Note 9: Equity Method Investments

IMFT/IMFS

Micron Technology, Inc. and Intel formed IM Flash Technologies, LLC (IMFT) and IM Flash Singapore, LLP (IMFS) to manufacture NAND flash memory products for Micron and Intel. As of March 31, 2012, we owned a 49% interest in IMFT and an 18% interest in IMFS. The carrying value of our investment in IMFT/IMFS was $1.3 billion as of March 31, 2012 ($1.3 billion as of December 31, 2011) and is classified within other long-term assets.

These joint ventures are variable interest entities. All costs of the joint ventures are passed on to Micron and Intel through our purchase agreements. The joint ventures are dependent upon Micron and Intel for any additional cash requirements. Our portion of IMFT/IMFS costs, primarily related to product purchases and production-related services, was approximately $240 million during the first quarter of 2012 (approximately $220 million during the first quarter of 2011). The amount due to IMFT/IMFS for product purchases and services provided was approximately $95 million as of March 31, 2012 (approximately $125 million as of December 31, 2011). Finally, $67 million was returned to Intel by IMFT/IMFS during the first quarter of 2012, which is reflected as a return of equity method investment within investing activities on the consolidated condensed statements of cash flows ($24 million during the first quarter of 2011).

Subsequent to the end of the first quarter of 2012, we completed agreements with Micron to expand our joint venture relationship. Under the new structure, we own a 49% interest in the remaining assets held by IMFT and no longer hold an ownership interest in IMFS. We also entered into an amended operating agreement for IMFT, which extends the term of IMFT to 2024, unless earlier terminated under certain terms and conditions, and provides that IMFT may manufacture certain emerging memory technologies in addition to NAND flash memory. These agreements include a NAND Flash supply agreement for Micron to supply us NAND products. Additionally, we received approximately $600 million from the sale of assets of IMFS and certain assets of IMFT to Micron. We provided approximately $365 million to Micron, which we expect will primarily be applied to future product purchases under the supply agreement with Micron. Additionally, the agreements extend Intel and Micron's NAND joint development program and expand it to include emerging memory technologies. Finally, the amended agreement also provides for certain buy-sell rights, beginning in 2015, under which we may elect to sell to Micron, or Micron may elect to purchase from us, our interest in IMFT. If Intel elects to exercise this right, Micron would set the closing date of the transaction within two years following such election and could elect to receive financing from Intel for one to two years.

We expect the closing of the joint venture expansion to have an insignificant impact on our consolidated condensed statements of income for the second quarter of 2012.

Subsequent to the closing of the transaction in the second quarter of 2012, our known maximum exposure to loss is $656 million, which approximated the carrying value of our investment balance in IMFT. Except for the amount due to IMFT for product purchases and services, we did not have any additional liabilities recognized on our consolidated condensed balance sheets in connection with our interests in these joint ventures as of March 31, 2012. In addition, our potential future losses could be higher than the carrying amount of our investment, as Intel and Micron are liable for other future operating costs or obligations of IMFT. Future cash calls could also increase our investment balance and the related exposure to loss. Finally, as we are currently committed to purchasing 49% of IMFT's production output and production-related services, we may be required to purchase products at a cost in excess of realizable value.

Under the accounting standards for consolidating variable interest entities, the consolidating investor is the entity with the power to direct the activities of the venture that most significantly impact the venture's economic performance and with the obligation to absorb losses or the right to receive benefits from the venture that could potentially be significant to the venture. We have determined that we do not have both of these characteristics and, therefore, we account for our interest in IMFT and our previous interest in IMFS using the equity method of accounting.