Commitments, Contingencies and Guarantees

6 Months Ended

Jul. 03, 2011

Commitments Contingencies and Guarantees [Abstract]

Commitments, Contingencies and Guarantees

12. Commitments, Contingencies and Guarantees

Flash Partners. The Company has a 49.9% ownership interest in Flash Partners Ltd. (“Flash Partners”), a business venture with Toshiba which owns 50.1%, formed in fiscal year 2004. In the venture, the Company and Toshiba have collaborated in the development and manufacture of NAND flash memory products. These NAND flash memory products are manufactured by Toshiba at a 300-millimeter wafer fabrication facility (“Fab 3”) located in Yokkaichi, Japan, using the semiconductor manufacturing equipment owned or leased by Flash Partners. Flash Partners purchases wafers from Toshiba at cost and then resells those wafers to the Company and Toshiba at cost plus a markup. The Company accounts for its 49.9% ownership position in Flash Partners under the equity method of accounting. The Company is committed to purchase its provided three-month forecast of Flash Partners’ NAND wafer supply, which generally equals 50% of the venture’s output. The Company is not able to estimate its total wafer purchase commitment obligation beyond its rolling three-month purchase commitment because the price is determined by reference to the future cost of producing the semiconductor wafers. In addition, the Company is committed to fund 49.9% of Flash Partners’ costs to the extent that Flash Partners’ revenues from wafer sales to the Company and Toshiba are insufficient to cover these costs.

As of July 3, 2011, the Company had notes receivable from Flash Partners of $494.0 million, denominated in Japanese yen. These notes are secured by the equipment purchased by Flash Partners using the note proceeds. The Company has additional guarantee obligations to Flash Partners; see “Off-Balance Sheet Liabilities.” At July 3, 2011 and January 2, 2011, the Company had an equity investment in Flash Partners of $243.2 million and $238.6 million, respectively, denominated in Japanese yen, offset by $73.9 million and $72.9 million, respectively, of cumulative translation adjustments recorded in accumulated OCI. In the six months ended July 3, 2011 and July 4, 2010, the Company recorded a basis adjustment of $3.5 million and $4.8 million, respectively, to its equity in earnings from Flash Partners related to the difference between the basis in the Company’s equity investment compared to the historical basis of the assets recorded by Flash Partners.

Flash Alliance. The Company has a 49.9% ownership interest in Flash Alliance Ltd. (“Flash Alliance”), a business venture with Toshiba which owns 50.1%, formed in fiscal year 2006. In the venture, the Company and Toshiba have collaborated in the development and manufacture of NAND flash memory products. These NAND flash memory products are manufactured by Toshiba at its 300-millimeter wafer fabrication facility (“Fab 4”) located in Yokkaichi, Japan, using the semiconductor manufacturing equipment owned or leased by Flash Alliance. Flash Alliance purchases wafers from Toshiba at cost and then resells those wafers to the Company and Toshiba at cost plus a markup. The Company accounts for its 49.9% ownership position in Flash Alliance under the equity method of accounting. The Company is committed to purchase its provided three-month forecast of Flash Alliance’s NAND wafer supply, which generally equals 50% of the venture’s output. The Company is not able to estimate its total wafer purchase commitment obligation beyond its rolling three-month purchase commitment because the price is determined by reference to the future cost of producing the semiconductor wafers. In addition, the Company is committed to fund 49.9% of Flash Alliance’s costs to the extent that Flash Alliance’s revenues from wafer sales to the Company and Toshiba are insufficient to cover these costs.

As of July 3, 2011, the Company had notes receivable from Flash Alliance of $1.03 billion, denominated in Japanese yen. These notes are secured by the equipment purchased by Flash Alliance using the note proceeds. The Company has additional guarantee obligations to Flash Alliance; see “Off-Balance Sheet Liabilities.” At July 3, 2011 and January 2, 2011, the Company had an equity investment in Flash Alliance of $279.5 million and $262.6 million, respectively, denominated in Japanese yen, offset by $77.8 million and $76.4 million, respectively, of cumulative translation adjustments recorded in accumulated OCI. In the six months ended July 3, 2011 and July 4, 2010, the Company recorded a basis adjustment of $15.6 million and ($6.4) million, respectively, to its equity earnings from Flash Alliance related to the difference between the basis in the Company’s equity investment compared to the historical basis of the assets recorded by Flash Alliance.

Flash Forward. The Company has a 49.9% ownership interest in Flash Forward Ltd. (“Flash Forward”), a business venture with Toshiba which owns 50.1%, formed in fiscal year 2010. In the venture, the Company and Toshiba collaborate to develop and manufacture NAND flash memory products. In this venture, NAND flash memory products are manufactured by Toshiba at a new 300-millimeter wafer fabrication facility (“Fab 5”) located in Yokkaichi, Japan, using the semiconductor manufacturing equipment owned or leased by Flash Forward. Toshiba owns the Fab 5 building, which is adjacent to the site of the Company and Toshiba’s current Flash Partners and Flash Alliance ventures. Fab 5 will be built in two phases. In the second quarter of fiscal year 2011, the Phase 1 building shell construction was completed and initial NAND production began. The Company committed to invest up to 50% of the initial ramp within Phase 1 of Fab 5, which is expected to occur in the second half of fiscal year 2011. No timelines have been finalized for Phase 1 capacity expansions beyond 2011 or for the construction of Phase 2. For Phase 1 expansion beyond the initial ramp, the Company has the option to make investments and share output on a 50/50 basis between the Company and Toshiba. If and when Phase 2 is built, the Company is committed to 50% of an initial ramp in Phase 2, similar to that in Phase 1. On completion of the second phase, Fab 5 is expected to be of similar size and capacity to Toshiba’s Fab 4. The Company and Toshiba will each retain some flexibility as to the extent and timing of each party’s respective fab capacity ramps, and the output allocation will be in accordance with each party’s proportionate level of equipment funding.

At July 3, 2011, the Company had an equity investment in Flash Forward of $18.5 million, denominated in Japanese yen, offset by $0.2 million of cumulative translation adjustments recorded in accumulated OCI.

Inventory Purchase Commitments with Flash Ventures. Purchase orders placed under Flash Ventures for up to three months are binding and cannot be canceled. These outstanding purchase commitments are included as part of the total “Noncancelable production purchase commitments” in the “Contractual Obligations” table below.

Other Silicon Sources. The Company’s contracts with its other sources of silicon wafers generally require the Company to provide monthly purchase order commitments based on non-binding nine month rolling forecasts. The purchase orders placed under these arrangements are generally binding and cannot be canceled. These outstanding purchase commitments for other sources of silicon wafers are included as part of the total “Noncancelable production purchase commitments” in the “Contractual Obligations” table.

Subcontractors. In the normal course of business, the Company’s subcontractors periodically procure production materials based on the forecast the Company provides to them. The Company’s agreements with these subcontractors require that the Company reimburse them for materials that are purchased on the Company’s behalf in accordance with such forecast. Accordingly, the Company may be committed to certain costs over and above its open noncancelable purchase orders with these subcontractors. These commitments for production materials to subcontractors are included as part of the total “Noncancelable production purchase commitments” in the “Contractual Obligations” table.

Off-Balance Sheet Liabilities

The following table details the Company’s portion of the remaining guarantee obligations under each of Flash Ventures’ master lease facilities (both original and refinanced leases) in both Japanese yen and U.S. dollar equivalent based upon the exchange rate at July 3, 2011.


Master Lease Agreements by Execution Date	Lease Type	Lease Amounts				Expiration
		(Yen in billions)		(Dollars in thousands)
Flash Partners
September 2006	Original	¥	11.8	$	146,472		2011
March 2007	Original		6.2		76,418		2012
February 2008	Original		2.4		29,815		2013
April 2010	Refinanced		3.3		39,609		2014
January 2011	Refinanced		5.3		65,657		2014

			29.0		357,971

Flash Alliance
November 2007	Original		13.2		162,764		2013
June 2008	Original		17.5		217,558		2013

			30.7		380,322

Total guarantee obligations		¥	59.7	$	738,293

The following table details the breakdown of the Company’s remaining guarantee obligations between the principal amortization and the purchase option exercise price at the end of the term of the master lease agreements, in annual installments as of July 3, 2011 in U.S. dollars based upon the exchange rate at July 3, 2011.


			Purchase Option
	Payment of		Exercise Price at
	Principal		Final Lease		Guarantee
Annual Installments	Amortization		Terms		Amount
			(In thousands)
Year 1	$	222,493	$	145,038	$	367,531
Year 2		109,853		170,988		280,841
Year 3		16,573		64,808		81,381
Year 4		954		7,586		8,540

Total guarantee obligations	$	349,873	$	388,420	$	738,293

Flash Partners. Flash Partners sells and leases back from a consortium of financial institutions (“lessors”) a portion of its tools and has entered into equipment master lease agreements totaling 202.7 billion Japanese yen, or approximately $2.50 billion based upon the exchange rate at July 3, 2011. As of July 3, 2011, the total amount outstanding from these master leases was 57.9 billion Japanese yen, or approximately $716 million based upon the exchange rate at July 3, 2011, of which the amount of the Company’s guarantee obligation of the Flash Partners’ master lease agreements, which reflects future payments and any lease adjustments, was 29.0 billion Japanese yen, or approximately $358 million based upon the exchange rate at July 3, 2011. The Company and Toshiba have each guaranteed 50%, on a several basis, of Flash Partners’ obligations under the master lease agreements. In addition, these master lease agreements are secured by the underlying equipment. Remaining master lease payments are due quarterly and certain lease payments are due semi-annually, and are scheduled to be completed in stages through the Company’s fiscal year 2014. At each lease payment date, Flash Partners has the option of purchasing the tools from the lessors. Flash Partners is obligated to insure the equipment, maintain the equipment in accordance with the manufacturers’ recommendations and comply with other customary terms to protect the leased assets. The fair value of the Company’s guarantee obligation of Flash Partners’ master lease agreements was not material at inception of each master lease.

The master lease agreements contain customary covenants for Japanese lease facilities. In addition to containing customary events of default related to Flash Partners that could result in an acceleration of Flash Partners’ obligations, the master lease agreements contain an acceleration clause for certain events of default related to the Company as guarantor, including, among other things, the Company’s failure to maintain a minimum shareholders’ equity of at least $1.51 billion, and its failure to maintain a minimum corporate rating of BB- from Standard & Poors (“S&P”) or Moody’s Corporation (“Moody’s”), or a minimum corporate rating of BB+ from Rating & Investment Information, Inc. (“R&I”). As of July 3, 2011, Flash Partners was in compliance with all of its master lease covenants. As of July 3, 2011, the Company’s R&I credit rating was BBB, three notches above the required minimum corporate rating threshold from R&I. As of July 3, 2011, the Company’s S&P credit rating was BB-, which is the required minimum corporate rating threshold from S&P. If both S&P and R&I were to downgrade the Company’s credit rating below the minimum corporate rating threshold, Flash Partners would become non-compliant under its master equipment lease agreements and would be required to negotiate a resolution to the non-compliance to avoid acceleration of the obligations under such agreements. Such resolution could include, among other things, supplementary security to be supplied by the Company, as guarantor, or increased interest rates or waiver fees, should the lessors decide they need additional collateral or financial consideration under the circumstances. If a non-compliance event were to occur and if the Company failed to reach a resolution, the Company could be required to pay a portion or the entire outstanding lease obligations covered by its guarantee under such Flash Partners master lease agreements.

Flash Alliance. Flash Alliance sells and leases back from lessors a portion of its tools and has entered into equipment master lease agreements totaling 200.0 billion Japanese yen, or approximately $2.47 billion based upon the exchange rate at July 3, 2011, of which 61.6 billion Japanese yen, or approximately $761 million based upon the exchange rate at July 3, 2011, was outstanding as of July 3, 2011. As of July 3, 2011, the amount of the Company’s guarantee obligation of the Flash Alliance’s master lease agreements was 30.7 billion Japanese yen, or approximately $380 million based upon the exchange rate at July 3, 2011. The Company and Toshiba have each guaranteed 50%, on a several basis, of Flash Alliance’s obligation under the master lease agreements. In addition, these master lease agreements are secured by the underlying equipment. Remaining master lease payments are due semi-annually and are scheduled to be completed in the Company’s fiscal year 2013. At each lease payment date, Flash Alliance has the option of purchasing the tools from the lessors. Flash Alliance is obligated to insure the equipment, maintain the equipment in accordance with the manufacturers’ recommendations and comply with other customary terms to protect the leased assets. The fair value of the Company’s guarantee obligation of Flash Alliance’s master lease agreements was not material at inception of each master lease.

The master lease agreements contain customary covenants for Japanese lease facilities. In addition to containing customary events of default related to Flash Alliance that could result in an acceleration of Flash Alliance’s obligations, the master lease agreements contain an acceleration clause for certain events of default related to the Company as guarantor, including, among other things, the Company’s failure to maintain a minimum shareholders’ equity of at least $1.51 billion, and its failure to maintain a minimum corporate rating of BB- from S&P or Moody’s or a minimum corporate rating of BB+ from R&I. As of July 3, 2011, Flash Alliance was in compliance with all of its master lease covenants. As of July 3, 2011, the Company’s R&I credit rating was BBB, three notches above the required minimum corporate rating threshold from R&I. As of July 3, 2011, the Company’s S&P credit rating was BB-, which is the required minimum corporate rating threshold from S&P. If both S&P and R&I were to downgrade the Company’s credit rating below the minimum corporate rating threshold, Flash Alliance would become non-compliant under its master equipment lease agreements and would be required to negotiate a resolution to the non-compliance to avoid acceleration of the obligations under such agreements. Such resolution could include, among other things, supplementary security to be supplied by the Company, as guarantor, or increased interest rates or waiver fees, should the lessors decide they need additional collateral or financial consideration under the circumstances. If a non-compliance event were to occur and if the Company failed to reach a resolution, the Company could be required to pay a portion or the entire outstanding lease obligations covered by its guarantee under such Flash Alliance master lease agreements.

Guarantees

Indemnification Agreements. The Company has agreed to indemnify suppliers and customers for alleged patent infringement. The scope of such indemnity varies, but may, in some instances, include indemnification for damages and expenses, including attorneys’ fees. The Company may periodically engage in litigation as a result of these indemnification obligations. The Company’s insurance policies exclude coverage for third-party claims for patent infringement. Although the liability is not remote, the nature of the patent infringement indemnification obligations prevents the Company from making a reasonable estimate of the maximum potential amount it could be required to pay to its suppliers and customers. Historically, the Company has not made any significant indemnification payments under any such agreements. As of July 3, 2011, no amounts had been accrued in the accompanying Condensed Consolidated Financial Statements with respect to these indemnification guarantees.

As permitted under Delaware law and the Company’s certificate of incorporation and bylaws, the Company has agreements, or has assumed agreements in connection with its acquisitions, whereby it indemnifies certain of its officers, employees, and each of its directors for certain events or occurrences while the officer, employee or director is, or was, serving at the Company’s or the acquired company’s request in such capacity. The term of the indemnification period is for the officer’s, employee’s or director’s lifetime. The maximum potential amount of future payments the Company could be required to make under these indemnification agreements is generally unlimited; however, the Company has a Director and Officer insurance policy that may reduce its exposure and enable it to recover all or a portion of any future amounts paid. As a result of its insurance policy coverage, the Company believes the estimated fair value of these indemnification agreements is minimal. The Company has no liabilities recorded for these agreements as of July 3, 2011 or January 2, 2011, as these liabilities are not reasonably estimable even though liabilities under these agreements are not remote.

The Company and Toshiba have agreed to mutually contribute to, and indemnify each other and Flash Ventures for environmental remediation costs or liability resulting from Flash Ventures’ manufacturing operations in certain circumstances. The Company and Toshiba have also entered into a Patent Indemnification Agreement under which in many cases the Company will share in the expenses associated with the defense and cost of settlement associated with such claims. This agreement provides limited protection for the Company against third party claims that NAND flash memory products manufactured and sold by Flash Ventures infringes third party patents. The Company has not made any indemnification payments under any such agreements and as of July 3, 2011, no amounts have been accrued in the accompanying Condensed Consolidated Financial Statements with respect to these indemnification guarantees.

Contractual Obligations and Off-Balance Sheet Arrangements

The following tables summarize the Company’s contractual cash obligations, commitments and off-balance sheet arrangements at July 3, 2011, and the effect such obligations are expected to have on its liquidity and cash flows in future periods.

Contractual Obligations.


										More than
						2 - 3 Years		4 - 5 Years		5 Years
				1 Year or Less		(Fiscal 2012		(Fiscal 2014		(Beyond
	Total			(6 months)		and 2013)		and 2015)		Fiscal 2015)
	(In thousands)
Facility and other operating leases	$	25,609		$	4,851	$	15,101	$	5,086	$	571
Flash Partners reimbursement for certain fixed costs including depreciation		945,698	⁽⁴⁾⁽⁵⁾		211,560		460,787		192,476		80,875
Flash Alliance reimbursement for certain fixed costs including depreciation		2,324,413	⁽⁴⁾⁽⁵⁾		489,461		1,043,416		579,833		211,703
Flash Forward equipment investments and expense reimbursement		1,096,553	⁽⁴⁾		205,824		581,866		216,947		91,916
Toshiba research and development		122,573	⁽⁴⁾		62,525		30,048		30,000		—
Capital equipment purchase commitments		41,973			41,481		293		199		—
1% Convertible senior notes principal and interest ⁽¹⁾		1,173,000			5,750		1,167,250		—		—
1.5% Convertible senior notes principal and interest ⁽²⁾		1,097,500			7,500		30,000		30,000		1,030,000
Operating expense commitments		41,534			36,369		5,165		—		—
Noncancelable production purchase commitments ⁽³⁾		373,317	⁽⁴⁾		373,317		—		—		—

Total contractual cash obligations	$	7,242,170		$	1,438,638	$	3,333,926	$	1,054,541	$	1,415,065

Off-Balance Sheet Arrangements.


	July 3,
	2011
Guarantee of Flash Ventures equipment leases ⁽⁶⁾	$	738,293


⁽¹⁾		In May 2006, the Company issued and sold $1.15 billion in aggregate principal amount of 1% Notes due 2013. The Company will pay cash interest at an annual rate of 1%, payable semi-annually on May 15 and November 15 of each year until calendar year 2013.

⁽²⁾		In August 2010, the Company issued and sold $1.00 billion in aggregate principal amount of 1.5% Notes due 2017. The Company will pay cash interest at an annual rate of 1.5%, payable semi-annually on August 15 and February 15 of each year until calendar year 2017.

⁽³⁾		Includes Flash Ventures, related party vendors and other silicon source vendor purchase commitments.

⁽⁴⁾		Includes amounts denominated in Japanese yen, which are subject to fluctuation in exchange rates prior to payment and have been translated using the exchange rate at July 3, 2011.

⁽⁵⁾		Excludes amounts related to the master lease agreements’ purchase option exercise price at final lease term.

⁽⁶⁾		The Company’s guarantee obligation, net of cumulative lease payments, is 59.7 billion Japanese yen, or approximately $738 million based upon the exchange rate at July 3, 2011.

The Company has excluded $204.6 million of unrecognized tax benefits (which includes penalties and interest) from the contractual obligation table above due to the uncertainty with respect to the timing of associated future cash flows at July 3, 2011. The Company is unable to make reasonably reliable estimates of the period of cash settlement with the respective taxing authorities.

The Company leases many of its office facilities and operating equipment for various terms under long-term, noncancelable operating lease agreements. The leases expire at various dates from fiscal year 2011 through fiscal year 2016. Future minimum lease payments at July 3, 2011 are presented below.


Fiscal Year	Lease Payments
	(In thousands)
2011 (remaining 6 months)	$	5,087
2012		10,331
2013		5,774
2014		3,498
2015		2,839
2016 and thereafter		571

		28,100
Sublease income to be received in the future under noncancelable subleases		(2,491	)

Net operating leases	$	25,609

Net rent expense for the three and six months ended July 3, 2011 and July 4, 2010 was as follows:


	Three months ended				Six months ended
	July 3, 2011		July 4, 2010		July 3, 2011		July 4, 2010
	(In thousands)
Rent expense, net	$	1,951	$	1,758	$	3,847	$	3,785