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 its 300-millimeter wafer fabrication facility (“Fab 3”) located in Yokkaichi, Japan, using 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 January 1, 2012, the Company had notes receivable from Flash Partners of $291.6 million, denominated in Japanese yen. These notes are secured by the equipment purchased by Flash Partners using the note proceeds. The Company also has guarantee obligations to Flash Partners; see “Off-Balance Sheet Liabilities.” At January 1, 2012 and January 2, 2011, the Company had an equity investment in Flash Partners of $258.2 million and $238.6 million, respectively, denominated in Japanese yen, offset by $85.8 million and $72.9 million, respectively, of cumulative translation adjustments recorded in accumulated OCI. In fiscal year 2011 and 2010, the Company recorded a basis adjustment of $5.3 million and $10.4 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 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 January 1, 2012, the Company had notes receivable from Flash Alliance of $973.2 million, denominated in Japanese yen. These notes are secured by the equipment purchased by Flash Alliance using the note proceeds. The Company also has guarantee obligations to Flash Alliance; see “Off-Balance Sheet Liabilities.” At January 1, 2012 and January 2, 2011, the Company had an equity investment in Flash Alliance of $368.5 million and $262.6 million, respectively, denominated in Japanese yen, offset by $92.6 million and $76.4 million, respectively, of cumulative translation adjustments recorded in accumulated OCI. In fiscal year 2011 and 2010, the Company recorded a basis adjustment of $24.5 million and $5.9 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 by Flash Forward. Toshiba owns the Fab 5 building, which is adjacent to the site of the Company’s and Toshiba’s current Flash Partners and Flash Alliance ventures. Fab 5 is being 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. As of January 2012, Phase 1 of Fab 5 was approximately 30% equipped and the Company has invested in 50% of that capacity. No commitment has yet been made for further Phase 1 capacity expansion; however, the Company is periodically reviewing the timeline of further Phase 1 capacity expansion. Furthermore, no timelines have been finalized for the construction of Phase 2. If and when Phase 2 is built, the Company is committed to 50% of the initial ramp in Phase 2, similar to that in Phase 1. On completion of Phase 2, 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.

As of January 1, 2012, the Company had notes receivable from Flash Forward of $32.4 million, denominated in Japanese yen. These notes are secured by the equipment purchased by Flash Forward using the note proceeds. At January 1, 2012, the Company had an equity investment in Flash Forward of $19.5 million, denominated in Japanese yen, offset by $1.1 million of cumulative translation adjustments recorded in accumulated OCI.

FlashVision. In the first quarter of fiscal year 2010, the wind-down was completed of FlashVision, a business venture with Toshiba in which the Company owned 49.9%. The Company recorded a gain of $4.1 million in the first quarter of fiscal year 2010 in other income (expense) related to the completion of this wind-down.

Flash Partners and Flash Alliance Restructuring. The Company and Toshiba restructured Flash Partners and Flash Alliance in the first quarter of fiscal year 2009 by selling more than 20% of these ventures’ capacity to Toshiba. The restructuring resulted in the Company receiving value of 79.3 billion Japanese yen of which 26.1 billion Japanese yen, or $277.1 million, was received in cash, reducing outstanding notes receivable from these ventures, and 53.2 billion Japanese yen reflected the transfer of off-balance sheet equipment lease guarantee obligations from the Company to Toshiba. The restructuring was completed in a series of closings through March 31, 2009. The Company received the cash and transferred 53.2 billion Japanese yen of off-balance sheet equipment lease guarantee obligations in the first half of fiscal year 2009. Transaction costs of $10.9 million related to the sale and transfer of equipment and lease obligations were expensed in the first quarter of fiscal year 2009.

Research and Development Activities. The Company participates in common research and development activities with Toshiba but is not committed to any minimum funding level.

Toshiba Foundry. The Company has the ability to purchase additional capacity under a foundry arrangement with Toshiba.

Business Ventures and Foundry Arrangement with Toshiba. Purchase orders placed under Flash Ventures and the foundry arrangement with Toshiba 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.

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 January 1, 2012.



Master Lease Agreements by Execution Date	Lease Type	Lease Amounts				Expiration
		(Yen in billions)		(Dollars in thousands)
Flash Partners
March 2007	Original	¥	5.0	$	65,694	2012
February 2008	Original	2.0		25,783		2013
April 2010	Refinanced	2.5		32,584		2014
January 2011	Refinanced	4.4		56,280		2014
November 2011	Refinanced	9.0		116,482		2014
		22.9		296,823
Flash Alliance
November 2007	Original	10.7		139,049		2013
June 2008	Original	14.9		192,122		2013
		25.6		331,171
Flash Forward
November 2011	Original	8.0		103,668		2016
Total guarantee obligations		¥	56.5	$	731,662

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 January 1, 2012 in U.S. dollars based upon the yen/dollar exchange rate at January 1, 2012 (in thousands).



Annual Installments	Payment of Principal Amortization		Purchase Option Exercise Price at Final Lease Terms		Guarantee Amount
Year 1	$	216,470	$	102,539	$	319,009
Year 2	106,160		150,486		256,646
Year 3	54,316		59,031		113,347
Year 4	13,301		—		13,301
Year 5	13,384		15,975		29,359
Total guarantee obligations	$	403,631	$	328,031	$	731,662

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 122.6 billion Japanese yen, or approximately $1.59 billion based upon the exchange rate at January 1, 2012. As of January 1, 2012, the total amount outstanding from these master leases was 45.8 billion Japanese yen, or approximately $594 million based upon the exchange rate at January 1, 2012, 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 22.9 billion Japanese yen, or approximately $297 million based upon the exchange rate at January 1, 2012. 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 January 1, 2012, Flash Partners was in compliance with all of its master lease covenants. As of January 1, 2012, the Company’s R&I credit rating was BBB, three notches above the required minimum corporate rating threshold from R&I; and the Company’s S&P credit rating was BB, one notch above 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, the Company’s stockholders’ equity falls below $1.51 billion, or other events of default occur, 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 $2.59 billion based upon the exchange rate at January 1, 2012, of which 51.1 billion Japanese yen, or approximately $662 million based upon the exchange rate at January 1, 2012, was outstanding as of January 1, 2012. As of January 1, 2012, the amount of the Company’s guarantee obligation of the Flash Alliance’s master lease agreements was 25.6 billion Japanese yen, or approximately $331 million based upon the exchange rate at January 1, 2012. The Company and Toshiba have each guaranteed 50%, on a several basis, of Flash Alliance’s obligations 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 January 1, 2012, Flash Alliance was in compliance with all of its master lease covenants. As of January 1, 2012, the Company’s R&I credit rating was BBB, three notches above the required minimum corporate rating threshold from R&I; and the Company’s S&P credit rating was BB, one notch above 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, the Company’s stockholders’ equity falls below $1.51 billion, or other events of default occur, 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.

Flash Forward. Flash Forward sells and leases back from lessors a portion of its tools and has entered into an equipment master lease agreement totaling 35.0 billion Japanese yen, or approximately $454 million based upon the exchange rate at January 1, 2012, of which 16.0 billion Japanese yen, or approximately $207 million based upon the exchange rate at January 1, 2012, was outstanding as of January 1, 2012. As of January 1, 2012, the amount of the Company’s guarantee obligation of the Flash Forward’s master lease agreement was 8.0 billion Japanese yen, or approximately $104 million based upon the exchange rate at January 1, 2012. The Company and Toshiba have each guaranteed 50%, on a several basis, of Flash Forward’s obligations under the master lease agreement. In addition, this master lease agreement is secured by the underlying equipment. Remaining master lease payments are due quarterly and are scheduled to be completed in the Company’s fiscal year 2016. At each lease payment date, Flash Forward has the option of purchasing the tools from the lessors. Flash Forward 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 Forward’s master lease agreement was not material at inception of the master lease.

The master lease agreement contains customary covenants for Japanese lease facilities. In addition to containing customary events of default related to Flash Forward that could result in an acceleration of Flash Forward’s obligations, the master lease agreement contains 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. As of January 1, 2012, Flash Forward was in compliance with all of its master lease covenants. If the Company’s shareholders’ equity falls below $1.51 billion, or other events of default occur, Flash Forward would become non-compliant under its master equipment lease agreement and would be required to negotiate a resolution to the non-compliance to avoid acceleration of the obligation under such agreement. 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 obligation covered by its guarantee under such Flash Forward master lease agreement.

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 January 1, 2012, no amounts had been accrued in the accompanying Consolidated Financial Statements with respect to these indemnification obligations.

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 had no liabilities recorded for these agreements as of January 1, 2012 or January 2, 2011, as these liabilities were 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 January 1, 2012, no amounts had been accrued in the accompanying 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 January 1, 2012, and the effect such obligations are expected to have on its liquidity and cash flows in future periods (in thousands).

Contractual Obligations. Contractual cash obligations and commitments as of January 1, 2012 are as follows (in thousands):



	Total			1 Year or Less		2 - 3 Years (Fiscal 2013 and 2014)		4 –5 Years (Fiscal 2015 and 2016)		More than 5 Years (Beyond Fiscal 2016)
Facility and other operating leases	$	22,004	⁽⁵⁾	$	10,469	$	8,749	$	2,786	$	—
Flash Partners⁽¹⁾	773,900		⁽⁵⁾⁽⁶⁾	307,174		296,734		95,456		74,536
Flash Alliance⁽¹⁾	1,884,483		⁽⁵⁾⁽⁶⁾	609,023		805,478		397,405		72,577
Flash Forward⁽¹⁾	1,002,272		⁽⁵⁾⁽⁶⁾	497,355		271,366		207,632		25,919
Toshiba research and development	68,357		⁽⁵⁾	38,357		15,000		15,000		—
Capital equipment purchase commitments	41,729			39,900		1,019		810		—
1% Convertible senior notes principal and interest⁽²⁾	941,982			9,281		932,701		—		—
1.5% Convertible senior notes principal and interest⁽³⁾	1,090,000			15,000		30,000		30,000		1,015,000
Operating expense commitments	53,403			51,403		2,000		—		—
Noncancelable production purchase commitments⁽⁴⁾	379,079		⁽⁵⁾	379,079		—		—		—
Total contractual cash obligations	$	6,257,209		$	1,957,041	$	2,363,047	$	749,089	$	1,188,032

————


⁽¹⁾	Includes reimbursement for depreciation and lease payments on owned and committed equipment, funding commitments for loans and equity investments and reimbursement for other committed expenses. Funding commitments assume no additional operating lease guarantees; new operating lease guarantees can reduce funding commitments.

(2)

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 on the outstanding notes at an annual rate of 1.0%, payable semi-annually on May 15 and November 15 of each year until calendar year 2013. In fiscal year 2011, the Company redeemed $221.9 million of the outstanding notes. See Note 7, “Financing Arrangements - Bond Repurchase,” for further discussion.


⁽³⁾	In August 2010, the Company issued and sold $1.0 billion in aggregate principal amount of 1.5% Notes due 2017. The Company will pay cash interest on the outstanding notes at an annual rate of 1.5%, payable semi-annually on August 15 and February 15 of each year until calendar year 2017.


⁽⁴⁾	Includes Flash Ventures, related party vendors and other silicon source vendor purchase commitments.


⁽⁵⁾	Includes amounts denominated in a currency other than the U.S. dollar, which are subject to fluctuation in exchange rates prior to payment and have been translated using the exchange rate at January 1, 2012.


⁽⁶⁾	Excludes amounts related to the master lease agreements’ purchase option exercise price at final lease term.

Off-Balance Sheet Arrangements. Off-balance sheet arrangements are as follows (in thousands):



	January 1, 2012
Guarantee of Flash Ventures equipment leases ⁽¹⁾	$	731,662

————


⁽¹⁾	The Company’s guarantee obligation, net of cumulative lease payments, was 56.5 billion Japanese yen, or approximately $732 million based upon the exchange rate at January 1, 2012.

The Company has excluded $219.0 million of unrecognized tax benefits (which includes penalties and interest) from the contractual obligation table above due to uncertainty with respect to the timing of associated future cash flows at January 1, 2012. 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 2012 through fiscal year 2016. Future minimum lease payments are presented below (in thousands):



	January 1, 2012
Fiscal year:
2012	$	10,958
2013	6,154
2014	3,650
2015	2,921
2016	576
	24,259
Sublease income to be received in the future under noncancelable subleases	(2,255		)
Net operating leases	$	22,004

On January 31, 2012, the Company purchased for $87.5 million, five adjacent buildings in Milpitas, California, of which three of these buildings were previously leased. Pursuant to this purchase, the Company terminated the three building lease agreements with remaining aggregate lease obligations of $3.9 million that were set to expire in 2013.

Net rent expense was as follows (in thousands):



	Fiscal years ended
	January 1, 2012		January 2, 2011		January 3, 2010
Rent expense, net	$	7,926	$	7,522	$	7,921