Commitments, Contingencies and Guarantees

Flash Ventures

Flash Ventures, the Company’s business ventures with Toshiba Corporation (“Toshiba”), consists of three separate legal entities: Flash Partners Ltd., Flash Alliance Ltd. and Flash Forward Ltd. The Company has a 49.9% ownership interest in each of these entities and Toshiba owns 50.1% of each of these entities. Through these ventures, the Company and Toshiba have collaborated in the development and manufacture of NAND flash memory products which are manufactured by Toshiba at its wafer fabrication facility located in Yokkaichi, Japan, using semiconductor manufacturing equipment owned or leased by Flash Ventures. Flash Ventures purchase wafers from Toshiba at cost and then resell those wafers to the Company and Toshiba at cost plus a markup. The Company accounts for its ownership position in each Flash Ventures entity under the equity method of accounting. The Company is committed to purchase its provided three-month forecast of Flash Ventures’ NAND wafer supply, which generally equals 50% of Flash Ventures’ 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 Ventures’ costs to the extent that Flash Ventures’ revenue from wafer sales to the Company and Toshiba are insufficient to cover these costs.

Flash Partners. Flash Partners Ltd. (“Flash Partners”) was formed in fiscal year 2004. NAND flash memory products provided to the Company by this venture are manufactured by Toshiba at its 300-millimeter wafer fabrication facility (“Fab 3”) located in Yokkaichi, Japan. As of June 29, 2014, the Company had notes receivable from Flash Partners of $29.6 million, denominated in Japanese yen. These notes are secured by the equipment purchased by Flash Partners with the note proceeds. The Company also has guarantee obligations to Flash Partners; see “Off-Balance Sheet Liabilities.” At June 29, 2014 and December 29, 2013, the Company had an equity investment in Flash Partners of $197.4 million and $190.7 million, respectively, denominated in Japanese yen, adjusted by $24.0 million and $17.3 million, respectively, of cumulative translation adjustments recorded in AOCI. The Company records basis adjustments to its equity in earnings from Flash Partners that relate to the difference between the basis in the Company’s equity investment compared to the historical basis of the assets recorded by Flash Partners. In the three and six months ended June 29, 2014, the Company recorded no basis adjustments to its equity in earnings from Flash Partners. In the three and six months ended June 30, 2013, the Company recorded a basis adjustment of $0.3 million and $0.6 million, respectively, to its equity earnings from Flash Partners. Flash Partners’ share of the Fab 3 fabrication facility is fully equipped.

Flash Alliance. Flash Alliance Ltd. (“Flash Alliance”) was formed in fiscal year 2006. NAND flash memory products provided to the Company by this venture are manufactured by Toshiba at its 300-millimeter wafer fabrication facility (“Fab 4”) located in Yokkaichi, Japan. As of June 29, 2014, the Company had notes receivable from Flash Alliance of $320.5 million, denominated in Japanese yen. These notes are secured by the equipment purchased by Flash Alliance with the note proceeds. The Company also has guarantee obligations to Flash Alliance; see “Off-Balance Sheet Liabilities.” At June 29, 2014 and December 29, 2013, the Company had an equity investment in Flash Alliance of $294.7 million and $284.0 million, respectively, denominated in Japanese yen, adjusted by $1.2 million and ($8.7) million, respectively, of cumulative translation adjustments recorded in AOCI. The Company records basis adjustments to its equity in earnings from Flash Alliance that relate to the difference between the basis in the Company’s equity investment compared to the historical basis of the assets recorded by Flash Alliance. In the three and six months ended June 29, 2014, the Company recorded no basis adjustments to its equity in earnings from Flash Alliance. In the three and six months ended June 30, 2013, the Company recorded a basis adjustment of $2.1 million and $5.0 million, respectively, to its equity earnings from Flash Alliance. Flash Alliance’s share of the Fab 4 fabrication facility is fully equipped.

Flash Forward. Flash Forward Ltd. (“Flash Forward”) was formed in fiscal year 2010. NAND flash memory products provided to the Company by this venture are manufactured by Toshiba at its 300-millimeter wafer fabrication facility (“Fab 5”) located in Yokkaichi, Japan. Fab 5 is to be built in two phases. Within the second half of fiscal year 2014, Phase 1 of the building is expected to be fully utilized with the addition of equipment including 1Y‑nanometer technology transition tools, development tools for 3D NAND, and tools for a planned increase in Flash Ventures wafer capacity of less than 5%. The Company and Toshiba each retain some flexibility as to the extent and timing of each party’s respective fab capacity ramps. The Phase 2 shell of the Fab 5 wafer fabrication facility is nearly complete and equipment installation will begin in the third quarter of fiscal year 2014. The Phase 2 shell is currently intended to be used primarily for technology transition of the existing Flash Ventures wafer capacity to 1Y‑nanometer and 1Z‑nanometer technology nodes and for a 3‑dimensional NAND (“3D NAND”) pilot line.

As of June 29, 2014, the Company had notes receivable from Flash Forward of $239.1 million, denominated in Japanese yen. These notes are secured by the equipment purchased by Flash Forward with the note proceeds. The Company also has guarantee obligations to Flash Forward; see “Off-Balance Sheet Liabilities.” At June 29, 2014 and December 29, 2013, the Company had an equity investment in Flash Forward of $93.8 million and $66.7 million, respectively, denominated in Japanese yen, adjusted by ($13.5) million and ($16.2) million, respectively, of cumulative translation adjustments recorded in AOCI.

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.

Off-Balance Sheet Liabilities

Flash Ventures. Flash Ventures sell and lease back from a consortium of financial institutions (“lessors”) a portion of their tools and have entered into equipment master lease agreements totaling 191.2 billion Japanese yen, or approximately $1.89 billion based upon the exchange rate at June 29, 2014. As of June 29, 2014, the total amount outstanding from these master leases was 118.9 billion Japanese yen, or approximately $1.17 billion based upon the exchange rate at June 29, 2014, of which the amount of the Company’s guarantee obligation of the Flash Ventures’ master lease agreements, which reflects future payments and any lease adjustments, was 59.4 billion Japanese yen, or approximately $586 million based upon the exchange rate at June 29, 2014.

The master lease agreements contain customary covenants for Japanese lease facilities. In addition to containing customary events of default related to Flash Ventures that could result in an acceleration of Flash Ventures’ 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 stockholders’ equity of at least $1.51 billion. As of June 29, 2014, Flash Ventures was in compliance with all of its master lease covenants, including the shareholders’ equity covenant with the Company’s stockholders’ equity at $7.15 billion as of June 29, 2014. If the Company’s stockholders’ equity falls below $1.51 billion, or other events of default occur, Flash Ventures 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 guarantees under such Flash Ventures master lease agreements.

The following table details the Company’s portion of the remaining guarantee obligations under each of Flash Ventures’ master lease facilities (both initial and refinanced leases) in both Japanese yen (in billions) and U.S. dollar-equivalent (in thousands) based upon the exchange rate at June 29, 2014:



Master Lease Agreements by Execution Date	Lease Type	Lease Amounts				Expiration
		(Japanese yen)		(U.S. dollar)
Flash Partners
April 2010	Refinanced	¥	0.7	$	6,421	2014
January 2011	Refinanced	0.9		8,831		2014
November 2011	Refinanced	3.4		33,221		2014
March 2012	Refinanced	2.5		25,838		2015
March 2014	Initial	5.0		49,093		2019
		12.5		123,404
Flash Alliance
March 2012	Initial	6.2		60,753		2017
July 2012	Refinanced	11.6		114,612		2017
March 2014	Initial	5.0		49,513		2019
May 2014	Initial	6.5		64,096		2019
		29.3		288,974
Flash Forward
November 2011	Initial	9.4		92,227		2016
March 2012	Initial	5.9		58,484		2017
July 2012	Initial	2.3		22,977		2017
		17.6		173,688
Total guarantee obligations		¥	59.4	$	586,066

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 June 29, 2014 in U.S. dollars based upon the yen/dollar exchange rate at June 29, 2014 (in thousands):



Annual Installments	Payment of Principal Amortization		Purchase Option Exercise Price at Final Lease Terms		Guarantee Amount
Year 1	$	163,028	$	42,784	$	205,812
Year 2	122,072		11,278		133,350
Year 3	88,036		56,825		144,861
Year 4	33,367		24,370		57,737
Year 5	17,884		26,422		44,306
Total guarantee obligations	$	424,387	$	161,679	$	586,066

Guarantees

Indemnification Agreements. The Company has agreed to indemnify suppliers and customers for alleged intellectual property 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 June 29, 2014, 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 and 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 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 June 29, 2014 or December 29, 2013, 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 infringe third-party patents. The Company has not made any indemnification payments under any such agreements. As of June 29, 2014, no amounts have been accrued in the Company’s 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 June 29, 2014, and the effect such obligations are expected to have on its liquidity and cash flows in future periods.

Contractual Obligations. Contractual cash obligations and commitments as of June 29, 2014 were as follows (in thousands):



	Total			1 Year (Remaining 6 months in Fiscal 2014)		2 – 3 Years (Fiscal 2015 and 2016)		4 – 5 Years (Fiscal 2017 and 2018)		More than 5 Years (Beyond Fiscal 2018)
Facility and other operating leases	$	22,764	⁽⁵⁾	$	4,218	$	10,582	$	4,307	$	3,657
Flash Partners⁽¹⁾	590,408		⁽⁵⁾⁽⁶⁾	90,020		281,295		159,510		59,583
Flash Alliance⁽¹⁾	1,810,485		⁽⁵⁾⁽⁶⁾	315,653		922,808		456,817		115,207
Flash Forward⁽¹⁾	732,517		⁽⁵⁾⁽⁶⁾	136,967		379,563		162,112		53,875
Toshiba research and development	108,776		⁽⁵⁾	64,918		43,858		—		—
Capital equipment purchase commitments	104,427			104,232		192		3		—
1.5% Notes due 2017 principal and interest⁽²⁾	1,052,500			7,500		30,000		1,015,000		—
0.5% Notes due 2020 principal and interest⁽³⁾	1,548,750			3,750		15,000		15,000		1,515,000
Operating expense commitments	60,474			58,112		2,278		84		—
Noncancelable production purchase commitments⁽⁴⁾	268,310		⁽⁵⁾	268,310		—		—		—
Total contractual cash obligations	$	6,299,411		$	1,053,680	$	1,685,576	$	1,812,833	$	1,747,322


⁽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 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 August 15, 2017.


⁽³⁾	In October 2013, the Company issued and sold $1.5 billion in aggregate principal amount of 0.5% Notes due 2020. The Company will pay cash interest on the outstanding notes at an annual rate of 0.5%, payable semi-annually on April 15 and October 15 of each year until October 15, 2020.


⁽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 June 29, 2014.


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

The Company has excluded $198.9 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 June 29, 2014. The Company is unable to make reasonably reliable estimates of the period of cash settlement with the respective taxing authorities.

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



	June 29, 2014
Guarantee of Flash Ventures equipment leases ⁽¹⁾	$	586,066


⁽¹⁾	The Company’s guarantee obligation, net of cumulative lease payments, was 59.4 billion Japanese yen, or approximately $586 million based upon the exchange rate at June 29, 2014.

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 2014 through fiscal year 2022. Future minimum lease payments are presented below (in thousands):



	Future minimum lease payments
Fiscal year:
2014 (Remaining 6 months)	$	4,492
2015	7,374
2016	3,919
2017	2,570
2018	1,737
2019 and thereafter	3,657
Operating leases, gross	23,749
Sublease income to be received in the future under noncancelable subleases	(985		)
Operating leases, net	$	22,764

Net rent expense was as follows (in thousands):



	Three months ended				Six months ended
	June 29, 2014		June 30, 2013		June 29, 2014		June 30, 2013
Rent expense, net	$	1,543	$	1,330	$	3,167	$	3,173