Commitments, Contingencies and Guarantees

Flash Ventures

Flash Ventures, the Company’s business ventures with 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. The entities within 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% to 50% 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 primarily at its 300-millimeter wafer fabrication facility (“Fab 3”) located in Yokkaichi, Japan. As of December 28, 2014, the Company had notes receivable from Flash Partners of $12.5 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.” As of December 28, 2014 and December 29, 2013, the Company had an equity investment in Flash Partners of $167.1 million and $190.7 million, respectively, denominated in Japanese yen, adjusted by ($7.3) 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 fiscal year ended December 28, 2014, the Company recorded no basis adjustments to its equity in earnings from Flash Partners. In the fiscal years ended December 29, 2013 and December 30, 2012, the Company recorded a basis adjustment of $1.2 million and $3.0 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 primarily at its 300-millimeter wafer fabrication facility (“Fab 4”) located in Yokkaichi, Japan. As of December 28, 2014, the Company had notes receivable from Flash Alliance of $292.7 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.” As of December 28, 2014 and December 29, 2013, the Company had an equity investment in Flash Alliance of $249.5 million and $284.0 million, respectively, denominated in Japanese yen, adjusted by ($45.5) 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 fiscal year ended December 28, 2014, the Company recorded no basis adjustments to its equity in earnings from Flash Alliance. In the fiscal years ended December 29, 2013 and December 30, 2012, the Company recorded a basis adjustment of $6.5 million and $15.2 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 primarily at its 300-millimeter wafer fabrication facility (“Fab 5”) located in Yokkaichi, Japan. Fab 5 was built in two phases. Phase 1 of the building is fully equipped. The Phase 2 shell of Fab 5 is complete and has been partially equipped. 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 15‑nanometer technology nodes, the addition of a 3‑dimensional NAND (“3D NAND”) pilot line in the second half of 2015, and for the tools required for a planned increase in Flash Ventures wafer capacity of approximately 5%, with such wafer capacity increase expected to be completed by mid‑2015. As of December 28, 2014, the Company had notes receivable from Flash Forward of $161.9 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.” As of December 28, 2014 and December 29, 2013, the Company had an equity investment in Flash Forward of $79.2 million and $66.7 million, respectively, denominated in Japanese yen, adjusted by ($28.4) million and ($16.2) million, respectively, of cumulative translation adjustments recorded in AOCI.

In 2014, the Company entered into a non-binding memorandum of understanding with Toshiba related to the construction and operation of Toshiba’s “New Fab 2” fabrication facility, which is primarily intended to provide space to convert Flash Ventures’ current 2D NAND capacity to 3D NAND, with expected readiness for production in 2016.

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.

Other Arrangements and Activities

Research and Development Activities. The Company participates in common R&D activities with Toshiba and is contractually committed to a minimum funding level.

Toshiba Foundry. In the first quarter of fiscal year 2013, the Company concluded its foundry arrangement with Toshiba.

Other Silicon Sources. The Company’s contracts with its other sources of silicon wafers generally require the Company to provide monthly purchase order commitments. 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

Flash Ventures. Flash Ventures sells and leases back from a consortium of financial institutions (“lessors”) a portion of its tools and has entered into equipment master lease agreements of which the Company guarantees half of the total outstanding obligations. As of December 28, 2014, the total amount of the Company’s guarantee obligation of Flash Ventures’ master lease agreements, which reflects future payments and any lease adjustments, was 66.4 billion Japanese yen, or approximately $551 million, based upon the exchange rate at December 28, 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 December 28, 2014, Flash Ventures was in compliance with all of its master lease covenants, including the stockholders’ equity covenant with the Company’s stockholders’ equity at $6.53 billion as of December 28, 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 December 28, 2014:



Master Lease Agreements by Execution Date	Lease Type	Lease Amounts				Expiration
		(Japanese yen)		(U.S. dollar)
Flash Partners:
March 2012	Refinanced	¥	1.9	$	16,074	2015
March 2014	Initial	4.6		37,967		2019
December 2014	Initial	3.2		26,932		2019
		9.7		80,973
Flash Alliance:
March 2012	Initial	5.2		43,477		2017
July 2012	Refinanced	9.8		81,271		2017
March 2014	Initial	4.5		37,479		2019
May 2014	Initial	6.1		50,256		2019
August 2014	Initial	6.4		53,040		2019
December 2014	Initial	5.0		41,418		2019
		37.0		306,941
Flash Forward:
November 2011	Initial	7.7		63,604		2016
March 2012	Initial	5.0		41,447		2017
July 2012	Initial	2.0		16,600		2017
December 2014	Initial	5.0		41,399		2019
		19.7		163,050
Total guarantee obligations		¥	66.4	$	550,964

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 December 28, 2014 in U.S. dollars based upon the yen/dollar exchange rate at December 28, 2014 (in thousands):



Annual Installments	Payment of Principal Amortization		Purchase Option Exercise Price at Final Lease Terms		Guarantee Amount
Year 1	$	145,318	$	15,073	$	160,391
Year 2	120,164		10,236		130,400
Year 3	78,822		49,238		128,060
Year 4	45,157		8,892		54,049
Year 5	26,079		31,530		57,609
Year 6	2,564		17,891		20,455
Total guarantee obligations	$	418,104	$	132,860	$	550,964

Guarantees

Indemnification Agreements. The Company has agreed to indemnify suppliers and customers for alleged IP 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 December 28, 2014 and December 29, 2013, no amounts have been accrued in the 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 had no liabilities recorded for these agreements as of December 28, 2014 and 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 December 28, 2014 and December 29, 2013, no amounts have been accrued in the Company’s 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 December 28, 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 December 28, 2014 were as follows (in thousands):



	Total			1 Year (Fiscal 2015)		2 – 3 Years (Fiscal 2016 and 2017)		4 – 5 Years (Fiscal 2018 and 2019)		More than 5 Years (Beyond Fiscal 2019)
Facility and other operating leases	$	65,416		$	15,166	$	21,062	$	15,509	$	13,679
Flash Partners⁽¹⁾	661,820		⁽⁵⁾⁽⁶⁾	206,713		256,768		157,159		41,180
Flash Alliance⁽¹⁾	1,656,655		⁽⁵⁾⁽⁶⁾	655,083		599,075		360,615		41,882
Flash Forward⁽¹⁾	905,736		⁽⁵⁾⁽⁶⁾	302,332		351,883		189,082		62,439
Toshiba research and development	39,298		⁽⁵⁾	39,298		—		—		—
1.5% Notes due 2017 principal and interest⁽²⁾	1,041,644			14,954		1,026,690		—		—
0.5% Notes due 2020 principal and interest⁽³⁾	1,545,000			7,500		15,000		15,000		1,507,500
Noncancelable production purchase commitments⁽⁴⁾	241,663		⁽⁵⁾	241,663		—		—		—
Capital equipment purchase commitments⁽⁷⁾	125,856			125,744		112		—		—
Operating expense commitments⁽⁸⁾	43,251			42,911		340		—		—
Total contractual cash obligations	$	6,326,339		$	1,651,364	$	2,270,930	$	737,365	$	1,666,680


⁽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. As of December 28, 2014, $3.2 million aggregate principal amount was converted and settled. As of January 30, 2015, the Company had received additional conversion notices for a total of $46 thousand aggregate principal amount of the 1.5% Notes due 2017, for which conversion is expected to be completed in the first quarter of fiscal year 2015. 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 December 28, 2014.


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


⁽⁷⁾	Excludes $119.2 million in capital expenditures not yet paid in cash.


⁽⁸⁾	Excludes amounts in accounts payable and accrued liabilities not yet paid in cash.

The Company has excluded $132.3 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 December 28, 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):



	December 28, 2014
Guarantee of Flash Ventures equipment leases ⁽¹⁾	$	550,964
Guarantee of asset purchase in Bangalore, India ⁽²⁾	25,483


⁽¹⁾	The Company’s guarantee obligation, net of cumulative lease payments, was 66.4 billion Japanese yen, or approximately $551 million based upon the exchange rate at December 28, 2014.

⁽²⁾

The Company is committed to purchase land and a building shell in Bangalore, India, if the seller is able to obtain necessary third‑party and government approvals by June 1, 2015. The Company’s purchase obligation was approximately $25 million based upon the exchange rate at December 28, 2014. The Company is currently making building improvements on the facility and has received a bank guarantee of up to approximately $17 million, based upon the exchange rate at December 28, 2014, from the seller to refund its building improvement expenditures if the purchase obligation expires unexercised.

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 2015 through fiscal year 2026. Future minimum lease payments are presented below (in thousands):



	Future minimum lease payments
Fiscal year:
2015	$	15,731
2016	11,404
2017	9,804
2018	8,708
2019 and thereafter	20,480
Operating leases, gross	66,127
Sublease income to be received in the future under noncancelable subleases	(711		)
Operating leases, net	$	65,416

Net rent expense was as follows (in thousands):



	Fiscal years ended
	December 28, 2014		December 29, 2013		December 30, 2012
Rent expense, net	$	13,022	$	6,473	$	6,366