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 facilities 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 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 September 27, 2015, the Company had notes receivable from Flash Partners of $77.9 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 September 27, 2015 and December 28, 2014, the Company had an equity investment in Flash Partners of $169.2 million and $167.1 million, respectively, denominated in Japanese yen, adjusted by ($7.7) million and ($7.3) million, respectively, of cumulative translation adjustments recorded in AOCI. Flash Partners’ share of the Fab 3 fabrication facility is fully equipped.

Flash Alliance. Flash Alliance Ltd. (“Flash Alliance”) was formed in 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 September 27, 2015, the Company had notes receivable from Flash Alliance of $272.2 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 September 27, 2015 and December 28, 2014, the Company had an equity investment in Flash Alliance of $251.9 million and $249.5 million, respectively, denominated in Japanese yen, adjusted by ($46.1) million and ($45.5) million, respectively, of cumulative translation adjustments recorded in AOCI. Flash Alliance’s share of the Fab 4 fabrication facility is fully equipped.

Flash Forward. Flash Forward Ltd. (“Flash Forward”) was formed in 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 Fab 5 is fully equipped. Phase 2 of Fab 5 is partially equipped. Phase 2 is being used for technology transition of the existing Flash Ventures wafer capacity to 1Y‑nanometer and 15‑nanometer technology nodes, wafer capacity expansion and a 3‑dimensional NAND (“3D NAND”) pilot line. An expansion of approximately 5% of Flash Ventures wafer capacity was completed in Fab 5 during the second quarter of 2015. As of September 27, 2015, the Company had notes receivable from Flash Forward of $126.4 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 September 27, 2015 and December 28, 2014, the Company had an equity investment in Flash Forward of $81.4 million and $79.2 million, respectively, denominated in Japanese yen, adjusted by ($28.6) million and ($28.4) million, respectively, of cumulative translation adjustments recorded in AOCI.

New Fab 2. In October 2015, the Company entered into a facility agreement (“New Fab 2 Agreement”) 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 a portion of the current Fab 3, Fab 4 and Fab 5 2D NAND capacity to 3D NAND, with expected readiness of the facility in the first calendar quarter of 2016. Under the New Fab 2 Agreement, the Company is committed to 50% of New Fab 2’s start-up costs, as well as 50% of the initial production ramp in New Fab 2. The Company’s share of the initial commitment is expected to result in equipment investments and start-up costs totaling approximately $600 million, to be incurred primarily through 2016. The Company is also required under the New Fab 2 Agreement to prepay approximately $42 million in October 2015 toward the New Fab 2 building depreciation, to be credited against future wafer charges.

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 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 September 27, 2015, the total amount of the Company’s guarantee obligation of Flash Ventures’ master lease agreements, which reflects future payments and any lease adjustments, was 92.4 billion Japanese yen, or approximately $766 million, based upon the exchange rate at September 27, 2015.

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 September 27, 2015, the Company’s stockholders’ equity of $5.63 billion was in compliance with the related covenant under Flash Ventures’ master lease agreements. If the Company’s stockholders’ equity were to fall below $1.51 billion, or other events of default occur, Flash Ventures would become non-compliant with certain covenants under its master lease agreements and would be required to negotiate a resolution to the non-compliance to avoid acceleration of the Company’s guarantee obligations under the master lease 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 and U.S. dollar-equivalent based upon the exchange rate at September 27, 2015:



Master Lease Agreements by Execution Date	Lease Type	Lease Amounts				Expiration
		(Japanese yen, in billions)		(U.S. dollar, in thousands)
Flash Partners:
March 2012	Refinanced	¥	0.4	$	3,779	2015
March 2014	Initial	3.9		32,181		2019
December 2014	Initial	2.9		24,045		2019
		7.2		60,005
Flash Alliance:
March 2012	Initial	3.9		32,532		2017
July 2012	Refinanced	7.1		59,195		2017
March 2014	Initial	3.8		31,291		2019
May 2014	Initial	5.0		41,813		2019
August 2014	Initial	5.4		44,599		2019
December 2014	Initial	4.5		37,019		2019
March 2015	Initial	9.5		78,330		2020
June 2015	Initial	7.0		58,007		2020
August 2015	Initial	4.5		37,291		2020
September 2015	Initial	4.0		33,146		2020
		54.7		453,223
Flash Forward:
November 2011	Initial	5.8		48,247		2016
March 2012	Initial	3.7		30,450		2017
July 2012	Initial	1.5		12,240		2017
December 2014	Initial	4.5		37,291		2019
June 2015	Initial	5.0		41,435		2020
August 2015	Initial	7.5		62,153		2020
September 2015	Initial	2.5		20,717		2020
		30.5		252,533
Total guarantee obligations		¥	92.4	$	765,761

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 September 27, 2015 in U.S. dollars based upon the Japanese yen to U.S. dollar exchange rate at September 27, 2015:



Annual Installments	Payment of Principal Amortization		Purchase Option Exercise Price at Final Lease Terms		Guarantee Amount
	(In thousands)
Year 1	$	186,838	$	9,415	$	196,253
Year 2	153,302		52,309		205,611
Year 3	111,562		32,025		143,587
Year 4	82,368		31,470		113,838
Year 5	44,284		57,482		101,766
Year 6	1,329		3,377		4,706
Total guarantee obligations	$	579,683	$	186,078	$	765,761

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 September 27, 2015 and December 28, 2014, no amounts have been accrued in the 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. The Company had no liabilities recorded for these agreements as of September 27, 2015 and December 28, 2014, 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 patent indemnification agreements under which, in many cases, the Company will share in the expenses associated with the defense and cost of settlement associated with such claims. These agreements provide 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 September 27, 2015 and December 28, 2014, no amounts have been accrued in the 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 September 27, 2015, 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 September 27, 2015 were as follows:



	Total			1 Year (Remaining 3 months in 2015)		2 - 3 Years (2016 and 2017)		4 - 5 Years (2018 and 2019)		More than 5 Years (Beyond 2019)
	(In thousands)
Facility and other operating leases	$	60,487	⁽⁴⁾	$	4,440	$	25,689	$	16,078	$	14,280
Flash Ventures and other related commitments⁽¹⁾	3,964,269		⁽⁴⁾⁽⁵⁾	339,239		2,108,923		1,035,173		480,934
Convertible senior notes⁽²⁾	2,567,867			3,750		1,041,617		15,000		1,507,500
Noncancelable production purchase commitments⁽³⁾	248,424		⁽⁴⁾	247,814		610		—		—
Capital equipment purchase commitments	42,208			38,982		3,226		—		—
Operating expense commitments	45,874			40,859		5,015		—		—
Total contractual cash obligations	$	6,929,129		$	675,084	$	3,185,080	$	1,066,251	$	2,002,714


⁽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, including research and development. Funding commitments assume no additional operating lease guarantees; additional operating lease guarantees can reduce funding commitments.


⁽²⁾	Includes principal and interest on both the 1.5% Notes due 2017 and the 0.5% Notes due 2020. See Note 7, “Financing Arrangements.”


⁽³⁾	Includes production purchase commitments to Flash Ventures and other suppliers.


⁽⁴⁾	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 September 27, 2015.


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

The Company has excluded $88.7 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 September 27, 2015. The Company is unable to make reasonably reliable estimates of the period of cash settlement with the respective taxing authorities.

As discussed previously, if the merger agreement with Western Digital is terminated under specific circumstances, the Company may be required to pay Western Digital up to approximately $553 million. In addition, the merger agreement requires the Company to pay a fee of approximately $184 million if either Western Digital or the Company terminates the merger due to the Company’s stockholders failure to approve this merger. See Note 1, “Organization and Summary of Significant Accounting Policies–Pending Acquisition by Western Digital Corporation.”

Off-Balance Sheet Arrangements. Off-balance sheet arrangements were as follows:



	September 27, 2015
	(In thousands)
Guarantee of Flash Ventures equipment leases ⁽¹⁾	$	765,761


⁽¹⁾	The Company’s guarantee obligation, net of cumulative lease payments, was 92.4 billion Japanese yen, or approximately $766 million based upon the exchange rate at September 27, 2015.

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 2015 through 2025. Future minimum lease payments are presented below:



	Future minimum lease payments
	(In thousands)
Year:
2015 (Remaining 3 months)	$	4,586
2016	14,362
2017	11,473
2018	9,111
2019	6,967
2020 and thereafter	14,280
Operating leases, gross	60,779
Sublease income to be received in the future under noncancelable subleases	(292		)
Operating leases, net	$	60,487

Net rent expense was as follows:



	Three months ended				Nine months ended
	September 27, 2015		September 28, 2014		September 27, 2015		September 28, 2014
	(In thousands)
Rent expense, net	$	3,105	$	5,058	$	10,180	$	8,225