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Commitments, Contingencies and Related Parties | 12 Months Ended
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Jun. 28, 2019
Commitments and Contingencies Disclosure [Abstract] |
Commitments, Contingencies and Related Parties | Commitments, Contingencies and Related Parties Flash Ventures The Company procures substantially all of its flash-based memory wafers from its business ventures with Toshiba Memory Corporation (“TMC”), which consists of three separate legal entities: Flash Partners Ltd. (“Flash Partners”), Flash Alliance Ltd. (“Flash Alliance”), and Flash Forward Ltd. (“Flash Forward”), collectively referred to as “Flash Ventures”. The Company has a 49.9% ownership interest and TMC has a 50.1% ownership interest in each of these entities. Through Flash Ventures, the Company and TMC collaborate in the development and manufacture of flash-based memory wafers, which are manufactured by TMC at its wafer fabrication facilities located in Japan using semiconductor manufacturing equipment individually owned or leased by each Flash Ventures entity. Each Flash Ventures entity purchases wafers from TMC at cost and then resells those wafers to the Company and TMC at cost plus a markup. Flash Partners. Flash Partners was formed in 2004 in connection with the construction of TMC’s “Y3” 300-millimeter wafer fabrication facility located in Yokkaichi, Japan. Flash Alliance. Flash Alliance was formed in 2006 in connection with the construction of TMC’s “Y4” 300-millimeter wafer fabrication facility located in Yokkaichi, Japan. Flash Forward. Flash Forward was formed in 2010 in connection with the construction of TMC’s “Y5” 300-millimeter wafer fabrication facility located in Yokkaichi, Japan. Y5 was built in two phases of approximately equal size. New Y2. The Company has a facility agreement with TMC related to the construction and operation of TMC’s “New Y2” 300-millimeter wafer fabrication facility located in Yokkaichi, Japan. New Y2 primarily provided additional clean room space to convert a portion of 2-dimensional (“2D”) flash-based wafer production capacity to 3-dimensional (“3D”) flash-based wafer production capacity. Production of flash-based wafers in New Y2 started in 2016. Y6. The Company also has a facility agreement with TMC related to the construction and operation of TMC’s “Y6” 300-millimeter wafer fabrication facility in Yokkaichi, Japan. Y6 is primarily intended to provide clean room space to continue the transition of existing 2D flash-based wafer capacity to 3D flash-based wafer production capacity. Production of flash-based wafers in Y6 started for Flash Ventures started in 2018. K1. In May 2019, the Company entered into additional agreements to extend Flash Ventures to a new wafer fabrication facility, referred to as “K1.” K1 is currently under construction at a site in Kitakami, Iwate, Japan. The Company is committed to pay, among other items, future building depreciation prepayments of $358 million as follows: $156 million in fiscal year 2020, $124 million in fiscal year 2021 and $78 million in fiscal 2022, to be credited against future wafer charges. The primary purpose of K1 is to provide clean room space to continue the transition of existing flash-based wafer capacity to newer flash technology nodes. Output from the initial production line at K1 is expected in the second half of fiscal year 2020. Meaningful output from K1 is not expected to begin until the first half of fiscal year 2021. The Company accounts for its ownership position of each entity within Flash Ventures under the equity method of accounting. The financial and other support provided by the Company in all periods presented was either contractually required or the result of a joint decision to expand wafer capacity, transition to new technologies or refinance existing equipment lease commitments. Entities within Flash Ventures are VIEs. The Company evaluated whether it is the primary beneficiary of any of the entities within Flash Ventures for all periods presented and determined that it is not the primary beneficiary of any of the entities within Flash Ventures because it does not have a controlling financial interest in any of those entities. In determining whether the Company is the primary beneficiary, the Company analyzed the primary purpose and design of Flash Ventures, the activities that most significantly impact Flash Ventures’ economic performance, and whether the Company had the power to direct those activities. The Company concluded, based upon its 49.9% ownership, the voting structure and the manner in which the day-to-day operations are conducted for each entity within Flash Ventures, that the Company lacked the power to direct most of the activities that most significantly impact the economic performance of each entity within Flash Ventures. The following table presents the notes receivable from, and equity investments in, Flash Ventures as of June 28, 2019 and June 29, 2018:
| June 28, 2019 |  | June 29, 2018
| (in millions)
Notes receivable, Flash Partners | $ | 551 |  |  | $ | 767 |
Notes receivable, Flash Alliance | 878 |  |  | 48 |
Notes receivable, Flash Forward | 743 |  |  | 700 |
Investment in Flash Partners | 200 |  |  | 191 |
Investment in Flash Alliance | 296 |  |  | 283 |
Investment in Flash Forward | 123 |  |  | 116 |
Total notes receivable and investments in Flash Ventures | $ | 2,791 |  |  | $ | 2,105 |
During 2019 and 2018, the Company made net payments to Flash Ventures of $4.13 billion and $3.79 billion, respectively, for purchased flash-based memory wafers and net loans and investments. The Company makes, or will make, loans to Flash Ventures to fund equipment investments for new process technologies and additional wafer capacity. The Company aggregates its Flash Ventures’ notes receivable into one class of financing receivables due to the similar ownership interest and common structure in each Flash Venture entity. For all reporting periods presented, no loans were past due and no loan impairments were recorded. The Company’s notes receivable from each Flash Ventures entity, denominated in Japanese yen, are secured by equipment owned by that Flash Ventures entity. As of June 28, 2019 and June 29, 2018, the Company had accounts payable balances due to Flash Ventures of $331 million and $259 million, respectively. The Company’s maximum reasonably estimable loss exposure (excluding lost profits) as a result of its involvement with Flash Ventures, based upon the Japanese yen to U.S. dollar exchange rate at June 28, 2019, is presented below. Investments in Flash Ventures are denominated in Japanese yen, and the maximum estimable loss exposure excludes any cumulative translation adjustment due to revaluation from the Japanese yen to the U.S. dollar.
| June 28, 2019
Notes receivable | $ | 2,172 |
Equity investments | 619 |
Operating lease guarantees | 1,575 |
Inventory | 197 |
Maximum estimable loss exposure | $ | 4,563 |
As of June 28, 2019 and June 29, 2018, the Company’s retained earnings included undistributed earnings of Flash Ventures of $14 million and $8 million, respectively. The Company is obligated to pay for variable costs incurred in producing its share of Flash Ventures’ flash-based memory wafer supply, based on its three month forecast, which generally equals 50% of Flash Ventures’ output. In addition, the Company is obligated to pay for half of Flash Ventures’ fixed costs regardless of the output the Company chooses to purchase. 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 50.0% of each Flash Ventures entity’s capital investments to the extent that each Flash Ventures entity’s operating cash flow is insufficient to fund these investments. Flash Ventures has historically operated near 100% of its manufacturing capacity. As a result of flash business conditions, the Company temporarily reduced its utilization of its share of Flash Ventures’ manufacturing capacity to an abnormally low level to more closely align the Company’s flash-based wafer supply with the projected demand. In 2019, the Company incurred costs of $264 million associated with the reduction in utilization, which was recorded as a charge to cost of revenue. In June 2019, an unexpected power outage incident occurred at the flash-based memory manufacturing facilities operated by Flash Ventures in Yokkaichi, Japan. The power outage incident impacted the facilities and process tools and resulted in the damage of flash wafers in production. As a result of the incident, the Company incurred charges of $145 million recorded in cost of revenue for the year ended June 28, 2019, which primarily consisted of the write-off of damaged inventory and unabsorbed manufacturing overhead costs. The Company is pursuing recovery of its losses associated with this event; however, the amount of any recovery cannot be estimated at this time. Inventory Purchase Commitments with Flash Ventures. Purchase orders placed under Flash Ventures for up to three months are binding and cannot be canceled. Research and Development Activities. The Company participates in common R&D activities with TMC and is contractually committed to a minimum funding level. R&D commitments are immaterial to the Consolidated Financial Statements. Off-Balance Sheet Liabilities Flash Ventures sells to and leases back from a consortium of financial institutions a portion of its tools and has entered into equipment lease agreements of which the Company guarantees half or all of the outstanding obligations under each lease agreement. The lease agreements are subject to customary covenants and cancellation events related to Flash Ventures and each of the guarantors. The occurrence of a cancellation event could result in an acceleration of Flash Ventures’ obligations and a call on the Company’s guarantees. The following table presents the Company’s portion of the remaining guarantee obligations under the Flash Ventures’ lease facilities in both Japanese yen and U.S. dollar-equivalent, based upon the Japanese yen to U.S. dollar exchange rate as of June 28, 2019.
| Lease Amounts
| (Japanese yen, in billions) |  | (U.S. dollar, in millions)
Total guarantee obligations | ¥ | 170 |  |  | $ | 1,575 |
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 Flash Ventures lease agreements, in annual installments as of June 28, 2019 in U.S. dollars, based upon the Japanese yen to U.S. dollar exchange rate as of June 28, 2019:
Annual Installments |  | Payment of Principal Amortization |  | Purchase Option Exercise Price at Final Lease Terms |  | Guarantee Amount
|  | (in millions)
2020 |  | $ | 419 |  |  | $ | 66 |  |  | $ | 485 |
2021 |  | 321 |  |  | 109 |  |  | 430 |
2022 |  | 235 |  |  | 50 |  |  | 285 |
2023 |  | 137 |  |  | 67 |  |  | 204 |
2024 |  | 51 |  |  | 120 |  |  | 171 |
Thereafter |  | — |  |  | — |  |  | — |
Total guarantee obligations |  | $ | 1,163 |  |  | $ | 412 |  |  | $ | 1,575 |
The Company and TMC 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 has not made any indemnification payments, nor recorded any indemnification receivables, under any such agreements. As of June 28, 2019, no amounts have been accrued in the Consolidated Financial Statements with respect to these indemnification agreements. Unis Venture The Company has a joint venture with Unisplendour Corporation Limited and Unissoft (Wuxi) Group Co. Ltd. (“Unis”), referred to as the “Unis Venture”, to market and sell the Company’s products in China and to develop data storage systems for the Chinese market in the future. The Unis Venture is 49% owned by the Company and 51% owned by Unis. The Company accounts for its investment in the Unis Venture under the equity method of accounting. Revenue on products distributed by the Unis Venture is recognized upon sell through to third-party customers. For the years ended June 28, 2019 and June 29, 2018, the Company recognized less than 1% of its consolidated revenue on products distributed by the Unis Venture. The outstanding accounts receivable due from and investment in the Unis Venture were not material to the Consolidated Financial Statements as of June 28, 2019 or June 29, 2018. Sale-Leaseback In April 2019, the Company completed a sale and leaseback of its manufacturing facility in Fremont, California. The Company received proceeds from the sale of $115 million and recognized a loss of $25 million. The property is being leased back over a term of 15 years at an annual lease rate of $7 million for the first year and increasing by 3% per year thereafter. The lease includes four 5-year renewal options for the ability to extend up to 20 years. Lease Commitments The Company leases certain facilities and equipment under long-term, non-cancelable operating leases. The Company’s operating leases consist of leased property and equipment that expire at various dates through 2034. Future minimum lease payments under operating leases that have initial non-cancelable lease terms in excess of one year at June 28, 2019 are as follows:
|  | Lease Amounts
|  | (in millions)
Fiscal year |  |
2020 |  | $ | 59 |
2021 |  | 45 |
2022 |  | 33 |
2023 |  | 22 |
2024 |  | 16 |
Thereafter |  | 116 |
Total future minimum lease payments |  | $ | 291 |
Net rent expense was as follows:
| 2019 |  | 2018 |  | 2017
| (In millions)
Rent expense, net | $ | 47 |  |  | $ | 49 |  |  | $ | 56 |
Purchase Agreements and Other Commitments In the normal course of business, the Company enters into purchase orders with suppliers for the purchase of components used to manufacture its products. These purchase orders generally cover forecasted component supplies needed for production during the next quarter, are recorded as a liability upon receipt of the components, and generally may be changed or canceled at any time prior to shipment of the components. The Company also enters into long-term agreements with suppliers that contain fixed future commitments, which are contingent on certain conditions such as performance, quality and technology of the vendor’s components. As of June 28, 2019, the Company had the following minimum long-term commitments:
|  | Long-term purchase commitments
|  | (in millions)
Fiscal year |  |
2020 |  | $ | 136 |
2021 |  | 244 |
2022 |  | 263 |
2023 |  | 154 |
2024 |  | 40 |
Thereafter |  | 210 |
Total |  | $ | 1,047 |

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