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SPANSION INC. - 10-Q - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS(Edgar Glimpses Via Acquire Media NewsEdge) Forward-Looking Statements This Quarterly Report on Form 10-Q, including this Management's Discussion and Analysis of Financial Condition and Results of Operations, contains forward-looking statements. These statements relate to future events or our future financial performance. Forward-looking statements may include words such as "may," "will," "should," "expect," "plan," "intend," "anticipate," "believe," "estimate," "predict," "potential," "continue" or other wording indicating future results or expectations. Forward-looking statements are subject to risks and uncertainties, and actual events or results may differ materially. Factors that could cause our actual results to differ materially include, but are not limited to, those discussed under "Part I, Item 1A. Risk Factors" in our 2013 Annual Report on Form 10-K, filed with the SEC on February 25, 2014, as amended by the Form 10-K/A filed on July 8, 2014. These risks include our ability to: accurately forecast customer demand for our products; manage risks associated with our investment in new business strategies and acquisitions, such as our acquisition of the MCA business from Fujitsu; maintain our distribution relationships and channels in the future; manage risks associated with our global customer base and support structure; maintain and manage relations with third party manufacturers; maintain manufacturing efficiency; and protect our intellectual property and defend against infringement or other intellectual property claims. We encourage you to read that section of our Annual Report carefully. Except as required by law, we undertake no obligation to revise or update any forward-looking statements to reflect any events or circumstances that arise after the date of this report, or to conform such statements to actual results or changes in our expectations. Overview We are a leading designer, manufacturer and developer of embedded systems semiconductors, which include flash memory, microcontrollers, mixed-signal and analog products and embedded system-on-chip solutions. Our leading-edge intellectual property and products are driving the development of high quality, reliable and economical devices that are high performing, intelligent, efficient and secure. The embedded markets we focus on are transportation, industrial, consumer, communications and gaming. These markets require reliable flash memory solutions, microcontrollers, mixed-signal and analog and other programmable semiconductors that run applications in a broad range of electronic systems. The embedded markets are generally characterized by longer design and product life cycles, relatively stable pricing, more predictable supply-demand outlook and lower capital investments. Within this embedded industry, we serve a well-diversified customer base through a predominantly differentiated, non-commodity, service oriented model that strives to meet our customers' needs. Our embedded solutions are incorporated in products manufactured by leading original equipment manufacturers (OEMs). We have many years of experience refining our product and service strategy to address market requirements and deliver high-quality products that go into a broad range of electronic applications such as automobiles, airplanes, set top boxes, games, telecommunications equipment, smart meters, factory automation and medical devices. Our products are designed to accommodate various voltage, interface and density requirements for a wide range of applications and customer platforms. The majority of our NOR flash memory product designs are based on our proprietary two-bit-per-cell MirrorBit® technology, which has a simpler cell architecture, higher yields and lower costs than competing floating gate NOR flash memory technology. While we are most known for our NOR products, we are continuing to expand our portfolio in the areas of NAND flash memory, microcontroller, mixed-signal and analog products, as well as programmable system solutions or embedded system-on-chip solutions to broaden our customer engagement and bring differentiated products to embedded markets. 31 -------------------------------------------------------------------------------- In addition to product sales, we generate revenue by licensing our intellectual property to third parties and we assist our customers in developing and prototyping their designs by providing software and hardware development tools, drivers and simulation models for system-level integration. Sale of Sunnyvale property and new headquarters lease On January 23, 2014, we sold our property in Sunnyvale, California, consisting of 24.5 acres of land with approximately 471,000 square feet of buildings that include our headquarters building and submicron development center, a Pacific Gas & Electric transmission facility and a warehouse building, for a net consideration of $58.9 million. We concurrently leased back approximately 170,000 square feet of the headquarters building on a month-to-month basis with the option to continue the lease for up to 24 months; thereafter, either party to the lease agreement can terminate the lease. The first six months of the lease are rent free. For accounting purposes, the rents relating to the rent-free period are assumed to have been netted against the sale proceeds and represent prepaid rent. Our rent-free use of this building constitutes continuing involvement by us as lessee, and recognition of the sale of the property and the related gain is deferred until the lease period ends. Due to our continuing involvement under the lease, the cash proceeds net of third-party costs, are recorded under the financing method as a short term financing obligation in accordance with the authoritative guidance on leases and sale of real estate. Interest is imputed on the financing obligation until such time as the sale can be recognized. The property continues to remain on our books and the buildings will be depreciated over their remaining useful life. As of June 29, 2014, $59.9 million, including interest, was recorded in Accrued liabilities and other, as a financing obligation. After the rent-free period, a portion of the lease payments will be recorded as a decrease to the financing obligation and the remainder will be recognized as interest expense. On May 22, 2014, we entered into a new headquarters lease for renting office space in San Jose, CA. The lease is for a period of 12 years, with two options to extend for periods of five years each after the initial lease term. The initial term of the lease will commence on January 1, 2015 and expire on December 31, 2026. Closure of Chapter 11 cases Pursuant to the confirmation of the Plan of Reorganization on April 16, 2010, a claims agent was appointed to analyze and, at his discretion, contest outstanding disputed claims totaling $1.5 billion. As of June 29, 2014, we had resolved all outstanding disputed claims and had distributed the 46,264,760 shares of stock that were reserved for holders of allowed general unsecured claims. On July 16, 2014, a final order was entered by the Bankruptcy Court closing all Chapter 11 cases. We recognized a gain of $3.2 million in the second quarter of fiscal 2014 relating to reversal of the reserve for bankruptcy claims. This has been recorded under Interest income and other, net in the Condensed Consolidated Statement of Operations. Critical Accounting Policies Pension and Other Postretirement Benefits In connection with our establishment of the Spansion Innovates Group Cash Balance Plan (an unfunded defined benefit plan), for the employees transferred as part of the MCA business, we adopted the relevant accounting guidance for defined benefit plans beginning in the fiscal quarter ended June 29, 2014. Defined benefit pension plans are accounted for on an actuarial basis, which requires the selection of various assumptions such as turnover rates, discount rates and other factors. The discount rate assumption is determined by comparing the projected benefit payments to the Japanese corporate bonds yield curve as of April 1, 2014. 32--------------------------------------------------------------------------------The benefit obligation is the projected benefit obligation (PBO), which represents the actuarial present value of benefits expected to be paid upon retirement. This liability is recorded in Other long term liabilities on the Condensed Consolidated Balance Sheets. Net periodic pension cost is recorded in the Condensed Consolidated Statement of Operations and includes service cost. Service cost represents the actuarial present value of participant benefits earned in the current year. Interest cost represents the time value of money associated with the passage of time on the PBO. Gains or losses resulting from a change in the PBO if actual results differ from actuarial assumptions will be accumulated and amortized over the future life of the plan participants if they exceed 10% of the PBO. Other Changes in Estimates or Accounting Policies There have been no other significant changes in our critical accounting estimates or significant accounting policies during the six months ended June 29, 2014 as compared to the discussion in Part II, Item 7 and in Note 2 to our consolidated financial statements in Part II, Item 8 of our Annual Report on Form 10-K for the year ended December 29, 2013, as amended by the Form 10-K/A filed on July 8, 2014. Recent Accounting Pronouncements In May 2014, the FASB issued an accounting standard update that provides guidance regarding revenue recognition. The guidance requires an entity to recognize revenue to depict the transfer of goods or services to customers in an amount that reflects the consideration to which a Company expects to be entitled in exchange for those goods or services. The guidance becomes effective in the first quarter of our fiscal year ending December 31, 2017. We will have the option of using either a full retrospective or modified retrospective approach for the adoption of the standard update. We are evaluating the impact that the standard update will have on our consolidated financial statements. Results of Operations Comparison of Net Sales, Gross Profit, Research and Development expense , Sales, General and Administrative expense, Interest Income and Other, Net and Interest Expense and Provision for Income Taxes The following is a summary of our operating results: Three Months Ended Six Months Ended June 29, 2014 June 30, 2013 Variance June 29, 2014 June 30, 2013 Variance (in thousands, except for percentages) Total net sales $ 314,666 $ 195,070 $ 119,596 $ 626,416 $ 384,642 $ 241,774 Cost of sales 221,844 137,714 84,130 443,762 281,431 162,331 Gross profit 92,822 57,356 35,466 182,654 103,211 79,443 Gross margin 29.5 % 29.4 % 0.1 % 29.2 % 26.8 % 2.3 % Research and development 39,702 23,548 16,154 83,264 46,325 36,939 Sales, general and administrative 61,081 34,414 26,667 116,712 62,897 53,815 Operating loss (7,961 ) (606 ) (7,355 ) (17,322 ) (6,011 ) (11,311 ) Interest income and other, net 5,941 3,118 2,823 1,341 4,080 (2,739 ) Interest expense (6,139 ) (7,378 ) 1,239 (12,226 ) (14,982 ) 2,756 Provision (benefit) for income taxes 3,815 (1,635 ) 5,450 6,262 753 5,509 Net Sales Net sales increased by $119.6 million from $195.1 million for the three months ended June 30, 2013 to $314.7 million for the three months ended June 29, 2014. The increase was due to the inclusion of $133.5 million of revenues from the MCA business acquired in the third quarter of fiscal 2013, which was partially offset by $18.3 million decrease in sales of embedded flash memory products. The decrease in embedded flash memory sales was primarily in the consumer, transportation and industrial markets. 33 -------------------------------------------------------------------------------- Net sales increased by $241.8 million from $384.6 million for the six months ended June 30, 2013 to $626.4 million for the six months ended June 29, 2014. The increase was due to the inclusion of $274.7 million of revenues from MCA business acquired, which was partially offset by $49.7 million decrease in embedded flash memory sales. The decrease in embedded flash memory sales was due to lower revenues from consumer, transportation and industrial markets and a downward pressure on selling prices. Geographically, revenue was derived from the following regions: Three Months Ended Six Months Ended June 29, 2014 June 30, 2013 June 29, 2014 June 30, 2013 Revenue ($ in Revenue ($ in Revenue ($ in Revenue ($ in thousands) % of Revenue thousands) % of Revenue thousands) % of Revenue thousands) % of Revenue Japan 114,498 36.4 % 38,677 19.9 % 217,150 34.7 % 80,645 21.0 % Asia Pacific 102,571 32.6 % 74,291 38.1 % 203,513 32.5 % 143,403 37.3 % Europe 46,840 14.9 % 39,429 20.2 % 98,325 15.7 % 75,347 19.6 % Americas 24,367 7.7 % 23,817 12.2 % 48,015 7.7 % 48,119 12.5 % Korea 19,098 6.1 % 11,594 5.9 % 39,653 6.3 % 22,149 5.8 % Licensing, and other 7,292 2.3 % 7,262 3.7 % 19,760 3.1 % 14,979 3.8 % Total 314,666 100.0 % 195,070 100.0 % 626,416 100.0 % 384,642 100.0 % Gross Profit Our gross profit increased by $35.4 million from $57.4 million for the three months ended June 30, 2013 to $92.8 million for the three months ended June 29, 2014. The gross margin percentage increased slightly from 29.4% in the three months ended June 30, 2013 to 29.5% in three months ended June 29, 2014. The increase in gross profit and gross margin was primarily due to revenues from the MCA business. This increase was partially offset by reduced profits from revenues in the embedded flash memory market due to decline in consumer, transportation and industrial sales as described under Net Sales above. Our gross profit increased by $79.5 million from $103.2 million for the six months ended June 30, 2013 to $182.7 million for the six months ended June 29, 2014. Our gross margin as a percentage of sales increased from 26.8% in the six months ended June 30, 2013 to 29.2% in the six months ended June 29, 2014. The increase in gross profit / margin was mainly due to revenues from MCA business and additional licensing revenues. The increase was partially offset by reduced profits from sales of embedded flash solutions due to lower revenues from consumer, transportation and industrial markets and changes in product sales mix. Research and Development (R&D) R&D expenses increased by $16.2 million from $23.5 million for the three months ended June 30, 2013 to $39.7 million for the three months ended June 29, 2014. R&D expenses increased by $37.0 million from $46.3 million for the six months ended June 30, 2013 to $83.3 million for the six months ended June 29, 2014. The increase for both three and six months ended June 29, 2014 was mainly due to incremental R&D expenses relating to the MCA business. Sales, General and Administrative (SG&A) SG&A expenses increased by $26.7 million from $34.4 million for the three months ended June 30, 2013 to $61.1 million for the three months ended June 29, 2014. The increase was mainly due to incremental SG&A expenses relating to the MCA business and $15.6 million of higher legal expenses on the Macronix patent infringement litigation. 34-------------------------------------------------------------------------------- SG&A expenses increased by $53.8 million from $62.9 million for the six months ended June 30, 2013 to $116.7 million for the six months ended June 29, 2014. The increase was mainly due to incremental SG&A expenses relating to the MCA business and $21.4 million higher legal expenses on the Macronix patent infringement litigation. Interest Income and Other, net Interest income and other, net increased by $2.8 million from $3.1 million for the three months ended June 30, 2013 to $5.9 million for the three months ended June 29, 2014. The increase is due to $3.2 million of reversal of bankruptcy related reserves on final closure of the Chapter 11 cases, $2.5 million gain recognized relating to better than expected performance of the total fund assets in the pension plan, and $0.5 million recovery from impaired investments consisting of auction rate securities. We impaired these securities at various intervals between fiscal year 2007 and fiscal year 2010 based on our periodic analysis of discounted cash flows and the lack of a market for those securities. In the second quarter of fiscal 2014, we received a refund on the principal portion of the investment. The increase was partially offset by an adverse impact of $2.4 million of gain on ineffective cash flow hedges in the second quarter of fiscal 2013, compared to no such gains in fiscal 2014 and $0.8 million higher realized and unrealized loss on foreign currency transactions in the second quarter of fiscal 2014. Interest income and other, net, decreased by $2.8 million from $4.1 million for the six months ended June 30, 2013 to $1.3 million for the six months ended June 29, 2014. The decrease was due to $4.8 million of costs incurred to repurchase $94.0 million of the remaining 7.875% Senior Notes, an adverse impact of $2.4 million gain on ineffective cash flow hedges in the second quarter of fiscal 2013, compared to no such event in fiscal 2014, and $1.1 million of higher realized and unrealized loss on foreign currency transactions. The decrease was offset by a gain of $3.2 million from the reversal of bankruptcy related reserves on final closure of the Chapter 11 cases, and $2.5 million gain recognized relating to better than expected performance of the total fund assets in the pension plan. Interest Expense Interest expense decreased by $1.3 million from $7.4 million for the three months ended June 30, 2013 to $6.1 million for the three months ended June 29, 2014 due to a lower interest rate on our debt. We fully redeemed 7.875% Senior Notes due 2017 (the Senior Notes) in the first quarter of fiscal 2014. The decrease was partially offset by $0.6 million of imputed interest recorded in fiscal 2014 on the financing obligation relating to the sale of the Sunnyvale property. Interest expense decreased by $2.8 million from $15.0 million for the six months ended June 30, 2013 to $12.2 million for the six months ended June 29, 2014 primarily due to lower interest expense on our debt. The decrease was partially offset by $1.0 million of imputed interest on the financing obligation relating to the sale of the Sunnyvale property in fiscal 2014. Provision for Income Taxes We recorded an income tax expense of $3.8 million and an income tax benefit of $1.6 million for the three months ended June 29, 2014 and June 30, 2013, respectively. Our income tax expense was $6.3 million and $0.8 million for the six months ended June 29, 2014 and June 30, 2013, respectively. The tax expense for the three months and the six months ended June 29, 2014 was primarily attributable to pre-tax income in foreign jurisdictions, withholding taxes related to Samsung licensing revenue and reserves for uncertain tax positions in foreign jurisdictions. The tax benefit for the three months ended June 30, 2013 was primarily attributable to the release of reserves for uncertain tax positions in foreign locations due to expiration of the applicable statues of limitations. The tax expense for the six months ended June 30, 2013 was primarily attributable to pre-tax income in foreign jurisdictions and withholding taxes related to Samsung licensing revenue offset by the release of reserves for uncertain tax positions in foreign locations. 35-------------------------------------------------------------------------------- As of June 29, 2014, all of our U.S. deferred tax assets, net of deferred tax liabilities continue to be subject to a full valuation allowance. The valuation allowance is based on our assessment that it is more likely than not that the deferred tax assets will not be realizable in the foreseeable future. As of December 29, 2013, we had U.S. federal and state net operating loss carry forwards of approximately $1,024 million and $219.8 million, respectively. Approximately $489.7 million of the federal net operating loss carry forwards are subject to an annual limitation of $27.2 million. These federal and state net operating losses, if not utilized, expire from 2016 to 2033. We also have U.S. federal credit carryovers of $3.3 million which expire from 2020 to 2033. We also have state tax credits of $18.2 million, which includes California state tax credits of $17.5 million, which can be brought forward indefinitely. If we were to undergo an "ownership change" for purposes of Section 382 of the Internal Revenue Code of 1986, as amended, our ability to utilize the unlimited federal net operating loss carry forwards could be limited under certain provisions of the Internal Revenue Code. As a result, we could incur greater tax liabilities than we would in the absence of such a limitation and any incurred liabilities could materially adversely affect our results of operations and financial condition. Contractual Obligations The following table summarizes our contractual obligations at June 29, 2014: Payments due by period 2019 and Total 2014 2015 2016 2017 2018 Beyond (in thousands) Senior Secured Term Loan $ 298,500 $ 1,500 $ 3,000 $ 3,000 $ 3,750 $ 3,000 $ 284,250 Exchangeable Senior Notes $ 150,000 - - - - - 150,000 Interest expense on Debt $ 82,669 7,183 14,249 14,166 16,721 13,938 16,412 Other long term liabilities (1) $ 24,952 - 8,755 9,036 5,939 - 1,222 Operating leases (2) $ 57,280 4,341 6,683 8,264 5,912 4,794 27,286 Unconditional purchase commitments (3) $ 116,973 56,754 30,994 29,225 - - - Total contractual obligations (4) $ 730,374 $ 69,778 $ 63,681 $ 63,691 $ 32,322 $ 21,732 $ 479,170 (1) Other long term liabilities consist of payment commitments under long term software license agreements with vendors and asset retirement obligations. (2) Operating leases includes payments relating to the new headquarters lease. The initial term of the lease will commence on January 1, 2015 and expire on December 31, 2026. (3) Unconditional purchase commitments (UPC) include agreements to purchase goods or services that are enforceable and legally binding on us and that specify all significant terms, including: fixed or minimum quantities to be purchased; fixed, minimum or variable price provisions; and the approximate timing of the transaction. These agreements are principally related to inventory. UPCs exclude agreements that are cancelable without penalty. (4) As of June 29, 2014, the liability for uncertain tax positions was $19.3 million, including interest and penalties. Due to the high degree of uncertainty regarding the timing of potential future cash flows associated with these liabilities, we are unable to make a reasonably reliable estimate of the amount and period in which these liabilities might be paid. 36--------------------------------------------------------------------------------2.00% Senior Exchangeable Notes due 2020 The net carrying amount of the liability component of 2.00% Senior Exchangeable Notes due 2020 (the Notes) consists of the following: June 29, 2014 (in thousands) Principal amount $ 150,000 Unamortized debt discount (35,950 ) Net carrying value $ 114,050 The following table presents the interest expense recognized on the Notes: Six Months Ended June 29, 2014 (in thousands) Contractual interest expense at 2% per annum $ 1,484 Amortization of debt issuance costs 261 Accretion of debt discount 2,317 Total $ 4,062 Capped Calls In connection with the issuance of the Notes, we entered into capped call transactions with certain bank counterparties to reduce the potential dilution to our common stock upon exchange of the Notes. The capped call transactions have a strike price of approximately $13.87 and a cap price of approximately $18.14, and are exercisable when and if the Notes are converted. If, upon conversion of the Notes, the price of our common stock is above the strike price of the capped calls, the counterparties will deliver shares of our common stock and/or cash with an aggregate value approximately equal to the difference between the price of our common stock at the conversion date (as defined, with a maximum price for purposes of this determination equal to the cap price) and the strike price, multiplied by the number of shares of our common stock related to the capped call transactions being exercised. The capped call transactions expire on September 1, 2020. We are in compliance of all covenants under our existing debt arrangements as of June 29, 2014. 7.875% Senior Notes due 2017 On January 21, 2014, we redeemed the remaining approximately $94.1 million aggregate principal amount outstanding of the Senior Notes at a redemption price that was 103.938% of their face value. We paid an aggregate amount of $99.1 million, including redemption price, accrued and unpaid interest, and repurchase premium. Loss on redemption of the Senior Notes of $4.8 million was recorded within Interest income and other, net. We redeemed these Senior Notes with the proceeds from the issuance of the 2.00% Senior Exchangeable Notes due 2020. 2012 Revolving Credit Facility As of June 29, 2014, we were in compliance with all of the 2012 Revolving Credit Facility's covenants. However, drawdown under the 2012 Revolving Credit Facility requires that we meet or obtain a waiver to certain conditions including the senior secured leverage ratio not to exceed 2.75:1.00 and compliance with coverage and leverage ratios, as of the last day of the most recently ended fiscal quarter. Based on the financial results for the quarter ended June 29, 2014, we do not meet the maximum leverage ratio limit. We have not obtained a waiver for those conditions, so we would not be able to draw down on the 2012 Revolving Credit Facility. We did not need to draw on the revolving line of credit during the quarter ended June 29, 2014. 37 --------------------------------------------------------------------------------Liquidity and Capital Resources We believe our sources of cash and liquidity are sufficient to meet our business requirements for the next 12 months, including capital expenditures for worldwide manufacturing and assembly and working capital requirements. Cash Requirements As of June 29, 2014 and December 29, 2013, we had the following cash and cash equivalents and short term investments: June 29, 2014 December 29, 2013 (in thousands) Cash $ 265,437 $ 282,163 Money market funds 115 3,906 Certificates of deposit 25,158 11,383 Time deposits 14,063 14,045 Total cash and cash equivalents and short-term investments $ 304,773 $ 311,497 Key components of our cash flow during the six months ended June 29, 2014 and June 30, 2013 were as follows: Six Months Ended June 29, 2014 June 30, 2013 (in thousands) Net cash provided by operating activities $ 46,946 $ 14,981 Net cash used for investing activities (31,988 ) (70,279 ) Net cash used for financing activities (32,671 ) (1,112 ) Effect of exchange rate changes on cash and cash equivalents 574 (232 ) Net decrease in cash and cash equivalents $ (17,139 ) $ (56,642 ) Operating Activities Net cash provided by operating activities was $46.9 million during the six months ended June 29, 2014, which consisted of net loss of $34.5 million and net increase in operating assets and liabilities of $18.1 million and net non-cash items of approximately $63.3 million. The net increase in operating assets and liabilities was primarily due to an increase of $24.3 million in accounts payable, accrued liabilities and accrued compensation and benefits, and an increase of $4.4 million in deferred income. This was partially offset by an increase of $12.2 million in other assets. Net non-cash items primarily consisted of $53.3 million in depreciation and amortization, and $15.6 million of stock compensation expense. Net cash provided by operating activities was $15.0 million during the six months ended June 30, 2013, which consisted of net loss of $17.7 million and net decrease in operating assets and liabilities of $20.8 million, offset by net non-cash items of approximately $53.4 million. The net decrease in operating assets and liabilities was due to an increase of $14.9 million in inventory, a decrease of $8.2 million in accounts payable, accrued liabilities, and accrued compensation and benefits, an increase of $5.2 million in accounts receivables and an increase of $6.0 million in deferred income. Net non-cash items primarily consisted of $39.3 million in depreciation and amortization, and $16.3 million of stock compensation expense. 38 -------------------------------------------------------------------------------- Investing Activities Net cash used for investing activities was $32.0 million during the six months ended June 29, 2014, primarily comprised of $23.4 million used to purchase marketable securities and $22.6 million used to purchase property, plant and equipment, which were offset by $13.0 million in proceeds from the maturities of marketable securities. Net cash used for investing activities was $70.3 million during the six months ended June 30, 2013, primarily comprised of $91.1 million used to purchase marketable securities and $24.7 million used to purchase property, plant and equipment, which were offset by $43.1 million in proceeds from the maturities of marketable securities. Financing Activities Net cash used for financing activities was $32.7 million during the six months ended June 29, 2014, primarily due to payments of $101.0 million on financing arrangements, offset by $59.0 million of proceeds from sale of our Sunnyvale building and $9.4 million of proceeds from the issuance of common stock upon the exercise of stock options. Net cash used for financing activities was $1.1 million during the six months ended June 30, 2013, primarily due to payments of $2.1 million on financing arrangements, offset by $1.4 million of proceeds from the issuance of common stock upon the exercise of stock options. Off-Balance Sheet Arrangements Indemnification Obligations During the normal course of business, we make certain indemnities and commitments under which we may be required to make payments in relation to certain transactions. These indemnities include non-infringement of patents and intellectual property, indemnities to our customers in connection with the delivery, design, manufacture and sale of our products, indemnities to our directors and officers in connection with legal proceedings, indemnities to various lessors in connection with facility leases for certain claims arising from such facility or lease, and indemnities to other parties to certain acquisition agreements. The duration of these indemnities and commitments varies, and in certain cases, is indefinite. We believe that substantially all of our indemnities and commitments provide for limitations on the maximum potential future payments we could be obligated to make. However, we are unable to estimate the maximum amount of liabilities related to our indemnities and commitments because such liabilities are contingent upon the occurrence of events, which are not reasonably determinable. As of June 29, 2014, we did not have any other significant off-balance sheet arrangements, as that term is defined in Item 303(a) (4) (ii) of Regulation S-K, promulgated under the Securities Exchange Act of 1934, as amended. 39-------------------------------------------------------------------------------- |