Attached files
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM
10-Q
þ
|
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
|
For the quarterly period ended September 27, 2009
OR
¨
|
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
|
For the
transition period from ________________ to ________________
Commission file number: 000-26734
SANDISK
CORPORATION
(Exact
name of registrant as specified in its charter)
Delaware
|
77-0191793
|
|
(State
or other jurisdiction of
|
(I.R.S.
Employer
|
|
incorporation
or organization)
|
Identification
No.)
|
|
601
McCarthy Blvd.
Milpitas,
California
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95035
|
|
(Address
of principal executive offices)
|
(Zip
Code)
|
Registrant’s
telephone number, including area code
(408)
801-1000
Indicate
by check mark whether the registrant: (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
Yes þ
|
No ¨
|
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Website, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding
12 months (or for such shorter period that the registrant was required to submit
and post such files).
Yes ¨
|
No ¨
|
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company. See the definitions of “large accelerated filer,”
“accelerated filer” and “smaller reporting company” in Rule 12b-2 of the
Exchange Act.
Large
accelerated filer þ
|
Accelerated
filer ¨
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Non
accelerated filer ¨
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Smaller
reporting company ¨
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(Do
not check if a smaller reporting company)
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
Yes ¨
|
No þ
|
Number of
shares outstanding of the issuer’s common stock $0.001 par value, as of
September 27, 2009: 228,213,584.
Index
Page No.
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||
PART
I. FINANCIAL INFORMATION
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||
Item
1.
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Condensed
Consolidated Financial Statements:
|
|
Condensed
Consolidated Balance Sheets as of September 27, 2009 and
December 28, 2008
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3
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Condensed
Consolidated Statements of Operations for the three and nine months ended
September 27, 2009 and September 28, 2008
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4
|
|
Condensed
Consolidated Statement of Equity for the nine months ended
September 27, 2009
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5
|
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Condensed
Consolidated Statements of Cash Flows for the nine months ended
September 27, 2009 and September 28, 2008
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6
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Notes
to Condensed Consolidated Financial Statements
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7
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Item
2.
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Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
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47
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Item
3.
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Quantitative
and Qualitative Disclosures About Market Risk
|
59
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Item
4.
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Controls
and Procedures
|
61
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PART
II. OTHER INFORMATION
|
||
Item
1.
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Legal
Proceedings
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62
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Item
1A.
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Risk
Factors
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62
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Item
2.
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Unregistered
Sales of Equity Securities and Use of Proceeds
|
77
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Item
3.
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Defaults
Upon Senior Securities
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77
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Item
4.
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Submission
of Matters to a Vote of Security Holders
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77
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Item
5.
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Other
Information
|
77
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Item
6.
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Exhibits
|
77
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Signatures
|
78
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Exhibit
Index
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79
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PART
I. FINANCIAL INFORMATION
Item
1. Condensed
Consolidated Financial Statements
CONDENSED
CONSOLIDATED BALANCE SHEETS
(Unaudited)
September 27,
2009
|
December 28,
2008
|
|||||||
(In
thousands)
|
||||||||
ASSETS
|
||||||||
Current
assets
|
||||||||
Cash
and cash equivalents
|
$ | 752,483 | $ | 962,061 | ||||
Short-term
investments
|
699,577 | 477,296 | ||||||
Accounts
receivable from product revenues, net
|
279,676 | 122,092 | ||||||
Inventory
|
620,976 | 598,251 | ||||||
Deferred
taxes
|
84,680 | 84,023 | ||||||
Other
current assets
|
75,542 | 469,961 | ||||||
Total
current assets
|
2,512,934 | 2,713,684 | ||||||
Long-term
investments
|
1,132,365 | 1,097,302 | ||||||
Property
and equipment, net
|
322,428 | 396,987 | ||||||
Notes
receivable and investments in the flash ventures with
Toshiba
|
1,600,810 | 1,602,291 | ||||||
Deferred
taxes
|
14,941 | 15,188 | ||||||
Intangible
assets, net
|
63,663 | 63,182 | ||||||
Other
non-current assets
|
102,143 | 43,506 | ||||||
Total
assets
|
$ | 5,749,284 | $ | 5,932,140 | ||||
LIABILITIES
|
||||||||
Current
liabilities
|
||||||||
Accounts
payable trade
|
$ | 123,454 | $ | 240,985 | ||||
Accounts
payable to related parties
|
292,737 | 370,006 | ||||||
Convertible
short-term debt
|
75,000 | — | ||||||
Other
current accrued liabilities
|
216,317 | 502,443 | ||||||
Deferred
income on shipments to distributors and retailers and deferred
revenue
|
246,279 | 149,575 | ||||||
Total
current liabilities
|
953,787 | 1,263,009 | ||||||
Convertible
long-term debt
|
919,470 | 954,094 | ||||||
Non-current
liabilities
|
317,824 | 274,316 | ||||||
Total
liabilities
|
2,191,081 | 2,491,419 | ||||||
Commitments
and contingencies (see Note 12)
|
||||||||
EQUITY
|
||||||||
Stockholders’
equity
|
||||||||
Preferred
stock
|
— | — | ||||||
Common
stock
|
228 | 226 | ||||||
Capital
in excess of par value
|
4,225,417 | 4,154,166 | ||||||
Accumulated
deficit
|
(826,994 | ) | (902,799 | ) | ||||
Accumulated
other comprehensive income
|
160,962 | 188,977 | ||||||
Total
stockholders’ equity
|
3,559,613 | 3,440,570 | ||||||
Non-controlling
interests
|
(1,410 | ) | 151 | |||||
Total
equity
|
3,558,203 | 3,440,721 | ||||||
Total
liabilities and equity
|
$ | 5,749,284 | $ | 5,932,140 |
The accompanying notes are an
integral part of these condensed consolidated financial
statements.
SANDISK
CORPORATION
(Unaudited)
Three
months ended
|
Nine
months ended
|
|||||||||||||||
September 27,
2009
|
September 28,
2008*
|
September
27,
2009
|
September
28,
2008*
|
|||||||||||||
(In thousands,
except per share amounts)
|
||||||||||||||||
Revenues
|
||||||||||||||||
Product
|
$ | 813,811 | $ | 689,556 | $ | 2,012,342 | $ | 2,101,115 | ||||||||
License
and royalty
|
121,360 | 131,941 | 312,873 | 386,360 | ||||||||||||
Total
revenues
|
935,171 | 821,497 | 2,325,215 | 2,487,475 | ||||||||||||
Cost
of product revenues
|
495,769 | 812,832 | 1,631,691 | 2,039,994 | ||||||||||||
Amortization
of acquisition-related intangible assets
|
3,132 | 14,582 | 9,396 | 43,746 | ||||||||||||
Total
cost of product revenues
|
498,901 | 827,414 | 1,641,087 | 2,083,740 | ||||||||||||
Gross
profit (loss)
|
436,270 | (5,917 | ) | 684,128 | 403,735 | |||||||||||
Operating
expenses
|
||||||||||||||||
Research
and development
|
94,925 | 104,560 | 273,080 | 328,137 | ||||||||||||
Sales
and marketing
|
55,750 | 87,859 | 144,037 | 245,653 | ||||||||||||
General
and administrative
|
45,350 | 47,091 | 122,311 | 158,579 | ||||||||||||
Amortization
of acquisition-related intangible assets
|
292 | 4,766 | 875 | 13,794 | ||||||||||||
Restructuring
and other
|
— | — | 765 | 4,085 | ||||||||||||
Total
operating expenses
|
196,317 | 244,276 | 541,068 | 750,248 | ||||||||||||
Operating
income (loss)
|
239,953 | (250,193 | ) | 143,060 | (346,513 | ) | ||||||||||
Interest
income
|
14,012 | 25,988 | 47,460 | 75,026 | ||||||||||||
Interest
(expense) and other income (expense), net
|
(16,550 | ) | (38,889 | ) | (63,975 | ) | (65,719 | ) | ||||||||
Total
other income (expense)
|
(2,538 | ) | (12,901 | ) | (16,515 | ) | 9,307 | |||||||||
Income
(loss) before income taxes
|
237,415 | (263,094 | ) | 126,545 | (337,206 | ) | ||||||||||
Provision
for (benefit from) income taxes
|
6,122 | (97,195 | ) | 50,740 | (108,513 | ) | ||||||||||
Net
income (loss)
|
$ | 231,293 | $ | (165,899 | ) | $ | 75,805 | $ | (228,693 | ) | ||||||
Net
income (loss) per share:
|
||||||||||||||||
Basic
|
$ | 1.02 | $ | (0.74 | ) | $ | 0.33 | $ | (1.02 | ) | ||||||
Diluted
|
$ | 0.99 | $ | (0.74 | ) | $ | 0.33 | $ | (1.02 | ) | ||||||
Shares
used in computing net income (loss) per share:
|
||||||||||||||||
Basic
|
227,771 | 225,682 | 227,092 | 225,030 | ||||||||||||
Diluted
|
232,724 | 225,682 | 230,936 | 225,030 |
_________________
|
* As adjusted for the
adoption of new accounting standards. See Note
1.
|
The accompanying notes are an
integral part of these condensed consolidated financial
statements.
CONDENSED
CONSOLIDATED STATEMENT OF EQUITY
(Unaudited)
Stockholders’
Equity
|
||||||||||||||||||||||||||||||||
Common
Stock Shares
|
Common
Stock
Par
Value
|
Capital
in Excess of Par Value
|
Accumulated
Deficit
|
Accumulated
Other Comprehensive
Income
|
Total
|
Non-Controlling
Interests
|
Total
Equity
|
|||||||||||||||||||||||||
(In
thousands)
|
||||||||||||||||||||||||||||||||
Balance
at December 28, 2008
|
226,128 | $ | 226 | $ | 4,154,166 | $ | (902,799 | ) | $ | 188,977 | $ | 3,440,570 | $ | 151 | $ | 3,440,721 | ||||||||||||||||
Net
income (loss)
|
— | — | — | 75,805 | — | 75,805 | (1,561 | ) | 74,244 | |||||||||||||||||||||||
Unrealized
income on available-for-sale investments
|
— | — | — | — | 40,733 | 40,733 | — | 40,733 | ||||||||||||||||||||||||
Foreign
currency translation
|
— | — | — | — | 19,740 | 19,740 | — | 19,740 | ||||||||||||||||||||||||
Unrealized
loss on hedging activities
|
— | — | — | — | (88,488 | ) | (88,488 | ) | — | (88,488 | ) | |||||||||||||||||||||
Comprehensive
income (loss)
|
47,790 | (1,561 | ) | 46,229 | ||||||||||||||||||||||||||||
Issuance
of shares pursuant to equity plans
|
927 | — | 2,833 | — | — | 2,833 | — | 2,833 | ||||||||||||||||||||||||
Issuance
of shares pursuant to employee stock purchase plan
|
1,159 | 2 | 11,163 | — | — | 11,165 | — | 11,165 | ||||||||||||||||||||||||
Share-based
compensation expense
|
— | — | 57,255 | — | — | 57,255 | — | 57,255 | ||||||||||||||||||||||||
Balance
at September 27, 2009
|
228,214 | $ | 228 | $ | 4,225,417 | $ | (826,994 | ) | $ | 160,962 | $ | 3,559,613 | $ | (1,410 | ) | $ | 3,558,203 |
|
|
The
accompanying notes are an integral part of these condensed consolidated
financial statements.
SANDISK
CORPORATION
(Unaudited)
Nine
months ended
|
||||||||
September
27,
2009
|
September
28,
2008*
|
|||||||
(In
thousands)
|
||||||||
Cash
flows from operating activities:
|
||||||||
Net
income (loss)
|
$ | 75,805 | $ | (228,693 | ) | |||
Adjustments
to reconcile net income (loss) to net cash provided by operating
activities:
|
||||||||
Deferred
and other taxes
|
2,521 | (43,949 | ) | |||||
Depreciation
|
114,595 | 134,341 | ||||||
Amortization
|
56,686 | 102,280 | ||||||
Provision
for doubtful accounts
|
1,675 | 6,211 | ||||||
Share-based
compensation expense
|
58,058 | 73,885 | ||||||
Excess
tax benefit from share-based compensation
|
— | (2,037 | ) | |||||
Impairment,
restructuring and other charges
|
5,701 | 27,578 | ||||||
Other
non-cash charges
|
983 | 15,730 | ||||||
Changes
in operating assets and liabilities:
|
||||||||
Accounts
receivable from product revenues
|
(159,260 | ) | 338,210 | |||||
Inventory
|
(37,151 | ) | (157,336 | ) | ||||
Other
assets
|
339,275 | 28,250 | ||||||
Accounts
payable trade
|
(117,625 | ) | (43,536 | ) | ||||
Accounts
payable to related parties
|
(77,269 | ) | (29,007 | ) | ||||
Other
liabilities
|
(164,170 | ) | (199,803 | ) | ||||
Total
adjustments
|
24,019 | 250,817 | ||||||
Net
cash provided by operating activities
|
99,824 | 22,124 | ||||||
Cash
flows from investing activities:
|
||||||||
Purchases
of short and long-term investments
|
(1,237,877 | ) | (1,668,510 | ) | ||||
Proceeds
from sales of short and long-term investments
|
860,855 | 1,288,906 | ||||||
Proceeds
from maturities of short and long-term investments
|
143,117 | 479,848 | ||||||
Acquisition
of property and equipment
|
(43,354 | ) | (112,680 | ) | ||||
Investment
in Flash Alliance Ltd.
|
— | (96,705 | ) | |||||
Distribution
from FlashVision Ltd.
|
12,713 | 102,530 | ||||||
Notes
receivable issuance, Flash Partners Ltd. and Flash Alliance
Ltd.
|
(377,923 | ) | (130,528 | ) | ||||
Notes
receivable proceeds, Flash Partners Ltd. and Flash Alliance
Ltd.
|
330,149 | — | ||||||
Acquisition
of MusicGremlin, Inc.
|
— | (4,604 | ) | |||||
Purchased
technology and other assets
|
(13,790 | ) | (875 | ) | ||||
Net
cash (used) in investing activities
|
(326,110 | ) | (142,618 | ) | ||||
Cash
flows from financing activities:
|
||||||||
Repayment
of debt financing
|
— | (9,785 | ) | |||||
Proceeds
from employee stock programs
|
13,998 | 19,358 | ||||||
Excess
tax benefit from share-based compensation
|
— | 2,037 | ||||||
Net
cash provided by financing activities
|
13,998 | 11,610 | ||||||
Effect
of changes in foreign currency exchange rates on cash
|
2,710 | (3,758 | ) | |||||
Net
decrease in cash and cash equivalents
|
(209,578 | ) | (112,642 | ) | ||||
Cash
and cash equivalents at beginning of the period
|
962,061 | 833,749 | ||||||
Cash
and cash equivalents at end of the period
|
$ | 752,483 | $ | 721,107 |
_________________
|
* As adjusted for the
adoption of new accounting standards. See Note
1.
|
The accompanying notes are an
integral part of these condensed consolidated financial
statements.
SANDISK
CORPORATION
(Unaudited)
1. Organization
and Summary of Significant Accounting Policies
Organization
These
interim Condensed Consolidated Financial Statements are unaudited but reflect,
in the opinion of management, all adjustments, consisting of normal recurring
adjustments and accruals, necessary to present fairly the financial position of
SanDisk Corporation and its subsidiaries (the “Company”) as of September 27,
2009, the Condensed Consolidated Statements of Operations for the three and nine
months ended September 27, 2009 and September 28, 2008, the Condensed
Consolidated Statement of Equity for the nine months ended September 27,
2009, and the Condensed Consolidated Statements of Cash Flows for the nine
months ended September 27, 2009 and September 28,
2008. Certain information and footnote disclosures normally included
in financial statements prepared in accordance with U.S. generally accepted
accounting principles (“GAAP”) have been omitted in accordance with the rules
and regulations of the Securities and Exchange Commission
(“SEC”). These Condensed Consolidated Financial Statements should be
read in conjunction with the audited consolidated financial statements and
accompanying notes included in the Company’s most recent Annual Report on Form
10-K/A filed on February 26, 2009 and Form 8-K filed on June 3,
2009. Certain prior period amounts have been reclassified to conform
to the current period presentation including certain cash flow line items within
individual categories. The results of operations for the three and
nine months ended September 27, 2009 are not necessarily indicative of the
results to be expected for the entire fiscal year.
The
Company’s fiscal year ends on the Sunday closest to December 31, and its
fiscal quarters end on the Sunday closest to March 31, June 30, and
September 30, respectively. The third quarter of fiscal years
2009 and 2008 ended on September 27, 2009 and September 28, 2008,
respectively. Fiscal year 2009 consists of 53 weeks with the fourth
quarter of fiscal year 2009 having 14 weeks and ending on
January 3, 2010, and fiscal year 2008 consisted of 52 weeks and ended
on December 28, 2008.
Basis of
Presentation. The Company has evaluated, recorded and
disclosed material subsequent events in the Notes to Condensed Consolidated
Financial Statements, if any, that has occurred up to the date of the filing of
this interim report on Form 10-Q on November 5, 2009. For accounting and disclosure purposes, the
exchange rate at September 27, 2009 of 90.20 was used to convert Japanese yen to
U.S. dollar.
Effective December 29, 2008, the Company adopted new
standards issued by the Financial Accounting Standards Board (“FASB”) related to
the Company’s minority interests. This guidance applies prospectively,
except for presentation and disclosure requirements which are applied
retrospectively, and requires reclassification of non-controlling
interests for all periods presented in accordance with new disclosure
requirements. In compliance, the
Company’s minority interest has been reclassified as non-controlling interests
for all periods presented, and is a component of
equity in the Condensed Consolidated Balance Sheets and the Condensed
Consolidated Statement of Equity. The recognition of non-controlling
interests in the Company’s Condensed Consolidated Statements of Operations for
the three and nine months ended September 27, 2009 did not have a material
impact on the Company’s Condensed Consolidated Financial
Statements.
Effective December 29, 2008, the Company implemented a change in accounting and has
separately accounted for the liability and equity components of its 1%
Convertible Senior Notes due 2013, which may be settled in cash upon conversion,
and retrospectively applied this guidance to all periods presented. In determining the value of the liability and
equity components, the Company calculated the value of the conversion
component of the debt and recorded this value as a component of equity and a
corresponding debt discount. The debt discount, which is a reduction to
the carrying value of the debt, will be amortized as additional non-cash
interest expense over the term of the original note. The retrospective
application of this accounting change affects fiscal years 2006 through
2008. Income taxes have been recorded on the foregoing adjustments to the
extent tax benefits were available. See Note 2, “Financing
Arrangements.”
The
following table reflects the impact of the adoption of the new accounting
pronouncements in the Company’s previously published Condensed Consolidated
Statement of Operations for the three and nine months ended September 28, 2008
(in thousands, except for per share amounts):
Three
months ended
September
28, 2008
|
Nine
months ended
September
28, 2008
|
|||||||||||||||
As
Reported
|
As
Adjusted
|
As
Reported
|
As
Adjusted
|
|||||||||||||
Interest
(expense) and other income (expense), net
|
$ | (26,438 | ) | $ | (38,889 | ) | $ | (29,052 | ) | $ | (65,719 | ) | ||||
Provision
for (benefit from) income taxes
|
(95,449 | ) | (97,195 | ) | (95,348 | ) | (108,513 | ) | ||||||||
Net
loss
|
(155,194 | ) | (165,899 | ) | (205,191 | ) | (228,693 | ) | ||||||||
Net
loss per share:
|
||||||||||||||||
Basic
|
$ | (0.69 | ) | $ | (0.74 | ) | $ | (0.91 | ) | $ | (1.02 | ) | ||||
Diluted
|
$ | (0.69 | ) | $ | (0.74 | ) | $ | (0.91 | ) | $ | (1.02 | ) |
Organization and
Nature of Operations. The Company was
incorporated in Delaware on June 1, 1988. The Company
designs, develops and markets flash storage products used in a wide variety of
consumer electronics products. The Company operates in one segment,
flash memory storage products.
Principles of
Consolidation. The Condensed
Consolidated Financial Statements include the accounts of the Company and its
majority-owned subsidiaries. All intercompany balances and
transactions have been eliminated. Non-controlling interest
represents the minority shareholders’ proportionate share of the net assets and
results of operations of the Company’s majority-owned
subsidiaries. The Condensed Consolidated Financial Statements also
include the results of companies acquired by the Company from the date of each
acquisition.
Use of
Estimates. The preparation of
Condensed Consolidated Financial Statements in conformity with GAAP requires
management to make estimates and assumptions that affect the amounts reported in
the Condensed Consolidated Financial Statements and accompanying
notes. The estimates and judgments affect the reported amounts of
assets, liabilities, revenues, expenses and related disclosure of contingent
liabilities. On an ongoing basis, the Company evaluates its
estimates, including those related to customer programs and incentives,
intellectual property claims, product returns, bad debts, inventories and
related reserves, investments, income taxes, warranty obligations,
restructuring, contingencies, share-based compensation, and
litigation. The Company bases estimates on historical experience and
on other assumptions that its management believes are reasonable under the
circumstances. These estimates form the basis for making judgments
about the carrying value of assets and liabilities when those values are not
readily apparent from other sources. Actual results could materially
differ from these estimates.
Recent
Accounting Pronouncements
In June
2009, the FASB amended the existing guidance on consolidation of variable
interest entities to require an enterprise to qualitatively assess the
determination of the primary beneficiary of a variable interest entity (“VIE”)
based on whether the entity has the power to direct matters that most
significantly impacts the VIE, and the obligation to absorb losses or the right
to receive benefits of the VIE that could be potentially significant to the
VIE. This amendment also requires the Company to perform ongoing
periodic reassessments of whether an enterprise is the primary interest
beneficiary of a VIE and not only when specific events have
occurred. This amendment is effective for the Company’s reporting
period that begins on January 4, 2010, and for interim periods within the first
annual reporting period. Management is currently evaluating the
effect that the provisions of this amendment may have on the Company’s Condensed
Consolidated Financial Statements.
In
October 2009, the FASB issued authoritative guidance to update the accounting
and reporting requirements for revenue arrangements with multiple
deliverables. This guidance established a selling price hierarchy,
which allows the use of an estimated selling price to determine the selling
price of a deliverable in cases where neither vendor-specific objective evidence
nor third-party evidence is available. This guidance is to be applied
prospectively for revenue arrangements entered into or materially modified in
fiscal years beginning on or after June 15, 2010. Early adoption
is permitted, and if this update is adopted early in other than the first
quarter of an entity’s fiscal year, then it must be applied retrospectively to
the beginning of that fiscal year. The Company is currently assessing
the impact of the adoption on its financial condition and results of
operations.
In
October 2009, the FASB issued authoritative guidance that clarifies which
revenue allocation and measurement guidance should be used for arrangements that
contain both tangible products and software, in cases where the software is more
than incidental to the tangible product as a whole. More
specifically, if the software sold with or embedded within the tangible product
is essential to the functionality of the tangible product, then this software as
well as undelivered software elements that relate to this software are excluded
from the scope of existing software revenue guidance. This guidance
is to be applied prospectively for revenue arrangements entered into or
materially modified in fiscal years beginning on or after June 15,
2010. Early adoption is permitted, and if this update is adopted
early in other than the first quarter of an entity’s fiscal year, then it must
be applied retrospectively to the beginning of that fiscal year. The
Company is currently assessing the impact of the adoption on its financial
condition and results of operations.
2. Financing
Arrangements
The
following table reflects the carrying value of the Company’s convertible debt as
of September 27, 2009 and December 28, 2008
(in millions):
September 27,
2009
|
December 28,
2008
|
|||||||
1%
Notes due 2013
|
$ | 1,150.0 | $ | 1,150.0 | ||||
Less:
Unamortized interest discount
|
(230.5 | ) | (270.9 | ) | ||||
Net
carrying amount of 1% Notes due 2013
|
919.5 | 879.1 | ||||||
1%
Notes due 2035
|
75.0 | 75.0 | ||||||
Total
convertible debt
|
994.5 | 954.1 | ||||||
Less:
convertible short-term debt
|
(75.0 | ) | — | |||||
Convertible
long-term debt
|
$ | 919.5 | $ | 954.1 |
1% Convertible
Senior Notes Due 2013. In May 2006, the Company issued and
sold $1.15 billion in aggregate principal amount of 1% Convertible Senior
Notes due 2013 (the “1% Notes due 2013”) at par. The 1% Notes due
2013 may be converted, under certain circumstances, based on an initial
conversion rate of 12.1426 shares of common stock per $1,000 principal amount of
notes (which represents an initial conversion price of approximately $82.36 per
share). The net proceeds to the Company from the offering of the 1%
Notes due 2013 were $1.13 billion.
As
discussed in Note 1, “Basis of Presentation,” the Company separately accounts
for the liability and equity components of the 1% Notes due
2013. The principal amount of the
liability component of $753.5 million as of the date of issuance was
recognized at the present value of its cash flows using a discount rate of 7.4%,
the Company’s borrowing rate at the date of the issuance for a similar debt
instrument without the conversion feature. The carrying value of the
equity component was $241.9 million as of September 27, 2009 and December
28, 2008.
The
following table presents the amount of interest cost recognized relating to both
the contractual interest coupon and amortization of the discount on the
liability component (in millions):
Three
months ended
|
Nine
months ended
|
|||||||||||||||
September 27,
2009
|
September 28,
2008
|
September
27,
2009
|
September
28,
2008
|
|||||||||||||
Contractual
interest coupon
|
$ | 2.9 | $ | 2.9 | $ | 8.6 | $ | 8.6 | ||||||||
Amortization
of interest discount
|
13.7 | 12.7 | 40.4 | 37.5 | ||||||||||||
Total
interest cost recognized
|
$ | 16.6 | $ | 15.6 | $ | 49.0 | $ | 46.1 |
The
remaining unamortized interest discount of $230.5 million as of September
27, 2009 will be amortized over the remaining life of the 1% Notes due 2013,
which is approximately 3.6 years.
Concurrent
with the issuance of the 1% Notes due 2013, the Company sold warrants to acquire
shares of its common stock at an exercise price of $95.03 per
share. As of September 27, 2009, the warrants had an expected
life of approximately 3.9 years and expire in August 2013. At
expiration, the Company may, at its option, elect to settle the warrants on a
net share basis. As of September 27, 2009, the warrants had not
been exercised and remain outstanding. In addition, counterparties
agreed to sell to the Company up to approximately 14.0 million shares of
its common stock, which is the number of shares initially issuable upon
conversion of the 1% Notes due 2013 in full, at a conversion price of $82.36 per
share. The convertible bond hedge transaction will be settled in net
shares and will terminate upon the earlier of the maturity date of the 1% Notes
due 2013 or the first day that none of the 1% Notes due 2013 remain outstanding
due to conversion or otherwise. Settlement of the convertible bond
hedge in net shares on the expiration date would result in the Company receiving
net shares equivalent to the number of shares issuable by it upon conversion of
the 1% Notes due 2013. As of September 27, 2009, the Company had
not purchased any shares under this convertible bond hedge
agreement.
1% Convertible
Notes Due 2035. In November 2006, as a result of its
acquisition of msystems Ltd. (“msystems”), the Company assumed the aggregate
principal amount of $75.0 million 1% Convertible Notes due March 2035
(the “1% Notes due 2035”) issued in the name of M-Systems Finance
Inc. The Company is obligated to pay interest on the 1% Notes due
2035 semi-annually on March 15 and September 15, which commenced on
March 15, 2007.
Holders
of the notes have the right to require the Company to purchase all or a portion
of their notes on March 15, 2010, March 15, 2015, March 15,
2020, March 15, 2025 and March 15, 2030. The purchase price
payable will be equal to 100% of the principal amount of the notes to be
purchased, plus accrued and unpaid interest, if any, to but excluding the
purchase date. Due to the short-term nature of the conversion rights,
the Company has reclassified the entire value of the 1% Notes due 2035 to
Convertible Short-term Debt in the Condensed Consolidated Balance Sheet as of
September 27, 2009.
3. Investments
and Fair Value Measurements
Fair Value
Hierarchy. The Company categorizes the fair value of its financial assets
and liabilities according to the hierarchy established by the FASB, which
prioritizes the inputs to valuation techniques used to measure fair
value. The hierarchy gives the highest priority to unadjusted quoted
prices in active markets for identical assets or liabilities (Level 1
measurements) and the lowest priority to unobservable inputs (Level 3
measurements). A financial instrument’s level within the fair value
hierarchy is based on the lowest level of any input that is significant to the
fair value measurement.
The
Company’s financial assets are measured at fair value on a recurring
basis. Instruments that are classified within Level 1 of the fair
value hierarchy generally include money market funds, U.S. Treasury securities
and equity securities. Instruments that are classified within Level 2
of the fair value hierarchy generally include U.S. agency securities,
asset-backed securities, mortgage-backed securities, commercial paper, U.S.
corporate notes and bonds, and municipal obligations.
Financial
assets and liabilities measured at fair value on a recurring basis as of
September 27, 2009 were as follows (in thousands):
Total
|
Quoted
Prices in Active Markets for Identical Assets
(Level
1)
|
Significant
Other Observable Inputs
(Level
2)
|
Significant
Unobservable Inputs
(Level
3)
|
|||||||||||||
Money
market funds
|
$ | 363,767 | $ | 363,767 | $ | — | $ | — | ||||||||
Fixed
income securities
|
1,760,749 | 144,619 | 1,616,130 | — | ||||||||||||
Equity
securities
|
82,680 | 82,680 | — | — | ||||||||||||
Derivative
assets
|
9,874 | — | 9,874 | — | ||||||||||||
Other
|
3,220 | — | 3,220 | — | ||||||||||||
Total
financial assets
|
$ | 2,220,290 | $ | 591,066 | $ | 1,629,224 | $ | — | ||||||||
Derivative
liabilities
|
$ | 33,235 | $ | — | $ | 33,235 | $ | — | ||||||||
Total
financial liabilities
|
$ | 33,235 | $ | — | $ | 33,235 | $ | — |
Financial
assets and liabilities measured at fair value on a recurring basis as of
December 28, 2008 were as follows (in thousands):
Total
|
Quoted
Prices in Active Markets for Identical Assets
(Level
1)
|
Significant
Other Observable Inputs
(Level
2)
|
Significant
Unobservable Inputs
(Level
3)
|
|||||||||||||
Money
market funds
|
$ | 317,081 | $ | 317,081 | $ | — | $ | — | ||||||||
Fixed
income securities
|
1,505,385 | — | 1,505,385 | — | ||||||||||||
Equity
securities
|
37,227 | 37,227 | — | — | ||||||||||||
Derivative
assets
|
105,133 | — | 105,133 | — | ||||||||||||
Other
|
2,889 | — | 2,889 | — | ||||||||||||
Total
financial assets
|
$ | 1,967,715 | $ | 354,308 | $ | 1,613,407 | $ | — | ||||||||
Derivative
liabilities
|
$ | 153,523 | $ | — | $ | 153,523 | $ | — | ||||||||
Total
financial liabilities
|
$ | 153,523 | $ | — | $ | 153,523 | $ | — |
Assets
and liabilities measured at fair value on a recurring basis as of September 27, 2009,
were presented on the Company’s Condensed Consolidated Balance Sheet as follows
(in thousands):
Total
|
Quoted
Prices in Active Markets for Identical Assets
(Level
1)
|
Significant
Other Observable Inputs
(Level
2)
|
Significant
Unobservable Inputs
(Level
3)
|
|||||||||||||
Cash
equivalents (1)
|
$ | 378,721 | $ | 377,767 | $ | 954 | $ | — | ||||||||
Short-term
investments
|
699,577 | 145,208 | 554,369 | — | ||||||||||||
Long-term
investments
|
1,132,365 | 68,091 | 1,064,274 | — | ||||||||||||
Other
current assets and other non-current assets
|
9,627 | — | 9,627 | — | ||||||||||||
Total
assets
|
$ | 2,220,290 | $ | 591,066 | $ | 1,629,224 | $ | — | ||||||||
Other
current accrued liabilities
|
$ | 10,534 | $ | — | $ | 10,534 | $ | — | ||||||||
Non-current
liabilities
|
22,701 | — | 22,701 | — | ||||||||||||
Total
liabilities
|
$ | 33,235 | $ | — | $ | 33,235 | $ | — |
(1)
|
Cash
equivalents exclude cash of $373.8 million included in Cash and Cash
Equivalents of the Condensed Consolidated Balance Sheet as of September
27, 2009.
|
As of
September 27, 2009, the Company did not elect the fair value option for any
financial assets and liabilities that were not required to be measured at fair
value.
Available-for-Sale
Investments. Available-for-sale investments as of
September 27, 2009 were as follows (in thousands):
September 27,
2009
|
||||||||||||||||
Amortized
Cost
|
Gross
Unrealized Gain
|
Gross
Unrealized Loss
|
Market
Value
|
|||||||||||||
Fixed
income securities:
|
||||||||||||||||
U.S.
Treasury and government agency securities
|
$ | 178,492 | $ | 248 | $ | (10 | ) | $ | 178,730 | |||||||
Corporate
notes and bonds
|
175,069 | 1,993 | (97 | ) | 176,965 | |||||||||||
Asset-backed
securities
|
28,209 | 176 | — | 28,385 | ||||||||||||
Mortgage-backed
securities
|
5,454 | 13 | — | 5,467 | ||||||||||||
Municipal
notes and bonds
|
1,348,494 | 22,741 | (33 | ) | 1,371,202 | |||||||||||
1,735,718 | 25,171 | (140 | ) | 1,760,749 | ||||||||||||
Equity
investments
|
70,226 | 12,528 | (74 | ) | 82,680 | |||||||||||
Total
available-for-sale investments
|
$ | 1,805,944 | $ | 37,699 | $ | (214 | ) | $ | 1,843,429 |
Available-for-sale
investments as of December 28, 2008 were as follows (in
thousands):
December 28,
2008
|
||||||||||||||||
Amortized
Cost
|
Gross
Unrealized Gain
|
Gross
Unrealized Loss
|
Market
Value
|
|||||||||||||
Fixed
income securities:
|
||||||||||||||||
U.S.
Treasury and government agency securities
|
$ | 40,110 | $ | 476 | $ | — | $ | 40,586 | ||||||||
Corporate
notes and bonds
|
56,916 | 267 | (360 | ) | 56,823 | |||||||||||
Municipal
notes and bonds
|
1,387,592 | 21,714 | (1,330 | ) | 1,407,976 | |||||||||||
1,484,618 | 22,457 | (1,690 | ) | 1,505,385 | ||||||||||||
Equity
investments
|
70,226 | — | (32,999 | ) | 37,227 | |||||||||||
Total
available-for-sale investments
|
$ | 1,554,844 | $ | 22,457 | $ | (34,689 | ) | $ | 1,542,612 |
Securities
that have been in an unrealized loss position, the fair value and gross
unrealized losses on the available-for-sale investments aggregated by type of
investment instrument, and the length of time that individual securities have
been in a continuous unrealized loss position as of September 27, 2009, are
summarized in the following table (in thousands). Available-for-sale
securities that were in an unrealized gain position have been excluded from the
table.
Less
than 12 months
|
Greater
than 12 months
|
|||||||||||||||
Market
Value
|
Gross
Unrealized
Loss
|
Market
Value
|
Gross
Unrealized
Loss
|
|||||||||||||
U.S.
Treasury and government agency securities
|
$ | 24,975 | $ | (10 | ) | $ | — | $ | — | |||||||
Corporate
notes and bonds
|
32,624 | (98 | ) | — | — | |||||||||||
Municipal
notes and bonds
|
37,691 | (28 | ) | 3,785 | (4 | ) | ||||||||||
Equity
investments
|
68,090 | (74 | ) | — | — | |||||||||||
Total
|
$ | 163,380 | $ | (210 | ) | $ | 3,785 | $ | (4 | ) |
The gross
unrealized loss related to publicly traded equity investments were due to
changes in market prices. The Company has cash flow hedges designated
to substantially mitigate risk from these equity investments as of
September 27, 2009, as discussed in Note 4, “Derivatives and Hedging
Activities.” The gross unrealized loss related to U.S. agency
securities, and U.S. corporate and municipal notes and bonds was primarily due
to changes in interest rates. Gross unrealized loss on all
available-for-sale fixed income securities at September 27, 2009 was
considered temporary in nature. Factors considered in determining
whether a loss is temporary include the length of time and extent to which fair
value has been less than the cost basis, the financial condition and near-term
prospects of the investee, and the Company’s intent and ability to hold an
investment for a period of time sufficient to allow for any anticipated recovery
in market value. For debt security investments, the Company
considered additional factors including the Company’s intent to sell the
investments or whether it is more likely than not the Company will be required
to sell the investments before the recovery of its amortized cost.
The
following table shows the gross realized gains and (losses) on sales of
available-for-sale securities (in thousands).
Three
months ended
|
Nine
months ended
|
|||||||||||||||
September 27,
2009
|
September 28,
2008
|
September 27,
2009
|
September 28,
2008
|
|||||||||||||
Gross
realized gains
|
$ | 2,253 | $ | 6,128 | $ | 9,424 | $ | 8,272 | ||||||||
Gross
realized (losses)
|
(10 | ) | (464 | ) | (570 | ) | (632 | ) |
Fixed
income securities by contractual maturity as of September 27, 2009 are
shown below (in thousands). Actual maturities may differ from
contractual maturities because issuers of the securities may have the right to
prepay obligations.
Cost
|
Estimated
Fair
Value
|
|||||||
Due
in one year or less
|
$ | 695,939 | $ | 699,941 | ||||
Due
after one year through five years
|
1,039,779 | 1,060,808 | ||||||
Total
|
$ | 1,735,718 | $ | 1,760,749 |
For
certain of the Company’s financial instruments, including accounts receivable,
short-term investments and accounts payable, the carrying amounts approximate
fair market value due to their short maturities. For those financial
instruments where the carrying amounts differ from fair market value, the
following table represents the related costs and the estimated fair values,
which are based on quoted market prices (in millions).
As
of September 27, 2009
|
As
of December 28, 2008
|
|||||||||||||||
Carrying
Value
|
Estimated
Fair
Value
|
Carrying
Value
|
Estimated
Fair
Value
|
|||||||||||||
1%
Notes due 2013
|
$ | 920 | $ | 903 | $ | 879 | $ | 477 | ||||||||
1%
Notes due 2035
|
75 | 74 | 75 | 64 |
4. Derivatives
and Hedging Activities
The
Company uses derivative instruments primarily to manage exposures to foreign
currency and equity security price risks. The Company’s primary
objective in holding derivatives is to reduce the volatility of earnings and
cash flows associated with changes in foreign currency and equity security
prices. The program is not designated for trading or speculative
purposes. The Company’s derivatives expose the Company to credit risk
to the extent that the counterparties may be unable to meet the terms of the
agreement. The Company seeks to mitigate such risk by limiting its
counterparties to major financial institutions and by spreading the risk across
several major financial institutions. In addition, the potential risk
of loss with any one counterparty resulting from this type of credit risk is
monitored on an ongoing basis.
The
Company recognizes derivative instruments as either assets or liabilities on the
balance sheet at fair value and provides qualitative disclosures about
objectives and strategies for using derivatives, quantitative disclosures about
fair value amounts of and gains and losses on derivative instruments, and
disclosures about credit-risk-related contingent features in derivative
agreements. Changes in fair value (i.e., gains or losses) of the
derivatives are recorded as cost of product revenues or other income (expense),
or as accumulated other comprehensive income (“OCI”). The Company
does not offset or net the fair value amounts of derivative instruments and
separately discloses the fair value amounts of the derivative instruments as
either assets or liabilities.
Cash Flow
Hedges. The Company uses a combination of forward contracts
and options designated as cash flow hedges to hedge a portion of future
forecasted purchases in Japanese yen. The gain or loss on the
effective portion of a cash flow hedge is initially reported as a component of
accumulated OCI and subsequently reclassified into cost of product revenues in
the same period or periods in which the cost of product revenues is recognized,
or reclassified into other income (expense) if the hedged transaction becomes
probable of not occurring. Any gain or loss after a hedge is no
longer designated because it is no longer probable of occurring or it is related
to an ineffective portion of a hedge, as well as any amount excluded from the
Company’s hedge effectiveness, is recognized as other income or expense
immediately, and was a net gain of $0.1 million and a net loss of ($1.0)
million for the three and nine months ended September 27, 2009,
respectively. As of September 27, 2009, the Company had options
contracts in place that hedged future purchases of approximately
3.0 billion Japanese yen, or approximately $33 million based upon the
exchange rate as of September 27, 2009, and the net unrealized gain on the
effective portion of these cash flow hedges was
$1.7 million. The option contracts cover the Company’s future
Japanese yen purchases that are expected to occur in the fourth quarter of
fiscal year 2009.
The
Company has an outstanding cash flow hedge designated to mitigate equity risk
associated with certain available-for-sale investments in equity
securities. The gain or loss on the cash flow hedge is reported as a
component of accumulated OCI and will be reclassified into other income
(expense) in the same period that the equity securities are sold. The
securities had a fair value of $68.1 million and $35.2 million as of
September 27, 2009 and December 28, 2008, respectively. The
cash flow hedge designated to mitigate equity risk of these securities had a
fair value of $3.5 million and $32.0 million as of September 27,
2009 and December 28, 2008, respectively.
Other
Derivatives. Other derivatives that are non-designated consist
primarily of forward and cross currency swap contracts to minimize the risk
associated with the foreign exchange effects of revaluing monetary assets and
liabilities. Monetary assets and liabilities denominated in foreign
currencies and the associated outstanding forward and cross currency swap
contracts were marked-to-market at September 27, 2009 with realized and
unrealized gains and losses included in other income (expense). As of
September 27, 2009, the Company had foreign currency forward contracts
hedging exposures in European euros, Israeli new shekels, Japanese yen and
Taiwanese dollars. Foreign currency forward contracts were
outstanding to buy and (sell) U.S. dollar equivalent of approximately
$287.5 million and ($152.0) million in foreign currencies,
respectively, based upon the exchange rates at September 27,
2009.
The
Company has currency swap transactions with one counterparty to exchange
Japanese yen for U.S. dollars for a combined notional amount of $453.4 million
which require the Company to maintain a minimum liquidity of $1.5 billion prior
to June 30, 2010 and $1.0 billion after June 30, 2010. Liquidity is
defined as the sum of the Company’s cash and cash equivalents, and short and
long-term investments. The Company also has foreign exchange forward
contracts with another counterparty which require the Company to maintain
collateral equal to the difference between the net mark-to-market loss, if any,
of the outstanding foreign exchange forward contracts and the lesser of $25.0
million or 2% of the Company’s cash and marketable securities. The
Company is in compliance with both covenants as of September 27,
2009. Should the Company fail to comply with these covenants, the
Company may be required to settle the unrealized gain or loss on the foreign
exchange contracts prior to the original maturity.
The
amounts in the tables below include fair value adjustments related to the
Company’s own credit risk and counterparty credit risk.
Fair Value of
Derivative Contracts. Fair value of derivative contracts were
as follows (in thousands):
Derivative
assets reported in
|
||||||||||||||||
Other
Current Assets
|
Long-term
Investments
|
|||||||||||||||
September 27,
2009
|
December 28,
2008
|
September 27,
2009
|
December 28,
2008
|
|||||||||||||
Designated
Cash Flow Hedges
|
||||||||||||||||
Foreign
exchange contracts
|
$ | 1,680 | $ | 51,576 | $ | — | $ | — | ||||||||
Equity
market risk contract
|
— | — | 3,467 | 31,987 | ||||||||||||
1,680 | 51,576 | 3,467 | 31,987 | |||||||||||||
Foreign
exchange contracts not designated
|
4,727 | 21,570 | — | — | ||||||||||||
Total
derivatives
|
$ | 6,407 | $ | 73,146 | $ | 3,467 | $ | 31,987 |
Derivative
liabilities reported in
|
||||||||||||||||
Other
Current Accrued Liabilities
|
Non-current
Liabilities
|
|||||||||||||||
September 27,
2009
|
December 28,
2008
|
September 27,
2009
|
December 28,
2008
|
|||||||||||||
Designated
Cash Flow Hedges
|
||||||||||||||||
Foreign
exchange contracts
|
$ | — | $ | — | $ | — | $ | — | ||||||||
Equity
market risk contract
|
— | — | — | — | ||||||||||||
— | — | — | — | |||||||||||||
Foreign
exchange contracts not designated
|
10,534 | 153,523 | 22,701 | — | ||||||||||||
Total
derivatives
|
$ | 10,534 | $ | 153,523 | $ | 22,701 | $ | — |
Foreign Exchange
and Equity Market Risk Contracts Designated as Cash Flow
Hedges. The effective portion of designated cash flow
derivative contracts on the results of operations were as follows (in
thousands):
Three
months ended
|
||||||||||||||||
Amount
of gain (loss) recognized
in
OCI
|
Amount
of gain (loss) reclassified from OCI to the Statements of
Operations
|
|||||||||||||||
September
27,
2009
|
September
28,
2008
|
September
27,
2009
|
September
28,
2008
|
|||||||||||||
Foreign
exchange contracts
|
$ | 823 | $ | 5,789 | $ | 25,642 | $ | 1,730 | ||||||||
Equity
market risk contract
|
(14,841 | ) | 11,411 | — | — |
Nine
months ended
|
||||||||||||||||
Amount
of gain (loss) recognized
in
OCI
|
Amount
of gain (loss) reclassified from OCI to the Statements of
Operations
|
|||||||||||||||
September
27,
2009
|
September
28,
2008
|
September
27,
2009
|
September
28,
2008
|
|||||||||||||
Foreign
exchange contracts
|
$ | (10,759 | ) | $ | (13,719 | ) | $ | 49,209 | $ | 1,730 | ||||||
Equity
market risk contract
|
(28,520 | ) | 9,794 | — | — |
Foreign
exchange contracts designated as cash flow hedges relate primarily to wafer
purchases and the associated gains and losses are expected to be recorded in
cost of product revenues when reclassified out of accumulated
OCI. Gains and losses from the equity market risk contract are
expected to be recorded in other income (expense) when reclassified out of
accumulated OCI. The Company expects to realize the accumulated OCI
balance related to foreign exchange contracts within the next twelve months and
realize the accumulated OCI balance related to the equity market risk contract
in fiscal year 2011.
The
ineffective portion and amount excluded from effectiveness testing on designated
cash flow derivative contracts on the Company’s results of operations recognized
in other income (expense) were as follows (in thousands):
Three
months ended
|
Nine
months ended
|
|||||||||||||||
September 27,
2009
|
September 28,
2008
|
September 27,
2009
|
September 28,
2008
|
|||||||||||||
Foreign
exchange contracts
|
$ | 69 | $ | 983 | $ | (1,046 | ) | $ | (423 | ) | ||||||
Equity
market risk contract
|
— | — | — | — |
Effect of
Non-Designated Derivative Contracts on the Condensed Consolidated Statements of
Operations. The effect of non-designated derivative contracts
on the Company’s results of operations recognized in Other Income (Expense) were
as follows (in thousands):
Three
months ended
|
Nine
months ended
|
|||||||||||||||
September 27,
2009
|
September 28,
2008
|
September 27,
2009
|
September 28,
2008
|
|||||||||||||
Gain
(loss) on foreign exchange contracts including forward point
income
|
$ | (18,322 | ) | $ | (330 | ) | $ | 76,642 | $ | (22,846 | ) | |||||
Gain
(loss) from revaluation of foreign currency exposures hedged by foreign
exchange contracts
|
17,719 | 5,188 | (72,552 | ) | 42,267 |
The above
noted gains and losses are included in Interest (Expense) and Other Income
(Expense), net, in the Company’s Condensed Consolidated Statements of
Operations.
5. Balance
Sheet Information
Accounts
Receivable from Product Revenues, net. Accounts receivable from product
revenues, net, were as follows (in thousands):
September 27,
2009
|
December 28,
2008
|
|||||||
Trade
accounts receivable
|
$ | 488,144 | $ | 584,262 | ||||
Related
party accounts receivable
|
13,808 | — | ||||||
Allowance
for doubtful accounts
|
(15,171 | ) | (13,881 | ) | ||||
Price
protection, promotions and other activities
|
(207,105 | ) | (448,289 | ) | ||||
Total
accounts receivable from product revenues, net
|
$ | 279,676 | $ | 122,092 |
Inventory. Inventories,
net of reserves, were as follows (in thousands):
September 27,
2009
|
December 28,
2008
|
|||||||
Raw
material
|
$ | 374,715 | $ | 309,436 | ||||
Work-in-process
|
64,839 | 90,544 | ||||||
Finished
goods
|
181,422 | 198,271 | ||||||
Total
inventory
|
$ | 620,976 | $ | 598,251 |
Other Current
Assets. Other current assets were as follows
(in thousands):
September 27,
2009
|
December 28,
2008
|
|||||||
Royalty
and other receivables
|
$ | 7,700 | $ | 81,451 | ||||
Prepaid
expenses
|
17,462 | 20,321 | ||||||
Prepaid
income taxes and tax-related receivables
|
43,974 | 294,906 | ||||||
Other
current assets
|
6,406 | 73,283 | ||||||
Total
other current assets
|
$ | 75,542 | $ | 469,961 |
Notes Receivable
and Investments in the Flash Ventures with Toshiba. Notes
receivable and investments in the flash ventures with Toshiba Corporation
(“Toshiba”) were as follows (in thousands):
September 27,
2009
|
December 28,
2008
|
|||||||
Notes
receivable, Flash Partners Ltd.
|
$ | 632,483 | $ | 843,380 | ||||
Notes
receivable, Flash Alliance Ltd.
|
533,260 | 276,518 | ||||||
Investment
in FlashVision Ltd.
|
— | 63,965 | ||||||
Investment
in Flash Partners Ltd.
|
207,892 | 202,530 | ||||||
Investment
in Flash Alliance Ltd.
|
227,175 | 215,898 | ||||||
Total
notes receivable and investments in the flash ventures with
Toshiba
|
$ | 1,600,810 | $ | 1,602,291 |
In the
first quarter of fiscal year 2009, the Company completed the wind-down of
FlashVision Ltd. (“FlashVision”) and received cash distributions of
$12.7 million, released $43.3 million of cumulative translation
adjustments recorded in accumulated OCI, and recorded an impairment charge of
$7.9 million in Other Income (Expense) related to FlashVision.
See
Note 12, “Commitments, Contingencies and Guarantees – FlashVision, Flash
Partners and Flash Alliance,” regarding equity method investments and Note 13,
“Related Parties,” for the Company’s maximum loss exposure related to these
variable interest entities.
Other Current
Accrued Liabilities. Other current accrued liabilities were as
follows (in thousands):
September 27,
2009
|
December 28,
2008
|
|||||||
Accrued
payroll and related expenses
|
$ | 87,341 | $ | 54,516 | ||||
Accrued
restructuring and other
|
4,561 | 22,545 | ||||||
Research
and development liability, related party
|
— | 4,000 | ||||||
Foreign
currency forward contract payables
|
10,534 | 153,523 | ||||||
Flash
Ventures adverse purchase commitments for under-utilized
capacity
|
— | 121,486 | ||||||
Other
accrued liabilities
|
113,881 | 146,373 | ||||||
Total
other current accrued liabilities
|
$ | 216,317 | $ | 502,443 |
Non-current
liabilities. Non-current liabilities were as follows (in
thousands):
September 27,
2009
|
December 28,
2008
|
|||||||
Deferred
tax liability
|
$ | 96,572 | $ | 87,688 | ||||
Income
taxes payable
|
162,221 | 145,432 | ||||||
Accrued
restructuring
|
9,722 | 11,070 | ||||||
Other
non-current liabilities
|
49,309 | 30,126 | ||||||
Total
non-current liabilities
|
$ | 317,824 | $ | 274,316 |
As of
September 27, 2009 and December 28, 2008, the total current accrued
restructuring liability was primarily comprised of contract termination costs
related to the 2008 Restructuring Plans and the current portion of excess lease
obligations. See Note 9, “Restructuring Plans.” The
non-current accrued restructuring balance and activity from the prior year end
was primarily related to excess lease obligations and cash lease obligation
payments, respectively. The lease obligations extend through the end
of the lease term in fiscal year 2016.
6. Goodwill
and Intangible Assets
Goodwill. Goodwill
balance is presented below (in thousands):
Balance
at December 30, 2007
|
$ | 840,870 | ||
Additions,
net
|
4,583 | |||
Impairment
|
(845,453 | ) | ||
Balance
at December 28, 2008 and September 27, 2009
|
$ | — |
Goodwill
is not amortized, but instead is reviewed and tested for impairment at least
annually and whenever events or circumstances occur which indicate that goodwill
might be impaired. Impairment of goodwill is tested by comparing the
carrying amount, including goodwill, to the fair value. In performing
the analysis, the Company uses the best information available, including
reasonable and supportable assumptions and projections. If the
carrying amount of the Company exceeds its implied fair value, goodwill is
considered impaired and a second step is performed to measure the amount of
impairment loss, if any. The Company performed its annual impairment
test on the first day of the fourth quarter of fiscal year 2008 and determined
that the goodwill was not impaired. However, based on a combination
of factors, including the economic environment, current and forecasted operating
results, NAND-industry pricing conditions and a sustained decline in the
Company’s market capitalization, the Company concluded that there were
sufficient indicators to require an interim goodwill impairment analysis during
the fourth quarter of fiscal year 2008 and the Company recognized an impairment
charge of $845.5 million.
Intangible
Assets. Intangible asset balances are presented below
(in thousands):
September 27,
2009
|
||||||||||||
Gross
Carrying Amount
|
Accumulated
Amortization
|
Net
Carrying Amount
|
||||||||||
Core
technology
|
$ | 79,800 | $ | (41,957 | ) | $ | 37,843 | |||||
Developed
product technology
|
11,400 | (6,039 | ) | 5,361 | ||||||||
Acquisition-related
intangible assets
|
91,200 | (47,996 | ) | 43,204 | ||||||||
Technology
licenses and patents
|
31,526 | (11,067 | ) | 20,459 | ||||||||
Total
|
$ | 122,726 | $ | (59,063 | ) | $ | 63,663 |
December 28,
2008
|
||||||||||||||||
Gross
Carrying Amount
|
Impairment
|
Accumulated
Amortization
|
Net
Carrying Amount
|
|||||||||||||
Core
technology
|
$ | 315,301 | $ | (136,001 | ) | $ | (132,407 | ) | $ | 46,893 | ||||||
Developed
product technology
|
12,900 | — | (6,318 | ) | 6,582 | |||||||||||
Customer
relationships
|
80,100 | (39,784 | ) | (40,316 | ) | — | ||||||||||
Acquisition-related
intangible assets
|
408,301 | (175,785 | ) | (179,041 | ) | 53,475 | ||||||||||
Technology
licenses and patents
|
23,814 | — | (14,107 | ) | 9,707 | |||||||||||
Total
|
$ | 432,115 | $ | (175,785 | ) | $ | (193,148 | ) | $ | 63,182 |
The
annual expected amortization expense of intangible assets as of
September 27, 2009, is presented below (in thousands):
Estimated
Amortization Expenses
|
||||||||
Acquisition-Related
Intangible Assets
|
Technology
Licenses and Patents
|
|||||||
Fiscal
Year:
|
||||||||
2009
(remaining three months)
|
$ | 3,424 | $ | 2,163 | ||||
2010
|
13,695 | 6,471 | ||||||
2011
|
13,034 | 4,619 | ||||||
2012
|
12,529 | 3,971 | ||||||
2013
|
522 | 2,671 | ||||||
2014
and thereafter
|
— | 564 | ||||||
Total
|
$ | 43,204 | $ | 20,459 |
7.
Warranties
Liability
for warranty expense is included in Other current accrued liabilities and
Non-current liabilities in the accompanying Condensed Consolidated Balance
Sheets and the activity was as follows (in thousands):
Three
months ended
|
Nine
months ended
|
|||||||||||||||
September 27,
2009
|
September 28,
2008
|
September 27,
2009
|
September 28,
2008
|
|||||||||||||
Balance,
beginning of period
|
$ | 33,119 | $ | 21,130 | $ | 36,469 | $ | 18,662 | ||||||||
Additions
|
6,949 | 21,913 | 22,737 | 53,041 | ||||||||||||
Usage
|
(7,977 | ) | (16,733 | ) | (27,115 | ) | (45,393 | ) | ||||||||
Balance,
end of period
|
$ | 32,091 | $ | 26,310 | $ | 32,091 | $ | 26,310 |
The
majority of the Company’s products have a warranty ranging from one to five
years. A provision for the estimated future cost related to warranty
expense is recorded at the time of customer invoice. The Company’s
warranty liability is affected by customer and consumer returns, product
failures, number of units sold, and repair or replacement costs
incurred. Should actual product failure rates, or repair or
replacement costs differ from the Company’s estimates, increases or decreases to
its warranty liability would be required. The prior year’s additions
to and usage of warranty reserve have been adjusted to conform to the current
presentation format.
8. Accumulated
Other Comprehensive Income
Accumulated
other comprehensive income, net of tax, presented in the accompanying Condensed
Consolidated Balance Sheets and Condensed Consolidated Statement of Equity
consists of the accumulated unrealized gains and losses on available-for-sale
investments, including the Company’s investments in equity securities, as well
as currency translation adjustments relating to local currency denominated
subsidiaries and equity investees, and the accumulated unrealized gains and
losses related to derivative instruments accounted for under hedge accounting
(in thousands).
September 27,
2009
|
December 28,
2008
|
|||||||
Accumulated
net unrealized gain (loss) on:
|
||||||||
Available-for-sale
investments
|
$ | 22,325 | $ | (18,408 | ) | |||
Foreign
currency translation
|
120,926 | 101,186 | ||||||
Hedging
activities
|
17,711 | 106,199 | ||||||
Total
accumulated other comprehensive income
|
$ | 160,962 | $ | 188,977 |
Comprehensive
income (loss) is presented below (in thousands):
Three
months ended
|
Nine
months ended
|
|||||||||||||||
September 27,
2009
|
September 28,
2008
|
September 27,
2009
|
September 28,
2008
|
|||||||||||||
Net
income (loss)
|
$ | 231,293 | $ | (165,899 | ) | $ | 75,805 | $ | (228,693 | ) | ||||||
Non-controlling
interest
|
(551 | ) | — | (1,561 | ) | — | ||||||||||
230,742 | (165,899 | ) | 74,244 | (228,693 | ) | |||||||||||
Change
in accumulated unrealized gain (loss) on:
|
||||||||||||||||
Available-for-sale
investments
|
26,021 | (9,505 | ) | 40,733 | (13,747 | ) | ||||||||||
Foreign
currency translation
|
48,677 | 5,339 | 19,740 | 25,142 | ||||||||||||
Hedging
activities
|
(39,660 | ) | 15,469 | (88,488 | ) | (5,656 | ) | |||||||||
Comprehensive
income (loss)
|
$ | 265,780 | $ | (154,596 | ) | $ | 46,229 | $ | (222,954 | ) |
Non-controlling
interest is included in Other Income (Expense) in the Condensed Consolidated
Statements of Operations.
The
amount of income tax expense allocated to accumulated unrealized gain (loss) on
available-for-sale investments and hedging activities was $15.2 million and
$7.1 million at September 27, 2009 and December 28, 2008,
respectively.
9. Restructuring
Plans
In the
three and nine months ended September 27, 2009, the Company recorded
restructuring expense of zero and $0.8 million, net, respectively, related
to employee severance costs in Restructuring and Other in the Condensed
Consolidated Statements of Operations.
Second Quarter of
Fiscal 2008 Restructuring Plan. In the second quarter ended
June 28, 2008, the Company initiated restructuring actions in an effort to
better align its cost structure with its anticipated revenue stream and to
improve the Company’s results of operations and cash flows (“Second Quarter of
Fiscal 2008 Restructuring Plan”). The following table sets forth the
activity in the accrued restructuring balances related to the Second Quarter of
Fiscal 2008 Restructuring Plan (in millions).
Severance
and Benefits
|
||||
Restructuring
provision
|
$ | 4.1 | ||
Cash
paid
|
(3.1 | ) | ||
Accrual
balance at December 28, 2008
|
1.0 | |||
Accrual
adjustments
|
(0.8 | ) | ||
Accrual
balance at September 27, 2009
|
$ | 0.2 |
The
remaining restructuring accrual balance is reflected in Other Current Accrued
Liabilities in the Condensed Consolidated Balance Sheets and is expected to be
utilized in fiscal year 2009.
Fourth Quarter of
Fiscal 2008 Restructuring Plan and Other. In the fourth
quarter ended December 28, 2008, the Company initiated additional
restructuring actions in an effort to better align its cost structure with
business operation levels (“Fourth Quarter of Fiscal 2008 Restructuring Plan and
Other”). Under this plan, the Company involuntarily terminated an
additional 51 employees in fiscal year 2009, in all functions, primarily in the
U.S. and Israel. The following table sets forth the activity in the
accrued restructuring balances related to the Fourth Quarter of Fiscal 2008
Restructuring Plan and Other (in millions).
Severance
and Benefits
|
Contract
Termination Fees and Other Charges
|
Total
|
|||||||||||
Restructuring
and other provisions
|
$ | 10.4 | $ | 21.0 | $ | 31.4 | |||||||
Cash
paid
|
(4.1 | ) | (2.4 | ) | (6.5 | ) | |||||||
Non-cash
utilization
|
─
|
(4.6 | ) | (4.6 | ) | ||||||||
Accrual
balance at December 28, 2008
|
6.3 | 14.0 | 20.3 | ||||||||||
Restructuring
|
2.2 |
─
|
2.2 | ||||||||||
Cash
paid
|
(7.8 | ) | (11.8 | ) | (19.6 | ) | |||||||
Accrual
adjustments
|
(0.6 | ) |
─
|
(0.6 | ) | ||||||||
Accrual
balance at September 27, 2009
|
$ | 0.1 | $ | 2.2 | $ | 2.3 |
The
Company anticipates that the remaining restructuring accrual balance of
$2.3 million will be substantially paid out or utilized in fiscal year
2009. The remaining restructuring and other accrual balance is
reflected in Other Current Accrued Liabilities in the Condensed Consolidated
Balance Sheets.
10. Share-Based
Compensation
Share-Based
Plans. The
Company has a share-based compensation program that provides its Board of
Directors with broad discretion in creating equity incentives for employees,
officers, non-employee board members and non-employee service
providers. This program includes incentive and non-statutory stock
option awards, stock appreciation right awards, restricted stock awards,
performance-based cash bonus awards for Section 16 executive officers and an
automatic grant program for non-employee board members pursuant to which such
individuals will receive option grants or other stock awards at designated
intervals over their period of board service. These awards are
granted under various plans, all of which are stockholder
approved. Stock option awards generally vest as follows: 25% of the
shares vest on the first anniversary of the vesting commencement date and the
remaining 75% vest proportionately each quarter over the next 3 years of
continued service. Restricted stock awards generally vest in equal
annual installments over a 2 or 4-year period. Initial grants under
the automatic grant program vest over a 4-year period and subsequent grants vest
over a 1-year period in accordance with the specific vesting provisions set
forth in that program. Additionally, the Company has an Employee
Stock Purchase Plan (“ESPP”) that allows employees to purchase shares of common
stock at 85% of the fair market value at the subscription date or the date of
purchase, whichever is lower.
Valuation
Assumptions. The fair value of the
Company’s stock options granted to employees, officers and non-employee board
members and ESPP shares granted to employees for the three and nine months ended
September 27, 2009 and September 28, 2008 was estimated using the
following weighted average assumptions.
Three
months ended
|
Nine
months ended
|
|||||||
September 27,
2009
|
September 28,
2008
|
September 27,
2009
|
September 28,
2008
|
|||||
Option
Plan Shares
|
||||||||
Dividend
yield
|
None
|
None
|
None
|
None
|
||||
Expected
volatility
|
0.67
|
0.54
|
0.87
|
0.52
|
||||
Risk
free interest rate
|
1.58%
|
2.83%
|
1.40%
|
2.52%
|
||||
Expected
lives
|
3.4
years
|
3.4
years
|
3.6
years
|
3.5
years
|
||||
Estimated
annual forfeiture rate
|
9.07%
|
8.31%
|
9.07%
|
8.31%
|
||||
Weighted
average fair value at grant date
|
$8.30
|
$6.10
|
$5.18
|
$8.47
|
||||
Employee
Stock Purchase Plan Shares
|
||||||||
Dividend
yield
|
None
|
None
|
None
|
None
|
||||
Expected
volatility
|
0.59
|
0.64
|
0.73
|
0.60
|
||||
Risk
free interest rate
|
0.28%
|
1.88%
|
0.35%
|
1.97%
|
||||
Expected
lives
|
½
year
|
½
year
|
½
year
|
½
year
|
||||
Weighted
average fair value for grant period
|
$5.86
|
$4.77
|
$4.82
|
$6.00
|
Share-Based
Compensation Plan Activities
Stock Options and
SARs. A summary of stock option and stock appreciation right
(“SARs”) activity under all of the Company’s share-based compensation plans as
of September 27, 2009 and changes during the nine months ended
September 27, 2009 is presented below (in thousands, except exercise price
and contractual term).
Shares
|
Weighted
Average Exercise Price
|
Weighted
Average Remaining Contractual Term (Years)
|
Aggregate
Intrinsic Value
|
|||||||||||||
Options
and SARs outstanding at December 28, 2008
|
25,057 | $ | 33.59 | 4.9 | $ | 5,284 | ||||||||||
Granted
|
4,023 | 8.80 | ||||||||||||||
Exercised
|
(526 | ) | 9.46 | 3,088 | ||||||||||||
Forfeited
|
(1,090 | ) | 35.07 | |||||||||||||
Expired
|
(1,824 | ) | 38.66 | |||||||||||||
Options
and SARs outstanding at September 27, 2009
|
25,640 | 29.77 | 4.6 | 97,126 | ||||||||||||
Options
and SARs vested and expected to vest after September 27, 2009, net of
forfeitures
|
24,354 | 30.36 | 4.6 | 87,139 | ||||||||||||
Options
and SARs exercisable at September 27, 2009
|
17,195 | 33.03 | 4.1 | 42,764 |
At
September 27, 2009, the total compensation cost related to options and SARs
granted to employees under the Company’s share-based compensation plans but not
yet recognized was approximately $93.5 million, net of estimated
forfeitures. This cost will be amortized on a straight-line basis
over a weighted average period of approximately 2.6 years.
Restricted Stock
Units. Restricted stock units (“RSUs”) are converted into
shares of the Company’s common stock upon vesting on a one-for-one
basis. Typically, vesting of RSUs is subject to the employee’s
continuing service to the Company. The cost of these awards is
determined using the fair value of the Company’s common stock on the date of the
grant, and compensation is recognized on a straight-line basis over the
requisite vesting period.
A summary
of the changes in RSUs outstanding under the Company’s share-based compensation
plan during the nine months ended September 27, 2009 is presented below
(in thousands, except for weighted average grant date fair
value).
Shares
|
Weighted
Average Grant Date Fair Value
|
Aggregate
Intrinsic Value
|
||||||||||
Non-vested
share units at December 28, 2008
|
1,523 | $ | 25.38 | $ | 13,983 | |||||||
Granted
|
55 | 12.72 | ||||||||||
Vested
|
(553 | ) | 26.19 | 7,858 | ||||||||
Forfeited
|
(158 | ) | 22.20 | |||||||||
Non-vested
share units at September 27, 2009
|
867 | 24.58 | 18,426 |
As of
September 27, 2009, the Company had approximately $16.5 million of
unrecognized compensation expense, net of estimated forfeitures, related to
RSUs, which will be recognized over a weighted average estimated remaining life
of 1.4 years.
Employee Stock
Purchase Plan. At September 27, 2009, there was
approximately $1.7 million of total unrecognized compensation cost related
to ESPP that is expected to be recognized over a period of approximately
4 months.
Share-Based
Compensation Expense. The Company recorded $19.4 million,
$58.1 million, $25.6 million and $73.9 million of share-based compensation expense for the three and nine
months ended September 27, 2009 and September 28, 2008,
respectively. The following tables set forth the detail allocation of
the share-based compensation expense (in thousands).
Three
months ended
|
Nine
months ended
|
|||||||||||||||
September 27,
2009
|
September 28,
2008
|
September 27,
2009
|
September 28,
2008
|
|||||||||||||
Share-based
compensation expense by caption:
|
||||||||||||||||
Cost
of product revenues
|
$ | 2,347 | $ | 2,649 | $ | 7,167 | $ | 8,286 | ||||||||
Research
and development
|
5,971 | 10,544 | 22,341 | 28,693 | ||||||||||||
Sales
and marketing
|
3,917 | 5,545 | 11,153 | 15,480 | ||||||||||||
General
and administrative
|
7,137 | 6,813 | 17,397 | 21,426 | ||||||||||||
Total
share-based compensation expense
|
$ | 19,372 | $ | 25,551 | $ | 58,058 | $ | 73,885 | ||||||||
Share-based
compensation expense by type of award:
|
||||||||||||||||
Stock
options and SARs
|
$ | 14,223 | $ | 19,515 | $ | 44,182 | $ | 59,838 | ||||||||
RSUs
|
4,061 | 4,324 | 11,455 | 9,740 | ||||||||||||
ESPP
|
1,088 | 1,712 | 2,421 | 4,307 | ||||||||||||
Total
share-based compensation expense
|
$ | 19,372 | $ | 25,551 | $ | 58,058 | $ | 73,885 |
Share-based
compensation expense of $2.3 million and $3.4 million related to
manufacturing personnel was capitalized into inventory as of September 27,
2009 and December 28, 2008, respectively.
11.
Net
Income (Loss) Per Share
The
following table sets forth the computation of basic and diluted net income
(loss) per share (in thousands, except per share amounts).
Three
months ended
|
Nine
months ended
|
|||||||||||||||
September 27,
2009
|
September 28,
2008
|
September 27,
2009
|
September 28,
2008
|
|||||||||||||
Numerator
for basic net income (loss) per share:
|
||||||||||||||||
Net
income (loss)
|
$ | 231,293 | $ | (165,899 | ) | $ | 75,805 | $ | (228,693 | ) | ||||||
Denominator
for basic net income (loss) per share:
|
||||||||||||||||
Weighted
average common shares outstanding
|
227,771 | 225,682 | 227,092 | 225,030 | ||||||||||||
Basic
net income (loss) per share
|
$ | 1.02 | $ | (0.74 | ) | $ | 0.33 | $ | (1.02 | ) |
Numerator
for diluted net income (loss) per share:
|
||||||||||||||||
Net
income (loss)
|
$ | 231,293 | $ | (165,899 | ) | $ | 75,805 | $ | (228,693 | ) | ||||||
Interest
on the 1% Notes due 2035, net of tax
|
116 | — | 348 | — | ||||||||||||
Net
income (loss) for diluted net income (loss) per share
|
$ | 231,409 | $ | (165,899 | ) | $ | 76,153 | $ | (228,693 | ) | ||||||
Denominator
for diluted net income (loss) per share:
|
||||||||||||||||
Weighted
average common shares
|
227,771 | 225,682 | 227,092 | 225,030 | ||||||||||||
Incremental
common shares attributable to exercise of outstanding employee stock
options, restricted stock, restricted stock units and warrants (assuming
proceeds would be used to purchase common stock)
|
2,941 | — | 1,832 | — | ||||||||||||
Effect
of dilutive 1% Notes due 2035
|
2,012 | — | 2,012 | — | ||||||||||||
Shares
used in computing diluted net income (loss) per share
|
232,724 | 225,682 | 230,936 | 225,030 | ||||||||||||
Diluted
net income (loss) per share
|
$ | 0.99 | $ | (0.74 | ) | $ | 0.33 | $ | (1.02 | ) |
Anti-dilutive
shares excluded from net income (loss) per share
calculation
|
47,391 | 54,857 | 48,311 | 53,595 |
Basic
earnings per share exclude any dilutive effects of stock options, SARs, RSUs,
warrants and convertible securities. Certain common stock issuable
under stock options, SARs, RSUs, warrants and the convertible notes were omitted
from the diluted earnings per share calculation because their inclusion is
considered anti-dilutive.
12.
Commitments,
Contingencies and Guarantees
FlashVision. In
June 2008, the Company agreed to wind-down its 49.9% ownership interest in
FlashVision Ltd. (“FlashVision”), a business venture with Toshiba which owns
50.1%. In this venture, the Company and Toshiba collaborated in the
development and manufacture of 200-millimeter NAND flash memory
products. In fiscal year 2008, the Company and Toshiba ceased
production of NAND flash memory products utilizing 200-millimeter
wafers. The Company’s investment in this venture was written-down to
zero in the first quarter of fiscal year 2009.
Flash
Partners. The Company has a 49.9% ownership interest in Flash
Partners Ltd. (“Flash Partners”), a business venture with Toshiba which owns
50.1%, formed in fiscal year 2004. In the venture, the Company and
Toshiba have collaborated in the development and manufacture of NAND flash
memory products. These NAND flash memory products are manufactured by
Toshiba at a 300-millimeter wafer fabrication facility located in Yokkaichi,
Japan, using the semiconductor manufacturing equipment owned or leased by Flash
Partners. Flash Partners purchases wafers from Toshiba at cost and
then resells those wafers to the Company and Toshiba at cost plus a
markup. The Company accounts for its 49.9% ownership position in
Flash Partners under the equity method of accounting. The Company is
committed to purchase its provided three-month forecast of Flash Partners’ NAND
wafer supply, which generally equals 50% of the venture’s 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
Partners’ costs to the extent that Flash Partners’ revenues from wafer sales to
the Company and Toshiba are insufficient to cover these costs.
As of
September 27, 2009, the Company had notes receivable from Flash Partners of
57.1 billion Japanese yen, or approximately $632 million, based upon
the exchange rate at September 27, 2009. These notes are secured
by the equipment purchased by Flash Partners using the note
proceeds. The Company has additional guarantee obligations to Flash
Partners, see “Off-Balance Sheet Liabilities.” At September 27,
2009, the Company had an equity investment in Flash Partners of
$207.9 million denominated in Japanese yen, offset by $0.8 million of
cumulative translation adjustments recorded in accumulated OCI. In
the three and nine months ended September 27, 2009, the Company recorded a
$1.3 million and $4.1 million, respectively, basis adjustment to its
equity in earnings from Flash Partners related to the difference between the
basis in the Company’s equity investment compared to the historical basis of the
assets recorded by Flash Partners.
Flash
Alliance. The Company has a 49.9% ownership interest in Flash
Alliance Ltd. (“Flash Alliance”), a business venture with Toshiba which owns
50.1%, formed in fiscal year 2006. In the venture, the Company and
Toshiba have collaborated in the development and manufacture of NAND flash
memory products. These NAND flash memory products are manufactured by
Toshiba at its 300-millimeter wafer fabrication facility located in Yokkaichi,
Japan, using the semiconductor manufacturing equipment owned or leased by Flash
Alliance. Flash Alliance purchases wafers from Toshiba at cost and
then resells those wafers to the Company and Toshiba at cost plus a
markup. The Company accounts for its 49.9% ownership position in
Flash Alliance under the equity method of accounting. The Company is
committed to purchase its provided three-month forecast of Flash Alliance’s NAND
wafer supply, which generally equals 50% of the venture’s 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
Alliance’s costs to the extent that Flash Alliance’s revenues from wafer sales
to the Company and Toshiba are insufficient to cover these costs.
As of
September 27, 2009, the Company had notes receivable from Flash Alliance of
48.1 billion Japanese yen, or approximately $533 million, based upon
the exchange rate at September 27, 2009. These notes are secured
by the equipment purchased by Flash Alliance using the note
proceeds. The Company has additional guarantee obligations to Flash
Alliance, see “Off-Balance Sheet Liabilities.” At September 27,
2009, the Company had an equity investment in Flash Alliance of
$227.1 million denominated in Japanese yen, offset by $1.2 million of
cumulative translation adjustments recorded in accumulated OCI. In
the three and nine months ended September 27, 2009, the Company recorded
$3.4 million and $10.4 million, respectively, of basis adjustment to
its equity earnings from Flash Alliance related to the difference between the
basis in the Company’s equity investment compared to the historical basis of the
assets recorded by Flash Alliance.
Flash
Ventures. As a part of the Flash Partners and Flash Alliance
(hereinafter referred to as “Flash Ventures”) agreements, the Company was
required to fund direct and common research and development expenses related to
the development of advanced NAND flash memory
technologies. Development under this agreement ended in the fourth
quarter of fiscal year 2008 and final funding was completed in the second
quarter of fiscal year 2009. As of September 27, 2009 and December
28, 2008, the Company had accrued liabilities related to these expenses of zero
and $4.0 million, respectively. The Company continues to participate
in other common research and development activities with Toshiba, as detailed in
the Contractual Obligations table, but is not committed to any minimum funding
level.
The
Company and Toshiba restructured Flash Ventures in the first quarter of fiscal
year 2009 by selling more than 20% of Flash Ventures’ capacity to
Toshiba. The restructuring resulted in the Company receiving value of
79.3 billion Japanese yen of which 26.1 billion Japanese yen, or
$277.1 million, was received in cash, reducing outstanding notes receivable
from Flash Ventures and 53.2 billion Japanese yen reflected the transfer of
off-balance sheet equipment lease guarantee obligations from the Company to
Toshiba. The restructuring was completed in a series of closings
through March 31, 2009. The Company received the cash and
transferred 53.2 billion Japanese yen of off-balance sheet equipment lease
guarantee obligations in the first half of fiscal year
2009. Transaction costs of $10.9 million related to the sale and
transfer of equipment and lease obligations were expensed in the first quarter
of fiscal year 2009.
The
Company has guarantee obligations to Flash Ventures, see “Off-Balance Sheet
Liabilities.”
Toshiba
Foundry. The
Company has the ability to purchase additional capacity under a foundry
arrangement with Toshiba.
Business Ventures
and Foundry Arrangement with Toshiba. Purchase orders placed
under Flash Ventures and the foundry arrangement with Toshiba for up to three
months are binding and cannot be canceled.
Other Silicon
Sources. The Company’s contracts with its other sources of
silicon wafers generally require the Company to provide purchase order
commitments based on nine month rolling forecasts. The purchase
orders placed under these arrangements relating to the first three months of the
nine month forecast 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
The
following table details the Company’s portion of the remaining guarantee
obligations under each of Flash Ventures’ master lease facilities in both
Japanese yen and U.S. dollar equivalent based upon the exchange rate at
September 27, 2009.
Master Lease Agreements by Execution
Date
|
Lease
Amounts
|
Expiration
|
||||||||||
(Yen
in billions)
|
(Dollars
in thousands)
|
|||||||||||
Flash
Partners
|
||||||||||||
December 2004
|
¥ | 6.6 | $ | 73,090 | 2010 | |||||||
December 2005
|
4.0 | 44,731 | 2011 | |||||||||
June
2006
|
6.8 | 75,531 | 2011 | |||||||||
September 2006
|
20.3 | 224,362 | 2011 | |||||||||
March
2007
|
10.2 | 112,923 | 2012 | |||||||||
February
2008
|
4.2 | 46,975 | 2013 | |||||||||
52.1 | 577,612 | |||||||||||
Flash
Alliance
|
||||||||||||
November
2007
|
21.5 | 237,849 | 2013 | |||||||||
June
2008
|
29.4 | 326,288 | 2013 | |||||||||
50.9 | 564,137 | |||||||||||
Total
guarantee obligations
|
¥ | 103.0 | $ | 1,141,749 |
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 term of the master lease agreements, in annual installments as of
September 27, 2009 in U.S. dollars based upon the exchange rate at
September 27, 2009 (in thousands).
Annual Installments
|
Payment
of Principal Amortization
|
Purchase
Option Exercise Price at Final Lease Terms
|
Guarantee
Amount
|
|||||||||
Year
1
|
$ | 312,678 | $ | 28,890 | $ | 341,567 | ||||||
Year
2
|
233,883 | 187,102 | 420,985 | |||||||||
Year
3
|
117,992 | 87,726 | 205,719 | |||||||||
Year
4
|
44,731 | 128,747 | 173,478 | |||||||||
Total
guarantee obligations
|
$ | 709,284 | $ | 432,465 | $ | 1,141,749 |
Flash
Partners. Flash Partners sells and leases back from a
consortium of financial institutions (“lessors”) a portion of its tools and has
entered into six equipment master lease agreements totaling 300.0 billion
Japanese yen, or approximately $3.32 billion based upon the exchange rate
at September 27, 2009, of which 104.2 billion Japanese yen, or
approximately $1.16 billion based upon the exchange rate at
September 27, 2009, was outstanding at September 27,
2009. The outstanding amount reflects the reduction in lease amounts
of 28.2 billion Japanese yen, or approximately $313 million based upon
the exchange rate at September 27, 2009, due to the restructuring of Flash
Partners’ master lease agreements in the nine months ended September 27,
2009. For further discussion on the restructuring of the Flash
Partners’ master lease agreements, see “Flash Ventures” above. The
Company and Toshiba have each guaranteed 50%, on a several basis, of Flash
Partners’ obligations under the master lease agreements. In addition,
these master lease agreements are secured by the underlying
equipment. As of September 27, 2009, the amount of the Company’s
guarantee obligation of the Flash Partners’ master lease agreements, which
reflects future payments and any lease adjustments, was 52.1 billion
Japanese yen, or approximately $578 million based upon the exchange rate at
September 27, 2009. Certain lease payments are due quarterly and
certain lease payments are due semi-annually, and are scheduled to be completed
in stages through fiscal year 2013. At each lease payment date, Flash
Partners has the option of purchasing the tools from the
lessors. Flash Partners is obligated to insure the equipment,
maintain the equipment in accordance with the manufacturers’ recommendations and
comply with other customary terms to protect the leased assets. The
fair value of the Company’s guarantee obligation of Flash Partners’ master lease
agreements was not material at inception of each master lease.
The
master lease agreements contain customary covenants for Japanese lease
facilities. In addition to containing customary events of default
related to Flash Partners that could result in an acceleration of Flash
Partners’ 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
shareholders’ equity of at least $1.51 billion, and its failure to maintain
a minimum corporate rating of BB- from Standard & Poors (“S&P”) or
Moody’s Corporation (“Moody’s”), or a minimum corporate rating of BB+ from
Rating & Investment Information, Inc. (“R&I”). As of
September 27, 2009, Flash Partners was in compliance with all of its master
lease covenants. While the Company’s S&P credit rating was B, two
levels below the required minimum corporate rating threshold from S&P, the
Company’s R&I credit rating was BBB-, one level above the required minimum
corporate rating threshold from R&I. If R&I were to downgrade
the Company’s credit rating below the minimum corporate rating threshold, Flash
Partners 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 guarantee under such Flash Partners master lease agreements.
Flash
Alliance. Flash Alliance sells and leases back from a
consortium of financial institutions (“lessors”) a portion of its tools and has
entered into two equipment master lease agreements totaling 200.0 billion
Japanese yen, or approximately $2.22 billion based upon the exchange rate
at September 27, 2009, of which 101.8 billion Japanese yen, or
approximately $1.13 billion based upon the exchange rate at
September 27, 2009, was outstanding as of September 27,
2009. The outstanding amount reflects the reduction in lease amounts
of 24.9 billion Japanese yen, or approximately $277 million based upon
the exchange rate at September 27, 2009, due to the restructuring of Flash
Alliance’s master lease agreements in the nine months ended September 27,
2009. For further discussion on the restructuring of the Flash
Alliance’s master lease agreements, see “Flash Ventures” above. The
Company and Toshiba have each guaranteed 50%, on a several basis, of Flash
Alliance’s obligation under the master lease agreements. In addition,
these master lease agreements are secured by the underlying
equipment. As of September 27, 2009, the amount of the Company’s
guarantee obligation of the Flash Alliance’s master lease agreements was
50.9 billion Japanese yen, or approximately $564 million based upon
the exchange rate at September 27, 2009. Remaining master lease
payments are due semi-annually and are scheduled to be completed in fiscal year
2013. At each lease payment date, Flash Alliance has the option of
purchasing the tools from the lessors. Flash Alliance is obligated to
insure the equipment, maintain the equipment in accordance with the
manufacturers’ recommendations and comply with other customary terms to protect
the leased assets. The fair value of the Company’s guarantee
obligation of Flash Alliance’s master lease agreements was not material at
inception of each master lease.
The
master lease agreements contain customary covenants for Japanese lease
facilities. In addition to containing customary events of default
related to Flash Alliance that could result in an acceleration of Flash
Alliance’s 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
shareholders’ equity of at least $1.51 billion, and its failure to maintain
a minimum corporate rating of BB- from S&P or Moody’s or a minimum corporate
rating of BB+ from R&I. As of September 27, 2009, Flash
Alliance was in compliance with all of its master lease
covenants. While the Company’s S&P credit rating was B, two
levels below the required minimum corporate rating threshold from S&P, the
Company’s R&I credit rating was BBB-, one level above the required minimum
corporate rating threshold from R&I. If R&I were to downgrade
the Company’s credit rating below the minimum corporate rating threshold, Flash
Alliance 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 guarantee under such Flash Alliance master lease agreements.
Guarantees
Indemnification
Agreements. The Company has agreed to indemnify suppliers and
customers for alleged patent 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, 2009, 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, 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 policy 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 September 27, 2009 or December 28, 2008, 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 infringes third party
patents. The Company has not made any indemnification payments under
any such agreements and as of September 27, 2009, no amounts have been
accrued in the accompanying 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, 2009, and
the effect such obligations are expected to have on its liquidity and cash flows
in future periods (in thousands).
Contractual
Obligations.
Total
|
1
Year or Less
(3
months)
|
2
- 3 Years
(Fiscal
2010
and
2011)
|
4
–5 Years
(Fiscal
2012
and
2013)
|
More
than 5 Years (Beyond
Fiscal
2013)
|
|||||||||||||||||
Operating
leases
|
$ | 28,763 | $ | 2,478 | $ | 15,022 | $ | 6,095 | $ | 5,168 | |||||||||||
Flash
Partners reimbursement for certain fixed costs including
depreciation
|
1,208,888 | (3 | )(4) | 118,925 | 790,759 | 236,646 | 62,558 | ||||||||||||||
Flash
Alliance reimbursement for certain fixed costs including
depreciation
|
1,366,467 | (3 | )(4) | 89,379 | 732,731 | 443,656 | 100,701 | ||||||||||||||
Toshiba
research and development
|
42,564 | (3 | ) | 20,959 | 21,605 | ― | ― | ||||||||||||||
Capital
equipment purchase commitments
|
8,166 | 8,166 | ― | ― | ― | ||||||||||||||||
Convertible
notes principal and interest (1)
|
1,266,976 | 3,063 | 98,158 | 23,000 | 1,142,755 | ||||||||||||||||
Operating
expense commitments
|
32,824 | 22,075 | 10,749 | ― | ― | ||||||||||||||||
Noncancelable
production purchase commitments (2)
|
276,666 | (3 | ) | 241,748 | 34,918 | ― | ― | ||||||||||||||
Total
contractual cash obligations
|
$ | 4,231,314 | $ | 506,793 | $ | 1,703,942 | $ | 709,397 | $ | 1,311,182 |
Off-Balance
Sheet Arrangements.
As
of
September 27,
2009
|
||||
Guarantee
of Flash Ventures equipment leases (5)
|
$ | 1,141,749 |
_________________
|
(1)
|
In
May 2006, the Company issued and sold $1.15 billion in aggregate
principal amount of 1% Notes due 2013. The Company will pay
cash interest at an annual rate of 1%, payable semi-annually on
May 15 and November 15 of each year until calendar year
2013. In November 2006, through its acquisition of msystems
Ltd., (“msystems”), the Company assumed msystems’ $75 million in
aggregate principal amount of 1% Notes due 2035. The Company
will pay cash interest at an annual rate of 1%, payable semi-annually on
March 15 and September 15 of each year. In addition,
the expected maturity of the 1% Notes due 2035 has been adjusted to March
15, 2010 as holders have an option to put these notes on this date and, as
a result, only interest payments through March 15, 2010 have been included
as an obligation.
|
|
(2)
|
Includes
Flash Ventures, related party vendors and other silicon source vendor
purchase commitments.
|
|
(3)
|
Includes
amounts denominated in Japanese yen, which are subject to fluctuation in
exchange rates prior to payment and have been translated using the
exchange rate at September 27,
2009.
|
|
(4)
|
Excludes
amounts related to the master lease agreements’ purchase option exercise
price at final lease term.
|
|
(5)
|
The
Company’s guarantee obligation, net of cumulative lease payments, is
103.0 billion Japanese yen, or approximately $1.14 billion based upon
the exchange rate at September 27,
2009.
|
The
Company has excluded $162.0 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, 2009. The Company is unable to make reasonable
reliable estimates of the period of cash settlement with the respective taxing
authorities.
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 2009 through fiscal year
2016. Future minimum lease payments at September 27, 2009 are
presented below (in thousands).
Fiscal
Year:
|
||||
2009
(3 months)
|
$ | 2,705 | ||
2010
|
9,242 | |||
2011
|
6,802 | |||
2012
|
5,042 | |||
2013
|
3,308 | |||
2014
and thereafter
|
5,168 | |||
32,267 | ||||
Sublease
income to be received in the future under noncancelable
subleases
|
(3,504 | ) | ||
Net
operating leases
|
$ | 28,763 |
Rent
expense for the three and nine months ended September 27, 2009 and
September 28, 2008 were $2.3 million, $6.3 million,
$2.2 million and $6.2 million, respectively.
13.
Related
Parties and Strategic Investments
Toshiba. The
Company and Toshiba have collaborated in the development and manufacture of NAND
flash memory products. These NAND flash memory products are
manufactured by Toshiba at Toshiba’s Yokkaichi, Japan operations using the
semiconductor manufacturing equipment owned or leased by FlashVision, Flash
Partners and Flash Alliance. See also Note 12, “Commitments,
Contingencies and Guarantees.” The Company purchased NAND flash
memory wafers from FlashVision, Flash Partners and Flash Alliance and made
payments for shared research and development expenses from FlashVision, Flash
Partners, Flash Alliance and Toshiba, which total in the aggregate of
approximately $360.0 million, $1,424.3 million, $520.8 million
and $1,524.9 million in the three and nine months ended September 27,
2009 and September 28, 2008, respectively. In addition, in the
three and nine months ended September 27, 2009, the Company issued loans to
Flash Ventures of zero and $377.9 million and received loan repayments from
Flash Ventures of zero and $330.1 million, respectively, and issued loans
to Flash Ventures of $93.1 million and $130.5 million in the three and
nine months ended September 28, 2008, respectively. See Note 12,
“Commitments, Contingencies and Guarantees – Flash Ventures,” for further
discussion regarding Flash Ventures restructuring.
The
purchases of NAND flash memory wafers are ultimately reflected as a component of
cost of product revenues. During the three and nine months ended
September 27, 2009, the Company had $13.8 million of sales to
Toshiba. During the three and nine months ended September 27, 2008,
the Company had sales to Toshiba of zero and $5.1 million,
respectively. At September 27, 2009 and December 28, 2008,
the Company had accounts receivable balances from Toshiba of $13.8 million and
$2.2 million, respectively. At September 27, 2009 and
December 28, 2008, the Company had accrued current liabilities due to
Toshiba for shared research and development expenses of zero and
$4.0 million, respectively.
Flash Ventures
with Toshiba. The Company owns 49.9% of each of the flash
ventures with Toshiba (FlashVision, Flash Partners and Flash Alliance) and
accounts for its ownership position under the equity method of
accounting. The Company’s obligations with respect to Flash Partners
and Flash Alliance master lease agreements, take-or-pay supply arrangements and
research and development cost sharing are described in Note 12, “Commitments,
Contingencies and Guarantees.” Flash Partners and Flash Alliance are
variable interest entities; however, the Company is not the primary beneficiary
of either Flash Partners or Flash Alliance because it absorbs less than a
majority of the expected gains and losses of each entity. At
September 27, 2009 and December 28, 2008, the Company had accounts
payable balances due to FlashVision, Flash Partners and Flash Alliance of
$292.7 million and $370.4 million, respectively. For
activity related to the wind-down of FlashVision, see Note 12,
“Commitments, Contingencies and Guarantees.”
The
Company’s maximum reasonably estimable loss exposure (excluding lost profits),
based upon the exchange rate at each respective balance sheet date, as a result
of its involvement with the flash ventures with Toshiba is presented below
(in millions).
September 27,
2009
|
December 28,
2008
|
|||||||
Notes
receivable
|
$ | 1,166 | $ | 1,120 | ||||
Equity
investments
|
435 | 482 | ||||||
Operating
lease guarantees
|
1,142 | 2,095 | ||||||
Maximum
loss exposure
|
$ | 2,743 | $ | 3,697 |
Tower
Semiconductor. As of December 28, 2008, Tower Semiconductor
Ltd. (“Tower”), one of the Company’s suppliers of wafers for its controller
components, ceased being a related party as the Company’s ownership was less
than 10% of Tower’s outstanding shares. The Company purchased
controller wafers and related non-recurring engineering of $4.1 million and
$23.0 million in the three and nine months ended September 28, 2008,
respectively. The purchases of controller wafers are ultimately
reflected as a component of Cost of Product Revenues in the Condensed
Consolidated Statement of Operations. At December 28, 2008, the
Company had a net receivable from Tower of $0.4 million and an outstanding
loan secured by equipment to Tower of $3.0 million.
Solid State
Storage Solutions LLC. During the second quarter of fiscal
year 2007, the Company formed a venture with third parties that licenses
intellectual property, Solid State Storage Solutions LLC (“S4”). S4
qualifies as a variable interest entity. The Company is considered
the primary beneficiary of S4 and the Company consolidates S4 in its Condensed
Consolidated Financial Statements. S4 was financed with
$10.2 million of initial aggregate capital contributions from the
partners. In addition, through September 27, 2009, the Company had
loaned S4 $1.0 million under a revolving line of credit which expires in
May, 2012. In July 2007, S4 invested $10.0 million for the
acquisition of intellectual property. Amortization of the
intellectual property for the three and nine months ended September 27,
2009 and September 28, 2008 was $0.8 million, $2.3 million, $0.8 million
and $2.3 million, respectively. S4 has an obligation of up to an
additional $32.5 million related to the acquisition of intellectual
property should S4 be profitable.
14.
Litigation
The flash
memory industry is characterized by significant litigation seeking to enforce
patent and other intellectual property rights. The Company's patent
and other intellectual property rights are primarily responsible for generating
license and royalty revenue. The Company seeks to protect its
intellectual property through patents, copyrights, trademarks, trade secrets,
confidentiality agreements and other methods, and has been and likely will
continue to enforce such rights as appropriate through litigation and related
proceedings. The Company expects that its competitors and others who
hold intellectual property rights related to its industry will pursue similar
strategies. From time-to-time, it has been and may continue to be
necessary to initiate or defend litigation against third
parties. These and other parties could bring suit against the
Company. In each case listed below where the Company is the
defendant, the Company intends to vigorously defend the action. At
this time, the Company does not believe it is reasonably possible that losses
related to the litigation described below have occurred beyond the amounts, if
any, that have been accrued.
On
October 15, 2004, the Company filed a complaint for patent infringement and
declaratory judgment of non-infringement and patent invalidity against
STMicroelectronics N.V. and STMicroelectronics, Inc. (collectively, “ST”) in the
United States District Court for the Northern District of California, captioned
SanDisk Corporation v. STMicroelectronics, Inc., et al., Civil Case No. C
04 04379 JF. The complaint alleges that ST’s products infringe one of
the Company’s U.S. patents, U.S. Patent No. 5,172,338 (the “’338 patent”),
and also alleges that several of ST’s patents are invalid and not
infringed. On December 6, 2005, the Company filed a second
complaint against ST for patent infringement before the same Court, captioned
SanDisk Corporation v. STMicroelectronics, Inc. et al., Civil Case
No. C0505021 JF. In this second suit, the Company sought damages
and injunctions against ST from making, selling, importing or using flash memory
chips or products that infringe the Company’s U.S. Patent No. 5,991,517
(the “’517 patent”). On June 18, 2007, the Company filed an amended
complaint, removing several of the Company’s declaratory judgment
claims. At a case management conference conducted on June 29, 2007,
the parties agreed that the remaining declaratory judgment claims would be
dismissed pursuant to a settlement agreement in two matters litigated in the
Eastern District of Texas (Civil Case No. 4:05CV44 and Civil Case
No. 4:05CV45). The parties also agreed that the ’338 patent and
the ’517 patent would be litigated together as if in the same
case. ST filed an answer and counterclaims on September 6,
2007. ST’s counterclaims included assertions of antitrust
violations. On October 19, 2007, the Company filed a motion to
dismiss ST’s antitrust counterclaims, which the Court later converted into a
motion for summary judgment. On December 20, 2007, the Court
entered a stipulated order staying all procedural deadlines. On
October 17, 2008, the Court issued an order granting in part and denying in part
the Company’s motion for summary judgment on ST’s antitrust
counterclaims. On April 16, 2009, the Court held a Case Management
Conference at which it addressed the Company’s motion for leave to amend its
complaint to assert two additional U.S. patents owned by the Company and ST’s
motion to bifurcate the case for discovery and trial. On May 19,
2009, the Court issued an order granting the Company’s motion to add two
additional patents related to those already in dispute. The Court
also ordered that discovery on ST’s Walker Process claim and the Company’s
infringement claims would be stayed pending resolution of ST’s inequitable
conduct defense at a bench trial to be held in or about January
2010. On September 16, 2009, the Company and ST entered a settlement
agreement resolving this action and all other pending litigation between the
parties on amicable and confidential terms. The Court then dismissed
this action with prejudice in light of the parties’ agreement.
On
October 14, 2005, STMicroelectronics, Inc. (“STMicro”) filed a complaint against
the Company and the Company’s CEO, Dr. Eli Harari, in the Superior Court of the
State of California for the County of Alameda, captioned STMicroelectronics,
Inc. v. Harari, Case No. HG 05237216 (the “Harari Matter”). The
case was subsequently transferred to Santa Clara County Superior Court, where it
is assigned Case No. 1-07-CV-080123. The complaint alleges that
STMicro, as the successor to Wafer Scale Integration, Inc.’s (“WSI”) legal
rights, has an ownership interest in several Company patents that were issued
from applications naming Dr. Harari, a former WSI employee, as an
inventor. The complaint seeks the assignment or co-ownership of
certain inventions and patents conceived of by Dr. Harari, including some of the
patents asserted by the Company in its litigations against STMicro, as well as
damages in an unspecified amount. As with the SanDisk v. ST case previously
discussed in this section, the parties to this proceeding entered into a
settlement agreement on September 16, 2009. The Court dismissed this
action with prejudice in light of the parties’ agreement.
On
September 11, 2006, Mr. Rabbi, a shareholder of msystems Ltd. (“msystems”),
a company subsequently acquired by the Company in or about November 2006, filed
a derivative action in Israel and a motion to permit him to file the derivative
action against msystems and four directors of msystems arguing that options were
allegedly allocated to officers and employees of msystems in violation of
applicable law. Mr. Rabbi claimed that the aforementioned actions
allegedly caused damage to msystems. On January 25, 2007, SanDisk IL
Ltd. (“SDIL”), successor in interest to msystems, filed a motion to dismiss the
motion to seek leave to file the derivative action and the derivative action on
the grounds, inter alia, that Mr. Rabbi ceased to be a shareholder of
msystems after the merger between msystems and the Company. On
March 12, 2008, the court granted SDIL’s motion and dismissed the motion to
seek leave to file the derivative action and consequently, the derivative action
itself was dismissed. On May 15, 2008, Mr. Rabbi filed an appeal with
the Supreme Court of Israel. The parties submitted their written summations and
the oral hearing in the Supreme Court is set for March 10, 2010.
On
September 11, 2007, Premier International Associates LLC (“Premier”) filed
suit against the Company and 19 other named defendants, including Microsoft
Corporation, Verizon Communications Inc. and AT&T Inc., in the United States
District Court for the Eastern District of Texas (Marshall
Division). The suit, Case No. 2-07-CV-396, alleges infringement
of Premier's U.S. Patents 6,243,725 (the “’725”) and 6,763,345 (the “’345”) by
certain of the Company’s portable digital music players, and seeks an injunction
and damages in an unspecified amount. On December 10, 2007, an
amended complaint was filed. On February 5, 2008, the Company filed
an answer to the amended complaint and counterclaims: (a) denying infringement;
(b) seeking a declaratory judgment that the ’725 and ’345 patents are invalid,
unenforceable and not infringed by the Company. On February 5, 2008,
the Company, along with the other defendants in the action, filed a motion to
stay the litigation pending completion of reexaminations of the ’725 and ’345
patents by the U.S. Patent and Trademark Office (“USPTO”). This
motion was granted and on June 4, 2008, the action was stayed. On
March 31, 2009, the USPTO’s reexamination proceedings as to U.S. Patent
6,242,725 were completed, with all prior claims being cancelled, and three new
claims added and found patentable. The reexamination proceedings
related to U.S. Patent 6,763,345 have also
concluded. On September 3, 2009, Plaintiff dismissed all of its
claims against the Company with prejudice, concluding the lawsuit as against
SanDisk.
On
October 24, 2007, the Company filed a complaint under Section 337 of the Tariff
Act of 1930 (as amended) (Inv. No. 337-TA-619) titled, “In the matter of
flash memory controllers, drives, memory cards, and media players and products
containing same” in the ITC (hereinafter, “the 619 Investigation”), naming the
following companies as respondents: Phison Electronics Corp.
(“Phison”); Silicon Motion Technology Corp., Silicon Motion, Inc. (Taiwan),
Silicon Motion, Inc. (California), and Silicon Motion International, Inc.
(collectively, “Silicon Motion”); USBest Technology, Inc. dba Afa Technologies,
Inc. (“USBest”); Skymedi Corp. (“Skymedi”); Chipsbrand Microelectronics (HK)
Co., Ltd., Chipsbank Technology (Shenzhen) Co., Ltd., and Chipsbank
Microelectronics Co., Ltd., (collectively, “Chipsbank”); Zotek Electronic Co.,
Ltd., dba Zodata Technology Ltd. (collectively, “Zotek”); Infotech Logistic LLC
(“Infotech”); Power Quotient International Co., Ltd., and PQI Corp.
(collectively, “PQI”); Power Quotient International (HK) Co., Ltd.; Syscom
Development Co. Ltd.; PNY Technologies, Inc. (“PNY”); Kingston Technology Co.,
Inc., Kingston Technology Corp., Payton Technology Corp., and MemoSun, Inc.
(collectively, “Kingston”); Buffalo, Inc., Melco Holdings, Inc., and Buffalo
Technology (USA), Inc. (collectively, “Buffalo”); Verbatim Corp. (“Verbatim”);
Transcend Information Inc. (Taiwan), Transcend Information Inc. (California),
and Transcend Information Maryland, Inc., (collectively, “Transcend”); Imation
Corp., Imation Enterprises Corp., and Memorex Products, Inc. (collectively,
“Imation”); Add-On Computer Peripherals, Inc. and Add-On Computer Peripherals,
LLC (collectively, “Add-On Computer Peripherals”); Add-On Technology Co.; A-Data
Technology Co., Ltd., and A-Data Technology (USA) Co., Ltd., (collectively,
“A-DATA”); Apacer Technology Inc. and Apacer Memory America, Inc. (collectively,
“Apacer”); Acer, Inc. (“Acer”); Behavior Tech Computer Corp. and Behavior Tech
Computer (USA) Corp. (collectively, “Behavior”); Emprex Technologies
Corp.(“Emprex”); Corsair Memory, Inc. (“Corsair”); Dane-Elec Memory S.A., and
Dane-Elec Corp. USA, (collectively, “Dane-Elec”); Deantusaiocht Dane-Elec TEO;
EDGE Tech Corp. (“EDGE”); Interactive Media Corp, (“Interactive”); Kaser Corp.
(“Kaser”); LG Electronics, Inc., and LG Electronics U.S.A., Inc., (collectively,
“LG”); TSR Silicon Resources Inc. (“TSR”); and Welldone Co.
(“Welldone”). In the complaint, the Company asserts that respondents’
accused flash memory controllers, drives, memory cards, and media players
infringe the following: U.S. Patent No. 5,719,808 (the “’808 patent”); U.S.
Patent No. 6,763,424 (the “’424 patent”); U.S. Patent No. 6,426,893
(the “’893 patent”); U.S. Patent No. 6,947,332 (the “’332 patent”); and
U.S. Patent No. 7,137,011 (the “’011 patent”). The Company seeks
an order excluding the accused products from entry into the United States as
well as a permanent cease and desist order against the
respondents. Since filing its complaint, the Company has terminated
the investigation as to the’808 patent, the ’893 patent, and the ’332
patent. After filing its complaint, the Company reached settlement
agreements with Add-On Computer Peripherals, EDGE, Infotech, Interactive, Kaser,
PNY, TSR, Verbatim, Chipsbank, USBest and Welldone. The investigation
has been terminated as to these respondents in light of these settlement
agreements. Three of the remaining respondents – Buffalo, Corsair,
and A-Data – were terminated from the investigation after entering consent
orders. The investigation has also been terminated as to Add-On Tech.
Co., Behavior, Emprex, and Zotek after these respondents were found in
default. The investigation has also been terminated as to Acer,
Payton, Silicon Motion Tech. Corp., and Silicon Motion, Int’l
Inc. The Company also terminated PQI from the investigation as to the
’011 patent. On July 15, 2008, the ALJ issued a Markman ruling
regarding the ’011 patent, the ’893 patent, the ’332 patent, and the ’424
patent. Beginning October 27, 2008, the ALJ held an evidentiary
hearing. On February 9, 2009, the ALJ extended the target date for
conclusion of the investigation to August 10, 2009. On April 10,
2009, the ALJ issued an Initial Determination, finding that (1) the Respondents
did not infringe either the ’424 patent or the ’011 patent, (2) claim 8 of the
’011 patent was obvious and, thus, invalid over the prior art, and (3) the
Company had a domestic industry in both the ’424 patent and the ’011
patent. The ALJ also denied the Respondents’ patent misuse and patent
exhaustion defenses. On April 14, 2009, the ITC granted the
Company’s request for an extension to file a petition for review. On
May 4, 2009, the Company and Respondents filed their respective petitions for
review, which were granted in part pursuant to the ITC’s August 24, 2009 Notice
of Review. In that notice, the ITC advised that it will review the
ALJ’s non-infringement and validity findings with respect to the ’424 patent,
but that it will not review any of the ALJ’s findings concerning the ’011
patent. In October 2009, the Commission issued its Final
Determination with respect to the '424, in which it reversed certain claim
construction findings that were adverse to SanDisk, but affirmed the ALJ’s
overall finding of no violation of Section 337 of the Tariff Act of
1930.
On
October 24, 2007, the Company filed a complaint for patent infringement in the
United States District Court for the Western District of Wisconsin against the
following defendants: Phison, Silicon Motion, Synergistic, USBest, Skymedi,
Chipsbank, Infotech, Zotek, PQI, PNY, Kingston, Buffalo, Verbatim, Transcend,
Imation, Add-On Computer Peripherals, A-DATA, Apacer, Behavior, Corsair,
Dane-Elec, EDGE, Interactive, LG, TSR and Welldone. In this action,
Case No. 07-C-0607-C, the Company asserts that the defendants infringe the
’808 patent, the ’424 patent, the ’893 patent, the ’332 patent and the ’011
patent. The Company seeks damages and injunctive
relief. In light of the above mentioned settlement agreements, the
Company dismissed its claims against Add-On Computer Peripherals, EDGE,
Infotech, Interactive, PNY, TSR and Welldone. The Company also
voluntarily dismissed its claims against Acer and Synergistic without
prejudice. The Company also voluntarily dismissed its claims against
Corsair in light of its agreement to sell flash memory products only under
license or consent from the Company. On November 21, 2007, defendant
Kingston filed a motion to stay this action. Several defendants
joined in Kingston’s motion. On December 19, 2007, the Court
issued an order staying the case in its entirety until the 619 Investigation
becomes final. On January 14, 2008, the Court issued an order
clarifying that the entire case is stayed for all parties.
On
October 24, 2007, the Company filed a complaint for patent infringement in the
United States District Court for the Western District of Wisconsin against the
following defendants: Phison, Silicon Motion, Synergistic, USBest, Skymedi,
Zotek, Infotech, PQI, PNY, Kingston, Buffalo, Verbatim, Transcend, Imation,
A-DATA, Apacer, Behavior, and Dane-Elec. In this action, Case
No. 07-C-0605-C, the Company asserts that the defendants infringe U.S.
Patent No. 6,149,316 (the “’316 patent”) and U.S. Patent No. 6,757,842
(the “’842 patent”). The Company seeks damages and injunctive
relief. In light of above mentioned settlement agreements, the
Company dismissed its claims against Infotech and PNY. The Company
also voluntarily dismissed its claims against Acer and Synergistic without
prejudice. On November 21, 2007, defendant Kingston filed a motion to
consolidate and stay this action. Several defendants joined in
Kingston’s motion. On December 17, 2007, the Company filed an
opposition to Kingston’s motion. That same day, several defendants
filed another motion to stay this action. On January 7, 2008, the
Company opposed the defendants’ second motion to stay. On January 22,
2008, defendants Phison, Skymedi and Behavior filed motions to dismiss the
Company’s complaint for lack of personal jurisdiction. That same day,
defendants Phison, Silicon Motion, USBest, Skymedi, PQI, Kingston, Buffalo,
Verbatim, Transcend, A-DATA, Apacer, and Dane-Elec answered the Company’s
complaint denying infringement and raising several affirmative
defenses. These defenses included, among others, lack of personal
jurisdiction, improper venue, lack of standing, invalidity, unenforceability,
express license, implied license, patent exhaustion, waiver, latches, and
estoppel. On January 24, 2008, Silicon Motion filed a motion to
dismiss the Company’s complaint for lack of personal jurisdiction. On
January 25, 2008, Dane-Elec also filed a motion to dismiss the Company’s
complaint for lack of personal jurisdiction. On January 28, 2008, the
Court issued an order staying the case in its entirety with respect to all
parties until the proceeding in the 619 Investigation become
final. In its order, the Court also consolidated this action (Case
Nos. 07-C-0605-C) with the action discussed in the preceding paragraph
(07-C-0607-C).
Between
August 31, 2007 and December 14, 2007, the Company (along with a number of
other manufacturers of flash memory products) was sued in the Northern District
of California, in eight purported class action complaints. On
February 7, 2008, all of the civil complaints were consolidated into two
complaints, one on behalf of direct purchasers and one on behalf of indirect
purchasers, in the Northern District of California in a purported class action
captioned In re Flash Memory Antitrust Litigation, Civil Case
No. C07-0086. Plaintiffs allege the Company and a number of
other manufacturers of flash memory products conspired to fix, raise, maintain,
and stabilize the price of NAND flash memory in violation of state and federal
laws. The lawsuits purport to be on behalf of purchasers of flash
memory between January 1, 1999 through the present. The lawsuits seek
an injunction, damages, restitution, fees, costs, and disgorgement of
profits. On May 20, 2009, the Court denied defendants' motion to
dismiss the consolidated direct purchaser complaint and denied (with limited
exceptions for certain state law claims) defendants' motion to dismiss the
consolidated indirect purchaser complaint. Class certification
discovery and briefing was recently completed, with a hearing and further case
management conference set for December 1, 2009.
On
November 6, 2007, Gil Mosek, a former employee of SanDisk IL Ltd. (“SDIL”),
filed a lawsuit against SDIL, Dov Moran and Amir Ban in the Tel-Aviv District
Court, claiming that he and Amir Ban, another former employee of SDIL, reached
an agreement according to which a jointly-held company should have been
established together with SDIL. According to Mr. Mosek, SDIL knew about the
agreement, approved it and breached it, while deciding not to establish the
jointly-held company. On January 1, 2008, SDIL filed a statement of
defense. Simultaneously, SDIL filed a request to dismiss the lawsuit, claiming
that Mr. Mosek signed a waiver in favor of SDIL, according to which he has no
claim against SDIL. On February 12, 2008, Mr. Mosek filed a request
to allow him to present certain documents, which contain confidential
information of SDIL. On February 26, 2008, SDIL opposed this request,
claiming that SDIL’s documents are the sole property of SDIL and Mr. Mosek has
no right to hold and to use them. On March 6, 2008, the District
Court decided that Mr. Mosek must pay a fee according to the estimated
amount of the claim. On April 3, 2008, Mr. Mosek filed a request to
amend the claim by setting the claim on an amount of NIS
3,000,000. On April 9, 2008, SDIL filed its response to this request,
according to which it has no objection to the amendment, subject to the issuance
of an order for costs. On April 10, 2008, the District Court accepted
Mr. Mosek’s request. According to the settlement agreement, reached
between the SDIL and Amir Ban in January 2008, Amir Ban shall indemnify and hold
SDIL harmless with regard to the claim filed by Mosek. On April 16,
2009 the District Court ruled because it lacks proper jurisdiction the claim
must be transferred to the Tel-Aviv Labor Court which will have to rule with
respect to SDIL's motion for dismissal of the claim due to the release form
which Mosek signed when he left the Company. The Labor Court
subsequently referred the case to mediation which was unsuccessful. A
pre-trial hearing is scheduled for November 10, 2009.
On
October 1, 2008, NorthPeak Wireless LLC (“NorthPeak”) filed suit against the
Company and 30 other named defendants including Dell, Inc., Fujitsu Computer
Systems Corp., Gateway, Inc., Hewlett-Packard Company and Toshiba America, Inc.,
in the United States District Court for the Northern District of Alabama,
Northeastern Division. The suit, Case No. CV-08-J-1813, alleges
infringement of U.S. Patents 4,977,577 and 5,978,058 by certain of the Company’s
discontinued wireless electronic products. On January 21, 2009, the
Court granted a motion by the defendants to transfer the case to the United
States District Court for the Northern District of California, becoming Case
No. 3:09-CV-01813. On August 18, 2009, the Company reached an
agreement with NorthPeak to settle the case. Pursuant to the
settlement agreement, on August 28, 2009, the Court dismissed all claims against
SanDisk with prejudice.
In May
2009, SanDisk IL Ltd. (f/k/a M-Systems Flash Disk Pioneers Ltd., hereinafter
“SanDisk IL”) filed a proof of claim against Spansion LLC (“Spansion”) in
Spansion’s Chapter 11 bankruptcy proceeding under the United States Bankruptcy
Code, asserting debt owed under an SSP Driver Software License Agreement and an
ORNAND Driver Software License Agreement (collectively with a New Collaboration
Agreement, the “Agreements”). As set forth in the Agreements,
Spansion must make quarterly royalty and support fee payments for use of SanDisk
IL’s patented technology. As of October 1, 2009, Spansion owes
$1,548,623 in past due royalty and support fee payments and $8,721,738 in future
payments.
On June
19, 2009, the Company filed a complaint against LSI Corporation (“LSI”) in the
Northern District of California seeking a declaration of non-infringement,
declaration of invalidity and/or unenforceability as to eight LSI patents
relating to digital audio and video technology, and seeking remedies under
various California State laws for misrepresentations made by LSI to the
Company’s customers. The suit, Case No. C09 02737, was filed in
response to threats made by LSI against the Company and certain customers of the
Company. LSI has counterclaimed for
infringement of the eight LSI patents in suit and has accused most of SanDisk’s
digital audio and video players of infringement. On September 18,
2009, the Court granted LSI’s motion to dismiss SanDisk’s state law claims. The
Court has set a date for the claim construction hearing for March 11, 2010 and a
trial date of November 2, 2010.
15. Condensed
Consolidating Financial Statements
As part
of the acquisition of msystems Ltd. (hereinafter referred to as “SanDisk IL
Ltd.,” “SDIL,” or “Other Guarantor Subsidiary”) in November 2006, the Company
entered into a supplemental indenture whereby the Company became an additional
obligor and guarantor of the assumed $75 million 1% Notes due 2035 issued
by M-Systems Finance Inc. (the “Subsidiary Issuer” or “mfinco”) and guaranteed
by SDIL. The Company’s (the “Parent Company”) guarantee is full and
unconditional, and joint and several with SDIL. Both SDIL and mfinco
are wholly-owned subsidiaries of the Company. The following Condensed
Consolidating Financial Statements present separate information for mfinco as
the subsidiary issuer, the Company and SDIL as guarantors and the Company’s
other combined non-guarantor subsidiaries, and should be read in conjunction
with the Condensed Consolidated Financial Statements of the
Company.
These
Condensed Consolidating Financial Statements have been prepared using the equity
method of accounting. Earnings of subsidiaries are reflected in the
Company’s investment in subsidiaries account. The elimination entries
eliminate investments in subsidiaries, related stockholders’ equity and other
intercompany balances and transactions.
Condensed
Consolidating Statements of Operations
For
the three months ended September 27, 2009
|
||||||||||||||||||||||||
Parent
Company
(1)
|
Subsidiary
Issuer (1)
|
Other
Guarantor Subsidiary (1)
|
Combined
Non-Guarantor Subsidiaries (2)
|
Consolidating
Adjustments
|
Total
Company
|
|||||||||||||||||||
(In thousands)
|
||||||||||||||||||||||||
Total
revenues
|
$ | 435,145 | $ | — | $ | 19,109 | $ | 1,065,593 | $ | (584,676 | ) | $ | 935,171 | |||||||||||
Total
cost of revenues
|
57,142 | — | 1,521 | 984,911 | (544,673 | ) | 498,901 | |||||||||||||||||
Gross
profit
|
378,003 | — | 17,588 | 80,682 | (40,003 | ) | 436,270 | |||||||||||||||||
Total
operating expenses
|
148,277 | — | 16,355 | 74,313 | (42,628 | ) | 196,317 | |||||||||||||||||
Operating
income
|
229,726 | — | 1,233 | 6,369 | 2,625 | 239,953 | ||||||||||||||||||
Total
other income (expense)
|
(4,985 | ) | (1 | ) | 839 | 2,680 | (1,071 | ) | (2,538 | ) | ||||||||||||||
Income
(loss) before income taxes
|
224,741 | (1 | ) | 2,072 | 9,049 | 1,554 | 237,415 | |||||||||||||||||
Provision
for (benefit from) income taxes
|
13,662 | — | 628 | (8,169 | ) | 1 | 6,122 | |||||||||||||||||
Equity
in net income (loss) of consolidated subsidiaries
|
5,536 | — | 1,219 | 3,900 | (10,655 | ) | — | |||||||||||||||||
Net
income (loss)
|
$ | 216,615 | $ | (1 | ) | $ | 2,663 | $ | 21,118 | $ | (9,102 | ) | $ | 231,293 |
Condensed
Consolidating Statements of Operations
For
the nine months ended September 27, 2009
|
||||||||||||||||||||||||
Parent
Company
(1)
|
Subsidiary
Issuer (1)
|
Other
Guarantor Subsidiary (1)
|
Combined
Non-Guarantor Subsidiaries (2)
|
Consolidating
Adjustments
|
Total
Company
|
|||||||||||||||||||
(In thousands)
|
||||||||||||||||||||||||
Total
revenues
|
$ | 1,210,532 | $ | — | $ | 62,879 | $ | 3,065,706 | $ | (2,013,902 | ) | $ | 2,325,215 | |||||||||||
Total
cost of revenues
|
702,017 | — | 7,120 | 2,825,478 | (1,893,528 | ) | 1,641,087 | |||||||||||||||||
Gross
profit
|
508,515 | — | 55,759 | 240,228 | (120,374 | ) | 684,128 | |||||||||||||||||
Total
operating expenses
|
391,676 | — | 51,239 | 217,160 | (119,007 | ) | 541,068 | |||||||||||||||||
Operating
income (loss)
|
116,839 | — | 4,520 | 23,068 | (1,367 | ) | 143,060 | |||||||||||||||||
Total
other income (expense)
|
(13,640 | ) | (12 | ) | 5,128 | (12,634 | ) | 4,643 | (16,515 | ) | ||||||||||||||
Income
(loss) before income taxes
|
103,199 | (12 | ) | 9,648 | 10,434 | 3,276 | 126,545 | |||||||||||||||||
Provision
for income taxes
|
42,259 | — | 2,006 | 6,474 | 1 | 50,740 | ||||||||||||||||||
Equity
in net income (loss) of consolidated subsidiaries
|
7,434 | — | 515 | 18,517 | (26,466 | ) | — | |||||||||||||||||
Net
income (loss)
|
$ | 68,374 | $ | (12 | ) | $ | 8,157 | $ | 22,477 | $ | (23,191 | ) | $ | 75,805 |
_________________
(1)
|
This
represents legal entity results which exclude any subsidiaries required to
be consolidated under GAAP.
|
(2)
|
This
represents all other legal
subsidiaries.
|
Condensed
Consolidating Statements of Operations
For
the three months ended September 28, 2008
|
||||||||||||||||||||||||
Parent
Company
(1) (3)
|
Subsidiary
Issuer (1)
|
Other
Guarantor Subsidiary (1)
|
Combined
Non-Guarantor Subsidiaries (2)
|
Consolidating
Adjustments
|
Total
Company
|
|||||||||||||||||||
(In
thousands)
|
||||||||||||||||||||||||
Total
revenues
|
$ | 440,715 | $ | — | $ | 45,157 | $ | 1,467,703 | $ | (1,132,078 | ) | $ | 821,497 | |||||||||||
Total
cost of revenues
|
570,792 | — | 26,758 | 1,308,615 | (1,078,751 | ) | 827,414 | |||||||||||||||||
Gross
profit (loss)
|
(130,077 | ) | — | 18,399 | 159,088 | (53,327 | ) | (5,917 | ) | |||||||||||||||
Total
operating expenses
|
180,529 | — | 30,611 | 85,828 | (52,692 | ) | 244,276 | |||||||||||||||||
Operating
income (loss)
|
(310,606 | ) | — | (12,212 | ) | 73,260 | (635 | ) | (250,193 | ) | ||||||||||||||
Total
other income (expense)
|
(22,491 | ) | (1 | ) | (1,475 | ) | 11,474 | (408 | ) | (12,901 | ) | |||||||||||||
Income
(loss) before income taxes
|
(333,097 | ) | (1 | ) | (13,687 | ) | 84,734 | (1,043 | ) | (263,094 | ) | |||||||||||||
Provision
for (benefit from) income taxes
|
(95,383 | ) | — | (105 | ) | (2,453 | ) | 746 | (97,195 | ) | ||||||||||||||
Equity
in net income (loss) of consolidated subsidiaries
|
78,264 | — | 2,466 | 10,134 | (90,864 | ) | — | |||||||||||||||||
Net
income (loss)
|
$ | (159,450 | ) | $ | (1 | ) | $ | (11,116 | ) | $ | 97,321 | $ | (92,653 | ) | $ | (165,899 | ) |
Condensed
Consolidating Statements of Operations
For
the nine months ended September 28, 2008
|
||||||||||||||||||||||||
Parent
Company
(1) (3)
|
Subsidiary
Issuer (1)
|
Other
Guarantor Subsidiary (1)
|
Combined
Non-Guarantor Subsidiaries (2)
|
Consolidating
Adjustments
|
Total
Company
|
|||||||||||||||||||
(In
thousands)
|
||||||||||||||||||||||||
Total
revenues
|
$ | 1,336,167 | $ | — | $ | 191,761 | $ | 3,675,373 | $ | (2,715,826 | ) | $ | 2,487,475 | |||||||||||
Total
cost of revenues
|
1,042,047 | — | 120,441 | 3,462,683 | (2,541,431 | ) | 2,083,740 | |||||||||||||||||
Gross
profit
|
294,120 | — | 71,320 | 212,690 | (174,395 | ) | 403,735 | |||||||||||||||||
Total
operating expenses
|
518,588 | — | 108,060 | 298,357 | (174,757 | ) | 750,248 | |||||||||||||||||
Operating
income (loss)
|
(224,468 | ) | — | (36,740 | ) | (85,667 | ) | 362 | (346,513 | ) | ||||||||||||||
Total
other income (expense)
|
(24,452 | ) | (1 | ) | 3,702 | 31,495 | (1,437 | ) | 9,307 | |||||||||||||||
Income
(loss) before income taxes
|
(248,920 | ) | (1 | ) | (33,038 | ) | (54,172 | ) | (1,075 | ) | (337,206 | ) | ||||||||||||
Provision
for (benefit from) income taxes
|
(118,385 | ) | — | (487 | ) | 10,919 | (560 | ) | (108,513 | ) | ||||||||||||||
Equity
in net income (loss) of consolidated subsidiaries
|
(75,259 | ) | — | (3,668 | ) | 26,031 | 52,896 | — | ||||||||||||||||
Net
income (loss)
|
$ | (205,794 | ) | $ | (1 | ) | $ | (36,219 | ) | $ | (39,060 | ) | $ | 52,381 | $ | (228,693 | ) |
_________________
(1)
|
This
represents legal entity results which exclude any subsidiaries required to
be consolidated under GAAP.
|
(2)
|
This
represents all other legal
subsidiaries.
|
(3)
|
As
adjusted for the adoption of new accounting standards. See Note
1.
|
Condensed
Consolidating Balance Sheets
As
of September 27, 2009
|
||||||||||||||||||||||||
Parent
Company (1)
|
Subsidiary
Issuer (1)
|
Other
Guarantor Subsidiary (1)
|
Combined
Non-Guarantor Subsidiaries (2)
|
Consolidating
Adjustments
|
Total
Company
|
|||||||||||||||||||
(In thousands)
|
||||||||||||||||||||||||
ASSETS
|
||||||||||||||||||||||||
Current
assets:
|
||||||||||||||||||||||||
Cash
and cash equivalents
|
$ | 198,839 | $ | 56 | $ | 28,071 | $ | 525,517 | $ | — | $ | 752,483 | ||||||||||||
Short-term
investments
|
683,510 | — | 16,068 | — | (1 | ) | 699,577 | |||||||||||||||||
Accounts
receivable, net
|
40,171 | — | 591 | 238,914 | — | 279,676 | ||||||||||||||||||
Inventory
|
77,967 | — | 1 | 543,820 | (812 | ) | 620,976 | |||||||||||||||||
Other
current assets
|
542,066 | — | 278,845 | 898,028 | (1,558,717 | ) | 160,222 | |||||||||||||||||
Total
current assets
|
1,542,553 | 56 | 323,576 | 2,206,279 | (1,559,530 | ) | 2,512,934 | |||||||||||||||||
Property
and equipment, net
|
155,682 | — | 29,955 | 136,792 | (1 | ) | 322,428 | |||||||||||||||||
Other
non-current assets
|
2,345,881 | 73,520 | 37,115 | 2,939,660 | (2,482,254 | ) | 2,913,922 | |||||||||||||||||
Total
assets
|
$ | 4,044,116 | $ | 73,576 | $ | 390,646 | $ | 5,282,731 | $ | (4,041,785 | ) | $ | 5,749,284 | |||||||||||
LIABILITIES
|
||||||||||||||||||||||||
Current
liabilities:
|
||||||||||||||||||||||||
Accounts
payable
|
$ | 36,714 | $ | — | $ | 2,837 | $ | 376,655 | $ | (15 | ) | $ | 416,191 | |||||||||||
Convertible
short-term debt
|
— | 75,000 | — | — | — | 75,000 | ||||||||||||||||||
Other
current accrued liabilities
|
369,249 | 1,978 | 16,194 | 1,685,928 | (1,610,753 | ) | 462,596 | |||||||||||||||||
Total
current liabilities
|
405,963 | 76,978 | 19,031 | 2,062,583 | (1,610,768 | ) | 953,787 | |||||||||||||||||
Convertible
long-term debt
|
919,470 | — | — | — | — | 919,470 | ||||||||||||||||||
Non-current
liabilities
|
276,081 | — | 9,885 | 1,089,824 | (1,057,966 | ) | 317,824 | |||||||||||||||||
Total
liabilities
|
1,601,514 | 76,978 | 28,916 | 3,152,407 | (2,668,734 | ) | 2,191,081 | |||||||||||||||||
EQUITY
|
||||||||||||||||||||||||
Stockholders’
equity
|
2,444,165 | (3,402 | ) | 360,320 | 2,130,324 | (1,371,794 | ) | 3,559,613 | ||||||||||||||||
Non-controlling
interests
|
(1,563 | ) | — | 1,410 | — | (1,257 | ) | (1,410 | ) | |||||||||||||||
Total
equity
|
2,442,602 | (3,402 | ) | 361,730 | 2,130,324 | (1,373,051 | ) | 3,558,203 | ||||||||||||||||
Total
liabilities and equity
|
$ | 4,044,116 | $ | 73,576 | $ | 390,646 | $ | 5,282,731 | $ | (4,041,785 | ) | $ | 5,749,284 |
_________________
(1)
|
This
represents legal entity results which exclude any subsidiaries required to
be consolidated under GAAP.
|
(2)
|
This
represents all other legal
subsidiaries.
|
Condensed
Consolidating Balance Sheets
As
of December 28, 2008
|
||||||||||||||||||||||||
Parent Company (1)
|
Subsidiary
Issuer (1)
|
Other
Guarantor Subsidiary (1)
|
Combined
Non-Guarantor Subsidiaries (2)
|
Consolidating
Adjustments
|
Total
Company
|
|||||||||||||||||||
(In thousands)
|
||||||||||||||||||||||||
ASSETS
|
||||||||||||||||||||||||
Current
assets:
|
||||||||||||||||||||||||
Cash
and cash equivalents
|
$ | 376,052 | $ | 66 | $ | 51,806 | $ | 534,137 | $ | — | $ | 962,061 | ||||||||||||
Short-term
investments
|
443,632 | — | 33,664 | — | — | 477,296 | ||||||||||||||||||
Accounts
receivable, net
|
76,733 | — | 1,862 | 43,497 | — | 122,092 | ||||||||||||||||||
Inventory
|
87,612 | — | 1,573 | 511,740 | (2,674 | ) | 598,251 | |||||||||||||||||
Other
current assets
|
1,165,716 | — | 209,861 | 1,424,708 | (2,246,301 | ) | 553,984 | |||||||||||||||||
Total
current assets
|
2,149,745 | 66 | 298,766 | 2,514,082 | (2,248,975 | ) | 2,713,684 | |||||||||||||||||
Property
and equipment, net
|
205,022 | — | 33,478 | 158,487 | — | 396,987 | ||||||||||||||||||
Other
non-current assets
|
2,778,895 | 73,710 | 69,797 | 1,564,731 | (1,665,664 | ) | 2,821,469 | |||||||||||||||||
Total
assets
|
$ | 5,133,662 | $ | 73,776 | $ | 402,041 | $ | 4,237,300 | $ | (3,914,639 | ) | $ | 5,932,140 | |||||||||||
LIABILITIES
|
||||||||||||||||||||||||
Current
liabilities:
|
||||||||||||||||||||||||
Accounts
payable
|
$ | 81,014 | $ | — | $ | 3,379 | $ | 526,809 | $ | (211 | ) | $ | 610,991 | |||||||||||
Other
current accrued liabilities
|
1,105,212 | 2,166 | 21,567 | 1,841,278 | (2,318,205 | ) | 652,018 | |||||||||||||||||
Total
current liabilities
|
1,186,226 | 2,166 | 24,946 | 2,368,087 | (2,318,416 | ) | 1,263,009 | |||||||||||||||||
Convertible
long-term debt
|
879,094 | 75,000 | — | — | — | 954,094 | ||||||||||||||||||
Non-current
liabilities
|
188,825 | — | 17,963 | 75,964 | (8,436 | ) | 274,316 | |||||||||||||||||
Total
liabilities
|
2,254,145 | 77,166 | 42,909 | 2,444,051 | (2,326,852 | ) | 2,491,419 | |||||||||||||||||
EQUITY
|
||||||||||||||||||||||||
Stockholders’
equity
|
2,879,517 | (3,390 | ) | 358,981 | 1,793,249 | (1,587,787 | ) | 3,440,570 | ||||||||||||||||
Non-controlling
interests
|
— | — | 151 | — | — | 151 | ||||||||||||||||||
Total
equity
|
2,879,517 | (3,390 | ) | 359,132 | 1,793,249 | (1,587,787 | ) | 3,440,721 | ||||||||||||||||
Total
liabilities and equity
|
$ | 5,133,662 | $ | 73,776 | $ | 402,041 | $ | 4,237,300 | $ | (3,914,639 | ) | $ | 5,932,140 |
_________________
(1)
|
This
represents legal entity results which exclude any subsidiaries required to
be consolidated under GAAP.
|
(2)
|
This
represents all other legal
subsidiaries.
|
Condensed
Consolidating Statements of Cash Flows
For
the nine months ended September 27, 2009
|
||||||||||||||||||||||||
Parent
Company (1)
|
Subsidiary
Issuer (1)
|
Other
Guarantor Subsidiary (1)
|
Combined
Non-Guarantor Subsidiaries (2)
|
Consolidating
Adjustments
|
Total
Company
|
|||||||||||||||||||
(In thousands)
|
||||||||||||||||||||||||
Net
cash provided by (used in) operating activities
|
$ | 106,108 | $ | (10 | ) | $ | (51,944 | ) | $ | 45,670 | $ | — | $ | 99,824 | ||||||||||
Net
cash provided by (used in) investing activities
|
(300,029 | ) | — | 28,209 | (54,290 | ) | — | (326,110 | ) | |||||||||||||||
Net
cash provided by (used in) financing activities
|
13,998 | — | — | — | — | 13,998 | ||||||||||||||||||
Effect
of changes in foreign currency exchange rates on cash
|
2,710 | — | — | — | — | 2,710 | ||||||||||||||||||
Net
increase (decrease) in cash and cash equivalents
|
(177,213 | ) | (10 | ) | (23,735 | ) | (8,620 | ) | — | (209,578 | ) | |||||||||||||
Cash
and cash equivalents at beginning of period
|
376,052 | 66 | 51,806 | 534,137 | — | 962,061 | ||||||||||||||||||
Cash
and cash equivalents at end of period
|
$ | 198,839 | $ | 56 | $ | 28,071 | $ | 525,517 | $ | — | $ | 752,483 |
Condensed
Consolidating Statements of Cash Flows
For
the nine months ended September 28, 2008
|
||||||||||||||||||||||||
Parent
Company (1)
|
Subsidiary
Issuer (1)
|
Other Guarantor
Subsidiary (1)
|
Combined
Non-Guarantor Subsidiaries (2)
|
Consolidating
Adjustments
|
Total
Company
|
|||||||||||||||||||
(In thousands)
|
||||||||||||||||||||||||
Net
cash provided by (used in) operating activities
|
$ | (60,953 | ) | $ | (149 | ) | $ | (33,779 | ) | $ | 117,006 | $ | (1 | ) | $ | 22,124 | ||||||||
Net
cash provided by (used in) investing activities
|
125,736 | — | (2,494 | ) | (265,860 | ) | — | (142,618 | ) | |||||||||||||||
Net
cash provided by (used in) financing activities
|
21,395 | — | — | (9,785 | ) | — | 11,610 | |||||||||||||||||
Effect
of changes in foreign currency exchange rates on cash
|
3,353 | — | — | (7,111 | ) | — | (3,758 | ) | ||||||||||||||||
Net
increase (decrease) in cash and cash equivalents
|
89,531 | (149 | ) | (36,273 | ) | (165,750 | ) | (1 | ) | (112,642 | ) | |||||||||||||
Cash
and cash equivalents at beginning of period
|
389,337 | 215 | 90,639 | 353,558 | — | 833,749 | ||||||||||||||||||
Cash
and cash equivalents at end of period
|
$ | 478,868 | $ | 66 | $ | 54,366 | $ | 187,808 | $ | (1 | ) | $ | 721,107 |
_________________
(1)
|
This
represents legal entity results which exclude any subsidiaries required to
be consolidated under GAAP.
|
(2)
|
This
represents all other legal
subsidiaries.
|
Statements
in this report, which are not historical facts, are forward-looking statements
within the meaning of the federal securities laws. These statements
may contain words such as “expects,” “anticipates,” “intends,” “plans,”
“believes,” “seeks,” “estimates” or other wording indicating future results or
expectations. Forward-looking statements are subject to significant
risks and uncertainties. Our actual results may differ materially
from the results discussed in these forward-looking
statements. Factors that could cause our actual results to differ
materially include, but are not limited to, those discussed under “Risk Factors”
in Part II, Item 1A of this report, and elsewhere in this report. Our
business, financial condition or results of operations could be materially
adversely affected by any of these or other factors. We undertake no
obligation to revise or update any forward-looking statements to reflect any
event or circumstance that arises after the date of this
report. References in this report to “SanDisk®,”
“we,” “our,” and “us” refer collectively to SanDisk Corporation, a Delaware
corporation, and its subsidiaries.
Overview
We are
the inventor of and worldwide leader in NAND-based flash storage
cards. Flash storage technology allows data to be stored in a
durable, compact format that retains the digital information even after the
power has been switched off. Our mission is to provide simple,
reliable and affordable storage at different capacities for consumer use in a
wide variety of formats and devices. We sell flash memory products
for consumer electronics through broad global retail and original equipment
manufacturer, or OEM, distribution channels.
We
design, develop and manufacture products and solutions in a variety of form
factors using our flash memory, controller and firmware
technologies. We source the vast majority of our flash memory supply
through our significant flash venture relationships with Toshiba Corporation, or
Toshiba, which provide us with leading-edge, low-cost memory
wafers. Our card products are used in a wide range of consumer
electronics devices such as mobile phones, digital cameras, gaming devices and
laptop computers. We produce Universal Serial Bus, or USB, drives,
and MP3 players as well as embedded flash storage products that are used in a
variety of systems for the enterprise, industrial, military and other
markets. We also provide high-speed and high-capacity storage
solutions, known as solid-state drives, or SSDs, that can be used in lieu of
hard disk drives in a variety of computing devices, including personal computers
and enterprise servers.
Our
strategy is to be an industry-leading supplier of flash storage solutions and to
develop large scale markets for flash-based storage products. We
maintain our technology leadership by investing in advanced technologies and
flash memory fabrication capacity in order to produce leading-edge, low-cost
flash memory for use in end-products that we design and market. We
are a one-stop-shop for our retail and OEM customers, selling all major flash
storage card formats for our target markets in high volumes.
Our
revenues are driven by the sale of our products and the licensing of our
intellectual property. We believe the market for flash storage is
price elastic, meaning that a decrease in the price per megabyte results in
demand for higher capacity products and the emergence of new applications for
flash storage. We continuously reduce the cost of NAND flash memory,
which we believe over time will enable new markets and expand existing markets
and allow us to achieve higher overall revenue. We seek to achieve
these cost reductions through technology improvements, primarily by increasing
the amount of memory stored in a given area of silicon.
Effective
December 29, 2008, we implemented a change in accounting and have separately
accounted for the liability and equity components of our 1% Senior Convertible
Note due 2013 that may be settled in cash upon conversion (including partial
cash settlement) in a manner that reflects our economic interest
cost. Accordingly, we bifurcated the debt into debt and equity
components and will amortize the debt discount that will result in the “economic
interest cost” being reflected in our Condensed Consolidated Statements of
Operations. We have retrospectively applied the change in accounting
to all periods presented, and have recast the Condensed Consolidated Financial
Statements presented in this report.
Results
of Operations.
Three
months ended
|
Nine
months ended
|
|||||||||||||||||||||||||||||||
September 27,
2009
|
%
of
Revenues
|
September 28,
2008
|
%
of
Revenues
|
September 27,
2009
|
%
of
Revenues
|
September 28,
2008
|
%
of
Revenues
|
|||||||||||||||||||||||||
(In millions,
except percentages)
|
||||||||||||||||||||||||||||||||
Product
revenues
|
$ | 813.8 | 87.0 | % | $ | 689.6 | 83.9 | % | $ | 2,012.3 | 86.5 | % | $ | 2,101.1 | 84.5 | % | ||||||||||||||||
License
and royalty revenues
|
121.4 | 13.0 | % | 131.9 | 16.1 | % | 312.9 | 13.5 | % | 386.4 | 15.5 | % | ||||||||||||||||||||
Total
revenues
|
935.2 | 100.0 | % | 821.5 | 100.0 | % | 2,325.2 | 100.0 | % | 2,487.5 | 100.0 | % | ||||||||||||||||||||
Cost
of product revenues
|
495.8 | 53.0 | % | 812.8 | 98.9 | % | 1,631.7 | 70.2 | % | 2,040.0 | 82.0 | % | ||||||||||||||||||||
Amortization
of acquisition-related intangible assets
|
3.1 | 0.3 | % | 14.6 | 1.8 | % | 9.4 | 0.4 | % | 43.8 | 1.8 | % | ||||||||||||||||||||
Total
cost of product revenues
|
498.9 | 53.3 | % | 827.4 | 100.7 | % | 1,641.1 | 70.6 | % | 2,083.8 | 83.8 | % | ||||||||||||||||||||
Gross
profit (loss)
|
436.3 | 46.7 | % | (5.9 | ) | (0.7 | %) | 684.1 | 29.4 | % | 403.7 | 16.2 | % | |||||||||||||||||||
Operating
expenses
|
||||||||||||||||||||||||||||||||
Research
and development
|
94.9 | 10.2 | % | 104.6 | 12.7 | % | 273.0 | 11.7 | % | 328.1 | 13.2 | % | ||||||||||||||||||||
Sales
and marketing
|
55.8 | 6.0 | % | 87.8 | 10.7 | % | 144.0 | 6.2 | % | 245.6 | 9.9 | % | ||||||||||||||||||||
General
and administrative
|
45.3 | 4.8 | % | 47.1 | 5.7 | % | 122.3 | 5.3 | % | 158.6 | 6.4 | % | ||||||||||||||||||||
Amortization
of acquisition-related intangible assets
|
0.3 | 0.0 | % | 4.8 | 0.6 | % | 0.9 | 0.0 | % | 13.8 | 0.5 | % | ||||||||||||||||||||
Restructuring
and other
|
─
|
0.0 | % |
─
|
0.0 | % | 0.8 | 0.0 | % | 4.1 | 0.1 | % | ||||||||||||||||||||
Total
operating expenses
|
196.3 | 21.0 | % | 244.3 | 29.7 | % | 541.0 | 23.2 | % | 750.2 | 30.1 | % | ||||||||||||||||||||
Operating
income (loss)
|
240.0 | 25.7 | % | (250.2 | ) | (30.4 | %) | 143.1 | 6.2 | % | (346.5 | ) | (13.9 | %) | ||||||||||||||||||
Other
income (expense)
|
(2.6 | ) | (0.3 | %) | (12.9 | ) | (1.6 | %) | (16.6 | ) | (0.7 | %) | 9.3 | 0.3 | % | |||||||||||||||||
Income
(loss) before income taxes
|
237.4 | 25.4 | % | (263.1 | ) | (32.0 | %) | 126.5 | 5.5 | % | (337.2 | ) | (13.6 | %) | ||||||||||||||||||
Provision
for (benefit from) income taxes
|
6.1 | 0.7 | % | (97.2 | ) | (11.8 | %) | 50.7 | 2.2 | % | (108.5 | ) | (4.4 | %) | ||||||||||||||||||
Net
income (loss)
|
$ | 231.3 | 24.7 | % | $ | (165.9 | ) | (20.2 | %) | $ | 75.8 | 3.3 | % | $ | (228.7 | ) | (9.2 | %) |
Product
Revenues.
Three
months ended
|
Nine
months ended
|
|||||||||||||||||||||||
September 27,
2009
|
September 28,
2008
|
Percent
Change
|
September 27,
2009
|
September 28,
2008
|
Percent
Change
|
|||||||||||||||||||
(In millions,
except percentages)
|
||||||||||||||||||||||||
Retail
|
$ | 357.6 | $ | 433.1 | (17.4 | %) | $ | 1,062.0 | $ | 1,272.8 | (16.6 | %) | ||||||||||||
OEM
|
456.2 | 256.5 | 77.9 | % | 950.3 | 828.3 | 14.7 | % | ||||||||||||||||
Product
revenues
|
$ | 813.8 | $ | 689.6 | 18.0 | % | $ | 2,012.3 | $ | 2,101.1 | (4.2 | %) |
The
increase in our product revenues for the three months ended September 27,
2009, as compared to the three months ended September 28, 2008, resulted
from a 107% increase in the number of gigabytes sold, partially offset by a 43%
reduction in average selling price per gigabyte. The decrease in our
product revenues for the nine months ended September 27, 2009, as compared
to the nine months ended September 28, 2008, resulted from a 126% increase
in the number of gigabytes sold, more than offset by a 57% reduction
in average selling price per gigabyte. Memory units sold were up 31%
and 16% for the three and nine months ended September 27, 2009,
respectively, compared to the prior year periods.
The
decline in retail product revenues for the three and nine months ended
September 27, 2009, versus the comparable period in fiscal year 2008, was
due to price declines not fully offset by a higher number of gigabytes
sold. This was primarily attributable to a weak worldwide consumer
spending environment.
The
increase in OEM product revenues for the three and nine months ended September
27, 2009, versus the comparable period in fiscal year 2008, was due to increased
sales of cards and embedded products primarily in the mobile phone markets and
increased sales to new OEM channels, including the sale of private label cards,
wafers and components.
Our ten
largest customers represented approximately 46% and 43% of our total revenues in
the three and nine months ended September 27, 2009,
respectively, compared to 49% and 47% in the three and nine months ended
September 28, 2008, respectively. Revenue from Samsung
Electronics Co. Ltd., or Samsung, which included both license and royalty
revenues and product revenues, accounted for 11% of our total revenues in the
three and nine months ended September 27, 2009, respectively, and 13% of
our total revenues in the three and nine months ended September 28, 2008,
respectively. No other customer exceeded 10% of our total revenues
during these periods.
Geographical
Product Revenues.
Three
months ended
|
Nine
months ended
|
|||||||||||||||||||||||||||||||||||||||
September 27,
2009
|
%
of Product Revenues
|
September 28,
2008
|
%
of Product Revenues
|
Percent
Change
|
September 27,
2009
|
%
of Product Revenues
|
September 28,
2008
|
%
of Product Revenues
|
Percent
Change
|
|||||||||||||||||||||||||||||||
(In millions,
except percentages)
|
||||||||||||||||||||||||||||||||||||||||
United
States
|
$ | 211.8 | 26.0 | % | $ | 235.5 | 34.1 | % | (10.0 | %) | $ | 654.0 | 32.5 | % | $ | 706.4 | 33.6 | % | (7.4 | %) | ||||||||||||||||||||
Japan
|
61.4 | 7.6 | % | 44.8 | 6.5 | % | 37.3 | % | 111.5 | 5.5 | % | 146.4 | 7.0 | % | (23.8 | %) | ||||||||||||||||||||||||
Europe,
Middle East & Africa
|
161.1 | 19.8 | % | 170.1 | 24.7 | % | (5.3 | %) | 464.1 | 23.1 | % | 539.7 | 25.7 | % | (14.0 | %) | ||||||||||||||||||||||||
Asia-Pacific
|
351.9 | 43.2 | % | 220.0 | 31.9 | % | 59.9 | % | 733.6 | 36.5 | % | 658.7 | 31.3 | % | 11.4 | % | ||||||||||||||||||||||||
Other
foreign countries
|
27.6 | 3.4 | % | 19.2 | 2.8 | % | 43.8 | % | 49.1 | 2.4 | % | 49.9 | 2.4 | % | (1.6 | %) | ||||||||||||||||||||||||
Product
revenues
|
$ | 813.8 | 100.0 | % | $ | 689.6 | 100.0 | % | 18.0 | % | $ | 2,012.3 | 100.0 | % | $ | 2,101.1 | 100.0 | % | (4.2 | %) |
Product
revenue decreased in the United States and Europe, Middle East and Africa, or
EMEA, for the three and nine months ended September 27, 2009, versus the
comparable periods in fiscal year 2008, primarily due to a weak consumer
spending environment. Product revenues in Japan increased for the
three months ended September 27, 2009, versus the comparable periods in fiscal
year 2008, due primarily to an increase in the sale of gaming cards in the OEM
channel. Product revenues in Japan decreased for the nine months
ended September 27, 2009, versus the comparable periods in fiscal year 2008, due
to a weak consumer spending environment and a reduction in sales of gaming cards
in the first half of fiscal 2009. Product revenues in Asia-Pacific
increased for the three months and nine months ended September 27, 2009, versus
the comparable periods in fiscal year 2008, primarily due to growth in the OEM
channel for the mobile phone markets and growth in the sale of private label
cards, wafers and components.
License
and Royalty Revenues.
Three
months ended
|
Nine
months ended
|
|||||||||||||||||||||||
September 27,
2009
|
September 28,
2008
|
Percent
Change
|
September 27,
2009
|
September 28,
2008
|
Percent
Change
|
|||||||||||||||||||
(In millions,
except percentages)
|
||||||||||||||||||||||||
License
and royalty revenues
|
$ | 121.4 | $ | 131.9 | (8.0 | %) | $ | 312.9 | $ | 386.4 | (19.0 | %) |
The
decrease in our license and royalty revenues for the three and nine months ended
September 27, 2009, versus the comparable period of fiscal year 2008,was
primarily due to lower flash memory revenues reported by our licensees partially
offset by new licensees. In addition, the first quarter of fiscal
year 2009 royalty revenues were reduced by a prior period adjustment identified
by a licensee. The licensee claimed that they incorrectly computed
certain royalties for periods prior to fiscal year 2008, and this amount was
offset against current payments. Beginning in the fourth quarter of
fiscal year 2009, we expect our license and royalty revenues will decline due to
a new license agreement with an existing licensee at a lower effective royalty
rate as compared to the previous license agreement.
Gross
Profit and Margin.
Three
months ended
|
Nine
months ended
|
|||||||||||||||||||||||
September 27,
2009
|
September 28,
2008
|
Percent
Change
|
September 27,
2009
|
September 28,
2008
|
Percent
Change
|
|||||||||||||||||||
(In millions,
except percentages)
|
||||||||||||||||||||||||
Product
gross profit
|
$ | 314.9 | $ | (137.9 | ) | 328.4 | % | $ | 371.3 | $ | 17.4 | 2033.9 | % | |||||||||||
Product
gross margin (as a percent of product revenues)
|
38.7 | % | (20.0 | %) | 18.4 | % | 0.8 | % | ||||||||||||||||
Total
gross margin (as a percent of total revenues)
|
46.7 | % | (0.7 | %) | 29.4 | % | 16.2 | % |
Product
gross profit and margin for the three and nine months ended September 27,
2009, was higher than the comparable period of fiscal year 2008, due to
manufacturing costs declining faster than prices and a net benefit of
approximately $139 million and $256 million, respectively, primarily
from the sale of inventory which had been previously partially
reserved. Product gross margin for the three and nine months ended
September 28, 2008 was negative due to aggressive industry price declines
and related lower-of-cost or market inventory charges.
Research
and Development.
Three
months ended
|
Nine
months ended
|
|||||||||||||||||||||||
September 27,
2009
|
September 28,
2008
|
Percent
Change
|
September 27,
2009
|
September 28,
2008
|
Percent
Change
|
|||||||||||||||||||
(In millions,
except percentages)
|
||||||||||||||||||||||||
Research
and development
|
$ | 94.9 | $ | 104.6 | (9.3 | %) | $ | 273.0 | $ | 328.1 | (16.8 | %) | ||||||||||||
Percent
of revenue
|
10.2 | % | 12.7 | % | 11.7 | % | 13.2 | % |
Our
research and development expense reduction for the three months ended
September 27, 2009, versus the comparable period in fiscal year 2008, was
due primarily to lower employee-related costs of ($3.7) million related to
decreased headcount and lower share-based compensation expense, and lower usage
of third-party engineering services of ($4.5) million.
Our
research and development expense reduction for the nine months ended
September 28, 2009, versus the comparable period in fiscal year 2008, was
due primarily to lower employee-related costs of ($20.1) million related to
decreased headcount and lower share-based compensation expense, and lower usage
of third-party engineering services of ($31.9) million.
Sales
and Marketing.
Three
months ended
|
Nine
months ended
|
|||||||||||||||||||||||
September 27,
2009
|
September 28,
2008
|
Percent
Change
|
September 27,
2009
|
September 28,
2008
|
Percent
Change
|
|||||||||||||||||||
(In millions,
except percentages)
|
||||||||||||||||||||||||
Sales
and marketing
|
$ | 55.8 | $ | 87.8 | (36.4 | %) | $ | 144.0 | $ | 245.6 | (41.4 | %) | ||||||||||||
Percent
of revenue
|
6.0 | % | 10.7 | % | 6.2 | % | 9.9 | % |
Our sales
and marketing expense reduction for the three months ended September 27,
2009, versus the comparable period in fiscal year 2008, was primarily due to
decreased branding and merchandising costs of ($26.4) million and lower
outside service costs of ($4.5) million.
Our sales
and marketing expense reduction for the nine months ended September 28,
2009, versus the comparable period in fiscal year 2008, was primarily due to
decreased branding and merchandising costs of ($74.7) million, lower
outside service costs of ($17.1) million, and lower employee-related
expenses of ($6.5) million related primarily to decreased headcount and
lower share-based compensation expense.
General
and Administrative.
Three
months ended
|
Nine
months ended
|
|||||||||||||||||||||||
September 27,
2009
|
September 28,
2008
|
Percent
Change
|
September 27,
2009
|
September 28,
2008
|
Percent
Change
|
|||||||||||||||||||
(In millions,
except percentages)
|
||||||||||||||||||||||||
General
and administrative
|
$ | 45.3 | $ | 47.1 | (3.8 | %) | $ | 122.3 | $ | 158.6 | (22.9 | %) | ||||||||||||
Percent
of revenue
|
4.8 | % | 5.7 | % | 5.3 | % | 6.4 | % |
Our
general and administrative expense reduction for the three months ended
September 27, 2009, versus the comparable period in fiscal year 2008, was
primarily related to lower legal and outside advisors costs of
($5.9) million offset by higher bad debt expense of
$3.2 million.
Our
general and administrative expense reduction for the nine months ended
September 28, 2009, versus the comparable period in fiscal year 2008, was
primarily related to lower legal and outside advisors costs of
($27.6) million, lower employee-related costs of ($6.7) million due to
decreased headcount and lower share-based compensation expense, and lower bad
debt expense of ($4.5) million.
Amortization
of Acquisition-Related Intangible Assets.
Three
months ended
|
Nine
months ended
|
|||||||||||||||||||||||
September 27,
2009
|
September 28,
2008
|
Percent
Change
|
September 27,
2009
|
September 28,
2008
|
Percent
Change
|
|||||||||||||||||||
(In millions,
except percentages)
|
||||||||||||||||||||||||
Amortization
of acquisition-related intangible assets
|
$ | 0.3 | $ | 4.8 | (93.8 | %) | $ | 0.9 | $ | 13.8 | (93.5 | %) | ||||||||||||
Percent
of revenue
|
0.0 | % | 0.6 | % | 0.0 | % | 0.5 | % |
Amortization
of acquisition-related intangible assets was lower in the three and nine months
ended September 27, 2009, compared to the three months ended
September 28, 2008, due to the impairment of certain Matrix Semiconductor,
Inc. and msystems Ltd. acquisition-related intangible assets in the fourth
quarter of fiscal year 2008.
Restructuring
and Other.
Three
months ended
|
Nine
months ended
|
|||||||||||||||||||||||
September 27,
2009
|
September 28,
2008
|
Percent
Change
|
September 27,
2009
|
September 28,
2008
|
Percent
Change
|
|||||||||||||||||||
(In millions,
except percentages)
|
||||||||||||||||||||||||
Restructuring
and others
|
$ | — | $ | — | — | $ | 0.8 | $ | 4.1 | (80.5 | %) | |||||||||||||
Percent
of revenue
|
— | — | 0.0 | % | 0.1 | % |
For the
three and nine months ended September 27, 2009, we recorded zero and
$0.8 million related to employee severance costs under our restructuring
plans compared to zero and $4.1 million recorded for the same periods in
fiscal year 2008, respectively. See Note 9, “Restructuring Plans,” of
the Notes to Condensed Consolidated Financial Statements of this Form
10-Q.
Other
Income (Expense).
Three
months ended
|
Nine
months ended
|
|||||||||||||||||||||||
September 27,
2009
|
September 28,
2008
|
Percent
Change
|
September 27,
2009
|
September 28,
2008
|
Percent
Change
|
|||||||||||||||||||
(In millions,
except percentages)
|
||||||||||||||||||||||||
Interest
income
|
$ | 14.0 | $ | 26.0 | (46.2 | %) | $ | 47.4 | $ | 75.0 | (36.8 | %) | ||||||||||||
Interest
expense
|
(17.6 | ) | (16.6 | ) | 6.0 | % | (51.8 | ) | (49.1 | ) | (5.5 | %) | ||||||||||||
Income
(loss) from equity investments
|
(2.1 | ) | (0.6 | ) | 250.0 | % |
─
|
0.3 | (100.0 | %) | ||||||||||||||
Other
income (expense), net
|
3.1 | (21.7 | ) | (114.3 | %) | (12.2 | ) | (16.9 | ) | 28.4 | % | |||||||||||||
Total
other income (expense), net
|
$ | (2.6 | ) | $ | (12.9 | ) | 79.8 | % | $ | (16.6 | ) | $ | 9.3 | (278.5 | %) |
The
decrease in total Other income (expense) for the three and nine months ended
September 27, 2009, versus the comparable period in fiscal year 2008, was
primarily due to lower interest income of ($12.0) million and ($27.6)
million, respectively, as a result of reduced interest rates. Other
income (expense) for the nine months ended September 27, 2009 included
transaction costs of ($10.9) million related to the sale of equipment and
transfer of lease obligations resulting from the restructuring of Flash
Partners Ltd., or Flash Partners, and Flash Alliance Ltd., or Flash Alliance,
hereinafter collectively referred to as Flash Ventures. Other income
(expense) for the three and nine months ended September 28, 2008 included
impairment charges of our investment in Tower Semiconductor Ltd., or Tower, of
($11.7) million and impairment charges of our investment in FlashVision
Ltd., or FlashVision, of ($10.4) million.
Provision
for Income Taxes.
Three
months ended
|
Nine
months ended
|
|||||||||||||||||||||||
September 27,
2009
|
September 28,
2008
|
Percent
Change
|
September 27,
2009
|
September 28,
2008
|
Percent
Change
|
|||||||||||||||||||
(In millions,
except percentages)
|
||||||||||||||||||||||||
Provision
for (benefit from) income taxes
|
$ | 6.1 | $ | (97.2 | ) | 106.3 | % | $ | 50.7 | $ | (108.5 | ) | 146.7 | % | ||||||||||
Effective
tax rate
|
2.6 | % | 36.9 | % | 40.1 | % | 32.2 | % |
The
provision for income taxes for the three and nine months ended September 27,
2009 consisted primarily of taxes for our income generating foreign
jurisdictions and withholding taxes on license and royalty income from certain
foreign licensees. Due to the valuation allowance recorded in the
fourth quarter of fiscal year 2008, the tax provision for the three and nine
months ended September 27, 2009 reflects the estimated taxes net of
valuation allowance. The tax provision for the three months ended
September 27, 2009 includes a cumulative adjustment based on the expected
annual tax rate.
Unrecognized
tax benefits decreased ($1.5) million and increased $9.4 million
during the three and nine months ended September 27, 2009,
respectively. Unrecognized tax benefits were $133.8 million and
$124.4 million as of September 27, 2009 and December 28, 2008,
respectively. Unrecognized tax positions that would impact the
effective tax rate in the future is approximately $109.1 million at
September 27, 2009. Income tax expense in the third quarter of
fiscal year 2009 included interest and penalties of $0.9 million and ($0.7) million,
respectively.
In
October 2009, the Internal Revenue Service commenced an examination of our
federal income tax returns for fiscal years 2005 through 2008. We do
not expect a resolution to be reached during the next twelve
months. In addition, we are currently under audit by various state
and international tax authorities and cannot reasonably estimate that the
outcome of these examinations will not have a material effect on our financial
position, results of operations or liquidity.
Liquidity
and Capital Resources.
Our cash
flows were as follows:
Nine
months ended
|
||||||||||||
September 27,
2009
|
September 28,
2008
|
Percent
Change
|
||||||||||
(In millions,
except percentages)
|
||||||||||||
Net
cash provided by operating activities
|
$ | 99.8 | $ | 22.1 | 351.2 | % | ||||||
Net
cash used in investing activities
|
(326.1 | ) | (142.6 | ) | 128.7 | % | ||||||
Net
cash provided by financing activities
|
14.0 | 11.6 | 20.6 | % | ||||||||
Effect
of changes in foreign currency exchange rates on cash
|
2.7 | (3.7 | ) | (172.1 | %) | |||||||
Net
decrease in cash and cash equivalents
|
$ | (209.6 | ) | $ | (112.6 | ) | 86.1 | % |
Operating
Activities. Cash provided by operating activities was
generated by our net income adjusted for certain non-cash items and changes in
operating assets and liabilities. Cash provided by operations was
$99.8 million for the first nine months of fiscal year 2009 as compared to
cash provided by operations of $22.1 million for the first nine months of
fiscal year 2008. The increase in cash provided by operations in the
first nine months of fiscal year 2009 compared to the first nine months of
fiscal year 2008 resulted primarily from net income of $75.8 million
compared with a net loss of ($228.7) million in the comparable period of
the prior year. Adjustments to net income to calculate cash provided
by operating activities for the nine months ended September 27, 2009
included the add-back of non-cash charges of $240.2 million and the
reduction of ($216.2) million for changes in operating assets and
liabilities. Accounts receivable increased, a use of cash, due to
increased revenue in the third quarter of fiscal year 2009. Inventory
increased, a use of cash, primarily due to the sale of previously reserved
inventory partially offset by a decrease in gross inventory. The cash
provided from other assets was primarily due to a tax refund received in the
first quarter of fiscal year 2009 related to carryback claims from the fiscal
year 2008 net loss. The cash used by accounts payable trade and
accounts payable from related parties is related to the reduction of gross
inventory and operating expenses as compared to the prior year, resulting in
lower accounts payable balances. The decrease in other liabilities in
fiscal year 2009 is a result of settlements in hedge contracts and the reduction
in liabilities for Flash Ventures adverse purchase commitments associated with
under utilization of Flash Ventures’ capacity.
Investing
Activities. Cash used for investing activities for the first
nine months of fiscal year 2009 was ($326.1) million as compared to cash
used for investing activities of ($142.6) million in the first nine months
of fiscal year 2008. The primary drivers of the change from fiscal
years 2008 to 2009 were a reduction in the net loans made to Flash Ventures and
a reduced investment in property and equipment.
In the
first nine months of fiscal year 2009, we loaned $377.9 million to Flash
Ventures for equipment purchases and received $330.1 million on the
collection of outstanding notes receivable from Flash Ventures for the sale of a
portion of our production capacity and the return of excess cash from Flash
Partners. This resulted in a net loan to Flash Ventures of $47.8
million in the first nine months of fiscal year 2009 compared to a loan of
$130.5 million to Flash Ventures for equipment purchases in the first nine
months of fiscal year 2008.
In the
first nine months of fiscal year 2009, our property and equipment expenditures
were $43.4 million, a reduction from the $112.7 million of property and
equipment expenditures in the first nine months of fiscal year 2008, primarily
due to reduced expansion of manufacturing capacity.
Financing
Activities. Net cash provided by financing activities for the
first nine months of fiscal year 2009 was $14.0 million, as compared to net
cash provided by financing activities of $11.6 million in the first nine
months of fiscal year 2008, primarily due to lower cash from employee stock
programs and repayment of debt financing in fiscal year 2008.
Liquid
Assets. At September 27, 2009, we had cash, cash
equivalents and short-term investments of $1.45 billion. We have
$1.13 billion of long-term investments which we believe are also liquid
assets, but are classified as long-term investments due to the remaining
contractual maturity of the investment being greater than one year.
Short-Term
Liquidity. As of September 27, 2009, our working capital
balance was $1.56 billion. We expect our gross loans and
investments in Flash Ventures as well as our investments in property and
equipment for the next twelve months to be approximately $0.5
billion. In addition, our 1% Convertible Notes due 2035 of
$75.0 million may be redeemed in whole or in part by the holders thereof at
a redemption price equal to 100% of the principal amount of the notes to be
redeemed, plus accrued and unpaid interest on March 15, 2010 and various
dates thereafter.
Our
short-term liquidity is impacted in part by our ability to maintain compliance
with covenants in the outstanding Flash Ventures master lease
agreements. The Flash Ventures master lease agreements contain
customary covenants for Japanese lease facilities as well as an acceleration
clause for certain events of default related to us as guarantor, including,
among other things, our failure to maintain a minimum shareholder equity of at
least $1.51 billion, and our failure to maintain a minimum corporate rating
of BB- from Standard & Poors, or S&P, or Moody’s Corporation, or a
minimum corporate rating of BB+ from Rating & Investment Information, Inc.,
or R&I. As of September 27, 2009, Flash Ventures was in
compliance with all of its master lease covenants. While our S&P
credit rating was B, two levels below the required minimum corporate rating
threshold from S&P, our R&I credit rating was BBB-, one level above the
required minimum corporate rating threshold from R&I.
If
R&I were to downgrade our credit rating below the minimum corporate rating
threshold, Flash Ventures would become non-compliant with certain covenants
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 us, 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 resolution
was unsuccessful, we could be required to pay a portion or up to the entire
$1.14 billion outstanding lease obligations covered by our guarantee under
such Flash Ventures master lease agreements, based upon the exchange rate at
September 27, 2009, which could negatively impact our short-term
liquidity.
Long-Term
Requirements. Depending on the demand for our products, we may
decide to make additional investments, which could be substantial, in wafer
fabrication foundry capacity and assembly and test manufacturing equipment to
support our business in the future. We may also make equity
investments in other companies or engage in merger or acquisition
transactions. These activities may require us to raise additional
financing, which could be difficult to obtain, and which if not obtained in
satisfactory amounts could prevent us from funding Flash Ventures; increasing
our wafer supply; developing or enhancing our products; taking advantage of
future opportunities; engaging in investments in or acquisitions of companies;
growing our business or responding to competitive pressures or unanticipated
industry changes; any of which could harm our business.
Financing
Arrangements. At September 27, 2009, we had
$1.23 billion of aggregate principal amount in convertible notes
outstanding, consisting of $1.15 billion in aggregate principal amount of
our 1% Senior Convertible Notes due 2013 or 1% Notes due 2013, and
$75.0 million in aggregate principal amount of our 1% Convertible Notes due
2035, or 1% Notes due 2035. Our 1% Notes due 2035 may be redeemed in
whole or in part by the holders thereof at a redemption price equal to 100% of
the principal amount of the notes to be redeemed, plus accrued and unpaid
interest on March 15, 2010 and various dates
thereafter.
Concurrent
with the issuance of the 1% Notes due 2013, we sold warrants to acquire shares
of our common stock at an exercise price of $95.03 per share. As of
September 27, 2009, the warrants had an expected life of approximately
3.9 years and expire in August 2013. At expiration, we may, at
our option, elect to settle the warrants on a net share basis. As of
September 27, 2009, the warrants had not been exercised and remain
outstanding. In addition, concurrent with the issuance of the 1%
Notes due 2013, we entered into a convertible bond hedge transaction in which
counterparties agreed to sell to us up to approximately 14.0 million shares
of our common stock, which is the number of shares initially issuable upon
conversion of the 1% Notes due 2013 in full, at a conversion price of $82.36 per
share. The convertible bond hedge transaction will be settled in net
shares and will terminate upon the earlier of the maturity date of the 1% Notes
due 2013 or the first day that none of the 1% Notes due 2013 remain outstanding
due to conversion or otherwise. Settlement of the convertible bond
hedge in net shares on the expiration date would result in us receiving net
shares equivalent to the number of shares issuable by us upon conversion of the
1% Notes due 2013. As of September 27, 2009, we had not
purchased any shares under this convertible bond hedge agreement.
Flash Partners
and Flash Alliance Ventures with Toshiba. We are a 49.9% owner
in both Flash Partners and Flash Alliance, hereinafter collectively referred to
as Flash Ventures, our business ventures with Toshiba to develop and
manufacture NAND flash memory products. These NAND flash memory
products are manufactured by Toshiba at Toshiba’s Yokkaichi, Japan operations
using the semiconductor manufacturing equipment owned or leased by Flash
Ventures. This equipment is funded or will be funded by investments
in or loans to the Flash Ventures from us and Toshiba as well as through
operating leases received by Flash Ventures from third-party banks and
guaranteed by us and Toshiba. Flash Ventures purchase wafers from
Toshiba at cost and then resell those wafers to us and Toshiba at cost plus a
markup. We are contractually obligated to purchase half of Flash
Ventures’ NAND wafer supply or pay for 50% of the fixed costs of Flash
Ventures. We are not able to estimate our total wafer purchase
obligations beyond our rolling three month purchase commitment because the price
is determined by reference to the future cost to produce the
wafers. See Note 13, “Related Parties and Strategic
Investments,” of the Notes to Condensed Consolidated Financial Statements of
this Form 10-Q.
The cost
of the wafers we purchase from Flash Ventures is recorded in inventory and
ultimately cost of product revenues. Flash Ventures are variable
interest entities; however, we are not the primary beneficiary of these ventures
because we are entitled to less than a majority of the expected gains and losses
with respect to each venture. Accordingly, we account for our
investments under the equity method and do not consolidate.
Under
Flash Ventures’ agreements, we agreed to share in Toshiba’s costs associated
with NAND product development and our common semiconductor research and
development activities. We and Toshiba each pay the cost of our own
design teams and 50% of the wafer processing and similar costs associated with
this direct design and development of flash memory. In the fourth
quarter of fiscal year 2008, our requirement to fund common research and
development activities ended and final funding was completed in the second
quarter of fiscal year 2009. As of September 27, 2009 and December
28, 2008, the Company had accrued liabilities related to these expenses of zero
and $4.0 million, respectively. We continue to participate in other
common research and development activities with Toshiba but are not committed to
any minimum funding level.
For
semiconductor fixed assets that are leased by Flash Ventures, we and/or Toshiba
jointly guarantee on an unsecured and several basis, 50% of the outstanding
Flash Ventures’ lease obligations under master lease agreements entered into
from December 2004 through June 2008. These master lease
obligations are denominated in Japanese yen and are
noncancelable. Our total master lease obligation guarantee as of
September 27, 2009 was 103.0 billion Japanese yen, or approximately
$1.14 billion based upon the exchange rate at September 27,
2009.
In our
fiscal year 2009, we and Toshiba restructured Flash Ventures by selling more
than 20% of Flash Ventures’ capacity to Toshiba. The restructuring
resulted in us receiving value of 79.3 billion Japanese yen of which
26.1 billion Japanese yen, or $277 million, was received in cash,
reducing outstanding notes receivable from Flash Ventures and 53.2 billion
Japanese yen of value reflected the transfer of off-balance sheet equipment
lease guarantee obligations from us to Toshiba. The restructuring was
completed in a series of closings beginning in January 2009 and extending
through March 31, 2009. In the first quarter of fiscal year
2009, transaction costs of $10.9 million related to the sale and transfer
of equipment and lease obligations were expensed.
From
time-to-time, we and Toshiba mutually approve the purchase of equipment in the
Flash Ventures for conversion to new process technologies or the addition of
wafer capacity. Flash Partners has previously reached full wafer
capacity. Flash Alliance’s production output ramped in 2008 to more
than 50% of its estimated full wafer capacity. There is currently no
wafer expansion underway in Flash Alliance, and any future expansion of wafer
capacity within Flash Alliance will be mutually agreed upon by both
parties. During fiscal year 2009, we expect to invest approximately
up to $400 million in Flash Ventures primarily for new process
technologies. We expect to make these investments through loans to Flash
Ventures and in the first nine months of fiscal year 2009, we have loaned
$378 million to Flash Ventures.
FlashVision
Venture with Toshiba. In the second quarter of fiscal year
2008, we and Toshiba determined that production of NAND flash memory products
utilizing 200-millimeter wafers was no longer cost effective relative to market
prices for NAND flash memory and decided to wind-down the FlashVision
venture. In the first nine months of fiscal year 2009, we received
distributions of $12.7 million, released $43.3 million of cumulative
translation adjustments recorded in accumulated OCI and impaired the remaining
$7.9 million relating to our investment in FlashVision.
Contractual
Obligations and Off-Balance Sheet Arrangements
Our
contractual obligations and off-balance sheet arrangements at September 27,
2009, and the effect those contractual obligations are expected to have on our
liquidity and cash flow over the next five years are presented in textual and
tabular format in Note 12, “Commitments, Contingencies and Guarantees,” of the
Notes to Condensed Consolidated Financial Statements of this Form
10-Q.
Impact
of Currency Exchange Rates
Exchange
rate fluctuations could have a material adverse effect on our business,
financial condition and results of operations. Our most significant
foreign currency exposure is to the Japanese yen in which we purchase the vast
majority of our NAND flash wafers. In addition, we also have
significant costs denominated in the Chinese renminbi and the Israeli new
shekel, and we have revenue denominated in the European euro and the British
pound. We do not enter into derivatives for speculative or trading
purposes. We use foreign currency forward and cross currency swap
contracts to mitigate transaction gains and losses generated by certain monetary
assets and liabilities denominated in currencies other than the U.S.
dollar. We use foreign currency forward contracts and options to
partially hedge our future Japanese yen costs for NAND flash
wafers. Our derivative instruments are recorded at fair value in
assets or liabilities with final gains or losses recorded in other income
(expense) or as a component of accumulated OCI and subsequently reclassified
into cost of product revenues in the same period or periods in which the cost of
product revenues is recognized. These foreign currency exchange
exposures may change over time as our business and business practices evolve,
and they could harm our financial results and cash flows. See
Note 4, “Derivatives and Hedging Activities,” of the Notes to Condensed
Consolidated Financial Statements of this Form 10-Q.
For a
discussion of foreign operating risks and foreign currency risks, see Part II,
Item 1A, “Risk Factors.”
Critical
Accounting Policies
Our
discussion and analysis of our financial condition and results of operations is
based upon our Condensed Consolidated Financial Statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States. The preparation of these financial statements requires
us to make estimates and judgments that affect the reported amounts of assets,
liabilities, revenues and expenses, and related disclosure of contingent
liabilities. On an ongoing basis, we evaluate our estimates,
including among others, those related to customer programs and incentives,
product returns, bad debts, inventories, investments, income taxes, warranty
obligations, share-based compensation, contingencies and
litigation. We base our estimates on historical experience and on
other assumptions that we believe are reasonable under the circumstances, the
results of which form the basis for our judgments about the carrying values of
assets and liabilities when those values are not readily apparent from other
sources. Estimates have historically approximated actual
results. However, future results will differ from these estimates
under different assumptions and conditions.
There
were no significant changes to our critical accounting policies during the
fiscal quarter ended September 27, 2009. For information about
critical accounting policies, see the discussion of critical accounting policies
in our most recent Annual Report on Form 10-K/A filed on February 26, 2009 and
Form 8-K filed on June 3, 2009, respectively.
Recent
Accounting Pronouncements
In June
2009, the FASB amended the existing guidance on consolidation of variable
interest entities to require an enterprise to qualitatively assess the
determination of the primary beneficiary of a variable interest entity (“VIE”)
based on whether the entity has the power to direct matters that most
significantly impacts the VIE, and the obligation to absorb losses or the right
to receive benefits of the VIE that could be potentially significant to the
VIE. This amendment also requires the Company to perform ongoing
periodic reassessments of whether an enterprise is the primary interest
beneficiary of a VIE and not only when specific events have
occurred. This amendment is effective for our reporting period
that begins on January 4, 2010, and for interim periods within the first annual
reporting period. We are currently evaluating the effect that
the provisions of this amendment may have on our Condensed Consolidated
Financial Statements.
In
October 2009, the FASB issued authoritative guidance to update the accounting
and reporting requirements for revenue arrangements with multiple
deliverables. This guidance established a selling price hierarchy,
which allows the use of an estimated selling price to determine the selling
price of a deliverable in cases where neither vendor-specific objective evidence
nor third-party evidence is available. This guidance is to be applied
prospectively for revenue arrangements entered into or materially modified in
fiscal years beginning on or after June 15, 2010. Early adoption
is permitted, and if this update is adopted early in other than the first
quarter of an entity’s fiscal year, then it must be applied retrospectively to
the beginning of that fiscal year. We are currently assessing the
impact of the adoption on its financial condition and results of
operations.
In
October 2009, the FASB issued authoritative guidance that clarifies which
revenue allocation and measurement guidance should be used for arrangements that
contain both tangible products and software, in cases where the software is more
than incidental to the tangible product as a whole. More
specifically, if the software sold with or embedded within the tangible product
is essential to the functionality of the tangible product, then this software as
well as undelivered software elements that relate to this software are excluded
from the scope of existing software revenue guidance. This guidance
is to be applied prospectively for revenue arrangements entered into or
materially modified in fiscal years beginning on or after June 15,
2010. Early adoption is permitted, and if this update is adopted
early in other than the first quarter of an entity’s fiscal year, then it must
be applied retrospectively to the beginning of that fiscal year. We
are currently assessing the impact of the adoption on its financial condition
and results of operations.
Item 3.
Quantitative
and Qualitative Disclosures About Market Risk
We are
exposed to financial market risks, including changes in interest rates, foreign
currency exchange rates and marketable equity security prices.
Interest Rate
Risk. Our exposure to market risk for changes in interest
rates relates primarily to our investment portfolio. The primary
objective of our investment activities is to preserve principal while maximizing
yields without significantly increasing risk. As of
September 27, 2009, a hypothetical 50 basis point increase in interest
rates would result in an approximate $11.8 million decline (less than
0.68%) of the fair value of our available-for-sale debt securities.
Foreign Currency
Risk. The majority of our revenues are transacted in the U.S.
dollar, with some revenues transacted in the European euro, the British pound,
and the Japanese yen. Our flash memory costs, which represent the
largest portion of our cost of revenues, are denominated in the Japanese
yen. We also have some cost of revenues denominated in Chinese
renminbi. The majority of our operating expenses are denominated in
the U.S. dollar; however, we have expenses denominated in the Israeli new shekel
and numerous other currencies. On the balance sheet, we have numerous
foreign currency denominated monetary assets and liabilities, with the largest
monetary exposure being our notes receivable from Flash Ventures, which are
denominated in Japanese yen.
We enter
into foreign currency forward and cross currency swap contracts to hedge the
gains or losses generated by the remeasurement of our significant foreign
currency denominated monetary assets and liabilities. The fair value
of these contracts is reflected as other current assets or other current
liabilities and the change in fair value of these balance sheet hedge contracts
is recorded into earnings as a component of other income (expense) to largely
offset the change in fair value of the foreign currency denominated monetary
assets and liabilities which is also recorded in other income
(expense).
We use
foreign currency forward contracts and option contracts to partially hedge
future Japanese yen flash memory costs. These contracts are
designated as cash flow hedges and are carried on our balance sheet at fair
value with the effective portion of the contracts’ gains or losses included in
accumulated other comprehensive income and subsequently recognized in cost of
product revenues in the same period the hedged cost of product revenues is
recognized.
At
September 27, 2009, we had foreign currency forward exchange and cross currency
swap contracts in place that amounted to a net sale in U.S. dollar equivalent of
approximately $342.8 million in foreign currencies to hedge our foreign
currency denominated monetary net asset position. The maturities of
these contracts were 36 months or less.
At
September 27, 2009, we had foreign currency option contracts in place that
amounted to a net purchase in U.S. dollar equivalent of approximately
$33.2 million to partially hedge our expected future wafer purchases in
Japanese yen. The maturities of these contracts were 3 months or
less. For the quarter ended September 27, 2009, we did not enter into
any Japanese yen derivative contracts designated as a cash flow hedge due to the
low exchange rate of the U.S. dollar against the Japanese yen relative to
historical levels.
The
notional amount and unrealized gain of our outstanding cross currency swap and
foreign currency forward contracts that are non-designated (balance sheet
hedges) as of September 27, 2009 is shown in the table below (in
thousands). In addition, this table shows the change in fair value of
these balance sheet hedges assuming a hypothetical adverse foreign currency
exchange rate movement of 10 percent. These changes in fair values
would be largely offset in other income (expense) by corresponding changes in
the fair values of the foreign currency denominated monetary assets and
liabilities.
Notional
Amount
|
Unrealized
Gain (Loss) as of September 27,
2009
|
Change
in Fair Value Due to 10% Adverse Rate Movement
|
||||||||||
Balance
sheet hedges
|
||||||||||||
Cross
currency swap contracts entered
|
$ | (478,381 | ) | $ | (30,920 | ) | $ | (48,013 | ) | |||
Forward
contracts sold
|
(151,996 | ) | (1,988 | ) | (15,440 | ) | ||||||
Forward
contracts purchased
|
287,528 | 4,400 | 31,553 | |||||||||
Total
net outstanding contracts
|
$ | (342,849 | ) | $ | (28,508 | ) | $ | (31,900 | ) |
The
notional amount and unrealized gain of our outstanding forward and option
contracts that are designated as cash flow hedges as of September 27, 2009
is shown in the table below (in thousands). In addition, this table
shows the change in fair value of these cash flow hedges assuming a hypothetical
adverse foreign currency exchange rate movement of 10 percent.
Notional
Amount
|
Unrealized
Gain (Loss) as of September 27,
2009
|
Change
in Fair Value Due to 10% Adverse Rate Movement
|
||||||||||
Cash
flow hedges
|
||||||||||||
Option
contracts purchased
|
$ | 33,259 | $ | 1,680 | $ | (1,680 | ) |
Notwithstanding
our efforts to mitigate some foreign exchange risks, we do not hedge all of our
foreign currency exposures, and there can be no assurances that our mitigating
activities related to the exposures that we do hedge will adequately protect us
against risks associated with foreign currency fluctuations.
Market
Risk. We also hold available-for-sale equity securities in
semiconductor wafer manufacturing companies. As of September 27,
2009, a reduction in price of 10% of these marketable equity securities would
result in a decrease in the fair value of our investments in marketable equity
securities of approximately $1.5 million.
All of
the potential changes noted above are based on sensitivity analysis performed on
our financial position at September 27, 2009. Actual results may
differ materially.
Item
4. Controls
and Procedures
Evaluation of
Disclosure Controls and Procedures. Under the supervision and
with the participation of our management, including our principal executive
officer and principal financial officer, we conducted an evaluation of the
effectiveness of the design and operation of our disclosure controls and
procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities
Exchange Act of 1934, as amended (the “Exchange Act”), as of the end of the
period covered by this report (the “Evaluation Date”). Based upon the
evaluation, our principal executive officer and principal financial officer
concluded as of the Evaluation Date that our disclosure controls and procedures
were effective to ensure that information required to be disclosed by us in
reports that we file or submit under the Exchange Act is recorded, processed,
summarized and reported within the time periods specified in Securities and
Exchange Commission rules and forms.
During
the three months ended September 27, 2009, we completed the implementation of a
new enterprise resource planning system that generates our financial
results. We evaluated the potential impact to the effectiveness of
our internal control over financial reporting prior to and subsequent to
implementation. We have concluded that this change, while
significant, does not materially affect our internal control over financial
reporting. There were no changes in our internal control over
financial reporting (as defined in Exchange Act Rule 13a-15(f)) during the three
months ended September 27, 2009 that have materially affected, or are
reasonably likely to materially affect, our internal control over financial
reporting.
PART
II. OTHER INFORMATION
Item 1.
Legal Proceedings
For a
discussion of legal proceedings, see Note 14, “Litigation,” in the Notes to
Condensed Consolidated Financial Statements of this Form 10-Q.
Item
1A. Risk Factors
The
following description of the risk factors associated with our business includes
any material changes to and supersedes the description of the risk factors
associated with our business previously disclosed in Part 1, Item 1A of our
Annual Report on Form 10-K/A for the fiscal year ended December 28, 2008
and Part II, Item 1A of our Quarterly Report on Form 10-Q for the quarter ended
June 28, 2009.
Our operating
results may fluctuate significantly, which may adversely affect our financial
condition and our stock price. Our
quarterly and annual operating results have fluctuated significantly in the past
and we expect that they will continue to fluctuate in the future. Our
results of operations are subject to fluctuations and other risks, including,
among others:
-
competitive pricing pressures, resulting in lower average selling prices and lower or negative product gross margins;
-
expansion of supply from existing competitors and ourselves creating excess market supply, causing our average selling prices to decline faster than our costs;
-
significant reduction in demand due to the prolonged and severe global economic downturn, or other conditions;
-
price increases which could result in lower unit and gigabyte demand, potentially leading to reduced revenue and/or excess inventory;
-
unpredictable or changing demand for our products, particularly demand for certain types or capacities of our products or for our products in certain markets or geographies;
-
inability to maintain or grow sales through our new channels to which we are selling private label products, wafers and components or potential loss of branded product sales as a result;
-
excess captive memory output or capacity which could result in write-downs for excess inventory, lower of cost or market reserves, fixed costs associated with under-utilized capacity, or other consequences;
-
insufficient supply from captive sources and inability to obtain non-captive supply in the time frame necessary to meet demand;
-
increased memory component and other costs as a result of currency exchange rate fluctuations to the U.S. dollar, particularly with respect to the Japanese yen;
-
insufficient non-memory materials or capacity from our suppliers and contract manufacturers to meet demand; or increases in cost of non-memory materials or capacity;
-
inability to adequately invest in future technologies and products while controlling operating expenses;
-
our license and royalty revenues may fluctuate or decline significantly in the future due to license agreement renewals or if licensees fail to perform on a portion or all of their contractual obligations;
-
inability to develop or unexpected difficulties or delays in developing or manufacturing with acceptable yields, 3-bits per cell NAND, 3-Dimensional Read/Write, or 3D Read/Write, or other advanced, alternative technologies or difficulty in bringing such or other advanced technologies such as 32-nanometer NAND flash memory into volume production at cost competitive levels;
-
increased purchases of non-captive flash memory, which typically cost more than captive flash memory and may be of less consistent quality;
-
insufficient assembly and test capacity from our Shanghai facility or our contract manufacturers;
-
difficulty in forecasting and managing inventory levels due to noncancelable contractual obligations to purchase materials, such as custom non-memory materials, and the need to build finished product in advance of customer purchase orders;
-
timing, volume and cost of wafer production from Flash Ventures as impacted by fab start-up delays and costs, technology transitions, yields or production interruptions;
-
a potential future downgrade in our corporate rating by Rating & Investment Information, Inc., leading to non-compliance with certain covenants in, or potential default under, certain Flash Venture master equipment leases;
-
disruption in the manufacturing operations of suppliers, including suppliers of sole-sourced components;
-
potential delays in the emergence of new markets and products for NAND-based flash memory and acceptance of our products in these markets;
-
timing of sell-through and the financial liquidity and strength of our distributors and retail customers;
-
errors or defects in our products caused by, among other things, errors or defects in the memory or controller components, including memory and non-memory components we procure from third-party suppliers; and
-
the other factors described under “Risk Factors” and elsewhere in this report.
Competitive pricing
pressures and excess supply have resulted in lower average selling prices and
negative product gross margins in the past and, if we do not experience adequate
price elasticity, our revenues may continue to decline. For
more than a year through 2008, the NAND flash memory industry was characterized
by supply exceeding demand, which led to significant declines in average selling
prices. Price declines have exceeded our cost declines in each of the
last three fiscal years, resulting in negative product gross margins in fiscal
year 2008 and the first quarter of fiscal year 2009. Price declines
may be influenced by, among other factors, supply exceeding demand,
macroeconomic factors, technology transitions, conversion of industry DRAM
capacity to NAND and new technologies or other strategic actions taken by us or
our competitors to gain market share. If our technology transitions
take longer or are more costly than anticipated to complete, or our cost
reductions fail to keep pace with the rate of price declines, our product gross
margins and operating results will be negatively impacted, which could lead to
quarterly or annual net losses.
Over our
history, price decreases have generally been more than offset by increased unit
demand and demand for products with increased storage
capacity. However, in fiscal year 2008 and the first half of 2009,
price declines outpaced unit and megabyte growth resulting in reduced revenue as
compared to prior comparable periods. There can be no assurance that
current and future price reductions will result in sufficient demand for
increased product capacity or unit sales, which could continue to harm our
revenue and margins.
Price
increases could reduce our overall product revenues and harm our financial
position. In the first half of fiscal year 2009, we increased
prices in order to improve profitability. Price increases can result
in reduced growth in gigabyte demand based upon market
conditions. For example, in the second quarter of fiscal year 2009,
our average selling price per gigabyte increased 12% and our gigabytes sold
decreased 7%, both on a sequential quarter basis. If we continue to
raise prices in order to improve our profit margins, our product revenues may be
harmed and we may have excess inventory.
We have incurred
negative product gross margins and net losses, which may continue to reduce our
cash flows and harm our financial condition. We
experienced negative product gross margins during the third and fourth quarters
of fiscal year 2008 and the first quarter of fiscal year 2009 due to sustained
aggressive industry price declines as well as inventory charges primarily due to
lower of cost or market write downs. While product gross margins have
improved in the second and third quarters of fiscal year 2009, our ability to
sustain positive product gross margin and profitability on a quarterly or annual
basis in the future depends in part on industry and our supply/demand balance,
our ability to reduce cost per gigabyte at an equal or higher rate than price
decline per gigabyte, our ability to develop new products and technologies, the
rate of growth of our target markets, the competitive position of our products,
the continued acceptance of our products by our customers, and our ability to
manage expenses. If we fail to return to profitability on a
consistent basis, continued operating losses will reduce our cash flows and cash
resources, and negatively harm our business and financial
condition. If we are unable to generate sufficient cash, we may have
to reduce, curtail or terminate certain business activities.
Sales to a small
number of customers represent a significant portion of our revenues, and if we
were to lose one of our major licensees or customers, or experience any material
reduction in orders from any of our customers, our revenues and operating
results would suffer. Our ten largest customers
represented approximately 46% and 43% of our total revenues in the three and
nine months ended September 27, 2009, respectively, compared to 49%
and 47% in the three and nine months ended September 28, 2008,
respectively. Revenue from Samsung Electronics Co. Ltd., or Samsung,
which included both license and royalty revenues and product revenues, accounted
for 11% of our total revenues in the three and nine months ended
September 27, 2009, respectively, and 13% of our total revenues in the
three and nine months ended September 28, 2008, respectively. No
other customer exceeded 10% of our total revenues during these
periods. The composition of our major customer base has changed over
time, including shifts between OEM and retail-based customers, and we expect
fluctuations to continue as our markets and strategies evolve, which could make
our revenues less predictable from period-to-period. If we were to
lose one of our major customers or licensees, or experience any material
reduction in orders from any of our customers or in sales of licensed products
by our licensees, our revenues and operating results would
suffer. Certain of our customers are covered by contracts that may be
complex, and our non-compliance to the contractual terms may harm the business
covered under these contracts and our financial
results. Additionally, our license and royalty revenues may decline
significantly in the future as our existing license agreements and patents
expire or if licensees fail to perform on a portion or all of their contractual
obligations. As an example, beginning in the fourth quarter of fiscal
year 2009, we expect our license and royalty revenues will decline due to a new
license agreement with an existing licensee at a lower effective royalty rate as
compared to the previous license agreement. Our sales are generally
made from standard purchase orders rather than long-term
contracts. Accordingly, our customers may generally terminate or
reduce their purchases from us at any time without notice or
penalty.
Our revenues depend
in part on the success of products sold by our OEM customers. A
significant portion of our sales are to OEMs, which either bundle or embed our
flash memory products with their products, such as mobile phones, GPS devices
and computers. Our sales to these customers are dependent upon the
OEMs choosing our products over those of our competitors and on the OEMs’
ability to create, introduce, market and sell their products successfully in
their markets. Should our OEM customers be unsuccessful in selling
their current or future products that include our products, or should they
decide to not use our products, our results of operations and financial
condition could be harmed. In 2009, we have added OEMs to whom we are
selling private label products, wafers and components. The sales to
these OEMs could be more variable than the sales to our historical customer
base, and these OEMs may be more inclined to switch to an alternative supplier
based on short-term price fluctuations. Sales to these OEMs could
also cause a decline in our branded product sales. In addition, we
are selling certain new products and if the intended customer does not purchase
these products as scheduled, we may incur temporary excess
inventory.
Our business depends
significantly upon sales through retailers and distributors, and if our
retailers and distributors are not successful, we could experience reduced
sales, substantial product returns or increased price protection, any of which
would negatively impact our business, financial condition and results of
operations. A significant portion of our sales are made through
retailers, either directly or through distributors. Sales through
these channels typically include rights to return unsold inventory and
protection against price declines, as well as participation in various
cooperative marketing programs. As a result, we do not recognize
revenue until after the product has been sold through to the end user, in the
case of sales to retailers, or to our distributors’ customers, in the case of
sales to distributors. Price protection against declines in our
selling prices has the effect of reducing our deferred revenues and eventually,
our revenues. If our retailers and distributors are not successful,
due to weak consumer retail demand caused by an economic downturn, decline in
consumer confidence, or other factors, we could continue to experience reduced
sales as well as substantial product returns or price protection claims, which
would harm our business, financial condition and results of
operations. Except in limited circumstances, we do not have exclusive
relationships with our retailers or distributors, and therefore, must rely on
them to effectively sell our products over those of our
competitors. Certain of our retail and distributor partners are
experiencing financial difficulty and prolonged negative economic conditions
could cause liquidity issues for our retail and distributor customers and
channels. For example, two of our North American retail customers,
Circuit City Stores, Inc. and Ritz Camera Centers, Inc., filed for bankruptcy
protection in 2008 and 2009, respectively. Negative changes in
customer credit worthiness; the ability of our customers to access credit; or
the bankruptcy or shutdown of any of our significant retail or distribution
partners would harm our revenue and our ability to collect outstanding
receivable balances. In addition, we have certain retail customers to
which we provide inventory on a consigned basis, and a bankruptcy or shutdown of
these customers could preclude us from taking possession of our consigned
inventory, which could result in inventory or impairment
charges.
Our financial
performance depends significantly on worldwide economic conditions and the
related impact on levels of consumer spending, which has deteriorated
significantly in many countries and regions, including the U.S., and may remain
depressed for the foreseeable future. Demand
for our products is adversely affected by negative macroeconomic factors
affecting consumer spending. The severe tightening of consumer
credit, low level of consumer liquidity, and extreme volatility in credit and
equity markets have weakened consumer confidence and decreased consumer
spending. These and other economic factors have reduced demand growth
for our products and harmed our business, financial condition and results of
operations, and to the extent such economic conditions continue, they could
cause further harm to our business, financial condition and results of
operations.
The future growth of
our business depends on the development and performance of new markets and
products for NAND-based flash memory. Our
future growth is dependent on development of new markets, new applications and
new products for NAND-based flash memory. Historically, the digital
camera market provided the majority of our revenues, but it is now a more mature
market, and the mobile handset market has emerged as the largest segment of our
revenues. Other markets for flash memory include digital audio and
video players, USB drives and SSDs. We cannot assure you that the use
of flash memory in mobile handsets or other existing markets and products will
develop and grow fast enough, or that new markets will adopt NAND flash
technologies in general or our products in particular, to enable us to
grow. Our future growth is also dependent on continued geographic
expansion and we may face difficulties entering or maintaining sales in
international markets. Some international markets are subject to a
higher degree of commodity pricing or tariffs and import taxes than in the U.S.,
subjecting us to increased risk of pricing and margin pressure.
Our strategy of
investing in captive manufacturing sources could harm us if our competitors are
able to produce products at lower costs or if industry supply exceeds
demand. We
secure captive sources of NAND through our significant investments in
manufacturing capacity. We believe that by investing in captive
sources of NAND, we are able to develop and obtain supply at the lowest cost and
access supply during periods of high demand. Our significant
investments in manufacturing capacity require us to obtain and guarantee capital
equipment leases and use available cash, which could be used for other corporate
purposes. To the extent we secure manufacturing capacity and supply
that is in excess of demand, or our cost is not competitive with other NAND
suppliers, we may not achieve an adequate return on our significant investments
and our revenues, gross margins and related market share may be
harmed. We may also incur increased inventory or impairment charges
related to our captive manufacturing investments and may not be able to exit
those investments without significant cost to us. For example, in
fiscal year 2008, we took impairment charges related to FlashVision, Flash
Partners and Flash Alliance of approximately $93 million, primarily due to
NAND industry pricing conditions due to supply exceeding demand. In
addition, in fiscal year 2008, we recorded inventory reserves primarily for
lower-of-cost-or-market for both inventory on-hand and in the channel of
$394 million. We also recorded charges of $121 million and $63
million in fiscal year 2008 and the first quarter of fiscal year 2009,
respectively, for adverse purchase commitments associated with under utilization
of Flash Partners and Flash Alliance capacity for the 90-day period in which we
have non-cancelable orders.
Our business and the
markets we address are subject to significant fluctuations in supply and demand
and our commitments to Flash Ventures may result in periods of significant
excess inventory. The
start of production by Flash Alliance at the end of fiscal year 2007 and the
ramp of production in fiscal year 2008 increased our captive supply and resulted
in excess inventory. While we restructured and reduced our total
capacity at Flash Ventures in the first quarter of fiscal year 2009, our
obligation to purchase 50% of the supply from Flash Ventures could continue to
harm our business and results of operations if our committed supply exceeds
demand for our products. The adverse effects could include, among
other things, significant decreases in our product prices, and significant
excess, obsolete or lower of cost or market inventory write-downs, such as those
we experienced in fiscal year 2008, which would harm our gross margins and could
result in the impairment of our investments in Flash Ventures.
We continually seek
to develop new applications, products, technologies and standards, which may not
be widely adopted by consumers or, if adopted, may reduce demand for our older
products; and our competitors seek to develop new standards which could reduce
demand for our products. We
continually devote significant resources to the development of new applications,
products and standards and the enhancement of existing products and standards
with higher memory capacities and other enhanced features. Any new
applications, products, technologies, standards or enhancements we develop may
not be commercially successful. The success of new product
introductions is dependent on a number of factors, including market acceptance,
our ability to manage risks associated with new products and production ramp
issues. New applications, such as the adoption of flash-based SSDs
that are designed to replace hard disk drives in devices such as notebook and
desktop computers, can take several years to develop. We cannot
guarantee that manufacturers will adopt SSDs or that this market will grow as we
anticipate. For the SSD market to become sizeable, the cost of flash
memory must decline significantly from current levels so that the product cost
for the end consumers is compelling. We believe this will require us
to implement multi-level cell, or MLC, technology into our SSDs, and that will
require us to develop highly capable controllers. There can be no
assurance that our MLC-based SSDs will complete development, will be able to
meet the specifications required to gain customer qualification and acceptance
or will be delivered to the market on a timely basis. For example, in
July 2009, we communicated that we were late to the market with our G3 SSD
product. Other new products, such as slotMusic™ and
slotRadio™, our
pre-loaded flash memory cards, may not gain market acceptance, and we may not be
successful in penetrating the new markets that we target. For
example, our Sansa®Connect™
product, a Wi-Fi®
enabled MP3 player, did not achieve market acceptance or our expected sales
volume.
New
applications may require significant up-front investment with no assurance of
long-term commercial success or profitability. As we introduce new
standards or technologies, it can take time for these new standards or
technologies to be adopted, for consumers to accept and transition to these new
standards or technologies and for significant sales to be generated, if at
all.
Competitors
or other market participants could seek to develop new standards for flash
memory products that, if accepted by device manufacturers or consumers, could
reduce demand for our products. For example, certain handset
manufacturers and flash memory chip producers are currently advocating and
developing a new standard, referred to as Universal Flash Storage, or UFS, for
flash memory cards used in mobile phones. Intel Corporation, or
Intel, and Micron Technology, Inc., or Micron, have also developed a new
specification for a NAND flash interface, called Open NAND Flash Interface, or
ONFI, which would be used primarily in computing devices. Broad
acceptance of new standards, technologies or products may reduce demand for some
of our products that may be based on different standards. If this
decreased demand is not offset by increased demand for new form factors or
products that we offer, our results of operations would be harmed.
Alternative
storage solutions such as high bandwidth wireless or internet-based storage,
including cloud computing, could reduce the need for physical flash storage
within electronic devices. These alternative technologies could
negatively impact the overall market for flash-based products, which could
seriously harm our results of operations.
Consumer
devices that use NAND-based flash memory do so in either a removable card or an
embedded format. We offer NAND-based flash memory products in both
categories; however, our market share is strongest for removable flash memory
products. If designers and manufacturers of consumer devices,
including mobile phones, increase their usage of embedded flash memory, we may
not be able to sustain our market share. In addition, if NAND-based
flash memory is used in an embedded format, we would have less opportunity to
influence the capacity of the NAND-based flash products and we would not have
the opportunity for additional after-market retail sales related to these
consumer devices or mobile phones. Any loss of market share or
reduction in the average capacity of our product sales or any loss in our retail
after-market opportunity could harm our operating results and business
condition.
In
addition, we are investing in future alternative technologies, particularly our
3D semiconductor memory. We are investing significant resources to
develop this technology for multiple read-write applications; however, there can
be no assurance that we will be successful in developing this or other
technologies or that we will be able to achieve the yields, quality or
capacities to be cost competitive with existing or other alternative
technologies.
We face competition
from numerous manufacturers and marketers of products using flash memory, as
well as from manufacturers of new and alternative technologies, and if we cannot
compete effectively, our results of operations and financial condition will
suffer. Our
competitors include many large companies that may have greater advanced wafer
manufacturing capacity and substantially greater financial, technical, marketing
and other resources than we do, which allows them to produce flash memory chips
in high volumes at low costs and to sell these flash memory chips themselves or
to our flash card competitors at a low cost. Some of our competitors
may sell their flash memory chips at or below their true manufacturing costs to
gain market share and to cover their fixed costs. Such practices
occurred in the DRAM industry during periods of excess supply and resulted in
substantial losses in the DRAM industry. Our primary semiconductor
competitors include Hynix Semiconductor, Inc., or Hynix, IM Flash Technologies
LLC (a company formed by Micron and Intel), Micron, Samsung and
Toshiba. These current and future competitors produce or could
produce alternative flash or other memory technologies that compete against our
NAND-based flash memory technology or our alternative technologies, which may
reduce demand or accelerate price declines for NAND. Furthermore, the
future rate of scaling of the NAND-based flash technology design that we employ
may slow down significantly, which would slow down cost reductions that are
fundamental to the adoption of flash memory technology in new
applications. If the scaling of NAND-based flash technology slows
down or alternative technologies prove to be more economical, our business would
be harmed, and our investments in captive fabrication facilities could be
impaired.
We also
compete with flash memory card manufacturers and resellers. These
companies purchase or have a captive supply of flash memory components and
assemble memory cards. Our primary competitors currently include,
among others, A-DATA Technology Co., Ltd., Buffalo, Inc., Chips and More GmbH,
Dane-Elec Memory, Eastman Kodak Company, Elecom Co., Ltd., FUJIFILM Corporation,
Gemalto N.V., Hagiwara Sys-Com Co., Ltd., Hama GmbH & Co. KG, Imation
Corporation, or Imation, and its division Memorex Products, Inc., or Memorex,
I-O Data Device, Inc., Kingmax Digital, Inc., Kingston Technology Company, Inc.,
or Kingston, Lexar Media, Inc., or Lexar, a subsidiary of Micron, Micron, Netac
Technology Co., Ltd., Panasonic Corporation, PNY Technologies, Inc., or PNY,
RITEK Corporation, Samsung, Sony Corporation, or Sony, STMicroelectronics N.V.,
Toshiba, Transcend Information, Inc., or Transcend, and Verbatim Americas LLC,
or Verbatim.
Some of
our competitors have substantially greater resources than we do, have well
recognized brand names or have the ability to operate their business on lower
margins than we do. The success of our competitors may adversely
affect our future revenues or margins and may result in the loss of our key
customers. For example, Toshiba and other manufacturers have
increased their market share of flash memory cards for mobile phones, including
the microSD™ card,
which have been a significant driver of our growth. In the digital
audio market, we face competition from well established companies such as Apple
Inc., or Apple, ARCHOS Technology, or ARCHOS, Coby Electronics Corporation, or
Coby, Creative Technology Ltd., or Creative, Koninklijke Philips Electronics
N.V., or Royal Philips Electronics, Microsoft Corporation, or Microsoft, Samsung
and Sony. In the USB flash drive market, we face competition from a
large number of competitors, including Hynix, Imation, Kingston, Lexar, Memorex,
PNY, Sony and Verbatim. In the market for SSDs, we face competition
from large NAND flash producers such as Intel, Samsung and Toshiba, as well as
from hard drive manufacturers, such as Seagate Technology LLC, Samsung, Western
Digital Corporation and others, who have established relationships with computer
manufacturers. We also face competition from third-party solid-state
drive solutions providers such as A-DATA Technology Co Ltd, Kingston, Phison
Electronics Corporation, STEC Inc., and Transcend.
We sell
flash memory in the form of cards, wafers or components to certain companies who
sell flash products that may ultimately compete with SanDisk branded products in
the retail or OEM channels. This could harm the SanDisk branded
market share and reduce our sales and profits.
Furthermore,
many companies are pursuing new or alternative technologies or alternative forms
of NAND, such as phase-change and charge-trap flash technologies which may
compete with NAND-based flash memory. New or alternative
technologies, if successfully developed by our competitors, and if we are unable
to scale our technology on an equivalent basis, could provide an advantage to
these competitors.
These new
or alternative technologies may enable products that are smaller, have a higher
capacity, lower cost, lower power consumption or have other
advantages. If we cannot compete effectively, our results of
operations and financial condition will suffer.
We
believe that our ability to compete successfully depends on a number of factors,
including:
-
price, quality and on-time delivery to our customers;
-
product performance, availability and differentiation;
-
success in developing new applications and new market segments;
-
sufficient availability of supply, the absence of which could lead to loss of market share;
-
efficiency of production;
-
timing of new product announcements or introductions by us, our customers and our competitors;
-
the ability of our competitors to incorporate standards or develop formats which we do not offer;
-
the number and nature of our competitors in a given market;
-
the ability to attract and retain key development and sales personnel;
-
successful protection of intellectual property rights; and
-
general market and economic conditions.
There can
be no assurance that we will be able to compete successfully in the
future.
Our license and
royalty revenues may fluctuate or decline significantly in the future due to
license agreement renewals or if licensees fail to perform on a portion or all
of their contractual obligations. If our
existing licensees do not renew their licenses upon expiration and we are not
successful in signing new licensees in the future, our license revenue,
profitability, and cash provided by operating activities would be
harmed. For example, beginning in the fourth quarter of fiscal year
2009, we expect our license and royalty revenues will decline due to a new
license agreement with an existing licensee at a lower effective royalty rate as
compared to the previous license agreement. To the extent that we are
unable to renew license agreements under similar terms or at all, our financial
results would be adversely impacted by the reduced license and royalty revenue
and we may incur significant patent litigation costs to enforce our patents
against these licensees. If our licensees fail to perform on a
portion or all of their contractual obligations, we may incur costs to enforce
the terms of our licenses and there can be no assurance that our enforcement and
collection efforts will be effective. In addition, we may be subject
to disputes, claims or other disagreements on the timing, amount or collection
of royalties or license payments under our existing license
agreements.
Under certain
conditions, a portion or the entire outstanding lease obligations related to
Flash Ventures’ master equipment lease agreements could be accelerated, which
would harm our business, results of operations, cash flows, and
liquidity. Flash
Ventures’ 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 us as guarantor, including,
among other things, our failure to maintain a minimum stockholder equity of at
least $1.51 billion, and our failure to maintain a minimum corporate rating
of either BB- from Standard & Poors, or S&P, or Moody’s Corporation, or
a minimum corporate rating of BB+ from Rating & Investment Information,
Inc., or R&I. As of September 27, 2009, Flash Ventures were in
compliance with all of their master lease covenants. While our
S&P credit rating was B, two levels below the required minimum corporate
rating threshold from S&P, our R&I credit rating was BBB-, one level
above the required minimum corporate rating threshold from R&I.
If
R&I were to downgrade our credit rating below the minimum corporate rating
threshold, Flash Ventures would become non-compliant with certain covenants
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 us, as guarantor, or increased interest
rates or waiver fees, should the lessors decide they need additional collateral
or financial consideration if an event of default occurs and if we failed to
reach a resolution, we may be required to pay a portion or the entire
outstanding lease obligations up to $1.14 billion, based upon the exchange
rate at September 27, 2009, covered by our guarantee under the Flash
Ventures master lease agreements, which would significantly reduce our cash
position and may force us to seek additional financing, which may or may not be
available.
The semiconductor
industry is subject to significant downturns that have harmed our business,
financial condition and results of operations in the past and may do so in the
future. The
semiconductor industry is highly cyclical and is characterized by constant and
rapid technological change, rapid product obsolescence, price declines, evolving
standards, short product life cycles and wide fluctuations in product supply and
demand. The industry has experienced significant downturns, often in
connection with, or in anticipation of, maturing product cycles of both
semiconductor companies and their customers’ products and declines in general
economic conditions. The flash memory industry has recently
experienced significant excess supply, reduced demand, high inventory levels,
and accelerated declines in selling prices. If we again experience
oversupply of NAND-based flash products, we may be forced to hold excessive
inventory, sell our inventory below cost, and record inventory write-downs, all
of which would place additional pressure on our results of operation and our
cash position.
We depend on Flash
Ventures and third parties for silicon supply and any disruption or shortage in
our supply from these sources will reduce our revenues, earnings and gross
margins. All of
our flash memory products require silicon supply for the memory and controller
components. The substantial majority of our flash memory is currently
supplied by Flash Ventures and to a much lesser extent by third-party silicon
suppliers. Any disruption or shortage in supply of flash memory from
our captive or non-captive sources would harm our operating
results. The risks of supply disruption are magnified at Toshiba’s
Yokkaichi, Japan operations, where Flash Ventures are operated and Toshiba’s
foundry capacity is located. Earthquakes and power outages have
resulted in production line stoppages and loss of wafers in Yokkaichi and
similar stoppages and losses may occur in the future. For example, in
the first quarter of fiscal year 2006, a brief power outage occurred at Fab 3,
which resulted in a loss of wafers and significant costs associated with
bringing the fab back on line. In addition, the Yokkaichi location is
often subject to earthquakes, which could result in production stoppage, a loss
of wafers and the incurrence of significant costs. Moreover,
Toshiba’s employees that produce Flash Ventures’ products are covered by
collective bargaining agreements and any strike or other job action by those
employees could interrupt our wafer supply from Flash Ventures. If we
have disruption in our captive wafer supply or if our non-captive sources fail
to supply wafers in the amounts and at the times we expect, or we do not place
orders with sufficient lead time to receive non-captive supply, we may not have
sufficient supply to meet demand and our operating results could be
harmed.
Currently,
our controller wafers are manufactured by Semiconductor Manufacturing
International Corporation, Taiwan Semiconductor Manufacturing Company, Ltd., and
United Microelectronics Corporation. Any disruption in the
manufacturing operations of our controller wafer vendors would result in
delivery delays, adversely affect our ability to make timely shipments of our
products and harm our operating results until we could qualify an alternate
source of supply for our controller wafers, which could take several quarters to
complete. In times of significant growth in global demand for flash
memory, demand from our customers may outstrip the supply of flash memory and
controllers available to us from our current sources. If our silicon
vendors are unable to satisfy our requirements on competitive terms or at all,
we may lose potential sales and market share, and our business, financial
condition and operating results may suffer. Any disruption or delay
in supply from our silicon sources could significantly harm our business,
financial condition and results of operations.
If actual
manufacturing yields are lower than our expectations, this may result in
increased costs and product shortages. The
fabrication of our products requires wafers to be produced in a highly
controlled and ultra clean environment. Semiconductor manufacturing
yields and product reliability are a function of both design and manufacturing
process technology and production delays may be caused by equipment
malfunctions, fabrication facility accidents or human error. Yield
problems may not be identified or improved until an actual product is
manufactured and can be tested. As a result, yield problems may not
be identified until the wafers are well into the production
process. We have from time-to-time experienced yields that have
adversely affected our business and results of operations. We have
experienced adverse yields on more than one occasion when we have transitioned
to new generations of products. If actual yields are low, we will
experience higher costs and reduced product supply, which could harm our
business, financial condition and results of operations. For example,
if the production ramp and/or yield of 32-nanometer 2-bits per cell and 3-bits
per cell NAND technology wafers does not increase as expected, our cost
competitiveness would be harmed, we may not have adequate supply or the right
product mix to meet demand, and our business, financial condition and results of
operations will be harmed.
We depend on our
captive assembly and test manufacturing facility in China and our business could
be harmed if this facility does not perform as planned. Our
reliance on our captive assembly and test manufacturing facility near Shanghai,
China has increased significantly and we now utilize this factory to satisfy a
majority of our assembly and test requirements, and also to produce products
with leading-edge technologies such as multi-stack die packages. Any
delays or interruptions in the production ramp or targeted yields or any quality
issues at our captive facility could harm our results of operations and
financial condition.
We depend on our
third-party subcontractors and our business could be harmed if our
subcontractors do not perform as planned. We
rely on third-party subcontractors for a portion of our wafer testing, IC
assembly, product assembly, product testing and order
fulfillment. From time-to-time, our subcontractors have experienced
difficulty meeting our requirements. If we are unable to increase the
capacity of our current subcontractors or qualify and engage additional
subcontractors, we may not be able to meet demand for our
products. We do not have long-term contracts with our existing
subcontractors nor do we expect to have long-term contracts with any new
subcontractors. We do not have exclusive relationships with any of
our subcontractors, and therefore, cannot guarantee that they will devote
sufficient resources to manufacturing our products. We are not able
to directly control product delivery schedules. Furthermore, we
manufacture on a turnkey basis with some of our subcontractors. In
these arrangements, we do not have visibility and control of their inventories
of purchased parts necessary to build our products or of the progress of our
products through their assembly line. Any significant problems that
occur at our subcontractors, or their failure to perform at the level we expect,
could lead to product shortages or quality assurance problems, either of which
would have adverse effects on our operating results.
In transitioning to
new processes, products and silicon sources, we face production and market
acceptance risks that may cause significant product delays, cost overruns or
performance issues that could harm our business.
Successive generations of our products have incorporated semiconductors
with greater memory capacity per chip. The transition to new
generations of products, such as products containing 32-nanometer process
technologies and/or 3-bits per cell and 4-bits per cell NAND
technologies, is highly complex and requires new controllers, new test
procedures and modifications to numerous aspects of any manufacturing processes,
as well as extensive qualification of the new products by our OEM customers and
us. There can be no assurance that these transitions or other future
technology transitions will occur on schedule or at the yields or costs that we
anticipate. If Flash Ventures encounters difficulties in
transitioning to new technologies, our cost per gigabyte may not remain
competitive with the costs achieved by other flash memory producers, which would
harm our gross margins and financial results. Any material delay in a
development or qualification schedule could delay deliveries and harm our
operating results. We have periodically experienced significant
delays in the development and volume production ramp-up of our
products. Similar delays could occur in the future and could harm our
business, financial condition and results of operations.
Our products may
contain errors or defects, which could result in the rejection of our products,
product recalls, damage to our reputation, lost revenues, diverted development
resources and increased service costs and warranty claims and litigation.
Our
products are complex, must meet stringent user requirements, may contain errors
or defects and the majority of our products are warrantied for one to five
years. Errors or defects in our products may be caused by, among
other things, errors or defects in the memory or controller components,
including components we procure from non-captive sources. In
addition, the substantial majority of our flash memory is supplied by Flash
Ventures, and if the wafers contain errors or defects, our overall supply could
be adversely affected. These factors could result in the rejection of
our products, damage to our reputation, lost revenues, diverted development
resources, increased customer service and support costs, indemnification of our
customer’s product recall costs, warranty claims and litigation. We
record an allowance for warranty and similar costs in connection with sales of
our products, but actual warranty and similar costs may be significantly higher
than our recorded estimate and result in an adverse effect on our results of
operations and financial condition.
Our new
products have from time-to-time been introduced with design and production
errors at a rate higher than the error rate in our established
products. We must estimate warranty and similar costs for new
products without historical information and actual costs may significantly
exceed our recorded estimates. Warranty and similar costs may be even
more difficult to estimate as we increase our use of non-captive
supply. Underestimation of our warranty and similar costs would have
an adverse effect on our results of operations and financial
condition.
From time-to-time,
we overestimate our requirements and build excess inventory, or underestimate
our requirements and have a shortage of supply, either of which harm our
financial results. The
majority of our products are sold directly or indirectly into consumer markets,
which are difficult to accurately forecast. Also, a substantial
majority of our quarterly sales are from orders received and fulfilled in that
quarter. Additionally, we depend upon timely reporting from our
retail and distributor customers as to their inventory levels and sales of our
products in order to forecast demand for our products. We have in the
past significantly over-forecasted or under-forecasted actual demand for our
products. The failure to accurately forecast demand for our products
will result in lost sales or excess inventory, both of which will harm our
business, financial condition and results of operations. In addition,
we may increase our inventory in anticipation of increased demand or as captive
wafer capacity ramps. If demand does not materialize, we may be
forced to write-down excess inventory or write-down inventory to the lower of
cost or market, as was the case in fiscal year 2008, which may harm our
financial condition and results of operations.
During
periods of excess supply in the market for our flash memory products, we may
lose market share to competitors who aggressively lower their
prices. In order to remain competitive, we may be forced to sell
inventory below cost. If we lose market share due to price
competition or if we must write-down inventory, our results of operations and
financial condition could be harmed. Conversely, under conditions of
tight flash memory supply, we may be unable to adequately increase our
production volumes or secure sufficient supply in order to maintain our market
share. In addition, longer than anticipated lead times for advanced
semiconductor manufacturing equipment or higher than expected equipment costs
could negatively impact our ability to meet our supply requirements or to reduce
future production costs. If we are unable to maintain market share, our
results of operations and financial condition could be harmed.
Our
ability to respond to changes in market conditions from our forecast is limited
by our purchasing arrangements with our silicon sources. Some of
these arrangements provide that the first three months of our rolling six-month
projected supply requirements are fixed and we may make only limited percentage
changes in the second three months of the period covered by our supply
requirement projections.
We have
some non-silicon components which have long-lead times requiring us to place
orders several months in advance of our anticipated demand. The
extended period of time to secure these long-lead time parts increases our risk
that forecasts will vary substantially from actual demand, which could lead to
excess inventory or loss of sales.
We rely on our
suppliers and contract manufacturers, some of which are the sole source of
supply for our non-memory components, and capacity limitations or the
absence of a back-up supplier exposes our supply chain to unanticipated
disruptions or potential additional costs. We do not have
long-term supply agreements with most of these vendors. From
time-to-time, certain materials may become difficult or more expensive to obtain
which could impact our ability to meet demand and could harm our
profitability. Our business, financial condition and operating
results could be significantly harmed by delays or reductions in shipments if we
are unable to obtain sufficient quantities of these components or develop
alternative sources of supply in a timely manner or at all.
Our global
operations and operations at Flash Ventures and third-party subcontractors are
subject to risks for which we may not be adequately insured. Our
global operations are subject to many risks including errors and omissions,
infrastructure disruptions, such as large-scale outages or interruptions of
service from utilities or telecommunications providers, supply chain
interruptions, third-party liabilities and fires or natural
disasters. No assurance can be given that we will not incur losses
beyond the limits of, or outside the scope of, coverage of our insurance
policies. From time-to-time, various types of insurance have not been
available on commercially acceptable terms or, in some cases at
all. We cannot assure you that in the future we will be able to
maintain existing insurance coverage or that premiums will not increase
substantially. We maintain limited insurance coverage and in some
cases no coverage for natural disasters and sudden and accidental environmental
damages as these types of insurance are sometimes not available or available
only at a prohibitive cost. For example, our test and assembly
facility in Shanghai, China, on which we have significant dependence, may not be
adequately insured against all potential losses. Accordingly, we may
be subject to an uninsured or under-insured loss in such
situations. We depend upon Toshiba to obtain and maintain sufficient
property, business interruption and other insurance for Flash
Ventures. If Toshiba fails to do so, we could suffer significant
unreimbursable losses, and such failure could also cause Flash Ventures to
breach various financing covenants. In addition, we insure against
property loss and business interruption resulting from the risks incurred at our
third-party subcontractors; however, we have limited control as to how those
sub-contractors run their operations and manage their risks, and as a result, we
may not be adequately insured.
We are exposed to
foreign currency exchange rate fluctuations that could negatively impact our
business, results of operations and financial condition. A
significant portion of our business is conducted in currencies other than the
U.S. dollar, which exposes us to adverse changes in foreign currency exchange
rates. These exposures may change over time as our business and
business practices evolve, and they could harm our financial results and cash
flows. Our most significant exposure is related to our purchases of
NAND flash memory from Flash Ventures, which are denominated in Japanese
yen. For example, in the last year, the Japanese yen has
significantly appreciated relative to the U.S. dollar and this has increased our
costs of NAND flash wafers, negatively impacting our gross margins and results
of operations. In addition, our investments in Flash Ventures are
denominated in Japanese yen and adverse changes in the exchange rate could
increase the cost to us of future funding or increase our exposure to asset
impairments. We also have foreign currency exposures related to
certain non-U.S. dollar-denominated revenue and operating expenses in Europe and
Asia. Additionally, we have exposures to emerging market currencies,
which can be extremely volatile. An increase in the value of the U.S.
dollar could increase the real cost to our customers of our products in those
markets outside the U.S. where we sell in dollars, and a weakened U.S. dollar
could increase local operating expenses and the cost of raw materials to the
extent purchased in foreign currencies. We also have significant
monetary assets and liabilities that are denominated in non-functional
currencies.
We enter
into foreign exchange forward and cross currency swap contracts to reduce the
impact of foreign currency fluctuations on certain foreign currency assets and
liabilities. In addition, we hedge certain anticipated foreign
currency cash flows with foreign exchange forward and option
contracts. We generally have not hedged our future investments and
distributions denominated in Japanese yen related to Flash
Ventures.
Our
attempts to hedge against currency risks may not be successful, resulting in an
adverse impact on our results of operations. In addition, if we do
not successfully manage our hedging program in accordance with current
accounting guidelines, we may be subject to adverse accounting treatment of our
hedging program, which could harm our results of operations and financial
condition. There can be no assurance that this hedging program will
be economically beneficial to us. Further, the ability to enter into
foreign exchange contracts with financial institutions is based upon our
available credit from such institutions and compliance with covenants and/or
other restrictions. Operating losses, third party downgrades of our
credit rating or instability in the worldwide financial markets could impact our
ability to effectively manage our foreign currency exchange rate fluctuation
risk, which could negatively impact our business, results of operations and
financial condition.
We may need to raise
additional financing, which could be difficult to obtain, and which if not
obtained in satisfactory amounts may prevent us from funding Flash Ventures,
developing or enhancing our products, taking advantage of future opportunities,
growing our business or responding to competitive pressures or unanticipated
industry changes, any of which could harm our business. We
currently believe that we have sufficient cash resources to fund our operations
as well as our anticipated investments in Flash Ventures for at least the next
twelve months; however, we may decide to raise additional funds to maintain the
strength of our balance sheet, and we cannot be certain that we will be able to
obtain additional financing on favorable terms, if at all. The
current worldwide financing environment is challenging, which could make it more
difficult for us to raise funds on reasonable terms, or at all. From
time-to-time, we may decide to raise additional funds through equity, public or
private debt, or lease financings. If we issue additional equity
securities, our stockholders will experience dilution and the new equity
securities may have rights, preferences or privileges senior to those of
existing holders of common stock. If we raise funds through debt or
lease financing, we will have to pay interest and may be subject to restrictive
covenants, which could harm our business. If we cannot raise funds on
acceptable terms, if and when needed, our credit rating may be downgraded, and
we may not be able to develop or enhance our technology or products, fulfill our
obligations to Flash Ventures, take advantage of future opportunities, grow our
business or respond to competitive pressures or unanticipated industry changes,
any of which could harm our business.
We may be unable to
protect our intellectual property rights, which would harm our business,
financial condition and results of operations. We
rely on a combination of patents, trademarks, copyright and trade secret laws,
confidentiality procedures and licensing arrangements to protect our
intellectual property rights. In the past, we have been involved in
significant and expensive disputes regarding our intellectual property rights
and those of others, including claims that we may be infringing third-parties’
patents, trademarks and other intellectual property rights. We expect
that we will be involved in similar disputes in the future.
We cannot
assure you that:
-
any of our existing patents will continue to be held valid, if challenged;
-
patents will be issued for any of our pending applications;
-
any claims allowed from existing or pending patents will have sufficient scope or strength;
-
our patents will be issued in the primary countries where our products are sold in order to protect our rights and potential commercial advantage; or
-
any of our products or technologies do not infringe on the patents of other companies.
In
addition, our competitors may be able to design their products around our
patents and other proprietary rights. We also have patent
cross-license agreements with several of our leading
competitors. Under these agreements, we have enabled competitors to
manufacture and sell products that incorporate technology covered by our
patents. While we obtain license and royalty revenue or other
consideration for these licenses, if we continue to license our patents to our
competitors, competition may increase and may harm our business, financial
condition and results of operations.
There are
both flash memory producers and flash memory card manufacturers who we believe
may require a license from us. Enforcement of our rights often
requires litigation. If we bring a patent infringement action and are
not successful, our competitors would be able to use similar technology to
compete with us. Moreover, the defendant in such an action may
successfully countersue us for infringement of their patents or assert a
counterclaim that our patents are invalid or unenforceable. If we do
not prevail in the defense of patent infringement claims, we could be required
to pay substantial damages, cease the manufacture, use and sale of infringing
products, expend significant resources to develop non-infringing technology,
discontinue the use of specific processes, or obtain licenses to the technology
infringed.
For
example, on October 24, 2007, we initiated two patent infringement actions in
the United States District Court for the Western District of Wisconsin and one
action in the United States International Trade Commission, or ITC, against
certain companies that manufacture, sell and import USB flash drives,
CompactFlash®
cards, multimedia cards, MP3/media players and/or other removable flash
storage products. In this ITC action, an Initial Determination was
issued in April 2009 and a Final Determination was issued in October 2009
finding non-infringement of certain accused flash memory
products. There can be no assurance that we will be successful in
future patent infringement actions or that the validity of the asserted patents
will be preserved or that we will not face counterclaims of the nature described
above.
We and certain of
our officers are currently and may in the future be involved in litigation,
including litigation regarding our intellectual property rights or those of
third parties, which may be costly, may divert the efforts of our key personnel
and could result in adverse court rulings, which could materially harm our
business. We are involved in a number of lawsuits, including among
others, several cases involving our patents and the patents of third
parties. We are the plaintiff in some of these actions and the
defendant in other of these actions. Some of the actions seek
injunctions against the sale of our products and/or substantial monetary
damages, which if granted or awarded, could have a material adverse effect on
our business, financial condition and results of operations.
We and
numerous other companies have been sued in the United States District Court of
the Northern District of California in purported consumer class actions alleging
a conspiracy to fix, raise, maintain or stabilize the pricing of flash memory,
and concealment thereof, in violation of state and federal laws. The
lawsuits purport to be on behalf of classes of purchasers of flash
memory. The lawsuits seek restitution, injunction and damages,
including treble damages, in an unspecified amount. In addition, in
September 2007, we received a notice from the Canadian Competition Bureau that
the Bureau has commenced an industry-wide investigation with respect to alleged
anti-competitive activity regarding the conduct of companies engaged in the
supply of NAND flash memory chips to Canada and requesting that we preserve any
records relevant to such investigation. We are unable to predict the
outcome of these lawsuits and investigations. The cost of discovery
and defense in these actions as well as the final resolution of these alleged
violations of antitrust laws could result in significant liability and expense
and may harm our business, financial condition and results of
operations. For additional information concerning these proceedings,
see Part II, Item 1, “Legal Proceedings.”
Litigation
is subject to inherent risks and uncertainties that may cause actual results to
differ materially from our expectations. Factors that could cause
litigation results to differ include, but are not limited to, the discovery of
previously unknown facts, changes in the law or in the interpretation of laws,
and uncertainties associated with the judicial decision-making
process. If we receive an adverse judgment in any litigation, we
could be required to pay substantial damages and/or cease the manufacture, use
and sale of products. Litigation, including intellectual property
litigation, can be complex, can extend for a protracted period of time, can be
very expensive, and the expense can be unpredictable. Litigation
initiated by us could also result in counter-claims against us, which could
increase the costs associated with the litigation and result in our payment of
damages or other judgments against us. In addition, litigation may
divert the efforts and attention of some of our key personnel.
From
time-to-time we have sued, and may in the future sue, third parties in order to
protect our intellectual property rights. Parties that we have sued
and that we may sue for patent infringement may
countersue us for infringing their patents. If we are held to
infringe the intellectual property or related rights of others, we may need to
spend significant resources to develop non-infringing technology or obtain
licenses from third parties, but we may not be able to develop such technology or acquire such licenses on
terms acceptable to us, or at all. We may also be required to pay
significant damages and/or discontinue the use of certain manufacturing or
design processes. In addition, we or our suppliers could be enjoined
from selling some or all of our respective products in one or more geographic
locations. If we or our suppliers are enjoined from selling any of
our respective products, or if we are required to develop new technologies or
pay significant monetary damages or are required to make substantial royalty
payments, our business would be harmed.
We may be
obligated to indemnify our current or former directors or employees, or former
directors or employees of companies that we have acquired, in connection with
litigation or regulatory investigations. These liabilities could be
substantial and may include, among other things, the costs of defending lawsuits
against these individuals; the cost of defending any shareholder derivative
suits; the cost of governmental, law enforcement or regulatory investigations;
civil or criminal fines and penalties; legal and other expenses; and expenses
associated with the remedial measures, if any, which may be
imposed.
We
continually evaluate and explore strategic opportunities as they arise,
including business combinations, strategic partnerships, collaborations, capital
investments and the purchase, licensing or sale of assets. Potential
continuing uncertainty surrounding these activities may result in legal
proceedings and claims against us, including class and derivative lawsuits on
behalf of our stockholders. We may be required to expend significant
resources, including management time, to defend these actions and could be
subject to damages or settlement costs related to these actions.
Moreover,
from time-to-time we agree to indemnify certain of our suppliers and customers
for alleged patent infringement. The scope of such indemnity varies
but generally includes indemnification for direct and consequential damages and
expenses, including attorneys’ fees. We may from time-to-time be
engaged in litigation as a result of these indemnification
obligations. Third-party claims for patent infringement are excluded
from coverage under our insurance policies. A future obligation to
indemnify our customers or suppliers may have a material adverse effect on our
business, financial condition and results of operations.
For
additional information concerning legal proceedings, including the examples set
forth above, see Part II, Item 1, “Legal Proceedings.”
We may be unable to
license intellectual property to or from third parties as needed, which could
expose us to liability for damages, increase our costs or limit or prohibit us
from selling products. If we
incorporate third-party technology into our products or if we are found to
infringe others’ intellectual property, we could be required to license
intellectual property from a third party. We may also need to license
some of our intellectual property to others in order to enable us to obtain
important cross-licenses to third-party patents. We cannot be certain
that licenses will be offered when we need them, that the terms offered will be
acceptable, or that these licenses will help our business. If we do
obtain licenses from third parties, we may be required to pay license fees or
royalty payments. In addition, if we are unable to obtain a license
that is necessary to manufacture our products, we could be required to suspend
the manufacture of products or stop our product suppliers from using processes
that may infringe the rights of third parties. We may not be
successful in redesigning our products, or the necessary licenses may not be
available under reasonable terms.
Seasonality in our
business may result in our inability to accurately forecast our product purchase
requirements. Sales of our products in the consumer
electronics market are subject to seasonality. For example, sales
have typically increased significantly in the fourth quarter of each fiscal
year, sometimes followed by significant declines in the first quarter of the
following fiscal year. This seasonality makes it more difficult for
us to forecast our business, especially in the current global economic
environment and its corresponding decline in consumer confidence, which may
impact typical seasonal trends. If our forecasts are inaccurate, we
may lose market share or procure excess inventory or inappropriately increase or
decrease our operating expenses, any of which could harm our business, financial
condition and results of operations. This seasonality also may lead
to higher volatility in our stock price, the need for significant working
capital investments in receivables and inventory and our need to build inventory
levels in advance of our most active selling seasons.
Because of our
international business and operations, we must comply with numerous
international laws and regulations, and we are vulnerable to political
instability and other risks related to international operations.
Currently, a large portion of our revenues is derived from our
international operations, and all of our products are produced overseas in
China, Israel, Japan, South Korea and Taiwan. We are, therefore,
affected by the political, economic, labor, environmental, public health and
military conditions in these countries.
For
example, China does not currently have a comprehensive and highly developed
legal system, particularly with respect to the protection of intellectual
property rights. This results, among other things, in the prevalence
of counterfeit goods in China. The enforcement of existing and future
laws and contracts remains uncertain, and the implementation and interpretation
of such laws may be inconsistent. Such inconsistency could lead to
piracy and degradation of our intellectual property
protection. Although we engage in efforts to prevent counterfeit
products from entering the market, those efforts may not be
successful. Our results of operations and financial condition could
be harmed by the sale of counterfeit products.
Our
international business activities could also be limited or disrupted by any of
the following factors:
-
the need to comply with foreign government regulation;
-
changes in diplomatic and trade relationships;
-
reduced sales to our customers or interruption to our manufacturing processes in the Pacific Rim that may arise from regional issues in Asia;
-
imposition of regulatory requirements, tariffs, import and export restrictions and other barriers and restrictions;
-
changes in, or the particular application of, government regulations;
-
duties and/or fees related to customs entries for our products, which are all manufactured offshore;
-
longer payment cycles and greater difficulty in accounts receivable collection;
-
adverse tax rules and regulations;
-
weak protection of our intellectual property rights;
-
delays in product shipments due to local customs restrictions; and
-
delays in research and development that may arise from political unrest at our development centers in Israel.
Our stock price and
convertible notes price have been, and may continue to be, volatile, which could
result in investors losing all or part of their investments. The
market prices of our stock and convertible notes have fluctuated significantly
in the past and may continue to fluctuate in the future. We believe
that such fluctuations will continue as a result of many factors, including
financing plans, future announcements concerning us, our competitors or our
principal customers regarding financial results or expectations, technological
innovations, industry supply or demand dynamics, new product introductions,
governmental regulations, the commencement or results of litigation or changes
in earnings estimates by analysts. In addition, in recent years the
stock market has experienced significant price and volume fluctuations and the
market prices of the securities of high technology and semiconductor companies
have been especially volatile, often for reasons outside the control of the
particular companies. These fluctuations as well as general economic,
political and market conditions may have an adverse affect on the market price
of our common stock as well as the price of our outstanding convertible
notes.
We may engage in
business combinations that are dilutive to existing stockholders, result in
unanticipated accounting charges or otherwise harm our results of operations,
and result in difficulties in assimilating and integrating the operations,
personnel, technologies, products and information systems of acquired companies
or businesses. We
continually evaluate and explore strategic opportunities as they arise,
including business combinations, strategic partnerships, collaborations, capital
investments and the purchase, licensing or sale of assets. If we
issue equity securities in connection with an acquisition, the issuance may be
dilutive to our existing stockholders. Alternatively, acquisitions
made entirely or partially for cash would reduce our cash reserves.
Acquisitions
may require significant capital infusions, typically entail many risks and could
result in difficulties in assimilating and integrating the operations,
personnel, technologies, products and information systems of acquired
companies. We may experience delays in the timing and successful
integration of acquired technologies and product development through volume
production, unanticipated costs and expenditures, changing relationships with
customers, suppliers and strategic partners, or contractual, intellectual
property or employment issues. In addition, key personnel of an
acquired company may decide not to work for us. The acquisition of
another company or its products and technologies may also result in our entering
into a geographic or business market in which we have little or no prior
experience. These challenges could disrupt our ongoing business,
distract our management and employees, harm our reputation, subject us to an
increased risk of intellectual property and other litigation and increase our
expenses. These challenges are magnified as the size of the
acquisition increases, and we cannot assure you that we will realize the
intended benefits of any acquisition. Acquisitions may require large
one-time charges and can result in increased debt or contingent liabilities,
adverse tax consequences, substantial depreciation or deferred compensation
charges, the amortization of identifiable purchased intangible assets or
impairment of goodwill, any of which could have a material adverse effect on our
business, financial condition or results of operations.
Mergers
and acquisitions of high-technology companies are inherently risky and subject
to many factors outside of our control, and no assurance can be given that our
previous or future acquisitions will be successful and will not materially
adversely affect our business, operating results, or financial
condition. Failure to manage and successfully integrate acquisitions
could materially harm our business and operating results. Even when
an acquired company has already developed and marketed products, there can be no
assurance that such products will be successful after the closing, will not
cannibalize sales of our existing products, that product enhancements will be
made in a timely fashion or that pre-acquisition due diligence will have
identified all possible issues that might arise with respect to such
company. Failed business combinations, or the efforts to create a
business combination, can also result in litigation.
Our success depends
on our key personnel, including our executive officers, the loss of whom could
disrupt our business. Our
success greatly depends on the continued contributions of our senior management
and other key research and development, sales, marketing and operations
personnel, including Dr. Eli Harari, our founder, chairman and chief executive
officer. We do not have employment agreements with any of our
executive officers and they are free to terminate their employment with us at
any time. Our success will also depend on our ability to recruit
additional highly skilled personnel. Historically, a significant
portion of our employee compensation has been dependent on equity compensation,
which is directly tied to our stock price. Our employees continue to
hold a substantial number of equity incentive awards that are underwater, and as
a result, a significant portion of our equity compensation has little or no
retention value. In addition, we did not pay any bonus in 2009
related to fiscal year 2008. Furthermore, in 2009, we canceled our
annual merit salary increases, instituted forced shutdown days, and reduced
certain employee benefits to reduce costs. These actions or any
further reduction in compensation elements may make it more difficult for us to
hire or retain key personnel.
Terrorist attacks,
war, threats of war and government responses thereto may negatively impact our
operations, revenues, costs and stock price.
Terrorist attacks, U.S. military responses to these attacks, war, threats
of war and any corresponding decline in consumer confidence could have a
negative impact on consumer demand. Any of these events may disrupt
our operations or those of our customers and suppliers and may affect the
availability of materials needed to manufacture our products or the means to
transport those materials to manufacturing facilities and finished products to
customers. Any of these events could also increase volatility in the
U.S. and world financial markets, which could harm our stock price and may limit
the capital resources available to us and our customers or suppliers, or
adversely affect consumer confidence. We have substantial operations
in Israel including a development center in Northern Israel, near the border
with Lebanon, and a research center in Omer, Israel, which is near the Gaza
Strip, areas that have experienced significant violence and political
unrest. Turmoil and unrest in Israel or the Middle East could cause
delays in the development or production of our products. This could
harm our business and results of operations.
Natural disasters or
epidemics in the countries in which we or our suppliers or subcontractors
operate could negatively impact our operations. Our
operations, including those of our suppliers and subcontractors, are
concentrated in Milpitas, California; Raleigh, North Carolina; Brno, Czech
Republic; Astugi and Yokkaichi, Japan; Hsinchu and Taichung, Taiwan; and
Dongguan, Futian, Shanghai and Shenzen, China. In the past, these
areas have been affected by natural disasters such as earthquakes, tsunamis,
floods and typhoons, and some areas have been affected by epidemics, such as
avian flu or H1N1 flu. If a natural disaster or epidemic were to
occur in one or more of these areas, our operations could be significantly
impaired and our business may be harmed. This is magnified by the
fact that we do not have insurance for most natural disasters, including
earthquakes. This could harm our business and results of
operations.
We have recently
upgraded our enterprise-wide information systems, controls, processes and
procedures, and any issues with the new systems could materially impact our
business operations and/or financial results. At the
beginning of the third quarter of fiscal year 2009, we implemented a new
enterprise resource planning, or ERP, system. Any ERP system
problems, quality issues or programming errors could impact our continued
ability to successfully operate our business or to timely and accurately report
our financial results. In addition, any distraction of our workforce
due to the new systems could harm our business or results of
operations.
Anti-takeover
provisions in our charter documents, stockholder rights plan and in Delaware law
could discourage or delay a change in control and, as a result, negatively
impact our stockholders. We
have taken a number of actions that could have the effect of discouraging a
takeover attempt. For example, we have a stockholders’ rights plan
that would cause substantial dilution to a stockholder, and substantially
increase the cost paid by a stockholder, who attempts to acquire us on terms not
approved by our board of directors. This could discourage an
acquisition of us. In addition, our certificate of incorporation
grants our board of directors the authority to fix the rights, preferences and
privileges of and issue up to 4,000,000 shares of preferred stock without
stockholder action (2,000,000 of which have already been reserved under our
stockholder rights plan). Issuing preferred stock could have the
effect of making it more difficult and less attractive for a third party to
acquire a majority of our outstanding voting stock. Preferred stock
may also have other rights, including economic rights senior to our common stock
that could have a material adverse effect on the market value of our common
stock. In addition, we are subject to the anti-takeover provisions of
Section 203 of the Delaware General Corporation Law. This section
provides that a corporation may not engage in any business combination with any
interested stockholder during the three-year period following the time that a
stockholder became an interested stockholder. This provision could
have the effect of delaying or discouraging a change of control of
SanDisk.
Unanticipated
changes in our tax provisions or exposure to additional income tax liabilities
could affect our profitability. We are
subject to income tax in the U.S. and numerous foreign
jurisdictions. Our tax liabilities are affected by the amounts we
charge for inventory, services, licenses, funding and other items in
intercompany transactions. We are subject to ongoing tax audits in
various jurisdictions. Tax authorities may disagree with our
intercompany charges or other matters and assess additional
taxes. For example, we are currently under a federal income tax audit
by the Internal Revenue Service, or IRS, for fiscal years 2005 through
2008. While we regularly assess the likely outcomes of these audits
in order to determine the appropriateness of our tax provision, examinations are
inherently uncertain and an unfavorable outcome could occur. An
unanticipated unfavorable outcome in any specific period could harm our results
of operations for that period or future periods. The financial cost
and our attention and time devoted to defending income tax positions may divert
resources from SanDisk’s business operations, which could harm our business and
profitability. The IRS audit may also impact the timing and/or amount
of our refund claim. In addition, our effective tax rate in the
future could be adversely affected by changes in the mix of earnings in
countries with differing statutory tax rates, changes in the valuation of
deferred tax assets and liabilities, changes in tax laws, and the discovery of
new information in the course of our tax return preparation
process. In particular, the carrying value of deferred tax assets,
which are predominantly in the U.S., is dependent on our ability to generate
future taxable income in the U.S. Any of these changes could affect
our profitability.
We may be subject to
risks associated with environmental regulations. Production
and marketing of products in certain states and countries may subject us to
environmental and other regulations including, in some instances, the
responsibility for environmentally safe disposal or recycling. Such
laws and regulations have recently been passed in several jurisdictions in which
we operate, including Japan and certain states within the
U.S. Although we do not anticipate any material adverse effects in
the future based on the nature of our operations and the focus of such laws,
there is no assurance such existing laws or future laws will not harm our
financial condition, liquidity or results of operations.
In the event we are
unable to satisfy regulatory requirements relating to internal controls, or if
our internal control over financial reporting is not effective, our business
could suffer. In
connection with our certification process under Section 404 of Sarbanes-Oxley
Act, we have identified in the past and will from time-to-time identify
deficiencies in our internal control over financial reporting. We
cannot assure you that individually or in the aggregate these deficiencies would
not be deemed to be a material weakness or significant deficiency. A
material weakness or significant deficiency in internal control over financial
reporting could materially impact our reported financial results and the market
price of our stock could significantly decline. Additionally, adverse
publicity related to the disclosure of a material weakness or deficiency in
internal controls could have a negative impact on our reputation, business and
stock price. Any internal control or procedure, no matter how well
designed and operated, can only provide reasonable assurance of achieving
desired control objectives and cannot prevent human error, intentional
misconduct or fraud.
Our debt obligations
may adversely affect us. Our
indebtedness could have significant negative consequences. For
example, it could:
-
increase our vulnerability to general adverse economic and industry conditions;
-
limit our ability to obtain additional financing;
-
require the dedication of a substantial portion of any cash flow from operations to the payment of principal of our indebtedness, thereby reducing the availability of such cash flow to fund our growth strategy, working capital, capital expenditures and other general corporate purposes;
-
limit our flexibility in planning for, or reacting to, changes in our business and our industry;
-
place us at a competitive disadvantage relative to our competitors with less debt; and
-
increase our risk of credit rating downgrades.
We have significant
financial obligations related to Flash Ventures, which could impact our ability
to comply with our obligations under our 1% Senior Convertible Notes due 2013
and our 1% Convertible Notes due 2035. We have entered into
agreements to guarantee or provide financial support with respect to lease and
certain other obligations of Flash Ventures in which we have a 49.9% ownership
interest. In addition, we may enter into future agreements to
increase manufacturing capacity, including the expansion of Fab 4. As
of September 27, 2009 we had guarantee obligations for Flash Ventures’ master
lease agreements of approximately $1.14 billion. In addition, we
have significant commitments for the future fixed costs of Flash
Ventures. Due to these and our other commitments, we may not have
sufficient funds to make payments under or repay the notes.
The settlement of
the 1% Senior Convertible Notes due 2013 or the 1% Convertible Notes due 2035
that may be put to us by the holders in March 2010, may have adverse
consequences. The 1% Senior Convertible
Notes due 2013 are subject to net share settlement, which means that we will
satisfy our conversion obligation to holders by paying a combination of cash and
shares of our common stock in settlement thereof, in an amount of cash equal to
the principal amount of the 1% Convertible Notes due 2013 plus an amount of
shares of our common stock, if any, equal to the excess of the daily conversion
values over the cash amount of the 1% Senior Convertible Notes due 2013 being
converted. The holders of the 1% Convertible Notes due 2035 have a
put option in March 2010 and various dates thereafter under which they can
demand cash repayment of the principal amount of $75 million.
Our
failure to convert the 1% Senior Convertible Notes due 2013 into cash or a
combination of cash and common stock upon exercise of a holder’s conversion
right in accordance with the provisions of the indenture would constitute a
default under the indenture. We may not have the financial resources
or be able to arrange for financing to pay such principal amount in connection
with the surrender of the 1% Senior Convertible Notes due 2013. While
we currently only have debt related to the 1% Senior Convertible Notes due 2013
and the 1% Convertible Notes due 2035 and we do not have other agreements that
would restrict our ability to pay the principal amount of any convertible notes
in cash, we may enter into such an agreement in the future, which may limit or
prohibit our ability to make any such payment. In addition, a default
under the indenture could lead to a default under existing and future agreements
governing our indebtedness. If, due to a default, the repayment of
related indebtedness were to be accelerated after any applicable notice or grace
periods, we may not have sufficient funds to repay such indebtedness and amounts
owing in respect of the conversion, maturity, or put of any convertible
notes.
The convertible note
hedge transactions and the warrant option transactions may affect the value of
the notes and our common stock. We
have entered into convertible note hedge transactions with Morgan Stanley &
Co. International Limited and Goldman, Sachs & Co., or the
dealers. These transactions are expected to reduce the potential
dilution upon conversion of the 1% Senior Convertible Notes due
2013. We used approximately $67.3 million of the net proceeds of
funds received from the 1% Senior Convertible Notes due 2013 to pay the net cost
of the convertible note hedge in excess of the warrant
transactions. These transactions were accounted for as an adjustment
to our stockholders’ equity. In connection with hedging these
transactions, the dealers or their affiliates:
-
have entered into various over-the-counter cash-settled derivative transactions with respect to our common stock, concurrently with, and shortly after, the pricing of the notes; and
-
may enter into, or may unwind, various over-the-counter derivatives and/or purchase or sell our common stock in secondary market transactions following the pricing of the notes, including during any observation period related to a conversion of notes.
The
dealers or their affiliates are likely to modify their hedge positions from
time-to-time prior to conversion or maturity of the notes by purchasing and
selling shares of our common stock, our securities or other instruments they may
wish to use in connection with such hedging. In particular, such
hedging modification may occur during any observation period for a conversion of
the 1% Senior Convertible Notes due 2013, which may have a negative effect on
the value of the consideration received in relation to the conversion of those
notes. In addition, we intend to exercise options we hold under the
convertible note hedge transactions whenever notes are converted. To
unwind their hedge positions with respect to those exercised options, the
dealers or their affiliates expect to sell shares of our common stock in
secondary market transactions or unwind various over-the-counter derivative
transactions with respect to our common stock during the observation period, if
any, for the converted notes.
The
effect of any of these transactions on the market price of our common stock or
the 1% Senior Convertible Notes due 2013 will depend in part on market
conditions and cannot be ascertained at this time. However, any of
these activities could adversely affect the value of our common stock and the
value of the 1% Senior Convertible Notes due 2013, and consequently affect the
amount of cash and the number of shares of common stock the holders will receive
upon the conversion of the notes.
Item 2. Unregistered
Sales of Equity Securities and Use of Proceeds
None.
None.
None.
None.
The
information required by this item is set forth on the exhibit index which
follows the signature page of this report.
Pursuant
to the requirements of the Securities Exchange Act of 1934, the Registrant has
duly caused this Report to be signed on its behalf by the undersigned, thereunto
duly authorized.
SANDISK
CORPORATION
(Registrant)
|
||
Dated:
November 5, 2009
|
By: |
/s/ Judy
Bruner
|
Judy
Bruner
Executive
Vice President, Administration and
Chief
Financial Officer
(On
behalf of the Registrant and as Principal
Financial
and Accounting Officer)
|
Exhibit
Number
|
Exhibit
Title
|
2.1
|
Agreement
and Plan of Merger and Reorganization, dated as of October 20, 2005,
by and among the Registrant, Mike Acquisition Company LLC, Matrix
Semiconductor, Inc. and Bruce Dunlevie as the stockholder representative
for the stockholders of Matrix Semiconductor, Inc.(1)
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2.2
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Agreement
and Plan of Merger, dated as of July 30, 2006, by and among the
Registrant, Project Desert, Ltd. and msystems Ltd.(2)
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3.1
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Restated
Certificate of Incorporation of the Registrant.(3)
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3.2
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Certificate
of Amendment of the Restated Certificate of Incorporation of the
Registrant dated December 9, 1999.(4)
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3.3
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Certificate
of Amendment of the Restated Certificate of Incorporation of the
Registrant dated May 11, 2000.(5)
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3.4
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Certificate
of Amendment to the Amended and Restated Certificate of Incorporation of
the Registrant dated May 26, 2006.(6)
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3.5
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Certificate
of Amendment to the Amended and Restated Certificate of Incorporation of
the Registrant dated May 27, 2009.(7)
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3.6
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Amended
and Restated Bylaws of the Registrant, as amended to
date.(11)
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3.7
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Certificate
of Designations for the Series A Junior Participating Preferred
Stock, as filed with the Delaware Secretary of State on October 14,
1997.(8)
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3.8
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Amendment
to Certificate of Designations for the Series A Junior Participating
Preferred Stock, as filed with the Delaware Secretary of State on
September 24, 2003.(9)
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4.1
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Reference
is made to Exhibits 3.1, 3.2, 3.3, 3.4, and 3.5.(3), (4), (5), (6),
(7)
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4.2
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Rights
Agreement, dated as of September 15, 2003, between the Registrant and
Computershare Trust Company, Inc.(9)
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4.3
|
Amendment
No. 1 to Rights Agreement, dated as of November 6, 2006, by and
between the Registrant and Computershare Trust Company,
Inc.(10)
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12.1
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Computation
of Ratio of Earnings to Fixed Charges.(*)
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31.1
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Certification
of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.(*)
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31.2
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Certification
of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.(*)
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32.1
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Certification
of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.(**)
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32.2
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Certification
of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.(**)
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____________
*
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Filed
herewith.
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**
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Furnished
herewith.
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(1)
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Previously
filed as an Exhibit to the Registrant’s Current Report on Form 8-K filed
with the SEC on January 20, 2006.
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(2)
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Previously
filed as an Exhibit to the Registrant’s Current Report on Form 8-K/A filed
with the SEC on August 1, 2006.
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(3)
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Previously
filed as an Exhibit to the Registrant’s Registration Statement on Form S-1
(No. 33-96298).
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(4)
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Previously
filed as an Exhibit to the Registrant’s Form 10-Q for the quarter ended
June 30, 2000.
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(5)
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Previously
filed as an Exhibit to the Registrant’s Registration Statement on Form S-3
(No. 333-85686).
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(6)
|
Previously
filed as an Exhibit to the Registrant’s Current Report on Form 8-K filed
with the SEC on June 1, 2006.
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(7)
|
Previously
filed as an Exhibit to the Registrant’s Current Report on Form 8-K filed
with the SEC on May 28, 2009.
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(8)
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Previously
filed as an Exhibit to the Registrant’s Current Report on Form 8-K/A dated
April 18, 1997.
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(9)
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Previously
filed as an Exhibit to the Registrant’s Registration Statement on Form 8-A
dated September 25, 2003.
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(10)
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Previously
filed as an Exhibit to the Registrant’s Registration Statement on Form
8-A/A dated November 8, 2006.
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(11)
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Previously
filed as an Exhibit to the Registrant’s Current Report on Form 8-K filed
with the SEC on August 7, 2009.
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