SanDisk 2005 Annual Report Download - page 95

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 up inventory levels in advance of our most active selling seasons.
From time to time, we overestimate our requirements and build excess inventories, and underestimate our
requirements and have a shortage of supply, both of which harm our financial results. The majority of our
products are sold 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. Our international customers submit these reports on a monthly, not weekly, basis
making it more difficult to accurately forecast demand. We have in the past significantly over-forecasted and 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 have an adverse effect on our business, financial condition and
results of operations. In addition, at times inventories may increase 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 which may
harm our financial condition and results of operations.
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. If we are unable to maintain market share,
our results of operations and financial condition could be harmed. Conversely, 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.
Our ability to respond to changes in market conditions from our forecast is limited by our purchasing
arrangements with our silicon sources. These arrangements generally provide that the first three months of our
rolling nine-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 are sole sourced for a number of our critical components and the absence of a back-up supplier exposes our
supply chain to unanticipated disruptions. We rely on our vendors, some of which are a sole source of supply, for
many of our critical components. We do not have long-term supply agreements with most of these vendors. Our
business, financial condition and operating results could be significantly harmed by delays or reductions in
shipments if we are unable to develop alternative sources or obtain sufficient quantities of these components.
We are exposed to foreign currency risks. Our purchases of NAND flash memory from the Toshiba venture
and our investments in those ventures are denominated in Japanese yen. Additionally, we expect over time to
increase the percentage of our sales denominated in currencies other than the U.S. dollar. Management of these
foreign exchange exposures and the foreign currency forward contracts used to mitigate these exposures is
complicated and if we do not successfully manage our foreign exchange exposures, our business, results of
operations and financial condition could be harmed.
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 retail demand, which
is the largest channel for our products. 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 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. 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 Sunnyvale, California, Yokkaichi, Japan, Hsinchu and Taichung, Taiwan and Dongguan, Shanghai
and Shenzen, China. In the past, these areas have been affected by natural disasters such as earthquakes, tsunamis
and typhoons, and some areas have been affected by epidemics, such as SARS. If a natural disaster or epidemic were
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