SanDisk 2010 Annual Report Download - page 151

This is a TAB type table. Insert
conts here. Annual Report
Certain of our products contain encryption or security algorithms to protect third-party content and user-
generated data stored on our products. To the extent our products are hacked or the encryption schemes are
compromised, this could harm our business or cause us financial harm by hurting our reputation, requiring us to
employ additional resources to fix the errors or defects. This could potentially impact future collaboration with
content providers or lead to product returns and/or claims against us due to actual or perceived vulnerabilities.
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 could 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 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
some of our suppliers and contract manufacturers. 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
23