SanDisk 2012 Annual Report Download - page 128

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, chip 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 amount of capacity allocated to us from 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 some of our existing subcontractors, nor do we 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
or quality assurance. 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 harm our operating results.
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, increased service costs,
warranty and indemnification claims and litigation. Our products are complex, must meet stringent user
requirements and may contain errors or defects, and the majority of our products provide a warranty period.
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 from Flash Ventures contain errors
or defects, our overall supply could be harmed. 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 customers’ product recall and other costs, warranty claims and litigation. Generally,
our OEM customers have more stringent requirements than other customers and our concentration of revenue
from OEMs, especially OEMs who purchase our enterprise storage and client storage products, could result in
increased expenditures for product testing, or increase our service costs and potentially lead to increased
warranty or indemnification claims. Furthermore, the costs of errors or defects in our embedded products may be
greater than those of stand-alone, removable products due to the effect that such errors or defects may have on
other components of the device in which they are embedded. 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 harm our operating results 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.
Underestimation of our warranty and similar costs would harm our operating results and financial condition.
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 or breached, this could harm our business by hurting our reputation, requiring us to employ
additional resources to fix the errors or defects and expose us to litigation and indemnification claims. This could
potentially impact future collaboration with content providers or lead to product returns or claims against us due
to actual or perceived vulnerabilities.
We are exposed to foreign currency exchange rate fluctuations that could harm our business, operating
results 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. 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. These exposures may change over time as our business
and business practices evolve, and they could harm our financial results and cash flows.
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