SanDisk 2012 Annual Report Download - page 129

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conts here. Annual Report
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 recent years the Japanese yen has significantly
appreciated relative to the U.S. dollar. This has increased our cost of NAND flash wafers, negatively impacting
our gross margins and operating results. In addition, our investments in Flash Ventures are denominated in
Japanese yen and further strengthening of the Japanese yen would increase the cost to us of future funding and
increase the value of our yen-denominated investments, increasing our exposure to asset impairments.
Macroeconomic weakness in the U.S. or other parts of the world could lead to further strengthening of the
Japanese yen, which would harm our gross margins, operating results, and the cost of future Flash Venture
funding and increase the risk of asset impairment. 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. 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, primarily for Japanese yen-
denominated inventory purchases. We generally have not hedged our future equity investments, distributions and
loans denominated in Japanese yen related to Flash Ventures.
Our attempts to hedge against currency risks may not be successful, which could harm our operating results.
In addition, if we do not successfully manage our hedging program in accordance with accounting guidelines, we
may be subject to adverse accounting treatment, which could harm our operating results. There can be no
assurance that this hedging program will be economically beneficial to us for numerous reasons, including that
hedging may reduce volatility, but prevent us from benefiting from a favorable market trend. 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 other restrictions. Operating losses, third-party downgrades of
our credit rating or instability in the worldwide financial markets, including the downgrade of the credit rating of
the U.S. government, could impact our ability to effectively manage our foreign currency exchange rate risk,
which could harm our business, operating results and financial condition.
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, the 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. There can be no assurance 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 at all, for natural disasters and 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 significantly rely, may not be adequately insured against all potential
losses. Accordingly, we may be subject to uninsured or under-insured losses. 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 and our suppliers rely upon certain rare earth materials that are necessary for the manufacturing of our
products, and our business could be harmed if we or our suppliers experience shortages or delays of these rare
earth materials. Rare earth materials are critical to the manufacture of some of our products. We and/or our
suppliers acquire these materials from a number of countries, including the People’s Republic of China. We
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