SanDisk 2004 Annual Report Download - page 27

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Table of Contents
Provision for Income Taxes. Our 2004 effective tax rate was approximately 37% compared to an effective tax rate in 2003 of 30%.
Our 2004 effective tax rate differs from the statutory rate primarily due to state tax expense, net of federal benefit. Our future tax rate
may be impacted by state taxes, our ability to realize tax benefits from capital losses and the geographic mix of our earnings.
Other Comprehensive Income. Foreign currency translation adjustments in 2004 were $5.6 million. Unrealized loss on investments
was $38.2 million. We expect that over time our international operations will expand resulting in increased foreign currency exposure.
Changes in prevailing interest rates in the United States would affect the fair market value of our short−term investment portfolio,
which generated the majority of our unrealized gains at the end of 2004. Other comprehensive income adjustments totaled
$90.2 million in 2003.
Cash Flows. Operating activities generated $227.7 million of cash during the year ended January 2, 2005. Significant contributors
to the generation of cash from operations were net income of $266.6 million, non−cash adjustments to income for depreciation and
amortization of $38.9 million, allowances for doubtful accounts of $4.6 million, amortization/accretion related to original
premium/discount on short−term investments of $3.2 million and amortization of bond issuance costs of $2.6 million; decreases in
deposits and other assets of $13.3 million, increases in accrued payroll and related expenses of $13.5 million and both current and
non−current other accrued liabilities of $15.2 million. These were partially offset by increases in the inventory balance of
$79.5 million, accounts receivable of $14.9 million and decreases in deferred income on shipments to distributors and retailers and
deferred revenue of $15.4 million, and decreases in accounts payable, income taxes payable and other current liabilities to related
parties of $6.2 million. Operating activities generated $272.5 million during the year ended December 28, 2003. We used
$523.0 million for investing activities. We increased our short−term investment balance by $337.0 million, loaned $33.6 million to
FlashVision, invested $23.1 million in Flash Partners, purchased $63.4 million of 200−millimeter semiconductor wafer manufacturing
equipment to be used at Toshiba’s Yokkaichi Operations and purchased $62.4 million of test equipment and other capital items. We
used $335.7 million for investing activities during the year ended December 28, 2003. We generated $24.7 million of cash from
exercises of stock options and sales under our employee stock purchase plan. We generated $576.9 million from financing activities
during the year ended December 28, 2003. As discussed under “Liquidity and Capital Resources,” we expect to grow our investments
in Flash Partners and FlashVision in 2005.
Comparison of 2003 and 2002
Product Revenues. In 2003, our product revenues were $982.3 million, an increase of 99% over $492.9 in 2002. The increase in
our product revenues was primarily the result of higher unit volumes and higher average card capacities within the digital still camera
market. In addition, we entered the market for USB flash drives which contributed to our 2003 revenue growth. Our megabytes sold
increased 237% in 2003 compared to 2002, while our average−selling price per megabyte decreased approximately 41%.
License and Royalty Revenues. In 2003, our license and royalty revenues were $97.5 million, an increase of 101% from
$48.4 million in 2002. The increase in license and royalty revenues between 2003 and 2002 was primarily the result of increased
royalty bearing sales by our licensees.
Gross Margins. Our product gross margin in 2003 was 34.7%, up 6.2% from 28.5% in 2002. The increase in product gross margin
was the result of a fairly stable pricing environment particularly in the second half of 2003 resulting from constrained industry supply,
combined with lower manufacturing costs resulting from the 160−nanometer to 130−nanometer conversion and economies of scale
related to higher unit volumes. These positive contributors to gross margin were partially offset by FlashVision start−up and tool
relocation costs. In addition, during fiscal 2003, we sold approximately $16.2 million of inventory that had been fully written off in
prior periods, which favorably impacted gross margin by approximately 2 percentage points for fiscal 2003.
Research and Development. Our 2003 research and development expenses were $84.2 million or 7.8% of revenues compared with
$63.2 million or 11.7% of revenues in 2002. Research and development
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