SanDisk 2006 Annual Report Download - page 86

On November 30, 2006, we assumed through our acquisition of msystems, $75.0 million in aggregate principal
amount of 1% Convertible Notes due 2035, or the “1% Notes due 2035.” The 1% Notes due 2035 pay interest at a
rate of 1% per annum. The 1% Notes due 2035 may be converted into our common stock, under certain
circumstances, based on an initial conversion rate of 26.8302 shares of common stock per $1,000 principal
amount of notes (which represents an initial conversion price of approximately $37.27 per share). The conversion
price will be subject to adjustment in certain events but will not be adjusted for accrued interest.
Critical Accounting Policies & Estimates
Our discussion and analysis of our financial condition and results of operations is based upon our consolidated
financial statements, which have been prepared in accordance with accounting principles generally accepted in the
United States. The preparation of these financial statements requires us to make estimates and judgments that affect
the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent liabilities. On
an ongoing basis, we evaluate our estimates, including, among others, those related to customer programs and
incentives, product returns, bad debts, inventories and related reserves, investments, income taxes, warranty
obligations, stock compensation, contingencies and litigation. We base our estimates on historical experience and
on other assumptions that we believe are reasonable under the circumstances, the results of which form the basis for
our judgments about the carrying values of assets and liabilities when those values are not readily apparent from
other sources. Estimates have historically approximated actual results. However, future results will differ from these
estimates under different assumptions and conditions.
Revenue Recognition, Sales Returns and Allowances and Sales Incentive Programs. We recognize net
revenues when the earnings process is complete, as evidenced by an agreement with the customer, transfer of title
and acceptance, if applicable, fixed pricing and reasonable assurance of realization. Sales made to distributors and
retailers are generally under agreements allowing price protection and/or right of return and, therefore, the sales and
related costs of these transactions are deferred until the retailers or distributors sell the merchandise to their end
customer, or the rights of return expire. At December 31, 2006 and January 1, 2006, deferred income, from sales to
distributors and retailers was $312.9 million and $139.9 million, respectively. Estimated sales returns are provided
for as a reduction to product revenue and deferred revenue and were not material for any period presented in our
consolidated financial statements.
We record estimated reductions to revenue or to deferred revenue for customer and distributor incentive
programs and offerings, including price protection, promotions, co-op advertising, and other volume-based
incentives and expected returns. Additionally, we have incentive programs that require us to estimate, based on
historical experience, the number of customers who will actually redeem the incentive. All sales incentive programs
are recorded as an offset to product revenues or deferred revenues. In the past, actual returns and rebates have not
been significantly different from our estimates. However, actual returns and rebates in any future period could differ
from our estimates, which could impact the net revenue we report.
Inventories and Inventory Valuation. Inventories are stated at the lower of cost (first-in, first-out) or market.
Market value is based upon an estimated average selling price reduced by estimated costs of disposal. The
determination of market value involves numerous judgments including estimating average selling prices based
upon recent sales volumes, industry trends, existing customer orders, current contract prices, industry analysis of
supply and demand and seasonal factors. Should actual market conditions differ from our estimates, our future
results of operations could be materially affected. The valuation of inventory also requires us to estimate obsolete or
excess inventory. The determination of obsolete or excess inventory requires us to estimate the future demand for
our products within specific time horizons, generally six to twelve months. To the extent our demand forecast for
specific products is less than our product on hand and our noncancelable orders, we could be required to record
additional inventory reserves, which would have a negative impact on our gross margin.
Accounting for Investments. We evaluate whether entities in which we have invested are variable interest
entities within the definition of the Financial Accounting Standards Board Interpretation No. 46R, or FIN 46R,
Accounting for Variable Interest Entities. If those entities are variable interest entities, then we determine whether
we are the primary beneficiary of that entity by reference to our contractual and business arrangements with respect
to residual gains and residual losses on liquidation of that entity.
37
Annual Report