SanDisk 2008 Annual Report Download - page 26

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Underestimation of our warranty and similar costs would have an adverse effect on our results of operations and
financial condition.
Our remaining investment of approximately $64 million in our FlashVision venture may not be recoverable.
In the second quarter of fiscal year 2008, we determined that the production of NAND flash memory products
utilizing 200-millimeter wafers is no longer cost effective and signed an agreement with Toshiba to wind-down
our FlashVision venture. As of the end of May 2008, the operations of FlashVision were discontinued and a plan
was put in place to sell or otherwise dispose of the tools owned or leased by FlashVision. In fiscal year 2008, we
took an impairment on our investment of approximately $10 million due to FlashVision’s difficulty in selling its
excess capital equipment due to deteriorating market conditions. As of December 28, 2008, we had an investment
in FlashVision of $64 million denominated in Japanese yen, offset by $43 million of cumulative translation
adjustments recorded in Accumulated Other Comprehensive Income, or OCI. A depreciation of the Japanese yen
to U.S. dollar exchange rate or a decrease in the expected final cash distribution from FlashVision could result in
further impairments on this investment, which could harm our financial results.
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 harm our financial results. The majority of our
products are sold 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 have an adverse effect on our business, financial condition and results of
operations. In addition, at times inventory may increase 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. 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 are sole-sourced from time to time for certain of our components and the absence of a back-up supplier
exposes our supply chain to unanticipated disruptions. We rely on our vendors, some of which are the sole
source of supply for certain of our components. We do not have long-term supply agreements with most of these
vendors. 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.
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