SanDisk 2008 Annual Report Download - page 86

Download and view the complete annual report

Please find page 86 of the 2008 SanDisk annual report below. You can navigate through the pages in the report by either clicking on the pages listed below, or by using the keyword search tool below to find specific information within the annual report.

Page out of 135

  • 1
  • 2
  • 3
  • 4
  • 5
  • 6
  • 7
  • 8
  • 9
  • 10
  • 11
  • 12
  • 13
  • 14
  • 15
  • 16
  • 17
  • 18
  • 19
  • 20
  • 21
  • 22
  • 23
  • 24
  • 25
  • 26
  • 27
  • 28
  • 29
  • 30
  • 31
  • 32
  • 33
  • 34
  • 35
  • 36
  • 37
  • 38
  • 39
  • 40
  • 41
  • 42
  • 43
  • 44
  • 45
  • 46
  • 47
  • 48
  • 49
  • 50
  • 51
  • 52
  • 53
  • 54
  • 55
  • 56
  • 57
  • 58
  • 59
  • 60
  • 61
  • 62
  • 63
  • 64
  • 65
  • 66
  • 67
  • 68
  • 69
  • 70
  • 71
  • 72
  • 73
  • 74
  • 75
  • 76
  • 77
  • 78
  • 79
  • 80
  • 81
  • 82
  • 83
  • 84
  • 85
  • 86
  • 87
  • 88
  • 89
  • 90
  • 91
  • 92
  • 93
  • 94
  • 95
  • 96
  • 97
  • 98
  • 99
  • 100
  • 101
  • 102
  • 103
  • 104
  • 105
  • 106
  • 107
  • 108
  • 109
  • 110
  • 111
  • 112
  • 113
  • 114
  • 115
  • 116
  • 117
  • 118
  • 119
  • 120
  • 121
  • 122
  • 123
  • 124
  • 125
  • 126
  • 127
  • 128
  • 129
  • 130
  • 131
  • 132
  • 133
  • 134
  • 135

Notes To Consolidated Financial Statements
Note 6: Derivatives and Hedging Activities
The Company uses derivative instruments primarily to manage exposures to foreign currency and equity
security price risks. The Company’s primary objective in holding derivatives is to reduce the volatility of
earnings and cash flows associated with changes in foreign currency and equity security prices. The program is
not designated for trading or speculative purposes. The Company’s derivatives expose the Company to credit risk
to the extent that the counterparties may be unable to meet the terms of the agreement. The Company seeks to
mitigate such risk by limiting its counterparties to major financial institutions and by spreading the risk across
several major financial institutions. In addition, the potential risk of loss with any one counterparty resulting from
this type of credit risk is monitored on an ongoing basis.
In accordance with Statement of Financial Accounting Standards No. 133 (“SFAS 133”), Accounting for
Derivative Instruments and Hedging Activities, the Company recognizes derivative instruments as either assets or
liabilities on the balance sheet at fair value. Changes in fair value (i.e. gains or losses) of the derivatives are
recorded as cost of product revenues or other income (expense), or as accumulated other comprehensive income
(“OCI”).
In March 2008, the FASB issued Statement of Financial Accounting Standards No. 161 (“SFAS 161”),
Disclosures about Derivative Instruments and Hedging Activities. SFAS 161 amends and expands the disclosure
requirements of SFAS 133, and requires qualitative disclosures about objectives and strategies for using
derivatives, quantitative disclosures about fair value amounts of and gains and losses on derivative instruments,
and disclosures about credit-risk-related contingent features in derivative agreements. The Company adopted the
reporting requirements per SFAS 161 during the second quarter of fiscal year 2008.
Cash Flow Hedges. The Company uses a combination of forward contracts and options designated as cash
flow hedges to hedge a portion of future forecasted purchases in Japanese yen. The gain or loss on the effective
portion of a cash flow hedge is initially reported as a component of accumulated OCI and subsequently
reclassified into cost of product revenues in the same period or periods in which the cost of product revenues is
recognized, or reclassified into other income (expense) if the hedged transaction becomes probable of not
occurring. Any gain or loss after a hedge is de-designated because it is no longer probable of occurring or related
to an ineffective portion of a hedge, as well as any amount excluded from the Company’s hedge effectiveness, is
recognized as other income (expense) immediately. The net gains or losses relating to ineffectiveness were not
material in the fiscal year ended December 28, 2008. As of December 28, 2008, the Company had forward
contracts and options in place that hedged future purchases of approximately 31.7 billion Japanese yen, or
approximately $352 million, based upon the exchange rate as of December 28, 2008. The forward and option
contracts cover future Japanese yen purchases expected to occur over the next twelve months.
The Company has an outstanding cash flow hedge designated to mitigate equity risk associated with certain
available-for-sale investments in equity securities. The gain or loss on the cash flow hedge is reported as a
component of accumulated OCI and will be reclassified into other income (expense) in the same period that the
equity securities are sold. The securities had a fair value of $35.2 million and $60.4 million as of December 28,
2008 and December 30, 2007, respectively.
Other Derivatives. Other derivatives not designated as hedging instruments under SFAS 133 consists
primarily of forward contracts to minimize the risk associated with the foreign exchange effects of revaluing
monetary assets and liabilities. Monetary assets and liabilities denominated in foreign currencies and the
associated outstanding forward contracts are marked-to-market at December 28, 2008 with realized and
unrealized gains and losses included in other income (expense). As of December 28, 2008, the Company had
foreign currency forward contracts in place hedging exposures in European euros, Israeli New shekels, Japanese
yen and Taiwanese dollars. Foreign currency forward contracts were outstanding to buy and sell U.S. dollar
F-21