SanDisk 2010 Annual Report Download - page 202

Notes To Consolidated Financial Statements
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.
The Company recognizes derivative instruments as either assets or liabilities on the balance sheet at fair
value and provides 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. 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”). The Company does not offset or net the fair value amounts of derivative
instruments and separately discloses the fair value amounts of the derivative instruments as either assets or
liabilities.
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 no longer designated because it is no longer probable of occurring or
it is 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, and was a net loss of ($0.6) million,
($1.0) million and ($9.7) million for the fiscal years ended January 2, 2011, January 3, 2010 and December 28,
2008, respectively. As of January 2, 2011, the Company had forward contracts in place to hedge future purchases
of approximately 68.3 billion Japanese yen, or approximately $843.5 million based upon the exchange rate as of
January 2, 2011, and the net unrealized gain on the effective portion of these cash flow hedges was $13.5 million.
The forward contracts cover a portion of the Company’s future Japanese yen purchases that are expected to occur
during fiscal year 2011.
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 $86.5 million and $71.8 million as of January 2, 2011
and January 3, 2010, respectively. The cash flow hedge designated to mitigate equity risk of these securities had
a fair value of ($6.9) million and $0.7 million as of January 2, 2011 and January 3, 2010, respectively.
Other Derivatives. Other derivatives that are non-designated consist primarily of forward and cross currency
swap 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 and cross currency swap contracts were marked-to-market at January 2, 2011 with realized and
unrealized gains and losses included in other income (expense). As of January 2, 2011, the Company had foreign
currency forward contracts hedging exposures in European euros, British pounds and Japanese yen. Foreign
currency forward contracts were outstanding to buy and (sell) U.S. dollar equivalent of approximately
$289.2 million and ($125.1) million in foreign currencies, respectively, based upon the exchange rates at
January 2, 2011.
The Company currently has two currency swap transactions with one counterparty to exchange Japanese
yen for U.S. dollars for a combined notional amount of ($469.0) million, which requires the Company to
maintain a minimum liquidity of $1.5 billion for one of the transactions and $1.0 billion for the other, on or prior
to, June 24, 2012 and $1.0 billion after June 24, 2012 for both. Liquidity is defined as the sum of the Company’s
F-16