SanDisk 2011 Annual Report Download - page 81

This is a TAB type table. Insert
conts here. Annual Report
unable to satisfy our requirements on competitive terms or at all, we may lose potential sales and market share,
and our business, financial condition and operating results may suffer. Any disruption or delay in supply from
our silicon sources could significantly harm our business, financial condition and operating results.
Our strategy of investing in captive manufacturing sources could harm us if our competitors are able to
produce products at lower cost or if industry supply exceeds demand. We secure captive sources of NAND
through our significant investments in manufacturing capacity. We believe that by investing in captive sources of
NAND, we are able to develop and obtain supply at the lowest cost and access supply during periods of high
demand. Our significant investments in manufacturing capacity require us to obtain and guarantee capital
equipment leases and use available cash, which could be used for other corporate purposes. To the extent we
secure manufacturing capacity and supply that is in excess of demand, or our cost is not competitive with other
NAND suppliers, we may not achieve an adequate return on our significant investments and our revenues, gross
margins and related market share may be harmed. For example, we recorded charges of $121 million and
$63 million in fiscal year 2008 and the first quarter of fiscal year 2009, respectively, for adverse purchase
commitments associated with under-utilization of Flash Ventures’ capacity. We also invest in captive product
assembly and test manufacturing capacity. We are currently expanding our assembly and test facility in
Shanghai, China. To the extent our assembly and test manufacturing capacity exceeds demand, our gross margins
would be harmed.
We make significant investments in captive memory manufacturing and if we do not invest appropriately,
our operating results may be harmed. Our investment in captive manufacturing sources is affected by many
factors, including the timing, rate and type of investment desired by each partner in Flash Ventures, our
profitability, our estimation of market demand and our liquidity position. If we under-invest in captive memory
capacity, we may not have enough captive supply to meet demand or we may be unable to transition to the next
process node on a timely basis, which could result in reduced yields and supply, and increased costs compared to
our competitors. Conversely, if we invest in too much captive memory capacity, our supply could exceed demand
or we may operate manufacturing facilities at less than full capacity, either of which could result in write-downs
for excess inventory, lower of cost or market charges, lower average selling prices, charges associated with
under-utilized capacity or other consequences.
Planned growth in captive memory supply may be more or less than actual demand. Our captive memory
supply growth comes from investments in technology transitions and new capacity. These investment decisions
require significant planning and lead-time before an increase in supply can be realized. If our planned memory
supply growth is less than demand growth, we may have insufficient supply to meet actual demand, which may
lead to losses in market share and revenue growth. Conversely, if our supply exceeds demand, we may
experience significant decreases in our product prices, significant excess inventory, obsolete or lower of cost or
market inventory write-downs and impairment of our fab investments, all of which would harm our operating
results and financial position.
Our business depends significantly upon sales through retailers and distributors, and if our retailers and
distributors are not successful, we could experience reduced sales, substantial product returns or increased price
protection claims, any of which would negatively impact our business, financial condition and operating results.
A significant portion of our sales is made through retailers, either directly or through distributors. Sales through
these channels typically include rights to return unsold inventory and protection against price declines, as well as
participation in various cooperative marketing programs. As a result, we do not recognize revenue until after the
product has been sold through to the end user, in the case of sales to retailers, or to our distributors’ customers, in
the case of sales to distributors. Price protection against declines in our selling prices has the effect of reducing
our deferred revenues, and eventually our revenues. If our retailers and distributors are not successful, due to
weak consumer retail demand, competitive issues, decline in consumer confidence, or other factors, we could
experience reduced sales as well as substantial product returns or price protection claims, which would harm our
business, financial condition and operating results. Except in limited circumstances, we do not have exclusive
relationships with our retailers or distributors and, therefore, must rely on them to effectively sell our products
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