SanDisk 2012 Annual Report Download - page 127

This is a TAB type table. Insert
conts here. Annual Report
the timeline that we require. If we are unable to source certain components or materials cost effectively, or at all,
our revenue and margins may be harmed.
Our financial performance depends significantly on worldwide economic conditions and the related impact on
consumer and enterprise spending, which have deteriorated in many countries and regions, and may not recover in
the foreseeable future. Demand for our products is harmed by negative macroeconomic factors affecting consumer
and enterprise spending. Continuing high unemployment rates, low levels of consumer liquidity, risk of default on
sovereign debt and volatility in credit and equity markets have weakened consumer confidence and decreased
consumer and enterprise spending in many regions around the world. These and other economic factors may reduce
demand for our products and harm our business, financial condition and operating results.
Under certain conditions, the Flash Ventures’ master equipment lease obligations could be accelerated, which
would harm our business, operating results, cash flows and liquidity. Flash Ventures’ master lease agreements
contain customary covenants for Japanese lease facilities. In addition to containing customary events of default
related to Flash Ventures that could result in an acceleration of Flash Ventures’ obligations, some of the master
lease agreements contain an acceleration clause for certain events of default related to us as guarantor, including,
among other things, our failure to maintain a minimum stockholders’ equity of at least $1.51 billion, or our failure
to maintain a minimum corporate rating of either BB—from S&P or Moody’s Corporation, or Moody’s, or a
minimum corporate rating of BB+ from Rating & Investment Information, Inc., or R&I. As of December 30, 2012,
Flash Ventures was in compliance with all of its master lease covenants. As of December 30, 2012, our R&I credit
rating was BBB, two notches above the required minimum corporate rating threshold for R&I; and our S&P credit
rating was BB, one notch above the required minimum corporate rating threshold for S&P.
If our stockholders’ equity were to fall below $1.51 billion or both S&P and R&I were to downgrade our
credit rating below the minimum corporate rating threshold, Flash Ventures would become non-compliant with
certain covenants under its master equipment lease agreements and would be required to negotiate a resolution to
the non-compliance to avoid acceleration of the obligations under such agreements. Such resolution could
include, among other things, supplementary security to be supplied by us, as guarantor, or increased interest rates
or waiver fees, should the lessors decide they need additional collateral or financial consideration. If an event of
default occurs and if we fail to reach a resolution, we may be required to pay a portion or the entire outstanding
lease obligations up to approximately $926 million, based upon the exchange rate at December 30, 2012, covered
by our guarantee under Flash Ventures’ master lease agreements, which would significantly reduce our cash
position and may force us to seek additional financing, which may not be available.
We depend on our captive assembly and test manufacturing facility in China and our business could be
harmed if this facility does not perform as planned. Our reliance on our captive assembly and test manufacturing
facility near Shanghai, China has increased significantly and we now utilize this factory to satisfy a majority of our
assembly and test requirements, to produce products with leading-edge technologies such as multi-stack die
packages and to provide order fulfillment. In addition, our Shanghai, China facility is responsible for packaging and
shipping our retail products within Asia and Europe. Any delays in adding new equipment capacity, interruptions in
production or the ability to ship product, or issues with manufacturing yields at our captive facility could harm our
operating results and financial condition. Furthermore, if we were to experience labor unrest, or strikes, or if wages
were to significantly increase, our ability to produce and ship products could be impaired and we could experience
higher labor costs, which could harm our operating results, financial condition and liquidity.
We rely on our suppliers, some of which are the sole source of supply for our non-memory components, and
capacity limitations of these suppliers expose our supply chain to unanticipated disruptions or potential additional
costs. We do not have long-term supply agreements with many of our suppliers, certain of which are sole sources of
supply for our non-memory components. From time-to-time, certain materials may become difficult or more
expensive to obtain, including due to capacity constraints of these suppliers, which could impact our ability to meet
demand and could harm our profitability. 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 in a timely manner, on competitive terms, or at all.
21