SanDisk 2012 Annual Report Download - page 159

This is a TAB type table. Insert
conts here. Annual Report
Contractual Obligations and Off-Balance Sheet Arrangements
Our contractual obligations and off-balance sheet arrangements at December 30, 2012 and the effect those
contractual obligations are expected to have on our liquidity and cash flow over the next five years are presented
in textual and tabular format in Note 13, “Commitments, Contingencies and Guarantees,” in the Notes to
Consolidated Financial Statements of this Form 10-K included in Item 8 of this report.
Impact of Currency Exchange Rates
Exchange rate fluctuations could have a material adverse effect on our business, financial condition and
results of operations. Our most significant foreign currency exposure is to the Japanese yen in which we purchase
the vast majority of our NAND flash wafers. In addition, we also have significant costs denominated in the
Chinese renminbi and the Israeli new shekel, and we have revenue denominated in the European euro, the British
pound, the Japanese yen, the Chinese renminbi and the Canadian dollar. We do not enter into derivatives for
speculative or trading purposes. We use foreign currency forward and cross currency swap contracts to mitigate
transaction gains and losses generated by certain monetary assets and liabilities denominated in currencies other
than the U.S. dollar. From time-to-time, we use foreign currency forward contracts and options to partially hedge
our future Japanese yen costs for NAND flash wafers. Our derivative instruments are recorded at fair value in
assets or liabilities with final gains or losses recorded in other income (expense) or as a component of
accumulated other comprehensive income, or OCI, and subsequently reclassified into cost of product revenues in
the same period or periods in which the cost of product revenues is recognized. These foreign currency exchange
exposures may change over time as our business and business practices evolve, and they could harm our financial
results and cash flows. See Note 4, “Derivatives and Hedging Activities,” in the Notes to Consolidated Financial
Statements of this Form 10-K included in Item 8 of this report.
Because we purchase the vast majority of our flash memory wafers from Flash Ventures, our flash memory
costs, which represent the largest portion of our cost of product revenues, are based upon wafer purchases
denominated in Japanese yen. However, our cost of product revenues in any given quarter generally reflect wafer
purchases that were made in the previous quarter, and are impacted by hedging decisions we may make from
time to time, including entering into forward contracts or other instruments to hedge our future Japanese yen
purchase rate. Based on wafer purchases made in the fourth quarter of 2012 and forward contracts entered into
for early 2013, changes in the Japanese yen to U.S. dollar exchange rate after December 2012 are not expected to
have a material impact on our cost of product revenues in the first half of fiscal year 2013. We expect the average
rate of the Japanese yen to the U.S. dollar for the wafer purchases portion of our cost of product revenues to be
approximately 81 for the first quarter of fiscal 2013 and approximately 86 for the second quarter of fiscal 2013.
See Item 7A, “Quantitative and Qualitative Disclosure About Market Risk – Foreign Currency Risk” for more
information about our foreign currency forward and cross currency swap contracts.
For a discussion of foreign operating risks and foreign currency risks, see Item 1A, “Risk Factors.”
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to financial market risks, including changes in interest rates and foreign currency exchange
rates.
Interest Rate Risk. Our exposure to market risk for changes in interest rates relates primarily to our
investment portfolio. The primary objective of our investment activities is to preserve principal while
maximizing yields without significantly increasing risk. As of December 30, 2012, a hypothetical 50 basis point
increase in interest rates would result in an approximate $30 million decline (less than 0.61%) of the fair value of
our available-for-sale debt securities.
Foreign Currency Risk. The majority of our revenues are transacted in the U.S. dollar, with some revenues
transacted in the European euro, the British pound, the Japanese yen, the Chinese renminbi and the Canadian
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