SanDisk 2013 Annual Report Download - page 127

wafers from Flash Ventures contain errors or defects, our overall supply could be harmed. These factors
could result in the rejection of our products, damage to our reputation, lost revenue, diverted development
resources, increased customer service and support costs, indemnification of our customers’ product recall
and other costs, warranty claims and litigation. Generally, our OEM customers have more stringent
requirements than other customers and our concentration of revenue from OEMs, especially OEMs who
purchase our enterprise and client SSD products, could result in increased expenditures for product
testing, or increase our service costs and potentially lead to increased warranty or indemnification claims.
Furthermore, the costs of errors or defects in our embedded products may be greater than those of stand-
alone, removable products due to the effect that such errors or defects may have on other components of
the device in which they are embedded. We record an allowance for warranty and similar costs in
connection with sales of our products, but actual warranty and similar costs may be significantly higher
than our recorded estimate and harm our operating results and financial condition.
Our new products have, from time-to-time, been introduced with design and production errors at a
rate higher than the error rate in our established products. We must estimate warranty and similar costs for
new products without historical information and actual costs may significantly exceed our recorded
estimates. Underestimation of our warranty and similar costs would harm our operating results and
financial condition.
Certain of our products contain encryption or security algorithms to protect third-party content and
user-generated data stored on our products. To the extent our products are hacked or the encryption
schemes are compromised or breached, this could harm our business by hurting our reputation, requiring
us to employ additional resources to fix the errors or defects and expose us to litigation and
indemnification claims. This could potentially impact future collaboration with content providers or lead to
product returns or claims against us due to actual or perceived vulnerabilities.
We are exposed to foreign currency exchange rate fluctuations that could harm our business, operating
results and financial condition. A significant portion of our business is conducted in currencies other than
the U.S. dollar, which exposes us to adverse changes in foreign currency exchange rates. An increase in the
value of the U.S. dollar could increase the real cost to our customers of our products in those markets
outside the U.S. where we sell in dollars, and a weakened U.S. dollar could increase local operating
expenses and the cost of raw materials to the extent purchased in foreign currencies. These exposures may
change over time as our business and business practices evolve, and they could harm our financial results
and cash flows.
Our most significant exposure is related to our purchases of NAND flash memory from Flash
Ventures, which are denominated in Japanese yen. Appreciation in the value of the Japanese yen relative
to the U.S. dollar would increase our cost of NAND flash wafers, negatively impacting our gross margin
and operating results. In addition, our investments in Flash Ventures are denominated in Japanese yen and
strengthening of the Japanese yen would increase the cost to us of future funding and increase the value of
our Japanese yen-denominated investments, increasing our exposure to asset impairments.
Macroeconomic weakness in the U.S. or other parts of the world could lead to strengthening of the
Japanese yen, which would harm our gross margin, operating results, and the cost of future Flash Venture
funding, and increase the risk of asset impairment. We also have foreign currency exposures related to
certain non-U.S. dollar-denominated revenue and operating expenses in Europe and Asia. Additionally,
we have exposures to emerging market currencies, which can be extremely volatile. We also have
significant monetary assets and liabilities that are denominated in non-functional currencies.
We enter into foreign exchange forward and cross currency swap contracts to reduce the impact of
foreign currency fluctuations on certain foreign currency assets and liabilities. In addition, from
time-to-time, we hedge certain anticipated foreign currency cash flows with foreign exchange forward and
option contracts, primarily for Japanese yen-denominated inventory purchases. We generally have not
29
Annual Report