SanDisk 2013 Annual Report Download - page 160

In the first quarter of fiscal year 2011, we made a $62 million prepayment for Flash Forward building-
related costs. As of December 29, 2013, approximately $5 million of this prepayment remains, which was
classified as other current assets.
Contractual Obligations and Off-Balance Sheet Arrangements
Our contractual obligations and off-balance sheet arrangements at December 29, 2013 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 12, ‘‘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 substantially all of our NAND flash wafers and incur R&D expenditures. 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 to partially hedge our future Japanese yen
requirements for NAND flash wafers and R&D expenses. 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 AOCI, and subsequently reclassified into cost of revenue
in the same period or periods in which the cost of revenue is recognized or into R&D expense as the R&D
expenses are incurred. 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 3,
‘‘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 substantially all of our flash memory wafers from Flash Ventures, our flash
memory costs, which represent the largest portion of our cost of revenue, are based upon wafer purchases
denominated in Japanese yen. However, our cost of revenue in any given quarter generally reflects wafer
purchases that were made in the previous quarter, and is 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 fiscal year 2013 and forward
contracts entered into for early 2014, changes in the Japanese yen to U.S. dollar exchange rate after
December 2013 are not expected to have a material impact on our cost of revenue in the first quarter of
fiscal year 2014. We expect the average rate of the Japanese yen to the U.S. dollar for the wafer portion of
our cost of revenue to be approximately 99 Japanese yen to the U.S. dollar for the first quarter of fiscal
year 2014, in comparison to a rate of approximately 97 Japanese yen to the U.S. dollar in our fourth
quarter of fiscal year 2013. Our wafer purchases are denominated in Japanese yen and generally comprise
50 percent or more of our cost of revenue. As of December 29, 2013, approximately one-third of our
expected Japanese yen denominated wafer purchases for fiscal year 2014 had been hedged at an average
rate of approximately 99 Japanese yen to the U.S. dollar. 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.’’
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