SanDisk 2014 Annual Report Download - page 134

primarily intended to provide space to convert Flash Ventures’ current 2D NAND capacity to 3D NAND,
with expected readiness for production in 2016.
The cost of the wafers we purchase from Flash Ventures is recorded in inventory and ultimately cost
of revenue. Entities within Flash Ventures are variable interest entities; however, we are not the primary
beneficiary of these ventures because we do not have a controlling financial interest in each venture.
Accordingly, we account for our investments under the equity method and do not consolidate.
For semiconductor manufacturing equipment that is leased by Flash Ventures, we and Toshiba jointly
guarantee, on an unsecured and several basis, 50% of the outstanding Flash Ventures’ lease obligations
under original master lease agreements entered into by Flash Ventures. These master lease obligations are
denominated in Japanese yen and are noncancelable. Our total master lease obligation guarantees as of
December 28, 2014 were $551 million based upon the exchange rate at December 28, 2014.
Contractual Obligations and Off-Balance Sheet Arrangements
Our contractual obligations and off-balance sheet arrangements at December 28, 2014 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 14, ‘‘Commitments, Contingencies and Guarantees,’’ in
the Notes to Consolidated Financial Statements of this Form 10-K included in Item 8, ‘‘Financial
Statement and Supplementary Data’’ 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. Due to our current construction of an assembly and test factory in Malaysia, we
expect increasing costs denominated in the Malaysian ringgit beginning in the second half of fiscal year
2015. We do not enter into derivatives for speculative or trading purposes. We generally use foreign
currency forward contracts to mitigate transaction gains and losses generated by certain monetary assets,
liabilities and net investments 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 4, ‘‘Derivatives and
Hedging Activities,’’ in the Notes to Consolidated Financial Statements of this Form 10-K included in
Item 8, ‘‘Financial Statement and Supplementary Data’’ 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 2014 and related
forward contracts entered into for settlement in early 2015, changes in the Japanese yen to U.S. dollar
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