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| SNDK > SEC Filings for SNDK > Form 10-K/A on 26-Feb-2009 | All Recent SEC Filings |
26-Feb-2009
Annual Report
Overview
Fiscal Years Ended
December 28, % of December 30, % of December 31, % of
2008 Revenue 2007 Revenue 2006 Revenue
(In thousands, except percentages)
Product revenues $ 2,843,243 84.8 % $ 3,446,125 88.4 % $ 2,926,472 89.8 %
License and royalty %
revenues 508,109 15.2 450,241 11.6 % 331,053 10.2 %
Total revenues 3,351,352 100.0 % 3,896,366 100.0 % 3,257,525 100.0 %
Cost of product revenues 3,288,265 98.1 % 2,693,647 69.1 % 2,018,052 62.0 %
Gross profit 63,087 1.9 % 1,202,719 30.9 % 1,239,473 38.0 %
Operating expenses
Research and development 429,949 12.8 % 418,066 10.7 % 306,866 9.4 %
Sales and marketing 328,079 9.8 % 294,594 7.6 % 203,406 6.3 %
General and administrative 204,765 6.1 % 181,509 4.7 % 159,835 4.9 %
Impairment of goodwill 845,453 25.2 % - - - -
Impairment of
acquisition-related
intangible assets 175,785 5.3 % - - - -
Amortization of
acquisition-related
intangible assets 17,069 0.5 % 25,308 0.6 % 17,432 0.5 %
Write-off of acquired
in-process technology - - - - 225,600 6.9 %
Restructuring and other 35,467 1.1 % 6,728 0.2 % - -
Total operating expenses 2,036,567 60.8 % 926,205 23.8 % 913,139 28.0 %
Operating income (loss) (1,973,480 ) (58.9 )% 276,514 7.1 % 326,334 10.0 %
Other income 70,446 2.1 % 121,902 3.1 % 104,374 3.2 %
Income (loss) before
provision for taxes (1,903,034 ) (56.8 )% 398,416 10.2 % 430,708 13.2 %
Provision for income taxes 153,742 4.6 % 174,848 4.5 % 230,193 7.1 %
Minority interest - - 5,211 0.1 % 1,619 -
Net income (loss) $ (2,056,776 ) (61.4 )% $ 218,357 5.6 % $ 198,896 6.1 %
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General
We are the inventor of and worldwide leader in NAND-based flash storage cards. Our mission is to provide simple, reliable and affordable storage for consumer use in portable devices. We sell SanDisk branded products for consumer electronics through broad global retail and OEM distribution channels.
We design, develop and manufacture products and solutions in a variety of form factors using our flash memory, controller and firmware technologies. We source the vast majority of our flash memory supply through our significant venture relationships with Toshiba which provide us with leading-edge, low-cost memory wafers. Our cards are used in a wide range of consumer electronics devices such as mobile phones, digital cameras, gaming devices and laptop computers. We also produce USB drives, MP3 players, SSDs, and embedded flash storage products.
Our results are primarily driven by worldwide demand for flash storage devices, which in turn depends on end-user demand for electronic products. We believe the market for flash storage is generally price elastic. Accordingly, we expect that as we reduce the price of our flash devices, consumers will demand an increasing number of gigabytes and/or units of memory and that over time, new markets will emerge. In order to profitably capitalize on price elasticity of demand in the market for flash storage products, we must reduce our cost per gigabyte at a rate similar to the change in selling price per gigabyte, and the average capacity of our products must grow enough to offset price declines. We seek to achieve these cost reductions through technology improvements, primarily by increasing the amount of memory stored in a given area of silicon.
We adopted Statement of Financial Accounting Standards No. 157, or SFAS 157, Fair Value Measurements, as of the beginning of fiscal year 2008. In February 2008, the Financial Accounting Standards Board, or FASB, issued FASB Staff Position No. FAS 157-2, Effective Date of FASB Statement No. 157, which provides a one year deferral of the effective date of SFAS 157 for non-financial assets and non-financial liabilities, except those that are recognized or disclosed in the financial statements at fair value at least annually. Therefore, we have only adopted the provisions of SFAS 157 with respect to our financial assets and liabilities. SFAS 157 defines fair value, establishes a framework for measuring fair value under generally accepted accounting principles and enhances disclosures about fair value measurements. Fair value is defined under SFAS 157 as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value under SFAS 157 must maximize the use of observable inputs and minimize the use of unobservable inputs. The adoption of this statement did not have a material impact on our consolidated results of operations and financial condition. See Note 3, "Investments and Fair Value Measurements," of the Notes to Consolidated Financial Statements of this Form 10-K included in Item 8 of this report.
We adopted Statement of Financial Accounting Standards No. 159, or SFAS 159, Establishing the Fair Value Option for Financial Assets and Liabilities, which permits entities to elect, at specified election dates, to measure eligible financial instruments at fair value. As of December 28, 2008, we did not elect the fair value option for any financial assets and liabilities that were not previously measured at fair value. See Note 3, "Investments and Fair Value Measurements," of the Notes to Consolidated Financial Statements of this Form 10-K included in Item 8 of this report.
The provision for income taxes for the year ended December 28, 2008, has been corrected to $153.7 million from $166.8 million as reported in our Form 8-K filed with the Securities and Exchange Commission on February 2, 2009. This correction has correspondingly reduced our net loss and net loss per share for fiscal year 2008 and adjusted net assets at December 28, 2008.
Critical Accounting Policies & Estimates
Our discussion and analysis of our financial condition and results of operations is based upon our Consolidated Financial Statements, which have been prepared in accordance with accounting principles generally accepted in the United States, or U.S. GAAP.
Use of Estimates. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent liabilities. On an ongoing basis, we evaluate our estimates, including, among others, those related to customer programs and incentives, product returns, bad debts, inventories and related reserves, investments, long-lived assets, income taxes, warranty obligations, restructuring, contingencies, share-based compensation, and litigation. We base our estimates on historical experience and on other assumptions that we believe are reasonable under the circumstances, the results of which form the basis for our judgments about the carrying values of assets and liabilities when those values are not readily apparent from other sources. Estimates have historically approximated actual results. However, future results will differ from these estimates under different assumptions and conditions.
Valuation of Long-Lived Assets, Intangible Assets and Goodwill. In accordance with Statement of Financial Accounting Standards No. 144, or SFAS 144, Accounting for the Impairment or Disposal of Long-Lived Assets, we perform tests for impairment of long-lived assets whenever events or circumstances suggest that other long-lived assets may not be recoverable. This analysis differs from our goodwill analysis in that an impairment is only deemed to have occurred if the sum of the forecasted undiscounted future cash flows related to the assets are less than the carrying value of the asset we are testing for impairment. If the forecasted cash flows are less than the carrying value, then we must write down the carrying value to its estimated fair value based primarily upon forecasted discounted cash flows. We recorded impairments of certain acquisition-related amortizable intangible assets of $176 million in fiscal year 2008 based primarily upon forecasted discounted cash flows. In addition, we recorded impairments of our investments in Flash Partners and Flash Alliance of $83 million in fiscal year 2008 based primarily upon forecasted discounted cash flows. These forecasted discounted cash flows include estimates and assumptions related to revenue growth rates and operating margins, risk-adjusted discount rates based on our weighted average cost of capital, future economic and market conditions and determination of appropriate market comparables. Our estimates of market segment growth and our market segment share and costs are based on historical data, various internal estimates and certain external sources, and are based on assumptions that are consistent with the plans and estimates we are using to manage the underlying business. Our business consists of both established and emerging technologies and our forecasts for emerging technologies are based upon internal estimates and external sources rather than historical information. If future forecasts are revised, they may indicate or require future impairment charges. We base our fair value estimates on assumptions we believe to be reasonable but that are unpredictable and inherently uncertain. Actual future results may differ from those estimates.
We perform our annual impairment analysis of goodwill on the first day of the fourth quarter of each year, or more often if there are indicators of impairment present. The provisions of Statement of Financial Accounting Standards No. 142, or SFAS 142, Goodwill and Other Intangible Assets, require that a two-step impairment test be performed on goodwill. In the first step, or Step 1, we compare our fair value to our carrying value. If the fair value exceeds the carrying value of the net assets, goodwill is considered not impaired and we are not required to perform further testing. If the carrying value of the net assets exceeds the fair value, then we must perform the second step, or Step 2, of the impairment test in order to determine the implied fair value of goodwill. If the carrying value of goodwill exceeds its implied fair value, then we would record an impairment loss equal to the difference. To determine the fair value used in Step 1, we use our market capitalization based upon our quoted closing stock price per NASDAQ, including an estimated control premium that an investor would be willing to pay for a controlling interest in us. The determination of a control premium requires the use of judgment and is based primarily on comparable industry and deal-size transactions, related synergies and other benefits. When we are required to perform a Step 2 analysis, determining the fair value of our net assets and our off-balance sheet intangibles used in Step 2 requires us to make judgments and involves the use of significant estimates and assumptions. We performed our annual impairment test on the first day of the fourth quarter of fiscal year 2008 and determined that the goodwill was not impaired. However, based on a combination of factors, including the economic environment, our current and forecasted operating results, NAND-industry pricing conditions and a sustained decline in our market capitalization, we concluded that there were sufficient indicators to require us to perform an interim goodwill impairment analysis during the fourth quarter of fiscal year 2008 and we recognized an impairment charge of $845.5 million.
Revenue Recognition, Sales Returns and Allowances and Sales Incentive Programs. We recognize revenues when the earnings process is complete, as evidenced by an agreement with the customer, transfer of title and acceptance, if applicable, fixed pricing and reasonable assurance of realization. Sales made to distributors and retailers are generally under agreements allowing price protection and/or right of return and, therefore, the sales and related costs of these transactions are deferred until the retailers or distributors sell the merchandise to their end customer, or the rights of return expire. At December 28, 2008 and December 30, 2007, deferred income from sales to distributors and retailers was $75.7 million and $167.3 million, respectively. Estimated sales returns are provided for as a reduction to product revenue and deferred revenue and were not material for any period presented in our Consolidated Financial Statements.
We record estimated reductions to revenue or to deferred revenue for customer and distributor incentive programs and offerings, including price protection, promotions, co-op advertising, and other volume-based incentives and expected returns. Additionally, we have incentive programs that require us to estimate, based on historical experience, the number of customers who will actually redeem the incentive. All sales incentive programs are recorded as an offset to product revenues or deferred revenues. In calculating the value of sales incentive programs, actual and estimated activity is used based upon reported weekly sell-through data from our customers. The timing and resolution of these claims could materially impact product revenues or deferred revenues. In addition, actual returns and rebates in any future period could differ from our estimates, which could impact the revenue we report.
Inventories and Inventory Valuation. Inventories are stated at the lower of cost (first-in, first-out) or market. Market value is based upon an estimated average selling price reduced by estimated costs of disposal. The determination of market value involves numerous judgments including estimating average selling prices based upon recent sales, industry trends, existing customer orders, current contract prices, industry analysis of supply and demand and seasonal factors. Should actual market conditions differ from our estimates, our future results of operations could be materially affected. The valuation of inventory also requires us to estimate obsolete or excess inventory. The determination of obsolete or excess inventory requires us to estimate the future demand for our products within specific time horizons, generally six to twelve months. To the extent our demand forecast for specific products is less than both our product on-hand and on noncancelable orders, we could be required to record additional inventory reserves, which would have a negative impact on our gross margin.
Accounting for Variable Interest Entities. We evaluate whether entities in which we have invested are variable interest entities within the definition of the FASB Interpretation No. 46R, or FIN 46R, Accounting for Variable Interest Entities. If those entities are variable interest entities, or VIEs, we then determine whether we are the primary beneficiary of that entity by reference to our contractual and business arrangements with respect to expected gains and losses. The assessment of the primary beneficiary includes an analysis of the forecast and contractual stipulations of the VIE. Determining whether we would consolidate or apply the equity method to a particular VIE requires review of the VIE's forecast, which involves analysis of company specific data, industry data, known trends and uncertainties, which are inherently subjective. Consolidating a VIE under FIN 46R rather than using the equity method can materially impact revenue, gross margin and operating income trends.
Deferred Tax Assets. We must make certain estimates in determining income tax expense for financial statement purposes. These estimates occur in the calculation of certain tax assets and liabilities, which arise from differences in the timing of recognition of revenue and expense for tax and financial statement purposes. In determining the need for and amount of our valuation allowance, we assess the likelihood that we will be able to recover our deferred tax assets using historical levels of income, estimates of future income and tax planning strategies. We have incurred cumulative losses in recent years and determined in the fourth quarter of fiscal year 2008, based on all available evidence, that there was substantial uncertainty as to the realizability of the deferred tax assets in future periods and accordingly we recorded a valuation allowance against a significant portion of our U.S. and certain foreign net deferred tax assets.
Our estimates for tax uncertainties require substantial judgment based upon the period of occurrence, complexity of the matter, available federal tax case law, interpretation of foreign laws and regulations and other estimates. There is no assurance that domestic or international tax authorities will agree with the tax positions we have taken which could materially impact future results.
Results of Operations
Product Revenues.
FY 2008 Percent Change FY 2007 Percent Change FY 2006
(in millions, except percentages)
Retail $ 1,812.9 (16 )% $ 2,162.5 9 % $ 1,975.5
OEM 1,030.3 (20 )% 1,283.6 35 % 951.0
Product revenues $ 2,843.2 (17 )% $ 3,446.1 18 % $ 2,926.5
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The decrease in our fiscal year 2008 product revenues compared to fiscal year 2007 reflected a 62% reduction in average selling price per gigabyte, partially offset by a 125% increase in the number of gigabytes sold, which reflected 15% growth in memory product units sold and 96% growth in average capacity. The decline in retail product revenues in fiscal year 2008 compared to fiscal year 2007 was due to aggressive price declines partially offset by a 116% increase in gigabytes sold. The decline in original equipment manufacturer, or OEM, product revenues in fiscal year 2008 compared to fiscal year 2007 was due to aggressive price declines, partially offset by a 135% increase in gigabytes sold, and the discontinuation of TwinSys Data Storage Limited Partnership, or TwinSys, operations on March 31, 2007, which contributed $53 million of product revenues in the first quarter of fiscal year 2007 prior to ceasing operations. We believe the unit growth of 15% in fiscal year 2008 was below the 75% unit growth in fiscal year 2007 due primarily to deteriorating worldwide economic conditions.
The increase in our fiscal year 2007 product revenues was comprised of a 190% increase in the number of gigabytes sold, partially offset by a 60% reduction in average selling price per gigabyte. Our unit sales increased 75% compared to fiscal year 2006 with the strongest unit growth coming from cards for mobile phones. OEM revenue particularly benefited from higher sales of mobile cards and embedded products to mobile handset vendors. Retail revenue growth benefited from the growing market for cards for mobile phones as well as increased sales of USB flash drives.
Geographical Product Revenues.
FY 2008 FY 2007 FY 2006
Percent Percent Percent
Revenue of Total Revenue of Total Revenue of Total
(in millions, except percentages)
United States $ 1,006.7 35 % $ 1,193.6 35 % $ 1,259.8 43 %
Asia-Pacific 834.8 29 % 944.7 27 % 649.5 22 %
Europe, Middle East
and Africa 752.6 27 % 889.7 26 % 728.4 25 %
Japan 178.3 6 % 283.8 8 % 194.0 7 %
Other foreign
countries 70.8 3 % 134.3 4 % 94.8 3 %
Product revenues $ 2,843.2 100 % $ 3,446.1 100 % $ 2,926.5 100 %
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Product revenues in fiscal year 2008 compared to fiscal year 2007 decreased in all geographical regions due to aggressive industry price declines partially offset by unit sales growth in all regions except Japan. Revenue and unit sales in Japan declined on a year over year basis due to lower sales of OEM USB drives and cards, and the discontinuation of TwinSys operations on March 31, 2007, which contributed $53 million of product revenues in the first quarter of fiscal year 2007 prior to ceasing operations.
In fiscal year 2007, revenue growth was strong in both APAC and EMEA primarily as a result of increased sales to OEM mobile handset vendors and the growth of mobile card and USB sales in international retail channels. Japan revenue increased from fiscal year 2006 to fiscal year 2007 primarily as a result of product revenue from our msystems acquisition in November 2006. Unit sales in the U.S. increased 41% over fiscal year 2006; however total revenues in the U.S. were lower by 2% due primarily to aggressive price reductions in fiscal year 2007.
License and Royalty Revenues.
FY 2008 Percent Change FY 2007 Percent Change FY 2006
(in millions, except percentages)
License and royalty revenues $ 508.1 13 % $ 450.2 36 % $ 331.1
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The increase in our fiscal year 2008 license and royalty revenues was primarily due to the addition of new licensees.
The increase in our fiscal year 2007 license and royalty revenues was primarily due to new license agreements as well as increased royalty-bearing sales by our existing licensees.
Gross Margins.
Percent
FY 2008 Change FY 2007 Percent Change FY 2006
(in millions, except percentages)
Product gross profit (loss) $ (445.0 ) (159 )% $ 752.5 (17 )% $ 908.4
Product gross margins (as a
percent of product revenue) (15.7 )% 21.8 % 31.0 %
Total gross margins (as a
percent of total revenue) 1.9 % 30.9 % 38.0 %
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Product gross margins in fiscal year 2008 decreased 37.5 percentage points compared to fiscal year 2007 primarily due to aggressive industry price declines resulting in the sale of products at negative gross margins and related charges. The related charges in fiscal year 2008 included:
- Inventory reserves primarily to reduce the carrying value to the lower-of-cost-or-market for both inventory on-hand and in the channel of $394 million.
- Charges of $121 million for adverse purchase commitments associated with under-utilization of Flash Ventures capacity for the 90-day period in which we have non-cancellable orders.
- Impairment in our investments in Flash Partners and Flash Alliance of $83 million.
Amortization expense of acquisition-related intangible assets is expected to decline in fiscal year 2009 primarily due to impairments recorded in fiscal year 2008.
In fiscal years 2008, 2007 and 2006, we sold $27 million, $13 million and $14 million, respectively, of inventory that had been fully written-off in previous periods.
Product gross margins in fiscal year 2007 decreased 9.2 percentage points compared to fiscal year 2006 due to excess industry supply which led to price per megabyte declining faster than cost per megabyte and also led to lower-of-cost-or-market inventory charges. Gross margin was also negatively impacted by charges for excess inventory of certain products and Flash Alliance venture costs, partially offset by insurance proceeds related to claims on a fab power outage that occurred in the first quarter of fiscal year 2006. In addition, cost of product increased due to amortization of acquisition-related intangible assets of $65 million, which accounted for approximately 1.4 percentage points.
Research and Development.
FY 2008 Percent Change FY 2007 Percent Change FY 2006
(in millions, except percentages)
Research and development $ 429.9 3 % $ 418.1 36 % $ 306.9
Percent of revenue 12.8 % 10.7 % 9.4 %
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Our fiscal year 2008 research and development expense growth was primarily due to an increase in payroll, payroll-related expenses and headcount-related expenses of approximately $21 million, an increase in consulting and material and equipment costs of $6 million, partially offset by lower share-based compensation expense of ($10) million and lower Flash Venture related costs of ($7) million. The growth in fiscal year 2008 research and development expense reflects parallel investment in NAND X2, X3 and X4 storage technologies, and 3D Read/Write memory architecture technology.
Our fiscal year 2007 research and development expense growth was primarily due to an increase in payroll and payroll-related expenses of $43 million associated with headcount growth and our acquisition of msystems, higher consultant and outside service costs of $17 million, higher non-recurring engineering and material costs of $11 million and share-based compensation expense of $8 million . . .
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