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| SNDK > SEC Filings for SNDK > Form 10-Q on 7-May-2009 | All Recent SEC Filings |
7-May-2009
Quarterly Report
Statements in this report, which are not historical facts, are forward-looking statements within the meaning of the federal securities laws. These statements may contain words such as "expects," "anticipates," "intends," "plans," "believes," "seeks," "estimates" or other wording indicating future results or expectations. Forward-looking statements are subject to significant risks and uncertainties. Our actual results may differ materially from the results discussed in these forward-looking statements. Factors that could cause our actual results to differ materially include, but are not limited to, those discussed under "Risk Factors" in Part II, Item 1A of this report, and elsewhere in this report. Our business, financial condition or results of operations could be materially adversely affected by any of these or other factors. We undertake no obligation to revise or update any forward-looking statements to reflect any event or circumstance that arises after the date of this report. References in this report to "SanDiskŪ," "we," "our," and "us" refer collectively to SanDisk Corporation, a Delaware corporation, and its subsidiaries.
Overview
We are the inventor of and worldwide leader in NAND-based flash storage cards. Flash storage technology allows data to be stored in a durable, compact format that retains the digital information even after the power has been switched off. Our mission is to provide simple, reliable and affordable storage at different capacities for consumer use in a wide variety of formats and devices. We sell SanDisk branded products for consumer electronics through broad global retail and original equipment manufacturer, or 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 flash venture relationships with Toshiba Corporation, or Toshiba, which provide us with leading-edge, low-cost memory wafers. Our card products are used in a wide range of consumer electronics devices such as mobile phones, digital cameras, gaming devices and laptop computers. We also provide high-speed and high-capacity storage solutions, known as solid-state drives, or SSDs, that can be used in lieu of hard disk drives in a variety of computing devices, including personal computers and enterprise servers. We also produce Universal Serial Bus, or USB, drives, and MP3 players as well as embedded flash storage products that are used in a variety of systems for the enterprise, industrial, military and other markets.
Our strategy is to be an industry-leading supplier of flash storage solutions
and to develop large scale markets for flash-based storage products. We maintain
our technology leadership by investing in advanced technologies and flash memory
fabrication capacity in order to produce leading-edge, low-cost flash memory for
use in end-products that we design and market. We are a one-stop-shop for our
retail and OEM customers, selling all major flash storage card formats for our
target markets in high volumes.
Our revenues are driven by the sale of our products and the licensing of our
intellectual property. We believe the market for flash storage is price elastic,
meaning that a decrease in the price per megabyte results in demand for higher
capacity products and the emergence of new applications for flash storage. We
continuously reduce the cost of NAND flash memory, which we believe over time
will enable new markets and expand existing markets and allow us to achieve
higher overall revenue. We seek to achieve these cost reductions through
technology improvements, primarily by increasing the amount of memory stored in
a given area of silicon.
On December 29, 2008, we adopted Financial Accounting Standards Board Staff Position, or FSP, APB 14-1, Accounting For Convertible Debt Instruments That May Be Settled in Cash Upon Conversion (Including Partial Cash Settlement). We have separately accounted for the liability and equity components of our 1% Senior Convertible Note due 2013 that may be settled in cash upon conversion (including partial cash settlement) in a manner that reflects our economic interest cost. In addition, we bifurcated the debt into debt and equity components and will accrete the debt discount that will result in the "economic interest cost" being reflected in our Condensed Consolidated Statements of Operations. We have retrospectively applied FSP APB 14-1 to all periods presented, from the issuance of the debt in May 2006, and have restated the Condensed Consolidated Financial Statements presented in this report.
Results of Operations.
Three months ended
March 29, % of March 30, % of
2009 Revenues 2008 Revenues
(In millions, except percentages)
Product revenues $ 588.1 89.2 % $ 724.1 85.2 %
License and royalty revenues 71.4 10.8 % 125.9 14.8 %
Total revenues 659.5 100.0 % 850.0 100.0 %
Cost of product revenues 657.5 99.7 % 576.6 67.8 %
Amortization of acquisition-related
intangible assets 3.1 0.5 % 14.6 1.7 %
Total cost of product revenues 660.6 100.2 % 591.2 69.5 %
Gross profit (loss) (1.1 ) (0.2 %) 258.8 30.5 %
Operating expenses
Research and development 86.9 13.2 % 111.4 13.1 %
Sales and marketing 37.9 5.7 % 80.2 9.5 %
General and administrative 38.3 5.8 % 57.8 6.8 %
Amortization of acquisition-related
intangible assets 0.3 0.1 % 4.5 0.5 %
Restructuring and other 0.8 0.1 % - -
Total operating expenses 164.2 24.9 % 253.9 29.9 %
Operating income (loss) (165.3 ) (25.1 %) 4.9 0.6 %
Other income (expense) (18.7 ) (2.8 %) 13.9 1.6 %
Income (loss) before provision for taxes (184.0 ) (27.9 %) 18.8 2.2 %
Provision for income taxes 24.0 3.6 % 7.8 0.9 %
Net income (loss) $ (208.0 ) (31.5 %) $ 11.0 1.3 %
Product Revenues.
Three months ended
March 29, March 30, Percent
2009 2008 Change
(In millions, except percentages)
Retail $ 346.6 $ 418.3 (17.1 %)
OEM 241.5 305.8 (21.0 %)
Product revenues $ 588.1 $ 724.1 (18.8 %)
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The decrease in our product revenues for the three months ended March 29, 2009 as compared to the three months ended March 30, 2008 resulted from a 69% reduction in average selling price per gigabyte, partially offset by a 166% increase in the number of gigabytes sold.
The decline in both retail and OEM product revenues for the three months ended March 29, 2009 versus the comparable period in fiscal year 2008 was primarily due to price declines not fully offset by higher unit sales. While units sold and average capacity per unit have increased from the prior year in both retail and OEM, significant price declines due to supply exceeding demand negatively impacted the first quarter of fiscal year 2009 revenues. We currently expect that our average selling price per gigabyte will be approximately stable or slightly higher in the second quarter of fiscal year 2009 as compared to the first quarter of fiscal year 2009.
Our ten largest customers represented approximately 44% of our total revenues in the three months ended March 29, 2009 compared to 50% in the three months ended March 30, 2008. No customer exceeded 10% of our total revenues in the three months ended March 29, 2009. In the three months ended March 30, 2008, revenue from Samsung Electronics Co. Ltd., or Samsung, which included both license and royalty revenues and product revenues, accounted for 13% of our total revenues.
Geographical Product Revenues.
Three months ended
March 29, % of Product March 30, % of Product Percent
2009 Revenues 2008 Revenues Change
(In millions, except percentages)
United States $ 214.0 36.4 % $ 253.1 35.0 % (15.5 %)
Japan 22.7 3.9 % 49.5 6.8 % (54.2 %)
Europe and Middle East 151.0 25.6 % 176.3 24.4 % (14.4 %)
Asia-Pacific 188.2 32.0 % 229.2 31.7 % (17.9 %)
Other foreign countries 12.2 2.1 % 16.0 2.1 % (22.9 %)
Product revenues $ 588.1 100.0 % $ 724.1 100.0 % (18.8 %)
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Product revenues declined in all regions for the three months ended March 29, 2009 versus the comparable period in fiscal year 2008 due to aggressive industry price declines. Unit sales increased in all regions except in Japan where we had a decline in both OEM gaming and retail unit sales.
License and Royalty Revenues.
Three months ended
March 29, March 30, Percent
2009 2008 Change
(In millions, except percentages)
License and royalty revenues $ 71.4 $ 125.9 (43.3 %)
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More than half of the decrease in our license and royalty revenues for the three months ended March 29, 2009 over the comparable period of fiscal year 2008 was due to lower flash memory revenue reported by our licensees. In addition, our first quarter of fiscal 2009 royalty revenues were reduced by a prior period adjustment identified by a licensee, which we are currently reviewing. The licensee believes they incorrectly computed certain royalties for periods prior to 2008, and this amount was offset against current payments.
Gross Profit (Loss) and Margin.
Three months ended
March 29, March 30, Percent
2009 2008 Change
(In millions, except percentages)
Product gross profit (loss) $ (72.5 ) $ 132.9 (154.6 %)
Product gross margin (as a percent of product revenues) (12.3 %) 18.4 %
Total gross margin (as a percent of total revenues) (0.2 %) 30.5 %
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Product gross margin for the three months ended March 29, 2009 was negative and lower than the comparable period of fiscal year 2008 due primarily to aggressive industry price declines exceeding cost declines, adverse effects of the fluctuation of the Japanese yen to the U.S. dollar and charges of $62.8 million for adverse purchase commitments associated with under-utilization of Flash Ventures capacity for the 90-day period in which we have non-cancelable orders. The first quarter of fiscal year 2009 product gross margin was favorably impacted by the release of inventory related reserves of $33.8 million for product sold during the period and adjustments to prior period Flash Ventures adverse purchase commitments.
Research and Development.
Three months ended
March 29, March 30, Percent
2009 2008 Change
(In millions, except percentages)
Research and development $ 86.9 $ 111.4 (22.0 %)
Percent of revenue 13.2 % 13.1 %
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Our research and development expense reduction for the three months ended March 29, 2009 versus the comparable period in fiscal year 2008 was due primarily to lower employee-related expenses of $8.1 million due to decreased headcount. In addition, we had a reduction of $12.9 million in other expenses primarily due to lower usage of third-party engineering services and engineering materials.
Sales and Marketing.
Three months ended
March 29, March 30, Percent
2009 2008 Change
(In millions, except percentages)
Sales and marketing $ 37.9 $ 80.2 (52.7 %)
Percent of revenue 5.7 % 9.5 %
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Our sales and marketing expense reduction for the three months ended March 29, 2009 versus the comparable period in fiscal year 2008 was primarily due to decreased branding and merchandising costs of $35.6 million and lower employee-related expenses of $5.2 million due to decreased headcount.
General and Administrative.
Three months ended
March 29, March 30, Percent
2009 2008 Change
(In millions, except percentages)
General and administrative $ 38.3 $ 57.8 (33.7 %)
Percent of revenue 5.8 % 6.8 %
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Our general and administrative expense reduction for the three months ended March 29, 2009 versus the comparable period in fiscal year 2008 was primarily related to lower legal and outside advisors costs of $11.4 million, lower bad debt expense of $3.6 million and lower employee-related costs of $3.5 million due to decreased headcount.
Amortization of Acquisition-Related Intangible Assets.
Three months ended
March 29, March 30, Percent
2009 2008 Change
(In millions, except percentages)
Amortization of acquisition-related intangible assets $ 0.3 $ 4.5 (93.3 %)
Percent of revenue 0.1 % 0.5 %
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Amortization of acquisition-related intangible assets was lower in the three months ended March 29, 2009 compared to the three months ended March 30, 2008, due to the impairment of certain Matrix Semiconductor, Inc. and msystems Ltd acquisition-related intangible assets in the fourth quarter of fiscal year 2008.
Restructuring and Other.
Three months ended
March 29, March 30, Percent
2009 2008 Change
(In millions, except percentages)
Restructuring and other $ 0.8 $ n/a -
Percent of revenue 0.1 % n/a
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In the first quarter of fiscal year 2009, we recorded $0.8 million, related to employee severance costs under our restructuring plans. See Note 9, "Restructuring Plans," of the Notes to Condensed Consolidated Financial Statements.
Other Income (Expense).
Three months ended
March 29, March 30, Percent
2009 2008 Change
(In millions, except percentages)
Interest income $ 19.4 $ 25.8 (24.8 %)
Interest expense (17.0 ) (16.2 ) 5.1 %
Income (loss) in equity investments (0.8 ) 0.7 (225.9 %)
Other income (expense) net (20.2 ) 3.6 (653.3 %)
Total other income (expense), net $ (18.6 ) $ 13.9 (234.6 %)
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The decrease in total Other Income (Expense) for the three months ended March 29, 2009 compared to the three months ended March 30, 2008 was primarily due to bank charges and fees of ($10.9) million related to the restructuring of the Flash Ventures master equipment leases, impairment of our equity investment in FlashVision Ltd. of ($7.9) million, and lower interest income due to reduced interest rates and lower cash and investment balances.
Provision for Income Taxes.
Three months ended
March 29, March 30, Percent
2009 2008 Change
(In millions, except percentages)
Provision for income taxes $ 24.0 $ 7.8 205.8 %
Effective tax rate (13.0 %) 41.7 %
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The provision for income taxes for the three months ended March 29, 2009
primarily consisted of taxes for our income generating foreign jurisdictions.
The change in our effective tax rate for the three months ended March 29, 2009
compared to the three months ended March 30, 2008 was primarily due to U.S.
losses and credits for which no tax benefit has been provided due to our
valuation allowance recorded in the fourth quarter of fiscal year 2008 on
certain deferred tax assets.
Unrecognized tax benefits increased $4.4 million during the three months ended March 29, 2009. Unrecognized tax benefits of $128.8 million at March 29, 2009 include approximately $106.2 million that would impact the effective tax rate in the future. In the first quarter of fiscal year 2009, we recognized interest and penalties of $1.4 million and $3.1 million, respectively, in income tax expense. We are currently under audit by various tax authorities but do not expect that the outcome of these examinations will have a material effect on our financial position, results of operations or liquidity.
Liquidity and Capital Resources.
Our cash flows were as follows:
Three months ended
March 29, March 30, Percent
2009 2008 Change
(In millions, except percentages)
Net cash provided by (used in) operating
activities $ (114.3 ) $ 218.6 (152.3 %)
Net cash provided by investing activities 238.0 176.4 34.9 %
Net cash provided by (used in) financing
activities 4.6 (2.6 ) (278.9 %)
Effect of changes in foreign currency exchange
rates on cash (0.3 ) (0.9 ) (74.2 %)
Net increase in cash and cash equivalents $ 128.0 $ 391.5 (67.3 %)
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Operating Activities. Cash provided by operating activities is generated by net income (loss) adjusted for certain non-cash items and changes in assets and liabilities. Cash used in operations was ($114.3) million for the first three months of fiscal year 2009 as compared to cash provided by operations of $218.6 million for the first three months of fiscal year 2008. The decline in cash provided by operations in the first three months of fiscal year 2009 compared to the first three months of fiscal year 2008 resulted primarily from a net loss of $208.0 million compared with net income of $11.0 million in the comparable prior year period, offset by non-cash charges. Cash provided from accounts receivable in the first quarter of fiscal year 2009 was impacted by the lower product revenue levels as compared with the prior year period. The decrease in inventory is related to planned reduced production and overall reduced capacity at Flash Partners and Flash Alliance and decreased other inventory purchases. Other assets benefited from a tax refund received in the first quarter of fiscal year 2009 related to carryback claims from the fiscal year 2008 net loss. The decrease in accounts payable trade and accounts payable from related parties is related to the overall reduction in inventory and lower operating expenses than in prior years. The decrease in other liabilities is a result of settlements in hedge contracts and the reduction in liabilities for Flash Ventures adverse purchase commitments for under utilized capacity.
Investing Activities. Cash provided by investing activities for the first three months of fiscal year 2009 was $238.0 million as compared to $176.4 million in the first three months of fiscal year 2008. In the first quarter of fiscal year 2009, we loaned $326.3 million to the Flash Ventures for equipment purchases and received $277.1 million on the collection of outstanding notes receivable from the Flash Ventures for the restructuring of a portion of our production capacity. In the first quarter of fiscal year 2008, we loaned $37 million to Flash Ventures for equipment purchases. In the first quarter of fiscal year 2009, our capital expenditures decreased from the first quarter of fiscal year 2008 primarily due to less expansion of manufacturing capacity.
Financing Activities. Net cash provided by financing activities for the first three months of fiscal year 2009 was $4.6 million as compared to cash used in financing activities of ($2.6) million in the first three months of fiscal year 2008 primarily due to the repayment of a $9.8 million outstanding line of credit in fiscal year 2008.
Liquid Assets. At March 29, 2009, we had cash, cash equivalents and short-term investments of $1.49 billion. We have $897.4 million of long-term investments which we believe are also liquid assets, but are classified as long-term investments due to the remaining maturity of the investment being greater than one year.
Short-Term Liquidity. As of March 29, 2009, our working capital balance was $1.40 billion. We expect our loans to and investments in Flash Ventures as well as our investments in property and equipment to be approximately $0.5 billion in fiscal year 2009. In addition, our 1% Convertible Notes due 2035 of $75.0 million may be redeemed in whole or in part by the holders thereof at a redemption price equal to 100% of the principal amount of the notes to be redeemed, plus accrued and unpaid interest on March 15, 2010.
Our short-term liquidity is impacted in part by our ability to maintain compliance with covenants in the outstanding Flash Ventures master lease agreements. The Flash Ventures master lease agreements contain customary covenants for Japanese lease facilities as well as an acceleration clause for certain events of default related to us as guarantor, including, among other things, our failure to maintain a minimum shareholder equity of at least $1.51 billion, and our failure to maintain a minimum corporate rating of BB- from Standard & Poors, or S&P, or Moody's Corporation, or a minimum corporate rating of BB+ from Rating & Investment Information, Inc., or R&I. As of March 29, 2009, Flash Ventures was in compliance with all of its master lease covenants. While our S&P credit rating was B, two levels below the required minimum corporate rating threshold from S&P, our R&I credit rating was BBB-, one level above the required minimum corporate rating threshold from R&I.
On February 4, 2009, R&I confirmed our credit rating at BBB- with a change in outlook from stable to negative. If R&I were to downgrade our credit rating below the minimum corporate rating threshold, Flash Ventures would become non-compliant with certain covenants under its master equipment lease agreements and would be required to negotiate a resolution to the non-compliance to avoid acceleration of the obligations under such agreements. Such resolution could include, among other things, supplementary security to be supplied by us, as guarantor, or increased interest rates or waiver fees, should the lessors decide they need additional collateral or financial consideration under the circumstances. If a resolution was unsuccessful, we could be required to pay a portion or the entire outstanding lease obligations covered by our guarantee under such Flash Ventures master lease agreements of up to $1.23 billion, based upon the exchange rate at March 29, 2009, which could negatively impact our short-term liquidity.
Long-Term Requirements. Depending on the demand for our products, we may decide to make additional investments, which could be substantial, in wafer fabrication foundry capacity and assembly and test manufacturing equipment to support our business in the future. We may also make equity investments in other companies or engage in merger or acquisition transactions. These activities may require us to raise additional financing, which could be difficult to obtain, and which if not obtained in satisfactory amounts could prevent us from funding Flash Ventures; increasing our wafer supply; developing or enhancing our products; taking advantage of future opportunities; engaging in investments in or acquisitions of companies; growing our business or responding to competitive . . .
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