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SanDisk 10-Q 2009 UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM
10-Q
For the
quarterly period endedMarch 29,
2009
OR
For the
transition period from ________________ to
________________ Commission
file number: 000-26734
 SANDISK CORPORATION (Exact
name of registrant as specified in its charter)
Registrant’s
telephone number, including area code
(408)
801-1000
Indicate
by check mark whether the registrant: (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding
12 months (or for such shorter period that the registrant was required to submit
and post such files).
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company. See the definitions of “large accelerated filer,”
“accelerated filer” and “smaller reporting company” in Rule 12b-2 of the
Exchange Act.
(Do
not check if a smaller reporting company)
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
Number of
shares outstanding of the issuer’s common stock $0.001 par value, as of
March 29, 2009: 226,855,067.
Index
PART
I. FINANCIAL INFORMATION
CONDENSED
CONSOLIDATED BALANCE SHEETS
(Unaudited)
_________________
The accompanying notes are an
integral part of these condensed consolidated financial
statements. SANDISK
CORPORATION
(Unaudited)
_________________
The accompanying notes are an
integral part of these condensed consolidated financial
statements. CONDENSED
CONSOLIDATED>
STATEMENT OF EQUITY
(Unaudited)
_________________
The
accompanying notes are an integral part of these condensed consolidated
financial statements.
SANDISK
CORPORATION
(Unaudited)
_________________
The accompanying notes are an
integral part of these condensed consolidated financial
statements. (Unaudited)
Organization
These
interim Condensed Consolidated Financial Statements are unaudited but reflect,
in the opinion of management, all adjustments, consisting of normal recurring
adjustments and accruals, necessary to present fairly the financial position of
SanDisk Corporation and its subsidiaries (the “Company”) as of March 29,
2009, the Condensed Consolidated Statements of Operations and the Condensed
Consolidated Statements of Cash Flows for the three months ended March 29,
2009 and March 30, 2008, and the Condensed Consolidated Statement of Equity
for the three months ended March 29, 2009. Certain information
and footnote disclosures normally included in financial statements prepared in
accordance with U.S. generally accepted accounting principles (“GAAP”) have been
omitted in accordance with the rules and regulations of the Securities and
Exchange Commission (“SEC”). These Condensed Consolidated Financial
Statements should be read in conjunction with the audited consolidated financial
statements and accompanying notes included in the Company’s most recent Annual
Report on Form 10-K/A. Certain prior period amounts have been
reclassified to conform to the current period presentation. The
results of operations for the three months ended March 29, 2009 are not
necessarily indicative of the results to be expected for the entire fiscal
year.
The
Company’s fiscal year ends on the Sunday closest to December 31, and its
fiscal quarters end on the Sunday closest to March 31, June 30, and
September 30, respectively. The first quarter of fiscal years
2009 and 2008 ended on March 29, 2009 and March 30, 2008,
respectively. Fiscal year 2009 ends on January 3, 2010 and
fiscal year 2008 ended on December 28, 2008.
SFAS 160. The
Company adopted Statement of Financial Accounting Standards No. 160
(“SFAS 160”), Noncontrolling Interests in
Consolidated Financial Statements, an amendment of ARB
No. 51. As a result of the adoption of SFAS 160, the
Company has reclassified for all periods presented non-controlling interests,
formerly called a minority interest, to a component of equity in the Condensed
Consolidated Balance Sheets and the Condensed Consolidated Statement of
Equity. SFAS 160 applies prospectively, except for presentation
and disclosure requirements, which are applied retrospectively.
FSP
APB 14-1. The Company adopted Financial Accounting
Standards Board (“FASB”) Staff Position (“FSP”) No. APB 14-1 (“FSP
APB 14-1”), Accounting
for Convertible Debt Instruments That May Be Settled in Cash Upon Conversion
(Including Partial Cash Settlement). FSP APB 14-1 is
effective for the Company’s $1.15 billion aggregate principal amount of 1%
Senior Convertible Notes due 2013 (the “1% Notes due 2013”) and requires
retrospective application for all periods presented. FSP APB 14-1
requires the issuer of convertible debt instruments with cash settlement
features to separately account for the liability and equity components of the
instrument.
As a
result of the adoption of FSP APB 14-1, the Company has separately
accounted for the liability and equity components of its 1% Notes due
2013. The Company calculated the value of the conversion component of
the debt and recorded this value as a component of equity and a corresponding
debt discount. The debt discount, which is a reduction to the
carrying value of the debt, will be amortized as additional non-cash interest
expense over the term of the original note. The retrospective
application of this pronouncement affects years 2006 through
2013. Income taxes have been recorded on the foregoing adjustments to
the extent tax benefits were available. See Note 2, “Financing
Arrangements.”
The
following table reflects the results of the adoption of FSP APB 14-1 in the
Company’s Condensed Consolidated Statement of Operations for the three months
ended March 30, 2008 (in thousands, except for per share amounts):
The
cumulative effect of the retrospective change in accounting principle of
$23.9 million was applied to the opening balance of accumulated deficit at
December 29, 2008.
Recent
Accounting Pronouncements
In April
2009, the FASB issued the following three FASB Staff Positions (“FSP”) intended
to provide additional application guidance and enhance disclosures regarding
fair value measurements and impairments of securities.
The
following table reflects the carrying value of the Company’s convertible debt as
of March 29, 2009 and December 28, 2008 (in millions):
As
discussed in Note 1, “Basis of Presentation — FSP APB 14-1,” the Company
separately accounts for the liability and equity components of the 1% Notes due
2013. The principal amount of the liability component
($753.5 million as of the date of issuance) was recognized at the present
value of its cash flows using a discount rate of 7.4%, the Company’s borrowing
rate at the date of the issuance for a similar debt instrument without the
conversion feature. The carrying value of the equity component was
$241.9 million as of March 29, 2009 and December 28, 2008.
The
following table presents the amount of interest cost recognized for the periods
relating to both the contractual interest coupon and amortization of the
discount on the liability component (in millions):
The
remaining interest discount (equity component) of $257.7 million as of
March 29, 2009 will be amortized over the remaining life of the 1% Notes due
2013 which is approximately 4.1 years.
Concurrent
with the issuance of the 1% Notes due 2013, the Company sold warrants to acquire
shares of its common stock at an exercise price of $95.03 per
share. As of March 29, 2009, the warrants had an expected life
of approximately 4.4 years and expire in August 2013. At
expiration, the Company may, at its option, elect to settle the warrants on a
net share basis. As of March 29, 2009, the warrants had not been
exercised and remain outstanding. In addition, counterparties agreed
to sell to the Company up to approximately 14.0 million shares of its
common stock, which is the number of shares initially issuable upon conversion
of the 1% Notes due 2013 in full, at a conversion price of $82.36 per
share. The convertible bond hedge transaction will be settled in net
shares and will terminate upon the earlier of the maturity date of the 1% Notes
due 2013 or the first day that none of the 1% Notes due 2013 remain outstanding
due to conversion or otherwise. Settlement of the convertible bond
hedge in net shares on the expiration date would result in the Company receiving
net shares equivalent to the number of shares issuable by it upon conversion of
the 1% Notes due 2013. As of March 29, 2009, the Company had not
purchased any shares under this convertible bond hedge agreement.
Holders
of the notes have the right to require the Company to purchase all or a portion
of their notes on March 15, 2010, March 15, 2015, March 15,
2020, March 15, 2025 and March 15, 2030. The purchase price
payable will be equal to 100% of the principal amount of the notes to be
purchased, plus accrued and unpaid interest, if any, to but excluding the
purchase date. Due to the short-term nature of the conversion rights,
the Company has reclassified the entire value of the 1% Notes due 2035 to
Convertible Short-term Debt in the Condensed Consolidated Balance Sheet as of
March 29, 2009.
Fair Value
Hierarchy. >The Statement of Financial Accounting Standards No. 157
(“SFAS 157”), Fair Value
Measurements, establishes a fair value hierarchy that prioritizes the
inputs to valuation techniques used to measure fair value. The
hierarchy gives the highest priority to unadjusted quoted prices in active
markets for identical assets or liabilities (Level 1 measurements) and the
lowest priority to unobservable inputs (Level 3 measurements). A
financial instrument’s level within the fair value hierarchy is based on the
lowest level of any input that is significant to the fair value
measurement.
The
Company’s financial assets are measured at fair value on a recurring
basis. Instruments that are classified within Level 1 of the fair
value hierarchy generally include most money market securities, U.S. agency
securities and equity investments. Instruments that are classified
within Level 2 of the fair value hierarchy generally include U.S. agency
securities, commercial paper, U.S. corporate notes and bonds, and municipal
obligations.
Financial
assets and liabilities measured at fair value under SFAS 157 on a recurring
basis as of March 29, 2009 were as follows (in thousands):
Financial
assets and liabilities measured at fair value under SFAS 157 on a recurring
basis as December 28, 2008 were as follows (in thousands):
On
December 29, 2008, the Company adopted FSP SFAS 157-2, Effective Date of FASB Statement
No. 157, which allows companies to delay the application of
SFAS 157 until fiscal years beginning after November 15, 2008, to certain
fair value measurements, primarily non-financial assets and
liabilities. The Company has reviewed its non-financial assets and
liabilities and has concluded that there were no non-financial assets or
liabilities which qualified under the provisions of FSP SFAS 157-2 as of
March 29, 2009. Assets
and liabilities measured at fair value under SFAS 157 on a recurring basis
as of March 29, 2009,
were presented on the Company’s Condensed Consolidated Balance Sheet as follows
(in thousands):
As of
March 29, 2009, the Company did not elect the fair value option under
Statement of Financial Accounting Standards No. 159 (“SFAS 159”),
Establishing the Fair Value
Option for Financial Assets and Liabilities, for any financial assets and
liabilities that were not required to be measured at fair value.
Available-for-Sale
Investments. >Available-for-sale investments as of
March 29, 2009 and December 28, 2008 were as follows (in
thousands):
Securities
that have been in an unrealized loss position, the fair value and gross
unrealized losses on the available-for-sale investments aggregated by type of
investment instrument, and the length of time that individual securities have
been in a continuous unrealized loss position as of March 29, 2009 are
summarized in the following table (in thousands). Available-for-sale
securities that were in an unrealized gain position have been excluded from the
table and all unrealized losses have been in a continuous unrealized loss
position for less than 12 months.
The gross
unrealized loss related to publicly traded equity investments were due to
changes in market prices. The Company has cash flow hedges designated
to substantially mitigate risk from these equity investments as of
March 29, 2009, as discussed in Note 4, “Derivatives and Hedging
Activities.” The gross unrealized loss related to U.S. agency
securities, U.S. corporate and municipal notes and bonds were primarily due to
changes in interest rates. Gross unrealized losses on all
available-for-sale fixed income securities at March 29, 2009 are considered
temporary in nature. Factors considered in determining whether a loss
is temporary include the length of time and extent to which fair value has been
less than the cost basis, the financial condition and near-term prospects of the
investee, and the Company’s intent and ability to hold an investment for a
period of time sufficient to allow for any anticipated recovery in market
value.
Gross
realized gains and losses on sales of available-for-sale securities for the
fiscal quarter ended March 29, 2009 totaled $5.8 million and
($0.6) million, respectively.
Fixed
income securities by contractual maturity as of March 29, 2009 are shown
below (in thousands). Actual maturities may differ from contractual
maturities because issuers of the securities may have the right to prepay
obligations.
The
Company uses derivative instruments primarily to manage exposures to foreign
currency and equity security price risks. The Company’s primary
objective in holding derivatives is to reduce the volatility of earnings and
cash flows associated with changes in foreign currency and equity security
prices. The program is not designated for trading or speculative
purposes. The Company’s derivatives expose the Company to credit risk
to the extent that the counterparties may be unable to meet the terms of the
agreement. The Company seeks to mitigate such risk by limiting its
counterparties to major financial institutions and by spreading the risk across
several major financial institutions. In addition, the potential risk
of loss with any one counterparty resulting from this type of credit risk is
monitored on an ongoing basis.
In
accordance with Statement of Financial Accounting Standards No. 133
(“SFAS 133”), Accounting
for Derivative Instruments and Hedging Activities, and Statement of
Accounting Standards No. 161 (“SFAS 161”), Disclosures about Derivative
Instruments and Hedging Activities, the Company recognizes derivative
instruments as either assets or liabilities on the balance sheet at fair value
and provides qualitative disclosures about objectives and strategies for using
derivatives, quantitative disclosures about fair value amounts of and gains and
losses on derivative instruments, and disclosures about credit-risk-related
contingent features in derivative agreements. Changes in fair value
(i.e., gains or losses)
of the derivatives are recorded as Cost of Product Revenues or Other Income
(Expense), or as accumulated Other Comprehensive Income (“OCI”).
The
Company has an outstanding cash flow hedge designated to mitigate equity risk
associated with certain available-for-sale investments in equity
securities. The gain or loss on the cash flow hedge is reported as a
component of accumulated OCI and will be reclassified into Other Income
(Expense) in the same period that the equity securities are sold. The
securities had a fair value of $43.6 million and $35.2 million as of
March 29, 2009 and December 28, 2008, respectively. The
cash flow hedge designated to mitigate equity risk of these securities had a
fair value of $22.2 million and $32.0 million as of March 29,
2009 and December 28, 2008, respectively.
For the
three months ended March 29, 2009, non-designated foreign currency forward
contracts resulted in a gain of $100.1 million including forward-point
income. For the three months ended March 29, 2009, the
revaluation of the foreign currency exposures hedged by these forward contracts
resulted in a loss of $100.2 million. All of the above noted
gains and losses are included in Interest (Expense) and Other Income (Expense),
net, in the Company’s Condensed Consolidated Statements of
Operations. The
amounts in the tables below include fair value adjustments related to the
Company’s own credit risk and counterparty credit risk.
Fair Value of
Derivative Contracts. >Fair value of derivative contracts under
SFAS 133 were as follows (in thousands):
Foreign Exchange
Contracts Designated as Cash Flow Hedges. >The effective
portion of designated cash flow derivative contracts under SFAS 133 on the
results of operations were as follows (in thousands):
Foreign
exchange contracts designated as cash flow hedges relate primarily to wafer
purchases and the associated gains (losses) are expected to be recorded in Cost
of Product Revenues when reclassified out of accumulated OCI. Gains
(losses) from the equity market risk contract are expected to be recorded in
Other Income (Expense) when reclassified out of accumulated OCI.
The
Company expects to realize the accumulated OCI balance related to foreign
exchange contracts within the next twelve months and realize the accumulated OCI
balance related to the equity market risk contract in fiscal year
2011.
The
ineffective portion and amount excluded from effectiveness testing on designated
cash flow derivative contracts under SFAS 133 on the Company’s results of
operations recognized in Other Income (Expense) were as follows (in
thousands):
In the
first quarter of fiscal year 2009, the Company completed the wind-down of
FlashVision Ltd. (“FlashVision”) and received cash distributions of
$12.7 million, released $34.0 million of cumulative translation
adjustments recorded in accumulated OCI and recorded an impairment charge of
$7.9 million in Other Income (Expense) related to FlashVision.
See
Note 12, “Commitments, Contingencies and Guarantees – FlashVision, Flash
Partners and Flash Alliance,” regarding equity method investments in the three
months ended March 29, 2009 and Note 13, “Related Parties,” for the
Company’s maximum loss exposure related to these variable interest
entities.
As of
March 29, 2009 and December 28, 2008, the total current accrued
restructuring liability was primarily comprised of contract termination costs
related to the 2008 Restructuring Plans and the current portion of excess lease
obligations. See Note 9, “Restructuring Plans.” The
non-current accrued restructuring balance and activity from the prior year end
was primarily related to excess lease obligations and cash lease obligation
payments, respectively. The lease obligations extend through the end
of the lease term in fiscal year 2016.
Intangible
asset balances are presented below (in thousands):
The
annual expected amortization expense of intangible assets that existed as of
March 29, 2009, is presented below (in thousands):
Liability
for warranty expense is included in Other Current Accrued Liabilities and
Non-current Liabilities in the accompanying Condensed Consolidated Balance
Sheets and the activity was as follows (in thousands):
The
majority of the Company’s products have a warranty ranging from one to five
years. A provision for the estimated future cost related to warranty
expense is recorded at the time of customer invoice. The Company’s
warranty liability is affected by customer and consumer returns, product
failures, number of units sold, and repair or replacement costs
incurred. Should actual product failure rates, or repair or
replacement costs differ from the Company’s estimates, increases or decreases to
its warranty liability would be required. Prior year’s additions to
and usage of warranty reserve has been adjusted to conform to the current
presentation format.
Accumulated
other comprehensive income, net of tax, presented in the accompanying Condensed
Consolidated Balance Sheets consists of the accumulated unrealized gains and
losses on available-for-sale investments, including the Company’s investments in
equity securities, as well as currency translation adjustments relating to local
currency denominated subsidiaries and equity investees, and the accumulated
unrealized gains and losses related to derivative instruments accounted for
under hedge accounting (in thousands).
Comprehensive
income (loss) is presented below (in thousands):
Non-controlling
interest is included in Other Income (Expense) on the Condensed Consolidated
Statements of Operations.
The
amount of income tax expense allocated to accumulated unrealized gain (loss) on
available-for-sale investments and hedging activities was $8.2 million and
$7.1 million at March 29, 2009 and December 28, 2008,
respectively.
In the
three months ended March 29, 2009, the Company recorded restructuring expense of
$0.8 million, net, related to employee severance costs in Restructuring and
Other in the Condensed Consolidated Statements of Operations.
The
remaining restructuring accrual balance is reflected in Other Current Accrued
Liabilities in the Condensed Consolidated Balance Sheets and is expected to be
utilized in fiscal year 2009.
The
Company anticipates that the remaining restructuring accrual balance of
$14.2 million will be substantially paid out or utilized in fiscal year
2009. The remaining restructuring accrual balance is reflected in
Other Current Accrued Liabilities in the Condensed Consolidated Balance
Sheets.
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