SANDISK CORP - FORM 10-Q - April 30, 2015

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EXCEL - IDEA: XBRL DOCUMENT - SANDISK CORP	Financial_Report.xls
EX-31.1 - CEO CERTIFICATION TO SECTION 302 - SANDISK CORP	sndkex-311xsoxceocertq115.htm
EX-31.2 - CFO CERTIFICATION TO SECTION 302 - SANDISK CORP	sndkex-312xsoxcfocertq115.htm
EX-32.2 - CFO CERTIFICATION TO SECTION 906 - SANDISK CORP	sndkex-322xsec906cfocertq1.htm
EX-12.1 - COMPUTATION OF RATIO TO FIXED CHARGES - SANDISK CORP	sndkex-121xratioofearnings.htm
EX-32.1 - CEO CERTIFICATION TO SECTION 906 - SANDISK CORP	sndkex-321xsec906ceocertq1.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)


þ	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 29, 2015


¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ________________ to ________________

Commission file number: 000-26734

SANDISK CORPORATION

(Exact name of registrant as specified in its charter)



Delaware	77-0191793
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

951 SanDisk Drive Milpitas, California	95035
(Address of principal executive offices)	(Zip Code)

(408) 801-1000

(Registrant’s telephone number, including area code)

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.



Yes þ	No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, 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).



Yes þ	No ¨

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.



Large accelerated filer þ	Accelerated filer ¨	Non-accelerated filer ¨	Smaller reporting company ¨

(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).



Yes ¨	No þ

Number of shares outstanding of the issuer’s common stock, $0.001 par value, as of March 29, 2015: 207,888,232.

SANDISK CORPORATION

TABLE OF CONTENTS



		Page No.
	PART I. FINANCIAL INFORMATION
Item 1.	Condensed Consolidated Financial Statements:	4
	Condensed Consolidated Balance Sheets as of March 29, 2015 and December 28, 2014	4
	Condensed Consolidated Statements of Operations for the three months ended March 29, 2015 and March 30, 2014	5
	Condensed Consolidated Statements of Comprehensive Income for the three months ended March 29, 2015 and March 30, 2014	6
	Condensed Consolidated Statements of Cash Flows for the three months ended March 29, 2015 and March 30, 2014	7
	Notes to Condensed Consolidated Financial Statements	8
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	44
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	62
Item 4.	Controls and Procedures	64
	PART II. OTHER INFORMATION
Item 1.	Legal Proceedings	65
Item 1A.	Risk Factors	65
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	87
Item 3.	Defaults Upon Senior Securities	87
Item 4.	Mine Safety Disclosures	87
Item 5.	Other Information	87
Item 6.	Exhibits	87
	Signature	S - 1
	Exhibit Index	E - 1

Table of Contents

FORWARD-LOOKING STATEMENTS

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, and elsewhere in this report. Our business, financial condition or results of operations could be materially harmed 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.

Unless the context requires otherwise, all references in this report to:


•	“SanDisk^®,” “the Company,” “we,” “our,” and “us” collectively refer to SanDisk Corporation, a Delaware corporation, and its subsidiaries.


•	Years or annual periods are references to our fiscal years, which consist of 53 weeks in fiscal year 2015 and consisted of 52 weeks in fiscal year 2014.


•	Quarters are references to our fiscal quarters, which consist of 13 weeks, except for the fourth quarter of fiscal year 2015, which will consist of 14 weeks.

PART I. FINANCIAL INFORMATION

Item 1. Condensed Consolidated Financial Statements

SANDISK CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)



	March 29, 2015			December 28, 2014*
	(In thousands)
ASSETS
Current assets:
Cash and cash equivalents	$	649,940		$	809,003
Short-term marketable securities	1,347,541			1,455,509
Accounts receivable, net	589,246			842,476
Inventory	713,053			698,011
Deferred taxes	162,298			180,134
Other current assets	290,908			214,992
Total current assets	3,752,986			4,200,125
Long-term marketable securities	2,396,950			2,758,475
Property and equipment, net	769,933			724,357
Notes receivable and investments in Flash Ventures	989,678			962,817
Deferred taxes	157,292			161,827
Goodwill	831,328			831,328
Intangible assets, net	437,858			542,351
Other non-current assets	125,196			108,677
Total assets	$	9,461,221		$	10,289,957

LIABILITIES, CONVERTIBLE SHORT-TERM DEBT CONVERSION OBLIGATION AND EQUITY
Current liabilities:
Accounts payable trade	$	397,617		$	404,237
Accounts payable to related parties	147,870			136,051
Convertible short-term debt	880,653			869,645
Other current accrued liabilities	409,434			506,293
Deferred income on shipments to distributors and retailers and deferred revenue	255,102			274,657
Total current liabilities	2,090,676			2,190,883
Convertible long-term debt	1,211,097			1,199,696
Non-current liabilities	207,334			245,554
Total liabilities	3,509,107			3,636,133

Commitments and contingencies (see Note 13)
Convertible short-term debt conversion obligation	116,067			127,143

Stockholders' equity:
Common stock	208			216
Capital in excess of par value	5,143,973			5,236,766
Retained earnings	876,252			1,499,149
Accumulated other comprehensive loss	(183,041		)	(208,072		)
Total stockholders' equity	5,837,392			6,528,059
Non-controlling interests	(1,345		)	(1,378		)
Total equity	5,836,047			6,526,681
Total liabilities, convertible short-term debt conversion obligation and equity	$	9,461,221		$	10,289,957


^*	Derived from audited financial statements

The accompanying notes are an integral part of these condensed consolidated financial statements.

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SANDISK CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)



	Three months ended
	March 29, 2015			March 30, 2014
	(In thousands, except per share amounts)
Revenue	$	1,332,241		$	1,511,945

Cost of revenue	762,483			741,039
Amortization of acquisition-related intangible assets	24,756			19,616
Total cost of revenue	787,239			760,655
Gross profit	545,002			751,290
Operating expenses:
Research and development	222,726			198,829
Sales and marketing	101,820			76,972
General and administrative	48,047			48,669
Amortization of acquisition-related intangible assets	13,681			1,646
Impairment of acquisition-related intangible assets	61,000			—
Restructuring and other	40,541			—
Total operating expenses	487,815			326,116
Operating income	57,187			425,174
Interest income	11,025			13,244
Interest (expense) and other income (expense), net	(34,595		)	(28,879		)
Total other income (expense), net	(23,570		)	(15,635		)
Income before income taxes	33,617			409,539
Provision for (benefit from) income taxes	(5,408		)	140,591
Net income	$	39,025		$	268,948

Net income per share:
Basic	$	0.18		$	1.19
Diluted	$	0.17		$	1.14
Shares used in computing net income per share:
Basic	211,428			225,845
Diluted	224,049			234,914

Cash dividends declared per share	$	0.300		$	0.225

The accompanying notes are an integral part of these condensed consolidated financial statements.

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SANDISK CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)



	Three months ended
	March 29, 2015			March 30, 2014
	(In thousands)
Net income	$	39,025		$	268,948
Other comprehensive income, before tax:
Unrealized holding gain on marketable securities	5,198			1,625
Reclassification adjustment for realized gain on marketable securities included in net income	(1,997		)	(570		)
Net unrealized holding gain on marketable securities	3,201			1,055

Foreign currency translation adjustments	12,254			24,482

Unrealized holding gain on derivatives qualifying as cash flow hedges	849			13,468
Reclassification adjustment for realized loss on derivatives qualifying as cash flow hedges included in net income	11,605			1,564
Net unrealized holding gain on derivatives qualifying as cash flow hedges	12,454			15,032
Total other comprehensive income, before tax	27,909			40,569
Income tax expense related to items of other comprehensive income	2,878			4,148
Total other comprehensive income, net of tax	25,031			36,421
Comprehensive income	$	64,056		$	305,369

The accompanying notes are an integral part of these condensed consolidated financial statements.

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SANDISK CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)



	Three months ended
	March 29, 2015			March 30, 2014
	(In thousands)
Cash flows from operating activities:
Net income	$	39,025		$	268,948
Adjustments to reconcile net income to net cash provided by operating activities:
Deferred taxes	(965		)	6,951
Depreciation	69,081			60,089
Amortization	83,374			72,598
Provision for doubtful accounts	330			(547		)
Share-based compensation expense	41,410			30,030
Excess tax benefit from share-based plans	(8,865		)	(17,460		)
Impairment and other	63,709			—
Other non-operating	(4,187		)	1,020
Changes in operating assets and liabilities:
Accounts receivable, net	252,899			86,689
Inventory	(13,945		)	(42,117		)
Other assets	(94,673		)	54,547
Accounts payable trade	(26,090		)	(36,546		)
Accounts payable to related parties	11,819			13,572
Other liabilities	(104,057		)	(115,695		)
Total adjustments	269,840			113,131
Net cash provided by operating activities	308,865			382,079
Cash flows from investing activities:
Purchases of short and long-term marketable securities	(692,656		)	(1,266,899		)
Proceeds from sales of short and long-term marketable securities	1,045,097			1,015,605
Proceeds from maturities of short and long-term marketable securities	99,881			129,620
Acquisition of property and equipment, net	(98,287		)	(34,517		)
Notes receivable issuances to Flash Ventures	(100,499		)	(24,352		)
Notes receivable proceeds from Flash Ventures	89,693			24,352
Purchased technology and other assets	(1,500		)	(869		)
Acquisitions, net of cash acquired	—			2,368
Net cash provided by (used in) investing activities	341,729			(154,692		)
Cash flows from financing activities:
Repayment of debt financing	(68		)	—
Proceeds from employee stock programs	30,844			51,882
Excess tax benefit from share-based plans	8,865			17,460
Dividends paid	(64,503		)	(51,560		)
Stock repurchases	(783,899		)	(114,452		)
Net cash used in financing activities	(808,761		)	(96,670		)
Effect of changes in foreign currency exchange rates on cash	(896		)	(25		)
Net increase (decrease) in cash and cash equivalents	(159,063		)	130,692
Cash and cash equivalents at beginning of period	809,003			986,246
Cash and cash equivalents at end of period	$	649,940		$	1,116,938
Supplemental disclosure of cash flow information:
Property and equipment additions not yet paid in cash	$	136,584		$	58,331

The accompanying notes are an integral part of these condensed consolidated financial statements.

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SANDISK CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)


Note 1.	Organization and Summary of Significant Accounting Policies

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, 2015, the Condensed Consolidated Statements of Operations, the Condensed Consolidated Statements of Comprehensive Income and the Condensed Consolidated Statements of Cash Flows for the three months ended March 29, 2015 and March 30, 2014. Certain information and footnote disclosures normally included in financial statements prepared in accordance with United States (“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 filed with the SEC on February 10, 2015. The results of operations for the three months ended March 29, 2015 are not necessarily indicative of the results to be expected for the entire year.

Basis of Presentation. The Company’s fiscal year ends on the Sunday closest to December 31 and its fiscal quarters generally consist of 13 weeks. Fiscal year 2015 will include 53 weeks with 14 weeks in the fourth fiscal quarter, while fiscal year 2014 included 52 weeks. The first quarters of fiscal years 2015 and 2014 ended on March 29, 2015 and March 30, 2014, respectively. For accounting and disclosure purposes, the exchange rates of 119.01, 120.44 and 102.69 at March 29, 2015, December 28, 2014 and March 30, 2014, respectively, were used to convert Japanese yen to the U.S. dollar. Throughout the Notes to Condensed Consolidated Financial Statements, unless otherwise indicated, references to Net income refer to Net income attributable to common stockholders, to years or annual periods are references to fiscal years, and to quarters are references to our fiscal quarters.

Organization and Nature of Operations. The Company was incorporated in the State of Delaware on June 1, 1988. The Company designs, develops, markets and manufactures data storage solutions in a variety of form factors using its flash memory, controller and firmware technologies. The Company operates in one segment, flash memory storage products.

Principles of Consolidation. The Condensed Consolidated Financial Statements include the accounts of the Company and its majority-owned subsidiaries. All intercompany balances and transactions have been eliminated. Non-controlling interest represents the minority stockholders’ proportionate share of the net assets and results of operations of the Company’s majority-owned subsidiaries. The Condensed Consolidated Financial Statements also include the results of companies acquired by the Company from the date of each acquisition.

Use of Estimates. The preparation of Condensed Consolidated Financial Statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the Condensed Consolidated Financial Statements and accompanying notes. The estimates and judgments affect the reported amounts of assets, liabilities, revenue, expenses and related disclosure of contingent liabilities. On an ongoing basis, the Company evaluates its estimates, including those related to customer programs and incentives, intellectual property (“IP”) claims, product returns, allowance for doubtful accounts, inventories and inventory valuation, valuation and impairments of marketable securities and investments, valuation and impairments of goodwill and long-lived assets, income taxes, warranty obligations, restructurings, contingencies, share-based compensation and litigation. The Company bases its estimates on historical experience and on other assumptions that its management believes are reasonable under the circumstances. These estimates form the basis for making judgments about the carrying value of assets and liabilities when those values are not readily apparent from other sources. Actual results could materially differ from these estimates.

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SANDISK CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)


Note 2.	Recent Accounting Pronouncements

In April 2015, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2015‑03, “Interest-Imputation of Interest,” to simplify the presentation of debt issuance costs by requiring that debt issuance costs be presented in the balance sheet as a direct deduction from the carrying amount of debt liability, consistent with debt discounts. ASU No. 2015‑03 is required to be adopted in 2016 but early adoption is allowed. The Company is currently assessing when it will adopt this ASU. The Company does not believe the adoption of this guidance will have a material impact on its Consolidated Financial Statements as the impact is classification only.

In April 2015, the FASB issued ASU No. 2015‑05, “Customer's Accounting for Fees Paid in a Cloud Computing Arrangement.” The amendments in this update provide guidance to customers about whether a cloud computing arrangement includes a software license. Under application of this guidance, if a cloud computing arrangement includes a software license, the update specifies that the customer should account for the software license element of the arrangement consistent with the acquisition of other software licenses. A customer should account for a cloud computing arrangement as a service contract if the arrangement does not include a software license. ASU No. 2015‑05 is effective for 2016 and early adoption is allowed. The Company is currently assessing the impact of this update and the timing of adoption.

In May 2014, the FASB issued ASU No. 2014‑09, “Revenue from Contracts with Customers.” Under this guidance, an entity is required to recognize revenue upon transfer of promised goods or services to customers, in an amount that reflects the expected consideration received in exchange for those goods or services. As such, an entity will need to use more judgment and make more estimates than under the current guidance. This standard becomes effective and will be adopted in the first quarter of 2017 with early adoption not permitted. Under application of the existing guidance, the Company’s sales made to distributors and retailers are generally deferred until the distributors or retailers sell the merchandise to their end customer. Under the new standard, the Company’s sales made to distributors and retailers are expected to be recognized upon transfer of inventory to the distributor or retailer resulting in earlier revenue recognition than per existing guidance with additional use of estimation. In addition, the timing of the Company’s revenue relating to the licensing of IP could materially change. The Company is currently evaluating the appropriate transition method and any further impact of this guidance on its Consolidated Financial Statements and related disclosures. The FASB has indicated that there may be certain future changes to the revenue guidance which could impact revenue relating to the licensing of IP, and on April 29, 2015, the FASB issued an exposure draft proposing the deferral of the effective date by one year.

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SANDISK CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)


Note 3.	Investments and Fair Value Measurements

The Company’s total cash, cash equivalents and marketable securities was as follows:



	March 29, 2015		December 28, 2014
	(In thousands)
Cash and cash equivalents	$	649,940	$	809,003
Short-term marketable securities	1,347,541		1,455,509
Long-term marketable securities	2,396,950		2,758,475
Total cash, cash equivalents and marketable securities	$	4,394,431	$	5,022,987

For certain of the Company’s financial assets and liabilities, including cash held in banks, accounts receivable and accounts payable, the carrying amounts approximate fair value due to their short maturities, and those financial assets and liabilities are therefore excluded from the fair value tables below.

Financial assets and liabilities measured and recorded at fair value on a recurring basis consisted of the following types of instruments:



	March 29, 2015								December 28, 2014
	Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3		Total
	(In thousands)
Money market funds	$	432,433	$	—	$	—	$	432,433	$	533,133	$	—	$	—	$	533,133
Fixed income securities	6,815		3,766,129		—		3,772,944		25,162		4,213,599		—		4,238,761
Derivative assets	—		3,243		—		3,243		—		4,800		—		4,800
Total financial assets	$	439,248	$	3,769,372	$	—	$	4,208,620	$	558,295	$	4,218,399	$	—	$	4,776,694

Derivative liabilities	$	—	$	1,448	$	—	$	1,448	$	—	$	8,224	$	—	$	8,224
Total financial liabilities	$	—	$	1,448	$	—	$	1,448	$	—	$	8,224	$	—	$	8,224

Financial assets and liabilities measured and recorded at fair value on a recurring basis were presented on the Condensed Consolidated Balance Sheets as follows:



	March 29, 2015								December 28, 2014
	Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3		Total
	(In thousands)
Cash equivalents⁽¹⁾	$	432,433	$	28,453	$	—	$	460,886	$	533,133	$	24,777	$	—	$	557,910
Short-term marketable securities	1,458		1,346,083		—		1,347,541		3,327		1,452,182		—		1,455,509
Long-term marketable securities	5,357		2,391,593		—		2,396,950		21,835		2,736,640		—		2,758,475
Other current assets	—		3,243		—		3,243		—		4,800		—		4,800
Total financial assets	$	439,248	$	3,769,372	$	—	$	4,208,620	$	558,295	$	4,218,399	$	—	$	4,776,694
Other current accrued liabilities	$	—	$	1,448	$	—	$	1,448	$	—	$	8,224	$	—	$	8,224
Total financial liabilities	$	—	$	1,448	$	—	$	1,448	$	—	$	8,224	$	—	$	8,224


⁽¹⁾	Cash equivalents exclude cash holdings of $189.1 million and $251.1 million included in Cash and cash equivalents on the Condensed Consolidated Balance Sheets as of March 29, 2015 and December 28, 2014, respectively.

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SANDISK CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

During the three months ended March 29, 2015, the Company had no transfers of financial assets and liabilities between Level 1 and Level 2 other than the transfer from Level 2 to Level 1 of the $1.50 billion 0.5% Convertible Senior Notes due 2020 outstanding due to active market trading directly prior to the end of the first quarter of 2015. During 2014, the Company had no transfers of financial assets and liabilities between Level 1 and Level 2.

As of March 29, 2015 and December 28, 2014, the Company had no financial assets or liabilities categorized as Level 3 and had not elected the fair value option for any financial assets and liabilities for which such an election would have been permitted.

Available-for-Sale Investments. Available-for-sale investments were as follows:



	March 29, 2015									December 28, 2014
	Amortized Cost		Gross Unrealized Gain		Gross Unrealized Loss			Fair Value		Amortized Cost		Gross Unrealized Gain		Gross Unrealized Loss			Fair Value
	(In thousands)
U.S. Treasury securities	$	6,797	$	19	$	(1	)	$	6,815	$	25,194	$	—	$	(32	)	$	25,162
U.S. government-sponsored agency securities	22,414		21		(11		)	22,424		7,511		—		(18		)	7,493
International government securities	58,032		80		(21		)	58,091		82,033		—		(314		)	81,719
Corporate notes and bonds	635,937		1,340		(411		)	636,866		774,869		325		(2,052		)	773,142
Asset-backed securities	138,814		84		(86		)	138,812		171,221		42		(353		)	170,910
Mortgage-backed securities	31,253		63		(108		)	31,208		48,378		6		(173		)	48,211
Municipal notes and bonds	2,871,130		8,677		(1,079		)	2,878,728		3,124,189		9,733		(1,798		)	3,132,124
Total available-for-sale investments	$	3,764,377	$	10,284	$	(1,717	)	$	3,772,944	$	4,233,395	$	10,106	$	(4,740	)	$	4,238,761

The fair value and gross unrealized losses on the available-for-sale securities that have been in a continuous unrealized loss position, 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, 2015, are summarized in the following table. Available-for-sale securities that were in an unrealized gain position have been excluded from the table.



	Less than 12 months					Greater than 12 months
	Fair Value		Gross Unrealized Loss			Fair Value		Gross Unrealized Loss
	(In thousands)
U.S. Treasury securities	$	1,570	$	(1	)	$	—	$	—
U.S. government-sponsored agency securities	4,486		(11		)	—		—
International government securities	22,853		(21		)	—		—
Corporate notes and bonds	204,004		(404		)	4,413		(7		)
Asset-backed securities	74,869		(84		)	1,248		(2		)
Mortgage-backed securities	13,923		(88		)	4,942		(20		)
Municipal notes and bonds	452,495		(1,014		)	15,042		(65		)
Total	$	774,200	$	(1,623	)	$	25,645	$	(94	)

The gross unrealized loss related to these securities was due primarily to changes in interest rates. The gross unrealized loss on all available-for-sale fixed income securities at March 29, 2015 was 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. For debt security investments, the Company considered additional factors including the Company’s intent to sell the investments or whether it is “more likely than not” the Company will be required to sell the investments before the recovery of its amortized cost.

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SANDISK CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The following table shows the realized gains and (losses) on sales of available-for-sale securities:



	Three months ended
	March 29, 2015			March 30, 2014
	(In thousands)
Realized gains	$	2,320		$	1,013
Realized losses	(323		)	(443		)
Net realized gains	$	1,997		$	570

Fixed income securities by contractual maturity as of March 29, 2015 are shown below. Actual maturities may differ from contractual maturities because issuers of the securities may have the right to prepay obligations or the Company has the option to demand payment.



	Amortized Cost		Fair Value
	(In thousands)
Due in one year or less	$	711,897	$	713,355
After one year through five years	2,262,309		2,268,567
After five years through ten years	120,900		120,993
After ten years	669,271		670,029
Total	$	3,764,377	$	3,772,944

For those financial instruments where the carrying amounts differ from fair value, the following table represents the related carrying values and fair values, which are based on quoted market prices. The 1.5% Convertible Senior Notes due 2017 and the 0.5% Convertible Senior Notes due 2020 were both categorized as Level 1, based on the frequency of trading of each respective convertible note directly prior to the end of the first quarter of 2015. As of December 28, 2014, the 1.5% Convertible Senior Notes due 2017 was categorized as Level 1 and the 0.5% Convertible Senior Notes due 2020 was classified as Level 2, both based on the frequency of trading of each respective convertible note directly prior to the end of 2014. See Note 7, “Financing Arrangements,” regarding details of each convertible note presented.



	March 29, 2015				December 28, 2014
	Carrying Value		Fair Value		Carrying Value		Fair Value
	(In thousands)
1.5% Convertible Senior Notes due 2017	$	880,653	$	1,363,792	$	869,645	$	1,948,721
0.5% Convertible Senior Notes due 2020	1,211,097		1,537,500		1,199,696		1,789,500
Total	$	2,091,750	$	2,901,292	$	2,069,341	$	3,738,221

As of March 29, 2015, and December 28, 2014, the Company has aggregate net investments under the cost method of accounting of $30.1 million and $29.3 million, respectively, and these investments consisted of privately-held equity securities without a readily determinable fair value. These privately-held equity investments are reported under Other non-current assets in the Condensed Consolidated Balance Sheet.

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SANDISK CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)


Note 4.	Derivatives and Hedging Activities

Cash Flow Hedges. The Company uses foreign exchange forward contracts designated as cash flow hedges to hedge a portion of future forecasted wafer purchases in Japanese yen. The gain or loss on the effective portion of a cash flow hedge is initially reported as a component of accumulated other comprehensive income (“AOCI”) and subsequently reclassified into cost of revenue in the same period or periods in which the cost of revenue is recognized, or reclassified into other income (expense) if the hedged transaction becomes probable of not occurring. Any gain or loss after a hedge is no longer designated, because it is no longer probable of occurring or related to an ineffective portion of a cash flow hedge, as well as any amount excluded from the Company’s hedge effectiveness, is recognized immediately as other income (expense).

Net Investment Hedges. To help protect certain foreign currency denominated equity method investments from adverse changes in foreign currency exchange rates, the Company may enter into foreign currency forward contracts to partially hedge the changes in the carrying amounts of these investments due to fluctuations in foreign currency exchange rates. Foreign exchange forward contracts designated as net investment hedges relate to the underlying value of the Company’s equity method investments in Japanese yen. The effective portion of a net investment hedge is initially recorded in AOCI as a part of foreign currency translation. Cumulative gains and losses including forward points associated with foreign exchange forward contracts designated as net investment hedges would be reclassified to other income (expense) from AOCI upon sale or substantial liquidation of the foreign equity method investments. The ineffective portions of net investment hedges are recognized immediately as other income (expense).

As of March 29, 2015, the notional amount and unrealized gain on the effective portion of the Company’s outstanding foreign exchange forward contracts to purchase Japanese yen that are designated as cash flow and sell Japanese yen that are designated as net investment hedges are shown in both Japanese yen and U.S. dollar, based upon the exchange rate at March 29, 2015, as follows:



	Notional Amount						Unrealized Gain
	(Japanese yen, in billions)			(U.S. dollar, in thousands)			(U.S. dollar, in thousands)
Foreign exchange forward contracts:
Cash flow hedges	¥	9.0		$	75,671		$	580
Net investment hedges	(20.0		)	(167,980		)	1,312
Foreign exchange forward contracts	¥	(11.0	)	$	(92,309	)	$	1,892

As of March 29, 2015, the maturities of the cash flow hedges were two months or less and the maturities of the net investment hedges were four months or less.

Other Derivatives. Other derivatives that are non-designated consist primarily of foreign exchange forward contracts to minimize the risk associated with the foreign exchange effects of revaluing monetary assets and liabilities. Monetary assets and liabilities denominated in foreign currencies and the associated outstanding foreign exchange forward contracts were marked-to-market at March 29, 2015 with realized and unrealized gains and losses included in other income (expense). As of March 29, 2015, the Company had foreign exchange forward contracts hedging balance sheet remeasurement exposures in European euros, British pounds and Japanese yen. Foreign exchange forward contracts were outstanding to buy and sell U.S. dollar-equivalents of approximately $226.3 million and $162.3 million in foreign currencies, respectively, based upon the exchange rates at March 29, 2015.

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SANDISK CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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. Gross fair value of derivative contracts was as follows:



	Derivative assets reported in
	Other Current Assets				Other Non-current Assets
	March 29, 2015		December 28, 2014		March 29, 2015		December 28, 2014
	(In thousands)
Foreign exchange forward contracts designated	$	2,643	$	—	$	—	$	—
Foreign exchange forward contracts not designated	600		4,800		—		—
Total derivatives	$	3,243	$	4,800	$	—	$	—



	Derivative liabilities reported in
	Other Current Accrued Liabilities				Non-current Liabilities
	March 29, 2015		December 28, 2014		March 29, 2015		December 28, 2014
	(In thousands)
Foreign exchange forward contracts designated	$	—	$	1,472	$	—	$	—
Foreign exchange forward contracts not designated	1,448		6,752		—		—
Total derivatives	$	1,448	$	8,224	$	—	$	—

As of March 29, 2015, the potential effect of rights of set-off associated with the above foreign exchange forward contracts would result in a net derivative asset balance of $3.1 million and a net derivative liability balance of $1.3 million. As of December 28, 2014, the potential effect of rights of set-off would result in a net derivative asset balance of $2.8 million and a net derivative liability balance of $6.3 million.

Effect of Foreign Exchange Forward Contracts Designated as Cash Flow and Net Investment Hedges on the Condensed Consolidated Statements of Operations. All designated cash flow and net investment hedge derivative contracts were considered effective for each of the three months ended March 29, 2015 and March 30, 2014. The impact of the effective portion of designated cash flow and net investment derivative contracts on the Company’s results of operations was as follows:



	Three months ended
	Amount of loss recognized in OCI				Amount of loss reclassified from AOCI to earnings
	March 29, 2015		March 30, 2014		March 29, 2015			March 30, 2014
	(In thousands)
Foreign exchange forward contracts:
Cash flow hedges	$	849	$	13,468	$	(11,605	)	$	(1,564	)
Net investment hedges	1,312		—		—			—
Foreign exchange forward contracts	$	2,161	$	13,468	$	(11,605	)	$	(1,564	)

The Company expects to realize the majority of the AOCI balance related to cash flow hedges within the next 12 months. Cumulative gains and losses on net investment hedges recognized in AOCI would be reclassified to other income (expense) from AOCI upon sale or substantial liquidation of the foreign equity method investments.

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SANDISK CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The following table presents the forward points on foreign exchange contracts excluded for the purposes of cash flow hedging designation recognized in other income (expense):



	Three months ended
	March 29, 2015			March 30, 2014
	(In thousands)
Foreign exchange forward contracts	$	(159	)	$	(458	)

Effect of Non-Designated Derivative Contracts on the Condensed Consolidated Statements of Operations. The effect of non-designated derivative contracts on the Company’s results of operations recognized in other income (expense) was as follows:



	Three months ended
	March 29, 2015			March 30, 2014
	(In thousands)
Gain (loss) on foreign exchange forward contracts including forward point income	$	(559	)	$	2,186
Loss from revaluation of foreign currency exposures hedged by foreign exchange forward contracts	$	(3,306	)	$	(1,743	)

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SANDISK CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)


Note 5.	Balance Sheet Information

Accounts Receivable, net. Accounts receivable, net was as follows:



	March 29, 2015			December 28, 2014
	(In thousands)
Accounts receivable	$	780,504		$	1,134,254
Allowance for doubtful accounts	(8,784		)	(9,622		)
Promotions, price protection and other activities	(182,474		)	(282,156		)
Total accounts receivable, net	$	589,246		$	842,476

Inventory. Inventory was as follows:



	March 29, 2015		December 28, 2014
	(In thousands)
Raw material	$	366,388	$	369,860
Work-in-process	109,101		138,594
Finished goods	237,564		189,557
Total inventory	$	713,053	$	698,011

Other Current Assets. Other current assets were as follows:



	March 29, 2015		December 28, 2014
	(In thousands)
Income tax receivables	$	95,217	$	18,579
Other tax-related receivables	73,528		84,432
Other non-trade receivables	68,947		69,033
Prepaid expenses	20,878		18,579
Other current assets	32,338		24,369
Total other current assets	$	290,908	$	214,992

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SANDISK CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Notes Receivable and Investments in Flash Ventures. Notes receivable and investments in Flash Partners Ltd., Flash Alliance Ltd. and Flash Forward Ltd. (collectively referred to as “Flash Ventures”) were as follows:



	March 29, 2015		December 28, 2014
	(In thousands)
Notes receivable, Flash Partners Ltd.	$	28,569	$	12,454
Notes receivable, Flash Alliance Ltd.	297,034		292,677
Notes receivable, Flash Forward Ltd.	157,550		161,906
Investment in Flash Partners Ltd.	170,036		167,102
Investment in Flash Alliance Ltd.	254,652		249,459
Investment in Flash Forward Ltd.	81,837		79,219
Total notes receivable and investments in Flash Ventures	$	989,678	$	962,817

Equity-method investments and the Company’s maximum loss exposure related to Flash Ventures are discussed further in Note 13, “Commitments, Contingencies and Guarantees – Flash Ventures” and Note 14, “Related Parties and Strategic Investments.”

The Company makes or will make long-term loans to Flash Ventures to fund new process technologies and additional wafer capacity. The Company aggregates its Flash Ventures’ notes receivable into one class of financing receivables due to the similar ownership interest and common structure in each Flash Venture entity. For all reporting periods presented, no loans were past due and no loan impairments were recorded.

Other Non-current Assets. Other non-current assets were as follows:



	March 29, 2015		December 28, 2014
	(In thousands)
Prepaid tax on intercompany transactions	$	33,179	$	33,375
Long-term income tax receivable	20,454		—
Other non-current assets	71,563		75,302
Total other non-current assets	$	125,196	$	108,677

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SANDISK CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Other Current Accrued Liabilities. Other current accrued liabilities were as follows:



	March 29, 2015		December 28, 2014
	(In thousands)
Accrued payroll and related expenses	$	152,663	$	233,702
Taxes payable	34,877		74,079
Derivative contract payables	1,448		8,224
Other current accrued liabilities	220,446		190,288
Total other current accrued liabilities	$	409,434	$	506,293

Non-current Liabilities. Non-current liabilities were as follows:



	March 29, 2015		December 28, 2014
	(In thousands)
Income tax liabilities	$	126,327	$	132,320
Deferred revenue	22,792		31,066
Deferred tax liabilities	239		22,360
Other non-current liabilities	57,976		59,808
Total non-current liabilities	$	207,334	$	245,554

Warranties. The liability for warranty expense is included in Other current accrued liabilities and Non-current liabilities in the Condensed Consolidated Balance Sheets, and the activity was as follows:



	Three months ended
	March 29, 2015			March 30, 2014
	(In thousands)
Balance, beginning of period	$	48,555		$	43,624
Additions and adjustments to cost of revenue	244			7,431
Usage	(4,167		)	(3,490		)
Balance, end of period	$	44,632		$	47,565

Additions and adjustments to cost of revenue in the three months ended March 29, 2015 included adjustments to certain warranty assumptions, related to future potential claims, resulting in a $3.1 million reduction to the overall future warranty exposure.

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SANDISK CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Accumulated Other Comprehensive Income (Loss). AOCI presented in the Condensed Consolidated Balance Sheets consists of unrealized gains and losses on available-for-sale investments, foreign currency translation and cash flow hedging activities, net of tax, for all periods presented:



	March 29, 2015			December 28, 2014
	(In thousands)
Accumulated net unrealized gain (loss) on:
Available-for-sale investments	$	5,461		$	3,359
Foreign currency translation	(186,777		)	(197,252		)
Cash flow hedging activities	(1,725		)	(14,179		)
Total accumulated other comprehensive loss	$	(183,041	)	$	(208,072	)

The amount of income tax expense allocated to the unrealized gain (loss) on available-for-sale investments and foreign currency translation activities was as follows:



	Three months ended
	March 29, 2015		March 30, 2014
	(In thousands)
Available-for-sale investments	$	1,099	$	377
Foreign currency translation	1,779		3,771
Total income tax expense allocated	$	2,878	$	4,148

The significant amounts reclassified out of each component of AOCI were as follows:



	Three months ended
AOCI Component	March 29, 2015			March 30, 2014			Statement of Operations Line Item
	(In thousands)
Unrealized gain on available-for-sale investments	$	1,997		$	570		Interest (expense) and other income (expense), net
Tax impact	(722		)	(195		)	Provision for (benefit from) income taxes
Unrealized gain on available-for-sale investments, net of tax	1,275			375
Unrealized holding loss on cash flow hedging activities:
Foreign exchange contracts	(11,605		)	(1,361		)	Cost of revenue
Foreign exchange contracts	—			(203		)	Research and development
Loss on cash flow hedging activities	(11,605		)	(1,564		)
Total reclassifications for the period, net of tax	$	(10,330	)	$	(1,189	)

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SANDISK CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)


Note 6.	Goodwill and Intangible Assets

Goodwill. Goodwill balances as of March 29, 2015 and December 28, 2014 were as follows:



	Carrying Amount
	(In thousands)
Balance, beginning of year and end of period	$	831,328

Intangible Assets. Intangible asset balances were as follows:



	March 29, 2015
	Gross Carrying Amount		Accumulated Amortization			Impairment			Net Carrying Amount
	(In thousands)
Developed product technology	$	451,560	$	(117,050	)	$	—		$	334,510
Customer relationships	64,600		(31,459		)	—			33,141
Trademarks and trade names	62,500		(10,626		)	—			51,874
Acquisition-related intangible assets	578,660		(159,135		)	—			419,525
Technology licenses and patents	102,000		(83,667		)	—			18,333
Total intangible assets subject to amortization	680,660		(242,802		)	—			437,858
Acquired in-process research and development	61,000		—			(61,000		)	—
Total intangible assets	$	741,660	$	(242,802	)	$	(61,000	)	$	437,858



	December 28, 2014
	Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount
	(In thousands)
Developed product technology	$	568,744	$	(209,478	)	$	359,266
Customer relationships	64,600		(21,009		)	43,591
Trademarks and trade names	62,500		(7,395		)	55,105
Acquisition-related intangible assets	695,844		(237,882		)	457,962
Technology licenses and patents	102,000		(78,611		)	23,389
Total intangible assets subject to amortization	797,844		(316,493		)	481,351
Acquired in-process research and development	61,000		—			61,000
Total intangible assets	$	858,844	$	(316,493	)	$	542,351

During the three months ended March 29, 2015, $61.0 million of in-process research and development (“IPR&D”) was impaired. The Company performs tests for impairment of long-lived assets whenever events or circumstances suggest that long-lived assets may be impaired. In the first quarter of 2015, due to a decline in revenue from previous forecasts and changes to the product development schedule related to an IPR&D project from the Fusion‑io, Inc. (“Fusion‑io”) acquisition, the Company performed impairment tests on the acquisition-related amortizable intangible and IPR&D assets for this acquisition. The Company reviewed the forecasts for the Fusion‑io IPR&D project and determined to cancel this project in order to reduce the number of platforms under development, resulting in no future attributable cash flows and a full impairment of the IPR&D asset of $61.0 million which was recorded in the first quarter of 2015. The project has been abandoned and resources have been redirected towards the next-generation PCIe and converged enterprise platform. In testing the recoverability of the Fusion‑io acquisition-related amortizable intangible assets, the Company determined that there was no impairment. The impairment test is based upon the lowest level for which identifiable cash flows are available related to the intangible assets. While the declines in revenue did not indicate that an impairment of the Fusion‑io acquisition-related intangible assets is required at this time, the Company will continue to monitor any events or circumstances that could indicate the acquisition-related amortizable intangible assets are impaired. As of March 29, 2015, the net book value of the Fusion‑io acquisition-related amortizable intangible assets was $313.3 million, some or all of which could be subject to impairment. In connection with the impairment

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SANDISK CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

analysis, the Company reduced the expected life of the acquisition-related amortizable developed technology intangible assets from the Fusion‑io acquisition from five years to four years, and will amortize the remaining net carrying amount of this developed technology intangible asset over the next 40 months.

The annual expected amortization expense of intangible assets subject to amortization as of March 29, 2015 was as follows:



	Acquisition-related Intangible Assets		Technology Licenses and Patents
	(In thousands)
Year:
2015 (remaining 9 months)	$	126,133	$	15,000
2016	126,231		3,333
2017	107,176		—
2018	53,160		—
2019	6,825		—
Total intangible assets subject to amortization	$	419,525	$	18,333

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SANDISK CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)


Note 7.	Financing Arrangements

The following table reflects the carrying values of the Company’s convertible debt:



	March 29, 2015			December 28, 2014
	(In thousands)
1.5% Notes due 2017	$	996,720		$	996,788
Less: Unamortized bond discount	(116,067		)	(127,143		)
Net carrying amount of 1.5% Notes due 2017	880,653			869,645

0.5% Notes due 2020	1,500,000			1,500,000
Less: Unamortized bond discount	(288,903		)	(300,304		)
Net carrying amount of 0.5% Notes due 2020	1,211,097			1,199,696
Total convertible debt	2,091,750			2,069,341
Less: Convertible short-term debt	(880,653		)	(869,645		)
Convertible long-term debt	$	1,211,097		$	1,199,696

1.5% Convertible Senior Notes Due 2017. In August 2010, the Company issued and sold $1.0 billion in aggregate principal amount of 1.5% Convertible Senior Notes due August 15, 2017 (“1.5% Notes due 2017”) at par. The 1.5% Notes due 2017 may be converted, under certain circumstances described below, based on an initial conversion rate of 19.0931 shares of common stock per $1,000 principal amount of notes (which represents 19.1 million shares at an initial conversion price of approximately $52.37 per share). The 1.5% Notes due 2017 contain provisions where the conversion rate and conversion price are adjusted if the Company pays a cash dividend or makes a distribution to all or substantially all holders of its common stock. Accordingly, as of March 29, 2015, the conversion rate was adjusted for dividends paid to date to 19.5456 shares of common stock per $1,000 principal amount of notes (which represents 19.5 million shares at a conversion price of approximately $51.16 per share). The net proceeds to the Company from the sale of the 1.5% Notes due 2017 were $981.0 million.

The Company separately accounts for the liability and equity components of the 1.5% Notes due 2017. The principal amount of the liability component of $706.0 million as of the date of issuance was recognized at the present value of its cash flows using a discount rate of 6.85%, the Company’s borrowing rate at the date of the issuance for a similar debt instrument without the conversion feature. As of the date of issuance, the carrying value of the equity component was $294.0 million.

The following table presents the amount of interest cost recognized relating to the contractual interest coupon, amortization of bond issuance costs and amortization of the bond discount on the liability component of the 1.5% Notes due 2017:



	Three months ended
	March 29, 2015		March 30, 2014
	(In thousands)
Contractual interest coupon	$	3,738	$	3,750
Amortization of bond issuance costs	665		667
Amortization of bond discount	10,873		10,192
Total interest cost recognized	$	15,276	$	14,609

The effective interest rate on the liability component of the 1.5% Notes due 2017 was 6.85% for each of the three months ended March 29, 2015 and March 30, 2014. The remaining unamortized bond discount of $116.1 million as of March 29, 2015 will be amortized over the remaining life of the 1.5% Notes due 2017, which is approximately 2.4 years.

As of the calendar quarter ended March 31, 2015, the 1.5% Notes due 2017 were convertible at the holders’ option through June 30, 2015 as the last reported sales price of the Company’s stock exceeded 130% of the conversion price for more than 20 days in a period of 30 consecutive trading days prior to March 31, 2015. Accordingly, the carrying value of the 1.5% Notes due 2017 was classified as a current liability and the difference between the principal amount payable in cash upon conversion and the carrying value of the equity component of $116.1 million of the 1.5% Notes due 2017 was reclassified from

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SANDISK CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Stockholders’ equity to Convertible short-term debt conversion obligation on the Condensed Consolidated Balance Sheet as of March 29, 2015, and will remain so while the notes are convertible. The determination of whether or not the 1.5% Notes due 2017 are convertible must continue to be performed on a calendar-quarter basis. Consequently, the 1.5% Notes due 2017 may be reclassified as long-term debt if the conversion threshold is not met in future quarters. Based on the last closing price of the quarter ended March 29, 2015 of $64.59 for the Company’s common stock, if all of the 1.5% Notes due 2017 then outstanding were converted, 4.0 million shares would be distributed to the holders.

During the three months ended March 29, 2015, $68 thousand aggregate principal amount of the 1.5% Notes due 2017 (“Converted Notes”) was converted at the holders’ option, and the Company delivered cash of $68 thousand and 505 shares of the Company’s common stock with respect to any conversion value greater than the principal amount of the Converted Notes. The Company recorded an immaterial loss during the quarter ended March 29, 2015 related to the extinguishment of the Converted Notes. As of March 29, 2015, after conversion of $3.3 million aggregate principal amount of the Converted Notes, the remaining aggregate principal amount of the 1.5% Notes due 2017 outstanding was $996.7 million.

The Company pays cash interest at an annual rate of 1.5%, payable semi-annually on February 15 and August 15 of each year, beginning February 15, 2011. Debt issuance costs were $18.7 million, of which $5.5 million was allocated to capital in excess of par value and $13.2 million was allocated to deferred issuance costs and is amortized to interest expense over the term of the 1.5% Notes due 2017. As of March 29, 2015, unamortized deferred issuance cost was $4.5 million.

Concurrently with the issuance of the 1.5% Notes due 2017, the Company purchased a convertible bond hedge in which counterparties initially agreed to sell to the Company up to approximately 19.1 million shares of the Company’s common stock, which is the number of shares initially issuable upon conversion of the 1.5% Notes due 2017 in full, at a price of $52.37 per share. The convertible bond hedge agreement contains provisions where the number of shares to be sold under the convertible bond hedge transaction and the conversion price will be adjusted if the Company pays a cash dividend or makes a distribution to all or substantially all holders of its common stock. Adjusting for dividends paid through March 29, 2015, the counterparties agreed to sell to the Company up to approximately 19.5 million shares of the Company’s common stock, which is the number of shares issuable upon conversion of the 1.5% Notes due 2017 in full, at a price of $51.16 per share as of March 29, 2015. This convertible bond hedge transaction will be settled in net shares and will terminate upon the earlier of the maturity date of the 1.5% Notes due 2017 or the first day none of the 1.5% Notes due 2017 remain outstanding due to conversion or otherwise. Settlement of the convertible bond hedge in net shares, based on the number of shares issuable upon conversion of the 1.5% Notes due 2017, on the maturity date would result in the Company receiving net shares equivalent to the number of shares issuable by the Company upon conversion of the 1.5% Notes due 2017. Through March 29, 2015, the Company had received 27,124 shares of the Company’s common stock from the exercise of a portion of the convertible bond hedge related to the conversion of $3.3 million aggregate principal amount of the 1.5% Notes due 2017.

In addition, concurrent with the issuance of the 1.5% Notes due 2017, the Company sold warrants to purchase up to approximately 19.1 million shares of the Company’s common stock at an exercise price of $73.3250 per share. The warrant agreement contains provisions whereby the number of shares to be acquired under the warrants and the strike price are adjusted if the Company pays a cash dividend or makes a distribution to all or substantially all holders of its common stock. Adjusting for dividends paid through March 29, 2015, holders of the warrants may acquire up to approximately 19.5 million shares of the Company’s common stock at a strike price of $71.6276 per share as of March 29, 2015. The warrants mature on 40 different dates from November 13, 2017 through January 10, 2018 and are exercisable at the maturity date. At each maturity date, the Company may, at its option, elect to settle the warrants on a net share basis. As of March 29, 2015, the warrants had not been exercised and remained outstanding. The value of the warrants was initially recorded in equity and continues to be classified as equity.

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SANDISK CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

0.5% Convertible Senior Notes Due 2020. In October 2013, the Company issued and sold $1.5 billion in aggregate principal amount of 0.5% Convertible Senior Notes due October 15, 2020 (the “0.5% Notes due 2020”) at par. The 0.5% Notes due 2020 may be converted, under certain circumstances described below, based on an initial conversion rate of 10.8470 shares of common stock per $1,000 principal amount of notes (which represents 16.3 million shares at an initial conversion price of approximately $92.19 per share). The 0.5% Notes due 2020 contain provisions where the conversion rate and conversion price are adjusted if the Company pays a cash dividend greater than a regular quarterly cash dividend of $0.225 per share or makes a distribution to all or substantially all holders of its common stock. Accordingly, as of March 29, 2015, the conversion rate was adjusted for dividends in excess of $0.225 per share paid to date to 10.8750 shares of common stock per $1,000 principal amount of notes (which represents 16.3 million shares at a conversion price of approximately $91.95 per share). The net proceeds to the Company from the sale of the 0.5% Notes due 2020 were approximately $1.48 billion.

The Company separately accounts for the liability and equity components of the 0.5% Notes due 2020. The principal amount of the liability component of $1.15 billion as of the date of issuance was recognized at the present value of its cash flows using a discount rate of 4.43%, the Company’s borrowing rate at the date of the issuance for a similar debt instrument without the conversion feature. As of March 29, 2015, the carrying value of the equity component of $352.0 million was unchanged from the date of issuance.



	Three months ended
	March 29, 2015		March 30, 2014
	(In thousands)
Contractual interest coupon	$	1,875	$	1,875
Amortization of bond issuance costs	627		659
Amortization of bond discount	11,254		10,771
Total interest cost recognized	$	13,756	$	13,305

The effective interest rate on the liability component of the 0.5% Notes due 2020 was 4.43% for the three months ended March 29, 2015 and March 30, 2014. The remaining unamortized bond discount of $288.9 million as of March 29, 2015 will be amortized over the remaining life of the 0.5% Notes due 2020, which is approximately 5.6 years.

As of March 29, 2015, the 0.5% Notes due 2020 were not convertible.

The Company pays cash interest at an annual rate of 0.5%, payable semi-annually on April 15 and October 15 of each year, beginning April 15, 2014. Debt issuance costs were $17.6 million, of which $4.1 million was allocated to capital in excess of par value and $13.5 million was allocated to deferred issuance costs and is amortized to interest expense over the term of the 0.5% Notes due 2020. As of March 29, 2015, unamortized deferred issuance cost was $10.7 million.

Concurrently with the issuance of the 0.5% Notes due 2020, the Company purchased a convertible bond hedge in which counterparties agreed to sell to the Company up to approximately 16.3 million shares of the Company’s common stock, which is the number of shares initially issuable upon conversion of the 0.5% Notes due 2020 in full, at a price of $92.19 per share. The convertible bond hedge agreement contains provisions where the number of shares to be sold under the convertible bond hedge transaction and the conversion price will be adjusted if the Company pays a cash dividend greater than a regular quarterly cash dividend of $0.225 per share or makes a distribution to all or substantially all holders of its common stock. Adjusting for dividends paid through March 29, 2015, the counterparties agreed to sell to the Company up to approximately 16.3 million shares of the Company’s common stock, which is the number of shares issuable upon conversion of the 0.5% Notes due 2020 in full, at a price of $91.95 per share as of March 29, 2015. This convertible bond hedge transaction will be settled in net shares and will terminate upon the earlier of the maturity date of the 0.5% Notes due 2020 or the first day none of the 0.5% Notes due 2020 remain outstanding due to conversion or otherwise. As of March 29, 2015, the Company had not purchased any shares under this convertible bond hedge agreement. Settlement of the convertible bond hedge in net shares, based on the number of shares issuable upon conversion of the 0.5% Notes due 2020, on the maturity date would result in the Company receiving net shares equivalent to the number of shares issuable by the Company upon conversion of the 0.5% Notes due 2020.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

In addition, concurrent with the issuance of the 0.5% Notes due 2020, the Company sold warrants to purchase up to approximately 16.3 million shares of the Company’s common stock at an exercise price of $122.9220 per share. The warrant agreement contains provisions whereby the number of shares to be acquired under the warrants and the strike price are adjusted if the Company pays a cash dividend greater than a regular quarterly cash dividend of $0.225 per share or makes a distribution to all or substantially all holders of its common stock. Adjusting for dividends paid through March 29, 2015, holders of the warrants may acquire up to approximately 16.3 million shares of the Company’s common stock at a strike price of $122.6054 per share as of March 29, 2015. The warrants mature on 40 different dates from January 13, 2021 through March 11, 2021 and are exercisable at the maturity date. At each maturity date, the Company may, at its option, elect to settle the warrants on a net share basis. As of March 29, 2015, the warrants had not been exercised and remained outstanding. The value of the warrants was initially recorded in equity and continues to be classified as equity.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)


Note 8.	Stock Repurchases

The Company’s Board of Directors authorized in October 2011 a program to repurchase up to $500.0 million of shares of the Company’s common stock. The stock repurchase program was increased by an additional $750.0 million by the Company’s Board of Directors in December 2012 and was fully expended by the end of the third quarter of 2013. In July 2013, the Company’s Board of Directors authorized a new stock repurchase program of $2.50 billion and in January 2015, the Company’s Board of Directors increased the stock repurchase program by an additional $2.50 billion. As of March 29, 2015, $2.38 billion remained available for stock repurchases. The current stock repurchase program will remain in effect until the available funds have been expended or the Company’s Board of Directors terminates the program.

Under the Company’s stock repurchase programs, from the fourth quarter of 2011 through March 29, 2015, the Company spent an aggregate $3.87 billion to repurchase 54.7 million shares. Included in the aggregate repurchase activity are 9.3 million shares that were repurchased for an aggregate amount of $750.0 million during the three months ended March 29, 2015. In addition to repurchases under the Company’s stock repurchase program, during the three months ended March 29, 2015, the Company spent $33.8 million to settle employee tax withholding obligations due upon the vesting of restricted stock units (“RSUs”) and withheld an equivalent value of shares from the shares provided to the employees upon vesting.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)


Note 9.	Stockholders’ Equity and Share‑based Compensation

Dividends

During the three months ended March 29, 2015, the Company’s Board of Directors declared the following dividend:

Declaration Date

Dividend per Share

Record Date

Total Amount Declared

Payment Date

(In millions)

January 20, 2015

0.30

March 2, 2015

65.9

March 23, 2015

On April 14, 2015, the Company’s Board of Directors declared a dividend of $0.30 per share for holders of record as of May 4, 2015, which is to be paid on May 26, 2015. Future dividends are subject to declaration by the Company’s Board of Directors.

Share-based Benefit Plans

Share-based Plans. The Company has a share-based compensation program that provides its Board of Directors with broad discretion in creating equity incentives for employees, officers, non-employee board members and non-employee service providers. This program includes incentive and non-statutory stock option awards, stock appreciation right awards (“SARs”), RSU awards, performance-based cash bonus awards for Section 16 executive officers and an automatic grant program for non-employee board members pursuant to which such individuals will receive option grants or other stock awards at designated intervals over their period of board service. These awards are granted under various programs, all of which are stockholder approved. Stock option awards generally vest as follows: 25% of the shares vest on the first anniversary of the vesting commencement date and the remaining 75% vest proportionately each quarter over the next 12 quarters of continued service. RSU awards generally vest in equal annual installments over a four-year period. Grants to non-employee board members generally vest in one installment on the earlier of (i) the first anniversary of the grant date or (ii) the day immediately preceding the next annual meeting of the Company’s stockholders following the grant date. Additionally, the Company has an Employee Stock Purchase Plan (“ESPP”) that allows employees to purchase shares of common stock at 85% of the fair market value at the subscription date or the date of purchase, whichever is lower.

Valuation Assumptions

Option Plan Shares. The fair value of the Company’s stock options granted to employees, officers and non-employee board members was estimated using the following weighted-average assumptions:



	Three months ended
	March 29, 2015	March 30, 2014
Dividend yield	1.52%	1.25%
Expected volatility	0.32	0.32
Risk-free interest rate	1.18%	1.22%
Expected term	4.2 years	4.4 years
Estimated annual forfeiture rate	8.79%	8.51%
Weighted-average fair value at grant date	$19.56	$18.53

RSU Plan Shares. The fair value of the Company’s RSU awards granted was valued using the closing price of the Company’s stock price on the date of grant.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Employee Stock Purchase Plan Shares. The fair value of shares issued under the Company’s ESPP program was estimated using the following weighted-average assumptions:



	Three months ended
	March 29, 2015	March 30, 2014
Dividend yield	1.52%	1.25%
Expected volatility	0.36	0.31
Risk-free interest rate	0.07%	0.08%
Expected term	½ year	½ year
Weighted-average fair value at purchase date	$20.20	$17.25

Share-based Compensation Plan Activities

Stock Options and SARs. A summary of stock option and SARs activities under all of the Company’s share-based compensation plans as of March 29, 2015 and changes during the three months ended March 29, 2015 are presented below:



	Shares		Weighted-Average Exercise Price Per Share		Weighted-Average Remaining Contractual Term	Aggregate Intrinsic Value
	(In thousands)				(Years)	(In thousands)
Options and SARs outstanding as of December 28, 2014	4,090			$51.94	4.5	$	202,044
Granted	936			$82.30
Exercised	(266	)		$41.25		$	163,623
Forfeited	(38	)		$62.41
Expired	(2	)		$27.02
Options and SARs outstanding as of March 29, 2015	4,720			$58.49	4.8	$	58,404
Options and SARs vested and expected to vest after March 29, 2015, net of forfeitures	4,384			$57.35	4.7	$	57,300
Options and SARs exercisable as of March 29, 2015	1,853			$44.26	3.4	$	40,054

As of March 29, 2015, the total unrecognized compensation cost related to stock options, net of estimated forfeitures, was approximately $44.1 million, and this amount is expected to be recognized over a weighted-average period of approximately 2.6 years. As of March 29, 2015, the Company had fully expensed all of its SARs awards.

Restricted Stock Units. RSUs are settled in shares of the Company’s common stock upon vesting on a one-for-one basis. Typically, vesting of RSUs is subject to the employee’s continuing service to the Company. The cost of these awards is determined using the fair value of the Company’s common stock on the date of grant, and compensation is recognized on a straight-line basis over the requisite vesting period.

A summary of the changes in RSUs outstanding under the Company’s share-based compensation plans during the three months ended March 29, 2015 is presented below:



	Shares		Weighted-Average Grant Date Fair Value Per Share		Aggregate Intrinsic Value
	(In thousands)				(In thousands)
Non-vested share units as of December 28, 2014	5,587			$67.18	$	375,366
Granted	2,043			$81.98
Vested	(1,332	)		$59.78	$	109,863
Forfeited	(124	)		$77.21
Non-vested share units as of March 29, 2015	6,174			$67.18	$	453,805

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The number of restricted stock units vested includes shares of common stock that the Company withheld on behalf of employees to satisfy the minimum statutory tax withholding requirements. Total payments for the employees’ tax obligations to taxing authorities are reflected as a financing activity within the Condensed Consolidated Statements of Cash Flows. These net-share settlements had the effect of share repurchases by the Company as they reduced and retired the number of shares that would have otherwise been issued as a result of the vesting. See Note 8, “Stock Repurchases.”

As of March 29, 2015, the total unrecognized compensation cost related to RSUs, net of estimated forfeitures, was approximately $346.1 million, and this amount is expected to be recognized over a weighted-average period of approximately 2.9 years.

Employee Stock Purchase Plan. As of March 29, 2015, the total unrecognized compensation cost related to ESPP was approximately $5.5 million, and this amount is expected to be recognized over a period of five months.

Share-based Compensation Expense. The following tables set forth the detailed allocation of the share-based compensation expense:



	Three months ended
	March 29, 2015			March 30, 2014
	(In thousands)
Share‑based compensation expense by caption:
Cost of revenue	$	4,062		$	2,610
Research and development	21,043			15,675
Sales and marketing	9,535			6,257
General and administrative	6,770			5,488
Total share‑based compensation expense	41,410			30,030
Total tax benefit recognized	(11,069		)	(8,776		)
Decrease in net income	$	30,341		$	21,254

Share‑based compensation expense by type of award:
Stock options	$	8,028		$	7,924
RSUs	30,225			19,465
ESPP	3,157			2,641
Total share‑based compensation expense	41,410			30,030
Total tax benefit recognized	(11,069		)	(8,776		)
Decrease in net income	$	30,341		$	21,254

Share-based compensation expense of $5.4 million and $4.3 million related to manufacturing personnel was capitalized into inventory as of March 29, 2015 and December 28, 2014, respectively.

The total grant date fair value of options and RSUs vested during the period was as follows:



	Three months ended
	March 29, 2015		March 30, 2014
	(In thousands)
Options	$	10,787	$	10,228
RSUs	79,628		49,866
Total grant date fair value of options and RSUs vested during the period	$	90,415	$	60,094

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SANDISK CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)


Note 10.	Restructuring and Other

The Company recorded the following in Restructuring and other:



	Three months ended
	March 29, 2015
	(In thousands)
Restructuring costs	$	4,250
Other costs	36,291
Total restructuring and other	$	40,541

Restructuring Costs. During 2014, the Company implemented a restructuring plan which primarily consisted of reductions in workforce in certain functions of the organization, in the U.S. and certain foreign countries, because of redundant activities due to the Fusion‑io acquisition, as well as realignment of certain projects. The restructuring costs under this plan for the three months ended March 29, 2015 were $4.3 million, related primarily to an excess lease obligation, and severance and benefits for involuntary terminations. All expenses, including adjustments, associated with the restructuring plan are included in Restructuring and other in the Condensed Consolidated Statements of Operations.

The following table sets forth an analysis of the components of the restructuring charge and payments made against the reserve as of March 29, 2015:



	Severance and Benefits			Other Charges			Total
	(In thousands)
Accrual balance at December 28, 2014	$	4,771		$	40		$	4,811
Charges	1,147			3,128			4,275
Adjustments	(25		)	—			(25		)
Cash payments	(3,868		)	(85		)	(3,952		)
Non-cash items	—			(1,126		)	(1,126		)
Accrual balance at March 29, 2015	$	2,025		$	1,957		$	3,983

The Company anticipates that the remaining restructuring reserve balance will be paid out in cash through the second quarter of 2015 for employee terminations and over the remaining lease term through 2021 for the excess lease obligation.

Other Costs. During the three months ended March 29, 2015, the Company recognized other costs of $36.3 million related primarily to legal settlements and also to Fusion‑io post-merger integration expenses.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)


Note 11.	Provision for (Benefit from) Income Taxes

The following table presents the provision for income taxes and the effective tax rate:



	Three months ended
	March 29, 2015			March 30, 2014
	(In thousands, except percentages)
Provision for (benefit from) income taxes	$	(5,408	)	$	140,591
Tax rate	(16.1		%)	34.3		%

The negative tax rate for the three months ended March 29, 2015 is primarily attributable to a discrete benefit recorded as a result of tax audit settlements and a low pre-tax profit due to an impairment charge related to an IPR&D intangible asset. The provision for income taxes for the three months ended March 29, 2015 prior to discrete items differs from the U.S. statutory tax rate of 35% due primarily to the tax impact of earnings from foreign operations, state taxes, non-deductibility of certain share-based compensation and tax-exempt interest income. Earnings and taxes resulting from foreign operations are largely attributable to the Company’s Chinese, Irish, Israeli, Japanese and Malaysian entities. Earnings in these countries where tax rates are lower than the U.S. notional rate contributed to the majority of the difference between the rate of the Company’s tax provision and the U.S. statutory tax rate. As of March 29, 2015, the Company believes that most of its deferred tax assets are more likely than not to be realized, except for certain loss and credit carry forwards in certain U.S. and foreign tax jurisdictions.

As of March 29, 2015, the Company had not made a provision for U.S. income taxes or foreign withholding taxes on $1.29 billion of undistributed earnings of foreign subsidiaries as the Company intends to indefinitely reinvest these earnings outside the U.S. to fund its international capital expenditures and operating requirements. The Company determined that it is not practicable to calculate the amount of unrecognized deferred tax liability related to these cumulative unremitted earnings. If these earnings were distributed to the U.S., the Company would be subject to additional U.S. income taxes and foreign withholding taxes reduced by any available foreign tax credits.

Unrecognized tax benefits were $120.4 million and $125.2 million as of March 29, 2015 and December 28, 2014, respectively. Unrecognized tax benefits that would impact the effective tax rate in the future were approximately $94.6 million at March 29, 2015. Income tax expense for the three months ended March 29, 2015 and March 30, 2014 included interest and penalties of ($3.2) million and $0.7 million, respectively. It is reasonably possible that the unrecognized tax benefits could decrease by approximately $33.4 million within the next 12 months as a result of the expiration of statutes of limitations and potential settlements of tax authority examinations. The Company is currently under audit by several tax authorities in which the timing of the resolution and/or closure of these audits is highly uncertain. Therefore it is not possible to estimate other changes to the amount of unrecognized tax benefits for positions existing as of March 29, 2015.

The Company is subject to U.S. federal income tax as well as income taxes in multiple state and foreign jurisdictions. In the first quarter of 2015, the Company received and signed the closing agreement with the Internal Revenue Service (“IRS”) related to the examination of the Company’s federal income tax returns for 2009 through 2011 and finalized audits with various state tax authorities. During the three months ended March 29, 2015, the Company recorded a discrete benefit of $20.9 million as a result of several audit settlements. The Company is currently under audit by various state and international tax authorities. The Company cannot reasonably estimate the outcome of these examinations, or provide assurance that the outcome of these examinations will not materially harm the Company’s financial position, results of operations or liquidity.

The Company has tax holidays in Malaysia that begin to expire in December 2028. The impact of the tax holidays was immaterial to all periods presented.

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SANDISK CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)


Note 12.	Net Income per Share

The following table sets forth the computation of basic and diluted net income per share:



	Three months ended
	March 29, 2015		March 30, 2014
	(In thousands, except per share amounts)
Numerator for basic net income per share:
Net income	$	39,025	$	268,948
Denominator for basic net income per share:
Weighted-average common shares outstanding	211,428		225,845
Basic net income per share	$	0.18	$	1.19

Numerator for diluted net income per share:
Net income	$	39,025	$	268,948
Denominator for diluted net income per share:
Weighted-average common shares outstanding	211,428		225,845
Incremental common shares attributable to exercise of outstanding employee stock options, SARs and ESPP (assuming proceeds would be used to purchase common stock), and RSUs	2,581		3,103
1.5% Notes due 2017	7,427		5,702
Warrants issued in conjunction with the 1.5% Notes due 2017	2,613		264
Shares used in computing diluted net income per share	224,049		234,914
Diluted net income per share	$	0.17	$	1.14

Anti-dilutive shares excluded from net income per share calculation	34,262		33,000

Basic earnings per share exclude any dilutive effects of stock options, SARs, RSUs, warrants and convertible debt. Diluted earnings per share include the dilutive effects of stock options, SARs, RSUs, ESPP, the 1.5% Notes due 2017 and warrants issued in conjunction with the 1.5% Notes due 2017. Certain common stock issuable under stock options, RSUs, the 0.5% Notes due 2020 and warrants issued in conjunction with the 0.5% Notes due 2020, has been omitted from the current year diluted net income per share calculation because the inclusion is considered anti-dilutive. Certain common stock issuable under stock options, SARs, RSUs, the 0.5% Notes due 2020, and warrants issued in conjunction with the 0.5% Notes due 2020, has been omitted from the prior year diluted net income per share calculation because the inclusion is considered anti-dilutive.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)


Note 13.	Commitments, Contingencies and Guarantees

Flash Ventures

Flash Ventures, the Company’s business ventures with Toshiba, consists of three separate legal entities: Flash Partners Ltd., Flash Alliance Ltd. and Flash Forward Ltd. The Company has a 49.9% ownership interest in each of these entities and Toshiba owns 50.1% of each of these entities. Through these ventures, the Company and Toshiba have collaborated in the development and manufacture of NAND flash memory products, which are manufactured by Toshiba at its wafer fabrication facility located in Yokkaichi, Japan, using semiconductor manufacturing equipment owned or leased by Flash Ventures. The entities within Flash Ventures purchase wafers from Toshiba at cost and then resell those wafers to the Company and Toshiba at cost plus a markup. The Company accounts for its ownership position in each Flash Ventures entity under the equity method of accounting. The Company is committed to purchase its provided three-month forecast of Flash Ventures’ NAND wafer supply, which generally equals 50% of Flash Ventures’ output. The Company is not able to estimate its total wafer purchase commitment obligation beyond its rolling three-month purchase commitment because the price is determined by reference to the future cost of producing the semiconductor wafers. In addition, the Company is committed to fund 49.9% to 50% of Flash Ventures’ costs to the extent that Flash Ventures’ revenue from wafer sales to the Company and Toshiba are insufficient to cover these costs.

Flash Partners. Flash Partners Ltd. (“Flash Partners”) was formed in 2004. NAND flash memory products provided to the Company by this venture are manufactured by Toshiba primarily at its 300-millimeter wafer fabrication facility (“Fab 3”) located in Yokkaichi, Japan. As of March 29, 2015, the Company had notes receivable from Flash Partners of $28.6 million, denominated in Japanese yen. These notes are secured by the equipment purchased by Flash Partners with the note proceeds. The Company also has guarantee obligations to Flash Partners; see “Off-Balance Sheet Liabilities.” As of March 29, 2015 and December 28, 2014, the Company had an equity investment in Flash Partners of $170.0 million and $167.1 million, respectively, denominated in Japanese yen, adjusted by ($5.3) million and ($7.3) million, respectively, of cumulative translation adjustments recorded in AOCI. Flash Partners’ share of the Fab 3 fabrication facility is fully equipped.

Flash Alliance. Flash Alliance Ltd. (“Flash Alliance”) was formed in 2006. NAND flash memory products provided to the Company by this venture are manufactured by Toshiba primarily at its 300-millimeter wafer fabrication facility (“Fab 4”) located in Yokkaichi, Japan. As of March 29, 2015, the Company had notes receivable from Flash Alliance of $297.0 million, denominated in Japanese yen. These notes are secured by the equipment purchased by Flash Alliance with the note proceeds. The Company also has guarantee obligations to Flash Alliance; see “Off-Balance Sheet Liabilities.” As of March 29, 2015 and December 28, 2014, the Company had an equity investment in Flash Alliance of $254.7 million and $249.5 million, respectively, denominated in Japanese yen, adjusted by ($42.5) million and ($45.5) million, respectively, of cumulative translation adjustments recorded in AOCI. Flash Alliance’s share of the Fab 4 fabrication facility is fully equipped.

Flash Forward. Flash Forward Ltd. (“Flash Forward”) was formed in 2010. NAND flash memory products provided to the Company by this venture are manufactured by Toshiba primarily at its 300-millimeter wafer fabrication facility (“Fab 5”) located in Yokkaichi, Japan. Fab 5 was built in two phases. Phase 1 of the building is fully equipped. The Phase 2 shell of Fab 5 is complete and has been partially equipped. Phase 2 is currently intended to be used primarily for technology transition of the existing Flash Ventures wafer capacity to 1Y‑nanometer and 15‑nanometer technology nodes, the addition of a 3‑dimensional NAND (“3D NAND”) pilot line in the second half of 2015, and for the tools required for a planned increase in Flash Ventures wafer capacity of approximately 5%, with such wafer capacity increase expected to be completed by mid‑2015. As of March 29, 2015, the Company had notes receivable from Flash Forward of $157.6 million, denominated in Japanese yen. These notes are secured by the equipment purchased by Flash Forward with the note proceeds. The Company also has guarantee obligations to Flash Forward; see “Off-Balance Sheet Liabilities.” As of March 29, 2015 and December 28, 2014, the Company had an equity investment in Flash Forward of $81.8 million and $79.2 million, respectively, denominated in Japanese yen, adjusted by ($27.4) million and ($28.4) million, respectively, of cumulative translation adjustments recorded in AOCI.

In 2014, the Company entered into a non-binding memorandum of understanding with Toshiba related to the construction and operation of Toshiba’s “New Fab 2” fabrication facility, which is primarily intended to provide space to convert Flash Ventures’ current 2D NAND capacity to 3D NAND, with expected readiness for production in 2016.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Inventory Purchase Commitments with Flash Ventures. Purchase orders placed under Flash Ventures for up to three months are binding and cannot be canceled. These outstanding purchase commitments are included as part of the total “Noncancelable production purchase commitments” in the “Contractual Obligations” table.

Off-Balance Sheet Liabilities

Flash Ventures. Flash Ventures sells and leases back from a consortium of financial institutions (“lessors”) a portion of its tools and has entered into equipment master lease agreements of which the Company guarantees half of the total outstanding obligations. As of March 29, 2015, the total amount of the Company’s guarantee obligation of Flash Ventures’ master lease agreements, which reflects future payments and any lease adjustments, was 72.2 billion Japanese yen, or approximately $606 million, based upon the exchange rate at March 29, 2015.

The master lease agreements contain customary covenants for Japanese lease facilities. In addition to containing customary events of default related to Flash Ventures that could result in an acceleration of Flash Ventures’ obligations, the master lease agreements contain an acceleration clause for certain events of default related to the Company as guarantor, including, among other things, the Company’s failure to maintain a minimum stockholders’ equity of at least $1.51 billion. As of March 29, 2015, Flash Ventures was in compliance with all of its master lease covenants, including the stockholders’ equity covenant with the Company’s stockholders’ equity at $5.84 billion as of March 29, 2015. If the Company’s stockholders’ equity falls below $1.51 billion, or other events of default occur, Flash Ventures would become non-compliant 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 the Company, 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 non-compliance event were to occur and if the Company failed to reach a resolution, the Company could be required to pay a portion or the entire outstanding lease obligations covered by its guarantees under such Flash Ventures master lease agreements.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The following table details the Company’s portion of the remaining guarantee obligations under each of Flash Ventures’ master lease facilities (both initial and refinanced leases) in both Japanese yen and U.S. dollar-equivalent based upon the exchange rate at March 29, 2015:



Master Lease Agreements by Execution Date	Lease Type	Lease Amounts				Expiration
		(Japanese yen, in billions)		(U.S. dollar, in thousands)
Flash Partners:
March 2012	Refinanced	¥	1.6	$	13,367	2015
March 2014	Initial	4.4		36,719		2019
December 2014	Initial	3.2		27,255		2019
		9.2		77,341
Flash Alliance:
March 2012	Initial	4.8		40,115		2017
July 2012	Refinanced	8.9		74,880		2017
March 2014	Initial	4.3		35,799		2019
May 2014	Initial	5.7		48,041		2019
August 2014	Initial	6.0		50,859		2019
December 2014	Initial	5.0		41,916		2019
March 2015	Initial	10.0		83,956		2020
		44.7		375,566
Flash Forward:
November 2011	Initial	6.9		58,353		2016
March 2012	Initial	4.5		38,000		2017
July 2012	Initial	1.9		15,337		2017
December 2014	Initial	5.0		41,896		2019
		18.3		153,586
Total guarantee obligations		¥	72.2	$	606,493

The following table details the breakdown of the Company’s remaining guarantee obligations between the principal amortization and the purchase option exercise price at the end of the term of the master lease agreements, in annual installments as of March 29, 2015 in U.S. dollars based upon the Japanese yen to U.S. dollar exchange rate at March 29, 2015:



Annual Installments	Payment of Principal Amortization		Purchase Option Exercise Price at Final Lease Terms		Guarantee Amount
	(In thousands)
Year 1	$	158,063	$	15,254	$	173,317
Year 2	130,987		22,660		153,647
Year 3	83,840		46,528		130,368
Year 4	54,331		13,775		68,106
Year 5	28,927		36,239		65,166
Year 6	2,120		13,769		15,889
Total guarantee obligations	$	458,268	$	148,225	$	606,493

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Guarantees

Indemnification Agreements. The Company has agreed to indemnify suppliers and customers for alleged IP infringement. The scope of such indemnity varies, but may, in some instances, include indemnification for damages and expenses, including attorneys’ fees. The Company may periodically engage in litigation as a result of these indemnification obligations. The Company’s insurance policies exclude coverage for third‑party claims for patent infringement. Although the liability is not remote, the nature of the patent infringement indemnification obligations prevents the Company from making a reasonable estimate of the maximum potential amount it could be required to pay to its suppliers and customers. Historically, the Company has not made any significant indemnification payments under any such agreements. As of March 29, 2015 and December 28, 2014, no amounts have been accrued in the Condensed Consolidated Financial Statements with respect to these indemnification guarantees.

As permitted under Delaware law and the Company’s certificate of incorporation and bylaws, the Company has agreements, or has assumed agreements in connection with its acquisitions, whereby it indemnifies certain of its officers and employees, and each of its directors for certain events or occurrences while the officer, employee or director is, or was, serving at the Company’s or the acquired company’s request in such capacity. The term of the indemnification period is for the officer’s, employee’s or director’s lifetime. The maximum potential amount of future payments the Company could be required to make under these indemnification agreements is generally unlimited; however, the Company has a Director and Officer insurance policy that may reduce its exposure and enable it to recover all or a portion of any future amounts paid. As a result of its insurance coverage, the Company believes the estimated fair value of these indemnification agreements is minimal. The Company had no liabilities recorded for these agreements as of March 29, 2015 and December 28, 2014, as these liabilities are not reasonably estimable even though liabilities under these agreements are not remote.

The Company and Toshiba have agreed to mutually contribute to, and indemnify each other and Flash Ventures for, environmental remediation costs or liability resulting from Flash Ventures’ manufacturing operations in certain circumstances. The Company and Toshiba have also entered into a Patent Indemnification Agreement under which, in many cases, the Company will share in the expenses associated with the defense and cost of settlement associated with such claims. This agreement provides limited protection for the Company against third‑party claims that NAND flash memory products manufactured and sold by Flash Ventures infringe third‑party patents. The Company has not made any indemnification payments under any such agreements. As of March 29, 2015 and December 28, 2014, no amounts have been accrued in the Condensed Consolidated Financial Statements with respect to these indemnification guarantees.

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SANDISK CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Contractual Obligations and Off-Balance Sheet Arrangements

The following tables summarize the Company’s contractual cash obligations, commitments and off-balance sheet arrangements at March 29, 2015, and the effect such obligations are expected to have on its liquidity and cash flows in future periods.

Contractual Obligations. Contractual cash obligations and commitments as of March 29, 2015 were as follows:



	Total			1 Year (Remaining 9 months in 2015)		2 - 3 Years (2016 and 2017)		4 - 5 Years (2018 and 2019)		More than 5 Years (Beyond 2019)
	(In thousands)
Facility and other operating leases	$	64,335	⁽⁴⁾	$	12,202	$	21,821	$	15,802	$	14,510
Flash Ventures and other related commitments⁽¹⁾	3,324,907		⁽⁴⁾⁽⁵⁾	1,000,762		1,296,618		754,370		273,157
Convertible senior notes⁽²⁾	2,579,120			14,976		1,041,644		15,000		1,507,500
Noncancelable production purchase commitments⁽³⁾	266,366		⁽⁴⁾	257,016		9,350		—		—
Capital equipment purchase commitments	96,602			96,490		66		46		—
Operating expense commitments	60,915			59,963		952		—		—
Total contractual cash obligations	$	6,392,245		$	1,441,409	$	2,370,451	$	785,218	$	1,795,167


⁽¹⁾	Includes reimbursement for depreciation and lease payments on owned and committed equipment, funding commitments for loans and equity investments and reimbursement for other committed expenses, including research and development. Funding commitments assume no additional operating lease guarantees; additional operating lease guarantees can reduce funding commitments.


⁽²⁾	Includes principal and interest on both the 1.5% Notes due 2017 and the 0.5% Notes due 2020. See Note 7, “Financing Arrangements.”


⁽³⁾	Includes production purchase commitments to Flash Ventures and other suppliers.


⁽⁴⁾	Includes amounts denominated in a currency other than the U.S. dollar, which are subject to fluctuation in exchange rates prior to payment and have been translated using the exchange rate at March 29, 2015.


⁽⁵⁾	Excludes amounts related to the master lease agreements’ purchase option exercise price at final lease term.

The Company has excluded $126.3 million of unrecognized tax benefits (which includes penalties and interest) from the contractual obligation table above due to the uncertainty with respect to the timing of associated future cash flows at March 29, 2015. The Company is unable to make reasonably reliable estimates of the period of cash settlement with the respective taxing authorities.

Off-Balance Sheet Arrangements. Off-balance sheet arrangements were as follows:



	March 29, 2015
	(In thousands)
Guarantee of Flash Ventures equipment leases ⁽¹⁾	$	606,493


⁽¹⁾	The Company’s guarantee obligation, net of cumulative lease payments, was 72.2 billion Japanese yen, or approximately $606 million based upon the exchange rate at March 29, 2015.

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SANDISK CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The Company leases many of its office facilities and operating equipment for various terms under long-term, noncancelable operating lease agreements. The leases expire at various dates from 2015 through 2026. Future minimum lease payments are presented below:



	Future minimum lease payments
	(In thousands)
Year:
2015 (Remaining 9 months)	$	12,628
2016	11,986
2017	9,981
2018	8,791
2019	7,011
2020 and thereafter	14,510
Operating leases, gross	64,907
Sublease income to be received in the future under noncancelable subleases	(572		)
Operating leases, net	$	64,335

Net rent expense was as follows:



	Three months ended
	March 29, 2015		March 30, 2014
	(In thousands)
Rent expense, net	$	4,080	$	1,624

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SANDISK CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)


Note 14.	Related Parties and Strategic Investments

Flash Ventures with Toshiba. The Company owns 49.9% of each entity within Flash Ventures and accounts for its ownership position under the equity method of accounting. The Company’s obligations with respect to Flash Ventures’ master lease agreements, take-or-pay supply arrangements and R&D cost sharing are described in Note 13, “Commitments, Contingencies and Guarantees.” The financial and other support provided by the Company in all periods presented was either contractually required or the result of a joint decision to expand wafer capacity, transition to new technologies or refinance existing equipment lease commitments. Entities within Flash Ventures are variable interest entities (“VIEs”). The Company evaluated whether it is the primary beneficiary of any of the entities within Flash Ventures for all periods presented and determined that it is not the primary beneficiary of any of the entities within Flash Ventures because it does not have a controlling financial interest in any of those entities. In determining whether the Company is the primary beneficiary, the Company analyzed the primary purpose and design of Flash Ventures, the activities that most significantly impact Flash Ventures’ economic performance, and whether the Company had the power to direct those activities. The Company concluded, based upon its 49.9% ownership, the voting structure and the manner in which the day-to-day operations are conducted for each entity within Flash Ventures, that the Company lacked the power to direct most of the activities that most significantly impact the economic performance of each entity within Flash Ventures.

The Company purchased NAND flash memory wafers from Flash Ventures and made prepayments, investments and loans to Flash Ventures, totaling $503.8 million and $460.1 million during the three months ended March 29, 2015 and March 30, 2014, respectively. The Company received loan repayments from Flash Ventures of $89.7 million and $24.4 million during the three months ended March 29, 2015 and March 30, 2014, respectively. At March 29, 2015 and December 28, 2014, the Company had accounts payable balances due to Flash Ventures of $147.9 million and $136.1 million, respectively.

The Company’s maximum reasonably estimable loss exposure (excluding lost profits), based upon the exchange rate at each respective balance sheet date, as a result of its involvement with Flash Ventures, is presented below. Flash Ventures’ investments are denominated in Japanese yen and the maximum possible loss exposure excludes any cumulative translation adjustment due to revaluation from the Japanese yen to the U.S. dollar.



	March 29, 2015		December 28, 2014
	(In millions)
Notes receivable	$	483	$	467
Equity investments	507		496
Operating lease guarantees	606		551
Maximum estimable loss exposure	$	1,596	$	1,514

Solid State Storage Solutions, Inc. Solid State Storage Solutions, Inc. (“S4”) is a venture with third parties to license IP. S4 qualifies as a VIE. The Company is considered the primary beneficiary of S4 and the Company consolidates S4 in its Condensed Consolidated Financial Statements for all periods presented. The Company considered multiple factors in determining it was the primary beneficiary, including its overall involvement with the venture, contributions and participation in operating activities. S4’s assets and liabilities were not material to the Condensed Consolidated Balance Sheets as of March 29, 2015 and December 28, 2014.

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SANDISK CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)


Note 15.	Litigation

From time to time, the Company is involved in various litigation matters, including those described below, among others. The litigation proceedings in which the Company is involved from time to time may include matters such as IP, antitrust, commercial, labor, class action and insurance disputes. The semiconductor industry is characterized by significant litigation seeking to enforce patent and other IP rights. The Company has enforced, and likely will continue to enforce, its own IP rights through litigation and related proceedings.

In each case listed below where the Company is the defendant, the Company intends to vigorously defend the action. At this time, the Company does not believe it is reasonably possible that losses related to the litigation described below have occurred beyond the amounts, if any, which have been accrued. However, legal discovery and litigation is highly unpredictable and future legal developments may cause current estimates to change in future periods.

Patent Infringement and Antitrust Litigation With Round Rock Research LLC. On October 27, 2011, in response to infringement allegations by Round Rock Research LLC (“Round Rock”), the Company filed a lawsuit against Round Rock in the U.S. District Court for the Northern District of California. The lawsuit sought a declaratory judgment that 12 Round Rock patents are invalid and/or not infringed by flash memory products sold by the Company. Round Rock later withdrew its infringement allegations as to eight of the patents. The parties filed several motions for summary judgment directed to various claims and defenses. On June 13, 2014, the Company won multiple summary judgment motions, which included a ruling that it did not infringe two of the remaining four patents based on patent exhaustion because its memories were purchased from an authorized licensee and other rulings limiting the potential damages from the other two patents. On July 3, 2014, Round Rock dismissed the two remaining patents in the case in order to appeal the court’s summary judgment rulings. The court entered final judgment on July 3, 2014. On July 23, 2014, Round Rock filed a notice of appeal.

On May 3, 2012, Round Rock filed an action in the U.S. District Court for the District of Delaware alleging that the Company infringed eleven patents, and subsequently filed an amended complaint alleging that the Company’s infringement was willful. The parties agreed to dismiss one patent from this Delaware lawsuit that was also being litigated in the California case described above. On January 16, 2015, the court commenced a jury trial on liability issues as to two of the asserted patents. On January 28, 2015, the jury found that although the Company infringed four of ten claims asserted in the two patents, all of the asserted claims in those two patents are invalid. On February 4, 2015, the court issued an order granting summary judgment that five of the six asserted claims of another asserted patent are invalid.

On March 19, 2014, the Company filed an action against Round Rock in the U.S. District Court for the District of Delaware for antitrust violations arising from Round Rock’s acquisition of patents from Micron Technology, Inc. (“Micron”) and demand for royalties that are not reasonable and non-discriminatory for alleged infringement of patents that Round Rock claims are standards-essential. The Company alleged that Round Rock violated the antitrust laws by conspiring with Micron and violating commitments that Micron made to the standards-setting organization, JEDEC Solid State Technology Association. The antitrust case was stayed until after the January 2015 trial in the patent case.

On December 3, 2014, Round Rock filed another action in the U.S. District Court for the District of Delaware alleging that the Company infringed five patents, which patents were not at issue in the matters described above.

On March 27, 2015, the Company entered into a confidential settlement agreement with Round Rock resolving all pending litigation between the parties, which matters were subsequently dismissed with prejudice.

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SANDISK CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Ritz Camera Federal Antitrust Class Action. On June 25, 2010, Ritz Camera & Image, LLC (“Ritz”) filed a complaint in the U.S. District Court for the Northern District of California (the “District Court”), alleging that the Company violated federal antitrust law by conspiring to monopolize and monopolizing the market for flash memory products. The lawsuit captioned Ritz Camera & Image, LLC v. SanDisk Corporation, Inc. and Eliyahou Harari, former SanDisk Corporation Chief Executive Officer, purports to be on behalf of direct purchasers of flash memory products sold by the Company and joint ventures controlled by the Company from June 25, 2006 through the present. The complaint alleges that the Company created and maintained a monopoly by fraudulently obtaining patents and using them to restrain competition and by allegedly converting other patents for its competitive use. On February 24, 2011, the District Court issued an Order granting in part and denying in part the Company’s motion to dismiss, which resulted in Dr. Harari being dismissed as a defendant. On September 19, 2011, the Company filed a petition for permission to file an interlocutory appeal in the U.S. Court of Appeals for the Federal Circuit (the “Federal Circuit”) for the portion of the District Court’s Order denying the Company’s motion to dismiss based on Ritz’s lack of standing to pursue Walker Process antitrust claims. On October 27, 2011, the District Court administratively closed the case pending the Federal Circuit’s ruling on the Company’s petition. On November 20, 2012, the Federal Circuit affirmed the District Court’s order denying SanDisk’s motion to dismiss. On December 2, 2012, the Federal Circuit issued its mandate returning the case to the District Court. On July 5, 2013, the District Court granted Ritz’s motion to substitute in Albert Giuliano, the Chapter 7 Trustee of the Ritz bankruptcy estate, as the plaintiff in this case. On October 1, 2013, the District Court granted the Trustee’s motion for leave to file a third amended complaint, which adds CPM Electronics Inc. and E.S.E. Electronics, Inc. as named plaintiffs. On September 19, 2014, the District Court granted the plaintiffs’ motion for leave to file a fourth amended complaint, which adds a cause of action for attempted monopolization and adds MFLASH as a named plaintiff. The plaintiffs have filed a motion for class certification, and the Company has filed a motion for summary judgment as to all of the plaintiffs’ asserted claims. Both motions are fully briefed and have been taken under submission by the District Court. A trial date of June 22, 2015, as previously set by the District Court, has since been vacated.

Samsung Federal Antitrust Action Against Panasonic and SD‑3C. On July 15, 2010, Samsung Electronics Co., Ltd. (“Samsung”) filed an action in the U.S. District Court for the Northern District of California (the “District Court”) alleging various claims against Panasonic Corporation and Panasonic Corporation of North America (collectively, “Panasonic”) and SD‑3C, LLC (“SD‑3C”) under federal antitrust law pursuant to Sections 1 and 2 of the Sherman Act, and under California antitrust and unfair competition laws relating to the licensing practices and operations of SD‑3C. The complaint seeks an injunction against collection of Secure Digital (“SD”) card royalties, treble damages, restitution, pre- and post-judgment interest, costs, and attorneys’ fees, as well as a declaration that Panasonic and SD‑3C engaged in patent misuse and that the patents subject to such alleged misuse should be held unenforceable. The Company is not named as a defendant in this case, but it established SD‑3C along with Panasonic and Toshiba, and the complaint includes various factual allegations concerning the Company. As a member of SD‑3C, the Company may be responsible for a portion of any monetary award. Other requested relief, including an injunction or declaration of patent misuse, could result in a loss of revenue to the Company. The defendants filed a motion to dismiss on September 24, 2010, and Samsung filed a first amended complaint on October 14, 2010. On August 25, 2011, the District Court dismissed the patent misuse claim with prejudice but gave Samsung leave to amend its other claims. Samsung filed a second amended complaint on September 16, 2011. On January 3, 2012, the District Court granted the defendants’ motion to dismiss Samsung’s complaint without leave to amend. Samsung appealed. On April 4, 2014, the U.S. Court of Appeals for the Ninth Circuit (the “Appeals Court”) issued a decision reversing the District Court’s dismissal on statute of limitations grounds and remanding the case to the District Court for further proceedings. The Appeals Court denied the defendants’ petition for rehearing and issued its mandate to send the case back to the District Court. On November 12, 2014, the defendants filed a petition for writ of certiorari with the U.S. Supreme Court, which the U.S. Supreme Court subsequently denied. Samsung filed a third amended complaint on January 20, 2015. On February 13, 2015, the defendants filed a motion to dismiss, which is fully briefed and is set for hearing on May 8, 2015. The District Court has stayed discovery until after completion of the pleading stage.

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SANDISK CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Federal Antitrust Class Action Against SanDisk, et al. On March 15, 2011, a putative class action captioned Oliver v. SD‑3C LLC, et al was filed in the U.S. District Court for the Northern District of California (the “District Court”) on behalf of a nationwide class of indirect purchasers of SD cards alleging various claims against the Company, SD‑3C, LLC (“SD‑3C”), Panasonic Corporation, Panasonic Corporation of North America, Toshiba and Toshiba America Electronic Components, Inc. under federal antitrust law pursuant to Section 1 of the Sherman Act, California antitrust and unfair competition laws, and common law. The complaint seeks an injunction of the challenged conduct, dissolution of “the cooperation agreements, joint ventures and/or cross-licenses alleged herein,” treble damages, restitution, disgorgement, pre- and post-judgment interest, costs, and attorneys’ fees. The plaintiffs allege that the Company (along with the other members of SD‑3C) conspired to artificially inflate the royalty costs associated with manufacturing SD cards in violation of federal and California antitrust and unfair competition laws, which in turn allegedly caused the plaintiffs to pay higher prices for SD cards. The allegations are similar to, and incorporate by reference the complaint in the Samsung Electronics Co., Ltd. v. Panasonic Corporation; Panasonic Corporation of North America; and SD‑3C LLC described above. On May 21, 2012, the District Court granted the defendants’ motion to dismiss the complaint with prejudice. The plaintiffs appealed. On May 14, 2014, the appeals court issued a decision reversing the District Court’s dismissal on statute of limitations grounds and remanding the case to the District Court for further proceedings. The appeals court denied the defendants’ petition for rehearing and issued its mandate to send the case back to the District Court. On December 1, 2014, the defendants filed a petition for writ of certiorari with the U.S. Supreme Court, which the U.S. Supreme Court subsequently denied. On February 3, 2015, the plaintiffs filed a second amended complaint in the District Court. On February 27, 2015, the defendants filed a motion to dismiss, which is fully briefed and is set for hearing on May 8, 2015. The District Court has stayed discovery until after completion of the pleading stage.

Trade Secret Litigation Against SK hynix Inc., et al. On March 13, 2014, the Company filed a civil action in Santa Clara Superior Court in California against SK hynix Inc. (“Hynix”) and certain related entities for trade secret misappropriation arising from the theft of trade secrets by a former employee of the Company and the defendants’ wrongful receipt and use of such information. The lawsuit seeks damages, an injunction and other remedies. Additionally, in March 2014, SanDisk submitted a criminal complaint to the Tokyo Metropolitan Police Department against the former employee. On April 3, 2014, the former employee was indicted by the Tokyo District Public Prosecutor’s Office for theft of trade secrets. The former employee’s criminal trial was held in January 2015. The former employee was convicted and, in March 2015, was sentenced to five years of imprisonment and a fine of 3 million yen.

In June 2014, the Company moved for a preliminary injunction requiring Hynix to stop using any of the Company’s information received from the former employee and to return stolen Company material. On July 1, 2014, the court issued a preliminary injunction prohibiting Hynix from using or disclosing trade secret information that originated from materials taken by the former employee and ordering Hynix to provide certain information to the Company’s counsel to facilitate the identification of those documents taken by the former employee that are in Hynix’s possession. The order does not preclude Hynix from continuing to sell NAND flash products that it has already qualified for commercial sale. Hynix has filed a notice of appeal of the court’s preliminary injunction and also moved to stay enforcement of the order pending the appeal. On July 16, 2014, the court denied Hynix’s motion with respect to the portion of the order prohibiting use or disclosure of the trade secret information, but granted the motion to stay with respect to the other portion of the order. On November 6, 2014, Hynix removed the case to federal court. On March 26, 2015, the federal court granted the Company’s motion to remand the case to state court and denied Hynix’s motions to compel arbitration and dismiss the case on inconvenient forum grounds.

Federal Securities Class Action Against Fusion‑io et al. Beginning on November 19, 2013, Fusion‑io and certain of its officers were named in three putative class action lawsuits filed in the United States District Court for the Northern District of California (Denenberg v. Fusion‑io, Inc. et al.; Miami Police Relief & Pension Fund v. Fusion‑io, Inc. et al.; Marriott v. Fusion‑io, Inc. et al.). Two of the complaints are allegedly brought on behalf of a class of purchasers of Fusion‑io’s common stock between August 10, 2012 and October 23, 2013, and one is brought on behalf of a purported class of purchasers between January 25, 2012 and October 23, 2013. The complaints generally allege violations of the federal securities laws arising out of alleged misstatements or omissions by the defendants during the alleged class periods. The complaints seek, among other things, compensatory damages and attorneys’ fees and costs on behalf of the putative class. On June 10, 2014, the Court consolidated the cases, appointed a lead plaintiff, and ordered the plaintiffs to file an amended consolidated complaint. On August 6, 2014, a consolidated amended complaint was filed on behalf of a putative class of purchasers of Fusion‑io common stock between October 25, 2012 and October 23, 2013, inclusive. The consolidated complaint generally alleges violations of the federal securities laws arising out of alleged misstatements or omissions by the defendants during the alleged class period and seeks, among other things, compensatory damages and attorneys’ fees and costs on behalf of the putative class. On February 12, 2015, the Court granted the defendants’ motion to dismiss, with leave to amend.

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SANDISK CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Federal Securities Class Action Against SanDisk et al. On March 30, 2015, the Company and certain of its officers were named in a putative class action lawsuit filed in the United States District Court for the Northern District of California (Glore v. SanDisk Corp. et al.). The complaint is allegedly brought on behalf of a class of purchasers of the Company’s securities between October 16, 2014 and March 25, 2015, and alleges violations of federal securities laws arising out of alleged misstatements or omissions by the defendants during the alleged class period. The complaint seeks, among other things, compensatory damages and attorneys’ fees and costs on behalf of the putative class.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Overview

We are a global leader in NAND flash storage solutions. We sell our products globally to commercial and retail customers. We design, develop and manufacture data storage solutions in a variety of form factors using flash memory, controller, firmware and software technologies. Our solutions include client solid state drives, or SSDs, enterprise SSDs and solutions, embedded products, removable cards, universal serial bus, or USB, drives, wireless media drives, digital media players, and wafers and components. Our SSD products are used in both client computing platforms and enterprise data centers and provide high-speed, high-capacity storage solutions that can be used in lieu of hard disk drives. Our embedded flash products are used in mobile phones, tablets, notebooks, computing platforms, imaging devices, and many other products. Our removable cards are used in a wide range of applications such as mobile phones, tablets, digital cameras, gaming devices, personal computers, or PCs, automobiles and many other products.

We have a deep understanding of the technology used in the design, manufacture and operation of NAND flash and have invented many of the key NAND flash technologies and solutions. We strive to continuously reduce the cost of NAND flash in order to continue to grow our markets, supply a diverse set of customers and channels, and enable us to profitably grow our business. A key component of our ability to reduce the cost of NAND flash is our ability to continue to transition our NAND flash manufacturing technology to smaller geometries. We began transitioning to the 15‑nanometer node (also referred to as 1Z‑nanometer), in the second half of 2014 and expect to continue ramping production on this node throughout 2015. We expect 15‑nanometer to be our last technology node on 2‑dimensional, or 2D, NAND flash architecture. We are investing in our 3‑dimensional, or 3D, NAND architecture, which we refer to as BiCS, and we will begin pilot line production of our 3D NAND in the second half of 2015 and expect to ramp commercial volume production of 3D NAND in 2016. We are also investing in 3D resistive RAM, or 3D ReRAM, technology which we believe may be a future alternative to NAND. We expect 2D NAND, 3D NAND and potential future technologies, including 3D ReRAM, to co-exist for an extended period of time.

Through our investments in our ventures with Toshiba and our in‑house assembly and test facilities, we have invested heavily in a vertically integrated business model. We purchase substantially all of our NAND flash supply requirements through Flash Ventures, our significant venture relationships with Toshiba, which produce and provide us with leading‑edge, high‑quality, low‑cost NAND flash wafers. While substantially all of our flash memory supply is purchased from Flash Ventures, from time-to-time, we also purchase flash memory from other NAND flash manufacturers. While we do not unilaterally control the operations of Flash Ventures, we believe that our vertically integrated business model helps us to reduce the costs of producing our products, increases our ability to control the quality of our products and speeds delivery to our customers. Our vertically integrated manufacturing operations are concentrated in three locations, with Flash Ventures located in Yokkaichi, Japan, our in‑house assembly and test operations located in Shanghai, China and our new in-house assembly and test operations located in Penang, Malaysia. We also utilize third‑party contract manufacturers in China, Malaysia, Taiwan and the U.S.

Most of our products are made by combining NAND flash memory with a controller and firmware, and, increasingly, many of our SSD solutions incorporate software. We use controllers which we have designed in‑house as well as controllers purchased from third‑parties. Our controllers that are designed in‑house are manufactured at third‑party foundries. The vast majority of our products use firmware that is developed in‑house.

Our revenue is derived from two sales channels, the Retail sales channel and the Commercial sales channel. Retail channel sales are made directly to retail customers and indirectly through distributors to retail customers. Commercial channel sales are made directly and through distributors to OEMs, system integrators and value-added resellers who bundle, embed or integrate our data storage solutions, and directly to enterprise customers. Our Commercial revenue also includes direct sales and license and royalty revenue related to our IP.

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Industry and Company Trends

We operate in an industry characterized by rapid technology transitions and evolving end-user markets for NAND flash. We believe that over the next several years, the largest growth areas for NAND flash will be SSD solutions in the enterprise and hyperscale data center and client computing markets. Within the market for mobile and connected applications, we expect growth in the adoption of smartphones and other mobile devices, as well as increasing storage capacity in these devices, to continue to drive increasing NAND flash storage demand. In addition, we expect to see growth in the usage of NAND flash memory in new applications, such as automobiles and connected homes. We expect the market for NAND flash memory solutions in consumer electronics, such as imaging devices and USB drives, to be approximately constant or declining over the next several years. We continue to focus on adapting our business to the changing end markets for NAND flash and aligning our resources accordingly.

For 2015, our expectations include:


•	We expect that industry bit-supply growth for 2015 will be approximately 35% to 40%, similar to the estimated industry supply growth rate in 2014 and 2013, and we expect our captive bit-supply growth to be within this industry growth range.


•	We expect our 2015 revenue to decline from 2014, with the primary factors being:


(1)	A significant client SSD program has ended for us at a large customer. Our revenue from this program in the first quarter of 2015 was substantially down sequentially and year-over-year, and we expect no further revenue from this program.


(2)	We expect minimal offsetting growth from enterprise solutions revenue in 2015 due to the timing of introduction and qualification of certain products on our roadmap relative to market demand shifts.


(3)	We are increasing our inventory levels in order to better meet customer service levels. As a result, our captive revenue bit growth will be less than our captive supply bit growth. At the same time, we expect our price decline in 2015 to be greater than the 22% blended price decline experienced in 2014.

•

We expect our 2015 blended average cost reduction per gigabyte to be between 15% and 25%. We expect our cost reduction in 2015 to come primarily from the 1Y‑nanometer and 15‑nanometer technology transitions, increased usage of X3 memory, and an expected positive impact from the Japanese yen to U.S. dollar exchange rate for Japanese yen denominated wafer purchases, partially offset by inventory-related charges recorded in the first quarter of 2015, a higher usage of non-captive memory and start-up costs related to our manufacturing facilities. The largest portion of our first quarter inventory-related charges was for excess non-captive memory used in enterprise PCIe products and excess controllers used in client SSDs, both due to demand reductions.


•	In the second quarter of 2015, we expect to implement expense reduction measures, including certain reductions in our non-factory headcount.

As part of our efforts to continuously reduce the cost of NAND flash, we are currently focused on transitioning our products to 1Y‑nanometer and 15‑nanometer technologies, with the 15‑nanometer node ramping across 2015. Our 1Y‑nanometer and 15‑nanometer nodes have increased manufacturing equipment requirements relative to previous nodes, which reduce the cost reduction benefits obtainable through these technologies compared with previous technology node transitions. We continue to develop our 3D NAND architecture and we expect to begin pilot line production of our 3D NAND in the second half of 2015 and ramp commercial volume production of 3D NAND in 2016. One of our competitors has introduced products based on its 3D NAND technology, and other competitors have announced the expected launch in 2015 of products incorporating 3D NAND technologies. At this time, these technologies are still emerging and it is unclear how these new technologies will compare to our 3D NAND technology and what implications other 3D NAND approaches may have for our industry or our business in terms of cost leadership, technology leadership, supply increases and product specifications. We believe that our 15‑nanometer 2D NAND is currently the industry’s lowest cost NAND and is capable of addressing a broad range of market opportunities. We are also investing in 3D ReRAM technology, which we believe may be a viable alternative to NAND flash memory in the future. We expect 2D NAND, 3D NAND and potential future technologies, including 3D ReRAM, to co-exist for an extended period of time.

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Results of Operations



	Three months ended
	March 29, 2015			% of Revenue		March 30, 2014			% of Revenue
	(In millions, except percentages)
Revenue	$	1,332.2		100	%	$	1,511.9		100	%
Cost of revenue	762.4			57	%	741.0			49	%
Amortization of acquisition-related intangible assets	24.8			2	%	19.6			1	%
Total cost of revenue	787.2			59	%	760.6			50	%
Gross profit	545.0			41	%	751.3			50	%
Operating expenses:
Research and development	222.7			17	%	198.8			13	%
Sales and marketing	101.8			8	%	77.0			6	%
General and administrative	48.0			4	%	48.7			3	%
Amortization of acquisition-related intangible assets	13.7			1	%	1.6			—	%
Impairment of acquisition-related intangible assets	61.0			5	%	—			—	%
Restructuring and other	40.6			3	%	—			—	%
Total operating expenses	487.8			38	%	326.1			22	%
Operating income	57.2			4	%	425.2			28	%
Other income (expense), net	(23.6		)	(3	%)	(15.7		)	—	%
Income before income taxes	33.6			3	%	409.5			27	%
Provision for (benefit from) income taxes	(5.4		)	0	%	140.6			9	%
Net income	$	39.0		3	%	$	268.9		18	%

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Revenue Mix by Channel.



	Three months ended
	March 29, 2015		% of Total		March 30, 2014		% of Total		% Change
	(In millions, except percentages)
Commercial ⁽¹⁾	$	867.2	65	%	$	978.6	65	%	(11	%)
Retail	465.0		35	%	533.3		35	%	(13	%)
Total revenue	$	1,332.2	100	%	$	1,511.9	100	%	(12	%)


⁽¹⁾	Commercial includes revenue from OEMs, system integrators, value-added resellers, direct sales and license and royalties.

The 12% decrease in our revenue for the three months ended March 29, 2015, compared to the three months ended March 30, 2014, reflected a 29% decline in the blended average selling price per gigabyte partially offset by a 24% increase in the number of gigabytes sold.


•	The decrease in our Commercial revenue for the three months ended March 29, 2015, compared to the three months ended March 30, 2014, is primarily related to lower sales of client SSDs, cards, and wafers and components, partially offset by higher sales of enterprise solutions and embedded products.


•	The decrease in our Retail revenue for the three months ended March 29, 2015, compared to the three months ended March 30, 2014, was primarily driven by lower sales of cards.

Our ten largest customers represented 46% and 49% of our total revenue in the three months ended March 29, 2015 and March 30, 2014, respectively. One customer exceeded 10% of our total revenue and represented 17% of our total revenue in each of the three months ended March 29, 2015 and March 30, 2014.

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Revenue Mix by Category ⁽¹⁾.



	Three months ended
	March 29, 2015		March 30, 2014
	(Percent of revenue)
Embedded ⁽²⁾	25	%	20	%
Removable ⁽³⁾	38	%	40	%
Client SSD Solutions ⁽⁴⁾	13	%	22	%
Enterprise Solutions ⁽⁵⁾	14	%	6	%
Other ⁽⁶⁾	10	%	11	%
Total revenue	100	%	100	%


⁽¹⁾	Revenue by category is estimated based on analysis of the information we collect in our sales reporting processes. Percentages may not add to 100% due to rounding.


⁽²⁾	Embedded includes products that attach to a host system board.


⁽³⁾	Removable includes products such as cards, USB flash drives and audio/video players.


⁽⁴⁾	Client SSD Solutions includes SSDs used in client devices and associated software.


⁽⁵⁾	Enterprise Solutions includes SSDs, system solutions and software used in data center applications.


⁽⁶⁾	Other includes wafers, components, accessories and license and royalty.

The changes in our revenue by category for the three months ended March 29, 2015, compared to the three months ended March 30, 2014, were due primarily to the following:


•	Embedded revenue increased 8%, driven by higher sales of custom embedded solutions, partially offset by lower sales of iNAND products.


•	Removable revenue declined 18%, due primarily to lower sales of cards.


•	Client SSD Solutions revenue declined 50%, as a significant client SSD program ended for us at a large customer.


•	Enterprise Solutions revenue increased 102%, in part due to the acquisition of Fusion‑io, Inc., or Fusion‑io, in the third quarter of 2014.


•	Other revenue declined 15% driven by lower sales of wafers and components and lower license and royalties.

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Revenue Mix by Geography.



	Three months ended
	March 29, 2015		% of Total		March 30, 2014		% of Total		% Change
	(In millions, except percentages)
United States	$	270.8	20	%	$	243.7	16	%	11	%
Asia-Pacific	801.1		60	%	1,011.4		67	%	(21	%)
Europe, Middle East and Africa	187.3		14	%	191.0		13	%	(2	%)
Other foreign countries	73.0		6	%	65.8		4	%	11	%
Total revenue	$	1,332.2	100	%	$	1,511.9	100	%	(12	%)

The changes in our revenue by geography for the three months ended March 29, 2015, compared to the three months ended March 30, 2014, were due primarily to the following:


•	Revenue in the U.S. increased due primarily to higher sales of client SSD and enterprise solutions, partially offset by lower sales of cards and USB drives.


•	Revenue in Asia-Pacific decreased due primarily to lower sales of client SSD solutions, iNAND products, cards, and wafers and components, partially offset by higher sales of custom embedded products, enterprise solutions and USB drives.


•	Revenue in Europe, Middle East and Africa decreased due primarily to lower sales of cards and client SSD solutions, partially offset by higher sales of enterprise solutions and USB drives.


•	Revenue in other foreign countries increased due primarily to higher sales of enterprise and client SSD solutions, partially offset by lower sales of USB drives.

Our revenue is designated based on the geographic location where the product is delivered, or in the case of license and royalty revenue, the location of the headquarters of the licensee, and therefore may not be indicative of the actual demand in those regions.

Gross Profit and Margin.



	Three months ended
	March 29, 2015			March 30, 2014			% Change
	(In millions, except percentages)
Gross profit	$	545.0		$	751.3		(27	%)
Gross margin	41		%	50		%

•

The change in gross margin for the three months ended March 29, 2015, compared to the three months ended March 30, 2014, reflected a 29% decrease in our blended average selling price, partially offset by a 17% decline in our blended average cost per gigabyte. Cost reduction in the first quarter of 2015 was derived primarily from non-memory cost per gigabyte reductions for embedded products and enterprise SSDs, lower wafer costs due to a favorable Japanese yen to U.S. dollar exchange rate, a higher mix of 1Y and 15‑nanometer memory, and a higher mix of X3 technology, partially offset by higher inventory-related charges. The largest portion of our first quarter inventory-related charges was for excess non-captive memory used in enterprise PCIe products and excess controllers used in client SSDs, both due to demand reductions.

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Research and Development.



	Three months ended
	March 29, 2015			March 30, 2014			% Change
	(In millions, except percentages)
Research and development	$	222.7		$	198.8		12	%
% of revenue	17		%	13		%

The increase in our research and development expense for the three months ended March 29, 2015, compared to the three months ended March 30, 2014, was due primarily to higher employee related costs of $13 million, higher third-party engineering costs of $7 million, higher facilities costs of $3 million and higher equipment costs of $3 million, in part related to the acquisition of Fusion‑io in July 2014, partially offset by lower product samples of $2 million. The higher employee related costs of $13 million were due primarily to higher salaries and benefits costs of $13 million and share-based compensation of $5 million, due primarily to increased headcount in part related to the acquisition of Fusion‑io, partially offset by lower incentive compensation of $5 million.

Sales and Marketing.



	Three months ended
	March 29, 2015			March 30, 2014			% Change
	(In millions, except percentages)
Sales and marketing	$	101.8		$	77.0		32	%
% of revenue	8		%	6		%

The increase in our sales and marketing expense for the three months ended March 29, 2015, compared to the three months ended March 30, 2014, was due primarily to higher employee-related costs of $21 million, higher outside services of $2 million and higher facilities and IT costs of $2 million. The higher employee-related costs were due primarily to an increase in compensation and benefits of $17 million, share-based compensation of $3 million and other employee costs of $3 million, due primarily to increased headcount, in part related to the acquisition of Fusion‑io, partially offset by lower incentive compensation of $2 million.

General and Administrative.



	Three months ended
	March 29, 2015			March 30, 2014			% Change
	(In millions, except percentages)
General and administrative	$	48.0		$	48.7		(1	%)
% of revenue	4		%	3		%

Our general and administrative expense for the three months ended March 29, 2015, compared to the three months ended March 30, 2014, was approximately the same.

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Amortization of Acquisition-related Intangible Assets.



	Three months ended
	March 29, 2015			March 30, 2014			% Change
	(In millions, except percentages)
Amortization of acquisition-related intangible assets	$	13.7		$	1.6		**
% of revenue	1		%	—		%


**	Amount not meaningful

The increase in amortization of acquisition-related intangible assets for the three months ended March 29, 2015, compared to the three months ended March 30, 2014, was due to the acquisition of Fusion‑io.

Impairment of Acquisition-related Intangible Assets.



	Three months ended
	March 29, 2015			March 30, 2014			% Change
	(In millions, except percentages)
Impairment of acquisition-related intangible assets	$	61.0		$	—		**
% of revenue	5		%	—		%


**	Amount not meaningful

Impairment of acquisition-related intangible assets for the three months ended March 29, 2015 related to an IPR&D project from the acquisition of Fusion‑io. The project has been abandoned and resources have been redirected towards the next-generation PCIe and converged enterprise platform. See Note 6, “Goodwill and Intangible Assets,” in the Notes to Condensed Consolidated Financial Statements of this Form 10-Q.

Restructuring and Other.



	Three months ended
	March 29, 2015			March 30, 2014			% Change
	(In millions, except percentages)
Restructuring and other	$	40.6		$	—		**
% of revenue	3		%	—		%


**	Amount not meaningful

The Restructuring and other expense for the three months ended March 29, 2015 primarily included legal settlements as well as Fusion‑io post-merger integration expenses and restructuring costs primarily related to the acquisition of Fusion‑io. Restructuring charges included an excess lease obligation, and severance and benefits related to involuntary terminations of personnel. See Note 10, “Restructuring and Other,” in the Notes to Condensed Consolidated Financial Statements of this Form 10-Q. In the second quarter of 2015, we expect to implement expense reduction measures, including certain reductions in our non-factory headcount.

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Other Income (Expense), net.



	Three months ended
	March 29, 2015			March 30, 2014			% Change
	(In millions, except percentages)
Interest income	$	11.0		$	13.2		(17%)
Interest expense	(29.0		)	(27.9		)	4%
Other income (expense), net	(5.6		)	(1.0		)	**
Total other income (expense), net	$	(23.6	)	$	(15.7	)	50%


^**	Amount not meaningful

“Total other income (expense), net” for the three months ended March 29, 2015 reflected a higher net expense, compared to the three months ended March 30, 2014, due primarily to higher other income (expense), net which related to losses from our equity method investments in Flash Ventures in the first quarter of 2015 and an impairment of an investment in a privately-held company. Interest income decreased due to lower balances of cash and cash equivalents, and short and long-term marketable securities balances. Interest expense increased due to interest accretion on our convertible debt.

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Provision for (Benefit from) Income Taxes.



	Three months ended
	March 29, 2015			March 30, 2014			% Change
	(In millions, except percentages)
Provision for (benefit from) income taxes	$	(5.4	)	$	140.6		(104	%)
Tax rate	(16.1		%)	34.3		%

The negative tax rate for the three months ended March 29, 2015 is primarily attributable to a discrete benefit recorded as a result of tax audit settlements and a low pre-tax profit due to an impairment charge related to an IPR&D intangible asset. The provision for income taxes for the three months ended March 29, 2015 prior to discrete items differs from the U.S. statutory tax rate of 35% due primarily to the tax impact of earnings from foreign operations, state taxes, non-deductibility of certain share-based compensation and tax-exempt interest income. Earnings and taxes resulting from foreign operations are largely attributable to our Chinese, Irish, Israeli, Japanese and Malaysian entities. Earnings in these countries where tax rates are lower than the U.S. notional rate contributed to the majority of the difference between the rate of our tax provision and the U.S. statutory tax rate. As of March 29, 2015, we believe that most of our deferred tax assets are more likely than not to be realized, except for certain loss and credit carry forwards in certain U.S. and foreign tax jurisdictions.

Unrecognized tax benefits were $120 million and $125 million as of March 29, 2015 and December 28, 2014, respectively. Unrecognized tax benefits that would impact the effective tax rate in the future were approximately $95 million at March 29, 2015. Income tax expense for the three months ended March 29, 2015 and March 30, 2014 included interest and penalties of ($3) million and $1 million, respectively. It is reasonably possible that the unrecognized tax benefits could decrease by approximately $33 million within the next 12 months as a result of the expiration of statutes of limitations and potential settlements of tax authority examinations. We are currently under audit by several tax authorities in which the timing of the resolution and/or closure of these audits are highly uncertain. Therefore it is not possible to estimate other changes to the amount of unrecognized tax benefits for positions existing as of March 29, 2015.

We are subject to U.S. federal income tax as well as income taxes in multiple state and foreign jurisdictions. In the first quarter of 2015, we received and signed the closing agreement with the Internal Revenue Service (“IRS”) related to the examination of the Company’s federal income tax returns for 2009 through 2011, and finalized audits with various state tax authorities. During the three months ended March 29, 2015, we recorded a discrete benefit of $21 million as a result of several audit settlements. We are currently under audit by various state and international tax authorities. We cannot reasonably estimate the outcome of these examinations, or provide assurance that the outcome of these examinations will not materially harm our financial position, results of operations or liquidity.

We have tax holidays in Malaysia that begin to expire in December 2028. The impact of the tax holidays was immaterial to all periods presented.

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Non-GAAP Financial Measures

Reconciliation of Net Income.



	Three months ended
	March 29, 2015			March 30, 2014
	(In millions, except per share amounts)
Net income	$	39.0		$	268.9
Share-based compensation	41.4			30.0
Amortization of acquisition-related intangible assets	38.5			21.3
Impairment of acquisition-related intangible assets	61.0			—
Convertible debt interest	22.1			21.0
Income tax adjustments	(68.3		)	(11.2		)
Non-GAAP net income	$	133.7		$	330.0

Diluted net income per share	$	0.17		$	1.14
Share-based compensation	0.19			0.15
Amortization of acquisition-related intangible assets	0.18			0.10
Impairment of acquisition-related intangible assets	0.29			—
Convertible debt interest	0.11			0.10
Income tax adjustments	(0.32		)	(0.05		)
Non-GAAP diluted net income per share	$	0.62		$	1.44

Reconciliation of Diluted Shares.



	Three months ended
	March 29, 2015		March 30, 2014
	(In millions)
GAAP diluted shares	224.0		234.9
Adjustment for share-based compensation	0.2		0.3
Offsetting shares from call options	(7.4	)	(5.7	)
Non-GAAP diluted shares	216.8		229.5

We believe these non-GAAP measures provide investors the ability to better assess and understand operating performance, especially when comparing results with previous periods or forecasting performance for future periods, primarily because management typically monitors the business excluding these items. We also use these non-GAAP measures to establish operational goals and for measuring performance for compensation purposes. However, analysis of results on a non-GAAP basis should be used as a complement to, and in conjunction with, and not as a replacement for, data presented in accordance with GAAP.

We believe that the presentation of non-GAAP measures, including non-GAAP net income and non-GAAP diluted net income per share, provides important supplemental information to management and investors about financial and business trends relating to our operating results. We believe that the use of these non-GAAP financial measures also provides consistency and comparability with our past financial reports.

We have historically used these non-GAAP measures when evaluating operating performance because we believe that the inclusion or exclusion of the items described below provides an additional measure of our core operating results and facilitates comparisons of our core operating performance against prior periods and our business model objectives. We have chosen to provide this information to investors to enable them to perform additional analyses of past, present and future operating performance and as a supplemental means to evaluate our ongoing core operations. Externally, we believe that these non-GAAP measures continue to be useful to investors in their assessment of our operating performance and their valuation of our company.

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Internally, these non-GAAP measures are significant measures used by us for purposes of:

•evaluating our core operating performance;

•establishing internal budgets;

•setting and determining variable compensation levels;

•calculating return on investment for development programs and growth initiatives;

•comparing performance with internal forecasts and targeted business models;

•strategic planning; and

•benchmarking performance externally against our competitors.

We exclude the following items from our non-GAAP measures:

•

Share-based Compensation Expense. These expenses consist primarily of expenses for share-based compensation, such as stock options, restricted stock units and our employee stock purchase plan. Although share-based compensation is an important aspect of the compensation of our employees, we exclude share-based compensation expenses from our non-GAAP measures primarily because they are non-cash expenses. Further, share-based compensation expenses are based on valuations with many underlying assumptions not in our control that vary over time and may include modifications that may not occur on a predictable cycle, neither of which is necessarily indicative of our ongoing business performance. In addition, the share-based compensation expenses recorded are often unrelated to the actual compensation an employee realizes. We believe that it is useful to exclude share-based compensation expense for investors to better understand the long-term performance of our core operations and to facilitate comparison of our results to our prior periods and to our peer companies.


•	Amortization and Impairment of Acquisition-related Intangible Assets. We incur amortization, and, occasionally, impair intangible assets in connection with acquisitions. Since we do not acquire businesses on a predictable cycle, we exclude these items in order to provide investors and others with a consistent basis for comparison across accounting periods.

•

Convertible Debt Interest. We incur non-cash economic interest expense relating to the implied value of the equity conversion component of our convertible debt. The value of the equity conversion component is treated as a debt discount and amortized to interest expense over the life of the notes using the effective interest rate method. We also incur interest expense equal to the change in fair value of the liability component of the convertible debt when we repurchase or a noteholder converts a portion of the convertible debt. We exclude these non-cash interest expenses that do not represent cash interest payments made to our note holders.


•	Income Tax Adjustments. This amount is used to present each of the amounts described above on an after-tax basis, considering jurisdictional tax rates, consistent with the presentation of non-GAAP net income.

•

Diluted Share Adjustments. As share-based compensation is excluded from our presentation of non-GAAP net income, the impact of share-based compensation on diluted share calculations is also excluded from non-GAAP diluted shares. Concurrent with the issuance of our convertible debt, we entered into convertible bond hedge transactions in which counterparties agreed to sell us a number of shares of our common stock which will be equal to the number of shares issuable upon conversion of the convertible debt. As a result, our convertible bond hedges, if exercised, will deliver shares to offset the issuance of dilutive shares from our convertible debt. Because the bond hedges will ultimately offset the shares issued at maturity of our convertible debt, we include the impact of the bond hedges in our non-GAAP dilutive shares in any period where the associated convertible debt is dilutive. The impact of the convertible bond hedges is excluded from GAAP dilutive shares.

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From time-to-time in the future, there may be other items that we may exclude if we believe that doing so is consistent with the goal of providing useful information to investors and management.

Limitations of Relying on Non-GAAP Financial Measures. We have incurred and will incur in the future, many of the costs that we exclude from the non-GAAP measures, including share-based compensation expense, inventory step-up expense, impairment of goodwill and acquisition-related intangible assets, amortization of acquisition-related intangible assets, non-cash economic interest expense associated with our convertible debt and related tax adjustments. These measures should be considered in addition to results prepared in accordance with GAAP, but should not be considered a substitute for, or superior to, GAAP results. These non-GAAP measures may be different than the non-GAAP measures used by other companies.

Liquidity and Capital Resources

Cash Flows. Our cash flows were as follows:



	Three months ended
	March 29, 2015			March 30, 2014
	(In millions)
Net cash provided by operating activities	$	308.9		$	382.1
Net cash provided by (used in) investing activities	341.7			(154.7		)
Net cash used in financing activities	(808.8		)	(96.7		)
Effect of changes in foreign currency exchange rates on cash	(0.9		)	—
Net increase (decrease) in cash and cash equivalents	$	(159.1	)	$	130.7

Operating Activities. Cash provided by operating activities is generated by net income adjusted for certain non-cash items and changes in assets and liabilities. Cash provided by operating activities was lower in the first quarter of 2015 than in the first quarter of 2014, primarily due to lower net income, partially offset by higher non-cash adjustments related to operating activities and changes in operating assets and liabilities. Change in operating assets and liabilities, compared to the prior year, were as follows:


•	cash flow from accounts receivable was a higher source of cash, due primarily to the timing of collections from our customers and lower year-over-year revenue;


•	cash flow from inventory was a lower use of cash, due primarily to lower year-over-year revenue and reduced growth in inventory balances;


•	cash flow from other assets was a use of cash, due primarily to the timing of tax payments in the current year;


•	cash flow from accounts payable trade was a lower use of cash, due primarily to the timing of payments to vendors;


•	cash flow from accounts payable from related parties was a lower source of cash, due primarily to the timing of proceeds from Flash Ventures; and


•	cash flow from other liabilities was a lower use of cash, due primarily to a reduction in the amount of incentive compensation payments and taxes payable.

Investing Activities. Net cash provided by investing activities in first quarter of 2015, compared to the net cash used by investing activities in the first quarter of 2014, resulted primarily from higher net proceeds from short and long-term marketable securities of $452 million.

Financing Activities. Net cash used in financing activities in first quarter of 2015 was primarily related to share repurchases of $750 million, shares withheld to settle employee tax obligations due upon the vesting of restricted stock units of $34 million and dividends paid of $65 million, partially offset by cash received from employee stock programs of $31 million. Net cash used in financing activities in first quarter of 2014 was primarily related to share repurchases of $90 million, shares withheld to settle employee tax obligations due upon the vesting of restricted stock units of $24 million and dividends paid of $52 million, partially offset by cash received from employee stock programs of $52 million.

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Liquid Assets. As of March 29, 2015, we had cash, cash equivalents and short-term marketable securities of $2.0 billion. We had $2.4 billion of long-term marketable securities, which we believe are also liquid assets, but are classified as long-term marketable securities due to the remaining maturity of each marketable security being greater than one year.

Short-Term Liquidity. As of March 29, 2015, our working capital balance was $1.7 billion. During 2015, we expect our total capital investment to be approximately $1.4 billion, including our net capital investments in Flash Ventures and our investment in non-fab property and equipment. We expect these 2015 investments to be funded by cash of approximately $500 million and by Flash Ventures’ working capital and equipment leases of approximately $900 million. For the three months ended March 29, 2015, total capital investments were $380 million, of which $109 million was funded by our cash and the remainder was funded by Flash Ventures’ working capital and equipment leases.

The conversion provision of the 1.5% Notes due 2017 allows the holders the option to convert their notes during a calendar quarter if our stock price exceeds 130% of the conversion price of the 1.5% Notes due 2017 for at least 20 trading days during the last 30 consecutive trading days of the previous calendar quarter. As of the calendar quarter ended March 31, 2015, the 1.5% Notes due 2017 were convertible at the holders’ option through June 30, 2015. Accordingly, the carrying value of the 1.5% Notes due 2017 was classified as a current liability as of March 29, 2015 and the difference between the principal amount payable in cash upon conversion and the carrying value of the 1.5% Notes due 2017 was reclassified from Stockholders’ equity to Convertible short-term debt conversion obligation on our Condensed Consolidated Balance Sheet as of March 29, 2015, and will remain so while the notes are convertible. The determination of whether or not the 1.5% Notes due 2017 are convertible must continue to be performed on a calendar-quarter basis. Consequently, the 1.5% Notes due 2017 may be reclassified as long-term debt if the conversion threshold is not met in future quarters. Upon conversion of any of the 1.5% Notes due 2017, we will deliver cash up to the principal amount of the 1.5% Notes due 2017 and shares of our common stock (plus cash in lieu of any fractional shares of common stock), with respect to any conversion value greater than the principal amount of the 1.5% Notes due 2017. Based on the last closing price of the quarter ended March 29, 2015 of $64.59 for our common stock, if all of the 1.5% Notes due 2017 then outstanding were converted, 4.0 million shares would be distributed to the holders. During the three months ended March 29, 2015, $68 thousand aggregate principal amount of the 1.5% Notes due 2017 (“Converted Notes”) was converted at the holders’ option. Upon conversion of the Converted Notes, we delivered cash of $68 thousand and 505 shares of our common stock with respect to any conversion value greater than the principal amount of the Converted Notes. Through March 29, 2015, we had received 27,124 shares of our common stock from the exercise of a portion of the convertible bond hedge related to the conversion of $3 million aggregate principal amount of the 1.5% Notes due 2017.

Depending on the forecasted demand for our products, we may decide to make additional investments, which could be substantial, in wafer fabrication capacity and assembly and test manufacturing equipment. We may also engage in merger or acquisition transactions, make equity investments in other companies or purchase or license technologies. 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 acquisitions of or investments in companies, growing our business, or responding to competitive pressures or unanticipated industry changes, any of which could harm our business.

On April 14, 2015, our Board of Directors declared a dividend of $0.30 per share for holders of record as of May 4, 2015. We expect to pay approximately $64 million to these holders of record on May 26, 2015. We expect to continue to pay quarterly dividends subject to declaration by our Board of Directors.

Our short-term liquidity is impacted in part by our ability to maintain compliance with covenants in the outstanding Flash Ventures’ master lease agreements. 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 stockholder equity of at least $1.51 billion. As of March 29, 2015, Flash Ventures was in compliance with all of its master lease covenants, including the stockholder equity covenant of $1.51 billion with our stockholders’ equity at $5.8 billion as of March 29, 2015. If our stockholders’ equity falls below $1.51 billion or other events of default occur, Flash Ventures would become non-compliant with certain covenants under certain 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, which as of March 29, 2015 were approximately $606 million based upon the exchange rate at March 29, 2015.

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As of March 29, 2015, the amount of cash and cash equivalents and short and long-term marketable securities held by non-U.S. subsidiaries was $969 million. Of the $969 million held by our non-U.S. subsidiaries, approximately $839 million was available for use in the U.S. without incurring additional income taxes in excess of the tax amounts already accrued in our Condensed Consolidated Financial Statements as of March 29, 2015. The remaining amount of non-U.S. cash and cash equivalents and short and long-term marketable securities has been indefinitely reinvested.

As of March 29, 2015, we had not made a provision for U.S. income taxes or foreign withholding taxes on $1.3 billion of undistributed earnings of foreign subsidiaries as we intend to indefinitely reinvest these earnings outside the U.S. to fund our international capital expenditures and operating requirements. We determined that it is not practicable to calculate the amount of unrecognized deferred tax liability related to these cumulative unremitted earnings. If these earnings were distributed to the U.S., we would be subject to additional U.S. income taxes and foreign withholding taxes reduced by any available foreign tax credits.

In January 2015, our Board of Directors increased the existing stock repurchase program by an additional $2.5 billion for share repurchases. Of the aggregate $6.3 billion authorized for share repurchases by our Board of Directors from the fourth quarter of 2011 through March 29, 2015, approximately $2.4 billion remained available for share repurchases as of March 29, 2015. Since the fourth quarter of 2011 through March 29, 2015, we have spent an aggregate $3.9 billion to repurchase 54.7 million shares. Included in the aggregate repurchase activity, in the three months ended March 29, 2015, we spent an aggregate amount of $750 million to repurchase over 9.3 million shares. In addition to repurchases under our repurchase program, during the three months ended March 29, 2015, we spent $34 million to settle employee tax withholding obligations due upon the vesting of restricted stock units and withheld an equivalent value of shares from the shares provided to the employees upon vesting. We currently expect to spend an additional $750 million for share repurchases over the remaining three quarters of 2015, however the timing and aggregate amount of the remaining share repurchases will continue to be reviewed each quarter.

Long-Term Requirements. Depending on the forecasted demand for our products, we may decide to make additional investments, which could be substantial, in wafer fabrication capacity and assembly and test manufacturing equipment. We may also engage in merger or acquisition transactions, make equity investments in other companies, or purchase or license technologies. 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, responding to competitive pressures or unanticipated industry changes, any of which could harm our business.

Financing Arrangements. As of March 29, 2015, we had $997 million aggregate principal amount of our 1.5% Notes due 2017 and $1.5 billion aggregate principal amount of our 0.5% Notes due 2020 outstanding. See Note 7, “Financing Arrangements,” in the Notes to Condensed Consolidated Financial Statements of this Form 10‑Q.

1.5% Notes due 2017. Concurrent with the issuance of the 1.5% Notes due 2017, we entered into a convertible bond hedge transaction in which counterparties initially agreed to sell to us up to approximately 19.1 million shares of our common stock, which is the number of shares initially issuable upon conversion of the 1.5% Notes due 2017 in full, at a price of $52.37 per share. The convertible bond hedge agreement contains provisions where the number of shares to be sold under the convertible bond hedge transaction and the conversion price will be adjusted if we pay a cash dividend or make a distribution to all or substantially all holders of our common stock. Adjusting for dividends paid through March 29, 2015, the counterparties have agreed to sell to us up to approximately 19.5 million shares of our common stock, which is the number of shares issuable upon conversion of the 1.5% Notes due 2017 in full, at a price of $51.16 per share as of March 29, 2015. This convertible bond hedge transaction will be settled in net shares and will terminate upon the earlier of the maturity date of the 1.5% Notes due 2017 or the first day that none of the 1.5% Notes due 2017 remain outstanding due to conversion or otherwise. In connection with the conversion of $3 million aggregate principal amount of the 1.5% Notes due 2017 through March 29, 2015 as described in “Short-Term Liquidity” above, we received 27,124 shares of our common stock from the exercise of a portion of the convertible bond hedge.

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In addition, concurrent with the issuance of the 1.5% Notes due 2017, we sold warrants to acquire up to approximately 19.1 million shares of our common stock at an exercise price of $73.3250 per share. The warrant agreement contains provisions whereby the number of shares to be acquired under the warrants and the strike price are adjusted if we pay a cash dividend or make a distribution to all or substantially all holders of our common stock. Adjusting for dividends paid through March 29, 2015, holders of the warrants may acquire up to approximately 19.5 million shares of our common stock at a strike price of $71.6276 per share. The warrants mature on 40 different dates from November 13, 2017 through January 10, 2018 and are exercisable at the maturity date. At each maturity date, we may, at our option, elect to settle the warrants on a net share basis. As of March 29, 2015, the warrants had not been exercised and remain outstanding.

0.5% Notes due 2020. Concurrent with the issuance of the 0.5% Notes due 2020, we entered into a convertible bond hedge transaction in which counterparties agreed to sell to us up to approximately 16.3 million shares of our common stock, which is the number of shares issuable upon conversion of the 0.5% Notes due 2020 in full, at a price of $92.19 per share. The convertible bond hedge agreement contains provisions where the number of shares to be sold under the convertible bond hedge transaction and the conversion price will be adjusted if we pay a cash dividend greater than a regular quarterly cash dividend of $0.225 per share or make a distribution to all or substantially all holders of our common stock. Adjusting for dividends in excess of $0.225 per share paid through March 29, 2015, the counterparties have agreed to sell to us up to approximately 16.3 million shares of our common stock, which is the number of shares issuable upon conversion of the 0.5% Notes due 2020 in full, at a price of $91.95 per share. This convertible bond hedge transaction will be settled in net shares and will terminate upon the earlier of the maturity date of the 0.5% Notes due 2020 or the first day that none of the 0.5% Notes due 2020 remain outstanding due to conversion or otherwise. As of March 29, 2015, we had not purchased any shares under this convertible bond hedge agreement.

In addition, concurrent with the issuance of the 0.5% Notes due 2020, we sold warrants to acquire up to approximately 16.3 million shares of our common stock at an exercise price of $122.9220 per share. The warrant agreement contains provisions whereby the number of shares to be acquired under the warrants and the strike price are adjusted if we pay a cash dividend greater than a regular quarterly cash dividend of $0.225 per share or make a distribution to all or substantially all holders of our common stock. Adjusting for dividends in excess of $0.225 per share paid through March 29, 2015, holders of the warrants may acquire up to approximately 16.3 million shares of our common stock at a strike price of $122.6054 per share. The warrants mature on 40 different dates from January 13, 2021 through March 11, 2021, and are exercisable at the maturity date. At each maturity date, we may, at our option, elect to settle the warrants on a net share basis. As of March 29, 2015, the warrants had not been exercised and remain outstanding.

Ventures with Toshiba. We are a 49.9% owner of each entity within Flash Ventures, our business ventures with Toshiba to develop and manufacture NAND flash memory products. These NAND flash memory products are manufactured by Toshiba at Toshiba’s Yokkaichi, Japan operations using the semiconductor manufacturing equipment owned or leased by Flash Ventures. This equipment is funded or will be funded by investments in, or loans to, Flash Ventures from us and Toshiba as well as through operating leases received by Flash Ventures from third‑party banks and guaranteed by us and Toshiba. The entities within Flash Ventures purchase wafers from Toshiba at cost and then resell those wafers to us and Toshiba at cost plus a markup. We are contractually obligated to purchase half of Flash Ventures’ NAND wafer supply or pay for 50% of the fixed costs of Flash Ventures. We are not able to estimate our total wafer purchase obligations beyond our rolling three month purchase commitment because the price is determined by reference to the future cost to produce the semiconductor wafers. We are also committed to fund 49.9% to 50% of other Flash Ventures’ costs to the extent that Flash Ventures’ revenue from wafer sales to us and Toshiba are insufficient to cover these costs. See Note 13, “Commitments, Contingencies and Guarantees” and Note 14, “Related Parties and Strategic Investments,” in the Notes to Condensed Consolidated Financial Statements of this Form 10‑Q.

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From time-to-time, we and Toshiba mutually approve the purchase of equipment for Flash Ventures in order to convert to new process technologies or add wafer capacity. Flash Partners’ share of Fab 3 and Flash Alliance’s share of Fab 4 have been previously equipped to full wafer capacity. Fab 5, which is primarily occupied by Flash Forward, was built in two phases. Phase 1 of the building has been fully equipped. The Phase 2 shell of Fab 5 is complete and has been partially equipped. Our current plans are to use the Phase 2 shell primarily for technology transition of the existing Flash Ventures wafer capacity to 1Y‑nanometer and 15‑nanometer technology nodes, the addition of a 3D NAND pilot line in the second half of 2015, and for the tools required for a planned increase in Flash Ventures wafer capacity of approximately 5%, with such wafer capacity increase expected to be completed by mid‑2015. To date, we have invested in approximately 50% of Flash Forward’s equipment, and the output has been shared equally between us and Toshiba. In 2014, we entered into a non-binding memorandum of understanding with Toshiba related to the construction and operation of Toshiba’s “New Fab 2” fabrication facility, which is 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 March 29, 2015 were $606 million based upon the exchange rate at March 29, 2015.

Contractual Obligations and Off-Balance Sheet Arrangements

Our contractual obligations and off-balance sheet arrangements at March 29, 2015 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 13, “Commitments, Contingencies and Guarantees,” in the Notes to Condensed Consolidated Financial Statements of this Form 10-Q.

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 research and development 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 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. 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. The use of such hedging activities may not offset any, or more than a portion of the adverse financial effects of unfavorable movements in foreign exchange rates over the limited time the hedges are in place. 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 Condensed Consolidated Financial Statements of this Form 10-Q.

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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 first quarter of 2015 and related forward contracts entered into for settlement in early 2015, changes in the Japanese yen to U.S. dollar exchange rate after March 29, 2015 are not expected to have a material impact on our cost of revenue in the second quarter of 2015. We expect the average rate of the Japanese yen to the U.S. dollar for the second quarter of 2015 for the wafer portion of our cost of revenue to be approximately 117 Japanese yen to the U.S. dollar in comparison to a rate of approximately 108 Japanese yen to the U.S. dollar in our first quarter of 2015. Our wafer purchases are denominated in Japanese yen and generally comprise approximately 50% of our cost of revenue. As of March 29, 2015, none of our expected Japanese yen denominated wafer purchases for the remainder of 2015 have been hedged. See Item 3, “Quantitative and Qualitative Disclosures About Market Risk - Foreign Currency Risk” for more information about our foreign currency forward contracts.

For a discussion of foreign operating risks and foreign currency risks, see Part II, Item 1A, “Risk Factors” and Item 3, “Quantitative and Qualitative Disclosures About Market Risk - Foreign Currency Risk.”

Critical Accounting Policies

Our discussion and analysis of our financial condition and operating results is based upon the Condensed Consolidated Financial Statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of the Condensed Consolidated Financial Statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the Condensed Consolidated Financial Statements and accompanying notes. The estimates and judgments affect the reported amounts of assets, liabilities, revenue, expenses and related disclosure of contingent liabilities. On an ongoing basis, we evaluate estimates, including those related to customer programs and incentives, intellectual property, or IP, claims, product returns, allowance for doubtful accounts, inventory valuation and related reserves, valuation and impairments of marketable securities and investments, impairments of goodwill and long-lived assets, income taxes, warranty obligations, restructurings, 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. These estimates form the basis for making judgments about the carrying value of assets and liabilities when those values are not readily apparent from other sources. Actual results could materially differ from these estimates.

There were no significant changes to our critical accounting policies during the three months ended March 29, 2015. For information about critical accounting policies, see the discussion of critical accounting policies in our most recent Annual Report on Form 10-K filed with the SEC on February 10, 2015.

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Item 3.	Quantitative and Qualitative Disclosures About Market Risk

We are exposed to financial market risks, including changes in interest rates and foreign currency exchange rates.

Interest Rate Risk. Our exposure to market risk for changes in interest rates relates primarily to our investment portfolio. The primary objective of our investment activities is to preserve principal while maximizing yields without significantly increasing risk. As of March 29, 2015 and December 28, 2014, a hypothetical 50 basis point increase in interest rates would have resulted in an approximate $23 million decline (less than 0.7%) and an approximate $28 million decline (less than 0.7%), respectively, of the fair value of our available-for-sale debt securities.

Foreign Currency Risk. The majority of our revenue is transacted in the U.S. dollar, with some revenue transacted in the European euro, the British pound, the Japanese yen, the Chinese renminbi and the Canadian dollar. Our flash memory costs, which represent the largest portion of our cost of revenue, are denominated in Japanese yen. We also have some cost of revenue denominated in the Chinese renminbi and the Malaysian ringgit. The majority of our operating expenses are denominated in the U.S. dollar; however, we have expenses denominated in Japanese yen, the Chinese renminbi, the Israeli new shekel and numerous other currencies. On the balance sheet, we have numerous foreign currency denominated monetary assets and liabilities, with the largest monetary exposure related to our balances with Flash Ventures, which are denominated in Japanese yen.

We generally enter into foreign exchange forward contracts to hedge the gains or losses generated by the remeasurement of our significant foreign currency denominated monetary assets and liabilities. These contracts are non-designated derivative instruments and are carried on our balance sheet at fair value and the change in fair value of these contracts is recorded into earnings as a component of other income (expense) to largely offset the change in fair value of the foreign currency denominated monetary assets and liabilities which is also recorded in other income (expense).

We may use foreign exchange forward contracts to partially hedge future Japanese yen wafer purchases. These contracts are designated as cash flow hedges and are carried on our balance sheet at fair value with the effective portion of the contracts’ gains or losses included in AOCI and subsequently reclassified to cost of revenue in the same period the hedged cost of revenue is recognized.

We may also use foreign exchange forward contracts to partially hedge Japanese-yen-denominated equity method investments. These contracts are designated as net investment hedges and are carried on our balance sheet at fair value with the effective portion of the contracts’ gains or losses included in AOCI. Cumulative gains and losses including forward points associated with foreign exchange forward contracts designated as net investment hedges would be reclassified to other income (expense) from AOCI upon sale or substantial liquidation of the foreign equity method investments.

As of March 29, 2015, we had foreign exchange forward contracts in place that amounted to a net purchase in U.S. dollar-equivalents of $64 million in foreign currencies to hedge our foreign currency denominated monetary net liability position. The notional amount and unrealized gain (loss) of our outstanding foreign exchange forward contracts that are non-designated derivative instruments as of March 29, 2015, based upon the exchange rate at March 29, 2015, are shown in the table below. In addition, this table shows the change in fair value of these contracts assuming a hypothetical adverse foreign currency exchange rate movement of 10%. These changes in fair values would be largely offset in other income (expense) by corresponding changes in the fair values of the foreign currency denominated monetary assets and liabilities.



	Notional Amount			Unrealized Gain (Loss)			Change in Fair Value Due to 10% Adverse Rate Movement
	(In millions)
Non-designated derivative instruments:
Forward contracts sold	$	(162.3	)	$	0.5		$	5.2
Forward contracts purchased	226.3			(1.3		)	(13.3		)
Total	$	64.0		$	(0.8	)	$	(8.1	)

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Based upon the foreign exchange forward contracts outstanding as of March 29, 2015 and December 28, 2014, a hypothetical adverse foreign currency exchange rate movement of 10% would have resulted in a change in fair value of ($8.1) million and $0.1 million, respectively.

As of March 29, 2015, we had foreign exchange forward contracts for future wafer purchases and net investment hedges in Japanese yen. As of March 29, 2015, the maturities of these contracts were 12 months or less. The notional amount and unrealized gain of our outstanding foreign exchange forward contracts that are designated as cash flow and net investment hedges as of March 29, 2015, based upon the exchange rate at March 29, 2015, are shown in the table below. In addition, this table shows the change in fair value of these cash flow and net investment hedges assuming a hypothetical adverse foreign currency exchange rate movement of 10% as of March 29, 2015.



	Notional Amount			Unrealized Gain		Change in Fair Value Due to 10% Adverse Rate Movement
	(In millions)
Designated derivative instruments:
Cash flow hedges	$	75.7		$	0.6	$	(6.3	)
Net investment hedges	(168.0		)	1.3		11.0
Total	$	(92.3	)	$	1.9	$	4.7

Based upon the cash flow and net investment hedges outstanding as of March 29, 2015 and December 28, 2014, a hypothetical adverse foreign currency exchange rate movement of 10% would have resulted in a change in fair value of $4.7 million and ($10.9) million, respectively.

Notwithstanding our efforts to mitigate some foreign exchange risks, we do not hedge all of our foreign currency exposures, and there can be no assurance that our mitigating activities related to the exposures that we hedge will adequately protect us against risks associated with foreign currency fluctuations.

Market Risk. With the U.S. long-term sovereign credit rating below the highest available rating and the risk of additional future downgrades or related downgrades by recognized credit rating agencies, the investment choices for our cash and marketable securities portfolio could be reduced, which could negatively impact our non-operating results. As of March 29, 2015, we had foreign exchange forward contracts with one European bank to purchase foreign currency with a U.S. dollar-equivalent of $16 million and to sell foreign currency with a U.S. dollar-equivalent of $23 million. We do not have any European sovereign debt. We manage our investments and foreign exchange contracts to limit our exposure to any one issuer or bank.

All of the potential changes noted above as of March 29, 2015 and December 28, 2014 are based on sensitivity analyses performed on our financial position as of March 29, 2015 and December 28, 2014, respectively. Actual results may differ materially.

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Item 4.	Controls and Procedures

Evaluation of Disclosure Controls and Procedures. Our management has evaluated, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, the effectiveness of our disclosure controls and procedures as of March 29, 2015. Based on their evaluation as of March 29, 2015, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures (as defined in Rules 13a‑15(e) and 15d‑15(e) under the Securities Exchange Act of 1934, as amended, or the Exchange Act) were effective at the reasonable assurance level to ensure that the information required to be disclosed by us in this Quarterly Report on Form 10‑Q was (i) recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and regulations and (ii) accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure.

There were no changes in our internal control over financial reporting (as defined in Exchange Act Rule 13a‑15(f)) during the quarter ended March 29, 2015 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II. OTHER INFORMATION


Item 1.	Legal Proceedings

For a discussion of legal proceedings, see Note 15, “Litigation,” in the Notes to Condensed Consolidated Financial Statements of this Form 10-Q.

Item 1A. Risk Factors

The following description of the risk factors associated with our business includes any material changes to and supersedes the description of the risk factors associated with our business previously disclosed in Part I, Item 1A of our Annual Report on Form 10‑K for the year ended December 28, 2014.

Our operating results may fluctuate significantly, which may harm our financial condition and our stock price. Our quarterly and annual operating results have fluctuated significantly in the past and we expect that they will continue to fluctuate in the future. Our results of operations are subject to fluctuations and other risks, including, among others:


•	competitive pricing pressures or product mix changes, resulting in lower average selling prices, lower revenue and reduced margins;


•	weakness in demand for one or more of our product categories, such as embedded products or SSDs, or adverse changes in our product or customer mix;


•	excess or mismatched captive memory output, capacity or inventory, resulting in lower average selling prices, financial charges and impairments, lower gross margin or other consequences, or insufficient or mismatched captive memory output, capacity or inventory, resulting in lost revenue and growth opportunities;


•	inability to reduce product costs to keep pace with reductions in average selling prices, resulting in lower or negative product gross margin;


•	potential delays in product development or lack of customer acceptance and qualification of our solutions, including on new technologies, particularly our client SSD, enterprise and embedded flash storage solutions;


•	inability to develop, or unexpected difficulties or delays in developing or ramping with acceptable yields, new technologies such as 15‑nanometer (which we also refer to as 1Z‑nanometer) process technologies, X3 NAND memory architecture, 3D NAND technology, 3D ReRAM, or other advanced technologies, or the failure of these new technologies to effectively compete with those of our competitors;


•	fluctuations in customer concentration and the loss of, or reduction in orders from, one or more of our major customers;


•	inability to penetrate new or growing markets for flash memory, including the client SSD and enterprise storage markets, failure of existing or new markets for flash memory to grow or develop, or failure to maintain or improve our position in any of these markets;


•	timing, volume and cost of wafer production from Flash Ventures as impacted by fab start-up delays and costs, technology transitions, lower than expected yields or production interruptions;


•	fluctuations or declines in our license and royalty revenue due to license agreement renewals on less favorable terms, non-renewals, declines in sales of the products or use of technology underlying the license and royalty revenue by our licensees, or failure by our licensees to perform on contractual obligations;


•	lengthy, costly and unpredictable design, qualification and sales processes for customers, particularly with SSD and embedded solutions;


•	increased costs and lower gross margin due to potentially higher warranty claims from our more complex solutions;


•	excess inventory or lost sales resulting from unpredictable or changing demand for our products;


•	failure to manage the risks associated with our ventures and strategic partnerships with Toshiba;


•	failure of the rate of growth of our captive flash memory supply to keep pace with that of our competitors for an extended period of time, resulting in lost sales opportunities and reduced market share;


•	insufficient supply of materials other than flash memory, such as DRAM, or capacity from our suppliers and contract manufacturers to meet demand or increases in the cost of these materials or capacity;


•	inability to realize the potential financial or strategic benefits of business acquisitions or strategic investments;


•	disruptions to our supply chain or operations, for example, whether due to natural disasters, emergencies such as power outages, fires or chemical spills, or employee strikes or other job actions, or geopolitical unrest;

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•	inability to enhance current products, develop new products or transition products to new technologies on a timely basis or in advance of our competitors;


•	inability to timely or cost effectively develop or source controllers, firmware or software that meet the requirements of our solutions;


•	increased memory component and other costs as a result of currency exchange rate fluctuations for the U.S. dollar, particularly with respect to the Japanese yen;


•	inability to obtain non-captive memory supply of the right product mix and quality in the time frame necessary to meet demand, or inability to realize an adequate margin on non-captive purchases;


•	insufficient or excess assembly and test or retail packaging and shipping capacity from our facilities in China and Malaysia or our contract manufacturers, or labor unrest, employee strikes or other disruptions at any of these facilities;


•	errors or defects in our products caused by, among other things, errors or defects in the memory or controller components, including memory and non-memory components we procure from third‑party suppliers;


•	the financial strength and market position of our customers; and


•	the other factors described in this “Risk Factors” section and elsewhere in this report.

Competitive pricing pressures or product mix changes may result in lower average selling prices for our products, and if such price declines are not offset by a corresponding increase in demand for our products or a reduction in our costs, our revenue, margins or both may decline. The price of NAND flash memory is influenced by, among other factors, the balance between supply and demand, including the effects of new fab capacity in the industry, macroeconomic factors and business conditions, technology transitions, conversion of industry DRAM capacity to NAND, development of new technologies such as 3D NAND or other actions taken by us or our competitors to gain market share. In particular, the NAND flash memory industry has, from time-to-time, experienced periods of excess supply, resulting in price declines. Industry bit supply is expected to continue to grow, and if bit supply grows at a faster rate than market demand, the industry could again experience unanticipated price declines. If we are not able to offset price declines with sufficient increases in unit sales or average memory capacity per unit or a shift in product mix towards products with higher average selling prices, our revenue may be harmed. In addition, our products have varying gross margins and, to the extent our revenue mix shifts towards products with lower gross margins, our overall profitability may decline or not grow as expected.

If we are unable to reduce our product costs to keep pace with reductions in average selling prices, our gross margin may be harmed. Because of the historical and expected future declines in the price of NAND flash memory, we need to reduce our product costs in order to maintain adequate gross margin. Our ability to reduce our cost per gigabyte of memory produced primarily depends on technology transitions and the improvement of manufacturing efficiency, including manufacturing yields. If our technology transitions (for example, the production ramp of NAND technology on the 15‑nanometer process node) take longer or are more costly to complete than anticipated, our flash memory costs may not remain competitive with other NAND flash memory producers, which would harm our gross margin and financial results. Furthermore, as 2D NAND approaches scaling limits, the inherent physical technology limitations of NAND flash technology are resulting in more costly technology transitions than we have experienced in the past, particularly with respect to required capital expenditures, which reduces the cost benefits of technology transitions and could limit our ability to keep pace with reductions in average selling prices. Manufacturing yields are a function of both design and manufacturing process technology, and yields may also be impacted by equipment malfunctions, fabrication facility accidents or human error. Any new manufacturing node may be more susceptible to manufacturing yield issues. Manufacturing yield issues may not be identified during the development or production process or solved until an actual product is manufactured and tested, further increasing our costs. If we are unable to improve manufacturing yields or other manufacturing efficiencies, our gross margin and results of operations would be harmed. In addition, our products contain materials other than flash memory and require product level assembly and test. As our product portfolio has evolved to include an increasing mix of complex products, the proportion of our product costs attributable to materials other than flash memory has increased. If we are unable to reduce the cost of these materials or manufacturing, our gross margin and results of operations would be harmed. In addition, as 2D NAND technology reaches its limits of cost‑effective technology scaling, our successful development of 3D NAND and alternative technologies, such as 3D ReRAM, is crucial to continue the cost reductions necessary to maintain adequate gross margin. We expect to begin pilot line production of our 3D NAND in the second half of 2015 and ramp commercial volume production of 3D NAND in 2016. Our failure to develop 3D NAND or other alternative technologies in a timely or effective manner, or at all, or the failure of these technologies to effectively compete with those of our competitors, could harm our revenue, gross margin and results of operations.

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Our captive manufacturing capacity requires significant investments by us, and our reliance on and investments in captive manufacturing capacity limit our ability to respond to industry fluctuations in supply and demand. The semiconductor industry, and the NAND flash memory industry in particular, is highly cyclical and is characterized by constant and rapid technological change, rapid product obsolescence, price declines, evolving standards, short product life cycles and wide fluctuations in product supply and demand. Because we rely on our significant investments in Flash Ventures as a captive source of substantially all of our NAND flash memory supply, we are limited in our ability to react or adjust our cost structure and technology mix in response to these cyclical fluctuations.

Growth in our captive memory supply comes from investments in technology transitions, productivity improvements and new capacity at Flash Ventures. These investment decisions require significant planning and lead-time before an increase in supply can be realized, and are further determined by factors such as the timing, rate and type of investment by us and Toshiba, our partner in Flash Ventures, agreement between us and Toshiba as to these matters, our evaluation of the potential return on investment of the addition of new capacity, particularly in light of the timing, cost and availability of next generation technology, our profitability, our estimation of market demand and our liquidity position. A failure to accurately forecast demand for our products or industry capacity could cause us to over-invest or under-invest in technology transitions or the expansion of captive memory capacity in Flash Ventures. Over-investment could result in excess supply, which could cause significant decreases in our product prices, significant excess, obsolete or lower of cost or market inventory write-downs or under-utilization charges, and the potential impairment of our investments in Flash Ventures. For example, in 2008 and the first quarter of 2009, we recorded charges for adverse purchase commitments associated with under-utilization of Flash Ventures’ capacity. On the other hand, if we or Toshiba under-invest in captive memory capacity or technology transitions, if we grow capacity more slowly than the rest of the industry, if our technology transitions do not occur on the timeline that we expect or we encounter unanticipated difficulties in implementing these transitions, or if we implement technology transitions more slowly than our competitors, we may not have enough captive supply of the right type of memory or at all to meet demand on a timely and cost effective basis and we may lose opportunities for revenue and market share as a result, which would harm our ability to grow or maintain revenue. In such cases, we may have only a limited ability to satisfy our supply needs from non-captive supply sources and may not be able to obtain the right mix of non-captive product that meets our requirements within an adequate lead time or at a cost that allows us to generate an adequate gross margin, which may cause us to lose sales, market share and profits. Prolonged inability to meet customer demand could also cause us to lose revenue opportunities with both existing and potential customers beyond the duration of any given supply shortage. In addition, the future transition to 3D NAND will require a significantly greater amount of equipment and, correspondingly, require additional cleanroom space to house the new equipment necessary for the transition without reducing wafer capacity. If we do not have adequate existing cleanroom space, we would need to reduce our wafer capacity or invest in new facilities to provide additional cleanroom space to fully implement the transition to 3D NAND, which may increase our capital requirements and could adversely impact our supply of captive NAND flash memory and financial results. Although we have entered into a non-binding memorandum of understanding with Toshiba to jointly invest in a new wafer fabrication facility, there is no certainty as to when we will enter into definitive agreements for the facility, if at all.

Furthermore, if our memory supply is limited, we may make strategic decisions with respect to the allocation of our supply among our products and customers in an effort to preserve our long-term goals. However, these strategic allocation decisions may result in less favorable gross margin in the short term or damage certain customer relationships. Our customers also may not allow us to change the memory in the products that they have already qualified, which can further limit our ability to satisfy our supply needs from other sources for products that require long and extensive qualification cycles. For example, certain of our embedded products and SSDs utilize older memory technology nodes or different memory architectures for extended periods of time, based on customer demand, requiring us to produce multiple technology nodes and memory architectures in parallel, increasing the complexity and cost of our business, limiting our manufacturing flexibility and exposing us to greater inventory risk.

In addition, we are contractually obligated to pay for 50% of the fixed costs of Flash Ventures regardless of whether we purchase any wafers from Flash Ventures. Furthermore, purchase orders placed under Flash Ventures and the foundry arrangements with Toshiba for up to three months are binding and cannot be canceled. Therefore, once our purchase decisions have been made, our production costs are fixed, and we may be unable to reduce costs to match any subsequent declines in pricing or demand, which would harm our gross margin. Our limited ability to react to fluctuations in supply and demand makes us particularly susceptible to variations from our forecasts and expectations, and even in times of excess demand, our operating results may be harmed.

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The future growth of our business depends on the development and performance of new and existing markets for flash memory, including the SSD markets, and on our ability to penetrate, maintain or improve our position in these markets. Historically, removable flash memory imaging cards and USB drives, both sold primarily through the retail channel, provided the majority of our revenue. As growth in these retail products slowed, we increased sales of embedded NAND flash memory and cards for devices such as mobile phones, tablets and other mobile devices. More recently, we have relied on SSD products to generate a significant portion of our revenue growth. Our future growth is dependent on the development of new markets, new applications and new products for NAND flash memory, on the continued use of NAND flash memory in existing markets and on our ability to penetrate, maintain or improve our position in such markets. There can be no assurance that the use of NAND flash memory in existing markets and products will continue or grow fast enough, or at all, that we will be able to maintain or improve our position in existing markets, or that new markets will adopt NAND flash technologies in general or our products in particular, to enable us to grow.

We believe that, over the next several years, the largest growth areas for NAND flash will be SSD and other high-value solutions, whereas the mobile market for NAND flash is expected to grow at a slower rate than in the past, and the retail market for NAND flash is expected to be approximately constant or declining. We will continue to make significant investments in the development of hardware and software solutions for SSD and other markets in order to successfully penetrate and gain market share in SSDs and other high-value solutions. However, our ability to succeed in the SSD or other high-value solutions markets is subject to various risks and uncertainties, including, among other things:


•	we may be unable to successfully develop or qualify solutions, on a timely basis or at all, that meet our customers’ requirements or are well matched to market demand, and even if we do, we cannot guarantee that customers will adopt our solutions;


•	designing and qualifying products in the market for SSDs or other high-value solutions requires significant investments and customization, which results in long development cycles and increased costs;


•	the complexity and longer development cycles required for high-value solutions increase the risk of development delays that can result in missing customer qualification cycles and other market opportunities;

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due to longer customer product cycles and end-of-life product support requirements in SSDs and other high-value solutions, we may be unable to transition customers to our leading-edge products in a timely manner, or at all, which would prevent us from achieving the full cost advantage of new technology transitions, we may be unable to adequately supply products that utilize older memory technology nodes, or, in supplying the older memory technology nodes to customers for high-value solutions, we may not have sufficient supply of the newer memory technology nodes to meet the demand requirements of other customers;


•	some customers have been developing and may continue to develop their own solutions, which could reduce demand for our high value system-level solutions, including SSDs, while potentially increasing demand for our component level products, which could harm our revenue and gross margins;


•	we may transition fab capacity to new technology nodes too quickly, which could result in inadequate supply of older memory technology nodes required for certain high-value solutions, limiting or reducing our revenue or market share;


•	products that contain our leading-edge technologies, whether based on 2D NAND or our alternative 3D NAND or 3D ReRAM technologies, may be unable to meet the performance requirements of high-value solutions or to compete effectively with products from our competitors, which would inhibit our ability to succeed in these markets and could impair our growth and profitability prospects;


•	we may be unable to realize the expected benefits of our recently completed acquisitions, many of which relate to high-value solutions;


•	SSDs and other high-value solutions require sophisticated firmware and software, and we must continue to develop firmware and software expertise;


•	SSDs and other high-value solutions require complex controllers, and we or our third-party vendors, some of which are single-source suppliers, may be unable to develop the required controllers, or we may otherwise be unable to source the required controllers, that meet the requirements for these solutions in a timely or cost effective manner, or at all;


•	SSDs and other high-value solutions incorporate unique parts, and if there is lower than expected demand, we may be unable to incorporate these unique parts in other products;


•	SSDs and other high-value solutions require longer production cycle times due to, among other things, more complex assembly and testing to produce a finished product, as well as customer requirements for consigned inventory and increased use of hubs for order fulfillment, which could lead to higher levels and cost of inventory; and


•	SSDs and other high-value solutions require different go-to-market strategies compared to our historical consumer and mobile products, which could increase our operating expenses, and we may be unable to build an effective sales and marketing operation to sell our high-value solutions.

If we are unable to successfully develop, qualify and sell SSDs and other high-value solutions, we could lose sales and corresponding profit opportunities, which would harm our operating results.

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Our revenue depends in large part on our ability to achieve design wins or sufficient sales volume with customers in our commercial channel and the success of these customers. Our primary products sold in the commercial channel include cards for mobile devices, embedded memory products, and SSDs for the notebook, storage and server markets. Our revenue from these products is primarily dependent upon these products meeting customers’ specifications and the achievement of design wins with OEMs, hyperscale data centers and other customers in our commercial channel. Even if our products meet customer specifications, our sales to these customers are dependent upon the customers choosing our products over those of our competitors and purchasing our products in sufficient volume, our ability to supply our products in sufficient quantity and in a timely manner and, with respect to OEM customers, the OEMs’ ability to create, market and sell successfully products containing our solutions. In addition, direct sales of our products may compete with products sold by our OEM partners, which may affect the commitment of our OEM partners to sell our products. If our OEM customers are not successful in selling their current or future products in sufficient volume or in a timely manner, our customers do not purchase or use our products in the volumes and within the timeframes that we anticipate, or at all, or we are not be able to produce our products in sufficient quantity or quality, our revenue, operating results and financial condition could be harmed.

Sales to a small number of customers represent a significant portion of our revenue, and if we were to lose one or more of our major customers or licensees, or experience any material reduction in orders from any of our customers, our revenue and operating results could suffer. Our ten largest customers represented 46% and 49% of our revenue in the three months ended March 29, 2015 and March 30, 2014, respectively. One customer accounted for 17% of our revenue in each of the three months ended March 29, 2015 and March 30, 2014. The composition of our major customer base has changed over time, including shifts between commercial and retail-based customers, and there have been changes in the market share concentration among our customers. Many of our commercial customers purchase more than one product category from us. We expect fluctuations in our customer and licensee base and the mix of our revenue by customer and licensee to continue as markets and strategies evolve, which could make our revenue less predictable from period-to-period. Our sales are generally made from standard purchase orders and short-term commitments rather than long-term contracts. Accordingly, our customers, including our major customers, may generally terminate or reduce their purchases from us at any time with limited notice or penalty. If we were to lose one or more of our major customers or experience any material reduction in orders from, or a material shift in product mix by, any of these customers, or if we were to lose one or more of our licensees or any of our licensees were to materially reduce their sales of licensed products, our revenue and operating results could suffer.

Our solutions rely on sophisticated firmware, that is complex and costly to develop and may require frequent product updates. Our embedded, client SSD and enterprise solutions increasingly depend on sophisticated firmware that may require significant customization for customers in our commercial channel. The development of sophisticated, complex or customized firmware is lengthy and requires significant resources, which increases our costs and time to market. We may be required to develop or update firmware for our solutions, including due to changes in customer specifications, changes in industry standards or new product introductions, which would result in increased costs. Furthermore, our failure to develop or update firmware in a timely manner, or at all, may result in reduced demand from our customers, notwithstanding the long design, qualification and test cycles we have undertaken as part of our sales process for a solution, which may harm our results of operations.

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We sell our enterprise solutions to a limited number of OEM customers that have long design, qualification and sales processes, and we expect growing demand from hyperscale customers that may be difficult to forecast. The enterprise storage market is comprised of a relatively limited number of OEM customers, with long design, qualification and test cycles prior to sales. OEM customers in the enterprise storage market typically also require us to customize our products, which could further lengthen the product design, qualification, manufacturing and sales process. We spend substantial time, money and other resources in our sales process without any assurance that our efforts will produce any customer orders on the timelines or in the quantities we expect. These lengthy and uncertain processes also make it difficult for us to forecast demand and timing of customer orders. Moreover, we start manufacturing our products and placing orders for materials and components based on non-binding forecasts that our OEM customers provide to us, further increasing our inventory exposure when actual sales vary from the OEM customer’s forecasts. The difficulty in forecasting demand and the customized nature of our products for certain OEMs make it difficult to anticipate our inventory requirements, which may cause us to over-purchase materials and components or over-produce finished goods, resulting in inventory write-offs, or under-produce finished goods, harming our ability to meet customer requirements and generate sales. Furthermore, due to longer customer product cycles, we may not be able to transition customers to our leading edge products, which would prevent us from benefitting from the technology transitions that enable cost reductions, which may harm our gross margin. When we acquire companies, such as Fusion‑io that have products using flash memory other than our captive flash memory, we typically transition these products to our captive memory, and any delays in the qualification of our captive memory for these products may cause unexpected declines in our revenue or margins from these products. We expect growing demand for our enterprise solutions from hyperscale customers. These hyperscale customers may place orders for significant volumes with short lead times that may be difficult for us to forecast and fulfill, which could result in the loss of sales opportunities and adversely affect our business.

We rely substantially on our ventures and strategic partnerships with Toshiba, which subjects us to risks and uncertainties that could harm our business, financial condition and operating results. Substantially all of our NAND flash memory is supplied by Flash Ventures. In addition, we partner with Toshiba on the development of NAND flash technology and we have entered into strategic partnerships with Toshiba relating to research and development for the next technology transitions of NAND flash and alternative technologies beyond NAND flash technologies. We have also entered into a non-binding memorandum of understanding with Toshiba to jointly invest in a new wafer fabrication facility in Yokkaichi, Japan, the primary purpose of which is to secure space for converting existing 2D NAND capacity to 3D NAND capacity beginning in 2016. These ventures and strategic partnerships are subject to various risks that could harm the value of our investments, our revenue and costs, our future rate of spending or our future growth opportunities, including, among others:

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under the terms of our venture agreements with Toshiba, which govern the operations of Flash Ventures, we have limited power to unilaterally direct most of the activities that most significantly impact Flash Ventures’ performance, including technology transitions, capital investment and other manufacturing and operational activities at Flash Ventures; the process of reaching agreement with Toshiba may be time consuming and may result in decisions that could harm our future results of operations, financial condition or competitiveness;


•	the terms of our arrangements with Toshiba include provisions such as exclusivity, transfer restrictions, and limited termination rights, which limit our flexibility; and


•	we may not always agree with Toshiba on the NAND research and development roadmap, the technology path beyond NAND flash memory, or expansions or conversions of fab capacity; we or Toshiba may have different priorities with respect to investment in Flash Ventures or future technologies, and divergent technology paths and investment priorities may adversely impact our results of operations.

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Future alternative non-volatile storage technologies or other disruptive technologies could make NAND flash memory or the alternative technologies that we are developing obsolete or less attractive, and we may not have access to those new technologies on a cost‑effective basis, or at all, or new technologies could reduce the demand for flash memory in a variety of applications or devices, any of which could harm our operating results and financial condition. Due to inherent technology limitations, the bit growth and cost reduction from 2D NAND flash technology transitions is slowing down. We began transitioning to the 15‑nanometer node in the second half of 2014 and expect to continue ramping production on this node throughout 2015. We expect 15‑nanometer to be our last technology node on 2D NAND flash architecture. We are investing in our 3D NAND flash architecture and we expect to begin pilot production of our 3D NAND in the second half of 2015 and ramp commercial volume production of 3D NAND in 2016. We are also investing in 3D ReRAM technology, which we believe may be a viable alternative to NAND flash memory in the future. We expect 2D NAND, 3D NAND and potential future technologies, including 3D ReRAM, to co-exist for an extended period of time. The success of our overall technology strategy is also dependent in part upon the development by third‑party suppliers of advanced semiconductor materials and process technologies, such as extreme ultraviolet. Our technology development of 2D NAND, 3D NAND and 3D ReRAM is done in conjunction with Toshiba, and the success of our development could be influenced by whether we are able to agree with Toshiba on a technology path or the timing and amount of investment. There can be no assurance that we will be successful in developing 3D NAND, 3D ReRAM or other technologies in a timely manner, or at all, or that we will be able to achieve the yields, quality or capacities to be cost competitive with existing or other alternative technologies. Furthermore, we cannot guarantee that 3D NAND, 3D ReRAM or other technologies we develop will match or exceed all of the performance characteristics of 2D NAND flash technology, will be developed at a rate that matches market needs, will result in cost reductions that will enable us to be competitive, or will be well-suited, in a timely manner, or at all, for all of the applications in the end markets that 2D NAND flash memory currently addresses or may address in the future. Additionally, 3D NAND, 3D ReRAM or other technologies may require different capital equipment or manufacturing processes than existing 2D NAND which could impact the cost reduction benefits obtainable through these technologies.

Many companies, including some of our competitors, have developed or are attempting to develop alternative non-volatile technologies such as magnetoresistive RAM, ReRAM, Memristor, vertical or stacked NAND, phase-change and charge-trap flash technologies and other technologies. Samsung Electronics Co., Ltd., or Samsung, has introduced products based on its 3D NAND flash technology, known as 3D VNAND, and other companies have announced the expected launch in 2015 of products incorporating 3D NAND technologies. At this time, these technologies are still emerging and it is unclear how they will compare to our 2D NAND or 3D NAND technology and what implications 3D NAND approaches may have for our industry or our business in terms of cost leadership, technology leadership, supply increases and product specifications. For example, the specifications of competitors’ 3D NAND may make it more competitive in certain products than the 2D NAND currently produced by us. Successful broad-based commercialization of one or more of these technologies could reduce the competitiveness and future revenue and profitability of our 2D NAND flash technology, and it could reduce the future competitiveness, revenue and profitability of our 3D NAND technology or the potential alternative 3D ReRAM technology that we are developing or even supplant them in their entirety. In addition, we generate license and royalty revenue from NAND flash technology, and if NAND flash technology is replaced by a technology where our IP is less relevant, our license and royalty revenue would decrease. Also, we may not have access to or we may have to pay royalties to access alternative technologies that we do not develop internally. If our competitors successfully develop new or alternative technologies, and we are unable to continue to develop our technologies on an equivalent basis, or if our competitors’ new or alternative technologies satisfy application-specific requirements that our technologies are not able to, we may not be able to compete effectively, and our operating results and financial condition would suffer.

Alternative technologies or storage solutions such as cloud storage, enabled by high bandwidth wireless or internet-based storage, could reduce the need for physical flash storage within electronic devices or reduce the rate by which average capacity increases in such devices, which could materially harm our operating results.

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Growth of our NAND flash memory bit supply at a slower rate than the overall industry for an extended period of time would result in lowering our industry market share which could limit our future opportunities or harm our financial results. Our strategy has been to focus on increasing our share of high-value solutions and industry revenue rather than our industry bit share. During 2014 and 2013, our competitors in total grew their NAND flash memory bits faster than us. Successful broad-based commercialization of 3D NAND may accelerate the growth of NAND flash bits more than we anticipate. If our bit growth lags behind our competitors for an extended period of time, it will reduce our captive flash bit market share in the industry. With lower bit market share, we may not be able to sufficiently address all market opportunities. Some of our customers may want to buy multiple types of products or specific quantities of our products and if we limit the growth of our production, we may not be able to meet customer requirements or our competitors may become more preferred suppliers based upon either the breadth of their product offerings or volume of their product supply. In addition to the potential loss of bit market share, our competitors may realize better cost declines than us enabled by improved economies of scale achieved through additional bit growth. If our competitors have lower costs, our competitors could offer similar products at a lower price than us which could harm our competitiveness and financial results. If we decide to purchase non-captive supply from competitors to provide supply to our customers, there is no guarantee we will be able to secure such supply at a competitive price, or in the right product mix or quality level or in sufficient volume, or at all.

Difficulty in forecasting demand for our products may result in excess inventory or lost sales, either of which could harm our financial results. A significant portion of our quarterly sales are from orders received and fulfilled in that quarter. Additionally, we depend upon timely reporting from some of our customers as to their inventory levels and sales of our products in order to forecast demand for our products. Furthermore, the diversification of our product offerings and our customer base requires us to produce multiple technology nodes and memory architectures in parallel in order to meet demand. The failure to accurately forecast demand for our products may result in lost sales or excess inventory and associated reserves or write-downs, any of which could harm our business, financial condition and operating results.

The long lead times for some of our purchasing or other arrangements further restrict our ability to respond to variations from our forecasts. Some of our silicon purchasing arrangements provide that the first three months of our rolling six-month projected supply requirements are fixed and we may make only limited percentage changes in the second three months of the period covered by our supply requirement projections. Our products also contain non-silicon components that have long lead-times requiring us to place orders several months in advance of anticipated demand. In addition, purchasing decisions for manufacturing tools in Flash Ventures as well as tools in our captive assembly and test manufacturing facilities in Shanghai, China and Penang, Malaysia often need to be made several months in advance in order to ensure that the tools can be integrated into the manufacturing process when increased capacity is needed. These purchasing arrangements increase the risk of excess inventory or loss of sales in the event our forecasts vary substantially from actual demand.

Our license and royalty revenue may fluctuate or decline significantly in the future due to license agreement renewals, declines in sales of the products or use of technology underlying the license and royalty revenue by our licensees, or if licensees fail to perform on a portion or all of their contractual obligations. If our existing licensees do not renew their licenses upon expiration, renew them on less favorable terms, exercise their option to terminate the license or fail to exercise their option to extend the licenses, or we are not successful in signing new licensees in the future, our license revenue, profitability, and cash provided by operating activities would be harmed. As our older patents expire, and the coverage of our newer patents may be different, it may be more difficult to negotiate or renew favorable license agreement terms or a license agreement at all. For example, in the first quarter of 2010, our license and royalty revenue decreased sequentially, due primarily to a new license agreement with Samsung that was effective in the third quarter of 2009, with a term expiring in August 2016, and contains a lower effective royalty rate compared to the previous license agreement. To the extent that we are unable to renew license agreements under similar terms, or at all, our financial results would be harmed by the reduced license and royalty revenue and we may incur significant patent litigation costs to enforce our patents against these licensees. Our agreements may require us in certain instances to recognize license revenue related to a particular licensee all in one period instead of over time which could create additional volatility in our licensing revenue. A portion of our license and royalty revenue is based on sales of product categories as well as underlying technology, and fluctuations in the sales of those products or technology adoption rates would also result in fluctuations in the license and royalty revenue due to us under our agreements. If our licensees or we fail to perform on contractual obligations, we may incur costs to enforce or defend the terms of our licenses and there can be no assurance that our enforcement, defense or collection efforts will be effective. If we license new IP from third parties or existing licensees, we may be required to pay license fees, royalty payments or offset existing license revenue. We may enter into agreements with customers, suppliers or partners that could limit our ability to monetize our IP or could result in us being required to provide IP indemnification to our customers, suppliers or partners. In addition, we may be subject to disputes, claims or other disagreements on the timing, amount or collection of royalties or license payments under our existing license agreements.

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In transitioning to new technologies and products, we may not achieve design wins, our customers may delay transition to new technologies, our competitors may transition more quickly than we do, or we may experience product delays, cost overruns or performance issues that could harm our business. The transition to new generations of products, such as products containing 1Y‑nanometer, 15‑nanometer or subsequent process technologies such as 3D NAND and/or X3 NAND memory architecture or new storage interfaces, is highly complex and requires new controllers, new test procedures and modifications to numerous aspects of our manufacturing processes, resulting in the need for extensive qualification of the new products by our customers and us. In addition, our competitors may transition to new technologies more quickly or more effectively than we are able to, which could harm our ability to compete effectively. If we fail to develop or achieve design wins for products using new technologies, if our customers choose to transition to these new technologies more slowly or faster than our roadmap plans, if the demand for the products that we develop is lower than expected, if the supporting technologies to implement these new technologies are not available, or if our competitors transition to these new technologies, including X3, more quickly or more effectively than we are able to, we may be unable to achieve the cost structure required to support our profit objectives or may be unable to grow or maintain our market position. Furthermore, there can be no assurance that technology transitions will occur on schedule or at the yields or costs that we anticipate, that the tools and equipment required for the technology transitions will be available on a cost‑effective basis, or at all, or that products based on the new technologies will meet customer specifications. The vast majority of our products require controllers and firmware. We rely on a limited number of third-party vendors to develop or supply controllers for many of our high-value solutions. Any delays or cost increases in developing or sourcing controllers or firmware, or incompatibility or quality issues relating to the controllers or firmware in our products, could harm our revenue and gross margin, as well as business relationships with our customers. Any material delay in a development or qualification schedule could delay deliveries and harm our operating results.

We require an adequate level of product gross margin to continue to invest in our business, and our product gross margin may vary significantly depending on a number of factors. Our ability to generate sufficient product gross margin and profitability to invest in our business is influenced by supply and demand balance in the flash memory industry, the mix of our product sales, our ability to reduce our cost per gigabyte at an equal or higher rate than the price decline per gigabyte, our ability to develop new products and technologies, the rate of growth of our target markets, the competitive position of our products, the continued acceptance of our products by our customers and our management of production capacity and technology transitions. Other factors that could result in volatility in our product gross margin include fluctuations in customer mix, as well as variations in the technologies or form factors of our products. For example, we experienced negative product gross margin for 2008 and the first quarter of 2009 due to sustained aggressive industry price declines as well as inventory charges, due primarily to lower of cost or market write-downs. If we fail to maintain adequate product gross margin and profitability, our business and financial condition would be harmed and we may have to reduce, curtail or terminate certain business activities, including funding technology development and capacity expansion. Furthermore, as we diversify the products that we sell, changes in our product mix could result in volatility in our product gross margin, since we have significant variation in our product gross margin across product lines, and some of the products that we sell have product gross margin that is significantly below our overall average.

We may not be able to realize the potential financial or strategic benefits of business acquisitions or strategic investments, which could harm our ability to grow our business, develop new products or sell our products. We have in the past and may in the future enter into acquisitions of, or investments in, businesses in order to complement or expand our current business or enter into new markets. Mergers and acquisitions of high-technology companies are inherently risky and subject to many factors outside of our control and no assurance can be given that our previous or future acquisitions will be successful, deliver the intended benefits and not materially harm our business, operating results or financial condition. Furthermore, negotiation and integration of acquisitions or strategic investments could divert management’s attention and other company resources.

Factors associated with past or future acquisitions or investments that could harm our growth prospects or results of operations include but are not limited to:


•	difficulty in integrating the technology, products, operations or workforce of the acquired business into our business;

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failure to transition an acquired business from third‑party sources of NAND flash memory to our captive supply of these materials, not having enough captive NAND flash memory to support the revenue growth of the acquired business or inability to procure sufficient NAND flash memory from third‑party sources in a cost effective manner, or at all, which could harm our ability to achieve the expected benefits from the acquisition;


•	failure to leverage the cost benefits of using our captive assembly and test or manufacturing facilities for the operations of an acquired business, which could harm our ability to achieve the expected benefits from the acquisition;


•	difficulty in entering into new markets in which we have limited or no experience, such as software solutions, and where competitors have stronger positions;


•	failure of the markets addressed by the acquired business to grow as expected;

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•	loss of, or the impairment of or failure to maintain and grow relationships with, key employees, suppliers, vendors or customers of the acquired business, including any on which the acquired business is significantly reliant;


•	difficulty in integrating the technology of the acquired business into our product lines in existence or in development, which could harm our ability to maintain the business after the acquisition or diminish our expected benefits of the acquisition;


•	difficulty in operating in new and potentially dispersed locations;


•	disruption of our ongoing business or the ongoing business of the company we invest in or acquire;


•	failure to realize the potential financial or strategic benefits of the transaction, including but not limited to any expected cost savings or synergies from the acquisition;


•	difficulty integrating the accounting, supply chain, human resources and other systems of the acquired business;


•	disruption of or delays in ongoing research and development efforts and release of new products to market;


•	diversion of capital, management attention and other resources;


•	assumption of liabilities;


•	issuance of equity securities that may be dilutive to our existing stockholders;


•	diversion of resources and unanticipated expenses resulting from litigation arising from potential or actual business acquisitions or investments, including any ongoing litigation of the acquired business;


•	failure of the due diligence processes to identify significant issues with product quality, technology and development, or legal and financial issues, among other things;


•	incurring non-recurring charges, increased contingent liabilities, adverse tax consequences, depreciation or deferred compensation charges, amortization or impairment of intangible assets or impairment of goodwill, which could harm our results of operations; and


•	potential delay in customer purchasing decisions due to uncertainty about the direction of our product offerings or those of the acquired business.

In July 2014, we completed the acquisition of Fusion‑io, a developer of flash-based PCIe hardware and software solutions that enhance application performance in enterprise and hyperscale data centers. In addition to the risks described above, failure to leverage or delays in leveraging Fusion‑io’s go-to-market capabilities to generate revenues for our products could harm our ability to realize the potential financial or strategic benefits of the acquisition and thereby harm our growth prospects or results of operations. Failure to realize the anticipated benefits from acquisitions could result in the impairment of our acquisition-related intangible assets, which would harm our results of operations. For example, in the first quarter of 2015, we recorded an impairment charge of $61 million related to an IPR&D asset from the acquisition of Fusion‑io. This impairment charge stemmed primarily from our decision to abandon this IPR&D project and redirect resources towards the next-generation PCIe and converged enterprise platform. As of March 29, 2015, the net book value of the Fusion‑io acquisition-related amortizable intangible assets was $313 million, some or all of which could be subject to impairment.

Any disruption or shortage in our supply chain could reduce our revenue, earnings and gross margin. All of our flash memory products require silicon supply for the memory and controller components. Substantially all of our flash memory is currently supplied by Flash Ventures and to a much lesser extent by third‑party silicon suppliers. Any disruption or shortage in supply of flash memory from our captive or non-captive sources, including disruptions due to disasters, unplanned maintenance, work stoppages, supply chain interruptions and other factors, would harm our operating results.

The concentration of Flash Ventures in Yokkaichi, Japan, magnifies the risks of supply disruption. The Yokkaichi location and Japan in general are subject to earthquakes, typhoons and other natural disasters. Moreover, Toshiba’s employees who produce Flash Ventures’ products are covered by collective bargaining agreements and any strike or other job action by those employees could interrupt our wafer supply from Flash Ventures. A disruption in our captive wafer supply, including but not limited to disruptions from natural disasters, emergencies such as power outages, fires or chemical spills, or employee strikes or other job actions could cause us not to have sufficient supply to meet demand, resulting in lost sales and market share, as well as significant costs, including wafer loss. For example, the March 11, 2011 earthquake and tsunami in Japan caused a brief equipment shutdown at Flash Ventures, which resulted in some wafer loss as well as delayed or canceled deliveries of certain tools and materials from suppliers impacted by the earthquake. In addition, Flash Ventures has, from time to time, experienced power outages and power fluctuations, which have resulted in a loss of wafers and increased costs associated with bringing the facility back online.

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Currently, wafers for our internally-designed controllers are manufactured by third‑party foundries. In addition, we purchase controllers from third‑party sources, and most of our products require other components and materials for which we do not have captive supply, such as the DRAM included in some of our SSDs and MCP storage solutions that we supply for use in mobile devices. A disruption in the manufacturing operations of our controller wafer vendors, third‑party controller vendors or suppliers of other components, such as DRAM, could result in delivery delays, harm our ability to make timely shipments of our products and harm our operating results until we could qualify an alternate source of supply for these components, which could take several quarters to complete.

Our business depends significantly upon sales through retailers and distributors, and if our retailers and distributors are not successful, we could experience reduced sales, substantial product returns or increased price protection claims, any of which would harm our business, financial condition and operating results. A significant portion of our sales is made through retailers (for our retail channel) and distributors (for both our retail and commercial channels), and we must rely on them to effectively sell our products. Except in limited circumstances, we do not have exclusive relationships with our retailers or distributors. In addition, sales through retailers and distributors typically include commercial terms such as the right to return unsold inventory and protection against price declines. As a result, we do not recognize revenue until after the product has been sold through to the end user, in the case of sales to retailers, or to our distributors’ customers, in the case of sales to distributors. If our retailers and distributors are not successful in selling our products, not only would our revenue decrease, but we could also experience lower gross margin due to substantial product returns or price protection claims. Furthermore, negative changes in the credit-worthiness or the ability to access credit, or the bankruptcy or shutdown of any of our significant retail or distribution partners would harm our revenue and our ability to collect outstanding receivable balances. We also provide inventory on a consigned basis to certain of our retailers, and a bankruptcy or shutdown of these customers could preclude us from taking possession of our consigned inventory, which could result in inventory charges.

We develop new products, technologies and standards, which may not be widely adopted by consumers or enterprises, or, if adopted, may reduce demand for our older products. We devote significant resources to the development of new products, technologies and standards. New products may require significant upfront investment with no assurance of long-term commercial success or profitability. As we introduce new products, standards or technologies, it can take time for these new standards or technologies to be adopted, for consumers to accept and transition to these new standards or technologies and for significant sales to be generated, if at all. Failure of consumers or enterprises to adopt our new products, standards or technologies could harm our results of operations as we fail to reap the benefits of our investments. Competitors or other market participants could seek to develop new standards for flash memory products that, if accepted by device manufacturers or consumers, could reduce demand for our products, negatively impact our license and royalty revenue, or increase license and royalty expense. If new standards are broadly accepted and we do not adopt these new standards in our products, our revenue and results of operations may be harmed.

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We face competition from numerous manufacturers and marketers of products using flash memory and if we cannot compete effectively, our operating results and financial condition will suffer. We face competition from NAND flash memory manufacturers and from companies that buy NAND flash memory and incorporate it into their end products. We face different competitive pressures in different markets, and we compete to varying degrees on the basis of, among other things, price, quality and timely delivery of products, product performance, availability and differentiation, and the development of industry standards and formats. The success of our competitors may harm our future revenue or margins and may result in the loss of our key customers.

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NAND Manufacturers. We compete with NAND flash memory manufacturers, including SK Hynix Semiconductor, Inc., Intel Corporation, or Intel, Micron Technology, Inc., or Micron, Samsung and Toshiba. These companies compete with us in selling a range of flash-based products and form factors, including embedded, SSDs, removable and other form factors. These competitors are large companies that may have greater and more advanced wafer manufacturing capacity, substantially greater financial, technical, marketing and other resources, better recognized brand names and more diversified and lower cost businesses than we do, which may allow them to produce flash memory chips in high volumes at low costs and to sell these flash memory chips themselves or to our competitors at a low cost. In addition, many of our competitors have more diversified semiconductor manufacturing capabilities and can internally produce integrated solutions or hybrid products that may include a combination of NAND flash, DRAM, custom ASICs or other integrated products, while our captive manufacturing capability is solely dedicated to NAND flash. These diversified capabilities may also provide these competitors with a competitive advantage not only in product design and manufacturing due to the ability to leverage know-how in DRAM, custom ASICs or other technologies, but also in a greater ability to respond to industry fluctuations due to their ability to convert their DRAM and other semiconductor manufacturing capacity or equipment to NAND flash and vice-versa. Furthermore, some of these competitors manufacture and sell products that are complementary to flash memory products, and may be able to leverage their competencies and customer relationships to gain a competitive advantage. Current and future memory manufacturer competitors could produce alternative flash or other memory technologies that could compete against our NAND flash technology or our alternative technologies, or may transition to more advanced technologies sooner than us, each of which may reduce demand or accelerate price declines for our products. Furthermore, if our technology development results in less cost reduction than the technology of our competitors, our business and operating results would be harmed and our investments in captive fabrication facilities could be impaired.

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Flash Memory Card and USB Drive Manufacturers and Resellers. We compete with manufacturers and resellers of flash memory card and USB drives, which purchase or have a captive supply of flash memory components and assemble memory products. Price fluctuations, the timing of product availability and resources allocated to marketing programs can harm our branded market share and reduce our sales and profits. We also sell flash memory in the form of private label cards, wafers or components to certain OEMs who sell flash products that may ultimately compete with our branded products in the retail or commercial channels. The sales volumes and pricing to these OEMs can be highly variable and these OEMs may be more inclined to switch to an alternative supplier based on short-term price fluctuations or the timing of product availability, which could harm our sales and profits.

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Client Storage Solution Manufacturers. In the market for client SSDs, we face competition from Intel, Micron, Samsung and Toshiba, all of which are also NAND flash producers, as well as client SSD and hard drive providers such as Kingston Technology Co., Inc., Philips & Lite-On Digital Solutions Corporation, or Lite-On, Seagate Technology PLC, or Seagate, and Western Digital Corporation, or WDC. In this market, we compete with these industry players largely on the basis of performance capabilities, quality, price, product reliability and relationships with computer manufacturers. Many of the large NAND flash producers have long established relationships with computer manufacturers, or are computer manufacturers themselves, which gives them a competitive advantage in qualifying and integrating their client storage solutions in this market as well as the ability to leverage competencies that have been developed through these relationships in the past. Hard drive manufacturers such as Seagate and WDC may also have a competitive advantage in their ability to leverage their existing relationships and brand recognition with customers, as well as their ability to leverage existing technology in creating hybrid drive products. Our failure to compete effectively against these industry players could harm our business and results of operations.

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Enterprise Storage Solution Manufacturers. In the market for enterprise data center storage solutions, we face competition from Intel, Micron, Samsung and Toshiba, all of which are also NAND flash producers, as well as from Lite-On, Seagate, WDC, including its Hitachi Global Storage Technologies subsidiaries, and emerging competitors. Many of these competitors have significantly more experience with the software components that are required for successful enterprise storage solutions, and our failure to continue to develop software expertise could harm our ability to effectively compete in this market. Many established and start-up companies are contributing to the development of the enterprise data center storage market. Our competitors in this market may be able to leverage existing resources and competencies or acquire or develop other strategic relationships with established or start-up companies before we are able to, which could give them a competitive advantage, and if we are unable to independently develop comparable capabilities, we may be unable to effectively compete.

Our ability to generate revenue or adequate margins for certain products may be limited by our ability to secure, at competitive prices or at all, components or materials required to produce those products. Our products require certain components and materials for which we do not have captive supply. Our ability to generate revenue or adequate margins could be impacted by an inability to source those components or materials in a cost‑effective manner, or at all. For example, some of our SSDs and the MCP storage solutions that we supply for use in mobile devices include both NAND flash memory and DRAM. Since we do not have a captive supply of DRAM, there could be periods in which we are unable to cost‑effectively and timely source DRAM in the quantities that we require, which could result in our competitors with greater access to DRAM becoming preferred suppliers for these solutions, as well as discrete flash solutions. In addition, costs of DRAM have increased in the past and continued increases in the future would harm our gross margin for our products that include DRAM. Furthermore, as our product portfolio has evolved to include an increasing mix of complex products, we have become increasingly reliant on components and materials other than flash memory, and the proportion of our product costs attributable to these materials has increased. If we are unable to source these components or materials cost effectively, or at all, or if we are unable to reduce the cost of these materials and other costs, our revenue and margin may be harmed.

Our financial performance and the value of our investments depend significantly on worldwide economic conditions, which have deteriorated in many countries and regions, and may not recover in the foreseeable future. Demand for our products is harmed by negative macroeconomic factors affecting consumer and enterprise spending. Continuing high unemployment rates, low levels of consumer liquidity, risk of default on sovereign debt and volatility in credit and equity markets have weakened consumer confidence and decreased consumer and enterprise spending in many regions around the world. These and other economic factors may reduce demand for our products and harm our business, financial condition and operating results. In addition, we maintain investments, including our cash, cash equivalents and marketable securities, of various holdings, types and maturities and, given the global nature of our business, our investment portfolio includes both domestic and international investments. Credit ratings and pricing of these investments can be negatively affected by liquidity, credit deterioration, financial results, economic risk, political risk, sovereign risk or other factors, and declines in the credit ratings or pricing of our investments could result in a decline in the value and liquidity of our investments, including our cash, cash equivalents and marketable securities, and result in a significant impairment of our assets.

We depend on our captive assembly and test manufacturing facilities in China and Malaysia and our business could be harmed if these facilities do not perform as planned. Our reliance on our captive assembly and test manufacturing facilities in Shanghai, China and our new Penang, Malaysia facility have increased significantly and we now utilize these factories to satisfy a majority of our assembly and test requirements, to produce products with leading-edge technologies such as multi-stack die packages and to provide order fulfillment. In addition, our China facilities are responsible for packaging and shipping our retail products within the U.S., Asia, Europe, Canada and Latin America. We expect that, by the end of 2015, we will produce a significant portion of our SSD products in our Malaysia facility. Any delays in ramping capacity or adding new or replacement equipment, interruptions in production or the ability to ship product, or issues with manufacturing yields at our captive facilities could harm our operating results and financial condition. In addition, investment decisions in adding new assembly and test capacity require significant planning and lead-time, and a failure to accurately forecast demand for our products could cause us to over-invest or under-invest in the expansion of captive assembly and test capacity in our facilities, which would lead to excess capacity, under-utilization charges and impairments, in the event of over-investment, or insufficient assembly and test capacity resulting in a loss of sales and revenue opportunities, in the event of under-investment. Furthermore, if we were to experience labor unrest, or strikes, or if wages were to significantly increase, our ability to produce and ship products could be impaired and we could experience higher labor costs, which could harm our operating results, financial condition and liquidity.

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We rely on our suppliers, some of which are the sole source of supply for our non-memory components, and capacity limitations or cost increases from these suppliers expose our supply chain to unanticipated disruptions or potential additional costs. We do not have long-term supply commitments from many of our suppliers, certain of which are sole sources of supply for our non-memory components. For example, the controllers for a majority of our SSD revenue are sourced from one third‑party controller vendor. From time-to-time, certain materials may become difficult or more expensive to obtain, including as a result of capacity constraints of these suppliers, or other cost increases sought by these suppliers, which could impact our ability to meet demand and could harm our profitability. Our business, financial condition and operating results could be significantly harmed by delays or reductions in shipments if we are unable to obtain sufficient quantities of these components or develop alternative sources of supply in a timely manner, on competitive terms, or at all.

We depend on our third‑party subcontractors and our business could be harmed if our subcontractors do not perform as planned. We rely on third‑party subcontractors for a portion of our wafer testing, chip assembly, product assembly, product testing and order fulfillment. From time-to-time, our subcontractors have experienced difficulty meeting our requirements. If we are unable to increase the amount of capacity allocated to us from our current subcontractors or qualify and engage additional subcontractors, we may not be able to meet demand for our products. We do not have long-term contracts with some of our existing subcontractors, nor do we have exclusive relationships with any of our subcontractors and, therefore, cannot guarantee that they will devote sufficient resources or capacity to manufacturing our products. We are not able to directly control product delivery schedules or quality assurance. Furthermore, we manufacture on a turnkey basis with some of our subcontractors. In these arrangements, we do not have visibility and control of their inventories of purchased parts necessary to build our products or of the progress of our products through their assembly line. Any significant problems that occur at our subcontractors, or their failure to perform at the level we expect, could lead to product shortages or quality assurance problems, either of which would harm our operating results.

Our products may contain errors or defects or otherwise fail to meet customer or user requirements, which could result in the rejection of our products, product recalls, damage to our reputation, lost revenue, diverted development resources, increased service costs, warranty and indemnification claims and litigation. Our products are complex, must meet stringent customer or user requirements and may contain errors or defects, and the majority of our products provide a warranty period. Errors or defects in our products may be caused by, among other things, errors or defects in the memory or controller components or firmware, including memory and components that we procure from non-captive sources, or may occur as a result of the production process. In addition, the substantial majority of our flash memory is supplied by Flash Ventures, and if the wafers from Flash Ventures contain errors or defects, our overall supply could be harmed. These factors could result in the rejection of our products, damage to our reputation, lost revenue, diverted development resources, increased customer service and support costs, indemnification of our customers’ product recall and other costs, warranty claims and litigation. Generally, our OEM customers have more stringent requirements than other customers and our concentration of revenue from OEMs, especially OEMs who purchase our enterprise solutions and client SSD products, could result in increased expenditures for product testing, or increase our service and support costs and potentially lead to increased warranty or indemnification claims. Furthermore, the costs of errors or defects in our embedded products may be greater than those of stand-alone, removable products due to the effect that such errors or defects may have on other components of the device in which they are embedded. In addition, we may be unable to provide timely, sufficient and cost-effective customer support and service, which could increase the risk of product rejections, reputational damage, revenue loss, warranty and indemnification claims and litigation. We record an allowance for warranty and similar costs in connection with sales of our products, but actual warranty and similar costs may be significantly higher than our recorded estimate and harm our operating results and financial condition.

Our new products have, from time-to-time, been introduced with design and production errors at a rate higher than the error rate in our established products. We must estimate warranty and similar costs for new products without historical information and actual costs may significantly exceed our recorded estimates. Underestimation of our warranty and similar costs would harm our operating results and financial condition.

Certain of our products contain encryption or security algorithms to protect third‑party content and user-generated data stored on our products. To the extent our products are hacked or the encryption schemes are compromised or breached, this could harm our business by hurting our reputation, requiring us to employ additional resources to fix the errors or defects and expose us to litigation and indemnification claims. This could potentially impact future collaboration with content providers or lead to product returns or claims against us due to actual or perceived vulnerabilities.

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We are exposed to foreign currency exchange rate fluctuations that could harm our business, operating results and financial condition. A significant portion of our business is conducted in currencies other than the U.S. dollar, which exposes us to adverse changes in foreign currency exchange rates. A stronger U.S. dollar could increase the real cost of our products to our customers in those markets outside the U.S. where we sell in U.S. dollars, and in those markets where we sell in foreign currencies, a stronger U.S. dollar would result in those sales translating into a lower U.S. dollar amount. A weakened U.S. dollar could increase our costs for foreign currency based operating expenses and product costs. These exposures may change over time as our business and business practices evolve, and they could harm our financial results and cash flows.

Our most significant exposure is related to our purchases of NAND flash memory from Flash Ventures, which are denominated in Japanese yen. Appreciation in the value of the Japanese yen relative to the U.S. dollar would increase our cost of NAND flash wafers, negatively impacting our gross margin and operating results. In addition, our investments in Flash Ventures are denominated in Japanese yen and strengthening of the Japanese yen would increase the cost to us of future funding and increase the value of our Japanese yen-denominated investments, increasing our exposure to asset impairments. Macroeconomic weakness in the U.S. or other parts of the world could lead to strengthening of the Japanese yen, which would harm our gross margin, operating results, and the cost of future Flash Venture funding, and increase the risk of asset impairment. We also have foreign currency exposures related to certain non-U.S. dollar-denominated revenue and operating expenses in Europe and Asia. Additionally, we have exposures to emerging market currencies, which can be extremely volatile. We also have significant monetary assets and liabilities that are denominated in non-functional currencies.

We generally enter into foreign exchange forward contracts to reduce the impact of foreign currency fluctuations on certain foreign currency assets, liabilities and net investments. In addition, from time-to-time, we hedge certain anticipated foreign currency cash flows with foreign exchange forward and option contracts, primarily for Japanese yen-denominated inventory purchases. We generally have not hedged our future equity investments, distributions and loans denominated in Japanese yen related to Flash Ventures.

Our decisions and hedging strategy with respect to currency risks may not be successful, which could harm our operating results. In addition, if we do not successfully manage our hedging program in accordance with accounting guidelines, we may be subject to adverse accounting treatment, which could harm our operating results. There can be no assurance that this hedging program will be economically beneficial to us for numerous reasons, including that hedging may reduce volatility, but prevent us from benefiting from a favorable market trend. Further, the ability to enter into foreign exchange contracts with financial institutions is based upon our available credit from such institutions and compliance with covenants and other restrictions. Operating losses, third‑party downgrades of our credit rating or instability in the worldwide financial markets, including the downgrade of the credit rating of the U.S. government, could impact our ability to effectively manage our foreign currency exchange rate risk, which could harm our business, operating results and financial condition.

Our global operations and operations at Flash Ventures and third‑party subcontractors are subject to risks for which we may not be adequately insured. Our global operations are subject to many risks, including but not limited to errors and omissions, infrastructure disruptions, such as large-scale outages or interruptions of service from utilities or telecommunications providers, supply chain interruptions, third‑party liabilities, theft and fires or natural disasters. No assurance can be given that we will not incur losses beyond the limits of, or outside the scope of, the coverage of our insurance policies. From time-to-time, various types of insurance have not been available on commercially acceptable terms or, in some cases, at all. There can be no assurance that in the future we will be able to maintain existing insurance coverage or that premiums will not increase substantially. Due to market availability, pricing or other reasons, we may elect not to purchase insurance coverage or to purchase only limited coverage. We maintain limited insurance coverage and, in some cases, no coverage at all, for natural disasters and environmental damages, as these types of insurance are sometimes not available or available only at a prohibitive cost. For example, our test and assembly facilities in Shanghai, China and Penang, Malaysia, on which we significantly rely, may not be adequately insured against all potential losses. Accordingly, we may be subject to uninsured or under-insured losses. We depend upon Toshiba to obtain and maintain sufficient property, business interruption and other insurance for Flash Ventures. If Toshiba fails to do so, we could suffer significant unreimbursable losses, and such failure could also cause Flash Ventures to breach various financing covenants. In addition, we insure against property loss and business interruption resulting from the risks incurred at our third‑party subcontractors; however, we have limited control as to how those sub-contractors run their operations and manage their risks, and as a result, we may not be adequately insured.

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If our security measures or security measures of our suppliers, vendors and partners are breached and unauthorized access to our or their information technology systems is obtained, we may lose proprietary data. Our security measures and the security measures of our suppliers, vendors and partners may be breached and our or their information technology systems accessed as a result of third‑party action, including computer hackers, employee error, malfeasance or otherwise, and result in unauthorized access to our customers’ data or our data, including IP and other confidential business information. Attempts by others to gain unauthorized access to information technology systems are increasingly more sophisticated. These attempts, which might be related to state-sponsored intrusions or industrial or other espionage, include covertly introducing malware to computers and networks and impersonating authorized users, among others. We seek to detect and investigate all security incidents and to prevent their recurrence, but in some cases, we might be unaware of an incident or its magnitude and effects. Moreover, because the techniques used to obtain unauthorized access, or to sabotage systems, change frequently, we may be unable to anticipate these techniques or to implement adequate preventative measures. Furthermore, we have limited or no control over the implementation of preventative measures of our suppliers, vendors and partners. While we have identified several incidents of unauthorized access, to date none have caused material damage to our business. Security breaches could result in disclosure of our IP, trade secrets or confidential customer, supplier or employee data, which could result in legal liability, harm to our reputation and other harm to our business. Security breaches or other cyber attacks involving disruptions to or failures in information technology, communication systems or other critical infrastructure could also result in delays to or malfunctions in company, supplier, vendor or partner operations or services. We have minimal insurance coverage for cybersecurity-related matters. We could also be negatively affected by existing and proposed laws and regulations, as well as government policies and practices, related to cybersecurity, privacy and data protection. We expect to continue to devote resources to the security of our information technology systems.

We may need to raise additional financing, which could be difficult to obtain, and which, if not obtained in satisfactory amounts, may prevent us from funding Flash Ventures, increasing our wafer supply, developing or enhancing our products, taking advantage of future opportunities, engaging in acquisitions of or investments in companies, growing our business or responding to competitive pressures or unanticipated industry changes, any of which could harm our business. We currently believe that we have sufficient cash resources to fund our operations as well as our anticipated investments in Flash Ventures for at least the next 12 months; however, we may decide to raise additional funds to maintain the strength of our balance sheet or fund our operations through equity, public or private debt, or lease financings. However, we cannot be certain that we will be able to obtain additional financing on favorable terms, or at all. If we issue additional equity securities, our stockholders will experience dilution and the new equity securities may have rights, preferences or privileges senior to those of existing holders of common stock. If we raise funds through debt or lease financing, we will have to pay interest and may be subject to restrictive covenants, which could harm our business. If we cannot raise funds on acceptable terms, if and when needed, our credit rating may be downgraded, and we may not be able to develop or enhance our technology or products, fulfill our obligations to Flash Ventures, increase our wafer supply, take advantage of future opportunities, engage in acquisitions of or investments in companies, grow our business or respond to competitive pressures or unanticipated industry changes, any of which could harm our business.

We may be unable to protect our IP rights, which would harm our business, financial condition and operating results. We rely on a combination of patent, trademark, copyright and trade secret laws, confidentiality procedures and licensing arrangements to protect our IP rights. In the past, we have been involved in significant and expensive disputes regarding our IP rights and those of others, including claims that we may be infringing patents, trademarks and other IP rights of third‑parties. We expect that we will be involved in similar disputes in the future.

There can be no assurance that:


•	any of our existing patents will continue to be held valid, if challenged;


•	patents will be issued for any of our pending applications;


•	any claims allowed from existing or pending patents will have sufficient scope or strength to protect us;


•	our patents will be issued in the primary countries where our products are sold in order to protect our rights and potential commercial advantage; or


•	any of our products or technologies do not infringe on the patents of other companies.

In addition, our competitors may be able to design their products around our patents and other proprietary rights. We also have patent cross-license agreements with several of our leading competitors. Under these agreements, we have enabled competitors to manufacture and sell products that incorporate technology covered by our patents. While we obtain license and royalty revenue or other consideration for these licenses, if we continue to license our patents to our competitors, competition may increase and may harm our business, financial condition and operating results.

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There are flash memory producers, flash memory card manufacturers and other companies that utilize flash memory who we believe may infringe our IP. Enforcement of our rights often requires litigation. If we bring a patent infringement action and are not successful, our competitors would be able to use similar technology to compete with us. Moreover, the defendant in such an action may successfully countersue us for infringement of their patents or assert a counterclaim that our patents are invalid or unenforceable. If we do not prevail in the defense of patent infringement claims, we could be required to pay substantial damages, cease the manufacture, use and sale of infringing products in one or more geographic locations, expend significant resources to develop non-infringing technology, discontinue the use of specific processes or obtain licenses to the technology infringed. If we are enjoined from selling our products, or if we are required to develop new technologies or pay significant monetary damages or are required to make substantial royalty payments, our business and results of operations would be harmed.

We rely on trade secrets to protect some of our IP. Trade secrets are difficult to maintain and protect. We have taken measures to protect our trade secrets and proprietary information, such as the use of confidentiality agreements with employees and business partners, but there is no guarantee that these measures will be effective. These agreements may be unenforceable or difficult and costly to enforce, and our proprietary information may be stolen or misused, otherwise become known or be independently developed by competitors. Enforcement of claims that a third party has illegally obtained or used trade secrets is expensive, time consuming and uncertain. In addition, foreign courts are sometimes less willing than domestic courts to protect trade secrets. Our failure to obtain or maintain trade secret protection could adversely affect our competitive position and harm our business.

The success of our branded products depends in part on the positive image that consumers have of our brands. We believe the popularity of our brands makes them a target of counterfeiting or imitation, with third parties attempting to pass off counterfeit products as our products. Any occurrence of counterfeiting, imitation or confusion with our brands could adversely affect our reputation and impair the value of our brands, which in turn could negatively impact sales of our branded products, our market share and our gross margin, as well as increase our administrative costs related to brand protection and counterfeit detection and prosecution.

We and certain of our officers are at times involved in litigation, including IP, antitrust and securities litigation, which may be costly, may divert the efforts of our key personnel and could result in adverse court rulings, which could materially harm our business. We are often involved in litigation, including cases involving our IP rights and those of others, antitrust and commercial matters, putative securities class action suits and other securities-related actions. We are the plaintiff in some of these actions and the defendant in others. Some of the actions seek injunctive relief, including injunctions against the sale of our products, and/or substantial monetary damages, which if granted or awarded, could materially harm our business, financial condition and operating results.

Litigation is subject to inherent risks and uncertainties that may cause actual results to differ materially from our expectations. Factors that could cause litigation results to differ include, but are not limited to, the discovery of previously unknown facts, changes in the law or in the interpretation of laws, and uncertainties associated with the judicial decision-making process. If we receive an adverse judgment in any litigation, we could be required to pay substantial damages and/or cease certain practices or activities, including the manufacture, use and sale of products. With or without merit, litigation can be complex, can extend for a protracted period of time, can be very expensive, and the expense can be unpredictable. Litigation initiated by us could also result in counter-claims against us, which could increase the costs associated with the litigation and result in our payment of damages or other judgments against us. In addition, litigation, and any related publicity, may divert the efforts and attention of some of our key personnel. Litigation may also harm the market prices of our securities.

We may be obligated to indemnify our current or former directors or employees, or former directors or employees of companies that we have acquired, in connection with litigation or regulatory investigations. These liabilities could be substantial and may include, among other things, the costs of defending lawsuits against these individuals; the cost of defending stockholder derivative suits; the cost of governmental, law enforcement or regulatory investigations; civil or criminal fines and penalties; legal and other expenses; and expenses associated with the remedial measures, if any, which may be imposed.

Moreover, from time-to-time, we agree to indemnify certain of our suppliers and customers for alleged IP infringement. The scope of such indemnity varies but generally includes indemnification for direct and consequential damages and expenses, including attorneys’ fees. We may be engaged in litigation as a result of these indemnification obligations. Third-party claims for patent infringement are excluded from coverage under our insurance policies. A future obligation to indemnify our customers or suppliers may harm our business, financial condition and operating results. For additional information concerning legal proceedings, see Part II, Item 1, “Legal Proceedings.”

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We may be unable to license, or license at a reasonable cost, IP from third parties as needed, which could expose us to liability for damages, increase our costs or limit or prohibit us from selling products. If we incorporate third‑party technology into our products or if we are found to infringe the IP of others, we could be required to license IP from third‑parties. We may also need to license some of our IP to others in order to enable us to obtain important cross-licenses to third‑party patents. We cannot be certain that licenses will be offered when we need them, that the terms offered will be acceptable, or that these licenses will help our business. If we do obtain licenses from third parties, we may be required to pay license fees, royalty payments, or offset license revenue. In addition, if we are unable to obtain a license that is necessary to manufacture or sell our products, we could be required to redesign or stop shipping our products to one or more geographic locations, suspend the manufacture of products or stop our product suppliers from using processes that may infringe the rights of third parties. We may not be successful in redesigning our products, or the necessary licenses may not be available under reasonable terms, which would harm our business and financial results.

New conflict minerals regulations are causing us to incur additional expenses and could limit the supply and increase the cost of certain metals used in manufacturing our products. In August 2012, the SEC adopted new rules establishing additional disclosure and reporting requirements regarding the use of specified minerals, or conflict minerals, that are necessary to the functionality or production of products manufactured or contracted to be manufactured. These new rules require us to determine, disclose and report whether or not such conflict minerals originate from the Democratic Republic of the Congo or any adjoining country. These new rules could affect our ability to source certain materials used in our products at competitive prices and could impact the availability of certain minerals used in the manufacture of our products, including gold, tantalum, tin and tungsten. During the course of our diligence procedures, we could find that the minerals procured by one or more of our suppliers are not “conflict free” or discover violations of other rules, regulations or laws. As there may be only a limited number of suppliers of “conflict free” minerals, we cannot be sure that we will be able to obtain necessary conflict free minerals in sufficient quantities or at competitive prices. Some customers have notified us that they will require that our products be free of conflict minerals, and our revenue and margin may be harmed if we are unable to provide assurances to our customers that our products are “conflict free,” procure conflict free minerals at a reasonable price, or at all, or pass through any increased costs associated with meeting these demands. Additionally, we may face reputational challenges with our customers and other stakeholders if we are unable to sufficiently verify the origins of all minerals used in our products through our due diligence procedures. We may also face challenges with government regulators and our customers and suppliers if we are unable to sufficiently verify that the metals used in our products are conflict free. We expect that there may be significant costs associated with complying with the ongoing diligence and disclosure requirements, such as costs related to determining the source of certain minerals used in our products and costs of an independent private sector audit, to the extent required, as well as costs related to possible changes to products, processes, or sources of supply as a consequence of such verification and disclosure requirements.

We and our suppliers rely upon certain rare earth materials that are necessary for the manufacturing of our products, and our business could be harmed if we or our suppliers experience shortages or delays of these rare earth materials. Rare earth materials are critical to the manufacture of some of our products. We and/or our suppliers acquire these materials from a number of countries, including the People’s Republic of China. We cannot predict whether the government of China or any other nation will impose regulations, quotas or embargoes upon the materials incorporated into our products that would restrict the worldwide supply of these materials or increase their cost. If China or any other major supplier were to restrict the supply available to us or our suppliers or increase the cost of the materials used in our products, we could experience a shortage in supply and an increase in production costs, which would harm our operating results.

Changes in the seasonality of our business may result in our inability to accurately forecast our product purchase requirements. Sales of our products in the consumer electronics market are subject to seasonality. Sales have typically increased significantly in the fourth quarter of each year, sometimes followed by significant declines in the first quarter of the following year. However, the global economic environment may impact typical seasonal trends, making it more difficult for us to forecast our business. Changes in the product or channel mix of our business can also impact seasonal patterns, adding to complexity in forecasting demand. If our forecasts are inaccurate, we may lose market share or procure excess inventory or inappropriately increase or decrease our operating expenses, any of which could harm our business, financial condition and operating results. Changes in seasonality may also lead to greater volatility in our stock price and the need for significant working capital investments in receivables and inventory, including the need to build inventory levels in advance of our projected high volume selling seasons.

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The Flash Ventures’ master equipment lease obligations contain covenants, which if breached, would harm our business, operating results, cash flows and liquidity. Flash Ventures’ master lease agreements contain customary covenants for Japanese lease facilities. In addition to containing customary events of default related to Flash Ventures that could result in an acceleration of Flash Ventures’ obligations, some of the master lease agreements contain an acceleration clause for certain events of default related to us as guarantor, including, among other things, our failure to maintain a minimum stockholders’ equity of at least $1.51 billion. As of March 29, 2015, Flash Ventures was in compliance with all of its master lease covenants.

If our stockholders’ equity were to fall below $1.51 billion, 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. If an event of default occurs and if we fail to reach a resolution, we may be required to pay a portion or the entire outstanding lease obligations up to approximately $606 million based upon the exchange rate at March 29, 2015, covered by our guarantee under Flash Ventures’ master lease agreements, which would significantly reduce our cash position and may force us to seek additional financing, which may not be available.

We are vulnerable to numerous risks related to our international operations, including political instability, and we must comply with numerous laws and regulations, many of which are complex. Currently, a large portion of our revenue is derived from our international operations, and all of our products and many of our components are produced overseas in China, Japan, Malaysia and Taiwan. Our revenue and future growth is also significantly dependent on international markets, and we may face difficulties entering or maintaining sales in some international markets. We are, therefore, affected by the political, economic, labor, environmental, public health and military conditions in these countries. For example, China does not currently have a comprehensive and highly developed legal system, particularly with respect to the protection of IP rights, which results in the prevalence of counterfeit goods in China, among other things, as well as piracy and degradation of our IP protection. Our efforts to prevent counterfeit products from entering the market may not be successful, and the sale of counterfeit products could harm our operating results and financial condition. In addition, customs regulations in China are complex and subject to frequent changes and, in the event of a customs compliance issue, our ability to import to, and export from, our factory in Shanghai, China could be adversely affected, which could harm our operating results and financial condition.

Our international business activities could also be limited or disrupted by any of the following factors:


•	the need to comply with foreign government regulation;


•	the need to comply with U.S. regulations on international business, including the Foreign Corrupt Practices Act, the United Kingdom Bribery Act 2010 and rules regarding conflict minerals;


•	changes in diplomatic and trade relationships or government intervention, which may impact our ability to sell to certain customers;


•	reduced sales to our customers or interruption to our manufacturing processes in the Pacific Rim that may arise from regional issues in Asia, including natural disasters or labor strikes;


•	imposition of regulatory requirements, tariffs, import and export restrictions and other barriers and restrictions;


•	a higher degree of commodity pricing than in the U.S.;


•	changes in, or the particular application of, government regulations;


•	import or export restrictions that could affect some of our products, including those with encryption technology;


•	duties and/or fees related to customs entries for our products, which are all manufactured offshore;


•	longer payment cycles and greater difficulty in accounts receivable collection;


•	adverse tax rules and regulations;


•	weak protection of our IP rights;


•	delays in product shipments due to local customs restrictions; and


•	delays in research and development that may arise from political unrest at our development centers in Israel or other countries.

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Our common stock and convertible notes prices have been, and may continue to be, volatile, which could result in investors losing all or part of their investments. The market prices of our common stock and convertible notes have fluctuated significantly in the past and may continue to fluctuate in the future. We believe that such fluctuations will continue as a result of many factors, such as financing plans, future announcements concerning us, our competitors or our principal customers regarding financial results or expectations, technological innovations, industry supply and demand dynamics, new product introductions, governmental regulations, the commencement or results of litigation, changes in earnings estimates by analysts or our ability to meet the expectations of investors or analysts. In addition, in recent years the stock market has experienced significant price and volume fluctuations and the market prices of the securities of high-technology and semiconductor companies have been especially volatile, often for reasons outside the control of the particular companies. These fluctuations as well as general economic, political and market conditions may harm the market price of our common stock as well as the prices of our outstanding convertible notes.

Our success depends on our key personnel, including our senior management, and the loss of key personnel or the transition of key personnel could disrupt our business. Our success greatly depends on the continued contributions of our senior management and other key research and development, sales, marketing and operations personnel. We do not have employment agreements with any of our executive officers and they are free to terminate their employment with us at any time. Our success will depend on our ability to recruit and retain additional highly-skilled personnel. We have relied on equity awards in the form of stock options and restricted stock units as one means for recruiting and retaining highly skilled talent and a reduction in our stock price may reduce the effectiveness of these equity awards in retaining employees. We also rely on cash incentive awards to motivate and retain employees. These cash incentive awards depend significantly on our financial and business performance, and variations in our financial and business performance from our expectations at the time we set the targets for such cash incentive awards could result in decreased or eliminated awards, reducing the effectiveness of these cash incentive awards in retaining employees.

Terrorist attacks, war, threats of war and government responses thereto may negatively impact our operations, revenue, costs and stock price. Terrorist attacks, U.S. military responses to these attacks, war, threats of war and any corresponding decline in consumer confidence could have a negative impact on consumer demand. Any of these events may disrupt our operations or those of our customers and suppliers and may affect the availability of materials needed to manufacture our products or the means to transport those materials to manufacturing facilities and finished products to customers. Any of these events could also increase volatility in the U.S. and world financial markets, which could harm our stock price and may limit the capital resources available to us and our customers or suppliers, or adversely affect consumer confidence. We have substantial operations in Israel, including a development center in Northern Israel, near the border with Lebanon, a research center in Omer, Israel, which is near the Gaza Strip, and offices near Tel Aviv, all areas that have experienced significant violence and political unrest. Conflict in the Gaza Strip and the surrounding areas, as well as turmoil and unrest in the Middle East or other regions, could cause delays in the development or production of our products and could harm our business and operating results.

Natural disasters or epidemics in the countries in which we or our suppliers or subcontractors operate could harm our operations. Our supply chain operations, including those of our suppliers and subcontractors, are concentrated in the U.S., China, Japan, Malaysia, Singapore and Taiwan. In the past, certain of these areas have been affected by natural disasters such as earthquakes, tsunamis, floods and typhoons, and some areas have been affected by epidemics. In addition, our headquarters, which house a significant concentration of our research and development and engineering staff, are located in the San Francisco Bay Area, an area that is prone to earthquakes. If a natural disaster or epidemic were to occur in one or more of these areas, we could incur a significant work or production stoppage. The impact of these potential events is magnified by the fact that we do not have insurance for most natural disasters or epidemics, including earthquakes and tsunamis. The impact of a natural disaster or epidemic could harm our business and operating results.

Disruptions in global transportation could impair our ability to deliver or receive product on a timely basis, or at all, causing harm to our financial results. Our raw materials, work-in-process and finished products are primarily distributed via air transport. If there are significant disruptions in air transport, we may not be able to deliver our products or receive raw materials. Any natural disaster or other event that affects air transport in Asia could disrupt our ability to receive raw materials in, or ship finished product from, our facilities in Shanghai, China and Penang,Malaysia or our Asia-based contract manufacturers. As a result, our business and operating results may be harmed.

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We rely on information systems to run our business and any prolonged down time could harm our business operations and/or financial results. We rely on an enterprise resource planning system, as well as multiple other systems, databases, and data centers to operate and manage our business. Any information system problems, programming errors or unanticipated system or data center interruptions could impact our continued ability to successfully operate our business and could harm our financial results or our ability to accurately report our financial results on a timely basis.

Anti-takeover provisions in our charter documents, stockholder rights plan and Delaware law could discourage or delay a change in control and negatively impact our stockholders. We have taken a number of actions that could have the effect of discouraging a takeover attempt. For example, we have a stockholders’ rights plan that would cause substantial dilution to a stockholder, and substantially increase the cost paid by a stockholder, who attempts to acquire us on terms not approved by our board of directors. This could discourage an acquisition of us. In addition, our certificate of incorporation grants our board of directors the authority to fix the rights, preferences and privileges of and issue up to 4,000,000 shares of preferred stock without stockholder action (2,000,000 shares of preferred stock have already been reserved under our stockholder rights plan). Issuing preferred stock could have the effect of making it more difficult and less attractive for a third party to acquire a majority of our outstanding voting stock. Preferred stock may also have other rights, including economic rights senior to our common stock that could harm the market value of our common stock. In addition, we are subject to the anti-takeover provisions of Section 203 of the Delaware General Corporation Law. This section provides that a corporation may not engage in any business combination with any interested stockholder, defined broadly as a beneficial owner of 15% or more of that corporation’s voting stock, during the three-year period following the time that a stockholder became an interested stockholder, without certain conditions being satisfied. This provision could delay or discourage a change of control of SanDisk.

Unanticipated changes in our tax provisions or exposure to additional income tax liabilities could affect our profitability. We are subject to income and other taxes in the U.S. and numerous foreign jurisdictions. Our tax liabilities are affected by the amounts we charge for inventory, services, licenses, funding and other items in intercompany transactions. We are subject to ongoing tax audits in various jurisdictions. Tax authorities may disagree with our intercompany charges or other matters and assess additional taxes. While we regularly assess the likely outcomes of these audits in order to determine the appropriateness of our tax provision, tax audits are inherently uncertain and an unfavorable outcome could occur. An unanticipated unfavorable outcome in any specific period could harm our operating results for that period or future periods. The financial cost and management attention and time devoted to defending income tax positions may divert resources from our business operations, which could harm our business and profitability. IRS audits may also impact the timing and/or amount of any refund claims. In addition, our effective tax rate in the future could be adversely affected by changes in the mix of earnings in countries with differing statutory tax rates, changes in the valuation of deferred tax assets and liabilities, changes in tax laws and the discovery of new information in the course of our tax return preparation process. In particular, the carrying value of deferred tax assets, which are predominantly in the U.S., is dependent on our ability to generate future taxable income in the U.S.

We may be subject to risks associated with laws, regulations and customer initiatives relating to the environment or other social responsibility issues. Production and marketing of products in certain states and countries may subject us to environmental and other regulations including, in some instances, the responsibility for environmentally safe disposal or recycling. Such laws and regulations have been enacted in several jurisdictions in which we operate, including Japan and certain states within the U.S. In addition, climate change issues, energy usage and emissions controls may result in new environmental legislation and regulations, at the international, federal or state level, that may make it more difficult or expensive for us, our suppliers and our customers to conduct business. Any of these regulations could cause us to incur additional direct costs, as well as increased indirect costs related to our relationships with our customers and suppliers, and otherwise harm our operations and financial condition.

Government regulators or our customers may require us to comply with product or manufacturing standards that are more restrictive than current laws and regulations related to environmental matters, conflict minerals or other social responsibility initiatives. The implementation of these standards could affect the sourcing, cost and availability of materials used in the manufacture of our products. Non-compliance with these standards could cause us to lose sales to these customers and compliance with these standards could increase our costs, which may harm our operating results.

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In the event we are unable to satisfy regulatory requirements relating to internal controls, or if our internal control over financial reporting is not effective, our business could suffer. In connection with our certification process under Section 404 of the Sarbanes-Oxley Act, we have identified in the past and may, from time-to-time in the future, identify deficiencies in our internal control over financial reporting. There can be no assurance that individually or in the aggregate these deficiencies would not be deemed to be a material weakness or significant deficiency. A material weakness or significant deficiency in internal control over financial reporting could have a materially adverse impact on our reported financial results and the market price of our stock could significantly decline. Additionally, adverse publicity related to the disclosure of a material weakness in internal controls could harm our reputation, business and stock price. Any internal control or procedure, no matter how well designed and operated, can only provide reasonable assurance of achieving desired control objectives and cannot prevent human error, intentional misconduct or fraud.

We have significant financial obligations related to Flash Ventures, as well as under our 1.5% Convertible Senior Notes due 2017 and our 0.5% Convertible Senior Notes due 2020, which could negatively impact our cash flows and financial position. We have entered into agreements to guarantee or provide financial support with respect to lease and certain other obligations of Flash Ventures in which we have a 49.9% ownership interest. As of March 29, 2015, we had guarantee obligations for Flash Ventures’ master lease agreements denominated in Japanese yen of approximately $606 million based on the exchange rate at March 29, 2015. We also have significant commitments for the future fixed costs of Flash Ventures, and we expect to continue to incur significant obligations with respect to, as well as make continued investments in, Flash Ventures. In addition, as of March 29, 2015, the aggregate principal amount outstanding under our 1.5% Convertible Senior Notes due 2017 (the “1.5% Notes due 2017”) and our 0.5% Convertible Senior Notes due 2020 (the “0.5% Notes due 2020,” and together with the 1.5% Notes due 2017, the “Notes”) was $2.5 billion. The Notes may be converted at the option of the holders during certain periods as a result of, among other things, fluctuations in our stock price. For example, as of the calendar quarter ended March 31, 2015, the stock price of our common stock had met the thresholds under which the 1.5% Notes due 2017 are convertible at the holders’ option, and as a result, the 1.5% Notes due 2017 were convertible through June 30, 2015. Convertibility of the Notes based on the trading price of our common stock is assessed on a calendar-quarter basis. Upon any conversion of the Notes, we will be required to deliver cash up to the principal amount of the Notes that are converted and, with respect to any excess conversion value greater than the principal amount of the Notes, shares of our common stock (plus cash in lieu of any fractional shares of common stock), which would result in dilution to our stockholders. In connection with the issuance of the Notes, we sold warrants to acquire shares of our common stock, which, if exercised, will result in dilution to our stockholders. We may not have sufficient funds to make payments related to our Flash Ventures obligations or under the Notes when converted or due. Further, these obligations could negatively impact our cash flows and limit our ability to use our cash flow for our other liquidity needs, including working capital, capital expenditures, acquisitions, investments and other general corporate purposes.

There can be no assurance that we will continue to declare cash dividends. Our continuation of declaring quarterly dividends is subject to capital availability and periodic determination by our Board of Directors that cash dividends are in the best interest of our stockholders. Future dividends may be affected by, among other factors, our views on potential future capital requirements, acquisition transactions, stock repurchases, changes in tax laws, and changes in our business model. A reduction in our dividend payments or discontinuance of dividend payments could have a negative effect on our stock price, which could have a material adverse impact on investor confidence and employee retention.

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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

Issuer Purchases of Equity Securities. The table below summarizes information about our purchases of equity securities registered pursuant to Section 12 of the Exchange Act based upon settlement date during the three months ended March 29, 2015.



Period	Total Number of Shares Purchased	Average Price Paid per Share ^(a)		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs	Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs
					(In millions)
December 29, 2014 to January 25, 2015	1,712,808		$84.64	1,712,808
January 26, 2015 to February 22, 2015	5,787,949		$78.62	5,787,949
February 23, 2015 to March 29, 2015	1,825,550		$82.17	1,825,550
Total	9,326,307			9,326,307	$2,377


^(a)	Does not include amounts paid for commissions.


Item 3.	Defaults Upon Senior Securities

None.


Item 4.	Mine Safety Disclosures

Not applicable.


Item 5.	Other Information

None.

Item 6. Exhibits

The information required by this item is set forth on the exhibit index which follows the signature page of this report.

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SIGNATURE

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.



		SANDISK CORPORATION

Dated:	April 30, 2015	By:	/s/ Judy Bruner
			Judy Bruner
			Executive Vice President, Administration and Chief Financial Officer (Principal Financial Officer)

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EXHIBIT INDEX

Incorporated by Reference

Exhibit Number

Exhibit Title

Form

File No.

Exhibit No.

Filing Date

Provided Herewith

3.1

Restated Certificate of Incorporation of the Registrant.

S-1

33-96298

3.2

8/29/1995

3.2

Certificate of Amendment of the Restated Certificate of Incorporation of the Registrant dated December 9, 1999.

10-Q

000-26734

3.1

8/16/2000

3.3

Certificate of Amendment of the Restated Certificate of Incorporation of the Registrant dated May 11, 2000.

S-3

333-85686

4.3

4/5/2002

3.4

Certificate of Amendment to the Amended and Restated Certificate of Incorporation of the Registrant dated May 26, 2006.

8-K

000-26734

3.1

6/1/2006

3.5

Certificate of Amendment to the Amended and Restated Certificate of Incorporation of the Registrant dated May 27, 2009.

8-K

000-26734

3.1

5/28/2009

3.6

Certificate of Designations for the Series A Junior Participating Preferred Stock, as filed with the Delaware Secretary of State on April 24, 1997.

8-K/A

000-26734

3.5

5/16/1997

3.7

Certificate of Amendment to Certificate of Designations for the Series A Junior Participating Preferred Stock, as filed with the Delaware Secretary of State on September 24, 2003.

8-A

000-26734

3.2

9/25/2003

3.8

Amended and Restated Bylaws of the Registrant dated September 11, 2013.

8-K

000-26734

3.1

9/17/2013

4.1

Rights Agreement, dated as of September 15, 2003, by and between the Registrant and Computershare Trust Company, Inc.

8-A

000-26734

4.2

9/25/2003

4.2

Amendment No. 1 to Rights Agreement, dated as of November 6, 2006, by and between the Registrant and Computershare Trust Company, Inc.

8-A/A

000-26734

4.2

11/8/2006

4.3

Indenture (including form of Notes) with respect to the Registrant’s 1.5% Convertible Senior Notes due 2017, dated as of August 25, 2010, by and between the Registrant and The Bank of New York Mellon Trust Company, N.A.

8-K

000-26734

4.1

8/25/2010

4.4

Indenture (including form of Notes) with respect to the Registrant’s 0.5% Convertible Senior Notes due 2020, dated as of October 29, 2013, by and between the Registrant and The Bank of New York Mellon Trust Company, N.A.

8-K

000-26734

4.1

10/29/2013

12.1

Computation of ratio of earnings to fixed charges.

31.1

Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2

Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1

Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.*

32.2

Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.*

101.INS

XBRL Instance Document.

101.SCH

XBRL Taxonomy Extension Schema Document.

101.CAL

XBRL Taxonomy Extension Calculation Linkbase Document.

101.DEF

XBRL Taxonomy Extension Definition Linkbase Document.

101.LAB

XBRL Taxonomy Extension Label Linkbase Document.

101.PRE

XBRL Taxonomy Extension Presentation Linkbase Document.


*	Furnished herewith.

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SANDISK CORP - FORM 10-Q - April 30, 2015

Attached files

SANDISK CORP Reports