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2. company
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SanDisk Corporation (NASDAQ: SNDK), a Fortune 500 and
S&P 500 company, is a global leader in flash storage solutions.
For more than 25 years, SanDisk has expanded the possibilities
of storage, giving businesses and consumers the peace of mind
that comes from knowing their data is readily available
and reliable, even in the most challenging environments.
Our products are used in the world's leading-edge data centers,
embedded in game-changing smartphones, tablets, and
laptops, and entrusted by consumers around the world.
For more information, visit www.SanDisk.com.
FOLLOW US ONLINE AT:
Website:
www.SanDisk.com
Other:
www.Facebook.com/SanDisk
www.Twitter.com/SanDisk
www.Twitter.com/SanDiskDataCtr
www.LinkedIn.com/company/SanDisk
www.Youtube.com/SanDisk
This annual report (including the Stockholders Letter) contains forward-looking statements that
are subject to numerous risks including those detailed under the title "Risk Factors" and
elsewhere in our periodic reports filed with the Securities and Exchange Commission.
Stockholders Letter
Proxy Statement
Annual Report
Revenue
Revenue Mix
$ in Millions
% of Revenue
$7,000
$6,628
100%
$6,170
$6,000
$5,000
11%
11%
14%
80%
$5,053
$4,826
14%
14%
90%
$5,662
70%
38%
43%
60%
$4,000
53%
58%
69%
50%
$3,000
23%
40%
$2,000
27%
30%
24%
20%
25%
$1,000
10%
$0
2011
2012
2013
2014
2010
9%
3%
1%
0%
2010
29%
19%
16%
2011
SSD
2012
Embedded
2013
Removable
2014
Other
Other includes revenue from wafers, components, accessories and license and royalty
Percentages may not add to 100% due to rounding
Operating & Free Cash Flow
GAAP & Non-GAAP Operating Margin
% of Revenue
35%
$ in Millions
$2,000
32%
30%
30%
29%
28%
27%
25%
25%
$1,864
$1,726
$1,800
29%
24%
$1,600
$1,400
$1,200
20%
16%
$1,491
$1,054
$1,000
14%
15%
$1,698
$1,452
$1,344
$795
$800
$530
$600
10%
$361
$400
5%
$200
$0
0%
2010
2011
GAAP Operating Margin
2012
2013
2014
Non-GAAP Operating Margin
Non-GAAP operating margin excludes share-based compensation expense, acquisition-related amortization
and impairments, and purchase accounting adjustments. Non-GAAP to GAAP reconciliation can be found on
Annex A of the proxy statement.
2010
2011
2012
Cash Flow from Operations
2013
2014
Free Cash Flow
Free Cash Flow is defined as net cash provided by operating activities less (a) acquisition of property and
equipment, net, and (b) net investment and notes receivable activity with Flash Ventures.
21APR201515514423
30JUL201319362378
Dear Fellow SanDisk Stockholders,
2014 was a year of significant accomplishments for SanDisk, with record revenue and strong earnings and free cash
flow. We executed our strategy of deriving a greater portion of revenue from high-value offerings, especially enterprise
solid state drives, and now have the broadest portfolio of enterprise solutions in the market. We also drove additional
stockholder value by returning 103 percent of our free cash flow to our stockholders, including increasing our dividend
payment rate by 33 percent on top of our continuing stock repurchases.
However, 2014 was not without challenges. Ongoing supply constraints and rapid shifts in the product mix required by
some customers prevented us from fulfilling all available demand towards the end of 2014. With inventory already at
very lean levels, a modest loss of output from the wafer fabs amplified the effects of supply constraints and resulted in
lower-than-anticipated fourth quarter results.
So far in 2015, we have been impacted by some additional challenges. In the first quarter, our client SSD sales to a
large customer came to an end. We have also experienced some product issues, and we are seeing certain market shifts
and softer-than-expected pricing in some areas of the business. We expect the combination of these factors to result in
a decline in revenue this year. I want to assure you that we understand the fundamental reasons behind these
challenges and—importantly—that we are taking immediate and aggressive actions to address the issues that are
causing our underperformance in the current fiscal year. Our top operational priority for 2015 is to regain the
excellence in execution that you have come to expect from us over the years. We have in place a solid foundation for
long-term profitable growth, a strong team and a clear strategy, and we remain fully focused on achieving consistent
growth, profits and cash flow.
Transforming the future of flash
Since late 2014, we have been ramping production of our industry-leading 15-nanometer node, using both X2 and
X3 technologies. In the second half of 2015, we will begin pilot production of 48-layer 3D NAND, the world’s most
advanced NAND technology, with commercial introduction targeted for 2016. We expect our 3D NAND will be
utilized across a broad range of offerings ranging from removable to enterprise storage solutions. The launch of
3D NAND represents a transformational change in memory architecture that will enable continued cost reductions
and the creation of new applications and markets.
Flash penetration in client and enterprise storage applications is accelerating. Client SSD adoption rates continue to
increase in the PC market, and SanDisk is addressing the market opportunities with a broad set of form factors and
wide deployment of three-bit-per-cell (X3) technology in both the retail and commercial channels. Meanwhile, in
enterprise markets, the shift to flash in datacenters is well underway, with many enterprise SSD products continuing to
penetrate market segments that historically have been served by hard disk drives. For example, we can now
demonstrate to customers that in many use cases it costs less to architect and install flash-based storage infrastructure
than HDDs, leading to a lower cost of acquisition. This cost crossover represents a tipping point for the enterprise
market, and as enterprise SSD densities increase further, we expect more and more datacenter infrastructure will likely
be architected using flash. In 2014, SanDisk introduced the world’s first 4 terabyte enterprise SAS SSD ideally suited
for HDD replacement. More recently, we launched our revolutionary InfiniFlash all-flash storage platform that
brings massive capacity with breakthrough price economics for big data workloads in hyperscale data centers. SanDisk
is well positioned to lead with both flash-based hardware and software to allow the highest level of performance in our
storage solution offerings.
Consumers across the world are adopting advanced smart mobile devices and increasingly these devices have higher
embedded storage capacities. The mobile market remains a key area of NAND flash consumption, and we continue to
innovate with embedded offerings including the iNAND Discrete, iNAND MCP and custom solutions. In 2015, we
expect to increase the use of X3 technology in our embedded portfolio.
Stockholders Letter
SanDisk Corporation
951 SanDisk Drive
Milpitas, CA 95035-7933
Our leading position in retail remains an important contributor to SanDisk’s success. Our retail products are available
in over 300,000 storefronts worldwide and our brand, known for high performance, quality and reliability, continues to
drive strong consumer preference for the SanDisk product. The innovation engine in our removable product category
is thriving, as reflected in our launch of the world’s highest-capacity microSD card at 200 gigabytes, a 512 gigabyte
high-performance SD card, and a high-endurance microSD card that can record up to 10,000 hours of full HD video
for use in security and surveillance applications, among other innovative offerings.
Customer engagement
A high level of engagement with customers and other members of the associated ecosystems, leveraging our vertical
integration model, is key to SanDisk’s future success. Our customers trust our expertise in memory cell design and
manufacturing, as well as our systems and software expertise, which we use to transform flash memory into
differentiated products used in storage solutions. We partner closely with our customers in their research and
development facilities in order to address their storage solutions requirements. SanDisk is also a supporter of industry
standards and an important contributor to open source collaborative projects such as Ceph and Open Compute.
Initiatives such as these help customers discover new use cases for flash memory-based storage solutions, driving
greater demand for our products. In 2015, we have aligned our teams even more closely with our customers in order to
better anticipate changes in our rapidly changing markets.
In conclusion
While we are experiencing a challenging 2015, we are confident that we are taking the necessary actions to return
SanDisk to operational excellence. SanDisk’s fundamentals remain strong. We are uniquely positioned in the industry
and have a solid strategy to create stockholder value. We are inspired by our progress in transforming flash and rapidly
expanding our reach to enable new markets and opportunities.
I would like to thank our employees, who remain the creative power behind the innovations that SanDisk brings to the
market. I would also like to thank you, our valued stockholders, for your continued support of SanDisk. Our resolve to
become the preeminent supplier of differentiated flash storage solutions remains as strong as ever. I look forward to
sharing our progress with you.
Sincerely yours,
21APR201418234505
Sanjay Mehrotra
President, Co-founder and Chief Executive Officer
30JUL201319362378
SANDISK CORPORATION
951 SanDisk Drive
Milpitas, California 95035
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
To Be Held on June 18, 2015
To Our Stockholders:
You are cordially invited to attend the 2015 Annual Meeting of Stockholders (the ‘‘Annual Meeting’’)
of SanDisk Corporation, a Delaware corporation (the ‘‘Company’’), to be held on June 18, 2015 at
8:00 a.m., local time, at the Company’s headquarters, 951 SanDisk Drive, Milpitas, CA 95035, for the
following purposes:
To elect eight directors to serve on the Company’s Board of Directors for the ensuing year and
until their respective successors are duly elected and qualified. The eight director nominees are
Irwin Federman, Steven J. Gomo, Eddy W. Hartenstein, Dr. Chenming Hu, Catherine P. Lego,
Michael E. Marks, Sanjay Mehrotra, and D. Scott Mercer.
2.
To ratify the appointment of Ernst & Young LLP as the Company’s independent registered public
accounting firm for the fiscal year ending January 3, 2016.
3.
To pass an advisory resolution to approve the compensation of the Company’s Named Executive
Officers.
4.
To transact such other business as may properly come before the Annual Meeting or any
adjournment or postponement thereof.
The foregoing items of business are more fully described in the Proxy Statement that accompanies this
Notice. The Company’s Board of Directors recommends that you vote (1) ‘‘FOR’’ each of the director
nominees listed above; (2) ‘‘FOR’’ ratification of the appointment of Ernst & Young LLP; and (3) ‘‘FOR’’
the advisory resolution to approve the compensation of the Company’s Named Executive Officers.
Only stockholders of record at the close of business on April 20, 2015 are entitled to notice of and to
vote at the Annual Meeting and at any adjournment or postponement thereof.
Regardless of whether you plan to attend the Annual Meeting, please vote your shares as soon as
possible so that your shares will be voted in accordance with your instructions. For specific voting
instructions, please refer to the instructions on the proxy card or the Notice of Internet Availability of
Proxy Materials that was mailed to you. If you attend the meeting, you may revoke your proxy and vote
your shares in person.
We look forward to seeing you at the Annual Meeting.
By Order of the Board of Directors,
10APR201403145991
Michael E. Marks
Chairman of the Board of Directors
Milpitas, California
April 27, 2015
IMPORTANT NOTICE REGARDING INTERNET AVAILABILITY OF PROXY MATERIALS AND
ANNUAL REPORT
The Company’s proxy materials and Annual Report on Form 10-K are available at
www.sandisk.com/IR.
Proxy Statement
1.
TABLE OF CONTENTS
PROXY STATEMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Important Notice Regarding Internet Availability of Proxy Materials and Annual Report . . . .
Voting Rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Stockholders Sharing the Same Last Name and Address . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Revocability of Proxies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Solicitation of Proxies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Annual Meeting Admission . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Stockholder Proposals and Nominations to be Presented at the 2016 Annual Meeting of
Stockholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
PROPOSAL NO. 1—ELECTION OF DIRECTORS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Business Experience and Qualifications of Nominees for Election as Directors . . . . . . . . . . . .
Board Governance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Board Leadership Structure and Risk Oversight . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consideration of Director Nominees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Director Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
PROPOSAL NO. 2—RATIFICATION OF APPOINTMENT OF INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
ANNUAL REPORT ON FORM 10-K . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
AUDIT COMMITTEE REPORT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
PROPOSAL NO. 3—ADVISORY RESOLUTION TO APPROVE THE COMPENSATION OF
THE NAMED EXECUTIVE OFFICERS OF SANDISK CORPORATION . . . . . . . . . . . . . . .
COMPENSATION DISCUSSION AND ANALYSIS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Executive Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Executive Compensation Program Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Say-on-Pay Results . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Elements of the Current Executive Compensation Program . . . . . . . . . . . . . . . . . . . . . . . . .
Clawback Policy on Bonus Awards . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Stock Ownership Guidelines . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Insider Trading Policy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Section 162(m) Policy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accounting for Share-based Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
COMPENSATION COMMITTEE REPORT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
EXECUTIVE COMPENSATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Summary Compensation Table—Fiscal Years 2012-2014 . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Grants of Plan-Based Awards in Fiscal Year 2014 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Outstanding Equity Awards at Fiscal 2014 Year-End . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Options Exercises and Stock Vested in Fiscal Year 2014 . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Potential Payments Upon Termination or Change in Control . . . . . . . . . . . . . . . . . . . . . . . . .
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT . . . . .
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE . . . . . . . . . . . . . .
EQUITY COMPENSATION INFORMATION FOR PLANS OR INDIVIDUAL
ARRANGEMENTS WITH EMPLOYEES AND NON-EMPLOYEES . . . . . . . . . . . . . . . . . . .
CERTAIN TRANSACTIONS AND RELATIONSHIPS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
OTHER BUSINESS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
ANNEX A—NON-GAAP TO GAAP RECONCILIATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . .
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A-1
PROXY STATEMENT
FOR THE ANNUAL MEETING OF STOCKHOLDERS OF
SANDISK CORPORATION
TO BE HELD JUNE 18, 2015
General
This Proxy Statement is furnished in connection with the solicitation by the Board of Directors (the
‘‘Board of Directors’’ or the ‘‘Board’’ and each member thereof, a ‘‘Director’’) of SanDisk Corporation, a
Delaware corporation (the ‘‘Company,’’ ‘‘SanDisk,’’ ‘‘we,’’ ‘‘us,’’ or ‘‘our’’), of proxies to be voted at the
Company’s 2015 Annual Meeting of Stockholders (the ‘‘Annual Meeting’’) to be held on June 18, 2015, or
at any adjournment or postponement thereof, for the purposes described herein. Stockholders of record at
the close of business on April 20, 2015 (the ‘‘Record Date’’) will be entitled to vote at the Annual Meeting.
The Annual Meeting will be held at 8:00 a.m., local time, on June 18, 2015, at the Company’s
headquarters, 951 SanDisk Drive, Milpitas, CA 95035.
These materials will be made available to stockholders entitled to vote at the Annual Meeting on or
about April 27, 2015.
Important Notice Regarding Internet Availability of Proxy Materials and Annual Report
Choosing to receive future Proxy Materials electronically saves the Company the cost of printing and
mailing documents to its stockholders, expedites receipt of the materials and conserves natural resources.
If a stockholder chooses to receive future Proxy Materials electronically, the stockholder will receive an
e-mail for each future proxy material distribution with instructions containing a link to those materials and
a link to the proxy voting site. Any stockholder’s election to receive the Proxy Materials electronically will
remain in effect until such stockholder terminates the request.
The Proxy Materials are also available at the Company’s website at www.sandisk.com/IR. In addition,
the Company will provide copies of any of the Proxy Materials free of charge to any stockholder who
requests copies by calling 1-800-579-1639 or by sending an e-mail with the 12-Digit Control Number found
on the Notice or proxy card in the subject line to [email protected].
Voting Rights
On the Record Date, approximately 207,919,199 shares of the Company’s common stock (the
‘‘Common Stock’’) were outstanding and entitled to vote at the Annual Meeting. The presence in person
or by proxy of a majority of the shares of Common Stock entitled to vote will constitute a quorum for the
transaction of business at the Annual Meeting.
1
Proxy Statement
Pursuant to the rules of the U.S. Securities and Exchange Commission (the ‘‘SEC’’), the Company is
furnishing its proxy materials and Annual Report on Form 10-K (the ‘‘Proxy Materials’’) primarily via the
Internet. Accordingly, the Company will send a Notice of Internet Availability of Proxy Materials (the
‘‘Notice’’) to its stockholders of record and beneficial owners on or about May 1, 2015. All stockholders
will have the ability to access the Proxy Materials on the website referred to in the Notice or to request a
printed set of the Proxy Materials. Instructions on how to access the Proxy Materials over the Internet or to
request a printed copy of the Proxy Materials may be found in the Notice. In addition, stockholders may
request to receive the Proxy Materials in printed form by mail, or electronically by e-mail, on an ongoing
basis.
In addition to voting in person at the Annual Meeting, stockholders may vote by proxy as follows:
Internet. A stockholder can submit a proxy over the Internet by following the instructions provided in
the Notice or on the separate proxy card or voting information form.
Telephone. A stockholder can submit a proxy over the telephone by following the instructions
provided in the proxy card or separate voting information form.
Mail. A stockholder that received a printed set of the Proxy Materials can submit a proxy by mail by
completing, signing and returning the separate proxy card in the prepaid and addressed envelope included
with the Proxy Materials.
Stockholders are urged to specify their votes on the proxy they submit by Internet, telephone or mail.
If you submit a proxy, but do not specify how you want to vote on a proposal, in the absence of contrary
instructions, the shares of Common Stock represented by such proxy will be voted as the Board
recommends on each proposal and the persons named as proxies will vote on any other matters properly
presented at the Annual Meeting in accordance with their best judgment. Stockholder votes will be
tabulated by a representative of Broadridge Financial Solutions, Inc.
Each share of Common Stock outstanding on the Record Date is entitled to one vote on each of the
eight Director nominees and one vote on each other matter. With respect to the election of each of the
eight Director nominees, you may vote FOR, AGAINST or ABSTAIN. To be elected, Directors must
receive a majority of the votes cast with respect to such Director (e.g., the number of shares voted FOR a
Director nominee must exceed the number of shares voted AGAINST that nominee). Under the
Company’s Corporate Governance Principles, each Director nominee submits, in advance of the Annual
Meeting, an irrevocable resignation that will become effective if (i) a majority of the votes cast in the
election are voted AGAINST the Director nominee and (ii) the Board accepts the tendered resignation.
The Nominating and Governance Committee of the Board (the ‘‘Nominating and Governance
Committee’’) considers any tendered resignation and makes a recommendation to the Board about
whether to accept or reject the resignation, or to take other action. The Board will consider and act on the
Nominating and Governance Committee’s recommendation within 90 days from the date that the election
results are certified and will disclose its action publicly within four business days of its decision.
With respect to the ratification of the appointment of Ernst & Young LLP as the Company’s
independent registered public accounting firm and the advisory resolution to approve the compensation of
the Company’s Named Executive Officers (who are identified below in ‘‘Compensation Discussion and
Analysis’’), you may vote FOR, AGAINST or ABSTAIN with respect to each proposal. In order to be
approved, each of these proposals requires the affirmative FOR vote of a majority in voting power of the
shares of Common Stock which are present in person or represented by proxy and which are entitled to
vote on the proposal. Any ABSTAIN vote will have the same effect as a vote AGAINST the matter.
If your shares of Common Stock are held in ‘‘street name’’ (i.e., held for your benefit through a
broker, bank, or other nominee), you have the right to instruct your broker, bank or other nominee on how
to vote the shares in your account. Please contact your bank, broker or other nominee to obtain a voting
information form for you to use to direct how your shares should be voted. If you are a ‘‘street name’’
stockholder, you may not vote your shares in person at the Annual Meeting unless you obtain a legal proxy
from the bank, broker or other nominee that holds your shares of Common Stock, giving you the right to
vote the shares instead of the bank, broker or other nominee holding your shares. A broker or nominee is
entitled to vote shares held for a beneficial holder on routine matters, such as the ratification of the
appointment of Ernst & Young LLP as the Company’s independent registered public accounting firm,
without instructions from the beneficial holder of those shares. On the other hand, absent instructions
2
from the beneficial holder of such shares, a broker or nominee is not entitled to vote shares held for a
beneficial holder on non-routine items considered at the Annual Meeting, such as the election of Directors
and the advisory resolution to approve the compensation of the Company’s Named Executive Officers.
Consequently, if you do not give your broker specific instructions, your shares may not be voted on the
non-routine matters and will not be counted in determining the number of shares necessary for approval.
However, abstentions and broker non-votes (i.e., when a stockholder does not provide voting instructions
to their broker or nominee) will count for purposes of determining whether a quorum exists. Please
instruct your broker or nominee so your vote can be counted on all proposals.
Stockholders Sharing the Same Last Name and Address
To reduce the expense of delivering duplicate proxy materials to stockholders who may have more
than one account holding Common Stock but who share the same address, the Company has adopted a
procedure approved by the SEC called ‘‘householding.’’ Under this procedure, certain stockholders of
record who have the same address and last name, and who do not participate in electronic delivery of proxy
materials, will receive only one copy of the Notice and the Proxy Materials that are delivered until such
time as one or more of these stockholders notifies the Company otherwise.
Revocability of Proxies
Any person giving a proxy has the power to revoke it at any time before the close of voting.
Stockholders of record may revoke their proxy by filing with the Secretary of the Company an instrument
of revocation or a duly executed proxy bearing a later date, or by attending the Annual Meeting and voting
in person. If your shares of Common Stock are held in ‘‘street name’’ (i.e., held for your benefit through a
broker, bank, or other nominee), contact your broker or nominee for specific instructions on revoking your
vote.
Solicitation of Proxies
The Board is soliciting proxies for the Annual Meeting. The Company will bear the cost of soliciting
proxies. Copies of solicitation materials will be furnished to brokerage houses, fiduciaries and custodians
holding shares in their names that are beneficially owned by others to forward to such beneficial owners
who have requested to receive paper copies. The Company may reimburse such persons for the costs they
incur to forward the solicitation material to such beneficial owners. The original solicitation of proxies may
be supplemented by solicitation by telephone, facsimile or other means by Directors, officers or employees
of the Company. No additional compensation will be paid to these individuals for these services. The
Company may enlist the help of banks and brokerage firms in soliciting proxies from their customers and
reimburse the banks and brokerage firms for related out-of-pocket expenses.
3
Proxy Statement
Stockholders who receive a single set of Proxy Materials as a result of householding and wish to have
separate copies of the Notice or the Proxy Materials may submit a request to: Investor Relations,
c/o SanDisk Corporation, 951 SanDisk Drive, Milpitas, CA 95035, or call the Company’s Investor
Relations department at (408) 801-1000, and the Company will promptly comply with such request.
Stockholders may contact the Company’s Investor Relations representative at the phone number above if
it receives multiple copies of the Proxy Materials and would prefer to receive a single copy in the future.
Annual Meeting Admission
All stockholders entitled to vote as of the Record Date are entitled to attend the Annual Meeting.
Such individuals should be prepared to present government-issued photo identification, such as a valid
driver’s license or passport, and verification of ownership of Common Stock or proxy status as of the
Record Date for admittance. For stockholders of record as of the Record Date, proof of ownership as of
the Record Date may be verified prior to admittance into the Annual Meeting. For stockholders who were
not stockholders of record but held shares through a bank, broker or other nominee holder as of the
Record Date, proof of beneficial ownership as of the Record Date, such as an account statement or similar
evidence of ownership, may be verified prior to admittance into the Annual Meeting. For proxy holders,
proof of valid proxy status may be verified prior to admittance into the Annual Meeting. Stockholders and
proxy holders will be admitted to the Annual Meeting if they comply with these procedures.
Stockholder Proposals and Nominations to be Presented at the 2016 Annual Meeting of Stockholders
Proposals of stockholders of the Company that are intended to be presented by such stockholders at
the 2016 Annual Meeting of Stockholders must be received by the Company no later than December 29,
2015 in order that they may be considered for inclusion in the Company’s Proxy Statement and form of
proxy relating to that meeting. All such proposals must comply with Rule 14a-8 under the Securities
Exchange Act of 1934, as amended (the ‘‘Exchange Act’’), which lists the requirements for the inclusion of
stockholder proposals in company-sponsored proxy materials. If the stockholder proposal is to be
presented at the 2016 Annual Meeting of Stockholders but is not to be included in the Company’s Proxy
Statement, including any stockholder-recommended Director nomination, the notice of proposal or
nomination, as applicable, must be received no earlier than January 20, 2016 and no later than
February 19, 2016 and with such information required by the Company’s Amended and Restated Bylaws
(the ‘‘Bylaws’’). Further information regarding stockholder submission of Director nominations is provided
below in ‘‘Consideration of Director Nominees—Stockholder-Recommended Nominees.’’
4
PROPOSAL NO. 1
ELECTION OF DIRECTORS
The Board currently consists of eight members. All current Directors have been recommended for
nomination by the Nominating and Governance Committee, have been nominated by the Board for
re-election and are standing for re-election. Each of the eight nominees were elected to the Board by the
stockholders at the 2014 Annual Meeting of Stockholders. The Board has determined that each of the
nominees listed below, other than Mr. Mehrotra and Dr. Hu, is independent as defined under SEC rules
and the listing standards of the NASDAQ Global Select Market (‘‘NASDAQ’’). The Board determined
that Dr. Hu is not independent because, as discussed below in ‘‘Certain Transactions and Relationships,’’
Dr. Hu entered into Consulting Services Agreements with the Company in October 2013, January 2014
and May 2014. There are no family relationships between any executive officer, as defined in Rule 3b-7 (an
‘‘executive officer’’) of the Exchange Act, and any Director nominee. Directors elected to the Board will
serve for the ensuing year and until their respective successors are duly elected and qualified. In the event
that any Director nominee is unavailable to serve, which is not anticipated, the proxies will be voted for any
nominee who is designated by the current Board to fill the resulting vacancy. Unless otherwise instructed,
the proxy holders will vote the proxies received by them ‘‘FOR’’ each of the eight nominees named below.
In accordance with the procedures described above under ‘‘Voting Rights,’’ a Director nominee must
receive a majority of the votes cast with respect to his or her election to the Board. The proxies solicited by
this Proxy Statement may not be voted for more than eight nominees.
Set forth below is additional information as of March 2, 2015 regarding the nominees to the Board.
Age
First
Elected/Appointed
as a Director
Chairman of the Board
Director
Director
Director
Director
Director
President, Chief Executive Officer and Director
Director
64
79
62
64
67
58
56
64
2003
1988
2005
2005
2009
2004
2010
2013
Name
(1)
Michael E. Marks
...
Irwin Federman(2)(3) . . . .
Steven J. Gomo(2)(3) . . . .
Eddy W. Hartenstein(1)(2)
Dr. Chenming Hu . . . . .
Catherine P. Lego(3)(4) . .
Sanjay Mehrotra . . . . . .
D. Scott Mercer(2)(3) . . .
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(1)
Member of the Nominating and Governance Committee.
(2)
Member of the Compensation Committee.
(3)
Member of the Audit Committee.
(4)
Ms. Lego served as a member of the Board from 1989 to 2002 and returned to the Board in May 2004.
Business Experience and Qualifications of Nominees for Election as Directors
Mr. Federman has served as a Director of the Company since September 1988.
Employment History: Mr. Federman has been a general partner in U.S. Venture Partners, a venture
capital firm, since April 1990. Mr. Federman was President and Chief Executive Officer from 1979 to 1987,
and Chief Financial Officer from 1970 to 1979, at Monolithic Memories, Inc., a semiconductor company.
Education: Mr. Federman has a B.S. in Economics from Brooklyn College and was awarded an
Honorary Doctorate of Engineering from Santa Clara University.
5
Proxy Statement
Position(s) with
the Company
Current Board Service: Mr. Federman has served as a director of Intermolecular, Inc. since June 2005,
Mellanox Technologies, Ltd. since June 1999 and Check Point Software Technologies Ltd. since 1995.
Director Qualifications: Mr. Federman has served in many senior leadership roles in the
semiconductor industry throughout his career. The Board values Mr. Federman’s experience serving as the
chief executive officer and chief financial officer of a large, complex, publicly-held technology company, his
venture capital experience, which is important to the Board’s understanding of business development,
financing, strategic alternatives and industry trends, and his extensive experience on the boards of
publicly-held technology companies. Mr. Federman’s tenure and experience provide valuable perspective
on the cycles of the semiconductor industry and the Company. The Board also values Mr. Federman’s
significant experience, expertise and background in financial and accounting matters, including in the
technology industry.
Mr. Gomo has served as a Director of the Company since December 2005.
Employment History: Mr. Gomo was Executive Vice President, Finance and Chief Financial Officer
from October 2004 until his retirement in December 2011, and Senior Vice President, Finance and Chief
Financial Officer from August 2002 to September 2004, at NetApp, Inc., a storage and data management
company. Mr. Gomo was also Chief Financial Officer of Gemplus International S.A. from November 2000
to April 2002, Chief Financial Officer of Asera, Inc. from February 2000 to November 2000 and Chief
Financial Officer of Silicon Graphics, Inc. from February 1998 to February 2000. Previously, Mr. Gomo
spent 24 years at Hewlett-Packard Company serving in various finance, financial management,
manufacturing and general management positions.
Education: Mr. Gomo has a B.S. in Business Administration from Oregon State University and an
M.B.A. from Santa Clara University.
Current Board Service: Mr. Gomo has served as a director of Enphase Energy, Inc. since March 2011,
NetSuite, Inc. since April 2012, and on the Board of Trustees for the Foundation of Oregon State
University since October 2011.
Prior Board Service: Mr. Gomo previously served as a director and member of the Audit Committee
of Macromedia, Inc. from April 2004 until its acquisition in December 2005.
Director Qualifications: Mr. Gomo’s service as Chief Financial Officer of NetApp, Inc., as well as
various senior finance roles with other companies in the technology industry, provides him with valuable
insight into the Company’s business. The Board also values Mr. Gomo’s significant experience, expertise
and background in financial and accounting matters in the technology industry.
Mr. Hartenstein has served as a Director of the Company since November 2005.
Employment History: Mr. Hartenstein was President and Chief Executive Officer of the Tribune
Company, a multimedia, publishing, digital media and broadcasting company, from May 2011 to January
2013. Mr. Hartenstein was also publisher and Chief Executive Officer of the Los Angeles Times from
August 2008 to August 2014. Mr. Hartenstein was Chief Executive Officer from 2001 to 2004, and
President from 1990 to 2001, of DIRECTV, Inc., a television service provider. Mr. Hartenstein was
inducted into the Consumer Electronics Association Hall of Fame in 2008, the Broadcasting and Cable
Hall of Fame in 2002 and the National Academy of Engineering in 2001, and received an Emmy from the
National Academy of Television Arts and Sciences for lifetime achievement in 2007.
6
Education: Mr. Hartenstein has a B.S. in Aerospace Engineering, a B.S. in Mathematics and an
honorary Doctor of Science from California State Polytechnic University, Pomona, and an M.S. in Applied
Mechanics from the California Institute of Technology.
Current Board Service: Mr. Hartenstein has served as Chairman of the board of directors of Tribune
Publishing Company, a media company, since its divestiture from the Tribune Company in August 2014, a
director of Sirius XM Radio Inc. since July 2008, including as the lead independent director since April
2013, a director of Broadcom Corporation since June 2008 and a director of City of Hope since 2007.
Prior Board Service: Mr. Hartenstein previously served as a member of the Tribune Company board
of directors from January 2013 until the Tribune Publishing Company divestiture in August 2014, Vice
Chairman of the board of directors of The DIRECTV Group, Inc. from December 2003 until his
retirement in December 2004, Chairman of the board of directors of DIRECTV, Inc. from 2001 through
2004 and a director of Thomson, S.A. (Thomson Multimedia) from 1999 until 2008.
Director Qualifications: Mr. Hartenstein has experience in media relations and the communications
industry and the Board benefits from his deep experience in the distribution of media content through a
variety of channels. Mr. Hartenstein also brings significant senior leadership, technological and industry
expertise to the Board. Mr. Hartenstein’s experience as a director of other public companies provides
insights with regard to the operation of the Board and its role in overseeing the Company. The Board also
values Mr. Hartenstein’s previous experience, including as the chief executive officer, of large, complex,
publicly-held companies.
Employment History: Since 1976, Dr. Hu has been a professor in Electrical Engineering and
Computer Science at University of California, Berkeley, most recently serving as the TSMC Distinguished
Chair Professor Emeritus and Professor in the Graduate School. Dr. Hu was also Chief Technology Officer
of Taiwan Semiconductor Manufacturing Company, a semiconductor company, from June 2001 to July
2004. Dr. Hu is a member of the U.S. National Academy of Engineering, the Chinese Academy of Sciences
and Academia Sinica.
Education: Dr. Hu has a B.S. from National Taiwan University and an M.S. and a Ph.D. from the
University of California, Berkeley, all in electrical engineering.
Current Board Service: Dr. Hu has served as a director of Inphi Corporation since August 2010,
Ambarella, Inc. since November 2011 and Fortinet, Inc. since August 2012.
Prior Board Service: Dr. Hu previously served as a director of FormFactor, Inc. from December 2009
to December 2010, MoSys, Inc. from January 2005 to June 2010 and was founding Chairman of the board
of directors of Celestry Design Technologies, Inc.
Director Qualifications: Dr. Hu has experience and expertise in the technologies used and supported
by the Company, which is useful in the Board’s understanding of the Company’s research and development
efforts, competing technologies and the products and processes that the Company develops. Dr. Hu’s
experience as an educator aids his ability to communicate and inform the Board about technology and
industry developments and trends. The Board also benefits from Dr. Hu’s experience on the boards of
other publicly-held technology companies.
Ms. Lego served as a Director of the Company from 1989 to 2002 and returned to the Board in May
2004.
7
Proxy Statement
Dr. Hu has served as a Director of the Company since August 2009.
Employment History: Since 1992, Ms. Lego has been the sole member of Lego Ventures LLC, an
early stage technology consulting firm. Ms. Lego was a General Partner of The Photonics Fund, an early
stage venture capital fund focused on investing in components, modules and systems companies for the
fiber optics telecommunications market, from December 1999 to December 2009. Ms. Lego was a general
partner at Oak Investment Partners, a venture capital firm, from 1981 to 1992. Ms. Lego previously
practiced as a Certified Public Accountant with Coopers and Lybrand.
Education: Ms. Lego has a B.A. from Williams College and an M.S. in Accounting from the New York
University Stern School of Business.
Current Board Service: Ms. Lego has served as a director of Lam Research Corporation since January
2006 and serves on its audit committee and nominating and governance committee. Ms. Lego served as the
Chair of the Audit Committee of Lam Research Corporation from 2009 to 2014. In August 2013, Ms. Lego
joined the board of directors of Fairchild Semiconductor International, Inc. and serves on its compensation
and nominating and governance committees.
Prior Board Service: Ms. Lego served as a director of the Cosworth Group, a private United
Kingdom-based precision engineering products and services company from March 2011 to June 2013.
Ms. Lego also previously served as a director and Chair of the Audit Committee of WJ
Communications, Inc. from October 2004 to May 2008 and StrataLight Communication, Inc. from
September 2007 to January 2009.
Director Qualifications: Ms. Lego’s financial expertise, leadership skills and experience as a director
of other public companies are valuable to the Board’s operations. The Board values Ms. Lego’s significant
experience, expertise and background in financial and accounting matters, including in the technology
industry. Ms. Lego’s venture capital experience aids the Board’s understanding of business development,
financing, strategic alternatives and industry trends.
Mr. Marks has served as a Director of the Company since August 2003 and as Chairman of the Board
since January 2011.
Employment History: Mr. Marks has managed Riverwood Capital, LLC (formerly Bigwood
Capital, LLC), a private equity firm, since March 2007. Mr. Marks was interim Chief Executive Officer of
Tesla Motors, Inc., a company that designs and manufactures electric vehicles, from August 2007 to
November 2007. Mr. Marks was also a senior adviser from January 2007 to January 2008, and a member
from January 2006 until January 2007, at Kohlberg Kravis Roberts & Co., a private equity firm. Mr. Marks
was Chief Executive Officer of Flextronics, Inc., a leading manufacturing services provider, from January
1994 to January 2006.
Education: Mr. Marks has a B.A. and an M.A. in Psychology from Oberlin College and an M.B.A.
from Harvard Business School.
Current Board Service: Mr. Marks has served as a director of GoPro, Inc., a company that produces
mountable and wearable cameras and accessories, since February 2011 and Schlumberger Limited, an oil
services company, since 2005, as well as on the Board of Trustees of The Juilliard School since December
2011.
Prior Board Service: Mr. Marks previously served as a director of Flextronics, Inc. from 1991 to
January 2008, including as Chairman of the board of directors of Flextronics, Inc. from 1993 to January
2003 and upon his retirement as Chief Executive Officer in January 2006 until his retirement from the
board of directors in January 2008. Mr. Marks also previously served as a director of Calix Networks, Inc.
8
from 2009 to December 2010, Sun Microsystems, Inc. from April 2007 to January 2010 and Crocs, Inc.
from August 2004 to July 2008.
Director Qualifications: Mr. Marks has experience serving as the chief executive officer of a large,
complex, publicly-held technology company, which brings valuable senior leadership, management and
operational expertise to the Board. The Board also values Mr. Marks’ significant experience, expertise and
background in financial and accounting matters, including in the technology industry. Mr. Marks’ private
equity experience adds value to the Board’s understanding of business development, financing, strategic
alternatives and industry trends. Mr. Marks’ experience as a director for other public companies provides
valuable insights with regard to the operation of the Board and its role in overseeing the Company.
Mr. Mehrotra has served as a Director of the Company since July 2010.
Employment History: Mr. Mehrotra co-founded the Company in 1988 and has been the President and
Chief Executive Officer of the Company since January 2011. Mr. Mehrotra previously served in various
executive roles for the Company, including as President and Chief Operating Officer, Executive Vice
President and Chief Operating Officer, Senior Vice President of Product Development, Vice President of
Product Development, and Director of Design Engineering. Mr. Mehrotra has 35 years of experience in
the non-volatile semiconductor memory industry, including engineering and management positions at
Integrated Device Technology, Inc., SEEQ Technology, Inc., Intel Corporation and Atmel Corporation.
Mr. Mehrotra is the named inventor on more than 70 patents and has published numerous articles in the
area of non-volatile memory design and flash memory systems.
Current Board Service: Mr. Mehrotra has served as a director of Cavium, Inc. since July 2009, and
currently also serves on the Global Semiconductor Alliance, the Semiconductor Industry Association, the
Engineering Advisory Board at the University of California, Berkeley, and the Stanford Graduate School
of Business Advisory Council.
Director Qualifications: Mr. Mehrotra, as the co-founder, President and Chief Executive Officer of
the Company, offers a unique perspective on the industry and the Company’s operations. Mr. Mehrotra
brings significant senior leadership and technological and industry expertise to the Board. The Board
values Mr. Mehrotra’s experience with the Company as its co-founder, President and Chief Executive
Officer, which gives the Board a detailed understanding of the Company’s business and operations.
Mr. Mercer has been a director of the Company since September 2013.
Employment History: From April 2008 to April 2011, Mr. Mercer served as the Chief Executive
Officer of Conexant Systems, Inc., a semiconductor solutions company that provides products for imaging,
video, audio and Internet connectivity applications. Mr. Mercer served as interim Chief Executive Officer
of Adaptec, Inc., a provider of software and hardware-based storage solutions, from May 2005 through
November 2005. Mr. Mercer also served as a senior vice president and advisor to the chief executive officer
of Western Digital Corporation, a supplier of disk drives to the personal computer and consumer
electronics industries, from February 2004 through December 2004. Prior to that, Mr. Mercer was a Senior
Vice President and the Chief Financial Officer of Western Digital Corporation from October 2001 through
January 2004. From June 2000 to September 2001, Mr. Mercer served as Vice President and Chief
Financial Officer of Teralogic, Inc. From June 1996 to May 2000, Mr. Mercer held various senior operating
and financial positions with Dell, Inc.
9
Proxy Statement
Education: Mr. Mehrotra has a B.S. and an M.S. in Electrical Engineering and Computer Sciences
from the University of California, Berkeley.
Education: Mr. Mercer holds a B.S. in Accounting from California Polytechnic University.
Current Board Service: Mr. Mercer has served as a director of QLogic Corp. since September 2010
and Polycom, Inc. since November 2007.
Prior Board Service: Mr. Mercer served on the board of directors of Conexant from May 2003 to April
2011 and served as Chairman of the board of directors of Conexant from August 2008 to April 2011. In
addition to Conexant, Mr. Mercer served on the boards of directors of Adaptec, Inc. from November 2003
to October 2008, SMART Modular Technologies (WWH), Inc. from June 2007 to January 2009, and
Palm, Inc. from June 2005 until July 2010 when Palm was acquired by Hewlett-Packard Company.
Director Qualifications: Mr. Mercer has significant senior management and operational experience
over the last 29 years in a number of technology companies. Mr. Mercer’s experience as a senior executive
officer, including as both chief executive officer and chief financial officer, of high growth technology
companies gives him a strong skill set in planning, operations, compliance and finance matters. Further,
Mr. Mercer has significant public board experience, which adds to his relevant knowledge and experience.
Board Governance
Corporate Governance Principles and Committee Charters
The Board has adopted a set of Corporate Governance Principles, which address important
governance policies that assist the Board in following corporate practices that serve the best interests of
the Company and its stockholders, including establishing the Board’s procedures for reviewing resignations
submitted pursuant to the Company’s majority voting standard. Stockholders can access the Corporate
Governance Principles by clicking on ‘‘Corporate Governance’’ at www.sandisk.com/IR. The Company will
also provide copies of the Corporate Governance Principles free of charge to any stockholder who sends a
written request to: Investor Relations, c/o SanDisk Corporation, 951 SanDisk Drive, Milpitas, CA 95035.
The Board currently has three standing committees: an Audit Committee, a Compensation
Committee and a Nominating and Governance Committee. The charters for the Audit Committee, the
Compensation Committee, and the Nominating and Governance Committee are available by clicking on
‘‘Corporate Governance’’ at www.sandisk.com/IR. The Company will also provide copies of any charter
free of charge to any stockholder who sends a written request to: Investor Relations, c/o SanDisk
Corporation, 951 SanDisk Drive, Milpitas, CA 95035.
Communications with the Board
The Company encourages stockholder communications with its Board and has adopted a policy
governing such communications. Under this policy, individuals may communicate with the Board by
sending an email to the Board’s attention at: [email protected], or by writing to: Board of Directors, c/o
Investor Relations, SanDisk Corporation, 951 SanDisk Drive, Milpitas, CA 95035. Communications that
are intended specifically for non-management Directors should be sent to the attention of the Chair of the
Nominating and Governance Committee. The Company will deliver correspondence to the Board unless
the communication is unrelated to the Board’s duties, such as spam, junk mail, advertisements, mass
mailings, solicitations, job inquiries or the communication is otherwise irrelevant.
10
Board Meetings and Attendance
The Board held seven meetings during fiscal year 2014. During fiscal year 2014, each member of the
Board attended or participated in 75% or more of the aggregate of (i) the total number of meetings of the
Board held during the period for which such person has been a Director and (ii) the total number of
meetings held by all committees of the Board on which such person served during the period for which
such Director served on the Board. The Company encourages each incumbent Director and each nominee
to the Board to attend its Annual Meeting of Stockholders. All of the Director nominees attended that
meeting.
Audit Committee
The Audit Committee also regularly reviews the Company’s enterprise risk assessment and mitigation
processes and assists the Board with its oversight and annual review of the Company’s enterprise risk
management. The Audit Committee is authorized to conduct investigations, and to retain, at the expense
of the Company, independent legal, accounting or other professional consultants selected by the Audit
Committee, for any matters relating to its purposes. The Board adopted a written charter for the Audit
Committee, which was last reviewed and approved in March 2015. The Board has determined that each
member of the Audit Committee is an ‘‘audit committee financial expert’’ as defined by the SEC. The
Board has also determined that each member of the Audit Committee is an ‘‘independent director’’ as
defined by NASDAQ listing standards and also meets the additional criteria for independence of Audit
Committee members set forth in Rule 10A-3(b)(1) under the Exchange Act.
Compensation Committee
The Compensation Committee of the Board (the ‘‘Compensation Committee’’) held eleven meetings
during fiscal year 2014. The Compensation Committee during fiscal year 2014 consisted of Mr. Federman
(Chair), Mr. Gomo, Mr. DeNuccio (through February 3, 2014), and, as of February 10, 2014 and
December 12, 2014, Mr. Mercer and Mr. Hartenstein, respectively. The Compensation Committee has
authority for establishing the general compensation policies of the Company, reviewing and setting the
compensation of the Company’s executive officers, as defined by NASDAQ listing standards and
Rule 16a-1(f) of the Exchange Act (the ‘‘Section 16 Officers’’), evaluating the performance of the
Company’s Section 16 Officers, administering the Company’s incentive and employee stock purchase
plans, including the review and grant of incentive awards to the Company’s Section 16 Officers, and
recommending to the Board appropriate compensation programs for non-employee directors of the
Company (including any equity award policies for non-employee directors). The Board adopted a charter
11
Proxy Statement
The Audit Committee of the Board (the ‘‘Audit Committee’’) held ten meetings during fiscal year
2014. The Audit Committee, which during fiscal year 2014 consisted of Ms. Lego (Chair), Mr. Federman,
Mr. Gomo and Mr. Mercer, oversees on behalf of the Board the integrity of the Company’s financial
statements and the appointment, compensation, qualifications, independence and performance of the
Company’s independent registered public accounting firm, the Company’s compliance with legal and
regulatory requirements and the performance of the Company’s internal accounting, audit and financial
controls. As part of its oversight and review of the Company’s independent registered public accounting
firm, the Audit Committee reviews, on an annual basis, the qualifications, independence and performance
of the Company’s audit engagement team, and monitors the rotation and selection of the partner-in-charge
on the Company’s audit engagement team as required by law (including providing input and guidance on
which partner to select), which occurs once every five years. In connection with monitoring the rotation
and selection of the partner-in-charge on the Company’s audit engagement team, which rotation is set to
occur after the completion of the fiscal year 2015 audit, the Audit Committee will review the performance
of the Company’s independent registered public accounting firm beginning in 2015.
for the Compensation Committee, which was last reviewed and approved in March 2015. The charter
requires, in part, that the Compensation Committee consist of no fewer than three Directors who satisfy
the independence requirements of NASDAQ and applicable law. The Board has determined that each
member of the Compensation Committee satisfies such independence requirements.
While the Compensation Committee has primary authority for the administration of the Company’s
incentive plans for the Company’s Section 16 Officers, the Board has delegated concurrent authority to the
Compensation Committee and a committee that may consist of one or more Directors (the ‘‘Secondary
Board Committee’’) as well as a committee that may consist of one or more executive officers of the
Company (the ‘‘Secondary Executive Committee’’) for certain other types of share-based awards. The
Secondary Board Committee may only grant share-based awards (including stock options and restricted
stock units (‘‘RSUs’’)) to employees who are not Section 16 Officers. In fiscal year 2014, the Secondary
Board Committee consisted of Mr. Mehrotra. The Secondary Executive Committee may only grant stock
options (but not RSUs or other share-based awards) to employees who are not Section 16 Officers. In
fiscal year 2014, the Secondary Executive Committee consisted of Judy Bruner, the Company’s Executive
Vice President, Administration and Chief Financial Officer and Donald Robertson, the Company’s Vice
President and Chief Accounting Officer. Share-based awards to the Section 16 Officers are made
exclusively by the Compensation Committee, and share-based awards to non-employee directors of the
Company are recommended by the Compensation Committee to the Board for approval.
Processes and Procedures. For information on the responsibilities and activities of the Compensation
Committee, including the processes and procedures for the consideration and determination of Director
and executive compensation, see ‘‘Director Compensation’’ and ‘‘Executive Compensation-Compensation
Discussion and Analysis.’’
Independent Compensation Consultant. Pursuant to its charter, the Compensation Committee has the
power, in its discretion, to retain at the expense of the Company, independent counsel and other advisors
as it deems necessary or appropriate to assist the Compensation Committee in carrying out its duties.
Under its charter, the Compensation Committee has the express authority to decide whether to retain a
compensation consultant to assist in the evaluation of the Company’s compensation programs. If the
Compensation Committee decides, in its discretion, to retain a compensation consultant, the
Compensation Committee has the sole authority to retain and terminate such consultant engaged to assist
in the evaluation of the compensation of the Company’s Section 16 Officers (including all of the Named
Executive Officers, who are identified below in ‘‘Compensation Discussion and Analysis’’). In fiscal year
2014, the Compensation Committee retained Farient Advisors (‘‘Farient’’), an outside compensation
consultant, to assist in analyzing the Company’s peer companies for fiscal year 2015 compensation, and to
provide information on compensation-related trends and developments in the Company’s industry and
fiscal year 2015 peer companies, including equity award practices. Compensia, Inc. (‘‘Compensia’’), an
outside compensation consultant that the Company had previously engaged, evaluated the competitiveness
of the Company’s executive compensation programs relative to the Company’s fiscal year 2014 peer
companies and provided information on compensation-related trends and developments in the Company’s
industry and fiscal year 2014 peer companies, including equity award practices.
Compensation Committee Interlocks and Insider Participation. The Compensation Committee during
fiscal year 2014 consisted of Mr. Federman (Chair), Mr. Gomo, Mr. DeNuccio (through February 3, 2014),
and, as of February 10, 2014 and December 12, 2014, Mr. Mercer and Mr. Hartenstein, respectively. In
fiscal year 2014, no member of the Compensation Committee was a current or former executive officer or
employee of the Company. See ‘‘Certain Transactions and Relationships’’ for a description of a transaction
occurring during fiscal year 2014 involving Mr. Federman and transactions occurring during fiscal year
2014 involving Dr. Hu, each of which requires disclosure by the Company under the SEC’s rules requiring
disclosure of certain relationships and related-party transactions. None of the Company’s executive officers
12
served as a director or a member of a compensation committee (or other committee serving an equivalent
function) of any other entity, the executive officers of which served as a Director or member of the
Compensation Committee during the fiscal year ended December 28, 2014.
Analysis of Risk in Compensation Programs. In setting compensation, the Compensation Committee
also considers the risks to the Company’s stockholders, and the Company as a whole, arising out of the
Company’s compensation programs. In March 2015, the Company’s management met to discuss and assess
the risk profile of the Company’s compensation programs. Their review considered risk-influencing
characteristics of the overall structure and individual components of the Company’s compensation
program, including the Company’s base salaries, incentive plans and equity plans. A report regarding
management’s findings was provided to the Compensation Committee for its review and consideration.
Following this review and consideration, the Compensation Committee concurred with management’s
conclusions that the Company’s compensation policies were not reasonably likely to have a material
adverse effect on the Company and included many features that mitigate the likelihood of excessive
risk-taking, including those discussed below.
Balance of Compensation. Individual elements of the Company’s compensation program include
base salaries, incentive compensation, and for certain of its employees, share-based awards. By providing a
mix of different elements of compensation that reward both short-term and long-term performance, the
Company’s compensation programs as a whole provide a balanced approach to incentivizing and retaining
employees, without placing an inappropriate emphasis on any particular form of compensation.
Use of Long-Term Incentive Compensation. Share-based long-term incentive compensation that vests
over a period of years is a key component of the total compensation of many of the Company’s employees.
This vesting period encourages the Company’s executives and other employees to focus on sustaining and
improving the Company’s long-term performance. These grants are generally made annually, so executives
and other key employees always have unvested awards that could decrease significantly in value if the
Company’s business is not managed for the long term.
Internal Processes Further Restrict Risk. The Company has in place additional processes to limit risk
to the Company from its compensation programs. Specifically, sales commission payments are subject to
multiple internal controls regarding payout terms and payroll programs. Additionally, financial results
upon which incentive compensation payments are based are subject to regular review and audit. In
addition, the Company from time to time engages an external compensation consulting firm to assist in the
design and review of the Company’s compensation programs, as well as external legal counsel to assist with
the periodic review of the Company’s compensation plans to ensure compliance with applicable laws and
regulations.
Nominating and Governance Committee
The Nominating and Governance Committee of the Board held three meetings during fiscal year
2014. During fiscal year 2014, the Nominating and Governance Committee consisted of Mr. Marks
(Chair), Mr. Hartenstein, and Mr. DeNuccio (through February 3, 2014). The Nominating and
Governance Committee identifies, considers and recommends Director nominees to be selected by the
13
Proxy Statement
Company Results and Pre-established Performance Measures Dictate Annual Incentives. Under the
Company’s cash-based incentive plan, payments are subject to the satisfaction of specific annual
performance objectives established by the Compensation Committee in advance and may be subject to
reimbursement or forfeiture under the Company’s clawback policy. These performance objectives were
directly and specifically tied to the Company’s fiscal year 2014 diluted non-GAAP earnings per share, as
well as the achievement of strategic objectives for fiscal year 2014.
Board for submission to vote at the Company’s annual stockholder meetings and to fill vacancies occurring
between annual stockholder meetings, implements the Board’s criteria for selecting new Directors,
develops or reviews and recommends corporate governance policies for the Board, and oversees the
annual board and committee evaluation process. The Nominating and Governance Committee is also
authorized to conduct investigations and to retain, at the expense of the Company, independent legal,
accounting, financial, governance or other professional consultants selected by the Nominating and
Governance Committee, for any matters relating to its purposes. The Board adopted a charter for the
Nominating and Governance Committee, which was last reviewed and approved in March 2015. The Board
has determined that each of the members of the Nominating and Governance Committee is an
‘‘independent director’’ as defined by NASDAQ listing standards.
Board Leadership Structure and Risk Oversight
Board Leadership Structure
Mr. Marks has served as the Chairman of the Board since January 1, 2011. Mr. Mehrotra has served
as Chief Executive Officer of the Company since January 1, 2011 and as a Director since July 2010. The
Board believes that it is in the Company’s best interests to maintain a separation of the Chairman of the
Board and the Chief Executive Officer roles because it allows the Chief Executive Officer of the Company
to focus on the Company’s day-to-day business, while allowing the Chairman of the Board to lead the
Board in its fundamental role of providing advice to and independent oversight of management.
Each of the current Directors, other than Mr. Mehrotra and Dr. Hu, is independent and the
independent Directors have regular executive sessions. Following an executive session of independent
Directors, one or more of the attending Directors may: (1) act as a liaison between the independent
Directors and management regarding any specific feedback or issues; (2) provide management with input
regarding agenda items for Board and Committee meetings; and (3) coordinate with management
regarding information to be provided to the independent Directors in performing their duties. The Board
believes that this approach appropriately and effectively complements the Company’s current leadership
structure.
Under its charter, the Nominating and Governance Committee periodically reviews the performance
of the Board and its Committees, including the functionality and effectiveness of the Board’s leadership
structure.
Board Role in Risk Oversight
The Board is actively involved in the oversight of risks that could affect the Company. This oversight is
conducted at the Board level and, where relevant to a committee’s duties, through the committees of the
Board. While the Board and its committees oversee risk management strategy, management is responsible
for implementing and supervising day-to-day risk management processes. In addition, the Audit
Committee regularly reviews the Company’s enterprise risk assessment and mitigation processes and
assists the Board with its oversight and annual review of the Company’s enterprise risk management. The
Company believes this division of risk management responsibilities is the most effective approach for
addressing the risks that the Company faces.
14
Consideration of Director Nominees
Identifying and Evaluating Nominees for Directors
The Nominating and Governance Committee initiates the director nomination process by preparing a
slate of potential candidates who, based on their qualifications and other information available to the
Nominating and Governance Committee, appear to meet the criteria specified below and/or who have
specific desirable qualities, skills or experience (based on input from the full Board). The Nominating and
Governance Committee may engage a third-party search firm or other advisors to assist in identifying
prospective nominees. The nomination of existing Directors is not automatic, but is based on continuing
qualification under the criteria set forth below and the Corporate Governance Principles of the Company.
Under the Company’s Corporate Governance Principles, at all times, a majority of the individuals serving
as Directors must be ‘‘independent’’ under applicable SEC and stock exchange rules.
After the Nominating and Governance Committee reviews a nominee’s qualifications and
characteristics, a new candidate will be interviewed by at least one member of the Nominating and
Governance Committee and by the Chief Executive Officer. Upon completion of the evaluation process,
the Nominating and Governance Committee determines the list of potential candidates to be
recommended to the full Board for nomination at the annual meeting or to fill any vacancy on the Board.
The Board will select the slate of nominees, including any nominee to fill a vacancy, only from candidates
screened and approved by the Nominating and Governance Committee.
The Nominating and Governance Committee considers recommendations for Director nominees that
are properly submitted by stockholders. In evaluating a recommended nominee (‘‘Recommended
Candidate’’), the Nominating and Governance Committee seeks to achieve a balance of knowledge,
experience and capability on the Board and considers the membership criteria set forth under ‘‘Identifying
and Evaluating Nominees for Directors’’ and ‘‘Director Qualifications.’’
In order to be submitted properly, recommendations of a Recommended Candidate must be timely
delivered to: Chair of the Nominating and Governance Committee, c/o SanDisk Corporation, 951 SanDisk
Drive, Milpitas, CA 95035. The recommendation must include the following written materials: (1) all
information relating to the Recommended Candidate that is required to be disclosed pursuant to
applicable Exchange Act rules and regulations, NASDAQ listing standards and the Company’s Bylaws
(including, with respect to the Recommended Candidate, such person’s written consent to being named in
the proxy statement as a nominee and, such person’s written consent to serving as a Director if elected);
(2) the name(s) and address(es) of the recommending stockholder(s) and the amount of the Company’s
securities owned beneficially and of record by such stockholder(s); (3) appropriate biographical
information (including a business address and a telephone number) and a statement as to the
Recommended Candidate’s qualifications, with a focus on the criteria described below under ‘‘Director
Qualifications;’’ (4) a representation that each recommending stockholder is a holder of record of stock of
the Company entitled to vote on the date of submission of such written materials; and (5) any material
interest of the recommending stockholder in the recommended nomination.
If the Recommended Candidate is intended to be considered by the Nominating and Governance
Committee for recommendation to the Board for the slate of Director nominees to be voted on at an
annual meeting of the Company’s stockholders, the written materials must be submitted within the time
permitted for submission of a stockholder proposal for inclusion in the Company’s proxy statement for the
subject annual meeting and must also comply with Exchange Act rules and regulations, NASDAQ listing
standards, and the provisions for stockholder proposals set forth in the Company’s Bylaws.
15
Proxy Statement
Stockholder-Recommended Nominees
Director Qualifications
The Nominating and Governance Committee has established the following minimum criteria for
evaluating prospective Board candidates:
• Reputation for integrity, strong moral character and adherence to high ethical standards;
• Holds or has held a generally recognized position of leadership in the community and/or chosen
field of endeavor, and has demonstrated high levels of accomplishment;
• Demonstrated business acumen and experience, and ability to exercise sound business judgment in
matters that relate to the current and long-term objectives of the Company;
• Ability to read and understand basic financial statements and other financial information pertaining
to the Company;
• Commitment to understand the Company and its business, industry and strategic objectives;
• Commitment and ability to regularly attend and participate in meetings of the Board, Board
Committees and stockholders, the number of other company boards on which the candidate serves
and ability to generally fulfill all responsibilities as a Director;
• Willingness to represent and act in the interests of all stockholders of the Company rather than the
interests of a particular group;
• Good health and ability to serve;
• For prospective non-employee Directors, independence under applicable SEC and stock exchange
rules, and the absence of any conflict of interest (whether due to a business or personal
relationship) or legal impediment to, or restriction on, the nominee’s ability to effectively serve as a
Director; and
• Willingness to accept the nomination to serve as a Director of the Company.
Other Factors for Potential Consideration. The Nominating and Governance Committee will also
consider the following factors in connection with its evaluation of each prospective nominee:
• Whether the prospective nominee will contribute to the Board’s overall diversity of backgrounds,
skills, perspectives and experiences;
• Whether the nominee possesses the requisite education, training and experience to qualify as
‘‘financially literate’’ or as an ‘‘audit committee financial expert’’ under applicable SEC and stock
exchange rules;
• The composition of the Board and whether the prospective nominee will add to or complement the
Board’s existing strengths;
• For incumbent Directors standing for re-election, the incumbent Director’s performance during his
or her term, including the number of meetings attended, level of participation and overall
contribution to the Company; the number of other company boards on which the individual serves;
the composition of the Board at that time; any changed circumstances affecting the individual
16
Director that may bear on his or her ability to continue to serve on the Board or his or her value to
the Board; and the Company’s retirement policy for Directors, as set forth in its Corporate
Governance Principles; and
• To the extent desired by the Nominating and Governance Committee, views of the other members
of the Board and the Company’s senior management regarding the qualifications and suitability of
prospective nominees.
Director Compensation
Director Compensation Table—Fiscal Year 2014
The following table presents information regarding the compensation earned during fiscal year 2014
to Directors who were members of the Board at any time during fiscal year 2014 and who were not also an
employee of the Company (referred to herein as ‘‘Non-Employee Directors’’). Directors employed by the
Company are not entitled to receive additional compensation for their service as Directors; information
regarding the compensation awarded to Mr. Mehrotra in fiscal year 2014 is included in ‘‘Summary
Compensation Table—Fiscal Years 2012-2014’’ in this Proxy Statement.
Fees Earned or
Paid in Cash
($)
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150,000
18,750
95,000
87,500
67,850(6)
60,000
90,000
86,676(8)
Option Awards
($)(1)(2)(3)
125,706
—
125,706
125,706
125,706
125,706
125,706
125,706
150,069
—
150,069
150,069
150,069
150,069
150,069
150,069
All Other
Compensation
($)(4)
1,348
—
1,348
1,348
1,348
238,848(7)
1,348
1,449
Total
($)
427,123
18,750
372,123
364,623
344,973
574,623
367,123
363,900
(1)
The amounts represent the full grant date fair value of the stock awards (which term includes RSUs for purposes
of this Proxy Statement) and option awards granted in fiscal year 2014 as computed in accordance with Financial
Accounting Standards Board Accounting Standards Codification Topic 718 (‘‘ASC 718’’). For a discussion of the
assumptions and methodologies used to calculate the valuations of the stock awards and option awards, please
see the discussion of stock awards and option awards contained in Note 10, ‘‘Stockholders’ Equity and ShareBased Compensation,’’ of the Notes to Consolidated Financial Statements in Item 8 ‘‘Financial Statements and
Supplementary Data,’’ of the Company’s Form 10-K for the fiscal year ended December 28, 2014 filed with the
SEC on February 10, 2015. Under general accounting principles, compensation expense with respect to stock
awards and option awards granted to the Directors is generally recognized over the vesting periods applicable to
the awards.
(2)
In June 2014, the Company granted each of the Non-Employee Directors an annual stock option award in the
amount of 6,250 shares, with an exercise price of $102.20, and an annual RSU award in the amount of 1,230
shares. Subject to the Non-Employee Director’s continued service, the shares subject to each such award vest in
one installment on the earlier of (i) the first anniversary of the grant date or (ii) the day immediately preceding
the next annual meeting of the Company’s stockholders following the grant date.
17
Proxy Statement
Michael E. Marks . .
Kevin DeNuccio(5) . .
Irwin Federman . . .
Steven J. Gomo . . .
Eddy W. Hartenstein
Dr. Chenming Hu . .
Catherine P. Lego . .
D. Scott Mercer . . .
Stock Awards
($)(1)(2)(3)
(3)
The following table presents the number of outstanding and unexercised option awards and the number of
unvested stock awards held by each of the Company’s Non-Employee Directors as of December 28, 2014:
Director
Michael E. Marks . .
Kevin DeNuccio . . . .
Irwin Federman . . . .
Steven J. Gomo . . . .
Eddy W. Hartenstein
Dr. Chenming Hu . .
Catherine P. Lego . .
D. Scott Mercer . . . .
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Number of Shares Subject to
Outstanding Option Awards
as of December 28, 2014
Number of Unvested
Shares or Units
as of December 28, 2014
6,250
—
12,500
31,250
18,750
31,250
37,500
10,958
1,230
—
1,230
1,230
1,230
1,230
1,230
1,230
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(4)
Includes dividends accrued on unvested RSUs during fiscal year 2014.
(5)
Mr. DeNuccio resigned from the Board, effective February 3, 2014.
(6)
Includes pro rata fee of $350 which was earned by Mr. Hartenstein for his Compensation Committee service in
the fourth quarter of fiscal year 2014, which was paid to Mr. Hartenstein in January 2015.
(7)
This amount includes $237,500 of compensation earned by Dr. Hu pursuant to a Consulting Services Agreement
with the Company, as discussed below in ‘‘Certain Transactions and Relationships.’’
(8)
Includes pro rata fee of $1,051 which was earned by Mr. Mercer for his Compensation Committee service in the
first quarter of fiscal year 2014.
Elements of Director Compensation
Compensation for Non-Employee Directors during fiscal year 2014 generally consisted of annual
retainers and annual share-based awards. The Compensation Committee, consisting solely of independent
directors, has the primary responsibility for reviewing and considering any revisions to Non-Employee
Director compensation, and recommending any such revisions to the Board for review. The Compensation
Committee periodically reviews Non-Employee Director compensation. In such review, the Compensation
Committee may review and consider data regarding the competitiveness of the Company’s Non-Employee
Director compensation program relative to the Company’s peer companies and general industry trends,
which data may be compiled by the Company’s management and/or with the assistance of a compensation
consultant. The Board reviews the Compensation Committee’s recommendations and determines the
amount of director compensation.
Annual Retainers
The Company policy regarding Non-Employee Director compensation in place during fiscal year 2014
was as follows:
Type of Fee
Fiscal Year 2014
Annual Board Retainer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Additional Annual Retainer to Chairman of the Board . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Additional Annual Retainer to Chair of Audit Committee . . . . . . . . . . . . . . . . . . . . . . . . . . .
Additional Annual Retainer to Chairs of Compensation Committee and Nominating and
Governance Committee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Additional Annual Retainer to non-Chair Members of Audit Committee . . . . . . . . . . . . . . . . .
Additional Annual Retainer to non-Chair Members of Compensation Committee and Nominating
and Governance Committee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
18
$60,000
$75,000
$30,000
$15,000
$20,000
$ 7,500
All Non-Employee Directors are also reimbursed for out-of-pocket expenses they incur serving as
Directors and as committee members.
Share-Based Awards
Under the Company’s Non-Employee Director compensation policy, as currently in effect, a
Non-Employee Director who first takes office and who has not been employed by the Company in the
preceding twelve (12) months receives (i) an initial option grant (the ‘‘Initial Option Grant’’) to purchase
that number of shares of Common Stock that results from multiplying the shares subject to the Annual
Option (as defined below) by the Initial Service Term (as defined below) and (ii) an initial RSU grant for a
number of units determined by multiplying the shares subject to the Annual RSU (as defined below) by the
Initial Service Term (the ‘‘Initial Unit Grant’’). The ‘‘Initial Service Term’’ means a fraction with the
numerator being the number of days from the date of appointment to the Board until the next scheduled
Annual Meeting of Stockholders or, if no Annual Meeting of Stockholders has been scheduled, the
one-year anniversary of the previous Annual Meeting of Stockholders, and the denominator being 365. In
addition, on the date of each Annual Meeting of Stockholders, each Non-Employee Director who has been
elected or re-elected at such Annual Meeting of Stockholders also receives (i) the Annual Option Grant,
and (ii) an RSU grant for a number of units determined by dividing $125,000 by the average closing price
per share of Common Stock on NASDAQ for the five (5) trading days ended on, and including, the grant
date (the ‘‘Annual Unit Grant’’). The initial and annual awards described in this paragraph are granted
under, and are subject to, the Company’s 2013 Incentive Plan (the ‘‘2013 Plan’’).
The stock options granted to Non-Employee Directors are immediately exercisable. However, upon a
Non-Employee Director’s cessation of service with the Company, any shares purchased upon exercise of
the option that have not vested (as described below) are subject to repurchase by the Company at the
lower of (i) the exercise price paid for the shares or (ii) the fair market value of the shares at the time of
repurchase (as determined under the 2013 Plan). This type of stock option is generally referred to as an
‘‘early exercise’’ stock option because the holder is permitted to exercise the option prior to the time that
the underlying shares vest. Subject to the Non-Employee Director’s continued service, the shares subject to
the Initial Option Grant and the Annual Option Grant vest, and the Company’s repurchase right lapses, in
one installment on the earlier of (i) first anniversary of the grant date or (ii) the day immediately preceding
the next Annual Meeting of Stockholders following the grant date.
Once vested, each option will generally remain exercisable for fully vested shares of Common Stock
(i.e., shares which are not subject to the Company’s repurchase right) until its normal expiration date. Each
of the options granted to the Company’s Non-Employee Directors, under the 2013 Plan, has a term of
seven (7) years. However, vested stock options may terminate earlier in connection with a change in
control of the Company. Pursuant to the terms of the 2013 Plan, stock options granted to the Company’s
Non-Employee Directors will vest on an accelerated basis in connection with a change in control of the
Company. Shares subject to the option that have not vested will immediately terminate (or be subject to
the Company’s repurchase right to the extent already purchased under the option) upon the cessation of
the Non-Employee Director’s service. However, the shares subject to options vest, and the Company’s
repurchase right lapses, in full if the Non-Employee Director’s cessation of service is as a result of the
Director’s death or permanent disability. Non-Employee Directors generally have twelve (12) months to
exercise the vested portion of the option following a cessation of service.
19
Proxy Statement
Initial and Annual Stock Option Grants. The Initial and Annual Option Grants are granted with a per
share exercise price equal to the fair market value of a share of Common Stock on the grant date. For
these purposes, and in accordance with the terms of the 2013 Plan and the Company’s share-based award
grant practices, the fair market value is equal to the closing price of a share of the Common Stock on
NASDAQ on the grant date.
The options granted to Non-Employee Directors do not include any dividend or dividend equivalent
rights. However, Non-Employee Directors are entitled to dividends with respect to shares purchased upon
the exercise of options, whether or not such shares have vested under the option, at the same rate as the
Company’s other stockholders.
Initial and Annual RSU Grants. Each RSU awarded to the Company’s Non-Employee Directors
represents a contractual right to receive one share of the Common Stock if the time-based vesting
requirements described below are satisfied.
Subject to the Non-Employee Director’s continued service, the units subject to the Initial Unit Grant
and the Annual Unit Grant 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 Stockholders following the grant
date. Pursuant to the terms of the 2013 Plan, RSUs granted to the Company’s Non-Employee Directors
will vest on an accelerated basis in connection with a change in control of the Company. Upon the
cessation of the Non-Employee Director’s service, any unvested RSUs will generally terminate. However,
RSUs granted to a Non-Employee Director vest in full if the Non-Employee Director’s cessation of service
is as a result of the Director’s death or permanent disability.
RSUs will generally be paid in an equivalent number of shares of the Common Stock as they vest.
Non-Employee Directors are not entitled to voting or dividend rights with respect to the RSUs, and the
RSUs generally may not be transferred, except to the Company or to a beneficiary of the Non-Employee
Director upon his or her death. However, non-Employee Directors are entitled to the following dividend
equivalent rights with respect to the RSUs. If the Company pays a cash dividend on its Common Stock and
the dividend record date occurs after the grant date and before all of the RSUs have either been paid or
terminated, then the Company will credit the Non-Employee Director’s bookkeeping account with an
amount equal to (i) the per-share cash dividend paid by the Company on its Common Stock with respect to
the dividend record date, multiplied by (ii) the total number of outstanding and unpaid RSUs (including
any unvested RSUs) as of the dividend record date. These dividend equivalents will be subject to the same
vesting, payment and other terms and conditions as the original RSUs to which they relate (except that the
dividend equivalents may be paid in cash or such other form as the plan administrator may deem
appropriate).
The Board administers the 2013 Plan as to Non-Employee Director awards and has the ability to
interpret and make all required determinations under the plan, subject to plan limits. This authority
includes making required proportionate adjustments to outstanding awards to reflect any impact resulting
from various corporate events such as reorganizations, mergers and stock splits.
Required Vote
The required vote for the election of each Director is as described above under ‘‘Voting Rights.’’
Recommendation of the Board of Directors
The Board believes that Proposal No. 1 is in the Company’s best interests and the best interests of its
stockholders’ and unanimously recommends a vote FOR the election of each of the Director nominees.
20
PROPOSAL NO. 2
RATIFICATION OF APPOINTMENT OF INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM
The Audit Committee has appointed Ernst & Young LLP as the Company’s independent registered
public accounting firm for the fiscal year ending January 3, 2016, and is asking the Company’s stockholders
to ratify this appointment. The affirmative vote of the holders of a majority of the shares present or
represented by proxy at the Annual Meeting and entitled to vote on this Proposal No. 2 will be required to
ratify the appointment of Ernst & Young LLP.
The Audit Committee is not required to take any action as a result of the outcome of the vote on this
Proposal No. 2. In the event the stockholders fail to ratify the appointment, the Audit Committee will
reconsider its appointment of Ernst & Young LLP as the Company’s independent registered public
accounting firm for the fiscal year ending January 3, 2016. Even if this appointment is ratified, the Audit
Committee, in its discretion, may direct the appointment of a different independent registered public
accounting firm at any time if the Audit Committee determines that such a change would be in the best
interests of the Company and its stockholders.
Ernst & Young LLP has audited the Company’s financial statements annually since 1991. The
Company expects that representatives of Ernst & Young LLP will be present at the Annual Meeting and
that they will have the opportunity to make a statement if they desire to do so, and respond to appropriate
questions from stockholders.
The following is a summary of the fees incurred by the Company from Ernst & Young LLP for
professional services rendered during fiscal years 2014 and 2013:
2014
2013
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$3,369,000
621,000
647,000
2,000
$3,062,000
472,000
537,000
2,000
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$4,639,000
$4,073,000
(1)
Audit Fees . . . . . .
Audit-Related Fees(2)
Tax Fees(3) . . . . . . . .
All Other Fees(4) . . .
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(1)
Audit fees consisted of professional services provided in connection with the integrated audit of the Company’s
financial statements including services provided in connection with the annual audit of the Company’s internal
control over financial reporting and review of the Company’s quarterly financial statements. The fees also include
professional services provided for new and existing statutory audits of subsidiaries or affiliates of the Company.
(2)
Audit-related fees consisted primarily of accounting consultations, services provided in connection with
regulatory filings, technical accounting guidance and other attestation services. The audit-related fees for 2014
included services related to the acquisition of Fusion-io, Inc. (‘‘Fusion-io’’). The audit-related fees for 2013
included services related to the issuance of convertible debt in 2013.
(3)
Tax fees primarily included tax compliance fees, including expatriate compliance services. Total compliance fees
were $442,000 and $324,000 for fiscal year 2014 and 2013, respectively. Tax fees also include tax advice and tax
planning fees of $205,000 and $213,000 for fiscal year 2014 and 2013, respectively.
(4)
All other fees consisted of online research tools.
21
Proxy Statement
Principal Accountant Fees and Services
All of the fiscal year 2014 services described above were pre-approved by the Audit Committee to the
extent required by Section 10A of the Exchange Act. In accordance with Section 10A of the Exchange Act,
the Audit Committee may delegate to any member of the Audit Committee (referred to as the ‘‘Audit
Committee Delegate’’) the authority to pre-approve services not prohibited by law to be performed by the
Company’s independent registered public accounting firm. The Audit Committee has appointed Ms. Lego
as the Audit Committee Delegate and, as such, Ms. Lego has the authority to pre-approve permissible
services and reports any decision to pre-approve permissible services to the full Audit Committee at its
next regular meeting. In addition, from time to time, the Audit Committee has adopted and/or revised a
Pre-Approval Policy under which particular services or categories of services are pre-approved.
The Audit Committee considered the non-audit fees and services performed when assessing the
independence of Ernst & Young LLP. The Audit Committee has concluded that the provision of the
audit-related services, tax services and other non-audit services identified above is compatible with Ernst &
Young LLP’s independence.
Required Vote
The affirmative vote of the holders of a majority of the shares present in person or represented by
proxy at the Annual Meeting and entitled to vote on Proposal No. 2 is required to ratify the appointment
of Ernst & Young LLP as the Company’s independent registered public accounting firm for the fiscal year
ending January 3, 2016.
Recommendation of the Board of Directors
The Board believes that Proposal No. 2 is in the Company’s best interests and the best interests of its
stockholders and unanimously recommends a vote FOR the ratification of the appointment of Ernst &
Young LLP to serve as the Company’s independent registered public accounting firm for the fiscal year
ending January 3, 2016.
22
ANNUAL REPORT ON FORM 10-K
The Company filed its Annual Report on Form 10-K with the SEC on February 10, 2015.
Stockholders may obtain a copy of the Annual Report on Form 10-K, without charge, by writing to: Investor
Relations, c/o SanDisk Corporation, 951 SanDisk Drive, Milpitas, CA 95035. The Annual Report on
Form 10-K is also available at www.sandisk.com/IR.
AUDIT COMMITTEE REPORT
The information contained in this report shall not be deemed to be ‘‘soliciting material’’ or to be ‘‘filed’’
with the SEC, nor shall such information be incorporated by reference into any future filings with the SEC, or
subject to the liabilities of Section 18 of the Exchange Act, except to the extent that the Company specifically
incorporates it by reference into a document filed under the Securities Act or the Exchange Act.
The following is the report of the Audit Committee with respect to the Company’s audited financial
statements for the fiscal year ended December 28, 2014 included in the Company’s Annual Report on
Form 10-K, which was filed with the SEC on February 10, 2015.
The Audit Committee has reviewed and discussed the audited financial statements with management
of the Company.
The Audit Committee has received the written disclosures and the letter from Ernst & Young LLP
required by applicable requirements of the Public Company Accounting Oversight Board regarding
Ernst & Young LLP’s communications with the Audit Committee concerning independence, and has
discussed with Ernst & Young LLP the independence of Ernst & Young LLP from the Company.
Based on the review and discussions referred to above in this report, the Audit Committee
recommended to the Company’s Board that the audited financial statements be included in the Company’s
Annual Report on Form 10-K for the fiscal year ended December 28, 2014 filed with the SEC.
Audit Committee of the Board of Directors
Catherine P. Lego (Chair)
Irwin Federman
Steven J. Gomo
D. Scott Mercer
23
Proxy Statement
The Audit Committee has discussed with the Company’s independent registered accounting firm,
Ernst & Young LLP, the matters required to be discussed by Public Company Accounting Oversight Board
(PCAOB) Auditing Standard No. 16 (AS 16), ‘‘Communications with Audit Committees,’’ which include,
among other items, matters related to the conduct of the audit of the Company’s financial statements.
PROPOSAL NO. 3
ADVISORY RESOLUTION TO APPROVE THE COMPENSATION OF THE
NAMED EXECUTIVE OFFICERS OF SANDISK CORPORATION
At the Company’s 2011 Annual Meeting of Stockholders, the Company’s stockholders voted in favor
of holding an advisory vote to approve the compensation of the Company’s named executive officers every
year. The Board considered the voting results on that proposal and determined to adopt a policy providing
for an annual advisory stockholder vote to approve the compensation of the Company’s named executive
officers.
In accordance with that policy and pursuant to Section 14A of the Exchange Act, the Company is
asking stockholders to pass an advisory resolution commonly known as a ‘‘say-on-pay’’ proposal to approve
the Company’s compensation of its Named Executive Officers for fiscal year 2014 (who are identified
below in the ‘‘Compensation Discussion and Analysis’’) as reported in this Proxy Statement. As described
below in the ‘‘Compensation Discussion and Analysis’’ of this Proxy Statement, the Compensation
Committee has designed the Company’s compensation of its Named Executive Officers to align each
Named Executive Officer’s compensation with the Company’s near-, medium- and long-term performance
and to provide the compensation and incentives needed to attract, motivate and retain the executive
officers who are crucial to the Company’s long-term success. You are urged to read the ‘‘Compensation
Discussion and Analysis,’’ which describes in more detail the Company’s executive compensation policies,
particularly as they relate to the Named Executive Officers, as well as the Summary Compensation Table
and other related compensation tables and narrative, which provide detailed information on the
compensation of the Company’s Named Executive Officers.
The advisory resolution gives stockholders the opportunity to express their approval of the Company’s
Named Executive Officer compensation program. This vote is not intended to address any specific item of
compensation, but rather the overall compensation of the Company’s Named Executive Officers and the
philosophy, policies and practices described in this Proxy Statement. Accordingly, you are being asked to
vote on the following resolution at the Annual Meeting:
‘‘RESOLVED, that the Company’s stockholders approve, on an advisory basis, the compensation of
the Named Executive Officers, as disclosed in the Company’s Proxy Statement for the 2015 Annual
Meeting of Stockholders pursuant to the compensation disclosure rules of the Securities and Exchange
Commission, including the Compensation Discussion and Analysis, the Summary Compensation Table and
the other related tables and disclosure.’’
The say-on-pay vote is advisory, and therefore not binding on the Company, the Compensation
Committee or the Board. However, the Board and the Compensation Committee value the opinions of the
Company’s stockholders and to the extent there is any significant vote against the ‘‘say-on-pay’’ proposal,
the Compensation Committee will consider the Company’s stockholders’ concerns and will evaluate
whether any actions are necessary to address those concerns.
Unless the Board modifies its policy on the frequency of say-on-pay votes, the next say-on-pay vote
will be held at the Company’s 2016 Annual Meeting of Stockholders.
Recommendation of the Board of Directors
The Board believes that approval of Proposal No. 3 is in the Company’s best interests and the best
interests of its stockholders and unanimously recommends a vote FOR the advisory resolution to approve
the compensation of the Company’s Named Executive Officers, as disclosed in this Proxy Statement.
24
COMPENSATION DISCUSSION AND ANALYSIS
This section contains a discussion of the material elements of compensation awarded to, earned by or
paid to the following executive officers of the Company: the principal executive officer; the principal
financial officer; and the three other most highly compensated individuals who were serving as executive
officers as of the last day of fiscal year 2014. These individuals are referred to as the ‘‘Named Executive
Officers’’ in this Proxy Statement and include:
• Sanjay Mehrotra—President and Chief Executive Officer (principal executive officer);
• Judy Bruner—Executive Vice President, Administration and Chief Financial Officer (principal
financial officer);
• Sumit Sadana—Executive Vice President, Chief Strategy Officer and, since April 2015, General
Manager, Enterprise Solutions;
• Mark Brazeal—Chief Legal Officer and Senior Vice President, IP Licensing; and
• Shuki Nir—Senior Vice President, Corporate Marketing, and General Manager, Retail.
Executive Summary
Business Overview and Performance. SanDisk is a global leader in flash storage solutions with a strong
history of innovative products. Flash storage technology allows digital information to be stored in a
durable, compact format that retains the data even without power. The Company’s flash-based products
enable businesses and consumers to efficiently and effectively capture, share and preserve digital content.
The Company’s products include flash storage solutions for enterprise data centers and client computing
platforms, as well as removable and embedded flash products for mobile devices, cameras, automotive,
connected home electronics and other applications. The Company’s products are used in a variety of large
markets, and the Company distributes its products globally through commercial and retail channels.
Fiscal Year 2014 Business Highlights.
• Achieved record revenue of $6.63 billion, up 7% compared to fiscal year 2013.
• Delivered non-GAAP operating margin of 28%, resulting in record diluted earnings per share on a
non-GAAP basis of $5.60 per share, up 5% from the non-GAAP diluted earnings per share in fiscal
year 2013.
• Generated free cash flow of $1.5 billion, and returned 103% of free cash flow to stockholders
through $1.3 billion of stock repurchases and $234 million of dividends.
• Increased sales of solid state drive (‘‘SSD’’) solutions by 61% on a year-over-year basis, with SSD
solutions revenue representing 29% of fiscal year 2014 revenue, up from 19% of fiscal year 2013
revenue.
25
Proxy Statement
The Company’s current executive compensation programs are determined and approved by the
Compensation Committee. None of the Named Executive Officers is a member of the Compensation
Committee.
• Completed the strategic acquisition of Fusion-io, a leading developer of flash-based PCIe hardware
and software solutions, enhancing the Company’s portfolio addressing enterprise and hyperscale
data centers.
• Began the volume ramp of the Company’s 15-nanometer memory technology, the industry’s most
advanced NAND flash manufacturing node.
Non-GAAP operating margin differs from what is reported under GAAP. See Annex A for
information on the rationale for the use of non-GAAP financial measures and for a reconciliation of
non-GAAP financial measures to the Company’s results as reported under GAAP.
The Company measures free cash flow as cash flow from operations less investments in property and
equipment and net cash flows related to investments in, and loans to, the Company’s manufacturing
ventures with Toshiba.
The Company uses non-GAAP measures to establish financial and strategic goals and to measure
performance for executive officer compensation because the Company believes that non-GAAP measures
allow management to better evaluate the core operating performance of the Company especially when
comparing to the results of previous periods and to the Company’s business model objectives. For
reconciliation of non-GAAP to GAAP financial measures, see Item 7, ‘‘Management’s Discussion and
Analysis of Financial Condition and Results of Operations—Non-GAAP Financial Measures,’’ of the
Company’s Form 10-K for the fiscal year ended December 28, 2014.
Fiscal Year 2014 Named Executive Officer Compensation Highlights. During fiscal year 2014, a significant
percentage of each Named Executive Officer’s total compensation (as reported in the Summary
Compensation Table) was at-risk, having included (1) annual performance-based cash bonus opportunities,
which become payable only upon the achievement of certain financial and strategic objectives established
by the Compensation Committee, which advance the Company’s near-, medium- and long-term business
objectives and are designed to create sustainable long-term stockholder value, (2) RSUs, the value of
which is directly tied to the value of the Company’s Common Stock over time, and (3) stock options, with
exercise prices equal to the fair market value of the Company’s Common Stock on the grant date, which
become valuable only upon realized share appreciation after the grant date. Information regarding the
compensation mix for the Company’s Chief Executive Officer and the other Named Executive Officers, as
a group, for fiscal year 2014 is set forth below.
26
Fiscal Year 2014 Named Executive Officer Compensation Mix.(1)
Chief Executive Officer
Other Named Executive Officers(2)
Salary
9%
Salary
19%
Bonus(3)
17%
Equity
Awards(4)
62%
Equity
Awards(4)
74%
Bonus(3)
19%
21APR201506253990
Excludes amounts reflected in the ‘‘All Other Compensation’’ column of the table labeled ‘‘Summary
Compensation Table—Fiscal Years 2012-2014’’ below.
(2)
Excludes Mr. Mehrotra, the Company’s Chief Executive Officer, and Mr. Brazeal, who was hired in
December 2014.
(3)
Consists of amounts reflected in the ‘‘Non-Equity Incentive Plan Compensation’’ column for fiscal
year 2014 in the table labeled ‘‘Summary Compensation Table—Fiscal Years 2012-2014’’ below.
(4)
Consists of amounts reflected in the ‘‘Stock Awards’’ and ‘‘Option Awards’’ columns for fiscal year
2014 in the table labeled ‘‘Summary Compensation Table—Fiscal Years 2012-2014’’ below.
A meaningful portion of the compensation for the Company’s Named Executive Officers in fiscal year
2014, with the exception of Mr. Brazeal who was hired in December 2014, was based on a performancebased cash incentive program (the ‘‘2014 bonus program’’), which is tied to the achievement of certain
financial and strategic objectives established by the Compensation Committee at the beginning of the year.
The financial objective for the 2014 bonus program was tied to the Company’s non-GAAP diluted earnings
per share (‘‘EPS’’). The Company’s EPS for fiscal year 2014 was $5.60 per share, which was below the EPS
target that drove the financial objectives portion of the 2014 bonus program, but was above the minimum
EPS target whereby bonus payouts are made. In aggregate, the Company exceeded the target performance
for its strategic objectives.
Consistent with the Company’s compensation philosophy described in more detail below, equity
awards increase each Named Executive Officer’s stake in the Company, thereby reinforcing the incentive
to manage the Company’s business as owners and subjecting a significant portion of the executive officer’s
total compensation to fluctuations in the market price of Common Stock.
Executive Compensation Program Overview
Executive Compensation Philosophy. SanDisk has a long-standing commitment to a compensation
program guided by three basic philosophies: (1) alignment of compensation with stockholder interests,
(2) pay-for-performance, and (3) compensation opportunities that are competitive so that the Company
can attract, retain and motivate top-tier talent. The Compensation Committee sets a significant portion of
the compensation of the executive officers, including the Named Executive Officers, based on their ability
to achieve annual financial and strategic objectives that advance the Company’s long-term business
objectives and that are designed to create sustainable long-term stockholder value.
27
Proxy Statement
(1)
Elements of Compensation Program. As described in more detail below, the material elements of the
Company’s current executive compensation program for the executive officers include the following: a base
salary, an annual cash bonus opportunity, a long-term share-based incentive opportunity, 401(k)
retirement benefits and severance protection for certain terminations of employment. These individual
compensation elements are intended to create a total compensation package for the executive officers that
the Company believes achieves its compensation objectives and provides competitive compensation
opportunities. Furthermore, with the exception of the severance protection, the elements of the executive
officers’ compensation are the same as those of the Company’s broader employee population, which the
Company believes also aligns the interests of the executive officers with the Company as a whole.
Objectives of Compensation Program The table below lists each material element of the Company’s
executive compensation program and the compensation objectives that it is designed to achieve:
Compensation Element
Compensation Objectives Designed to be Achieved
Base Salary
• Attract and retain top-tier talent
Annual Cash Bonus Opportunity
• Pay-for-performance
• Align executive officers’ interests with those of
stockholders
• Attract, retain and motivate top-tier talent
Long-term Share-Based Incentives
• Pay-for-performance
• Align executive officers’ interests with those of
stockholders
• Attract, retain and motivate top-tier talent
401(k) Retirement Benefits
• Attract and retain top-tier talent
Severance and Other Benefits Upon Termination of
Employment in Certain Circumstances
• Attract and retain top-tier talent
The material elements described above include both fixed amounts and variable amounts, which serve
distinct purposes. The Company believes that in order to attract and retain top-caliber executive officers, it
needs to provide them with fixed, predictable benefit amounts that reward their continued service, and the
Company provides its executive officers with base salaries, 401(k) retirement benefits and severance and
other termination benefits, which are generally fixed or predictable.
The variable elements, including the Company’s annual bonus opportunity, are primarily intended to
hold the executive officers, including the Named Executive Officers, accountable for their performance,
although the Company believes the bonus also aligns the interests of the executive officers with those of
the Company’s stockholders and helps the Company attract, retain and motivate the executive officers.
The Company’s long-term share-based incentives are primarily intended to align the interests of the
executive officers, including the Named Executive Officers, with those of the Company’s stockholders,
although the Company believes the share-based incentives also help hold executive officers accountable for
their performance and help the Company attract, retain and motivate executive officers. The annual bonus
opportunity and the long-term share-based incentives are designed to reward performance and the
creation of stockholder value, and therefore the value of these benefits is dependent on performance. The
annual bonus opportunity is paid out on an annual basis to the executive officers, including the Named
Executive Officers, and is designed to reward performance for that period. The long-term equity incentives
are generally designed to reward performance over one or more years.
Continued Commitment to Good Compensation Governance. The Company endeavors to maintain good
governance standards with respect to its executive compensation program. The Company has instituted the
28
following policies, which remained in effect in fiscal year 2014, to ensure that its executive compensation
program is consistent with good governance standards:
• In general, the executive officers are not entitled to guaranteed, non-performance based bonuses or
salary increases.
• The executive officers are not entitled to tax reimbursement or tax gross-up payments in respect of
perquisites or other compensation.
• The Company maintains a clawback policy pursuant to which each Section 16 Officer, including
each Named Executive Officer, may be required to reimburse or forfeit all or a portion of any
cash-based incentive compensation received if the Company’s financial statements are required to
be restated as a result of material non-compliance with any financial reporting requirements.
• To align the interests of the Company’s executive officers with the interests of the Company’s
stockholders, the Company maintains stock ownership guidelines (set forth in the Company’s
Corporate Governance Principles, which are available on the Company’s website) that require that
each executive officer retain a minimum equity ownership interest in the Company. The Company
revised its stock ownership guidelines in March 2014 to, among other things, require certain levels
of outright equity ownership, as discussed in more detail under ‘‘Stock Ownership Guidelines’’
below.
• Perquisites and other personal benefits do not constitute a significant portion of the compensation
for the executive officers. The Company’s executive officers participate in broad-based Companysponsored health and welfare benefits programs on the same basis as other regular employees.
• The Company does not currently offer, nor does the Company have plans to provide, defined
benefit pension arrangements or nonqualified deferred compensation plans or arrangements to its
executive officers.
Comparison to Peer Companies. Consistent with the compensation philosophies described above, the
goal of the Company is to provide its executive officers, including the Named Executive Officers, with a
compensation program that is competitive relative to its industry peers. To that end, the Compensation
Committee evaluates executive compensation relative to compensation paid to similarly situated executive
officers at companies determined to be peer companies of the Company. The Compensation Committee
reviewed and approved the following selected peer companies for fiscal year 2014:
•
•
•
•
•
•
•
Advanced Micro Devices, Inc.
Analog Devices, Inc.
Applied Materials, Inc.
Broadcom Corporation
Freescale Semiconductor, Ltd.
Juniper Networks, Inc.
Lam Research Corporation
•
•
•
•
•
•
•
•
29
LSI Corporation
Marvell Technology Group Ltd.
Micron Technology, Inc.
NetApp, Inc.
NVIDIA Corporation
Seagate Technology PLC
Texas Instruments Incorporated
Western Digital Corporation
Proxy Statement
• The Company’s insider trading policy prohibits the Company’s executive officers from short-selling
the Company’s Common Stock, trading in derivative securities related to the Company’s securities,
including the Company’s Common Stock, or otherwise engaging in activities designed to hedge
against the Company’s Common Stock.
These peer companies were selected using criteria intended to identify companies that: (i) operate in
a similar industry as the Company, (ii) compete with the Company for executive talent, and (iii) are
comparable to the Company in size and growth patterns. In addition, the peer selection process targets
companies that fall within an approximately 0.5x to 2x range of the Company’s revenue and an
approximately 0.3x to 3x multiple of the Company’s market capitalization. Companies that fall outside of
these parameters may be included based on relevance as product and/or labor market competitors.
With the assistance of its independent compensation consultant, the Company adjusted its peer group
to be utilized for fiscal year 2015. The 2015 peer companies were generally selected with an objective that
they meet a majority of the following criteria: (i) operate in a similar industry as the Company, (ii) have at
least a 5% growth in revenue, (iii) have at least 45% of revenue from non-U.S. markets, (iv) have
approximately 0.4x to 2.5x range of the Company’s revenue, (v) have research and development
expenditures of at least 8% of revenue, (vi) have at least 35% gross margin, (vii) own and operate
fabrication plants, and (viii) have multiple selling channels, including retail and commercial. Companies
that fall outside of these parameters may be included based on relevance as product and/or labor market
competitors. The 2015 peer companies are as follows:
•
•
•
•
•
•
•
Advanced Micro Devices, Inc.
Analog Devices, Inc.
Broadcom Corporation
Freescale Semiconductor, Ltd.
Juniper Networks, Inc.
Marvell Technology Group Ltd.
Micron Technology, Inc.
•
•
•
•
•
•
•
NetApp, Inc.
NVIDIA Corporation
Seagate Technology PLC
Symantec Corporation
Texas Instruments Incorporated
VMware, Inc.
Western Digital Corporation
In evaluating competitive compensation levels, the Compensation Committee also refers to survey
data, which is focused on technology-oriented companies and provided by Radford. While the
Compensation Committee evaluates executive officer compensation relative to the market data, the
Compensation Committee does not use a formula for determining compensation for the executive officers,
including the Named Executive Officers, and therefore does not benchmark compensation at any specific
levels relative to the peer companies. In setting compensation for the Named Executive Officers, the
Compensation Committee reviews and considers a multitude of factors, including not only
competitiveness, but also experience levels, performance achieved, specific skills or competencies, the
desired pay mix between near-, medium- and long-term incentives, the Company’s budget, and the Chief
Executive Officer’s recommendation (with respect to executive officers other than himself). In determining
the appropriate levels of compensation to be paid to the executive officers, including the Named Executive
Officers, the Compensation Committee also considers compensation previously realized by the executive
officer in his or her employment with the Company. However, amounts realized from prior compensation
were not a material factor in determining the fiscal year 2014 compensation for the Named Executive
Officers.
Processes and Procedures. The Company’s President and Chief Executive Officer (the ‘‘Chief
Executive Officer’’) recommends to the Compensation Committee for its approval the base salary, annual
bonus and long-term equity compensation levels for the executive officers other than himself, in
accordance with the Compensation Committee charter. At Compensation Committee meetings pertaining
to executive officer compensation, the Company’s Chief Executive Officer presents compensation
recommendations for the executive officers other than himself and explains to the Compensation
Committee the basis and rationale for his recommendations. With respect to his recommendations, the
Company’s Chief Executive Officer considers the scope and responsibility of each executive officer’s
position, the individual performance of each executive officer and the contributions of each executive
officer to the Company’s performance. He also reviews survey data on the compensation of similarly
30
situated executive officers in comparable companies based on size, location and industry, including the
Company’s peer companies, to the extent that there is a similarly situated executive officer. Except for the
Company’s Chief Executive Officer, the Company’s executive officers do not have any role in determining
or recommending the form or amount of compensation provided to the Named Executive Officers other
than providing financial or other information as the Compensation Committee may request from time to
time.
The Company’s Chief Executive Officer, Mr. Mehrotra, does not participate in the Compensation
Committee deliberations that relate to his personal compensation and excuses himself from portions of the
Compensation Committee meetings during which such deliberations occur. During fiscal year 2014,
Mr. Mehrotra attended the portions of the meetings of the Compensation Committee relating to
Company-wide compensation issues and the compensation of the executive officers other than himself.
In fiscal year 2014, the Compensation Committee retained Farient, an outside compensation
consultant, to assist in analyzing the Company’s peer companies for fiscal year 2015 compensation, and to
provide information on compensation-related trends and developments in the Company’s industry and
fiscal year 2015 peer companies, including equity award practices. Compensia, an outside compensation
consultant that the Company had previously engaged, evaluated the competitiveness of the Company’s
executive compensation programs relative to the Company’s fiscal year 2014 peer companies and provided
information on compensation-related trends and developments in the Company’s industry and fiscal year
2014 peer companies, including equity award practices. The Company’s Chief Executive Officer has not
met with Farient or Compensia with respect to his individual compensation. The Compensation
Committee has reviewed its relationship with Compensia and Farient and determined that the services
provided to the Company do not create any conflicts of interest.
Say-on-Pay Results
The Board and management value the opinions of the Company’s stockholders. At the 2014 Annual
Meeting of Stockholders, more than 96% of the votes cast on the say-on-pay advisory vote proposal were
in favor of the Company’s executive compensation program. The Board and the Compensation Committee
reviewed the results of the say-on-pay vote and in light of the approval of a substantial majority of the
Company’s stockholders of the executive compensation program, did not make any material changes to the
executive compensation program. At the 2011 Annual Meeting of Stockholders, approximately 89% of the
31
Proxy Statement
With respect to compensation of each of the executive officers, the Compensation Committee
considers the individual performance of the executive officer, the contributions of the executive officer to
the Company’s performance and the desired pay mix between near-, medium- and long-term incentives
and deliberates to determine an appropriate level of compensation for each executive officer. With respect
to the compensation of each of the executive officers other than the Company’s Chief Executive Officer,
the Compensation Committee also considers the Chief Executive Officer’s recommendations and the basis
and rationale for such recommendations, as well as the scope and responsibility of each executive officer’s
position. The performance of each executive officer is reviewed annually by the Compensation Committee
based on whether various performance objectives were met during the preceding review period and, with
respect to executive officers other than the Company’s Chief Executive Officer, based on the Chief
Executive Officer’s feedback regarding the performance of each executive officer. Each executive officer is
given a performance rating based on the Compensation Committee’s review, which is then used in the
Compensation Committee’s review and analysis of such executive officer’s overall compensation. During
the course of its deliberations, the Compensation Committee may also review data pertaining to executive
officer compensation data from the Company’s peer companies, which data may be prepared and
presented by the Company’s management and/or a compensation consulting firm.
votes cast on the say-on-pay frequency vote proposal were in favor of holding a say-on-pay advisory vote
every year and, consistent with those results, the Board has implemented an annual advisory vote on the
Company’s executive compensation program. The Board and the Compensation Committee recognize that
executive pay practices and notions of sound governance principles continue to evolve, and will continue to
evaluate and adapt the Company’s executive compensation practices.
Elements of the Current Executive Compensation Program
Base Salaries
The Compensation Committee generally reviews the base salaries of the executive officers, including
the Named Executive Officers, in the first quarter of each year. To assist with that review, Compensia
provided the Compensation Committee with a summary of the base salary levels in effect for comparable
executive officers based upon industry surveys as well as the Company’s peer companies (based on their
published prior year’s data). The Compensation Committee has typically considered such summaries, as
well as internal comparables, individual performance and the Company’s financial performance, in
reviewing the executive officers’ base salary levels. The weighting of these factors by the Compensation
Committee has been subjective, and not formulaic. The Compensation Committee does not use a formula
for determining the executive officers’ base salaries and other forms of compensation and does not
benchmark compensation at any specific levels relative to the peer companies.
Based on the subjective factors described above, the Compensation Committee determined it was
appropriate to set annual base salaries for fiscal year 2014 for Mr. Mehrotra, Ms. Bruner, Mr. Sadana, and
Mr. Nir, effective as of February 25, 2014, at $1,000,000, $620,000, $516,000 and $387,000, respectively.
The salary for Mr. Brazeal for fiscal year 2014 was set by the Company’s Chief Executive Officer at
$400,000 in connection with his appointment as Chief Legal Officer and Senior Vice President,
IP Licensing in December 2014. The total base salaries effective for fiscal year 2014 for each of the Named
Executive Officers are as set forth in the ‘‘Salary’’ column of the Summary Compensation Table.
Annual Bonus Awards
Although none of the executive officers, including the Named Executive Officers who are currently
employees of the Company, has an employment agreement or other contractual right to bonus awards for
any given year (other than the change in control agreements entered into with the Named Executive
Officers and the severance benefits agreement entered into with the Company’s Chief Executive Officer),
in recent years, the Company has granted bonus awards to the Named Executive Officers. These bonus
awards were determined based on the achievement of specified performance goals, which were the same
performance goals for the bonus awards provided to the Company’s broader employee population. In
February 2014, the Compensation Committee approved the 2014 bonus program in which the employees,
including the Named Executive Officers, were participants. Bonus awards provided to the Named
Executive Officers under the 2014 bonus program were designed so that they may qualify as ‘‘performancebased’’ for purposes of Section 162(m) of the Internal Revenue Code of 1986, as amended (the ‘‘Code’’),
with respect to Messrs. Mehrotra, Sadana, and Nir. The Named Executive Officers’ awards under the 2014
bonus program are based on a target bonus amount that is expressed as a percentage of base salary. Such
target bonus amounts for each of Mr. Mehrotra, Ms. Bruner, Mr. Sadana, and Mr. Nir were approved by
the Compensation Committee based on its review of comparable bonus opportunities at the Company’s
peer companies, internal comparability with percentage targets of other executive officers and the
executive officer’s level of responsibility, experience and knowledge. Mr. Brazeal was not eligible for an
annual performance-based cash award for fiscal year 2014 as a result of his appointment to his position in
December 2014. The target bonus amounts generally increase as an executive officer’s responsibilities
32
increase, reflecting the Company’s compensation philosophy that as an executive officer’s level of
responsibility increases, a greater portion of that executive officer’s total compensation should be
dependent on the Company’s performance.
In February 2014, the Compensation Committee set the target bonus percentages for certain Named
Executive Officers for fiscal year 2014 as follows: 150% of base salary for Mr. Mehrotra; 100% of base
salary for Ms. Bruner; 90% of base salary for Mr. Sadana; and 65% of base salary for Mr. Nir. The 2014
target bonus percentages were consistent with the target bonus percentages for fiscal year 2013 with the
exception of Mr. Nir’s target bonus percentage, which was 5% higher than in fiscal year 2013. In
accordance with Section 162(m) of the Code, the Compensation Committee established a maximum bonus
amount payable to each of Mr. Mehrotra, Mr. Sadana and Mr. Nir under the 2014 bonus program of 300%
of his target bonus amount in connection with the achievement of the business objectives described below.
The Compensation Committee also established a maximum bonus amount payable to Ms. Bruner under
the 2014 bonus program of 300% of her target bonus amount in connection with the achievement of the
business objectives described below, although the compensation of the principal financial officer is not
subject to Section 162(m) of the Code. Subject to the maximum target bonus amount, the Compensation
Committee has the discretion to vary the individual bonuses based on the performance of the Company
and the individual.
In the aggregate, the Company exceeded the target performance for the strategic objectives. The
Company’s EPS for fiscal year 2014 was $5.60 per share, which was below the EPS target that drove the
financial objectives portion of the 2014 bonus program, but was above the minimum EPS target whereby
bonus payouts are made. Part II, Item 7 ‘‘Management’s Discussion and Analysis of Financial Condition
and Results of Operations—Non-GAAP Financial Measures,’’ of the Company’s Form 10-K for the fiscal
year ended December 28, 2014 includes a discussion of the non-GAAP financial measures used by the
Company. The table within the non-GAAP financial measures discussion reconciles the Company’s
non-GAAP net income to the Company’s GAAP-basis net income and shows how the corresponding
per-share amounts were derived. The discussion following that table also includes a description of the
adjustments shown in the table, including income tax adjustments.
After the completion of fiscal year 2014, the Compensation Committee evaluated the fiscal year 2014
performance of the Company and the individual performance of each Named Executive Officer who was
currently an employee of the Company. As a result of the Company’s achievement against the financial
and strategic objectives described above, each of the Named Executive Officers, with the exception of
Mr. Brazeal, became eligible for the maximum bonus amount of 300% of his or her target bonus amount.
The Compensation Committee also considered the individual performance of the Named Executive
Officers eligible for a bonus award, as follows:
• Mr. Mehrotra—The Compensation Committee considered Mr. Mehrotra’s contributions to the
Company’s fiscal year 2014 financial performance and the overachievement of its 2014 strategic
objectives, as well as his leadership in key decisions about future strategy.
33
Proxy Statement
The amount of bonuses payable under the 2014 bonus program was based on the following: (1) the
Company’s performance during fiscal year 2014 relative to a non-GAAP EPS target, which constituted
60% of the 2014 bonus program, and (2) the Company’s performance relative to strategic objectives, which
collectively constituted 40% of the 2014 bonus program. The strategic objectives approved by the
Compensation Committee related to (1) memory technology in 2D NAND, (2) memory technology in
3D NAND, (3) system technology and product platform competitiveness, (4) strategic OEM customer
ratings on quality and metrics related to sample approvals by strategic OEM customers, (5) diversifying
client SSD business, and (6) growing and diversifying enterprise SSD business.
• Ms. Bruner—The Compensation Committee considered Ms. Bruner’s contributions to the
Company’s financial matters, investor relations and other administrative and infrastructure
functions and corporate management of the Company, including with respect to her leadership on
the integration of Fusion-io.
• Mr. Sadana—The Compensation Committee considered Mr. Sadana’s contributions to the
Company’s overall strategy, and in particular the negotiation and closing of the acquisition of
Fusion-io and its subsequent integration. The Compensation Committee also considered
Mr. Sadana’s leadership in expanding the Company’s venture investments initiative.
• Mr. Nir—The Compensation Committee considered Mr. Nir’s leadership of the Company’s retail
strategy and business, which continued its strong profit profile, market share leadership in key
markets, and introduction of new products. The Compensation Committee also considered
Mr. Nir’s leadership in the Company’s corporate marketing strategy and achievements.
Upon consideration of each of the foregoing company-wide and individual factors, the Compensation
Committee determined that the actual bonus awards for fiscal year 2014 for the Named Executive Officers
eligible for such awards should be as follows: $1,875,000 for Mr. Mehrotra (125% of his target bonus);
$775,500 for Ms. Bruner (125% of her target bonus); $581,000 for Mr. Sadana (125% of his target bonus);
and $315,000 for Mr. Nir (125% of his target bonus). These annual bonuses earned by the Named
Executive Officers for fiscal year 2014 are also set forth in the ‘‘Non-Equity Incentive Plan Compensation’’
column in the Summary Compensation Table.
Clawback Policy on Bonus Awards
The Section 16 Officers, including the Named Executive Officers, are subject to the Company’s
clawback policy. The Company’s clawback policy provides that the Board may require reimbursement or
forfeiture of all or a portion of any bonus compensation paid to such individual to the extent that (i) the
Company’s financial statements are required to be restated as a result of material non-compliance with any
financial reporting requirements under the federal securities laws (other than a restatement due to a
change in financial accounting rules), (ii) as a result of such restatement, a performance measure or
specified performance target which was a material factor in determining the amount of bonus
compensation previously earned by the individual is restated, and (iii) upon a determination by the Board,
a lesser payment of bonus compensation would have been made to the individual based upon the restated
financial results. The Board intends to revisit the Company’s clawback policy once the SEC adopts final
rules implementing the requirements of Section 954 of the Dodd-Frank Act.
Long-Term Share-Based Incentive Awards
The Company’s policy is that the long-term compensation of the executive officers, including the
Named Executive Officers, should be directly linked to the value provided to the Company’s stockholders.
Therefore, 100% of the Named Executive Officers’ long-term compensation is currently awarded in the
form of share-based instruments that are in, or valued by reference to, the Company’s Common Stock. The
Company’s share-based awards have been made in the form of a combination of stock options and RSUs,
although the majority of the share-based awards have historically been stock options. The number of
shares of Common Stock subject to each annual award is intended to create a meaningful opportunity for
stock ownership in light of the Named Executive Officer’s current position with the Company, the
economic value of comparable awards to comparable executive officers at the Company’s peer companies,
the individual’s potential for increased responsibility and promotion over the award term, and the
individual’s performance in recent periods. The Compensation Committee also takes into consideration
the number of unvested share-based incentive awards held by each Named Executive Officer, in order to
34
maintain an appropriate level of equity incentive for that individual. However, the Compensation
Committee does not adhere to any specific guidelines as to the relative equity award holdings of the
Company’s executive officers, including the Named Executive Officers. Furthermore, similar to the setting
of base salaries, the weighting of the above factors is subjective, and the Compensation Committee does
not use a formula to determine the number or value of share-based incentive awards granted to any
executive officer, including the Named Executive Officers.
Timing. The Compensation Committee typically grants long-term share-based incentive awards in
the first quarter of the fiscal year, except for awards to new hires and awards related to the promotion and
retention of current employees. However, there is no formal program, plan or policy in place at the
Company or in the Compensation Committee’s charter with respect to the timing of long-term share-based
incentive award grants, except as set forth below with respect to grants to new employees and related to
promotions and retention. The Compensation Committee has complete discretion as to when it awards
long-term share-based incentive awards. There is also no program, plan or policy related to the timing of
grants to the executive officers in coordination with the release of material nonpublic information.
Long-term share-based incentive awards granted to new hires or to promoted employees occur after the
new hire has joined the Company or, in the case of a promoted employee, after the promotion has been
approved. For a newly hired or promoted executive officer, the associated stock award is granted at the
next meeting of the Compensation Committee. For a newly hired or promoted employee who is not an
executive officer, the associated stock award is granted by the Company’s Special Option Committee or
Secondary Executive Committee which generally takes actions at least once per month.
RSUs. The Compensation Committee grants a portion of the long-term share-based incentive
awards to the executive officers, including the Named Executive Officers, in the form of RSUs. An RSU
represents a contractual right to receive one share of Common Stock if the applicable vesting requirements
are satisfied. The Company has determined that it is advisable to grant RSUs in addition to stock options
(and in lieu of larger stock option grants) in order to minimize stock expense to the Company and dilution
to stockholders as well as to attract and retain the executive officers. RSUs granted in fiscal year 2014
function as a retention incentive as they generally vest and result in the annual issuance of stock over a
four (4) year period following the grant date. In fiscal year 2014, the Compensation Committee granted
RSUs subject to such time-based vesting to each of the Named Executive Officers. The material terms of
these RSUs granted in fiscal year 2014 to the Named Executive Officers are described below under
‘‘Grants of Plan-Based Awards in Fiscal 2014.’’
In February 2014, the Compensation Committee granted RSUs and stock options to each of
Mr. Mehrotra, Ms. Bruner, Mr. Sadana and Mr. Nir, as described under ‘‘Grants of Plan-Based Awards in
Fiscal 2014.’’ In December 2014, in connection with his hire, Mr. Brazeal was granted stock options by the
Company’s Chief Executive Officer, prior to Mr. Brazeal’s appointment as an executive officer, and RSUs
by the Compensation Committee upon his appointment as an executive officer. In determining such grants,
35
Proxy Statement
Stock Options. The Compensation Committee grants a portion of the long-term share-based
incentive awards to the executive officers, including the Named Executive Officers, in the form of stock
options with an exercise price that is equal to the fair market value of the closing price of the Common
Stock on the grant date. Thus, the Named Executive Officers will only realize value on their stock options
if the Company’s stockholders realize value on their shares. The stock options also function as a retention
incentive for the Company’s executive officers as they generally vest and become exercisable over a four
(4) year period following the grant date. In fiscal year 2014, the Compensation Committee granted stock
options to each of the Named Executive Officers. The material terms of these stock options granted in
fiscal year 2014 to the Named Executive Officers are described below under ‘‘Grants of Plan-Based
Awards in Fiscal 2014.’’
the Compensation Committee and the Company’s Chief Executive Officer, as applicable, considered the
following general factors:
• The economic value of the share-based awards granted to comparable executive officers at the
Company’s peer companies;
• The proportional amount and value of the Named Executive Officer’s unvested share-based
incentive awards in comparison to the other Named Executive Officers;
• The Company’s financial performance in fiscal year 2013 (other than for Mr. Brazeal); and
• The Named Executive Officer’s expected future contributions to the Company.
The Compensation Committee and the Company’s Chief Executive Officer, as applicable, also considered
the following individual-specific factors:
• Mr. Mehrotra—The Compensation Committee considered Mr. Mehrotra’s individual performance
in the recent period related to the Company’s financial, operational and strategic performance and
his continued leadership of the Company.
• Ms. Bruner—The Compensation Committee considered Ms. Bruner’s position and responsibilities
as Executive Vice President, Administration and Chief Financial Officer and individual
performance in the recent period related to the Company’s financial matters, investor relations and
other administrative and infrastructure functions, as well as corporate management of the
Company.
• Mr. Sadana—The Compensation Committee considered Mr. Sadana’s position and responsibilities
in his then current role as Executive Vice President and Chief Strategy Officer and individual
performance related to the Company’s overall strategy and mergers and acquisitions, as well as
corporate management of the Company.
• Mr. Brazeal—The Compensation Committee and the Company’s Chief Executive Officer
considered Mr. Brazeal’s position and responsibilities as Chief Legal Officer and Senior Vice
President, IP Licensing.
• Mr. Nir—The Compensation Committee considered Mr. Nir’s position and responsibilities as
Senior Vice President, Corporate Marketing, and General Manager, Retail, and individual
performance related to the Company’s corporate marketing activities, retail strategy, as well as the
performance of the Company’s retail business.
Severance and Other Benefits Upon Termination of Employment or Change in Control
In order to achieve the Company’s compensation objective of attracting, retaining and motivating
qualified executive officers, the Company believes that it needs to provide the executive officers with
severance protections that are consistent with the severance protections offered by its peer companies. The
Company’s philosophy is that a contractual right to severance pay should exist for certain executive
officers, including the Named Executive Officers, only upon certain terminations of employment in
connection with a change in control of the Company, and for the Company’s Chief Executive Officer, upon
certain other terminations of employment.
36
Severance Benefits Agreement Upon Termination of Employment. In connection with his promotion to
Chief Executive Officer in January 2011, Mr. Mehrotra and the Company entered into a separate
severance agreement not related to a change in control of the Company, pursuant to which Mr. Mehrotra
is entitled to severance benefits upon his termination without ‘‘cause’’ or voluntary resignation for ‘‘good
reason’’ (as those terms are defined in the severance agreement) without regard to whether a change in
control has occurred. The benefits payable to Mr. Mehrotra under his severance agreement are generally
the same as provided for under his change in control agreement, which is discussed below, with the
exception that the severance payment is two times his base salary without a multiple of bonus and he is still
entitled to a pro-rata cash incentive bonus for the year in which his termination of employment has
occurred. Only the equity awards which would vest over the twenty-four (24) months following
Mr. Mehrotra’s termination of employment would accelerate upon his termination of employment (instead
of all of Mr. Mehrotra’s then outstanding equity awards as provided for under his change in control
agreement). In the event that Mr. Mehrotra is eligible to receive severance benefits under both his
severance agreement and his change in control agreement, he will be entitled only to the severance
benefits provided under his change in control agreement.
None of the change in control agreements of the Named Executive Officers provide for a tax
‘‘gross-up’’ obligation by the Company in the event of any excise tax payable as a result of Section 280G of
the Code. Instead, the change in control agreements provide for a ‘‘Best Results’’ methodology (which
means that if a Named Executive Officer would be subject to such excise tax, any payments and benefits
must be reduced to avoid triggering the excise tax if the reduction would result in a greater after-tax
amount to the executive officer compared to the amount the executive officer would receive net of the
excise tax if no reduction were made). The change in control agreements are for a term of four (4) years
37
Proxy Statement
Executive Severance Benefits Agreement Upon a Change in Control. Uncertainty regarding the
continued employment of the executive officers upon the occurrence or potential occurrence of a change
in control transaction results from the fact that many change in control transactions result in significant
organizational changes, particularly at the senior executive level. However, the Company generally does
not believe that the executive officers should be entitled to cash severance benefits merely because a
change in control transaction occurs. In order to encourage the executive officers to remain employed with
the Company during an important time when their prospects for continued employment following the
transaction are often uncertain, the Company provides executive officers with severance benefits pursuant
to a change in control agreement, if their employment is terminated by the Company without ‘‘cause’’ or by
the executive officer for ‘‘good reason’’ (as those terms are defined in the agreements) within three
(3) months before or eighteen (18) months following a change in control (a ‘‘Qualifying Termination’’).
The Company believes that a protected period of three (3) months before and eighteen (18) months
following a change in control is in line with the severance protections provided to comparable executive
officers at the Company’s peer companies. Given that none of the Named Executive Officers has an
employment agreement that provides for a fixed position or duties, or for a fixed base salary or fixed
annual bonus, absent some form of severance trigger upon ‘‘good reason,’’ potential acquirers could
constructively terminate a Named Executive Officer’s employment and avoid paying severance. For
example, following a change in control, an acquirer could materially demote a Named Executive Officer,
reduce significantly his or her salary and/or eliminate his or her annual bonus opportunity to force the
Named Executive Officer to terminate his or her own employment and thereby avoid paying severance.
The Company believes that constructive terminations in connection with a change in control are
conceptually the same as actual terminations, and that acquirers would otherwise have an incentive to
constructively terminate Named Executive Officers to avoid paying severance. As a result, the change in
control agreements the Company has entered into with its Named Executive Officers permit the Named
Executive Officers to terminate their employment in connection with a change in control for certain ‘‘good
reasons’’ that the Company believes result in the constructive termination of the Named Executive
Officers’ employment.
and, with the exception of Mr. Mehrotra’s agreement, provide for a severance payment of one and one-half
times the annual base salary and target bonus, as well as eighteen (18) months of Company-paid medical
insurance, in the event of a Qualifying Termination. Under Mr. Mehrotra’s change in control agreement in
effect through December 31, 2014, in the event of a Qualifying Termination, the severance payment is two
times his annual base salary and target bonus and his entitlement to Company-paid medical insurance is
for twenty-four (24) months. On December 21, 2014, the Company entered into a new change in control
agreement with Mr. Mehrotra, effective as of January 1, 2015, pursuant to which, in the event of a
Qualifying Termination, the severance payment is three times his annual base salary and target bonus and
his entitlement to Company-paid medical insurance is for twenty-four (24) months.
As discussed under ‘‘Annual Bonus Awards’’ and ‘‘Subsequent Committee Actions,’’ the
Compensation Committee has established a target bonus percentage for each Named Executive Officer.
Severance payments under the change in control agreements are based on these target bonus percentages
as in effect for the calendar year in which the change in control occurs, regardless of actual performance
and regardless of whether the Compensation Committee had the discretion to award a lower bonus or no
bonus. The Company believes that the use of target bonuses for this purpose is appropriate to provide
certainty to the executive officers and to avoid disputes concerning the calculation of severance payments.
The change in control agreements with the Named Executive Officers also provide certain other
severance protections, such as (i) accelerated vesting of outstanding equity awards (with accelerated
options to remain exercisable for twelve (12) months following termination, subject to the maximum term
of the option); and (ii) executive outplacement benefits for twelve (12) months following termination
(including resume assistance, career evaluation and assessment, individual career counseling, access to one
or more on-line employment databases, and administrative support). Similar to cash severance benefits,
the Company believes these other severance benefits are consistent with the severance arrangements of the
Company’s peer companies and provide the Named Executive Officers with financial and personal security
during a period of time when they are likely to be unemployed.
Please see ‘‘Potential Payments Upon Termination or Change in Control’’ below for a description of
the potential payments that may be made to the Named Executive Officers in connection with their
termination of employment or a change in control.
401(k) Retirement Benefits
The Company provides a retirement benefit opportunity to its executive officers, including the Named
Executive Officers, under the terms of its tax-qualified 401(k) plan. In fiscal year 2014, the Company made
a discretionary matching contribution on behalf of each participant equal to one-half of the first 6% of
compensation contributed to the plan by the participant. The Named Executive Officers participate in the
plan on the same terms as the Company’s other participating employees. The Company does not maintain
any other deferred compensation (including nonqualified deferred compensation), defined benefit or
supplemental retirement plans for its Named Executive Officers.
Subsequent Committee Actions
In February 2015, the Compensation Committee established performance targets and a maximum
individual bonus payout amount in connection with the Company’s fiscal year 2015 annual cash incentive
program (the ‘‘2015 bonus program’’) for the executive officers including the Named Executive Officers.
The performance targets under the 2015 bonus program relate to a non-GAAP EPS goal and certain
strategic objectives, the attainment of which the Compensation Committee will evaluate following the end
of fiscal year 2015. For fiscal year 2015, based on the factors discussed above under ‘‘Base Salaries,’’ the
Compensation Committee set the fiscal year 2015 base salaries of the Named Executive Officers, with the
38
exception that there were no changes to the base salary of Mr. Brazeal which was determined in
connection with his hire in December 2014, as follows: Mr. Mehrotra, $1,050,000; Ms. Bruner, $651,000;
Mr. Sadana, $542,000; and Mr. Nir, $420,000. These base salary adjustments, effective as of February 23,
2015, reflect increases from the most recent salaries for each of these Named Executive Officers of 5.0%,
5.0%, 5.0% and 8.5%, respectively. The target bonus percentages remained the same for each of the
Named Executive Officers. Mr. Brazeal’s target bonus percentage for fiscal year 2015 is 70% of his annual
base salary, which was established in connection with his hire in December 2014.
In February 2015, the Compensation Committee approved the grant of long-term share-based
incentive awards to each of the Named Executive Officers, except for Mr. Brazeal who received a grant in
connection with his hire in December 2014. The awards were in the form of RSUs and stock options. The
stock options vest and become exercisable over a four (4) year period following the grant date. The RSUs
vest and result in the annual issuance of stock over a four (4) year period following the grant date.
Stock Ownership Guidelines
Company Position
Director . . . . . . . . . . .
Chief Executive Officer .
Executive Vice President
Senior Vice President . .
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Required
Equity Stake
Required Outright
Equity Ownership
5,000
65,000
25,000
15,000
3,000
16,250
6,250
3,750
The Company’s Directors and executive officers complied with the stock ownership guidelines in
effect in fiscal year 2014.
The Company’s stock ownership guidelines are set forth in the Company’s Corporate Governance
Principles, which are available on the Company’s website.
Insider Trading Policy
The Company’s insider trading policy prohibits the Company’s employees, including executive
officers, from short-selling the Company’s Common Stock, trading in derivative securities related to the
Company’s securities, including the Company’s Common Stock, or otherwise engaging in activities
designed to hedge against the Company’s Common Stock.
39
Proxy Statement
Each Director and executive officer is required to beneficially own Common Stock (within the
meaning of Rule 13d-3 under the Exchange Act), with a minimum stock ownership requirement, if any, as
determined by the Board from time to time. In 2014, the Company revised its stock ownership guidelines,
as set forth in the Company’s Corporate Governance Principles, to establish required minimum equity
stakes (calculated by including shares of Company Common Stock owned outright and half a share for
each Company unvested RSU) and outright equity ownership (defined as shares of Company Common
Stock owned outright) for Directors and executive officers. The revised stock ownership guidelines provide
for a phase-in period of five years from appointment as a Director or executive officer or from
modification of the stock ownership guidelines, provided that if a Director or executive officer achieves
compliance with either (or both, as the case may be) of the required equity stake and the required outright
equity ownership prior to expiration of the applicable phase-in period, then the Director or executive
officer must continue to comply with such holding requirement(s) as if the applicable phase-in period had
expired. The revised stock ownership guidelines contain the following required minimum equity stakes and
outright equity ownership:
Section 162(m) Policy
Section 162(m) of the Code disallows a tax deduction to publicly-held companies for compensation
paid to certain executive officers, to the extent that compensation exceeds $1 million per officer in any
year. The limitation applies only to compensation which is not considered to be performance-based, either
because it is not tied to the attainment of performance milestones or because it is not paid pursuant to a
stockholder-approved plan. The Compensation Committee believes that in establishing the cash and equity
incentive compensation programs for the Company’s executive officers, the potential deductibility of the
compensation payable under those programs should be only one of a number of relevant factors taken into
consideration, and not the sole governing factor. Accordingly, the Compensation Committee may provide
one or more executive officers with the opportunity to earn incentive compensation, whether through cash
bonus programs tied to the Company’s financial performance or share-based awards in the form of
restricted stock, RSUs or other forms of equity compensation, which may be in excess of the amount
deductible by reason of Section 162(m) or other provisions of the Code. The Compensation Committee
believes it is important to maintain incentive compensation at the requisite level to attract and retain the
executive officers essential to the Company’s financial success, even if all or part of that compensation may
not be deductible by reason of the Section 162(m) limitation.
Accounting for Share-based Compensation
The Compensation Committee takes accounting considerations into account in designing
compensation plans and arrangements for the Company’s executive officers, other employees, and
Directors. Chief among these is ASC 718, the standard which governs the accounting treatment of sharebased compensation awards.
ASC 718 requires the Company to measure and record in the Company’s consolidated statement of
operations all share-based payments to executive officers, employees, and Directors based on their grant
date fair values. The application of ASC 718 involves judgment in the determination of inputs into the
Black-Scholes-Merton valuation model that the Company uses to determine the fair value of stock options.
These inputs are based upon assumptions as to the volatility of the underlying stock, risk free interest rates,
dividend yields, and the expected term of the options. As required under GAAP, the Company reviews its
valuation assumptions periodically, and, as a result, the Company’s valuation assumptions used to value
stock options granted in future periods may vary from the valuation assumptions the Company has used
previously.
ASC 718 also requires the Company to recognize the compensation cost of share-based payments
based upon the grant date fair value of the award in the Company’s consolidated statement of operations
over the period that an employee or Director is required to render service in exchange for the award
(which, generally, will correspond to the award’s vesting schedule). This calculation is performed for
accounting purposes and reported in the compensation tables below for the Company’s executive officers
and Directors, even though the Company’s executive officers and Directors may never realize any value
from their awards.
40
COMPENSATION COMMITTEE REPORT
The information contained in this report shall not be deemed to be ‘‘soliciting material’’ or to be ‘‘filed’’
with the SEC, nor shall such information be incorporated by reference into any future filings with the SEC, or
subject to the liabilities of Section 18 of the Exchange Act, except to the extent that the Company specifically
incorporates it by reference into a document filed under the Securities Act or the Exchange Act.
The Compensation Committee has reviewed and discussed with management the disclosures
contained in the ‘‘Compensation Discussion and Analysis’’ of this Proxy Statement. Based upon this review
and the Company’s discussions, the Compensation Committee has recommended to the Company’s Board
that this ‘‘Compensation Discussion and Analysis’’ be included in this Proxy Statement.
The foregoing report is provided by the following Non-Employee Directors, who constituted the
Compensation Committee and participated in the review, discussions and recommendation referred to
above with respect to the ‘‘Compensation Discussion and Analysis’’ of this Proxy Statement:
Compensation Committee of the Board of Directors
Irwin Federman (Chair)
Steven J. Gomo
Eddy Hartenstein
D. Scott Mercer
Proxy Statement
41
EXECUTIVE COMPENSATION
Summary Compensation Table—Fiscal Years 2012—2014
The following table presents information regarding compensation of the Named Executive Officers
for services rendered during fiscal years 2014, 2013 and 2012.
Name and Principal Position
Year
Salary
($)
Bonus
($)
Stock
Awards
($)(1)
Option
Awards
($)(1)
Non-Equity
Incentive
Plan
All Other
Compensation Compensation
($)(2)
($)(3)
Total
($)
Sanjay Mehrotra, . . . . . . 2014 1,028,846
President & Chief
2013 946,134
2012 880,769
Executive Officer(4)
—
—
—
4,661,875 3,748,988
3,231,875 3,296,606
2,389,500 2,709,615
1,875,000
3,063,750
661,500
184,254
100,218
24,852
11,498,963
10,638,583
6,666,236
Judy Bruner, . . . . . . . . . 2014
Executive Vice President, 2013
Administration & Chief 2012
Financial Officer
639,135
593,516
561,808
—
—
—
1,305,325
904,925
788,535
954,634
853,477
836,892
775,500
1,275,000
276,800
59,100
32,605
11,567
3,733,694
3,659,523
2,475,602
Sumit Sadana, . . . . . . . . 2014
Executive Vice President, 2013
Chief Strategy Officer
2012
and General Manager,
Enterprise Solutions
532,000
494,757
430,769(5)
—
—
—
932,375
646,375
1,731,625
681,881
609,626
634,009
581,000
960,000
211,000
56,902
32,049
9,474
2,784,158
2,742,807
3,016,877
30,769 100,000(7) 1,481,850
605,223
—
104
2,217,946
572,780
315,000
33,017
2,101,606
Mark Brazeal, . . . . . . . . 2014
Chief Legal Officer and
Senior Vice President,
IP Licensing(6)
Shuki Nir, . . . . . . . . . . . 2014
Senior Vice President,
Corporate Marketing,
and General Manager,
Retail
397,614
—
783,195
(1)
The amounts shown represent the full grant date fair value of the stock awards and option awards granted to the
Named Executive Officers during the fiscal year as computed in accordance with ASC 718. For a discussion of the
assumptions and methodologies used to calculate the valuations of the stock awards and option awards, please
see the discussion of stock awards and option awards contained in Note 10, ‘‘Stockholders’ Equity and ShareBased Compensation,’’ of the Notes to Consolidated Financial Statements in Item 8 ‘‘Financial Statements and
Supplementary Data,’’ of the Company’s Form 10-K for the fiscal year ended December 28, 2014 filed with the
SEC on February 10, 2015. Under U.S. generally accepted accounting principles (‘‘GAAP’’), compensation
expense with respect to stock awards and option awards granted to the Company’s employees is generally
recognized over the vesting periods applicable to the awards.
(2)
As described in the ‘‘Compensation Discussion and Analysis’’ under ‘‘Elements of the Current Executive
Compensation Program—Annual Bonus Awards,’’ the Named Executive Officers received bonus awards in fiscal
years 2012, 2013 and 2014, in the amounts disclosed. Mr. Brazeal was not eligible for a bonus award for fiscal year
2014 as a result of his appointment to his position in December 2014.
(3)
The amounts shown include matching contributions to the Company’s 401(k) Plan on behalf of certain Named
Executive Officers, imputed income from term life insurance coverage, and dividends accrued on unvested RSUs.
(4)
As an employee-Director, Mr. Mehrotra did not receive additional compensation for his services as a Director in
fiscal years 2012, 2013 or 2014.
(5)
Salary earned in fiscal year 2012 reflects an increased annual base salary of $475,000 per year, effective as of
September 13, 2012, in connection with Mr. Sadana’s promotion to Executive Vice President and Chief Strategy
Officer.
(6)
Amounts shown for Mr. Brazeal are for less than a full year as Mr. Brazeal joined the Company on December 1,
2014. Mr. Brazeal was appointed as an executive officer of the Company on December 12, 2014.
(7)
The amount shown reflects a sign-on bonus, which was paid in January 2015.
42
Compensation of Named Executive Officers
The Summary Compensation Table above quantifies the value of the different forms of compensation
earned by or awarded to the Named Executive Officers in fiscal years 2014, 2013 and 2012. The primary
elements of each Named Executive Officer’s total compensation reported in the table are base salary, an
annual cash incentive award in the form of either a bonus or a non-equity incentive plan compensation
award and long-term equity incentives consisting of stock options and RSUs. The Named Executive
Officers also earned or were paid the other benefits listed in the ‘‘All Other Compensation’’ column of the
Summary Compensation Table, as further described in footnotes to the table.
The Summary Compensation Table should be read in conjunction with the tables and narrative
descriptions that follow. A description of the material terms of each Named Executive Officer’s base salary
and annual bonus is provided immediately following this paragraph. The Grants of Plan-Based Awards in
Fiscal Year 2014 table, and the description of the material terms of the RSUs and stock options granted in
fiscal year 2014 that follows the table, provides information regarding the long-term equity incentives
awarded to the Named Executive Officers in fiscal year 2014. The Outstanding Equity Awards at Fiscal
2014 Year-End table and the Option Exercises and Stock Vested in Fiscal Year 2014 table provide further
information on the Named Executive Officers’ potential realizable value and actual value realized with
respect to their equity awards. The discussion of the potential payments due upon a termination of
employment or change in control that follows in ‘‘Change of Control Benefits Agreements with Named
Executive Officers’’ is intended to further explain the potential future payments that are, or may become,
payable to the Named Executive Officers under certain circumstances.
As indicated above, none of the Named Executive Officers is employed pursuant to an employment
agreement. As a result, their base salary and bonus opportunities are not fixed by contract. Instead,
generally in the first quarter of each fiscal year, the Compensation Committee establishes the base salary
level for each of the Named Executive Officers. In making its determination, the Compensation
Committee considers the factors discussed above under ‘‘Elements of the Current Executive
Compensation Program—Base Salaries.’’ After the completion of fiscal year 2014, the Compensation
Committee evaluated the performance of the Company and the individual performance of each Named
Executive Officer during the year, and made bonus payments in March 2015 to each of the Named
Executive Officers with respect to fiscal year 2014. The material terms of the bonuses paid with respect to
fiscal year 2014 are described above under ‘‘Elements of the Current Executive Compensation Program—
Annual Bonus Awards.’’
Consistent with the Company’s philosophy that a substantial portion of compensation should be
contingent on the Company’s performance, equity and non-equity incentive compensation, including bonus
amounts, for Named Executive Officers in fiscal year 2014, the value of which, as described below under
‘‘Description of Plan-Based Awards,’’ is significantly dependent upon Company performance, comprised a
large percentage of total compensation. The Company believes this allocation of base salary and incentive
compensation in proportion to total compensation is appropriate to balance the Company’s dual goals of
aligning the interests of executives and stockholders and providing predictable benefit amounts that reward
an executive’s continued service.
43
Proxy Statement
Description of Employment Agreements, Salary and Bonus Amounts
Grants of Plan-Based Awards in Fiscal Year 2014
The following table presents information regarding the equity incentive awards granted to the Named
Executive Officers during fiscal year 2014 under the 2013 Plan. The material terms of each grant are
described below under ‘‘Description of Plan-Based Awards.’’
Name
Sanjay Mehrotra . . . .
Judy Bruner . . . . . . .
Sumit Sadana . . . . . .
Grant
Date
2/18/2014
2/18/2014
2/18/2014
All Stock All Option
Awards:
Awards:
Grant Date
Estimated Possible Payouts under Number
of Number of Exercise or Fair Value of
Non-Equity Incentive Plan
Shares of Securities Base Price of Stock and
Awards
Stock or Underlying
Option
Option
Threshold
Target
Maximum
Units
Options
Awards
Awards
(1)
(1)
(1)
($)
($)
($)
(#)
(#)
($/Sh)
($)(2)
—
2/18/2014
2/18/2014
2/18/2014
2/18/2014
2/18/2014
2/18/2014
Mark Brazeal . . . . . .
12/5/2014
12/12/2014
Shuki Nir . . . . . . . . .
2/18/2014
2/18/2014
2/18/2014
1,500,000 4,500,000
620,000 1,860,000
—
464,400 1,393,200
62,500
17,500
12,500
15,000
—
251,550
754,650
10,500
187,500
74.59
3,748,988
4,661,875
52,500
74.59
954,634
1,305,325
37,500
74.59
681,881
932,375
25,000
104.47
605,223
1,481,850
31,500
74.59
572,780
783,195
(1)
Under the 2014 bonus program, each Named Executive Officer is eligible for a maximum bonus amount equal to
300% of his or her target bonus upon the achievement of any one of the objectives established under the 2014
bonus program. However, the Compensation Committee has the ability to exercise its discretion to adjust the
actual payout to a lesser amount or to eliminate the bonus payout entirely. As a matter of practice, the
Compensation Committee generally exercises discretion to pay each executive officer a lesser amount upon
consideration of the actual achievement of the financial and strategic objectives in the fiscal year, the relative
weightings assigned to the financial and strategic objectives by the Compensation Committee, the individual
performance of the executive officer, and other factors as described under ‘‘Compensation Discussion and
Analysis—Elements of the Current Executive Compensation Program—Annual Bonus Awards.’’ Amounts under
‘‘Threshold’’ reflect that no payouts would have been payable under the 2014 bonus program if the Compensation
Committee determined that actual achievement was sufficiently low compared against the established objectives
under the 2014 bonus program and exercised its discretion to eliminate the bonus payout entirely. Amounts
under ‘‘Target’’ reflect the target bonus amount, which would have been paid to the executive officer if each of
the objectives had been achieved at 100% and the individual performance of each executive officer met his or her
specified target levels, and the Compensation Committee had exercised its discretion accordingly, which, for each
executive officer, would have been 100% of his or her target bonus. Actual bonuses paid under the 2014 bonus
program are reflected in the ‘‘Non-Equity Incentive Plan Compensation’’ column of the table labeled ‘‘Summary
Compensation Table’’ above. Mr. Brazeal was not eligible for a bonus award for fiscal year 2014 as a result of his
appointment to his position in December 2014.
(2)
The amounts represent the full grant date fair value of the stock awards and option awards granted in fiscal year
2014 as computed in accordance with ASC 718. For a discussion of the assumptions and methodologies used to
calculate the valuations of the stock awards and option awards, please see the discussion of stock awards and
option awards contained in Note 10, ‘‘Stockholders’ Equity and Share-Based Compensation,’’ of the Notes to
Consolidated Financial Statements in Item 8 ‘‘Financial Statements and Supplementary Data,’’ of the Company’s
Form 10-K for the fiscal year ended December 28, 2014 filed with the SEC on February 10, 2015. Under GAAP,
compensation expense with respect to stock awards and option awards granted to the Company’s employees is
generally recognized over the vesting periods applicable to the awards.
44
Description of Plan-Based Awards
All actual non-equity incentive plan payouts were made under the 2014 bonus program and are
disclosed in the Summary Compensation Table in the column entitled ‘‘Non-Equity Incentive Plan
Compensation.’’
During fiscal year 2014, each Named Executive Officer was awarded time-based RSU and stock
option awards. Each of these awards was granted under, and is subject to the terms of, the 2013 Plan. The
2013 Plan is administered by the Compensation Committee. The Compensation Committee has authority
to interpret the provisions and make all required determinations under the 2013 Plan. This authority
includes making required proportionate adjustments to outstanding awards upon the occurrence of certain
corporate events such as reorganizations, mergers and stock splits and making provision to ensure that any
tax withholding obligations incurred in respect of awards are satisfied. Awards granted under the 2013 Plan
are generally transferable only to a beneficiary of a Named Executive Officer upon his or her death.
However, the Compensation Committee may establish procedures for the transfer of awards to other
persons or entities, provided that such transfers comply with applicable securities laws and, with limited
exceptions set forth in the plan document, are not made for value.
Restricted Stock Units
Each RSU reported in the table above and granted to the Named Executive Officers in fiscal year
2014 represents a contractual right to receive one share of the Company’s Common Stock if the vesting
requirements described below are satisfied. RSUs are credited to a bookkeeping account established by
the Company on behalf of each Named Executive Officer receiving such an award. The RSUs are subject
to a four (4) year vesting schedule, with 25% of the units vesting annually from the vesting commencement
date. Outstanding RSUs, however, may terminate earlier in connection with a change in control
transaction or a termination of the Named Executive Officer’s employment. Subject to any accelerated
vesting that may apply, the unvested portion of the RSU will immediately terminate upon a termination of
the Named Executive Officer’s employment.
RSUs will generally be paid in an equivalent number of shares of the Company’s Common Stock as
they vest. The Named Executive Officers are not entitled to voting rights with respect to the RSUs.
However, the Named Executive Officers are entitled to the following dividend equivalent rights with
respect to the RSUs. If the Company pays a cash dividend on its Common Stock and the dividend record
date occurs after the grant date and before all of the RSUs have either been paid or terminated, then the
Company will credit the Named Executive Officer’s bookkeeping account with an amount equal to (i) the
per-share cash dividend paid by the Company on its Common Stock with respect to the dividend record
date, multiplied by (ii) the total number of outstanding and unpaid RSUs (including any unvested RSUs)
as of the dividend record date. These dividend equivalents will be subject to the same vesting, payment and
45
Proxy Statement
Under the terms of the 2013 Plan, if there is a change in control of the Company, each Named
Executive Officer’s outstanding share-based awards granted under the plan will generally become fully
vested and, in the case of options, exercisable, to the extent such outstanding awards are not substituted or
assumed in connection with the transaction. Any options that would vest in connection with a change in
control generally must be exercised prior to the change in control, or they will be canceled in exchange for
the right to receive a cash payment in connection with the change in control transaction. In addition, if
there is a change in control of the Company, the Compensation Committee may terminate the
performance period applicable to the cash incentive award and pro-rate (based on the number of days
during the performance period prior to the transaction) the bonus and performance objectives based on
year-to-date performance.
other terms and conditions as the original RSUs to which they relate (except that the dividend equivalents
may be paid in cash or such other form as the plan administrator may deem appropriate).
Stock Options
Each stock option reported in the table above was granted with a per-share exercise price equal to the
fair market value of a share of Common Stock on the grant date. For these purposes, and in accordance
with the terms of the 2013 Plan and the Company’s option grant practices, the fair market value is equal to
the closing price of a share of Common Stock on NASDAQ on the applicable grant date.
Each stock option granted to the Named Executive Officers in fiscal year 2014 is subject to a four
(4) year vesting schedule, with 25% of the option vesting on first anniversary of the vesting commencement
date, and the remaining 75% of the option vesting in twelve (12) substantially equal installments on each
successive three (3) month anniversary thereafter. Once vested, each stock option will generally remain
exercisable until its normal expiration date. Each of the stock options granted to the Named Executive
Officers in fiscal year 2014 has a term of seven (7) years. Outstanding options, however, may terminate
earlier in connection with a change in control transaction or a termination of the Named Executive
Officer’s employment. Subject to any accelerated vesting that may apply, the unvested portion of the stock
option will immediately terminate upon a termination of the Named Executive Officer’s employment. The
Named Executive Officer will generally have three (3) months to exercise the vested portion of the stock
option following a termination of employment. This period is extended to twelve (12) months if the
termination is on account of the Named Executive Officer’s death or permanent disability. However, if a
Named Executive Officer’s employment is terminated by the Company for ‘‘misconduct’’ (as determined
under the plan), outstanding stock options (whether vested or unvested) will immediately terminate.
The stock options granted to the Named Executive Officers during fiscal year 2014 do not include any
dividend or dividend equivalent rights.
46
Outstanding Equity Awards at Fiscal 2014 Year-End
The following table presents information regarding the outstanding share-based awards held by each
Named Executive Officer as of December 28, 2014, including the vesting dates for the portions of these
awards that had not vested as of that date. Additional information regarding these awards is presented in
the footnotes below and in the table below under ‘‘Option Exercises and Stock Vested in Fiscal Year 2014.’’
Name
(a)
Sanjay Mehrotra . . . .
Option Awards(1)
Stock Awards(2)
Number of
Number of
Number of Market Value
Securities
Securities
Shares or of Shares or
Underlying
Underlying
Units of
Units of
Unexercised Unexercised
Option
Option
Stock That Stock That
Option
Options (#) Options (#) Exercise Expiration Stock Award Have Not
Have Not
Grant Date Exercisable Unexercisable Price ($)
Date
Grant Date Vested (#) Vested ($)(3)
(b)
(c)
(d)
(e)
(f)
(g)
(h)
(i)
1/3/2011
2/22/2011
2/17/2012
2/15/2013
2/18/2014
Totals . . . . . . . . . .
Judy Bruner . . . . . .
Totals . . . . . . . . . .
Sumit Sadana . . . . . .
2/22/2011
2/17/2012
2/15/2013
2/18/2014
12/5/2014
Totals . . . . . . . . . .
Shuki Nir . . . . . . . .
Totals . . . . . . . . . .
(1)
—
360,469
3,712
3,094
22,968
—
29,774
Totals . . . . . . . . . .
Mark Brazeal . . . . . .
16,875(4)
3,750(5)
46,875(6)
105,469(7)
187,500(8)
2/22/2011
2/17/2012
2/15/2013
2/18/2014
1/3/2011
2/22/2011
2/17/2012
2/15/2013
2/18/2014
15,000(10)
3,334(11)
25,000(12)
46,875(14)
62,500(15)
152,709
(5)
3,713
15,469(6)
29,532(7)
52,500(8)
48.85
47.79
51.71
74.59
2/22/2011
2/17/2012
2/15/2013
2/18/2014
101,214
(5)
1,237
—
—
—
1,238
11,719(6)
21,094(7)
37,500(8)
1,237
71,551
(9)
—
25,000
—
25,000
1
—
—
—
1,238(5)
5,625(6)
17,719(7)
31,500(8)
1
51.24
48.85
47.79
51.71
74.59
56,082
48.85
47.79
51.71
74.59
104.47
48.85
47.79
51.71
74.59
2/22/2011
2/17/2012
9/13/2012
2/15/2013
2/18/2014
12/12/2014
2/22/2011
2/17/2012
2/15/2013
2/18/2014
1,519,650
337,768
2,532,750
4,748,906
6,331,875
15,470,949
3,300(11)
8,250(12)
13,125(14)
17,500(15)
334,323
835,807
1,329,694
1,772,925
42,175
4,272,749
1,100(11)
6,250(12)
12,500(13)
9,375(14)
12,500(15)
111,441
633,188
1,266,375
949,781
1,266,375
41,725
4,227,160
15,000(16)
1,519,650
15,000
1,519,650
1,100(11)
3,000(12)
7,875(14)
10,500(15)
111,441
303,930
797,816
1,063,755
22,475
2,276,942
Each stock option reported in the table above with a grant date on or after June 13, 2013 was granted under, and is subject to,
the 2013 Plan. The stock option expiration date shown in column (f) above is the latest date that the stock options may be
exercised; however, the stock options may terminate earlier in certain circumstances described below. For each Named
Executive Officer, the unexercisable stock options shown in column (d) above are unvested and will generally terminate if the
Named Executive Officer’s employment terminates.
47
Proxy Statement
2/22/2011
2/17/2012
2/15/2013
2/18/2014
—
—
—
—
—
The exercisable stock options shown in column (c) above, and any unexercisable stock options shown in column (d) above that
subsequently become exercisable, will generally expire earlier than the normal expiration date upon the termination of the
Named Executive Officer’s employment. Unless exercised, exercisable stock options will generally terminate within three
(3) months after the date of termination of employment. However, if a Named Executive Officer dies or becomes totally
disabled while employed with the Company, or if their employment is terminated by the Company without cause or by the
executive for good reason within three (3) months prior to or eighteen (18) months following a change in control, exercisable
stock options will generally remain exercisable for twelve (12) months following the Named Executive Officer’s death, disability
or termination of employment. In addition, the stock options (whether exercisable or not) will immediately terminate if a
Named Executive Officer’s employment is terminated by the Company for ‘‘misconduct’’ (as determined under the plan). The
stock options may become fully vested and may terminate earlier than the normal expiration date if there is a change in control
of the Company and the stock options are not assumed or replaced by an acquirer.
(2)
The shares underlying the RSUs held by the Named Executive Officers are subject to accelerated vesting in connection with
certain changes in control of the Company if not assumed or replaced by an acquirer and upon certain terminations of
employment in connection with a change in control of the Company, as described in more detail above under ‘‘Grants of
Plan-Based Awards’’ and below under ‘‘Potential Payments Upon Termination or Change in Control.’’ Except as otherwise
indicated in those sections, unvested shares underlying the RSUs will generally be forfeited upon the termination of the Named
Executive Officer’s employment.
(3)
The market value of stock awards reported is computed by multiplying the number of shares or units of stock reported by
$101.31, the closing market price of Common Stock on December 26, 2014, the last trading day in fiscal year 2014.
(4)
The unvested portions of these stock options vested on January 3, 2015.
(5)
The unvested portions of these stock options vested on February 22, 2015.
(6)
The unvested portions of these stock options vest in five (5) substantially equal installments, beginning on February 17, 2015
and at the end of each three (3) month period thereafter.
(7)
The unvested portions of these stock options vest in nine (9) substantially equal installments, beginning on February 15, 2015
and at the end of each three (3) month period thereafter.
(8)
Of the unvested portions of these stock options, 25% of the stock options vested on February 18, 2015, and the remaining 75%
of the stock options vest in twelve (12) substantially equal installments at the end of each three (3) month period thereafter.
(9)
Of the unvested portions of these stock options, 25% of the stock options will vest on December 5, 2015, and the remaining
75% of the stock options vest in twelve (12) substantially equal installments at the end of each three (3) month period
thereafter.
(10)
The unvested portions of these stock awards vested on January 3, 2015.
(11)
The unvested portions of these stock awards vested on February 22, 2015.
(12)
The unvested portions of these stock awards vest in two (2) substantially equal annual installments, beginning on February 17,
2015 and on the anniversary thereafter.
(13)
The unvested portions of these stock awards vest in two (2) substantially equal annual installments, beginning on September 13,
2015 and on the anniversary thereafter.
(14)
The unvested portions of these stock awards vest in three (3) substantially equal annual installments, beginning on February 15,
2015 and on each anniversary thereafter.
(15)
The unvested portions of these stock awards vest in four (4) substantially equal annual installments, beginning on February 18,
2015 and on each anniversary thereafter.
(16)
The unvested portions of these stock awards vest in four (4) substantially equal annual installments, beginning on December 12,
2015 and on each anniversary thereafter.
48
Options Exercises and Stock Vested in Fiscal Year 2014
The following table presents information regarding the exercise of stock options by the Named
Executive Officers during fiscal year 2014 and the vesting during fiscal year 2014 of stock awards previously
granted to the Named Executive Officers.
Option Awards
Number of Shares
Acquired on
Value Realized on
Exercise
Exercise
(#)
($)(1)
Name
Sanjay Mehrotra
Judy Bruner . . .
Sumit Sadana . .
Mark Brazeal . .
Shuki Nir . . . . .
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
470,531
142,912
44,157
—
28,705
20,157,426
6,631,351
1,807,894
—
1,143,758
Stock Awards
Number of Shares
Acquired on
Value Realized on
Vesting
Vesting
(#)
($)(2)
53,125
15,134
16,934
—
6,559
3,885,477
1,133,606
1,450,320
—
491,094
(1)
The dollar amounts shown for option awards are determined by multiplying (i) the number of shares of Common
Stock to which the exercise of the option related, by (ii) the difference between the per-share sales price of
Common Stock at exercise and the exercise price of the options.
(2)
The dollar amounts shown for stock awards are determined by multiplying the number of shares or units, as
applicable, that vested by the per-share closing price of Common Stock on the vesting date.
The following section describes the benefits that may become payable to Named Executive Officers in
connection with certain terminations of their employment with the Company and/or a change in control of
the Company. As prescribed by the SEC’s disclosure rules, in calculating the amount of any potential
payments to these Named Executive Officers, the Company has assumed that the applicable triggering
event (i.e., termination of employment or change in control) occurred on December 28, 2014 and that the
price per share of Common Stock is equal to $101.31, the closing price per share on December 26, 2014
(the last trading day in fiscal year 2014).
In addition to the change in control and termination benefits described below, outstanding sharebased awards held by the Company’s Named Executive Officers may also be subject to accelerated vesting
in connection with certain changes in control of the Company under the terms of the Company’s equity
incentive plans as noted under ‘‘Grants of Plan-Based Awards in Fiscal Year 2014’’ and ‘‘Outstanding
Equity Awards at Fiscal 2014 Year-End’’ above. The estimated value of accelerated vesting under the
Company’s equity incentive plans is covered below under the description of these Named Executive
Officers’ severance arrangements.
The Company has calculated the value of any option award or stock award that may be accelerated in
connection with a change in control of the Company to be the full value of such award (i.e., the full
‘‘spread’’ value for option awards and the full price per share of Common Stock for stock awards).
Change of Control Benefits Agreements with Named Executive Officers
The Company has entered into a change of control agreement with each Named Executive Officer.
The agreements are substantially identical (except as noted below with respect to Mr. Mehrotra) and
provide for certain benefits to be paid to the Named Executive Officer in connection with a change of
control and/or termination of employment with the Company under the circumstances described below.
49
Proxy Statement
Potential Payments Upon Termination or Change in Control
Change of Control Benefits. Upon a ‘‘Change of Control’’ (as defined in the change of control
agreement) of the Company, for purposes of the Named Executive Officer’s vesting in then outstanding
and unvested performance-based equity awards, the Named Executive Officer will be deemed to have met
the performance objectives as of the end of the specified performance measuring period if the Named
Executive Officer remains an employee as of the end of such period. Any performance-based awards that
do not vest solely by meeting the performance objectives shall continue to vest in accordance with the
terms of the applicable award agreement by assuming the performance objective is met.
Severance Benefits—Termination of Employment in Connection with Change in Control. In the event a
Named Executive Officer’s employment is terminated by the Company (or a successor) without ‘‘Cause’’
(and not on account of the Named Executive Officer’s death or disability) or by the Named Executive
Officer for ‘‘Good Reason’’ (as those terms are defined in the change of control agreement) within three
(3) months before or eighteen (18) months following a Change of Control of the Company (a ‘‘Qualifying
Termination’’), the Named Executive Officer will be entitled to severance pay that includes: (i) a lump sum
cash payment equal to one and one-half times (two times for Mr. Mehrotra) the sum of (A) the Named
Executive Officer’s annual base salary as of the Change of Control or termination of employment,
whichever is greater, plus (B) the Named Executive Officer’s annual target bonus for the calendar year of
termination; (ii) for a period of eighteen (18) months (plus six (6) additional months for Mr. Mehrotra)
following the termination date (or, if earlier, until the date the Named Executive Officer becomes eligible
for coverage under the health plan of a future employer), premiums for 18 months’ (24 months’ in the case
of Mr. Mehrotra) continuation of the same or equivalent health insurance coverage for the Named
Executive Officer and his or her eligible dependents (if applicable) as the Named Executive Officer was
receiving immediately prior to the termination; (iii) accelerated vesting of the Named Executive Officer’s
equity awards to the extent outstanding on the termination date and not otherwise vested, with accelerated
options to remain exercisable for one (1) year following the termination (subject to the maximum term of
the option and to any right that the Company may have to terminate options in connection with the
Change of Control); and (iv) if requested, for a period of twelve (12) months following the termination,
executive-level outplacement benefits (which shall include at least resume assistance, career evaluation and
assessment, individual career counseling, access to one or more on-line employment databases (with
research assistance provided), and administrative support). On December 21, 2014, the Company entered
into a new change of control agreement with Mr. Mehrotra, effective as of January 1, 2015, pursuant to
which, in the event of a Qualifying Termination, the severance payment is three times his annual base
salary and target bonus and his entitlement to Company-paid medical insurance is for twenty-four
(24) months. If following a Change of Control, an excise tax imposed by Section 4999 of the Code would
apply to any payments or benefits received by a Named Executive Officer, then his or her benefits shall be
either (a) paid in full or (b) delivered to a lesser extent such that no portion would be subject to the excise
tax, whichever results in the greatest after-tax benefit to the Named Executive Officer.
50
The following table lists the Named Executive Officers and the estimated amounts they would have
become entitled to under their change of control agreement had their employment with the Company
terminated on December 28, 2014 under the circumstances described above.
Name
Sanjay Mehrotra
Judy Bruner . . .
Sumit Sadana . .
Mark Brazeal . .
Shuki Nir . . . . .
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
Estimated Total
Value of Cash
Payment
($)
Estimated Total
Value of Insurance
Coverage
Continuation
($)(1)
Estimated Total
Value of Equity
Acceleration
($)(2)
Estimated Value
of Outplacement
Benefits
($)
Total
($)
5,000,000
1,860,000
1,470,600
1,020,000
957,825
45,594
34,196
34,196
33,859
32,226
29,262,637
8,163,021
6,967,569
1,519,650
4,363,480
25,000
25,000
25,000
25,000
25,000
34,333,231
10,082,217
8,497,365
2,598,509
5,378,531
(1)
This amount includes estimated health insurance premiums.
(2)
This amount includes option awards and stock awards. The amount for option awards is calculated based on the
number of shares of Common Stock that would have been subject to acceleration multiplied by the difference
between the closing price of the Common Stock on December 26, 2014 (the last trading day in fiscal year 2014) of
$101.31 per share and the exercise price of the stock option. The amount for stock awards is calculated based on
the number of shares of Common Stock that would have been subject to acceleration multiplied by the closing
price of the Common Stock on December 26, 2014 of $101.31 per share.
51
Proxy Statement
Severance Benefits—Termination of Employment Not in Connection with Change in Control. In
connection with his promotion to Chief Executive Officer in January 2011, Mr. Mehrotra and the
Company entered into a severance agreement pursuant to which Mr. Mehrotra is entitled to severance
benefits upon his termination without cause or voluntary resignation for good reason (as those terms are
defined in the severance agreement) without regard to whether a change of control has occurred. The
benefits payable to Mr. Mehrotra under his severance agreement are generally the same as provided for
under his change of control agreement with the exception that the bonus component of the severance is
comprised of Mr. Mehrotra’s pro-rata cash incentive bonus for the year in which his termination of
employment occurs instead of a multiple of his target bonus, and only those equity awards which would
have vested over the twenty-four (24) months following Mr. Mehrotra’s termination of employment would
have accelerated upon his termination of employment, instead of all of Mr. Mehrotra’s then outstanding
equity awards as provided for under the change of control agreement. In the event that Mr. Mehrotra is
eligible to receive severance benefits under both his severance agreement and his change of control
agreement, he will be entitled only to the severance benefits provided under his change of control
agreement. Assuming Mr. Mehrotra’s employment was terminated without ‘‘cause’’ or he resigned for
‘‘good reason’’ (as such terms are defined in the severance agreement) and not in connection with a
‘‘Change of Control’’ (as defined in his change of control agreement) on the last day of fiscal year 2014, the
estimated total cash values of Mr. Mehrotra’s cash payment, insurance coverage continuation, equity
acceleration and outplacement assistance under his severance agreement would have been the following:
$3,500,000, $45,594, $16,393,681 and $25,000, respectively, for a total amount of $19,964,275.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information known to the Company regarding the ownership of
Common Stock as of March 2, 2015 by each Director and Named Executive Officer and all current
Directors and executive officers of the Company as a group.
The beneficial ownership reported in the tables below is based upon 209,586,352 shares of Common
Stock outstanding on March 2, 2015. For each individual, the total number of shares of Common Stock
beneficially owned represents shares held outright plus shares which such individual has the right to
acquire either on or within 60 days after March 2, 2015, including upon the exercise of a stock option or
the vesting of RSUs. Such potential acquisitions of Common Stock within 60 days of March 2, 2015 are not
deemed outstanding for the purpose of computing the percentage owned by any other individual. Unless
otherwise indicated and subject to applicable community property laws, the persons named in the following
tables have sole voting and investment power with respect to all shares of Common Stock.
Number of
Shares Owned
Outright
Name or Group of Beneficial Owners
Mark Brazeal . . . . . . . .
Judy Bruner(2) . . . . . . .
Irwin Federman . . . . . .
Steven J. Gomo . . . . . .
Eddy W. Hartenstein . . .
Dr. Chenming Hu . . . .
Catherine P. Lego(3) . . .
Michael E. Marks(4) . . .
Sanjay Mehrotra(5) . . . .
D. Scott Mercer . . . . . .
Shuki Nir . . . . . . . . . .
Sumit Sadana . . . . . . .
All current directors and
group (13 persons)(6) .
................
................
................
................
................
................
................
................
................
................
................
................
executive officers as a
................
Beneficial Ownership
Number of Shares
Exercisable on or
within 60 days after Total Beneficial
March 2, 2015(1)
Shares
Percentage
Owned
.
.
.
.
.
.
.
.
.
.
.
.
—
55,002
28,780
6,021
25,064
3,106
204,096
32,184
80,406
4,580
3,762
12,879
—
46,182
12,500
31,250
18,750
31,250
37,500
6,250
88,594
10,958
7,875
16,538
—
101,184
41,280
37,271
43,814
34,356
241,596
38,434
169,000
15,538
11,637
29,417
*
*
*
*
*
*
*
*
*
*
*
*
.
466,457
321,584
788,041
*
*
Less than 1% of the outstanding Common Stock.
(1)
Consists of shares subject to outstanding options granted to the Directors or executive officers that were
exercisable on or within 60 days after March 2, 2015. Some of the shares subject to those options granted to the
Directors are currently unvested and would be subject to a repurchase right of the Company that lapses over
time, if such options were exercised.
(2)
Includes 55,002 shares held in the name of a trust for the benefit of Ms. Bruner and her spouse.
(3)
Includes 201,110 shares held in the name of a trust of which Ms. Lego is the trustee.
(4)
Includes 20,000 shares held by limited liability companies controlled by Mr. Marks.
(5)
Includes 80,406 shares held in the name of a trust for the benefit of Mr. Mehrotra and his spouse.
(6)
Includes 321,584 shares subject to outstanding options granted to the Directors or executive officers that were
exercisable on or within 60 days after March 2, 2015.
52
The following table sets forth certain information about entities of which the Company is aware, based
solely on filings made with the SEC, to be beneficial owners of 5% or more of the Common Stock based on
209,586,352 shares of Common Stock outstanding as of March 2, 2015:
Beneficial Ownership
Number of
Percentage
Shares
Owned
Name or Group of Beneficial Owners
BlackRock, Inc.(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
55 East 52nd Street
New York, New York 10022
13,104,333
6.3%
The Vanguard Group, Inc.(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
100 Vanguard Blvd.
Malvern, Pennsylvania 19355
14,221,310
6.8%
Neuberger Berman LLC(3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
605 3rd Avenue
New York, New York 10158
11,392,417
5.4%
Clearbridge Investments, LLC(4) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
620 8th Avenue
New York, New York 10018
14,123,272
6.7%
Number of shares beneficially owned is reported as of December 31, 2014 and based on the Schedule 13G/A filed
by BlackRock, Inc. on January 30, 2015 with the SEC. BlackRock’s Schedule 13G/A disclosed that it has the sole
dispositive power with respect to 13,104,333 shares of Common Stock and sole voting power with respect to
11,105,209 shares of Common Stock.
(2)
Number of shares beneficially owned is reported as of December 31, 2014 and based on the Schedule 13G/A filed
by The Vanguard Group, Inc. on February 10, 2015 with the SEC. The Vanguard Group’s Schedule 13G/A
disclosed that it has the sole voting power with respect to 383,771 shares of Common Stock, sole dispositive
power with respect to 13,854,139 shares of Common Stock and shared dispositive power with respect to 367,171
shares of Common Stock.
(3)
Number of shares beneficially owned is reported as of December 31, 2014 and based on the Schedule 13G filed
by Neuberger Berman LLC on February 11, 2015 with the SEC. Neuberger Berman LLC’s Schedule 13G
disclosed that it has shared dispositive power with respect to 11,392,417 shares of Common Stock and shared
voting power with respect to 9,102,805 shares of Common Stock.
(4)
Number of shares beneficially owned is reported as of December 31, 2014 and based on the Schedule 13G/A filed
by Clearbridge Investments, LLC on February 17, 2015 with the SEC. Clearbridge Investments, LLC’s
Schedule 13G/A disclosed that it has sole dispositive power with respect to 14,123,272 shares of Common Stock
and sole voting power with respect to 13,713,952 shares of Common Stock.
53
Proxy Statement
(1)
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Exchange Act, requires the Company’s Directors, executive officers and persons
who own more than 10% of a registered class of the Company’s equity securities, to file initial reports of
ownership and reports of changes in ownership of Common Stock and other equity securities of the
Company with the SEC. Officers, Directors and stockholders holding more than 10% of the outstanding
capital stock of the Company are required by SEC regulations to furnish the Company with copies of all
Section 16(a) reports they file.
The Company reviewed copies of reports filed pursuant to Section 16(a) of the Exchange Act and
written representations from reporting persons that all reportable transactions were reported. Based solely
on that review, the Company believes that during the fiscal year ended December 28, 2014 all required
filings were timely made in accordance with the Exchange Act’s requirements, except that, on January 8,
2014, Mr. Mehrotra filed one Form 4 regarding the vesting of RSUs one day late.
54
EQUITY COMPENSATION INFORMATION FOR PLANS OR INDIVIDUAL ARRANGEMENTS
WITH EMPLOYEES AND NON-EMPLOYEES
The following table provides information as of December 28, 2014 with respect to the shares of
Common Stock that may be issued under the Company’s existing equity compensation plans. Other than as
described in footnote (4) to the following table, there are no assumed plans under which any options to
acquire shares or other share-based awards may be granted.
Number of securities to be
issued upon exercise of
outstanding options,
warrants and rights
(a)
Plan category
Equity compensation plans
approved by stockholders(2) . . . .
Equity compensation plans not
approved by stockholders . . . . . .
Total . . . . . . . . . . . . . . . . . . . . .
Weighted-average exercise
price of outstanding
options, warrants and
rights(1)
(b)
9,159,762(3)(4)(5)
Number of securities
remaining available for
future issuance under
equity compensation plans
(excluding securities
reflected in column (a))
(c)
18,465,271(6)
$52.70
N/A
N/A
N/A
9,159,762
$52.70
18,465,271
Weighted average exercise price of outstanding options; excludes RSUs.
(2)
Consists of the Company’s Amended and Restated 2005 Incentive Plan, as amended (the ‘‘2005 Plan’’), the 2013
Plan, including options and RSUs incorporated from the 2005 Plan and options from the 1995 Stock Option Plan
(together with the 2005 Plan, the ‘‘Predecessor Plans’’), and the 2005 Amended and Restated Employee Stock
Purchase Plan and the 2005 Amended and Restated International Employee Stock Purchase Plan (together with
the 2005 Amended and Restated Employee Stock Purchase Plan, the ‘‘2005 Purchase Plans’’).
(3)
Excludes purchase rights accruing under the 2005 Purchase Plans, which have a combined stockholder-approved
reserve of 10,000,000 shares. Under the 2005 Purchase Plans, each eligible employee may purchase up to 1,500
shares of Common Stock at the end of each six (6) month offering period (the last U.S. business day on or
preceding February 14th and August 14th of each calendar year) at a purchase price per share equal to 85% of
the lower of (i) the closing selling price per share of Common Stock on the employee’s entry date into that six
(6) month offering period or (ii) the closing selling price per share on the purchase date.
(4)
Excludes 506,221 shares that are subject to options and other equity compensation awards that were originally
granted by FlashSoft Corporation (‘‘FlashSoft’’), Fusio-io, Matrix Semiconductor, Inc. (‘‘Matrix’’), msystems Ltd.
(‘‘msystems’’), Pliant Technology, Inc. (‘‘Pliant’’) and SMART Storage prior to their acquisition by the Company,
as set forth in this table:
Acquired Company
FlashSoft . . . . .
Fusion-io . . . . .
Fusion-io . . . . .
Matrix . . . . . . .
msystems . . . . .
msystems . . . . .
Pliant . . . . . . . .
SMART Storage
Award Category
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
RSUs
RSUs
Options
Options
Options
Stock Settled Appreciation Rights
Options
Options
Number of
Securities
Subject to
Applicable Plan
Weighted
Average
Exercise
Price
Weighted
Average
Estimated
Remaining
Life (yrs)
24,404
185,436
141,654
1,458
11,116
11,415
24,552
106,186
—
—
64.76
5.56
48.01
43.74
3.69
20.74
1.13
2.59
5.28
0.77
1.80
1.35
4.68
5.22
(5)
Includes 1,134,196 shares subject to options and 3,096,589 shares subject to RSUs outstanding under the 2013
Plan. Also includes 2,658,857 shares subject to outstanding options and 2,270,120 RSUs outstanding under the
Company’s Predecessor Plans. The weighted average estimated remaining life of the outstanding options is
4.44 years.
(6)
Consists of shares available for future issuance under the 2013 Plan and the 2005 Purchase Plans. As of
December 28, 2014, 14,758,870 shares of Common Stock were available for issuance under the 2013 Plan and
3,706,401 shares of Common Stock were available for issuance under the combined share reserve for the
2005 Purchase Plans.
55
Proxy Statement
(1)
CERTAIN TRANSACTIONS AND RELATIONSHIPS
The Audit Committee is responsible for review, approval, or ratification of ‘‘related-person
transactions’’ between the Company or its subsidiaries and related persons. Under SEC rules, a related
person is a Director, officer, nominee for Director, or 5% stockholder of the Company since the beginning
of the last fiscal year and their immediate family members. The Company has adopted a written related
person transaction policy and procedures that apply to any transaction or series of transactions in which
the Company or a subsidiary is a participant, the amount involved exceeds $120,000 and a related person
has a direct or indirect material interest. The Audit Committee has determined that, barring additional
facts or circumstances, a related person does not have a direct or indirect material interest in the following
categories of transactions:
• Any transaction with another company for which a related person’s only relationship is as an
employee (other than an executive officer), director, or beneficial owner of less than 5% of that
company’s shares, if the amount involved does not exceed the greater of $200,000, or 2% of that
company’s total annual revenue;
• Compensation to executive officers determined by the Compensation Committee;
• Compensation to Directors determined by the Board;
• Transactions in which all security holders receive proportional benefits; and
• Banking-related services involving a bank depository of funds, transfer agent, registrar, trustee
under a trust indenture, or similar service.
In accordance with the adopted policy and procedures, transactions involving related persons that are
not included in one of the above categories are generally reviewed by the Company’s legal department.
The legal department determines whether a related person could have a material interest in such a
transaction, and any such transaction is submitted to the Audit Committee for review. The Audit
Committee has delegated authority to the chair of the Audit Committee to review any such transactions
involving an amount less than $1,000,000. The Audit Committee or its chair, as applicable, determines
whether the related person has a material interest in a transaction and may approve, ratify, rescind, or take
other action with respect to the transaction in its discretion.
The son of Irwin Federman, one of the Company’s directors, is a Senior Manager in the business
development department of the Company’s Retail group. Mr. Federman’s son’s compensation is consistent
with that of others who hold similar roles at the Company. Mr. Federman plays no personal role in
determining his son’s compensation or reviewing his son’s performance. Mr. Federman does not receive a
direct or indirect benefit from his son’s position with the Company. In accordance with the related-person
transaction approval policy described above, Mr. Federman’s son’s employment with the Company was
reviewed by the legal department of the Company and submitted for review to the chair of the Audit
Committee, who ratified the transaction.
Dr. Chenming Hu, one of the Company’s directors, entered into Consulting Services Agreements with
the Company on October 10, 2013, January 13, 2014 and May 7, 2014 (the ‘Consulting Agreements’’),
pursuant to which Dr. Hu provided the Company with advanced memory technology consulting services
through July 14, 2014. Dr. Hu earned $237,500 in consulting fees pursuant to the Consulting Agreements
in 2014. The Consulting Agreements contain substantially similar terms and include confidentiality
provisions in favor of the Company. In addition to consulting fees, the Consulting Agreements provide for
reimbursement, subject to the Company’s written approval, of expenses incurred in the performance of
56
work under the Consulting Agreements. The Consulting Agreement entered into on October 10, 2013 is
filed as Exhibit 10.50 to the Company’s Form 10-K for the fiscal year ended December 29, 2013, filed with
the SEC on February 21, 2014. The Consulting Agreement entered into on January 13, 2014 is filed as
Exhibit 10.1 to the Company’s Form 10-Q for the quarter ended March 30, 2014, filed with the SEC on
May 1, 2015. The Consulting Agreement entered into on May 7, 2014 is filed as Exhibit 10.1 to the
Company’s Form 10-Q for the quarter ended June 29, 2014, filed with the SEC on July 31, 2014. In
accordance with the related-person transaction approval policy described above, the Consulting
Agreements were reviewed by the legal department of the Company and submitted for review to the Audit
Committee, which ratified the transactions.
The Company’s Amended and Restated Certificate of Incorporation, as amended (the ‘‘Certificate of
Incorporation’’), authorizes the Company to provide indemnification of the Company’s Directors and
officers, and the Company’s Bylaws require the Company to indemnify its Directors and officers, to the
fullest extent permitted by the Delaware General Corporation Law (the ‘‘DGCL’’). In addition, each of the
Company’s current Directors and executive officers has entered into a separate indemnification agreement
with the Company. Finally, the Company’s Certificate of Incorporation and Bylaws limit the liability of
Directors to the Company or its stockholders to the fullest extent permitted by the DGCL.
The Company intends that all future transactions between the Company and its officers, Directors,
principal stockholders and their affiliates be approved by the Audit Committee or the chair of the Audit
Committee, and be on terms no less favorable to the Company than could be obtained from unaffiliated
third parties.
Proxy Statement
57
OTHER BUSINESS
The Board knows of no other business that will be presented for consideration at the Annual Meeting.
If other matters are properly brought before the Annual Meeting; however, it is the intention of the
persons named in the accompanying proxy to vote the shares represented thereby on such matters in
accordance with their best judgment.
By Order of The Board of Directors,
10APR201403145991
Michael E. Marks
Chairman of the Board of Directors
April 27, 2015
58
ANNEX A
Non-GAAP Financial Measures
Reconciliation Operating Income and Margin
December 28,
2014
Fiscal years ended
December 29, December 30,
2013
2012
(In millions)
January 1,
2012
January 2,
2011
GAAP Operating Income . . . . . . . . . . . . . .
Share-based compensation . . . . . . . . . . . . .
Amortization of acquisition-related intangible
assets . . . . . . . . . . . . . . . . . . . . . . . . . .
Inventory step-up . . . . . . . . . . . . . . . . . . .
Impairment of acquisition-related intangible
assets . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
$
$
Non-GAAP Operating Income . . . . . . . . .
$
1,558
155
127
8
December 28,
2014
$
61
—
—
1,848
1,562
100
52
—
83
$
1,806
696
78
44
—
1
$
827
Fiscal years ended
December 29, December 30,
2013
2012
1,530
63
14
—
—
$
1,637
1,462
78
—
$
1,553
January 1,
2012
January 2,
2011
24%
2%
25%
2%
14%
2%
27%
1%
30%
2%
2%
—%
1%
—%
1%
—%
1%
—%
—%
—%
—%
1%
—%
—%
—%
Non-GAAP Operating Margin . . . . . . . . .
28%
29%
16%
29%
32%
The Company believes 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. The Company also uses 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.
The Company believes 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 the Company’s operating results.
The Company believes that the use of these non-GAAP financial measures also provides consistency and
comparability with the Company’s past financial reports.
The Company has historically used these non-GAAP measures when evaluating operating
performance because the Company believes that the inclusion or exclusion of the items described below
provides an additional measure of the Company’s core operating results and facilitates comparisons of the
Company’s core operating performance against prior periods and the Company’s business model
objectives. The Company has 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
A-1
Proxy Statement
GAAP Operating Margin . . . . . . . . . . . . . .
Share-based compensation . . . . . . . . . . . . .
Amortization of acquisition-related intangible
assets . . . . . . . . . . . . . . . . . . . . . . . . . .
Inventory step-up . . . . . . . . . . . . . . . . . . .
Impairment of acquisition-related intangible
assets . . . . . . . . . . . . . . . . . . . . . . . . . .
evaluate the Company’s ongoing core operations. Externally, the Company believes that these non-GAAP
measures continue to be useful to investors in their assessment of the Company’s operating performance
and their valuation of the Company.
Internally, these non-GAAP measures are significant measures used by the Company for purposes of:
•
•
•
•
•
•
•
evaluating the Company’s 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 the Company’s competitors.
The Company excludes the following items from its non-GAAP measures:
• Share-based Compensation Expense. These expenses consist primarily of expenses for share-based
compensation, such as stock options, RSUs and the Company’s employee stock purchase plan.
Although share-based compensation is an important aspect of the compensation of the Company’s
employees, the Company excludes share-based compensation expenses from its 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 the Company’s control
that vary over time and may include modifications that may not occur on a predictable cycle, neither
of which is necessarily indicative of the Company’s ongoing business performance. In addition, the
share-based compensation expenses recorded are often unrelated to the actual compensation an
employee realizes. The Company believes that it is useful to exclude share-based compensation
expense for investors to better understand the long-term performance of the Company’s core
operations and to facilitate comparison of the Company’s results to the Company’s prior periods
and to the Company’s peer companies.
• Inventory Step-up. Acquired inventory in a business combination is generally recognized at fair
value less costs to sell, which is generally higher than the historical cost value of the inventory. The
Company excludes these increased or ‘‘stepped-up’’ values of inventory when sold to provide a
consistent basis for comparison across accounting periods as these costs are not representative of
ongoing future costs.
• Amortization and Impairment of Acquisition-related Intangible Assets. The Company incurs
amortization, and, occasionally, impairs intangible assets in connection with acquisitions. Since the
Company does not acquire businesses on a predictable cycle, the Company excludes these items in
order to provide investors and others with a consistent basis for comparison across accounting
periods.
From time-to-time in the future, there may be other items that the Company may exclude if it believes
that doing so is consistent with the goal of providing useful information to investors and management.
A-2
Reconciliation of Cash Provided by Operating Activities to Free Cash Flow.
Fiscal Year Ended
December 28, 2014
(In millions)
Net cash provided by operating activities . . . .
Acquisition of property and equipment, net . . .
Investment in Flash Ventures . . . . . . . . . . . . .
Notes receivable proceeds from Flash Ventures,
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Free cash flow . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$1,698
(233)
(24)
50
$1,491
Limitations of Relying on Non-GAAP Financial Measures. The Company has incurred and will incur in
the future, many of the costs that the Company excludes from the non-GAAP measures, including sharebased compensation expense, impairment of goodwill and acquisition-related intangible assets,
amortization of acquisition-related intangible assets and other acquisition-related costs, non-cash
economic interest expense associated with the Company’s convertible debt and income 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.
Proxy Statement
A-3
(This page has been left blank intentionally.)
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
፼ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 28, 2014
OR
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
30JUL201319362378
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)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Name of each exchange on which registered
Common Stock, $0.001 par value;
Rights to Purchase Series A Junior Participating Preferred Stock
NASDAQ Global Select Market
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ፼
No Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange
Act. Yes No ፼
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 ፼ 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 ፼ 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 definitions of ‘‘large accelerated filer,’’ ‘‘accelerated filer’’ and ‘‘smaller reporting company’’ in Rule 12b-2 of the
Exchange Act. (Check one):
Large accelerated filer ፼
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 ፼
As of June 29, 2014, the aggregate market value of the registrant’s common stock held by non-affiliates of the registrant was
$20,109,794,996, based on the closing sale price as reported on the NASDAQ Global Select Market.
Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date.
Class
Outstanding at January 30, 2015
Common Stock, $0.001 par value per share
Document
213,013,780 shares
DOCUMENTS INCORPORATED BY REFERENCE
Parts Into Which Incorporated
Proxy Statement for the Annual Meeting of Stockholders to be held
June 18, 2015 (Proxy Statement)
Part III
Annual Report
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not
be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. SANDISK CORPORATION
Table of Contents
Page
No.
Item
Item
Item
Item
Item
Item
1.
1A.
1B.
2.
3.
4.
Item 5.
Item 6.
Item 7.
Item 7A.
Item 8.
Item 9.
Item 9A.
Item 9B.
Business . . . . . . . . . . . . . .
Risk Factors . . . . . . . . . . . .
Unresolved Staff Comments
Properties . . . . . . . . . . . . .
Legal Proceedings . . . . . . .
Mine Safety Disclosures . . .
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PART I
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4
14
40
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65
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69
69
PART II
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Selected Financial Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Management’s Discussion and Analysis of Financial Condition and Results of
Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Quantitative and Qualitative Disclosures About Market Risk . . . . . . . . . . . . . . .
Financial Statements and Supplementary Data . . . . . . . . . . . . . . . . . . . . . . . . . .
Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Controls and Procedures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
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Item 13.
Item 14.
PART III
Directors, Executive Officers and Corporate Governance . . . . . . . . . . . . . . . . .
Executive Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Certain Relationships and Related Transactions, and Director Independence . . .
Principal Accountant Fees and Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
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69
69
69
Item 15.
PART IV
Exhibits and Financial Statement Schedules . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
70
OTHER
Index to Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
F-1
S-1
Item 10.
Item 11.
Item 12.
2
FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K contains forward-looking statements regarding future events and
our future results that are subject to the safe harbors created under the Securities Act of 1933, as amended,
and the Securities Exchange Act of 1934, as amended. All statements other than statements of historical
fact are statements that could be deemed forward-looking statements. These statements may contain
words such as ‘‘expects,’’ ‘‘anticipates,’’ ‘‘intends,’’ ‘‘plans,’’ ‘‘targets,’’ ‘‘goals,’’ ‘‘projects,’’ ‘‘believes,’’
‘‘seeks,’’ ‘‘estimates,’’ ‘‘continues,’’ ‘‘endeavors,’’ ‘‘strives,’’ ‘‘may,’’ ‘‘could,’’ variations of such words or
other wording indicating future results or expectations. Forward-looking statements are subject to risks
and uncertainties. Our actual results may differ materially from the results discussed in these forwardlooking statements. Factors that could cause our actual results to differ materially include, but are not
limited to, those discussed in ‘‘Risk Factors’’ in Item 1A and elsewhere in this report. Our business,
financial condition or results of operations could be materially harmed by any of these 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,’’ ‘‘we,’’ ‘‘our,’’ and
‘‘us’’ collectively refer to SanDisk Corporation, a Delaware corporation, and its subsidiaries, and all
references to years or annual periods are references to our fiscal years, which consisted of 52 weeks in each
of the fiscal years 2014, 2013 and 2012.
Annual Report
3
PART I
ITEM 1.
BUSINESS
Overview
Who We Are. SanDisk Corporation is a global leader in flash storage solutions with a strong history of
innovative products. Flash storage technology allows digital information to be stored in a durable, compact
format that retains the data even without power. Our flash-based products enable businesses and
consumers to efficiently and effectively capture, share and preserve digital content. Our products include
flash storage solutions for enterprise data centers and client computing platforms, as well as removable and
embedded flash products for mobile devices, cameras, automotive, connected home electronics and other
applications. Our products are used in a variety of large markets, and we distribute our products globally
through commercial and retail channels. We offer simple, reliable and affordable flash storage solutions
for use by consumers and enterprises in a wide variety of devices and applications. We were incorporated
in the State of Delaware in June 1988. Since 2006, we have been a Standards & Poor, or S&P, 500 company
and since 2011, we have been a Fortune 500 company.
What We Do. 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 a broad range
of solid state drives, or SSDs, 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 enterprise data centers and client computing platforms 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, computing platforms, imaging devices, automobiles 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 also offer software
solutions that can be used in conjunction with flash storage products to optimize performance in various
computing and data center environments.
Most of our products are made by combining NAND flash memory with a controller and firmware.
We purchase substantially all of our NAND flash supply through our venture relationships with Toshiba
Corporation, or Toshiba, which produce and provide us with leading-edge, high-quality NAND wafers.
From time-to-time, we also purchase flash memory from other NAND flash manufacturers. We use
controllers that 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.
Industry Background
We operate in the flash storage solutions market. NAND flash memory is the current mainstream
technology used for flash storage solutions, providing the benefits of a small form factor, fast write speed,
solid-state architecture and the ability to retain data without a power source. NAND flash memory has
been characterized by rapid technology transitions which have reduced the cost per bit by increasing the
density of the memory die on the wafer. The benefits of NAND flash memory have led to the proliferation
of its usage in a wide variety of devices and applications.
4
Our Strategy
In order to remain an industry-leading supplier of NAND flash storage solutions and to develop large
scale markets for NAND flash-based storage products, we strive to:
• Create industry-leading storage solutions by leveraging our innovative technology. 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 continue to develop
advanced generations of NAND flash technology with increased memory density and capacity
including 2-dimensional and 3-dimensional NAND, or 2D NAND and 3D NAND, respectively. In
parallel with our NAND scaling efforts, we are also investing in future alternative technologies,
including 3-dimensional resistive RAM, or 3D ReRAM. In addition, we continue to invest in
complementary technologies, such as controllers, firmware and software that manage the NAND
flash and enable us to provide differentiated solutions for our customers.
• Strengthen position in high-value solutions. We have been increasing the mix of our sales from
embedded and SSD solutions as we grow our share in the embedded and SSD markets. These
solutions generally provide the opportunity for greater differentiation and a higher price per
gigabyte. We strive to continue strong growth in both the SSD and embedded markets over the next
several years.
• Maintain cost leadership, leverage scale and drive operational excellence. We believe the markets for
flash storage are generally price elastic, meaning that a decrease in the price per gigabyte results in
increased demand for higher capacities and the emergence of new applications for flash storage. We
strive to continuously reduce the cost of NAND flash memory to grow existing and future markets,
supply a diverse set of customers and channels, and support the profitable growth of our business.
We have invested heavily in a vertically integrated business model, which includes our investments
in high volume, state-of-the-art NAND flash manufacturing facilities in Japan through our ventures
with Toshiba and our in-house assembly and test facilities in Shanghai, China in order to reduce the
costs of producing our products, increase our ability to control the quality of our products and
provide efficient delivery to our customers. We will continue to leverage our vertical integration and
invest in additional manufacturing capacity in order to produce leading-edge, high-quality products
that our customers can count on to store and reliably access their data.
• Drive profitable growth across diversified markets, customers and channels. We create new markets for
NAND flash memory through our design and development of NAND flash solutions that cater to
specific requirements in the end markets we serve. We continue to expand our retail customer base
to new geographic regions and outlets, and we continue to achieve design wins from our current and
new original equipment manufacturer, or OEM, customers by offering leading-edge NAND flash
storage solutions. We are also expanding our reach into small and medium business customers
through distributors, value added resellers and system integrators. In addition, we directly engage
with enterprise and hyperscale customers to better understand and develop scalable enterprise
storage solutions.
Our products are sold in a wide variety of form factors, capacities and performance levels, and include
the following:
• Removable Cards. Our removable cards are used in a variety of applications and consumer devices.
Our CompactFlash and Secure Digital, or SD, removable cards are primarily used in digital
cameras and camcorders. Our ultra-small microSD removable cards are designed primarily for
use in mobile products such as smartphones, tablets and eReaders. We offer removable cards with
increasing levels of performance and reliability through our SanDisk Ultra, SanDisk Extreme and
SanDisk Extreme PRO product lines.
5
Annual Report
Our Solutions
• Embedded Products. Our embedded products are designed to meet the increasing demand for
embedded storage for mobile phones, tablets, notebooks and other portable and wearable devices,
as well as in automotive and connected home applications. Our embedded products include our
iNAND embedded flash product line, our multi-chip packages, or MCP iNAND, solutions which
combine NAND and mobile dynamic random-access memory, or DRAM, in an integrated package,
and custom embedded solutions. Our iNAND solutions are offered under the SanDisk Standard,
SanDisk Ultra and SanDisk Extreme brand names.
• Client Solid State Drives. We offer SSDs for client computing applications which encompass desktop
computers, notebook computers, tablets and other computing devices. Our client SSDs can be used
in a stand-alone configuration, in lieu of a hard drive, or in a dual-drive configuration in
conjunction with a hard drive or in hybrid drives that contain a hard drive and our SSD. Our client
SSDs are offered in industry-standard and custom form factors and branded under the SanDisk,
SanDisk Ultra, SanDisk Ultra Plus and SanDisk Extreme PRO names.
• Enterprise Solid State Drives. Our enterprise SSDs are used in high-capacity and/or
high-performance data storage applications, and to accelerate application performance. We also
provide enterprise software solutions designed to improve the performance of SSDs in various
enterprise workload environments. Our enterprise SSD solutions encompass all major storage
interface protocols, including Serial Attached SCSI, or SAS, Serial ATA, or SATA, and Peripheral
Component Interconnect Express, or PCIe. Our enterprise SSD brand names include Lightning,
Optimus, CloudSpeed and Fusion ioMemory.
• USB Flash Drives. Our USB flash drives provide the user with the ability to carry files and
application software in a portable format. Our USB flash drives are used in the computing and
consumer markets, and are designed for high-performance and reliability. Our professional and
enterprise lines of USB flash drives are marketed to the corporate user and are specifically designed
to support secure, authorized access to corporate information.
• Digital Media Players and Wireless Drives. Sansa is our branded line of flash-based digital media
players, and SanDisk Connect is our branded line of wireless media and flash drive products. Our
Sansa line of products includes features such as FM radio, voice recording and support for a variety
of audio and video formats. Our Connect line of products allows wireless streaming of
high-definition movies, photos, music and documents on tablets, smartphones and computers.
• Wafers and Components. We also sell memory wafers and memory components to customers who
package the memory under their own brands or embed the memory in other products.
Our Primary End Markets
Our products are sold in four primary end markets:
• Enterprise and Hyperscale Data Centers. We provide enterprise SSDs that are designed for mission
critical environments and include solutions optimized for storage in write intensive, read intensive
and mixed use applications. These enterprise solutions include SAS and SATA SSDs for enterprise
storage, and PCIe SSDs, which are designed to accelerate enterprise application performance. We
also provide enterprise software solutions designed to improve the performance of SSDs in various
enterprise environments. We believe that enterprise SSD solutions will be a key NAND flash
growth driver over the next several years as SSDs increasingly replace hard disk drives in enterprise
and hyperscale data centers.
• Client Computing. We provide client SSD solutions that are designed to enhance the user
experience in notebooks, thin-and-light laptops and desktop computers. These client SSD solutions
include SATA and PCIe interfaces. We believe client SSDs will increasingly replace hard disk drives
in both corporate and consumer client computing platforms over the next several years.
6
• Mobile and Connected Applications. We provide embedded and removable storage for mobile and
connected applications. We are a leading supplier of microSD removable storage cards and
embedded products, such as iNAND, MCP iNAND and custom solutions, for use in phones,
tablets, notebooks, global positioning system, or GPS, devices, eReaders, wearable products and
other mobile or computing devices. Multimedia features in mobile products that enable imaging,
high-definition, or HD, videos, gaming and other applications have driven significantly increased
demand for flash storage solutions in these devices. We also provide removable storage cards and
embedded storage solutions for use in automotive and connected home applications.
• Consumer Electronics. We provide flash storage solutions to multiple consumer markets, including
imaging, USB drive, gaming, audio/video and others. Flash storage solutions are used in digital
cameras for high-resolution still images and video, and in solid-state digital camcorders for
high-resolution video. Gaming consoles and portable game devices now include advanced features
that require high-capacity embedded or removable storage solutions, and we offer solutions that are
specifically packaged for the gaming market. Our USB flash drives allow consumers to store and
transfer files, pictures and music on keychain-sized devices. We sell a line of digital media players
with both embedded and removable NAND flash under our Sansa brand with varying combinations
of audio and video capabilities. We also sell a line of wireless media drives under our Connect brand
that provide wireless streaming of content to computers and mobile products. Primary removable
card formats for consumer devices include CompactFlash, SD and microSD.
Our Sales Channels
Our revenue is generated through the following channels:
• Commercial. Our Commercial channel represents sales directly and through distributors to OEMs,
system integrators and value-added resellers who bundle, embed or integrate our flash storage
solutions. Our Commercial channel addresses a large variety of applications, including mobile
phones, tablets, notebooks, gaming devices, enterprise storage solutions, servers and other
computing devices. Within our enterprise business, both our sales and technical resources are
increasingly engaged alongside our OEM and other partners to address end-customer requirements
and generate demand. Our Commercial channel sales also include sales made directly to enterprise
customers. We also sell our data storage solutions to customers in our Commercial channel that
offer our products under their own brand name in retail channels. We generate license and royalty
revenue related to intellectual property, or IP, and this revenue is also included in our Commercial
revenue.
• Retail. We sell our products directly and through distributors to consumer electronics stores, office
superstores, mobile phone stores, mass merchants, e-commerce retailers, catalog and mail order
companies, drug stores, supermarkets, convenience stores and kiosks in a wide variety of locations.
Backlog
7
Annual Report
As of the end of fiscal years 2014 and 2013, our backlog was $305 million and $296 million,
respectively. Because our customers can generally change or cancel orders with limited or no penalty and
limited advance notice prior to shipment, we do not believe that our backlog, as of any particular date, is
indicative of future sales.
Seasonality
Because the majority of our products are ultimately sold to consumers, our revenue is generally
highest in our fourth fiscal quarter due to the holiday buying season. In addition, our revenue is generally
lowest in our first fiscal quarter.
Customer Concentration
In fiscal years 2014, 2013 and 2012, revenue from our top 10 direct customers and licensees accounted
for approximately 48%, 49% and 43% of our revenue, respectively. In fiscal year 2014, 2013 and 2012,
Apple Inc., or Apple, accounted for 19%, 20% and 13% of our revenue, respectively. The composition of
our major customer base has changed over time, and we expect this pattern to continue as our markets and
strategies evolve. Sales to our customers are generally made pursuant to purchase orders rather than
long-term contracts.
Technology
Since our inception, we have focused our research, development and standardization efforts on
developing highly reliable, high-performance, cost-effective NAND flash storage products in small form
factors to address a variety of markets. Our research and development, or R&D, efforts are designed to
help ensure the creation of fully-integrated, broadly interoperable products that are compatible with both
existing and newly developed system platforms. We have successfully developed and commercialized 2-bits
per cell flash multi-level cell, or X2, and 3-bits per cell flash multi-level cell, or X3, technologies, which
have enabled significant cost reduction and growth in NAND flash usage. In addition, we are investing in
the development of our 3D NAND technology, which we refer to as BiCS, and 3D ReRAM architecture.
We have also initiated, defined and developed standards to meet new market needs and to promote wide
acceptance of flash storage standards through interoperability and ease-of-use. We believe our core
technical competencies are in:
• high-density NAND flash process, module integration, device design and reliability;
• securing data on a flash device;
• controller design;
• firmware and software development;
• system-level design and integration;
• multi-die stacking and packaging technology; and
• low-cost system testing.
To achieve compatibility with various electronic platforms regardless of the host processors or
operating systems used, we continue to develop new capabilities in NAND flash, advanced controllers and
firmware design. We also continue to evolve our architecture to leverage advances in manufacturing
process technology. Our products are designed to be compatible with industry-standard and customerspecific interfaces used in operating systems for PCs, mobile phones, tablets, notebooks, digital imaging
devices, gaming platforms, GPS products, servers and storage systems, and other computing and electronic
devices.
Our sophisticated controller and firmware technologies permit our flash storage solutions to achieve a
high level of reliability and longevity. Each one of our flash devices contains millions of flash memory cells.
A failure in any one of these cells can result in loss of data. Our system technologies, including our
controller chips and firmware, are designed to detect such defects and prevent loss of data under most
conditions.
8
Patents and Licenses
We rely on a combination of patents, trademarks, copyright and trade secret laws, confidentiality
procedures and licensing arrangements to protect our IP rights. See Item 1A, ‘‘Risk Factors.’’
As of the end of fiscal year 2014, we owned, or had rights to, more than 3,000 United States, or U.S.,
patents and more than 2,100 foreign patents. We had more than 1,400 patent applications pending in the
U.S., and had foreign counterparts pending on many of the applications in multiple jurisdictions. We
continually seek additional U.S. and international patents on our technology.
We have patent license agreements with many companies, including Hitachi, Ltd., or Hitachi, Intel
Corporation, or Intel, Renesas Electronics Corporation, Samsung Electronics Co., Ltd., or Samsung,
SK hynix Inc., or Hynix, Sony Corporation, or Sony, and Toshiba. In the three years ended December 28,
2014, we generated $1.11 billion in revenue from license and royalty agreements.
Trade secrets and other confidential information are also important to our business. We protect our
trade secrets through confidentiality and invention assignment agreements, among other measures.
Supply Chain
Our supply chain is an important competitive advantage and is comprised of the following:
• Silicon Sourcing. All of our memory storage solutions require silicon chips for the memory and
controller components. Substantially all of our NAND flash memory is supplied by our ventures
with Toshiba. This represents captive supply and we are obligated to take our share of the output
from these ventures or pay the fixed costs associated with that capacity. See ‘‘Ventures with
Toshiba.’’ We also purchase flash memory from other suppliers, which we refer to as non-captive, to
supplement our captive flash memory. We use controllers that 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.
• Assembly and Testing. We sort and test our memory wafers at captive and third-party facilities in
China, Japan and Taiwan. Our products are assembled and tested at both our in-house facilities in
Shanghai, China, and through our network of contract manufacturers, which are located primarily
in China, Malaysia, Taiwan and the U.S. We believe the use of our in-house assembly and test
facilities, as well as contract manufacturers, reduces the cost of our operations, provides flexibility
and gives us access to increased production capacity.
Ventures with Toshiba
Through Flash Ventures, located within Toshiba’s Yokkaichi, Japan facilities, we and Toshiba
collaborate in the development and manufacture of NAND flash wafers using semiconductor
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Annual Report
We and Toshiba currently operate three business ventures in 300-millimeter NAND flash
manufacturing facilities, which provide us leading-edge, cost-competitive NAND wafers for our end
products. Flash Partners Ltd., which operates primarily in Toshiba’s Fab 3 facility, or Fab 3, was formed in
September 2004. Flash Alliance Ltd., which operates primarily in Toshiba’s Fab 4 facility, or Fab 4, was
formed in July 2006. Flash Forward Ltd., which operates primarily in Toshiba’s Fab 5 facility, or Fab 5, was
formed in July 2010. We refer to Flash Partners, Flash Alliance and Flash Forward collectively as Flash
Ventures. 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.
manufacturing equipment owned or leased by each of the Flash Venture entities. We hold a 49.9%
ownership position in each of the Flash Venture entities. Each Flash Venture entity purchases wafers from
Toshiba at cost and then resells those wafers to us and Toshiba at cost plus a mark-up. We are committed to
purchase half of Flash Ventures’ NAND wafer supply or pay for half of Flash Ventures’ fixed costs
regardless of the output we choose to purchase. 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. We and Toshiba also collaborate on joint R&D activities.
Competition
We face competition from NAND flash memory manufacturers and from companies that buy NAND
flash memory and incorporate it into their end products.
We believe that our ability to compete successfully depends on a number of factors, including:
• product performance, reliability and differentiation;
• price, quality and availability of products;
• success in developing new products, applications and markets;
• timing of new product announcements and successful introductions;
• sufficient availability of cost-efficient supply;
• creation and monetization of IP and the development of industry standards and formats;
• the number and nature of competitors in a given market; and
• general market and economic conditions.
We believe our key competitive advantages are:
• our strong history of technological innovation and standards creation, which enables us to grow the
overall market for flash storage solutions;
• our vertically integrated business model, including our investment in Flash Ventures, which provides
us with leading-edge, low-cost NAND flash;
• we are the only pure play NAND flash storage solutions provider, which strengthens our focus on
NAND technology and solutions;
• our IP ownership, in particular our patents, and multi-level cell, or MLC, manufacturing know-how,
which provides us with license and royalty revenue as well as cost advantages;
• our system expertise in controller and firmware development;
• that we market and sell a broad range of flash storage products, which gives us an advantage in
attracting and retaining retail and commercial customers;
• that we have global retail distribution for our products and worldwide leading market share in
removable flash cards and USB flash drives;
• that we have a well-recognized and trusted brand; and
• our strong financial position.
Our competitors include:
• NAND Manufacturers. We compete with NAND flash memory manufacturers, including Hynix,
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, SSD, removable
and other form factors. We compete with these NAND flash memory manufacturers based upon
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technology and advanced wafer manufacturing processes which influence cost, performance and
quality of the flash memory. We further compete based upon the features and performance of our
flash storage solutions, the system technology in our solutions and the branding of our solutions.
• 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. We compete based upon product features
and performance, the breadth and availability of our product offerings, quality and reliability,
marketing programs, brand recognition and price. Our primary competitors currently include,
among others, Kingston Technology Company, Inc., or Kingston, Lexar Media, Inc., or Lexar, a
subsidiary of Micron, PNY Technologies, Inc., or PNY, Samsung, Sony, Toshiba, Transcend
Information, Inc., or Transcend, and Verbatim Americas, LLC, or Verbatim. We also sell flash
products, in the form of private label cards, wafers or components, to certain companies who sell
products that may ultimately compete with our branded products in the retail or commercial
channels.
• Client Storage Solution Manufacturers. In the market for client SSDs, we face competition from
NAND flash memory manufacturers including Intel, Micron, Samsung and Toshiba. We also face
competition from other suppliers of client SSDs and hard drives such as Kingston, Philips &
Lite-On Digital Solutions Corporation, or Lite-On, Seagate Technology plc, or Seagate, and
Western Digital Corporation, or WDC. We compete based upon the performance, quality and
reliability of our product offerings, price and relationships with computer manufacturers.
• Enterprise Storage Solution Manufacturers. We compete in the enterprise storage solutions market
where we face competition from NAND flash memory manufacturers including Intel, Micron,
Samsung and Toshiba, and from other providers of enterprise SSDs and hard drives such as
Lite-On, Seagate and WDC. We compete based upon the performance, quality and reliability of our
product offerings, price and relationships with storage OEMs and enterprise customers.
• Digital Media Players and Drives. In the standalone digital audio/video player market, we face strong
competition from Apple. We also face competition from Coby Electronics Corporation, GPX, a
brand of Digital Products International, Inc., Koninklijke Philips N.V., Mach Speed
Technologies, LLC and Sony, among others. We also face competition for our wireless media and
flash drives from companies such as ADATA Technology Co., Ltd., or ADATA, Seagate and WDC.
We compete based upon the breadth and availability of our product offerings, quality and reliability,
marketing programs, brand recognition and price.
Corporate Responsibility
We believe that corporate social responsibility is an essential factor for our overall corporate success.
This includes adopting ethical and sustainable business practices to direct how we do business while
keeping the interests of our stakeholders and the environment in focus.
• treat all employees with dignity and respect;
• set up processes and procedures intended to (i) comply with applicable laws and regulations as well
as our internal guidelines and (ii) uphold ethical standards;
• establish policies and procedures intended to promote the idea that the quality of our products and
services, consistency of production and employee well-being are predicated on a safe and healthy
work environment; and
• establish policies and procedures intended to promote environmental responsibility as an integral
part of our culture.
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Annual Report
We strive to uphold the following principles:
Additional Information
We file reports and other information with the Securities and Exchange Commission, or SEC,
including annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and
proxy or information statements. Those reports and statements and all amendments to those documents
filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act (1) may be read and
copied at the SEC’s Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549, (2) are
available at the SEC’s internet site (www.sec.gov), which contains reports, proxy and information
statements and other information regarding issuers that file electronically with the SEC and (3) are
available free of charge through our website as soon as reasonably practicable after electronic filing with,
or furnishing to, the SEC. Information regarding the operation of the SEC’s Public Reference Room may
be obtained by calling the SEC at (202) 551-8090. Our website address is www.sandisk.com. Information on
our website is not incorporated by reference nor otherwise included in this report, and any references in
this report to our website are intended to be inactive textual references only. Our principal executive
offices are located at 951 SanDisk Drive, Milpitas, CA 95035, and our telephone number is (408) 801-1000.
SanDisk is our trademark, and is registered in the U.S. and other countries. Other brand names mentioned
herein are for identification purposes only and may be the trademarks of their respective holder(s).
Employees
As of December 28, 2014, we had 8,696 full-time employees, including 3,014 employees in research
and development, 1,023 employees in sales and marketing, 639 employees in general and administrative,
and 4,020 employees in operations. None of our employees is represented by a collective bargaining
agreement and we have never experienced any employee work stoppage. We believe that our employee
relations are good.
Executive Officers
Our executive officers, who are elected by and serve at the discretion of our board of directors, are as
follows (all ages are as of February 10, 2015):
Name
Sanjay Mehrotra
Judy Bruner . . .
Sumit Sadana . .
Mark Brazeal . .
Shuki Nir . . . . .
Dr. Siva Sivaram
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Age
Position
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President and Chief Executive Officer
Executive Vice President, Administration and Chief Financial Officer
Executive Vice President and Chief Strategy Officer
Chief Legal Officer and Senior Vice President, IP Licensing
Senior Vice President, Corporate Marketing, and General Manager, Retail
Senior Vice President, Memory Technology
Sanjay Mehrotra co-founded SanDisk in 1988 and has been our President and Chief Executive Officer
since January 2011. He was appointed to our board of directors in July 2010. Mr. Mehrotra previously
served as our Chief Operating Officer, Executive Vice President, Vice President of Engineering, Vice
President of Product Development, and Director of Memory Design and Product Engineering.
Mr. Mehrotra has 35 years of experience in the non-volatile semiconductor memory industry, including
engineering and management positions at Integrated Device Technology, Inc., SEEQ Technology, Inc.,
Intel Corporation and Atmel Corporation. Mr. Mehrotra has a B.S. and an M.S. in Electrical Engineering
and Computer Sciences from the University of California, Berkeley. He is the named inventor on over
70 patents and has published numerous articles in the area of non-volatile memory design and flash
memory systems. Mr. Mehrotra serves on the board of directors of Cavium, Inc., the Engineering Advisory
Board of the University of California, Berkeley, the Global Semiconductor Alliance and the Stanford
Graduate School of Business Advisory Council.
12
Judy Bruner has been our Executive Vice President, Administration and Chief Financial Officer since
June 2004. She served as a member of our board of directors from July 2002 to July 2004. Ms. Bruner has
35 years of financial management experience, including serving as Senior Vice President and Chief
Financial Officer of Palm, Inc., a provider of handheld computing and communications solutions, from
September 1999 until June 2004. Ms. Bruner also held financial management positions at
3Com Corporation, Ridge Computers and Hewlett-Packard Company. Ms. Bruner has a B.A. in
Economics from the University of California, Los Angeles and an M.B.A. from Santa Clara University.
Since January 2009, Ms. Bruner has served on the board of directors and the audit committee of Brocade
Communications Systems, Inc. Since July 2014, Ms. Bruner has served on the board of directors of the
Computer History Museum, a 501(c)(3) organization.
Sumit Sadana has been our Executive Vice President and Chief Strategy Officer since September
2012, and previously served as our Senior Vice President and Chief Strategy Officer from April 2010 to
September 2012. Mr. Sadana was President of Sunrise Capital LLC, a technology and financial consulting
firm, from October 2008 to March 2010. Mr. Sadana was also Senior Vice President, Strategy and Business
Development from December 2004 to September 2008, as well as Chief Technology Officer from January
2006 to May 2007, at Freescale Semiconductor, Inc., a provider of embedded processors. Mr. Sadana
started his career at International Business Machines Corporation where he held several hardware design,
software development, operations, strategic planning, business development and general management
roles. Mr. Sadana has a B.Tech. in Electrical Engineering from the Indian Institute of Technology (IIT),
Kharagpur and an M.S. in Electrical Engineering from Stanford University. Since January 2014,
Mr. Sadana has served on the board of directors of Second Harvest Food Bank, a 501(c)(3) charity.
Mark Brazeal has been our Chief Legal Officer and Senior Vice President, IP Licensing since
December 2014. Prior to joining SanDisk, Mr. Brazeal served in various positions of increasing
responsibility at Broadcom Corporation from April 2000 to September 2014, most recently as Senior Vice
President and Senior Deputy General Counsel. Prior to joining Broadcom Corporation, Mr. Brazeal was
an attorney with the law firms of Wilson Sonsini Goodrich and Rosati, P.C. in Palo Alto, California from
1998 to 2000, YUASA and HARA in Tokyo, Japan from 1996 to 1997 and Howrey and Simon, LLP in
Washington, D.C. from 1993 to 1996. Mr. Brazeal holds a B.A. with Distinction in American Government
from the University of Virginia and a J.D. from the University of Virginia School of Law.
Shuki Nir has been our Senior Vice President, Corporate Marketing, and General Manager, Retail
since December 2012, and previously served as Senior Vice President and General Manager, Retail and
various other sales and marketing roles as a Vice President from November 2006 to December 2012.
Mr. Nir also served in various sales and marketing roles as a Vice President at msystems Ltd. from
February 2003 until November 2006, when it was acquired by us. Prior to that, Mr. Nir held sales and
marketing positions at Destinator Ltd. and also co-founded and served as Chief Executive Officer of
MindEcho, Inc. Mr. Nir has a B.A. in Law and Accounting and an M.B.A. from Tel Aviv University.
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Annual Report
Dr. Siva Sivaram has been our Senior Vice President, Memory Technology since June 2013, and
previously served as our Vice President Technology from January 2005 to March 2007 and as Chief
Operating Officer for Matrix Semiconductor, Inc. from November 1999 until January 2005, when it was
acquired by us. Most recently, Dr. Sivaram was Chief Executive Officer of Twin Creeks Technologies, Inc.,
a company focused on manufacturing equipment for the production of solar modules, sensors, LEDs and
other solid-state devices, from January 2008 to December 2012. Dr. Sivaram also held various engineering
and management positions at Intel Corporation between July 1986 and October 1999. Dr. Sivaram serves
on the board of directors of ZigStor Inc., Sand 9, Inc. and EnerGram Pvt. Ltd. Dr. Sivaram received
a Ph.D. and an M.S. in Materials Science from Rensselaer Polytechnic Institute and a B.E. in Mechanical
Engineering from the National Institute of Technology, Tiruchirappalli.
ITEM 1A.
RISK FACTORS
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 in 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 technology nodes, particularly OEM products such as our embedded
flash storage and SSD 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 SSD 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 OEM customers,
particularly with embedded and SSD products;
• 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;
14
• 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;
• inability to enhance current products, develop new products or transition products to new
technologies on a timely basis or in advance of our competitors;
• 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 assembly and test or retail packaging and shipping capacity from our Shanghai, China
facilities 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 thirdparty 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.
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Annual Report
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 invest in a 3D NAND pilot line
in the second half of fiscal year 2015 and ramp volume production of 3D NAND in fiscal year 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.
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 underinvest 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 fiscal year
2008 and the first quarter of fiscal year 2009, we recorded charges for adverse purchase commitments
associated with under-utilization of Flash Ventures’ capacity. On the other hand, if we or Toshiba underinvest 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
16
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.
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
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Annual Report
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, SSD products have generated the largest
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.
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 that meet our customers’
requirements, 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 will require
greater investments and customization than our traditional products, which results in longer
development cycles and higher 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;
• 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 reap the expected benefits of our recently completed and pending acquisitions,
many of which relate to the high-value solutions space;
• SSDs and other high-value solutions require more software than our traditional products, therefore
we must continue to develop software expertise;
• SSDs and other high-value solutions require more complex controllers than our traditional
products, and we may be unable to develop or source controllers that meet the performance
requirements of these solutions;
• 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.
18
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.
Our revenue depends in large part on our ability to achieve design wins with OEM customers and the
success of products sold by our OEM customers. Our primary OEM products include cards for mobile
devices, embedded memory products, and SSDs for the notebook, storage and server markets. Our OEM
revenue is primarily dependent upon our products meeting OEM specifications and the achievement of
design wins in an OEM’s products such as mobile phones, tablets, computers and enterprise servers. Even
if our products meet OEM specifications, our sales to these customers are dependent upon the
OEMs choosing our products over those of our competitors, the OEMs’ ability to create, market and sell
their products successfully, and our ability to supply our products in sufficient quantity and in a timely
manner. For example, in the first half of fiscal year 2012, our OEM sales declined because our next
generations of mobile embedded products were in various stages of development and qualification, and
because mobile OEM customers reduced their rate of card bundling and bundled lower capacity cards. 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, should they decide
not to use our products in the volumes and within the timeframes that we anticipate, or at all, or should we
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
approximately 48% and 49% of our revenue in fiscal years 2014 and 2013, respectively. One customer
accounted for 19% and 20% of our revenue in fiscal years 2014 and 2013, respectively. The composition of
our major customer base has changed over time, including shifts between OEM and retail-based
customers, and there have been changes in the market share concentration among our customers. Many of
our OEM 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.
We sell our enterprise SSDs 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
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Annual Report
Our SSD products are more complex and rely on more sophisticated firmware than our other products,
which may result in increased costs and lower gross margin due to more frequent product updates. Our SSD
solutions are more complex than our traditional products due to, among other things, an increased
dependence on more sophisticated firmware and customization of our products for specific OEM
customers. Changes in our OEM customers’ specifications for these products could require us to update
the firmware for our SSD products, which would result in increased costs for processing these updates.
Furthermore, our failure to update our products to comply with the new specifications may result in
reduced demand from our customers for a particular SSD solution, notwithstanding the long design,
qualification and test cycles we have undertaken as part of our sales process for that solution, which may
harm our results of operations.
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 underproduce 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, Inc., or 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 SSD 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:
• 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.
20
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 fiscal year 2014 and expect to continue ramping production on this node throughout
fiscal year 2015. Beyond the 15-nanometer node, there is no certainty that further technology scaling can
be achieved cost effectively with the 2D NAND flash architecture. In the first quarter of fiscal year 2011,
we began investing in our 3D NAND flash architecture and we continue with our 3D NAND development,
optimizing for manufacturability, scalability, cost and product specifications, and targeting a broad range of
applications. We expect to invest in a 3D NAND pilot line in the second half of fiscal year 2015 and ramp
volume production of 3D NAND in fiscal year 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, or EUV. 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.
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Annual Report
Many companies, including some of our competitors, have developed or are attempting to develop
alternative non-volatile technologies such as magnetoresistive RAM, or MRAM, ReRAM, Memristor,
vertical or stacked NAND, phase-change and charge-trap flash technologies and other technologies.
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 current and future generations of 2D NAND flash technology, and it could reduce the
competitiveness and future revenue and profitability of the potential alternative 3D NAND or 3D ReRAM
technologies 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
scale our technology 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.
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, this could allow our
competitors to 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 near Shanghai, China 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
22
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 fiscal year 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 fiscal year 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. 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.
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
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Annual Report
In transitioning to new technologies and products, we may not achieve OEM design wins, our OEM
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, 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 OEM
customers and us. In addition, our competitors may transition to these new technologies more quickly or
more effectively than we are able to, which could harm our ability to compete effectively. If we fail to
achieve OEM design wins with new technologies such as 1Y-nanometer, 15-nanometer or subsequent
process technologies or the use of X3 in certain products, if our OEM customers choose to transition to
these new technologies more slowly 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 OEM 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 products require controllers or firmware, and any delays 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.
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 fiscal year 2008 and the first quarter of fiscal
year 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;
• 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;
• 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;
24
• 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 third
quarter of fiscal year 2013, we recorded impairment charges of $47 million related to amortizable
intangible assets and $36 million related to an in-process research and development intangible asset, both
from the acquisition of Pliant Technology, Inc., or Pliant. These impairment charges stemmed primarily
from our decision to integrate more of the SMART Storage Systems, or SMART Storage, architecture and
technology into our future enterprise product roadmap and from the delay of our next-generation SSD
platform built on the Pliant technology.
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.
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Annual Report
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.
Currently, wafers for our internally-designed controllers are manufactured by third-party foundries. In
addition, we purchase controllers from third-party sources, and some 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.
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
26
and formats. The success of our competitors may harm our future revenue or margins and may result in
the loss of our key customers.
• NAND Manufacturers. We compete with NAND flash memory manufacturers, including Hynix,
Intel, Micron, Samsung and Toshiba. These companies compete with us in selling a range of flashbased 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, which may reduce demand or accelerate price declines for our products.
Furthermore, the future rate of scaling of the NAND flash technology design that we employ may
slow down significantly, which would slow down cost reductions that are fundamental to the
adoption of NAND flash technology in new applications. If our scaling of NAND flash technology
slows down relative to our competitors, our business and operating results would be harmed and
our investments in captive fabrication facilities could be impaired.
• 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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Annual Report
• 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, Lite-On, Seagate and 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.
• Enterprise Storage Solution Manufacturers. In the market for enterprise data center SSDs, we face
competition from Intel, Micron, Samsung and Toshiba, all of which are also NAND flash producers,
as well as from Lite-On, Seagate and WDC. Many of these competitors have significantly more
experience with the software components that are required for successful enterprise SSD 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 SSD 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 our business could be
harmed if these facilities do not perform as planned. Our reliance on our captive assembly and test
manufacturing facilities near Shanghai, China has 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 Shanghai,
28
China facilities are responsible for packaging and shipping our retail products within the U.S., Asia,
Europe, Canada and Latin America. Any delays in adding new equipment capacity, 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 and under-utilization charges, 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.
We rely on our suppliers, some of which are the sole source of supply for our non-memory components, and
capacity limitations of 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, 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.
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Annual Report
Our products may contain errors or defects, 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 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. 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 and client SSD products, could result in increased expenditures for product
testing, or increase our service 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. 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.
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.
30
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, 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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Annual Report
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 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.
We expect to continue to devote additional 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.
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
32
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 intellectual property. 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 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.
We and certain of our officers are at times involved in litigation, including litigation regarding our IP rights
or that of third parties, 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. We are the plaintiff in some of these actions and the
defendant in others. Some of the actions seek 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.
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Annual Report
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 the manufacture, use and
sale of products. Litigation, including IP 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 may divert the efforts and
attention of some of our key personnel.
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 I, Item 3, ‘‘Legal Proceedings.’’
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.
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 fiscal year, sometimes followed by
significant declines in the first quarter of the following fiscal 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.
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 December 28, 2014, Flash Ventures was in compliance with all of its master lease
covenants.
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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
$551 million based upon the exchange rate at December 28, 2014, 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;
• 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.
35
Annual Report
• import or export restrictions that could affect some of our products, including those with encryption
technology;
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.
36
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
Shanghai, China facilities or our Asia-based contract manufacturers. As a result, our business and
operating results may be harmed.
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.
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. For
example, the Internal Revenue Service, or IRS, is currently conducting an examination of our federal
income tax returns for fiscal years 2009 through 2011, and we cannot be certain as to when a resolution of
37
Annual Report
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.
this examination will be reached or what the outcome will be. 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.
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’’ or to procure conflict free
minerals at a reasonable price, or at all, or are unable to 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
the due diligence procedures that we implement. 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
38
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.
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 will, 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.
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.
39
Annual Report
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 December 28, 2014, we had guarantee obligations for Flash Ventures’ master
lease agreements denominated in Japanese yen of approximately $551 million based on the exchange rate
at December 28, 2014. 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 December 28, 2014, 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 December 31, 2014, 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 beginning on January 1, 2015 and ending March 31, 2015.
Convertibility of the Notes based on the trading price of our common stock is assessed on a calendarquarter 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.
ITEM 1B.
UNRESOLVED STAFF COMMENTS
None.
ITEM 2.
PROPERTIES
Our corporate headquarters are located in Milpitas, California. As of December 28, 2014, we owned
five buildings in Milpitas comprising approximately 589,000 square feet. These buildings house our
corporate offices, including personnel from engineering, sales, marketing, operations and administration.
We own two testing and assembly buildings comprising approximately 715,000 square feet located on a
50-year land lease in Shanghai, China, of which 42 years remain. We are constructing a testing and
assembly building of approximately 387,000 square feet located on a 30-year land lease in Pulau Pinang,
Malaysia of which 29 years remain. In addition, we own three buildings in Israel that house administrative
offices and research and development facilities. Two buildings comprising approximately 167,000 square
feet are located in Kfar Saba, Israel, and are on a 99-year land lease, of which 78 years remain; and one
building of approximately 64,000 square feet, located in Tefen, Israel, is on a 50-year land lease, of which
43 years remain.
We also lease offices supporting our sales, operations, administration and design in the U.S., Brazil,
China, France, Germany, India, Ireland, Israel, Istanbul, Italy, Japan, Korea, Malaysia, the Netherlands,
Poland, Russia, Scotland, Singapore, Spain, Sweden, Taiwan, Turkey, the United Arab Emirates and the
United Kingdom.
ITEM 3.
LEGAL PROCEEDINGS
See Note 18, ‘‘Litigation,’’ in the Notes to Consolidated Financial Statements of this Form 10-K
included in Item 8, ‘‘Financial Statement and Supplementary Data’’ of this report.
ITEM 4.
MINE SAFETY DISCLOSURES
Not applicable.
40
PART II
ITEM 5.
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER
MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Market For Our Common Stock. Our common stock is traded on the NASDAQ Global Select Market, or
NASDAQ, under the symbol ‘‘SNDK.’’ The following table summarizes the high and low sale prices for
our common stock as reported by NASDAQ for our two most recent fiscal years.
High
2013
First quarter .
Second quarter
Third quarter .
Fourth quarter
2014
First quarter .
Second quarter
Third quarter .
Fourth quarter
Low
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$
56.49
63.73
63.97
70.93
$
42.30
50.68
53.09
58.58
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$
82.55
104.00
108.77
106.64
$
66.80
73.11
90.66
80.26
Holders. As of January 30, 2015, we had approximately 244 stockholders of record.
Dividends. In the third quarter of fiscal year 2013, our Board of Directors declared our first dividend.
We paid a total of $235 million and $101 million in cash for dividends during fiscal years 2014 and 2013,
respectively.
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 fiscal months ended December 28, 2014 (in millions, except share and per share amounts).
Period
September 29, 2014 to
October 26, 2014 . . . . . . . . .
October 27, 2014 to
November 23, 2014 . . . . . . .
November 24, 2014 to
December 28, 2014 . . . . . . .
Total . . . . . . . . . . . . . . . . .
1,808,349
Average Price Paid
per Share(b)
$
88.51
1,808,349
3,346,863
90.54
3,346,863
367,174
101.81
367,174
5,522,386
5,522,386
Approximate
Dollar Value of
Shares that May
Yet Be Purchased
Under the Plans or
Programs(a)
$
627
Our Board of Directors has authorized a stock repurchase program that allows management to repurchase shares
of our stock. The stock repurchase program does not obligate us to acquire any specific number of shares of
common stock, or any shares at all, and may be suspended at any time at our discretion. The timing and amount
of any repurchase of shares is determined by our management, based on its evaluation of market conditions, cash
on hand, applicable legal requirements and other factors. Under the stock repurchase program, shares may be
repurchased from time to time in privately negotiated or open market transactions, including under plans
complying with Rule 10b5-1 of the Exchange Act. Our Board of Directors authorized in October 2011 and
increased in December 2012 a stock repurchase program which was fully expended by the end of the third quarter
of fiscal year 2013. On July 31, 2013, we announced that our Board of Directors authorized a new stock
repurchase program of $2.5 billion of our common stock, which will remain in effect until the available funds have
41
Annual Report
(a)
Total Number of
Shares Purchased(a)
Total Number of
Shares Purchased
as Part of Publicly
Announced Plans
or Programs(a)
been expended or the program is terminated by our Board of Directors. As of December 28, 2014, there was
$627 million remaining available for stock repurchases under the current program. On January 21, 2015, we
announced that our Board of Directors increased the current stock repurchase program by an additional
$2.5 billion.
(b)
Does not include amounts paid for commissions.
Stock Performance Graph*
Five-Year Stockholder Return Comparison. The following graph compares the cumulative total
stockholder return on our common stock with that of the S&P 500, a broad market index published by
S&P, a selected S&P Semiconductor Index and the Philadelphia, or PHLX, Semiconductor Sector Index
for the five-year period ended December 28, 2014. These indices, which reflect formulas for dividend
reinvestment and weighting of individual stocks, do not necessarily reflect returns that could be achieved
by an individual investor.
The comparison for each of the periods assumes that $100 was invested on January 3, 2010 in our
common stock, the S&P 500, the S&P Semiconductor Index and the PHLX Semiconductor Sector Index,
and assumes all dividends are reinvested. For each reported year, the reported dates are the last trading
dates of our fiscal quarters (which end on the Sunday closest to March 31, June 30 and September 30,
respectively) and year (which ends on the Sunday closest to December 31).
$400
$350
$300
$250
$200
$150
$100
$50
$0
2009
2010
2011
SanDisk Corporation
S&P 500
2012
S&P Semiconductor Index
2009
SanDisk Corporation . . . . . . . . . .
S&P 500 . . . . . . . . . . . . . . . . . .
S&P Semiconductor Index . . . . . .
PHLX Semiconductor Sector Index
*
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2010
100.00 $
100.00
100.00
100.00
171.97 $
112.78
108.63
114.42
2011
169.72 $
112.78
108.52
102.03
2013
2014
PHLX Semiconductor
Sector Index
23FEB201514312279
2012
147.20 $
125.77
100.16
104.71
2013
244.00 $
165.13
133.35
147.25
2014
356.35
187.32
181.34
193.66
The material in this section of this report is not deemed ‘‘filed’’ with the SEC and is not to be incorporated by reference
into any of our filings under the Securities Act of 1933 or the Securities Exchange Act of 1934 or subject to
Regulation 14A or 14C, whether made before or after the date hereof and irrespective of any general incorporation
language in any such filing.
42
ITEM 6.
SELECTED FINANCIAL DATA
December 28,
2014(1)
December 29,
2013(2)
Fiscal years ended
December 30,
January 1,
2012(3)
2012(4)
January 2,
2011(5)
(In millions, except per share data)
Revenue . . . . . . . . . . . . . . . . . . . . . . . $
Cost of revenue . . . . . . . . . . . . . . . . . .
6,627.7 $
3,559.9
6,170.0 $
3,302.5
5,052.5 $
3,369.3
5,662.1 $
3,223.0
4,826.8
2,564.7
Gross profit . . . . . . . . . . . . . . . . . . . . $
Operating income . . . . . . . . . . . . . . . . $
Net income attributable to common
stockholders . . . . . . . . . . . . . . . . . .
3,067.8 $
1,557.9 $
2,867.5 $
1,562.2 $
1,683.2 $
696.1 $
2,439.1 $
1,530.1 $
2,262.1
1,461.6
1,007.4
1,042.7
417.4
987.0
1,300.1
Net income attributable to common
stockholders per share:
Basic . . . . . . . . . . . . . . . . . . . . . . . . . $
Diluted . . . . . . . . . . . . . . . . . . . . . . . $
Shares used in computing net income
attributable to common stockholders
per share:
Basic . . . . . . . . . . . . . . . . . . . . . . . . .
Diluted . . . . . . . . . . . . . . . . . . . . . . .
4.52 $
4.23 $
222.7
238.2
Cash dividends declared per share . . . . . $
234.9
240.2
1.05 $
December 28,
2014
4.44 $
4.34 $
242.1
245.3
0.45 $
December 29,
2013
1.72 $
1.70 $
— $
As of
December 30,
2012
4.12 $
4.04 $
239.5
244.6
— $
January 1,
2012
5.59
5.44
232.5
238.9
—
January 2,
2011
(In millions)
Working capital .
Total assets . . . .
Convertible debt
Total equity . . .
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
. $
.
.
.
2,009.2 $
10,290.0
2,069.3
6,526.7
3,420.1 $
10,488.7
1,985.4
6,965.7
2,724.7 $
10,339.1
1,696.6
7,259.6
3,262.6 $
10,174.6
1,604.9
7,060.8
3,072.6
8,776.7
1,711.0
5,779.4
Includes share-based compensation expense of $155 million, amortization of acquisition-related intangible assets
of $127 million, inventory step-up expense of $8 million, amortization of convertible debt bond discount of
$86 million, and restructuring and other expense of $33 million.
(2)
Includes share-based compensation expense of $100 million, amortization of acquisition-related intangible assets
of $61 million, impairment of acquisition-related intangible assets of $83 million and amortization of convertible
debt bond discount of $68 million.
(3)
Includes share-based compensation expense of $78 million, amortization of acquisition-related intangible assets
of $52 million, impairment of acquisition-related intangible assets of $1 million and amortization of convertible
debt bond discount of $90 million.
(4)
Includes share-based compensation expense of $63 million, amortization of acquisition-related intangible assets
of $44 million, amortization of convertible debt bond discount of $91 million, a charge of $25 million related to a
power outage and earthquake experienced in Fab 3 and Fab 4, a loss of $11 million related to the early
extinguishment of debt and a net gain of $19 million related to the sale of our investment in certain equity
securities.
(5)
Includes share-based compensation expense of $78 million, which includes $17 million due to a non-cash
modification of outstanding stock awards pursuant to the retirement of our former Chief Executive Officer,
amortization of acquisition-related intangible assets of $14 million, amortization of convertible debt bond
discount of $69 million, a charge of $18 million related to a power outage experienced in Fab 3 and Fab 4 and a
gain of $13 million related to the sale of the net assets of our mobile phone SIM business.
43
Annual Report
(1)
ITEM 7.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Overview
December 28,
2014
% of
Revenue
Fiscal years ended
December 29,
% of
2013
Revenue
December 30,
2012
% of
Revenue
(In millions, except percentages)
Revenue . . . . . . . . . . . . . . . . . . $
Cost of revenue . . . . . . . . . . . . .
Amortization of acquisitionrelated intangible assets . . . . . .
6,627.7
3,459.0
5,052.5
3,326.7
100%
66%
100.9
2%
49.5
1%
42.6
1%
Total cost of revenue . . . . . . . .
3,559.9
54%
3,302.5
54%
3,369.3
67%
...
3,067.8
46%
2,867.5
46%
1,683.2
33%
...
...
...
852.3
383.3
214.9
13%
6%
3%
742.3
276.3
192.3
12%
5%
3%
602.7
224.1
150.4
12%
4%
3%
...
26.4
—%
11.2
—%
9.0
—%
...
...
—
33.0
—%
—%
83.2
—
1%
—%
0.9
—
—%
—%
Total operating expenses . . . .
1,509.9
22%
1,305.3
21%
987.1
19%
Operating income . . . . . . .
Other income (expense), net . . . .
1,557.9
(68.9)
24%
(2%)
1,562.2
(46.1)
25%
—%
696.1
(69.2)
14%
(2%)
Income before income taxes . . .
Provision for income taxes . . . . .
1,489.0
481.6
22%
7%
1,516.1
473.4
25%
8%
626.9
209.5
12%
4%
1,007.4
15% $
1,042.7
17% $
417.4
8%
Gross profit . . . . . . . . .
Operating expenses:
Research and development .
Sales and marketing . . . . .
General and administrative
Amortization of acquisitionrelated intangible assets .
Impairment of acquisitionrelated intangible assets .
Restructuring and other . . .
Net income . . . . . . . . . . . . . . $
100% $
52%
6,170.0
3,253.0
100% $
53%
All fiscal years presented included 52 weeks, while fiscal year 2015 will include 53 weeks with 14 weeks
in our fourth fiscal quarter.
General
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 SSDs,
embedded products, removable cards, 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, 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
44
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 fiscal year 2014 and expect to continue ramping production on this
node throughout fiscal year 2015. Beyond the 15-nanometer node, there is no certainty that further
technology scaling can be achieved cost-effectively with the 2D NAND flash architecture. We are investing
in our 3D NAND architecture, which we refer to as BiCS, and we expect to invest in a 3D NAND pilot line
in the second half of fiscal year 2015 and ramp volume production of 3D NAND in fiscal year 2016. We are
also investing in 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 two locations, with Flash Ventures located in Yokkaichi, Japan, and our in-house assembly and test
operations located in Shanghai, China. 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.
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 license and royalty revenue
related to our IP.
Industry and Company Trends
45
Annual Report
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 fiscal year 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.
• We expect that our captive bit-supply growth for fiscal year 2015 will be near the upper end of the
industry supply growth rate of 35% to 40%, compared to our captive bit-supply growth of 20% in
fiscal year 2014 and 18% in fiscal year 2013.
• In 2015, we plan to increase our inventory levels in order to better meet customer service
requirements and accommodate variations in forecasted demand from our customers as well as
variations in fab output. Including both our captive supply and the non-captive supply we expect to
purchase, we expect our 2015 revenue bit growth to be no more than 30%. As we rebuild our
inventory levels in fiscal year 2015 and due to the expected loss of a large customer for our client
SSDs, we expect our revenue to experience a year-over-year decline in both the first and second
quarters and then return to year-over-year growth in the second half of fiscal year 2015.
• We expect both our blended average selling price per gigabyte and our blended average cost per
gigabyte to decline in fiscal year 2015. Our blended average selling price per gigabyte and our
blended average cost per gigabyte both declined 22% in fiscal year 2014.
• We expect our fiscal year 2015 blended average cost reduction per gigabyte to be between 15% and
25%. We expect our cost reduction in fiscal year 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 a higher usage of non-captive memory and start-up costs related to our
manufacturing facilities.
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 fiscal year 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 invest in a 3D NAND pilot line in the
second half of fiscal year 2015 and ramp volume production of 3D NAND in fiscal year 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 continued 2D NAND scaling is the most efficient method of reducing NAND costs in the near
term and addressing the broadest range of market opportunities and therefore continue to focus on scaling
2D NAND flash through the 15-nanometer technology node. 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.
Fiscal Year 2014 Acquisition
In July 2014, we completed the acquisition of Fusion-io, a leading developer of flash-based, Peripheral
Component Interconnect Express (‘‘PCIe’’) hardware and software solutions that enhance application
performance in enterprise and hyperscale data centers. We acquired all of the outstanding shares of
Fusion-io through an all-cash transaction. The total purchase price was $1.07 billion, net of cash acquired.
Of the total Fusion-io purchase price, $382 million was allocated to amortizable intangible assets and
46
$513 million was allocated to goodwill. In addition, $61 million of the Fusion-io purchase price was
allocated to acquired in-process research and development, or IPR&D, which we estimate will be
completed by the first quarter of fiscal year 2016 at an estimated cost of $12 million. See Note 17,
‘‘Business Acquisitions,’’ in the Notes to Consolidated Financial Statements of this Form 10-K included in
Item 8, ‘‘Financial Statement and Supplementary Data’’ of this report.
Critical Accounting Policies and Estimates
Our discussion and analysis of our financial condition and results of operations is based upon our
Consolidated Financial Statements, which have been prepared in accordance with U.S. Generally
Accepted Accounting Principles, or GAAP.
Use of Estimates. The preparation of these financial statements requires us to make estimates and
judgments that affect the reported amounts of assets, liabilities, revenue and expenses, and related
disclosure of contingent liabilities. On an ongoing basis, we evaluate our estimates, including, among
others, those related to customer programs and incentives, product returns, 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, IP claims and litigation. We base our
estimates on historical experience and on other assumptions that we believe are reasonable under the
circumstances, the results of which form the basis for our judgments about the carrying values of assets and
liabilities when those values are not readily apparent from other sources. Estimates have historically
approximated actual results. However, future results will differ from these estimates under different
assumptions and conditions.
Revenue Recognition, Sales Returns and Allowances and Sales Incentive Programs. Sales made to
distributors and retailers are generally under agreements allowing price protection and/or right of return
and, therefore, the revenue and related costs of these transactions are deferred until the distributors or
retailers sell the merchandise to their end customer, or the rights of return expire. As of December 28,
2014 and December 29, 2013, deferred income from sales to distributors and retailers were $237 million
and $254 million, respectively. Estimated sales returns are recorded as a reduction to revenue and deferred
revenue and were not material for any period presented in our Consolidated Financial Statements.
Inventories and Inventory Valuation. Inventories are stated at the lower of cost (first-in, first-out) or
market. Market value is based upon an estimated average selling price reduced by estimated costs of
disposal. The determination of market value involves numerous judgments including estimating average
selling prices based upon recent sales, industry trends, existing customer orders, current contract prices,
industry analysis of supply and demand and seasonal factors. Should actual market conditions differ from
our estimates, our future results of operations could be materially affected. The valuation of inventory also
requires us to estimate obsolete or excess inventory. The determination of obsolete or excess inventory
requires us to estimate the future demand for our products within appropriate time horizons, generally six
47
Annual Report
We record estimated reductions to revenue or to deferred revenue for customer and distributor
incentive programs and offerings, including price protection, promotions, co-op advertising, and other
volume-based incentives and expected returns. All sales incentive programs are recorded as an offset to
revenue or deferred revenue. In calculating the value of sales incentive programs, actual and estimated
activity is used based upon reported weekly sell-through data from our customers and historical activity.
The resolution of these claims is generally within 12 months and could materially impact revenue or
deferred revenue. In addition, actual returns and rebates in any future period could differ from our
estimates, which could impact the revenue we report. Our actual returns and rebates have not been
materially different from our estimates.
to 12 months. The estimated future demand is compared to inventory levels to determine the amount, if
any, of obsolete and excess inventory. The demand forecast includes our estimates of market growth and
our market share, various internal estimates and data from certain external sources, and is based on
assumptions that are consistent with the plans and estimates we are using to manage our underlying
business and short-term manufacturing plans. To the extent our demand forecast for specific products is
less than the combination of our product on-hand and our noncancelable orders from suppliers, we could
be required to record additional inventory reserves, which would have a negative impact on our gross
margin.
Deferred Tax Assets. We must make certain estimates in determining income tax expense for financial
statement purposes. These estimates occur in the calculation of certain tax assets and liabilities, which arise
from differences in the timing of recognition of revenue and expense for tax and financial statement
purposes. From time-to-time, we must evaluate the expected realization of our deferred tax assets and
determine whether a valuation allowance needs to be established or released. In determining the need for
and amount of our valuation allowance, we assess the likelihood that we will be able to recover our
deferred tax assets using historical levels of income, estimates of future income and tax planning strategies.
Our estimates of future income include our internal projections and various internal estimates and certain
external sources which we believe to be reasonable but that are unpredictable and inherently uncertain. We
also consider the jurisdictional mix of income and loss, changes in tax regulations in the period the changes
are enacted and the type of deferred tax assets and liabilities. In assessing whether a valuation allowance
needs to be established or released, we use judgment in considering the cumulative effect of negative and
positive evidence and the weight given to the potential effect of the evidence. Recent historical income or
loss and future projected operational results have the most influence on our determinations of whether a
deferred tax valuation allowance is required or not.
Our estimates for tax uncertainties require substantial judgment based upon the period of occurrence,
complexity of the matter, available federal tax case law, interpretation of foreign laws and regulations and
other estimates. We recognize liabilities for uncertain tax positions based on a two-step process. The first
step is to evaluate the tax position for recognition by determining whether the weight of available evidence
indicates that it is more likely than not that the position will be sustained on audit, including resolution of
related appeals or litigation processes, if any. If we determine that a tax position will more likely than not
be sustained on audit, the second step requires us to estimate and measure the tax benefit as the largest
amount that is more than 50% likely to be realized upon ultimate settlement. Although we believe we have
adequately reserved for our uncertain tax positions, no assurance can be given with respect to the final
outcome of these matters. To the extent that the final outcome of these matters is different than the
amounts recorded, such differences generally will impact our provision for income taxes in the period in
which such a determination is made.
Valuation of Long-Lived Assets, Intangible Assets and Goodwill. We perform tests for impairment of
long-lived assets whenever events or circumstances suggest that long-lived assets may not be recoverable.
An impairment is only deemed to have occurred if the sum of the forecasted undiscounted future cash
flows related to the assets are less than the carrying value of the asset we are testing for impairment. If the
forecasted undiscounted cash flows are less than the carrying value, then we must determine the fair value
of the long-lived asset or group of long-lived assets and recognize an impairment loss if the carrying
amount of the long-lived asset or group of long-lived assets exceeds its fair value which is based primarily
upon forecasted discounted cash flows. These forecasted discounted cash flows include estimates and
assumptions related to revenue growth rates and operating margins, risk-adjusted discount rates based on
our weighted average cost of capital, future economic and market conditions and determination of
appropriate market comparables. Our estimates of market growth and our market share and costs are
based on historical data, various internal estimates and certain external sources, and are based on
assumptions that are consistent with the plans and estimates we are using to manage the underlying
48
business. Our business consists of both established and emerging technologies and our forecasts for
emerging technologies are based upon internal estimates and external sources rather than historical
information. If future forecasts are revised, they may indicate or require future impairment charges. We
base our fair value estimates on assumptions we believe to be reasonable but that are unpredictable and
inherently uncertain. Actual future results may differ from those estimates.
We perform our annual impairment analysis of goodwill and indefinite-lived intangible assets (such as
IPR&D) on the first day of the fourth quarter of each fiscal year, or more often if there are indicators of
impairment. We allocate goodwill to reporting units based on the reporting unit expected to benefit from
the business combination. We evaluate our reporting units on an annual basis and, if necessary, reassign
goodwill using a relative fair value allocation approach. As of December 28, 2014, we had one reporting
unit. We may first assess qualitative factors to determine whether the existence of events or circumstances
leads to a determination that it is ‘‘more likely than not’’ that the fair value of the reporting unit is less than
its carrying amount and whether the two-step impairment test on goodwill is required. If, based upon
qualitative factors, it is ‘‘more likely than not’’ that the fair value of a reporting unit is greater than its
carrying amount, we will not be required to proceed to a two-step impairment test on goodwill. However,
we also have the option to proceed directly to a two-step impairment test on goodwill. In the first step, or
Step 1, of the two-step impairment test, we compare the fair value of each reporting unit to its carrying
value. If the fair value exceeds the carrying value of the net assets, goodwill is considered not impaired and
we are not required to perform further testing. If the carrying value of the net assets exceeds the fair value,
then we must perform the second step, or Step 2, of the two-step impairment test in order to determine the
implied fair value of goodwill. If the carrying value of goodwill exceeds its implied fair value, then we
would record an impairment loss equal to the difference. The fair value of each reporting unit is estimated
using a discounted cash flow methodology. This analysis requires significant judgments, including
estimation of future cash flows, which is dependent on internal forecasts, estimation of the long-term rate
of growth for our business, estimation of the useful life over which cash flows will occur, and determination
of our weighted average cost of capital. We evaluate the reasonableness of the fair value calculations of our
reporting units by reconciling the total of the fair values of all of our reporting units to our total market
capitalization, taking into account an appropriate control premium. The determination of a control
premium requires the use of judgment and is based primarily on comparable industry and deal-size
transactions, related synergies and other benefits. When we are required to perform a Step 2 analysis,
determining the fair value of our net assets and our off-balance sheet intangibles used in Step 2 requires us
to make judgments and involves the use of significant estimates and assumptions. For both goodwill and
indefinite-lived intangible assets, we have the option to first assess qualitative factors to determine whether
events and circumstances indicate that it is more likely than not that the goodwill or an indefinite-lived
intangible asset is impaired and determine whether further action is needed.
49
Annual Report
Fair Value of Investments in Debt Instruments. There are three levels of inputs that may be used to
measure fair value (see Note 3, ‘‘Investments and Fair Value Measurements’’ in the Notes to Consolidated
Financial Statements included in Item 8 of this report). Each level of input has different levels of
subjectivity and difficulty involved in determining fair value. Level 1 securities represent quoted prices in
active markets, and therefore do not require significant management judgment. Our Level 2 securities are
primarily valued using quoted market prices for similar instruments and non-binding market prices that are
corroborated by observable market data. We use inputs such as actual trade data, benchmark yields,
broker/dealer quotes, and other similar data, which are obtained from independent pricing vendors,
quoted market prices, or other sources to determine the ultimate fair value of our assets and liabilities. The
inputs and fair value are reviewed for reasonableness, may be further validated by comparison to publicly
available information, compared to multiple independent valuation sources and could be adjusted based
on market indices or other information. In the current market environment, the assessment of fair value
can be difficult and subjective. However, given the relative reliability of the inputs we use to value our
investment portfolio and because substantially all of our valuation inputs are obtained using quoted market
prices for similar or identical assets, we do not believe estimates and assumptions materially impacted our
valuation of our cash equivalents and short and long-term marketable securities. We currently do not have
any investments that use Level 3 inputs.
Results of Operations
Revenue by Channel.
FY 2014
Percent
Revenue
of Total
FY 2013
Percent
Revenue
of Total
FY 2012
Percent
Revenue
of Total
(In millions, except percentages)
Commercial . . . . . . . . . . . . . . . .
Retail . . . . . . . . . . . . . . . . . . . .
$
4,454.9
2,172.8
67%
33%
$
3,907.3
2,262.7
63%
37%
$
3,205.5
1,847.0
63%
37%
Total revenue . . . . . . . . . . . . .
$
6,627.7
100%
$
6,170.0
100%
$
5,052.5
100%
The 7% increase in our fiscal year 2014 revenue, compared to fiscal year 2013, reflected a 36%
increase in the number of gigabytes sold, partially offset by a 22% decline in the blended average selling
price per gigabyte.
• The increase in our Commercial revenue for fiscal year 2014, compared to fiscal year 2013, is
primarily related to higher sales of client and enterprise SSDs, partially offset by a decline in sales
of embedded products.
• The decrease in our Retail revenue for fiscal year 2014, compared to fiscal year 2013, was primarily
driven by lower sales of imaging cards and USB drives, partially offset by increased sales of cards for
mobile devices.
The increase in our fiscal year 2013 revenue, compared to fiscal year 2012, reflected a 22% increase in
the number of gigabytes sold with no change in the average selling price per gigabyte. The increase in
Commercial revenue was primarily related to increased sales of client and enterprise SSD products and
embedded memory products for mobile devices, partially offset by decreased sales of cards for mobile
devices due to continued OEM debundling and our allocation of less supply to private label channels. The
increase in Retail revenue was primarily related to increased sales of cards for mobile devices, USB drives
and SSDs. While sales of cards for mobile devices through the Commercial channel were down on a
year-over-year basis, increased sales in after-market retail mobile cards partially offset the Commercial
channel declines.
Revenue by Category.
FY 2014
Removable . .
SSD solutions
Embedded . .
Other(1) . . . .
(1)
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.
% of Revenue
FY 2013
FY 2012
.
.
.
.
38%
29%
22%
11%
43%
19%
27%
11%
53%
9%
24%
14%
Total revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
100%
100%
100%
Other revenue includes license and royalty, wafers and components, and accessories.
50
The changes in our revenue by category for fiscal year 2014, compared to fiscal year 2013, were due
primarily to the following:
• Removable revenue for fiscal year 2014 comprised 38% of our revenue mix and revenue was lower
by 5% year-over-year, due primarily to lower sales of imaging cards, USB drives and gaming cards.
• SSD solutions achieved 29% of our revenue mix for fiscal year 2014, with a 61% year-over-year
revenue growth rate. We experienced rapid growth in sales of both client SSD solutions and
enterprise SSD solutions, with growth in enterprise SSD solutions partially benefiting from our
acquisition of SMART Storage in August 2013 and our acquisition of Fusion-io in July 2014. We
expect our client SSD solutions revenue to decline in fiscal year 2015, compared to fiscal year 2014,
due to a large customer moving away from our client SSD solutions, starting in the first quarter of
fiscal year 2015.
• Embedded revenue for fiscal year 2014 comprised 22% of our revenue mix and was lower by 11%
year-over-year, due primarily to lower sales of custom embedded solutions.
Removable revenue for fiscal year 2013 comprised 43% of our revenue mix and was stable, compared
to fiscal year 2012. SSD solutions achieved 19% of our revenue mix for fiscal year 2013 with a 170%
year-over-year revenue growth as SSD solutions were the fastest growing revenue category. Embedded
revenue for fiscal year 2013 comprised 27% of our revenue mix with a 37% increase year-over-year
revenue growth related to higher sales of embedded memory for mobile devices.
Revenue by Geography.
FY 2014
Percent
Revenue
of Total
FY 2013
Percent
Revenue
of Total
FY 2012
Percent
Revenue
of Total
(In millions, except percentages)
United States . . . . . . . . . . . . .
Asia-Pacific . . . . . . . . . . . . . .
Europe, Middle East and Africa
Other foreign countries . . . . . .
.
.
.
.
.
.
.
.
$
1,136.3
4,355.3
814.8
321.3
17%
66%
12%
5%
$
877.8
4,209.8
780.1
302.3
14%
68%
13%
5%
$
714.3
3,467.7
642.5
228.0
14%
69%
13%
4%
Total revenue . . . . . . . . . . . . .
$
6,627.7
100%
$
6,170.0
100%
$
5,052.5
100%
The changes in our revenue by geography for fiscal year 2014, compared to fiscal year 2013, were due
primarily to the following:
• Revenue in the U.S. increased in fiscal year 2014, compared to fiscal year 2013, due primarily to
increased sales of client and enterprise SSD products and cards for mobile devices, partially offset
by lower sales of imaging cards and USB drives.
• Revenue in the Europe, Middle East and Africa, or EMEA, increased in fiscal year 2014, compared
to fiscal year 2013, due primarily to increased sales of client and enterprise SSD products, partially
offset by lower sales of imaging cards and USB drives.
• Revenue in other foreign countries decreased in fiscal year 2014, compared to fiscal year 2013, due
primarily to lower sales of imaging cards and cards for mobile devices, partially offset by higher
sales of embedded products.
51
Annual Report
• Revenue in Asia-Pacific increased in fiscal year 2014, compared to fiscal year 2013, due primarily to
increased sales of client and enterprise SSD products, wafer and components, and cards for mobile
devices, partially offset by lower sales of embedded products, gaming cards and imaging cards.
Revenue in the U.S. increased in fiscal year 2013, compared to fiscal year 2012, due primarily to
increased sales of client and enterprise SSD products, retail cards for mobile devices and USB drives.
Revenue in Asia-Pacific increased in fiscal year 2013, compared to fiscal year 2012, due primarily to
increased sales of client and enterprise SSD products and embedded products for mobile devices, partially
offset by lower OEM sales of cards for mobile and gaming devices, and lower sales of wafers and
components. Revenue in EMEA increased in fiscal year 2013, compared to fiscal year 2012, due primarily
to increased sales of client and enterprise SSD products, retail cards for mobile devices and USB drives.
Revenue in other foreign countries increased in fiscal year 2013, compared to fiscal year 2012, due
primarily to higher sales of USB drives and cards for mobile devices.
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.
FY 2014
Percent
Change
FY 2013
Percent
Change
FY 2012
(In millions, except percentages)
Gross profit . . . . . . . . . . . . . . . . . . . . . . . . .
Gross margin . . . . . . . . . . . . . . . . . . . . . . . .
$ 3,067.8
46.3%
7%
$ 2,867.5
46.5%
70%
$ 1,683.2
33.3%
Gross margin was approximately the same in fiscal year 2014, compared to fiscal year 2013, as our
blended average selling price per gigabyte and our blended average cost per gigabyte both declined by
22%. Gross margin in fiscal year 2014 was negatively impacted by a decreased mix of removable product
revenue, an increased mix of client SSD revenue, increased amortization of acquisition-related intangible
assets and increased share-based compensation. Gross margin in fiscal year 2014 was positively impacted
by an increased mix of enterprise SSD revenue, a decreased mix of embedded revenue and a weaker
Japanese yen relative to the U.S. dollar.
Gross margin increased in fiscal year 2013, compared to fiscal year 2012, due primarily to a favorable
industry supply and demand environment coupled with a higher product mix of enterprise SSD products
and high-performance retail products. These factors led to no year-over-year change in our average selling
price per gigabyte, while our cost per gigabyte declined by 20%. Cost declines in fiscal year 2013, compared
to fiscal year 2012, were derived primarily from our increased mix of 19-nanometer wafers, lower
depreciation costs for fab equipment, and weakening of the Japanese yen relative to the U.S. dollar,
partially offset by increased non-flash memory costs and decreased usage of X3-technology memory, both
due to the increased mix of SSD and embedded products.
Research and Development.
FY 2014
Percent
Change
FY 2013
Percent
Change
FY 2012
(In millions, except percentages)
Research and development . . . . . . . . . . . . . . .
% of revenue . . . . . . . . . . . . . . . . . . . . . . . .
$ 852.3
13%
15%
$ 742.3
12%
23%
$ 602.7
12%
The increase in our research and development expense for fiscal year 2014, compared to fiscal year
2013, was due primarily to higher employee-related costs of $73 million, higher facility costs of $20 million,
an increase in third-party services of $12 million and an increase in higher equipment depreciation of
$9 million, partially offset by lower third-party license costs of $10 million. The higher employee-related
costs were due primarily to an increase in salary and benefits of $69 million and share-based compensation
52
of $23 million, due primarily to increased headcount, which was in part related to our acquisition of
Fusion-io, partially offset by lower incentive compensation of $19 million.
The increase in our research and development expense for fiscal year 2013, compared to fiscal year
2012, was due primarily to higher employee-related costs of $119 million, which included an increase in
incentive compensation of $59 million due to improved financial and operational performance, and
increases in salary and benefits of $49 million and share-based compensation of $11 million due to
increased head count. In addition, fiscal year 2013 expenses included an increase of $25 million for
technology acquisition, prototype expenditures and non-recurring engineering costs.
Sales and Marketing.
FY 2014
Percent
Change
FY 2013
Percent
Change
FY 2012
(In millions, except percentages)
Sales and marketing . . . . . . . . . . . . . . . . . . .
% of revenue . . . . . . . . . . . . . . . . . . . . . . . .
$ 383.3
6%
39%
$ 276.3
5%
23%
$ 224.1
4%
The increase in our sales and marketing expense for fiscal year 2014, compared to fiscal year 2013, was
due primarily to higher employee-related costs of $77 million, higher advertising, branding and
merchandising of $19 million, increased facility costs of $6 million, and an increase in outside services of
$4 million. The higher employee-related costs were due primarily to an increase in salary and benefits of
$65 million and share-based compensation of $17 million, due primarily to increased headcount, which was
in part related to our acquisition of Fusion-io, partially offset by lower incentive compensation of
$5 million.
The increase in our sales and marketing expense for fiscal year 2013, compared to fiscal year 2012, was
due primarily to higher employee-related costs of $47 million, which included an increase in incentive
compensation of $22 million, an increase in salary and benefits of $20 million and an increase in sharebased compensation of $5 million. The increase in incentive compensation expense was due to improved
financial and operational performance and the increase in salary and benefit costs was due primarily to
increased headcount. In addition, branding, merchandising and other expenses increased by $5 million.
General and Administrative.
FY 2014
Percent
Change
FY 2013
Percent
Change
FY 2012
(In millions, except percentages)
General and administrative . . . . . . . . . . . . . .
% of revenue . . . . . . . . . . . . . . . . . . . . . . . .
$ 214.9
3%
12%
$ 192.3
3%
28%
$ 150.4
3%
The increase in our general and administrative expense for fiscal year 2013, compared to fiscal year
2012, was due primarily to higher employee-related costs of $20 million, which included increases in
incentive compensation expense of $14 million due to improved financial and operational performance,
and salary and benefits of $6 million, higher charitable expense of $10 million and outside service expenses
of $5 million. Expenses in fiscal year 2012 were reduced by insurance recoveries of $5 million that did not
recur in fiscal year 2013.
53
Annual Report
The increase in our general and administrative expense for fiscal year 2014, compared to fiscal year
2013, was due primarily to an increase in employee-related costs of $20 million and higher legal costs of
$12 million, partially offset by lower outside service expense of $3 million and lower other costs of
$4 million. The higher employee-related costs were due primarily to an increase in salary and benefits of
$14 million and share-based compensation of $10 million, due primarily to increased headcount, which was
in part related to our acquisition of Fusion-io, partially offset by lower incentive compensation of
$4 million.
Amortization of Acquisition-related Intangible Assets.
FY 2014
Percent
Change
FY 2013
Percent
Change
FY 2012
(In millions, except percentages)
Amortization of acquisition-related intangible
assets . . . . . . . . . . . . . . . . . . . . . . . . . . . .
% of revenue . . . . . . . . . . . . . . . . . . . . . . . .
$
26.4
—%
136%
$
11.2
—%
24%
$
9.0
—%
Amortization of acquisition-related intangible assets in fiscal year 2014, compared to fiscal year 2013,
was higher due to a full year of amortization of intangible assets from our acquisition of SMART Storage,
which was completed in the third quarter of fiscal year 2013, and from our Fusion-io acquisition which was
completed in the third quarter of fiscal year 2014.
Amortization of acquisition-related intangible assets in fiscal year 2013, compared to fiscal year 2012,
reflected higher amortization of intangible assets from our SMART Storage acquisition which was
completed in the third quarter of fiscal year 2013, partially offset by lower amortization of intangible assets
from our Pliant acquisition, which were impaired in fiscal year 2013.
Impairment and Write-off of Acquisition-related Intangible Assets.
FY 2014
Percent
Change
FY 2013
Percent
Change
FY 2012
(In millions, except percentages)
Impairment and write-off of acquisition-related
intangible assets . . . . . . . . . . . . . . . . . . . .
Percent of revenues . . . . . . . . . . . . . . . . . . . .
**
$
—
—%
**
$
83.2
1%
**
$
0.9
—%
Amount not meaningful
In fiscal year 2013, we impaired and wrote off $83 million of IPR&D and amortizable intangible assets
related to our Pliant acquisition.
Restructuring and Other.
FY 2014
Percent
Change
FY 2013
Percent
Change
FY 2012
(In millions, except percentages)
Restructuring and other . . . . . . . . . . . . . . . . .
Percent of revenues . . . . . . . . . . . . . . . . . . . .
**
$
33.0
—%
**
$
—
—%
**
$
—
—%
Amount not meaningful
During fiscal year 2014, we implemented a restructuring plan, which primarily consisted of reductions
in workforce in certain functions of the organization worldwide because of redundant activities due to the
Fusion-io acquisition, as well as realignment of certain projects. The restructuring plan included severance
and benefits related to involuntary terminations of personnel in manufacturing operations, research and
development, sales and marketing, and general and administrative functions of the organization, primarily
in the U.S. and certain foreign countries. In addition, we recorded other expense related to the acquisition
of Fusion-io, which primarily consisted of legal, banker, accounting and tax fees, certain employee change
of control charges and employee retention bonus payments, and litigation and integration expenses. See
Note 11, ‘‘Restructuring and Other,’’ in the Notes to Consolidated Financial Statements of this Form 10-K
included in Item 8, ‘‘Financial Statement and Supplementary Data’’ of this report.
54
Other Income (Expense), net.
FY 2014
Percent
Change
FY 2013
Percent
Change
FY 2012
(In millions, except percentages)
Interest income . . . . . . . . . . . . . . . . . . . . . .
Interest expense . . . . . . . . . . . . . . . . . . . . . .
Other income (expense), net . . . . . . . . . . . . .
$
51.8
(113.1)
(7.6)
6%
24%
**
$
48.8
(91.5)
(3.4)
(17%) $
(24%)
**
59.0
(119.7)
(8.5)
Total other income (expense), net . . . . . . . .
$
(68.9)
**
$
(46.1)
**
(69.2)
**
$
Amount not meaningful
‘‘Total other income (expense), net’’ for fiscal year 2014 reflected a higher net expense, compared to
fiscal year 2013, due primarily to higher interest expense as a result of higher average convertible debt
balances, partially offset by increased interest income due primarily to realized gains on sales of
marketable securities. ‘‘Other income (expense), net’’ was a higher expense in fiscal year 2014, compared
to fiscal year 2013, due to an impairment charge on a loan provided to io-Control, a product line of
Fusion-io which we divested in the fourth quarter of fiscal year 2014.
‘‘Total other income (expense), net’’ for the fiscal year 2013 reflected a lower net expense, compared
to fiscal year 2012, due primarily to lower interest expense as a result of lower average convertible debt
balances, lower interest income due to lower average interest income yield on our cash and investments, a
non-recurring charge incurred by Flash Ventures of $9 million and losses on non-designated foreign
exchange contracts included in other income (expense) in fiscal year 2012 that did not recur in fiscal year
2013.
Provision for Income Taxes.
FY 2014
Percent
Change
FY 2013
Percent
Change
FY 2012
(In millions, except percentages)
Provision for income taxes . . . . . . . . . . . . . . .
Effective tax rate . . . . . . . . . . . . . . . . . . . . .
$ 481.6
32.3%
2%
$ 473.4
31.2%
126%
$ 209.5
33.4%
Our fiscal year 2014, 2013 and 2012 provisions for income taxes differ from the U.S. statutory tax rate
due primarily to the tax impact of earnings from foreign operations, state taxes, non-deductibility of certain
share-based compensation, tax audit settlements and tax-exempt interest income. In addition, fiscal year
2014 included the 2014 federal R&D credit, while fiscal year 2013 included both the 2013 federal R&D
credit and retroactive inclusion of the 2012 federal R&D credit. Earnings and taxes resulting from foreign
operations are largely attributable to our Chinese, Irish, Israeli and Japanese entities. Earnings in these
countries where tax rates are lower than the U.S. notional rate contributed to majority of the difference
between the rate of our tax provision and the U.S. statutory tax rate.
The IRS is currently conducting an examination of our federal income tax returns for fiscal years 2009
through 2011. Though we can reasonably expect the current cycle to be resolved within the next 12 months,
the timing of the resolution of income tax examinations is highly uncertain as are the amounts and timing
of tax payments that are part of any audit settlement process. In addition, we are currently under audit by
55
Annual Report
We are subject to U.S. federal income tax as well as income taxes in multiple state and foreign
jurisdictions. In August 2014, we received and signed the closing agreement from the IRS relating to our
federal income tax returns for the fiscal years 2005 through 2008. In fiscal year 2014, we recorded a benefit
of $25 million as a result of several audit settlements.
various state and international tax authorities. While we believe that we have an adequate provision for the
years under audit, there is still a possibility that an adverse outcome from these matters could have a
material effect on our financial position, results of operations or liquidity.
The Tax Increase Prevention Act of 2014 enacted on December 19, 2014 extended the federal R&D
tax credit and exemption of certain intercompany transactions from federal taxation through December 31,
2014. As a result, our income tax provision for fiscal year 2014 includes a tax benefit that reduced our
effective annual fiscal year 2014 tax rate. The financial statement benefit related to the 2014 federal R&D
tax credit was $19 million.
Non-GAAP Financial Measures
Reconciliation of Net Income.
FY 2014
Fiscal years ended
FY 2013
FY 2012
(In millions except per share amounts)
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Share-based compensation . . . . . . . . . . . . . . . . . .
Amortization of acquisition-related intangible assets
Inventory step-up expense . . . . . . . . . . . . . . . . . .
Impairment of acquisition-related intangible assets .
Convertible debt interest . . . . . . . . . . . . . . . . . . .
Income tax adjustments . . . . . . . . . . . . . . . . . . . .
.
.
.
.
.
.
.
$
1,007.4 $
155.4
127.4
7.8
—
85.7
(95.5)
1,042.7 $
99.8
60.7
—
83.2
67.6
(87.0)
417.4
78.4
51.5
—
0.9
90.0
(55.8)
Non-GAAP net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
1,288.2
1,267.0
582.4
Diluted net income per share . . . . . . . . . . . . . . . . .
Share-based compensation . . . . . . . . . . . . . . . . . .
Amortization of acquisition-related intangible assets
Inventory step-up expense . . . . . . . . . . . . . . . . . .
Impairment of acquisition-related intangible assets .
Convertible debt interest . . . . . . . . . . . . . . . . . . .
Income tax adjustments . . . . . . . . . . . . . . . . . . . .
.
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$
Non-GAAP diluted net income per share . . . . . . . . . . . . . . . . . . . .
$
$
4.23 $
0.73
0.59
0.09
—
0.40
(0.44)
5.60
$
$
4.34 $
0.42
0.26
—
0.35
0.29
(0.35)
5.31
$
1.70
0.32
0.21
—
—
0.37
(0.22)
2.38
Reconciliation of Diluted Shares.
FY 2014
FY 2013
FY 2012
(In millions)
GAAP diluted shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Adjustment for share-based compensation . . . . . . . . . . . . . . . . . . . . .
Offsetting shares from call options . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-GAAP diluted shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
238.2
0.3
(8.3)
240.2
0.3
(2.1)
245.3
(0.1)
—
230.2
238.4
245.2
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.
56
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.
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.
• Inventory Step-up. Acquired inventory in a business combination is generally recognized at fair
value less costs to sell, which is generally higher than the historical cost value of the inventory. We
exclude these increased or ‘‘stepped-up’’ values of inventory when sold to provide a consistent basis
for comparison across accounting periods as these costs are not representative of ongoing future
costs.
• 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
57
Annual Report
• 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.
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.
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:
FY 2014
FY 2013
FY 2012
(In millions)
Net cash
Net cash
Net cash
Effect of
provided by operating activities . . . . . . . . . . . . . .
used in investing activities . . . . . . . . . . . . . . . . .
used in financing activities . . . . . . . . . . . . . . . . .
changes in foreign currency exchange rates on cash
.
.
.
.
$
1,698.4 $
(514.7)
(1,352.8)
(8.1)
1,863.7 $
(922.9)
(956.4)
6.4
529.9
(574.4)
(125.1)
(2.4)
Net decrease in cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . .
$
(177.2) $
(9.2) $
(172.0)
58
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
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.
.
.
.
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.
.
.
Operating Activities. Cash provided by operating activities is generated by net income adjusted for
certain non-cash items and changes in assets and liabilities. The decrease in cash provided by operations in
fiscal year 2014, compared to fiscal year 2013, resulted primarily from less cash provided by changes in
operating assets and liabilities and lower net income, partially offset by higher non-cash adjustments to
operating activities:
• cash flow from accounts receivable was a higher use of cash compared with the prior year, due
primarily to higher sales in fiscal year 2014 and longer average payment terms based upon our
customer mix. There are no specific credit risks as a result of higher accounts receivable, net
balances at the end of fiscal year 2014;
• cash flow from inventory was a higher source of cash compared with the prior year, due primarily to
a reduction in inventory levels;
• cash flow from other assets was a lower source of cash compared with the prior year due primarily
to collection of a federal tax receivable in the prior year and by the timing of prepaid and other
receivable activities;
• cash flow from accounts payable trade was a higher source of cash compared with the prior year due
primarily to the timing of payments to vendors and higher expenses in fiscal year 2014, compared to
fiscal year 2013;
• cash flow from accounts payable from related parties was a lower use of cash compared with the
prior year due primarily to the timing of payments to Flash Ventures; and
• cash flow from other liabilities was a use of cash compared to cash provided by other liabilities in
the prior year, due primarily to the amount and timing of incentive compensation payments and tax
payments.
The increase in cash provided by operations in fiscal year 2013, compared to fiscal year 2012, resulted
primarily from higher net income. Cash flow from accounts receivable was a lower usage of cash compared
with the prior year due to collections of outstanding receivables, partially offset by higher sales in the
current year compared to the prior year. Cash flow from inventory increased compared to the prior year
due primarily to utilization of fiscal year 2012 inventory balances in fiscal year 2013. Cash flow from other
assets increased compared to the prior year due primarily to utilization of income tax receivables. Cash
flow related to accounts payable increased due primarily to the timing of payments to vendors. Cash flow
related to accounts payable to related parties was a higher usage of cash due primarily to the timing of
payments to Flash Ventures as compared to the prior year. Cash flow from other liabilities was a source of
cash compared to a usage of cash in the prior year due primarily to higher accrued incentive compensation
and higher tax liabilities in fiscal year 2013, both as a result of higher fiscal year 2013 profitability, as well as
higher other accrued liabilities in fiscal year 2013.
Net cash used in investing activities for fiscal year 2013 was primarily related to acquisition of property
and equipment of $213 million, net purchases of short and long-term marketable securities of $472 million
and the acquisition of SMART Storage, net of cash acquired of $304 million, partially offset by net
proceeds from Flash Ventures of $75 million.
Financing Activities. Net cash used in financing activities for fiscal year 2014 was primarily related to
share repurchases of $1.30 billion and dividends paid of $235 million, partially offset by cash received from
employee stock programs of $181 million.
59
Annual Report
Investing Activities. Net cash used in investing activities for fiscal year 2014 was primarily related to the
acquisition of Fusion-io, net of cash acquired of $1.06 billion and purchases of property and equipment of
$233 million, partially offset by net proceeds from sales and maturities of short and long-term marketable
securities of $781 million and net proceeds from Flash Ventures of $26 million.
Net cash used in financing activities for fiscal year 2013 was primarily related to share repurchases of
$1.59 billion, repayment of our 1% Convertible Senior Notes due 2013 of $928 million, and dividends paid
of $101 million, offset by net cash received of $1.48 billion from the issuance of our 0.5% Notes due 2020,
and related transactions including the purchase of a convertible bond hedge for $332 million and proceeds
from the sale of warrants of $218 million.
Liquid Assets. As of December 28, 2014, we had cash, cash equivalents and short-term marketable
securities of $2.26 billion. We had $2.76 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 December 28, 2014, our working capital balance was $2.01 billion. During
fiscal year 2015, we expect our total capital investment to be approximately $1.40 billion, including our net
capital investments in Flash Ventures and our investment in non-fab property and equipment. We expect
these fiscal year 2015 investments to be funded by cash of approximately $300 million to $400 million and
by Flash Ventures’ working capital and equipment leases of approximately $1.0 billion to $1.1 billion. For
the fiscal year ended December 28, 2014, total capital investments were $1.15 billion, of which $207 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 December 31, 2014, the 1.5% Notes due 2017 were convertible
at the holders’ option beginning on January 1, 2015 and ending March 31, 2015. Accordingly, the carrying
value of the 1.5% Notes due 2017 was classified as a current liability as of December 28, 2014 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 Consolidated Balance Sheet as of December 28, 2014, 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 December 28, 2014 of $101.31 for our common stock, if all of the
1.5% Notes due 2017 then outstanding were converted, 9.6 million shares would be distributed to the
holders. During the fiscal year ended December 28, 2014, $3 million 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 $3 million and 26,626 shares of our common stock with respect to
any conversion value greater than the principal amount of the Converted Notes. Through December 28,
2014, we had received 26,622 shares of our common stock from the exercise of a portion of the convertible
note hedges related to the conversion of $3 million aggregate principal amount of the 1.5% Notes due
2017. As of January 30, 2015, we had received additional conversion notices for a total of $46 thousand
aggregate principal amount of the 1.5% Notes due 2017, for which conversion is expected to be completed
in the first quarter of fiscal year 2015.
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
60
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 January 21, 2015, our Board of Directors declared a dividend of $0.30 per share for holders of
record as of March 2, 2015. We expect to pay approximately $66 million to these holders of record on
March 23, 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 December 28, 2014, 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 $6.53 billion as of December 28, 2014. 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 December 28,
2014 were approximately $551 million based upon the exchange rate at December 28, 2014.
As of December 28, 2014, the amount of cash and cash equivalents and short and long-term
marketable securities held by non-U.S. subsidiaries was $899 million. Of the $899 million held by our
non-U.S. subsidiaries, approximately $773 million was available for use in the U.S. without incurring
additional income taxes in excess of the tax amounts already accrued in our Consolidated Financial
Statements as of December 28, 2014. The remaining amount of non-U.S. cash and cash equivalents and
short and long-term marketable securities has been indefinitely reinvested.
As of December 28, 2014, we had not made a provision for U.S. income taxes or foreign withholding
taxes on $969 million 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.
We are committed to purchase land and a building shell in Bangalore, India, if the seller is able to
obtain necessary third-party and government approvals by June 1, 2015. Our purchase obligation was
approximately $25 million based upon the exchange rate at December 28, 2014. We are currently making
building improvements on the facility and have received a bank guarantee of up to approximately
61
Annual Report
Of the aggregate $3.75 billion authorized for share repurchases by our Board of Directors since the
fourth quarter of fiscal year 2011 through December 28, 2014, approximately $627 million remained
available for share repurchases as of December 28, 2014. In January 2015, our Board of Directors
increased the existing stock repurchase program by an additional $2.5 billion for share repurchases. Since
the fourth quarter of fiscal year 2011 through December 28, 2014, we have spent an aggregate $3.12 billion
to repurchase 45.3 million shares. Included in the aggregate repurchase activity are 14 million shares that
were repurchased for an aggregate amount of $1.3 billion during the fiscal year ended December 28, 2014.
In addition to repurchases under our repurchase program, during the fiscal year ended December 28, 2014,
we spent $41 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.
$17 million, based upon the exchange rate at December 28, 2014, from the seller to refund our building
improvement expenditures if the purchase obligation expires unexercised.
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 December 28, 2014, we had $997 million aggregate principal amount of
our 1.5% Notes due 2017 and $1.50 billion aggregate principal amount of our 0.5% Notes due 2020
outstanding. See Note 7, ‘‘Financing Arrangements,’’ in the Notes to Consolidated Financial Statements of
this Form 10-K included in Item 8, ‘‘Financial Statement and Supplementary Data’’ of this report.
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
December 28, 2014, the counterparties have agreed to sell to us up to approximately 19.4 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 $51.36 per share as of December 28, 2014. 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 conversions of $3 million aggregate principal amount of the 1.5% Notes due 2017 as
described in ‘‘Short-Term Liquidity’’ above, we received 26,622 shares of our common stock from the
exercise of a portion of the convertible note hedges related to the conversion of $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, 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 December 28, 2014, holders of the
warrants may acquire up to approximately 19.5 million shares of our common stock at a strike price of
$71.9005 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 December 28, 2014, 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
62
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 December 28, 2014, 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 $92.04 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 December 28, 2014, 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 December 28, 2014, holders of the warrants may
acquire up to approximately 16.3 million shares of our common stock at a strike price of $122.7218 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 December 28, 2014, 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 14, ‘‘Commitments, Contingencies and Guarantees’’
and Note 15, ‘‘Related Parties and Strategic Investments,’’ in the Notes to Consolidated Financial
Statements of this Form 10-K included in Item 8, ‘‘Financial Statement and Supplementary Data’’ of this
report.
63
Annual Report
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
December 28, 2014 were $551 million based upon the exchange rate at December 28, 2014.
Contractual Obligations and Off-Balance Sheet Arrangements
Our contractual obligations and off-balance sheet arrangements at December 28, 2014 and the effect
those contractual obligations are expected to have on our liquidity and cash flow over the next five years
are presented in textual and tabular format in Note 14, ‘‘Commitments, Contingencies and Guarantees,’’ in
the Notes to Consolidated Financial Statements of this Form 10-K included in Item 8, ‘‘Financial
Statement and Supplementary Data’’ of this report.
Impact of Currency Exchange Rates
Exchange rate fluctuations could have a material adverse effect on our business, financial condition
and results of operations. Our most significant foreign currency exposure is to the Japanese yen in which
we purchase substantially all of our NAND flash wafers and incur R&D expenditures. In addition, we also
have significant costs denominated in the Chinese renminbi and the Israeli new shekel, and we have
revenue denominated in the European euro, the British pound, the Japanese yen, the Chinese renminbi
and the Canadian dollar. Due to our current construction of an assembly and test factory in Malaysia, we
expect increasing costs denominated in the Malaysian ringgit beginning in the second half of fiscal year
2015. We do not enter into derivatives for speculative or trading purposes. We generally use foreign
currency forward contracts to mitigate transaction gains and losses generated by certain monetary assets,
liabilities and net investments denominated in currencies other than the U.S. dollar. From time-to-time, we
use foreign currency forward contracts to partially hedge our future Japanese yen requirements for NAND
flash wafers and R&D expenses. Our derivative instruments are recorded at fair value in assets or liabilities
with final gains or losses recorded in other income (expense) or as a component of accumulated other
comprehensive income, or AOCI, and subsequently reclassified into cost of revenue in the same period or
periods in which the cost of revenue is recognized or into R&D expense as the R&D expenses are
incurred. These foreign currency exchange exposures may change over time as our business and business
practices evolve, and they could harm our financial results and cash flows. See Note 4, ‘‘Derivatives and
Hedging Activities,’’ in the Notes to Consolidated Financial Statements of this Form 10-K included in
Item 8, ‘‘Financial Statement and Supplementary Data’’ of this report.
Because we purchase substantially all of our flash memory wafers from Flash Ventures, our flash
memory costs, which represent the largest portion of our cost of revenue, are based upon wafer purchases
denominated in Japanese yen. However, our cost of revenue in any given quarter generally reflects wafer
purchases that were made in the previous quarter, and is impacted by hedging decisions we may make from
time to time, including entering into forward contracts or other instruments to hedge our future Japanese
yen purchase rate. Based on wafer purchases made in the fourth quarter of fiscal year 2014 and related
forward contracts entered into for settlement in early 2015, changes in the Japanese yen to U.S. dollar
64
exchange rate after December 28, 2014 are not expected to have a material impact on our cost of revenue
in the first quarter of fiscal year 2015. We expect the average rate of the Japanese yen to the U.S. dollar for
the first quarter of fiscal year 2015 for the wafer portion of our cost of revenue to be approximately
108 Japanese yen to the U.S. dollar in comparison to a rate of approximately 102 Japanese yen to the U.S.
dollar in our fourth quarter of fiscal year 2014. Our wafer purchases are denominated in Japanese yen and
generally comprise approximately 50% of our cost of revenue. As of December 28, 2014, none of our
expected Japanese yen denominated wafer purchases for the first quarter of fiscal year 2015 have been
hedged. See Item 7A, ‘‘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 Item 1A, ‘‘Risk Factors’’ and
Item 7A, ‘‘Quantitative and Qualitative Disclosures About Market Risk — Foreign Currency Risk.’’
ITEM 7A.
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 December 28, 2014 and December 29, 2013, a
hypothetical 50 basis point increase in interest rates would have resulted in an approximate $28 million
decline (less than 0.7%) and an approximate $35 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, liabilities and net
investments. The fair value of these contracts is reflected as other assets or other liabilities and the change
in fair value of these balance sheet hedge 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, liabilities and net investments which is also recorded in other income (expense).
As of December 28, 2014, we had foreign exchange forward contracts in place that amounted to a net
purchase in U.S. dollar-equivalents of $47 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 (balance sheet hedges) as of
65
Annual Report
We use foreign exchange forward contracts to partially hedge future Japanese yen wafer purchases
and to partially hedge future Japanese yen R&D expenses. 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 or R&D expenses in the same
period the hedged cost of revenue or R&D expenses are recognized.
December 28, 2014, based upon the exchange rate at December 28, 2014, are shown in the table below. In
addition, this table shows the change in fair value of these balance sheet hedges 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.
Unrealized
Gain
(Loss)
Notional
Amount
Change in Fair
Value Due to 10%
Adverse Rate
Movement
(In millions)
Balance sheet hedges:
Forward contracts sold . . . . . . . . . . . . . . . . . . . . . . .
Forward contracts purchased . . . . . . . . . . . . . . . . . . .
$
Total net outstanding contracts . . . . . . . . . . . . . . . .
$
(135.2) $
182.4
47.2
$
4.8 $
(6.7)
9.4
(9.3)
(1.9) $
0.1
Based upon the foreign exchange forward contracts outstanding as of December 28, 2014 and
December 29, 2013, a hypothetical adverse foreign currency exchange rate movement of 10% would have
resulted in a change in fair value of $0.1 million and ($12.8) million, respectively.
As of December 28, 2014, we had foreign exchange forward contracts for future wafer purchases and
R&D expenses in Japanese yen. As of December 28, 2014, the maturities of these contracts were
12 months or less. The notional amount and unrealized loss of our outstanding foreign exchange forward
contracts that are designated as cash flow hedges as of December 28, 2014, based upon the exchange rate
at December 28, 2014, are shown in the table below. In addition, this table shows the change in fair value
of these cash flow hedges assuming a hypothetical adverse foreign currency exchange rate movement of
10% as of December 28, 2014.
Notional
Amount
Unrealized
Loss
Change in Fair
Value Due to 10%
Adverse Rate
Movement
(In millions)
Cash flow hedges . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
103.8
$
(1.5) $
(10.9)
Based upon the cash flow hedges outstanding as of December 28, 2014 and December 29, 2013, a
hypothetical adverse foreign currency exchange rate movement of 10% would have resulted in a change in
fair value of ($10.9) million and ($60.1) 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 December 28, 2014, we had foreign exchange forward
contracts with one European bank to purchase foreign currency with a U.S. dollar-equivalent of
$36 million and to sell foreign currency with a U.S. dollar-equivalent of $54 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.
66
All of the potential changes noted above as of December 28, 2014 and December 29, 2013 are based
on sensitivity analyses performed on our financial position as of December 28, 2014 and December 29,
2013, respectively. Actual results may differ materially.
ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this item is set forth beginning at page F-1.
ITEM 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
Not applicable.
ITEM 9A.
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 December 28, 2014. Based on their evaluation as of
December 28, 2014, 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 Annual Report on Form 10-K 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.
Report of Management on Internal Control Over Financial Reporting. Our management is responsible for
establishing and maintaining a comprehensive system of internal control over financial reporting to
provide reasonable assurance of the proper authorization of transactions, the safeguarding of assets and
the reliability of financial records. Our internal control system was designed to provide reasonable
assurance to our management and board of directors regarding the preparation and fair presentation of
published financial statements. The system of internal control over financial reporting provides for
appropriate division of responsibility and is documented by written policies and procedures that are
communicated to employees. The framework upon which management relied in evaluating the
effectiveness of our internal control over financial reporting was set forth in Internal Control — Integrated
Framework published by the Committee of Sponsoring Organizations of the Treadway Commission (2013
framework).
Based on the results of our evaluation, our management concluded that our internal control over
financial reporting was effective at the reasonable assurance level as of December 28, 2014.
Our independent registered public accounting firm has audited the financial statements included in
Item 8 of this report and has issued an attestation report on our internal control over financial reporting
which is included at page F-3.
67
Annual Report
However, projections of any evaluation of effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in our business or other conditions, or that the degree
of compliance with our policies or procedures may deteriorate.
Inherent Limitations of Disclosure Controls and Procedures and Internal Control over Financial Reporting.
Any system of controls, however well designed and operated, can provide only reasonable, and not
absolute, assurance that the objectives of the system will be met. In addition, the design of any control
system is based in part upon certain assumptions about the likelihood of future events.
Changes in Internal Control over Financial Reporting. There were no changes in our internal control over
financial reporting (as defined in Exchange Act Rule 13a-15(f)) during the quarter ended December 28,
2014 that have materially affected, or are reasonably likely to materially affect, our internal control over
financial reporting.
ITEM 9B.
OTHER INFORMATION
Not applicable.
68
PART III
ITEM 10.
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information required by this item is set forth under ‘‘Business-Executive Officers’’ in this report
and will be included under ‘‘Election of Directors’’ and ‘‘Compliance with Section 16(a) of the Securities
Exchange Act of 1934’’ in our Proxy Statement for our 2015 Annual Meeting of Stockholders, and is
incorporated herein by reference.
We have adopted a code of ethics that applies to our Principal Executive Officer and Principal
Financial Officer. This code of ethics, which consists of the ‘‘Financial Executives’’ section of our code of
ethics, that applies to our employees generally, is posted on our website at
‘‘www.sandisk.com/about-sandisk/corporate-responsibility/social.’’ From this webpage, click on ‘‘SanDisk
Worldwide Code of Business Conduct.’’
We intend to satisfy the disclosure requirement under Item 5.05 of Form 8-K regarding an
amendment to, or waiver from, a provision of this code of ethics by posting the required information on
our website, at the address and location specified above.
ITEM 11.
EXECUTIVE COMPENSATION
The information required by this item will be included under ‘‘Director Compensation,’’
‘‘Compensation Committee Report,’’ ‘‘Compensation Discussion and Analysis,’’ ‘‘Executive
Compensation’’ and ‘‘Compensation Committee Interlocks and Insider Participation’’ in our Proxy
Statement for our 2015 Annual Meeting of Stockholders, and is incorporated herein by reference.
ITEM 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
AND RELATED STOCKHOLDER MATTERS
The information required by this item will be included under ‘‘Security Ownership of Certain
Beneficial Owners and Management’’ and ‘‘Equity Compensation Information for Plans or Individual
Arrangements with Employees and Non-Employees’’ in our Proxy Statement for our 2015 Annual Meeting
of Stockholders, and is incorporated herein by reference.
ITEM 13.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
The information required by this item will be included under ‘‘Certain Transactions and
Relationships’’ and ‘‘Election of Directors’’ in our Proxy Statement for our 2015 Annual Meeting of
Stockholders, and is incorporated herein by reference.
PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information required by this item will be included under ‘‘Principal Accountant Fees and
Services’’ and ‘‘Audit Committee Report’’ in our Proxy Statement for our 2015 Annual Meeting of
Stockholders, and is incorporated herein by reference.
69
Annual Report
ITEM 14.
PART IV
ITEM 15.
EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Documents filed as part of this report
1) All financial statements
Index to Financial Statements
Page
Reports of Independent Registered Public Accounting Firm
Consolidated Balance Sheets . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Statements of Operations . . . . . . . . . . . . . . .
Consolidated Statements of Comprehensive Income . . . . . .
Consolidated Statements of Equity . . . . . . . . . . . . . . . . . . .
Consolidated Statements of Cash Flows . . . . . . . . . . . . . . .
Notes to Consolidated Financial Statements . . . . . . . . . . . .
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F-2
F-4
F-5
F-6
F-7
F-8
F-9
All other schedules have been omitted because the required information is not present or not present
in amounts sufficient to require submission of the schedules, or because the information required is
included in the Consolidated Financial Statements or notes thereto.
2) Exhibits required by Item 601 of Regulation S-K
The information required by this item is set forth on the exhibit index which follows the signature
pages of this report.
70
SANDISK CORPORATION
INDEX TO FINANCIAL STATEMENTS
Page
Reports of Independent Registered Public Accounting Firm
Consolidated Balance Sheets . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Statements of Operations . . . . . . . . . . . . . . .
Consolidated Statements of Comprehensive Income . . . . . .
Consolidated Statements of Equity . . . . . . . . . . . . . . . . . . .
Consolidated Statements of Cash Flows . . . . . . . . . . . . . . .
Notes to Consolidated Financial Statements . . . . . . . . . . . .
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F-2
F-4
F-5
F-6
F-7
F-8
F-9
Annual Report
F-1
REPORT OF INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders of
SanDisk Corporation
We have audited the accompanying Consolidated Balance Sheets of SanDisk Corporation as of
December 28, 2014 and December 29, 2013, and the related Consolidated Statements of Operations,
Comprehensive Income, Equity, and Cash Flows for each of the three years in the period ended
December 28, 2014. These financial statements are the responsibility of the Company’s management. Our
responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the
consolidated financial position of SanDisk Corporation at December 28, 2014 and December 29, 2013, and
the consolidated results of its operations and its cash flows for each of the three years in the period ended
December 28, 2014, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States), SanDisk Corporation’s internal control over financial reporting as of December 28,
2014, based on criteria established in Internal Control — Integrated Framework issued by the Committee
of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated
February 10, 2015 expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
San Jose, California
February 10, 2015
F-2
REPORT OF INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders of
SanDisk Corporation
We have audited SanDisk Corporation’s internal control over financial reporting as of December 28,
2014, based on criteria established in Internal Control — Integrated Framework issued by the Committee
of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). SanDisk
Corporation’s management is responsible for maintaining effective internal control over financial
reporting, and for its assessment of the effectiveness of internal control over financial reporting included in
the accompanying Report of Management on Internal Control Over Financial Reporting. Our
responsibility is to express an opinion on the company’s internal control over financial reporting based on
our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control over financial reporting was maintained in
all material respects. Our audit included obtaining an understanding of internal control over financial
reporting, assessing the risk that a material weakness exists, testing and evaluating the design and
operating effectiveness of internal control based on the assessed risk, and performing such other
procedures as we considered necessary in the circumstances. We believe that our audit provides a
reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting principles. A company’s internal
control over financial reporting includes those policies and procedures that (1) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the
assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted accounting principles,
and that receipts and expenditures of the company are being made only in accordance with authorizations
of management and directors of the company; and (3) provide reasonable assurance regarding prevention
or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have
a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect
misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk
that controls may become inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States), the Consolidated Balance Sheets of SanDisk Corporation as of December 28, 2014
and December 29, 2013, and the related Consolidated Statements of Operations, Comprehensive Income,
Equity, and Cash Flows for each of the three years in the period ended December 28, 2014 and our report
dated February 10, 2015 expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
San Jose, California
February 10, 2015
F-3
Annual Report
In our opinion, SanDisk Corporation maintained, in all material respects, effective internal control
over financial reporting as of December 28, 2014, based on the COSO criteria.
SANDISK CORPORATION
CONSOLIDATED BALANCE SHEETS
December 28,
2014
December 29,
2013
(In thousands, except for share
and per share amounts)
Current assets:
Cash and cash equivalents . . . .
Short-term marketable securities
Accounts receivable, net . . . . . .
Inventory . . . . . . . . . . . . . . . .
Deferred taxes . . . . . . . . . . . .
Other current assets . . . . . . . . .
ASSETS
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.......
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Ventures
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4,200,125
2,758,475
724,357
962,817
161,827
831,328
542,351
108,677
4,650,718
3,179,471
655,794
1,134,620
134,669
318,111
247,904
167,430
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$10,289,957
$10,488,717
Total current assets . . .
Long-term marketable securities
Property and equipment, net . . .
Notes receivable and investments
Deferred taxes . . . . . . . . . . . .
Goodwill . . . . . . . . . . . . . . . .
Intangible assets, net . . . . . . . .
Other non-current assets . . . . . .
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......
......
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in Flash
......
......
......
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$
809,003
1,455,509
842,476
698,011
180,134
214,992
$
986,246
1,919,611
682,809
756,975
138,192
166,885
LIABILITIES, CONVERTIBLE SHORT-TERM DEBT CONVERSION OBLIGATION AND EQUITY
Current liabilities:
Accounts payable trade . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accounts payable to related parties . . . . . . . . . . . . . . . . . . . . . . . . .
Convertible short-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other current accrued liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred income on shipments to distributors and retailers and deferred
revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
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$
404,237
136,051
869,645
506,293
$
282,582
146,964
—
509,732
......
274,657
291,302
Total current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Convertible long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2,190,883
1,199,696
245,554
1,230,580
1,985,363
307,083
Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
3,636,133
3,523,026
Commitments and contingencies (see Note 14)
Convertible short-term debt conversion obligation . . . . . . . . . . . . . . . . . . . . . . . .
127,143
—
—
—
Stockholders’ equity:
Preferred stock, $0.001 par value, Authorized shares: 4,000,000, Issued and
outstanding: none . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Common stock, $0.001 par value, Authorized shares: 800,000,000, Issued and
outstanding: 215,743,090 in 2014 and 225,290,940 in 2013 . . . . . . . . . . . .
Capital in excess of par value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accumulated other comprehensive loss . . . . . . . . . . . . . . . . . . . . . . . . . .
...
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216
5,236,766
1,499,149
(208,072)
225
5,040,017
2,004,089
(76,459)
Total stockholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-controlling interests . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
6,528,059
(1,378)
6,967,872
(2,181)
Total equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
6,526,681
6,965,691
Total liabilities, convertible short-term debt conversion obligation and
equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$10,289,957
$10,488,717
The accompanying notes are an integral part of these consolidated financial statements.
F-4
SANDISK CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
December 28,
2014
Fiscal years ended
December 29,
December 30,
2013
2012
(In thousands, except per share amounts)
Revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cost of revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amortization of acquisition-related intangible assets . . . . . . . . . . .
$
6,627,701
3,458,954
100,899
$
6,170,003
3,252,988
49,532
$
5,052,509
3,326,747
42,542
Total cost of revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
3,559,853
3,302,520
3,369,289
Gross profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
3,067,848
2,867,483
1,683,220
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.
.
852,310
383,288
214,902
26,423
—
32,991
742,268
276,312
192,310
11,155
83,228
—
602,765
224,054
150,401
9,045
860
—
Total operating expenses . . . . . . . . . . . . . . . . . . . . . . . .
1,509,914
1,305,273
987,125
1,557,934
51,811
4,763
(125,478)
1,562,210
48,785
3,219
(98,065)
696,095
58,991
(7,762)
(120,408)
Operating expenses:
Research and development . . . . . . . . . . . . . . . . .
Sales and marketing . . . . . . . . . . . . . . . . . . . . . .
General and administrative . . . . . . . . . . . . . . . . .
Amortization of acquisition-related intangible assets
Impairment of acquisition-related intangible assets .
Restructuring and other . . . . . . . . . . . . . . . . . . .
Operating income . . .
Interest income . . . . . . . . . . . . . .
Gain (loss) on investments . . . . . . .
Interest (expense) and other income
..........
..........
..........
(expense), net
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
Total other income (expense), net . . . . . . . . . . . . . . . . . . . . .
(68,904)
Income before income taxes . . . . . . . . . . . . . . . . . .
Provision for income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(46,061)
1,489,030
481,584
(69,179)
1,516,149
473,492
626,916
209,512
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
1,007,446
$
1,042,657
$
417,404
Net income per share:
Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
4.52
$
4.44
$
1.72
Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
4.23
$
4.34
$
1.70
Shares used in computing net income per share:
Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash dividends declared per share . . . . . . . . . . . . . . . . . . . . . . .
222,714
238,209
$
1.05
234,886
240,236
$
0.45
242,076
245,253
$
—
The accompanying notes are an integral part of these consolidated financial statements.
Annual Report
F-5
SANDISK CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
December 28,
2014
Fiscal years ended
December 29, December 30,
2013
2012
(In thousands)
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other comprehensive loss, before tax:
Unrealized holding gain (loss) on marketable securities . . . . . . . . .
Reclassification adjustment for realized gain on marketable
securities included in net income . . . . . . . . . . . . . . . . . . . . . . .
$ 1,007,446
$ 1,042,657
$
417,404
(3,511)
(6,448)
11,160
(7,543)
(2,375)
(2,969)
Net unrealized holding gain (loss) on marketable securities . . . . .
(11,054)
(8,823)
8,191
Foreign currency translation adjustments . . . . . . . . . . . . . . . . . . .
(153,975)
(240,835)
(169,190)
(99)
(74,834)
(38,197)
Unrealized holding loss on derivatives qualifying as cash flow
hedges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Reclassification adjustment for realized loss on derivatives
qualifying as cash flow hedges included in net income . . . . . . . .
25,418
41,523
10,946
Net unrealized holding gain (loss) on derivatives qualifying as
cash flow hedges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
25,319
(33,311)
(27,251)
(139,710)
(8,097)
(282,969)
(41,389)
(188,250)
(20,670)
Total other comprehensive loss, before tax . . . . . . . . . . . . . . .
Income tax benefit related to items of other comprehensive loss . . . .
Total other comprehensive loss, net of tax . . . . . . . . . . . . . . . . . .
Comprehensive income . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(131,613)
$
875,833
(241,580)
$
801,077
(167,580)
$
The accompanying notes are an integral part of these consolidated financial statements.
F-6
249,824
SANDISK CORPORATION
CONSOLIDATED STATEMENTS OF EQUITY
Common
Stock
Shares
Common
Stock
Par
Value
Capital in
Excess of
Par Value
Retained
Earnings
Accumulated
Other
Total
NonComprehensive Stockholders’ controlling
Income (Loss)
Equity
Interests
Total
Equity
(In thousands)
Balance as of January 1, 2012 . . . . . . . .
Net income . . . . . . . . . . . . . . . . .
Other comprehensive loss, net . . . . . .
Loss on non-controlling interest . . . . .
Issuance of shares pursuant to equity
plans . . . . . . . . . . . . . . . . . . . .
Issuance of shares pursuant to employee
stock purchase plan . . . . . . . . . . .
Net cash received for stock repurchase
contracts . . . . . . . . . . . . . . . . . .
Share-based compensation expense . . .
Income tax benefit from share-based
plans . . . . . . . . . . . . . . . . . . . .
Stock repurchases . . . . . . . . . . . . . .
.
.
.
.
242,552 $
—
—
—
.
3,846
4
63,312
—
—
63,316
—
63,316
.
685
—
22,986
—
—
22,986
—
22,986
.
.
—
—
—
—
2,675
79,132
—
—
—
—
2,675
79,132
—
—
2,675
79,132
—
(6)
11,691
(87,090)
—
—
11,691
(230,081)
—
—
11,691
(230,081)
Balance as of December 30, 2012 . . . . . .
Net income . . . . . . . . . . . . . . . . .
Other comprehensive loss, net . . . . . .
Income from non-controlling interest . .
Distribution to non-controlling interests
Issuance of shares pursuant to equity
plans . . . . . . . . . . . . . . . . . . . .
Issuance of shares pursuant to employee
stock purchase plan . . . . . . . . . . .
Share-based compensation expense . . .
Income tax benefit from share-based
plans . . . . . . . . . . . . . . . . . . . .
Dividends and dividend equivalent rights
declared . . . . . . . . . . . . . . . . . .
Stock repurchases . . . . . . . . . . . . . .
Equity value of debt issuance . . . . . . .
Purchased convertible bond hedge, net .
Sold warrants . . . . . . . . . . . . . . . .
.
.
.
.
.
241,432
—
—
—
—
241
—
—
—
—
5,027,271
—
—
—
—
2,071,268
1,042,657
—
—
—
.
7,934
8
241,316
—
—
241,324
—
241,324
.
.
624
—
1
—
24,720
100,641
—
—
—
—
24,721
100,641
—
—
24,721
100,641
.
—
—
583
—
—
583
—
583
.
.
.
.
.
.
.
—
(5,651)
243 $ 4,934,565 $ 1,796,849 $
—
—
417,404
—
—
—
—
—
—
—
(142,985)
165,121
—
(241,580)
—
—
(4,301)
—
—
2,207
(87)
Balance as of December 29, 2013 . . . . . . .
Net income . . . . . . . . . . . . . . . . . .
Other comprehensive loss, net . . . . . . .
Income from non-controlling interest . . .
Issuance of shares pursuant to equity
plans . . . . . . . . . . . . . . . . . . . . .
Issuance of shares pursuant to employee
stock purchase plan . . . . . . . . . . . .
Share-based compensation expense . . . .
Income tax benefit from share-based
plans . . . . . . . . . . . . . . . . . . . . .
Dividends and dividend equivalent rights
declared . . . . . . . . . . . . . . . . . . .
Stock repurchases . . . . . . . . . . . . . . .
Equity value of debt issuance . . . . . . . .
Convertible debt conversion . . . . . . . .
Exercise of convertible note hedges . . . .
Assumption of share-based compensation
plan awards in connection with
acquisition . . . . . . . . . . . . . . . . . .
Reclassification to Convertible short-term
debt conversion obligation . . . . . . . .
225,291
—
—
—
225
—
—
—
5,040,017
—
—
—
2,004,089
1,007,446
—
—
4,706
5
145,664
—
—
145,669
—
145,669
639
—
1
—
35,816
157,328
—
—
—
—
35,817
157,328
—
—
35,817
157,328
—
—
45,120
—
—
45,120
—
45,120
Balance as of December 28, 2014 . . . . . . .
215,743 $
—
—
—
7,041
(127,143)
—
—
216 $ 5,236,766 $ 1,499,149 $
—
—
—
—
—
—
—
6,967,872
1,007,446
(131,613)
—
—
—
—
—
—
(2,181)
—
—
803
(238,170)
(1,341,476)
193
(25)
—
—
—
—
—
—
7,041
—
(127,143)
(208,072) $ 6,528,059 $
—
6,965,691
1,007,446
(131,613)
803
(238,170)
(1,341,476)
193
(25)
—
7,041
(127,143)
(1,378) $ 6,526,681
The accompanying notes are an integral part of these consolidated financial statements.
F-7
(102,896)
(1,589,540)
349,250
(338,989)
217,800
Annual Report
—
—
(238,170)
(67,245) (1,274,216)
193
—
(25)
—
—
—
(76,459)
—
(131,613)
—
(102,896)
(1,589,540)
349,250
(338,989)
217,800
7,259,600
1,042,657
(241,580)
2,207
(87)
—
(25)
—
—
—
—
(15)
—
—
—
—
—
—
—
—
7,263,901
1,042,657
(241,580)
—
—
(3,519) $ 7,060,839
—
417,404
—
(167,580)
(782)
(782)
—
(24,699)
—
—
—
—
(14,893)
—
27
(27)
—
(102,896)
(582,575) (1,006,940)
349,250
—
(338,989)
—
217,800
—
332,701 $ 7,064,358 $
—
417,404
(167,580)
(167,580)
—
—
SANDISK CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
December 28,
2014
Fiscal years ended
December 29, December 30,
2013
2012
(In thousands)
Cash flows from operating activities:
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Adjustments to reconcile net income to net cash provided by operating
activities:
Deferred taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Provision for doubtful accounts . . . . . . . . . . . . . . . . . . . . . . . .
Share-based compensation expense . . . . . . . . . . . . . . . . . . . . .
Excess tax benefit from share-based plans . . . . . . . . . . . . . . . . .
Impairment and other . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other non-operating . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Changes in operating assets and liabilities:
Accounts receivable, net . . . . . . . . . . . . . . . . . . . . . . . . . . .
Inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accounts payable trade . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accounts payable to related parties . . . . . . . . . . . . . . . . . . . .
Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . .
$
1,007,446
$
1,042,657
$
417,404
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
(7,915)
254,271
324,231
857
155,313
(44,919)
6,790
636
527
226,334
237,731
2,167
99,756
(27,198)
75,561
(792)
34,368
161,949
254,352
1,452
78,443
(16,015)
(17,350)
9,424
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
(118,606)
136,442
37,738
37,380
(10,913)
(80,303)
(51,125)
23,310
147,713
16,377
(67,842)
138,496
(68,070)
(71,260)
(84,579)
(4,124)
(61,469)
(104,671)
Total adjustments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
691,002
821,015
112,450
Net cash provided by operating activities . . . . . . . . . . . . . . . . .
1,698,448
1,863,672
529,854
.
.
.
.
.
.
.
.
.
(4,106,494)
4,114,712
772,882
(232,786)
(24,296)
(181,481)
231,409
(24,837)
(1,063,798)
(4,925,520)
3,701,528
751,900
(213,415)
(12,342)
(37,099)
124,765
(8,377)
(304,320)
(3,178,660)
2,197,302
650,060
(487,973)
(50,439)
(142,316)
511,289
(4,000)
(69,629)
Net cash used in investing activities . . . . . . . . . . . . . . . . . . . . . . . . .
(514,689)
(922,880)
(574,366)
.
.
.
.
.
.
.
.
.
.
—
—
—
(3,212)
—
181,486
44,919
(234,565)
(1,341,476)
—
1,483,125
(331,650)
217,800
(928,061)
(87)
266,044
27,198
(101,191)
(1,589,539)
—
—
—
—
—
—
86,302
16,015
—
(230,081)
2,675
(956,361)
(125,089)
Cash flows from investing activities:
Purchases of short and long-term marketable securities . . . . . . . . . .
Proceeds from sales of short and long-term marketable securities . . . .
Proceeds from maturities of short and long-term marketable securities
Acquisition of property and equipment, net . . . . . . . . . . . . . . . . .
Investment in Flash Ventures . . . . . . . . . . . . . . . . . . . . . . . . . .
Notes receivable issuances to Flash Ventures . . . . . . . . . . . . . . . . .
Notes receivable proceeds from Flash Ventures . . . . . . . . . . . . . . .
Purchased technology and other assets . . . . . . . . . . . . . . . . . . . .
Acquisitions, net of cash acquired . . . . . . . . . . . . . . . . . . . . . . .
Cash flows from financing activities:
Proceeds from issuance of convertible senior notes, net
Purchase of convertible bond hedge . . . . . . . . . . . .
Proceeds from sale of warrants . . . . . . . . . . . . . . .
Repayment of debt financing . . . . . . . . . . . . . . . . .
Distribution to non-controlling interests . . . . . . . . . .
Proceeds from employee stock programs . . . . . . . . .
Excess tax benefit from share-based plans . . . . . . . .
Dividends paid . . . . . . . . . . . . . . . . . . . . . . . . .
Stock repurchases . . . . . . . . . . . . . . . . . . . . . . . .
Net cash received for share repurchase contracts . . . .
.
.
.
.
.
.
.
.
.
of issuance costs
. . . . . . . . . . .
. . . . . . . . . . .
. . . . . . . . . . .
. . . . . . . . . . .
. . . . . . . . . . .
. . . . . . . . . . .
. . . . . . . . . . .
. . . . . . . . . . .
. . . . . . . . . . .
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
Net cash used in financing activities . . . . . . . . . . . . . . . . . . . . . . . . .
(1,352,848)
Effect of changes in foreign currency exchange rates on cash . . . . . . . . . . . .
(8,154)
Net decrease in cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . .
Cash and cash equivalents at beginning of year . . . . . . . . . . . . . . . . . . . . .
(177,243)
986,246
6,345
(2,425)
(9,224)
995,470
(172,026)
1,167,496
Cash and cash equivalents at end of year . . . . . . . . . . . . . . . . . . . . . . .
$
809,003
$
986,246
$
995,470
Supplemental disclosure of cash flow information:
Cash paid for income taxes, net of refunds . . . . . . . . . . . . . . . . . . . . . .
$
(433,959)
$
(373,183)
$
(360,688)
Cash paid for interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
(22,349)
$
(20,403)
$
(24,957)
The accompanying notes are an integral part of these consolidated financial statements.
F-8
SANDISK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1: Organization and Summary of Significant Accounting Policies
Organization and Nature of Operations. SanDisk Corporation (together with its subsidiaries, 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.
Basis of Presentation. The Company’s fiscal year ends on the Sunday closest to December 31. Fiscal years
2014, 2013 and 2012 consisted of 52 weeks, while fiscal year 2015 will include 53 weeks with 14 weeks in the
fourth fiscal quarter. Certain prior-period amounts have been reclassified in the footnotes to conform to
the current-period presentation, including line items within other current and non-current assets and
liabilities, and warranties in Note 5, ‘‘Balance Sheet Information.’’ For accounting and disclosure purposes,
the exchange rate used to convert Japanese yen to the United States (‘‘U.S.’’) dollar for fiscal years ended
December 28, 2014, December 29, 2013 and December 30, 2012 was 120.44, 104.94 and 85.99, respectively.
Throughout the Notes to Consolidated Financial Statements, unless otherwise indicated, references to Net
income refer to Net income attributable to common stockholders.
Principles of Consolidation. The 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 Consolidated Financial
Statements also include the results of companies acquired by the Company from the date of each
acquisition.
Revenue Recognition, Sales Returns and Allowances and Sales Incentive Programs. The Company
recognizes revenue when the earnings process is complete, as evidenced by an agreement with the
customer, transfer of title and acceptance, if applicable, pricing is fixed or determinable and collectability is
reasonably assured. Revenue is generally recognized at the time of shipment or transfer of title for
customers not eligible for price protection and/or a right of return. Sales made to distributors and retailers
are generally under agreements allowing price protection and/or a right of return and, therefore, the
revenue and related costs of these transactions are deferred until the retailers or distributors sell-through
the merchandise to their end customer or their rights of return expire. Estimated sales returns are
recorded as a reduction to revenue and deferred revenue and were not material for any period presented
in the accompanying Consolidated Financial Statements. The cost of shipping products to customers is
F-9
Annual Report
Use of Estimates. The preparation of Consolidated Financial Statements in conformity with U.S.
generally accepted accounting principles (‘‘GAAP’’) requires management to make estimates and
assumptions that affect the amounts reported in the 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.
SANDISK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
included in cost of revenue. The Company recognizes expenses related to sales commissions in the period
in which the commissions are earned.
For multiple-element arrangements that include support or software elements, the Company analyzes
whether tangible products containing software and non-software components function together and
therefore should be excluded from industry-specific software revenue recognition guidance. The Company
allocates revenue to each element, or the software elements as a group, based on the relative selling price
determined in accordance with the Company’s normal pricing and discounting practices for the specific
element when sold separately for all multiple-element arrangements. Multiple-element arrangements and
arrangements that include software have not been significant to the Company’s revenue and operating
results.
Revenue from patent licensing arrangements is recognized when earned, estimable and realizable.
The timing of revenue recognition is dependent on the terms of each license agreement and on the timing
of sales of licensed products. The Company generally recognizes royalty revenue when it is reported to the
Company by its licensees, which is generally one quarter in arrears from the licensees’ sales of licensed
products. For licensing fees that are not determined by the number of licensed units sold, the Company
recognizes license fee revenue on a straight-line basis over the life of the license.
The Company records estimated reductions of revenue for customer and distributor incentive
programs and offerings, including price protection, promotions, co-op advertising and other volume-based
incentives and expected returns. All sales incentive programs are recorded as an offset to revenue or
deferred revenue. Marketing development programs are recorded as a reduction to revenue.
Accounts Receivable and Allowance for Doubtful Accounts. Accounts receivable include amounts owed by
geographically dispersed distributors, retailers and original equipment manufacturer (‘‘OEM’’) customers.
No collateral is required. Provisions are provided for sales returns and credit losses.
The Company estimates the collectability of its accounts receivable based on a combination of factors
including, but not limited to, customer credit ratings and historical experience. In circumstances where the
Company is aware of a specific customer’s inability to meet its financial obligations to the Company (e.g.,
bankruptcy filings or substantial downgrading of credit ratings), the Company provides allowances for bad
debts against amounts due to reduce the net recognized receivable to the amount it reasonably believes
will be collected.
Income Taxes. The Company accounts for income taxes using an asset and liability approach, which
requires recognition of deferred tax assets and liabilities for the expected future tax consequences of events
that have been recognized in the Company’s Consolidated Financial Statements, but have not been
reflected in the Company’s taxable income. The Company must evaluate the expected realization of its
deferred tax assets and determine whether a valuation allowance needs to be established or released. In
determining the need for and amount of a valuation allowance, the Company assesses the likelihood that it
will be able to recover its deferred tax assets using historical levels of income, estimates of future income
and tax planning strategies. A valuation allowance is established to the extent that the Company does not
believe it is ‘‘more likely than not’’ that it will generate sufficient taxable income in future periods to realize
the benefit of its deferred tax assets.
The Company recognizes interest and penalties related to unrecognized tax benefits in income tax
expense. The Company recognizes the tax benefit from an uncertain tax position only if it is ‘‘more likely
than not’’ the tax position will be sustained on examination by the taxing authorities, based on the technical
F-10
SANDISK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
merits of the position. The tax benefits recognized in the financial statements from such positions are then
measured based on the largest benefit that has a greater than 50% likelihood of being realized upon
settlement.
Foreign Currency. The Company determines the functional currency for its parent company and each of
its subsidiaries by reviewing the currencies in which their respective operating activities occur. Transaction
gains and losses arising from activities in other than the applicable functional currency are calculated using
average exchange rates for the applicable period and reported in net income as a non-operating item in
each period. Non-monetary balance sheet items denominated in a currency other than the applicable
functional currency are translated using the historical rate. The Company continuously evaluates its
foreign currency exposures and may continue to enter into hedges or other risk mitigating arrangements in
the future. Aggregate gross foreign currency transaction gain (loss) prior to consideration of the offsetting
hedges recorded to income before taxes was $3.1 million, ($3.3) million and ($2.8) million in fiscal years
2014, 2013 and 2012, respectively.
Cash Equivalents, Short and Long-Term Marketable Securities. Cash equivalents consist of short-term,
highly liquid financial instruments with insignificant interest rate risk that are readily convertible to cash
and have maturities of three months or less from the date of purchase. Marketable securities with original
maturities greater than three months from purchase date and remaining maturities less than one year are
classified as short-term marketable securities. Marketable securities with remaining maturities greater than
one year as of the balance sheet date are classified as long-term marketable securities. Short and long-term
fixed income investments consist of U.S. Treasury securities, U.S. government-sponsored agency securities,
international government securities, corporate notes and bonds, asset-backed securities, mortgage-backed
securities and municipal notes and bonds. The fair market value of cash equivalents at December 28, 2014
approximated their carrying value. Cost of securities sold is based on specific identification.
In determining if and when a decline in market value below cost of these investments is
other-than-temporary, the Company evaluates both quantitative and qualitative information including the
market conditions, offering prices, trends of earnings, price multiples and other key measures. For fixed
income securities, only the decline attributable to deteriorating credit of an other-than-temporary
impairment is taken to the Consolidated Statement of Operations, unless the Company intends, or ‘‘more
likely than not’’ will be required, to sell the security.
Property and Equipment. Property and equipment are carried at cost less accumulated depreciation and
amortization. Depreciation and amortization are computed using the straight-line method over the
estimated useful lives of the assets, ranging from two to twenty-five years, or the remaining lease term,
whichever is shorter.
Equity Investments. The Company accounts for investments in equity securities of other entities,
including VIEs that are not consolidated, under the cost method of accounting if investments in voting
F-11
Annual Report
Variable Interest Entities. The Company evaluates its equity method investments to determine whether
any investee is a variable interest entity (‘‘VIE’’). If the Company concludes that an investee is a VIE, the
Company evaluates its power to direct the activities of the investee, its obligation to absorb the expected
losses of the investee and its right to receive the expected residual returns of the investee to determine
whether the Company is the primary beneficiary of the investee. If the Company is the primary beneficiary
of a VIE, the Company consolidates such entity and reflects the non-controlling interest of other
beneficiaries of that entity. If the Company concludes that an investee is not a VIE, the Company does not
consolidate the investee.
SANDISK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
equity interests of the investee are less than 20%. The equity method of accounting is used if the
Company’s investment in voting stock is greater than or equal to 20% but less than a majority. In
considering the accounting method for investments less than 20%, the Company also considers other
factors such as its ability to exercise significant influence over operating and financial policies of the
investee. If certain factors are present, the Company could account for investments for which it has less
than a 20% ownership under the equity method of accounting.
Investments in public companies with restrictions of less than one year are classified as
available-for-sale and are adjusted to their fair market value with unrealized gains and losses recorded as a
component of accumulated other comprehensive income (‘‘AOCI’’). Investments in public and non-public
companies are reviewed on a quarterly basis to determine if their value has been impaired and adjustments
are recorded as necessary. Upon disposition of these investments, the specific identification method is used
to determine the cost basis in computing realized gains or losses. Declines in value that are judged to be
other-than-temporary are reported in Interest (expense) and other income (expense), net, or Cost of
revenue in the accompanying Consolidated Statements of Operations.
Inventories and Inventory Valuation. Inventories are stated at the lower of cost (first-in, first-out) or
market. Market value is based upon an estimated average selling price reduced by estimated costs of
disposal. Should actual market conditions differ from the Company’s estimates, the Company’s future
results of operations could be materially affected. Reductions in inventory valuation are included in Cost
of revenue in the accompanying Consolidated Statements of Operations. Inventory impairment charges,
when taken, permanently establish a new cost basis and are not subsequently reversed to income even if
circumstances later suggest that increased carrying amounts are recoverable. Rather, these amounts are
recognized in income only if, as and when the inventory is sold.
The Company reduces the carrying value of its inventory to a new basis for estimated obsolescence or
unmarketable inventory by an amount equal to the difference between the cost of the inventory and the
estimated market value based upon assumptions about future demand and market conditions, including
assumptions about changes in average selling prices. If actual market conditions are less favorable than
those projected by management, additional reductions in inventory valuation may be required.
The Company’s finished goods inventory includes consigned inventory held at customer locations as
well as at third-party fulfillment centers and subcontractors.
Other Long-Lived Assets. Intangible assets with finite useful lives and other long-lived assets are tested
for impairment if certain impairment indicators are identified. The Company assesses the carrying value of
long-lived assets, whenever events or changes in circumstances indicate that the carrying value of these
long-lived assets may not be recoverable. Factors the Company considers important which could result in
an impairment review include: (1) significant under-performance relative to the historical or projected
future operating results; (2) significant changes in the manner of use of assets; (3) significant negative
industry or economic trends; and (4) significant changes in the Company’s market capitalization relative to
net book value. Any changes in key assumptions used by the Company, including those set forth above,
could result in an impairment charge and such a charge could have a material adverse effect on the
Company’s consolidated results of operations.
Advertising Expenses. Marketing co-op development programs, where the Company receives, or will
receive, an identifiable benefit (e.g., goods or services) in exchange for the amount paid to its customer and
the Company can reasonably estimate the fair value of the benefit it receives for the customer incentive
payment, are classified, when granted, as a marketing expense. Advertising expenses not meeting this
F-12
SANDISK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
criteria are classified as a reduction to revenue when the expense is incurred. Advertising expenses
recorded as marketing expense were $27.9 million, $19.6 million and $16.2 million in fiscal years 2014, 2013
and 2012, respectively.
Research and Development Expenses. Research and development (‘‘R&D’’) expenditures are expensed as
incurred.
Note 2. Recent Accounting Pronouncements
In August 2014, the Financial Accounting Standards Board (‘‘FASB’’) issued Accounting Standards
Update (‘‘ASU’’) No. 2014-15, ‘‘Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going
Concern,’’ to provide guidance on management’s responsibility in evaluating whether there is substantial
doubt about a company’s ability to continue as a going concern and to provide related footnote disclosures.
The Company expects to adopt ASU 2014-15 in fiscal year 2016 and the Company does not expect the
adoption of ASU 2014-15 to have a significant impact on its Consolidated Financial Statements or related
disclosures.
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 fiscal year
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.
F-13
Annual Report
During the third quarter of fiscal year 2014, the Company early adopted the FASB accounting
guidance ASU No. 2014-08, ‘‘Presentation of Financial Statements and Property, Plant and Equipment,’’
which raises the threshold for a disposal to qualify as a discontinued operation and requires new
disclosures of both discontinued operations and certain other disposals that do not meet the new definition
of a discontinued operation. It also allows an entity to present a discontinued operation even when it has
continuing cash flows and significant continuing involvement with the disposed component. The Company
determined that the adoption of this ASU did not have any impact on the Company’s Consolidated
Financial Statements or related disclosures.
SANDISK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 3. Investments and Fair Value Measurements
The Company’s total cash, cash equivalents and marketable securities was as follows (in thousands):
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Short-term marketable securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Long-term marketable securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total cash, cash equivalents and marketable securities . . . . . . . . . . . . . . . . . .
December 28,
2014
December 29,
2013
$
$
809,003
1,455,509
2,758,475
$ 5,022,987
986,246
1,919,611
3,179,471
$ 6,085,328
Fair Value of Financial Instruments. For certain of the Company’s financial instruments, including cash
held in banks, accounts receivable and accounts payable, the carrying amounts approximate fair value due
to their short maturities, and are therefore excluded from the fair value tables below.
The Company categorizes the fair value of its financial assets and liabilities according to the hierarchy
established by the FASB, which prioritizes the inputs to valuation techniques used to measure fair value.
The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or
liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements).
The three levels of the fair value hierarchy are:
Level 1
Valuations based on quoted prices in active markets for identical assets or liabilities that
the Company has the ability to directly access.
Level 2
Valuations based on quoted prices for similar assets or liabilities; valuations for interestbearing securities based on non-daily quoted prices in active markets; quoted prices in
markets that are not active; or other inputs that are observable or can be corroborated by
observable data for substantially the full term of the assets or liabilities.
Level 3
Valuations based on inputs that are supported by little or no market activity and that are
significant to the fair value of the assets or liabilities.
A financial instrument’s level within the fair value hierarchy is based on the lowest level of any input
that is significant to the fair value measurement.
In circumstances in which a quoted price in an active market for the identical liability is not available,
the Company is required to use the quoted price of the identical liability when traded as an asset, quoted
prices for similar liabilities, or quoted prices for similar liabilities when traded as assets. If these quoted
prices are not available, the Company is required to use another valuation technique, such as an income
approach or a market approach.
The Company’s financial assets are measured at fair value on a recurring basis. Instruments that are
classified within Level 1 of the fair value hierarchy generally include money market funds and U.S.
Treasury securities. Level 1 securities represent quoted prices in active markets, and therefore do not
require significant management judgment.
Instruments that are classified within Level 2 of the fair value hierarchy primarily include U.S.
government-sponsored agency securities, international government securities, corporate notes and bonds,
asset-backed securities, mortgage-backed securities and municipal notes and bonds. The Company’s
F-14
SANDISK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Level 2 securities are primarily valued using quoted market prices for similar instruments and non-binding
market prices that are corroborated by observable market data. The Company uses inputs such as actual
trade data, benchmark yields, broker/dealer quotes and other similar data, which are obtained from
independent pricing vendors, quoted market prices or other sources to determine the ultimate fair value of
the Company’s assets and liabilities. The inputs and fair value are reviewed for reasonableness and may be
further validated by comparison to publicly available information or compared to multiple independent
valuation sources. In addition, the Company reviews third-party valuation models, independently
calculates the fair value of selective financial instruments and assesses the controls at its third-party
valuation service providers in determining the overall reasonableness of the fair value of its Level 2
financial instruments.
Financial assets and liabilities measured and recorded at fair value on a recurring basis consisted of
the following types of instruments (in thousands):
Level 1
December 28, 2014
Level 2
Level 3
Total
Level 1
December 29, 2013
Level 2
Level 3
Total
Money market funds . . $ 533,133 $
— $
Fixed income securities .
25,162 4,213,599
Derivative assets . . . . .
—
4,800
— $ 533,133 $ 760,363 $
— $
— 4,238,761 160,194 4,985,059
—
4,800
—
777
— $ 760,363
— 5,145,253
—
777
Total financial
assets . . . . . . . . $ 558,295 $ 4,218,399 $
— $ 4,776,694 $ 920,557 $ 4,985,836 $
— $ 5,906,393
Derivative liabilities . . . $
— $
8,224 $
— $
8,224 $
— $
45,859 $
— $
45,859
Total financial
liabilities . . . . . $
— $
8,224 $
— $
8,224 $
— $
45,859 $
— $
45,859
Financial assets and liabilities measured and recorded at fair value on a recurring basis were
presented on the Company’s Consolidated Balance Sheets as follows (in thousands):
Level 1
(1)
Cash equivalents . . .
Short-term marketable
securities . . . . . . . .
Long-term marketable
securities . . . . . . . .
Other current assets . .
. $ 533,133 $
December 28, 2014
Level 2
Level 3
24,777 $
Total
Level 1
— $ 557,910 $ 773,435 $
December 29, 2013
Level 2
Level 3
33,099 $
Total
— $ 806,534
.
3,327
1,452,182
—
1,455,509
15,090
1,904,521
—
1,919,611
.
.
21,835
—
2,736,640
4,800
—
—
2,758,475
4,800
132,032
—
3,047,439
777
—
—
3,179,471
777
— $ 4,776,694 $ 920,557 $ 4,985,836 $
— $ 5,906,393
Other current accrued
liabilities . . . . . . . . . $
Non-current liabilities . .
— $
—
8,224 $
—
— $
—
8,224 $
—
— $
—
45,741 $
118
— $
—
45,741
118
Total financial
liabilities . . . . . $
— $
8,224 $
— $
8,224 $
— $
45,859 $
— $
45,859
(1)
Cash equivalents exclude cash holdings of $251.1 million and $179.7 million included in Cash and cash
equivalents on the Company’s Consolidated Balance Sheets as of December 28, 2014 and December 29, 2013,
respectively.
F-15
Annual Report
Total financial
assets . . . . . . . . $ 558,295 $ 4,218,399 $
SANDISK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
During the fiscal year ended December 28, 2014, the Company had no transfers of financial assets or
liabilities between Level 1 and Level 2. As of December 28, 2014 and December 29, 2013, 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 (in thousands):
Amortized
Cost
December 28, 2014
Gross
Gross
Unrealized Unrealized
Gain
Loss
U.S. Treasury
securities . . . . . . $ 25,194 $
U.S. governmentsponsored agency
securities . . . . . .
7,511
International
government
securities . . . . . .
82,033
Corporate notes and
bonds . . . . . . . . .
774,869
Asset-backed
securities . . . . . .
171,221
Mortgage-backed
securities . . . . . .
48,378
Municipal notes and
bonds . . . . . . . . . 3,124,189
Fair Value
Amortized
Cost
December 29, 2013
Gross
Gross
Unrealized Unrealized
Gain
Loss
— $
(32) $
—
(18)
7,493
8,112
10
(1)
8,121
—
(314)
81,719
38,492
1
(224)
38,269
325
(2,052)
773,142
864,331
1,504
(1,565)
864,270
42
(353)
170,910
226,620
114
(170)
226,564
6
(173)
48,211
86,542
18
(554)
86,006
9,733
(1,798)
3,132,124
3,744,138
18,931
(1,241)
3,761,828
Total availablefor-sale
investments . $ 4,233,395 $ 10,106 $
25,162 $ 160,598 $
21 $
Fair Value
(4,740) $ 4,238,761 $ 5,128,833 $ 20,599 $
(424) $ 160,195
(4,179) $ 5,145,253
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 December 28, 2014, are
summarized in the following table (in thousands). Available-for-sale securities that were in an unrealized
gain position have been excluded from the table.
Less than 12 months
Gross
Unrealized
Fair Value
Loss
U.S. Treasury securities . . . . . . . . . . . . . . .
U.S. government-sponsored agency securities
International government securities . . . . . .
Corporate notes and bonds . . . . . . . . . . . .
Asset-backed securities . . . . . . . . . . . . . . .
Mortgage-backed securities . . . . . . . . . . . .
Municipal notes and bonds . . . . . . . . . . . .
.
.
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.
.
.
.
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
F-16
$
Greater than 12 months
Gross
Unrealized
Fair Value
Loss
25,162
7,394
81,719
586,903
137,007
31,954
709,505
$
(32) $
(18)
(314)
(2,046)
(353)
(132)
(1,796)
—
—
—
2,494
—
9,518
4,453
$
—
—
—
(6)
—
(41)
(2)
$ 1,579,644
$
(4,691) $
16,465
$
(49)
SANDISK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 December 28, 2014 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.
The following table shows the realized gains and (losses) on sales of available-for-sale securities (in
thousands):
December 28,
2014
Realized gains . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Realized losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
Net realized gains . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
Fiscal years ended
December 29, December 30,
2013
2012
8,918 $
(1,375)
7,543
$
4,724 $
(2,349)
2,375
$
3,867
(898)
2,969
Fixed income securities by contractual maturity as of December 28, 2014 are shown below (in
thousands). 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
Due in one year or less . . . . . . .
After one year through five years .
After five years through ten years
After ten years . . . . . . . . . . . . .
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.
.
.
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
860,203
2,603,444
122,637
647,111
$ 4,233,395
Fair
Value
$
861,915
2,606,289
122,643
647,914
$ 4,238,761
December 28, 2014
Carrying
Fair
Value
Value
1.5% Convertible Senior Notes due 2017 . . . . . . . . . .
0.5% Convertible Senior Notes due 2020 . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
December 29, 2013
Carrying
Fair
Value
Value
869,645
1,199,696
$ 1,948,721
1,789,500
$
829,792
1,155,571
$ 1,467,160
1,480,290
$ 2,069,341
$ 3,738,221
$ 1,985,363
$ 2,947,450
F-17
Annual Report
For those financial instruments where the carrying amounts differ from fair value, the following table
(in thousands) represents the related carrying values and fair values, which are based on quoted market
prices. The 1.5% Convertible Senior Notes due 2017 were categorized as Level 1 and the 0.5% Convertible
Senior Notes due 2020 were categorized as Level 2, based on the frequency of trading as of December 28,
2014 and December 29, 2013. See Note 7, ‘‘Financing Arrangements,’’ regarding details of each convertible
note presented.
SANDISK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 4. Derivatives and Hedging Activities
The Company uses derivative instruments primarily to manage exposures to foreign currency. The
Company’s primary objective in holding derivative instruments is to reduce the volatility of earnings and
cash flows associated with changes in foreign currency. The program is not designated for trading or
speculative purposes. The Company’s derivative instruments expose the Company to credit risk to the
extent that the counterparties may be unable to meet the terms of the agreement. The Company seeks to
mitigate such risk by limiting its counterparties to major financial institutions and by spreading the risk
across several major financial institutions. In addition, the potential risk of loss with any one counterparty
resulting from this type of credit risk is monitored by the Company on an ongoing basis.
The Company recognizes derivative instruments as either assets or liabilities on the balance sheet at
fair value and provides qualitative disclosures about objectives and strategies for using derivative
instruments, quantitative disclosures about fair value amounts of gains and losses on derivative
instruments, and disclosures about credit-risk-related contingent features in derivative agreements.
Changes in fair value (i.e., gains or losses) of the derivatives are recorded as cost of revenue, operating
expense, other income (expense), or as other comprehensive income (‘‘OCI’’). Under certain provisions
and conditions within agreements with counterparties to the Company’s foreign exchange forward
contracts, subject to applicable requirements, the Company has the right of set-off associated with the
Company’s foreign exchange forward contracts and is allowed to net settle transactions of the same
currency with a single net amount payable by one party to the other. The Company does not offset or net
the fair value amounts of derivative instruments in its Consolidated Balance Sheets and separately
discloses the gross fair value amounts of the derivative instruments as either assets or liabilities.
Cash Flow Hedges. The Company uses foreign exchange forward contracts designated as cash flow
hedges to hedge a portion of future forecasted wafer purchases and R&D expenses in Japanese yen. The
gain or loss on the effective portion of a cash flow hedge is initially reported as a component of AOCI and
subsequently reclassified into cost of revenue or R&D expense in the same period or periods in which the
cost of revenue or R&D expense are 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). As of December 28, 2014, the notional amount and unrealized loss on the effective
portion of the Company’s outstanding foreign exchange forward contracts to purchase Japanese yen that
are designated as cash flow hedges are shown in both Japanese yen (in billions) and U.S. dollar (in
thousands), based upon the exchange rate at December 28, 2014, as follows:
Unrealized
Loss
Notional Amount
(Japanese yen)
Foreign exchange forward contracts . . . . . . . . . . . . . . . . . . . . .
¥
12.5
(U.S. dollar)
$
103,826
(U.S. dollar)
$
(1,472)
As of December 28, 2014, the maturities of these contracts were two 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 December 28, 2014 with
realized and unrealized gains and losses included in other income (expense). As of December 28, 2014, the
F-18
SANDISK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Company had foreign exchange forward contracts hedging exposures in European euros, British pounds
and Japanese yen. Foreign exchange forward contracts were outstanding to buy and sell U.S. dollarequivalents of approximately $182.4 million and $135.2 million in foreign currencies, respectively, based
upon the exchange rates at December 28, 2014.
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 (in thousands):
Derivative assets reported in
Other Current Assets
Other Non-current Assets
December 28, December 29, December 28, December 29,
2014
2013
2014
2013
Foreign exchange forward contracts not designated . . .
$
4,800
$
777
$
—
$
—
Derivative liabilities reported in
Other Current Accrued
Non-current
Liabilities
Liabilities
December 28, December 29, December 28, December 29,
2014
2013
2014
2013
Foreign exchange forward contracts designated . . . . . .
Foreign exchange forward contracts not designated . . .
$
1,472
6,752
$
38,375
7,366
$
—
—
$
118
—
Total derivatives . . . . . . . . . . . . . . . . . . . . . . .
$
8,224
$
45,741
$
—
$
118
As of December 28, 2014, the potential effect of rights of set-off associated with the above foreign
exchange forward contracts would result in a $2.8 million net derivative asset balance and a net derivative
liability balance of $6.3 million. As of December 29, 2013, the potential effect of rights of set-off would
result in a net derivative liability balance of $45.2 million and an immaterial net derivative asset balance.
Effect of Foreign Exchange Forward Contracts Designated as Cash Flow Hedges on the Consolidated
Statements of Operations. All designated cash flow derivative contracts were considered effective for the fiscal
years ended December 28, 2014 and December 29, 2013. The impact of the effective portion of designated
cash flow derivative contracts on the Company’s results of operations was as follows (in thousands):
Foreign exchange
forward contracts . . . .
$
(99) $
(74,834) $
(38,197) $
(25,418) $
(41,523) $
(10,946)
Foreign exchange forward contracts designated as cash flow hedges relate to forecasted wafer
purchases and R&D expenses in Japanese yen. Gains and losses associated with foreign exchange forward
contracts designated as cash flow hedges are expected to be recorded in cost of revenue for wafer
purchases or R&D expense when reclassified out of AOCI. The Company expects to realize the majority of
the AOCI balance related to foreign exchange contracts within the next 12 months.
F-19
Annual Report
Fiscal years ended
Amount of loss
Amount of loss reclassified
recognized in OCI
from AOCI to earnings
December 28, December 29, December 30, December 28, December 29, December 30,
2014
2013
2012
2014
2013
2012
SANDISK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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) (in thousands):
December 28,
2014
Foreign exchange forward contracts . . . . . . . . . . . . . . . . . . . . . . . .
$
Fiscal years ended
December 29, December 30,
2013
2012
(1,134) $
(1,201) $
(6,630)
Effect of Non-Designated Derivative Contracts on the 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 (in thousands):
December 28,
2014
Gain (loss) on foreign exchange forward contracts including forward
point income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gain (loss) from revaluation of foreign currency exposures hedged by
foreign exchange forward contracts . . . . . . . . . . . . . . . . . . . . . .
$
Fiscal years ended
December 29,
December 30,
2013
2012
(5,627) $
7,998
1,427
$
(4,460)
9,025
(3,511)
Note 5. Balance Sheet Information
Accounts Receivable, net. Accounts receivable, net was as follows (in thousands):
December 28,
2014
Accounts receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Allowance for doubtful accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Promotions, price protection and other activities . . . . . . . . . . . . . . . . . . . . . . . . .
Total accounts receivable, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
December 29,
2013
$ 1,134,254 $
(9,622)
(282,156)
$
842,476
$
904,551
(8,274)
(213,468)
682,809
Allowance for Doubtful Accounts. The activity in the allowance for doubtful accounts was as follows (in
thousands):
December 28,
2014
Balance, beginning of year . . . . . . . . . . . . .
Additions charged to costs and expenses
Allowance adjustment . . . . . . . . . . . . .
Deductions/write-offs . . . . . . . . . . . . .
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.
$
8,274 $
857
1,272
(781)
6,627 $
2,167
—
(520)
5,717
1,452
—
(542)
Balance, end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
9,622
8,274
6,627
F-20
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Fiscal years ended
December 29,
December 30,
2013
2012
$
$
SANDISK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Inventory. Inventory was as follows (in thousands):
December 28,
2014
December 29,
2013
Raw material . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Work-in-process . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Finished goods . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
369,860
138,594
189,557
$
440,570
102,543
213,862
Total inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
698,011
$
756,975
Other Current Assets. Other current assets were as follows (in thousands):
December 28,
2014
December 29,
2013
.
.
.
.
.
$
18,579
84,432
69,033
18,579
24,369
$
7,976
62,784
37,368
12,630
46,127
Total other current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
214,992
$
166,885
Income tax receivables . . . . .
Other tax-related receivables .
Other non-trade receivables .
Prepaid expenses . . . . . . . . .
Other current assets . . . . . .
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.
.
Property and Equipment. Property and equipment were as follows (in thousands):
Machinery and equipment . . . . . . .
Furniture and fixtures . . . . . . . . . .
Software . . . . . . . . . . . . . . . . . . .
Buildings and building improvements
Leasehold improvements . . . . . . . .
Land . . . . . . . . . . . . . . . . . . . . . .
Capital land lease . . . . . . . . . . . . .
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.
December 28,
2014
December 29,
2013
$ 1,318,454
24,090
191,900
338,412
26,525
24,427
12,827
$ 1,148,150
20,481
171,733
261,471
6,559
24,427
6,644
Property and equipment, at cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accumulated depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Property and equipment, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,936,635
(1,212,278)
$
724,357
1,639,465
(983,671)
$
655,794
Depreciation expense of property and equipment totaled $254.3 million, $226.3 million and
$161.9 million in fiscal years 2014, 2013 and 2012, respectively.
Annual Report
F-21
SANDISK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 (in thousands):
December 28,
2014
December 29,
2013
.
.
.
.
.
.
$
12,454
292,677
161,906
167,102
249,459
79,219
$
Total notes receivable and investments in Flash Ventures . . . . . . . . . . . . . . . .
$
962,817
$ 1,134,620
Notes receivable, Flash Partners Ltd.
Notes receivable, Flash Alliance Ltd.
Notes receivable, Flash Forward Ltd.
Investment in Flash Partners Ltd. . .
Investment in Flash Alliance Ltd. . .
Investment in Flash Forward Ltd. . .
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.
100,057
323,995
169,144
190,694
283,999
66,731
Equity-method investments and the Company’s maximum loss exposure related to Flash Ventures are
discussed further in Note 14, ‘‘Commitments, Contingencies and Guarantees — Flash Ventures’’ and
Note 15, ‘‘Related Parties and Strategic Investments.’’
The Company assesses financing receivable credit quality through financial and operational reviews of
the borrower and creditworthiness, including credit rating agency ratings, of significant investors of the
borrower, where material or known. Impairments, when required for credit worthiness, are recorded in
other income (expense). 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 (in thousands):
December 28,
2014
December 29,
2013
Prepaid tax on intercompany transactions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Long-term prepaid income tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other non-current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
33,375
—
75,302
$
37,747
66,176
63,507
Total other non-current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
108,677
$
167,430
Other Current Accrued Liabilities. Other current accrued liabilities were as follows (in thousands):
December 28,
2014
December 29,
2013
.
.
.
.
$
233,702
74,079
8,224
190,288
$
227,779
59,618
45,741
176,594
Total other current accrued liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
506,293
$
509,732
Accrued payroll and related expenses .
Taxes payable . . . . . . . . . . . . . . . . .
Derivative contract payables . . . . . . .
Other current accrued liabilities . . . .
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F-22
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.
SANDISK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Non-current Liabilities. Non-current liabilities were as follows (in thousands):
December 28,
2014
December 29,
2013
.
.
.
.
$
132,320
31,066
22,360
59,808
$
205,266
35,346
3,482
62,989
Total non-current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
245,554
$
307,083
Income tax liabilities . . . . .
Deferred revenue . . . . . . .
Deferred tax liabilities . . . .
Other non-current liabilities
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Warranties. The liability for warranty expense is included in Other current accrued liabilities and
Non-current liabilities in the Consolidated Balance Sheets, and the activity was as follows (in thousands):
December 28,
2014
Balance, beginning of year . . . . . . . . . . . . . . . . .
Additions and adjustments to cost of revenue .
Warranty liability assumed from acquisition . .
Usage . . . . . . . . . . . . . . . . . . . . . . . . . . .
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$
Balance, end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
Fiscal years ended
December 29,
December 30,
2013
2012
43,624 $
21,315
3,794
(20,178)
48,555
$
38,787 $
33,400
2,363
(30,926)
43,624
$
26,957
33,247
—
(21,417)
38,787
The majority of the Company’s products have a warranty of five years or less, with a small number of
products having a warranty ranging up to ten years or more. For warranties ten years or greater, including
lifetime warranties, the Company uses the estimated useful life of the product to calculate the warranty
exposure. A provision for the estimated future cost related to warranty expense is recorded at the time of
customer invoice. The Company’s warranty liability is affected by customer and consumer returns, product
failures, number of units sold and repair or replacement costs incurred. Should actual product failure rates,
or repair or replacement costs, differ from the Company’s estimates, increases or decreases to its warranty
liability would be required. Additions and adjustments to cost of revenue in the fiscal year ended
December 28, 2014 included adjustments to certain warranty assumptions, related to future potential
claims, resulting in a $5.7 million reduction to the overall future warranty exposure.
Accumulated Other Comprehensive Income (Loss). AOCI presented in the Consolidated Balance Sheets
consists of unrealized gains and losses on available-for-sale investments, foreign currency translation and
hedging activities, net of tax, for all periods presented (in thousands):
Accumulated net unrealized gain
Available-for-sale investments
Foreign currency translation .
Hedging activities . . . . . . . . .
(loss) on:
....................................
....................................
....................................
Total accumulated other comprehensive loss . . . . . . . . . . . . . . . . . . . . . . . . .
F-23
December 29,
2013
$
3,359 $
(197,252)
(14,179)
10,479
(47,440)
(39,498)
$
(208,072) $
(76,459)
Annual Report
December 28,
2014
SANDISK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The amount of income tax benefit allocated to the unrealized gain (loss) on available-for-sale
investments and foreign currency translation activities was as follows (in thousands):
December 28,
2014
Fiscal years ended
December 29,
December 30,
2013
2012
Available-for-sale investments . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign currency translation . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
(3,934) $
(4,163)
(3,383) $
(38,006)
3,121
(23,791)
Total income tax benefit allocated . . . . . . . . . . . . . . . . . . . . . .
$
(8,097) $
(41,389) $
(20,670)
The significant amounts reclassified out of each component of AOCI were as follows (in thousands):
AOCI Component
December 28,
2014
Unrealized gain on
available-for-sale investments . . .
$
Tax impact . . . . . . . . . . . . . . . . .
7,543
Fiscal years ended
December 29,
December 30,
2013
2012
$
2,375
$
Statement of Operations Line Item
2,969
Interest (expense) and other
income (expense), net
(1,051) Provision for income taxes
(2,677)
(1,122)
4,866
1,253
Unrealized holding loss on
derivatives:
Foreign exchange contracts . . . .
Foreign exchange contracts . . . .
(24,142)
(1,276)
(41,523)
—
(10,946) Cost of revenue
— Research and development
Loss on cash flow hedging
activities . . . . . . . . . . . . . .
(25,418)
(41,523)
(10,946)
(20,552) $
(40,270) $
Unrealized gain on
available-for-sale investments,
net of tax . . . . . . . . . . . . . . .
Total reclassifications for the
period, net of tax . . . . . .
$
1,918
(9,028)
Note 6. Goodwill and Intangible Assets
Goodwill. Goodwill balances and activity were as follows (in thousands):
Fiscal years ended
December 28,
December 29,
2014
2013
Balance, beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Acquisition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Adjustment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
318,111 $
513,398
(181)
201,735
115,775
601
Balance, end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
831,328
318,111
$
During the fiscal year ended December 28, 2014, goodwill increased by $513.2 million, due primarily
to the Company’s acquisition of Fusion-io, Inc. (‘‘Fusion-io’’) during the third quarter of fiscal year 2014.
For additional information regarding the Fusion-io acquisition, see Note 17, ‘‘Business Acquisitions.’’
F-24
SANDISK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Goodwill is not amortized, but is reviewed and tested for impairment at least annually, on the first day
of the Company’s fourth quarter and whenever events or circumstances occur that indicate that goodwill
might be impaired. Impairment of goodwill is tested at the Company’s reporting unit level. The Company
has the option to first assess qualitative factors to determine whether events and circumstances indicate
that it is more likely than not that the goodwill is impaired and determine whether further action is needed
(‘‘Step 0’’). For the year ended December 28, 2014, the Company performed a Step 1 quantitative
assessment of its goodwill and did not identify an impairment of goodwill. As such, the Company did not
perform any further goodwill impairment testing.
Intangible Assets. Intangible asset balances were as follows (in thousands):
December 28, 2014
Gross
Carrying
Amount
Developed product technology . . . . . . . . . . . . . . . . . . . . . . . . . . .
Customer relationships . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Trademarks and trade names . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
568,744
64,600
62,500
Accumulated
Amortization
$
Net Carrying
Amount
(209,478) $
(21,009)
(7,395)
359,266
43,591
55,105
Acquisition-related intangible assets . . . . . . . . . . . . . . . . . . . .
Technology licenses and patents . . . . . . . . . . . . . . . . . . . . . . . . . .
695,844
102,000
(237,882)
(78,611)
457,962
23,389
Total intangible assets subject to amortization . . . . . . . . . . . . .
Acquired in-process research and development . . . . . . . . . . . . . . . .
797,844
61,000
(316,493)
—
481,351
61,000
(316,493) $
542,351
Total intangible assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
858,844
$
December 29, 2013
Gross
Carrying
Amount
Developed product technology
Customer relationships . . . . . .
Trademarks . . . . . . . . . . . . .
Covenants not to compete . . .
.
.
.
.
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$
348,385
20,650
14,200
3,100
Accumulated
Amortization
$
Impairment
Net Carrying
Amount
(121,304) $
(14,426)
(3,634)
(2,959)
(44,216) $
—
(2,812)
—
182,865
6,224
7,754
141
Acquisition-related intangible assets . . . . . . . . . .
Technology licenses and patents . . . . . . . . . . . . . . . .
386,335
133,909
(142,323)
(89,289)
(47,028)
—
196,984
44,620
Total intangible assets subject to amortization . . .
Acquired in-process research and development . . . . .
520,244
42,500
(231,612)
—
(47,028)
(36,200)
241,604
6,300
(231,612) $
(83,228) $
247,904
Total intangible assets . . . . . . . . . . . . . . . . . . .
$
562,744
$
In fiscal year 2013, the Company performed impairment tests on the amortizable intangible and
IPR&D assets from the Pliant Technology, Inc. (‘‘Pliant’’) acquisition due to the SMART Storage Systems
(‘‘SMART Storage’’) acquisition. Based upon its impairment analysis, the Company recorded an
impairment of certain amortizable intangible assets and IPR&D assets totaling $83.2 million in fiscal year
2013, which was included in Impairment of acquisition-related intangible assets in the Consolidated
Statements of Operations.
F-25
Annual Report
During the fiscal year ended December 28, 2014, total intangible assets increased due primarily to the
acquisition of Fusion-io. Additionally, the Company reclassified $6.3 million of in-process research and
development (‘‘IPR&D’’) to developed product technology and commenced amortization during the
second quarter of fiscal year 2014.
SANDISK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Acquired IPR&D is accounted for as an indefinite-lived intangible asset. Indefinite-lived intangible
assets are reviewed for impairment at least annually until technological feasibility is achieved or
development is complete. Upon completion of development, the acquired IPR&D is considered an
amortizable finite-lived intangible asset. Amortization expense of technology licenses and patents is
recorded to cost of revenue or R&D based upon the use of the technology.
Amortization expense of intangible assets totaled $148.6 million, $84.3 million and $76.5 million in
fiscal years 2014, 2013 and 2012, respectively.
The annual expected amortization expense of intangible assets subject to amortization as of
December 28, 2014 was as follows (in thousands):
Acquisition-related
Intangible Assets
Technology Licenses
and Patents
.
.
.
.
.
$
152,375
109,971
90,916
66,260
38,440
$
20,056
3,333
—
—
—
Total intangible assets subject to amortization . . . . . . . . . . . . .
$
457,962
$
23,389
Fiscal year:
2015 .
2016 .
2017 .
2018 .
2019 .
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Note 7. Financing Arrangements
The following table reflects the carrying values of the Company’s convertible debt (in thousands):
December 28,
2014
1.5% Notes due 2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less: Unamortized bond discount . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net carrying amount of 1.5% Notes due 2017 . . . . . . . . . . . . . . . . . . . . . . . .
0.5% Notes due 2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less: Unamortized bond discount . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net carrying amount of 0.5% Notes due 2020 . . . . . . . . . . . . . . . . . . . . . . . .
Total convertible debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less: Convertible short-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Convertible long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
December 29,
2013
996,788 $ 1,000,000
(127,143)
(170,208)
869,645
829,792
1,500,000
(300,304)
1,500,000
(344,429)
1,199,696
1,155,571
2,069,341
(869,645)
1,985,363
—
$ 1,199,696
$ 1,985,363
1% Convertible Senior Notes Due 2013. On May 15, 2013, the maturity date for the 1% Convertible Senior
Notes due May 15, 2013 (‘‘1% Notes due 2013’’), the Company settled the 1% Notes due 2013 through an
all-cash transaction for principal and accrued interest of $928.1 million and $4.6 million, respectively. As of
the date of the redemption, the Company had no further obligations related to the 1% Notes due 2013. In
connection with the maturity of the 1% Notes due 2013, the associated convertible bond hedge and
warrant transactions also terminated, with no shares purchased under the convertible bond hedge
agreement and no exercises of the warrants.
F-26
SANDISK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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% Notes due 2013 that was settled upon maturity in the second quarter of fiscal year
2013 (in thousands):
Fiscal years ended
December 29, December 30,
2013
2012
Contractual interest coupon . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amortization of bond issuance costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amortization of bond discount . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
3,481
1,013
21,022
$
9,280
2,783
53,599
Total interest cost recognized . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
25,516
$
65,662
The effective interest rate on the liability component of the 1% Notes due 2013 was 7.4% for the fiscal
years ended December 29, 2013 and December 30, 2012.
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 December 28, 2014, the conversion rate was adjusted for dividends
paid to date to 19.4714 shares of common stock per $1,000 principal amount of notes (which represents
19.4 million shares at a conversion price of approximately $51.36 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 (in thousands):
Fiscal years ended
December 29, December 30,
2013
2012
Contractual interest coupon . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amortization of bond issuance costs . . . . . . . . . . . . . . . . . . . . . . .
Amortization of bond discount . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
14,984
2,666
41,848
$
15,000
2,667
39,095
$
15,000
2,666
36,364
Total interest cost recognized . . . . . . . . . . . . . . . . . . . . . . . . .
$
59,498
$
56,762
$
54,030
The effective interest rate on the liability component of the 1.5% Notes due 2017 was 6.85% for each
of the three fiscal years ended December 28, 2014. The remaining unamortized bond discount of
$127.1 million as of December 28, 2014 will be amortized over the remaining life of the 1.5% Notes due
2017, which is approximately 2.6 years.
F-27
Annual Report
December 28,
2014
SANDISK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The 1.5% Notes due 2017 may be converted on any day prior to the close of business on the scheduled
trading day immediately preceding May 15, 2017, in multiples of $1,000 principal amount at the option of
the holder under any of the following circumstances: 1) during the five business-day period after any five
consecutive trading-day period (the ‘‘measurement period’’) in which the trading price per note for each
day of such measurement period was less than 98% of the product of the last reported sale price of the
Company’s common stock and the conversion rate on each such day; 2) during any calendar quarter after
the calendar quarter ending September 30, 2010, if the last reported sale price of the Company’s common
stock for 20 or more trading days in a period of 30 consecutive trading days ending on the last trading day
of the immediately preceding calendar quarter exceeds 130% of the applicable conversion price in effect
on the last trading day of the immediately preceding calendar quarter; or 3) upon the occurrence of
specified corporate transactions. On and after May 15, 2017 until the close of business on the second
scheduled trading day immediately preceding the maturity date of August 15, 2017, holders may convert
their notes at any time, regardless of the foregoing circumstances.
Upon conversion, a holder will receive the conversion value of the 1.5% Notes due 2017 to be
converted equal to the conversion rate multiplied by the volume-weighted-average price of the Company’s
common stock during a specified period following the conversion date. The conversion value of each 1.5%
Note due 2017 will be paid in: 1) cash equal to the lesser of the principal amount of the note or the
conversion value, as defined, and 2) to the extent the conversion value exceeds the principal amount of the
note, common stock (plus cash in lieu of any fractional shares of common stock). The conversion price will
be subject to adjustment in some events but will not be adjusted for accrued interest. Upon a ‘‘fundamental
change’’ at any time, as defined, the Company will in some cases increase the conversion rate for a holder
who elects to convert its 1.5% Notes due 2017 in connection with such fundamental change. In addition,
the holders may require the Company to repurchase for cash all or a portion of their notes upon a
‘‘designated event’’ at a price equal to 100% of the principal amount of the notes being repurchased plus
accrued and unpaid interest, if any.
As of the calendar quarter ended December 31, 2014, the 1.5% Notes due 2017 were convertible at
the holders’ option beginning on January 1, 2015 and ending March 31, 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 December 31, 2014. 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 $127.1 million of the
1.5% Notes due 2017 was reclassified from Stockholders’ equity to Convertible short-term debt conversion
obligation on the Company’s Consolidated Balance Sheet as of December 28, 2014, 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 December 28, 2014 of $101.31 for the Company’s common
stock, if all of the 1.5% Notes due 2017 then outstanding were converted, 9.6 million shares would be
distributed to the holders.
During the fiscal year ended December 28, 2014, $3.2 million aggregate principal amount of the 1.5%
Notes due 2017 (‘‘Converted Notes’’) was converted at the holders’ option, and the Company delivered
cash of $3.2 million and 26,626 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 a loss of
$0.4 million during the quarter ended December 28, 2014 related to the extinguishment of the Converted
F-28
SANDISK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Notes, which represents the difference between the fair market value allocated to the liability component
and the net carrying amount of the liability component and unamortized debt issuance costs on settlement
date. As of December 28, 2014, after conversion of $3.2 million aggregate principal amount of the
Converted Notes, the remaining aggregate principal amount of the 1.5% Notes due 2017 outstanding was
$996.8 million. As of January 30, 2015, the Company had received additional conversion notices for a total
of $46 thousand aggregate principal amount of the 1.5% Notes due 2017, for which conversion is expected
to be completed in the first quarter of fiscal year 2015.
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
December 28, 2014, unamortized deferred issuance cost was $4.9 million.
Concurrently with the issuance of the 1.5% Notes due 2017, the Company purchased a convertible
bond hedge and sold warrants. The convertible bond hedge transaction is structured to reduce the
potential future economic dilution associated with the conversion of the 1.5% Notes due 2017 and,
combined with the warrants, to increase the initial conversion price to $73.3250 per share. Each of these
components is discussed separately below:
• Warrants. The Company received $188.1 million from the same counterparties from the sale of
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 1.5% Notes due 2017 contains provisions whereby the
F-29
Annual Report
• Convertible Bond Hedge. Counterparties 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 1.5% Notes
due 2017 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 December 28, 2014, the counterparties have agreed to sell to us up to approximately
19.4 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 $51.36 per share as of December 28,
2014. 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. Should
there be an early unwind of the convertible bond hedge transaction, the number of net shares
potentially received by the Company will depend upon 1) the then existing overall market
conditions, 2) the Company’s stock price, 3) the volatility of the Company’s stock, and 4) the
amount of time remaining before maturity of the convertible bond hedge. The convertible bond
hedge transaction cost of $292.9 million has been accounted for as an equity transaction. The
Company initially recorded approximately $1.7 million in stockholders’ equity from the deferred tax
asset related to the convertible bond hedge at inception of the transaction. Through December 28,
2014, the Company had received 26,622 shares of the Company’s common stock from the exercise
of a portion of the convertible note hedges related to the conversion of the $3.2 million aggregate
principal amount of the 1.5% Notes due 2017.
SANDISK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 December 28, 2014, holders of the warrants
may acquire up to approximately 19.5 million shares of the Company’s common stock at a strike
price of $71.9005 per share as of December 28, 2014. 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 December 28, 2014, 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.
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
December 28, 2014, the conversion rate was adjusted for dividends in excess of $0.225 per share paid to
date to 10.8647 shares of common stock per $1,000 principal amount of notes (which represents
16.3 million shares at a conversion price of approximately $92.04 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 December 28,
2014, the carrying value of the equity component of $352.0 million was unchanged from the date of
issuance.
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 0.5% Notes due 2020 (in thousands):
Fiscal years ended
December 28, December 29,
2014
2013
Contractual interest coupon . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amortization of bond issuance costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amortization of bond discount . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
7,500
2,551
43,527
$
1,271
439
7,486
Total interest cost recognized . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
53,578
$
9,196
The effective interest rate on the liability component of the 0.5% Notes due 2020 was 4.43% for the
fiscal years ended December 28, 2014 and December 29, 2013. The remaining unamortized bond discount
of $300.3 million as of December 28, 2014 will be amortized over the remaining life of the 0.5% Notes
due 2020, which is approximately 5.8 years.
F-30
SANDISK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The 0.5% Notes due 2020 may be converted on any day prior to the close of business on the scheduled
trading day immediately preceding July 15, 2020, in multiples of $1,000 principal amount at the option of
the holder under any of the following circumstances: 1) during the five business-day period after any five
consecutive trading-day period (the ‘‘measurement period’’) in which the trading price per note for each
day of such measurement period was less than 98% of the product of the last reported sale price of the
Company’s common stock and the conversion rate on each such day; 2) during any calendar quarter after
the calendar quarter ending December 29, 2013, if the last reported sale price of the Company’s common
stock for 20 or more trading days in a period of 30 consecutive trading days ending on the last trading day
of the immediately preceding calendar quarter exceeds 130% of the applicable conversion price in effect
on the last trading day of the immediately preceding calendar quarter; or 3) upon the occurrence of
specified corporate transactions. On and after July 15, 2020 until the close of business on the second
scheduled trading day immediately preceding the maturity date of October 15, 2020, holders may convert
their notes at any time, regardless of the foregoing circumstances.
Upon conversion, a holder will receive the conversion value of the 0.5% Notes due 2020 to be
converted equal to the conversion rate multiplied by the volume-weighted-average price of the Company’s
common stock during a specified period following the conversion date. The conversion value of each 0.5%
Note due 2020 will be paid in: 1) cash equal to the lesser of the principal amount of the note or the
conversion value, as defined, and 2) to the extent the conversion value exceeds the principal amount of the
note, common stock (plus cash in lieu of any fractional shares of common stock). The conversion price will
be subject to adjustment in some events but will not be adjusted for accrued interest. Upon a ‘‘fundamental
change’’ at any time, as defined, the Company will in some cases increase the conversion rate for a holder
who elects to convert its 0.5% Notes due 2020 in connection with such fundamental change. In addition,
the holders may require the Company to repurchase for cash all or a portion of their notes upon a
‘‘designated event’’ at a price equal to 100% of the principal amount of the notes being repurchased plus
accrued and unpaid interest, if any. As of December 28, 2014, 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
December 28, 2014, unamortized deferred issuance cost was $11.2 million.
• Convertible Bond Hedge. 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 0.5% Notes
due 2020 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 December 28,
2014, the counterparties have agreed to sell to us up to approximately 16.3 million shares of the
F-31
Annual Report
Concurrently with the issuance of the 0.5% Notes due 2020, the Company purchased a convertible
bond hedge and sold warrants. The convertible bond hedge transaction is structured to reduce the
potential future economic dilution associated with the conversion of the 0.5% Notes due 2020 and,
combined with the warrants, to increase the initial conversion price to $122.9220 per share. Each of these
components is discussed separately below:
SANDISK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 $92.04 per share as of December 28, 2014. 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. 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. Should there be an early
unwind of the convertible bond hedge transaction, the number of net shares potentially received by
the Company will depend upon 1) the then existing overall market conditions, 2) the Company’s
stock price, 3) the volatility of the Company’s stock, and 4) the amount of time remaining before
maturity of the convertible bond hedge. The convertible bond hedge transaction cost of
$331.7 million has been accounted for as an equity transaction. The Company initially recorded
approximately $119.5 million in stockholders’ equity from the deferred tax asset related to the
convertible bond hedge at inception of the transaction. As of December 28, 2014, the Company had
not purchased any shares under this convertible bond hedge agreement.
• Warrants. The Company received $217.8 million from the same counterparties from the sale of
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 0.5% Notes due 2020 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 December 28, 2014, holders of the warrants may acquire up to approximately
16.3 million shares of the Company’s common stock at a strike price of $122.7218 per share as of
December 28, 2014. 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 December 28, 2014, 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.
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 fiscal year 2013. In July 2013, the Company’s Board of
Directors authorized a new stock repurchase program of $2.5 billion, of which $626.7 million remained
available for stock repurchases as of December 28, 2014. In January 2015, the Company’s Board of
Directors increased the stock repurchase program by an additional $2.5 billion. 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 program, shares repurchased are recorded as a reduction to
Capital in excess of par value and Retained earnings in the Company’s Consolidated Balance Sheets. The
repurchases will be made from time to time in privately negotiated or open market transactions, including
under plans complying with Rule 10b5-1 of the Securities Exchange Act, or in structured stock repurchase
programs, and may be made in one or more repurchases, in compliance with Rule 10b-18 of the Securities
F-32
SANDISK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Exchange Act. Stock repurchases are subject to market conditions, applicable legal requirements and other
factors. The stock repurchase program does not obligate the Company to acquire any specific number of
common stock, or any shares at all, and may be suspended at any time at the Company’s discretion. As part
of the stock repurchase program, the Company has entered into, and may continue to enter into,
structured stock repurchase transactions with financial institutions. These agreements generally require
that the Company make an up-front payment in exchange for the right to receive a fixed number of shares
of its common stock upon execution of the agreement, with a potential increase or decrease in the number
of shares at the end of the term of the agreement.
In the third quarter of fiscal year 2013, under the Company’s stock repurchase program, the Company
entered into an accelerated share repurchase (‘‘ASR’’) agreement with a financial institution to purchase
$1.0 billion of the Company’s common stock. In exchange for an up-front payment of $1.0 billion, the
financial institution committed to deliver shares during the ASR’s purchase period, which ended on
April 8, 2014. During the third quarter of fiscal year 2013, 14.5 million shares were initially delivered to the
Company under this ASR agreement. The up-front payment of $1.0 billion was accounted for as a
reduction to Stockholders’ equity in the Company’s Consolidated Balance Sheet. In April 2014, the ASR
was settled and the Company received an additional 0.6 million shares from the financial institution for a
total of 15.1 million shares, which resulted in a volume-weighted-average price of $66.07 per share.
The Company reflected the ASR as a repurchase of common stock for purposes of calculating
earnings per share and as a forward contract indexed to its own common stock. The forward contract met
all of the applicable criteria for equity classification, and therefore, was not accounted for as a derivative
instrument.
Under the Company’s stock repurchase programs, since the fourth quarter of fiscal year 2011 through
December 28, 2014, the Company spent an aggregate $3.12 billion to repurchase 45.3 million shares.
Included in the aggregate repurchase activity are 14.3 million shares that were repurchased for an
aggregate amount of $1.30 billion during the fiscal year ended December 28, 2014. In addition to
repurchases under the Company’s stock repurchase program, during the fiscal year ended December 28,
2014, the Company spent $41.3 million to settle employee tax withholding obligations due upon the vesting
of restricted stock units (‘‘RSUs’’) and withheld an equivalent value of shares from the shares provided to
the employees upon vesting.
Note 9. Concentration of Risk and Segment Information
Other than sales in the U.S., China and Taiwan, no individual country represented more than 10% of
the Company’s revenue. Intercompany sales between geographic areas have been eliminated.
F-33
Annual Report
Geographic Information and Major Customers. The Company markets and sells flash memory products in
the U.S. and in foreign countries through its sales personnel, dealers, distributors, retailers and
subsidiaries. The Company’s Chief Operating Decision Maker, its President and Chief Executive Officer,
evaluates performance of the Company and makes decisions regarding allocation of resources based on
total Company results. Since the Company operates in one segment, all financial segment information can
be found in the accompanying Consolidated Financial Statements.
SANDISK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Revenue by geographic areas for fiscal years 2014, 2013 and 2012 were as follows (in thousands):
December 28,
2014
United States . . . . . . . .
China . . . . . . . . . . . . .
Taiwan . . . . . . . . . . . . .
Other Asia-Pacific . . . . .
Europe, Middle East and
Other foreign countries .
.....
.....
.....
.....
Africa
.....
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Fiscal years ended
December 29, December 30,
2013
2012
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$ 1,136,284
2,026,122
864,461
1,464,720
814,817
321,297
$
877,759
1,887,207
958,705
1,363,927
780,079
302,326
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 6,627,701
$ 6,170,003
$
714,293
1,195,617
981,801
1,290,291
642,494
228,013
$ 5,052,509
Product revenue from customers is designated based on the geographic location to which the product
is delivered. License and royalty revenue is attributed to countries based upon the location of the
headquarters of the licensee.
Long-lived assets by geographic area were as follows (in thousands):
United States . . . . . . .
Japan . . . . . . . . . . . . .
China . . . . . . . . . . . .
Other foreign countries
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Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
December 28,
2014
December 29,
2013
$
$
314,578
503,234
283,533
150,918
$ 1,252,263
313,959
553,318
299,704
47,070
$ 1,214,051
Long-lived assets are attributed to the geographic location in which they are located. The Company
includes in long-lived assets property and equipment, long-term equity investments in Flash Ventures and
other equity investments, and attributes those investments to the location of the investee’s primary
operations.
Customer and Supplier Concentrations. A limited number of customers or licensees have accounted for a
substantial portion of the Company’s revenue. Revenue from the Company’s top 10 customers or licensees
accounted for approximately 48%, 49% and 43% of the Company’s revenue for fiscal years 2014, 2013 and
2012, respectively. In fiscal years 2014, 2013 and 2012, Apple Inc. (‘‘Apple’’) accounted for 19%, 20% and
13% of the Company’s revenue, respectively.
All of the Company’s flash memory system products require silicon wafers for the memory and
controller components. The Company’s memory wafers are currently supplied almost entirely from Flash
Ventures and the controller wafers are all manufactured by third-party subcontractors. The failure of any
of these sources to deliver silicon wafers could have a material adverse effect on the Company’s business,
financial condition and results of operations. Moreover, the employees of Toshiba Corporation
(‘‘Toshiba’’) that produce Flash Ventures’ products are covered by collective bargaining agreements and
any strike or other job action by those employees could interrupt the Company’s wafer supply from
Toshiba’s Yokkaichi, Japan operations.
F-34
SANDISK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In addition, some key components are purchased from single source vendors for which alternative
sources are currently not available. Shortages could occur in these essential materials due to an
interruption of supply or increased demand in the industry. If the Company were unable to procure certain
of such materials, it could reduce sales, which could have a material adverse effect upon its results of
operations. The Company also relies on third-party subcontractors to assemble and test a portion of its
products. The Company does not have long-term contracts with some of these subcontractors and cannot
directly control product delivery schedules or manufacturing processes. This could lead to product
shortages or quality assurance problems that could increase the manufacturing costs of the Company’s
products and have material adverse effects on the Company’s operating results.
Concentration of Credit Risk. The Company’s concentration of credit risk consists principally of cash,
cash equivalents, short and long-term marketable securities and trade receivables. The Company’s
investment policy restricts investments to high-credit quality investments and limits the amounts invested
with any one issuer. The Company sells to Commercial and Retail customers in the Americas; Europe,
Middle East and Africa (‘‘EMEA’’); and Asia-Pacific. The Company performs ongoing credit evaluations
of its customers’ financial condition and generally requires no collateral. As of December 28, 2014 and
December 29, 2013, the Company’s top 10 customers or licensees accounted for approximately 68% and
64% of the Company’s net accounts receivable, respectively. As of December 28, 2014, Apple and Best
Buy Co., Inc. (‘‘Best Buy’’) accounted for 34% and 10% of the Company’s net accounts receivable,
respectively. As of December 29, 2013, Apple and Best Buy accounted for 32% and 11% of the Company’s
net accounts receivable, respectively.
Off-Balance Sheet Risk. The Company has off-balance sheet financial obligations. See Note 14,
‘‘Commitments, Contingencies and Guarantees.’’
Note 10. Stockholders’ Equity and Share-based Compensation
Dividends
During the fiscal year ended December 28, 2014, the Company’s Board of Directors declared the
following dividends:
Declaration Date
Dividend per Share
Record Date
Total Amount Declared
Payment Date
(In millions)
January 21, 2014 .
April 15, 2014 . .
July 15, 2014 . . .
October 15, 2014
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.
$0.225
0.225
0.300
0.300
February 3, 2014
May 5, 2014
August 4, 2014
November 3, 2014
$51.7
52.0
68.5
67.5
February 24, 2014
May 27, 2014
August 25, 2014
November 24, 2014
F-35
Annual Report
On January 21, 2015, the Company’s Board of Directors declared a dividend of $0.30 per share for
holders of record as of March 2, 2015, which is to be paid on March 23, 2015. Future dividends are subject
to declaration by the Company’s Board of Directors.
SANDISK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Share-based Benefit Plans
2013 Incentive Plan. On June 12, 2013, the Company’s stockholders approved the 2013 Incentive Plan
(‘‘2013 Plan’’). Shares of the Company’s common stock may be issued under the 2013 Plan pursuant to two
separate equity incentive programs: (i) the discretionary grant program under which stock options and
stock appreciation rights (‘‘SARs’’) may be granted to officers and other employees, non-employee board
members and independent consultants, and (ii) the stock issuance and cash bonus program under which
eligible persons may, at the discretion of the plan administrator, be issued shares of the Company’s
common stock pursuant to restricted stock awards, restricted stock units (‘‘RSUs’’) or other share-based
awards which vest upon the completion of a designated service period or the attainment of pre-established
performance milestones, be awarded cash bonus opportunities which are earned through the attainment of
pre-established performance milestones, or be issued shares of the Company’s common stock through
direct purchase or as a bonus for services rendered to the Company. Options eligible for exercise may be
exercised for shares of the Company’s common stock at any time prior to the expiration of the seven-year
option term or any earlier termination of those options in connection with the optionee’s cessation of
service with the Company. Outstanding RSU awards under the 2013 Plan have dividend equivalent rights
which entitle holders of RSUs to the same dividend value per share as holders of common stock. Dividend
equivalent rights are subject to the same vesting and other terms and conditions as the corresponding
unvested RSUs. Dividend equivalent rights are accumulated and paid when the underlying shares vest. A
total of 20,000,000 shares of the Company’s common stock have initially been reserved for issuance under
the 2013 Plan. The 2013 Plan share reserve may be increased by up to 10,000,000 shares of common stock
to the extent that outstanding share-based awards under the 1995 Stock Option Plan and the 2013 Plan
expire, terminate or lapse, of which 762,444 shares of common stock as of December 28, 2014 had been
added to the 2013 Plan share reserve. All options granted under the 2013 Plan are granted with an exercise
price equal to the fair market value of the common stock on the date of grant and will expire seven years
from the date of grant.
2005 Incentive Plan. The 2005 Incentive Plan terminated on June 12, 2013 and no further share-based
awards were made under this plan after that date. Share-based awards that were outstanding under this
plan as of December 28, 2014 continue to be governed by their existing terms. Options eligible for exercise
may be exercised for shares of the Company’s common stock at any time prior to the expiration of the
seven-year option term or any earlier termination of those options in connection with the optionee’s
cessation of service with the Company. Outstanding RSU awards under this plan have dividend equivalent
rights, which entitle holders of RSUs to the same dividend value per share as holders of common stock.
Dividend equivalent rights are subject to the same vesting and other terms and conditions as the
corresponding unvested RSUs.
1995 Stock Option Plan. This plan terminated on May 27, 2005 and no further option grants were made
under the plans after that date. Options eligible for exercise that were outstanding under these plans as of
December 28, 2014 continue to be governed by their existing terms and may be exercised for shares of the
Company’s common stock at any time prior to the expiration of the ten-year option term or any earlier
termination of those options in connection with the optionee’s cessation of service with the Company.
2005 Employee Stock Purchase Plan. The 2005 Employee Stock Purchase Plan (‘‘ESPP’’) was originally
approved by the stockholders on May 27, 2005 and amended and restated with approval by the
stockholders on June 19, 2014. The ESPP allows eligible employees to purchase shares of the Company’s
common stock at the end of each six-month offering period at a purchase price equal to 85% of the lower
of the fair market value per share on the start date of the offering period or the fair market value per share
F-36
SANDISK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
on the purchase date. The ESPP has 10,000,000 shares reserved for issuance, of which 3,706,401 shares
were available to be issued as of December 28, 2014. In fiscal years 2014, 2013 and 2012, a total of 639,265
shares, 623,887 shares and 684,646 shares of common stock, respectively, were issued under this plan.
Acquired Plans. In connection with the Company’s acquisitions of Fusion-io, SMART Storage,
FlashSoft, Pliant, msystems Ltd. and Matrix Semiconductor, Inc., the Company adopted various equity
incentive plans, which were effective upon completion of the applicable acquisition. Each of these plans
was terminated as of the date of acquisition and no further grants were made under any of these plans
after their termination. Any unvested option grants that were outstanding under these plans as of
December 28, 2014 continue to be governed by their existing terms and may be exercised for shares of the
Company’s common stock. Vested options may be exercised for shares of the Company’s common stock at
any time prior to the expiration of the option term or any earlier termination of those options in
connection with the optionee’s cessation of service with the Company.
Accounting for Share-based Compensation Expense
For share-based awards expected to vest, compensation cost is based on the grant-date fair value. The
Company recognizes compensation expense for the fair values of these awards, which have graded vesting,
on a straight-line basis over the requisite service period of each of these awards, net of estimated
forfeitures.
Valuation Assumptions
The Company estimates the fair value of stock options granted and ESPP shares issued using the
Black-Scholes-Merton option-pricing formula and a single-option award approach. The Company’s
expected term represents the period that the Company’s share-based awards are expected to be
outstanding and was determined based on historical experience for similar awards, giving consideration to
the contractual terms of the share-based awards. The Company’s expected volatility is based on the implied
volatility of its traded options. The Company’s dividend yield is based on the annualized dividend and the
share price at each dividend declaration date. The risk-free interest rate is based on the yield from U.S.
Treasury zero-coupon bonds with an equivalent term.
Option Plan Shares. The fair value of the Company’s stock options granted to employees, officers and
non-employee board members, excluding unvested stock options assumed through acquisitions, was
estimated using the following annual weighted-average assumptions:
Dividend yield . . . . . . . . . . . . . . . . . . .
Expected volatility . . . . . . . . . . . . . . . .
Risk-free interest rate . . . . . . . . . . . . . .
Expected term . . . . . . . . . . . . . . . . . . .
Estimated annual forfeiture rate . . . . . . .
Weighted-average fair value at grant date .
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Fiscal years ended
December 29,
2013
1.14% – 1.42%
0.32
1.22%
4.4 years
8.79%
$18.96
0% – 1.65%
0.37
0.74%
4.4 years
8.51%
$16.26
December 30,
2012
—%
0.43
0.60%
4.3 years
8.59%
$16.45
RSU Plan Shares. The fair value of the Company’s RSU awards granted, excluding unvested RSU
awards assumed through acquisitions, was valued using the closing price of the Company’s stock price on
the date of grant.
F-37
Annual Report
December 28,
2014
SANDISK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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:
December 28,
2014
Dividend yield . . . . . . . . . . . . . . . . . . . . .
Expected volatility . . . . . . . . . . . . . . . . . .
Risk-free interest rate . . . . . . . . . . . . . . . .
Expected term . . . . . . . . . . . . . . . . . . . . .
Weighted-average fair value at purchase date
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.
.
Fiscal years ended
December 29,
2013
1.14% – 1.25%
0.31
0.07%
1⁄2 year
$19.39
December 30,
2012
0% – 1.65%
0.34
0.11%
1⁄2 year
$13.08
—%
0.41
0.15%
1⁄2 year
$11.87
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 December 28, 2014 and changes during the three fiscal years ended
December 28, 2014 are presented below (in thousands, except for weighted-average exercise price and
remaining contractual term):
Shares
WeightedAverage
Exercise Price
WeightedAverage
Remaining
Contractual
Term (Years)
Aggregate
Intrinsic Value
Options and SARs outstanding as of January 1,
Granted . . . . . . . . . . . . . . . . . . . . . . . .
Exercised . . . . . . . . . . . . . . . . . . . . . . .
Forfeited . . . . . . . . . . . . . . . . . . . . . . .
Expired . . . . . . . . . . . . . . . . . . . . . . . .
2012
....
....
....
....
.
.
.
.
.
.
.
.
.
.
17,559 $
2,336
(3,403)
(469)
(597)
36.55
46.49
21.32
38.12
53.10
3.4
$
257,251
Options and SARs outstanding as of December
2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Granted . . . . . . . . . . . . . . . . . . . . . . . .
Exercised . . . . . . . . . . . . . . . . . . . . . . .
Forfeited . . . . . . . . . . . . . . . . . . . . . . .
Expired . . . . . . . . . . . . . . . . . . . . . . . .
Options assumed through acquisition . . . .
30,
...
...
...
...
...
...
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
15,426
1,142
(7,362)
(433)
(2,363)
183
40.73
52.69
35.53
43.72
60.70
19.37
3.2
Options and SARs outstanding as of December
2013 . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Granted . . . . . . . . . . . . . . . . . . . . . . . .
Exercised . . . . . . . . . . . . . . . . . . . . . . .
Forfeited . . . . . . . . . . . . . . . . . . . . . . .
Expired . . . . . . . . . . . . . . . . . . . . . . . .
Options assumed through acquisition . . . .
29,
...
...
...
...
...
...
.
.
.
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.
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.
.
.
6,593
1,032
(3,635)
(318)
(9)
427
40.66
76.82
40.54
51.88
41.09
68.49
4.2
Options and SARs outstanding as of December 28,
2014 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
4,090
51.94
4.5
202,044
Options and SARs vested and expected to vest after
December 28, 2014, net of forfeitures . . . . . . . . . . .
3,864
51.23
4.4
193,621
Options and SARs exercisable as of December 28, 2014
1,547
38.53
3.2
97,107
81,622
109,411
163,992
195,018
163,623
As of December 28, 2014, the total unrecognized compensation cost related to stock options, net of
estimated forfeitures, was approximately $36.2 million, and this amount is expected to be recognized over a
weighted-average period of approximately 2.2 years. As of December 28, 2014, the Company had fully
expensed all of its SARs awards.
F-38
SANDISK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 fiscal years ended December 28, 2014 is presented below (in thousands, except for
weighted-average grant date fair value):
Shares
Non-vested share units as of January 1, 2012 .
Granted . . . . . . . . . . . . . . . . . . . . . .
Vested . . . . . . . . . . . . . . . . . . . . . . .
Forfeited . . . . . . . . . . . . . . . . . . . . . .
Assumed through acquisition . . . . . . . .
Aggregate
Intrinsic Value
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.
2,051 $
1,840
(646)
(227)
59
40.22
45.04
47.75
42.85
46.63
December 30,
..........
..........
..........
2012
....
....
....
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.
3,077
2,665
(950)
(338)
43.51
53.99
41.97
46.93
131,622
Non-vested share units as of December 29,
Granted . . . . . . . . . . . . . . . . . . . .
Vested . . . . . . . . . . . . . . . . . . . . .
Forfeited . . . . . . . . . . . . . . . . . . . .
Assumed through acquisition . . . . . .
2013
....
....
....
....
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.
.
4,454
2,888
(1,594)
(606)
445
49.87
81.62
51.19
70.81
94.35
221,457
5,587
67.18
375,366
Non-vested share units as of
Granted . . . . . . . . . .
Vested . . . . . . . . . . .
Forfeited . . . . . . . . . .
.
.
.
.
.
WeightedAverage Grant
Date Fair Value
Non-vested share units as of December 28, 2014 . . . . . . . .
$
100,913
29,479
50,268
129,945
As of December 28, 2014, the total unrecognized compensation cost related to RSUs, net of estimated
forfeitures, was approximately $244.8 million, and this amount is expected to be recognized over a
weighted-average period of approximately 2.6 years.
Employee Stock Purchase Plan. As of December 28, 2014, the total unrecognized compensation cost
related to ESPP was approximately $1.5 million, and this amount is expected to be recognized over a
period of two months.
Annual Report
F-39
SANDISK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Share-based Compensation Expense. The following tables set forth the detailed allocation of the sharebased compensation expense (in thousands):
December 28,
2014
Share-based compensation expense by caption:
Cost of revenue . . . . . . . . . . . . . . . . . .
Research and development . . . . . . . . . . .
Sales and marketing . . . . . . . . . . . . . . .
General and administrative . . . . . . . . . .
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.
.
.
.
$
Total share-based compensation expense . . . . . . . . . . . . . .
Total tax benefit recognized . . . . . . . . . . . . . . . . . . . . . . . . . .
Decrease in net income . . . . . . . . . . . . . . . . . . . . . . . . . .
Share-based compensation expense by type
Stock options . . . . . . . . . . . . . . . . .
RSUs . . . . . . . . . . . . . . . . . . . . . .
ESPP . . . . . . . . . . . . . . . . . . . . . .
of
..
..
..
award:
.................
.................
.................
14,720
74,842
35,972
29,779
$
155,313
(42,685)
9,820
51,521
19,193
19,222
$
99,756
(28,183)
7,459
41,009
14,585
15,390
78,443
(20,122)
$
112,628
$
71,573
$
58,321
$
35,607
108,259
11,447
$
32,803
59,962
6,991
$
35,428
35,260
7,755
Total share-based compensation expense . . . . . . . . . . . . . .
Total tax benefit recognized . . . . . . . . . . . . . . . . . . . . . . . . . .
Decrease in net income . . . . . . . . . . . . . . . . . . . . . . . . . .
Fiscal years ended
December 29, December 30,
2013
2012
155,313
(42,685)
$
112,628
99,756
(28,183)
$
71,573
78,443
(20,122)
$
58,321
Share-based compensation expense of $4.3 million and $2.7 million related to manufacturing
personnel was capitalized into inventory as of December 28, 2014 and December 29, 2013, respectively.
In the fiscal year ended December 28, 2014, the Company recognized $10.8 million in share-based
compensation expense related to acceleration of equity awards held by former Fusion-io employees.
The total grant date fair value of options and RSUs vested during the three fiscal years ended
December 28, 2014 was as follows (in thousands):
December 28,
2014
Fiscal years ended
December 29, December 30,
2013
2012
Options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
RSUs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
37,986
81,619
$
36,703
39,885
$
37,674
24,327
Total grant date fair value of vested options and RSUs . . . . . . . .
$
119,605
$
76,588
$
62,001
F-40
SANDISK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 11. Restructuring and Other
During the fiscal year ended December 28, 2014, the Company recorded the following in
Restructuring and other (in thousands):
Restructuring costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
12,050
20,941
Total restructuring and other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
32,991
Restructuring Costs. During the six months ended December 28, 2014, the Company implemented a
restructuring plan which primarily consisted of reductions in workforce in certain functions of the
organization, primarily 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. A restructuring charge of $12.0 million was
recorded during the fiscal year ended December 28, 2014, of which $11.4 million related to severance and
benefits for involuntary termination of personnel in manufacturing operations, research and development,
sales and marketing, and general and administrative functions of approximately 143 employees. The
remaining $0.6 million was primarily for asset disposals and an excess lease obligation. All expenses,
including adjustments, associated with the restructuring plan are included in Restructuring and other in the
Company’s 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 December 28, 2014 (in thousands):
Severance
and Benefits
Accrual balance at December 29, 2013
Charges . . . . . . . . . . . . . . . . . .
Adjustments . . . . . . . . . . . . . . .
Cash payments . . . . . . . . . . . . .
Non-cash items . . . . . . . . . . . . .
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.
.
$
Accrual balance at December 28, 2014 . . . . . . . . . . . . . . . . . . . . . .
$
Other
Charges
— $
11,437
33
(6,699)
—
4,771
$
Total
— $
585
(5)
(25)
(515)
40
$
—
12,022
28
(6,724)
(515)
4,811
The Company anticipates that the remaining restructuring reserve balance will be paid out in cash
through the second quarter of fiscal year 2015 in connection with the Company’s employee transition
program.
F-41
Annual Report
Other Costs. During the fiscal year ended December 28, 2014, the Company recognized other costs of
$20.9 million related to its acquisition of Fusion-io. Direct acquisition-related costs of $9.1 million
primarily consisted of expenses incurred for legal, banker, accounting and tax fees. The remaining costs
incurred were primarily related to certain employee change of control charges, employee retention bonus
payments and litigation and integration expenses.
SANDISK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 12. Provision for Income Taxes
The provision for income taxes consists of the following (in thousands):
December 28,
2014
Current:
Federal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
State . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
Deferred:
Federal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
State . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fiscal years ended
December 29, December 30,
2013
2012
388,532
12,404
88,563
$
$
$
74,258
(824)
101,710
489,499
472,965
175,144
10,544
(13,250)
(5,209)
27,328
2,645
(29,446)
45,383
1,634
(12,649)
(7,915)
Provision for income taxes . . . . . . . . . . . . . . . . . . . . . . . .
359,012
9,972
103,981
481,584
527
$
473,492
34,368
$
209,512
Income before provision for income taxes consisted of the following (in thousands):
December 28,
2014
Fiscal years ended
December 29, December 30,
2013
2012
United States . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 1,319,528
169,502
$ 1,436,470
79,679
$
518,509
108,407
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 1,489,030
$ 1,516,149
$
626,916
The Company’s provision for income taxes differs from the amount computed by applying the federal
statutory rates to income before taxes as follows:
December 28,
2014
U.S. federal statutory rate . . . . . . . . . . . . . . . . .
State taxes, net of federal benefit . . . . . . . . . . . .
Non-deductible share-based compensation expense .
Valuation allowance . . . . . . . . . . . . . . . . . . . . . .
Tax-exempt interest income . . . . . . . . . . . . . . . .
Foreign earnings at other than U.S. rates . . . . . . .
Settlements with tax authorities . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
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.
Fiscal years ended
December 29, December 30,
2013
2012
.
.
.
.
.
.
.
.
35.0%
0.8
1.0
0.8
(0.6)
(2.2)
(1.7)
(0.8)
35.0%
0.6
0.5
(0.1)
(0.7)
(2.9)
—
(1.2)
35.0%
0.3
1.3
0.2
(1.9)
(1.2)
(0.6)
0.3
Effective income tax rates . . . . . . . . . . . . . . . . . . . . . . . . . . .
32.3%
31.2%
33.4%
The Company’s earnings and taxes resulting from foreign operations are largely attributable to its
Chinese, Irish, Israeli and Japanese entities.
F-42
SANDISK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Deferred income taxes reflect the net tax effects of temporary differences between the carrying
amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax
return reporting purposes. Significant components of the Company’s net deferred tax assets were as
follows (in thousands):
Deferred tax assets:
Deferred income on shipments to distributors and retailers and deferred
revenue recognized for tax purposes . . . . . . . . . . . . . . . . . . . . .
Accruals and reserves not currently deductible . . . . . . . . . . . . . . . . . .
Depreciation and amortization not currently deductible . . . . . . . . . . . .
Deductible share-based compensation . . . . . . . . . . . . . . . . . . . . . . . .
Unrealized loss on investments . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unrealized foreign exchange loss . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net operating loss carryforwards . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tax credit carryforwards . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
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.
December 28,
2014
December 29,
2013
$
$
Gross deferred tax assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Valuation allowance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred tax assets, net of valuation allowance . . . . . . . . . . . . . . . . . . . . . . .
Deferred tax liabilities:
Acquired intangible assets . . . . . .
Unrealized gain on investments . .
Unrealized foreign exchange gain
U.S. taxes provided on unremitted
........
........
........
earnings of
..............
..............
..............
foreign subsidiaries
.
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.
Total deferred tax liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net deferred tax assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
65,002
98,342
96,735
32,679
10,045
10,357
196,809
61,134
22,100
593,203
(96,128)
361,957
(52,105)
497,075
309,852
(146,955)
(2,007)
—
(28,844)
(2,701)
(5,939)
(3,127)
(28,844)
(177,806)
$
68,117
63,236
81,245
28,684
13,620
8,061
36,422
37,905
24,667
319,269
(40,611)
$
269,241
The Company assesses its valuation allowance recorded against deferred tax assets on a regular and
periodic basis. The assessment of valuation allowance against deferred tax assets requires estimations and
significant judgment. The Company continues to assess and adjust its valuation allowance based on operating
results and market conditions. During fiscal years 2014, 2013 and 2012, based on weighing both the positive and
negative evidence available, including but not limited to, earnings history, projected future outcomes, industry
and market trends and the nature of each of the deferred tax assets, the Company determined that it is able to
realize most of its deferred tax assets with the exception of certain loss and credit carryforwards.
As of December 28, 2014, the Company had not made a provision for U.S. income taxes or foreign
withholding taxes on $969.1 million 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.
F-43
Annual Report
The Company has federal and state net operating loss carryforwards of $513.2 million and
$453.7 million, respectively. The net operating losses will begin to expire in fiscal year 2015 if not utilized.
The Company also has Federal and California research credit carryforwards of $13.1 million and
$77.3 million, respectively. Federal research credits can be carried forward 20 years, while California
research credits can be carried forward to future years indefinitely. Some of these carryforwards are
subject to annual limitations, including under Section 382 and Section 383 of the U.S. Internal Revenue
Code of 1986, as amended, for U.S. tax purposes and similar state provisions.
SANDISK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The tax benefit from share-based plans was applied to capital in excess of par value in the amount of
$45.1 million, $0.6 million and $11.7 million in fiscal years 2014, 2013 and 2012, respectively.
A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows (in
thousands):
December 28,
2014
Balance, beginning of year . . . . . . . . . . . . . . .
Additions:
Tax positions related to current year . .
Tax positions related to prior years . . .
Reductions:
Tax positions related to prior years . . .
Expiration of statute of limitations . . .
Settlements with taxing authorities . . .
Foreign currency translation adjustment
...............
$
...............
...............
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Balance, end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
Fiscal years ended
December 29, December 30,
2013
2012
185,250
$
179,522
$
185,826
17,656
14,411
8,255
15,938
8,164
942
(9,597)
(8,039)
(71,121)
(3,387)
(1,737)
(7,419)
—
(9,309)
(7,186)
(2,003)
—
(6,221)
125,173
$
185,250
$
179,522
The total amount of unrecognized tax benefits that would impact the effective tax rate, if recognized,
was $100.4 million as of December 28, 2014. The Company recognizes interest and penalties related to
unrecognized tax benefits in income tax expense. Accrued interest and penalties included in the Company’s
liability related to unrecognized tax benefits as of December 28, 2014 and December 29, 2013 was
$30.1 million and $32.7 million, respectively. Interest and penalties, net, included in the Company’s tax
expense was ($0.2) million, $2.2 million and $2.9 million for fiscal years 2014, 2013 and 2012, respectively.
It is reasonably possible that the unrecognized tax benefits could decrease by approximately
$56.2 million within the next 12 months as a result of the expiration of statutes of limitations and the
settlement of income tax audits. 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
December 28, 2014.
The Company is subject to U.S. federal income tax as well as income
foreign jurisdictions. In August 2014, the Company received and signed the
Internal Revenue Service (‘‘IRS’’) relating to its federal income tax returns
2008. In fiscal year 2014, the Company recorded a benefit of $25.2 million
settlements.
taxes in multiple state and
closing agreement with the
for the years 2005 through
as a result of several audit
The IRS is currently conducting an examination of the Company’s federal income tax returns for fiscal
years 2009 through 2011. Though the Company can reasonably expect the current cycle to be resolved
within the next 12 months, the timing of the resolution of income tax examinations is highly uncertain as
are the amounts and timing of tax payments that are part of any audit settlement process. In addition, 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 a tax holiday in Malaysia that expires in December 2023. The impact of the tax
holiday was immaterial to income taxes and earnings per share in the Company’s Consolidated Financial
Statements.
F-44
SANDISK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 13. Net Income per Share
The following table sets forth the computation of basic and diluted net income per share (in
thousands, except per share amounts):
December 28,
2014
Numerator for basic net income per share:
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Denominator for basic net income per share:
Weighted-average common shares outstanding . . . . . . . . . . . . .
Basic net income per share . . . . . . . . . . . . . . . . . . . . . . .
Numerator for diluted net income per share:
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Denominator for diluted net income per share:
Weighted-average common shares outstanding . . . . . . . . . . . . .
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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1.5% Notes due 2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Warrants issued in conjunction with the 1.5% Notes due 2017 . . .
$ 1,007,446
Anti-dilutive shares excluded from net income per share calculation . .
$ 1,042,657
222,714
$
234,886
242,076
1.72
$ 1,007,446
$ 1,042,657
$
417,404
222,714
234,886
242,076
3,419
8,261
3,815
3,263
2,087
—
3,177
—
—
238,209
240,236
245,253
4.23
33,672
$
417,404
$
$
4.52
$
4.44
Shares used in computing diluted net income per share . . . .
Diluted net income per share . . . . . . . . . . . . . . . . . . .
Fiscal years ended
December 29, December 30,
2013
2012
$
4.34
53,485
$
1.70
70,309
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 1% Notes due 2013, the 1.5% Notes due 2017, the 0.5% Notes due 2020,
and warrants issued in conjunction with the 1% Notes due 2013, the 1.5% Notes due 2017 and 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.
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.
F-45
Annual Report
Note 14. Commitments, Contingencies and Guarantees
SANDISK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 fiscal year 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 December 28, 2014,
the Company had notes receivable from Flash Partners of $12.5 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
December 28, 2014 and December 29, 2013, the Company had an equity investment in Flash Partners of
$167.1 million and $190.7 million, respectively, denominated in Japanese yen, adjusted by ($7.3) million
and $17.3 million, respectively, of cumulative translation adjustments recorded in AOCI. The Company
records basis adjustments to its equity in earnings from Flash Partners that relate to the difference between
the basis in the Company’s equity investment compared to the historical basis of the assets recorded by
Flash Partners. In the fiscal year ended December 28, 2014, the Company recorded no basis adjustments to
its equity in earnings from Flash Partners. In the fiscal years ended December 29, 2013 and December 30,
2012, the Company recorded a basis adjustment of $1.2 million and $3.0 million, respectively, to its equity
earnings from Flash Partners. Flash Partners’ share of the Fab 3 fabrication facility is fully equipped.
Flash Alliance. Flash Alliance Ltd. (‘‘Flash Alliance’’) was formed in fiscal year 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 December 28, 2014,
the Company had notes receivable from Flash Alliance of $292.7 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
December 28, 2014 and December 29, 2013, the Company had an equity investment in Flash Alliance of
$249.5 million and $284.0 million, respectively, denominated in Japanese yen, adjusted by ($45.5) million
and ($8.7) million, respectively, of cumulative translation adjustments recorded in AOCI. The Company
records basis adjustments to its equity in earnings from Flash Alliance that relate to the difference between
the basis in the Company’s equity investment compared to the historical basis of the assets recorded by
Flash Alliance. In the fiscal year ended December 28, 2014, the Company recorded no basis adjustments to
its equity in earnings from Flash Alliance. In the fiscal years ended December 29, 2013 and December 30,
2012, the Company recorded a basis adjustment of $6.5 million and $15.2 million, respectively, to its equity
earnings from Flash Alliance. Flash Alliance’s share of the Fab 4 fabrication facility is fully equipped.
Flash Forward. Flash Forward Ltd. (‘‘Flash Forward’’) was formed in fiscal year 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. The Phase 2 shell 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
F-46
SANDISK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 December 28, 2014, the Company had
notes receivable from Flash Forward of $161.9 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 December 28, 2014 and
December 29, 2013, the Company had an equity investment in Flash Forward of $79.2 million and
$66.7 million, respectively, denominated in Japanese yen, adjusted by ($28.4) million and ($16.2) 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.
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.
Other Arrangements and Activities
Research and Development Activities. The Company participates in common R&D activities with Toshiba
and is contractually committed to a minimum funding level.
Toshiba Foundry. In the first quarter of fiscal year 2013, the Company concluded its foundry
arrangement with Toshiba.
Other Silicon Sources. The Company’s contracts with its other sources of silicon wafers generally require
the Company to provide monthly purchase order commitments. The purchase orders placed under these
arrangements are generally binding and cannot be canceled. These outstanding purchase commitments for
other sources of silicon wafers 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 December 28, 2014, the total amount
of the Company’s guarantee obligation of Flash Ventures’ master lease agreements, which reflects future
F-47
Annual Report
Subcontractors. In the normal course of business, the Company’s subcontractors periodically procure
production materials based on the forecast the Company provides to them. The Company’s agreements
with these subcontractors require that the Company reimburse them for materials that are purchased on
the Company’s behalf in accordance with such forecast. Accordingly, the Company may be committed to
certain costs over and above its open noncancelable purchase orders with these subcontractors. These
commitments for production materials to subcontractors are included as part of the total ‘‘Noncancelable
production purchase commitments’’ in the ‘‘Contractual Obligations’’ table.
SANDISK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
payments and any lease adjustments, was 66.4 billion Japanese yen, or approximately $551 million, based
upon the exchange rate at December 28, 2014.
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 December 28, 2014, Flash
Ventures was in compliance with all of its master lease covenants, including the stockholders’ equity
covenant with the Company’s stockholders’ equity at $6.53 billion as of December 28, 2014. 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.
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 (in
billions) and U.S. dollar-equivalent (in thousands) based upon the exchange rate at December 28, 2014:
Master Lease Agreements by Execution Date
Lease Type
Lease Amounts
(Japanese yen)
Flash Partners:
March 2012 . . . . . . . . . . . . . . . . . . . . . .
March 2014 . . . . . . . . . . . . . . . . . . . . . .
December 2014 . . . . . . . . . . . . . . . . . . . .
Flash Alliance:
March 2012 . .
July 2012 . . . .
March 2014 . .
May 2014 . . . .
August 2014 . .
December 2014
Flash Forward:
November 2011
March 2012 . .
July 2012 . . . .
December 2014
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Refinanced
Initial
Initial
¥
Initial
Refinanced
Initial
Initial
Initial
Initial
Initial
Initial
Initial
Initial
Total guarantee obligations . . . . . . . . . .
¥
F-48
1.9
4.6
3.2
Expiration
(U.S. dollar)
$
16,074
37,967
26,932
9.7
80,973
5.2
9.8
4.5
6.1
6.4
5.0
43,477
81,271
37,479
50,256
53,040
41,418
37.0
306,941
7.7
5.0
2.0
5.0
63,604
41,447
16,600
41,399
19.7
163,050
66.4
$
550,964
2015
2019
2019
2017
2017
2019
2019
2019
2019
2016
2017
2017
2019
SANDISK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 December 28, 2014 in U.S. dollars based upon the yen/dollar
exchange rate at December 28, 2014 (in thousands):
Payment of
Principal
Amortization
Annual Installments
Year
Year
Year
Year
Year
Year
1
2
3
4
5
6
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Purchase Option
Exercise Price at
Final Lease
Terms
Guarantee
Amount
.
.
.
.
.
.
$
145,318
120,164
78,822
45,157
26,079
2,564
$
15,073
10,236
49,238
8,892
31,530
17,891
$
160,391
130,400
128,060
54,049
57,609
20,455
Total guarantee obligations . . . . . . . . . . . . . . . . . . . .
$
418,104
$
132,860
$
550,964
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 thirdparty 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
December 28, 2014 and December 29, 2013, no amounts have been accrued in the Consolidated Financial
Statements with respect to these indemnification guarantees.
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
F-49
Annual Report
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 December 28, 2014 and December 29, 2013, as these liabilities are not reasonably
estimable even though liabilities under these agreements are not remote.
SANDISK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
and sold by Flash Ventures infringe third-party patents. The Company has not made any indemnification
payments under any such agreements. As of December 28, 2014 and December 29, 2013, no amounts have
been accrued in the Company’s Consolidated Financial Statements with respect to these indemnification
guarantees.
Contractual Obligations and Off-Balance Sheet Arrangements
The following tables summarize the Company’s contractual cash obligations, commitments and
off-balance sheet arrangements at December 28, 2014, 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 December 28, 2014 were
as follows (in thousands):
1 Year
(Fiscal 2015)
Total
Facility and other operating leases .
Flash Partners(1) . . . . . . . . . . . . .
Flash Alliance(1) . . . . . . . . . . . . .
Flash Forward(1) . . . . . . . . . . . . .
Toshiba research and development .
1.5% Notes due 2017 principal and
interest(2) . . . . . . . . . . . . . . . . .
0.5% Notes due 2020 principal and
interest(3) . . . . . . . . . . . . . . . . .
Noncancelable production purchase
commitments(4) . . . . . . . . . . . . .
Capital equipment purchase
commitments(7) . . . . . . . . . . . . .
Operating expense commitments(8) .
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.
.
.
.
.
.
.
.
.
$
65,416
$
661,820(5)(6)
1,656,655(5)(6)
905,736(5)(6)
39,298(5)
15,166
206,713
655,083
302,332
39,298
2 - 3 Years
(Fiscal 2016
and 2017)
$
21,062
256,768
599,075
351,883
—
4 - 5 Years
(Fiscal 2018
and 2019)
$
15,509
157,159
360,615
189,082
—
More than
5 Years
(Beyond
Fiscal 2019)
$
13,679
41,180
41,882
62,439
—
..
1,041,644
14,954
1,026,690
—
—
..
1,545,000
7,500
15,000
15,000
1,507,500
..
241,663(5)
241,663
—
—
—
..
..
125,856
43,251
125,744
42,911
112
340
—
—
—
—
Total contractual cash obligations .
$ 6,326,339
$ 1,651,364
$ 2,270,930
737,365
$ 1,666,680
$
(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. Funding
commitments assume no additional operating lease guarantees; new operating lease guarantees can reduce
funding commitments.
(2)
In August 2010, the Company issued and sold $1.0 billion in aggregate principal amount of 1.5% Notes due 2017.
As of December 28, 2014, $3.2 million aggregate principal amount was converted and settled. As of January 30,
2015, the Company had received additional conversion notices for a total of $46 thousand aggregate principal
amount of the 1.5% Notes due 2017, for which conversion is expected to be completed in the first quarter of fiscal
year 2015. The Company will pay cash interest on the outstanding notes at an annual rate of 1.5%, payable
semi-annually on August 15 and February 15 of each year until August 15, 2017.
(3)
In October 2013, the Company issued and sold $1.5 billion in aggregate principal amount of 0.5% Notes due
2020. The Company will pay cash interest on the outstanding notes at an annual rate of 0.5%, payable
semi-annually on April 15 and October 15 of each year until October 15, 2020.
(4)
Includes Flash Ventures, related party vendors and other silicon source vendor purchase commitments.
F-50
SANDISK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(5)
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 December 28, 2014.
(6)
Excludes amounts related to the master lease agreements’ purchase option exercise price at final lease term.
(7)
Excludes $119.2 million in capital expenditures not yet paid in cash.
(8)
Excludes amounts in accounts payable and accrued liabilities not yet paid in cash.
The Company has excluded $132.3 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 December 28, 2014. 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 (in thousands):
December 28,
2014
Guarantee of Flash Ventures equipment leases(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Guarantee of asset purchase in Bangalore, India(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
550,964
25,483
(1)
The Company’s guarantee obligation, net of cumulative lease payments, was 66.4 billion Japanese yen, or
approximately $551 million based upon the exchange rate at December 28, 2014.
(2)
The Company is committed to purchase land and a building shell in Bangalore, India, if the seller is able to obtain
necessary third-party and government approvals by June 1, 2015. The Company’s purchase obligation was
approximately $25 million based upon the exchange rate at December 28, 2014. The Company is currently
making building improvements on the facility and has received a bank guarantee of up to approximately
$17 million, based upon the exchange rate at December 28, 2014, from the seller to refund its building
improvement expenditures if the purchase obligation expires unexercised.
The Company leases many of its office facilities and operating equipment for various terms under
long-term, noncancelable operating lease agreements. The leases expire at various dates from fiscal year
2015 through fiscal year 2026. Future minimum lease payments are presented below (in thousands):
Future minimum
lease payments
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$
Operating leases, gross . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Sublease income to be received in the future under noncancelable subleases . . . . . . . . . . .
Operating leases, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
F-51
15,731
11,404
9,804
8,708
20,480
66,127
(711)
$
65,416
Annual Report
Fiscal year:
2015 . . . . . . . . . .
2016 . . . . . . . . . .
2017 . . . . . . . . . .
2018 . . . . . . . . . .
2019 and thereafter
SANDISK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Net rent expense was as follows (in thousands):
December 28,
2014
Rent expense, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
13,022
Fiscal years ended
December 29, December 30,
2013
2012
$
6,473
$
6,366
Note 15. 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 14, ‘‘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 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 $1.91 billion, $1.87 billion and $2.71 billion during the
fiscal years ended December 28, 2014, December 29, 2013 and December 30, 2012, respectively. The
Company received loan repayments from Flash Ventures of $231.4 million, $124.8 million and
$511.3 million during the fiscal years ended December 28, 2014, December 29, 2013 and December 30,
2012, respectively. At December 28, 2014 and December 29, 2013, the Company had accounts payable
balances due to Flash Ventures of $136.1 million and $146.0 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 (in millions). 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.
December 28,
2014
December 29,
2013
.
.
.
.
$
467
496
551
—
$
593
541
492
5
Maximum estimable loss exposure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
1,514
$
1,631
Notes receivable . . . . . . .
Equity investments . . . . . .
Operating lease guarantees
Prepayments . . . . . . . . . .
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As of both December 28, 2014 and December 29, 2013, the Company’s retained earnings included
undistributed earnings of Flash Ventures of $8.1 million.
F-52
SANDISK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following summarizes the aggregated financial information for Flash Ventures, which includes
both the Company and Toshiba’s portions (in millions).
December 28,
2014
December 29,
2013
(Unaudited)
Current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Property, plant, equipment, net and other assets . . . . . . . . . . . . . . . . . . . . . . . . . .
$
494
2,602
$
631
2,802
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
3,096
$
3,433
Current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Long-term liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
1,160
934
$
1,144
1,186
The following summarizes the aggregated financial information for Flash Ventures, which includes
both the Company and Toshiba’s portions, for fiscal years 2014, 2013 and 2012, respectively (in millions).
Flash Ventures’ year-ends are March 31, with quarters ending on March 31, June 30, September 30 and
December 31.
December 28,
2014
Fiscal years ended
December 29, December 30,
2013
2012
(Unaudited)
Net sales(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gross profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(1)
$
3,296
18
—
$
3,589
31
28
$
4,787
8
(15)
Net sales represent sales to both the Company and Toshiba.
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 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 Company’s Consolidated Balance Sheets as of December 28, 2014 and December 29, 2013.
Note 16. Stockholders’ Rights Plan
F-53
Annual Report
On September 15, 2003, the Company amended its existing stockholder rights plan to terminate the
rights issued under that rights plan, and the Company adopted a new rights plan. Under the new rights
plan, rights were distributed as a dividend at the rate of one right for each share of common stock of the
Company held by stockholders of record as of the close of business on September 25, 2003. In November
2006, the Company extended the term of the rights plan, such that the rights will expire on April 28, 2017
unless redeemed or exchanged. Under the new rights agreement and after giving effect to the Company’s
stock dividend effected on February 18, 2004, each right will, under the circumstances described below,
entitle the registered holder to buy one (1) two-hundredths of a share of Series A Junior Participating
Preferred Stock for $225.00. The rights will become exercisable only if a person or group acquires
beneficial ownership of 15% or more of the Company’s common stock or commences a tender offer or
exchange offer upon consummation of which such person or group would beneficially own 15% or more of
the Company’s common stock.
SANDISK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 17. Business Acquisitions
The Consolidated Financial Statements include the operating results of the acquired businesses
described below from the respective dates of acquisition. Pro forma results of operations have not been
presented as the prior-period financial results of the acquired businesses are not considered material to the
Company. None of the goodwill was deductible for tax purposes.
Fusion-io, Inc. On July 23, 2014, the Company acquired 100% of Fusion-io, a leading developer of flashbased, Peripheral Component Interconnect Express (‘‘PCIe’’) hardware and software solutions that
enhance application performance in enterprise and hyperscale data centers. The Company expects this
acquisition to accelerate its efforts to enable the flash-transformed data center, helping companies better
manage increasingly heavy data workloads at a lower total cost of ownership. The total aggregate
consideration to acquire Fusion-io was $1.26 billion and comprised of the following (in thousands):
Purchase Price
Cash consideration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fair value of assumed equity attributed to pre-combination service . . . . . . . . . . . . . . . . . . . . . .
$
1,256,502
7,041
Total purchase price . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
1,263,543
The total aggregate consideration net of cash assumed was $1.07 billion.
The Company assumed all of Fusion-io’s outstanding unvested stock option awards with an exercise
price less than or equal to the acquisition price of $11.25 per share and unvested RSU awards. The
assumed unvested stock options converted into 427,388 options to purchase the Company’s common stock
and the assumed unvested RSUs converted into 445,072 RSU awards.
The weighted-average fair value of the assumed unvested stock option awards was $35.02 and was
determined using the Black-Scholes-Merton valuation model and included the following assumptions:
Dividend yield . . . . . . . . . . .
Expected volatility . . . . . . . . .
Risk-free interest rate . . . . . .
Weighted average expected life
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1.14%
0.32
1.00%
2.6 years
The fair value of the assumed unvested RSU awards was based on the Company’s acquisition-date
share value of $94.35 per share.
The fair value of the assumed unvested stock option and RSU awards attributed to post-combination
services of $49.9 million was not included in the consideration transferred and will be recognized over the
awards’ remaining requisite service periods.
F-54
SANDISK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table presents the fair values of the tangible and intangible assets acquired and
liabilities assumed from, and goodwill attributed to, the Fusion-io acquisition as of July 23, 2014, and
reflects adjustments made during the open measurement period to finalize the purchase accounting (in
thousands):
Cash . . . . . . . . . . . . . . . .
Accounts receivable, net . . .
Inventory . . . . . . . . . . . . .
Deferred tax asset, net . . . .
Finite-lived intangible assets .
IPR&D . . . . . . . . . . . . . . .
Goodwill . . . . . . . . . . . . . .
Other assets . . . . . . . . . . .
Other current liabilities . . . .
Other non-current liabilities .
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$
Total purchase price . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
190,336
67,666
76,780
54,490
382,000
61,000
513,398
30,498
(94,016)
(18,609)
1,263,543
Goodwill in the table above was reduced by $29.3 million during the three months ended
December 28, 2014 in connection with the finalization of the purchase accounting, due primarily to the
recognition of deferred tax assets associated with the divestiture of the io-Control product line of
Fusion-io. The divestiture of the product line was deemed immaterial to the Company’s Consolidated
Financial Statements.
The following table presents the fair value of the intangible assets acquired (in thousands):
Weighted-Average
Useful Lives
Intangible assets:
Developed technology . . . .
Customer relationships . . .
Trademark and trade names
IPR&D . . . . . . . . . . . . . .
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Total intangible assets acquired, excluding goodwill . . . . . . . . . . . . . . . .
5 years
1.5 years
5 years
Fair Value
$
271,000
57,000
54,000
61,000
$
443,000
In-process Research and Development. A portion of the Fusion-io purchase price was allocated to
acquired IPR&D. The value of the IPR&D project was determined by estimating the future net cash flows
and by discounting them to their present values, which represents an established valuation technique in the
high-technology computer industry.
The net cash flows from the IPR&D project were based on estimates of revenues, costs of revenues,
research and development expenses, including costs to complete the project, selling, marketing and
administrative expenses, and income taxes from the project. The estimated net revenues and gross margins
were based on projections of the project and were in line with industry averages. Estimated total net
F-55
Annual Report
The initial weighted-average amortization period for the finite-lived intangible assets was 4.5 years.
The intangible assets are amortized on a straight-line basis over the period which the economic benefits of
the intangible assets are expected to be utilized. The goodwill resulted from expected synergies from the
transaction, including complementary products that will enhance the Company’s overall product portfolio.
SANDISK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
revenues from the project were expected to grow through fiscal year 2019 and to decline thereafter as
other new technologies are expected to become available and the technology approaches the end of its life
cycle. Estimated operating expenses included research and development expenses, which included costs to
bring the project to technological feasibility and costs associated with ongoing maintenance after a product
is released, as well as selling, marketing and administrative expenses based on historical and expected
direct expenses. The Company believes the assumptions used in the valuation were reasonable at the time
of the acquisition.
The effective tax rate used in the analysis of the IPR&D project reflects the Company’s structural tax
rate based on the Company’s historical operating model and related tax planning. A discount rate (the rate
utilized to discount the net cash flows to their present values) of 17.5% was used in computing the present
value of net cash flows for the project. The percentage of completion was determined using costs incurred
by Fusion-io prior to the acquisition date compared to the estimated remaining research and development
to be completed to bring the project to technological feasibility.
Direct Acquisition-related Costs. Direct acquisition-related costs of $11.7 million during the fiscal year
ended December 28, 2014 were related to legal, banker, accounting and tax fees, of which $2.6 million
were expensed to General and administrative expense in the second quarter of fiscal year 2014, and
$9.1 million were expensed to Restructuring and other expense in the second half of fiscal year 2014 in the
Company’s Consolidated Statement of Operations.
SMART Storage Systems. On August 22, 2013, the Company completed its acquisition of SMART
Storage, a developer of enterprise solid state drives (‘‘SSDs’’). The Company expects this acquisition to
enhance its enterprise storage product portfolio. The Company acquired 100% of the outstanding shares
of SMART Storage through an all-cash transaction. The total aggregate consideration to acquire SMART
Storage was $305.1 million and comprised of the following (in thousands):
Purchase Price
Cash consideration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fair value of assumed stock options attributed to pre-combination service . . . . . . . . . . . . . . . . .
$
304,982
136
Total purchase price . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
305,118
The Company assumed all outstanding unvested SMART Storage stock option awards, which were
converted into 183,069 options to purchase the Company’s common stock. The fair value of these unvested
stock options was determined using the Black-Scholes-Merton valuation model.
The weighted-average fair value of the assumed unvested stock option awards was $41.15 and was
determined using the Black-Scholes-Merton valuation model and included the following assumptions:
Dividend yield . . . . . . . . . . . .
Expected volatility . . . . . . . . .
Risk-free interest rate . . . . . . .
Weighted average expected life .
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1.60%
0.32
0.33%
1.4 years
The fair value of the assumed unvested stock option attributed to post-combination services of
$6.8 million was not included in the consideration transferred and will be recognized over the awards’
remaining requisite service periods.
F-56
SANDISK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table presents the fair values of the tangible and intangible assets acquired and
liabilities assumed from, and goodwill attributed to, the SMART Storage acquisition as of August 22, 2013,
and reflects adjustments made through the measurement period to finalize the purchase accounting (in
thousands):
Cash . . . . . . . . . . . . . . . .
Accounts receivable, net . . .
Inventory . . . . . . . . . . . . .
Deferred taxes – current . . .
Other current assets . . . . . .
Property and equipment . . .
Deferred taxes – non-current
Finite-lived intangible assets .
IPR&D . . . . . . . . . . . . . . .
Goodwill . . . . . . . . . . . . . .
Other assets . . . . . . . . . . .
Accounts payable . . . . . . . .
Other current liabilities . . . .
Other non-current liabilities .
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$
1,423
7,827
29,331
921
28,002
5,734
3,338
162,200
6,300
115,594
149
(11,746)
(34,976)
(8,979)
Total purchase price . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
305,118
An existing $25.5 million liability that SMART Storage owed SMART Holdings, (the ‘‘Seller’’), was
not settled prior to the closing of the acquisition of SMART Storage in accordance with the purchase
agreement. The Seller was contractually obligated to refund $25.5 million of the purchase price for this
unsettled liability. As of December 29, 2013, the purchase price refund receivable and unsettled liability
were recorded gross in Other current assets and Other current liabilities of the acquired tangible assets and
liabilities of SMART Storage, respectively, as the Company did not have the legal right to offset. The
Company settled the liability to the Seller and the Seller refunded the Company for the same amount in
the first quarter of fiscal year 2014.
The following table presents the fair value of the intangible assets acquired (in thousands):
Weighted-Average
Useful Lives
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.
Total intangible assets acquired, excluding goodwill . . . . . . . . . . . . . . . .
4 years
4 years
2 years
Fair Value
$
146,100
8,500
7,600
6,300
$
168,500
The initial weighted-average amortization period for the finite-lived intangible assets was 3.9 years.
The intangible assets are amortized on a straight-line basis over the period which the economic benefits of
the intangible assets are expected to be utilized. The goodwill resulted from expected synergies from the
transaction, including the Company’s supply of NAND flash and complementary products that will
enhance the Company’s overall product portfolio. The Company did not record a deferred tax liability due
to certain tax incentives awarded by the Malaysian government.
F-57
Annual Report
Intangible assets:
Developed technology . . . .
Trademark and trade names
Customer relationships . . .
IPR&D . . . . . . . . . . . . . .
SANDISK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Direct Acquisition-related Costs. Direct acquisition-related costs of $3.1 million during the fiscal year
ended December 29, 2013 were related to legal, regulatory and accounting fees, and were expensed to
General and administrative expense in the Consolidated Statement of Operations.
Note 18. 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
seeks a declaratory judgment that 12 Round Rock patents are invalid and/or not infringed by flash memory
products sold by the Company. Round Rock has since withdrawn 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 alleges that Round Rock violated the antitrust laws by conspiring with Micron and violating
F-58
SANDISK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
commitments that Micron made to the standards-setting organization, JEDEC Solid State Technology
Association. The antitrust case has been 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 are not at issue in the matters
described above. The Company has not yet filed its response.
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, which is fully briefed and has been taken under submission by the District Court. On
February 3, 2015, the Company filed a motion for summary judgment as to all of the plaintiffs’ asserted
claims. Trial is scheduled to begin on June 22, 2015.
F-59
Annual Report
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
SANDISK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
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. On February 3, 2015, the plaintiffs filed a second amended complaint in the District
Court.
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 on January 20, 2015 and January 21, 2015, and a decision by the
court is expected in March 2015.
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
F-60
SANDISK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 December 8, 2014, the Company filed a motion to remand the case to state court.
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 September 22, 2014, the defendants filed a motion to dismiss,
which is fully briefed and has been taken under submission by the court.
Annual Report
F-61
SANDISK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 19. Supplementary Financial Data (Unaudited)
Fiscal quarters ended
June 29,
September 28,
2014
2014
March 30,
2014
December 28,
2014
(In thousands, except per share data)
2014
Revenue . . . . . . .
Gross profit . . . .
Operating income
Net income . . . . .
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
$ 1,511,945
751,290
425,174
268,948
$ 1,634,011
759,650
416,656
273,946
$
1,746,491
817,138
387,794
262,661
Net income per share:
Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
1.19
1.14
$
$
1.21
1.14
$
$
1.18
1.09
$
$
0.93
0.86
Dividends declared per share . . . . . . . . . . . . . . . . .
$
0.225
$
0.225
$
0.300
$
0.300
Fiscal quarters ended
June 30,
September 29,
2013
2013
March 31,
2013
$ 1,735,254
739,770
328,310
201,891
December 29,
2013
(In thousands, except per share data)
2013
Revenue . . . . . . .
Gross profit . . . .
Operating income
Net income . . . . .
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
$ 1,340,729
531,516
253,791
166,229
$ 1,476,263
676,819
392,558
261,789
$
1,625,153
801,993
408,448
276,859
Net income per share:
Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
0.69
0.68
$
$
1.08
1.06
$
$
1.20
1.18
$
$
1.50
1.45
Dividends declared per share . . . . . . . . . . . . . . . . .
$
—
$
—
$
0.225
$
0.225
F-62
$ 1,727,858
857,155
507,413
337,780
SIGNATURES
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
(Registrant)
Dated: February 10, 2015
By: /s/ JUDY BRUNER
Judy Bruner
Executive Vice President, Administration and
Chief Financial Officer
(Principal Financial Officer)
By: /s/ DONALD ROBERTSON
Donald Robertson
Vice President, Chief Accounting Officer
(Principal Accounting Officer)
Annual Report
S-1
POWER OF ATTORNEY
KNOW ALL PEOPLE BY THESE PRESENTS, that each person whose signature appears below
constitutes and appoints each of Sanjay Mehrotra and Judy Bruner, jointly and severally, his or her
attorneys in fact, each with the power of substitution, for him or her in any and all capacities, to sign any
amendments to this Report on Form 10-K, and to file the same, with exhibits thereto and other documents
in connection therewith, with the Securities and Exchange Commission, hereby ratifying and confirming all
that each of said attorneys in fact, or his or her substitute or substitutes, may do or cause to be done by
virtue thereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this Report has
been signed below by the following persons on behalf of the Registrant and in the capacities and on the
dates indicated.
Signature
By: /s/ SANJAY MEHROTRA
Sanjay Mehrotra
By: /s/ JUDY BRUNER
Judy Bruner
By: /s/ DONALD ROBERTSON
Donald Robertson
By: /s/ MICHAEL E. MARKS
Title
Date
President and Chief Executive Officer
and Director
(Principal Executive Officer)
February 10, 2015
Executive Vice President, Administration
and Chief Financial Officer
(Principal Financial Officer)
February 10, 2015
Vice President, Chief Accounting Officer
(Principal Accounting Officer)
February 10, 2015
Chairman of the Board
February 8, 2015
Director
February 8, 2015
Director
February 9, 2015
Director
February 9, 2015
Director
February 8, 2015
Director
February 8, 2015
Director
February 8, 2015
Michael E. Marks
By: /s/ IRWIN FEDERMAN
Irwin Federman
By: /s/ STEVEN J. GOMO
Steven J. Gomo
By: /s/ EDDY W. HARTENSTEIN
Eddy W. Hartenstein
By: /s/ DR. CHENMING HU
Dr. Chenming Hu
By: /s/ CATHERINE P. LEGO
Catherine P. Lego
By: /s/ D. SCOTT MERCER
D. Scott Mercer
S-2
EXHIBIT INDEX
Form
Incorporated by Reference
File No.
Exhibit No.
2.1
Agreement and Plan of Merger, dated
June 16, 2014, by and among the
Registrant, Flight Merger Sub, Inc. and
Fusion-io, Inc.#
8-K
000-26734
2.1
6/16/2014
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
E-1
Filing Date
Provided
Herewith
Annual Report
Exhibit Title
Exhibit
Number
Exhibit Title
Form
Incorporated by Reference
File No.
Exhibit No.
Filing Date
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
10.1
License Agreement, dated September 6,
1988, between the Registrant and Dr. Eli
Harari.
S-1
33-96298
3.2
8/29/1995
10.2
The Registrant’s 1995 Stock Option Plan,
amended and restated on January 2,
2002.†
S-8
333-8532
99.1
4/1/2002
10.3
The Registrant’s Amended and Restated
2005 Incentive Plan.†
Def 14A
000-26734
Annex A
4/25/2011
10.4
The Registrant’s Amended and Restated
2005 Employee Stock Purchase Plan and
Amended and Restated 2005 International
Employee Stock Purchase Plan.†
Def 14A
000-26734
Annex B
4/28/2014
10.5
2005 Incentive Plan — Form of Notice of
Grant of Stock Option.†
8-K
000-26734
10.2
6/3/2005
10.6
2005 Incentive Plan — Form of Notice of
Grant of Non-Employee Director
Automatic Stock Option (Initial Grant).†
8-K
000-26734
10.3
6/3/2005
10.7
2005 Incentive Plan — Form of Notice of
Grant of Non-Employee Director
Automatic Stock Option (Annual Grant).†
8-K
000-26734
10.4
6/3/2005
10.8
2005 Incentive Plan — Form of Stock
Option Agreement.†
8-K
000-26734
10.5
6/3/2005
10.9
2005 Incentive Plan — Form of Automatic
Stock Option Agreement.†
8-K
000-26734
10.6
6/3/2005
10.10
2005 Incentive Plan — Form of Restricted
Stock Unit Issuance Agreement.†
10-Q
000-26734
10.1
5/8/2008
10.11
2005 Incentive Plan — Form of Restricted
Stock Unit Issuance Agreement (Director
Grant).†
8-K
000-26734
10.8
6/3/2005
10.12
2005 Incentive Plan — Form of Restricted
Stock Award Agreement.†
8-K
000-26734
10.9
6/3/2005
10.13
2005 Incentive Plan — Form of Restricted
Stock Award Agreement (Director
Grant).†
8-K
000-26734
10.10
6/3/2005
10.14
2005 Incentive Plan — Form of
Performance Stock Unit Issuance
Agreement.†
10-K
000-26734
10.40
2/25/2009
10.15
2005 Incentive Plan — Form of Option
Agreement Amendment.†
8-K
000-26734
10.2
11/12/2008
Exhibit
Number
4.4
E-2
Provided
Herewith
Exhibit
Number
Exhibit Title
10.16
The Registrant’s 2013 Incentive Plan.†
10.17
Form
Incorporated by Reference
File No.
Exhibit No.
Filing Date
000-26734
Annex A
4/26/2013
2013 Incentive Plan — Form of Notice of
Grant of Stock Option.†
10-Q
000-26734
10.2
7/30/2013
10.18
2013 Incentive Plan — Form of Global
Stock Option Agreement.†
10-Q
000-26734
10.3
7/30/2013
10.19
2013 Incentive Plan — Form of Global
Restricted Stock Unit Issuance
Agreement.†
10-Q
000-26734
10.4
7/30/2013
10.20
2013 Incentive Plan — Form of Notice of
Grant of Stock Option (Director Grants).†
10-Q
000-26734
10.5
7/30/2013
10.21
2013 Incentive Plan — Form of Stock
Option Agreement (Director Grants).†
10-Q
000-26734
10.6
7/30/2013
10.22
2013 Incentive Plan — Form of Restricted
Stock Unit Issuance Agreement (Director
Grants).†
10-Q
000-26734
10.7
7/30/2013
10.23
Flash Partners Master Agreement, dated
as of September 10, 2004, by and among
the Registrant and the other parties
thereto.DŽ
10-Q
000-26734
10.1
11/5/2004
10.24
Operating Agreement of Flash
Partners Ltd., dated as of September 10,
2004, by and between SanDisk
International Limited and Toshiba
Corporation.DŽ
10-Q
000-26734
10.2
11/5/2004
10.25
Mutual Contribution and Environmental
Indemnification Agreement, dated as of
September 10, 2004, by and among the
Registrant and the other parties thereto.DŽ
10-Q
000-26734
10.5
11/5/2004
10.26
Patent Indemnification Agreement, dated
as of September 10, 2004, by and among
the Registrant and the other parties
thereto.DŽ
10-Q
000-26734
10.6
11/5/2004
10.27
Flash Alliance Master Agreement, dated
as of July 7, 2006, by and among the
Registrant, Toshiba Corporation and
SanDisk (Ireland) Limited.DŽ
10-Q
000-26734
10.1
11/8/2006
10.28
Operating Agreement of Flash
Alliance, Ltd., dated as of July 7, 2006, by
and between Toshiba Corporation and
SanDisk (Ireland) Limited.DŽ
10-Q
000-26734
10.2
11/8/2006
10.29
Flash Alliance Mutual Contribution and
Environmental Indemnification
Agreement, dated as of July 7, 2006, by
and between Toshiba Corporation and
SanDisk (Ireland) Limited.DŽ
10-Q
000-26734
10.5
11/8/2006
E-3
Annual Report
Def 14A
Provided
Herewith
Exhibit Title
Form
Incorporated by Reference
File No.
Exhibit No.
10.30
Patent Indemnification Agreement, dated
as of July 7, 2006, by and among the
Registrant and the other parties thereto.DŽ
10-Q
000-26734
10.6
11/8/2006
10.31
Flash Forward Master Agreement, dated
as of July 13, 2010, by and among Toshiba
Corporation, the Registrant and SanDisk
Flash B.V.DŽ
10-Q/A
000-26734
10.1
9/9/2011
10.32
Transition Agreement, dated as of July 13,
2010, by and among Toshiba Corporation,
the Registrant and SanDisk Flash B.V.DŽ
10-Q
000-26734
10.2
11/12/2010
10.33
Flash Forward Mutual Contribution and
Environmental Indemnification
Agreement, dated as of July 13, 2010, by
and among Toshiba Corporation, the
Registrant and SanDisk Flash B.V.DŽ
10-Q
000-26734
10.3
11/12/2010
10.34
Patent Indemnification Agreement, dated
as of July 13, 2010, by and among Toshiba
Corporation, the Registrant and SanDisk
Flash B.V.DŽ
10-Q
000-26734
10.4
11/12/2010
10.35
Operating Agreement of Flash
Forward, Ltd. by and between Toshiba
Corporation and SanDisk Flash B.V.DŽ
10-Q
000-26734
10.5
11/12/2010
10.36
Form of Indemnification Agreement
entered into between the Registrant and
its directors and officers.
S-1
33-96298
3.2
8/29/1995
10.37
Form of Change of Control Executive
Benefits Agreement entered into by and
between the Registrant and its Named
Executive Officers other than the
Registrant’s CEO.†
8-K
000-26734
10.1
10/7/2010
10.38
Sanjay Mehrotra Offer Letter effective as
of January 1, 2011.†
10-Q
000-26734
10.9
11/12/2010
10.39
Change of Control Executive Benefits
Agreement, effective as of January 1, 2011,
by and between the Registrant and Sanjay
Mehrotra.†
10-Q
000-26734
10.10
11/12/2010
10.40
Change of Control Executive Benefits
Agreement, effective as of January 1, 2015,
by and between the Registrant and Sanjay
Mehrotra.†
10.41
Executive Severance Agreement, effective
as of January 1, 2011, by and between the
Registrant and Sanjay Mehrotra.†
Exhibit
Number
Filing Date
Provided
Herewith
x
10-Q
E-4
000-26734
10.11
11/12/2010
Exhibit Title
Form
Incorporated by Reference
File No.
Exhibit No.
10.42
Joint Venture Restructure Agreement,
dated as of January 29, 2009, by and
among the Registrant, SanDisk (Ireland)
Limited, SanDisk (Cayman) Limited,
Toshiba Corporation, Flash Partners
Limited, and Flash Alliance Limited.DŽ
10-Q
000-26734
10.1
5/7/2009
10.43
Pliant Technology, Inc. 2007 Stock Plan.†
S-8
333-174633
4.1
6/1/2011
10.44
Form of the Registrant’s Clawback Policy
Acknowledgement.†
8-K
000-26734
10.1
9/9/2011
10.45
FlashSoft Corporation Amended and
Restated 2011 Equity Plan.†
S-8
333-179644
4.3
2/23/2012
10.46
SMART Storage Systems (Global
Holdings), Inc. 2011 Share Incentive Plan†
S-8
333-191804
4.3
10/18/2013
10.47
Consultant Services Agreement, dated
October 10, 2013, between the Registrant
and Dr. Chenming Hu.
10-K
000-26734
10.5
2/21/2014
10.48
Consultant Services Agreement, dated
January 13, 2014, between the Registrant
and Dr. Chenming Hu.
10-Q
000-26734
10.1
5/1/2014
10.49
Consultant Services Agreement, dated
May 7, 2014, between the Registrant and
Dr. Chenming Hu.
10-Q
000-26734
10.1
7/31/2014
10.50
Fusion-io, Inc. 2008 Stock Incentive Plan
and related documents.†
S-8
333-197581
4.3
7/23/2014
10.51
Fusion-io, Inc. 2010 Executive Stock
Incentive Plan and related documents.†
S-8
333-197581
4.4
7/23/2014
10.52
Fusion-io, Inc. 2011 Equity Incentive Plan
and related documents.†
S-8
333-197581
4.5
7/23/2014
10.53
Form of Fusion-io, Inc. Non-Plan Stock
Option Agreement.†
S-8
333-197581
4.6
7/23/2014
10.54
IO Turbine, Inc. 2009 Equity Incentive
Plan and related documents.†
S-8
333-197581
4.7
7/23/2014
10.55
NexGen Storage, Inc. 2010 Equity
Incentive Plan and related documents.†
S-8
333-197581
4.8
7/23/2014
12.1
Computation of ratio of earnings to fixed
charges.
x
21.1
Subsidiaries of the Registrant.
x
23.1
Consent of Independent Registered Public
Accounting Firm.
x
24.1
Power of Attorney (included on the
Signatures page of this Annual Report on
Form 10-K).
x
Exhibit
Number
Provided
Herewith
Annual Report
E-5
Filing Date
Exhibit
Number
Exhibit Title
Form
Incorporated by Reference
File No.
Exhibit No.
Filing Date
Provided
Herewith
31.1
Certification of Chief Executive Officer
Pursuant to Section 302 of the SarbanesOxley Act of 2002.
x
31.2
Certification of Chief Financial Officer
Pursuant to Section 302 of the SarbanesOxley Act of 2002.
x
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.*
x
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.*
x
101.INS
XBRL Instance Document.
x
101.SCH
XBRL Taxonomy Extension Schema
Document.
x
101.CAL
XBRL Taxonomy Extension Calculation
Linkbase Document.
x
101.DEF
XBRL Taxonomy Extension Definition
Linkbase Document.
x
101.LAB
XBRL Taxonomy Extension Label
Linkbase Document.
x
101.PRE
XBRL Taxonomy Extension Presentation
Linkbase Document.
x
#
Schedules have been omitted pursuant to Item 601(b)(2) of Regulation S-K. The Registrant hereby undertakes to
furnish supplementally copies of any omitted schedules upon request by the Securities and Exchange
Commission.
†
Indicates management contract or compensatory plan or arrangement.
DŽ
Pursuant to a request for confidential treatment, certain portions of this exhibit have been redacted from the
publicly filed document and have been furnished separately to the Securities and Exchange Commission as
required by Rule 24b-2 under the Securities Exchange Act of 1934, as amended.
*
Furnished herewith.
E-6
NAMED EXECUTIVE
OFFICERS
BOARD OF
DIRECTORS
CORPORATE
OFFICES
Sanjay Mehrotra
President and
Irwin Federman
Steven J. Gomo
Eddy W. Hartenstein
Dr. Chenming Hu
Catherine P. Lego
Michael E. Marks
Sanjay Mehrotra
D. Scott Mercer
SanDisk Corporation
951 SanDisk Drive
Milpitas, CA 95035
Phone: +1-408-801-1000
Judy Bruner
Executive Vice President,
Administration and
Sumit Sadana
Executive Vice President,
Chief Strategy Officer and
General Manager, Enterprise Solutions
Mark Brazeal
Senior Vice President,
IP Licensing
Shuki Nir
Senior Vice President,
Corporate Marketing, and
General Manager, Retail
STOCK LISTING
NASDAQ Exchange Symbol:
SNDK
INDEPENDENT AUDITOR
Ernst & Young LLP
TRANSFER AGENT
Shareholder Correspondence:
Computershare
P.O. Box 30170
College Station, TX 77842-3170
Within USA, US territories &
Canada: +1-800-962-4284
Outside USA, US territories &
Canada: +1-781-575-3120
Overnight Correspondence:
Computershare
211 Quality Circle, Suite 210
College Station, TX 77845
Website:
www.computershare.com/investor
Online Inquiries:
https://www-us.computershare.com/investor/Contact
STOCKHOLDER INQUIRIES
Requests for information may be
sent to SanDisk Investor Relations
INVESTOR RELATIONS
Phone: +1-408-801-1000
Email: [email protected]
Additional information is
available on our website:
www.SanDisk.com