SanDisk Announces Fourth Quarter and Full Year 2011 Financial Results

CONFERENCE CALL

SanDisk’s fourth quarter of fiscal 2011 conference call is scheduled for 2:00 P.M., Pacific Time, Wednesday, January 25, 2012. The conference call will be webcast and can be accessed live, and throughout the quarter, at SanDisk’s website at http://www.sandisk.com/IR. To participate in the call via telephone, the dial-in number is 719-457-1036 and the dial-in password is 5300014. A copy of this press release will be furnished to the Securities and Exchange Commission on a current report on Form 8-K and will be posted to our website prior to the conference call.

FORWARD LOOKING STATEMENTS

This news release contains certain forward-looking statements, including statements about our business prospects and our expectations regarding our business, demand trends and expected growth, including in the Enterprise and Client Computing markets, that are based on our current expectations and are subject to numerous risks and uncertainties that may cause these forward-looking statements to be inaccurate and may significantly harm our business, financial condition and results of operations. Risks that may cause these forward-looking statements to be inaccurate include among others:

  • competitive pricing pressures, resulting in lower average selling prices and lower or negative product gross margins;
  • unpredictable or changing demand for our products, particularly for certain form factors, such as embedded flash memory, or capacities, or the mix of X2 and X3 technologies;
  • excess captive memory output or capacity which could result in write-downs for excess inventory, lower of cost or market charges, fixed costs associated with under-utilized capacity, or other consequences;
  • increased memory component and other costs as a result of currency exchange rate fluctuations to the U.S. dollar, particularly with respect to the Japanese yen;
  • lower than anticipated demand, including due to general economic weakness in our markets;
  • expansion of industry supply, including low-grade supply useable in limited markets, creating excess supply, causing our average selling prices to decline faster than our costs;
  • insufficient supply from captive flash memory sources, inability to obtain non-captive flash memory supply of the right product mix and quality in the time frame necessary to meet demand, or inability to realize a positive margin on non-captive purchases; and
  • the other risks detailed from time-to-time under the caption “Risk Factors” and elsewhere in our Securities and Exchange Commission filings and reports, including, but not limited to, our Quarterly Report on Form 10-Q for the fiscal quarter ended October 2, 2011.

(1) GAAP represents U.S. Generally Accepted Accounting Principles.

(2) Non-GAAP represents GAAP excluding the impact of share-based compensation expense, amortization of acquisition-related intangible assets, non-cash economic interest expense associated with the convertible debts, non-cash change in fair value of the liability component of the repurchased portion of the convertible debt, and related tax adjustments.

(3) Free cash flow represents net cash provided by operating activities plus net cash used in investing activities excluding net purchases, sales and maturities of short and long-term marketable securities.

ABOUT SANDISK

SanDisk Corporation is a global leader in flash memory storage solutions, from research and development, product design and manufacturing to branding and distribution for OEM and retail channels. Since 1988, SanDisk’s innovations in flash memory and storage system technologies have provided customers with new and transformational digital experiences. SanDisk’s diverse product portfolio includes flash memory cards and embedded solutions used in smart phones, tablets, digital cameras, camcorders, digital media players and other consumer electronic devices, as well as USB flash drives and solid-state drives (SSD) for the computing market. SanDisk’s products are used by consumers and enterprise customers around the world.

SanDisk is a Silicon Valley-based S&P 500 and Fortune 500 company, with more than half its sales outside the United States. For more information, visit www.sandisk.com.

SanDisk and the SanDisk logo are trademarks of SanDisk Corporation, registered in the United States and other countries. Other brand names mentioned herein are for identification purposes only and may be the trademarks of their respective holder(s).

SanDisk Corporation
Preliminary Condensed Consolidated Statements of Operations
(in thousands, except per share amounts, unaudited)
       
 
Three months ended   Twelve months ended
January 1, 2012 January 2, 2011   January 1, 2012 January 2, 2011
Revenues:
Product $ 1,473,444 $ 1,240,827 $ 5,287,555 $ 4,462,930
License and royalty   103,476   86,576     374,590     363,877  
Total revenues 1,576,920 1,327,403 5,662,145 4,826,807
 
Cost of product revenues 901,993 747,985 3,183,257 2,552,188
Amortization of acquisition-related intangible assets   13,186   3,133     39,742     12,529  
Total cost of product revenues 915,179 751,118 3,222,999 2,564,717
         
Gross profit 661,741 576,285 2,439,146 2,262,090
 
Operating expenses:
Research and development 147,228 112,592 547,373 422,562
Sales and marketing 55,227 58,812 199,422 209,797
General and administrative 41,746 47,838 157,766 166,485
Amortization of acquisition-related intangible assets   1,877

-

    4,485     1,672  
Total operating expenses   246,078   219,242     909,046     800,516  
 
Operating income 415,663 357,043 1,530,100 1,461,574
 
Other income (expense)   2,871   (9,935 )   (53,346 )   (4,141 )
 
Income before income taxes 418,534 347,108 1,476,754 1,457,433
 
Provision for (benefit from) income taxes   137,311   (138,357 )   489,764     157,291  
Net income $ 281,223 $ 485,465   $ 986,990   $ 1,300,142  
 
Net income per share:
Basic $ 1.16 $ 2.06 $ 4.12 $ 5.59
Diluted $ 1.14 $ 2.01 $ 4.04 $ 5.44
 
Shares used in computing net income per share:
Basic 241,775 235,231 239,484 232,531
Diluted 246,543 241,034 244,553 238,901
SanDisk Corporation
Reconciliation of Preliminary GAAP to Non-GAAP Operating Results (1)
(in thousands, except per share data, unaudited)
       
Three months ended Twelve months ended
January 1, 2012 January 2, 2011 January 1, 2012 January 2, 2011
 
SUMMARY RECONCILIATION OF NET INCOME
GAAP NET INCOME $ 281,223 $ 485,465 $ 986,990 $ 1,300,142
Share-based compensation (a) 18,432 24,799 63,110 77,590
Amortization of acquisition-related intangible assets (b) 15,063 3,133 44,227 14,201
Convertible debt interest (c) (d) 21,316 22,786 111,354 68,898
Income tax adjustments (e)   (18,893 )   (229,555 )   (67,673 )   (360,508 )
NON-GAAP NET INCOME $ 317,141   $ 306,628   $ 1,138,008   $ 1,100,323  
 
 
GAAP COST OF PRODUCT REVENUES $ 915,179 $ 751,118 $ 3,222,999 $ 2,564,717
Share-based compensation (a) (1,358 ) (849 ) (4,674 ) (5,821 )
Amortization of acquisition-related intangible assets (b)   (13,186 )   (3,133 )   (39,742 )   (12,529 )
NON-GAAP COST OF PRODUCT REVENUES $ 900,635   $ 747,136   $ 3,178,583   $ 2,546,367  
 
GAAP GROSS PROFIT $ 661,741 $ 576,285 $ 2,439,146 $ 2,262,090
Share-based compensation (a) 1,358 849 4,674 5,821
Amortization of acquisition-related intangible assets (b)   13,186     3,133     39,742     12,529  
NON-GAAP GROSS PROFIT $ 676,285   $ 580,267   $ 2,483,562   $ 2,280,440  
 
GAAP RESEARCH AND DEVELOPMENT EXPENSES $ 147,228 $ 112,592 $ 547,373 $ 422,562
Share-based compensation (a)   (10,929 )   (6,317 )   (34,177 )   (26,292 )
NON-GAAP RESEARCH AND DEVELOPMENT EXPENSES $ 136,299   $ 106,275   $ 513,196   $ 396,270  
 
GAAP SALES AND MARKETING EXPENSES $ 55,227 $ 58,812 $ 199,422 $ 209,797
Share-based compensation (a)   (2,847 )   (2,634 )   (10,593 )   (10,934 )
NON-GAAP SALES AND MARKETING EXPENSES $ 52,380   $ 56,178   $ 188,829   $ 198,863  
 
GAAP GENERAL AND ADMINISTRATIVE EXPENSES $ 41,746 $ 47,838 $ 157,766 $ 166,485
Share-based compensation (a)   (3,298 )   (14,999 )   (13,666 )   (34,543 )
NON-GAAP GENERAL AND ADMINISTRATIVE EXPENSES $ 38,448   $ 32,839   $ 144,100   $ 131,942  
 
GAAP TOTAL OPERATING EXPENSES $ 246,078 $ 219,242 $ 909,046 $ 800,516
Share-based compensation (a) (17,074 ) (23,950 ) (58,436 ) (71,769 )
Amortization of acquisition-related intangible assets (b)   (1,877 )   -     (4,485 )   (1,672 )
NON-GAAP TOTAL OPERATING EXPENSES $ 227,127   $ 195,292   $ 846,125   $ 727,075  
 
GAAP OPERATING INCOME $ 415,663 $ 357,043 $ 1,530,100 $ 1,461,574
Cost of product revenues adjustments (a) (b) 14,544 3,982 44,416 18,350
Operating expense adjustments (a) (b)   18,951     23,950     62,921     73,441  
NON-GAAP OPERATING INCOME $ 449,158   $ 384,975   $ 1,637,437   $ 1,553,365  
 
GAAP OTHER INCOME (EXPENSE) $ 2,871 $ (9,935 ) $ (53,346 ) $ (4,141 )
Convertible debt interest (c) (d)   21,316     22,786     111,354     68,898  
NON-GAAP OTHER INCOME (EXPENSE) $ 24,187   $ 12,851   $ 58,008   $ 64,757  
 
GAAP NET INCOME $ 281,223 $ 485,465 $ 986,990 $ 1,300,142
Cost of product revenues adjustments (a) (b) 14,544 3,982 44,416 18,350
Operating expense adjustments (a) (b) 18,951 23,950 62,921 73,441
Convertible debt interest (c) (d) 21,316 22,786 111,354 68,898
Income tax adjustments (e)   (18,893 )   (229,555 )   (67,673 )   (360,508 )
NON-GAAP NET INCOME $ 317,141   $ 306,628   $ 1,138,008   $ 1,100,323  
 
Diluted net income per share:
GAAP $ 1.14 $ 2.01 $ 4.04 $ 5.44
Non-GAAP $ 1.29 $ 1.27 $ 4.65 $ 4.60
 
Shares used in computing diluted net income per share:
GAAP 246,543 241,034 244,553 238,901
Non-GAAP 246,595 241,059 244,568 239,042
SanDisk Corporation
Reconciliation of Preliminary GAAP to Non-GAAP Operating Results (1)
     
 
 
(1) To supplement our condensed consolidated financial statements presented in accordance with generally accepted accounting principles (GAAP), we use non-GAAP measures of operating results, net income and net income per share, which are adjusted from results based on GAAP to exclude certain expenses, gains and losses. These non-GAAP financial measures are provided to enhance the user's overall understanding of our current financial performance and our prospects for the future. Specifically, we believe the non-GAAP results provide useful information to both management and investors as these non-GAAP results exclude certain expenses, gains and losses that we believe are not indicative of our core operating results and because it is consistent with the financial models and estimates published by many analysts who follow the Company. For example, because the non-GAAP results exclude the expenses we recorded for share-based compensation, amortization of acquisition-related intangible assets related to acquisitions of Matrix Semiconductor, Inc. in January 2006, MusicGremlin, Inc. in June 2008 and Pliant Technology, Inc. in May 2011, non-cash economic interest expense associated with the convertible debt, non-cash change in fair value of the liability component of the repurchased portion of the convertible debt, and tax valuation allowances, we believe the inclusion of non-GAAP financial measures provide consistency in our financial reporting. These non-GAAP results are some of the primary indicators management uses for assessing our performance, allocating resources and planning and forecasting future periods. Further, management uses non-GAAP information that excludes certain non-cash charges, such as amortization of purchased intangible assets, share-based compensation, non-cash economic interest expense associated with our convertible debt, non-cash change in fair value of the liability component of the repurchased portion of the convertible debt, and tax valuation allowances, as these non-GAAP charges do not reflect the cash operating results of the business or the ongoing results. 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.
 
(a) Share-based compensation expense.
 
(b) Amortization of acquisition-related intangible assets, primarily core technology, developed technology, customer relationships and trademarks related to the acquisitions of Matrix Semiconductor, Inc. (January 2006), MusicGremlin, Inc. (June 2008) and Pliant Technology, Inc. (May 2011).
 
(c) Incremental interest expense relating to the non-cash economic interest expense associated with the Company's 1% Sr. Convertible Notes due 2013 and 1.5% Sr. Convertible Notes due 2017.
 
(d) Year-to-date fiscal 2011 convertible debt interest includes the non-cash change in fair value of the liability component of the repurchased portion of the 1% Sr. Convertible Notes due 2013.
 
(e) Income taxes associated with certain non-GAAP to GAAP adjustments and valuation allowances on deferred taxes.
SanDisk Corporation
Preliminary Condensed Consolidated Balance Sheets
(in thousands, unaudited)
   
 
January 1, 2012 January 2, 2011  
ASSETS
Current assets:
Cash and cash equivalents $ 1,167,496 $ 829,149
Short-term marketable securities 1,681,492 2,018,565
Accounts receivable from product revenues, net 521,763 367,784
Inventory 678,382 509,585
Deferred taxes 100,409 104,582
Other current assets   206,419     203,027  
Total current assets 4,355,961 4,032,692
 
Long-term marketable securities 2,766,263 2,494,972
Property and equipment, net 344,897 266,721
Notes receivable and investments in flash ventures with Toshiba 1,943,295 1,733,491
Deferred taxes 199,027 149,486
Goodwill 154,899

-

Intangible assets, net 287,691 37,404
Other non-current assets   122,615     61,944  
Total assets $ 10,174,648   $ 8,776,710  
 
LIABILITIES
Current liabilities:
Accounts payable trade $ 258,583 $ 173,259
Accounts payable to related parties 276,275 241,744
Other current accrued liabilities 337,517 284,709
Deferred income on shipments to distributors and retailers and deferred revenue   220,999     260,395  
Total current liabilities 1,093,374 960,107
 
Convertible long-term debt 1,604,911 1,711,032
Non-current liabilities   415,524     326,176  
Total liabilities   3,113,809     2,997,315  
 
EQUITY
Stockholders' equity:
Common stock 4,934,808 4,709,743
Retained earnings 1,796,849 812,653
Accumulated other comprehensive income   332,701     260,228  
Total stockholders' equity 7,064,358 5,782,624
Non-controlling interests   (3,519 )   (3,229 )
Total equity   7,060,839     5,779,395  
Total liabilities and equity $ 10,174,648   $ 8,776,710  
SanDisk Corporation
Preliminary Condensed Consolidated Statements of Cash Flows
(in thousands, unaudited)
       
 
Three months ended Twelve months ended
January 1, 2012 January 2, 2011 January 1, 2012 January 2, 2011
Cash flows from operating activities:
Net income $ 281,223 $ 485,465 $ 986,990 $ 1,300,142
Adjustments to reconcile net income to net cash provided by operating activities:
Deferred taxes 3,013 (76,478 ) (74,829 ) (172,327 )
Depreciation 30,025 30,743 114,984 132,818
Amortization 43,895 28,612 161,930 93,961
Provision for doubtful accounts 453 229 (1,476 ) (2,575 )
Share-based compensation expense 18,432 24,799 63,110 77,590
Excess tax benefit from share-based compensation (9,075 ) (9,666 ) (24,895 ) (29,626 )
Impairments, restructuring and other (24,320 ) (13,918 ) (49,438 ) (41,505 )
Other non-operating 22,889 15,346 86,660 41,054
Changes in operating assets and liabilities:
Accounts receivable from product revenues (57,569 ) (28,207 ) (146,726 ) (132,479 )
Inventory 6,264 17,340 (158,534 ) 84,314
Other assets (43,134 ) (129,278 ) (112,577 ) (127,629 )
Accounts payable trade 35,343 21,598 73,711 38,957
Accounts payable to related parties 17,454 77,837 34,531 59,653
Other liabilities   (115,341 )   (85,025 )   100,331     129,544  
Total adjustments   (71,671 )   (126,068 )   66,782     151,750  
 
Net cash provided by operating activities   209,552     359,397     1,053,772     1,451,892  
 
Cash flows from investing activities:
Purchases of short and long-term marketable securities (973,002 ) (1,571,485 ) (3,473,915 ) (5,803,438 )
Proceeds from sale of short and long-term marketable securities 572,876 1,135,291 2,849,232 2,771,840
Proceeds from maturities of short and long-term marketable securities 128,470 89,196 634,390 407,001
Acquisition of property and equipment (78,609 ) (48,414 ) (192,876 ) (108,142 )
Investment in Flash Ventures

-

-

(83,316 )

-

Distribution from FlashVision Ltd.

-

-

-

122
Notes receivable issuance to Flash Ventures

-

(59,880 ) (399,281 ) (59,880 )
Notes receivable proceeds from Flash Ventures 167,872

-

416,388 59,664
Proceeds from sale of assets

-

-

-

17,767
Purchased technology and other assets

-

2,455 (100,000 ) 473
Acquisition of Pliant Technology, Inc., net of cash acquired  

-

   

-

    (317,649 )  

-

 
Net cash used in investing activities   (182,393 )   (452,837 )   (667,027 )   (2,714,593 )
 
Cash flows from financing activities:
Proceeds from issuance of convertible senior notes, net of issuance costs

-

-

-

982,500
Proceeds from sale (purchase) of convertible bond hedge

-

-

1,494 (292,900 )
Proceeds from sale (purchase) of warrants

-

-

(1,158 ) 188,100
Repayment of debt financing

-

-

(211,441 ) (75,000 )
Proceeds from employee stock programs 61,349 44,872 143,140 152,843
Excess tax benefit from share-based compensation 9,075 9,666 24,895 29,626
Share repurchase program   (4,039 )  

-

    (4,039 )  

-

 
Net cash provided by (used in) financing activities   66,385     54,538     (47,109 )   985,169  
 
Effect of changes in foreign currency exchange rates on cash   (898 )   2,663     (1,289 )   6,317  
Net increase (decrease) in cash and cash equivalents 92,646 (36,239 ) 338,347 (271,215 )
Cash and cash equivalents at beginning of period   1,074,850     865,388     829,149     1,100,364  
Cash and cash equivalents at end of period $ 1,167,496   $ 829,149   $ 1,167,496   $ 829,149  

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