425

0001000180-16-000089.txt : 20160427 0001000180-16-000089.hdr.sgml : 20160427 20160427161349 ACCESSION NUMBER: 0001000180-16-000089 CONFORMED SUBMISSION TYPE: 425 PUBLIC DOCUMENT COUNT: 4 FILED AS OF DATE: 20160427 DATE AS OF CHANGE: 20160427 SUBJECT COMPANY: COMPANY DATA: COMPANY CONFORMED NAME: SANDISK CORP CENTRAL INDEX KEY: 0001000180 STANDARD INDUSTRIAL CLASSIFICATION: COMPUTER STORAGE DEVICES [3572] IRS NUMBER: 770191793 STATE OF INCORPORATION: DE FISCAL YEAR END: 1229 FILING VALUES: FORM TYPE: 425 SEC ACT: 1934 Act SEC FILE NUMBER: 000-26734 FILM NUMBER: 161595509 BUSINESS ADDRESS: STREET 1: 951 SANDISK DRIVE CITY: MILPITAS STATE: CA ZIP: 95035 BUSINESS PHONE: 408-801-1000 MAIL ADDRESS: STREET 1: 951 SANDISK DRIVE CITY: MILPITAS STATE: CA ZIP: 95035 FILED BY: COMPANY DATA: COMPANY CONFORMED NAME: SANDISK CORP CENTRAL INDEX KEY: 0001000180 STANDARD INDUSTRIAL CLASSIFICATION: COMPUTER STORAGE DEVICES [3572] IRS NUMBER: 770191793 STATE OF INCORPORATION: DE FISCAL YEAR END: 1229 FILING VALUES: FORM TYPE: 425 BUSINESS ADDRESS: STREET 1: 951 SANDISK DRIVE CITY: MILPITAS STATE: CA ZIP: 95035 BUSINESS PHONE: 408-801-1000 MAIL ADDRESS: STREET 1: 951 SANDISK DRIVE CITY: MILPITAS STATE: CA ZIP: 95035 425 1 form8-kxq116earningsreleas.htm FORM 8-K Q1'16 EARNINGS RELEASE 425

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 8-K

CURRENT REPORT

Pursuant to Section 13 OR 15(d) of The Securities Exchange Act of 1934

Date of Report (Date of earliest event reported): April 27, 2016

SANDISK CORPORATION

(Exact name of registrant as specified in its charter)



Delaware	000-26734	77-0191793
(State or other jurisdiction of incorporation)	(Commission File No.)	(I.R.S. Employer Identification No.)

951 SanDisk Drive, Milpitas, California 95035

(Address of principal executive offices) (Zip Code)

Registrant’s telephone number, including area code: (408) 801-1000

N/A

(Former name or former address, if changed since last report)

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions (see General Instruction A.2. below):


x	Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)


¨	Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)


¨	Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))


¨	Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))

TABLE OF CONTENTS

Item 2.02 Results of Operations and Financial Condition

Item 9.01 Financial Statements and Exhibits

SIGNATURE

EXHIBIT INDEX

EXHIBIT 99.1

EXHIBIT 99.2

Item 2.02 Results of Operations and Financial Condition

On April 27, 2016, SanDisk Corporation (the “Registrant” or “SanDisk”) issued a press release to report its financial results for its first quarter ended April 3, 2016.

The press release and accompanying Business and Financial Commentary are attached hereto as Exhibit 99.1 and Exhibit 99.2, respectively, and are incorporated herein in their entirety by reference. In addition to the preliminary condensed consolidated financial statements presented in accordance with generally accepted accounting principles (GAAP), the attached documents contain 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 the Registrant’s current financial performance and its prospects for the future. Specifically, the Registrant believes the non-GAAP results provide useful information to both management and investors as these non-GAAP results exclude certain expenses, gains and losses that it believes are not indicative of its core operating results and because they are consistent with the financial models and estimates published by many analysts who follow the Registrant. For example, because the non-GAAP results exclude the expenses the Registrant recorded for share-based compensation, amortization of acquisition-related intangible assets related to acquisitions of FlashSoft Corporation in February 2012, Schooner Information Technology, Inc. in June 2012, SMART Storage Systems in August 2013 and Fusion-io, Inc. in July 2014, inventory step-up expense, impairment of acquisition-related in-process research and development intangible assets, Western Digital Corporation (“Western Digital”) acquisition-related expenses, gains and losses related to the shortened duration or liquidation prior to their effective maturity of marketable securities due to the pending acquisition of the Registrant by Western Digital, non-cash economic interest expense associated with the Registrant’s convertible senior notes, non-cash change in fair value of the liability component of the convertible senior notes due to the conversion of a portion of the 1.5% Convertible Senior Notes due 2017, gains and losses related to the modifications and terminations of warrants and related tax adjustments, the Registrant believes the inclusion of non-GAAP financial measures provides consistency in its financial reporting. In addition, the Registrant’s non-GAAP diluted shares are adjusted for the impact of expensing share-based compensation and include the impact of the Registrant’s call options which, when exercised, will offset the issuance of dilutive shares from the Registrant’s convertible senior notes, while the Registrant’s GAAP diluted shares exclude the anti-dilutive impact of these call options. These non-GAAP results are some of the primary indicators management uses for assessing the Registrant’s performance, allocating resources, and planning and forecasting future periods. Further, management uses non-GAAP information that excludes certain charges, such as share-based compensation, amortization of acquisition-related intangible assets, inventory step-up expense, impairment of acquisition-related in-process research and development intangible assets, Western Digital acquisition-related expenses, gains and losses related to the shortened duration or liquidation prior to their effective maturity of marketable securities due to the pending acquisition of the Registrant by Western Digital, non-cash economic interest expense associated with the convertible senior notes, non-cash change in fair value of the liability component of the convertible senior notes due to the conversion of a portion of the 1.5% Convertible Senior Notes due 2017, gains and losses related to modifications and terminations of warrants and related tax adjustments, 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.

The information contained herein and in the accompanying exhibits shall not be incorporated by reference into any filing of the Registrant, whether made before or after the date hereof, regardless of any general incorporation language in such filing, unless expressly incorporated by specific reference in such filing.

Forward Looking Statements

All statements included or incorporated by reference in this document, other than statements or characterizations of historical fact, are forward-looking statements within the meaning of the federal securities laws, including Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These forward-looking statements are based on SanDisk's current expectations, estimates and projections about the proposed merger, its business and industry, management’s beliefs, and certain assumptions made by SanDisk and Western Digital, all of which are subject to change. Forward-looking statements can often be identified by words such as “anticipates,” “expects,” “intends,” “plans,” “predicts,” “believes,” “seeks,” “estimates,” “may,” “will,” “should,” “would,” “could,” “potential,” “continue,” “ongoing,” similar expressions, and variations or negatives of these words. Examples of such forward-looking statements include, but are not limited to, references to the anticipated benefits of the proposed merger and the expected date of closing of the merger with Western Digital’s wholly-owned subsidiary, Schrader Acquisition Corporation. These forward-looking statements are not guarantees of future results and are subject to risks, uncertainties and assumptions that could cause actual results to differ materially and adversely from those expressed in any forward-looking statement.

Important risk factors that may cause such a difference in connection with the proposed merger include, but are not limited to, the following factors: (1) the failure to satisfy conditions to completion of the merger, including the receipt of all regulatory approvals related to the merger; (2) uncertainties as to the timing of the consummation of the merger and the ability of each party to consummate the merger; (3) risks that the proposed merger disrupts the current plans and operations of Western Digital or SanDisk; (4) the ability of Western Digital and SanDisk to retain and hire key personnel; (5) competitive responses to the proposed merger; (6) unexpected costs, charges or expenses resulting from the merger; (7) the outcome of any legal proceedings that could be instituted against Western Digital, SanDisk or their respective directors related to the merger agreement; (8) potential adverse reactions or changes to business relationships resulting from the announcement or completion of the merger; (9) the inability to obtain, or delays in obtaining, cost savings and synergies from the merger; (10) delays, challenges and expenses associated with integrating the combined companies’ existing businesses and the indebtedness planned to be incurred in connection with the merger; and (11) legislative, regulatory and economic developments. These risks, as well as other risks associated with the proposed merger, are more fully discussed in the joint proxy statement/prospectus that is included in the Registration Statement on Form S-4 filed with the Securities and Exchange Commission (“SEC”) in connection with the proposed merger. The forward-looking statements in this document speak only as of the date of the particular statement. Neither SanDisk nor Western Digital undertakes any obligation to revise or update publicly any forward-looking statement to reflect future events or circumstances.

In addition, actual results are subject to other risks and uncertainties that relate more broadly to SanDisk’s overall business, including those more fully described in SanDisk’s filings with the SEC including its annual report on Form 10-K for the fiscal year ended January 3, 2016, and its quarterly reports filed on Form 10-Q for fiscal year 2015, and Western Digital’s overall business and financial condition, including those more fully described in Western Digital’s filings with the SEC including its annual report on Form 10-K for the fiscal year ended July 3, 2015 and its quarterly reports filed on Form 10-Q for the current fiscal year.

Additional Information And Where To Find It

This communication does not constitute an offer to sell or the solicitation of an offer to buy any securities or a solicitation of any vote or approval. Western Digital filed with the SEC a Registration Statement on Form S-4 which includes a joint proxy statement/prospectus of SanDisk and Western Digital. The Registration Statement on Form S-4 was declared effective on February 5, 2016. Each of SanDisk and Western Digital are providing the joint proxy statement/prospectus to their respective stockholders. SanDisk and Western Digital also plan to file other documents with the SEC regarding the proposed merger. This document is not a substitute for the joint proxy statement/prospectus or registration statement or any other document which SanDisk or Western Digital may file with the SEC in connection with the proposed merger. INVESTORS AND SECURITY HOLDERS OF SANDISK AND WESTERN DIGITAL ARE URGED TO READ THE JOINT PROXY STATEMENT/PROSPECTUS AND ANY OTHER RELEVANT DOCUMENTS THAT WILL BE FILED WITH THE SEC CAREFULLY AND IN THEIR ENTIRETY WHEN THEY BECOME AVAILABLE BECAUSE THEY WILL CONTAIN IMPORTANT INFORMATION ABOUT THE PROPOSED MERGER. You may obtain copies of all documents filed with the SEC regarding this merger, free of charge, at the SEC’s website (www.sec.gov). In addition, copies of the documents filed with the SEC by SanDisk will be available free of charge on SanDisk’s website at http://www.sandisk.com. Copies of the documents filed with the SEC by Western Digital will be available free of charge on Western Digital’s website at http://www.westerndigital.com.

Item 9.01 Financial Statements and Exhibits

(d) Exhibits



Exhibit Number	Description of Document
99.1	Press release of SanDisk Corporation dated April 27, 2016 to report its financial results for its first quarter ended April 3, 2016
99.2	SanDisk Corporation Business and Financial Commentary on First Fiscal Quarter 2016 Results

SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.



		SANDISK CORPORATION

Date:	April 27, 2016	By:	/s/ Judy Bruner
			Judy Bruner
			Executive Vice President, Administration and Chief Financial Officer (Principal Financial Officer)

EXHIBIT INDEX



Exhibit Number	Description of Document
99.1	Press release of SanDisk Corporation dated April 27, 2016 to report its financial results for its first quarter ended April 3, 2016
99.2	SanDisk Corporation Business and Financial Commentary on First Fiscal Quarter 2016 Results

EX-99.1 2 exhibit991-q116earningsrel.htm EXHIBIT 99.1 PRESS RELEASE AND FINANCIALS Exhibit

EXHIBIT 99.1

NEWS RELEASE

SanDisk Corporation

951 SanDisk Drive

Milpitas, CA 95035-7932

Phone: 408-801-1000

SanDisk Announces First Quarter 2016 Results

MILPITAS, Calif., April 27, 2016 - SanDisk Corporation (NASDAQ: SNDK), a global leader in flash storage solutions, today announced results for the first quarter ended April 3, 2016. First quarter revenue of $1.37 billion increased 3 percent on a year-over-year basis and decreased 11 percent sequentially.

On a GAAP⁽¹⁾ basis, first quarter net income was $78 million, or $0.37 per share, compared to net income of $39 million, or $0.17 per share, in the first quarter of 2015 and net income of $135 million, or $0.65 per share, in the fourth quarter of 2015.

On a non-GAAP⁽²⁾⁽³⁾ basis, first quarter net income was $167 million, or $0.82 per share, compared to net income of $134 million, or $0.62 per share, in the first quarter of 2015 and net income of $257 million, or $1.26 per share, in the fourth quarter of 2015. For a reconciliation of non-GAAP to GAAP results, see accompanying financial tables and footnotes.

“Our first quarter results mark a solid start to 2016,” said Sanjay Mehrotra, president and chief executive officer of SanDisk. “We delivered year-over-year growth in revenue, earnings and cash flow, and are pleased with the strength of our Q1 revenue in enterprise solutions, client SSDs and removable products. We are excited about the opportunities ahead as the combination of SanDisk and Western Digital will provide our customers with a tremendous breadth of solutions and deep expertise in storage across a range of applications.”

KEY FINANCIAL RESULTS



	GAAP ⁽¹⁾						Non-GAAP ⁽²⁾
(in millions, except percentages and per share amounts)	Q1'16		Q1’15		Q4’15		Q1'16		Q1’15		Q4’15
Revenue	$1,366		$1,332		$1,543		$1,366		$1,332		$1,543
Gross profit	$543		$545		$625		$577		$574		$658
percent of revenue	40	%	41	%	41	%	42	%	43	%	43	%
Operating income	$137		$57		$218		$234		$198		$333
percent of revenue	10	%	4	%	14	%	17	%	15	%	22	%
EPS ⁽³⁾	$0.37		$0.17		$0.65		$0.82		$0.62		$1.26

OTHER FINANCIAL INFORMATION



(in millions)	Q1'16			Q1’15			Q4’15
Cash, cash equivalents, short and long-term marketable securities	$	4,633		$	4,394		$	4,123
Less aggregate principal amount of convertible senior notes outstanding	(2,497		)	(2,497		)	(2,497		)
Net cash ⁽⁴⁾	$	2,137		$	1,898		$	1,627
Net cash provided by operating activities	$	355		$	309		$	434
Less acquisition of property and equipment, net	(59		)	(98		)	(131		)
Change in investment and notes receivable activity with Flash Ventures	189			(11		)	(27		)
Free cash flow ⁽⁵⁾	$	484		$	200		$	276

NEWS HIGHLIGHTS

•

SanDisk and IBM announced a collaboration to bring out a unique class of next-generation, software-defined, all-flash storage solutions for the data center utilizing SanDisk’s InfiniFlash™ System and software defined storage featuring IBM Spectrum Scale™ filesystem from IBM. The joint solution addresses the escalating datacenter challenges of scale, performance, agility and break-through economics.


•	SanDisk expanded its automotive solutions with an automotive grade SD™ card featuring a new suite of smart features including enhanced power failure protection, and a memory health status monitor. SanDisk also extended these new smart features to its SanDisk Industrial and SanDisk Industrial XT SD cards.


•	SanDisk introduced new retail removable products, including introducing the world’s fastest microSD™ card, featuring transfer speeds of up to 275MB/s*, and the SanDisk Ultra^® USB Type-C™ Flash Drive designed specifically for next-generation devices with USB Type-C connectors.

In light of the pending acquisition of SanDisk by Western Digital Corporation (“Western Digital”), SanDisk will not hold a conference call to discuss its financial results. Concurrent with this press release, SanDisk has published business and financial commentary along with earnings presentation materials on its website at www.sandisk.com/ir.

ABOUT SANDISK

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, providing trusted and innovative products that have transformed the electronics industry. Today, SanDisk’s quality, state-of-the-art solutions are at the heart of many of the world's largest data centers, and embedded in advanced smartphones, tablets and PCs. SanDisk’s consumer products are available at hundreds of thousands of retail stores worldwide. For more information, visit www.sandisk.com.

© 2016 SanDisk Corporation. All rights reserved. SanDisk and SanDisk Ultra are trademarks of SanDisk Corporation, registered in the United States and other countries. InfiniFlash is a trademark of SanDisk Corporation. SD is a trademark of SD-3C, LLC. USB Type-C is a trademark of USB Implementers Forum. Other brand names mentioned herein are for identification purposes only and may be the trademarks of their respective holder(s).


*	Up to 275 MB/s read; up to 100 MB/s write. Based on internal testing; performance may be lower depending upon host device, interface, usage conditions and other factors. 1 MB = 1,000,000 bytes.


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

⁽²⁾

Non-GAAP represents GAAP excluding the impact of share-based compensation, inventory step-up expense, amortization and impairment of acquisition-related intangible assets, Western Digital acquisition-related expenses, gains and losses related to the shortened duration and expected liquidation prior to their effective maturity of marketable securities due to the pending acquisition of SanDisk by Western Digital, gains and losses due to the modifications and terminations of warrants, non-cash economic interest expense associated with the convertible senior notes, non-cash change in fair value of the liability component of the convertible senior notes due to the conversion of a portion of the 1.5% Convertible Senior Notes due 2017 and related tax adjustments.


⁽³⁾	Non-GAAP diluted shares are adjusted for the impact of expensing share-based compensation and include the impact of offsetting shares from the call options related to the convertible senior notes.


⁽⁴⁾	Net cash is defined as cash, cash equivalents, short and long-term marketable securities, minus the aggregate principal amount of the outstanding convertible senior notes.


⁽⁵⁾	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 receivables activity with Flash Ventures. Calculation of free cash flow may not agree to the sum of the components presented due to rounding.

This news release contains certain forward-looking statements, including those regarding our pending acquisition by Western Digital, industry environment, our business prospects, our intended financial, operational and strategic plans and priorities, our future financial performance and market share, our customer base, customer qualifications and product mix, technology trends and adoption, strategic relationships, and new products and technologies, that are based on our current expectations and involve numerous risks and uncertainties that may cause these forward-looking statements to be inaccurate.

Risks that may cause these forward-looking statements to be inaccurate include, among others:


•	the announcement and pendency of our agreement to be acquired by Western Digital or the failure of our pending acquisition by Western Digital to be completed on a timely basis, or at all, or any materially burdensome conditions that may be imposed, or inability to achieve the expected benefits from the acquisition;


•	failure to effectively or efficiently execute on our financial, operational or strategic plans or priorities, which may change, may not have the effects that we anticipate or otherwise be successful on the timeline that we expect or at all or may have unanticipated consequences;


•	changes in industry supply and demand environment, and production and pricing levels being different than what we anticipate;


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


•	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 develop, or unexpected difficulties or delays in developing or ramping with acceptable yields, new technologies, such as 3D NAND technology, 3D ReRAM, or the failure of new technologies to effectively compete with those of our competitors;


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


•	potential delays in product development or lack of customer acceptance and qualification of our solutions, including on new technologies, particularly our 3D NAND technology, enterprise solutions, client SSDs and embedded flash storage solutions;


•	slower than anticipated growth, lower than anticipated demand or weakness in demand in one or more of our product categories, such as enterprise, embedded products or SSDs, or adverse changes in our product or customer mix;


•	failure to successfully sell enterprise solutions on the timelines or in the quantities we expect or transition our enterprise customers to our leading edge solutions;


•	failure or delays in making new products or technologies available in the manner and capacities we anticipate, whether due to technology or supply chain difficulties or other factors;


•	our 15-nanometer process technology, our X3 NAND memory architecture, our 3D NAND technology or our solutions utilizing these new technologies may not be available when we expect, in the capacities that we expect or perform as expected;


•	failure to continue to expand or manage the risks associated with our ventures, strategic partnerships and commercial relationships, such as with Toshiba, including the risk of early termination;


•	inability to achieve the expected benefits from acquisitions and strategic relationships in a timely manner, or at all;


•	industry and technology trends not occurring in the timeline we anticipate or at all;


•	capital investments requiring additional cash or the unavailability of lease financing on terms acceptable to us;


•	the failure of all-flash storage systems to achieve the various functionality, performance and cost benefits currently anticipated, potential delays in product development or lack of customer acceptance of all-flash storage systems, and failure to manage and continue the collaboration with IBM; 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 Annual Report on Form 10-K for the year ended January 3, 2016.

All statements made in this news release are made only as of the date of this release. We undertake no obligation to update the information in this release in the event facts or circumstances change after the date of this release.

All references to annual and quarterly periods refer to our fiscal year and fiscal quarters.

Forward-Looking Statements

All statements included or incorporated by reference in this document, other than statements or characterizations of historical fact, are forward-looking statements within the meaning of the federal securities laws, including Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These forward-looking statements are based on SanDisk Corporation’s (“SanDisk”) current expectations, estimates and projections about the proposed merger, its business and industry, management’s beliefs, and certain assumptions made by SanDisk and Western Digital, all of which are subject to change. Forward-looking statements can often be identified by words such as “anticipates,” “expects,” “intends,” “plans,” “predicts,” “believes,” “seeks,” “estimates,” “may,” “will,” “should,” “would,” “could,” “potential,” “continue,” “ongoing,” similar expressions, and variations or negatives of these words. Examples of such forward-looking statements include, but are not limited to, references to the anticipated benefits of the proposed merger and the expected date of closing of the merger with Western Digital’s wholly-owned subsidiary, Schrader Acquisition Corporation. These forward-looking statements are not guarantees of future results and are subject to risks, uncertainties and assumptions that could cause actual results to differ materially and adversely from those expressed in any forward-looking statement.

Additional Information and Where to Find It

Source: SanDisk Corporation

Investor Contacts:

Jay Iyer

408-801-2067, jay.iyer@sandisk.com

Brendan Lahiff

408-801-1732, brendan.lahiff@sandisk.com

Media Contact:

Laura Bakken

408-801-7653, laura.bakken@sandisk.com

# # # # #

SanDisk Corporation

Preliminary Condensed Consolidated Statements of Operations

(in thousands, except per share amounts, unaudited)



	Three months ended
	April 3, 2016			March 29, 2015
Revenue	$	1,365,736		$	1,332,241

Cost of revenue	794,135			762,483
Amortization of acquisition-related intangible assets	28,276			24,756
Total cost of revenue	822,411			787,239
Gross profit	543,325			545,002
Operating expenses:
Research and development	244,187			222,726
Sales and marketing	96,030			101,820
General and administrative	40,590			48,047
Amortization of acquisition-related intangible assets	6,397			13,681
Impairment of acquisition-related intangible assets	—			61,000
Restructuring and other	47			40,541
Western Digital acquisition-related expenses	18,963			—
Total operating expenses	406,214			487,815
Operating income	137,111			57,187
Other income (expense), net	(15,350		)	(23,570		)
Income before income taxes	121,761			33,617
Provision for (benefit from) income taxes	43,408			(5,408		)
Net income	$	78,353		$	39,025
Net income per share:
Basic	$	0.39		$	0.18
Diluted	$	0.37		$	0.17
Shares used in computing net income per share:
Basic	201,928			211,428
Diluted	209,923			224,049

SanDisk Corporation

Reconciliation of Preliminary GAAP to Non-GAAP Operating Results ⁽¹⁾

(in thousands, except per share data, unaudited)



	Three months ended
	April 3, 2016			March 29, 2015
SUMMARY RECONCILIATION OF NET INCOME:

GAAP NET INCOME	$	78,353		$	39,025
Share-based compensation ^(a)	43,699			41,410
Amortization of acquisition-related intangible assets ^(b)	34,673			38,437
Impairment of acquisition-related intangible assets ^(c)	—			61,000
Western Digital acquisition-related expenses ^(d)	18,987			—
Convertible debt interest ^(e)	23,333			22,134
Income tax adjustments ^(f)	(31,753		)	(68,319		)
NON-GAAP NET INCOME	$	167,292		$	133,687

GAAP COST OF REVENUE	$	822,411		$	787,239
Share-based compensation^(a)	(5,376		)	(4,062		)
Amortization of acquisition-related intangible assets ^(b)	(28,276		)	(24,756		)
NON-GAAP COST OF REVENUE	$	788,759		$	758,421

GAAP GROSS PROFIT	$	543,325		$	545,002
Share-based compensation ^(a)	5,376			4,062
Amortization of acquisition-related intangible assets ^(b)	28,276			24,756
NON-GAAP GROSS PROFIT	$	576,977		$	573,820

GAAP RESEARCH AND DEVELOPMENT EXPENSES	$	244,187		$	222,726
Share-based compensation ^(a)	(21,960		)	(21,043		)
NON-GAAP RESEARCH AND DEVELOPMENT EXPENSES	$	222,227		$	201,683

GAAP SALES AND MARKETING EXPENSES	$	96,030		$	101,820
Share-based compensation ^(a)	(9,355		)	(9,535		)
NON-GAAP SALES AND MARKETING EXPENSES	$	86,675		$	92,285

GAAP GENERAL AND ADMINISTRATIVE EXPENSES	$	40,590		$	48,047
Share-based compensation ^(a)	(7,008		)	(6,770		)
NON-GAAP GENERAL AND ADMINISTRATIVE EXPENSES	$	33,582		$	41,277

GAAP TOTAL OPERATING EXPENSES	$	406,214		$	487,815
Share-based compensation ^(a)	(38,323		)	(37,348		)
Amortization of acquisition-related intangible assets ^(b)	(6,397		)	(13,681		)
Impairment of acquisition-related intangible assets ^(c)	—			(61,000		)
Western Digital acquisition-related expenses ^(d)	(18,963		)	—
NON-GAAP TOTAL OPERATING EXPENSES	$	342,531		$	375,786

GAAP OPERATING INCOME	$	137,111		$	57,187
Cost of revenue adjustments ^{(a) (b)}	33,652			28,818
Operating expense adjustments ^{(a) (b) (c) (d)}	63,683			112,029
NON-GAAP OPERATING INCOME	$	234,446		$	198,034

GAAP OTHER INCOME (EXPENSE), NET	$	(15,350	)	$	(23,570	)
Western Digital acquisition-related expenses ^(d)	24			—
Convertible debt interest ^(e)	23,333			22,134
NON-GAAP OTHER INCOME (EXPENSE), NET	$	8,007		$	(1,436	)

GAAP NET INCOME	$	78,353		$	39,025
Cost of revenue adjustments ^{(a) (b)}	33,652			28,818
Operating expense adjustments ^{(a) (b) (c) (d)}	63,683			112,029
Other income (expense) adjustments ^{(d) (e)}	23,357			22,134
Income tax adjustments ^(f)	(31,753		)	(68,319		)
NON-GAAP NET INCOME	$	167,292		$	133,687

Diluted net income per share:
GAAP	$	0.37		$	0.17
Non-GAAP	$	0.82		$	0.62

Shares used in computing diluted net income per share:
GAAP	209,923			224,049
Non-GAAP ^(g)	204,001			216,842

SanDisk Corporation

Reconciliation of Preliminary GAAP to Non-GAAP Operating Results ⁽¹⁾

(in thousands, unaudited)



	Three months ended
	April 3, 2016		March 29, 2015
SUMMARY RECONCILIATION OF DILUTED SHARES:

GAAP	209,923		224,049
Adjustments for share-based compensation	(64	)	220
Offsetting shares from call options	(5,858	)	(7,427	)
Non-GAAP ^(g)	204,001		216,842

⁽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 they are consistent with the financial models and estimates published by many analysts who follow us. 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 FlashSoft Corporation in February 2012, Schooner Information Technology, Inc. in June 2012, SMART Storage Systems in August 2013 and Fusion-io, Inc. in July 2014, inventory step-up expense, impairment of acquisition-related in-process research and development intangible assets, Western Digital Corporation acquisition-related expenses, gains and losses related to the shortened duration or liquidation prior to their effective maturity of marketable securities due to the pending acquisition of SanDisk by Western Digital, non-cash economic interest expense associated with the convertible senior notes, non-cash change in fair value of the liability component of the convertible senior notes due to the conversion of a portion of the 1.5% Convertible Senior Notes due 2017, gains and losses related to modifications and terminations of warrants and related tax adjustments, we believe the inclusion of non-GAAP financial measures provides consistency in our financial reporting. In addition, our non-GAAP diluted shares are adjusted for the impact of expensing share-based compensation and include the impact of the call options which, when exercised, will offset the issuance of dilutive shares from the convertible senior notes, while our GAAP diluted shares exclude the anti-dilutive impact of these call options. 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 charges, such as share-based compensation, amortization of acquisition-related intangible assets, inventory step-up expense, impairment of acquisition-related in-process research and development intangible assets, Western Digital acquisition-related expenses, gains and losses related to the shortened duration or liquidation prior to their effective maturity of marketable securities due to the pending acquisition of SanDisk by Western Digital, non-cash economic interest expense associated with the convertible senior notes, non-cash change in fair value of the liability component of the convertible senior notes due to the conversion of a portion of the 1.5% Convertible Senior Notes due 2017, gains and losses related to modifications and terminations of warrants and related tax adjustments, 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 developed technology, customer relationships, and trademarks and trade names related to the acquisitions of FlashSoft Corporation, Schooner Information Technology, Inc., SMART Storage Systems and Fusion-io, Inc.


^(c)	Impairment of acquisition-related in-process research and development intangible assets related to the acquisition of Fusion-io, Inc.


^(d)	Incremental expense related to the pending acquisition of SanDisk by Western Digital, primarily for transaction, legal, employee-related and other costs, gains and losses related to the shortened duration and expected liquidation prior to their effective maturity date of marketable securities, and gains and losses related to modifications and terminations of warrants.


^(e)	Incremental interest expense related to the non-cash economic interest expense associated with the convertible senior notes and the non-cash change in fair value of the liability component of the convertible senior notes due to the conversion of a portion of the 1.5% Convertible Senior Notes due 2017.


^(f)	Income taxes associated with certain non-GAAP to GAAP adjustments and the effects of one-time income tax adjustments recorded in a specific quarter for GAAP purposes are reflected on a forecast basis in the non-GAAP tax rate but not in the forecasted GAAP tax rate.


^(g)	Non-GAAP diluted shares are adjusted for the impact of expensing share-based compensation and include the impact of offsetting shares from the call options related to the convertible senior notes.

SanDisk Corporation

Preliminary Condensed Consolidated Balance Sheets

(in thousands, unaudited)



	April 3, 2016			January 3, 2016
ASSETS
Current assets:
Cash and cash equivalents	$	3,271,927		$	1,478,948
Short-term marketable securities	1,249,367			2,527,245
Accounts receivable, net	497,183			618,191
Inventory	881,056			809,395
Other current assets	253,847			226,007
Total current assets	6,153,380			5,659,786
Long-term marketable securities	112,195			117,142
Property and equipment, net	790,402			817,130
Notes receivable and investments in Flash Ventures	899,419			1,009,989
Deferred taxes	310,724			325,033
Goodwill	831,328			831,328
Intangible assets, net	266,644			296,726
Other non-current assets	147,764			173,627
Total assets	$	9,511,856		$	9,230,761

LIABILITIES, CONVERTIBLE SHORT-TERM DEBT CONVERSION OBLIGATION AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable trade	$	292,797		$	323,280
Accounts payable to related parties	194,580			177,510
Convertible short-term debt⁽¹⁾	2,175,578			913,178
Terminated warrant liability	417,934			—
Other current accrued liabilities	405,922			353,940
Deferred income on shipments to distributors and retailers and deferred revenue	205,798			235,572
Total current liabilities	3,692,609			2,003,480
Convertible long-term debt ⁽¹⁾	—			1,237,776
Non-current liabilities	179,419			170,093
Total liabilities	3,872,028			3,411,349

Convertible short-term debt conversion obligation ⁽¹⁾	309,753			80,488

Stockholders' equity:
Common stock	4,612,183			5,203,926
Retained earnings	812,225			733,937
Accumulated other comprehensive loss	(94,333		)	(198,939		)
Total stockholders' equity	5,330,075			5,738,924
Total liabilities, convertible short-term debt conversion obligation and stockholders’ equity	$	9,511,856		$	9,230,761


⁽¹⁾	As of April 3, 2016, the convertible debt is convertible due to the pending acquisition of SanDisk by Western Digital Corporation and as a result is classified as short term. The convertible short-term debt conversion obligation represents the difference between the carrying values prior to debt issuance costs and the principal amounts of the convertible debt due in cash upon conversion.

SanDisk Corporation

Preliminary Condensed Consolidated Statements of Cash Flows

(in thousands, unaudited)



	Three months ended
	April 3, 2016			March 29, 2015
Cash flows from operating activities:
Net income	$	78,353		$	39,025
Adjustments to reconcile net income to net cash provided by operating activities:
Deferred taxes	14,553			(965		)
Depreciation	68,356			69,081
Amortization	70,991			83,374
Provision for doubtful accounts	(443		)	330
Share-based compensation expense	43,699			41,410
Excess tax benefit from share-based plans	(5,743		)	(8,865		)
Impairment and other	641			63,709
Other non-operating	(23,733		)	(4,187		)
Changes in operating assets and liabilities:
Accounts receivable, net	121,451			252,899
Inventory	(71,799		)	(13,945		)
Other assets	(5,294		)	(94,673		)
Accounts payable trade	(16,209		)	(26,090		)
Accounts payable to related parties	17,070			11,819
Other liabilities	63,250			(104,057		)
Total adjustments	276,790			269,840
Net cash provided by operating activities	355,143			308,865
Cash flows from investing activities:
Purchases of short and long-term marketable securities	(299,154		)	(692,656		)
Proceeds from sales of short and long-term marketable securities	1,361,719			1,045,097
Proceeds from maturities of short and long-term marketable securities	207,896			99,881
Acquisition of property and equipment, net	(59,458		)	(98,287		)
Notes receivable issuances to Flash Ventures	(45,723		)	(100,499		)
Notes receivable proceeds from Flash Ventures	234,524			89,693
Purchased technology and other assets	16,628			(1,500		)
Net cash provided by investing activities	1,416,432			341,729
Cash flows from financing activities:
Repayment of debt financing	—			(68		)
Proceeds from employee stock programs	39,344			30,844
Excess tax benefit from share-based plans	5,743			8,865
Dividends paid	(2,574		)	(64,503		)
Repurchase of common stock	—			(750,140		)
Taxes paid related to net share settlement of equity awards	(30,525		)	(33,759		)
Net cash provided by (used in) financing activities	11,988			(808,761		)
Effect of changes in foreign currency exchange rates on cash	9,416			(896		)
Net increase (decrease) in cash and cash equivalents	1,792,979			(159,063		)
Cash and cash equivalents at beginning of period	1,478,948			809,003
Cash and cash equivalents at end of period	$	3,271,927		$	649,940

SanDisk Corporation

Preliminary Quarterly Metrics

(unaudited)

Revenue Mix by Category ⁽¹⁾

% of revenue

Percentages may not add to 100% due to rounding



	Q1'14		Q2'14		Q3'14		Q4'14		Q1'15		Q2'15		Q3'15		Q4'15		Q1'16
Removable⁽²⁾	40	%	40	%	38	%	33	%	38	%	44	%	37	%	41	%	39	%
Embedded ⁽³⁾	20	%	19	%	24	%	26	%	25	%	20	%	27	%	22	%	16	%
Enterprise Solutions ⁽⁴⁾	6	%	8	%	10	%	15	%	14	%	14	%	11	%	13	%	16	%
Client SSD Solutions ⁽⁵⁾	22	%	21	%	17	%	16	%	13	%	10	%	10	%	12	%	13	%
Other⁽⁶⁾	11	%	12	%	11	%	10	%	10	%	11	%	15	%	12	%	16	%
Total Revenue	100	%	100	%	100	%	100	%	100	%	100	%	100	%	100	%	100	%


⁽¹⁾	Revenue is estimated based on analysis of the information the company collects in its sales reporting processes.


⁽²⁾	Removable includes products such as cards, USB flash drives and audio/video players.


⁽³⁾	Embedded includes products that attach to a host system board.


⁽⁴⁾	Enterprise Solutions includes SSDs, system solutions and software used in data center applications.


⁽⁵⁾	Client SSD Solutions includes SSDs used in client devices and associated software.


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

Revenue Mix by Channel ⁽¹⁾

% of revenue



	Q1'14		Q2'14		Q3'14		Q4'14		Q1'15		Q2'15		Q3'15		Q4'15		Q1'16
Commercial ⁽²⁾	65	%	67	%	68	%	69	%	65	%	61	%	67	%	61	%	64	%
Retail	35	%	33	%	32	%	31	%	35	%	39	%	33	%	39	%	36	%
Total Revenue	100	%	100	%	100	%	100	%	100	%	100	%	100	%	100	%	100	%


⁽¹⁾	Revenue is estimated based on analysis of the information the company collects in its sales reporting processes.


⁽²⁾	Commercial includes revenue from OEMs, system integrators, value-added resellers, direct sales, and license and royalties.

SanDisk Corporation

Preliminary Quarterly and Annual Metrics

(unaudited)



	Q1'14		Q2'14		Q3'14		Q4'14		Q1'15		Q2'15		Q3'15		Q4'15		Q1'16
Q/Q Change in Gigabytes Sold	-10	%	+31	%	+9	%	+4	%	-15	%	-1	%	+49	%	+23	%	-6	%
Y/Y Change in Gigabytes Sold	+20	%	+51	%	+43	%	+32	%	+24	%	-6	%	+30	%	+53	%	+71	%
Q/Q Change in ASP/Gigabyte	-3	%	-16	%	-3	%	-4	%	-10	%	-6	%	-22	%	-10	%	-8	%
Y/Y Change in ASP/Gigabyte	-7	%	-26	%	-26	%	-24	%	-29	%	-21	%	-37	%	-41	%	-40	%
Q/Q Change in Cost/Gigabyte ⁽¹⁾	-3	%	-12	%	-3	%	+3	%	-6	%	-4	%	-24	%	-12	%	-6	%
Y/Y Change in Cost/Gigabyte ⁽¹⁾	-23	%	-28	%	-23	%	-15	%	-17	%	-10	%	-29	%	-40	%	-39	%

Average Gigabyte/Unit Capacity	13.9		14.1		16.5		22.3		20.8		19.2		23.5		23.9		25.6

As of end of period:
Factory Headcount ⁽²⁾⁽³⁾	1,366		2,874		3,276		3,284		3,149		3,149		3,322		3,456		3,536
Non-Factory Headcount ⁽⁴⁾	4,490		4,664		5,461		5,412		5,490		5,371		5,292		5,334		5,333
Total Headcount	5,856		7,538		8,737		8,696		8,639		8,520		8,614		8,790		8,869


⁽¹⁾	Cost per gigabyte and cost reduction are non-GAAP and are computed from non-GAAP cost of revenue.


⁽²⁾	Reflects SanDisk China and Malaysia factory employees, excluding temporary and contract workers.


⁽³⁾	During 2014, 1,505 employees were converted from contractor to employee status in SanDisk’s assembly and test facility in China.


⁽⁴⁾	Reflects SanDisk non-factory employees, excluding temporary and contract workers.

EX-99.2 3 exhibit992-q116businessand.htm EXHIBIT 99.2 BUSINESS AND FINANCIAL COMMENTARY Exhibit

EXHIBIT 99.2

SanDisk Corporation

951 SanDisk Drive

Milpitas, CA 95035

Phone: 408-801-1000

Fax: 408-801-8657

Business and Financial Commentary on First Fiscal Quarter 2016 Results¹

April 27, 2016

Please note that any non-GAAP financial measures discussed in the business and financial commentary, as defined by the SEC in Regulation G, will be reconciled to the most directly comparable GAAP financial measure. The reconciliation of our financial results is available in the press release issued this afternoon. A presentation containing supplemental information and non-GAAP to GAAP reconciliation tables has been posted on our investor relations website at http://investor.sandisk.com. Any applicable forward looking commentary is exclusive of one-time transactions and does not reflect the effect of any acquisitions, divestitures or other transactions that may be announced after April 27, 2016.

The business and financial commentary contains forward-looking statements that refer to expectations, projections, beliefs or other future events. Please refer to today’s press release, the presentation that has been posted on our investor relations website and our SEC filings, including the most recent 10-K, for more information on the “Risk Factors” that could cause actual results to differ materially from those expressed in the forward-looking statements. SanDisk assumes no obligation to update these forward-looking statements, which speak as of April 27, 2016.


^1.	The business and financial commentary has been posted on the SanDisk investor relations website at http://investor.sandisk.com. In light of the pending acquisition of SanDisk Corporation (“SanDisk”) by Western Digital Corporation (“Western Digital”), SanDisk is not holding a conference call to discuss its first fiscal quarter 2016 financial results.

Overview

SanDisk delivered a strong first quarter, with year-over-year growth in revenue of 3%, non-GAAP EPS of 32% and cash flow from operations of 15%. Q1 results were driven by solid execution and better than anticipated demand for our enterprise solutions, client SSDs and removable products. Despite moving from a 14-week to a 13-week quarter, the Q1 sequential decline was shallower than in the last several years. We continue to expect the acquisition by Western Digital to close in the second calendar quarter of 2016, pending regulatory approval from China.

Commentary on Business and Revenue

Our Q1 revenue increased year-over-year by 5% in the retail channel and 1% in the commercial channel. Sequentially, Q1 revenue was down 18% in retail and down 7% in commercial. Our year-over-year performance in the retail channel is particularly noteworthy, with the 5% growth driven by share gains in client SSDs and new innovative solutions such as the SanDisk iXpand^™ and SanDisk Ultra^®Dual USB Drive products. The SanDisk brand is a competitive advantage in driving demand for new retail products.

Enterprise solutions revenue grew 9% sequentially and 15% year-over-year, driven by enterprise SATA SSDs and PCIe solutions and growth at hyperscale customers. Growth of our enterprise SATA revenue was driven by SanDisk's 15nm, 2-terabyte solution at hyperscale customers. Revenue from hyperscale customers grew both sequentially and year-over-year. While demand patterns from these customers can be lumpy, we expect them to drive significant levels of enterprise SSD usage over the long term. During the first quarter we have been pleased with the growing contribution and strengthening customer engagements related to our InfiniFlash^™ all-flash storage platform. The InfiniFlash system is providing game-changing performance, flexibility and economic benefits across a wide range of workloads to a growing set of global customers. We have sampled our second-generation 12 Gb/s enterprise SAS SSD based on our 15nm technology and remain on track to launch this new SAS offering as well as our NVMe PCIe SSD later in 2016. We believe we are on track for another record year of enterprise revenue in 2016.

Client SSD solutions revenue declined 6% sequentially, reflecting seasonality, and grew 6% year-over-year despite the fact that Q1 last year included revenue from a client SSD program at a large customer that ended in Q1 2015. Excluding client SSD revenue from that large customer, client SSD revenue in Q116 was up 55% year-over-year, with strong growth in both commercial and retail channels. During the quarter, we finished qualification of our 15nm X3-based client SSDs at a major OEM, with production ramp expected in Q2. We also expect to complete additional OEM qualifications for our 15nm X3 client SSDs in the second quarter.

Embedded revenue was down 33%, both sequentially and year-over-year, with declines in custom embedded, iNAND^™ and iNAND MCP solutions, caused primarily by weak demand from our smartphone customers and our focus on X3 eMMC embedded solutions, which are in the early stages of market adoption. During the first quarter, SanDisk achieved additional design wins for the X3-based iNAND 7232 including the recently announced and highly acclaimed HTC 10. We expect to continue to ramp production of the iNAND 7232 throughout the year as these designs come to market.

Removable products revenue declined 15% sequentially due to Q1 retail seasonality, however we believe we gained global retail market share from Q4 to Q1 in both cards and USBs. Geographically, our retail sales grew year-over-year in most key regions. Removable products revenue grew 6% year-over-year benefiting from new retail solutions such as the iXpand and Dual USB Drive products and growing usage of our cards in new commercial applications that span the home to industrial sectors. In the mobile market, key handset customers are showing renewed commitment to offering a microSD card slot in their phone models and Android M is offering increased functionality in using the removable storage as part of the main memory, both trends in support of continued demand for mobile cards.

We are increasingly penetrating new markets for NAND, such as automotive, connected home, and industrial, with both removable and embedded solutions. The development of connected and autonomous cars is driving customer requirements for NAND solutions; new home automation and entertainment applications continue to grow; and there is a proliferation of industrial applications related to surveillance, healthcare, automation, digital signage, agriculture, drones and more.

Revenue in the ‘other’ category increased 12% sequentially and 54% year-over-year, with the growth driven primarily by sales of components and wafers.

Our total revenue for Q1 reflected year-over-year growth in bits sold of 71% and a year-over-year decline in ASP per gigabyte of 40%. We did not have a 10% customer for the quarter.

Commentary on P&L Results

Non-GAAP gross margin for Q1 was 42%, compared to 43% in both the prior and the year ago quarter. Sequentially, our blended ASP per gigabyte declined 8% and cost per gigabyte declined 6%. Our sequential cost decline was driven by an increased mix of product sales using the 15nm node, reduced wafer costs, and lower non-memory costs stemming from product design initiatives, increased average capacity of the products sold and product mix. We believe the mix of 15nm technology in our sales has now been maximized. The yen to U.S. dollar exchange rate and usage of non-captive memory both had a small negative impact on Q1 sequential cost improvement. The yen rate in our Q1 cost of sales was 121, compared to 123 in Q415, and non-captive memory was used for 5% of Q1 bits sold, compared to 4% in Q415.

Non-GAAP operating expenses in Q1 were $343 million, up $17 million sequentially, with the increase related primarily to higher employee-related costs in R&D.

Q1 non-GAAP operating margin was 17%, up from 15% in Q1 last year. Q1 non-GAAP other income of $8 million included realized gains on two private company investments from our SanDisk Ventures portfolio. The non-GAAP tax rate for Q1 was 31.0% compared to 32.0% in the year ago quarter, and diluted shares were down 6% year-over-year driven by 2015 share repurchases. The resulting Q1 non-GAAP EPS was $0.82, up 32% from Q115.

Last quarter, we indicated that we expected GAAP other income and expense in Q1 to include charges related to the modification and termination of warrants which were under negotiation with bank counterparties related to the Western Digital acquisition. Those negotiations were completed and the Q1 GAAP other income & expense includes gains and losses resulting from the accounting for these transactions, however the net impact to the income statement was immaterial.

Commentary on Cash Flows

Q1 cash flow from operations was $355 million, with strong contribution from a reduction in accounts receivable which reflected a healthy linearity of Q1 sales. SanDisk spent $59 million on non-fab capital investments and received a net $189 million of cash from Flash Ventures as a repayment of notes receivable. The resulting free cash flow for Q1 was $484 million.

SanDisk’s share of the Flash Ventures Q1 capital investments was $390 million, with the majority of the investment relating to the planned 5% wafer capacity increase, and to a lesser extent, equipment for the technology transition to 3D NAND. Flash Ventures financed these investments with joint venture working capital as well as new equipment leases, of which SanDisk’s share was approximately $223 million. SanDisk’s off-balance sheet joint venture equipment lease guarantees totaled $984 million at the end of Q1.

Commentary on Balance Sheet

SanDisk’s convertible notes are now all classified as short-term, reflecting March 1, 2016 notices sent to the holders in anticipation of the closing of the acquisition by Western Digital that resulted in the 2020 convertible notes being convertible as of March 8, 2016, in addition to the 2017 convertible notes which were already convertible.

The balance sheet also includes a $418 million current liability related to the negotiated termination of warrants associated with our 2017 convertible notes. Because these warrants have been terminated, they require payment at the earlier of acquisition close or August 2017 and therefore the payment amount has been reclassified from equity to liability. The warrants associated with our 2020 convertible notes were amended, and would be terminated and require payment only in conjunction with closing of the acquisition. As a result they continue to be classified in equity.

At the end of Q1, SanDisk’s “Available Cash” as defined in the Western Digital/SanDisk merger agreement, was $4.481 billion, reflecting total cash, cash equivalents and marketable securities of $4.634 billion less $153 million of cash that would be taxed if repatriated to the United States. The relevant Available Cash targets in the merger agreement are $4.049 billion for a closing before June 30, 2016 and $4.139 billion for a closing on or after June 30, 2016. We expect our Available Cash to continue to exceed these targeted levels at closing of the acquisition.

Commentary on Technology & Operations

In March 2016, Toshiba announced plans to construct a new wafer fab in Yokkaichi, which will be used to provide additional cleanroom space for expanded 3D NAND production. SanDisk intends to extend the JV partnership with Toshiba to the new wafer fab, providing the cleanroom space needed for continued conversion of 2D NAND capacity to 3D NAND. We are now receiving initial 3D NAND production output from the new Fab 2 facility, and we have also begun OEM qualification work on 3D NAND. We are on track for the development of the next generation 3D NAND, which we expect to be in volume production in the first half of 2017.

In the first quarter, we began the planned 5% wafer capacity expansion comprised of both 2D and 3D NAND, in Yokkaichi, with completion expected in the second quarter of 2016. Our back-end supply chain operations executed well in Q1, responding to demand upsides and continuing to be ranked best in class in on-time delivery and support by nearly all of our top OEM and enterprise customers. Our captive assembly and test facilities in Shanghai and Penang along with our network of contract manufacturing partners continue to provide us with the scale and agility to meet our customer requirements.

Management’s Forward Looking Commentary

We expect the acquisition by Western Digital to close in the second calendar quarter. In the quarter of close, Western Digital’s results will include SanDisk results only from the acquisition date forward. Additionally, purchase accounting will impact many aspects of the SanDisk financial results, both GAAP and non-GAAP, including by substantially eliminating deferred revenue, which for SanDisk includes all shipments that have not yet been sold through by our retail customers and some of our commercial customers. Furthermore, differences in the accounting policies between SanDisk and Western Digital will impact many aspects of the future financial results of the SanDisk business. Due to these upcoming changes, we are providing guidance on selected factors that may impact future results, but we are suspending specific forward-looking forecasts of revenue, gross margin and expenses.

Selected Factors Impacting Future Results:

Foreign exchange rates: The yen has strengthened considerably against the U.S. dollar in recent months. Using the yen to U.S. dollar exchange rate of 121 in our cost of sales as a starting point, combined with current gross margin levels and product mix, we estimate that a movement of 10% in the yen to dollar exchange rate would have an impact of approximately 300 basis points on our gross margin to the extent no hedges have been placed. We have locked in a portion of the yen purchases required for our 2016 wafer purchases, however, purchase accounting in the Western Digital acquisition may eliminate the P&L impact of any hedges existing at the close of the acquisition.

Industry & SanDisk Supply growth: Our estimate of 2016 NAND industry bit supply growth remains unchanged in the low 30% range. We expect SanDisk’s 2016 bit supply growth to be somewhat lower than the industry average, likely close to 30%. We continue to estimate that 3D NAND will represent 15% to 20% of the industry’s total NAND wafer capacity exiting 2016. We estimate SanDisk’s 3D NAND wafer capacity to be approximately 15% of our total wafer capacity exiting 2016.

Capital investments: Estimated 2016 fab and non-fab capital investments remain between $1.7 billion and $1.8 billion. Based on expected joint venture working capital and continued use of joint venture equipment lease financing, we continue to forecast the total 2016 cash usage for this capital investment to be approximately 25% to 30% of the gross investment. In Q1 we had a net cash inflow related to our joint venture and non-fab investments, and over the remainder of the year we expect a net cash outflow.

Conclusion

We are pleased with the performance of our business and the year-over-year growth in our first quarter revenue, earnings and cash flow. The SanDisk team is focused on continuing to drive our positive momentum, and we look forward to closing the pending combination with Western Digital.

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

Forward-Looking Statements

The business and financial commentary contains certain forward-looking statements, including those regarding our expectations for: our financial, operational and strategic plans and priorities; growth of enterprise SSD usage and enterprise revenues; gaining qualifications and customer adoption of our products; product and product category share and revenue growth and market position; industry trends such as growth of automotive, connected home and industrial; timing of production ramps; extending the JV partnership with Toshiba to a new wafer fab; 3D NAND development, development of next generation of 3D NAND, capacity expansion, production ramp and output timing; impact of movements in yen to dollar exchange rate; industry bit supply and SanDisk bit supply in 2016; expected date of closing of the acquisition by Western Digital Corporation (“Western Digital”); level of Available Cash and ability to meet relevant targets in the merger agreement with Western Digital; capital investment plans and cash usage; and continued use of joint venture equipment lease financing, that are based on our current expectations and involve numerous risks and uncertainties that may cause these forward-looking statements to be inaccurate.

Risks that may cause these forward-looking statements to be inaccurate include, among others: (a) the announcement and pendency of our merger agreement with Western Digital or the failure of the pending merger to be completed on a timely basis, or at all, or any materially burdensome conditions that may be imposed, or inability to achieve the expected benefits from the acquisition; (b) inability to complete the merger due to failure to satisfy conditions to completion of the merger, including the receipt of all regulatory approvals related to the merger; (c) uncertainties as to the timing of the consummation of the merger and the ability of each party to consummate the merger; (d) failure to effectively or efficiently execute on our financial, operational or strategic plans or priorities, which may change, may not have the effects that we anticipate or otherwise be successful on the timeline that we expect or at all or may have unanticipated consequences; (e) changes in industry supply and demand environment, and production and pricing levels being different than what we anticipate; (f) competitive pricing pressures or product mix changes, resulting in lower average selling prices, lower revenues and reduced margins; (g) 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; (h) inability to develop, or unexpected difficulties or delays in developing or ramping with acceptable yields, new technologies, such as 3D NAND technology, 3D ReRam, or the failure of new technologies to effectively compete with those of our competitors; (i) inability to reduce product costs to keep pace with reductions in average selling prices, resulting in lower or negative product gross margin; (j) potential delays in product development or lack of customer acceptance and qualification of our solutions, including on new technologies, particularly our 3D NAND technology, enterprise solutions, client SSDs and embedded flash storage solutions; (k) slower than anticipated growth, lower than anticipated demand or weakness in demand in one or more of our product categories, such as enterprise, embedded products or SSDs, or adverse changes in our product or customer mix; (l) failure to successfully sell enterprise solutions on the timelines or in the quantities we expect or transition our enterprise customers to our leading edge solutions; (m) failure or delays in making new products or technologies available in the manner and capacities we anticipate, whether due to technology or supply chain difficulties or other factors; (n) our 15 nanometer process technology, our X3 NAND memory architecture, our 3D NAND technology or our solutions utilizing these new technologies may not be available when we expect, in the capacities we expect or perform as expected; (o) failure to continue to expand or manage the risks associated with our ventures, strategic partnerships and commercial relationships, such as with Toshiba, including the risk of early termination; (p) inability to achieve the expected benefits from acquisitions and strategic relationships in a timely manner, or at all; (q) industry and technology trends not occurring in the timeline we anticipate or at all; (r) capital investments requiring additional cash or the unavailability of lease financing on terms acceptable to us, and (s) 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 Annual Report on Form 10-K for the year ended January 3, 2016, and the joint proxy statement/prospectus included in the Registration Statement on Form S-4 filed by Western Digital and declared effective on February 5, 2016.

All statements included or incorporated by reference in this document, other than statements or characterizations of historical fact, are forward-looking statements within the meaning of the federal securities laws, including Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These forward-looking statements are based on SanDisk Corporation’s (“SanDisk”) current expectations, estimates and projections about the proposed merger, its business and industry, management’s beliefs, and certain assumptions made by SanDisk and Western Digital, all of which are subject to change. Forward-looking statements can often be identified by words such as “anticipates,” “expects,” “intends,” “plans,” “predicts,” “believes,” “seeks,” “estimates,” “may,” “will,” “should,” “would,” “could,” “potential,” “continue,” “ongoing,” similar expressions, and variations or negatives of these words. Examples of such forward-looking statements include, but are not limited to, references to the anticipated benefits of the proposed merger and the expected date of closing of the merger with Western Digital’s wholly-owned subsidiary, Schrader Acquisition Corporation. These forward-looking statements are not guarantees of future results and are subject to risks, uncertainties and assumptions that could cause actual results to differ materially and adversely from those expressed in any forward-looking statement.

Additional Information and Where to Find It

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