SanDisk Announces Third Quarter Results

At the end of the third quarter of fiscal 2013, SanDisk’s cash and short and long-term marketable investments totaled $4.3 billion. Cash flow from operations in the third quarter of fiscal 2013 totaled $382 million.

OTHER KEY DEVELOPMENTS

SanDisk established its first ever dividend program on July 31, 2013 with the first quarterly payment made in the third fiscal quarter.
SanDisk announced today its fourth-quarter dividend of $0.225 per share of common stock, payable on November 25, 2013 to shareholders of record as of the close of business on November 4, 2013.
SanDisk spent a total of $1.07 billion on stock repurchases in the third fiscal quarter, including a previously announced $1.0 billion accelerated stock repurchase program.
SanDisk completed the acquisition of SMART Storage Systems.

CONFERENCE CALL

SanDisk’s third quarter of fiscal 2013 conference call is scheduled for 2:00 P.M., Pacific Time, Wednesday, October 16, 2013. The conference call will be webcast and can be accessed live, and throughout the quarter, at SanDisk’s website at www.sandisk.com/IR. To participate in the call via telephone, the dial-in number is 785-830-7989 and the dial-in password is 9223060. 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.

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 smart phones, tablets and PCs. SanDisk’s consumer products are available at hundreds of thousands of retail stores worldwide. For more information, visit www.sandisk.com.

This press release contains certain forward-looking statements, including statements about our business

prospects, our strategy to shift to higher value solutions across our product portfolio, our anticipated momentum for client and enterprise SSD products, the expected benefits of our acquisition of SMART Storage Systems and our growth in the enterprise SSD space, that are based on our current expectations and subject to numerous risks and uncertainties that may cause these forward-looking statements to be inaccurate and significantly harm our business, financial condition and results of operations. We undertake no obligation to update the information contained in this press release. 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 revenues;
inability to continue to penetrate the client and enterprise SSD markets, the failure of existing markets for flash memory to grow, or failure to maintain or improve our position in any of these markets;
potential delays in product development or lack of customer acceptance of our solutions, particularly OEM products such as our embedded flash storage solutions, and client and enterprise SSD solutions;
delays in the successful integration of SMART Storage Systems and our inability to achieve the expected benefits from the acquisition in a timely manner, or at all;
inability to enhance current products or develop new products on a timely basis or in advance of our competitors; 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 second fiscal quarter ended June 30, 2013.

(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, impairment of acquisition-related intangible assets, non-cash economic interest expense associated with our convertible debt and related tax adjustments.
(3)	Non-GAAP diluted shares include the impact of the outstanding call option which is expected to provide an offset to dilutive shares from the Company’s 1.5% Sr. Convertible Notes due 2017. Non-GAAP diluted EPS for Q2’13 has been revised from the previously reported $1.21 to $1.22 to include the expected impact of the outstanding call option, which reduces the non-GAAP diluted shares by 1.6 million shares.


SanDisk Corporation Preliminary Condensed Consolidated Statements of Operations (in thousands, except per share amounts, unaudited)

	Three months ended						Nine months ended
	September 29, 2013			September 30, 2012			September 29, 2013			September 30, 2012

Revenues	$	1,625,153		$	1,273,190		$	4,442,145		$	3,511,006

Cost of revenues		812,904			880,469			2,401,901			2,398,086
Amortization of acquisition-related intangible assets		10,256			9,800			29,916			32,712
Total cost of revenues		823,160			890,269			2,431,817			2,430,798

Gross profit		801,993			382,921			2,010,328			1,080,208

Operating expenses:
Research and development		183,821			150,336			526,987			443,690
Sales and marketing		72,237			57,938			194,965			159,234
General and administrative		49,171			40,205			141,152			110,488
Amortization of acquisition-related intangible assets		5,088			2,369			9,199			6,676
Impairment of acquisition-related intangible assets		83,228			-			83,228			-
Total operating expenses		393,545			250,848			955,531			720,088

Operating income		408,448			132,073			1,054,797			360,120

Other income (expense), net		(4,892	)		(13,695	)		(33,890	)		(56,208	)
Income before income taxes		403,556			118,378			1,020,907			303,912

Provision for income taxes		126,697			41,871			316,030			100,051
Net income	$	276,859		$	76,507		$	704,877		$	203,861

Net income per share:
Basic	$	1.20		$	0.32		$	2.96		$	0.84
Diluted	$	1.18		$	0.31		$	2.91		$	0.83

Shares used in computing net income per share:
Basic		230,253			241,694			238,097			242,284
Diluted		235,032			244,221			242,270			245,502

SanDisk Corporation Reconciliation of Preliminary GAAP to Non-GAAP Operating Results ⁽¹⁾ (in thousands, except per share data, unaudited)

	Three months ended						Nine months ended
	September 29, 2013			September 30, 2012			September 29, 2013			September 30, 2012

SUMMARY RECONCILIATION OF NET INCOME
GAAP NET INCOME	$	276,859		$	76,507		$	704,877		$	203,861
Share-based compensation (a)		25,930			19,950			72,325			59,283
Amortization of acquisition-related intangible assets (b)		15,344			12,169			39,115			39,388
Impairment of acquisition-related intangible assets (c)		83,228			-			83,228			-
Convertible debt interest (d)		9,859			22,685			50,202			66,927
Income tax adjustments (e)		(40,473	)		(13,547	)		(73,131	)		(44,266	)
NON-GAAP NET INCOME	$	370,747		$	117,764		$	876,616		$	325,193


GAAP COST OF REVENUES	$	823,160		$	890,269		$	2,431,817		$	2,430,798
Share-based compensation (a)		(2,716	)		(1,929	)		(6,880	)		(5,389	)
Amortization of acquisition-related intangible assets (b)		(10,256	)		(9,800	)		(29,916	)		(32,712	)
NON-GAAP COST OF REVENUES	$	810,188		$	878,540		$	2,395,021		$	2,392,697

GAAP GROSS PROFIT	$	801,993		$	382,921		$	2,010,328		$	1,080,208
Share-based compensation (a)		2,716			1,929			6,880			5,389
Amortization of acquisition-related intangible assets (b)		10,256			9,800			29,916			32,712
NON-GAAP GROSS PROFIT	$	814,965		$	394,650		$	2,047,124		$	1,118,309

GAAP RESEARCH AND DEVELOPMENT EXPENSES	$	183,821		$	150,336		$	526,987		$	443,690
Share-based compensation (a)		(13,142	)		(10,379	)		(37,486	)		(31,029	)
NON-GAAP RESEARCH AND DEVELOPMENT EXPENSES	$	170,679		$	139,957		$	489,501		$	412,661

GAAP SALES AND MARKETING EXPENSES	$	72,237		$	57,938		$	194,965		$	159,234
Share-based compensation (a)		(5,241	)		(3,794	)		(13,813	)		(11,057	)
NON-GAAP SALES AND MARKETING EXPENSES	$	66,996		$	54,144		$	181,152		$	148,177

GAAP GENERAL AND ADMINISTRATIVE EXPENSES	$	49,171		$	40,205		$	141,152		$	110,488
Share-based compensation (a)		(4,831	)		(3,848	)		(14,146	)		(11,808	)
NON-GAAP GENERAL AND ADMINISTRATIVE EXPENSES	$	44,340		$	36,357		$	127,006		$	98,680

GAAP TOTAL OPERATING EXPENSES	$	393,545		$	250,848		$	955,531		$	720,088
Share-based compensation (a)		(23,214	)		(18,021	)		(65,445	)		(53,894	)
Amortization of acquisition-related intangible assets (b)		(5,088	)		(2,369	)		(9,199	)		(6,676	)
Impairment of acquisition-related intangible assets (c)		(83,228	)		-			(83,228	)		-
NON-GAAP TOTAL OPERATING EXPENSES	$	282,015		$	230,458		$	797,659		$	659,518

GAAP OPERATING INCOME	$	408,448		$	132,073		$	1,054,797		$	360,120
Cost of revenues adjustments (a) (b)		12,972			11,729			36,796			38,101
Operating expense adjustments (a) (b) (c)		111,530			20,390			157,872			60,570
NON-GAAP OPERATING INCOME	$	532,950		$	164,192		$	1,249,465		$	458,791

GAAP OTHER INCOME (EXPENSE), NET	$	(4,892	)	$	(13,695	)	$	(33,890	)	$	(56,208	)
Convertible debt interest (d)		9,859			22,685			50,202			66,927
NON-GAAP OTHER INCOME (EXPENSE), NET	$	4,967		$	8,990		$	16,312		$	10,719

GAAP NET INCOME	$	276,859		$	76,507		$	704,877		$	203,861
Cost of revenues adjustments (a) (b)		12,972			11,729			36,796			38,101
Operating expense adjustments (a) (b) (c)		111,530			20,390			157,872			60,570
Convertible debt interest (d)		9,859			22,685			50,202			66,927
Income tax adjustments (e)		(40,473	)		(13,547	)		(73,131	)		(44,266	)
NON-GAAP NET INCOME	$	370,747		$	117,764		$	876,616		$	325,193

Diluted net income per share:
GAAP	$	1.18		$	0.31		$	2.91		$	0.83
Non-GAAP	$	1.59		$	0.48		$	3.63		$	1.32

Shares used in computing diluted net income per share:
GAAP		235,032			244,221			242,270			245,502
Non-GAAP (f)		233,256			244,287			241,408			245,472

SanDisk Corporation Reconciliation of Preliminary GAAP to Non-GAAP Operating Results ⁽¹⁾ (in thousands, unaudited)

	Three months ended			Nine months ended
	September 29, 2013		September 30, 2012	September 29, 2013		September 30, 2012

SUMMARY RECONCILIATION OF DILUTED SHARES

Shares used in computing diluted net income per share:
GAAP	235,032		244,221	242,270		245,502
Adjustments for share-based compensation	363		66	248		(30	)
Offsetting shares from call option	(2,139	)	-	(1,110	)	-
Non-GAAP (f)	233,256		244,287	241,408		245,472

(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 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, Pliant Technology, Inc. in May 2011, FlashSoft Corporation in February 2012, Schooner Information Technology, Inc. in June 2012 and SMART Storage Systems in August 2013, impairment of acquisition-related intangible assets, non-cash economic interest expense associated with the convertible debt and related tax adjustments, we believe the inclusion of non-GAAP financial measures provides consistency in our financial reporting. In addition, the Company's non-GAAP diluted shares include the impact of the Company's outstanding call option which, when exercised, will offset the issuance of dilutive shares from the Company's 1.5% Sr. Convertible Notes due 2017, while the Company's GAAP diluted shares excludes the anti-dilutive impact of this call option. 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 acquisition-related intangible assets, impairment of acquisition-related intangible assets, share-based compensation, non-cash economic interest expense associated with the convertible debt 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 core technology, developed technology, customer relationships and trademarks related to the acquisitions of Matrix Semiconductor, Inc. (January 2006), Pliant Technology, Inc. (May 2011), FlashSoft Corporation (February 2012), Schooner Information Technology, Inc. (June 2012) and SMART Storage Systems (August 2013).

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

(d)	Incremental interest expense relating to the non-cash economic interest expense associated with the Company's 1% Sr. Convertible Notes due 2013, which matured in May 2013, and 1.5% Sr. Convertible Notes due 2017.

(e)	Income taxes associated with certain non-GAAP to GAAP adjustments.

(f)	Non-GAAP diluted shares includes the impact of offsetting shares from the call option related to the Company's 1.5% Sr. Convertible Notes due 2017 and the impact of share based compensation.

SanDisk Corporation Preliminary Condensed Consolidated Balance Sheets (in thousands, unaudited)

	September 29, 2013			December 30, 2012

ASSETS
Current assets:
Cash and cash equivalents	$	902,765		$	995,470
Short-term marketable securities		1,142,616			1,880,034
Accounts receivable, net		685,103			626,025
Inventory		776,224			750,075
Deferred taxes		101,020			93,877
Other current assets		340,177			260,879
Total current assets		3,947,905			4,606,360

Long-term marketable securities		2,243,700			2,835,931
Property and equipment, net		673,219			665,542
Notes receivable and investments in Flash Ventures		1,214,943			1,460,112
Deferred taxes		121,090			168,718
Goodwill		318,111			201,735
Intangible assets, net		275,141			246,919
Other non-current assets		150,422			153,810
Total assets	$	8,944,531		$	10,339,127

LIABILITIES
Current liabilities:
Accounts payable trade	$	348,399		$	254,459
Accounts payable to related parties		163,831			214,806
Convertible short-term debt		-			906,708
Other current accrued liabilities		389,098			257,539

Deferred income on shipments to distributors and retailers and deferred revenue		291,318			248,155
Total current liabilities		1,192,646			1,881,667

Convertible long-term debt		819,681			789,913
Non-current liabilities		329,743			407,947
Total liabilities		2,342,070			3,079,527

EQUITY
Stockholders' equity:
Common stock		4,752,172			5,027,512
Retained earnings		1,833,713			2,071,268
Accumulated other comprehensive income		19,650			165,121
Total stockholders' equity		6,605,535			7,263,901
Non-controlling interests		(3,074	)		(4,301	)
Total equity		6,602,461			7,259,600
Total liabilities and equity	$	8,944,531		$	10,339,127

SanDisk Corporation Preliminary Condensed Consolidated Statements of Cash Flows (in thousands, unaudited)

	Three months ended						Nine months ended
	September 29, 2013			September 30, 2012			September 29, 2013			September 30, 2012
Cash flows from operating activities:
Net income	$	276,859		$	76,507		$	704,877		$	203,861

Adjustments to reconcile net income to net cash provided by operating activities:
Deferred taxes		(12,240	)		3,591			53,254			9,554
Depreciation		57,650			42,768			165,862			112,471
Amortization		50,710			57,799			171,956			190,079
Provision for doubtful accounts		(644	)		1,794			498			70
Share-based compensation expense		25,930			19,950			72,325			59,283
Excess tax benefit from share-based plans		(4,238	)		(3,095	)		(19,899	)		(14,116	)
Impairment and other		81,774			(4,385	)		76,258			(14,256	)
Other non-operating		1,134			(544	)		774			8,896
Changes in operating assets and liabilities:
Accounts receivable, net		(40,539	)		(138,428	)		(51,749	)		56,081
Inventory		(23,411	)		9,921			4,096			(173,794	)
Other assets		(44,666	)		(24,887	)		(23,093	)		35,387
Accounts payable trade		66,824			63,174			82,194			59,764
Accounts payable to related parties		(4,188	)		(8,707	)		(50,975	)		(50,139	)
Other liabilities		(48,542	)		32,481			60,479			(268,913	)
Total adjustments		105,554			51,432			541,980			10,367

Net cash provided by operating activities		382,413			127,939			1,246,857			214,228

Cash flows from investing activities:
Purchases of short and long-term marketable securities		(507,392	)		(588,098	)		(2,504,479	)		(1,950,164	)
Proceeds from sales of short and long-term marketable securities		1,277,691			410,323			3,125,350			1,583,503
Proceeds from maturities of short and long-term marketable securities		127,695			71,045			634,600			478,475
Acquisition of property and equipment, net		(50,866	)		(142,338	)		(170,715	)		(382,632	)
Investment in Flash Ventures	―			―			―				(50,439	)
Notes receivable issuances to Flash Ventures	―			―			―				(142,316	)
Notes receivable proceeds from Flash Ventures	―				146,090			73,388			357,876
Purchased technology and other assets		(5,353	)		(23	)		(9,261	)		(245	)
Acquisitions, net of cash acquired		(304,178	)		(213	)		(304,320	)		(69,417	)
Net cash provided by (used in) investing activities		537,597			(103,214	)		844,563			(175,359	)

Cash flows from financing activities:
Repayment of debt financing	―			―				(928,061	)	―
Distribution to non-controlling interests	―			―				(87	)	―
Proceeds from employee stock programs		43,036			27,098			206,052			77,770
Excess tax benefit from share-based plans		4,238			3,095			19,899			14,116
Dividends paid		(50,638	)	―				(50,638	)	―
Share repurchase program		(1,069,545	)		(37,429	)		(1,439,539	)		(191,504	)
Net cash received for share repurchase contracts	―				21,533		―				2,675
Net cash provided by (used in) financing activities		(1,072,909	)		14,297			(2,192,374	)		(96,943	)

Effect of changes in foreign currency exchange rates on cash		1,533			1,009			8,249			1,063

Net increase (decrease) in cash and cash equivalents		(151,366	)		40,031			(92,705	)		(57,011	)

Cash and cash equivalents at beginning of period		1,054,131			1,070,454			995,470			1,167,496

Cash and cash equivalents at end of period	$	902,765		$	1,110,485		$	902,765		$	1,110,485

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