In a move that will shift capacity to Toshiba and lower Sandisk's expenses, the two memory companies have inked an agreement to restructure their flash manufacturing joint ventures operating at two 300-mm fabs.

As part of the agreement, outlined in October 2008, more than 20% of the companies' joint ventures’ capacity will be transferred to Toshiba. Originally, approximately 30% of capacity was expected to be transferred to Toshiba. The companies did not explain why the percentage was lowered in their statement this morning.

SanDisk and Toshiba work together on Flash Partners and Flash Alliance. This agreement pertains to Fab 3 and Fab 4 at Toshiba’s Yokkaichi Operations in Japan.

The restructuring will result in the shift of equipment lease obligations from SanDisk to Toshiba and a cash payment to SanDisk for the transfer of certain equipment currently owned by the joint ventures. The total value to SanDisk is approximately $890 million (80 billion yen), based on current exchange rates.

Approximately two-thirds of the total $890 million amount will reduce SanDisk’s current equipment lease obligations by about 28% and approximately one-third will be received by SanDisk in cash. The lease transfers and cash payment are expected to be completed by the end of the current quarter.

As stated in the companies' October announcement, SanDisk and Toshiba will remain equal partners for the remaining capacity from the joint ventures. Further, SanDisk will have the option to purchase a part of the transferred capacity from Toshiba on a foundry basis and retains the option to continue to invest up to 50% in future Fab 4 expansions and technology transitions in Fab 3 and Fab 4. In addition, the companies said they will continue their existing joint development in NAND and 3D read/write memory.

“This agreement will reduce our capital spending, strengthen our financial position, and increase our business flexibility by allowing us to return more rapidly to our desired captive/non-captive supply model," said Eli Harari, chairman and CEO of SanDisk, in today's statement. "Importantly, this maintains the economies of scale of Fab 3 and Fab 4 for SanDisk and the deep technology and manufacturing cooperation between SanDisk and Toshiba.”

The ink is drying on this restructuring agreement just days before SanDisk is scheduled to report earnings for Q4 2008 on Monday, February 2.

Hurt by weak memory ASPs (average selling prices), the company's Q3 came in below expectations with a greater than expected loss of $155 million. Plans for recovery stated on SanDisk's Q3 earnings call included job cuts in the final quarter of the year and a reduced full-year 2008 $500 million capital expenditure (capex) budget, far below the company's original $2.4 billion level. SanDisk also said at the time that 2009 capex investments would be approximately $1.3 billion, down from the company's previously planned $3 billion.

Analysts except SanDisk to report another harsh quarter when it announces Q4 results.

"We believe the continued worsening of global end market demand, lower utilization rates, and inventory write downs to negatively impact gross margin, earnings, and revenue growth through out 2009," said Betsy Van Hees, an analyst at Caris Company, in a research note on the company this morning.

Van Hees estimated SanDisk will post Q4 results with "significant" pro forma EPS (earnings per share) loss of $0.66 a share on revenue of $730 million, down 11% on the company's Q3 sales. The forecast is below Street estimates calling for EPS loss of $0.60 on revenue of $769 million. Van Hees noted the company's results are being "driven by weak unit demand, lower quarter-over-quarter bit growth, and significant quarter-over-quarter declines in retail card and MP3 player prices."

By: DocMemory
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