e10vk
UNITED STATES
SECURITIES AND EXCHANGE
COMMISSION
Washington, D.C.
20549
FORM 10-K
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(Mark One)
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þ ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
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For the fiscal year ended June
27, 2008
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or
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o TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
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For the transition period
from to
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Commission file number 1-8703
WESTERN
DIGITAL CORPORATION
(Exact Name of Registrant as
Specified in Its Charter)
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Delaware
(State or Other Jurisdiction of
Incorporation or Organization)
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33-0956711
(I.R.S. Employer
Identification No.)
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20511 Lake Forest Drive
Lake Forest, California
(Address of principal executive
offices)
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92630
(Zip Code)
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Registrants telephone number, including area code:
(949) 672-7000
Securities registered pursuant to Section 12(b) of the
Act:
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Name of each exchange
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Title of each class
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on which registered
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Common Stock, $.01 Par Value Per Share
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New York Stock Exchange
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Rights to Purchase Series A Junior
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New York Stock Exchange
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Participating Preferred Stock
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Securities registered pursuant to Section 12(g) of the
Act: None
Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes þ No o
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the
Exchange
Act. Yes o No þ
Indicate by check mark whether the registrant: (1) has
filed all reports required to be filed by Section 13 or
15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past
90 days. Yes þ No o
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of
Regulation S-K
is not contained herein, and will not be contained, to the best
of registrants knowledge, in definitive proxy or
information statements incorporated by reference in
Part III of this
Form 10-K
or any amendment to this
Form 10-K. þ
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See the definitions of
large accelerated filer, accelerated
filer and smaller reporting company in
Rule 12b-2
of the Exchange Act. (Check one):
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Large accelerated filer þ
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Accelerated filer o
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Non-accelerated
filer o
(Do not check if a smaller reporting company)
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Smaller reporting company o
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Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the Exchange
Act). Yes o No þ
The aggregate market value of the registrants common stock
held by non-affiliates of the registrant on December 28,
2007, the last business day of the registrants most
recently completed second fiscal quarter, was approximately
$6.6 billion, based on the closing sale price as reported
on the New York Stock Exchange.
As of the close of business on August 13, 2008,
221,485,710 million shares of common stock, par value $.01
per share, were outstanding.
Documents Incorporated by Reference
Part III incorporates by reference certain information from
the registrants definitive proxy statement (the
Proxy Statement) for the 2008 Annual Meeting of
Stockholders, which will be filed with the Securities and
Exchange Commission within 120 days after the close of the
2008 fiscal year. Except with respect to information
specifically incorporated by reference in this
Form 10-K,
the Proxy Statement is not deemed to be filed as part hereof.
WESTERN
DIGITAL CORPORATION
INDEX
TO ANNUAL REPORT ON
FORM 10-K
For
the Fiscal Year Ended June 27, 2008
Typically, our fiscal year ends on the Friday nearest to June 30
and consists of 52 weeks. However, approximately every five
years, we report a 53-week fiscal year to align our fiscal
quarters with calendar quarters by adding a week to our fourth
fiscal quarter. The 2008, 2007 and 2006 fiscal years, which
ended on June 27, 2008, June 29, 2007 and
June 30, 2006, respectively, consisted of 52 weeks
each. Unless otherwise indicated, references herein to specific
years and quarters are to our fiscal years and fiscal quarters,
and references to financial information are on a consolidated
basis. As used herein, the terms we, us,
our and WD refer to Western Digital
Corporation and its subsidiaries.
We are a Delaware corporation that operates as the parent
company of our hard drive business, Western Digital
Technologies, Inc., which was formed in 1970.
Our principal executive offices are located at 20511 Lake Forest
Drive, Lake Forest, California 92630. Our telephone number is
(949) 672-7000
and our web site is
http://www.westerndigital.com.
The information on our web site is not incorporated in this
Annual Report on
Form 10-K.
Western Digital, WD, the WD logo, WD Caviar, WD Raptor, WD
VelociRaptor, WD Scorpio, WD Elements, My Passport, My Book, My
DVR Expander and
GreenPower are trademarks of Western Digital Technologies, Inc.
and/or its
affiliates. All other trademarks mentioned are the property of
their respective owners.
2
Forward-Looking
Statements
This document contains forward-looking statements within the
meaning of the federal securities laws. Any statements that do
not relate to historical or current facts or matters are
forward-looking statements. You can identify some of the
forward-looking statements by the use of forward-looking words,
such as may, will, could,
project, believe,
anticipate, expect,
estimate, continue,
potential, plan, forecasts,
and the like, or the use of future tense. Statements concerning
current conditions may also be forward-looking if they imply a
continuation of current conditions. Examples of forward-looking
statements include, but are not limited to, statements
concerning:
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growth in demand for hard drives in the desktop, mobile,
enterprise and consumer electronics markets and factors
contributing to such growth;
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our plans to develop new products and to continue our
expansion into non-desktop markets, such as mobile, consumer
electronics, retail, and enterprise markets, and into emerging
geographic markets;
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acceptance and emergence of the SATA and SAS interfaces in
the enterprise market;
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increase in demand for higher capacity hard drives;
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our plans to design and manufacture a substantial portion of
the heads and media required for the hard drives we
manufacture;
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our beliefs regarding the adequacy of our facilities and
fabrication capacity and our expansion plans for our head wafer
fabrication facilities in Fremont, California;
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our share repurchase plans;
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our long-term product component purchase commitments;
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our future effective tax rates;
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expectations regarding our capital expenditure plans and our
depreciation and amortization expense in fiscal 2009; and
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beliefs regarding the sufficiency of our cash, cash
equivalents and short-term investments to meet our working
capital needs.
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Forward-looking statements are subject to risks and
uncertainties that could cause actual results to differ
materially from those expressed in the forward-looking
statements. You are urged to carefully review the disclosures we
make concerning risks and other factors that may affect our
business and operating results, including those made in
Part I, Item 1A of this Annual Report on
Form 10-K,
and any of those made in our other reports filed with the
Securities and Exchange Commission (the SEC). You
are cautioned not to place undue reliance on these
forward-looking statements, which speak only as of the date of
this document. We do not intend, and undertake no obligation, to
publish revised forward-looking statements to reflect events or
circumstances after the date of this document or to reflect the
occurrence of unanticipated events.
3
PART I
General
We design, develop, manufacture and sell hard drives. A hard
drive is a device that uses one or more rotating magnetic disks
(media) to store and allow fast access to data. Hard
drives are key components of computers, including desktop and
notebook computers (PCs), data storage subsystems
and many consumer electronic (CE) devices.
We sell our products worldwide to original equipment
manufacturers (OEMs) and original design
manufacturers (ODMs) for use in computer systems,
subsystems or CE devices, and to distributors, resellers and
retailers. Our hard drives are used in desktop computers,
notebook computers, and enterprise applications such as servers,
workstations, network attached storage, storage area networks
and video surveillance equipment. Additionally, our hard drives
are used in CE applications such as digital video recorders
(DVRs), and satellite and cable set-top boxes
(STBs). We also sell our hard drives as stand-alone
storage products and integrate them into external casings,
embedding application software and presenting them as
WD®-branded
external storage appliances for purposes such as personal data
backup and portable or expanded storage of digital music,
photographs, video and other data.
Hard drives provide non-volatile data storage, which means that
the data remains present when power is no longer applied to the
device. Our hard drives currently include 3.5-inch and 2.5-inch
form factor drives, having capacities ranging from 40 gigabytes
(GB) to 1 terabyte (TB), nominal
rotation speeds of 5,400, 7,200 and 10,000 revolutions per
minute (RPM), and offer interfaces including both
Enhanced Integrated Drive Electronics (EIDE) and
Serial Advanced Technology Attachment (SATA). We
also embed our hard drives into
WD®-branded
external storage appliances that utilize interfaces such as USB
2.0, external SATA,
FireWiretm
and Ethernet network connections. In addition, we recently
announced a family of hard drives specifically designed to
consume substantially less power than standard drives, utilizing
our Green
Powertm
technology.
We manufacture hard drives and head stack assemblies
(HSAs) in Malaysia and Thailand. We also design and
manufacture most of our required magnetic heads in California
and head gimbal assemblies (HGAs) in Thailand and we
design in California and manufacture in Malaysia most of our
required media and substrates. For geographical financial data,
see Part II, Item 8, Note 6 in the Notes to
Consolidated Financial Statements, included in this Annual
Report on
Form 10-K.
On September 5, 2007, we completed our acquisition (the
Acquisition) of Komag, Incorporated
(Komag) through a cash tender offer by State M
Corporation (State M), our indirect wholly-owned
subsidiary, for all outstanding shares of Komags common
stock, which was followed by a merger of State M and Komag (the
Merger) whereby Komag became an indirect
wholly-owned subsidiary and changed its name to WD Media, Inc.
The Acquisition has strengthened our production efficiencies and
improved our access to and control of technology and competitive
position in the worldwide hard drive industry, while enhancing
our hard drive manufacturing process by integrating media. The
aggregate purchase price for Komag was approximately
$1 billion, consisting of cash paid for outstanding shares,
transaction fees, severance and other employee-related equity
payments.
Business
Strategy
Our business strategy is to provide a broad selection of
reliable, high quality hard drives at a low total cost of
ownership and with high efficiency and speed. We believe this
strategy helps accomplish the following:
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distinguishes us in the dynamic and competitive hard drive
industry;
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provides great value to our customers; and
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allows us to better achieve consistent financial performance,
including strong returns on invested capital.
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We have designed our business strategy to accommodate
significant unit and revenue growth with relatively small
increases in operating expenses and to consistently achieve high
asset utilization.
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Industry
We design, develop and manufacture hard drives for the desktop
and mobile PC, enterprise, CE and branded product retail
markets. We believe that growth in the sales of hard drives has
continued to outpace the growth in the sales of all PCs as there
were approximately 88% more hard drives sold in the market than
PCs in calendar 2007, based on industry data. We believe the
following factors continue to drive this accelerating growth of
hard drive sales in addition to PC applications:
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consumer use of hard drives for the playing, retention, and
creation of digital content for personal use in the rapidly
growing CE market;
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growth of the external hard drive or branded products market,
permitting the easy storage, portability and backup of digital
data such as music, photographs, or video;
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increased use of multiple hard drives in PCs for data backup and
expanded storage capacity; and
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increased use of multiple cost-optimized high performance hard
drives in data-intensive applications such as Internet search
engines and in hard drive intensive hosts for handheld computing
devices.
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Additionally, we believe that the demand for 2.5-inch hard
drives has grown from approximately 16% of the overall hard
drive market in calendar 2003 to 34% of the overall hard drive
market in calendar 2007, driven principally by the fast-growing
market for notebook computers.
These factors and our product expansion strategy have gradually
increased our percentage of revenue derived from non-desktop
sources. In 2008, 56% of our revenue was from non-desktop
sources compared to 43% in 2007.
For an additional discussion of risks relating to the hard drive
industry, please see Item 1A of this Annual Report on
Form 10-K.
Desktop
PC Market
The desktop PC market consists of the overall hard drive market
for desktop computers. Individuals use desktop computers in
homes, businesses and multi-user networks. Desktop computers use
software applications for word processing, spreadsheet, desktop
publishing, database management, multimedia, entertainment and
for other needs. Hard drives store desktop computer operating
system and application software, as well as the data used by the
applications.
We believe that the demand for hard drives in the desktop PC
market has grown in part due to:
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the overall growth of desktop computer sales;
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the increasing needs of businesses and individuals for increased
storage capacity on their desktop computers;
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the continuing development of software applications to manage
multimedia content; and
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the increasing use of broadband Internet, including content
downloaded from the Internet onto desktop computer hard drives.
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We believe several other factors affect the rate of desktop
computer unit growth, including maturing desktop PC markets in
North America and Western Europe, an increase in first-time
buyers of desktop computers in Asia, Eastern Europe and Latin
America, and the lengthening of desktop computer replacement
cycles.
Mobile PC
Market
The mobile PC market consists primarily of notebook computers.
Individuals use notebook computers both in and away from homes
and businesses. Like desktop computers, notebook computers use
software applications for various needs and hard drives store
notebook operating system and application software, and the data
used by the applications.
We believe that the demand for hard drives in the mobile PC
market has grown in part due to:
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the overall growth of notebook sales, including increased
transition from desktop computers to notebook computers;
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the increased mobility of the workforce;
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the increasing needs of businesses and individuals for increased
storage capacity on their notebook computers;
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the continuing development of software applications to manage
multimedia content; and
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the increasing use of broadband Internet, including content
downloaded from the Internet onto notebook hard drives.
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We expect the mobile PC market to continue to grow faster than
the desktop or enterprise markets in the next three years. As
the mobile PC market continues to evolve to a higher volume
market, we believe customers are placing increased emphasis on
attributes such as quality, availability, reliability,
execution, flexibility, and the competitive cost structures of
their hard drive suppliers. These are the same attributes that
have been emphasized for many years by customers in the
high-volume desktop PC market.
Enterprise
Market
The enterprise market for hard drives includes workstations,
servers, network attached storage, storage area networks, other
computing systems or subsystems, and video surveillance.
Historically, hard drives for this market have utilized several
interfaces, including the Small Computer Systems Interface
(SCSI) and Fibre Channel Arbitrated Loop
(FCAL). Beginning in 2003, these traditional
enterprise interfaces have been supplemented or have been
replaced in certain storage applications by hard drives
featuring the SATA interface technology, which is supported by
industry standards, as well as by Serial Attached SCSI
(SAS). SATA hard drives typically cost customers
less than SCSI hard drives while offering higher capacities and
maintaining similar reliability, scalability and performance.
We believe that enterprise uses of SATA hard drives will
continue to increase. During the past few years, a new
disk-based
back-up
application has emerged with high-capacity SATA hard drives
augmenting SCSI hard drives, tape and optical media. This new
application, popularly referred to as near-line
storage, has created a growth market because hard drives back up
or access data more quickly than tape or optical solutions, and
quickly retrieve critical
back-up or
near-line data. The availability of SATA hard drive solutions,
which are more cost effective than SCSI hard drives, promotes
the increasing use of high-capacity hard drives in near-line
storage applications. The low price per capacity of SATA drives
has stimulated new applications such as video surveillance,
video editing/broadcasting and medical imaging. These
applications represent segments of a growing market for high
capacity storage in non-computing imaging and multimedia
professions.
Enterprise-class SATA drives are becoming commonplace for
IT infrastructure applications such as databases, scientific
computing, web content, web caching, web search engines and
electronic mail. These applications have become an important
market for high-capacity SATA hard drives. We believe that this
market will consume a growing portion of the highest capacity
hard drives in the next three years.
SAS is the next generation SCSI technology and is expected to
replace SCSI drives over the next few years. SATA technology is
compatible with SAS technology, enabling customers the
flexibility of incorporating SATA hard drives in SAS storage
systems. We believe the market transition from SCSI to SAS will
add to the growth of the enterprise-class SATA market,
which currently is estimated to be approximately 40% of the
enterprise hard drive market.
High-performance applications such as blade servers are
increasingly using 2.5-inch form factor hard drives, supplanting
traditional 3.5-inch drives. Smaller form factors enable more
drives per physical space for increased performance, higher
capacity per square foot and lower power consumption. This trend
demonstrates the fragmentation of the enterprise hard drive
market and the need for application-specific enterprise-class
hard drives.
Consumer
Electronics Market
The use of hard drives in CE products has been a major growth
area in recent years. Currently, the three largest segments of
this market are:
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video content in applications such as DVRs;
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audio and video content in applications such as consumer
handheld devices, including MP3 players; and
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hard drives in game consoles.
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Since 1999, DVRs have been available for use in home
entertainment systems and they offer enhanced capabilities such
as pausing live television, simplifying the process of recording
and cataloging recorded television programs and quickly
forwarding or returning to any section of a recorded television
program. Additionally, digital video disk (DVD)
recorders increasingly incorporate hard drives to allow for DVR
functionality and faster recording of content onto removable
DVDs. The market for these products favors larger capacity hard
drives and continues to grow in Japan, North America and
Europe. Additionally, the rest of Asia Pacific shows strong
interest in this market. We believe growth in this market will
continue to build demand for higher capacity hard drives.
The proliferation in the CE market of more sophisticated mobile
devices including cell phones and MP3 players is driving the
delivery of diverse content from hard drive intensive hosts. We
believe this is one of the factors influencing increased sales
of enterprise-class SATA drives. We also believe that
multimedia handheld devices such as video cameras and
high-resolution still cameras are enabling consumer production
of expansive digital content that requires increasing amounts of
small form-factor hard drive storage, as well as high-capacity
desktop-class hard drives for editing, manipulation and
long-term storage of such content.
Hard drives with 1.8-inch or 1.0-inch form factors primarily
address the consumer handheld device and portable external
storage markets. The majority of hard drives used in portable
media players that play both digital audio and video content are
1.8-inch form factors. Currently, we believe the markets for
these handheld devices are better served by flash memory as
opposed to rotating magnetic storage.
External
Hard Drive Market
Most new PC systems include high-speed external interfaces, such
as USB 2.0, external SATA,
FireWiretm
or Ethernet network connections, that permit users to supplement
the storage space of their PC systems or home and small office
networks with the use of external hard drives. Users store
additional programs or multimedia content, and back up internal
hard drives with external hard drives, as well as mobile
external hard drives for mobility convenience. Although external
hard drives are a small part of the overall hard drive market,
we believe that sales of external hard drives will continue to
grow. External storage can often be the easiest, quickest or
only way of adding additional storage capacity to either a
desktop or notebook computer. We believe there is an increasing
consumer awareness of the need and value of securely storing
personal digital content through backup applications and
devices. In addition, there is opportunity for external storage
as a way of expanding storage capacity in CE devices such as
DVRs.
Other
Market Opportunities
We regularly review opportunities to apply our knowledge of data
storage technology to markets that we do not currently serve.
Based on significant investments we made over the last five
years, we believe we have the technology building blocks to
increase our overall market penetration and be a full-line hard
drive supplier. Consistent with our measured and deliberate
approach to new market entries in the recent past, our approach
to additional new markets will be based on a careful assessment
of the risks, rewards, requirements and profit potential of such
actions.
Products
We offer a broad line of hard drives designed for various
markets. We market our hard drives under brand names including
WD Caviar, WD Raptor, WD VelociRaptor, WD Scorpio, WD Elements,
My Passport, My Book, My DVR Expander and GreenPower. These hard
drives service the desktop, mobile, enterprise, CE and branded
products markets, and can be found in products including desktop
computers, notebook computers, enterprise storage, workstations,
video surveillance equipment, networking products, DVRs, STBs
and external storage appliances.
Desktop
Hard Drive Products
The hard drives we design for the desktop PC market currently
consist of 3.5-inch form factor products with capacities ranging
from 40 GB to 1 TB. These products utilize either the EIDE or
SATA interfaces, providing high performance while retaining ease
of use and overall low cost of connection. The type of EIDE
interface currently used in our hard drives is ATA/100, which
signifies a burst data transfer rate of 100 megabytes per
second, which is the maximum specified data transition that can
be sustained under ideal conditions. The SATA interface
available in the majority of our hard drives enable burst
transfer rates of up to 300 megabytes per second.
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Mobile
Hard Drive Products
Our hard drives used in mobile products typically include
2.5-inch form factor drives for notebook computers. Although the
desktop PC market still accounts for a majority of hard drive
sales, unit shipments of hard drives for notebook computers
represent a growing share of the total. We entered the 2.5-inch
mobile market in September 2004. We are now shipping our fifth
generation of the WD
Scorpio®
product family, offering up to 320 GB of capacity. Our product
expansion, including a recently announced high-performance hard
drive spinning at 7,200 RPM, has enabled us to provide customers
with a full-line of 2.5-inch mobile drives and helped us enhance
our market position in this fast-growing market.
Enterprise
Hard Drive Products
We offer multiple product lines to address enterprise market
needs, including:
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the WD
VelociRaptortm,
which is a 300 GB 10,000 RPM 2.5-inch enterprise-class drive
with the SATA interface for enterprise applications requiring
high performance and high reliability;
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the
WD®
RE family of drives, with capacities ranging from 160 GB to 1
TB. The
WD®
RE family serves the SATA market and has enhanced reliability
features and ratings when contrasted to our desktop
products; and
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low-power versions of the
WD®
RE family of drives featuring WDs
GreenPowertm
technology, which reduces power consumption as much as
40 percent compared with standard hard drives. Lower power
consumption reduces total cost of ownership for our customers by
cutting energy costs and lowering operating temperatures, which
contributes to longer reliability.
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Both WD
VelociRaptortm
and
WD®
RE drives may be used in, but are not limited to, applications
such as databases,
e-commerce
and super computing in life science, oil and gas and similar
industries, business records management,
e-mail, file
serving, web serving, near-line storage, medical records,
engineering data management, video broadcasting and video
security. The WD
VelociRaptortm
also has been popular for use in the high-end desktop PC market
for applications including gaming and advanced CAD/CAM
(computer aided design/computer-aided manufacturing)
systems.
Consumer
Electronics Products
We offer a line of hard drives under the
WD®
AV brand that are designed for use in products such as DVRs,
STBs, karaoke systems, multi-function printers, and gaming
systems.
WD®
AV drives deliver the characteristics CE manufacturers seek
most, which are quiet operation, low operating temperature, low
power consumption specifications, high reliability and optimized
streaming capabilities. We also offer low-power
WD®
AV drive models that feature WDs
GreenPowertm
technology. Lower power consumption in our
WD®
AV drives results in cooler operation, which enhances long-term
reliability. Our
GreenPowertm
technology also quiets drive operation, which is an important
attribute for our consumer electronics customers.
Branded
Products
We sell a broad line of
WD®-branded
hard drive-based storage appliances, which are internal drives
embedded into PC peripheral-style enclosures that have USB 2.0,
external SATA,
FireWiretm and
Ethernet network connections and include software that assists
customers with back up, remote access and management of digital
content. We sell these branded storage appliances, as well as
related adapters and accessories, through retail store fronts,
online stores and distributors. These include:
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the 3.5-inch hard drive-based My
Book®
family of storage appliances, which are designed to reside on
desktops as PC peripherals, as well as be connected to networks,
and simplify storage for mainstream consumers, and offer from
160 GB to 2 TB of capacity;
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The 3.5-inch My DVR
Expandertm series
of external SATA(eSATA) and USB 2.0 storage
appliances, which adds recording time to STBs with DVR
capability;
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the 2.5-inch hard drive-based My
Passport®
Portable series of USB 2.0 and FireWire storage devices, which,
weighing less than one-half of a pound, offer from 120 GB to 320
GB of portable storage capacity; and
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3.5-inch and 2.5-inch internal hard drives packaged with PC
installation kits under the WD brand for retail store sales.
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Research
and Development
We devote substantial resources to development of new products
and improvement of existing products. We focus our engineering
efforts on coordinating our product design and manufacturing
processes to bring our products to market in a cost-effective
and timely manner. Research and development expenses totaled
$464 million (excluding $49 million of in-process
research and development acquired in the acquisition of Komag),
$306 million and $297 million in 2008, 2007 and 2006,
respectively.
For an additional discussion of risks related to our development
of new products, see Item 1A of this Annual Report on
Form 10-K.
Technology
and Product Development
Hard drives record, store and retrieve digital data. Performance
attributes of hard drives, such as their ability to access and
transmit data and storage capacity, are currently better than
removable or floppy disks, optical hard drives and tapes, and
they are more cost effective than semiconductor technology. The
primary measures of hard drive performance include:
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Acoustics which is the sound power
emitted during hard drive operation, commonly expressed in
decibels, and perceived loudness due to sound pressure, commonly
expressed in sones.
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Data transfer rate which is the
sustained rate of data transfer to and from the disk, commonly
expressed in megabits per second. One megabit equals one million
bits.
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Seek time which is the time needed to
position the heads over a selected track on the disk surface,
commonly expressed in milliseconds.
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Spindle rotation speed which is the
nominal rotation speed of the disks inside the hard drive,
commonly expressed in RPM or latency. Spindle rotation speeds
commonly stated as 5,400, 7,200 and 10,000 RPM are sometimes
approximations.
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Storage capacity which is the amount of
data that can be stored on the hard drive, commonly expressed in
GB or TB. As defined in the hard drive industry, one GB equals
one billion bytes and one TB equals one trillion bytes. A byte
is a digital character, typically comprised of eight bits. A bit
is a binary digit, the smallest unit of information in a digital
system.
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Power Consumption which is the amount of
electricity required to operate the drive, measured in watts.
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All of our hard drive products employ similar technology. The
main components of the hard drive are a Head-Disk-Assembly
(HDA) and a Printed Circuit Board Assembly
(PCBA). The HDA includes heads, media
(disks), head positioning mechanism
(actuator) and spindle motor. A rigid base and top
cover contain these components in a contamination-controlled
environment. The PCBA includes both standard and custom
integrated circuits, an interface connector to the host computer
and a power connector.
HDA: One or more disks positioned around a motor-driven spindle
hub that rotates the disks comprise the disk-pack assembly. The
disk is made up of a smooth substrate on which thin layers of
magnetic materials are deposited. The HSA is comprised of a
magnetic positioner, a pivot-arm module, on which the individual
heads are mounted. Each disk has a head suspended directly above
it, which can read data from or write data to the spinning disk.
PCBA: The integrated circuits on the printed circuit board
typically include a drive interface and a controller. The drive
interface receives instructions from the host computer, while
the controller directs the flow of data to or from the disks and
controls the heads. The location of data on each disk is
logically maintained in concentric tracks divided into sectors.
The host computer sends instructions to the controller to read
data from or write data to the disks, based on
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logical track and sector locations. Guided by instructions from
the controller, the HSA pivots in an arc, across the disk until
it reaches the selected track of a disk, where the data is
recorded or retrieved.
Industry standard interfaces allow the hard drive to communicate
with the computer. Currently, the primary interfaces for PCs are
EIDE and SATA, and the primary interfaces for enterprise systems
are SCSI, SATA, SAS and FCAL. As computer performance continues
to improve, the hard drive will need to deliver information
faster. We believe this will continue to drive the PC industry
transition to higher speed interfaces, such as SATA and SAS, to
facilitate the higher data transfer rates. We currently offer
the SATA interface on our WD
Caviar®,
WD
Scorpio®,
WD®
RE, WD
VelociRaptortm
and
WD®
AV hard drive families; and EIDE on WD
Caviar®,
WD
Scorpio®
and
WD®
AV families.
The number of disks and each disks areal density, which is
a measure of the amount of data that can be stored on the
recording surface of the disk, determines storage capacity of
the hard drive. The higher the areal density, the more
information can be stored on a single platter. Achieving a given
drive capacity requires fewer disks and heads as the areal
density increases, potentially reducing product costs over time
through reduced component requirements. Beginning in June 2007,
we began shipping 3.5-inch hard drives with 188 GB per platter
areal density and 2.5-inch hard drives with 125 GB per platter
areal density. In July 2007, we introduced the WD
Caviar®
GreenPowertm
3.5-inch hard drive which has 250 GB per platter areal density.
In October 2007, we introduced WD
Scorpio®
2.5-inch drives that employ 160 GB per platter technology. In
January 2008, we began shipping a 3.5-inch hard drive platform
with 320 GB per platter areal density and in June 2008, we began
shipping our WD
Caviar®
family of drives at 333 GB per platter areal density. In April
2008, we began shipping WD
VelociRaptortm
hard drives, 2.5-inch 300 GB drives employing the highest
shipping areal density in the industry at 290 gigabits per
square inch.
Head technology is one of the key components affecting areal
density. Historically, there have been rapid technological
changes resulting in several generations of head technology in a
relatively short time. However, in recent years the time has
lengthened between changes in generations of head technology.
The hard drive industry has essentially transitioned from the
use of longitudinal magnetic recording (LMR) head
technology for the head writer function to perpendicular
magnetic recording (PMR) technology, which allows
for significantly higher storage capacities. In addition, the
industry has made the transition to tunnel-junction magneto
resistive (TMR) technology for the head reader
function. We have completed the transition to PMR and TMR in our
2.5-inch products and in the majority of our 3.5-inch products.
With the transition to PMR, media plays a much more important
role in achieving higher areal density. PMR demands a much
tighter interaction and matching between head and media designs.
The acquisition of Komag has enabled us to be vertically
integrated in the two most important technology components of
hard drives (heads and media), and has enabled us to achieve a
more optimum design and utilization of these components.
We invest considerable resources in research and development,
manufacturing infrastructure and capital equipment of head and
media components, in order to secure our competitive position
and cost structure.
The
WD®
product line generally leverages a common platform for various
products within product families with different capacities to
serve differing market needs. This platform strategy results in
commonality of components across different products within
product families and, in some cases, across product families,
which reduces exposure to changes in demand, facilitates
inventory management and allows us to achieve lower costs
through purchasing economies. This platform strategy also
enables our customers to leverage their qualification efforts
onto successive product models.
Fiscal 2008 represented the sixth consecutive year of
substantial growth in our research and development and capital
spending to support our significant broadening of our product
and technology portfolios. Over that six-year period, we have
grown our investment spending 173% from $170 million in
fiscal 2002 to $464 million in fiscal 2008. As a result of
this investment activity, we continue to expand our business
beyond the desktop PC market into newer markets or markets in
which we have not previously participated. Such investments have
allowed us to execute against our strategic objective of revenue
diversification to address the growth of new applications for
hard drives and fast-growing new market opportunities.
We are currently expanding our existing head wafer fabrication
facilities in Fremont, California to accommodate our anticipated
growth. The expansion will involve a process change to utilize
8-inch
wafers from
6-inch
wafers and will cost an estimated $280 million in the
fiscal 2009 to 2010 timeframe. This will be in addition to our
ongoing capital expenditures for hard drive and head assembly,
and our anticipated capital expenditures for media development
and manufacturing following our planned acquisition of Komag.
10
For an additional discussion of risks related to technological
innovations, see Item 1A of this Annual Report on
Form 10-K.
Sales and
Distribution
We sell our products globally to OEMs, ODMs, distributors and
retailers. OEMs purchase our hard drives, either directly or
through a contract manufacturer such as an ODM, and assemble
them into the computer or CE systems they build. Distributors
typically sell our hard drives to non-direct customers such as
small computer and CE manufacturers, dealers, systems
integrators, online retailers and other resellers. Retailers
typically sell our hard drive products directly to end-users
through their storefront or online facilities.
Original
Equipment Manufacturers
Sales to OEMs, which include sales through ODMs, accounted for
51%, 48% and 54% of our hard drive revenue in 2008, 2007 and
2006, respectively. During 2008, no single customer accounted
for 10%, or more, of our revenue. During 2007 and 2006, sales to
Dell, Inc. accounted for 10% and 12%, respectively, of our
revenue. We believe that our success depends on our ability to
maintain and improve our strong relationships with the leading
OEMs.
OEMs evaluate and select their hard drive suppliers based on a
number of factors, including quality and reliability, storage
capacities, performance characteristics, price, service and
support, ease of doing business, and the suppliers
long-term financial stability. They typically seek to qualify
two or more providers for each generation of hard drives, and
once an OEM has chosen its qualified hard drive vendors for a
given product, it generally will purchase hard drives from those
vendors for the life of that product. To achieve success with
OEM qualifications, a hard drive supplier must consistently
offer hard drives featuring leading technology, quality and
reliability at acceptable capacity per disk. Suppliers must
quickly achieve volume production of each new generation of high
quality and reliable hard drives, requiring access to flexible,
high-capacity, high-quality manufacturing capabilities.
Many of our OEM customers utilize
just-in-time
inventory management processes or supply chain business models
that combine build-to-order, in which they do not
build until there is a firm order, and contract
manufacturing, in which the OEM contracts assembly work to
a contract manufacturer, such as an ODM, who purchases
components and assembles the computer based on the OEMs
instructions. For certain OEMs, we maintain a base stock of
finished goods inventory in facilities located near or adjacent
to the OEMs operations.
For an additional discussion of risks related to our need to
adapt to our customers business models and maintain
customer satisfaction, refer to Item 1A of this Annual
Report on
Form 10-K.
Distributors
We use a broad group of distributors to sell our products to
non-direct customers such as small computer and CE
manufacturers, dealers, systems integrators, online retailers
and other resellers. Distributors accounted for approximately
31%, 36% and 39% of our hard drive revenue for 2008, 2007 and
2006, respectively. Distributors generally enter into
non-exclusive agreements for specific territories with us for
the purchase and redistribution of our products in specific
territories. We grant our distributors limited price protection
rights.
Retailers
We sell our branded products directly to a select group of major
retailers such as computer superstores, warehouse clubs, online
retailers, and computer electronics stores, and authorize sales
through distributors to smaller retailers. Retailers accounted
for approximately 18%, 16% and 7% of our hard drive revenue for
2008, 2007 and 2006, respectively. Our current retail customer
base is primarily in the United States, Canada and Europe. The
retail channel complements our other sales channels while
helping to build brand awareness for WD and our products.
Retailers supply end-users with products to upgrade their
computers and externally store their data for backup or mobility
purposes. We grant our retailers price protection and limited
rights to return product on an inventory rotation basis. We also
sell our branded products through our web site.
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Sales and
Marketing
We maintain sales offices in selected parts of the world
including the major geographies of the Americas,
Asia Pacific, Japan, Europe and the Middle East. Our
international sales, which include sales to foreign subsidiaries
of U.S. companies but do not include sales to
U.S. subsidiaries of foreign companies, represented 76%,
68% and 68% of our revenue for 2008, 2007 and 2006,
respectively. Sales to international customers may be subject to
certain risks not normally encountered in domestic operations,
including exposure to tariffs and various trade regulations. For
an additional discussion regarding the risks related to sales to
international customers, see Item 1A of this Annual Report
on
Form 10-K.
For additional information concerning revenue recognition, sales
by geographic region and significant customer information, see
Part II, Item 8, Notes 1 and 6 in the Notes to
Consolidated Financial Statements, included in this Annual
Report on
Form 10-K.
We perform our marketing and advertising functions internally
and through outside firms. We target advertising, worldwide
packaging and marketing materials to various reseller and
end-user categories. We utilize both consumer media and trade
publications. We have programs under which we reimburse
qualified distributors and retailers for certain marketing
expenditures. We also maintain customer relationships by
communicating with our resellers and providing end-users with
information and support through our web site.
Competition
We compete primarily with manufacturers of hard drives for use
in desktop, notebook, enterprise, CE and external storage
products. Our competitors in the hard drive market include
ExcelStor Technology, Fujitsu Limited, Hitachi Global Storage
Technologies, Samsung Electronics Incorporated, Seagate
Technology and Toshiba Corporation.
The hard drive industry is intensely competitive, with hard
drive suppliers competing for sales to a limited number of major
customers. Hard drives manufactured by different competitors are
highly substitutable due to the industry mandate of technical
form, fit and function standards. Hard drive manufacturers
compete on the basis of product quality and reliability, storage
capacity, unit price, product performance, production volume
capabilities, delivery capability, leadership in time-to-market,
time-to-volume and time-to-quality, service and support and ease
of doing business. The relative importance of these factors
varies by customer and market. We believe that we are generally
competitive in all of these factors.
We believe that there are no substantial barriers for existing
competitors to offer competing products. Therefore, we believe
that we cannot differentiate
WD®
hard drive products solely on attributes such as storage
capacity, buffer size or time-to-market. Accordingly, we
differentiate WD by focusing on operational excellence, high
product quality and reliability, and designing and incorporating
into our hard drives desirable product performance attributes.
Such performance attributes include seek times, data transfer
rates, intelligent caching, failure prediction, remote
diagnostics, acoustics, error recovery, low operating
temperature, low power consumption and optimized streaming
capabilities.
In addition, we differentiate WD by emphasizing non-product
related attributes, including rapid response to our customers.
Rapid response requires accelerated design cycles, customer
delivery, production flexibility and timely service and support,
which contribute to customer satisfaction. We also rely on the
strength of the WD brand name with value-added resellers,
retailers and solution providers to whom we sell our hard drive
products directly and indirectly. We believe that trust in a
manufacturers reputation, its execution track record and
the establishment of strategic relationships have become
important factors in the selection of a hard drive, particularly
in a rapidly changing technology environment.
Advances in magnetic, optical or other data storage technologies
could result in competitive products with better performance or
lower cost per unit of capacity than our products. We monitor
the advantages, disadvantages and advances of the full array of
storage technologies on an ongoing basis.
High-speed semiconductor memory competes with hard drive
products in some applications, such as consumer handheld devices
and portable external storage. Semiconductor memory is much
faster in some applications than magnetic hard drives, but
currently is not competitive in most applications using 3.5-inch
and 2.5-inch form factor hard drives from a cost standpoint.
Flash memory, a non-volatile semiconductor memory, is currently
much more costly and, while it has
12
higher read performance attributes than hard drives,
it has lower write performance attributes. Flash
memory could become more competitive in the near future for
additional applications requiring less storage capacity than
that provided by hard drives. However, we believe that the
traditional high-volume computing markets will remain the domain
of 3.5-inch and 2.5-inch hard drives based on the hard drive
industrys attributes of reliability, availability and cost.
For an additional discussion of risks related to competition,
see Item 1A of this Annual Report on
Form 10-K.
Service
and Warranty
We generally warrant our newly manufactured hard drives against
defects in materials and workmanship from one to five years from
the date of manufacture depending on the type of product. Our
warranty obligation is generally limited to repair or
replacement of the hard drive. We have engaged third parties in
various countries in multiple regions, including Africa, Asia
Pacific, Australia, Europe, India, Latin America, the Middle
East and North America to provide various levels of testing,
processing
and/or
recertification of returned hard drives for our customers. In
addition, we process, test and recertify returned hard drives at
our facility in the United States.
Manufacturing
We believe that we have significant know-how, unique product
manufacturing processes, execution skills and human resources to
continue to be successful and have the ability to grow, as
necessary, our manufacturing operations. To be competitive, we
must manufacture high quality hard drives with industry leading
time-to-volume production at competitive unit costs. We strive
to maintain manufacturing flexibility, high manufacturing
yields, reliable products, and high-quality components that we
manufacture ourselves, while insisting that our suppliers
provide high-quality components at competitive prices. The
critical elements of our hard drive production are high volume,
low cost assembly and testing, and establishment and maintenance
of key supplier relationships. By establishing close
relationships with our strategic component suppliers, we believe
we access best-of-class technology and manufacturing quality. In
addition, we believe that our sourcing strategy currently
enables us to have the business flexibility needed to select the
highest quality, low cost of ownership suppliers as product
designs and technologies evolve.
Hard drive manufacturing is a complex process involving the
assembly of precision components with narrow tolerances and
thorough testing. The assembly process occurs in a clean
room environment that demands skill in process engineering
and efficient space utilization to control the operating costs
of this manufacturing environment. Our clean room manufacturing
process consists of modular production units, each of which
contains a number of work cells.
We manufacture hard drives in Malaysia and Thailand. We
continually evaluate our manufacturing processes in an effort to
increase productivity, sustain and improve quality and decrease
manufacturing costs. We continually evaluate which steps in the
manufacturing process would benefit from automation and how
automated manufacturing processes can improve productivity and
reduce manufacturing costs.
We use our wafer fabrication facilities in Fremont, California
and our slider fabrication facility in Bang Pa-In, Thailand, to
design and manufacture a substantial portion of the heads and
HGAs we include in the hard drives we manufacture.
We are currently expanding our head wafer fabrication facilities
in Fremont, California and expect to complete the expansion in
calendar 2009, which will provide us with adequate wafer
fabrication capacity for the foreseeable future.
Following our acquisition of Komag, we also have media and
substrate design and manufacturing facilities in Malaysia. We
use these facilities to design and manufacture most of the media
and substrates that we use in our products.
For an additional discussion of risks related to manufacturing,
see Item 1A of this Annual Report on
Form 10-K.
Materials
and Supplies
The following products are the major components currently used
in the manufacture of our hard drives:
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magnetic heads and media;
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suspensions with related HGAs and HSAs;
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spindle motors;
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custom and standard electronics such as system on chips, memory,
motor controllers,
pre-amps and
printed circuit boards;
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base and top covers; and
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magnets and related voice coil motors.
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We also use several other components in our hard drives such as
seals, filters, plastic molded parts, capacitors, resistors,
connectors and cables.
We design and manufacture a substantial portion of the heads,
media and substrates required for the hard drives we
manufacture. We purchase a portion of these components from
third party suppliers.
We acquire all of the remaining components for our products from
third party suppliers. We generally retain multiple suppliers
for each of our component requirements but in some instances use
sole sources for business reasons.
We sole-source some components, such as custom integrated
circuit devices for certain products from suppliers like Marvell
Technology, STMicroelectronics and Texas Instruments. Because of
their custom nature, these products require significant
design-in periods and long lead times. There has been a trend in
integrated circuit design toward increased integration of
various separate circuits and we expect this trend to continue
in custom integrated circuits for hard drives.
For an additional discussion of risks related to our component
supplies, see Item 1A of this Annual Report on
Form 10-K.
Backlog
Historically, a substantial portion of our orders have been for
shipments of hard drives within 30 to 60 days of the
placement of the order. We generally negotiate pricing, order
lead times, product support requirements and other terms and
conditions before receiving a customers first purchase
order for a product. Customers purchase orders typically
may be canceled with relatively short notice to us, with little
or no cost to the customer, or modified by customers to provide
for delivery at a later date. In addition, we make many of our
sales to OEMs under
just-in-time
delivery contracts that do not generally require firm order
commitments by the customer until the time of sale. Instead, we
receive a periodic forecast of requirements from the customer
and invoice the customer upon shipment of the product from the
just-in-time
warehouse. Therefore, backlog information as of the end of a
particular period is not necessarily indicative of future levels
of our revenue and profit and may not be comparable to earlier
periods.
Patents,
Licenses and Proprietary Information
We own numerous patents and have many patent applications in
process. We believe that, although our patents and patent
applications have considerable value, the successful
manufacturing and marketing of our products depends primarily
upon the technical and managerial competence of our staff.
Accordingly, the patents held and applied for do not ensure our
future success.
In addition to patent protection of certain intellectual
property rights, we consider elements of our product designs and
processes to be proprietary and confidential. We believe that
our non-patented intellectual property, particularly some of our
process technology, is an important factor in our success. We
rely upon non-disclosure agreements and contractual provisions
and a system of internal safeguards to protect our proprietary
information. Despite these safeguards, there is a risk that
competitors may obtain and use such information. The laws of
foreign jurisdictions in which we conduct business may provide
less protection for confidential information than the United
States.
We rely on certain technology that we license from other parties
to manufacture and sell WD products. We believe that we have
adequate cross-licenses and other agreements in place in
addition to our own intellectual property portfolio to compete
successfully in the hard drive industry. For additional
discussion of risks related to our ownership and use of
intellectual property, see Item 1A of this Annual Report on
Form 10-K.
14
Environmental
Regulation
We are subject to a variety of regulations in connection with
our operations. We believe that we have obtained or are in the
process of obtaining all necessary environmental permits for our
operations. For additional discussion of risks related to
environmental regulation, see Item 1A of this Annual Report
on
Form 10-K.
Employees
As of June 27, 2008, we employed a total of
50,072 employees worldwide. This represents an increase in
headcount of approximately 69% since June 29, 2007 and an
increase of approximately 102% since June 30, 2006. Many of
our employees are highly skilled, and our continued success
depends in part upon our ability to attract and retain such
employees. Accordingly, we offer employee benefit programs,
which we believe are, in the aggregate, competitive with those
offered by our competitors. We and most of our competitors
nevertheless have difficulty at times hiring and retaining
certain skilled employees. We have engaged consultants and
contract personnel to fill these needs until full-time employees
could be recruited. We consider our employee relations to be
good. For additional discussion of risks related to our skilled
employees, see Item 1A of this Annual Report on
Form 10-K.
Available
Information
We maintain an Internet web site at
http://www.westerndigital.com.
Our Annual Report on
Form 10-K,
Quarterly Reports on
Form 10-Q,
Current Reports on
Form 8-K
and amendments to reports filed pursuant to Sections 13(a)
and 15(d) of the Securities Exchange Act of 1934, as amended,
are available on our web site at
http://www.westerndigital.com,
free of charge, as soon as reasonably practicable after the
electronic filing of these reports with the SEC. Any materials
we file with the SEC are available at the SECs Public
Reference Room at 100 F Street, NE, Washington, DC
20549. Additional information about the operation of the Public
Reference Room can also be obtained by calling the SEC at
1-800-SEC-0330.
In addition, the SEC maintains a web site at
http://www.sec.gov
that contains reports, proxy and information statements, and
other information regarding issuers that file electronically
with the SEC, including us.
Executive
Officers of the Registrant
Listed below are all of our executive officers as of
June 27, 2008, followed by a brief account of their
business experience during the past five years. Executive
officers are normally appointed annually by the Board of
Directors at a meeting of the directors immediately following
the Annual Meeting of Stockholders. There are no family
relationships among these officers nor any arrangements or
understandings between any officer and any other person pursuant
to which an officer was selected.
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Name
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Age
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Position
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John F. Coyne
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President and Chief Executive Officer
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Timothy M. Leyden
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Executive Vice President and Chief Financial Officer
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Raymond M. Bukaty
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Senior Vice President, Administration, General Counsel and
Secretary
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Hossein Moghadam
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Senior Vice President and Chief Technology Officer
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Mr. Coyne, 58, has been a director since October
2006. He joined us in 1983 and has served in various
executive capacities. From November 2002 until June 2005,
Mr. Coyne served as Senior Vice President, Worldwide
Operations, from June 2005 until September 2005, he served as
Executive Vice President, Worldwide Operations and from November
2005 until June 2006, he served as Executive Vice President and
Chief Operations Officer. Effective June 2006, he was named
President and Chief Operating Officer. In January 2007, he
became President and Chief Executive Officer. Mr. Coyne is
a director of Jacobs Engineering Group Inc.
Mr. Leyden, 56, re-joined us in May 2007 as Executive Vice
President, Finance, and was promoted to Executive Vice President
and Chief Financial Officer in September 2007. From December
2001 to May 2007, Mr. Leyden served in senior finance
capacities at Sage Software Inc. and Sage Software of
California, subsidiaries of Sage Group PLC, a U.K. public
company that supplies accounting and business management
software to small and medium-sized businesses, including as
Senior Vice President, Finance and Chief Financial Officer from
May 2004 to May 2007, and as Vice President, Finance and
Chief Financial Officer from December 2001 to May 2004.
Mr. Leyden previously served in various worldwide finance,
manufacturing and information technology capacities with us from
1983 to December 2000.
15
Mr. Bukaty, 51, joined us in 1999 as Vice President,
Corporate Law. He was appointed to Vice President, General
Counsel and Secretary in March 2002, and to Senior Vice
President in January 2004, and assumed his current position as
Senior Vice President, Administration, General Counsel and
Secretary in October 2004.
Dr. Moghadam, 64, joined us in October 2000 as Vice
President, Engineering and site manager of our San Jose
facility. He served as Senior Vice President, Research and
Development from November 2004 to November 2005 and was
appointed Senior Vice President and Chief Technology Officer in
November 2005.
Item 1A. Risk
Factors
Declines
in average selling prices (ASPs) in the hard drive
industry could adversely affect our operating results.
The hard drive industry historically has experienced declining
ASPs. Our ASPs tend to decline when competitors lower prices as
a result of decreased costs or to absorb excess capacity,
liquidate excess inventories, restructure or attempt to gain
market share. Our ASPs also decline when there is a shift in the
mix of product sales, and sales of lower priced products
increase relative to those of higher priced products. When ASPs
in the hard drive industry decline, our ASPs are also likely to
decline, which adversely affects our operating results.
If we
fail to anticipate or timely respond to changes in the markets
for hard drives, our operating results could be adversely
affected.
Over the past few years the consumer market for computers has
shifted significantly towards lower priced systems. If we are
not able to continue to offer a competitively priced hard drive
for the low-cost PC market, our share of that market will likely
fall, which could harm our operating results.
The market for hard drives is also fragmenting into a variety of
devices and products. Many industry analysts expect, as do we,
that, as content increasingly converts to digital technology
from the older, analog technology, the technology of computers
and consumer electronics will continue to converge, and hard
drives will be found in many CE products other than computers.
In addition, we expect that the consumer market for multi-media
applications, including audio-video products, incorporating high
capacity, and handheld consumer storage will continue to grow.
However, because this market remains relatively new, accurate
forecasts for future growth remain challenging.
Moreover, some devices, such as personal video recorders and
digital video recorders, or some new PC operating systems which
allow greater consumer choice in levels of functionality,
therefore allowing for greater market differentiation, may
require attributes not currently offered in our products,
resulting in a need to develop new interfaces, form factors,
technical specifications or hard drive features, increasing our
overall operational expense without corresponding incremental
revenue at this stage. If we are not successful in continuing to
deploy our hard drive technology and expertise to develop new
products for the emerging CE market, or if we are required to
incur significant costs in developing such products, it may harm
our operating results.
Our
prices and margins are subject to declines due to unpredictable
end-user demand and oversupply of hard drives.
Demand for our hard drives depends on the demand for systems
manufactured by our customers and on storage upgrades to
existing systems. The demand for systems has been volatile in
the past and often has had an exaggerated effect on the demand
for hard drives in any given period. As a result, the hard drive
market has experienced periods of excess capacity which can lead
to liquidation of excess inventories and intense price
competition. If intense price competition occurs, we may be
forced to lower prices sooner and more than expected, which
could result in lower revenue and gross margins.
Our
failure to accurately forecast market and customer demand for
our products could adversely affect our business and financial
results.
The hard drive industry faces difficulties in accurately
forecasting market and customer demand for its products. The
variety and volume of products we manufacture is based in part
on these forecasts. If our forecasts exceed actual market
demand, or if market demand decreases significantly from our
forecasts, then we could experience periods of product
oversupply and price decreases, which could impact our financial
performance. If our forecasts do not meet actual market demand,
or if market demand increases significantly beyond our forecasts
or beyond our ability to add
16
manufacturing capacity, then we may not be able to satisfy
customer product needs, which could result in a loss of market
share if our competitors are able to meet customer demands.
We also use forecasts in making decisions regarding investment
of our resources. For example, as the hard drive industry
transitions from the Parallel Advanced Technology Attachment
(PATA) interface to the SATA interface, we may
invest more resources in the development of products using the
SATA interface. If our forecasts regarding the replacement of
the PATA interface with the SATA interface are inaccurate, we
may not have products available to meet our customers
needs.
In addition, although we receive forecasts from our customers,
they are not generally obligated to purchase the forecasted
amounts. In particular, sales volumes in the distribution and
retail channels are volatile and harder to predict than sales to
our OEM or ODM customers. We consider these forecasts in
determining our component needs and our inventory requirements.
If we fail to accurately forecast our customers product
demands, we may have inadequate or excess inventory of our
products or components, which could adversely affect our
operating results.
Increases
in areal density may outpace customers demand for storage
capacity, which may lower the prices our customers are willing
to pay for new products.
Historically, the industry has experienced periods of variable
areal density growth rates. When the rate of areal density
growth increases, the rate of increase may exceed the increase
in our customers demand for aggregate storage capacity.
Furthermore, our customers demand for storage capacity may
not continue to grow at current industry estimates as a result
of developments in the regulation and enforcement of digital
rights management or otherwise. These factors could lead to our
customers storage capacity needs being satisfied with
lower capacity hard drives at lower prices, thereby decreasing
our revenue. As a result, even with increasing aggregate demand
for storage capacity, our ASPs could decline, which could
adversely affect our operating results.
Expansion
into new hard drive markets may cause our capital expenditures
to increase and if we do not successfully expand into new
markets, our business may suffer.
To remain a significant supplier of hard drives, we will need to
offer a broad range of hard drive products to our customers. We
currently offer a variety of 3.5-inch hard drives for the
desktop, enterprise, CE and external storage markets, and we
also offer 2.5-inch form factor hard drives for the mobile, CE
and external storage markets. However, demand for hard drives
may shift to products in form factors or with interfaces that
our competitors offer but which we do not. Expansion into other
hard drive markets and resulting increases in manufacturing
capacity requirements may require us to make substantial
additional investments due in part because our operations are
largely vertically integrated. If we fail to successfully expand
into new hard drive markets with products that we do not
currently offer, we may lose business to our competitors who
offer these products.
If we
fail to successfully manage our new product development or new
market expansion, or if we fail to anticipate the issues
associated with such development or expansion, our business may
suffer.
While we continue to develop new products and look to expand
into other hard drive markets, the success of our new product
introductions is dependent on a number of factors, including our
ability to anticipate and manage a variety of issues associated
with these new products and new markets, such as:
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difficulties faced in manufacturing ramp;
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market acceptance;
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effective management of inventory levels in line with
anticipated product demand; and
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quality problems or other defects in the early stages of new
product introduction that were not anticipated in the design of
those products.
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Further, we need to identify how any of the hard drive markets
into which we are expanding may have different characteristics
from the markets in which we currently exist and properly
address these differences. These characteristics may include:
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demand volume growth rates;
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demand seasonality;
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product generation development rates;
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customer concentrations;
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warranty expectations and product return policies; and
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cost, performance and compatibility requirements.
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Our business may suffer if we fail to successfully anticipate
and manage these issues associated with our product development
and market expansion. For example, our branded products are
designed to attach to and interoperate with a wide variety of PC
and CE devices and therefore their functionality is reliant on
the manufacturer of such devices, or the associated operating
systems, enabling the manufacturers devices to operate
with our branded products. If our branded products are not
compatible with a wide variety of devices, or if device
manufacturers design their devices so that our branded products
cannot operate with them, and we cannot quickly and efficiently
adapt our branded products to address these compatibility
issues, our business could suffer.
Expanding
into new hard drive markets exposes our business to different
seasonal demand cycles, which in turn could adversely affect our
operating results.
The CE and retail markets have different seasonal pricing and
volume demand cycles as compared to the PC market. By expanding
into these markets, we became exposed to seasonal fluctuations
that are different from, and in addition to, those of the PC
market. For example, because the primary customer for products
such as our branded products are individual consumers, these
markets experience a dramatic increase in demand during the
winter holiday season. If we do not properly adjust our supply
to new demand cycles such as this, we risk having excess
inventory during periods of low demand and insufficient
inventory during periods of high demand, therefore adversely
affecting our operating results.
If we do
not predict the size and demands of the market for 2.5-inch hard
drives, our business may suffer.
To continue to increase the sale of our 2.5-inch hard drives in
the mobile market, we must predict and successfully adapt to the
differences between the desktop and mobile markets, such as
different requirements, features and competitors. If we do not
predict the size and demands of the markets for 2.5-inch hard
drives, including the mobile market, our business may suffer.
For example, if a market that traditionally has used 3.5-inch
hard drives, such as the desktop PC market, shifts its volume
demand to 2.5-inch hard drives at a faster rate than we
anticipate, our ability to meet the demands of such market, as
well as the mobile market, may be impaired, which may cause our
business to suffer.
Selling
to the retail market has become an important part of our
business, and if we fail to maintain and grow our market share
or gain market acceptance of our branded products, our operating
results could suffer.
We sell our branded products directly to a select group of major
retailers, for example, computer superstores and CE stores, and
authorize sales through distributors to other retailers and
online resellers. Our current retail customer base is primarily
in the United States, Canada and Europe. We are facing increased
competition from other companies for shelf space at a small
number of major retailers that have strong buying power and
pricing leverage. If we fail to successfully maintain a customer
preference for
WD®brand
products or fail to successfully expand into multiple channels,
our operating results may be adversely affected. We face strong
competition in maintaining and trying to grow our market share
in the retail market, particularly because of the relatively low
barriers to entry in this market. For example, several
additional hard drive manufacturers have recently disclosed
plans to expand into the external storage market and as these
companies attempt to gain market share, we may have difficulty
in maintaining or growing our market share and there may be
increased downward pressure on pricing. We will continue to
introduce new products in the retail market that incorporate our
disk drives; however, there can be no assurance that these
products will gain market acceptance, and if they do not, our
operating results could suffer.
18
Loss of
market share with or by a key customer could harm our operating
results.
During the year ended June 27, 2008, a large percentage of
our revenue came from sales to our top 10 customers, which
accounted for 47% of our revenue. These customers have a variety
of suppliers to choose from and therefore can make substantial
demands on us, including demands on product pricing and on
contractual terms, which often results in the allocation of risk
to us as the supplier. Even if we successfully qualify a product
with a customer, the customer generally is not obligated to
purchase any minimum volume of products from us and may be able
to cancel an order or terminate its relationship with us at any
time. Our ability to maintain strong relationships with our
principal customers is essential to our future performance. If
we lose a key customer, if any of our key customers reduce their
orders of our products or require us to reduce our prices before
we are able to reduce costs, if a customer is acquired by one of
our competitors or if a key customer suffers financial hardship,
our operating results would likely be harmed. In addition, if
customer pressures require us to reduce our pricing such that
our gross margins are diminished, we could decide not to sell
our products to a particular customer, which could result in a
decrease in our revenue.
Current
or future competitors may gain a technology advantage or develop
an advantageous cost structure that we cannot match.
It may be possible for our current or future competitors to gain
an advantage in product technology, manufacturing technology, or
process technology, which may allow them to offer products or
services that have a significant advantage over the products and
services that we offer. Advantages could be in capacity,
performance, reliability, serviceability, or other attributes.
Higher capacity storage needs have typically been better served
by magnetic hard drives than flash memory as hard drive
manufacturers can offer better value at high capacities, while
lower capacity needs have been successfully served by solid
state storage such as flash memory technology. Advances in
magnetic, optical, semiconductor or other data storage
technologies could result in competitive products that have
better performance or lower cost per unit of capacity than our
products. If we fail to be cost competitive against flash
memory, we could be at a competitive disadvantage to companies
using semiconductor technology.
Further
industry consolidation could provide competitive advantages to
our competitors.
The hard drive industry has experienced consolidation over the
past several years. Consolidation by our competitors may enhance
their capacity, abilities and resources and lower their cost
structure, causing us to be at a competitive disadvantage.
Additionally, continued industry consolidation may lead to
uncertainty in areas such as component availability, which could
negatively impact our cost structure.
Sales in
the distribution channel are important to our business, and if
we fail to maintain brand preference with our distributors or if
distribution markets for hard drives weaken, our operating
results could suffer.
Our distribution customers typically sell to small computer
manufacturers, dealers, systems integrators and other resellers.
We face significant competition in this channel as a result of
limited product qualification programs and a significant focus
on price and availability of product. If we fail to remain
competitive in terms of our technology, quality, service and
support, our distribution customers may favor our competitors,
and our operating results could suffer. We also face significant
risk in the distribution market for hard drives. If the
distribution market weakens as a result of a slowing PC growth
rate, technology transitions or a significant change in consumer
buying preference from white box to branded PCs, or we
experience significant price declines due to oversupply in the
distribution channel, then our operating results would be
adversely affected.
The hard
drive industry is highly competitive and can be characterized by
significant shifts in market share among the major
competitors.
The price of hard drives has fallen over time due to increases
in supply, cost reductions, technological advances and price
reductions by competitors seeking to liquidate excess
inventories or attempting to gain market share. In addition,
rapid technological changes often reduce the volume and
profitability of sales of existing products and increase the
risk of inventory obsolescence. We also face competition from
other companies that produce alternative storage technologies
like flash memory. These factors, taken together, may result in
significant shifts in market share among the industrys
major participants. In addition, product recalls can lead to a
loss of market share, which could adversely affect our operating
results.
19
Some of
our competitors with diversified business units outside the hard
drive industry periodically sell hard drives at prices that we
cannot profitably match.
Some of our competitors earn a significant portion of their
revenue from business units outside the hard drive industry.
Because they do not depend solely on sales of hard drives to
achieve profitability, they periodically sell hard drives at
lower prices and operate their hard drive business unit at a
loss while still remaining profitable overall. In addition, if
these competitors can increase sales of non-hard drive products
to the same customers, they may benefit from selling their hard
drives at low prices. Our operating results may be adversely
affected if we cannot successfully compete with the pricing by
these companies.
If we
fail to qualify our products with our customers, they may not
purchase any units of a particular product line, which would
have a significant adverse impact on our sales.
We regularly engage in new product qualification with our
customers. Once a product is accepted for qualification testing,
failures or delays in the qualification process can result in
our losing sales to that customer until the next generation of
products is introduced. The effect of missing a product
qualification opportunity is magnified by the limited number of
high volume OEMs, which continue to consolidate their share of
the PC and CE markets. If product life cycles lengthen, we may
have a significantly longer period to wait before we have an
opportunity to qualify a new product with a customer, which
could harm our competitive position. These risks are increased
because we expect cost improvements and competitive pressures to
result in declining gross margins on our current generation
products.
We are
subject to risks related to product defects, which could result
in product recalls and could subject us to warranty claims in
excess of our warranty provisions or which are greater than
anticipated due to the unenforceability of liability
limitations.
We warrant the majority of our products for periods of one to
five years. We test our hard drives in our manufacturing
facilities through a variety of means. However, there can be no
assurance that our testing will reveal latent defects in our
products, which may not become apparent until after the products
have been sold into the market. Accordingly, there is a risk
that product defects will occur, which could require a product
recall. Product recalls can be expensive to implement and, if a
product recall occurs during the products warranty period,
we may be required to replace the defective product. In
addition, a product recall may damage our relationship with our
customers, and we may lose market share with our customers,
including our OEM and ODM customers.
Our standard warranties contain limits on damages and exclusions
of liability for consequential damages and for misuse, improper
installation, alteration, accident or mishandling while in the
possession of someone other than us. We record an accrual for
estimated warranty costs at the time revenue is recognized. We
may incur additional operating expenses if our warranty
provision does not reflect the actual cost of resolving issues
related to defects in our products. If these additional expenses
are significant, it could adversely affect our business,
financial condition and operating results.
A low
cost structure is critical to our operating results and
increased costs may adversely affect our operating
margin.
A low cost structure for our products, including critical
components, labor and overhead, is critical to the success of
our business, and our operating results depend on our ability to
maintain competitive cost structures on new and established
products. If our competitors are able to achieve a lower cost
structure for manufacturing hard drives, and we are unable to
match their cost structure, we could be at a competitive
disadvantage to those competitors.
Shortages
of commodity materials, price volatility, or use by other
industries of materials used in the hard drive industry, may
increase our cost structure.
There are costs for certain commodity materials, an increase of
which increases our costs of manufacturing and transporting hard
drives and key components. Shortages of materials such as
stainless steel, aluminum, nickel, neodymium, ruthenium or
platinum increase our costs and may result in lower operating
margins if we are unable to find ways to mitigate these
increased costs. For example, in advance of the 2008 Beijing
Summer Olympics, in seeking to minimize pollution, the
Peoples Republic of China shut down factories within a
specified radius of Beijing. These factory shut-downs may cause
a future shortage in materials we use in nickel plating of
magnetic media, causing prices to increase and adversely
affecting our nickel plating costs. Additionally, perpendicular
recording technology requires increased usage of precious metals
such as ruthenium and platinum, the price of which may continue
to be volatile, which
20
could adversely affect our operating margins. Furthermore, if
other high volume industries increase their demand for materials
such as these, our costs may further increase which could have
an adverse effect on our operating margins. The volatility in
the cost of oil also affects our transportation costs and may
result in lower operating margins if we are unable to pass these
increased costs through to our customers.
If we
fail to maintain effective relationships with our major
component suppliers, our supply of critical components may be at
risk and our profitability could suffer.
We make most of our own heads and media for some of our product
families; however, we do not manufacture many of the component
parts used in our hard drives. As a result, the success of our
products depends on our ability to gain access to and integrate
parts that are best in class from reliable component
suppliers. To do so, we must effectively manage our
relationships with our major component suppliers. We must also
effectively integrate different products from a variety of
suppliers, each of which employs variations on technology, which
can impact, for example, feasible combinations of heads and
media components. In August 2003, we settled litigation with a
supplier who previously was the sole source of read channel
devices for our hard drives. As a result of the disputes that
gave rise to the litigation, our profitability was at risk until
another suppliers read channel devices could be designed
into our products. Similar disputes with other strategic
component suppliers could adversely affect our operating results.
Violation
of labor or environmental laws and practices by our suppliers or
sub-suppliers could harm our business.
We expect our suppliers to operate in compliance with applicable
laws and regulations, including labor and environmental laws,
and to otherwise meet our required supplier standards of
conduct. While our internal operating guidelines promote ethical
business practices, we do not control our suppliers or
sub-suppliers or their labor or environmental practices. The
violation of labor, environmental or other laws by any of our
suppliers or sub-suppliers, or divergence of a suppliers
or sub-suppliers labor or environmental practices from
those generally accepted as ethical in the U.S., could harm our
business by:
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interrupting or otherwise disrupting the shipment of our product
components;
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damaging our reputation;
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forcing us to find alternate component sources;
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reducing demand for our products (for example, through a
consumer boycott); or
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exposing us to potential liability for our suppliers or
sub-suppliers wrongdoings.
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Dependence
on a limited number of qualified suppliers of components and
manufacturing equipment could lead to delays, lost revenue or
increased costs.
Certain components are available from a limited number of
suppliers, and we are sole sourced with some of these suppliers
on certain products. Because we depend on a limited number of
suppliers for certain hard drive components and manufacturing
equipment, each of the following could significantly harm our
operating results:
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an increase in the cost of such components or equipment;
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an extended shortage of required components or equipment;
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consolidation of key suppliers, such as the acquisition of
Brilliant Manufacturing Limited by Nidec Corporation, the
acquisition of Agere Systems Inc. by LSI Corporation, the
acquisition of Infineon Technologies hard drive
semiconductor business by LSI Corporation, the acquisition of
Alps Electric Co. Ltd.s magnetic device divisions
assets and related intellectual property by TDK Corp, and the
acquisition of Magnecomp Precision Technology Public Company
Limited by TDK Corp;
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failure of a key suppliers business process; or
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failure of key suppliers to remain in business, to remain
independent merchant suppliers, to adjust to market conditions,
or to meet our quality, yield or production requirements.
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If
components and equipment that we use are available from only a
limited number of suppliers or are in short supply, it may
negatively impact our production and cause us to lose
revenue.
Our future operating results may also depend substantially on
our suppliers ability to timely qualify their components
in our programs, and their ability to supply us with these
components in sufficient volumes to meet our production
requirements. A number of the components that we use are
available from only a single or limited number of qualified
outside suppliers, and may be used across multiple product
lines. In addition, some of the components (or component types)
used in our products are used in other devices, such as mobile
telephones and digital cameras. If there is a significant
simultaneous upswing in demand for such a component (or
component type) from several high volume industries, resulting
in a supply reduction, or a component is otherwise in short
supply, or if a supplier fails to qualify or has a quality issue
with a component, we may experience delays or increased costs in
obtaining that component. If we are unable to obtain sufficient
quantities of materials used in the manufacture of magnetic
components, or other necessary components, we may experience
production delays which could cause us loss of revenue. If a
component becomes unavailable, we could suffer significant loss
of revenue.
In addition, certain equipment we use in our manufacturing or
testing processes is available only from a limited number of
suppliers. Some of this equipment uses materials that at times
could be in short supply. If these materials are not available,
or are not available in the quantities we require for our
manufacturing and testing processes, our ability to manufacture
our products could be impacted, and we could suffer significant
loss of revenue.
Contractual
commitments with component suppliers may result in us paying
increased charges and cash advances for such
components.
To reduce the risk of component shortages, we attempt to provide
significant lead times when buying components. As a result, we
may be subject to cancellation charges if we cancel orders,
which may occur when we make technology transitions or when our
component needs change. In addition, we have entered into
contractual commitments with component suppliers and may enter
into contractual commitments with other component suppliers, in
an effort to increase and stabilize the supply of those
components, and enable us to purchase such components at
favorable prices. Some of these commitments require or may
require us to buy a substantial number of components from the
supplier or make significant cash advances to the supplier;
however, these commitments may not result in a satisfactory
increase or stabilization of the supply of such components.
Failure
by certain suppliers to effectively and efficiently develop and
manufacture components for our products may adversely affect our
operations.
We rely on suppliers for various component parts that we
integrate into our hard drives but do not manufacture ourselves,
such as semiconductors, motors, flex circuits and suspensions.
Some of these components must be specifically designed to be
compatible for use in our products, and are only available from
a limited number of suppliers with whom we are sole sourced for
certain products. We are therefore dependent on the suppliers of
these various components to be able and willing to dedicate
adequate engineering resources to develop technology that can be
successfully integrated with our products, and to manufacture
these components efficiently. The failure of component suppliers
to effectively and efficiently develop and manufacture
technology that can be integrated into our products may cause us
to experience inability or delay in our manufacturing and
shipment of hard drive products, or our expansion into new
technology and markets, therefore adversely affecting our
business and financial results.
There are
certain additional capital expenditure costs and asset
utilization risks to our business associated with our strategy
to vertically integrate our operations.
Our vertical integration of head and media manufacturing
resulted in a fundamental change in our operating structure, as
we now manufacture heads and media for use in many of the hard
drives we manufacture. Consequently, we make more capital
investments than we would if we were not vertically integrated
and carry a higher percentage of fixed costs than assumed in our
prior financial business model. If the overall level of
production decreases for any reason, and we are unable to reduce
our fixed costs to match sales, our head or media manufacturing
assets may face under-utilization that may impact our operating
results. We are therefore subject to additional risks related to
overall asset utilization,
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including the need to operate at high levels of utilization to
drive competitive costs and the need for assured supply of
components that we do not manufacture ourselves.
In addition, we may incur additional risks, including:
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failure to continue to leverage the integration of our media
technology with our head technology;
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insufficient third party sources to satisfy our needs if we are
unable to manufacture a sufficient supply of heads or media;
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third party head or media suppliers may not continue to do
business with us or may not do business with us on the same
terms and conditions we have previously enjoyed;
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claims that our manufacturing of heads or media may infringe
certain intellectual property rights of other companies; and
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difficulties locating in a timely manner suitable manufacturing
equipment for our head or media manufacturing processes and
replacement parts for such equipment.
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If we do not adequately address the challenges related to our
head or media manufacturing operations, our ongoing operations
could be disrupted, resulting in a decrease in our revenue or
profit margins and negatively impacting our operating results.
If we are
unable to timely and cost-effectively develop heads and media
with leading technology and overall quality, our ability to sell
our products may be significantly diminished, which could
materially and adversely affect our business and financial
results.
Under our business plan, we are developing and manufacturing a
substantial portion of the heads and media used in some of the
hard drive products we manufacture. Consequently, we are more
dependent upon our own development and execution efforts and
less able to take advantage of head and media technologies
developed by other manufacturers. Technology transition for head
and media designs is critical to increasing our volume
production of heads and media. There can be no assurance,
however, that we will be successful in timely and
cost-effectively developing and manufacturing heads or media for
products using future technologies. We also may not effectively
transition our head or media design and technology to achieve
acceptable manufacturing yields using the technologies necessary
to satisfy our customers product needs, or we may
encounter quality problems with the heads or media we
manufacture. In addition, we may not have access to external
sources of supply without incurring substantial costs which
would negatively impact our business and financial results.
Changes
in product life cycles could adversely affect our financial
results.
If product life cycles lengthen, we may need to develop new
technologies or programs to reduce our costs on any particular
product to maintain competitive pricing for that product. If
product life cycles shorten, it may result in an increase in our
overall expenses and a decrease in our gross margins, both of
which could adversely affect our operating results. In addition,
shortening of product life cycles also make it more difficult to
recover the cost of product development before the product
becomes obsolete. Our failure to recover the cost of product
development in the future could adversely affect our operating
results.
If we
fail to make the technical innovations necessary to continue to
increase areal density, we may fail to remain
competitive.
New products in the hard drive market typically require higher
areal densities than previous product generations, posing
formidable technical and manufacturing challenges. Higher areal
densities require existing head and media technology to be
improved or new technology developed to accommodate more data on
a single disk. In addition, our introduction of new products
during a technology transition increases the likelihood of
unexpected quality concerns. Our failure to bring high quality
new products to market on time and at acceptable costs may put
us at a competitive disadvantage to companies that achieve these
results.
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A
fundamental change in recording technology could result in
significant increases in our operating expenses and could put us
at a competitive disadvantage.
Historically, when the industry experiences a fundamental change
in technology, any manufacturer that fails to successfully and
timely adjust its designs and processes to accommodate the new
technology fails to remain competitive. There are some
technologies, such as current-perpendicular-to-plane
(CPP) and heat assisted magnetic recording
(HAMR), discrete track recording (DTR)
and other similar potentially break through technology, that
will represent revolutionary recording technologies if they can
be implemented by a competitor on a commercially viable basis
ahead of the industry, which could put us at a competitive
disadvantage. As a result of these technology shifts, we could
incur substantial costs in developing new technologies, such as
heads, media, and tools to remain competitive. If we fail to
successfully implement these new technologies, or if we are
significantly slower than our competitors at implementing new
technologies, we may not be able to offer products with
capacities that our customers desire. For example, new recording
technology requires changes in the manufacturing process of
heads and media, which may cause longer production times and
reduce the overall availability of media in the industry.
Additionally, the new technology requires a greater degree of
integration between heads and media which may lengthen our time
of development of hard drives using this technology.
Furthermore, as we attempt to develop and implement new
technologies, we may become more dependent on suppliers to
ensure our access to components that accommodate the new
technology. These results would increase our operating costs,
which may negatively impact our operating results.
The
difficulty of introducing hard drives with higher levels of
areal density and the challenges of reducing other costs may
impact our ability to achieve historical levels of cost
reduction.
Storage capacity of the hard drive, as manufactured by us, is
determined by the number of disks and each disks areal
density. Areal density is a measure of the amount of magnetic
bits that can be stored on the recording surface of the disk.
Generally, the higher the areal density, the more information
can be stored on a single platter. Historically, we have been
able to achieve a large percentage of cost reduction through
increases in areal density. Increases in areal density mean that
the average drive we sell has fewer heads and disks for the same
capacity and, therefore, may result in a lower component cost.
However, because increasing areal density has become more
difficult in the hard drive industry, such increases may require
increases in component costs, and other opportunities to reduce
costs may not continue at historical rates. Additionally,
increases in areal density may require us to make further
capital expenditures on items such as new testing equipment
needed as a result of an increased number of GB per platter. Our
inability to achieve cost reductions could adversely affect our
operating results.
If we do
not properly manage the technology transitions of our products,
our operating results may be negatively affected.
Many of the markets in which we offer our products are
undergoing technology transitions. For example, in order to
handle higher data transfer rates, the PC and enterprise markets
are transitioning from parallel interfaces, such as PATA and
SCSI, to serial interfaces, such as SATA and SAS, respectively.
We must effectively manage the transition of the features of our
products to serial interfaces in order to remain competitive and
cost effective. In the PC market, we currently offer PATA and
SATA products and must timely and efficiently manage both our
manufacture of PATA products through their end of life and our
ramp of SATA products and features. If we fail to successfully
manage the transition from parallel interfaces to serial
interfaces, our operating results may suffer.
Our
high-volume hard drive and media manufacturing facilities, and
the manufacturing facilities of many of our suppliers, are
concentrated in Asia, which subjects us to the risk of damage or
loss of any of these facilities and localized risks to employees
in these locations.
Our high-volume hard drive and media manufacturing facilities
are in Malaysia and Thailand and the manufacturing facilities of
many of our suppliers are in Asia. A condition or event such as
political instability, civil unrest or a power outage, or a
fire, flood, earthquake or other disaster that adversely affects
any of these facilities or our ability to manufacture could
limit the total volume of hard drives we are able to manufacture
and result in a loss of sales and revenue and harm our operating
results. Similarly, a localized health risk affecting our
employees or the staff of our suppliers, such as a new pandemic
influenza in Asia, could impair the total volume of hard drives
that we are able to manufacture.
24
Our head
manufacturing operations include a single wafer fabrication
facility in California and a single head gimbal assembly
facility in Thailand, and our media operations include four
facilities in Malaysia, which subjects us to substantial risk of
damage or loss if operations at any of these facilities are
disrupted.
As we have previously discussed in public statements, our
business plan presently contemplates that we will design and
manufacture a substantial portion of the heads and media
required for the hard drives we manufacture. We fabricate wafers
in our Fremont, California facility, and the wafers are then
sent to our Thailand facility for slider fabrication and wafer
slicing and HGA assembly and testing. Additionally, we
manufacture the majority of our media and substrates in four
facilities in Penang, Johor and Sarawak, Malaysia. A fire,
flood, earthquake or other disaster, condition or event such as
a power outage that adversely affects any of these facilities
would significantly affect supply of our heads or media, and
limit our ability to manufacture hard drives which would result
in a substantial loss of sales and revenue and a substantial
harm to our operating results.
Our
operating results will be adversely affected if we fail to
optimize the overall quality, time-to-market and time-to-volume
of new and established products.
To achieve consistent success with our customers, we must
balance several key attributes such as time-to-market,
time-to-volume, quality, cost, service, price and a broad
product portfolio. Our operating results will be adversely
affected if we fail to:
|
|
|
|
|
maintain overall quality of products in new and established
programs;
|
|
|
|
produce sufficient quantities of products at the capacities our
customers demand while managing the integration of new and
established technologies;
|
|
|
|
develop and qualify new products that have changes in overall
specifications or features that our customers may require for
their business needs;
|
|
|
|
obtain commitments from our customers to qualify new products,
redesigns of current products, or new components in our existing
products;
|
|
|
|
obtain customer qualification of these products on a timely
basis by meeting all of our customers needs for
performance, quality and features;
|
|
|
|
maintain an adequate supply of components required to
manufacture our products; or
|
|
|
|
maintain the manufacturing capability to quickly change our
product mix between different capacities, form factors and spin
speeds in response to changes in customers product demands.
|
Manufacturing
and marketing our products abroad subjects us to numerous
risks.
We are subject to risks associated with our foreign
manufacturing operations and foreign marketing efforts,
including:
|
|
|
|
|
obtaining requisite U.S. and foreign governmental permits
and approvals;
|
|
|
|
currency exchange rate fluctuations or restrictions;
|
|
|
|
political instability and civil unrest;
|
|
|
|
limited transportation availability, delays, and extended time
required for shipping, which risks may be compounded in periods
of price declines;
|
|
|
|
higher freight rates;
|
|
|
|
labor problems;
|
|
|
|
trade restrictions or higher tariffs;
|
|
|
|
copyright levies or similar fees imposed in European and other
countries:
|
|
|
|
exchange, currency and tax controls and reallocations;
|
25
|
|
|
|
|
increasing labor and overhead costs; and
|
|
|
|
loss or non-renewal of favorable tax treatment under agreements
or treaties with foreign tax authorities.
|
Terrorist
attacks may adversely affect our business and operating
results.
The continued threat of terrorist activity and other acts of war
or hostility have created uncertainty in the financial and
insurance markets and have significantly increased the
political, economic and social instability in some of the
geographic areas in which we operate. Additionally, it is
uncertain what impact the reactions to such acts by various
governmental agencies and security regulators worldwide will
have on shipping costs. Acts of terrorism, either domestically
or abroad, could create further uncertainties and instability.
To the extent this results in disruption or delays of our
manufacturing capabilities or shipments of our products, our
business, operating results and financial condition could be
adversely affected.
Sudden
disruptions to the availability of freight lanes could have an
impact on our operations.
We ship the majority of our products to our various customers
via air freight. The sudden unavailability of air cargo
operations used to ship our products would impair our ability to
deliver our products in a timely and efficient manner, which
could adversely impact our operating results. We also ship a
portion of our product via ocean freight, and events or
conditions at shipping ports, such as labor difficulties or
disputes, could also impact our operating results by impairing
our ability to timely and efficiently deliver these products.
We are
vulnerable to system failures, which could harm our
business.
We are heavily dependent on our technology infrastructure, among
other functions, to operate our factories, sell our products,
fulfill orders, manage inventory and bill, collect and make
payments. Our systems are vulnerable to damage or interruption
from natural disasters, power loss, telecommunication failures,
computer viruses, computer denial-of-service attacks and other
events. Our business is also subject to break-ins, sabotage and
intentional acts of vandalism by third parties as well as
employees. Despite any precautions we may take, such problems
could result in, among other consequences, interruptions in our
business, which could harm our reputation and financial
condition.
We may be
unable to retain our key staff and skilled employees.
Our success depends upon the continued contributions of our key
staff and skilled employees, many of whom would be extremely
difficult to replace. Worldwide competition for skilled
employees in the hard drive industry is intense. Volatility or
lack of positive performance in our stock price may adversely
affect our ability to retain key staff or skilled employees who
have received equity compensation. If we are unable to retain
our existing key staff or skilled employees, or hire and
integrate new key staff or skilled employees, or if we fail to
implement succession plans for our key staff, our operating
results would likely be harmed.
The
nature of our business and our reliance on intellectual property
and other proprietary information subjects us to the risk of
significant litigation.
The hard drive industry has been characterized by significant
litigation. This includes litigation relating to patent and
other intellectual property rights, product liability claims and
other types of litigation. Litigation can be expensive, lengthy
and disruptive to normal business operations. Moreover, the
results of litigation are inherently uncertain and may result in
adverse rulings or decisions. We may enter into settlements or
be subject to judgments that may, individually or in the
aggregate, have a material adverse effect on our business,
financial condition or operating results.
We evaluate notices of alleged patent infringement and notices
of patents from patent holders that we receive from time to
time. If claims or actions are asserted against us, we may be
required to obtain a license or cross-license, modify our
existing technology or design a new non-infringing technology.
Such licenses or design modifications can be extremely costly.
In addition, we may decide to settle a claim or action against
us, which settlement could be costly. We may also be liable for
any past infringement. If there is an adverse ruling against us
in an infringement lawsuit, an injunction could be issued
barring production or sale of any infringing product. It could
also result in a damage award
26
equal to a reasonable royalty or lost profits or, if there is a
finding of willful infringement, treble damages. Any of these
results would increase our costs and harm our operating results.
Our
reliance on intellectual property and other proprietary
information subjects us to the risk that these key ingredients
of our business could be copied by competitors.
Our success depends, in significant part, on the proprietary
nature of our technology, including non-patentable intellectual
property such as our process technology. Despite safeguards, to
the extent that a competitor is able to reproduce or otherwise
capitalize on our technology, it may be difficult, expensive or
impossible for us to obtain necessary legal protection. Also,
the laws of some foreign countries may not protect our
intellectual property to the same extent as do the laws of the
United States. In addition to patent protection of intellectual
property rights, we consider elements of our product designs and
processes to be proprietary and confidential. We rely upon
employee, consultant and vendor non-disclosure agreements and
contractual provisions and a system of internal safeguards to
protect our proprietary information. However, any of our
registered or unregistered intellectual property rights may be
challenged or exploited by others in the industry, which might
harm our operating results.
Environmental
regulation costs could harm our operating results.
We may be subject to various state, federal and international
laws and regulations governing the environment, including those
restricting the presence of certain substances in electronic
products and making producers of those products financially
responsible for the collection, treatment, recycling and
disposal of certain products. Such laws and regulations have
been passed in several jurisdictions in which we operate. For
example, the European Union has enacted the Restriction of the
Use of Certain Hazardous Substances in Electrical and Electronic
Equipment (RoHS) directive, which prohibits the use
of certain substances in electronic equipment, and the Waste
Electrical and Electronic Equipment (WEEE)
directive, which obligates parties that place electrical and
electronic equipment onto the market in the EU to put a clearly
identifiable mark on the equipment, register with and report to
EU member countries regarding distribution of the equipment, and
provide a mechanism to take-back and properly dispose of the
equipment. Similar legislation may be enacted in other locations
where we manufacture or sell our products. We will need to
ensure that we comply with such laws and regulations as they are
enacted, and that our component suppliers also timely comply
with such laws and regulations. If we fail to timely comply with
the legislation, our customers may refuse to purchase our
products, which would have a materially adverse effect on our
business, financial condition and operating results.
In connection with our compliance with such environmental laws
and regulations, we could incur substantial costs and be subject
to disruptions to our operations and logistics. In addition, if
we were found to be in violation of these laws, we could be
subject to governmental fines and liability to our customers. If
we have to make significant capital expenditures to comply with
environmental laws, or if we are subject to significant expenses
in connection with a violation of these laws, our financial
condition or operating results could suffer.
Fluctuations
in currency exchange rates as a result of our international
operations may negatively affect our operating
results.
Because we manufacture our products abroad, our operating costs
are subject to fluctuations in foreign currency exchange rates.
Further fluctuations in the exchange rate of the Thai Baht and
of the Malaysian Ringgit may negatively impact our operating
results.
The Thai Baht is a free floating currency while the Malaysian
Ringgit exchange rate policy is one of a managed float. We have
attempted to manage the impact of foreign currency exchange rate
changes by, among other things, entering into short-term,
forward contracts. However, these contracts do not cover our
full exposure and can be canceled by the issuer if currency
controls are put in place. Currently, we hedge the Thai Baht,
Malaysian Ringgit, Euro and British Pound Sterling with forward
contracts.
If the U.S. dollar exhibits sustained weakness against most
foreign currencies, the U.S. dollar equivalents of unhedged
manufacturing costs could increase because a significant portion
of our production costs are foreign-currency denominated.
Conversely, there would not be an offsetting impact to revenues
since revenues are substantially U.S. dollar denominated.
27
Increases
in our customers credit risk could result in credit losses
and an increase in our operating costs.
Some of our OEM customers have adopted a subcontractor model
that requires us to contract directly with companies, such as
ODMs, that provide manufacturing services to our OEM customers.
Because these subcontractors are generally not as well
capitalized as our direct OEM customers, this subcontractor
model exposes us to increased credit risks. Our agreements with
our OEM customers may not permit us to increase our product
prices to alleviate this increased credit risk. Additionally, as
we attempt to expand our OEM and distribution channel sales into
emerging economies such as Brazil, Russia, India and China, the
customers in these regions may have relatively short operating
histories, making it more difficult for us to accurately assess
the associated credit risks. Any credit losses we may suffer as
a result of these increased risks, or as a result of credit
losses from any significant customer, would increase our
operating costs, which may negatively impact our operating
results.
Negative
conditions in the credit markets could result in a decrease in
sales and lower revenue in the distribution channel.
Many of our customers in the distribution channel rely on credit
financing in order to purchase our products. If the recent
negative conditions in the global credit markets prevent our
customers access to credit, product orders in the
distribution channel may decrease which could result in lower
revenue.
Inaccurate
projections of demand for our product can cause large
fluctuations in our quarterly results.
We often ship a high percentage of our total quarterly sales in
the third month of the quarter, which makes it difficult for us
to forecast our financial results before the end of the quarter.
In addition, our quarterly projections and results may be
subject to significant fluctuations as a result of a number of
other factors including:
|
|
|
|
|
the timing of orders from and shipment of products to major
customers;
|
|
|
|
our product mix;
|
|
|
|
changes in the prices of our products;
|
|
|
|
manufacturing delays or interruptions;
|
|
|
|
acceptance by customers of competing products in lieu of our
products;
|
|
|
|
variations in the cost of components for our products;
|
|
|
|
limited availability of components that we obtain from a single
or a limited number of suppliers;
|
|
|
|
competition and consolidation in the data storage industry;
|
|
|
|
seasonal and other fluctuations in demand for PCs often due to
technological advances; and
|
|
|
|
availability and rates of transportation.
|
Rapidly
changing conditions in the hard drive industry make it difficult
to predict actual results.
We have made and continue to make a number of estimates and
assumptions relating to our consolidated financial reporting.
The highly technical nature of our products and the rapidly
changing market conditions with which we deal means that actual
results may differ significantly from our estimates and
assumptions. These changes have impacted our financial results
in the past and may continue to do so in the future. Key
estimates and assumptions for us include:
|
|
|
|
|
price protection adjustments and other sales promotions and
allowances on products sold to retailers, resellers and
distributors;
|
|
|
|
inventory adjustments for write-down of inventories to lower of
cost or market value (net realizable value);
|
|
|
|
reserves for doubtful accounts;
|
|
|
|
accruals for product returns;
|
|
|
|
accruals for warranty costs related to product defects;
|
|
|
|
accruals for litigation and other contingencies; and
|
|
|
|
liabilities for unrecognized tax benefits.
|
28
The
market price of our common stock is volatile.
The market price of our common stock has been, and may continue
to be, extremely volatile. Factors such as the following may
significantly affect the market price of our common stock:
|
|
|
|
|
actual or anticipated fluctuations in our operating results;
|
|
|
|
announcements of technological innovations by us or our
competitors which may decrease the volume and profitability of
sales of our existing products and increase the risk of
inventory obsolescence;
|
|
|
|
new products introduced by us or our competitors;
|
|
|
|
periods of severe pricing pressures due to oversupply or price
erosion resulting from competitive pressures or industry
consolidation;
|
|
|
|
developments with respect to patents or proprietary rights;
|
|
|
|
conditions and trends in the hard drive, computer, data and
content management, storage and communication industries;
|
|
|
|
growth rates that are lower than our previous high growth-rate
periods;
|
|
|
|
changes in financial estimates by securities analysts relating
specifically to us or the hard drive industry in
general; and
|
|
|
|
macroeconomic conditions that affect the market generally.
|
In addition, general economic conditions may cause the stock
market to experience extreme price and volume fluctuations from
time to time that particularly affect the stock prices of many
high technology companies. These fluctuations often appear to be
unrelated to the operating performance of the companies.
Securities class action lawsuits are often brought against
companies after periods of volatility in the market price of
their securities. A number of such suits have been filed against
us in the past, and should any new lawsuits be filed, such
matters could result in substantial costs and a diversion of
resources and managements attention.
Negative
conditions in the global credit markets may impair the liquidity
of a portion of our investment portfolio.
Our long-term investments consist of auction-rate securities
totaling $28 million as of June 27, 2008. The recent
negative conditions in the global credit markets have prevented
some investors from liquidating their holdings of auction-rate
securities because the amount of securities submitted for sale
has exceeded the amount of purchase orders for such securities.
If the credit market does not improve, auctions for our invested
amounts may fail. If an auction fails for securities in which we
have invested, we may be unable to liquidate some or all of our
auction-rate securities at par, should we need or desire to
access the funds invested in those securities. In the event we
need or desire to access these funds, we will not be able to do
so until a future auction on these investments is successful or
a buyer is found outside the auction process. If a buyer is
found but is unwilling to purchase the investments at par, we
may incur a loss. For example, during the year ended
June 27, 2008, the market values of some of the
auction-rate securities we owned were impacted by the
macro-economic credit market conditions and as a result, we
recognized $10 million of other-than-temporary losses to
mark the remaining investments to estimated market value.
Further, rating downgrades of the security issuer or the
third-parties insuring such investments may require us to adjust
the carrying value of these investments through an additional
impairment charge.
If our
internal controls are found to be ineffective, our financial
results or our stock price may be adversely affected.
Our most recent evaluation resulted in our conclusion that as of
June 27, 2008, in compliance with Section 404 of the
Sarbanes-Oxley Act of 2002, our internal control over financial
reporting was effective. We believe that we currently have
adequate internal control procedures in place for future
periods; however, if our internal control over financial
reporting is found to be ineffective, investors may lose
confidence in the reliability of our financial statements, which
may adversely affect our financial results or our stock price.
29
|
|
Item 1B.
|
Unresolved
Staff Comments
|
Not applicable.
Our corporate headquarters are located in Lake Forest,
California. The Lake Forest facilities consist of approximately
257,000 square feet of leased space and house our
management, research and development, administrative and sales
staff. In addition, in Fremont, California, we own facilities
consisting of approximately 286,000 square feet, which we
use for head wafer fabrication, research and development and
warehousing. In San Jose, California, we lease facilities
consisting of approximately 401,000 square feet, which we
use for research and development. In Longmont, Colorado, we
lease one facility consisting of approximately
23,000 square feet, which we use for research and
development. In addition, we lease one facility in Irvine,
California, which consists of approximately 60,000 square
feet, which we use as a hard drive return and refurbishing
center. We also lease office space in various other locations
throughout the world primarily for research and development and
sales and technical support.
We own manufacturing facilities in Kuala Lumpur, Malaysia, of
approximately 575,000 square feet, which we use for
assembly of hard drives, printed circuit boards and HSAs, and
facilities in Penang, Johor and Sarawak, Malaysia, of
approximately 1,343,000 square feet, which we use for our
media operations. We also own manufacturing facilities in
Navanakorn, Thailand, of approximately 226,000 square feet,
which we use for assembly of hard drives and HSAs, and
facilities in Bang Pa-In, Thailand, of approximately
901,000 square feet, which we use for slider fabrication,
the assembly of hard drives, HGAs and HSAs, and research and
development.
We believe our present facilities are adequate for our current
needs, although the process of upgrading our facilities to meet
technological and market requirements is expected to continue.
New manufacturing facilities, in general, can be developed and
become operational within approximately nine to eighteen months
should we require such additional facilities.
|
|
Item 3.
|
Legal
Proceedings
|
For a description of our legal proceedings, see Part II,
Item 8, Note 5 in our Notes to Consolidated Financial
Statements, which is incorporated by reference in response to
this item.
|
|
Item 4.
|
Submission
of Matters to a Vote of Security Holders
|
No matters were submitted to a vote of security holders during
the fourth quarter of 2008.
30
PART II
|
|
Item 5.
|
Market
for Registrants Common Equity, Related Stockholder
Matters, and Issuer Purchases of Equity
Securities.
|
Our common stock is listed on the New York Stock Exchange, Inc.
(NYSE) under the symbol WDC. The
approximate number of holders of record of our common stock as
of August 13, 2008 was 2,080.
We have not paid any cash dividends on our common stock and do
not intend to pay any cash dividends on common stock in the
foreseeable future.
The high and low sales prices of our common stock, as reported
by the NYSE, for each quarter of 2008 and 2007 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First
|
|
|
Second
|
|
|
Third
|
|
|
Fourth
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
High
|
|
$
|
26.16
|
|
|
$
|
31.70
|
|
|
$
|
34.80
|
|
|
$
|
40.00
|
|
Low
|
|
$
|
18.34
|
|
|
$
|
23.52
|
|
|
$
|
21.91
|
|
|
$
|
26.14
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
High
|
|
$
|
20.11
|
|
|
$
|
21.70
|
|
|
$
|
21.38
|
|
|
$
|
20.32
|
|
Low
|
|
$
|
15.90
|
|
|
$
|
16.65
|
|
|
$
|
16.65
|
|
|
$
|
16.21
|
|
The following table provides information about repurchases by us
of our common stock during the quarter ended June 27, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Number of
|
|
|
Maximum Value of
|
|
|
|
|
|
|
|
|
|
Shares Purchased as
|
|
|
Shares that May Yet
|
|
|
|
Total Number
|
|
|
|
|
|
Part of Publicly
|
|
|
be Purchased
|
|
|
|
of Shares
|
|
|
Average Price
|
|
|
Announced
|
|
|
Under the
|
|
|
|
Purchased
|
|
|
Paid per Share
|
|
|
Program(1)
|
|
|
Program(1)
|
|
|
March 29, 2008 April 25, 2008
|
|
|
6,075
|
(2)
|
|
$
|
29.30
|
|
|
|
|
|
|
$
|
502,524,104
|
|
April 26, 2008 May 23, 2008
|
|
|
2,383
|
(2)
|
|
$
|
35.25
|
|
|
|
|
|
|
$
|
502,524,104
|
|
May 24, 2008 June 27, 2008
|
|
|
6,099
|
(2)
|
|
$
|
35.23
|
|
|
|
|
|
|
$
|
502,524,104
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
14,557
|
|
|
$
|
32.76
|
|
|
|
|
|
|
$
|
502,524,104
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
As announced on November 21, 2005, our Board of Directors
authorized us to repurchase $250 million of our common
stock in open market transactions under a program during the
five-year period from November 17, 2005 to
November 17, 2010. On April 3, 2008, we announced the
authorization of the repurchase of an additional
$500 million of our common stock under the program and an
extension of the program period until March 31, 2013. We
did not engage in any repurchases of our common stock under this
program during the quarter ended June 27, 2008. |
|
(2) |
|
Represents shares delivered by employees to us to satisfy
tax-withholding obligations upon the vesting of restricted stock. |
31
Stock
Performance Graph
The following graph compares the cumulative total stockholder
return of our common stock with the cumulative total return of
the S&P 500 Index and the Dow Jones US Technology
Hardware & Equipment Index for the five years ended
June 27, 2008. The graph assumes that $100 was invested in
our common stock on June 27, 2003, and that all dividends
were reinvested. We have not declared any cash dividends on our
common stock. Stockholder returns over the indicated period
should not be considered indicative of future stockholder
returns.
TOTAL
RETURN TO STOCKHOLDERS
(Assumes $100 investment on
6/27/03)
Total
Return Analysis
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6/27/03
|
|
|
7/2/04
|
|
|
7/1/05
|
|
|
6/30/06
|
|
|
6/29/07
|
|
|
6/27/08
|
Western Digital Corporation
|
|
|
|
100.00
|
|
|
|
|
78.65
|
|
|
|
|
128.84
|
|
|
|
|
185.49
|
|
|
|
|
181.18
|
|
|
|
|
326.50
|
|
S&P 500 Index
|
|
|
|
100.00
|
|
|
|
|
119.11
|
|
|
|
|
126.64
|
|
|
|
|
137.57
|
|
|
|
|
165.90
|
|
|
|
|
144.13
|
|
Dow Jones US Technology Hardware & Equipment Index
|
|
|
|
100.00
|
|
|
|
|
129.14
|
|
|
|
|
125.58
|
|
|
|
|
130.11
|
|
|
|
|
163.52
|
|
|
|
|
144.76
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The stock performance graph shall not be deemed soliciting
material or to be filed with the Securities and Exchange
Commission or subject to Regulation 14A or 14C under the
Securities Exchange Act or to the liabilities of Section 18
of the Securities Exchange Act, nor shall it be incorporated by
reference into any past or future filing under the Securities
Act or the Securities Exchange Act, except to the extent we
specifically request that it be treated as soliciting material
or specifically incorporate it by reference into a filing under
the Securities Act or the Securities Exchange Act.
32
|
|
Item 6.
|
Selected
Financial Data
|
Financial
Highlights
This selected consolidated financial data should be read
together with the Consolidated Financial Statements and related
Notes contained in this Annual Report on
Form 10-K
and in the subsequent reports filed with the SEC, as well as the
section of this Annual Report on
Form 10-K
and the other reports entitled Managements
Discussion and Analysis of Financial Condition and Results of
Operations.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 27,
|
|
|
June 29,
|
|
|
June 30,
|
|
|
July 1,
|
|
|
July 2,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
(in millions, except per share and employee data)
|
|
|
Revenue, net
|
|
$
|
8,074
|
|
|
$
|
5,468
|
|
|
$
|
4,341
|
|
|
$
|
3,639
|
|
|
$
|
3,047
|
|
Gross margin
|
|
$
|
1,739
|
|
|
$
|
900
|
|
|
$
|
829
|
|
|
$
|
590
|
|
|
$
|
461
|
|
Net income
|
|
$
|
867
|
|
|
$
|
564
|
|
|
$
|
395
|
|
|
$
|
196
|
|
|
$
|
150
|
|
Net income per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
3.92
|
|
|
$
|
2.57
|
|
|
$
|
1.84
|
|
|
$
|
0.94
|
|
|
$
|
0.73
|
|
Diluted
|
|
$
|
3.84
|
|
|
$
|
2.50
|
|
|
$
|
1.76
|
|
|
$
|
0.90
|
|
|
$
|
0.69
|
|
Working capital
|
|
$
|
1,167
|
|
|
$
|
899
|
|
|
$
|
633
|
|
|
$
|
361
|
|
|
$
|
270
|
|
Total assets
|
|
$
|
4,875
|
|
|
$
|
2,901
|
|
|
$
|
2,086
|
|
|
$
|
1,589
|
|
|
$
|
1,159
|
|
Long-term debt
|
|
$
|
482
|
|
|
$
|
10
|
|
|
$
|
19
|
|
|
$
|
33
|
|
|
$
|
53
|
|
Shareholders equity
|
|
$
|
2,696
|
|
|
$
|
1,716
|
|
|
$
|
1,157
|
|
|
$
|
700
|
|
|
$
|
487
|
|
Number of employees
|
|
|
50,072
|
|
|
|
29,572
|
|
|
|
24,750
|
|
|
|
23,161
|
|
|
|
17,376
|
|
No cash dividends were paid for the years presented.
|
|
Item 7.
|
Managements
Discussion and Analysis of Financial Condition and Results of
Operations
|
Forward-Looking
Statements
The following discussion and analysis contains
forward-looking statements within the meaning of the federal
securities laws. You are urged to carefully review our
description and examples of forward-looking statements included
earlier in this Annual Report on
Form 10-K
immediately prior to Part I, under the heading
Forward Looking Statements. Forward-looking
statements are subject to risks and uncertainties that could
cause actual results to differ materially from those expressed
in the forward-looking statements. You are urged to carefully
review the disclosures we make concerning risks and other
factors that may affect our business and operating results,
including those made in Item 1A of this Annual Report on
Form 10-K,
as well as our other reports filed with the SEC. You are
cautioned not to place undue reliance on these forward-looking
statements, which speak only as of the date of this document. We
do not intend, and undertake no obligation, to publish revised
forward-looking statements to reflect events or circumstances
after the date of this document or to reflect the occurrence of
unanticipated events.
Our
Company
We design, develop, manufacture and sell hard drives. A hard
drive is a device that uses one or more rotating magnetic disks
(media) to store and allow fast access to data. Hard
drives are key components of computers, including desktop and
notebook computers (PCs), data storage subsystems
and many consumer electronic (CE) devices.
We sell our products worldwide to original equipment
manufacturers (OEMs) and original design
manufacturers (ODMs) for use in computer systems,
subsystems or CE devices, and to distributors, resellers and
retailers. Our hard drives are used in desktop computers,
notebook computers, and enterprise applications such as servers,
workstations, network attached storage, storage area networks
and video surveillance equipment. Additionally, our hard drives
are used in CE applications such as digital video recorders
(DVRs), and satellite and cable set-top boxes
(STBs). We also sell our hard drives as stand-alone
storage products and integrate them into external casings,
embedding application software and presenting them as our own
WD®-branded
external storage appliances for purposes such as personal data
backup and portable or expanded storage of music, photographs,
video and other digital data.
33
Hard drives provide non-volatile data storage, which means that
the data remains present when power is no longer applied to the
device. Our hard drives currently include 3.5-inch and 2.5-inch
form factor drives, having capacities ranging from 40 gigabytes
(GB) to 1 terabyte (TB), nominal
rotation speeds of 5,400, 7,200 and 10,000 revolutions per
minute (RPM), and offer interfaces including both
Enhanced Integrated Drive Electronics (EIDE) and
Serial Advanced Technology Attachment (SATA). We
also embed our hard drives into WD-branded external storage
appliances that utilize interfaces such as USB 2.0, external
SATA (eSATA),
FireWiretm
and Ethernet network connections. In addition, we recently
announced a family of hard drives specifically designed to
consume substantially less power than standard drives.
We manufacture hard drives and head stack assemblies
(HSAs) in Malaysia and Thailand. We also design and
manufacture most of our required magnetic heads in California
and head gimbal assemblies (HGAs) in Thailand, and
we design in California and manufacture in Malaysia most of our
required media and substrates.
On September 5, 2007, we completed our acquisition (the
Acquisition) of Komag, Incorporated
(Komag) through a cash tender offer by State M
Corporation (State M), our indirect wholly-owned
subsidiary, for all outstanding shares of Komags common
stock, which was followed by a merger of State M and Komag (the
Merger) whereby Komag became an indirect
wholly-owned subsidiary and changed its name to WD Media, Inc.
The Acquisition has strengthened our production efficiencies and
improved our access to and control of technology and competitive
position in the worldwide hard drive industry, while enhancing
our hard drive manufacturing process by integrating media. The
aggregate purchase price for Komag was approximately
$1 billion, consisting of cash paid for outstanding shares,
transaction fees, severance and other employee-related equity
payments.
Results
of Operations
In accordance with U.S. generally accepted accounting
principles, operating results for Komag prior to the date of the
Acquisition (September 5, 2007), including the first two
months of fiscal 2008 and the fiscal years 2007 and 2006, are
not included in our operating results and are therefore not
discussed. Accordingly, 2008 revenues and expenses reflect the
addition of results from our media operations since the date of
the Acquisition while the 2007 and 2006 results do not include
operating results for Komag prior to the date of the
Acquisition. This affects our discussion of changes in our
revenues and expenses comparing these periods. In connection
with the Acquisition, we incurred charges for in-process
research and development and transition costs, which impacted
our earnings in 2008.
Fiscal
2008 Overview
In 2008, our net revenue increased by 48% to $8.1 billion
on shipments of 133 million units as compared to
$5.5 billion and 97 million units, respectively, in
2007. In 2008, 56% of our hard drive revenue was derived from
non-desktop sources including CE products, enterprise
applications, notebook computers and retail sales as compared to
43% in 2007. Gross margin percentage increased to 21.5% from
16.5% in 2007 and operating income increased by
$591 million to $1.0 billion. As a percentage of net
revenue, operating income was 12.4% in 2008 compared to 7.6% in
2007. Net income in 2008 was $867 million, or $3.84 per
diluted share, compared to $564 million, or $2.50 per
diluted share in 2007. We successfully completed our acquisition
of Komag, and have completed the integration of the media
operation, which is generating technology and cost contributions
to the overall business.
34
Summary
Comparison of 2008, 2007 and 2006
The following table sets forth, for the periods indicated,
summary information from our consolidated statements of income
by dollars and percentage of revenue (in millions, except
percentages):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended
|
|
|
|
June 27, 2008
|
|
|
June 29, 2007
|
|
|
June 30, 2006
|
|
|
Revenue, net
|
|
$
|
8,074
|
|
|
|
100
|
%
|
|
$
|
5,468
|
|
|
|
100
|
%
|
|
$
|
4,341
|
|
|
|
100
|
%
|
Gross margin
|
|
|
1,739
|
|
|
|
21.5
|
|
|
|
900
|
|
|
|
16.5
|
|
|
|
829
|
|
|
|
19.1
|
|
Operating expenses
|
|
|
684
|
|
|
|
8.5
|
|
|
|
485
|
|
|
|
8.9
|
|
|
|
463
|
|
|
|
10.7
|
|
Acquired in-process research and development
|
|
|
49
|
|
|
|
0.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
1,006
|
|
|
|
12.4
|
|
|
|
415
|
|
|
|
7.6
|
|
|
|
366
|
|
|
|
8.4
|
|
Non-operating income (expense)
|
|
|
(25
|
)
|
|
|
(0.3
|
)
|
|
|
28
|
|
|
|
0.5
|
|
|
|
16
|
|
|
|
0.4
|
|
Income before income taxes
|
|
|
981
|
|
|
|
12.1
|
|
|
|
443
|
|
|
|
8.1
|
|
|
|
382
|
|
|
|
8.8
|
|
Income tax expense (benefit)
|
|
|
114
|
|
|
|
1.4
|
|
|
|
(121
|
)
|
|
|
(2.2
|
)
|
|
|
(13
|
)
|
|
|
(0.3
|
)
|
Net income
|
|
|
867
|
|
|
|
10.7
|
|
|
|
564
|
|
|
|
10.3
|
|
|
|
395
|
|
|
|
9.1
|
|
The following table sets forth, for the periods indicated,
summary information regarding volume shipments, average selling
prices (ASPs) and revenues by geography, channel and
product (in millions, except percentages and ASPs):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended
|
|
|
|
June 27,
|
|
|
June 29,
|
|
|
June 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Net revenue
|
|
$
|
8,074
|
|
|
$
|
5,468
|
|
|
$
|
4,341
|
|
Unit shipments*
|
|
|
133
|
|
|
|
97
|
|
|
|
73
|
|
ASPs (per unit)*
|
|
$
|
59
|
|
|
$
|
57
|
|
|
$
|
59
|
|
Revenues by Geography(%)*
|
|
|
|
|
|
|
|
|
|
|
|
|
Americas
|
|
|
31
|
%
|
|
|
37
|
%
|
|
|
36
|
%
|
Europe, Middle East and Africa
|
|
|
30
|
|
|
|
29
|
|
|
|
28
|
|
Asia
|
|
|
39
|
|
|
|
34
|
|
|
|
36
|
|
Revenues by Channel(%)*
|
|
|
|
|
|
|
|
|
|
|
|
|
OEM
|
|
|
51
|
%
|
|
|
48
|
%
|
|
|
54
|
%
|
Distributors
|
|
|
31
|
|
|
|
36
|
|
|
|
39
|
|
Branded products
|
|
|
18
|
|
|
|
16
|
|
|
|
7
|
|
Revenues by Product(%)*
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-desktop sources
|
|
|
56
|
%
|
|
|
43
|
%
|
|
|
29
|
%
|
Desktop computers
|
|
|
44
|
|
|
|
57
|
|
|
|
71
|
|
|
|
|
* |
|
Based on sales of hard drives only |
Fiscal
Year 2008 Compared to Fiscal Year 2007
Net Revenue. Net revenue was $8.1 billion
for 2008, an increase of 48% from 2007. Total unit shipments
increased to 133 million as compared to 97 million for
the prior year. This unit increase resulted from an increase in
higher overall demand for hard drives and our continuing
diversification into non-desktop markets, including mobile,
consumer electronics, enterprise and branded products. For
example, we shipped 37 million 2.5 inch drives to the
mobile and branded markets in 2008 as compared to
12 million units in 2007. Additionally, we shipped
15 million units to the DVR market in 2008 as compared to
10 million units in 2007. ASPs increased to $59 due to an
improved mix of revenues by market category, improved product
mix and more favorable demand/supply conditions. Changes in
revenue by geography generally reflect normal fluctuations in
market demand and competitive dynamics as well as an increase in
mobile drives sold to Asia. Changes in revenue by channel are a
result of increases in sales of mobile hard drives to
35
OEMs and an increase in sales of branded products due to the
growing worldwide acceptance of our My
Passport®
and My
Book®
external digital storage appliances.
Gross Margin. Gross margin for 2008 was
$1.7 billion, an increase of $839 million, or 93% over
the prior year. Gross margin percentage increased to 21.5% in
2008 from 16.5% in 2007. The factors contributing to this
increase were an improved mix of revenues by market category,
improved product mix and more favorable demand/supply
conditions. Our manufacturing throughput and costs also improved
through operational efficiencies, higher utilization and a
higher mix of products based on newer, more cost-effective
technologies and the contribution of media operations.
Operating Expenses. Total operating expenses,
consisting of research and development (R&D)
and selling, general and administrative (SG&A),
decreased to 8.5% of net revenue in 2008 compared to 8.9% in
2007. R&D expense was $464 million in 2008, an
increase of $158 million, or 52% over the prior year. This
increase in R&D expense includes $75 million relating
to the acquired media operations, $52 million related to
product development to support new programs and $31 million
in incentive and equity compensation. As a percentage of net
revenue, R&D expense remained consistent at 5.7% in 2008
compared to 5.6% in 2007. SG&A expense was
$220 million in 2008, an increase of $41 million, or
23%, as compared to 2007. This increase in SG&A expense
includes $28 million for the expansion of sales and
marketing to support new products and $13 million in higher
incentive and equity compensation. As a percentage of net
revenue, SG&A expense decreased to 2.7% in 2008 from 3.3%
in 2007 primarily due to an increase in net revenue in 2008
compared to 2007.
During 2008, we recorded a $49 million charge to operating
expense related to an in-process research and development
project acquired from Komag involving technology for higher
recording densities on advanced perpendicular recording media.
As these advanced products were not ready for commercial
production and had no alternative future use, the fair value of
the development effort did not qualify for capitalization and
was immediately expensed. For additional information regarding
acquired in-process research and development, see Part II,
Item 8, Note 11 in the Notes to Consolidated Financial
Statements, included in this Annual Report on
Form 10-K.
Interest and Other Income (Expense). Net
interest and other expense was $25 million in 2008 compared
to net interest and other income of $28 million in 2007.
This decrease is a result of higher debt balances and realized
and recognized losses on investments of $13 million.
Income Tax Expense (Benefit). Income tax
expense was $114 million in 2008 compared to an income tax
benefit of $121 million in 2007. Tax provision as a
percentage of income before taxes was 12% in 2008 compared to
tax benefit as a percentage of income of 27% for 2007.
Differences between the effective tax rates and the
U.S. Federal statutory rate are primarily due to tax
holidays and incentive programs and the current year generation
of income tax credits. We have tax holidays in Malaysia and
Thailand that expire at various times through 2022. In 2008,
income tax expense also includes net charges of $75 million
for taxes related to the license of certain intellectual
property to a foreign subsidiary. In 2007, the tax provision was
impacted by a favorable adjustment to the companys
valuation allowance for deferred tax assets of
$126 million. In the fourth quarter of 2007, we reversed
the remaining valuation allowance for our deferred tax assets
based upon a determination that it was more likely than not that
our deferred tax assets will be realized. The realization of the
deferred tax assets is primarily dependent on our ability to
generate sufficient earnings in certain jurisdictions in future
years. The amount of deferred tax assets considered realizable
may increase or decrease in subsequent periods based on
fluctuating industry or company conditions.
We adopted the provisions of FASB Interpretation No. 48,
Accounting for Uncertainty in Income Taxes an
interpretation of FASB Statement No. 109
(FIN 48), as of June 30, 2007. As a result
of the implementation of FIN 48, we recognized no
adjustment in the net liability for unrecognized tax benefits.
The total amount of gross unrecognized tax benefits as of the
date of adoption of FIN 48 was $58 million, all of
which would affect our effective tax rate if realized. During
the year ended June 27, 2008, we recognized a
$17 million increase in the liability for unrecognized tax
benefits and recorded $32 million of liabilities for
unrecognized tax benefits related to Komag. As of June 27,
2008, we had approximately $107 million of unrecognized tax
benefits which included the $32 million of gross
unrecognized tax benefits related to Komag.
36
Fiscal
Year 2007 Compared to Fiscal Year 2006
Net Revenue. Net revenue was $5.5 billion
for 2007, an increase of 26% from 2006. Total unit shipments
increased to 97 million as compared to 73 million for
the prior year. This unit increase resulted from an increase in
our desktop PC market share, stronger overall demand for hard
drives in the desktop PC market and our increasing focus on the
non-desktop market, including mobile, CE, enterprise and branded
products. For example, we shipped 12 million drives to the
mobile market in 2007 as compared to 5 million units in
2006. Additionally, we shipped 10 million units to the DVR
market in 2007 as compared to 7 million units in 2006. ASPs
declined to $57 due to normal technology price declines and a
more competitive pricing environment in the notebook, desktop,
and consumer electronics markets. Changes in revenue by
geography generally reflect overall market demand fluctuations
for hard drives. Changes in revenue by channel are a result of
increases in sales of branded products due to the growing
worldwide acceptance of our My
Passport®
and My
Book®
external digital storage appliances.
Gross Margin. Gross margin for 2007 was
$900 million, an increase of $71 million, or 9% over
the prior year. Gross margin percentage decreased to 16.5% in
2007 from 19.1% in 2006. The factors contributing to this
decrease include normal technology price declines and a more
competitive pricing environment in the notebook, desktop, and
consumer electronics markets. In addition, gross margin in 2006
benefited from a more favorable supply/demand balance.
Operating Expenses. Total operating expenses,
consisting of research and development (R&D)
and selling, general and administrative (SG&A)
expenses, decreased to 8.9% of net revenue in 2007 compared to
10.7% in 2006. R&D expense was $306 million in 2007,
an increase of $9 million, or 3% over the prior year. The
increase in R&D expense was primarily related to the
development of new product platforms in support of our entry
into new markets and expenditures for advanced head
technologies, partially offset by a decrease of $2 million
in variable incentive compensation programs. SG&A expense
was $179 million in 2007, an increase of $13 million,
or 8% as compared to 2006. The increase in SG&A expense was
primarily due to an increase of $19 million in stock based
compensation expense and other long-term employee incentive
programs, offset by a $5 million decrease in software
write-offs that occurred in 2006.
Interest and Other Income. Net interest and
other income was $28 million and $16 million in 2007
and 2006, respectively. This increase in net interest income was
primarily due to higher average invested cash and short-term
investment balances.
Income Tax Benefit. Income tax benefit was
$121 million and $13 million in 2007 and 2006,
respectively. Tax benefit as a percentage of income before taxes
was 27% and 3% for 2007 and 2006, respectively. Differences
between the effective tax rates and the U.S. Federal
statutory rate are primarily due to tax holidays and incentive
programs and reductions to our valuation allowance for deferred
tax assets. We have tax holidays in Malaysia and Thailand that
expire at various times through 2022. In addition to the tax
holidays, the tax provision was impacted by favorable
adjustments to the companys valuation allowance for
deferred tax assets of $126 and $22 million in 2007 and
2006, respectively. These adjustments were based upon a
determination that it was more likely than not that all or a
portion of our deferred tax assets will be realized. In the
fourth quarter of 2007, we reversed the remaining valuation
allowance for our deferred tax assets based on the weight of
available evidence including our history of cumulative pretax
income and the increased likelihood of our ability to generate
profits in the future. In 2006, we released a portion of the
valuation allowance on deferred tax assets due to the difficulty
at the time in accurately projecting income for periods of
longer than two years given the cyclical nature of our industry.
The realization of the deferred tax assets is primarily
dependent on our ability to generate sufficient earnings in
certain jurisdictions in future years. The amount of deferred
tax assets considered realizable may increase or decrease in
subsequent periods based on fluctuating industry or company
conditions.
Liquidity
and Capital Resources
We ended 2008 with total cash, cash equivalents and short-term
investments of $1.1 billion, an increase of
$200 million from June 29, 2007. Our investment policy
is to manage our investment portfolio to preserve principal and
37
liquidity while maximizing return through the full investment of
available funds. The following table summarizes the results of
our statements of cash flows for the three years ended
June 27, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended
|
|
|
|
June 27,
|
|
|
June 29,
|
|
|
June 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Net cash flow provided by (used in):
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating activities
|
|
$
|
1,399
|
|
|
$
|
618
|
|
|
$
|
368
|
|
Investing activities
|
|
|
(1,321
|
)
|
|
|
(383
|
)
|
|
|
(303
|
)
|
Financing activities
|
|
|
326
|
|
|
|
(86
|
)
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase in cash and cash equivalents
|
|
$
|
404
|
|
|
$
|
149
|
|
|
$
|
66
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
Activities
Net cash provided by operating activities during 2008 was
$1.4 billion as compared to $618 million for 2007 and
$368 million for 2006. Cash flow from operations consists
of net income, adjusted for non-cash charges, plus or minus
working capital changes. This represents our principal source of
cash. Net cash provided by changes in working capital was
$22 million for 2008 as compared to $78 million and
$207 million used to fund working capital for 2007 and
2006, respectively.
Our working capital requirements primarily depend upon the
effective management of our cash conversion cycle, which
measures how quickly we can convert our products into cash
through sales. The following table summarizes the cash
conversion cycle for the three years ended 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended
|
|
|
|
June 27,
|
|
|
June 29,
|
|
|
June 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Days sales outstanding
|
|
|
46
|
|
|
|
45
|
|
|
|
39
|
|
Days in inventory
|
|
|
27
|
|
|
|
20
|
|
|
|
19
|
|
Days payables outstanding
|
|
|
(67
|
)
|
|
|
(66
|
)
|
|
|
(64
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash conversion cycle
|
|
|
6
|
|
|
|
(1
|
)
|
|
|
(6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The decrease in the cash conversion cycle for 2008 was primarily
due to our days in inventory (DIOs), which increased
by 7 days from 2007. This increase was primarily due to an
increase in our inventory
on-hand as a
result of our acquisition of Komag, which requires us to hold
precious metals to be used in the production of recording media.
The 1 day increase in days sales outstanding
(DSOs) is primarily a result of changes in customer
mix.
From time to time, we modify the timing of payments to our
vendors. We make these modifications primarily to manage our
vendor relationships and to manage our cash flows, including our
cash balances. Generally, we make the payment modifications
through negotiations with or by granting to or receiving from
our vendors payment term accommodations.
Investing
Activities
Net cash used in investing activities for 2008 was
$1.3 billion as compared to $383 million for 2007 and
$303 million for 2006. During 2008, cash used in investing
activities consisted of $927 million for acquisitions and
$615 million for capital expenditures, partially offset by
cash provided by investments of $221 million. During 2007,
cash used in investing activities consisted of $324 million
for capital expenditures and $59 million for investments.
The increase in capital expenditures in 2008 compared to 2007
primarily consisted of the on-going conversion of our head wafer
fabrication facilities to utilizing
8-inch
wafers from
6-inch
wafers, continued investment in advanced head technologies,
increased capacity for our broadening and growing product
portfolio and continued investment in media equipment as a
result of the Acquisition. The increase in capital expenditures
in 2007 compared to 2006 was primarily a result of equipment
purchased to support our investments in advanced head
technologies, new product platforms and capacity for our
broadening and growing product portfolio.
38
For 2009, we expect capital additions to be approximately
$800 million. Depreciation and amortization for 2009 is
expected to be approximately $475 million.
Our cash and cash equivalents of $1.1 billion are invested
primarily in readily accessible, AAA rated institutional
money-market funds, the majority of which are backed by the
U.S. government. The carrying value of our investments in
auction-rate securities was reduced from $203 million as of
June 29, 2007 to $28 million as of June 27, 2008.
The reduction resulted from the sale of these investments as
well as an additional $10 million loss recognized as
other-than-temporary losses on remaining investments. These
securities are expected to be held until secondary markets
become available and as a result have been reclassified to
long-term investments as of June 27, 2008. These
investments are currently accounted for as available-for-sale
securities and recorded at fair value within other non-current
assets in the consolidated balance sheet. The estimated fair
values of these investments are subject to fluctuation.
Unrealized holding gains and losses are generally recorded in
other comprehensive income. However, if a decline in fair value
is determined to be other-than-temporary, the cost basis is
written down to fair value through earnings. During 2008, we
realized $3 million in losses on sales and recognized
$10 million in other-than-temporary losses on these
auction-rate securities.
Financing
Activities
Net cash provided by financing activities for 2008 was
$326 million as compared to net cash used in financing
activities for 2007 of $86 million. Net cash provided by
financing activities was $1 million for 2006. The net cash
provided by financing activities in 2008 consisted of
$500 million in net proceeds from acquisition related debt
(see Contractual Obligations and Commitments below),
$250 million repayment of convertible debentures assumed in
the Acquisition, $60 million provided by the issuance of
common stock under employee plans, $60 million used to
repurchase our common stock, $89 million provided by a tax
benefit from employee stock plans and $13 million used to
repay other long-term debt. The net cash used in financing
activities in 2007 consisted of $73 million used for
repurchases of our common stock and $43 million used for
repayments of long-term debt, offset by $30 million
provided by the issuance of common stock under employee plans.
The net cash provided by financing activities in 2006 consisted
of $78 million provided by the issuance of common stock
options under employee plans, offset by $54 million used in
repurchases of our common stock and $23 million used for
repayments of long-term debt.
Off-Balance
Sheet Arrangements
Other than facility and equipment lease commitments incurred in
the normal course of business and certain indemnification
provisions (see Capital Commitments below), we do not have any
off-balance sheet financing arrangements or liabilities,
guarantee contracts, retained or contingent interests in
transferred assets, or any obligation arising out of a material
variable interest in an unconsolidated entity. We do not have
any majority-owned subsidiaries that are not included in the
consolidated financial statements. Additionally, we do not have
an interest in, or relationships with, any special-purpose
entities.
Contractual
Obligations and Commitments
The following is a summary of our significant contractual cash
obligations and commercial commitments as of June 27, 2008
(in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less than
|
|
|
|
|
|
|
|
|
More than
|
|
|
|
Total
|
|
|
1 Year
|
|
|
1-3 Years
|
|
|
3-5 Years
|
|
|
5 Years
|
|
|
Long-term debt, including current portion
|
|
$
|
500
|
|
|
$
|
19
|
|
|
$
|
187
|
|
|
$
|
294
|
|
|
$
|
|
|
Capital lease obligations
|
|
|
9
|
|
|
|
8
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
Operating leases
|
|
|
56
|
|
|
|
13
|
|
|
|
21
|
|
|
|
13
|
|
|
|
9
|
|
Unrecognized tax benefits
|
|
|
25
|
|
|
|
|
|
|
|
|
|
|
|
25
|
|
|
|
|
|
Purchase obligations
|
|
|
4,100
|
|
|
|
4,078
|
|
|
|
8
|
|
|
|
7
|
|
|
|
7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
4,690
|
|
|
$
|
4,118
|
|
|
$
|
217
|
|
|
$
|
339
|
|
|
$
|
16
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
39
Long-Term
Debt
On February 11, 2008, Western Digital Technologies, Inc.
(WDTI), a wholly owned subsidiary of the Company,
entered into a five-year Credit Agreement (the Credit
Facility) with JPMorgan Chase Bank, N.A., as
administrative agent, Citigroup Global Markets Inc., as
syndication agent, JP Morgan Securities Inc. and Citigroup
Global Markets Inc., as arrangers, and Bank of America, N.A.,
HSBC Bank USA, National Association and The Royal Bank of
Scotland plc, as
co-documentation
agents, and lenders party thereto.
The Credit Facility provides for a $750 million unsecured
loan consisting of a $500 million term loan facility and a
$250 million revolving credit facility. The revolving
credit facility includes borrowing capacity available for
letters of credit and for short-term borrowings referred to as
swingline. In addition, WDTI may elect to expand the Credit
Facility by up to $250 million if existing or new lenders
provide additional term or revolving commitments.
The $750 million available under the Credit Facility was
borrowed on February 11, 2008 and was used, together with
additional cash from the accounts of WDTI, to repay in full the
$760 million previously borrowed under a bridge facility
that had been used to fund the Acquisition. As of June 27,
2008, the Company repaid the amounts borrowed under the
revolving credit facility leaving $250 million available
for future borrowings.
Borrowings under the Credit Facility bear interest at a rate
equal to, at the option of WDTI, either (a) a LIBOR rate
determined by reference to the cost of funds for Eurodollar
deposits for the interest period relevant to such borrowing,
adjusted for certain additional costs (the Eurocurrency
Rate) or (b) a base rate determined by reference to
the higher of (i) the federal funds rate plus 0.50% and
(ii) the prime rate as announced by JPMorgan Chase Bank,
N.A. (the Base Rate), in each case plus an
applicable margin. The applicable margin for borrowings under
the term loan facility ranges from 1.25% to 1.50% with respect
to borrowings at the Eurocurrency Rate and 0.0% to 0.125% with
respect to borrowings at the Base Rate. The applicable margin
for revolving loan borrowings under the revolving credit
facility ranges from 0.8% to 1.125% with respect to borrowings
at the Eurocurrency Rate and 0.0% to 0.125% with respect to
borrowings at the Base Rate. The applicable margins for
borrowings under the Credit Facility are determined based upon a
leverage ratio of the Company and its subsidiaries calculated on
a consolidated basis. The interest rate at June 27, 2008
was 3.75%.
In addition to paying interest on outstanding principal under
the Credit Facility, WDTI is required to pay a facility fee to
the lenders under the revolving credit facility in respect of
the aggregate revolving commitments thereunder. The facility fee
rate ranges from 0.20% to 0.375% per annum and is determined
based upon a leverage ratio of the Company and its subsidiaries
calculated on a consolidated basis. WDTI is also required to pay
letter of credit fees (a) to the revolving credit facility
lenders on the aggregate face amount of all outstanding letters
of credit equal to an applicable margin in effect with respect
to the Eurocurrency Rate borrowings under the revolving credit
facility and (b) to the letter of credit issuer computed at
a rate equal to 0.125% per annum on the face amount of the
letter of credit, plus such letter of credit issuers
customary documentary and processing fees and charges.
Beginning on June 30, 2009, WDTI is required under the term
loan facility to make regularly scheduled payments of principal
in quarterly installments equal to a percentage of the original
principal amount of the term loan as follows: 3.75% per quarter
for each of the four quarters ended June 30, 2009,
September 30, 2009, December 31, 2009 and
March 31, 2010, 5% per quarter for each of the four
quarters ended June 30, 2010, September 30, 2010,
December 31, 2010 and March 31, 2011, 6.25% per
quarter for each of the four quarters ended June 30, 2011,
September 30, 2011, December 31, 2011 and
March 31, 2012, and 10% per quarter for each of the three
quarters ended June 30, 2012, September 30, 2012 and
December 31, 2012, with the balance due and payable at
maturity on February 11, 2013.
The Credit Facility requires WDTI to comply with a leverage
ratio and an interest coverage ratio calculated on a
consolidated basis for the Company and its subsidiaries. In
addition, the Credit Facility contains customary covenants,
including covenants that limit or restrict WDTIs and its
subsidiaries ability to: incur liens, incur indebtedness,
make certain restricted payments, merge or consolidate and enter
into certain speculative hedging arrangements. Upon the
occurrence of an event of default under the Credit Facility, the
lenders may cease making loans, terminate the Credit Facility
and declare all amounts outstanding to be immediately due and
payable. The Credit Facility specifies a number of events of
default (some of which are subject to applicable grace or cure
periods), including, among others, non-payment defaults,
covenant defaults, cross-defaults to other material
indebtedness, bankruptcy and insolvency defaults and material
judgment defaults. As of June 27, 2008, WDTI was in
compliance with all covenants.
40
The obligations of WDTI under the Credit Facility are guaranteed
by the Company and WDTIs wholly-owned subsidiary, WD Media.
Purchase
Orders
In the normal course of business, we enter into purchase orders
with suppliers for the purchase of hard drive components used to
manufacture our products. These purchase orders generally cover
forecasted component supplies needed for production during the
next quarter, are recorded as a liability upon receipt of the
components, and generally may be changed or canceled at any time
prior to shipment of the components. In some cases, we may be
obligated to pay for certain costs related to changes to, or
cancellation of, a purchase order, such as costs incurred for
raw materials or
work-in-process.
We have entered into long-term purchase agreements with various
component suppliers, which contain minimum quantity
requirements. However, the dollar amount of the purchases may
depend on the specific products ordered, achievement of
pre-defined quantity or quality specifications or future price
negotiations. The estimated related minimum purchase
requirements are included in Purchase obligations in
the table above.
We enter into, from time to time, other long-term purchase
agreements for components with certain vendors. Generally,
future purchases under these agreements are not fixed and
determinable as they depend on our overall unit volume
requirements and are contingent upon the prices, technology and
quality of the suppliers products remaining competitive.
These arrangements are not included under Purchase
obligations in the table above. Please see Item 1A of
this Annual Report on
Form 10-K
for a discussion of risks related to these commitments.
Forward
Exchange Contracts
We purchase short-term, forward exchange contracts to hedge the
impact of foreign currency fluctuations on certain underlying
assets, liabilities and commitments for operating expenses and
product costs denominated in foreign currencies. See
Part II, Item 7A, under the heading Disclosure
About Foreign Currency Risk, for our current forward
exchange contract commitments.
Indemnifications
In the ordinary course of business, we may provide
indemnifications of varying scope and terms to customers,
vendors, lessors, business partners and other parties with
respect to certain matters, including, but not limited to,
losses arising out of our breach of such agreements, products or
services to be provided by us, or from intellectual property
infringement claims made by third parties. In addition, we have
entered into indemnification agreements with our directors and
certain of our officers that will require us, among other
things, to indemnify them against certain liabilities that may
arise by reason of their status or service as directors or
officers. We maintain director and officer insurance, which may
cover certain liabilities arising from our obligation to
indemnify our directors and officers in certain circumstances.
It is not possible to determine the maximum potential amount
under these indemnification agreements due to the limited
history of prior indemnification claims and the unique facts and
circumstances involved in each particular agreement. Such
indemnification agreements may not be subject to maximum loss
clauses. Historically, we have not incurred material costs as a
result of obligations under these agreements.
Stock
Repurchase Program
As announced on November 21, 2005, our Board of Directors
previously authorized us to repurchase $250 million of our
common stock in open market transactions. Since the inception of
this stock repurchase program through June 27, 2008, we
have repurchased 17 million shares for a total cost of
$248 million (including commissions). In April 2008, our
Board of Directors authorized a $500 million increase to
repurchase our common stock in open market transactions through
March 31, 2013. We expect stock repurchases to be funded
principally by operating cash flows. We may continue to
repurchase our stock as we deem appropriate and market
conditions allow.
We believe our current cash, cash equivalents and other sources
of cash will be sufficient to meet our working capital needs
through the foreseeable future. Our ability to sustain our
working capital position is subject to a number of risks that we
discuss in Item 1A of this Annual Report on
Form 10-K.
41
Critical
Accounting Policies and Estimates
We have prepared the accompanying consolidated financial
statements in conformity with accounting principles generally
accepted in the United States of America. The preparation of the
financial statements requires the use of judgment and estimates
that affect the reported amounts of revenues, expenses, assets,
liabilities and shareholders equity. We have adopted
accounting policies and practices that are generally accepted in
the industry in which we operate. We believe the following are
our most critical accounting policies that affect significant
areas and involve judgment and estimates made by us. If these
estimates differ significantly from actual results, the impact
to the consolidated financial statements may be material.
Revenue
and Accounts Receivable
In accordance with standard industry practice, we have
agreements with resellers that provide limited price protection
for inventories held by resellers at the time of published list
price reductions and other incentive programs. In accordance
with current accounting standards, we recognize revenue upon
delivery to OEMs, ODMs and resellers and record a reduction to
revenue for estimated price protection and other programs in
effect until the resellers sell such inventory to their
customers. We base these adjustments on anticipated price
decreases during the reseller holding period, estimated amounts
to be reimbursed to qualifying customers, as well as historical
pricing information. If end-market demand for hard drives
declines significantly, we may have to increase sell-through
incentive payments to resellers, resulting in an increase in our
allowances, which could adversely impact operating results.
We record an allowance for doubtful accounts by analyzing
specific customer accounts and assessing the risk of loss based
on insolvency, disputes or other collection issues. In addition,
we routinely analyze the different receivable aging categories
and establish reserves based on a combination of past due
receivables and expected future losses based primarily on our
historical levels of bad debt losses. If the financial condition
of a significant customer deteriorates resulting in its
inability to pay its accounts when due, or if our overall loss
history changes significantly, an adjustment in our allowance
for doubtful accounts would be required, which could affect
operating results.
We establish provisions against revenue and cost of revenue for
estimated sales returns in the same period that the related
revenue is recognized. We base these provisions on existing
product return notifications. If actual sales returns exceed
expectations, an increase in the sales return accrual would be
required, which could negatively affect operating results.
Warranty
We record an accrual for estimated warranty costs when revenue
is recognized. We generally warrant our products for periods of
one to five years. Our warranty provision considers estimated
product failure rates and trends, estimated repair or
replacement costs and estimated costs for customer compensatory
claims related to product quality issues, if any. We use a
statistical warranty tracking model to help with our estimates
and we exercise judgment in determining the underlying
estimates. Our statistical tracking model captures specific
detail on hard drive reliability, such as factory test data,
historical field return rates and costs to repair by product
type. If actual product return trends, costs to repair returned
products or costs of customer compensatory claims differ
significantly from our estimates, our future results of
operations could be materially affected. Our judgment is subject
to a greater degree of subjectivity with respect to newly
introduced products because of limited field experience with
those products upon which to base our warranty estimates. We
review our warranty accrual quarterly for products shipped in
prior periods and which are still under warranty. Any changes in
the estimates underlying the accrual may result in adjustments
that impact current period gross margin and income. Such changes
are generally a result of differences between forecasted and
actual return rate experience and costs to repair. For a summary
of historical changes in estimates related to pre-existing
warranty provisions, refer to Part II, Item 8,
Note 4 in the Notes to Consolidated Financial Statements,
included in this Annual Report on
Form 10-K.
Inventory
We value inventories at the lower of cost
(first-in,
first-out and weighted average methods) or net realizable value.
Weighted-average
cost is calculated based upon the cost of precious metals at the
time they are received by us. We have determined that it is less
practicable to assign specific costs to individual units of
precious metal and as such, we relieve our precious metals
inventory based on the
weighted-average
cost of the inventory at the time the inventory is used in
42
production. The weighted average method of valuing precious
metals does not materially differ from a first-in, first-out
method. We record inventory write-downs for the valuation of
inventory at the lower of cost or net realizable value by
analyzing market conditions and estimates of future sales prices
as compared to inventory costs and inventory balances.
We evaluate inventory balances for excess quantities and
obsolescence on a regular basis by analyzing estimated demand,
inventory on hand, sales levels and other information, and
reduce inventory balances to net realizable value for excess and
obsolete inventory based on this analysis. Unanticipated changes
in technology or customer demand could result in a decrease in
demand for one or more of our products, which may require a
write down of inventory that could negatively affect operating
results.
Litigation
and Other Contingencies
We apply SFAS No. 5, Accounting for
Contingencies, to determine when and how much to accrue
for and disclose related to legal and other contingencies.
Accordingly, we disclose contingencies deemed to be reasonably
possible and accrue loss contingencies when, in consultation
with our legal advisors, we conclude that a loss is probable and
reasonably estimable (Refer to Part II, Item 8,
Note 5 in the Notes to Consolidated Financial Statements,
included in this Annual Report on
Form 10-K).
The ability to predict the ultimate outcome of such matters
involves judgments, estimates and inherent uncertainties. The
actual outcome of such matters could differ materially from
managements estimates.
Income
Taxes
We account for income taxes under the asset and liability
method, which provides that deferred tax assets and liabilities
be recognized for temporary differences between the financial
reporting basis and the tax basis of our assets and liabilities
and expected benefits of utilizing net operating loss
(NOL) and tax credit carryforwards. We record a
valuation allowance where it is more likely than not that the
deferred tax assets will not be realized. Each period we
evaluate the need for a valuation allowance for our deferred tax
assets and we adjust the valuation allowance so that we record
net deferred tax assets only to the extent that we conclude it
is more likely than not that these deferred tax assets will be
realized.
We recognize liabilities for uncertain tax positions based on
the two-step process prescribed in FIN 48. To the extent a
tax position does not meet a more-likely-than-not level of
certainty, no benefit is recognized in the financial statements.
If a position meets the more-likely-than-not level of certainty,
it is recognized in the financial statements at the largest
amount that has a greater than 50% likelihood of being realized
upon ultimate settlement. Interest and penalties related to
unrecognized tax benefits are recognized on liabilities recorded
for uncertain tax positions and are recorded in our provision
for income taxes. The actual liability for unrealized tax
benefit in any such contingency may be materially different from
our estimates, which could result in the need to record
additional liabilities for unrecognized tax benefits or
potentially adjust previously recorded liabilities for
unrealized tax benefits.
Stock-Based
Compensation
We account for all stock-based compensation in accordance with
the fair value recognition provisions of
SFAS No. 123(R), Share-Based Payment
(SFAS 123(R)). Under these provisions,
stock-based compensation cost is measured at the grant date
based on the value of the award and is recognized as expense
over the vesting period. The fair values of all stock options
granted are estimated using a binomial model, and the fair
values of all Employee Stock Purchase Plan (ESPP)
shares are estimated using the Black-Scholes-Merton option
pricing model. Both the binomial and the Black-Scholes-Merton
models require the input of highly subjective assumptions. Under
SFAS 123(R), we are required to use judgment in estimating
the amount of stock-based awards that are expected to be
forfeited. If actual forfeitures differ significantly from the
original estimate, stock-based compensation expense and our
results of operations could be materially impacted.
New
Accounting Standards
In September 2006, the FASB issued SFAS No. 157,
Fair Value Measurements (SFAS 157).
SFAS 157 provides guidance for using fair value to measure
assets and liabilities. It also responds to investors
requests for expanded information about the extent to which
companies measure assets and liabilities at fair value, the
information used to measure fair value, and the effect of fair
value measurements on earnings. SFAS 157 applies whenever
other standards
43
require (or permit) assets or liabilities to be measured at fair
value. The standard does not expand the use of fair value in any
new circumstances, but provides clarification on acceptable fair
valuation methods and applications. SFAS 157 was effective
for financial statements issued for fiscal years beginning after
November 15, 2007, and interim periods within those fiscal
years, which is the first quarter of our fiscal year 2009. On
November 14, 2007, the FASB provided a one year deferral
for the adoption of SFAS 157 for non-financial assets and
liabilities. We are currently evaluating the impact the adoption
of SFAS 157 will have on our consolidated financial
statements.
In February 2007, the FASB issued SFAS No. 159,
The Fair Value Option for Financial Assets and Financial
Liabilities (SFAS 159). SFAS 159
permits entities to choose to measure many financial assets and
financial liabilities at fair value. Unrealized gains and losses
on items for which the fair value option has been elected are
reported in earnings. SFAS 159 is effective for fiscal
years beginning after November 15, 2007, which is the first
quarter of our fiscal year 2009. We are currently evaluating the
impact the adoption of SFAS 159 will have on our
consolidated financial statements.
In December 2007, the FASB issued SFAS No. 141(R),
Business Combinations
(SFAS 141(R)). SFAS 141(R) establishes
principles and requirements for how the acquirer of a business
recognizes and measures in its financial statements the
identifiable assets acquired, the liabilities assumed, and any
noncontrolling interest in the acquiree. The statement also
provides guidance for recognizing and measuring the goodwill
acquired in the business combination or a gain from a bargain
purchase and determines what information to disclose to enable
users of financial statements to evaluate the nature and
financial effects of the business combination. SFAS 141(R)
is effective for financial statements issued for fiscal years
beginning after December 15, 2008, which is the first
quarter of our fiscal year 2010. We are currently evaluating the
impact the adoption of SFAS 141(R) will have on our
consolidated financial statements.
In March 2008, the FASB issued SFAS No. 161,
Disclosures about Derivative Instruments and Hedging
Activities-an amendment of FASB Statement No. 133
(SFAS 161). SFAS 161 updates guidance
regarding disclosure requirements for derivative instruments and
hedging activities. It responds to constituents concerns
that FASB Statement No. 133 does not provide adequate
information about how derivative and hedging activities affect
an entitys financial position, financial performance, and
cash flows. The disclosure of fair values of derivative
instruments and their gains and losses in a tabular format, as
required by SFAS 161, should provide a more complete
picture of the location in an entitys financial statements
of both the derivative positions existing at period end and the
effect of using derivatives during the reporting period.
SFAS 161 is effective for financial statements issued for
fiscal years and interim period beginning after
November 15, 2008, which is the first quarter of our fiscal
year 2010. We are currently evaluating the impact the adoption
of SFAS 161 will have on our consolidated financial
statements.
|
|
Item 7A.
|
Quantitative
and Qualitative Disclosures About Market Risk
|
Disclosure
About Foreign Currency Risk
Although the majority of our transactions are in
U.S. dollars, some transactions are based in various
foreign currencies. We purchase short-term, forward exchange
contracts to hedge the impact of foreign currency exchange
fluctuations on certain underlying assets, liabilities and
commitments for operating expenses and product costs denominated
in foreign currencies. The purpose of entering into these hedge
transactions is to minimize the impact of foreign currency
fluctuations on our results of operations. The contract maturity
dates do not exceed 12 months. We do not purchase
short-term forward exchange contracts for trading purposes.
Currently, we focus on hedging our foreign currency risk related
to the Thai Baht, Malaysian Ringgit, Euro and the British Pound
Sterling. Malaysian Ringgit contracts are designated as cash
flow hedges. Euro and British Pound Sterling contracts are
designated as fair value hedges. Thai Baht contracts are
designated as both cash flow and fair value hedges. See
Part II, Item 8, Note 1 in the Notes to
Consolidated Financial Statements, included in this Annual
Report on
Form 10-K.
44
As of June 27, 2008, we had outstanding the following
purchased foreign currency forward exchange contracts (in
millions, except weighted average contract rate):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contract
|
|
|
Weighted Average
|
|
|
Unrealized
|
|
|
|
Amount
|
|
|
Contract Rate*
|
|
|
Loss
|
|
|
Foreign currency forward contracts:
|
|
|
|
|
|
|
|
|
|
|
|
|
Thai Baht cash flow hedges
|
|
$
|
733
|
|
|
|
33.22
|
|
|
$
|
(9
|
)
|
Thai Baht fair value hedges
|
|
$
|
144
|
|
|
|
33.63
|
|
|
|
|
|
Malaysian Ringgit cash flow hedges
|
|
$
|
359
|
|
|
|
3.23
|
|
|
$
|
(3
|
)
|
Euro fair value hedges
|
|
$
|
14
|
|
|
|
0.64
|
|
|
|
|
|
|
|
|
* |
|
Expressed in units of foreign currency per dollar. |
In 2008, 2007 and 2006, total net realized transaction and
forward exchange contract currency gains and losses were not
material to our consolidated financial statements.
Disclosure
About Other Market Risks
Variable
Interest Rate Risk
Borrowings under the Credit Facility bear interest at a rate
equal to, at the option of WDTI, either (a) a LIBOR rate
determined by reference to the cost of funds for Eurodollar
deposits for the interest period relevant to such borrowing,
adjusted for certain additional costs (the Eurocurrency
Rate) or (b) a base rate determined by reference to
the higher of (i) the federal funds rate plus 0.50% and
(ii) the prime rate as announced by JPMorgan Chase Bank,
N.A. (the Base Rate), in each case plus an
applicable margin. The applicable margin for borrowings under
the term loan facility ranges from 1.25% to 1.50% with respect
to borrowings at the Eurocurrency Rate and 0.0% to 0.125% with
respect to borrowings at the Base Rate. The applicable margin
for revolving loan borrowings under the revolving credit
facility ranges from 0.8% to 1.125% with respect to borrowings
at the Eurocurrency Rate and 0.0% to 0.125% with respect to
borrowings at the Base Rate. The applicable margins for
borrowings under the Credit Facility are determined based upon a
leverage ratio of the Company and its subsidiaries calculated on
a consolidated basis. If either the base rate or LIBOR rate
increase, our interest payments would also increase. A one
percent increase in the variable rate of interest on the Credit
Facility would increase interest expense by approximately
$5 million annually.
Credit
Market Risk
Our long-term investments consist of auction-rate securities
totaling $28 million as of June 27, 2008. The recent
negative conditions in the global credit markets have prevented
us from liquidating some of our holdings of auction-rate
securities because the amount of securities submitted for sale
has exceeded the amount of purchase orders for such securities.
If the credit market does not improve, auctions for our invested
amounts may continue to fail. If this occurs, we may be unable
to liquidate some or all of our auction-rate securities at par
should we need or desire to access the funds invested in those
securities prior to maturity of the underlying assets. In the
event we need or desire to access these funds, we will not be
able to do so until a future auction on these investments is
successful or a buyer is found outside the auction process. If a
buyer is found but is unwilling to purchase the investments at
par, we may incur a loss. The market values of some of the
auction-rate securities we owned were impacted by the
macro-economic credit market conditions. Rating downgrades of
the security issuer or the third-parties insuring such
investments may require us to adjust the carrying value of these
investments through an impairment charge. Based on our ability
to access our cash, cash equivalents and short-term investments,
our expected operating cash flows and our other sources of cash,
we do not anticipate these investments will affect our ability
to execute our current business plan.
45
|
|
Item 8.
|
Financial
Statements and Supplementary Data
|
Index to
Financial Statements and Financial Statement Schedule
|
|
|
|
|
|
|
Page
|
|
Consolidated Financial Statements:
|
|
|
|
|
|
|
|
47
|
|
|
|
|
49
|
|
|
|
|
50
|
|
|
|
|
51
|
|
|
|
|
52
|
|
|
|
|
53
|
|
Financial Statement Schedule:
|
|
|
|
|
|
|
|
77
|
|
46
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors
Western Digital Corporation:
We have audited the accompanying consolidated balance sheets of
Western Digital Corporation and subsidiaries as of June 27,
2008 and June 29, 2007, and the related consolidated
statements of income, shareholders equity and
comprehensive income, and cash flows for each of the years in
the three-year period ended June 27, 2008. In connection
with our audits of the consolidated financial statements, we
have also audited the related financial statement schedule.
These consolidated financial statements and financial statement
schedule are the responsibility of the Companys
management. Our responsibility is to express an opinion on these
consolidated financial statements and financial statement
schedule based on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred
to above present fairly, in all material respects, the financial
position of Western Digital Corporation and subsidiaries as of
June 27, 2008 and June 29, 2007, and the results of
their operations and their cash flows for each of the years in
the three-year period ended June 27, 2008, in conformity
with U.S. generally accepted accounting principles. Also,
in our opinion, the related financial statement schedule, when
considered in relation to the basic consolidated financial
statements taken as a whole, presents fairly, in all material
respects, the information set forth therein.
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States),
Western Digital Corporation and subsidiaries internal
control over financial reporting as of June 27, 2008, based
on criteria established in Internal Control
Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO), and our report
dated August 20, 2008 expressed an unqualified opinion on
the effectiveness of the Companys internal control over
financial reporting.
August 20, 2008
Costa Mesa, California
47
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors
Western Digital Corporation:
We have audited Western Digital Corporation and
subsidiaries internal control over financial reporting as
of June 27, 2008, based on criteria established in Internal
Control Integrated Framework issued by the Committee
of Sponsoring Organizations of the Treadway Commission (COSO).
The Companys management is responsible for maintaining
effective internal control over financial reporting and for its
assessment of the effectiveness of internal control over
financial reporting, included in the accompanying
Managements Report on Internal Control Over Financial
Reporting appearing under Item 9A. Our responsibility is to
express an opinion on the Companys internal control over
financial reporting based on our audit.
We conducted our audit in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control
over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of
internal control over financial reporting, assessing the risk
that a material weakness exists, and testing and evaluating the
design and operating effectiveness of internal control based on
the assessed risk. Our audit also included performing such other
procedures as we considered necessary in the circumstances. We
believe that our audit provides a reasonable basis for our
opinion.
A companys internal control over financial reporting is a
process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles. A companys
internal control over financial reporting includes those
policies and procedures that (1) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions
are recorded as necessary to permit preparation of financial
statements in accordance with U.S. generally accepted
accounting principles, and that receipts and expenditures of the
company are being made only in accordance with authorizations of
management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the
companys assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
In our opinion, Western Digital Corporation and subsidiaries
maintained, in all material respects, effective internal control
over financial reporting as of June 27, 2008, based on
criteria established in Internal Control Integrated
Framework issued by the Committee of Sponsoring Organizations of
the Treadway Commission.
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
consolidated balance sheets of Western Digital Corporation and
subsidiaries as of June 27, 2008 and June 29, 2007,
the related consolidated statements of income,
shareholders equity and comprehensive income, and cash
flows for each of the years in the three-year period ended
June 27, 2008, and the related financial statement
schedule, and our report dated August 20, 2008 expressed an
unqualified opinion on those consolidated financial statements
and financial statement schedule.
August 20, 2008
Costa Mesa, California
48
WESTERN
DIGITAL CORPORATION
(in
millions)
|
|
|
|
|
|
|
|
|
|
|
June 27,
|
|
|
June 29,
|
|
|
|
2008
|
|
|
2007
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
1,104
|
|
|
$
|
700
|
|
Short-term investments
|
|
|
3
|
|
|
|
207
|
|
Accounts receivable, net
|
|
|
1,010
|
|
|
|
697
|
|
Inventories
|
|
|
456
|
|
|
|
259
|
|
Advances to suppliers
|
|
|
36
|
|
|
|
63
|
|
Other current assets
|
|
|
122
|
|
|
|
103
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
2,731
|
|
|
|
2,029
|
|
Property and equipment, net
|
|
|
1,668
|
|
|
|
741
|
|
Goodwill
|
|
|
116
|
|
|
|
|
|
Other intangible assets, net
|
|
|
81
|
|
|
|
4
|
|
Other non-current assets
|
|
|
279
|
|
|
|
127
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
4,875
|
|
|
$
|
2,901
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS EQUITY
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
1,181
|
|
|
$
|
882
|
|
Accrued expenses
|
|
|
266
|
|
|
|
163
|
|
Accrued warranty
|
|
|
90
|
|
|
|
73
|
|
Current portion of long-term debt
|
|
|
27
|
|
|
|
12
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
1,564
|
|
|
|
1,130
|
|
Long-term debt
|
|
|
482
|
|
|
|
10
|
|
Other liabilities
|
|
|
133
|
|
|
|
45
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
2,179
|
|
|
|
1,185
|
|
Commitments and contingencies (Notes 3 and 4)
|
|
|
|
|
|
|
|
|
Shareholders equity:
|
|
|
|
|
|
|
|
|
Preferred stock, $.01 par value; authorized
5 shares; outstanding None
|
|
|
|
|
|
|
|
|
Common stock, $.01 par value; authorized
450 shares; outstanding 225 shares
|
|
|
2
|
|
|
|
2
|
|
Additional paid-in capital
|
|
|
906
|
|
|
|
811
|
|
Accumulated comprehensive loss
|
|
|
(12
|
)
|
|
|
(1
|
)
|
Retained earnings
|
|
|
1,822
|
|
|
|
955
|
|
Treasury stock common shares at cost; 1 and
3 shares, respectively
|
|
|
(22
|
)
|
|
|
(51
|
)
|
|
|
|
|
|
|
|
|
|
Total shareholders equity
|
|
|
2,696
|
|
|
|
1,716
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders equity
|
|
$
|
4,875
|
|
|
$
|
2,901
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
49
WESTERN
DIGITAL CORPORATION
(in
millions, except per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended
|
|
|
|
June 27,
|
|
|
June 29,
|
|
|
June 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Revenue, net
|
|
$
|
8,074
|
|
|
$
|
5,468
|
|
|
$
|
4,341
|
|
Cost of revenue
|
|
|
6,335
|
|
|
|
4,568
|
|
|
|
3,512
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin
|
|
|
1,739
|
|
|
|
900
|
|
|
|
829
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
464
|
|
|
|
306
|
|
|
|
297
|
|
Selling, general and administrative
|
|
|
220
|
|
|
|
179
|
|
|
|
166
|
|
Acquired in-process research and development
|
|
|
49
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
733
|
|
|
|
485
|
|
|
|
463
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
1,006
|
|
|
|
415
|
|
|
|
366
|
|
Non-operating income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
27
|
|
|
|
32
|
|
|
|
20
|
|
Interest and other expense
|
|
|
(52
|
)
|
|
|
(4
|
)
|
|
|
(4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-operating income (expense)
|
|
|
(25
|
)
|
|
|
28
|
|
|
|
16
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
981
|
|
|
|
443
|
|
|
|
382
|
|
Income tax expense (benefit)
|
|
|
114
|
|
|
|
(121
|
)
|
|
|
(13
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
867
|
|
|
$
|
564
|
|
|
$
|
395
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
3.92
|
|
|
$
|
2.57
|
|
|
$
|
1.84
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
3.84
|
|
|
$
|
2.50
|
|
|
$
|
1.76
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
221
|
|
|
|
219
|
|
|
|
215
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
226
|
|
|
|
226
|
|
|
|
224
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
50
WESTERN
DIGITAL CORPORATION
(in
millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended
|
|
|
|
June 27,
|
|
|
June 29,
|
|
|
June 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Cash flows from operating activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
867
|
|
|
$
|
564
|
|
|
$
|
395
|
|
Adjustments to reconcile net income to net cash provided by
operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
413
|
|
|
|
210
|
|
|
|
160
|
|
Acquired in-process research and development
|
|
|
49
|
|
|
|
|
|
|
|
|
|
Stock-based compensation
|
|
|
37
|
|
|
|
48
|
|
|
|
37
|
|
Deferred income taxes
|
|
|
(2
|
)
|
|
|
(126
|
)
|
|
|
(22
|
)
|
Loss on investments
|
|
|
13
|
|
|
|
|
|
|
|
|
|
Other non-cash items
|
|
|
|
|
|
|
|
|
|
|
5
|
|
Changes in:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(194
|
)
|
|
|
(218
|
)
|
|
|
(77
|
)
|
Inventories
|
|
|
8
|
|
|
|
(53
|
)
|
|
|
(52
|
)
|
Accounts payable
|
|
|
114
|
|
|
|
196
|
|
|
|
30
|
|
Accrued expenses
|
|
|
38
|
|
|
|
6
|
|
|
|
(27
|
)
|
Advances to suppliers
|
|
|
54
|
|
|
|
(7
|
)
|
|
|
(80
|
)
|
Prepaid expenses and other
|
|
|
2
|
|
|
|
(2
|
)
|
|
|
(1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
1,399
|
|
|
|
618
|
|
|
|
368
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisitions, net of cash acquired
|
|
|
(927
|
)
|
|
|
|
|
|
|
|
|
Purchases of property and equipment
|
|
|
(615
|
)
|
|
|
(324
|
)
|
|
|
(268
|
)
|
Purchases of investments
|
|
|
(105
|
)
|
|
|
(68
|
)
|
|
|
(109
|
)
|
Sales and maturities of investments
|
|
|
326
|
|
|
|
9
|
|
|
|
74
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(1,321
|
)
|
|
|
(383
|
)
|
|
|
(303
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock under employee plans
|
|
|
60
|
|
|
|
30
|
|
|
|
78
|
|
Repurchase of common stock
|
|
|
(60
|
)
|
|
|
(73
|
)
|
|
|
(54
|
)
|
Tax benefit from employee stock plans
|
|
|
89
|
|
|
|
|
|
|
|
|
|
Repayment of acquired convertible debentures
|
|
|
(250
|
)
|
|
|
|
|
|
|
|
|
Proceeds from debt
|
|
|
1,510
|
|
|
|
|
|
|
|
|
|
Repayment of debt
|
|
|
(1,023
|
)
|
|
|
(43
|
)
|
|
|
(23
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities
|
|
|
326
|
|
|
|
(86
|
)
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase in cash and cash equivalents
|
|
|
404
|
|
|
|
149
|
|
|
|
66
|
|
Cash and cash equivalents, beginning of year
|
|
|
700
|
|
|
|
551
|
|
|
|
485
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of year
|
|
$
|
1,104
|
|
|
$
|
700
|
|
|
$
|
551
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flow information:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for income taxes
|
|
$
|
11
|
|
|
$
|
8
|
|
|
$
|
5
|
|
Cash paid for interest
|
|
$
|
33
|
|
|
$
|
3
|
|
|
$
|
2
|
|
Supplemental disclosure of non-cash investing and financing
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Equipment acquired under capital lease
|
|
|
|
|
|
$
|
21
|
|
|
$
|
15
|
|
Acquired convertible debentures
|
|
$
|
248
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
51
WESTERN
DIGITAL CORPORATION
(in
millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retained
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
Accumulated Other
|
|
|
Earnings
|
|
|
Total
|
|
|
Total
|
|
|
|
Common Stock
|
|
|
Treasury Stock
|
|
|
Paid-In
|
|
|
Comprehensive
|
|
|
(Accumulated
|
|
|
Shareholders
|
|
|
Comprehensive
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Income (Loss)
|
|
|
Deficit)
|
|
|
Equity
|
|
|
Income
|
|
|
Balance at July 1, 2005
|
|
|
215
|
|
|
$
|
2
|
|
|
|
(1
|
)
|
|
$
|
(12
|
)
|
|
$
|
714
|
|
|
$
|
|
|
|
$
|
(4
|
)
|
|
$
|
700
|
|
|
|
|
|
Employee stock plans
|
|
|
6
|
|
|
|
|
|
|
|
4
|
|
|
|
50
|
|
|
|
29
|
|
|
|
|
|
|
|
|
|
|
|
79
|
|
|
|
|
|
Deferred compensation
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
4
|
|
|
|
11
|
|
|
|
|
|
|
|
|
|
|
|
15
|
|
|
|
|
|
Stock based compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
21
|
|
|
|
|
|
|
|
|
|
|
|
21
|
|
|
|
|
|
Repurchase of common stock
|
|
|
|
|
|
|
|
|
|
|
(4
|
)
|
|
|
(54
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(54
|
)
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
395
|
|
|
|
395
|
|
|
$
|
395
|
|
Unrealized gain on foreign currency contracts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1
|
|
|
|
|
|
|
|
1
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at June 30, 2006
|
|
|
222
|
|
|
$
|
2
|
|
|
|
(1
|
)
|
|
$
|
(12
|
)
|
|
$
|
775
|
|
|
$
|
1
|
|
|
$
|
391
|
|
|
$
|
1,157
|
|
|
$
|
396
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee stock plans
|
|
|
1
|
|
|
|
|
|
|
|
3
|
|
|
|
50
|
|
|
|
(12
|
)
|
|
|
|
|
|
|
|
|
|
|
38
|
|
|
|
|
|
Deferred compensation
|
|
|
2
|
|
|
|
|
|
|
|
(1
|
)
|
|
|
(16
|
)
|
|
|
30
|
|
|
|
|
|
|
|
|
|
|
|
14
|
|
|
|
|
|
Stock based compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18
|
|
|
|
|
|
|
|
|
|
|
|
18
|
|
|
|
|
|
Repurchase of common stock
|
|
|
|
|
|
|
|
|
|
|
(4
|
)
|
|
|
(73
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(73
|
)
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
564
|
|
|
|
564
|
|
|
$
|
564
|
|
Unrealized loss on foreign currency contracts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2
|
)
|
|
|
|
|
|
|
(2
|
)
|
|
|
(2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at June 29, 2007
|
|
|
225
|
|
|
$
|
2
|
|
|
|
(3
|
)
|
|
$
|
(51
|
)
|
|
$
|
811
|
|
|
$
|
(1
|
)
|
|
$
|
955
|
|
|
$
|
1,716
|
|
|
$
|
562
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee stock plans
|
|
|
|
|
|
|
|
|
|
|
4
|
|
|
|
92
|
|
|
|
(27
|
)
|
|
|
|
|
|
|
|
|
|
|
65
|
|
|
|
|
|
Deferred compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3
|
)
|
|
|
15
|
|
|
|
|
|
|
|
|
|
|
|
12
|
|
|
|
|
|
Stock based compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18
|
|
|
|
|
|
|
|
|
|
|
|
18
|
|
|
|
|
|
Tax benefit from employee stock plans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
89
|
|
|
|
|
|
|
|
|
|
|
|
89
|
|
|
|
|
|
Repurchase of common stock
|
|
|
|
|
|
|
|
|
|
|
(2
|
)
|
|
|
(60
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(60
|
)
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
867
|
|
|
|
867
|
|
|
$
|
867
|
|
Unrealized loss on foreign currency contracts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(11
|
)
|
|
|
|
|
|
|
(11
|
)
|
|
|
(11
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at June 27, 2008
|
|
|
225
|
|
|
$
|
2
|
|
|
|
(1
|
)
|
|
$
|
(22
|
)
|
|
$
|
906
|
|
|
$
|
(12
|
)
|
|
$
|
1,822
|
|
|
$
|
2,696
|
|
|
$
|
856
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
52
WESTERN
DIGITAL CORPORATION
|
|
Note 1.
|
Organization
and Summary of Significant Accounting Policies
|
Western Digital Corporation (the Company or
Western Digital or WD) designs,
develops, manufactures and sells hard drives. A hard drive is a
device that stores data on one or more rotating magnetic disks
to allow fast access to data. The Companys hard drives are
used in desktop computers, notebook computers, external storage
devices, enterprise applications such as servers, workstations,
network attached storage and storage area networks and in
consumer electronics products such as personal/digital video
recorders and satellite and cable set-top boxes. The Company
sells its products worldwide to original equipment manufacturers
and original design manufacturers for inclusion in computer
systems or subsystems, and to distributors, resellers and
retailers.
Western Digital has prepared its consolidated financial
statements in accordance with accounting principles generally
accepted in the United States (GAAP) and has adopted
accounting policies and practices which are generally accepted
in the industry in which it operates. The Companys
significant accounting policies are summarized below.
Fiscal
Year
The Company has a 52 or 53-week fiscal year. The 2008, 2007 and
2006 fiscal years, which ended on June 27, 2008,
June 29, 2007 and June 30, 2006, respectively,
consisted of 52 weeks each.
Basis of
Presentation
The consolidated financial statements include the accounts of
the Company and its wholly owned subsidiaries. All significant
intercompany accounts and transactions have been eliminated in
consolidation. The accounts of foreign subsidiaries have been
remeasured using the U.S. dollar as the functional
currency. As such, gains or losses resulting from remeasurement
of these accounts from local currencies into U.S. dollars
are reflected in the results of operations. These gains and
losses were immaterial to the consolidated financial statements.
On September 5, 2007, the Company completed its acquisition
(the Acquisition) of Komag, Incorporated
(Komag). The Acquisition is further described in
Note 11 below. In connection with the Acquisition, Komag
became an indirect wholly-owned subsidiary of the Company and
changed its name to WD Media, Inc. (WD Media). WD
Medias results of operations since the date of the
Acquisition are included in the consolidated financial
statements. The consolidated financial statements include the
accounts of the Company and its wholly-owned subsidiaries,
including WD Media. All significant inter-company accounts and
transactions have been eliminated in consolidation.
Cash and
Cash Equivalents
The Companys cash and cash equivalents represent highly
liquid investments, primarily money market funds and commercial
paper, with original maturities of three months or less.
Investments
The Companys investments consist primarily of auction-rate
securities, which are investments in bonds with original
maturities greater than 90 days. The Company has classified
these investments as available for sale securities
under Statement of Financial Accounting Standards
(SFAS) No. 115 Accounting for Certain
Investments in Debt and Equity Securities and are carried
at fair value.
Fair
Value of Financial Instruments
The carrying amounts of cash and cash equivalents, accounts
receivable, investments, accounts payable and accrued expenses
approximate fair value for all periods presented because of the
short-term maturity of these assets and liabilities or by using
appropriate market information. The carrying amount of debt
approximates fair value because of its variable interest rate.
53
WESTERN
DIGITAL CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Concentration
of Credit Risk
The Company designs, develops, manufactures and markets hard
drives to computer manufacturers, resellers and retailers
throughout the world. The Company performs ongoing credit
evaluations of its customers financial condition and
generally requires no collateral. The Company maintains
allowances for potential credit losses, and such losses have
historically been within managements expectations. At any
given point in time, the total amount outstanding from any one
of a number of its customers may be individually significant to
the Companys financial results. At June 27, 2008 and
June 29, 2007, the Company had reserves for potential
credit losses of $8 million and $5 million,
respectively, and net accounts receivable of $1.0 billion
and $697 million, respectively. The Company also has cash
equivalent and investment policies that limit the amount of
credit exposure to any one financial institution or investment
instrument and require that investments be made only with
financial institutions or in investment instruments evaluated as
highly credit-worthy.
Inventory
Valuation
The Company values inventory at the lower of cost or net
realizable value. Cost is determined primarily using the
first-in,
first-out method (FIFO) for the majority of its
inventory and the weighted average method for its precious
metals inventory acquired from Komag.
Weighted-average
cost is calculated based upon the cost of precious metals at the
time they are received by the Company. As of June 27, 2008,
78% of the inventory was valued using the FIFO method with the
remainder valued using the weighted average method. Inventories
as of June 29, 2007 were valued using the FIFO method only.
Inventory write-downs are recorded to reduce the carrying value
of inventory to the lower of cost or net realizable value by
analyzing market conditions and estimates of future sales prices
as compared to inventory costs and inventory balances. The
Company evaluates inventory balances for excess quantities and
obsolescence on a regular basis by analyzing estimated demand,
inventory on hand, sales levels, and other information, and
reduces inventory balances to net realizable value for excess
and obsolete inventory based on this analysis.
Property
and Equipment
The cost of property and equipment is depreciated over the
estimated useful lives of the respective assets. The
Companys buildings are being depreciated over periods
ranging from fifteen to thirty years. The majority of the
Companys equipment is being depreciated over periods of
three to seven years. Depreciation is computed on a
straight-line basis. Leasehold improvements are amortized over
the lesser of the estimated useful lives of the assets or the
related lease terms.
Goodwill
and Other Intangible Assets
In accordance with SFAS No. 141, Business
Combinations (SFAS 141), the total
purchase price in a business combination is allocated to the
fair value of assets acquired and liabilities assumed based on
their fair values at the acquisition date, with amounts
exceeding the fair values being recorded as goodwill. In
accordance with SFAS No. 142, Goodwill and Other
Intangible Assets (SFAS 142), goodwill is
not amortized. Instead, it is tested for impairment on an annual
basis or more frequently whenever events or changes in
circumstances indicate that goodwill may be impaired. The
Company did not record any impairment of goodwill during 2008.
Other intangible assets consist primarily of purchased
technology and customer relationships acquired in an
acquisition. Acquired intangibles are amortized on a
straight-line basis over their respective estimated useful lives
included in Note 12. In accordance with SFAS No. 144,
Accounting for the Impairment or Disposal of Long-Lived
Assets, long-lived assets are tested for recoverability
whenever events or changes in circumstances indicate that their
carrying amounts may not be recoverable. The Company did not
record any impairment of long-lived assets during 2008.
54
WESTERN
DIGITAL CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Revenue
Recognition
The Company recognizes revenue in accordance with SEC Staff
Accounting Bulletin (SAB) No. 104,
Revenue Recognition in Financial Statements. Under
SAB No. 104, revenue is recognized when the title and
risk of loss have passed to the customer, there is persuasive
evidence of an arrangement, delivery has occurred, or services
have been rendered, the sales price is fixed or determinable and
collectability is reasonably assured. The Company establishes
provisions against revenue and cost of revenue for estimated
sales returns in the same period that the related revenue is
recognized based on existing product return notifications.
In accordance with standard industry practice, the Company has
agreements with resellers that provide limited price protection
for inventories held by resellers at the time of published list
price reductions and other incentive programs. Either party may
terminate these agreements upon written notice. In the event of
termination, the Company may be obligated to repurchase a
certain portion of the resellers inventory. The Company
records a reduction to revenue for estimated price protection
and other programs in effect until the resellers sell such
inventory to their customers. These adjustments are based on
anticipated price decreases during the reseller holding period,
estimated amounts to be reimbursed to qualifying customers, as
well as historical pricing information. If end-market demand for
hard drives declines significantly, the Company may have to
increase sell-through incentive payments to resellers, resulting
in an increase in price protection allowances, which could
adversely impact operating results. Net revenue recognized on
sales to resellers was approximately $3.8 billion,
$2.8 billion and $2.0 billion in 2008, 2007 and 2006,
respectively. Repurchases of reseller inventory were not
material in 2008, 2007 or 2006.
Western Digital establishes an allowance for doubtful accounts
by analyzing specific customer accounts and assessing the risk
of loss based on insolvency, disputes or other collection
issues. In addition, the Company routinely analyzes the
different receivable aging categories and its bad debt loss
history and establishes reserves based on a combination of past
due receivables and expected future losses based primarily on
the Companys historical levels of bad debt losses. If the
financial condition of a significant customer deteriorates
resulting in its inability to pay its accounts when due, or if
the overall loss history of the Company changes significantly,
an adjustment in the Companys allowance for doubtful
accounts would be required, which could affect operating results.
Warranty
The Company records an accrual for estimated warranty costs when
revenue is recognized. The Company generally warrants its
products for periods of one to five years. The warranty
provision considers estimated product failure rates and trends,
estimated repair or replacement costs and estimated costs for
customer compensatory claims related to product quality issues,
if any. A statistical warranty tracking model is used to help
with estimates and assists in exercising judgment in determining
the underlying estimates. The statistical tracking model
captures specific detail on hard drive reliability, such as
factory test data, historical field return rates, and costs to
repair by product type. If actual product return trends, costs
to repair returned products or costs of customer compensatory
claims differ significantly from estimates, future results of
operations could be materially affected. Managements
judgment is subject to a greater degree of subjectivity with
respect to newly introduced products because of limited field
experience with those products upon which to base warranty
estimates. Management reviews the warranty accrual quarterly for
products shipped in prior periods and which are still under
warranty. Any changes in the estimates underlying the accrual
may result in adjustments that impact current period gross
margin and income. Such changes are generally a result of
differences between forecasted and actual return rate experience
and costs to repair.
Advertising
Expense
Advertising costs are expensed as incurred. Selling, general and
administrative expenses of the Company include advertising costs
of $3 million, $5 million and $6 million in 2008,
2007 and 2006, respectively.
55
WESTERN
DIGITAL CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Income
Taxes
The Company accounts for income taxes under the asset and
liability method, which provides that deferred tax assets and
liabilities be recognized for temporary differences between the
financial reporting basis and the tax basis of our assets and
liabilities and expected benefits of utilizing net operating
loss (NOL) and tax credit carryforwards. The Company
records a valuation allowance where it is more likely than not
that the deferred tax assets will not be realized. Each period
the Company evaluates the need for a valuation allowance for its
deferred tax assets and adjusts the valuation allowance so that
the Company records net deferred tax assets only to the extent
that it has concluded it is more likely than not that these
deferred tax assets will be realized.
As a result of the implementation of FASB Interpretation
No. 48, Accounting for Uncertainty in Income
Taxes an interpretation of FASB Statement
No. 109 (FIN 48), the Company
recognized liabilities for uncertain tax positions based on the
two-step process prescribed in FIN 48. To the extent a tax
position does not meet a more-likely-than-not level of
certainty, no benefit is recognized in the financial statements.
If a position meets the more-likely-than-not level of certainty,
it is recognized in the financial statements at the largest
amount that has a greater than 50% likelihood of being realized
upon ultimate settlement. Interest and penalties related to
unrecognized tax benefits are recognized on liabilities recorded
for uncertain tax positions and are recorded in the provision
for income taxes. The actual liability for unrealized tax
benefit in any such contingency may be materially different from
the Companys estimates, which could result in the need to
record additional liabilities for unrecognized tax benefits or
potentially adjust previously recorded liabilities for
unrealized tax benefits.
Per Share
Information
The Company computes basic income per common share using net
income and the weighted average number of common shares
outstanding during the period. Diluted income per share is
computed using net income and the weighted average number of
common shares and potentially dilutive common shares outstanding
during the period. Potentially dilutive common shares include
outstanding employee stock options, rights to purchase shares of
common stock under our employee stock purchase plan and
restricted stock and stock unit awards.
The following table illustrates the computation of basic and
diluted income per common share (in millions, except per share
data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended
|
|
|
|
June 27,
|
|
|
June 29,
|
|
|
June 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Net income
|
|
$
|
867
|
|
|
$
|
564
|
|
|
$
|
395
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
221
|
|
|
|
219
|
|
|
|
215
|
|
Employee stock options and other
|
|
|
5
|
|
|
|
7
|
|
|
|
9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
226
|
|
|
|
226
|
|
|
|
224
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
3.92
|
|
|
$
|
2.57
|
|
|
$
|
1.84
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
3.84
|
|
|
$
|
2.50
|
|
|
$
|
1.76
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Antidilutive common share equivalents excluded*
|
|
|
1
|
|
|
|
2
|
|
|
|
2
|
|
|
|
|
* |
|
For purposes of computing diluted income per common share,
common share equivalents with an exercise price that exceeded
the average fair market value of common stock for the period are
considered antidilutive and have been excluded from the
calculation. |
56
WESTERN
DIGITAL CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Stock-Based
Compensation
The Company accounts for all stock-based compensation in
accordance with the fair value recognition provisions in
SFAS No. 123(R), Share-Based Payment
(SFAS 123(R)). Under the fair value recognition
provisions of SFAS 123(R), stock-based compensation cost is
measured at the grant date based on the value of the award and
is recognized as expense over the vesting period. The fair
values of all stock options granted are estimated using a
binomial model, and the fair values of all Employee Stock
Purchase Plan (ESPP) shares are estimated using the
Black-Scholes-Merton option pricing model. Both the binomial and
the Black-Scholes-Merton models require the input of highly
subjective assumptions. Under SFAS 123(R), the Company is
required to use judgment in estimating the amount of stock-based
awards that are expected to be forfeited. If actual forfeitures
differ significantly from the original estimate, stock-based
compensation expense and the results of operations could be
materially impacted.
Other
Comprehensive Income (Loss)
Other comprehensive income (loss) refers to revenue, expenses,
gains and losses that are recorded as an element of
shareholders equity but are excluded from net income. The
Companys other comprehensive income (loss) is comprised of
unrealized gains and losses on foreign currency contracts.
Foreign
Exchange Contracts
Although the majority of the Companys transactions are in
U.S. dollars, some transactions are based in various
foreign currencies. The Company purchases short-term, forward
exchange contracts to hedge the impact of foreign currency
fluctuations on certain underlying assets, liabilities and
commitments for operating expenses and product costs denominated
in foreign currencies. The contracts have maturity dates that do
not exceed 12 months. The Company does not purchase
short-term forward exchange contracts for trading purposes.
The Company applies the provisions of SFAS No. 133,
Accounting for Derivative Instruments and Hedging
Activities (SFAS 133), as amended, which
establishes accounting and reporting standards for derivative
instruments embedded in other contracts and for hedging
activities. The Company had outstanding forward exchange
contracts with commercial banks for Thai Baht, Malaysian
Ringgit, British Pound Sterling and Euro with values of
$1.3 billion and $493 million at June 27, 2008
and June 29, 2007, respectively. Malaysian Ringgit
contracts are designated as cash flow hedges. Euro and British
Pound Sterling contracts are designated as fair value hedges.
Thai Baht contracts include both cash flow and fair value hedges.
If the derivative is designated as a cash flow hedge, the
effective portion of the change in fair value of the derivative
is initially deferred in other comprehensive income (loss), net
of tax. These amounts are subsequently recognized into earnings
when the underlying cash flow being hedged is recognized into
earnings. Recognized gains and losses on foreign currency
contracts entered into for manufacturing related activities are
reported in cost of revenues. Hedge effectiveness is measured by
comparing the hedging instruments cumulative change in
fair value from inception to maturity to the underlying
exposures terminal value. The Company has determined that
all of its cash flow hedging instruments for all years presented
were effective as defined under SFAS 133.
Fair value hedges are not designated as hedging instruments, and
therefore, the change in the instruments fair value is
recognized currently in earnings and is reported as a component
of non-operating income. Changes in fair value on these
contracts were not material to the consolidated financial
statements for all years presented.
Use of
Estimates
Company management has made estimates and assumptions relating
to the reporting of certain assets and liabilities in conformity
with U.S. GAAP. These estimates and assumptions have been
applied using methodologies which are consistent throughout the
periods presented. However, actual results could differ from
these estimates.
57
WESTERN
DIGITAL CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
New
Accounting Standards
In September 2006, the FASB issued SFAS No. 157,
Fair Value Measurements (SFAS 157).
SFAS 157 provides guidance for using fair value to measure
assets and liabilities. It also responds to investors
requests for expanded information about the extent to which
companies measure assets and liabilities at fair value, the
information used to measure fair value and the effect of fair
value measurements on earnings. SFAS 157 applies whenever
other standards require (or permit) assets or liabilities to be
measured at fair value. The standard does not expand the use of
fair value in any new circumstances, but provides clarification
on acceptable fair valuation methods and applications.
SFAS 157 was effective for financial statements issued for
fiscal years beginning after November 15, 2007, and interim
periods within those fiscal years, which for the Company is the
first quarter of fiscal year 2009. On November 14, 2007,
the FASB provided a one year deferral for the adoption of
SFAS 157 for non-financial assets and liabilities. The
Company is currently evaluating the impact the adoption of
SFAS 157 will have on its consolidated financial statements.
In February 2007, the FASB issued SFAS No. 159,
The Fair Value Option for Financial Assets and Financial
Liabilities (SFAS 159). SFAS 159
permits entities to choose to measure many financial assets and
financial liabilities at fair value. Unrealized gains and losses
on items for which the fair value option has been elected are
reported in earnings. SFAS 159 is effective for fiscal
years beginning after November 15, 2007, which for the
Company is the first quarter of fiscal year 2009. The Company is
evaluating the impact the adoption of SFAS 159 will have on
its consolidated financial statements.
In December 2007, the FASB issued SFAS No. 141(R),
Business Combinations
(SFAS 141(R)). SFAS 141(R) establishes
principles and requirements for how the acquirer of a business
recognizes and measures in its financial statements the
identifiable assets acquired, the liabilities assumed, and any
noncontrolling interest in the acquiree. The statement also
provides guidance for recognizing and measuring the goodwill
acquired in the business combination or a gain from a bargain
purchase and determines what information to disclose to enable
users of financial statements to evaluate the nature and
financial effects of the business combination. SFAS 141(R)
is effective for financial statements issued for fiscal years
beginning after December 15, 2008, which for the Company is
the first quarter of fiscal year 2010. The Company is currently
evaluating the impact the adoption of SFAS 141(R) will have
on its consolidated financial statements.
In March 2008, the FASB issued SFAS No. 161,
Disclosures about Derivative Instruments and Hedging
Activities-an amendment of FASB Statement No. 133
(SFAS 161). SFAS 161 updates guidance
regarding disclosure requirements for derivative instruments and
hedging activities. It responds to constituents concerns
that FASB Statement No. 133 does not provide adequate
information about how derivative and hedging activities affect
an entitys financial position, financial performance, and
cash flows. The disclosure of fair values of derivative
instruments and their gains and losses in a tabular format, as
required by SFAS 161, should provide a more complete
picture of the location in an entitys financial statements
of both the derivative positions existing at period end and the
effect of using derivatives during the reporting period.
SFAS 161 is effective for financial statements issued for
fiscal years and interim period beginning after
November 15, 2008, which for the Company is the first
quarter of fiscal year 2010. The Company is currently evaluating
the impact the adoption of SFAS 161 will have on its
consolidated financial statements.
Reclassifications
Certain prior year amounts have been reclassified to conform to
the current year presentation.
58
WESTERN
DIGITAL CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
Note 2.
|
Supplemental
Financial Statement Data
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended
|
|
|
|
June 27,
|
|
|
June 29,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
(in millions)
|
|
|
Inventories:
|
|
|
|
|
|
|
|
|
Raw materials and component parts
|
|
$
|
144
|
|
|
$
|
12
|
|
Work-in-process
|
|
|
145
|
|
|
|
94
|
|
Finished goods
|
|
|
167
|
|
|
|
153
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
456
|
|
|
$
|
259
|
|
|
|
|
|
|
|
|
|
|
Property and Equipment:
|
|
|
|
|
|
|
|
|
Land and buildings
|
|
$
|
478
|
|
|
$
|
189
|
|
Machinery and equipment
|
|
|
2,166
|
|
|
|
1,203
|
|
Machinery and equipment recorded under capital leases
|
|
|
58
|
|
|
|
60
|
|
Furniture and fixtures
|
|
|
10
|
|
|
|
12
|
|
Leasehold improvements
|
|
|
102
|
|
|
|
53
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,814
|
|
|
|
1,517
|
|
Accumulated depreciation and amortization
|
|
|
(1,146
|
)
|
|
|
(776
|
)
|
|
|
|
|
|
|
|
|
|
Net property and equipment
|
|
$
|
1,668
|
|
|
$
|
741
|
|
|
|
|
|
|
|
|
|
|
Amortization expense for assets under capital lease was
$12 million, $14 million and $5 million for 2008,
2007 and 2006, respectively. Accumulated amortization on
machinery and equipment recorded under capital leases was
$30 million and $20 million as of June 27, 2008
and June 29, 2007, respectively.
Long-term debt consisted of the following as of June 27,
2008 and June 29, 2007 (in millions):
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
Term loan
|
|
$
|
500
|
|
|
$
|
|
|
Capital lease obligations (Note 4)
|
|
|
9
|
|
|
|
22
|
|
|
|
|
|
|
|
|
|
|
Total debt
|
|
|
509
|
|
|
|
22
|
|
Less amounts due in one year
|
|
|
(27
|
)
|
|
|
(12
|
)
|
|
|
|
|
|
|
|
|
|
Long-term debt
|
|
$
|
482
|
|
|
$
|
10
|
|
|
|
|
|
|
|
|
|
|
Credit
Facility
On February 11, 2008, Western Digital Technologies, Inc.
(WDTI), a wholly owned subsidiary of the Company,
entered into a five-year Credit Agreement (the Credit
Facility) with JPMorgan Chase Bank, N.A., as
administrative agent, Citigroup Global Markets Inc., as
syndication agent, JP Morgan Securities Inc. and Citigroup
Global Markets Inc., as arrangers, and Bank of America, N.A.,
HSBC Bank USA, National Association and The Royal Bank of
Scotland plc, as co-documentation agents, and lenders party
thereto.
The Credit Facility provides for a $750 million unsecured
loan consisting of a $500 million term loan facility and a
$250 million revolving credit facility. The revolving
credit facility includes borrowing capacity available for
letters of credit and for short-term borrowings referred to as
swingline. In addition, WDTI may elect to expand the Credit
Facility by up to $250 million if existing or new lenders
provide additional term or revolving commitments.
59
WESTERN
DIGITAL CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The $750 million available under the Credit Facility was
borrowed on February 11, 2008 and was used, together with
additional cash from the accounts of WDTI, to repay in full the
$760 million previously borrowed under a bridge facility
that had been used to fund the Acquisition. As of June 27,
2008, the Company repaid the amounts borrowed under the
revolving credit facility leaving $250 million available
for future borrowings.
Borrowings under the Credit Facility bear interest at a rate
equal to, at the option of WDTI, either (a) a LIBOR rate
determined by reference to the cost of funds for Eurodollar
deposits for the interest period relevant to such borrowing,
adjusted for certain additional costs (the Eurocurrency
Rate) or (b) a base rate determined by reference to
the higher of (i) the federal funds rate plus 0.50% and
(ii) the prime rate as announced by JPMorgan Chase Bank,
N.A. (the Base Rate), in each case plus an
applicable margin. The applicable margin for borrowings under
the term loan facility ranges from 1.25% to 1.50% with respect
to borrowings at the Eurocurrency Rate and 0.0% to 0.125% with
respect to borrowings at the Base Rate. The applicable margin
for revolving loan borrowings under the revolving credit
facility ranges from 0.8% to 1.125% with respect to borrowings
at the Eurocurrency Rate and 0.0% to 0.125% with respect to
borrowings at the Base Rate. The applicable margins for
borrowings under the Credit Facility are determined based upon a
leverage ratio of the Company and its subsidiaries calculated on
a consolidated basis. The interest rate at June 27, 2008
was 3.75%.
In addition to paying interest on outstanding principal under
the Credit Facility, WDTI is required to pay a facility fee to
the lenders under the revolving credit facility in respect of
the aggregate revolving commitments thereunder. The facility fee
rate ranges from 0.20% to 0.375% per annum and is determined
based upon a leverage ratio of the Company and its subsidiaries
calculated on a consolidated basis. WDTI is also required to pay
letter of credit fees (a) to the revolving credit facility
lenders on the aggregate face amount of all outstanding letters
of credit equal to an applicable margin in effect with respect
to the Eurocurrency Rate borrowings under the revolving credit
facility and (b) to the letter of credit issuer computed at
a rate equal to 0.125% per annum on the face amount of the
letter of credit, plus such letter of credit issuers
customary documentary and processing fees and charges.
Beginning on June 30, 2009, WDTI is required under the term
loan facility to make regularly scheduled payments of principal
in quarterly installments equal to a percentage of the original
principal amount of the term loan as follows: 3.75% per quarter
for each of the four quarters ended June 30, 2009,
September 30, 2009, December 31, 2009 and
March 31, 2010, 5% per quarter for each of the four
quarters ended June 30, 2010, September 30, 2010,
December 31, 2010 and March 31, 2011, 6.25% per
quarter for each of the four quarters ended June 30, 2011,
September 30, 2011, December 31, 2011 and
March 31, 2012, and 10% per quarter for each of the three
quarters ended June 30, 2012, September 30, 2012 and
December 31, 2012, with the balance due and payable at
maturity on February 11, 2013.
The Credit Facility requires WDTI to comply with a leverage
ratio and an interest coverage ratio calculated on a
consolidated basis for the Company and its subsidiaries. In
addition, the Credit Facility contains customary covenants,
including covenants that limit or restrict WDTIs and its
subsidiaries ability to: incur liens, incur indebtedness,
make certain restricted payments, merge or consolidate and enter
into certain speculative hedging arrangements. Upon the
occurrence of an event of default under the Credit Facility, the
lenders may cease making loans, terminate the Credit Facility
and declare all amounts outstanding to be immediately due and
payable. The Credit Facility specifies a number of events of
default (some of which are subject to applicable grace or cure
periods), including, among others, non-payment defaults,
covenant defaults, cross-defaults to other material
indebtedness, bankruptcy and insolvency defaults and material
judgment defaults. As of June 27, 2008, WDTI was in
compliance with all covenants.
The obligations of WDTI under the Credit Facility are guaranteed
by the Company and WDTIs wholly-owned subsidiary, WD Media.
Note 4. Commitments
and Contingencies
Lease
Commitments
The Company leases certain facilities and equipment under
long-term, non-cancelable operating and capital leases. The
Companys operating leases consist of leased property and
equipment that expire at various dates through 2015.
60
WESTERN
DIGITAL CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Rental expense under these operating leases, including
month-to-month rentals, was $18 million, $15 million
and $16 million in 2008, 2007 and 2006, respectively. The
Companys capital leases consist of leased equipment. These
leases have maturity dates through July 2009 and interest rates
averaging approximately 6.3%. Future minimum lease payments
under operating and capital leases that have initial or
remaining non-cancelable lease terms in excess of one year at
June 27, 2008 are as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
Operating
|
|
|
Capital
|
|
|
2009
|
|
$
|
13
|
|
|
$
|
8
|
|
2010
|
|
|
12
|
|
|
|
1
|
|
2011
|
|
|
9
|
|
|
|
|
|
2012
|
|
|
7
|
|
|
|
|
|
2013
|
|
|
6
|
|
|
|
|
|
Thereafter
|
|
|
9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total future minimum payments
|
|
$
|
56
|
|
|
$
|
9
|
|
|
|
|
|
|
|
|
|
|
Less: interest on capital leases
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total principal payable on capital leases
|
|
|
|
|
|
$
|
9
|
|
|
|
|
|
|
|
|
|
|
Product
Warranty Liability
Changes in the warranty accrual for 2008, 2007 and 2006 were as
follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Warranty accrual, beginning of period
|
|
$
|
90
|
|
|
$
|
89
|
|
|
$
|
92
|
|
Charges to operations
|
|
|
106
|
|
|
|
74
|
|
|
|
76
|
|
Utilization
|
|
|
(73
|
)
|
|
|
(52
|
)
|
|
|
(49
|
)
|
Changes in estimate related to pre-existing warranties
|
|
|
(9
|
)
|
|
|
(21
|
)
|
|
|
(30
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warranty accrual, end of period
|
|
$
|
114
|
|
|
$
|
90
|
|
|
$
|
89
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued warranty also includes amounts classified in non-current
liabilities of $24 million at June 27, 2008 and
$17 million at June 29, 2007.
Long-term
Purchase Agreements
The Company has entered into long-term purchase agreements with
various component suppliers. The commitments depend on specific
products ordered and may be subject to minimum quality
requirements and future price negotiations. For 2009, 2010,
2011, 2012, 2013 and thereafter, the Company expects these
commitments to total approximately $673 million,
$4 million, $4 million, $4 million,
$3 million and $7 million, respectively. In
conjunction with these agreements, the Company has advanced
approximately $36 million related to 2009 purchase
commitments which is included in advances to suppliers as of
June 27, 2008.
Note 5. Legal
Proceedings
In the normal course of business, the Company is subject to
legal proceedings, lawsuits and other claims. Although the
ultimate aggregate amount of probable monetary liability or
financial impact with respect to these matters is subject to
many uncertainties and is therefore not predictable with
assurance, management believes that any monetary liability or
financial impact to the Company from these matters or the
specified matters below, individually and in the aggregate would
not be material to the Companys financial condition.
However, there can be no assurance with respect to such
61
WESTERN
DIGITAL CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
result, and monetary liability or financial impact to the
Company from these legal proceedings, lawsuits and other claims
could differ materially from those projected.
After the Company announced on July 27, 2006 that it was
conducting a company-initiated, voluntary review of its
historical stock option grants, the following purported
shareholder derivative actions were filed challenging conduct by
certain of the Companys current and former board members
and officers in connection with various stock option grants:
(1) In re Western Digital Corporation Derivative
Litigation, United States District Court for the Central
District of California (the Federal Derivative
Action); and (2) In re State Court Western Digital
Corporation Derivative Litigation, Superior Court of the State
of California for the County of Orange (the State
Derivative Action). The complaints in these actions
asserted claims for accounting, breach of fiduciary duty
and/or
aiding and abetting, constructive fraud, waste of corporate
assets, unjust enrichment, rescission, breach of contract,
violation of the California Corporations Code, abuse of control,
gross mismanagement, and constructive trust in connection with
the Companys option granting practices. The complaint in
the Federal Derivative Action also alleged violations of
Sections 10(b), 14(a) and 20(a) of the Securities Exchange
Act. The complaints sought unspecified monetary damages and
other relief against the individual defendants and certain
governance reforms affecting the Company. The Company was named
solely as a nominal defendant in each action.
The parties in these actions executed a Stipulation of
Settlement on March 21, 2008. The financial impact of the
settlement was not material to the Company. The court in the
Federal Derivative Action granted final approval of the
settlement on June 9, 2008, and entered a judgment
dismissing the action. Based on this judgment, the parties
requested a voluntary dismissal of the State Derivative Action,
which the court overseeing that action granted on July 29,
2008.
On January 22, 2007, StorMedia Texas LLC filed a complaint
against the Company and several other companies, including other
disk drive manufacturers, for patent infringement in the Eastern
District of Texas alleging infringement of U.S. Patent
No. 6,805,891. The Company has entered a Settlement
Agreement dated August 13, 2008, on behalf of the Company
and its subsidiaries, including WD Media, Inc., the successor to
the business of Komag, Inc., which disposes of this lawsuit in
its entirety. The financial impact of the settlement was not
material to the Company.
On October 9, 2007, the United States International Trade
Commission (ITC) issued a notice of investigation In
the Matter of Certain Hard Disk Drives, Components thereof, and
Products Containing the Same regarding a complaint filed on
September 10, 2007 by Steven F. Reiber and Mary L. Reiber
(the Reibers). The complaint named as respondents
the Company and several other companies, including certain other
disk drive manufacturers and personal computer vendors. The
Reibers also filed a complaint in the United States District
Court for the Eastern District of California on
September 10, 2007. On April 28, 2008 the Reibers
dismissed the district court action without prejudice, and on
May 13, 2008 the ITC investigation was terminated.
On June 20, 2008, Convolve, Inc. (Convolve),
filed a complaint against the Company and two other companies
for patent infringement in the Eastern District of Texas
alleging infringement of U.S. Patent Nos. 6,314,473 and
4,916,635 (the Asserted Patents) and is seeking
unspecified monetary damages and injunctive relief. One of these
patents allegedly relates to a method to reduce vibration and
noise in physical systems, and the other allegedly relates to
interface technology to select between certain modes of a disk
drives operations relating to speed and noise. The United
States Patent Office is currently reexamining the Asserted
Patents in connection with a lawsuit involving Convolve and
other parties and has issued preliminary rejections of both
patents. The Company intends to defend itself vigorously in this
matter.
Note 6. Business
Segment, International Operations and Major Customers
Segment
Information
The Company operates in one segment, the hard drive business.
62
WESTERN
DIGITAL CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
International
Operations
The Companys operations outside the United States include
manufacturing facilities in Malaysia and Thailand as well as
sales offices throughout Canada, Europe, Asia, Japan, India and
the Middle East. The following table summarizes the
Companys operations by geographic area for the three years
ended June 27, 2008 (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Net Revenue(1):
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
1,949
|
|
|
$
|
1,780
|
|
|
$
|
1,386
|
|
Asia
|
|
|
3,343
|
|
|
|
1,840
|
|
|
|
1,550
|
|
Europe, Middle East and Africa
|
|
|
2,344
|
|
|
|
1,591
|
|
|
|
1,225
|
|
Other
|
|
|
438
|
|
|
|
257
|
|
|
|
180
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
8,074
|
|
|
$
|
5,468
|
|
|
$
|
4,341
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-lived assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
905
|
|
|
$
|
409
|
|
|
|
|
|
Asia
|
|
|
1,167
|
|
|
|
462
|
|
|
|
|
|
Europe, Middle East and Africa
|
|
|
72
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
2,144
|
|
|
$
|
872
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Revenue is attributed to geographic regions based on location of
customer. |
Major
Customer
For 2008, no single customer accounted for 10%, or more, of
revenue. For 2007 and 2006, sales to Dell, Inc. accounted for
10% and 12% of the Companys revenue, respectively.
Note 7. Western
Digital Corporation 401(k) Plan
The Company has adopted the Western Digital Corporation 401(k)
Plan (the Plan). The Plan covers substantially all
domestic employees, subject to certain eligibility requirements.
The Company makes annual contributions to the Plan, subject to
approval from the Board of Directors. For 2008, 2007 and 2006
the Company made Plan contributions of $4 million per year.
Note 8. Shareholders
Equity
Stock
Incentive Plans
The Company has four stock-based incentive plans (collectively
referred to as the Stock Plans): The 2004 amended
and restated Performance Incentive Plan, the Employee Stock
Option Plan, the Broad-Based Stock Incentive Plan and the Stock
Option Plan for Non-Employee Directors. Subsequent to the
expiration of the Employee Stock Option Plan on
November 10, 2004 and approval of the 2004 Performance
Incentive Plan by the Companys shareholders on
November 18, 2004, no new awards are permitted under the
Employee Stock Option Plan, the Broad-Based Stock Incentive Plan
or the Stock Option Plan for Non-Employee Directors
(collectively referred to as the Prior Stock Plans).
As of June 27, 2008, options to purchase 3.5 million
shares of the Companys common stock remain outstanding
under the Prior Stock Plans, of which 3.3 million shares
were exercisable and less than 0.1 million shares of
restricted stock remain unvested. Options granted under the
Prior Stock Plans vested over periods from one to four years.
Options granted under the Prior Stock Plans expire either five
or ten years from the date of grant.
In November 2004, the Companys shareholders approved the
2004 Performance Incentive Plan. Subsequently, in November 2005,
the Companys shareholders approved an authorization for an
additional 13 million shares. The types of
63
WESTERN
DIGITAL CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
awards that may be granted under the 2004 Performance Incentive
Plan include stock options, stock appreciation rights,
restricted stock, stock bonuses and other forms of awards
granted or denominated in the Companys common stock or
units of the Companys common stock, as well as certain
cash bonus awards. Persons eligible to receive awards under the
2004 Performance Incentive Plan include officers or employees of
the Company or any of its subsidiaries, directors of the Company
and certain consultants and advisors to the Company or any of
its subsidiaries. The vesting of awards under the Performance
Incentive Plan is determined at the date of grant. Each award
expires on a date determined at the date of grant; however, the
maximum term of options, stock appreciation rights and other
rights to acquire common stock under the 2004 Performance
Incentive Plan is ten years after the grant date of the award.
As of June 27, 2008, the maximum number of shares of the
Companys common stock that are authorized for award grants
under the 2004 Performance Incentive Plan is 22.6 million
shares. Any shares subject to awards under the prior stock plans
that are canceled, forfeited or otherwise terminate without
having vested or been exercised, as applicable, will become
available for other award grants under the 2004 Performance
Incentive Plan. The 2004 Performance Incentive Plan will
terminate on September 21, 2014 unless terminated earlier
by the Companys Board of Directors.
Employee
Stock Purchase Plan
During 2006, the Company adopted the Western Digital Corporation
2005 Employee Stock Purchase Plan (ESPP) whereby
eligible employees may authorize payroll deductions of up to 10%
of their eligible compensation to purchase shares of the
Companys common stock at 95% of the fair market value of
common stock on either the date of grant or on the exercise
date, whichever is less. The date of grant of each offering
period is June 1st or December 1st, except for
the initial offering period, which began on December 15,
2005. Each offering period is 24 months and consists of
four exercise dates. If the fair market value of the common
stock is less on a given exercise date than on the date of
grant, employee participation in that offering period is
terminated and re-enrollment in the new offering period occurs
automatically. The Companys ESPP operates in accordance
with Section 423 of the Internal Revenue Code.
Stock-Based
Compensation Expense
Effective July 2, 2005, the Company adopted
SFAS No. 123(R), Share-Based Payment
(SFAS 123(R)) using the modified prospective
method. SFAS 123(R) establishes the financial accounting
and reporting standards for stock-based compensation plans. As
required by SFAS 123(R), the Company recognized the cost
resulting from all share-based payment transactions including
shares issued under the Companys stock option plans and
employee stock purchase plans in the financial statements. The
Company expensed $18 million, $18 million and
$21 million related to stock-based compensation from stock
options and ESPP shares in 2008, 2007 and 2006, respectively. As
of June 27, 2008, total compensation cost related to
unvested stock options granted to employees and ESPP shares, but
not yet recognized, was $33 million and will be amortized
on a straight-line basis over a weighted average period of
approximately 2.4 years.
64
WESTERN
DIGITAL CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Stock
Options
The following table summarizes activity under the Stock Plans
(in millions, except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average
|
|
|
Remaining
|
|
|
Aggregate
|
|
|
|
Number
|
|
|
Exercise Price
|
|
|
Contractual Life
|
|
|
Intrinsic
|
|
|
|
of Shares
|
|
|
Per Share
|
|
|
(in years)
|
|
|
Value
|
|
|
Options outstanding at July 1, 2005
|
|
|
19.5
|
|
|
$
|
9.39
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
1.2
|
|
|
|
17.22
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(7.6
|
)
|
|
|
8.36
|
|
|
|
|
|
|
|
|
|
Canceled or expired
|
|
|
(0.7
|
)
|
|
|
11.79
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options outstanding at June 30, 2006
|
|
|
12.4
|
|
|
$
|
10.65
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
1.6
|
|
|
|
19.30
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(2.7
|
)
|
|
|
8.34
|
|
|
|
|
|
|
|
|
|
Canceled or expired
|
|
|
(0.5
|
)
|
|
|
18.68
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options outstanding at June 29, 2007
|
|
|
10.8
|
|
|
$
|
12.15
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
2.1
|
|
|
|
25.22
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(4.2
|
)
|
|
|
10.59
|
|
|
|
|
|
|
|
|
|
Canceled or expired
|
|
|
(0.7
|
)
|
|
|
29.34
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options outstanding at June 27, 2008
|
|
|
8.0
|
|
|
$
|
14.92
|
|
|
|
5.73
|
|
|
$
|
160
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at June 27, 2008
|
|
|
4.2
|
|
|
$
|
9.11
|
|
|
|
4.66
|
|
|
$
|
109
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The aggregate intrinsic value is calculated as the difference
between the exercise price of the underlying awards and the
quoted price of the Companys common stock for those awards
that have an exercise price currently below the quoted price. As
of June 27, 2008, the Company had options outstanding to
purchase an aggregate of 8.0 million shares with an
exercise price below the quoted price of the Companys
stock resulting in an aggregate intrinsic value of
$160 million. During 2008 and 2007, the aggregate intrinsic
value of options exercised under the Companys stock option
plans was $76 million and $30 million, respectively,
determined as of the date of exercise.
The following tables summarize information about options
outstanding and exercisable under the Stock Plans as of
June 27, 2008 (in millions, except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding
|
|
|
Options Exercisable
|
|
|
|
|
|
|
Remaining
|
|
|
|
|
|
|
|
|
|
|
Range of
|
|
Number
|
|
|
Contractual Life*
|
|
|
Weighted Average
|
|
|
Number
|
|
|
Weighted Average
|
|
Exercise Prices
|
|
of Shares
|
|
|
(in years)
|
|
|
Exercise Price
|
|
|
of Shares
|
|
|
Exercise Price
|
|
|
$ 2.10 6.00
|
|
|
1.6
|
|
|
|
2.97
|
|
|
$
|
3.92
|
|
|
|
1.6
|
|
|
$
|
3.92
|
|
6.05 11.99
|
|
|
1.6
|
|
|
|
5.46
|
|
|
|
9.18
|
|
|
|
1.3
|
|
|
|
9.02
|
|
12.25 19.40
|
|
|
2.1
|
|
|
|
6.91
|
|
|
|
15.95
|
|
|
|
1.1
|
|
|
|
14.35
|
|
19.42 23.46
|
|
|
1.8
|
|
|
|
6.59
|
|
|
|
22.45
|
|
|
|
0.1
|
|
|
|
20.03
|
|
23.97 38.55
|
|
|
0.9
|
|
|
|
6.77
|
|
|
|
27.48
|
|
|
|
0.1
|
|
|
|
24.17
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8.0
|
|
|
|
5.73
|
|
|
$
|
14.92
|
|
|
|
4.2
|
|
|
$
|
9.11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
Represents the weighted average remaining contractual lives of
the options outstanding. |
Deferred
Stock Compensation
The Company granted approximately 0.9 million,
1.8 million and 2.0 million shares of restricted stock
and restricted stock unit awards during 2008, 2007 and 2006,
respectively. The restricted stock and restricted stock unit
awards vest annually over periods from one to five years. The
aggregate market value of the restricted stock at the date of
issuance was $23 million, $36 million and
$27 million in 2008, 2007 and 2006, respectively. These
amounts have been recorded as deferred compensation and are
being amortized to expense over the corresponding vesting
periods. For
65
WESTERN
DIGITAL CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
purposes of valuing these awards, the Company has assumed a
forfeiture rate of zero based on a historical analysis
indicating minimal forfeitures for these types of awards. The
Company charged to expense $19 million, $29 million
and $16 million related to restricted stock awards that
were vested during 2008, 2007 and 2006, respectively. As of
June 27, 2008, the aggregate unamortized fair value of all
unvested restricted stock awards was $42 million, which
will be amortized on a straight-line basis over a weighted
average vesting period of approximately 2.3 years.
During 2005, the Company also awarded certain executives and
other key employees 0.5 million restricted stock units with
performance-based vesting (Performance Shares).
However, during 2006, the Company canceled all outstanding
Performance Shares. The impact of these awards, and subsequent
cancellation, were not material to the consolidated financial
statements.
Stock
Reserved for Issuance
The following table summarizes all shares of common stock
reserved for issuance at June 27, 2008 (in millions):
|
|
|
|
|
|
|
Number
|
|
|
|
of Shares
|
|
|
Maximum shares issuable in connection with:
|
|
|
|
|
Outstanding awards and shares available for award grants
|
|
|
19.1
|
|
ESPP
|
|
|
2.3
|
|
|
|
|
|
|
|
|
|
21.4
|
|
|
|
|
|
|
Fair
Value Disclosure Binomial Model
The fair value of stock options granted during 2008, 2007 and
2006 was estimated using a binomial option pricing model. The
binomial model requires the input of highly subjective
assumptions including the expected stock price volatility, the
expected price multiple at which employees are likely to
exercise stock options and the expected employee termination
rate. The Company uses historical data to estimate option
exercise, employee termination, and expected stock price
volatility within the binomial model. The risk-free rate for
periods within the contractual life of the option is based on
the U.S. Treasury yield curve in effect at the time of
grant.
The fair value of stock options granted during the three years
ended June 27, 2008 was estimated using the following
weighted average assumptions:
|
|
|
|
|
|
|
|
|
2008
|
|
2007
|
|
2006
|
|
Suboptimal exercise factor
|
|
1.61
|
|
1.62
|
|
1.58
|
Range of risk-free interest rates
|
|
1.57% to 4.38%
|
|
4.48% to 5.12%
|
|
4.01% to 5.21%
|
Range of expected volatility
|
|
0.33 to 0.67
|
|
0.34 to 0.79
|
|
0.38 to 0.82
|
Weighted average expected volatility
|
|
0.48
|
|
0.59
|
|
0.67
|
Post-vesting termination rate
|
|
5.26%
|
|
5.34%
|
|
14.00%
|
Dividend yield
|
|
|
|
|
|
|
Fair value
|
|
$9.65
|
|
$8.18
|
|
$7.11
|
The weighted average expected term of the Companys stock
options for 2008, 2007 and 2006 was 5.29 years,
5.34 years and 4.32 years, respectively.
Fair
Value Disclosure Black-Scholes-Merton
Model
The fair value of ESPP rights issued is estimated at the date of
issue using the Black-Scholes-Merton option-pricing model. The
Black-Scholes-Merton option-pricing model was developed for use
in estimating the fair value of traded options that have no
vesting restrictions and are fully transferable. The
Black-Scholes-Merton option pricing model
66
WESTERN
DIGITAL CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
requires the input of highly subjective assumptions such as the
expected stock price volatility and the expected period until
options are exercised.
The fair values of all ESPP shares granted on or prior to
June 27, 2008 have been estimated at the date of grant
using a Black-Scholes-Merton option-pricing model with the
following weighted average assumptions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ESPP
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Option life (in years)
|
|
|
1.24
|
|
|
|
1.22
|
|
|
|
1.21
|
|
Risk-free interest rate
|
|
|
3.40
|
%
|
|
|
4.51
|
%
|
|
|
4.45
|
%
|
Stock price volatility
|
|
|
0.38
|
|
|
|
0.40
|
|
|
|
0.42
|
|
Dividend yield
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value
|
|
$
|
6.47
|
|
|
$
|
3.83
|
|
|
$
|
3.85
|
|
Stock
Repurchase Program
As announced on November 21, 2005, the Companys Board
of Directors previously authorized the repurchase of
$250 million of the Companys common stock in open
market transactions. During 2008, the Company repurchased
2.3 million shares of common stock at a total cost of
$60 million. Since the inception of the program, the
Company has repurchased 16.6 million shares for a total
cost of $248 million (including commissions). In April
2008, the Companys Board of Directors authorized a
$500 million increase to repurchase the Companys
common stock in open market transactions through March 31,
2013. Stock repurchases are expected to be funded principally
from operating cash flows. The Company may continue to
repurchase its stock as it deems appropriate and market
conditions allow.
Stock
Purchase Rights
In 1989, the Company implemented a plan to protect
shareholders rights in the event of a proposed takeover of
the Company. Under the plan, each share of the Companys
outstanding common stock carried one Right to Purchase
Series A Junior Participating Preferred Stock (the
Right). The Right enabled the holder, under certain
circumstances, to purchase common stock of Western Digital or of
an acquiring company at a substantially discounted price ten
days after a person or group publicly announces it has acquired
or has tendered an offer for 15% or more of the Companys
outstanding common stock. On September 10, 1998, the
Companys Board of Directors approved the adoption of a new
Rights plan to replace the previous plan, which expired in
September 1998. The Rights under the 1998 plan were similar to
the rights under the 1989 plan except they were redeemable by
the Company at $.01 per Right and expired in 2008. In connection
with the establishment of a holding company structure on
April 6, 2001, the Company terminated the Rights under the
1998 plan and adopted a new Rights plan. The 2001 plan is
similar to the terminated 1998 plan, except that the exercise
price was reduced from $150.00 to $50.00 per share and the
expiration date for the 2001 Rights plan was extended to April
2011.
Note 9. Income
Taxes
Pre-tax
Income
The domestic and foreign components of income before income
taxes were as follows for the three years ended June 27,
2008 (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Foreign
|
|
$
|
812
|
|
|
$
|
322
|
|
|
$
|
272
|
|
Domestic
|
|
|
169
|
|
|
|
121
|
|
|
|
110
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
$
|
981
|
|
|
$
|
443
|
|
|
$
|
382
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
67
WESTERN
DIGITAL CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Income
Tax Provision (Benefit)
The components of the provision (benefit) for income taxes were
as follows for the three years ended June 27, 2008 (in
millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Current:
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
|
|
$
|
12
|
|
|
$
|
8
|
|
|
$
|
6
|
|
Domestic-federal
|
|
|
103
|
|
|
|
(4
|
)
|
|
|
3
|
|
Domestic-state
|
|
|
1
|
|
|
|
|
|
|
|
|
|
Deferred:
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic-federal
|
|
|
(2
|
)
|
|
|
(65
|
)
|
|
|
(19
|
)
|
Domestic-state
|
|
|
|
|
|
|
(60
|
)
|
|
|
(3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax provision (benefit)
|
|
$
|
114
|
|
|
$
|
(121
|
)
|
|
$
|
(13
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Remaining net undistributed earnings from foreign subsidiaries
at June 27, 2008 on which no U.S. tax has been
provided amounted to approximately $2.2 billion. The net
undistributed earnings are intended to finance local operating
requirements. Accordingly, an additional U.S. tax provision
has not been made on these earnings. The tax liability for these
earnings would approximate $803 million, if the Company
repatriated the $2.2 billion in undistributed earnings from
the foreign subsidiaries.
Deferred
Taxes
Temporary differences and carryforwards, which give rise to a
significant portion of deferred tax assets and liabilities as of
June 27, 2008 and June 29, 2007 were as follows (in
millions):
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Sales related reserves and accrued expenses not currently
deductible
|
|
$
|
83
|
|
|
$
|
54
|
|
Accrued compensation and benefits not currently deductible
|
|
|
37
|
|
|
|
25
|
|
Domestic net operating loss (NOL) carryforward
|
|
|
51
|
|
|
|
|
|
Business credit carryforward
|
|
|
109
|
|
|
|
35
|
|
Other
|
|
|
45
|
|
|
|
43
|
|
|
|
|
|
|
|
|
|
|
|
|
|
325
|
|
|
|
157
|
|
Deferred tax liabilities
|
|
|
(15
|
)
|
|
|
(10
|
)
|
|
|
|
|
|
|
|
|
|
Deferred tax assets, net
|
|
$
|
310
|
|
|
$
|
147
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Current portion (included in other current assets)
|
|
$
|
85
|
|
|
$
|
69
|
|
Non-current portion (included in other non-current assets)
|
|
|
240
|
|
|
|
88
|
|
Deferred tax liabilities
|
|
|
(15
|
)
|
|
|
(10
|
)
|
|
|
|
|
|
|
|
|
|
Deferred tax assets, net
|
|
$
|
310
|
|
|
$
|
147
|
|
|
|
|
|
|
|
|
|
|
In addition to the deferred tax assets presented above, the
Company had additional NOL and credit benefits related to
stock-based compensation deductions of approximately
$43 million and $106 million at June 27, 2008 and
June 29, 2007, respectively, including $11 million as
of June 27, 2008 related to the Acquisition. The deductions
related to stock based compensation resulted in a
$19 million tax benefit and the use of NOL and credit
carryforwards related to stock
68
WESTERN
DIGITAL CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
based compensation resulted in a $70 million tax benefit
during the year ended June 27, 2008. In accordance with the
provisions of SFAS 123(R), shareholders equity was
increased by $89 million during 2008 for these benefits.
Beginning in the year ended June 27, 2008, deferred tax
assets are presented before any reduction for liabilities
relating to unrecognized tax benefits. The increase to the
deferred tax assets for the fiscal year ended June 27, 2008
relates primarily to 1) the acquisition of Komag and its
net deferred tax assets of $92 million and 2) the
reclassification of $50 million of liabilities for
unrecognized tax benefits that were previously recorded net in
deferred tax assets.
As of the end of fiscal 2007, the Company determined that it is
more likely than not that its net deferred tax assets will be
realized. Accordingly, the Company eliminated its remaining
valuation allowance which resulted in the recognition of
additional net deferred tax assets of $125 million. The
realization of the deferred tax assets is primarily dependent on
the Companys ability to generate sufficient earnings in
certain jurisdictions in future years. The Company released the
remainder of the valuation allowance for its deferred tax assets
based on the weight of available evidence including the history
of cumulative pretax income and the increased likelihood of the
Companys ability to generate profits in the future. The
amount of deferred tax assets considered realizable may increase
or decrease in subsequent periods based on fluctuating industry
or Company conditions.
Effective
Tax Rate
Reconciliation of the U.S. Federal statutory rate to the
Companys effective tax rate is as follows for the three
years ended June 27, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
U.S. Federal statutory rate
|
|
|
35
|
%
|
|
|
35
|
%
|
|
|
35
|
%
|
Tax rate differential on international income
|
|
|
(28
|
)
|
|
|
(24
|
)
|
|
|
(25
|
)
|
Tax effect of U.S. permanent differences
|
|
|
4
|
|
|
|
|
|
|
|
|
|
State income tax, net of federal tax
|
|
|
2
|
|
|
|
|
|
|
|
|
|
Income tax credits
|
|
|
(2
|
)
|
|
|
|
|
|
|
|
|
Change in valuation allowance
|
|
|
|
|
|
|
(39
|
)
|
|
|
(16
|
)
|
Other
|
|
|
1
|
|
|
|
1
|
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective tax rate
|
|
|
12
|
%
|
|
|
(27
|
)%
|
|
|
(3
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax
Holidays and Carryforwards
A substantial portion of the Companys manufacturing
operations in Malaysia and Thailand operate under various tax
holidays and tax incentive programs which will expire in whole
or in part at various dates through 2022. Certain of the
holidays may be extended if specific conditions are met. The net
impact of these tax holidays and tax incentives was to increase
the Companys net earnings by $391 million ($1.73 per
diluted share), $86 million ($0.38 per diluted share) and
$81 million ($0.36 per diluted share) in 2008, 2007, and
2006, respectively.
As of June 27, 2008, the Company had federal and state NOL
carryforwards of approximately $185 million and
$69 million, respectively. In addition, the Company had
various federal and state tax credit carryforwards combined of
approximately $157 million. The loss carryforwards
available to offset future federal and state taxable income
expire at various times from 2019 to 2026 and 2013 to 2017,
respectively. Approximately $55 million of the credit
carryforwards available to offset future taxable income expire
at various times from 2009 to 2027. The remaining amount is
available indefinitely. NOLs and credits relating to Komag are
subject to limitations under Section 382 and 383 of the
Internal Revenue Code. The Company does not expect these
limitations to result in a reduction in the total amount of NOLs
and credits ultimately realized.
Adoption
of FIN 48
Effective as of June 30, 2007, the Company adopted the
provisions of FIN 48. FIN 48 contains a two-step
approach to recognizing and measuring uncertain tax positions
accounted for in accordance with SFAS No. 109,
Accounting for
69
WESTERN
DIGITAL CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Income Taxes. First, the tax position is evaluated for
recognition by determining if it is more likely than not that
the position will be sustained on audit, including resolution of
related appeals or litigation processes, if any. If the tax
position is deemed more-likely-than-not to be
sustained, the tax position is then assessed to determine the
amount of benefit to be recognized in the financial statements.
The amount of the benefit that may be recognized is the largest
amount that has a greater than 50% likelihood of being realized
upon ultimate settlement.
The adoption of FIN 48 at the beginning of fiscal year 2008
did not result in an adjustment for unrecognized tax benefits.
The total amount of gross unrecognized tax benefits as of the
date of adoption was $58 million which had previously been
presented as a reduction to deferred tax assets of
$47 million and an inclusion in other long term liabilities
of $11 million as of June 29, 2007. With the exception
of certain unrecognized tax benefits that are directly
associated with the tax position taken, unrecognized tax
benefits are now presented gross in the Companys balance
sheet. Interest and penalties related to unrecognized tax
benefits are recognized on liabilities recorded for uncertain
tax positions and are recorded in the provision for income
taxes. As of the date of adoption of FIN 48, and at
June 27, 2008, such interest and penalties were not
material.
As of June 27, 2008 the Company had approximately
$107 million of unrecognized tax benefits, which included
$32 million of unrecognized tax benefits related to Komag.
The following is a tabular reconciliation of the total amounts
of unrecognized tax benefits for the year:
|
|
|
|
|
Unrecognized tax benefit at June 29, 2007
|
|
$
|
58
|
|
Gross increases related to prior year tax positions
|
|
|
35
|
|
Gross decreases related to prior year tax positions
|
|
|
|
|
Gross increases related to current year tax positions
|
|
|
17
|
|
Settlements/lapse of statute of limitations
|
|
|
(3
|
)
|
|
|
|
|
|
Unrecognized tax benefit at June 27, 2008
|
|
$
|
107
|
|
|
|
|
|
|
Gross increases related to prior year tax positions includes
$32 million recorded in purchase accounting for the Komag
acquisition.
Included in the balance of unrecognized tax benefits at
June 27, 2008 are $75 million of tax benefits that, if
recognized, would affect the effective tax rate.
The Company files U.S. federal, U.S. state, and
foreign tax returns. For federal tax returns, the Company is
subject to examination for fiscal years 2004 through 2008. For
state returns, with few exceptions, the Company is subject to
tax examinations for 2003 through 2008. In foreign
jurisdictions, with few exceptions, the Company is subject to
examination for all years subsequent to fiscal 2000. The Company
is no longer subject to examination by the Internal Revenue
Service (IRS) for periods prior to 2004 and by the
state taxing authorities for periods prior to 2003, although
carry forwards generated prior to those periods may still be
adjusted upon examination by the IRS or state taxing authority
if they either have been or will be used in a future period.
The IRS is scheduled to commence an examination of the fiscal
years ended 2006 and 2007 for the Company and calendar years
2005 and 2006 for Komag in August 2008. Additionally, the
Companys French subsidiary is under examination by the
local tax authorities for fiscal years 2003 through 2005.
Due to the risk that audit outcomes and the timing of audit
settlements are subject to significant uncertainty, the
Companys current estimate of the total amounts of
unrecognized tax benefits could increase or decrease for all
open tax years. As of June 27, 2008, it is not possible to
estimate the amount of change, if any, in the unrecognized tax
benefits that is reasonably possible within the next twelve
months. Any significant change in the amount of the
Companys unrecognized tax benefits would most likely
result from additional information or settlements relating to
the Companys tax examination of uncertain tax positions.
70
WESTERN
DIGITAL CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
As of June 27, 2008, the Company had investments of
$3 million in U.S. government securities and
$28 million in auction-rate securities primarily backed by
insurance products. The auction-rate securities are expected to
be held until secondary markets become available and as a result
have been reclassified to long-term investments as of
June 27, 2008. These investments are currently accounted
for as available-for-sale securities and recorded at fair value
within other non-current assets in the consolidated balance
sheet. The estimated fair values of these investments are
subject to fluctuation. Unrealized holding gains and losses are
generally recorded in other comprehensive income. However, if a
decline in fair value is determined to be other-than-temporary,
the cost basis is written down to fair value through earnings.
During the year ended June 27, 2008, the Company realized
$3 million in losses on sales and recognized
$10 million in other-than-temporary impairment losses on
these auction-rate securities.
|
|
Note 11.
|
Komag
Acquisition
|
The Company completed the Acquisition on September 5, 2007
through a cash tender offer by State M Corporation (State
M), an indirect wholly-owned subsidiary of the Company,
for all outstanding shares of Komags common stock, which
was followed by a merger of State M and Komag whereby Komag
became an indirect wholly-owned subsidiary of the Company and
changed its name to WD Media. WD Medias results of
operations since the date of the Acquisition are included in the
accompanying consolidated financial statements.
Purchase
Price Allocation
The aggregate purchase price for Komag was $1.0 billion,
consisting of cash paid for outstanding shares, transaction
fees, severance and other employee-related equity payments. The
application of purchase accounting under SFAS No. 141,
Business Combinations (SFAS 141),
requires that the total purchase price be allocated to the fair
value of assets acquired and liabilities assumed based on their
fair values at the acquisition date, with amounts exceeding the
fair values being recorded as goodwill. The allocation process
requires an analysis and valuation of acquired assets, including
fixed assets, deferred tax assets, technologies, customer
contracts and relationships, trade names and liabilities
assumed, including contractual commitments and legal
contingencies. The values assigned to certain acquired assets
and liabilities were finalized as of June 27, 2008.
The Company has identified and recorded the assets, including
specifically identifiable intangible assets, and liabilities
assumed from Komag at their estimated fair values as of the date
of the Acquisition, and has allocated the residual value to
goodwill.
71
WESTERN
DIGITAL CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
|
|
Sept. 5,
|
|
|
|
2007
|
|
|
Tangible assets acquired and liabilities assumed:
|
|
|
|
|
Cash
|
|
$
|
72
|
|
Short-term investments
|
|
|
58
|
|
Accounts receivable
|
|
|
114
|
|
Inventories
|
|
|
204
|
|
Other current assets
|
|
|
6
|
|
Property and equipment
|
|
|
657
|
|
Deferred taxes and other non-current assets
|
|
|
118
|
|
Accounts payable
|
|
|
(130
|
)
|
Accrued expenses
|
|
|
(81
|
)
|
Debt assumed
|
|
|
(248
|
)
|
Other liabilities
|
|
|
(15
|
)
|
Intangible assets
|
|
|
89
|
|
In-process research and development
|
|
|
49
|
|
Goodwill
|
|
|
109
|
|
|
|
|
|
|
Total
|
|
$
|
1,002
|
|
|
|
|
|
|
Property
and Equipment
The property and equipment acquired was valued at current
replacement cost for similar assets. Land and buildings were
estimated at fair value on September 5, 2007, the date of
the Acquisition. The following table summarizes the estimated
fair value of the property and equipment acquired from Komag and
their estimated useful lives:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated
|
|
|
|
Estimated Fair
|
|
|
Weighted-Average
|
|
|
|
Value
|
|
|
Useful Life
|
|
|
|
(in millions)
|
|
|
(in years)
|
|
|
Land leases
|
|
$
|
17
|
|
|
|
36.8
|
|
Buildings and improvements
|
|
|
224
|
|
|
|
17.8
|
|
Equipment
|
|
|
416
|
|
|
|
5.0
|
|
|
|
|
|
|
|
|
|
|
Total property and equipment
|
|
$
|
657
|
|
|
|
10.3
|
|
|
|
|
|
|
|
|
|
|
Inventories
Total inventories acquired included $11 million and
$39 million of finished goods and
work-in-process,
respectively. Finished goods and
work-in-process
were valued at estimated selling prices less costs of disposal,
estimated reseller profit and costs to complete. Acquired raw
materials of $154 million, consisting primarily of precious
metals, were valued at estimated replacement cost.
Identifiable
Intangible Assets Acquired
In accordance with SFAS 141, the Company identified
intangible assets apart from goodwill if one of the following
criteria was met: 1) the asset arises from contractual or
other legal rights; or 2) the asset is capable of being
separated or divided from the acquired enterprise and sold,
transferred, licensed, rented, or exchanged, either individually
or in
72
WESTERN
DIGITAL CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
conjunction with a related contract, asset, or liability. The
recorded values and estimated useful lives of the intangibles
acquired from Komag were:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated
|
|
|
|
Estimated Fair
|
|
|
Weighted-Average
|
|
|
|
Value
|
|
|
Useful Life
|
|
|
|
(in millions)
|
|
|
(in years)
|
|
|
Existing technology
|
|
$
|
79
|
|
|
|
9.7
|
|
Customer substrate relationships
|
|
|
10
|
|
|
|
3.0
|
|
|
|
|
|
|
|
|
|
|
Total acquired identifiable intangible assets
|
|
$
|
89
|
|
|
|
9.0
|
|
|
|
|
|
|
|
|
|
|
Existing technology relates to Komags media and substrate
products that have reached technological feasibility as well as
a combination of Komags processes, patents, and trade
secrets developed through years of experience in the design and
production of its products. Existing technology was valued using
the Excess Earnings Method under the Income Approach. This
approach reflects the present value of projected cash flows that
a market participant would expect to generate from these
technologies less charges related to the contribution of other
assets to those cash flows. The fair value of the existing
technology is being amortized to Cost of Revenue over the
weighted average useful life of 9.7 years.
The fair value of customer substrate relationships was
determined using the Excess Earnings Method under the Income
Approach based on the estimated revenues to be derived from
Komags customers. This approach reflects the present value
of projected cash flows that a market participant would expect
to generate from these customer substrate relationships less
charges related to the contribution of other assets to those
cash flows. The fair values of the customer substrate
relationships are being amortized to Cost of Revenue over the
weighted average useful life of 3.0 years.
In-Process
Research and Development
Komag had an in-process research and development project
associated with technology for higher recording densities on
advanced perpendicular recording media. The project is expected
to incorporate significant changes in the magnetic structure of
the media to achieve higher recording density. As these advanced
products were not ready for commercial production and had no
alternative future use, the development effort did not qualify
for capitalization. Accordingly, the Company recorded
$49 million as a charge to research and development expense
at the time of the Acquisition. Costs to complete the
development of this technology were expected to approximate
$5 million as of the acquisition date and utilize existing
engineering personnel. This technology may be necessary to
remain competitive with anticipated industry advances in areal
recording densities for thin-film media. The in-process research
and development was valued using the Excess Earnings Method
under the Income Approach. This approach reflects the present
value of projected cash flows that a market participant would
expect to generate from these technologies less costs related to
the contribution of other assets to those cash flows.
Debt
Assumed
In connection with the Acquisition, the Company assumed
$250 million face value of additional debt in the form of
Convertible Subordinated Notes (the Notes) issued by
Komag on March 28, 2007. In accordance with the terms of
the Notes, the Acquisition constituted a Fundamental
Change that allowed the holders of the Notes to obligate
the Company, for a limited period of time, to purchase the Notes
for an amount equal to 100% of the principal amount of the
Notes, plus accrued and unpaid interest through the purchase
date. The holders of the Notes tendered their Notes to the
Company and on December 5, 2007, the Company paid
$250 million plus accrued and unpaid interest to purchase
the Notes.
Adverse/Favorable
Leasehold Interests
In accordance with the guidance in SFAS 141, the Company
analyzed its contractual facility lease to determine the fair
value of the leasehold interest. An adverse leasehold position
exists when the present value of the contractual rental
73
WESTERN
DIGITAL CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
obligation is greater than the present value of the market
rental obligation, and conversely for a favorable leasehold
interest. The Company recorded a favorable leasehold interest
aggregating $4 million, which has been classified within
Other Non-current Assets in the purchase price allocation table.
The $4 million is being amortized to Cost of Revenue and
Operating Expenses over the remaining duration of the lease,
which ends December 31, 2014.
Recognition
of Liabilities in Connection with Komag Acquisition
Under
EITF 95-3,
Recognition of Liabilities in Connection with a Business
Combination, the Company accrued certain exit costs
aggregating $40 million, which relate to employee severance
and the cash payment for equity related liabilities payable to
Komag employees. The following table summarizes the
Companys exit activities in connection with the
Acquisition (in millions):
|
|
|
|
|
|
|
Severance
|
|
|
|
and
|
|
|
|
Related
|
|
|
Accrued exit costs, September 5, 2007
|
|
$
|
40
|
|
Cash payments
|
|
|
(32
|
)
|
|
|
|
|
|
Accrued exit costs, June 27, 2008
|
|
$
|
8
|
|
|
|
|
|
|
As of June 27, 2008, the accrued exit costs of
$8 million are expected to be paid out through April 2010.
Stock-Based
Compensation
In connection with the Acquisition, each outstanding option to
purchase shares of Komags common stock with an exercise
price below $32.25 as of the date of the Acquisition was
converted into a right to receive $32.25 in cash less the
exercise price of the option. In addition, each share of Komag
restricted common stock granted on or before September 5,
2007 was converted into $32.25 in cash. These converted option
and restricted stock awards are payable in cash according to
their original vesting schedules. All shares of restricted stock
and options remain subject to their original terms, including
the terms and conditions of Komags Amended and Restated
2002 Qualified Stock Plan, the applicable restricted stock and
option agreement and the Merger Agreement. As of June 27,
2008, the future expense for the converted Komag unvested
options and restricted stock awards is $4 million to be
paid in cash, which will be expensed based on individual award
vesting terms through April 2010.
Pro Forma
Financial Information
The unaudited financial information in the table below
summarizes the combined results of operations of the Company and
Komag prior to the Acquisition, on a pro forma basis, as though
the companies had been combined as of July 1, 2006 for each
period presented. The pro forma financial information presented
includes adjustments to certain periods related to the fair
value of acquired inventory and fixed assets, amortization
charges from acquired intangible assets, stock-based
compensation charges for unvested options and unvested
restricted stock awards exchanged and to be paid in cash and the
related tax effects of those adjustments. The pro forma
financial information is presented for informational purposes
only and is not indicative of the results of operations that
would have been achieved if the acquisition had taken place at
the beginning of the earliest period presented, nor does it
intend to be a projection of future results.
The following unaudited pro forma financial information is for
the years ended June 27, 2008 and June 29, 2007. It
combines the Companys financial results for the year ended
June 27, 2008 with Komags financial results from
July 2, 2007 through the date of Acquisition and the year
ended June 29, 2007 with Komags historical financial
results for the twelve months ended July 1, 2007 (in
millions, except per share amounts).
74
WESTERN
DIGITAL CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
|
June 27,
|
|
|
June 29,
|
|
|
|
2008
|
|
|
2007
|
|
|
Revenue
|
|
$
|
8,183
|
|
|
$
|
6,060
|
|
Net income
|
|
$
|
850
|
|
|
$
|
656
|
|
Basic net income per share
|
|
$
|
3.85
|
|
|
$
|
3.00
|
|
Diluted net income per share
|
|
$
|
3.76
|
|
|
$
|
2.90
|
|
|
|
Note 12.
|
Other
Intangible Assets
|
Other intangible assets consist primarily of patented technology
and customer relationships acquired in business combinations and
amortized on a straight-line basis over the respective estimated
useful lives of the assets. The net carrying value of intangible
assets as of June 27, 2008 and June 29, 2007 was
$81 million and $4 million, respectively. Accumulated
amortization of intangibles was $29 million and
$13 million as of June 27, 2008 and June 29,
2007, respectively. Intangible assets for 2008 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average
|
|
|
Gross Carrying
|
|
|
Accumulated
|
|
|
Net Carrying
|
|
|
|
Amortization Period
|
|
|
Amount
|
|
|
Amortization
|
|
|
Amount
|
|
|
|
(in years)
|
|
|
(in millions)
|
|
|
(in millions)
|
|
|
(in millions)
|
|
|
Existing technology
|
|
|
9
|
|
|
$
|
100
|
|
|
$
|
26
|
|
|
$
|
74
|
|
Customer relationships
|
|
|
3
|
|
|
|
10
|
|
|
|
3
|
|
|
|
7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
$
|
110
|
|
|
$
|
29
|
|
|
$
|
81
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization expense for intangible assets was $16 million,
$3 million and $4 million for 2008, 2007 and 2006,
respectively. As of June 27, 2008, estimated future
amortization expense for intangible assets is approximately
$12 million per year for 2009 and 2010 and $9 million
per year for 2011, 2012 and 2013.
|
|
Note 13.
|
Quarterly
Results of Operations (unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First
|
|
|
Second
|
|
|
Third
|
|
|
Fourth
|
|
|
2008(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue, net
|
|
$
|
1,766
|
|
|
$
|
2,204
|
|
|
$
|
2,111
|
|
|
$
|
1,993
|
|
Gross margin
|
|
|
323
|
|
|
|
513
|
|
|
|
477
|
|
|
|
425
|
|
Operating income
|
|
|
135
|
|
|
|
332
|
|
|
|
298
|
|
|
|
241
|
|
Net income
|
|
|
69
|
|
|
|
305
|
|
|
|
280
|
|
|
|
213
|
|
Basic earnings per share
|
|
$
|
0.31
|
|
|
$
|
1.39
|
|
|
$
|
1.26
|
|
|
$
|
0.96
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share
|
|
$
|
0.31
|
|
|
$
|
1.35
|
|
|
$
|
1.23
|
|
|
$
|
0.94
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue, net
|
|
$
|
1,264
|
|
|
$
|
1,428
|
|
|
$
|
1,410
|
|
|
$
|
1,367
|
|
Gross margin
|
|
|
218
|
|
|
|
255
|
|
|
|
222
|
|
|
|
205
|
|
Operating income
|
|
|
99
|
|
|
|
122
|
|
|
|
115
|
|
|
|
79
|
|
Net income
|
|
|
103
|
|
|
|
128
|
|
|
|
121
|
|
|
|
212
|
|
Basic earnings per share
|
|
$
|
0.47
|
|
|
$
|
0.58
|
|
|
$
|
0.55
|
|
|
$
|
0.97
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share
|
|
$
|
0.46
|
|
|
$
|
0.57
|
|
|
$
|
0.53
|
|
|
$
|
0.94
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
75
WESTERN
DIGITAL CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
(1) |
|
The first quarter of 2008 included $60 million for taxes
related to the license of intellectual property to subsidiaries
and $49 million for acquired in-process research and
development. The fourth quarter of 2008 included
$15 million for taxes related to the license of
intellectual property to subsidiaries. |
|
(2) |
|
The fourth quarter of 2007 included a $126 million benefit
to income taxes from an adjustment to the valuation allowance
for deferred income taxes. This benefit is net of an adjustment
made in the fourth quarter to reduce the deferred tax asset and
the related valuation allowance by approximately
$21 million to correct the amount of state deferred tax
asset recognized in prior periods. As both the deferred tax
asset and the related valuation allowance were overstated in
prior periods, there was no net effect to the total assets or
net income as reported in those prior periods, or in the fourth
quarter of 2007. |
76
|
|
|
|
|
|
|
Allowance for
|
|
|
|
Doubtful
|
|
|
|
Accounts
|
|
|
Balance at July 1, 2005
|
|
$
|
3
|
|
Charges to operations
|
|
|
5
|
|
Deductions
|
|
|
(3
|
)
|
|
|
|
|
|
Balance at June 30, 2006
|
|
$
|
5
|
|
Charges to operations
|
|
|
|
|
Deductions
|
|
|
(
|
)
|
|
|
|
|
|
Balance at June 29, 2007
|
|
$
|
5
|
|
Charges to operations
|
|
|
4
|
|
Deductions
|
|
|
(1
|
)
|
|
|
|
|
|
Balance at June 27, 2008
|
|
$
|
8
|
|
|
|
|
|
|
77
|
|
Item 9.
|
Changes
in and Disagreements with Accountants on Accounting and
Financial Disclosure
|
None.
|
|
Item 9A.
|
Controls
and Procedures
|
Evaluation
of Disclosure Controls and Procedures
As required by SEC
Rule 13a-15(b)
of the Securities Exchange Act of 1934, as amended (the
Exchange Act), we carried out an evaluation, under
the supervision and with the participation of our management,
including our Chief Executive Officer and Chief Financial
Officer, of the effectiveness of the design and operation of our
disclosure controls and procedures (as such term is defined in
Rule 13a-15(e)
under the Exchange Act) as of the end of the period covered by
this Annual Report on
Form 10-K.
Based on that evaluation, our Chief Executive Officer and Chief
Financial Officer concluded that, as of the end of the period
covered by this Annual Report on
Form 10-K,
our disclosure controls and procedures were effective.
Managements
Report on Internal Control over Financial
Reporting
Our management is responsible for establishing and maintaining
adequate internal control over financial reporting (as defined
in
Rules 13a-15(f)
and
15d-15(f) of
the Exchange Act) to provide reasonable assurance regarding the
reliability of our financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles. Internal control over
financial reporting includes those policies and procedures that
(i) pertain to the maintenance of records that in
reasonable detail accurately and fairly reflect the transactions
and dispositions of our assets; (ii) provide reasonable
assurance that the transactions are recorded as necessary to
permit preparation of financial statements in accordance with
generally accepted accounting principles, and that our receipts
and expenditures are being made only in accordance with
authorizations of our management and our directors; and
(iii) provide reasonable assurance regarding prevention or
timely detection of unauthorized acquisition, use or disposition
of our assets that could have a material effect on the financial
statements.
Our management evaluated the effectiveness of our internal
control over financial reporting using the criteria set forth by
the Committee of Sponsoring Organizations of the Treadway
Commission (COSO) in Internal Control Integrated
Framework. Based on this evaluation, our management
concluded that our internal control over financial reporting was
effective as of the end of the period covered by this Annual
Report on
Form 10-K.
KPMG LLP, our independent registered public accounting firm
which audited the consolidated financial statements included in
this Annual Report on
Form 10-K,
has issued an audit report on our internal control over
financial reporting. See page 48 herein.
Changes
in Internal Control over Financial Reporting
There has been no change in our internal control over financial
reporting during the fourth fiscal quarter ended June 27,
2008 that has materially affected, or is reasonably likely to
materially affect, our internal control over financial reporting.
Inherent
Limitations of Effectiveness of Controls
Our management, including our Chief Executive Officer and its
Chief Financial Officer, does not expect that our disclosure
controls and procedures or our internal controls over financial
reporting will prevent all error and all fraud. A control
system, no matter how well conceived and operated, can provide
only reasonable, not absolute, assurance that the objectives of
the control system are met. Further, the benefits of controls
must be considered relative to their costs. Because of the
inherent limitations in all control systems, no evaluation of
controls can provide absolute assurance that all control issues
and instances of fraud, if any, have been detected. These
inherent limitations include the realities that judgments in
decision-making can be faulty, and that breakdowns can occur
because of simple error or mistake. Additionally, controls can
be circumvented by the individual acts of some persons, by
collusion of two or more people, or by management override of
the control. The design of any system of controls is also based
in part upon certain assumptions about the likelihood of future
events, and there can be no assurance that any design will
succeed in achieving its stated goals under all potential future
conditions. Because of the inherent limitations in a
cost-effective control system, misstatements due to error or
fraud may occur and not be detected.
78
|
|
Item 9B.
|
Other
Information
|
None.
PART III
|
|
Item 10.
|
Directors,
Executive Officers and Corporate Governance
|
There is incorporated herein by reference the information
required by this Item included in the Companys Proxy
Statement for the 2008 Annual Meeting of Stockholders, which
will be filed with the Securities and Exchange Commission no
later than 120 days after the close of the fiscal year
ended June 27, 2008, except that the information required
by this Item 10 concerning executive officers is set forth
in Part I of this report under Item 1.
Business Executive Officers of the Registrant.
|
|
Item 11.
|
Executive
Compensation
|
There is incorporated herein by reference the information
required by this Item included in the Companys Proxy
Statement for the 2008 Annual Meeting of Stockholders, which
will be filed with the Securities and Exchange Commission no
later than 120 days after the close of the fiscal year
ended June 27, 2008.
|
|
Item 12.
|
Security
Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters
|
There is incorporated herein by reference the information
required by this Item included in the Companys Proxy
Statement for the 2008 Annual Meeting of Stockholders, which
will be filed with the Securities and Exchange Commission no
later than 120 days after the close of the fiscal year
ended June 27, 2008.
|
|
Item 13.
|
Certain
Relationships and Related Transactions, and Director
Independence
|
There is incorporated herein by reference the information, if
any, required by this Item included in the Companys Proxy
Statement for the 2008 Annual Meeting of Stockholders, which
will be filed with the Securities and Exchange Commission no
later than 120 days after the close of the fiscal year
ended June 27, 2008.
|
|
Item 14.
|
Principal
Accountant Fees and Services
|
There is incorporated herein by reference the information
required by this Item included in the Companys Proxy
Statement for the 2008 Annual Meeting of Stockholders, which
will be filed with the Securities and Exchange Commission no
later than 120 days after the close of the fiscal year
ended June 27, 2008.
79
PART IV
|
|
Item 15.
|
Exhibits
and Financial Statement Schedules
|
(a) Documents filed as a part of this Annual Report on
Form 10-K:
(1) Financial Statements
The financial statements included in Part II, Item 8
of this document are filed as part of this Annual Report on
Form 10-K.
(2) Financial Statement Schedules
The financial statement schedule included in Part II,
Item 8 of this document is filed as part of this Annual
Report on
Form 10-K.
All other schedules are omitted as the required information is
inapplicable or the information is presented in the consolidated
financial statements or related Notes.
Separate financial statements have been omitted as we are
primarily an operating company and our subsidiaries are wholly
or majority owned and do not have minority equity interests
and/or
indebtedness to any person other than us in amounts which
together exceed 5% of the total consolidated assets as shown by
the most recent year-end consolidated balance sheet.
(3) Exhibits
The following exhibits are filed herewith or are incorporated by
reference, as specified below, from exhibits previously filed
with the Securities and Exchange Commission. We shall furnish
copies of exhibits for a reasonable fee (covering the expense of
furnishing copies) upon written request to our Secretary at our
principal executive offices.
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Description
|
|
|
2
|
.1
|
|
Agreement and Plan of Merger, dated as of June 28, 2007, by
and among Western Digital Corporation, State M Corporation and
Komag, Incorporated(26)
|
|
3
|
.1
|
|
Amended and Restated Certificate of Incorporation of Western
Digital Corporation, as amended to date(18)
|
|
3
|
.2
|
|
Amended and Restated Bylaws of Western Digital Corporation, as
amended effective as of November 5, 2007(30)
|
|
4
|
.1
|
|
Rights Agreement between Western Digital Corporation and
American Stock Transfer & Trust Company, as
Rights Agent, dated as of April 6, 2001, which includes as
Exhibit A thereto the Form of Right Certificate to be
distributed to holders of Rights after the Distribution Date (as
that term is defined in the Rights Agreement)(5)
|
|
4
|
.2
|
|
Form of Common Stock Certificate(1)
|
|
4
|
.3
|
|
Certificate of Designations of Series A Junior
Participating Preferred Stock of Western Digital Corporat |