Western Digital 1995 Annual Report Download - page 13

   Management’s Discussion and Analysis of Financial Condition and Results of Operations  .
O
Western Digital operates in an extremely competitive industry characterized by
short product life cycles, dependence upon a limited number of suppliers for
certain component parts, dependence upon highly skilled engineering and other
personnel and significant expenditures for product development. The hard drive
market is also subject to recurring periods of severe price competition, the most
recent of which occurred during the fourth quarter of fiscal 1993 and the first
quarter of fiscal 1994.
The Company’s hard drive product strategy is to be the first to market with
the highest capacity per platter hard drives at competitive prices. The successful
implementation of this strategy during the last three fiscal years has resulted in
significant increases in unit shipments of hard drives, with attendant improve-
ments in factory utilization and manufacturing efficiencies, lower component costs
and overall reductions in per unit manufacturing costs. During fiscal 1994 the
Company also implemented a “fabless” manufacturing strategy for its microcom-
puter products business by selling its silicon wafer manufacturing facility and
entering into supply agreements with several suppliers of integrated circuits. This
resulted in an immediate reduction in manufacturing costs, which significantly
improved microcomputer products gross profit margins during fiscal 1994 and
1995.
These factors, combined with stabilizing industry conditions, resulted in
Western Digital improving operating earnings to $133.0 and $91.9 million in fis-
cal 1995 and 1994, respectively, after incurring an operating loss of $10.0 million
in fiscal 1993. Although microcomputer product operations improved signifi-
cantly from fiscal 1993 to fiscal 1994, hard drive product operations accounted
for the majority of the increase in operating income during this period. During
fiscal 1995, hard drive product operations improved modestly, while continuing
improvement in microcomputer products operations, although at a reduced rate
from fiscal 1994, provided most of the increase in operating income from fiscal
1994.
Western Digital’s continuing focus on asset management, combined with the
improvement in operating income, has resulted in the Company strengthening its
financial position during each of the last three years. Key measures of these
improvements are as follows (dollar amounts in millions):
1995 1994 1993
Cash and short-term investments $ 307.7 $ 243.5 $ 33.8
Cash flows from operating activities 121.3 178.8 55.9
Long-term debt — 58.6 182.6
Net interest and other income (expense) $ 12.0 $ (5.8) $ (15.1)
Average:
Inventory turns 19.5 12.7 9.5
Operating asset turns 4.5 3.4 2.5
Asset turns 2.8 2.6 2.3