Western Digital 2006 Annual Report Download - page 18

Thailand manufacturing facility. 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.
In July 2003, we purchased substantially all of the assets of Read-Rite Corporation, formerly one of our suppliers of
heads, including its wafer fabrication equipment in Fremont, California and its slider fabrication facility in Bang Pa-In,
Thailand. We upgraded and enhanced these facilities to meet the demands of new technologies consistent with our hard
drive production facilities. We use these facilities to design and manufacture a substantial portion of the heads, HGAs
and HSAs we include in the hard drives we manufacture.
For an additional discussion of risks related to manufacturing, see Item 1A of this Annual Report on Form 10-K.
Materials and Supplies
The principal components currently used in the manufacture of our hard drives are magnetic heads and related
HGAs, HSAs, media, controllers, spindle motors and mechanical parts used in the head disk assembly. We use both
custom and standard semiconductor components such as logic, memory and microprocessor devices obtained from other
manufacturers, as well as a wide variety of other parts, including printed circuit boards, connectors, cables, and other
interconnect technology. We also design and manufacture a substantial portion of the heads 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. For
example, during 2006, we purchased media from several outside vendors including Fuji Electric, Hoya Corp., Komag
Inc. and Showa Denko KK. We have volume purchase agreements with Komag Inc. and Showa Denko KK which
obligate us to purchase from each supplier, and obligates each supplier to supply to us, certain specified media volumes in
accordance with the terms in the agreements.
We sole-source some components, such as custom integrated circuit devices for certain products from STMicroe-
lectronics and Marvell Semiconductor, Inc. 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. 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 has 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 computer manufacturer’s 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 personnel. 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
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