Western Digital 2006 Annual Report Download - page 31

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The Thai Baht is a free floating currency while the Malaysian Ringgit exchange rate policy recently defined by the
Malaysian government 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, 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.
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 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 a relatively short operating history, making it
more difficult for us to accurately access 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.
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:
• accruals for warranty costs related to product defects;
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