Western Digital 2006 Annual Report Download - page 68

quarterly and updated to reflect the impact of current results on prior expectations. If actual product return trends or costs
to repair returned products demonstrate significant differences from expectations, a change in the warranty accrual is
made. Changes in the warranty accrual for the years ended June 30, 2006, July 1, 2005 and July 2, 2004 were as follows
(in millions):
2006 2005 2004
Warranty accrual, beginning of period ..... $91.9 $ 56.8 $ 52.9
Charges to operations ................ 76.5 82.0 60.6
Utilization ....................... (49.0) (46.3) (55.1)
Changes in estimate related to pre-existing
warranties ...................... (30.0) (0.6) (1.6)
Warranty accrual, end of period .......... $89.4 $ 91.9 $ 56.8
Accrued warranty also includes amounts classified in non-current liabilities of $17.8 million at June 30, 2006,
$16.7 million at July 1, 2005, and $10.4 million at July 2, 2004.
Long-term Purchase Agreements
The Company has entered into long-term purchase agreements with various component suppliers. The commit-
ments depend on specific products ordered and may be subject to minimum quality requirements and future price
negotiations. For 2007, 2008, and 2009, WD expects these commitments to total approximately $885 million,
$1.075 billion and $970 million, respectively. In conjunction with these agreements, the Company has advanced
approximately $92 million related to 2007 and 2008 purchase commitments, of which $80 million is included in
advances to suppliers and $12 million is included in other long-term assets as of June 30, 2006.
Note 7. 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 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,
beyond that provided at June 30, 2006, would not be material to the Company’s financial condition. However, there can
be no assurance with respect to such result, and monetary liability or financial impact to the Company from these legal
proceedings, lawsuits and other claims could differ materially from those projected.
In June 1994, Papst Licensing (“Papst”) brought suit against the Company alleging infringement by the Company
of five hard drive motor patents owned by Papst. In December 1994, Papst dismissed its case without prejudice. In
July 2002, Papst filed a new complaint against the Company and several other defendants alleging infringement by the
Company of seventeen of Papst’s patents related to hard drive motors that the Company purchased from motor vendors.
Papst sought an injunction and damages. The Company filed an answer on September 4, 2002, denying Papst’s
complaint, and the lawsuit was subsequently stayed pending the outcome of certain other related litigation. On July 4,
2005, the Company entered into a Settlement and License Agreement with Papst. In connection with the settlement, the
Company made a one-time payment of $24 million to Papst on July 29, 2005, of which $19 million represented a charge
to selling, general and administrative expense for the Company’s 2005 fiscal fourth quarter ($5 million had been accrued
in a prior year). In exchange for the payment, Papst has dismissed with prejudice its lawsuit pending against the
Company, granted the Company a fully-paid license to certain patents owned by Papst, and released the Company of all
past, present and future claims alleging infringement by the Company of those Papst patents. The Settlement and License
Agreement resolved all outstanding litigation between the two companies without any admission of infringement by the
Company.
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WESTERN DIGITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)