Western Digital 2007 Annual Report Download - page 43

Income Tax Expense (Benefit). Income tax (benefit) expense was $(13) million and $4 million in 2006 and 2005,
respectively. Tax (benefit) expense as a percentage of income before taxes was (3)% and 2% for 2006 and 2005,
respectively. Differences between the effective tax rates and the U.S. Federal statutory rate are primarily due to tax
holidays in Malaysia and Thailand that expire at various times ranging from 2008 to 2022. In addition to the tax
holidays, the tax provision for 2006 was favorably impacted by $22 million given the partial reduction of our valuation
allowance on deferred tax assets upon determination that it was more likely than not that a portion of our deferred tax
assets would be realized. The realization of the deferred tax assets is primarily dependent on our ability to generate
sufficient earnings in certain jurisdictions in fiscal years 2007 and 2008. A two-year period was used due to the difficulty
at the time in accurately projecting income for longer periods of time given the cyclical nature of our industry. The 2005
effective tax rate benefited by approximately 0.7% from the favorable resolution of certain tax contingencies.
Liquidity and Capital Resources
We ended 2007 with total cash, cash equivalents and short-term investments of $907 million, an increase of
$208 million from June 30, 2006. Our investment policy is to manage our investment portfolio to preserve principal and
liquidity while maximizing return through the full investment of available funds. A portion of our available funds is
invested in auction rate securities, which are short-term investments in bonds with original maturities greater than
90 days. The following table summarizes the results of our statements of cash flows for the three years ended June 29,
2007:
June 29,
2007
June 30,
2006
July 1,
2005
Years Ended
Net cash flow provided by (used in):
Operating activities ............................... $618 $368 $421
Investing activities ............................... (383) (303) (274)
Financing activities ............................... (86) 1 (7)
Net increase in cash and cash equivalents ................. $149 $ 66 $140
Operating Activities
Net cash provided by operating activities during 2007 was $618 million as compared to $368 million during 2006
and $421 million for 2005. 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 used to fund working capital was
$78 million for 2007 as compared to $207 million for 2006 and net cash provided by changes in working capital of
$89 million for 2005.
Our working capital requirements depend upon the effective management of our cash conversion cycle, which
measures how quickly a company can convert its products into cash through sales. The following table summarizes the
cash conversion cycle for the three years ended 2007:
June 29,
2007
June 30,
2006
July 1,
2005
Years Ended
Days sales outstanding ............................... 45 39 40
Days in inventory .................................. 20 19 16
Days payables outstanding ............................ (66) (64) (65)
Cash conversion cycle................................ (1) (6) (9)
The increase in the cash conversion cycle for 2007 was primarily due to our days sales outstanding (“DSOs”), which
increased by six days from 2006. This increase was primarily due to the discontinuance of an early pay program with one
of our larger customers and increasing sales to branded products’ customers and other customers who have longer
payment terms.
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