Western Digital 2012 Annual Report Download - page 28

prices and operate their hard drive business unit at a loss over an extended period of time while still remaining profit-
able overall. In addition, if these competitors can increase sales of non-hard drive products to the same customers, they
may benefit from selling their hard drives at lower prices. Our operating results may be adversely affected if we cannot
successfully compete with the pricing by these companies.
If we fail to qualify our products with our customers or if product life cycles lengthen, it may have a significant adverse impact on
our sales and margins.
We regularly engage in new product qualification with our customers. Once a product is accepted for qual-
ification testing, failures or delays in the qualification process can result in delayed or reduced product sales, reduced
product margins caused by having to continue to offer a more costly current generation product, or lost sales to that
customer until the next generation of products is introduced. The effect of missing a product qualification oppor-
tunity is magnified by the limited number of high volume OEMs, which continue to consolidate their share of the
storage markets. Likewise, if product life cycles lengthen, we may have a significantly longer period to wait before we
have an opportunity to qualify a new product with a customer, which could reduce our profits because we expect
declining gross margins on our current generation products as a result of competitive pressures.
We are subject to risks related to product defects, which could result in product recalls or epidemic failures and could subject us to
warranty claims in excess of our warranty provisions or which are greater than anticipated.
We warrant the majority of our products for periods of one to five years. We test our hard drives in our manu-
facturing facilities through a variety of means. However, there can be no assurance that our testing will reveal defects
in our products, which may not become apparent until after the products have been sold into the market. Accord-
ingly, there is a risk that product defects will occur, which could require a product recall. Product recalls can be
expensive to implement and, if a product recall occurs during the product’s warranty period, we may be required to
replace the defective product. Moreover, there is a risk that product defects may trigger an epidemic failure clause in a
customer agreement. If an epidemic failure occurs, we may be required to replace or refund the value of the defective
product and to cover certain other costs associated with the consequences of the epidemic failure. In addition, a prod-
uct recall or epidemic failure may damage our reputation or customer relationships, and may cause us to lose market
share with our customers, including our OEM and ODM customers.
Our standard warranties contain limits on damages and exclusions of liability for consequential damages and for
misuse, improper installation, alteration, accident or mishandling while in the possession of someone other than us.
We record an accrual for estimated warranty costs at the time revenue is recognized. We may incur additional operat-
ing expenses if our warranty provision does not reflect the actual cost of resolving issues related to defects in our prod-
ucts, whether as a result of a product recall, epidemic failure or otherwise. If these additional expenses are significant,
it could adversely affect our business, financial condition and operating results.
Dependence on a limited number of qualified suppliers of components and manufacturing equipment could lead to delays, lost
revenue or increased costs.
Our future operating results may depend substantially on our suppliers’ ability to timely qualify their compo-
nents in our programs, and their ability to supply us with these components in sufficient volumes to meet our pro-
duction requirements. A number of the components that we use are available from only a single or limited number of
qualified suppliers, and may be used across multiple product lines. As such, the success of our products depends on
our ability to gain access to and integrate parts from reliable component suppliers. To do so, we must maintain effec-
tive relationships with our supply base to source our component needs, develop compatible technology, and maintain
continuity of supply at reasonable costs. If we fail to maintain effective relationships with our supply base, or if we fail
to integrate components from our suppliers effectively, this may adversely affect our ability to develop and deliver the
best products to our customers and our profitability could suffer.
Certain equipment and consumables we use in our manufacturing or testing processes are available only from a
limited number of suppliers. Some of this equipment and consumables use materials that at times could be in short sup-
ply. If these materials are not available, or are not available in the quantities we require for our manufacturing and testing
processes, our ability to manufacture our products could be impacted, and we could suffer significant loss of revenue.
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