Seagate 2004 Annual Report Download - page 32

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Table of Contents
We continue to maintain various sales programs aimed at increasing customer demand. We exercise judgment in formulating the
underlying estimates related to distributor inventory levels, sales program participation and customer claims submittals in determining the
provision for such programs. During fiscal year 2005, sales programs recorded as contra revenue were approximately 5% of our gross revenue,
compared to 7% of our gross revenue for fiscal year 2004. The decrease in sales programs as a percentage of gross revenue was the result of a
shift in revenue mix from our distribution customers, where the various sales programs are more prevalent, to our OEM customers, and lower
channel inventory levels with respect to our distribution customers.
Cost of Revenue.
Cost of revenue for fiscal year 2005 was $5.880 billion, up 23% from $4.765 billion in fiscal year 2004. Gross margin
as a percentage of revenue for fiscal year 2005 was 22% as compared with 23% for fiscal year 2004. The decrease in gross margin as a
percentage of revenue from fiscal year 2004 was primarily due to price erosion, higher costs associated with new product transitions and
increased warranty accruals with respect to new and older products partially offset by higher overall unit shipments and an increased mix of
new higher-margin products.
Product Development Expense. Product development expense decreased by $21 million, or 3%, for fiscal year 2005 when compared
with fiscal year 2004. The decrease in product development expense from fiscal year 2004 was primarily due to decreases of $26 million in
salaries resulting from reductions in staffing levels, $10 million in product development support costs, $6 million resulting from the
discontinuation of certain benefits associated with our post-retirement medical plan, $4 million in relocation costs and $4 million in
depreciation. These decreases were partially offset by an increase of $30 million in variable performance-based compensation.
Marketing and Administrative Expense. Marketing and administrative expense increased by $16 million, or 6%, for fiscal year 2005
when compared with fiscal year 2004. The increase in marketing and administrative expense from fiscal year 2004 was primarily due to
increases of $27 million in variable performance-based compensation and $4 million in the provision for bad debt. These increases were
partially offset by decreases of $13 million in salaries resulting from reductions in staffing levels and $3 million resulting from the
discontinuation of certain benefits associated with our post-retirement medical plan.
Restructuring. During fiscal year 2005, we recorded $8 million in restructuring charges. These costs were primarily a result of a
restructuring plan established to continue the alignment of our global workforce with existing and anticipated future business requirements,
primarily in our U.S. operations. The restructuring charges were comprised of employee termination costs of $5 million relating to a reduction
in our workforce and approximately $3 million in charges related to impaired facilities improvements as a result of the alignment plan. These
restructuring activities were substantially complete at July 1, 2005. Additionally, we reversed approximately $8 million of our restructuring
accruals comprised of approximately $3 million recorded in prior fiscal years relating to accrued severance benefits that were less than amounts
originally estimated and approximately $5 million relating to the sale in the first quarter of fiscal year 2005 of a surplus building previously
impaired in the fiscal year 2000 restructuring.
Upon completion of the fiscal year 2005 restructuring activities, we estimate that annual salary expense will be reduced by approximately
$8 million. We continue to look at opportunities for further cost reductions which may result in additional restructuring activities and
restructuring charges in the future.
Net Other Income (Expense). Net other income of $10 million in fiscal year 2005 changed from net other expense of $16 million for
fiscal year 2004. The change from fiscal year 2004 was primarily due to an increase in interest income of $18 million resulting from higher
average interest rates and higher average balances in our interest bearing accounts and $10 million in income in our fourth quarter of fiscal year
2005 resulting from the settlement of a litigation matter.
Income Taxes. We recorded a provision for income taxes of $25 million for the fiscal year ended July 1, 2005 compared to a benefit
from income taxes of $101 million for the fiscal year ended July 2, 2004. We are a
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