Western Digital 1995 Annual Report Download - page 15

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   Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)  .
The improvement in hard drive product gross margin from 1993 to 1994
was the result of a significant increase in unit shipments which reduced per unit
production costs by lowering component costs and increasing manufacturing effi-
ciencies. As compared to 1993, the Company also increased its relative level of
business with retail and distribution customers that typically purchase product in
lower volumes, but at higher ASPs.
The improvements in microcomputer products gross margins were generally
attributable to lower product costs resulting from the Company’s fabless manufac-
turing strategy implemented in January 1994.
Research and development expense (“R&D”) in 1995 increased approxi-
mately $18.0 million, or 16%, as compared with the prior year and increased
approximately $11.2 million, or 11%, from 1993 to 1994. These increases were
primarily attributable to planned expenditures to support new hard drive product
introductions.
Selling, general and administrative expenses (“SG&A”) increased $17.1 mil-
lion, or 15%, from the prior year and $22.8 million, or 25%, from 1993 to 1994
primarily as a result of higher selling, marketing and other related expenses in sup-
port of higher revenue levels and higher variable compensation plan accruals.
Interest and other income was $12.0 million in 1995, comprising net inter-
est income of $8.9 million and a $3.1 million gain from the sale of stock held for
investment. Net interest expense was $5.8 million and $15.1 million in 1994 and
1993, respectively. The improvement from 1994 to 1995 was the result of signifi-
cantly lower levels of outstanding debt and higher average cash and short-term
investment balances. The $9.3 million decline in net interest expense from 1993 to
1994 was due to significant reductions in outstanding debt.
The provision for income taxes in 1995 and 1994 consists primarily of
taxes associated with certain of the Company’s foreign subsidiaries which had tax-
able income. The Company’s effective tax rate of 15% recorded in 1995 and 1994
results primarily from the earnings of certain subsidiaries which are taxed at sub-
stantially lower tax rates as compared with United States statutory rates (see Note
6 to the consolidated financial statements).