Western Digital 1999 Annual Report Download - page 24

Bowne Conversion 19
hard drive products. These efforts should further enhance the time-to-market of the Company's drive designs and lower its component
costs through the efficiencies of Komag's global high-volume media manufacturing facilities.
On July 8, 1999, a further restructuring of operations and management responsibilities was announced. The structural change
established a Worldwide Operations and Geographies structure and a Lines of Business/Research and Development organization
("LOB"). The assignment of LOB's and geographic responsibilities is expected to help the Company focus on narrower vertical markets,
and on specific geographic territories and customers. The restructuring is also expected to enable the Company to be more responsive
to its markets and to encourage faster, more focused, customer-oriented decision-making. The restructuring resulted in a reduction of
worldwide employee headcount of approximately 40 employees, approximately 25 of whom were direct and indirect labor and the rest
were management, professional and administrative personnel. The Company expects to record a charge to operations, primarily for
severance accruals, of approximately $2 million in the first quarter of 2000.
On July 20, 1999, the Company's chairman, president, and chief executive officer, Chuck Haggerty, announced his plans to retire by
the end of June 2000, or upon the Company's appointment of a new president and CEO. Currently the new operating and management
structure is led by co-chief operating officers.
On August 13, 1999, the Company announced its intention to move substantially all of its production of desktop hard drives to
Malaysia, while retaining in Singapore production of enterprise drives and expanding its role in design, development and
manufacturing process engineering. The Company expects to finalize its plans relative to the restructuring by the end of its first quarter.
The Company expects that the transfer of production of desktop hard drives to its Malaysia facility will result in a reduction of
employee headcount in Singapore by the end of December 1999 of approximately 2,000 direct and 500 indirect workers and a charge to
operations during the first half of 2000 of approximately $30 million relating to the write-off of fixed assets to be disposed of, lease
cancellations, and employee severance and other costs of vacating leased properties. The Company expects that the transfer to its
Malaysia facility will result in an employee headcount increase in Malaysia of approximately 2,000 workers by the end of December
1999. The Company also expects that this restructuring, along with the January 1999 consolidation of its Singapore facilities, will result
in a combined annualized cost savings of approximately $100 million.
On September 27, 1999, the Company announced a recall of up to 400,000 of its 6.8GB per platter series of WD Caviar desktop hard
drives which are in completed computer systems, because of a reliability problem resulting from a faulty power driver chip
manufactured by a third-party supplier. Approximately 1.2 million units were manufactured with the faulty chip, but the Company
believes the remaining drives are either in the Company's or its customers' inventory. Replacement of the chips will involve rework of
the printed circuit board assembly. The Company expects that it will be able to resume production of the hard drives with new chips by
approximately October 11, 1999. The Company has not yet quantified the total impact of the recall, rework, and manufacturing stoppage
on its financial position, results of operation, or liquidity, although it believes it will be material. The special charges associated with the
cost of recalling and repairing the affected drives are not expected to exceed $50 million. This estimate excludes any impact on the
Company's revenues or market share. The Company has not yet determined how much of the potential loss might be recoverable from
insurance sources and from the supplier of the faulty chip.
Results of Operations
Comparison of 1997, 1998 and 1999
In 1997, the Company reported net income of $267.6 million compared with net losses of $290.2 and $492.7 million in 1998 and 1999,
respectively. The deterioration in operating performance from 1997 to 1998 occurred because of a 15% decrease in revenues, a 13
percentage point decline in gross profit margin and a three percentage point increase in operating expenses as a percentage of
revenues. The increase in operating loss from 1998 to 1999 resulted from a 22% decrease in revenues, a three percentage point decrease
in gross margin, and a six percentage point increase in operating expenses as a percentage of revenues. The net loss in 1998 included
charges of $148 million recorded in the second quarter, primarily to cost of sales, and $22 million of costs recorded in the fourth quarter
to research and development ("R&D") principally related to the start-up of the IBM Agreement. The net loss in 1999 included
approximately $77 million of charges for incremental thin-film warranty provisions and approximately $7.5 million in Malaysian currency
losses recorded in the first quarter, $12.0 million of in-process research and development write-offs associated with the acquisition of
Connex in the third quarter, and restructuring charges totaling $61.0 million for the consolidation of the Company's Personal Storage
Division and Enterprise Storage Group and sale of its media operations in the third and fourth quarter, respectively.