Western Digital 1999 Annual Report Download - page 60

Bowne Conversion 55
650,858
Gross profit (loss).................................. (82,752) 19,167 39,864 20,873
Operating income (loss) ........................ (192,005) (79,015) (110,045) (95,727)
Net income (loss) .................................. (194,658) (82,253) (114,293) (101,486)
Basic earnings (loss) per share ............... (2.20) (.93) (1.27) (1.12)
Diluted earnings (loss) per share ............ $
(2.20)
$ (.93)$ (1.27)$ (1.12)
____________
(1) First quarter 1999 includes a $77.0 million special charge to increase warranty accruals associated with the Company's last
generations of thin-film desktop products. The increase was primarily due to a normal increase in units under warranty and the
completion of the Company's transition in its desktop business from thin-film to the newer magnetoresistive ("MR") head
technology in the June 1998 quarter. This transition and recent experience with thin film returns, which indicated a slightly higher
return rate, higher cost of repair and longer duration of returns within the warranty period, resulted in an increase in warranty
accruals. Prior to the first quarter of 1999, the Company's experience with returns of older generation thin-film products was that a
large percentage of the products which were going to fail, failed in the first six months after sale. However, with the advancements
in thin-film recording technology, the gaps between critical components (principally the recording heads and disks) within the drive
became much smaller until they were almost in contact with one another. This made the thin-film drives much more susceptible to
environmental factors which typically manifest themselves over long periods of time, such as gases released from the surrounding
environment that may permeate through or from other components in the drive. During the first quarter of 1999, the Company began
to see consistent data indicating a higher percentage of these advanced thin-film drives coming back after the first six months.
That, combined with the significant amount of these drives that were now in the field, led to a higher life-time return rate being
applied to a larger base of products in the field. This resulted in a special charge to warranty provision of $77 million in the first
quarter of 1999.
(2) During the second quarter of 1998, the Company incurred $148 million of special charges as a result of its decisions to reduce its
exposure to the sustained oversupply and unusually competitive pricing pressures in the lower capacity portion of the hard drive
marketplace, and to sharpen its focus and resources on its desktop and enterprise storage product lines. This decision led the
Company to accelerate its transition to magnetoresistive head technology and to redeploy the resources which were used on
development of its mobile disk drive product line back to its core desktop and enterprises disk drive products. The special charges
included approximately $49 million of vendor purchase order cancellation charges on older, thin-film technology components due to
reduced production of thin-film products, $35 million for write-down of inventory and service center stock, $24 million for
incremental warranty accruals on older technology products, $10 million for write-offs of investments in companies developing
advanced thin-film and mobile disk drive technologies, $8 million of mobile engineering development expenses incurred during the
quarter, and $22 million of other incremental costs incurred within the quarter associated with the accelerated transition out of older,
thin-film technology into MR products. Of the total $148 million special charges, approximately $8 million was recorded in research
and development expense and $140 million was recorded in cost of sales. Since these charges were either incurred during the
second quarter of 1998, or resulted from liabilities incurred or assets impaired upon the Company's decision in the second quarter to
implement these actions, the entire $148 million was recorded in the second quarter of 1998. The inventory referred to above was
scrapped or subsequently sold at or slightly above its adjusted book value with minimal gross margin impact. The Company
substantially completed its transition to magnetoresistive products by the fourth quarter of 1998, largely as planned, improving its
technology leadership position relative to its competitors. Of the total charges, approximately $100 million required the use of cash.
There were no significant subsequent changes to the cost estimates associated with the special charges.
(3) Third quarter 1999 includes a $41.0 restructuring charge for the combination of the Company's Personal Storage Division and
Enterprise Storage Group and the resulting consolidation of its Singapore facilities (see Note 8 of Notes to Consolidated Financial
Statements), and a $12.0 million charge to in-process research and development expenses for the acquisition of Connex.
(4) Fourth quarter 1998 results include $22 million of costs recorded to research and development principally related to the start-up of
the IBM Agreement.