Western Digital 2000 Annual Report Download - page 24

competitive market, and a decline in desktop hard drive unit shipments of approximately 8%, due largely to
the product recall in the Ñrst quarter of 2000.
Gross ProÑt
Gross proÑt totaled $100.0 million, or 2.8% of revenue in 1998, negative $2.8 million, or (0.1)% of
revenue in 1999 and $8.1 million, or 0.4% of revenue in 2000. Gross proÑt for 1998 included $140.0 million of
special charges to cost of revenues to accelerate the Company's transition to magnetoresistive head
technology. Gross proÑt for 1999 included $77.0 million of special charges to cost of revenues for incremental
thin-Ñlm warranty provision related to a higher lifetime return rate being applied to a larger base of products as
a result of the transition in desktop product line technology. Gross proÑt for 2000 includes $72.5 million of
special charges to costs of revenues, related directly to the exit from the enterprise hard drive market and the
product recall. Excluding special charges, gross proÑt was $240.0 million, or 6.8% of revenue, $74.2 million, or
2.7% of revenue and $80.6 million, or 4.1% of revenue, for 1998, 1999 and 2000, respectively. The reduction of
gross proÑt margin from 1998 to 1999 (excluding special charges) was primarily due to continued competitive
pricing pressure in the desktop hard drive market and lower sales of higher margin enterprise hard drive
products. The increase in the gross proÑt margin from 1999 to 2000 (excluding special charges) was primarily
the result of lower manufacturing costs due to the consolidation of desktop hard drive production to a single,
highly utilized facility in Malaysia, oÅset by lower volumes and lower ASPs.
Operating Expenses
Research and development expense was $217.0 million in 1999, an increase of $13.3 million from 1998.
The increase was primarily due to the third quarter $12.0 million charge for in-process research and
development related to the acquisition of Connex. Research and development expense for 2000 was $163.2
million, a decrease of $53.8 million from 1999. The decrease was primarily due to the Company's exit from the
enterprise hard drive market and expense reduction eÅorts, partially oÅset by increased spending at Connex,
Sagetree, and other new ventures.
Selling, general and administrative (""SG&A'') expense was $196.0 million in 1999, an increase of $3.8
million from 1998. The increase was primarily the result of a $7.5 million charge on terminated Malaysian
Ringgit hedging contracts recorded in 1999, partially oÅset by decreased marketing expenditures. SG&A
expense in 2000 was $138.3 million, a decrease of $57.6 million from 1999. The decrease in SG&A expense
was primarily due to the Company's exit from the enterprise hard drive market, expense reductions in its
desktop hard drive business, a $11.0 million accrual reduction in the fourth quarter of 2000 and the
nonrecurrence of a $7.5 million charge on the terminated hedging contracts recorded in 1999. The decrease
was partially oÅset by increased spending at Connex, Sagetree and other of the Company's developing
ventures in 2000.
Interest and Other Income/Expense, Extraordinary Item and Tax BeneÑt
Net interest and other income (expense) was $3.8 million, ($15.9) million and $4.9 million in 1998, 1999
and 2000, respectively. The change from 1998 to 1999 was primarily due to a full year's accrual of original
issue discount on the Company's convertible debentures and a full year of interest expense incurred on a $50.0
million term loan. The increase in net interest and other income in 2000 was due to a $14.8 million gain on
disposition of certain investment securities and lower interest expense due to lower average debt balances
resulting from the payment in 2000 of an outstanding term loan of $50.0 million and redemption of convertible
bonds, oÅset by a reduced amount of interest income due to lower cash and cash equivalent balances.
During 2000, the Company recognized extraordinary gains of $166.9 million upon retirement of
convertible debentures. The Company issued 26.7 million shares of common stock in exchange for $735.6
million in face value of its convertible debentures (with a book value of $284.1 million) which were retired in
non-cash transactions. These redemptions were private, individually negotiated transactions with certain
institutional investors.
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