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$36.1 million decrease in operating expenses, partially oÅset by a $5.7 million increase in interest and other
nonoperating expense.
Net Revenues
Consolidated net revenues of $2.0 billion in 2000, decreased $0.8 billion or 29.3% from 1999, due to the
Company's decision in the third quarter of 2000 to cease production of SCSI hard drives (1999 revenue
included $435.0 million for SCSI hard drives compared to $141.8 million in 2000), a decline in the average
selling prices (""ASP's'') of EIDE hard drive products due to an intensely competitive market, and a decline in
EIDE drive unit shipments of approximately 6%, due largely to the product recall in the Ñrst quarter of 2000.
During the Ñrst quarter of 2000, the Company announced a recall of its 6.8GB per platter series of WD
Caviar» EIDE hard drives because of a reliability problem resulting from a faulty power driver chip
manufactured by a third-party supplier. As a result, revenues of approximately $100 million were reversed and
production was shut down for approximately two weeks, eliminating approximately $70 million of forecasted
revenue.
Consolidated net revenues in 2001 were Öat with 2000, at approximately $2.0 billion. Excluding the
revenue from SCSI drive sales in 2000, revenue increased $138.0 million or 7.6% in 2001. This improvement
was due to an increase in EIDE drive unit shipments of approximately 19%, oÅset by a decline in ASP's.
Revenues from new business ventures were not material for the periods presented. In 2001, the Company
adopted StaÅ Accounting Bulletin 101 ""Revenue Recognition in Financial Statements'' (""SAB 101''), which
defers the recognition of revenue on sales made under certain shipping terms. The implementation of SAB 101
resulted in an increase to revenues for 2001 of $13.1 million.
Gross ProÑt
Gross proÑt (loss) was ($2.8) million, or (0.1)% of revenue in 1999, $9.6 million, or 0.5% of revenue in
2000 and $207.7 million, or 10.6% of revenue in 2001. Gross proÑt for 1999 included $77.0 million of special
charges for incremental thin-Ñlm warranty provision related to a change in the estimated lifetime return rate
applied to an installed base of products. Gross proÑt for 2000 included $72.5 million of special charges related
to exiting the SCSI hard drive product line and the product recall. Excluding special charges, gross proÑt was
$74.2 million, or 2.7% of revenue, and $82.1 million, or 4.2% of revenue, for 1999 and 2000, respectively. The
increase in gross proÑt from 1999 to 2000 (excluding special charges) was primarily the result of lower
manufacturing costs due to the consolidation of drive production to a single, highly utilized facility in
Malaysia, oÅset by lower volumes and lower ASPs. The increase in gross proÑt from 2000 to 2001 (excluding
special charges) was the result of higher volume, oÅset by lower ASP's, lower manufacturing costs due to
2000 expense reduction eÅorts and lower warranty costs due to the discontinuance of the SCSI hard drive
product line in 2000 and the expiration of the warranty period for thin-Ñlm products in 2001. The net impact
of SAB 101 on gross proÑt in 2001 was insigniÑcant.
Operating Expenses
Research and development expense was $198.4, $150.7 and $122.5 million for 1999, 2000 and 2001,
respectively. The $47.7 and $28.1 million decreases from 1999 to 2000 and from 2000 to 2001, respectively,
were due to the Company's exit from SCSI hard drive production during 2000 and expense reduction eÅorts in
its remaining hard drive operations, partially oÅset by increased spending in the Company's developing new
business ventures.
Selling, general and administrative (""SG&A'') expense was $194.4, $127.0 and $119.1 million for 1999,
2000 and 2001, respectively. The decrease of $67.4 million from 1999 to 2000 was primarily due to the
Company's exit from SCSI hard drive production, expense reductions in its remaining hard drive operations,
an $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
in the Company's developing new business ventures. The decrease of $7.9 million from 2000 to 2001 was
19