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Annual Report and Form 10-K
2002
Western Digital
>

Table of contents

  • Page 1
    We s t e r n D i g i t a l > Annual Report and Form 10-K 2002

  • Page 2
    THE COMPANY > Western Digital Corporation is an information storage pioneer and long-time industry leader providing products and services for people and organizations that collect, manage and use digital information. We produce reliable, high-performance hard drives that keep users' data close at ...

  • Page 3
    ... with our hard drive deliveries to other new customers such as TiVo for its personal video recorders and Scientific-Atlanta for its home entertainment servers, more than 10 percent of our unit shipments in fiscal 2002 went to business segments that barely existed just a year earlier. Western Digital...

  • Page 4
    ...Western Digital because we are exclusively a producer of EIDE drives and have no SCSI products that would be displaced by this new technology. Serial ATA also is slated to become the standard desktop interface as computer manufacturers begin placing Serial ATA onto their motherboards. In fiscal 2002...

  • Page 5
    ... for desktops PCs; the eventual replacement of aging desktop PCs in business organizations with new PCs; the emergence of Serial ATA-based hard drives in applications traditionally dominated by SCSI technology; and the acceptance of new consumer electronics products containing hard drives. Perhaps...

  • Page 6
    ...Lake Forest Drive Lake Forest, California (Address of principal executive oÇces) 92630 (Zip Code) Registrant's telephone number, including area code: (949) 672-7000 Registrant's Web Site: http://www.westerndigital.com Securities Registered Pursuant to Section 12(b) of the Act: Title of each class...

  • Page 7
    ... a Delaware corporation that operates as the parent company of its hard drive business, Western Digital Technologies, Inc., which was formed in 1970. The Company's principal executive oÇces are located at 20511 Lake Forest Drive, Lake Forest, California 92630. The Company's telephone number is (949...

  • Page 8
    PART I Item 1. General Western Digital Corporation (the ""Company'' or ""Western Digital'') designs, develops, manufactures and markets hard drives featuring leading-edge technology. A hard drive is a storage device found in most computers that stores data on one or more rotating magnetic disks that...

  • Page 9
    ... of this product development eÃ...ort, see Part II, Item 7, under the heading ""Risk factors relating to Western Digital particularly.'' Video Game Market. According to TrendFOCUS, home electronic game devices that include hard disk drives and that are played on home entertainment systems had sales of...

  • Page 10
    ...product models. The Company expects to continue to utilize this platform strategy as it develops products for the emerging market for hard drives speciÃ'cally designed for audio-video applications, such as new digital video recording devices. Non-PC Hard Drive Products. The Company oÃ...ers customized...

  • Page 11
    ... the desktop PC industry plans to transition to higher speed interfaces such as ""serial ATA'' to handle the higher data transfer rates. The Company is working to develop products that will support these higher speed interfaces. Storage capacity of the hard drive is determined by the number of disks...

  • Page 12
    ... which utilize common Ã'rmware and mechanical designs and reuse of manufacturing tooling and application-speciÃ'c integrated circuits across various product generations and product lines. For an additional discussion of technological innovations, see Part II, Item 7, under the heading ""Risk factors...

  • Page 13
    ... Company sells directly include Best Buy, Circuit City, CompUSA, Fry's Electronics and Sam's Club. Retailers accounted for approximately 7% of revenues for each of 2002, 2001 and 2000. The Company's current retail customer base is primarily in the United States, Canada and Europe. The retail channel...

  • Page 14
    ... in Korea and Brazil to process and test returned hard drives. The Company has contracts with third parties to refurbish or repair its products at service facilities located in Singapore and Germany. Manufacturing To be competitive, Western Digital must manufacture high quality hard drives with...

  • Page 15
    ... its hard drives from external suppliers. For an additional discussion of manufacturing, see Part II, Item 7, under the heading ""Risk factors relating to Western Digital particularly.'' Research and Development The Company devotes substantial resources to development of new products and improvement...

  • Page 16
    ... of various separate circuits. The Company expects this trend to continue in the area of custom integrated circuits for hard drives. For an additional discussion of component supplies, see Part II, Item 7, under the heading ""Risk factors relating to Western Digital particularly.'' Backlog...

  • Page 17
    ... 2002 for research and development activities, but which is currently used as a processing center and for light manufacturing. The San Jose lease expires in July 2006 and the Irvine lease expires in September 2010. Western Digital owns a manufacturing facility in Kuala Lumpur, Malaysia and acquired...

  • Page 18
    ... as Product Manager, Integrated Drive Electronics. Mr. Shakeel served in various executive capacities, including Vice President, Materials Ì Asia, until October 1997, when he left the Company to become Managing Director of Mah Lin Associates, a supplier of electromechanical components in Singapore...

  • Page 19
    PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters Western Digital's common stock is listed on the New York Stock Exchange, Inc. (""NYSE'') under the symbol ""WDC.'' The approximate number of holders of record of common stock of the Company as of September 10, 2002...

  • Page 20
    ... operating results, including those made under the headings ""Risk factors related to the hard drive industry in which we operate'' and ""Risk factors relating to Western Digital particularly'', in this report, as well as the Company's other reports Ã'led with the Securities and Exchange Commission...

  • Page 21
    ...set by a 16% decrease in average selling prices (""ASP's''). The signiÃ'cant change in units and ASP's in 2002 from 2001 is primarily due to expansion of the Company's hard drive product line into lower-end desktop PC and consumer electronics markets. Consolidated net revenues in 2001 were Ã-at with...

  • Page 22
    ... systems assets, and net lease cancellation costs. Also recorded in connection with these actions were special charges to cost of revenues of $34.8 million for vendor settlements, incremental warranty, and inventory write-downs associated with exiting the SCSI hard drive product line. Interest and...

  • Page 23
    ... the Company's new manufacturing facility in Thailand, and $17.6 million for debenture redemptions. Other sources of cash during 2002 included $9.9 million received from the sale of assets, $10.2 million received in connection with stock option and warrant exercises and Employee Stock Purchase Plan...

  • Page 24
    ... hard drive industry in which we operate'' and ""Risk factors relating to Western Digital particularly.'' Commitments The following is a summary of the Company's signiÃ'cant contractual cash obligations and commercial commitments at June 28, 2002: Convertible Debentures The Company has zero coupon...

  • Page 25
    ...that provide for stock rotation on slow-moving items and other incentive programs. In accordance with current accounting standards, the Company recognizes revenue upon shipment or delivery to resellers and records a corresponding adjustment for estimated price protection and other programs in eÃ...ect...

  • Page 26
    ...The Company has comprehensive processes with which to estimate accruals for warranty, which include speciÃ'c detail on hard drives in the Ã'eld by product type, historical Ã'eld return rates and costs to repair. Inventory Inventories are valued at the lower of cost (Ã'rst-in, Ã'rst-out basis) or net...

  • Page 27
    ..., which means that existing head technology must be improved to accommodate more data on a single disk. Our failure to bring these new products to market on time and at acceptable costs would put us at a competitive disadvantage to companies that achieve these results. Short product life cycles make...

  • Page 28
    ..., and hard drives will be found in many consumer products other than computers. For 2002, more than 10% of our unit sales were for consumer products other than computers, primarily gaming devices. If we are not successful in using our hard drive technology and expertise to develop new products for...

  • Page 29
    ...new key personnel or skilled employees, our operating results would likely be harmed. Risk factors relating to Western Digital particularly Loss of market share with a key customer could harm our operating results. A majority of our revenue comes from a few customers. For example, during 2002, sales...

  • Page 30
    ... supply us with read channel chips could harm our operating results. To develop new products we must maintain eÃ...ective partner relationships with our strategic component suppliers. Under our business model, we do not manufacture any of the component parts used in our hard drives. As a result, the...

  • Page 31
    ...extent as do the laws of the United States. In addition to patent protection of intellectual property rights, we consider elements of our product designs and processes to be proprietary and conÃ'dential. We rely upon employee, consultant and vendor nondisclosure agreements and contractual provisions...

  • Page 32
    ...accruals for warranty costs related to product defects; ‚ price protection adjustments and other sales promotions and allowances on products sold to retailers, resellers and distributors; ‚ inventory adjustments for write-down of inventories to lower of cost or market value (net realizable value...

  • Page 33
    ... its hedging program related to the Singapore Dollar. During the third quarter of 2002, the Company purchased a manufacturing facility in Thailand and began hedging the Thai Baht. As of June 28, 2002, the Company had outstanding the following purchased foreign currency forward exchange contracts (in...

  • Page 34
    ... comprehensive income (shareholders' equity). As of June 28, 2002, a $2.6 million total accumulated unrealized gain has been recorded in accumulated other comprehensive income. If the Company sells any portion of this common stock, the related unrealized gain or loss on the date of sale will become...

  • Page 35
    ... Schedule Page Consolidated Financial Statements: Independent Auditors' Report Consolidated Statements of Operations ÃŒ Three Years Ended June 28, 2002 Consolidated Balance Sheets ÃŒ June 28, 2002 and June 29, 2001 Consolidated Statements of Shareholders' Equity (DeÃ'ciency) ÃŒ Three Years Ended...

  • Page 36
    INDEPENDENT AUDITORS' REPORT The Board of Directors Western Digital Corporation: We have audited the consolidated Ã'nancial statements of Western Digital Corporation and subsidiaries as listed in the accompanying index. In connection with our audits of the consolidated Ã'nancial statements, we also ...

  • Page 37
    WESTERN DIGITAL CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except per share amounts) June 28, 2002 Years ended June 29, 2001 June 30, 2000 Revenues, net Costs and expenses: Cost of revenues Research and development Selling, general and administrative Restructuring charges...

  • Page 38
    WESTERN DIGITAL CORPORATION CONSOLIDATED BALANCE SHEETS (in thousands) June 28, 2002 June 29, 2001 ASSETS Current assets: Cash and cash equivalents 223,728 Accounts receivable, less allowance for doubtful accounts of $7,573 in 2002 and $13,298 in 2001 218,832 Inventories 73,395 Prepaid expenses ...

  • Page 39
    WESTERN DIGITAL CORPORATION CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIENCY) (in thousands) Common Stock Shares Amount $1,019 Ì Ì 268 246 1 Ì Ì 1,...stock options Shares issued in debenture redemptions 26,725 Shares issued in equity facility sales 24,611 Other shares issued 91 Net ...

  • Page 40
    WESTERN DIGITAL CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) June 28, 2002 Years ended June 29, 2001 June 30, 2000 Cash Ã-ows from operating activities Net income (loss 65,428 Adjustments to reconcile net income (loss) to net cash provided by (used for) operating activities of ...

  • Page 41
    ...of Credit Risk The Company designs, develops, manufactures and markets hard drives to personal computer manufacturers, resellers and retailers throughout the world. The Company performs ongoing credit evaluations of its customers' Ã'nancial condition and generally requires no collateral. The Company...

  • Page 42
    ...portion of the resellers' inventory. The Company recognizes revenue at the time of delivery to resellers and accrues for estimated pricing adjustments and sales returns. Net revenue recognized on sales to resellers was approximately $990, $1,016 and $881 million for 2002, 2001 and 2000, respectively...

  • Page 43
    ... using the net income (loss) and the weighted average number of common shares and dilutive potential common shares outstanding during the period. Dilutive potential common shares include outstanding employee stock options, employee stock purchase plan shares, restricted stock awards and common...

  • Page 44
    ... in fair value were recorded through the results of operations for the years ended June 28, 2002 and June 29, 2001. Use of Estimates Company management has made estimates and assumptions relating to the reporting of certain assets and liabilities in conformity with generally accepted accounting...

  • Page 45
    WESTERN DIGITAL CORPORATION ...2002. The Company's previous extinguishments of its convertible debentures involving the issuance of stock have been accounted for under APB 26 whereby a gain on early extinguishment was recorded equal to the excess of the net book value of the indebtedness over the fair...

  • Page 46
    ... for redemption of convertible debentures Redemption of convertible debentures for Company common stock, net of capitalized issuance costs Settlement of accounts payable by transfer of cost method investments Transfer of Service Center assets in exchange for promissory note ÏÏÏÏ 367,443 (259...

  • Page 47
    ... rate, plus a margin determined by the borrowing base. The Senior Credit Facility requires the Company to maintain certain amounts of tangible net worth, prohibits the payment of cash dividends on common stock and contains a number of other covenants. The Senior Credit Facility replaced a previous...

  • Page 48
    ...) Ã'led suit against Cirrus Logic, Inc. (""Cirrus'') in California Superior Court for the County of Orange for breach of contract and other claims resulting from Cirrus' role as a strategic supplier of read channel chips for the Company's hard drives. The Company also stopped making payments to...

  • Page 49
    ... 28, 2002 (in thousands): Number of Shares Issuable in connection with: Convertible debentures Exercise of stock options, including options available for grant Employee stock purchase plan 2,890 42,340 1,592 46,822 Employee Stock Purchase Plan The Company has an employee stock purchase plan...

  • Page 50
    .... The Company has a Stock Option Plan for Non-Employee Directors (""Director Plan'') and has reserved 2.6 million shares for issuance thereunder. The Director Plan provides for initial option grants to new directors of 75,000 shares per director and additional grants of options to purchase 10,000...

  • Page 51
    WESTERN DIGITAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued) The following table summarizes activity under the Employee, Broad-Based and Director Plans (in thousands, except per share amounts): Number of Shares Weighted Average Exercise Price Per Share Options outstanding ...

  • Page 52
    ... stock of Western Digital or of an acquiring company at a substantially discounted price ten days after a person or group publicly announces it has acquired or has tendered an oÃ...er for 15% or more of the Company's outstanding common stock. On September 10, 1998 the Company's Board of Directors...

  • Page 53
    ... and management responsibilities, transfer of hard drive production from Singapore to the Company's manufacturing facility in Malaysia, removal of property and equipment from service, closure of the Company's Singapore operations and closure of its Rochester, Minnesota design center. These actions...

  • Page 54
    ... of June 28, 2002, the Company operated in one segment, the hard drive business. The Company's new business ventures have been discontinued (see Note 10). International Operations The Company's operations outside the United States include manufacturing facilities in Malaysia and Thailand as well as...

  • Page 55
    WESTERN DIGITAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued) United States Europe Asia Eliminations (in millions) Total Year ended June 28, 2002 Sales to unaÇliated customers 1,703 Transfers between geographic areas 433 Revenues, net 2,136 Operating income (loss 21) ...

  • Page 56
    ...ed stock options, disqualifying dispositions of stock acquired with incentive stock options, and disqualifying dispositions of stock acquired under the employee stock purchase plan generally reduce taxes currently payable. However, no tax beneÃ'ts were recorded to additional paid-in capital in 2002...

  • Page 57
    ... 28, 2002, on which no U.S. tax has been provided, amounted to approximately $110 million. The net undistributed earnings are intended to Ã'nance local operating requirements. Accordingly, an additional United States tax provision has not been made on these earnings. The Company determines deferred...

  • Page 58
    WESTERN DIGITAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ÃŒ (Continued) Reconciliation of the United States Federal statutory rate to the Company's eÃ...ective tax rate is as follows: 2002 2001 2000 U.S. Federal statutory rate... 2002, the Company sold substantially all the assets of Connex and...

  • Page 59
    ... debentures. (2) The second quarter of 2002 includes a $9.0 million cash recovery from its Komag note receivable and investment that were written oÃ... during the fourth quarter of 2001. Also during the quarter, the Company recorded a $5.5 million non-cash loss on the write-down of certain cost-method...

  • Page 60
    WESTERN DIGITAL CORPORATION SCHEDULE II Ì CONSOLIDATED VALUATION AND QUALIFYING ACCOUNTS Three years ended June 28, 2002 (in thousands) Allowance for Doubtful Accounts Accrued Warranty(1) Balance at July 3, 1999 Charges to operations Deductions Balance at June 30, 2000 Charges to operations ...

  • Page 61
    ... and Financial Disclosure PART III Item 10. Directors and Executive OÇcers of the Registrant There is incorporated herein by reference the information required by this Item included in the Company's Proxy Statement for the 2002 Annual Meeting of Shareholders under the captions ""Proposal...

  • Page 62
    ... Employee Stock Option Plan, as amended on November 5, 1998(12)* First Amendment to the Western Digital Corporation Employee Stock Option Plan, dated April 6, 2001(23)* Amended and Restated 401(k) Plan, adopted as of March 28, 2002(26) Western Digital Corporation 1993 Employee Stock Purchase Plan...

  • Page 63
    ... and Purchase of Semiconductor Products between International Business Machines Corporation and Western Digital Technologies, Inc., dated as of June 19, 2002Û‰ OEM Component Supply and Technology License Agreement, dated June 7, 1998, between Western Digital Corporation and IBM Corporation(10...

  • Page 64
    ... 1999 Employee Severance Plan for U.S. Employees, dated April 6, 2001(23)* Amended and Restated Purchase Agreement, dated February 23, 2000, by and between Western Digital Corporation and Mayo Foundation(16) Credit Agreement, dated as of September 20, 2000, among Western Digital Technologies, Inc...

  • Page 65
    ...Act Filings‰ Statement Under Oath of Principal Financial OÇcer Regarding Facts and Circumstances Relating to Exchange Act Filings‰ New exhibit Ã'led with this Report. Compensation plan, contract or arrangement required to be Ã'led as an exhibit pursuant to applicable rules of the Securities and...

  • Page 66
    ... 2001. (23) Incorporated by reference to the Company's Annual Report on Form 10-K (File No. 1-08703), ...Company's Quarterly Report on Form 10-Q (File No. 1-08703), as Ã'led with the Securities and Exchange Commission on February 8, 2002. (26) Incorporated by reference to the Company's Quarterly Report...

  • Page 67
    ... the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. WESTERN DIGITAL CORPORATION By: D. SCOTT MERCER D. Scott Mercer Senior Vice President and Chief Financial OÇcer /s/ Dated: September 25, 2002 Pursuant to the requirements of the...

  • Page 68
    ...of the Sarbanes-Oxley Act of 2002, and 17 C.F.R. Û240.13a-14. CertiÃ'cation of Chief Executive OÇcer I, Matthew E. Massengill, certify that: ‚ I have reviewed this Annual Report on Form 10-K of Western Digital Corporation; ‚ Based on my knowledge, this Annual Report does not contain any untrue...

  • Page 69
    ... Western Digital Japan Ltd Western Digital (Malaysia) Sdn. Bhd Western Digital Netherlands B.V Western Digital (Thailand) Company Limited Western Digital Korea, Ltd Western Digital Latin America, Inc Delaware Delaware Hawaii Ontario, Canada Germany France Hong Kong Cayman Islands Ireland...

  • Page 70
    ... shareholders' equity (deÃ'ciency) and cash Ã-ows for each of the years in the three-year period ended June 28, 2002, and the related Ã'nancial statement schedule, which report appears in the June 28, 2002 annual report on Form 10-K of Western Digital Corporation. KPMG LLP Orange County, California...

  • Page 71
    ... Dell Computer Corporation Computer manufacturer Roger H. Moore President and Chief Executive Officer Illuminet Holdings, Inc. Advanced intelligent network services Thomas E. Pardun Former Chairman and Chief Executive Officer Edge2net International communication company Corporate Officers Matthew...

  • Page 72
    ... and Development Centers Lake Forest, California San Jose, California Manufacturing Facilities Malaysia Thailand Domestic Sales Offices Lake Forest, California San Jose, California Boca Raton, Florida Burlington, Massachusetts Princeton, New Jersey North Sioux City, South Dakota Austin, Texas Dallas...