Western Digital 2003 Annual Report Download

Download and view the complete annual report

Please find the complete 2003 Western Digital annual report below. You can navigate through the pages in the report by either clicking on the pages listed below, or by using the keyword search tool below to find specific information within the annual report.

Page out of 76

  • 1
  • 2
  • 3
  • 4
  • 5
  • 6
  • 7
  • 8
  • 9
  • 10
  • 11
  • 12
  • 13
  • 14
  • 15
  • 16
  • 17
  • 18
  • 19
  • 20
  • 21
  • 22
  • 23
  • 24
  • 25
  • 26
  • 27
  • 28
  • 29
  • 30
  • 31
  • 32
  • 33
  • 34
  • 35
  • 36
  • 37
  • 38
  • 39
  • 40
  • 41
  • 42
  • 43
  • 44
  • 45
  • 46
  • 47
  • 48
  • 49
  • 50
  • 51
  • 52
  • 53
  • 54
  • 55
  • 56
  • 57
  • 58
  • 59
  • 60
  • 61
  • 62
  • 63
  • 64
  • 65
  • 66
  • 67
  • 68
  • 69
  • 70
  • 71
  • 72
  • 73
  • 74
  • 75
  • 76

and Form 10-K
2003
Western Digital
Annual Report

Table of contents

  • Page 1
    Western Digital Annual Report and Form 10-K 2003

  • Page 2
    ... loss. In addition to the design and production of hard drives for desktop personal computers, Western Digital is growing in other applications for rotating magnetic storage, notably game consoles, personal video recorders, and storage in the enterprise market. The company is also re-entering the...

  • Page 3
    ...execution of our product and manufacturing plans, and a great customer base. Western Digital has maintained its leadership position at the very high end of the desktop hard drive market and begun addressing the near-line storage market with the fastest and highest-capacity drive based on 80-gigabyte...

  • Page 4
    ...Western Digital has been an exclusive producer of EIDE drives and has no SCSI product line to protect, we benefit even further from the shift to ESATA. TrendFOCUS estimates that by calendar 2006, approximately 36.1 percent of hard drives shipped to enterprise-class customers will have the Serial ATA...

  • Page 5
    ...nonvertically integrated model and was spurred by the reduction of merchant head suppliers to two following the demise of Read-Rite as an independent entity. The acquisition ensures our long-term access to recording head technologies - the most technically advanced component in our hard drives - and...

  • Page 6

  • Page 7
    ...number 1-8703 WESTERN DIGITAL CORPORATION (Exact Name of Registrant as SpeciÃ'ed in Its Charter) Delaware (State or Other Jurisdiction of Incorporation or Organization) 33-0956711 (I.R.S. Employer IdentiÃ'cation No.) 20511 Lake Forest Drive Lake Forest, California (Address of principal executive...

  • Page 8
    ... located at 20511 Lake Forest Drive, Lake Forest, California 92630. The Company's telephone number is (949) 672-7000 and its web site is http://www.westerndigital.com. The information on the Company's web site is not incorporated in this report. Western Digital», the Western Digital logo, WD Caviar...

  • Page 9
    ... storage devices, video game consoles, digital video recording devices, and satellite and cable set-top boxes. The Company's hard drive products currently include 1.0-inch high, 3.5-inch form factor drives with capacities ranging from 8 gigabytes (""GB'') to 250 GB, rotation speeds of 5400, 7200...

  • Page 10
    ... year 2002, with an expected compound annual growth rate of approximately 29% through calendar year 2006. In calendar year 2001, Microsoft introduced the Xbox» video game system that uses a hard disk drive for game use. In addition, in May 2003, Sony announced plans to release the PSXTM product...

  • Page 11
    ...in EIDE/ATA class hard drives which is progressing at a faster rate than tape media cost reduction trends. While an insigniÃ'cant part of the overall market in 2003, the use of EIDE/ATA drives as back-up and disaster recovery technology has seen signiÃ'cant attention and product introductions. Other...

  • Page 12
    ... to active design work on a 2.5-inch form factor drive to target the mobile market. Technology and Product Development Hard drives are used to record, store and retrieve digital data. Their performance attributes are currently better than removable or Ã-oppy disks, optical disk drives and tapes, and...

  • Page 13
    .... Western Digital currently oÃ...ers its WD Raptor hard drive, a 10,000 RPM enterprise-class drive with the SATA interface. The Company is working to develop additional products that will support these higher speed interfaces. Storage capacity of the hard drive is determined by the number of disks and...

  • Page 14
    ..., at its web site. The Company maintains sales oÇces throughout North America, Eastern and Western Europe, the Middle East, Japan and Asia/PaciÃ'c. Field application engineering is provided to strategic computer manufacturer accounts, and localized end-user technical support services are provided...

  • Page 15
    ...with hard drive suppliers competing for sales to a limited number of major customers. Hard drives manufactured by diÃ...erent competitors are highly substitutable due to the industry mandate of technical form, Ã't and function standards. Hard drive manufacturers compete on the basis of product quality...

  • Page 16
    ... for its hard drives from external suppliers. In July 2003, the Company purchased substantially all of the assets of Read-Rite Corporation, formerly one of the Company's suppliers of heads, including its wafer fabrication equipment in Fremont, California and its slider fabrication facility in Bang...

  • Page 17
    ... equipment in Fremont, California and its slider fabrication facility located in Bang Pa-In, Thailand. The Company uses the assets purchased from Read-Rite to design and manufacture HGAs and HSAs for use in disk drives it manufactures. For additional information regarding the Read-Rite acquisition...

  • Page 18
    ...the acquisition of Read-Rite's assets in July 2003, as of August 29, 2003 the Company had hired 659 employees to work in its new Fremont, California facility and 4,074 employees to work in its newly acquired Bang Pa-In, Thailand facility. Combined, as of August 29, 2003, the Company employed a total...

  • Page 19
    ... reports, proxy and information statements, and other information regarding issuers that Ã'le electronically with the SEC, including Western Digital. Item 2. Properties The Company's corporate headquarters are located in Lake Forest, California. The Lake Forest facility includes three buildings...

  • Page 20
    ... in Singapore. Mr. Shakeel rejoined the Company in April 1999 as Senior Vice President of Operations, Drive Products Division. He became Senior Vice President of Worldwide Operations in July 1999. In February 2000, he became Executive Vice President and General Manager of Hard Drive Solutions...

  • Page 21
    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 August 29, 2003 ...

  • Page 22
    ...2003 report published by Gartner, Inc. (""Gartner''). Western Digital builds hard drives in two assembly facilities, one in Malaysia and one in Thailand, procuring components from industry-leading technology companies that work with the Company from design and development through manufacturing. Hard...

  • Page 23
    ... ensure access to future head technologies, Western Digital purchased substantially all of the assets of Read-Rite Corporation, including the wafer fabrication equipment in Fremont, California and the manufacturing facility in Bang Pa-In, Thailand. The total cost of the acquisition will be between...

  • Page 24
    ... hard drive industry have generally declined annually in the 10-20% range. However, those price declines have moderated over the past few quarters given longer product life cycles, industry consolidation, improved supply/demand management and fewer component cost reduction opportunities. Net revenue...

  • Page 25
    ... higher sales volume and improved cost management. The Company's cash conversion cycle, which represents the sum of the number of days sales outstanding (""DSO'') and days inventory outstanding (""DIO'') less days payable outstanding (""DPO''), was negative 9 days for 2003 and 2002. Accounts...

  • Page 26
    ... net proceeds from asset sales. As discussed above under the heading ""Recent Developments,'' Western Digital purchased substantially all of the assets of Read-Rite Corporation, including the wafer fabrication equipment in Fremont, California and the manufacturing facility in Bang Pa-In, Thailand...

  • Page 27
    ... Orders In the normal course of business, to reduce the risk of component shortages, the Company enters into purchase commitments with suppliers for the purchase of hard drive components used to manufacture the Company's products. These commitments generally cover forecasted component supplies...

  • Page 28
    ... or replacement of the hard drive over the warranty period, which ranges from one to Ã've years. 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...

  • Page 29
    ..., our ASP's could decline, which could adversely aÃ...ect our results of operations. Short product life cycles make it diÇcult to recover the cost of development. Product life cycles have extended during the past twelve months due to a decrease in the rate of hard drive areal density growth. However...

  • Page 30
    ... that the average drive we sell has fewer heads and disks for the same capacity, and therefore lower component cost. Because of the competitiveness of the hard drive industry, lower costs generally mean lower prices. This is true even for those products that are competitive and introduced into the...

  • Page 31
    ... or mobile market to encourage sales of desktop hard drives. We depend on our key personnel and skilled employees. Our success depends upon the continued contributions of our key personnel and skilled employees, many of whom would be extremely diÇcult to replace. Worldwide competition for skilled...

  • Page 32
    ... or increased costs. Because we depend on a limited number of suppliers for certain hard drive components, an extended shortage of required components or the failure of key suppliers to remain in business, adjust to market conditions, or to meet our quality, yield or production requirements could...

  • Page 33
    ..., our business and Ã'nancial results could be adversely aÃ...ected. In July 2003, we acquired the assets of Read-Rite Corporation, formerly one of our suppliers of heads, and we are in the process of integrating the acquired assets into our company. We may not successfully address the integration...

  • Page 34
    ...our hard drive manufacturing volume comes from one facility in Malaysia. During 2002, we acquired a second, smaller manufacturing facility in Thailand. In addition, following our acquisition of the assets of Read-Rite in July 2003, we are operating a wafer fabrication facility in Fremont, California...

  • Page 35
    ... 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 and a system of internal safeguards to protect our proprietary information. However, any of...

  • Page 36
    ... 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); ‚ reserves for doubtful accounts...

  • Page 37
    ...cally to us or the hard drive industry in general. In addition, general economic conditions may cause the stock market to experience extreme price and volume Ã-uctuations from time to time that particularly aÃ...ect the stock prices of many high technology companies. These Ã-uctuations often appear to...

  • Page 38
    .... This is the only Company borrowing facility which does not have a Ã'xed-rate of interest. At June 27, 2003, there were no borrowings outstanding under the Facility. Fair Value Risk During 2003, the Company sold all of its remaining shares of Vixel Corporation common stock resulting in a gain of...

  • Page 39
    ... Index to Financial Statements and Financial Statement Schedule Page Consolidated Financial Statements: Independent Auditors' Report Consolidated Statements of Operations Ì Three Years Ended June 27, 2003 Consolidated Balance Sheets Ì June 27, 2003 and June 28, 2002 Consolidated Statements of...

  • Page 40
    ...Ã'nancial statements, the Company changed its method of revenue recognition with respect to certain sales commencing on July 1, 2000 in order to conform with SEC Accounting Bulletin No. 101, ""Revenue Recognition in Financial Statements.'' KPMG LLP Orange County, California July 24, 2003, except as...

  • Page 41
    WESTERN DIGITAL CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS (in millions, except per share amounts) June 27, 2003 Years ended June 28, 2002 June 29, 2001 Revenue, net Cost of revenue Gross margin Operating expenses: Research and development Selling, general and administrative Total ...

  • Page 42
    ... and equipment, net Total assets LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable Accrued warranty Accrued expenses Convertible debentures Total current liabilities Other liabilities Commitments and contingent liabilities Shareholders' equity: Preferred stock, $.01...

  • Page 43
    ....4 (3.7) (581.7) 3.1 11.8 (3.7) Balance at June 30, 2000 ESPP shares issued Exercise of stock options Shares issued in debenture redemption Shares issued in equity facility sales Deferred compensation plan Net loss Unrealized gain on investment securities 0.2 0.2 $549.9 (6.8) (5.9) 95.3 110...

  • Page 44
    ... amortization Non-cash interest expense Investment gains, net Non-cash adjustment to Komag investment and note Changes in: Accounts receivable Inventories Other assets Accounts payable Accrued expenses Other Net cash provided by (used for) continuing operations Cash Ã-ows from investing...

  • Page 45
    ...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 46
    ... were not material in 2003, 2002 and 2001. Warranty The Company records an accrual for estimated warranty costs as products are sold. Warranty covers cost of repair or replacement of the hard drive during the warranty period, which ranges from one to Ã've years and is recorded in the accompanying...

  • Page 47
    ... Ã'nancial accounting and reporting standards for stock-based compensation plans. As permitted by SFAS 123, the Company elected to continue accounting for stock-based employee compensation plans in accordance with Accounting Principles Board Opinion No. 25, ""Accounting for Stock Issued to Employees...

  • Page 48
    ... on these contracts were recorded through the results of operations for the years ended June 27, 2003 and June 28, 2002. 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 49
    ...and Line of Credit Convertible Debentures During 2003, the Company redeemed its remaining outstanding 5.25% zero coupon convertible subordinated debentures due February 18, 2018 (the ""Debentures'') and paid $88.3 million in cash and issued approximately 0.1 million shares of common stock. The book...

  • Page 50
    ...-Rite asset acquisition (see Note 11). At June 27, 2003 there were no borrowings under the revolving credit facility. However, the Company has issued a $25 million standby letter of credit under the facility to Cirrus Logic, Inc. (""Cirrus'') concerning the $26.5 million in disputed accounts payable...

  • Page 51
    ...The Company records a provision for estimated warranty costs as products are sold to cover the cost of repair or replacement of the hard drive during the warranty period. This provision is based on estimated future returns within the warranty period and costs to repair, using historical Ã'eld return...

  • Page 52
    ... of the agreement, the Company will make a one-time payment to Cirrus on or before October 17, 2003 of $45 million in exchange for a mutual release of claims. The letter of credit previously posted by the Company will also be released. Western Digital had previously recorded an obligation totaling...

  • Page 53
    ...either one year, two years or four years from the date of grant. As of June 27, 2003, options to purchase 4.7 million shares of common stock were exercisable and 1.5 million shares were available for grant as options or stock awards, under this plan. Under the Broad-Based Plan, the Company issued to...

  • Page 54
    WESTERN DIGITAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued) generally vest 25% one year from the date of grant and in twelve quarterly increments thereafter and have a ten-year term. As of June 27, 2003, options to purchase 0.5 million shares of common stock were ...

  • Page 55
    ... in 2003, 2002 and 2001 reported below has been estimated at the date of grant using a Black-Scholes option pricing model with the following weighted average assumptions: Stock Option Plans 2003 2002 2001 2003 ESPP 2002 2001 Option life (in years Risk-free interest rate Stock price volatility...

  • Page 56
    WESTERN DIGITAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued) International Operations The Company's operations outside the United States include manufacturing facilities in Malaysia and Thailand as well as sales oÇces throughout Europe and Asia. The following table ...

  • Page 57
    ... of non-qualiÃ'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...

  • Page 58
    WESTERN DIGITAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ÃŒ (Continued) Temporary diÃ...erences and carryforwards, which give rise to a signiÃ'cant portion of deferred tax assets and liabilities at June 27, 2003 and June 28, 2002 are as follows (in millions): 2003 2002 Deferred tax ...

  • Page 59
    ... Events Asset Acquisition (unaudited) On July 31, 2003, the Company purchased substantially all of the assets of Read-Rite Corporation, including the wafer fabrication equipment in Fremont, California and the manufacturing facility in Bang Pa-In, Thailand. The total cost of the acquisition...

  • Page 60
    ... the businesses. (2) The second quarter of 2002 includes a $9 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 $6 million non-cash loss on the write-down of certain cost-method...

  • Page 61
    WESTERN DIGITAL CORPORATION SCHEDULE II Ì CONSOLIDATED VALUATION AND QUALIFYING ACCOUNTS Three years ended June 27, 2003 (in millions) Allowance for Doubtful Accounts Accrued Warranty(1) Balance at June 30, 2000 Charges to operations Deductions Balance at June 29, 2001 Charges to operations ...

  • Page 62
    ... are designed to ensure that information required to be disclosed in the Company's Exchange Act reports is recorded, processed, summarized and reported within the time periods speciÃ'ed in the SEC's rules and forms and that such information is accumulated and communicated to the Company's management...

  • Page 63
    ...and RR(US) Acquisition Corporation, dated July 24, 2003, including Option Agreements to purchase all of the outstanding capital stock of Read-Rite International, Sunward Technologies International, and Read Rite Holding Company(21) Amended and Restated CertiÃ'cate of Incorporation of Western Digital...

  • Page 64
    ...ective as of May 25, 2000(11)* First Amendment to the Western Digital Corporation Amended and Restated Stock Option Plan for NonEmployee Directors, dated April 6, 2001(11)* Western Digital Corporation 1993 Employee Stock Purchase Plan (amended and restated as of November 14, 2002)(17)* Amended and...

  • Page 65
    ... October 17, 2002, among Western Digital Corporation, Komag, Inc. and Komag USA (Malaysia) Sdn.(17)(19) Agreement for Fabrication and Purchase of Semiconductor Products between International Business Machines Corporation and Western Digital Technologies, Inc., dated February 7, 2001(15)Û Amendment...

  • Page 66
    ...reference to the Company's Quarterly Report on Form 10-Q (File No. 1-08703), as Ã'led with the Securities and Exchange Commission on May 9, 2003. (19) Subject to conÃ'dentiality order dated May 13, 2003. (20) Incorporated by reference to the Company's Registration Statement on Form S-8 (File No. 333...

  • Page 67
    ... included an update on certain conditions in the hard drive industry. On June 11, 2003, the Company Ã'led a current report on Form 8-K to provide Regulation FD disclosure in connection with investor presentations delivered by oÇcials of the Company that included an update on certain conditions in...

  • Page 68
    ..., thereunto duly authorized. WESTERN DIGITAL CORPORATION By: SCOTT MERCER D. Scott Mercer Senior Vice President and Chief Financial OÇcer /s/ Dated: September 22, 2003 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following...

  • Page 69
    ...Corporation Read-Rite International Read-Rite (Malaysia) Sdn. Bhd Western Digital (BangPa-In) Company, Limited Western Digital Canada Corporation Western Digital (Deutschland) GmbH Western Digital (France) SARL Western Digital (Fremont), Inc Western Digital Hong Kong Limited Western Digital...

  • Page 70
    ... income (loss) and cash Ã-ows for each of the years in the three-year period ended June 27, 2003, and the related Ã'nancial statement schedule, which report appears in the June 27, 2003 annual report on Form 10-K of Western Digital Corporation. /s/ KPMG LLP Orange County, California September 22...

  • Page 71
    ... 31.1 CertiÃ'cation of Principal Executive OÇcer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 I, Matthew E. Massengill, certify that: 1. I have reviewed this annual report on Form 10-K of Western Digital Corporation; 2. Based on my knowledge, this report does not contain any untrue...

  • Page 72
    ...in the design or operation of internal control over Ã'nancial reporting which are reasonably likely to adversely aÃ...ect the registrant's ability to record, process, summarize and report Ã'nancial information; and (b) Any fraud, whether or not material, that involves management or other employees who...

  • Page 73
    ... Matthew E. Massengill Chief Executive OÇcer Dated: September 22, 2003 A signed original of this written statement required by Section 906 has been provided to Western Digital Corporation and will be retained by Western Digital Corporation and furnished to the Securities and Exchange Commission...

  • Page 74
    ... Annual Report on Form 10-K of the Company for the period ended June 27, 2003 (the ""Report'') fully complies with the requirements of Section 13(a) or Section 15(d), as applicable, of the Securities Exchange Act of 1934, as amended; and (ii) the information contained in the Report fairly presents...

  • Page 75
    ... Chief Executive Officer Western Digital Corporation Peter D. Behrendt Former Chairman and Chief Executive Officer Exabyte Corporation Computer tape storage products I. M. Booth Former Chairman, President and Chief Executive Officer Polaroid Corporation Photographic equipment manufacturer Kathleen...

  • Page 76
    Manufacturing Facilities Fremont, California Selangor, Malaysia Bang Pa-In, Thailand Pathumthani, Thailand Research and Development Centers Lake Forest, California San Jose, California Domestic Sales Offices Lake Forest, California San Jose, California Boca Raton, Florida Reading, Massachusetts ...