Western Digital 2003 Annual Report Download - page 35

‚ transportation delays or higher freight rates;
‚ labor problems;
‚ trade restrictions or higher tariÅs;
‚ exchange, currency and tax controls and reallocations;
‚ increasing labor and overhead costs; and
‚ loss or non-renewal of favorable tax treatment under agreements or treaties with foreign tax authorities.
We have attempted to manage the impact of foreign currency exchange rate changes by, among other things,
entering into short-term, forward exchange contracts. However, those contracts do not cover our full exposure and can be
canceled by the issuer if currency controls are put in place, which occurred in Malaysia during the Ñrst quarter of 1999. As
a result of the Malaysian currency controls, we are no longer hedging the Malaysian currency risk. Currently, we hedge the
Euro, Thai Baht and British Pound Sterling.
The nature of our business and our reliance on intellectual property and other proprietary information subjects us to the
risk of signiÑcant litigation.
The hard drive industry has been characterized by signiÑcant litigation. This includes litigation relating to patent
and other intellectual property rights, product liability claims and other types of litigation. Litigation can be expensive,
lengthy, and disruptive to normal business operations. Moreover, the results of litigation are inherently uncertain and may
result in adverse rulings or decisions. We may enter into settlements or be subject to judgments that may, individually or
in the aggregate, have a material adverse eÅect on our business, Ñnancial condition or results of operations.
We are currently evaluating notices of alleged patent infringement or notices of patents from patent holders. We also
are a party to several judicial and other proceedings relating to patent and other intellectual property rights. If claims or
actions are asserted against us, we may be required to obtain a license or cross-license, modify our existing technology or
design a new non-infringing technology. Such licenses or design modiÑcations can be extremely costly. We may also be
liable for any past infringement. If there is an adverse ruling against us in an infringement lawsuit, an injunction could be
issued barring production or sale of any infringing product. It could also result in a damage award equal to a reasonable
royalty or lost proÑts or, if there is a Ñnding of willful infringement, treble damages. Any of these results would likely
increase our costs and harm our operating results.
Our reliance on intellectual property and other proprietary information subjects us to the risk that these key ingredients
of our business could be copied by competitors.
Our success depends, in signiÑcant part, on the proprietary nature of our technology, including non-patentable
intellectual property such as our process technology. Despite safeguards, to the extent that a competitor is able to
reproduce or otherwise capitalize on our technology, it may be diÇcult, expensive or impossible for us to obtain necessary
legal protection. Also, the laws of some foreign countries may not protect our intellectual property to the same 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 conÑdential. We rely upon employee, consultant and vendor non-
disclosure agreements and contractual provisions and a system of internal safeguards to protect our proprietary
information. However, any of our registered or unregistered intellectual property rights may be challenged or exploited by
others in the industry, which might harm our operating results.
We are subject to risks related to product defect, which could subject us to warranty claims in excess of our warranty
provisions or which are greater than anticipated due to the unenforceability of liability limitations.
We generally warrant our products for one to Ñve years. The standard warranties used by us contain limits on
damages and exclusions of liability for consequential damages and for negligent or improper use of the products. We
record an accrual for estimated warranty costs at the time revenue is recognized. We may incur additional operating
expenses if our warranty provision does not reÖect the actual cost of resolving issues related to defects in our products. If
these additional expenses are signiÑcant, it could adversely aÅect our business, Ñnancial condition and results of
operations.
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