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Annual Report and Form 10-K
Western Digital
2004

Table of contents

  • Page 1
    Western Digital Annual Report and Form 10-K 2004

  • Page 2
    ... company is also entering the market for hard drives for mobile computing. WD was founded in 1970. Our hard drives are marketed to leading systems manufacturers and selected resellers under the Western Digital brand name. Product, financial, and investor information is available on our Web site at...

  • Page 3
    ... 2004. WD continued to be a good cash-flow producer, generating $190 million in cash from operations and ending the year with cash totaling $378 million, even after the acquisition of the Read-Rite Corp. assets and the related expansion of head production. We completed the Read-Rite acquisition...

  • Page 4
    ... end, we began shipping WD Caviar® RE (RAID Edition) hard drives which are manufactured to enterprise-class standards. They are designed for the highest reliability in a host of server applications including e-mail, file, video and enterprise backup, document image management, engineering, and data...

  • Page 5
    ... FROM SALES TO ASIA 30% 29.0% support, and corporate resources on our Web site is now available in 10 languages. We also have begun offering in-region telephone support in areas such as China, Taiwan, Korea, Malaysia, and Thailand to better strengthen our market position in those locations. We...

  • Page 6
    ... Forest Drive Lake Forest, California (Address of principal executive oÇces) 92630 (Zip Code) Registrant's telephone number, including area code: (949) 672-7000 Securities registered pursuant to Section 12(b) of the Act: Title of each class Name of each exchange on which registered Common Stock...

  • Page 7
    ... 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», WD Raptor» and WD...

  • Page 8
    PART I Item 1. General Western Digital Corporation (the ""Company'' or ""Western Digital'') designs, develops, manufactures and markets hard disk drives, one of the key components found in most computers and data storage subsystems. Hard disk drives are also found in a number of consumer electronics...

  • Page 9
    ... a compound annual growth rate of 22%. Western Digital did not ship any hard disk drives to the mobile PC market during 2004. However, the Company has announced intentions to enter the mobile PC market with new, 2.5-inch form factor product oÃ...erings before the end of calendar year 2004. Enterprise...

  • Page 10
    ...mobile market before the end of calendar year 2004. In addition, the Company has indicated its plans to develop and bring to market smaller form factor drives. Enterprise Hard Disk Drive Products. Western Digital currently oÃ...ers multiple products to address enterprise market needs, including the WD...

  • Page 11
    ... hard disk drive is operating Ì commonly expressed in decibels. All of the Company's hard disk drive products employ similar technology. The main components of the hard disk drive are the head disk assembly and the printed circuit board. The head disk assembly includes the head, media (disks), head...

  • Page 12
    .... Western Digital currently oÃ...ers its WD Raptor hard disk drive, a 10,000 RPM enterprise-class drive with the SATA interface, and the WD Caviar RAID Edition hard disk drive, a 7200 RPM drive manufactured to enterprise-class standards and available with a SATA interface. The Company is working to...

  • Page 13
    ... Company's OEM customers utilize just-in-time inventory management processes or supply chain business models that combine ""build-to-order'' (computer manufacturer does not build until there is a Ã'rm order) and ""contract manufacturing'' (computer manufacturer contracts assembly work to a contract...

  • Page 14
    ...Service and Warranty Western Digital generally warrants its newly manufactured hard disk drives against defects in materials and workmanship for a period of one to Ã've years from the date of sale. The Company's warranty obligation is generally limited to repair or replacement of the hard disk drive...

  • Page 15
    ...The Company strives to maintain manufacturing Ã-exibility and high manufacturing yields, while insisting that its suppliers provide high-quality components at competitive prices. The critical elements of Western Digital's hard disk drive production are high volume, low cost assembly and testing, and...

  • Page 16
    ... to continue in the area of custom integrated circuits for hard disk drives. For an additional discussion of component supplies, see Part II, Item 7, under the heading ""Risk Factors That May AÃ...ect Future Results.'' Backlog Historically, a substantial portion of the Company's orders has been for...

  • Page 17
    ... labor organization, and the Company considers its employee relations to be good. Available Information The Company maintains an Internet web site at http://www.westerndigital.com. The Company's Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to...

  • Page 18
    ... manufacturing. The San Jose lease expires in July 2006 and the Irvine lease expires in September 2010. The Company also leases an aggregate of approximately 29,000 square feet of oÇce space in various other locations throughout the world primarily for sales and technical support. Western Digital...

  • Page 19
    ...the Company of its common stock during the quarter ended July 2, 2004: Total Number of Shares Purchased Total Number of Shares Purchased as Part of Publicly Announced Program Maximum Value of Shares that May Yet be Purchased Under the Program(3) Average Price Paid per Share March 27, 2004 Ì April...

  • Page 20
    .... Examples of forward-looking statements include, but are not limited to, statements concerning the growth of unit sales of desktop PCs; growth of unit shipments of hard disk drives in the desktop PC, CE (including audio-video), and mobile markets; growth of revenue from sales of hard disk drives in...

  • Page 21
    ... share and industry data included in this discussion are according to the Gartner report published in April of 2004. Western Digital builds hard disk drives in assembly facilities in Malaysia and Thailand. The Company also builds hard disk drive components such as printed circuit board assemblies...

  • Page 22
    ... fundamental change in the Company's operating structure as the Company is now manufacturing heads for use in its hard disk drives. Previously, the Company purchased all of its recording head requirements from external suppliers, including Read-Rite. The Company acquired the Read-Rite assets for the...

  • Page 23
    ... Company recorded the $25.6 million as a charge to research and development expense at the time of the acquisition. Results of Operations Summary of 2004, 2003 and 2002 Comparison The following table sets forth, for the periods indicated, summary information from the Company's statements of income...

  • Page 24
    ...other charges totaling $18.1 million incurred during the Ã'rst quarter of 2004 relating to the Company's head manufacturing operations acquired in July 2003. Western Digital was able to partially oÃ...set the impact of these pricing conditions and start-up related costs with the ongoing accretive bene...

  • Page 25
    .... The increase in net capital expenditures was primarily for assets purchased to upgrade the Company's head manufacturing capabilities, increase desktop hard disk drive production capabilities and for the normal replacement of existing assets. For 2005, capital expenditures are expected to...

  • Page 26
    ... of business to reduce the risk of component shortages, the Company enters into purchase orders with suppliers for the purchase of hard disk drive components used to manufacture the Company's products. These purchase orders generally cover forecasted component supplies needed for production during...

  • Page 27
    ... sales return provision would be required, which could negatively aÃ...ect operating results. Warranty The Company records an accrual for estimated warranty costs when revenue is recognized. Warranty covers costs of repair or replacement of the hard disk drive over the warranty period, which generally...

  • Page 28
    ...heads and disks for the same capacity and, therefore, a lower component cost. Because of the competitiveness of the hard disk drive industry, lower costs generally mean lower prices. This is true even for those products that are competitive and introduced into the market in a timely manner. Our ASPs...

  • Page 29
    ... sales to that customer until the next generation of products is introduced. The eÃ...ect of missing a product qualiÃ'cation opportunity is magniÃ'ed by the limited number of high volume computer manufacturers, most of which continue to consolidate their share of the PC market. If product life cycles...

  • Page 30
    ... fundamental shift in recording technology, hard disk drive manufacturers would need to timely adjust their designs and processes to accommodate the new technology in order to remain competitive. As a result, we could incur substantial costs in developing new technologies, media, and tools to remain...

  • Page 31
    ... and manufacture new products, customers may decrease the amount of our products that they purchase, and we may lose business to our competitors who oÃ...er these products or who use their dominance in the enterprise or mobile market to encourage sales of desktop hard disk drives. We depend on our key...

  • Page 32
    ...levels of utilization to drive competitive costs, and the need for assured supply of components, especially hard disk drive media, that is optimized to work with our heads. Moreover, capital expenditures and working capital investments required to support the head manufacturing operations, including...

  • Page 33
    ... impacting our operating results. To develop new products, we must maintain eÃ...ective partner relationships with our major component suppliers. Under our business model, we do not manufacture any of the component parts used in our hard disk drives, other than heads as a result of our acquisition...

  • Page 34
    ... in Fremont, California and a slider fabrication, HGA and HSA assembly, and research and development facility in Thailand. A Ã're, Ã-ood, earthquake or other disaster, condition or event that adversely aÃ...ects any of these facilities or our ability to manufacture could result in a loss of sales and...

  • Page 35
    ... 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 Ã've years. We test our hard disk drives in our manufacturing facilities through a variety of means. However, there can be...

  • Page 36
    ...and assumptions. Key estimates and assumptions for us include: ‚ 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...

  • Page 37
    ... to us or the hard disk 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...

  • Page 38
    ... payments could also increase. At July 2, 2004 the Company had a $50 million term loan outstanding under the Senior Credit Facility. A one percent increase in the variable rate of interest on the Senior Credit Facility would increase interest expense by approximately $0.5 million annually. 33

  • Page 39
    ... 8. Financial Statements and Supplementary Data Index to Financial Statements and Financial Statement Schedule Page Consolidated Financial Statements: Independent Auditors' Report Consolidated Statements of Income Ì Three Years Ended July 2, 2004 Consolidated Balance Sheets Ì July 2, 2004 and...

  • Page 40
    ... OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM 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...

  • Page 41
    WESTERN DIGITAL CORPORATION CONSOLIDATED STATEMENTS OF INCOME (in millions, except per share amounts) July 2, 2004 Years Ended June 27, 2003 June 28, 2002 Revenue, net Cost of revenue Gross margin Operating expenses: Research and development Selling, general and administrative Total operating ...

  • Page 42
    WESTERN DIGITAL CORPORATION CONSOLIDATED BALANCE SHEETS (in millions) July 2, 2004 June 27, 2003 ASSETS Current assets: Cash and cash equivalents Accounts receivable, net Inventories Other Total current assets Property and equipment, net Intangible and other assets Total assets LIABILITIES ...

  • Page 43
    ...ESPP shares issued Exercise of stock options Deferred compensation plan Repurchase of common stock Net income Unrealized gain on foreign currency contracts 208.8 $2.1 (2.7) $ (29.2) $698.7 9.8 15.5 (0.6) (16.0) 151.3 0.2 $(1.3) $(182.9) $ 0.2 $487.6 $151.3 0.2 $151.5 Balance at July 2, 2004...

  • Page 44
    WESTERN DIGITAL CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (in millions) July 2, 2004 Years Ended June 27, 2003 June 28, 2002 Cash Ã-ows from operating activities Net income Adjustments to reconcile net income to net cash provided by continuing operations: Depreciation and amortization In-...

  • Page 45
    ... Risk The Company designs, develops, manufactures and markets hard disk 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
    ..., respectively. Repurchases of reseller inventory were not material in 2004, 2003 and 2002. Warranty The Company records an accrual for estimated warranty costs as products are sold. Warranty covers costs of repair or replacement of the hard disk drive over the warranty period, which ranges from one...

  • Page 47
    WESTERN DIGITAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued) potential common shares include outstanding employee stock options, employee stock purchase plan shares and restricted stock awards. For the years ended July 2, 2004, June 27, 2003 and June 28, 2002, 14.7 million, ...

  • Page 48
    ... operating expenses and product costs denominated in foreign currencies. The contracts have maturity dates that do not exceed six months. The Company does not purchase short-term forward exchange contracts for trading purposes. The Company applies the provisions of Statement of Financial Accounting...

  • Page 49
    ... suppliers of magnetic recording heads, commenced voluntary Chapter 7 bankruptcy proceedings. On July 31, 2003, Western Digital purchased substantially all of the assets of Read-Rite, including its wafer fabrication equipment in Fremont, California and manufacturing facility in Bang Pa-In, Thailand...

  • Page 50
    WESTERN DIGITAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued) As of the date of the acquisition, Read-Rite had two in-process research and development (""IPR&D'') projects: 120 gigabyte per platter and 160 gigabyte per platter products. The fair value allocated to these ...

  • Page 51
    ... on capital leases Product Warranty Liability $ 9.8 10.5 8.4 7.8 7.2 13.7 $57.4 $ 6.6 6.6 6.0 Ì Ì Ì $19.2 (1.3) $17.9 The Company records a provision for estimated warranty costs as products are sold to cover the cost of repair or replacement of the hard disk drive during the warranty period...

  • Page 52
    ...7. Shareholders' Equity Stock Option Plans Western Digital's Employee Stock Option Plan (""Employee Plan'') is administered by the Compensation Committee of the Board of Directors (""Compensation Committee''), which determines the vesting provisions, the form of payment for the shares and all other...

  • Page 53
    WESTERN DIGITAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued) of common stock were exercisable and 0.9 million shares were available for grant as options or stock awards under this plan. Under the Broad-Based Plan, the Company issued to certain employees 0.1 million and 0.2 ...

  • Page 54
    WESTERN DIGITAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued) The following tables summarizes information about options outstanding and exercisable under the Employee, Broad-Based and Director Plans at July 2, 2004 (in millions, except per share amounts): Options Outstanding ...

  • Page 55
    ...to purchase common 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...

  • 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, Asia and the Middle East. The ...

  • Page 57
    WESTERN DIGITAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued) Note 11. Income Taxes The domestic and international components of income (loss) before income taxes are as follows (in millions): 2004 2003 2002 United States International Income before income taxes $(44...

  • Page 58
    WESTERN DIGITAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ÃŒ (Continued) Reserves and accrued expenses not currently deductible include the following (in millions): 2004 2003 Sales related reserves and adjustments Accrued compensation and beneÃ'ts Inventory reserves and adjustments ...

  • Page 59
    WESTERN DIGITAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued) Note 12. Quarterly Results of Operations (unaudited) First(1) Second Third Fourth(2) (in millions, except per share amounts) 2004 Revenue, net Gross margin Operating income Net income Basic earnings per share...

  • Page 60
    WESTERN DIGITAL CORPORATION SCHEDULE II Ì CONSOLIDATED VALUATION AND QUALIFYING ACCOUNTS Three years ended July 2, 2004 (in millions) Allowance for Doubtful Accounts Accrued Warranty(1) Balance at June 29, 2001 Charges to operations Deductions Balance at June 28, 2002 Charges to operations ...

  • Page 61
    ... in the Company's reports Ã'led under the Securities Exchange Act of 1934, as amended, 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, including its...

  • Page 62
    ... and Restated By-laws of Western Digital Corporation, adopted as of May 19, 2004‰ Rights Agreement between Western Digital Corporation and American Stock Transfer & Trust Company, as Rights Agent, dated as of April 6, 2001, which includes as Exhibit A thereto the Form of Right CertiÃ'cate to...

  • Page 63
    ... Western Digital Corporation and Arif Shakeel, eÃ...ective as of December 20, 2002(13)* Western Digital Corporation 1999 Employee Severance Plan for U.S. Employees, eÃ...ective December 1, 1999(4)* First Amendment to the Western Digital Corporation 1999 Employee Severance Plan for U.S. Employees, dated...

  • Page 64
    ... Investments Corporation and Read-Rite Corporation, together with Second Amendment to Lease, dated as of May 28, 2002(18) Supply Agreement for the Fabrication and Purchase of Semiconductor Products, dated June 13, 2002, among Marvell Semiconductor, Inc., Marvell Asia Pte. Ltd. and Western Digital...

  • Page 65
    ... Commission on August 15, 2003. (17) Subject to conÃ'dentiality order dated September 5, 2003. (18) Incorporated by reference to the Company's Annual Report on Form 10-K (File No. 1-08703), as Ã'led with the Securities and Exchange Commission on September 23, 2003. (19) Incorporated by reference to...

  • Page 66
    ..., thereunto duly authorized. WESTERN DIGITAL CORPORATION By: STEPHEN D. MILLIGAN Stephen D. Milligan Senior Vice President and Chief Financial OÇcer /s/ Dated: September 13, 2004 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the...

  • Page 67
    ... Read-Rite International Read-Rite (Malaysia) Sdn. Bhd Read-Rite Philippines, Inc 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...

  • Page 68
    ... income and cash Ã-ows for each of the years in the three-year period ended July 2, 2004, and the related Ã'nancial statement schedule, which report appears in the July 2, 2004 annual report on Form 10-K of Western Digital Corporation. /s/ September 13, 2004 Costa Mesa, California KPMG...

  • Page 69
    ... information; and (b) Any fraud, whether or not material, that involves management or other employees who have a signiÃ'cant role in the registrant's internal control over Ã'nancial reporting. By: /s/ MATTHEW E. MASSENGILL Matthew E. Massengill Chief Executive OÇcer Dated: September 13, 2004

  • Page 70
    ...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 71
    ...that: (i) the accompanying Annual Report on Form 10-K of the Company for the period ended July 2, 2004 (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...

  • Page 72
    ...that: (i) the accompanying Annual Report on Form 10-K of the Company for the period ended July 2, 2004 (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...

  • Page 73
    ... Former President and Chief Executive Officer Illuminet Holdings, Inc. Advanced intelligent network services Thomas E. Pardun Former Chairman and Chief Executive Officer Edge2net, Inc. International communication company Arif Shakeel President and Chief Operating Officer Western Digital Corporation

  • Page 74
    ... factors listed in the company's Form 10-K for the fiscal year ending July 2, 2004 and in the company's other recent SEC filings. The company undertakes no obligation to update forward-looking statements to reflect events or circumstances after the date hereof. Stock Exchange Listing Western Digital...