Western Digital 2004 Annual Report Download - page 16

The Company acquires all of the remaining components for its products from third party suppliers. The Company
tries to have multiple suppliers for each of its component requirements. For example, during 2004, the Company's media
requirements were purchased from several outside vendors including Komag, Showa Denko KK and Trace Storage
Technology Corporation. The Company has a volume purchase agreement with Komag under which the Company is
obligated to purchase a percentage of its requirements for hard disk media from Komag as long as Komag's prices,
technology and quality remain competitive.
Although the Company tries to have multiple suppliers for each of its component requirements, some components
are currently sole-sourced. For example, some custom integrated circuit devices are currently sole-sourced from
STMicroelectronics, IBM and Marvell Semiconductor, Inc. The Company has entered into volume purchase agreements
with IBM and Marvell to purchase custom integrated circuit devices at negotiated quantities and prices. Because of their
custom nature, these products require signiÑcant design-in periods and long lead times. There has been a trend in
integrated circuit design toward increased integration of various separate circuits. The Company expects this trend 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
AÅect Future Results.''
Backlog
Historically, a substantial portion of the Company's orders has been for shipments within 30 to 60 days of the
placement of the order. The Company generally negotiates pricing, order lead times, product support requirements and
other terms and conditions prior to receiving a computer manufacturer's Ñrst purchase order for a product. Customers'
purchase orders typically may be canceled with relatively short notice to the Company, with little or no cost to the
customer, or modiÑed by customers to provide for delivery at a later date. In addition, many of the Company's sales to
OEMs are made under just-in-time delivery contracts that do not generally require Ñrm order commitments by the
customer until the time of sale. Instead, the Company receives a periodic forecast of requirements from the customer, and
the customer is invoiced upon shipment of the product from the just-in-time warehouse. Therefore, backlog information
as of the end of a particular period is not necessarily indicative of future levels of the Company's revenue and proÑt and
may not be comparable to earlier periods.
Patents, Licenses and Proprietary Information
The Company owns numerous patents and has many patent applications in process. The Company believes that,
although its patents and patent applications have considerable value, the successful manufacturing and marketing of its
products depends primarily upon the technical and managerial competence of its personnel. Accordingly, the patents held
and applied for do not assure the Company's future success.
In addition to patent protection of certain intellectual property rights, the Company considers elements of its
product designs and processes to be proprietary and conÑdential. The Company believes that its non-patented intellectual
property, particularly some of its process technology, is an important factor in its success. Western Digital relies upon
non-disclosure agreements and contractual provisions and a system of internal safeguards to protect its proprietary
information. Despite these safeguards, there is a risk that competitors may obtain and use such information. The laws of
foreign jurisdictions in which the Company conducts business also may provide less protection for conÑdential
information than the United States.
The Company relies on certain technology that is licensed from other parties in order to manufacture and sell its
products. The Company believes that it has adequate cross-licenses and other agreements in place in addition to its own
intellectual property portfolio to compete successfully in the hard disk drive industry.
For additional discussion of intellectual property, see Part II, Item 7, under the heading ""Risk Factors That May
AÅect Future Results.''
Environmental Regulation
The Company is subject to a variety of regulations in connection with its operations. It believes that it has obtained
or is in the process of obtaining all necessary environmental permits for its operations.
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