Western Digital 2004 Annual Report Download - page 23

Capital expenditures and working capital investments required to support the head manufacturing operations will
increase when compared to the Company's prior Ñnancial business model. For example, capital expenditures related to the
head manufacturing operations are expected to average between $80 million and $100 million on an annual basis after
initial capital investments are completed. Also, inventory turns are expected to decrease to between 17 and 19 from the
Company's historical average of between 20 and 22.
The Company accounted for this transaction as an asset acquisition. The estimated fair value of the assets acquired
and liabilities assumed are as follows:
Current assetsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 17.4
Property and equipment ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 90.2
Purchased technology ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 38.8
In-process research and development ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 25.6
$172.0
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 projects as part of the
acquisition was $17.8 million and $7.8 million, respectively. The multi-period excess earnings method, a discounted cash
Öow income approach, was used to determine the value allocated to the IPR&D. The rate utilized to discount the cash
Öows to their present values was based on the weighted average cost of capital and an additional risk premium based on
an analysis of the technology and the IPR&D stages of completion. Based on these factors, 27% was used as the annual
discount rate. These acquired IPR&D projects had not reached technological feasibility and had no alternative future use.
Accordingly, the 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 (in millions).
Years Ended
July 2, 2004 June 27, 2003 June 28, 2002
Revenue, net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $3,046.7 100.0% $2,718.5 100.0% $2,151.2 100.0%
Gross margin ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 461.6 15.2 442.9 16.3 281.6 13.1
Operating expenses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 306.7 10.1 256.1 9.4 230.9 10.7
Operating income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 154.9 5.1 186.8 6.9 50.7 2.4
Net interest and other income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 0.3 0.0 2.9 0.0 1.4 0.0
Income from continuing operations before income
taxesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 155.2 5.1 189.7 7.0 52.1 2.4
Income tax expense (beneÑt) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 3.9 0.1 7.6 0.3 (1.1) (0.0)
Income from continuing operations ÏÏÏÏÏÏÏÏÏÏÏÏ 151.3 5.0 182.1 6.7 53.2 2.4
Net Revenue
Net revenue was $3.0 billion for 2004, an increase of 12%, or $328 million, from 2003. Total unit shipments
increased to 48.3 million for the year as compared to 39.7 million from the prior year as a result of an increase in market
share and overall demand for hard disk drives in the desktop PC market. This growth in units was partially oÅset by a
$5 per unit decline in average selling prices (""ASPs'') to $63 per unit for 2004 from $68 per unit in 2003.
Revenue by geographic region for 2004 was 41% from the Americas, 30% from Europe and 29% from Asia,
compared to 48%, 30% and 22%, respectively, for 2003. These changes reÖect the Company's continued focus on
revenue growth in emerging geographic markets.
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