Western Digital 2004 Annual Report Download - page 25

earnings and a more favorable mix of earnings within certain tax jurisdictions. DiÅerences between the eÅective tax rate
for 2004 of 2.5%, as compared to the U.S. federal statutory rate, are primarily due to tax holidays in Malaysia and
Thailand that expire at various points in time ranging from 2005 to 2014. The 2003 increase in the income tax expense
of $8.7 million from 2002 is primarily related to higher overall earnings in 2003 and the non-recurrence of certain tax
beneÑts realized in 2002. The Company's 2002 net income tax beneÑt of $1.1 million included a federal income tax
refund of $3.1 million for a loss carryback available as a result of tax legislation enacted during that year.
Discontinued Operations
During 2002, the Company discontinued the operations of new business ventures, including Connex, Inc.
(""Connex''), SANavigator, Inc. (""SANavigator'') and Keen Personal Media, Inc. (""Keen''). The Company sold
substantially all of the assets of its Connex and SANavigator businesses in 2002 for a net gain of $24.5 million and
terminated the Keen operations. The 2002 operating losses for the new ventures and the net gain recognized on the sale
of Connex and SANavigator have been excluded from continuing operations and reported separately on the statements of
income as discontinued operations.
Liquidity and Capital Resources
The Company had cash and cash equivalents of $378 million at July 2, 2004 and $393 million at June 27, 2003.
Net cash provided by operating activities during 2004 was $190 million as compared to $278 million for 2003. Net
cash Öows from operating activities primarily resulted from net income. This represents the Company's principal source of
cash. Operating cash Öows were impacted by net cash used to fund working capital requirements of $89 million for
2004, an increase of $116 million from 2003. The increase in net cash used to fund working capital requirements was
primarily due to a higher accounts receivable balance associated with changes in the Company's mix of customers, higher
work in process inventory associated with the head manufacturing operations and the payment of a $45 million litigation
settlement.
The Company's working capital requirements depend upon the eÅective management of the Company's cash
conversion cycle. The cash conversion cycle, which consisted of 39 days sales outstanding (""DSO'') plus 20 days
inventory outstanding (""DIO'') less 61 days payable outstanding (""DPO''), was negative two days for 2004 as
compared to negative nine days for 2003. The increase in the cash conversion cycle was due to higher DSO's as a result of
changes in the Company's mix of customers and higher DIO's as a result of the longer production cycle associated with
the head manufacturing operations. These increases were partially oÅset by an increase in DPO's. The Company expects
its Ñnancial business model will continue to generate a negative cash conversion cycle going forward.
Net cash used in investing activities for 2004 was $227 million as compared to $59 million for 2003. The 2004
investing activities consisted of $95 million for the Read-Rite asset acquisition and $132 million of net capital
expenditures. The 2003 investing activities related primarily to net capital expenditures. 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 increase to approximately $250 million. The increase in capital expenditures is expected to
consist primarily of investments in mobile hard disk drive manufacturing capacity, continued expansion of head
manufacturing operations and IT infrastructure upgrades. The Company expects to use planned capital lease facilities to
oÅset up to $100 million of its capital expenditures. Approximately $19 million of capital leases were completed in 2004.
Net cash provided by Ñnancing activities for 2004 was $21 million as compared to net cash used by Ñnancing
activities of $50 million for 2003. The net cash provided by Ñnancing activities in 2004 consisted primarily of
$24 million received upon issuance of common stock under employee plans and $14 million of net proceeds from long-
term debt, partially oÅset by $16 million used in the Company's stock repurchase program. The net cash used by
Ñnancing activities for the year ended 2003 consisted primarily of $88 million used for redemption of the Company's
remaining convertible debentures, partially oÅset by $44 million received upon issuance of common stock under
employee plans.
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