Western Digital 2005 Annual Report Download - page 26

Interest and Other Income
Net interest and other income was $5 million, $0 and $3 million in 2005, 2004 and 2003, respectively. This
includes net investment gains of $4 million in 2003. Excluding these net gains, net interest and other income
(expense) was $5 million, $0 and ($1) million in 2005, 2004 and 2003, respectively. The increase in net interest
income in 2005 over 2004 was primarily due to a higher average cash and short-term investments balance as well as an
increase in the rates of return on investments, yielding higher interest income in 2005 as compared to 2004. The increase
in net interest income in 2004 over net interest expense in 2003 was primarily due to the Company's redemption of its
convertible debentures during the third quarter of 2003, resulting in lower interest expense in 2004.
Income Tax Expense
Income tax expense was $4 million, $4 million and $8 million in 2005, 2004 and 2003, respectively. Tax expense
as a percentage of income before taxes was 1.9%, 2.5% and 4.0% for 2005, 2004 and 2003, respectively. Differences
between the effective tax rates and the U.S. Federal statutory rate are primarily due to tax holidays in Malaysia and
Thailand that expire at various times ranging from 2008 to 2019. The 2005 effective tax rate benefited by approximately
0.7% from the favorable resolution of certain tax contingencies. The decrease in income tax expense from 2003 to 2004 is
primarily related to lower overall earnings in 2004 and a more favorable mix of earnings within certain tax jurisdictions.
Liquidity and Capital Resources
Western Digital ended fiscal 2005 with total cash, cash equivalents and short-term investments of $598 million, an
increase of $220 million from July 2, 2004. The Company's investment policy is to manage its investment portfolio to
preserve principal and liquidity while maximizing return through the full investment of available funds. A large portion
of Western Digital's available funds is invested in auction rate securities, which are short-term investments in bonds with
original maturities greater than 90 days. The following table summarizes the results of the Company's statements of cash
flows for the three-year periods ended July 1, 2005, July 2, 2004 and June 27, 2003.
Years Ended
July 1, July 2, June 27,
2005 2004 2003
Net cash flow provided by (used for):
Operating activities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 461 $ 190 $258
Investing activities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (314) (259) (59)
Financing activities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (7) 21 (30)
Net increase (decrease) in cash and cash equivalents ÏÏÏÏÏÏÏÏÏÏ $ 140 $ (48) $169
Operating Activities
Net cash provided by operating activities during 2005 was $461 million as compared to $190 million during 2004
and $258 million for 2003. Cash flow from operations consists of net income, adjusted for non-cash charges, plus or
minus working capital changes. This represents the Company's principal source of cash. Net cash provided by working
capital changes was $128 million for 2005 as compared to net cash used to fund working capital of $89 million for 2004
and net cash provided by working capital of $45 million for 2003.
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