Western Digital 2006 Annual Report Download - page 43

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ranging from 2008 to 2019. The 2005 effective tax rate was benefited by approximately 0.7% from the favorable
resolution of certain tax contingencies.
Liquidity and Capital Resources
We ended 2006 with total cash, cash equivalents and short-term investments of $699 million, an increase of
$100 million from July 1, 2005. Our investment policy is to manage our investment portfolio to preserve principal and
liquidity while maximizing return through the full investment of available funds. A portion of our 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 our statements of cash flows for the three years ended June 30,
2006:
June 30,
2006
July 1,
2005
July 2,
2004
Years Ended
Net cash flow provided by (used in):
Operating activities ................................ $402 $461 $190
Investing activities ................................ (337) (314) (259)
Financing activities ................................ 1 (7) 21
Net increase (decrease) in cash and cash equivalents ........... $ 66 $140 $ (48)
Operating Activities
Net cash provided by operating activities during 2006 was $402 million as compared to $461 million during 2005
and $190 million for 2004. Cash flow from operations consists of net income, adjusted for non-cash charges, plus or
minus working capital changes. This represents our principal source of cash. Net cash used to fund working capital was
$173 million for 2006 as compared to net cash provided by changes in working capital of $129 million for 2005 and net
cash used to fund working capital of $88 million for 2004.
Our working capital requirements depend upon the effective management of our cash conversion cycle, which
measures how quickly a company can convert its products into cash through sales. The following table summarizes the
cash conversion cycle for the three years ended 2006:
June 30,
2006
July 1,
2005
July 2,
2004
Years Ended
Days sales outstanding ................................ 39 40 39
Days in inventory ................................... 19 16 20
Days payables outstanding . . ........................... (64) (65) (61)
Cash conversion cycle ................................. (6) (9) (2)
The change in the cash conversion cycle for 2006 was primarily due to increased inventory levels compared to 2005.
In addition to the cash conversion cycle, cash flows from operating activities were negatively impacted by prepayments to
suppliers, incentive compensation, and a legal settlement payment of $24 million. The improvement in the cash
conversion cycle for 2005 compared to 2004 was primarily due to better alignment in the timing of our inventory build
and sales schedules. Cash flows from operating activities for 2004 were impacted by the payment of a $45 million
litigation settlement.
From time to time, we modify the timing of payments to our vendors. We make these modifications primarily to
manage our vendor relationships and to manage our cash flows, including our cash balances. Generally, we make the
payment modifications through negotiations with or by granting to or receiving from our vendors payment term
accommodations.
37