Western Digital 2007 Annual Report Download - page 40

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Hard drives provide non-volatile data storage, which means that the data remains present when power is no longer
applied to the device. Our hard drives currently include 3.5-inch and 2.5-inch form factor drives, having capacities
ranging from 40 gigabytes (“GB”) to 1 terabyte (“TB”), nominal rotation speeds of 5,400, 7,200 and 10,000 revolutions
per minute (“RPM”), and offer interfaces including both Enhanced Integrated Drive Electronics (“EIDE”) and Serial
Advanced Technology Attachment (“SATA”). We also embed our hard drives into WD-branded external storage
appliances that utilize interfaces such as USB 2.0, external SATA, FireWire
TM
and Ethernet network connections. In
addition, we recently announced a family of hard drives specifically designed to consume substantially less power than
previous designs.
We manufacture hard drives and head stack assemblies (“HSAs”) in Malaysia and Thailand. We also design and
manufacture a substantial portion of our required magnetic heads in California, and head gimbal assemblies (“HGAs”) in
Thailand. Following our planned acquisition of Komag, Incorporated (“Komag”), a leading media manufacturer and one
of our current suppliers, we will also design in California and manufacture in Malaysia most of our required media and
substrates. For geographical financial data, see Part II, Item 8, Note 6 in the Notes to Consolidated Financial Statements,
included in this Annual Report on Form 10-K.
On June 28, 2007, we entered into a definitive agreement to acquire all the outstanding shares of Komag for a value
of approximately $1.0 billion. The planned acquisition of Komag is intended to strengthen our production effeciencies
and enhance our hard drive manufacturing process by integrating media. The planned acquisition is structured as a cash
tender offer at $32.25 per share for all the outstanding shares of Komag common stock, followed by a merger of our
indirect wholly-owned subsidiary into Komag in which the remaining shareholders of Komag will receive $32.25 in cash
per share. The planned acquisition is expected to close in the third calendar quarter of 2007. We intend to fund the
planned acquisition, including the expected repurchase of Komag’s convertible notes due 2014 and related fees and
expenses, through a combination of cash and proceeds from a senior unsecured term bridge loan facility of up to
$1.3 billion.
Results of Operations
Fiscal 2007 Overview
In 2007, our net revenue increased by 26% to $5.5 billion on unit shipments of 97 million as compared to
$4.3 billion and 73 million units, respectively, in 2006. In 2007, 43% of our revenue was derived from non-desktop
sources including CE products, enterprise applications, notebook computers and retail sales as compared to 29% in 2006.
Gross margin percentage decreased to 16.5% from 19.1% in 2006. Operating income increased by $49 million to
$415 million. As a percentage of net revenue, operating income was 7.6% in 2007 compared to 8.4% 2006. We
generated $618 million in cash flow from operations in 2007 compared with $368 million in 2006, finishing the year
with $907 million in cash and short-term investments, an increase of $208 million from the prior year. We utilized
$73 million to repurchase 4 million shares of our common stock and $43 million to repay long-term debt.
Summary Comparison of 2007, 2006 and 2005
The following table sets forth, for the periods indicated, summary information from our consolidated statements of
income by dollars and percentage of revenue (in millions, except percentages):
Years Ended
June 29, 2007 June 30, 2006 July 1, 2005
Revenue, net .................................. $5,468 100% $4,341 100% $3,639 100%
Gross margin ................................. 900 16.5 829 19.1 590 16.2
Operating expenses ............................. 485 8.9 463 10.7 395 10.9
Operating income .............................. 415 7.6 366 8.4 195 5.3
Non-operating income ........................... 28 0.5 16 0.4 5 0.2
Income before income taxes ....................... 443 8.1 382 8.8 200 5.5
Income tax (benefit) expense ....................... (121) (2.2) (13) (0.3) 4 0.1
Net income .................................. 564 10.3 395 9.1 196 5.4
34