Western Digital 2008 Annual Report Download - page 40

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 (“eSATA”), FireWire
TM
and Ethernet network
connections. In addition, we recently announced a family of hard drives specifically designed to consume substantially
less power than standard drives.
We manufacture hard drives and head stack assemblies (“HSAs”) in Malaysia and Thailand. We also design and
manufacture most of our required magnetic heads in California and head gimbal assemblies (“HGAs”) in Thailand, and
we design in California and manufacture in Malaysia most of our required media and substrates.
On September 5, 2007, we completed our acquisition (the “Acquisition”) of Komag, Incorporated (“Komag”)
through a cash tender offer by State M Corporation (“State M”), our indirect wholly-owned subsidiary, for all outstanding
shares of Komag’s common stock, which was followed by a merger of State M and Komag (the “Merger”) whereby Komag
became an indirect wholly-owned subsidiary and changed its name to WD Media, Inc. The Acquisition has strengthened
our production efficiencies and improved our access to and control of technology and competitive position in the
worldwide hard drive industry, while enhancing our hard drive manufacturing process by integrating media. The
aggregate purchase price for Komag was approximately $1 billion, consisting of cash paid for outstanding shares,
transaction fees, severance and other employee-related equity payments.
Results of Operations
In accordance with U.S. generally accepted accounting principles, operating results for Komag prior to the date of
the Acquisition (September 5, 2007), including the first two months of fiscal 2008 and the fiscal years 2007 and 2006,
are not included in our operating results and are therefore not discussed. Accordingly, 2008 revenues and expenses reflect
the addition of results from our media operations since the date of the Acquisition while the 2007 and 2006 results do not
include operating results for Komag prior to the date of the Acquisition. This affects our discussion of changes in our
revenues and expenses comparing these periods. In connection with the Acquisition, we incurred charges for in-process
research and development and transition costs, which impacted our earnings in 2008.
Fiscal 2008 Overview
In 2008, our net revenue increased by 48% to $8.1 billion on shipments of 133 million units as compared to
$5.5 billion and 97 million units, respectively, in 2007. In 2008, 56% of our hard drive revenue was derived from non-
desktop sources including CE products, enterprise applications, notebook computers and retail sales as compared to 43%
in 2007. Gross margin percentage increased to 21.5% from 16.5% in 2007 and operating income increased by
$591 million to $1.0 billion. As a percentage of net revenue, operating income was 12.4% in 2008 compared to 7.6% in
2007. Net income in 2008 was $867 million, or $3.84 per diluted share, compared to $564 million, or $2.50 per diluted
share in 2007. We successfully completed our acquisition of Komag, and have completed the integration of the media
operation, which is generating technology and cost contributions to the overall business.
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