Western Digital 2010 Annual Report Download - page 37

However, any of our registered or unregistered intellectual property rights may be challenged or exploited by others in
the industry, which might harm our operating results.
The costs of compliance with state, federal and international legal and regulatory requirements, such as environmental, labor,
trade and tax regulations, and customers’ standards of corporate citizenship could cause an increase in our operating costs.
We may be or become subject to various state, federal and international laws and regulations governing our
environmental, labor, trade and tax practices. These laws and regulations, particularly those applicable to our inter-
national operations, are or may be complex, extensive and subject to change. We will need to ensure that we and our
component suppliers timely comply with such laws and regulations, which may result in an increase in our operating
costs. For example, the European Union (“EU”) has enacted the Restriction of the Use of Certain Hazardous Substances in
Electrical and Electronic Equipment (“RoHS”) directive, which prohibits the use of certain substances in electronic
equipment, and the Waste Electrical and Electronic Equipment (“WEEE”) directive, which obligates parties that place
electrical and electronic equipment onto the market in the EU to put a clearly identifiable mark on the equipment,
register with and report to EU member countries regarding distribution of the equipment, and provide a mechanism to
take back and properly dispose of the equipment. Similar legislation may be enacted in other locations where we
manufacture or sell our products. In addition, climate change legislation in the U.S. is a significant topic of discussion
and may generate federal or other regulatory responses in the near future. If we or our component suppliers fail to timely
comply with applicable legislation, our customers may refuse to purchase our products or we may face increased operating
costs as a result of taxes, fines or penalties, which would have a materially adverse effect on our business, financial
condition and operating results.
In connection with our compliance with such environmental laws and regulations, as well as our compliance with
industry environmental initiatives, the standards of business conduct required by some of our customers, and our
commitment to sound corporate citizenship in all aspects of our business, we could incur substantial compliance and
operating costs and be subject to disruptions to our operations and logistics. In addition, if we were found to be in
violation of these laws or noncompliant with these initiatives or standards of conduct, we could be subject to
governmental fines, liability to our customers and damage to our reputation and corporate brand which could cause
our financial condition or operating results to suffer.
Fluctuations in currency exchange rates as a result of our international operations may negatively affect our operating results.
Because we manufacture and sell our products abroad, our revenue, margins, operating costs and cash flows are
impacted by fluctuations in foreign currency exchange rates. If the U.S. dollar exhibits sustained weakness against most
foreign currencies, the U.S. dollar equivalents of unhedged manufacturing costs could increase because a significant
portion of our production costs are foreign-currency denominated. Conversely, there would not be an offsetting impact to
revenues since revenues are substantially U.S. dollar denominated. Additionally, we negotiate and procure some of our
component requirements in U.S. dollars from Japanese and other non-U.S. based vendors. If the U.S. dollar continues to
weaken against other foreign currencies, some of our component suppliers may increase the price they charge for their
components in order to maintain an equivalent profit margin. If this occurs, it would have a negative impact on our
operating results.
Prices for our products are substantially U.S. dollar denominated, even when sold to customers that are located
outside the U.S. Therefore, as a substantial portion of our sales are from countries outside the U.S., fluctuations in
currency exchanges rates, most notably the strengthening of the U.S. dollar against other foreign currencies, contribute to
variations in sales of products in impacted jurisdictions and could adversely impact demand and revenue growth. In
addition, currency variations can adversely affect margins on sales of our products in countries outside the U.S.
We have attempted to manage the impact of foreign currency exchange rate changes by, among other things,
entering into short-term, foreign exchange contracts. However, these contracts do not cover our full exposure and can be
canceled by the counterparty if currency controls are put in place. Currently, we hedge the Thai Baht, Malaysian Ringgit,
Euro and British Pound Sterling with foreign exchange contracts.
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