Western Digital 2011 Annual Report Download - page 42

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primarily from an increase in unit shipments due to the strong demand for hard drives, particularly in the mobile PC
market. We shipped 80 million mobile drives in 2010 as compared to 55 million units in 2009. The increase in mobile
unit shipments was driven by continued strength in notebook and netbook PC demand, coupled with increased customer
preference for our product offerings.
Changes in revenue by geography generally reflect normal fluctuations in market demand and competitive
dynamics, as well as demand strength in Asia, which continues to be driven by the concentration of global manufacturing
in that region. Changes in revenue by channel are a result of normal fluctuations in market demand and competitive
dynamics.
In accordance with standard industry practice, we have sales incentive and marketing programs that provide
customers with price protection and other incentives or reimbursements that are recorded as a reduction to gross revenue.
For 2010, these programs represented 8% of gross revenues compared to 11% in 2009 and 10% in 2008, respectively.
These amounts generally vary according to several factors including industry conditions, seasonal demand, competitor
actions, channel mix and overall availability of product.
Gross Margin. Gross margin for 2010 was $2.4 billion, an increase of $1.1 billion, or 80% over the prior year.
Gross margin as a percentage of net revenue increased to 24.4% in 2010 from 17.9% in 2009. This increase was primarily
due to higher volume, lower costs, a favorable product mix and a moderate pricing environment.
Operating Expenses. Total R&D expense and SG&A expense decreased to 8.9% of net revenue in 2010 compared to
9.5% in 2009. R&D expense was $611 million in 2010, an increase of $102 million, or 20% over the prior year. This
increase in R&D expense was primarily due to a $68 million increase relating to product development to support new
programs and a $34 million increase in variable incentive compensation. As a percentage of net revenue, R&D expense
decreased to 6.2% in 2010 compared to 6.8% in 2009 primarily due to an increase in net revenue in 2010 compared to
2009. SG&A expense was $265 million in 2010, an increase of $64 million, or 32%, as compared to 2009. This increase
in SG&A expense was primarily due to $27 million of expense related to litigation settlements, a $19 million increase in
variable incentive compensation and an $18 million increase in the expansion of our sales and marketing presence into
new regions. SG&A expense as a percentage of net revenue remained consistent at 2.7% in 2010 and 2009.
During 2009, we recorded a $14 million in-process research and development charge related to the acquisition of
SiliconSystems. This charge relates to projects that were not ready for commercial production and had no alternative
future use and, therefore, the fair value of the development effort did not qualify for capitalization and was immediately
expensed. During 2009, we also recorded $112 million in restructuring charges and an $18 million gain on the sale of our
substrate manufacturing facility, and related assets, in Sarawak, Malaysia.
Other Income (Expense). Other expense, net was $5 million in 2010 compared to $18 million in 2009. This decrease
was primarily due to no impairment charges related to our auction-rate securities in 2010, compared to $10 million in
other-than-temporary losses in 2009, as well as decreases in the variable interest rate on a lower amount of debt.
Income Tax Provision. Income tax expense was $138 million in 2010 as compared to $31 million in 2009. Tax
expense as a percentage of income before taxes was 9% in 2010 compared to 6% for 2009. In 2009, income tax expense
included a provision of $42 million offset by $6 million in tax benefits related to the extension of the U.S. Federal
research and development tax credit enacted into law in October 2008, and a favorable adjustment of $5 million to
previously recorded tax accruals and credits. Differences between the effective tax rate and the U.S. Federal statutory rate
were primarily due to tax holidays in Malaysia and Thailand that expire at various dates through 2022 and the current
year generation of income tax credits.
We recognized a net $94 million increase in the liability for unrecognized tax benefits during 2010. As of July 2,
2010, we had approximately $230 million of unrecognized tax benefits which, if recognized, would decrease the effective
tax rate in subsequent years.
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