Western Digital 2012 Annual Report Download - page 24

‰Credit Volatility and Loss of Receivables. We extend credit and payment terms to some of our customers. In
addition to ongoing credit evaluations of our customers’ financial condition, we traditionally seek to mitigate
our credit risk by purchasing credit insurance on certain of our accounts receivable balances. As a result of the
continued uncertainty and volatility in global economic conditions, however, we may find it increasingly diffi-
cult to be able to insure these accounts receivable. We could suffer significant losses if a customer whose
accounts receivable we have not insured, or have underinsured, fails and is unable to pay us. Additionally,
negative or uncertain global economic conditions increase the risk that if a customer whose accounts receivable
we have insured fails, the financial condition of the insurance carrier for such customer account may have also
deteriorated such that it cannot cover our loss. A significant loss of an accounts receivable that we cannot
recover through credit insurance would have a negative impact on our financial results.
‰Impairment Charges. Negative or uncertain global economic conditions could result in circumstances, such as a
sustained decline in our stock price and market capitalization or a decrease in our forecasted cash flows such
that they are insufficient, indicating that the carrying value of our long-lived assets or goodwill may be
impaired. If we are required to record a significant charge to earnings in our consolidated financial statements
because an impairment of our long-lived assets or goodwill is determined, our results of operations will be
adversely affected.
We participate in a highly competitive industry that is subject to the risk of declining average selling prices (“ASPs”), volatile
gross margins and significant shifts in market share, all of which could adversely affect our operating results.
Demand for our hard drives depends in large part on the demand for systems manufactured by our customers and
on storage upgrades to existing systems. The demand for systems has been volatile in the past and often has had an
exaggerated effect on the demand for hard drives in any given period. As a result, the hard drive market has experi-
enced periods of excess capacity, which can lead to liquidation of excess inventories and more intense price competi-
tion. If more intense price competition occurs, we may be forced to lower prices sooner and more than expected, which
could adversely impact revenue and gross margins. Our ASPs and gross margins also tend to decline when there is a
shift in the mix of product sales, and sales of lower priced products increase relative to those of higher priced products.
In addition, rapid technological changes often reduce the volume and profitability of sales of existing products and
increase the risk of inventory obsolescence. These factors, along with others, may result in significant shifts in market
share among the industry’s major participants.
Our failure to accurately forecast market and customer demand for our products, or to quickly adjust to forecast changes, could
adversely affect our business and financial results or operating efficiencies.
The data storage industry faces difficulties in accurately forecasting market and customer demand for its prod-
ucts. The variety and volume of products we manufacture is based in part on these forecasts. Accurately forecasting
demand has become increasingly difficult for us, our customers and our suppliers in light of the volatility in global
economic conditions, a recent shift from air to ocean freight in response to increased transportation costs, which
requires additional lead times, and industry consolidation, which has resulted in less availability of historical market
data for certain product segments. In addition, because hard drives are designed to be largely interchangeable with
competitors’ products, our demand forecasts may be impacted significantly by the strategic actions of our competitors.
As forecasting demand becomes more difficult, the risk that our forecasts are not in line with demand increases. If our
forecasts exceed actual market demand, then we could experience periods of product oversupply and price decreases,
which could impact our financial performance. If market demand increases significantly beyond our forecasts or
beyond our ability to add manufacturing capacity, then we may not be able to satisfy customer product needs, which
could result in a loss of market share if our competitors are able to meet customer demands.
We experience significant sales seasonality and cyclicality, which could cause our operating results to fluctuate.
Sales of computer systems, storage subsystems and consumer electronics tend to be seasonal and cyclical, and
therefore we expect to continue to experience seasonality and cyclicality in our business as we respond to variations in
our customers’ demand for hard drives. In the desktop, mobile, CE and retail markets, seasonality historically has been
partially attributable to the increase in sales of PCs and CE devices during the back-to-school and winter holiday sea-
sons. In the enterprise market our sales are typically seasonal because of the capital budgeting and purchasing cycles of
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