Western Digital 2014 Annual Report Download - page 35

‰forcing us to find alternate component sources;
‰reducing demand for our products (for example, through a consumer boycott); or
‰exposing us to potential liability for our suppliers’ or customers’ wrongdoings.
Any decisions to reduce or discontinue paying cash dividends to our shareholders or repurchase shares of our common stock pursuant
to our previously announced stock repurchase program could cause the market price for our common stock to decline.
Our payment of quarterly cash dividends and repurchase shares of our common stock pursuant to our stock pur-
chase program will be subject to, among other things, our financial position and results of operations, available cash
and cash flow, capital requirements, and other factors. Any reduction or discontinuance by us of the payment of quar-
terly cash dividends or repurchases of our common stock pursuant to our stock repurchase program could cause the
market price of our common stock to decline. Moreover, in the event our payment of quarterly cash dividends or
repurchases of shares of our common stock are reduced or discontinued, our failure or inability to resume paying cash
dividends or repurchasing shares of our common stock at historical levels could result in a lower market valuation of
our common stock.
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 sig-
nificant portion of our production costs are foreign-currency denominated. Conversely, there would not be an off-
setting 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 non-U.S. based vendors. If the U.S. dollar weakens
against other foreign currencies, some of our component suppliers may increase the price they charge for their compo-
nents in order to maintain an equivalent profit margin. If this occurs, it would have a negative impact on our operat-
ing results.
Prices for our products are substantially U.S. dollar denominated even when sold to customers that are located
outside the United States. Therefore, as a substantial portion of our sales are from countries outside the United States,
fluctuations in currency exchanges rates, most notably the strengthening of the U.S. dollar against other foreign cur-
rencies, 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 United States.
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.
Increases in our customers’ credit risk could result in credit losses and term extensions under existing contracts with customers with
credit losses could result in an increase in our operating costs.
Some of our OEM customers have adopted a subcontractor model that requires us to contract directly with
companies, such as ODMs, that provide manufacturing and fulfillment services to our OEM customers. Because these
subcontractors are generally not as well capitalized as our direct OEM customers, this subcontractor model exposes us
to increased credit risks. Our agreements with our OEM customers may not permit us to increase our product prices
to alleviate this increased credit risk. Additionally, as we attempt to expand our OEM and distribution channel sales
into emerging economies such as Brazil, Russia, India and China, the customers with the most success in these regions
may have relatively short operating histories, making it more difficult for us to accurately assess the associated credit
risks. Our acquisition of HGST has also resulted in an increase to our customer credit risk given that we service many
of the same customers. Any credit losses we may suffer as a result of these increased risks, or as a result of credit losses
from any significant customer, especially in situations where there are term extensions under existing contracts with
such customers, would increase our operating costs, which may negatively impact our operating results.
29