WDC » Topics » Fiscal Year 2008 Compared to Fiscal Year 2007

These excerpts taken from the WDC 10-K filed Aug 20, 2008.
Fiscal Year 2008 Compared to Fiscal Year 2007
 
Net Revenue.  Net revenue was $8.1 billion for 2008, an increase of 48% from 2007. Total unit shipments increased to 133 million as compared to 97 million for the prior year. This unit increase resulted from an increase in higher overall demand for hard drives and our continuing diversification into non-desktop markets, including mobile, consumer electronics, enterprise and branded products. For example, we shipped 37 million 2.5 inch drives to the mobile and branded markets in 2008 as compared to 12 million units in 2007. Additionally, we shipped 15 million units to the DVR market in 2008 as compared to 10 million units in 2007. ASPs increased to $59 due to an improved mix of revenues by market category, improved product mix and more favorable demand/supply conditions. Changes in revenue by geography generally reflect normal fluctuations in market demand and competitive dynamics as well as an increase in mobile drives sold to Asia. Changes in revenue by channel are a result of increases in sales of mobile hard drives to


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OEMs and an increase in sales of branded products due to the growing worldwide acceptance of our My Passport® and My Book® external digital storage appliances.
 
Gross Margin.  Gross margin for 2008 was $1.7 billion, an increase of $839 million, or 93% over the prior year. Gross margin percentage increased to 21.5% in 2008 from 16.5% in 2007. The factors contributing to this increase were an improved mix of revenues by market category, improved product mix and more favorable demand/supply conditions. Our manufacturing throughput and costs also improved through operational efficiencies, higher utilization and a higher mix of products based on newer, more cost-effective technologies and the contribution of media operations.
 
Operating Expenses.  Total operating expenses, consisting of research and development (“R&D”) and selling, general and administrative (“SG&A”), decreased to 8.5% of net revenue in 2008 compared to 8.9% in 2007. R&D expense was $464 million in 2008, an increase of $158 million, or 52% over the prior year. This increase in R&D expense includes $75 million relating to the acquired media operations, $52 million related to product development to support new programs and $31 million in incentive and equity compensation. As a percentage of net revenue, R&D expense remained consistent at 5.7% in 2008 compared to 5.6% in 2007. SG&A expense was $220 million in 2008, an increase of $41 million, or 23%, as compared to 2007. This increase in SG&A expense includes $28 million for the expansion of sales and marketing to support new products and $13 million in higher incentive and equity compensation. As a percentage of net revenue, SG&A expense decreased to 2.7% in 2008 from 3.3% in 2007 primarily due to an increase in net revenue in 2008 compared to 2007.
 
During 2008, we recorded a $49 million charge to operating expense related to an in-process research and development project acquired from Komag involving technology for higher recording densities on advanced perpendicular recording media. As these advanced products were not ready for commercial production and had no alternative future use, the fair value of the development effort did not qualify for capitalization and was immediately expensed. For additional information regarding acquired in-process research and development, see Part II, Item 8, Note 11 in the Notes to Consolidated Financial Statements, included in this Annual Report on Form 10-K.
 
Interest and Other Income (Expense).  Net interest and other expense was $25 million in 2008 compared to net interest and other income of $28 million in 2007. This decrease is a result of higher debt balances and realized and recognized losses on investments of $13 million.
 
Income Tax Expense (Benefit).  Income tax expense was $114 million in 2008 compared to an income tax benefit of $121 million in 2007. Tax provision as a percentage of income before taxes was 12% in 2008 compared to tax benefit as a percentage of income of 27% for 2007. Differences between the effective tax rates and the U.S. Federal statutory rate are primarily due to tax holidays and incentive programs and the current year generation of income tax credits. We have tax holidays in Malaysia and Thailand that expire at various times through 2022. In 2008, income tax expense also includes net charges of $75 million for taxes related to the license of certain intellectual property to a foreign subsidiary. In 2007, the tax provision was impacted by a favorable adjustment to the company’s valuation allowance for deferred tax assets of $126 million. In the fourth quarter of 2007, we reversed the remaining valuation allowance for our deferred tax assets based upon a determination that it was more likely than not that our deferred tax assets will be realized. The realization of the deferred tax assets is primarily dependent on our ability to generate sufficient earnings in certain jurisdictions in future years. The amount of deferred tax assets considered realizable may increase or decrease in subsequent periods based on fluctuating industry or company conditions.
 
We adopted the provisions of FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes — an interpretation of FASB Statement No. 109” (“FIN 48”), as of June 30, 2007. As a result of the implementation of FIN 48, we recognized no adjustment in the net liability for unrecognized tax benefits. The total amount of gross unrecognized tax benefits as of the date of adoption of FIN 48 was $58 million, all of which would affect our effective tax rate if realized. During the year ended June 27, 2008, we recognized a $17 million increase in the liability for unrecognized tax benefits and recorded $32 million of liabilities for unrecognized tax benefits related to Komag. As of June 27, 2008, we had approximately $107 million of unrecognized tax benefits which included the $32 million of gross unrecognized tax benefits related to Komag.


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Fiscal
Year 2008 Compared to Fiscal Year 2007



 



Net Revenue.  Net revenue was $8.1 billion
for 2008, an increase of 48% from 2007. Total unit shipments
increased to 133 million as compared to 97 million for
the prior year. This unit increase resulted from an increase in
higher overall demand for hard drives and our continuing
diversification into non-desktop markets, including mobile,
consumer electronics, enterprise and branded products. For
example, we shipped 37 million 2.5 inch drives to the
mobile and branded markets in 2008 as compared to
12 million units in 2007. Additionally, we shipped
15 million units to the DVR market in 2008 as compared to
10 million units in 2007. ASPs increased to $59 due to an
improved mix of revenues by market category, improved product
mix and more favorable demand/supply conditions. Changes in
revenue by geography generally reflect normal fluctuations in
market demand and competitive dynamics as well as an increase in
mobile drives sold to Asia. Changes in revenue by channel are a
result of increases in sales of mobile hard drives to





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OEMs and an increase in sales of branded products due to the
growing worldwide acceptance of our My
Passport®
and My
Book®
external digital storage appliances.


 



Gross Margin.  Gross margin for 2008 was
$1.7 billion, an increase of $839 million, or 93% over
the prior year. Gross margin percentage increased to 21.5% in
2008 from 16.5% in 2007. The factors contributing to this
increase were an improved mix of revenues by market category,
improved product mix and more favorable demand/supply
conditions. Our manufacturing throughput and costs also improved
through operational efficiencies, higher utilization and a
higher mix of products based on newer, more cost-effective
technologies and the contribution of media operations.


 



Operating Expenses.  Total operating expenses,
consisting of research and development (“R&D”)
and selling, general and administrative (“SG&A”),
decreased to 8.5% of net revenue in 2008 compared to 8.9% in
2007. R&D expense was $464 million in 2008, an
increase of $158 million, or 52% over the prior year. This
increase in R&D expense includes $75 million relating
to the acquired media operations, $52 million related to
product development to support new programs and $31 million
in incentive and equity compensation. As a percentage of net
revenue, R&D expense remained consistent at 5.7% in 2008
compared to 5.6% in 2007. SG&A expense was
$220 million in 2008, an increase of $41 million, or
23%, as compared to 2007. This increase in SG&A expense
includes $28 million for the expansion of sales and
marketing to support new products and $13 million in higher
incentive and equity compensation. As a percentage of net
revenue, SG&A expense decreased to 2.7% in 2008 from 3.3%
in 2007 primarily due to an increase in net revenue in 2008
compared to 2007.


 



During 2008, we recorded a $49 million charge to operating
expense related to an in-process research and development
project acquired from Komag involving technology for higher
recording densities on advanced perpendicular recording media.
As these advanced products were not ready for commercial
production and had no alternative future use, the fair value of
the development effort did not qualify for capitalization and
was immediately expensed. For additional information regarding
acquired in-process research and development, see Part II,
Item 8, Note 11 in the Notes to Consolidated Financial
Statements, included in this Annual Report on
Form 10-K.


 



Interest and Other Income (Expense).  Net
interest and other expense was $25 million in 2008 compared
to net interest and other income of $28 million in 2007.
This decrease is a result of higher debt balances and realized
and recognized losses on investments of $13 million.


 



Income Tax Expense (Benefit).  Income tax
expense was $114 million in 2008 compared to an income tax
benefit of $121 million in 2007. Tax provision as a
percentage of income before taxes was 12% in 2008 compared to
tax benefit as a percentage of income of 27% for 2007.
Differences between the effective tax rates and the
U.S. Federal statutory rate are primarily due to tax
holidays and incentive programs and the current year generation
of income tax credits. We have tax holidays in Malaysia and
Thailand that expire at various times through 2022. In 2008,
income tax expense also includes net charges of $75 million
for taxes related to the license of certain intellectual
property to a foreign subsidiary. In 2007, the tax provision was
impacted by a favorable adjustment to the company’s
valuation allowance for deferred tax assets of
$126 million. In the fourth quarter of 2007, we reversed
the remaining valuation allowance for our deferred tax assets
based upon a determination that it was more likely than not that
our deferred tax assets will be realized. The realization of the
deferred tax assets is primarily dependent on our ability to
generate sufficient earnings in certain jurisdictions in future
years. The amount of deferred tax assets considered realizable
may increase or decrease in subsequent periods based on
fluctuating industry or company conditions.


 



We adopted the provisions of FASB Interpretation No. 48,
“Accounting for Uncertainty in Income Taxes — an
interpretation of FASB Statement No. 109”
(“FIN 48”), as of June 30, 2007. As a result
of the implementation of FIN 48, we recognized no
adjustment in the net liability for unrecognized tax benefits.
The total amount of gross unrecognized tax benefits as of the
date of adoption of FIN 48 was $58 million, all of
which would affect our effective tax rate if realized. During
the year ended June 27, 2008, we recognized a
$17 million increase in the liability for unrecognized tax
benefits and recorded $32 million of liabilities for
unrecognized tax benefits related to Komag. As of June 27,
2008, we had approximately $107 million of unrecognized tax
benefits which included the $32 million of gross
unrecognized tax benefits related to Komag.





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EXCERPTS ON THIS PAGE:

10-K (2 sections)
Aug 20, 2008
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