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This excerpt taken from the WDC 10-K filed Nov 20, 2006. Fiscal
Year 2005 Compared to Fiscal Year 2004
Net Revenue. Net revenue was $3.6 billion
for 2005, an increase of 19.4% from 2004. Total unit shipments
increased to 61.4 million as compared to 48.3 million
for the prior year. This unit increase resulted from an increase
in our desktop market share, stronger overall demand for hard
drives in the desktop market and our increasing focus on the
non-desktop market. For example, we shipped 3.6 million
units to the DVR market in 2005 as compared to 1.0 million
units in 2004. The growth in total unit shipments was partially
offset by a $4 per unit decline in ASPs to $59 per unit for
2005. The changes in our revenue contribution by geographic
region for 2005 compared to 2004 reflect our continued focus on
revenue growth in emerging geographic markets, primarily in
Asia. Revenue derived from OEMs increased in 2005 due to higher
sales into the non-desktop markets, which are serviced primarily
by OEMs.
Gross Margin. Gross margin percentage
increased to 16.2% for 2005 from 15.2% for 2004. The increase in
gross margin percentage was impacted by continuing improvements
in quality, manufacturing cost efficiencies and product mix,
partially offset by unit price declines. Gross margin also
benefited from the ongoing accretive benefit of our head
manufacturing operations. Our 2004 gross margin was
impacted by
start-up
expenses and other charges totaling $18 million relating to
our head manufacturing operations acquired in July 2003.
Operating Expenses. Total operating expenses,
consisting of R&D and SG&A, were 10.9% of net revenue in
2005, as compared to 10.1% of net revenue in 2004. R&D
expense was $240 million and $202 million for 2005 and
2004, respectively. The increase in R&D expense was
primarily related to the development of new product platforms in
support of our entry into new markets, expenditures for advanced
head technologies and an increase of $27 million in
employee incentive compensation programs. R&D expense in
2004 included a $26 million charge for acquired in-process
research and development related to the Read-Rite asset
acquisition.
SG&A expense was $155 million and $106 million for
2005 and 2004, respectively. The increase in SG&A expense
was primarily due to an expansion of sales resources to support
increasing PC demand in certain geographic regions and the
growing mobile and CE markets and an increase of
$16 million in employee incentive compensation programs.
Fiscal 2005 included a $19 million charge for the
settlement of a patent infringement lawsuit.
Interest and Other Income. Net interest and
other income was $5 million and zero for 2005 and 2004,
respectively. The increase in net interest income in 2005 over
2004 was primarily due to a higher average cash and short-term
investment balance as well as an increase in the rates of return
on investments.
Income Tax Expense. Income tax expense was
$4 million in both 2005 and 2004. Tax expense as a
percentage of income before taxes was 2.0% and 2.6% for 2005 and
2004, respectively. Differences between the effective tax rates
and the U.S. Federal statutory rate are primarily due to
tax holidays in Malaysia and Thailand that expire at various
times
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ranging from 2008 to 2019. The 2005 effective tax rate was
benefited by approximately 0.7% from the favorable resolution of
certain tax contingencies.
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