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This excerpt taken from the WDC 10-K filed Aug 28, 2007. Fiscal
Year 2006 Compared to Fiscal Year 2005
Net Revenue. Net revenue was $4.3 billion
for 2006, an increase of 19% from 2005. Total unit shipments
increased to 73 million as compared to 61 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, including mobile, CE and branded products.
For example, we shipped 5 million drives to the mobile
market in 2006 as compared to 1 million units in 2005.
Additionally, we shipped 7 million units to the DVR market
in 2006 as compared to 4 million units in 2005. ASPs
remained at a relatively constant level of $59 due to an
increase in the average storage capacity of hard drives sold
offset by moderate price declines. Revenue contribution by
geographic region for 2006 as compared to 2005 reflects our
focus on revenue growth in emerging geographic markets,
primarily in Asia. Changes in revenue by channel reflect overall
market demand fluctuations for hard drives.
Gross Margin. Gross margin for 2006 was
$829 million, an increase of $239 million, or 41% over
the prior year. Gross margin percentage increased to 19.1% in
2006 from 16.2% in 2005. Gross margin in 2006 benefited from a
more favorable supply/demand balance. In addition, gross margin
was favorably impacted in 2006 by the following factors:
1) manufacturing efficiencies, 2) lower customer
returns resulting from ongoing quality improvements that
favorably impacted warranty obligations, and 3) an increase
in the average storage capacity of hard drives sold. Moderate
price declines somewhat offset the favorable impact of the
aforementioned factors. During 2006 and 2005, our warranty
accrual for prior quarters’ shipments was favorably
adjusted by approximately $30 million and $1 million,
respectively, as a result of improvements in quality and
customer return rates and their expected impact on future levels
of customer returns under warranty.
Operating Expenses. Total operating expenses,
consisting of research and development (“R&D”)
and selling, general and administrative (“SG&A”)
expenses, were 10.7% of net revenue in 2006, as compared to
10.9% in 2005. R&D expense was $297 million in 2006,
an increase of $57 million, or 24% over the prior year. 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 $18 million in employee incentive
compensation programs, of which $12 million related to the
adoption of Statement of Financial Accounting Standard
(“SFAS”)
No. 123-R.
SG&A expense was $166 million in 2006, an increase of
$11 million, or 7% as compared to 2005. This increase in
SG&A expense was primarily due to an expansion of sales
resources to support increasing desktop computer demand in
certain geographic regions, the growing mobile and CE markets,
an increase of $15 million in employee incentive
compensation programs, of which $7 million related to the
adoption of
SFAS No. 123-R,
and a $5 million software write-off. The 2005 fiscal period
included a $19 million charge for the settlement of a
patent infringement lawsuit.
Interest and Other Income. Net interest and
other income was $16 million and $5 million in 2006
and 2005, respectively. This increase in net interest income was
primarily due to higher average invested cash and short-term
investment balances as well as increases in the rates of return
on investments.
Table of Contents
Income Tax Expense (Benefit). Income tax
(benefit) expense was $(13) million and $4 million in
2006 and 2005, respectively. Tax (benefit) expense as a
percentage of income before taxes was (3)% and 2% for 2006 and
2005, 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 ranging from 2008 to 2022. In addition to the tax
holidays, the tax provision for 2006 was favorably impacted by
$22 million given the partial reduction of our valuation
allowance on deferred tax assets upon determination that it was
more likely than not that a portion of our deferred tax assets
would be realized. The realization of the deferred tax assets is
primarily dependent on our ability to generate sufficient
earnings in certain jurisdictions in fiscal years 2007 and 2008.
A two-year period was used due to the difficulty at the time in
accurately projecting income for longer periods of time given
the cyclical nature of our industry. The 2005 effective tax rate
benefited by approximately 0.7% from the favorable resolution of
certain tax contingencies.
This excerpt taken from the WDC 10-K filed Nov 20, 2006. Fiscal
Year 2006 Compared to Fiscal Year 2005
Net Revenue. Net revenue was $4.3 billion
for 2006, an increase of 19.3% from 2005. Total unit shipments
increased to 73.3 million as compared to 61.4 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, including mobile, CE and branded products.
For example, we shipped 5.4 million drives to the mobile
market in 2006 as compared to 1.0 million units in 2005.
Additionally, we shipped 6.7 million units to the DVR
market in 2006 as compared to 3.6 million units in 2005.
ASP remained at a relatively constant level of $59 due to an
increase in the average storage capacity of hard drives sold
offset by moderate price declines. Revenue contribution by
geographic region for 2006 as compared to 2005 reflects our
continued focus on revenue growth in emerging geographic
markets, primarily in Asia. Changes in revenue by geography and
by channel generally reflect overall market demand fluctuations
for hard drives.
Gross Margin. Gross margin for 2006 was
$829 million, an increase of $239 million, or 40.5%
over the prior year. Gross margin percentage increased to 19.1%
in 2006 from 16.2% in 2005. Gross margin was favorably impacted
in 2006 by the following factors: 1) manufacturing
efficiencies, 2) lower customer returns resulting from
ongoing quality improvements that favorably impacted warranty
obligations, and 3) an increase in the average storage
capacity of hard drives sold. Moderate price declines somewhat
offset the favorable impact of the aforementioned factors.
During 2006 and 2005, our warranty accrual for prior
quarters’ shipments was favorably adjusted by approximately
$30 million and $1 million, respectively, as a result
of improvements in quality and customer return rates and their
expected impact on future levels of customer returns under
warranty.
Operating Expenses. Total operating expenses,
consisting of research and development (“R&D”) and
selling, general and administrative (“SG&A”)
expenses, were 10.7% of net revenue in 2006, as compared to
10.9% of net revenue in 2005. R&D expense was
$297 million in 2006, an increase of $57 million, or
23.8% over the prior year. 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 $18 million in
employee incentive compensation programs, of which
$12 million related to the adoption of Statement of
Financial Accounting Standard (“SFAS”)
No. 123-R.
SG&A expense was $166 million in 2006, an increase of
$11 million, or 7.1% as compared to 2005. This increase in
SG&A expense was primarily due to an expansion of sales
resources to support increasing desktop computer demand in
certain geographic regions, the growing mobile and CE markets,
and an increase of $15 million in employee incentive
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compensation programs, of which $7 million related to the
adoption of
SFAS No. 123-R.
The 2005 fiscal period included a $19 million charge for
the settlement of a patent infringement lawsuit.
Interest and Other Income. Net interest and
other income was $16 million and $5 million in 2006
and 2005, respectively. This increase in net interest income was
primarily due to higher average invested cash and short-term
investment balances as well as increases in the rates of return
on investments.
Income Tax Expense. Income tax (benefit)
expense was $(13) million and $4 million in 2006 and
2005, respectively. Tax (benefit) expense as a percentage of
income before taxes was (3.4)% and 2.0% for 2006 and 2005,
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
ranging from 2008 to 2019. In addition to the tax holidays, the
tax provision for 2006 was favorably impacted by
$22 million given the partial reduction of our valuation
allowance on deferred tax assets upon determination that it was
more likely than not that a portion of 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 fiscal years 2007 and 2008.
A two-year period is used due to the difficulty in accurately
projecting income for longer periods of time given the cyclical
nature of our industry. This assumption may change in the future
based on fluctuating industry or company conditions. The amount
of deferred tax assets considered realizable may increase or
decrease in subsequent quarters when we update our estimates of
future income. The 2005 effective tax rate benefited by
approximately 0.7% from the favorable resolution of certain tax
contingencies.
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