Western Digital Corporation 2012 Annual Report Page 35

exposing us to potential liability for our supplier's wrongdoings.

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 continues
to weaken against other foreign currencies, some of our component suppliers may increase the price they charge for
their components in order to maintain an equivalent profit margin. If this occurs, it would have a negative impact on
our operating 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 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, would increase our operating costs, which may negatively impact our operating results.

Our operating results fluctuate, sometimes significantly, from period to period due to many factors, which may result in a
significant decline in our stock price.

Our quarterly operating results may be subject to significant fluctuations as a result of a number of other factors

including:

the timing of orders from and shipment of products to major customers;
our product mix;
changes in the prices of our products;
manufacturing delays or interruptions;
acceptance by customers of competing products in lieu of our products;
variations in the cost of and lead times for components for our products;
limited availability of components that we obtain from a single or a limited number of suppliers;
seasonal and other fluctuations in demand for PCs often due to technological advances; and