Western Digital Corporation: 2009 Fiscal Year Summary
Business Context and Reporting Period
This Form 10-K covers the fiscal year ended July 3, 2009, which consisted of 53 weeks. Western Digital Corporation (WD) designs, develops, manufactures, and sells hard drives, solid-state drives (SSDs), and media players. The company serves desktop, mobile, enterprise, consumer electronics (CE), and branded product retail markets globally. In fiscal 2009, WD expanded its product portfolio by acquiring SiliconSystems, Inc. to enter the SSD market and began selling media players.
Key Financial Metrics
| Metric | Fiscal 2009 | Fiscal 2008 |
|---|---|---|
| Net Revenue | $7,453 million | $8,074 million |
| Gross Margin | $1,337 million (17.9%) | $1,739 million (21.5%) |
| Operating Income | $519 million (7.0%) | $1,006 million (12.4%) |
| Net Income | $470 million | $867 million |
| Diluted EPS | $2.08 | $3.84 |
| Operating Cash Flow | $1,305 million | $1,399 million |
| Cash and Equivalents (End of Period) | $1,794 million | $1,104 million |
| Long-Term Debt | $400 million | $482 million |
| Unit Shipments | 146 million | 133 million |
| Average Selling Price (ASP) | $51 | $59 |
Material Changes vs. Prior Period
- Revenue Decline: Net revenue decreased 8% year-over-year despite a 10% increase in unit shipments (146M vs. 133M). The decline was driven by a significant drop in Average Selling Price (ASP) from $59 to $51 due to competitive pricing pressures, particularly in mobile and branded markets.
- Margin Compression: Gross margin percentage fell to 17.9% from 21.5%, reflecting the lower ASPs and a more competitive environment.
- Restructuring Charges: Operating income was impacted by $112 million in restructuring charges related to a plan announced in late 2008 to realign costs with softer demand. This included closing a manufacturing facility in Thailand, disposing of a facility in Malaysia, and reducing headcount by approximately 3,300 employees.
- Acquisition Activity: WD completed the acquisition of SiliconSystems, Inc. for $66 million, incurring a $14 million in-process research and development charge. This acquisition enabled WD to enter the solid-state drive market.
- Asset Sale Gain: The company recorded an $18 million gain on the sale of its media substrate manufacturing facility in Sarawak, Malaysia.
Guidance, Outlook, and Risks
- Outlook: Management expects continuing sequential growth in the first quarter of fiscal 2010. Due to stronger-than-anticipated demand in the fourth quarter of 2009, WD reopened the Thailand manufacturing facility that had been closed during the restructuring.
- Capital Expenditures: Capital expenditures for fiscal 2010 are expected to be approximately $600 million, with depreciation and amortization estimated at $530 million.
- Key Risks:
- Economic Conditions: Negative worldwide economic conditions could reduce sales, increase operating costs, and impair the ability to forecast demand accurately.
- Competition and Pricing: Intense competition and industry consolidation may lead to further declines in ASPs and margins.
- Supply Chain: Dependence on a limited number of suppliers for critical components and manufacturing equipment poses risks of delays or cost increases.
- Investment Liquidity: The company holds $18 million in auction-rate securities which may be illiquid due to global credit market conditions.
Investor Verification Checklist
- ASP Trends: Verify if the decline in Average Selling Price stabilizes or continues in upcoming quarters, as this is the primary driver of margin compression.
- Restructuring Completion: Confirm that the $112 million restructuring plan is fully executed and that cost savings are materializing as projected.
- SSD Integration: Assess the progress of integrating SiliconSystems' technology and the revenue contribution from solid-state drives in the embedded systems market.
- Inventory Levels: Monitor inventory balances and days in inventory to ensure no significant write-downs are required due to obsolescence or demand shifts.
- Customer Concentration: Note that sales to Dell Inc. accounted for 10% of net revenue in 2009; verify the stability of relationships with top 10 customers.