Western Digital Corp. 10-Q Summary
Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended December 26, 1998 (Second Quarter of Fiscal 1999) and the six-month period ended December 26, 1998. Western Digital Corporation operates in the highly competitive hard drive industry, facing intense price erosion and rapid technological transitions, specifically from thin film to magneto-resistive (MR) and giant magneto-resistive (GMR) head technologies.
Key Financial Metrics
| Metric (in thousands) | 3 Months Ended Dec 26, 1998 | 6 Months Ended Dec 26, 1998 |
|---|---|---|
| Net Revenues | $738,590 | $1,389,448 |
| Cost of Revenues | $719,423 | $1,453,033 |
| Gross Profit | $19,167 | $(63,585) |
| Operating Loss | $(79,015) | $(271,020) |
| Net Loss | $(82,253) | $(276,911) |
| Loss Per Share (Basic/Diluted) | $(0.93) | $(3.12) |
| Cash and Equivalents (Ending) | $353,660 | |
| Long-Term Debt | $531,505 | |
| Net Cash Used in Operating Activities | $(48,332) (6-month) |
Note: Gross profit for the six-month period is negative due to special charges recorded in the prior quarter.
Material Changes vs. Prior Period
- Revenue Decline: Revenues decreased 24% year-over-year for the quarter and 33% for the six-month period. This was driven by a 7% and 17% decline in unit shipments, respectively, combined with reduced average selling prices (ASP) due to industry oversupply.
- Margin Compression: While reported gross margins improved sequentially due to the absence of the $77 million special charge recorded in the prior quarter, underlying margins remain under pressure. Excluding special charges, the gross margin for the current quarter was 3%, down from 10% in the prior year.
- Expense Increases: Research and Development (R&D) expenses increased $15.5 million year-over-year for the six-month period to support the development of enterprise storage products and MR desktop products. SG&A expenses increased primarily due to foreign currency-related special charges in the prior quarter.
- Liquidity: Cash and cash equivalents decreased from $459.8 million to $353.7 million. Net cash used in operating activities was $48.3 million for the six-month period, compared to $14.0 million provided in the prior year.
Outlook, Risks, and Unusual Items
- Restructuring Program: On January 19, 1999, the company initiated a restructuring to combine its Personal Storage and Enterprise Storage divisions. This includes closing the Tuas, Singapore facility and reducing headcount by approximately 750 employees. A charge of approximately $45 million is expected in the quarter ending March 27, 1999, with $10 million in cash outflow.
- Acquisition: On February 1, 1999, Western Digital acquired Crag Technologies for approximately $12 million. A one-time charge of $12 million for in-process R&D is expected in the next quarter.
- Legal Proceedings: A mistrial was declared in the Amstrad PLC lawsuit (seeking $186 million) on January 5, 1999, with a retrial set for March 1, 1999. The company believes it has meritorious defenses but acknowledges the risk of a material judgment.
- Market Risks: The company faces risks related to the transition to GMR technology, dependence on IBM for head components, and potential inventory obsolescence due to rapid price declines. Year 2000 remediation costs are expected to total approximately $35 million.
Investor Verification Checklist
- Verify the impact of the upcoming $45 million restructuring charge and $12 million acquisition charge on Q3 1999 results.
- Monitor the outcome of the Amstrad PLC retrial scheduled for March 1, 1999.
- Assess the success of the transition to GMR head technology and the ability to regain time-to-market leadership.
- Review the company's ability to meet debt covenants under the new Senior Bank Facility, which prohibits dividends and requires specific net equity levels.
- Track the execution of the Year 2000 remediation plan, with full integration testing expected by July 1999.