Western Digital Corp. 10-Q Summary
Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended March 27, 1999 (Fiscal Q3 1999) and the nine-month period ended March 27, 1999. Western Digital Corporation operates in the hard drive industry, manufacturing storage solutions for desktop and enterprise markets. The company is currently undergoing significant restructuring to combine its Personal Storage and Enterprise Storage divisions into a single Drive Products Division (DPD).
Key Financial Metrics
| Metric | Q3 1999 (3 Months) | Q3 1998 (3 Months) | YTD 1999 (9 Months) | YTD 1998 (9 Months) |
|---|---|---|---|---|
| Net Revenues | $668.5 million | $831.3 million | $2.06 billion | $2.89 billion |
| Gross Profit | $39.9 million (6%) | $36.3 million (4%) | ($23.7) million (-1%) | $141.8 million (5%) |
| Operating Loss | ($110.0) million | ($58.2) million | ($381.1) million | ($133.4) million |
| Net Loss | ($114.3) million | ($45.0) million | ($391.2) million | ($127.5) million |
| Loss Per Share (Diluted) | ($1.27) | ($0.51) | ($4.39) | ($1.46) |
| Cash & Equivalents | $297.1 million | $459.8 million (Prior Year End) | N/A | |
| Long-Term Debt | $537.8 million | $519.2 million (Prior Year End) | N/A | |
| Operating Cash Flow (YTD) | ($87.3) million | $46.1 million | N/A |
Material Changes vs. Prior Period
- Revenue Decline: Q3 revenues fell 20% year-over-year due to a 2% decline in unit shipments and reduced average selling prices (ASPs) driven by intense competition. YTD revenues dropped 29%.
- Restructuring Charges: A one-time restructuring charge of $41.0 million was recorded in Q3 1999. This included $26.0 million in non-cash write-offs of facilities/assets, $5.0 million in severance, and other costs associated with closing the Tuas, Singapore facility and reducing headcount by ~900.
- Acquisition Charge: The company acquired Crag Technologies (Connex) for ~$12.0 million. The entire purchase price was expensed as in-process R&D in Q3 1999.
- Interest Expense: Net interest expense increased significantly to $4.2 million in Q3 (from $0.5 million in Q3 1998) due to a new $50 million term loan and accruals on convertible debentures.
- Liquidity: Cash balances decreased from $459.8 million to $297.1 million. Operating cash flow turned negative ($87.3 million used) compared to positive flow in the prior year, primarily due to the net loss.
Guidance, Outlook, and Risks
- Future Charges: The company expects to record an additional charge of approximately $20.0 million in the fourth quarter (ending July 3, 1999) related to the sale of its Santa Clara disk media operations to Komag, Inc. This sale also involves a headcount reduction of ~1,100.
- Strategic Shifts: The company is transitioning to giant magneto-resistive head technology and expanding into enterprise storage via the Connex acquisition. It has entered a three-year volume purchase agreement with Komag for disk media.
- Legal Contingencies:
- Amstrad PLC: Retrial ongoing regarding defective drives from 1988-1989; Amstrad seeks $186 million. Company believes it has meritorious defenses.
- Lemelson Foundation: Sued in Feb 1999 alleging patent infringement; company does not currently expect a material adverse effect.
- Papst Licensing: Threatens to reinstate patent infringement suit regarding disk drive motors.
- Year 2000 Compliance: Total remediation costs are expected to reach ~$20.0 million. Testing is scheduled for completion by July 1999.
- Market Risks: High competition, rapid technological transitions, and dependence on a limited number of suppliers (e.g., IBM for heads, Komag for media) pose significant risks.
Investor Verification Checklist
- Verify the impact of the $41 million restructuring charge and the anticipated $20 million Q4 charge on future profitability.
- Monitor the outcome of the Amstrad PLC retrial and potential liability exposure.
- Assess the success of the transition to giant magneto-resistive head technology and time-to-market performance relative to competitors.
- Review the terms and performance of the new Komag media supply agreement and the IBM component supply agreement.
- Track cash burn rate and the utilization of the $150 million revolving credit facility given the negative operating cash flow.
- Confirm the timeline and cost of Year 2000 remediation completion.