Western Digital Corporation Fiscal 2021 Form 10-K Summary
Business context and reporting period
Western Digital develops and manufactures data-storage products and solutions based on hard disk drive (HDD) and flash technologies, serving client devices, data centers and client solutions markets. The filing is an annual report for the 52-week fiscal year ended July 2, 2021; it is not a standalone quarterly filing. Fiscal 2020 included 53 weeks.
During fiscal 2021, the company reorganized into separate flash-based products and HDD business units and began implementing new reporting processes. Management expected operating-segment disclosures to be updated in the first quarter of fiscal 2022.
Key financial metrics
| Metric | Fiscal 2021 | Fiscal 2020 | Change |
|---|---|---|---|
| Net revenue | $16.922 billion | $16.736 billion | Up 1% |
| Gross profit | $4.521 billion | $3.781 billion | Up 19.6% |
| Gross margin | 26.7% | 22.6% | Up 4.1 percentage points |
| Operating income | $1.220 billion | $335 million | Up $885 million |
| Operating margin | 7.2% | 2.0% | Up 5.2 percentage points |
| Net income (loss) | $821 million | $(250) million | Returned to profitability |
| Diluted EPS | $2.66 | $(0.84) | Improved $3.50 |
| Operating cash flow | $1.898 billion | $824 million | Up $1.074 billion |
| Capital expenditures | $1.146 billion | $647 million | Up $499 million |
Revenue by product was $8.216 billion for HDD, down from $8.967 billion, and $8.706 billion for flash-based products, up from $7.769 billion. Revenue by end market was $8.255 billion for Client Devices, $4.950 billion for Data Center Devices and Solutions, and $3.717 billion for Client Solutions.
Cash and cash equivalents were $3.370 billion at July 2, 2021, compared with $3.048 billion a year earlier. Inventories increased to $3.616 billion from $3.070 billion, and the cash conversion cycle increased to 77 days from 70 days.
Total debt was $8.825 billion at face value, or $8.725 billion net of issuance costs and discounts, compared with $9.711 billion and $9.575 billion, respectively, in the prior year. The company had $2.25 billion available under its revolving credit facility and was in compliance with applicable financial covenants. Long-term debt included substantial maturities in fiscal 2023.
Material changes versus the prior comparable period
- Revenue increased modestly, but the mix shifted materially toward flash products and Client Devices and away from HDD and Data Center Devices and Solutions.
- Gross margin improved primarily because of lower acquired-intangible amortization, recovery of prior power-outage costs, production ramp benefits and cost reductions. The company also recorded approximately $127 million of COVID-19-related charges, primarily higher logistics costs.
- Operating expenses declined to $3.301 billion from $3.446 billion. R&D decreased slightly, while SG&A declined largely because of lower travel, marketing and outside-service costs.
- Data Center Devices and Solutions revenue fell 20%, affected by cloud customer inventory digestion, China shipment restrictions, earlier product-qualification delays and lower pricing. Management stated that cloud digestion had abated and qualifications with cloud customers had been completed by year-end.
- Operating cash flow more than doubled, while investing cash flow turned negative because of higher capital expenditures. Financing cash use declined, including $886 million of debt repayment and $600 million of voluntary Term Loan B-4 prepayments.
- The company recorded a $75 million insurance recovery related to the 2019 Flash Ventures power outage, compared with $68 million of outage charges in fiscal 2020.
Guidance, outlook, commentary and unusual items
- For fiscal 2022, management expected total company and Flash Ventures property, plant and equipment expenditures of approximately $3.1 billion. After lease financing and related cash flows, expected net cash use for property, plant and equipment and Flash Ventures notes receivable was approximately $2.0 billion.
- Management expected cash, operating cash generation and available credit facilities to meet working-capital, debt and capital-expenditure needs for at least the following twelve months.
- Management cited recovering cloud and enterprise demand, the ramp of 18-terabyte energy-assisted HDDs, growth in second-generation NVMe enterprise SSDs and continued demand for notebook, Chromebook, gaming, smart-home, automotive and industrial applications.
- The quarterly dividend remained suspended, having been suspended in April 2020 to support reinvestment and deleveraging. The company had not resumed share repurchases; $4.5 billion remained authorized under the repurchase program through July 25, 2023.
- Flash Ventures is a major strategic dependency: Western Digital owns 49.9%, obtains substantially all of its flash wafer supply through the ventures with Kioxia, is obligated to fund specified fixed costs and capital investments, and guarantees a portion of lease obligations. The company’s reported maximum reasonably estimable Flash Ventures exposure was $4.271 billion, including $1.973 billion of lease guarantees.
- Key risks include COVID-19 resurgence, supply-chain disruption, dependence on Kioxia and limited-source suppliers, volatile pricing and demand, rapid technology transitions, customer concentration, foreign-exchange and interest-rate exposure, cyber and product-quality risks, and substantial debt.
- The IRS is challenging transfer-pricing positions for multiple fiscal periods. The IRS asserted proposed additional federal tax liabilities of approximately $335 million for fiscal 2008–2009 and $922 million for fiscal 2010–2012, plus approximately $343 million for fiscal 2013–2015, before interest and penalties. The company disputes the positions and intends to contest them.
- Unrecognized tax benefits were approximately $748 million, with accrued interest and penalties of approximately $138 million; the filing states that the timing of potential payments cannot be reasonably estimated.
- KPMG issued unqualified opinions on the consolidated financial statements and internal control over financial reporting. The critical audit matter concerned estimates of variable consideration, including reseller price protection and sales incentives.
Important facts for investors to verify
- Whether the anticipated data-center recovery and new HDD and enterprise SSD ramps offset continued pricing pressure and the fiscal 2021 decline in data-center revenue.
- The actual fiscal 2022 capital-spending and Flash Ventures funding requirements versus the approximately $2.0 billion expected net cash use.
- Debt refinancing and repayment capacity, particularly the approximately $5.174 billion of scheduled debt maturities in fiscal 2023, covenant headroom and exposure to variable interest rates.
- The status and ultimate cash impact of the IRS transfer-pricing examination, related penalties and unrecognized tax benefits.
- Flash Ventures’ operating performance, capacity investments, lease guarantees and alignment with Kioxia, given the company’s reliance on the venture for flash wafers.
- Inventory levels, channel incentives and price-protection accruals, which are significant judgment areas and affect reported revenue and gross margin.
- Whether and when Western Digital resumes its quarterly dividend or share repurchases, subject to leverage improvement and credit-agreement restrictions.