Western Digital Corp. 10-Q Summary
Business Context and Reporting Period
Company: Western Digital Corporation (Delaware)
Filing Type: Form 10-Q (Unaudited)
Reporting Period: Quarter ended December 26, 2008 (13 weeks) and Six Months ended December 26, 2008.
Business Overview: Western Digital designs, develops, manufactures, and sells hard drives for desktops, notebooks, enterprise applications, and consumer electronics. The company operates manufacturing facilities in Malaysia and Thailand and is vertically integrated, manufacturing its own heads and media.
Key Financial Metrics
| Metric (in millions) | Q2 2009 (3 mos) | Q2 2008 (3 mos) | 6 Months 2009 | 6 Months 2008 |
|---|---|---|---|---|
| Net Revenue | $1,823 | $2,204 | $3,933 | $3,970 |
| Gross Margin | $290 | $513 | $714 | $836 |
| Gross Margin % | 15.9% | 23.3% | 18.2% | 21.1% |
| Operating Income | $16 | $332 | $250 | $467 |
| Net Income | $14 | $305 | $225 | $374 |
| Diluted EPS | $0.06 | $1.35 | $1.00 | $1.66 |
| Cash & Equivalents (End of Period) | $1,376 | N/A (Balance Sheet Data) | ||
| Operating Cash Flow (6 mos) | $601 |
Debt & Liquidity: Total debt consists of a $500 million term loan and a $250 million revolving credit facility. As of December 26, 2008, $250 million remained available on the revolving facility. The company holds $1.376 billion in cash and cash equivalents.
Material Changes vs. Prior Period
- Revenue Decline: Q2 2009 revenue decreased 17% year-over-year to $1.823 billion, driven by a 16% decline in Average Selling Prices (ASP) due to intense competition and excess industry supply. Unit shipments increased 4% to 35.5 million.
- Margin Compression: Gross margin percentage dropped 740 basis points to 15.9% due to pricing pressures.
- Restructuring Charge: A significant one-time charge of $113 million was recorded in Q2 2009. This included $80 million in asset impairments (related to closing facilities in Thailand and Malaysia) and $32 million in employee termination costs. This charge reduced operating income by 95% compared to the prior year.
- Income Tax Benefit: The company recorded a net tax benefit of $7 million for the quarter, compared to an $11 million expense in the prior year, largely due to the extension of the R&D tax credit and favorable adjustments to prior accruals.
Guidance, Outlook, and Risks
Outlook: Management expects revenue and gross margin percentage for the March quarter (Q3 2009) to be lower than the December quarter. This is attributed to global macroeconomic conditions, tight credit for customers, continued inventory rationalization, and competitive pricing.
Restructuring Plan: The company announced a plan to realign costs with softer demand, targeting a 7% headcount reduction (approx. 3,400 people) and facility closures. Total estimated cost is $140 million, with $113 million charged in Q2 and the remaining $27 million expected in Q3.
Risks & Contingencies:
- Legal Proceedings: The company is defending against patent infringement lawsuits filed by Convolve, Inc. and MagSil Corporation/MIT regarding interface technology and tunneling magnetoresistive technology.
- Investment Liquidity: The company holds $19 million in auction-rate securities. Due to global credit market conditions, these may be illiquid, and the company recognized $9 million in other-than-temporary impairment losses on these assets in the six-month period.
- Goodwill Impairment: While an interim test indicated goodwill was not impaired as of December 26, 2008, the company noted that market capitalization had fallen below shareholders' equity, creating ongoing risk.
Investor Verification Checklist
- Restructuring Execution: Verify the timeline and cash impact of the remaining $27 million in restructuring costs and the closure of the Thailand and Malaysia facilities.
- ASP Trends: Monitor Average Selling Prices in the upcoming quarter to determine if pricing stabilization is occurring or if further margin compression is likely.
- Auction-Rate Securities: Assess the liquidity status of the $19 million investment in auction-rate securities and potential for further impairment charges.
- Customer Concentration: Note that Dell accounted for 10% or more of revenue in the period; monitor order volumes from top customers.
- Inventory Levels: Review inventory days (27 days in Q2) to ensure the company is not overstocked relative to the slowing demand environment.