Western Digital Corporation: 2008 Fiscal Year Summary
Business Context and Reporting Period
This Form 10-K covers the fiscal year ended June 27, 2008. Western Digital Corporation (WD) designs, develops, manufactures, and sells hard drives for desktop, mobile, enterprise, and consumer electronics markets. The company operates as a vertically integrated manufacturer, producing its own heads and media following the September 2007 acquisition of Komag, Incorporated (renamed WD Media, Inc.). WD sells products globally to OEMs, ODMs, distributors, and retailers.
Key Financial Metrics
| Metric | Fiscal 2008 | Fiscal 2007 |
|---|---|---|
| Net Revenue | $8,074 million | $5,468 million |
| Gross Margin | $1,739 million (21.5%) | $900 million (16.5%) |
| Operating Income | $1,006 million (12.4%) | $415 million (7.6%) |
| Net Income | $867 million | $564 million |
| Diluted EPS | $3.84 | $2.50 |
| Operating Cash Flow | $1,399 million | $618 million |
| Total Assets | $4,875 million | $2,901 million |
| Long-Term Debt | $482 million | $10 million |
| Cash & Equivalents | $1,104 million | $700 million |
Unit Shipments: 133 million units in 2008 compared to 97 million in 2007.
Average Selling Price (ASP): $59 per unit in 2008 compared to $57 in 2007.
Material Changes vs. Prior Period
- Revenue Growth: Net revenue increased 48% year-over-year, driven by a 37% increase in unit shipments and a shift in product mix toward higher-margin non-desktop sources (56% of revenue in 2008 vs. 43% in 2007).
- Margin Expansion: Gross margin percentage improved significantly to 21.5% from 16.5%, attributed to favorable demand/supply conditions, improved product mix, and operational efficiencies from the Komag integration.
- Debt Structure: Long-term debt increased substantially to $482 million from $10 million. This reflects the assumption of a $750 million credit facility (consisting of a $500 million term loan and $250 million revolving credit) in February 2008 to refinance bridge loans used for the Komag acquisition.
- Acquisition Impact: The 2008 results include the full impact of the Komag acquisition, including a $49 million charge for acquired in-process research and development (IPR&D) and $75 million in tax charges related to intellectual property licensing.
Guidance, Outlook, and Risks
Capital Expenditures: Management expects capital additions for fiscal 2009 to be approximately $800 million, with depreciation and amortization expected to be around $475 million.
Stock Repurchase: The Board authorized an additional $500 million for stock repurchases in April 2008, extending the program through March 31, 2013. As of June 27, 2008, $502.5 million remained available under the program.
Key Risks and Contingencies:
- Market Volatility: The hard drive industry is characterized by declining average selling prices (ASPs) and intense competition. Demand is volatile and subject to rapid technological changes.
- Supply Chain: The company relies on a limited number of suppliers for critical components (e.g., custom integrated circuits) and faces risks related to commodity material shortages (e.g., nickel, platinum) and price volatility.
- Investment Liquidity: The company holds $28 million in auction-rate securities. Due to negative conditions in global credit markets, these securities may be illiquid, and the company recognized $10 million in other-than-temporary impairment losses during the year.
- Legal Proceedings: The company is involved in various patent infringement lawsuits (e.g., Convolve, Inc., StorMedia Texas LLC), though management believes the financial impact of these matters is not material.
Investor Verification Checklist
- Inventory Valuation: Verify the adequacy of inventory write-downs given the rapid technology cycle and the inclusion of precious metals inventory from the Komag acquisition.
- Debt Covenants: Confirm continued compliance with the leverage and interest coverage ratios required by the new $750 million Credit Facility.
- Auction-Rate Securities: Monitor the liquidity status of the $28 million investment in auction-rate securities and potential for further impairment charges.
- Customer Concentration: While no single customer exceeded 10% of revenue in 2008, verify the stability of relationships with top 10 customers, which collectively accounted for 47% of revenue.
- Tax Position: Review the $107 million in unrecognized tax benefits and the reliance on foreign tax holidays in Malaysia and Thailand, which expire at various times through 2022.