Western Digital Corporation: FY2022 Form 10-K Summary
Business context and reporting period
Western Digital develops and manufactures data-storage products using flash and hard-disk-drive technologies. Its reportable segments are Flash and HDD, serving Cloud, Client, and Consumer end markets. The filing covers the 52-week fiscal year ended July 1, 2022, compared with the 52-week fiscal year ended July 2, 2021.
In June 2022, the company began reviewing strategic alternatives, including a possible separation of its Flash and HDD businesses, following a $1 billion investment by Elliott Investment Management and an agreement with Elliott.
Financial performance and liquidity
| Metric | FY2022 | FY2021 | Change |
|---|---|---|---|
| Net revenue | $18.793 billion | $16.922 billion | Up 11% |
| Gross profit | $5.874 billion | $4.521 billion | Up 30% |
| Gross margin | 31.3% | 26.7% | Up 4.6 points |
| Operating income | $2.391 billion | $1.220 billion | Up 96% |
| Net income | $1.500 billion | $821 million | Up 83% |
| Diluted EPS | $4.75 | $2.66 | Up 79% |
| Cash flow from operations | $1.880 billion | $1.898 billion | Down $18 million |
- Flash revenue was $9.753 billion, up from $8.706 billion; Flash gross margin increased to 36.2% from 30.0%.
- HDD revenue was $9.040 billion, up from $8.216 billion; HDD gross margin increased to 29.4% from 27.0%.
- Cloud revenue increased to $8.017 billion from $5.723 billion, while Client revenue declined to $7.076 billion from $7.281 billion and Consumer revenue declined to $3.700 billion from $3.918 billion.
- Exabytes shipped increased to 645 from 541.
- Cash and cash equivalents were $2.327 billion at year-end, down from $3.370 billion. Accounts receivable increased to $2.804 billion and inventory was $3.638 billion.
- Capital expenditures were $1.122 billion. Net cash used in investing activities was $1.192 billion, and net cash used in financing activities was $1.718 billion, primarily reflecting debt repayment and refinancing activity.
- Debt principal declined to $7.100 billion from $8.825 billion. More than 80% of principal was due in 2026 or later, and $2.25 billion remained available under the revolving credit facility through January 2027.
- The company was in compliance with its debt leverage covenant as of July 1, 2022. Its variable-rate debt was $2.70 billion, and a one-percentage-point increase in variable rates would increase annual interest expense by approximately $27 million.
- The cash conversion cycle increased to 97 days from 77 days, reflecting higher days sales outstanding and inventory days.
- The quarterly dividend remained suspended, and no share repurchases were made during FY2022.
Material changes versus the prior comparable period
- Revenue growth was driven by higher Flash and HDD exabyte shipments, particularly Cloud demand, enterprise HDD capacity products, BiCS5 Flash products, gaming, and 5G-related demand. Lower average price per gigabyte and weaker Client and Consumer demand partially offset volume growth.
- Gross margin benefited from newer-product cost reductions, higher-capacity product mix, higher-margin Flash mix, and a $265 million reduction in acquired-intangible amortization. These benefits were partly offset by $207 million of Flash Ventures contamination-related charges.
- Research and development expense increased $80 million to $2.323 billion, while SG&A remained broadly flat.
- Interest expense declined to $304 million from $326 million because of debt paydowns.
- The effective tax rate increased to 29% from 11%, including a $352 million increase in unrecognized tax benefits, of which $324 million related to a tentative IRS settlement.
- Other comprehensive loss was $357 million, primarily reflecting foreign-currency translation and derivative losses.
Guidance, outlook, commentary, risks and unusual items
- Management expected FY2023 company and Flash Ventures property, plant and equipment expenditures to total approximately $3.2 billion, with estimated net cash used for property, plant and equipment and related Flash Ventures notes receivable of approximately $1.6 billion.
- Management stated that cash, operating cash flow, and available credit facilities were expected to fund working capital, debt, capital expenditures, and other material cash needs for at least the next twelve months and the foreseeable future.
- Y7, a new Flash Ventures fabrication facility in Japan, was under construction; first output was expected in the first half of calendar 2023. Western Digital committed to approximately $290 million of future building-depreciation prepayments, including $268 million in FY2023 and $22 million in FY2024.
- A February 2022 contamination incident at Flash Ventures facilities in Yokkaichi and Kitakami reduced wafer availability and resulted in $207 million of charges. The company was evaluating recovery options.
- The company incurred approximately $248 million of COVID-related logistics, absorption, and factory costs in FY2022, compared with $127 million in FY2021.
- Management cited PC customer inventory reductions, supply-chain disruptions, component shortages, inflation, higher fuel and interest rates, weaker consumer confidence, slower economic growth, and the Russia-Ukraine conflict as pressures on demand and margins. Shipments to distributors serving Russia were stopped after February 2022.
- The tentative IRS settlement was expected to require approximately $600 million to $700 million of tax and interest payments, partially offset by approximately $100 million to $150 million of future tax reductions and interest-related savings. Final settlement terms and payment timing remained uncertain.
- Beginning in FY2023, required capitalization and amortization of research and development costs under the Tax Cuts and Jobs Act was expected to materially increase cash taxes and the effective tax rate unless modified or repealed.
- Material risks include volatile storage demand and average selling prices, intense competition, technology transitions, inventory obsolescence, dependence on Kioxia and other concentrated suppliers, Flash Ventures funding and lease guarantees, customer concentration, cybersecurity, product defects, foreign exchange, debt service, tax examinations, litigation, and execution of the strategic review.
- Western Digital reported approximately $1.760 billion of its portion of Flash Ventures lease guarantees and a maximum reasonably estimable loss exposure related to Flash Ventures of approximately $4.093 billion, excluding lost profits.
Most important facts for investors to verify
- Progress and outcome of the strategic alternatives review, including any separation of the Flash and HDD businesses and related transaction costs.
- Actual FY2023 demand, pricing, inventory, and margin trends in Cloud, Client, and Consumer markets.
- Final resolution, cash payment timing, and tax offsets associated with the IRS settlement.
- Cash generation after the planned approximately $3.2 billion of FY2023 gross capital expenditures and the company’s ability to maintain debt covenant compliance.
- Recovery, insurance, or other reimbursement related to the $207 million Flash Ventures contamination charge.
- Y7 construction and production ramp, Flash Ventures funding requirements, and the company’s exposure to Kioxia and Japanese-yen movements.
- Impact of FY2023 R&D tax capitalization requirements, expiring international tax holidays, and the Inflation Reduction Act corporate minimum tax beginning in FY2024.
- Potential dilution from the 2024 convertible notes, equity compensation, and the company’s future capital-allocation decisions regarding dividends and repurchases.