Western Digital Corporation Fiscal 2020 Form 10-K Summary
Business context and reporting period
Western Digital develops and manufactures data-storage devices and solutions using hard-disk drive (HDD) and flash technologies. Its principal markets are Client Devices, Data Center Devices and Solutions, and Client Solutions. The filing covers the 53-week fiscal year ended July 3, 2020; fiscal 2019 ended June 28, 2019 and had 52 weeks. The company operated as one reportable segment and employed approximately 63,800 people.
Financial performance and liquidity
| Metric | Fiscal 2020 | Fiscal 2019 |
|---|---|---|
| Net revenue | $16.736 billion | $16.569 billion |
| Gross profit / margin | $3.781 billion / 22.6% | $3.752 billion / 22.6% |
| Operating income / margin | $335 million / 2.0% | $87 million / 0.5% |
| Net income (loss) | $(250) million | $(754) million |
| Diluted EPS | $(0.84) | $(2.58) |
| Cash flow from operations | $824 million | $1.547 billion |
| Capital expenditures | $647 million | $876 million |
| Cash and cash equivalents | $3.048 billion | $3.455 billion |
| Total debt principal | $9.711 billion | $10.694 billion |
Revenue was broadly flat as higher storage volumes and approximately 30 percentage points of exabyte growth were offset by lower average selling prices. HDD revenue increased to $8.967 billion from $8.746 billion, while flash-based revenue declined to $7.769 billion from $7.823 billion.
Data Center Devices and Solutions revenue increased 24% to $6.228 billion, driven principally by capacity enterprise HDD and flash demand. Client Devices revenue declined 12% to $7.160 billion, and Client Solutions revenue declined 3% to $3.348 billion. Exabytes shipped increased to 518 from 383.
Working capital was $4.642 billion. The cash conversion cycle increased to 71 days from 65 days, primarily because days sales outstanding increased to 52 days from 26 days. The company had $2.25 billion of undrawn revolving-credit availability and stated that available liquidity was sufficient for at least the next twelve months.
Material changes versus the prior comparable period
- Operating income improved by $248 million, primarily because fiscal 2020 had lower amortization, manufacturing underutilization, power-outage, and restructuring-related charges. These benefits were partly offset by lower pricing, COVID-19 costs, and higher per-unit HDD overhead during the ramp of 18-terabyte drives.
- Net loss narrowed by $504 million, although the company remained unprofitable because interest expense and tax expense exceeded operating income.
- Operating cash flow declined by $723 million, largely reflecting a $1.175 billion increase in accounts receivable and other working-capital movements.
- Debt principal declined by $983 million, including $725 million of voluntary Term Loan B-4 prepayments and $257 million of scheduled principal payments.
- Research and development expense increased $79 million to $2.261 billion, while selling, general and administrative expense decreased $164 million to $1.153 billion.
- The company exited its Storage Systems business. IntelliFlash was sold for $28 million, collected over three years, producing an approximately $17 million gain; ActiveScale was also sold, with immaterial proceeds and net assets.
- The company suspended its quarterly dividend in April 2020 and made no share repurchases during fiscal 2020. Fiscal-year declared dividends totaled $1.50 per share, or $449 million.
Guidance, outlook, commentary, risks, and unusual items
Management expected fiscal 2021 company and Flash Ventures property, plant and equipment expenditures of approximately $3.1 billion, with estimated net cash usage of approximately $1.3 billion after lease financing and operating cash flow. The company expected near-term gross-margin pressure from the ramp of new HDD products and continuing COVID-19 costs.
Management reported that fiscal 2020 revenue was not significantly affected by COVID-19 overall. Capacity-enterprise demand benefited from accelerated cloud adoption and remote work, while retail demand weakened. Management expected some softening in cloud demand as customers absorbed capacity additions and some improvement in retail demand as lockdown restrictions eased, but emphasized that the duration and effects of the pandemic were uncertain. COVID-related under-absorbed overhead, logistics, and other costs totaled approximately $110 million.
Flash Ventures with Kioxia supplies substantially all of the company’s flash memory. Western Digital owns 49.9% of each venture, must fund approximately half of fixed costs regardless of purchased output, and is committed to fund approximately 49.9% to 50% of capital investments when operating cash flow is insufficient. K1 production began in the third quarter of fiscal 2020, but meaningful output was not expected until the end of calendar 2020.
The company recorded $68 million of fiscal 2020 charges related to the June 2019 Yokkaichi power outage and continued to pursue recovery; the amount of any recovery could not be estimated. Flash Ventures-related guarantees totaled approximately $1.903 billion, and the company’s maximum reasonably estimable exposure to Flash Ventures was $4.304 billion.
Debt maturities are concentrated in fiscal 2023, when approximately $5.774 billion is due. The company was in compliance with its debt covenants at July 3, 2020. Approximately 65% of debt was variable rate; after interest-rate swaps, a one-percentage-point increase in variable rates would increase annual interest expense by approximately $43 million.
Other material matters include estimated contractual obligations of $21.639 billion, including debt, interest, Flash Ventures commitments, leases, purchase commitments, and mandatory deemed-repatriation tax. The IRS has asserted approximately $1.065 billion of additional federal tax for fiscal years 2008 through 2012, plus $340 million of proposed penalties; the company disputes the assessments. Unrecognized tax benefits, excluding interest and penalties, were approximately $717 million.
Important facts for investors to verify
- Whether enterprise HDD and flash demand remains strong after customers absorb pandemic-related cloud capacity additions.
- The pace, yield, and cost of the K1 ramp and Western Digital’s continuing capital commitments to Flash Ventures.
- Debt refinancing and deleveraging capacity, particularly ahead of the large fiscal 2023 maturities.
- Whether and when the suspended dividend and share-repurchase program resume.
- The effect of average selling-price declines, product mix, technology transitions, and new-drive ramp costs on gross margin.
- The eventual outcome and cash impact of the IRS tax dispute, unrecognized tax benefits, and mandatory deemed-repatriation tax payments.
- Potential additional COVID-19 effects on manufacturing, supply chains, retail demand, customer credit, and logistics costs.
- Recovery prospects related to the Yokkaichi power outage and other contingent claims or indemnification obligations.