Western Digital Corp. 10-Q Summary: Quarter Ended March 27, 2009
Business Context and Reporting Period
Western Digital Corporation (WDC) filed its Quarterly Report on Form 10-Q for the 13-week period ended March 27, 2009. The company designs, develops, manufactures, and sells hard drives for desktops, notebooks, enterprise applications, and consumer electronics. The fiscal year 2009 is a 53-week year ending July 3, 2009. The company operates manufacturing facilities in Malaysia and Thailand and is a large accelerated filer.
Key Financial Metrics
| Metric | Three Months Ended Mar 27, 2009 | Nine Months Ended Mar 27, 2009 |
|---|---|---|
| Net Revenue | $1,592 million | $5,524 million |
| Gross Margin | $253 million (15.9%) | $967 million (17.5%) |
| Operating Income | $61 million (3.8%) | $310 million (5.6%) |
| Net Income | $50 million | $274 million |
| Diluted EPS | $0.22 | $1.22 |
| Cash and Equivalents | $1,579 million (Balance Sheet) | N/A |
| Operating Cash Flow | N/A | $956 million |
| Total Debt | $502 million ($77M current + $425M long-term) | N/A |
Material Changes vs. Prior Period
- Revenue Decline: Net revenue decreased 25% year-over-year (YoY) for the quarter and 9% for the nine-month period. This was driven by an 8% decline in unit shipments (31.6 million units) and a 15% decline in average selling prices (ASP) to $50 per unit.
- Margin Compression: Gross margin percentage dropped 670 basis points to 15.9% for the quarter, primarily due to competitive pricing pressures and declining end-user demand.
- Restructuring Charges: The company recorded $4 million in restructuring expenses for the quarter and $117 million for the nine-month period as part of a plan to realign costs with softer demand. Total estimated restructuring costs are approximately $122 million.
- Acquisition: On March 27, 2009, WDC acquired SiliconSystems, Inc. for $66 million to expand solid-state drive capabilities. This resulted in a $14 million charge for acquired in-process research and development.
- Investment Impairments: The company recognized $10 million in other-than-temporary impairment charges on auction-rate securities during the nine-month period.
Guidance, Outlook, and Risks
- Outlook: Management expects revenue for the June quarter to be flat to slightly down, with gross margin percentage slightly down from the March quarter due to continuing global macroeconomic challenges and competitive pricing.
- Restructuring Progress: The restructuring plan, involving the closure of a Thailand facility and headcount reductions of approximately 3,400 people, is expected to be completed in the fourth fiscal quarter of 2009. Remaining cash expenditures are estimated at $23 million.
- Liquidity: The company ended the quarter with $1.6 billion in cash and cash equivalents. It maintains a $750 million credit facility with $250 million available for future borrowings.
- Risks: Key risks include the potential for further demand softening, inability to accurately forecast demand leading to inventory issues, credit risk associated with customers, and the impact of global economic conditions on the liquidity of auction-rate securities ($18 million held).
Investor Verification Checklist
- Inventory Levels: Verify the adequacy of inventory write-downs given the 15.9% gross margin and declining ASPs.
- Restructuring Execution: Monitor the timeline and cost realization of the $122 million restructuring plan, specifically the closure of the Thailand facility.
- Auction-Rate Securities: Assess the liquidity risk and potential for further impairment on the $18 million portfolio of auction-rate securities.
- Customer Concentration: Review the top 10 customers, which accounted for 47% of revenue in the quarter, for credit stability.
- Solid-State Integration: Evaluate the strategic impact and integration progress of the SiliconSystems acquisition.