WDC

Western Digital Corp. 10-Q Summary

Business Context and Reporting Period

Western Digital Corporation (WDC) filed a Quarterly Report on Form 10-Q for the period ended December 28, 2001. The company is a leading manufacturer of hard disk drives. During this period, the company continued to restructure its operations, having recently discontinued and sold its Connex and SANavigator businesses, which are now reported as discontinued operations. The primary business segment remains Western Digital Technologies, Inc. (WDT), focused on hard drives.

Key Financial Metrics

Note: Net income for the six-month period includes a $24.5 million gain from the disposal of discontinued operations.

Material Changes vs. Prior Period

• Revenue Growth: Revenues increased 2% year-over-year (Q3) and 3% for the six-month period. This growth was driven by a 25% increase in unit shipments (Q3) and 16% (six-month), partially offset by an 18% and 11% decline in average selling prices (ASPs), respectively.
• Profitability Improvement: Operating income improved significantly from $2.0 million in the prior year quarter to $9.6 million. For the six months, the company moved from an operating loss of $33.6 million to an operating income of $5.4 million.
• Discontinued Operations: The company recognized a $24.5 million gain from the sale of Connex and SANavigator assets during the six months ended December 28, 2001. In the prior year six-month period, these segments contributed a loss of $17.9 million.
• Expense Reduction: Research and Development (R&D) and Selling, General, and Administrative (SG&A) expenses decreased year-over-year due to cost reduction efforts in both the hard drive business and new ventures.

Guidance, Outlook, and Risks

Management Commentary: Management attributes the improvement in operating results to higher sales volume, improved cost management, and expense reduction efforts. The company successfully reduced its cash conversion cycle by 2 days compared to the prior year.

Liquidity: The company holds $193.3 million in cash and cash equivalents and has a $125 million revolving credit facility (currently unutilized). Management believes current resources are sufficient to meet working capital needs through the foreseeable future.

Risks and Contingencies:

• Legal Proceedings: A significant dispute exists with supplier Cirrus Logic, Inc. regarding approximately $27 million in disputed payables and $26 million in canceled purchase orders. Cirrus has sought writs of attachment for $25.2 million. The company does not currently believe this will have a material adverse effect.
• Market Conditions: The hard drive industry faces intense competition, declining ASPs, and short product life cycles. Demand is volatile and dependent on PC market trends.
• Supplier Dependence: The company relies on a limited number of suppliers, including Komag (currently in Chapter 11 reorganization) for media components.

Investor Verification Checklist

• Cirrus Logic Litigation: Verify the status of the $27 million disputed payable and the potential impact of the writs of attachment on liquidity.
• Discontinued Operations: Confirm the final settlement of the Connex and SANavigator sales, including any escrow releases or indemnification claims.
• Inventory Levels: Review the increase in inventory from $78.9 million to $96.4 million to assess potential obsolescence risks given declining ASPs.
• Convertible Debentures: Monitor the redemption schedule and the company's strategy for managing the $102.4 million book value of outstanding debentures.
• Supplier Stability: Assess the operational impact of Komag's Chapter 11 proceedings on media component supply.