Western Digital Corp. 10-Q Summary
Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended March 29, 2002, and the nine-month period ended on the same date. Western Digital Corporation is a leading supplier of hard drives for the desktop personal computer market. The company operates primarily through its hard drive business segment (Western Digital Technologies, Inc. or "WDT") and has significantly reduced its exposure to new business ventures (such as Connex and SANavigator) which were discontinued or divested during the prior fiscal year.
Key Financial Metrics
| Metric (in thousands) | Three Months Ended Mar 29, 2002 |
Three Months Ended Mar 30, 2001 |
Nine Months Ended Mar 29, 2002 |
Nine Months Ended Mar 30, 2001 |
|---|---|---|---|---|
| Revenues, net | $594,867 | $511,723 | $1,610,480 | $1,497,659 |
| Operating Income | $18,052 | $985 | $23,472 | $(32,604) |
| Net Income (Loss) | $19,198 | $(5,748) | $52,310 | $(37,687) |
| Diluted EPS | $0.10 | $(0.03) | $0.27 | $(0.23) |
| Cash and Equivalents | $226,487 | $167,582 | $226,487 | $167,582 |
| Working Capital | $106,026 | $45,363 | $106,026 | $45,363 |
| Convertible Debentures | $89,517 | $112,491 | $89,517 | $112,491 |
Note: Working capital calculated as Total Current Assets ($524,561) minus Total Current Liabilities ($418,535) for Mar 29, 2002. Prior period working capital calculated as $385,709 - $340,346.
- Gross Margin: Improved to 13.6% for the quarter ended March 29, 2002, compared to 12.4% in the prior year quarter.
- Cash Flow: Net cash provided by continuing operations was $63.0 million for the nine months ended March 29, 2002, a significant improvement from a net cash use of $59.3 million in the prior year period.
Material Changes vs. Prior Period
- Revenue Growth: Quarterly revenue increased 16% year-over-year, driven by a 39% increase in unit shipments, partially offset by a 17% decrease in average selling prices (ASPs). Nine-month revenue increased 8%.
- Profitability Turnaround: The company returned to profitability, reporting net income of $19.2 million for the quarter compared to a loss of $5.7 million in the prior year. This was driven by a $13.1 million increase in operating income from the hard drive business and reduced losses from new ventures.
- Discontinued Operations: The company recognized a gain of $24.5 million on the disposal of discontinued operations (Connex and SANavigator) during the nine-month period, which was excluded from continuing operations in the prior year.
- Debt Reduction: The company redeemed a portion of its convertible debentures, reducing the book value from $112.5 million to $89.5 million. This involved issuing 2.6 million shares of common stock and $13.2 million in cash.
Guidance, Outlook, and Risks
Management Commentary: Management attributes the improved results to lower cost design efforts, higher unit volume, and a strategic shift of resources from new ventures to the core hard drive business. The cash conversion cycle was reduced by 3 days compared to the prior year.
Outlook: The company expects average selling prices to continue to decline due to industry competition and rapid technological advances. Forecasts for calendar year 2002 are described as cautious due to weak PC demand.
Risks and Contingencies:
- Legal Proceedings: A significant dispute exists with supplier Cirrus Logic, Inc. regarding approximately $27 million in disputed accounts payable and $26 million in canceled purchase orders. The company has posted a $25.2 million letter of credit to satisfy writs of attachment. The company does not currently believe the outcome will be materially adverse.
- Supplier Dependence: The company relies heavily on Komag for media components; Komag is currently in Chapter 11 reorganization.
- Market Volatility: The hard drive industry is characterized by short product life cycles, declining ASPs, and rapid shifts in market share.
Investor Verification Checklist
- Cirrus Logic Litigation: Verify the status of the $27 million disputed payable and the potential impact of the $26 million in canceled orders on future liquidity and operations.
- Komag Supply Chain: Assess the risk of supply disruption given Komag's Chapter 11 status and Western Digital's dependence on them for media components.
- ASP Trends: Monitor the trajectory of average selling prices, as management explicitly forecasts continued declines which could pressure margins despite volume growth.
- Convertible Debentures: Review the terms of the remaining $203.6 million principal amount of debentures due 2018, specifically the repurchase options available to holders in 2003, 2008, and 2013.
- Discontinued Operations: Confirm that the $24.5 million gain from the sale of Connex and SANavigator is a one-time event and not indicative of recurring revenue streams.