Western Digital Corporation — Fiscal 2013 Form 10-K Summary
Reporting period: Fiscal year ended June 28, 2013; 52 weeks. The filing is an annual Form 10-K, not a standalone quarterly filing, but it includes fourth-quarter results. Western Digital operates storage businesses under the WD, HGST and G-Technology brands, with hard drives, solid-state storage and related products.
Financial performance and key metrics
| Metric | FY2013 | FY2012 | Change |
|---|---|---|---|
| Net revenue | $15.351 billion | $12.478 billion | +23% |
| Hard-drive units shipped | 242 million | 202 million | +20% |
| Average selling price per hard drive | $61 | $62 | Down $1 |
| Gross profit | $4.363 billion | $3.638 billion | +20% |
| Gross margin | 28.4% | 29.2% | Down 80 basis points |
| Operating income | $1.266 billion | $1.771 billion | Down 29% |
| Operating margin | 8.2% | 14.2% | Down 600 basis points |
| Net income | $980 million | $1.612 billion | Down 39% |
| Diluted EPS | $3.98 | $6.58 | Down 39% |
| Operating cash flow | $3.119 billion | $3.067 billion | +2% |
| Capital expenditures | $952 million | $717 million | +33% |
Non-PC markets, including enterprise, branded and consumer-electronics products, contributed approximately 50% of fiscal 2013 revenue, compared with 19% in fiscal 2012. PC shipments were 162 million units, while non-PC shipments were 80 million.
Liquidity, debt and capital allocation
- Cash and cash equivalents were $4.309 billion at year-end, up from $3.208 billion. Approximately $2.8 billion was held outside the United States.
- Working capital was $3.625 billion, compared with $3.109 billion in the prior year.
- Total long-term debt, including the current portion, was approximately $1.955 billion; $230 million was due within one year. The company had $500 million available under its revolving credit facility and was in compliance with all debt covenants.
- Debt repayments totaled $230 million during fiscal 2013. A remaining approximately $1.3 billion term-loan balance was scheduled to mature in fiscal 2017.
- The company repurchased 19.0 million shares for $842 million and had approximately $2.0 billion remaining under its repurchase authorization.
- The company declared $1.00 per share of dividends, totaling $240 million; $181 million was paid during the year. The dividend policy may be modified, suspended or canceled.
- Known contractual obligations totaled $7.660 billion, including $1.980 billion of debt, $5.302 billion of purchase obligations, $170 million of operating leases and $208 million of cash-related unrecognized tax benefits.
Material changes versus the prior comparable period
- Fiscal 2013 included a full year of HGST operations following its March 2012 acquisition. HGST contributed materially to the increase in revenue and unit shipments, but regulatory conditions limited integration and expected operating synergies.
- Revenue increased substantially despite soft industry demand, weak PC demand and a 9% estimated decline in overall industry unit volumes. The company’s growth reflected the HGST acquisition and greater non-PC exposure.
- Profitability deteriorated because of lower average selling prices, higher amortization, increased research and development and SG&A expenses, employee termination and other charges, and a $681 million arbitration charge.
- Research and development expense rose 49% to $1.572 billion, while SG&A expense rose 36% to $706 million.
- Operating cash flow remained strong, but financing cash flow turned negative because of share repurchases, dividends and debt repayment.
- Fiscal 2012 had included $214 million of net Thailand-flooding charges; no comparable flooding charge was recorded in fiscal 2013.
Fourth-quarter results and outlook
Fiscal fourth-quarter revenue was $3.728 billion, gross profit was $1.050 billion, operating loss was $221 million and net loss was $265 million, or $1.12 diluted loss per share. The quarter included the $681 million Seagate arbitration charge and $8 million of employee termination and other charges.
Management expected September-quarter industry shipments of approximately 135 million to 140 million units, modestly above the June quarter’s 133 million units. Revenue was expected to remain flat or increase slightly from the June quarter, reflecting modest price declines and a seasonal shift toward consumer-electronics and branded-product shipments.
Management cited long-term growth in digital data, cloud computing, enterprise storage, solid-state storage and branded products. The company entered an agreement to acquire sTec for approximately $340 million in cash, subject to customary closing conditions, to expand enterprise SSD capabilities.
Risks, contingencies and unusual items
- Seagate arbitration: The company accrued $706 million in total, including the $681 million fiscal 2013 charge. The Minnesota Court of Appeals ordered confirmation of the $630.4 million award, while the company intended to petition the Minnesota Supreme Court. If confirmed, additional post-award interest could apply.
- HGST regulatory restrictions: MOFCOM conditions required HGST to remain an independent competitor for at least two years after closing, limiting integration and synergies and creating compliance risk.
- Industry and pricing risk: PC weakness, tablet substitution, declining ASPs, excess capacity, volatile gross margins and intense competition could pressure revenue and profitability.
- Technology risk: Solid-state storage and other alternatives may displace hard drives. The company must fund significant R&D and capital investment while managing product transitions and inventory obsolescence.
- Manufacturing and supply-chain risk: Operations are concentrated in purpose-built facilities and depend on selected suppliers, including some sole-source suppliers. Natural disasters, labor disruption, component shortages and commodity-price volatility could affect production.
- Tax matters: The effective tax rate increased to approximately 20% from 8% in fiscal 2012. The company had $240 million of unrecognized tax benefits and ongoing IRS examinations; the filing does not provide a clear estimate of potential additional cash tax payments.
- Foreign earnings: Approximately $6.8 billion of foreign earnings were indefinitely reinvested. The company estimated a potential U.S. tax liability of $2.3 billion if those earnings were repatriated.
- Other unusual items: Fiscal 2013 included $138 million of employee termination benefits and other charges, an $88 million California Proposition 39 tax charge and a $37 million R&D tax-credit benefit.
Facts investors should verify
- Whether the Seagate arbitration award was ultimately confirmed, paid or otherwise resolved, and the resulting cash impact.
- Progress and financial contribution of the sTec acquisition and the company’s broader enterprise SSD strategy.
- Revenue mix, margins and market share as PC demand continues to weaken and non-PC markets expand.
- Debt repayment requirements, variable-rate exposure and compliance with credit-facility covenants.
- Sustainability of the dividend and share-repurchase program relative to operating cash flow and capital requirements.
- Expiration of foreign tax holidays and resolution of IRS examinations and other uncertain tax positions.
- Warranty, inventory, supplier-commitment and manufacturing-concentration exposures, particularly in Asia.