01—Abstract
Summary
Summary of the 10-K filed September 29, 1995. Cited figures are marked; the original filing is the authoritative source.
Western Digital's fiscal 1995 (ended July 1, 1995) was a sharp turnaround year.
Revenue rose 38% to $2.13 billiona, up from $1.54 billion, driven mainly by hard drive revenue of $1.9 billion (up 41%) on 49% higher unit shipments, largely from OEM customers. Operating income more than doubled to $133.0 million from $91.9 million, and net income reached $123.3 million, or $2.56 per primary share, versus $73.1 million in 1994 and a $25.1 million loss in 1993. The improvement came despite a roughly two-point decline in overall gross margin to 18.5%, as hard drive gross margins fell from 19.1% to 16.2% amid heavier OEM volume and tougher industry pricing, while microcomputer products margins rose to 41.8%.
The company describes the hard drive market as highly cyclical with significant price erosion, so margin pressure is a structural risk for investors. The balance sheet improved markedly. Long-term debt was fully retired, with $58.1 millionb of 9% convertible debentures converted into equity during the year.
Cash and short-term investments reached $307.7 million, shareholders' equity rose to $473.4 millionc from $288.2 million, and working capital grew to $360.5 million. Operating cash flow was $121.3 million, and management plans capital expenditures of about $125 million in 1996, a significant step up from $54.8 million in 1995, to expand hard drive capacity. Accounts receivable grew faster than revenue, and inventories also rose, which investors should monitor against future demand.
Key risks include customer concentration (Gateway 2000 accounted for 11% of revenue), reliance on a single thin-film head supplier (Read-Rite), dependence on manufacturing in Singapore and Malaysia, and several pending lawsuits. The Amstrad suit seeks $186.0 milliond, and Conner and Rodime patent claims could be material, though management believes none will have a material adverse effect. The company has not paid cash dividends and does not intend to in the foreseeable future.
02—Key points
Key Highlights
- Revenue grew 38% to $2,130.9 million in fiscal 1995, with hard drive revenue up 41% to $1.9 billion on 49% higher unit shipments.
- Net income of $123.3 million ($2.56 primary EPS) compared with $73.1 million in 1994 and a $25.1 million loss in 1993.
- Overall gross margin declined to 18.5% from 20.6%, as hard drive margins fell to 16.2% from 19.1% under OEM pricing and industry competition, while microcomputer product margins improved to 41.8%.
- Long-term debt was eliminated: $58.1 million of convertible debentures converted to common stock, and the remaining $0.5 million was redeemed.
- Cash and short-term investments of $307.7 million and working capital of $360.5 million, with shareholders' equity up to $473.4 million.
- Planned 1996 capital expenditures of about $125.0 million, more than double the $54.8 million spent in 1995, to expand hard drive capacity.
- Material litigation remains: Amstrad seeks $186.0 million, and Conner and Rodime patent suits could be material, though management considers none likely to have a material adverse effect.
03—Questions
Frequently Asked Questions
What drove Western Digital's profit improvement in fiscal 1995?
Profit rose mainly from volume. Hard drive unit shipments grew 49%, mostly from OEM customers, and revenue rose 38% to $2.13 billion. Operating expenses fell as a share of revenue, and net interest and other income swung to $12.0 million from a $5.8 million expense, helping net income reach $123.3 million.
Is the company's gross margin trend a concern?
Yes, it is a watch item. Overall gross margin fell about two points to 18.5%. Hard drive margins dropped to 16.2% because of lower-margin OEM business and more intense industry competition. Management attributes the decline to shorter product cycles and industry capacity matching demand more closely. Microcomputer product margins, by contrast, improved to 41.8% after the fabless manufacturing shift.
How strong is the balance sheet after the debt conversion?
Considerably stronger. The company has no long-term debt, having converted most of its 9% convertible subordinated debentures into equity. It holds $307.7 million in cash and short-term investments and has an undrawn $85.0 million accounts receivable facility. Shareholders' equity rose 64% to $473.4 million. Equity expansion came partly from the debenture conversion and stock issuances.
What are the main risks to the business?
The hard drive market is highly cyclical with steep price erosion. The company depends on Gateway 2000 (11% of 1995 revenue) and other major OEMs, and it buys substantially all thin-film heads from Read-Rite. Its manufacturing is concentrated in Singapore and Malaysia, with exposure to foreign political, currency, and trade risks. Component shortages and yield problems during new product ramps could also hurt results.
Does the company pay dividends, and what are its capital plans?
No. Western Digital has never paid cash dividends and does not expect to in the foreseeable future, so returns depend on share price appreciation. Capital spending is set to rise sharply, to about $125.0 million in 1996, for hard drive capacity expansion. The company also repurchased 805,000 shares for $10.8 million in 1995.
04—Continue