10-QPeriod: Q1 FY2004

WESTERN DIGITAL CORP Quarterly Report for Q1 Ended Sep 26, 2003

Filed November 7, 2003For Securities:WDC

Summary

Western Digital Corporation (WDC) reported its fiscal third-quarter results for the period ending September 26, 2003. The company experienced a significant revenue increase of 22.5% year-over-year, reaching $714.2 million, driven by higher unit shipments and improved market share, particularly in emerging markets. However, net income saw a substantial decline from $22.2 million in the prior year's comparable quarter to $5.0 million. This reduction in profitability was largely attributed to significant one-time charges, including $25.6 million for acquired in-process research and development related to the acquisition of assets from Read-Rite Corporation, and other integration costs associated with this strategic move to enhance operational flexibility and secure future head technologies. The acquisition of Read-Rite's assets, completed on July 31, 2003, for $172 million, is expected to improve gross margins in the long term by integrating head manufacturing. Despite the immediate impact on net income, the company's balance sheet shows a decrease in cash and cash equivalents from $393.2 million to $285.8 million, reflecting substantial investments in the acquisition and capital expenditures. Management believes current cash on hand is sufficient for working capital needs, and the company secured a new $125 million credit facility to support its operations.

Key Highlights

  • 1Revenue increased by 22.5% to $714.2 million in the quarter compared to the prior year, driven by a 27% increase in unit shipments.
  • 2Net income significantly decreased to $5.0 million from $22.2 million in the comparable prior-year period.
  • 3The company incurred a $25.6 million charge for acquired in-process research and development related to the Read-Rite asset acquisition.
  • 4Gross margin percentage declined slightly to 13.5% from 14.3%, impacted by $18.1 million in start-up expenses for the acquired head manufacturing operations.
  • 5Operating expenses increased substantially due to R&D charges from the acquisition and ongoing head-design R&D.
  • 6Cash and cash equivalents decreased to $285.8 million from $393.2 million, primarily due to the $94.8 million cash portion of the Read-Rite acquisition and capital expenditures.
  • 7A new $125 million five-year credit facility was secured, replacing a previous one.

Frequently Asked Questions

The primary driver for the decrease in net income was a $25.6 million charge for acquired in-process research and development related to the acquisition of assets from Read-Rite Corporation. Additionally, other acquisition-related charges and start-up expenses for the newly acquired head manufacturing operations also impacted profitability.

The acquisition of substantially all of Read-Rite Corporation's assets was a strategic move to increase operational flexibility and ensure access to future head technologies. While it incurred significant upfront charges, the company expects it to improve gross margins in the second half of fiscal year 2004 through improved efficiencies in head manufacturing.

Cash and cash equivalents decreased by approximately $107.4 million during the quarter, ending at $285.8 million. This was mainly due to cash used for the Read-Rite acquisition and capital expenditures. The company also entered into a new $125 million credit facility, indicating a need for ongoing financial flexibility. Management believes current cash is sufficient for working capital needs.

The company settled litigation with Cirrus Logic for $45.0 million, which was paid in October 2003. The difference between this settlement amount and the previously recorded $26.5 million obligation was included in the cost of sales for the fourth quarter and fiscal year ended June 27, 2003. This settlement resolved a dispute over disputed payables and had a letter of credit posted under the new credit facility released post-period.