10-QPeriod: Q3 FY2012

WESTERN DIGITAL CORP Quarterly Report for Q3 Ended Mar 30, 2012

Filed May 9, 2012For Securities:WDC

Summary

Western Digital Corporation (WDC) reported its fiscal third-quarter and year-to-date results for the period ending March 30, 2012. The company completed a significant acquisition of Hitachi Global Storage Technologies (HGST) on March 8, 2012, which substantially impacted its financial statements. The acquisition led to a significant increase in total assets, goodwill, and debt. Revenue for the quarter increased by 35% year-over-year to $3.0 billion, primarily driven by higher average selling prices (ASPs) for hard drives, a consequence of industry-wide supply constraints from the Thailand floods. Gross margin also saw a substantial improvement, rising to 32.2% from 18.2% in the prior-year period. Despite these revenue and margin improvements, the company faced challenges. The devastating floods in Thailand in late 2011 resulted in significant charges and disruptions, though recovery efforts were underway and capacity was being restored. Furthermore, the company is involved in a substantial arbitration award dispute with Seagate Technology LLC, with a total award of $630.4 million, which WDC is contesting. The acquisition of HGST, while strategically significant, also brought integration challenges and associated expenses, as well as required regulatory divestitures. Investors should monitor the progress of the HGST integration, the resolution of the Seagate arbitration, and the ongoing impact of supply chain disruptions and recovery efforts.

Financial Highlights

51 data points
Beta

Revenue

$3.04B

32.2% Gross Margin

Net Income

$483.00M

15.9% Net Margin

EPS (Diluted)

$1.96

Total Assets

$14.51B

Cash & Equivalents

$3.38B

Free Cash Flow

$1.07B

Financial Statements
Beta
Revenue$3.04B
Cost of Revenue$2.06B
Gross Profit$977.00M
SG&A Expenses$155.00M
Operating Expenses$435.00M
Operating Income$542.00M
Net Income$483.00M
EPS (Basic)$2.00
EPS (Diluted)$1.96
Shares Outstanding (Basic)241.00M
Shares Outstanding (Diluted)246.00M

Key Highlights

  • 1Completion of the acquisition of Hitachi Global Storage Technologies (HGST) on March 8, 2012, significantly expanding the company's scale and product offerings.
  • 2Quarterly revenue increased 35% year-over-year to $3.0 billion, driven by higher Average Selling Prices (ASPs) due to industry-wide supply constraints post-Thailand flooding.
  • 3Gross margin improved significantly to 32.2% from 18.2% in the prior-year period, reflecting higher ASPs.
  • 4Net income for the quarter was $483 million, a substantial increase from $146 million in the prior-year period, benefiting from the HGST acquisition's revenue contribution and improved margins.
  • 5The company incurred significant charges related to the Thailand flooding in the nine months ended March 30, 2012 ($214 million), impacting operations and costs.
  • 6A substantial legal contingency exists due to an arbitration award against WDC in favor of Seagate Technology LLC, totaling $630.4 million, which WDC is contesting.
  • 7Total assets more than doubled from $8.1 billion to $14.5 billion, largely due to the HGST acquisition, with a significant increase in Goodwill.

Frequently Asked Questions

The acquisition of HGST significantly increased Western Digital's assets, including substantial increases in Property, Plant, and Equipment, Goodwill ($1.7 billion), and Intangible Assets ($793 million). It also led to a considerable rise in liabilities, particularly Long-Term Debt ($2.013 billion) and current portions of debt, to finance the transaction. This has fundamentally reshaped the company's balance sheet and capital structure.

The Thailand flooding in October 2011 severely impacted Western Digital's operations, leading to production suspensions and supply chain disruptions. This resulted in significant charges of $15 million in the three months ended March 30, 2012, and $214 million in the nine months ended March 30, 2012, encompassing asset impairments, recovery charges, and inventory write-downs. However, these charges were partially offset by insurance recoveries. The flooding also contributed to industry-wide supply constraints, which, paradoxically, helped drive up average selling prices (ASPs) for hard drives, positively impacting revenue and gross margin in the reported periods.

Western Digital is facing a significant legal contingency related to an arbitration award from Seagate Technology LLC. An arbitrator issued a final award of $630.4 million (including pre-award interest). Western Digital is vigorously contesting this award, filing a petition to have it vacated. The company has not recorded a liability for the award beyond a previously accrued $25 million, as it does not believe the award is probable of being sustained. However, if the award is upheld, it could have a material adverse effect on the company's financial condition, results of operations, and cash flows. The potential range of losses in excess of the accrued amount is estimated to be up to $605.4 million.

The company significantly increased its debt to finance the HGST acquisition. On March 8, 2012, Western Digital entered into a new $2.8 billion credit facility, consisting of a $2.3 billion term loan and a $500 million revolving credit facility. This facility was used, along with cash and newly issued stock, to fund the acquisition, repay existing debt, and repay debt assumed in the acquisition. As of March 30, 2012, the outstanding balance of the term loan was $2.2 billion, and the $500 million revolving credit facility was classified as a current liability, indicating an intention to repay it within one year.