10-QPeriod: Q2 FY2014

WESTERN DIGITAL CORP Quarterly Report for Q2 Ended Dec 27, 2013

Filed January 31, 2014For Securities:WDC

Summary

Western Digital Corporation (WDC) reported solid financial results for the quarter ended December 27, 2013, with a 4% increase in net revenue year-over-year to $3.97 billion. This growth was driven by a 7% increase in hard drive unit shipments, although offset by a slight decrease in average selling price (ASP). The company demonstrated improved profitability, with gross margin increasing to 28.7% from 27.7% in the prior year, attributed to cost improvements and operational efficiencies. While operating income remained flat at $478 million, net income saw a substantial increase to $430 million, up from $335 million in the prior year, signaling effective cost management and a stronger bottom line. Significant strategic acquisitions, including Virident and sTec, are beginning to be integrated, with management expecting them to bolster the company's position in the enterprise SSD market and overall storage solutions. Financially, WDC maintained a strong liquidity position with $4.7 billion in cash and cash equivalents at the end of the quarter. The company also refinanced its credit facility, securing a larger $4.0 billion unsecured loan facility, demonstrating continued access to capital. Investors should note the ongoing legal proceedings related to the Seagate arbitration award, which represents a significant contingent liability, although WDC continues to vigorously defend itself.

Financial Highlights

53 data points
Beta

Revenue

$3.97B

29.1% Gross Margin

Net Income

$430.00M

10.8% Net Margin

EPS (Diluted)

$1.77

Total Assets

$15.28B

Cash & Equivalents

$4.66B

Free Cash Flow

$556.00M

Financial Statements
Beta
Revenue$3.97B
Cost of Revenue$2.82B
Gross Profit$1.16B
SG&A Expenses$226.00M
Operating Expenses$678.00M
Operating Income$478.00M
Net Income$430.00M
EPS (Basic)$1.82
EPS (Diluted)$1.77
Shares Outstanding (Basic)236.00M
Shares Outstanding (Diluted)243.00M

Key Highlights

  • 1Net revenue increased by 4% year-over-year to $3.97 billion, driven by a 7% increase in hard drive unit shipments.
  • 2Gross margin improved to 28.7% from 27.7% in the prior year due to operational efficiencies and cost improvements.
  • 3Net income significantly increased to $430 million from $335 million year-over-year.
  • 4The company acquired Virident Systems, Inc. and sTec, Inc., integrating them to strengthen its position in enterprise SSDs and overall storage solutions.
  • 5Cash and cash equivalents remained strong at $4.7 billion at the end of the quarter.
  • 6WDC refinanced its credit facility, obtaining a new $4.0 billion unsecured loan agreement.
  • 7The company continues to aggressively repurchase shares, with $1.7 billion remaining under its stock repurchase program.

Frequently Asked Questions

The acquisitions of Virident (Oct 17, 2013) and sTec (Sep 12, 2013) are beginning to be integrated. While their individual financial impact was reported as immaterial for the current quarter's income statement, their R&D and SG&A expenses were included from their acquisition dates. Management expects these acquisitions to enhance HGST's solid-state storage capabilities and address enterprise customer needs.

The Seagate arbitration matter is ongoing, with an appeal before the Minnesota Supreme Court scheduled for February 2014. WDC strongly disagrees with the Minnesota Court of Appeals' decision to confirm the arbitration award. As of December 27, 2013, the company had accrued $732 million for this matter, which includes the arbitration award amount and accrued interest. This accrual represents a significant contingent liability, and the outcome remains uncertain.

Western Digital maintains a strong liquidity position with $4.7 billion in cash and cash equivalents. The company recently refinanced its credit facility, entering into a new $4.0 billion unsecured loan agreement consisting of a $2.5 billion term loan and a $1.5 billion revolving credit facility. This provides ample financial flexibility to meet working capital, capital expenditure, debt, and dividend needs. The company believes its current cash flow, cash on hand, and available credit facilities are sufficient for at least the next twelve months.

The increase in gross margin to 28.7% from 27.7% in the prior-year period is primarily attributed to cost improvements resulting from operational efficiencies. The company also benefited from a slight increase in hard drive unit shipments, which helped absorb fixed costs, though this was partially offset by a decrease in average selling price due to a competitive pricing environment.