10-QPeriod: Q1 FY2019

WESTERN DIGITAL CORP Quarterly Report for Q1 Ended Sep 28, 2018

Filed November 6, 2018For Securities:WDC

Summary

Western Digital Corporation (WDC) reported a decrease in revenue for the first quarter of fiscal year 2019 compared to the prior year, primarily driven by lower average selling prices (ASPs) for flash-based products. Gross profit also saw a significant decline due to these lower ASPs, despite some improvements in production costs. Operating expenses were managed effectively with reductions in R&D and SG&A. The company's liquidity remains sufficient, with cash generated from operations and available credit facilities expected to cover working capital, debt, and capital expenditure needs for at least the next twelve months. However, the company is facing increased headwinds in the flash industry due to normalizing demand and improving supply, leading to expected underutilization charges in cost of sales. Significant debt levels persist, and the company is managing its obligations while continuing its share repurchase program and paying dividends.

Financial Highlights

57 data points
Beta

Revenue

$5.03B

33.1% Gross Margin

Net Income

$511.00M

10.2% Net Margin

EPS (Diluted)

$1.71

Total Assets

$28.70B

Cash & Equivalents

$4.65B

Free Cash Flow

$428.00M

Financial Statements
Beta
Revenue$5.03B
Cost of Revenue$3.36B
Gross Profit$1.66B
SG&A Expenses$356.00M
Operating Expenses$978.00M
Operating Income$686.00M
Interest Expense$116.00M
Net Income$511.00M
EPS (Basic)$1.75
EPS (Diluted)$1.71
Shares Outstanding (Basic)292.00M
Shares Outstanding (Diluted)298.00M

Key Highlights

  • 1Revenue decreased by 3.0% year-over-year to $5.03 billion, primarily due to lower average selling prices (ASPs) for flash-based products.
  • 2Gross profit declined by 13.0% year-over-year to $1.66 billion, impacted by lower ASPs, although partially offset by cost improvements.
  • 3Net income decreased by 25.0% year-over-year to $511 million, resulting in diluted EPS of $1.71.
  • 4Operating cash flow was $705 million, a decrease from $1.13 billion in the prior year's comparable quarter.
  • 5The company repurchased $563 million of its common stock during the quarter under its new $5.00 billion share repurchase program.
  • 6The company's balance sheet shows total assets of $28.71 billion and total liabilities of $17.33 billion as of September 28, 2018.
  • 7The company expects underutilization charges in cost of sales for flash manufacturing in the range of $250 million to $300 million spread over the remainder of fiscal year 2019 due to expected reductions in wafer starts.

Frequently Asked Questions

The primary driver for the year-over-year revenue decline was lower average selling prices (ASPs) per gigabyte for flash-based products. This impacted the Client Devices and Client Solutions segments significantly.

The company has a substantial debt level of approximately $11.34 billion. While the company is managing its debt, it is subject to financial covenants. The decrease in interest expense during the quarter was due to reductions in the principal amount of debt and lower interest rates resulting from changes to debt facilities.

The flash industry is normalizing, with supply increasing relative to demand, leading to declining ASPs. WDC is responding by reducing wafer starts and delaying capital equipment deployment for flash production, expecting to reduce output by 10-15% in calendar year 2019. However, this is expected to result in underutilization charges of $250-300 million in cost of sales during fiscal year 2019.

The company continues to return capital to shareholders through dividends ($0.50 per share declared for the quarter) and share repurchases. During the quarter, WDC repurchased $563 million of its common stock under a new $5.00 billion authorization. The company expects its cash position and operating cash flows to be sufficient to meet its financial obligations, including capital expenditures and shareholder returns.