1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
______________________________________
FORM 10-Q
(Mark One)
[X] Quarterly Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the quarterly period ended March 26, 1994.
OR
[ ] Transition Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from to
Commission file number 1-8703
WESTERN DIGITAL CORPORATION
------------------------------------------------------
(Exact name of Registrant as specified in its charter)
DELAWARE 95-2647125
- - ------------------------------- --------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
8105 Irvine Center Drive
Irvine, California 92718
---------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER INCLUDING AREA CODE (714) 932-5000
N/A
- - --------------------------------------------------------------------------------
Former name, former address and former fiscal year if changed since last report.
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No ___
Number of shares outstanding of Common Stock, as of April 30, 1994 is
44,773,002.
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WESTERN DIGITAL CORPORATION
INDEX
Page No.
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements of Operations - Three
Months Ended March 26, 1994 and March 27, 1993 . . . 3
Consolidated Statements of Operations - Nine
Months Ended March 26, 1994 and March 27, 1993 . . . 4
Consolidated Balance Sheets - March 26, 1994 and
June 30, 1993. . . . . . . . . . . . . . . . . . . . 5
Consolidated Statements of Cash Flows - Nine
Months Ended March 26, 1994 and March 27, 1993 . . . 6
Notes to Consolidated Financial Statements . . . . . 7
Item 2. Management's Discussion and Analysis of Financial
Conditions and Results of Operations . . . . . . . . 9
PART II OTHER INFORMATION
Item 1. Legal Proceedings . . . . . . . . .. . . . . . . . . 11
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . 11
Signatures. . . . . . . . . . . . . . . . . . . . . . . . . . 12
Index to Exhibits . . . . . . . . . . . . . . . . . . . . . . 13
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PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
WESTERN DIGITAL CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
THREE-MONTH PERIOD ENDED
------------------------
MARCH 26, MARCH 27,
1994 1993
--------- ---------
Revenues, net . . . . . . . . . . . . . . . $420,878 $325,407
Costs and expenses:
Cost of revenues . . . . . . . . . . . . 327,116 273,107
Research and development . . . . . . . . 27,542 24,946
Selling, general and administrative. . . 32,071 22,092
-------- --------
Total costs and expenses. . . . . . . 386,729 320,145
-------- --------
Operating income. . . . . . . . . . . . . . 34,149 5,262
Net interest expense. . . . . . . . . . . . 681 3,629
-------- --------
Income before income taxes. . . . . . . . . 33,468 1,633
Provision for income taxes. . . . . . . . . 5,020 --
-------- --------
Net income $ 28,448 $ 1,633
======== ========
Earnings per common and common
equivalent share (Note 2):
Primary . . . . . . . . . . . . . . . $ .64 $ .05
======== ========
Fully diluted . . . . . . . . . . . . $ .61 $ .05
======== ========
Common and common equivalent shares used
in computing per share amounts:
Primary . . . . . . . . . . . . . . . 44,480 35,302
======== ========
Fully diluted . . . . . . . . . . . . 48,863 35,306
======== ========
The accompanying notes are an integral part of these financial statements.
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WESTERN DIGITAL CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NINE-MONTH PERIOD ENDED
-----------------------
MARCH 26, MARCH 27,
1994 1993
--------- ---------
Revenues, net . . . . . . . . . . . . . . . . . . . . $1,077,448 $940,023
Costs and expenses:
Cost of revenues . . . . . . . . . . . . . . . . . 864,446 778,763
Research and development . . . . . . . . . . . . . 83,967 71,816
Selling, general and administrative. . . . . . . . 80,589 63,854
---------- --------
Total costs and expenses . . . . . . . . . . . 1,029,002 914,433
---------- --------
Operating income. . . . . . . . . . . . . . . . . . . 48,446 25,590
Net interest expense. . . . . . . . . . . . . . . . . 6,285 11,646
---------- --------
Income before income taxes. . . . . . . . . . . . . . 42,161 13,944
Provision for income taxes. . . . . . . . . . . . . . 6,324 1,231
---------- --------
Net income. . . . . . . . . . . . . . . . . . . . . . $ 35,837 $ 12,713
========== ========
Earnings per common and common
equivalent share (Note 2):
Primary . . . . . . . . . . . . . . . . . . . . $ .91 $ .39
========== ========
Fully diluted . . . . . . . . . . . . . . . . . $ .88 $ .39
========== ========
Common and common equivalent shares
used in computing per share amounts:
Primary . . . . . . . . . . . . . . . . . . . . 39,507 32,546
========== ========
Fully diluted . . . . . . . . . . . . . . . . . 44,917 32,681
========== ========
The accompanying notes are an integral part of these financial statements.
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WESTERN DIGITAL CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
MARCH 26, JUNE 30,
1994 1993
-------- --------
ASSETS
Current assets:
Cash and cash equivalents . . . . . . . . . . . . . . $173,396 $ 33,837
Accounts receivable, less allowance for doubtful
accounts of $10,611 and $9,340. . . . . . . . . . . 185,555 159,478
Inventories (Notes 3 and 4). . . . . . . . . . . . . 73,465 112,516
Prepaid expenses. . . . . . . . . . . . . . . . . . . 13,133 12,626
-------- --------
Total current assets. . . . . . . . . . . . . . . . 445,549 318,457
Property and equipment, at cost, less accumulated
depreciation and amortization (Note 4). . . . . . . . 78,280 181,030
Intangible and other assets, net (Note 4) . . . . . . . 31,485 31,684
-------- --------
Total assets. . . . . . . . . . . . . . . . . . . . $555,314 $531,171
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable . . . . . . . . . . . . . . . . . . . $133,069 $128,538
Accrued expenses (Note 4). . . . . . . . . . . . . . . 106,808 54,911
Current portion of long-term debt (Notes 4 and 5). . . -- 23,460
-------- --------
Total current liabilities. . . . . . . . . . . . . . 239,877 206,909
Other long-term debt, less current portion
(Notes 4 and 5) . . . . . . . . . . . . . . . . . . . -- 123,561
Convertible subordinated debentures. . . . . . . . . . . 58,870 59,000
Deferred income taxes. . . . . . . . . . . . . . . . . . 9,464 10,751
Commitments and contingent liabilities
Shareholders' equity:
Preferred stock, $.10 par value;
Authorized: 5,000 shares
Outstanding: None . . . . . . . . . . . . . . . . . -- --
Common stock, $.10 par value;
Authorized: 95,000 shares
Outstanding: 44,669 shares at March 26 and
35,338 shares at June 30 . . . . . . . 4,467 3,534
Additional paid-in capital . . . . . . . . . . . . . . 279,661 200,278
Accumulated deficit. . . . . . . . . . . . . . . . . . (37,025) (72,862)
-------- --------
Total shareholders' equity . . . . . . . . . . . . . 247,103 130,950
-------- --------
Total liabilities and shareholders' equity . . . . . $555,314 $531,171
======== ========
The accompanying notes are an integral part of these financial statements.
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WESTERN DIGITAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
NINE-MONTH PERIOD ENDED
------------------------
MARCH 26, MARCH 27,
1994 1993
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income . . . . . . . . . . . . . . . . . . . . . $ 35,837 $ 12,713
Adjustments to reconcile net income to net
cash provided by (used for) operating activities:
Depreciation and amortization. . . . . . . . . . . 37,668 39,160
Changes in current assets and liabilities, net of
effects from the sale of facility (Note 4):
Accounts receivable. . . . . . . . . . . . . . (26,077) (42,510)
Inventories. . . . . . . . . . . . . . . . . . 29,903 17,169
Prepaid expenses . . . . . . . . . . . . . . . (2,346) (2,239)
Accounts payable and accrued expenses. . . . . 37,244 31,916
Other assets . . . . . . . . . . . . . . . . . . . (2,563) (2,335)
Deferred income taxes. . . . . . . . . . . . . . . (1,287) (61)
-------- --------
Net cash provided by operating activities. . . 108,379 53,813
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures, net . . . . . . . . . . . . . (13,337) (34,021)
Proceeds from the sale of facility (Note 4). . . . . 110,677 --
-------- --------
Net cash provided by (used for) investing
activities . . . . . . . . . . . . . . . . . 97,340 (34,021)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of debt. . . . . . . . . . . . . . . . . . (146,346) (62,453)
Proceeds from stock offering, net (Note 6) . . . . . 73,293 42,390
Exercise of stock options and warrants . . . . . . . 6,893 1,404
-------- --------
Net cash used for financing activities . . . . (66,160) (18,659)
-------- --------
Net increase in cash and cash equivalents. . . . . . 139,559 1,133
Cash and cash equivalents, beginning of period . . . 33,837 33,815
-------- --------
Cash and cash equivalents, end of period . . . . . . $173,396 $ 34,948
======== ========
SUPPLEMENTAL DISCLOSURES:
Cash paid during the period for:
Interest . . . . . . . . . . . . . . . . . . . $ 4,889 $ 10,631
Income taxes . . . . . . . . . . . . . . . . . 1,419 1,026
The accompanying notes are an integral part of these financial statements.
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WESTERN DIGITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. The accounting policies followed by the Company are set forth in Note 1 of
Notes to Consolidated Financial Statements included in the Company's Annual
Report on Form 10-K for the year ended June 30, 1993. Quarterly information
is reported on a 13 week fiscal period which ends the last Saturday of the
quarter.
2. Primary earnings per share amounts are based upon the weighted average
number of shares and dilutive common stock equivalents calculated using the
average price of the Company's common stock for each period presented.
Fully diluted earnings per share additionally reflect dilutive shares
assumed to be issued upon conversion of the Company's convertible
debentures.
3. Inventories comprised the following:
MARCH 26, JUNE 30,
1994 1993
--------- --------
(IN THOUSANDS)
Finished goods . . . . . . . . . . . . . $24,993 $ 43,634
Work in process. . . . . . . . . . . . . 27,936 44,087
Raw materials and component parts. . . . 20,536 24,795
------- --------
$73,465 $112,516
======= ========
4. In December 1993, the Company sold its Irvine, California silicon wafer
fabrication facility and certain tangible assets to the Semiconductor
Products Sector of Motorola, Inc. ("Motorola") for approximately $110.6
million ($103.9 million in cash and a $6.7 million note payable, which has
been paid as of March 26, 1994) plus certain other considerations, including
the assumption by Motorola of equipment leases and certain other liabilities
associated with the facility. Approximately $95.0 million of the proceeds
from the sale were used to reduce bank indebtedness. Concurrent with the
sale, the Company entered into a supply contract with Motorola under which
Motorola will supply silicon wafers to Western Digital for at least two
years.
The gain on the sale of the facility, which has been reduced to provide for
certain additional costs necessary to conform the Company's operations to an
environment without in-house wafer fabrication facilities, is not material
to the financial position of the Company and is being deferred and amortized
over the life of the supply contract with Motorola.
5. In January 1994, the Company entered into a $75.0 million accounts
receivable facility with certain financial institutions. The facility
consists of a $50.0 million three-year arrangement at Eurodollar or
reference rates of the participating banks and a $25.0 million one-year
committed arrangement at a rate approximating commercial paper rates. This
new facility is intended to serve as a source of working capital as may be
needed from time to time and replaces a credit facility secured by
substantially all of the Company's assets, the remaining borrowings under
which were repaid on December 31, 1993. In March 1994, the facility was
amended to increase the one-year commitment to $35.0 million, for a total of
$85.0 million available credit.
6. In February 1993, the Company issued 7,618,711 shares of its common stock in
a public common stock offering. Proceeds from the offering, net of
commissions and other related expenses totaling $4.2 million, were $73.3
million. The proceeds were used for working capital and other general
corporate purposes.
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WESTERN DIGITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. In the opinion of management, all adjustments necessary to fairly state the
results of operations for the three and nine months ended March 26, 1994 and
March 27, 1993 have been made. All such adjustments are of a normal
recurring nature. Certain information and footnote disclosures normally
included in the financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted pursuant to
the rules and regulations of the Securities and Exchange Commission. These
consolidated financial statements should be read in conjunction with the
consolidated financial statements and the notes thereto included in the
Company's Annual Report.
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ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(DOLLAR AMOUNTS IN MILLIONS)
RESULTS OF OPERATIONS
Net income for the third quarter of 1994 was $28.4 million, compared with net
income of $1.6 million in the corresponding quarter of the prior year and $12.5
million in the immediately preceding quarter. Net income for the nine months
ended March 26, 1994 was $35.8 million versus $12.7 million for the same period
a year ago. Revenue for the three month period ended March 26, 1994 increased
29% to $420.9 million from $325.4 million in the third quarter of 1993 and 13%
from $371.1 million in the second quarter of 1994. Gross margins for the
current fiscal quarter improved six percentage points to 22.3% from 16.1% in
the same quarter a year ago as gross profit margins for the disk drive and
microcomputer products ("MCP") businesses improved five and 20 percentage
points, respectively. As compared with the immediately preceding quarter,
gross margin improved approximately three percentage points, despite a six
percent decline in disk drive average selling prices ("ASPs"), reflecting the
Company's continuing effort to improve manufacturing efficiencies. For the
nine months ended March 26, 1994, the Company increased its revenue and gross
margins to $1.08 billion and 19.8%, respectively, reflecting significant
increases in the volume of disk drive unit shipments and lower component costs
in both the disk drive and MCP businesses.
Revenue for disk drive products totaled $387.3 million in the third quarter of
1994, an increase of $54.5 million or 16% from the second quarter of 1994, as a
result of a 19% increase in unit shipments. Revenue for drive products for the
three and nine months ended March 26, 1994 increased $105.9 million or 38% and
$157.9 million or 20%, respectively, over the corresponding periods of the
prior year. These increases were the result of a 69% and 45% increase in the
volume of drives shipped over the corresponding three and nine month periods,
respectively, of the prior year and a shift in the mix to higher-capacity
drives.
Revenue for MCP totaled $33.6 million in the third quarter of 1994, a decrease
of $4.7 million, or 12% from the second quarter of 1994, primarily due to a
decrease in storage controller product revenue as a result of reduced unit
shipments to one customer period to period. Revenue for MCP for the three and
nine months ended March 26, 1994 decreased $10.4 million or 24% and $20.5
million or 15%, respectively, as compared with the corresponding periods of
the prior year. The decline in revenue for both periods reflects decreases
across all products lines.
Disk drive gross margin for the three months ended March 26, 1994 increased
approximately three and five percentage points to 21.2% from 18.3% in the
immediately preceding quarter and from 16.2% in the third quarter of the prior
year. The increases in gross margin are primarily the result of increased unit
shipments which reduced per unit product costs, lower component costs and a
favorable product mix. Disk drive gross margin for the nine months ended March
26, 1994 remained relatively flat as compared with the corresponding period of
the prior year due to the pricing pressures experienced in the disk drive
industry in the first quarter of 1994.
MCP gross margin for the third quarter of 1994 increased approximately four
percentage points to 35.0% from 31.2% in the immediately preceding quarter as
the Company began to realize the cost benefits of selling its wafer fabrication
facility (see Note 4) and thereby reducing manufacturing costs. MCP gross
margin for the three and nine month periods of the current fiscal year
increased approximately 20 and 21 percentage points, respectively, from 15.3%
and 10.5% in the same periods of the prior year. These increases in MCP gross
margins were primarily attributable to reduced product costs as a result of
realizing the cost of benefits of selling the wafer fabrication facility and
continued improvements in manufacturing efficiencies.
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ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(DOLLAR AMOUNTS IN MILLIONS)
Research and development expense ("R&D") for the third quarter of 1994
decreased approximately $2.5 million or 8% from the second quarter of 1994 as a
result of the timing of the completion of certain R&D related projects. R&D
expense for the three and nine months ended March 26, 1994 increased $2.6
million or 10% and $12.2 million or 17%, respectively, as compared with the
corresponding periods of the prior year. These increases were primarily
attributable to planned expenditures to support new product introductions for
the current fiscal year.
Selling, general and administrative ("SG&A") expense for the three months ended
March 26, 1994 increased $5.7 million or 21% from the preceding quarter. SG&A
expense for the three and nine month periods of the current year increased
$10.0 million or 45% and $16.7 million or 26%, respectively, as compared with
the three and nine month periods of 1993. The increases in SG&A expense for
all periods are primarily a result of increases in selling, marketing and other
related expenses in support of higher revenue levels and provisions made for
the Company's pay-for-performance plans.
Net interest expense decreased $1.9 million in the third quarter of
1994 as compared with the prior quarter due to significant reductions in debt
outstanding. Net interest expense decreased $2.9 million and $5.4 million from
the three and nine month periods of 1993, respectively, primarily due to lower
interest rates and significantly lower levels of debt outstanding during 1994
as compared with the prior periods.
FINANCIAL CONDITION
Cash and cash equivalents totaled $173.4 million at March 26, 1994 as compared
with $33.8 million at June 30, 1993. In the first nine months of 1994, the
Company generated $108.4 in cash from operations and $73.3 million in net
proceeds from the sale of 7,618,711 shares of common stock on February 8, 1994.
Cash flows from operations, along with approximately $95.0 million of proceeds
from the sale of the Company's wafer fabrication facility (see Note 4) were
used to reduce long-term debt by $146.3 million and to fund capital
expenditures of $13.3 million. Capital expenditures were incurred primarily
for increased disk drive manufacturing and wafer testing capacity.
In January 1994, the Company entered into a $75.0 million accounts receivable
facility with certain financial institutions. The facility consists of a $50.0
million three-year arrangement at Eurodollar or reference rates of the
participating banks and a $25.0 million one-year committed arrangement at a
rate approximating commercial paper rates. This new facility is intended to
serve as a source of working capital as may be needed from time to time and
replaces a credit facility secured by substantially all of the Company's
assets, the remaining borrowings under which were repaid on December 31, 1993.
In March 1994, the facility was amended to increase the one-year commitment to
$35.0 million, for a total of $85.0 million available credit.
Notwithstanding the significant improvements in financial position realized
over the past nine months, the ability of the Company to sustain its improved
working capital management and to continue operating profitably is dependent
upon a number of factors including competitive conditions in the marketplace,
general economic conditions, the efficiency of the Company's manufacturing
operations and the timely development and introduction of new products which
address market needs.
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PART II. OTHER INFORMATION
ITEM 1. Legal Procedings
The Company is engaged in litigation with Amstrad plc, a British
computer maker. For a complete discussion of this matter see Part II,
Item 1, "Legal Procedings" in the Quarterly Report on Form 10-Q for
the quarter ended December 25, 1993.
ITEM 6. Exhibits and reports on Form 8-K.
(a) Exhibits:
10.30 Receivables Contribution and Sale Agreement, dated as of
January 7, 1994 by and between the Company, as seller, and
Western Digital Capital Corporation, as buyer.
10.31 Receivables Purchase Agreement, dated as of January 7, 1994,
by and among Western Digital Capital Corporation, as seller,
the Company, as servicer, the Financial Institutions listed
therein, as bank purchasers and J.P. Morgan Delaware, as
administrative agent.
10.32 First Amendment to Receivables Purchase Agreement, dated
March 23, 1994, by and between Western Digital Corporation, as
seller and the Financial Institutions listed therein as bank
purchasers and administrative agents.
10.32.1 Assignment Agreement, dated as of March 23, 1994, by and between
J.P. Morgan Delaware as Bank Purchaser and Assignor and the Bank
of California, N.A. and the Long-Term Credit Bank of Japan, LTD.,
Los Angeles Agency as Assignees.
11 Computation of Per Share Earnings.
(b) Reports on Form 8-K:
On March 16, 1994, the Company filed a Current Report on Form 8-K
with the Securities and Exchange Commission reporting that a
proposed settlement of the pending class action securities
litigation against the Company received preliminary court
approval.
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SIGNATURES
- - ----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
WESTERN DIGITAL CORPORATION
--------------------------------
Registrant
/s/ Scott Mercer
---------------------------------
D. Scott Mercer
Executive Vice President,
Chief Financial and
Administrative Officer
Date: May 9, 1994
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EXHIBIT INDEX
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGE
------- ----------- -------------
10.30 Receivables Contribution and Sale Agreement, dated as of January 7, 1994 by and
between the Company, as seller, and Western Digital Capital Corporation, as buyer.
10.31 Receivables Purchase Agreement, dated as of January 7, 1994, by and among Western
Digital Capital Corporation, as seller, the Company, as servicer, the Financial
Institutions listed therein, as bank purchasers and J.P. Morgan Delaware, as
administrative agent.
10.32 First Amendment to Receivables Purchase Agreement, dated March 23, 1994, by and
between Western Digital Capital Corporation, as seller and the Financial Institutions
listed therein as bank purchasers and adminitrative agents.
10.32.1 Assignment Agreement, dated as of March 23, 1994, by and between J.P. Morgan Delaware
as Bank Purchaser and Assignor and The Bank of California, N.A. and The Long-Term
Credit Bank of Japan, LTD., Los Angeles Agency as Assignees.
11 Computation of Per Share Earnings.
13