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 April 1, 1995.
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
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(Exact name of Registrant as specified in its charter)
DELAWARE 95-2647125
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
8105 Irvine Center Drive
Irvine, California 92718
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(Address of principal executive offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER INCLUDING AREA CODE (714) 932-5000
N/A
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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 May 1, 1995 is
46,384,564.
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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 April 1, 1995 and March 26, 1994 . . . . 3
Consolidated Statements of Operations - Nine
Months Ended April 1, 1995 and March 26, 1994 . . . . 4
Consolidated Balance Sheets - April 1, 1995 and
June 30, 1994 . . . . . . . . . . . . . . . . . . . . 5
Consolidated Statements of Cash Flows - Nine
Months Ended April 1, 1995 and March 26, 1994 . . . . 6
Notes to Consolidated Financial Statements . . . . . 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations . . . . . . . . . 8
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . 10
Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Index to Exhibits . . . . . . . . . . . . . . . . . . . . . . . . 12
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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
----------------------------------
APRIL 1, MARCH 26,
1995 1994
-------- ---------
Revenues, net . . . . . . . . . . . . . . . . . . . . . . $529,297 $420,878
Costs and expenses:
Cost of revenues . . . . . . . . . . . . . . . . 440,929 327,116
Research and development . . . . . . . . . . . . 33,500 27,542
Selling, general and administrative . . . . . . 34,204 32,071
-------- --------
Total costs and expenses . . . . . . . . 508,633 386,729
-------- --------
Operating income . . . . . . . . . . . . . . . . . . . . 20,664 34,149
Interest and other income (expense), net . . . . . . . . 2,430 (681)
-------- --------
Income before income taxes . . . . . . . . . . . . . . . 23,094 33,468
Provision for income taxes . . . . . . . . . . . . . . . 3,444 5,020
-------- --------
Net income . . . . . . . . . . . . . . . . . . . . . . . $ 19,650 $ 28,448
======== ========
Earnings per common and common
equivalent share (Note 2):
Primary . . . . . . . . . . . . . . . . $ .40 $ .64
======== ========
Fully diluted . . . . . . . . . . . . . $ .40 $ .61
======== ========
Common and common equivalent shares used
in computing per share amounts:
Primary . . . . . . . . . . . . . . . . 48,586 44,480
======== ========
Fully diluted . . . . . . . . . . . . . 51,386 48,863
======== ========
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
-----------------------------------
APRIL 1, MARCH 26,
1995 1994
---------- ----------
Revenues, net . . . . . . . . . . . . . . . . . . . . . . $1,545,831 $1,077,448
Costs and expenses:
Cost of revenues . . . . . . . . . . . . . . . . 1,250,656 864,446
Research and development . . . . . . . . . . . . 93,087 83,967
Selling, general and administrative . . . . . . 96,192 80,589
---------- ----------
Total costs and expenses . . . . . . . . 1,439,935 1,029,002
---------- ----------
Operating income . . . . . . . . . . . . . . . . . . . . 105,896 48,446
Interest and other income (expense), net . . . . . . . . 8,106 (6,285)
---------- ----------
Income before income taxes . . . . . . . . . . . . . . . 114,002 42,161
Provision for income taxes . . . . . . . . . . . . . . . 17,080 6,324
---------- ----------
Net income . . . . . . . . . . . . . . . . . . . . . . . $ 96,922 $ 35,837
========== ==========
Earnings per common and common equivalent
share (Note 2):
Primary . . . . . . . . . . . . . . . . $ 2.03 $ .91
========== ==========
Fully diluted . . . . . . . . . . . . . $ 1.95 $ .88
========== ==========
Common and common equivalent shares used
in computing per share amounts:
Primary . . . . . . . . . . . . . . . . 47,844 39,507
========== ==========
Fully diluted . . . . . . . . . . . . . 51,364 44,917
========== ==========
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)
APRIL 1, JUNE 30,
1995 1994
-------- --------
ASSETS
Current assets:
Cash and cash equivalents . . . . . . . . . . . . . $188,717 $243,484
Short-term investments (Note 1) . . . . . . . . . . 91,619 --
Accounts receivable, less allowance for doubtful
accounts of $10,761 and $10,825 . . . . . . . . 255,923 201,512
Inventories (Note 3) . . . . . . . . . . . . . . . 93,742 79,575
Prepaid expenses . . . . . . . . . . . . . . . . . . 26,249 12,917
-------- --------
Total current assets . . . . . . . . . . . . 656,250 537,488
Property and equipment, at cost, less accumulated
depreciation and amortization . . . . . . . . . . . 82,864 73,417
Intangible and other assets, net . . . . . . . . . . . . . . 38,884 29,608
-------- --------
Total assets . . . . . . . . . . . . . . . . $777,998 $640,513
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable . . . . . . . . . . . . . . . . . . $198,201 $172,730
Accrued expenses . . . . . . . . . . . . . . . . . . 114,869 103,014
-------- --------
Total current liabilities . . . . . . . . . 313,070 275,744
Convertible subordinated debentures . . . . . . . . . . . . . 40,464 58,646
Deferred income taxes . . . . . . . . . . . . . . . . . . . . 23,570 17,884
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: 46,314 shares at
April 1 and 44,895 shares
at June 30 . . . . . . . . . . . . . . . . . 4,631 4,490
Additional paid-in capital . . . . . . . . . . . . . 299,067 283,475
Retained earnings . . . . . . . . . . . . . . . . . 97,196 274
-------- ---------
Total shareholders' equity . . . . . . . . . 400,894 288,239
-------- --------
Total liabilities and shareholders' equity . $777,998 $640,513
======== ========
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
----------------------------------
APRIL 1, MARCH 26,
1995 1994
---------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income . . . . . . . . . . . . . . . . . . . $ 96,922 $ 35,837
Adjustments to reconcile net income to net
cash provided by (used for) operating activities:
Depreciation and amortization . . . . . . . . . 31,914 37,668
Changes in current assets and liabilities:
Accounts receivable . . . . . . . . . . . . (54,411) (26,077)
Inventories . . . . . . . . . . . . . . . . (14,167) 29,903
Prepaid expenses . . . . . . . . . . . . . (13,332) (2,346)
Accounts payable and accrued expenses . . . 37,326 37,244
Intangible and other assets . . . . . . . . . . . . . (11,794) (2,563)
Deferred income taxes . . . . . . . . . . . . . . . . 5,686 (1,287)
--------- ---------
Net cash provided by operating activities . . . . 78,144 108,379
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Increase in short-term investments . . . . . . . . . (91,619) --
Capital expenditures, net . . . . . . . . . . . . . . (38,843) (13,337)
Proceeds from the sale of facility . . . . . . . . . -- 110,677
--------- ---------
Net cash provided by (used for) investing
activities . . . . . . . . . . . . . . . . (130,462) 97,340
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of debt . . . . . . . . . . . . . . . . . . -- (146,346)
Proceeds from stock offering, net . . . . . . . . . . -- 73,293
Repurchase of common stock . . . . . . . . . . . . . (10,822) --
Exercise of stock options and warrants . . . . . . . 8,373 6,893
--------- ---------
Net cash used for financing activities . . . . . (2,449) (66,160)
--------- ---------
Net increase (decrease) in cash and cash equivalents (54,767) 139,559
Cash and cash equivalents, beginning of period . . . 243,484 33,837
--------- ---------
Cash and cash equivalents, end of period . . . . . . $ 188,717 $ 173,396
========= =========
SUPPLEMENTAL DISCLOSURES:
Cash paid during the period for:
Interest . . . . . . . . . . . . . . . . . . . . $ 2,703 $ 4,889
Income taxes . . . . . . . . . . . . . . . . . . 5,021 1,419
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, 1994.
All highly liquid investments purchased with an original maturity of
three months or less are considered cash equivalents. Similar
investments with original maturities beyond three months and less than
twelve months are considered short-term investments and are carried at
cost, which approximates market.
2. Primary earnings per share amounts are based upon the weighted average
number of shares and dilutive common stock equivalents for each period
presented. Fully diluted earnings per share additionally reflect
dilutive shares assumed to be issued upon conversion of the Company's
convertible subordinated debentures.
3. Inventories comprised the following:
APRIL 1, JUNE 30,
1995 1994
----------- --------
(in thousands)
Finished goods . . . . . . . . . . . . . $28,958 $27,847
Work in process . . . . . . . . . . . . 36,267 32,178
Raw materials and component parts . . . 28,517 19,550
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$93,742 $79,575
======= =======
4. During the nine months ended April 1, 1995, approximately $18.2
million of the Company's 9% convertible subordinated debentures, due
2014, were converted into 1,258,266 shares of the Company's common
stock.
The Company repurchased 805,000 shares of its common stock in the open
market at a cost of approximately $11 million.
5. On November 8, 1994, the Company entered into a patent cross-license
agreement with International Business Machines Corporation ("IBM").
The license granted from IBM covers the Company's entire product line.
Under the agreement, the Company will make a series of payments to
IBM. The payments are not expected to have a material impact on the
Company.
6. In the opinion of management, all adjustments necessary to fairly
state the results of operations for the three and nine months ended
April 1, 1995 and March 26, 1994 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 on Form 10-K for the year ended June 30, 1994.
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ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Revenue for the personal storage group ("PSG"), the Company's hard drive
business targeted at desktop and portable personal computer applications,
totaled $481.2 million in the third quarter of 1995, a decrease of $18.6
million or 4% from the second quarter of 1995. PSG revenue was impacted in the
third quarter of 1995 by an industry-wide shortage of certain component parts,
which limited the Company's ability to increase unit shipments from the second
quarter. Average selling prices ("ASPs") declined approximately 11% from the
second quarter as the Company shipped a greater proportion of its units to
certain new OEM customers, which resulted in a higher concentration of lower
capacity drives sold during the quarter. Revenue for PSG for the three and
nine months ended April 1, 1995 increased $93.9 million or 24% and $432.4
million or 45%, respectively, over the corresponding periods of the prior year.
These increases were the result of a 33% and 55% increase in the volume of
drives shipped over the corresponding three and nine month periods,
respectively, partially offset by a decline in ASPs.
Revenue for microcomputer products ("MCP") totaled $48.1 million in the third
quarter of 1995, down $4.1 million, or 8% from the second quarter of 1995,
primarily due to a decrease in multimedia product revenue, partially offset by
higher sales of input/output products. Revenue for MCP for the three and nine
months ended April 1, 1995 increased $14.5 million or 43% and $36 million or
31%, respectively, as compared with the corresponding periods of the prior
year, reflecting increased revenue across all products lines.
Gross Profit Margin
----------------------------------- Nine-Month
Three-Month Period Ended Period Ended
----------------------------------- --------------------
4/1/95 12/31/94 3/26/94 4/1/95 3/26/94
------ -------- ------- ------ -------
PSG 14.0% 17.4% 21.2% 16.7% 18.3%
MCP 43.2% 42.0% 34.8% 41.5% 31.1%
Consolidated 16.7% 19.8% 22.3% 19.1% 19.8%
PSG gross margin for the three months ended April 1, 1995 decreased
approximately three and seven percentage points from the second quarter of 1995
and the third quarter of 1994, respectively. PSG gross margin for the nine
months ended April 1, 1995 decreased by approximately two percentage points from
the corresponding period of the prior year. The decreases in gross margin
resulted from the higher concentration of lower capacity drives sold during the
quarter, reflecting the shift in customer mix, a decline in ASPs, which were
not fully offset by reductions in product costs, and component shortages.
MCP gross margin for the third quarter of 1995 increased approximately one
percentage point from the immediately preceding quarter, primarily due to a
change in the mix of products sold. MCP gross margin for the three and nine
month periods of the current fiscal year increased approximately eight and 10
percentage points, respectively, from the corresponding periods of the prior
year. The improvements in MCP gross margins were primarily attributable to the
cost benefits realized from selling the wafer fabrication facility during 1994,
which reduced product costs.
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ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Research and development expense ("R&D") for the third quarter of 1995
increased approximately $2.6 million or 8% from the second quarter of 1995.
R&D expense for the three and nine months ended April 1, 1995 increased $6
million or 22% and $9.1 million or 11%, 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 and to support its high performance storage product
development activities.
Selling, general and administrative ("SG&A") expense for the three months ended
April 1, 1995 increased $3.4 million or 11% from the preceding quarter,
primarily due to higher royalty expense in the current quarter. SG&A expense
for the three and nine month periods of the current year increased $2.1 million
or 7% and $15.6 million or 19%, respectively, as compared with the
corresponding three and nine month periods of 1994. These increases are
primarily the result of increased selling, marketing and other related expenses
in support of higher revenue levels and higher variable compensation plan
accruals.
Interest and other income for the current quarter was $2.4 million, as
compared with $2.7 million in the preceding quarter and net interest expense of
$.7 million in the third quarter of 1994. Interest and other income was $8.1
million for the nine months ended April 1, 1995, an improvement of $14.4
million over net interest expense in the corresponding period of the prior
year. The decrease in interest and other income over the immediately preceding
quarter is primarily due to a reduction in interest expense as a result of the
conversion of $15.6 million of 9% convertible subordinated debentures into
common stock during the current quarter. The improvement over the prior year
is the result of significantly lower levels of debt outstanding and higher
average cash balances.
FINANCIAL CONDITION
Cash and short-term investments totaled $280.3 million at April 1, 1995 as
compared with $243.5 million at June 30, 1994. Cash flows from operations
were $78.1 million, with cash flows from earnings, depreciation, and an
increase in current liabilities being offset by cash used to fund increased
receivables and inventories. Capital additions for the first nine months of
1995 totaled $38.8 million and were incurred primarily for increased disk drive
manufacturing and wafer testing capacity. Approximately $11 million was also
used to repurchase 805,000 shares of the Company's common stock in the open
market.
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 6. Exhibits and reports on Form 8-K.
(a) Exhibits:
10.1.1 The Western Digital Corporation Amended and Restated
Employee Stock Option Plan.
10.2.1 The Western Digital Corporation Stock Option Plan for
Non-Employee Directors.
11 Computation of Per Share Earnings.
27 Financial Data Schedule
(b) Reports on Form 8-K:
None
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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 15, 1995
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EXHIBIT INDEX
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGE
- ------ ----------- ------------
10.1.1 The Western Digital Corporation Amended and Restated
Employee Stock Option Plan . . . . . . . . . . . . . . . . . . . .
10.2.1 The Western Digital Corporation Stock Option Plan for
Non-Employee Directors . . . . . . . . . . . . . . . . . . . . . .
11 Computation of Per Share Earnings . . . . . . . . . . . . . . . .
27 Financial Data Schedule . . . . . . . . . . . . . . . . . . . . .
12