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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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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 September 28, 1996.
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 92618
(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 November 1, 1996 is
44,097,913.
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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 Income - Three-Month Periods
Ended September 28, 1996 and September 30, 1995............... 3
Consolidated Balance Sheets - September 28, 1996 and
June 29, 1996................................................. 4
Consolidated Statements of Cash Flows - Three-Month Periods
Ended September 28, 1996 and September 30, 1995............... 5
Notes to Consolidated Financial Statements.................... 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations........................... 7
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K............................. 10
Signatures............................................................. 11
Exhibit Index.......................................................... 12
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PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
WESTERN DIGITAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
THREE-MONTH PERIOD ENDED
-------------------------
SEPT. 28, SEPT. 30,
1996 1995
--------- ---------
Revenues, net ........................... $883,115 $558,149
Costs and expenses:
Cost of revenues ..................... 770,226 477,357
Research and development ............. 34,260 40,723
Selling, general and administrative... 42,860 33,904
-------- --------
Total costs and expenses ..... 847,346 551,984
-------- --------
Operating income ........................ 35,769 6,165
Interest and other income ............... 2,911 3,632
-------- --------
Income before income taxes .............. 38,680 9,797
Provision for income taxes .............. 5,802 1,470
-------- --------
Net income .............................. $ 32,878 $ 8,327
======== ========
Earnings per common and common
equivalent share (Note 2):
Primary ...................... $ .71 $ .16
======== ========
Fully diluted ................ $ .70 $ .16
======== ========
Common and common equivalent shares used
in computing per share amounts:
Primary ...................... 46,302 51,641
======== ========
Fully diluted ................ 46,824 51,643
======== ========
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)
SEPT. 28, JUNE 29,
1996 1996
----------- ---------
ASSETS
Current assets:
Cash and cash equivalents .......................... $ 210,664 $ 182,565
Short-term investments ............................. 12,947 36,598
Accounts receivable, less allowance for doubtful
accounts of $12,376 and $9,376 ................ 441,954 409,473
Inventories (Note 3) .............................. 146,282 142,622
Prepaid expenses ................................... 24,497 23,006
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Total current assets .......................... 836,344 794,264
Property and equipment at cost, net ...................... 184,227 148,258
Intangible and other assets, net ......................... 46,171 41,621
---------- ---------
Total assets .................................. $1,066,742 $ 984,143
========== =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable ................................... $ 384,294 $ 345,866
Accrued compensation ............................... 23,838 30,457
Accrued expenses ................................... 155,033 137,699
---------- ---------
Total current liabilities ..................... 563,165 514,022
Deferred income taxes .................................... 16,035 16,229
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: 50,666 shares at
September 28 and at June 29 ................... 5,066 5,066
Additional paid-in capital ......................... 345,079 349,773
Retained earnings .................................. 253,348 220,470
Treasury stock-common stock at cost;
6,585 shares at September 28 and
7,095 shares at June 29 (Note 4) .............. (115,951) (121,417)
---------- ---------
Total shareholders' equity .................... 487,542 453,892
---------- ---------
Total liabilities and shareholders' equity .... $1,066,742 $ 984,143
========== =========
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)
THREE-MONTH PERIOD ENDED
------------------------
SEPT. 28, SEPT. 30,
1996 1995
--------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ......................................... $ 32,878 $ 8,327
Adjustments to reconcile net income to net
cash provided by (used for) operating activities:
Depreciation and amortization ................. 14,998 12,363
Changes in current assets and liabilities:
Accounts receivable ...................... (32,481) (15,307)
Inventories .............................. (3,660) (48,153)
Prepaid expenses ......................... (1,491) (1,136)
Accounts payable and accrued expenses .... 49,143 15,865
Other assets .................................. 905 669
Deferred income taxes ......................... (194) 785
--------- ---------
Net cash provided by (used for) operating
activities ............................. 60,098 (26,587)
CASH FLOWS FROM INVESTING ACTIVITIES:
Decrease in short-term investments ................. 23,651 7,487
Capital expenditures, net .......................... (48,984) (16,647)
Increase in other assets ........................... (7,438) (2,625)
--------- ---------
Net cash used for investing activities .... (32,771) (11,785)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from stock options exercised .............. 4,946 2,203
Proceeds from ESPP shares issued ................... 4,378 3,795
Repurchase of common stock (Note 4) ................ (8,552) (25,983)
--------- ---------
Net cash provided by (used for) financing
activities ............................. 772 (19,985)
--------- ---------
Net increase (decrease) in cash and cash equivalents 28,099 (58,357)
Cash and cash equivalents, beginning of period ..... 182,565 217,531
--------- ---------
Cash and cash equivalents, end of period ........... $ 210,664 $ 159,174
========= =========
SUPPLEMENTAL DISCLOSURES:
Cash paid during the period for income taxes ............. $ 3,777 $ 1,127
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 29, 1996.
2. Primary and fully diluted earnings per share amounts are based upon the
weighted average number of shares and dilutive common stock equivalents
for each period presented.
3. Inventories comprised the following:
SEPT. 28, JUNE 29,
1996 1996
-------- --------
(in thousands)
Finished goods...................... $ 58,634 $ 72,239
Work in process..................... 38,344 31,781
Raw materials and component parts... 49,304 38,602
-------- --------
$146,282 $142,622
======== ========
4. During the quarter ended September 28, 1996, the Company purchased
359,763 shares of its common stock in the open market at a cost of
approximately $8.6 million. During the same period, 289,777 and 579,791
shares were distributed in connection with the Employee Stock Purchase
Plan ("ESPP") and common stock option exercises, respectively, for
approximately $9.3 million.
5. In the opinion of management, all adjustments necessary to fairly state
the results of operations for the three-month periods ended September
28, 1996 and September 30, 1995 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 29, 1996.
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WHEN USED IN THIS DISCUSSION, THE WORDS "ANTICIPATES", "BELIEVES", "EXPECTS",
"INTENDS", "FORECASTS", "PLANS", "FUTURE", "STRATEGY" OR WORDS OF SIMILAR IMPORT
ARE INTENDED TO IDENTIFY FORWARD-LOOKING STATEMENTS. SUCH STATEMENTS ARE SUBJECT
TO CERTAIN RISKS AND UNCERTAINTIES WHICH COULD CAUSE ACTUAL RESULTS TO DIFFER
MATERIALLY FROM THOSE EXPRESSED IN THE FORWARD-LOOKING STATEMENTS. READERS ARE
CAUTIONED NOT TO PLACE UNDUE RELIANCE ON THESE FORWARD-LOOKING STATEMENTS WHICH
SPEAK ONLY AS OF THE DATE HEREOF. THE COMPANY UNDERTAKES NO OBLIGATION TO
PUBLISH REVISED FORWARD-LOOKING STATEMENTS TO REFLECT EVENTS OR CIRCUMSTANCES
AFTER THE DATE HEREOF OR TO REFLECT THE OCCURRENCE OF UNANTICIPATED EVENTS.
READERS ARE URGED TO CAREFULLY REVIEW AND CONSIDER THE VARIOUS DISCLOSURES MADE
BY THE COMPANY WHICH ATTEMPT TO ADVISE INTERESTED PARTIES OF THE FACTORS WHICH
AFFECT THE COMPANY'S BUSINESS, INCLUDING THE DISCLOSURES MADE UNDER THE CAPTION
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS" IN THIS REPORT, AS WELL AS THE COMPANY'S OTHER PERIODIC REPORTS ON
FORMS 10-K, 10-Q AND 8-K FILED WITH THE SECURITIES AND EXCHANGE COMMISSION.
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Consolidated sales were $883.1 million in the first quarter of 1997, compared
with $820.7 million in the immediately preceding quarter and $558.1 million in
the first quarter of 1996. The growth in revenues stemmed from 7% and 75%
increases in hard drive unit shipments over the immediately preceding quarter
and the corresponding quarter of the prior year, respectively. The higher volume
was partially offset by a decline in the average selling prices of hard drive
products. Also, the results in the first quarter of 1996 included revenues from
the Company's microcomputer products ("MCP") businesses, which were sold in
1996.
The consolidated gross margin percentage was 12.8% in the first quarter of 1997,
compared with 12.7% in the immediately preceding quarter and 14.5% in the first
quarter of 1996. The decrease in gross margin percentage from the first quarter
of 1996 was primarily due to the sale of the MCP businesses, which had higher
average gross profit margins than the Company's hard drive products. The gross
margin percentage for hard drive products only in the first quarter of 1996 was
13.0%.
Research and development ("R&D") expense for the current quarter was $34.3
million, or 3.9% of revenues, versus $34.0 million, or 4.1% of revenues, and
$40.7 million, or 7.3% of revenues, in the immediately preceding quarter and
first quarter of 1996, respectively. The decrease from the prior year is
primarily attributable to the elimination of MCP-related expenditures. This
decrease was partially offset by higher expenditures to support the development
of enterprise and mobile hard drive products. R&D expenses declined as a
percentage of revenues from the first and fourth quarters of 1996 primarily as a
result of the higher revenue base in the current quarter.
Selling, general and administrative ("SG&A") expenses for the first quarter of
1997 were $42.9 million, or 4.9% of revenues, as compared to $39.4 million, or
4.8% of revenues, and $33.9 million, or 6.1% of revenues, in the immediately
preceding quarter and first quarter of 1996, respectively. The increase from the
immediately preceding quarter is attributable to incremental selling, marketing
and other related expenses in support of the higher revenue levels. SG&A
expenses declined as a percentage of revenues from the first quarter of 1996
primarily as a result of the higher revenue base.
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ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Net interest and other income for the current quarter was $2.9 million, as
compared to $3.0 million in the immediately preceding quarter and $3.6 million
in the first quarter of 1996. The decrease from the first quarter of 1996 is
primarily the result of lower average cash and short-term investment balances
combined with lower average interest rates.
FINANCIAL CONDITION
Cash and short-term investments totaled $223.6 million at September 28, 1996 as
compared with $219.2 million at June 29, 1996. Net cash provided by operating
activities was $60.1 million for the quarter ended September 28, 1996. Cash flow
from earnings, depreciation and an increase in current liabilities were
partially offset by cash used to fund increases in accounts receivable and
inventories. Other significant uses of cash during the first three months of
1997 were $49.0 million of capital expenditures, which were incurred primarily
to support increased production of hard drives and related components, and the
acquisition of approximately .4 million shares of the Company's common stock in
the open market for $8.6 million.
The Company has an $150 million revolving credit agreement with certain
financial institutions extending through April 1999. This facility is intended
to meet short-term working capital requirements which may arise from time to
time. The Company believes that its current cash and short-term investments
combined with cash flow from operations and its revolving credit agreement will
be sufficient to meet its working capital needs for the foreseeable future.
However, the Company's ability to sustain its favorable working capital position
is dependent upon a number of factors that are discussed below and in the
Company's Annual Report on Form 10-K for the year ended June 29, 1996 under the
heading "Certain Factors Affecting Future Operating Results."
CERTAIN FACTORS AFFECTING WESTERN DIGITAL CORPORATION AND THE DISK DRIVE
INDUSTRY
The hard drive industry in which the Company competes is subject to a number of
risks which have affected the Company's operating results in the past and could
affect its future operating results. Demand for the Company's hard drive
products depends on the demand for the computer systems manufactured by its
customers and storage upgrades to computer systems, which in turn are affected
by computer systems product cycles, end user demand for increased storage
capacity, and prevailing economic conditions.
The computing industry is intensely competitive and has been characterized by
significant price erosion over the life of a product, periodic rapid price
declines due to industry over-capacity or other competitive factors,
technological changes, changing market requirements, occasional shortages of
materials, dependence upon a limited number of vendors for certain components,
dependence upon highly skilled engineering and other personnel, and significant
expenditures for product development. The hard drive market in particular has
been subject to recurring periods of severe price competition. The Company's
principal competitors are Quantum Corporation ("Quantum"), Seagate Technology,
Inc. ("Seagate Technology") and large computer manufacturers such as IBM that
manufacture drives for use in their own products and for sale to others. In
February 1996, Seagate Technology merged with Conner Peripherals, Inc.
("Conner") formerly one of the Company's principal competitors. This merger
changed the industry dynamics by reducing the number of competitors and by
significantly increasing the size of Seagate Technology. The Company is unable
to predict the long-term effects that the merger will have on this industry
and/or the Company. The Company has increased its market share recently in part
by capitalizing on some missteps made by its competitors. While the Company
believes that its products and its marketing efforts will continue to be
competitive, there can be no assurance that its competitors will not improve
their position in the market through new product introduction or other means.
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ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Even during periods of consistent demand, the hard drive industry has been
characterized by intense competition and ongoing price erosion over the life of
a given drive product, and the Company expects that price erosion in the data
storage industry will continue for the foreseeable future. In general, the unit
price for a given product in all of the Company's markets decreases over time as
increases in industry supply and cost reductions occur and as technological
advancements are achieved. Cost reductions are primarily achieved as volume
efficiencies are realized, component cost reductions are achieved, experience is
gained in manufacturing the product and design enhancements are made.
Competitive pressures and customer expectations result in these cost
improvements being passed along as reductions in selling prices. At times, the
rate of general price decline is accelerated when some competitors lower prices
to absorb excess capacity, to liquidate excess inventories and/or to gain market
share. The competition and continuing price erosion could adversely affect the
Company's results of operations in any given quarter, and such adverse effect
often cannot be anticipated until late in any given quarter.
A number of the components used by the Company are available from a single or
limited number of outside suppliers. Some of these materials may periodically be
in short supply, and the Company has, on occasion, experienced temporary delays
or increased costs in obtaining these materials. Because the Company is less
vertically integrated than its competitors, an extended shortage of required
materials and supplies could have a more severe effect on the Company's revenues
and earnings as compared to its competition. The Company must allow for
significant lead times when procuring certain materials and supplies. The
Company has more than one available source of supply for most of its required
materials. Where there is only one source of supply, the Company has entered
into close technical and manufacturing relationships, has access to more than
one manufacturing location in most instances, and believes that a second source
could be obtained over a period of time. However, no assurance can be given that
the Company's results of operations would not be adversely affected until a new
source could be secured. The supply of headstack assemblies is a critical issue
for the Company as it commences volume production of the initial enterprise
storage products. It is currently purchasing headstack components from a single
vendor but expects to qualify another supplier by the end of December 1996. A
shortage in the supply of headstack assemblies could adversely affect the
Company's ability to meet customer demand for enterprise storage products. In
addition, the increased customer demand for the Company's desktop storage
products has increased the requirements for headstack assemblies, the
availability of which may limit the Company's ability to increase production
above its current planned levels.
The demand of hard drive customers for greater storage capacity and higher
performance has led to short product life cycles that require the Company to
constantly develop and introduce new drive products such as the enterprise
storage products on a cost effective and timely basis. Failure of the Company to
execute its strategy of achieving time-to-market in volume leadership with these
new products, or any delay in introduction of more advanced and more cost
effective products, could result in significantly lower gross margins. The
Company's future is therefore dependent upon its ability to develop new
products, to qualify these new products with its customers, to successfully
introduce these products to the market on a timely basis, and to commence volume
production to meet customer demands.
The Company experiences fluctuations in manufacturing yields that can materially
affect the Company's operations, particularly in the start-up phase of new
products or new manufacturing processes. With the continued pressures to shorten
the time required to introduce new products, the Company must accelerate
production learning curves to shorten the time to achieve acceptable
manufacturing yields and costs. In this regard, the Company's new enterprise
storage products are expected to achieve volume production and contribute to
sales beginning in the second quarter of 1997. The Company's inability to
successfully achieve its sales goals for its enterprise storage products would
significantly impact the Company's future operating results. The Company's
future operating results may also be adversely affected if it is unsuccessful in
marketing the 3.0-inch form factor hard drive to the mobile PC market.
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ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
All of the Company's hard drive products currently utilize conventional thin
film inductive head technology. The Company believes that MR heads, which enable
higher capacity per disk than conventional thin film inductive heads, will
eventually replace thin film inductive heads as the leading recording head
technology. Several of the Company's major competitors incorporate MR head
technology into some of their current products. Failure of the Company to
successfully manufacture and market products incorporating MR head technology in
a timely manner could have a material adverse effect on the Company's business
and results of operations.
The Company's operating results have been and may in the future be subject to
significant quarterly fluctuations as a result of a number of other factors.
These factors have included the timing of orders from and shipment of products
to major customers, product mix, pricing, delays in product development,
introduction in production, competing technologies, variations in product cost,
component availability due to single or limited sources of supply, foreign
exchange fluctuations, increased competition and general economic and industry
fluctuations. The Company's future operating results may also be adversly
affected by an adverse judgement or settlement in the legal procedings in which
the Company is currently involved. This statement should be read in conjunction
with "PART I, Item 3. Legal Proceedings" included in the Company's Annual Report
on Form 10-K for the year ended June 29, 1996.
PART II. OTHER INFORMATION
ITEM 6. Exhibits and reports on Form 8-K.
(a) Exhibits:
10.12.1 Amendment Number One to the Company's Extended
Severance Plan
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/Duston Williams
---------------------------------------
Duston M. Williams
Senior Vice President
and Chief Financial Officer
Date: November 11, 1996
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EXHIBIT INDEX
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGE
- ------- ----------- ------------
10.12.1 Amendment Number One to the Company's Extended
Severance Plan...................................
11 Computation of Per Share Earnings................
27 Financial Data Schedule..........................
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