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 30, 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 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 May 1, 1996 is 43,562,025.
2
WESTERN DIGITAL CORPORATION
SEC FORM 10-Q
INDEX
PAGE NO.
--------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements of Income - Three-Month Periods
Ended March 30, 1996 and April 1, 1995 . . . . . . . . . . . . . . . . 3
Consolidated Statements of Income - Nine-Month Periods
Ended March 30, 1996 and April 1, 1995 . . . . . . . . . . . . . . . . 4
Consolidated Balance Sheets - March 30, 1996 and July 1, 1995. . . . . . 5
Consolidated Statements of Cash Flows - Nine-Month Periods
Ended March 30, 1996 and April 1, 1995 . . . . . . . . . . . . . . . . 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
2
3
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
--------------------------
MARCH 30, APRIL 1,
1996 1995
--------- --------
Revenues, net . . . . . . . . . . . . . . . . . . . . . . $728,362 $529,297
Costs and expenses:
Cost of revenues . . . . . . . . . . . . . . . . . 635,038 440,929
Research and development . . . . . . . . . . . . . 36,682 33,500
Selling, general and administrative . . . . . . . . 37,628 34,204
-------- --------
Total costs and expenses . . . . . . . . . . . 709,348 508,633
-------- --------
Operating income . . . . . . . . . . . . . . . . . . . . 19,014 20,664
Net interest and other income . . . . . . . . . . . . . . 3,328 2,430
-------- --------
Income before income taxes . . . . . . . . . . . . . . . 22,342 23,094
Provision for income taxes . . . . . . . . . . . . . . . 2,904 3,444
-------- --------
Net income . . . . . . . . . . . . . . . . . . . . . . . $ 19,438 $ 19,650
======== ========
Earnings per common and common
equivalent share (Note 2): . . . . . . . . . . . . $ .42 $ .40
======== ========
Common and common equivalent shares used
in computing per share amounts . . . . . . . . . . 46,592 48,586
======== ========
The accompanying notes are an integral part of these financial statements.
3
4
WESTERN DIGITAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NINE-MONTH PERIOD ENDED
----------------------------------
MARCH 30, APRIL 1,
1996 1995
---------- ----------
Revenues, net . . . . . . . . . . . . . . . . . . . . $2,044,503 $1,545,831
Costs and expenses:
Cost of revenues . . . . . . . . . . . . . . . 1,767,008 1,250,656
Research and development . . . . . . . . . . . 116,070 93,087
Selling, general and administrative . . . . . . 115,071 96,192
---------- ----------
Total costs and expenses . . . . . . . . . 1,998,149 1,439,935
---------- ----------
Operating income . . . . . . . . . . . . . . . . . . 46,354 105,896
Net interest and other income . . . . . . . . . . . . 10,115 8,106
Gain on sale of multimedia business (Note 5) . . . . 17,275 --
---------- ----------
Income before income taxes . . . . . . . . . . . . . 73,744 114,002
Provision for income taxes . . . . . . . . . . . . . 9,586 17,080
---------- ----------
Net income . . . . . . . . . . . . . . . . . . . . . $ 64,158 $ 96,922
========== ==========
Earnings per common and common
equivalent share (Note 2):
Primary . . . . . . . . . . . . . . . . . $ 1.31 $ 2.03
========== ==========
Fully diluted . . . . . . . . . . . . . . $ 1.31 $ 1.95
========== ==========
Common and common equivalent shares used
in computing per share amounts:
Primary . . . . . . . . . . . . . . . . . 48,890 47,844
========== ==========
Fully diluted . . . . . . . . . . . . . . 49,014 51,364
========== ==========
The accompanying notes are an integral part of these financial statements.
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5
WESTERN DIGITAL CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
MARCH 30, JULY 1,
1996 1995
--------- ---------
ASSETS
Current assets:
Cash and cash equivalents . . . . . . . . . . . . . $ 138,627 $ 217,531
Short-term investments . . . . . . . . . . . . . . 59,995 90,177
Accounts receivable, less allowance for doubtful
accounts of $10,141 and $9,309. . . . . . . . . 393,699 303,841
Inventories (Note 3) . . . . . . . . . . . . . . . 145,273 98,925
Prepaid expenses . . . . . . . . . . . . . . . . . 23,321 19,663
--------- ---------
Total current assets . . . . . . . . . . . . . 760,915 730,137
Property and equipment, at cost, less accumulated
depreciation and amortization . . . . . . . . . . . 120,009 88,576
Intangible and other assets, net . . . . . . . . . . . . 38,823 40,127
--------- ---------
Total assets . . . . . . . . . . . . . . . . . $ 919,747 $ 858,840
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable . . . . . . . . . . . . . . . . . $ 332,845 $ 250,325
Accrued compensation . . . . . . . . . . . . . . . 25,463 30,064
Accrued expenses . . . . . . . . . . . . . . . . . 109,251 89,213
--------- ---------
Total current liabilities . . . . . . . . . . 467,559 369,602
Deferred income taxes . . . . . . . . . . . . . . . . . . 16,232 15,812
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
March 30 and 50,482 shares
at July 1 . . . . . . . . . . . . . . . . 5,066 5,048
Additional paid-in capital . . . . . . . . . . . . 354,230 355,624
Retained earnings . . . . . . . . . . . . . . . . . 187,734 123,576
Treasury stock-common stock at cost;
6,661 shares at March 30 and
805 shares at July 1 (Note 4) . . . . . . . . (111,074) (10,822)
--------- ---------
Total shareholders' equity . . . . . . . . . . 435,956 473,426
--------- ---------
Total liabilities and shareholders' equity . . $ 919,747 $ 858,840
========= =========
The accompanying notes are an integral part of these financial statements.
5
6
WESTERN DIGITAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
NINE-MONTH PERIOD ENDED
--------------------------
MARCH 30, APRIL 1,
1996 1995
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income . . . . . . . . . . . . . . . . . . . . $ 64,158 $ 96,922
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization . . . . . . . . 39,133 31,914
Gain on sale of multimedia business . . . . . (17,275) --
Changes in current assets and liabilities, net of
the effect of the sale of the businesses:
Accounts receivable . . . . . . . . . . . (93,858) (54,411)
Inventories . . . . . . . . . . . . . . . (53,834) (14,167)
Prepaid expenses . . . . . . . . . . . . (5,288) (13,332)
Accounts payable and accrued expenses . . 77,365 37,326
Other assets . . . . . . . . . . . . . . . . . . . 2,102 (10,383)
Deferred income taxes . . . . . . . . . . . . . . . 420 5,686
--------- ---------
Net cash provided by operating activities 12,923 79,555
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Decrease (increase) in short-term investments . . . 30,182 (91,619)
Capital expenditures, net . . . . . . . . . . . . . (67,005) (38,843)
Increase in other assets . . . . . . . . . . . . . (6,491) (1,411)
Proceeds from sale of businesses (Note 5) . . . . . 53,115 --
--------- ---------
Net cash provided by (used for) investing
activities . . . . . . . . . . . . . 9,801 (131,873)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Exercise of stock options . . . . . . . . . . . . . 4,760 3,075
Proceeds from ESPP shares issued . . . . . . . . . 7,350 5,298
Repurchase of common stock (Note 4) . . . . . . . . (113,738) (10,822)
--------- ---------
Net cash used for financing
activities . . . . . . . . . . . . . (101,628) (2,449)
--------- ---------
Net decrease in cash and cash equivalents . . . . . (78,904) (54,767)
Cash and cash equivalents, beginning of period . . 217,531 243,484
--------- ---------
Cash and cash equivalents, end of period . . . . . $ 138,627 $ 188,717
========= =========
SUPPLEMENTAL DISCLOSURES:
Cash paid during the period for:
Interest . . . . . . . . . . . . . . . . . . . . . $ -- $ 2,703
Income taxes . . . . . . . . . . . . . . . . . . . 2,728 5,021
The accompanying notes are an integral part of these financial statements.
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7
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 July 1, 1995.
2. Primary earnings per share amounts are based upon the weighted average
number of shares and dilutive common stock equivalents for each period
presented. For the nine-month period ended April 1, 1995, fully
diluted earnings per share additionally reflect dilutive shares
assumed to be issued upon conversion of the Company's convertible
subordinated debentures.
3. Inventories consist of the following:
MARCH 30, JULY 1,
1996 1995
--------- -------
(in thousands)
Finished goods . . . . . . . . . . . . . . $ 59,857 $31,811
Work in process . . . . . . . . . . . . . 42,854 35,763
Raw materials and component parts . . . . 42,562 31,351
-------- -------
$145,273 $98,925
======== =======
4. During the nine-month period ended March 30, 1996, the Company
repurchased 6,819,800 shares of its common stock in the open market at
a cost of $113.7 million. During the same period, 646,202 and 318,015
shares were distributed in connection with the Employee Stock Purchase
Plan ("ESPP") and common stock option exercises, respectively.
5. In October 1995, the Company sold its multimedia business to Philips
Semiconductors, Inc. ("Philips") for $51.9 million, resulting in a
one-time, pre-tax gain of $17.3 million. Separately, in March 1996,
the Company sold its high speed fiber-optic communication links
("Fibre Channel") business to Vixel Corporation ("Vixel"). The sale
to Vixel did not have a material impact on the Company's results of
operations. Through these transactions, Philips and Vixel acquired
specific assets and intellectual properties and assumed certain
liabilities directly related to the multimedia and Fibre Channel
businesses.
In April 1996, the Company completed the sale of its input/output
products business to Adaptec, Inc. ("Adaptec") for $33.4 million. In
connection with the sale, Adaptec acquired specific assets and
intellectual properties and assumed certain liabilities directly
related to the input/output products business. As a result of the
sale, the Company is restructuring its business in order to improve
the Company's focus on its primary objectives and strengths. The net
result of the sale to Adaptec and the related restructuring charges is
not expected to be material to the Company's results of operations for
the quarter ended June 29, 1996.
6. In the opinion of management, all adjustments necessary to fairly
state the results of operations for the three- and nine-month periods
ended March 30, 1996 and April 1, 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 July 1,
1995.
7. Certain prior quarter amounts have been reclassified to conform to the
current quarter presentation.
7
8
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Consolidated sales were $728.4 million in the third quarter of 1996, compared
with $758.0 million in the immediately preceding quarter and $529.3 million in
the third quarter of 1995. Consolidated sales were $2.0 billion in the first
nine months of 1996, an increase of $498.7 million or 32% from the same period
of the prior year. The growth in revenues stemmed from 51% and 46% increases
in hard drive unit shipments for the three- and nine-month periods ended March
30, 1996, respectively, over the corresponding periods of the prior year. The
higher volume was partially offset by a decline in the average selling prices
of hard drive products and lower sales of microcomputer products due to the
sale of the multimedia and Fibre Channel businesses during 1996. The decrease
from the seasonally strong December quarter was due to slightly lower hard
drive unit shipments and declining average selling prices.
The consolidated gross margin percentage was 12.8% in the third quarter of
1996, a decrease of .8 and 3.9 percentage points from the immediately preceding
quarter and the third quarter of 1995, respectively. The consolidated gross
margin percentage was 13.6% in the first nine months of 1996, down 5.5
percentage points from the same period of 1995. The decrease in gross profit
margin from the third quarter of 1995 and the nine-month period ended April 1,
1995 was primarily due to three factors. First, higher-capacity products were
introduced at lower average selling prices as a result of competitive pricing
pressures. Second, the Company shipped a broader mix of hard drives during
fiscal year 1996. This resulted in higher shipments of lower-capacity products
at lower price points, which generally have smaller gross margins. Finally,
fewer microcomputer products (which have higher average gross margin
percentages) were sold due to the sale of the multimedia and Fibre Channel
businesses during 1996. The decrease in gross margin percentage from the
immediately preceding quarter was primarily the result of the decline in
average selling prices in the current quarter.
Research and development expense ("R&D") for the current quarter decreased $2.0
million or 5% as compared to the second quarter of 1996. The decline was
primarily due to lower expenditures as a result of the sale of the multimedia
and Fibre Channel businesses. R&D expense for the three- and nine-month
periods ended March 30, 1996 increased $3.2 million or 9% and $23.0 million or
25%, respectively, over the same periods of the prior year. Higher
expenditures to support the development of higher-capacity products was the
primary factor contributing to the increases. R&D expense declined as a
percentage of revenues for the three- and nine-month periods ended March 30,
1996 as compared to the corresponding periods of 1995 as lower amounts were
spent for connectivity solutions group ("CSG") products in anticipation of the
sale of these businesses.
Selling, general and administrative ("SG&A") expense for the current quarter
increased $3.4 million, or 10% over the same period a year ago and decreased
$5.9 million or 14% as compared to the second quarter of 1996. SG&A expense
for the nine-month period ended March 30, 1996 increased $18.9 million or 20%
over the first nine months of fiscal year 1995. The increases were primarily
the result of incremental expenses in support of the higher revenue levels and
higher royalty expense, partially offset by lower expenses related to CSG. The
decrease in expenses related to CSG was the primary factor contributing to the
decline in SG&A expense as a percentage of revenues for the three- and
nine-month periods ended March 30, 1996 compared with the corresponding periods
of the prior year. The decrease from the immediately preceding quarter was
primarily the result of lower spending in anticipation of the sale of the
input/output products business.
8
9
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Net interest and other income for the three- and nine-month periods ended March
30, 1996 increased $.9 million and $2.0 million, respectively, over the
corresponding periods of fiscal year 1995. The elimination of the Company's
outstanding debt was responsible for the improvements in net interest and other
income over the prior year.
In April 1996, the Company sold its input/output products business, which
represented the final component of CSG (see note 5). CSG revenue for the first
nine months of 1996 totaled $69.8 million, or 3% of consolidated revenues.
Beginning with the fourth quarter of 1996, the Company's operations will relate
entirely to hard drive products.
FINANCIAL CONDITION
Cash and short-term investments totaled $198.6 million at March 30, 1996 as
compared with $307.7 million at July 1, 1995. Net cash provided by operating
activities was $12.9 million for the nine-month period ended March 30, 1996.
Cash flow from earnings (net of the gain on sale of the multimedia business),
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 nine months of 1996 were $67.0
million of capital expenditures, which were incurred primarily to support
increased production of hard drives and related components, and the acquisition
of 6.8 million shares of the Company's common stock in the open market for
$113.7 million. Partially offsetting these uses of cash was approximately
$53.1 million received in connection with the sale of the multimedia and Fibre
Channel businesses (see Note 5).
The ability of the Company to continue to effectively manage its working
capital and operate profitably is dependent upon a number of factors including
competitive conditions in the marketplace, growth rates in the personal and
enterprise computing industries, availability of third party components at
reasonable prices, continued success in the design and manufacturing ramp,
efficient utilization of manufacturing capacity, and continued timely
collection of accounts receivable.
9
10
PART II. OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K.
(a) Exhibits:
11 Computation of Per Share Earnings.
27 Financial Data Schedule
(b) Reports on Form 8-K:
None
10
11
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 13, 1996
11
12
EXHIBIT INDEX
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGE
- ------ ----------- ------------
11 Computation of Per Share Earnings. . . . . . . . .
27 Financial Data Schedule . . . . . . . . . . . . .
12
1
EXHIBIT 11
WESTERN DIGITAL CORPORATION
COMPUTATION OF PER SHARE EARNINGS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
THREE-MONTH PERIOD ENDED NINE-MONTH PERIOD ENDED
------------------------ -------------------------
MARCH 30, APRIL 1, MARCH 30, APRIL 1,
1996 1995 1996 1995
--------- -------- --------- --------
PRIMARY
Net income . . . . . . . . . . . . . . . . $19,438 $19,650 $64,158 $96,922
======= ======= ======= =======
Weighted average number of common
shares outstanding during the period . . . 44,895 46,716 47,137 45,765
Incremental common shares attributable
to exercise of outstanding options and
warrants . . . . . . . . . . . . . . . . . 1,697 1,870 1,753 2,079
------- ------- ------- -------
Total shares . . . . . . . . . . . . . . . 46,592 48,586 48,890 47,844
======= ======= ======= =======
Net income per share . . . . . . . . . . . $ .42 $ .40 $ 1.31 $ 2.03
======= ======= ======= =======
FULLY DILUTED
Net income . . . . . . . . . . . . . . . . $19,438 $19,650 $64,158 $96,922
Add back: interest expense, net of
income tax effect, applicable to
convertible subordinated debentures . . . . -- 813 -- 3,036
------- ------- ------- -------
$19,438 $20,463 $64,158 $99,958
======= ======= ======= =======
Weighted average number of common
shares outstanding during the period . . . 44,895 46,716 47,137 45,765
Incremental common shares attributable
to exercise of outstanding options and
warrants . . . . . . . . . . . . . . . . . 1,815 1,870 1,877 2,080
Incremental common shares attributable
to conversion of convertible subordinated
debentures . . . . . . . . . . . . . . . . -- 2,800 -- 3,519
------- ------- ------- -------
Total shares . . . . . . . . . . . . . . . 46,710 51,386 49,014 51,364
======= ======= ======= =======
Net income per share . . . . . . . . . . . $.42 $.40 $1.31 $1.95
======= ======= ======= =======
5
1,000
U.S. DOLLARS
9-MOS
JUN-29-1996
JUL-02-1995
MAR-30-1996
1
138,627
59,995
403,840
10,141
145,273
760,915
255,366
135,357
919,747
467,559
0
0
0
4,400
431,556
919,747
2,044,503
2,044,503
1,767,008
1,767,008
231,141
1,150
(10,115)
73,744
9,586
64,158
0
0
0
64,158
1.31
1.31
