Western Digital 1998 Annual Report Download

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ANNUAL REPORT
AND FORM 10-K
Western Digital
98
19

Table of contents

  • Page 1
    West er n D igit al 1 9 98 A N N U A L A N D R E P O R T 1 0 - K F O R M

  • Page 2
    ... N Design Center SAN JOSE, CA Design Center SANTA CLARA, CA M ALAYSIA HDD Manufacturing Media Manufacturing Center IRVINE, CA Headquarters, Design Center SINGAPORE HDD Manufacturing, Design Plus 27 sales locations w orldw ide Established in 1970, Western Digital is the first U.S.-headquartered...

  • Page 3
    ...resulting in reported losses for every publicly owned hard drive manufacturer. Western Digital realized an operating loss following a 15 percent decrease in revenues and a 13-point decline in gross profit margin from fiscal 1997. Our market share in desktop PC hard drives was impacted in fiscal 1998...

  • Page 4
    ... 1998, Western Digital's Enterprise Storage Group continued to grow as it supplied the vigorous market for hard drives used in workstations, servers and other networking applications. In its first 18 months of volume shipments, Western Digital's high-end product line captured an eight percent share...

  • Page 5
    ...Division to increase volume and market share. In the face of one of the hard drive industry's longest down cycles, WD maintains a strong balance sheet and vigorous asset management practices. Last February, we brought to market an offering of zero coupon convertible subordinated debentures that grew...

  • Page 6
    ... 1-8703 WESTERN DIGITAL CORPORATION (Exact name of registrant as specified in its charter) Delaware (State or other jurisdiction of incorporation or organization) 92-2647125 (I.R.S. Employer Identification No.) 8105 Irvine Center Drive Irvine, California (Address of principal executive offices...

  • Page 7
    WESTERN DIGITAL CORPORATION INDEX TO ANNUAL REPORT ON FORM 10-K For the Fiscal Year Ended June 27, 1998 Page PART I Item 1. Item 2. Item 3. Item 4. Business ...Properties ...Legal Proceedings ...Submission of Matters to a Vote of Security Holders...PART II Item 5. Item 6. Item 7. Item 7A. Item 8. ...

  • Page 8
    ....westerndigital.com. The information on the web site is not incorporated in this report. PART I Item 1. Business General Western Digital Corporation (the "Company" or "Western Digital") designs, develops, manufactures and markets a broad line of rigid magnetic disk drives ("hard drives") for use in...

  • Page 9
    ...Company designs, develops, manufactures and markets hard drives for use in the desktop PC and enterprise markets. Users of computer systems in both markets are increasingly demanding additional data storage capacity with higher performance in order to (i) use more sophisticated applications software...

  • Page 10
    ...per platter hard drive platform. Data Lifeguard, which the Company plans to implement in all future desktop hard drives, protects end-user data by automatically detecting, isolating, and repairing possible problem areas on the hard drive before data loss can occur. The WD Caviar products utilize the...

  • Page 11
    ... capacity" - the amount of data that can be stored on the hard drive - commonly expressed in gigabytes. "Average seek time" - the time needed to position the heads over a selected track on the disk surface - commonly expressed in milliseconds. "Internal data transfer rate" - the rate at which data...

  • Page 12
    ...1996, 1997 and 1998, respectively. Western Digital hard drives are either incorporated into computer systems for resale or installed into end user systems as upgrades. The business models of computer manufacturers, which account for the majority of the Company's sales, are in the process of changing...

  • Page 13
    .... The Company's end-user technical support is supplied by both employees and qualified third-party support organizations through toll-free telephone support during business hours in the United States, prepaid telephone cards in Europe and via the Company's web site. The Company's major OEM customers...

  • Page 14
    ... in Singapore and at a third-party return facility located in Germany. As a response to the large increase in theft of high technology products and in an effort to deter the sale of Western Digital products on the "black market," the Company does not warrant product which is stolen. Manufacturing 9

  • Page 15
    ... from automation and how automated manufacturing processes support the Company's business plans. For an additional discussion of manufacturing, see Part II, Item 7, Risk Factors Affecting the Company and/or the Hard Drive Industry - Foreign Sales and Manufacturing Risks. Research and Development The...

  • Page 16
    ..., the Company currently buys MR heads from IBM, Read-Rite and SAE. IBM will supply all of the heads for the Company's desktop PC hard drives incorporating IBM technology under the IBM Agreement. Media requirements not fulfilled internally are purchased through several outside vendors including Komag...

  • Page 17
    ... Irvine, California (expires in June, 2000), house management, research and development, administrative and sales personnel. The Company also leases facilities in San Jose, California, and Rochester, Minnesota for research and development activities. The Company operates two hard drive manufacturing...

  • Page 18
    ... for the Central District of California alleging infringement by Western Digital of five hard drive motor patents owned by Papst. The patents relate to disk drive motors that the Company purchases from motor vendors. On December 1, 1994, Papst dismissed its case without prejudice but has notified...

  • Page 19
    ... years. PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters Western Digital's common stock is listed on the New York Stock Exchange ("NYSE") under the symbol "WDC." The approximate number of holders of record of common stock of the Company as of July 25, 1998 was...

  • Page 20
    Number of employees...No cash dividends were paid for the years presented. 6,593 7,647 9,628 13,384 13,286 15

  • Page 21
    ... business over the past few years and has built its share of this market to approximately 8% as of the end of 1998. The Company is planning a significant increase in its research and development spending during 1999 to transform Western Digital into a full-line supplier of enterprise hard drives...

  • Page 22
    ... in the desktop storage market during the last three quarters of 1998. The Company also experienced higher assembly costs associated with extending the life of thin film head technology in desktop storage products and the accelerated transition to hard drives utilizing MR heads. The $148 million of...

  • Page 23
    ... exercises and Employee Stock Purchase Plan ("ESPP") purchases. The Company anticipates that capital expenditures in 1999 will total approximately $135 million and will relate to retooling of the Company's hard drive assembly lines in order to accommodate new technologies and normal replacement of...

  • Page 24
    ...'s market share eroded in 1998, primarily due to competitive conditions in the hard drive industry (with resulting cutbacks in production), the timing of the Company's transition from thin film to magneto-resistive ("MR") head technology and certain manufacturing and performance issues encountered...

  • Page 25
    ... to manufacture hard drives with thin film inductive heads for the lower capacity points of the enterprise market. Failure of the Company to regain time-to-market leadership with products incorporating MR head technology in a timely manner, to qualify these products with key OEM customers, or...

  • Page 26
    ...become a full-line supplier in the enterprise market. Development, design, manufacturing and acceptance of these new enterprise products are subject to the various business risks discussed herein which are applicable to all hard drive product development. Additionally, the Company is facing staffing...

  • Page 27
    ... 1998. Customer Concentration and Changing Customer Models High volume customers for hard drives are concentrated among a small number of OEMs, distributors and retailers. Although the Company believes its relationships with key customers such as these are generally good, the concentration of sales...

  • Page 28
    ... base stock of product in a location adjacent to its customers' manufacturing facilities. JIT ordering complicates the Company's inventory management strategies and makes it more difficult to match manufacturing plans with projected customer demand. The Company's failure to manage its inventory...

  • Page 29
    ... can be no assurance that the Company will be able to develop lower cost hard drives that will successfully compete in this growing market. Foreign Sales and Manufacturing Risks Western Digital products are currently manufactured in Singapore and Malaysia. The Company is subject to certain risks...

  • Page 30
    ... their currencies relative to the U.S. Dollar. The "Asian crisis" has reduced the market for the Company's products as well as helped some Asian hard drive companies become more competitive since they can pay some of their costs in devalued currency while receiving their revenue in U.S. Dollars. The...

  • Page 31
    ... in the manufacture, delivery or sale of products. Therefore, the Company is in the process of developing contingency plans along with its remediation efforts for continuing operations in the event such problems arise. Item 7A. Quantitative and Qualitative Disclosures About Market Risk Disclosure...

  • Page 32
    ... June 27, 1998, the market value of the Company's 5.25% zero coupon convertible subordinated debentures due in 2018 was approximately $335 million, compared to the related carrying value of $469.2 million. The convertible debentures will be repurchased by the Company, at the option of the holder, as...

  • Page 33
    Item 8. Financial Statements and Supplementary Data Index to Financial Statements and Financial Statement Schedule Page(s) Consolidated Financial Statements: Independent Auditors' Report...29 Consolidated Statements of Operations - Three Years Ended June 27, 1998 ...30 Consolidated Balance Sheets -...

  • Page 34
    INDEPENDENT AUDITORS' REPORT The Board of Directors Western Digital Corporation: We have audited the consolidated financial statements of Western Digital Corporation and subsidiaries as listed in the accompanying index. In connection with our audits of the consolidated financial statements, we also ...

  • Page 35
    WESTERN DIGITAL CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except per share amounts) June 29, 1996 Years ended June 28, 1997 June 27, 1998 Revenues, net ...Costs and expenses: Cost of revenues...Research and development...Selling, general and administrative (Note 8)...Total ...

  • Page 36
    WESTERN DIGITAL CORPORATION CONSOLIDATED BALANCE SHEETS (in thousands, except per share amounts) ASSETS June 28, 1997 June 27, 1998 Current assets: Cash and cash equivalents...$ 208,276 Accounts receivable, less allowance for doubtful accounts of $11,706 in 1997 and $15,926 in 1998...545,552 ...

  • Page 37
    WESTERN DIGITAL CORPORATION CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY Three years ended June 27, 1998 (in thousands) Common Stock Shares Amount Treasury Stock Shares Amount Additional Paid-in Capital Retained Earnings Total Shareholders' Equity 100,964 Balance at July 1, 1995 ...Common stock ...

  • Page 38
    WESTERN DIGITAL CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) June 29, 1996 Years ended June 28, 1997 June 27, 1998 Cash flows from operating activities Net income (loss) ...Adjustments to reconcile net income (loss) to net cash provided by (used for) operating activities: ...

  • Page 39
    ...Company designs, develops, manufactures and markets hard drives to personal computer manufacturers, resellers and retailers throughout the world. The Company performs ongoing credit evaluations of its customers' financial condition and generally requires no collateral. The Company maintains reserves...

  • Page 40
    ..., warranty and estimated sales returns. In accordance with standard industry practice, the Company's agreements with its resellers provide price protection for inventories held by the resellers at the time of published list price reductions and, under certain circumstances, stock rotation for slow...

  • Page 41
    ... and SFAS 131, respectively. Application of the Statements' requirements is not expected to have a material impact on the Company's consolidated financial position, results of operations or earnings (loss) per share data as currently reported. In June 1998, the Financial Accounting Standards Board...

  • Page 42
    WESTERN DIGITAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Use of Estimates Company management has made a number of estimates and assumptions relating to the reporting of assets and liabilities in conformity with generally accepted accounting principles. Actual results could...

  • Page 43
    WESTERN DIGITAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Convertible Debentures On February 18, 1998, the Company received gross proceeds of $460.1 million (before the Initial Purchasers' discount) from a private offering of 5.25% zero coupon convertible subordinated ...

  • Page 44
    ... employee stock purchase plan reduce taxes currently payable as shown above by $20.2 and $2.3 million for 1997 and 1998, respectively. Such benefits are credited to additional paid-in capital. The total cash paid for income taxes was $4.5 million, $19.2 million and $16.9 million for the years ended...

  • Page 45
    ...reserved for issuance at June 27, 1998 (in thousands): Number of Shares Issuable in connection with: Convertible debentures...Exercise of stock options, including options available for grant ...Employee stock purchase plan...Stock Option Plans 19,374 16,430 2,373 38,177 Western Digital's Employee...

  • Page 46
    ..., the Company implemented an employee stock purchase plan ("ESPP") in accordance with Section 423 of the Internal Revenue Code whereby eligible employees may authorize payroll deductions of up to 10% of their salary to purchase shares of the Company's common stock at 85% of the fair market value of...

  • Page 47
    ...and 1998 reported below has been estimated at the date of grant using a Black-Scholes option pricing model with the following weighted average assumptions: Stock Option Plans 1996 1997 1998 1996 ESPP Plan 1997 1998 Option life (in years)...Risk-free interest rate...Stock price volatility...Dividend...

  • Page 48
    ...) Western Digital currently operates in one industry segment - the design, development, manufacture and marketing of hard drives for the computer marketplace. During 1996 and 1997, sales to Gateway 2000 and to IBM accounted for 11% and 13% of the Company's revenues, respectively. During 1998, sales...

  • Page 49
    WESTERN DIGITAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) restructuring of the Company's other support organizations. The restructuring resulted in a personnel reduction of 102 people, not including employees that were hired by the purchaser, Adaptec, Inc. The net result of ...

  • Page 50
    ...(loss) per share ...$ .67 $ (1.66) $ (.51) $ (1.84) _____ * Second quarter 1998 results include special charges of $148 million recorded primarily to cost of sales. ** Fourth quarter 1998 results include $22 million of costs recorded to research and development principally related to the start-up of...

  • Page 51
    WESTERN DIGITAL CORPORATION SCHEDULE II - CONSOLIDATED VALUATION AND QUALIFYING ACCOUNTS Three years ended June 27, 1998 (in thousands) Allowance for Doubtful Accounts Balance at July 1, 1995 ...Charges to operations...Deductions...Balance at June 29, 1996...Charges to operations...Deductions......

  • Page 52
    ... on Accounting and Financial Disclosure None. PART III Item 10. Directors and Executive Officers of the Registrant There is incorporated herein by reference the information required by this Item included in the Company's Proxy Statement for the 1998 Annual Meeting of Shareholders under the captions...

  • Page 53
    ... and between Western Digital Corporation and American Stock Transfer & Trust Company, as Rights Agent (incorporated by reference to Exhibit 1 to the Company's Current Report on Form 8-K as filed with the Securities and Exchange Commission on February 5, 1997) Certificate of Designation, Preferences...

  • Page 54
    ... Savings and Profit Sharing Plan(14)** Fifth Amendment to the Company's Retirement Savings and Profit Sharing Plan* ** The Company's Amended and Restated Stock Option Plan for Non-Employee Directors, amended as of July 10, 1997(15)** Fiscal Year 1998 Western Digital Management Incentive Plan(15...

  • Page 55
    ... plan, contract or arrangement required to be filed as an exhibit pursuant to applicable rules of the Securities and Exchange Commission. *** New exhibit filed with this Report, with confidential treatment requested. (1) (2) (3) (4) (5) (6) (7) (8) (9) Incorporated by reference to the Company...

  • Page 56
    ...-Q as filed with the Securities and Exchange Commission on May 12, 1998. (19) Incorporated by reference to the Company's Registration Statement on Form S-3 (No. 333-52463) as filed with the Securities and Exchange Commission on May 12, 1998. (b) Reports on Form 8-K: No reports on Form 8-K were filed...

  • Page 57
    ..., the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. WESTERN DIGITAL CORPORATION By: DUSTON M. WILLIAMS Duston M. Williams Senior Vice President and Chief Financial Officer Dated: September 1, 1998 Pursuant to the requirements of the...

  • Page 58
    ...) Pte Ltd. Western Digital (I.S.) Limited Western Digital (Tuas-Singapore) Pte Ltd. Pacifica Insurance Corporation Cayman Islands Malaysia Federal Republic of Germany France Japan United Kingdom Canada Singapore Taiwan, Republic of China Hong Kong The Netherlands Singapore Ireland Singapore Hawaii

  • Page 59
    ...the related consolidated statements of operations, shareholders' equity and cash flows for each of the years in the three-year period ended June 27, 1998, and the related schedule, which report appears in the June 27, 1998 Annual Report on Form 10-K of Western Digital Corporation. KPMG PEAT MARWICK...

  • Page 60
    ...M A T I O N Board of Directors Corporate Officers Charles A. Haggerty Chairman of the Board, President and Chief Executive Officer James A. Abrahamson President and Chief Executive Officer International Air Safety, L.L.C. Air Traffic Control Products and Services Peter D. Behrendt Retired. Former...

  • Page 61
    ... Registrar Irvine, California San Jose, California Rochester, Minnesota Manufacturing Facilities American Stock Transfer & Trust Company 40 Wall Street New York, NY 10005 Telephone: 718.921.8200 Certified Public Accountants Santa Clara, California Malaysia Singapore Domestic Sales Offices KPMG...