WDC Western Digital Corporation

Western Digital Corp. (NASDAQ: WDC) today reported revenue of $4.6 billion, operating income of $525 million and net income of $248 million, or $0.83 per share, for its third fiscal quarter ended March 31, 2017. The GAAP net income for the period includes charges associated with the company’s recent acquisitions. Excluding these charges and after other non-GAAP adjustments, third quarter non-GAAP operating income was $1.0 billion and non-GAAP net income was $716 million, or $2.39 per share.

In the year-ago quarter, the company reported revenue of $2.8 billion, operating income of $88 million and net income of $74 million, or $0.32 per share. Non-GAAP operating income in the year-ago quarter was $347 million and non-GAAP net income was $317 million, or $1.35 per share.

The company generated $1.0 billion in cash from operations during the third fiscal quarter of 2017, ending with $5.8 billion of total cash, cash equivalents and available-for-sale securities. On Feb. 1, 2017, the company declared a cash dividend of $0.50 per share of its common stock, which was paid to shareholders on April 17, 2017.

“We reported strong financial performance in the March quarter, enabled by excellent operational execution by our team in a healthy market environment with good demand for all NAND based products, as well as for capacity enterprise and client hard drives,” said Steve Milligan, chief executive officer. “We also achieved targeted cost and efficiency improvements and improved our liquidity position with strong cash flow generation.

“With three consecutive quarters of strong financial results since completing the SanDisk acquisition, we are seeing continued validation of our growth strategy and our ongoing transformation into a comprehensive provider of diversified storage products and technologies. We have constructed a powerful platform with the broadest set of products, enabling us to be a leader in the storage industry. Our transformation provides us with the opportunity to not only compete in today’s marketplace but also to be positioned to grow and thrive into the future.”

The investment community conference call to discuss these results and the company’s guidance for the fourth fiscal quarter 2017 will be broadcast live over the Internet today at 2:30 p.m. Pacific/5:30 p.m. Eastern. The live and archived conference call/webcast can be accessed online at investor.wdc.com. Supplemental financial information, including the company’s guidance for the fourth fiscal quarter 2017, will also be posted on the same website. The telephone replay number in the U.S. is 1(855)859-2056 or +1(404)537-3406 for international callers. The required passcode is 94428076.

About Western Digital

Western Digital is an industry-leading provider of storage technologies and solutions that enable people to create, leverage, experience and preserve data. The company addresses ever-changing market needs by providing a full portfolio of compelling, high-quality storage solutions with customer-focused innovation, high efficiency, flexibility and speed. Our products are marketed under the HGST, SanDisk and WD brands to OEMs, distributors, resellers, cloud infrastructure providers and consumers. Financial and investor information is available on the company's Investor Relations website at investor.wdc.com.

Forward-Looking Statements

This press release contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including statements concerning the company’s preliminary financial results for its third fiscal quarter ended March 31, 2017; market and demand trends; achievement of synergy goals associated with our acquisitions; our product portfolio and market position; and our growth strategy. These forward-looking statements are based on management’s current expectations and are subject to risks and uncertainties that could cause actual results to differ materially from those expressed or implied in the forward-looking statements. The preliminary financial results for the company’s third fiscal quarter ended March 31, 2017 included in this press release represent the most current information available to management. The company’s actual results when disclosed in its quarterly report on Form 10-Q may differ from these preliminary results as a result of the completion of the company’s financial closing procedures; final adjustments; completion of the review by the company’s independent registered accounting firm and other developments that may arise between now and the disclosure of the final results. Other risks and uncertainties that could cause actual results to differ materially from those expressed or implied in the forward-looking statements include: uncertainties with respect to the company’s business ventures with Toshiba; volatility in global economic conditions; business conditions and growth in the storage ecosystem; impact of competitive products and pricing; market acceptance and cost of commodity materials and specialized product components; actions by competitors; unexpected advances in competing technologies; our development and introduction of products based on new technologies and expansion into new data storage markets; risks associated with acquisitions, mergers and joint ventures; difficulties or delays in manufacturing; and other risks and uncertainties listed in the company’s filings with the Securities and Exchange Commission (the “SEC”), including the company’s Form 10-Q filed with the SEC on Feb. 7, 2017, to which your attention is directed. You should not place undue reliance on these forward-looking statements, which speak only as of the date hereof, and the company undertakes no obligation to update these forward-looking statements to reflect new information or events.

Western Digital, WD and SanDisk are registered trademarks or trademarks of Western Digital Corporation or its affiliates in the U.S. and/or other countries. Other trademarks, registered trademarks, and/or service marks, indicated or otherwise, are the property of their respective owners. © 2017 Western Digital Corporation or its affiliates. All rights reserved.

WESTERN DIGITAL CORPORATION       CONDENSED CONSOLIDATED BALANCE SHEETS   (in millions; unaudited)   Mar. 31, July 1, 2017 2016   ASSETS   Current assets: Cash and cash equivalents $ 5,652 $ 8,151 Short-term investments 25 227 Accounts receivable, net 1,948 1,461 Inventories 2,254 2,129 Other current assets   434   616 Total current assets 10,313 12,584 Property, plant and equipment, net 3,099 3,503 Notes receivable and investments in Flash Ventures 1,291 1,171 Goodwill 10,012 9,951 Other intangible assets, net 4,144 5,034 Other non-current assets   589   619 Total assets $ 29,448 $ 32,862     LIABILITIES AND SHAREHOLDERS' EQUITY   Current liabilities: Accounts payable $ 2,185 $ 1,888 Accounts payable to related parties 194 168 Accrued expenses 1,073 995 Accrued compensation 480 392 Accrued warranty 196 172 Bridge loan - 2,995 Current portion of long-term debt   181   339 Total current liabilities 4,309 6,949 Long-term debt 12,907 13,660 Other liabilities   1,201   1,108 Total liabilities 18,417 21,717 Total shareholders' equity   11,031   11,145 Total liabilities and shareholders' equity $ 29,448 $ 32,862   WESTERN DIGITAL CORPORATION           CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS   (in millions, except per share amounts; unaudited)       Three Months Ended Nine Months Ended Mar. 31, Apr. 1, Mar. 31, Apr. 1, 2017 2016 2017 2016   Revenue, net $ 4,649 $ 2,822 $ 14,251 $ 9,499 Cost of revenue   3,126     2,069     9,860     6,885   Gross profit   1,523     753     4,391     2,614   Operating expenses: Research and development 613 359 1,837 1,133 Selling, general and administrative 346 166 1,100 565 Charges related to arbitration award - - - 32 Employee termination, asset impairment and other charges   39     140     152     223   Total operating expenses   998     665     3,089     1,953   Operating income 525 88 1,302 661 Interest and other expense, net   (221 )   (8 )   (948 )   (23 ) Income before taxes 304 80 354 638 Income tax expense   56     6     237     30   Net income $ 248   $ 74   $ 117   $ 608     Income per common share: Basic $ 0.86   $ 0.32   $ 0.41   $ 2.62   Diluted $ 0.83   $ 0.32   $ 0.40   $ 2.60     Weighted average shares outstanding: Basic   289     233     287     232   Diluted   299     234     295     234    

WESTERN DIGITAL CORPORATION

 

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

 

 (in millions; unaudited)

      Three Months Ended   Nine Months Ended Mar. 31,   Apr. 1, Mar. 31,   Apr. 1, 2017 2016 2017 2016   Operating Activities Net income $ 248 $ 74 $ 117 $ 608 Adjustments to reconcile net income to net cash provided by operations: Depreciation and amortization 560 246 1,582 734 Stock-based compensation 102 42 303 121 Deferred income taxes (56 ) (32 ) 61 (17 ) Loss on disposal of assets 2 7 12 13 Write-off of issuance costs and amortization of debt discounts 17 1 275 3 Loss on convertible debt 1 - 6 - Non-cash portion of employee termination, asset impairment and other charges - 18 13 36 Other non-cash operating activities, net 16 - 58 - Changes in operating assets and liabilities, net   108     129     71     130   Net cash provided by operating activities   998     485     2,498     1,628     Investing Activities Purchases of property, plant and equipment, net (103 ) (133 ) (432 ) (433 ) Activity related to Flash Ventures, net (154 ) - (224 ) - Investment activity, net 136 587 231 445 Strategic investments and other, net   (9 )   (11 )   (21 )   (23 ) Net cash provided by (used in) investing activities   (130 )   443     (446 )   (11 )   Financing Activities Employee stock plans, net (4 ) 14 102 17 Proceeds from acquired call option - - 61 - Repurchases of common stock - - - (60 ) Dividends paid to shareholders (144 ) (116 ) (428 ) (347 ) Proceeds from debt, net of issuance costs 3,913 - 7,898 - Repayment of debt   (3,925 )   (302 )   (12,179 )   (364 ) Net cash used in financing activities   (160 )   (404 )   (4,546 )   (754 ) Effect of exchange rate changes on cash   4     -     (5 )   -   Net increase (decrease) in cash and cash equivalents 712 524 (2,499 ) 863 Cash and cash equivalents, beginning of period   4,940     5,363     8,151     5,024   Cash and cash equivalents, end of period $ 5,652   $ 5,887   $ 5,652   $ 5,887     WESTERN DIGITAL CORPORATION         RECONCILIATION OF GAAP TO NON-GAAP FINANCIAL MEASURES   (in millions, except per share amounts; unaudited)      

Three Months Ended

Nine Months Ended Mar. 31, Apr. 1, Mar. 31, Apr. 1, 2017 2016 2017 2016

Summary Reconciliation of Net Income:

  GAAP net income $ 248 $ 74 $ 117 $ 608 Amortization of acquired intangible assets 324 22 843 71 Stock-based compensation expense 98 36 293 112 Employee termination, asset impairment and other charges 39 140 152 223 Acquisition-related charges 2 16 35 43 Charges related to cost saving initiatives 28 49 114 86 Charges related to arbitration award - - - 32 Convertible debt activity, net 1 - 7 - Debt extinguishment costs 7 - 274 - Other 6 (4 ) 20 (8 ) Income tax adjustments   (37 )   (16 )   (16 )   (35 ) Non-GAAP net income $ 716   $ 317   $ 1,839   $ 1,132     GAAP cost of revenue $ 3,126 $ 2,069 $ 9,860 $ 6,885 Amortization of acquired intangible assets (284 ) (16 ) (724 ) (49 ) Stock-based compensation expense (13 ) (4 ) (37 ) (13 ) Acquisition-related charges - - (18 ) - Charges related to cost saving initiatives (6 ) (25 ) (44 ) (47 ) Other   -     2     (3 )   5   Non-GAAP cost of revenue $ 2,823   $ 2,026   $ 9,034   $ 6,781     GAAP gross profit $ 1,523 $ 753 $ 4,391 $ 2,614 Amortization of acquired intangible assets 284 16 724 49 Stock-based compensation expense 13 4 37 13 Acquisition-related charges - - 18 - Charges related to cost saving initiatives 6 25 44 47 Other   -     (2 )   3     (5 ) Non-GAAP gross profit $ 1,826   $ 796   $ 5,217   $ 2,718     GAAP operating expense $ 998 $ 665 $ 3,089 $ 1,953 Amortization of acquired intangible assets (40 ) (6 ) (119 ) (22 ) Stock-based compensation expense (85 ) (32 ) (256 ) (99 ) Employee termination, asset impairment and other charges (39 ) (140 ) (152 ) (223 ) Acquisition-related charges (2 ) (16 ) (17 ) (43 ) Charges related to arbitration award - - - (32 ) Charges related to cost saving initiatives (22 ) (24 ) (70 ) (39 ) Other   1     2     (4 )   3   Non-GAAP operating expense $ 811   $ 449   $ 2,471   $ 1,498     GAAP operating income $ 525 $ 88 $ 1,302 $ 661 Cost of revenue adjustments 303 43 826 104 Operating expense adjustments   187     216     618     455   Non-GAAP operating income $ 1,015   $ 347   $ 2,746   $ 1,220     GAAP interest and other expense, net $ (221 ) $ (8 ) $ (948 ) $ (23 ) Convertible debt activity, net 1 - 7 - Debt extinguishment costs 7 - 274 - Other   7     -     13     -   Non-GAAP interest and other expense, net $ (206 ) $ (8 ) $ (654 ) $ (23 )   GAAP income tax expense $ 56 $ 6 $ 237 $ 30 Income tax adjustments   37     16     16     35   Non-GAAP income tax expense $ 93   $ 22   $ 253   $ 65     GAAP net income $ 248 $ 74 $ 117 $ 608 Cost of revenue adjustments 303 43 826 104 Operating expense adjustments 187 216 618 455 Interest and other expense, net adjustments 15 - 294 - Income tax adjustments   (37 )   (16 )   (16 )   (35 ) Non-GAAP net income $ 716   $ 317   $ 1,839   $ 1,132     Diluted net income per common share: GAAP $ 0.83   $ 0.32   $ 0.40   $ 2.60   Non-GAAP $ 2.39   $ 1.35   $ 6.23   $ 4.84     Diluted weighted average shares outstanding: GAAP   299     234     295     234   Non-GAAP   299     234     295     234    

To supplement the condensed consolidated financial statements presented in accordance with U.S. generally accepted accounting principles (“GAAP”), the table above sets forth non-GAAP cost of revenue; non-GAAP gross profit; non-GAAP operating expenses; non-GAAP operating income; non-GAAP interest and other expense, net; non-GAAP income tax expense; non-GAAP net income and non-GAAP diluted net income per common share (“Non-GAAP measures”). These Non-GAAP measures are not in accordance with, or an alternative for, measures prepared in accordance with GAAP and may be different from Non-GAAP measures used by other companies. Western Digital Corporation believes the presentation of these Non-GAAP measures, when shown in conjunction with the corresponding GAAP measures, provides useful information to investors for measuring the Company’s earnings performance and comparing it against prior periods. Specifically, we believe these Non-GAAP measures provide useful information to both management and investors as they exclude certain expenses, gains and losses that we believe are not indicative of our core operating results or because they are consistent with the financial models and estimates published by many analysts who follow us and our peers. As discussed further below, these Non-GAAP measures exclude the amortization of acquired intangible assets, stock-based compensation expense, employee termination, asset impairment and other charges, acquisition-related charges, charges related to arbitration award, charges related to cost saving initiatives, convertible debt activity, debt extinguishment costs, other charges, and income tax adjustments, and we believe these measures along with the related reconciliations to the GAAP measures provide additional detail and comparability for assessing our results. These Non-GAAP measures are some of the primary indicators management uses for assessing our performance and planning and forecasting future periods. These measures should be considered in addition to results prepared in accordance with GAAP, but should not be considered a substitute for, or superior to, GAAP results.

As described above, we exclude the following items from our Non-GAAP measures:

Amortization of acquired intangible assets. We incur expenses from the amortization of acquired intangible assets over their economic lives. Such charges are significantly impacted by the timing and magnitude of our acquisitions and any related impairment charges.

Stock-based compensation expense. Because of the variety of equity awards used by companies, the varying methodologies for determining stock-based compensation expense, the subjective assumptions involved in those determinations, and the volatility in valuations that can be driven by market conditions outside our control, we believe excluding stock-based compensation expense enhances the ability of management and investors to understand and assess the underlying performance of our business over time and compare it against our peers, a majority of whom also exclude stock-based compensation expense from their non-GAAP results.

Employee termination, asset impairment and other charges. From time-to-time, in order to realign our operations with anticipated market demand or to achieve cost synergies from the integration of acquisitions, we may terminate employees and/or restructure our operations. From time-to-time, we may also incur charges from the impairment of intangible assets and other long-lived assets. These charges (including any reversals of charges recorded in prior periods) are inconsistent in amount and frequency and are not indicative of the underlying performance of our business.

Acquisition-related charges. In connection with our business combinations, we incur expenses which we would not have otherwise incurred as part of our business operations. These expenses include third-party professional service and legal fees, third-party integration services, severance costs, non-cash adjustments to the fair value of acquired inventory, contract termination costs, and retention bonuses. We may also experience other accounting impacts in connection with these transactions. These charges and impacts are related to acquisitions, are inconsistent in amount and frequency, and are not indicative of the underlying performance of our business.

Charges related to arbitration award. In relation to an arbitration award for claims brought against the Company by Seagate Technology LLC, which was satisfied in October 2014, and the related dispute over the calculation of post-award interest, we have recorded loss contingencies. The resulting expense is inconsistent in amount and frequency.

Charges related to cost saving initiatives. In connection with the transformation of our business, we have incurred charges related to cost saving initiatives which do not qualify for special accounting treatment as exit or disposal activities. These charges, which are not indicative of the underlying performance of our business, primarily relate to costs associated with rationalizing our channel partners or vendors, transforming our information systems infrastructure, integrating our product roadmap, and accelerated depreciation on assets.

Convertible debt activity, net. We exclude non-cash economic interest expense associated with the convertible senior notes, the gains and losses on the conversion of the convertible senior notes and call option, and unrealized gains and losses related to the change in fair value of the exercise option and call option. These charges and gains and losses do not reflect our cash operating results and are not indicative of the underlying performance of our business.

Debt extinguishment costs. From time-to-time, we replace our existing debt with new financing at more favorable interest rates or utilize available capital to settle debt early, both of which generate interest savings in future periods. We incur debt extinguishment charges consisting of the costs to call the existing debt and/or the write-off of any related unamortized debt issuance costs. These gains and losses related to our debt activity occur infrequently and are not indicative of the underlying performance of our business.

Other charges. From time-to-time, we sell or impair investments or other assets which are not considered necessary to our business operations; are a party to legal or arbitration proceedings, which could result in an expense or benefit due to settlements, final judgments, or accruals for loss contingencies; or incur other charges or gains which are not a part of the ongoing operation of our business. The resulting expense or benefit is inconsistent in amount and frequency.

Income tax adjustments. Income tax adjustments reflect the difference between income taxes based on a forecasted annual non-GAAP tax rate and a forecasted annual GAAP tax rate as a result of the timing of certain non-GAAP pre-tax adjustments.

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Western Digital Corp.Media Contact:Jim Pascoe, 408.717.6999jim.pascoe@wdc.comorInvestor Contact:Bob Blair, 949.672.7834robert.blair@wdc.com