The AES Investment Code - the go-to counsel for the most well-informed, wise...
western digital annual97
1. We s t e r n Di g i t a l
“The Western Digital
1997 Summary Annual Report
brand has come to
mean quality, reliability
and exceptional
security for the
information that
people create and
collect in their
professional and
personal lives.”
2. The Company
Western Digital Corporation is a leading manufacturer of hard drives for
information storage products. The Company’s hard drives form the foundations
on which individuals, businesses and institutions build secure information
environments.
Western Digital manufactures hard drives for the world’s leading makers of
desktop and mobile personal computers and for producers of servers,
workstations and other networking devices. The Company serves consumer
markets for replacement and add-on data storage under its top-selling WD
brand.
Established in 1970, Western Digital is the first U.S.-headquartered, multi-
national company to have been awarded company-wide ISO 9001 registration,
linking all WD organizations with a consistent global standard for quality
processes.
Western Digital Corporation
3. Financial Highlights
Fiscal Years Ended
(in millions, except per share and employee data) June 30, 1993 June 30, 1994 July 1, 1995 June 29, 1996 June 28, 1997
Revenues, net $ 1,225.2) $ 1,539.7) $ 2,130.9) $ 2,865.2) $ 4,177.9)
Gross profit $ 182.0) $ 317.9) $ 394.1) $ 382.1) $ 650.3)
Operating income (loss) $ (10.0) $ 91.9) $ 133.0) $ 77.5) $ 301.6)
Net income (loss) $ (25.1) $ 73.1) $ 123.3) $ 96.9) $ 267.6)
Fully diluted earnings (loss) per share* $ (.39) $ .85) $ 1.23) $ 1.00) $ 2.85)
Fully diluted common and
common equivalent shares* 63.6) 91.4) 102.8) 96.6) 93.9)
Working capital $ 111.5) $ 261.7) $ 360.5) $ 280.2) $ 364.2)
Total assets $ 531.2) $ 640.5) $ 858.8) $ 984.1) $ 1,307.1)
Long-term debt $ 182.6) $ 58.6) $ —) $ —) $ —)
Shareholders’ equity $ 131.0) $ 288.2) $ 473.4) $ 453.9) $ 620.0)
Number of employees 7,322) 6,593) 7,647) 9,628) 13,384)
* Reflects retroactive recognition of the two-for-one stock split that occurred in June 1997.
1
4. To Our Shareholders:
Fiscal 1997 was Western Digital’s best year ever. The Company produced record
unit volume, revenues, net income and earnings per share as well as record
shareholders’ equity.
As the 1997 fiscal year marked Western Digital’s fifth year with present manage-
ment, it seems appropriate not only to review the year’s results but also to
summarize where we have taken the Company since 1992. This has been a time
of dramatic change that positioned Western Digital as a major player in the
worldwide market for hard drives, earned us a place among the Fortune 500
companies and, in 1996, gained recognition for Western Digital as the number
one company on that list in total return to shareholders.
In September of 1992, our Personal Storage Division launched its “platform
strategy,” which was the precursor of our “asset management strategy” — the
fundamental ingredient in our financial success. We succeeded in establishing
the Western Digital brand name while shedding assets that were not “core” to
our hard drive business. We divested unrelated businesses such as graphics
acceleration, battery chargers, SCSI adapter boards and fibre channel products,
and in late 1995 we formed our Enterprise Storage Group from scratch.
ESG has been a great and early success. This new operation brought its first
products to market in a record 21 months, and became profitable in its first
quarter of volume operation. This group is now responsible for approximately
1,200 people in its Rochester, Minnesota headquarters and in its Tuas, Singapore
production facility.
...a full-line hard drive supplier to the world’s leading computer makers.
5. Desktop Computing
Enterprise Computing
Mobile Computing
3 Western Digital Corporation
6. e s t e r n D i g i t a l ’s P r o d u c t s
Western Digital ranks among
the world’s top producers of
desktop computer hard drives.
WD Caviar EIDE hard drives
are used by leading computer
makers and are the most often
recommended hard drives for
replacement and add-on uses.
Western Digital builds
WD Enterprise SCSI hard
drives for workstations, file
servers, multi-user, audio-
video and a wide variety of
network applications.
Western Digital manufactures
WD Portfolio hard drives for
mobile computers in a new,
3-inch format that provides
70 percent more recording
area per platter than the
2.5-inch format that has been
in use for years.
4 Western Digital Corporation
7. ...record unit volume, revenues, net income and earnings per share as well as
record shareholders’ equity.
Thus, the Western Digital of today is quite unlike the company we knew in
1992. We have become a full-line hard drive supplier to the world’s leading
computer makers. Hard drive revenues have grown more than sixfold and, with
financial disciplines in place, the Company is now solidly profitable. Long-term
debt has been reduced from $243 million to zero, and cash reserves have grown
from $34 million to more than $200 million. In recognition of these accom-
plishments, the Company’s market value grew from $142 million in 1992 to
more than $2.7 billion by the end of fiscal 1997.
A point of pride for the people of Western Digital is the attainment of special
recognition for the Company’s brand name. The Western Digital brand has
come to mean quality, reliability and exceptional security for the information
that people create and collect in their professional and personal lives.
Western Digital’s success over these five years could not have been accomplished
without the able leadership of Kathy Braun, President and Chief Operating
Officer of our Personal Storage Division, Marc Nussbaum, Senior Vice President
of Engineering for Personal Storage, Matt Massengill, Senior Vice President and
General Manager of our Enterprise Storage Group, David Schafer, Senior Vice
President of Worldwide Sales, and Duston Williams, Senior Vice President and
Chief Financial Officer. These leaders and the more than 13,000 associates we
have at Western Digital are dedicated to increasing shareholder value. That’s our
true measure.
We look forward to bringing you a $10 billion company within the next five
years.
Sincerely,
Charles A. Haggerty
Chairman, President and
Chief Executive Officer
September 12, 1997
5
8. Western Digital Growth
Hard Drive Units Shipped
23.1
(in millions)
Hard drive unit volume grew 51 percent in fiscal year
15.3
1997. Analysts foresee a compounded annual growth
rate of 19 percent for the hard drive industry through
10.2
6.9
the year 2001.
4.4
2.7
92 93 94 95 96 97
Hard Drive Revenues
$4,178
(in millions)
Net hard drive revenues grew 49 percent in fiscal year
$2,795
1997, and at a compounded annual rate of 44 percent
$1,940
over the past five years.
$1,380
$1,047
$668
92 93 94 95 96 97
19.7% Worldwide Market Share
calendar year (source: IDC, July 1997)
18.5%
Western Digital has gained market share in a very
13.8%
competitive environment by growing customer
12.8%
10.2%
relationships, producing quality products, deploying
9.1%
technology, executing manufacturing efficiently,
improving time-to-market and adding enterprise
storage products.
92 93 94 95 96 97E
Western Digital vs. Industry Growth Rate
calendar year (source: IDC, July 1997)
Since 1992, Western Digital’s unit volume has
46%
grown at a compounded annual rate of 46 percent,
far in excess of the hard drive industry growth
27%
rate of 27 percent.
Industry WDC
Graph information is based on fiscal years unless otherwise noted.
6 Western Digital Corporation
9. A point of pride for the people of Western Digital is the attainment of special
recognition for the Company’s brand name.
Efficient Use of Resources
Revenues Per Employee $363
(in thousands)
$332
Employee productivity as measured in revenues has $299
grown at a compounded annual rate of 21percent over $221
$172
the past five years. $138
92 93 94 95 96 97
Operating Expenses to Revenues (percent of revenues)
18.9%
Western Digital employs aggressive cost controls that 15.7%
14.7%
result in an expense structure regarded as the most 12.3%
10.6%
competitive in the hard drive industry. 8.3%
92 93 94 95 96 97
7
10. Superior Balance Sheet Management
(annual performance)
Inventory Turns
21.1
18.9 The fastest inventory turns in its industry reduce
18.1
Western Digital’s inventory risk and minimize
13.5
10.1
working capital outlays.
5.7
92 93 94 95 96 97
3.6
(annual performance)
Asset Turns
3.2
2.8
2.8 Western Digital has become a leader in asset
2.2
management.
1.6
92 93 94 95 96 97
(in millions)
Long-Term Debt
$243
Superior asset management and sustained profitability
$183
have led to the elimination of the Company’s long-
term debt.
$59
92 93 94 95 96 97
51% Return on Invested Capital
Western Digital has focused exclusively on the
31%
26%
hard drive business, divested itself of unrelated
21%
business lines and increased its investment in the
enterprise storage product line. This focus and
-2%
close attention to asset management have
-12%
produced superior returns on invested capital.
92 93 94 95 96 97
8 Western Digital Corporation
11. Shareholder Value
Shareholders’ Equity $620
(in millions)
Western Digital’s shareholders’ equity has increased
$473 $454
over 450 percent since 1992, during which time the
Company also has carried on an aggressive stock $288
repurchase program. $112 $131
92 93 94 95 96 97
Stock Repurchase Program cumulative purchases (in millions)
$278
Since the inception of its stock repurchase program,
the Company has repurchased a total of 22.2 million
shares at an average price of $12.53 for a total of $278 $143
million. The continuing stock buyback program
$11
reflects an outstanding investment opportunity which
the Company believes to be in the best interest of its
95 96 97
shareholders.
Market Capitalization (in millions) $2,722
Western Digital’s total market value has grown as the
Company improved its product quality, manu-
facturing efficiency and asset management. $1,138
$869
$572
$142 $146
92 93 94 95 96 97
9
12. Condensed Consolidated Statements of Income
Fiscal Years Ended
(in thousands, except per share data) July 1, 1995 June 29, 1996 June 28, 1997
Revenues, net $2,130,867 $2,865,219 $4,177,857
Cost of revenues 1,736,761 2,483,155 3,527,574
Research and development expense 130,789 150,112 150,157
Selling, general and administrative expense 130,286 154,497 198,530
Operating income 133,031 77,455 301,596
Net interest and other income 30,4095
12,002 13,223
Income before income taxes 145,033 107,864 314,819
Provision for income taxes 21,731 10,970 47,223
Net income $ 123,302 $ 96,894 $ 267,596
Fully diluted earnings per common and common equivalent share $ 1.23 $ 1.00 $ 2.85
5Includes $17.3 million gain on sale of multimedia business
Condensed Consolidated Statements of Cash Flows
Fiscal Years Ended
(in thousands) July 1, 1995 June 29, 1996 June 28, 1997
Net income $ 267,596)
$ 123,302) $ 96,894)
Adjustments to net income (13,437)
(1,985) (38,613)
Net cash provided by operating activities 254,159)
121,317) 58,281)
Cash flows from investing activities:
Capital expenditures, net (155,958)
(54,774) (108,696)
Proceeds from sale of businesses —)
—) 85,486)
Change in short-term investments and other assets 29,011)
(96,464) 46,391)
Net cash provided by (used for) investing activities (126,947)
(151,238) 23,181)
Cash flows from financing activities:
Repurchase of common stock (144,574)
(10,822) (132,114)
Other financing activities 43,073)
14,790) 15,686)
Net cash provided by (used for) financing activities (101,501)
3,968) (116,428)
Net increase (decrease) in cash and cash equivalents 25,711)
(25,953) (34,966)
Cash and cash equivalents at beginning of year 182,565)
243,484) 217,531)
Cash and cash equivalents at end of year $ 208,276)
$ 217,531) $ 182,565)
10
13. Condensed Consolidated Balance Sheets
Fiscal Years Ended
(in thousands) June 29, 1996 June 28, 1997
Assets
Current assets:
Cash and cash equivalents $ 208,276
$ 182,565
Short-term investments —
36,598
Accounts receivable, net 545,552
409,473
Inventories 224,474
142,622
Prepaid expenses and other assets 39,593
23,006
Total current assets 1,017,895
794,264
Property and equipment at cost, net 247,895
148,258
Intangible and other assets, net 41,332
41,621
Total assets $1,307,122
$ 984,143
Liabilities and Shareholders’ Equity
Current liabilities $ 653,705
$ 514,022
Deferred income taxes 33,430
16,229
Shareholders’ equity:
Common stock and paid-in capital, net of treasury stock 131,921
233,422
Retained earnings 488,066
220,470
Total shareholders’ equity 619,987
453,892
Total liabilities and shareholders’ equity $1,307,122
$ 984,143
Independent Auditors’ Report
The Board of Directors
Western Digital Corporation:
We have audited, in accordance with generally accepted auditing standards, the
consolidated balance sheets of Western Digital Corporation and subsidiaries as
of June 29, 1996 and June 28, 1997, and the related consolidated statements of
income, shareholders’ equity and cash flows for the three years ended June 28,
1997, and in our report dated July 16, 1997, we expressed an unqualified
opinion on those consolidated financial statements.
In our opinion, the information set forth in the accompanying condensed
consolidated financial statements is fairly stated, in all material respects, in
relation to the consolidated financial statements from which it has been derived.
Orange County, California
September 12, 1997
11 Western Digital Corporation
14. Corporate Information
Board of Directors Corporate Officers
Charles A. Haggerty Charles A. Haggerty
Chairman of the Board, Chairman of the Board,
President and President and
Chief Executive Officer Chief Executive Officer
James A. Abrahamson Kathryn A. Braun
Chairman and Chief Executive Officer President and Chief Operating Officer,
International Air Safety, L.L.C., Personal Storage Division
Air Traffic Control Products and Services
Matthew Massengill
Peter D. Behrendt Senior Vice President and General Manager,
Chairman Enterprise Storage Group
Exabyte Corporation
Computer Tape Storage Products Marc H. Nussbaum
Senior Vice President, Engineering,
I.M. Booth Personal Storage Division
Retired. Former Chairman, President
and Chief Executive Officer David W. Schafer
Polaroid Corporation Senior Vice President, Worldwide Sales
Photographic Equipment
Duston M. Williams
Irwin Federman Senior Vice President,
General Partner Chief Financial Officer
U.S. Venture Partners
Venture Capital Investments Michael A. Cornelius
Vice President, Law & Administration
André R. Horn and Secretary
Retired. Chairman Emeritus, Needham & Co.,
Investment Banking Steven M. Slavin
Former Chairman of the Board Vice President, Taxes and Treasurer
Joy Manufacturing Company
Capital Equipment for the Energy Industry Jack Van Berkel
Vice President, Human Resources
Dr. Anne O. Krueger
Professor of Economics
Department of Economics
Stanford University
Thomas E. Pardun
President and Chief Executive Officer
U S WEST International, Asia-Pacific,
Subsidiary of U S WEST, Inc.
Diversified Communications
12 Western Digital Corporation
