This post examines Western Digital’s FY2018 financial statements.

Western Digital released its FY2018 financial statements on 8/24/18. We can examine these financials using a variety of tools and approaches, such as (1) comparing the prior year balances to current year, (2) forecasting future earnings through a pro-forma model, and (3) graphing the critical financial ratio such as the Price-Earnings ratio (with comparable companies).

Comparing Balances

Comparing prior year and current year balances is standard practice within the financial industry. This allows one to easily decipher balances in increase and balances in decline.

6-29-18 6-30-17 Difference Difference as %
Consolidated Balance Sheet In Millions
Current assets: 0.0 0.0 0.0 0.00%
Cash and cash equivalents 5,005.0 6,354.0 1,349.0 21.23%
Accounts receivable, net 2,197.0 1,948.0 -249.0 -12.78%
Inventories 2,944.0 2,341.0 -603.0 -25.76%
Other current assets 492.0 413.0 -79.0 -19.13%
Total current assets 10,638.0 11,056.0 418.0 3.78%
Non-current assets: 0.0 0.0 0.0 0.00%
Property, plant and equipment, net 3,095.0 3,033.0 -62.0 -2.04%
Notes receivable and investments in Flash Ventures 2,105.0 1,340.0 -765.0 -57.09%
Goodwill 10,075.0 10,014.0 -61.0 -0.61%
Other intangible assets, net 2,680.0 3,823.0 1,143.0 29.90%
Other non-current assets 642.0 594.0 -48.0 -8.08%
Total assets 29,235.0 29,860.0 625.0 2.09%
Current liabilities: 0.0 0.0 0.0 0.00%
Accounts payable 2,265.0 2,144.0 -121.0 -5.64%
Accounts payable to related parties 259.0 206.0 -53.0 -25.73%
Accrued expenses 1,274.0 1,255.0 -19.0 -1.51%
Accrued compensation 479.0 506.0 27.0 5.34%
Current portion of long-term debt 179.0 233.0 54.0 23.18%
Total current liabilities 4,456.0 4,344.0 -112.0 -2.58%
Non-current liabilities: 0.0 0.0 0.0 0.00%
Long-term debt 10,993.0 12,918.0 1,925.0 14.90%
Other liabilities 2,255.0 1,180.0 -1,075.0 -91.10%
Total liabilities 17,704.0 18,442.0 738.0 4.00%
Commitments and contingencies (Notes 6, 9, 13 and 16) 0.0 0.0 0.0 0.00%
Shareholders’ equity: 0.0 0.0 0.0 0.00%
Preferred stock, $0.01 par value; authorized — 5 shares; issued and outstanding — none 0.0 0.0 0.0 0.00%
Common stock, $0.01 par value; authorized — 450 shares; issued — 312 shares in 2018 and 2017; outstanding — 296 shares in 2018 and 294 shares in 2017 3.0 3.0 0.0 0.00%
Additional paid-in capital 4,254.0 4,506.0 252.0 5.59%
Accumulated other comprehensive loss -39.0 -58.0 -19.0 32.76%
Retained earnings 8,757.0 8,633.0 -124.0 -1.44%
Treasury stock — common shares at cost; 16 shares in 2018 and 18 shares in 2017 -1,444.0 -1,666.0 -222.0 13.33%
Total shareholders’ equity 11,531.0 11,418.0 -113.0 -0.99%
Total liabilities and shareholders’ equity 29,235.0 29,860.0 625.0 2.09%

Going down the list, we will examine any large differences (as defined by being in excess of $500M and 20% or by our own judgement).

1. Cash and Cash Equivalents

Cash and Cash Equivalents declined by $1.3B, or 21%. Cash from operating activities was healthy at $4.2B. $1.3B was invested in Flash Ventures, while $2.7B was used to pay down debt (see below).

2. Inventories

Inventories increased by $600M or 26%. This could reflect a softening in the marketplace. Given the growth in flash products for the company, the excess inventory is likely composed largely of HDD products.

3. Notes Receivable and Investments in Flash Ventures

Increased by $765M, or 57%. The company was involved in a legal dispute with Toshiba over the course of the past year and a half. Toshiba sold their chip business to a consortium group led by Bain Capital, but Western Digital was also involved in the competition. In order to maintain their competitive advantage in the flash marketplace the company pursued legal avenues to slow Bain’s acquisition of Toshiba’s chip business. The result of the legal dispute is WD has been allowed to continue to invest in their flash ventures with Toshiba.

4. Other Intangible Assets, Net

Decreased by $1.1B or 30%.

5. Long-term debt

Decreased by $1.9B, or 15%. The company continues to pay down their secured and unsecured notes acquired following WD’s cash acquisition of SanDisk in 2015. The company also redeemed their 7.375% and 10.50% senior notes ($1.9B and $3.4B, respectively) for a lower rate of 4.750% due in 2026. This is an improvement to their debt servicing plan. Notes on debt servicing are taken from Note 6 of the 10K.

6-29-18 6-30-17 7-1-16 Difference 18v17 Difference as %
Consolidated Income Statement In Millions
0 0.0 0.0 0.0 0.0 0.00%
Income Statement 0.0 0.0 0.0 0.0 0.00%
Revenue, net 20,647.0 19,093.0 12,994.0 1,554.0 8.14%
Cost of revenue 12,942.0 13,021.0 9,559.0 -79.0 -0.61%
Gross profit 7,705.0 6,072.0 3,435.0 1,633.0 26.89%
Operating expenses: 0.0 0.0 0.0 0.0 0.00%
Research and development 2,400.0 2,441.0 1,627.0 -41.0 -1.68%
Selling, general and administrative 1,473.0 1,445.0 997.0 28.0 1.94%
Employee termination, asset impairment, and other charges 215.0 232.0 345.0 -17.0 -7.33%
Total operating expenses 4,088.0 4,118.0 2,969.0 -30.0 -0.73%
Operating income 3,617.0 1,954.0 466.0 1,663.0 85.11%
Interest and other income (expense): 0.0 0.0 0.0 0.0 0.00%
Interest income 60.0 26.0 26.0 34.0 130.77%
Interest expense -676.0 -847.0 -266.0 171.0 -20.19%
Other expense, net -916.0 -364.0 -73.0 -552.0 151.65%
Total interest and other expense, net -1,532.0 -1,185.0 -313.0 -347.0 29.28%
Income before taxes 2,085.0 769.0 153.0 1,316.0 171.13%
Income tax expense (benefit) 1,410.0 372.0 -89.0 1,038.0 279.03%
Net income 675.0 397.0 242.0 278.0 70.03%
Income per common share 0.0 0.0 0.0 0.0 0.00%
Basic (in dollars per share) 2.27 1.38 1.01 0.89 64.49%
Diluted (in dollars per share) 2.2 1.34 1.0 0.86 64.18%
Weighted average shares outstanding: 0.0 0.0 0.0 0.0 0.00%
Basic (in shares) 297.0 288.0 239.0 9.0 3.12%
Diluted (in shares) 307.0 296.0 242.0 11.0 3.72%
Cash dividends declared per share (in USD per share) 2.0 2.0 2.0 0.0 0.00%

1. Revenue

Revenue increased $1.5B, or 8%, to $20.6B. This growth per the Company is primarily a result of a favorable flash memory (NAND) market.

2. Gross Profit

Gross profit increased $1.6B, or 27% to $3.4B. The market was strong for flash memory, and this resulted in the significant increase in gross profit. The company’s Q1 guidance is flat with regard to gross profit. This may well indicate the storage marketplace is saturated or nearing saturation.

3. Operating Income

Increased $1.7B, or 85% from $2.0B to $3.7B. See Gross Profit for explanation.

4. Other expense, Net

Increased by $552M, or 152% from $364M to $916M. These expenses primarily relate to losses on exchange of high interest secured debt for lower interest debt. These exchanges will provide significant savings over the course of their term. As such, the losses are well warrented.

5. Income Tax Expense

Increased $1.0B, or 279% from $372M to $1.4B. This is a direct result of the 2017 Tax Cuts and Jobs Act enacted by the US Federal Government. This tax act reduced the US federal corporate tax rate from 35% to 21%, and also required immediate repatriation of certain foreign subsidiaries whose taxable income was previously deferred. The lower corporate tax rate of 21% will benefit the Company moving forward.

Further Analysis to Come

We have only begun to examine Western Digital as a corporation. Our next analysis will investigate the direction of the company through a pro-forma model. We desire to answer the question, “Is the company under- or overvalued?” A pro-forma model will be the vehicle to accomplish this.