BA Final Assingment

8/8/2019 BA Final Assingment

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Financial Position & Reporting of Western Digital Corporation

Accounting Assignment

Financial Position & Reporting

Of

Western Digital Corporation

Submitted By :Rafay Mirza

UOB No: 09032076

Submitted to

Rafay Mirza(UOB No 09032076) 1


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ACCOUNTING ASSIGNMENT ......................................................................................................................................................................... .....1

FINANCIAL POSITION & REPORTING .................................................................................................................................................. ...........1

OF ................................................................................................................................................................................................................................1

WESTERN DIGITAL CORPORATION ...................................................................................................................................................... ..........1

SUBMITTED BY :RAFAY MIRZA .............................................................................................................................................................. ..........1

UOB NO: 09032076 ....................................................................................................................................................................................................1

SUBMITTED TO .......................................................................................................................................................................................................1

1.EXECUTIVE SUMMARY .....................................................................................................................................................................................3

WESTERN DIGITAL CORPORATION BACKGROUND INFORMATION.............................................................................................................................................3

2.CRITICAL APPRAISAL OF ACCOUNTING POLICES ..................................................................................................................................5

FISCAL YEAR.....................................................................................................................................................................................................................5

BASISOF PRESENTATION.....................................................................................................................................................................................................5

CASHAND CASH EQUIVALENTS............................................................................................................................................................................................5

CREDIT FACILITY...............................................................................................................................................................................................................5

LEGAL PROCEEDINGS..........................................................................................................................................................................................................6

3.FINANCIAL STRENGTH & WEAKNESS .............................................................................................................................................. ...........7



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STRENGTHS........................................................................................................................................................................................................................7

PROFITABILITY.....................................................................................................................................................................................................................7

GROSS PROFITMARGIN........................................................................................................................................................................................................7

RETURNON ASSETS.............................................................................................................................................................................................................8

RETURNON CAPITAL EMPLOYED ...........................................................................................................................................................................................8

.........................................................................................................................................................................................................................................9

EFFICIENCY (WORKING CAPITAL CYCLE)..........................................................................................................................................................................10

FINANCIAL LEVERAGE.......................................................................................................................................................................................................11

3.1.WEAKNESS ................................................................................................................................................................................................................13

4.STOCK PRICE ANALYSIS ............................................................................................................................................................................. ...14

REVIEW OF MARKET PERCEPTION ...............................................................................................................................................................15

BIBLIOGRAPHY .................................................................................................................................................................................................. ..16



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1. EXECUTIVE SUMMARY

We have performed the financial due diligence of Western Digital Corporation in order to evaluate it from the point ofpotential investment in this Company, The company is behind the market leader Seagate with the 22% market share.

We would like to highlight that we have conducted our due diligence review based on the audited financial statements ofWestern Digital Corporation for the year ended July 3 2009. For the purpose of carrying on our review, we havedownloaded the financial statements of the Company from its website.

In view of the above, the amounts, related explanations and observations / comments thereon, included in this report, arebased on the audited financial statements of Western Digital for the year ended July 3 2009. However, there may besubstantial changes after the date of the annual report.

Western Digital Corporation Background Information

Western Digital design develops, manufacture and sell hard drives. A hard drive is a device that uses one or more rotatingmagnetic disks (magnetic media) to store and allow fast access to data. Hard drives are key components of computers,including desktop and notebook computers (PCs), data storage subsystems and many consumer electronic (CE)devices.

Following diagram illustrates the over market share holding of the company as it is the one of the largest in the market justbehind its market leader Seagate.



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[Source WikkiInvest.com/Western Digital]



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2. Critical Appraisal of Accounting PolicesThe Company has prepared its consolidated financial statements in accordance with accounting principles generallyaccepted in the United States (U.S. GAAP) and has adopted accounting policies and practices which are generallyaccepted in the industry in which it operates. The Companys significant accounting policies are summarized below.

Fiscal Year

The Company has a 52 or 53-week fiscal year. The 2009 fiscal year which ended on July 3, 2009 consisted of 53 weeks.The 2008 and 2007 fiscal years, which ended on June 27, 2008 and June 29, 2007, respectively, consisted of 52 weekseach.

Basis of Presentation

On March 27, 2009, the Company completed its acquisition of SiliconSystems, Inc. (SiliconSystems). On September 5,2007, the Company completed its acquisition of Komag, Inc. (Komag). The acquisitions are further described in Note 14below. The results of operations of SiliconSystems and Komag since the dates of their acquisitions are included in theconsolidated financial statements. The consolidated financial statements include the accounts of the Company and itswholly-owned subsidiaries, including SiliconSystems and Komag. All significant inter-company accounts and transactionshave been eliminated in consolidation.

Cash and Cash Equivalents

The Companys cash equivalents represent highly liquid investments in money market funds, U.S. Treasury securities,and U.S. Government agency securities with original maturities of three months or less.

Credit Facility

In February 2008, Western Digital Technologies, Inc. (WDTI), a wholly-owned subsidiary of the Company, entered intoa five-year Credit Agreement (Credit Facility) that provides for a $750 million unsecured loan consisting of a $500 millionterm loan facility and a $250 million revolving credit facility. The revolving credit facility includes borrowing capacityavailable for letters of credit and for short-term borrowings referred to as swingline. In addition, WDTI may elect to expandthe Credit Facility by up to $250 million if existing or new lenders provide additional term or revolving commitments. The



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$500 million term loan had a variable interest rate of 1.63% as of July 3, 2009 and requires sixteen quarterly principalpayments, that began in June 2009, of approximately $19 million, $25 million, $31 million and $50 million per quarter foreach four quarter increment. The Credit Facility requires WDTI to comply with a leverage ratio and an interest coverage

ratio calculated on a consolidated basis for the Company and its subsidiaries.

Legal Proceedings

On July 15, 2009, plaintiffs Carl B. Collins and Farzin Davanloo filed a complaint in the Eastern District of Texas againstthe Company and ten other companies alleging infringement of U.S. Patent Nos. 5,411,797 and 5,478,650. Plaintiffs areseeking injunctive relief and unspecified monetary damages, fees, and costs. The asserted patents allegedly relate tonanophase diamond films. The Company intends to defend itself vigorously in this matter.



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3. Financial Strength & Weakness

Strengths

Profitability

Gross Profit Margin

2009 2008 2007 2006 2005 2004 2003 2002 2001 2000

Gross Profit(USD) 7,453,000 8,074,000 5,468,000 4,341,000 3,638,800 3,046,700 2,718,500 2,151,200 1,953,400 1,957,199

Gross Sales(USD) 1,816,000 2,152,000 1,110,000 989,000 720,600 561,800 493,300 327,400 259,600 87,888

Percentage 24.37 26.65 20.30 22.78 19.80 18.44 18.15 15.22 13.29 4.49



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The gross profit margin gives estimate about the company's pricing strategy but it does give a good indication of financialhealth. Without an adequate gross margin, through it is quite low from the industry average which is 39.11% that is whynow they are investing in there R&D and in future will be coming up with some good products, but since Western Digital

holds the second largest share in the portable hard disk market so the steady gross profit margin shows that company isdoing well. Through this is from 2002 onwards.

Return on Assets

2009 2008 2007 2006 2005 2004 2003 2002 2001 2000Net IncomeBeforeInterestand Tax

501,000.00 981,000.00 443,000.00 382,000.00 200,100.00 153,800.00 189,700.00 52,100.00 (52,200.00) (349,002.00)

AverageTotalAssets

5,291,000.00 4,875,000.00 2,901,000.00 2,086,000.00 1,588,600.00 1,159,200.00 866,200.00 636,700.00 507,652.00 612,952.00

Percentage

9.47 20.12 15.27 18.31 12.60 13.27 21.90 8.18 (10.28) (56.94)

Return on Capital Employed

2009 2008 2007 2006 2005 2004 2003 2002 2001 2000

Net Income BeforeInterest and Tax

501,000 981,000 443,000 382,000 200,100 153,800 189,700 52,100 (52,200) (349,002)

Total Assets -Current Liabilities 3,766,000 3,311,000 1,771,000 1,214,000 768,300 572,300 360,500 144,000 167,306 170,492

Percentage 14.02 31.20 25.24 31.80 26.47 27.24 54.09 41.81 (26.00) (193.47)



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Above graph and ratio clearly show that the returns from the investors point of view are always increasing andsustainable. Except 2009 because of the cost realignment measure that are taken by the company, the Companysinvestors ratio reflects that the long term profitability and return on the invested capital are expected to sustain and grow.

Efficiency (Working Capital Cycle)

2009 2008 2007 2006 2005 2004 2003 2002 2001 2000Net Assets Turnover 1.98 2.44 3.09 3.58 4.74 5.32 7.54 14.94 11.68 11.48

Stock Turnover 19.82 17.71 21.11 21.18 23.80 20.50 27.80 29.31 24.76 23.38

Collection period (days) 45 45 46 40 40 37 32 37 24 27

Credit period (days) 53 53 58 52 56 51 47 51 41 49

Efficiency (Working Capital Cycle)

0

20

40

60

80

100

120140

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

Years

Days

Credit period (day

Collection period

(days)

Stock Turnover

Net Assets Turno

Net asset turn over indicates that the company is doing very good as all the profits generated by the sales are quiteproportional, as it can be seen that this is reduced from 2000 a lot which shows that there is significant increase in theoperating performance of the firm.Stock turn over and collection period, credit period are all among the industry standards and, as the stock turn overindicates the good stock and demand. And the collection period is also just around the industry standard which is 43 days.



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Financial Leverage

2009 2008 2007 2006 2005 2004 2003 2002 2001 2000Interest Cover(x) 19.22 19.35 103.75 91.50 59.00 73.09 35.24 6.26 (2.47) (18.48)

Current Ratio(x) 2.12 1.75 1.80 1.73 1.44 1.46 1.47 1.07 1.13 1.02

Liquidity Ratio(x) 1.87 1.46 1.57 1.49 1.25 1.21 1.28 0.92 0.90 0.83

Gearing (%) 20.55 23.81 3.90 7.09 12.58 20.49 10.11 39.94 2359.30 n.a.

This value of the interest cover shows that the company is able to generate enough profits to satisfy the interest cover ratethrough there is some concern regarding the decline the in 2008 and 2009 the reasons can be recession and the costrealignment measures taken by the Western Digital.



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The current ratio is based on the current assets and current liabilities and as we can see Western Digital have very steadycurrent ratio which is a good indicator of their assets and liabilities proportion.

Gearing basically demonstrates the degree to which company activates depend on or funded by the owners fund or on the creditorsfund. As this can be seen that the is getting higher in the last two years but this can be due to the acquisitions and the credit that istaken for these acquisitions



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3.1. Weakness

Following are few of the points that should be highlighted

I. Some of the acquisitions in the past, acquisition of Komag, Incorporated on September 05, 2009 and acquisition ofSilicon Systems on March 27, 2009 but Operating results of both the companies are not included in the financialstatements.

II. Net revenue decrease by 8% from 8.1 billion to 7.5 billion on hard drive shipment

III. Gross margin percentage decreased by 17.9% in 2009 from 21.5% in 2008

IV. Operating Income decreased by $487 million to $519 million in 2009,this included a $14 million in process research

and development charge related to acquisition of silicon System,$112 million of restructuring charges and $18million gain on the sale of assets from our media substrate manufacturing facility in Sarawak, Malaysia.

V. Net Income in 2009 was $470 million, or $2.08 per diluted share, compared to $867 million, $3.84 per diluted sharein 2008.

VI. Restructuring plan to realign the cost resulted in closure of one of hard drive manufacturing unit in Thailand anddisposal of media substrate manufacturing unit in Sarawak Malaysia and the reduction in the headcount around theworld of around 3,300 people

VII. Total cash expenditures related to the restructuring activities were approximately $31 million.

VIII. A gain of $18 million as the media substrate in Sarawak, Malaysia was sold at approximately $29 million; this wasdone due to expectation regarding the demand at that time.



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4. Stock Price Analysis

Following charts perfectly describe the stock price variations of Western Digital

(Source Western Digital Website Investor Relations)

(Source Western Digital website investor relations)

The volume shows that Western Digital showed good performance some of the factors towards this are someimprovement in the recession along with the favorable supply demand conditions, as reported on their web site the



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highest price for the stock been USD44.96 and the lowest being the USD 11.8 so the overall %change is 1.23%.thiershares have risen this year, but some cautions investors are beginning to raise some eyebrows due to the amount ofinsider sales. According to moneycentral.msn.com

According to Barrons, Western Digitals Vice President and Chief Technology Officer Hossein Moghadam sold almost$3.5 million worth of shares at an average price of $38.72 on December 2. After the sales were done, he was left with just4,260 shares, far less than 1% of the companys total outstanding.

Other executives include Martin Finkbeiner, who sold 140,000 for $5.4 million; Michael D. Lambert sold 20,000 for$774,100; and Raymond Bukaty sold 38,500 for $1.5 million.

Year-to-date, Western Digitals stock has gained 241%.

Review of Market Perception

Western Digital, the No. 2 disk drive maker, The Company forecast earnings for the current quarter of $1.26 to $1.36 ashare on revenue of $2.25 billion to $2.35 billion. That compares with the average analyst estimate for earnings of $1.09 ashare on revenue of $2.19 billion. We continue to be very encouraged by the demonstration through the last six monthsin terms of the recovery of demand once an inventory adjustment had been made," Chief Executive John Coyne said on aconference call with analysts.[]

He said strong demand appears to be coming from consumers buying PCs and external storage as part of the growing"social media phenomenon. Western Digital said hard drive inventories remain "extremely lean," as the industry remainsdisciplined in managing supply and demand. , Gross margin was 23.3 percent, up from 20.1 percent last year, and better

than the 19.9 percent analyst forecast. The average hard drive selling price was roughly $49 per unit, up $1 from theprevious quarter.

The company said net profit in the fiscal first quarter ended Oct. 2 rose to $288 million, or $1.25 a share, from $211million, or 93 cents a share, in the year-ago period. Revenue rose 5 percent to $2.21 billion, above the $2.06 billion WallStreet estimate. Hard drive shipments rose 12 percent to 44.1 million units.



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Analysts are expecting corporations to begin updating 4- and 5-year-old PCs in a wave of upgrades starting some timenext year, which should help boost sales for component suppliers such as Western Digital.

Western Digital initiated with a Outperform at Wedbush Morgan; target $49 Wedbush Morgan initiates WDC with aOutperform and price target of $49 based on expectations for continued favorable supply-demand conditions, share gainsin the enterprise drive segment and expanding margins. The firm believes that 2010 should be a very good year for HDDvendors as demand is likely to be very strong driven by a tech refresh in businesses and an improved consumer spendingenvironment. In addition, the industry has consolidated and the companies are now focusing on profitability rather thanmarket share gains.

BibliographyFollowing references were used and constantly referred to during the creation of this report.

Companies Websiteshttp://www.wdc.com/en/company/index.asphttp://www.emc.com/http://www.lexmark.com/index.htmlhttp://www.imation.com/en-us/http://www.netapp.com/

Educational websiteshttp://www.netmba.com/finance/financial/ratios/http://www.va-interactive.com/inbusiness/editorial/finance/ibt/ratio_analysis.html

Financial Websiteshttp://money.cnn.com/quote/analyst/analyst.html?symb=WDChttp://www.zacks.com/research/report.php?type=brec&t=WDChttp://news.moneycentral.msn.comhttp://www.wikinvest.com/stock/Western_Digital_(WDC)http://phx.corporate-ir.net/phoenix.zhtml?c=115264&p=irol-estimates

http://www.wdc.com/en/company/index.asphttp://www.emc.com/http://www.lexmark.com/index.htmlhttp://www.imation.com/en-us/http://www.netapp.com/http://www.netmba.com/finance/financial/ratios/http://www.va-interactive.com/inbusiness/editorial/finance/ibt/ratio_analysis.htmlhttp://money.cnn.com/quote/analyst/analyst.html?symb=WDChttp://www.zacks.com/research/report.php?type=brec&t=WDChttp://news.moneycentral.msn.com/http://www.wikinvest.com/stock/Western_Digital_(WDC)http://phx.corporate-ir.net/phoenix.zhtml?c=115264&p=irol-estimateshttp://www.wdc.com/en/company/index.asphttp://www.emc.com/http://www.lexmark.com/index.htmlhttp://www.imation.com/en-us/http://www.netapp.com/http://www.netmba.com/finance/financial/ratios/http://www.va-interactive.com/inbusiness/editorial/finance/ibt/ratio_analysis.htmlhttp://money.cnn.com/quote/analyst/analyst.html?symb=WDChttp://www.zacks.com/research/report.php?type=brec&t=WDChttp://news.moneycentral.msn.com/http://www.wikinvest.com/stock/Western_Digital_(WDC)http://phx.corporate-ir.net/phoenix.zhtml?c=115264&p=irol-estimates

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