Western Digital Corporation

Concordia University, IrvineCorporate Finance

Janet MullerLatique Simmons

Jeff RoeserJunsung Kim

Parham NooriCody Summerville

Western DigitialCompany Profile

• Industry: Data storage Devices

• Main Product lines: External, Internal storage, network

products, home entertainment

• Headquartered : Irvine, CA

• year in business

- Founded in 1970

- Pc hard Drive design, manufactures and sales

Western DigitialCompany Profile

• Annual revenue, Earnings Annual revenue($thousand) - 2008 : 8074 - 2009 : 7453 - 2010 : 9850

Annual Earnings($thousand) - 2008 : 1822 - 2009 : 2292 - 2010 : 3674

Western DigitialCompany Profile

• Total Assets($Million) - 2008 : 4875 - 2008 : 5291 - 2010 : 7328

• Market Capitalization - 7.12B

• Stock price, range(before and after crisis) - The lowest point : 11.17.08, $10.38 - Tthe highest point : 01.04.10, $45.82

Western DigitialCompany Profile

• Stock market where traded : NYSE

• Target market : USA, Asia

• Main suppliers - Netac Technology Co. Ltd, Ma Labs, Evertek Computer corp.

• Main competitors : STX, TOSBF.PK

Description

• Proposed new type of video recorder named “TV Drive”

• can connect to any device like TV and VCR• And have the capabilities of recording any

type of media• play blue ray & regular DVDs and will have

WIFI capabilities

Assumption• Sunk Costs:

– Research and development cost : $30mill USD– Market research study cost : $3mill USD

• Sold in 2 variations:– Electronic Device: external unit price : $250 USD– TV Manufacturing Part: internal unit price : $125 USD

• Initial capital investment : $275 mill USD• MACRS 5-yr depreciation model• The discount rate/ cost of capital: 28% • The resale value : $10.5mill USD

Ratio Analysis• Seagate a close competitor • balance sheet and income statement• Comparing WDC and SGC • Liquidity and leverage • ASSET Management• Profitability

Ratio AnalysisLiquidity Ratios:• Current ratio• Quick ratio

Ratio AnalysisLeverage:• Debt ratio• Debt to Equity

Data for forecasted ratio ASSET Management• Inventory turnover • Average collection• Total Asset Turn

Data for forecasted ratio Profitability• Gross profit • Profit Margin • P/E ratios

Strategic Long Range Plan

• Who are we?– Western Digital Corporation– Hard drive industry

• Where would we like to be?– Expand into different markets– Expand to new buyers

• Increase in demand for SSD’s

• How do we plan to get there?– Rely heavily on R&D– Develop and maintain relationships with our customers

SWOT: Strengths • Strong research and development

– Over past 3 yrs R&D expenses grew 29% annually– Strong R&D led to the launch of the My Book– Helps company to be successful in product categories

• Extensive product offerings – Desktops, mobile computers, enterprise & consumer markets– Brand name products; WD Caviar, WD VelociRaptor, WD

Scorpio• Gain expertise from acquiring smaller innovative companies

• Changing product mix– Shifting towards non-desktop products; gaining market share– Strengthening position in external storage space markets

SWOT: Weaknesses

• Dependency on OEMs and distributors– Original equipment manufacturers & Original

design manufacturers; 54% of revenues in 09– With relying on a few customers it reduces risk

• Lack of diversification– Western Digital; focuses on a few products &

channels.– Their competitors like Samsung and Hitachi are

much more broad with several channels of products.

SWOT: Opportunity

• Increasing Demand for HDD– Projected to grow 5% annually till 2012– In terms of TB; size of hard drives, it is expected to

grow CAGR 38% till 2012.

• Increasing Demand for SSD; Solid State Disks– Due to increased storage capacities– Super technical advantages

SWOT: Threats

• Competition to have the best flash memory– Everyone is competing on price and storage

capacity; fierce market.

• Competition for Large Customers– It is hard to differentiate amongst each other so

obtaining a large customer is a big deal.

Challenge with CF model

• The initial difficulties - over-estimated amounts in the sales volume - an unusually high NPV & IRR percentage - an payback period of less than one year• Adjustments - Lower our initial sales forest -Increase the expenditure (175Mill→275Mill)• Results of adjustment - NPV : $622M - IRR : 0.84% - Payback : 2.72yrs

Best & worst case scenario• Best case scenario - Assumption increase our sales by 15% & decreasing our cost by 10%, - results NPN : raised from $622million to $822 million Payback : decreased from 2.72yrs to 2.42 yrs IRR : IRR was raised FROM 84% to 102%.

• Worst case scenario - Assumption 25% decrease in sales and 20% increase in cost of goods sold - Results NPV : decreased from $622million to $261.7 million Payback : increased from 2.72yrs to 23.41 yrs IRR : IRR was decreased FROM 84% to 154%.

Price sensitivity• Assumption - increase 15% in price• Results - NPV : raised from $622million to $425 million - Payback : decreased from 2.72yrs to 2.65 yrs - IRR : raised from 84% to 74%. • Assumption - Decrease 25%, 15% and 10% in price• Results - Decrease 25% Decrease 15% Decrease 10% NPV -$90M $39M $103M IRR 17% 32% 40% Payback 4.88yrs 3.78 yrs 3.46yrs

.

WDC & Project Planning• Goal is to show a realistic potential forecast of the

company’s future financial sheets

– Sought to implement ideas formed from SLRP• 10% increase in revenue (improve turnover ratios)• 5% decrease in liability accounts (improve collection period)• After first year there is 3% increase in asset for conversion

– Impact of TV Drive Project

• Created Annual Income Stmt then Balance Sheet– Maintain relationship between Revenue, COGS with

A/P (20% of COGS) , A/R (12% of revenue) and Inventory (7.5% of COGS)

Projected 2011 Income Statement for WD

ACTUALS

2010 Projected NPV Total

Basis Factor Base Project 2011

Revenue 9850 Growth % 0.1 10,835.0 887.5 11,722.5Cost of revenue 7449 Rev 0.7562437 8,193.9 607.5 8,801.4Depreciation expense 31 31.0 35.0 66.0 Total COGS 7480 8,224.9 642.5 8,867.4 Gross Margin 2370 2,610.1 245.0 2,855.1

SG&A 265 0.95 255.0 2.0 257.0R&D 611 incre budget 616.0 0.0 616.0Other Operating Expenses 0 flat budget 20.0 2.5 22.5Total Operating Expenses 876 891.0 4.5 895.5Operating Income 1494 1,719.1 240.5 1,959.6

Interest 4 4.0 16.5 20.5Other Expense -9 -9.0 0.0 -9.0 EBT 1499 1,724.1 224.0 1,939.1Income tax expense (benefit)138 EBT 0.9079386 158.7 20.6 179.3

Net Income 1361 1,565.4 203.4 1,759.8

2011 Projection

WDC & Project Planning• Created Annual Income Stmt then Balance Sheet

– Maintain relationship between Revenue, COGS with A/P (20% of COGS) , A/R (12% of revenue) and Inventory (7.5% of COGS)

• Quarterly Statements breakdown yearly change– Historical % of change for each quarter determines

increase to balance sheet accounts, and revenue stream

• Quarter 1 accounts of 21% yearly change• Quarter 2 accounts for 27% yearly change and so on

Projected 2011 B/S for WDWestern DigitalBALANCE SHEET ACTUALS Projected NPV Total

2010 Basis Factor Base Project 2011USD$ Millions

ASSETSCurrent Assets:

Cash 2,734.0 33.5 4,276.2 Accounts Receivable 1,256.0 Sales 0.12751 108.7 1,490.3 Inventory 560.0 COGS 0.07518 139.8 755.8 Other Current Assets 170.0 1.02941 - 170.0 Total Current Assets 4,720.0 282.0 6,692.3

Long Term Assets:Property, Plant & Equipment 2,159.0 275.0 2,434.0 Accumulated Depreciation 510.0 Depreciation 55.0 596.0 Net Property, Plant & Equip 1,649.0 220.0 1,838.0 Other intangible assets 449.0 449.0 - 449.0 Total Long Term Assets 2,098.0 220.0 2,287.0 TOTAL ASSETS 7,328.0 557.0 9,575.3

carry prior

2011 Projection

4,242.7 1,381.6

6,410.3

616.0 170.0

2,159.0

1,618.0 541.0

2,067.0 9,018.3

Western DigitalBALANCE SHEET ACTUALS Projected NPV Total

2010 Basis Factor Base Project 2011USD$ Millions

LIABILITIESCurrent Liabilities:

Accounts Payable 1,507.0 COGS 0.202309 1,657.7 62.1 1,719.8 Other Current Liabilities 516.0 490.2 16.5 506.7 Total Current Liabilities 2,023.0 2,147.9 78.6 2,226.5 2,023.0 2,147.9 78.6 2,226.5

Long Term LiabilitiesLong term Debt 294.0 294.0 275.0 569.0 Other Liabilities 302.0 302.0 - 302.0 Total Long Term Liabilities 596.0 596.0 275.0 871.0 TOTAL LIABILITIES 2,619.0 2,743.9 353.6 3,097.5

OWNER'S EQUITYCommon Stock 2.0 2.0 - 2.0 Additional paid-in capital 1,022.0 1,022.0 - 1,022.0 Accumulated other comprehensive income 11.0 11.0 - 11.0 Retained Earnings 3,674.0 EAT 5,239.4 5,239.4 203.4 5,442.8 Treasury Stock 0.0 - - - TOTAL O.E. 4,709.0 6,274.4 203.4 6,477.8

TOTAL LIABILITIES & O.E. 7,328.0 9,018.3 557.0 9575.3

2011 Projection

Projected 2011 B/S for WD

Sales Proposal Pricing Structure

• Step one: was to get our Sales Volume from the Project CF• Second; split up Sales Volume in three proportions, small, medium,

and big.• After brainstorming together as a whole we came up with a 10%, 30%,

and 60% ratio; small -> big• Third step; Volume Discount to medium and big customers; 10% &

20%• Lastly, we took the totals of each volume respectively for each section

of customers and then gave them their discount if they fell into the medium or big category.

WACC

• First: we needed to determine how much equity the company had along with their long term debt.• Second: calculate cost of debt and cost of equity using the beta, S&P percentage, and the percentage of a 10 year bond.• Third: lay out possible scenarios • Fourth: choose one of the scenarios that would give us the best possible outcome.

WACC (cont.)• Last: calculate the WACC with the chosen amount of debt

(5%) and equity (95%).• After determining the WACC we needed to calculate the PV of

our bonds.• We issued 275,000 bonds at 6% for 10 years but calculated

their PV at the end of 5 years.• After recalculating the WACC with our new debt and equity it

changed but was very slight.

Contract

• Offer, Acceptance, Consideration• Termination

– Non Acceptance– Customer convenience– Change of control

• Terms & Conditions– Defines how a contract is to be implemented

• What’s being sold• Price per unit• How to be shipped, return policy, etc.• How the items are to be paid for

Conclusion• Our model is sensitive to decrease in price• →would impart CF if products are sold below as it decrease

revenue• Therefore sales discounts would impact profitability• Due to the high CF produced from operating activities, our

model is highly responsive to favorable production conditions

• However it also contributes to having significant changes in our net working capital

• Therefore when revenue is decreased or cost of goods are raised our model struggles to maintain enough cash flow to sustain itself and could need to funds from company until reaches a profitable year.