Western Digital to Close Plant, Phase Out Older Products
Caught in an ill-timed transition between technologies, Western Digital Corp. said Wednesday that it will take a write-off of up to $70 million in the current quarter and close a plant in Puerto Rico as it accelerates plans to phase out its older computer products.
About 400 workers in Puerto Rico will lose their jobs, cutting Western Digital’s total employment to about 6,900. The Puerto Rico plant made older computer products which the company phased out more quickly than expected.
In addition, Roger W. Johnson, chairman and chief executive of Western Digital, said the company will probably reduce its work force in some product lines by an additional 500 people over the next six months, either by attrition or layoff, while hiring 400 people in other, fast-growing product areas.
The net loss of jobs will be about 500 and could include some jobs in Irvine, he said.
Western Digital, which manufactures five major categories of computer components, will take the charge against its earnings during its fiscal 1991 second quarter, ending Dec. 31. The company said it also will restructure its financial agreements with lenders to ensure that it remains in good financial standing.
Western Digital said it will also realign its distribution channels to place greater emphasis on selling to computer manufacturers that buy its products directly and place less emphasis on the resale channel, in which it sells its products to computer-products dealers. It will also continue to cut its operating expenses.
Johnson said that about 80% of sales will be to computer manufacturers and 20% to computer resellers after the restructuring is completed. That compares with 60% manufacturers and 40% computer resellers at present.
Johnson said the drop in demand for the older product lines has hurt Western Digital because its production of new products is not coming on line fast enough to compensate for the shortfall.
Sales of Western Digital’s storage controllers, which are mounted on add-in cards and control the functions of a computer’s disk drives, have dropped from about $100 million per quarter to about $50 million during the past year because they are becoming outdated as new disk drives include the controllers. In addition, the slumping economy has also hurt the company’s sales.
Meanwhile, new chip-sets, disk drives and video products--aimed primarily at the growing laptop and notebook-computer markets--will not be produced in quantity until mid-1991.
The size of the write-off surprised several analysts.
Raj Rajnaratnam of Needham & Co. in New York said he had expected only a small loss because that is what the company said last month that it expects for the quarter.
“Managing this transition is going to be tricky for at least two quarters,” Rajnaratnam said. “I think Western Digital will come back because of the new products that are coming down the pipe, but it’s going to be choppy for a while.”
One other analyst said he would not have been shaken by a $30-million write-down, but that is less than half the $60- to $70-million the company announced Wednesday.
The company will report its earnings in January.
Johnson said that during the last two years, Western Digital and others in the industry have been combining more and more storage and video functions onto fewer and smaller chips. He said the shift has been orderly up until now.
“Very recently, however, it became clear that demand for the older board products was declining abruptly in the face of weakening economic conditions, and, as a result, that our near-term business plans would be negatively impacted,” Johnson said. “Therefore, we felt it prudent and necessary to implement our restructuring plan now.”
In June, analysts said that Johnson’s eight-year acquisition strategy appeared to be on the verge of success. His plan was to assemble a collection of computer-component suppliers and make Western Digital a low-cost, one-stop supermarket for personal computer makers worldwide.
During the spring and summer of this year, Western Digital stock rose on rumors that it had landed a lucrative contract to manufacture a notebook computer for International Business Machines Corp.
Johnson declined to comment on the rumors at the time, though he said the company was negotiating a manufacturing agreement with IBM.
Now analysts say that IBM has delayed its introduction of the notebook computer until at least the first quarter of 1991.
Other upheavals surfaced in early August. Two top executives resigned in a management restructuring in which Kathryn A. Braun was promoted to executive vice president and assumed control over all company operations.
In October, Western Digital laid off 200 of its 600 employees in Puerto Rico, citing for the first time a drop in demand for its older board-level products. Then the company said it expected delays in the launch of its new Caviar disk drives because of a temporary quality problem with one of its suppliers. The drives are now being shipped in volume.
On Nov. 16, Western Digital officials confirmed that they expected to report lower-than-anticipated earnings for the second quarter and said they had laid off 60 of the firm’s 7,300 employees in a restructuring of the company’s corporate headquarters in Irvine.
For its fiscal first quarter ended Sept. 29, the company reported net income of $1.7 million, compared with a $2.7-million loss a year earlier. Revenue of $255.8 million was up 14% from $225.3 million a year earlier.