TECHNOLOGY : Western Digital Reports Loss in Second Quarter
Western Digital Corp. said Friday that it has entered into negotiations with lenders to refinance $160 million in debt and reported a $98.5-million second-quarter loss largely due to a onetime charge from an ongoing restructuring.
The Irvine-based company, a maker of computer disk drives, semiconductors and other components, has asked banks to roll over current loans as they come due and suspended loan payments until renegotiation of its long-term debt is completed.
The company, the largest high-technology firm based in Orange County, missed a payment on a $10-million loan, but on Friday afternoon the lender agreed to renew the company’s credit on a day-to-day basis. Another $40 million in short-term loans comes due in the next 30 days.
Roger W. Johnson, chairman and chief executive of Western Digital, said the temporary waiver will allow the company to renegotiate its debt over the coming months. However, additional defaults could accelerate payment of $235 million in borrowings, the company said.
That prompted Standard & Poor’s, a debt-rating service, to place $59 million of Western Digital’s convertible subordinated debentures on its Creditwatch list for possible downgrading.
“The company’s $98.5-million second-quarter loss, which included a $66-million business restructuring charge, reflects severe price competition and a shift in the product mix toward growing but lower margin products,” S&P; said in a statement.
The second-quarter loss on revenue of $230 million for the period ended Dec. 31 contrasts with net earnings of $8.6 million on revenue of $265.6 million for the same three months a year ago. The company lost $96.8 million on sales of $485.8 million for the first six months of the fiscal year, contrasting with net earnings of $5.9 million on revenue of $490.9 million a year ago.
Johnson said he expects that the company will lose money in the third quarter and, barring a “deepening recession” that impacts the personal computer industry, a return to profitability by the fourth quarter.
Several Wall Street analysts said the second-quarter loss was expected, but the depth of the company’s problems took some by surprise. The company’s stock fell $1.875 per share to $4.50 in trading Friday on the New York Stock Exchange. With 3.13 million shares traded, it was the third-most-active stock on the NYSE.
“It looks terrible,” said Steve DeLuca, an analyst for Cruttenden & Co. investment banking in Newport Beach. “We knew there would be losses, but everybody was expecting some decent news. Still, in the long term, I’m positive about their strategy.”
Johnson insisted that the company was not desperate for cash--it had $39 million in cash at the end of the second quarter--and was preserving it for strategic reasons. “This isn’t a strategic retreat, it’s a strategic refocus,” he said.
Analysts agreed the company is facing just a short-term credit crunch. Most were optimistic that it can survive the tough times by introducing a promising line of new high-volume products for the notebook computer market in the coming months.
In the corporate restructuring that began in December, Johnson said Western Digital is making a fundamental shift in the way it sells its computer products, moving away from low-margin sales of add-on computer boards to storefront resellers and switching instead to higher-margin sales of chips and disk drives to computer makers.
In the second quarter, the company turned down $33 million in reseller orders and received $17 million in returned inventory from the resellers as a result of an acceleration in the schedule for the restructuring, Johnson said.
In line with its shifted marketing plan, the company closed a board-making plant in Puerto Rico and cut about 600 jobs or 7% of its worldwide staff to reduce its overhead.
