Loans a Burden for Western Digital
Struggling with the financial strain of a massive product recall, Western Digital Corp. hopes to avoid defaulting on a loan from one of its largest lenders by year’s end.
Irvine-based Western Digital, the nation’s third-largest independent maker of disk drives, hasn’t defaulted on loans with FleetBoston Financial Corp. The Boston-based lender has provided a $125-million credit line and a $47.5-million term loan to Western, according to officials and recent Securities and Exchange Commission filings.
Company executives are talking with FleetBoston officials about renegotiating the terms of the agreements, said Duston Williams, Western’s senior vice president and chief financial officer, on Tuesday. He declined to discuss details of the talks.
“Clearly, it has been a difficult time,” Williams said. “But we will renegotiate these covenants [of both the credit line and the loan] with this bank or find a solution with another bank. One way or another, we will remedy the situation.”
It isn’t clear what would happen if Western were to default on the loans. FleetBoston officials could not be reached for comment. The company staved off a similar crisis in June 1998 by renegotiating the terms of its lending agreements.
Western is in the throes of a three-year industrywide slump in desktop computer storage prices that has obliterated profit margins. Analysts also blame a two-year price war that has caused losses for every manufacturer of hard drives for desktop computers.
Western has endured a streak of eight quarterly losses totaling $952 million. And its stock, which has lost nearly 75% of its value this year, fell 31 cents Tuesday, closing at $3.88 a share on the New York Stock Exchange.
The company’s current problem dates to September, when Western voluntarily recalled 400,000 hard-disk drives, the first such action in its 29-year history. The recall, which involved an estimated 1.2 million units, came about because of a defect in a chip provided by an outside supplier.
Such drives are used in computers to store data. The defect, which affected one of Western’s most significant product lines, could cause the hard drives to fail to power up after six to 12 months of full-time use, the company said.
Western also stopped production for two weeks in late September and early October, to deal with the technical problem and focus on the recall, Williams said.
The company has recalled about 90% of the affected 1.2 million drives from around the world as of Oct. 21, Williams said. Western’s major manufacturing customers are Gateway Inc., Compaq Computer Corp. and Dell Computer Corp.
Western took a one-time charge of $37.7 million in its first fiscal quarter--the estimated cost of recalling and repairing the affected drives. Western also said that the recall resulted in lost gross profits of about $20 million.
It also drastically reduced the amount of money coming into the company because Western halted all shipments during the process. In its fiscal first quarter ended Oct. 2, Western’s accounts receivable plunged to $87.3 million, only about one-third of the $273.4 million at the end of its fiscal 1999 fourth quarter ended July 3.
Williams said that Western has not borrowed against the $125-million credit line, and won’t until a review of the agreements and the company’s assets is completed, probably by year’s end. Under terms of the current lending agreement, Western will be able to borrow more money if the level of its receivables grows, he said.
The company has started shipping products again, but Williams declined to comment on the prospects of expanding its amount of receivables.
As of Nov. 16, Western had borrowed to the limit of the $47.5-million term loan, the SEC filing shows.
In an effort to pull itself out of its slump, Western is starting to diversify into higher-margin products and services. By 2002, the company hopes desktop computer hard drives, its core business, will make up less than half of its revenue, with storage subsystems, storage management software and audiovisual consumer products generating about 60% of sales.
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Dow Jones contributed to this report.
