Disk drive and networking product manufacturer Western Digital Corp. (WDC) recently raised its guidance for the December quarter, notwithstanding the severe floods in Thailand, which affected the company’s supply chain considerably.
For the upcoming December quarter, the company now expects revenues of approximately $1.8 billion and gross margins at the high end of its targeted range of 18.0% to 23.0%. This apart, the company expects to incur operating expenses of approximately $265.0 million, which typically excludes unusual charges related to the floods, acquisition-related expenses and litigation.
Moreover, the company expects unusual charges related to the floods in the range of $225.0 million to $275.0 million for the December quarter, exclusive of any insurance recovery. The company is also expected to file a property damage claim of at least $50.0 million and an additional claim for business interruption during the December quarter. The accounting treatment of these claims is dependent on their status at the end of the quarter. Moreover, the company expects acquisition related charges of approximately $15.0 million for the period.
Disk drive manufacturers like Western Digital and Seagate Technology (STX), which have large manufacturing facilities in Thailand, were hit hard by the natural catastrophe in July, which killed nearly 320 people and ravaged the industrialized areas.
The company’s plants in Thailand account for nearly 60.0% of its production and help serve customers such as Hewlett-Packard Company (HPQ), Dell, Inc (DELL) and Acer Inc.
Apart from the existing manufacturing facility, the company is planning to start manufacturing operations known as head sliders in the March quarter, in regions like Thailand and Malaysia. Moreover, WDC expects the acquisition of Hitachi Global Storage Technologies to be completed during that period, subject to regulations imposed by the European Commission.
In light of the above mentioned facts, we believe that WDC is positive about reviving its operations in Thailand, which is already in demand among different PC manufacturers. Moreover, the company is trying to lower its interest expense by reducing its debt burden.
Although Western Digital is cash rich, its cash generation ability has been tempered by the stagnant pricing environment. Moreover, intense competition in the hard disk manufacturing space and increase in component cost price are headwinds for the company. On the positive side, a renewed interest in Thailand might help the company to improve its business fundamentals.
The company has a Zacks #3 Rank, implying a short-term Hold rating.
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