Western Digital Corp. (NASDAQ:WDC)

The period under review demonstrates significant fluctuations in financial performance as measured by economic profit. Net operating profit after taxes (NOPAT) experienced substantial volatility, shifting from positive values in 2018, 2020, and 2022 to negative figures in 2019 and 2023. This variability directly impacts the calculation of economic profit.

Economic Profit Trend

Economic profit consistently remained negative throughout the analyzed period. While the magnitude of the loss decreased from 2018 to 2021, it increased substantially in 2023. The largest negative economic profit occurred in 2023, reaching a loss of US$4,861 million, indicating a significant underperformance relative to the cost of capital employed.

NOPAT Analysis

NOPAT exhibited a dramatic decline in 2019, resulting in a substantial loss. A recovery was observed in 2020 and a further increase in 2022. However, this positive trend was reversed in 2023, with NOPAT falling into a significant loss, exceeding the loss experienced in 2019. This suggests potential operational or market challenges impacting profitability in the most recent fiscal year.

Cost of Capital

The cost of capital fluctuated between 14.43% and 18.10% over the period. While there was a decrease in 2020, the cost of capital generally trended upwards, peaking in 2022 before decreasing slightly in 2023. The increasing cost of capital contributes to the negative economic profit, as a higher percentage return is required to satisfy investors.

Invested Capital

Invested capital demonstrated a gradual decline from 2018 to 2023. Despite the decrease, the level of invested capital remained relatively stable, fluctuating within a range of US$19,579 million to US$22,667 million. The consistent negative economic profit suggests that even with a reduction in invested capital, the returns generated are insufficient to cover the cost of that capital.

In summary, the organization consistently failed to generate returns exceeding its cost of capital during the examined timeframe. The substantial decline in NOPAT in 2023, coupled with a relatively high cost of capital, resulted in the largest economic loss observed within the period. The trend suggests a growing disconnect between profitability and the returns expected by capital providers.

Net Income (Loss)

The net income demonstrates significant volatility over the six-year period. Initially, there was a positive net income of $675 million in 2018, followed by a sharp decline resulting in a net loss of $754 million in 2019. The net loss continued in 2020 but to a lesser extent, amounting to $250 million. A recovery is observed in 2021 with net income rebounding to $821 million, further increasing to $1,500 million in 2022. However, in 2023, the trend reverses dramatically with a substantial net loss of $1,706 million. This pattern indicates instability in profitability with notable peaks and troughs.

Net Operating Profit After Taxes (NOPAT)

The NOPAT figures largely mirror the trends seen in net income, showing considerable fluctuations. Starting with a positive $782 million in 2018, NOPAT turned slightly negative in 2019 at -$15 million. A modest recovery occurs in 2020 with a positive $38 million, followed by a strong improvement to $793 million in 2021. The peak value is recorded in 2022 at $1,840 million, indicating optimal operational efficiency and profitability that year. Yet, similar to net income, 2023 sees a significant decline to a negative $1,604 million, which suggests operational challenges or extraordinary expenses affecting the company's core profitability.

Income Tax Expense

The income tax expense exhibited a significant decline from 1,410 million USD in June 2018 to 467 million USD in June 2019. This downward trend continued with further reductions to 204 million USD in July 2020 and 106 million USD in July 2021. However, there was a notable increase to 623 million USD in July 2022, followed by a sharp decrease to 146 million USD in June 2023. Overall, the figures indicate volatility in the income tax expense with periods of substantial reduction interspersed with a sudden spike in 2022.

Cash Operating Taxes

Cash operating taxes experienced a drastic drop from 1,932 million USD in June 2018 to 181 million USD in June 2019. After this steep decline, cash operating taxes showed a fluctuating but generally increasing trend, rising to 369 million USD in July 2020, 417 million USD in July 2021, and peaking at 574 million USD in July 2022. In the most recent period ending June 2023, cash operating taxes decreased to 243 million USD. This pattern suggests variability with an initial sharp decrease followed by a gradual upward movement and a slight pullback towards the end of the period.

Total Reported Debt & Leases

The total reported debt and leases exhibit a consistent downward trend from June 29, 2018, to July 1, 2022, decreasing from $11,344 million to $7,339 million. However, there is a marginal increase observed in the period ending June 30, 2023, where the figure rises slightly to $7,354 million. This overall reduction suggests an effort to deleverage or refinance liabilities over the years, with stabilization noted in the most recent year.

Shareholders’ Equity

Shareholders’ equity experienced a decline from $11,531 million in June 29, 2018, to $9,551 million as of July 3, 2020. Subsequently, equity improved significantly, reaching a peak of $12,221 million by July 1, 2022. There is a minor decrease in the following year, ending June 30, 2023, at $11,723 million. This pattern indicates a recovery phase after initial pressure on equity, reflecting improved retained earnings or other comprehensive income components in the latter years.

Invested Capital

Invested capital displays a steady decline throughout the observed timeframe, moving from $22,667 million in June 29, 2018, down to $18,928 million by June 30, 2023. The decrease appears gradual and continuous, suggesting divestment or capital efficiency measures. The reduction in invested capital alongside decreasing debt levels may indicate a strategic shift towards optimizing the capital structure or asset base.

The economic spread ratio exhibited a generally deteriorating trend over the observed period. Initially negative, the ratio became increasingly unfavorable before showing a slight improvement, followed by a substantial decline in the most recent year.

Economic Spread Ratio

In Jun 29, 2018, the economic spread ratio was -13.12%. This figure worsened to -16.27% in Jun 28, 2019, indicating a widening gap between the cost of capital and returns generated from invested capital. A modest improvement was seen in Jul 3, 2020, with the ratio moving to -14.24%, and this trend continued into Jul 2, 2021, reaching -13.59%. However, the ratio improved significantly to -8.79% in Jul 1, 2022, suggesting a narrowing of the gap. This positive movement was reversed in Jun 30, 2023, with the ratio declining sharply to -25.68%, representing the most unfavorable spread observed during the analyzed timeframe.

The economic profit consistently remained negative throughout the period, mirroring the unfavorable economic spread ratio. While the magnitude of the economic profit fluctuated, it never reached positive territory. The most substantial negative economic profit occurred in Jun 30, 2023, at US$-4,861 million, coinciding with the lowest economic spread ratio.

Invested Capital

Invested capital demonstrated a gradual decreasing trend from US$22,667 million in Jun 29, 2018, to US$18,928 million in Jun 30, 2023. The decline was not linear, with minor increases observed between certain years, but the overall direction was downward. This reduction in invested capital did not translate into improved economic returns, as evidenced by the worsening economic spread ratio in the final year.

The combination of consistently negative economic profit and a declining economic spread ratio, particularly the significant deterioration in the most recent year, suggests increasing challenges in generating returns that exceed the cost of capital. The decreasing invested capital, while potentially indicative of capital discipline, has not been sufficient to offset the negative economic spread.

The economic profit margin exhibited considerable fluctuation over the observed period. Initially negative, the margin worsened significantly before showing some improvement, only to decline sharply in the most recent year. A consistent pattern of economic loss is evident throughout the entire timeframe.

Economic Profit Margin Trend

The economic profit margin began at -14.40% in 2018 and deteriorated to -20.71% in 2019, representing the lowest point in the observed period. A subsequent improvement was noted in 2020, with the margin increasing to -16.75%, and this positive trend continued into 2021, reaching -15.72%. However, in 2022, the margin improved further to -9.25%. This improvement was short-lived, as the margin experienced a substantial decline in 2023, falling to -39.46%.

Relationship to Revenue

While revenue decreased from 2018 to 2019, it remained relatively stable between 2019 and 2021, with a slight increase in 2022. However, revenue experienced a significant decrease in 2023. The most substantial deterioration in the economic profit margin occurred in 2023, coinciding with the largest reduction in revenue, suggesting a strong correlation between revenue performance and economic profitability.

Economic Profit

Economic profit remained negative throughout the period. While the absolute value of economic loss decreased from 2018 to 2022, it increased substantially in 2023, reaching -4,861 million US dollars. This increase in economic loss contributed to the dramatic decline in the economic profit margin observed in the final year.

The company consistently failed to generate economic profit during the analyzed period. The recent decline in both economic profit margin and revenue suggests increasing challenges in generating returns exceeding the cost of capital.