Investing.com -- Fitch Ratings has taken Western Digital Corp (NASDAQ: WDC ) off its Rating Watch Negative (RWN) list, according to an announcement made on Friday, February 21, 2025. The ratings firm has confirmed the company's Long-Term Issuer Default Rating (IDR) at 'BB+' and maintains a Stable Outlook. The first-lien senior secured debt is affirmed at 'BBB-' with a Recovery Rating of 'RR2', while the senior unsecured debt is rated at 'BB+'/'RR4'.

The decision to remove Western Digital from the RWN list comes after the successful completion of a tax-free spinoff, which separated its flash business, Sandisk Corp, from its hard disk drive (HDD) business. The ratings and outlook given by Fitch reflect less cyclical post-separation operating results and a sufficiently robust product portfolio.

Western Digital plans to use a $600 million dividend from the Sandisk separation, along with Free Cash Flow (FCF), to decrease debt and boost profitability over the next few years. The company aims for net leverage of 1.0x-1.5x EBITDA and plans to resume dividends in the fourth quarter of fiscal year 2025 (FY25Q4). It will wait to restart share repurchases with FCF until it achieves this leverage target. At that point, the company has committed to return 100% of annual FCF.

The firm expects more stable revenue growth for Western Digital after the spinoff, driven by long-term cloud demand for mass capacity drives. Fitch considers the severe HDD downturn in 2023 as an anomaly and anticipates demand for mass capacity drives to support low single-digit average positive revenue growth.

Fitch also expects Western Digital's investment intensity to remain steady in the mid-single digits after the separation and become more stable annually. The firm expects Western Digital's gross profit margins to rise to the mid-30% range due to favorable sales mix dynamics and an improved position against its chief competitor, Seagate Technology Holding plc.

However, Fitch warns that technology risk will remain significant, driven by areal density increases in HDDs and technology transitions in manufacturing flash memory. New product delays, caused by lagging technology, could decrease prices and result in market share losses and significantly lower profitability.

Western Digital and Seagate each account for roughly half of all high capacity drives sold to cloud customers and video applications. This collaboration with cloud customers will represent the bulk of future revenue, while also moderating investments to minimize cyclicality.

Fitch believes Western Digital can absorb cyclicality while still prioritizing capital returns upon achieving its EBITDA net leverage target. It expects Western Digital and Seagate to maintain similar profitability and financial structures over the rating horizon.

Western Digital's liquidity will be adequate and supported by $1.0 billion of cash and cash equivalents and an undrawn $1.25 billion 1st-lien senior secured revolving credit facility due January 2027. Fitch's forecast for $500 million of average annual FCF also supports liquidity. The company will use $600 million of dividend from Sandisk at separation and net proceeds from the sale of Western Digital's retained stake in Sandisk over the next 12 months for debt reduction.

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