Western Digital Corp. ( WDC - Analyst Report ) reported fourth quarter 2012 earnings per share (EPS) of $3.35, comprehensively beating the Zacks Consensus Estimate of $2.46.

Revenues

Revenues during the quarter increased 97.8% year over year to $4.75 billion. Hard drive shipments were 157 million units during the quarter, thus bringing the total shipments for the year to 599 million units, aided by higher demand.

The company’s HGST subsidiary exceeded expectation in the reported quarter and delivered solid revenue growth.

Western Digital recorded 69% of revenues from OEM sales; distribution channel sales were 21% of the total, while retail sales were 10%.

Operating Results

Gross margin in the reported quarter was 30.9% versus 19.5% in the year-ago quarter. Gross margin exceeded the company’s estimate on the back of lower-than-expected price declines and better-than-expected shipments.

Operating margin for the quarter was 16.9%, down from 8.4% reported in the year-ago quarter. Total operating expense shot up 123.6% on higher R&D and SG&A expense.

Net income for the quarter was $745.0 million or $2.87 per share, down from $158.0 million or 67 cents in the year-ago quarter. Excluding charges and expenses related to the Thailand flooding and the acquisition of HGST, non-GAAP net income was $872.0 million or $3.35 per share.

Cash Position

The company generated $1.13 billion in cash from operations in the quarter, up from $447 million in the year ago quarter. Cash and cash equivalents were $3.21 billion versus $3.37 billion in the previous quarter.

Capital spending and depreciation and amortization for the fourth quarter totalled $324.0 million and $339.0 million, respectively. The company has a debt balance of $1.95 billion, down from $2.51 billion reported in the previous quarter.

The company’s conversion cycle was a positive 2 days. This consisted of 45 days of receivables, 34 days of inventory, or 11 turns, and 77 days payables.

Our Take

The company’s fourth quarter results exceeded our expectations, with EPS handsomely beating the Zacks Consensus Estimate and sales improving substantially on a year-over-year basis. However, the company witnessed a decrease in its debt burden, which may result in lower interest outflow.

Gross margin also improved as a result of a better pricing environment. The company is cash rich, and has good cash generation ability.

The company’s international business and overall demand for its products are slowly improving, and the company is expected to generate better revenue going forward.

This apart, the Hitachi deal is expected to strengthen its foothold in the data storage business. Although the company has been able to handle competition efficiently, but bigger players like Seagate Technology plc ( STX - Analyst Report ) , Fujitsu Ltd, Samsung and Toshiba pose considerable challenges.

The company has a Zacks #3 Rank (implying a short-term Hold rating).