2017 Annual Report
and Form 10-K
The Company
The power of data is undeniable—creating a world that’s more predictive, more productive
and more personal, and enabling smarter decisions, breakthrough discoveries and
deeper connections. At Western Digital, we believe in the promise of data. Everywhere
data is captured, preserved, accessed and transformed—we are leading the charge
to unlock its potential. Western Digital is developing the technologies and solutions
that shape our lives.
Western Digital is the world’s largest provider of data storage solutions, employing a
global workforce focused on delivering the possibilities of data. Our data-centric solutions
are marketed under the HGST, SanDisk and WD brands.
Our Brands
HGST helps organizations harness the power of data to unlock
the greater business potential through a broad portfolio of
storage solutions. HGST branded smarter storage solutions are
everywhere, touching lives and enabling possibilities for cloud,
enterprise and sophisticated infrastructures and powering the
markets and companies that shape our lives. HGST is trusted
and relied upon by people who are moving the world forward
with innovation. For more information about the HGST brand,
visit hgst.com.
SanDisk provides trusted and innovative flash storage products
that have transformed the electronics industry. SanDisk brand
quality, state-of-the-art solutions are at the heart of many of
the world’s largest data centers, and embedded in advanced
smartphones, tablets and PCs. SanDisk’s consumer products are
available at hundreds of thousands of retail stores worldwide. For
more information about the SanDisk brand, visit sandisk.com.
WD has been a technology standard-setter in the industry’s
highest volume markets for decades. WD hard drives are
deployed in personal computers, consumer electronics and
digital video applications, as well as in its external storage,
personal cloud and business storage solutions portfolios. WD
empowers people around the world to easily save, protect,
share and experience their content on multiple connected
devices. For more information about the WD brand, visit
wd.com.
A Message from the CEO
Dear Fellow Shareholders,
is becoming
Our multi-year transformation of Western Digtal
increasingly relevant to our customers in an expanded set of end
markets. As a differentiated storage solutions leader, we are delivering
significant value through our unique portfolio of technologies and
products to create environments that capture, preserve and transform
users’ most important data—with new devices, new systems, new
solutions, new architectures, all optimized and tuned to create the
right conditions for data to thrive.
As a result of this strategy and strong ongoing demand for storage,
we posted outstanding financial results in fiscal 2017, including 7%
year-over-year pro forma revenue growth after taking into account our
SanDisk acquisition. Our pro forma non-GAAP gross margin increased
500 basis points and our pro forma non-GAAP operating income dollars
grew by 52% on a year-over-year basis demonstrating the strength of our broad portfolio
and favorable market conditions. For fiscal 2017, the company achieved revenue of $19.1
billion, and on a non-GAAP basis, gross margin of 37.8%, operating income of $3.9 billion,
net income of $2.7 billion and diluted earnings per share of $9.19. We generated $3.4
billion in cash from operations during the fiscal year, and returned $574 million in dividends
to shareholders. Additionally, during the fiscal year, we reduced our net debt by
approximately $2.1 billion to $6.9 billion.1
Steve Milligan
Chief Executive Officer
Western Digital Corporation
The integration of SanDisk and substantial portions of HGST have enabled us to expand
our customer base and to offer the broadest array of products and solutions for the fast-
growing data storage industry. We ended fiscal 2017 achieving a total synergy savings of
approximately $900 million from these integrations. Furthermore, we remained on track
to achieve $800 million of annualized savings from the HGST integration by the end of
calendar 2017 and reach our 18-month target of $500 million of total annual run-rate
synergies from the SanDisk integration. These synergies will enable us to commit to
future growth from ongoing investments in product development, go-to-market
capabilities and IT projects.
In addition, we made significant progress on several key operational initiatives to drive
value creation during the fiscal year:
• Continued to unleash the power of our platform. The various components that
comprise this platform, including our team, technologies, products, and go-to-market
capabilities are helping us better serve our diversified customer base, and manage
our business to the best strategic and financial outcomes. Simply put, the power of
our platform allows us to allocate resources and capital to particular businesses or
products based on the marketplace supply/demand and customer needs.
•
Strengthened our leadership in capacity enterprise Helium HDDs. We are shipping
our third generation HDD at 10TB leveraging this platform. We have shipped more than
16 million Helium HDDs since the HelioSeal family inception four years ago, reflecting
strong customer adoption of this breakthrough technology. The production ramp of
our fourth generation 12TB drive is underway and we have announced and are
sampling our 14TB-offering, continuing our leadership in this area.
• Made important advancements in our 3D NAND transition. We launched BiCS3, our
64-layer technology and are ramping it into high-volume production. A significant
portion of our NAND products now incorporate this industry leading technology. We
also announced BiCS4, our next-generation 96-layer 3D-NAND technology, which we
expect to commercialize in calendar 2018.
Looking ahead, we will continue to strive for progress on our key initiatives and believe
we are well-positioned for long-term growth as a differentiated leader in the data storage
industry. We continue to generate strong operating cash flow, further bolstering our
balance sheet, while re-investing in our business. We look forward to making further
progress in building out our capabilities across a number of fronts to make our platform
even stronger in the years ahead.
As we look back on our accomplishments and look forward to what lies ahead, I want to
thank our employees for their hard work and dedication. We have continued to grow and
innovate at a rapid pace, and our talented team has been there every step of the way
to execute our plans and help lead the industry forward. We have achieved our success in
large part due to their support, as well the continued support of our customers, partners
and shareholders. I look forward to continuing to work alongside our team during this
exciting time.
Steve Milligan
Chief Executive Officer
Western Digital Corporation
September 18, 2017
1 Reconciliations of the differences between the foregoing non-GAAP financial measures to the comparable
GAAP financial measures can be found on the last page of this document.
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
È ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
‘ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended June 30, 2017
Or
For the transition period from
to
Commission file number: 1-8703
WESTERN DIGITAL CORPORATION
(Exact Name of Registrant as Specified in Its Charter)
Delaware
(State or other jurisdiction of
incorporation or organization)
5601 Great Oaks Parkway
San Jose, California
(Address of principal executive offices)
33-0956711
(I.R.S. Employer
Identification No.)
95119
(Zip Code)
Registrant’s telephone number, including area code: (408) 717-6000
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Common Stock, $.01 Par Value Per Share
Name of each exchange
on which registered
The NASDAQ Stock Market LLC
(NASDAQ Global Select Market)
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes È
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ‘
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes È
No È
No ‘
No ‘
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File
required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter
period that the registrant was required to submit and post such files). Yes È
No ‘
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and
will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. ‘
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an
emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company”
in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer È Accelerated filer ‘
Smaller reporting company ‘ Emerging growth company ‘
Non-accelerated filer ‘
(Do not check if a smaller reporting company)
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any
new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ‘
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ‘
The aggregate market value of the registrant’s common stock held by non-affiliates of the registrant on December 30, 2016, the last business day of the
registrant’s most recently completed second fiscal quarter, was $15.0 billion, based on the closing sale price as reported on the NASDAQ Global Select Mar-
ket.
No È
There were 294,875,015 shares of common stock, par value $0.01 per share, outstanding as of the close of business on August 16, 2017.
Part III incorporates by reference certain information from the registrant’s definitive proxy statement (the “Proxy Statement”) for the 2017 Annual
Meeting of Stockholders, which will be filed with the Securities and Exchange Commission within 120 days after the end of the 2017 fiscal year. Except with
respect to information specifically incorporated by reference in this Form 10-K, the Proxy Statement is not deemed to be filed as part hereof.
Documents Incorporated by Reference
WESTERN DIGITAL CORPORATION
INDEX
PART I
Item 1.
Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 1A. Risk Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 1B. Unresolved Staff Comments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 2.
Item 3.
Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 4. Mine Safety Disclosures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 6.
Selected Financial Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 7. Management’s Discussion and Analysis of Financial Conditions and Results of Operations . . . . . . .
Item 7A. Quantitative and Qualitative Disclosures About Market Risk . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Financial Statements and Supplementary Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 8.
Item 9.
Changes in and Disagreements With Accountants on Accounting and Financial Disclosure . . . . . .
Item 9A. Controls and Procedures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 9B. Other Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
PART III
Item 10. Director, Executive Officers and Corporate Governance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 11. Executive Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 13. Certain Relationships and Related Transactions, and Director Independence . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 14. Principal Accounting Fees and Services
PAGE
NO.
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12
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41
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44
57
59
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136
136
136
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PART IV
Item 15. Exhibits, Financial Statement Schedules . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 16. Form 10-K Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
137
137
Unless otherwise indicated, references herein to specific years and quarters are to our fiscal years and fiscal quar-
ters, and references to financial information are on a consolidated basis. As used herein, the terms “we,” “us,” “our,”
the “Company,” “WDC” and “Western Digital” refer to Western Digital Corporation and its subsidiaries, unless we
state, or the context indicates, otherwise.
WDC, a Delaware corporation, is the parent company of our data storage business. Our principal executive offi-
ces are located at 5601 Great Oaks Parkway, San Jose, California 95119. Our telephone number is (408) 717-6000
and our website is www.wdc.com. The information on our website is not incorporated in this Annual Report on
Form 10-K.
Western Digital, WD, the WD logo and SanDisk are registered trademarks or trademarks of Western Digital
Corporation or its affiliates in the U.S. and/or other countries. All other trademarks, registered trademarks and/or
service marks, indicated or otherwise, are the property of their respective owners.
2
FORWARD-LOOKING STATEMENTS
This document contains forward-looking statements within the meaning of the federal securities laws. Any statements that do
not relate to historical or current facts or matters are forward-looking statements. You can identify some of the forward-looking
statements by the use of forward-looking words, such as “may,” “will,” “could,” “would,” “project,” “believe,” “anticipate,”
“expect,” “estimate,” “continue,” “potential,” “plan,” “forecast,” and the like, or the use of future tense. Statements concerning current
conditions may also be forward-looking if they imply a continuation of current conditions. Examples of forward-looking statements
include, but are not limited to, statements concerning:
‰ expectations concerning the integration of, and anticipated benefits from, our acquisition of SanDisk Corporation;
‰ expectations regarding the integration of our HGST and WD subsidiaries following the decision by the Ministry of Com-
merce of the People’s Republic of China in October 2015;
‰ expectations regarding our Flash Ventures joint venture with Toshiba;
‰ expectations regarding the growth of digital data and demand for digital storage;
‰ expectations regarding our business strategy, our ability to execute that strategy and its intended benefits;
‰ expectations with respect to relationships with our customers, employees, suppliers and strategic partners;
‰ our plans to develop and invest in new products and expand into new storage markets and into emerging economic markets;
‰ expectations regarding the personal computer market and the emergence of new storage markets for our products;
‰ expectations regarding the amount and timing of charges and cash expenditures associated with our restructuring activities;
‰ our quarterly cash dividend policy;
‰ expectations regarding the outcome of legal proceedings in which we are involved;
‰ expectations regarding the repatriation of funds from our foreign operations;
‰ our beliefs regarding tax benefits and the timing of future payments, if any, relating to the unrecognized tax benefits, and
the adequacy of our tax provisions;
‰ expectations regarding capital investments and sources of funding for those investments; and
‰ our beliefs regarding the sufficiency of our available liquidity to meet our working capital, debt, dividend and capital
expenditure needs.
Forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those
expressed in the forward-looking statements. You are urged to carefully review the disclosures we make concerning risks and other
factors that may affect our business and operating results, including those made in Part I, Item 1A of this Annual Report on
Form 10-K, and any of those made in our other reports filed with the Securities and Exchange Commission. You are cautioned not
to place undue reliance on these forward-looking statements, which speak only as of the date of this document. We do not intend, and
undertake no obligation, to publish revised forward-looking statements to reflect events or circumstances after the date of this docu-
ment or to reflect the occurrence of unanticipated events.
3
Item 1. Business
General
PART I
Western Digital Corporation (“Western Digital”) is a leading developer, manufacturer, and provider of data stor-
age devices and solutions that address the evolving needs of the information technology (“IT”) industry and the infra-
structure that enables the proliferation of data in virtually every other industry. Our broad portfolio of technology and
products address the following key markets: Data Center Devices and Solutions; Client Devices; and Client Solutions.
We also generate license and royalty revenue related to our intellectual property (“IP”) which is included in each of
the three categories.
We have a rich heritage of innovation and operational excellence, a wide range of IP assets and broad research and
development (“R&D”) capabilities. The growth and the value of data continues unabated which in turn is rapidly
evolving the landscape of storage markets we serve. We estimate that on a worldwide basis, the rate at which data is
stored will likely increase 400% by the year 2020. We are transforming ourselves to address this growth by providing
the broadest range of storage technologies, deep product portfolio and global reach in the industry. Founded in 1970
in Santa Ana, California and now headquartered in San Jose, California, Western Digital has one of the technology
industry’s most valuable patent portfolios with more than 14,000 patents awarded worldwide. Since 2009, we have
been a Standard & Poor’s 500 (“S&P 500”) company.
Built on decades of expertise in developing leading technology and components, we are enabling enterprises to
collect virtually limitless data and helping cloud providers build more powerful, cost effective and efficient data cen-
ters. We have relationships with the full range of original equipment manufacturers (“OEM”) and data center custom-
ers currently addressing storage opportunities, such as storage subsystem suppliers, major server OEMs, Internet and
social media infrastructure players, and personal computer (“PC”) and Mac™ OEMs. We have also built strong con-
sumer brands by providing people with effective tools to manage fast-accumulating libraries of personal content. We
market our products primarily under the HGST, SanDisk and WD brands, and our products are sold through dis-
tribution, retail and direct channels worldwide. We are a vertically integrated company with deep capabilities to
transform disk drive and NAND-flash components into products and solutions in our broad portfolio. We operate a
series of joint ventures in Yokkaichi, Japan, that provides us industry leading NAND-flash technology for use in our
solid-state offerings (see “Ventures with Toshiba” Section below).
We believe we are well positioned to capitalize on the ongoing expansion in digital content generation and
management. These trends are linked directly to commercial enterprises’ and consumers’ increasingly ubiquitous
experience with data and the increasing value of that data. The continued growth of data and the value creation of this
data are driving the need for the long-term retention of as much data as possible. The ways in which people and orga-
nizations are creating and using data are changing and that the amount of data considered useful to store is expanding.
Increasingly, more and more digital content is being stored and managed in a cloud environment on both hard disk
drives (“HDDs”) and solid state drives (“SSDs”), and we believe we are well positioned to continue to play a role in
this transition. With a focus on innovation and user value creation, our goal is to grow through continued strong
execution and with targeted investments in data center infrastructure, mobility and the cloud.
Industry
We operate in the data storage and data management industry. Our devices and solutions are made using either
rotating magnetic or NAND-flash technologies that together provide a broad range of reliability, performance, stor-
age capacity and data retention capabilities to our customers. With increasing ability to capture and create meaning
and value from data, we believe our customers view insights gained from data analytics as one of their most important
assets. In a connected global marketplace, there is a proliferation in the methods by and the rates at which content is
generated, consumed and stored by end users. When combined with fast global networks, these trends create tremen-
dous need for cost effective, high-performance and/or high-capacity storage solutions in mobile, computing and con-
sumer electronic devices, as well as in a wide range of storage systems, servers and data centers.
The storage industry is increasingly utilizing tiered architectures with HDDs, SSDs and other NAND-flash stor-
age devices to address an expanding set of uses and applications. The growth in computing complexity, cloud comput-
4
ing applications, connected mobile devices and Internet connected products in the world continues unabated, creating
the need for greater volumes of digital content to be stored, which in turn, drives a proliferation of data storage form
factors. In addition, we monitor the advantages, disadvantages and advances of the full array of storage technologies,
and review these with our customers on an ongoing basis to ensure we are appropriately resourced to meet our
customers’ storage needs. Storage solutions that hold large amounts of data are a key enabler of the trends seen in the
evolution of a data driven economy, underpinned by the proliferation of digital content creation, consumption and
monetization.
We are a market and customer driven company, focused on growth, innovation and value creation for our custom-
ers, employees and shareholders. We develop deep and collaborative relationships with our customers with a goal of
enabling their continued success, an approach that has made us a trusted advisor and market maker in our served
markets. As our portfolio of storage solutions expands further, we believe our customer engagement approach is one of
the key factors that will help us continue to achieve strong financial performance over the long term. We believe that
our product platform is broad-based and compelling, and our unique competitive advantages with growth drivers will
continue to provide us the opportunity to expand our value-creation model within an evolving, changing and growing
storage ecosystem.
Competition
Our industry is highly competitive. We compete with manufacturers of HDDs and NAND-flash memory for
client devices and solutions, and data center devices and solutions. The HDD market consists of three principal manu-
facturers: Seagate Technology plc, with its Maxtor and Samsung brands, Toshiba Corporation (“Toshiba”) and West-
ern Digital, with our HGST and WD brands. In NAND-flash memory, we compete with a wide range of
manufacturers, from numerous small startup companies to large multinational corporations, including captive NAND
suppliers SK Hynix, Inc. (“SK Hynix”), Intel Corporation (“Intel”), Micron Technology, Inc., Samsung Electronics
Co., Ltd. (“Samsung Electronics”) and Toshiba.
Business Strategy
Our overall strategy is to leverage our innovation and execution capabilities to be an industry-leading and broad-
based developer, manufacturer and provider of storage devices and solutions that support the evolving IT industry
infrastructure that enables the unabated proliferation of data. We strive to successfully execute our strategy through
the following foundational elements:
‰ Focus on strategy and execution: We focus on both strategy and execution to deliver the best outcome for our
customers, partners and employees;
‰ Optimize our core HDD business: We are focused on delivering the best value for our customers in data center
and client markets through a relentless focus on operational excellence and continued innovation;
‰ Lead in NAND-flash memory and solutions: We strategically align our investments to focus on established prof-
itable and growing markets, as well as on emerging markets such as “Internet of Things”, commonly referred
to as “IoT”, to enable our future growth;
‰ Grow in higher value markets with a blend of HDD and NAND-flash technologies: We leverage our capabilities in
firmware, software and systems to deliver compelling storage solutions to our customers that offer the best
combinations of performance, cost, power consumption, form factor, quality and reliability; and
‰ Align our retail offerings and client solutions portfolio: We compete with the industry’s broadest portfolio of stor-
age offerings for consumers in all the channels we serve while creating new use cases for our solutions in
emerging markets.
We believe our strategy provides the following benefits, which distinguish us in the dynamic and competitive
storage industry:
‰ enables scaling for efficiency and flexibility, allowing us to leverage our R&D and capital expenditures to
deliver storage solutions to multiple markets;
5
‰ results in continued diversification of our storage solutions portfolio and entry into additional growing
adjacent markets; and
‰ allows us to achieve strong financial performance, including healthy cash generation, thereby enabling alloca-
tion of capital to shareholders and strategic long-term investments in innovative technologies.
Data Storage Solutions
We offer a broad line of data storage solutions to meet the evolving storage needs of end markets which include
the following:
Data Center Devices and Solutions
Data Center Devices and Solutions consist of high-performance and high-capacity enterprise HDDs and enter-
prise SSDs, data center software and system solutions. Our nearline capacity helium hard drives provide the massive
high capacity storage needs and low total cost of ownership benefits for the growing hyperscale data center market.
Our high-performance enterprise class HDDs are optimized for performance applications providing a range of capacity
and performance levels primarily for use in enterprise servers, supporting high volume on-line transactions, data
analysis and other enterprise applications. Our data center solutions also include a wide range of high-capacity HDDs
and drive configurations which provide enterprise class reliability at the lowest cost per gigabyte (“GB”) and are pri-
marily for use in data storage systems, in tiered storage models and where data must be stored reliably for years. Our
enterprise SSDs include high-performance NAND-flash SSDs and software solutions designed to improve the
performance in various enterprise workload environments and encompass all major storage interface protocols. Our
system solutions provide petabyte scalable capacity with high performance at compelling economics. We also provide
higher value data storage platforms and systems to the market through our vertically integrated scale-out object stor-
age active archive systems.
Client Devices
Client Devices consist of HDDs and SSDs for computing devices, such as desktop and notebook PCs, security
surveillance systems, gaming consoles and set top boxes; NAND-flash embedded storage products for mobile phones,
tablets, notebook PCs and other portable and wearable devices, automotive, IoT and connected home applications; and
NAND-flash memory wafers. Our HDDs and SSDs are designed for use in devices requiring high performance, reli-
ability and capacity with various attributes such as low cost per GB, quiet acoustics, low power consumption and
protection against shocks. Our embedded storage include custom embedded solutions and iNAND® embedded flash
products, such as our multi-chip package (“MCP”) solutions that combine NAND-flash and mobile dynamic random-
access memory (“DRAM”) in an integrated package.
Client Solutions
Client Solutions consist of HDDs and SSDs embedded into external storage products and removable NAND-
flash products which include cards, universal serial bus (“USB”) flash drives and wireless drives. Our external HDD
storage products in both mobile and desktop form factors provide affordable, high quality, reliable storage for backup
and capacity expansion that are designed to keep digital content secure. We offer client SSDs with a range of capaci-
ties and performance characteristics to address a broad spectrum of the client storage market. Our removable cards are
designed primarily for use in consumer devices, such as mobile phones, tablets, imaging systems, still cameras, action
video cameras and security surveillance systems. Our USB flash drives are used in the computing and consumer mar-
kets and are designed for high-performance and reliability. Our wireless drive products allow in-field back up of cre-
ated content, as well as wireless streaming of high-definition movies, photos, music and documents to tablets,
smartphones and PCs.
Technology
Rotating Magnetic Storage
HDDs provide non-volatile data storage based on the recording of magnetic information on a rotating disk. We
have successfully developed and commercialized HDDs that operate in an enclosed helium environment, instead of air,
6
delivering industry leading HDD capacity and performance attributes. Our improvements in HDD capacity, which
lower product costs over time, have been enabled largely through advancements in recording head and magnetic
media technology. We develop and manufacture substantially all of the recording heads and magnetic media used in
our hard drive products. We invest considerable resources in R&D, manufacturing infrastructure and capital equip-
ment for recording head and media technology, as well as in other aspects of the magnetic recording system such as
HDD mechanics, controller and firmware technology, in order to secure our competitive position and cost structure.
Solid State Storage
Solid state storage products provide non-volatile storage based on NAND-flash technology. We develop and
manufacture solid state storage products in different form factors for a variety of different markets, including enter-
prise or cloud storage, client storage, automotive, mobile devices and removable memory devices.
Our solid state storage products utilize our captive NAND-flash technology which we develop and manufacture
through our business ventures with Toshiba. We focus significant research, development and effort on developing
highly reliable, high-performance, cost-effective NAND-flash technology. Over time, we have successfully developed
and commercialized an increased number of bits per cell in an increasingly smaller form factor, further driving cost
reductions.
In 2017, we achieved major milestones in NAND-flash technology. We have:
‰ successfully introduced and commercialized 3-dimensional (“3D”) NAND technology, which we refer to as
BiCS3, with 64 layers of vertical storage capability which features advances in high aspect ratio semiconductor
processing. A key focus for us in BiCS3 is the use of X3 technology;
‰ successfully developed and commercialized the world’s first 512-gigabit 64-layer 3D NAND chip based on our
BiCS3 technology; and
‰ successfully developed our next generation of 3D NAND, which we refer to as BiCS4, with 96 layers of vertical
storage capability, which will be available in 3-bits-per-cell and 4-bits-per-cell architectures.
We expect to develop and commercialize additional generations of 3D NAND technologies over the next several
years while continuing to utilize our older technology for certain markets and applications.
We are leveraging our expertise, resources and strategic investments in non-volatile memories to explore a wide
spectrum of persistent memory and storage class memory technologies. We have also initiated, defined and developed
standards to meet new market needs and to promote wide acceptance of flash storage standards through interoper-
ability and ease-of-use.
Our products generally leverage a common platform for various products within product families, and in some
cases across product families, resulting in the commonality of components which reduces our exposure to changes in
demand, facilitates inventory management and allows us to achieve lower costs through purchasing economies. This
platform strategy also enables our customers to leverage their qualification efforts onto successive product models. For
a discussion of associated risks, see Part I, Item 1A, Risk Factors, of this Annual Report on Form 10-K.
Research and Development
We devote substantial resources to the development of new products and the improvement of existing products.
We focus our engineering efforts on coordinating our product design and manufacturing processes to bring our prod-
ucts to market in a cost-effective and timely manner. R&D expenses totaled $2.44 billion, $1.63 billion and
$1.65 billion in 2017, 2016 and 2015, respectively. For a discussion of associated risks, see Part I, Item 1A, Risk Fac-
tors, of this Annual Report on Form 10-K.
Patents, Licenses and Proprietary Information
We rely on a combination of patents, trademarks, copyright and trade secret laws, confidentiality procedures and
licensing arrangements to protect our IP rights.
We have more than 14,000 active patents worldwide and have many patent applications in process. We con-
tinually seek additional United States (“U.S.”) and international patents on our technology. We believe that, although
7
our active patents and patent applications have considerable value, the successful manufacturing and marketing of our
products also depends upon the technical and managerial competence of our staff. Accordingly, the patents held and
applied for cannot alone ensure our future success.
In addition to patent protection of certain IP rights, we consider elements of our product designs and processes
to be proprietary and confidential. We believe that our non-patented IP, particularly some of our process technology,
is an important factor in our success. We rely upon non-disclosure agreements, contractual provisions and a system of
internal safeguards to protect our proprietary information. Despite these safeguards, there is a risk that competitors
may obtain and use such information. The laws of foreign jurisdictions in which we conduct business may provide less
protection for confidential information than the laws of the U.S.
We rely on certain technology that we license from other parties to manufacture and sell our products. We
believe that we have adequate cross-licenses and other agreements in place in addition to our own IP portfolio to
compete successfully in the storage industry. For a discussion of associated risks, see Part I, Item 1A, Risk Factors, of
this Annual Report on Form 10-K.
Manufacturing
We believe that we have significant know-how, unique product manufacturing processes, test and tooling,
execution skills and human resources to continue to be successful and to grow our manufacturing operations as neces-
sary. We strive to maintain manufacturing flexibility, high manufacturing yields, reliable products and high-quality
components. The critical elements of our production of HDD and NAND-flash products are high-volume and uti-
lization, low-cost assembly and testing, strict adherence to quality metrics and maintaining close relationships with
our strategic component suppliers to access best-in-class technology and manufacturing capacity.
HDD and NAND-flash product manufacturing are complex processes involving the production and assembly of
precision components with narrow tolerances and rigorous testing. The assembly process occurs in a “clean room”
environment that demands skill in process engineering and efficient space utilization to control the operating costs of
this manufacturing environment. Our clean room manufacturing process consists of modular production units, each of
which contains a number of work cells. We continually evaluate our manufacturing processes in an effort to increase
productivity, sustain and improve quality and decrease manufacturing costs. We continually evaluate which steps in
the manufacturing process would benefit from automation and how automated manufacturing processes can improve
productivity and reduce manufacturing costs.
A majority of our NAND-flash supply requirements for our NAND-flash products is obtained from our business
ventures with Toshiba, which provide us with leading-edge, high-quality and low-cost NAND-flash memory wafers.
This represents a captive supply and we are obligated to take our share of the output from these ventures or pay the
fixed costs associated with that capacity. See “Ventures with Toshiba” below for additional information. While a
majority of our flash memory supply utilized for our products is purchased from these ventures, from time-to-time, we
also purchase flash memory from other NAND-flash manufacturers, which we refer to as non-captive. While we do
not unilaterally control the operations of these ventures, we believe that our business venture relationship with
Toshiba helps us to reduce the costs of producing our products, increases our ability to control the quality of our
products and speeds delivery of our products to our customers. Our vertically integrated manufacturing operations for
our NAND-flash products are concentrated in three locations, with our business ventures with Toshiba located in
Yokkaichi, Japan, and our in-house assembly and test operations located in Shanghai, China and Penang, Malaysia.
We also leverage the efficiencies of contract manufacturers when strategically advantageous. For a discussion of
associated risks, see Part I, Item 1A, Risk Factors, of this Annual Report on Form 10-K.
Materials and Supplies
HDD primarily consists of recording heads, magnetic media and a printed circuit board assembly. We design
and manufacture substantially all of the recording heads and magnetic media required for our products. As a result, we
are more dependent upon our own development and execution efforts and less reliant on recording head and magnetic
media technologies developed by other manufacturers. We depend on an external supply base for all remaining
components and materials for use in our HDD product design and manufacturing.
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Our NAND-flash product consists of NAND-flash memory and controllers. A majority of our NAND-flash
memory is primarily supplied by our business ventures with Toshiba. Controllers are primarily designed in-house and
manufactured by third-party foundries or acquired from third-party suppliers. We believe the use of our in-house
assembly and test facilities, as well as contract manufacturers, provides flexibility and gives us access to increased
production capacity. We have developed deep relationships with these vendors and Toshiba to establish continuous
supply of NAND-flash memory and controllers.
We generally retain multiple suppliers for our component requirements but in some instances use sole or single
sources for business or technology reasons. Currently, we believe that there are no major issues with component avail-
ability. For a discussion of associated risks, see Part I, Item 1A, Risk Factors, of this Annual Report on Form 10-K.
Ventures with Toshiba
We and Toshiba currently operate three business ventures in 300-millimeter NAND-flash manufacturing facili-
ties in Yokkaichi, Japan, which provide us leading-edge, cost-competitive NAND-flash memory wafers for our end
products. Through Flash Partners Ltd., Flash Alliance Ltd., and Flash Forward Ltd., which we collectively refer to as
Flash Ventures, we and Toshiba collaborate in the development and manufacture of NAND-flash memory wafers
using semiconductor manufacturing equipment owned or leased by each of the Flash Venture entities. We hold a
49.9% ownership position in each of the Flash Venture entities. Each Flash Venture entity purchases wafers from
Toshiba at cost and then resells those wafers to us and Toshiba at cost plus a mark-up. We are obligated to purchase
half of Flash Ventures’ NAND-flash memory wafer supply or pay for half of Flash Ventures’ fixed costs regardless of
the output we choose to purchase. We are also obligated to fund 49.9% to 50% of Flash Ventures’ investments to the
extent that Flash Ventures’ operating cash flow is insufficient to fund these investments. We and Toshiba also
collaborate on certain R&D activities in support of Flash Ventures.
The agreements governing the operations of the Flash Venture entities also set out a framework for any invest-
ment by the joint venture partners in NAND manufacturing capacity. We have a facility agreement with Toshiba
related to the construction and operation of Toshiba’s “New Fab 2” fabrication facility, which is primarily intended to
provide additional clean room space to convert a significant portion of existing 2-dimensional (“2D”) NAND wafer
capacity to 3D NAND. In addition, Toshiba has announced that it is investing in a new “Fab 6” fabrication facility in
Yokkaichi, Japan. Similar to New Fab 2, the additional clean room space in Fab 6 is primarily intended to support the
continued conversion of 2D NAND capacity to 3D NAND. Pursuant to our agreements governing Flash Ventures,
which give us priority to participate in expansions and conversions of NAND manufacturing capacity, we intend to
jointly invest in Fab 6 equipment with Toshiba and our board of directors has authorized investments for our share of
initial Fab 6 equipment. We have been in discussions with Toshiba to come to mutually acceptable terms around our
planned investment in Fab 6.
Toshiba has announced significant losses related to its U.S. nuclear business and substantial doubt about its abil-
ity to continue as a going concern. Due to Toshiba’s financial condition, Toshiba’s working capital and access to credit
and capital markets are severely limited. Toshiba could become unable to, or otherwise fail to, timely fund invest-
ments in Flash Ventures or our joint development efforts or fulfill its payment obligations to suppliers, which could
harm Flash Ventures’ operations, our joint technology roadmap and supplier relationships. Lease financings guaran-
teed by both Toshiba and us are not currently available to Flash Ventures on favorable terms and we are pursuing
alternative forms of financing to fund our share of investments, which might not continue to be accessible. Toshiba
has also announced various efforts to stabilize its financial condition, including a possible sale of a majority or the
entire stake in its memory business, which includes its interests in Flash Ventures. According to Toshiba, on April 1,
2017, it transferred its memory business, including its interests in Flash Ventures, to a newly formed affiliate as part
of those efforts. We have asserted our consent rights under the terms of the Flash Ventures agreements with respect to
transactions involving the transfer of Toshiba’s interests in Flash Ventures. See Part II, Item 8, Note 17, Legal Proceed-
ings, of the Notes to Consolidated Financial Statements included in this Annual Report on Form 10-K. We are mon-
itoring and evaluating other potential impacts of Toshiba’s financial condition and efforts to sell its memory business
on Flash Ventures and, in turn, on our own memory business and financial condition.
For a discussion of risks associated with our business ventures with Toshiba, see Part I, Item 1A, Risk Factors, of
this Annual Report on Form 10-K.
9
Sales and Distribution
We maintain sales offices in selected parts of the world including the major geographies of the Americas, Asia
Pacific, Europe and the Middle East. Our international sales, which include sales to foreign subsidiaries of U.S.
companies but do not include sales to U.S. subsidiaries of foreign companies, represented 80%, 72% and 79% of our
net revenue for 2017, 2016 and 2015, respectively. Sales to international customers are subject to certain risks not
normally encountered in domestic operations, including exposure to tariffs and various trade regulations. For a dis-
cussion of associated risks, see Part I, Item 1A, Risk Factors, of this Annual Report on Form 10-K.
We perform our marketing and advertising functions internally and through outside firms utilizing both
consumer media and trade publications targeting various reseller and end-user categories. We also maintain customer
relationships through direct communication and by providing information and support through our website. In
accordance with standard storage industry practice, we provide distributors and retailers with limited price protection
and programs under which we reimburse certain marketing expenditures. We also provide distributors, resellers and
OEMs with other sales incentive programs. While these groups of customers make up our end markets, some of these
customers cross into multiple groups. We define these customers as follows:
Original Equipment Manufacturers. OEMs, including large-scale data center operators, system integrators and
hyperscale customers who bundle, embed, or integrate our storage solutions, purchase our products either directly or
through a contract manufacturer such as an original design manufacturer (“ODM”) and assemble them into the
devices they build. OEMs typically seek to qualify two or more providers for each generation of products and generally
will purchase products from those vendors for the life of that product. Many of our OEM customers utilize
just-in-time inventory management processes. As a result, for certain OEMs, we maintain a base stock of finished
goods inventory in facilities located near or adjacent to the OEM’s operations. In addition, we sell directly to cloud
infrastructure players as well as flash storage solutions to customers that offer our products under their own brand
name in the retail market, which we also classify as OEMs.
Distributors. We use a broad group of distributors to sell our products to non-direct customers such as small
computer and consumer electronics (“CE”) manufacturers, dealers, value-added resellers, systems integrators, online
retailers and other resellers. Distributors generally enter into non-exclusive agreements with us for the purchase and
redistribution of our products in specific territories.
Retailers. We sell our branded products directly to a select group of major retailers such as computer super-
stores, warehouse clubs, online retailers and computer electronics stores, and authorize sales through distributors to
smaller retailers. The retail channel complements our other sales channels while helping to build brand awareness for
us and our products. We also sell our branded products through our websites.
For both 2017 and 2016, no single customer accounted for 10% or more of our net revenue. For 2015, Hewlett-
Packard Company accounted for 11% of our net revenue. For a discussion of associated risks, see Part I, Item 1A, Risk
Factors, of this Annual Report on Form 10-K. For additional information regarding revenue recognition, sales by
geographic region and major customers, see Part II, Item 8, Note 1, Organization and Basis of Presentation and Note 10,
Business Segment, Geographic Information and Concentration of Risk, of the Notes to Consolidated Financial Statements
included in this Annual Report on Form 10-K.
Backlog
A substantial portion of our orders are generally for shipments within 60 days of the placement of the order.
Customers’ purchase orders may be canceled with relatively short notice to us, with little or no cost to the customer,
or modified by customers to provide for delivery at a later date. In addition, for many of our OEMs utilizing
just-in-time inventory, we do not generally require firm order commitments and instead, receive a periodic forecast of
requirements. Therefore, backlog information as of the end of a particular period is not necessarily indicative of future
levels of our revenue and profit and may not be comparable to prior periods.
Seasonality
We have historically experienced seasonal fluctuations in our business with higher levels of demand in the first
and second quarters of our fiscal year as a result of increased customer spending. Seasonality can also be impacted by
10
the growth in emerging markets and macroeconomic conditions. For a discussion of associated risks, see Part I,
Item 1A, Risk Factors, of this Annual Report on Form 10-K.
Service and Warranty
We generally warrant our newly manufactured products against defects in materials and workmanship from one
to five years from the date of manufacture depending on the type of product, with a small number of products having
a warranty ranging up to ten years or more. Our warranty obligation is generally limited to repair or replacement. We
have engaged third parties in various countries in multiple regions to provide various levels of testing, processing, or
recertification of returned products for our customers. For additional information regarding our service and warranty
policy, see Part II, Item 8, Note 1, Organization and Basis of Presentation, of the Notes to Consolidated Financial State-
ments included in this Annual Report on Form 10-K.
Environmental Regulation
We are subject to a variety of U.S. and foreign laws and regulations in connection with our operations and relat-
ing to the protection of the environment, including those governing discharges of pollutants into the air and water,
the management and disposal of hazardous substances and the clean-up of contaminated sites. Some of our operations
require environmental permits and controls to prevent and reduce air and water pollution. These permits are subject
to modification, renewal and revocation by issuing authorities. We believe that we have obtained or are in the process
of obtaining all necessary environmental permits for our operations.
We have established environmental management systems and continually update our environmental policies and
standard operating procedures for our operations worldwide. We believe that our operations are in material com-
pliance with applicable environmental laws, regulations and permits. We budget for operating and capital costs on an
ongoing basis to comply with environmental laws.
Our properties have in some cases been operated for many years and may contain soil or groundwater con-
tamination. In certain of our facilities we are undertaking voluntary monitoring of soil and groundwater. Based on
available information, including our voluntary monitoring activities, we do not believe that we have a current affirma-
tive legal obligation for any remedial action.
For a discussion of associated risks, see Part I, Item 1A, Risk Factors, of this Annual Report on Form 10-K.
Employees
As of June 30, 2017, we employed a total of approximately 68,000 employees worldwide, excluding temporary
employees and contractors. Many of our employees are highly skilled and our continued success depends in part upon
our ability to attract and retain such employees. Accordingly, we offer employee benefit programs that we believe are,
in the aggregate, competitive with those offered by our competitors.
While the substantial majority of our employees are not party to a collective bargaining agreement, a majority of
our employees in Japan and China are subject to collective bargaining agreements. We consider our employee rela-
tions to be good. For a discussion of associated risks, see Part I, Item 1A, Risk Factors, of this Annual Report on
Form 10-K.
Corporate Responsibility and Sustainability
We believe that corporate social responsibility is an essential factor for our overall success. This includes adopt-
ing ethical and sustainable practices to direct how we do business while keeping the interests of our stakeholders and
the environment in mind.
We strive to uphold the following principles:
‰ treat all employees with dignity and respect;
‰ set up processes and procedures intended to comply with applicable laws and regulations as well as our internal
guidelines and uphold ethical standards;
11
‰ establish policies and procedures intended to promote the idea that the quality of our products and services,
consistency of production and employee well-being are predicated on a safe and healthy work environment; and
‰ establish policies and procedures intended to promote environmental responsibility as an integral part of our
culture.
Available Information
We maintain an Internet website at www.wdc.com. Our Annual Report on Form 10-K, Quarterly Reports on
Form 10-Q, Current Reports on Form 8-K and amendments to reports filed or furnished pursuant to Sections 13(a)
and 15(d) of the Securities Exchange Act of 1934, as amended, are available on our website at www.wdc.com, free of
charge, as soon as reasonably practicable after the electronic filing of these reports with, or furnishing of these reports
to, the Securities and Exchange Commission (“SEC”). Any materials we file with the SEC are available at the SEC’s
Public Reference Room at 100 F Street NE, Washington, DC 20549. Additional information about the operation of
the Public Reference Room can also be obtained by calling the SEC at 1-800-SEC-0330. In addition, the SEC main-
tains a website at www.sec.gov that contains reports, proxy and information statements and other information regarding
issuers that file electronically with the SEC, including us.
Item 1A. RiskFactors
The business, financial condition and operating results of the Company can be affected by a number of risks and
uncertainties, whether currently known or unknown, any one or more of which could, directly or indirectly, cause the
Company’s actual results of operations and financial condition to vary materially from past, or from anticipated future,
results of operations and financial condition. The risks and uncertainties discussed below are not the only ones facing
our business, but do represent those risks and uncertainties that we believe are material to us. Additional risks and
uncertainties not presently known to us or that we currently deem immaterial may also adversely affect our business,
financial condition, results of operations or the market price of our common stock.
Adverse global economic conditions and credit market uncertainty could harm our business, results of operations and financial
condition.
Adverse global economic conditions and uncertain conditions in the credit market have had, and in the future
could have, a significant adverse effect on our company and on the storage industry as a whole. Several factors contrib-
ute to these conditions and this uncertainty, including, but not limited to, volatility in the equity, credit and other
financial markets and real estate markets, slower growth in certain geographic regions, lower levels of consumer
liquidity, risk of default on sovereign debt, higher interest rates, materials and component cost increases, political
uncertainty and other macroeconomic factors, such as the June 2016 referendum by British voters to exit the European
Union, commonly referred to as “Brexit,” and changes to policies, rules and regulations which may be proposed or
implemented by the U.S. President and his administration. Some of the risks and uncertainties we face as a result of
these conditions include the following:
‰ Volatile Demand and Supplier Risk. Our direct and indirect customers may delay or reduce their purchases of
our products and systems containing our products. In addition, many of our customers rely on credit financing
to purchase our products. If negative conditions in the global credit markets prevent our customers’ access to
credit, product orders may decrease, which could result in lower revenue. Likewise,
if our suppliers,
sub-suppliers and sub-contractors (collectively referred to as “suppliers”), or partners face challenges in obtain-
ing credit, in selling their products or otherwise in operating their businesses, they may be unable to offer the
materials we use to manufacture our products. These actions could result in reductions in our revenue and
increased operating costs, which could adversely affect our business, results of operations and financial con-
dition.
‰ Restructuring Activities. If demand for our products slows as a result of a deterioration in economic conditions,
we may undertake restructuring activities to realign our cost structure with softening demand. The occurrence
of restructuring activities could result in impairment charges and other expenses, which could adversely impact
our results of operations and financial condition.
12
‰ Credit Volatility and Loss of Receivables. We extend credit and payment terms to some of our customers. In
addition to ongoing credit evaluations of our customers’ financial condition, we seek to mitigate our credit risk
from time to time by purchasing credit insurance on certain of our accounts receivable balances. As a result of
the continued uncertainty and volatility in global economic conditions, however, we may find it increasingly
difficult to be able to insure these accounts receivable. We could suffer significant losses if a customer whose
accounts receivable we have not insured, or have underinsured, fails to pay us on their accounts receivable
balances. Additionally, negative or uncertain global economic conditions increase the risk that if a customer we
have insured fails to pay us on their accounts receivable, the financial condition of the insurance carrier for such
customer account may have also deteriorated such that it cannot cover our loss. A significant loss of accounts
receivable that we cannot recover through credit insurance would have a negative impact on our financial con-
dition.
‰ Impairment Charges. We test goodwill for impairment annually as of the first day of our fourth quarter and at
other times if events have occurred or circumstances exist that indicate the carrying value of goodwill may no
longer be recoverable. Negative or uncertain global economic conditions could result in circumstances, such as
a sustained decline in our stock price and market capitalization or a decrease in our forecasted cash flows,
indicating that the carrying value of our long-lived assets or goodwill may be impaired. If we are required to
record a significant charge to earnings in our Consolidated Financial Statements because of an impairment of
our long-lived assets or goodwill, our results of operations will be adversely affected.
We rely substantially on our business ventures with Toshiba for the supply of NAND-flash memory, which subjects us to risks
and uncertainties that could harm our business, financial condition and operating results.
We are dependent on our ventures with Toshiba to develop and manufacture NAND-flash memory products for
our NAND-flash memory supply, and therefore our business, financial condition and operating results, and our ability
to realize the anticipated benefits from our acquisition of SanDisk Corporation (“SanDisk”), pursuant to an Agreement
and Plan of Merger (the “Merger”), will be dependent on the success of Flash Ventures.
A majority of our NAND-flash memory is supplied by Flash Ventures, which limits our ability to respond to
demand and supply changes. A failure to accurately forecast demand could cause us to over-invest or under-invest in
technology transitions or the expansion of captive memory capacity in Flash Ventures. Over-investment could result
in excess supply, which could cause significant decreases in our product prices, significant excess, obsolete or lower of
cost or net realizable value inventory write-downs or under-utilization charges, and the potential impairment of our
investments in Flash Ventures. On the other hand, if we or Toshiba under-invest in captive memory capacity or tech-
nology transitions, if we grow capacity more slowly than the rest of the industry, if our technology transitions do not
occur on the timeline that we expect, if we encounter unanticipated difficulties in implementing these transitions, or
if we implement technology transitions more slowly than our competitors, we may not have enough captive supply of
the right type of memory or at all to meet demand on a timely and cost effective basis and we may lose opportunities
for revenue, gross margin and share as a result. If our NAND memory supply is limited, we may make strategic deci-
sions with respect to the allocation of our supply among our products and customers, and these strategic allocation
decisions may result in less favorable gross margin in the short term or damage certain customer relationships.
Growth of our NAND-flash memory bit supply at a slower rate than the overall industry for an extended period of
time would result in lowering our share which could limit our future opportunities and harm our financial results. We
are also contractually obligated to pay for 50% of the fixed costs of Flash Ventures regardless of whether we purchase
any wafers from Flash Ventures. Furthermore, purchase orders placed with Flash Ventures and under the foundry
arrangements with Toshiba for up to three months are binding and cannot be canceled. Therefore, once our purchase
decisions have been made, our production costs for flash memory are fixed, and we may be unable to reduce costs to
match any subsequent declines in pricing or demand, which would harm our gross margin. Our limited ability to
react to fluctuations in flash memory supply and demand makes our financial results particularly susceptible to varia-
tions from our forecasts and expectations.
In addition, we partner with Toshiba on the development of NAND-flash technology, including the next
technology transitions of NAND-flash, as well as other non-volatile memory technology in support of Flash Ventures.
These ventures are subject to various risks that could harm the value of our investments, our revenue and costs,
our future rate of spending, our technology plans and our future growth opportunities. Under the terms of our venture
13
agreements with Toshiba, which govern the operations of Flash Ventures, we have limited power to unilaterally direct
most of the activities that most significantly impact Flash Ventures’ performance. The integration of SanDisk into our
organization could complicate the process of reaching agreement with Toshiba in a timely and favorable manner. We
may not always agree with Toshiba on our joint R&D roadmap or expansions or conversions of production capacity. In
addition, Toshiba’s financial position or shift in strategic priorities could adversely impact our business.
Flash Ventures requires significant investments by both Toshiba and us for technology transitions, including the
transition to 3D NAND, and capacity expansions. In March 2016, Toshiba announced plans to construct a new wafer
fab in Yokkaichi, Japan, to provide additional cleanroom space to support the continued conversion of 2D NAND
capacity to 3D NAND, and we intend to participate in that wafer fab. Although we have had discussions to extend
the joint venture partnership with Toshiba to the new wafer fab, there is no certainty as to when, and on what terms,
we will participate with Toshiba in any investment in equipment for the new wafer fab, if at all. Failure to extend the
joint venture partnership or failure to continue to secure and invest in additional cleanroom space to support the con-
tinued 3D NAND transition could adversely impact our supply of captive NAND-flash memory and financial results.
If Toshiba does not or we do not provide sufficient resources or have adequate access to credit, investments in Flash
Ventures could be delayed or reduced. In addition, in the event that lease financings for Flash Ventures are not avail-
able on favorable terms or at all, more cash would be required to fund these investments.
Toshiba has announced significant losses related to its U.S. nuclear business and substantial doubt about its ability to
continue as a going concern. Due to Toshiba’s financial condition, Toshiba’s working capital and access to credit and capital
markets are severely limited. Toshiba could become unable to, or otherwise fail to, timely fund investments in Flash Ven-
tures or our joint development efforts or fulfill its payment obligations to suppliers, which could harm Flash Ventures’ oper-
ations, our joint technology roadmap and supplier relationships. Lease financings guaranteed by both Toshiba and us are not
currently available to Flash Ventures on favorable terms and we are pursuing alternative forms of financing to fund our share
of investments, which might not continue to be accessible. Toshiba has also announced various efforts to stabilize its finan-
cial condition, including a possible sale of a majority or the entire stake in its memory business. According to Toshiba, on
April 1, 2017, it transferred its memory business, including its interests in Flash Ventures, to a newly formed affiliate as part
of those efforts. On May 14, 2017, several of our SanDisk subsidiaries filed a request for arbitration with the ICC Interna-
tional Court of Arbitration seeking an order requiring Toshiba to unwind the transfer to its affiliate, and injunctive relief
preventing Toshiba from further breaching the Flash Ventures agreements (copies of which are incorporated by reference
into this Annual Report on Form 10-K) by transferring its interests in Flash Ventures without SanDisk’s consent. Numerous
proceedings and actions related to Flash Ventures and our consent and other rights under the terms of the Flash Ventures
agreements followed and are ongoing. Please see Part II, Item 8, Note 17, Legal Proceedings, of the Notes to Consolidated
Financial Statements included in this Annual Report on Form 10-K for a further description of these proceedings and
actions. While we have asserted our consent rights under the terms of the Flash Ventures agreements with respect to trans-
actions involving the transfer of Toshiba’s interests in Flash Ventures, our request for arbitration, legal proceedings, other
potential litigation, a change in the management or control of Flash Ventures or of Toshiba’s memory business could lead to
delays in decision-making, disputes, or changes in strategic direction that could adversely impact Flash Ventures, and there-
fore adversely affect our business prospects, results of operations and financial condition.
If a third party acquires any of Toshiba’s interests in Flash Ventures, that third party might not have the same
interest that we do in protecting and growing Flash Ventures’ business and might have conflicts of interest between
itself and Flash Ventures or us. Reduced investment in manufacturing capacity or research and development, or other
misalignment between us and our partner or any third party acquirer on strategic direction, could impact Flash Ven-
tures’ ability to stay at the forefront of technological advancement. Flash Ventures’ competitiveness could also be
harmed by a mishandling or misuse of IP or other competitively sensitive confidential information regarding Flash
Ventures, such as its technology roadmap, business or investment plans, by any acquirer or other third party that
might gain access to such information during the bidding process.
A failure by Toshiba to successfully stabilize its financial condition could lead to insolvency or bankruptcy pro-
ceedings, which could result in Flash Ventures and related agreements being terminated early or modified unfavorably
for us. We are monitoring and evaluating other potential impacts of Toshiba’s financial condition and efforts to sell its
memory business on Flash Ventures and, in turn, on our own memory business and financial condition. The deterio-
ration of our partner’s financial condition could adversely affect the value of our investments in Flash Ventures and our
business prospects, results of operations and financial condition.
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Integrating SanDisk’s operations with ours may be more difficult, costly or time consuming than expected and the anticipated
benefits, synergies and cost savings of the Merger may not be realized.
The success of our acquisition of SanDisk, including anticipated benefits, synergies and cost savings, will depend,
in part, on our ability to successfully combine and integrate the businesses and culture of SanDisk into our company.
It is possible that the integration process will take longer than anticipated. In addition, the integration process could
result in the loss of key employees, higher than expected costs, ongoing diversion of management attention, the dis-
ruption of our ongoing businesses or inconsistencies in standards, controls, procedures and policies that adversely
affect our ability to maintain relationships with customers, vendors, partners and employees. If we experience diffi-
culties with the integration process, the anticipated benefits of the Merger may not be realized fully or at all, or may
take longer to realize than expected. In addition, the actual cost savings of the Merger could be less than anticipated.
Additionally, the integration of SanDisk’s operations into our operations may also increase the risk that our internal
controls are found to be ineffective.
Achieving the benefits of the Merger will depend, in part, on our ability to integrate the business and operations
of SanDisk successfully and efficiently with our business. The challenges involved in this integration, which will be
complex and time-consuming, include, but are not limited to, the following:
‰ difficulties entering new markets or manufacturing in new geographies where we have no or limited direct
prior experience;
‰ successfully managing relationships with our strategic partners and our combined supplier and customer base;
‰ coordinating and integrating independent R&D and engineering teams across technologies and product plat-
forms to enhance product development while reducing costs;
‰ increased levels of investment in R&D, manufacturing capability and technology enhancement relating to
SanDisk’s business;
‰ successfully transitioning to 3D NAND and future technologies;
‰ coordinating sales and marketing efforts to effectively position the combined company’s capabilities and the
direction of product development;
‰ difficulties in integrating the systems and processes of two companies with complex operations and multiple
manufacturing sites;
‰ the increased scale and complexity of our operations resulting from the Merger;
‰ retaining key employees;
‰ obligations that we have to counterparties of SanDisk that arose as a result of the change in control of SanDisk;
and
‰ the diversion of management attention from other important business objectives.
If we do not successfully manage these issues and the other challenges inherent in integrating an acquired busi-
ness of the size and complexity of SanDisk, then we may not achieve the anticipated benefits of the Merger and our
revenue, expenses, operating results and financial condition could be materially adversely affected.
Our high level of debt may have an adverse impact on our liquidity, restrict our current and future operations, particularly our
ability to respond to business opportunities, and increase our vulnerability to adverse economic and industry conditions.
In connection with the Merger, we substantially increased our indebtedness, which could adversely affect our
ability to fulfill our obligations and have a negative impact on our financing options and liquidity position. As of
June 30, 2017, our total indebtedness was $13.36 billion in aggregate principal, and we had $1.00 billion of addi-
tional borrowing availability under our revolving credit facility.
Our high level of debt could have significant consequences, which include, but are not limited to, the following:
‰ limiting our ability to obtain additional financing in the future for working capital, capital expenditures,
acquisitions or other general corporate purposes;
15
‰ requiring a substantial portion of our cash flows to be dedicated to debt service payments instead of other
purposes, thereby reducing the amount of cash flows available for working capital, capital expenditures, acquis-
itions, R&D and other general corporate purposes;
‰ imposing financial and other restrictive covenants on our operations, including limiting our ability to
(i) declare or pay dividends or purchase our common stock; (ii) purchase assets, make investments, complete
acquisitions, consolidate or merge with or into, or sell all or substantially all of our assets to, another person;
(iii) dispose of assets; (iv) incur liens; and (v) enter into transactions with affiliates;
‰ placing us at a competitive disadvantage to competitors carrying less debt; and
‰ making us more vulnerable to economic downturns and limiting our ability to withstand competitive pressures
or take advantage of new opportunities to grow our business.
Our ability to meet the debt service obligations contained in our debt agreements will depend on our available
cash and our future performance, which will be affected by financial, business, economic and other factors, including
potential changes in laws or regulations, industry conditions, industry supply and demand balance, customer prefer-
ences, the success of our products and pressure from competitors. If we are unable to meet our debt service obligations
or should we fail to comply with our financial and other restrictive covenants contained in the agreements governing
our indebtedness, causing an event of default under the applicable indebtedness, the debt holders could accelerate the
related debt and that may result in the acceleration of any other debt, leases or other obligations to which a cross
acceleration or cross-default provision applies. If we are required to repay our indebtedness before their due dates, we
may not have sufficient funds available to repay such indebtedness and we may be required to refinance all or part of
our debt, sell important strategic assets at unfavorable prices, incur additional indebtedness or issue common stock or
other equity securities. We may not be able to, at any given time, refinance our debt, sell assets, incur additional
indebtedness or issue equity securities on terms acceptable to us, in amounts sufficient to meet our needs or at all. Our
inability to service our debt obligations or refinance our debt could have a material adverse effect on our business,
operating results and financial condition. Further, if we are unable to repay, refinance or restructure our secured
indebtedness, the holder of such debt could proceed against the collateral securing that indebtedness. Refinancing our
indebtedness may also require us to expense previous debt issuance costs or to incur new debt issuance costs.
In addition, our credit ratings impact the cost and availability of future borrowings and, accordingly, our cost of
capital. Our ratings reflect the opinions of the ratings agencies of our financial strength, operating performance and
ability to meet our debt obligations. There can be no assurance that we will achieve a particular rating or maintain a
particular rating in the future.
We may from time to time seek to refinance the substantial indebtedness we incurred to finance the Merger by
issuing additional shares of our common stock in one or more securities offerings. These securities offerings may dilute
our existing shareholders, reduce the value of our common stock, or both. Because our decision to issue securities will
depend on, among other things, market conditions and other factors beyond our control, we cannot predict or estimate
the amount, timing or nature of any future securities offerings. Thus, holders of our common stock bear the risk of our
future offerings diluting and potentially reducing the value of our common stock.
We participate in a highly competitive industry that is subject to declining average selling prices (“ASPs”), volatile gross margins
and significant shifts in market share, all of which could adversely affect our operating results and financial condition.
Demand for our devices, software and solutions that we offer to our customers, which we refer to in this Item 1A
as our “products”, depends in large part on the demand for systems (including personal computers (“PCs”) and mobile
devices) manufactured by our customers and on storage upgrades to existing systems. The demand for systems has
been volatile in the past and often has had an exaggerated effect on the demand for our products in any given period.
The price of NAND-flash memory is influenced by, among other factors, the balance between supply and demand,
including the effects of new fab capacity in the industry, macroeconomic factors, business conditions, technology tran-
sitions, conversion of industry DRAM capacity to NAND, conversion of 2D NAND capacity to 3D NAND or other
actions taken by us or our competitors. The price of HDDs is influenced by, among other factors, the balance between
supply and demand, including the effects of new fab capacity in the industry, macroeconomic factors, business con-
ditions, technology transitions, and other actions taken by us or our competitors. The storage market has experienced
16
periods of excess capacity, which can lead to liquidation of excess inventories and significant reductions in price. If
these price changes occur unnecessarily or in an unexpected manner, there will likely be an adverse impact on our
revenue and gross margins. In addition, we compete based on our ability to offer our customers competitive solutions
that provide the most current and desired product and service features. We expect that competition will continue to
be intense, and there is a risk that our competitors’ products may be less costly, provide better performance or include
additional features when compared to our products. Our ASPs and gross margins also tend to decline when there is a
shift in the mix of product sales, and sales of lower priced products increase relative to those of higher priced products.
Further, we face potential gross margin pressures resulting from our ASPs declining more rapidly than our cost of
goods sold. Rapid technological changes often reduce the volume and profitability of sales of existing products and
increase the risk of inventory obsolescence. These factors, along with others, may also result in significant shifts in
market share among the industry’s major participants, including a substantial decrease in our market share, all of
which could adversely impact our operating results and financial condition.
Our failure to accurately forecast market and customer demand for our products, or to quickly adjust to forecast changes, could
adversely affect our business and financial results or operating efficiencies.
The data storage industry faces difficulties in accurately forecasting market and customer demand for its prod-
ucts. The variety and volume of products we manufacture are based in part on these forecasts. Accurately forecasting
demand has become increasingly difficult for us, our customers and our suppliers in light of the volatility in global
economic conditions and industry consolidation, resulting in less availability of historical market data for certain
product segments. Further, for many of our OEMs utilizing just-in-time inventory, we do not generally require firm
order commitments and instead receive a periodic forecast of requirements, which may prove to be inaccurate. In
addition, because our products are designed to be largely interchangeable with competitors’ products, our demand
forecasts may be impacted significantly by the strategic actions of our competitors. As forecasting demand becomes
more difficult, the risk that our forecasts are not in line with demand increases. If our forecasts exceed actual market
demand, then we could experience periods of product oversupply, excess inventory, and price decreases, which could
impact our financial performance. If market demand increases significantly beyond our forecasts or beyond our ability
to add manufacturing capacity, then we may not be able to satisfy customer product needs, possibly resulting in a loss
of market share if our competitors are able to meet customer demands. In addition, some of our components have long
lead-times, requiring us to place orders several months in advance of anticipated demand. Such long lead-times
increase the risk of excess inventory or loss of sales in the event our forecasts vary substantially from actual demand.
We experience significant sales seasonality and cyclicality, which could cause our operating results to fluctuate.
Sales of computer systems, mobile devices, storage subsystems, gaming consoles and consumer electronics (“CE”)
tend to be seasonal and cyclical, and therefore we expect to continue to experience seasonality and cyclicality in our
business as we respond to variations in our customers’ demand for our products. However, changes in seasonal and
cyclical patterns have made it, and could continue to make it, more difficult for us to forecast demand, especially as a
result of the current macroeconomic environment. Changes in the product or channel mix of our business can also
impact seasonal and cyclical patterns, adding complexity in forecasting demand. Seasonality and cyclicality also may
lead to higher volatility in our stock price. It is difficult for us to evaluate the degree to which seasonality and cycli-
cality may affect our stock price or business in future periods because of the rate and unpredictability of product tran-
sitions and new product introductions and macroeconomic conditions.
Our sales to the CE, cloud computing, network attached storage (“NAS”), surveillance systems and enterprise markets, which
have accounted for and may continue accounting for an increasing percentage of our overall revenue, may grow at a slower rate
than current estimates or not at all, which could materially adversely impact our operating results and financial condition.
The secular growth of digital data has resulted in a more diversified mix of revenue from the CE, cloud comput-
ing, NAS, surveillance systems and enterprise markets. As sales into these markets have become a more significant
portion of our revenue, events or circumstances that adversely impact demand in these markets, or our inability to
address that demand successfully, could materially adversely impact our operating results. For example, demand in, or
our sales to, these markets may be adversely affected by the following:
‰ Mobile Devices. There has been and continues to be a rapid growth in devices that do not contain a hard
drive such as tablet computers and smart phones. As tablet computers and smart phones provide many of the
17
same capabilities as PCs, they have displaced or materially affected, and we expect will continue to displace or
materially affect, the demand for PCs. If we are not successful in adapting our product offerings to include disk
drives or alternative storage solutions that address these devices, even after our acquisition of SanDisk, demand
for our products in these markets may decrease and our financial results could be materially adversely affected.
In addition, global slowdown in the growth rate of mobile devices will also negatively impact our financial
results.
‰ Enterprise. The enterprise storage space is comprised of customers with long design, qualification and test
cycles prior to sales. We spend substantial time and resources in our sales process without any assurance that
our efforts will produce any customer orders on the timelines or in the quantities we expect. These lengthy and
uncertain processes also make it difficult for us to forecast demand and timing of customer orders. Due to
longer customer product cycles, we may not be able to transition customers to our leading edge products,
which would prevent us from benefitting from the technology transitions that enable cost reductions, which
may harm our gross margin. Demand for our enterprise solutions from our hyperscale customers is correlated
to large projects and expansions which can be sporadic, resulting in demand that is lumpy and less consistent
than the consumer-driven demand for many of our solutions. Hyperscale customers may place orders for sig-
nificant volumes with short lead times that may be difficult for us to fulfill, and sales to hyperscale customers
may negatively impact gross margins due to product mix and pricing, each of which could adversely affect our
business. In addition, hyperscale companies may internally develop enterprise storage solutions that reduce the
demand for our solutions.
‰ Cloud Computing. Consumers traditionally have stored their data on their PC, often supplemented with
personal external storage devices. Most businesses also include similar local storage as a primary or secondary
storage location. This storage is typically provided by HDDs and increasingly SSDs. With cloud computing,
applications and data are hosted, accessed and processed through a third-party provider over a broadband
Internet connection, potentially reducing or eliminating the need for, among other things, significant storage
inside the accessing electronic device. Even if we are successful at increasing revenues from sales to cloud
computing customers, if we are not successful in manufacturing compelling products to address the cloud
computing opportunity, demand for our products in these other markets may decrease and our financial results
could be materially adversely affected. Demand for cloud computing solutions themselves may be volatile due
to differing patterns of technology adoption and innovation, improved data storage efficiency by cloud
computing service providers, and concerns about data protection by end users.
‰ Obsolete Inventory.
In some cases, products we manufacture for these markets are uniquely configured for a
single customer’s application, creating a risk of obsolete inventory if anticipated demand is not actually real-
ized. In addition, rapid technological change in our industry increases the risk of inventory obsolescence.
‰ Macroeconomic Conditions. Consumer spending has been, and may continue to be, adversely affected in
many regions due to negative macroeconomic conditions and high unemployment levels. Please see the risk
factor entitled “Adverse global economic conditions and credit market uncertainty could harm our business, results of oper-
ations and financial condition” for additional risks and uncertainties relating to macroeconomic conditions.
In addition, demand in these areas also could be negatively impacted by developments in the regulation and
enforcement of digital rights management and the emergence of new technologies, such as data duplication, com-
pression and storage virtualization. If we are not able to respond appropriately, these factors could lead to our custom-
ers’ storage needs being satisfied at lower prices with lower capacity hard drives or solid-state storage products,
thereby decreasing our revenue or putting us at a disadvantage to competing storage technologies. As a result, even
with increasing aggregate demand for digital storage, if we fail to anticipate or timely respond to these developments
in the demand for storage, our ASPs could decline, which could adversely affect our operating results and financial
condition. Furthermore, our ability to accurately read and respond to market trends, such as trends relating to IoT or
big data, could harm our results.
Deterioration in the PC market may continue or accelerate, which could cause our operating results to suffer.
While sales to non-PC markets are becoming a more significant source of revenue, sales to the PC market remain
an important part of our business. We believe that sales of PCs have declined due to fundamental changes in the PC
18
market, including the growth of alternative mobile devices and the lengthening of product life cycles, and that further
deterioration of the PC market may continue or accelerate, which could cause our operating results and financial con-
dition to suffer. Additionally, if demand in the PC market is worse than expected as a result of these or other con-
ditions, or demand for our products in the PC market decreases at a faster rate than expected, our operating results and
financial condition may be adversely affected.
Selling to the retail market is an important part of our business, and if we fail to maintain and grow our market share or gain
market acceptance of our branded products, our operating results could suffer.
Selling branded products is an important part of our business, and as our branded products revenue increases as a
portion of our overall revenue, our success in the retail market becomes increasingly important to our operating
results. Our success in the retail market depends in large part on our ability to maintain our brand image and corpo-
rate reputation and to expand into and gain market acceptance of our products in multiple channels. We must
successfully respond to the rapid change away from traditional advertising media, marketing and sales methods to the
use of Internet media and advertising, particularly social media, and online sales, or our brand and retail sales could be
negatively affected. Adverse publicity, whether or not justified, or allegations of product or service quality issues, even
if false or unfounded, could tarnish our reputation and cause our customers to choose products offered by our com-
petitors. In addition, the proliferation of new methods of mass communication facilitated by the Internet makes it
easier for false or unfounded allegations to adversely affect our brand image and reputation. If customers no longer
maintain a preference for WD, HGST or SanDisk brand products, our operating results may be adversely affected. A
significant portion of our sales is made through retailers, and if our retailers are not successful in selling our products,
not only would our revenue decrease, but we could also experience lower gross margin due to the return of unsold
inventory or the protection we provide to retailers against price declines.
Sales in the distribution channel are important to our business, and if we fail to respond to demand changes in distribution
markets or if distribution markets for our products weaken, our operating results could suffer.
Our distribution customers typically sell to small computer manufacturers, dealers, systems integrators and other
resellers. We face significant competition in this channel as a result of limited product qualification programs and a
significant focus on price and availability of product. In addition, the PC market is experiencing a shift to notebook
and other mobile devices and, as a result, more computing devices are being delivered to the market as complete sys-
tems, which could weaken the distribution market. If we fail to respond to changes in demand in the distribution
market, our operating results could suffer. Additionally, if the distribution market weakens as a result of a slowing PC
growth rate, technology transitions or a significant change in consumer buying preference, or if we experience sig-
nificant price declines due to demand changes in the distribution channel, then our operating results would be
adversely affected. Negative changes in the credit-worthiness or the ability to access credit, or the bankruptcy or
shutdown of any of our significant retail or distribution partners would harm our revenue and our ability to collect
outstanding receivable balances.
Loss of market share with or by a key customer, or consolidation among our customer base, could harm our operating results.
During 2017, 36% of our revenue came from sales to our top 10 customers. These customers have a variety of
suppliers to choose from and therefore can make substantial demands on us, including demands on product pricing
and on contractual terms, often resulting in the allocation of risk to us as the supplier. Our ability to maintain strong
relationships with our principal customers is essential to our future performance. If we lose a key customer, if any of
our key customers reduce their orders of our products or require us to reduce our prices before we are able to reduce
costs, if a customer is acquired by one of our competitors or if a key customer suffers financial hardship, our operating
results and financial condition would likely be harmed.
Additionally, if there is consolidation among our customer base, our customers may be able to command
increased leverage in negotiating prices and other terms of sale, which could adversely affect our profitability. In addi-
tion, if, as a result of increased leverage, customer pressures require us to reduce our pricing such that our gross mar-
gins are diminished, it might not be feasible to sell our products to a particular customer, which could result in a
decrease in our revenue. Consolidation among our customer base may also lead to reduced demand for our products,
replacement of our products by the combined entity with those of our competitors and cancellations of orders, each of
which could harm our operating results.
19
Also, the storage ecosystem is constantly evolving, and our traditional customer base is changing. Fewer compa-
nies now hold greater market share for certain applications and services, such as mobile, social media, shopping and
streaming media. As a result, the competitive landscape is changing, giving these companies increased leverage in
negotiating prices and other terms of sale, which could adversely affect our profitability. In addition, the changes in
our evolving customer base create new selling and distribution patterns to which we must adapt. To remain com-
petitive, we must respond to these changes by ensuring we have proper scale in this evolving market, as well as offer
products that meet the technological requirements of this customer base at competitive pricing points. To the extent
we are not successful in adequately responding to these changes, our operating results and financial condition could be
harmed.
Expansion into new markets may increase the complexity of our business and cause us to increase our R&D expenses and
investments in manufacturing capability, technology enhancements and go-to-market capability, and if we are unable to
successfully adapt our business processes and product offerings as required by these new markets, our ability to grow will be
adversely affected.
To remain a significant supplier in the storage industry and to expand into new markets, we will need to offer a
broader range of storage products to our customers. We currently offer a variety of 3.5-inch and 2.5-inch HDDs, SSDs
and systems, flash storage solutions, and other products for the PC, mobile, enterprise, data center and other storage
markets. As we expand our product lines to sell into new markets, such as our recent entry into active archive systems
and new flash memory business through the Merger, including the vertically integrated business model through Flash
Ventures, the overall complexity of our business may increase at an accelerated rate and we may become subject to
different market dynamics. These dynamics may include, among other things, different demand volume, cyclicality,
seasonality, product requirements, sales channels, and warranty and return policies. In addition, expansion into other
markets may result in increases in R&D expenses and substantial investments in manufacturing capability, technology
enhancements and go-to-market capability. Flash Ventures requires significant investments by both Toshiba and us
for technology transitions, including the transition to 3D NAND, and capacity expansions. If we fail to successfully
expand into new markets with products that we do not currently offer, we may lose business to our competitors or
new entrants who offer these products.
Our vertical integration of some of our products makes us dependent on our ability to timely and cost-effectively develop products
with leading technology and overall quality, increasing capital expenditure costs and asset utilization risks for our business.
We develop NAND-flash memory as well as other non-volatile memory technology through our partnership
with Toshiba; we are also vertically integrated in a substantial portion of the recording heads and magnetic media
used in the hard drive products we produce. Consequently, for some of our products, we are more dependent upon our
own development and execution efforts and less able to take advantage of technologies developed by other manu-
facturers. Since we may not have access to alternative technologies that we do not develop internally, we may have to
pay royalties in order to access those technologies.
In addition, we may be unsuccessful in timely and cost-effectively developing and manufacturing products using
future technologies. We also may not effectively transition our design and technology to achieve acceptable manu-
facturing yields using the technologies necessary to satisfy our customers’ product needs, or we may encounter quality
problems with the products we manufacture. If we are unable to timely and cost-effectively develop products with
leading technology and overall quality, continuing the cost reductions necessary to maintain adequate gross margin
and our ability to sell our products may be significantly diminished, which could materially and adversely affect our
business and financial results.
Further, as a result of our vertical integration of some of our products, we make more capital investments and
carry a higher percentage of fixed costs than we would if we were not vertically integrated. If our overall level of pro-
duction decreases for any reason, and we are unable to reduce our fixed costs to match sales, some of our assets may
face underutilization that may impact our operating results. We are therefore subject to additional risks related to
overall asset utilization, including the need to operate at high levels of utilization to drive competitive costs and the
need for assured supply of components that we do not manufacture ourselves. In addition, as a result of adverse labor
rates or availability, we may be required to increase investments in automation, which may cause our capital
expenditures to increase. If we do not adequately address these challenges, our ongoing operations could be disrupted,
resulting in a decrease in our revenue or profit margins and negatively impacting our operating results.
20
We make significant investments in R&D to improve our technology and develop new technologies, and unsuccessful investments or
investments that are not cost effective could materially adversely affect our business, financial condition and results of operations.
As a leading supplier of hard drives and flash storage solutions, we make significant investments to maintain our
existing products and to lead innovation and development of new technologies. This strategy requires us to make sig-
nificant investments in R&D. In addition, we may increase our capital expenditures and expenses above our historical
run-rate model in order to remain competitive or as a result of the Merger with SanDisk, which has historically main-
tained higher levels of investment in R&D than our company. The current inherent physical limitations associated
with storage technologies are resulting in more costly capital expenditures that reduce the cost benefits of technology
transitions and could limit our ability to keep pace with reductions in ASPs. These investments may not result in
viable technologies or products, and even if they do result in viable technologies or products, they may not be profit-
able or accepted by the market. Significant investments in unsuccessful or cost-ineffective R&D efforts could materi-
ally adversely affect our business, financial condition and results of operations. In addition, increased investments in
technology could cause our cost structure to fall out of alignment with demand for our products, which would have a
negative impact on our financial results.
Current or future competitors may gain a technology advantage or develop an advantageous cost structure that we cannot match.
It may be possible for our current or future competitors to gain an advantage in product technology, manufactur-
ing technology, or process technology, which may allow them to offer products or services that have a significant
advantage over the products and services that we offer. Advantages could be in price, capacity, performance, reli-
ability, serviceability, industry standards or formats, brand and marketing, or other attributes. A competitive cost
structure for our products, including critical components, labor and overhead, is also critical to the success of our
business. We may be at a competitive disadvantage to any companies that are able to gain a technological or cost
structure advantage. The Chinese government and various agencies, state-owned or affiliated enterprises and invest-
ment funds are making significant investments to promote China’s domestic semiconductor industry consistent with
the government’s stated national policy objectives. If we are unable to effectively compete with any manufacturers
located in China or non-Chinese competitors benefitting from alliances with Chinese companies in the markets where
we compete, our operating results and financial condition will suffer.
Consolidation within the data storage industry could provide competitive advantages to our competitors.
The data storage industry as a whole has experienced consolidation over the past several years through acquis-
itions, mergers and decisions by industry players to exit the industry. Further consolidation across the industry,
including by our competitors who are vertically integrated with NAND-flash memory, may enhance their capacity,
abilities and resources and lower their cost structure, causing us to be at a competitive disadvantage.
Some of our competitors with diversified business units outside of storage products, may, over extended periods of time, sell storage
products at prices that we cannot profitably match.
Some of our competitors earn a significant portion of their revenue from business units outside of storage prod-
ucts. Because they do not depend solely on sales of storage products to achieve profitability, they may sell storage
products at lower prices and operate their storage business unit at a loss over an extended period of time while still
remaining profitable overall. In addition, if these competitors can increase sales of non-storage products to the same
customers, they may benefit from selling their storage products at lower prices. Our operating results may be
adversely affected if we cannot successfully compete with the pricing by these companies.
If we fail to qualify our products and achieve design wins with our customers, it may have a significant adverse impact on our
sales and margins.
We regularly engage in new product qualification with our customers, and the product qualification process may
be lengthy for some customers, including those in enterprise storage. Once a product is accepted for qualification test-
ing, failures or delays in the qualification process can result in delayed or reduced product sales, reduced product
margins caused by having to continue to offer a more costly current generation product, or lost sales to that customer
until the next generation of products is introduced. The effect of missing a product qualification opportunity is
21
magnified by the limited number of high volume OEMs and hyperscale customers, which continue to consolidate
their share of the storage markets. Likewise, if product life cycles lengthen, we may have a significantly longer period
to wait before we have an opportunity to qualify a new product with a customer, which could reduce our profits
because we expect declining gross margins on our current generation products as a result of competitive pressures.
Even if our products meet customer specifications, our sales to these customers are dependent upon the customers
choosing our products over those of our competitors and purchasing our products in sufficient volume, our ability to
supply our products in sufficient quantity and in a timely manner and, with respect to OEM partners, the OEMs’ abil-
ity to create, market and successfully sell products containing our solutions. Moreover, in transitioning to new tech-
nologies, such as 3D NAND, and products, we may not achieve design wins, our customers may delay transition to
these new technologies, our competitors may transition more quickly than we do, or we may experience product
delays, cost overruns or performance issues that could harm our operating results and financial condition.
We are subject to risks related to product defects or the unintended use or security breaches of our products, which could result in
product recalls or epidemic failures and could subject us to warranty claims in excess of our warranty provisions or which are
greater than anticipated, litigation or indemnification claims.
We warrant the majority of our products for periods of one to five years. We test our products in our manufactur-
ing facilities through a variety of means. However, our testing may fail to reveal defects in our products that may not
become apparent until after the products have been sold into the market. In addition, our products may be used in a
manner that is not intended or anticipated by us, resulting in potential liability. Accordingly, there is a risk that
product defects will occur, which could require a product recall. Product recalls can be expensive to implement. As
part of a product recall, we may be required or choose to replace the defective product. Moreover, there is a risk that
product defects may trigger an epidemic failure clause in a customer agreement. If an epidemic failure occurs, we may
be required to replace or refund the value of the defective product and to cover certain other costs associated with the
consequences of the epidemic failure. In addition, product defects, product recalls or epidemic failures may cause
damage to our reputation or customer relationships, lost revenue, indemnification for a recall of our customers’ prod-
ucts, warranty claims, litigation or loss of market share with our customers, including our OEM and original design
manufacturers (“ODM”) customers. Our business liability insurance may be inadequate or future coverage may be
unavailable on acceptable terms, which could adversely impact our operating results and financial condition.
Our standard warranties contain limits on damages and exclusions of liability for consequential damages and for
misuse, improper installation, alteration, accident or mishandling while in the possession of someone other than us.
We record an accrual for estimated warranty costs at the time revenue is recognized. We may incur additional
expenses if our warranty provision do not reflect the actual cost of resolving issues related to defects in our products,
whether as a result of a product recall, epidemic failure or otherwise. If these additional expenses are significant, it
could adversely affect our business, financial condition and operating results.
Certain of our products contain encryption or security algorithms to protect third party content and user-
generated data stored on our products. To the extent our products are hacked or the encryption schemes are compro-
mised or breached, this could harm our business by hurting our reputation, requiring us to employ additional
resources to fix the errors or defects and expose us to litigation and indemnification claims.
In addition, third-party components or applications that we incorporate or use in our products may contain
defects in design or manufacturing that could unexpectedly result in epidemic failures and subject us to liability.
Our strategic relationships subject us to risks that could adversely affect our business, financial condition and results of operations.
We have entered into strategic relationships with various partners for future product development, sales growth
and the supply of technologies, components, equipment and materials for use in our product design and manufactur-
ing, including our relationships with Toshiba for NAND-flash memory supply. In addition, in the first quarter of
2017, our joint venture with Unisplendour Corporation Limited (“Unis”) to market and sell our current data center
storage systems in China and to develop data storage systems for the Chinese market in the future became operational;
the joint venture is 49% owned by us and 51% owned by Unis and its subsidiary, Unissoft (Wuxi) Group Co. Ltd.
Please see the risk factor entitled “Because we are dependent on a limited number of qualified suppliers for components,
sub-assemblies, testing, equipment, consumables, raw materials, and logistics, a supplier’s inability, unwillingness, or failure to
22
support us in a timely manner with goods or services at a quality level and cost acceptable to us can adversely affect our margins,
revenues and operating results” for a further description of the risks associated with our reliance on external suppliers.
These strategic relationships are subject to various risks that could adversely affect the value of our investments and
our results of operations and financial condition. These risks include, but are not limited to, the following:
‰ our interests could diverge from our partners’ interests or we may not agree with co-venturers on ongoing activ-
ities, technology transitions or on the amount, timing or nature of further investments in the relationship;
‰ we may experience difficulties and delays in product and technology development at, ramping production at,
and transferring technology to, our business ventures;
‰ our control over the operations of our business ventures is limited;
‰ due to financial constraints, our co-venturers may be unable to meet their commitments to us or may pose
credit risks for our transactions with them;
‰ due to differing business models, financial constraints or long-term business goals, our partners may decide not
to join us in funding capital investment by our business ventures, which may result in higher levels of cash
expenditures by us or prevent us from proceeding in the investment;
‰ we may lose the rights to technology or products being developed by the strategic relationship, including if
any of our co-venturers is acquired by another company or otherwise transfers its interest in the business ven-
ture, files for bankruptcy or experiences financial or other losses;
‰ a bankruptcy event involving a co-venturer could result in the early termination or adverse modification of the
business venture or agreements governing the business venture;
‰ we may experience difficulties or delays in collecting amounts due to us from our co-venturers;
‰ the terms of our arrangements may turn out to be unfavorable; and
‰ changes in tax,
co-venturers.
legal or regulatory requirements may necessitate changes in the agreements with our
If our strategic relationships are unsuccessful or there are unanticipated changes in, or termination of, our strate-
gic relationships, our business, results of operations and financial condition may be adversely affected.
Because we are dependent on a limited number of qualified suppliers for components, sub-assemblies, testing, equipment,
consumables, raw materials, and logistics, a supplier’s inability, unwillingness, or failure to support us in a timely manner with
goods or services at a quality level and cost acceptable to us can adversely affect our margins, revenues and operating results.
We depend on an external supply base for technologies, software (including firmware), preamps, controller,
components, equipment and materials for use in our product design and manufacturing. We also depend on suppliers
for a portion of our wafer testing, chip assembly, product assembly and product testing, and on service suppliers for
providing technical support for our products. In addition, we use logistics partners to manage our just-in-time hubs,
distribution centers and freight from suppliers to our factories and from our factories to our customers throughout the
world. Many of the components and much of the equipment we acquire must be specifically designed to be compat-
ible for use in our products or for developing and manufacturing our future products, and are only available from a
limited number of suppliers, some of whom are our sole-source suppliers. We are therefore dependent on these suppli-
ers to be able and willing to dedicate adequate engineering resources to develop components that can be successfully
integrated into our products, technology and equipment that can be used to develop and manufacture our next-
generation products efficiently. Our supply base has experienced industry consolidation. Where we rely on a limited
number of suppliers or a single supplier, the risk of supplier loss due to industry consolidation is enhanced. Some of
our suppliers may be competitors in other areas of our business, which could lead to difficulties in price negotiations
or meeting our supply requirements. Any disruption in our supply chain could reduce our revenue and adversely
impact our financial results.
From time to time, our suppliers have experienced difficulty meeting our requirements. If we are unable to pur-
chase sufficient quantities from our current suppliers or qualify and engage additional suppliers, we may not be able to
23
meet demand for our products. We do not have long-term contracts with some of our existing suppliers, nor do we
always have guaranteed manufacturing capacity with our suppliers and, therefore, we cannot guarantee that they will
devote sufficient resources or capacity to manufacturing our products. We are not able to directly control product
delivery schedules or quality assurance. Furthermore, we manufacture on a turnkey basis with some of our suppliers.
In these arrangements, we do not have visibility and control of our suppliers’ inventories of purchased parts necessary
to build our products or of the progress of our products through their assembly line. Any significant problems that
occur at our suppliers, or their failure to perform at the level we expect, could lead to product shortages or quality
assurance problems, either of which would harm our operating results and financial condition. In addition, if we are
unable to purchase sufficient quantities from our current suppliers, we may not be able to engage alternative suppliers
who are able or willing to provide goods or services in sufficient quantities or at a cost acceptable to us.
Our products require preamps, controllers and firmware. We rely on a limited number of third-party vendors to
develop or supply controllers for many of our high-value solutions. Any delays or cost increases in developing or
sourcing controllers or firmware, or incompatibility or quality issues relating to the controllers or firmware in our
products, could harm our financial results as well as business relationships with our customers.
A majority of our flash memory is currently supplied by Flash Ventures and, to a much lesser extent, by third-
party silicon suppliers. Any disruption or shortage in supply of flash memory from our captive or non-captive sources
would harm our operating results and financial condition. Many of the risks that affect us also affect our supply base
and Flash Ventures, including, but not limited to, having single site manufacturing locations and other facilities
based in high risk regions of the world (for example, Flash Ventures is located in Yokkaichi, Japan), natural disasters,
power shortages, macro and local economic conditions, shortages of commodity materials, proper management of
technology transitions, geo-political risks, employee strikes and other labor actions, compliance with legal require-
ments, financial instability and exposure to IP and other litigation, including an injunction or other action that could
delay shipping. If any of these risks were to affect our suppliers or Flash Ventures, we could also be adversely affected,
especially in the case of products, components or services that are single-sourced. For example, if suppliers are facing
increased costs due to the above risks, they may require us to enter into long-term volume agreements to shift the
burden of fixed costs to us. Further, we work closely with many of our suppliers and strategic partners to develop new
technologies and, as a result, we may become subject to litigation from our suppliers, strategic partners or third par-
ties.
Without a capable and financially stable supply base that has established appropriate relationships within the
supply chain and has implemented business processes, strategies and risk management safeguards, we would be unable
to develop our products, manufacture them in high volumes, and distribute them to our customers to execute our
business plans effectively. Some of our suppliers have also experienced a decline in financial performance. Our suppli-
ers may be acquired by our competitors, consolidate, or decide to exit the industry, redirect their investments and
increase costs to us, each of which may have an adverse effect on our business and operations. In addition, moving to
new technologies may require us to align to, and build, a new supply base. Our success in new product areas may be
dependent on our ability to develop close relationships with new suppliers, with preferential agreements. Where this
cannot be done, our business and operations may be adversely affected.
In addition to an external supply base, we also rely on an internal supply chain of heads, media and media sub-
strate, and we rely on our business ventures with Toshiba for the supply of NAND-flash memory. Please see the risk
factors entitled, “The substitution or replacement of our technologies and products by new technologies could make our products obso-
lete and harm our operating results,” “If we do not properly manage technology transitions, our competitiveness and operating results
may be negatively affected,” and “We rely substantially on our business ventures with Toshiba for the supply of NAND-flash
memory, which subjects us to risks and uncertainties that could harm our business, financial condition and operating results” for a
review of some of the risks related to these supplies.
Price volatility, shortages of critical materials or components, or use by other industries of materials and components used in the
storage industry, may negatively impact our operating results.
Increases in the cost for certain critical materials and components and oil may increase our costs of manufacturing
and transporting our products and key components and may result in lower operating margins if we are unable to pass
these increased costs on to our customers. Shortages of critical components such as DRAM and NAND-flash memory,
24
or materials such as glass substrates, stainless steel, aluminum, nickel, neodymium, ruthenium, platinum or cerium,
may increase our costs and may result in lower operating margins if we are unable to find ways to mitigate these
increased costs. We or our suppliers acquire certain precious metals and rare earth metals like ruthenium, platinum,
neodymium and cerium, which are critical to the manufacture of components in our products from a number of coun-
tries, including the People’s Republic of China. The government of China or any other nation may impose regulations,
quotas or embargoes upon these metals that would restrict the worldwide supply of such metals or increase their cost,
both of which could negatively impact our operating results until alternative suppliers are sourced. Furthermore, if
other high volume industries increase their demand for materials or components used in our products, our costs may
further increase, which could have an adverse effect on our operating margins. In addition, shortages in other compo-
nents and materials used in our customers’ products could result in a decrease in demand for our products, which
would negatively impact our operating results.
Contractual commitments with component suppliers may result in us paying increased charges and cash advances for such
components or may cause us to have inadequate or excess component inventory.
To reduce the risk of component shortages, we attempt to provide significant lead times when buying compo-
nents, which may subject us to cancellation charges if we cancel orders as a result of technology transitions or changes
in our component needs. In addition, we may from time to time enter into contractual commitments with component
suppliers in an effort to increase and stabilize the supply of those components and enable us to purchase such compo-
nents at favorable prices. Some of these commitments may require us to buy a substantial number of components from
the supplier or make significant cash advances to the supplier; however, these commitments may not result in a sat-
isfactory increase or stabilization of the supply of such components. Furthermore, as a result of uncertain global eco-
nomic conditions, our ability to forecast our requirements for these components has become increasingly difficult,
therefore increasing the risk that our contractual commitments may not meet our actual supply requirements, which
could cause us to have inadequate or excess component inventory and adversely affect our operating results and
increase our operating costs.
If we do not properly manage technology transitions, our competitiveness and operating results may be negatively affected.
The storage markets in which we offer our products continuously undergo technology transitions that we must
anticipate and adapt our products to address in a timely manner. If we fail to implement new technologies success-
fully, or if we are slower than our competitors at implementing new technologies, we may not be able to com-
petitively offer products that our customers desire or keep pace with ASP reduction, which could harm our operating
results. For example, in transitioning our 2D NAND manufacturing capacity to 3D NAND technology, we could
experience delays or other challenges in the production ramp, qualification of wafers, shipment of samples to custom-
ers or customer approval process. 3D NAND and any new manufacturing node may be more susceptible to manu-
facturing yield issues. Manufacturing yield issues may not be identified during the development or production process
or solved until an actual product is manufactured and tested, further increasing our costs. If our technology tran-
sitions, including the production ramp of 3D NAND technology, take longer, are more costly to complete than
anticipated, or do not improve manufacturing yield or other manufacturing efficiencies, our flash memory costs may
not remain competitive with other NAND-flash memory producers or may not fall commensurate with declines in the
price of NAND-flash memory, which would harm revenues, our gross margin and operating results.
Many companies, including some of our competitors, have developed or are attempting to develop alternative
non-volatile technologies. Successful broad-based commercialization of one or more competing technologies, as well as
differing strategies and timing with respect to the transition from 2D NAND to 3D NAND, could reduce the com-
petitiveness and future revenue and profitability of our 2D NAND and 3D NAND-flash technologies. For additional
technology transition risks related to 3D NAND, see “We rely substantially on our business ventures with Toshiba for the
supply of NAND-flash memory, which subjects us to risks and uncertainties that could harm our business, financial condition and
operating results.”
In addition, if our customers choose to delay transition to new technologies, if demand for the products that we
develop is lower than expected or if the supporting technologies to implement these new technologies are not avail-
able, we may be unable to achieve the cost structure required to support our profit objectives or may be unable to
grow or maintain our market position.
25
Changes in product life cycles could adversely affect our financial results.
If product life cycles lengthen, we may need to develop new technologies or programs to reduce our costs on any
particular product to maintain competitive pricing for that product. Longer product life cycles could also restrict our
ability to transition customers to our newer products in a timely manner, or at all, negatively impacting our ability to
recoup our significant R&D investments to improve our existing technology and develop new technologies. If product
life cycles shorten, it may result in an increase in our overall expenses and a decrease in our gross margins, both of
which could adversely affect our operating results. In addition, shortening of product life cycles also makes it more
difficult to recover the cost of product development before the product becomes obsolete. Our failure to recover the
cost of product development in the future could adversely affect our operating results.
The substitution or replacement of our technologies and products by new technologies could make our products obsolete and harm
our operating results.
Given the pace of technological development, there is a possibility that new technologies could substitute for or
replace our current technologies and products and make them obsolete. Historically, when the industry experiences a
fundamental change in storage technologies or standards, any manufacturer that fails to successfully and timely adjust
its designs and processes to accommodate or manufacture the new technology or standard fails to remain competitive.
There are some revolutionary technologies, such as current-perpendicular-to-plane giant magnetoresistance, shingle
magnetic recording, heat-assisted magnetic recording, patterned magnetic media and advanced signal processing that,
if implemented by a competitor on a commercially viable basis ahead of the industry, could put us at a competitive
disadvantage. In addition, many companies, including some of our competitors, have developed or are attempting to
develop alternative non-volatile technologies, including non-NAND technologies such as magnetoresistive random-
access memory (“RAM”), resistive random-access memory (“ReRAM”) and phase change, as well as NAND based
vertical or stacked 3D memories based on charge trap, floating gate and other cell architecture. In embedded sol-
utions, certain competitors have recently introduced a mobile storage standard referred to as Universal Flash Storage
(“UFS”). In the data center market, certain competitors have recently introduced a non-volatile memory express
(“NVMe”) product that can be used as a substitute for our peripheral component interconnect express (“PCIe”) sol-
utions. In addition, a provider of processors and non-volatile memory solutions may be developing a new standard to
attach ultra-low latency non-volatile memory to its processor memory bus, which it may choose not to license to its
competitors, resulting in it being a single source provider of such non-volatile memory solutions. As a result of these
shifts in technology and standards, we could incur substantial costs in developing new technologies, such as recording
heads, magnetic media and tools, in adopting new standards or in investing in different capital equipment or manu-
facturing processes to remain competitive. If we fail to successfully implement these new technologies or standards, or
if we are significantly slower than our competitors at implementing new technologies or standards, we may not be
able to offer products with capacities and capabilities that our customers desire, which could harm our operating
results.
The difficulty of introducing hard drives with higher levels of areal density and the challenges of reducing other costs may impact
our ability to achieve historical levels of cost reduction.
Storage capacity of the hard drive, as manufactured by us, is determined by the number of disks and each disk’s
areal density. Areal density is a measure of the amount of magnetic bits that can be stored on the recording surface of
the disk. Generally, the higher the areal density, the more information can be stored on a single platter. Higher areal
densities require existing recording head and magnetic media technology to be improved or new technologies devel-
oped to accommodate more data on a single disk. Historically, we have been able to achieve a large percentage of cost
reduction through increases in areal density. Increases in areal density mean that the average drive we sell has fewer
heads and disks for the same capacity and, therefore, may result in a lower component cost. However, increasing areal
density has become more difficult in the storage industry. If we are not able to increase areal density at the same rate
as our competitors or at a rate that is expected by our customers, we may be required to include more components in
our drives to meet demand without corresponding incremental revenue, which could negatively impact our operating
margins and make achieving historical levels of cost reduction difficult or unlikely. Additionally, increases in areal
density may require us to make further capital expenditures on items such as new test equipment needed as a result of
an increased number of gigabytes per platter. Our inability to achieve cost reductions could adversely affect our
operating results.
26
Our license and royalty revenue may fluctuate or decline significantly in the future due to license agreement expirations or
renewals, declines in sales of the products or use of technology underlying the license and royalty revenue by our licensees, or if
licensees fail to perform on a portion or all of their contractual obligations.
If our existing licensees do not renew their licenses upon expiration, renew or sign new agreements on less favor-
able terms, exercise their option to terminate the license or fail to exercise their option to extend the licenses, or we are
not successful in signing new licensees in the future, our license revenue, profitability and cash provided by operating
activities would be harmed and we may incur significant patent litigation costs to enforce our patents against these
licensees. As our older patents expire, and the coverage of our newer patents may be different, it may be more difficult
to negotiate or renew favorable license agreement terms or a license agreement at all. Our agreements may require us
in certain instances to recognize license revenue related to a particular licensee all in one period instead of over time,
which could create additional volatility in our licensing revenue. A portion of our license and royalty revenue is based
on sales of product categories as well as the underlying technology, and fluctuations in the sales of those products or
technology adoption rates would also result in fluctuations in the license and royalty revenue due to us under our
agreements. If our licensees or we fail to perform on contractual obligations, we may incur costs to enforce or defend
the terms of our licenses and there can be no assurance that our enforcement, defense or collection efforts will be effec-
tive. If we license new IP from third parties or existing licensees, we may be required to pay license fees, royalty
payments or offset existing license revenue. We may enter into agreements with customers, suppliers or partners that
could limit our ability to monetize our IP or could result in us being required to provide IP indemnification to our
customers, suppliers or partners. In addition, we may be subject to disputes, claims or other disagreements on the
timing, amount or collection of royalties or license payments under our license agreements.
If we do not properly manage new product development, our competitiveness and operating results may be negatively affected.
Our success depends in part on our ability to develop and introduce new products in a timely manner in order to
keep pace with technology advancements. Advances in semiconductor technology have resulted in other emerging
technologies that can be competitive with traditional storage technologies. We may be unsuccessful in anticipating
and developing new and improved products for the client, enterprise and other storage markets in response to compet-
ing technologies. If our hard drive, solid-state products and our storage solutions products fail to offer a superior value
proposition to alternative storage products, we will be at a competitive disadvantage and our business will suffer. In
some cases, our customers’ demand for a more diversified portfolio results in investments in new products for a partic-
ular market that do not necessarily expand overall market opportunity, which may negatively affect our operating
results. As we introduce new products, standards or technologies, it can take time for these new standards or tech-
nologies to be adopted, for consumers to accept and transition to these new standards or technologies and for sig-
nificant sales to be generated, if at all. Failure of consumers or enterprises to adopt our new products, standards or
technologies could harm our results of operations as we fail to reap the benefits of our investments.
In addition, the success of our new product introductions depends on a number of other factors, including:
‰ difficulties faced in manufacturing ramp;
‰ implementing at an acceptable cost product features expected by our customers;
‰ market acceptance/qualification;
‰ effective management of inventory levels in line with anticipated product demand;
‰ quality problems or other defects in the early stages of new product introduction and problems with compati-
bility between our products and those of our customers that were not anticipated in the design of those prod-
ucts;
‰ our ability to increase our software development capability; and
‰ the effectiveness of our go-to-market capability in selling these new products.
In particular, as part of our growth strategy, we have made significant investments in active archive systems,
which are designed to enable organizations to rapidly access massive long-term data stores. For example, our acquis-
ition of Amplidata NV in March 2015 was partially driven by our strategy to expand in this area. We expect to con-
tinue to make significant investments in active archive systems. Our active archive systems may fail to gain market
acceptance, or the market for active archive systems may not grow as we anticipate.
27
We have also seen, and anticipate continuing to see, an increase in customers requesting that we develop prod-
ucts, including software associated with our products, that incorporate open source software elements and operate in
an open source environment. Adapting to this demand may cause product delays, placing us at a competitive dis-
advantage. Open source products could also reduce our capability for product differentiation or innovation and our
affected products could be diminished to commodity status, which we expect would place increased downward pres-
sure on our margins. If we fail to successfully anticipate and manage issues associated with our product development
generally, our business may suffer.
Our operations, and those of certain of our suppliers and customers, are concentrated in large, purpose-built facilities, subjecting us
to substantial risk of damage or loss if operations at any of these facilities are disrupted.
As a result of our cost structure and strategy of vertical integration, we conduct our operations at large, high
volume, purpose-built facilities in California and throughout Asia. The concentration of Flash Ventures in Yokkaichi,
Japan, magnifies the risks of supply disruption. The facilities of many of our customers, our suppliers and our custom-
ers’ suppliers are also concentrated in certain geographic locations throughout Asia and elsewhere. A localized health
risk affecting our employees at these facilities or the staff of our or our customers’ other suppliers, such as the spread of
a pandemic influenza, could impair the total volume of our products that we are able to manufacture or sell, which
would result in substantial harm to our operating results. Similarly, a fire, flood, earthquake, tsunami or other natural
disaster, condition or event such as political instability, civil unrest or a power outage that adversely affects any of
these facilities, including access to or from these facilities by employees or logistics operators, would significantly
affect our ability to manufacture or sell our products, which would result in a substantial loss of sales and revenue and
a substantial harm to our operating results. For example, prior to the 2011 flooding in Thailand, all of our internal
slider capacity and 60% of our hard drive manufacturing capacity was in Thailand. As a result of the flooding in Thai-
land, our facilities were inundated and temporarily shut down. During that period, our ability to manufacture hard
drives was significantly constrained, adversely affecting our business, financial condition and results of operations. In
addition, the concentration of our manufacturing sites could exacerbate the negative impacts resulting from localized
labor unrest or other employment issues. A significant event that impacts any of our manufacturing sites, or the sites
of our customers or suppliers, could adversely affect our ability to manufacture or sell our products, and our business,
financial condition and results of operations could suffer.
We may incur losses beyond the limits of, or outside the scope of, the coverage of our insurance policies. There
can be no assurance that in the future we will be able to maintain existing insurance coverage or that premiums will
not increase substantially. Due to market availability, pricing or other reasons, we may elect not to purchase insurance
coverage or to purchase only limited coverage. We maintain limited insurance coverage and, in some cases, no cover-
age at all, for natural disasters and environmental damages, as these types of insurance are sometimes not available or
available only at a prohibitive cost. We depend upon Toshiba to obtain and maintain sufficient property, business
interruption and other insurance for Flash Ventures. If Toshiba fails to do so, we could suffer significant
unreimbursable losses, and such failure could also cause Flash Ventures to breach various financing covenants.
If our technology infrastructure, systems or products are compromised, damaged or interrupted by cyber attacks, data security
breaches, other security problems, security vulnerabilities or design defects, or sustain system failures, our operating results and
financial condition could be adversely affected.
We experience cyber attacks of varying degrees on our technology infrastructure and systems and, as a result,
unauthorized parties have obtained in the past, and may in the future obtain, access to our computer systems and
networks. The technology infrastructure and systems of our suppliers, vendors and partners may also experience such
attacks. Cyber attacks can include computer viruses, computer denial-of-service attacks, worms, and other malicious
software programs or other attacks, covert introduction of malware to computers and networks, impersonation of
authorized users, and efforts to discover and exploit any security vulnerabilities or security weaknesses, as well as
intentional or unintentional acts by employees or other insiders with access privileges, intentional acts of vandalism by
third parties and sabotage. We believe cyber attack attempts are increasing in number and that cyber attackers are
developing increasingly sophisticated systems and means to not only attack systems, but also to evade detection or to
obscure their activities. Our products are also targets for cyber attacks. While some of our products contain encryption
or security algorithms to protect third-party content or user-generated data stored on our products, these products
28
could still be hacked or the encryption schemes could be compromised, breached, or circumvented by motivated and
sophisticated attackers. We have agreed with certain customers and strategic partners, including Toshiba, to under-
take certain commitments to promote information security, and we may be liable to Toshiba or such other parties if
we fail to meet our cyber security commitments.
In addition, our technology infrastructure and systems are vulnerable to damage or interruption from natural
disasters, power loss and telecommunications failures. Further, our products contain sophisticated hardware and
operating system software and applications that may contain security problems, security vulnerabilities, or defects in
design or manufacture, including “bugs” and other problems that could interfere with the intended operation of our
products.
If efforts to breach our infrastructure, systems or products are successful or we are unable to protect against these
risks, we could suffer interruptions, delays, or cessation of operations of our systems, and loss or misuse of proprietary
or confidential information, IP, or sensitive or personal information. Breaches of our infrastructure, systems or prod-
ucts could also cause our customers and other affected third parties to suffer loss or misuse of proprietary or con-
fidential information, IP, or sensitive or personal information, and could harm our relationships with customers and
other third parties. As a result, we could experience additional costs, indemnification claims, litigation, and damage to
our brand and reputation. All of these consequences could harm our reputation and our business and materially and
adversely affect our operating results and financial condition.
Manufacturing, marketing and selling our products globally subjects us to numerous risks.
Currently, a large portion of our revenue is derived from our international operations, and many of our products
and components are produced overseas. Our revenue and future growth is significantly dependent on the growth of
international markets, and we may face difficulties in entering or maintaining international sales markets. We are
subject to risks associated with our global manufacturing operations and global marketing and sales efforts, as well as
risks associated with our utilization of and reliance on contract manufacturers, including:
‰ obtaining requisite governmental permits and approvals, compliance with foreign laws and regulations,
changes in foreign laws and regulations;
‰ the need to comply with regulations on international business, including the Foreign Corrupt Practices Act,
the United Kingdom Bribery Act 2010, the anti-bribery laws of other countries and rules regarding conflict
minerals;
‰ currency exchange rate fluctuations or restrictions;
‰ political and economic instability, civil unrest and natural disasters;
‰ limited transportation availability, delays, and extended time required for shipping, which risks may be com-
pounded in periods of price declines;
‰ higher freight rates;
‰ labor challenges, including difficulties finding and retaining talent or responding to labor disputes or dis-
ruptions;
‰ trade restrictions or higher tariffs and fees;
‰ import and export restrictions and license and certification requirements, including on encryption technology,
and complex customs regulations;
‰ copyright levies or similar fees or taxes imposed in European and other countries;
‰ exchange, currency and tax controls and reallocations;
‰ increasing labor and overhead costs;
‰ weaker protection of IP rights;
‰ difficulties in managing international operations, including appropriate internal controls; and
‰ loss or non-renewal of favorable tax treatment under agreements or treaties with foreign tax authorities.
29
As a result of these risks, our business, results of operations or financial condition could be adversely affected.
Some of these risks, such as trade restrictions, higher tariffs and fees, import and export restrictions or loss of favorable
tax treatment under agreements or treaties with foreign tax authorities, could increase as a result of changes to poli-
cies, rules and regulations which may be proposed or implemented by the U.S. President and his administration.
Terrorist attacks may adversely affect our business and operating results.
Recent terrorist incidents around the world and the continued threat of terrorist activity and other acts of war or
hostility have created uncertainty in the financial and insurance markets and have significantly increased the political,
economic and social instability in some of the geographic areas in which we, our suppliers or our customers operate.
Additionally, it is uncertain what impact the reactions to such acts by various governmental agencies and security
regulators worldwide will have on shipping costs. Acts of terrorism, either domestically or abroad, could create further
uncertainties and instability. To the extent this results in disruption or delays of our manufacturing capabilities, R&D
activities (including our operations in Israel) or shipments of our products, our business, operating results and finan-
cial condition could be adversely affected. Any of these events could also increase volatility in the U.S. and world
financial markets, which could have a negative effect on our stock price and may limit the capital resources available
to us and our customers or suppliers, or adversely affect consumer confidence.
Sudden disruptions to the availability of air transportation, or ocean or land freight lanes, could have an impact on our
operations.
We generally ship our products to our customers, and receive shipments from our suppliers, via air, ocean or land
freight. The sudden unavailability or disruption of air transportation, cargo operations or ocean, rail or truck freight
lanes caused by, among other things, labor difficulties or disputes, severe weather patterns or other natural disasters,
or political instability or civil unrest, could impact our operating results by impairing our ability to timely and effi-
ciently receive shipments from our suppliers or deliver our products.
If we fail to identify, manage, complete and integrate acquisitions, investment opportunities or other significant transactions,
which are a key part of our growth strategy, it may adversely affect our future results.
We seek to be an industry-leading developer, manufacturer and provider of innovative storage solutions, balanc-
ing our core hard drive and flash memory business with growing investments in newer areas that we believe will pro-
vide us with higher growth opportunities. Acquisitions of,
investment opportunities in, or other significant
transactions with companies that are complementary to our business are a key part of our overall business strategy. In
order to pursue this part of our growth strategy successfully, we must continue to identify attractive acquisition or
investment opportunities, successfully complete the transactions, some of which may be large and complex, and
manage post-closing issues such as integration of the acquired company or employees. We may not be able to continue
to identify or complete appealing acquisition or investment opportunities given the intense competition for these
transactions. We are also subject to certain covenants in our debt agreements which place limits on our ability to
complete acquisitions and investments. Even if we identify and complete suitable corporate transactions, we may not
be able to successfully address any integration challenges in a timely manner, or at all. Failing to successfully integrate
or realign our business to take advantage of efficiencies or reduce redundancies of an acquisition may result in not real-
izing all or any of the anticipated benefits of the acquisition. In addition, failing to achieve the financial model projec-
tions for an acquisition may result in the incurrence of impairment charges and other expenses, both of which could
adversely impact our results of operations or financial condition. Acquisitions and investments may also result in the
issuance of equity securities that may be dilutive to our shareholders and the issuance of additional indebtedness
which would put additional pressure on liquidity. Furthermore, we may agree to provide continuing service obliga-
tions or enter into other agreements in order to obtain certain regulatory approvals of our corporate transactions, and
failure to satisfy these additional obligations could result in our failing to obtain regulatory approvals or the
imposition of additional obligations on us, any of which could adversely affect our business, financial condition and
results of operations.
30
If we are unable to successfully integrate the business and operations of HGST, our business and financial condition may be
adversely affected.
In connection with obtaining the regulatory approvals required to complete the acquisition of HGST, we agreed
to certain conditions required by the Ministry of Commerce of the People’s Republic of China (“MOFCOM”), includ-
ing adopting measures to keep HGST as an independent competitor until MOFCOM agreed otherwise. On
October 19, 2015, MOFCOM announced that it had made a decision allowing us to integrate substantial portions of
our HGST and WD subsidiaries, provided that we continue to offer both HGST and WD product brands and main-
tain separate sales teams that will separately offer products under the WD and HGST brands for two years from the
date of the decision.
As a result of MOFCOM’s decision, we immediately began planning for the integration of the substantial por-
tions of our HGST and WD subsidiaries that we are now allowed to integrate (including corporate functions, R&D,
recording heads and magnetic media operations, engineering and manufacturing). We expect this integration to con-
tinue through the end of calendar year 2017. Our integration efforts during this time may involve significant
management time and create uncertainty for employees and customers. Any delays in the integration process could
have a material adverse effect on our business, results of operations and financial condition. It is possible that the
integration process could result in the loss of key employees, the loss of customers, the disruption of our company’s
ongoing business or in unexpected integration issues, higher than expected integration costs and an overall integration
process that takes longer than originally anticipated. Additionally, the integration of the operations of our HGST and
Western Digital Technologies, Inc. (“WDT”) subsidiaries may also increase the risk that our internal controls are
found to be ineffective. Further, until we are able to begin combining our HGST and WD product brands and sales
teams following the expiration of the MOFCOM restrictions on October 19, 2017, we will continue to incur addi-
tional costs to maintain separate brands and sales teams. These additional costs, along with any delay in the
integration process or higher than expected integration costs or other integration issues, could adversely affect our
ability to achieve the full operating expense synergies we expect from integration of the businesses of our HGST and
WDT subsidiaries. Any failure to achieve the full operating expense synergies that we expect from this integration
could harm our business and financial condition. Achieving these synergies is also subject to significant business,
operational, economic and competitive uncertainties and contingencies, and we cannot assure you that any or all of
these synergies will be achieved in the anticipated amounts or within the anticipated time frames or cost expectations
or at all.
The loss of our key executive management, staff and skilled employees, the inability to hire and integrate new employees or
decisions to realign our business could negatively impact our business prospects.
Our success depends upon the continued contributions of our key management, staff and skilled employees,
many of whom would be extremely difficult to replace. Global competition for skilled employees in the data storage
industry is intense and, as we attempt to move to a position of technology leadership in the storage industry, our
business success becomes increasingly dependent on our ability to retain our key staff and skilled employees, to
attract, integrate and retain new skilled employees, including employees from acquisitions, and to make decisions to
realign our business to take advantage of efficiencies or reduce redundancies. Volatility or lack of positive performance
in our stock price and the overall markets may adversely affect our ability to retain key staff or skilled employees who
have received equity compensation. Additionally, because a substantial portion of our key employees’ compensation is
placed “at risk” and linked to the performance of our business, when our operating results are negatively impacted, we
are at a competitive disadvantage for retaining and hiring key management, staff and skilled employees versus other
companies that pay a relatively higher fixed salary. If we lose our existing key management, staff or skilled employees,
or are unable to hire and integrate new key management, staff or skilled employees, or if we fail to implement succes-
sion plans for our key management or staff, our operating results would likely be harmed. Furthermore, if we do not
realize the anticipated benefits of our intended realignment after we make decisions regarding our personnel and
implement our realignment plans, our operating results could be adversely affected.
31
We and certain of our officers are at times involved in litigation, investigations and governmental proceedings, which may be
costly, may divert the efforts of our key personnel and could result in adverse court rulings, fines or penalties, which could
materially harm our business.
We are involved in litigation, including cases involving our IP rights and those of others, antitrust and commer-
cial matters, putative securities class action suits and other actions. We are the plaintiff in some of these actions and
the defendant in others. Some of the actions seek injunctive relief, including injunctions against the sale of our prod-
ucts, and substantial monetary damages, which if granted or awarded, could materially harm our business, financial
condition and operating results. From time to time, we may also be the subject of inquiries, requests for information,
investigations and actions by government and regulatory agencies regarding our businesses. Any such matters could
result in material adverse consequences to our results of operations, financial condition or ability to conduct our busi-
ness, including fines, penalties or restrictions on our business activities.
Litigation is subject to inherent risks and uncertainties that may cause actual results to differ materially from our
expectations. In the event of an adverse outcome in any litigation, investigation or governmental proceeding, we could
be required to pay substantial damages, fines or penalties and cease certain practices or activities, including the manu-
facture, use and sale of products. With or without merit, such matters can be complex, can extend for a protracted
period of time, can be very expensive and the expense can be unpredictable. Litigation initiated by us could also result
in counter-claims against us, which could increase the costs associated with the litigation and result in our payment of
damages or other judgments against us. In addition, litigation, investigations or governmental proceedings and any
related publicity, may divert the efforts and attention of some of our key personnel and may also harm the market
prices of our securities.
We may be obligated to indemnify our current or former directors or employees, or former directors or employ-
ees of companies that we have acquired, in connection with litigation, investigations or governmental proceedings.
These liabilities could be substantial and may include, among other things: the costs of defending lawsuits against
these individuals; the cost of defending shareholder derivative suits; the cost of governmental, law enforcement or
regulatory investigations or proceedings; civil or criminal fines and penalties; legal and other expenses; and expenses
associated with the remedial measures, if any, which may be imposed.
We are subject to laws, rules, and regulations in the U.S. and other countries relating to the collection, use, sharing, and security
of third-party data including personal data, and our failure to comply with these laws, rules and regulations could subject us to
proceedings by governmental entities or others and cause us to incur penalties, significant legal liability, or loss of customers, loss
of revenue, and reputational harm.
We are subject to laws, rules, and regulations in the U.S. and other countries relating to the collection, use, and
security of third-party data including data that relates to or identifies an individual person. In many cases, these laws
apply not only to third-party transactions, but also to transfers of information between us and our subsidiaries, and
among us, our subsidiaries and other parties with which we have commercial relations. Our possession and use of
third-party data, including personal data and employee data in conducting our business subjects us to legal and regu-
latory burdens that may require us to notify vendors, customers or employees or other parties with which we have
commercial relations of a data security breach and to respond to regulatory inquiries and to enforcement proceedings.
Global privacy and data protection legislation, enforcement, and policy activity in this area are rapidly expanding and
evolving, and may be inconsistent from jurisdiction to jurisdiction. Compliance requirements and even our
inadvertent failure to comply with applicable laws may cause us to incur substantial costs, subject us to proceedings
by governmental entities or others, and cause us to incur penalties or other significant legal liability, or lead us to
change our business practices.
The nature of our industry and its reliance on IP and other proprietary information subjects us and our suppliers, customers and
partners to the risk of significant litigation.
The data storage industry has been characterized by significant litigation. This includes litigation relating to
patent and other IP rights, product liability claims and other types of litigation. We have historically been involved in
frequent disputes regarding patent and other IP rights, and we have in the past received, and we may in the future
receive, communications from third parties asserting that certain of our products, processes or technologies infringe
32
upon their patent rights, copyrights, trademark rights or other IP rights. We may also receive claims of potential
infringement if we attempt to license IP to others. IP risks increase when we enter into new markets where we have
little or no IP protection as a defense against litigation. The complexity of the technology involved and the
uncertainty of IP litigation increase the IP risks we face. Litigation can be expensive, lengthy and disruptive to normal
business operations. Moreover, the results of litigation are inherently uncertain and may result in adverse rulings or
decisions. We may be subject to injunctions, enter into settlements or be subject to judgments that may, individually
or in the aggregate, have a material adverse effect on our business, financial condition or operating results.
If we incorporate third-party technology into our products or if claims or actions are asserted against us for
alleged infringement of the IP of others, we may be required to obtain a license or cross-license, modify our existing
technology or design a new non-infringing technology. Such licenses or design modifications can be extremely costly.
We evaluate notices of alleged patent infringement and notices of patents from patent holders that we receive from
time to time. We may decide to settle a claim or action against us, which settlement could be costly. We may also be
liable for any past infringement. If there is an adverse ruling against us in an infringement lawsuit, an injunction
could be issued barring production or sale of any infringing product. It could also result in a damage award equal to a
reasonable royalty or lost profits or, if there is a finding of willful infringement, treble damages. Any of these results
would increase our costs and harm our operating results. In addition, our suppliers, customers and partners are subject
to similar risks of litigation, and a material, adverse ruling against a supplier, customer or partner could negatively
impact our business.
Moreover, from time to time, we agree to indemnify certain of our suppliers and customers for alleged IP
infringement. The scope of such indemnity varies but may include indemnification for direct and consequential
damages and expenses, including attorneys’ fees. We may be engaged in litigation as a result of these indemnification
obligations. Third party claims for patent infringement are excluded from coverage under our insurance policies. A
future obligation to indemnify our customers or suppliers may harm our business, financial condition and operating
results.
Our reliance on IP and other proprietary information subjects us to the risk that these key ingredients of our business could be
copied by competitors.
Our success depends, in significant part, on the proprietary nature of our technology, including non-patentable
IP such as our process technology. We primarily rely on patent, copyright, trademark and trade secret laws, as well as
nondisclosure agreements and other methods, to protect our proprietary technologies and processes. There can be no
assurance that our existing patents will continue to be held valid, if challenged, or that they will have sufficient scope
or strength to protect us. It is also possible that competitors or other unauthorized third parties may obtain, copy, use
or disclose, illegally or otherwise, our proprietary technologies and processes, despite our efforts to protect our propri-
etary technologies and processes. If a competitor is able to reproduce or otherwise capitalize on our technology despite
the safeguards we have in place, it may be difficult, expensive or impossible for us to obtain necessary legal protection.
There are entities whom we believe may infringe our IP. Enforcement of our rights often requires litigation. If we
bring a patent infringement action and are not successful, our competitors would be able to use similar technology to
compete with us. Moreover, the defendant in such an action may successfully countersue us for infringement of their
patents or assert a counterclaim that our patents are invalid or unenforceable. Also, the laws of some foreign countries
may not protect our IP to the same extent as do U.S. laws. In addition to patent protection of IP rights, we consider
elements of our product designs and processes to be proprietary and confidential. We rely upon employee, consultant
and vendor non-disclosure agreements and contractual provisions and a system of internal safeguards to protect our
proprietary information. However, any of our registered or unregistered IP rights may be challenged or exploited by
others in the industry, which could harm our operating results.
The success of our branded products depends in part on the positive image that consumers have of our brands.
We believe the popularity of our brands makes them a target of counterfeiting or imitation, with third parties
attempting to pass off counterfeit products as our products. Any occurrence of counterfeiting, imitation or confusion
with our brands could adversely affect our reputation and impair the value of our brands, which in turn could neg-
atively impact sales of our branded products, our share and our gross margin, as well as increase our administrative
costs related to brand protection and counterfeit detection and prosecution.
33
The costs of compliance with state, federal and international legal and regulatory requirements, such as environmental, labor,
trade, health, safety, anti-corruption and tax regulations, customers’ standards of corporate citizenship, and industry and
coalition standards, such as those established by the Electronics Industry Citizenship Coalition (“EICC”), could cause an increase
in our operating costs.
We are subject to, and may become subject to additional, state, federal and international laws and regulations
governing our environmental, labor, trade, health, safety, anti-corruption and tax practices. These laws and regu-
lations, particularly those applicable to our international operations, are or may be complex, extensive and subject to
change. We will need to ensure that we and our suppliers and partners timely comply with such laws and regulations,
which may result in an increase in our operating costs. Legislation has been, and may in the future be, enacted in loca-
tions where we manufacture or sell our products. In addition, climate change and financial reform legislation is a sig-
nificant topic of discussion and has generated and may continue to generate federal, international or other regulatory
responses in the near future. If we or our suppliers or partners fail to timely comply with applicable legislation, our
customers may refuse to purchase our products or we may face increased operating costs as a result of taxes, fines or
penalties, or legal liability and reputational damage, which would have a materially adverse effect on our business,
operating results and financial condition.
In connection with our compliance with environmental laws and regulations, as well as our compliance with
industry and coalition environmental initiatives, such as those established by the EICC, the standards of business
conduct required by some of our customers, and our commitment to sound corporate citizenship in all aspects of our
business, we could incur substantial compliance and operating costs and be subject to disruptions to our operations
and logistics. In addition, if we were found to be in violation of these laws or noncompliant with these initiatives or
standards of conduct, we could be subject to governmental fines, liability to our customers and damage to our reputa-
tion and corporate brand which could cause our financial condition and operating results to suffer.
Conflict minerals regulations may cause us to incur additional expenses and could limit the supply and increase the cost of certain
components and metals contained in our products.
We are subject to the SEC’s diligence and disclosure requirements regarding the use and source of gold, tanta-
lum, tin and tungsten, commonly referred to as 3TG or conflict minerals, which are necessary to the functionality or
production of products manufactured or contracted to be manufactured by public companies. As a result of these rules,
we report annually regarding whether such 3TG originated from the Democratic Republic of the Congo or an adjoin-
ing country. These rules could affect our ability to source components that contain 3TG, or 3TG generally, at accept-
able prices and could impact the availability of such components or 3TG, since there may be only a limited number of
suppliers of “conflict free” 3TG. Our customers, including our OEM customers, may require, and some of our
customers have notified us that they require, that our products contain only conflict free 3TG, and our revenues and
margins may be harmed if we are unable to meet this requirement at a reasonable price, or at all, or are unable to pass
through any increased costs associated with meeting this requirement. Additionally, we may suffer reputational harm
with our customers and other stakeholders and challenges from government regulators if our products are not conflict
free or if we are unable to sufficiently verify the origins of the 3TG contained in our products through the due dili-
gence procedures that we implement. We could incur significant costs to the extent that we are required to make
changes to products, processes, or sources of supply due to the foregoing requirements or pressures. Conflict minerals
legislation in Europe, Canada or any other jurisdiction, could increase these risks.
Violation of applicable laws, including labor or environmental laws, and certain other practices by our suppliers, customers or
partners could harm our business.
We expect our suppliers, customers and partners to operate in compliance with applicable laws and regulations,
including labor and environmental laws, and to otherwise meet our required standards of conduct. While our internal
operating guidelines promote ethical business practices, we do not control our suppliers, customers, partners or their
labor or environmental practices. The violation of labor, environmental or other laws by any of them, or divergence of
their business practices from those generally accepted as ethical, could harm our business by:
‰ interrupting or otherwise disrupting the shipment of our product components;
‰ damaging our reputation;
34
‰ forcing us to find alternate component sources;
‰ reducing demand for our products (for example, through a consumer boycott); or
‰ exposing us to potential liability for our suppliers’, customers’ or partners’ wrongdoings.
Flash Ventures’ equipment lease agreements contain covenants and other cancellation events, and cancellation of the leases would
harm our business, operating results and financial condition.
Flash Ventures sells and leases back from a consortium of financial institutions (“lessors”) a portion of its equip-
ment and Flash Ventures has entered into equipment lease agreements, most of which we and Toshiba each guarantee
half of the total outstanding obligations and some of which we guarantee in full for our share of the Flash Ventures
investment. As of June 30, 2017, the portion of outstanding Flash Ventures’ lease obligations covered by our guaran-
tees totaled approximately $968 million, based upon the Japanese yen to U.S. dollar exchange rate at June 30, 2017.
The equipment lease agreements contain covenants and cancellation events that are customary for Japanese lease facili-
ties and that relate to Flash Ventures and each of the guarantors. Cancellation events relating to the guarantors
include, among other things, an assignment of all or a substantial part of a guarantor’s business, a bankruptcy event
involving a guarantor and acceleration of other monetary debts of a guarantor above a specified threshold.
The breach of a covenant or the occurrence of another cancellation event could result in an acceleration of the
Flash Ventures’ lease obligations. If a cancellation event were to occur, Flash Ventures would be required to negotiate
a resolution with the lessors, as well as other parties to the lease transactions, to avoid cancellation and acceleration of
the lease obligations. Such resolution could include, among other things, supplementary security to be supplied by us,
as guarantor, increased interest rates or waiver fees. If a cancellation event occurs and we fail to reach a resolution, we
may be required to pay all or a portion of the outstanding lease obligations covered by our guarantees, which would
significantly reduce our cash position and may force us to seek additional financing, which may not be available on
terms acceptable to us, if at all.
Any decisions to reduce or discontinue paying cash dividends to our shareholders could cause the market price for our common stock
to decline.
We may modify, suspend or cancel our cash dividend policy in any manner and at any time. Any reduction or
discontinuance by us of the payment of quarterly cash dividends could cause the market price of our common stock to
decline. Moreover, in the event our payment of quarterly cash dividends are reduced or discontinued, our failure or
inability to resume paying cash dividends at historical levels could cause the market price of our common stock to
decline.
Fluctuations in currency exchange rates as a result of our international operations may negatively affect our operating results.
Because we manufacture and sell our products abroad, our revenue, cost of goods sold, margins, operating costs
and cash flows are impacted by fluctuations in foreign currency exchange rates. If the U.S. dollar exhibits sustained
weakness against most foreign currencies, the U.S. dollar equivalents of unhedged manufacturing costs could increase
because a significant portion of our production costs are foreign-currency denominated. Conversely, there would not
be an offsetting impact to revenues since revenues are substantially U.S. dollar denominated. Additionally, we nego-
tiate and procure some of our component requirements in U.S. dollars from non-U.S. based vendors. If the U.S. dollar
weakens against other foreign currencies, some of our component suppliers may increase the price they charge for their
components in order to maintain an equivalent profit margin. In addition, our purchases of NAND-flash memory
from Flash Ventures and our investment in Flash Ventures are denominated in Japanese yen. If the Japanese yen
appreciates against the U.S. dollar, our cost of purchasing NAND-flash memory wafers and the cost to us of future
capital funding of Flash Ventures would increase, which could negatively impact our operating results. If any of these
events occur, they would have a negative impact on our operating results.
Prices for our products are substantially U.S. dollar denominated, even when sold to customers that are located
outside the U.S. Therefore, as a substantial portion of our sales are from countries outside the U.S., fluctuations in
currency exchanges rates, most notably the strengthening of the U.S. dollar against other foreign currencies, contrib-
ute to variations in sales of products in impacted jurisdictions and could adversely impact demand and revenue
growth. In addition, currency variations can adversely affect margins on sales of our products in countries outside the
U.S.
35
We attempt to manage the impact of foreign currency exchange rate changes by, among other things, entering
into short-term, foreign exchange contracts. However, these contracts do not cover our full exposure, and can be can-
celed by the counterparty if currency controls are put in place. Thus, our decisions and hedging strategy with respect
to currency risks may not be successful and harm our operating results. Further, the ability to enter into foreign
exchange contracts with financial institutions is based upon our available credit from such institutions and compliance
with covenants and other restrictions. Operating losses, third party downgrades of our credit rating or instability in
the worldwide financial markets could impact our ability to effectively manage our foreign currency exchange rate
risk. Hedging also exposes us to the credit risk of our counterparty financial institutions.
Increases in our customers’ credit risk could result in credit losses and term extensions under existing contracts with customers with
credit losses could result in an increase in our operating costs.
Some of our OEM customers have adopted a subcontractor model that requires us to contract directly with
companies, such as ODMs, that provide manufacturing and fulfillment services to our OEM customers. Because these
subcontractors are generally not as well capitalized as our direct OEM customers, this subcontractor model exposes us
to increased credit risks. Our agreements with our OEM customers may not permit us to increase our product prices
to alleviate this increased credit risk. Additionally, as we attempt to expand our OEM and distribution channel sales
into emerging economies such as Brazil, Russia, India and China, the customers with the most success in these regions
may have relatively short operating histories, making it more difficult for us to accurately assess the associated credit
risks. Any credit losses we may suffer as a result of these increased risks, or as a result of credit losses from any sig-
nificant customer, especially in situations where there are term extensions under existing contracts with such custom-
ers, would increase our operating costs, which may negatively impact our operating results.
Our operating results fluctuate, sometimes significantly, from period to period due to many factors, which may result in a
significant decline in our stock price.
Our quarterly operating results may be subject to significant fluctuations as a result of a number of other factors
including:
‰ weakness in demand for one or more product categories;
‰ the timing of orders from and shipment of products to major customers, loss of major customers;
‰ our product mix;
‰ reductions in the ASPs of our products and lower margins;
‰ excess output, capacity or inventory, resulting in lower ASPs, financial charges or impairments, or insufficient
output, capacity or inventory, resulting in lost revenue opportunities;
‰ inability to successfully transition to 3D NAND or other technology developments, or other failure to reduce
product costs to keep pace with reduction in ASPs;
‰ manufacturing delays or interruptions;
‰ delays in design wins or customer qualifications, acceptance by customers of competing products in lieu of our
products;
‰ success of our partnerships and joint ventures, in particular the volume, timing and cost of wafer production at
Flash Ventures, and our success in managing the relationships with our strategic partners;
‰ inability to realize the potential benefits of our acquisitions and the success of our integration efforts;
‰ ability to penetrate new markets for our storage solutions;
‰ variations in the cost of and lead times for components for our products, disruptions of our supply chain;
‰ limited availability of components that we obtain from a single or a limited number of suppliers;
‰ seasonal and other fluctuations in demand often due to technological advances;
36
‰ increase in costs due to warranty claims;
‰ higher costs as a result of currency exchange rate fluctuations; and
‰ availability and rates of transportation.
We often ship a high percentage of our total quarterly sales in the third month of the quarter, which makes it
difficult for us to forecast our financial results before the end of the quarter. As a result of the above or other factors,
our forecast of operating results for the quarter may differ materially from our actual financial results. If our results of
operations fail to meet the expectations of analysts or investors, it could cause an immediate and significant decline in
our stock price.
We have made and continue to make a number of estimates and assumptions relating to our consolidated financial reporting, and
actual results may differ significantly from our estimates and assumptions.
We have made and continue to make a number of estimates and assumptions relating to our consolidated finan-
cial reporting. The highly technical nature of our products and the rapidly changing market conditions with which we
deal means that actual results may differ significantly from our estimates and assumptions. These changes have
impacted our financial results in the past and may continue to do so in the future. Key estimates and assumptions for
us include:
‰ price protection adjustments and other sales promotions and allowances on products sold to retailers, resellers
and distributors;
‰ inventory adjustments for write-down of inventories to lower of cost or market value (net realizable value);
‰ testing of goodwill and other long-lived assets for impairment;
‰ accruals for product returns;
‰ accruals for litigation and other contingencies; and
‰ liabilities for unrecognized tax benefits.
In addition, changes in existing accounting or taxation rules or practices, new accounting pronouncements or
taxation rules, or varying interpretations of current accounting pronouncements or taxation practice could have an
adverse effect on our results of operations and financial condition.
The market price of our common stock is volatile.
The market price of our common stock has been, and may continue to be, volatile. Factors that may significantly
affect the market price of our common stock include the following:
‰ actual or anticipated fluctuations in our operating results, including those resulting from the seasonality of our
business;
‰ announcements of technological innovations by us or our competitors, which may decrease the volume and
profitability of sales of our existing products and increase the risk of inventory obsolescence;
‰ new products introduced by us or our competitors;
‰ strategic actions by us or competitors, such as acquisitions and restructurings;
‰ periods of severe pricing pressures due to oversupply or price erosion resulting from competitive pressures or
industry consolidation;
‰ developments with respect to patents or proprietary rights, and any litigation;
‰ proposed or adopted regulatory changes or developments or anticipated or pending investigations, proceedings
or litigation that involve or affect us or our competitors;
‰ conditions and trends in the hard drive, solid-state storage, flash memory, computer, mobile, data and content
management, storage and communication industries;
37
‰ contraction in our operating results or growth rates that are lower than our previous high growth-rate periods;
‰ failure to meet analysts’ revenue or earnings estimates or changes in financial estimates or publication of
research reports and recommendations by financial analysts relating specifically to us or the storage industry in
general;
‰ announcements relating to dividends and share repurchases; and
‰ macroeconomic conditions that affect the market generally and, in particular, developments related to market
conditions for our industry.
In addition, the sale of substantial amounts of shares of our common stock, or the perception that these sales may
occur, could adversely affect the market price of our common stock. Further, the stock market is subject to fluctua-
tions in the stock prices and trading volumes that affect the market prices of the stock of public companies, including
us. These broad market fluctuations have adversely affected and may continue to adversely affect the market price of
shares of our common stock. For example, expectations concerning general economic conditions may cause the stock
market to experience extreme price and volume fluctuations from time to time that particularly affect the stock prices
of many high technology companies. These fluctuations may be unrelated to the operating performance of the compa-
nies.
Securities class action lawsuits are often brought against companies after periods of volatility in the market price
of their securities. A number of such suits have been filed against us in the past, and should any new lawsuits be filed,
such matters could result in substantial costs and a diversion of resources and management’s attention.
Our cash balances and investment portfolio are subject to various risks, any of which could adversely impact our financial
position.
Given the international footprint of our business, we have both domestic and international cash balances and
investments. We maintain an investment portfolio of various holdings, security types, and maturities. These invest-
ments are subject to general credit, liquidity, market, political, sovereign and interest rate risks, which may be
exacerbated by unusual events that affect global financial markets. A material part of our investment portfolio consists
of investment grade corporate securities, bank deposits, asset backed securities and U.S. government and agency secu-
rities. If global credit and equity markets experience prolonged periods of decline, or if there is a downgrade of the
U.S. government credit rating due to an actual or threatened default on government debt, our investment portfolio
may be adversely impacted and we could determine that our investments may experience an other-than-temporary
decline in fair value, requiring impairment charges that could adversely affect our financial results. A failure of any of
these financial institutions in which deposits exceed Federal Deposit Insurance Corporation (“FDIC”) limits could also
have an adverse impact on our financial position.
In addition, if we are unable to generate sufficient cash flows from operations to repay our indebtedness, fund
acquisitions, pay dividends, or repurchase shares of our common stock, we may choose or be required to increase our
borrowings, if available, or to repatriate funds to the U.S. at a substantial tax cost. We must comply with regulations
regarding the conversion and distribution of funds earned in the local currencies of various countries. If we cannot
comply with these or other applicable regulations, we may face increased difficulties in using cash generated in these
countries.
If our internal controls are found to be ineffective, our stock price may be adversely affected.
Our most recent evaluation resulted in our conclusion that as of June 30, 2017, in compliance with Section 404
of the Sarbanes-Oxley Act of 2002, our internal control over financial reporting was effective. If our internal control
over financial reporting is found to be ineffective or if we identify a material weakness in our financial reporting in
future periods, investors may lose confidence in the reliability of our financial statements, we may be required to
restate our financial results, our access to capital markets may be limited, and we may be subject to sanctions from
regulatory agencies and The NASDAQ Global Select Market, each of which may adversely affect our stock price.
38
From time to time we may become subject to income tax examinations or similar proceedings, and as a result we may incur
additional costs and expenses or owe additional taxes, interest and penalties that may negatively impact our operating results.
We are subject to income taxes in the U.S. and certain foreign jurisdictions, and our determination of our tax
liability is subject to review by applicable domestic and foreign tax authorities. For example, as we have previously
disclosed, we are under examination by the Internal Revenue Service for certain fiscal years and in connection with
that examination, we received a Revenue Agent’s Report seeking certain adjustments to income as disclosed in Part II,
Item 8, Note 13, Income Tax Expense (Benefit), of the Notes to Consolidated Financial Statements included in this
Annual Report on Form 10-K. Although we believe our tax positions are properly supported, the final timing and
resolution of any tax examinations are subject to significant uncertainty and could result in our having to pay amounts
to the applicable tax authority in order to resolve examination of our tax positions, which could result in an increase or
decrease of our current estimate of unrecognized tax benefits and may negatively impact our financial position, results
of operations or cash flows.
We are subject to risks associated with loss or non-renewal of favorable tax treatment under agreements or treaties with foreign
tax authorities.
Portions of our operations are subject to a reduced tax rate or are free of tax under various tax holidays that expire
in whole or in part from time to time, or may be terminated if certain conditions are not met. Although many of these
holidays may be extended when certain conditions are met, we may not be able to meet such conditions. If the tax
holidays are not extended, or if we fail to satisfy the conditions of the reduced tax rate, then our effective tax rate could
increase in the future. In addition, any actions by us to repatriate non-U.S. earnings for which we have not previously
provided for U.S. taxes may impact our effective tax rate.
Changes in tax laws could increase our worldwide tax rate and materially affect our financial position and results of operations.
Tax laws are dynamic and subject to change as new laws and regulations are passed and new interpretations of
the laws are issued or applied. While the former U.S. administration and members of Congress made public state-
ments indicating that tax reform is a priority, and certain changes to the U.S. tax laws and regulations have been made
and others proposed, additional changes may be proposed by the current U.S. administration or members of Congress
and new U.S. tax laws and regulations may go into effect. In addition, many countries in the European Union and
around the globe have adopted and/or proposed changes to current tax laws. Further, organizations such as the Orga-
nization for Economic Cooperation and Development, have published action plans that, if adopted by countries where
we do business, could increase our tax obligations in these countries. Due to the large scale of our U.S. and interna-
tional business activities, many of these enacted and proposed changes to the taxation of our activities could increase
our worldwide effective tax rate and harm our financial position and results of operations.
Item 1B. UnresolvedStaffComments
Not applicable.
39
Item 2.
Properties
Our principal executive offices are located in San Jose, California. Our leased facilities are occupied under leases
that expire at various times through 2027. Our principal manufacturing, R&D, marketing and administrative facili-
ties as of June 30, 2017 were as follows:
Location
United States
California
Buildings
Owned or
Leased
Approximate
Square
Footage
Description
Fremont . . . . . . . . . . . . . . . . . . . . . . . . . . . . Owned
Irvine . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Leased
Milpitas . . . . . . . . . . . . . . . . . . . . . . . . . . . . Owned
392,000 Manufacturing of head wafers and R&D
490,000
589,000
R&D, administrative, marketing and sales
R&D, marketing and sales, operations and
administrative
San Jose . . . . . . . . . . . . . . . . . . . . . . . . . . . . Owned and
2,887,000 Manufacturing of head wafers, head, media and
Leased
product development, R&D, administrative,
marketing and sales
Colorado
Longmont . . . . . . . . . . . . . . . . . . . . . . . . . . .
Leased
62,000
R&D
Minnesota
Rochester . . . . . . . . . . . . . . . . . . . . . . . . . . .
Leased
118,000
Product development
Asia
China
Shanghai . . . . . . . . . . . . . . . . . . . . . . . . . . . . Owned
Shenzhen . . . . . . . . . . . . . . . . . . . . . . . . . . . Owned and
715,000
548,000 Manufacturing of media and administrative
Assembly and test
Leased
Japan
Fujisawa . . . . . . . . . . . . . . . . . . . . . . . . . . . . Owned
661,000
Product development
Malaysia
Johor
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Owned
Kuala Lumpur . . . . . . . . . . . . . . . . . . . . . . . Owned
Kuching . . . . . . . . . . . . . . . . . . . . . . . . . . . . Owned
Penang . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Owned
Philippines
Laguna . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Owned
Leased
Singapore
Thailand
271,000 Manufacturing of substrates
1,074,000 Manufacturing of hard drives and R&D
285,000 Manufacturing and development of substrates
1,075,000
Assembly and test, manufacturing of media and
SSDs, and R&D
621,000 Manufacturing of HGAs and slider fabrication
324,000
R&D and administrative
Bang Pa-In . . . . . . . . . . . . . . . . . . . . . . . . . . Owned
1,665,000
Slider fabrication, manufacturing of hard drives
and HGAs, and R&D
Navanakorn . . . . . . . . . . . . . . . . . . . . . . . . . Owned
. . . . . . . . . . . . . . . . . . . . . . . . . Owned
Prachinburi
290,000 Manufacturing of HGAs
729,000 Manufacturing of hard drives
India
Bangalore . . . . . . . . . . . . . . . . . . . . . . . . . . . Owned
240,000
R&D, marketing and administrative
Middle East
Israel
Kfar Saba . . . . . . . . . . . . . . . . . . . . . . . . . . . Owned
Tefen . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Owned
167,000
64,000
R&D, marketing and administrative
R&D, marketing and administrative
We also lease office space in various other locations throughout the world primarily for R&D, sales, operations,
administration and technical support. We believe our present facilities are adequate for our current needs, although we
upgrade our facilities from time to time to meet anticipated future technological and market requirements. In general,
new manufacturing facilities can be developed and become operational within approximately nine to eighteen months
should we require such additional facilities.
40
Item 3.
LegalProceedings
For a description of our legal proceedings, see Part II, Item 8, Note 17, Legal Proceedings, of the Notes to Con-
solidated Financial Statements included in this Annual Report on Form 10-K, which is incorporated by reference in
response to this item.
Item 4. MineSafetyDisclosures
Not applicable.
41
PART II
Item 5. MarketforRegistrant’sCommonEquity,RelatedStockholderMattersandIssuer
PurchasesofEquitySecurities
Market Information for Common Stock
Our common stock is listed on the NASDAQ Global Select Market (“NASDAQ”) under the symbol “WDC.”
The approximate number of holders of record of our common stock as of August 16, 2017 was 1,069.
The high and low sales prices of our common stock as reported by NASDAQ for each quarter of 2017 and 2016
were as follows:
Quarter Ended
High
Low
September 30, 2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
December 30, 2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
March 31, 2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
June 30, 2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$59.86
$72.01
$84.28
$95.00
$43.09
$52.10
$68.58
$80.51
Quarter Ended
High
Low
October 2, 2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
January 1, 2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
April 1, 2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
July 1, 2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$88.46
$86.39
$60.97
$51.27
$67.87
$57.94
$38.64
$34.99
Repurchases of Equity Securities
There were no repurchases by us of shares of our common stock during 2017.
Dividends to Shareholders
On September 13, 2012, we announced that our Board of Directors had authorized the adoption of a quarterly
cash dividend policy. Under the cash dividend policy, holders of our common stock receive dividends when and as
declared by our Board of Directors. In 2017, we declared aggregate cash dividends of $2.00 per share of our common
stock, totaling $579 million. We may modify, suspend, or cancel our cash dividend policy in any manner and at any
time.
The following table provides information about the quarterly dividends our Board of Directors declared in the
last two fiscal years.
Record Date
Payment Date
Dividend Per
Share
October 2, 2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . October 15, 2015
January 15, 2016
January 1, 2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
April 15, 2016
April 1, 2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
July 1, 2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
July 15, 2016
September 30, 2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . October 17, 2016
January 17, 2017
December 30, 2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
April 17, 2017
March 31, 2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
July 17, 2017
June 30, 2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$0.50
$0.50
$0.50
$0.50
$0.50
$0.50
$0.50
$0.50
42
Stock Performance Graph
The following graph compares the cumulative total stockholder return of our common stock with the cumulative
total return of the S&P 500 Index and the Dow Jones US Technology Hardware & Equipment Index for the five years
ended June 30, 2017. The graph assumes that $100 was invested in our common stock at the close of market on
June 29, 2012 and that all dividends were reinvested. Stockholder returns over the indicated period should not be
considered indicative of future stockholder returns.
TOTAL RETURN TO STOCKHOLDERS
(Assumes $100 investment on 6/29/12)
$400
$350
$300
$250
$200
$150
$100
$50
$0
6/29/12
6/28/13
6/27/14
7/3/15
7/1/16
6/30/17
Western Digital Corporation
S&P 500 Index
Dow Jones US Technology Hardware & Equipment Index
Total Return Analysis
Western Digital Corporation . . . . . . . . . . . .
S&P 500 Index . . . . . . . . . . . . . . . . . . . . . . .
Dow Jones US Technology Hardware &
6/29/12
6/28/13
6/27/14
7/3/15
7/1/16
6/30/17
$100.00
$100.00
$208.29
$120.60
$316.45
$150.32
$280.92
$162.54
$167.36
$168.23
$326.27
$197.92
Equipment Index . . . . . . . . . . . . . . . . . . .
$100.00
$ 96.91
$137.92
$156.25
$144.23
$203.76
The stock performance graph shall not be deemed soliciting material or to be filed with the SEC or
subject to Regulation 14A or 14C under the Securities Exchange Act of 1934 or to the liabilities of Section 18
of the Securities Exchange Act of 1934, nor shall it be incorporated by reference into any past or future filing
under the Securities Act of 1933 or the Securities Exchange Act of 1934, except to the extent we specifically
request that it be treated as soliciting material or specifically incorporate it by reference into a filing under
the Securities Act of 1933 or the Securities Exchange Act of 1934.
43
Item 6. SelectedFinancialData
Financial Highlights
This selected consolidated financial data should be read together with the Consolidated Financial Statements and
related Notes contained in this Annual Report on Form 10-K, as well as the section of this Annual Report on
Form 10-K entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
Revenue, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gross profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income per common share:
Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash dividends declared per common share . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Working capital
Total assets
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Shareholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Number of employees(1) . . . . . . . . . . . . . . . . . . . . . . . . . .
(1) Excludes temporary employees and contractors.
June 30,
2017
$19,093
6,072
397
July 1,
2016
June 27,
2014
July 3,
2015
(in millions, except per share and employee data)
$14,572
4,221
1,465
$15,130
4,360
1,617
$12,994
3,435
242
June 28,
2013
$15,351
4,363
980
1.38
$
1.34
$
2.00
$
$ 6,712
$29,860
$12,918
$11,418
67,629
1.01
$
1.00
$
2.00
$
$ 5,635
$32,862
$13,660
$11,145
72,878
6.31
$
6.18
$
1.80
$
$ 5,275
$15,170
$ 2,149
$ 9,219
76,449
6.88
$
6.68
$
1.25
$
$ 4,875
$15,499
$ 2,313
$ 8,842
84,072
4.07
$
3.98
$
1.00
$
$ 3,625
$14,036
$ 1,725
$ 7,893
85,777
Results for SanDisk, Amplidata NV, Virident Systems, Inc., sTec, Inc. and VeloBit, Inc., which were acquired
on May 12, 2016, March 9, 2015, October 17, 2013, September 12, 2013 and July 9, 2013, respectively, are included
in our operating results only after their respective dates of acquisition.
Item 7. Management’sDiscussionandAnalysisofFinancialConditionsandResultsofOperations
Our Company
We are a leading developer, manufacturer and provider of data storage devices and solutions that address the
evolving needs of the information technology (“IT”) industry and the infrastructure that enables the proliferation of
data in virtually every other industry. Our broad portfolio of technology and products address the following key mar-
kets: Data Center Devices and Solutions; Client Devices; and Client Solutions. We also generate license and royalty
revenue related to our IP, which is included in each of the three categories.
Our fiscal year ends on the Friday nearest to June 30 and typically consists of 52 weeks. Approximately every six
years, we report a 53-week fiscal year to align our fiscal year with the foregoing policy. Fiscal years 2017 and 2016,
which ended on June 30, 2017 and July 1, 2016, respectively, both comprised 52 weeks, with all quarters presented
consisting of 13 weeks. Fiscal year 2015, which ended on July 3, 2015, comprised 53 weeks, with the first quarter
consisting of 14 weeks and the second, third and fourth quarters consisting of 13 weeks each.
Key Developments
Acquisition of SanDisk
On May 12, 2016 (the “SanDisk Closing Date”), we completed the acquisition of SanDisk (the “Merger”), a
global leader in NAND-flash storage solutions, pursuant to the terms of the Agreement and Plan of Merger, dated
October 21, 2015. The Merger is primarily intended to deepen our expertise in non-volatile memory and enable us to
vertically integrate into NAND, securing long-term access to solid state technology at a lower cost. The aggregate
purchase price of the Merger was $15.59 billion. This acquisition broadened our product portfolio, significantly
increased our revenues in 2017 and enhanced our gross margins. Operating expenses also increased with the assump-
tion of the SanDisk operations. For additional information on the acquisition, see Part II, Item 8, Note 15, Acquis-
itions, of the Notes to Consolidated Financial Statements included in this Annual Report on Form 10-K.
44
Debt Facilities
In connection with the Merger, we entered into new debt facilities aggregating approximately $18.09 billion in
principal to finance a portion of the purchase price related to the Merger. The proceeds were also used to refinance
certain existing indebtedness of Western Digital and SanDisk, and pay certain transaction costs. This new debt sig-
nificantly increased our interest expense in 2017. During 2017, we repaid a $3.00 billion short-term bridge loan,
made a voluntary $750 million principal payment on one of the term loans and entered into several repricing trans-
actions that significantly lowered the rate of interest on some of the new term loans. We also settled a substantial
portion of the remaining assumed SanDisk convertible notes. The reductions in principal and the repricing trans-
actions are expected to lower our interest expense going forward compared to 2017. For additional information, see
Part II, Item 8, Note 6, Debt, of the Notes to Consolidated Financial Statements included in this Annual Report on
Form 10-K.
Ventures with Toshiba
Through Flash Ventures, we and Toshiba currently operate three business ventures in 300-millimeter NAND-
flash manufacturing facilities in Yokkaichi, Japan, which provide us leading-edge, cost-competitive NAND wafers for
our end products. Toshiba has announced significant losses related to its U.S. nuclear business and substantial doubt
about its ability to continue as a going concern. Due to Toshiba’s financial condition, Toshiba’s working capital and
access to credit and capital markets are severely limited. Toshiba could become unable to, or otherwise fail to, timely
fund investments in Flash Ventures or our joint development efforts or fulfill its payment obligations to suppliers,
which could harm Flash Ventures’ operations, our joint technology roadmap and supplier relationships. We are
committed to the success of Flash Ventures and we intend to, and have been engaged in discussions with Toshiba to,
jointly invest in Fab 6 equipment with Toshiba. See Part I, Item I, Business: Ventures with Toshiba, for additional
information. For a discussion of risks associated with our business ventures with Toshiba, see Part I, Item 1A, Risk
Factors, of this Annual Report on Form 10-K.
Results of Operations
Summary Comparison of 2017, 2016 and 2015
The following table sets forth, for the periods presented, selected summary information from our consolidated
statements of operations by dollars and percentage of net revenue:
2017
2016
(in millions, except percentages)
2015
Revenue, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cost of revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$19,093
13,021
100.0% $12,994
9,559
68.2
100.0% $14,572
10,351
73.6
100.0%
71.0
Gross profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Operating expenses . . . . . . . . . . . . . . . . . . . . . . . . . .
Operating income . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total interest and other expense, net . . . . . . . . . . . . .
Income before taxes . . . . . . . . . . . . . . . . . . . . . . . . . .
Income tax expense (benefit) . . . . . . . . . . . . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
6,072
4,118
1,954
(1,185)
769
372
397
31.8
21.6
10.2
(6.2)
4.0
1.9
2.1
3,435
2,969
466
(313)
153
(89)
26.4
22.8
3.6
(2.4)
1.2
(0.7)
4,221
2,610
1,611
(34)
1,577
112
$
242
1.9
$ 1,465
29.0
17.9
11.1
(0.2)
10.8
0.8
10.1
45
The following table sets forth, for the periods presented, summary information regarding net revenues by geog-
raphy and end market:
Revenue, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Revenues by Geography (%)
Americas
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Europe, Middle East and Africa . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Asia . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Revenues by End Market (%)
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Client Devices
Data Center Devices & Solutions
. . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Client Solutions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Exabytes Shipped . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2017
2016
(in millions, except exabytes and percentages)
$14,572
$12,994
$19,093
2015
27%
17
56
50%
29
21
313
32%
21
47
48%
38
14
262
28%
22
50
53%
34
13
249
For 2017 and 2016, no customer accounted for 10% or more of our net revenue. For 2015, one customer,
Hewlett-Packard Company, accounted for 11% of our net revenue. For 2017, 2016 and 2015, our top 10 customers
accounted for 36%, 43% and 44%, of our net revenue, respectively.
Fiscal Year 2017 Net Revenue and Gross Margin Compared to Fiscal Year 2016 Net Revenue and Gross Margin
Net Revenue. Net revenue was $19.09 billion for 2017, an increase of $6.10 billion, or 47%, as compared to
2016, primarily due to a full year of revenue from the sale of NAND-flash products following the SanDisk Closing
Date, compared to a partial year of such revenue in the prior year. This increase was partially offset by lower revenue
related to lower PC and enterprise HDD shipments.
Consistent with standard industry practice, we have sales incentive and marketing programs that provide custom-
ers with price protection and other incentives or reimbursements that are recorded as a reduction to gross revenue. For
2017 and 2016, these programs represented 12% and 13% of gross revenues, respectively. The decrease in sales
incentive and marketing programs year-over-year reflects lower incentive programs offered on NAND-flash products
as a result of the Merger. The amounts attributed to our sales incentive and marketing programs also generally vary
according to several factors including industry conditions, seasonal demand, competitor actions, channel mix and
overall availability of products. Changes in future customer demand and market conditions may require us to adjust
our incentive programs as a percentage of gross revenue.
Net Revenue by Geography. Changes in the mix of net revenue by geography for 2017, as compared to 2016,
reflect the additional revenues from the Merger which has comparatively higher revenue in Asia than our
pre-acquisition business.
Net Revenue by End Market. Our end markets include Data Center Devices and Solutions (capacity and perform-
ance enterprise HDD, enterprise SSD, data center software and system solutions); Client Devices (mobile, desktop,
gaming and digital video hard drives, client SSDs, embedded products and wafers); and Client Solutions (removable
products, hard drive content solutions and flash content solutions).
Changes in the mix of net revenue by end market for 2017, as compared to 2016, reflect the full year increase in
revenues from the Merger which has comparatively higher revenue in Client Devices and Client Solutions than our
pre-acquisition business.
Gross Profit and Gross Margin. Gross profit was $6.07 billion for 2017, an increase of $2.64 billion, or 77%, as
compared to 2016, largely driven by the increase in revenue mentioned above. Gross profit for 2017 was negatively
impacted by amortization expense on acquired intangible assets, charges related to the implementation of cost-saving
initiatives, stock-based compensation and acquisition related charges, which aggregated $1.14 billion, or 6.0% of
revenue, for 2017, and $375 million, or 2.9% of revenue, for 2016. Gross margin increased to 31.8% for 2017, as
compared to 26.4% for 2016. The increase in gross margin was primarily due to sales of NAND-flash products
46
following the SanDisk Closing Date, as such products have comparatively higher gross margins than our
pre-acquisition products, cost improvements across all products driven by manufacturing integration activities and
cost improvements as NAND-flash technology transitions to more cost efficient designs.
Fiscal Year 2016 Net Revenue and Gross Margin Compared to Fiscal Year 2015 Net Revenue and Gross Margin
Net Revenue. Net revenue was $12.99 billion for 2016, a decrease of $1.58 billion, or 11%, as compared to 2015,
primarily due to lower HDD unit shipments partially offset by an increase in HDD ASPs and partial year revenues
from SanDisk of $793 million following the SanDisk Closing Date. The decrease in HDD unit shipments was primar-
ily due to a softer demand environment. The increase in HDD ASPs was primarily due to a change in HDD product
mix.
Consistent with standard industry practice, we have sales incentive and marketing programs that provide custom-
ers with price protection and other incentives or reimbursements that are recorded as a reduction to gross revenue. For
2016 and 2015, these programs represented 13% and 10% of gross revenues, respectively. These amounts generally
vary according to several factors including industry conditions, seasonal demand, competitor actions, channel mix and
overall availability of products. Changes in future customer demand and market conditions may require us to adjust
our incentive programs as a percentage of gross revenue.
Net Revenue by Geography. Changes in the mix of net revenue by geography for 2016, as compared to 2015,
reflect a decrease in Asia primarily due to reduced demand of client HDD shipments as a result of a decline in the
desktop and notebook PC market and a decrease in Europe, Middle East and Africa due to lower demand for our client
and retail HDD products primarily due to the continued decline of PC-related after-market sales.
Net Revenue by End Market. Changes in the mix of net revenue by end market for 2016, as compared to 2015,
reflected lower Client Devices revenues primarily due to reduced demand for HDDs as a result of a decline in desktop
and notebook PC market, partially offset by a partial year increase in revenues from the Merger, which has com-
paratively higher revenue in Client Devices and Client Solutions than our pre-acquisition business.
Gross Profit and Gross Margin. Gross profit was $3.44 billion for 2016, a decrease of $786 million, or 19%,
from 2015. Gross margin decreased to 26.4% in 2016, as compared to 29.0% in 2015. This decrease was primarily
the result of lower HDD unit sales and the related absorption impact, and accelerated depreciation on assets related to
both the closure of the Odawara, Japan facility and the restructuring plan (“Restructuring Plan 2016”) associated with
the integration of substantial portions of our HGST and WD subsidiaries. This decrease in gross profit was partially
offset by SanDisk’s gross profit following the SanDisk Closing Date.
Operating Expense
The following table sets forth operating expense information from our Consolidated Statement of Operations by
dollar and percentage(1) of net revenue.
Research and development . . . . . . . . . . . . . . . . . . . . . . . . . .
Selling, general and administrative . . . . . . . . . . . . . . . . . . . .
Employee termination, asset impairment, and other
2017
2016
(in millions, except percentages)
2015
$2,441
1,445
12.8% $1,627
997
7.6
12.5% $1,646
788
7.7
11.3%
5.4
charges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
232
1.2
345
2.6
176
1.2
Total operating expenses . . . . . . . . . . . . . . . . . . . . . . . . . .
$4,118
21.6
$2,969
22.8
$2,610
17.9
(1) Percentages may not total due to rounding.
Fiscal Year 2017 Operating Expenses Compared to Fiscal Year 2016 Operating Expenses
Research and development (“R&D”) expense was $2.44 billion in 2017, an increase of $814 million, or 50%,
from 2016, primarily due to the Merger and continued development of NAND-flash technology. Fiscal year 2017 also
included aggregate charges of $199 million related to stock-based compensation expenses, charges related to the
implementation of cost-saving initiatives, acquisition-related charges and other discrete charges, compared to
$106 million in 2016 related to such charges.
47
Selling, general and administrative (“SG&A”) expense was $1.45 billion in 2017, an increase of $448 million, or
45%, from 2016, primarily due to the Merger. Fiscal year 2017 also included aggregate charges of $404 million,
related to stock-based compensation expenses, amortization expense on acquired intangible assets, charges related to
the implementation of cost-saving initiatives, acquisition-related charges and other discrete charges, compared to
$379 million in 2016 related to such charges.
Employee termination and other charges were $232 million in 2017, a decrease of $113 million, or 33%, from
2016. These charges in 2017 primarily related to further actions under the Restructuring Plan 2016 associated with
the integration and business realignment of substantial portions of our business. For additional information regarding
employee termination, asset impairment and other charges, see Part II, Item 8, Note 16, Employee Termination, Asset
Impairment and Other Charges, of the Notes to Consolidated Financial Statements included in this Annual Report on
Form 10-K.
Fiscal Year 2016 Operating Expenses Compared to Fiscal Year 2015 Operating Expenses
R&D expense was $1.63 billion in 2016, a decrease of $19 million, or 1%, from 2015. This slight decrease was
primarily due to reductions in employee compensation expenses due to a reduction in headcount as a result of our
business realignment initiatives, reduction in material spend due to the consolidation of our product roadmap in rela-
tion to the integration of our HGST and WD subsidiaries and an additional week in the prior year. These decreases
were partially offset by SanDisk’s R&D expenses following the SanDisk Closing Date and expenses related to the
integration of our HGST and WD subsidiaries.
SG&A expense was $997 million in 2016, an increase of $209 million, or 27%, from 2015. This increase was
primarily due to SanDisk’s SG&A expenses following the SanDisk Closing Date, acquisition charges and expenses
related to the integration of our HGST and WD subsidiaries. These charges were partially offset by a reduction in
employee compensation expenses due to a reduction in headcount as a result of our business realignment initiatives
and an additional week in the prior year.
Employee termination, asset impairment and other charges was $345 million in 2016, an increase of
$169 million, or 96%, from 2015 as we implemented our Restructuring Plan 2016 and initiated the closure of our
hard component front-end wafer manufacturing facility in Odawara, Japan. For additional information, see Part II,
Item 8, Note 16, Employee Termination, Asset Impairment and Other Charges, of the Notes to Consolidated Financial
Statements included in this Annual Report on Form 10-K.
Interest and Other Income (Expense)
The following table sets forth interest and other income (expense) information from our Consolidated Statement
of Operations by dollar and percentage(1) of net revenue.
Interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other income (expense), net . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
26
(847)
(364)
0.1% $ 26
(266)
(4.4)
(73)
(1.9)
0.2% $ 14
(49)
(2.0)
1
(0.6)
0.1%
(0.3)
—
Total interest and other expense, net . . . . . . . . . . . . . . . . . . . .
$(1,185)
(6.2)
$(313)
(2.4)
$(34)
(0.2)
2017
2016
2015
(in millions, except percentages)
(1) Percentages may not total due to rounding.
Fiscal Year 2017 Interest and Other Expense, Net Compared to Fiscal Year 2016 Interest and Other Expense, Net
Total interest and other expense, net increased $872 million in 2017, primarily due to a full year of interest
expense in 2017 resulting from the additional debt issued in connection with the Merger compared to only a partial
year of such expense in 2016, as well as losses on the settlements of certain of our term loans (see Part II, Item 8,
Note 6, Debt, of the Notes to Consolidated Financial Statements included in this Annual Report on Form 10-K) and
impairment charges related to our cost-method investments.
48
Fiscal Year 2016 Interest and Other Income (Expense) Compared to Fiscal Year 2015 Interest and Other Income (Expense)
In 2016, Total interest and other expense, net increased $279 million over 2015, primarily due to interest
expense resulting from the additional debt incurred in connection with the Merger, the loss on the settlement of con-
vertible debt and write-off of debt issuance costs on settlement of other previously issued debt.
Income Tax Expense (Benefit)
The following table sets forth income tax information from our Consolidated Statement of Operations by dollar
and effective tax rate.
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income tax expense (benefit)
Effective tax rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fiscal Year 2017 Income Tax Expense Compared to Fiscal Year 2016 Income Tax Benefit
2015
2017
2016
(in millions, except percentages)
$112
$(89)
$372
(58)%
48%
7%
Income tax expense was $372 million in 2017, as compared to an income tax benefit of $89 million in 2016.
Income tax expense as a percentage of income before taxes was 48% in 2017, as compared to income tax benefit as a
percentage of income before taxes of 58% in 2016. Income tax expense in 2017 reflects tax expense from the
integration of SanDisk and a valuation allowance on both acquired tax attributes and net operating loss carryforwards
from restructuring activities. The difference between the effective tax rate and the U.S. Federal statutory rate of 35%
is primarily due to taxes on the integration of SanDisk and an increase in the valuation allowance for both acquired tax
attributes and net operating loss carryforwards from restructuring activities, which are partially offset by the current
year generation of tax credits and foreign income taxed at lower tax rates due to tax holidays in Malaysia, Philippines,
Singapore and Thailand that expire at various dates from 2018 through 2030.
The Internal Revenue Service (“IRS”) previously completed its field examination of our federal income tax
returns for fiscal years 2006 through 2009 and proposed certain adjustments. We have received Revenue Agent
Reports from the IRS that seek to increase our U.S. taxable income which would result in additional federal tax
expense totaling $795 million, subject to interest. The issues in dispute relate primarily to transfer pricing with our
foreign subsidiaries and intercompany payable balances. We disagree with the proposed adjustments and in September
2015, filed a protest with the IRS Appeals Office and received the IRS rebuttal in July 2016. We believe that our tax
positions are properly supported and will vigorously contest the position taken by the IRS. In September 2015, the
IRS commenced an examination of our fiscal years 2010 through 2012.
We believe that adequate provision has been made for any adjustments that may result from tax examinations.
However, the outcome of tax examinations cannot be predicted with certainty. If any issues addressed in our tax
examinations are resolved in a manner not consistent with management’s expectations, we could be required to adjust
our provision for income taxes in the period such resolution occurs. As of June 30, 2017, it is not possible to estimate
the amount of change, if any, in the unrecognized tax benefits that is reasonably possible within the next twelve
months. Any significant change in the amount of our liability for unrecognized tax benefits would most likely result
from additional information or settlements relating to the examination of our tax returns.
For additional information regarding income tax expense (benefit), see Part II, Item 8, Note 13, Income Tax
Expense (Benefit), of the Notes to Consolidated Financial Statements included in this Annual Report on Form 10-K.
Fiscal Year 2016 Income Tax Benefit Compared to Fiscal Year 2015 Income Tax Expense
Income tax benefit was $89 million in 2016, as compared to a $112 million expense in 2015. Tax benefit as a
percentage of income before taxes was 58.2% in 2016, as compared to tax expense of 7.1% in 2015. Fiscal year 2016
income tax benefit reflects tax benefits from expenses related to the Merger and from interest expense related to new
debt facilities. The difference between the effective tax rate and the U.S. Federal statutory rate is primarily due to for-
eign income taxed at lower tax rates due to tax holidays in Malaysia, the Philippines, Singapore and Thailand that
expire at various dates from 2016 through 2029, the current year generation of income tax credits and the tax deduc-
tible expenses related to the Merger.
49
Liquidity and Capital Resources
The following table summarizes our statements of cash flows:
2017
2016
(in millions)
2015
Net cash provided by (used in):
Operating activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Investing activities
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Financing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Effect of exchange rate changes on cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 3,437
(636)
(4,595)
(3)
$ 1,983
(9,608)
10,751
1
$ 2,242
(953)
(1,069)
—
Net increase (decrease) in cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . .
$(1,797)
$ 3,127
$
220
We believe our current cash, cash equivalents and cash generated from operations as well as our available credit
facilities will be sufficient to meet our working capital, debt, dividend and capital expenditure needs for at least the
next twelve months. Our ability to sustain our working capital position is subject to a number of risks that we discuss
in Part I, Item 1A, Risk Factors, in this Annual Report on Form 10-K.
The indebtedness used to finance the Merger could cause us to place more reliance on cash generated from oper-
ations to pay principal and interest on our debt, thereby reducing the availability of our cash flow for working capital,
capital expenditure needs, dividends, or to pursue other potential strategic plans.
During 2018, we expect cash used for purchases of property, plant and equipment and net activity in notes receiv-
able and equity investments relating to Flash Ventures to be approximately $1.5 billion to $1.9 billion of our cash.
The total expected cash to be used could vary depending on the timing and completion of various capital projects and
the availability, timing and terms of related financing.
A total of $4.99 billion and $6.90 billion of our cash and cash equivalents was held outside of the U.S. as of
June 30, 2017 and July 1, 2016, respectively. Our current plans anticipate we can meet our U.S. cash needs while
continuing to permanently reinvest the undistributed earnings of our foreign subsidiaries. In the event the reinvested
earnings of our foreign subsidiaries are distributed to the U.S., such a distribution could result in the accrual and
payment of additional U.S. taxes.
Operating Activities
Cash flow from operating activities consists of net income, adjusted for non-cash charges, plus or minus working
capital changes. This represents our principal source of cash. Net cash provided by changes in working capital was
$91 million for 2017, as compared to net cash provided by changes in working capital of $374 million for 2016 and
net cash used for changes in working capital of $593 million for 2015.
Our working capital requirements primarily depend on the effective management of our cash conversion cycle,
which measures how quickly we can convert our products into cash through sales. The cash conversion cycles were as
follows:
Days sales outstanding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Days in inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Days payables outstanding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash conversion cycle . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2017
37
65
(66)
36
2016
(in days)
41
81
(78)
44
2015
39
49
(67)
21
Changes in days sales outstanding (“DSOs”) are generally due to the linearity of shipments. Changes in days in
inventory (“DIOs”) are generally related to the timing of inventory builds. Changes in days payables outstanding
(“DPOs”) are generally related to production volume and the timing of purchases during the period. From time to
time, we modify the timing of payments to our vendors. We make modifications primarily to manage our vendor
relationships and to manage our cash flows, including our cash balances. Generally, we make the payment term mod-
ifications through negotiations with our vendors or by granting to, or receiving from, our vendors’ payment term
accommodations.
50
The working capital metrics in 2016 were notably impacted by the inclusion of SanDisk’s accounts receivable,
inventory and accounts payable balances as of July 1, 2016, but only including SanDisk’s revenue and cost of sales
following the SanDisk Closing Date. The Merger inflated DSO, DIO and DPO by 12 days, 32 days and 14 days,
respectively. Excluding the impact of the Merger in 2016, DSO in 2017 increased by 8 days over 2016 and was 2 days
lower than 2015, primarily reflecting timing of customer receipts in the prior year. Excluding the impact of the
Merger in 2016, DIO in 2017 increased by 16 days over both 2016 and 2015. The increase in DIO primarily reflects
short-term build-up of inventory to maintain supply as we close certain facilities and transition production. Excluding
the impact of the Merger in 2016, DPO in 2017 increased by 2 days over 2016 and decreased by 1 day from 2015,
primarily reflecting routine variations in timing purchases and payments during the period.
Investing Activities
During 2017, net cash used in investing activities primarily consisted of $578 million of capital expenditures
and a net $277 million increase in notes receivable to and investments in Flash Ventures, partially offset by cash pro-
vided by a net $230 million decrease in our investments in marketable securities. During 2016, net cash used in
investing activities primarily consisted of $9.84 billion related to the Merger, net of cash acquired, $632 million
related to the purchase of investments, $584 million of capital expenditures, $90 million net increase in notes receiv-
able to Flash Ventures and a net $76 million of other investing activities, partially offset by $1.20 billion of proceeds
from sales of investments and $405 million of proceeds from maturities of investments. During 2015, net cash used in
investing activities primarily consisted of $857 million related to the purchase of investments, $612 million of capital
expenditures and $257 million related to acquisitions, net of cash acquired, partially offset by $505 million of pro-
ceeds from sales of investments and $263 million of proceeds from maturities of investments.
Our cash equivalents are primarily invested in highly liquid money market funds that are invested in
U.S. Treasury securities and U.S. Government agency securities as well as bank certificates of deposit. In addition, we
invest directly in U.S. Treasury securities, U.S. and International Government agency securities, certificates of deposit,
asset-backed securities and corporate and municipal notes and bonds.
Financing Activities
During 2017, net cash used in financing activities primarily consisted of $11.70 billion to repay debt,
$574 million to pay dividends on our common stock and $492 million to settle convertible debt, partially offset by
$7.90 billion of proceeds from debt, net of issuance costs, a net $230 million provided by employee stock plans and
$61 million of proceeds from call options. During 2016, net cash provided by financing activities consisted of
$16.58 billion of proceeds from debt, net of issuance costs, $409 million of proceeds from call options, $125 million
of proceeds from borrowings under our revolving credit facility and a net $74 million provided by employee stock
plans, offset by a net $2.61 billion to settle convertible debt, $2.31 billion to repay debt, $613 million for payment
upon settlement of warrants, $464 million to pay dividends on our common stock, $380 million to repay the revolv-
ing credit facility and $60 million to repurchase shares of our common stock. During 2015, net cash used in financing
activities consisted of $970 million to repurchase shares of our common stock, $396 million to pay dividends on our
common stock and $125 million to repay debt, partially offset by $255 million of proceeds from our revolving credit
facility and a net $167 million provided by employee stock plans.
Off-Balance Sheet Arrangements
Other than the commitments related to Flash Ventures, facility lease commitments incurred in the normal
course of business and certain indemnification provisions (see “Contractual Obligations and Commitments” below),
we do not have any other material off-balance sheet financing arrangements or liabilities, guarantee contracts, retained
or contingent interests in transferred assets, or any other obligation arising out of a material variable interest in an
unconsolidated entity. We do not have any majority-owned subsidiaries that are not included in the Consolidated
Financial Statements. Additionally, we do not have an interest in, or relationships with, any special-purpose entities.
For additional information regarding our off-balance sheet arrangements, see Part II, Item 8, Note 9, Commitments,
Contingencies and Related Parties, of the Notes to Consolidated Financial Statements included in this Annual Report on
Form 10-K.
51
Short and Long-term Liquidity
Contractual Obligations and Commitments
The following is a summary of our known contractual cash obligations and commercial commitments as of
June 30, 2017:
Long-term debt, including current portion . . . . . .
Interest on debt . . . . . . . . . . . . . . . . . . . . . . . . . . .
Flash Ventures and other related
commitments(1) . . . . . . . . . . . . . . . . . . . . . . . . .
Operating leases . . . . . . . . . . . . . . . . . . . . . . . . . .
Purchase obligations . . . . . . . . . . . . . . . . . . . . . . .
Total
1 Year (2018)
$13,356
4,467
$ 246
769
2-3 Years
(2019-2020)
(in millions)
$ 802
1,513
4-5 Years
(2021-2022)
More than
5 Years
(Beyond
2022)
$3,312
1,347
$ 8,996
838
7,510
178
1,634
3,096
46
1,575
2,542
73
59
1,502
39
—
370
20
—
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$27,145
$5,732
$4,989
$6,200
$10,224
(1) Includes reimbursement for depreciation and lease payments on owned and committed equipment, funding
commitments for loans and equity investments and reimbursement for other committed expenses, including
R&D. Funding commitments assume no additional operating lease guarantees. Additional operating lease
guarantees can reduce funding commitments.
Debt
See Part II, Item 8, Note 6, Debt, of the Notes to Consolidated Financial Statements included in this Annual
Report on Form 10-K for information regarding our indebtedness, including the principal repayment terms, interest
rates, covenants and other key terms.
Interest Rate Swap
We have entered into interest rate swap agreements to moderate our exposure to fluctuations in interest rates
underlying our variable rate debt. For a description of our current interest rate swaps, see Part II, Item 7A, Quantita-
tive and Qualitative Disclosures About Market Risk and Part II, Item 8, Note 5, Derivative Instruments and Hedging Activ-
ities, of the Notes to Consolidated Financial Statements included in this Annual Report on Form 10-K.
Flash Ventures
Flash Ventures sells and leases back from a consortium of financial institutions a portion of its tools and has
entered into equipment lease agreements of which we guarantee half of the total outstanding obligations. The lease
agreements contain customary covenants for Japanese lease facilities. In addition to containing customary events of
default related to Flash Ventures that could result in an acceleration of Flash Ventures’ obligations, the lease agree-
ments contain acceleration clauses for certain events of default related to the guarantors, including us. As of June 30,
2017, we were in compliance with all covenants under these Japanese lease facilities.
See Part II, Item 8, Note 9, Commitments, Contingencies and Related Parties, of the Notes to Consolidated Financial
Statements included in this Annual Report on Form 10-K for information regarding Flash Ventures.
Foreign Exchange Contracts
We purchase foreign exchange contracts to hedge the impact of foreign currency fluctuations on certain under-
lying assets, liabilities and commitments for operating expenses and product costs denominated in foreign currencies.
For a description of our current foreign exchange contract commitments, see Part II, Item 7A, Quantitative and Qual-
itative Disclosures About Market Risk and Part II, Item 8, Note 5, Derivative Instruments and Hedging Activities, of the
Notes to Consolidated Financial Statements included in this Annual Report on Form 10-K.
52
Indemnifications
In the ordinary course of business, we may provide indemnifications of varying scope and terms to customers,
vendors, lessors, business partners and other parties with respect to certain matters, including, but not limited to,
losses arising out of our breach of agreements, products or services to be provided by us, environmental compliance or
from IP infringement claims made by third parties. In addition, we have entered into indemnification agreements
with our directors and certain of our officers that will require us, among other things, to indemnify them against cer-
tain liabilities that may arise by reason of their status or service as directors or officers. We maintain director and offi-
cer insurance, which may cover certain liabilities arising from our obligation to indemnify our directors and officers in
certain circumstances.
It is not possible to determine the maximum potential amount under these indemnification agreements due to
the limited history of prior indemnification claims and the unique facts and circumstances involved in each particular
agreement. Such indemnification agreements may not be subject to maximum loss clauses. Historically, we have not
incurred material costs as a result of obligations under these agreements.
Unrecognized Tax Benefits
As of June 30, 2017, the amount of unrecognized tax benefits, including related accrued interest and penalties,
was $611 million, of which $493 million could result in potential cash payments. We are not able to provide a
reasonable estimate of the timing of future tax payments related to these obligations. For additional information
regarding our total tax liability for unrecognized tax benefits, see Part II, Item 8, Note 13, Income Tax Expense
(Benefit), of the Notes to Consolidated Financial Statements included in this Annual Report on Form 10-K.
Cash Dividend
Since the first quarter of 2013, we have issued a quarterly cash dividend. On May 3, 2017, we declared a cash
dividend of $0.50 per share of our common stock to our shareholders of record as of June 30, 2017. The cash dividend
of $147 million was paid on July 17, 2017. On August 2, 2017, we declared a cash dividend of $0.50 per share of our
common stock to our shareholders of record as of September 29, 2017. The cash dividend will be paid on October 16,
2017. We may modify, suspend, or cancel our cash dividend policy in any manner and at any time.
Recently Issued Accounting Pronouncements Not Yet Adopted
In March 2017, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update
(“ASU”) No. 2017-07, “Compensation — Retirement Benefits (Topic 715): Improving the Presentation of Net Peri-
odic Pension Cost and Net Periodic Postretirement Benefit Cost” (“ASU 2017-07”). ASU 2017-07 requires that an
employer report the service cost component in the same line item or items as other compensation costs arising from
services rendered by the pertinent employees during the period. The other components of net benefit cost are required
to be presented in the income statement separately from the service cost component and outside a subtotal of income
from operations, if one is presented. If a separate line item or items are not used, the line item or items used in the
income statement to present the other components of net benefit cost must be disclosed. The new standard is effective
for fiscal years beginning after December 15, 2017, which for us is the first quarter of 2019. Early adoption is permit-
ted within the first interim period. We are currently evaluating the impact ASU 2017-07 will have on our Con-
solidated Financial Statements.
In January 2017, the FASB issued ASU No. 2017-04, “Intangibles — Goodwill and Other (Topic 350): Simplify-
ing the Test for Goodwill Impairment” (“ASU 2017-04”). ASU 2017-04 simplifies the test for goodwill impairment
by removing Step 2 from the goodwill impairment test. Companies will now perform the goodwill impairment test
by comparing the fair value of a reporting unit with its carrying amount, recognizing an impairment charge for the
amount by which the carrying amount exceeds the reporting unit’s fair value not to exceed the total amount of good-
will allocated to that reporting unit. An entity still has the option to perform the qualitative assessment for a report-
ing unit to determine if the quantitative impairment test is necessary. The new standard is effective for goodwill
impairment tests in fiscal years beginning after December 15, 2019, which for us is the first quarter of 2021. Early
adoption is permitted for goodwill impairment tests performed after January 1, 2017. The adoption of this standard is
not expected to have a material impact on our Consolidated Financial Statements.
53
In October 2016, the FASB issued ASU No. 2016-16, “Income Taxes (Topic 740): Intra-Entity Transfers of
Assets Other Than Inventory” (“ASU 2016-16”). ASU 2016-16 removes the prohibition in the FASB Accounting
Standards Codification (“ASC”) Topic 740 against the immediate recognition of the current and deferred income tax
effects of intra-entity transfers of assets other than inventory. The new standard is intended to reduce the complexity
of U.S. GAAP and diversity in practice related to the tax consequences of certain types of intra-entity asset transfers,
particularly those involving IP. The new standard is effective for fiscal years beginning after December 15, 2017,
which for us is the first quarter of 2019. Early adoption is permitted. We are currently evaluating the impact
ASU 2016-16 will have on our Consolidated Financial Statements.
In August 2016, the FASB issued ASU No. 2016-15, “Statement of Cash Flows (Topic 230): Classification of
Certain Cash Receipts and Cash Payments” (“ASU 2016-15”). ASU 2016-15 addresses certain cash flows issues
regarding the classification of certain cash receipts and cash payments, which, among others, includes our disclosure
requirement related to debt prepayment or extinguishment costs and distributions received from equity method
investees. The new standard is effective for fiscal years beginning after December 15, 2017, which for us is the first
quarter of 2019. Early adoption is permitted. We expect to adopt this standard in the first quarter of 2018. The adop-
tion of this standard is not expected to have a material impact on our Consolidated Financial Statements.
In March 2016, the FASB issued ASU No. 2016-09, “Compensation — Stock Compensation (Topic 718):
Improvements to Employee Share-Based Payment Accounting” (“ASU 2016-09”). ASU 2016-09 simplifies several
aspects of the accounting for stock-based payment transactions and states that, among other things, all excess tax
benefits and tax deficiencies should be recognized as income tax expense or benefit in the income statement and an
entity can make an entity-wide accounting policy election to either estimate the number of awards that are expected
to vest or account for forfeitures when they occur. We will adopt this standard in the first quarter of 2018 using the
modified retrospective approach. This adoption will result in a one-time increase to beginning retained earnings for
cumulative adjustments of $58 million for the unrecognized windfall tax benefits related to previous vesting and
exercises of stock-based awards and $19 million related to the change in our accounting policy for estimated for-
feitures and share cancellations. In addition, under the new standard, we will prospectively reflect the tax deficiencies
and benefits as an operating activity, rather than as a financing activity under the previous standard, in our Con-
solidated Statements of Cash Flows.
In February 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842)” (“ASU 2016-02”). ASU 2016-02,
among other things, requires lessees to recognize a right-of-use asset and a lease liability for leases. We expect to adopt
this standard in the first quarter of 2020. We are currently evaluating the impact ASU 2016-02 will have on our
Consolidated Financial Statements and related disclosures.
In January 2016, the FASB issued ASU No. 2016-01, “Financial Instruments — Overall (Subtopic 825-10):
Recognition and Measurement of Financial Assets and Financial Liabilities” (“ASU 2016-01”). ASU 2016-01 provides
guidance related to accounting for equity investments, financial liabilities under the fair value option and the pre-
sentation and disclosure requirements for financial instruments. In addition, the FASB clarified guidance related to
the valuation allowance assessment when recognizing deferred tax assets resulting from unrealized losses on
available-for-sale debt securities. ASU 2016-01 is effective for fiscal years beginning after December 15, 2017, which
for us is the first quarter of 2019. Early adoption is not permitted. We are currently evaluating the impact
ASU 2016-01 will have on our Consolidated Financial Statements.
In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers (Topic 606)” (“ASC
Topic 606”), which amends the guidance in former ASC Topic 605, “Revenue Recognition”, to provide a single,
comprehensive revenue recognition model for all contracts with customers. ASC Topic 606 requires an entity to
recognize revenue in a manner that depicts the transfer of promised goods or services to customers in amounts that
reflect the consideration to which an entity expects to be entitled in exchange for those goods or services. The new
standard also requires entities to enhance disclosures about the nature, amount, timing and uncertainty of revenue and
cash flows arising from contracts with customers. The standard is effective beginning the first quarter of fiscal 2019,
with early adoption permitted. The standard may be applied retrospectively to all prior periods presented (“full retro-
spective method”), or retrospectively with the cumulative effect of initially applying the guidance recognized at the
date of initial application (“modified retrospective method”). Based on our preliminary plan, we intend to adopt the
new standard beginning with the first quarter of 2019 using the modified retrospective method. However, we con-
tinue to assess this in connection with our entire project plan.
54
We expect the implementation of the new standard to impact the recognition of our revenue as follows:
‰ Substantially all of our current revenue is from the sale of hardware products. We do not expect any material
changes to the timing or amount of revenue for these types of sales under the new standard.
‰ For sales-based royalties, we will need to estimate and recognize revenue in the period the royalty-bearing sales
occur as opposed to the existing treatment of recognizing revenue in the period the royalty report is received.
This change will result in the acceleration of revenue recognition by one fiscal quarter as well as fluctuations
between the estimated and actual reported sales-based royalties which we do not expect to be material.
‰ For software and IP licenses, we are still assessing the impact and timing to revenue from the implementation
of the new standard. However, we do not currently expect the new standard to have a material impact on our
revenue for these types of arrangements.
‰ Our revenue disclosures are expected to expand and may require judgment in certain areas.
As we are completing our assessment, we are also identifying and preparing to implement changes to our proc-
esses, internal controls and systems configurations from the implementation of the new revenue standard. We do not
currently expect any significant changes to our other accounting policies from the adoption of the new revenue stan-
dard. Our implementation efforts are progressing as planned.
For a description of recently adopted accounting pronouncements, including the respective dates of adoption and
effects on our results of operations and financial condition, see Part II, Item 8, Note 2, Recently Adopted Accounting
Pronouncements, of the Notes to Consolidated Financial Statements included in this Annual Report on Form 10-K.
Critical Accounting Policies and Estimates
We have prepared the accompanying Consolidated Financial Statements in accordance with accounting princi-
ples generally accepted in the United States (“U.S. GAAP”). The preparation of the financial statements requires the
use of judgments and estimates that affect the reported amounts of revenues, expenses, assets, liabilities and share-
holders’ equity. We have adopted accounting policies and practices that are generally accepted in the industry in
which we operate. We believe the following are our most critical accounting policies that affect significant areas and
involve judgment and estimates made by us. If these estimates differ significantly from actual results, the impact to
Consolidated Financial Statements may be material.
Revenue
In accordance with standard industry practice, we provide distributors and retailers (collectively referred to as
“resellers”) with limited price protection for inventories held by resellers at the time of published list price reductions
and/or a right of return and we provide resellers and OEMs with other sales incentive programs. At the time we
recognize revenue to resellers and OEMs, we record a reduction of revenue for estimated price protection and/or
returns until the resellers sell such inventory to their customers and we also record a reduction of revenue for the other
programs in effect. We base these adjustments on several factors including anticipated price decreases during the
reseller holding period, resellers’ sell-through and inventory levels, estimated amounts to be reimbursed to qualifying
customers, historical pricing information, historical and anticipated returns information and customer claim process-
ing. If customer demand for our products or market conditions differ from our expectations, our operating results
could be materially affected. We also have programs under which we reimburse qualified distributors and retailers for
certain marketing expenditures, which are recorded as a reduction of revenue. These amounts generally vary according
to several factors including industry conditions, seasonal demand, competitor actions, channel mix and overall avail-
ability of product. Changes in future customer demand and market conditions may require us to adjust our incentive
programs as a percentage of gross revenue from the current range. Total sales incentive and marketing programs have
ranged from 8% to 14% of gross revenue and adjustments to revenue due to changes in accruals for these programs
related to revenue reported in prior periods have generally averaged less than 1% of gross revenue over the last three
fiscal years.
We establish provisions against revenue and cost of revenue for sales returns in the same period that the related
revenue is recognized. We base these provisions on existing product return notifications. If actual sales returns exceed
expectations, an increase in the sales return accrual would be required, which could materially affect operating results.
55
Inventories
We value inventories at the lower of cost (first-in, first-out) or net realizable value. We record inventory write-
downs for the valuation of inventory at the lower of cost or net realizable value by analyzing market conditions and
estimates of future sales prices as compared to inventory costs and inventory balances.
We evaluate inventory balances for excess quantities and obsolescence on a regular basis by analyzing estimated
demand, inventory on hand, sales levels and other information and reduce inventory balances to net realizable value for
excess and obsolete inventory based on this analysis. Unanticipated changes in technology or customer demand could
result in a decrease in demand for one or more of our products, which may require a write down of inventory that
could materially affect operating results.
Litigation and Other Contingencies
When we become aware of a claim or potential claim, we assess the likelihood of any loss or exposure. We dis-
close information regarding each material claim where the likelihood of a loss contingency is probable or reasonably
possible. If a loss contingency is probable and the amount of the loss can be reasonably estimated, we record an accrual
for the loss. In such cases, there may be an exposure to potential loss in excess of the amount accrued. Where a loss is
not probable but is reasonably possible or where a loss in excess of the amount accrued is reasonably possible, we dis-
close an estimate of the amount of the loss or range of possible losses for the claim if a reasonable estimate can be
made, unless the amount of such reasonably possible losses is not material to our financial position, results of oper-
ations or cash flows. The ability to predict the ultimate outcome of such matters involves judgments, estimates and
inherent uncertainties. The actual outcome of such matters could differ materially from management’s estimates. For
additional information, see Part II, Item 8, Note 17, Legal Proceedings, of the Notes to Consolidated Financial State-
ments included in this Annual Report on Form 10-K.
Income Taxes
We account for income taxes under the asset and liability method, which provides that deferred tax assets and
liabilities be recognized for temporary differences between the financial reporting basis and the tax basis of our assets
and liabilities and expected benefits of utilizing net operating loss and tax credit carryforwards. We record a valuation
allowance when it is more likely than not that the deferred tax assets will not be realized. Each quarter, we evaluate
the need for a valuation allowance for our deferred tax assets and we adjust the valuation allowance so that we record
net deferred tax assets only to the extent that we conclude it is more likely than not that these deferred tax assets will
be realized.
We recognize liabilities for uncertain tax positions based on a two-step process. To the extent a tax position does
not meet a more-likely-than-not level of certainty, no benefit is recognized in the financial statements. If a position
meets the more-likely-than-not level of certainty, it is recognized in the financial statements at the largest amount
that has a greater than 50% likelihood of being realized upon ultimate settlement. Interest and penalties related to
unrecognized tax benefits are recognized on liabilities recorded for uncertain tax positions and are recorded in our
provision for income taxes. The actual liability for unrealized tax benefits in any such contingency may be materially
different from our estimates, which could result in the need to record additional liabilities for unrecognized tax bene-
fits or potentially adjust previously-recorded liabilities for unrealized tax benefits and materially affect our operating
results.
Goodwill and Other Long-Lived Assets
Goodwill is not amortized. Instead, it is tested for impairment on an annual basis or more frequently whenever
events or changes in circumstances indicate that goodwill may be impaired. We perform our annual impairment test
as of the first day of our fiscal fourth quarter. We either use qualitative factors to determine whether goodwill is more
likely than not impaired or we perform a two-step approach to quantify impairment. If we conclude from the qual-
itative assessment that goodwill is more likely than not impaired, we are required to follow a two-step approach to
quantify the impairment. We are required to use judgment when applying the goodwill impairment test, including
the identification of reporting units, assignment of assets and liabilities to reporting units, assignment of goodwill to
reporting units and determination of the fair value of each reporting unit. In addition, the estimates used to determine
56
the fair value of each reporting unit may change based on results of operations, macroeconomic conditions or other
factors. Changes in these estimates could materially affect our assessment of the fair value and goodwill impairment
for each reporting unit. If our stock price decreases significantly, goodwill could become impaired, which could result
in a material charge and adversely affect our results of operations.
In-process research and development (“IPR&D”) is an intangible asset accounted as an indefinite-lived asset until
the completion or abandonment of the associated R&D effort. During the development period, we conduct an IPR&D
impairment test annually and whenever events or changes in facts and circumstances indicate that it is more likely
than not that the IPR&D is impaired. Events which might indicate impairment include, but are not limited to,
adverse cost factors, strategic decisions made in response to economic, market, and competitive conditions, the impact
of the economic environment on us and our customer base. If impairment is indicated, the impairment is measured as
the amount by which the carrying amount of the assets exceeds the fair value of the assets.
Other long-lived intangible assets are amortized over their estimated useful lives based on the pattern in which
the economic benefits are expected to be received. Long-lived assets are tested for recoverability whenever events or
changes in circumstances indicate that their carrying amounts may not be recoverable. If impairment is indicated, the
impairment is measured as the amount by which the carrying amount of the assets exceeds the fair value of the assets.
Item 7A. QuantitativeandQualitativeDisclosuresAboutMarketRisk
Disclosure About Foreign Currency Risk
Although the majority of our transactions are in U.S. dollars, some transactions are based in various foreign cur-
rencies. We purchase short-term, foreign exchange contracts to hedge the impact of foreign currency exchange
fluctuations on certain underlying assets, liabilities and commitments for product costs and operating expenses
denominated in foreign currencies. The purpose of entering into these hedge transactions is to minimize the impact of
foreign currency fluctuations on our results of operations. The contract maturity dates do not exceed 12 months. We
do not purchase foreign exchange contracts for speculative or trading purposes. For additional information, see Part II,
Item 8, Note 4, Fair Value Measurements and Investments and Note 5, Derivative Instruments and Hedging Activities, of the
Notes to Consolidated Financial Statements included in this Annual Report on Form 10-K.
As of June 30, 2017, we had outstanding the foreign exchange contracts presented in the following table. The
changes in fair values of these foreign exchange contracts would be largely offset in other income (expense) by corre-
sponding changes in the fair values of the foreign currency denominated monetary assets and liabilities.
British pound sterling . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Euro . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Japanese yen . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Malaysian ringgit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Philippine peso . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Singapore dollar . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Thai baht . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Weighted-Average
Contract Rate(1)
Contract
Unrealized
Gain (Loss)
Amount
(in millions, except weighted-average contract rate)
0.78
$
0.87
111.55
4.39
50.26
1.39
34.37
24
1,100
1,092
118
117
49
286
$—
3
(1)
2
(1)
1
4
Total forward contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$2,786
$ 8
(1) Expressed in units of foreign currency per U.S. dollar.
During 2017 and 2016, total net realized transaction and foreign exchange contract currency gains and losses
were not material to our Consolidated Financial Statements.
Notwithstanding our efforts to mitigate some foreign exchange risks, we do not hedge all of our foreign currency
exposures and there can be no assurance that our mitigating activities related to the exposures that we hedge will
adequately protect us against risks associated with foreign currency fluctuations.
57
Disclosure About Other Market Risks
Variable Interest Rate Risk
Borrowings under our Term Loan A and our revolving credit facility bear interest at a rate per annum, at our
option, of either an adjusted LIBOR rate (subject to a 0.0% floor) plus an applicable margin of 2.00% or at a base rate
plus an applicable margin of 1.0% (3.23% as of June 30, 2017). The applicable margin for the borrowings under our
Term Loan A and our revolving credit facility will range, depending on our leverage, from 1.50% to 2.25% for
LIBOR loans and from 0.50% to 1.25% for base rate loans.
Borrowings under the U.S. Term Loan B-2 tranche bear interest at a rate per annum, at our option, of an
adjusted LIBOR rate, subject to a 0.75% floor, plus 2.75% or a base rate plus 1.75% (3.98% as of June 30, 2017).
Borrowings under the Euro Term Loan B-2 tranche bear interest at a rate per annum, at our option, equal to an
adjusted EURIBOR rate, subject to a 0.75% floor, plus 2.00% (2.75% as of June 30, 2017).
We have generally held a balance of fixed and variable rate debt. At June 30, 2017, 61% of the par value of our
debt was at variable rates. To balance the portfolio, we entered into a pay-fixed interest rate swap on $1.00 billion
notional amount, which effectively converts a portion of our term loan to fixed rates through May 2020. As of
June 30, 2017, we had $8.10 billion of variable rate debt. After giving effect to the $1.00 billion of interest rate
swaps, we effectively had $7.10 billion of long-term debt subject to variations in interest rates and a one percent
increase in the variable rate of interest, subject to each loan’s specific floor, would increase annual interest expense by
$61 million.
For additional information regarding our term loans and our interest rate swaps, see Part II, Item 8, Note 6,
Debt, of the Notes to Consolidated Financial Statements included in this Annual Report on Form 10-K.
58
Item 8. FinancialStatementsandSupplementaryData
Index to Financial Statements and Financial Statement Schedule
Consolidated Financial Statements:
Reports of Independent Registered Public Accounting Firm . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Balance Sheets — As of June 30, 2017 and July 1, 2016 . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Statements of Operations — Three Years Ended June 30, 2017 . . . . . . . . . . . . . . . . . . . . . .
Consolidated Statements of Comprehensive Income — Three Years Ended June 30, 2017 . . . . . . . . . . . . .
Consolidated Statements of Cash Flows — Three Years Ended June 30, 2017 . . . . . . . . . . . . . . . . . . . . . .
Consolidated Statements of Shareholders’ Equity — Three Years Ended June 30, 2017 . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Notes to Consolidated Financial Statements
PAGE
NO.
60
62
63
64
65
67
68
Financial Statement Schedule:
Schedule II — Consolidated Valuation and Qualifying Accounts — Three Years Ended
June 30, 2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
134
59
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Shareholders
Western Digital Corporation:
We have audited the accompanying consolidated balance sheets of Western Digital Corporation and subsidiaries
as of June 30, 2017 and July 1, 2016, and the related consolidated statements of operations, comprehensive income,
cash flows, and shareholders’ equity, for each of the years in the three-year period ended June 30, 2017. In connection
with our audits of the consolidated financial statements, we have also audited the related financial statement schedule.
These consolidated financial statements and financial statement schedule are the responsibility of the Company’s
management. Our responsibility is to express an opinion on these consolidated financial statements and financial
statement schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evi-
dence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the
financial position of Western Digital Corporation and subsidiaries as of June 30, 2017 and July 1, 2016, and the
results of their operations and their cash flows for each of the years in the three-year period ended June 30, 2017, in
conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement
schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly,
in all material respects, the information set forth therein.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board
(United States), Western Digital Corporation and subsidiaries’ internal control over financial reporting as of June 30,
2017, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO), and our report dated August 28, 2017, expressed an
unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.
August 28, 2017
Irvine, California
/s/ KPMG LLP
60
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Shareholders
Western Digital Corporation:
We have audited Western Digital Corporation and subsidiaries’ internal control over financial reporting as of
June 30, 2017, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Commit-
tee of Sponsoring Organizations of the Treadway Commission (COSO). Western Digital Corporation and subsidiaries’
management is responsible for maintaining effective internal control over financial reporting and for its assessment of
the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on
Internal Control over Financial Reporting appearing under Item 9A. Our responsibility is to express an opinion on the
Company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about
whether effective internal control over financial reporting was maintained in all material respects. Our audit included
obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness
exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk.
Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regard-
ing the reliability of financial reporting and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company’s internal control over financial reporting includes those
policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions
are recorded as necessary to permit preparation of financial statements in accordance with U.S. generally accepted
accounting principles, and that receipts and expenditures of the company are being made only in accordance with
authorizations of management and directors of the company; and (3) provide reasonable assurance regarding pre-
vention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a
material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstate-
ments. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may
become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures
may deteriorate.
In our opinion, Western Digital Corporation and subsidiaries maintained, in all material respects, effective
internal control over financial reporting as of June 30, 2017, based on criteria established in Internal Control —
Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission
(COSO).
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board
(United States), the consolidated balance sheets of Western Digital Corporation and subsidiaries as of June 30, 2017
and July 1, 2016, the related consolidated statements of operations, comprehensive income, cash flows, and share-
holders’ equity for each of the years in the three-year period ended June 30, 2017, and the related financial statement
schedule, and our report dated August 28, 2017, expressed an unqualified opinion on those consolidated financial
statements and financial statement schedule.
August 28, 2017
Irvine, California
/s/ KPMG LLP
61
WESTERN DIGITAL CORPORATION
CONSOLIDATED BALANCE SHEETS
(in millions, except par value)
ASSETS
Current assets:
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Short-term investments
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accounts receivable, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other current assets
Total current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Property, plant and equipment, net
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Notes receivable and investments in Flash Ventures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Goodwill
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other intangible assets, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other non-current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
June 30,
2017
July 1,
2016
$ 6,354
24
1,948
2,341
389
11,056
3,033
1,340
10,014
3,823
594
$ 8,151
227
1,461
2,129
616
12,584
3,503
1,171
9,951
5,034
619
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$29,860
$32,862
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accounts payable to Flash Ventures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued warranty . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Bridge loan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Current portion of long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other liabilities
$ 2,144
206
1,069
506
186
—
233
4,344
12,918
1,180
Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
18,442
$ 1,888
168
995
392
172
2,995
339
6,949
13,660
1,108
21,717
Commitments and contingencies (Notes 6, 9, 13 and 17)
Shareholders’ equity:
Preferred stock, $0.01 par value; authorized — 5 shares; issued and outstanding — none . . .
Common stock, $0.01 par value; authorized — 450 shares; issued — 312 shares in 2017
and 2016; outstanding — 294 shares in 2017 and 284 shares in 2016 . . . . . . . . . . . . . . .
Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accumulated other comprehensive income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Treasury stock — common shares at cost; 18 shares in 2017 and 28 shares in 2016 . . . . . . .
—
—
3
4,506
(58)
8,633
(1,666)
3
4,429
103
8,848
(2,238)
Total shareholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
11,418
11,145
Total liabilities and shareholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$29,860
$32,862
The accompanying notes are an integral part of these Consolidated Financial Statements.
62
WESTERN DIGITAL CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(in millions, except per share amounts)
June 30,
2017
Year Ended
July 1,
2016
July 3,
2015
Revenue, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cost of revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$19,093
13,021
$12,994
9,559
$14,572
10,351
Gross profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
6,072
3,435
4,221
Operating expenses:
Research and development . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Selling, general and administrative . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Employee termination, asset impairment, and other charges . . . . . . . . . . . . . . .
Total operating expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Operating income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest and other income (expense):
Interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other income (expense), net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2,441
1,445
232
4,118
1,954
26
(847)
(364)
Total interest and other expense, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(1,185)
Income before taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income tax expense (benefit)
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
769
372
397
Income per common share
Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
1.38
1.34
Weighted average shares outstanding:
1,627
997
345
2,969
466
26
(266)
(73)
(313)
153
(89)
1,646
788
176
2,610
1,611
14
(49)
1
(34)
1,577
112
$
$
$
242
$ 1,465
1.01
1.00
$
$
6.31
6.18
Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
288
296
239
242
232
237
Cash dividends declared per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
2.00
$
2.00
$
1.80
The accompanying notes are an integral part of these Consolidated Financial Statements.
63
WESTERN DIGITAL CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in millions)
June 30,
2017
Year Ended
July 1,
2016
July 3,
2015
$ 397
$242
$1,465
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other comprehensive income (loss), before tax:
Actuarial pension gain (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign currency translation adjustment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net unrealized gain (loss) on derivative contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net unrealized gain on available-for-sale securities . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total other comprehensive income (loss), before tax . . . . . . . . . . . . . . . . . . . . . . . .
39
(115)
(77)
2
(151)
Income tax benefit (expense) related to items of other comprehensive income (loss),
before tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(10)
Other comprehensive income (loss), net of tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(161)
(73)
74
99
—
100
23
123
(2)
—
(30)
—
(32)
—
(32)
Total comprehensive income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 236
$365
$1,433
The accompanying notes are an integral part of these Consolidated Financial Statements.
64
WESTERN DIGITAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in millions)
Cash flows from operating activities
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Adjustments to reconcile net income to net cash provided by operations:
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Stock-based compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loss on disposal of assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Write-off of issuance costs and amortization of debt discounts . . . . . . . . . . . . . .
Loss on convertible debt and related instruments . . . . . . . . . . . . . . . . . . . . . . . .
Non-cash portion of employee termination, asset impairment and other
charges
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other non-cash operating activities, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Changes in:
Accounts receivable, net
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accounts payable to related parties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued arbitration award . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other assets and liabilities, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
June 30,
2017
Year Ended
July 1,
2016
July 3,
2015
$
397
$
242
$ 1,465
2,128
394
12
18
285
5
13
94
(487)
(204)
223
38
—
231
115
175
1,154
191
(149)
22
39
58
41
11
466
306
(299)
(115)
—
102
(94)
8
1,114
162
28
17
—
—
86
(37)
458
(143)
(148)
—
(758)
35
(134)
97
Net cash provided by operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
3,437
1,983
2,242
Cash flows from investing activities
Purchases of property, plant and equipment
. . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from the sale of property, plant and equipment . . . . . . . . . . . . . . . . . . . .
Acquisitions, net of cash acquired . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Purchases of investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from sale of investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from maturities of investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Investments in Flash Ventures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Notes receivable issuances to Flash Ventures . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Notes receivable proceeds from Flash Ventures . . . . . . . . . . . . . . . . . . . . . . . . . . .
Strategic investments and other, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net cash used in investing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(578)
21
—
(281)
94
417
(20)
(549)
292
(32)
(636)
(584)
—
(9,835)
(632)
1,204
405
—
(106)
16
(76)
(9,608)
(612)
—
(257)
(857)
505
263
—
—
—
5
(953)
The accompanying notes are an integral part of these Consolidated Financial Statements.
65
WESTERN DIGITAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS — (Continued)
(in millions)
June 30,
2017
Year Ended
July 1,
2016
July 3,
2015
Cash flows from financing activities
Issuance of stock under employee stock plans . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Taxes paid on vested stock awards under employee stock plans . . . . . . . . . . . . . . .
Excess tax benefits from employee stock plans . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from acquired call option . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Settlement of convertible debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Repurchases of common stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from revolving credit facility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Repayment of revolving credit facility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Dividends paid to shareholders
Settlement of debt hedge contracts
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Repayment of debt
Proceeds from debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Debt issuance costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Payment upon settlement of acquired warrants . . . . . . . . . . . . . . . . . . . . . . . . . . .
235
(124)
119
61
(492)
—
—
—
(574)
(21)
(11,697)
7,908
(10)
—
117
(50)
7
409
(2,611)
(60)
125
(380)
(464)
—
(2,313)
17,108
(524)
(613)
212
(64)
19
—
—
(970)
—
—
(396)
—
(125)
255
—
—
Net cash provided by (used in) financing activities
. . . . . . . . . . . . . . . . . .
(4,595)
10,751
(1,069)
Effect of exchange rate changes on cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net increase (decrease) in cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . .
Cash and cash equivalents, beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(3)
(1,797)
8,151
1
3,127
5,024
—
220
4,804
Cash and cash equivalents, end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 6,354
$ 8,151
$ 5,024
Supplemental disclosure of cash flow information:
Cash paid for income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash paid for interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Supplemental disclosure of non-cash investing and financing activities:
Common stock issued and equity awards assumed in connection with
acquisition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Shares issued in conjunction with settlement of convertible notes . . . . . . . . . . . . .
Shares received in conjunction with assumed call options
. . . . . . . . . . . . . . . . . . .
Accrual of cash dividend declared . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
$
$
$
$
184
777
$
$
26
113
$
$
47
45
— $ 1,822
94
$
16
(70)
$
(11)
142
$
147
$ —
$ —
$ —
116
$
The accompanying notes are an integral part of these Consolidated Financial Statements.
66
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B
WESTERN DIGITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Organization and Basis of Presentation
Western Digital Corporation (“Western Digital” or “the Company”) is a leading developer, manufacturer and
provider of data storage devices and solutions that address the evolving needs of the information technology (“IT”)
industry and the infrastructure that enables the proliferation of data in virtually every other industry. The Company’s
broad portfolio of technology and products address the following key markets: Client Devices; Data Center Devices
and Solutions; and Client Solutions. The Company also generates license and royalty revenue related to its intellectual
property (“IP”) which is included in each of the three categories.
Basis of Presentation
The Company has prepared its Consolidated Financial Statements in accordance with accounting principles gen-
erally accepted in the United States (“U.S. GAAP”) and has adopted accounting policies and practices which are gen-
erally accepted in the industry in which it operates. The Company’s significant accounting policies are summarized
below.
Fiscal Year
The Company’s fiscal year ends on the Friday nearest to June 30 and typically consists of 52 weeks. Approx-
imately every six years, the Company reports a 53-week fiscal year to align the fiscal year with the foregoing policy.
Fiscal years 2017 and 2016, which ended on June 30, 2017 and July 1, 2016, respectively, both comprised 52 weeks,
with all quarters consisting of 13 weeks. Fiscal year 2015, which ended on July 3, 2015, comprised 53 weeks, with
the first quarter consisting of 14 weeks and the second, third and fourth quarters consisting of 13 weeks each.
Basis of Consolidation
The Consolidated Financial Statements include the accounts of the Company and its wholly owned subsidiaries.
All significant intercompany accounts and transactions have been eliminated in consolidation. The functional currency
of most of the Company’s foreign subsidiaries is the U.S. dollar. The accounts of these foreign subsidiaries have been
remeasured using the U.S. dollar as the functional currency. Gains or losses resulting from remeasurement of these
accounts from local currencies into U.S. dollars were immaterial to the Consolidated Financial Statements. Financial
statements of the Company’s foreign subsidiaries for which the functional currency is the local currency are translated
into U.S. dollars using the exchange rate at each balance sheet date for assets and liabilities and a weighted average
exchange rate for each period for statement of operations items. Translation adjustments are recorded in accumulated
other comprehensive income, a component of stockholders’ equity.
Reclassifications
Certain prior year amounts have been reclassified in the consolidated statements of cash flows to conform to the
current year presentation.
Use of Estimates
Management has made estimates and assumptions relating to the reporting of certain assets and liabilities in
conformity with U.S. GAAP. These estimates and assumptions have been applied using methodologies that are con-
sistent throughout the periods presented. However, actual results could differ materially from these estimates.
Cash Equivalents
The Company’s cash equivalents represent highly liquid investments in money market funds, which are invested
in U.S. Treasury securities and U.S. Government agency securities as well as bank certificates of deposit with original
maturities at purchase of three months or less. Cash equivalents are carried at cost plus accrued interest, which approx-
imates fair value.
68
WESTERN DIGITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Available-for-Sale Securities
The Company invests in U.S. Treasury securities, U.S. and International Government agency securities, certifi-
cates of deposit, asset-backed securities, and corporate and municipal notes and bonds, with original maturities at
purchase of more than three months. These investments are classified as available-for-sale securities and included
within short-term investments and other non-current assets in the Consolidated Balance Sheets. Available-for-sale
securities are stated at fair value with unrealized gains and losses included in accumulated other comprehensive
income (loss), which is a component of shareholders’ equity. Gains and losses on available-for-sale securities are
recorded based on the specific identification method. The Company evaluates the available-for-sale securities in an
unrealized loss position for other-than-temporary impairment. The amortized cost of available-for-sale securities is
adjusted for amortization of premiums and accretion of discounts to maturity. Such amortization and accretion are
included in total other expense, net in the consolidated statements of operations. In addition, realized gains and losses
are included in total other expense, net in the consolidated statements of operations.
Equity Investments
The Company enters into certain strategic investments for the promotion of business and strategic objectives.
The equity method of accounting is used if the Company’s ownership interest is greater than or equal to 20% but less
than a majority or where the Company has the ability to exercise significant influence over operating and financial
policies. The Company’s equity in the earnings or losses in equity-method investments is recognized in Other income
(expense), net, in the Consolidated Statement of Operations.
The Company accounts for investments in equity securities of other entities under the cost method of accounting
if the Company’s ownership interest is less than 20% and the Company does not have the ability to exercise sig-
nificant influence over operating and financial policies of the investee. Investments accounted for under the cost
method of accounting are recorded within Other non-current assets in the Consolidated Balance Sheets and are also
periodically analyzed to determine whether or not there are indicators of impairment.
Variable Interest Entities
The Company evaluates its investments and other significant relationships to determine whether any investee is a
variable interest entity (“VIE”). If the Company concludes that an investee is a VIE, the Company evaluates its power
to direct the activities of the investee, its obligation to absorb the expected losses of the investee and its right to
receive the expected residual returns of the investee to determine whether the Company is the primary beneficiary of
the investee. If the Company is the primary beneficiary of a VIE, the Company consolidates such entity and reflects
the non-controlling interest of other beneficiaries of that entity. The Company does not consolidate any cost method
investment or equity method investment entities.
Fair Value of Financial Instruments
The carrying amounts of cash equivalents, accounts receivable, accounts payable and accrued expenses approx-
imate fair value for all periods presented because of the short-term maturity of these assets and liabilities. The fair
value of investments that are not accounted for under the equity method is based on appropriate market information.
Inventories
The Company values inventories at the lower of cost (first-in, first out and weighted-average methods) or net
realizable value. The first-in, first-out (“FIFO”) method is used to value the cost of the majority of the Company’s
inventories, while the weighted-average method is used to value precious metal inventories. Weighted-average cost is
calculated based upon the cost of precious metals at the time they are received by the Company. The Company has
determined that it is not practicable to assign specific costs to individual units of precious metals and, as such, pre-
cious metals are relieved from inventory based on the weighted-average cost of the inventory at the time the inventory
69
WESTERN DIGITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
is used in production. The weighted average method of valuing precious metals does not materially differ from the
FIFO method. Inventory write-downs are recorded for the valuation of inventory at the lower of cost or net realizable
value by analyzing market conditions and estimates of future sales prices as compared to inventory costs and inventory
balances.
The Company evaluates inventory balances for excess quantities and obsolescence on a regular basis by analyzing
estimated demand, inventory on hand, sales levels and other information and reduces inventory balances to net realiz-
able value for excess and obsolete inventory based on this analysis. Unanticipated changes in technology or customer
demand could result in a decrease in demand for one or more of the Company’s products, which may require a write
down of inventory that could materially affect operating results.
Property, Plant and Equipment
Property and equipment are carried at cost less accumulated depreciation and amortization. The cost of property,
plant and equipment is depreciated over the estimated useful lives of the respective assets. The Company’s buildings
are depreciated over periods ranging from fifteen to thirty-five years. The majority of the Company’s machinery and
equipment, software, and furniture and fixtures, are depreciated on a straight-line basis over a period of two to seven
years. Leasehold improvements are amortized over the lesser of the estimated useful lives of the assets or the related
lease terms.
Business Combinations
The application of acquisition accounting to a business combination requires that the Company identify the
individual assets acquired and liabilities assumed and estimate the fair value of each. The fair value of assets acquired
and liabilities assumed in a business acquisition are recognized at the acquisition date using a combination of valu-
ation techniques, with the purchase price exceeding the fair values being recognized as goodwill. Determining fair
value of identifiable assets, particularly intangibles, liabilities acquired and contingent obligations assumed requires
management to make estimates. In certain circumstances, the allocations of the excess purchase price are based upon
preliminary estimates and assumptions and subject to revision when the Company receives final information, includ-
ing appraisals and other analyses. Accordingly, the measurement period for such purchase price allocations will end
when the information, or the facts and circumstances, becomes available, but will not exceed twelve months. The
Company will recognize measurement-period adjustments during the period of resolution, including the effect on
earnings of any amounts that would have been recorded in previous periods if the accounting had been completed at
the acquisition date.
Goodwill and intangible assets often represent a significant portion of the assets acquired in a business combina-
tion. The Company recognizes the fair value of an acquired intangible apart from goodwill whenever the intangible
arises from contractual or other legal rights, or when it can be separated or divided from the acquired entity and sold,
transferred, licensed, rented or exchanged, either individually or in combination with a related contract, asset or
liability. Intangible assets consist primarily of technology, customer relationships, and trade name and trademarks
acquired in business combinations and in-process research and development (“IPR&D”). The Company’s assessment of
IPR&D also includes consideration of the risk of the projects not achieving technological feasibility.
Goodwill and Other Long-Lived Assets
Goodwill is not amortized. Instead, it is tested for impairment on an annual basis or more frequently whenever
events or changes in circumstances indicate that goodwill may be impaired. The Company performs an annual
impairment test as of the first day of its fiscal fourth quarter. The Company either uses qualitative factors to
determine whether goodwill is more likely than not impaired or performs a two-step approach to quantify impair-
ment. If the Company concludes from the qualitative assessment that goodwill is more likely than not impaired, the
Company is required to follow a two-step approach to quantify the impairment. The Company is required to use
judgment when applying the goodwill impairment test, including the identification of reporting units, assignment of
70
WESTERN DIGITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
assets, liabilities and goodwill to reporting units, and determination of the fair value of each reporting unit. In addi-
tion, the estimates used to determine the fair value of reporting units may change based on results of operations,
macroeconomic conditions or other factors. Changes in these estimates could materially affect the Company’s assess-
ment of the fair value and goodwill impairment. If the Company’s stock price decreases significantly, goodwill could
become impaired, which could result in a material charge and adversely affect the Company’s results of operations.
IPR&D is an intangible asset accounted as an indefinite-lived asset until the completion or abandonment of the
associated research and development effort. During the development period, the Company conducts an IPR&D
impairment test annually and whenever events or changes in facts and circumstances indicate that it is more likely
than not that the IPR&D is impaired. Events which might indicate impairment include, but are not limited to,
adverse cost factors, strategic decisions made in response to economic, market, and competitive conditions, and the
impact of the economic environment the Company and on its customer base. If impairment is indicated, the impair-
ment is measured as the amount by which the carrying amount of the assets exceeds the fair value of the assets.
Other long-lived intangible assets are amortized over their estimated useful lives based on the pattern in which
the economic benefits are expected to be received. Long-lived assets are tested for recoverability whenever events or
changes in circumstances indicate that their carrying amounts may not be recoverable. If impairment is indicated, the
impairment is measured as the amount by which the carrying amount of the assets exceeds the fair value of the assets.
The Company recorded impairments to certain long-lived assets in 2017, 2016 and 2015. See Note 4, Fair Value
Measurements and Investments, Note 7, Goodwill and Other Intangible Assets and Note 15, Acquisitions, for additional dis-
closures related to the Company’s other intangible assets.
Revenue and Accounts Receivable
Revenue is recognized when the title and risk of loss have passed to the customer, there is persuasive evidence of
an arrangement, delivery has occurred, or services have been rendered, the sales price is fixed or determinable and col-
lectability is reasonably assured. The Company establishes provisions against revenue and cost of revenue for estimated
sales returns in the same period that the related revenue is recognized based on existing product return notifications. If
actual sales returns exceed expectations, an increase in the sales return accrual would be required, which could materi-
ally affect operating results.
In accordance with standard industry practice, the Company provides distributors and retailers (collectively
referred to as “resellers”) with limited price protection for inventories held by resellers at the time of published list
price reductions and/or a right of return and the Company provides resellers and original equipment manufacturers
(“OEMs”) with other sales incentive programs. At the time the Company recognizes revenue to resellers and OEMs, a
reduction of revenue is recorded for estimated price protection and/or returns until the resellers sell such inventory to
their customers and the Company also records a reduction of revenue for the other programs in effect. The Company
bases these adjustments on several factors including anticipated price decreases during the reseller holding period,
reseller’s sell-through and inventory levels, estimated amounts to be reimbursed to qualifying customers, historical
pricing information, historical and anticipated returns information and customer claim processing. If customer
demand for the Company’s products or market conditions differ from the Company’s expectations, the Company’s
operating results could be materially affected. The Company also has programs under which it reimburses qualified
distributors and retailers for certain marketing expenditures, which are recorded as a reduction of revenue.
Revenue from patent licensing arrangements is recognized when earned, estimable and realizable. The timing of
revenue recognition is dependent on the terms of each license agreement and on the timing of sales of licensed prod-
ucts. The Company generally recognizes royalty revenue when it is reported to the Company by its licensees, which is
generally one quarter in arrears from the licensees’ sales of licensed products. For licensing fees that are not determined
by the licensees’ sales, the Company generally recognizes license fee revenue on a straight-line basis over the life of the
license.
Some of the Company’s revenue arrangements are multiple-element arrangements because they are generally
comprised of product, software and support services or multiple distinct licenses. For multiple-element arrangements,
71
WESTERN DIGITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
the Company evaluates whether each deliverable should be accounted for as a separate unit of accounting. For
multiple-element arrangements that include support or software elements, the Company analyzes whether tangible
products containing software and non-software components function together and therefore should be excluded from
industry-specific software revenue recognition guidance. For all multiple-element arrangements, the Company allo-
cates revenue to each element, or the software elements as a group, based on the relative selling price determined in
accordance with the Company’s normal pricing and discounting practices for the specific element when sold sepa-
rately. For multiple-element license agreements that include more than one license to distinct technology that are
separate units of accounting, the Company allocates revenue to each license based on the relative selling price of each
deliverable. License fees related to existing technology with no continuing performance obligations are generally
recognized upon license commencement and other license fees are generally recognized on a straight-line basis over
the life of the license. The Company primarily uses an estimate of selling price to allocate revenue for multiple-
element license agreements based upon similar licenses, historical and estimated future sales volume, duration and
market conditions.
The Company records an allowance for doubtful accounts by analyzing specific customer accounts and assessing
the risk of loss based on insolvency, disputes or other collection issues. In addition, the Company routinely analyzes
the different receivable aging categories and establishes reserves based on a combination of past due receivables and
expected future losses based primarily on its historical levels of bad debt losses. If the financial condition of a sig-
nificant customer deteriorates resulting in its inability to pay its accounts when due, or if the Company’s overall loss
history changes significantly, an adjustment in the Company’s allowance for doubtful accounts would be required,
which could materially affect operating results.
Warranty
The Company records an accrual for estimated warranty costs when revenue is recognized. The Company gen-
erally warrants its products for a period of one to five years, with a small number of products having a warranty rang-
ing up to ten years or more. The warranty provision considers estimated product failure rates and trends, estimated
replacement costs, estimated repair costs which include scrap costs and estimated costs for customer compensatory
claims related to product quality issues, if any. For warranties ten years or greater, including lifetime warranties, the
Company uses the estimated useful life of the product to calculate the warranty exposure. A statistical warranty track-
ing model is used to help prepare estimates and assist the Company in exercising judgment in determining the under-
lying estimates. The statistical tracking model captures specific detail on product reliability, such as factory test data,
historical field return rates and costs to repair by product type. Management’s judgment is subject to a greater degree
of subjectivity with respect to newly introduced products because of limited field experience with those products upon
which to base warranty estimates. Management reviews the warranty accrual quarterly for products shipped in prior
periods and which are still under warranty. Any changes in the estimates underlying the accrual may result in adjust-
ments that impact current period gross profit and income. Such changes are generally a result of differences between
forecasted and actual return rate experience and costs to repair. If actual product return trends, costs to repair returned
products or costs of customer compensatory claims differ significantly from estimates, future results of operations
could be materially affected.
Litigation and Other Contingencies
When the Company becomes aware of a claim or potential claim, the Company assesses the likelihood of any loss
or exposure. The Company discloses information regarding each material claim where the likelihood of a loss con-
tingency is probable or reasonably possible. If a loss contingency is probable and the amount of the loss can be reason-
ably estimated, the Company records an accrual for the loss. In such cases, there may be an exposure to potential loss
in excess of the amount accrued. Where a loss is not probable but is reasonably possible or where a loss in excess of the
amount accrued is reasonably possible, the Company discloses an estimate of the amount of the loss or range of possi-
ble losses for the claim if a reasonable estimate can be made, unless the amount of such reasonably possible losses is
not material to the Company’s financial position, results of operations or cash flows. The ability to predict the ulti-
72
WESTERN DIGITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
mate outcome of such matters involves judgments, estimates and inherent uncertainties. The actual outcome of such
matters could differ materially from management’s estimates. See Note 17, Legal Proceedings, for additional disclosures
related to the Company’s litigation.
Advertising Expense
Advertising costs are expensed as incurred and amounted to $89 million, $60 million and $71 million in 2017,
2016 and 2015, respectively. These expenses are included in Selling, general and administrative (“SG&A”) in the
Consolidated Statements of Operations.
Research and Development Expense
Research and development (“R&D”) expenditures are expensed as incurred.
Income Taxes
The Company accounts for income taxes under the asset and liability method, which provides that deferred tax
assets and liabilities be recognized for temporary differences between the financial reporting basis and the tax basis of
assets and liabilities and expected benefits of utilizing net operating loss (“NOL”) and tax credit carryforwards. The
Company records a valuation allowance when it is more likely than not that the deferred tax assets will not be realized.
Each quarter, the Company evaluates the need for a valuation allowance for its deferred tax assets and adjusts the valu-
ation allowance so that the Company records net deferred tax assets only to the extent that it has concluded it is more
likely than not that these deferred tax assets will be realized.
The Company recognizes liabilities for uncertain tax positions based on a two-step process. To the extent a tax
position does not meet a more-likely-than-not level of certainty, no benefit is recognized in the financial statements. If
a position meets the more-likely-than-not level of certainty, it is recognized in the financial statements at the largest
amount that has a greater than 50% likelihood of being realized upon ultimate settlement. Interest and penalties
related to unrecognized tax benefits are recognized in liabilities recorded for uncertain tax positions and are recorded
in the provision for income taxes. The actual liability for unrealized tax benefits in any such contingency may be
materially different from the Company’s estimates, which could result in the need to record additional liabilities for
unrecognized tax benefits or potentially adjust previously-recorded liabilities for unrealized tax benefits, and may
materially affect the Company’s operating results.
Income per Common Share
The Company computes basic income per common share using net income and the weighted average number of
common shares outstanding during the period. Diluted income per common share is computed using net income and
the weighted average number of common shares and potentially dilutive common shares outstanding during the
period. Potentially dilutive common shares include dilutive outstanding employee stock options, restricted stock unit
awards (“RSUs”), performance-based restricted stock unit awards (“PSUs”), rights to purchase shares of common stock
under the Company’s Employee Stock Purchase Plan (“ESPP”) and shares issuable in connection with convertible debt.
Stock-based Compensation
The Company accounts for all stock-based compensation at fair value. Stock-based compensation cost is measured
at the grant date based on the value of the award and is recognized as expense over the vesting period. The fair values
of all stock options granted are estimated using a binomial option-pricing model, and the fair values of all ESPP pur-
chase rights are estimated using the Black-Scholes-Merton option-pricing model. The Company accounts for stock
appreciation rights (“SARs”) as liability awards based upon management’s intention to settle such awards in cash. All
SARs issued to employees were fully vested, and the fair values are now solely subject to market price fluctuations.
Both the binomial and the Black-Scholes-Merton option-pricing models require the input of highly subjective
73
WESTERN DIGITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
assumptions. The Company is required to use judgment in estimating the amount of stock-based awards that are
expected to be forfeited. If actual forfeitures differ significantly from the original estimate, stock-based compensation
expense and the results of operations could be materially affected. PSUs are granted to certain employees and vest only
after the achievement of pre-determined performance metrics. Once the performance metrics are met, vesting of PSUs
is subject to continued service by the employee. At the end of each reporting period, the Company evaluates the
probability that PSUs will be earned. The Company records stock-based compensation expense based on the proba-
bility that the performance metrics will be achieved over the vesting period.
Other Comprehensive Income (Loss), Net of Tax
Other comprehensive income (loss), net of tax refers to revenue, expenses, gains and losses that are recorded as an
element of shareholders’ equity but are excluded from net income. The Company’s other comprehensive income (loss),
net of tax is comprised of unrealized gains or losses on foreign exchange contracts and interest rate swap agreements
designated as cash flow hedges, available-for-sale securities, foreign currency translation, and actuarial gains or losses
related to pensions.
Derivative Contracts
The majority of the Company’s transactions are in U.S. dollars; however, some transactions are based in various
foreign currencies. The Company purchases foreign exchange contracts to hedge the impact of foreign currency
exchange fluctuations on certain underlying assets, liabilities and commitments for operating expenses and product
costs denominated in foreign currencies. The purpose of entering into these hedging transactions is to minimize the
impact of foreign currency fluctuations on the Company’s results of operations. These contract maturity dates do not
exceed 12 months. All foreign exchange contracts are for risk management purposes only. The Company does not
purchase foreign exchange contracts for speculative or trading purposes. The Company had foreign exchange contracts
with commercial banks for British Pound Sterling, European Euro, Japanese yen, Malaysian ringgit, Philippine peso,
Singapore dollar and Thai baht, which had an aggregate notional amount of $2.79 billion and $3.07 billion at
June 30, 2017 and July 1, 2016, respectively.
If the derivative is designated as a cash flow hedge, the effective portion of the change in fair value of the
derivative is initially deferred in other comprehensive income (loss), net of tax. These amounts are subsequently
recognized into earnings when the underlying cash flow being hedged is recognized into earnings. Recognized gains
and losses on foreign exchange contracts are reported in cost of revenue and operating expenses, and presented within
cash flows from operating activities. Hedge effectiveness is measured by comparing the hedging instrument’s cumu-
lative change in fair value from inception to maturity to the underlying exposure’s terminal value. The Company
determined the ineffectiveness associated with its cash flow hedges to be immaterial to the Consolidated Financial
Statements for all years presented.
A change in the fair value of undesignated hedges is recognized in earnings in the period incurred and is reported
in Other income (expense), net. See Note 4, Fair Value Measurements and Investments, and Note 5, Derivative Instruments
and Hedging Activities, for additional disclosures related to the Company’s foreign exchange contracts.
The Company accounts for its interest rate swap as a designated cash flow hedge to mitigate variations in interest
payments under a portion of its LIBOR-based term loans due to variations in the LIBOR index. The Company pays
interest monthly at a fixed rate and receives interest monthly at the LIBOR rate on the notional amount of the con-
tract. The effective portion of the change in fair value of this designated cash flow hedge is deferred in other compre-
hensive income (loss), net of tax, with any ineffective portion recognized in Other income (expense), net. See Note 5,
Derivative Instruments and Hedging Activities, and Note 6, Debt, for further discussion on interest rate swaps.
Pensions and Other Post-Retirement Benefit Plans
The Company has defined benefit pension plans and other post-retirement plans covering certain employees in
various countries. The benefits are based on the employees’ years of service and compensation. The plans are funded in
74
WESTERN DIGITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
conformity with the funding requirements of applicable government authorities. The Company amortizes unrecog-
nized actuarial gains and losses and prior service costs on a straight-line basis over the remaining estimated average
service life of the participants. The measurement date for the plans is the Company’s fiscal year-end. The Company
recognizes the funded status of its defined benefit pension and post-retirement plans in the Consolidated Balance
Sheets, with changes in the funded status recognized through accumulated other comprehensive income (loss) in the
year in which such changes occur. See Note 8, Pension and Other Post-Retirement Benefit Plans, for additional disclosures
related to the Company’s pensions and other post-retirement benefit plans.
Note 2. Recently Adopted Accounting Pronouncements
In April 2015, the Financial Accounting Standard Board (“FASB”) issued Accounting Standards Update (“ASU”)
No. 2015-05, “Intangibles — Goodwill and Other — Internal-Use Software (Subtopic 350-40)” (“ASU 2015-05”),
which provides guidance to customers about whether a cloud computing arrangement includes a software license. If a
cloud computing arrangement includes a software license, the customer should account for the software license ele-
ment of the arrangement consistent with the acquisition of other software licenses. If a cloud computing arrangement
does not include a software license, the customer should account for the arrangement as a service contract. The
Company’s adoption of ASU 2015-05 at the beginning of the current year did not have a material impact on its Con-
solidated Financial Statements.
Note 3. Supplemental Financial Statement Data
Accounts receivable, net
From time to time, in connection with factoring agreements, the Company sells trade accounts receivable with-
out recourse to third party purchasers in exchange for cash. During 2017, the Company did not sell any trade accounts
receivable. During 2016, the Company sold trade accounts receivable and received cash proceeds of $225 million. The
discounts on the trade accounts receivable sold during 2016 were not material and were recorded within Other income
(expense), net in the Consolidated Financial Statements.
Inventories
Inventories:
June 30,
2017
July 1,
2016
(in millions)
Raw materials and component parts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Work-in-process . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Finished goods . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 646
632
1,063
$ 569
589
971
Total inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$2,341
$2,129
75
WESTERN DIGITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Property, plant, and equipment, net
Property, plant, and equipment:
June 30,
2017
July 1,
2016
(in millions)
Land and buildings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Machinery and equipment
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Software . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Furniture and fixtures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Leasehold improvements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Construction-in-process . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 1,855
6,868
284
116
259
144
$ 1,900
6,915
155
110
307
245
Property, plant, and equipment, gross
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accumulated depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
9,526
(6,493)
9,632
(6,129)
Property, plant, and equipment, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 3,033
$ 3,503
Depreciation expense of property, plant, and equipment totaled $960 million, $888 million and $809 million in
2017, 2016 and 2015, respectively.
Product warranty liability
Changes in the warranty accrual were as follows:
Warranty accrual, beginning of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Warranty liabilities assumed as a result of acquisitions . . . . . . . . . . . . . . . . . . . . . . . . .
Charges to operations
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Utilization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Changes in estimate related to pre-existing warranties . . . . . . . . . . . . . . . . . . . . . . . . . .
2017
$ 279
—
177
(151)
6
2016
(in millions)
$ 221
45
162
(178)
29
2015
$ 182
1
187
(190)
41
Warranty accrual, end of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 311
$ 279
$ 221
The long-term portion of the warranty accrual classified in Other liabilities was $125 million and $107 million
as of June 30, 2017 and July 1, 2016, respectively.
76
WESTERN DIGITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Accumulated other comprehensive income
Other comprehensive income (“OCI”), net of tax refers to expenses, gains and losses that are recorded as an ele-
ment of shareholders’ equity but are excluded from net income. The following table illustrates the changes in the
balances of each component of Accumulated other comprehensive income (loss) (“AOCI”):
Actuarial
Pension Gains
(Losses)
Foreign
Currency
Translation
Gains (Losses)
Balance at July 3, 2015 . . . . . . . . . . . . . . . . . .
Other comprehensive income (loss) before
$ 5
$ —
reclassifications
. . . . . . . . . . . . . . . . . . . .
(73)
Amounts reclassified from accumulated
other comprehensive income (loss) . . . . . .
Income tax benefit related to items of other
comprehensive income (loss)
. . . . . . . . . .
Net current-period other comprehensive
income (loss)
. . . . . . . . . . . . . . . . . . . .
Balance at July 1, 2016 . . . . . . . . . . . . . . . . . .
Other comprehensive income (loss) before
reclassifications
. . . . . . . . . . . . . . . . . . . .
Amounts reclassified from accumulated
other comprehensive income (loss) . . . . . .
Income tax benefit (expense) related to items
of other comprehensive income (loss) . . . .
—
23
(50)
(45)
39
—
(12)
Net current-period other comprehensive
income (loss)
. . . . . . . . . . . . . . . . . . . .
27
Balance at June 30, 2017 . . . . . . . . . . . . . . . . .
$(18)
74
—
—
74
74
(115)
—
2
(113)
$ (39)
Unrealized
Gains (Losses)
on Available for
Sale Securities
(in millions)
$—
Unrealized
Gains (Losses)
on Derivative
Contracts
Total
Accumulated
Comprehensive
Income (Loss)
$(25)
$ (20)
—
—
—
—
—
2
—
—
2
$ 2
48
51
—
99
74
(47)
(30)
—
(77)
$ (3)
49
51
23
123
103
(121)
(30)
(10)
(161)
$ (58)
The following table illustrates the significant amounts of each component reclassified out of AOCI to the Con-
solidated Statements of Operations:
AOCI Component
2017
2016
(in millions)
2015
Statement of Operations Line Item
Unrealized holding gain (loss) on cash flow hedging
activities:
Foreign exchange contracts . . . . . . . . . . . . . . . . . . . . . . . .
Foreign exchange contracts . . . . . . . . . . . . . . . . . . . . . . . .
$33
(3)
$(17)
(34)
$(44) Cost of revenue
— Research and development
Total reclassifications for the period . . . . . . . . . . . . . . . . . . .
$30
$(51)
$(44)
77
WESTERN DIGITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Note 4. Fair Value Measurements and Investments
The Company’s total cash, cash equivalents and marketable securities was as follows:
June 30,
2017
July 1,
2016
(in millions)
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Short-term marketable securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Long-term marketable securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$6,354
24
94
$8,151
227
119
Total cash, cash equivalents and marketable securities
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$6,472
$8,497
Financial Instruments Carried at Fair Value
Financial assets and liabilities that are remeasured and reported at fair value at each reporting period are classified
and disclosed in one of the following three levels:
Level 1. Quoted prices in active markets for identical assets or liabilities.
Level 2.
Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for
similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are
observable or can be corroborated by observable market data for substantially the full term of the assets
or liabilities.
Level 3.
Inputs that are unobservable for the asset or liability and that are significant to the fair value of the
assets or liabilities.
78
WESTERN DIGITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The following tables present information about the Company’s financial assets and liabilities that are measured at
fair value on a recurring basis as of June 30, 2017 and July 1, 2016, and indicate the fair value hierarchy of the valu-
ation techniques utilized to determine such values:
June 30, 2017
Level 1
Level 2
Level 3
Total
(in millions)
Assets:
Cash equivalents:
Money market funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Certificates of deposit
$2,836
—
$ —
10
$— $2,836
10
—
Total cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2,836
Short-term investments:
Corporate notes and bonds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Asset-backed securities
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Municipal notes and bonds
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Equity securities
Total short-term investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Long-term investments:
U.S. Treasury securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
U.S. Government agency securities
. . . . . . . . . . . . . . . . . . . . . . . . . . . .
International government securities . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Corporate notes and bonds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Asset-backed securities
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Municipal notes and bonds
Total long-term investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign exchange contracts
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
—
—
—
4
4
5
—
—
—
—
—
5
—
10
11
7
2
—
20
—
5
1
67
7
9
89
16
—
—
—
—
—
—
—
—
—
—
—
—
—
—
2,846
11
7
2
4
24
5
5
1
67
7
9
94
16
Total assets at fair value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$2,845
$135
$— $2,980
Liabilities:
Foreign exchange contracts
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest rate swap contract . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Exchange option . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ — $
—
—
8
1
—
$— $
—
1
8
1
1
Total liabilities at fair value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ — $
9
$ 1
$
10
79
WESTERN DIGITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
July 1, 2016
Level 1
Level 2
Level 3
Total
(in millions)
Assets:
Cash equivalents:
Money market funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Certificates of deposit
$2,199
—
$ — $ — $2,199
1
—
1
Total cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2,199
1
Short-term investments:
Certificates of deposit
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Corporate notes and bonds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Asset-backed securities
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Municipal notes and bonds
Total short-term investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Long-term investments:
U.S. Treasury securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
U.S. Government agency securities
. . . . . . . . . . . . . . . . . . . . . . . . . . . .
International government securities . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Corporate notes and bonds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Asset-backed securities
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Municipal notes and bonds
Total long-term investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign exchange contracts
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Call options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
—
—
—
—
—
2
—
—
—
—
—
2
—
—
202
8
11
6
227
—
10
1
89
11
6
117
126
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
71
2,200
202
8
11
6
227
2
10
1
89
11
6
119
126
71
Total assets at fair value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$2,201
$471
$ 71
$2,743
Liabilities:
Foreign exchange contracts
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Exchange option . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ — $ 23
—
—
$ — $
155
23
155
Total liabilities at fair value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ — $ 23
$155
$ 178
Money Market Funds. The Company’s money market funds are funds that invest in U.S. Treasury and U.S.
Government agency securities. Money market funds are valued based on quoted market prices.
Certificates of Deposit. The Company’s certificates of deposit are investments which are held in custody by a third
party. Certificates of deposit are valued using fixed interest rates.
Asset-Backed Securities, and Corporate and Municipal Notes and Bonds. The Company’s asset-backed securities, and
Corporate and Municipal notes and bonds securities are investments issued by corporations and U.S. state municipal-
ities which are held in custody by a third party. Asset-backed securities, and Corporate and Municipal notes and bonds
are valued using a market approach which is based on observable inputs including market interest rates from multiple
pricing sources.
U.S. Treasury Securities. The Company’s U.S. Treasury securities are direct obligations of the U.S. federal
government and are held in custody by a third party. U.S. Treasury securities are valued using a market approach
which is based on observable inputs including market interest rates from multiple pricing sources.
80
WESTERN DIGITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
U.S. Government Agency and International Government Securities. The Company’s U.S. Government agency and
international government securities are investments in fixed income securities sponsored by the U.S. Government and
international governments and are held in custody by a third party. U.S. Government agency and international
government securities are valued using a market approach which is based on observable inputs including market
interest rates from multiple pricing sources.
Foreign Exchange Contracts. The Company’s foreign exchange contracts are short-term contracts to hedge the
Company’s foreign currency risk. Foreign exchange contracts are valued using an income approach that is based on a
present value of future cash flows model. The market-based observable inputs for the model include forward rates and
credit default swap rates. For more information on the Company’s foreign exchange contracts, see Note 5, Derivative
Instruments and Hedging Activities.
Interest Rate Swaps. The Company’s interest rate swaps are long-term contracts to hedge the Company’s variable
rate debt risk. Interest rate swaps are valued based on estimated present value of future cash flows model. The market-
based observable inputs for the model include interest rate curves and credit valuation adjustments.
During 2017 and 2016, the Company had no transfers of financial assets and liabilities between Level 1 and
Level 2.
Assets and Liabilities Measured at Fair Value on a Recurring Basis Using Significant Unobservable Inputs (Level 3)
Call Options. The call options are derivative instruments classified as an asset that result in the Company receiv-
ing cash and shares that partially offset the Company’s obligation upon conversion of its convertible notes.
Exchange Options. The Company’s convertible notes were bifurcated into a debt host and exchange option for
accounting purposes. The exchange options are accounted for as derivative liabilities because they are predominantly
settled in cash.
The fair value measurement of the call options and exchange options arising from the Company’s Convertible
Notes (as defined in Note 6, Debt), which are not actively traded, is determined using unobservable inputs (Level 3).
These inputs include (i) the estimated amount and timing of settlement of the underlying debt; (ii) the probability of
the achievement of the factor(s) on which the settlement is based; (iii) the risk-adjusted discount rate based on the
expected term to maturity of the debt; and (iv) the economic incentive for holders to exercise their exchange option.
Significant increases or decreases in any of those inputs in isolation could result in a significantly lower or higher fair
value measurement.
There were no transfers of call options or exchange options out of Level 3 for 2017.
The following table illustrates the changes in the balances of the call options reported in Other current assets and
Other non-current assets in the Company’s Consolidated Balance Sheets:
Initial estimate upon acquisition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Redemptions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net unrealized gain . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 501
(437)
6
2017 Call
Options
2020 Call
Options
(in millions)
$—
—
1
Fair value as of July 1, 2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net realized gain (loss)
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Redemptions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
70
2
(72)
1
(1)
—
Total
$ 501
(437)
7
71
1
(72)
Fair value as of June 30, 2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ —
$—
$ —
81
WESTERN DIGITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The following table illustrates the changes in the balances of the exchange options reported in Accrued expenses
and Other liabilities in the Company’s Consolidated Balance Sheets:
Initial estimate upon acquisition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net realized loss
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Redemptions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net unrealized gain . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fair value as of July 1, 2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net realized gain . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Redemptions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net unrealized loss
2017 Exchange
Options
2020 Exchange
Options
Total
$ 610
8
(531)
—
87
(3)
(83)
—
(in millions)
$ 357
8
(283)
(14)
68
(31)
(46)
9
$ 967
16
(814)
(14)
155
(34)
(129)
9
Fair value as of June 30, 2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
1
$ —
$
1
Available-for-Sale Securities
The cost basis of the Company’s investments classified as available-for-sale securities, individually and in the
aggregate, approximated its fair value as of June 30, 2017 and July 1, 2016. The cost basis and fair value of the
Company’s investments classified as available-for-sale securities as of June 30, 2017, by remaining contractual
maturity, were as follows:
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Due in less than one year (short-term investments)
Due in one to five years (included in other non-current assets) . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cost Basis
Fair Value
(in millions)
$ 22
94
$116
$ 24
94
$118
The Company determined available-for-sale securities had no material other-than-temporary impairments during
2017, 2016 and 2015.
82
WESTERN DIGITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Financial Instruments Not Carried at Fair Value
For financial instruments where the carrying value (which includes principal adjusted for any unamortized issu-
ance costs, and discounts or premiums) differs from fair value (which is based on quoted market prices), the following
table represents the related carrying value and fair value for each of the Company’s outstanding financial instruments.
Each of the financial instruments presented below was categorized as Level 2 for all periods presented, based on the
frequency of trading immediately prior to the end of the fourth quarter of 2017 and the fourth quarter of 2016,
respectively.
June 30, 2017
July 1, 2016
Carrying
Value
Fair
Value
Carrying
Value
Fair
Value
(in millions)
Secured Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unsecured Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Term Loan A . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
U.S. Term Loan B . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
U.S. Term Loan B-2 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Euro Term Loan B(1)
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Euro Term Loan B-2(1)
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Bridge Loan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Convertible Debt 2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Convertible Debt 2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 1,835
3,244
4,074
—
2,968
—
1,000
—
—
30
$ 2,062
3,956
4,130
—
2,989
—
1,010
—
—
34
$ 1,828
3,229
4,061
3,546
—
960
—
2,995
124
251
$ 2,044
3,575
4,161
3,773
—
981
—
3,000
125
264
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$13,151
$14,181
$16,994
$17,923
(1) Euro Term Loan B and Euro Term Loan B-2 outstanding principal amounts as of June 30, 2017 and July 1, 2016
were based upon the Euro to U.S. dollar exchange rate as of those respective dates.
Equity Method Investments
In November 2015, the Company entered into an agreement to form a joint venture, referred to as the “Unis
Venture”, with Unisplendour Corporation Limited (“Unis”) to market and sell the Company’s current data center
storage systems in China and to develop data storage systems for the Chinese market in the future. The Unis Venture
became operational during 2017. The Unis Venture is 49% owned by the Company and 51% owned by Unis and its
subsidiary, Unissoft (Wuxi) Group Co. Ltd. The Company accounts for its investment in the Unis Venture under the
equity method of accounting. The investment in Unis Venture is recorded within Other non-current assets in the
Consolidated Balance Sheets and is not material to the Consolidated Financial Statements as of June 30, 2017 and
July 1, 2016.
In addition, the Company has joint venture investments with Toshiba Corporation (“Toshiba”), see Note 9,
Commitments, Contingencies and Related Parties, for further discussion regarding these joint ventures.
Cost Method Investments
From time to time, the Company enters into certain strategic investments for the promotion of business and stra-
tegic objectives. The Company reports these investments under the cost method of accounting as these investments
consist of debt and equity securities of privately-held companies which do not have a readily determinable fair value.
The Company assesses these securities for indications of other-than-temporary impairments and, in this regard,
recorded impairment charges of $55 million to Other income (expense), net in the Consolidated Statements of Oper-
ations in 2017. There were no impairment charges related to cost method investments during 2016 and 2015. As of
83
WESTERN DIGITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
June 30, 2017 and July 1, 2016, these investments aggregated $91 million and $135 million, respectively, and are
reported under Other non-current assets in the Consolidated Balance Sheets.
Note 5. Derivative Instruments and Hedging Activities
As of June 30, 2017, the Company had outstanding foreign exchange forward contracts which were designated as
either cash flow hedges or non-designated hedges. The contract maturity dates of these foreign exchange forward con-
tracts do not exceed 12 months. In addition, the Company had outstanding interest rate swaps which were designated
as cash flow hedges. The Company determined the ineffectiveness associated with its cash flow hedges to be immate-
rial to the Consolidated Financial Statements for 2017, 2016 and 2015.
As of June 30, 2017, the amount of existing net losses related to cash flow hedges recorded in Accumulated other
comprehensive income (loss) that are expected to be reclassified into earnings over the next twelve months was
$3 million. In addition, as of June 30, 2017, the Company did not have any foreign exchange forward contracts with
credit-risk-related contingent features.
A change in the fair value of non-designated hedges is recognized in earnings in the period incurred and is
reported as a component of Other income (expense), net. The changes in fair value on these contracts were immaterial
to the Consolidated Financial Statements during 2017, 2016 and 2015.
See Note 4, Fair Value Measurements and Investments, for additional disclosures related to the fair value of the
Company’s foreign exchange forward contracts.
Derivative Instruments
The fair value and balance sheet location of the Company’s derivative instruments were as follows:
Foreign exchange forward contracts, designated . . . . . . . . . . . . . . . . . . . . . . . .
Foreign exchange forward contracts, not designated . . . . . . . . . . . . . . . . . . . . .
Call options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total derivatives . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign exchange forward contracts, designated . . . . . . . . . . . . . . . . . . . . . . . .
Foreign exchange forward contracts, not designated . . . . . . . . . . . . . . . . . . . . .
Interest rate swaps, designated . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Exchange option . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total derivatives . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Derivative Assets Reported in
Other current
assets
June 30,
2017
July 1,
2016
Other non-current
assets
June 30,
2017
July 1,
2016
(in millions)
$ 6
10
—
$16
$114
12
70
$196
$—
—
—
$—
$—
—
1
$ 1
Derivative Liabilities Reported in
Accrued expenses
July 1,
June 30,
2016
2017
Other liabilities
June 30,
2017
July 1,
2016
(in millions)
$ 2
6
1
—
$ 9
$ 23
—
—
141
$164
$—
—
—
1
$ 1
$—
—
—
14
$14
Netting Arrangements
Under certain provisions and conditions within agreements with counterparties to the Company’s foreign
exchange forward contracts, subject to applicable requirements, the Company has the right of set-off associated with
the Company’s foreign exchange forward contracts and is allowed to net settle transactions of the same currency with a
84
WESTERN DIGITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
single net amount payable by one party to the other. As of June 30, 2017, the Company did not offset or net the fair
value amounts of derivative instruments in its Consolidated Balance Sheets and separately recorded the gross fair value
amounts of the derivative instruments as either assets or liabilities. As of June 30, 2017 and July 1, 2016, the effect of
rights of set-off was not material.
Effect of Derivative Contracts on the Consolidated Statements of Operations
The impact of derivative contracts on the Consolidated Financial Statements was as follows:
Amount of Gain (Loss) Recognized in AOCI
2016
(in millions)
2017
2015
Derivatives designated as hedging instruments:
Foreign exchange forward contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest rate swaps . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total
$(46)
(1)
$(47)
$48
—
$48
$(74)
—
$(74)
Amount of Gain (Loss) Reclassified from
AOCI into Earnings
2016
(in millions)
2015
2017
Derivatives designated as hedging instruments:
Foreign exchange forward contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$30
$(51)
$(44)
The total net realized transaction and foreign exchange forward contract currency gains and losses were not mate-
rial to the Consolidated Financial Statements for 2017, 2016 and 2015.
Note 6. Debt
Debt consisted of the following as of June 30, 2017 and July 1, 2016:
Variable interest rate Term Loan A maturing 2021 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Variable interest rate U.S. Term Loan B maturing 2023 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Variable interest rate U.S. Term Loan B-2 maturing 2023 . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . .
Variable interest rate Euro Term Loan B maturing 2023(1)
. . . . . . . . . . . . . . . . . . . . . . . . . .
Variable interest rate Euro Term Loan B-2 maturing 2023(1)
7.375% senior secured notes due 2023 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
10.500% senior unsecured notes due 2024 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Convertible senior notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Bridge loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Issuance costs and debt discounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Subtotal
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less bridge loans and current portion of long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . .
June 30,
2017
July 1,
2016
(in millions)
$ 4,125
—
2,970
—
1,001
1,875
3,350
35
—
13,356
(205)
13,151
(233)
$ 4,125
3,750
—
987
—
1,875
3,350
439
3,000
17,526
(532)
16,994
(3,334)
Long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$12,918
$13,660
(1) Euro Term Loan B and Euro Term Loan B-2 outstanding principal amounts as of June 30, 2017 and July 1, 2016
were based upon the Euro to U.S. dollar exchange rate as of those respective dates.
85
WESTERN DIGITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Credit Agreement — Term Loans and Revolving Credit Facility
On April 29, 2016, the Company entered into a credit agreement (the “Credit Agreement”) that provided for the
following facilities:
‰ Term Loan A. Term Loan A with interest payable monthly at a rate based on LIBOR, plus an applicable
spread of 2.00% (approximately 3.23% at June 30, 2017). Beginning in September 2017, the Company is
required to make quarterly principal payments on Term Loan A totaling $206 million in fiscal 2018,
$309 million in fiscal 2019, $413 million in fiscal 2020 and the remaining balance of $3.20 billion due in
fiscal 2021. The aggregate principal amount outstanding was $4.13 billion at both June 30, 2017 and July 1,
2016. As of June 30, 2017, unamortized issuance costs were $51 million.
‰ U.S. Term Loan B. U.S. dollar-denominated Term Loan B (“U.S. Term Loan B”) which bore interest at a rate
based on LIBOR, subject to a 0.75% floor, plus an applicable spread of 5.50% and had an aggregate principal
amount outstanding of $3.75 billion at July 1, 2016. On August 17, 2016, the Company borrowed
$3.00 billion under a new U.S. dollar-denominated term loan (“U.S. Term Loan B-1”) under the Credit
Agreement and used the proceeds of this new loan and cash of $750 million to prepay in full the U.S. Term
Loan B previously outstanding under the Credit Agreement. After making scheduled principal payments dur-
ing the year of $15 million on U.S. Term Loan B-1, on March 14, 2017, the Company borrowed $2.99 billion
under a new U.S. dollar-denominated term loan (“U.S. Term Loan B-2”) under the Credit Agreement and used
the proceeds of this new loan to prepay in full the U.S. Term Loan B-1 previously outstanding under the Credit
Agreement. The U.S. Term Loan B-2 has an interest rate equal to, at the Company’s option, either an adjusted
LIBOR rate, subject to a 0.75% floor, plus 2.75% or a base rate plus 1.75% (3.98% as of June 30, 2017).
Principal payments on U.S. Term Loan B-2 of approximately $7 million are due quarterly and began on
March 31, 2017 with the balance due on April 29, 2023. As of June 30, 2017, the aggregate principal amount
outstanding on U.S. Term Loan B-2 was $2.97 billion and unamortized issuance costs were $2 million.
‰ Euro Term Loan B. Euro-denominated Term Loan B (“Euro Term Loan B”) which bore interest at a rate based
on EURIBOR, subject to a 0.75% floor, plus an applicable spread of 5.25% and had an aggregate principal
amount outstanding of €885 million at July 1, 2016. On September 22, 2016, the Company borrowed
€885 million under a new Euro-denominated term loan (“Euro Term Loan B-1”) under the Credit Agreement
and used the proceeds of this new loan to prepay in full the Euro Term Loan B previously outstanding under
the Credit Agreement. After making scheduled principal payments during the year of €4 million on Euro
Term Loan B-1, on March 23, 2017, the Company borrowed €881 million under a new Euro-denominated
term loan (“Euro Term Loan B-2”) under the Credit Agreement and used the proceeds of this new loan to pre-
pay in full the Euro Term Loan B-1 previously outstanding under the Credit Agreement. The Euro Term
Loan B-2 has an interest rate equal to, at the Company’s option, either an adjusted EURIBOR rate, subject to a
0.75% floor, plus 2.00% or a base rate plus 1.75% (2.75% as of June 30, 2017). Principal payments on Euro
Term Loan B-2 of approximately €2 million are due quarterly and began on March 31, 2017 with the balance
due on April 29, 2023. As of June 30, 2017, the aggregate principal amount outstanding on Euro Term
Loan B-2 was €876 million ($1.00 billion, based upon the Euro to U.S. dollar exchange rate as of June 30,
2017) and unamortized issuance costs were $1 million.
‰ Revolving Credit Facility. Revolving credit facility of $1.00 billion, which includes a $200 million sublimit
for letters of credit (the “Revolving Credit Facility”). Borrowings under the revolving credit facility bear inter-
est at a rate based on LIBOR, plus an applicable spread of 2.00%. The Revolving Credit Facility has a 5-year
term. As of June 30, 2017, the revolving credit facility was not drawn upon, and there was no outstanding
balance.
In connection with the settlement of the U.S. Term Loans B and B-1 and Euro Term Loans B and B-1, the
Company recognized an aggregate loss of $274 million during 2017 consisting of unamortized issuance costs, debt
discount fees, and call premiums.
86
WESTERN DIGITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
In May 2017, the Company entered into an interest rate swap for $1.00 billion notional amount which it has
designated as a cash flow hedge to mitigate variations in interest payments under a portion of its LIBOR-based term
loans due to variations in the LIBOR index. Under the agreement, the Company pays interest monthly at a fixed rate
of 1.66% and receives at LIBOR rate on the notional amount of the contract through May 2020.
The obligations under the Credit Agreement are guaranteed by HGST, Inc., WD Media, LLC, Western Digital
(Fremont), LLC and Western Digital Technologies, Inc. (“WDT”) (together referred to as the “WD Guarantors”), and
are secured on a first-priority basis by a lien on substantially all the assets and properties of the Company and the WD
Guarantors, including all of the capital stock held by these entities (subject to a 65% limitation on pledges of capital
stock of foreign subsidiaries and domestic holding companies of foreign subsidiaries), subject to certain exceptions.
The term loans and the revolving credit facility under the Credit Agreement may be prepaid in whole or in part
at any time without premium or penalty, subject to certain conditions, except that the U.S. Term Loan B-2 and the
Euro Term Loan B-2 require the Company to pay a 1.0% prepayment fee if the loans are repaid in connection with
certain “repricing” transactions on or before September 14, 2017 and September 23, 2017, respectively.
The Credit Agreement requires the Company to comply with certain financial covenants, such as a leverage ratio
and an interest coverage ratio. As of June 30, 2017, the Company was in compliance with all financial covenants. In
addition, the documents governing substantially all of the Company’s outstanding debt, including the Credit Agree-
ment, require the Company to comply with customary covenants that limit or restrict the Company’s and its sub-
sidiaries’ ability to incur liens and indebtedness; make certain restricted payments, acquisitions, investments, loans
and guarantees; and enter into certain transactions with affiliates, mergers and consolidations.
Senior Notes
On April 13, 2016, the Company completed an offering consisting of $1.88 billion 7.375% senior secured notes
due May 2023 (the “Secured Notes”) and $3.35 billion 10.500% senior unsecured notes due May 2024 (the “Initial
Unsecured Notes”). On January 6, 2017, to fulfill the Company’s obligations under the registration rights agreement
associated with the Initial Unsecured Notes, the Company commenced an exchange offer to exchange all of these out-
standing unsecured notes for an equal principal amount of new 10.500% senior unsecured notes due 2024 (the “New
Unsecured Notes”), with substantially the same terms as the Initial Unsecured Notes. On February 6, 2017, the
exchange offer expired and substantially all of the outstanding Initial Unsecured Notes were tendered in the exchange
offer and accepted by the Company. The New Unsecured Notes are registered under the Securities Act of 1933, as
amended, and have no transfer restrictions or rights to additional interest. The New Unsecured Notes and the Secured
Notes are collectively referred to as the “Notes”. The Company pays cash interest on the Notes semi-annually on
April 1 and October 1. As of June 30, 2017, the unamortized issuance cost of the Secured Notes and New Unsecured
Notes was $40 million and $106 million, respectively
The Company is not required to make principal payments on the Notes prior to their respective maturity dates,
except that the Company may be required to offer to purchase the Notes upon the occurrence of a change of control (as
defined in the indentures governing the Notes) or with the proceeds of certain non-ordinary course asset sales.
The Notes are guaranteed by the WD Guarantors, and the Secured Notes and related guarantees are secured on
an equal and ratable basis by liens on the same assets that secure indebtedness under the Credit Agreement.
Convertible Notes, Exchange Options and Call Options
As of July 1, 2016, the Company had outstanding $129 million aggregate principal amount of its 1.5% Con-
vertible Senior Notes due 2017 (the “2017 Notes”) and $310 million aggregate principal amount of its 0.5% Con-
vertible Senior Notes due 2020 (the “2020 Notes” and, together with the 2017 Notes, the “Convertible Notes”). The
Company assumed the Convertible Notes in connection with its acquisition of SanDisk Corporation (“SanDisk”),
pursuant to an Agreement and Plan of Merger (the “Merger”), on May 12, 2016 (the “SanDisk Closing Date”). The
2017 Notes matured on August 15, 2017 and the 2020 Notes mature on November 15, 2020.
87
WESTERN DIGITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
During 2017, the Company paid to the holders of the Convertible Notes for conversion and repurchase,
$492 million of cash and 0.3 million shares of the Company’s common stock with an aggregate value of $16 million.
As of June 30, 2017, $35 million principal amount of the 2020 Notes were outstanding, which had a conversion
rate of 10.9006 units of reference property per $1,000 principal amount of the 2020 Notes, corresponding to 2.6020
shares of the Company’s common stock and $735.79 of cash, subject to adjustments under the indenture. The
2020 Notes are not currently exchangeable into reference property. In addition, as of June 30, 2017, the Company had
an immaterial amount of 2017 Notes outstanding. The 2017 Notes were paid in full and the related call option was
terminated on August 15, 2017.
The Convertible Notes were bifurcated into a debt host and exchange option for accounting purposes. The
exchange options are accounted for as a derivative liability because they are predominantly settled in cash. Changes in
the fair value of the exchange options are reported, and will be reported until the Company extinguishes the related
debt, in Other income (expense), net in the consolidated statements of operations. The exchange options are measured
and reported at fair value on a recurring basis, within Level 3 of the fair value hierarchy. The fair value of the
unredeemed and unsettled exchange options is reported in Accrued expenses and Other liabilities in the Consolidated
Balance Sheets. See Note 4, Fair Value Measurements and Investments, for additional disclosures related to the fair values
of the exchange options. For 2017, the change in the fair value of the outstanding exchange options related to the
Convertible Notes resulted in an immaterial loss.
In connection with the Merger, the Company assumed the outstanding call options entered into by SanDisk at
the inception of the respective Convertible Notes, which were structured to reduce the potential economic dilution
associated with the conversion of Convertible Notes. The call options are derivative instruments classified as an asset
that result in the Company receiving cash and shares that partially offset the Company’s obligation upon conversion of
the Convertible Notes. The fair value of the unredeemed and unsettled call options is reported in Other current assets
and Other non-current assets in the Consolidated Balance Sheets. During 2017, under the call options, the Company
received $61 million of cash and 0.1 million shares of the Company’s common stock which had an aggregate value of
$11 million. During 2017, the Company recognized an immaterial non-cash loss related to the change in value in the
outstanding call options. The value of the call options as of June 30, 2017 was immaterial.
The conversion and repurchase of the Convertible Notes and related settlement of the call options during 2017
resulted in an immaterial net loss.
Additional Bridge Facility
On May 12, 2016, WDT entered into a short-term senior secured bridge credit agreement providing for
$3.00 billion in aggregate principal amount of senior secured bridge loans. On July 21, 2016, the Company repaid in
full the $3.00 billion aggregate principal amount outstanding, together with accrued interest.
88
WESTERN DIGITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Future Debt Payments
As of June 30, 2017, annual future debt payments were as follows:
Fiscal year
2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2019 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2021 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2022 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2023 and thereafter
Future Debt
Payments
(in millions)
$
246
350
452
3,272
40
8,996
Total debt maturities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Issuance costs and debt discounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
13,356
(205)
Net carrying value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$13,151
Note 7. Goodwill and Other Intangible Assets
The following table summarizes the activity related to the carrying amount of goodwill:
Balance at July 3, 2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Goodwill recorded in connection with acquisitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign currency translation adjustment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Carrying Amount
(in millions)
$ 2,766
7,183
2
Balance at July 1, 2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Purchase price adjustments to goodwill
Foreign currency translation adjustment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
9,951
66
(3)
Balance at June 30, 2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$10,014
The purchase price adjustments resulted from adjustments to the assessment of fair value for certain acquired
intangible assets; inventory; property, plant and equipment; and a portion of the deferred tax liability related to the
Merger.
89
WESTERN DIGITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The following tables present intangible assets as of June 30, 2017 and July 1, 2016:
June 30, 2017
Weighted Average
Amortization Period
(in years)
Gross Carrying
Amount
Accumulated
Amortization
(in millions)
Net Carrying
Amount
Finite:
Existing technology . . . . . . . . . . . . . . . . . . . . .
Trade names and trademarks . . . . . . . . . . . . . .
Customer relationships . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Leasehold interests . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . .
Total finite intangible assets
In-process research and development . . . . . . . . . .
3
7
6
2
31
$3,478
645
627
375
35
5,160
696
$(1,373)
(134)
(227)
(288)
(11)
(2,033)
—
$2,105
511
400
87
24
3,127
696
Total intangible assets . . . . . . . . . . . . . . . . . . . . .
$5,856
$(2,033)
$3,823
Weighted Average
Amortization Period
(in years)
July 1, 2016
Gross Carrying
Amount
Accumulated
Amortization
(in millions)
Net Carrying
Amount
Finite:
Existing technology . . . . . . . . . . . . . . . . . . . . .
Trade names and trademarks . . . . . . . . . . . . . .
Customer relationships . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Leasehold interests . . . . . . . . . . . . . . . . . . . . . .
Total finite intangible assets
. . . . . . . . . . . . . . . .
In-process research and development . . . . . . . . . .
Total intangible assets . . . . . . . . . . . . . . . . . . . . .
3
7
6
2
31
$2,008
645
628
219
39
3,539
2,435
$5,974
$(632)
(45)
(157)
(96)
(10)
(940)
—
$1,376
600
471
123
29
2,599
2,435
$(940)
$5,034
Acquired in-process research and development (“IPR&D”) is accounted for as an indefinite-lived intangible asset.
Upon completion of development, IPR&D is considered to be an amortizable finite-lived intangible asset. During
2017, the Company reclassified $1.74 billion of acquired IPR&D to existing technology and commenced amortization
over an estimated useful life of 4 years.
During 2017, the Company did not record any impairment charges related to intangible assets. During 2016
and 2015, the Company recorded $36 million and $39 million of impairment charges related to intangible assets,
respectively, which are recorded in the employee termination, asset impairment and other charges within the Con-
solidated Statements of Operations. The impairment charges primarily relate to acquired IPR&D projects that were
abandoned and resulted in full impairment.
Intangible assets are amortized over the estimated useful lives based on the pattern in which the economic bene-
fits are expected to be received. Intangible asset amortization was as follows:
Intangible asset amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$1,169
2017
2016
(in millions)
$266
2015
$171
90
WESTERN DIGITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The following table presents estimated future amortization expense for intangible assets currently subject to
amortization as of June 30, 2017:
Future
Intangible Asset
Amortization
Expense
(in millions)
Fiscal year
2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2019 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2021 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2022 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2023 and thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total future amortization expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$1,085
796
590
339
157
160
$3,127
Note 8. Pension and Other Post-Retirement Benefit Plans
The Company has pension and other post-retirement benefit plans in various countries. The Company’s principal
pension plans are in Japan. All pension and other post-retirement benefit plans outside of the Company’s Japanese
defined benefit pension plan (the “Japanese Plan”) are immaterial to the Consolidated Financial Statements.
Obligations and Funded Status
The following table presents the unfunded status of the benefit obligations for the Japanese Plan:
2017
2016
(in millions)
2015
Change in benefit obligation:
Benefit obligation at beginning of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Service cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Actuarial loss (gain)
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Benefits paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Settlement/Curtailment
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-U.S. currency movement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$326
8
1
(22)
(30)
(6)
(28)
$231
8
3
52
(16)
(1)
49
$255
9
4
16
(8)
—
(45)
Benefit obligation at end of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$249
$326
$231
Change in plan assets:
Fair value of plan assets at beginning of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Actual return on plan assets
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Employer contributions
Benefits paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-U.S. currency movement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$212
15
10
(30)
(18)
Fair value of plan assets at end of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$189
Unfunded status . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 60
$185
(14)
20
(16)
37
$212
$114
$191
22
14
(8)
(34)
$185
$ 46
91
WESTERN DIGITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The following table presents the unfunded amounts related to the Japanese Plan as recognized on the Company’s
Consolidated Balance Sheets:
Current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-current liabilities
Net amount recognized . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
June 30,
2017
July 1,
2016
(in millions)
$ 1
59
$60
$ —
114
$114
The accumulated benefit obligation for the Japanese defined benefit pension plans was $249 million at June 30,
2017. As of June 30, 2017, actuarial gains for the Japanese defined benefit pension plans of $16 million are included
in Accumulated other comprehensive income (loss) in the Consolidated Balance Sheet. There were no prior service
credits for the defined benefit pension plans recognized in Accumulated other comprehensive income (loss) in the
Consolidated Balance Sheet as of June 30, 2017.
Assumptions
Weighted-Average Assumptions
The weighted-average actuarial assumptions used to determine benefit obligations for the Japanese defined bene-
fit pension plans were as follows:
2017
2016
2015
Discount rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Rate of compensation increase . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
0.8% 0.4% 1.3%
0.8% 0.8% 0.9%
The weighted-average actuarial assumptions used to determine benefit costs for the Japanese defined benefit
pension plans were as follows:
2017
2016
2015
Discount rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expected long-term rate of return on plan assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Rate of compensation increase . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
0.4% 1.3% 1.6%
2.5% 2.5% 3.5%
0.8% 0.9% 1.0%
The Company develops a discount rate by calculating when the estimated benefit payments will be due. Manage-
ment in Japan then matches the benefit payments to bond ratings that are “AA” or higher which match the timing of
the expected benefit payments to determine the appropriate discount rate.
The Company develops the expected long-term rate of return on plan assets by analyzing rates of return in Japan
as well as the investment portfolio applicable to the plan. The Company’s estimates of future rates of return on assets
is based in large part on the projected rate of return from the respective investment managers using a long-term view
of historical returns, as well as actuarial recommendations using the most current generational and mortality tables
and rates.
The Company develops the rate of compensation increase assumptions using local compensation practices and
historical rates of increases.
Plan Assets
Investment Policies and Strategies
The investment policy in Japan is to generate a stable return on investments over a long-term horizon in order to
have adequate pension funds to meet the Company’s future obligations. In order to achieve this investment goal, a
92
WESTERN DIGITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
diversified portfolio with target asset allocation and expected rate of return is established by considering factors such
as composition of participants, level of funded status, capacity to absorb risks and the current economic environment.
The target asset allocation is 62% in debt securities, 35% in equity securities, and the remaining 3% in other assets.
Risk management is accomplished through diversification, periodic review of plan asset performance and appropriate
realignment of asset allocation. Assumptions regarding the expected long-term rate of return on plan assets are
periodically reviewed and are based on the historical trend of returns, the risk and correlation of each asset and the
latest economic environment.
The expected long-term rate of return is estimated based on many factors, including expected forecast for
inflation, risk premiums for each asset class, expected asset allocation, current and future financial market conditions
and diversification and rebalancing strategies. Historical return patterns and correlations, consensus return forecasts
and other relevant financial factors are analyzed periodically by the investment advisor so as to ensure that the
expected long-term rate of return is reasonable and appropriate.
Fair Value Measurements
The following tables present the Japanese defined benefit pension plans’ major asset categories and their asso-
ciated fair values as of June 30, 2017 and July 1, 2016:
June 30, 2017
Level 1
Level 2
Level 3
Total
(in millions)
Equity:
Equity commingled/mutual funds(1)(2)
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$—
$ 67
$— $ 67
Fixed income:
Fixed income commingled/mutual funds(1)(3)
Cash equivalents and short-term investments . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . —
2
116
4
—
—
116
6
Fair value of plan assets
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 2
$187
$— $189
July 1, 2016
Level 1
Level 2
Level 3
Total
(in millions)
Equity:
Equity commingled/mutual funds(1)(2)
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$—
$ 72
$— $ 72
Fixed income:
Fixed income commingled/mutual funds(1)(3)
Cash equivalents and short-term investments . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . —
8
129
3
—
—
129
11
Fair value of plan assets
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 8
$204
$— $212
(1) Commingled funds represent pooled institutional investments.
(2) Equity mutual funds invest primarily in equity securities.
(3) Fixed income mutual funds invest primarily in fixed income securities.
Assets held in defined benefit plans in the Philippines, Taiwan and Thailand were less than $1 million and are
not presented in the above tables.
There were no significant movements of assets between any level categories in 2017, 2016 or 2015.
93
WESTERN DIGITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Fair Value Valuation Techniques
Equity securities are valued at the closing price reported on the stock exchange on which the individual securities
are traded. Equity commingled/mutual funds are typically valued using the net asset value (“NAV”) provided by the
investment manager or administrator of the fund. The NAV is based on the value of the underlying assets owned by
the fund, minus liabilities and divided by the number of shares or units outstanding. These assets are classified as
either Level 1 or Level 2, depending on availability of quoted market prices for identical or similar assets.
If available, fixed income securities are valued using the close price reported on the major market on which the
individual securities are traded and are classified as Level 1. The fair value of other fixed income securities is typically
estimated using pricing models and quoted prices of securities with similar characteristics, and is generally classified
as Level 2.
Cash equivalents includes money market accounts that are valued at their cost plus interest on a daily basis,
which approximates fair value. Short-term investments represent securities with original maturities of one year or less.
These assets are classified as either Level 1 or Level 2.
Cash Flows
Contributions
The Company’s expected employer contributions for 2018 are $8 million for its Japanese defined benefit pension
plans.
Estimated Future Benefits Payments
Annual benefit payments from the Japanese defined benefit pension plans are estimated to range from $6 million
to $10 million annually over the next 5 years.
Note 9. Commitments, Contingencies and Related Parties
Flash Ventures
The Company’s business ventures with Toshiba consist of three separate legal entities: Flash Partners Ltd. (“Flash
Partners”), Flash Alliance Ltd. (“Flash Alliance”) and Flash Forward Ltd (“Flash Forward”), collectively referred to as
“Flash Ventures”. The Company has a 49.9% ownership interest and Toshiba has a 50.1% ownership interest in each
of these entities. Through Flash Ventures, the Company and Toshiba collaborate in the development and manufacture
of NAND-flash memory wafers, which are manufactured by Toshiba at its wafer fabrication facilities located in Yok-
kaichi, Japan, using semiconductor manufacturing equipment individually owned or leased by each Flash Ventures
entity. Each Flash Ventures entity purchases wafers from Toshiba at cost and then resell those wafers to the Company
and Toshiba at cost plus a markup.
Flash Partners.
Flash Partners was formed in 2004. NAND-flash products provided to the Company by this
venture are manufactured by Toshiba primarily at its 300-millimeter wafer fabrication facility (“Fab 3”) located in
Yokkaichi, Japan.
Flash Alliance.
Flash Alliance was formed in 2006. NAND-flash products provided to the Company by this
venture are manufactured by Toshiba primarily at its 300-millimeter wafer fabrication facility (“Fab 4”) located in
Yokkaichi, Japan.
Flash Forward.
Flash Forward was formed in 2010. NAND-flash products provided to the Company by this
venture are manufactured by Toshiba primarily at its 300-millimeter wafer fabrication facility (“Fab 5”) located in
Yokkaichi, Japan. Fab 5 was built in two phases of approximately equal size.
New Fab 2. The Company has a facility agreement with Toshiba related to the construction and operation of
Toshiba’s “New Fab 2” 300-millimeter wafer fabrication facility located in Yokkaichi, Japan. New Fab 2 is primarily
94
WESTERN DIGITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
intended to provide additional cleanroom space to convert a portion of 2-dimensional (“2D”) NAND-flash wafer
capacity to 3-dimensional (“3D”) NAND-flash wafer capacity. Production of NAND-flash wafers in New Fab 2
started in 2016.
The Company accounts for its ownership position of each entity with Flash Ventures under the equity method of
accounting. The financial and other support provided by the Company in all periods presented was either con-
tractually required or the result of a joint decision to expand wafer capacity, transition to new technologies or
refinance existing equipment lease commitments. Entities within Flash Ventures are variable interest entities
(“VIEs”). The Company evaluated whether it is the primary beneficiary of any of the entities within Flash Ventures for
all periods presented and determined that it is not the primary beneficiary of any of the entities within Flash Ventures
because it does not have a controlling financial interest in any of those entities. In determining whether the Company
is the primary beneficiary, the Company analyzed the primary purpose and design of Flash Ventures, the activities
that most significantly impact Flash Ventures’ economic performance, and whether the Company had the power to
direct those activities. The Company concluded, based upon its 49.9% ownership, the voting structure and the man-
ner in which the day-to-day operations are conducted for each entity within Flash Ventures, that the Company lacked
the power to direct most of the activities that most significantly impact the economic performance of each entity
within Flash Ventures.
The following table presents the notes receivable from, and equity investments in, Flash Ventures as of June 30,
2017 and July 1, 2016:
June 30,
2017
July 1,
2016
(in millions)
Notes receivable, Flash Partners . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Notes receivable, Flash Alliance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Notes receivable, Flash Forward . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Investment in Flash Partners . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Investment in Flash Alliance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Investment in Flash Forward . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 264
119
379
187
279
112
$
65
235
263
202
306
100
Total notes receivable and investments in Flash Ventures . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$1,340
$1,171
During 2017 and 2016, the Company made net payments to Flash Ventures of $2.64 billion and $371 million,
respectively, for purchased NAND-flash memory wafers and net loans and investments.
The Company makes, or will make, loans to Flash Ventures to fund equipment investments for new process
technologies and additional wafer capacity. The Company aggregates its Flash Ventures’ notes receivable into one class
of financing receivables due to the similar ownership interest and common structure in each Flash Venture entity. For
all reporting periods presented, no loans were past due and no loan impairments were recorded. The Company’s notes
receivable from each Flash Ventures entity, denominated in Japanese yen, are secured by equipment owned by that
Flash Ventures entity.
The Company assesses financing receivable credit quality through financial and operational reviews of the bor-
rower and creditworthiness, including credit rating agency ratings, of significant investors of the borrower, where
material or known. Impairments, when required for credit worthiness, are recorded in Other income (expense), net in
the consolidated statements of operations. There were no such impairments in 2017, 2016 or 2015.
As of June 30, 2017 and July 1, 2016, the Company had accounts payable balances due to Flash Ventures of
$206 million and $168 million, respectively.
The Company’s maximum reasonably estimable loss exposure (excluding lost profits) as a result of its involve-
ment with Flash Ventures, based upon the Japanese yen to U.S. dollar exchange rate at June 30, 2017, is presented
95
WESTERN DIGITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
below. Investments in Flash Ventures are denominated in Japanese yen and the maximum possible loss exposure
excludes any cumulative translation adjustment due to revaluation from the Japanese yen to the U.S. dollar.
Notes receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Equity investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Operating lease guarantees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
June 30,
2017
$ 762
578
968
187
Maximum estimable loss exposure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$2,682
As of June 30, 2017 and July 1, 2016, the Company’s retained earnings included undistributed earnings of Flash
Ventures of $5 million and $2 million, respectively.
The Company is committed to purchase its provided three-month forecast of Flash Ventures’ NAND wafer sup-
ply, which generally equals 50% of Flash Ventures’ output. The Company is not able to estimate its total wafer pur-
chase commitment obligation beyond its rolling three-month purchase commitment because the price is determined
by reference to the future cost of producing the semiconductor wafers. In addition, the Company is committed to fund
49.9% to 50.0% of each Flash Ventures entity’s investments to the extent that each Flash Ventures entity’s operating
cash flow is insufficient to fund these investments.
Inventory Purchase Commitments with Flash Ventures. Purchase orders placed under Flash Ventures for up to three
months are binding and cannot be canceled.
Research and Development Activities. The Company participates in common R&D activities with Toshiba and is
contractually committed to a minimum funding level. R&D commitments are immaterial to the Consolidated Finan-
cial Statements.
Off-Balance Sheet Liabilities
Flash Ventures sells and leases back from a consortium of financial institutions a portion of its tools and has
entered into equipment lease agreements of which the Company guarantees half of the total outstanding obligations.
The lease agreements contain customary covenants for Japanese lease facilities. In addition to containing customary
events of default related to Flash Ventures that could result in an acceleration of Flash Ventures’ obligations, the lease
agreements contain acceleration clauses for certain events of default related to the guarantors, including the Company.
The following table presents the Company’s portion of the remaining guarantee obligations under the Flash
Ventures’ lease facilities in both Japanese yen and U.S. dollar-equivalent, based upon the Japanese yen to U.S. dollar
exchange rate as of June 30, 2017.
Total guarantee obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Lease Amounts
(Japanese yen,
in billions)
¥109
(U.S. dollar,
in millions)
$968
96
WESTERN DIGITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The following table details the breakdown of the Company’s remaining guarantee obligations between the princi-
pal amortization and the purchase option exercise price at the end of the term of the Flash Ventures lease agreements,
in annual installments as of June 30, 2017 in U.S. dollars, based upon the Japanese yen to U.S. dollar exchange rate as
of June 30, 2017:
Annual Installments
Payment of
Principal
Amortization
Purchase Option
Exercise Price at
Final Lease
Terms
(in millions)
Guarantee
Amount
Year 1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Year 2 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Year 3 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Year 4 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Year 5 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total guarantee obligations
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$257
219
154
71
10
$711
$ 17
24
64
104
48
$257
$274
243
218
175
58
$968
The Company and Toshiba have agreed to mutually contribute to, and indemnify each other and Flash Ventures
for, environmental remediation costs or liability resulting from Flash Ventures’ manufacturing operations in certain
circumstances. The Company has not made any indemnification payments, nor recorded any indemnification receiv-
ables, under any such agreements. As of June 30, 2017, no amounts have been accrued in the Consolidated Financial
Statements with respect to these indemnification guarantees.
Lease Commitments
The Company leases certain facilities and equipment under long-term, non-cancelable operating leases. The
Company’s operating leases consist of leased property and equipment that expire at various dates through 2027.
Future minimum lease payments under operating leases that have initial non-cancelable lease terms in excess of one
year at June 30, 2017 are as follows:
Lease Amounts
(in millions)
Fiscal year
2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2019 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2021 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2022 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2023 and thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total future minimum lease payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 46
42
31
26
13
20
$178
Net rent expense was as follows:
2017
Rent expense, net
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$56
2016
(in millions)
$59
2015
$60
Purchase Agreements
The Company has supply contracts that generally require the Company to provide monthly purchase order
commitments. The purchase orders placed under these arrangements are generally binding and cannot be canceled. In
addition, the Company’s subcontractors periodically procure production materials based on the forecast the Company
provides to them. The Company’s agreements with these subcontractors require that the Company reimburse them for
97
WESTERN DIGITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
materials that are purchased on the Company’s behalf in accordance with such forecast. Accordingly, the Company
may be committed to certain costs over and above its open noncancelable purchase orders with these subcontractors.
As of June 30, 2017, the Company had no material long-term purchase agreements.
Note 10. Business Segment, Geographic Information and Concentration of Risk
The Company manufactures, markets, and sells data storage devices and solutions in the U.S. and in foreign
countries through its sales personnel, dealers, distributors, retailers, and subsidiaries. The Company introduced a new
operating model during the fourth quarter of fiscal 2016 that incorporates the HGST, WD and SanDisk businesses.
Based upon the revised management structure under the new operating model, the Company determined that the
Company’s Chief Operating Decision Maker, its Chief Executive Officer, evaluates performance of the Company and
makes decisions regarding allocation of resources based on total Company results. As a result, the Company concluded
it operates in one segment, data storage devices and solutions.
The following table summarizes the Company’s revenues by end market product category, between Client
Devices (mobile, desktop, gaming and digital video hard drives, client solid-state drives (“SSD”), embedded products
and wafers); Data Center Devices and Solutions (capacity and performance enterprise hard disk drives (“HDD”),
enterprise SSDs, data center software and system solutions); and Client Solutions (removable products, hard drive
content solutions and flash content solutions):
Client Devices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Data Center Devices & Solutions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Client Solutions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 9,520
5,505
4,068
2017
2016
(in millions)
$ 6,205
4,919
1,870
2015
$ 7,710
5,012
1,850
Total revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$19,093
$12,994
$14,572
The Company’s operations outside the United States include manufacturing facilities in China, Japan, Malaysia,
the Philippines and Thailand, as well as sales offices throughout the Americas, Asia Pacific, Europe and the Middle
East. The following tables summarize the Company’s operations by geographic area:
2017
2016
(in millions)
2015
Net revenue(1)
United States . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
China . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Hong Kong . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Asia . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Europe, Middle East and Africa . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 3,881
4,271
3,257
3,181
3,276
1,227
$ 3,651
2,413
1,527
2,462
2,664
277
$ 3,054
2,726
1,989
2,562
3,169
1,072
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$19,093
$12,994
$14,572
(1) Net revenue is attributed to geographic regions based on the ship-to location of the customer. License and royalty
revenue is attributed to countries based upon the location of the headquarters of the licensee.
98
WESTERN DIGITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
June 30,
2017
July 1,
2016
(in millions)
Long-lived assets(1)
United States . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
China . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Asia . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Europe, Middle East and Africa . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$1,249
443
1,293
48
$1,406
463
1,628
6
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$3,033
$3,503
(1) Long-lived assets are attributed to the geographic location in which they are located.
Customer Concentration and Credit Risk
The Company sells its products to computer manufacturers, resellers and retailers throughout the world. For
2017 and 2016, no customer accounted for 10% or more of the Company’s net revenue. For 2015, one company,
Hewlett-Packard Company, accounted for 11% of the Company’s net revenue. For 2017, 2016, and 2015, the
Company’s top 10 customers accounted for 36%, 43%, and 44%, respectively, of the Company’s net revenue.
The Company performs ongoing credit evaluations of its customers’ financial condition and generally requires no
collateral. The Company maintains allowances for potential credit losses, and such losses have historically been within
management’s expectations. At any given point in time, the total amount outstanding from any one of a number of its
customers may be individually significant to the Company’s financial results. As of June 30, 2017, one customer, Dell
Inc., accounted for 11% of the Company’s net accounts receivable. As of July 1, 2016, no single customer accounted
for 10% or more of the Company’s net accounts receivable. As of June 30, 2017 and July 1, 2016, the Company had
reserves for potential credit losses of $10 million as of each period, and net accounts receivable of $1.95 billion and
$1.46 billion, respectively.
The Company also has cash equivalent and investment policies that limit the amount of credit exposure to any
one financial institution or investment instrument and requires that investments be made only with financial
institutions or in investment instruments evaluated as highly credit-worthy.
Supplier Concentration
All of the Company’s flash memory system products require silicon wafers for the memory and controller compo-
nents. The Company’s memory wafers are currently supplied almost entirely from Flash Ventures and the controller
wafers are all manufactured by third-party sources. The failure of any of these sources to deliver silicon wafers could
have a material adverse effect on the Company’s business, financial condition and results of operations.
In addition, some key components are purchased from single source vendors for which alternative sources are
currently not available. Shortages could occur in these essential materials due to an interruption of supply or increased
demand in the industry. If the Company was unable to procure certain of such materials, the Company’s sales could
decline, which could have a material adverse effect upon its results of operations. The Company also relies on third-
party subcontractors to assemble and test a portion of its products. The Company does not have long-term contracts
with some of these subcontractors and cannot directly control product delivery schedules or manufacturing processes.
This could lead to product shortages or quality assurance problems that could increase the manufacturing costs of the
Company’s products and have material adverse effects on the Company’s operating results.
99
WESTERN DIGITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Note 11. Western Digital Corporation 401(k) Plan
The Company maintains the Western Digital Corporation 401(k) Plan (the “Plan”). The Plan covers sub-
stantially all domestic employees, subject to certain eligibility requirements. Eligible employees receive employer
matching contributions immediately upon hire unless the individual is covered by a collective bargaining agreement,
provides services as a consultant, intern, independent contractor, leased or temporary employee, or otherwise is not
treated as a common-law employee.
Eligible employees are generally able to contribute up to 30% of their eligible compensation on a pre-tax basis or
10% of their eligible compensation on an after-tax basis subject to Internal Revenue Service (“IRS”) limitations. The
Company makes a basic matching contribution equal to 50% of the each eligible participant’s contribution that does
not exceed 6% of the eligible participant’s annual compensation in the year of contribution. The Company’s employer
matching contributions vest over a two-year graded period. Prior to the amendment of the Plan on May 5, 2016, the
Company’s employer matching contributions vested over a five-year graded period. The Company may suspend
matching contributions at any time at its discretion. Contributions, including the Company’s matching contribution
to the Plan, are recorded as soon as administratively possible after the Company makes payroll deductions from Plan
participants.
For 2017, 2016 and 2015, the Company made Plan contributions of $36 million, $20 million and $22 million,
respectively.
Note 12. Shareholders’ Equity
Stock Incentive Plans
2004 Performance Incentive Plan
The types of awards that may be granted under the Western Digital Corporation Amended and Restated 2004
Performance Incentive Plan (“2004 Performance Incentive Plan”) include stock options, SARs, RSUs, PSUs, stock
bonuses and other forms of awards granted or denominated in the Company’s common stock or units of the Compa-
ny’s common stock, as well as cash bonus awards. Persons eligible to receive awards under the 2004 Performance
Incentive Plan include officers and employees of the Company or any of its subsidiaries, directors of the Company and
certain consultants and advisors to the Company or any of its subsidiaries. The vesting of awards under the 2004 Per-
formance Incentive Plan is determined at the date of grant. Each award expires on a date determined at the date of
grant; however, the maximum term of options and SARs under the 2004 Performance Incentive Plan is ten-years after
the grant date of the award. RSUs granted under the 2004 Performance Incentive Plan typically vest over periods
ranging from one to four years from the date of grant. PSUs are granted to certain employees and vest only after the
achievement of pre-determined performance metrics and completion of requisite service periods. Once the perform-
ance metrics are met, vesting of PSUs is generally subject to continued service by the employee. At the end of each
reporting period, the Company evaluates the probability that PSUs will be earned. The Company records stock-based
compensation expense based on the probability that the performance metrics will be achieved over the vesting period.
To the extent available, the Company issues shares out of treasury stock upon the vesting of awards, the exercise of
employee stock options and the purchase of shares pursuant to the ESPP.
Outstanding RSU and PSU awards have dividend equivalent rights which entitle holders of such outstanding
awards to the same dividend value per share as holders of common stock. Dividend equivalent rights are subject to the
same vesting and other terms and conditions as the corresponding unvested RSUs and PSUs. Dividend equivalent
rights are accumulated and paid in additional shares when the underlying shares vest.
As of June 30, 2017, the maximum number of shares of the Company’s common stock that was authorized for
award grants under the 2004 Performance Incentive Plan was 65.8 million shares. Shares issued in respect of stock
options and SARs granted under the 2004 Performance Incentive Plan count against the plan’s share limit on a
one-for-one basis, whereas currently, shares issued in respect of any other type of award granted count against the
100
WESTERN DIGITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
plan’s share limit as 1.72 shares for every one share issued in connection with such award. The 2004 Performance
Incentive Plan was extended in 2013 and will terminate on August 4, 2025 unless terminated earlier by the Compa-
ny’s Board of Directors (the “Board”).
Acquired Plan
In connection with the Merger, the Company assumed 14.4 million shares that were available to be granted to
SanDisk employees under the SanDisk 2013 Incentive Plan. The Company also assumed outstanding stock options
and RSUs which were converted into equivalent stock options and RSUs with respect to shares of the Company’s
common stock using the equity award exchange ratio as defined in the merger agreement with SanDisk. Options
eligible for exercise may be exercised for shares of the Company’s common stock at any time prior to the expiration of
the seven-year option term or any earlier termination of those options in connection with the optionee’s cessation of
service with the Company. Outstanding RSU awards under the SanDisk 2013 Incentive Plan have dividend equiv-
alent rights which entitle holders of RSUs to the same dividend value per share as holders of common stock. Dividend
equivalent rights are subject to the same vesting and other terms and conditions as the corresponding unvested RSUs.
Dividend equivalent rights are accumulated and paid when the underlying shares vest.
Employee Stock Purchase Plan
Under the Company’s ESPP, eligible employees may authorize payroll deductions of up to 10% of their eligible
compensation, subject to IRS limitations, during prescribed offering periods to purchase shares of the Company’s
common stock at 95% of the fair market value of common stock on either the first day of that offering period or on
the applicable exercise date, whichever is less. A participant may participate in only one offering period at a time, and
a new offering period generally begins each June 1st and December 1st. Each offering period is generally 24 months
and consists of four exercise dates (each, generally six months following the start of the offering period or the preced-
ing exercise date, as the case may be). If the fair market value of the Company’s common stock is less on a given
exercise date than on the date of grant, employee participation in that offering period ends and participants are auto-
matically re-enrolled in the next new offering period.
Stock-based Compensation Expense
The following tables present the Company’s stock-based compensation for equity-settled awards by type and
financial statement line as well as the related tax benefit included in the Company’s consolidated statements of oper-
ations:
Options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Restricted and performance stock units . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Employee stock purchase plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 41
330
23
2017
2016
(in millions)
$ 55
123
13
2015
$ 58
88
16
Subtotal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tax benefit
394
(105)
191
(48)
162
(43)
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 289
$143
$119
101
WESTERN DIGITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Cost of revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Research and development . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Selling, general and administrative . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Employee termination, asset impairment, and other charges . . . . . . . . . . . . . . . . . . . . . . . .
2017
$ 49
173
161
11
2016
(in millions)
$ 21
76
85
9
2015
$ 17
61
84
—
Subtotal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tax benefit
394
(105)
191
(48)
162
(43)
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 289
$143
$119
Compensation cost related to unvested stock options, RSU’s, PSUs and ESPP will generally be amortized on a
straight-line basis over the remaining average service period. The following table presents the unamortized compensa-
tion cost and weighted average service period of all unvested outstanding awards as of June 30, 2017.
Options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
RSUs and PSUs(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
ESPP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unamortized
Compensation
Costs
(in millions)
$ 60
461
31
Weighted
Average Service
Period
(years)
2.6
2.3
1.0
(1) Weighted average service period assumes the performance metrics are met for the PSUs.
102
WESTERN DIGITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Plan Activities
Stock Options
The following table summarizes stock option activity under the Company’s incentive plans:
Options outstanding at June 27, 2014 . . . . . . . . . .
Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Assumed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Exercised . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Canceled or expired . . . . . . . . . . . . . . . . . . . . . .
Options outstanding at July 3, 2015 . . . . . . . . . . .
Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Assumed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Exercised . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Canceled or expired . . . . . . . . . . . . . . . . . . . . . .
Options outstanding at July 1, 2016 . . . . . . . . . . .
Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Exercised . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Canceled or expired . . . . . . . . . . . . . . . . . . . . . .
Options outstanding at June 30, 2017 . . . . . . . . . .
Exercisable at June 30, 2017 . . . . . . . . . . . . . . . . .
Vested and expected to vest after June 30, 2017 . . .
Number
of Shares
(in millions)
10.1
1.2
0.1
(4.1)
(0.5)
6.8
1.7
2.9
(1.7)
(0.7)
9.0
2.8
(3.5)
(0.9)
7.4
3.3
7.2
Weighted
Average Exercise
Price Per Share
Weighted
Average
Remaining
Contractual Life
(in years)
Aggregate
Intrinsic Value
(in millions)
$37.03
94.10
3.49
31.90
56.41
50.00
82.68
38.37
27.43
66.03
55.74
44.83
37.72
71.31
$58.14
$62.38
$58.42
$283
57
120
$240
$ 99
$231
4.5
3.1
4.4
103
WESTERN DIGITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
RSU and PSU
The following table summarizes RSU and PSU activity under the Company’s incentive plans:
RSUs and PSUs outstanding at June 27, 2014 . . . . . . . . . . . . . . . . . . . . . . . . .
Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Vested . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Forfeited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
RSUs and PSUs outstanding at July 3, 2015 . . . . . . . . . . . . . . . . . . . . . . . . . .
Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Assumed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Vested . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Forfeited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
RSUs and PSUs outstanding at July 1, 2016 . . . . . . . . . . . . . . . . . . . . . . . . . .
Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Vested . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Forfeited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
RSUs and PSUs outstanding at June 30, 2017 . . . . . . . . . . . . . . . . . . . . . . . . .
Expected to vest after June 30, 2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Aggregate
Intrinsic
Value at
Vest Date
(in millions)
$170
144
399
Weighted
Average
Grant
Date Fair
Value
$ 49.77
100.13
42.24
67.31
73.80
61.32
32.14
56.11
62.09
41.92
44.13
46.98
43.89
$ 45.01
$ 45.13
Number
of Shares
(in millions)
3.7
1.3
(1.7)
(0.3)
3.0
2.7
12.5
(2.0)
(0.5)
15.7
6.0
(5.9)
(2.1)
13.7
12.7
RSUs and PSUs are generally settled in an equal number of shares of the Company’s common stock at the time of
vesting of the units.
Vested Options, RSUs and PSUs
The total grant date fair value of options, RSUs and PSUs vested during the period was as follows:
Options
RSUs and PSUs
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 41
261
2017
2016
(in millions)
$ 61
113
Total grant date fair value of options, RSUs and PSUs vested during the period . . . . . . . .
$302
$174
2015
$ 62
65
$127
SARs
As of June 30, 2017, all outstanding SARs issued to employees were fully vested and will be settled in cash upon
exercise. The fair value of SARs is solely subject to market price fluctuations. The following table presents the
adjustments to the fair market value of SARs:
SAR expense (benefit) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tax expense (benefit)
$ 7
(1)
2017
2016
(in millions)
$(18)
2
Total SAR expense (benefit)
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 6
$(16)
2015
$ (3)
—
$ (3)
104
WESTERN DIGITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The Company had a total liability of $2 million and $20 million related to SARs included in Accrued expenses
in the Consolidated Balance Sheets as of June 30, 2017 and July 1, 2016, respectively. There were no SARs granted in
2017, 2016, and 2015 and as of June 30, 2017, an immaterial number of SARs were outstanding with a weighted
average exercise price of $24.45.
Fair Value Valuation Assumptions
Stock Option Grants — Binomial Model
The fair value of stock options granted is estimated using a binomial option-pricing model. The binomial model
requires the input of highly subjective assumptions. The Company uses historical data to estimate exercise, employee
termination and expected stock price volatility within the binomial model. The risk-free rate for periods within the
contractual life of the option is based on the U.S. Treasury yield curve in effect at the time of grant. The fair value of
stock options granted was estimated using the following weighted average assumptions:
2017
2016
2015
Suboptimal exercise factor . . . . . . . . . . . . . . . . . . . . . . . .
Range of risk-free interest rates . . . . . . . . . . . . . . . . . . . .
Range of expected stock price volatility . . . . . . . . . . . . . .
Weighted-average expected volatility . . . . . . . . . . . . . . .
Post-vesting termination rate . . . . . . . . . . . . . . . . . . . . .
Dividend yield . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fair value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Weighted-average expected term (in years) . . . . . . . . . . .
RSU and PSU Grants
2.52
2.69
2.71
0.59% to 1.42% 0.25% to 2.09% 0.11% to 2.16%
0.28 to 0.49
0.35
0.47%
2.61%
$22.54
4.7
0.35 to 0.49
0.40
1.71%
3.42%
$13.72
3.6
0.23 to 0.47
0.36
1.25%
1.69%
$32.19
5.8
The fair value of the Company’s RSU and PSU awards granted, excluding unvested RSU awards assumed
through acquisitions, was based upon the closing price of the Company’s stock price on the date of grant.
ESPP — Black-Scholes-Merton Model
The fair value of ESPP purchase rights issued is estimated at the date of grant of the purchase rights using the
Black-Scholes-Merton option-pricing model. The Black-Scholes-Merton option-pricing model requires the input of
highly subjective assumptions such as the expected stock price volatility and the expected period until options are
exercised. Purchase rights under the ESPP are generally granted on either June 1st or December 1st of each year.
The fair values of all outstanding ESPP purchase rights have been estimated at the date of grant using a Black-
Scholes-Merton option-pricing model with the following weighted average assumptions:
2017
2016
2015
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Weighted-average expected term (in years)
Risk-free interest rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Stock price volatility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Dividend yield . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fair value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Stock Repurchase Program
1.27
1.26
0.81% 0.82%
0.42
4.02% 3.92%
0.38
1.26
0.45%
0.26
2.34%
$10.06
$9.91
$14.50
The Company’s Board has authorized $5.00 billion for the repurchase of the Company’s common stock. The
stock repurchase program is effective until February 3, 2020. The Company did not repurchase any shares of common
stock during 2017. The remaining amount available to be purchased under the Company’s stock repurchase program
as of June 30, 2017 was $2.10 billion.
105
WESTERN DIGITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Stock Reserved for Issuance
The following table summarizes all common stock reserved for issuance at June 30, 2017:
Outstanding awards and shares available for award grants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
ESPP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Number of Shares
(in millions)
44
7
Total
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
51
Dividends to Shareholders
On September 13, 2012, the Company announced that the Board had authorized the adoption of a quarterly cash
dividend policy. Under the cash dividend policy, holders of the Company’s common stock receive dividends when and
as declared by the Board. During 2017, the Company declared aggregate cash dividends of $2.00 per share on the
Company’s outstanding common stock totaling $579 million, of which $432 million was paid in 2017 and
$147 million was paid on July 17, 2017. The Company also paid $142 million in 2017 related to dividends accrued
in 2016.
On August 2, 2017, the Board declared a cash dividend of $0.50 per share to shareholders of record as of Sep-
tember 29, 2017, which will be paid on October 16, 2017.
The Company may modify, suspend or cancel its cash dividend policy in any manner and at any time.
Note 13.
Income Tax Expense (Benefit)
Income Before Taxes
The domestic and foreign components of income before taxes were as follows:
2017
Foreign . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Domestic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$560
209
2016
(in millions)
$ 516
(363)
2015
$1,501
76
Income before taxes
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$769
$ 153
$1,577
106
WESTERN DIGITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Income Tax Provision
The components of the provision for income taxes were as follows:
Current:
Foreign . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Domestic — Federal
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Domestic — State . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred:
Foreign . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Domestic — Federal
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Domestic — State . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2017
2016
(in millions)
2015
$127
229
4
360
56
(44)
—
12
$ 59
2
(1)
60
(39)
(109)
(1)
(149)
$ 54
43
(13)
84
12
11
5
28
Income tax provision . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$372
$ (89)
$112
The Company’s income tax expense for 2017 reflects tax expense from the integration of SanDisk and a valuation
allowance on both acquired tax attributes and net operating loss carryforwards from restructuring activities. The
Company’s income tax benefit for 2016 reflects tax benefits from expenses related to the Merger and from interest
expense related to debt facilities.
Remaining net undistributed earnings from foreign subsidiaries at June 30, 2017, on which no U.S. tax has been
provided, amounted to $16 billion. The net undistributed earnings are intended to finance local operating require-
ments and capital investments. Accordingly, an additional U.S. tax provision has not been made on these earnings.
The tax liability for these earnings would be approximately $5 billion, if the Company repatriated the undistributed
earnings from the foreign subsidiaries.
107
WESTERN DIGITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Deferred Taxes
Temporary differences and carryforwards, which give rise to a significant portion of deferred tax assets and
liabilities were as follows:
Deferred tax assets:
June 30,
2017
July 1,
2016
(in millions)
Sales related reserves and accrued expenses not currently deductible . . . . . . . . . . . . . . . . . . . .
Accrued compensation and benefits not currently deductible . . . . . . . . . . . . . . . . . . . . . . . . . .
Net operating loss carryforward . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Business credit carryforward . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Long-lived assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
84
252
292
283
236
141
$
82
207
259
264
256
177
Total deferred tax assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred tax liabilities:
1,288
1,245
Long-lived assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unremitted earnings of certain non-U.S. entities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total deferred tax liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Valuation allowances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(874)
(38)
(11)
(923)
(518)
(1,030)
—
(9)
(1,039)
(294)
Deferred tax liabilities, net
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ (153)
$
(88)
The increase in deferred tax liabilities, net in 2017, compared to 2016, was primarily due to the increase in
deferred tax expense of $12 million, tax effects of OCI items of $10 million, purchase price adjustments to goodwill of
$27 million and shortfalls related to stock-based compensation deductions included in additional paid-in capital of
$15 million.
The net deferred tax asset valuation allowance increased by $224 million and $128 million in 2017 and 2016,
respectively. The valuation allowance increase in 2017 is primarily attributable to $111 million for acquired tax
attributes, $46 million for net operating loss carryforwards from restructuring activities, $31 million for capital losses,
and $27 million for the current year generation of state tax credits which the Company does not anticipate being able
to utilize. The assessment of valuation allowances against deferred tax assets requires estimations and significant
judgment. The Company continues to assess and adjust its valuation allowance based on operating results and market
conditions. After weighing both the positive and negative evidence available, including but not limited to, earnings
history, projected future outcomes, industry and market trends and the nature of each of the deferred tax assets, the
Company determined that it is able to realize most of its deferred tax assets with the exception of certain loss and
credit carryforwards.
In addition to the deferred tax assets presented above, the Company had benefits related to net operating loss
(“NOL”) benefits from stock-based compensation deductions of $20 million and $119 million as of June 30, 2017 and
July 1, 2016, respectively. During 2017, the Company recorded $119 million of tax benefits related to stock-based
compensation deductions to Shareholders’ equity of which $98 million related to NOL benefits for stock-based com-
pensation deductions and $21 million was related to current year stock-based compensation deductions.
108
WESTERN DIGITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Effective Tax Rate
Reconciliation of the U.S. Federal statutory rate to the Company’s effective tax rate is as follows:
2017
2016
2015
35% 35% 35%
U.S. Federal statutory rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tax rate differential on international income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(103)
(27)
Tax effect of U.S. non-deductible convertible debt costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . —
Tax effect of U.S. non-deductible acquisition costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . —
4
Tax effect of U.S. foreign income inclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1
Tax effect of U.S. non-deductible stock-based compensation . . . . . . . . . . . . . . . . . . . . . . . . . . .
(1)
Tax effect of U.S. permanent differences . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1
State income tax, net of federal tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
29
Change in valuation allowance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unremitted earnings of certain non-U.S. entities
5
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tax related to SanDisk integration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
12
Retroactive extension of Federal R&D credit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . —
(12)
Income tax credits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(29)
13 —
10 —
9 —
9 —
1
1
(1) —
16
2
— —
— —
(9) —
(4)
(43)
2
5
Effective tax rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
48% (58)% 7%
Tax Holidays and Carryforwards
A substantial portion of the Company’s manufacturing operations in Malaysia, the Philippines, Singapore and
Thailand operate under various tax holidays and tax incentive programs which will expire in whole or in part at vari-
ous dates from 2018 through 2030. Certain of the holidays may be extended if specific conditions are met. The net
impact of these tax holidays and tax incentives was an increase to the Company’s net earnings by $467 million, or
$1.58 per diluted share, $500 million, or $2.07 per diluted share, and $641 million, or $2.70 per diluted share, in
2017, 2016, and 2015, respectively.
As of June 30, 2017, the Company had federal and state NOL carryforwards of $765 million and $552 million,
respectively. The NOL carryforwards available to offset future federal taxable income expire at various dates from
2020 to 2037 and future state taxable income expire at various dates from 2018 to 2037. As of June 30, 2017, the
Company had various federal and state tax credit carryforwards totaling $599 million. The available federal tax credit
carryforwards of $78 million to offset future federal taxable income expire at various dates from 2018 to 2037. The
remaining credit carryforward amount of $521 million relates primarily to state tax credit carryforwards which are
available indefinitely.
The federal and state NOLs and credits relating to various acquisitions are subject to limitations under Sections
382 and 383 of the Internal Revenue Code. The Company expects the total amount of federal NOLs ultimately real-
ized will be reduced by $498 million and state NOLs ultimately realized will be reduced by $422 million. The
Company expects the total amount of federal credits ultimately realized will be reduced by $41 million and state tax
credit carryforwards ultimately realized will be reduced by $375 million.
109
WESTERN DIGITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The Company had varying amounts of foreign NOL carryforward that do not expire or, if not used, expire in
various years, depending on the country. The major jurisdictions that the Company receives foreign NOL carryforward
and the related expiration dates of these NOL carryforward tax credits are as follows:
Jurisdiction
Japan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Belgium . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
China . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Singapore . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
NOL
Carryforward
Amount
(in millions)
$142
61
53
40
Expiration
2024 to 2026
No expiration
2023
No expiration
The Company expects the total amount of NOL carryforwards in Japan ultimately realized will be reduced by
$76 million. The Company expects the NOL carryforwards in Belgium, China and Singapore will not be ultimately
realized.
Uncertain Tax Positions
With the exception of certain unrecognized tax benefits that are directly associated with the tax position taken,
unrecognized tax benefits are presented gross in the Consolidated Balance Sheets. Interest and penalties related to
unrecognized tax benefits are recognized in liabilities recorded for uncertain tax positions and are recorded in the
provision for income taxes. Accrued interest and penalties included in the Company’s liability related to unrecognized
tax benefits as of June 30, 2017, July 1, 2016 and July 3, 2015 was $89 million, $75 million and $55 million,
respectively.
The following is a tabular reconciliation of the total amounts of unrecognized tax benefits excluding accrued
interest and penalties:
Unrecognized tax benefit, beginning balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gross increases related to current year tax positions
. . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gross increases related to prior year tax positions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gross decreases related to prior year tax positions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Settlements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Lapse of statute of limitations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Acquisitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2017
$491
35
3
(8)
(8)
(19)
28
2016
(in millions)
$350
46
6
(15)
(8)
(8)
120
2015
$300
44
6
—
—
(3)
3
Unrecognized tax benefit, ending balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$522
$491
$350
The Company’s unrecognized tax benefits are primarily included within long-term liabilities in the Consolidated
Balance Sheets. The entire balance of unrecognized tax benefits as of June 30, 2017, July 1, 2016 and July 3, 2015, if
recognized, would affect the effective tax rate.
The Company files U.S. Federal, U.S. state and foreign tax returns. For both federal and state tax returns, with
few exceptions, the Company is subject to examination for fiscal years 2008 through 2016. The Company is no longer
subject to examination by the IRS for periods prior to 2008, although carry forwards generated prior to those periods
may still be adjusted upon examination by the IRS or state taxing authority if they either have been or will be used in
a subsequent period. In the major foreign jurisdictions, the Company could be subject to examination in China for
calendar years 2007 through 2016, in Ireland for calendar years 2013 through 2016, and Japan in fiscal years 2011
through 2016.
110
WESTERN DIGITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The IRS previously completed its field examination of the Company’s federal income tax returns for fiscal years
2006 through 2009 and proposed certain adjustments. The Company received Revenue Agent Reports from the IRS
that seek to increase the Company’s U.S. taxable income which would result in additional federal tax expense totaling
$795 million, subject to interest. The issues in dispute relate primarily to transfer pricing with the Company’s foreign
subsidiaries and intercompany payable balances. The Company disagrees with the proposed adjustments and in Sep-
tember 2015, filed a protest with the IRS Appeals Office and received the IRS rebuttal in July 2016. Meetings with
the IRS Appeals Office began in March 2017. The Company believes that its tax positions are properly supported and
will vigorously contest the position taken by the IRS. In September 2015, the IRS commenced an examination of the
Company’s fiscal years 2010 through 2012.
The Company believes that adequate provision has been made for any adjustments that may result from tax
examinations. However, the outcome of tax examinations cannot be predicted with certainty. If any issues addressed in
the Company’s tax examinations are resolved in a manner not consistent with management’s expectations, the Com-
pany could be required to adjust its provision for income taxes in the period such resolution occurs. As of June 30,
2017, it is not possible to estimate the amount of change, if any, in the unrecognized tax benefits that is reasonably
possible within the next twelve months. Any significant change in the amount of the Company’s liability for
unrecognized tax benefits would most likely result from additional information or settlements relating to the
examination of the Company’s tax returns.
Note 14. Net Income Per Common Share
The following table presents the computation of basic and diluted income per common share:
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2015
2016
2017
(in millions, except per share data)
$1,465
$ 242
$ 397
Weighted average shares outstanding:
Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Employee stock options, RSUs, PSUs and ESPP . . . . . . . . . . . . . . . . . . . . . . . . .
Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
288
8
296
Income per common share
Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$1.38
Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$1.34
Anti-dilutive potential common shares excluded(1) . . . . . . . . . . . . . . . . . . . . . . . . .
3
239
3
242
$1.01
$1.00
5
232
5
237
$ 6.31
$ 6.18
1
(1) For purposes of computing diluted income per common share, certain potentially dilutive securities have been
excluded from the calculation because their effect would have been anti-dilutive.
The Company computes basic income per common share using net income and the weighted average number of
common shares outstanding during the period. Diluted income per common share is computed using net income and
the weighted average number of common shares and potentially dilutive common shares outstanding during the
period. Potentially dilutive common shares include dilutive outstanding employee stock options, rights to purchase
shares of common stock under the Company’s ESPP and awards of RSUs.
111
WESTERN DIGITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Note 15. Acquisitions
The Consolidated Financial Statements include the results of operations of acquired companies commencing after
their respective acquisition dates.
Acquisition of SanDisk
On May 12, 2016, WDT, a wholly-owned subsidiary of the Company, completed the acquisition of SanDisk (the
“Merger”), a global leader in NAND-flash storage solutions. The acquisition was primarily intended to deepen the
Company’s expertise in non-volatile memory and enable the Company to vertically integrate into NAND, securing
long-term access to solid state technology at a lower cost.
At the SanDisk Closing Date, each issued and outstanding share of SanDisk common stock, other than shares of
SanDisk common stock held in the treasury of SanDisk, shares of SanDisk common stock owned by shareholders who
had validly exercised their appraisal rights under Delaware law and shares of SanDisk common stock owned by West-
ern Digital or any subsidiary of Western Digital, was converted into the right to receive $67.50 per share in cash; and
0.2387 shares of Western Digital common stock per share of SanDisk common stock, with cash paid in lieu of frac-
tional shares.
The aggregate purchase price of the SanDisk acquisition was $15.59 billion, consisting of $13.77 billion in cash
funded with existing cash and cash from new debt, 49 million newly issued shares of the Company’s common stock
with a fair value of $1.76 billion and $58 million related to the fair value of stock options and RSUs assumed. The fair
value of the newly issued shares of the Company’s common stock was determined based on the closing market price of
the Company’s shares of common stock on the date of the acquisition. The fair values of stock options assumed were
estimated using a binomial option-pricing model.
Cash consideration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Equity consideration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fair value of assumed equity attributed to pre-combination service . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
May 12, 2016
(in millions)
$13,766
1,764
58
Total purchase price . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$15,588
Assets Acquired and Liabilities Assumed at Fair Value
The assets acquired and liabilities assumed were recognized at fair value as of the date of the acquisition.
112
WESTERN DIGITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
During 2017, the Company finalized the analysis of the purchase price resulting in adjustments of $66 million
to the assessed fair value of certain acquired intangible assets; inventory; property, plant and equipment; and a portion
of the deferred tax liability related to the Merger. The following table summarizes the final fair values assigned to the
assets acquired and liabilities assumed:
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Marketable securities
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accounts receivables, net
Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other current assets
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Property, plant and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Notes receivable and investments in Flash Ventures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Intangible assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other non-current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accounts payable, accrued liabilities and other current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred tax liabilities
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other long-term liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Convertible notes and related derivatives
Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net assets acquired . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Goodwill
(in millions)
$ 3,931
737
394
1,076
770
897
1,012
4,915
213
13,945
1,058
595
210
3,743
5,606
8,339
7,249
Total purchase price . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$15,588
Accounts Receivable, Net
Accounts receivable are net of allowances for program-related incentives and doubtful accounts of $262 million.
Inventories
Finished goods were valued at estimated selling prices less costs of disposal and a reasonable profit allowance for
the selling effort. Work-in-process inventory was valued at estimated selling prices less costs to complete, costs of
disposal and a reasonable profit allowance for the completion and selling effort, or at estimated replacement costs for
certain components. Raw materials were valued at estimated replacement costs at the date of acquisition.
113
WESTERN DIGITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Property, Plant, and Equipment
The property, plant and equipment acquired were valued using either the replacement cost or market value
approach, as appropriate, as of the date of acquisition. The following table summarizes the final fair value of the prop-
erty, plant and equipment acquired and their estimated useful lives:
Land . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Buildings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Machinery and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Furniture and fixtures
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Leasehold improvements
Estimated
Fair Value
(in millions)
$ 73
308
478
16
22
Estimated
Weighted-
Average Useful
Life
(in years)
N/A
15
2
4
5
Total property, plant and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$897
Identifiable Intangible Assets Acquired
The following table summarizes the final fair values and estimated useful lives of the intangibles acquired:
Developed technology . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Trade names and trademarks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Customer relationships . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Supply agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Backlog . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
In-process research and development . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Estimated
Fair Value
(in millions)
$1,360
610
475
130
50
2,290
Estimated
Weighted-
Average Useful
Life
(in years)
2.5
7.0
7.0
2.5
0.1
N/A
Total acquired identifiable intangible assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$4,915
The fair values of the identifiable intangible assets acquired were estimated using an income approach. The fair
value of the finite-lived intangible assets will be amortized over the estimated useful lives based on the pattern in
which the economic benefits are expected to be received to cost of revenue and operating expenses. SanDisk had
IPR&D projects associated with new generations of 3D NAND-flash technology, a next generation of controllers for
retail products, and a new platform for enterprise solutions products that have not yet reached technological feasibility
as of the date of the Merger. These projects are expected to enable increased layers in and achieve lower costs for
memory products compared to existing 2D NAND-flash technology, improve controller performance and cost, and
expand the range of enterprise solutions offerings. Accordingly, the Company recorded indefinite-lived intangible
assets of $2.29 billion for the fair value of these projects, which will not begin amortization until they have reached
technological feasibility. Until such time, the projects will be tested for impairment on an annual basis or more fre-
quently whenever events or changes in circumstances indicate that the projects may be impaired. Once a project
reaches technological feasibility, the Company will begin to amortize the intangible asset over its estimated useful
life.
During 2017, acquired IPR&D projects of $1.74 billion reached technological feasibility and was reclassified to
developed technology and commenced amortization over an estimated useful life of 4 years.
114
WESTERN DIGITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Goodwill
Goodwill represents the excess of the preliminary estimated purchase price over the sum of the estimated fair
values assigned to assets acquired less liabilities assumed. Goodwill of $7.25 billion is primarily attributable to the
benefits the Company expects to derive from deepening its expertise in non-volatile memory and enabling it to verti-
cally integrate into NAND, securing long-term access to solid state technology at a lower cost. None of the goodwill
is expected to be deductible for tax purposes.
Convertible Notes and Related Derivatives
On the SanDisk Closing Date, SanDisk had outstanding $997 million aggregate principal amount of the 2017
Notes and $1.50 billion aggregate principal amount of the 2020 Notes. Concurrently with the issuance of the Con-
vertible Notes, SanDisk also purchased call options and sold warrants. The assumed liability for the Convertible Notes
and related derivatives reflects the estimated fair values of the Convertible Notes and the related call options and
warrants. See Note 6, Debt, for additional disclosures.
Stock-based Awards
In connection with the Merger, each outstanding SanDisk option and RSU that was unvested as of the SanDisk
Closing Date and each outstanding underwater vested option was converted into equivalent options and RSUs, in each
case with respect to shares of the Company’s common stock, using the equity award exchange ratio in accordance with
the merger agreement. The value of these converted awards related to pre-combination expense was $58 million and is
included in the aggregate purchase price. The remaining value of the converted awards represents post-combination
expense and will be recognized by the Company over the remaining service periods. As of June 30, 2017 and July 1,
2016, the future expense for the remaining outstanding assumed SanDisk options and RSUs was $172 million and
$347 million, respectively, which will be recognized over a weighted average service period of approximately 1.9 years
and 2.7 years, respectively.
Acquisition-related Expenses
During 2016, the Company incurred $98 million of transaction expenses related to the Merger, which are
included within SG&A in the Consolidated Statements of Operations. During 2016, the Company incurred merger-
related charges of $30 million associated with the acceleration of certain equity awards in connection with the Merger,
of which $24 million was recorded in SG&A and $6 million was recorded in R&D. The Company also incurred
$35 million and $31 million of other acquisition related expenses, in 2017 and 2016, respectively, primarily consist-
ing of retention and separation costs in connection with the Merger, which are included in SG&A.
115
WESTERN DIGITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Pro Forma Financial Information (Unaudited)
The unaudited financial information in the table below summarizes the combined results of operations of the
Company and SanDisk, on a pro forma basis, as though the combination had occurred as of the beginning of 2015.
The pro forma financial information presented includes the effects of adjustments related to the fair value of acquired
inventory, amortization charges from acquired intangible assets, depreciation charges from acquired fixed assets,
interest expenses from financing the acquisition, stock-based compensation expenses from the conversion of unvested
equity awards and the elimination of certain expenses directly related to the transaction. The pro forma financial
information as presented below is for informational purposes only and is not necessarily indicative of the results of
operations that would have been achieved if the acquisition and any borrowings undertaken to finance the acquisition
had taken place at the beginning of the earliest period presented, nor does it intend to be a projection of future results:
2016
2015
(in millions, except per share amounts)
Revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Basic income per common share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Diluted income per common share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$17,846
65
0.23
0.23
$
$
$20,613
762
2.71
2.65
$
$
Note 16. Employee Termination, Asset Impairment and Other Charges
The Company recorded the following charges related to employee terminations benefits, asset impairment, and
other charges:
2017
2016
(in millions)
2015
Employee termination and other charges:
Restructuring Plan 2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Closure of Foreign Manufacturing Facility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Business Realignment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$128
10
72
Total employee termination and other charges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
210
Stock-based compensation accelerations and adjustments
Business Realignment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total stock-based compensation accelerations and adjustments . . . . . . . . . . . . . . . . . . .
Asset impairment:
Restructuring Plan 2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Closure of Foreign Manufacturing Facility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Business Realignment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total asset impairment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
11
11
—
11
—
11
$ 77
128
94
299
9
9
5
24
8
37
$ —
—
94
94
—
—
—
—
82
82
Total employee termination and other charges, stock-based compensation adjustments
and asset impairments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$232
$345
$176
Restructuring Plan 2016
In 2016, the Company initiated a set of actions relating to the restructuring plan associated with the integration
of substantial portions of its HGST and WD subsidiaries (“Restructuring Plan 2016”). Restructuring Plan 2016 con-
sists of asset and footprint reduction, product road map consolidation and organization rationalization. In addition to
the amounts recognized under Restructuring Plan 2016 for employee termination, asset impairments and other
116
WESTERN DIGITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
charges, as presented above, the Company recognized $65 million and $22 million during 2017 and 2016,
respectively, of accelerated depreciation on facility assets and other charges in cost of revenue and operating expense.
The Company expects Restructuring Plan 2016 to be substantially completed by the end of calendar year 2017.
The following table presents an analysis of the components of the activity against the reserve:
Employee
Termination
Benefits
Charges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrual balance at July 1, 2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Charges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-cash items and other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 58
(32)
26
84
(99)
—
Contract
Termination and
Other
(in millions)
$ 19
(19)
—
44
(41)
(1)
Total
$ 77
(51)
26
128
(140)
(1)
Accrual balance at June 30, 2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 11
$ 2
$ 13
Closure of Foreign Manufacturing Facility
In January 2016, the Company announced the closing of its head component front end wafer manufacturing
facility in Odawara, Japan, in order to reduce manufacturing costs. As of June 30, 2017, the Company had completed
all activities related to the closure of the facility. The following table presents an analysis of the components of the
activity against the reserve:
Employee
Termination
Benefits
Charges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-cash items and other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrual balance at July 1, 2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Charges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-cash items and other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 119
(104)
(1)
14
1
(15)
—
Contract
Termination and
Other
(in millions)
$ 9
(10)
1
—
9
(12)
3
Total
$ 128
(114)
—
14
10
(27)
3
Accrual balance at June 30, 2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ —
$ —
$ —
117
WESTERN DIGITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Business Realignment
The Company periodically incurs charges as part of the integration process of recent acquisitions and to realign
its operations with anticipated market demand. The following table presents an analysis of the components of the
activity against the reserve:
Employee
Termination
Benefits
Accrual balance at July 3, 2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Charges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-cash items and other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrual balance at July 1, 2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Charges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-cash items and other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 10
65
(58)
(6)
11
68
(74)
13
Contract
Termination and
Other
(in millions)
$ —
29
(23)
(3)
3
4
(2)
—
Total
$ 10
94
(81)
(9)
14
72
(76)
13
Accrual balance at June 30, 2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 18
$ 5
$ 23
Note 17. Legal Proceedings
Unless otherwise stated below, for each of the matters described below, the Company has either recorded an
accrual for losses that are probable and reasonably estimable or has determined that, while a loss is reasonably possible
(including potential losses in excess of the amounts accrued by the Company), a reasonable estimate of the amount of
loss or range of possible losses with respect to the claim or in excess of amounts already accrued by the Company can-
not be made. The ability to predict the ultimate outcome of such matters involves judgments, estimates and inherent
uncertainties. The actual outcome of such matters could differ materially from management’s estimates.
Solely for purposes of this note, “WD” refers to Western Digital Corporation or one or more of its subsidiaries
excluding HGST prior to the closing of the Company’s acquisition of HGST on March 8, 2012 (the “HGST Closing
Date”) and SanDisk prior to the SanDisk Closing Date; “HGST” refers to Hitachi Global Storage Technologies Hold-
ings Pte. Ltd. or one or more of its subsidiaries as of the HGST Closing Date; “SanDisk” refers to SanDisk Corporation
or one or more of its subsidiaries as of the SanDisk Closing Date; and “the Company” refers to Western Digital Corpo-
ration and all of its subsidiaries on a consolidated basis including HGST and SanDisk.
Intellectual Property Litigation
In June 2008, Convolve, Inc. (“Convolve”) filed a complaint with the U.S. District Court for the Eastern District
of Texas against WD, HGST, and two other companies alleging infringement of U.S. Patent Nos. 6,314,473 and
4,916,635. The complaint sought unspecified monetary damages and injunctive relief. In October 2008, Convolve
amended its complaint to allege infringement of only the ’473 patent. The ’473 patent allegedly relates to interface
technology to select between certain modes of a disk drive’s operations relating to speed and noise. In July 2011, a
verdict was rendered against WD and HGST in an amount that is not material to the Company’s financial position,
results of operations or cash flows, for which the Company previously recorded an accrual. In March 2015, WD and
HGST filed notices of appeal with the U.S. District Court for the Federal Circuit (“Federal Circuit”). In April 2015,
Convolve filed a motion for reconsideration of the final judgment. In June 2017, the District Court vacated the
judgment against WD and HGST with respect to infringement, willfulness, and damages and denied Convolve’s
motion for reconsideration. WD and HGST intend to continue to defend themselves vigorously in this matter.
In May 2016, Lambeth Magnetic Structures, LLC (“Lambeth”) filed a complaint with the U.S. District Court for
the Western District of Pennsylvania against WD and certain of its subsidiaries alleging infringement of U.S. Patent
118
WESTERN DIGITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
No. 7,128,988. The complaint seeks unspecified monetary damages and injunctive relief. The ’988 patent, entitled
“Magnetic Material Structures, Devices and Methods,” allegedly relates to a magnetic material structure for hard disk
drive devices. The Company intends to defend itself vigorously in this matter.
In December 2016, Memory Technologies, LLC (“MTL”), a subsidiary of Pendrell Corporation, filed two com-
plaints — one with the International Trade Commission (“ITC”) and the other with the U.S. District Court for the
Central District of California — against WD and certain of its subsidiaries alleging infringement of various patents.
In the ITC complaint, MTL asserted that certain of the Company’s Secure Digital (“SD”) and microSD products
infringe U.S. Patent Nos. RE45,542; RE45,486; 7,565,469; 9,063,850; and 8,307,180. The ITC complaint sought an
exclusion order barring the accused products, and components thereof, from entry into the U.S. In the other com-
plaint, MTL asserted that certain of the Company’s SD, microSD and/or eMMC products infringe the same patents
asserted in the ITC complaint, as well as U.S. Patent Nos. 7,275,186; 7,827,370; and 7,739,487. The complaint
sought unspecified monetary damages. In June 2017, the parties entered into a settlement and patent license agree-
ment. The agreement fully resolves all pending litigation between the parties and grants the Company a license to
Pendrell patents relating to memory and storage technologies. The settlement terms are not material to the Compa-
ny’s financial position, results of operations or cash flows.
Antitrust
In June 2010, Ritz Camera & Image, LLC (“Ritz”) filed a complaint with the U.S. District Court for the North-
ern District of California, alleging that SanDisk violated federal antitrust laws by conspiring to monopolize and
monopolizing the market for flash memory products. The lawsuit purports to be on behalf of direct purchasers of flash
memory products sold by SanDisk and SanDisk-controlled joint ventures from June 2006 through the present. The
complaint alleged that SanDisk created and maintained a monopoly by fraudulently obtaining patents and using them
to restrain competition and by allegedly converting other patents for its competitive use. The complaint sought
damages, injunctive relief, and fees and costs. In February 2011, Dr. Harari was dismissed as a defendant. Between
2013 and 2014, Albert Giuliano, the Chapter 7 Trustee of the Ritz bankruptcy estate, was substituted in as named
plaintiff and CPM Electronics Inc., E.S.E. Electronics, Inc. and Mflash, Inc. were added as named plaintiffs. In May
2015, the District Court granted in part plaintiffs’ motion for class certification. In April 2016, the District Court
granted SanDisk’s motion for summary judgment and entered judgment in SanDisk’s favor as to all of the plaintiffs’
claims. In May 2016, the plaintiffs filed a notice of appeal to the U.S. Court of Appeals for the Federal Circuit. In July
2017, the Federal Circuit affirmed the District Court’s grant of SanDisk’s motion for summary judgment.
In July 2010, Samsung Electronics Co., Ltd. (“Samsung”) filed an action against Panasonic and SD-3C LLC
(“SD-3C”) with the U.S. District Court for the Northern District of California, alleging that the defendants violated
federal antitrust laws and California antitrust and unfair competition laws relating to the licensing practices and oper-
ations of SD-3C. The complaint seeks damages, restitution, injunctive and declaratory relief, and fees and costs. San-
Disk is not a defendant in this case, but it established SD-3C along with Panasonic and Toshiba, and the complaint
includes various factual allegations concerning SanDisk. As a member of SD-3C, SanDisk could be responsible for a
portion of any monetary award. Other requested relief, if granted, could result in a loss of revenue to SanDisk. In
November 2015, the defendants filed a motion to dismiss. In September 2016, the District Court stayed the litigation
pending the outcome of an ongoing arbitration between Samsung and Toshiba. The District Court denied the motion
to dismiss without prejudice to refiling after the stay is lifted. The arbitration between Samsung and Toshiba was
concluded in May 2017, and the District Court lifted its stay of the litigation in July 2017.
In March 2011, a complaint was filed against SanDisk, SD-3C, Panasonic Corporation, Panasonic Corporation of
North America, Toshiba and Toshiba America Electronic Components, Inc. with the U.S. District Court for the
Northern District of California. The lawsuit purports to be on behalf of a nationwide class of indirect purchasers of SD
cards. The complaint asserts claims under federal antitrust laws and California antitrust and unfair competition laws,
as well as common law claims. The complaint seeks damages, restitution, injunctive relief, and fees and costs. The
plaintiffs allege that the defendants conspired to artificially inflate the royalty costs associated with manufacturing
119
WESTERN DIGITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
SD cards, which in turn allegedly caused the plaintiffs to pay higher prices for SD cards. The allegations are similar to
and incorporate allegations in Samsung Electronics Co., Ltd. v. Panasonic Corp., et al., described above. In
November 2015, the defendants filed a motion to dismiss the plaintiffs’ federal law claims. In October 2016, the
District Court granted the defendants’ motion with leave to amend and the defendants filed a motion to dismiss the
plaintiffs’ remaining claims. Discovery is presently stayed until after completion of the pleading stage. The Company
intends to defend itself vigorously in this matter.
Securities
Beginning in March 2015, SanDisk and two of its officers, Sanjay Mehrotra and Judy Bruner, were named in
three putative class action lawsuits filed with the U.S. District Court for the Northern District of California. Two
complaints are allegedly brought on behalf of a class of purchasers of SanDisk’s securities between October 2014 and
March 2015, and one is brought on behalf of a purported class of purchasers of SanDisk’s securities between April
2014 and April 2015. The complaints generally allege violations of federal securities laws arising out of alleged mis-
statements or omissions by the defendants during the alleged class periods. The complaints seek, among other things,
damages and fees and costs. In July 2015, the District Court consolidated the cases and appointed Union Asset Man-
agement Holding AG and KBC Asset Management NV as lead plaintiffs. The lead plaintiffs filed an amended com-
plaint in August 2015. In January 2016, the District Court granted the defendants’ motion to dismiss and dismissed
the amended complaint with leave to amend. In February 2016, the District Court issued an order appointing as new
lead plaintiffs Bristol Pension Fund; City of Milford, Connecticut Pension & Retirement Board; Pavers and Road
Builders Pension, Annuity and Welfare Funds; the Newport News Employees’ Retirement Fund; and Massachusetts
Laborers’ Pension Fund (collectively, the “Institutional Investor Group”). In March 2016, the Institutional Investor
Group filed an amended complaint. In June 2016, the District Court granted the defendants’ motion to dismiss and
dismissed the amended complaint with leave to amend. In July 2016, the Institutional Investor Group filed a further
amended complaint. In June 2017, the District Court denied the defendants’ motion to dismiss. The Company
intends to defend itself vigorously in this matter.
Toshiba Matters
Toshiba litigation against the Company
In July 2017, the Company received a petition for provisional disposition that was filed by Toshiba Corporation
and Toshiba Memory Corporation in the Tokyo District Court. The petition alleges that the Company has engaged in
acts of defamation and wrongful acquisition and use of trade secrets in violation of the Unfair Competition Prevention
Act. The petition requests injunctive relief.
In June 2017, Toshiba issued a press release announcing that it also brought suit for a permanent injunction,
damages and payment of 120 billion Japanese yen. The Company has not received Toshiba’s announced filing or any
formal notice of such lawsuit. The Company intends to defend itself vigorously in these matters.
SanDisk litigation against Toshiba
In May 2017, several of the Company’s SanDisk subsidiaries (the “SanDisk Subsidiaries”) filed a request for arbi-
tration with the ICC International Court of Arbitration seeking an order requiring Toshiba Corporation to unwind the
transfer of its interests in Flash Ventures to its affiliate, Toshiba Memory Corporation, and injunctive relief preventing
Toshiba from further breaching the Flash Ventures agreements by transferring its interests in Flash Ventures without
SanDisk’s consent. In June 2017, the SanDisk Subsidiaries sought preliminary injunctive relief in the Superior Court
of the State of California for the County of San Francisco to prevent Toshiba from transferring its interests in Flash
Ventures until the request of the SanDisk Subsidiaries for injunctive relief in arbitration is decided by the arbitral
tribunal. In July 2017, the Superior Court entered a stipulated order requiring Toshiba to give the SanDisk Sub-
sidiaries at least 14 days’ advance notice of any transfer involving Toshiba’s interests in Flash Ventures, in order to
ensure that the issue is preserved for arbitration.
120
WESTERN DIGITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
In July 2017, SanDisk LLC filed a request for arbitration with the ICC International Court of Arbitration against
Toshiba seeking damages and injunctive relief for, among other things, blocking certain employees of SanDisk’s affili-
ates from accessing shared databases regarding Flash Ventures and from refusing to ship certain engineering wafers
and samples to SanDisk’s affiliates in breach of the JV agreements. SanDisk LLC also sought injunctive relief, a pre-
liminary injunction and a temporary restraining order (“TRO”), in aid of that arbitration from the Superior Court of
the State of California for the County of San Francisco. On July 11, 2017, the Superior Court granted a TRO in favor
of SanDisk. Toshiba filed a notice of appeal, and on July 18, the California Court of Appeal, First Appellate District,
issued a temporary stay of the TRO while it reviewed Toshiba’s petition for a permanent stay of the TRO pending
appeal. On July 24, SanDisk LLC amended its request for arbitration to, among other things, add Toshiba Memory
Corporation as a defendant. On August 2, 2017, the Court of Appeal denied Toshiba’s petition for a permanent stay of
the TRO and dissolved the temporary stay. On August 14, the Superior Court granted SanDisk’s request for a
preliminary injunction. On August 18, Toshiba withdrew its appeal of the TRO, and filed a notice of appeal of the
preliminary injunction.
Copyright
In December 2011, the German Central Organization for Private Copying Rights (Zentralstelle für private
Überspielungsrechte) (“ZPÜ”), an organization consisting of several copyright collecting societies, instituted arbi-
tration proceedings against WD’s German subsidiary (“WD Germany”) before the Copyright Arbitration Board
(“CAB”) claiming copyright levies for multimedia hard drives, external hard drives and network hard drives sold or
introduced into commerce in Germany by WD Germany from January 2008 through December 2010. In February
2013, WD Germany filed a declaratory relief action against ZPÜ in the Higher Regional Court of Munich (the
“Higher Court”), seeking an order from the Higher Court to determine the copyright levy issue. In May 2013, ZPÜ
filed a counter-claim against WD Germany with the Higher Court, seeking copyright levies for multimedia hard
drives, external hard drives and network hard drives sold or introduced into commerce from January 2008 through
December 2010 based on tariffs published by ZPÜ in November 2011. In January 2015, the Higher Court ruled in
favor of ZPÜ. In its ruling, the Higher Court declared that WD Germany must pay certain levies on certain products
which it sold in Germany between January 2008 and December 2010. The judgment specified levy amounts on cer-
tain products sold from January 2008 through December 2010 and directed WD Germany to disclose applicable sales
data to ZPÜ. The exact amount of the judgment had not been determined. ZPÜ and WD Germany filed appeals with
the German Federal Court of Justice in February 2015. In March 2017, the German Federal Court of Justice rendered
a judgment affirming ZPÜ’s claim concerning the disclosure of WD Germany’s sales data regarding HDDs sold
between January 2008 and December 2010. The German Federal Court of Justice also set aside the Higher Court’s
decision on the levy amounts and referred the case back to the Higher Court for further fact finding and decision on
the levy amounts. The Company intends to defend itself vigorously in this matter.
In December 2014, ZPÜ submitted a pleading to the CAB seeking copyright levies for multimedia hard drives,
external hard drives and network hard drives sold or introduced into commerce in Germany by WD Germany between
January 2012 and December 2013. The Company intends to defend itself vigorously in this matter.
The Company has recorded an accrual for German copyright levies in an amount that is not material to the
Company’s financial position, results of operations or cash flows; however, it is reasonably possible that the Company
could incur losses totaling up to $155 million, inclusive of amounts accrued, if it does not prevail in this matter.
Other Matters
In the normal course of business, the Company is subject to other legal proceedings, lawsuits and other claims.
Although the ultimate aggregate amount of probable monetary liability or financial impact with respect to these
other matters is subject to many uncertainties, management believes that any monetary liability or financial impact to
the Company from these other matters, individually and in the aggregate, would not be material to the Company’s
financial condition, results of operations or cash flows. However, any monetary liability and financial impact to the
Company from these other matters could differ materially from the Company’s expectations.
121
WESTERN DIGITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Note 18. Separate Financial Information of Guarantor Subsidiaries
The New Unsecured Notes are registered under the Securities Act of 1933, as amended, and have no transfer
restrictions or rights to additional interest. The New Unsecured Notes are fully and unconditionally guaranteed,
jointly and severally, on a senior unsecured basis, subject to certain customary guarantor release conditions, by the
WD Guarantors (or the “Guarantor Subsidiaries”). The guarantee by a Guarantor Subsidiary will be released in the
event of (i) the designation of a Guarantor Subsidiary as an unrestricted subsidiary under the indenture governing the
New Unsecured Notes, (ii) the release of a Guarantor Subsidiary from its guarantee of indebtedness under the Credit
Agreement or other indebtedness that would have required the Guarantor Subsidiary to guarantee the New Unsecured
Notes, (iii) the sale, issuance or other disposition of capital stock of a Guarantor Subsidiary such that it is no longer a
restricted subsidiary under the indenture governing the New Unsecured Notes, (iv) the sale of all or substantially all
of a Guarantor Subsidiary’s assets, (v) the Company’s exercise of its defeasance options under the indenture governing
the New Unsecured Notes, (vi) the dissolution or liquidation of a Guarantor Subsidiary or (vii) the sale of all the
equity interest in a Guarantor Subsidiary. The Company’s other domestic subsidiaries and its foreign subsidiaries
(collectively, the “Non-Guarantor Subsidiaries”) do not guarantee the New Unsecured Notes. The following con-
densed consolidating financial information reflects the summarized financial information of Western Digital Corpo-
ration (“Parent”), the Guarantor Subsidiaries on a combined basis, and the Non-Guarantor Subsidiaries on a combined
basis.
For more information regarding the New Unsecured Notes, refer to Note 6, Debt.
122
WESTERN DIGITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Condensed Consolidating Balance Sheet
As of June 30, 2017
Parent
Guarantor
Subsidiaries
Non-Guarantor
Subsidiaries
(in millions)
Eliminations
Total
Company
Current assets:
Cash and cash equivalents . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . .
Short-term investments
Accounts receivable, net . . . . . . . . . . . . . . . . . . . .
Intercompany receivable . . . . . . . . . . . . . . . . . . . .
Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other current assets . . . . . . . . . . . . . . . . . . . . . . .
Total current assets . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . .
Property, plant and equipment, net
Notes receivable and investments in Flash
Ventures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Goodwill
Other intangible assets, net
. . . . . . . . . . . . . . . . . . .
Investments in consolidated subsidiaries . . . . . . . . . .
Loans due from consolidated affiliates . . . . . . . . . . . .
Other non-current assets . . . . . . . . . . . . . . . . . . . . . .
ASSETS
$
18
—
—
1,225
—
4
1,247
—
—
—
—
19,082
4,700
51
$ 1,212
—
1,247
2,528
1,133
158
6,278
1,124
—
331
11
17,588
16
723
$ 5,124
24
701
622
1,494
221
8,186
1,909
1,340
9,683
3,812
—
—
419
$
— $ 6,354
24
—
1,948
—
—
(4,375)
2,341
(286)
389
6
(4,655)
—
11,056
3,033
—
1,340
— 10,014
3,823
—
—
(36,670)
—
(4,716)
594
(599)
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . .
$25,080
$26,071
$25,349
$(46,640)
$29,860
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . .
Intercompany payable . . . . . . . . . . . . . . . . . . . . . .
Accounts payable to Flash Ventures . . . . . . . . . . .
Accrued expenses . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued compensation . . . . . . . . . . . . . . . . . . . . .
Accrued warranty . . . . . . . . . . . . . . . . . . . . . . . . .
Current portion of long-term debt . . . . . . . . . . . .
$ — $
270
—
270
—
—
233
Total current liabilities . . . . . . . . . . . . . . . . . . .
Long-term debt
. . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loans due to consolidated affiliates . . . . . . . . . . . . . .
Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total liabilities . . . . . . . . . . . . . . . . . . . . . . .
Total shareholders’ equity . . . . . . . . . . . . . . . . . . . . .
773
12,889
—
—
13,662
11,418
257
4,039
—
360
313
4
—
4,973
—
546
1,243
6,762
19,309
$ 1,887
66
206
439
193
182
—
2,973
29
4,170
530
7,702
17,647
$
— $ 2,144
—
206
1,069
506
186
233
(4,375)
—
—
—
—
—
(4,375)
4,344
— 12,918
—
1,180
(4,716)
(593)
(9,684)
(36,956)
18,442
11,418
Total liabilities and shareholders’ equity . . . .
$25,080
$26,071
$25,349
$(46,640)
$29,860
123
WESTERN DIGITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Condensed Consolidating Balance Sheet
As of July 1, 2016
Parent
Guarantor
Subsidiaries
Non-Guarantor
Subsidiaries
(in millions)
Eliminations
Total
Company
ASSETS
Current assets:
Cash and cash equivalents . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . .
Short-term investments
Accounts receivable, net . . . . . . . . . . . . . . . . . . . .
Intercompany receivable . . . . . . . . . . . . . . . . . . . .
Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other current assets . . . . . . . . . . . . . . . . . . . . . . .
$ — $ 1,206
—
985
886
896
276
—
—
934
—
4
Total current assets . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . .
Property, plant and equipment, net
Notes receivable and investments in Flash
Ventures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Goodwill
Other intangible assets, net
. . . . . . . . . . . . . . . . . . .
Investments in consolidated subsidiaries . . . . . . . . . .
Loans due from consolidated affiliates . . . . . . . . . . . .
Other non-current assets . . . . . . . . . . . . . . . . . . . . . .
938
—
—
—
—
18,009
6,000
50
4,249
1,265
—
324
28
27,020
55
33
$ 6,945
227
476
2,546
1,450
379
12,023
2,238
1,171
9,627
5,006
—
—
702
$
— $ 8,151
227
—
1,461
—
—
(4,366)
2,129
(217)
616
(43)
(4,626)
—
12,584
3,503
—
—
—
(45,029)
(6,055)
(166)
1,171
9,951
5,034
—
—
619
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . .
$24,997
$32,974
$30,767
$(55,876)
$32,862
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . .
Intercompany payable . . . . . . . . . . . . . . . . . . . . . .
Accounts payable to Flash Ventures . . . . . . . . . . .
Accrued expenses . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued compensation . . . . . . . . . . . . . . . . . . . . .
Accrued warranty . . . . . . . . . . . . . . . . . . . . . . . . .
Bridge loan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Current portion of long-term debt . . . . . . . . . . . .
$ — $
119
—
109
—
—
—
14
Total current liabilities . . . . . . . . . . . . . . . . . . .
Long-term debt
. . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loans due to consolidated affiliates . . . . . . . . . . . . . .
Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total liabilities . . . . . . . . . . . . . . . . . . . . . . .
Total shareholders’ equity . . . . . . . . . . . . . . . . . . . . .
242
13,610
—
—
13,852
11,145
239
4,043
—
462
222
4
2,995
—
7,965
—
6,000
862
14,827
18,147
$ 1,649
204
168
404
170
168
—
325
3,088
50
55
475
3,668
27,099
$
— $ 1,888
—
168
995
392
172
2,995
339
(4,366)
—
20
—
—
—
—
(4,346)
6,949
— 13,660
—
1,108
(6,055)
(229)
(10,630)
(45,246)
21,717
11,145
Total liabilities and shareholders’ equity . . . .
$24,997
$32,974
$30,767
$(55,876)
$32,862
124
WESTERN DIGITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Condensed Consolidating Statement of Operations
For the year ended June 30, 2017
Revenue, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cost of revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ — $14,732
— 12,786
(in millions)
$16,381
12,203
$(12,020)
(11,968)
$19,093
13,021
Parent
Guarantor
Subsidiaries
Non-Guarantor
Subsidiaries
Eliminations
Total
Company
1,946
4,178
(52)
6,072
822
433
1,736
144
3,135
1,043
22
(348)
(61)
(387)
656
395
—
261
—
—
—
—
—
(52)
(354)
354
(62)
2,441
1,445
—
232
4,118
1,954
26
(847)
(364)
(62)
(1,185)
(114)
—
(1,194)
$ (1,308)
$
769
372
—
397
Gross profit
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Operating expenses:
Research and development . . . . . . . . . . . . . . . . . . . .
Selling, general and administrative . . . . . . . . . . . . . .
. . . . . . . .
Intercompany operating expense (income)
Employee termination, asset impairment, and other
charges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total operating expenses . . . . . . . . . . . . . . . . . . . .
—
—
6
—
—
6
Operating income (loss)
. . . . . . . . . . . . . . . . . .
(6)
Interest and other income (expense):
Interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other income (expense), net . . . . . . . . . . . . . . . . . . .
Total interest and other income (expense), net . . .
Income (loss) before taxes . . . . . . . . . . . . . . . . . . . . . . .
Income tax expense (benefit) . . . . . . . . . . . . . . . . . . . . .
Equity in earnings from subsidiaries . . . . . . . . . . . . . . .
347
(843)
(290)
(786)
(792)
(282)
907
1,619
1,006
(1,736)
88
977
969
11
(10)
49
50
1,019
259
287
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 397
$ 1,047
$
125
WESTERN DIGITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Condensed Consolidating Statement of Operations
For the year ended July 1, 2016
Revenue, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cost of revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ — $12,600
— 11,796
(in millions)
$13,285
10,662
$(12,891)
(12,899)
$12,994
9,559
Parent
Guarantor
Subsidiaries
Non-Guarantor
Subsidiaries
Eliminations
Total
Company
Gross profit
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Operating expenses:
Research and development . . . . . . . . . . . . . . . . . . . .
Selling, general and administrative . . . . . . . . . . . . . .
. . . . . . . .
Intercompany operating expense (income)
Employee termination, asset impairment, and other
charges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total operating expenses . . . . . . . . . . . . . . . . . . . .
—
—
4
—
—
4
Operating income (loss)
. . . . . . . . . . . . . . . . . .
(4)
Interest and other income (expense):
Interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other income (expense), net . . . . . . . . . . . . . . . . . . .
Total interest and other expense, net
. . . . . . . . . .
Income (loss) before taxes . . . . . . . . . . . . . . . . . . . . . . .
Income tax benefit . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Equity in earnings from subsidiaries . . . . . . . . . . . . . . .
54
(184)
11
(119)
(123)
(44)
321
804
2,623
8
3,435
1,095
645
(1,087)
105
758
46
2
(128)
(30)
(156)
(110)
(27)
400
532
348
1,087
240
2,207
416
24
(8)
(54)
(38)
378
(18)
—
—
—
—
—
—
8
(54)
54
—
—
8
—
(721)
1,627
997
—
345
2,969
466
26
(266)
(73)
(313)
153
(89)
—
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 242
$
317
$
396
$
(713)
$
242
126
WESTERN DIGITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Condensed Consolidating Statement of Operations
For the year ended July 3, 2015
Revenue, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cost of revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ — $14,942
— 14,086
Parent
Guarantor
Subsidiaries
Non-Guarantor
Subsidiaries
(in millions)
$15,356
11,935
Eliminations
Total
Company
$(15,726)
(15,670)
$14,572
10,351
856
3,421
(56)
4,221
Gross profit
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Operating expenses:
Research and development . . . . . . . . . . . . . . . . . . .
Selling, general and administrative . . . . . . . . . . . . .
. . . . . . .
Intercompany operating expense (income)
Employee termination, asset impairment and other
charges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total operating expenses . . . . . . . . . . . . . . . . . . .
—
—
4
—
—
4
Operating income (loss)
. . . . . . . . . . . . . . . . .
(4)
Other income (expense):
Interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other income (expense), net . . . . . . . . . . . . . . . . . .
Total other expense, net . . . . . . . . . . . . . . . . . . .
—
—
—
—
1,191
548
(1,237)
49
551
305
3
(46)
—
(43)
Income (loss) before income taxes . . . . . . . . . . . . . . . .
Income tax expense (benefit) . . . . . . . . . . . . . . . . . . . .
Equity in earnings from consolidated subsidiaries . . . .
(4)
(1)
1,468
262
108
1,381
455
236
1,237
127
2,055
1,366
12
(4)
1
9
1,375
5
—
—
—
—
—
—
(56)
(1)
1
—
—
1,646
788
—
176
2,610
1,611
14
(49)
1
(34)
(56)
—
(2,849)
1,577
112
—
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$1,465
$ 1,535
$ 1,370
$ (2,905)
$ 1,465
127
WESTERN DIGITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Condensed Consolidating Statement of Comprehensive Income (Loss)
For the year ended June 30, 2017
Parent
Guarantor
Subsidiaries
Non-Guarantor
Subsidiaries
Eliminations
Total
Company
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other comprehensive loss, before tax:
$ 397
$1,047
Actuarial pension gain . . . . . . . . . . . . . . . . . . . . . . .
Foreign currency translation adjustment . . . . . . . . . .
Net unrealized loss on derivative contracts . . . . . . . .
Net unrealized gain on available-for-sale
39
(115)
(77)
39
(113)
(77)
securities
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2
2
Total other comprehensive loss, before tax . . . . . .
(151)
(149)
Income tax expense related to items of other
comprehensive loss . . . . . . . . . . . . . . . . . . . . . . . . . .
(10)
Other comprehensive loss, net of tax . . . . . . . . . . . . . . .
(161)
(10)
(159)
(in millions)
$ 261
$(1,308)
$ 397
39
(136)
(75)
2
(170)
(8)
(178)
(78)
249
152
(4)
319
18
337
39
(115)
(77)
2
(151)
(10)
(161)
Total comprehensive income . . . . . . . . . . . . . . . . . . . . .
$ 236
$ 888
$ 83
$ (971)
$ 236
Condensed Consolidating Statement of Comprehensive Income (Loss)
For the year ended July 1, 2016
Parent
Guarantor
Subsidiaries
Non-Guarantor
Subsidiaries
Eliminations
Total
Company
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other comprehensive income, before tax:
$242
$317
Actuarial pension loss . . . . . . . . . . . . . . . . . . . . . . . .
Foreign currency translation adjustment . . . . . . . . . .
Net unrealized gain on derivative contracts . . . . . . . .
(73)
74
99
Total other comprehensive income, before tax . . . .
100
Income tax benefit related to items of other
comprehensive income . . . . . . . . . . . . . . . . . . . . . . .
Other comprehensive income, net of tax . . . . . . . . . . . .
23
123
(73)
74
99
100
23
123
Total comprehensive income . . . . . . . . . . . . . . . . . . . . .
$365
$440
(in millions)
$396
$(713)
$242
(73)
74
93
94
23
117
$513
146
(148)
(192)
(194)
(46)
(240)
(73)
74
99
100
23
123
$(953)
$365
128
WESTERN DIGITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Condensed Consolidating Statement of Comprehensive Income (Loss)
For the year ended July 3, 2015
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other comprehensive income (loss), before tax:
Actuarial pension loss . . . . . . . . . . . . . . . . . . . . . . .
Net unrealized gain (loss) on derivative contracts . .
Total other comprehensive loss, before tax . . . . .
Income tax benefit related to items of other
comprehensive income (loss) . . . . . . . . . . . . . . . . . .
Other comprehensive loss, net of tax . . . . . . . . . . . . . .
Parent
Guarantor
Subsidiaries
$1,465
$1,535
Non-Guarantor
Subsidiaries
(in millions)
$1,370
Eliminations
Total
Company
$(2,905)
$1,465
(2)
(30)
(32)
—
(32)
(2)
(30)
(32)
—
(32)
(2)
(25)
(27)
—
(27)
4
55
59
—
59
(2)
(30)
(32)
—
(32)
Total comprehensive income . . . . . . . . . . . . . . . . . . . .
$1,433
$1,503
$1,343
$(2,846)
$1,433
129
WESTERN DIGITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Condensed Consolidating Statement of Cash Flows
For the year ended June 30, 2017
Cash flows from operating activities
Net cash provided by (used in) operating
activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ (360)
$ (836)
$ 4,593
$
40
$ 3,437
Parent
Guarantor
Subsidiaries
Non-Guarantor
Subsidiaries
(in millions)
Eliminations
Total
Company
Cash flows from investing activities
Purchases of property, plant and equipment
Proceeds from the sale of property, plant and
. . . . . . .
—
(240)
equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Purchases of investments . . . . . . . . . . . . . . . . . . . . . .
Proceeds from sale of investments . . . . . . . . . . . . . . .
Proceeds from maturities of investments . . . . . . . . . .
Investments in Flash Ventures . . . . . . . . . . . . . . . . . .
Notes receivable issuances to Flash Ventures . . . . . . .
Notes receivable proceeds from Flash Ventures . . . . .
Strategic investments and other, net . . . . . . . . . . . . .
. . . . .
Intercompany loan from consolidated affiliates
Advances from (to) parent and consolidated
affiliates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net cash provided by (used in) investing
—
—
—
—
—
—
—
—
1,300
—
—
—
—
—
—
—
(1)
39
(158)
166
(338)
21
(281)
94
417
(20)
(549)
292
(31)
—
—
—
—
—
—
—
—
—
—
—
(1,339)
(578)
21
(281)
94
417
(20)
(549)
292
(32)
—
(8)
—
activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,142
(36)
(395)
(1,347)
(636)
Cash flows from financing activities
Issuance of stock under employee stock plans . . . . . . .
Taxes paid on vested stock awards under employee
stock plans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Excess tax benefits from employee stock plans . . . . . .
Proceeds from acquired call option . . . . . . . . . . . . . .
Settlement of convertible debt . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . .
Dividends paid to shareholders
Settlement of debt hedge contracts
. . . . . . . . . . . . . .
Repayment of debt
. . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from debt . . . . . . . . . . . . . . . . . . . . . . . . . .
Debt issuance costs . . . . . . . . . . . . . . . . . . . . . . . . . .
Intercompany loan from (to) consolidated affiliates . .
Change in investment in consolidated subsidiaries . . .
(124)
119
—
—
(574)
—
(8,702)
7,908
(10)
—
384
Net cash provided by (used in) financing
activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(764)
Effect of exchange rate changes on cash . . . . . . . . . . . . .
Net increase (decrease) in cash and cash equivalents . . . .
Cash and cash equivalents, beginning of year . . . . . . . . .
Cash and cash equivalents, end of year . . . . . . . . . . . . . .
$
—
18
—
18
130
235
—
—
—
235
—
—
—
—
—
(21)
(2,995)
—
—
(5,454)
9,348
878
—
6
1,206
—
—
61
(492)
—
—
—
—
—
4,115
(9,700)
—
—
—
—
—
—
—
—
—
1,339
(32)
(124)
119
61
(492)
(574)
(21)
(11,697)
7,908
(10)
—
—
(6,016)
1,307
(4,595)
(3)
(1,821)
6,945
—
—
—
(3)
(1,797)
8,151
$ 1,212
$ 5,124
$ — $ 6,354
WESTERN DIGITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Condensed Consolidating Statement of Cash Flows
For the year ended July 1, 2016
Parent
Guarantor
Subsidiaries
Non-Guarantor
Subsidiaries
(in millions)
Eliminations
Total
Company
Cash flows from operating activities
Net cash provided by (used in) operating
activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
(210) $ 1,018
$ 1,299
$
(124)
$ 1,983
Cash flows from investing activities
Purchases of property, plant and equipment . . . . . . . .
Acquisitions, net of cash acquired . . . . . . . . . . . . . . . .
Purchases of investments
. . . . . . . . . . . . . . . . . . . . . .
Proceeds from sale of investments . . . . . . . . . . . . . . . .
Proceeds from maturities of investments . . . . . . . . . . .
Notes receivable issuances to Flash Ventures . . . . . . . .
Notes receivable proceeds from Flash Ventures . . . . . .
Strategic investments and other, net . . . . . . . . . . . . . .
Intercompany loans from (to) consolidated affiliates . .
. . . . . . . . . . . . . . .
Advances to consolidated affiliates
Net cash provided by (used in) investing
—
(233)
— (13,767)
—
—
—
—
—
—
—
—
—
—
(10)
(34)
40
(6,000)
(96)
(8,845)
(351)
3,932
(632)
1,204
405
(106)
16
(32)
—
(229)
—
—
—
—
—
—
—
—
5,960
9,170
(584)
(9,835)
(632)
1,204
405
(106)
16
(76)
—
—
activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(14,879)
(14,066)
4,207
15,130
(9,608)
Cash flows from financing activities
Issuance of stock under employee stock plans . . . . . . .
Taxes paid on vested stock awards under employee
stock plans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Excess tax benefits from employee stock plans
. . . . . .
Proceeds from acquired call option . . . . . . . . . . . . . . .
Settlement of convertible debt . . . . . . . . . . . . . . . . . .
Repurchases of common stock . . . . . . . . . . . . . . . . . . .
Proceeds from revolving credit facility . . . . . . . . . . . .
Repayment of revolving credit facility . . . . . . . . . . . .
Dividends paid to shareholders . . . . . . . . . . . . . . . . . .
Repayment of debt . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from debt . . . . . . . . . . . . . . . . . . . . . . . . . . .
Debt issuance costs . . . . . . . . . . . . . . . . . . . . . . . . . . .
Payment upon settlement of acquired warrants . . . . . .
Intercompany loan from (to) consolidated affiliates . . .
Change in investment in consolidated subsidiaries . . .
Net cash provided by (used in) financing
117
—
—
—
117
(50)
7
—
—
(60)
—
—
(464)
—
14,108
(497)
—
—
1,928
—
—
—
—
—
125
(125)
—
(2,313)
3,000
(27)
—
6,000
6,933
—
—
409
(2,611)
—
—
(255)
—
—
—
—
(613)
(40)
185
(50)
—
7
—
409
—
(2,611)
—
(60)
—
125
—
(380)
—
(464)
—
—
(2,313)
— 17,108
(524)
—
(613)
—
—
(5,960)
—
(9,046)
activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
15,089
13,593
(2,925)
(15,006)
10,751
Effect of exchange rate changes on cash . . . . . . . . . . . . . .
Net increase in cash and cash equivalents . . . . . . . . . . . .
Cash and cash equivalents, beginning of year . . . . . . . . .
—
—
—
—
545
661
1
2,582
4,363
—
—
—
1
3,127
5,024
Cash and cash equivalents, end of year
. . . . . . . . . . . . . .
$
— $ 1,206
$ 6,945
$
— $ 8,151
131
WESTERN DIGITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Condensed Consolidating Statement of Cash Flows
For the year ended July 3, 2015
Cash flows from operating activities
Net cash provided by operating activities
. . . . .
$
23
$
150
$ 2,066
$
3
$ 2,242
Parent
Guarantor
Subsidiaries
Non-Guarantor
Subsidiaries
(in millions)
Eliminations
Total
Company
Cash flows from investing activities
. . . . .
Purchases of property, plant and equipment
Acquisitions, net of cash acquired . . . . . . . . . . . . .
Purchases of investments . . . . . . . . . . . . . . . . . . . .
Proceeds from sale of investments . . . . . . . . . . . . .
Proceeds from maturities of investments . . . . . . . .
Strategic investments and other, net . . . . . . . . . . .
Return of capital from subsidiaries
. . . . . . . . . . . .
Intercompany loan to consolidated affiliates . . . . . .
Advances to (from) parent and consolidated
—
—
—
—
—
—
—
—
(189)
(16)
(130)
463
167
6
255
(60)
affiliates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,015
(114)
Net cash provided by (used in) investing
(423)
(241)
(727)
42
96
(1)
—
—
2
—
—
—
—
—
—
(255)
60
(903)
(612)
(257)
(857)
505
263
5
—
—
—
activities . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,015
382
(1,252)
(1,098)
(953)
Cash flows from financing activities
Issuance of stock under employee stock plans . . . . .
Taxes paid on vested stock awards under employee
stock plans . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Excess tax benefits from employee stock plans . . . .
Repurchases of common stock . . . . . . . . . . . . . . . .
Dividends paid to shareholders . . . . . . . . . . . . . . .
Repayment of debt
. . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from debt . . . . . . . . . . . . . . . . . . . . . . . .
Return of capital to parent . . . . . . . . . . . . . . . . . . .
Intercompany loan from parent . . . . . . . . . . . . . . .
Change in investment in consolidated
212
—
(64)
19
(970)
(396)
—
—
—
—
—
—
—
—
(125)
—
—
—
subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . .
161
(1,071)
Net cash provided by (used in) financing
activities . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(1,038)
(1,196)
—
—
—
—
—
—
255
(255)
60
10
70
—
212
—
—
—
—
—
—
255
(60)
900
(64)
19
(970)
(396)
(125)
255
—
—
—
1,095
(1,069)
Net increase (decrease) in cash and cash
equivalents
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash and cash equivalents, beginning of year . . . . . . .
—
—
(664)
1,325
884
3,479
—
—
220
4,804
Cash and cash equivalents, end of year . . . . . . . . . . . .
$ — $
661
$ 4,363
$ — $ 5,024
132
WESTERN DIGITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Note 19. Quarterly Results of Operations (unaudited)
First
Second
Third
Fourth
(in millions, except per share amounts)
2017
Revenue, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gross profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Operating income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income (loss)
Basic income (loss) per common share . . . . . . . . . . . . . . . . . . . . . . . . . . .
$4,714
1,335
232
(366)
$ (1.28)
$4,888
1,533
545
235
$ 0.82
$4,649
1,523
525
248
$ 0.86
$4,842
1,681
652
280
$ 0.96
Diluted income (loss) per common share . . . . . . . . . . . . . . . . . . . . . . . . .
$ (1.28)
$ 0.80
$ 0.83
$ 0.93
First
Second
Third
Fourth
(in millions, except per share amounts)
2016
Revenue, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gross profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Operating income (loss)
Net income (loss)
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Basic income (loss) per common share . . . . . . . . . . . . . . . . . . . . . . . . . . .
$3,360
955
322
283
$ 1.23
$3,317
906
251
251
$ 1.08
$2,822
753
88
74
$ 0.32
$3,495
821
(195)
(366)
$ (1.40)
Diluted income (loss) per common share . . . . . . . . . . . . . . . . . . . . . . . . .
$ 1.21
$ 1.07
$ 0.32
$ (1.40)
133
WESTERN DIGITAL CORPORATION
SCHEDULE II — CONSOLIDATED VALUATION AND QUALIFYING ACCOUNTS
Balance at July 3, 2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Balance assumed as a result of SanDisk acquisition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deductions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Balance at July 1, 2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Additions charged to operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deductions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Balance at June 30, 2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Allowance for
Doubtful Accounts
(in millions)
$ 7
6
(3)
10
3
(3)
$10
Item 9. ChangesinandDisagreementsWithAccountantsonAccountingandFinancialDisclosure
None.
Item 9A. ControlsandProcedures
Evaluation of Disclosure Controls and Procedures
As required by SEC Rule 13a-15(b) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”),
we carried out an evaluation, under the supervision and with the participation of our management, including our
Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure
controls and procedures (as such term is defined in Rule 13a-15(e) under the Exchange Act) as of the end of the period
covered by this Annual Report on Form 10-K.
Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of the end of
the period covered by this Annual Report on Form 10-K, our disclosure controls and procedures were effective.
Management’s Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial report-
ing (as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act) to provide reasonable assurance regarding the
reliability of our financial reporting and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. Internal control over financial reporting includes those policies and
procedures that (i) pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the
transactions and dispositions of our assets; (ii) provide reasonable assurance that the transactions are recorded as neces-
sary to permit preparation of financial statements in accordance with generally accepted accounting principles, and
that our receipts and expenditures are being made only in accordance with authorizations of our management and our
directors; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition,
use or disposition of our assets that could have a material effect on the financial statements.
Our management evaluated the effectiveness of our internal control over financial reporting using the criteria set
forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control —
Integrated Framework (2013). Based on this evaluation, our management concluded that our internal control over
financial reporting was effective as of the end of the period covered by this Annual Report on Form 10-K. KPMG
LLP, our independent registered public accounting firm, which audited the Consolidated Financial Statements
included in this Annual Report on Form 10-K, has issued an audit report on our internal control over financial report-
ing. See Report of Independent Registered Public Accounting Firm herein.
Changes in Internal Control over Financial Reporting
There has been no change in our internal control over financial reporting during the fourth fiscal quarter ended
June 30, 2017, that has materially affected, or is reasonably likely to materially affect, our internal control over finan-
cial reporting.
134
Inherent Limitations of Effectiveness of Controls
Our management, including our Chief Executive Officer and our Chief Financial Officer, does not expect our
internal controls over financial reporting will prevent all error and all fraud. A control system, no matter how well
conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system
are met. Further, the benefits of controls must be considered relative to their costs. Because of the inherent limitations
in a system of internal control over financial reporting, no evaluation of controls can provide absolute assurance that
all control issues and instances of fraud, if any, have been detected. These inherent limitations include the realities
that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake.
Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people,
or by management override of the control. The design of any system of controls is also based in part upon certain
assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in
achieving its stated goals under all potential future conditions. Because of the inherent limitations in a cost-effective
control system, misstatements due to error or fraud may occur and not be detected.
Item 9B. OtherInformation
None.
135
Item 10. Director,ExecutiveOfficersandCorporateGovernance
PART III
There is incorporated herein by reference the information required by this Item included in the Company’s Proxy
Statement for the 2017 Annual Meeting of Stockholders, which will be filed with the SEC no later than 120 days after
the close of the fiscal year ended June 30, 2017. In addition, our Board of Directors has adopted a Code of Business
Ethics that applies to all of our directors, employees and officers, including our Chief Executive Officer and Chief
Financial Officer. The current version of the Code of Business Ethics is available on our website under the Governance
section at www.wdc.com. To the extent required by rules adopted by the SEC and The NASDAQ Stock Market LLC, we
intend to promptly disclose future amendments to certain provisions of the Code of Business Ethics, or waivers of such
provisions granted to executive officers and directors, on our website under the Corporate Governance section at
www.wdc.com.
Item 11. ExecutiveCompensation
There is incorporated herein by reference the information required by this Item included in the Company’s Proxy
Statement for the 2017 Annual Meeting of Stockholders, which will be filed with the SEC no later than 120 days after
the close of the fiscal year ended June 30, 2017.
Item 12. SecurityOwnershipofCertainBeneficialOwnersandManagementandRelated
StockholderMatters
There is incorporated herein by reference the information required by this Item included in the Company’s Proxy
Statement for the 2017 Annual Meeting of Stockholders, which will be filed with the SEC no later than 120 days after
the close of the fiscal year ended June 30, 2017.
Item 13. CertainRelationshipsandRelatedTransactions,andDirectorIndependence
There is incorporated herein by reference the information required by this Item included in the Company’s Proxy
Statement for the 2017 Annual Meeting of Stockholders, which will be filed with the SEC no later than 120 days after
the close of the fiscal year ended June 30, 2017.
Item 14. PrincipalAccountingFeesandServices
There is incorporated herein by reference the information required by this Item included in the Company’s Proxy
Statement for the 2017 Annual Meeting of Stockholders, which will be filed with the SEC no later than 120 days after
the close of the fiscal year ended June 30, 2017.
136
Item 15. Exhibits,FinancialStatementSchedules
The following documents are filed as a part of this Annual Report on Form 10-K:
PART IV
(1) Financial Statements. The financial statements included in Part II, Item 8 of this document are filed as part
of this Annual Report on Form 10-K.
(2) Financial Statement Schedules. The financial statement schedule included in Part II, Item 8 of this document
is filed as part of this Annual Report on Form 10-K.
All other schedules are omitted as the required information is inapplicable or the information is presented in the
Consolidated Financial Statements or related Notes.
Separate financial statements have been omitted as we are primarily an operating company and our subsidiaries
are wholly or majority owned and do not have minority equity interests and/or indebtedness to any person other than
us in amounts which together exceed 5% of the total consolidated assets as shown by the most recent year-end Con-
solidated Balance Sheet.
(3) Exhibits. The exhibits listed in the Exhibit Index (following the signature page of the Annual Report on
Form 10-K) are filed with, or incorporated by reference in, this Annual Report on Form 10-K, as specified in the
Exhibit List, from exhibits previously filed with the SEC. Certain agreements listed in the Exhibit List that we have
filed or incorporated by reference may contain representations and warranties by us or our subsidiaries. These repre-
sentations and warranties have been made solely for the benefit of the other party or parties to such agreements and
(i) may have been qualified by disclosures made to such other party or parties, (ii) were made only as of the date of
such agreements or such other date(s) as may be specified in such agreements and are subject to more recent develop-
ments, which may not be fully reflected in our public disclosures, (iii) may reflect the allocation of risk among the
parties to such agreements and (iv) may apply materiality standards different from what may be viewed as material to
investors. Accordingly, these representations and warranties may not describe the actual state of affairs at the date
hereof and should not be relied upon.
Item 16. Form10-KSummary
None.
137
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has
duly caused this Annual Report on Form 10-K to be signed on its behalf by the undersigned, thereunto duly
authorized.
SIGNATURES
WESTERN DIGITAL CORPORATION
By:
/s/ MARK P. LONG
Mark P. Long
President WD Capital, Chief Strategy Officer and
Chief Financial Officer
(Principal Financial Officer and
Principal Accounting Officer)
Dated: August 28, 2017
Pursuant to the requirements of the Securities Exchange Act of 1934, this Annual Report on Form 10-K has
been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates
indicated.
Signature
Title
Date
/s/
STEPHEN D. MILLIGAN
Stephen D. Milligan
/s/ MARK P. LONG
Mark P. Long
/s/ MATTHEW E. MASSENGILL
Matthew E. Massengill
/s/ MARTIN I. COLE
Martin I. Cole
/s/ KATHLEEN A. COTE
Kathleen A. Cote
/s/ HENRY T. DENERO
Henry T. DeNero
/s/ MICHAEL D. LAMBERT
Michael D. Lambert
/s/
LEN J. LAUER
Len J. Lauer
/s/ PAULA A. PRICE
Paula A. Price
Chief Executive Officer, Director
(Principal Executive Officer)
President WD Capital, Chief Strategy
Officer and Chief Financial Officer
(Principal Financial Officer and
Principal Accounting Officer)
August 28, 2017
August 28, 2017
Chairman of the Board
August 28, 2017
August 28, 2017
August 28, 2017
August 28, 2017
August 28, 2017
August 28, 2017
August 28, 2017
Director
Director
Director
Director
Director
Director
138
Exhibit
Number
2.1
3.1
3.2
4.1
4.2
4.3
4.4
4.5
4.6
10.1
10.1.1
EXHIBIT INDEX
Description
Agreement and Plan of Merger, dated as of October 21, 2015, among Western Digital Corporation,
Schrader Acquisition Corporation and SanDisk Corporation (Filed as Exhibit 2.1 to the Company’s
Current Report on Form 8-K (File No. 1-08703) with the Securities and Exchange Commission on
October 26, 2015)±
Amended and Restated Certificate of Incorporation of Western Digital Corporation, as amended to date
(Filed as Exhibit 3.1 to the Company’s Quarterly Report on Form 10-Q (File No. 1-08703) with the
Securities and Exchange Commission on February 8, 2006)
Amended and Restated By-Laws of Western Digital Corporation, as amended effective as of February 2,
2017 (Filed as Exhibit 3.2 to the Company’s Quarterly Report on Form 10-Q (File No. 1-08703) with
the Securities and Exchange Commission on February 7, 2017)
Indenture (including Form of 7.375% Senior Secured Notes due 2023), dated as of April 13, 2016,
among Western Digital Corporation; HGST, Inc., WD Media, LLC, Western Digital (Fremont), LLC and
Western Digital Technologies, Inc., as guarantors; and U.S. Bank National Association, as trustee and
collateral agent (Filed as Exhibit 4.1 to the Company’s Current Report on Form 8-K (File No. 1-08703)
with the Securities and Exchange Commission on April 14, 2016)
First Supplemental Indenture to the Indenture filed as Exhibit 4.1 hereto, dated as of May 12, 2016,
among Western Digital Corporation, the subsidiary guarantors party thereto and U.S. Bank National
Association, as trustee and collateral agent (Filed as Exhibit 4.3 to the Company’s Current Report on
Form 8-K (File No. 1-08703) with the Securities and Exchange Commission on May 12, 2016)
Indenture (including Form of 10.500% Senior Unsecured Notes due 2024), dated as of April 13, 2016,
among Western Digital Corporation; HGST, Inc., WD Media, LLC, Western Digital (Fremont), LLC and
Western Digital Technologies, Inc., as guarantors; and U.S. Bank National Association, as trustee (Filed
as Exhibit 4.2 to the Company’s Current Report on Form 8-K (File No. 1-08703) with the Securities and
Exchange Commission on April 14, 2016)
First Supplemental Indenture to the Indenture filed as Exhibit 4.3 hereto, dated as of May 12, 2016,
among Western Digital Corporation, the subsidiary guarantors party thereto and U.S. Bank National
Association, as trustee (Filed as Exhibit 4.4 to the Company’s Current Report on Form 8-K (File
No. 1-08703) with the Securities and Exchange Commission on May 12, 2016)
Indenture (including Form of 0.5% Convertible Senior Notes due 2020), dated as of October 29, 2013,
by and between SanDisk Corporation and The Bank of New York Mellon Trust Company, N.A. (Filed as
Exhibit 4.1 to SanDisk Corporation’s Current Report on Form 8-K (File No. 000-26734) with the
Securities and Exchange Commission on October 29, 2013)
First Supplemental Indenture to the Indenture filed as Exhibit 4.5 hereto, dated as of May 12, 2016,
among SanDisk Corporation, The Bank of New York Mellon Trust Company, N.A., as trustee, and
Western Digital Corporation (Filed as Exhibit 4.1 to the Company’s Current Report on Form 8-K (File
No. 1-08703) with the Securities and Exchange Commission on May 12, 2016)
Western Digital Corporation Amended and Restated 2004 Performance Incentive Plan, amended and
restated as of August 5, 2015 (Filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K (File
No. 1-08703) with the Securities and Exchange Commission on November 5, 2015)*
Form of Notice of Grant of Stock Option and Option Agreement — Executives, as amended on
November 3, 2015, under the Western Digital Corporation Amended and Restated 2004 Performance
Incentive Plan (Filed as Exhibit 10.1.1 to the Company’s Quarterly Report on Form 10-Q (File
No. 1-08703) with the Securities and Exchange Commission on February 10, 2016)*
139
Exhibit
Number
10.1.2
10.1.3
10.1.4
10.1.5
10.1.6
10.1.7
10.1.8
10.1.9
Description
Form of Notice of Grant of Stock Option and Option Agreement — Non-Executives, as amended on
November 3, 2015, under the Western Digital Corporation Amended and Restated 2004 Performance
Incentive Plan (Filed as Exhibit 10.1.2 to the Company’s Quarterly Report on Form 10-Q (File
No. 1-08703) with the Securities and Exchange Commission on February 10, 2016)*
Form of Notice of Grant of Stock Units and Stock Unit Award Agreement — Executives, as amended on
November 3, 2015, under the Western Digital Corporation Amended and Restated 2004 Performance
Incentive Plan (Filed as Exhibit 10.1.3 to the Company’s Quarterly Report on Form 10-Q (File
No. 1-08703) with the Securities and Exchange Commission on February 10, 2016)*
Form of Notice of Grant of Stock Units and Stock Unit Award Agreement, as amended on November 3,
2015, under the Western Digital Corporation Amended and Restated 2004 Performance Incentive Plan
(Filed as Exhibit 10.1.4 to the Company’s Quarterly Report on Form 10-Q (File No. 1-08703) with the
Securities and Exchange Commission on February 10, 2016)*
Form of Notice of Grant of Performance Stock Units and Performance Stock Unit Award Agreement —
Executives, as amended on November 3, 2015, under the Western Digital Corporation Amended and
Restated 2004 Performance Incentive Plan (Filed as Exhibit 10.1.5 to the Company’s Quarterly Report
on Form 10-Q (File No. 1-08703) with the Securities and Exchange Commission on February 10, 2016)*
Form of Notice of Grant of Performance Stock Units and Performance Stock Unit Award Agreement for
Mark Long, dated September 17, 2015, under the Western Digital Corporation Amended and Restated
2004 Performance Incentive Plan (Filed as Exhibit 10.2 to the Company’s Quarterly Report on
Form 10-Q (File No. 1-08703) with the Securities and Exchange Commission on November 10, 2015)*
Form of Notice of Grant of Performance Stock Units and Performance Stock Unit Award Agreement
(revised March 2016) under the Western Digital Corporation Amended and Restated 2004 Performance
Incentive Plan (Filed as Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q (File
No. 1-08703) with the Securities and Exchange Commission on May 9, 2016)*
Western Digital Corporation Amended and Restated 2004 Performance Incentive Plan Non-Employee
Director Option Grant Program, as amended September 6, 2012, and Form of Notice of Grant of Stock
Option and Option Agreement — Non-Employee Directors (Filed as Exhibit 10.5 to the Company’s
Quarterly Report on Form 10-Q (File No. 1-08703) with the Securities and Exchange Commission on
November 2, 2012)*
Western Digital Corporation Amended and Restated 2004 Performance Incentive Plan Non-Employee
Director Restricted Stock Unit Grant Program, as amended November 4, 2016 (Filed as Exhibit 10.1 to
the Company’s Quarterly Report on Form 10-Q (File No. 1-08703) with the Securities and Exchange
Commission on February 7, 2017)*
10.1.10 Western Digital Corporation Incentive Compensation Plan, as Amended and Restated August 5, 2015
(Filed as Exhibit 10.1.8 to the Company’s Annual Report on Form 10-K (File No. 1-08703) with the
Securities and Exchange Commission on August 21, 2015)*
10.2
10.3
10.4
10.5
Western Digital Corporation 2005 Employee Stock Purchase Plan, as amended August 5, 2015 (Filed as
Exhibit 4.2 to the Company’s Registration Statement on Form S-8 (File No. 333-207842) with the
Securities and Exchange Commission on November 5, 2015)*
SanDisk Corporation 2013 Incentive Plan (Filed as Exhibit 4.2 to the Company’s Registration Statement
on Form S-8 (File No. 333-211420) with the Securities and Exchange Commission on May 17, 2016)*
Western Digital Corporation Summary of Compensation Arrangements for Named Executive Officers
and Directors†*
Amended and Restated Deferred Compensation Plan, amended and restated effective January 1, 2013
(Filed as Exhibit 10.4 to the Company’s Annual Report on Form 10-Q (File No. 1-08703) with the
Securities and Exchange Commission on November 2, 2012)*
140
Exhibit
Number
10.6
10.7
10.8
10.9
10.10
10.11
10.12
10.13
10.14
10.15
10.16
10.17
Description
Amended and Restated Employment Agreement, dated as of September 6, 2012, between Western
Digital Corporation and Stephen D. Milligan (Filed as Exhibit 10.2 to the Company’s Quarterly Report
on Form 10-Q (File No. 1-08703) with the Securities and Exchange Commission on November 2, 2012)*
Separation and General Release Agreement, dated August 3, 2016, between Western Digital
Technologies, Inc. and Olivier C. Leonetti (Filed as Exhibit 10.8 to the Company’s Annual Report on
Form 10-K (File No. 1-08703) with the Securities and Exchange Commission on August 29, 2016)*
Western Digital Corporation Amended and Restated Change of Control Severance Plan, amended and
restated as of November 3, 2015 (Filed as Exhibit 10.2 to the Company’s Current Report on
Form 8-K (File No. 1-08703) with the Securities and Exchange Commission on November 5, 2015)*
Western Digital Corporation Executive Severance Plan, amended and restated as of February 2, 2017
(Filed as Exhibit 10.3 to the Company’s Quarterly Report on Form 10-Q (File No. 1-08703) with the
Securities and Exchange Commission on February 7, 2017)*
Form of Indemnity Agreement for Directors of Western Digital Corporation (Filed as Exhibit 10.4 to the
Company’s Quarterly Report on Form 10-Q (File No. 1-08703) with the Securities and Exchange
Commission on November 8, 2002)*
Form of Indemnity Agreement for Officers of Western Digital Corporation (Filed as Exhibit 10.5 to the
Company’s Quarterly Report on Form 10-Q (File No. 1-08703) with the Securities and Exchange
Commission on November 8, 2002)*
Form of Indemnification Agreement entered into between SanDisk Corporation and its directors and
officers (Filed as Exhibit 3.2 to SanDisk Corporation’s Registration Statement on Form S-1 (File
No. 33-96298) with the Securities and Exchange Commission on August 29, 1995)*
Change of Control Executive Benefits Agreement, effective as of January 1, 2015, by and between
SanDisk Corporation and Sanjay Mehrotra (Filed as Exhibit 10.4 to SanDisk Corporation’s Annual Report
on Form 10-K (File No. 000-26734) with the Securities and Exchange Commission on February 10,
2015)*
Letter Agreement Clarifying Change of Control Executive Benefits, by and between Western Digital
Corporation, SanDisk Corporation and Sanjay Mehrotra, dated as of May 12, 2016 (Filed as Exhibit 10.16
to the Company’s Annual Report on Form 10-K (File No. 1-08703) with the Securities and Exchange
Commission on August 29, 2016)*
Loan Agreement, dated as of April 29, 2016, by and among Western Digital Corporation, JPMorgan
Chase Bank, N.A., as administrative agent and collateral agent, and the lenders and financial institutions
from time to time party thereto (Filed as Exhibit 10.4 to the Company’s Quarterly Report on Form 10-Q
(File No. 1-08703) with the Securities and Exchange Commission on May 9, 2016)
Amendment No. 1, dated as of August 17, 2016, to the Loan Agreement dated as of April 29, 2016, by
and among Western Digital Corporation, JPMorgan Chase Bank, N.A., as administrative agent and
collateral agent, the lenders party thereto and the other loan parties thereto (Filed as Exhibit 10.1 to the
Company’s Current Report on Form 8-K (File No. 1-08703) with the Securities and Exchange
Commission on August 18, 2016)
Amendment No. 2, dated as of September 22, 2016, to the Loan Agreement dated as of April 29, 2016,
by and among Western Digital Corporation, JPMorgan Chase Bank, N.A., as administrative agent and
collateral agent, the lenders party thereto and the other loan parties thereto (Filed as Exhibit 10.1 to the
Company’s Current Report on Form 8-K (File No. 1-08703) with the Securities and Exchange
Commission on September 22, 2016)
141
Exhibit
Number
10.18
10.19
10.20
10.21
10.22
10.23
10.24
10.25
10.26
10.27
12.1
23
Description
Amendment No. 3, dated as of March 14, 2017, to the Loan Agreement dated as of April 29, 2016, by
and among Western Digital Corporation, JPMorgan Chase Bank, N.A., as administrative agent and
collateral agent, the lenders party thereto and the other loan parties thereto (Filed as Exhibit 10.1 to the
Company’s Current Report on Form 8-K (File No. 1-08703) with the Securities and Exchange
Commission on March 14, 2017)
Amendment No. 4, dated as of March 23, 2017, to the Loan Agreement dated as of April 29, 2016, by
and among Western Digital Corporation, JPMorgan Chase Bank, N.A., as administrative agent and
collateral agent, the lenders party thereto and the other loan parties thereto (Filed as Exhibit 10.1 to the
Company’s Current Report on Form 8-K (File No. 1-08703) with the Securities and Exchange
Commission on March 23, 2017)
Guaranty Agreement, dated as of April 29, 2016, by and among Western Digital Corporation, the
subsidiary guarantors party thereto and JPMorgan Chase Bank, N.A., as administrative agent for the
guaranteed creditors (Filed as Exhibit 10.2 to the Company’s Current Report on Form 8-K (File No.
1-08703) with the Securities and Exchange Commission on April 29, 2016)
Security Agreement, dated as of May 12, 2016, by and among Western Digital Corporation, the
subsidiary guarantors party thereto and U.S. Bank National Association, as trustee and collateral agent
(Filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K (File No. 1-08703) with the
Securities and Exchange Commission on May 12, 2016)
Security Agreement, dated as of May 12, 2016, by and among the debtors (as defined therein) party
thereto and JPMorgan Chase Bank, N.A., as collateral agent (Filed as Exhibit 10.2 to the Company’s
Current Report on Form 8-K (File No. 1-08703) with the Securities and Exchange Commission on
May 12, 2016)
Assumption and Supplement to Guaranty Agreement, dated as of May 12, 2016, by and among the new
guarantor (as defined therein) and JPMorgan Chase Bank, N.A. as administrative agent (Filed as Exhibit
10.3 to the Company’s Current Report on Form 8-K (File No. 1-08703) with the Securities and
Exchange Commission on May 12, 2016)
Flash Alliance Master Agreement, dated as of July 7, 2006, by and among SanDisk Corporation, Toshiba
Corporation and SanDisk (Ireland) Limited (Filed as Exhibit 10.1 to SanDisk Corporation’s Quarterly
Report on Form 10-Q (File No. 000-26734) with the Securities and Exchange Commission on
November 8, 2006)#
Operating Agreement of Flash Alliance, Ltd., dated as of July 7, 2006, by and between Toshiba
Corporation and SanDisk (Ireland) Limited (Filed as Exhibit 10.2 to SanDisk Corporation’s Quarterly
Report on Form 10-Q (File No. 000-26734) with the Securities and Exchange Commission on
November 8, 2006)#
Joint Venture Restructure Agreement, dated as of January 29, 2009, by and among SanDisk Corporation,
SanDisk (Ireland) Limited, SanDisk (Cayman) Limited, Toshiba Corporation, Flash Partners Limited and
Flash Alliance Limited (Filed as Exhibit 10.1 to SanDisk Corporation’s Quarterly Report on Form 10-Q
(File No. 000-26734) with the Securities and Exchange Commission on May 7, 2009)#
New Y2 Facility Agreement, dated October 20, 2015, by and among SanDisk Corporation, SanDisk
(Ireland) Limited, SanDisk (Cayman) Limited, SanDisk Flash B.V., Toshiba Corporation, Flash Partners
Limited, Flash Alliance Limited and Flash Forward Limited (Filed as Exhibit 10.37 to SanDisk
Corporation’s Annual Report on Form 10-K (File No. 000-26734) with the Securities and Exchange
Commission on February 12, 2016)#
Statement of Computation of Ratio of Earnings to Fixed Charges†
Consent of Independent Registered Public Accounting Firm†
142
Exhibit
Number
31.1
31.2
32.1
32.2
Description
Certification of Principal Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002†
Certification of Principal Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002†
Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002**
Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002**
101.INS XBRL Instance Document†
101.SCH XBRL Taxonomy Extension Schema Document†
101.CAL XBRL Taxonomy Extension Calculation Linkbase Document†
101.LAB XBRL Taxonomy Extension Label Linkbase Document†
101.PRE XBRL Taxonomy Extension Presentation Linkbase Document†
101.DEF XBRL Taxonomy Extension Definition Linkbase Document†
†
Filed with this report.
** Furnished with this report.
* Management contract or compensatory plan or arrangement required to be filed as an exhibit pursuant to appli-
cable rules of the Securities and Exchange Commission.
±
#
Certain schedules have been omitted pursuant to Item 601(b)(2) of Regulation S-K. The Company agrees to fur-
nish supplementally copies of any of the omitted schedules upon request by the Securities and Exchange
Commission.
Pursuant to a request for confidential treatment, certain portions of this exhibit have been redacted from the
publicly filed document and have been furnished separately to the Securities and Exchange Commission as
required by Rule 24b-2 under the Securities Exchange Act of 1934, as amended.
143
[THIS PAGE INTENTIONALLY LEFT BLANK]
Reconciliation of GAAP to Non-GAAP Financial Measures
(in millions, except per share information, unaudited)
Revenue
Reconciliation of non-GAAP gross margin
GAAP gross profit
Amortization of acquired intangible assets
Stock-based compensation expense
Acquisition-related charges
Charges related to cost saving initiatives
Other
Non-GAAP gross profit
GAAP gross margin
Non-GAAP gross margin
Reconciliation of non-GAAP operating expenses
GAAP operating expense
Amortization of acquired intangible assets
Stock-based compensation expense
Employee termination, asset impairment and other charges
Acquisition-related charges
Charges related to cost saving initiatives
Other
Non-GAAP operating expense
Non-GAAP operating income
Year Ended July 1, 2016
Year Ended
June 30, 2017
Western Digital
Corporation
SanDisk
Corporation
Pro Forma
Combined
Increase
$ 19,093
$ 12,994
$ 4,852
$ 17,846
7%
$ 6,072
1,003
49
18
68
5
$ 7,215
31.8%
37.8%
$ 3,435
$ 1,930
$ 5,365
163
21
122
74
(5)
98
18
–
–
–
$ 3,810
$ 2,046
261
39
122
74
(5)
$ 5,856
30.1%
32.8%
5%
$ 4,118
$ 2,969
$ 1,388
$ 4,357
(159)
(333)
(232)
(17)
(86)
(8)
3,283
$ 3,932
(95)
(159)
(345)
(159)
(69)
(3)
2,139
$ 1,671
(34)
(131)
–
(85)
–
(4)
1,134
$ 912
(129)
(290)
(345)
(244)
(69)
(7)
3,273
$ 2,583
52%
Reconciliation of non-GAAP net income and earnings per share:
GAAP net income
Amortization of acquired intangible assets
Stock-based compensation expense
Employee termination, asset impairment and other charges
Acquisition-related charges
Charges related to cost saving initiatives
Convertible debt activity, net
Debt extinguishment costs
Other
Income tax adjustments
Non-GAAP net income
Diluted weighted average shares outstanding:
Diluted income per common share:
GAAP
Non-GAAP
Year Ended
June 30, 2017
$ 397
1,162
382
232
35
154
6
274
67
11
$ 2,720
296
$ 1.34
$ 9.19
Summary of net debt:
Cash and cash equivalents
Short-term marketable securities
Long-term marketable securities
Debt, aggregate principal amount
Net debt
As of
June 30, 2017
July 1, 2016
$ 6,354
$ 8,151
24
94
227
119
(13,356)
$ (6,884)
(17,526)
$ (9,029)
To supplement the condensed consolidated financial statements presented in accordance with U.S. generally
accepted accounting principles (“GAAP”), the table above sets forth non-GAAP gross margin; non-GAAP operating
income; non-GAAP net income and non-GAAP diluted income per common share (“Non-GAAP measures”). These
Non-GAAP measures are not in accordance with, or an alternative for, measures prepared in accordance with GAAP
and may be different from Non-GAAP measures used by other companies. Western Digital Corporation believes the
presentation of these Non-GAAP measures, when shown in conjunction with the corresponding GAAP measures,
provides useful information to investors for measuring the Company’s earnings performance and comparing it against
prior periods. Specifically, we believe these Non-GAAP measures provide useful information to both management
and investors as they exclude certain expenses, gains and losses that we believe are not indicative of our core
operating results or because they are consistent with the financial models and estimates published by many analysts
who follow us and our peers. As discussed further below, these Non-GAAP measures exclude the amortization of
acquired intangible assets, stock-based compensation expense, employee termination, asset impairment and other
charges, acquisition-related charges, charges related to cost saving initiatives, charges related to arbitration award,
convertible debt activity, debt extinguishment costs, other charges, and income tax adjustments, and we believe these
measures along with the related reconciliations to the GAAP measures provide additional detail and comparability
for assessing our results. These Non-GAAP measures are some of the primary indicators management uses for assess-
ing our performance and planning and forecasting future periods. These measures should be considered in addition
to results prepared in accordance with GAAP, but should not be considered a substitute for, or superior to, GAAP results.
As described above, we exclude the following items from our Non-GAAP measures:
Amortization of acquired intangible assets. We incur expenses from the amortization of acquired intangible assets
over their economic lives. Such charges are significantly impacted by the timing and magnitude of our acquisitions
and any related impairment charges.
Stock-based compensation expense. Because of the variety of equity awards used by companies, the varying
methodologies for determining stock-based compensation expense, the subjective assumptions involved in those
determinations, and the volatility in valuations that can be driven by market conditions outside our control, we
believe excluding stock-based compensation expense enhances the ability of management and investors to
understand and assess the underlying performance of our business over time and compare it against our peers, a
majority of whom also exclude stock-based compensation expense from their non-GAAP results.
Employee termination, asset impairment and other charges. From time-to-time, in order to realign our operations
with anticipated market demand or to achieve cost synergies from the integration of acquisitions, we may terminate
employees and/or restructure our operations. From time-to-time, we may also incur charges from the impairment
of intangible assets and other long-lived assets. These charges (including any reversals of charges recorded in prior
periods) are inconsistent in amount and frequency, and we believe are not indicative of the underlying performance of
our business.
Acquisition-related charges. In connection with our business combinations, we incur expenses which we would not
have otherwise incurred as part of our business operations. These expenses include third-party professional service
and legal fees, third-party integration services, severance costs, non-cash adjustments to the fair value of acquired
inventory, contract termination costs, and retention bonuses. We may also experience other accounting impacts in
connection with these transactions. These charges and impacts are related to acquisitions, are inconsistent in amount
and frequency, and we believe are not indicative of the underlying performance of our business.
Charges related to cost saving initiatives. In connection with the transformation of our business, we have incurred
charges related to cost saving initiatives which do not qualify for special accounting treatment as exit or disposal
activities. These charges, which we believe are not indicative of the underlying performance of our business, primarily
relate to costs associated with rationalizing our channel partners or vendors, transforming our information systems
infrastructure, integrating our product roadmap, and accelerated depreciation on assets.
Convertible debt activity, net. We exclude non-cash economic interest expense associated with the convertible
senior notes, the gains and losses on the conversion of the convertible senior notes and call option, and unrealized
gains and losses related to the change in fair value of the exercise option and call option. These charges and gains
and losses do not reflect our operating results, and we believe are not indicative of the underlying performance of
our business.
Debt extinguishment costs. From time-to-time, we replace our existing debt with new financing at more favorable
interest rates or utilize available capital to settle debt early, both of which generate interest savings in future periods.
We incur debt extinguishment charges consisting of the costs to call the existing debt and/or the write-off of any
related unamortized debt issuance costs. These gains and losses related to our debt activity occur infrequently and
we believe are not indicative of the underlying performance of our business.
Other charges. From time-to-time, we sell or impair investments or other assets which are not considered necessary
to our business operations; are a party to legal or arbitration proceedings, which could result in an expense or benefit
due to settlements, final judgments, or accruals for loss contingencies; or incur other charges or gains which we
believe are not a part of the ongoing operation of our business. The resulting expense or benefit is inconsistent in
amount and frequency.
Income tax adjustments. Income tax adjustments reflect the difference between income taxes based on a forecasted
annual non-GAAP tax rate and a forecasted annual GAAP tax rate as a result of the timing of certain non-GAAP pre-tax
adjustments.
Corporate Information
BOARD OF DIRECTORS
EXECUTIVE OFFICERS
Matthew E. Massengill
Chairman of the Board
Former President and Chief Executive Officer
Western Digital Corporation
Martin I. Cole
Former Group Chief Executive, Technology
Accenture plc
Kathleen A. Cote
Former Chief Executive Officer
Worldport Communications, Inc.
Stephen D. Milligan
Chief Executive Officer
Michael D. Cordano
President and Chief Operating Officer
Mark P. Long
President WD Capital, Chief Strategy Officer
and Chief Financial Officer
Manish H. Bhatia
Executive Vice President, Silicon Operations
Henry T. DeNero
Former Chairman and Chief Executive Officer
Homespace, Inc.
Jacqueline M. DeMaria
Executive Vice President and Chief Human
Resources Officer
Michael D. Lambert
Former Senior Vice President
Dell, Inc.
Len J. Lauer
Lead Independent Director
Chairman and Chief Executive Officer
Memjet
Stephen D. Milligan
Chief Executive Officer
Western Digital Corporation
Paula A. Price
Senior Lecturer
Harvard Business School
Martin R. Fink
Executive Vice President and Chief
Technology Officer
Michael C. Ray
Executive Vice President, Chief Legal Officer
and Secretary
Dr. Siva Sivaram
Executive Vice President, Memory Technology
Corporate Headquarters
Western Digital Corporation
5601 Great Oaks Parkway
San Jose, CA 95119
P: 408.717.6000
Investor Relations
investor.wdc.com
E: investor@wdc.com
P: 800.695.6399
Worldwide Websites
investor.wdc.com
hgst.com
sandisk.com
wd.com
Transfer Agent and Registrar
American Stock Transfer & Trust
Company, LLC
Operations Center
6201 15th Avenue
Brooklyn, New York 11219
astfinancial.com
P: 800.937.5449
Independent Registered Public
Accounting Firm
KPMG LLP
Stock Exchange Listing
Western Digital’s common stock trades
on The NASDAQ Global Select Market®
under the symbol WDC.
Financial and investor information is available on the company’s
Investor Relations website at investor.wdc.com.
FORWARD-LOOKING STATEMENTS: This Annual Report contains forward-looking statements, including but not limited to, statements relating to the
expectations regarding: the company’s business strategy and growth opportunities; future financial and operating performance; the anticipated benefits
of the integration of HGST and SanDisk; the company’s positioning and opportunities in the data storage industry; and the company’s product portfolio
and investments in and development of new technologies and products. These forward-looking statements are based on the company’s current
expectations and are subject to risks and uncertainties that could cause actual results to differ materially from those expressed in the forward-looking
statements, including: uncertainties with respect to the company’s business ventures with Toshiba; volatility in global economic conditions; business
conditions and growth in the storage ecosystem; impact of competitive products and pricing; market acceptance and cost of commodity materials and
specialized product components; actions by competitors; unexpected advances in competing technologies; the company’s development and introduction
of products based on new technologies and expansion into new data storage markets; risks associated with acquisitions, mergers and joint ventures;
difficulties or delays in manufacturing; and other risks and uncertainties listed in this Annual Report, to which your attention is directed. You should not
place undue reliance on these forward-looking statements, which speak only as of the date hereof, and the company undertakes no obligation to update
these forward-looking statements to reflect subsequent events or circumstances.
Western Digital, WD, the WD logo and SanDisk are registered trademarks or trademarks of Western Digital Corporation or its affiliates in the U.S. and/or
other countries. All other trademarks, registered trademarks and/or service marks, indicated or otherwise, are the property of their respective owners.
© 2017 Western Digital Technologies, Inc. All rights reserved.
2278–001005-A13 Sept. 2017