Corporate Headquarters
Western Digital Corporation
5601 Great Oaks Parkway
San Jose, CA 95119
P: 408.717.6000
Investor Relations
W: investor.wdc.com
E: investor@wdc.com
P: 800.695.6399
Worldwide Websites
g-technology.com
sandisk.com
wdc.com
Transfer Agent and Registrar
American Stock Transfer & Trust Company, LLC
Operations Center
6201 15th Avenue
Brooklyn, New York 11219
W: 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; product and technology platform; positioning and opportunities in the data storage industry; flash
memory demand-supply and market trends; 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: 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, G-Technology, HGST, SanDisk, and WD are registered trademarks or trademarks of Western Digital Corporation or its affiliates in the U.S. and/or other countries. All other
marks are the property of their respective owners.
As used for storage capacity, one terabyte (TB) = one trillion bytes. Total accessible capacity varies depending on operating environment.
© 2018 Western Digital Technologies, Inc. All rights reserved.
2278–001005-A14 Sept. 2018
2018
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, enabling the technologies and solutions
that shape our lives. We are an industry leading provider of data storage solutions,
employing a global workforce focused on delivering the possibilities of data.
Our Brands
Western Digital has an unmatched depth and breadth of technologies, storage
devices, systems and solutions that offer us unique ways to innovate that no one else
in the industry can. Our Western Digital products and solutions portfolio offer data-
centric solutions that meet the performance, reliability, scalability and TCO needs
of commercial and enterprise markets, and enable both businesses and individuals
to capture, preserve, access and transform an ever-growing volume of data. Our
data-centric solutions are marketed under the Western Digital, SanDisk, WD and
G-Technology brands.
A Message from the CEO
Dear Fellow Shareholders,
Fiscal 2018 was an outstanding year for Western Digital. Over the
past year we experienced strong financial performance while
continuing to make progress on the transformation of Western
Digital into the world’s leading provider of solutions to capture,
preserve, access and transform data. We have built a platform
for long-term growth and leadership, and are well positioned
to address the breadth of Big Data and Fast Data needs with an
increasing range of purpose-built technologies and architectures.
We will continue to take an active role in shaping the future trends
as the market continues to evolve and grow.
In fiscal 2018 we grew revenue to $21 billion, representing growth
of 8% from the prior year and at the high end of our long-term
target revenue growth range of 4% to 8%. Demand for our hard
drive and flash products was strong across our end markets
resulting in revenue growth in both categories. Non-GAAP gross
margin expanded nearly 5 points to a record 42.5% driven by a
higher revenue mix of capacity enterprise hard drives and flash. With just a 2% increase in non-GAAP
operating expenses, we generated a 38% improvement in non-GAAP operating income, reflecting
the significant operating leverage in our business model. Non-GAAP earnings per share grew 60%
from the prior year to $14.73 setting a significant milestone.1
Stephen D. Milligan
Chief Executive Officer
Western Digital Corporation
Reflecting solid execution supported by healthy demand for our products, operating cash flow
increased 22% from the prior year to $4.2 billion. We invested $1.6 billion in our business, primarily
in the flash joint venture, resulting in fiscal year 2018 free cash flow of $2.7 billion. We continued
to optimize our debt structure resulting in lower interest expenses and an improved credit rating
enabling us to accelerate our shareholder return initiatives via share repurchases.
We made further progress on several key operational initiatives outlined previously towards
continued value creation:
• Continued to unleash the power of our platform. The various components that comprise this
platform, including technologies, products, go-to-market capabilities, and our team, are helping
us better serve our diversified customer base and an expanding set of end markets, 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 and products based on market
supply/demand and customer needs.
• Leadership in capacity enterprise helium HDDs. We began shipping our fifth-generation platform
at 14 terabyte capacities to global customers in both established and emerging markets. On
a cumulative basis, since the launch of our industry-leading helium platform, we have shipped
more than 30 million drives, reflecting strong customer preference and adoption of our offering.
The significant penetration of our helium platform underscores our multi-generational leadership
position in this category.
• Leadership in 3D flash and multi-level cell technologies. We launched BiCS4, our 96-layer
technology, an industry first, and will be implementing it across our product portfolio spanning
consumer, mobile, computing and data center end markets. Our 3D flash will also feature four-
bits-per-cell architecture, a technology that we pioneered, and we believe that over time,
four-bits-per-cell technology will find mainstream use in all end markets. Our deep expertise in
silicon processing, device engineering and system integration capabilities positions us to provide
differentiated storage solutions for our customers.
1 Reconciliations of the differences between the foregoing non-GAAP financial measures and free cash flow to the comparable GAAP financial
measures can be found on the last page of this document.
Fiscal 2017 and much of fiscal 2018 was characterized by tight demand-supply dynamics in flash. In
the past few quarters, however, flash demand-supply conditions have been in a normalization phase.
Further, a softer than expected demand environment in key sectors such as mobility, is causing
temporary imbalances in the demand-supply environment causing flash pricing to decline at a rate
faster than we experienced previously. We are responding to the changing market environment and
we are in discussions with our JV partner to appropriately adjust our capital investment plans with
the objective to align our supply growth with market needs.
For the first time since we acquired SanDisk, Western Digital has been navigating the normalizing
flash environment. We are managing our business in these dynamic conditions well with our
portfolio of hard drive and flash products. The soft flash environment will constrain our near-term
financial performance, but the long-term capabilities of our business and value of our platform
remain as strong as ever. To ensure that our positioning gets continuously stronger, we are:
• Expanding our portfolio further to support growth in data and to derive value from it
• Investing in 3D flash, microwave assisted magnetic recording and related systems
level capabilities to ensure our technology leadership position
• Re-aligning our hard drive manufacturing footprint with market requirements
• Focused on operational execution to deliver value for our customers and
other stakeholders
Combined with a deepening engagement with our diversified customer base, the Western Digital
platform remains on a path to deliver long-term earnings that we believe will exceed the record-
setting fiscal 2018 levels.
In closing, I thank our employees for their hard work and dedication. We continue to grow and
innovate at a rapid pace, and our talented team has been there every step of the way to help us
execute and lead the industry forward. We are also grateful for the ongoing support from our
customers, partners and shareholders.
Steve Milligan
Chief Executive Officer
Western Digital Corporation
September 28, 2018
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended June 29, 2018
Or
□ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
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 ☒ No □
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 □ No ☒
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 ☒ 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 ☒ 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 ☒
Accelerated filer □
Non-accelerated filer □
(Do not check if a smaller reporting company)
Smaller reporting company □
Emerging growth 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 □ No ☒
The aggregate market value of the registrant’s common stock held by non-affiliates of the registrant on December 29, 2017, the last business day of the registrant’s most
recently completed second fiscal quarter, was $18.9 billion, based on the closing sale price as reported on the Nasdaq Global Select Market.
There were 291,356,809 shares of common stock, par value $0.01 per share, outstanding as of the close of business on August 15, 2018.
Part III incorporates by reference certain information from the registrant’s definitive proxy statement (the ‘‘Proxy Statement’’) for the 2018 Annual Meeting of Stockholders,
which will be filed with the Securities and Exchange Commission within 120 days after the end of the 2018 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.
Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 3.
Mine Safety Disclosures. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 4.
PART II
Item 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Selected Financial Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 6.
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.
Changes in and Disagreements With Accountants on Accounting and Financial Disclosure . . . . . . .
Item 9.
Item 9A.
Controls and Procedures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 9B. Other Information. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
PART III
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
Director, Executive Officers and Corporate Governance. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Executive Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Certain Relationships and Related Transactions, and Director Independence. . . . . . . . . . . . . . . . . . .
Principal Accounting Fees and Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
PAGE
NO.
4
11
33
34
35
35
36
39
39
52
54
124
124
125
126
126
126
126
126
PART IV
Item 15.
Item 16.
Exhibits, Financial Statement Schedules . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Form 10-K Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
127
133
Unless otherwise indicated, references herein to specific years and quarters are to our fiscal years and fiscal quarters, 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 offices 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, SanDisk, Tegile, and Upthere are registered trademarks or trademarks of Western Digital 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 regarding our Flash Ventures joint venture with Toshiba Memory Corporation;
• our quarterly cash dividend policy and share repurchase program;
• expectations regarding our product development and technology plans;
• expectations regarding our future results of operations;
• expectations regarding the outcome of legal proceedings in which we are involved;
• expectations regarding the impact of the Tax Cuts and Jobs Act enacted on December 22, 2017 on the Company;
• 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 document 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 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 markets: Client Devices; Data Center Devices and Solutions; and Client Solutions. We also generate license
and royalty revenue related to our intellectual property (‘‘IP’’) which is included in each of these three categories.
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. 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 unabated growth and value of data
continues creating a global need for a larger and more capable storage infrastructure. We continue to transform ourselves to
address this growth by providing the broadest range of storage technologies in the industry with a comprehensive product
portfolio and global reach.
Built on decades of expertise in developing leading technology and components, we are enabling enterprises to capture,
preserve and access virtually limitless data. We enable cloud service providers to build more powerful, cost effective and
efficient data centers. We have relationships with the full range of original equipment manufacturers (‘‘OEM’’) and data
center customers 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
consumer brands by providing effective tools to manage fast-accumulating libraries of personal content. We market our
products primarily under the HGST, SanDisk and WD brands. Our products are sold through distribution, retail and direct
channels worldwide. We are a vertically integrated company with deep capabilities to transform disk drive and flash-based
components into products and solutions. We operate a series of joint ventures with Toshiba Memory Corporation (‘‘TMC’’)
that provide us with our flash-based technologies and products (see ‘‘Ventures with Toshiba Memory’’ Section below).
We are well positioned to capitalize on the ongoing expansion in digital content generation and management driven by
the uses of Artificial Intelligence (‘‘AI’’), Machine Learning and Data Analytics. These trends are linked directly to
commercial enterprises’ and consumers’ need for data storage. The ways in which people and organizations are creating and
using data are changing and the amount of data considered useful to store is expanding. More digital content is being stored
and managed in a cloud environment on both hard disk drives (‘‘HDDs’’) and solid state drives (‘‘SSDs’’). With a focus on
innovation and value creation, our goal is to grow through strong execution and 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 flash-based technologies that together provide a broad range of reliability, performance, storage capacity and
data retention capabilities to our customers. The ability to capture and create value through the use of data analytics is an
important asset to our customers. 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 tremendous need for cost effective, high-performance and/or high-capacity storage solutions in mobile, computing and
consumer electronic devices, as well as in a wide range of storage systems, servers and data centers.
The growth in computing complexity, cloud computing applications, connected mobile devices and Internet connected
products is driving unabated growth in the volume of digital content to be stored. This growth has led to a proliferation of
data storage form factors. The storage industry is increasingly utilizing tiered architectures with HDDs, SSDs and other
flash-based storage devices to address an expanding set of uses and applications. We continuously monitor the advantages,
disadvantages and advances of the full array of storage technologies, including review of these technologies with our
customers, 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 increase
of digital content creation, consumption and monetization.
4
We are a market and customer driven company, focused on growth, innovation and value creation for our customers,
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 business partner 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 continue to evolve our customer engagement and
go-to-market model to address changing customer and market needs. We are well positioned to expand our value-creation
model within an evolving and growing storage ecosystem with our diversified product platform and unique competitive
advantages.
Competition
Our industry is highly competitive. We compete with manufacturers of HDDs and flash-based memory for client
devices and solutions, and data center devices and solutions. The HDD market consists of three principal manufacturers:
Seagate Technology plc, with its Maxtor and Samsung brands, Toshiba Electronic Devices & Storage Corporation
(‘‘Toshiba’’) and Western Digital, with our HGST and WD brands. In flash-based 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 TMC.
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 has enabled the unabated proliferation of data. We strive to successfully execute our strategy through the following
foundational elements in order to deliver the best outcome for our customers, partners, investors and employees:
• Technology Leadership: We continue to innovate and develop advanced technologies in both HDD and Flash to deliver
timely new products and solutions to meet growing demands for scale, performance and cost efficiency in the market.
• Broad Product Portfolio: We leverage our capabilities in firmware, software and systems to deliver compelling and
differentiated storage solutions to our customers that offer the best combinations of performance, cost, power
consumption, form factor, quality and reliability, while creating new use cases for our solutions in emerging markets.
• Operational Excellence: We are focused on delivering the best value for our customers in data center, client and
consumer markets through a relentless focus on appropriately scaling our operations to efficiently support business
growth, achieving best in class cost, quality and cycle-time, maintaining industry leading manufacturing
capabilities, and having a competitive advantage in supply-chain management.
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;
• 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 organic and
inorganic business investments and allocation of capital to shareholders.
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:
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; flash-based embedded storage products for mobile phones, tablets,
notebook PCs and other portable and wearable devices, automotive, IoT, industrial and connected home applications; and
5
flash-based memory wafers. Our HDDs and SSDs are designed for use in devices requiring high performance, reliability 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 flash-based and mobile dynamic random-access memory (‘‘DRAM’’) in
an integrated package.
Data Center Devices and Solutions
Data Center Devices and Solutions consist of high-capacity enterprise HDDs and high-performance enterprise SSDs,
data center software and system solutions. Our capacity enterprise helium hard drives provide high capacity storage needs and
low total cost of ownership benefits for the growing cloud data center market. Our high-performance enterprise class SSDs
include high-performance flash-based SSDs and software solutions which 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’’). These drives are primarily for use in data storage systems, in tiered storage models and where data must be stored
reliably for years. 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 storage active archive systems.
Client Solutions
Client Solutions consist of HDDs and SSDs embedded into external storage products and removable flash-based
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 capacities 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 markets and are designed for
high-performance and reliability. Our wireless drive products allow in-field back up of created 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, 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 equipment for recording head and media
technology, as well as 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. In 2018, we announced the world’s first
microwave-assisted magnetic recording (‘‘MAMR’’) HDD — a breakthrough in innovation for delivering ultra-high
capacity HDDs to meet the future demands of Big Data with proven data center-level reliability.
Solid State Storage
Solid state storage products provide non-volatile storage based on flash-based technology. We develop and manufacture
solid state storage products in different form factors for a variety of different markets, including enterprise or cloud storage,
client storage, automotive, mobile devices and removable memory devices.
Our solid state storage products utilize our captive flash-based technology which we develop and manufacture through
our business ventures with Toshiba Memory Corporation (‘‘TMC’’). We focus significant research, development and effort on
developing highly reliable, high-performance, cost-effective flash-based 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
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reductions. In 2018, we successfully introduced and commercialized 4-bits-per-cell architectures (X4 technology), on
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. BiCS3 X4 technology delivers an industry-leading storage
capacity of 768 gigabits on a single chip. In addition, we leveraged our advanced UFS and e.MMC interface technologies to
introduce a new portfolio of advanced iNAND embedded flash drives to empower smartphone users to unlock the full
potential of today’s data-driven applications and experiences.
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 interoperability 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 products to
market in a cost-effective and timely manner. R&D expenses totaled $2.40 billion, $2.44 billion and $1.63 billion in 2018,
2017 and 2016, respectively. For a discussion of associated risks, see Part I, Item 1A, Risk Factors, 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 continually seek
additional United States (‘‘U.S.’’) and international patents on our technology. We believe that, although 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, human resources and training to continue to be successful and to grow our manufacturing operations as necessary. We
strive to maintain manufacturing flexibility, high manufacturing yields, reliable products and high-quality components.
The critical elements of our production of HDD and flash-based products are high-volume and utilization, low-cost assembly
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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. We continually monitor our manufacturing capabilities to
respond to the changing requirements of our customers and maintain our competitiveness and position as a data technology
leader.
HDD and flash-based 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. 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.
Substantially all of our flash-based supply requirements for our flash-based products is obtained from our business
ventures with TMC, which provide us with leading-edge, high-quality and low-cost flash-based 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 Memory’’ below for additional information. While substantially
all 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 flash-based 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 TMC 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 flash-based products are concentrated in three
locations, with our business ventures with TMC 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.
Our flash-based product consists of flash-based memory and controllers. Substantially all of our flash-based memory is
supplied by our business ventures with TMC. 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 TMC to establish continuous supply of flash-based 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 availability. For a
discussion of associated risks, see Part I, Item 1A, Risk Factors, of this Annual Report on Form 10-K.
Ventures with Toshiba Memory
We and TMC currently operate three business ventures in 300-millimeter flash-based manufacturing facilities in
Yokkaichi, Japan, which provide us leading-edge, cost-competitive flash-based 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 TMC collaborate in the development and manufacture of flash-based 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 TMC at cost and then resells those wafers
to us and TMC at cost plus a mark-up. We are obligated to purchase half of Flash Ventures’ flash-based 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 TMC also collaborate on certain R&D activities in support of Flash Ventures.
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The agreements governing the operations of the Flash Venture entities also set out a framework for any investment by
the joint venture partners in NAND manufacturing capacity. Flash Ventures’ manufacturing site in Yokkaichi, Japan is
owned and operated by TMC and includes five wafer fabrication facilities, the newest of which are known as ‘‘New Fab 2’’ and
‘‘Fab 6.’’ The primary purpose of New Fab 2 and Fab 6 is to provide clean room space to support the continued conversion
of existing 2-dimensional (‘‘2D’’) NAND wafer capacity to 3D NAND. We have jointly invested, and intend to continue to
jointly invest, with TMC in manufacturing equipment for these facilities. In addition, TMC has announced that it is starting
construction of a new wafer fabrication facility for the manufacture of 3D NAND in Kitakami, Iwate, Japan. 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 with TMC in manufacturing equipment at the new facility in Kitakami,
based on our ongoing discussions with TMC.
On June 1, 2018, TMC, formerly a wholly owned subsidiary of Toshiba Corporation, was purchased by a consortium led
by Bain Capital (the ‘‘Bain Consortium’’) that includes SK hynix Inc. and other competitors, as well as key customers.
For a discussion of risks associated with our business ventures with TMC, see Part I, Item 1A, Risk Factors, of this Annual
Report on Form 10-K.
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 78%, 80% and 72% of our net revenue for 2018, 2017
and 2016, 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 discussion 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 cloud
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 superstores,
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 each of 2018, 2017 and 2016, no single customer accounted for 10% or more 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
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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 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 sale 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 Statements 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 relating 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 compliance 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 contamination. 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 affirmative 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 29, 2018, we employed a total of approximately 71,600 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.
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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 relations 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 are committed to growing our company in a strong and sustainable way and fostering a sustainable future for the
communities we serve. We believe that corporate social responsibility is an essential factor for our overall success. This
includes adopting ethical and sustainable practices to direct how we do business while keeping the interests of our
stakeholders and the environment in mind, including valuing and challenging the talented men and women who comprise
our workforce, and investing in and improving the communities where we live and work.
Our practices and policies underscore this commitment:
• We treat all employees with dignity and respect and foster diversity and inclusion globally.
• We establish processes and policies for our employees to uphold ethical standards and comply with applicable laws
and our internal guidelines, including a Code of Business Ethics adopted by our Board of Directors and applicable to
members of our Board of Directors and all employees, a Global Code of Conduct applicable to all employees and an
actively-managed ethics hotline.
• We 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.
• We establish policies and processes intended to promote environmental responsibility as an integral part of our
culture, and we publish an environmental report detailing emissions output and set goals to reduce our greenhouse
gas emissions and electronic waste profile.
• We engage with local communities across the globe, focusing on science, technology, engineering and math
(targeting underrepresented and underprivileged youth), hunger relief, and environmental quality.
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 maintains 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. Risk Factors
Our business, financial condition and operating results 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 our 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 contribute to these
conditions and this uncertainty, including, but not limited to, volatility in the equity, credit and other financial markets and
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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 trade and tariff actions recently announced by the U.S., China and other countries, and changes to policies,
rules and regulations. Some of the risks and uncertainties we face as a result of these conditions include, but are not limited
to, the following:
• Our direct and indirect customers may delay or reduce their purchases of our products and systems containing our
products.
• 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.
• We extend credit and payment terms to some of our customers and 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.
• If negative or uncertain global economic conditions 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, we could be required to record a significant charge to earnings in our
Consolidated Financial Statements.
These actions and conditions could result in reductions in our revenue, increased operating costs, impairment charges
and other expenses, which could adversely affect our business, results of operations and financial condition.
We rely substantially on our business ventures with Toshiba Memory Corporation (‘‘TMC’’) for the supply of flash-based memory
and the development of flash-based technology, which subjects us to risks and uncertainties that could harm our business, financial
condition and operating results.
We are dependent on our ventures with TMC to develop and manufacture flash-based memory products for our
flash-based memory supply, and therefore our business, financial condition and operating results are dependent on the
continued success of Flash Ventures. We partner with TMC on the development of flash-based technology, including the
next technology transitions of flash-based memory, as well as other non-volatile memory technology in support of Flash
Ventures. Flash Ventures is 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.
Substantially all of our flash-based memory is supplied by Flash Ventures, which limits our ability to respond to market
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 inventory or inventory
write-downs or under-utilization charges, and the potential impairment of our investments in Flash Ventures. On the other
hand, if we or TMC under-invest in captive memory capacity or technology 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 market share as a result. If our flash-based
memory supply is limited, we may make strategic decisions 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 or damage certain customer
relationships. 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 TMC 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 variations from our forecasts and
expectations.
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Under the terms of our venture agreements with TMC, 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 and we have
limits to our ability to source or fabricate flash-based products outside of the Flash Ventures. We may not always agree with
TMC on our joint R&D roadmap or expansions or conversions of production capacity. In addition, TMC’s shift in strategic
priorities could adversely impact our business.
On June 1, 2018, Toshiba Corporation announced it had completed the sale of TMC, including its interests in Flash
Ventures, to a consortium led by SK hynix Inc. and Bain Capital (the ‘‘Bain Consortium’’) that includes other competitors,
as well as key customers. The sale of TMC to the Bain Consortium could lead to delays in decision-making, disputes, or
changes in strategic direction that could adversely impact Flash Ventures and/or adversely affect our business prospects,
results of operations and financial condition. The Bain Consortium might not have the same interest that we do in protecting
and growing Flash Ventures’ business and there may exist conflicts of interest between the Bain Consortium and Flash
Ventures or us. Misalignment between us and TMC or the Bain Consortium on the strategic direction of Flash Ventures could
adversely impact Flash Ventures’ ability to stay at the forefront of technological advancement and/or our investment in Flash
Ventures. Flash Ventures’ competitiveness and/or our investment in Flash Ventures 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 a third party that might gain access to such information.
Flash Ventures requires significant investments by both TMC and us for technology transitions, including the
transition to 3D NAND, and capacity expansions. The Bain Consortium has entered into financing agreements in connection
with its purchase of TMC that could limit TMC’s ability to timely fund or finance investments in Flash Ventures or our joint
development efforts, as well as limit Flash Ventures’ ability to enter into lease financings. To the extent that lease financings
for Flash Ventures are not accessible on favorable terms or at all, more cash would be required to fund investments. If TMC
does not or we do not provide sufficient resources, or have adequate access to credit, to timely fund investments in Flash
Ventures, our investments could be delayed or reduced. Delayed or reduced investment in manufacturing capacity or research
and development by TMC or us could harm Flash Ventures’ competitiveness and/or our investment in Flash Ventures. In
addition, the financing arrangements that the Bain Consortium has entered into in connection with its purchase of TMC are
secured by TMC’s equity interests in Flash Ventures, permitting the lenders to foreclose on those equity interests under
certain circumstances.
TMC has announced that it is starting construction of a new wafer fabrication facility for the manufacture of 3D NAND
in Kitakami, Iwate, Japan. Although we intend to enter into agreements with TMC in due course to participate in the new
Kitakami facility, there is no certainty as to when, and on what terms, we will do so. If we are unable to extend our partnership
with TMC to the Kitakami facility on favorable terms, our future supply of captive flash-based memory could be adversely
impacted, which could adversely affect our long-term business and financial results.
We participate in a highly competitive industry that is subject to volatile demand, declining average selling prices (‘‘ASPs’’), rapid
technological change and industry consolidation, 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 prices of our products
are 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 transitions, and other actions taken by us or our
competitors. The price of NAND flash memory is also influenced by conversion of industry DRAM capacity to NAND and
conversion of 2D NAND capacity to 3D NAND. The storage market has experienced 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 may be able to gain a technological or cost structure advantage over us, which may allow their products to be less
costly or enable them to provide better performance or to include additional features when compared to our products.
Further, some of our competitors may utilize certain pricing strategies, including offering products at prices at or below cost,
that we may be unable to competitively match. In addition, the Chinese government and various agencies, state-owned or
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affiliated enterprises and investment 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.
Additionally, some of our competitors offer products and technologies that we do not offer and may be able to use their
broader product and technology portfolio to win sales from us. 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. Finally, the data storage industry as a whole has experienced consolidation over the past several years
through acquisitions, mergers and decisions by industry players to exit the industry. Further consolidation across the
industry could enhance the capacity, abilities and resources and lower the cost structure of some of our competitors, causing
us to be at a competitive disadvantage. 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.
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. As we expand our product lines to sell into new markets, 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 new markets may result in increases in R&D expenses and
substantial investments in manufacturing capability, technology enhancements and go-to-market capability. 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.
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 successfully, or if
we are slower than our competitors at implementing new technologies, we may not be able to competitively 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 customers or customer approval process.
3D NAND and any new manufacturing node may be more susceptible to manufacturing 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 transitions, 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 flash-based memory producers or
may not fall commensurate with declines in the price of flash-based memory, which would harm revenues, our gross margin
and operating results.
For additional technology transition risks related to 3D NAND, see the risk factors entitled ‘‘We rely substantially on our
business ventures with Toshiba Memory Corporation (‘‘TMC’’) for the supply of flash-based memory and the development of flash-based
technology, which subjects us to risks and uncertainties that could harm our business, financial condition and operating results’’ and ‘‘Our
strategic relationships subject us to risks that could adversely affect our business, financial condition and results of operations.’’
With respect to HDDs, we announced that we will use microwave-assisted magnetic recording (MAMR) technology to
increase HDD capacities. If our HDD technology transitions, including the production ramp of MAMR HDDs, take longer
or are more costly to complete than anticipated or if we otherwise fail to implement new HDD technologies successfully, we
may not remain competitive with other HDD producers, which could adversely affect our revenues, our gross margin and
operating results.
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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 in part on our ability to develop close relationships with new suppliers and on our ability to enter into
favorable supply agreements. Where this cannot be done, our business and operations may be adversely affected. 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 available, 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.
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 that, if implemented by a competitor on a commercially viable basis ahead
of the industry, could put us at a competitive disadvantage, including shingled magnetic recording, energy-assisted
magnetic recording, patterned magnetic media and advanced signal processing.
Many companies, including some of our competitors, have also developed or are attempting to develop alternative
non-volatile technologies, including non-NAND technologies such as magnetoresistive random-access memory (MRAM),
resistive random-access memory (ReRAM) and phase change memory (PCM), and NAND-based vertical or stacked 3D
memories based on charge trap, floating gate and other cell architectures.
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 manufacturing 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.
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 and compete with alternative storage technologies. If our products fail to offer a superior
value proposition to alternative storage products, we will be at a competitive disadvantage and our business will suffer. As we
introduce new products, standards or technologies, it can take time for these new standards or technologies to be adopted, for
customers to accept and transition to these new standards or technologies and for significant sales to be generated, if at all.
Failure of our customers 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;
• our ability to successfully transition future core, processor and controller development to the RISC-V architecture;
• market acceptance/qualification;
• effective management of inventory levels in line with anticipated product demand;
• our ability to respond to customer requests for new products and software associated with our products;
• our ability to incorporate open source software elements into our products and operate in an open source
environment;
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• quality problems or other defects in the early stages of new product introduction and problems with compatibility
between our products and those of our customers that were not anticipated in the design of those products;
• our ability to increase our software development capability; and
• the effectiveness of our go-to-market capability in selling new products.
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 manufacturing, including
our partnership with TMC for flash-based memory development and manufacturing. See the risk factor entitled ‘‘Because we
are dependent on a limited number of qualified suppliers, a disruption in our supply chain, including a shortage in supply or a supplier’s
failure to support us in a timely manner with goods or services at a quality level and cost acceptable to us, or supplier consolidation, could
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 activities,
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 venture, 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, legal or regulatory requirements may necessitate changes in the agreements with our co-venturers.
If our strategic relationships are unsuccessful or there are unanticipated changes in, or termination of, our strategic
relationships, our business, results of operations and financial condition may be adversely affected.
Because we are dependent on a limited number of qualified suppliers, a disruption in our supply chain, including a shortage in
supply or a supplier’s failure to support us in a timely manner with goods or services at a quality level and cost acceptable to us, or
supplier consolidation, could 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 compatible for use in our products
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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 suppliers to be able and willing to dedicate adequate
engineering resources to develop components that can be successfully integrated into our products, technology and
equipment.
From time to time, our suppliers have experienced difficulty meeting our requirements. If we are unable to purchase
sufficient quantities from our current suppliers or qualify and engage additional suppliers, we may not be able to meet
demand for our products. Delays or cost increases experienced by our suppliers in developing or sourcing materials and
components for use in our products or incompatibility or quality issues relating to our products, could also harm our financial
results as well as business relationships with our customers. 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. 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.
In addition, our supply base has experienced industry consolidation. Our suppliers may be acquired by our competitors,
consolidate, decide to exit the industry, or redirect their investments and increase costs to us, each of which may have an
adverse effect on our business and operations. In addition, some of our suppliers have experienced a decline in financial
performance. Where we rely on a limited number of suppliers or a single supplier, the risk of supplier loss due to industry
consolidation or a decline in financial performance is enhanced. Some of our suppliers may also 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.
See the risk factors entitled ‘‘We rely substantially on our business ventures with Toshiba Memory Corporation (‘‘TMC’’) for the
supply of flash-based memory and the development of flash-based technology, which subjects us to risks and uncertainties that could harm our
business, financial condition and operating results’’ and ‘‘Our strategic relationships subject us to risks that could adversely affect our
business, financial condition and results of operations’’ for additional risks related to our supply of flash memory and our strategic
relationships.
Price volatility, shortages of critical materials or components, or use by other industries of materials and components used in the
storage industry, or contractual commitments we enter into with suppliers to reduce the risk of component shortages, could increase our
costs and 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, flash-based memory and multi-layer
ceramic capacitors (MLCC), 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
countries, including the People’s Republic of China. The government of China or any other nation may impose regulations
(such as the recently announced trade and tariff actions), 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 components and materials used in our customers’ products could result in a decrease
in demand for our products, which would negatively impact our operating results.
To reduce the risk of component shortages, we attempt to provide significant lead times when buying components,
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 components at favorable
prices. Some of these commitments may require us to buy a substantial number of components from the supplier or make
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significant cash advances to the supplier; however, these commitments may not result in a satisfactory increase or
stabilization of the supply of such components and may cause us to have inadequate or excess component inventory, which
could increase our operating costs and adversely affect our operating results.
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 may be at a competitive disadvantage
for retaining and hiring key management, staff and skilled employees versus other companies that may pay a relatively higher
portion of 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 succession 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.
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 current concentration of Flash Ventures in Yokkaichi, Japan,
magnifies the risks of supply disruption. The facilities of many of our customers, our suppliers and our customers’ suppliers
are also concentrated in certain geographic locations throughout Asia and elsewhere. A fire, flood, earthquake, tsunami or
other natural disaster, condition or event such as a power outage, political instability, civil unrest, localized labor unrest or
other employment issues, or a localized health risk that adversely affects any of these facilities or the employees or logistics
operators at these facilities, 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. In addition, the geographic
concentration of our manufacturing sites could exacerbate the negative impacts resulting from any of these problems. 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 coverage 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 TMC to obtain and maintain sufficient property, business interruption and other insurance for Flash
Ventures. If TMC fails to do so, we could suffer significant unreimbursable losses, and such failure could also cause Flash
Ventures to breach various financing covenants.
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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 compounded
in periods of price declines;
• higher freight rates;
• labor challenges, including difficulties finding and retaining talent or responding to labor disputes or disruptions;
• trade restrictions, such as export bans, embargos, sanctions and license and certification requirements (including on
encryption technology), new or increased tariffs and fees 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.
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 policies, rules and
regulations. For example, beginning in early 2018, the U.S. commenced certain trade actions, including proposed new and
increased tariffs on an evolving list of imported materials and products. Countries have responded to these actions in various
ways, including proposed tariff increases on products imported from the U.S. We cannot predict whether, or to what extent,
there may be changes to international trade agreements or whether tariffs or other restrictions may be changed or imposed on
our products or our supply chain. Such tariffs, policy or regulatory changes or other trade restrictions could increase our cost
of doing business, our ability to sell to certain customers, and our operating results and financial condition could be adversely
affected.
We experience 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 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 cyclicality may affect our stock price or business in
future periods because of the rate and unpredictability of product transitions and new product introductions and
macroeconomic conditions.
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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, balancing our
core hard drive and flash memory business with growing investments in newer areas that we believe will provide 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 that 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 realizing all or any of the anticipated benefits of the acquisition. In addition, failing to achieve
the financial model projections for an acquisition or changes in technology development and related roadmaps following 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 that would put additional pressure on
liquidity. Furthermore, we may agree to provide continuing service obligations 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. In addition, new legislation or additional
regulations may affect or impair our ability to invest with or in certain other countries or require us to obtain regulatory
approvals to do so, including investments in joint ventures, minority investments and outbound technology transfers to
certain countries
Any cost savings initiatives or restructurings that we undertake may not deliver the results we expect, which may adversely affect our
business.
From time to time, we engage in cost savings initiatives and restructurings that may result in workforce reduction and
consolidation of our manufacturing or other facilities. As a result of any cost savings initiatives or restructurings, we may
experience a loss of continuity, loss of accumulated knowledge, disruptions to our operations and inefficiency during
transitional periods. These actions could also impact employee retention. In addition, we cannot be sure that these actions
will be as successful in reducing our overall expenses as we expect or that additional costs will not offset any such reductions
or consolidations. If our operating costs are higher than we expect or if we do not maintain adequate control of our costs and
expenses, our operating results could be adversely affected.
Changes in demand for our products, changes in product life cycles and the failure to qualify our products and achieve design wins
with our customers could adversely affect our sales, margins, ASPs and our ability to recover the cost of product development.
Events or circumstances that impact demand in the markets for our products, or our inability to address that demand
successfully, could materially adversely impact our operating results. For example, demand for our products may be affected
by, among other factors, the following:
• inconsistent demand from customers whose sales are correlated to large projects and expansions which can be
sporadic;
• internal customer development of storage solutions;
• developments in the regulation and enforcement of digital rights management;
• emergence of new technologies;
• volatility in demand due to differing patterns of technology adoption and innovation; or
• concerns about data protection by end users.
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If we are not able to respond to these or other events or circumstances that impact demand for our products, it could lead
to our customers’ storage needs being satisfied by competing storage technologies, thereby decreasing our sales. As a result,
even with increasing aggregate demand for digital storage, if we fail to anticipate or timely respond to the demand for storage,
our sales, ASPs and gross margin could decline, which could adversely affect our operating results and financial condition.
Product life cycles may lengthen or shorten, both of which could adversely affect gross margins or our ability to recover
the cost of product development.
We regularly engage in new product qualification with our customers, and the product qualification process may be
lengthy for some customers. Once a product is accepted for qualification testing, failures or delays in the qualification process
can result in delayed or reduced product sales, reduced product margins or lost sales to that customer until the next
generation of products is introduced. 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’ ability to create, market and successfully sell products containing our solutions.
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.
As of June 29, 2018, our total indebtedness was $11.38 billion in aggregate principal, and we had $1.75 billion of
additional 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;
• 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, acquisitions, 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 repurchase shares of 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. Our bank debt also contains
a variable interest rate component based on our corporate credit ratings, which could result in increased interest rates and
debt service obligations if our ratings were to decline. 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 cross-acceleration or cross-default of other debt, leases or other obligations. If we are required to repay our
indebtedness before the applicable due dates, we may not have sufficient funds available 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, which we may be unable to do 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.
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In addition to our credit ratings impacting the interest rate on our current debt, our 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 further refinance our substantial indebtedness 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.
Changes in tax laws could increase our worldwide tax rate and materially affect our financial position and results of operations.
On December 22, 2017, the President of the United States of America signed the Tax Cuts and Jobs Act (the ‘‘2017
Act’’), which includes a broad range of tax reform proposals affecting businesses, including a reduction in the U.S. federal
corporate tax rate from 35% to 21%, a one-time mandatory deemed repatriation tax on earnings of certain foreign
subsidiaries that were previously tax deferred, and a new minimum tax on certain foreign earnings. The 2017 Act
significantly impacts our effective tax rate for fiscal year 2018 as a result of the deemed repatriation tax and may impact
several other elements of our operating model. In future years, certain additional provisions of the 2017 Act, such as the
minimum tax on certain foreign earnings, will also apply to us and, as a result, we generally expect our effective tax rate to
increase from the fiscal year 2018 rate (excluding the mandatory deemed repatriation tax and the re-measurement of deferred
taxes). Taxes due over a period of time as a result of the 2017 Act could be accelerated upon certain triggering events,
including failure to pay such taxes when due. The 2017 Act makes broad and complex changes to the U.S. tax code and we
expect to see future regulatory, administrative or legislative guidance. We are analyzing the 2017 Act to determine the full
impact of the new tax law, and to the extent any future guidance differs from our preliminary interpretation of the law, it
could have a material effect on our financial position and results of operations.
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 Organization 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 international 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.
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.
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 statutory notice of deficiency 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.
22
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,
including cloud-based platforms. The technology infrastructure and systems of our suppliers, vendors, service providers,
cloud solution providers 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 design flaws,
bugs, 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. In some instances, efforts to correct
vulnerabilities or prevent attacks may reduce the performance of our computer systems and networks, which could negatively
impact our business. 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, including those products utilized in cloud-based environments as
well as our cloud service offerings. 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 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 TMC, to undertake certain commitments to promote information
security, and we may be liable to TMC 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 products could
also cause our customers and other affected third parties to suffer loss or misuse of proprietary or confidential 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.
Sales in the distribution channel and to the retail market are important to our business, and if we fail to respond to demand changes
within these markets, or maintain and grow our applicable market share, 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 systems, 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 significant 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.
A significant portion of our sales is also made through retailers. Our success in the retail market depends in large part
on our ability to maintain our brand image and corporate reputation and to expand into and gain market acceptance of our
products in multiple retail market channels. Particularly in the retail market, adverse publicity, whether or not justified, or
allegations of product or service quality issues, even if false or unfounded, could damage our reputation and cause our
customers to choose products offered by our competitors. If customers no longer maintain a preference for our product brands
or if our retailers are not successful in selling our products, our operating results may be adversely affected.
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Loss of market share with or by a key customer, or consolidation among our customer base, could harm our operating results.
During the year ended June 29, 2018, 42% 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. Consolidation among our
customer base may also lead to reduced demand for our products, increased customer pressure on our prices, 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.
Also, the storage ecosystem is constantly evolving, and our traditional customer base is changing. Fewer companies 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 competitive, 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.
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.
We make significant R&D investments to maintain our existing products and to lead innovation and development of
new technologies. In addition, we may increase our capital expenditures and expenses above our historical run-rate model in
order to remain competitive. The challenges of reducing operating costs could result 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. Our R&D
investments may not result in viable technologies or products, and even if they do result in viable technologies or products,
they may not be profitable or accepted by the market. In addition, if we are not able to improve our technology or develop
new technologies at the same rate as our competitors or at a rate that is expected by our customers, we may be required to incur
additional costs 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. Significant investments in unsuccessful
or cost-ineffective R&D efforts could materially 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.
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 manufacturing
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
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revenue, indemnification for a recall of our customers’ products, 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 compromised 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, security vulnerabilities or performance issues
and subject us to liability.
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 commercial
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 products, 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 business, 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 manufacture, 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 employees 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.
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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 regulatory 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 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.
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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 proprietary 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 negatively 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.
The costs of compliance with state, federal and international legal and regulatory requirements, such as environmental, labor, trade,
health, safety, data privacy, anti-corruption and tax regulations, customers’ standards of corporate citizenship, and industry and
coalition standards, such as those established by the Responsible Business Alliance (‘‘RBA’’), 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, data privacy, anti-corruption and tax practices. These laws and regulations,
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 locations where we manufacture or
sell our products. In addition, climate change and financial reform legislation is a significant 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 RBA, 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 reputation and corporate brand which could cause our
financial condition and operating results to suffer.
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, 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.
27
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 products. 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 sales, ASPs and gross margin, thereby adversely affecting our
operating results and our financial condition. 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.
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 flash-based memory as well as other non-volatile memory technology through our partnership with TMC;
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 manufacturers. 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 manufacturing 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 production 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.
Terrorist attacks may adversely affect our business and operating results.
The continued threat of terrorist activity and other acts of war or hostility have created, and may continue to create,
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. Future 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
28
Israel) or shipments of our products, our business, operating results and financial 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 efficiently receive
shipments from our suppliers or deliver our products.
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 favorable
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 effective. 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.
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 to and leases back from a consortium of financial institutions (‘‘lessors’’) a portion of its equipment
and Flash Ventures has entered into equipment lease agreements, most of which we and TMC 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 29,
2018, the portion of outstanding Flash Ventures’ lease obligations covered by our guarantees totaled approximately
$1.22 billion, based upon the Japanese yen to U.S. dollar exchange rate at June 29, 2018. The equipment lease agreements
contain covenants and cancellation events that are customary for Japanese lease facilities 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.
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Any decisions to reduce or discontinue paying cash dividends to our shareholders or to reduce or discontinue repurchases of shares of
our common stock pursuant to our previously announced stock repurchase program 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. In addition, we may reduce
or discontinue repurchases of shares of our common stock as we deem appropriate and as market conditions allow. Any
reduction or discontinuance by us of the payment of quarterly cash dividends or the repurchases of our common stock
pursuant to our stock repurchase program could cause the market price of our common stock to decline. Moreover, in the
event our payment of quarterly cash dividends or repurchases of shares of our common stock are reduced or discontinued, our
failure or inability to resume paying cash dividends or repurchasing shares of our common stock 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 negotiate 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 flash-based 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
flash-based 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, contribute 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.
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 canceled 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 significant customer, especially in situations where there are term
extensions under existing contracts with such customers, would increase our operating costs, which may negatively impact
our operating results.
30
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;
• 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 financial
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;
31
• accruals for litigation and other contingencies;
• liabilities for unrecognized tax benefits; and
• provisional estimates related to tax reform.
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;
• perceptions about our strategic relationships and joint ventures, access to supply of flash-based memory, new
technologies and technology transitions;
• 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;
• 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 fluctuations 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 companies.
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.
32
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 investments 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 securities. 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 an additional 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.
Item 1B. Unresolved Staff Comments
Not applicable.
33
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 2030. Our principal manufacturing, R&D, marketing and administrative facilities as of June
29, 2018 were as follows:
Location
United States
California
Buildings
Owned or
Leased
Approximate
Square
Footage
Description
Fremont . . . . . . . . . . . . . . . . . . . . . Owned
Irvine . . . . . . . . . . . . . . . . . . . . . . . Leased
Milpitas . . . . . . . . . . . . . . . . . . . . . Owned
San Jose. . . . . . . . . . . . . . . . . . . . . . Owned and
Leased
392,000 Manufacturing of head wafers and R&D
490,000 R&D, administrative, marketing and sales
589,000 R&D, marketing and sales, and administrative
2,750,000 Manufacturing of head wafers, head, media and product
development, R&D, administrative, marketing and sales
Colorado
Longmont . . . . . . . . . . . . . . . . . . . . Leased
62,000 R&D
Minnesota
Rochester . . . . . . . . . . . . . . . . . . . . Leased
121,000
Product development
Asia
China
Shanghai . . . . . . . . . . . . . . . . . . . . . Owned
Shenzhen . . . . . . . . . . . . . . . . . . . . . Owned and
715,000 Assembly and test of SSDs
535,000 Manufacturing of media
Japan
Leased
Fujisawa . . . . . . . . . . . . . . . . . . . . . Owned
661,000
Product development
Malaysia
Johor . . . . . . . . . . . . . . . . . . . . . . . Owned
Kuala Lumpur(1). . . . . . . . . . . . . . . . Owned
Kuching . . . . . . . . . . . . . . . . . . . . . Owned
Penang . . . . . . . . . . . . . . . . . . . . . . Owned
271,000 Manufacturing of substrates
1,074,000 Manufacturing of HDDs and R&D
285,000 Manufacturing and development of substrates
1,552,000 Assembly and test of SSDs, manufacturing of media, and
Philippines
Laguna . . . . . . . . . . . . . . . . . . . . . . Owned
621,000 Manufacturing of HGAs and slider fabrication
R&D
Thailand
Bang Pa-In . . . . . . . . . . . . . . . . . . . Owned
1,665,000
Slider fabrication, manufacturing of hard drives and HGAs,
and R&D
Navanakorn . . . . . . . . . . . . . . . . . . . Owned
Prachinburi . . . . . . . . . . . . . . . . . . . Owned
290,000 Manufacturing of HGAs
729,000 Manufacturing of HDDs
India
Bangalore . . . . . . . . . . . . . . . . . . . . Owned and
460,000 R&D and marketing
Leased
Middle East
Israel
Kfar Saba. . . . . . . . . . . . . . . . . . . . . Owned
Tefen . . . . . . . . . . . . . . . . . . . . . . . Owned
167,000 R&D and marketing
64,000 R&D and marketing
(1)
In July 2018, we announced the closing of our manufacturing facility in Kuala Lumpur, Malaysia. We expect the closure
to be substantially completed by the end of the calendar year 2019. For additional information, see Part II, Item 8,
Note 15, Employee Termination, Asset Impairment and Other Charges, of the Notes to Consolidated Financial Statements
included in this Annual Report on Form 10-K.
34
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.
Item 3.
Legal Proceedings
For a description of our legal proceedings, see Part II, Item 8, Note 16, Legal Proceedings, of the Notes to Consolidated
Financial Statements included in this Annual Report on Form 10-K, which is incorporated by reference in response to this
item.
Item 4.
Mine Safety Disclosures
Not applicable.
35
PART II
Item 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases
of Equity Securities
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 15, 2018 was 999.
The high and low sales prices of our common stock as reported by Nasdaq for each quarter of 2018 and 2017 were as
follows:
Quarter Ended
High
Low
September 29, 2017. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
December 29, 2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
March 30, 2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
June 29, 2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 95.77
$ 93.31
$106.96
$ 93.41
$78.31
$76.59
$77.90
$75.96
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
Repurchases of Equity Securities
The following table provides information about repurchases by us of shares of our common stock during the quarter
ended June 29, 2018:
Total Number of
Shares
Purchased
Average Price
Paid per Share(1)
Total Number of
Shares
Purchased As
Part of Publicly
Announced
Program(2)
Maximum Value
of Shares
that May Yet be
Purchased
Under the
Program(2)
—
1.9
3.4
5.3
$ —
84.61
81.16
$82.37
—
1.9
3.4
5.3
$1,969
$1,812
$1,533
(in millions, except average price paid per share)
Mar. 31, 2018 - Apr. 27, 2018. . . . . . . . . . . . . . .
Apr. 28, 2018 - May 25, 2018 . . . . . . . . . . . . . . .
May 26, 2018 - Jun. 29, 2018 . . . . . . . . . . . . . . .
Total for the quarter ended Jun. 29, 2018 . . . . . .
(1)
Includes commissions.
(2) Our Board of Directors previously authorized $5.00 billion for the repurchase of our common stock. In 2018, we
repurchased 7.1 million shares for a total cost of $591 million. Subsequent to June 29, 2018 and through July 25, 2018,
we repurchased an additional 0.8 million shares for a total cost of $61 million. On July 25, 2018, our Board of Directors
authorized a new $5.00 billion share repurchase program that is effective through July 25, 2023, replacing all prior
programs. Repurchases under the stock repurchase program may be made in the open market or in privately negotiated
transactions and may be made under a Rule 10b5-1 plan. We expect stock repurchases to be funded principally by
operating cash flows. Subsequent to July 25, 2018 and through August 22, 2018, we repurchased an additional
5.9 million shares for a total cost of $404 million under this new program.
36
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 2018, we declared aggregate cash dividends of $2.00 per share of our common stock, totaling
$592 million.
The following table provides information about the quarterly dividends our Board of Directors declared in the last two
fiscal years:
Record Date
September 30, 2016
December 30, 2016
March 31, 2017
June 30, 2017
September 29, 2017
December 29, 2017
March 30, 2018
June 29, 2018
Payment Date
October 17, 2016
January 17, 2017
April 17, 2017
July 17, 2017
October 16, 2017
January 16, 2018
April 16, 2018
July 16, 2018
Dividend Per
Share
$0.50
$0.50
$0.50
$0.50
$0.50
$0.50
$0.50
$0.50
In addition, on August 1, 2018, we declared a cash dividend of $0.50 per share of our common stock to our shareholders
of record as of September 28, 2018, which will be paid on October 15, 2018.
The amount of future dividends under our cash dividend policy, and the declaration and payment thereof, will be based
upon all relevant factors, including our financial position, results of operations, cash flows, capital requirements and
restrictions under our financing agreements, and shall be in compliance with applicable law. Our Board of Directors retains
the power to modify, suspend or cancel the cash dividend policy in any manner and at any time as it may deem necessary or
appropriate in the future.
37
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 U.S. Technology Hardware & Equipment Index for the five years ended
June 29, 2018. The graph assumes that $100 was invested in our common stock at the close of market on June 28, 2013 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 June 28, 2013)
$300
$250
$200
$150
$100
$50
$0
6/28/13
6/27/14
7/3/15
7/1/16
6/30/17
6/29/18
Western Digital Corporation
S&P 500 Index
Dow Jones U.S. Technology Hardware & Equipment Index
Total Return Analysis
June 28,
2013
June 27,
2014
July 3,
2015
July 1,
2016
June 30,
2017
June 29,
2018
Western Digital Corporation . . . . . . . . . . . . . . . . . . . . . $100.00 $151.92 $134.87 $ 80.35 $157.42 $140.87
S&P 500 Index. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $100.00 $ 14.61 $133.86 $139.20 $164.11 $187.70
Dow Jones U.S. Technology Hardware & Equipment
Index . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $100.00 $142.33 $161.24 $148.84 $210.22 $273.85
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.
38
Item 6.
Selected Financial Data
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 29,
2018
June 30,
2017
July 1,
2016
July 3,
2015
June 27,
2014
(in millions, except per share and employee data)
$20,647
7,705
675
$19,093
6,072
397
$12,994
3,435
242
$14,572
4,221
1,465
$15,130
4,360
1,617
2.27
$
2.20
$
$
2.00
$ 6,182
$29,235
$10,993
$11,531
71,600
1.38
$
1.34
$
$
2.00
$ 6,712
$29,860
$12,918
$11,418
67,600
1.01
$
1.00
$
$
2.00
$ 5,635
$32,862
$13,660
$11,145
72,900
6.31
$
6.18
$
$
1.80
$ 5,275
$15,170
$ 2,149
$ 9,219
76,400
6.88
$
6.68
$
$
1.25
$ 4,875
$15,499
$ 2,313
$ 8,842
84,100
Results for Tegile Systems, Inc., Upthere, Inc., SanDisk Corporation, Amplidata NV, Virident Systems, Inc., sTec, Inc.
and VeloBit, Inc., which were acquired on September 15, 2017, August 25, 2017, 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’s Discussion and Analysis of Financial Conditions and Results of Operations
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 markets: Client Devices; Data
Center Devices and Solutions; and Client Solutions. We also generate license and royalty revenue related to our intellectual
property (‘‘IP’’), which is included in each of these three categories.
Key Developments
Debt Facilities
During the year ended June 29, 2018, we entered into new debt facilities, amended our existing credit agreement,
increased our revolving credit facility, and repaid higher rate debt. These actions, along with scheduled principal payments,
reduced the aggregate principal amount of our debt by $1.98 billion since the beginning of the fiscal year and reduced our
overall interest cost, extended the tenor of our debt and provided additional flexible capacity to meet our financing needs. The
financing arrangement activities were as follows in the year ended June 29, 2018:
• In November 2017, we settled our then-existing U.S. dollar-denominated term B-2 loans (‘‘U.S. Term Loan B-2’’)
with the proceeds of a new issuance of a $2.96 billion U.S. dollar-denominated term loan (‘‘U.S. Term Loan B-3’’) at
an interest rate lower than our U.S. Term Loan B-2 tranche. In February 2018, we made a voluntary partial
39
prepayment of $500 million of the U.S. Term Loan B-3 using drawings from the Revolving Facility (as defined
below), and in May 2018, we settled our then-existing U.S. dollar-denominated term B-3 loans with the proceeds of
a new issuance of a $2.46 billion U.S. dollar-denominated term loan (‘‘U.S. Term Loan B-4’’) at an interest rate lower
than our U.S. Term Loan B-3 tranche.
• In November 2017, we made a voluntary prepayment of the full principal amounts of our Euro-denominated term
B-2 loans (‘‘Euro Term Loan B-2’’) using cash on hand.
• In February 2018, we issued $2.3 billion aggregate principal amount of 4.750% senior unsecured notes due 2026
(the ‘‘2026 Senior Unsecured Notes’’).
• In February 2018, we issued a $1.1 billion aggregate principal amount of 1.50% convertible senior notes due 2024
(the ‘‘2024 Convertible Notes’’).
• In February 2018, we entered into an amendment to the credit agreement entered into on April 29, 2016 to provide
for, among other things, (i) the issuance of a new $5.02 billion of term loan A-1 due 2023 (the ‘‘Term Loan A-1’’),
(ii) a new $2.25 billion revolving credit facility maturing in 2023 (the ‘‘Revolving Facility’’), which replaced our
prior $1.50 billion revolving credit facility maturing in 2021, (iii) modifications to the restrictive and financial
maintenance covenants, to provide more flexibility and increased incremental debt capacity, (iv) amendments of the
applicable varying interest rate margins to be based on our corporate credit ratings, and (v) upon the occurrence of
certain circumstances, a release of the security and guarantees as well as further covenant flexibility and increased
incremental debt capacity. We used a portion of the proceeds of the Term Loan A-1 to repay in full our previous
variable interest rate Term Loan A maturing 2021 in the principal amount of $4.02 billion.
• In February and March 2018, we completed the redemption of all of our outstanding 7.375% senior secured notes
due 2023 in the aggregate principal amount of $1.875 billion (the ‘‘2023 Notes’’) and the tender offer and
redemption and settlement of all of our outstanding 10.500% senior unsecured notes due 2024 in the aggregate
principal amount of $3.350 billion (the ‘‘2024 Notes’’ and collectively with the 2023 Notes, the ‘‘Redeemed
Notes’’).
• In connection with the settlements of the various debt instruments described above during 2018, we incurred
aggregate losses on extinguishment of debt of $899 million for the year ended June 29, 2018, consisting of
$720 million of ‘‘make-whole’’ premiums and $179 million of unamortized issuance costs.
For additional information regarding our debt facilities, see Part II, Item 8, Note 6, Debt, of the Notes to Consolidated
Financial Statements included in this Annual Report on Form 10-K.
Tax Reform
On December 22, 2017, the President of the United States of America signed the Tax Cuts and Jobs Act (the ‘‘2017
Act’’), which includes a broad range of tax reform proposals affecting businesses, including a reduction in the U.S. federal
corporate tax rate from 35% to 21% and a one-time mandatory deemed repatriation tax on earnings of certain foreign
subsidiaries that were previously tax deferred, and creates new taxes on certain foreign earnings. As a result of the 2017 Act,
we have made a reasonable estimate of the effects on our existing deferred tax balances and the one-time mandatory deemed
repatriation tax required by the 2017 Act and have recognized a provisional income tax expense of $1.57 billion for the
one-time mandatory deemed repatriation tax and a provisional income tax benefit of $65 million related to the re-
measurement of deferred tax assets and liabilities for the year ended June 29, 2018. For additional information regarding the
2017 Act, 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. See also the discussion in ‘‘Results of Operations - Income Tax Expense’’ and
‘‘Liquidity and Capital Resources’’ below for information regarding the impact of the 2017 Act on our financial condition,
results of operations and cash flows.
Closure of Foreign Manufacturing Facility
In July 2018, we announced the closing of our manufacturing facility in Kuala Lumpur, Malaysia, in order to reduce
manufacturing costs and consolidate hard disk drive (‘‘HDD’’) operations into Thailand. We expect the closure to be
substantially completed by the end of the calendar year 2019 and to result in total pre-tax charges of approximately
$160 million. These charges are expected to consist of approximately $85 million in employee termination benefits and
40
$75 million in asset-related, contract termination and other charges. During the year ended June 29, 2018, we recognized
$56 million in employee termination benefits within Employee termination, asset impairment and other charges in the
Consolidated Statements of Operations. For additional information, see Part II, Item 8, Note 15, Employee Termination, Asset
Impairment and Other Charges, of the Notes to Consolidated Financial Statements included in this Annual Report on
Form 10-K.
Results of Operations
Summary Comparison of 2018, 2017 and 2016
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(1):
2018
2017
2016
(in millions, except percentages)
Revenue, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $20,647
12,942
Cost of revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
100.0% $19,093
13,021
62.7
100.0% $12,994
9,559
68.2
100.0%
73.6
Gross profit. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
7,705
37.3
6,072
31.8
3,435
26.4
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 expense, net . . . . . . . . . . . . . . . . . . . . . . . .
2,400
1,473
215
4,088
3,617
60
(676)
(916)
Total interest and other expense, net . . . . . . . . .
(1,532)
Income before taxes. . . . . . . . . . . . . . . . . . . . . . . . . .
Income tax expense (benefit) . . . . . . . . . . . . . . . . . . .
2,085
1,410
11.6
7.1
1.0
19.8
17.5
0.3
(3.3)
(4.4)
(7.4)
10.1
6.8
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
675
3.3
$
2,441
1,445
232
4,118
1,954
26
(847)
(364)
(1,185)
769
372
397
12.8
7.6
1.2
21.6
10.2
0.1
(4.4)
(1.9)
(6.2)
4.0
1.9
2.1
1,627
997
345
2,969
466
26
(266)
(73)
(313)
153
(89)
242
$
12.5
7.7
2.7
22.8
3.6
0.2
(2.0)
(0.6)
(2.4)
1.2
(0.7)
1.9
(1) Percentages may not total due to rounding.
41
The following table sets forth, for the periods presented, summary information regarding net revenues by geography
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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2018
2017
2016
(in millions, except exabytes and percentages)
$20,647
$19,093
$12,994
27%
19
54
49%
29
22
389
27%
17
56
50%
29
21
313
32%
21
47
48%
38
14
262
For each of 2018, 2017, and 2016, no single customer accounted for 10% or more of our net revenue. For 2018, 2017,
and 2016, our top 10 customers accounted for 42%, 36% and 43% of our net revenue, respectively.
Fiscal Year 2018 Net Revenue and Gross Margin Compared to Fiscal Year 2017 Net Revenue and Gross Margin
Net Revenue. Net revenue increased $1.55 billion, or 8%, in 2018 compared to 2017, driven by increases in all end
markets. Client Devices revenue for the year ended June 29, 2018 increased 6% year over year, primarily driven by growth
in embedded flash products offset by client compute HDD devices. Our revenue for Data Center Devices and Solutions for
the year ended June 29, 2018 increased 10% year over year, driven primarily by a significant increase in sales from our
capacity enterprise HDD, partially offset by our expected lower sales of performance enterprise HDDs. Client Solutions
revenue for the year ended June 29, 2018 increased 10% year over year, reflecting growth in both retail flash and HDD
products.
Changes in the net revenue by geography generally reflect normal fluctuations in market demand and competitive
dynamics.
Consistent with standard industry practice, we have sales incentive and marketing programs that provide customers
with price protection and other incentives or reimbursements that are recorded as a reduction to gross revenue. For 2018,
2017 and 2016, these programs represented 12%, 12% and 13% of gross revenues, respectively. The amounts attributed to
our sales incentive and marketing programs generally vary according to several factors including industry conditions, list
pricing strategies, 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.
Gross Profit and Gross Margin. Gross profit increased $1.63 billion, or 27%, in 2018 compared to 2017, primarily due
to the increase in revenue and improvement in our gross margin. The improvement in our gross margin for the year ended
June 29, 2018 was primarily due to a favorable demand environment for flash-based products, a higher mix of revenue from
sales of flash-based products and capacity enterprise devices; and improvements in our production costs from technology
transitions. In addition, gross profit was impacted by amortization expense on acquired intangible assets, stock-based
compensation, charges related to the implementation of cost-saving initiatives and other charges, which aggregated
$1.06 billion, or 5.2%, of revenue, in 2018, compared to $1.14 billion, or 6.0%, of revenue, in 2017.
The flash industry is characterized by cyclicality as it responds to variations in customers’ demand for products and
expands or manages production capacity to meet that demand. The favorable demand environment for flash-based products
experienced by the industry for the last several quarters is beginning to normalize as technology conversions are maturing and
manufacturing yields are improving, thus increasing flash supply. As a result, we expect our gross margins to decline in fiscal
2019 compared to fiscal 2018 due to expected declines in the average selling price per gigabyte of flash memory as supply
grows to meet demand.
42
Fiscal Year 2017 Net Revenue and Gross Margin Compared to Fiscal Year 2016 Net Revenue and Gross Margin
Net Revenue. Net revenue increased $6.10 billion, or 47%, as compared to 2016, primarily due to a full year of revenue
from the sale of flash-based products following the acquisition of SanDisk Corporation (‘‘SanDisk’’) in May 2016 (the
‘‘Merger’’), 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. 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 resulted in comparatively higher revenue in
Client Devices and Client Solutions than our pre-acquisition business.
Changes in the mix of net revenue by geography for 2017, as compared to 2016, reflect the additional revenues from the
Merger which has resulted in comparatively higher revenue in Asia than our pre-acquisition business.
Gross Profit and Gross Margin. Gross profit increased $2.64 billion, or 77%, in 2017, as compared to 2016, primarily due
to the increase in revenue mentioned above. In addition, gross profit for 2017 was 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 flash-based products following the Merger, 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 flash-based technology transitions to more cost efficient designs.
Operating Expenses
Fiscal Year 2018 Operating Expenses Compared to Fiscal Year 2017 Operating Expenses
Research and development (‘‘R&D’’) expense decreased $41 million, or 2%, in 2018 compared to 2017, primarily due
to our cost saving initiatives and lower variable compensation expense, partially offset by further investments in flash
technologies. In addition, fiscal year 2018 included aggregate charges of $179 million related to stock-based compensation
expenses, charges related to the implementation of cost-saving initiatives, acquisition-related charges and other charges
compared to $199 million in 2017.
Selling, general and administrative (‘‘SG&A’’) expense increased $28 million, or 2%, in 2018 compared to 2017,
primarily due to operating expenses from recent acquisitions and higher consulting services, partially offset by lower variable
compensation expense and lower charges 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
charges aggregating to $340 million in 2018 compared to $404 million in 2017.
Employee termination, asset impairment and other charges was $215 million in 2018, a decrease of $17 million, or 7%,
from 2017. The decrease is related to our progress toward completion of our integration restructuring plan, partially offset
by the announced closure of our foreign manufacturing facility. For additional information regarding employee termination,
asset impairment and other charges, see Part II, Item 8, Note 15, 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 2017 Operating Expenses Compared to Fiscal Year 2016 Operating Expenses
R&D expense increased $814 million, or 50%, in 2017 compared to 2016, primarily due to the Merger and continued
development of flash-based 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.
SG&A expense increased $448 million, or 45%, in 2017 compared to 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, asset impairment and other charges was $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
43
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 15, 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)
Fiscal Year 2018 Interest and Other Expense, Net Compared to Fiscal Year 2017 Interest and Other Expense, Net
Total interest and other expense, net increased $347 million in 2018, primarily due to losses on extinguishment of debt
of $899 million in 2018 compared to $274 million in 2017. These losses were partially offset by lower interest expense
resulting from reductions in the principal amount of debt and lower interest rates, lower impairment charges related to our
cost-method investments, and higher interest income due to increased rates of return on investment (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) and impairment charges related to our cost-method investments.
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 and impairment charges related to our cost-method
investments.
Income Tax Expense (Benefit)
The following table sets forth income tax information from our Consolidated Statement of Operations by dollar and
effective tax rate:
2018
2017
2016
(in millions, except percentages)
Income before taxes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income tax expense (benefit) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Effective tax rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$2,085
1,410
68%
$769
372
48%
$153
(89)
(58)%
Under the 2017 Act, the U.S. federal corporate tax rate is reduced from 35% to 21% and is effective January 1, 2018,
resulting in the use of an estimated annual effective tax rate of approximately 28% for our U.S. federal corporate tax rate for
fiscal year 2018. For fiscal year 2019 and beyond, we will utilize the enacted U.S. federal corporate tax rate of 21%.
Consistent with applicable Securities and Exchange Commission (‘‘SEC’’) guidance, we made a reasonable estimate of
the effects on our existing deferred tax balances and the one-time mandatory deemed repatriation tax required by the 2017
Act and have recognized a provisional income tax expense of $1.57 billion for the one-time mandatory deemed repatriation
tax and a provisional income tax benefit of $65 million related to the re-measurement of deferred tax assets and liabilities for
the year ended June 29, 2018. For other elements of tax expense noted 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, or where we have not made
an election, we have not been able to make a reasonable estimate and continue to account for such items based on the
provisions of the tax laws that were in effect immediately prior to the 2017 Act. As we finalize the accounting for the tax
effects of the enactment of the 2017 Act during a one-year measurement period permitted by applicable SEC guidance, we
expect to reflect adjustments to the recorded provisional amounts and record additional tax effects of the 2017 Act.
The primary drivers for the difference between the effective tax rate for the year ended June 29, 2018 and the blended
U.S. Federal statutory rate of 28% are provisional taxes recognized as a result of the 2017 Act and an increase to the valuation
allowance for net operating loss carryforwards from restructuring activities, which are partially offset by the 2018 generation
of tax credits and tax holidays in Malaysia, Philippines, Singapore and Thailand that expired or will expire at various dates
during fiscal years 2018 through 2030.
44
The primary drivers for the difference between the effective tax rate for the year ended June 30, 2017 and the
U.S. Federal statutory rate of 35% are taxes related to 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 2017 generation of tax credits and foreign income taxed at lower rates due primarily to tax holidays in Malaysia,
Philippines, Singapore and Thailand.
The primary drivers for the difference between the effective tax rate for the year ended July 1, 2016 and the U.S. Federal
statutory rate of 35% are the 2016 generation of tax credits and foreign income taxed at lower rates due primarily to tax
holidays in Malaysia, Philippines, Singapore and Thailand.
The 2017 Act is expected to have an unfavorable impact on our effective tax rate for fiscal year 2018 due to the
mandatory deemed repatriation tax offset in part by the re-measurement of deferred taxes and the reduction in the corporate
tax rate. In future years, certain additional provisions of the 2017 Act, such as a minimum tax on foreign earnings, will also
apply to us and, as a result, we generally expect our effective tax rate to increase from the rate expected for fiscal year 2018
(excluding the mandatory deemed repatriation tax and the re-measurement of deferred taxes). Our estimate of the effective
tax rate increase is subject to our assertion as to whether foreign undistributed earnings are indefinitely reinvested and to
other calculations and elections during the measurement period. Our total tax expense in future fiscal years will also vary as
a result of discrete items such as excess tax benefits or deficiencies.
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.
Liquidity and Capital Resources
The following table summarizes our statements of cash flows:
2018
2017
2016
(in millions)
Net cash provided by (used in):
Operating activities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Investing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Financing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Effect of exchange rate changes on cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 4,205
(1,655)
(3,900)
1
$ 3,437
(636)
(4,595)
(3)
$ 1,983
(9,608)
10,751
1
Net (decrease) increase in cash and cash equivalents. . . . . . . . . . . . . . . . . . . . . . . . . .
$(1,349)
$(1,797)
$ 3,127
We believe our cash, cash equivalents and cash generated from operations as well as our available credit facilities will be
sufficient to meet our working capital, debt, stock repurchases, 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.
During 2019, we expect cash used for purchases of property, plant and equipment and net activity in notes receivable
and equity investments relating to our Flash Ventures joint venture with Toshiba Memory Corporation to be approximately
$1.50 billion to $1.90 billion. 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.
Pursuant to the 2017 Act, we are required to pay a one-time deemed repatriation tax related to the undistributed
earnings of our foreign subsidiaries. For 2018, we recorded a provisional amount for the mandatory deemed repatriation tax
liability of $1.57 billion, which is payable over an 8-year period as further discussed below under ‘‘Short and Long-term
Liquidity-Contractual Obligations and Commitments.’’ The provisional amount included in the Consolidated Financial
Statements may change when we finalize the calculation of our post-1986 foreign earnings and profits that were previously
deferred from U.S. income taxes and the amount of foreign earnings held in cash or other specified assets. For additional
information regarding our total tax liability for the mandatory repatriation tax, 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.
A total of $4.15 billion and $4.99 billion of our cash and cash equivalents was held outside of the U.S. as of June 29,
2018 and June 30, 2017, respectively. Although the mandatory deemed repatriation tax has removed U.S. federal taxes on
45
distributions to the U.S., we continue to evaluate the expected manner of recovery to determine whether or not to continue
to assert indefinite reinvestment on a part or all the foreign undistributed earnings. This requires us to re-evaluate the
existing short and long-term capital allocation policies in light of the 2017 Act and calculate the tax cost that is incremental
to the U.S. deemed repatriation tax (e.g., foreign withholding, state income taxes, and additional U.S. tax on currency
transaction gains or losses) of repatriating cash to the U.S. While the current tax expense is based upon an assumption that
foreign undistributed earnings are indefinitely reinvested, our plan may change upon the completion of long-term capital
allocation plans in light of the 2017 Act and completion of the calculation of the incremental tax effects on the repatriation
of foreign undistributed earnings. In the event we determine not to continue to assert the permanent reinvestment of part or
all of our foreign undistributed earnings, such a determination could result in the accrual and payment of additional federal,
foreign, state and local taxes.
Operating Activities
Cash flow from operating activities primarily consists of net income, adjusted for non-cash charges, plus or minus
changes in other operating assets and liabilities. This represents our principal source of cash. Net cash provided by changes
in other operating assets and liabilities was $486 million for 2018, as compared to net cash provided by changes in other
operating assets and liabilities of $91 million for 2017. The increase in cash provided by changes in other operating assets and
liabilities in 2018 primarily reflects the payable recorded for the mandatory repatriation tax as described in the Tax Reform
section of Key Developments above. Changes in our other operating assets and liabilities are also largely affected by our
working capital requirements, which are dependent on the effective management of our cash conversion cycle. Our cash
conversion cycle measures how quickly we can convert our products into cash through sales. The cash conversion cycles were
as follows:
2018
2017
2016
Days sales outstanding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Days in inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Days payables outstanding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash conversion cycle . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
39
83
(71)
51
(in days)
37
65
(66)
36
41
81
(78)
44
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 modifications through negotiations with our
vendors or by granting to, or receiving from, our vendors’ payment term accommodations.
For 2018, DSO increased by 2 days over the prior year, primarily reflecting the timing of shipments and customer
receipts. DIO increased by 18 days over the prior year, primarily reflecting increases in flash inventory and an increase in
HDD inventory due to ongoing hard drive manufacturing transformation activities. The decrease in DPO primarily reflects
the increased production volume and timing of vendor payments.
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 Merger. 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, 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 2016. 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, primarily reflecting routine
variations in timing of purchases and payments during the period.
46
Investing Activities
During 2018, net cash used in investing activities primarily consisted of $835 million of capital expenditures, a net
$742 million increase in notes receivable issuances to Flash Ventures to fund its capital expansion, and $100 million for
acquisitions. Net cash used in investing activities for 2017 primarily consisted of $578 million of capital expenditures and
a $277 million net increase in notes receivable issuances to and investments in Flash Ventures, partially offset by a net
reduction of our available for sale securities of $230 million. During 2016, net cash used in investing activities primarily
consisted of $9.84 billion related to the Merger, net of cash acquired, $584 million of capital expenditures, $90 million net
increase in notes receivable to Flash Ventures and a net $76 million of other investing activities, partially offset by
$977 million of proceeds from a net decrease in investments and sales of marketable securities.
Our cash equivalents are primarily invested in money market funds that invest 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 2018, net cash used in financing activities primarily consisted of $17.07 billion in debt repayments,
$593 million to pay dividends on our common stock and $591 million of share repurchases, partially offset by net proceeds
of $14.28 billion from debt issuances and draws under our Revolving Facility. 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 and a net $74 million provided by employee stock plans, offset by a net $2.61 billion to settle
convertible debt, $2.57 billion to repay debt and our prior revolving credit facility, $613 million for payment upon
settlement of warrants, $464 million to pay dividends on our common stock and $60 million to repurchase shares of our
common stock.
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.
47
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 29,
2018:
Total
1 Year (2019)
Long-term debt, including current portion(1) . . . . . .
Interest on debt. . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Flash Ventures and other related commitments(2) . . .
Operating leases . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Purchase obligations . . . . . . . . . . . . . . . . . . . . . . . . .
Mandatory Repatriation Tax . . . . . . . . . . . . . . . . . . .
$11,375
2,323
8,298
190
3,179
1,566
Total. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$26,931
$ 179
425
3,637
53
2,540
131
$6,965
2-3 Years
(2020-2021)
4-5 Years
(2022-2023)
(in millions)
$ 589
835
2,749
80
319
255
$4,827
$ 7,207
719
1,603
37
320
248
$10,134
More than
5 Years
(Beyond 2023)
$3,400
344
309
20
—
932
$5,005
(1) Principal portion of debt, excluding discounts and issuance costs.
(2)
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 information about new borrowings and repayments,
increased availability under our Revolving Facility and the principal repayment terms, interest rates, covenants and other key
terms of our outstanding indebtedness.
Flash Ventures
Flash Ventures sells to 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 or all of the outstanding obligations under each lease agreement.
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 us. As of June 29, 2018, 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.
Purchase Obligations
In the normal course of business, we enter into purchase orders with suppliers for the purchase of components used to
manufacture our products. These purchase orders generally cover forecasted component supplies needed for production
during the next quarter, are recorded as a liability upon receipt of the components, and generally may be changed or canceled
at any time prior to shipment of the components. In addition, we have entered into long-term purchase agreements with
various component suppliers, containing minimum quantity requirements. However, the dollar amount of the purchases
may depend on the specific products ordered, achievement of pre-defined quantity or quality specifications or future price
negotiations. The estimated related minimum purchase requirements are included in ‘‘Purchase obligations’’ in the table
48
above. We have also entered into long-term purchase agreements with various component suppliers that carry fixed volumes
and pricing which obligate us to make certain future purchases, contingent on certain conditions of performance, quality and
technology of the vendor’s components. These arrangements are included under ‘‘Purchase obligations’’ in the table above.
Mandatory Repatriation Tax
The following is a summary of our estimated provisional mandatory deemed repatriation tax obligations that are
payable in the following fiscal years ending (in millions):
June 28, 2019 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 131
131
July 3, 2020. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
124
July 2, 2021. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
124
July 1, 2022. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
124
June 30, 2023 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
233
June 28, 2024 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
311
June 27, 2025 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
388
July 3, 2026. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,566
The 2017 Act allows for the provisional mandatory deemed repatriation tax of $1.57 billion to be payable over an 8-year
period without interest. The payments are due with 8% of the tax to be paid in each of the first five years, 15% in the 6th year,
20% in the 7th year, and 25% in the 8th year. For additional information regarding our provisional estimate of the total tax
liability for the mandatory repatriation tax, 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.
Unrecognized Tax Benefits
As of June 29, 2018, the liability for unrecognized tax benefits (excluding accrued interest and penalties) was
approximately $551 million. Accrued interest and penalties related to unrecognized tax benefits as of June 29, 2018 was
approximately $110 million. Of these amounts, approximately $508 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.
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, Quantitative and Qualitative
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.
Foreign Exchange Contracts
We purchase foreign exchange contracts to hedge the impact of foreign currency fluctuations on certain underlying
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 Qualitative
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.
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
49
our officers that will require us, among other things, to indemnify them against certain liabilities that may arise by reason of
their status or service as directors or officers. We maintain director and officer 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.
Stock Repurchase Program
Our Board of Directors previously authorized $5.00 billion for the repurchase of our common stock. In 2018, we
repurchased 7.1 million shares for a total cost of $591 million. Subsequent to June 29, 2018 and through July 25, 2018, we
repurchased an additional 0.8 million shares for a total cost of $61 million. On July 25, 2018, our Board of Directors
authorized a new $5.00 billion share repurchase program that is effective through July 25, 2023, replacing all prior
programs. Repurchases under the stock repurchase program may be made in the open market or in privately negotiated
transactions and may be made under a Rule 10b5-1 plan. We expect stock repurchases to be funded principally by operating
cash flows. Subsequent to July 25, 2018 and through August 22, 2018, we repurchased an additional 5.9 million shares for
a total cost of $404 million under this new program.
Cash Dividend
Since the first quarter of 2013, we have issued a quarterly cash dividend. During the year ended June 29, 2018, we
declared aggregate cash dividends of $2.00 per share of our common stock totaling $592 million. On May 2, 2018, we
declared a cash dividend of $0.50 per share of our common stock to our shareholders of record as of June 29, 2018, which
aggregated $148 million and was paid on July 16, 2018. On August 1, 2018, we declared a cash dividend of $0.50 per share
of our common stock to our shareholders of record as of September 28, 2018, which will be paid on October 15, 2018. We
may modify, suspend, or cancel our cash dividend policy in any manner and at any time.
Recent Accounting Pronouncements
For a description of recently issued and adopted accounting pronouncements, including the respective dates of adoption
and expected effects on our results of operations and financial condition, see Part II, Item 8, Note 2, Recent 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 principles
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 shareholders’ 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 processing. 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
50
of revenue. These amounts generally vary according to several factors including industry conditions, seasonal demand,
competitor actions, channel mix and overall availability 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 12% to 13% 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.
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 disclose
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 disclose 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 operations 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 16, Legal Proceedings, of the
Notes to Consolidated Financial Statements 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 benefits or potentially adjust previously-recorded
liabilities for unrealized tax benefits and materially affect our operating results.
51
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 use qualitative factors to determine whether goodwill is more likely than not impaired
and whether a quantitative test for impairment is considered necessary. If we conclude from the qualitative assessment that
goodwill is more likely than not impaired, we are required to perform a quantitative approach to determine the amount of
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 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. Quantitative and Qualitative Disclosures About Market Risk
Disclosure About Foreign Currency Risk
Although the majority of our transactions are in U.S. dollars, some transactions are based in various foreign currencies.
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 29, 2018, we had outstanding the foreign exchange contracts presented in the following table. The
designated foreign exchange contracts are entered to protect the U.S. dollar value of our product cost and operating expenses.
Changes in fair values of the non-designated foreign exchange contracts are recognized in other income (expense), net and are
largely offset by corresponding changes in the fair values of the foreign currency denominated monetary assets and liabilities.
Designated Hedges (cash flow hedges)
Contract
Amount
Weighted-
Average
Contract Rate(1)
Mark to Market
Unrealized Gain
(Loss)
(in millions, except weighted-average contract rate)
Japanese yen . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Malaysian ringgit. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Philippine peso . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Thai baht . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total designated forward contracts. . . . . . . . . . . . . . . . . . . . . . . . . . .
$634
101
48
162
$945
109.39
3.97
52.69
31.48
$ (3)
(2)
(1)
(8)
$(14)
52
Non-Designated Hedges
Contract
Amount
Weighted-
Average
Contract Rate(1)
Unrealized Gain
(Loss)
(in millions, except weighted-average contract rate)
British pound sterling . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Euro. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Japanese yen . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Malaysian ringgit. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Philippine peso . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Thai baht . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
28
76
2,921
104
80
211
Total non-designated forward contracts . . . . . . . . . . . . . . . . . . . . . . .
$3,420
0.76
0.86
108.20
4.00
53.11
32.42
$—
—
42
(1)
—
(4)
$37
(1) Expressed in units of foreign currency per U.S. dollar.
During 2018, 2017 and 2016, total net realized and unrealized 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.
Disclosure About Other Market Risks
Variable Interest Rate Risk
Borrowings under our Revolving Facility and Term Loan A-1 bear interest at a rate per annum, at our option, of either
an adjusted London Interbank Offered Rate (‘‘LIBOR’’) (subject to a 0.0% floor) plus an applicable margin varying from
1.125% to 2.000% or a base rate plus an applicable margin varying from 0.125% to 1.000%, in each case depending on our
corporate credit ratings. As of June 29, 2018, the applicable margin based on our current credit ratings was 1.5%.
Borrowings under our U.S. Term Loan B-4 bear interest at a rate per annum, at our option, of either an adjusted LIBOR
(subject to a 0.0% floor) plus a margin of 1.75% or a base rate plus a margin of 0.75%.
We have generally held a balance of fixed and variable rate debt. At June 29, 2018, 70% of the par value of our debt was
at variable rates. We entered into pay-fixed interest rate swaps, which effectively converts $1.00 billion of our term loans to
fixed rates through May 2020 and an incremental $1.00 billion through April 2023. As of June 29, 2018, we had
$7.94 billion of variable rate debt. After giving effect to the $2.00 billion of interest rate swaps, we effectively had
$5.94 billion of long-term debt subject to variations in interest rates and a one percent increase in the variable rate of interest
would increase annual interest expense by $59 million.
For additional information regarding our indebtedness 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.
53
Item 8.
Financial Statements and Supplementary Data
Index to Financial Statements and Financial Statement Schedule
Consolidated Financial Statements:
Reports of Independent Registered Public Accounting Firm. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Balance Sheets — As of June 29, 2018 and June 30, 2017. . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Statements of Operations — Three Years Ended June 29, 2018. . . . . . . . . . . . . . . . . . . . .
Consolidated Statements of Comprehensive Income — Three Years Ended June 29, 2018 . . . . . . . . . . .
Consolidated Statements of Cash Flows — Three Years Ended June 29, 2018. . . . . . . . . . . . . . . . . . . . .
Consolidated Statements of Shareholders' Equity — Three Years Ended June 29, 2018 . . . . . . . . . . . . .
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
PAGE
NO.
55
57
58
59
60
62
63
54
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and Board of Directors
Western Digital Corporation:
Opinions on the Consolidated Financial Statements and Internal Control Over Financial Reporting
We have audited the accompanying consolidated balance sheets of Western Digital Corporation and subsidiaries (the
Company) as of June 29, 2018 and June 30, 2017, the related consolidated statements of operations, comprehensive income,
shareholders’ equity, and cash flows for each of the years in the three-year period ended June 29, 2018, and the related notes,
collectively the consolidated financial statements. We also have audited the Company’s internal control over financial
reporting as of June 29, 2018, based on criteria established in Internal Control — Integrated Framework (2013) issued by the
Committee of Sponsoring Organizations of the Treadway Commission.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the
financial position of the Company as of June 29, 2018 and June 30, 2017, and the results of its operations and its cash flows
for each of the years in the three-year period ended June 29, 2018, in conformity with U.S. generally accepted accounting
principles. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial
reporting as of June 29, 2018, based on criteria established in Internal Control — Integrated Framework (2013) issued by the
Committee of Sponsoring Organizations of the Treadway Commission.
Basis for Opinions
The Company’s management is responsible for these consolidated financial statements, 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 Item 9A, Management’s Report on Internal Control over Financial Reporting. Our responsibility is
to express an opinion on the Company’s consolidated financial statements and an opinion on the Company’s internal control
over financial reporting based on our audits. We are a public accounting firm registered with the Public Company
Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in
accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange
Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and
perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material
misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained
in all material respects.
Our audits of the consolidated financial statements included performing procedures to assess the risks of material
misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond
to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the
consolidated financial statements. Our audits also included evaluating the accounting principles used and significant
estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our
audit of internal control over financial reporting 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 audits also included performing such other procedures as we considered
necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding 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 generally accepted accounting principles, and that receipts and
55
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 prevention 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 misstatements.
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.
/s/ KPMG LLP
We have served as the Company’s auditor since 1970.
August 24, 2018
Irvine, California
56
WESTERN DIGITAL CORPORATION
CONSOLIDATED BALANCE SHEETS
(in millions, except par value)
June 29,
2018
June 30,
2017
ASSETS
Current assets:
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 5,005 $ 6,354
1,948
Accounts receivable, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2,341
Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
413
Other current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2,197
2,944
492
Total current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Property, plant and equipment, net. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Notes receivable and investments in Flash Ventures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Goodwill. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other intangible assets, net. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other non-current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
10,638
3,095
2,105
10,075
2,680
642
11,056
3,033
1,340
10,014
3,823
594
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $29,235 $29,860
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,265 $ 2,144
Accounts payable to related parties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
206
1,255
Accrued expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
506
Accrued compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
233
Current portion of long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
259
1,274
479
179
Total current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Long-term debt. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
4,456
10,993
2,255
Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
17,704
4,344
12,918
1,180
18,442
Commitments and contingencies (Notes 6, 9, 13 and 16)
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 2018 and
2017; outstanding — 296 shares in 2018 and 294 shares in 2017. . . . . . . . . . . . . . . . . . . . . . .
Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accumulated other comprehensive loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Treasury stock — common shares at cost; 16 shares in 2018 and 18 shares in 2017 . . . . . . . . . . .
—
—
3
4,254
(39)
8,757
(1,444)
3
4,506
(58)
8,633
(1,666)
Total shareholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
11,531
11,418
Total liabilities and shareholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $29,235 $29,860
The accompanying notes are an integral part of these Consolidated Financial Statements.
57
WESTERN DIGITAL CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(in millions, except per share amounts)
Year Ended
June 29,
2018
June 30,
2017
July 1,
2016
Revenue, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $20,647
$19,093
$12,994
Cost of revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
12,942
13,021
Gross profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
7,705
6,072
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 expense, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2,400
1,473
215
4,088
3,617
60
(676)
(916)
2,441
1,445
232
4,118
1,954
26
(847)
(364)
Total interest and other expense, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(1,532)
(1,185)
Income before taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income tax expense (benefit) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2,085
1,410
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
675
$
Income per common share
Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
2.27
2.20
Weighted average shares outstanding:
Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash dividends declared per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
297
307
2.00
$
$
$
769
372
397
1.38
1.34
288
296
2.00
$
$
$
$
9,559
3,435
1,627
997
345
2,969
466
26
(266)
(73)
(313)
153
(89)
242
1.01
1.00
239
242
2.00
The accompanying notes are an integral part of these Consolidated Financial Statements.
58
WESTERN DIGITAL CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in millions)
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other comprehensive income (loss), before tax:
Actuarial pension gain (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign currency translation adjustment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net unrealized gain (loss) on derivative contracts and available-for-sale securities. . . .
Total other comprehensive income (loss), before tax . . . . . . . . . . . . . . . . . . . . . . . .
Income tax benefit (expense) related to items of other comprehensive income (loss),
before tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other comprehensive income (loss), net of tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Year Ended
June 29,
2018
$675
June 30,
2017
$ 397
July 1,
2016
$242
(2)
18
7
23
(4)
19
39
(115)
(75)
(151)
(10)
(161)
(73)
74
99
100
23
123
Total comprehensive income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$694
$ 236
$365
The accompanying notes are an integral part of these Consolidated Financial Statements.
59
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 . . . . . . . . . . . . . . . . . .
Cash premium on extinguishment of debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
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 expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other assets and liabilities, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net cash provided by operating activities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Year Ended
June 29,
2018
June 30,
2017
July 1,
2016
$
675
$ 397
$
242
2,056
377
(348)
21
221
720
—
16
(19)
(244)
(598)
(15)
53
(17)
(26)
1,333
4,205
(835)
26
(100)
(89)
48
19
—
(1,313)
571
18
(1,655)
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
3,437
1,983
(584)
(578)
21
—
— (9,835)
(632)
1,204
405
—
(106)
16
(76)
(281)
94
417
(20)
(549)
292
(32)
(636)
(9,608)
The accompanying notes are an integral part of these Consolidated Financial Statements.
60
WESTERN DIGITAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS — (Continued)
(in millions)
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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Dividends paid to shareholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Settlement of debt hedge contracts. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from (repayment of) revolving credit facility . . . . . . . . . . . . . . . . . . . . . . . . . .
Repayment of debt and premiums . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Debt issuance costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Payment upon settlement of acquired warrants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Year Ended
June 29,
2018
June 30,
2017
July 1,
2016
220
(171)
—
—
—
(591)
(593)
28
500
(17,074)
13,840
(59)
—
235
(124)
119
61
(492)
—
(574)
(21)
—
(11,697)
7,908
(10)
—
117
(50)
7
409
(2,611)
(60)
(464)
—
(255)
(2,313)
17,108
(524)
(613)
Net cash provided by (used in) financing activities. . . . . . . . . . . . . . . . . . . . . . .
(3,900)
(4,595)
10,751
Effect of exchange rate changes on cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1
Net increase (decrease) in cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash and cash equivalents, beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(1,349)
6,354
(3)
(1,797)
8,151
1
3,127
5,024
Cash and cash equivalents, end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 5,005 $ 6,354 $ 8,151
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 . . . . . . . . . . . . . . . . . . . . . . . . $
220 $
708 $
184 $
777 $
26
113
— $
— $
— $
— $ 1,822
94
16 $
(70)
(11) $
The accompanying notes are an integral part of these Consolidated Financial Statements.
61
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62
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 generally
accepted in the United States (‘‘U.S. GAAP’’) and has adopted accounting policies and practices which are generally 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. Approximately every
six years, the Company reports a 53-week fiscal year to align the fiscal year with the foregoing policy. Fiscal years 2018, which
ended on June 29, 2018; 2017, which ended on June 30, 2017; and 2016, which ended on July 1, 2016, were each comprised
of 52 weeks, with all quarters presented consisting of 13 weeks.
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 shareholders’ equity.
Reclassifications
Certain prior year amounts have been reclassified in the consolidated balance sheets 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 consistent 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 approximates fair value.
63
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, certificates 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 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 Other expense, net in the Consolidated Statement of Operations. In addition,
realized gains and losses are included in Other expense, net in the Consolidated Statement 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 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 significant 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 approximate 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) 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. 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.
64
WESTERN DIGITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
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 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 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 valuation 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, including 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 combination.
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 uses qualitative factors to determine whether goodwill is more likely
than not impaired and whether a quantitative test for impairment is considered necessary. If the Company concludes from the
qualitative assessment that goodwill is more likely than not impaired, the Company is required to perform a quantitative
approach to determine the amount of impairment. The Company is required to use judgment when applying the goodwill
impairment test, including the identification of reporting units, assignment of assets, liabilities and goodwill to reporting
units, and determination of the fair value of each reporting unit. In addition, 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 assessment 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
65
WESTERN DIGITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
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 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. See Note 7, Goodwill
and Other Intangible Assets, for additional disclosures 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 collectability
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 materially 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 products. 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, 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 allocates 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 separately. 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
66
WESTERN DIGITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
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 significant 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 generally
warrants its products for a period of one to five years, with a small number of products having a warranty ranging 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 tracking model is used to help prepare
estimates and assist the Company in exercising judgment in determining the underlying 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 adjustments 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 contingency is
probable or reasonably possible. If a loss contingency is probable and the amount of the loss can be reasonably 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 possible 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 ultimate 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 16, Legal Proceedings, for additional disclosures related to the Company’s litigation.
Advertising Expense
Advertising costs are expensed as incurred and amounted to $112 million, $89 million and $60 million in 2018, 2017
and 2016, 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.
67
WESTERN DIGITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
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 valuation 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 purchase rights are
estimated using the Black-Scholes-Merton option-pricing model. Both the binomial and the Black-Scholes-Merton
option-pricing models require the input of highly subjective assumptions. 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 probability 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
68
WESTERN DIGITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
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 $4.37 billion and $2.79 billion at June 29, 2018 and June 30, 2017, 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 cumulative 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 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 swaps as designated cash flow hedges 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 contract. The effective
portion of the change in fair value of this designated cash flow hedge is deferred in Other comprehensive 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 conformity
with the funding requirements of applicable government authorities. The Company amortizes unrecognized 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. Recent Accounting Pronouncements
Accounting Pronouncements Recently Adopted
In January 2017, the Financial Accounting Standards Board (‘‘FASB’’) issued Accounting Standards Update (‘‘ASU’’)
No. 2017-04,
‘‘Intangibles — Goodwill and Other (Topic 350): Simplifying 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 goodwill allocated to that reporting unit. An entity still has the
option to perform the qualitative assessment for a reporting unit to determine if the quantitative impairment test is
necessary. As permitted by ASU 2017-04, the Company has elected to early adopt this standard for its fiscal 2018 goodwill
impairment test, which was performed as of the first day of the Company’s fourth quarter, March 31, 2018. The adoption of
this standard did not have a material impact on the Company’s Consolidated Financial Statements.
69
WESTERN DIGITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
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 provides amendments that address eight specific cash
flow classification issues for which there exists diversity in practice: Debt prepayment or debt extinguishment costs;
settlement of zero-coupon debt instruments or other debt instruments with coupon interest rates that are insignificant in
relation to the effective interest rate of the borrowing; contingent consideration payments made after a business combination;
proceeds from the settlement of insurance claims; proceeds from the settlement of corporate-owned life insurance policies,
including bank-owned life insurance policies; distributions received from equity method investees; beneficial interests in
securitization transactions; and separately identifiable cash flows and application of the predominance principle. The
Company adopted ASU 2016-15 in the second quarter of 2018 on a modified retrospective basis as required by the standard.
The Company’s adoption of ASU 2016-15 did not have a material effect on the Company’s historical 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. The Company adopted this standard in the first quarter of 2018 using the modified retrospective
approach. This adoption resulted in a one-time net increase to beginning retained earnings of $70 million, consisting of a
$58 million cumulative adjustment for the previously unrecognized windfall tax benefits related to previous vesting and
exercises of stock-based awards, and a $19 million cumulative adjustment related to the change in accounting policy for
estimated forfeitures and share cancellations, partially offset by a decrease of $7 million for the related tax impacts of change
in forfeiture policy. In addition, upon adoption of the new standard in the Company’s first quarter of 2018, the Company
began prospectively reflecting the tax deficiencies and benefits as an operating activity, rather than as a financing activity
under the previous standard, in the Company’s Consolidated Statements of Cash Flows. For the year ended June 29, 2018, the
Company recognized net excess tax benefits $78 million, as a component of Income tax expense (benefit).
In July 2015, the FASB issued ASU No. 2015-11, ‘‘Inventory (Topic 330) - Simplifying the Measurement of Inventory’’
(‘‘ASU 2015-11’’), which dictates that an entity should measure inventory within the scope of this update at the lower of cost
and net realizable value. Net realizable value is the estimated selling price in the ordinary course of business, less reasonably
predictable costs of completion, disposal, and transportation. The Company adopted this standard in the first quarter of
2018. The Company’s adoption of ASU 2015-11 did not have a material impact on its Consolidated Financial Statements.
Recently Issued Accounting Pronouncements Not Yet Adopted
In February 2018, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update (‘‘ASU’’)
No. 2018-02, ‘‘Income Statement-Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects
from Accumulated Other Comprehensive Income’’ (‘‘ASU 2018-02’’). ASU 2018-02 allows a reclassification from
accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the 2017 Act.
Consequently, the amendments eliminate the stranded tax effects resulting from the 2017 Act and will improve the
usefulness of information reported to financial statement users. However, because the amendments only relate to the
reclassification of the income tax effects of the 2017 Act, the underlying guidance that requires that the effect of a change in
tax laws or rates be included in income from continuing operations is not affected. The amendments in this update also
require certain disclosures about stranded tax effects. The Company early adopted this standard effective June 30, 2018, the
beginning of the first quarter of 2019. The adoption of this standard did not have a material impact on the Company’s
Consolidated Financial Statements.
In August 2017, the FASB issued ASU No. 2017-12, ‘‘Derivatives and Hedging (Topic 815): Targeted Improvements
to Accounting for Hedging Activities’’ (‘‘ASU 2017-12’’). ASU 2017-12 simplifies hedge accounting through changes to
both designation and measurement requirements. For hedges that qualify as highly effective, the new standard eliminates the
requirement to separately measure and record hedge ineffectiveness, resulting in better alignment between the presentation
of the effects of the hedging instrument and the hedged item in the financial statements. The Company adopted this standard
70
WESTERN DIGITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
effective June 30, 2018, the beginning of the first quarter of 2019. The adoption of this standard did not have a material
impact on the Company’s Consolidated Financial Statements.
In May 2017, the FASB issued ASU No. 2017-09, ‘‘Compensation-Stock Compensation (Topic 718): Scope of
Modification Accounting’’ (‘‘ASU 2017-09’’). ASU 2017-09 provides clarification when a change to the terms or conditions
of a share-based payment award must be accounted for as a modification. The new guidance requires modification accounting
if the fair value, vesting condition or the classification of the award is not the same immediately before and after a change to
the terms and conditions of the award. This ASU is effective prospectively and was adopted effective June 30, 2018, the
beginning of the first quarter of 2019. The adoption of this standard did not have a material impact on the Company’s
Consolidated Financial Statements.
In March 2017, the FASB issued ASU No. 2017-07, ‘‘Compensation—Retirement Benefits (Topic 715): Improving the
Presentation of Net Periodic 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 Company adopted this standard effective June 30,
2018, the beginning of the first quarter of 2019. The adoption of this standard did not have a material impact on the
Company’s Consolidated Financial Statements.
In January 2017, the FASB issued ASU No. 2017-01, ‘‘Business Combinations (Topic 805): Clarifying the Definition
of a Business’’ (‘‘ASU 2017-01’’). ASU 2017-01 narrows the definition of a ‘‘business’’. This standard provides guidance to
assist entities with evaluating when a set of transferred assets and activities is a business. The Company adopted this standard
effective June 30, 2018, the beginning of the first quarter of 2019, and applied it prospectively to transactions occurring
thereafter. The adoption of this standard did not have a material impact on the Company’s Consolidated Financial
Statements.
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 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 accounting principles generally accepted in the United States
(‘‘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 Company adopted this standard effective June 30, 2018, the beginning of the first
quarter of 2019. The adoption of this standard did not have a material impact on the Company’s Consolidated Financial
Statements.
In June 2016, the FASB issued ASU No. 2016-13, ‘‘Financial Instruments-Credit Losses (Topic 326): Measurement of
Credit Losses on Financial Instruments’’ (‘‘ASU 2016-13’’). ASU 2016-13 seeks to provide financial statement users with
more decision-useful information about the expected credit losses on financial instruments, including trade receivables, and
other commitments to extend credit held by a reporting entity at each reporting date. The amendments require an entity to
replace the incurred loss impairment methodology in current U.S. GAAP with a methodology that reflects current expected
credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss
estimates. The amendments are effective for fiscal years, and interim periods within those fiscal years, beginning after
December 15, 2019, which for the Company is the first quarter of fiscal 2021. The Company is currently evaluating the
impact this update will have on its Consolidated Financial Statements.
In February 2016, the FASB issued ASU No. 2016-02, ‘‘Leases (Topic 842)’’ (‘‘ASU 2016-02’’). ASU 2016-02
supersedes ASC 840 ‘‘Leases’’. The amendments in this update require, among other things, that lessees recognize the
following for all leases (unless a policy election is made by class of underlying asset to exclude short-term leases) at the
commencement date: (1) a lease liability, which is a lessee’s obligation to make lease payments arising from a lease, measured
on a discounted basis; and (2) a right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use
71
WESTERN DIGITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
of, a specified asset for the lease term. Based on the standard as originally issued, lessees and lessors were to apply a modified
retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period
presented in the financial statements. However, the FASB issued ASU 2018-11 on July 30, 2018, which allows entities to
apply the provisions of ASC 842 at the effective date without adjusting comparative periods. The standard is effective for
interim and annual reporting periods beginning after December 15, 2018, with early adoption permitted. As the Company
plans for the adoption of this standard, the Company has completed its first phase of globally identifying its leases including
the identification of embedded leases. The Company is in the process of identifying changes to its processes, internal controls
and system requirements and configurations that would result from the new lease standard. The Company’s implementation
efforts are progressing as planned. The Company expects to adopt this standard in the first quarter of fiscal 2020 and expects
to elect the practical expedient to not present historical comparative information. The Company continues to evaluate the
impact ASU 2016-02 will have on its Consolidated Financial Statements.
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 presentation
and disclosure requirements for financial instruments, including the requirement to measure certain equity investments at
fair value with changes in fair value recognized in net income. 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. The Company adopted this standard effective June 30, 2018, the beginning of the first quarter of 2019. The
adoption of this standard did not have a material impact on the Company’s 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’’ (‘‘ASC Topic 605’’), 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 Company adopted the new standard effective June 30, 2018, the beginning of the first quarter
of 2019, using the modified retrospective method, with the cumulative effect of initially applying the guidance recognized
at the date of initial application.
The implementation of the new standard will impact the recognition of the Company’s revenue and cost as follows:
• Substantially all of the Company’s current revenue is from the sale of hardware products. The Company does not
believe that there are any material changes to the timing or amount of revenue for these types of sales under the new
standard as the majority of the Company’s revenue is recognized at a point in time.
• For sales-based royalties, the Company will 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 the Company does not expect to be material.
• For other revenue streams such as multi-element transactions, software and IP licenses, these transactions are
immaterial and the related changes to revenue recognition will not be material.
• For assets recognized from costs incurred to obtain or fulfill a contract, the Company does not expect to have material
capitalized fees for contracts where the amortization period is greater than one year. The Company will continue to
expense these costs as incurred.
• The Company’s revenue disclosures will expand and may require judgment in certain areas.
The adoption of the new revenue standard resulted in a post-tax adjustment of approximately $54 million to increase
the beginning retained earnings for fiscal year 2019 for uncompleted contracts for which revenue will not be recognized in
72
WESTERN DIGITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
the future periods under ASC Topic 606. The Company continues to evaluate the effect that ASC Topic 606 will have on its
Consolidated Financial Statements, including the impact on income tax expense and related balance sheet accounts. Changes
to the Company’s processes, internal controls and systems as a result of the adoption of this new revenue standard were not
significant.
Note 3. Supplemental Financial Statement Data
Accounts receivable, net
From time to time, in connection with factoring agreements, the Company sells trade accounts receivable without
recourse to third party purchasers in exchange for cash. During 2018, the Company sold trade accounts receivable and
received cash proceeds of $57 million. The discounts on the trade accounts receivable sold during 2018 were not material and
were recorded within Other expense, net in the Consolidated Financial Statements. During 2017, the Company did not sell
any trade accounts receivable.
Inventories
Inventories:
June 29,
2018
June 30,
2017
(in millions)
Raw materials and component parts. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,048 $ 646
632
Work-in-process . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,063
Finished goods . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
878
1,018
Total inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $2,944 $2,341
Property, plant and equipment, net
June 29,
2018
June 30,
2017
(in millions)
Property, plant, and equipment:
Land and buildings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,998 $ 1,855
6,815
Machinery and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
404
Computer equipment and software . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
49
Furniture and fixtures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
259
Leasehold improvements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
144
Construction-in-process . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
7,209
440
48
257
234
Property, plant and equipment, gross. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accumulated depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
10,186
(7,091)
9,526
(6,493)
Property, plant, and equipment, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 3,095 $ 3,033
Depreciation expense of property, plant, and equipment totaled $871 million, $960 million and $888 million in 2018,
2017 and 2016, respectively.
73
WESTERN DIGITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Product warranty liability
Changes in the warranty accrual were as follows:
2018
2017
2016
(in millions)
Warranty accrual, beginning of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 311 $ 279 $ 221
45
162
(178)
29
Warranty liabilities assumed as a result of acquisitions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . —
176
Charges to operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(151)
Utilization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(18)
Changes in estimate related to pre-existing warranties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
—
177
(151)
6
Warranty accrual, end of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 318 $ 311 $ 279
In 2018, the Company updated its estimate of the timing of its expected expenditures for warranty obligations resulting
in a reclassification from current to long-term warranty obligations. The current portion of the warranty accrual classified in
Accrued expenses was $168 million and $186 million as of June 29, 2018 and June 30, 2017, respectively, with the
long-term portion of $150 million and $125 million, respectively, classified in Other liabilities.
Other liabilities
Other non-current liabilities:
2018
2017
(in millions)
Non-current net tax payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,315 $ —
1,180
Other non-current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
940
Total other non-current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $2,255 $1,180
74
WESTERN DIGITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Accumulated other comprehensive income (loss)
Other comprehensive income (‘‘OCI’’), net of tax refers to expenses, gains and losses that are recorded as an element 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)
Unrealized
Gains (Losses)
on Derivative
Contracts and
Available for
Sale Securities
Total
Accumulated
Comprehensive
Income (Loss)
(in millions)
Balance at July 1, 2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other comprehensive income (loss) before reclassifications. .
Amounts reclassified from accumulated other
$(45)
39
comprehensive income (loss) . . . . . . . . . . . . . . . . . . . . . .
—
Income tax benefit (expense) related to items of other
comprehensive income (loss) . . . . . . . . . . . . . . . . . . . . . .
Net current-period other comprehensive income (loss). . .
Balance at June 30, 2017. . . . . . . . . . . . . . . . . . . . . . . . . . . . .
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) . . . . . . . . . . . . . . . . . . . . . .
Net current-period other comprehensive income (loss). . .
(12)
27
$(18)
(2)
—
1
(1)
$ 74
(115)
—
2
(113)
$ (39)
18
—
—
18
$ 74
(45)
(30)
—
(75)
$ (1)
25
(18)
(5)
2
$ 103
(121)
(30)
(10)
(161)
$ (58)
41
(18)
(4)
19
Balance at June 29, 2018. . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$(19)
$ (21)
$ 1
$ (39)
The following table illustrates the significant amounts of each component reclassified out of AOCI to the Consolidated
Statements of Operations:
AOCI Component
2018
2017
2016
Statement of Operations Line Item
Unrealized holding gain (loss) on designated hedging activities:
Foreign exchange contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $16 $33
(3)
Foreign exchange contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2
$(17) Cost of revenue
(34) Research and development
Total reclassifications for the period . . . . . . . . . . . . . . . . . . . . . . . . . $18 $30
$(51)
(in millions)
75
WESTERN DIGITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Note 4.
Fair Value Measurements and Investments
The Company’s total cash, cash equivalents and available-for-sale securities was as follows:
June 29,
2018
June 30,
2017
(in millions)
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $5,005 $6,354
24
Short-term available-for-sale securities (included within Other current assets) . . . . . . . . . . . . . . . . . . . .
94
Long-term available-for-sale securities (included within Other non-current assets) . . . . . . . . . . . . . . . . .
23
93
Total cash, cash equivalents and available-for-sale securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $5,121 $6,472
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.
76
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 29, 2018 and June 30, 2017, and indicate the fair value hierarchy of the valuation
techniques utilized to determine such values:
June 29, 2018
Level 1
Level 2
Level 3
Total
(in millions)
Assets:
Cash equivalents:
Money market funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $2,554 $ — $ — $2,554
4
Certificates of deposit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
—
—
4
Total cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2,554
Short-term available-for-sale securities:
U.S. Treasury securities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Corporate notes and bonds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Asset-backed securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Municipal notes and bonds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Equity securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total short-term available-for-sale securities . . . . . . . . . . . . . . . . . . . . . . . . .
Long-term available-for-sale securities:
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 available-for-sale securities . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign exchange contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest rate swap contract. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
3
—
—
—
2
5
3
—
—
—
—
—
3
—
—
4
—
12
4
2
—
18
—
5
1
65
8
11
90
51
16
— 2,558
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
3
12
4
2
2
23
3
5
1
65
8
11
93
51
16
Total assets at fair value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $2,562 $ 179 $ — $2,741
Liabilities:
Foreign exchange contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ — $
28 $ — $
Total liabilities at fair value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ — $
28 $ — $
28
28
77
WESTERN DIGITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
June 30, 2017
Level 1
Level 2 Level 3
Total
(in millions)
Assets:
Cash equivalents:
Money market funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $2,836 $ — $— $2,836
10
Certificates of deposit. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
— 10 —
Total cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2,836
10 — 2,846
Short-term available-for-sale securities:
Corporate notes and bonds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Asset-backed securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Municipal notes and bonds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Equity securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
— 11 —
—
7 —
2 —
—
4 — —
Total short-term available-for-sale securities . . . . . . . . . . . . . . . . . . . . . . . . . . .
4
20 —
Long-term available-for-sale securities:
U.S. Treasury securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
U.S. Government agency securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
International government securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Corporate notes and bonds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Asset-backed securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Municipal notes and bonds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
5 — —
5 —
—
—
1 —
— 67 —
7 —
—
9 —
—
Total long-term available-for-sale securities . . . . . . . . . . . . . . . . . . . . . . . . . . . .
5
89 —
Foreign exchange contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
— 16 —
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 options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
—
— —
8
1 —
1
$— $
8
1
1
Total liabilities at fair value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ — $
9
$ 1
$
10
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 municipalities
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.
78
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. Derivative assets and liabilities are reflected in the Company’s Consolidated Balance Sheet under Other current
assets and Accrued expenses, respectively.
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.
Assets and Liabilities Measured at Fair Value on a Recurring Basis Using Significant Unobservable Inputs (Level 3)
Exchange Options. The Company’s 2020 Convertible Notes (as defined in Note 6, Debt) 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 exchange options arising from the Company’s 2020 Convertible Notes, 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.
During 2018 and 2017, the Company had no transfers of financial assets and liabilities between levels.
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 29, 2018 and June 30, 2017.
79
WESTERN DIGITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Financial Instruments Not Carried at Fair Value
The carrying value of the Company’s revolving credit facility approximates its fair value given the revolving nature of
the balance and the variable market interest rate. For financial instruments where the carrying value (which includes
principal adjusted for any unamortized issuance 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 2018 and the fourth
quarter of 2017, respectively.
June 29, 2018
June 30, 2017
Carrying
Value
Fair
Value
Carrying
Value
Fair
Value
(in millions)
0.50% convertible senior notes due 2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Variable interest rate Term Loan A maturing 2021 . . . . . . . . . . . . . . . . . . . . . . .
Variable interest rate Term Loan A-1 maturing 2023. . . . . . . . . . . . . . . . . . . . . .
Variable interest rate U.S. Term Loan B-2 maturing 2023 . . . . . . . . . . . . . . . . . .
Variable interest rate U.S. Term Loan B-4 maturing 2023 . . . . . . . . . . . . . . . . . .
Variable interest rate Euro Term Loan B-2 maturing 2023(1) . . . . . . . . . . . . . . . .
7.375% senior secured notes due 2023 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1.50% convertible notes due 2024 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
10.50% senior unsecured notes due 2024 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
4.750% senior unsecured notes due 2026 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
31 $
—
4,982
—
2,448
—
—
931
—
2,280
30 $
34 $
— 4,074
—
— 2,968
—
— 1,000
— 1,835
—
— 3,244
—
5,013
2,452
1,114
2,238
34
4,130
—
2,989
—
1,010
2,062
—
3,956
—
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $10,672 $10,851 $13,151 $14,181
(1) Euro Term Loan B-2 outstanding principal amount as of June 30, 2017 was based upon the Euro to U.S. dollar exchange
rate as of that date.
Equity Method Investments
The Company has joint venture investments with Toshiba Memory Corporation and with Unisplendour Corporation
Limited and Unissoft (Wuxi) Group Co. Ltd. (‘‘Unis’’). 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 strategic
objectives. The Company reports these investments under the cost method of accounting as it does not have a significant
influence over the operations of these investees. These investments consist of debt and equity securities of privately-held
companies that do not have a readily determinable fair value and are carried at historical cost. The Company assesses these
securities for indications of other-than-temporary impairments.
In 2018 and 2017, the Company recorded impairment charges and losses related to the sale of these cost method
investments of $17 million and $55 million, respectively, which were included in Other expense, net in the Consolidated
Statements of Operations. There were no impairments in 2016 related to these investments. As of June 29, 2018 and June 30,
2017, these investments aggregated $39 million and $91 million, respectively, and are reported under Other non-current
assets in the Consolidated Balance Sheets.
80
WESTERN DIGITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Note 5. Derivative Instruments and Hedging Activities
As of June 29, 2018, the Company had outstanding foreign exchange forward contracts that were designated as either
cash flow hedges or non-designated hedges. The contract maturity dates of these foreign exchange forward contracts do not
exceed 12 months. In addition, the Company had outstanding interest rate swaps that were designated as cash flow hedges.
The Company determined the ineffective portion and the amount excluded for effectiveness testing associated with its cash
flow hedges to be immaterial to the Consolidated Financial Statements for 2018, 2017 and 2016.
As of June 29, 2018, the amount of existing net gains related to cash flow hedges recorded in AOCI was $2 million, of
which the majority is expected to be reclassified to earnings over the next twelve months. In addition, as of June 29, 2018,
the Company did not have any foreign exchange forward contracts with credit-risk-related contingent features.
Changes in fair values of the non-designated foreign exchange contracts are recognized in other income (expense), net
and are largely offset by corresponding changes in the fair values of the foreign currency denominated monetary assets and
liabilities. During 2018, 2017 and 2016, total net realized and unrealized transaction and foreign exchange contract currency
gains and losses were not material to the Company’s Consolidated Financial Statements.
See Note 4, Fair Value Measurements and Investments, for additional disclosures related to the fair value of the Company’s
foreign exchange forward contracts.
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 offset associated with the Company’s
foreign exchange forward contracts and is allowed to net settle transactions of the same currency with a single net amount
payable by one party to the other. As of June 29, 2018 and June 30, 2017, the effect of rights of offset was not material and
the Company did not offset or net the fair value amounts of derivative instruments in its Consolidated Balance Sheets.
81
WESTERN DIGITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Note 6. Debt
Debt consisted of the following as of June 29, 2018 and June 30, 2017:
June 29,
2018
June 30,
2017
(in millions)
0.50% convertible senior notes due 2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Revolving credit facility maturing 2023 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Variable interest rate Term Loan A maturing 2021. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Variable interest rate Term Loan A-1 maturing 2023 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Variable interest rate U.S. Term Loan B-2 maturing 2023 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Variable interest rate U.S. Term Loan B-4 maturing 2023 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Variable interest rate Euro Term Loan B-2 maturing 2023(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
7.375% senior secured notes due 2023 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1.50% convertible notes due 2024 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
10.50% senior unsecured notes due 2024 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
4.750% senior unsecured notes due 2026 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
35
500
—
4,991
—
2,449
—
—
1,100
—
2,300
$
35
—
4,125
—
2,970
—
1,001
1,875
—
3,350
—
Total debt. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Issuance costs and debt discounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Subtotal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less current portion of long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
11,375
(203)
11,172
(179)
13,356
(205)
13,151
(233)
Long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $10,993
$12,918
(1) Euro Term Loan B-2 outstanding principal amount as of June 30, 2017 was based upon the Euro to U.S. dollar exchange
rate as of that date.
In February 2018, the Company entered into an amendment to the credit agreement entered into on April 29, 2016 (as
amended, the ‘‘Credit Agreement’’), to provide for, among other things, (i) the issuance of a new $5.02 billion of term
loan A-1 due 2023 (the ‘‘Term Loan A-1’’), (ii) a new $2.25 billion revolving credit facility maturing in 2023 (the ‘‘Revolving
Facility’’), which replaced the Company’s prior $1.50 billion revolving credit facility maturing in 2021, (iii) modifications
to the restrictive and financial maintenance covenants, to provide more flexibility and increased incremental debt capacity,
(iv) amendments of the applicable varying interest rate margins to be based on the Company’s corporate credit ratings as
described in the indenture, and (v) upon the occurrence of certain circumstances, a release of the security and guarantees as
well as further covenant flexibility and increased incremental debt capacity. The Company used a portion of the proceeds of
the Term Loan A-1 to repay in full its previous variable interest rate Term Loan A in the principal amount of $4.02 billion.
The Term Loan A-1 bears interest at a per annum rate equal to, at the Company’s option, either an adjusted London
Interbank Offered Rate (‘‘LIBOR’’) rate, subject to a 0.00% floor, plus an applicable margin varying from 1.125% to 2.000%
or a base rate plus an applicable margin varying from 0.125% to 1.000%, in each case depending on the Company’s corporate
credit ratings. Currently the Company has selected the LIBOR rate option, and the applicable rate was 3.59% as of June 29,
2018. Principal payments are due in quarterly installments of (i) 0.625% per quarter from June 2018 through March 2019
and (ii) 1.25% per quarter from June 2019 through December 2022, with the remaining balance payable on February 27,
2023. The Term Loan A-1 issuance costs are amortized to interest expense over the term of the loan, and as of June 29, 2018,
issuance costs of $8 million remained unamortized.
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
82
WESTERN DIGITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
receives a LIBOR rate on the notional amount of the contract through May 2020. In addition, in April 2018, 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 2.75% and receives a LIBOR rate on the notional amount
of the contract through February 2023.
Proceeds of $500 million were drawn under the Revolving Facility and were used to fund a voluntary partial
prepayment of the Company’s existing U.S. Dollar denominated term B-3 loans (‘‘U.S. Term Loan B-3’’). Loans under the
Revolving Facility bear interest, at the Company’s option, at either LIBOR plus an applicable margin varying from 1.125%
to 2.000% or a base rate plus an applicable margin varying from 0.125% to 1.000%, in each case depending on the
Company’s corporate credit ratings. Currently the Company has selected the LIBOR rate option, and the applicable interest
rate was 3.59% as of June 29, 2018. The Company will also pay an unused commitment fee on the Revolving Facility ranging
from 0.120% to 0.350% based on the Company’s corporate credit ratings as described in the indenture, with an initial fee
of 0.250%. As of June 29, 2018, the Company had $1.75 billion of additional borrowing availability under the Revolving
Facility.
In November 2017, the Company borrowed $2.96 billion under U.S. Term Loan B-3 under its Credit Agreement and
used the proceeds of this new loan to prepay in full the U.S. Term Loan B-2 previously outstanding under the Credit
Agreement. During the year ended June 29, 2018, the Company funded a voluntary partial prepayment of $500 million,
using proceeds from the Revolving Facility. In May 2018, the Company borrowed $2.46 billion under U.S. Term Loan B-4
under its Credit Agreement and used the proceeds of this new loan to prepay in full the U.S. Term Loan B-3 previously
outstanding under the Credit Agreement. The U.S. Term Loan B-4 has an interest rate equal to, at the Company’s option,
either an adjusted LIBOR rate, subject to a 0.00% floor, plus 1.75% or a base rate plus 0.75%. Currently the Company has
selected the LIBOR rate option, and the applicable interest rate was 3.84% as of June 29, 2018. Principal payments on
U.S. Term Loan B-4 of 0.25% are due quarterly and began on June 29, 2018 with the balance due on April 29, 2023. The
U.S. Term Loan B-4 issuance costs are amortized to interest expense over the term of the loan and as of June 29, 2018, issuance
costs of $1 million remained unamortized.
The Revolving Facility, Term Loan A-1 and Term Loan B-4 are unconditionally guaranteed by each of the guarantors
under the Credit Agreement and are secured on a first-priority basis (subject to permitted liens) by a lien on the same
collateral that secure the other loans under the Credit Agreement; provided that the security and guarantees will be
automatically suspended upon certain conditions.
The Company assumed the 0.5% convertible senior notes due November 15, 2020 (the ‘‘2020 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’’). As of June 29, 2018, $35 million principal amount of the 2020
Convertible Notes was outstanding and had a conversion rate of 10.9006 units of reference property per $1,000 principal
amount of the 2020 Convertible 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 Convertible Notes are not currently exchangeable into reference
property.
The 2020 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
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 2018, the change in the fair
value of the outstanding exchange options related to the 2020 Notes resulted in an immaterial loss.
83
WESTERN DIGITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
In February 2018, the Company issued $1.10 billion aggregate principal amount of convertible senior notes due
February 1, 2024 (the ‘‘2024 Convertible Notes’’). The 2024 Convertible Notes bear interest at an annual rate of 1.50% with
interest payable on February 1 and August 1 of each year. The Company is not required to make principal payments on the
2024 Convertible Notes prior to the maturity date. The 2024 Convertible Notes are jointly and severally guaranteed by
certain material domestic subsidiaries of the Company.
The 2024 Convertible Notes are convertible into cash, shares of the Company’s common stock, or a combination thereof
at an initial conversion price of approximately $121.91 per share of common stock. Holders of the 2024 Convertible Notes
may freely convert their 2024 Convertible Notes on or after November 1, 2023 until the close of business on the business day
immediately preceding the maturity date. Prior to November 1, 2023, holders may convert their 2024 Convertible Notes
based on variations in market price of the Company’s common stock in relation to the conversion price or the trading price
of the 2024 Convertible Notes or upon the occurrence of specified corporate events. On or after February 5, 2021, the
Company may redeem all or part of the 2024 Convertible Notes, at its option, if the market price of the Company’s stock
achieves certain levels.
The Company separately accounts for the liability and equity components of the 2024 Convertible Notes. The value of
the liability component as of the date of issuance was recognized at the present value of its cash flows using a discount rate
of 4.375%, the Company’s borrowing rate at the date of the issuance for a similar debt instrument without the conversion
feature, resulting in a debt discount of $165 million, which was allocated to equity as the value of the conversion feature. The
2024 Convertible Notes debt issuance costs were approximately $18 million, of which $15 million was allocated to the debt
component and $3 million was allocated to equity. The debt discount and issuance costs are amortized to interest expense
over the term of the 2024 Convertible Notes. As of June 29, 2018, debt discount and issuance cost of $169 million remained
unamortized.
In February 2018, the Company issued $2.30 billion aggregate principal amount of senior unsecured notes due
February 15, 2026 (the ‘‘2026 Senior Unsecured Notes’’). The 2026 Senior Unsecured Notes bear interest at an annual rate
of 4.750% with interest payable on February 15 and August 15 of each year. The Company is not required to make principal
payments on the 2026 Senior Unsecured Notes prior to the maturity date. The 2026 Senior Unsecured Notes are jointly and
severally guaranteed by certain material domestic subsidiaries of the Company. The 2026 Senior Unsecured Notes issuance
costs are amortized to interest expense over the term of the 2026 Senior Unsecured Notes and as of June 29, 2018, issuance
costs of $20 million remained unamortized.
In February and March, 2018, the Company completed the redemption of all of its outstanding 7.375% senior secured
notes due 2023 in the aggregate principal amount of $1.875 billion (the ‘‘2023 Notes’’) and the tender offer and redemption
and settlement of all of its outstanding 10.50% senior unsecured notes due 2024 in the aggregate principal amount of
$3.350 billion (the ‘‘2024 Notes’’ and collectively with the 2023 Notes, the ‘‘Redeemed Notes’’), including an aggregate of
$720 million of ‘‘make-whole’’ and tender premiums required for the tender offer of the 2024 Notes and the optional
redemption of the Redeemed Notes in accordance with the applicable indentures and accrued interest through the applicable
redemption dates. In November 2017, the Company settled in full the principal amounts of the Euro Term Loan B-2, plus
accrued interest, using cash on hand.
In connection with the settlements of the various debt instruments described above, in 2018, the Company recognized
an aggregate loss on debt extinguishment of $899 million, consisting of $720 million of ‘‘make-whole’’ and tender premiums
and $179 million of unamortized issuance costs. In 2017, the Company incurred losses on the extinguishment of debt of
$274 million.
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 29, 2018, the Company was in compliance with all financial covenants. In addition, the
Credit Agreement requires the Company to comply with customary covenants that limit or restrict the Company’s and its
subsidiaries’ 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. In addition, the indentures
84
WESTERN DIGITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
governing the 2026 Senior Unsecured Notes and the 2024 Convertible Notes contain restrictive covenants that limit the
Company’s and its subsidiaries’ ability to, among other things, consolidate, merge or sell all or substantially all of their assets;
create liens; and incur, assume or guarantee additional indebtedness.
Future Debt Payments
As of June 29, 2018, annual future debt payments were as follows:
Fiscal year
2019. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2020. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2021. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2022. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2023. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2024 and thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Future Debt
Payments
(in millions)
$
179
278
311
276
6,931
3,400
Total debt maturities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Issuance costs and debt discounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
11,375
(203)
Net carrying value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$11,172
Note 7. Goodwill and Other Intangible Assets
The following table summarizes the activity related to the carrying amount of goodwill:
Balance at July 1, 2016. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Purchase price adjustments to goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign currency translation adjustment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Balance at June 30, 2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Goodwill recorded in connection with acquisitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Carrying
Amount
(in millions)
$ 9,951
66
(3)
10,014
61
Balance at June 29, 2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$10,075
On September 15, 2017, the Company acquired substantially all the assets of Tegile Systems, Inc., a provider of flash
and persistent-memory storage solutions for enterprise data center applications. On August 25, 2017, the Company acquired
substantially all the assets of Upthere, Inc., a cloud services company. These acquisitions are primarily intended to help meet
the evolving needs of customers, while driving long-term growth for the Company's existing data center and client solution
products over the long term.
The aggregate purchase price of acquisitions during the year ended June 29, 2018 was $100 million in cash, with net
assets acquired primarily consisting of developed technology and other intangible assets, of which $61 million was allocated
to goodwill. Goodwill is primarily attributable to the benefits the Company expects to derive from diversifying product
offerings to its Data Center Devices and Solutions and Client Solutions end markets as well as the acquired workforce.
Goodwill is expected to be deductible for tax purposes because the acquisitions were structured as asset acquisitions but
accounted for as business combinations. Concurrent with these acquisitions, the Company received $36 million in proceeds
on previously outstanding notes receivable due from these acquired entities.
85
WESTERN DIGITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
During the year ended June 29, 2018, the expenses incurred by the Company related to these acquisitions were
immaterial and are primarily included within Selling, general and administrative expenses in the Consolidated Statements
of Operations. Revenues and earnings related to these acquisitions was not material.
The purchase price adjustments in 2017 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.
The following tables present intangible assets as of June 29, 2018 and June 30, 2017:
June 29, 2018
Weighted Average
Amortization Period
Gross Carrying
Amount
Accumulated
Amortization
Net Carrying
Amount
(in years)
(in millions)
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
$4,323
648
635
180
32
5,818
80
$5,898
$(2,528)
(222)
(299)
(161)
(8)
(3,218)
—
$(3,218)
$1,795
426
336
19
24
2,600
80
$2,680
June 30, 2017
Weighted Average
Amortization Period
Gross Carrying
Amount
Accumulated
Amortization
Net Carrying
Amount
(in years)
(in millions)
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
$3,478
645
627
375
35
5,160
696
$5,856
$(1,373)
(134)
(227)
(288)
(11)
(2,033)
—
$(2,033)
$2,105
511
400
87
24
3,127
696
$3,823
As part of prior acquisitions, the Company recorded at the time of the acquisition acquired IPR&D for projects in
progress that had not yet reached technological feasibility. IPR&D is initially accounted for as an indefinite-lived intangible
asset. Once a project reaches technological feasibility, the Company reclassifies the balance to existing technology and begins
to amortize the intangible asset over its estimated useful life. During 2018, two IPR&D projects reached technological
feasibility totaling $616 million and commenced amortization over an estimated useful life of 4 years.
During 2018 and 2017, the Company did not record any impairment charges related to intangible assets. During 2016,
the Company recorded $36 million of impairment charges related to intangible assets, which are recorded in Employee
termination, asset impairment and other charges within the Consolidated Statements of Operations. The impairment charges
primarily relate to acquired IPR&D projects that were abandoned and resulted in full impairment.
86
WESTERN DIGITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Intangible assets are amortized over the estimated useful lives based on the pattern in which the economic benefits are
expected to be received. Intangible asset amortization was as follows:
2018
2017
2016
(In millions)
Intangible asset amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,185 $1,169 $266
The following table presents estimated future amortization expense for intangible assets currently subject to
amortization as of June 29, 2018:
Future
Intangible Asset
Amortization
Expense
(in millions)
Fiscal year
2019. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2020. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2021. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2022. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2023 and thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total future amortization expense. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 968
755
503
230
144
$2,600
87
WESTERN DIGITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
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:
2018
2017
2016
(in millions)
Change in benefit obligation:
Benefit obligation at beginning of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $249
6
Service cost. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2
Interest cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
9
Actuarial loss (gain) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Benefits paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(9)
Settlement/Curtailment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . —
3
Non-U.S. currency movement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Benefit obligation at end of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $260
Change in plan assets:
Actual return on plan assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Employer contributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Benefits paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-U.S. currency movement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fair value of plan assets at beginning of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $189
8
10
(9)
2
Fair value of plan assets at end of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $200
Unfunded status. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 60
$326
8
1
(22)
(30)
(6)
(28)
$249
$212
15
10
(30)
(18)
$189
$ 60
$231
8
3
52
(16)
(1)
49
$326
$185
(14)
20
(16)
37
$212
$114
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 29,
2018
June 30,
2017
(in millions)
$ 1
59
$60
$ 1
59
$60
The accumulated benefit obligation for the Japanese defined benefit pension plans was $260 million at June 29, 2018.
As of June 29, 2018, actuarial losses for the Japanese defined benefit pension plans of $21 million are included in
Accumulated other comprehensive loss in the Consolidated Balance Sheet. There were no prior service credits for the defined
benefit pension plans recognized in Accumulated other comprehensive loss in the Consolidated Balance Sheet as of June 29,
2018.
88
WESTERN DIGITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Assumptions
Weighted-Average Assumptions
The weighted-average actuarial assumptions used to determine benefit obligations for the Japanese defined benefit
pension plans were as follows:
Discount rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Rate of compensation increase . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
0.7% 0.8% 0.4%
0.7% 0.8% 0.8%
The weighted-average actuarial assumptions used to determine benefit costs for the Japanese defined benefit pension
plans were as follows:
2018
2017
2016
Discount rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expected long-term rate of return on plan assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Rate of compensation increase . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2018
2017
2016
0.8% 0.4% 1.3%
2.5% 2.5% 2.5%
0.8% 0.8% 0.9%
The Company develops a discount rate by calculating when the estimated benefit payments will be due. Management
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 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 63% in debt securities, 34% 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.
89
WESTERN DIGITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Fair Value Measurements
The following tables present the Japanese defined benefit pension plans’ major asset categories and their associated fair
values as of June 29, 2018 and June 30, 2017:
June 29, 2018
Level 1
Level 2
Level 3
Total
(in millions)
Equity:
Equity commingled/mutual funds(1)(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$— $ 68
$— $ 68
Fixed income:
Fixed income commingled/mutual funds(1)(3) . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash equivalents and short-term investments . . . . . . . . . . . . . . . . . . . . . . . . . . . .
—
3
125
4
—
—
125
7
Fair value of plan assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 3
$197
$— $200
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
(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 immaterial and are not presented in
the above tables.
There were no significant movements of assets between any level categories in 2018, 2017 or 2016.
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.
90
WESTERN DIGITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
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
The Company’s expected employer contributions for 2019 and annual benefit payments over the next 5 years for its
Japanese defined benefit pension plans are not expected to be material.
Note 9. Commitments, Contingencies and Related Parties
Flash Ventures
The Company’s business ventures with Toshiba Memory Corporation (‘‘TMC’’) 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 TMC has a 50.1% ownership
interest in each of these entities. Through Flash Ventures, the Company and TMC collaborate in the development and
manufacture of flash-based memory wafers, which are manufactured by TMC at its wafer fabrication facilities located in
Yokkaichi, Japan, using semiconductor manufacturing equipment individually owned or leased by each Flash Ventures
entity. Each Flash Ventures entity purchases wafers from TMC at cost and then resell those wafers to the Company and TMC
at cost plus a markup.
Flash Partners. Flash Partners was formed in 2004 in connection with the construction of TMC’s ‘‘Fab 3’’ 300-
millimeter wafer fabrication facility located in Yokkaichi, Japan.
Flash Alliance. Flash Alliance was formed in 2006 in connection with the construction of TMC’s ‘‘Fab 4’’ 300-
millimeter wafer fabrication facility located in Yokkaichi, Japan.
Flash Forward. Flash Forward was formed in 2010 in connection with the construction of TMC’s ‘‘Fab 5’’ 300-
millimeter wafer fabrication facility 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 TMC related to the construction and operation of TMC’s ‘‘New
Fab 2’’ 300-millimeter wafer fabrication facility located in Yokkaichi, Japan. New Fab 2 is primarily intended to provide
additional clean room space to convert a portion of 2-dimensional (‘‘2D’’) flash-based wafer production capacity to
3-dimensional (‘‘3D’’) flash-based wafer production capacity. Production of flash-based wafers in New Fab 2 started in 2016.
Fab 6. In December 2017, the Company entered into a facility agreement with TMC related to the construction and
operation of a new 300-millimeter wafer fabrication facility in Yokkaichi, Japan, referred to as ‘‘Fab 6’’, which is primarily
intended to provide clean room space to continue the transition of the parties’ existing 2D flash-based wafer capacity to
3D flash-based wafer production capacity. The Company is committed to 50% of Fab 6’s start-up costs, as well as 50% of
approved Flash Ventures investments in manufacturing equipment for Fab 6.
The Company accounts for its ownership position of each entity within Flash Ventures under the equity method of
accounting. The financial and other support provided by the Company in all periods presented was either contractually
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 manner 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.
91
WESTERN DIGITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The following table presents the notes receivable from, and equity investments in, Flash Ventures as of June 29, 2018
and June 30, 2017:
June 29,
2018
June 30,
2017
(in millions)
Notes receivable, Flash Partners . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 767 $ 264
119
Notes receivable, Flash Alliance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
379
Notes receivable, Flash Forward . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
187
Investment in Flash Partners . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
279
Investment in Flash Alliance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
112
Investment in Flash Forward . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total notes receivable and investments in Flash Ventures. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $2,105 $1,340
48
700
191
283
116
During 2018 and 2017, the Company made net payments to Flash Ventures of $3.79 billion and $2.64 billion,
respectively, for purchased flash-based 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 borrower and
creditworthiness, including credit rating agency ratings, of significant investors of the borrower, where material or known.
There were no impairments in 2018, 2017, or 2016.
As of June 29, 2018 and June 30, 2017, the Company had accounts payable balances due to Flash Ventures of
$259 million and $206 million, respectively.
The Company’s maximum reasonably estimable loss exposure (excluding lost profits) as a result of its involvement with
Flash Ventures, based upon the Japanese yen to U.S. dollar exchange rate at June 29, 2018, is presented 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.
June 29,
2018
Notes receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,515
590
Equity investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,223
Operating lease guarantees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
282
Inventory and prepayments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Maximum estimable loss exposure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $3,610
As of June 29, 2018 and June 30, 2017, the Company’s retained earnings included undistributed earnings of Flash
Ventures of $8 million and $5 million, respectively.
The Company is committed to purchase its provided three-month forecast of Flash Ventures’ flash-based wafer supply,
which generally equals 50% of Flash Ventures’ output. The Company is not able to estimate its total wafer purchase
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.
92
WESTERN DIGITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Research and Development Activities. The Company participates in common R&D activities with TMC and is contractually
committed to a minimum funding level. R&D commitments are immaterial to the Consolidated Financial Statements.
Off-Balance Sheet Liabilities
Flash Ventures sells to 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 or all of the outstanding obligations under each lease
agreement. 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 29, 2018.
Total guarantee obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
¥135
$1,223
The following table details the breakdown of the Company’s remaining guarantee obligations between the principal
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 29, 2018 in U.S. dollars, based upon the Japanese yen to U.S. dollar exchange rate as of June 29, 2018:
Lease Amounts
(Japanese yen,
in billions)
(U.S. dollar,
in millions)
Annual Installments
Payment of
Principal
Amortization
Purchase Option
Exercise Price at
Final Lease
Terms
(in millions)
2019 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2021 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2022 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2023 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Thereafter. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total guarantee obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$341
218
201
112
38
5
$915
$ 24
45
104
70
28
37
$308
Guarantee
Amount
$ 365
263
305
182
66
42
$1,223
The Company and TMC 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 receivables,
under any such agreements. As of June 29, 2018, no amounts have been accrued in the Consolidated Financial Statements
with respect to these indemnification agreements.
Unis Venture
In November 2015, the Company entered into an agreement with Unis to form a joint venture, referred to as the ‘‘Unis
Venture’’, to market and sell the Company’s products 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. The Company accounts for its investment in the Unis Venture under the equity method of accounting.
93
WESTERN DIGITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Revenue on products distributed by the Unis Venture are recognized upon sell through to third-party customers. During
2018, the Company recognized less than 1% of its consolidated revenue on products distributed by the Unis Venture. The
outstanding accounts receivable due from and investment in Unis Venture were not material to the Consolidated Financial
Statements as of June 29, 2018 or June 30, 2017.
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 2030. Future minimum lease
payments under operating leases that have initial non-cancelable lease terms in excess of one year at June 29, 2018 are as
follows:
Fiscal year
2019 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2021 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2022 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2023 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total future minimum lease payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net rent expense was as follows:
Lease Amounts
(in millions)
$ 53
45
35
23
14
20
$190
2018
2017
2016
(In millions)
Rent expense, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$49
$56
$59
94
WESTERN DIGITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Purchase Agreements
In the normal course of business, the Company enters into purchase orders with suppliers for the purchase of
components used to manufacture its products. These purchase orders generally cover forecasted component supplies needed
for production during the next quarter, are recorded as a liability upon receipt of the components, and generally may be
changed or canceled at any time prior to shipment of the components. The Company also enters into long-term purchase
agreements with various component suppliers that carry fixed volumes and pricing which obligates the Company to make
certain future purchases, contingent on certain conditions of performance, quality and technology of the vendor’s
components. As of June 29, 2018, the Company had the following minimum long-term purchase commitments:
Long-term purchase
commitments
(in millions)
Fiscal year
2019 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2021 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2022 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2023 and thereafter. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$135
141
137
150
170
$733
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
management structure under the current 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):
2018
2017
2016
(in millions)
Client Devices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $10,108 $ 9,520 $ 6,205
4,919
Data Center Devices & Solutions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,870
Client Solutions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
6,075
4,464
5,505
4,068
Total revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $20,647 $19,093 $12,994
95
WESTERN DIGITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
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:
2018
2017
2016
(in millions)
Net revenue(1)
United States. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 4,640 $ 3,881 $ 3,651
2,413
China . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,527
Hong Kong . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2,462
Rest of Asia . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2,664
Europe, Middle East and Africa . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
277
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
4,271
3,257
3,181
3,276
1,227
4,393
4,022
2,752
3,858
982
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $20,647 $19,093 $12,994
(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.
June 29,
2018
June 30,
2017
(in millions)
Long-lived assets(1)
United States . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,187 $1,249
556
Malaysia. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
443
China. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
392
Thailand . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
345
Rest of Asia . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
48
Europe, Middle East and Africa . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
737
427
349
336
59
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $3,095 $3,033
(1) Long-lived assets include property, plant and equipment and 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 each of
2018, 2017 and 2016, no customer accounted for 10% or more of the Company’s net revenue. For 2018, 2017 and 2016, the
Company’s top 10 customers accounted for 42%, 36%, and 43%, 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 29, 2018, two customers, Apple,
Inc. and Dell Inc., accounted for 13% and 10%, respectively, of the Company’s net accounts receivable. As of June 30, 2017,
one customer, Dell Inc., accounted for 11% of the Company’s net accounts receivable. As of June 29, 2018 and June 30, 2017,
the Company had net accounts receivable of $2.20 billion and $1.95 billion, respectively, and reserves for potential credit
losses were not material as of each period.
96
WESTERN DIGITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
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 components.
The Company’s flash 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.
Note 11. Western Digital Corporation 401(k) Plan
The Company maintains the Western Digital Corporation 401(k) Plan (the ‘‘Plan’’). The Plan covers substantially 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. 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 2018, 2017 and 2016, the Company made Plan contributions of $35 million, $36 million and $20 million,
respectively.
Note 12. Shareholders’ Equity
2017 Performance Incentive Plan
The types of awards that may be granted under the Western Digital Corporation Amended and Restated 2017
Performance Incentive Plan (‘‘2017 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 Company’s common stock,
as well as cash bonus awards. Persons eligible to receive awards under the 2017 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 2017 Performance 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 2017 Performance Incentive Plan is ten years after the grant date of the award. RSUs granted under the 2017
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
97
WESTERN DIGITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
service periods. Once the performance metrics are met, vesting of PSUs is generally subject to continued service by the
employee. 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 29, 2018, the maximum number of shares of the Company’s common stock that was authorized for award
grants under the 2017 Performance Incentive Plan was 80.5 million shares. Shares issued in respect of stock options and SARs
granted under the 2017 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 plan’s share limit as 1.72 shares for
every one share issued in connection with such award. The 2017 Performance Incentive Plan was extended in 2013 and will
terminate on August 4, 2025 unless terminated earlier by the Company’s Board of Directors (the ‘‘Board’’).
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 preceding 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 automatically re-enrolled in the next new offering period.
During 2018, 2017 and 2016, the Company issued 2.5 million, 2.3 million, and 1.3 million shares, respectively, for
aggregate purchase amounts of $119 million, $105 million, and $68 million, respectively.
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 Operations:
2018
Options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 25
325
Restricted and performance stock units . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
27
Employee stock purchase plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
377
Subtotal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(66)
Tax benefit. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $311
2018
Cost of revenue. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 49
170
Research and development . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
157
Selling, general and administrative. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Employee termination, asset impairment, and other charges. . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1
377
Subtotal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(66)
Tax benefit. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $311
2017
(in millions)
$ 41
330
23
394
(105)
$ 289
2017
(in millions)
$ 49
173
161
11
394
(105)
$ 289
2016
$ 55
123
13
191
(48)
$143
2016
$ 21
76
85
9
191
(48)
$143
98
WESTERN DIGITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Compensation cost related to unvested stock options, RSU, PSU and ESPP will generally be amortized on a straight-line
basis over the remaining average service period. The following table presents the unamortized compensation cost and
weighted average service period of all unvested outstanding awards as of June 29, 2018:
Unamortized
Compensation
Costs
Weighted
Average Service
Period
(in millions)
(years)
Options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
RSUs and PSUs(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
ESPP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total unamortized compensation cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 25
464
51
$540
1.8
2.1
1.5
(1) Weighted average service period assumes the performance metrics are met for the PSUs.
Plan Activities
Stock Options
The following table summarizes stock option activity under the Company’s incentive plans:
Weighted
Average Exercise
Price Per Share
Weighted
Average
Remaining
Contractual Life
Aggregate
Intrinsic Value
(in years)
(in millions)
Number
of Shares
(in millions)
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 . . . . . . . . . . . . . . . .
Exercised . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Canceled or expired . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Options outstanding at June 29, 2018 . . . . . . . . . . . . . . . .
Exercisable at June 29, 2018. . . . . . . . . . . . . . . . . . . . . . . .
6.8
1.7
2.9
(1.7)
(0.7)
9.0
2.8
(3.5)
(0.9)
7.4
(2.2)
(0.4)
4.8
3.0
$50.00
82.68
38.37
27.43
66.03
55.74
44.83
37.72
71.31
$58.14
44.52
60.85
$64.23
$70.70
$ 57
120
$ 99
$ 94
$ 47
3.7
3.1
99
WESTERN DIGITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
RSUs and PSUs
The following table summarizes RSU and PSU activity under the Company’s incentive plans:
Weighted
Average Grant
Date Fair
Value
Aggregate
Intrinsic Value
at Vest Date
(in millions)
Number
of Shares
(in millions)
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. . . . . . . . . . . . . . . . . . . . . . . . .
Granted. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Vested . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Forfeited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
RSUs and PSUs outstanding at June 29, 2018. . . . . . . . . . . . . . . . . . . . . . . . .
3.0
2.7
12.5
(2.0)
(0.5)
15.7
6.0
(5.9)
(2.1)
13.7
6.3
(6.3)
(1.1)
12.6
$73.80
61.32
32.14
56.11
62.09
41.92
44.13
46.98
43.89
$45.01
74.68
45.20
50.35
$58.31
$144
399
$552
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.
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. No options were granted
in 2018. The fair value of stock options granted in 2017 and 2016 was estimated using the following weighted average
assumptions:
2017
2016
Suboptimal exercise factor. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Range of risk-free interest rates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.59% to 1.42% 0.25% to 2.09%
Range of expected stock price volatility. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Weighted-average expected volatility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Post-vesting termination rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Dividend yield . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fair value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Weighted-average expected term (in years) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
0.35 to 0.49
0.40
1.71%
3.42%
$13.72
3.6
0.28 to 0.49
0.35
0.47%
2.61%
$22.54
4.7
2.71
2.69
100
WESTERN DIGITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
RSU and PSU Grants
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:
2018
2017
2016
Weighted-average expected term (in years) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Risk-free interest rate. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Stock price volatility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Dividend yield . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fair value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Stock Repurchase Program
1.24
2.25%
0.35
2.42%
1.27
1.26
0.81% 0.82%
0.42
4.02% 3.92%
0.38
$16.89
$10.06
$9.91
The Company’s Board of Directors previously authorized $5.00 billion for the repurchase of the Company’s common
stock. In 2018, the Company repurchased 7.1 million shares for a total cost of $591 million. Subsequent to June 29, 2018
and through July 25, 2018, the Company repurchased an additional 0.8 million shares for a total cost of $61 million. On
July 25, 2018, the Company’s Board of Directors authorized a new $5.00 billion share repurchase program that is effective
through July 25, 2023, replacing all prior programs. Repurchases under the stock repurchase program may be made in the
open market or in privately negotiated transactions and may be made under a Rule 10b5-1 plan. The Company expects stock
repurchases to be funded principally by operating cash flows. Subsequent to July 25, 2018 and through August 22, 2018, the
Company repurchased an additional 5.9 million shares for a total cost of $404 million under this new program.
Stock Reserved for Issuance
The following table summarizes all common stock reserved for issuance at June 29, 2018:
Number of Shares
(in millions)
Outstanding awards and shares available for award grants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
ESPP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
36
5
41
Dividends to Shareholders
Since the first quarter of 2013, the Company has issued a quarterly cash dividend. During the year ended June 29, 2018,
the Company declared aggregate cash dividends of $2.00 per share on its outstanding common stock totaling $592 million,
of which $148 million was paid on July 16, 2018.
On August 1, 2018, the Board declared a cash dividend of $0.50 per share to shareholders of record as of September 28,
2018, which will be paid on October 15, 2018. The Company may modify, suspend or cancel its cash dividend policy in any
manner and at any time.
101
WESTERN DIGITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Note 13.
Income Tax Expense (Benefit)
Income Before Taxes
The domestic and foreign components of income before taxes were as follows:
2018
2017
2016
(in millions)
Foreign. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $2,398 $560 $ 516
(363)
Domestic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(313)
209
Income before taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $2,085 $769 $ 153
Income Tax Expense (Benefit)
The components of the income tax expense (benefit) were as follows:
2018
2017
2016
(in millions)
Current:
Foreign. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 166 $127 $ 59
2
Domestic - Federal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(1)
Domestic - State. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,597
(5)
229
4
Deferred:
Foreign. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Domestic - Federal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Domestic - State. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,758
360
60
(39)
(300)
56
(44)
(9) —
(348)
12
(39)
(109)
(1)
(149)
Income tax expense (benefit). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,410 $372 $ (89)
The Tax Cuts and Jobs Act (‘‘2017 Act’’) was enacted on December 22, 2017. The 2017 Act includes a broad range of
tax reform proposals affecting businesses, including a reduction in the U.S. federal corporate tax rate from 35% to 21%, a
one-time mandatory deemed repatriation tax on earnings of certain foreign subsidiaries that were previously tax deferred and
creates new taxes on certain foreign earnings.
For the year ended June 29, 2018, the Company has not finalized the accounting for the tax effects of the enactment of
the 2017 Act. However, consistent with applicable SEC guidance, the Company has made a reasonable estimate of the effects
on the Company’s existing deferred tax balances and the one-time mandatory deemed repatriation tax required by the 2017
Act and has recognized a provisional income tax expense of $1.57 billion for the one-time mandatory deemed repatriation tax
and a provisional income tax benefit of $65 million related to the re-measurement of deferred tax assets and liabilities for the
year ended June 29, 2018. For other elements of tax expense noted below, or where the Company has not made an election,
the Company has not been able to make a reasonable estimate and continues to account for such items based on the provisions
of the tax laws that were in effect immediately prior to the 2017 Act. As the Company finalizes the accounting for the tax
effects of the enactment of the 2017 Act during the one-year measurement period permitted by applicable SEC guidance, the
Company expects to reflect adjustments to the recorded provisional amounts and record additional tax effects of the 2017
Act.
102
WESTERN DIGITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Additional information regarding the significant provisions of the 2017 Act that are expected to impact the Company
is provided below.
Re-measurement of deferred taxes
The provisional income tax benefit of $65 million recorded for the year ended June 29, 2018 related to the
re-measurements of the Company’s deferred tax balances and is based primarily on the rates at which the deferred tax assets
and liabilities are expected to reverse in the current and future fiscal years, which are generally 29% and 22%, respectively.
However, the Company is still analyzing certain aspects of the 2017 Act and refining the calculations, which could
potentially affect the measurement of these balances or potentially give rise to new deferred tax amounts. The Company is also
analyzing the impact of the 2017 Act to the existing valuation allowance assessments from both a federal and state tax
perspective, which could potentially affect the realizability of the existing deferred tax assets. In calculating the provisional
amount, the Company utilized an estimate of the expected reversals of certain tax assets and liabilities, which will be revised
in future quarters during the one-year measurement period as additional information becomes available. The provisional
income tax benefit for the year ended June 29, 2018 reflects a revision to the Company’s initial provisional estimate resulting
in income tax expense of $23 million for refinements to the expected reversals of deferred tax assets and liabilities.
Mandatory deemed repatriation tax
In connection with the transition from a global to a territorial U.S. tax system, companies are required to pay a
mandatory deemed repatriation tax. For the year ended June 29, 2018, the Company recorded a provisional amount for the
mandatory deemed repatriation tax liability of $1.57 billion for foreign subsidiaries and $131 million of this amount is
classified as a current tax liability. The calculation of the mandatory deemed repatriation tax liability is provisional and based
upon preliminary estimates of post-1986 earnings and profits. In addition, the mandatory deemed repatriation tax is based
on a provisional amount of foreign earnings held in cash and other specified assets, which are taxed at 15.5% and 8%,
respectively, and is payable over an 8-year period. On August 1, 2018, U.S. Treasury issued proposed regulations as guidance
for the mandatory deemed repatriation tax. The Company will continue to evaluate the impact of this guidance through the
end of the one-year measurement period. As such, the provisional amount may change during the one-year measurement
period when the Company finalizes the calculation of post-1986 foreign earnings and profits and the amount of foreign
earnings held in cash or other specified assets. The provisional income tax expense for the year ended June 29, 2018 reflects
a revision to the Company’s initial provisional estimate resulting in income tax benefits of $18 million for the required
utilization of the 2018 generated foreign tax credits and $73 million for potential cash tax payments arising from certain
unrecognized tax benefits that would partially offset the mandatory deemed repatriation tax.
Although the mandatory deemed repatriation tax has removed U.S. federal taxes on distributions to the U.S., the
Company continues to evaluate the expected manner of recovery to determine whether or not to continue to assert indefinite
reinvestment on a part or all the foreign undistributed earnings. This requires the Company to re-evaluate the existing short
and long-term capital allocation policies in light of the 2017 Act and calculate the tax cost that is incremental to the deemed
repatriation tax (e.g., foreign withholding, state income taxes, and additional U.S. tax on currency transaction gains or losses)
of repatriating cash to the U.S. While the provisional tax expense for the year ended June 29, 2018 is based upon an
assumption that foreign undistributed earnings are indefinitely reinvested, the Company’s plan may change upon the
completion of long-term capital allocation plans in light of the 2017 Act and completion of the calculation of the incremental
tax effects on the repatriation of foreign undistributed earnings. In the event the Company determines not to continue to
assert the permanent reinvestment of part or all of foreign undistributed earnings, such a determination could result in the
accrual and payment of additional federal, foreign, state and local taxes.
Deferred taxes on foreign earnings
As a result of the shift to a territorial system for U.S. taxation, the new minimum tax on certain foreign earnings (‘‘global
intangible low-tax income’’) provision of the 2017 Act imposes a tax on foreign earnings and profits in excess of a deemed
return on tangible assets of foreign subsidiaries. This provision is effective for tax years beginning on or after January 1, 2018,
which for the Company would be the fiscal year beginning on June 30, 2018 (fiscal year 2019). The Company has not
103
WESTERN DIGITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
progressed sufficiently in the analysis of this provision to make an election either to account for the effects of this provision
either as a component of future income tax expense in the period the tax arises or as a component of deferred taxes on the
related investments. Accordingly, no deferred tax assets and liabilities have been established for timing differences between
foreign U.S. GAAP income and foreign earnings and profits that would be expected to reverse under the new minimum tax
in future years. Additionally, the Company has not yet completed the calculation of post-1986 foreign earnings and profits
for the mandatory repatriation tax, which would be the starting point for the measurement of deferred tax assets and
liabilities in order to record any provisional amounts.
Undistributed Foreign Earnings
The Company has previously asserted all of its unremitted earnings offshore were permanently reinvested and had not
recorded any deferred taxes related to any outside basis differences associated with its foreign subsidiaries. The estimated
remaining net undistributed earnings from foreign subsidiaries at June 29, 2018 is estimated to be approximately
$17 billion. While the Company has included a provisional estimate of the mandatory deemed repatriation tax on these
earnings, the Company is currently evaluating how the 2017 Act will impact the Company's existing assertion of indefinite
reinvestment and determining a reasonable estimate of the remaining tax liability, if any, for any outside basis differences
after consideration of the mandatory repatriation tax. As such, no change has been made with respect to this assertion for the
year ended June 29, 2018. The Company will complete its analysis of the impact of the 2017 Act on its indefinite
reinvestment assertion and record amounts, such as any remaining outside basis differences, foreign withholding taxes, state
income taxes, and additional U.S. tax on currency transaction gains or losses, if necessary, during the measurement period.
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 29,
2018
June 30,
2017
(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. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
53 $
145
443
448
161
118
84
252
292
283
236
141
Total deferred tax assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred tax liabilities:
1,368
1,288
Long-lived assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unremitted earnings of certain non-U.S. entities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total deferred tax liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Valuation allowances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(491)
(5)
(43)
(539)
(614)
(874)
(38)
(11)
(923)
(518)
Deferred tax assets (liabilities), net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 215 $ (153)
The change from a net deferred tax liability to a net deferred tax asset is primarily due to an increase in the deferred tax
asset for the 2018 generation of net operating losses and business credits of $316 million, the 2018 reversal of the deferred
tax liability associated purchase accounting intangibles of $90 million, and the re-measurement of the Company’s deferred
tax balances of $65 million due to the 2017 Act.
104
WESTERN DIGITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The net deferred tax asset valuation allowance increased by $96 million and $224 million in 2018 and 2017,
respectively. The valuation allowance increase in 2018 is primarily attributable to the 2018 generation of foreign net
operating loss carryforwards of $54 million and state tax credits of $33 million, 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 benefits
from stock-based compensation deductions of $20 million as of June 30, 2017. The reduction in NOL benefits from
stock-based compensation deductions was due to the adoption of ASU 2016-09 during the first quarter of 2018. See Part II,
Item 8, Note 2, Recent Accounting Pronouncements, of the Notes to Consolidated Financial Statements included in this Annual
Report on Form 10-K.
Effective Tax Rate
Under the 2017 Act, the reduction of the U.S. federal corporate tax rate from 35% to 21% is effective January 1, 2018,
requiring companies to use a blended rate for their fiscal 2018 tax year by applying a pro-rated percentage of the number of
days before and after the January 1, 2018 effective date. This results in the use of an estimated annual effective tax rate of
approximately 28% for the Company’s U.S. federal corporate tax rate for fiscal year 2018. For fiscal year 2019 and beyond,
the Company will utilize the enacted U.S. federal corporate tax rate of 21%.
Reconciliation of the U.S. Federal statutory rate to the Company’s effective tax rate is as follows:
2018
2017
2016
U.S. Federal statutory rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tax rate differential on international income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(27)
Tax effect of U.S. non-deductible convertible debt costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — —
Tax effect of U.S. non-deductible acquisition costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — —
1
4
Tax effect of U.S. foreign income inclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1
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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . —
1
Impact of 2017 Act:
(103)
13
10
9
9
1
(1)
28 % 35 % 35 %
(34)
75 —
One-time mandatory deemed repatriation tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(3) —
Re-measurement of deferred taxes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
29
Change in valuation allowance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
5
5
Unremitted earnings of certain non-U.S. entities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . —
Tax related to SanDisk integration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — 12
Retroactive extension of Federal R&D credit. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — —
(12)
Income tax credits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(4)
1
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . —
—
—
16
—
—
(9)
(43)
5
Effective tax rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
68 % 48 % (58)%
105
WESTERN DIGITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
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 expired or will expire in whole or in part at various 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 $519 million, or $1.69 per diluted share,
$467 million, or $1.58 per diluted share, and $500 million, or $2.07 per diluted share, in 2018, 2017, and 2016,
respectively.
As of June 29, 2018, the Company had varying amounts of federal and state NOL/tax credit carryforwards that do not
expire or, if not used, expire in various years. Following is a summary of the Company’s federal and state NOL/tax credit
carryforwards and the related expiration dates of these NOL/tax credit carryforwards:
Jurisdiction
NOL/Tax
Credit
Carryforward
Amount
(in millions)
Federal NOL (Pre 2017 Act Generation) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Federal NOL (Post 2017 Act Generation) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
State NOL. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Federal tax credits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
State tax credits. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$766
704
850
155
550
Expiration
2020 to 2037
No expiration
2022 to 2038
2019 to 2038
No expiration
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 realized will be
reduced by $448 million and state NOLs ultimately realized will be reduced by $435 million. The Company expects the total
amount of federal credits ultimately realized will be reduced by $39 million and state tax credit carryforwards ultimately
realized will be reduced by $550 million.
The Company had varying amounts of foreign NOL carryforwards 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 carryforwards and the
related amounts and expiration dates of these NOL carryforwards are as follows:
Jurisdiction
NOL
Carryforward
Amount
(in millions)
Japan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Belgium . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
China . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Malaysia . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Spain. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$141
86
129
117
56
Expiration
2024 to 2026
No expiration
2023 to 2024
No expiration
No expiration
The Company expects the total amount of NOL carryforwards in Japan ultimately realized will be reduced by
$84 million. The Company expects the NOL carryforwards in Belgium, China and Spain will not be ultimately realized.
106
WESTERN DIGITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
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 29, 2018, June 30, 2017 and July 1, 2016 was $110 million, $89 million and $75 million, respectively.
The following is a tabular reconciliation of the total amounts of unrecognized tax benefits excluding accrued interest
and penalties:
2018
2017
2016
(in millions)
Unrecognized tax benefit, beginning balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $522
38
30
(9)
(19)
(11)
$491
35
Gross increases related to current year tax positions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
3
Gross increases related to prior year tax positions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(8)
Gross decreases related to prior year tax positions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(8)
Settlements. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Lapse of statute of limitations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(19)
Acquisitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — 28
$350
46
6
(15)
(8)
(8)
120
Unrecognized tax benefit, ending balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $551
$522 $491
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 29, 2018, June 30, 2017 and July 1, 2016, 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 2010 through 2017. The Company is no longer subject to
examination by the IRS for periods prior to 2010, 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 2008 through
2017, in Ireland for calendar years 2014 through 2017, in India for fiscal years 2013 through 2017, in Israel for fiscal years
2013 through 2017 and in Japan for fiscal years 2011 through 2017.
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. As previously disclosed, the Company received Revenue Agent Reports
from the IRS, proposing adjustments relating to transfer pricing with the Company’s foreign subsidiaries and intercompany
payable balances. The Company disagrees with the proposed adjustments and in September 2015, filed a protest with the IRS
Appeals Office and received the IRS rebuttal in July 2016. The Company and the IRS Appeals Office did not reach a
settlement on the disputed matters. On June 28, 2018, the IRS issued a statutory notice of deficiency with respect to the
unagreed issues, seeking to increase the Company’s U.S. taxable income by an amount that would result in additional federal
tax through fiscal year 2009 totaling approximately $516 million, subject to interest. The Company intends to file a Petition
with the U.S. Tax Court. 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 Company could
be required to adjust its provision for income taxes in the period such resolution occurs. As of June 29, 2018, it was not
107
WESTERN DIGITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
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:
Year Ended
2018
2017
2016
(in millions, except per share data)
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 675
$ 397
$ 242
Weighted average shares outstanding:
Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Employee stock options, RSUs, PSUs and ESPP. . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
297
10
307
Income per common share
Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$2.27
Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Anti-dilutive potential common shares excluded(1). . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$2.20
2
288
8
296
$1.38
$1.34
3
239
3
242
$1.01
$1.00
5
(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, RSUs and PSUs, and rights to
purchase shares of common stock under the Company’s ESPP.
108
WESTERN DIGITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Note 15. Employee Termination, Asset Impairment and Other Charges
The Company recorded the following charges related to employee terminations benefits, asset impairment, and other
charges:
Employee termination and other charges:
2018
2017
2016
(in millions)
Restructuring Plan 2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 92 $128 $ 77
128
Closure of Foreign Manufacturing Facilities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
94
Business Realignment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
10
72
56
50
Total employee termination and other charges. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
198
210
299
Stock-based compensation accelerations and adjustments
Business Realignment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total stock-based compensation accelerations and adjustments . . . . . . . . . . . . . . . . . . . . . . . . . .
1
1
11
11
Asset impairment: . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
16 —
Restructuring Plan 2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Closure of Foreign Manufacturing Facility. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — 11
Business Realignment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — —
Total asset impairment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
16
11
9
9
5
24
8
37
Total employee termination and other charges, and stock-based compensation accelerations and
adjustments. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $215 $232 $345
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 consists of
asset and footprint reduction, product road map consolidation and organization rationalization. In addition to the amounts
recognized under Restructuring Plan 2016 as presented above, the Company recognized $9 million and $65 million of
accelerated depreciation on facility assets in cost of revenue during the year ended June 29, 2018 and June 30, 2017,
respectively.
The following table presents an analysis of the components of the activity against the reserve during the year ended
June 29, 2018:
Employee
Termination
Benefits
Contract
Termination and
Other
(in millions)
Accrual balance at June 30, 2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Charges. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-cash items and other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrual balance at June 29, 2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 11
68
(74)
—
$ 5
$ 2
24
(23)
(1)
$ 2
Total
$ 13
92
(97)
(1)
$ 7
109
WESTERN DIGITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Closure of Foreign Manufacturing Facilities
In July 2018, the Company announced the closing of its HDD manufacturing facility in Kuala Lumpur, Malaysia, in
order to reduce its manufacturing costs and consolidate HDD operations into Thailand. The Company expects the closure to
be substantially completed by the end of the calendar year 2019 and to result in total pre-tax charges of approximately
$160 million. These charges are expected to consist of approximately $85 million in employee termination benefits and
$75 million in asset-related, contract termination and other charges. During the year ended June 29, 2018, the Company
recognized $56 million in employee termination benefits within Employee termination, asset impairment and other charges
in the Consolidated Statements of Operations.
The following table presents an analysis of the components of the restructuring charges, payments and adjustments
made against the reserve as of June 29, 2018:
Accrual balance at June 30, 2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Charges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrual balance at June 29, 2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Employee
Termination
Benefits
(in millions)
$—
56
$56
The Company incurred charges of $10 million and $128 million in 2017 and 2016, respectively, related to the closure
of its head component front end wafer manufacturing facility in Odawara, Japan. As of June 29, 2018, the Company had
completed all activities related to the closure of the facility.
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
Contract
Termination and
Other
(in millions)
Accrual balance at June 30, 2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Charges. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-cash items and other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrual balance at June 29, 2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 18
43
(29)
(1)
$ 31
$ 5
7
(6)
(1)
$ 5
Total
$ 23
50
(35)
(2)
$ 36
Note 16. 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 cannot 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
110
WESTERN DIGITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
SanDisk prior to the SanDisk Closing Date; ‘‘HGST’’ refers to Hitachi Global Storage Technologies Holdings 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 Corporation and all of its
subsidiaries on a consolidated basis including HGST and SanDisk.
Intellectual Property Litigation
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
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.
Antitrust
In March 2011, a complaint was filed against SanDisk, SD-3C LLC, Panasonic Corporation, Panasonic Corporation of
North America, Toshiba Corporation 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 SD cards, which in turn
allegedly caused the plaintiffs to pay higher prices for SD cards. 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. In July 2018, ten of the thirteen named
plaintiffs voluntarily dismissed their claims against the defendants. Counsel for the remaining named plaintiffs are engaged
in settlement discussions with counsel for the defendants. The case has been stayed pending these settlement discussions. 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
brought on behalf of a purported 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 misstatements 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 Management Holding AG and KBC Asset
Management NV as lead plaintiffs. The lead plaintiffs filed an amended complaint 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.
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 arbitration
proceedings against WD’s German subsidiary (‘‘WD Germany’’) before the Copyright Arbitration Board (‘‘CAB’’) claiming
111
WESTERN DIGITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
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 that it sold in Germany between January 2008 and December 2010. The
judgment specified levy amounts on certain 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.
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.
On or around June 22, 2018, Bitkom, an industry association, and ZPÜ entered into an agreement for regulating the
obligation to pay compensation under copyright law in Germany for hard drives for the period beginning January 1, 2008.
On or around June 29, 2018, the Company elected to join the agreement. Pursuant to the agreement, the Company and ZPÜ
intend to dismiss the actions against each other following an accounting and payment of past liabilities. The entry into this
agreement did not have a material impact on the Company’s financial condition, results of operations or cash flows.
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.
Note 17. Separate Financial Information of Guarantor Subsidiaries
The 2026 Senior Unsecured Notes are fully and unconditionally guaranteed, jointly and severally, on a senior unsecured
basis, subject to certain customary guarantor release conditions, by certain 100% owned material domestic subsidiaries of the
Company (or the ‘‘Guarantor Subsidiaries’’). The guarantee by a Guarantor Subsidiary will be released in the event of (i) 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 2026 Senior Unsecured Notes, (ii) 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 2026 Senior Unsecured Notes, (iii) the sale of all or substantially all of a Guarantor Subsidiary’s assets, (iv) the
Company’s exercise of its defeasance options under the indenture governing the 2026 Senior Unsecured Notes, (v) the
dissolution or liquidation of a Guarantor Subsidiary or (vi) 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 2026 Senior Unsecured Notes. The following condensed consolidating financial information reflects the
summarized financial information of Western Digital Corporation (‘‘Parent’’), the Guarantor Subsidiaries on a combined
basis, and the Non-Guarantor Subsidiaries on a combined basis.
112
WESTERN DIGITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Condensed Consolidating Balance Sheet
As of June 29, 2018
Parent
Guarantor
Subsidiaries
Non-Guarantor
Subsidiaries
Eliminations
Total
Company
ASSETS
Current assets:
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . $
Accounts receivable, net . . . . . . . . . . . . . . . . . . . . . . . . .
Intercompany receivables . . . . . . . . . . . . . . . . . . . . . . . .
Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . .
40
—
1,903
—
20
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 . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,963
—
—
—
—
20,847
943
182
$
668
1,358
4,256
990
195
7,467
1,092
—
387
38
19,893
16
29
(in millions)
$ 4,297
839
2,674
2,159
277
10,246
2,003
2,105
9,688
2,642
—
—
431
$
— $ 5,005
2,197
—
—
(8,833)
2,944
(205)
492
—
10,638
(9,038)
3,095
—
—
2,105
— 10,075
2,680
—
—
(40,740)
—
(959)
642
—
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $23,935
$28,922
$27,115
$(50,737) $29,235
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ — $
Accounts payable to related parties . . . . . . . . . . . . . . . . .
Intercompany payables . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued compensation . . . . . . . . . . . . . . . . . . . . . . . . . .
Current portion of long-term debt . . . . . . . . . . . . . . . . .
—
1,066
198
—
179
Total current liabilities . . . . . . . . . . . . . . . . . . . . . . . .
Long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loans due to consolidated affiliates . . . . . . . . . . . . . . . . . . .
Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total shareholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . .
1,443
10,962
—
(1)
12,404
11,531
279
—
4,648
505
297
—
5,729
—
427
1,768
7,924
20,998
$ 1,986
259
3,119
571
182
—
6,117
31
532
488
7,168
19,947
$
— $ 2,265
259
—
—
(8,833)
1,274
—
479
—
179
—
(8,833)
4,456
— 10,993
—
2,255
(959)
—
(9,792)
(40,945)
17,704
11,531
Total liabilities and shareholders’ equity . . . . . . . . . $23,935
$28,922
$27,115
$(50,737) $29,235
113
WESTERN DIGITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Condensed Consolidating Balance Sheet
As of June 30, 2017
Parent
Guarantor
Subsidiaries
Non-Guarantor
Subsidiaries
Eliminations
Total
Company
ASSETS
Current assets:
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . $
Accounts receivable, net . . . . . . . . . . . . . . . . . . . . . . . . .
Intercompany receivables . . . . . . . . . . . . . . . . . . . . . . . .
Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . .
18
—
1,225
—
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 . . . . . . . . . . . . . . . . . . . . . . . . . . .
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
(in millions)
$ 5,124
701
622
1,494
245
8,186
1,909
1,340
9,683
3,812
—
—
419
$
— $ 6,354
1,948
—
—
(4,375)
2,341
(286)
413
6
11,056
(4,655)
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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ — $
Accounts payable to Flash Ventures . . . . . . . . . . . . . . . .
Intercompany payables . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued compensation . . . . . . . . . . . . . . . . . . . . . . . . . .
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
364
313
—
4,973
—
546
1,243
6,762
19,309
$ 1,887
206
66
621
193
—
2,973
29
4,170
530
7,702
17,647
$
— $ 2,144
206
—
—
(4,375)
1,255
—
506
—
233
—
(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
114
WESTERN DIGITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Condensed Consolidating Statement of Operations
For the year ended June 29, 2018
Parent
Guarantor
Subsidiaries
Non-Guarantor
Subsidiaries
Eliminations
Total
Company
Revenue, net. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ — $14,913
— 12,913
Cost of revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gross profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
—
2,000
Operating expenses:
Research and development . . . . . . . . . . . . . . . . . . . . . . .
Selling, general and administrative . . . . . . . . . . . . . . . . .
Intercompany operating expense (income). . . . . . . . . . . .
Employee termination, asset impairment, and other
charges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total operating expenses. . . . . . . . . . . . . . . . . . . . . . .
Operating income (loss) . . . . . . . . . . . . . . . . . . . . .
—
8
1,551
1,044
— (1,626)
1
9
(9)
47
1,016
984
Interest and other income (expense):
Interest income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other expense, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
211
(674)
(905)
Total interest and other expense, net. . . . . . . . . . . . . .
(1,368)
8
(21)
(9)
(22)
Income (loss) before taxes . . . . . . . . . . . . . . . . . . . . . . . . . .
Income tax expense (benefit) . . . . . . . . . . . . . . . . . . . . . . . .
Equity in earnings from subsidiaries . . . . . . . . . . . . . . . . . .
(1,377)
(354)
1,698
962
1,633
2,223
(in millions)
$20,155
14,573
5,582
$(14,421) $20,647
12,942
(14,544)
123
7,705
849
421
1,626
167
3,063
2,519
51
(191)
(2)
(142)
2,377
131
—
—
—
—
—
—
123
(210)
210
—
2,400
1,473
—
215
4,088
3,617
60
(676)
(916)
— (1,532)
123
—
(3,921)
2,085
1,410
—
Net income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
675
$ 1,552
$ 2,246
$ (3,798) $
675
115
WESTERN DIGITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Condensed Consolidating Statement of Operations
For the year ended June 30, 2017
Parent
Guarantor
Subsidiaries
Non-Guarantor
Subsidiaries
Eliminations
Total
Company
(in millions)
$16,381
12,203
4,178
$(12,020)
(11,968)
$19,093
13,021
(52)
6,072
822
433
1,736
144
3,135
1,043
22
(348)
(61)
(387)
656
395
—
261
—
—
—
—
—
(52)
(354)
354
(62)
(62)
(114)
—
(1,194)
$ (1,308)
$
2,441
1,445
—
232
4,118
1,954
26
(847)
(364)
(1,185)
769
372
—
397
Revenue, net. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ — $14,732
— 12,786
Cost of revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
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
1,946
1,619
1,006
(1,736)
88
977
969
11
(10)
49
50
1,019
259
287
Net income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 397
$ 1,047
$
116
WESTERN DIGITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Condensed Consolidating Statement of Operations
For the year ended July 1, 2016
Parent
Guarantor
Subsidiaries
Non-Guarantor
Subsidiaries
Eliminations
Total
Company
(in millions)
$13,285
10,662
2,623
532
348
1,087
240
2,207
416
24
(8)
(54)
(38)
378
(18)
—
396
$(12,891)
(12,899)
$12,994
9,559
8
—
—
—
—
—
8
(54)
54
—
—
8
—
(721)
(713)
3,435
1,627
997
—
345
2,969
466
26
(266)
(73)
(313)
153
(89)
—
242
$
$
Revenue, net. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ — $12,600
— 11,796
Cost of revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
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
1,095
645
(1,087)
105
758
46
2
(128)
(30)
(156)
(110)
(27)
400
Net income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 242
$
317
$
117
WESTERN DIGITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Condensed Consolidating Statement of Comprehensive Income (Loss)
For the year ended June 29, 2018
Net income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other comprehensive income, before tax:
Actuarial pension loss . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign currency translation adjustment . . . . . . . . . . . . .
Net unrealized gain (loss) on derivative contracts and
available-for-sale securities . . . . . . . . . . . . . . . . . . . . .
Total other comprehensive income, before tax. . . . . . .
Income tax benefit (expense) related to items of other
comprehensive income . . . . . . . . . . . . . . . . . . . . . . . . . .
Other comprehensive income, net of tax . . . . . . . . . . . . . . .
Parent
Guarantor
Subsidiaries
Non-Guarantor
Subsidiaries
Eliminations
Total
Company
$675
$1,552
$2,246
$(3,798)
$675
(in millions)
(2)
18
7
23
(4)
19
(2)
15
(10)
3
1
4
(2)
15
(6)
7
(1)
6
4
(30)
16
(10)
—
(10)
(2)
18
7
23
(4)
19
Total comprehensive income. . . . . . . . . . . . . . . . . . . . . . . .
$694
$1,556
$2,252
$(3,808)
$694
Condensed Consolidating Statement of Comprehensive Income (Loss)
For the year ended June 30, 2017
Parent
Guarantor
Subsidiaries
Non-Guarantor
Subsidiaries
Eliminations
Total
Company
(in millions)
$1,047
$ 261
$(1,308)
$ 397
39
(113)
(75)
(149)
(10)
(159)
39
(136)
(73)
(170)
(8)
(178)
$ 83
(78)
249
148
319
18
337
39
(115)
(75)
(151)
(10)
(161)
$ (971)
$ 236
Net income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 397
Other comprehensive loss, before tax:
Actuarial pension gain . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign currency translation adjustment . . . . . . . . . . . . .
Net unrealized gain (loss) on derivative contracts and
39
(115)
available-for-sale securities . . . . . . . . . . . . . . . . . . . . .
(75)
Total other comprehensive loss, before tax . . . . . . . . .
(151)
Income tax expense related to items of other
comprehensive loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(10)
Other comprehensive loss, net of tax . . . . . . . . . . . . . . . . . .
(161)
Total comprehensive income. . . . . . . . . . . . . . . . . . . . . . . . $ 236
$ 888
118
WESTERN DIGITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Condensed Consolidating Statement of Comprehensive Income (Loss)
For the year ended July 1, 2016
Parent
Guarantor
Subsidiaries
Non-Guarantor
Subsidiaries
Eliminations
Total
Company
$242
$317
$396
$(713)
$242
(in millions)
(73)
74
93
94
23
117
$513
146
(148)
(192)
(194)
(46)
(240)
(73)
74
99
100
23
123
$(953)
$365
Net income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other comprehensive income (loss), before tax:
Actuarial pension loss . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign currency translation adjustment . . . . . . . . . . . . .
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 . . . . . . . . . . . . . . . . . .
(73)
74
99
100
23
123
(73)
74
99
100
23
123
Total comprehensive income. . . . . . . . . . . . . . . . . . . . . . . .
$365
$440
119
WESTERN DIGITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Condensed Consolidating Statement of Cash Flows
For the year ended June 29, 2018
Cash flows from operating activities
Net cash provided by (used in) operating activities . . . $
(144)
$ 211
$ 4,158
$
(20)
$ 4,205
Parent
Guarantor
Subsidiaries
Non-Guarantor
Subsidiaries
Eliminations
Total
Company
(in millions)
—
(220)
(615)
—
(835)
—
—
—
—
—
—
—
—
3,757
(86)
3,671
—
(94)
(21)
—
—
—
—
(2)
—
86
(251)
26
(6)
(68)
48
19
(1,313)
571
20
—
—
(1,318)
—
—
—
—
—
—
—
—
(3,757)
—
(3,757)
26
(100)
(89)
48
19
(1,313)
571
18
—
—
(1,655)
220
—
—
—
220
(171)
(591)
(593)
28
(17,074)
13,840
500
(59)
—
395
—
—
—
—
—
—
—
—
(119)
(385)
(504)
—
(544)
1,212
—
—
—
—
—
—
—
—
(3,638)
(30)
(3,668)
1
(827)
5,124
—
(171)
—
(591)
—
(593)
28
—
— (17,074)
13,840
—
500
—
(59)
—
—
3,757
—
20
3,777
(3,900)
—
—
—
1
(1,349)
6,354
$ 668
$ 4,297
$ — $ 5,005
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 . . . . . . . . . . . . .
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 activities . . .
Cash flows from financing activities
Issuance of stock under employee stock plans . . . . . . . . .
Taxes paid on vested stock awards under employee stock
plans. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Repurchases of common stock. . . . . . . . . . . . . . . . . . . . .
Dividends paid to shareholders . . . . . . . . . . . . . . . . . . . .
Settlement of debt hedge contracts . . . . . . . . . . . . . . . . .
Repayment of debt and premiums . . . . . . . . . . . . . . . . .
Proceeds from debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from (repayment of) revolving credit facility. . .
Debt issuance costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Intercompany loan to consolidated affiliates . . . . . . . . . .
Change in investment in consolidated subsidiaries . . . . .
Net cash used in financing activities . . . . . . . . . . . . . .
(3,505)
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 . . . . . . . . . . . . . . . . $
—
22
18
40
120
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
Eliminations
Total
Company
(in millions)
Cash flows from investing activities
Purchases of property, plant and equipment . . . . . . . . . . . .
Proceeds from the sale of property, plant and
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 loans from consolidated affiliates . . . . . . .
Advances from (to) consolidated affiliates . . . . . . . . . . . . . .
—
—
—
—
—
—
—
—
1,300
(158)
Net cash provided by (used in) investing activities . . .
1,142
Cash flows from financing activities
—
(240)
(338)
21
(281)
94
417
(20)
(549)
292
(31)
—
—
(395)
—
—
—
—
—
—
—
—
—
(1,339)
(8)
(1,347)
(578)
21
(281)
94
417
(20)
(549)
292
(32)
—
—
(636)
—
—
—
—
—
—
—
(1)
39
166
(36)
235
—
—
—
235
—
(124)
—
119
—
—
—
—
—
(574)
(21)
—
(2,995)
(8,702)
—
7,908
(10)
—
— (5,454)
9,348
384
878
—
6
1,206
—
—
61
(492)
—
—
—
—
—
4,115
(9,700)
(6,016)
(3)
(1,821)
6,945
(124)
—
119
—
61
—
(492)
—
(574)
—
—
(21)
— (11,697)
7,908
—
(10)
—
—
1,339
—
(32)
1,307
—
—
—
(4,595)
(3)
(1,797)
8,151
$ 1,212
$ 5,124
$ — $ 6,354
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 and premiums . . . . . . . . . . . . . . . . .
Proceeds from debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Debt issuance costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Intercompany loan to consolidated affiliates . . . . . . . . . .
Change in investment in consolidated subsidiaries . . . . .
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
121
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
Eliminations
Total
Company
(in millions)
Cash flows from operating activities
Net cash provided by 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 . . . . . . . . . . . . . . . . .
—
(233)
— (13,767)
—
—
—
—
—
—
—
—
—
—
(10)
(34)
40
(6,000)
(96)
(8,845)
Net cash provided by (used in) investing activities . . .
(14,879)
(14,066)
(351)
3,932
(632)
1,204
405
(106)
16
(32)
—
(229)
4,207
—
(584)
— (9,835)
—
(632)
1,204
—
405
—
(106)
—
16
—
(76)
—
—
5,960
—
9,170
15,130
(9,608)
117
—
—
—
117
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. . . . . . . . . . . . . . . . . . . . .
Dividends paid to shareholders . . . . . . . . . . . . . . . . . . . .
Repayment of debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from (repayment of) revolving credit facility. . .
Debt issuance costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Payment upon settlement of acquired warrants . . . . . . . .
Intercompany loan from (to) consolidated affiliates . . . . .
Change in investment in consolidated subsidiaries . . . . .
(50)
7
—
—
(60)
(464)
—
14,108
—
(497)
—
—
1,928
—
—
—
—
—
—
(2,313)
3,000
—
(27)
—
6,000
6,933
Net cash provided by (used in) financing activities . . .
15,089
13,593
Effect of exchange rate changes on cash . . . . . . . . . . . . . . . .
Net increase (decrease) in cash and cash equivalents . . . . . .
Cash and cash equivalents, beginning of year . . . . . . . . . . .
—
—
—
—
545
661
—
—
409
(2,611)
—
—
—
—
(255)
—
(613)
(40)
185
(2,925)
1
2,582
4,363
(50)
—
7
—
—
409
— (2,611)
—
(60)
(464)
—
— (2,313)
— 17,108
(255)
—
(524)
—
(613)
—
—
(5,960)
—
(9,046)
(15,006)
10,751
—
—
—
1
3,127
5,024
Cash and cash equivalents, end of year . . . . . . . . . . . . . . . . $
— $ 1,206
$ 6,945
$
— $ 8,151
122
WESTERN DIGITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Note 18. Quarterly Results of Operations (unaudited)
First
Second
Third
Fourth
(in millions, except per share amounts)
2018
Revenue, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gross profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Operating income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income (loss). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$5,181
1,913
905
681
$5,336
2,013
955
(823)
$5,013
1,927
914
61
$5,117
1,852
843
756
Basic income (loss) per common share . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 2.31
$ (2.78)
$ 0.20
$ 2.53
Diluted income (loss) per common share . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 2.23
$ (2.78)
$ 0.20
$ 2.46
First
Second
Third
Fourth
(in millions, except per share amounts)
2017
Revenue, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gross profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Operating income (loss). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income (loss). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$4,714
1,335
232
(366)
$4,888
1,533
545
235
$4,649
1,523
525
248
$4,842
1,681
652
280
Basic income (loss) per common share . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ (1.28)
$ 0.82
$ 0.86
$ 0.96
Diluted income (loss) per common share . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ (1.28)
$ 0.80
$ 0.83
$ 0.93
123
Item 9.
Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
None.
Item 9A. Controls and Procedures
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 reporting (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 necessary 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 reporting. 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 29,
2018, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
We are implementing an enterprise resource planning (‘‘ERP’’) system on a worldwide basis, which is expected to
improve the efficiency of certain financial and related transactional processes. The gradual implementation is expected to
occur in phases over the next several years. We have completed the implementation of certain processes, including the
financial consolidation and reporting and supplier management processes, and have revised and updated the related controls.
These changes did not materially affect our internal control over financial reporting. As we implement the remaining
functionality under this ERP system over the next several years, we will continue to assess the impact on our internal control
over financial reporting.
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
124
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. Other Information
None.
125
PART III
Item 10. Director, Executive Officers and Corporate Governance
There is incorporated herein by reference the information required by this Item included in the Company’s Proxy
Statement for the 2018 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 29, 2018. 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 Corporate 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.
Executive Compensation
There is incorporated herein by reference the information required by this Item included in the Company’s Proxy
Statement for the 2018 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 29, 2018.
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
There is incorporated herein by reference the information required by this Item included in the Company’s Proxy
Statement for the 2018 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 29, 2018.
Item 13. Certain Relationships and Related Transactions, and Director Independence
There is incorporated herein by reference the information required by this Item included in the Company’s Proxy
Statement for the 2018 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 29, 2018.
Item 14. Principal Accounting Fees and Services
There is incorporated herein by reference the information required by this Item included in the Company’s Proxy
Statement for the 2018 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 29, 2018.
126
Item 15.
Exhibits, Financial Statement Schedules
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.
All schedules are omitted as the required information is immaterial, inapplicable or the information is presented in the
Consolidated Financial Statements or related Notes.
(3) Exhibits. The exhibits listed in the Exhibit Index below 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 representations 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
developments, 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.
127
Exhibit
Number
2.1
3.1
3.2
4.1
4.2
4.3
4.4
10.1
10.1.1
10.1.2
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 May 2, 2018
(Filed as Exhibit 3.1 to the Company’s Current Report on Form 8-K (File No. 1-08703) with the
Securities and Exchange Commission on May 7, 2018)
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 4.1 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)
Indenture (including Form of 4.750% Senior Notes due 2026), dated as of February 13, 2018, 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 4.1 to the Company’s Current Report on Form 8-K (File No. 333-222762) with the Securities
and Exchange Commission on February 13, 2018)
Indenture (including Form of 1.50% Convertible Senior Notes due 2024), dated as of February 13, 2018,
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. 333-222762) with the Securities
and Exchange Commission on February 13, 2018)
Western Digital Corporation 2017 Performance Incentive Plan (formerly named the Western Digital
Corporation Amended and Restated 2004 Performance Incentive Plan), amended and restated as of
August 3, 2017 (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 2, 2017)*
Form of Notice of Grant of Stock Option and Option Agreement - Executives, under the Western Digital
Corporation 2017 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 6, 2018)*
Form of Notice of Grant of Stock Option and Option Agreement - Non-Executives, under the Western
Digital Corporation 2017 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 6, 2018)*
128
Exhibit
Number
10.1.3
10.1.4
10.1.5
10.1.6
10.1.7
10.1.8
10.1.9
10.1.10
10.1.11
Description
Form of Notice of Grant of Stock Units and Stock Unit Award Agreement - Executives, under the
Western Digital Corporation 2017 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 6, 2018)*
Form of Notice of Grant of Stock Units and Stock Unit Award Agreement, under the Western Digital
Corporation 2017 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 6, 2018)*
Form of Notice of Grant of Performance Stock Units and Performance Stock Unit Award Agreement -
Executives, under the Western Digital Corporation 2017 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 6, 2018)*
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 (now named the Western Digital Corporation 2017 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)*
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 (now named the Western Digital Corporation 2017 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 (now named the Western Digital Corporation 2017 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
(now named the Western Digital Corporation 2017 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 for
Mark Long, dated September 17, 2015, under the Western Digital Corporation Amended and Restated
2004 Performance Incentive Plan (now named the Western Digital Corporation 2017 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 (now named the Western Digital Corporation 2017 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)*
129
Exhibit
Number
10.1.12
10.1.13
10.1.14
10.2
10.3
10.4
10.5
10.6
10.7
10.8
10.9
10.10
10.11
Description
Western Digital Corporation Amended and Restated 2004 Performance Incentive Plan (now named the
Western Digital Corporation 2017 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 2017 Performance Incentive Plan Non-Employee Director Restricted Stock
Unit Grant Program, as amended November 1, 2017 (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 February 6,
2018)*
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)*
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)*
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†*
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)
130
Exhibit
Number
10.11.1
10.11.2
10.11.3
10.11.4
10.11.5
10.11.6
10.11.7
10.11.8
Description
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)
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)
Amendment No. 5, dated as of November 8, 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 November 8, 2017)
Amendment No. 6, dated as of November 29, 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 November 29, 2017)
Amendment No. 7, dated as of February 27, 2018, 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 February 27, 2018)
Amendment No. 8, dated as of May 15, 2018, 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
May 15, 2018)
131
Exhibit
Number
10.12
10.13
10.14
10.15
10.16
10.17
10.18
10.19
10.20
Description
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 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)
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)#
FAL Commitment and Extension Agreement, dated as of December 12, 2017, by and among Western
Digital Corporation, SanDisk LLC, SanDisk (Ireland) Limited and Toshiba Memory Corporation (Filed as
Exhibit 10.6 to the Company’s Quarterly Report on Form 10-Q (File No. 1-08703) with the Securities
and Exchange Commission on February 6, 2018)#
Y6 Facility Agreement, dated as of December 12, 2017, by and among Western Digital Corporation,
SanDisk LLC, SanDisk (Cayman) Limited, SanDisk (Ireland) Limited, SanDisk Flash B.V., Flash Partners,
Ltd., Flash Alliance, Ltd., Flash Forward, Ltd. and Toshiba Memory Corporation (Filed as Exhibit 10.7 to
the Company’s Quarterly Report on Form 10-Q (File No. 1-08703) with the Securities and Exchange
Commission on February 6, 2018)#
Confidential Settlement and Mutual Release Agreement, dated as of December 12, 2017, by and among
Western Digital Corporation, SanDisk LLC, SanDisk (Cayman) Limited, SanDisk (Ireland) Limited,
SanDisk Flash B.V., Toshiba Corporation and Toshiba Memory Corporation (Filed as Exhibit 10.8 to the
Company’s Quarterly Report on Form 10-Q (File No. 1-08703) with the Securities and Exchange
Commission on February 6, 2018)#
132
Exhibit
Number
10.21
Description
Confidential Settlement and Mutual Release Agreement, dated as of December 12, 2017, by and among
Western Digital Corporation, SanDisk LLC, SanDisk (Cayman) Limited, SanDisk (Ireland) Limited,
SanDisk Flash B.V., Bain Capital Private Equity, L.P., BCPE Pangea Cayman, L.P., BCPE Pangea
Cayman2, Ltd., Bain Capital Fund XII, L.P., Bain Capital Asia Fund III, L.P. and K.K. Pangea (Filed as
Exhibit 10.9 to the Company’s Quarterly Report on Form 10-Q (File No. 1-08703) with the Securities
and Exchange Commission on February 6, 2018)#
12.1
Statement of Computation of Ratio of Earnings to Fixed Charges†
21
23
31.1
31.2
32.1
32.2
Subsidiaries of Western Digital Corporation†
Consent of Independent Registered Public Accounting Firm†
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 applicable
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 furnish
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.
Item 16.
Form 10-K Summary
None.
133
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 24, 2018
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
Chief Executive Officer, Director
(Principal Executive Officer)
/s/ MARK P. LONG
Mark P. Long
President WD Capital, Chief Strategy Officer
and Chief Financial Officer
(Principal Financial Officer and
Principal Accounting Officer)
August 24, 2018
August 24, 2018
/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
Chairman of the Board
August 24, 2018
August 24, 2018
August 24, 2018
August 24, 2018
August 24, 2018
August 24, 2018
August 24, 2018
Director
Director
Director
Director
Director
Director
134
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WESTERN DIGITAL CORPORATION
RECONCILIATION OF GAAP TO NON-GAAP FINANCIAL MEASURES
(in millions, except percentages and per share information, unaudited)
Reconciliation of non-GAAP operating expenses:
GAAP operating expenses
$
4,088
$
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
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 expenses
Reconciliation of non-GAAP operating income:
GAAP operating income
Gross profit adjustments
Operating expenses adjustments
Non-GAAP operating income
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
Free cash flow:
Cash flows provided by operating activities
Purchases of property, plan and equipment, net
Activity related to Flash Ventures, net
Free cash flow
$
$
$
$
$
$
$
$
Year Ended
June 29, 2018
Year Ended
June 30, 2017
20,647
$
19,093
$
$
7,705
$
1,022
49
-
(7)
-
$
8,769
$
37.3%
42.5%
6,072
1,003
49
18
68
5
7,215
31.8%
37.8%
4,118
(159)
(333)
(232)
(17)
(86)
(8)
3,283
1,914
1,143
835
(163)
(327)
(215)
(13)
(19)
3
3,354
$
3,617
1,064
734
5,415
$
3,932
675
$
1,185
376
215
13
12
10
899
2
1,136
397
1,162
382
232
35
154
6
274
67
11
4,523
$
2,720
307
296
2.20
14.73
$
$
1.34
9.19
4,205
(809)
(742)
2,654
FOOTNOTES:
This annual report contains the following financial measures that are not in accordance with U.S. generally accepted accounting
principles (“GAAP”): non-GAAP gross profit; non-GAAP gross margin; non-GAAP operating expenses; non-GAAP operating income;
non-GAAP net income; non-GAAP diluted income per common share and free cash flow (“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. The company 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, the company believes these non-GAAP measures
provide useful information to both management and investors as they exclude certain expenses, gains and losses that the company
believes are not indicative of its core operating results or because they are consistent with the financial models and estimates
published by many analysts who follow the company and its 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, convertible debt activity, debt extinguishment
costs, other charges, and income tax adjustments, and the company believes these measures along with the related reconciliations
to the GAAP measures provide additional detail and comparability for assessing the company’s results. These non-GAAP measures
are some of the primary indicators management uses for assessing the company’s 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.
Free cash flow is a non-GAAP financial measure defined as cash flows provided by operating activities less purchases of property,
plant and equipment, net of proceeds from sales of property, plant and equipment, and the activity related to Flash Ventures,
net. The company considers free cash flow to be useful as an indicator of its overall liquidity, as the amount of free cash flow
generated in any period is representative of cash that is available for strategic opportunities including, among others, investing
in the company’s business, making strategic acquisitions, strengthening the balance sheet, repaying debt, paying dividends and
repurchasing stock.
As described above, the company excludes the following items from its non-GAAP measures:
Amortization of acquired intangible assets. The company incurs expenses from the amortization of acquired intangible assets over
their economic lives. Such charges are significantly impacted by the timing and magnitude of the company’s 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 the company’s control, the company believes excluding stock-based
compensation expense enhances the ability of management and investors to understand and assess the underlying performance
of its business over time and compare it against the company’s 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 the company’s operations
with anticipated market demand or to achieve cost synergies from the integration of acquisitions, the company may terminate
employees and/or restructure its operations. During the fiscal years ended June 29, 2018 and June 30, 2017, the company incurred
charges related to restructuring actions as more fully described in Part II, Item 8, Note 15, Employee Termination, Asset Impairment
and Other Charges, of the Notes to the Consolidated Financial Statements included in the Company’s Annual Report of Form 10-K
for the year ended June 29, 2018. From time-to-time, the company 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 the company believes are not indicative of the underlying performance of its business.
Acquisition-related charges. In connection with the company’s business combinations, the company incurs expenses which it
would not have otherwise incurred as part of its 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. The company 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 the company
believes are not indicative of the underlying performance of its business.
Charges related to cost saving initiatives. In connection with the transformation of the company’s business, the company has
incurred charges related to cost saving initiatives which do not qualify for special accounting treatment as exit or disposal activities.
These charges, which the company believes are not indicative of the underlying performance of its business, primarily relate to
costs associated with rationalizing the company’s channel partners or vendors, transforming the company’s information systems
infrastructure, integrating the company’s product roadmap, and accelerated depreciation on assets.
Convertible debt activity, net. The company excludes non-cash economic interest expense associated with its convertible notes,
the gains and losses on the conversion of its 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 the company’s
operating results, and the company believes are not indicative of the underlying performance of its business.
Debt extinguishment costs. From time-to-time, the company replaces its existing debt with new financing at more favorable
interest rates or utilizes available capital to settle debt early, both of which generate interest savings in future periods. The company
incurs 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 do not reflect the company’s operating results, and the company believes are not
indicative of the underlying performance of its business.
Other charges. From time-to-time, the company sells or impairs investments or other assets which are not considered necessary
to its business operations, or incurs other charges or gains that the company believes are not a part of the ongoing operation of its
business. The resulting expense or benefit is inconsistent in amount and frequency.
Income tax adjustments. Income tax adjustments include 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. Additionally,
as a result of the Tax Cuts and Jobs Act, the twelve months ended June 29, 2018 income tax adjustments include a provisional
income tax expense of $1.6 billion for the one-time mandatory deemed repatriation tax and a provisional income tax benefit of
$65 million related to the re-measurement of deferred tax assets and liabilities.
Corporate Information
BOARD OF DIRECTORS
EXECUTIVE OFFICERS
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
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, Silicon
Technology & Manufacturing
Lori S. Sundberg
Executive Vice President and Chief
Human Resources Officer
Matthew E. Massengill
Chairman of the Board
Former President and Chief Executive Officer
Western Digital Corporation
Martin I. Cole
Former Chief Executive
Accenture plc Technology Group
Kathleen A. Cote
Former Chief Executive Officer
Worldport Communications, Inc.
Henry T. DeNero
Former Chief Executive Officer
Homespace, Inc.
Tunç Doluca
President and Chief Executive Officer
Maxim Integrated
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
Chief Financial Officer
Macy’s, Inc.
Corporate Headquarters
Western Digital Corporation
5601 Great Oaks Parkway
San Jose, CA 95119
P: 408.717.6000
Investor Relations
W: investor.wdc.com
E: investor@wdc.com
P: 800.695.6399
Worldwide Websites
g-technology.com
sandisk.com
wdc.com
Transfer Agent and Registrar
American Stock Transfer & Trust Company, LLC
Operations Center
6201 15th Avenue
Brooklyn, New York 11219
W: 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; product and technology platform; positioning and opportunities in the data storage industry; flash
memory demand-supply and market trends; 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: 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, G-Technology, HGST, SanDisk, and WD are registered trademarks or trademarks of Western Digital Corporation or its affiliates in the U.S. and/or other countries. All other
marks are the property of their respective owners.
As used for storage capacity, one terabyte (TB) = one trillion bytes. Total accessible capacity varies depending on operating environment.
© 2018 Western Digital Technologies, Inc. All rights reserved.
2278–001005-A14 Sept. 2018
2018
ANNUAL
REPORT
AND FORM 10-K