UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K


(Mark One)
ýANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended June 30, 2017July 3, 2020
Or
oTRANSITION 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


wdc-20200703_g1.gif
WESTERN DIGITAL CORPORATION
(Exact Name of Registrant as Specified in Its Charter)

Delaware33-0956711
Delaware33-0956711
(State or other jurisdiction of

incorporation or organization)
(I.R.S. Employer
Identification No.)
5601 Great Oaks Parkway
San Jose, CaliforniaCalifornia95119
(Address of principal executive offices)(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 classTrading symbol(s)Name of each exchange on which registered
Common Stock, $.01 Par Value Per ShareWDCThe NASDAQNasdaq Stock Market LLC
(NASDAQNasdaq 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  ý    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  ý
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  ý    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  ý    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, a 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
ý
Accelerated filer
¨
Non-accelerated filer
¨
Smaller reporting company
¨
Emerging growth company
¨
(Do not check if a smaller reporting company)
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.    ¨

Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).    Yes  ¨    No  ý
The aggregate market value of the registrant’s common stock held by non-affiliates of the registrant on December 30, 2016,January 3, 2020, the last business day of the registrant’s most recently completed second fiscal quarter, was $15.0$15.7 billion, based on the closing sale price as reported on the NASDAQNasdaq Global Select Market.
There were 294,875,015302,525,787 shares of common stock, par value $0.01 per share, outstanding as of the close of business on August 16, 2017.
19, 2020.
Documents Incorporated by Reference
Part III incorporates by reference certain information from the registrant’s definitive proxy statement (the “Proxy Statement”) for the 20172020 Annual Meeting of Stockholders, which will be filed with the Securities and Exchange Commission within 120 days after the end of the 20172020 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.


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WESTERN DIGITAL CORPORATION
INDEX
PAGE NO.
PART I
Item 1.Business
Item 1A.Risk Factors
Item 1B.Unresolved Staff Comments
Item 2.Properties
Item 3.Legal Proceedings
Item 4.Mine Safety Disclosures
PART II
Item 5.Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Item 6.Selected Financial Data
Item 7.Management’s Discussion and Analysis of Financial ConditionsCondition and Results of Operations
Item 7A.Quantitative and Qualitative Disclosures About Market Risk
Item 8.Financial Statements and Supplementary Data
Item 9.Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
Item 9A.Controls and Procedures
Item 9B.Other Information
PART III
Item 10.Director, Executive Officers and Corporate Governance
Item 11.Executive Compensation
Item 12.Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Item 13.Certain Relationships and Related Transactions, and Director Independence
Item 14.Principal Accounting Fees and Services
PART IV
Item 15.Exhibits and Financial Statement Schedules
Item 16.Form 10‑K10-K Summary


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.717-6000.


Western Digital, WD, the WDWestern Digital logo, G-Technology, SanDisk and SanDiskWD are registered trademarks or trademarks of Western Digital Corporation or its affiliates in the U.S. and/or other countries. All other trademarks, registered trademarks and/or service marks, indicated or otherwise, are the property of their respective owners.



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FORWARD-LOOKING STATEMENTS


This document contains forward-looking statements within the meaning of the federal securities laws. Any statements that do not relate to historical or current facts or matters are forward-looking statements. You can identify some of the forward-looking statements by the use of forward-looking words, such as “may,” “will,” “could,” “would,” “project,” “believe,” “anticipate,” “expect,” “estimate,” “continue,” “potential,” “plan,” “forecast,” and the like, or the use of future tense. Statements concerning current conditions may also be forward-looking if they imply a continuation of current conditions. Examples of forward-looking statements include, but are not limited to, statements concerning:


expectations concerning the integration of, and anticipated benefits from, our acquisition of SanDisk Corporation;
expectations regarding the integration of our HGST and WD subsidiaries following the decision by the Ministry of Commerceeffects of the People’s Republic of China in October 2015;COVID-19 pandemic and measures intended to reduce its spread;
expectations regarding our Flash Ventures joint venture with Toshiba;Kioxia Corporation, the flash industry and our flash wafer output plans;
expectations regarding the growth of digital data and demandpricing conditions for digital storage;flash products;
expectations regarding our business strategy, our ability to execute that strategy and its intended benefits;cost saving initiatives;
expectations with respect to relationships with our customers, employees, suppliers and strategic partners;
our plans to develop and invest in new products and expand into new storage markets and into emerging economic markets;
expectations regarding the personal computer marketour product development and the emergence of new storage markets for our products;technology plans;
expectations regarding the amount and timing of charges and cash expenditures associated with our restructuring activities;
our quarterly cash dividend policy;
expectations regarding the outcome of legal proceedings in which we are involved;
our reinvestment in the business and ongoing deleveraging efforts;
our share repurchase program and resumption of our quarterly cash dividend policy;
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,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.



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  PART I


Item 1.
Business

GeneralItem 1. Business


General

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. We create environments for data to thrive. We are driving the innovation needed to help customers capture, preserve, access and transform an ever-increasing diversity of data. Everywhere data lives, from advanced data centers to mobile sensors to personal devices, our industry-leading solutions deliver the possibilities of data.

Our broad portfolio of technology and products address the following key end markets: Client Devices; Data Center Devices and Solutions; Client Devices; and Client Solutions. We also generate license and royalty revenue related tofrom our extensive intellectual property (“IP”), which is included in each of thethese three end market categories.


We have a rich heritage of innovation and operational excellence, a wide range of IP assets and broad research and development (“R&D”) capabilities. The growth and the value of data continues unabated which in turn is rapidly evolving the landscape of storage markets we serve. We estimate that on a worldwide basis, the rate at which data is stored will likely increase 400% by the year 2020. We are transforming ourselves to address this growth by providing the broadest range of storage technologies, deep product portfolio and global reach in the industry. Founded in 1970 in Santa Ana, California and now headquartered in San Jose, California, Western Digital has one of the technology industry’s most valuable patent portfolios with more than 14,000approximately 13,500 active 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 what we believe to be the broadest range of storage technologies in the industry with a comprehensive product portfolio and global reach. Our devices and solutions are made using either rotating magnetic technology, hard disk drives (“HDD”), or semiconductor technology, referred to as flash-based memory (“flash”).


Built on decades of expertise in developing leading technology and components, we are enabling enterprisesWe enable cloud service providers to collect virtually limitless data and helping cloud providers build more powerful, cost effective and efficient data centers. We have deep relationships with the fulla large 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 people with effective tools to manage fast-accumulating libraries of personal content. We market our products primarily underWestern Digital data-centric solutions are comprised of the HGST, SanDiskWestern Digital®, G-Technology™, SanDisk® and WD brands, and ourWD® 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 NAND-flashflash-based components into products and solutions in our broad portfolio.solutions. We operate a series of joint ventures in Yokkaichi, Japan,with Kioxia Corporation (“Kioxia,” formerly known as Toshiba Memory Corporation) that providesprovide us with industry leading NAND-flash technology forflash-based memory wafers that we use in our solid-state offerings (seeproducts (see “Ventures with Toshiba” Section below)Kioxia” section below).


We believe we are well positioned to capitalize on the ongoing expansion in digital content generation and management. These trends areThis fundamental trend is linked directly to commercial enterprises’ and consumers’ increasingly ubiquitous experience with data and the increasing value of that data. The continued growth of data and the value creation of this data are driving the need for data storage and extraction of value from the long-term retention of as much data as possible.data. The ways in which people and organizations are creating and using data are changing and that the amount of data considered useful to store is expanding. Increasingly, more and moreMore digital content is being stored and managed in a cloud environment on both hard disk drives (“HDDs”)HDDs and flash-based solid state drives (“SSDs”SSD”), and we believe we are well positioned to continue to play a role in this transition.. With a focus on innovation and user value creation, our goal is to grow through continued strong execution and with targeted investments in data center infrastructure, mobility and the cloud.


Industry


We operate in the data storage and data management industry. Our devices and solutions are made using either rotating magnetic or NAND-flash technologies that together provide a broad range of reliability, performance, storage capacity and data retention capabilities to our customers. With increasingThe ability to capture and create meaning and value from data, we believe our customers view insights gained fromthrough the use of data analytics as one of their mostis increasingly important assets.to our customers. In a connected global marketplace, across the data infrastructure, there ishas been a proliferation in the methods by and the rates at which content is generated, accessed, transformed, 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 edge and end-point use cases such as mobile, computing and consumer electronic devices, as well as in a wide range of storage systems, servers and data centers.



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The storage industry is increasingly utilizing tiered architectures with HDDs, SSDs and other NAND-flash storage devices to address an expanding set of uses and applications.
The growth in computing complexity, cloud computing applications, connected mobile devices and Internet connected products is driving unabated growth in the world continues unabated, creating the need for greater volumesvolume of digital content to be stored, which in turn, drivesstored. This growth has led to a proliferationcreation of new form factors for data storage. The storage form factors. In addition, weindustry is increasingly utilizing tiered architectures with HDDs, SSDs and other non-volatile memory-based storage to address an expanding set of uses and applications. We continuously monitor the advantages, disadvantages and advances of the full array of storage technologies, and reviewincluding reviewing these technologies with our customers, on an ongoing basis to ensure we are appropriately resourced to meet our customers’storage needs. Storage solutions that hold large amounts of data are a key enablerenablers of the trends seen in the evolution of a data driven economy, underpinned by the proliferationincrease of digital content creation, consumption and monetization.


We are a market and customer driven company, focused on growth, technology, 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 advisor and market makerbusiness 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 believe that our product platform is broad-based and compelling, and our unique competitive advantages with growth drivers will continue to provide us the opportunityevolve 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 changing and growing storage ecosystem.ecosystem with our diversified product platform and unique competitive advantages.


Competition


Our industry is highly competitive. We compete with manufacturers of HDDs and NAND-flashflash-based memory for client devices and solutions, and data center devices and solutions. TheIn HDD, market consists of three principal manufacturers:we compete with Seagate Technology plc with its Maxtor and Samsung brands, Toshiba Corporation (“Toshiba”) and Western Digital, with our HGST and WD brands.Electronic Devices & Storage Corporation. In NAND-flash memory,flash, we compete with a wide range of manufacturers, from numerous small startup companies to large multinational corporations, including captive NANDvertically integrated suppliers SK Hynix, Inc. (“SK Hynix”),such as Intel Corporation, (“Intel”),Kioxia, Micron Technology, Inc., Samsung Electronics Co., Ltd. (“Samsung Electronics”), SK hynix, Inc., Yangtze Memory Technologies Co., Ltd. and Toshiba.numerous smaller companies that assemble flash into products.


Business Strategy


Our overall strategy is to leverage our technology, 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 enableshas enabled the unabated proliferation of data. We believe we are the only company in the world with large-scale capabilities to develop and manufacture a portfolio of integrated data storage solutions that are based on both rotating magnetic and flash memory technologies. We strive to successfully execute our strategy through the following foundational elements:

Focus on strategy and execution: We focus on both strategy and executionelements in order to deliver the best outcome for our customers, partners, investors and employees;
employees:


Optimize our core HDD business:Technology Leadership: We are focused on delivering the best valuecontinue to innovate and develop advanced technologies across platforms for our customers in data center and client markets through a relentless focus on operational excellence and continued innovation;

Lead in NAND-flash memory and solutions: We strategically align our investments to focus on established profitable and growing markets, as well as on emerging markets such as “Internet of Things”, commonly referred to as “IoT”, to enable our future growth;

Grow in higher value markets with a blend ofboth HDD and NAND-flash technologies: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 in both HDD and flash to deliver compelling and differentiated integrated storage solutions to our customers that offer the best combinations of performance, cost, power consumption, form factor, quality and reliability; and

Align our retail offerings and client solutions portfolio: We compete with the industry’s broadest portfolio of storage offerings for consumers in all the channels we servereliability, while creating new use cases for our solutions in emerging markets.


Operational Excellence: We believeare 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 across both HDD and flash technologies 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 data storage industry:


differentiates us as the leading developer and manufacturer of integrated products and solutions based on both HDD and flash, making us a more strategic supply partner to our large-scale customers who have storage needs across the data infrastructure ecosystem;

enables scaling for efficiency and flexibility, allowing us to leverage our HDD and flash R&D and capital expenditures to deliver storage solutions to multiple markets;


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results in continued diversification of our HDD and flash storage solutions portfolio and entry into additional growing adjacent markets; and


allows us to achieve strong financial performance, including healthy cash generation, thereby enabling allocation of capital to shareholdersorganic and strategic long-terminorganic business investments in innovative technologies.and facilitating our ongoing deleveraging efforts.


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, smart video 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, Internet of Things (“IoT”), industrial and connected home applications; and flash-based memory wafers and components. Our HDDs and SSDs are designed for use in devices requiring high performance, reliability and capacity with various attributes such as low cost per gigabyte (“GB”), quiet acoustics, low power consumption and protection against shocks.

Data Center Devices and Solutions


Data Center Devices and Solutions consist of high-performance and high-capacity enterprise HDDs and high-performance enterprise SSDs, data center software and system solutions.platforms. Our nearline capacity enterprise helium hard drives provide the massive high capacity storage needs and low total cost of ownership benefitsper GB for the growing hyperscalecloud data center market. These drives are primarily for use in data storage systems, in tiered storage models and where data must be stored reliably for years. Our high-performance enterprise class HDDsSSDs 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”) and are primarily for use in data storage systems, in tiered storage models and where data must be stored reliably for years. Our enterprise SSDs include high-performance NAND-flash SSDs and software solutions designed to improve the performance in various enterprise workload environments and encompass all major storage interface protocols. Our system solutions provide petabyte scalable capacity with high performance at compelling economics. We also provide higher value data storage platforms and systems to the market through our vertically integrated scale-out object storage active archive systems.market.

Client Devices

Client Devices consist of HDDs and SSDs for computing devices, such as desktop and notebook PCs, security surveillance systems, gaming consoles and set top boxes; NAND-flash embedded storage products for mobile phones, tablets, notebook PCs and other portable and wearable devices, automotive, IoT and connected home applications; and NAND-flash memory wafers. Our HDDs and SSDs are designed for use in devices requiring high performance, 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 NAND-flash and mobile dynamic random-access memory (“DRAM”) in an integrated package.


Client Solutions


Client Solutions consist of HDDs and SSDs embedded into external storage products and removable NAND-flashflash-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 portable 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 surveillancesmart video 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 in other aspects of the magnetic recording system such as HDD mechanics, controller and firmware technology, in order to secure our competitive position and cost structure. To support our ongoing efforts of driving innovation and continued areal density leadership, we are actively investing in both microwave-assisted magnetic recording (“MAMR”) and heat-assisted magnetic recording (“HAMR”) technology. As part of our energy-assisted recording technology roadmap, in 2019 we introduced our 16-, 18-, and 20-terabyte drives that are using energy-assisted perpendicular magnetic recording (“ePMR”) technology.

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Solid State Storage


Solid state storage products provide non-volatile data storage based on NAND-flashflash 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 NAND-flashflash-based technology which we develop and manufacture through our business ventures with Toshiba.Kioxia. We focusdevote significant research and development and effort on developingresources to the development of highly reliable, high-performance, cost-effective NAND-flashflash-based technology. Over time, we have successfully developed and commercialized an increased number of storage bits per cell in an increasingly smaller form factor, further driving cost reductions.

In 2017, we achieved major milestones Following our introduction and commercialization in NAND-flash technology. We have:

successfully introduced and commercialized 3-dimensional (“3D”) NAND technology, which we refer to as BiCS3, with 64 layers2018 of vertical storage capability which features advances in high aspect ratio semiconductor processing. A key focus for us in BiCS3 is the use of X3 technology;

successfully developed and commercialized the world’s first 512-gigabit 64-layer 3D NAND chipproducts based on our BiCS3 technology;4-bits-per-cell architectures (“QLC technology”) and

successfully developed our next generation of on 3-dimensional flash technology (“3D NAND,NAND”), which we refer to as BiCS4, with 96 layerswe started shipping products based on QLC and our 4th generation 96-layer BiCS4 technologies in 2019. Our BiCS4 QLC technology delivers an industry-leading storage capacity of vertical1.33 terabits on a single chip. We have also begun initial shipments of our 5th generation 112-layer BiCS5 products.In addition, we implemented our advanced UFS and e.MMC interface in a new portfolio of advanced embedded flash drives to empower smartphone users to unlock the full potential of today’s data-driven applications and experiences. We also provide a range of embedded storage capability, which will be available in 3-bits-per-cellsolutions for customers developing high-end, highly demanding, and 4-bits-per-cell architectures.data-intensive automotive applications.


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.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 $2.44 billion, $1.63 billion and $1.65 billion in 2017, 2016 and 2015, respectively. For a discussion of associated risks, see Part I, Item 1A, Risk Factors, of this Annual Report on Form 10‑K.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 14,000approximately 13,500 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.


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We rely on certain technology that we license from other parties to manufacture and sell our products. We believe that we have adequate cross-licenses and other agreements in place in addition to our own IP portfolio to compete successfully in the storage industry. For a discussion of associated risks, see Part I, Item 1A, Risk Factors, of this Annual Report on Form 10‑K.


Manufacturing


We believe that we have significant know-how, unique product manufacturing processes, test and tooling, execution skills, and human resources 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 NAND-flashflash-based products are high-volume and utilization, low-cost assembly and testing, strict adherence to quality metrics and maintaining close relationships with our strategic component suppliers to access best-in-class technology and manufacturing capacity. 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 NAND-flashflash-based product manufacturing are complex processes involving the production and assembly of precision components with narrow tolerances and rigorous testing. The assembly process occursmanufacturing processes involve a number of steps that are dependent on each other and occur in a “clean room” environmentenvironments that demandsdemand skill in process engineering and efficient space utilization to control the operating costs of thisthese manufacturing environment. Our clean room manufacturing process consists of modular production units, each of which contains a number of work cells.environments. We continually evaluate our manufacturing processes in an effort to increase productivity, sustain and improve quality and decrease manufacturing costs. We continually evaluate which steps in the manufacturing process would benefit from automation and how automated manufacturing processes can improve productivity and reduce manufacturing costs.


A majoritySubstantially all of our NAND-flashflash-based supply requirements for our NAND-flashflash-based products is obtained from our business ventures with Toshiba,Kioxia, which provide us with leading-edge, high-quality and low-cost NAND-flashflash memory wafers. This represents aour 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”Kioxia” below for additional information. While a majoritysubstantially 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 NAND-flashflash manufacturers, which we refer to as non-captive. While we do not unilaterally control the operations of theseour ventures with Kioxia, we believe that our business venture relationship with ToshibaKioxia helps us to reduce the costs of producing our products, increases our ability to control the quality of our products and speeds delivery of our products to our customers. Our vertically integrated manufacturing operations for our NAND-flashflash-based products are concentrated in three locations, with our business ventures with ToshibaKioxia located primarily 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.10-K.


Materials and Supplies


HDD consists 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, manufacturing, and manufacturing.testing.


Our NAND-flash product consistsflash-based products consist of NAND-flashflash memory, controllers and controllers. A majorityfirmwares. Substantially all of our NAND-flashflash-based memory is primarily supplied by our business ventures with Toshiba.Kioxia. 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 ToshibaKioxia to establish continuous supply of NAND-flashflash-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.reasons, we source some of our components from a limited number of sole or single source providers. 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.10-K.


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Ventures with ToshibaKioxia


We and ToshibaKioxia currently operate three business ventures in 300-millimeter NAND-flashflash-based manufacturing facilities in Yokkaichi, Japan, which provide us leading-edge, cost-competitive NAND-flashflash-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 ToshibaKioxia collaborate in the development and manufacture of NAND-flashflash-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 ToshibaKioxia at cost and then resells those wafers to us and ToshibaKioxia at cost plus a small mark-up. We are obligated to purchase halfpay for variable costs incurred in producing our share of Flash Ventures’ NAND-flashflash-based memory wafer supply, orbased on our three-month forecast, which generally equals 50% of Flash Ventures’ output. In addition, we are obligated to 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 each Flash Ventures’Ventures entity’s capital investments to the extent that Flash Ventures’Ventures entity’s operating cash flow is insufficient to fund these investments. We co-develop flash technologies (including process technology and Toshiba also collaborate on certain R&D activities in support ofmemory design) with Kioxia and contribute IP for Flash Ventures.Ventures’ use.


The agreements governing the operations of the Flash Venture entities also set out a framework for any investment by the joint venture partners in NANDflash manufacturing capacity. Since its inception, Flash Ventures’ primary manufacturing site has been located in Yokkaichi, Japan. The Yokkaichi site, which is owned and operated by Kioxia, currently includes five wafer fabrication facilities. We have jointly invested, and intend to continue to jointly invest, with Kioxia in manufacturing equipment for the Yokkaichi fabrication facilities. In May 2019, we entered into additional agreements to extend Flash Ventures to a facility agreement with Toshiba related to the construction and operation of Toshiba’s “New Fab 2”new wafer fabrication facility, whichknown as “K1.” Located in Kitakami, Japan, K1 is primarily intendedoperated by Kioxia Iwate Corporation, a wholly owned subsidiary of Kioxia. The primary purpose of K1 is to provide additional clean room space to convert a significant portioncontinue the transition of existing 2-dimensional (“2D”) NANDflash-based wafer capacity to 3D NAND. In addition, Toshiba has announced that itnewer technology nodes. Output from the initial production line at K1 began in the third quarter of fiscal year 2020. Meaningful output from K1 is investing in a new “Fab 6” fabrication facility in Yokkaichi, Japan. Similarnot expected to New Fab 2,begin until the additional clean room space in Fab 6 is primarily intended to support the continued conversionend of 2D NAND capacity to 3D NAND. Pursuant to our agreements governing Flash Ventures, which give us priority to participate in expansions and conversions of NAND manufacturing capacity, we intend to jointly invest in Fab 6 equipment with Toshiba and our board of directors has authorized investments for our share of initial Fab 6 equipment. We have been in discussions with Toshiba to come to mutually acceptable terms around our planned investment in Fab 6.calendar year 2020.


Toshiba has announced significant losses related to its U.S. nuclear business and substantial doubt about its ability to continue as a going concern. Due to Toshiba’s financial condition, Toshiba’s working capital and access to credit and capital markets are severely limited. Toshiba could become unable to, or otherwise fail to, timely fund investments in Flash Ventures or our joint development efforts or fulfill its payment obligations to suppliers, which could harm Flash Ventures’ operations, our joint technology roadmap and supplier relationships. Lease financings guaranteed by both Toshiba and us are not currently available to Flash Ventures on favorable terms and we are pursuing alternative forms of financing to fund our share of investments, which might not continue to be accessible. Toshiba has also announced various efforts to stabilize its financial condition, including a possible sale of a majority or the entire stake in its memory business, which includes its interests in Flash Ventures. According to Toshiba, on April 1, 2017, it transferred its memory business, including its interests in Flash Ventures, to a newly formed affiliate as part of those efforts. We have asserted our consent rights under the terms of the Flash Ventures agreements with respect to transactions involving the transfer of Toshiba’s interests in Flash Ventures. See Part II, Item 8, Note 17, Legal Proceedings, of the Notes to Consolidated Financial Statements included in this Annual Report on Form 10‑K. We are monitoring and evaluating other potential impacts of Toshiba’s financial condition and efforts to sell its memory business on Flash Ventures and, in turn, on our own memory business and financial condition.

For a discussion of risks associated with our business ventures with Toshiba,Kioxia, see Part I, Item 1A, Risk Factors, of this Annual Report on Form 10‑K.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 80%72%, 72%78% and 79%78% of our net revenue for 2017, 20162020, 2019 and 2015,2018, 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.10-K.



We perform our marketing and advertising functions internally and through outside firms utilizing both consumer media and trade publications targeting various reseller and end-user categories. We also maintain customer relationships through direct communication and by providing information and support through our website. In accordance with standard storage industry practice, we provide distributors and retailers with limited price protection and programs under which we reimburse certain marketing expenditures. We also provide distributors, resellers and OEMs with other sales incentive programs. While these groups of customers make up our end markets, some of these customers cross into multiple groups. We define these customers as follows:


Original Equipment Manufacturers. OEMs including large-scale data center operators, system integrators and hyperscale customers who bundle, embed, or integrate our storage solutions, purchase our products either directly or through a contract manufacturer such as an original design manufacturer (“ODM”) and assemble them into the devices they build.build and market under their own brands. 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 directly to customers that offer our products under their own brand name in the retail market, which we also classify as OEMs.


Cloud. A large and growing customer base are those who integrate our storage solutions to provide services to other companies and end users primarily through the cloud. This customer base includes hyper-scale users that utilize our storage solutions to provide cloud-based services and infrastructure including information technology services, social media, gaming, streaming media, research and other services to an ever-increasing market. This group of customers purchase either directly, through an integrator, an original design manufacturer (“ODM”), an OEM or a combination of channels.
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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 both 2017each of 2020, 2019 and 2016,2018, no single customer accounted for 10% or more of our net revenue. For 2015, Hewlett-Packard Company accounted for 11% of our net revenue. For a discussion of associated risks, see Part I, Item 1A, Risk Factors, of this Annual Report on Form 10‑K.10-K. For additional information regarding revenue recognition sales by geographic region and major customers, see Part II, Item 8, Note 1, Organization and Basis of Presentation, and Note 10, Business Segment, Revenue Information, Geographic Information and Concentration of Risk, of the Notes to Consolidated Financial Statements included in this Annual Report on Form 10‑K.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.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 manufacturesale 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,, and Note 3, Supplemental Financial Statement Data, of the Notes to Consolidated Financial Statements included in this Annual Report on Form 10‑K.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.


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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.10-K.


Employees


As of June 30, 2017,July 3, 2020, we employed a total of approximately 68,00063,800 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 employeeour employees compensation and benefit programs that we believe are, in the aggregate, competitive with those offered by our competitors.


While the substantial majority of our employees are not party to a collective bargaining agreement, a majoritynearly half of our employees in Japan and China and a portion of our employees in Malaysia 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.10-K.


Corporate Responsibility and Sustainability


We believe that corporate social responsibility is an essential factor for our overall success. This includes adopting ethicalresponsible and sustainable business practices support our long-term success. As a company, we are deeply committed to direct how we do business while keeping the interests ofprotecting and supporting our stakeholderspeople, our environment, and the environment in mind.

We strive to uphold the following principles:

treat all employees with dignity and respect;

set up processes and procedures intended to comply with applicable laws and regulationsour communities. That commitment is reflected through sustainability-focused initiatives as well as day-to-day activities, including our internal guidelines and uphold ethical standards;

establishadoption of sustainability-focused policies and procedures, intended to promote the idea that the qualityour publicly-recognized focus on fostering an inclusive workplace, our constant drive toward more efficient use of materials and energy, our careful and active management of our productssupply chain, our community-focused volunteerism programs and services, consistencyphilanthropic initiatives, and our impactful, globally-integrated ethics and compliance program.

We seek to protect the human rights and civil liberties of productionour employees through policies, procedures, and programs that avoid risks of compulsory and child labor, both within our company and throughout our supply chain.

We foster a workplace of dignity, respect, diversity, and inclusion through our recruiting and advancement practices, internal communications, and employee well-being are predicatedresource groups.

We educate our employees annually on relevant ethics and compliance topics, publish accessible guidance on ethical issues and related company resources in our Global Code of Conduct, and encourage reporting of ethical concerns through any of several global and local reporting channels.

We support local communities throughout the world, focusing on hunger relief, environmental quality, and STEM (science, technology, engineering, and math) education, especially for underrepresented and underprivileged youth.

We utilize a safe and healthy work environment; and

establishrobust integrated management system, with associated policies and procedures, intended to promoteevaluate and manage occupational health and safety risks, environmental responsibility as an integral partcompliance, and chemical and hazardous substance risks.

We innovate to reduce the energy used by our products, the energy used to manufacture them, and the amount of new materials required to manufacture them.

We proactively protect the health and safety of our culture.employees through policies and practices that help employees maintain safe distances from others (including remote work and social distancing at our facilities), ensure our facilities are regularly sanitized, and provide support to employees who have been or are at risk of being infected by dangerous viruses though an emergency leave plan for absences caused directly or indirectly by COVID-19.



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Available Information


We maintain an Internet website at www.wdc.com. The information on our website is not incorporated in this Annual Report on Form 10-K. Our Annual Report on Form 10‑K,10-K, Quarterly Reports on Form 10‑Q,10-Q, Current Reports on Form 8‑K8-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, theThe 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

TheItem 1A.Risk Factors

Our business, financial condition and operating results of the Company can be affected by a number of risks and uncertainties, whether currently known or unknown, any one or more of which could, directly or indirectly, cause the Company’sour 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.


The COVID-19 pandemic could adversely affect our business, results of operations and financial condition.

The COVID-19 pandemic and efforts to control its spread have impacted and will continue to impact our workforce and operations, and those of our strategic partners, customers, suppliers and logistics providers. These impacts have included and may continue to include under-absorbed overhead, increased logistics and other costs, decreased demand for our products and manufacturing challenges, including decreased product output. While our manufacturing facilities and those used by Flash Ventures are all currently operational, in some cases with exemptions from government restrictions, this is subject to change based on evolving conditions related to the pandemic.

The effects of the pandemic are uncertain and difficult to predict, but may include:

Further disruptions to our supply chain, our operations or those of our strategic partners, customers or suppliers caused by employees or others contracting COVID-19, or governmental orders to contain the spread of COVID-19 such as travel restrictions, quarantines, shelter in place orders, trade controls, and business shutdowns;

A deepening of the global economic downturn or a recession causing a decrease or shift in short- or long-term demand for our products, resulting in industry oversupply and decreases of average selling prices (“ASPs”), which would adversely impact our profitability;

Further deterioration of worldwide credit markets that may limit our ability or increase our cost to obtain external financing to fund our operations and capital expenditures and result in a higher rate of losses on our accounts receivables due to customer credit defaults;

Extreme volatility in financial markets which has and may continue to adversely impact our stock price and our ability to access the financial markets on acceptable terms;

Increased data security and technology risk as many employees continue to work from home, including possible outages to systems and technologies critical to remote work and increased data privacy risk with cybercriminals attempting to take advantage of the disruption;

Reduced productivity or other disruptions of our operations if essential workers in our factories or those returning to our worksites are exposed to or spread COVID-19 to other employees; and

Management’s ongoing commitment of significant time, attention and resources to respond to the pandemic.

The degree to which the pandemic ultimately impacts our business and results of operations will depend on future developments beyond our control which are highly uncertain and cannot be predicted at this time, including the severity and duration of the pandemic, the extent of actions to contain or treat COVID-19, the effectiveness of government stimulus programs, any possible resurgence of COVID-19 that may occur after the current outbreak subsides, how quickly and to what
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extent normal economic and operating activity can resume, and the severity and duration of the global economic downturn that results from the pandemic. The COVID-19 pandemic may also have the effect of heightening many of the other risks described in more detail in this “Risk Factors” section, such as those relating to adverse global or regional conditions, our highly competitive industry, supply chain disruption, demand conditions and our ability to forecast demand, cost saving initiatives, our indebtedness and liquidity, and cyber attacks.

Adverse global economicor regional conditions and credit market uncertainty could harm our business, results of operations and financial condition.


A large portion of our revenue is derived from our international operations, and many of our products and components are produced overseas. As a result, our business, results of operations and financial condition depend significantly on global and regional conditions. Adverse changes in global or regional 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 real estate markets,tighter credit, slower growth in certain geographic regions, lower levels of consumer liquidity, risk of default on sovereign debt, higher interest rates, materials and component cost increases, political uncertainty, and other macroeconomic factors, such as the June 2016 referendum by British voters to exit the European Union, commonly referred to as “Brexit,” and changes to social conditions, policies, rules and regulations, whichcould significantly harm demand for our products, increase credit and collectability risks, result in revenue reductions, cause us to change our business practices, increase manufacturing and operating costs or result in impairment charges or other expenses.

Our revenue and future growth are significantly dependent on the growth of international markets, and we may be proposedface difficulties in entering or implemented by 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 and changes in foreign laws and regulations;

the U.S. Presidentneed 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 his administration. Somerules regarding conflict minerals;

copyright levies or similar fees or taxes imposed in European and other countries;

exchange, currency and tax controls and reallocations;

weaker protection of the risksIP rights;

trade restrictions, such as export controls, export bans, embargoes, sanctions, license and uncertainties we face ascertification requirements (including semiconductor, encryption and other technology), new or increased tariffs and fees and complex customs regulations; and

difficulties in managing international operations, including appropriate internal controls.

As a result of these conditions include the following:

Volatile Demand and Supplier Risk. Our direct and indirect customers may delay or reduce their purchases of our products and systems containing our products. In addition, many of our customers rely on credit financing to purchase our products. If negative conditions in the global credit markets prevent our customers’ access to credit, product orders may decrease, which could result in lower revenue. Likewise, if our suppliers, sub-suppliers and sub-contractors (collectively referred to as “suppliers”), or partners face challenges in obtaining credit, in selling their products or otherwise in operating their businesses, they may be unable to offer the materials we use to manufacture our products. These actions could result in reductions in our revenue and increased operating costs, which could adversely affectrisks, our business, results of operations and financial condition.

Restructuring Activities. If demand for our products slows as a result of a deterioration in economic conditions, we may undertake restructuring activities to realign our cost structure with softening demand. The occurrence of restructuring activities could result in impairment charges and other expenses, which could adversely impact our results of operations and financial condition.

Credit Volatility and Loss of Receivables. We extend credit and payment terms to some of our customers. In addition to ongoing credit evaluations of our customers’or financial condition we seek to mitigate our credit risk from time to time by purchasing credit insurance on certain of our accounts receivable balances. As a result of the continued uncertainty and volatility in global economic conditions, however, we may find it increasingly difficult to be able to insure these accounts receivable. We could suffer significant losses if a customer whose accounts receivable we have not insured, or have underinsured, fails to pay us on their accounts receivable balances. Additionally, negative or uncertain global economic conditions increase the risk that if a customer we have insured fails to pay us on their accounts receivable, the financial condition of the insurance carrier for such customer account may have also deteriorated such that it cannot cover our loss. A significant loss of accounts receivable that we cannot recover through credit insurance would have a negative impact on our financial condition.


Impairment Charges. We test goodwill for impairment annually as of the first day of our fourth quarter and at other times if events have occurred or circumstances exist that indicate the carrying value of goodwill may no longer be recoverable. Negative or uncertain global economic conditions could result in circumstances, such as a sustained decline in our stock price and market capitalization or a decrease in our forecasted cash flows, indicating that the carrying value of our long-lived assets or goodwill may be impaired. If we are required to record a significant charge to earnings in our Consolidated Financial Statements because of an impairment of our long-lived assets or goodwill, our results of operations will be adversely affected.


We rely substantially on our business ventures with ToshibaKioxia for the development and supply of NAND-flashflash-based memory, which subjects us to risks and uncertainties that could harm our business, financial condition and operating results.


We are dependentdepend on our ventures with ToshibaKioxia to develop and manufacture NAND-flashour flash-based memory. We partner with Kioxia on the development of flash-based technology, including future generations of 3D NAND, as well as other non-volatile memory products fortechnology in support of Flash Ventures. Flash Ventures is subject to various risks that could harm the value of our NAND-flash memory supply,investments, our revenue and thereforecosts, our business, financial condition and operating results,future rate of spending, our technology plans and our ability to realize the anticipated benefits from our acquisitionfuture growth opportunities.

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Table of SanDisk Corporation (“SanDisk”), pursuant to an Agreement and Plan of Merger (the “Merger”), will be dependent on the success of Flash Ventures.Contents


A majoritySubstantially all of our NAND-flashflash-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.Ventures’ capacity. Over-investment by us or our competitors could result in excess supply, which could cause significant decreases in our product prices, significant excess, obsolete inventory or lower of cost or net realizable value inventory write-downs or under-utilization charges, and the potential impairment of our investments in Flash Ventures. On the other hand, if we or Toshiba under-invest in captive memory capacityFlash Ventures or technology transitions, if weotherwise grow or transition Flash Ventures’ capacity more slowly than we expect or 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 NAND 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 in the short term or damage certain customer relationships. Growth of our NAND-flash memory bit supply at a slower rate than the overall industry for an extended period of time would result in lowering our share which could limit our future opportunities and harm our financial results. We are also contractually obligated to pay for 50% of the fixed costs of Flash Ventures regardless of whether we purchase any wafers from Flash Ventures. Furthermore, purchase orders placed with Flash Ventures and under the foundry arrangements with ToshibaKioxia 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.


In addition, we partner with Toshiba on the development of NAND-flash technology, including the next technology transitions of NAND-flash, as well as other non-volatile memory technology in support of Flash Ventures.

These ventures are subject to various risks that could harm the value of our investments, our revenue and costs, our future rate of spending, our technology plans and our future growth opportunities. Under the terms of our venture agreements with Toshiba, which govern the operations of Flash Ventures agreements, we have limited power to unilaterally direct most of the activities that most significantly impact Flash Ventures’ performance. The integrationperformance and we have limited ability to source or fabricate flash-based memory outside of SanDisk into our organization could complicate the processFlash Ventures. Lack of reaching agreementalignment with Toshiba in a timely and favorable manner. We may not always agreeKioxia with Toshiba on our joint R&D roadmap or expansions or conversions of production capacity. In addition, Toshiba’s financial position or shift in strategic prioritiesrespect to Flash Ventures could adversely impact our business.

Flash Ventures requires significant investments by both Toshibaability to stay at the forefront of technological advancement and us for technology transitions, including the transition to 3D NAND, and capacity expansions. In March 2016, Toshiba announced plans to construct a new wafer fab in Yokkaichi, Japan, to provide additional cleanroom space to support the continued conversion of 2D NAND capacity to 3D NAND, and we intend to participate in that wafer fab. Although we have had discussions to extend the joint venture partnership with Toshiba to the new wafer fab, there is no certainty as to when, and on what terms, we will participate with Toshiba in anyour investment in equipment for the new wafer fab, if at all. Failure to extend the joint venture partnership or failure to continue to secure and invest in additional cleanroom space to support the continued 3D NAND transition could adversely impact our supply of captive NAND-flash memory and financial results. If Toshiba does not or we do not provide sufficient resources or have adequate access to credit, investments in Flash Ventures and otherwise harm our business. Misalignment could be delayed arise due to changes in Kioxia’s strategic priorities, management, ownership and/or reduced. In addition,access to capital, which has changed significantly recently and could continue to change. Kioxia’s stakeholders may include, or have included in the event that lease financings for Flash Ventures are not available on favorable termspast, flash and HDD competitors, customers, a private equity firm and a bank owned by the Government of Japan or at all, more cash would be required to fund these investments.

Toshiba has announced significant losses related topublic shareholders, if Kioxia publicly lists its U.S. nuclear business and substantial doubt about its ability to continue as a going concern. Due to Toshiba’s financial condition, Toshiba’s working capital and access to creditshares in the future. Kioxia’s management changes, ownership and capital markets are severely limited. Toshiba could become unable to, or otherwise fail to, timely fund investments in Flash Ventures or our joint development efforts or fulfill its payment obligations to suppliers, which could harm Flash Ventures’ operations, our joint technology roadmap and supplier relationships. Lease financings guaranteed by both Toshiba and us are not currently available to Flash Ventures on favorable terms and we are pursuing alternative forms of financing to fund our share of investments, which might not continue to be accessible. Toshiba has also announced various efforts to stabilize its financial condition, including a possible sale of a majority or the entire stake in its memory business. According to Toshiba, on April 1, 2017, it transferred its memory business, including its interests in Flash Ventures, to a newly formed affiliate as part of those efforts. On May 14, 2017, several of our SanDisk subsidiaries filed a request for arbitration with the ICC International Court of Arbitration seeking an order requiring Toshiba to unwind the transfer to its affiliate, and injunctive relief preventing Toshiba from further breaching the Flash Ventures agreements (copies of which are incorporated by reference into this Annual Report on Form 10‑K) by transferring its interests in Flash Ventures without SanDisk’s consent. Numerous proceedings and actions related to Flash Ventures and our consent and other rights under the terms of the Flash Ventures agreements followed and are ongoing. Please see Part II, Item 8, Note 17, Legal Proceedings, of the Notes to Consolidated Financial Statements included in this Annual Report on Form 10‑K for a further description of these proceedings and actions. While we have asserted our consent rights under the terms of the Flash Ventures agreements with respect to transactions involving the transfer of Toshiba’s interests in Flash Ventures, our request for arbitration, legal proceedings, other potential litigation, a change in the management or control of Flash Ventures or of Toshiba’s memory businessstructure could lead to delays in decision-making, disputes, or changes in strategic direction that could adversely impact Flash Ventures and thereforeand/or adversely affect our business prospects, results of operations and financial condition.

If a third party acquires any There may exist conflicts of Toshiba’s interests ininterest between Kioxia’s stakeholders and Flash Ventures that third party might not have the same interest that we do inor us with respect to, among other things, protecting and growing Flash Ventures’ business, IP and might have conflictscompetitively sensitive confidential information.

Flash Ventures requires significant investments by both Kioxia and us for technology transitions, including the transition to 3D NAND, and capacity expansions. In May 2019, Kioxia’s parent company, Kioxia Holdings Corporation (“KHC”), announced new financing in the amount of interest between itself and1.2 trillion Japanese yen. KHC’s financing agreements and/or its high level of debt could limit Kioxia’s ability to timely fund or finance investments in Flash Ventures or us. Reducedour joint development efforts, as well as limit Flash Ventures’ ability to enter into lease financings. Availability of lease financings for Flash Ventures could also be limited by our and/or Kioxia’s financial performance. 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 Kioxia 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, or other misalignment between us and our partner or any third party acquirer on strategic direction,R&D could impact Flash Ventures’ ability to stay at the forefront of technological advancement.harm Flash Ventures’ competitiveness could alsoand/or our investment in Flash Ventures. In addition, KHC’s financing arrangements might be harmedsecured by a mishandling or misuse of IP or other competitively sensitive confidential information regarding Flash Ventures, such as its technology roadmap, business or investment plans, by any acquirer or other third party that might gain access to such information during the bidding process.

A failure by Toshiba to successfully stabilize its financial condition could lead to insolvency or bankruptcy proceedings, which could resultKioxia’s equity interests in Flash Ventures, permitting the lenders to foreclose on those equity interests under certain circumstances.

In May 2019, we entered into definitive agreements with Kioxia regarding a new 3D NAND wafer fabrication facility in Kitakami, Iwate, Japan, known as “K1.” Output from Flash Ventures’ initial production line at K1 began in the third quarter of fiscal year 2020. As K1 is located at a new manufacturing site, K1 could be particularly susceptible to delays and related agreements being terminated early or modified unfavorablyother challenges in the production ramp and yields, qualification of wafers, shipment of samples to customers and customer approval processes. Further, although we intend to continue to jointly invest with Kioxia to ramp up manufacturing capacity at K1, there is no certainty as to when, and on what terms, we will do so. If and for us. We are monitoring and evaluating other potential impacts of Toshiba’s financial condition and efforts to sell its memory business on Flash Ventures and, in turn, onso long as our own memory business and financial condition. The deterioration of our partner’s financial condition could adversely affect the value of our investments in Flash Ventures and our business prospects, results of operations and financial condition.

Integrating SanDisk’s operations with ours may be more difficult, costly or time consuming than expected and the anticipated benefits, synergies and cost savingsshare of the Merger may not be realized.

The success of our acquisition of SanDisk, including anticipated benefits, synergies and cost savings, will depend, in part, on our ability to successfully combine and integrate the businesses and culture of SanDisk into our company. It is possible that the integration process will take longer than anticipated. In addition, the integration process could result in the loss of key employees, higher than expected costs, ongoing diversion of management attention, the disruption of our ongoing businesses or inconsistencies in standards, controls, procedures and policies that adversely affect our ability to maintain relationships with customers, vendors, partners and employees. IfK1 capacity falls below a specified threshold, we experience difficulties with the integration process, the anticipated benefits of the Merger may not be realized fully or at all, or may take longer to realize than expected. In addition, the actual cost savings of the Merger could be less than anticipated. Additionally, the integration of SanDisk’s operations into our operations may also increase the risk that our internal controls are found to be ineffective.

Achieving the benefits of the Merger will depend, in part, on our ability to integrate the business and operations of SanDisk successfully and efficiently with our business. The challenges involved in this integration, which will be complex and time-consuming, include, but are not limited to, the following:

difficulties entering new markets or manufacturing in new geographies where we have no or limited direct prior experience;

successfully managing relationshipsresponsible for bearing fixed costs associated with our strategic partners and our combined supplier and customer base;

coordinating and integrating independent R&D and engineering teams across technologies and product platforms to enhance product development while reducing costs;

increased levels of investment in R&D, manufacturing capability and technology enhancement relating to SanDisk’s business;

successfully transitioning to 3D NAND and future technologies;

coordinating sales and marketing efforts to effectively position the combined company’s capabilities and the direction of product development;

difficulties in integrating the systems and processes of two companies with complexK1’s operations and multiple manufacturing sites;

the increased scale and complexity of our operations resulting from the Merger;

retaining key employees;

obligationsat that we have to counterparties of SanDisk that arose as a result of the change in control of SanDisk; and

the diversion of management attention from other important business objectives.

If we do not successfully manage these issues and the other challenges inherent in integrating an acquired business of the size and complexity of SanDisk, then we may not achieve the anticipated benefits of the Merger and our revenue, expenses, operating results and financial condition could be materially adversely affected.

Our high level of debt may have an adverse impact on our liquidity, restrict our current and future operations, particularly our ability to respond to business opportunities, and increase our vulnerability to adverse economic and industry conditions.

In connection with the Merger, we substantially increased our indebtedness,threshold, which could adversely affect our ability to fulfill our obligations and have a negative impact on our financing options and liquidity position. Asfinancial results.
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Table of June 30, 2017, our total indebtedness was $13.36 billion in aggregate principal, and we had $1.00 billion of additional borrowing availability under our revolving credit facility.Contents


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 purchase our common stock; (ii) purchase assets, make investments, complete acquisitions, consolidate or merge with or into, or sell all or substantially all of our assets to, another person; (iii) dispose of assets; (iv) incur liens; and (v) enter into transactions with affiliates;

placing us at a competitive disadvantage to competitors carrying less debt; and

making us more vulnerable to economic downturns and limiting our ability to withstand competitive pressures or take advantage of new opportunities to grow our business.


Our ability to meet the debt service obligations contained in our debt agreements will depend on our available cash and our future performance, which will be affected by financial, business, economic and other factors, including potential changes in laws or regulations, industry conditions, industry supply and demand balance, customer preferences, the success of our products and pressure from competitors. If we are unable to meet our debt service obligations or should we fail to comply with our financial and other restrictive covenants contained in the agreements governing our indebtedness, causing an event of default under the applicable indebtedness, the debt holders could accelerate the related debt and that may result in the acceleration of any other debt, leases or other obligations to which a cross acceleration or cross-default provision applies. If we are required to repay our indebtedness before their due dates, we may not have sufficient funds available to repay such indebtedness and we may be required to refinance all or part of our debt, sell important strategic assets at unfavorable prices, incur additional indebtedness or issue common stock or other equity securities. We may not be able to, at any given time, refinance our debt, sell assets, incur additional indebtedness or issue equity securities on terms acceptable to us, in amounts sufficient to meet our needs or at all. Our inability to service our debt obligations or refinance our debt could have a material adverse effect on our business, operating results and financial condition. Further, if we are unable to repay, refinance or restructure our secured indebtedness, the holder of such debt could proceed against the collateral securing that indebtedness. Refinancing our indebtedness may also require us to expense previous debt issuance costs or to incur new debt issuance costs.

In addition, our credit ratings impact the cost and availability of future borrowings and, accordingly, our cost of capital. Our ratings reflect the opinions of the ratings agencies of our financial strength, operating performance and ability to meet our debt obligations. There can be no assurance that we will achieve a particular rating or maintain a particular rating in the future.

We may from time to time seek to refinance the substantial indebtedness we incurred to finance the Merger by issuing additional shares of our common stock in one or more securities offerings. These securities offerings may dilute our existing shareholders, reduce the value of our common stock, or both. Because our decision to issue securities will depend on, among other things, market conditions and other factors beyond our control, we cannot predict or estimate the amount, timing or nature of any future securities offerings. Thus, holders of our common stock bear the risk of our future offerings diluting and potentially reducing the value of our common stock.


We participate in a highly competitive industry that is subject to declining average selling prices (“ASPs”), volatile gross marginsdemand, rapid technological change and significant shifts in market share,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 priceprices of NAND-flash memory isour products are influenced by, among other factors, the balance between supply and demand in the storage market, including the effects of new fab capacity, in the industry, macroeconomic factors, business conditions, technology transitions, conversion of industry DRAM capacity to NAND, conversion of 2D NAND capacity to 3D NAND or other actions taken by us or our competitors. The price of HDDs is influenced by, among other factors, the balance between supply and demand, including the effects of new fab capacity in the industry, macroeconomic factors, business conditions, technology transitions and other actions taken by us or our competitors. The storage market has experienced volatile product life cycles, which can adversely affect our ability to recover the cost of product development, and 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 anASPs and adverse impactimpacts on our revenue and gross margins. In addition, we compete based on

Further, our ability to offer our customers competitive solutions that provide the most current and desired product and service features. We expect that competition will continue to be intense, and there is a risk that our competitors’ products may be less costly, provide better performance or include additional features when compared to our products. Our ASPs and gross margins also tend to decline when there is a shift in the mix of product sales, and sales of lower priced products increase relative to those of higher priced products. Further, we face potential gross margin pressures resulting from our ASPs declining more rapidly than our cost of goods sold.revenue. 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 has experienced consolidation over the past several years. 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.


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 financial performance. If market demand increases significantly beyond our forecasts or beyond our ability to add manufacturing capacity, then we may not be able to satisfy customer product needs, possibly resulting in a loss of market share if our competitors are able to meet customer demands. In addition, some of our components have long lead-times, requiring us to place orders several months in advance of anticipated demand. Such long lead-times increase the risk of excess inventory or loss of sales in the event our forecasts vary substantially from actual demand.

We experience significant sales seasonality and cyclicality, which could cause our operating results to fluctuate.

Sales of computer systems, mobile devices, storage subsystems, gaming consoles and consumer electronics (“CE”) tend to be seasonal and cyclical, and therefore we expect to continue to experience seasonality and cyclicality in our business as we respond to variations in our customers’ demand for our products. However, changes in seasonal and cyclical patterns have made it, and could continue to make it, more difficult for us to forecast demand, especially as a result of the current macroeconomic environment. Changes in the product or channel mix of our business can also impact seasonal and cyclical patterns, adding complexity in forecasting demand. Seasonality and cyclicality also may lead to higher volatility in our stock price. It is difficult for us to evaluate the degree to which seasonality and 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.

Our sales to the CE, cloud computing, network attached storage (“NAS”), surveillance systems and enterprise markets, which have accounted for and may continue accounting for an increasing percentage of our overall revenue, may grow at a slower rate than current estimates or not at all, which could materially adversely impact our operating results and financial condition.

The secular growth of digital data has resulted in a more diversified mix of revenue from the CE, cloud computing, NAS, surveillance systems and enterprise markets. As sales into these markets have become a more significant portion of our revenue, events or circumstances that adversely impact demand in these markets, or our inability to address that demand successfully, could materially adversely impact our operating results. For example, demand in, or our sales to, these markets may be adversely affected by the following:

Mobile Devices. There has been and continues to be a rapid growth in devices that do not contain a hard drive such as tablet computers and smart phones. As tablet computers and smart phones provide many of the same capabilities as PCs, they have displaced or materially affected, and we expect will continue to displace or materially affect, the demand for PCs. If we are not successful in adapting our product offerings to include disk drives or alternative storage solutions that address these devices, even after our acquisition of SanDisk, demand for our products in these markets may decrease and our financial results could be materially adversely affected. In addition, global slowdown in the growth rate of mobile devices will also negatively impact our financial results.


Enterprise. The enterprise storage space is comprised of customers with long design, qualification and test cycles prior to sales. We spend substantial time and resources in our sales process without any assurance that our efforts will produce any customer orders on the timelines or in the quantities we expect. These lengthy and uncertain processes also make it difficult for us to forecast demand and timing of customer orders. Due to longer customer product cycles, we may not be able to transition customers to our leading edge products, which would prevent us from benefitting from the technology transitions that enable cost reductions, which may harm our gross margin. Demand for our enterprise solutions from our hyperscale customers is correlated to large projects and expansions which can be sporadic, resulting in demand that is lumpy and less consistent than the consumer-driven demand for many of our solutions. Hyperscale customers may place orders for significant volumes with short lead times that may be difficult for us to fulfill, and sales to hyperscale customers may negatively impact gross margins due to product mix and pricing, each of which could adversely affect our business. In addition, hyperscale companies may internally develop enterprise storage solutions that reduce the demand for our solutions.

Cloud Computing. Consumers traditionally have stored their data on their PC, often supplemented with personal external storage devices. Most businesses also include similar local storage as a primary or secondary storage location. This storage is typically provided by HDDs and increasingly SSDs. With cloud computing, applications and data are hosted, accessed and processed through a third-party provider over a broadband Internet connection, potentially reducing or eliminating the need for, among other things, significant storage inside the accessing electronic device. Even if we are successful at increasing revenues from sales to cloud computing customers, if we are not successful in manufacturing compelling products to address the cloud computing opportunity, demand for our products in these other markets may decrease and our financial results could be materially adversely affected. Demand for cloud computing solutions themselves may be volatile due to differing patterns of technology adoption and innovation, improved data storage efficiency by cloud computing service providers, and concerns about data protection by end users.

Obsolete Inventory. In some cases, products we manufacture for these markets are uniquely configured for a single customer’s application, creating a risk of obsolete inventory if anticipated demand is not actually realized. In addition, rapid technological change in our industry increases the risk of inventory obsolescence.

Macroeconomic Conditions. Consumer spending has been, and may continue to be, adversely affected in many regions due to negative macroeconomic conditions and high unemployment levels. Please see the risk factor entitled “Adverse global economic conditions and credit market uncertainty could harm our business, results of operations and financial condition” for additional risks and uncertainties relating to macroeconomic conditions.


In addition, demand in these areas also could be negatively impacted by developments in the regulation and enforcement of digital rights management and the emergence of new technologies, such as data duplication, compression and storage virtualization. If we are not able to respond appropriately, these factors could lead to our customers’ storage needs being satisfied at lower prices with lower capacity hard drives or solid-state storage products, thereby decreasing our revenue or putting us at a disadvantage to competing storage technologies. As a result, even with increasing aggregate demand for digital storage, if we fail to anticipate or timely respond to these developments in the demand for storage, our ASPs could decline, which could adversely affect our operating results and financial condition. Furthermore, our ability to accurately read and respond to market trends, such as trends relating to IoT or big data, could harm our results.

Deterioration in the PC market may continue or accelerate, which could cause our operating results to suffer.

While sales to non-PC markets are becoming a more significant source of revenue, sales to the PC market remain an important part of our business. We believe that sales of PCs have declined due to fundamental changes in the PC market, including the growth of alternative mobile devices and the lengthening of product life cycles, and that further deterioration of the PC market may continue or accelerate, which could cause our operating results and financial condition to suffer. Additionally, if demand in the PC market is worse than expected as a result of these or other conditions, or demand for our products in the PC market decreases at a faster rate than expected, our operating results and financial condition may be adversely affected.


Selling to the retail market is an important part of our business, and if we fail to maintain and grow our market share or gain market acceptance of our branded products, our operating results could suffer.

Selling branded products is an important part of our business, and as our branded products revenue increases as a portion of our overall revenue, our success in the retail market becomes increasingly important to our operating results. Our success in the retail market depends in large partcompete based on our ability to maintain our brand image and corporate reputation and to expand into and gain market acceptance of our products in multiple channels. We must successfully respond to the rapid change away from traditional advertising media, marketing and sales methods to the use of Internet media and advertising, particularly social media, and online sales, or our brand and retail sales could be negatively affected. Adverse publicity, whether or not justified, or allegations of product or service quality issues, even if false or unfounded, could tarnish our reputation and causeoffer our customers to choosecompetitive solutions that provide the most current and desired products offered by our competitors. In addition, the proliferation of new methods of mass communication facilitated by the Internet makes it easier for false or unfounded allegations to adversely affect our brand image and reputation. If customers no longer maintain a preference for WD, HGST or SanDisk brand products, our operating results may be adversely affected. A significant portion of our sales is made through retailers, and if our retailers are not successful in selling our products, not only would our revenue decrease, but we could also experience lower gross margin due to the return of unsold inventory or the protection we provide to retailers against price declines.

Sales in the distribution channel are important to our business, and if we fail to respond to demand changes in distribution markets or if distribution markets for our products weaken, our operating results could suffer.

Our distribution customers typically sell to small computer manufacturers, dealers, systems integrators and other resellers. We face significant competition in this channel as a result of limited product qualification programs and a significant focus on price and availability of product. In addition, the PC market is experiencing a shift to notebook and other mobile devices and, as a result, more computing devices are being delivered to the market as complete 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.

Loss of market share with or by a key customer, or consolidation among our customer base, could harm our operating results.

During 2017, 36% of our revenue came from sales to our top 10 customers. These customers have a variety of suppliers to choose from and therefore can make substantial demands on us, including demands on product pricing and on contractual terms, often resulting in the allocation of risk to us as the supplier. Our ability to maintain strong relationships with our principal customers is essential to our future performance. If we lose a key customer, if any of our key customers reduce their orders of our products or require us to reduce our prices before we are able to reduce costs, if a customer is acquired by one of our competitors or if a key customer suffers financial hardship, our operating results and financial condition would likely be harmed.

Additionally, if there is consolidation among our customer base, our customers may be able to command increased leverage in negotiating prices and other terms of sale, which could adversely affect our profitability. In addition, if, as a result of increased leverage, customer pressures require us to reduce our pricing such that our gross margins are diminished, it might not be feasible to sell our products to a particular customer, which could result in a decrease in our revenue. Consolidation among our customer base may also lead to reduced demand for our products, replacement of our products by the combined entity with those of our competitors and cancellations of orders, each of which could harm our operating results.

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.


Expansion into new markets may increase the complexity of our business and cause us to increase our R&D expenses and investments in manufacturing capability, technology enhancements and go-to-market capability, and if we are unable to successfully adapt our business processes and product offerings as required by these new markets, our ability to grow will be adversely affected.

To remain a significant supplier in the storage industry and to expand into new markets, we will need to offer a broader range of storage products to our customers. We currently offer a variety of 3.5-inch and 2.5-inch HDDs, SSDs and systems, flash storage solutions, and other products for the PC, mobile, enterprise, data center and other storage markets.service features. As we expand ourcompete in new product lines to sell into new markets, such as our recent entry into active archive systems and new flash memory business through the Merger, including the vertically integrated business model through Flash Ventures,areas, the overall complexity of our business may increase at an accelerated rate and we may become subject to different market dynamics. These dynamics may include, among other things, different demand volume, cyclicality, seasonality, product requirements, sales channels, and warranty and return policies. In addition, expansion into other markets may result in increases in R&D expenses and substantial investments in manufacturing capability, technology enhancements and go-to-market capability. Flash Ventures requires significant investments by both ToshibaWe must also qualify our products with customers through potentially lengthy testing processes, which may result in delayed, reduced or lost product sales. 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, and some of our customers may be developing storage solutions internally, which may reduce their demand for our products. We expect that competition will continue to be intense, and there is a risk that our competitors may be able to gain a product offering or cost structure advantage over us, which may result in a loss of business to us. 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. We may also have difficulty effectively competing with manufacturers benefitting from governmental investments.

If we do not properly manage technology transitions including the transitionand product development and introduction, 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 existing products or develop new products to 3D NAND, and capacity expansions.address in a timely manner. If we fail to implement new technologies successfully, expand intoif we are slower than our competitors at implementing new markets with products that we do not currently offer,technologies, or if our technology transitions or product development are more costly to complete than anticipated, we may lose businessnot be able to offer products our competitors or new entrants who offer these products.customers desire and our costs may not remain competitive, which would harm revenues, our gross margin and operating results.


OurIn addition, the success of our technology transitions and product development and introduction depends on a number of other factors, including:

R&D expenses and results;

difficulties faced in manufacturing ramp;

market acceptance/qualification;

effective management of inventory levels in line with anticipated product demand;

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the vertical integration of some of our products, makes us dependent on our ability to timely and cost-effectively develop products with leading technology and overall quality, increasing capital expenditure costs and asset utilization risks for our business.

We develop NAND-flash memory as well as other non-volatile memory technology through our partnership with Toshiba; we are also vertically integratedwhich may result 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 investmentsexpenditures and carry a higher percentage ofgreater fixed costs than we would if we were not vertically integrated. If integrated;

our overall levelability to cost effectively respond to customer requests for new products or features and software associated with our products;

our ability to increase our software development capability; and

the effectiveness of production decreasesour go-to-market capability in selling new products.

Moving to new technologies and products 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 any reason, andthe 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 reduceachieve the cost structure required to support our fixedprofit objectives or may be unable to grow or maintain our market position.

Additionally, new technologies and products could substitute for or replace our current technologies and products and make them obsolete. We also develop products to meet certain industry and technical standards, which may change. We could incur substantial 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 investmentsshifts 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.


We make significant investments in R&D to improve our technology and developstandards, such as adopting new technologies, and unsuccessful investmentsstandards or investments that are not cost effective could materially adversely affect our business, financial condition and results of operations.

As a leading supplier of hard drives and flash storage solutions, we make significant investments to maintain our existing products and to lead innovation and development of new technologies. This strategy requires us to make significant investmentsinvesting in R&D. In addition, we may increase ourdifferent capital expenditures and expenses above our historical run-rate model in orderequipment or manufacturing processes to remain competitive or as a result of the Merger with SanDisk, which has historically maintained higher levels of investment in R&D than our company. The current inherent physical limitations associated with storage technologies are resulting in more costly capital expenditures that reduce the cost benefits ofcompetitive.

For additional technology transitions and could limit our ability to keep pace with reductions in ASPs. These investments may not result in viable technologies or products, and even if they do result in viable technologies or products, they may not be profitable or accepted by the market. 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.

Current or future competitors may gain a technology advantage or develop an advantageous cost structure that we cannot match.

It may be possible for our current or future competitors to gain an advantage in product technology, manufacturing technology, or process technology, which may allow them to offer products or services that have a significant advantage over the products and services that we offer. Advantages could be in price, capacity, performance, reliability, serviceability, industry standards or formats, brand and marketing, or other attributes. A competitive cost structure for our products, including critical components, labor and overhead, is also critical to the success of our business. We may be at a competitive disadvantage to any companies that are able to gain a technological or cost structure advantage. The Chinese government and various agencies, state-owned or affiliated enterprises and 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.

Consolidation within the data storage industry could provide competitive advantages to our competitors.

The data storage industry as a whole has experienced consolidation over the past several years through acquisitions, mergers and decisions by industry players to exit the industry. Further consolidation across the industry, including by our competitors who are vertically integrated with NAND-flash memory, may enhance their capacity, abilities and resources and lower their cost structure, causing us to be at a competitive disadvantage.

Some of our competitors with diversified business units outside of storage products, may, over extended periods of time, sell storage products at prices that we cannot profitably match.

Some of our competitors earn a significant portion of their revenue from business units outside of storage products. Because they do not depend solely on sales of storage products to achieve profitability, they may sell storage products at lower prices and operate their storage business unit at a loss over an extended period of time while still remaining profitable overall. In addition, if these competitors can increase sales of non-storage products to the same customers, they may benefit from selling their storage products at lower prices. Our operating results may be adversely affected if we cannot successfully compete with the pricing by these companies.


If we fail to qualify our products and achieve design wins with our customers, it may have a significant adverse impact on our sales and margins.

We regularly engage in new product qualification with our customers, and the product qualification process may be lengthy for some customers, including those in enterprise storage. Once a product is accepted for qualification testing, failures or delays in the qualification process can result in delayed or reduced product sales, reduced product margins caused by having to continue to offer a more costly current generation product, or lost sales to that customer until the next generation of products is introduced. The effect of missing a product qualification opportunity is magnified by the limited number of high volume OEMs and hyperscale customers, which continue to consolidate their share of the storage markets. Likewise, if product life cycles lengthen, we may have a significantly longer period to wait before we have an opportunity to qualify a new product with a customer, which could reduce our profits because we expect declining gross margins on our current generation products as a result of competitive pressures. Even if our products meet customer specifications, our sales to these customers are dependent upon the customers choosing our products over those of our competitors and purchasing our products in sufficient volume, our ability to supply our products in sufficient quantity and in a timely manner and, with respect to OEM partners, the OEMs’ ability to create, market and successfully sell products containing our solutions. Moreover, in transitioning to new technologies, such as 3D NAND, and products, we may not achieve design wins, our customers may delay transition to these new technologies, our competitors may transition more quickly than we do, or we may experience product delays, cost overruns or performance issues that could harm our operating results and financial condition.

We are subject to risks related to product defects orFlash Ventures, see the unintended use or security breachesrisk factor entitled “We rely substantially on our business ventures with Kioxia for the development and supply of our products,flash-based memory, which could result in product recalls or epidemic failures and could subjectsubjects 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 productsrisks and uncertainties that may not become apparent until after the products have been sold into the market. In addition, our products may be used in a manner that is not intended or anticipated by us, resulting in potential liability. Accordingly, there is a risk that product defects will occur, which could require a product recall. Product recalls can be expensive to implement. As part of a product recall, we may be required or choose to replace the defective product. Moreover, there is a risk that product defects may trigger an epidemic failure clause in a customer agreement. If an epidemic failure occurs, we may be required to replace or refund the value of the defective product and to cover certain other costs associated with the consequences of the epidemic failure. In addition, product defects, product recalls or epidemic failures may cause damage to our reputation or customer relationships, lost revenue, indemnification for a recall of our customers’ 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 affectharm 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 and subject us to liability.



Our strategic relationships subject us to risks that could adversely affect our business, financial condition and results of operations.


We have entered into strategic relationships with various partners for future product development, sales growth and the supply of technologies, components, equipment and materials for use in our product design and manufacturing, including our relationshipspartnership with ToshibaKioxia for NAND-flashflash-based memory supply. In addition, in the first quarter of 2017, our joint venture with Unisplendour Corporation Limited (“Unis”) to marketdevelopment and sell our current data center storage systems in China and to develop data storage systems for the Chinese market in the future became operational; the joint venture is 49% owned by us and 51% owned by Unis and its subsidiary, Unissoft (Wuxi) Group Co. Ltd. Please see the risk factor entitled “Because we are dependent on a limited number of qualified suppliers for components, sub-assemblies, testing, equipment, consumables, raw materials, and logistics, a supplier’s inability, unwillingness, or failure to support us in a timely manner with goods or services at a quality level and cost acceptable to us can adversely affect our margins, revenues and operating results” for a further description of the risks associated with our reliance on external suppliers.manufacturing. 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;

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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 weWe are dependent on a limited number of qualified suppliers forwho provide critical materials or components, sub-assemblies, testing, equipment, consumables, raw materials, and logistics,a disruption in our supply chain, including a shortage in supply or a supplier’s inability, unwillingness, or failure to support us in a timely manner with goods or services at a quality level and cost acceptable to us, canor 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,controllers, dynamic random-access memory, 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 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 dedicatemeet our business needs including dedicating adequate engineering resources to develop components that can be successfully integrated into our products, technology and equipment that can be used to develop and manufacture our next-generation products efficiently. Our supply base has experienced industry consolidation. Where we rely on a limited number of suppliers or a single supplier, the risk of supplier loss due to industry consolidation is enhanced. Some of our suppliers may be competitors in other areas of our business, which could lead to difficulties in price negotiations or meeting our supply requirements. Any disruption in our supply chain could reduce our revenue and adversely impact our financial results.equipment.


From time to time, ourOur suppliers have experienced difficulty meetingin the past been, and may in the future be, unable or unwilling to meet our requirements. If we are unable to purchase sufficient quantities from our current suppliers or qualify and engage additional suppliers, or if we cannot purchase materials at a reasonable price, we may not be able to meet demand for our products. Trade restrictions, including tariffs, quotas and embargoes, demand from other high volume industries for materials or components used in our products, disruptions in supplier relationships or shortages in other components and materials used in our customers’ products could result in increased costs to us or decreased demand for our products, which could negatively impact our operating results. 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. We are not able to directly control product delivery schedules or quality assurance. Furthermore, we manufacture on a turnkey basis with some of our suppliers. In these arrangements, we do not have visibility and control of our suppliers’ inventories of purchased parts necessary to build our products or of the progress of our products through their assembly line. Any significant problems that occur at our suppliers, or their failure to perform at the level we expect, could lead to product shortages or quality assurance problems, either of which would harm our operating results and financial condition. In addition, if we are unable to purchase sufficient quantities from our current suppliers, we may not be able to engage alternative suppliers who are able or willing to provide goods or services in sufficient quantities or at a cost acceptable to us.

Our products require preamps, controllers and firmware. We rely on a limited number of third-party vendors to develop or supply controllers for many of our high-value solutions. Any delays or cost increases in developing or sourcing controllers or firmware, or incompatibility or quality issues relating to the controllers or firmware in our products, could harm our financial results as well as business relationships with our customers.

A majority of our flash memory is currently supplied by Flash Ventures and, to a much lesser extent, by third-party silicon suppliers. Any disruption or shortage in supply of flash memory from our captive or non-captive sources would harm our operating results and financial condition. Many of the risks that affect us also affect our supply base and Flash Ventures, including, but not limited to, having single site manufacturing locations and other facilities based in high risk regions of the world (for example, Flash Ventures is located in Yokkaichi, Japan), natural disasters, power shortages, macro and local economic conditions, shortages of commodity materials, proper management of technology transitions, geo-political risks, employee strikes and other labor actions, compliance with legal requirements, financial instability and exposure to IP and other litigation, including an injunction or other action that could delay shipping. If any of these risks were to affect our suppliers or Flash Ventures, we could also be adversely affected, especially in the case of products, components or services that are single-sourced. For example, if suppliers are facing increased costs due to the above risks, they may require us to enter into long-term volume agreements to shift the burden of fixed costs to us. Further, we work closely with many of our suppliers and strategic partners to develop new technologies and, as a result, we may become subject to litigation from our suppliers, strategic partners or third parties.


Without a capable and financially stable supply base that has established appropriate relationships within the supply chain and has implemented business processes, strategies and risk management safeguards, we would be unable to develop our products, manufacture them in high volumes, and distribute them to our customers to execute our business plans effectively. Some of our suppliers have also experienced a decline in financial performance. Our suppliers may be acquired by our competitors, consolidate, or decide to exit the industry, redirect their investments and increase costs to us, each of which may have an adverse effect on our business and operations. In addition, moving to new technologies may require us to align to, and build, a new supply base. Our success in new product areas may be dependent on our ability to develop close relationships with new suppliers, with preferential agreements. Where this cannot be done, our business and operations may be adversely affected.

In addition to an external supply base, we also rely on an internal supply chain of heads, media and media substrate, and we rely on our business ventures with Toshiba for the supply of NAND-flash memory. Please see the risk factors entitled, “The substitution or replacement of our technologies and products by new technologies could make our products obsolete and harm our operating results,” “IfWhen we do not properly manage technology transitions, our competitiveness and operating results may be negatively affected,” and We rely substantially on our business ventures with Toshiba for the supply of NAND-flash memory, which subjects us to risks and uncertainties that could harm our business, financial condition and operating resultsfor a review of some of the risks related to these supplies.

Price volatility, shortages of critical materials or components, or use by other industries of materials and components used in the storage industry, may negatively impact our operating results.

Increases in the cost for certain critical materials and components and oil may increase our costs of manufacturing and transporting our products and key components and may result in lower operating margins if we are unable to pass these increased costs on to our customers. Shortages of critical components such as DRAM and NAND-flash memory, 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, 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.

Contractual commitments with component suppliers may result in us paying increased charges and cash advances for such components or may cause us to have inadequate or excess component inventory.

To reduce the risk of component shortages, we attempt to provide significant lead times when buying 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 thesethose commitments may require us to buy a substantial number of components from the supplier or make significant cash advances to the supplier; however, these commitments may not result in a satisfactory increase or stabilization of the supply of such components. Furthermore, as a result of uncertain global economic conditions, our ability to forecast our requirements for these components has become increasingly difficult, therefore increasing the risk that our contractual commitmentsand may not meet our actual supply requirements, which could cause us to have inadequate or excess component inventory, and adversely affect our operating results andwhich could increase our operating costs.


If we do not properly manage technology transitions, our competitivenesscosts 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 NAND-flash memory producers or may not fall commensurate with declines in the price of NAND-flash memory, which would harm revenues, our gross margin and operating results.

Many companies, including some of our competitors, have developed or are attempting to develop alternative non-volatile technologies. Successful broad-based commercialization of one or more competing technologies, as well as differing strategies and timing with respect to the transition from 2D NAND to 3D NAND, could reduce the competitiveness and future revenue and profitability of our 2D NAND and 3D NAND-flash technologies. For additional technology transition risks related to 3D NAND, see “We rely substantially on our business ventures with Toshiba for the supply of NAND-flash memory, which subjects us to risks and uncertainties that could harm our business, financial condition and operating results.

In addition, if our customers choose to delay transition to new technologies, if demand for the products that we develop is lower than expected or if the supporting technologies to implement these new technologies are not 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.

Changes in product life cycles could adversely affect our financial results.

If product life cycles lengthen, we may need to develop new technologies or programs to reduce our costs on any particular product to maintain competitive pricing for that product. Longer product life cycles could also restrict our ability to transition customers to our newer products in a timely manner, or at all, negatively impacting our ability to recoup our significant R&D investments to improve our existing technology and develop new technologies. If product life cycles shorten, it may result in an increase in our overall expenses and a decrease in our gross margins, both of which could adversely affect our operating results. In addition, shortening of product life cycles also makes it more difficult to recover the cost of product development before the product becomes obsolete. Our failure to recover the cost of product development in the future could adversely affect our operating results.



The substitution or replacement ofIn addition, our technologies and productssupply base has experienced industry consolidation. Our suppliers may be acquired 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, whencompetitors, consolidate, decide to exit the industry, experiences a fundamental change in storage technologies or standards, any manufacturer that failsredirect their investments and increase costs to successfullyus, each of which may have an adverse effect on our business and timely adjust its designs and processes to accommodate or manufacture the new technology or standard fails to remain competitive. There are some revolutionary technologies, such as current-perpendicular-to-plane giant magnetoresistance, shingle magnetic recording, heat-assisted magnetic recording, patterned magnetic media and advanced signal processing that, if implemented by a competitor on a commercially viable basis ahead of the industry, could put us at a competitive disadvantage.operations. In addition, many companies, including some of our competitors,suppliers have developedexperienced a decline in financial performance. Where we rely on a limited number of suppliers or are attempting to develop alternative non-volatile technologies, including non-NAND technologies such as magnetoresistive random-access memory (“RAM”), resistive random-access memory (“ReRAM”) and phase change, as well as NAND based vertical or stacked 3D memories based on charge trap, floating gate and other cell architecture. In embedded solutions, certain competitors have recently introduced a mobile storage standard referred to as Universal Flash Storage (“UFS”). In the data center market, certain competitors have recently introduced a non-volatile memory express (“NVMe”) product that can be used as a substitute for our peripheral component interconnect express (“PCIe”) solutions. 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 providersupplier, the risk of such non-volatile memory solutions. Assupplier loss due to industry consolidation or a resultdecline in financial performance is enhanced. Some of these shiftsour suppliers may also be competitors 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 thanother areas of our competitors at implementing new technologies or standards, we may not be able to offer products with capacities and capabilities that our customers desire,business, which could harmlead to difficulties in price negotiations or meeting our operating results.

The difficulty of introducing hard drives with higher levels of areal densitysupply requirements. Any disruption in our supply chain could reduce our revenue and the challenges of reducing other costs mayadversely impact our ability to achieve historical levelsfinancial results.

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Storage capacity of the hard drive, as manufactured by us, is determined by the number of disks and each disk’s areal density. Areal density is a measure of the amount of magnetic bits that can be stored on the recording surface of the disk. Generally, the higher the areal density, the more information can be stored on a single platter. Higher areal densities require existing recording head and magnetic media technology to be improved or new technologies developed to accommodate more data on a single disk. Historically, we have been able to achieve a large percentage of cost reduction through increases in areal density. Increases in areal density mean that the average drive we sell has fewer heads and disks for the same capacity and, therefore, may result in a lower component cost. However, increasing areal density has become more difficult in the storage industry. If we are not able to increase areal density at the same rate as our competitors or at a rate that is expected by our customers, we may be required to include more components in our drives to meet demand without corresponding incremental revenue, which could negatively impact our operating margins and make achieving historical levels of cost reduction difficult or unlikely. Additionally, increases in areal density may require us to make further capital expenditures on items such as new test equipment needed as a result of an increased number of gigabytes per platter. Our inability to achieve cost reductions could adversely affect our operating results.


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.

If we do not properly manage new product development, our competitiveness and operating results may be negatively affected.

Our success depends in part on our ability to develop and introduce new products in a timely manner in order to keep pace with technology advancements. Advances in semiconductor technology have resulted in other emerging technologies that can be competitive with traditional storage technologies. We may be unsuccessful in anticipating and developing new and improved products for the client, enterprise and other storage markets in response to competing technologies. If our hard drive, solid-state products and our storage solutions products fail to offer a superior value proposition to alternative storage products, we will be at a competitive disadvantage and our business will suffer. In some cases, our customers’ demand for a more diversified portfolio results in investments in new products for a particular market that do not necessarily expand overall market opportunity, which may negatively affect our operating results. As we introduce new products, standards or technologies, it can take time for these new standards or technologies to be adopted, for consumers to accept and transition to these new standards or technologies and for significant sales to be generated, if at all. Failure of consumers or enterprises to adopt our new products, standards or technologies could harm our results of operations as we fail to reap the benefits of our investments.

In addition, the success of our new product introductions depends on a number of other factors, including:

difficulties faced in manufacturing ramp;

implementing at an acceptable cost product features expected by our customers;

market acceptance/qualification;

effective management of inventory levels in line with anticipated product demand;

quality problems or other defects in the early stages of new product introduction and problems with 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 these new products.

In particular, as part of our growth strategy, we have made significant investments in active archive systems, which are designed to enable organizations to rapidly access massive long-term data stores. For example, our acquisition of Amplidata NV in March 2015 was partially driven by our strategy to expand in this area. We expect to continue to make significant investments in active archive systems. Our active archive systems may fail to gain market acceptance, or the market for active archive systems may not grow as we anticipate.


We have also seen, and anticipate continuing to see, an increase in customers requesting that we develop products, including software associated with our products, that incorporate open source software elements and operate in an open source environment. Adapting to this demand may cause product delays, placing us at a competitive disadvantage. Open source products could also reduce our capability for product differentiation or innovation and our affected products could be diminished to commodity status, which we expect would place increased downward pressure on our margins. If we fail to successfully anticipate and manage issues associated with our product development generally, our business may suffer.

Our operations, and those of certain of our suppliers and customers, are concentrated in large, purpose-built facilities, subjecting ussubject to substantial risk of damage or loss if operations at any of these facilities are disrupted.disruption.


As a result of our cost structure and strategy of vertical integration, we conduct our operations at large, high volume, purpose-built facilities in California and throughout Asia. The concentration of Flash Ventures in Yokkaichi, Japan, magnifies the risks of supply disruption. The facilities of many of our customers, our suppliers and our customers’ suppliers are also concentrated in certain geographic locations throughout Asia and elsewhere. A localized health risk affecting our employees at these facilities or the staff of our or our customers’ other suppliers, such as the spread of a pandemic influenza, could impair the total volume of our products that we are able to manufacture or sell, which would result in substantial harm to our operating results. Similarly, a fire, flood, earthquake, tsunami or other natural disaster, condition or event such as a power outage, terrorist attack, political instability, civil unrest, localized labor unrest or other employment issues, or a power outagehealth epidemic that adversely affects any of these facilities, including access to or from these facilities bythe employees, the technology infrastructure or logistics operators at these facilities, would significantly affect our ability to manufacture or sell our products and source components, which would result in a substantial loss of sales and revenue and a substantial harm to our operating results. For example, prior to the 2011 flooding in Thailand, all of our internal slider capacity and 60% of our hard drive manufacturing capacity was in Thailand. As a result of the flooding in Thailand, our facilities were inundated and temporarily shut down. During that period, our ability to manufacture hard drives was significantly constrained, adversely affecting our business, financial condition and results of operations. In addition, the geographic concentration of our manufacturing sites could exacerbate the negative impacts resulting from localized labor unrest or other employment issues.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 ToshibaKioxia to obtain and maintain sufficient property, business interruption and other insurance for Flash Ventures. If ToshibaKioxia fails to do so, we could suffer significant unreimbursable losses, and such failure could also cause Flash Ventures to breach various financing covenants.


If our technology infrastructure, systems or products are compromised, damaged or interrupted by cyber attacks, data security breaches, other security problems, security vulnerabilities or design defects, or sustain system failures,We experience sales seasonality and cyclicality, which could cause our operating results and financial condition could be adversely affected.

We experience cyber attacks of varying degrees on our technology infrastructure and systems and, as a result, unauthorized parties have obtained in the past, and may in the future obtain, access to our computer systems and networks. The technology infrastructure and systems of our suppliers, vendors and partners may also experience such attacks. Cyber attacks can include computer viruses, computer denial-of-service attacks, worms, and other malicious software programs or other attacks, covert introduction of malware to computers and networks, impersonation of authorized users, and efforts to discover and exploit any security vulnerabilities or security weaknesses, as well as intentional or unintentional acts by employees or other insiders with access privileges, intentional acts of vandalism by third parties and sabotage. We believe cyber attack attempts are increasing in number and that cyber attackers are developing increasingly sophisticated systems and means to not only attack systems, but also to evade detection or to obscure their activities. Our products are also targets for cyber attacks. While some of our products contain encryption or security algorithms to protect third-party content or user-generated data stored on our products, these products could still be hacked or the encryption schemes could be compromised, breached, or circumvented by motivated and sophisticated attackers. We have agreed with certain customers and strategic partners, including Toshiba, to undertake certain commitments to promote information security, and we may be liable to Toshiba or such other parties if we fail to meet our cyber security commitments.


fluctuate. 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 thataccurately forecasting demand has become more difficult, which 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.

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 or higher tariffs and fees;

import and export restrictions and license and certification requirements, including on encryption technology, and complex customs regulations;

copyright levies or similar fees or taxes imposed in European and other countries;

exchange, currency and tax controls and reallocations;

increasing labor and overhead costs;

weaker protection of IP rights;

difficulties in managing international operations, including appropriate internal controls; and

loss or non-renewal of favorable tax treatment under agreements or treaties with foreign tax authorities.

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 which may be proposed or implemented by the U.S. President and his administration.

Terrorist attacks may adversely affect our business and financial results or operating results.efficiencies.


Recent terrorist incidents aroundSales of computer systems, mobile devices, storage subsystems, gaming consoles and consumer electronics tend to be seasonal and subject to supply-demand cycles, and therefore we expect to continue to experience seasonality and cyclicality in our business as we respond to variations in supply dynamics and customer demand. Changes in seasonal and cyclical supply and demand patterns have made it, and could continue to make it, more difficult for us to forecast demand, especially as a result of the world and the continued threat of terrorist activity and other acts of war or hostility have created uncertaintycurrent macroeconomic environment. Changes in the financialproduct or channel mix of our business can also impact seasonal and insurance marketscyclical patterns, adding complexity in forecasting demand. Seasonality and have significantly increasedcyclicality also may lead to higher volatility in our stock price. It is difficult for us to evaluate the political, economicdegree to which seasonality and social instabilitycyclicality may affect our stock price or business in somefuture periods because of the geographic areasrate and unpredictability of product transitions, actions by competitors, new product introductions and macroeconomic conditions.

The variety and volume of products we manufacture are based in which we,part on accurately forecasting market and customer demand for our products. Accurately forecasting demand has also become increasingly difficult for us, our customers and our suppliers or our customers operate. Additionally, it is uncertain what impact the reactionsdue to such acts by various governmental agenciesvolatility in global economic conditions and security regulators worldwide will have on shipping costs. Actsindustry consolidation, resulting in less availability of terrorism, either domestically or abroad, could create further uncertainties and instability. To the extent this results in disruption or delayshistorical market data for certain product segments. Further, for many of our manufacturing capabilities, R&D activities (includingoriginal equipment manufacturers (“OEM”) customers 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 operations in Israel) or shipmentsproducts are designed to be largely interchangeable with competitors’ products, our demand forecasts may be impacted significantly by the strategic actions of our products,competitors. As forecasting demand becomes more difficult, the risk that our business,forecasts are not in line with demand increases. If our forecasts exceed actual market demand, 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 couldcondition. If market demand increases significantly beyond our forecasts or beyond our ability to add manufacturing capacity, then we may not be adversely affected. Anyable to satisfy customer product needs, possibly resulting in a loss of these events could alsomarket 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 volatilitythe risk of excess inventory or loss of sales in the U.S.event our forecasts vary substantially from actual demand.
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The loss of our key management, staff and world financial markets, whichskilled employees, the inability to hire and integrate new employees or decisions to realign our business could have a negative effectnegatively 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. Changes in our key management team can result in loss of continuity, loss of accumulated knowledge, departure of other key employees, disruptions to our operations and inefficiency during transitional periods. Global competition for skilled employees in the technology related industry is intense, and our business success becomes increasingly dependent on our stock priceability to retain our key staff and skilled employees, to implement succession plans for our key management and staff, 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. Changes in immigration policies may limit the capital resources availableimpair our ability to usrecruit and hire technical and professional talent. Our employee hiring and retention also depend on our customers or suppliers, or adversely affect consumer confidence.

Sudden disruptionsability to build and maintain a diverse and inclusive workplace culture and be viewed as an employer of choice. Additionally, because a substantial portion of our key employees’ compensation is placed “at risk” and linked to the availabilityperformance 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 impactbusiness, including through equity compensation, when our operating results by impairingare 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 base compensation. If we are unable to hire and retain key management, staff or skilled employees, our ability to timely and efficiently receive shipments from our suppliers or deliver our products.operating results would likely be harmed.


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 which place limits on our ability to complete acquisitions and investments. Even if we identify and complete suitable corporate transactions, we may not be able to successfully address any integration challenges in a timely manner, or at all. There may be difficulties with implementing new systems and processes or with integrating systems and processes of companies with complex operations, which could result in inconsistencies in standards, controls, procedures and policies and may increase the risk that our internal controls are found to be ineffective. 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 whichthat 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 saving initiatives, restructurings or divestitures that we undertake may result in disruptions to our operations and may not deliver the results we expect, which may adversely affect our business.

From time to time, we engage in cost saving initiatives, restructurings and divestitures that may result in workforce reduction and consolidation of our manufacturing or other facilities. As a result of these actions, 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, that additional costs will not offset any such reductions or consolidations or that we do not forego future business opportunities as a result of these actions. If our operating costs are higher than we are unable to successfully integrate the businessexpect or if we do not maintain adequate control of our costs and operations of HGST,expenses, our business and financial condition mayoperating results could be adversely affected.

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Our high level of debt may adversely impact our liquidity, restrict our operations and ability to respond to business opportunities, and increase our vulnerability to adverse economic and industry conditions.

As of July 3, 2020, our total indebtedness was $9.71 billion in aggregate principal, and we had $2.25 billion of additional borrowing availability under our revolving credit facility, subject to customary conditions under the credit agreement.

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 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;

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; 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 our debt service obligations, comply with our debt covenants and deleverage depends on our cash flows and financial performance, which are affected by financial, business, economic and other factors. The rate at which we will be able to or choose to deleverage is uncertain. Failure to meet our debt service obligations or comply with our debt covenants could result in an event of default under the applicable indebtedness. We may be unable to cure, or obtain a waiver of, an event of default or otherwise amend our debt agreements to prevent an event of default thereunder on terms acceptable to us or at all. In connection with obtainingthat event, the regulatory approvalsdebt holders could accelerate the related debt, which may result in the cross-acceleration or cross-default of other debt, leases or other obligations. We may not have sufficient funds available to repay accelerated indebtedness, and we may be required to complete the acquisition of HGST, we agreed to certain conditions required by the Ministry of Commerce of the People’s Republic of China (“MOFCOM”), including adopting measures to keep HGST as an independent competitor until MOFCOM agreed otherwise. On October 19, 2015, MOFCOM announced that it had made a decision allowing us to integrate substantial portionsrefinance all or part of our HGST and WD subsidiaries, provided thatdebt, sell important strategic assets at unfavorable prices, incur additional indebtedness or issue common stock or other equity securities, which we continuemay be unable to offer both HGST and WD product brands and maintain separate sales teams that will separately offer products under the WD and HGST brands for two years from the date of the decision.


As a result of MOFCOM’s decision, we immediately began planning for the integration of the substantial portions ofdo on terms acceptable to us, in amounts sufficient to meet our HGST and WD subsidiaries that we are now allowedneeds or at all. Our inability to integrate (including corporate functions, R&D, recording heads and magnetic media operations, engineering and manufacturing). We expect this integration to continue through the end of calendar year 2017. Our integration efforts during this time may involve significant management time and create uncertainty for employees and customers. Any delays in the integration processservice 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.

As our bank debt contains a variable interest rate component based on our corporate credit ratings, a decline in our ratings could result in increased interest rates and debt service obligations. In addition, 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 as to 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.

Our credit agreement uses the London Interbank Offered Rate (“LIBOR”) as a reference rate for our term loans and revolving credit facility, such that the applicable interest rate may, at our option, be calculated based on LIBOR. In July 2017, the U.K.’s Financial Conduct Authority, which regulates LIBOR, announced that it intends to phase out LIBOR by the end of 2021. In April 2018, the Federal Reserve Bank of New York began publishing a Secured Overnight Funding Rate, which is intended to replace U.S. dollar LIBOR. Plans for alternative reference rates for other currencies have also been announced. At this time, we cannot predict how markets will respond to these proposed alternative rates or the effect of any changes to LIBOR or the discontinuation of LIBOR. If LIBOR is no longer available or if our lenders have increased costs due to changes in LIBOR, we may experience potential increases in interest rates on our variable rate debt, which could adversely impact our interest expense, results of operations and financial condition. Itcash flows. In addition, replacing LIBOR with an alternative reference rate for any of our debt could be a taxable event.

We may from time to time seek to further refinance our substantial indebtedness by issuing additional shares of common stock, which may dilute our existing shareholders, reduce the value of our common stock, or both.
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Loss of revenue from a key customer, or consolidation among our customer base, could harm our operating results.

During the year ended July 3, 2020, 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 possible thatessential to our future performance. We have experienced and may in the integration process could result infuture experience events such as the loss of a key employees, the losscustomer, prohibition or restriction of customers, the disruption ofsales to a key customer by law, regulation or other government action, reductions in sales to or orders by a key customer, customer requirements to reduce our company’s ongoing business or in unexpected integration issues, higher than expected integration costs and an overall integration process that takes longer than originally anticipated. Additionally, the integration of the operations of our HGST and Western Digital Technologies, Inc. (“WDT”) subsidiaries may also increase the risk that our internal controls are found to be ineffective. Further, untilprices before we are able to begin combining our HGST and WD product brands and sales teams following the expiration of the MOFCOM restrictions on October 19, 2017, we will continue to incur additional costs to maintain separate brands and sales teams. These additional costs, along with any delay in the integration process or higher than expected integrationreduce costs or the acquisition of a key customer by one of our competitors. These events would likely harm our operating results and financial condition. Further, government authorities may implement laws or regulations or take other integration issues,actions that could result in significant changes to the business or operating models of our customers. Such changes could adversely affect our abilityoperating results.

Additionally, if there is consolidation among our customer base, our customers may be able to achieve the full operating expense synergies we expect from integrationcommand increased leverage in negotiating prices and other terms of the businessessale, 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 HGSTproducts by the combined entity with those of our competitors and WDT subsidiaries. Any failure to achieve the full operating expense synergies that we expect from this integrationcancellations of orders, each of which could harm our business and financial condition. Achieving these synergies is also subject to significant business, operational, economic and competitive uncertainties and contingencies, and we cannot assure you that any or all of these synergies will be achieved in the anticipated amounts or within the anticipated time frames or cost expectations or at all.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 inAlso, the storage industry,ecosystem is constantly evolving, and our business success becomes increasingly dependent on our ability to retain our key stafftraditional customer base is changing. Fewer companies now hold greater market share for certain applications and skilled employees, to attract, integrateservices, such as cloud storage and retain new skilled employees, including employees from acquisitions,computing platforms, mobile, social media, shopping and to make decisions to realign our business to take advantagestreaming media. As a result, the competitive landscape is changing, giving these companies increased leverage in negotiating prices and other terms of efficiencies or reduce redundancies. Volatility or lack of positive performance in our stock price and the overall markets maysale, which could adversely affect our abilityprofitability. In addition, the changes in our evolving customer base create new selling and distribution patterns to retain key staff or skilled employees whowhich we must adapt. To remain competitive, we must respond to these changes by ensuring we have received equity compensation. Additionally, because a substantial portionproper scale in this evolving market, as well as offer products that meet the technological requirements of our key employees’ compensation is placed “at risk” and linkedthis customer base at competitive pricing points. To the extent we are not successful in adequately responding to the performance of our business, whenthese changes, our operating results and financial condition could be harmed.

Tax matters may materially affect our financial position and results of operations.

Changes in tax laws in the United States, the European Union and around the globe have impacted and will continue to impact our effective worldwide tax rate, which may materially affect our financial position and results of operations. 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. Additionally, portions of our operations are negatively impacted, we are atsubject to a competitive disadvantage for retaining and hiring key management, staff and skilled employees versus other companies that pay a relatively higher fixed salary. If we lose our existing key management, staff or skilled employees,reduced tax rate or are unablefree of tax under various tax holidays that expire in whole or in part from time to hire and integrate new key management, stafftime, or skilled employees,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 implement succession planssatisfy the conditions of the reduced tax rate, then our effective tax rate could increase in the future.

Our determination of our tax liability in the U.S. and other jurisdictions is subject to review by applicable domestic and foreign tax authorities. For example, as disclosed in Part II, Item 8, Note 13, Income Tax Expense, of the Notes to Consolidated Financial Statements included in this Annual Report on Form 10-K, we are under examination by the Internal Revenue Service for certain fiscal years and in connection with that examination, we received statutory notices of deficiency seeking certain adjustments to income and have filed petitions with the U.S. Tax Court. Although we believe our key managementtax positions are properly supported, the final timing and resolution of any tax examinations are subject to significant uncertainty and could result in litigation or staff,the payment of significant 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.

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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. As a result of the shift to mobile devices, 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 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, our operating results would likely be harmed. Furthermore, if we do not realizeadversely affected. Negative changes in the anticipated benefitscredit-worthiness or the ability to access credit, or the bankruptcy or shutdown of any of our intended realignment after we make decisions regardingsignificant retail or distribution partners would harm our personnelrevenue and implement our realignment plans,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. Further, changes to the retail environment, such as store closures caused by macroeconomic conditions or changing customer preferences, may reduce the demand for our products. 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.

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 or 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 implement technology transitions 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;

variations in the cost of and lead times for components for our products, disruptions of our supply chain;

increase in costs due to warranty claims; and

higher costs as a result of currency exchange rate fluctuations.

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.

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If our technology infrastructure, systems or products are compromised, damaged or interrupted by cyber attacks, data security breaches, other security problems, 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 have in the past experienced and may in the future 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 or fraud 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. 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. To the extent our products are hacked or the encryption schemes are compromised or breached, this could harm our business by requiring us to employ additional resources to fix the errors or defects, exposing us to litigation and indemnification claims and hurting our reputation.

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.

We are subject to laws, rules, and regulations 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 relating to the collection, use, and security and privacy 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 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. Laws and regulations relating to the collection, use, and security and privacy of third-party data change over time and new laws and regulations become effective from time to time. For example, the California Consumer Privacy Act (“CCPA”), which became effective January 1, 2020, imposes new obligations on certain companies doing business in California with respect to the personal information of California residents. These obligations include new notice and privacy policy requirements, as well as new obligations to respond to requests to know and access personal information, delete personal information and say no to the sale of personal information. 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.

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We are subject to risks related to product defects, 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, including as a result of third-party components or applications that we incorporate in our products, which could require a product recall. Product recalls can be expensive to implement. As part of a product recall, we may be required or choose to replace the defective product. Moreover, there is a risk that product defects may trigger an epidemic failure clause in a customer agreement. If an epidemic failure occurs, we may be required to replace or refund the value of the defective product and to cover certain other costs associated with the consequences of the epidemic failure. In addition, product defects, product recalls or epidemic failures may cause damage to our reputation or customer relationships, lost revenue, indemnification for a recall of our customers’ products, warranty claims, litigation or loss of market share with our customers, including our OEM and 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 provisions 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.

We are subject to state, federal and international legal and regulatory requirements, such as environmental, labor, trade, health, safety, anti-corruption and tax regulations, customers’ standards of corporate citizenship, and industry and coalition standards, such as those established by the Responsible Business Alliance (“RBA”), and compliance with those requirements could cause an increase in our operating costs and failure to comply may harm our business.

We are subject to, and may become subject to additional, state, federal and international laws and regulations governing our environmental, labor, trade, health, safety, anti-corruption and tax practices. These laws and 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, customers 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, which could impair our ability to conduct business in certain jurisdictions or with certain customers and harm our operating results. 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, customers or partners fail to timely comply with applicable legislation, certain 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 could have a material 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 or our suppliers, customers or partners 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.

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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.


WeFrom time to time, 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, affect demand for our products 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.

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.


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Moreover, from time to time, we agree to indemnify certain of our suppliers and customers for alleged IP infringement. The scope of such indemnity varies but may include indemnification for direct and consequential damages and expenses, including attorneys’ fees. We may be engaged in litigation as a result of these indemnification obligations. Third party claims for patent infringement are excluded from coverage under our insurance policies. A future obligation to indemnify our customers or suppliers may harm our business, financial condition and operating results.



Our reliance on IP and other proprietary information subjects us to the risk that these key ingredients of our business could be copied by competitors.


Our success depends, in significant part, on the proprietary nature of our technology, including non-patentable IP such as our process technology. We primarily rely on patent, copyright, trademark and trade secret laws, as well as nondisclosure agreements and other methods, to protect our proprietary technologies and processes. There can be no assurance that our existing patents will continue to be held valid, if challenged, or that they will have sufficient scope or strength to protect us. It is also possible that competitors or other unauthorized third parties may obtain, copy, use or disclose, illegally or otherwise, our proprietary technologies and processes, despite our efforts to protect our 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, anti-corruption and tax regulations, customers’ standards of corporate citizenship, and industry and coalition standards, such as those established by the Electronics Industry Citizenship Coalition (“EICC”), could cause an increase in our operating costs.

We are subject to, and may become subject to additional, state, federal and international laws and regulations governing our environmental, labor, trade, health, safety, anti-corruption and tax practices. These laws and 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 EICC, the standards of business conduct required by some of our customers, and our commitment to sound corporate citizenship in all aspects of our business, we could incur substantial compliance and operating costs and be subject to disruptions to our operations and logistics. In addition, if we were found to be in violation of these laws or noncompliant with these initiatives or standards of conduct, we could be subject to governmental fines, liability to our customers and damage to our reputation and corporate brand which could cause our financial condition and operating results to suffer.


Conflict minerals regulations may cause us to incur additional expenses and could limit the supply and increase the cost of certain components and metals contained in our products.

We are subject to the SEC’s diligence and disclosure requirements regarding the use and source of gold, tantalum, tin and tungsten, commonly referred to as 3TG or conflict minerals, which are necessary to the functionality or production of products manufactured or contracted to be manufactured by public companies. As a result of these rules, we report annually regarding whether such 3TG originated from the Democratic Republic of the Congo or an adjoining country. These rules could affect our ability to source components that contain 3TG, or 3TG generally, at acceptable prices and could impact the availability of such components or 3TG, since there may be only a limited number of suppliers of “conflict free” 3TG. Our customers, including our OEM customers, may require, and some of our customers have notified us that they require, that our products contain only conflict free 3TG, and our revenues and margins may be harmed if we are unable to meet this requirement at a reasonable price, or at all, or are unable to pass through any increased costs associated with meeting this requirement. Additionally, we may suffer reputational harm with our customers and other stakeholders and challenges from government regulators if our products are not conflict free or if we are unable to sufficiently verify the origins of the 3TG contained in our products through the due diligence procedures that we implement. We could incur significant costs to the extent that we are required to make changes to products, processes, or sources of supply due to the foregoing requirements or pressures. Conflict minerals legislation in Europe, Canada or any other jurisdiction, could increase these risks.

Violation of applicable laws, including labor or environmental laws, and certain other practices by our suppliers, customers or partners could harm our business.

We expect our suppliers, customers and partners to operate in compliance with applicable laws and regulations, including labor and environmental laws, and to otherwise meet our required standards of conduct. While our internal operating guidelines promote ethical business practices, we do not control our suppliers, customers, partners or their labor or environmental practices. The violation of labor, environmental or other laws by any of them, or divergence of their business practices from those generally accepted as ethical, could harm our business by:

interrupting or otherwise disrupting the shipment of our product components;

damaging our reputation;

forcing us to find alternate component sources;

reducing demand for our products (for example, through a consumer boycott); or

exposing us to potential liability for our suppliers’, customers’ or partners’ wrongdoings.


Flash Ventures’ equipment lease agreements contain covenants and other cancellation events, and cancellation of the leases would harm our business, operating results and financial condition.


Flash Ventures sells to and leases back a portion of its equipment 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 Toshiba each guarantee halfinstitutions. Most of the total outstandinglease obligations are guaranteed 50% by us and some50% by Kioxia. Some of which we guaranteethe lease obligations are guaranteed in full for our share of the Flash Ventures investment.by us. As of June 30, 2017,July 3, 2020, the portion of outstanding Flash Ventures’ lease obligations covered by our guarantees totaled approximately $968 million,$1.90 billion, based upon the Japanese yen to U.S. dollar exchange rate at June 30, 2017.July 3, 2020. The equipment lease agreements containleases are subject to customary 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 Flash Ventures or 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 is not reached, we may be required to pay all or a portion of the outstanding lease obligations covered by our guarantees, which would significantly reduce our cash position and may force us to seek additional financing, which may not be available on terms acceptable to us, if at all.



Any decisions to reduceIf we do not resume paying a quarterly cash dividend or discontinue paying cash dividends torepurchasing shares of our shareholders could causecommon stock, the market price for our common stock tocould decline.


We may modify, suspend or cancelIn April 2020, we suspended our quarterly cash dividend policy in any manner and at any time. Any reduction or discontinuance by uspolicy. In addition, we have not repurchased shares of our common stock pursuant to our stock repurchase program since the paymentfirst quarter of quarterlyfiscal 2019. Although we will reevaluate paying cash dividends could causeand repurchasing shares of our common stock when appropriate, there can be no assurance if, when or at what level we may resume these activities. If we choose not to or are unable to resume paying cash dividends or repurchasing shares of our common stock in the future, the market price of our common stock to decline. Moreover, in the event our payment of quarterly cash dividends are reduced or discontinued, our failure or inability to resume paying cash dividends at historical levels could cause the market price of our common stock tomay decline.


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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,revenue, 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 NAND-flashflash-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 NAND-flashflash-based memory wafers and the cost to us of future capital funding of Flash Ventures would increase, which could negatively impact our operating results.increase. If any of these events occur, they wouldcould 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 domay 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. Our customers’ credit risk may also be exacerbated by an economic downturn or other adverse global or regional economic conditions. 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.

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;


accruals for litigation and other contingencies; and

liabilities for unrecognized tax benefits.

In addition, changes in existing accounting or taxation rules or practices, new accounting pronouncements or taxation rules, or varying interpretations of current accounting pronouncements or taxation practice could have an adverse effect on our results of operations and financial condition.


The market price of our common stock is volatile.


The market price of our common stock has been, and may continue to be, volatile. Factors that may significantly affect the market price of our common stock include the following:


actual or anticipated fluctuations in our operating results, including those resulting from the seasonality of our business;


perceptions about our strategic relationships and joint ventures, access to supply of flash-based memory, new technologies and technology transitions;

announcements of technological innovations or new products 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;

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Table of Contents
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;adverse publicity, whether or not justified;


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 or other events that affect the market generally and, in particular, developments related to market conditions foror events impacting 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.



Further, a sustained decline in our stock price or market capitalization are among the factors that may be considered a change in circumstances indicating that the carrying value of our long-lived assets or goodwill may be impaired and, if an impairment review is triggered, could require us to record a significant charge to earnings in our Consolidated Financial Statements.

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 anbalances. From time to time, our investment portfolio ofmay include various holdings, security types, and maturities. These investments areOur investment portfolio is 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 ourOur investment portfolio consists ofmay include 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”)(FDIC) limits could also have an adverse impact on our financial position.


In addition, if we are unable to generate sufficient cash flows from operations to repay our indebtedness, fund acquisitions, pay dividends, or repurchase shares of our common stock, we may choose or be required to increase our borrowings, if available, or to repatriate funds to the U.S. at a substantialan 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.


If our internal controls are found to be ineffective, our stock price may be adversely affected.
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Our most recent evaluation resulted in our conclusion that as of June 30, 2017, in compliance with Section 404 of the Sarbanes-Oxley Act of 2002, our internal control over financial reporting was effective. If our internal control over financial reporting is found to be ineffective or if we identify a material weakness in our financial reporting in future periods, investors may lose confidence in the reliability of our financial statements, we may be required to restate our financial results, our access to capital markets may be limited, and we may be subject to sanctions from regulatory agencies and The NASDAQ Global Select Market, each of which may adversely affect our stock price.


From time to time we may become subject to income tax examinations or similar proceedings, and as a result we may incur additional costs and expenses or owe additional taxes, interest and penalties that may negatively impact our operating results.

We are subject to income taxes in the U.S. and certain foreign jurisdictions, and our determination of our tax liability is subject to review by applicable domestic and foreign tax authorities. For example, as we have previously disclosed, we are under examination by the Internal Revenue Service for certain fiscal years and in connection with that examination, we received a Revenue Agent’s Report seeking certain adjustments to income as disclosed in Part II, Item 8, Note 13, Income Tax Expense (Benefit), of the Notes to Consolidated Financial Statements included in this Annual Report on Form 10‑K. Although we believe our tax positions are properly supported, the final timing and resolution of any tax examinations are subject to significant uncertainty and could result in our having to pay amounts to the applicable tax authority in order to resolve examination of our tax positions, which could result in an increase or decrease of our current estimate of unrecognized tax benefits and may negatively impact our financial position, results of operations or cash flows.

We are subject to risks associated with loss or non-renewal of favorable tax treatment under agreements or treaties with foreign tax authorities.

Portions of our operations are subject to a reduced tax rate or are free of tax under various tax holidays that expire in whole or in part from time to time, or may be terminated if certain conditions are not met. Although many of these holidays may be extended when certain conditions are met, we may not be able to meet such conditions. If the tax holidays are not extended, or if we fail to satisfy the conditions of the reduced tax rate, then our effective tax rate could increase in the future. In addition, any actions by us to repatriate non-U.S. earnings for which we have not previously provided for U.S. taxes may impact our effective tax rate.


Changes in tax laws could increase our worldwide tax rate and materially affect our financial position and results of operations.

Tax laws are dynamic and subject to change as new laws and regulations are passed and new interpretations of the laws are issued or applied. While the former U.S. administration and members of Congress made public statements indicating that tax reform is a priority, and certain changes to the U.S. tax laws and regulations have been made and others proposed, additional changes may be proposed by the current U.S. administration or members of Congress and new U.S. tax laws and regulations may go into effect. In addition, many countries in the European Union and around the globe have adopted and/or proposed changes to current tax laws. Further, organizations such as the 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.

Item 1B.Unresolved Staff Comments

Item 1B.Unresolved Staff Comments

Not applicable.



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Item 2.Properties

Item 2.Properties

Our principal executive offices are located in San Jose, California. Our leased facilities are occupied under leases that expire at various times through 2027.2034. Our principal manufacturing, R&D, marketing and administrative facilities as of June 30, 2017July 3, 2020 were as follows:
LocationBuildings Owned or LeasedApproximate Square FootageDescription
United States
California
FremontOwnedLeased392,000290,000
Manufacturing of head wafers and R&D
IrvineLeased490,000434,000
R&D, administrative, marketing and sales
MilpitasOwned589,000
R&D, marketing and sales, operations and administrative
San JoseOwned and Leased2,887,0002,561,000
Manufacturing of head wafers, head, media and product development, R&D, administrative, marketing and sales
Colorado
LongmontLeased62,00087,000
R&D
MinnesotaColorado SpringsLeased59,000R&D
RochesterMinnesotaLeased118,000
Product development
AsiaRochesterLeased121,000Product development
ChinaAsia
ShanghaiChinaOwned715,000
Assembly and test
ShenzhenShanghaiOwned and Leased548,000774,000
Manufacturing of media and administrative
Japan
FujisawaOwned661,000
Product development
Malaysia
JohorOwned271,000
Manufacturing of substrates
Kuala LumpurOwned1,074,000
Manufacturing of hard drives and R&D
KuchingOwned285,000
Manufacturing and development of substrates
PenangOwned1,075,000
Assembly and test manufacturingof SSDs
ShenzhenOwned and Leased563,000Manufacturing of media and SSDs, and R&D
PhilippinesJapan
LagunaFujisawaOwned621,000661,000
Product development
Malaysia
JohorOwned277,000Manufacturing of HGAs and slider fabricationsubstrates
SingaporeKuala LumpurLeasedOwned324,000145,000
R&D and administrative
ThailandKuchingOwned285,000Manufacturing and development of substrates
PenangOwned1,683,000Assembly and test of SSDs, manufacturing of media, and R&D
Philippines
LagunaOwned632,000Manufacturing of HGAs and slider fabrication
Thailand
Bang Pa-InOwned1,665,0001,578,000
Slider fabrication, manufacturing of hard drivesHDDs and HGAs, and R&D
NavanakornOwned290,000
PrachinburiOwned838,000Manufacturing of HGAsHDDs
PrachinburiIndiaOwned729,000
Manufacturing of hard drives
IndiaBangaloreOwned and Leased638,000R&D and administrative
BangaloreMiddle EastOwned240,000
R&D, marketing and administrative
Middle EastIsrael
IsraelKfar SabaOwned167,000R&D
Kfar SabaTefenOwned167,00064,000
R&D marketing and administrative
TefenOwned64,000
R&D, marketing and administrative


We also lease office space in various other locations throughout the world primarily for R&D, sales, operations, administration and technical support. We believe our present facilities are adequate for our current needs, although we upgrade our facilities from time to time to meet anticipated future technological and market requirements. In general, new manufacturing facilities can be developed and become operational within approximately nine to eighteen months should we require such additional facilities.



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Item 3.Legal Proceedings

Item 3.Legal Proceedings

For a description of our legal proceedings, see Part II, Item 8, Note 17, 16, Legal Proceedings, of the Notes to Consolidated Financial Statements included in this Annual Report on Form 10‑K,10-K, which is incorporated by reference in response to this item.


Item 4.Mine Safety Disclosures

Item 4.Mine Safety Disclosures

Not applicable.



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PART II


Item 5.Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

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 NASDAQNasdaq Global Select Market (“NASDAQ”Nasdaq”) under the symbol “WDC.” The approximate number of holders of record of our common stock as of August 16, 201719, 2020 was 1,069.920.

The high and low sales prices of our common stock as reported by NASDAQ for each quarter of 2017 and 2016 were as follows:
Quarter Ended High Low
September 30, 2016 $59.86 $43.09
December 30, 2016 $72.01 $52.10
March 31, 2017 $84.28 $68.58
June 30, 2017 $95.00 $80.51
     
Quarter Ended High Low
October 2, 2015 $88.46 $67.87
January 1, 2016 $86.39 $57.94
April 1, 2016 $60.97 $38.64
July 1, 2016 $51.27 $34.99


Repurchases of Equity Securities


There were no repurchases by us ofWe have not repurchased shares of our common stock during 2017.pursuant to our stock repurchase program since the first quarter of fiscal 2019. For additional information about our share repurchase program see Part II, Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations - Stock Repurchase Program.


Dividends to Shareholders


On September 13, 2012,In April 2020, we announced thatsuspended our Board of Directors had authorized the adoption of a quarterly cash dividend policy. Under the cashFor more information about our dividend policy holderssee Part II, Item 7, Management’s Discussion and Analysis of our common stock receive dividends whenFinancial Condition and as declared by our BoardResults of Directors. In 2017, we declared aggregate cash dividends of $2.00 per share of our common stock, totaling $579 million. We may modify, suspend, or cancel our cash dividend policy in any manner and at any time.Operations - Cash Dividends.

The following table provides information about the quarterly dividends our Board of Directors declared in the last two fiscal years.
Record DatePayment DateDividend Per Share
October 2, 2015October 15, 2015$0.50
January 1, 2016January 15, 2016$0.50
April 1, 2016April 15, 2016$0.50
July 1, 2016July 15, 2016$0.50
September 30, 2016October 17, 2016$0.50
December 30, 2016January 17, 2017$0.50
March 31, 2017April 17, 2017$0.50
June 30, 2017July 17, 2017$0.50


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 USU.S. Technology Hardware & Equipment Index for the five years ended June 30, 2017.July 3, 2020. The graph assumes that $100 was invested in our common stock at the close of market on June 29, 2012July 2, 2015 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 29, 2012)July 2, 2015)
wdc-20200703_g2.jpg





32

Total Return Analysis
July 2,
2015
July 1,
2016
June 30,
2017
June 29,
2018
June 28,
2019
July 3,
2020
Western Digital Corporation$100.00 $59.58 $116.72 $104.45 $67.05 $61.61 
S&P 500 Index$100.00 $103.99 $122.60 $140.23 $154.83 $166.45 
Dow Jones U.S. Technology Hardware & Equipment Index$100.00 $92.31 $130.38 $169.84 $183.12 $266.37 
 June 29,
2012
 June 28,
2013
 June 27,
2014
 July 3,
2015
 July 1,
2016
 June 30,
2017
Western Digital Corporation$100.00
 $208.29
 $316.45
 $280.92
 $167.36
 $326.27
S&P 500 Index$100.00
 $120.60
 $150.32
 $162.54
 $168.23
 $197.92
Dow Jones US Technology Hardware & Equipment Index$100.00
 $96.91
 $137.92
 $156.25
 $144.23
 $203.76


The stock performance graph shall not be deemed soliciting material or to be filed with the SEC or subject to Regulation 14A or 14C under the Securities Exchange Act of 1934 or to the liabilities of Section 18 of the Securities Exchange Act of 1934, nor shall it be incorporated by reference into any past or future filing under the Securities Act of 1933 or the Securities Exchange Act of 1934, except to the extent we specifically request that it be treated as soliciting material or specifically incorporate it by reference into a filing under the Securities Act of 1933 or the Securities Exchange Act of 1934.



33

Item 6.Selected Financial Data

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,10-K, as well as the section of this Annual Report on Form 10‑K10-K entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
July 3,
2020
June 28,
2019
June 29,
2018
June 30,
2017
July 1,
2016
(in millions, except per share and employee data)
Revenue, net$16,736 $16,569 $20,647 $19,093 $12,994 
Gross profit3,781 3,752 7,705 6,072 3,435 
Net income (loss)(250)(754)675 397 242 
Income (loss) per common share:
Basic$(0.84)$(2.58)$2.27 $1.38 $1.01 
Diluted$(0.84)$(2.58)$2.20 $1.34 $1.00 
Cash dividends declared per common share$1.50 $2.00 $2.00 $2.00 $2.00 
Working capital$4,642 $4,660 $6,182 $6,712 $5,635 
Total assets$25,662 $26,370 $29,235 $29,860 $32,862 
Long-term debt$9,289 $10,246 $10,993 $12,918 $13,660 
Shareholders’ equity$9,551 $9,967 $11,531 $11,418 $11,145 
Number of employees (1)
63,800 61,800 71,600 67,600 72,900 
 June 30,
2017
 July 1,
2016
 July 3,
2015
 June 27,
2014
 June 28,
2013
 (in millions, except per share and employee data)
Revenue, net$19,093
 $12,994
 $14,572
 $15,130
 $15,351
Gross profit6,072
 3,435
 4,221
 4,360
 4,363
Net income397
 242
 1,465
 1,617
 980
          
Income per common share:         
Basic$1.38
 $1.01
 $6.31
 $6.88
 $4.07
Diluted$1.34
 $1.00
 $6.18
 $6.68
 $3.98
          
Cash dividends declared per common share$2.00
 $2.00
 $1.80
 $1.25
 $1.00
          
Working capital$6,712
 $5,635
 $5,275
 $4,875
 $3,625
Total assets$29,860
 $32,862
 $15,170
 $15,499
 $14,036
Long-term debt$12,918
 $13,660
 $2,149
 $2,313
 $1,725
Shareholders’ equity$11,418
 $11,145
 $9,219
 $8,842
 $7,893
          
Number of employees (1)
67,629
 72,878
 76,449
 84,072
 85,777

(1)
Excludes temporary employees and contractors.

(1) Excludes temporary employees and contractors.

Results for SanDisk, Amplidata NV, ViridentKazan Networks, Inc., Tegile Systems, Inc., sTec,Upthere, Inc., and VeloBit, Inc.,SanDisk Corporation, which were acquired on September 10, 2019, September 15, 2017, August 25, 2017 and 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.

34
Item 7.
Management’s Discussion and Analysis of Financial Conditions and Results of Operations


Item 7.Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis contains forward-looking statements within the meaning of the federal securities laws, and should be read in conjunction with the disclosures we make concerning risks and other factors that may affect our business and operating results. You should read this information in conjunction with the Consolidated Financial Statements and the notes thereto included in Part II, Item 8 of this Annual Report on Form 10-K. See also “Forward-Looking Statements” immediately prior to Part I, Item 1 of this Annual Report on Form 10-K.

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. We create environments for data to thrive. We drive the innovation needed to help customers capture, preserve, access and transform an ever-increasing diversity of data. Everywhere data lives, from advanced data centers to mobile sensors to personal devices, our industry-leading solutions deliver the possibilities of data.

Our broad portfolio of technology and products address the following key end markets: Client Devices; Data Center Devices and Solutions; Client Devices; and Client Solutions. We also generate license and royalty revenue related tofrom our IP,extensive intellectual property (“IP”), which is included in each of thethese three end market categories.


Our fiscal year ends on the Friday nearest to June 30 and typically consists of 52 weeks. Approximately every five to six years, we report a 53-week fiscal year to align ourthe fiscal year with the foregoing policy. Fiscal years 2017 and 2016, which ended on June 30, 2017 and July 1, 2016, respectively, both comprised 52 weeks, with all quarters presented consisting of 13 weeks. Fiscal year 2015,2020, which ended on July 3, 2015,2020, is comprised of 53 weeks, with the first quarter consisting of 14 weeks and the second, third and fourthremaining quarters consisting of 13 weeks each. Fiscal years 2019, which ended on June 28, 2019, and 2018, which ended on June 29, 2018, were each comprised of 52 weeks, with all quarters presented consisting of 13 weeks.


Key Developments


AcquisitionCOVID-19 Pandemic

In March 2020, the World Health Organization declared COVID-19 a pandemic, and the United States declared a national emergency. In the intervening months, COVID-19 has spread globally and led governments and other authorities around the world, including federal, state and local authorities in the United States, to impose measures intended to reduce its spread, including restrictions on freedom of SanDiskmovement and business operations such as travel bans, border closings, business limitations and closures (subject to exceptions for essential operations and businesses), quarantines and shelter-in-place orders.

Although some of these governmental restrictions have since been lifted or scaled back, a recent surge of COVID-19 infections has resulted in the re-imposition of certain restrictions and may lead to other restrictions being re-implemented in response to efforts to reduce the spread of COVID-19. These measures may remain in place for a significant amount of time. In light of these events, we have taken actions to protect the health and safety of our employees while continuing to serve our global customers as an essential business. We have implemented more thorough sanitation practices as outlined by health organizations and instituted social distancing policies at our locations around the world, including working from home, limiting the number of employees attending meetings, reducing the number of people in our sites at any one time, and suspending employee travel. These actions have resulted in some reductions of production levels, particularly impacting our manufacture of hard drives, as we adapt to a more limited number of employees in facilities and, as a result, we have incurred charges of approximately $110 million in costs related to under-absorbed overhead and higher logistics and other costs during the year ended July 3, 2020.
On
As an essential business, we continue to provide products and solutions that enable the proliferation of data and facilitate the sharing of information remotely, which has become more critical as much of the world is interacting from areas of self-isolation. While we have experienced some reductions of sales in certain areas such as retail in our Client Solutions end market where brick and mortar operations have been impacted, we have seen strong demand for capacity enterprise products in our Data Center Devices and Solutions end market as the current environment has accelerated the movement to the cloud. As such, our net revenue for the year ended July 3, 2020 was not significantly impacted by COVID-19. We currently expect some softening in Cloud demand as these customers absorb recent capacity expansions, but expect some improvement in retail demand as countries begin to ease their lockdown restrictions and as brick and mortar locations shift more of their operations online. However, we cannot predict the duration of this crisis and how demand may change if it becomes more protracted.

35

We will continue to actively monitor the situation and may take further actions altering our business operations that we determine are in the best interests of our employees, customers, partners, suppliers, and stakeholders, or as required by federal, state, or local authorities. See “The COVID-19 pandemic could adversely affect our business, results of operations and financial condition” in Part I, Item 1A, Risk Factors, of this Annual Report on Form 10-K for more information regarding the risks we face as a result of the COVID-19 pandemic.

Flash Ventures

Through our three business ventures with Kioxia Corporation (“Kioxia”), referred to as “Flash Ventures”, we and Kioxia operate flash-based memory wafer manufacturing facilities in Japan. We are obligated to pay for variable costs incurred in producing our share of Flash Ventures’ flash-based memory wafer supply, based on our three-month forecast, which generally equals 50% of Flash Ventures’ output. In addition, we are obligated to 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 each Flash Ventures entity’s capital investments to the extent that Flash Ventures entity’s operating cash flow is insufficient to fund these investments.

Since its inception, Flash Ventures’ primary manufacturing site has been located in Yokkaichi, Japan, which currently includes five wafer fabrication facilities. These facilities historically operated near 100% of their manufacturing capacity. As a result of supply/demand imbalance for flash-based products arising in the prior year, we temporarily reduced our utilization of our share of Flash Ventures’ manufacturing capacity to an abnormally low level for several quarters to more closely align our flash-based wafer supply with the projected demand. As a result of this temporary reduction to abnormally low production levels, we incurred $264 million associated with the reduction in utilization, which was recorded as a charge to cost of revenue in the year ended June 28, 2019. In addition, levels at the Yokkaichi site were temporarily reduced as a result of an unexpected power outage incident that occurred in the Yokkaichi region on June 15, 2019. The power outage incident impacted the facilities and process tools and resulted in the damage of flash wafers in production. The incident resulted in a reduction of our flash wafer availability by approximately 4 exabytes, the majority of which was contained in the first quarter of fiscal year 2020. As a result of this power outage incident, we incurred aggregate charges of $68 million and $145 million recorded in Cost of revenue in the years ended July 3, 2020 and June 28, 2019, respectively, which primarily consisted of the write-off of damaged inventory and unabsorbed manufacturing overhead costs. We continue to pursue recovery of our losses associated with this event; however, the total amount of recovery cannot be estimated at this time.

In May 12, 2016 (the “SanDisk Closing Date”),2019, we entered into additional agreements with Kioxia to extend Flash Ventures to a new wafer fabrication facility, known as “K1,” located in Kitakami, Japan. The primary purpose of K1 is to provide clean room space to continue the transition of existing flash-based wafer capacity to newer technology nodes. Output from the initial production line at K1 began in the third quarter of fiscal year 2020, although meaningful output from K1 is not expected to begin until the end of calendar 2020. We have paid for most of our share of initial K1 equipment investments and relocation costs. Other period expenses associated with the initial production ramp at K1 will begin trailing off as output increases toward the end of the calendar year. We also agreed to prepay an aggregate of approximately $360 million over a 3-year period beginning in the first half of fiscal year 2020 toward K1 building depreciation, to be credited against future wafer charges. As of July 3, 2020, remaining committed prepayments totaled $206 million.

Exit of Storage Systems Business

In September 2019, we announced our intention to exit Storage Systems, which consisted of IntelliFlash and ActiveScale. These actions allow us to redirect investments to other higher value priorities. In November 2019, we completed the acquisitionsale of SanDisk (the “Merger”),IntelliFlash for a global leader in NAND-flash storage solutions, pursuant to the terms of the Agreement and Plan of Merger, dated October 21, 2015. The Merger is primarily intended to deepen our expertise in non-volatile memory and enable us to vertically integrate into NAND, securing long-term access to solid state technology at a lower cost. The aggregate purchase price of $28 million, to be collected over the Merger was $15.59 billion. This acquisition broadenednext three years. The sale of our product portfolio, significantly increasedIntelliFlash business included an immaterial amount of inventory, other tangible and intangible assets, and goodwill and resulted in a gain of approximately $17 million recorded in Employee termination, asset impairment, and other charges in the Consolidated Statements of Operations for the year ended July 3, 2020. Additionally, in March 2020, we completed the sale of ActiveScale. The net assets sold and the proceeds from the sale of ActiveScale were not material.

36

Results of Operations

Summary Comparison of 2020, 2019 and 2018

The following table sets forth, for the periods presented, selected summary information from our revenuesConsolidated Statements of Operations by dollars and percentage of net revenue(1):
202020192018
(in millions, except percentages)
Revenue, net$16,736 100.0 %$16,569 100.0 %$20,647 100.0 %
Cost of revenue12,955 77.4 12,817 77.4 12,942 62.7 
Gross profit3,781 22.6 3,752 22.6 7,705 37.3 
Operating Expenses:
Research and development2,261 13.5 2,182 13.2 2,400 11.6 
Selling, general and administrative1,153 6.9 1,317 7.9 1,473 7.1 
Employee termination, asset impairment, and other charges32 0.2 166 1.0 215 1.0 
Total operating expenses3,446 20.6 3,665 22.1 4,088 19.8 
Operating income335 2.0 87 0.5 3,617 17.5 
Interest and other income (expense):
Interest income28 0.2 57 0.3 60 0.3 
Interest expense(413)(2.5)(469)(2.8)(676)(3.3)
Other income (expense), net4  38 0.2 (916)(4.4)
Total interest and other expense, net(381)(2.3)(374)(2.3)(1,532)(7.4)
Income (loss) before taxes(46)(0.3)(287)(1.7)2,085 10.1 
Income tax expense204 1.2 467 2.8 1,410 6.8 
Net income (loss)$(250)(1.5)%$(754)(4.6)%$675 3.3 %
(1) Percentages may not total due to rounding.


37

The following table sets forth, for the periods presented, summary information regarding our revenue(1):

Year Ended
202020192018
(in millions)
Revenue by Product
Hard disk drives (“HDD”)$8,967 $8,746 $10,698 
Flash-based7,769 7,823 9,949 
Total Revenue$16,736 $16,569 $20,647 
Revenue by End Market
Client Devices$7,160 $8,095 $10,108 
Data Center Devices & Solutions6,228 5,038 6,075 
Client Solutions3,348 3,436 4,464 
Total Revenue$16,736 $16,569 $20,647 
Revenue by Geography
Americas$5,444 $4,361 $5,622 
Europe, Middle East and Africa2,926 3,109 3,858 
Asia8,366 9,099 11,167 
Total Revenue$16,736 $16,569 $20,647 
Exabytes Shipped518 383 389 


(1) Revenue for 2020 and 2019 are presented in 2017 and enhancedaccordance with Accounting Standards Codification (“ASC”) Topic 606. Revenue for 2018 is presented in accordance with ASC Topic 605. For information related to our gross margins. Operating expenses also increased with the assumption of the SanDisk operations. For additional information on the acquisition,transition from Topic 605 to Topic 606, see Part II, Item 8, Note 15, Acquisitions1, Organization and Basis of Presentation, of the Notes to Consolidated Financial Statements included in this Annual Report on Form 10‑K.10-K.


Debt FacilitiesNet Revenue


In connection withNet revenue was relatively flat in 2020 compared to 2019. Higher volumes of memory generated approximately 30 percentage points of exabyte growth year over year, split relatively evenly between HDD and Flash products, which was largely offset by lower average selling prices. Our revenue for Data Center Devices and Solutions increased 24% year over year, reflecting approximately 46 percentage points of growth in exabytes of storage, primarily driven by strength in capacity enterprise HDD and Flash, which we believe reflects an acceleration in the Merger, we entered into new debt facilities aggregatingmovement to cloud driven by remote working conditions as a result of COVID-19. This growth was partially offset by lower average selling prices. Client Devices revenue declined 12% year over year, which primarily reflects lower average selling prices in HDD and mobility products. Client Solutions revenue declined 3% year over year, which reflects a decline of approximately $18.09 billion in principal to finance a portion of the purchase price related to the Merger. The proceeds were also used to refinance certain existing indebtedness of Western Digital and SanDisk, and pay certain transaction costs. This new debt significantly increased our interest expense in 2017. During 2017, we repaid a $3.00 billion short-term bridge loan, made a voluntary $750 million principal payment on one of the term loans and entered into several repricing transactions that significantly lowered the rate of interest on some of the new term loans. We also settled a substantial portion of the remaining assumed SanDisk convertible notes. The reductions in principal and the repricing transactions are expected12 percentage points due to lower our interest expense going forward compared to 2017. For additional information, see Part II, Item 8, Note 6, Debt, of the Notes to Consolidated Financial Statements includedaverage selling prices, primarily on retail products, partially offset by an increase in this Annual Report on Form 10‑K.

Ventures with Toshiba

Through Flash Ventures, we and Toshiba currently operate three business ventures in 300-millimeter NAND-flash manufacturing facilities in Yokkaichi, Japan, which provide us leading-edge, cost-competitive NAND wafers for our end products. Toshiba has announced significant losses related to its U.S. nuclear business and substantial doubt about its ability to continue as a going concern. Due to Toshiba’s financial condition, Toshiba’s working capital and access to credit and capital markets are severely limited. Toshiba could become unable to, or otherwise fail to, timely fund investments in Flash Ventures or our joint development efforts or fulfill its payment obligations to suppliers, which could harm Flash Ventures’ operations, our joint technology roadmap and supplier relationships. We are committed to the successvolume of Flash Ventures and we intend to, and have been engaged in discussions with Toshiba to, jointly invest in Fab 6 equipment with Toshiba. See Part I, Item I, Business: Ventures with Toshiba, for additional information. For a discussion of risks associated with our business ventures with Toshiba, see Part I, Item 1A, Risk Factors, of this Annual Report on Form 10‑K.products.


Results of Operations

Summary Comparison of 2017, 2016 and 2015


The following table sets forth, for the periods presented, selected summary information from our consolidated statements of operations by dollars and percentage ofchanges in net revenue:
 2017 2016 2015
 (in millions, except percentages)
Revenue, net$19,093
 100.0 % $12,994
 100.0 % $14,572
 100.0 %
Cost of revenue13,021
 68.2
 9,559
 73.6
 10,351
 71.0
Gross profit6,072
 31.8
 3,435
 26.4
 4,221
 29.0
Operating expenses4,118
 21.6
 2,969
 22.8
 2,610
 17.9
Operating income1,954
 10.2
 466
 3.6
 1,611
 11.1
Total interest and other expense, net(1,185) (6.2) (313) (2.4) (34) (0.2)
Income before taxes769
 4.0
 153
 1.2
 1,577
 10.8
Income tax expense (benefit)372
 1.9
 (89) (0.7) 112
 0.8
Net income$397
 2.1
 $242
 1.9
 $1,465
 10.1

The following table sets forth, for the periods presented, summary information regarding net revenuesrevenue by geography reflect a decrease in Asia in 2020 primarily driven by our decision to limit our participation in the mobile market and end market:our exit from multi-chip package solutions sales, resulting in lower sales to manufacturers in the Asia region, and a slight increase in the Americas driven by increased sales of capacity enterprise HDD.
 2017 2016 2015
 (in millions, except exabytes and percentages)
Revenue, net$19,093
 $12,994
 $14,572
      
Revenues by Geography (%)     
Americas27% 32% 28%
Europe, Middle East and Africa17
 21
 22
Asia56
 47
 50
      
Revenues by End Market (%)     
Client Devices50% 48% 53%
Data Center Devices & Solutions29
 38
 34
Client Solutions21
 14
 13
      
Exabytes Shipped313
 262
 249


For 20172020, 2019 and 2016,2018, our top 10 customers accounted for 42%, 45% and 42%, respectively, of our net revenue. For each of 2020, 2019 and 2018, no single customer accounted for 10% or more of our net revenue. For 2015, one customer, Hewlett-Packard Company, accounted for 11%

38



Fiscal Year 2017 Net Revenue and Gross Margin Compared to Fiscal Year 2016 Net Revenue and Gross Margin

Net Revenue. Net revenue was $19.09 billion for 2017, an increase of $6.10 billion, or 47%, as compared to 2016, primarily due to a full year of revenue from the sale of NAND-flash products following the SanDisk Closing Date, compared to a partial year of such revenue in the prior year. This increase was partially offset by lower revenue related to lower PC and enterprise HDD shipments.

Consistent with standard industry practice, we have sales incentive and marketing programs that provide customers with price protection and other incentives or reimbursements that are recorded as a reduction to gross revenue. For 20172020, 2019 and 2016,2018, these programs represented 12%16%, 15% and 13%12%, respectively, of gross revenues, respectively. The decreaseand adjustments to revenue due to changes in sales incentive and marketingaccruals for these programs year-over-year reflects lower incentive programs offered on NAND-flash products as a resulthave generally averaged less than 1% of gross revenue over the Merger.last three fiscal years. The amounts attributed to our sales incentive and marketing programs also 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.


Net Revenue by Geography. Changes in the mix of net revenue by geography for 2017, as compared to 2016, reflect the additional revenues from the Merger which has comparatively higher revenue in Asia than our pre-acquisition business.

Net Revenue by End Market. Our end markets include Data Center Devices and Solutions (capacity and performance enterprise HDD, enterprise SSD, data center software and system solutions); Client Devices (mobile, desktop, gaming and digital video hard drives, client SSDs, embedded products and wafers); and Client Solutions (removable products, hard drive content solutions and flash content solutions).

Changes in the mix of net revenue by end market for 2017, as compared to 2016, reflect the full year increase in revenues from the Merger which has comparatively higher revenue in Client Devices and Client Solutions than our pre-acquisition business.

Gross Profit and Gross Margin. Margin

Gross profit was $6.07 billionand gross margin for 2017, an increase of $2.64 billion, or 77%, as2020 were relatively flat compared to 2016, largely driven by the increase in revenue mentioned above. Gross profit2019, which reflected lower aggregate charges for 2017 was negatively impacted by amortization expense on acquired intangible assets, manufacturing underutilization charges, and charges related to the implementation of cost-saving initiatives, stock-based compensation and acquisition related charges,power outage incident, which aggregated $1.14 billion, or 6.0% of revenue,$678 million for 2017, and $375 million, or 2.9% of revenue, for 2016. Gross margin increased to 31.8% for 2017, as2020 compared to 26.4%$1.2 billion for 2016. The increase2019. These lower costs were offset by the impact of lower average selling prices, as noted above; the impact of COVID-related costs; and higher per-unit overhead costs in gross margin was primarily due to sales of NAND-flash products following the SanDisk Closing Date,HDD as such products have comparatively higherwe ramp up production on our new 18-terabyte drives. We expect gross margins than our pre-acquisition products, cost improvements across all products driven by manufacturing integration activities and cost improvements as NAND-flash technology transitions to more cost efficient designs.

Fiscal Year 2016 Net Revenue and Gross Margin Compared to Fiscal Year 2015 Net Revenue and Gross Margin

Net Revenue. Net revenue was $12.99 billion for 2016, a decrease of $1.58 billion, or 11%, as compared to 2015, primarily due to lower HDD unit shipments partially offset by an increase in HDD ASPs and partial year revenues from SanDisk of $793 million following the SanDisk Closing Date. The decrease in HDD unit shipments was primarily due to a softer demand environment. The increase in HDD ASPs was primarily due to a change in HDD product mix.

Consistent with standard industry practice, we have sales incentive and marketing programs that provide customers with price protection and other incentives or reimbursements that are recorded as a reduction to gross revenue. For 2016 and 2015, these programs represented 13% and 10% of gross revenues, respectively. These amounts generally vary according to several factors including industry conditions, seasonal demand, competitor actions, channel mix and overall availability of products. Changes in future customer demand and market conditions may require us to adjust our incentive programs as a percentage of gross revenue.

Net Revenue by Geography. Changesbe constrained in the mix of net revenue by geography for 2016,near term as comparedwe continue to 2015, reflect a decrease in Asia primarily dueramp up production on our new drives and continue to reduced demand of client HDD shipments as a result of a decline in the desktop and notebook PC market and a decrease in Europe, Middle East and Africa due to lower demand for our client and retail HDD products primarily due to the continued decline of PC-related after-market sales.incur COVID-related costs.


Net Revenue by End Market. Changes in the mix of net revenue by end market for 2016, as compared to 2015, reflected lower Client Devices revenues primarily due to reduced demand for HDDs as a result of a decline in desktop and notebook PC market, partially offset by a partial year increase in revenues from the Merger, which has comparatively higher revenue in Client Devices and Client Solutions than our pre-acquisition business.


Gross Profit and Gross Margin. Gross profit was $3.44 billion for 2016, a decrease of $786 million, or 19%, from 2015. Gross margin decreased to 26.4% in 2016, as compared to 29.0% in 2015. This decrease was primarily the result of lower HDD unit sales and the related absorption impact, and accelerated depreciation on assets related to both the closure of the Odawara, Japan facility and the restructuring plan (“Restructuring Plan 2016”) associated with the integration of substantial portions of our HGST and WD subsidiaries. This decrease in gross profit was partially offset by SanDisk’s gross profit following the SanDisk Closing Date.

Operating Expense

The following table sets forth operating expense information from our Consolidated Statement of Operations by dollar and percentage(1) of net revenue.
 2017 2016 2015
 (in millions, except percentages)
Research and development$2,441
 12.8% $1,627
 12.5% $1,646
 11.3%
Selling, general and administrative1,445
 7.6
 997
 7.7
 788
 5.4
Employee termination, asset impairment, and other charges232
 1.2
 345
 2.6
 176
 1.2
Total operating expenses$4,118
 21.6
 $2,969
 22.8
 $2,610
 17.9
(1)
Percentages may not total due to rounding.

Fiscal Year 2017 Operating Expenses Compared to Fiscal Year 2016 Operating Expenses


Research and development (“R&D”) expense was $2.44 billionincreased $79 million in 2017, an increase of $814 million, or 50%, from 2016,2020 compared to 2019 primarily due to the Merger and continued developmentapproximately $30 million of NAND-flash technology. Fiscal year 2017 also included aggregate charges of $199 million related to stock-based compensation expenses, chargesadditional expense related to the implementation of cost-saving initiatives, acquisition-related chargesadditional week in the current year and other discrete charges, compared to $106 million in 2016 related to such charges.increased variable compensation, partially offset by savings from our exit from the storage systems business and lower outside services and travel and entertainment (“T&E”) spending.


Selling, general and administrative (“SG&A”) expense was $1.45 billiondecreased $164 million in 2017, an increase of $448 million, or 45%, from 2016,2020 compared to 2019 primarily due to savings realized from our exit from the Merger. Fiscal year 2017 also included aggregate chargesstorage systems business, lower outside services and T&E spending, partially offset by approximately $10 million of $404 million, related to stock-based compensation expenses, amortizationadditional expense on acquired intangible assets, charges related to the implementation of cost-saving initiatives, acquisition-related chargesadditional week in the current year and other discrete charges, compared to $379 million in 2016 related to such charges.increased variable compensation.


Employee termination, asset impairment and other charges were $232 milliondecreased from the prior year as many of the actions initiated in 2017, a decrease of $113 million, or 33%, from 2016. These charges in 2017 primarily related to further actions under the Restructuring Plan 2016 associated with the integration and business realignment of substantial portions of our business.prior year have been substantially completed. For additional information regarding employee termination, asset impairment and other charges, see Part II, Item 8, Note 16, 15, Employee Termination, Asset Impairment and Other Charges, of the Notes to Consolidated Financial Statements included in this Annual Report on Form 10‑K.10-K.


Fiscal Year 2016 Operating Expenses ComparedInterest and Other Income (Expense)

The decreases in total interest and other expense, net in 2020 compared to Fiscal Year 2015 Operating Expenses2019 primarily reflect decreases in interest expense resulting from the pay-down of principal on our debt and lower index rates, partially offset by decreases in Interest income resulting from lower invested cash and lower rates of return, as well as lower gains on foreign currency transactions.


R&D expense was $1.63 billionIncome Tax Expense

The following table sets forth income tax information from our Consolidated Statements of Operations by dollar and effective tax rate:
 202020192018
(in millions, except percentages)
Income (loss) before taxes$(46)$(287)$2,085 
Income tax expense204 467 1,410 
Effective tax rate(443)%(163)%68 %

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The Tax Cuts and Jobs Act (the “2017 Act”) includes a broad range of tax reform proposals affecting businesses. We completed our accounting for the tax effects of the enactment of the 2017 Act during the second quarter of fiscal 2019. However, the U.S. Treasury and the Internal Revenue Service (“IRS”) have issued tax guidance on certain provisions of the 2017 Act since the enactment date, and we anticipate the issuance of additional regulatory and interpretive guidance. We applied a reasonable interpretation of the 2017 Act along with the then-available guidance in 2016,finalizing our accounting for the tax effects of the 2017 Act. Any additional regulatory or interpretive guidance would constitute new information, which may require further refinements to our estimates in future periods.

The primary drivers of the difference between the effective tax rate for 2020 and the U.S. Federal statutory rate of 21% are the relative mix of earnings and losses by jurisdiction, the deduction for foreign derived intangible income, credits and tax holidays in Malaysia, Philippines and Thailand that will expire at various dates during fiscal years 2021 through 2030. In addition, the effective tax rate for 2020 includes the discrete effect of a decreasede-recognition of $19$31 million or 1%, from 2015. This slight decrease was primarilyfor certain deferred tax assets associated with creditable foreign withholding taxes due to reductionsthe issuance of final regulatory guidance. The regulatory guidance does not preclude us from potentially claiming these creditable taxes as a period benefit when paid.

The primary driver of the difference between the effective tax rate for the year ended June 28, 2019 and the U.S. Federal statutory rate of 21% is the discrete effect of the finalization of the accounting for the tax effects of the enactment of the 2017 Act. These discrete effects consist of $119 million related to the mandatory deemed repatriation tax and $189 million related to the decision to change our indefinite reinvestment assertion. The remaining difference is attributable primarily to a change in employee compensation expensesthe estimated effective tax rate due to a reductionchanges in headcountthe relative mix of earnings by jurisdiction, partially offset by credits and tax holidays.

Our future effective tax rate is subject to future regulatory developments and changes in the mix of our U.S. earnings compared to foreign earnings. Our total tax expense in future fiscal years may also vary as a result of our business realignment initiatives, reduction in material spend due to the consolidation of our product roadmap in relation to the integration of our HGST and WD subsidiaries and an additional week in the prior year. These decreases were partially offset by SanDisk’s R&D expenses following the SanDisk Closing Date and expenses related to the integration of our HGST and WD subsidiaries.discrete items such as excess tax benefits or deficiencies.


SG&A expense was $997 million in 2016, an increase of $209 million, or 27%, from 2015. This increase was primarily due to SanDisk’s SG&A expenses following the SanDisk Closing Date, acquisition charges and expenses related to the integration of our HGST and WD subsidiaries. These charges were partially offset by a reduction in employee compensation expenses due to a reduction in headcount as a result of our business realignment initiatives and an additional week in the prior year.

Employee termination, asset impairment and other charges was $345 million in 2016, an increase of $169 million, or 96%, from 2015 as we implemented our Restructuring Plan 2016 and initiated the closure of our hard component front-end wafer manufacturing facility in Odawara, Japan. For additional information regarding Income tax expense (benefit), see Part II, Item 8, Note 16, Employee Termination, Asset Impairment and Other Charges13, Income Tax Expense, of the Notes to Consolidated Financial Statements included in this Annual Report on Form 10‑K.10-K.


.

Interest and Other Income (Expense)

The following table sets forth interest and other income (expense) information fromA discussion of our Consolidated Statementresults of Operations by dollar and percentage(1) of net revenue.
 2017 2016 2015
 (in millions, except percentages)
Interest income$26
 0.1 % $26
 0.2 % $14
 0.1 %
Interest expense(847) (4.4) (266) (2.0) (49) (0.3)
Other income (expense), net(364) (1.9) (73) (0.6) 1
 
Total interest and other expense, net$(1,185) (6.2) $(313) (2.4) $(34) (0.2)
(1)
Percentages may not total due to rounding.

Fiscal Year 2017 Interest and Other Expense, Net Compared to Fiscal Year 2016 Interest and Other Expense, Net

Total interest and other expense, net increased $872 million in 2017, primarily due tooperations for 2018, including a full year of interest expense in 2017 resulting from the additional debt issued in connection with the Merger compared to only a partial yearcomparison of such expenseresults of operations to 2019, is included in 2016, as well as losses on the settlements of certain of our term loans (see Part II, Item 8, Note 6, Debt,7, Management’s Discussion and Analysis of the Notes to Consolidated Financial StatementsCondition and Results of Operations, included in thisour Annual Report on Form 10‑K) and impairment charges related to our cost-method investments.

Fiscal Year 2016 Interest and Other Income (Expense) Compared to Fiscal Year 2015 Interest and Other Income (Expense)

In 2016, Total interest and other expense, net increased $279 million over 2015, primarily due to interest expense resulting from10-K for the additional debt incurred in connectionyear ended June 28, 2019 filed with the Merger, the lossSecurities and Exchange Commission on the settlementAugust 27, 2019.

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Income Tax Expense (Benefit)

The following table sets forth income tax information from our Consolidated Statement of Operations by dollar and effective tax rate.
 2017 2016 2015
 (in millions, except percentages)
Income tax expense (benefit)$372
 $(89) $112
Effective tax rate48% (58)% 7%

Fiscal Year 2017 Income Tax Expense Compared to Fiscal Year 2016 Income Tax Benefit

Income tax expense was $372 million in 2017, as compared to an income tax benefit of $89 million in 2016. Income tax expense as a percentage of income before taxes was 48% in 2017, as compared to income tax benefit as a percentage of income before taxes of 58% in 2016. Income tax expense in 2017 reflects tax expense from the integration of SanDisk and a valuation allowance on both acquired tax attributes and net operating loss carryforwards from restructuring activities. The difference between the effective tax rate and the U.S. Federal statutory rate of 35% is primarily due to taxes on the integration of SanDisk and an increase in the valuation allowance for both acquired tax attributes and net operating loss carryforwards from restructuring activities, which are partially offset by the current year generation of tax credits and foreign income taxed at lower tax rates due to tax holidays in Malaysia, Philippines, Singapore and Thailand that expire at various dates from 2018 through 2030.

The Internal Revenue Service (“IRS”) previously completed its field examination of our federal income tax returns for fiscal years 2006 through 2009 and proposed certain adjustments. We have received Revenue Agent Reports from the IRS that seek to increase our U.S. taxable income which would result in additional federal tax expense totaling $795 million, subject to interest. The issues in dispute relate primarily to transfer pricing with our foreign subsidiaries and intercompany payable balances. We disagree with the proposed adjustments and in September 2015, filed a protest with the IRS Appeals Office and received the IRS rebuttal in July 2016. We believe that our tax positions are properly supported and will vigorously contest the position taken by the IRS. In September 2015, the IRS commenced an examination of our fiscal years 2010 through 2012.

We believe that adequate provision has been made for any adjustments that may result from tax examinations. However, the outcome of tax examinations cannot be predicted with certainty. If any issues addressed in our tax examinations are resolved in a manner not consistent with management’s expectations, we could be required to adjust our provision for income taxes in the period such resolution occurs. As of June 30, 2017, it is not possible to estimate the amount of change, if any, in the unrecognized tax benefits that is reasonably possible within the next twelve months. Any significant change in the amount of our liability for unrecognized tax benefits would most likely result from additional information or settlements relating to the examination of our tax returns.

For additional information regarding income tax expense (benefit), see Part II, Item 8, Note 13, Income Tax Expense (Benefit), of the Notes to Consolidated Financial Statements included in this Annual Report on Form 10‑K.

Fiscal Year 2016 Income Tax Benefit Compared to Fiscal Year 2015 Income Tax Expense

Income tax benefit was $89 million in 2016, as compared to a $112 million expense in 2015. Tax benefit as a percentage of income before taxes was 58.2% in 2016, as compared to tax expense of 7.1% in 2015. Fiscal year 2016 income tax benefit reflects tax benefits from expenses related to the Merger and from interest expense related to new debt facilities. The difference between the effective tax rate and the U.S. Federal statutory rate is primarily due to foreign income taxed at lower tax rates due to tax holidays in Malaysia, the Philippines, Singapore and Thailand that expire at various dates from 2016 through 2029, the current year generation of income tax credits and the tax deductible expenses related to the Merger.


Liquidity and Capital Resources


The following table summarizes our statements of cash flows:
 202020192018
(in millions)
Net cash provided by (used in):
Operating activities$824 $1,547 $4,205 
Investing activities278 (1,272)(1,655)
Financing activities(1,508)(1,829)(3,900)
 Effect of exchange rate changes on cash(1)4 1 
Net decrease in cash and cash equivalents$(407)$(1,550)$(1,349)
 2017 2016 2015
 (in millions)
Net cash provided by (used in):     
Operating activities$3,437
 $1,983
 $2,242
Investing activities(636) (9,608) (953)
Financing activities(4,595) 10,751
 (1,069)
 Effect of exchange rate changes on cash(3) 1
 
Net increase (decrease) in cash and cash equivalents$(1,797) $3,127
 $220


We believe our current cash, cash equivalents and cash generated from operations as well as our available credit facilities will be sufficient to meet our working capital, debt dividend and capital expenditure needs for at least the next twelve months. Our ability to sustain our working capital position is subject to a number of risks that we discuss in Part I, Item 1A, Risk Factors, in this Annual Report on Form 10‑K.10-K.


The indebtedness used to financeDuring fiscal 2021, we expect expenditures for property, plant and equipment for our company plus our portion of the Merger could cause us to place more reliance on cash generated fromcapital expenditures by our Flash Ventures joint venture with Kioxia for its operations to pay principalaggregate approximately $3.1 billion. After consideration of the Flash Ventures’ lease financing of its capital expenditures and interest on our debt, thereby reducing the availability of ournet operating cash flow, for working capital, capital expenditure needs, dividends, or to pursue other potential strategic plans.

During 2018, we expect net cash used for our purchases of property, plant and equipment and net activity in notes receivable and equity investments relating to Flash Ventures to be a cash outflow of approximately $1.5$1.3 billion to $1.9 billion of our cash.during fiscal 2021. 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.financing.


During fiscal 2019, we made the determination that it was our intention to repatriate all of our foreign undistributed earnings as a result of the 2017 Act, except a portion of our foreign undistributed earnings, which could result in additional federal taxes based on interpretive guidance issued by the IRS. After consideration of this interpretative guidance affecting the taxation of a certain portion of our foreign undistributed earnings, we made the determination that we do not intend to repatriate this portion of our foreign undistributed earnings and did not establish an accrual for this liability of $1.25 billion.
A total of $4.99$2.12 billion and $6.90$2.37 billion of our cashCash and cash equivalents was held outside of the U.S. as of July 3, 2020 and June 30, 2017 and July 1, 2016,28, 2019, respectively. Our current plans anticipate we can meetAs a result of the change in our U.S. cash needs while continuing to permanently reinvestpermanent reinvestment assertion, there are no material tax consequences that were not previously accrued for on the undistributed earningsrepatriation of our foreign subsidiaries. In the event the reinvested earnings of our foreign subsidiaries are distributed to the U.S., such a distribution could result in the accrual and payment of additional U.S. taxes.this cash.


Operating Activities


Cash flow from operating activities primarily consists of net income, adjusted for non-cash charges, plus or minus working capital changes.changes in operating assets and liabilities. This represents our principal source of cash. Net cash provided byused for changes in working capitaloperating assets and liabilities was $91$757 million for 2017,2020, as compared to net cash provided by changes in working capital of $374$260 million for 2016 and net cash used for changes in working capital of $593 millionoperating assets and liabilities for 2015.

Our2019. Changes in our operating assets and liabilities are largely affected by our working capital requirements, primarily dependwhich are dependent on the effective management of our cash conversion cycle whichas well as timing of payments for taxes. Our cash conversion cycle measures how quickly we can convert our products into cash through sales. The cash conversion cycles were as follows:
202020192018
(in days)
Days sales outstanding52 26 39 
Days in inventory85 93 83 
Days payables outstanding(66)(54)(71)
Cash conversion cycle71 65 51 

41

 2017 2016 2015
 (in days)
Days sales outstanding37 41 39
Days in inventory65 81 49
Days payables outstanding(66) (78) (67)
Cash conversion cycle36 44 21


Changes in days sales outstanding (“DSOs”DSO”) are generally due to the linearity of shipments. Changes in days in inventory (“DIOs”DIO”) are generally related to the timing of inventory builds. Changes in days payables outstanding (“DPOs”DPO”) 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 2020, DSO increased by 26 days over the prior year, reflecting 6 days for lower factoring of receivables, and 4 days resulting from balance sheet reclassifications of certain customer incentives in connection with the adoption of ASC Topic 606 related to recognition of agreements with customers. The working capital metricsadditional increase primarily reflects the timing of shipments and customer collections. We have seen no significant deterioration in 2016 were notably impacted by the inclusionour receivables as a result of SanDisk’s accounts receivable, inventory and accounts payable balances as of July 1, 2016, but only including SanDisk’s revenue and cost of sales following the SanDisk Closing Date. The Merger inflated DSO,COVID-19. DIO and DPO by 12 days, 32 days and 14 days, respectively. Excluding the impact of the Merger in 2016, DSO in 2017 increaseddecreased by 8 days over 2016 and was 2 days lower than 2015, primarilythe prior year, reflecting timinghigher stocking levels of customer receiptsHDD inventory in the prior year. Excludingyear in response to the impact of the Mergerplant closure in 2016, DIO in 2017Kuala Lumpur. DPO increased by 1612 days over both 2016 and 2015. The increase in DIOthe prior year, primarily reflects short-term build-upreflecting resumptions of inventory to maintain supplyflash production volumes as we close certain facilities and transition production. Excluding the impact of the Merger in 2016, DPO in 2017 increased by 2 days over 2016 and decreased by 1 day from 2015, primarily reflectingwell as routine variations in the timing of purchases and payments during the period.


Investing Activities


During 2017,Net cash provided by investing activities in 2020 primarily consisted of a $931 million net decrease in notes receivable issuances to Flash Ventures, partially offset by $647 million of capital expenditures and $22 million for acquisitions. Net cash used in investing activities in 2019 primarily consisted of $578$876 million of capital expenditures and a net $277$598 million increase in notes receivable to and investments in Flash Ventures, partially offset by cash provided by a net $230 million decrease in our investments in marketable securities. During 2016, net cash used in investing activities primarily consisted of $9.84 billion related to the Merger, net of cash acquired, $632 million related to the purchase of investments, $584 million of capital expenditures, $90 million net increase in notes receivableissuances to Flash Ventures and a net $76 million of other investing activities, partially offset by $1.20 billion of proceeds from sales of investments and $405 million of proceeds from maturities of investments. During 2015, net cash used in investing activities primarily consisted of $857 million related to the purchase of investments, $612 million offund its capital expenditures and $257 million related to acquisitions, net of cash acquired, partially offset by $505 million of proceeds from sales of investments and $263 million of proceeds from maturities of investments.expansion.


Our cash equivalents are primarily invested in highly liquid money market funds that are investedinvest in U.S. Treasury securities and U.S. Government agency securities as well as bank certificates of deposit.securities. In addition, from time to time, we invest directly in U.S. Treasury securities, U.S. and International Governmentinternational government agency securities, certificates of deposit, asset-backedasset backed securities and corporate and municipal notes and bonds.


Financing Activities


During 2017,2020, net cash used in financing activities primarily consisted of $11.70 billion to repay$982 million for repayment of debt $574(of which $257 million was for scheduled principal payments and $725 million was for voluntary prepayments), $595 million to pay dividends on our common stock and $492$72 million to settle convertible debt,for taxes paid on vested stock awards under employee stock plans, partially offset by $7.90 billion$141 million of proceedscash from debt, netthe issuance of issuance costs, a net $230 million provided bystock under our employee stock plans and $61 million of proceeds from call options. During 2016, netplans. Net cash provided byused in financing activities in 2019 primarily consisted of $16.58 billion$681 million for the repayment of proceeds from debt, net of issuance costs, $409 million of proceeds from call options, $125 million of proceeds from borrowings under our revolving credit facility and a net $74 million provided by employee stock plans, offset by a net $2.61 billion to settle convertibleother debt, $2.31 billion to repay debt, $613 million for payment upon settlement of warrants, $464 million to pay dividends on our common stock, $380 million to repay the revolving credit facility and $60 million to repurchase shares of our common stock. During 2015, net cash used in financing activities consisted of $970 million to repurchase shares of our common stock, $396$584 million to pay dividends on our common stock, and $125$563 million for share repurchases. On July 31, 2020, we made an incremental voluntary prepayment of $150 million on our Term Loan B-4.

In April 2020, we suspended our dividend policy to repay debt, partially offset by $255 millionreinvest in the business and to support our ongoing deleveraging efforts. We will reevaluate our dividend policy as our leverage ratio improves.

A discussion of proceeds from our revolving credit facilitycash flows for the year ended June 29, 2018 is included in Part II, Item 7, Management’s Discussion and a net $167 million provided by employee stock plans.Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources, included in our Annual Report on Form 10-K for the year ended June 28, 2019 filed with the Securities and Exchange Commission on August 27, 2019.



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“Short and Long-term Liquidity-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, with the exception of Flash Ventures and our joint venture with Unisplendour Corporation Limited and Unissoft (Wuxi) Group Co. Ltd. (“Unis”), referred to as the “Unis Venture”, we do not have an interest in, or relationships with, any special-purposevariable interest entities. For additional information regarding our off-balance sheet arrangements, see Part II, Item 8, Note 9, Commitments, Contingencies8, Related Parties and Related PartiesCommitments and Contingencies, of the Notes to Consolidated Financial Statements included in this Annual Report on Form 10‑K.10-K.

42


Short and Long-term Liquidity


Contractual Obligations and Commitments


The following is a summary of our known contractual cash obligations and commercial commitments as of June 30, 2017:July 3, 2020:
Total1 Year (2021)2-3 Years (2022-2023)4-5 Years (2024-2025)More than 5 Years (Beyond 2025)
(in millions)
Long-term debt, including current portion(1)
$9,711 $286 $6,025 $1,100 $2,300 
Interest on debt1,152 289 519 235 109 
Flash Ventures related commitments(2)
5,786 2,793 2,171 688 134 
Operating leases304 45 60 55 144 
Purchase obligations and other commitments3,657 1,851 1,146 470 190 
Mandatory Deemed Repatriation Tax1,029 106 208 417 298 
Total$21,639 $5,370 $10,129 $2,965 $3,175 
 Total 1 Year (2018) 2-3 Years (2019-2020) 4-5 Years (2021-2022) More than 5 Years (Beyond 2022)
 (in millions)
Long-term debt, including current portion$13,356
 $246
 $802
 $3,312
 $8,996
Interest on debt4,467
 769
 1,513
 1,347
 838
Flash Ventures and other related commitments(1)
7,510
 3,096
 2,542
 1,502
 370
Operating leases178
 46
 73
 39
 20
Purchase obligations1,634
 1,575
 59
 
 
Total$27,145
 $5,732
 $4,989
 $6,200
 $10,224

(1)
Includes reimbursement for depreciation and lease payments on owned and committed equipment, funding commitments for loans and equity investments and reimbursement for other committed expenses, including R&D. Funding commitments assume no additional operating lease guarantees. Additional operating lease guarantees can reduce funding commitments.

(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 payments for other committed expenses, including R&D and building depreciation. Funding commitments assume no additional operating lease guarantees. Additional operating lease guarantees can reduce funding commitments.

Debt


SeeIn addition to our existing debt, we have $2.25 billion available under our revolving credit facility, subject to customary conditions under the credit agreement. Additional information regarding our indebtedness, including information about availability under our revolving credit facility and the principal repayment terms, interest rates, covenants and other key terms of our outstanding indebtedness, is included in 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 regarding10-K. The credit agreement governing our indebtedness, including the principal repayment terms,revolving credit facility and our term loan A-1 due 2023 requires us to comply with certain financial covenants, consisting of a leverage ratio and an interest rates, covenants and other key terms.coverage ratio. As of July 3, 2020, we were in compliance with these financial covenants.

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.


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 total outstanding obligations.obligations under each lease agreement. The lease agreements containleases are subject to customary covenants for Japanese lease facilities. In addition to containing customaryand cancellation events of default relatedthat relate to Flash Ventures thatand each of the guarantors. The occurrence of a cancellation event 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.obligations and a call on our guarantees. As of June 30, 2017,July 3, 2020, we were in compliance with all covenants under these Japanese lease facilities.

See Part II, Item 8, Note 9, Commitments, Contingencies8, Related Parties and Related PartiesCommitments and Contingencies, of the Notes to Consolidated Financial Statements included in this Annual Report on Form 10‑K10-K for information regarding Flash Ventures.


Purchase Obligations and Other Commitments

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. We also enter into long-term agreements with suppliers that contain fixed future commitments, which are contingent on certain conditions such as performance, quality and technology of the vendor’s components. These arrangements are included under “Purchase obligations” in the table above.

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Mandatory Deemed Repatriation Tax

The following is a summary of our estimated mandatory deemed repatriation tax obligations that are payable in the following fiscal years (in millions):
2021106 
2022104 
2023104 
2024179 
2025238 
2026298 
Total$1,029 

For additional information regarding our estimate of the total tax liability for the mandatory deemed repatriation tax, see Part II, Item 8, Note 13, Income Tax Expense, of the Notes to Consolidated Financial Statements included in our Annual Report on Form 10-K for the fiscal year ended June 28, 2019.

Unrecognized Tax Benefits

As of July 3, 2020, the liability for unrecognized tax benefits (excluding accrued interest and penalties) was approximately $717 million. Accrued interest and penalties related to unrecognized tax benefits as of July 3, 2020 was approximately $137 million. Of these amounts, approximately $720 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.

Interest Rate Swap

We have generally held a balance of fixed and variable rate debt. At July 3, 2020, we had $6.28 billion of variable rate debt, comprising 65% of the par value of our debt. To balance the portfolio and moderate our exposure to fluctuations in interest rates underlying our variable debt, we entered into pay-fixed interest rate swaps on $2.00 billion notional amount, which effectively converts a portion of our term loan to fixed rates through February 2023. After giving effect to the $2.00 billion of interest rate swaps, we effectively had $4.28 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 $43 million.

Foreign Exchange Contracts


We purchase foreign exchange contracts to hedge the impact of foreign currency fluctuations on certain underlying assets, liabilities and commitments for operatingOperating 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.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 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.

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Unrecognized Tax Benefits


AsStock Repurchase Program

Our Board of June 30, 2017,Directors has authorized a stock repurchase program for the amountrepurchase of unrecognized tax benefits, including related accrued interest and penalties, was $611 million, of which $493 million could result in potential cash payments. We are not ableup to provide a reasonable estimate of the timing of future tax payments related to these obligations. For additional information regarding our total tax liability for unrecognized tax benefits, see Part II, Item 8, Note 13, Income Tax Expense (Benefit), of the Notes to Consolidated Financial Statements included in this Annual Report on Form 10‑K.

Cash Dividend

Since the first quarter of 2013, we have issued a quarterly cash dividend. On May 3, 2017, we declared a cash dividend of $0.50 per share$5.00 billion of our common stock, to our shareholders of record as of June 30, 2017. The cash dividend of $147 million was paid onwhich authorization is effective through July 17, 2017. On August 2, 2017,25, 2023. For the year ended July 3, 2020, we declared a cash dividend of $0.50 per sharedid not make any stock repurchases and have not repurchased any shares of our common stock pursuant to our shareholders of record as of September 29, 2017. The cash dividend will be paid on October 16, 2017. We may modify, suspend, or cancel our cash dividend policy in any manner and at any time.

Recently Issued Accounting Pronouncements Not Yet Adopted

In March 2017, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2017-07, “Compensation—Retirement Benefits (Topic 715): Improving the Presentation of Net 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 new standard is effective for fiscal years beginning after December 15, 2017, which for us is the first quarter of 2019. Early adoption is permitted within the first interim period. We are currently evaluating the impact ASU 2017-07 will have on our Consolidated Financial Statements.

In January 2017, the FASB issued 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. The new standard is effective for goodwill impairment tests in fiscal years beginning after December 15, 2019, which for us is the first quarter of 2021. Early adoption is permitted for goodwill impairment tests performed after January 1, 2017. The adoption of this standard is not expected to have a material impact on our Consolidated Financial Statements.


In October 2016, the FASB issued ASU No. 2016-16, “Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory” (“ASU 2016-16”). ASU 2016-16 removes the prohibition in the FASB Accounting Standards Codification (“ASC”) Topic 740 against the immediate recognition of the current and deferred income tax effects of intra-entity transfers of assets other than inventory. The new standard is intended to reduce the complexity of U.S. GAAP and diversity in practice related to the tax consequences of certain types of intra-entity asset transfers, particularly those involving IP. The new standard is effective for fiscal years beginning after December 15, 2017, which for us is the first quarter of 2019. Early adoption is permitted. We are currently evaluating the impact ASU 2016-16 will have on our Consolidated Financial Statements.

In August 2016, the FASB issued ASU No. 2016-15, “Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments” (“ASU 2016-15”). ASU 2016-15 addresses certain cash flows issues regarding the classification of certain cash receipts and cash payments, which, among others, includes our disclosure requirement related to debt prepayment or extinguishment costs and distributions received from equity method investees. The new standard is effective for fiscal years beginning after December 15, 2017, which for us is the first quarter of 2019. Early adoption is permitted. We expect to adopt this standard in the first quarter of 2018. The adoption of this standard is not expected to have a material impact on our Consolidated Financial Statements.

In March 2016, the FASB issued ASU No. 2016-09, “Compensation — Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting” (“ASU 2016-09”). ASU 2016-09 simplifies several aspects of the accounting for stock-based payment transactions and states that, among other things, all excess tax benefits and tax deficiencies should be recognized as income tax expense or benefit in the income statement and an entity can make an entity-wide accounting policy election to either estimate the number of awards that are expected to vest or account for forfeitures when they occur. We will adopt this standard in the first quarter of 2018 using the modified retrospective approach. This adoption will result in a one-time increase to beginning retained earnings for cumulative adjustments of $58 million for the unrecognized windfall tax benefits related to previous vesting and exercises of stock-based awards and $19 million related to the change in our accounting policy for estimated forfeitures and share cancellations. In addition, under the new standard, we will prospectively reflect the tax deficiencies and benefits as an operating activity, rather than as a financing activity under the previous standard, in our Consolidated Statements of Cash Flows.

In February 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842)” (“ASU 2016-02”). ASU 2016-02, among other things, requires lessees to recognize a right-of-use asset and a lease liability for leases. We expect to adopt this standard in the first quarter of 2020. We are currently evaluating the impact ASU 2016-02 will have on our Consolidated Financial Statements and related disclosures.

In January 2016, the FASB issued ASU No. 2016-01, “Financial Instruments — Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities” (“ASU 2016-01”). ASU 2016-01 provides guidance related to accounting for equity investments, financial liabilities under the fair value option and the presentation and disclosure requirements for financial instruments. In addition, the FASB clarified guidance related to the valuation allowance assessment when recognizing deferred tax assets resulting from unrealized losses on available-for-sale debt securities. ASU 2016-01 is effective for fiscal years beginning after December 15, 2017, which for us is the first quarter of 2019. Early adoption is not permitted. We are currently evaluating the impact ASU 2016-01 will have on our Consolidated Financial Statements.

In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers (Topic 606)” (“ASC Topic 606”), which amends the guidance in former ASC Topic 605, “Revenue Recognition”, to provide a single, comprehensive revenue recognition model for all contracts with customers. ASC Topic 606 requires an entity to recognize revenue in a manner that depicts the transfer of promised goods or services to customers in amounts that reflect the consideration to which an entity expects to be entitled in exchange for those goods or services. The new standard also requires entities to enhance disclosures about the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. The standard is effective beginningstock repurchase program since the first quarter of fiscal 2019, with early adoption permitted.2019. Although we will reevaluate the repurchasing of our common stock when appropriate, there can be no assurance if, when or at what level we may resume such activity. The standardremaining amount available to be repurchased under our current stock repurchase program as of July 3, 2020 was $4.50 billion. Repurchases under the stock repurchase program may be applied retrospectively to all prior periods presented (“full retrospective method”),made in the open market or retrospectively with the cumulative effect of initially applying the guidance recognized at the date of initial application (“modified retrospective method”). Based on our preliminary plan, we intend to adopt the new standard beginning within privately negotiated transactions and may be made under a Rule 10b5-1 plan.

Cash Dividend

We issued a quarterly cash dividend from the first quarter of 2019 using the modified retrospective method. However, we continue to assess this in connection with our entire project plan.

We expect the implementation of the new standard to impact the recognition of our revenue as follows:

Substantially all of our current revenue is from the sale of hardware products. We do not expect any material changesfiscal 2013 up to the timing or amountthird quarter of revenue for these typesfiscal 2020. During the year ended July 3, 2020, we declared aggregate cash dividends of sales under the new standard.


For sales-based royalties,$1.50 per share on our outstanding common stock totaling $449 million. In April 2020, we will needsuspended our dividend to estimate and recognize revenuereinvest in the period the royalty-bearing sales occurbusiness and to support our ongoing deleveraging efforts. We will reevaluate our dividend policy as opposed to the existing treatment of recognizing revenue in the period the royalty report is received. This change will result in the acceleration of revenue recognition by one fiscal quarter as well as fluctuations between the estimated and actual reported sales-based royalties which we do not expect to be material.our leverage ratio improves.


For software and IP licenses, we are still assessing the impact and timing to revenue from the implementation of the new standard. However, we do not currently expect the new standard to have a material impact on our revenue for these types of arrangements.

Recent Accounting Pronouncements
Our revenue disclosures are expected to expand and may require judgment in certain areas.

As we are completing our assessment, we are also identifying and preparing to implement changes to our processes, internal controls and systems configurations from the implementation of the new revenue standard. We do not currently expect any significant changes to our other accounting policies from the adoption of the new revenue standard. Our implementation efforts are progressing as planned.

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, Recently AdoptedRecent Accounting Pronouncements, of the Notes to Consolidated Financial Statements included in this Annual Report on Form 10‑K.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”)(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 the Consolidated Financial Statements may be material.


Revenue


In accordance with standard industry practice, weWe 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 wereductions. We also provide resellers and OEMsoriginal equipment manufacturers (“OEMs”) with other sales incentive programs. AtThe Company records estimated variable consideration related to these items as a reduction to revenue at the time of revenue recognition. We use judgment in our assessment of variable consideration in contracts to be included in the transaction price. We use the expected value method to arrive at the amount of variable consideration. The Company is constraining variable consideration until the likelihood of a significant revenue reversal is not probable and believes that the expected value method is the appropriate estimate of the amount of variable consideration based on the fact that we recognize revenuehave a large number of contracts with similar characteristics.

For sales to OEMs, the Company’s methodology for estimating variable consideration is based on the amount of consideration expected to be earned based on the OEMs’ volume of purchases from the Company or other agreed upon sales incentive programs. For sales to resellers, and OEMs, we record a reduction of revenuethe methodology 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 adjustmentsestimating variable consideration is based 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, historicalcurrent pricing trends and anticipated returns informationchannel inventory levels. Differences between the estimated 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, whichactual amounts of variable consideration are recognized as adjustments to revenue.

Marketing development program costs are typically recorded as a reduction of the transaction price and, therefore, of revenue. These amounts generally vary accordingWe net sales rebates against open customer receivable balances if the criteria 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 8% to 14% of gross revenue and adjustments to revenue due to changes in accruals for these programs related to revenue reported in prior periods have generally averaged less than 1% of gross revenue over the last three fiscal years.offset are met, otherwise they are recorded within other accrued liabilities.

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.

45


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 17, 16,Legal Proceedings, of the Notes to Consolidated Financial Statements included in this Annual Report on Form 10‑K.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 account for interest and penalties related to income taxes as a component of the provision for income taxes.


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.


Goodwill and Other Long-Lived Assets


Goodwill is not amortized. Instead, it is tested for impairment on an annual basis or more frequently whenever events or changes in circumstances indicate that goodwill may be impaired. We perform our annual impairment test as of the first day of our fiscal fourth quarter. We either use qualitative factors to determine whether goodwill is more likely than not impaired or we performand whether a two-step approach to quantify impairment.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 followperform a two-stepquantitative approach to quantifydetermine the amount of impairment. We are required to use judgment when applying the goodwill impairment test, including the identification of one or more reporting units,units. If we had more than one reporting unit, judgment would also be required in the 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. The estimates of fair

46

value require evaluation of future market conditions and product lifecycles as well as projected revenue, earnings and cash flow.

47

Item 7A.Quantitative and Qualitative Disclosures About Market Risk

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 operatingOperating 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. TheSubstantially all of 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.10-K.


As of June 30, 2017, we had outstandingDue to macroeconomic changes and volatility experienced in the foreign exchange contracts presentedmarket recently, we believe sensitivity analysis is more informative in representing the following table. The changes in fair valuespotential impact to the portfolio as a result of these foreign exchange contracts would be largely offset in other income (expense) by corresponding changesmarket movement. Therefore, we have performed sensitivity analyses for 2020 and 2019, using a modeling technique that measures the change in the fair values arising from a hypothetical 10% adverse movement in the levels of the foreign currency denominated monetary assetsexchange rates relative to the U.S. dollar, with all other variables held constant. The analyses cover all of our foreign currency derivative contracts used to offset the underlying exposures. The foreign currency exchange rates used in performing the sensitivity analyses were based on market rates in effect at July 3, 2020 and liabilities.June 28, 2019. The sensitivity analyses indicated that a hypothetical 10% adverse movement in foreign currency exchange rates relative to the U.S. dollar would result in a foreign exchange fair value loss of $135 million and $82 million at July 3, 2020 and June 28, 2019, respectively.
 Contract Amount 
Weighted-Average Contract Rate (1)
 Unrealized Gain (Loss)
 (in millions, except weighted-average contract rate)
British pound sterling$24
 0.78
 $
Euro1,100
 0.87
 3
Japanese yen1,092
 111.55
 (1)
Malaysian ringgit118
 4.39
 2
Philippine peso117
 50.26
 (1)
Singapore dollar49
 1.39
 1
Thai baht286
 34.37
 4
Total forward contracts$2,786
   $8
(1)
Expressed in units of foreign currency per U.S. dollar.


During 20172020, 2019 and 2016,2018, 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 RisksInterest Rate Risk


Variable Interest Rate Risk


Borrowings under our Term Loan Arevolving credit facility and our revolvingterm loan A-1 due 2023 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 facilityratings. As of July 3, 2020, the applicable margin based on our current credit ratings was 1.5%. Borrowings under our term loan B-4 due 2023 bear interest at a rate per annum, at our option, of either an adjusted LIBOR rate (subject to a 0.0% floor) plus an applicablea margin of 2.00% or at a base rate plus an applicable margin of 1.0% (3.23% as of June 30, 2017). The applicable margin for the borrowings under our Term Loan A and our revolving credit facility will range, depending on our leverage, from 1.50% to 2.25% for LIBOR loans and from 0.50% to 1.25% for base rate loans.

Borrowings under the U.S. Term Loan B-2 tranche bear interest at a rate per annum, at our option, of an adjusted LIBOR rate, subject to a 0.75% floor, plus 2.75%1.75% or a base rate plus 1.75% (3.98% asa margin of June 30, 2017). Borrowings under the Euro Term Loan B-2 tranche bear interest at a rate per annum, at our option, equal to an adjusted EURIBOR rate, subject to a 0.75% floor, plus 2.00% (2.75% as of June 30, 2017).


We have generally held a balance of fixed and variable rate debt. At June 30, 2017, 61%July 3, 2020, 65% of the par value of our debt was at variable rates. To balance the portfolio and moderate our exposure to fluctuations in interest rates underlying our variable debt, we entered into a pay-fixed interest rate swapswaps on $1.00$2.00 billion notional amount, which effectively converts a portion of our term loan to fixed rates through May 2020.February 2023. As of June 30, 2017,July 3, 2020, we had $8.10$6.28 billion of variable rate debt. After giving effect to the $1.00$2.00 billion of interest rate swaps, we effectively had $7.10$4.28 billion of long-termLong-term debt subject to variations in interest rates and a one percent increase in the variable rate of interest subject to each loan’s specific floor, would increase annual interest expense by $61$43 million.


For additional information regarding our term loans and ourvariable interest rate swaps,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.10-K.



48

Item 8.Financial Statements and Supplementary Data

Item 8.Financial Statements and Supplementary Data

Index to Financial Statements and Financial Statement Schedule
PAGE NO.
Consolidated Financial Statements:
ReportsReport of Independent Registered Public Accounting Firm
Consolidated Balance Sheets — As of July 3, 2020 and June 30, 2017 and July 1, 201628, 2019
Consolidated Statements of Operations — Three Years Ended June 30, 2017July 3, 2020
Consolidated Statements of Comprehensive Income (Loss) — Three Years Ended June 30, 2017July 3, 2020
Consolidated Statements of Cash Flows — Three Years Ended June 30, 2017July 3, 2020
Consolidated Statements of Shareholders' Equity — Three Years Ended June 30, 2017July 3, 2020
Notes to Consolidated Financial Statements
Financial Statement Schedule:
Schedule II — Consolidated Valuation and Qualifying Accounts — Three Years Ended June 30, 2017



49
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

TheReport of Independent Registered Public Accounting Firm

To the Shareholders and Board of Directors and Shareholders
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 July 3, 2020 and June 30, 2017 and July 1, 2016, and28, 2019, the related consolidated statements of operations, comprehensive income (loss), cash flows, and shareholders’ equity for each of the years in the three-year period ended June 30, 2017. In connection with our audits ofJuly 3, 2020, and the related notes (collectively, the consolidated financial statements, westatements). We also have also audited the relatedCompany’s internal control over financial statement schedule. These consolidated financial statements and financial statement schedule arereporting as of July 3, 2020, based on criteria established in Internal Control - Integrated Framework(2013) issued by the responsibilityCommittee of Sponsoring Organizations of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedule based on our audits.Treadway Commission.


We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Western Digital Corporation and subsidiariesthe Company as of July 3, 2020 and June 30, 2017 and July 1, 2016,28, 2019, and the results of theirits operations and theirits cash flows for each of the years in the three-year period ended June 30, 2017,July 3, 2020, in conformity with U.S. generally accepted accounting principles. Also in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly,Company maintained, in all material respects, the information set forth therein.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Western Digital Corporation and subsidiaries’effective internal control over financial reporting as of June 30, 2017,July 3, 2020, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated August 28, 2017, expressed an unqualified opinion on the effectiveness of theCommission.

Basis for Opinions

The Company’s internal control over financial reporting.
/s/ KPMG LLP
August 28, 2017
Irvine, California

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Shareholders
Western Digital Corporation:

We have audited Western Digital Corporation and subsidiaries’ internal control over financial reporting as of June 30, 2017, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Western Digital Corporation and subsidiaries’ 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 Controls and Procedures - Management’s Report on Internal Control over Financial Reporting appearing under Item 9A.. 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 audit.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 auditaudits in accordance with the standards of the Public Company Accounting Oversight Board (United States).PCAOB. Those standards require that we plan and perform the auditaudits 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 auditaudits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit providesaudits provide a reasonable basis for our opinion.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 U.S. generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding 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.

50


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.


In our opinion, Western Digital Corporation and subsidiaries maintained, in all material respects, effective internal control over financial reporting as of June 30, 2017, based on criteria established in Internal Control — Integrated Framework (2013) issued byCritical Audit Matter

The critical audit matter communicated below is a matter arising from the Committee of Sponsoring Organizationscurrent period audit of the Treadway Commission (COSO).

We also have audited, in accordance withconsolidated financial statements that was communicated or required to be communicated to the standards ofaudit committee and that: (1) relates to accounts or disclosures that are material to the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Western Digital Corporation and subsidiaries as of June 30, 2017 and July 1, 2016, the related consolidated statements of operations, comprehensive income, cash flows, and shareholders’ equity for each of the years in the three-year period ended June 30, 2017, and the related financial statement schedule, and our report dated August 28, 2017, expressed an unqualified opinion on those consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgment. The communication of a critical audit matter does not alter in any way our opinion on the consolidated financial statement schedule.statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.

Assessment of variable consideration for sales to resellers

As discussed in Note 1 to the consolidated financial statements, the Company provides resellers with price protection and other sales incentive programs. The Company uses judgment in its assessment of variable consideration in contracts to be included in the transaction price. The Company’s estimate of variable consideration for sales to resellers is based on several factors, including historical pricing information, current pricing trends, and channel inventory levels.

We identified the assessment of variable consideration for sales to resellers as a critical audit matter. Evaluating the assumptions used by the Company to estimate the variable consideration, specifically anticipated price decreases based on historical pricing information, current pricing trends, and channel inventory levels during the expected reseller holding period, required a higher degree of auditor judgment due to the uncertainty involved in the estimate.

The primary procedures performed to address this critical audit matter include the following. We tested certain internal controls over the Company’s process of determining the variable consideration, including controls related to the development of the assumption of anticipated price decreases during the reseller holding period. We evaluated the Company’s ability to accurately estimate the assumptions used to determine the variable consideration by comparing historically recorded variable consideration to actual subsequent payments and credits. We developed an expectation of the variable consideration for resellers based on historically recorded variable consideration and compared it to the actual variable consideration. We developed an expectation of the variable consideration for resellers based on subsequent payments and credits issued and compared it to the actual variable consideration.


/s/ KPMG LLP
August 28, 2017
Irvine, California


We have served as the Company’s auditor since 1970.

Santa Clara, California
August 27, 2020


51

WESTERN DIGITAL CORPORATION
CONSOLIDATED BALANCE SHEETS
(in millions, except par value)
July 3,
2020
June 28,
2019
June 30,
2017
 July 1,
2016
ASSETSASSETSASSETS
Current assets:   Current assets:
Cash and cash equivalents$6,354
 $8,151
Cash and cash equivalents$3,048 $3,455 
Short-term investments24
 227
Accounts receivable, net1,948
 1,461
Accounts receivable, net2,379 1,204 
Inventories2,341
 2,129
Inventories3,070 3,283 
Other current assets389
 616
Other current assets551 535 
Total current assets11,056
 12,584
Total current assets9,048 8,477 
Property, plant and equipment, net3,033
 3,503
Property, plant and equipment, net2,854 2,843 
Notes receivable and investments in Flash Ventures1,340
 1,171
Notes receivable and investments in Flash Ventures1,875 2,791 
Goodwill10,014
 9,951
Goodwill10,067 10,076 
Other intangible assets, net3,823
 5,034
Other intangible assets, net941 1,711 
Other non-current assets594
 619
Other non-current assets877 472 
Total assets$29,860
 $32,862
Total assets$25,662 $26,370 
LIABILITIES AND SHAREHOLDERS’ EQUITYLIABILITIES AND SHAREHOLDERS’ EQUITYLIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:   Current liabilities:
Accounts payable$2,144
 $1,888
Accounts payable$1,945 $1,567 
Accounts payable to Flash Ventures206
 168
Accounts payable to related partiesAccounts payable to related parties407 331 
Accrued expenses1,069
 995
Accrued expenses1,296 1,296 
Accrued compensation506
 392
Accrued compensation472 347 
Accrued warranty186
 172
Bridge loan
 2,995
Current portion of long-term debt233
 339
Current portion of long-term debt286 276 
Total current liabilities4,344
 6,949
Total current liabilities4,406 3,817 
Long-term debt12,918
 13,660
Long-term debt9,289 10,246 
Other liabilities1,180
 1,108
Other liabilities2,416 2,340 
Total liabilities18,442
 21,717
Total liabilities16,111 16,403 
Commitments and contingencies (Notes 6, 9, 13 and 17)
 
Commitments and contingencies (Notes 8, 9, 13 and 16)Commitments and contingencies (Notes 8, 9, 13 and 16)
Shareholders’ equity:   Shareholders’ equity:
Preferred stock, $0.01 par value; authorized — 5 shares; issued and outstanding — none
 
Common stock, $0.01 par value; authorized — 450 shares; issued — 312 shares in 2017 and 2016; outstanding — 294 shares in 2017 and 284 shares in 20163
 3
Preferred stock, $0.01 par value; authorized — 5 shares; issued and outstanding — NaNPreferred stock, $0.01 par value; authorized — 5 shares; issued and outstanding — NaN  
Common stock, $0.01 par value; authorized — 450 shares; issued — 312 shares in 2020 and 2019; outstanding — 302 shares in 2020 and 295 shares in 2019Common stock, $0.01 par value; authorized — 450 shares; issued — 312 shares in 2020 and 2019; outstanding — 302 shares in 2020 and 295 shares in 20193 3 
Additional paid-in capital4,506
 4,429
Additional paid-in capital3,717 3,851 
Accumulated other comprehensive income (loss)(58) 103
Accumulated other comprehensive lossAccumulated other comprehensive loss(157)(68)
Retained earnings8,633
 8,848
Retained earnings6,725 7,449 
Treasury stock — common shares at cost; 18 shares in 2017 and 28 shares in 2016(1,666) (2,238)
Treasury stock — common shares at cost; 10 shares in 2020 and 17 shares in 2019Treasury stock — common shares at cost; 10 shares in 2020 and 17 shares in 2019(737)(1,268)
Total shareholders’ equity11,418
 11,145
Total shareholders’ equity9,551 9,967 
Total liabilities and shareholders’ equity$29,860
 $32,862
Total liabilities and shareholders’ equity$25,662 $26,370 


The accompanying notes are an integral part of these Consolidated Financial Statements.

52

WESTERN DIGITAL CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(in millions, except per share amounts)
Year EndedYear Ended
June 30,
2017
 July 1,
2016
 July 3,
2015
July 3,
2020
June 28,
2019
June 29,
2018
Revenue, net$19,093
 $12,994
 $14,572
Revenue, net$16,736 $16,569 $20,647 
Cost of revenue13,021
 9,559
 10,351
Cost of revenue12,955 12,817 12,942 
Gross profit6,072
 3,435
 4,221
Gross profit3,781 3,752 7,705 
Operating expenses:     Operating expenses:
Research and development2,441
 1,627
 1,646
Research and development2,261 2,182 2,400 
Selling, general and administrative1,445
 997
 788
Selling, general and administrative1,153 1,317 1,473 
Employee termination, asset impairment, and other charges232
 345
 176
Employee termination, asset impairment, and other charges32 166 215 
Total operating expenses4,118
 2,969
 2,610
Total operating expenses3,446 3,665 4,088 
Operating income1,954
 466
 1,611
Operating income335 87 3,617 
Interest and other income (expense):     Interest and other income (expense):
Interest income26
 26
 14
Interest income28 57 60 
Interest expense(847) (266) (49)Interest expense(413)(469)(676)
Other income (expense), net(364) (73) 1
Other income (expense), net4 38 (916)
Total interest and other expense, net(1,185) (313) (34)Total interest and other expense, net(381)(374)(1,532)
Income before taxes769
 153
 1,577
Income tax expense (benefit)372
 (89) 112
Net income$397
 $242
 $1,465
Income (loss) before taxesIncome (loss) before taxes(46)(287)2,085 
Income tax expenseIncome tax expense204 467 1,410 
Net income (loss)Net income (loss)$(250)$(754)$675 
     
Income per common share     
Income (loss) per common shareIncome (loss) per common share
Basic$1.38
 $1.01
 $6.31
Basic$(0.84)$(2.58)$2.27 
Diluted$1.34
 $1.00
 $6.18
Diluted$(0.84)$(2.58)$2.20 
Weighted average shares outstanding:     Weighted average shares outstanding:
Basic288
 239
 232
Basic298 292 297 
Diluted296
 242
 237
Diluted298 292 307 
     
Cash dividends declared per share$2.00
 $2.00
 $1.80
Cash dividends declared per share$1.50 $2.00 $2.00 


The accompanying notes are an integral part of these Consolidated Financial Statements.

53

WESTERN DIGITAL CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(in millions)
Year Ended
Year EndedJuly 3,
2020
June 28,
2019
June 29,
2018
Net income (loss)Net income (loss)$(250)$(754)$675 
Other comprehensive income (loss), before tax:Other comprehensive income (loss), before tax:
Actuarial pension lossActuarial pension loss(1)(39)(2)
Foreign currency translation adjustmentForeign currency translation adjustment(7)28 18 
June 30,
2017
 July 1,
2016
 July 3,
2015
Net income$397
 $242
 $1,465
Other comprehensive income (loss), before tax:     
Actuarial pension gain (loss)39
 (73) (2)
Foreign currency translation adjustment(115) 74
 
Net unrealized gain (loss) on derivative contracts(77) 99
 (30)
Net unrealized gain on available-for-sale securities2
 
 
Net unrealized gain (loss) on derivative contracts and available-for-sale securitiesNet unrealized gain (loss) on derivative contracts and available-for-sale securities(93)(39)7 
Total other comprehensive income (loss), before tax(151) 100
 (32)Total other comprehensive income (loss), before tax(101)(50)23 
Income tax benefit (expense) related to items of other comprehensive income (loss), before tax(10) 23
 
Income tax benefit (expense) related to items of other comprehensive income (loss), before tax12 21 (4)
Other comprehensive income (loss), net of tax(161) 123
 (32)Other comprehensive income (loss), net of tax(89)(29)19 
Total comprehensive income$236
 $365
 $1,433
Total comprehensive income (loss)Total comprehensive income (loss)$(339)$(783)$694 


The accompanying notes are an integral part of these Consolidated Financial Statements.

54

WESTERN DIGITAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in millions)
Year EndedYear Ended
June 30,
2017
 July 1,
2016
 July 3,
2015
July 3,
2020
June 28,
2019
June 29,
2018
Cash flows from operating activities     Cash flows from operating activities
Net income$397
 $242
 $1,465
Adjustments to reconcile net income to net cash provided by operations:     
Net income (loss)Net income (loss)$(250)$(754)$675 
Adjustments to reconcile net income (loss) to net cash provided by operations:Adjustments to reconcile net income (loss) to net cash provided by operations:
Depreciation and amortization2,128
 1,154
 1,114
Depreciation and amortization1,566 1,812 2,056 
Stock-based compensation394
 191
 162
Stock-based compensation308 306 377 
Deferred income taxes12
 (149) 28
Deferred income taxes(82)374 (348)
Loss on disposal of assets18
 22
 17
Write-off of issuance costs and amortization of debt discounts285
 39
 
Loss on convertible debt and related instruments5
 58
 
Loss (gain) on disposal of assetsLoss (gain) on disposal of assets(7)39 21 
Non-cash portion of employee termination, asset impairment and other charges13
 41
 86
Non-cash portion of employee termination, asset impairment and other charges  16 
Amortization of debt discountsAmortization of debt discounts40 38 221 
Cash premium on extinguishment of debtCash premium on extinguishment of debt  720 
Other non-cash operating activities, net94
 11
 (37)Other non-cash operating activities, net6 (8)(19)
Changes in:     Changes in:
Accounts receivable, net(487) 466
 458
Accounts receivable, net(1,175)993 (244)
Inventories(204) 306
 (143)Inventories200 (339)(598)
Accounts payable223
 (299) (148)Accounts payable192 (588)(15)
Accounts payable to related parties38
 (115) 
Accounts payable to related parties75 72 53 
Accrued arbitration award
 
 (758)
Accrued expenses231
 102
 35
Accrued expenses184 (42)(17)
Accrued compensation115
 (94) (134)Accrued compensation124 (135)(26)
Other assets and liabilities, net175
 8
 97
Other assets and liabilities, net(357)(221)1,333 
Net cash provided by operations3,437
 1,983
 2,242
Net cash provided by operating activitiesNet cash provided by operating activities824 1,547 4,205 
Cash flows from investing activities     Cash flows from investing activities
Purchases of property, plant and equipment(578) (584) (612)Purchases of property, plant and equipment(647)(876)(835)
Proceeds from the sale of property, plant and equipment21
 
 
Proceeds from the sale of property, plant and equipment 119 26 
Acquisitions, net of cash acquired
 (9,835) (257)Acquisitions, net of cash acquired(22) (100)
Purchases of investments(281) (632) (857)Purchases of investments (79)(89)
Proceeds from sale of investments94
 1,204
 505
Proceeds from sale of investments 175 48 
Proceeds from maturities of investments417
 405
 263
Proceeds from maturities of investments 7 19 
Investments in Flash Ventures(20) 
 
Notes receivable issuances to Flash Ventures(549) (106) 
Notes receivable issuances to Flash Ventures(353)(1,364)(1,313)
Notes receivable proceeds from Flash Ventures292
 16
 
Notes receivable proceeds from Flash Ventures1,284 766 571 
Strategic investments and other, net(32) (76) 5
Strategic investments and other, net16 (20)18 
Net cash used in investing activities(636) (9,608) (953)
Net cash provided by (used in) investing activitiesNet cash provided by (used in) investing activities278 (1,272)(1,655)
Cash flows from financing activities     Cash flows from financing activities
Issuance of stock under employee stock plans235
 117
 212
Issuance of stock under employee stock plans141 118 220 
Taxes paid on vested stock awards under employee stock plans(124) (50) (64)Taxes paid on vested stock awards under employee stock plans(72)(115)(171)
Excess tax benefits from employee stock plans119
 7
 19
Proceeds from acquired call option61
 409
 
Settlement of convertible debt(492) (2,611) 
Repurchases of common stock
 (60) (970)Repurchases of common stock (563)(591)
Proceeds from revolving credit facility
 125
 
Repayment of revolving credit facility
 (380) 
Dividends paid to shareholders(574) (464) (396)Dividends paid to shareholders(595)(584)(593)
Settlement of debt hedge contracts(21) 
 
Settlement of debt hedge contracts  28 
Repayment of debt(11,697) (2,313) (125)Repayment of debt(982)(181)(17,074)
Proceeds from debt7,908
 17,108
 255
Proceeds from debt  13,840 
Borrowings from (repayment of) revolving credit facilityBorrowings from (repayment of) revolving credit facility (500)500 
Debt issuance costs(10) (524) 
Debt issuance costs (4)(59)
Payment upon settlement of acquired warrants
 (613) 
Net cash provided by (used in) financing activities(4,595) 10,751
 (1,069)
Net cash used in financing activitiesNet cash used in financing activities(1,508)(1,829)(3,900)
Effect of exchange rate changes on cash(3) 1
 
Effect of exchange rate changes on cash(1)4 1 
Net increase (decrease) in cash and cash equivalents(1,797) 3,127
 220
Net decrease in cash and cash equivalentsNet decrease in cash and cash equivalents(407)(1,550)(1,349)
Cash and cash equivalents, beginning of year8,151
 5,024
 4,804
Cash and cash equivalents, beginning of year3,455 5,005 6,354 
Cash and cash equivalents, end of year$6,354
 $8,151
 $5,024
Cash and cash equivalents, end of year$3,048 $3,455 $5,005 
Supplemental disclosure of cash flow information:     Supplemental disclosure of cash flow information:
Cash paid for income taxes$184
 $26
 $47
Cash paid for income taxes$341 $377 $220 
Cash paid for interest$777
 $113
 $45
Cash paid for interest$372 $431 $708 
Supplemental disclosure of non-cash investing and financing activities:     
Common stock issued and equity awards assumed in connection with acquisition$
 $1,822
 $
Shares issued in conjunction with settlement of convertible notes$16
 $94
 $
Shares received in conjunction with assumed call options$(11) $(70) $
Accrual of cash dividend declared$147
 $142
 $116


The accompanying notes are an integral part of these Consolidated Financial Statements.

55


WESTERN DIGITAL CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(in millions)
Common StockTreasury StockAdditional Paid-In CapitalAccumulated Other Comprehensive Income (Loss)Retained EarningsTotal Shareholders’ Equity
SharesAmountSharesAmount
Balance at June 30, 2017312 3 (18)(1,666)4,506 (58)8,633 11,418 
Net income      675 675 
Adoption of new accounting standards    (19) 70 51 
Employee stock plans  9 813 (764)  49 
Stock-based compensation    377   377 
Equity value of convertible debt issuance, net of deferred taxes    125   125 
Repurchases of common stock  (7)(591)   (591)
Dividends to shareholders    29  (621)(592)
Actuarial pension loss     (1) (1)
Foreign currency translation adjustment     18  18 
Net unrealized gain on derivative contracts and available-for-sale securities     2  2 
Balance at June 29, 2018312 3 (16)(1,444)4,254 (39)8,757 11,531 
Net loss      (754)(754)
Employee stock plans  7 739 (736)  3 
Adoption of new accounting standards      56 56 
Stock-based compensation    306   306 
Repurchases of common stock  (8)(563)   (563)
Dividends to shareholders    27  (610)(583)
Actuarial pension loss     (34) (34)
Foreign currency translation adjustment     25  25 
Net unrealized loss on derivative contracts     (20) (20)
Balance at June 28, 2019312 3 (17)(1,268)3,851 (68)7,449 9,967 
Net loss      (250)(250)
Employee stock plans  7 531 (462)  69 
Adoption of new accounting standards      (5)(5)
Stock-based compensation    308   308 
Dividends to shareholders    20  (469)(449)
Actuarial pension loss     (5) (5)
Foreign currency translation adjustment     (6) (6)
Net unrealized loss on derivative contracts     (78) (78)
Balance at July 3, 2020312 $3 (10)$(737)$3,717 $(157)$6,725 $9,551 
 Common Stock Treasury Stock Additional Paid-In Capital Accumulated Other Comprehensive Income (Loss) Retained Earnings Total Shareholders’ Equity
 Shares Amount Shares Amount    
Balance at June 27, 2014261
 $3
 (27) $(1,570) $2,331
 $12
 $8,066
 $8,842
Net income
 
 
 
 
 
 1,465
 1,465
Employee stock plans
 
 6
 241
 (93) 
 
 148
Stock-based compensation
 
 
 
 162
 
 
 162
Stock awards assumed in acquisition
 
 
 
 3
 
 
 3
Increase in excess tax benefits from employee stock plans
 
 
 
 19
 
 
 19
Repurchases of common stock
 
 (10) (970) 
 
 
 (970)
Dividends to shareholders
 
 
 
 6
 
 (424) (418)
Actuarial pension loss
 
 
 
 
 (2) 
 (2)
Net unrealized loss on derivative contracts
 
 
 
 
 (30) 
 (30)
Balance at July 3, 2015261
 3
 (31) (2,299) 2,428
 (20) 9,107
 9,219
Net income
 
 
 
 
 
 242
 242
Employee stock plans
 
 5
 191
 (124) 
 
 67
Stock-based compensation
 
 
 
 191
 
 
 191
Common stock issued in connection with acquisition49
 
 
 
 1,764
 
 
 1,764
Stock awards assumed in acquisition
 
 
 
 58
 
 
 58
Increase in excess tax benefits from employee stock plans
 
 
 
 7
 
 
 7
Shares issued in conjunction with settlement of convertible notes2
 
 
 
 94
 
 
 94
Shares received in conjunction with assumed call options
 
 (1) (70) 
 
 
 (70)
Repurchases of common stock
 
 (1) (60) 
 
 
 (60)
Dividends to shareholders
 
 
 
 11
 
 (501) (490)
Actuarial pension loss
 
 
 
 
 (50) 
 (50)
Foreign currency translation adjustment
 
 
 
 
 74
 
 74
Net unrealized gain on derivative contracts
 
 
 
 
 99
 
 99
Balance at July 1, 2016312
 3
 (28) (2,238) 4,429
 103
 8,848
 11,145
Net income
 
 
 
 
 
 397
 397
Employee stock plans
 
 10
 583
 (472) 
 
 111
Stock-based compensation
 
 
 
 394
 
 
 394
Increase in excess tax benefits from employee stock plans
 
 
 
 104
 
 
 104
Shares issued in conjunction with settlement of convertible notes
 
 
 
 16
 
 
 16
Shares received in conjunction with assumed call options
 
 
 (11) 
 
 
 (11)
Dividends to shareholders
 
 
 
 35
 
 (612) (577)
Actuarial pension gain
 
 
 
 
 27
 
 27
Foreign currency translation adjustment
 
 
 
 
 (113) 
 (113)
Net unrealized gain on available-for-sale securities
 
 
 
 
 2
 
 2
Net unrealized loss on derivative contracts
 
 
 
 
 (77) 
 (77)
Balance at June 30, 2017312
 $3
 (18) $(1,666) $4,506
 $(58) $8,633
 $11,418


The accompanying notes are an integral part of these Consolidated Financial Statements.

56

Table of Contents

WESTERN DIGITAL CORPORATION
NOTES TOCONSOLIDATED FINANCIAL STATEMENTS

Note 1.Organization and Basis of Presentation

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 creates environments for data to thrive. The Company is driving the innovation needed to help customers capture, preserve, access and transform an ever-increasing diversity of data. Everywhere data lives, from advanced data centers to mobile sensors to personal devices, the Company’s industry-leading solutions deliver the possibilities of data.

The Company’s broad portfolio of technology and products address the following key end markets: Client Devices; Data Center Devices and Solutions; and Client Solutions. The Company also generates license and royalty revenue related tofrom its extensive intellectual property (“IP”), which is included in each of thethese three end market 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 five to six years, the Company reports a 53-week fiscal year to align the fiscal year with the foregoing policy. Fiscal years 2017 and 2016, which ended on June 30, 2017 and July 1, 2016, respectively, both comprised 52 weeks, with all quarters consisting of 13 weeks. Fiscal year 2015,2020, which ended on July 3, 2015,2020, is comprised of 53 weeks, with the first quarter consisting of 14 weeks and the second, third and fourthremaining quarters consisting of 13 weeks each. Fiscal years 2019, which ended on June 28, 2019, and 2018, which ended on June 29, 2018, are 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 stockholders’shareholders’ equity.

Reclassifications

Certain prior year amounts have been reclassified in the consolidated statements of cash flows to conform to the current year presentation.


Use of Estimates


ManagementCompany 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.presented with consideration given to the potential impacts of the coronavirus disease 2019 (“COVID-19”) pandemic. However, actual results could differ materially from these estimates.estimates and be significantly affected by the severity and duration of the pandemic, the extent of actions to contain or treat COVID-19, how quickly and to what extent normal economic and operating activity can resume, and the severity and duration of the global economic downturn that results from the pandemic.


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.

57



Table of Contents


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 short-term investments and other non-current assets in the Consolidated Balance Sheets. Available-for-sale securities are stated at fair value with unrealized gains and losses included in accumulated other comprehensive income (loss), which is a component of shareholders’ equity. Gains and losses on available-for-sale securities are recorded based on the specific identification method. The Company evaluates the available-for-sale securities in an unrealized loss position for other-than-temporary impairment. The amortized cost of available-for-sale securities is adjusted for amortization of premiums and accretion of discounts to maturity. Such amortization and accretion are included in total other expense, net in the consolidated statements of operations. In addition, realized gains and losses are included in total other expense, net in the consolidated statements of operations.


Equity Investments


The Company enters into certain strategic investments for the promotion of business and strategic objectives. The equity method of accounting is used if the Company’s ownership interest is greater than or equal to 20% but less than a majority or where the Company has the ability to exercise significant influence over operating and financial policies. The Company’s equity in the earnings or losses in equity-method investments is recognized in Other income (expense), net, in the Consolidated StatementStatements of Operations.


The Company accounts for investments in equity securities of other entities under the cost method of accounting ifIf 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. Investmentsinvestee, the Company accounts for these investments at fair value, or if these equity securities do not have a readily determinable fair value, these securities are measured and recorded using the measurement alternative under Accounting Standards Update (“ASU”) No. 2016-01, “Financial Instruments — Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities,” which is cost minus impairment, if any, plus or minus changes resulting from observable price changes. Previously, these investments were accounted for under the cost method of accountingaccounting. These investments 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 and weighted-average methods)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, while the weighted-average method is used to value precious metal inventories. Weighted-average cost is calculated based upon the cost of precious metals at the time they are received by the Company. The Company has determined that it is not practicable to assign specific costs to individual units of precious metals and, as such, precious metals are relieved from inventory based on the weighted-average cost of the inventory at the time the inventory is used in production. The weighted average method of valuing precious metals does not materially differ from the FIFO method. Inventory write-downs are recorded for the valuation of inventory at the lower of cost or net realizable value by analyzing market conditions and estimates of future sales prices as compared to inventory costs and inventory balances.


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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 and improvements are depreciated over periods ranging from fifteen to thirty-fivethirty 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.

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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 daybeginning of its fiscal fourth quarter. The Company either uses qualitative factors to determine whether goodwill is more likely than not impaired or performsand whether a two-step approach to quantify impairment.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 followperform a two-stepquantitative approach to quantifydetermine the amount of impairment. The Company’s assessment resulted in 0 impairment of goodwill in 2020, 2019, or 2018.

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.


WESTERN DIGITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


IPR&D is an intangible asset accounted as an indefinite-lived asset until the completion or abandonment of the associated research and development effort. During the development period, the Company conducts an IPR&D impairment test annually and whenever events or changes in facts and circumstances indicate that it is more likely than not that the IPR&D is impaired. Events which might indicate impairment include, but are not limited to, adverse cost factors, strategic decisions made in response to economic, market, and competitive conditions, and the impact of the economic environment the Company and on its customer base. If impairment is indicated, the impairment is measured as the amount by which the carrying amount of the assets exceeds the fair value of the assets.


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Other long-lived intangible assets are amortized over their estimated useful lives based on the pattern in which the economic benefits are expected to be received. Long-lived assets are tested for recoverability whenever events or changes in circumstances indicate that their carrying amounts may not be recoverable. If impairment is indicated, the impairment is measured as the amount by which the carrying amount of the assets exceeds the fair value of the assets. The Company recorded impairments to certain long-lived assets in 2017, 2016estimates of fair value require evaluation of future market conditions and 2015.product lifecycles as well as projected revenue, earnings and cash flow. See Note 4, Fair Value Measurements and Investments, Note 7, Goodwill and Other Intangible Assets and Note 15, Acquisitions3, Supplemental Financial Statement Data, for additional disclosures related to the Company’s other intangible assets.


Revenue and Accounts Receivable


RevenueIn May 2014, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2014-09, “Revenue from Contracts with Customers (Topic 606),” which superseded the requirements in Accounting Standards Codification (“ASC”) 605 “Revenue Recognition (Topic 605)”. Topic 606 outlines a comprehensive five-step revenue recognition model based on the principle that an entity should recognize revenue when control of the promised goods or services is recognized whentransferred to customers at an amount that reflects the titleconsideration to which the Company expects to be entitled in exchange for those goods or services. Topic 606 also requires more detailed disclosures to enable users of financial statements to understand the nature, amount, timing, and riskuncertainty of loss have passedrevenue and cash flows arising from contracts with customers. The Company adopted Topic 606 effective June 30, 2018, using the modified retrospective method to all contracts that were not completed contracts as of the beginning of the fiscal year. Results for reporting periods beginning with fiscal year 2019 are presented under Topic 606, while prior period information presented on the financial statements or elsewhere in this Annual Report on Form 10-K is reported under the Company’s historic accounting policies under Topic 605 in effect for those periods and is not adjusted to reflect the retrospective effect of the adoption of Topic 606. The cumulative effect of adopting Topic 606 was a post-tax increase to the customer, there is persuasive evidenceopening retained earnings of an arrangement, delivery has occurred, or services$56 million as of June 30, 2018, which was primarily related to the Company’s license and royalty revenue arrangements. These arrangements had no remaining performance obligations but were previously recognized under Topic 605 when they were reported to the Company by its licensees, which was generally one quarter in arrears from the licensees’ sales of the licensed products. Adoption of the standard did not have been rendered,a material impact on the sales price is fixed or determinableCompany’s financial position, results of operations, and collectability is reasonably assured. cash flows.

The Company establishes provisions againstoffers a broad range of data storage products that include Client Devices, Data Center Devices and Solutions, and Client Solutions. Client Devices consist of hard disk drives (“HDDs”) and solid state drives (“SSDs”) for computing devices; flash-based embedded storage products; and flash-based memory wafers. Data Center Devices and Solutions consist of high-capacity enterprise HDDs and high-performance enterprise SSDs, data center software and system solutions. Client Solutions consist of HDDs and SSDs embedded into external storage products and removable flash-based products. The Company also generates license and royalty revenue related to its IP patent licenses.

The Company recognizes revenue when it satisfies a performance obligation by transferring control over a product or service to the customer. The transaction price to be recognized as revenue is adjusted for variable consideration, such as sales incentives, and costexcludes amounts collected on behalf of third parties, including taxes imposed by governmental authorities. The Company’s performance obligations are typically not constrained based on the Company’s history with similar transactions and that uncertainties are resolved in a fairly short period of time.

Substantially all of the Company’s revenue is from the sale of tangible products for estimated sales returnswhich the performance obligations are satisfied at a point in time, generally upon delivery. The Company’s services revenue mainly includes post contract customer support, warranty as a service and maintenance contracts.The performance obligations for the sameCompany’s services are generally satisfied ratably over the service period thatbased on the relatednature of the service provided and contract terms. Similarly, revenue from patent licensing arrangements is recognized based on existing product return notifications. If actual sales returns exceed expectations, an increasewhether the arrangement provides the customer a right to use or right to access the IP. Revenue for a right to use arrangement is recognized at the time the control of the license is transferred to the customer. Revenue for a right to access arrangement is recognized over the contract period using the time lapse method. For the sales-based royalty arrangements, the Company estimates and recognizes revenue in the period in which customers’ licensable sales return accrual would be required, which could materially affect operating results.occur.


In accordance
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


The Company’s customer payment terms are typically less than two months from the date control over the product or service is transferred to the customer. The Company uses the practical expedient and does not recognize a significant financing component for payment considerations of less than one year. The financing components of contracts with standard industry practice, thepayment terms were not material.

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 thereductions. The Company also provides resellers and original equipment manufacturers (“OEMs”) with other sales incentive programs. AtThe Company records estimated variable consideration related to these items as a reduction to revenue at the time of revenue recognition. The Company uses judgment in its assessment of variable consideration in contracts to be included in the transaction price. The Company uses the expected value method to arrive at the amount of variable consideration. The Company is constraining variable consideration until the likelihood of a significant revenue reversal is not probable and believes that the expected value method is the appropriate estimate of the amount of variable consideration based on the fact that the Company recognizes revenuehas a large number of contracts with similar characteristics.

For sales to OEMs, the Company’s methodology for estimating variable consideration is based on the amount of consideration expected to be earned based on the OEMs’ volume of purchases from the Company or other agreed upon sales incentive programs. For sales to resellers, and OEMs, a reduction of revenuethe Company’s methodology for estimating variable consideration 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 adjustmentsbased 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, historicalcurrent pricing trends and anticipated returns informationchannel inventory levels. Differences between the estimated 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, whichactual amounts of variable consideration are recognized as adjustments to revenue.

Marketing development program costs are typically recorded as a reduction of revenue.

Revenue from patent licensing arrangements is recognized when earned, estimablethe transaction price and, realizable. The timingtherefore, of revenue recognition is dependent on the terms of each license agreement and on the timing of sales of licensed products.revenue. The Company generally recognizes royalty revenue when it is reportednets sales rebates against open customer receivable balances if the criteria to the Company by its licensees, which is generally one quarter in arrears from the licensees’ sales of licensed products. For licensing fees thatoffset 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.met; otherwise they are recorded within other accrued liabilities.


SomeAn immaterial amount of the Company’s revenue arrangements include contracts that contain more than one performance obligation, which are multiple-element arrangements because they are generallytypically comprised of product,tangible products, software and support services orfor multiple distinct licenses. For multiple-element arrangements,these contracts with multiple performance obligations, the Company evaluates whether each deliverable is a distinct promise and should be accounted for as a separate unit of accounting. For multiple-element arrangements that include supportperformance obligation. If a promised good 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 determinedservice is not distinct in accordance with the revenue guidance, the Company combines that good or service with the other promised goods or services in the arrangement until a distinct bundle of goods is identified. The Company allocates the transaction price to the performance obligations of each distinct product or service, or distinct bundle, based on their relative standalone selling prices. Where a separate standalone selling price is not available, the transaction price is based on the Company’s normal pricing and discounting practices forbest estimate of the specific element when sold separately. For multiple-element license agreements that includestandalone selling price. The Company uses one or a combination of more than one licenseof the following methods to distinct technology that are separate units of accounting,estimate the Company allocates revenue to each licensestandalone selling price: the adjusted market assessment approach, the expected cost plus a margin approach, or another suitable method based on the relative selling price of each deliverable. License fees relatedfacts and circumstances.

Contract assets represent the Company’s rights to existing technology with no continuingconsideration where performance obligations are generally recognized upon license commencementcompleted but the customer payments are not due until another performance obligation is satisfied. The Company did not have any contract assets as of either July 3, 2020 or June 28, 2019.

The Company incurs sales commissions and other license feesdirect incremental costs to obtain sales contracts. The Company has applied the practical expedient to recognize the direct incremental costs of obtaining contracts as an expense when incurred if the amortization period is expected to be one year or less or the amount is not material, with these costs charged to Selling, general and administrative expenses. Other direct incremental costs to obtain contracts that have an expected benefit of greater than one year are generally recognized on a straight-line basisamortized over the lifeperiod of expected cash flows from the license. The Company primarily uses an estimaterelated contracts, and the amortization expense is recorded as a reduction to revenue. Total capitalized contract costs and the related amortization as of selling price to allocate revenueJuly 3, 2020 and June 28, 2019 and for multiple-element license agreements based upon similar licenses, historical and estimated future sales volume, duration and market conditions.the years then ended were not material.


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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)




Contract liabilities relate to customers’ payments in advance of performance under the contract and primarily relate to remaining performance obligations under support and maintenance contracts. As of July 3, 2020 and June 28, 2019, contract liabilities were $3 million and $43 million, respectively, and were reflected in Accrued expenses. Changes in the contract liability balance during fiscal years 2020 and 2019 include $24 million and $104 million, respectively, of revenue recognized during the respective periods, of which the substantial majority relates to the balances that were deferred at the end of the respective previous years, June 28, 2019 and June 29, 2018, partially offset by payments received and billings in advance of satisfying performance obligations.

The Company applies the practical expedients and does not disclose transaction price allocated to the remaining performance obligations for (i) arrangements that have an original expected duration of one year or less, which mainly consist of the support and maintenance contracts, and (ii) variable consideration amounts for sale-based or usage-based royalties for IP license arrangements, which typically range longer than one year. Remaining performance obligations are mainly attributed to right-to-access patent license arrangements and customer support and service contracts which will be recognized over the remaining contract period. The transaction price allocated to the remaining performance obligations as of July 3, 2020 was $112 million, which is mainly attributable to the functional IP license and service arrangements. The Company expects to recognize this amount as revenue as follows: $41 million in fiscal 2021, $40 million in fiscal 2022, $31 million in fiscal 2023 and thereafter.

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 claimsand could differ significantly from estimates, future resultsthe estimates.

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WESTERN DIGITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


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 17, 16, Legal Proceedings, for additional disclosures related to the Company’s litigation.


Advertising Expense


Advertising costs are expensed as incurred and amounted to $89$93 million, $60$107 million and $71$112 million in 2017, 20162020, 2019 and 2015,2018, 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.


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 accounts for interest and penalties related to income taxes as a component of the provision for income taxes.


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”RSU”), performance-based restricted stock unit awards with performance conditions or market conditions (“PSUs”PSU”), rights to purchase shares of common stock under the Company’s Employee Stock Purchase Plan (“ESPP”) and shares issuable in connection with convertible debt.


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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


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 allRSUs and PSUs with a performance condition are determined based on the closing market price of the Company’s stock options granted are estimated using a binomial option-pricing model, andon the date of the grant. The fair values of all ESPP purchase rights are estimated using the Black-Scholes-Merton option-pricing model. The Company accounts for stock appreciation rights (“SARs”) as liability awards based upon management’s intention to settle such awards in cash. All SARs issued to employees were fully vested,model and the fair values are now solely subject to market price fluctuations. Both the binomial and the Black-Scholes-Merton option-pricing models require the input of highly subjective assumptions. The Company is required to use judgment in estimating the amountfair values of stock-based awards thatPSUs with a market condition are expected to be forfeited. If actual forfeitures differ significantly from the original estimate, stock-based compensation expense and the results of operations could be materially affected.estimated using a Monte Carlo simulation model. PSUs are granted to certain employees and vest only after the achievement of pre-determined performance metrics.or market conditions. Once the performance metricsthese conditions 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 with a performance condition will be earned. The Companyearned and records the related stock-based compensation expense based on the probability that the performance metrics will be achieved over the vestingservice period. Compensation expense for PSUs with market conditions is recognized ratably over the required service period regardless of expected or actual achievement.


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 primarily 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.

WESTERN DIGITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)



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 operatingOperating expenses and product costs denominated in foreign currencies. The purpose of entering into these hedging transactions is to minimize the impact of foreign currency fluctuations on the Company’s results of operations. TheseSubstantially all of 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,pound sterling, European Euro,euro, Japanese yen, Malaysian ringgit, Philippine peso, Singapore dollar and Thai baht, which had an aggregate notional amount of $2.79$4.62 billion and $3.07$5.71 billion at July 3, 2020 and June 30, 2017 and July 1, 2016,28, 2019, respectively.


If the derivative is designated as a cash flow hedge theand is determined to be highly effective, portion of the change in fair value of the derivative is initially deferred in otherOther 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 costCost of revenue and operatingOperating expenses, and presented within cash flows from operating activities. 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 with realized gains or losses recognized in Interest expense. 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 income (expense), net. See Note 4, Fair Value Measurements and Investments, and Note 5, Derivative Instruments and Hedging Activities, for additional disclosures related to the Company’s foreign exchange contracts.


The Company accounts for its interest rate swap as a designated cash flow hedge to mitigate variations in interest payments under a portion
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Table 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.Contents



WESTERN DIGITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


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 actuarial 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

The Company reports 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. In addition, the other components of net benefit cost are presented in Other Post-Retirement Benefit Plansincome (expense), for additional disclosures related tonet in the Company’s pensions and other post-retirement benefit plans.Consolidated Statements of Operations.

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Note 2.Recently Adopted Accounting Pronouncements

Note 2. Recent Accounting Pronouncements

Accounting Pronouncements Recently Adopted

In April 2015,February 2016, the Financial Accounting Standard Board (“FASB”)FASB issued Accounting Standards Update (“ASU”)ASU No. 2015‑05, “Intangibles — Goodwill and Other — Internal‑Use Software (Subtopic 350‑40)2016-02, “Leases (Topic 842)” (“ASU 2015‑05”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 provides guidanceis a lessee’s obligation to customers about whethermake lease payments arising from a cloud computing arrangement includeslease, measured on a software license. Ifdiscounted basis; and (2) a cloud computing arrangement includesright-of-use asset, which is an asset that represents the lessee’s right to use, or the direct use of, a software license, the customer should accountspecified asset for the software license elementlease term. The FASB issued ASU 2018-11, “Leases (Topic 842): Targeted Improvements” (“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 Company adopted this standard effective June 29, 2019, the first day of the arrangement consistent withfiscal year ending July 3, 2020, and has elected the acquisitiontransition method provided in ASU 2018-11 to apply Topic 842 as of other software licenses. Ifthe date of adoption without adjusting comparative periods. The Company has elected the package of practical expedients and did not reassess prior conclusions including (a) whether its contracts are or contain a cloud computing arrangement does not includelease, (b) lease classification and (c) capitalization of initial direct costs. The adoption of Topic 842 resulted in an increase in lease assets and a software license,corresponding increase in lease liabilities on the customer should accountConsolidated Balance Sheet of $221 million as of June 29, 2019. The cumulative effect of adopting Topic 842 also included an after-tax decrease to opening retained earnings of $5 million as of June 29, 2019, which was primarily related to previously recorded sublease proceed assumptions on lease exit liabilities for which there was no expected future economic benefit at transition. See Note 9, Leases and Other Commitments, for additional disclosures related to this standard.

In October 2018, the FASB issued ASU No. 2018-16, “Derivatives and Hedging (Topic 815): Inclusion of the Secured Overnight Financing Rate (SOFR) Overnight Index Swap (OIS) Rate as a Benchmark Interest Rate for Hedge Accounting Purposes” (“ASU 2018-16”). ASU 2018-16 allows for the arrangementuse of the OIS rate based on the SOFR as a service contract.U.S. benchmark interest rate for hedge accounting purposes under Topic 815, Derivatives and Hedging. The Company adopted this standard in the first quarter of 2020. The Company’s adoption of ASU 2015‑05 at the beginning of the current year2018-16 did not have a material impact on its Consolidated Financial Statements.



Recently Issued Accounting Pronouncements Not Yet Adopted

In December 2019, the FASB issued ASU No. 2019-12, “Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes” (“ASU 2019-12”). ASU 2019-12 removes certain exceptions for recognizing deferred taxes for investments, performing intraperiod allocation and calculating income taxes in interim periods. The ASU also adds guidance to reduce complexity in certain areas, including recognizing deferred taxes for tax goodwill and allocating taxes to members of a consolidated group. This ASU is effective for fiscal years (and interim periods within those fiscal years) beginning after December 15, 2020, which for the Company is the first quarter of fiscal 2022. Early adoption is permitted. The Company does not expect this update to have a material impact on its Consolidated Financial Statements.

In November 2018, the FASB issued ASU No. 2018-18, “Collaborative Arrangements (Topic 808): Clarifying the Interaction between Topic 808 and Topic 606” (“ASU 2018-18”). ASU 2018-18 clarifies that certain transactions between collaborative arrangement participants should be accounted for as revenue when the collaborative arrangement participant is a customer in the context of a unit of account and precludes recognizing as revenue consideration received from a collaborative arrangement participant if the participant is not a customer. This ASU requires retrospective adoption to the date the Company adopted ASC 606 by recognizing a cumulative-effect adjustment to the opening balance of retained earnings of the earliest annual period presented. 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 does not expect this update to have a material impact on its Consolidated Financial Statements.

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WESTERN DIGITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)



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 does not expect this update to have a material impact on its Consolidated Financial Statements.

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WESTERN DIGITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


Note 3.Supplemental Financial Statement Data

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 2017, the Company did not sell any trade accounts receivable. During 2016,In 2020, 2019 and 2018, the Company sold trade accounts receivable and received cash proceeds of $225 million.$411 million, $1.02 billion and $57 million, respectively. The discounts on the trade accounts receivable sold during 2016the periods were not material and were recorded within Other income (expense), net in the Consolidated Financial Statements.Statements of Operations. As of July 3, 2020 and June 28, 2019, the amount of factored receivables that remained outstanding was $113 million and $318 million, respectively.


Inventories
July 3,
2020
June 28,
2019
(in millions)
Inventories:
Raw materials and component parts$1,306 $1,142 
Work-in-process956 968 
Finished goods808 1,173 
Total inventories$3,070 $3,283 
 June 30,
2017
 July 1,
2016
 (in millions)
Inventories:   
Raw materials and component parts$646
 $569
Work-in-process632
 589
Finished goods1,063
 971
Total inventories$2,341
 $2,129


Property, plant and equipment, net
July 3,
2020
June 28,
2019
(in millions)
Property, plant and equipment:
Land$294 $294 
Buildings and improvements1,837 1,743 
Machinery and equipment7,391 7,267 
Computer equipment and software429 441 
Furniture and fixtures52 56 
Construction-in-process297 202 
Property, plant and equipment, gross10,300 10,003 
Accumulated depreciation(7,446)(7,160)
Property, plant and equipment, net$2,854 $2,843 
 June 30,
2017
 July 1,
2016
 (in millions)
Property, plant, and equipment:   
Land and buildings$1,855
 $1,900
Machinery and equipment6,868
 6,915
Software284
 155
Furniture and fixtures116
 110
Leasehold improvements259
 307
Construction-in-process144
 245
Property, plant, and equipment, gross9,526
 9,632
Accumulated depreciation(6,493) (6,129)
Property, plant, and equipment, net$3,033
 $3,503


Depreciation expense of property, plant and equipment totaled $960$797 million, $888$844 million and $809$871 million in 2017, 20162020, 2019 and 2015,2018, respectively.



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WESTERN DIGITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)



Goodwill
Carrying Amount
(in millions)
Balance at June 29, 2018$10,075
Foreign currency translation adjustment1
Balance at June 28, 2019$10,076
Goodwill recorded in connection with an acquisition14
Reduction in goodwill in connection with disposition of business(21)
Foreign currency translation adjustment(2)
Balance at July 3, 2020$10,067

Acquisition

On September 10, 2019, the Company acquired substantially all the assets of Kazan Networks, Inc., an innovator in high-performance networking and non-volatile memory express over fabrics technology ("NVMe-oF"), and an industry leader in application-specific integrated circuit and adapter solutions to connect storage platforms and systems over ethernet fabrics. The purchase price of this acquisition was $22 million in cash, with net assets acquired primarily consisting of IPR&D of $8 million and $14 million allocated to Goodwill. Goodwill is primarily attributable to the benefits the Company expects to derive from diversifying product offerings in its Data Center Devices and Solutions and Client Solutions end markets as well as the acquired workforce. The expenses incurred by the Company related to the acquisition as well as the revenues and earnings related to the acquisition were not material to the Consolidated Financial Statements.

Dispositions

In September 2019, the Company announced its intention to exit storage systems, which consisted of IntelliFlash and ActiveScale. These actions allow the Company to redirect investments to other high value priorities. In November 2019, the Company completed its sale of IntelliFlash for a price of $28 million, to be collected over the next three years. The sale of the IntelliFlash business included an immaterial amount of inventory, other tangible and intangible assets, and goodwill; and resulted in a gain of approximately $17 million recorded in Employee termination, asset impairment, and other charges in the Consolidated Statements of Operations for the year ended July 3, 2020. Additionally, in March 2020, the Company completed the sale of ActiveScale. The net assets sold and the proceeds from the sale of ActiveScale were not material. The revenues and expenses related to these businesses were not material to the Consolidated Financial Statements and did not qualify to be reported as discontinued operations. The operating results of these businesses have been reflected in the Company’s results from continuing operations in the Consolidated Statements of Operations for all periods presented through the date of disposition.

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WESTERN DIGITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


Intangible assets

The following tables present intangible assets as of July 3, 2020 and June 28, 2019:

July 3, 2020
Weighted Average Amortization PeriodGross Carrying AmountAccumulated AmortizationNet Carrying Amount
(in years)(in millions)
Finite:
Existing technology34,248 (3,852)396 
Trade names and trademarks7648 (398)250 
Customer relationships6616 (423)193 
Leasehold interests3129 (7)22 
Total finite intangible assets5,541 (4,680)861 
In-process research and development80  80 
Total intangible assets5,621 (4,680)941 


June 28, 2019
Weighted Average Amortization PeriodGross Carrying AmountAccumulated AmortizationNet Carrying Amount
(in years)(in millions)
Finite:
Existing technology34,332 (3,316)1,016 
Trade names and trademarks7648 (310)338 
Customer relationships6635 (372)263 
Other2180 (180) 
Leasehold interests3129 (7)22 
Total finite intangible assets5,824 (4,185)1,639 
In-process research and development72  72 
Total intangible assets5,896 (4,185)1,711 

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 2020, 2019 and 2018, the Company did 0t record any impairment charges related to intangible assets.

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:

202020192018
(in millions)
Intangible asset amortization$769 $968 $1,185 

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WESTERN DIGITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)



The following table presents estimated future amortization expense for intangible assets currently subject to amortization as of July 3, 2020:


Future Intangible Asset Amortization Expenses
(in millions)
Fiscal year:
2021$489 
2022220 
2023133 
2024 and thereafter19 
Total future amortization expense$861 

Product warranty liability


Changes in the warranty accrual were as follows:
202020192018
(in millions)
Warranty accrual, beginning of period$350 $318 $311 
Charges to operations203 162 176 
Utilization(151)(142)(151)
Changes in estimate related to pre-existing warranties6 12 (18)
Warranty accrual, end of period$408 $350 $318 
 2017 2016 2015
 (in millions)
Warranty accrual, beginning of period$279
 $221
 $182
Warranty liabilities assumed as a result of acquisitions
 45
 1
Charges to operations177
 162
 187
Utilization(151) (178) (190)
Changes in estimate related to pre-existing warranties6
 29
 41
Warranty accrual, end of period$311
 $279
 $221


The long-termcurrent portion of the warranty accrual is classified in Accrued expenses and the long-term portion is classified in Other liabilities was $125 million and $107 million as noted below:

20202019
(in millions)
Warranty accrual
Current portion (included in Accrued expenses)$205 $188 
Long-term portion (included in Other liabilities)203 162 
Total warranty accrual$408 $350 

Other liabilities
20202019
(in millions)
Other liabilities:
Non-current net tax payable$815 $928 
Payables related to unrecognized tax benefits720 699 
Other non-current liabilities881 713 
Total other liabilities$2,416 $2,340 

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Table of June 30, 2017 and July 1, 2016, respectively.Contents



WESTERN DIGITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


Accumulated other comprehensive income (loss)


OtherAccumulated other comprehensive income (loss) (“OCI”AOCI”), 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”):AOCI:
Actuarial Pension Gains (Losses)Foreign Currency Translation AdjustmentUnrealized Gains (Losses) on Derivative ContractsTotal Accumulated Comprehensive Income (Loss)
(in millions)
Balance at June 29, 2018$(19)$(21)$1 $(39)
Other comprehensive income (loss) before reclassifications(39)28 (48)(59)
Amounts reclassified from accumulated other comprehensive income (loss)  9 9 
Income tax benefit (expense) related to items of other comprehensive income (loss)5 (3)19 21 
Net current-period other comprehensive income (loss)(34)25 (20)(29)
Balance at June 28, 2019$(53)$4 $(19)$(68)
Other comprehensive loss before reclassifications(1)(7)(87)(95)
Amounts reclassified from accumulated other comprehensive loss  (6)(6)
Income tax benefit (expense) related to items of other comprehensive loss(4)1 15 12 
Net current-period other comprehensive loss(5)(6)(78)(89)
Balance at July 3, 2020$(58)$(2)$(97)$(157)

During 2020, 2019 and 2018, the amounts reclassified out of AOCI related to derivative contracts were substantially all charged to Cost of revenue in the Consolidated Statements of Operations.

72
 Actuarial Pension Gains (Losses) Foreign Currency Translation Gains (Losses) Unrealized Gains (Losses) on Available for Sale Securities Unrealized Gains (Losses) on Derivative Contracts Total Accumulated Comprehensive Income (Loss)
 (in millions)
Balance at July 3, 2015$5
 $
 $
 $(25) $(20)
Other comprehensive income (loss) before reclassifications(73) 74
 
 48
 49
Amounts reclassified from accumulated other comprehensive income (loss)
 
 
 51
 51
Income tax benefit related to items of other comprehensive income (loss)23
 
 
 
 23
Net current-period other comprehensive income (loss)(50) 74
 
 99
 123
Balance at July 1, 2016(45) 74
 
 74
 103
Other comprehensive income (loss) before reclassifications39
 (115) 2
 (47) (121)
Amounts reclassified from accumulated other comprehensive income (loss)
 
 
 (30) (30)
Income tax benefit (expense) related to items of other comprehensive income (loss)(12) 2
 
 
 (10)
Net current-period other comprehensive income (loss)27
 (113) 2
 (77) (161)
Balance at June 30, 2017$(18) $(39) $2
 $(3) $(58)



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WESTERN DIGITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


The following table illustrates the significant amounts of each component reclassified out of AOCI to the Consolidated Statements of Operations:

AOCI Component 2017 2016 2015 Statement of Operations Line Item
  (in millions)  
Unrealized holding gain (loss) on cash flow hedging activities:        
Foreign exchange contracts $33
 $(17) $(44) Cost of revenue
Foreign exchange contracts (3) (34) 
 Research and development
Total reclassifications for the period $30
 $(51) $(44)  


WESTERN DIGITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Note 4.
Note 4. Fair Value Measurements and Investments

The Company’s total cash, cash equivalents and marketable securities was as follows:
 June 30,
2017
 July 1,
2016
 (in millions)
Cash and cash equivalents$6,354
 $8,151
Short-term marketable securities24
 227
Long-term marketable securities94
 119
Total cash, cash equivalents and marketable securities$6,472
 $8,497


Financial Instruments Carried at Fair Value


Financial assets and liabilities that are remeasured and reported at fair value at each reporting period are classified and disclosed in one of the following three levels:

Level 1.Quoted prices in active markets for identical assets or liabilities.

Level 2.Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

Level 3.Inputs that are unobservable for the asset or liability and that are significant to the fair value of the assets or liabilities.



Level 1. Quoted prices in active markets for identical assets or liabilities.
WESTERN DIGITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
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.

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 July 3, 2020 and June 30, 2017 and July 1, 2016,28, 2019, and indicate the fair value hierarchy of the valuation techniques utilized to determine such values:
July 3, 2020
 Level 1Level 2Level 3Total
(in millions)
Assets:
Cash equivalents - Money market funds$1,079 $ $ $1,079 
Foreign exchange contracts 28  28 
Total assets at fair value$1,079 $28 $ $1,107 
Liabilities:
Foreign exchange contracts$ $9 $ $9 
Interest rate swap contract 133  133 
Total liabilities at fair value$ $142 $ $142 

June 28, 2019
 Level 1Level 2Level 3Total
(in millions)
Assets:
Cash equivalents:
Money market funds$1,388 $ $ $1,388 
Certificates of deposit 17  17 
Total cash equivalents1,388 17  1,405 
Foreign exchange contracts 44  44 
Interest rate swap contracts 2  2 
Total assets at fair value$1,388 $63 $ $1,451 
Liabilities:
Foreign exchange contracts$ $40 $ $40 
Interest rate swap contract 65  65 
Total liabilities at fair value$ $105 $ $105 

73

 June 30, 2017
 Level 1 Level 2 Level 3 Total
 (in millions)
Assets:       
Cash equivalents:       
Money market funds$2,836
 $
 $
 $2,836
Certificates of deposit
 10
 
 10
Total cash equivalents2,836
 10
 
 2,846
Short-term investments:       
Corporate notes and bonds
 11
 
 11
Asset-backed securities
 7
 
 7
Municipal notes and bonds
 2
 
 2
Equity securities4
 
 
 4
Total short-term investments4
 20
 
 24
Long-term investments:       
U.S. Treasury securities5
 
 
 5
U.S. Government agency securities
 5
 
 5
International government securities
 1
 
 1
Corporate notes and bonds
 67
 
 67
Asset-backed securities
 7
 
 7
Municipal notes and bonds
 9
 
 9
Total long-term investments5
 89
 
 94
Foreign exchange contracts
 16
 
 16
Total assets at fair value$2,845
 $135
 $
 $2,980
Liabilities:       
Foreign exchange contracts$
 $8
 $
 $8
Interest rate swap contract
 1
 
 1
Exchange option
 
 1
 1
Total liabilities at fair value$
 $9
 $1
 $10


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WESTERN DIGITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)



 July 1, 2016
 Level 1 Level 2 Level 3 Total
 (in millions)
Assets:       
Cash equivalents:       
Money market funds$2,199
 $
 $
 $2,199
Certificates of deposit
 1
 
 1
Total cash equivalents2,199
 1
 
 2,200
Short-term investments:       
Certificates of deposit
 202
 
 202
Corporate notes and bonds
 8
 
 8
Asset-backed securities
 11
 
 11
Municipal notes and bonds
 6
 
 6
Total short-term investments
 227
 
 227
Long-term investments:       
U.S. Treasury securities2
 
 
 2
U.S. Government agency securities
 10
 
 10
International government securities
 1
 
 1
Corporate notes and bonds
 89
 
 89
Asset-backed securities
 11
 
 11
Municipal notes and bonds
 6
 
 6
Total long-term investments2
 117
 
 119
Foreign exchange contracts
 126
 
 126
Call options
 
 71
 71
Total assets at fair value$2,201
 $471
 $71
 $2,743
Liabilities:       
Foreign exchange contracts$
 $23
 $
 $23
Exchange option
 
 155
 155
Total liabilities at fair value$
 $23
 $155
 $178

Money Market Funds. The Company’s money market funds are funds that invest in U.S. Treasury and U.S. Government agency securities. Money market funds are valued based on quoted market prices.


Certificates of Deposit. The Company’s certificates of deposit are investments which are held in custody by a third party. Certificates of deposit are valued using fixed interest rates.


Asset-Backed Securities, and Corporate and Municipal Notes and Bonds. The Company’s asset-backed securities, and Corporate and Municipal notes and bonds securities are investments issued by corporations and U.S. state 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.


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.adjustments based on published credit default swap curves.


During 20172020 and 2016,2019, the Company had no transfers of financial assets and liabilities between Level 1levels and Level 2.

Assetsthere were no changes in valuation techniques and Liabilities Measured at Fair Value on a Recurring Basis Using Significant Unobservable Inputs (Level 3)

Call Options. The call options are derivative instruments classified as an asset that resultthe inputs used in the Company receiving cash and shares that partially offset the Company’s obligation upon conversion of its convertible notes.

Exchange Options. The Company’s convertible notes were bifurcated into a debt host and exchange option for accounting purposes. The exchange options are accounted for as derivative liabilities because they are predominantly settled in cash.

The fair value measurement of the call options and exchange options arising from the Company’s Convertible Notes (as defined in Note 6, Debt), which are not actively traded, is determined using unobservable inputs (Level 3). These inputs include (i) the estimated amount and timing of settlement of the underlying debt; (ii) the probability of the achievement of the factor(s) on which the settlement is based; (iii) the risk-adjusted discount rate based on the expected term to maturity of the debt; and (iv) the economic incentive for holders to exercise their exchange option. Significant increases or decreases in any of those inputs in isolation could result in a significantly lower or higher fair value measurement.

There were no transfers of call options or exchange options out of Level 3 for 2017.

The following table illustrates the changes in the balances of the call options reported in Other current assets and Other non-current assets in the Company’s Consolidated Balance Sheets:
 2017 Call Options 2020 Call Options Total
 (in millions)
Initial estimate upon acquisition$501
 $
 $501
Redemptions(437) 
 (437)
Net unrealized gain6
 1
 7
Fair value as of July 1, 201670
 1
 71
Net realized gain (loss)2
 (1) 1
Redemptions(72) 
 (72)
Fair value as of June 30, 2017$
 $
 $


WESTERN DIGITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The following table illustrates the changes in the balances of the exchange options reported in Accrued expenses and Other liabilities in the Company’s Consolidated Balance Sheets:
 2017 Exchange Options 2020 Exchange Options Total
 (in millions)
Initial estimate upon acquisition$610
 $357
 $967
Net realized loss8
 8
 16
Redemptions(531) (283) (814)
Net unrealized gain
 (14) (14)
Fair value as of July 1, 201687
 68
 155
Net realized gain(3) (31) (34)
Redemptions(83) (46) (129)
Net unrealized loss
 9
 9
Fair value as of June 30, 2017$1
 $
 $1

Available-for-Sale Securities

The cost basis of the Company’s investments classified as available-for-sale securities, individually and in the aggregate, approximated its fair value as of June 30, 2017 and July 1, 2016. The cost basis and fair value of the Company’s investments classified as available-for-sale securities as of June 30, 2017, by remaining contractual maturity, were as follows:
 Cost Basis Fair Value
 (in millions)
Due in less than one year (short-term investments)$22
 $24
Due in one to five years (included in other non-current assets)94
 94
Total$116
 $118

The Company determined available-for-sale securities had no material other-than-temporary impairments during 2017, 2016 and 2015.



WESTERN DIGITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


Financial Instruments Not Carried at Fair Value


For financial instruments where the carrying value (which includes principal adjusted for any unamortized 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 20172020 and the fourth quarter of 2016,2019, respectively.
July 3, 2020June 28, 2019
Carrying
Value
Fair
Value
Carrying
Value
Fair
Value
(in millions)
0.50% convertible senior notes due 2020$34 $30 $33 $31 
Variable interest rate Term Loan A-1 maturing 20234,576 4,474 4,824 4,780 
Variable interest rate Term Loan B-4 maturing 20231,692 1,656 2,424 2,370 
1.50% convertible notes due 2024987 1,036 958 986 
4.75% senior unsecured notes due 20262,286 2,428 2,283 2,263 
Total$9,575 $9,624 $10,522 $10,430 

74
 June 30, 2017 July 1, 2016
 
Carrying
Value
 
Fair
Value
 Carrying
Value
 Fair
Value
 (in millions)
Secured Notes$1,835
 $2,062
 $1,828
 $2,044
Unsecured Notes3,244
 3,956
 3,229
 3,575
Term Loan A4,074
 4,130
 4,061
 4,161
U.S. Term Loan B
 
 3,546
 3,773
U.S. Term Loan B-22,968
 2,989
 
 
Euro Term Loan B(1)

 
 960
 981
Euro Term Loan B-2(1)
1,000
 1,010
 
 
Bridge Loan
 
 2,995
 3,000
Convertible Debt 2017
 
 124
 125
Convertible Debt 202030
 34
 251
 264
Total$13,151
 $14,181
 $16,994
 $17,923


Table of Contents
(1)
Euro Term Loan B and Euro Term Loan B-2 outstanding principal amounts as of June 30, 2017 and July 1, 2016 were based upon the Euro to U.S. dollar exchange rate as of those respective dates.


Equity Method Investments

In November 2015, the Company entered into an agreement to form a joint venture, referred to as the “Unis Venture”, with Unisplendour Corporation Limited (“Unis”) to market and sell the Company’s current data center storage systems in China and to develop data storage systems for the Chinese market in the future. The Unis Venture became operational during 2017. The Unis Venture is 49% owned by the Company and 51% owned by Unis and its subsidiary, Unissoft (Wuxi) Group Co. Ltd. The Company accounts for its investment in the Unis Venture under the equity method of accounting. The investment in Unis Venture is recorded within Other non-current assets in the Consolidated Balance Sheets and is not material to the Consolidated Financial Statements as of June 30, 2017 and July 1, 2016.

In addition, the Company has joint venture investments with Toshiba Corporation (“Toshiba”), see Note 9, Commitments, Contingencies and Related Parties, for further discussion regarding these joint ventures.

Cost Method Investments

From time to time, the Company enters into certain strategic investments for the promotion of business and strategic objectives. The Company reports these investments under the cost method of accounting as these investments consist of debt and equity securities of privately-held companies which do not have a readily determinable fair value. The Company assesses these securities for indications of other-than-temporary impairments and, in this regard, recorded impairment charges of $55 million to Other income (expense), net in the Consolidated Statements of Operations in 2017. There were no impairment charges related to cost method investments during 2016 and 2015. As of June 30, 2017 and July 1, 2016, these investments aggregated $91 million and $135 million, respectively, and are reported under Other non-current assets in the Consolidated Balance Sheets.



WESTERN DIGITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)



Note 5.Derivative Instruments and Hedging Activities

Note 5. Derivative Instruments and Hedging Activities

As of June 30, 2017,July 3, 2020, the Company had outstanding foreign exchange forward contracts whichthat were designated as either cash flow hedges or non-designated hedges. TheSubstantially all of the contract maturity dates of these foreign exchange forward contracts do not exceed 12 months. In addition, the Company had outstanding pay-fixed interest rate swaps whichthat were designated as cash flow hedges. The Company determined the ineffectiveness associated withhedges of variable rate interest payments on a portion of its cash flow hedges to be immaterial to the Consolidated Financial Statements for 2017, 2016 and 2015.term loans through February 2023.


As of June 30, 2017,July 3, 2020, the amount of existing net losses related to cash flow hedges recorded in Accumulated other comprehensive income (loss)AOCI included $83 million related to the Company’s interest rate swaps that areis expected to be reclassified intoto earnings over the nextafter twelve months was $3 million.months. In addition, as of June 30, 2017,July 3, 2020, the Company did not have any foreign exchange forward contracts with credit-risk-related contingent features.


A changeChanges 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 valuevalues of non-designated hedges is recognized in earnings in the period incurredforeign currency denominated monetary assets and is reported as a componentliabilities. For each of Other income (expense), net. The changes in fair value on these contracts2020, 2019 and 2018, total net realized and unrealized transaction and foreign exchange contract currency gains and losses were immaterialnot material to the Company’s Consolidated Financial Statements during 2017, 2016 and 2015.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.

Derivative Instruments

The fair value and balance sheet location of the Company’s derivative instruments were as follows:
 Derivative Assets Reported in
 Other current assets Other non-current assets
 June 30,
2017
 July 1,
2016
 June 30,
2017
 July 1,
2016
 (in millions)
Foreign exchange forward contracts, designated$6
 $114
 $
 $
Foreign exchange forward contracts, not designated10
 12
 
 
Call options
 70
 
 1
Total derivatives$16
 $196
 $
 $1

 Derivative Liabilities Reported in
 Accrued expenses Other liabilities
 June 30,
2017
 July 1,
2016
 June 30,
2017
 July 1,
2016
 (in millions)
Foreign exchange forward contracts, designated$2
 $23
 $
 $
Foreign exchange forward contracts, not designated6
 
 
 
Interest rate swaps, designated1
 
 
 
Exchange option
 141
 1
 14
Total derivatives$9
 $164
 $1
 $14


WESTERN DIGITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


Netting Arrangements


Under certain provisions and conditions within agreements with counterparties to the Company’s foreign exchange forward contracts, subject to applicable requirements, the Company has the right of set-offoffset 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 July 3, 2020 and June 30, 2017,28, 2019, 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 and separately recorded the gross fair value amountsSheets.

75


Table of the derivative instruments as either assets or liabilities. As of June 30, 2017 and July 1, 2016, the effect of rights of set-off was not material.Contents


Effect of Derivative Contracts on theConsolidated Statements of Operations

The impact of derivative contracts on the Consolidated Financial Statements was as follows:
 Amount of Gain (Loss) Recognized in AOCI
 2017 2016 2015
 (in millions)
Derivatives designated as hedging instruments:     
Foreign exchange forward contracts$(46) $48
 $(74)
Interest rate swaps(1) 
 
Total$(47) $48
 $(74)

 Amount of Gain (Loss) Reclassified from AOCI into Earnings
 2017 2016 2015
 (in millions)
Derivatives designated as hedging instruments:     
Foreign exchange forward contracts$30
 $(51) $(44)

The total net realized transaction and foreign exchange forward contract currency gains and losses were not material to the Consolidated Financial Statements for 2017, 2016 and 2015.



WESTERN DIGITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)



Note 6.Debt

Note 6. Debt

Debt consisted of the following as of July 3, 2020 and June 30, 2017 and July 1, 2016:28, 2019:
July 3,
2020
June 28,
2019
(in millions)
0.50% convertible senior notes due 2020$35 $35 
Variable interest rate Term Loan A-1 maturing 20234,583 4,834 
Variable interest rate Term Loan B-4 maturing 20231,693 2,425 
1.50% convertible notes due 20241,100 1,100 
4.75% senior unsecured notes due 20262,300 2,300 
Total debt9,711 10,694 
Issuance costs and debt discounts(136)(172)
Subtotal9,575 10,522 
Less current portion of long-term debt(286)(276)
Long-term debt$9,289 $10,246 
 June 30,
2017
 July 1,
2016
 (in millions)
Variable interest rate Term Loan A maturing 2021$4,125
 $4,125
Variable interest rate U.S. Term Loan B maturing 2023
 3,750
Variable interest rate U.S. Term Loan B-2 maturing 20232,970
 
Variable interest rate Euro Term Loan B maturing 2023(1)

 987
Variable interest rate Euro Term Loan B-2 maturing 2023(1)
1,001
 
7.375% senior secured notes due 20231,875
 1,875
10.500% senior unsecured notes due 20243,350
 3,350
Convertible senior notes35
 439
Bridge loans
 3,000
Total debt13,356
 17,526
Issuance costs and debt discounts(205) (532)
Subtotal13,151
 16,994
Less bridge loans and current portion of long-term debt(233) (3,334)
Long-term debt$12,918
 $13,660

(1)
Euro Term Loan B and Euro Term Loan B-2 outstanding principal amounts as of June 30, 2017 and July 1, 2016 were based upon the Euro to U.S. dollar exchange rate as of those respective dates.

Credit Agreement – Term Loans and Revolving Credit Facility

OnThe Company has a credit agreement originally entered into on April 29, 2016 and most recently amended in July 2020 (as amended, the Company entered into a credit agreement (the “Credit Agreement”), that providedprovides for, among other things, (i) a $2.25 billion revolving credit facility maturing in 2023 (the “Revolving Facility”), (ii) a term loan A-1 due 2023 (the “Term Loan A-1”), and (iii) a term loan B-4 due 2023 (the “Term Loan B-4”).

Borrowings under the following facilities:

Term Loan A. Term Loan A with interest payable monthly at a rate based on LIBOR, plus an applicable spread of 2.00% (approximately 3.23% at June 30, 2017). Beginning in September 2017, the Company is required to make quarterly principal payments on Term Loan A totaling $206 million in fiscal 2018, $309 million in fiscal 2019, $413 million in fiscal 2020 and the remaining balance of $3.20 billion due in fiscal 2021. The aggregate principal amount outstanding was $4.13 billion at both June 30, 2017 and July 1, 2016. As of June 30, 2017, unamortized issuance costs were $51 million.

U.S. Term Loan B. U.S. dollar-denominated Term Loan B (“U.S. Term Loan B”) which borerevolving credit facility bear interest at a rate based on LIBOR,equal to, at the Company’s option, either an adjusted London Interbank Offered Rate (“LIBOR”) rate, subject to a 0.75%0.00% floor, plus an applicable spread of 5.50% and hadmargin varying from 1.125% to 2.000% or a base rate plus an aggregate principal amount outstanding of $3.75 billion at July 1, 2016. On August 17, 2016,applicable margin varying from 0.125% to 1.000%, in each case depending on the Company’s corporate credit ratings. During 2018, the Company borrowed $3.00 billionrepaid the previously outstanding borrowings under a new U.S. dollar-denominated term loan (“U.S.its revolving credit facility. At July 3, 2020, the Company’s borrowing capacity under the revolving credit facility was $2.25 billion.

The Term Loan B-1”) under the Credit Agreement and used the proceeds of this new loan and cash of $750 million to prepay in full the U.S. Term Loan B previously outstanding under the Credit Agreement. After making scheduled principal payments during the year of $15 million on U.S. Term Loan B-1, on March 14, 2017, the Company borrowed $2.99 billion underA-1 bears interest at a new U.S. dollar-denominated term loan (“U.S. Term Loan B-2”) under the Credit Agreement and used the proceeds of this new loan to prepay in full the U.S. Term Loan B-1 previously outstanding under the Credit Agreement. The U.S. Term Loan B-2 has an interest rate equal to, at the Company’s option, either an adjusted LIBOR rate, subject to a 0.75%0.00% floor, plus 2.75%an applicable margin varying from 1.125% to 2.000% or a base rate plus 1.75% (3.98%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 1.67% as of June 30, 2017).July 3, 2020. Principal payments are due in quarterly installments of 1.250% per quarter through December 2022, with the remaining balance payable on U.S.February 27, 2023. The Term Loan B-2A-1 issuance costs are amortized to interest expense over the term of approximatelythe loan, and as of July 3, 2020, issuance costs of $7 million remained unamortized.

The Term Loan B-4 bears interest at a 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 1.92% as of July 3, 2020. During 2020, the Company made aggregate voluntary prepayments of $725 million on its Term Loan B-4, which was applied toward the remaining scheduled amortization and the remainder towards the principal due at maturity. As of July 3, 2020, there are no longer any scheduled amortization payments due quarterly and began on March 31, 2017 withunder the balance dueTerm Loan B-4 prior to its maturity on April 29, 2023. As of June 30, 2017,July 3, 2020, issuance costs of less than $1 million remained unamortized. On July 31, 2020, the Company made an incremental voluntary prepayment of $150 million on its Term Loan B-4.

In February 2018, the Company issued $1.10 billion aggregate principal amount outstandingof 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 U.S. Term Loan B-2 was $2.97 billionFebruary 1 and unamortized issuance costs were $2 million.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.


76




Table of Contents


WESTERN DIGITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)



Euro Term Loan B. Euro-denominated Term Loan B (“Euro Term Loan B”) which bore interestThe 2024 Convertible Notes are convertible into cash, shares of the Company’s common stock, or a combination thereof at a ratean initial conversion price of $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 EURIBOR, subjectvariations 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 0.75% floor, plus an applicable spreaddiscount rate of 5.25%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 had an$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 July 3, 2020, debt discount and issuance costs of $113 million remained unamortized.

In February 2018, the Company issued $2.30 billion aggregate principal amount outstanding of €885 million at July 1, 2016. On September 22, 2016, the Company borrowed €885 million under a new Euro-denominated term loan (“Euro Term Loan B-1”) under the Credit Agreement and used the proceeds of this new loan to prepay in full the Euro Term Loan B previously outstanding under the Credit Agreement. After making scheduled principal payments during the year of €4 million on Euro Term Loan B-1, on March 23, 2017, the Company borrowed €881 million under a new Euro-denominated term loan (“Euro Term Loan B-2”) under the Credit Agreement and used the proceeds of this new loan to prepay in full the Euro Term Loan B-1 previously outstanding under the Credit Agreement. The Euro Term Loan B-2 has an interest rate equal to, at the Company’s option, either an adjusted EURIBOR rate, subject to a 0.75% floor, plus 2.00% or a base rate plus 1.75% (2.75% as of June 30, 2017). Principal payments on Euro Term Loan B-2 of approximately €2 million are due quarterly and began on March 31, 2017 with the balance due on April 29, 2023. As of June 30, 2017, the aggregate principal amount outstanding on Euro Term Loan B-2 was €876 million ($1.00 billion, based upon the Euro to U.S. dollar exchange rate as of June 30, 2017) and unamortized issuance costs were $1 million.

Revolving Credit Facility. Revolving credit facility of $1.00 billion, which includes a $200 million sublimit for letters of credit (the “Revolving Credit Facility”). Borrowings under the revolving credit facility bear interest at a rate based on LIBOR, plus an applicable spread of 2.00%. The Revolving Credit Facility has a 5-year term. As of June 30, 2017, the revolving credit facility was not drawn upon, and there was no outstanding balance.

In connection with the settlement of the U.S. Term Loans B and B-1 and Euro Term Loans B and B-1, the Company recognized an aggregate loss of $274 million during 2017 consisting of unamortized issuance costs, debt discount fees, and call premiums.

In May 2017, the Company entered into an interest rate swap for $1.00 billion notional amount which it has designated as a cash flow hedge to mitigate variations in interest payments under a portion of its LIBOR-based term loans due to variations in the LIBOR index. Under the agreement, the Company pays interest monthly at a fixed rate of 1.66% and receives at LIBOR rate on the notional amount of the contract through May 2020.

The obligations under the Credit Agreement are guaranteed by HGST, Inc., WD Media, LLC, Western Digital (Fremont), LLC and Western Digital Technologies, Inc. (“WDT”) (together referred to as the “WD Guarantors”), and are secured on a first-priority basis by a lien on substantially all the assets and properties of the Company and the WD Guarantors, including all of the capital stock held by these entities (subject to a 65% limitation on pledges of capital stock of foreign subsidiaries and domestic holding companies of foreign subsidiaries), subject to certain exceptions.

The term loans and the revolving credit facility under the Credit Agreement may be prepaid in whole or in part at any time without premium or penalty, subject to certain conditions, except that the U.S. Term Loan B-2 and the Euro Term Loan B-2 require the Company to pay a 1.0% prepayment fee if the loans are repaid in connection with certain “repricing” transactions on or before September 14, 2017 and September 23, 2017, respectively.

The Credit Agreement requires the Company to comply with certain financial covenants, such as a leverage ratio and an interest coverage ratio. As of June 30, 2017, the Company was in compliance with all financial covenants. In addition, the documents governing substantially all of the Company’s outstanding debt, including the Credit Agreement, require 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.


WESTERN DIGITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Senior Notes

On April 13, 2016, the Company completed an offering consisting of $1.88 billion 7.375% senior secured notes due May 2023 (the “Secured Notes”) and $3.35 billion 10.500% senior unsecured notes due May 2024February 15, 2026 (the “Initial“2026 Senior Unsecured Notes”). On January 6, 2017, to fulfill the Company’s obligations under the registration rights agreement associated with the InitialThe 2026 Senior Unsecured Notes the Company commencedbear interest at an exchange offer to exchange allannual rate of these outstanding unsecured notes for an equal principal amount4.750% with interest payable on February 15 and August 15 of new 10.500% senior unsecured notes due 2024 (the “New Unsecured Notes”), with substantially the same terms as the Initial Unsecured Notes. On February 6, 2017, the exchange offer expired and substantially all of the outstanding Initial Unsecured Notes were tendered in the exchange offer and accepted by the Company. The New Unsecured Notes are registered under the Securities Act of 1933, as amended, and have no transfer restrictions or rights to additional interest. The New Unsecured Notes and the Secured Notes are collectively referred to as the “Notes”. The Company pays cash interest on the Notes semi-annually on April 1 and October 1. As of June 30, 2017, the unamortized issuance cost of the Secured Notes and New Unsecured Notes was $40 million and $106 million, respectively

each year. The Company is not required to make principal payments on the 2026 Senior Unsecured Notes prior to their respectivethe maturity dates, except that the Company may be required to offer to purchase the Notes upon the occurrence of a change of control (as defined in the indentures governing the Notes) or with the proceeds of certain non-ordinary course asset sales.

date. The 2026 Senior Unsecured Notes are jointly and severally guaranteed by certain material domestic subsidiaries of the WD Guarantors, andCompany. The 2026 Senior Unsecured Notes issuance costs are amortized to interest expense over the Securedterm of the 2026 Senior Unsecured Notes and related guarantees are secured on an equal and ratable basis by liens on the same assets that secure indebtedness under the Credit Agreement.

Convertible Notes, Exchange Options and Call Options

Asas of July 1, 2016, the Company had outstanding $1293, 2020, issuance costs of $14 million aggregate principal amount of its 1.5% Convertible Senior Notes due 2017 (the “2017 Notes”) and $310 million aggregate principal amount of its 0.5% Convertible Senior Notes due 2020 (the “2020 Notes” and, together with the 2017 Notes, the “Convertible Notes”). remained unamortized.

The Company assumed the 0.5% convertible senior notes due October 15, 2020 (the “2020 Convertible NotesNotes”) in connection with its acquisition of SanDisk Corporation (“SanDisk”), pursuant to an Agreement and Plan of Merger, (the “Merger”), on May 12, 2016 (the “SanDisk Closing Date”). The 2017 Notes matured on August 15, 2017 and the 2020 Notes mature on November 15, 2020.

During 2017, the Company paid to the holders of the Convertible Notes for conversion and repurchase, $492 million of cash and 0.3 million shares of the Company’s common stock with an aggregate value of $16 million.

2016. As of June 30, 2017,July 3, 2020, $35 million principal amount of the 2020 Convertible Notes werewas outstanding whichand 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. On and after July 15, 2020 until the close of business on the second scheduled trading day immediately preceding the maturity date of October 15, 2020, holders may convert their 2020 Convertible Notes into the reference property by following the procedures set out in the indenture. The 2020 Convertible Notes issuance costs are not currently exchangeable into reference property.amortized to interest expense over the term of the 2020 Convertible Notes and as of July 3, 2020, issuance costs of less than $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 Credit Agreement requires the Company to comply with certain financial covenants with respect to the Revolving Facility and Term Loan A-1, consisting of a Leverage Ratio and an Interest Coverage Ratio (each as defined below). Consolidated Adjusted EBITDA is defined as net income (loss) plus interest expense, income tax expense (benefit) and depreciation and amortization, as well as other contractual adjustments as provided for in the Credit Agreement, including, for purposes of the financial covenants, an addback for certain depreciation-related payments made to the Company’s Flash Ventures.

The Company is required to maintain a maximum ratio of total funded debt to trailing twelve-month Consolidated Adjusted EBITDA (“Leverage Ratio”) at the end of each quarter of 4.25 to 1.00 through the quarter ending October 2, 2020, 4.00 to 1.00 through the quarter ending July 2, 2021, 3.75 to 1.00 through the quarter ending December 31, 2021, 3.50 to 1.00 through the quarter ending July 1, 2022, and 3.25 to 1.00 thereafter. In addition, as of June 30, 2017, the Company had an immaterial amountis required to maintain a minimum ratio of 2017 Notes outstanding. The 2017 Notes were paid in full andConsolidated Adjusted EBITDA to interest expense (“Interest Coverage Ratio”), both calculated on a trailing twelve-month basis, at the related call option was terminated on August 15, 2017.

The Convertible Notes were bifurcated into a debt host and exchange option for accounting purposes. The exchange options are accounted for as a derivative liability because they are predominantly settled in cash. Changes in the fair valueend of the exchange options are reported, and will be reported untileach quarter of 3.50 to 1.00. As of July 3, 2020, the Company extinguisheswas in compliance with all financial covenants under the related debt, in Other income (expense), net in the consolidated statementsCredit Agreement.
77


Table of operations. The exchange optionContents are measured and reported at fair value on a recurring basis, within Level 3 of the fair value hierarchy. The fair value of the unredeemed and unsettled exchange options is reported in Accrued expenses and Other liabilities in the Consolidated Balance Sheets. See Note 4, Fair Value Measurements and Investments, for additional disclosures related to the fair values of the exchange options. For 2017, the change in the fair value of the outstanding exchange options related to the Convertible Notes resulted in an immaterial loss.




WESTERN DIGITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)



In connection with the Merger,
The Credit Agreement also requires the Company assumedand its subsidiaries to comply with customary covenants that include, among others, limitations on the outstanding call options entered into by SanDisk at the inceptionincurrence of the respective Convertible Notes, which were structured to reduce the potential economic dilution associated with the conversion of Convertible Notes. The call options are derivative instruments classified as anadditional debt, liens on property, acquisitions and investments, loans and guarantees, mergers, consolidations, liquidations and dissolutions, asset that resultsales, dividends and other payments in the Company receiving cash and shares that partially offset the Company’s obligation upon conversion of the Convertible Notes. The fair value of the unredeemed and unsettled call options is reported in Other current assets and Other non-current assets in the Consolidated Balance Sheets. During 2017, under the call options, the Company received $61 million of cash and 0.1 million sharesrespect of the Company’s commoncapital stock, which had an aggregate valueprepayments of $11 million. During 2017,certain debt, transactions with affiliates and certain modifications of organizational documents and certain debt agreements. In addition, the Company recognized an immaterial non-cash loss related toindentures governing the change in value inCompany’s 2026 Senior Unsecured Notes and the outstanding call options. The value of the call options as of June 30, 2017 was immaterial.

The conversion and repurchase of the2024 Convertible Notes contain restrictive covenants that limit the Company’s and related settlementits subsidiaries’ ability to, among other things, consolidate, merge or sell all or substantially all of the call options during 2017 resulted in an immaterial net loss.their assets; create liens; and incur, assume or guarantee additional indebtedness.


Additional Bridge Facility

On May 12, 2016, WDT entered into a short-term senior secured bridge credit agreement providing for $3.00 billion in aggregate principal amount of senior secured bridge loans. On July 21, 2016, the Company repaid in full the $3.00 billion aggregate principal amount outstanding, together with accrued interest.

Future Debt Payments


As of June 30, 2017,July 3, 2020, required annual future debt payments were as follows:
Future Debt Payments
(in millions)
Fiscal year:
2021$286 
2022251 
20235,774 
20241,100 
2025 and thereafter2,300 
Total debt maturities$9,711 
Issuance costs and debt discounts(136)
Net carrying value$9,575 

78
  Future Debt Payments
  (in millions)
Fiscal year  
2018 $246
2019 350
2020 452
2021 3,272
2022 40
2023 and thereafter 8,996
Total debt maturities 13,356
Issuance costs and debt discounts (205)
Net carrying value $13,151



Table of Contents



WESTERN DIGITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


Note 7.Goodwill and Other Intangible Assets

The following table summarizes the activity related to the carrying amount of goodwill:

 Carrying Amount
 (in millions)
Balance at July 3, 2015$2,766
Goodwill recorded in connection with acquisitions7,183
Foreign currency translation adjustment2
Balance at July 1, 20169,951
Purchase price adjustments to goodwill66
Foreign currency translation adjustment(3)
Balance at June 30, 2017$10,014

The purchase price adjustments resulted from adjustments to the assessment of fair value for certain acquired intangible assets; inventory; property, plant and equipment; and a portion of the deferred tax liability related to the Merger.

The following tables present intangible assets as of June 30, 2017 and July 1, 2016:
 June 30, 2017
 Weighted Average Amortization Period Gross Carrying Amount Accumulated Amortization Net Carrying Amount
 (in years) (in millions)
Finite:       
Existing technology3 $3,478
 $(1,373) $2,105
Trade names and trademarks7 645
 (134) 511
Customer relationships6 627
 (227) 400
Other2 375
 (288) 87
Leasehold interests31 35
 (11) 24
Total finite intangible assets  5,160
 (2,033) 3,127
In-process research and development  696
 
 696
Total intangible assets  $5,856
 $(2,033) $3,823
 July 1, 2016
 Weighted Average Amortization Period Gross Carrying Amount Accumulated Amortization Net Carrying Amount
 (in years) (in millions)
Finite:       
Existing technology3 $2,008
 $(632) $1,376
Trade names and trademarks7 645
 (45) 600
Customer relationships6 628
 (157) 471
Other2 219
 (96) 123
Leasehold interests31 39
 (10) 29
Total finite intangible assets  3,539
 (940) 2,599
In-process research and development  2,435
 
 2,435
Total intangible assets  $5,974
 $(940) $5,034


WESTERN DIGITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Acquired in-process research and development (“IPR&D”) is accounted for as an indefinite-lived intangible asset. Upon completion of development, IPR&D is considered to be an amortizable finite-lived intangible asset. During 2017, the Company reclassified $1.74 billion of acquired IPR&D to existing technology and commenced amortization over an estimated useful life of 4 years.

During 2017, the Company did not record any impairment charges related to intangible assets. During 2016 and 2015, the Company recorded $36 million and $39 million of impairment charges related to intangible assets, respectively, which are recorded in the employee termination, asset impairment and other charges within the Consolidated Statements of Operations. The impairment charges primarily relate to acquired IPR&D projects that were abandoned and resulted in full impairment.

Intangible assets are amortized over the estimated useful lives based on the pattern in which the economic benefits are expected to be received. Intangible asset amortization was as follows:
      2017 2016 2015
 (In millions)
Intangible asset amortization$1,169
 $266
 $171

The following table presents estimated future amortization expense for intangible assets currently subject to amortization as of June 30, 2017:
 Future Intangible Asset Amortization Expense
 (in millions)
Fiscal year 
2018$1,085
2019796
2020590
2021339
2022157
2023 and thereafter160
Total future amortization expense$3,127



WESTERN DIGITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Note 8.Pension and Other Post-Retirement Benefit Plans

Note 7. 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.Japan, Thailand and the Philippines. All pension and other post-retirement benefit plans outside of the Company’s JapaneseJapan, Thailand and the Philippines defined benefit pension planplans (the “Japanese Plan”“Pension Plans”) 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:Pension Plans:
202020192018
(in millions)
Change in benefit obligation:
Projected benefit obligation at beginning of period$352 $300 $285 
Service cost13 10 10 
Interest cost4 4 4 
Plan amendments 13  
Actuarial loss (gain)3 26 7 
Benefits paid(8)(9)(9)
Settlement/curtailment (3) 
Other   
Non-U.S. currency movement2 11 3 
Projected benefit obligation at end of period366 352 300 
Change in plan assets:
Fair value of plan assets at beginning of period209 200 189 
Actual return on plan assets4 2 8 
Employer contributions9 10 10 
Benefits paid(8)(9)(9)
Non-U.S. currency movement1 6 2 
Fair value of plan assets at end of period215 209 200 
Unfunded status$151 $143 $100 
 2017 2016 2015
 (in millions)
Change in benefit obligation:     
Benefit obligation at beginning of period$326
 $231
 $255
Service cost8
 8
 9
Interest cost1
 3
 4
Actuarial loss (gain)(22) 52
 16
Benefits paid(30) (16) (8)
Settlement/Curtailment(6) (1) 
Non-U.S. currency movement(28) 49
 (45)
Benefit obligation at end of period$249
 $326
 $231
Change in plan assets:     
Fair value of plan assets at beginning of period$212
 $185
 $191
Actual return on plan assets15
 (14) 22
Employer contributions10
 20
 14
Benefits paid(30) (16) (8)
Non-U.S. currency movement(18) 37
 (34)
Fair value of plan assets at end of period$189
 $212
 $185
Unfunded status$60
 $114
 $46


The following table presents the unfunded amounts related to the Japanese PlanPension Plans as recognized on the Company’s Consolidated Balance Sheets:
July 3,
2020
June 28,
2019
(in millions)
Current liabilities$1 $1 
Non-current liabilities150 142 
Net amount recognized$151 $143 
 June 30,
2017
 July 1,
2016
 (in millions)
Current liabilities$1
 $
Non-current liabilities59
 114
Net amount recognized$60
 $114


The accumulated benefit obligation for the Japanese defined benefit pension plansPension Plans was $249$366 million at June 30, 2017.July 3, 2020. As of June 30, 2017,July 3, 2020, actuarial gainslosses for the Japanese defined benefit pension plansPension Plans of $16$67 million are included in Accumulated other comprehensive income (loss)loss in the Consolidated Balance Sheet. There were no0 material prior service credits for the defined benefit pension plans recognized in Accumulated other comprehensive income (loss)loss in the Consolidated Balance Sheet as of June 30, 2017.July 3, 2020.



Net periodic benefit costs were not material for 2020, 2019, and 2018.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)




Assumptions


Weighted-Average Assumptions


The weighted-average actuarial assumptions used to determine the projected benefit obligations for the Japanese defined benefit pension plansPension Plans were as follows:
202020192018
Discount rate1.1 %1.1 %1.3 %
Rate of compensation increase2.0 %1.7 %1.4 %
 2017 2016 2015
Discount rate0.8% 0.4% 1.3%
Rate of compensation increase0.8% 0.8% 0.9%


The weighted-average actuarial assumptions used to determine benefit costs for the Japanese defined benefit pension plansPension Plans were as follows:
202020192018
Discount rate1.1 %1.3 %0.5 %
Expected long-term rate of return on plan assets2.5 %2.5 %2.5 %
Rate of compensation increase1.7 %1.2 %1.5 %
 2017 2016 2015
Discount rate0.4% 1.3% 1.6%
Expected long-term rate of return on plan assets2.5% 2.5% 3.5%
Rate of compensation increase0.8% 0.9% 1.0%


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 higherhigh quality bonds 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 Japaneach plan as well as the investment portfolio applicable to the plan.plan depending on each plan’s economic environment. 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. As of July 3, 2020, Pension Plan assets materially consisted of plan assets related to the Japan Pension Plan and as such the assumption used herein is primarily related to the Japan Pension Plan.


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 Japanthe Pension Plans 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 62% in debt securities, 35% in equity securities, and the remaining 3% in other assets. Risk management is accomplished through diversification, periodic review of plan asset performance and appropriate realignment of asset allocation. Assumptions regarding the expected long-term rate of return on plan assets are periodically reviewed and are based on the historical trend of returns, the risk and correlation of each asset and the latest economic environment.


The expected long-term rate of return is estimated based on many factors, including expected forecast for inflation, risk premiums for each asset class, expected asset allocation, current and future financial market conditions and diversification and rebalancing strategies. Historical return patterns and correlations, consensus return forecasts and other relevant financial factors are analyzed periodically by the investment advisor so as to ensure that the expected long-term rate of return is reasonable and appropriate.



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)



Fair Value Measurements


The following tables present the Japanese defined benefit pension plans’Pension Plans’ major asset categories and their associated fair values as of July 3, 2020 and June 30, 2017 and July 1, 2016:28, 2019:
July 3, 2020
Level 1Level 2Level 3Total
(in millions)
Equity:
Equity commingled/mutual funds(1)(2)
$ $72 $ $72 
Fixed income:
Fixed income commingled/mutual funds(1)(3)
 131  131 
Cash equivalents and short-term investments12   12 
Fair value of plan assets$12 $203 $ $215 
 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)

 116
 
 116
Cash equivalents and short-term investments2
 4
 
 6
Fair value of plan assets$2
 $187
 $
 $189

June 28, 2019
Level 1Level 2Level 3Total
(in millions)
Equity:
Equity commingled/mutual funds(1)(2)
$ $68 $ $68 
Fixed income:
Fixed income commingled/mutual funds(1)(3)
 132  132 
Cash equivalents and short-term investments9   9 
Fair value of plan assets$9 $200 $ $209 
 July 1, 2016
 Level 1 Level 2 Level 3 Total
 (in millions)
Equity:       
Equity commingled/mutual funds(1)(2)
$
 $72
 $
 $72
Fixed income:       
Fixed income commingled/mutual funds(1)(3)

 129
 
 129
Cash equivalents and short-term investments8
 3
 
 11
Fair value of plan assets$8
 $204
 $
 $212

(1)
Commingled funds represent pooled institutional investments.
(2)
Equity mutual funds invest primarily in equity securities.
(3)
Fixed income mutual funds invest primarily in fixed income securities.

(1) Commingled funds represent pooled institutional investments.
Assets held(2) Equity mutual funds invest primarily in defined benefit plansequity securities.
(3) Fixed income mutual funds invest primarily in the Philippines, Taiwan and Thailand were less than $1 million and are not presented in the above tables.fixed income securities.


There were no significant movements of assets between any level categories in 2017, 20162020 or 2015.2019.


Fair Value Valuation Techniques


Equity securities are valued at the closing price reported on the stock exchange on which the individual securities are traded. Equity commingled/mutual funds are typically valued using the net asset value (“NAV”) provided by the investment manager or administrator of the fund. The NAV is based on the value of the underlying assets owned by the fund, minus liabilities and divided by the number of shares or units outstanding. These assets are classified as either Level 1 or Level 2, depending on availability of quoted market prices for identical or similar assets.


If available, fixed income securities are valued using the close price reported on the major market on which the individual securities are traded and are classified as Level 1. The fair value of other fixed income securities is typically estimated using pricing models and quoted prices of securities with similar characteristics, and is generally classified as Level 2.


Cash equivalents includes money market accounts that are valued at their cost plus interest on a daily basis, which approximates fair value. Short-term investments represent securities with original maturities of one year or less. These assets are classified as either Level 1 or Level 2.



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)



Cash Flows

Contributions


The Company’s expected employer contributions for 2018 are $8 million for its Japanese defined2021 and annual benefit pension plans.

Estimated Future Benefits Payments

Annual benefit payments from the Japanese defined benefit pension plans are estimated to range from $6 million to $10 million annually over the next 5 years.five years for its Pension Plans are not expected to be material.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)



Note 9.Commitments, Contingencies and Related Parties

Note 8. Related Parties and Related Commitments and Contingencies

Flash Ventures


The Company’sCompany procures substantially all of its flash-based memory wafers from its business ventures with Toshiba consistKioxia Corporation (“Kioxia”), which consists of three3 separate legal entities: Flash Partners Ltd. (“Flash Partners”), Flash Alliance Ltd. (“Flash Alliance”), and Flash Forward LtdLtd. (“Flash Forward”), collectively referred to as “Flash Ventures”. The Company has a 49.9% ownership interest and ToshibaKioxia has a 50.1% ownership interest in each of these entities. Through Flash Ventures, the Company and ToshibaKioxia collaborate in the development and manufacture of NAND-flashflash-based memory wafers, which are manufactured by ToshibaKioxia 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 ToshibaKioxia at cost and then resellresells those wafers to the Company and ToshibaKioxia at cost plus a markup.markup.


Flash Partners.Partners. Flash Partners was formed in 2004. NAND-flash products provided to2004 in connection with the Company by this venture are manufactured by Toshiba primarily at itsconstruction of Kioxia’s “Y3” 300-millimeter wafer fabrication facility (“Fab 3”) located in Yokkaichi, Japan.


Flash Alliance.Flash Alliance was formed in 2006. NAND-flash products provided to2006 in connection with the Company by this venture are manufactured by Toshiba primarily at itsconstruction of Kioxia’s “Y4” 300-millimeter wafer fabrication facility (“Fab 4”) located in Yokkaichi, Japan.


Flash Forward.Forward. Flash Forward was formed in 2010. NAND-flash products provided to2010 in connection with the Company by this venture are manufactured by Toshiba primarily at itsconstruction of Kioxia’s “Y5” 300-millimeter wafer fabrication facility (“Fab 5”) located in Yokkaichi, Japan. Fab 5Y5 was built in two phases of approximately equal size.


New Fab 2.Y2. The Company has a facility agreement with ToshibaKioxia related to the construction and operation of Toshiba’sKioxia’s “New Fab 2”Y2” 300-millimeter wafer fabrication facility located in Yokkaichi, Japan. New Fab 2 isY2 primarily intended to provideprovided additional cleanroomclean room space to convert a portion of 2-dimensional (“2D”) NAND-flashflash-based wafer production capacity to 3-dimensional (“3D”) NAND-flashflash-based wafer production capacity. Production of NAND-flashflash-based wafers in New Fab 2Y2 started in 2016.


Y6. The Company also has a facility agreement with Kioxia related to the construction and operation of Kioxia’s “Y6” 300-millimeter wafer fabrication facility in Yokkaichi, Japan. Y6 is primarily intended to provide clean room space to continue the transition of existing 2D flash-based wafer capacity to 3D flash-based wafer production capacity. Production of flash-based wafers in Y6 started in 2018.

K1. The Company also has a facility agreement with Kioxia related to the construction and operation of Kioxia’s “K1” 300-milimeter wafer fabrication facility in Kitakami, Japan. The primary purpose of K1 is to provide clean room space to continue the transition of existing flash-based wafer capacity to newer technology nodes. Output from the initial production line at K1 began in the third quarter of fiscal year 2020, although meaningful output from K1 is not expected to begin until the end of calendar 2020. The Company has paid for most of its share of initial K1 equipment investments and relocation costs. Other period expenses associated with the initial production ramp at K1 will begin trailing off as output increases toward the end of calendar year 2020. The Company also agreed to prepay an aggregate of approximately $360 million over a 3-year period beginning in the first half of fiscal year 2020 toward K1 building depreciation, to be credited against future wafer charges. As of July 3, 2020, remaining committed prepayments totaled $206 million.

The Company accounts for its ownership position of each entity withwithin 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”).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.


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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


The following table presents the notes receivable from, and equity investments in, Flash Ventures as of July 3, 2020 and June 30, 2017 and July 1, 2016:28, 2019:
July 3,
2020
June 28,
2019
(in millions)
Notes receivable, Flash Partners$273 $551 
Notes receivable, Flash Alliance301 878 
Notes receivable, Flash Forward670 743 
Investment in Flash Partners203 200 
Investment in Flash Alliance300 296 
Investment in Flash Forward128 123 
Total notes receivable and investments in Flash Ventures$1,875 $2,791 
 June 30,
2017
 July 1,
2016
 (in millions)
Notes receivable, Flash Partners$264
 $65
Notes receivable, Flash Alliance119
 235
Notes receivable, Flash Forward379
 263
Investment in Flash Partners187
 202
Investment in Flash Alliance279
 306
Investment in Flash Forward112
 100
Total notes receivable and investments in Flash Ventures$1,340
 $1,171


WESTERN DIGITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


During 20172020, 2019 and 2016,2018, the Company made net payments to Flash Ventures of $2.64$3.09 billion, $4.13 billion and $371 million,$3.79 billion, respectively, for purchased NAND-flashflash-based memory wafers and net loans and investments.loans.


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. Impairments, when required for credit worthiness, are recorded in Other income (expense), net in the consolidated statements of operations. There were no such impairments in 2017, 2016 or 2015.


As of July 3, 2020 and June 30, 2017 and July 1, 2016,28, 2019, the Company had accountsAccounts payable balances due to Flash Ventures of $206$407 million and $168$331 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 30, 2017,July 3, 2020, is presented below. Investments in Flash Ventures are denominated in Japanese yen, and the maximum possibleestimable loss exposure excludes any cumulative translation adjustment due to revaluation from the Japanese yen to the U.S. dollar.
July 3,
2020
Notes receivable$1,244
Equity investments631
Operating lease guarantees1,903
Inventory and prepayments526
Maximum estimable loss exposure$4,304
 June 30,
2017
  
Notes receivable$762
Equity investments578
Operating lease guarantees968
Inventory187
Maximum estimable loss exposure$2,682

As of July 3, 2020 and June 30, 2017 and July 1, 2016,28, 2019, the Company’s retained earnings included undistributed earnings of Flash Ventures of $5$24 million and $2$14 million, respectively.


The Company is committedobligated to purchasepay for variable costs incurred in producing its provided three-month forecastshare of Flash Ventures’ NANDflash-based memory wafer supply, based on its three-month forecast, which generally equals 50% of Flash Ventures’ output. In addition, the Company is obligated to pay for half of Flash Ventures’ fixed costs regardless of the output the Company chooses to purchase. 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 capital investments to the extent that each Flash Ventures entity’s operating cash flow is insufficient to fund these investments.


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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


Flash Ventures has historically operated near 100% of its manufacturing capacity. During 2019, as a result of flash business conditions, the Company temporarily reduced its utilization of its share of Flash Ventures’ manufacturing capacity to an abnormally low level to more closely align the Company’s flash-based wafer supply with the projected demand. In 2019, the Company incurred costs of $264 million associated with the reduction in utilization, which was recorded as a charge to Cost of revenue.

In June 2019, an unexpected power outage incident occurred at the flash-based memory manufacturing facilities operated by Flash Ventures in Yokkaichi, Japan. The power outage incident impacted the facilities and process tools and resulted in the damage of flash wafers in production and a reduction in the Company’s flash wafer availability. As a result of this incident, the Company incurred charges of $68 million and $145 million in 2020 and 2019, respectively, which were recorded in Cost of revenue and primarily consisted of the write-off of damaged inventory and unabsorbed manufacturing overhead costs. The Company continues to pursue recovery of its losses associated with this event; however, the total amount of recovery cannot be estimated at this time.

Inventory Purchase Commitments with Flash Ventures. Purchase orders placed under Flash Ventures for up to three months are binding and cannot be canceled.


Research and Development Activities. The Company participates in common R&D activities with ToshibaKioxia 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 total outstanding obligations.obligations under each lease agreement. The lease agreements containare subject to customary covenants for Japanese lease facilities. In addition to containing customaryand cancellation events of default related to Flash Ventures thatand each of the guarantors. The occurrence of a cancellation event could result in an acceleration of Flash Ventures’ obligations and a call on the lease agreements contain acceleration clauses for certain events of default related to the guarantors, including the Company.Company’s guarantees.

WESTERN DIGITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)



The following table presents the Company’s portion of the remaining guarantee obligations under the Flash Ventures’ lease facilities in both Japanese yen and U.S. dollar-equivalent, based upon the Japanese yen to U.S. dollar exchange rate as of June 30, 2017.July 3, 2020.
Lease Amounts
(Japanese yen, in billions)(U.S. dollar, in millions)
Total guarantee obligations¥205 $1,903 

85

 Lease Amounts
 (Japanese yen, in billions) (U.S. dollar, in millions)
Total guarantee obligations¥109
 $968


Table of Contents


WESTERN DIGITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


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 30, 2017July 3, 2020 in U.S. dollars, based upon the Japanese yen to U.S. dollar exchange rate as of June 30, 2017:July 3, 2020:

Annual Installments Payment of Principal Amortization Purchase Option Exercise Price at Final Lease Terms Guarantee Amount
  (in millions)
Year 1 $257
 $17
 $274
Year 2 219
 24
 243
Year 3 154
 64
 218
Year 4 71
 104
 175
Year 5 10
 48
 58
Total guarantee obligations $711
 $257
 $968
Annual InstallmentsPayment of Principal AmortizationPurchase Option Exercise Price at Final Lease TermsGuarantee Amount
(in millions)
2021$497 $109 $606 
2022414 50 464 
2023304 67 371 
2024156 121 277 
202536 111 147 
Thereafter4 34 38 
Total guarantee obligations$1,411 $492 $1,903 


The Company and ToshibaKioxia 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 30, 2017,July 3, 2020, no amounts have been accrued in the Consolidated Financial Statements with respect to these indemnification guarantees.agreements.


Lease CommitmentsUnis Venture


The Company leases certain facilitieshas a joint venture with Unisplendour Corporation Limited and equipmentUnissoft (Wuxi) Group Co. Ltd. (“Unis”), 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 is 49% owned by the Company and 51% owned by Unis. The Company accounts for its investment in the Unis Venture under long-term, non-cancelable operating leases.the equity method of accounting. Revenue on products distributed by the Unis Venture is recognized upon sell through to third-party customers. For both the years ended July 3, 2020 and June 28, 2019, the Company recognized less than 2% of its consolidated revenue on products distributed by the Unis Venture. The Company’s operating leases consistoutstanding accounts receivable due from and investment in the Unis Venture were less than 5% of leased propertyAccounts receivable, net as of both July 3, 2020 and equipment that expire at various dates through 2027. Future minimum lease payments under operating leases that have initial non-cancelable lease terms in excessJune 28, 2019.



86


Table of one year at June 30, 2017 are as follows:Contents

  Lease Amounts
  (in millions)
Fiscal year  
2018 $46
2019 42
2020 31
2021 26
2022 13
2023 and thereafter 20
Total future minimum lease payments $178



WESTERN DIGITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)



Net rentNote 9. Leases and Other Commitments

Leases

The Company leases certain domestic and international facilities and data center space under long-term, non-cancelable operating leases that expire at various dates through 2034. These leases include no material variable or contingent lease payments. Operating lease assets and liabilities are recognized based on the present value of the remaining lease payments discounted using the Company’s incremental borrowing rate. Operating lease assets also include prepaid lease payments minus any lease incentives. Extension or termination options present in the Company’s lease agreements are included in determining the right-of-use asset and lease liability when it is reasonably certain the Company will exercise that option. Lease expense is recognized on a straight-line basis over the lease term. The following table summarizes supplemental balance sheet information related to operating leases as of July 3, 2020:
Lease Amounts
Minimum lease payments by fiscal year:(in millions)
2021$45 
202232 
202328 
202428 
202527 
Thereafter144 
Total future minimum lease payments304 
Less: Imputed Interest(59)
Present value of lease liabilities245 
Less: Current portion (included in Accrued expenses)36 
Long-term operating lease liabilities (included in Other liabilities)$209 
Operating lease right-of-use assets (included in Other non-current assets)$230 
Weighted average remaining lease term in years9.2
Weighted average discount rate4.2 %

The following table summarizes supplemental disclosures of operating cost and cash flow information related to operating leases for the year ended July 3, 2020:
Year Ended
July 3,
2020
(in millions)
Cost of operating leases$55
Cash paid for operating leases53
Operating lease assets obtained in exchange for operating lease liabilities57

Cost of operating leases was as follows:
202020192018
(in millions)
Cost of operating leases$55 $47 $49 
87

 2017 2016 2015
 (In millions)
Rent expense, net$56
 $59
 $60


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Purchase Agreements

The Company has supply contracts that generally require the Company to provide monthly purchase order commitments. The purchase orders placed under these arrangements are generally binding and cannot be canceled. In addition, the Company’s subcontractors periodically procure production materials based on the forecast the Company provides to them. The Company’s agreements with these subcontractors require that the Company reimburse them for materials that are purchased on the Company’s behalf in accordance with such forecast. Accordingly, the Company may be committed to certain costs over and above its open noncancelable purchase orders with these subcontractors. As of June 30, 2017, the Company had no material long-term purchase agreements.



WESTERN DIGITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)



Note 10.Business Segment, Geographic Information and Concentration of Risk


Purchase Agreements and Other Commitments

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 agreements with suppliers that contain fixed future commitments, which are contingent on certain conditions such as performance, quality and technology of the vendor’s components. As of July 3, 2020, the Company had the following minimum long-term commitments:
Long-term commitments
(in millions)
Fiscal year:
2021$448 
2022606 
2023521 
2024322 
2025148 
Thereafter190 
Total$2,235 

Sale-Leaseback

In April 2019, the Company completed a sale and leaseback of its manufacturing facility in Fremont, California. The Company received proceeds from the sale of $115 million and recognized a loss of $25 million. The property is being leased back over a term of 15 years at an annual lease rate of $7 million for the first year and increasing by 3% per year thereafter. The lease includes 4 5-year renewal options for the ability to extend up to 20 years.





















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Note 10. Business Segment, Revenue Information, Geographic Information and Concentration of Risk

The Company manufactures, markets, and sells data storage devices and solutions in the U.S. and in foreign countries through its sales personnel, dealers, distributors, retailers, and subsidiaries. The Company introduced a new operating model during the fourth quarter of fiscal 2016 that incorporates the HGST, WD and SanDisk businesses. Based upon the revised management structure under the newcurrent 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 one1 segment, data storage devices and solutions.


The following table summarizes the Company’s revenuesrevenue by end market product category, between Client Devices (mobile, desktop, gaming and digital video hard drives, client solid-state drives (“SSD”),SSDs, embedded products and wafers); Data Center Devices and Solutions (capacity and performance enterprise hard disk drives (“HDD”),HDDs, enterprise SSDs, data center software and system solutions); and Client Solutions (removable products, hard drive content solutions and flash content solutions):

 2017 2016 2015
 (in millions)
Client Devices$9,520
 $6,205
 $7,710
Data Center Devices & Solutions5,505
 4,919
 5,012
Client Solutions4,068
 1,870
 1,850
Total revenues$19,093
 $12,994
 $14,572
The Company’s disaggregated revenue information is as follows:

202020192018
(in millions)
Revenue by Product
HDD$8,967 $8,746 $10,698 
Flash-based7,769 7,823 9,949 
Total Revenue$16,736 $16,569 $20,647 
Revenue by End Market
Client Devices$7,160 $8,095 $10,108 
Data Center Devices & Solutions6,228 5,038 6,075 
Client Solutions3,348 3,436 4,464 
Total Revenue16,736 16,569 20,647 

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:
202020192018
(in millions)
Net revenue (1)
United States$4,679 $3,602 $4,640 
China4,075 3,861 4,393 
Hong Kong2,592 3,122 4,022 
Rest of Asia1,699 2,116 2,752 
Europe, Middle East and Africa2,926 3,109 3,858 
Other765 759 982 
Total$16,736 $16,569 $20,647 
 2017 2016 2015
 (in millions)
Net revenue(1)
     
United States$3,881
 $3,651
 $3,054
China4,271
 2,413
 2,726
Hong Kong3,257
 1,527
 1,989
Asia3,181
 2,462
 2,562
Europe, Middle East and Africa3,276
 2,664
 3,169
Other1,227
 277
 1,072
Total$19,093
 $12,994
 $14,572


(1)
(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.



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 June 30,
2017
 July 1,
2016
 (in millions)
Long-lived assets(1)
   
United States$1,249
 $1,406
China443
 463
Asia1,293
 1,628
Europe, Middle East and Africa48
 6
Total$3,033
 $3,503



20202019
(in millions)
Long-lived assets (1)
United States$949 $962 
Malaysia643 667 
China373 420 
Thailand472 405 
Rest of Asia366 335 
Europe, Middle East and Africa51 54 
Total$2,854 $2,843 


(1)
Long-lived assets are attributed to the geographic location in which they are located.

(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 2017each of 2020, 2019 and 2016,2018, no customer accounted for 10% or more of the Company’s net revenue. For 2015, one company, Hewlett-Packard Company, accounted for 11% of the Company’s net revenue. For 2017, 2016,2020, 2019 and 2015,2018, the Company’s top 10 customers accounted for 36%42%, 43%45%, and 44%42%, respectively, of the Company’s net revenue.


The Company performs ongoing credit evaluations of its customers’ financial condition and generally requires no collateral. The Company maintains allowances for potential credit losses, and such losses have historically been within management’s expectations. At any given point in time, the total amount outstanding from any one of a number of its customers may be individually significant to the Company’s financial results. As of June 30, 2017,July 3, 2020, one customer, Kingston Technology Company, accounted for 10% of the Company’s net accounts receivable. As of June 28, 2019, two customers, Dell Technologies Inc. and Huawei Investment & Holding Co., accounted for 11%14% and 10%, respectively, of the Company’s net accounts receivable. As of July 1, 2016, no single customer accounted for 10% or more of3, 2020 and June 28, 2019, the Company’sCompany had net accounts receivable. Asreceivable of June 30, 2017$2.4 billion and July 1, 2016, the Company had$1.2 billion, respectively, and reserves for potential credit losses of $10 millionwere not material as of each period and net accounts receivable of $1.95 billion and $1.46 billion, respectively.end.


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
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


assurance problems that could increase the manufacturing costs of the Company’s products and have material adverse effects on the Company’s operating results.




















































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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)



Note 11.
Western Digital Corporation 401(k) Plan

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. Prior to the amendment of the Plan on May 5, 2016, the Company’s employer matching contributions vested over a five-yeartwo-year graded period. The Company may suspend matching contributions at any time at its discretion. Contributions, including the Company’s matching contribution to the Plan, are recorded as soon as administratively possible after the Company makes payroll deductions from Plan participants.


For 2017, 20162020, 2019 and 2015,2018, the Company made Plan contributions of $36$33 million, $20$34 million and $22$35 million, respectively.



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)



Note 12.  
Shareholders’ Equity

Stock Incentive Plans

20042017 Performance Incentive Plan


The types of awards that may be granted under the Western Digital Corporation Amended and Restated 20042017 Performance Incentive Plan (“2004(as amended, the “2017 Performance Incentive Plan”) include stock options, SARs,stock appreciation rights (“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 20042017 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 20042017 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 20042017 Performance Incentive Plan is ten-yearsten years after the grant date of the award. RSUs granted under the 20042017 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 metricsconditions or market conditions and completion of requisite service periods. Once the performance metricsconditions or market conditions are met, vesting of PSUs is generally subject to continued service by the employee. At the end of each reporting period, the Company evaluates the probability that PSUs will be earned. The Company records stock-based compensation expense based on the probability that the performance metrics will be achieved over the vesting period. To the extent available, the Company issues shares out of treasury stock upon the vesting of awards, the exercise of employee stock options and the purchase of shares pursuant to the ESPP.


Outstanding RSU and PSU awards have dividend equivalent rights which entitle holders of such outstanding awards to the same dividend value per share as holders of common stock. Dividend equivalent rights are subject to the same vesting and other terms and conditions as the corresponding unvested RSUs and PSUs. Dividend equivalent rights are accumulated and paid in additional shares when the underlying shares vest.


As of June 30, 2017,July 3, 2020, the maximum number of shares of the Company’s common stock that was authorized for award grants under the 20042017 Performance Incentive Plan was 65.895.6 million shares. Shares issued in respect of stock options and SARs granted under the 20042017 Performance Incentive Plan count against the plan’s share limit on a one-for-one1-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 20042017 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”).Directors.

Acquired Plan

In connection with the Merger, the Company assumed 14.4 million shares that were available to be granted to SanDisk employees under the SanDisk 2013 Incentive Plan. The Company also assumed outstanding stock options and RSUs which were converted into equivalent stock options and RSUs with respect to shares of the Company’s common stock using the equity award exchange ratio as defined in the merger agreement with SanDisk. Options eligible for exercise may be exercised for shares of the Company’s common stock at any time prior to the expiration of the seven-year option term or any earlier termination of those options in connection with the optionee’s cessation of service with the Company. Outstanding RSU awards under the SanDisk 2013 Incentive Plan have dividend equivalent rights which entitle holders of RSUs to the same dividend value per share as holders of common stock. Dividend equivalent rights are subject to the same vesting and other terms and conditions as the corresponding unvested RSUs. Dividend equivalent rights are accumulated and paid when the underlying shares vest.


WESTERN DIGITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


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 at the first daybeginning 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 four4 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 2020, 2019 and 2018, the Company issued 3.0 million, 2.6 million, and 2.5 million shares, respectively, for aggregate purchase amounts of $107 million, $102 million and $119 million, respectively.










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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)



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 statementsConsolidated Statements of operations:Operations:
202020192018
(in millions)
Options$7 $16 $25 
RSUs and PSUs268 263 325 
Employee stock purchase plan33 27 27 
Total$308 $306 $377 
 2017 2016 2015
 (in millions)
Options$41
 $55
 $58
Restricted and performance stock units330
 123
 88
Employee stock purchase plan23
 13
 16
Subtotal394
 191
 162
Tax benefit(105) (48) (43)
Total$289
 $143
 $119


202020192018
(in millions)
Cost of revenue$51 $48 $49 
Research and development163 155 170 
Selling, general and administrative94 103 157 
Employee termination, asset impairment, and other charges  1 
Subtotal308 306 377 
Tax benefit(45)(50)(66)
Total$263 $256 $311 

 2017 2016 2015
 (in millions)
Cost of revenue$49
 $21
 $17
Research and development173
 76
 61
Selling, general and administrative161
 85
 84
Employee termination, asset impairment, and other charges11
 9
 
Subtotal394
 191
 162
Tax benefit(105) (48) (43)
Total$289
 $143
 $119
Windfall tax benefits related to the vesting and exercise of stock-based awards, which are recognized as a component of the Company’s Income tax expense, were immaterial for the periods presented.


Compensation cost related to unvested stock options, RSU’s,RSUs, PSUs, and rights to purchase shares of common stock under the ESPP will generally be amortized on a straight-line basis over the remaining average service period. The remaining compensation cost related to unvested stock options is immaterial as of July 3, 2020. The following table presents the unamortized compensation cost and weighted average service period of all unvested outstanding awards as of June 30, 2017.July 3, 2020:
Unamortized Compensation CostsWeighted Average Service Period
(in millions)(years)
RSUs and PSUs (1)
543 2.4
ESPP38 1.1
Total unamortized compensation cost$581 
 Unamortized Compensation Costs Weighted Average Service Period
 (in millions) (years)
Options$60
 2.6
RSUs and PSUs (1)
461
 2.3
ESPP31
 1.0

(1)Weighted average service period assumes the performance metricsconditions are met for the PSUs.



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)



Plan Activities


Stock Options


The following table summarizes stock option activity under the Company’s incentive plans:
Number of SharesWeighted Average Exercise Price Per ShareWeighted Average Remaining Contractual LifeAggregate Intrinsic Value
(in millions)(in years)(in millions)
Options outstanding at June 30, 20177.4 $58.14 
Exercised(2.2)44.52 $99 
Canceled or expired(0.4)60.85 
Options outstanding at June 29, 20184.8 64.23 
Exercised(0.4)39.58 $8 
Canceled or expired(0.5)74.79 
Options outstanding at June 28, 20193.9 65.72 
Exercised(0.8)43.26 $12 
Canceled or expired(0.4)88.58 
Options outstanding at July 3, 20202.7 $69.16 2.1$ 
Exercisable at July 3, 20202.6 $70.10 2.1$ 
 Number of Shares Weighted Average Exercise Price Per Share Weighted Average Remaining Contractual Life Aggregate Intrinsic Value
 (in millions)   (in years) (in millions)
Options outstanding at June 27, 201410.1
 $37.03
    
Granted1.2
 94.10
    
Assumed0.1
 3.49
    
Exercised(4.1) 31.90
   $283
Canceled or expired(0.5) 56.41
    
Options outstanding at July 3, 20156.8
 50.00
    
Granted1.7
 82.68
    
Assumed2.9
 38.37
    
Exercised(1.7) 27.43
   57
Canceled or expired(0.7) 66.03
    
Options outstanding at July 1, 20169.0
 55.74
    
Granted2.8
 44.83
    
Exercised(3.5) 37.72
   120
Canceled or expired(0.9) 71.31
    
Options outstanding at June 30, 20177.4
 $58.14
 4.5 $240
Exercisable at June 30, 20173.3
 $62.38
 3.1 $99
Vested and expected to vest after June 30, 20177.2
 $58.42
 4.4 $231


NaN options were granted in 2020, 2019 or 2018.


WESTERN DIGITAL CORPORATIONRSUs and PSUs
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

RSU and PSU


The following table summarizes RSU and PSU activity under the Company’s incentive plans:
Number of SharesWeighted Average Grant Date Fair ValueAggregate Intrinsic Value at Vest Date
(in millions)(in millions)
RSUs and PSUs outstanding at June 30, 201713.7 $45.01 
Granted6.3 74.68 
Vested(6.3)45.20 $552 
Forfeited(1.1)50.35 
RSUs and PSUs outstanding at June 29, 201812.6 58.31 
Granted7.3 54.82 
Vested(6.3)53.21 $360 
Forfeited(2.0)58.63 
RSUs and PSUs outstanding at June 28, 201911.6 62.07 
Granted7.4 55.32 
Vested(4.4)58.36 $252 
Forfeited(1.3)63.33 
RSUs and PSUs outstanding at July 3, 202013.3 $60.92 
 Number of Shares Weighted Average Grant Date Fair Value Aggregate Intrinsic Value at Vest Date
 (in millions)   (in millions)
RSUs and PSUs outstanding at June 27, 20143.7
 $49.77
  
Granted1.3
 100.13
  
Vested(1.7) 42.24
 $170
Forfeited(0.3) 67.31
  
RSUs and PSUs outstanding at July 3, 20153.0
 73.80
  
Granted2.7
 61.32
  
Assumed12.5
 32.14
  
Vested(2.0) 56.11
 144
Forfeited(0.5) 62.09
  
RSUs and PSUs outstanding at July 1, 201615.7
 41.92
  
Granted6.0
 44.13
  
Vested(5.9) 46.98
 399
Forfeited(2.1) 43.89
  
RSUs and PSUs outstanding at June 30, 201713.7
 $45.01
  
Expected to vest after June 30, 201712.7
 $45.13
  


RSUs and PSUs are generally settled in an equal number of shares of the Company’s common stock at the time of vesting of the units.

Vested Options, RSUs and PSUs

The total grant date fair value of options, RSUs and PSUs vested during the period was as follows:
95

 2017 2016 2015
 (in millions)
Options$41
 $61
 $62
RSUs and PSUs261
 113
 65
Total grant date fair value of options, RSUs and PSUs vested during the period$302
 $174
 $127


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WESTERN DIGITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)



SARs

As of June 30, 2017, all outstanding SARs issued to employees were fully vested and will be settled in cash upon exercise. The fair value of SARs is solely subject to market price fluctuations. The following table presents the adjustments to the fair market value of SARs:
 2017 2016 2015
 (in millions)
SAR expense (benefit)$7
 $(18) $(3)
Tax expense (benefit)(1) 2
 
Total SAR expense (benefit)$6
 $(16) $(3)

The Company had a total liability of $2 million and $20 million related to SARs included in Accrued expenses in the Consolidated Balance Sheets as of June 30, 2017 and July 1, 2016, respectively. There were no SARs granted in 2017, 2016, and 2015 and as of June 30, 2017, an immaterial number of SARs were outstanding with a weighted average exercise price of $24.45.

Fair Value Valuation Assumptions

Stock Option Grants — Binomial Model

The fair value of stock options granted is estimated using a binomial option-pricing model. The binomial model requires the input of highly subjective assumptions. The Company uses historical data to estimate exercise, employee termination and expected stock price volatility within the binomial model. The risk-free rate for periods within the contractual life of the option is based on the U.S. Treasury yield curve in effect at the time of grant. The fair value of stock options granted was estimated using the following weighted average assumptions:
 2017 2016 2015
Suboptimal exercise factor2.69 2.71 2.52
Range of risk-free interest rates0.59% to 1.42% 0.25% to 2.09% 0.11% to 2.16%
Range of expected stock price volatility0.35 to 0.49 0.28 to 0.49 0.23 to 0.47
Weighted-average expected volatility0.40 0.35 0.36
Post-vesting termination rate1.71% 0.47% 1.25%
Dividend yield3.42% 2.61% 1.69%
Fair value$13.72 $22.54 $32.19
Weighted-average expected term (in years)3.6 4.7 5.8


RSU and PSU Grants


The fair value of the Company’s RSU and PSU awards granted, excluding unvested RSU awards assumed through acquisitions, waswith a performance condition is determined based upon the closing price of the Company’s stock price on the date of grant. The fair value of PSU awards with a market condition is estimated using a Monte Carlo simulation model on the date of grant using historical volatility.


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.


WESTERN DIGITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


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:
202020192018
Weighted-average expected term (in years)1.251.241.26
Risk-free interest rate0.55%2.25%0.81%
Stock price volatility0.590.350.42
Dividend yield1.08%2.42%4.02%
Fair value$12.76$16.89$10.06
 2017 2016 2015
Weighted-average expected term (in years)1.26 1.27 1.26
Risk-free interest rate0.81% 0.82% 0.45%
Stock price volatility0.42 0.38 0.26
Dividend yield4.02% 3.92% 2.34%
Fair value$10.06 $9.91 $14.50


Stock Repurchase Program


The Company’s Board of Directors has authorized $5.00 billiona stock repurchase program for the repurchase of up to $5.0 billion of the Company’s common stock. Thestock, which authorization is effective through July 25, 2023. For the year ended July 3, 2020, the Company did 0t make any stock repurchases and has 0t repurchased any shares of its common stock pursuant to its stock repurchase program is effective until February 3, 2020. Thesince the first quarter of fiscal 2019. Although the Company did not repurchase any shareswill reevaluate the repurchasing of common stock during 2017.when appropriate, there can be no assurance if, when or at what level the Company may resume such activity. The remaining amount available to be purchasedrepurchased under the Company’s current stock repurchase program as of June 30, 2017July 3, 2020 was $2.10$4.5 billion. 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.


Stock Reserved for Issuance


The following table summarizes all common stock reserved for issuance at June 30, 2017:
July 3, 2020:
Number of Shares
(in millions)
Outstanding awards and shares available for award grants4431
ESPP79
Total51
Total
40


Dividends to Shareholders


On September 13, 2012, theThe Company announced that the Board had authorized the adoption ofissued a quarterly cash dividend policy. Underfrom the cash dividend policy, holdersfirst quarter of fiscal 2013 up to the Company’s common stock receive dividends when and as declared bythird quarter of fiscal 2020. During the Board. During 2017,year ended July 3, 2020, the Company declared aggregate cash dividends of $2.00$1.50 per share on the Company’sits outstanding common stock totaling $579 million,$449 million. In April 2020, the Company suspended its dividend to reinvest in the business and to support its ongoing deleveraging efforts.
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Table of which $432 million was paid in 2017 and $147 million was paid on July 17, 2017. The Company also paid $142 million in 2017 related to dividends accrued in 2016.Contents


On August 2, 2017, the Board declared a cash dividend of $0.50 per share to shareholders of record as of September 29, 2017, which will be paid on October 16, 2017.

The Company may modify, suspend or cancel its cash dividend policy in any manner and at any time.



WESTERN DIGITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)



Note 13.Income Tax Expense (Benefit)

Note 13. Income Tax Expense

Income (loss) Before Taxes


The domestic and foreign components of incomeIncome (loss) before taxes were as follows:
202020192018
(in millions)
Foreign$(695)$(642)$2,398 
Domestic649 355 (313)
Income (loss) before taxes$(46)$(287)$2,085 
 2017 2016 2015
 (in millions)
Foreign$560
 $516
 $1,501
Domestic209
 (363) 76
Income before taxes$769
 $153
 $1,577


Income Tax ProvisionExpense (Benefit)


The components of the provision for income taxestax expense (benefit) were as follows:
202020192018
(in millions)
Current:
Foreign$157 $181 $166 
Domestic - Federal124 (91)1,597 
Domestic - State5 3 (5)
286 93 1,758 
Deferred:
Foreign(29)226 (39)
Domestic - Federal(53)141 (300)
Domestic - State 7 (9)
(82)374 (348)
Income tax expense$204 $467 $1,410 
 2017 2016 2015
 (in millions)
Current:     
Foreign$127
 $59
 $54
Domestic - Federal229
 2
 43
Domestic - State4
 (1) (13)
 360
 60
 84
Deferred:     
Foreign56
 (39) 12
Domestic - Federal(44) (109) 11
Domestic - State
 (1) 5
 12
 (149) 28
Income tax provision$372
 $(89) $112


On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) was enacted in response to the COVID-19 pandemic in the U.S. The Company’sCARES Act, among other things, allows NOLs arising in tax years 2018, 2019, and 2020 to be carried back to each of the five preceding taxable years to generate a refund of previously paid income taxes and increases the business interest expense limitation from 30% to 50% of adjusted taxable income for tax expense for 2017 reflectsyears 2019 and 2020. Additionally, countries around the world continue to implement emergency tax expense frommeasures to provide relief similar to the integrationCARES Act. The provisions of SanDiskthe CARES Act and the emergency tax measures around the world did not result in a valuation allowance on both acquired tax attributesmaterial cash benefit to the Company. However, the Company continues to monitor and net operating loss carryforwards from restructuring activities. The Company’s income tax benefit for 2016 reflects tax benefits from expensesevaluate the regulatory and interpretive guidance related to the MergerCARES Act as well as in other jurisdictions.

The Tax Cuts and from interest expense related to debt facilities.

Remaining net undistributed earnings from foreign subsidiaries at June 30,Jobs Act (the “2017 Act”) includes a broad range of tax reform proposals affecting businesses. The Company completed its accounting for the tax effects of the enactment of the 2017 Act during the second quarter of fiscal 2019. However, the U.S. Treasury and the IRS have issued tax guidance on which no U.S. tax has been provided, amounted to $16 billion. The net undistributed earnings are intended to finance local operating requirementscertain provisions of the 2017 Act since the enactment date, and capital investments. Accordingly, an additional U.S. tax provision has not been made on these earnings. The tax liability for these earnings would be approximately $5 billion, if the Company repatriatedanticipates the undistributed earnings fromissuance of additional regulatory and interpretive guidance. The Company applied a reasonable interpretation of the foreign subsidiaries.2017 Act along with the then-available guidance in finalizing its accounting for the tax effects of the 2017 Act. Any additional regulatory or interpretive guidance would constitute new information, which may require further refinements to the Company’s estimates in future periods.




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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)



Deferred Taxes


Temporary differences and carryforwards, which give rise to a significant portion of deferred tax assets and liabilities were as follows:
July 3,
2020
June 28,
2019
(in millions)
Deferred tax assets:
Sales related reserves and accrued expenses not currently deductible$52 $48 
Accrued compensation and benefits not currently deductible130 124 
Net operating loss carryforward251 285 
Business credit carryforward438 410 
Long-lived assets123 144 
Other133 135 
Total deferred tax assets1,127 1,146 
Deferred tax liabilities:
Long-lived assets(294)(413)
Unremitted earnings of certain non-U.S. entities(228)(220)
Other(26)(32)
Total deferred tax liabilities(548)(665)
Valuation allowances(624)(619)
Deferred tax liabilities, net$(45)$(138)
 June 30,
2017
 July 1,
2016
 (in millions)
Deferred tax assets:   
Sales related reserves and accrued expenses not currently deductible$84
 $82
Accrued compensation and benefits not currently deductible252
 207
Net operating loss carryforward292
 259
Business credit carryforward283
 264
Long-lived assets236
 256
Other141
 177
Total deferred tax assets1,288
 1,245
Deferred tax liabilities:   
Long-lived assets(874) (1,030)
Unremitted earnings of certain non-U.S. entities(38) 
Other(11) (9)
Total deferred tax liabilities(923) (1,039)
Valuation allowances(518) (294)
Deferred tax liabilities, net$(153) $(88)

The increase in deferred tax liabilities, net in 2017, compared to 2016, was primarily due to the increase in deferred tax expense of $12 million, tax effects of OCI items of $10 million, purchase price adjustments to goodwill of $27 million and shortfalls related to stock-based compensation deductions included in additional paid-in capital of $15 million.


The net deferred tax asset valuation allowance increased by $224 million and $128$5 million in 2017each of 2020 and 2016, respectively. The valuation allowance increase in 2017 is primarily attributable to $111 million for acquired tax attributes, $46 million for net operating loss carryforwards from restructuring activities, $31 million for capital losses, and $27 million for the current year generation of state tax credits which the Company does not anticipate being able to utilize.2019. The assessment of valuation allowances against deferred tax assets requires estimations and significant judgment. The Company continues to assess and adjust its valuation allowance based on operating results and market conditions. After weighing both the positive and negative evidence available, including, but not limited to, earnings history, projected future outcomes, industry and market trends and the nature of each of the deferred tax assets, the Company determined that it is able to realize most of its deferred tax assets with the exception of certain loss and credit carryforwards.


In addition to the deferred tax assets presented above, the Company had benefits related to net operating loss (“NOL”) benefits from stock-based compensation deductions
98


Table of $20 million and $119 million as of June 30, 2017 and July 1, 2016, respectively. During 2017, the Company recorded $119 million of tax benefits related to stock-based compensation deductions to Shareholders’ equity of which $98 million related to NOL benefits for stock-based compensation deductions and $21 million was related to current year stock-based compensation deductions.Contents




WESTERN DIGITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)



Effective Tax Rate


Under the 2017 Act, the reduction of the U.S. federal corporate tax rate from 35% to 21% became 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:
202020192018
U.S. Federal statutory rate21 %21 %28 %
Tax rate differential on international income(443)(75)(34)
Tax effect of U.S. foreign income inclusion(38)(7)1 
Tax effect of U.S. foreign minimum tax(235)(38) 
Tax effect of U.S. foreign derived intangible income109 11  
Tax effect of U.S. non-deductible stock-based compensation(21)(1)1 
Tax effect of U.S. permanent differences(26)(3)(1)
Impact of 2017 Act:
One-time mandatory deemed repatriation tax (41)75 
Re-measurement of deferred taxes 2 (3)
Change in valuation allowance(12)(2)5 
Unremitted earnings of certain non-U.S. entities(114)(79) 
Foreign income tax credits191 23  
Federal R&D credits147 24 (4)
Other(22)2  
Effective tax rate(443)%(163)%68 %

99

 2017 2016 2015
U.S. Federal statutory rate35 % 35 % 35 %
Tax rate differential on international income(27) (103) (29)
Tax effect of U.S. non-deductible convertible debt costs
 13
 
Tax effect of U.S. non-deductible acquisition costs
 10
 
Tax effect of U.S. foreign income inclusion4
 9
 
Tax effect of U.S. non-deductible stock-based compensation1
 9
 
Tax effect of U.S. permanent differences(1) 1
 1
State income tax, net of federal tax1
 (1) 
Change in valuation allowance29
 16
 2
Unremitted earnings of certain non-U.S. entities5
 
 
Tax related to SanDisk integration12
 
 
Retroactive extension of Federal R&D credit
 (9) 
Income tax credits(12) (43) (4)
Other1
 5
 2
Effective tax rate48 % (58)% 7 %


Table of Contents


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 2018during fiscal years 2021 through 2030. Certain of the holidays may be extended if specific conditions are met. The net impact of these tax holidays and tax incentives was an increase to the Company’s net earnings by $467$464 million, or $1.58$1.54 per diluted share, $500$393 million, or $2.07$1.33 per diluted share, and $641$519 million, or $2.70$1.69 per diluted share, in 2017, 2016,2020, 2019, and 2015,2018, respectively.


As of June 30, 2017,July 3, 2020, the Company had varying amounts of federal and state NOLNOL/tax credit carryforwards that do not expire or, if not used, expire in various years. Following is a summary of $765 million and $552 million, respectively. The NOL carryforwards available to offset future federal taxable income expire at various dates from 2020 to 2037 and future state taxable income expire at various dates from 2018 to 2037. As of June 30, 2017, the Company had variousCompany’s federal and state NOL/tax credit carryforwards totaling $599 million. The available federal and the related expiration dates of these NOL/tax credit carryforwards of $78 million to offset future federal taxable income expire at various dates from 2018 to 2037. The remaining credit carryforward amount of $521 million relates primarily to state tax credit carryforwards which are available indefinitely.carryforwards:

JurisdictionNOL/Tax Credit Carryforward AmountExpiration
(in millions)
Federal NOL (Pre 2017 Act Generation)$6762021 to 2037
Federal NOL (Post 2017 Act Generation)No expiration
State NOL4712021 to 2038
Federal tax credits582021 to 2034
State tax credits619No 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 $498 million and state NOLs ultimately realized will be reduced as a result of these provisions by $422 million.$128 million and $349 million, respectively. The Company expects the total amount of federal and state credits ultimately realized will be reduced as a result of these provisions by $41$27 million and state tax credit carryforwards ultimately realized will be reduced by $375 million.$2 million, respectively.



WESTERN DIGITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

TheAs of July 3, 2020, the Company had varying amounts of foreign NOL carryforwardcarryforwards 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 carryforwardcarryforwards and the related amounts and expiration dates of these NOL carryforward tax creditscarryforwards are as follows:


JurisdictionNOL Carryforward AmountExpiration
(in millions)
Malaysia$1672025 to 2027
Japan1272023 to 2026
Belgium121No expiration
China1032022 to 2025
Spain48No expiration
Jurisdiction NOL Carryforward Amount Expiration
  (in millions)  
Japan $142
 2024 to 2026
Belgium 61
 No expiration
China 53
 2023
Singapore 40
 No expiration

The Company expects the total amount of NOL carryforwards in Japan ultimately realized will be reduced by $76 million. The Company expects the NOL carryforwards in Belgium, China and Singapore will not be ultimately realized.


Uncertain Tax Positions


With the exception of certain unrecognized tax benefits that are directly associated with the tax position taken, unrecognized tax benefits are presented gross in the Consolidated Balance Sheets.

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WESTERN DIGITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


The following is a tabular reconciliation of the total amounts of unrecognized tax benefits excluding accrued interest and penalties:

202020192018
(in millions)
Unrecognized tax benefit, beginning balance$695 $551 $522 
Gross increases related to current year tax positions11 172 38 
Gross increases related to prior year tax positions35 8 30 
Gross decreases related to prior year tax positions(4)(24)(9)
Settlements(12)(1)(19)
Lapse of statute of limitations(8)(11)(11)
Acquisitions   
Unrecognized tax benefit, ending balance$717 $695 $551 

Interest and penalties related to unrecognized tax benefits are recognized in liabilities recorded for uncertain tax positions and are recorded in the provision for income taxes. Accrued interest and penalties included in the Company’s liability related to unrecognized tax benefits as of June 30, 2017, July 1, 2016 and July 3, 20152020, June 28, 2019 and June 29, 2018 was $89$137 million, $75$123 million and $55$110 million, respectively.

The following is a tabular reconciliation of the total amounts of unrecognized tax benefits excluding accrued interest and penalties:
 2017 2016 2015
 (in millions)
Unrecognized tax benefit, beginning balance$491
 $350
 $300
Gross increases related to current year tax positions35
 46
 44
Gross increases related to prior year tax positions3
 6
 6
Gross decreases related to prior year tax positions(8) (15) 
Settlements(8) (8) 
Lapse of statute of limitations(19) (8) (3)
Acquisitions28
 120
 3
Unrecognized tax benefit, ending balance$522
 $491
 $350

The Company’s unrecognized tax benefits are primarily included Included within long-term liabilities in the Consolidated Balance Sheets.Sheets are the Company’s payables related to unrecognized tax benefits, including accrued interest and penalties, of $720 million, $699 million, and $508 million as of July 3, 2020, June 28, 2019 and June 29, 2018, respectively. The entire balance of the gross unrecognized tax benefits as of June 30, 2017, July 1, 2016 and July 3, 2015,2020, June 28, 2019 and June 29, 2018, 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 20082013 through 2016.2019. The Company is no longer subject to examination by the IRS for periods prior to 2008,2012, 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 where there is no tax holiday, the Company could be subject to examination in China for calendar years 20072010 through 2016,2019, in Ireland for calendar year 2014 through fiscal year 2019, in India for fiscal years 2008 through 2019, in Israel for calendar year 2015 through fiscal year 2019 and in Japan for fiscal years 2013 through 2016, and Japan in fiscal years 2011 through 2016.2019.


WESTERN DIGITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


The IRS previously completed its field examination of the Company’s federal income tax returns for fiscal years 20062008 through 20092012 and proposed certain adjustments. TheAs previously disclosed, the Company received Revenue Agent Reports from the IRS that seek to increase the Company’s U.S. taxable income which would result in additional federal tax expense totaling $795 million, subject to interest. The issues in dispute relate primarilyfor fiscal years 2008 through 2009, 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. Meetings withThe Company and the IRS Appeals Office begandid not reach a settlement on the disputed matters. On June 28, 2018, the IRS issued a statutory notice of deficiency with respect to the disputed matters for fiscal years 2008 through 2009, 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 and penalties. The Company filed a petition with the U.S. Tax Court in September 2018. On December 10, 2018, the IRS issued a statutory notice of deficiency with respect to fiscal years 2010 through 2012, seeking to increase the Company’s U.S. taxable income by an amount that would result in additional federal tax for fiscal years 2010 through 2012 totaling approximately $549 million, subject to interest and penalties. Approximately $535 million of the total additional federal tax for fiscal years 2010 through 2012 relates to proposed adjustments for transfer pricing with the Company’s foreign subsidiaries, intercompany payable balances and the utilization of certain tax attributes. The Company filed a petition with the U.S. Tax Court in March 2017.2019. The U.S. Tax Court consolidated the case for fiscal years 2008 through 2009 with the case for fiscal years 2010 through 2012. On May 4, 2020, the IRS filed with the U.S. Tax Court Amendments to Answer to assert penalties totaling $340 million on the proposed adjustments relating to transfer pricing with respect to fiscal years 2008 through 2009 and fiscal years 2010 through 2012. The Company believescontinues to believe 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

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Table of the Company’s fiscal years 2010 through 2012.Contents



WESTERN DIGITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


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 30, 2017,July 3, 2020, it iswas not possible to estimate the amount of change, if any, in the unrecognized tax benefits that is reasonably possible within the next twelve months. Any significant change in the amount of the Company’s liability for unrecognized tax benefits would most likely result from additional information or settlements relating to the examination of the Company’s tax returns.



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WESTERN DIGITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)



Note 14.
Net Income Per Common Share

Note 14. Net Income (Loss) Per Common Share

The following table presents the computation of basic and diluted income (loss) per common share:
Year Ended
 202020192018
(in millions, except per share data)
Net income (loss)$(250)$(754)$675 
Weighted average shares outstanding:
Basic298 292 297 
Employee stock options, RSUs, PSUs and ESPP  10 
Diluted298 292 307 
Income (loss) per common share
Basic$(0.84)$(2.58)$2.27 
Diluted$(0.84)$(2.58)$2.20 
Anti-dilutive potential common shares excluded15 17 2 
 2017 2016 2015
 (in millions, except per share data)
Net income$397
 $242
 $1,465
Weighted average shares outstanding:     
Basic288
 239
 232
Employee stock options, RSUs, PSUs and ESPP8
 3
 5
Diluted296
 242
 237
Income per common share     
Basic$1.38
 $1.01
 $6.31
Diluted$1.34
 $1.00
 $6.18
Anti-dilutive potential common shares excluded(1)
3
 5
 1
(1)
For purposes of computing diluted income per common share, certain potentially dilutive securities have been excluded from the calculation because their effect would have been anti-dilutive.


The Company computes basic income (loss) per common share using netNet income (loss) and the weightedWeighted average number of common shares outstanding during the period. Diluted income (loss) per common share is computed using netNet income (loss) and the weightedWeighted 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 ESPPESPP. For 2018, the Company excluded common shares subject to outstanding equity awards from the calculation of diluted shares because their impact would have been anti-dilutive based on the Company’s average stock price during the period. For 2020 and 2019, the Company recorded net loss, and all shares subject to outstanding equity awards have been excluded for those periods because including them would be anti-dilutive.

103


Table of RSUs.Contents




WESTERN DIGITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


Note 15.
Acquisitions

The Consolidated Financial Statements include the results of operations of acquired companies commencing after their respective acquisition dates.

Acquisition of SanDisk

On May 12, 2016, WDT, a wholly-owned subsidiary of the Company, completed the acquisition of SanDisk (the “Merger”), a global leader in NAND-flash storage solutions. The acquisition was primarily intended to deepen the Company’s expertise in non-volatile memory and enable the Company to vertically integrate into NAND, securing long-term access to solid state technology at a lower cost.

At the SanDisk Closing Date, each issued and outstanding share of SanDisk common stock, other than shares of SanDisk common stock held in the treasury of SanDisk, shares of SanDisk common stock owned by shareholders who had validly exercised their appraisal rights under Delaware law and shares of SanDisk common stock owned by Western Digital or any subsidiary of Western Digital, was converted into the right to receive $67.50 per share in cash; and 0.2387 shares of Western Digital common stock per share of SanDisk common stock, with cash paid in lieu of fractional shares.

The aggregate purchase price of the SanDisk acquisition was $15.59 billion, consisting of $13.77 billion in cash funded with existing cash and cash from new debt, 49 million newly issued shares of the Company’s common stock with a fair value of $1.76 billion and $58 million related to the fair value of stock options and RSUs assumed. The fair value of the newly issued shares of the Company’s common stock was determined based on the closing market price of the Company’s shares of common stock on the date of the acquisition. The fair values of stock options assumed were estimated using a binomial option-pricing model.

 May 12,
2016
 (in millions)
Cash consideration$13,766
Equity consideration1,764
Fair value of assumed equity attributed to pre-combination service58
Total purchase price$15,588
Note 15. Employee Termination, Asset Impairment and Other Charges

Assets Acquired and Liabilities Assumed at Fair Value

The assets acquired and liabilities assumed were recognized at fair value as of the date of the acquisition.


WESTERN DIGITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

During 2017, the Company finalized the analysis of the purchase price resulting in adjustments of $66 million to the assessed fair value of certain acquired intangible assets; inventory; property, plant and equipment; and a portion of the deferred tax liability related to the Merger. The following table summarizes the final fair values assigned to the assets acquired and liabilities assumed:
 (in millions)
Cash and cash equivalents$3,931
Marketable securities737
Accounts receivables, net394
Inventories1,076
Other current assets770
Property, plant and equipment897
Notes receivable and investments in Flash Ventures1,012
Intangible assets4,915
Other non-current assets213
Total assets13,945
Accounts payable, accrued liabilities and other current liabilities1,058
Deferred tax liabilities595
Other long-term liabilities210
Convertible notes and related derivatives3,743
Total liabilities5,606
Net assets acquired8,339
Goodwill7,249
Total purchase price$15,588

Accounts Receivable, Net

Accounts receivable are net of allowances for program-related incentives and doubtful accounts of $262 million.

Inventories

Finished goods were valued at estimated selling prices less costs of disposal and a reasonable profit allowance for the selling effort. Work-in-process inventory was valued at estimated selling prices less costs to complete, costs of disposal and a reasonable profit allowance for the completion and selling effort, or at estimated replacement costs for certain components. Raw materials were valued at estimated replacement costs at the date of acquisition.


WESTERN DIGITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Property, Plant, and Equipment

The property, plant and equipment acquired were valued using either the replacement cost or market value approach, as appropriate, as of the date of acquisition. The following table summarizes the final fair value of the property, plant and equipment acquired and their estimated useful lives:
 
Estimated
Fair Value
 Estimated Weighted-Average Useful Life
 (in millions) (in years)
Land$73
 N/A
Buildings308
 15
Machinery and equipment478
 2
Furniture and fixtures16
 4
Leasehold improvements22
 5
Total property, plant and equipment$897
  

Identifiable Intangible Assets Acquired

The following table summarizes the final fair values and estimated useful lives of the intangibles acquired:
 
Estimated
Fair Value
 Estimated Weighted-Average Useful Life
 (in millions) (in years)
Developed technology$1,360
 2.5
Trade names and trademarks610
 7.0
Customer relationships475
 7.0
Supply agreements130
 2.5
Backlog50
 0.1
In-process research and development2,290
 N/A
Total acquired identifiable intangible assets$4,915
  

The fair values of the identifiable intangible assets acquired were estimated using an income approach. The fair value of the finite-lived intangible assets will be amortized over the estimated useful lives based on the pattern in which the economic benefits are expected to be received to cost of revenue and operating expenses. SanDisk had IPR&D projects associated with new generations of 3D NAND-flash technology, a next generation of controllers for retail products, and a new platform for enterprise solutions products that have not yet reached technological feasibility as of the date of the Merger. These projects are expected to enable increased layers in and achieve lower costs for memory products compared to existing 2D NAND-flash technology, improve controller performance and cost, and expand the range of enterprise solutions offerings. Accordingly, the Company recorded indefinite-lived intangible assets of $2.29 billion for the fair value of these projects, which will not begin amortization until they have reached technological feasibility. Until such time, the projects will be tested for impairment on an annual basis or more frequently whenever events or changes in circumstances indicate that the projects may be impaired. Once a project reaches technological feasibility, the Company will begin to amortize the intangible asset over its estimated useful life.

During 2017, acquired IPR&D projects of $1.74 billion reached technological feasibility and was reclassified to developed technology and commenced amortization over an estimated useful life of 4 years.


WESTERN DIGITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Goodwill

Goodwill represents the excess of the preliminary estimated purchase price over the sum of the estimated fair values assigned to assets acquired less liabilities assumed. Goodwill of $7.25 billion is primarily attributable to the benefits the Company expects to derive from deepening its expertise in non-volatile memory and enabling it to vertically integrate into NAND, securing long-term access to solid state technology at a lower cost. None of the goodwill is expected to be deductible for tax purposes.

Convertible Notes and Related Derivatives

On the SanDisk Closing Date, SanDisk had outstanding $997 million aggregate principal amount of the 2017 Notes and $1.50 billion aggregate principal amount of the 2020 Notes. Concurrently with the issuance of the Convertible Notes, SanDisk also purchased call options and sold warrants. The assumed liability for the Convertible Notes and related derivatives reflects the estimated fair values of the Convertible Notes and the related call options and warrants. See Note 6, Debt, for additional disclosures.

Stock-based Awards

In connection with the Merger, each outstanding SanDisk option and RSU that was unvested as of the SanDisk Closing Date and each outstanding underwater vested option was converted into equivalent options and RSUs, in each case with respect to shares of the Company’s common stock, using the equity award exchange ratio in accordance with the merger agreement. The value of these converted awards related to pre-combination expense was $58 million and is included in the aggregate purchase price. The remaining value of the converted awards represents post-combination expense and will be recognized by the Company over the remaining service periods. As of June 30, 2017 and July 1, 2016, the future expense for the remaining outstanding assumed SanDisk options and RSUs was $172 million and $347 million, respectively, which will be recognized over a weighted average service period of approximately 1.9 years and 2.7 years, respectively.

Acquisition-related Expenses

During 2016, the Company incurred $98 million of transaction expenses related to the Merger, which are included within SG&A in the Consolidated Statements of Operations. During 2016, the Company incurred merger-related charges of $30 million associated with the acceleration of certain equity awards in connection with the Merger, of which $24 million was recorded in SG&A and $6 million was recorded in R&D. The Company also incurred $35 million and $31 million of other acquisition related expenses, in 2017 and 2016, respectively, primarily consisting of retention and separation costs in connection with the Merger, which are included in SG&A.

Pro Forma Financial Information (Unaudited)

The unaudited financial information in the table below summarizes the combined results of operations of the Company and SanDisk, on a pro forma basis, as though the combination had occurred as of the beginning of 2015. The pro forma financial information presented includes the effects of adjustments related to the fair value of acquired inventory, amortization charges from acquired intangible assets, depreciation charges from acquired fixed assets, interest expenses from financing the acquisition, stock-based compensation expenses from the conversion of unvested equity awards and the elimination of certain expenses directly related to the transaction. The pro forma financial information as presented below is for informational purposes only and is not necessarily indicative of the results of operations that would have been achieved if the acquisition and any borrowings undertaken to finance the acquisition had taken place at the beginning of the earliest period presented, nor does it intend to be a projection of future results:
 2016 2015
 (in millions, except per share amounts)
Revenue$17,846
 $20,613
Net income65
 762
Basic income per common share$0.23
 $2.71
Diluted income per common share$0.23
 $2.65

WESTERN DIGITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Note 16.
Employee Termination, Asset Impairment and Other Charges


The Company recorded the following charges related to employee terminations benefits, asset impairment, and other charges:
202020192018
(in millions)
Employee termination and other charges:
Closure of Foreign Manufacturing Facilities$5 $22 $56 
Business Realignment44 144 50 
Restructuring Plan 2016  92 
Total employee termination and other charges49 166 198 
Asset impairment:
Restructuring Plan 2016  16 
Total asset impairment  16 
Stock-based compensation accelerations and adjustments:
Business Realignment  1 
Total stock-based compensation accelerations and adjustments  1 
Gain on disposition of assets:
Business Realignment(17)  
Total gain on disposition of assets(17)  
Total employee termination, asset impairment, and other charges$32 $166 $215 

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 substantially completed the closure in fiscal year 2019.

The following table presents an analysis of the components of the restructuring charges, payments and adjustments made against the reserve during the year ended July 3, 2020:

Employee Termination BenefitsContract Termination and OtherTotal
(in millions)
Accrual balance at June 28, 2019$30 $2 $32 
Charges3 2 5 
Cash payments(26)(4)(30)
Accrual balance at July 3, 2020$7 $ $7 

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WESTERN DIGITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


 2017 2016 2015
 (in millions)
Employee termination and other charges:     
Restructuring Plan 2016$128
 $77
 $
Closure of Foreign Manufacturing Facility10
 128
 
Business Realignment72
 94
 94
Total employee termination and other charges210
 299
 94
Stock-based compensation accelerations and adjustments     
Business Realignment11
 9
 
Total stock-based compensation accelerations and adjustments11
 9
 
Asset impairment:     
Restructuring Plan 2016
 5
 
Closure of Foreign Manufacturing Facility11
 24
 
Business Realignment
 8
 82
Total asset impairment11
 37
 82
Total employee termination and other charges, stock-based compensation adjustments and asset impairments$232
 $345
 $176
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, primarily consisting of organization rationalization designed to streamline its business, reduce its cost structure and focus its resources. In addition to the amounts recognized under Business Realignment as presented above, the Company recognized $5 million of accelerated depreciation on facility assets in Cost of revenue and Operating expenses in the Consolidated Statements of Operations for the year ended July 3, 2020.

The following table presents an analysis of the components of the activity against the reserve during the year ended July 3, 2020:

Employee Termination BenefitsContract Termination and OtherTotal
(in millions)
Accrual balance at June 28, 2019$37 $8 $45 
Charges38 6 44 
Cash payments(62)(14)(76)
Accrual balance at July 3, 2020$13 $ $13 

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 consistsconsisted of asset and footprint reduction,reductions, product road map consolidation and organization rationalization. In addition to the amounts recognized under Restructuring Plan 2016 for employee termination, asset impairments and other charges, as presented above, the Company recognized $65 million and $22 million during 2017 and 2016, respectively, of accelerated depreciation on facility assets and other charges in cost of revenue and operating expense. The Company expects Restructuring Plan 2016 to beThese actions were substantially completed by the endin fiscal year 2018.

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Table of calendar year 2017.Contents


The following table presents an analysis of the components of the activity against the reserve:
 Employee Termination Benefits Contract Termination and Other Total
 (in millions)
Charges$58
 $19
 $77
Cash payments(32) (19) (51)
Accrual balance at July 1, 201626
 
 26
Charges84
 44
 128
Cash payments(99) (41) (140)
Non-cash items and other
 (1) (1)
Accrual balance at June 30, 2017$11
 $2
 $13


WESTERN DIGITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)



Closure of Foreign Manufacturing Facility

In January 2016, the Company announced the closing of its head component front end wafer manufacturing facility in Odawara, Japan, in order to reduce manufacturing costs. As of June 30, 2017, the Company had completed all activities related to the closure of the facility. The following table presents an analysis of the components of the activity against the reserve:

 Employee Termination Benefits Contract Termination and Other Total
 (in millions)
Charges$119
 $9
 $128
Cash payments(104) (10) (114)
Non-cash items and other(1) 1
 
Accrual balance at July 1, 201614
 
 14
Charges1
 9
 10
Cash payments(15) (12) (27)
Non-cash items and other
 3
 3
Accrual balance at June 30, 2017$
 $
 $

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 Total
 (in millions)
Accrual balance at July 3, 2015$10
 $
 $10
Charges65
 29
 94
Cash payments(58) (23) (81)
Non-cash items and other(6) (3) (9)
Accrual balance at July 1, 201611
 3
 14
Charges68
 4
 72
Cash payments(74) (2) (76)
Non-cash items and other13
 
 13
Accrual balance at June 30, 2017$18
 $5
 $23


WESTERN DIGITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Note 17.
Note 16. Legal Proceedings

Unless otherwise stated below, for each
Tax

For disclosures regarding statutory notices 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 accrueddeficiency issued 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 accruedIRS on June 28, 2018 and December 10, 2018, and petitions filed 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 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 June 2008, Convolve, Inc. (“Convolve”) filed a complaint with the U.S. DistrictTax Court for the Eastern District of Texas against WD, HGST, and two other companies alleging infringement of U.S. Patent Nos. 6,314,473 and 4,916,635. The complaint sought unspecified monetary damages and injunctive relief. In October 2008, Convolve amended its complaint to allege infringement of only the ’473 patent. The ’473 patent allegedly relates to interface technology to select between certain modes of a disk drive’s operations relating to speed and noise. In July 2011, a verdict was rendered against WD and HGST in an amount that is not material to the Company’s financial position, results of operations or cash flows, for which the Company previously recorded an accrual. In March 2015, WD and HGST filed notices of appeal with the U.S. District Court for the Federal Circuit (“Federal Circuit”). In April 2015, Convolve filed a motion for reconsideration of the final judgment. In June 2017, the District Court vacated the judgment against WD and HGST with respect to infringement, willfulness, and damages and denied Convolve’s motion for reconsideration. WD and HGST intend to continue to defend themselves vigorously in this matter.

In May 2016, Lambeth Magnetic Structures, LLC (“Lambeth”) filed a complaint with the U.S. District Court for the Western District of Pennsylvania against WD and certain of its subsidiaries alleging infringement of U.S. Patent No. 7,128,988. The complaint seeks unspecified monetary damages and injunctive relief. The ’988 patent, entitled “Magnetic Material Structures, Devices and Methods,” allegedly relates to a magnetic material structure for hard disk drive devices. The Company intends to defend itself vigorously in this matter.

In December 2016, Memory Technologies, LLC (“MTL”), a subsidiary of Pendrell Corporation, filed two complaints - one with the International Trade Commission (“ITC”) and the other with the U.S. District Court for the Central District of California - against WD and certain of its subsidiaries alleging infringement of various patents. In the ITC complaint, MTL asserted that certain of the Company’s Secure Digital (“SD”) and microSD products infringe U.S. Patent Nos. RE45,542; RE45,486; 7,565,469; 9,063,850; and 8,307,180. The ITC complaint sought an exclusion order barring the accused products, and components thereof, from entry into the U.S. In the other complaint, MTL asserted that certain of the Company’s SD, microSD and/or eMMC products infringe the same patents asserted in the ITC complaint, as well as U.S. Patent Nos. 7,275,186; 7,827,370; and 7,739,487. The complaint sought unspecified monetary damages. In June 2017, the parties entered into a settlement and patent license agreement. The agreement fully resolves all pending litigation between the parties and grants the Company a license to Pendrell patents relating to memory and storage technologies. The settlement terms are not material to the Company’s financial position, results of operations or cash flows.


WESTERN DIGITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Antitrust

In June 2010, Ritz Camera & Image, LLC (“Ritz”) filed a complaint with the U.S. District Court for the Northern District of California, alleging that SanDisk violated federal antitrust laws by conspiring to monopolize and monopolizing the market for flash memory products. The lawsuit purports to be on behalf of direct purchasers of flash memory products sold by SanDisk and SanDisk-controlled joint ventures from June 2006 through the present. The complaint alleged that SanDisk created and maintained a monopoly by fraudulently obtaining patents and using them to restrain competition and by allegedly converting other patents for its competitive use. The complaint sought damages, injunctive relief, and fees and costs. In February 2011, Dr. Harari was dismissed as a defendant. Between 2013 and 2014, Albert Giuliano, the Chapter 7 Trustee of the Ritz bankruptcy estate, was substituted in as named plaintiff and CPM Electronics Inc., E.S.E. Electronics, Inc. and Mflash, Inc. were added as named plaintiffs. In May 2015, the District Court granted in part plaintiffs’ motion for class certification. In April 2016, the District Court granted SanDisk’s motion for summary judgment and entered judgment in SanDisk’s favor as to all of the plaintiffs’ claims. In May 2016, the plaintiffs filed a notice of appeal to the U.S. Court of Appeals for the Federal Circuit. In July 2017, the Federal Circuit affirmed the District Court’s grant of SanDisk’s motion for summary judgment.

In July 2010, Samsung Electronics Co., Ltd. (“Samsung”) filed an action against Panasonic and SD-3C LLC (“SD-3C”) with the U.S. District Court for the Northern District of California, alleging that the defendants violated federal antitrust laws and California antitrust and unfair competition laws relating to the licensing practices and operations of SD-3C. The complaint seeks damages, restitution, injunctive and declaratory relief, and fees and costs. SanDisk is not a defendant in this case, but it established SD-3C along with Panasonic and Toshiba, and the complaint includes various factual allegations concerning SanDisk. As a member of SD-3C, SanDisk could be responsible for a portion of any monetary award. Other requested relief, if granted, could result in a loss of revenue to SanDisk. In November 2015, the defendants filed a motion to dismiss. In September 2016, the District Court stayed the litigation pending the outcome of an ongoing arbitration between Samsung and Toshiba. The District Court denied the motion to dismiss without prejudice to refiling after the stay is lifted. The arbitration between Samsung and Toshiba was concluded in May 2017, and the District Court lifted its stay of the litigation in July 2017.

In March 2011, a complaint was filed against SanDisk, SD-3C, Panasonic Corporation, Panasonic Corporation of North America, Toshiba and Toshiba America Electronic Components, Inc. with the U.S. District Court for the Northern District of California. The lawsuit purports to be on behalf of a nationwide class of indirect purchasers of SD cards. The complaint asserts claims under federal antitrust laws and California antitrust and unfair competition laws, as well as common law claims. The complaint seeks damages, restitution, injunctive relief, and fees and costs. The plaintiffs allege that the defendants conspired to artificially inflate the royalty costs associated with manufacturing SD cards, which in turn allegedly caused the plaintiffs to pay higher prices for SD cards. The allegations are similar to and incorporate allegations in Samsung Electronics Co., Ltd. v. Panasonic Corp., et al., described above. In November 2015, the defendants filed a motion to dismiss the plaintiffs’ federal law claims. In October 2016, the District Court granted the defendants’ motion with leave to amend and the defendants filed a motion to dismiss the plaintiffs’ remaining claims. Discovery is presently stayed until after completion of the pleading stage. The Company intends to defend itself vigorously in this matter.


WESTERN DIGITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Securities

Beginning in March 2015, SanDisk and two of its officers, Sanjay Mehrotra and Judy Bruner, were named in three putative class action lawsuits filed with the U.S. District Court for the Northern District of California. Two complaints are allegedly brought on behalf of a class of purchasers of SanDisk’s securities between October 20142018 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.2019, see Note 13, Income Tax Expense.

Toshiba Matters

Toshiba litigation against the Company

In July 2017, the Company received a petition for provisional disposition that was filed by Toshiba Corporation and Toshiba Memory Corporation in the Tokyo District Court. The petition alleges that the Company has engaged in acts of defamation and wrongful acquisition and use of trade secrets in violation of the Unfair Competition Prevention Act. The petition requests injunctive relief.

In June 2017, Toshiba issued a press release announcing that it also brought suit for a permanent injunction, damages and payment of 120 billion Japanese yen. The Company has not received Toshiba’s announced filing or any formal notice of such lawsuit. The Company intends to defend itself vigorously in these matters.

SanDisk litigation against Toshiba

In May 2017, several of the Company’s SanDisk subsidiaries (the “SanDisk Subsidiaries”) filed a request for arbitration with the ICC International Court of Arbitration seeking an order requiring Toshiba Corporation to unwind the transfer of its interests in Flash Ventures to its affiliate, Toshiba Memory Corporation, and injunctive relief preventing Toshiba from further breaching the Flash Ventures agreements by transferring its interests in Flash Ventures without SanDisk’s consent. In June 2017, the SanDisk Subsidiaries sought preliminary injunctive relief in the Superior Court of the State of California for the County of San Francisco to prevent Toshiba from transferring its interests in Flash Ventures until the request of the SanDisk Subsidiaries for injunctive relief in arbitration is decided by the arbitral tribunal. In July 2017, the Superior Court entered a stipulated order requiring Toshiba to give the SanDisk Subsidiaries at least 14 days’ advance notice of any transfer involving Toshiba’s interests in Flash Ventures, in order to ensure that the issue is preserved for arbitration.


WESTERN DIGITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

In July 2017, SanDisk LLC filed a request for arbitration with the ICC International Court of Arbitration against Toshiba seeking damages and injunctive relief for, among other things, blocking certain employees of SanDisk’s affiliates from accessing shared databases regarding Flash Ventures and from refusing to ship certain engineering wafers and samples to SanDisk’s affiliates in breach of the JV agreements. SanDisk LLC also sought injunctive relief, a preliminary injunction and a temporary restraining order (“TRO”), in aid of that arbitration from the Superior Court of the State of California for the County of San Francisco. On July 11, 2017, the Superior Court granted a TRO in favor of SanDisk. Toshiba filed a notice of appeal, and on July 18, the California Court of Appeal, First Appellate District, issued a temporary stay of the TRO while it reviewed Toshiba’s petition for a permanent stay of the TRO pending appeal. On July 24, SanDisk LLC amended its request for arbitration to, among other things, add Toshiba Memory Corporation as a defendant. On August 2, 2017, the Court of Appeal denied Toshiba’s petition for a permanent stay of the TRO and dissolved the temporary stay. On August 14, the Superior Court granted SanDisk’s request for a preliminary injunction. On August 18, Toshiba withdrew its appeal of the TRO, and filed a notice of appeal of the preliminary injunction.

Copyright

In December 2011, the German Central Organization for Private Copying Rights (Zentralstelle für private Überspielungsrechte) (“ZPÜ”), an organization consisting of several copyright collecting societies, instituted arbitration proceedings against WD’s German subsidiary (“WD Germany”) before the Copyright Arbitration Board (“CAB”) claiming copyright levies for multimedia hard drives, external hard drives and network hard drives sold or introduced into commerce in Germany by WD Germany from January 2008 through December 2010. In February 2013, WD Germany filed a declaratory relief action against ZPÜ in the Higher Regional Court of Munich (the “Higher Court”), seeking an order from the Higher Court to determine the copyright levy issue. In May 2013, ZPÜ filed a counter-claim against WD Germany with the Higher Court, seeking copyright levies for multimedia hard drives, external hard drives and network hard drives sold or introduced into commerce from January 2008 through December 2010 based on tariffs published by ZPÜ in November 2011. In January 2015, the Higher Court ruled in favor of ZPÜ. In its ruling, the Higher Court declared that WD Germany must pay certain levies on certain products which it sold in Germany between January 2008 and December 2010. The judgment specified levy amounts on 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. The Company intends to defend itself vigorously in this matter.

In December 2014, ZPÜ submitted a pleading to the CAB seeking copyright levies for multimedia hard drives, external hard drives and network hard drives sold or introduced into commerce in Germany by WD Germany between January 2012 and December 2013. The Company intends to defend itself vigorously in this matter.

The Company has recorded an accrual for German copyright levies in an amount that is not material to the Company’s financial position, results of operations or cash flows; however, it is reasonably possible that the Company could incur losses totaling up to $155 million, inclusive of amounts accrued, if it does not prevail in this matter.


Other Matters


In the normal course of business, the Company is subject to other legal proceedings, lawsuits and other claims. Although the ultimate aggregate amount of probable monetary liability or financial impact with respect to these other matters is subject to many uncertainties, management believes that any monetary liability or financial impact to the Company from these other matters, individually and in the aggregate, would not be material to the Company’s financial condition, results of operations or cash flows. However, any monetary liability and financial impact to the Company from these other matters could differ materially from the Company’s expectations.



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WESTERN DIGITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


Note 18.Separate Financial Information of Guarantor Subsidiaries

The New Unsecured Notes are registered under the Securities Act of 1933, as amended, and have no transfer restrictions or rights to additional interest. The New Unsecured Notes are fully and unconditionally guaranteed, jointly and severally, on a senior unsecured basis, subject to certain customary guarantor release conditions, by the WD Guarantors (or the “Guarantor Subsidiaries”). The guarantee by a Guarantor Subsidiary will be released in the event of (i) the designation of a Guarantor Subsidiary as an unrestricted subsidiary under the indenture governing the New Unsecured Notes, (ii) the release of a Guarantor Subsidiary from its guarantee of indebtedness under the Credit Agreement or other indebtedness that would have required the Guarantor Subsidiary to guarantee the New Unsecured Notes, (iii) the sale, issuance or other disposition of capital stock of a Guarantor Subsidiary such that it is no longer a restricted subsidiary under the indenture governing the New Unsecured Notes, (iv) the sale of all or substantially all of a Guarantor Subsidiary’s assets, (v) the Company’s exercise of its defeasance options under the indenture governing the New Unsecured Notes, (vi) the dissolution or liquidation of a Guarantor Subsidiary or (vii) the sale of all the equity interest in a Guarantor Subsidiary. The Company’s other domestic subsidiaries and its foreign subsidiaries (collectively, the “Non-Guarantor Subsidiaries”) do not guarantee the New Unsecured Notes. The following 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.

For more information regarding the New Unsecured Notes, refer to Note 6, Debt.


WESTERN DIGITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


Note 17. Quarterly Results of Operations (unaudited)

FirstSecondThirdFourth
(in millions, except per share amounts)
2020
Revenue, net$4,040 $4,234 $4,175 $4,287 
Gross profit758 935 1,005 1,083 
Operating income (loss)(129)50 153 261 
Net income (loss)(276)(139)17 148 
Basic income (loss) per common share(0.93)(0.47)0.06 0.49 
Diluted income (loss) per common share(0.93)(0.47)0.06 0.49 

FirstSecondThirdFourth
(in millions, except per share amounts)
2019
Revenue, net$5,028 $4,233 $3,674 $3,634 
Gross profit1,664 1,044 579 465 
Operating income (loss)686 176 (394)(381)
Net income (loss)511 (487)(581)(197)
Basic income (loss) per common share1.75 (1.68)(1.99)(0.67)
Diluted income (loss) per common share1.71 (1.68)(1.99)(0.67)

107
Condensed Consolidating Balance Sheet
As of June 30, 2017
          
 Parent Guarantor Subsidiaries Non-Guarantor Subsidiaries Eliminations Total
Company
 (in millions)
ASSETS
Current assets:         
Cash and cash equivalents$18
 $1,212
 $5,124
 $
 $6,354
Short-term investments
 
 24
 
 24
Accounts receivable, net
 1,247
 701
 
 1,948
Intercompany receivable1,225
 2,528
 622
 (4,375) 
Inventories
 1,133
 1,494
 (286) 2,341
Other current assets4
 158
 221
 6
 389
Total current assets1,247
 6,278
 8,186
 (4,655) 11,056
Property, plant and equipment, net
 1,124
 1,909
 
 3,033
Notes receivable and investments in Flash Ventures
 
 1,340
 
 1,340
Goodwill
 331
 9,683
 
 10,014
Other intangible assets, net
 11
 3,812
 
 3,823
Investments in consolidated subsidiaries19,082
 17,588
 
 (36,670) 
Loans due from consolidated affiliates4,700
 16
 
 (4,716) 
Other non-current assets51
 723
 419
 (599) 594
Total assets$25,080
 $26,071
 $25,349
 $(46,640) $29,860
          
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:         
Accounts payable$
 $257
 $1,887
 $
 $2,144
Intercompany payable270
 4,039
 66
 (4,375) 
Accounts payable to Flash Ventures
 
 206
 
 206
Accrued expenses270
 360
 439
 
 1,069
Accrued compensation
 313
 193
 
 506
Accrued warranty
 4
 182
 
 186
Current portion of long-term debt233
 
 
 
 233
Total current liabilities773
 4,973
 2,973
 (4,375) 4,344
Long-term debt12,889
 
 29
 
 12,918
Loans due to consolidated affiliates
 546
 4,170
 (4,716) 
Other liabilities
 1,243
 530
 (593) 1,180
Total liabilities13,662
 6,762
 7,702
 (9,684) 18,442
Total shareholders’ equity11,418
 19,309
 17,647
 (36,956) 11,418
Total liabilities and shareholders’ equity$25,080
 $26,071
 $25,349
 $(46,640) $29,860



WESTERN DIGITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)Table of Contents

Condensed Consolidating Balance Sheet
As of July 1, 2016
          
 Parent Guarantor Subsidiaries Non-Guarantor Subsidiaries Eliminations Total
Company
 (in millions)
ASSETS
Current assets:         
Cash and cash equivalents$
 $1,206
 $6,945
 $
 $8,151
Short-term investments
 
 227
 
 227
Accounts receivable, net
 985
 476
 
 1,461
Intercompany receivable934
 886
 2,546
 (4,366) 
Inventories
 896
 1,450
 (217) 2,129
Other current assets4
 276
 379
 (43) 616
Total current assets938
 4,249
 12,023
 (4,626) 12,584
Property, plant and equipment, net
 1,265
 2,238
 
 3,503
Notes receivable and investments in Flash Ventures
 
 1,171
 
 1,171
Goodwill
 324
 9,627
 
 9,951
Other intangible assets, net
 28
 5,006
 
 5,034
Investments in consolidated subsidiaries18,009
 27,020
 
 (45,029) 
Loans due from consolidated affiliates6,000
 55
 
 (6,055) 
Other non-current assets50
 33
 702
 (166) 619
Total assets$24,997
 $32,974
 $30,767
 $(55,876) $32,862
          
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:         
Accounts payable$
 $239
 $1,649
 $
 $1,888
Intercompany payable119
 4,043
 204
 (4,366) 
Accounts payable to Flash Ventures
 
 168
 
 168
Accrued expenses109
 462
 404
 20
 995
Accrued compensation
 222
 170
 
 392
Accrued warranty
 4
 168
 
 172
Bridge loan
 2,995
 
 
 2,995
Current portion of long-term debt14
 
 325
 
 339
Total current liabilities242
 7,965
 3,088
 (4,346) 6,949
Long-term debt13,610
 
 50
 
 13,660
Loans due to consolidated affiliates
 6,000
 55
 (6,055) 
Other liabilities
 862
 475
 (229) 1,108
Total liabilities13,852
 14,827
 3,668
 (10,630) 21,717
Total shareholders’ equity11,145
 18,147
 27,099
 (45,246) 11,145
Total liabilities and shareholders’ equity$24,997
 $32,974
 $30,767
 $(55,876) $32,862

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)
Revenue, net$
 $14,732
 $16,381
 $(12,020) $19,093
Cost of revenue
 12,786
 12,203
 (11,968) 13,021
Gross profit
 1,946
 4,178
 (52) 6,072
Operating expenses:         
Research and development
 1,619
 822
 
 2,441
Selling, general and administrative6
 1,006
 433
 
 1,445
Intercompany operating expense (income)
 (1,736) 1,736
 
 
Employee termination, asset impairment, and other charges
 88
 144
 
 232
Total operating expenses6
 977
 3,135
 
 4,118
Operating income (loss)(6) 969
 1,043
 (52) 1,954
Interest and other income (expense):         
Interest income347
 11
 22
 (354) 26
Interest expense(843) (10) (348) 354
 (847)
Other income (expense), net(290) 49
 (61) (62) (364)
Total interest and other income (expense), net(786) 50
 (387) (62) (1,185)
Income (loss) before taxes(792) 1,019
 656
 (114) 769
Income tax expense (benefit)(282) 259
 395
 
 372
Equity in earnings from subsidiaries907
 287
 
 (1,194) 
Net income$397
 $1,047
 $261
 $(1,308) $397


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)
Revenue, net$
 $12,600
 $13,285
 $(12,891) $12,994
Cost of revenue
 11,796
 10,662
 (12,899) 9,559
Gross profit
 804
 2,623
 8
 3,435
Operating expenses:         
Research and development
 1,095
 532
 
 1,627
Selling, general and administrative4
 645
 348
 
 997
Intercompany operating expense (income)
 (1,087) 1,087
 
 
Employee termination, asset impairment, and other charges
 105
 240
 
 345
Total operating expenses4
 758
 2,207
 
 2,969
Operating income (loss)(4) 46
 416
 8
 466
Interest and other income (expense):         
Interest income54
 2
 24
 (54) 26
Interest expense(184) (128) (8) 54
 (266)
Other income (expense), net11
 (30) (54) 
 (73)
Total interest and other expense, net(119) (156) (38) 
 (313)
Income (loss) before taxes(123) (110) 378
 8
 153
Income tax benefit(44) (27) (18) 
 (89)
Equity in earnings from subsidiaries321
 400
 
 (721) 
Net income$242
 $317
 $396
 $(713) $242


WESTERN DIGITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Condensed Consolidating Statement of Operations
For the year ended July 3, 2015
          
 Parent Guarantor Subsidiaries Non-Guarantor Subsidiaries Eliminations Total
Company
 (in millions)
Revenue, net$
 $14,942
 $15,356
 $(15,726) $14,572
Cost of revenue
 14,086
 11,935
 (15,670) 10,351
Gross profit
 856
 3,421
 (56) 4,221
Operating expenses:         
Research and development
 1,191
 455
 
 1,646
Selling, general and administrative4
 548
 236
 
 788
Intercompany operating expense (income)
 (1,237) 1,237
 
 
Employee termination, asset impairment and other charges
 49
 127
 
 176
Total operating expenses4
 551
 2,055
 
 2,610
Operating income (loss)(4) 305
 1,366
 (56) 1,611
Other income (expense):         
Interest income
 3
 12
 (1) 14
Interest expense
 (46) (4) 1
 (49)
Other income (expense), net
 
 1
 
 1
Total other expense, net
 (43) 9
 
 (34)
Income (loss) before income taxes(4) 262
 1,375
 (56) 1,577
Income tax expense (benefit)(1) 108
 5
 
 112
Equity in earnings from consolidated subsidiaries1,468
 1,381
 
 (2,849) 
Net income$1,465
 $1,535
 $1,370
 $(2,905) $1,465


WESTERN DIGITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Condensed Consolidating Statement of Comprehensive Income (Loss)
For the year ended June 30, 2017
          
 Parent Guarantor Subsidiaries Non-Guarantor Subsidiaries Eliminations Total
Company
 (in millions)
Net income$397
 $1,047
 $261
 $(1,308) $397
Other comprehensive loss, before tax:         
Actuarial pension gain39
 39
 39
 (78) 39
Foreign currency translation adjustment(115) (113) (136) 249
 (115)
Net unrealized loss on derivative contracts(77) (77) (75) 152
 (77)
Net unrealized gain on available-for-sale securities2
 2
 2
 (4) 2
Total other comprehensive loss, before tax(151) (149) (170) 319
 (151)
Income tax expense related to items of other comprehensive loss(10) (10) (8) 18
 (10)
Other comprehensive loss, net of tax(161) (159) (178) 337
 (161)
Total comprehensive income$236
 $888
 $83
 $(971) $236

Condensed Consolidating Statement of Comprehensive Income (Loss)
For the year ended July 1, 2016
          
 Parent Guarantor Subsidiaries Non-Guarantor Subsidiaries Eliminations Total
Company
 (in millions)
Net income$242
 $317
 $396
 $(713) $242
Other comprehensive income, before tax:         
Actuarial pension loss(73) (73) (73) 146
 (73)
Foreign currency translation adjustment74
 74
 74
 (148) 74
Net unrealized gain on derivative contracts99
 99
 93
 (192) 99
Total other comprehensive income, before tax100
 100
 94
 (194) 100
Income tax benefit related to items of other comprehensive income23
 23
 23
 (46) 23
Other comprehensive income, net of tax123
 123
 117
 (240) 123
Total comprehensive income$365
 $440
 $513
 $(953) $365


WESTERN DIGITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Condensed Consolidating Statement of Comprehensive Income (Loss)
For the year ended July 3, 2015
          
 Parent Guarantor Subsidiaries Non-Guarantor Subsidiaries Eliminations Total
Company
 (in millions)
Net income$1,465
 $1,535
 $1,370
 $(2,905) $1,465
Other comprehensive income (loss), before tax:         
Actuarial pension loss(2) (2) (2) 4
 (2)
Net unrealized gain (loss) on derivative contracts(30) (30) (25) 55
 (30)
Total other comprehensive loss, before tax(32) (32) (27) 59
 (32)
Income tax benefit related to items of other comprehensive income (loss)
 
 
 
 
Other comprehensive loss, net of tax(32) (32) (27) 59
 (32)
Total comprehensive income$1,433
 $1,503
 $1,343
 $(2,846) $1,433


WESTERN DIGITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Condensed Consolidating Statement of Cash Flows
For the year ended June 30, 2017
          
 Parent Guarantor Subsidiaries Non-Guarantor Subsidiaries Eliminations Total
Company
 (in millions)
Cash flows from operating activities         
Net cash provided by (used in) operating activities$(360) $(836) $4,593
 $40
 $3,437
Cash flows from investing activities         
Purchases of property, plant and equipment
 (240) (338) 
 (578)
Proceeds from the sale of property, plant and equipment
 
 21
 
 21
Purchases of investments
 
 (281) 
 (281)
Proceeds from sale of investments
 
 94
 
 94
Proceeds from maturities of investments
 
 417
 
 417
Investments in Flash Ventures
 
 (20) 
 (20)
Notes receivable issuances to Flash Ventures
 
 (549) 
 (549)
Notes receivable proceeds from Flash Ventures
 
 292
 
 292
Strategic investments and other, net
 (1) (31) 
 (32)
Intercompany loan from consolidated affiliates1,300
 39
 
 (1,339) 
Advances from (to) parent and consolidated affiliates(158) 166
 
 (8) 
Net cash provided by (used in) investing activities1,142
 (36) (395) (1,347) (636)
Cash flows from financing activities         
Issuance of stock under employee stock plans235
 
 
 
 235
Taxes paid on vested stock awards under employee stock plans(124) 
 
 
 (124)
Excess tax benefits from employee stock plans119
 
 
 
 119
Proceeds from acquired call option
 
 61
 
 61
Settlement of convertible debt
 
 (492) 
 (492)
Dividends paid to shareholders(574) 
 
 
 (574)
Settlement of debt hedge contracts
 (21) 
 
 (21)
Repayment of debt(8,702) (2,995) 
 
 (11,697)
Proceeds from debt7,908
 
 
 
 7,908
Debt issuance costs(10) 
 
 
 (10)
Intercompany loan from (to) consolidated affiliates
 (5,454) 4,115
 1,339
 
Change in investment in consolidated subsidiaries384
 9,348
 (9,700) (32) 
Net cash provided by (used in) financing activities(764) 878
 (6,016) 1,307
 (4,595)
Effect of exchange rate changes on cash
 
 (3) 
 (3)
Net increase (decrease) in cash and cash equivalents18
 6
 (1,821) 
 (1,797)
Cash and cash equivalents, beginning of year
 1,206
 6,945
 
 8,151
Cash and cash equivalents, end of year$18
 $1,212
 $5,124
 $
 $6,354


WESTERN DIGITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Condensed Consolidating Statement of Cash Flows
For the year ended July 1, 2016
          
 Parent Guarantor Subsidiaries Non-Guarantor Subsidiaries Eliminations Total
Company
 (in millions)
Cash flows from operating activities         
Net cash provided by (used in) operating activities$(210) $1,018
 $1,299
 $(124) $1,983
Cash flows from investing activities         
Purchases of property, plant and equipment
 (233) (351) 
 (584)
Acquisitions, net of cash acquired
 (13,767) 3,932
 
 (9,835)
Purchases of investments
 
 (632) 
 (632)
Proceeds from sale of investments
 
 1,204
 
 1,204
Proceeds from maturities of investments
 
 405
 
 405
Notes receivable issuances to Flash Ventures
 
 (106) 
 (106)
Notes receivable proceeds from Flash Ventures
 
 16
 
 16
Strategic investments and other, net(34) (10) (32) 
 (76)
Intercompany loans from (to) consolidated affiliates(6,000) 40
 
 5,960
 
Advances to consolidated affiliates(8,845) (96) (229) 9,170
 
Net cash provided by (used in) investing activities(14,879) (14,066) 4,207
 15,130
 (9,608)
Cash flows from financing activities         
Issuance of stock under employee stock plans117
 
 
 
 117
Taxes paid on vested stock awards under employee stock plans(50) 
 
 
 (50)
Excess tax benefits from employee stock plans7
 
 
 
 7
Proceeds from acquired call option
 
 409
 
 409
Settlement of convertible debt
 
 (2,611) 
 (2,611)
Repurchases of common stock(60) 
 
 
 (60)
Proceeds from revolving credit facility
 125
 
��
 125
Repayment of revolving credit facility
 (125) (255) 
 (380)
Dividends paid to shareholders(464) 
 
 
 (464)
Repayment of debt
 (2,313) 
 
 (2,313)
Proceeds from debt14,108
 3,000
 
 
 17,108
Debt issuance costs(497) (27) 
 
 (524)
Payment upon settlement of acquired warrants
 
 (613) 
 (613)
Intercompany loan from (to) consolidated affiliates
 6,000
 (40) (5,960) 
Change in investment in consolidated subsidiaries1,928
 6,933
 185
 (9,046) 
Net cash provided by (used in) financing activities15,089
 13,593
 (2,925) (15,006) 10,751
Effect of exchange rate changes on cash
 
 1
 
 1
Net increase in cash and cash equivalents
 545
 2,582
 
 3,127
Cash and cash equivalents, beginning of year
 661
 4,363
 
 5,024
Cash and cash equivalents, end of year$
 $1,206
 $6,945
 $
 $8,151


WESTERN DIGITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Condensed Consolidating Statement of Cash Flows
For the year ended July 3, 2015
          
 Parent Guarantor Subsidiaries Non-Guarantor Subsidiaries Eliminations Total
Company
 (in millions)
Cash flows from operating activities         
Net cash provided by operating activities$23
 $150
 $2,066
 $3
 $2,242
Cash flows from investing activities         
Purchases of property, plant and equipment
 (189) (423) 
 (612)
Acquisitions, net of cash acquired
 (16) (241) 
 (257)
Purchases of investments
 (130) (727) 
 (857)
Proceeds from sale of investments
 463
 42
 
 505
Proceeds from maturities of investments
 167
 96
 
 263
Strategic investments and other, net
 6
 (1) 
 5
Return of capital from subsidiaries
 255
 
 (255) 
Intercompany loan to consolidated affiliates
 (60) 
 60
 
Advances to (from) parent and consolidated affiliates1,015
 (114) 2
 (903) 
Net cash provided by (used in) investing activities1,015
 382
 (1,252) (1,098) (953)
Cash flows from financing activities         
Issuance of stock under employee stock plans212
 
 
 
 212
Taxes paid on vested stock awards under employee stock plans(64) 
 
 
 (64)
Excess tax benefits from employee stock plans19
 
 
 
 19
Repurchases of common stock(970) 
 
 
 (970)
Dividends paid to shareholders(396) 
 
 
 (396)
Repayment of debt
 (125) 
 
 (125)
Proceeds from debt
 
 255
 
 255
Return of capital to parent
 
 (255) 255
 
Intercompany loan from parent
 
 60
 (60) 
Change in investment in consolidated subsidiaries161
 (1,071) 10
 900
 
Net cash provided by (used in) financing activities(1,038) (1,196) 70
 1,095
 (1,069)
Net increase (decrease) in cash and cash equivalents
 (664) 884
 
 220
Cash and cash equivalents, beginning of year
 1,325
 3,479
 
 4,804
Cash and cash equivalents, end of year$
 $661
 $4,363
 $
 $5,024


WESTERN DIGITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Note 19.Quarterly Results of Operations (unaudited)
 First Second Third Fourth
 (in millions, except per share amounts)
2017       
Revenue, net$4,714
 $4,888
 $4,649
 $4,842
Gross profit1,335
 1,533
 1,523
 1,681
Operating income232
 545
 525
 652
Net income (loss)(366) 235
 248
 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
 First Second Third Fourth
 (in millions, except per share amounts)
2016       
Revenue, net$3,360
 $3,317
 $2,822
 $3,495
Gross profit955
 906
 753
 821
Operating income (loss)322
 251
 88
 (195)
Net income (loss)283
 251
 74
 (366)
        
Basic income (loss) per common share$1.23
 $1.08
 $0.32
 $(1.40)
Diluted income (loss) per common share$1.21
 $1.07
 $0.32
 $(1.40)

WESTERN DIGITAL CORPORATION
SCHEDULE II — CONSOLIDATED VALUATION AND QUALIFYING ACCOUNTS

 Allowance for Doubtful Accounts
 (in millions)
Balance at July 3, 2015$7
Balance assumed as a result of SanDisk acquisition6
Deductions(3)
Balance at July 1, 201610
Additions charged to operations3
Deductions(3)
Balance at June 30, 2017$10

Item 9.Changes in and Disagreements With Accountants on Accounting and Financial Disclosure

Item 9.Changes in and Disagreements With Accountants on Accounting and Financial Disclosure

None.


Item 9A.Controls and Procedures

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,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 30, 2017,July 3, 2020, 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, fixed assets, supplier management and indirect procure-to-pay 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.

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Inherent Limitations of Effectiveness of Controls


Our management, including our Chief Executive Officer and our Chief Financial Officer, does not expect our internal controls over financial reporting will prevent all error and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the benefits of controls must be considered relative to their costs. Because of the inherent limitations in a system of internal control over financial reporting, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control. The design of any system of controls is also based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.



Item 9B.Other Information

Item 9B.Other Information

None.




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PART III


Item 10.Director, Executive Officers and Corporate Governance

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 20172020 Annual Meeting of Stockholders, which will be filed with the SEC no later than 120 days after the close of the fiscal year ended June 30, 2017.July 3, 2020. 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 NASDAQNasdaq 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

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 20172020 Annual Meeting of Stockholders, which will be filed with the SEC no later than 120 days after the close of the fiscal year ended June 30, 2017.July 3, 2020.


Item 12.Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

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 20172020 Annual Meeting of Stockholders, which will be filed with the SEC no later than 120 days after the close of the fiscal year ended June 30, 2017.July 3, 2020.


Item 13.Certain Relationships and Related Transactions, and Director Independence

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 20172020 Annual Meeting of Stockholders, which will be filed with the SEC no later than 120 days after the close of the fiscal year ended June 30, 2017.July 3, 2020.


Item 14.Principal Accounting Fees and Services

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 20172020 Annual Meeting of Stockholders, which will be filed with the SEC no later than 120 days after the close of the fiscal year ended June 30, 2017.July 3, 2020.



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PART IV


Item 15.Exhibits, Financial Statement Schedules

Item 15.Exhibits and Financial Statement Schedules

The following documents are filed as a part of this Annual Report on Form 10‑K:


(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.

(1)Financial Statements. The financial statements included in Part II, Item 8 of this document are filed as part of this Annual Report on Form 10‑K.
(2)
Financial Statement Schedules. The financial statement schedule included in Part II, Item 8 of this document is filed as part of this Annual Report on Form 10‑K.


(2)Financial Statement Schedules.

All other schedules are omitted as the required information is immaterial, inapplicable or the information is presented in the Consolidated Financial Statements or related Notes.


Separate financial statements have been omitted as we are primarily an operating company and our subsidiaries are wholly or majority owned and do not have minority equity interests and/or indebtedness to any person other than us(3)Exhibits. The exhibits listed in amounts which together exceed 5% of the total consolidated assets as shown by the most recent year-end Consolidated Balance Sheet.

(3)
Exhibits. The exhibits listed in the Exhibit Index (following the signature page of the Annual Report on Form 10‑K)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.

Item 16.Form 10‑K Summary

None.


SIGNATURES

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, 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 signed on its behalf byspecified in such agreements and are subject to more recent developments, which may not be fully reflected in our public disclosures, (iii) may reflect the undersigned, thereunto duly authorized.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.

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EXHIBIT INDEX
WESTERN DIGITAL CORPORATION
By:/s/ MARK P. LONG
Mark P. Long
President WD Capital, Chief Strategy Officer and Chief Financial Officer
(Principal Financial Officer and Principal Accounting Officer)
Dated: August 28, 2017

Pursuant to the requirements of the Securities Exchange Act of 1934, this Annual Report on Form 10‑K has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
SignatureTitleDate
/s/ STEPHEN D. MILLIGAN
Chief Executive Officer, Director
(Principal Executive Officer)
August 28, 2017
Stephen D. Milligan
/s/ MARK P. LONG
President WD Capital, Chief Strategy Officer and Chief Financial Officer
(Principal Financial Officer and Principal Accounting Officer)
August 28, 2017
Mark P. Long
/s/ MATTHEW E. MASSENGILLChairman of the BoardAugust 28, 2017
Matthew E. Massengill
/s/ MARTIN I. COLEDirectorAugust 28, 2017
Martin I. Cole
/s/ KATHLEEN A. COTEDirectorAugust 28, 2017
Kathleen A. Cote
/s/ HENRY T. DENERODirectorAugust 28, 2017
Henry T. DeNero
/s/ MICHAEL D. LAMBERTDirectorAugust 28, 2017
Michael D. Lambert
/s/ LEN J. LAUERDirectorAugust 28, 2017
Len J. Lauer
/s/ PAULA A. PRICEDirectorAugust 28, 2017
Paula A. Price


EXHIBIT INDEX
Exhibit
Number
Description
Exhibit
Number3.1
Description
2.1Agreement 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)±
3.1Amended 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 FebruaryMay 2, 20172018 (Filed as Exhibit 3.2 to the Company’s Quarterly Report on Form 10-Q (File No. 1-08703) with the Securities and Exchange Commission on February 7, 2017)
4.1Indenture (including Form of 7.375% Senior Secured Notes due 2023), dated as of April 13, 2016, among Western Digital Corporation; HGST, Inc., WD Media, LLC, Western Digital (Fremont), LLC and Western Digital Technologies, Inc., as guarantors; and U.S. Bank National Association, as trustee and collateral agent (Filed as Exhibit 4.1 to the Company’s Current Report on Form 8-K (File No. 1-08703) with the Securities and Exchange Commission on April 14, 2016)
4.2First Supplemental Indenture to the Indenture filed as Exhibit 4.1 hereto, dated as of May 12, 2016, among Western Digital Corporation, the subsidiary guarantors party thereto and U.S. Bank National Association, as trustee and collateral agent (Filed as Exhibit 4.33.1 to the Company’s Current Report on Form 8-K (File No. 1-08703) with the Securities and Exchange Commission on May 12, 2016)7, 2018)
4.3Indenture (including FormDescription of 10.500% Senior Unsecured Notes due 2024), dated as of April 13, 2016, among Western Digital Corporation; HGST, Inc., WD Media, LLC, Western Digital (Fremont), LLC and Western Digital Technologies, Inc., as guarantors; and U.S. Bank National Association, as trusteeCorporation’s Capital Stock (Filed as Exhibit 4.24.1 to the Company’s CurrentAnnual Report on Form 8-K10-K (File No. 1-08703) with the Securities and Exchange Commission on April 14, 2016)August 27, 2019)
4.4First Supplemental Indenture to the Indenture filed as Exhibit 4.3 hereto, dated as of May 12, 2016, among Western Digital Corporation, the subsidiary guarantors party thereto and U.S. Bank National Association, as trustee (Filed as Exhibit 4.4 to the Company’s Current Report on Form 8-K (File No. 1-08703) with the Securities and Exchange Commission on May 12, 2016)
4.5Indenture (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)
4.6First Supplemental Indenture to the Indenture filed as Exhibit 4.54.2 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)
10.1Indenture (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 Amended and Restated 20042017 Performance Incentive Plan, amended and restated as of August 5, 20157, 2019 (Filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K (File No. 1-08703) with the Securities and Exchange Commission on November 5, 2015)14, 2019)*
Form of Notice of Grant of Stock Option and Option Agreement - Executives, 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 October 28, 2011)*
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 - Financial Measures, under 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 November 6, 2018)*
Form of Notice of Grant of Performance Stock Units and Performance Stock Unit Award Agreement - TSR Measure, under 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 6, 2018)*
Form of Notice of Grant of Performance Stock Units and Performance Stock Unit Award Agreement - Financial Measures, under 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 November 12, 2019)*
Form of Notice of Grant of Performance Stock Units and Performance Stock Unit Award Agreement - TSR Measure, under 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 12, 2019)*
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)*
10.1.2Form of Notice of Grant of Stock Option and Option Agreement - Non-Executives, as amended on November 3, 2015, under the Western Digital Corporation Amended and Restated 2004 Performance Incentive Plan (Filed as Exhibit 10.1.2 to the Company’s Quarterly Report on Form 10-Q (File No. 1-08703) with the Securities and Exchange Commission on February 10, 2016)*
10.1.3Form 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)*
112

Table of Contents
10.1.4Exhibit
Number
Description
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)*
10.1.5Form of Notice of Grant of Performance Stock Units and Performance Stock Unit Award Agreement - Executives, as amended on November 3, 2015, under the Western Digital Corporation Amended and Restated 20042017 Performance Incentive Plan (Filed as Exhibit 10.1.5 to the Company’s Quarterly Report on Form 10-Q (File No. 1-08703) with the Securities and Exchange Commission on February 10, 2016)*
10.1.6Form of Notice of Grant of Performance Stock Units and PerformanceNon-Employee Director Restricted Stock Unit Award Agreement for Mark Long, dated September 17, 2015, under the Western Digital Corporation Amended and Restated 2004 Performance Incentive PlanGrant 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 November 10, 2015)February 6, 2018)*

Exhibit
Number10.1.12
Description
10.1.7Form of Notice of Grant of PerformanceRestricted Stock Units and PerformanceRestricted Stock Unit Award Agreement (revised March 2016)- Vice President and Above under the Western Digital Corporation Amended and Restated 20042017 Performance Incentive Plan (Filed as Exhibit 10.110.3 to the Company’s Quarterly Report on Form 10-Q (File No. 1-08703) with the Securities and Exchange Commission on November 6, 2018)*
Form of Notice of Grant of Restricted Stock Units and Restricted Stock Unit Award Agreement - Vice President and Above under the Western Digital Corporation 2017 Performance Incentive Plan (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 November 12, 2019)*
Form of Notice of Grant of Restricted Stock Units and Restricted Stock Unit Award Agreement under the Western Digital Corporation 2017 Performance Incentive Plan (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 6, 2018)*
Notice of Grant of Restricted Stock Units and Restricted Stock Unit Award Agreement – CEO Sign-On Award (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 May 9, 2016)8, 2020)*
10.1.8Western Digital Corporation Amended and Restated 2004 Performance Incentive Plan Non-Employee Director Option Grant Program, as amended September 6, 2012, and Form of Notice of Grant of Performance Stock OptionUnits and Option Agreement - Non-Employee DirectorsPerformance Stock Unit Award – TSR Measure (CEO Sign-On Award) (Filed as Exhibit 10.510.3 to the Company’s Quarterly Report on Form 10-Q (File No. 1-08703) with the Securities and Exchange Commission on November 2, 2012)May 8, 2020)*
10.1.9Western Digital Corporation Amended and Restated 2004 PerformanceExecutive Short-Term Incentive Plan Non-Employee Director Restricted Stock Unit Grant Program, as amended November 4, 2016(supersedes the Western Digital Corporation Incentive Compensation Plan), dated August 7, 2019 (Filed as Exhibit 10.110.4 to the Company’s Quarterly Report on Form 10-Q10‑Q (File No. 1-08703) with the Securities and Exchange Commission on February 7, 2017)November 12, 2019)*
10.1.10Western Digital Corporation Incentive Compensation Plan, as Amended and Restated 2005 Employee Stock Purchase Plan, as amended August 5, 20152, 2018 (Filed as Exhibit 10.1.810.2 to the Company’s AnnualCurrent Report on Form 10‑K8-K (File No. 1-08703) with the Securities and Exchange Commission on August 21, 2015)November 7, 2018)*
10.2Western 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)*
10.3SanDisk 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)*
10.4Western Digital Corporation Summary of Compensation Arrangements for Named Executive Officers and Directors†*
10.5Amended 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)*
Amended and Restated Employment Agreement, dated as of September 6, 2012, between Western Digital Corporation and Stephen D. Milligan (Filed as Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q (File No. 1-08703) with the Securities and Exchange Commission on November 2, 2012)*
10.7Separation and General Release Agreement, dated August 3, 2016, between Western Digital Technologies, Inc. and Olivier C. Leonetti (Filed as Exhibit 10.8 to the Company’s Annual Report on Form 10‑K (File No. 1-08703) with the Securities and Exchange Commission on August 29, 2016)*
10.8Western 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)*
10.9Western 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)*
10.10Form 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)*
10.11Form 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)*
10.12Form of Indemnification Agreement entered into between SanDisk Corporation and its directors and officers (Filed as Exhibit 3.2 to SanDisk Corporation’s Registration Statement on Form S-1 (File No. 33-96298) with the Securities and Exchange Commission on August 29, 1995)*
10.13Change of Control Executive Benefits Agreement, effective as of January 1, 2015, by and between SanDisk Corporation and Sanjay Mehrotra (Filed as Exhibit 10.4 to SanDisk Corporation’s Annual Report on Form 10‑K (File No. 000-26734) with the Securities and Exchange Commission on February 10, 2015)*
10.14Letter Agreement Clarifying Change of Control Executive Benefits, by and between Western Digital Corporation, SanDisk Corporation and Sanjay Mehrotra, dated as of May 12, 2016 (Filed as Exhibit 10.1610.10 to the Company’s Annual Report on Form 10‑K10-K (File No. 1-08703) with the Securities and Exchange Commission on August 29, 2016)24, 2018)*
10.15Offer Letter, dated as of February 18, 2020, to David Goeckeler (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 8, 2020)*
Retention Agreement, dated April 1, 2020, with Michael Cordano†*
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)
10.16Amendment 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)
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10.17Exhibit
Number
Description
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)

Exhibit
Number10.13.3
Description
10.18Amendment 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)
10.19Amendment 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)
10.20Amendment 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)
Amendment No. 9, dated as of April 29, 2019, 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 10.2 to the Company’s Quarterly Report on Form 10-Q (File No. 1-08703) with the Securities and Exchange Commission on May 7, 2019)
Amendment No. 10, dated as of July 2, 2020, to the Loan Agreement dated as of April 29, 2016, by and between Western Digital Corporation and JPMorgan Chase Bank, N.A., as administrative agent†
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)
10.21Security Agreement, dated as of May 12, 2016, by and among Western Digital Corporation, the subsidiary guarantors party thereto and U.S. Bank National Association, as trustee and collateral agent (Filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K (File No. 1-08703) with the Securities and Exchange Commission on May 12, 2016)
10.22Security 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)
10.23Assumption and Supplement to Guaranty Agreement, dated as of May 12, 2016, by and among the new guarantor (as defined therein) and JPMorgan Chase Bank, N.A. as administrative agent (Filed as Exhibit 10.3 to the Company’s Current Report on Form 8-K (File No. 1-08703) with the Securities and Exchange Commission on May 12, 2016)
10.24Flash 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)#
10.257Operating 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)#
10.26Joint 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)#
10.27New 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‑K10-K (File No. 000-26734) with the Securities and Exchange Commission on February 12, 2016)#
12.1StatementFAL Commitment and Extension Agreement, dated as of Computation of Ratio of EarningsDecember 12, 2017, by and among Western Digital Corporation, SanDisk LLC, SanDisk (Ireland) Limited and Toshiba Memory Corporation (Filed as Exhibit 10.6 to Fixed Charges†the Company’s Quarterly Report on Form 10-Q (File No. 1-08703) with the Securities and Exchange Commission on February 6, 2018)#
23Y6 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)#
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Exhibit
Number
Description
K1 Facility Agreement, dated as of May 15, 2019, by and among Western Digital, SanDisk LLC, SanDisk (Cayman) Limited, SanDisk (Ireland) Limited, SanDisk Flash B.V., Flash Partners, Ltd., Flash Alliance, Ltd., Flash Forward Ltd., Toshiba Memory Corporation and Toshiba Memory Corporation Iwate (Filed as Exhibit 10.21 to the Company’s Annual Report on Form 10-K (File No. 1-08703) with the Securities and Exchange Commission on August 27, 2019##
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)#
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)#
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.INSXBRL Instance Document†Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.
101.SCHXBRL Taxonomy Extension Schema Document†
101.CALXBRL Taxonomy Extension Calculation Linkbase Document†
101.LABXBRL Taxonomy Extension Label Linkbase Document†
101.PREXBRL Taxonomy Extension Presentation Linkbase Document†
101.DEFXBRL Taxonomy Extension Definition Linkbase Document†
104Cover Page Interactive Data File - formatted in Inline XBRL and contained in Exhibit 101

† 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.
# 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.
## As permitted by Regulation S-K, Item 601(b)(10)(iv) of the Securities Exchange Act of 1934, as amended, certain confidential portions of this exhibit have been redacted from the publicly filed document.


Item 16.Form 10-K Summary

None.

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SIGNATURES

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.
Filed with this report.WESTERN DIGITAL CORPORATION
**Furnished with this report.By:/s/ Gene Zamiska
Gene Zamiska
Vice President, Global Accounting and Chief Accounting Officer
(Principal Accounting Officer)
Dated: August 27, 2020

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.
*SignatureManagement contract or compensatory plan or arrangement required to be filed as an exhibit pursuant to applicable rules of the Securities and Exchange Commission.TitleDate
±/s/ David V. GoeckelerCertain 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.Chief Executive Officer, Director
(Principal Executive Officer)
August 27, 2020
David V. Goeckeler
#Pursuant to a request for confidential treatment, certain portions
/s/ Robert K. EulauExecutive Vice President and Chief Financial Officer
(Principal Financial Officer)
August 27, 2020
Robert K. Eulau
/s/ Gene ZamiskaVice President, Global Accounting and Chief Accounting Officer
(Principal Accounting Officer)
August 27, 2020
Gene Zamiska
/s/ Matthew E. MassengillChairman 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.BoardAugust 27, 2020
Matthew E. Massengill
/s/ Kimberly E. AlexyDirectorAugust 27, 2020
Kimberly E. Alexy
/s/ Martin I. ColeDirectorAugust 27, 2020
Martin I. Cole
/s/ Kathleen A. CoteDirectorAugust 27, 2020
Kathleen A. Cote
/s/ Tunҫ Doluca
DirectorAugust 27, 2020
Tunҫ Doluca
/s/ Paula A. PriceDirectorAugust 27, 2020
Paula A. Price
/s/ Stephanie A. StreeterDirectorAugust 27, 2020
Stephanie A. Streeter


147
116