~~The Company believes that adequate provision has been made for any adjustments that may result from tax examinations. However, the outcome~~

Table 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 April 1, 2016, it is not possible to estimate the amount of change, if any, in the unrecognized tax benefits that is reasonably possible within the next twelve months. Any significant change in the amount of the Company’s liability for unrecognized tax benefits would most likely result from additional information or settlements relating to the examination of the Company’s tax returns.

~~7. Fair Value Measurements~~WESTERN DIGITAL CORPORATION

~~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:~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

~~Level 1.~~ ~~Quoted prices in active markets for identical assets or liabilities.~~(Unaudited)

~~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 April 1, 2016 and July 3, 2015, and indicate the fair value hierarchy of the valuation techniques utilized to determine such values (in millions):

Fair Value Measurements at
April 1, 2016
Using
Level 1 Level 2 Level 3 Total
Assets:
Cash equivalents:
Money market funds $ 231
$ —
$ —
$ 231
Total cash equivalents 231
—
—
231
Short-term investments:
Certificates of deposit —
146
—
146
Total short-term investments —
146
—
146
Foreign exchange contracts —
31
—
31
Total assets at fair value $ 231
$ 177
$ —
$ 408

Fair Value Measurements at
July 3, 2015
Using
Level 1 Level 2 Level 3 Total
Assets:
Cash equivalents:
Money market funds $ 135
$ —
$ —
$ 135
Total cash equivalents 135
—
—
135
Short-term investments:
U.S. Treasury securities —
50
—
50
U.S. Government agency securities —
4
—
4
Commercial paper —
109
—
109
Certificates of deposit —
99
—
99
Total short-term investments —
262
—
262
Long-term investments:
U.S. Treasury securities —
237
—
237
U.S. Government agency securities —
91
—
91
Total long-term investments —
328
—
328
Total assets at fair value $ 135
$ 590
$ —
$ 725
Liabilities:
Foreign exchange contracts $ —
$ 31
$ —
$ 31
Total liabilities at fair value $ —
$ 31
$ —
$ 31

~~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.~~

~~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.

~~U.S. Government Agency Securities.~~ The Company’s U.S. Government agency securities are investments in fixed income securities sponsored by the U.S. Government and are held in custody by a third party. U.S. Government agency securities are valued using a market approach which is based on observable inputs including market interest rates from multiple pricing sources.

~~Commercial Paper.~~ The Company’s commercial paper securities are investments issued by corporations which are held in custody by a third party. Commercial paper securities are valued using a market approach which is based on observable inputs including market interest rates from multiple pricing sources.

~~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.~~

~~Foreign Exchange Contracts.~~ The Company’s foreign exchange contracts are short-term contracts to hedge the Company’s foreign currency risk. For contracts that have a right of offset by its individual counterparties under master netting arrangements, the Company presents its foreign exchange contracts on a net basis by counterparty in the consolidated balance sheets. 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 8 to these condensed consolidated financial statements.

In the three and nine months ended April 1, 2016, there were no transfers between levels. The carrying amounts of cash, 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. As of April 1, 2016, the carrying amount of debt approximated fair value because of its variable interest rate.



Condensed Consolidating Balance Sheet
As of December 30, 2016

	Parent		Guarantor Subsidiaries		Non-Guarantor Subsidiaries		Eliminations			Total Company
	(in millions)
ASSETS
Current assets:
Cash and cash equivalents	$	46	$	883	$	4,011	$	—		$	4,940
Short-term investments	—		—		161		—			161
Accounts receivable, net	—		1,320		684		—			2,004
Intercompany receivable	813		1,878		2,923		(5,614		)	—
Inventories	—		828		1,455		(198		)	2,085
Other current assets	4		253		159		—			416
Total current assets	863		5,162		9,393		(5,812		)	9,606
Property, plant and equipment, net	—		1,207		2,031		—			3,238
Notes receivable and investments in Flash Ventures	—		—		1,082		—			1,082
Goodwill	—		325		9,680		—			10,005
Other intangible assets, net	—		19		4,450		—			4,469
Investments in consolidated subsidiaries	17,942		17,874		—		(35,816		)	—
Loans due from consolidated affiliates	5,230		15		—		(5,245		)	—
Other non-current assets	46		99		466		(36		)	575
Total assets	$	24,081	$	24,701	$	27,102	$	(46,909	)	$	28,975
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	—	$	225	$	1,787	$	—		$	2,012
Intercompany payable	180		4,823		611		(5,614		)	—
Accounts payable to related parties	—		—		175		—			175
Accrued expenses	126		507		368		—			1,001
Accrued compensation	—		376		205		—			581
Accrued warranty	—		4		186		—			190
Current portion of long-term debt	129		—		—		—			129
Total current liabilities	435		5,935		3,332		(5,614		)	4,088
Long-term debt	12,915		—		29		—			12,944
Loans due to consolidated affiliates	—		34		5,211		(5,245		)	—
Other liabilities	—		670		578		(37		)	1,211
Total liabilities	13,350		6,639		9,150		(10,896		)	18,243
Shareholders’ equity	10,731		18,062		17,952		(36,013		)	10,732
Total liabilities and shareholders’ equity	$	24,081	$	24,701	$	27,102	$	(46,909	)	$	28,975

~~8. Foreign Exchange Contracts~~

~~Although the majority~~

Table of the Company’s transactions are in U.S. dollars, some transactions are based in various foreign currencies. The Company purchases short-term, foreign exchange contracts to hedge the impact of foreign currency exchange fluctuations on certain underlying assets, liabilities and commitments for operating expenses and product costs denominated in foreign currencies. The purpose of entering into these hedging transactions is to minimize the impact of foreign currency fluctuations on the Company’s results of operations. These contract maturity dates do not exceed 12 months. All foreign exchange contracts are for risk management purposes only. The Company does not purchase foreign exchange contracts for speculative or trading purposes. As of April 1, 2016, the Company had outstanding foreign exchange contracts with commercial banks for British Pound Sterling, Euro, Japanese Yen, Malaysian Ringgit, Philippine Peso, Singapore Dollar and Thai Baht, which were designated as either cash flow or fair value hedges.Contents

If the derivative is designated as a cash flow hedge, the effective portion of the change in fair value of the derivative is initially deferred in accumulated other comprehensive income (loss), net of tax. These amounts are subsequently recognized into earnings when the underlying cash flow being hedged is recognized into earnings. Recognized gains and losses on foreign exchange contracts entered into for manufacturing-related activities are reported in cost of revenue and presented within cash flow from operations. 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 condensed consolidated financial statements for the three and nine months ended April 1, 2016 and April 3, 2015.WESTERN DIGITAL CORPORATION

A change in the fair value of fair value hedges is recognized in earnings in the period incurred and is reported as a component of cost of revenue or operating expenses, depending on the nature of the underlying hedged item. All fair value hedges were determined to be effective as of April 1, 2016 and July 3, 2015. The changes in fair value on these contracts were immaterial to the condensed consolidated financial statements during the three and nine months ended April 1, 2016 and April 3, 2015.NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

As of April 1, 2016, the net amount of unrealized gains with respect to the Company’s foreign exchange contracts that is expected to be reclassified into earnings within the next twelve months was $27 million. In addition, as of April 1, 2016, the Company did not have any foreign exchange contracts with credit-risk-related contingent features. The Company opened $996 million and $2.9 billion, and closed $1.0 billion and $3.1 billion, in foreign exchange contracts during the three and nine months ended April 1, 2016, respectively. The Company opened $1.5 billion and $3.5 billion, and closed $1.3 billion and $3.5 billion, in foreign exchange contracts during the three and nine months ended April 3, 2015, respectively. The fair value and balance sheet location of the Company's foreign exchange contracts as of April 1, 2016 and July 3, 2015 were as follows (in millions):(Unaudited)

Asset Derivatives Liability Derivatives

April 1, 2016 July 3, 2015 April 1, 2016 July 3, 2015
Derivatives Designated as
Hedging Instruments
Balance Sheet
Location Fair
Value Balance Sheet
Location Fair
Value Balance Sheet
Location Fair
Value Balance Sheet
Location Fair
Value
Foreign exchange contracts Other current assets $ 31
Other current assets $ —
Accrued expenses $ —
Accrued expenses $ 31

The following table presents the gross amounts of the Company's derivative instruments, amounts offset due to master netting arrangements with the Company's various counterparties and the net amounts recognized in the condensed consolidated balance sheet as of April 1, 2016 (in millions):

Derivatives Designated as
Hedging Instruments
Gross Amounts of Recognized
Assets (Liabilities)

Gross Amounts Offset
in the Balance Sheet

Net Amounts of Assets
Presented in the Balance Sheet
Foreign exchange contracts
  Financial assets $ 34
$ (3 ) $ 31
  Financial liabilities (3 ) 3
—
    Total derivative instruments $ 31
$ —
$ 31



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 receivable	934		886		2,546		(4,366		)	—
Inventories	—		896		1,450		(217		)	2,129
Other current assets	4		276		379		(43		)	616
Total current assets	938		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 subsidiaries	18,009		27,020		—		(45,029		)	—
Loans due from consolidated affiliates	6,000		55		—		(6,055		)	—
Other non-current assets	50		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 payable	119		4,043		204		(4,366		)	—
Accounts payable to related parties	—		—		168		—			168
Accrued expenses	109		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 debt	14		—		325		—			339
Total current liabilities	242		7,965		3,088		(4,346		)	6,949
Long-term debt	13,610		—		50		—			13,660
Loans due to consolidated affiliates	—		6,000		55		(6,055		)	—
Other liabilities	—		862		475		(229		)	1,108
Total liabilities	13,852		14,827		3,668		(10,630		)	21,717
Shareholders’ equity	11,145		18,147		27,099		(45,246		)	11,145
Total liabilities and shareholders’ equity	$	24,997	$	32,974	$	30,767	$	(55,876	)	$	32,862

~~The Company had a gross and net liability~~

Table of ~~$31 million related to its derivative instruments outstanding at July 3, 2015. There were no amounts offset due to master netting arrangements in place at July 3, 2015.~~Contents

~~The impact of foreign exchange contracts on the condensed consolidated financial statements was as follows (in millions):~~WESTERN DIGITAL CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

Amount of Gain (Loss) Recognized in Accumulated OCI on Derivatives
Location of
Gain (Loss) Reclassified from Accumulated OCI into Income
Amount of (Gain) Loss Reclassified From Accumulated OCI into Income
Derivatives in Cash
Flow Hedging Relationships
Three Months Ended Nine Months Ended Three Months Ended Nine Months Ended Three Months Ended Nine Months Ended Three Months Ended Nine Months Ended
April 1,
2016 April 3,
2015 April 1,
2016 April 3,
2015
Foreign exchange contracts $ 31
$ (9 ) $ 19
$ (39 ) Cost of revenue $ 8
$ 61
$ 10
$ 24



Condensed Consolidating Statements of Operations
For the three months ended December 30, 2016

	Parent			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Eliminations			Total Company
	(in millions)
Revenue, net	$	—		$	3,786		$	4,245		$	(3,143	)	$	4,888
Cost of revenue	—			3,085			3,495			(3,225		)	3,355
Gross profit	—			701			750			82			1,533
Operating expenses:
Research and development	—			372			213			—			585
Selling, general and administrative	3			252			103			—			358
Intercompany operating expense (income)	—			(218		)	218			—			—
Employee termination, asset impairment and other charges	—			9			36			—			45
Total operating expenses	3			415			570			—			988
Operating income (loss)	(3		)	286			180			82			545
Interest and other income (expense):
Interest income	86			—			2			(83		)	5
Interest expense	(203		)	—			(85		)	83			(205		)
Other expense, net	(2		)	(5		)	(17		)	—			(24		)
Total interest and other expense, net	(119		)	(5		)	(100		)	—			(224		)
Income (loss) before taxes	(122		)	281			80			82			321
Income tax expense (benefit)	(87		)	116			57			—			86
Equity in earnings from subsidiaries	270			19			—			(289		)	—
Net income	$	235		$	184		$	23		$	(207	)	$	235

The total net realized transaction and foreign exchange contract currency gains and losses were not material to the condensed consolidated financial statements during the three and nine months ended April 1, 2016 and April 3, 2015.

Table of Contents

~~9. Shareholders' Equity~~WESTERN DIGITAL CORPORATION

~~Stock-Based Compensation Expense~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

~~The following table presents the Company's stock-based compensation and related tax benefit for the three and nine months ended April 1, 2016 and April 3, 2015 (in millions):~~(Unaudited)

Three Months Ended Nine Months Ended
April 1, 2016 April 3, 2015 April 1, 2016 April 3, 2015
Expense Tax Benefit Expense Tax Benefit Expense Tax Benefit Expense Tax Benefit
Options and ESPP $ 19
$ 5
$ 17
$ 8
$ 51
$ 13
$ 53
$ 20
RSUs 23
6
21
6
70
18
64
17
Total $ 42
$ 11
$ 38
$ 14
$ 121
$ 31
$ 117
$ 37



Condensed Consolidating Statements of Operations
For the six months ended December 30, 2016

	Parent			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Eliminations			Total Company
	(in millions)
Revenue, net	$	—		$	7,484		$	8,538		$	(6,420	)	$	9,602
Cost of revenue	—			6,150			7,048			(6,464		)	6,734
Gross profit	—			1,334			1,490			44			2,868
Operating expenses:
Research and development	—			813			411			—			1,224
Selling, general and administrative	4			526			224			—			754
Intercompany operating expense (income)	—			(569		)	569			—			—
Employee termination, asset impairment and other charges	—			58			55			—			113
Total operating expenses	4			828			1,259			—			2,091
Operating income (loss)	(4		)	506			231			44			777
Interest and other income (expense):
Interest income	180			1			9			(180		)	10
Interest expense	(431		)	(5		)	(185		)	180			(441		)
Other expense, net	(274		)	(4		)	(18		)	—			(296		)
Total interest and other expense, net	(525		)	(8		)	(194		)	—			(727		)
Income (loss) before taxes	(529		)	498			37			44			50
Income tax expense (benefit)	(181		)	121			241			—			181
Equity in earnings from subsidiaries	217			(208		)	—			(9		)	—
Net income (loss)	$	(131	)	$	169		$	(204	)	$	35		$	(131	)

Table of April 1, 2016, total compensation cost related to unvested stock options and ESPP rights issued to employees but not yet recognized was $99 million and will be amortized on a straight-line basis over a weighted average service period of approximately 2.3 years.Contents

For purposes of this footnote, references to restricted stock unit awards (“RSUs”) include performance stock unit awards (“PSUs”). PSUs are granted to certain employees only after the achievement of pre-determined performance metrics. Once the PSU is granted, vesting is then subject to continued service by the employee, and expense is recognized over the vesting period. 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. As of April 1, 2016, the aggregate unamortized fair value of all unvested RSUs was $178 million, which will be recognized on a straight-line basis over a weighted average vesting period of approximately 1.9 years, assuming the performance metrics are met for the PSUs.WESTERN DIGITAL CORPORATION

~~Stock Option Activity~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

~~The following table summarizes stock option activity under the Company’s stock option plans (in millions, except per share amounts and remaining contractual lives):~~(Unaudited)

Number of Shares Weighted Average Exercise Price Per Share Weighted Average Remaining Contractual Life (in years) Aggregate Intrinsic Value
Options outstanding at July 3, 2015 6.8
$ 50.00

Granted 1.7
82.68

Exercised (1.2 ) 25.10

Canceled or expired (0.3 ) 63.04

Options outstanding at April 1, 2016 7.0
$ 61.68
4.2 $ 45
Exercisable at April 1, 2016 3.8
$ 47.36
3.1 $ 41
Vested and expected to vest after April 1, 2016 6.8
$ 61.16
4.2 $ 45



Condensed Consolidating Statements of Operations
For the three months ended January 1, 2016

	Parent			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Eliminations			Total Company
	(in millions)
Revenue, net	$	—		$	3,411		$	3,611		$	(3,705	)	$	3,317
Cost of revenue	—			3,190			2,918			(3,697		)	2,411
Gross profit	—			221			693			(8		)	906
Operating expenses:
Research and development	—			270			119			—			389
Selling, general and administrative	1			138			100			—			239
Intercompany operating expense (income)	—			(278		)	278			—			—
Employee termination, asset impairment and other charges	—			20			7			—			27
Total operating expenses	1			150			504			—			655
Operating income (loss)	(1		)	71			189			(8		)	251
Interest and other income (expense):
Interest income	—			—			4			1			5
Interest expense	—			(11		)	(2		)	—			(13		)
Other income, net	—			—			2			(1		)	1
Total interest and other income (expense), net	—			(11		)	4			—			(7		)
Income (loss) before taxes	(1		)	60			193			(8		)	244
Income tax expense (benefit)	—			19			(26		)	—			(7		)
Equity in earnings from subsidiaries	252			217			—			(469		)	—
Net income	$	251		$	258		$	219		$	(477	)	$	251

~~Options granted during the three and nine months ended April 1, 2016 had a weighted average fair value per share~~

Table of $12.46 and $22.54, respectively. As of April 1, 2016, the Company had options outstanding to purchase an aggregate of 3.1 million shares with an exercise price below the quoted price of the Company’s stock on that date resulting in an aggregate intrinsic value of $45 million at that date. During the three and nine months ended April 1, 2016, the aggregate intrinsic value of options exercised under the Company’s stock option plans was $13 million and $49 million, respectively, determined as of the date of exercise, as compared to $73 million and $236 million in the respective prior-year periods.Contents

~~RSU Activity~~WESTERN DIGITAL CORPORATION

~~The following table summarizes RSU activity under the Company's stock plans (in millions, except weighted average grant date fair value):~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

Number of Shares Weighted Average Grant-Date Fair Value
RSUs outstanding at July 3, 2015 3.0
$ 73.80
Granted 2.5
68.16
Vested (1.6 ) 62.43
Forfeited (0.2 ) 84.57
RSUs outstanding at April 1, 2016 3.7
$ 74.48
Expected to vest after April 1, 2016 3.4
$ 74.98

Outstanding RSU awards 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 in additional shares when the underlying shares vest.

RSUs are generally settled in an equal number of shares of the Company’s common stock at the time of vesting of the units. The fair value of the shares underlying the RSU awards at the date of grant or assumption was $51 million and $160 million for awards granted in the three and nine months ended April 1, 2016. These amounts are being recognized to expense over the corresponding vesting periods.

Included in the table above, the Company granted 1.0 million PSUs in the three months ended April 1, 2016, at a weighted average grant-date fair value of $50.06 per share. The total number of PSUs outstanding as of April 1, 2016 was 1.2 million, with a weighted average fair value per share of $55.78.

~~SARs Activity~~

During the three and nine months ended April 1, 2016, the Company recognized a $7 million and $18 million benefit, respectively, related to adjustments to fair market value of stock appreciation rights (“SARs”), as compared to a $9 million benefit and $3 million expense in the respective prior-year periods. The tax expense realized as a result of the aforementioned SARs benefit was $1 million and $2 million during the three and nine months ended April 1, 2016, respectively, as compared to a $2 million expense and $1 million benefit during the three and nine months ended April 3, 2015, respectively. The Company's SARs will be settled in cash upon exercise. The Company had a total liability of $22 million and $41 million related to SARs included in accrued expenses in the condensed consolidated balance sheet as of April 1, 2016 and July 3, 2015, respectively. As of April 1, 2016, all SARs issued to employees were fully vested, and the fair values are now solely subject to market price fluctuations. As of April 1, 2016, 0.5 million SARs were outstanding with a weighted average exercise price of $7.87. There were no SARs granted during the three and nine months ended April 1, 2016.

~~Stock Repurchase Program~~

The Company's Board of Directors (the “Board”) previously authorized $5.0 billion for the repurchase of the Company's common stock and approved the extension of its stock repurchase program to February 3, 2020. Effective October 21, 2015, in connection with the Merger, the stock repurchase program was suspended. The Company did not repurchase any shares during the three months ended April 1, 2016. The Company repurchased 0.7 million shares for a total cost of $60 million during the nine months ended April 1, 2016. The remaining amount available to be purchased under the Company’s stock repurchase program as of April 1, 2016 was $2.1 billion.



Condensed Consolidating Statements of Operations
For the six months ended January 1, 2016

	Parent			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Eliminations			Total Company
	(in millions)
Revenue, net	$	—		$	6,837		$	7,024		$	(7,184	)	$	6,677
Cost of revenue	—			6,410			5,578			(7,172		)	4,816
Gross profit	—			427			1,446			(12		)	1,861
Operating expenses:
Research and development	—			579			195			—			774
Selling, general and administrative	2			309			120			—			431
Intercompany operating expense (income)	—			(590		)	590			—			—
Employee termination, asset impairment and other charges	—			70			13			—			83
Total operating expenses	2			368			918			—			1,288
Operating income (loss)	(2		)	59			528			(12		)	573
Interest and other income (expense):
Interest income	—			1			8			—			9
Interest expense	—			(22		)	(4		)	—			(26		)
Other income, net	—			—			2			—			2
Total interest and other income (expense), net	—			(21		)	6			—			(15		)
Income (loss) before taxes	(2		)	38			534			(12		)	558
Income tax expense (benefit)	—			52			(28		)	—			24
Equity in earnings from subsidiaries	536			562			—			(1,098		)	—
Net income	$	534		$	548		$	562		$	(1,110	)	$	534

~~Dividends to Shareholders~~

On September 13, 2012, the Company announced that the Board had authorized the adoption of a quarterly cash dividend policy. Under the cash dividend policy, holders of the Company’s common stock receive dividends when and as declared by the Board. In the three months ended April 1, 2016, the Company declared a cash dividend of $0.50 per share to shareholders of record as of April 1, 2016, totaling $116 million, which was paid on April 15, 2016. In the nine months ended April 1, 2016, the Company declared total cash dividends of $1.50 per share for a total of $347 million. The Company may modify, suspend or cancel its cash dividend policy in any manner and at any time.

~~Termination of Investment by Unis~~

On September 29, 2015, the Company entered into an agreement (the “Stock Purchase Agreement”) with Unis (the “Guarantor”) and Unis Union Information System Ltd., a subsidiary of Unis (the “Investor”), pursuant to which, subject to the conditions in the agreement, the Company agreed to issue and sell to the Investor 40,814,802 shares of the Company’s common stock (the “Shares”) for $92.50 per share, for an aggregate purchase price of approximately $3.775 billion, and the Guarantor agreed to guarantee the payment and performance of Investor’s obligations therein (collectively, the “Transaction”).

The closing of the Transaction was subject to certain closing conditions. These closing conditions included clearance by the U.S. Committee on Foreign Investment in the United States (“CFIUS”) and the receipt of requisite regulatory approvals, including clearance by U.S. antitrust authorities and certain Chinese regulatory approvals, including clearance by the Ministry of Commerce of the People’s Republic of China, the Ministry of Education of the People’s Republic of China, the National Development and Reform Commission of the People’s Republic of China and the State Administration of Foreign Exchange of the People’s Republic of China. In addition, the Investor’s obligation to purchase the shares of common stock of the Company and the Guarantor’s guarantee were subject to approval of the Transaction by shareholders of the Guarantor.

On February 22, 2016, CFIUS informed the Company that it planned to undertake an investigation of the transactions contemplated under the Stock Purchase Agreement, triggering a 15-day period during which either the Company or the Investor could terminate the Stock Purchase Agreement. On February 23, 2016, the Investor notified the Company of its termination of the Stock Purchase Agreement pursuant to the terms of the Stock Purchase Agreement. The Company did not incur any early termination penalties in connection with the termination of the Stock Purchase Agreement.

The termination of the investment by Unis is not expected to impact the agreement to form a joint venture with Unis to market and sell the Company’s data center storage systems in China and to develop data center storage solutions for the Chinese market in the future.

Table of Contents

~~10. Pensions and Other Post-retirement Benefit Plans~~WESTERN DIGITAL CORPORATION

The Company’s principal pension and other post-retirement benefit plans are in Japan. All pension and other post-retirement benefit plans outside of the Company’s Japanese plans were immaterial to the Company’s condensed consolidated financial statements for the three and nine months ended April 1, 2016 and April 3, 2015. The expected long-term rate of return on the Japanese plan assets is 2.5%.NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

~~The following table presents the unfunded status of the benefit obligations and Japanese plan assets (in millions):~~(Unaudited)

~~Recently Issued~~

~~In March 2016, the FASB issued ASU No. 2016-09, “Compensation~~Table of Contents

WESTERN DIGITAL CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting” (“ASU 2016-09”). The new standard simplifies several aspects of the accounting for share-based payment transactions and states that, among other things, all excess tax benefits and tax deficiencies should be recognized as income tax expense or benefit in the income statement and an entity can make an entity-wide accounting policy election to either estimate the number of awards that are expected to vest or account for forfeitures when they occur. The new standard is effective for fiscal years beginning after December 15, 2016, and interim periods within these periods, which for the Company is the first quarter of fiscal 2018. The Company is currently evaluating the impact ASU 2016-09 will have on its consolidated financial statements and related disclosures.(Continued)

In February 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842)” (“ASU 2016-02”). The new standard, among other things, requires lessees to recognize a right-of-use asset and a lease liability for leases. The new standard is effective for fiscal years beginning after December 15, 2018, which for the Company is the first quarter of fiscal 2020. The Company is currently evaluating the impact ASU 2016-02 will have on its consolidated financial statements and related disclosures.(Unaudited)

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”). The new standard requires equity investments (except those accounted for under the equity method of accounting or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income, simplifies the impairment assessment of equity investments without readily determinable fair values, eliminates the requirement to disclose the methods and significant assumptions used to estimate fair value, requires use of the exit price notion when measuring fair value, requires separate presentation in certain financial statements and requires an evaluation of the need for a valuation allowance on a deferred tax asset related to available-for-sale securities. The new standard is effective for fiscal years beginning after December 15, 2017, which for the Company is the first quarter of fiscal 2019. The Company is currently evaluating the impact ASU 2016-01 will have on its consolidated financial statements and related disclosures.

In September 2015, the FASB issued ASU No. 2015-16, “Business Combinations (Topic 805): Simplifying the Accounting for Measurement-Period Adjustments” (“ASU 2015-16”), which eliminates the requirement for an acquirer in a business combination to account for measurement-period adjustments retrospectively. Acquirers must recognize measurement-period adjustments during the period of resolution, including the effect on earnings of any amounts they would have recorded in previous periods if the accounting had been completed at the acquisition date. The new standard is effective for fiscal years beginning after December 15, 2015, which for the Company is the first quarter of fiscal 2017. Earlier adoption is permitted for any interim and annual financial statements that have not yet been issued. The Company is currently evaluating the impact ASU 2015-16 will have on its consolidated financial statements and related disclosures.

In August 2015, the FASB issued ASU 2015-15, “Interest — Imputation of Interest (Subtopic 835-30): Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements — Amendments to SEC Paragraphs Pursuant to Staff Announcement at June 18, 2015 EITF Meeting” (“ASU 2015-15”). The new standard states that SEC staff would not object to an entity deferring and presenting debt issuance costs as an asset and subsequently amortizing the deferred debt issuance costs ratably over the term of the line-of-credit arrangement, regardless of whether there are any outstanding borrowings on the line-of-credit arrangement. The Company is currently evaluating the impact ASU 2015-15 will have on its consolidated financial statements and related disclosures.

In April 2015, the FASB issued ASU 2015-03, “Interest — Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs” (“ASU 2015-03”). The new standard requires debt issuance costs related to a recognized debt liability to be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The new standard is effective for fiscal years and interim periods within those fiscal years, beginning after December 15, 2015, which for the Company is the first quarter of fiscal 2017. The Company is currently evaluating the impact ASU 2015-03 will have on its consolidated financial statements and related disclosures.

In February 2015, the FASB issued ASU 2015-02, “Consolidation (Topic 810): Amendments to the Consolidation Analysis” (“ASU 2015-02”). The new standard eliminates the presumption that a general partner should consolidate a limited partnership, requires that a reporting entity determine whether it has a variable interest in the entity being evaluated for consolidation, eliminates the requirement to consolidate variable interest entities (“VIEs”) caused by certain fees paid to decision makers and eliminates the indefinite deferral of FASB Statement No. 167 included in ASU 2010-10. The new standard is effective for fiscal years beginning after December 15, 2015, which for the Company is the first quarter of fiscal 2017. Early adoption is permitted. The Company is currently evaluating the impact ASU 2015-02 will have on its consolidated financial statements and related disclosures.

In May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers” (“ASU 2014-09”), which amends the guidance in former Accounting Standards Codification Topic 605, “Revenue Recognition,” to provide a single, comprehensive revenue recognition model for all contracts with customers. The new standard 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. In August 2015, the FASB issued ASU 2015-14, which deferred the effective date of this ASU by one year. The new standard allows for either a full retrospective or a modified retrospective transition method and is effective for fiscal years and interim periods within those years beginning after December 15, 2017, which for the Company is the first quarter of fiscal 2019, and early adoption is permitted beginning after December 15, 2016. The Company has not yet selected a transition method and is currently evaluating the impact ASU 2014-09 will have on its consolidated financial statements and related disclosures.

~~14. Subsequent Event~~

In connection with the Merger with SanDisk, the Company expects to enter into new debt facilities totaling approximately $18.1 billion, of which the Company has incurred aggregate borrowings of approximately $10.0 billion as of the date of this Quarterly Report on Form 10-Q. In addition to the notes and new credit agreement described below, the Company expects to enter into an additional bridge facility in the amount of $3.0 billion on the closing date of the Merger.

~~Notes~~

On April 13, 2016, the Company completed an offering of its $1.875 billion aggregate principal amount of 7.375% senior secured notes due 2023 (the “Secured Notes”) and $3.35 billion aggregate principal amount of 10.500% senior unsecured notes due 2024 (the “Unsecured Notes” and, together with the Secured Notes, the “Notes”). The Notes were issued pursuant to indentures (the “Indentures”) among (i) the Company, (ii) HGST, Inc., WD Media, LLC, Western Digital (Fremont), LLC and Western Digital Technologies, Inc. (the “WD Guarantors”) and (iii) U.S. Bank National Association, as trustee (and as collateral agent with respect to the Secured Notes). Immediately following the consummation of the Merger, SanDisk Technologies, Inc., which will be an indirect subsidiary of the Company (the “SD Guarantor”), and the other parties to the Indentures will enter into supplemental indentures and the SD Guarantor will become party to the Indentures and will agree to guarantee the Company’s obligations under the Notes. The Company is not required to make principal payments on the Notes prior to their respective maturity dates, except that the Company may be required to offer to purchase the Notes upon the occurrence of a change of control (as defined in the Indentures) or with the proceeds of certain non-ordinary course asset sales.

The Company has deposited the gross proceeds from the offering of each series of Notes into separate segregated escrow accounts. The release of the escrowed funds is subject to the conditions set forth in the escrow agreements. If the consummation of the Merger does not occur on or prior to January 21, 2017, the Company must redeem the Notes at a price equal to 100% of the initial issue price of the Notes, plus accrued and unpaid interest.

Prior to the release of the Notes offering proceeds from escrow, each series of Notes and the related guarantees are secured by an exclusive first-priority lien on the funds held in the respective escrow account from the issuance of such series of Notes. Following the release of the Notes offering proceeds from escrow, the Secured Notes and related guarantees will be secured on an equal and ratable basis by liens on the same assets that secure indebtedness under the New Credit Agreement as described below and, as a result, will be effectively senior to the Unsecured Notes to the extent of the value of the assets that secure the Secured Notes and will be effectively pari passu with obligations under the New Credit Agreement and all other existing and future obligations of WDC and the WD Guarantors secured by first-priority liens on the assets securing the Secured Notes (subject to permitted liens and certain limitations).



Condensed Consolidating Statement of Cash Flows
For the six months ended December 30, 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	$	(256	)	$	211		$	1,443		$	102		$	1,500
Cash flows from investing activities
Purchases of property, plant and equipment	—			(136		)	(194		)	—			(330		)
Proceeds from the sale of equipment	—			—			1			—			1
Purchases of investments	—			—			(239		)	—			(239		)
Proceeds from sale of investments	—			—			55			—			55
Proceeds from maturities of investments	—			—			279			—			279
Investments in Flash Ventures	—			—			(20		)	—			(20		)
Notes receivable issuances to Flash Ventures	—			—			(309		)	—			(309		)
Notes receivable proceeds from Flash Ventures	—			—			259			—			259
Strategic investments and other, net	—			—			(12		)	—			(12		)
Intercompany loans to consolidated affiliates	770			40			—			(810		)	—
Advances to consolidated affiliates	293			(285		)	—			(8		)	—
Net cash provided by (used in) investing activities	1,063			(381		)	(180		)	(818		)	(316		)
Cash flows from financing activities
Issuance of stock under employee stock plans	90			—			—			—			90
Taxes paid on vested stock awards under employee stock plans	(40		)	—			—			—			(40		)
Excess tax benefits from employee stock plans	56			—			—			—			56
Proceeds from acquired call option	—			—			61			—			61
Dividends paid to shareholders	(284		)	—			—			—			(284		)
Repayment of debt	(4,767		)	(2,995		)	(492		)	—			(8,254		)
Proceeds from debt	3,992			—			—			—			3,992
Debt issuance costs	(7		)	—			—			—			(7		)
Intercompany loan from parent	—			(5,966		)	5,156			810			—
Change in investment in consolidated subsidiaries	199			8,808			(8,913		)	(94		)	—
Net cash used in financing activities	(761		)	(153		)	(4,188		)	716			(4,386		)
Effect of exchange rate changes on cash	—			—			(9		)	—			(9		)
Net increase (decrease) in cash and cash equivalents	46			(323		)	(2,934		)	—			(3,211		)
Cash and cash equivalents, beginning of year	—			1,206			6,945			—			8,151
Cash and cash equivalents, end of period	$	46		$	883		$	4,011		$	—		$	4,940

~~New Credit Agreement~~

On April 29, 2016, the Company entered into a new credit agreement (the “New Credit Agreement”) with JPMorgan Chase Bank, N.A., as administrative agent and collateral agent (the “Administrative Agent”), and the lenders party thereto, which provides for secured loan facilities consistingTable of a $4.125 billion term loan facility (the “Term Loan A Facility”), a $3.75 billion term loan facility (the “U.S. Term Loan B Facility”), an €885 million term loan facility (the “Euro Term Loan B Facility” and, together with the U.S. Term Loan B Facility, the “Term Loan B Facilities”), and a $1.0 billion revolving credit facility (the “Revolving Credit Facility”). The Revolving Credit Facility includes a $200 million sublimit for letters of credit. The Term Loan B Facilities closed into escrow on April 29, 2016. Borrowings under the U.S. Term Loan B Facility bear interest at a rate per annum, at the Company's option, of either an adjusted LIBOR rate (subject to a 0.75% floor) plus an applicable margin of 5.50% or at a base rate plus an applicable margin of 4.50%. The borrowings under the Euro Term Loan B Facility bear interest at a rate per annum equal to an adjusted EURIBOR rate (subject to a 0.75% floor) plus an applicable margin of 5.25%. As of April 29, 2016, the variable interest rates on the Term Loan B Facility and the Euro Term Loan B Facility were 6.25% and 6.00%, respectively.Contents

The Term Loan A Facility will close and the related proceeds will be received by the Company on the closing date of the Merger. The Revolving Credit Facility will be available starting on the closing date of the Merger. The Term Loan A Facility and the Revolving Credit Facility have terms of five years. The Term Loan B Facilities have terms of seven years. The obligations under the New Credit Agreement are guaranteed by the WD Guarantors. Immediately following the consummation of the Merger, the SD Guarantor will execute a guaranty supplement and will agree to guarantee the Company’s obligations under the New Credit Agreement. The term loans and the revolving credit loans may be prepaid in whole or in part at any time without premium or penalty, subject to certain conditions, except that the Term Loan B Facilities require the Company to pay a 1.00% prepayment fee if the loans thereunder are repaid in connection with certain “repricing” transactions on or before the one year anniversary of the effective date.WESTERN DIGITAL CORPORATION

As of the date of this Quarterly Report on Form 10-Q, the outstanding balances under the New Credit Agreement were $3.75 billion for the U.S. Term Loan B Facility and €885 million for the Euro Term Loan B Facility. Beginning in September 2016, the Company is required to make quarterly principal payments on the Term Loan B Facilities equal to 0.25% of the original principal amount thereof, with the remaining balance due in 2023.NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The Company has deposited the net proceeds of the borrowings under the Term Loan B Facilities into separate segregated escrow accounts. The release of the escrowed funds is subject to the conditions set forth in the escrow agreement for the Term Loan B Facilities. Prior to the release of the Term Loan B Facilities proceeds from escrow, the Administrative Agent will have a perfected first-priority lien on the funds held in the respective escrow accounts on behalf of the lenders under the Term Loan B Facilities. If the consummation of the Merger does not occur on or prior to January 21, 2017, the Company must prepay in full the amount of the Term Loan B Facilities funded into escrow, plus accrued and unpaid interest.(Unaudited)

At the closing of the Merger, (i) the net proceeds of the borrowings under the Term Loan B Facilities will be released from escrow and (ii) the Company will borrow the full amount of the term loans under the Term Loan A Facility and will have the ability to borrow under the Revolving Credit Facility.

Upon the release of the net proceeds of the borrowings under the Term Loan B Facilities from escrow, the obligations under the New Credit Agreement will be secured on a first-priority basis (subject to permitted liens) 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 such 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.

Upon the release of the net proceeds of the borrowings under the Term Loan B Facilities from escrow, the New Credit Agreement will require the Company to comply with a leverage ratio and an interest coverage ratio calculated on a consolidated basis for the Company and its subsidiaries. In addition, the New Credit Agreement contains customary covenants that will apply following the release of the net proceeds of the borrowings under the Term Loan B Facilities from escrow, including covenants that limit or restrict the Company’s and its subsidiaries’ ability to incur liens, incur indebtedness, make certain restricted payments, make acquisitions and investments, loans and guarantees, enter into transactions with affiliates, make certain modifications of organizational documents and certain debt agreements and merge or consolidate, and customary events of default.

Subject to certain exceptions and thresholds, following the release of the net proceeds of the borrowings under the Term Loan B Facilities from escrow, the Term Loan A Facility and the Term Loan B Facilities require mandatory prepayments in connection with (i) excess cash flow (with respect to the Term Loan B Facilities only), (ii) non-ordinary course asset sales and other dispositions and (iii) the issuance of certain debt obligations, among other things. In addition, if more than $100 million in aggregate principal amount of SanDisk’s convertible notes due 2017 and 2020 remains outstanding on the date that is 90 days after the closing date of the Merger, the New Credit Agreement requires the Company to make a mandatory prepayment of the term loans under the Term Loan B Facilities in an amount equal to the outstanding amount of such convertible notes.

~~Termination~~



Condensed Consolidating Statement of Cash Flows
For the six months ended January 1, 2016

	Parent			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Eliminations			Total Company
	(in millions)
Cash flows from operating activities
Net cash provided by operating activities	$	12		$	266		$	852		$	13		$	1,143
Cash flows from investing activities
Purchases of property, plant and equipment	—			(114		)	(186		)	—			(300		)
Purchases of investments	—			—			(408		)	—			(408		)
Proceeds from sale of investments	—			—			—			266			266
Proceeds from maturities of investments	—			—			266			(266		)	—
Strategic investments and other, net	—			—			(12		)	—			(12		)
Advances from (to) consolidated affiliates	207			(207		)	—			—			—
Net cash provided by (used in) investing activities	207			(321		)	(340		)	—			(454		)
Cash flows from financing activities
Issuance of stock under employee stock plans	54			—			—			—			54
Taxes paid on vested stock awards under employee stock plans	(44		)	—			—			—			(44		)
Excess tax benefits from employee stock plans	(6		)	—			—			—			(6		)
Repurchases of common stock	(60		)	—			—			—			(60		)
Dividends paid to shareholders	(231		)	—			—			—			(231		)
Repayment of debt	—			(63		)	—			—			(63		)
Change in investment in consolidated subsidiaries	68			(52		)	(3		)	(13		)	—
Net cash used in financing activities	(219		)	(115		)	(3		)	(13		)	(350		)
Net increase (decrease) in cash and cash equivalents	—			(170		)	509			—			339
Cash and cash equivalents, beginning of year	—			661			4,363			—			5,024
Cash and cash equivalents, end of period	$	—		$	491		$	4,872		$	—		$	5,363

Table of ~~Existing Credit Agreement~~Contents

On the closing date of the Merger, pursuant to the terms of the New Credit Agreement, Western Digital Technologies, Inc., Western Digital Ireland, Ltd. and Western Digital International Ltd. (collectively, the “Existing Borrowers”) will repay all outstanding loans, together with accrued interest, and will terminate all commitments under the credit agreement dated as of January 9, 2014, as amended, among the Company, the Existing Borrowers, the lenders party thereto and JPMorgan Chase Bank, N.A., as administrative agent.


Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations

~~Item 2.~~ ~~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 unaudited condensed consolidated financial statements and the notes thereto included in this Quarterly Report on Form 10-Q, and the audited consolidated financial statements and notes thereto and Part II, Item 7, contained in our Annual Report on Form 10-K for the fiscal year ended July ~~3, 2015.~~1, 2016.

Unless otherwise indicated, references herein to specific years and quarters are to our fiscal years and fiscal quarters. As used herein, the terms “we,” “us,” “our,” and the “Company” refer to Western Digital Corporation and its subsidiaries.

~~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 planned merger (the “Merger”) with SanDisk Corporation (“SanDisk”);~~

~~expectations regarding the integration of our HGST and WD subsidiaries following the decision by the Ministry of Commerce of the People’s Republic of China (“MOFCOM”) in October 2015;~~

~~expectations regarding the growth of digital data and demand for digital storage;~~

~~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 (“PC”) market and the emergence of new storage markets for our products;~~

~~expectations regarding the amount and timing of charges and cash expenditures associated with our restructuring activities;~~

~~our quarterly cash dividend policy;~~

~~expectations regarding the outcome of legal proceedings in which we are involved;~~

~~expectations regarding the repatriation of funds from our foreign operations;~~

~~our beliefs regarding tax benefits and the timing of future payments, if any, relating to the unrecognized tax benefits, and the adequacy of our tax provisions;~~

~~our beliefs regarding the sufficiency of our available liquidity to meet our working capital, debt, dividend and capital expenditure needs; and~~

~~expectations regarding our debt financing plans.~~

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 Quarterly Report on Form 10-Q, and any of those made in our other reports filed with the Securities and Exchange Commission (the “SEC”). 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.

Our Company

We are a leading developer, manufacturer and provider of data storage devices and solutions that ~~enable consumers, businesses, governments~~address the evolving needs of the information technology (“IT”) industry and ~~other organizations to create, manage, experience~~the infrastructure that enables the proliferation of data in virtually every industry. Our broad portfolio of offerings addresses three categories: Data Center Devices and ~~preserve digital content. Our product portfolio includes~~Solutions (capacity and performance enterprise hard disk drives (“~~HDDs”~~HDD”), ~~solid state~~enterprise solid-state drives (“~~SSDs”~~SSD”), ~~direct attached storage solutions, personal cloud network attached storage~~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 ~~public~~flash content solutions). We also generate license and ~~private cloud data center storage solutions. HDDs are~~royalty revenue related to our ~~principal products and are today’s primary storage medium for~~intellectual property which is included in each of the ~~vast majority of digital content, with the use of solid-state storage products growing rapidly. Our products are marketed under the HGST and WD brand names.~~three categories.

Our fiscal year ends on the Friday nearest to June 30 and typically consists of 52 weeks. ~~Approximately every six~~Fiscal years ~~we report a 53-week fiscal year to align our fiscal year with the foregoing policy. Our fiscal third quarters~~2017, which ends on June 30, 2017, and 2016, which ended ~~April~~July 1, 2016, ~~and April 3, 2015~~are both ~~consisted of 13 weeks. The nine months ended April 1, 2016 and April 3, 2015 consisted of 39 and 40 weeks, respectively. Fiscal 2016 will be~~ comprised of 52 weeks, ~~and will end on July 1, 2016. Fiscal year 2015 was comprised~~with all quarters presented consisting of ~~53 weeks and ended on July 3, 2015.~~13 weeks.

Recent Developments

~~Restructuring Plan (the “Restructuring Plan”)~~

Debt Facilities

During the first half of 2017, we settled certain debt facilities and entered into new debt facilities at lower rates. The financing arrangement activities during the first half of 2017 were:

We paid in full, with accrued interest, our $3.0 billion short-term senior secured bridge credit agreement.

We settled our $3.750 billion U.S. Term Loan B tranche with a new issuance of a $3.0 billion six-year U.S. dollar-denominated term loan (“U.S. Term Loan B-1”) at an interest rate lower than our U.S. Term Loan B tranche. Proceeds from this new loan and a voluntary cash prepayment of $750 million were used to settle our U.S. Term Loan B tranche.

We settled our €885 million Euro Term Loan B tranche with a new issuance of a €885 million seven-year Euro-denominated term loan (“Euro Term Loan B-1”) at an interest rate lower than our Euro Term Loan B tranche.

We paid to the holders of our Convertible Notes (as defined below), for conversion and repurchase, $493 million of cash and 0.3 million shares of our common stock with an aggregate value of $16 million. In ~~connection~~conjunction with the ~~regulatory approval process for the HGST acquisition, which closed on March 8, 2012,~~settlements, we agreed to certain conditions required by MOFCOM, including adopting measures to maintain HGST as an independent competitor until MOFCOM agreed otherwise. Accordingly, since March 2012, we have operated our global business through two independent subsidiaries — HGST and WD. In March 2014, we submitted an application to MOFCOM to lift the condition it imposed on us to operate these businesses separately. On October 19, 2015, MOFCOM issued a decision in response to our application that permits us to integrate our HGST and WD subsidiaries, except that we committed to maintain two sales teams that will separately offer products under the WD or HGST brands for two yearsreceived from the ~~date~~exercise of the ~~decision.~~

~~We have initiated a set~~related call options, $61 million of ~~actions relating to the Restructuring Plan associated with the integration of substantial portions~~cash and 0.1 million shares of our ~~HGST and WD subsidiaries. The Restructuring Plan consists~~common stock which had an aggregate value of ~~asset and footprint reduction, product roadmap consolidation and organization rationalization.~~$11 million.

We expect the Restructuring Plan to be substantially completed by the end of calendar year 2017 and it is expected to result in total pre-tax charges of approximately $400 million. These charges are expected to consist of approximately $185 million in employee termination benefits, $125 million in asset charges and $90 million in other related costs. Approximately $275 million of these charges are expected to be cash expenditures.

For ~~further~~additional information ~~refer to~~regarding our debt facilities, see Part I, Item 1, Note ~~12 of the Notes to Condensed Consolidated Financial Statements and Part II, Item 5, Other Information included in this Quarterly Report on Form 10-Q~~.

~~Planned SanDisk Merger~~

On October 21, 2015, we entered into an Agreement and Plan of Merger (the “Merger Agreement”) with SanDisk, a global leader in NAND flash storage solutions, pursuant to which a subsidiary of our company will merge with and into SanDisk, with SanDisk surviving and becoming our wholly-owned indirect subsidiary. 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.

Pursuant to the Merger Agreement, we will pay $67.50 per share in cash and issue 0.2387 shares of our common stock per share of SanDisk’s common stock. The Merger will be financed by a mix of cash, new debt financing and issuance of our common stock.

Consummation of the Merger is subject to customary closing conditions, including without limitation: (i) the required approval by SanDisk shareholders and our shareholders, which was obtained on March 15, 2016; (ii) the expiration or early termination of the waiting period applicable to the consummation of the Merger under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, which expired on January 15, 2016, and the receipt of foreign regulatory approvals. In certain circumstances, a termination fee of up to $1.06 billion may be payable by us or a termination fee of up to $553.3 million may be payable by SanDisk, upon termination of the transaction as more fully described in the Merger Agreement.

~~New Debt Facilities~~

As further described below, in connection with the Merger with SanDisk, we expect to enter into new debt facilities totaling approximately $18.1 billion, of which we have incurred aggregate borrowings of approximately $10.0 billion as of the date of this Quarterly Report on Form 10-Q. In addition to the notes and new credit agreement described below, we expect to enter into an additional bridge facility in the amount of $3.0 billion on the closing date of the Merger. The proceeds from the new debt facilities will be used to pay a portion of the purchase price of the Merger, refinance existing debt of both us and SanDisk and pay transaction related fees and expenses.

On April 13, 2016, we completed an offering of our $1.875 billion aggregate principal amount of 7.375% senior secured notes due 2023 and $3.35 billion aggregate principal amount of 10.500% senior unsecured notes due 2024.

On April 29, 2016, we entered into a new credit agreement with JPMorgan Chase Bank, N.A., as administrative agent and collateral agent, and the lenders party thereto, which provides for secured loan facilities consisting of a $4.125 billion term loan facility, a $3.75 billion term loan facility, an €885 million term loan facility, and a $1.0 billion revolving credit facility.

~~For further information related to the debt entered into in connection with the Merger, refer to Part I, Item 1, Note 14 of the Notes to Condensed Consolidated Financial Statements included~~6, in this Quarterly Report on Form 10-Q.

~~Closure~~

Table of ~~Foreign Manufacturing Facility~~Contents

~~In January 2016, we announced we would be closing our head component front end wafer manufacturing facility in Odawara, Japan, in order to reduce manufacturing costs. In the three~~

Results of Operations

Second Quarter and nine months ended April 1, 2016, we recognized $48 million of expenses related to the closure of the facility, which consisted of approximately $24 million in land impairment charges, $23 million in employee termination benefits and $1 million in contract termination and other costs. In addition, in the nine months ended April 1, 2016, we recognized $55 million of accelerated depreciation charges on assets held at the Odawara facility, of which $40 million was recognized in cost of revenue and $15 million was recognized in research and development within the condensed consolidated statements of income. We expect to record approximately $100 million in remaining charges during the fourth quarter of fiscal 2016.

~~Termination of Investment by Unisplendour Corporation Limited (“Unis”)~~

On September 29, 2015, we entered into an agreement (the “Stock Purchase Agreement”) with Unis and Unis Union Information System Ltd., a subsidiary of Unis (the “Investor”), pursuant to which, subject to the conditions in the agreement, we agreed to issue and sell to the Investor 40,814,802 shares of our common stock (the “Shares”) for $92.50 per share, for an aggregate purchase price of approximately $3.775 billion (the “Transaction”).

~~The closing of the Transaction was subject to certain closing conditions, including clearance by the U.S. Committee on Foreign Investment in the United States (“CFIUS”).~~

On February 22, 2016, CFIUS informed us that it planned to undertake an investigation of the Transaction, triggering a 15-day period during which either we or the Investor could terminate the Stock Purchase Agreement. On February 23, 2016, the Investor terminated the Stock Purchase Agreement pursuant to its terms. We did not incur any early termination penalties in connection with the termination of the Stock Purchase Agreement. For more information, refer to Part I, Item 1, Note 9 of the Notes to Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q.

~~Joint Venture~~

In November 2015, we entered into an agreement to form a joint venture with Unis to market and sell our current data center storage systems in China and to develop data storage systems for the Chinese market in the future. The joint venture will be 51% owned by Unis and its subsidiary, Unissoft (Wuxi) Group Co. Ltd., and 49% by us. The termination of the investment by Unis described above is not expected to impact our agreement to form the joint venture, which is expected to become operational by the fourth quarter of fiscal 2016, pending regulatory approvals.

~~Third Quarter~~First Half Overview

For the quarter ended April 1, 2016, we believe that overall HDD industry shipments totaled approximately 100 million units, down 20% from the prior-year period and down 13% from the quarter ended January 1, 2016. These decreases are the result of a softer demand environment.

The following table sets forth, for the periods presented, selected summary information from our condensed consolidated statements of ~~income~~operations by dollars ~~(in millions)~~ and percentage of net revenue:


	Three Months Ended								Nine Months Ended								Three Months Ended										Six Months Ended
	April 1, 2016				April 3, 2015				April 1, 2016				April 3, 2015				December 30, 2016				January 1, 2016				% Change		December 30, 2016					January 1, 2016				% Change
Net revenue	$	2,822	100.0	%	$	3,550	100.0	%	$	9,499	100.0	%	$	11,381	100.0	%
																	(in millions, except percentages)
Revenue, net																	$	4,888	100.0	%	$	3,317	100.0	%	47	%	$	9,602		100.0	%	$	6,677	100.0	%	44	%
Gross profit	753		26.7		1,032		29.1		2,614		27.5		3,291		28.9		1,533		31.4		906		27.3		69		2,868			29.9		1,861		27.9		54
Total operating expenses	665		23.6		611		17.2		1,953		20.6		1,935		17.0		988		20.2		655		19.7		51		2,091			21.8		1,288		19.3		62
Operating income	88		3.1		421		11.9		661		7.0		1,356		11.9		545		11.1		251		7.6		117		777			8.1		573		8.6		36
Net income	74		2.6		384		10.8		608		6.4		1,245		10.9
Net income (loss)																	235		4.8		251		7.6		(6	)	(131		)	(1.4	)	534		8.0		(125	)

The following ~~is a summary of our financial performance~~table sets forth, for the ~~third quarter~~periods presented, summary information regarding unit shipments, average selling prices (“ASPs”) and net revenues by geography and end market:



	Three Months Ended						Six Months Ended
	December 30, 2016			January 1, 2016			December 30, 2016			January 1, 2016
	(in millions, except exabytes, percentages and ASPs)
Revenue, net	$	4,888		$	3,317		$	9,602		$	6,677
HDD ASPs (per unit)	$	62		$	61		$	61		$	61

Revenues by Geography (%)
Americas	39		%	31		%	39		%	31		%
Europe, Middle East and Africa	17			23			17			22
Asia	44			46			44			47

Revenues by End Market (%)
Client Devices	49		%	48		%	50		%	49		%
Client Solutions	22			14			21			13
Data Center Devices & Solutions	29			38			29			38

HDD Unit Shipments	44			49			92			101
Exabytes Shipped	78			69			158			133

Table of ~~fiscal 2016:~~Contents

~~Consolidated net revenue totaled $2.8 billion.~~

Net Revenue

Net revenue ~~derived~~for the three months ended December 30, 2016 increased $1.6 billion, or 47%, compared to the same period in 2016, which reflects an increase from ~~enterprise SSDs was $200~~NAND-flash products from our acquisition of SanDisk, partially offset by lower HDD unit shipments. Total HDD shipments for the three months ended December 30, 2016 decreased to 44 million units, as compared to ~~$224 million in the prior-year period.~~

~~HDD shipments decreased 21% from the prior-year period to 43.1 million units.~~

~~Gross margin decreased to 26.7% as compared to 29.1% in the prior-year period.~~

~~Operating income decreased to $88 million as compared to $421 million in the prior-year period.~~

~~We generated $485 million in cash flow from operations and ended the quarter with $5.9 billion in cash and cash equivalents.~~

~~Results of Operations~~

~~Net Revenue~~

Three Months Ended Nine Months Ended
(in millions, except percentages and
average selling price)
April 1,
2016 April 3,
2015 Percentage Change April 1,
2016 April 3,
2015 Percentage Change
Net revenue $ 2,822

$ 3,550
(21 )% $ 9,499

$ 11,381
(17 )%
Average selling price (per unit)* $ 60
$ 61
(2 )% $ 60
$ 60
— %
Revenues by Geography (%)
Americas 30 % 29 % 30 % 27 %
Europe, Middle East and Africa 23
21
22
22

Asia 47
50
48
51

Revenues by Channel (%)
OEM 66 % 64 % 66 % 64 %
Distributors 22
23
21
23

Retailers 12
13
13
13

Unit Shipments*
PC 24.2
32.3
79.5
108.6

Non-PC 18.9
22.2
65.0
71.7

Total units shipped 43.1
54.5
(21 )% 144.5
180.3
(20 )%



*	~~Based on sales of HDD units only.~~

For the quarter ended April 1, 2016, net revenue was $2.8 billion, a decrease of 21% from the prior-year period. Total hard drive shipments decreased to 43.1 million units for the quarter ended April 1, 2016 as compared to 54.549 million units in the ~~prior-year period. For~~same period in 2016, primarily due to lower HDD shipments for personal computer (“PC”) and performance enterprise. This was partially offset by an increase in HDD ASP per unit of $1 compared to the ~~nine~~same period in 2016, primarily due to a change in product mix.

Net revenue for the six months ended ~~April 1,~~December 30, 2016 ~~net revenue was $9.5~~increased $2.9 billion, ~~a decrease~~or 44%, compared to the same period in 2016, which reflects an increase from NAND-flash products from our acquisition of ~~17% from~~SanDisk, partially offset by lower HDD unit shipments. Total HDD shipments for the ~~prior-year period. Total hard drive shipments~~six months ended December 30, 2016 decreased to ~~144.5~~92 million units, ~~for the nine months ended April 1, 2016~~ as compared to ~~180.3~~101 million units in the ~~prior-year period. These decreases~~same period in ~~revenue and shipments were~~2016, primarily ~~the result of a softer demand environment. For the quarter ended April 1, 2016, the average selling prices (“ASP”) for HDDs decreased~~due to ~~$60 compared to the prior-year period ASP for HDDs of $61. For the nine months ended April 1, 2016, the ASP for HDDs remained flat at $60 compared to the prior-year period ASP for HDDs.~~lower HDD shipments.

~~Changes in net revenue by geography and channel generally reflect normal fluctuations in market demand and competitive dynamics.~~

For the three and six months ended ~~April 1,~~December 30, 2016 ~~Hewlett Packard Enterprise Company accounted for approximately 10% of our net revenue. For the nine months ended April~~and January 1, 2016, no ~~one company~~customer accounted for 10% or more of our net revenue. For the three and ~~nine~~six months ended ~~April 3, 2015, Hewlett-Packard Company~~December 30, 2016, our top 10 customers accounted for ~~approximately 10%~~43% and ~~11%~~42%, respectively. For each of the three and six months ended January 1, 2016, our top 10 customers accounted for 44% of our net ~~revenue, respectively.~~revenue.

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. ~~Total sales incentive~~For each of the three and ~~marketing~~six months ended December 30, 2016, these programs ~~have ranged from 7% to 14%~~represented 8% of gross ~~revenues per quarter since the first quarter of fiscal 2014.~~revenues. For the three and ~~nine~~six months ended ~~April~~January 1, 2016, these programs represented ~~14%~~13% and ~~13%~~12% of gross revenues, ~~respectively, as compared to 10% in both the respective prior-year periods.~~respectively. These amounts generally vary according to several factors including industry conditions, seasonal demand, competitor actions, channel mix and overall availability of ~~product.~~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 the three and six months ended December 30, 2016, compared to the same period in 2016, reflect the additional revenues from our acquisition of SanDisk which has comparatively higher revenue in the ~~current range. Adjustments~~Americas than our pre-acquisition business.

Net Revenue by End Market

Changes in the mix of net revenue by end market for the three and six months ended December 30, 2016, compared to the same period in 2016, also reflect the increase in revenues ~~due to changes~~from our acquisition of SanDisk which has comparatively higher revenue in ~~accruals for these programs related to revenues reported in prior periods have averaged 0.6% of quarterly gross revenue since the first quarter of fiscal 2014.~~Client Devices and Data Center Devices and Solutions than our pre-acquisition business.

Gross Profit and Gross Margin

Three Months Ended

Nine Months Ended

(in millions, except percentages) April 1,
2016
April 3,
2015
Percentage Change
April 1,
2016
April 3,
2015
Percentage Change
Net revenue $ 2,822
$ 3,550
(21 )%
$ 9,499

$ 11,381

(17 )%
Gross profit 753
1,032
(27 )%
2,614

3,291

(21 )%
Gross margin 26.7 % 29.1 %
27.5 %
28.9 %

~~For~~Gross profit for the three months ended ~~April 1,~~December 30, 2016 was $1.5 billion, an increase of $627 million compared to the same period in 2016, driven by gross ~~margin decreased to 26.7%,~~profit from NAND-flash products from our acquisition of SanDisk. Gross profit as a percentage of net revenue was 31.4% in the three months ended December 30, 2016, as compared to ~~29.1% for~~27.3% in the ~~prior-year period. For~~same period in 2016. The increase in gross profit was due primarily to higher margins on NAND-flash memory products, increased HDD ASPs and cost improvements resulting from integration activities. Gross profit in the ~~nine~~three months ended ~~April 1,~~December 30, 2016 gross margin decreased to 27.5%, as compared to 28.9% for the prior-year period. These decreases in gross margin were primarily the result of a change in product mix and the related absorption impact due to lower sales volume, as well aswas negatively impacted by amortization expense on acquired intangible assets, stock-based compensation, charges related to the ~~acceleration~~implementation of ~~depreciation~~cost-saving initiatives and acquisition related charges, which aggregated $259 million, or 5.3% of revenue. Gross profit in the three months ended January 1, 2016 was negatively impacted by charges related to the implementation of cost-saving initiatives, amortization expense on acquired intangible assets ~~held at~~and stock-based compensation, which aggregated $39 million, or 1.2% of revenue.

Table of Contents

Gross profit for the ~~Odawara, Japan facility~~six months ended December 30, 2016 was $2.9 billion, an increase of $1.0 billion compared to the same period in 2016, driven by the increased revenues from NAND-flash products from our acquisition of SanDisk. Gross profit as a ~~result~~percentage of net revenue was 29.9% in the ~~closure~~six months ended December 30, 2016, as compared to 27.9% in the same period in 2016. The increase in gross profit was due primarily to higher margins on NAND-flash memory products and cost improvements resulting from integration activities. Gross profit in the six months ended December 30, 2016 was negatively impacted by amortization expense on acquired intangible assets, charges related to the implementation of cost-saving initiatives, stock-based compensation and acquisition related charges, which aggregated $523 million, or 5.4% of revenue. Gross profit in the ~~facility.~~six months ended January 1, 2016 was negatively impacted by amortization expense on acquired intangible assets, charges related to the implementation of cost-saving initiatives and stock-based compensation, which aggregated was $61 million, or 0.9% of revenue.

Operating Expenses

Three Months Ended Nine Months Ended
(in millions, except percentages) April 1,
2016 April 3,
2015 Percentage Change April 1,
2016 April 3,
2015 Percentage Change
R&D expense $ 359

$ 402

(11 )%
$ 1,133
$ 1,265

(10 )%
SG&A expense 166

199

(17 )%
565
583

(3 )%
Charges related to arbitration award —

—

— %
32
15

113 %
Employee termination, asset impairment and other charges 140

10

1,300 %
223
72

210 %
Total operating expenses $ 665
$ 611

$ 1,953
$ 1,935



	Three Months Ended										Six Months Ended
	December 30, 2016				January 1, 2016						December 30, 2016				January 1, 2016
	Amount		% of Rev		Amount		% of Rev		% Change		Amount		% of Rev		Amount		% of Rev		% Change
	(in millions, except percentages)
Research and development	$	585	12.0	%	$	389	11.7	%	50	%	$	1,224	12.7	%	$	774	11.6	%	58	%
Selling, general and administrative	358		7.3		239		7.2		50		754		7.9		431		6.5		75
Employee termination, asset impairment and other charges	45		0.9		27		0.8		67		113		1.2		83		1.2		36
Total operating expenses	$	988	20.2		$	655	19.7		51		$	2,091	21.8		$	1,288	19.3		62

~~Research~~

The increase in research and development (“R&D”) expense ~~was $359 million for~~in the three and six months ended ~~April 1,~~December 30, 2016, ~~a decrease~~compared to the same period in 2016, was primarily related to our acquisition of ~~$43 million from the prior-year period. R&D expense was $1.1 billion for the nine~~SanDisk and continued development of NAND technology to complement our existing product offerings. The three and six months ended ~~April 1,~~December 30, 2016 ~~a decrease~~also included aggregate charges of ~~$132~~$49 million ~~from the prior-year period. These decreases were primarily the result of reductions in our R&D costs as a result of our business realignment initiatives, partially offset by~~and $102 million, respectively, related to share-based compensation expenses, charges related to the ~~acceleration~~implementation of ~~depreciation on assets held at the Odawara, Japan facility. As a percentage of net revenue, R&D expense was 12.7%~~cost-saving initiatives and ~~11.9% in the~~acquisition-related charges. These costs were partially offset by cost savings from our integration activities. The three and ~~nine~~six months ended ~~April~~January 1, 2016 ~~as compared~~also included aggregate charges of $20 million and $36 million, respectively, related to ~~11.3%~~share-based compensation expenses, charges related to the implementation of cost-saving initiatives and ~~11.1%~~other charges.

The increase in ~~the respective prior-year periods.~~

~~Selling,~~selling, general and administrative (“SG&A”) expense was $166 million for the three months ended April 1, 2016, a decrease of $33 million from the prior-year period. SG&A expense was $565 million for the nine months ended April 1, 2016, a decrease of $18 million from the prior-year period. These decreases were primarily the result of reductions in ~~our SG&A costs as a result of our business realignment initiatives, partially offset by acquisition expenses. SG&A expense as a percentage of net revenue was 5.9% in both~~ the three and ~~nine~~six months ended ~~April~~December 30, 2016, compared to the same period in 2016, was primarily related to our acquisition of SanDisk. The three and six months ended December 30, 2016 also included aggregate charges of $97 million and $216 million, respectively, related to share-based compensation expenses, amortization expense on acquired intangible assets, charges related to the implementation of cost-saving initiatives and acquisition-related charges. The three and six months ended January 1, 2016 ~~as compared~~also included aggregate charges of $90 million and $120 million, respectively, related to ~~5.6% and 5.1% in the respective prior-year periods.~~

~~During the nine months ended April 1, 2016, we recorded $32 million of additional interest~~share-based compensation expenses, acquisition-related charges, charges related to an arbitration award, ~~for claims brought against us~~amortization expense on acquired intangible assets, charges related to the implementation of cost-saving initiatives and ~~a now former employee of ours by Seagate Technology LLC, as compared to $15~~other charges.

Employee termination and other charges were $45 million and $113 million in the ~~respective prior-year period. We paid the additional post-award interest to Seagate during~~three and six months ended December 30, 2016, respectively, an increase of $18 million and $30 million from the three and six months ended ~~April~~January 1, 2016, ~~and no additional post-award interest amounts will be recorded on our consolidated financial statements or paid to Seagate.~~respectively. For additional information ~~refer to~~regarding employee termination, asset impairment and other charges, see Part I, Item 1, Note 513 of the Notes to Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q.

~~During the three and nine months ended April 1, 2016, we recorded employee termination, asset impairment and other charges~~

Table of $140 million and $223 million, respectively, which included charges related to the closure of our manufacturing facility in Odawara, Japan, charges related to realigning our operations with anticipated market demand and charges related to oContents

~~ur Restructuring Plan, as compared to $10 million~~Interest and $72 million in the respective prior-year periods. For additional information, refer to Part I, Item 1, Note 12 of the Notes to Condensed Consolidated Financial Statements in this Quarterly Report on Form 10-Q.

Other Income (Expense)

~~Other~~



	Three Months Ended												Six Months Ended
	December 30, 2016					January 1, 2016							December 30, 2016					January 1, 2016
	Amount			% of Rev		Amount			% of Rev		% Change		Amount			% of Rev		Amount			% of Rev		% Change
	(in millions, except percentages)
Interest income	$	5		0.1	%	$	5		0.2	%	100	%	$	10		0.1	%	$	9		0.1	%	11	%
Interest expense	(205		)	(4.2	)	(13		)	(0.4	)	**		(441		)	(4.6	)	(26		)	(0.4	)	**
Other income (expense), net	(24		)	(0.5	)	1			—		**		(296		)	(3.1	)	2			—		**
Total interest and other expense, net	$	(224	)	(4.6	)	$	(7	)	(0.2	)	**		$	(727	)	(7.6	)	$	(15	)	(0.2	)	**


**	Amount not meaningful.

Interest expense ~~net~~increased for the three and ~~nine~~six months ended ~~April 1,~~December 30, 2016, was $8 million and $23 million, respectively, as compared to $9 million and $26 million in the respective prior-year periods. Interest and other income for the three and nine months ended April 1, 2016 increased $3 million and $6 million, respectively, as compared to the ~~prior-year periods~~same period in 2016, primarily due to ~~a higher average daily invested cash balance. Interest and other expense~~the additional debt issued in connection with the acquisition of SanDisk.

Other income (expense), net for the three months ended ~~April 1,~~December 30, 2016 ~~increased $2 million as compared to the prior-year period due to higher interest rates. Interest and other expense~~was primarily comprised of foreign exchange losses. Other income (expense), net for the ~~nine~~six months ended ~~April 1,~~December 30, 2016 ~~increased $3 million as compared to~~was primarily comprised of the ~~prior-year period due to a higher~~write-off of debt ~~balance.~~issuance costs on the settlement of the original U.S. Term Loan B and Euro Term Loan B, loss on the settlement of our convertible debt instruments, and foreign exchange losses.

Income Tax ~~Provision~~Expense (Benefit)

~~We had~~



	Three Months Ended											Six Months Ended
	December 30, 2016					January 1, 2016						December 30, 2016					January 1, 2016
	Amount			% of Rev		Amount			% of Rev		% Change	Amount			% of Rev		Amount			% of Rev		% Change
	(in millions, except percentages)
Income tax expense (benefit)	$	86		1.8	%	$	(7	)	(0.2	)%	**	$	181		1.9	%	$	24		0.4	%	**
Effective tax rate	27		%			(3		)%				362		%			4		%


**	Amount not meaningful.

Income tax expense of $181 million for the six months ended December 30, 2016 is attributable primarily to discrete effects consisting of income tax expense from the integration of $6SanDisk of $90 million and ~~$30 million in~~a valuation allowance on acquired tax attributes of $109 million. Income tax expense related to the ~~three~~SanDisk integration is partially offset by income tax benefit from deductible debt issuance costs, debt discounts and ~~nine~~prepayment fees from the debt refinancing of $96 million. These discrete items are the primary drivers of the effective tax rate for the six months ended ~~April 1, 2016, respectively. Our income~~December 30, 2016.

The primary drivers for the difference between the effective tax ~~expense~~rate for the three and ~~nine~~six months ended ~~April 3, 2015 was $28 million~~December 30, 2016 and ~~$85 million, respectively. Our~~the U.S. Federal statutory rate of 35% are the current year generation of tax ~~provision~~credits, tax holidays in Malaysia, the Philippines, Singapore and Thailand that expire at various dates from 2016 through 2029, for both periods, and the discrete items described above for the ~~three~~six months ended ~~April~~December 30, 2016. For the three and six months ended January 1, 2016, ~~reflects a tax benefit of $10 million for deductible acquisition expenses. Our tax provision for~~ the ~~nine months ended April 1, 2016 reflects a tax benefit of $34 million from restructuring activities and a tax benefit of $10 million for deductible acquisition expenses. The~~ difference between the effective tax rate and the U.S. Federal statutory rate of 35% is primarily due to tax holidays in Malaysia, the Philippines, Singapore and Thailand that expire at various dates from 2016 through ~~2025 and the current year generation of income tax credits.~~ 2029.

For additional information ~~refer to~~regarding income tax expense (benefit), see Part I, Item 1, Note 610 of the Notes to Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q.

Table of Contents

Liquidity and Capital Resources

~~We ended the third quarter of fiscal 2016 with total cash and cash equivalents of $5.9 billion.~~

The following table summarizes our statements of cash flows ~~(in millions):~~for the six months ended December 30, 2016 and January 1, 2016:


							Six Months Ended
	Nine Months Ended						December 30, 2016			January 1, 2016
	April 1, 2016			April 3, 2015			(in millions)
Net cash flow provided by (used in):
Operating activities	$	1,628		$	1,754		$	1,500		$	1,143
Investing activities	(11		)	(712		)	(316		)	(454		)
Financing activities	(754		)	(1,034		)	(4,386		)	(350		)
Net increase in cash and cash equivalents	$	863		$	8
Effect of exchange rate changes on cash							(9		)	—
Net increase (decrease) in cash and cash equivalents							$	(3,211	)	$	339



Delaware	33-0956711
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

~~3355 Michelson Drive, Suite 100~~ ~~Irvine,~~5601 Great Oaks Parkway San Jose, California	~~92612~~95119
(Address of principal executive offices)	(Zip Code)



Large accelerated filer	ý	Accelerated filer	¨
Non-accelerated filer	¨ (Do not check if a smaller reporting company)	Smaller reporting company	¨



		PAGE NO.
PART I. FINANCIAL INFORMATION			3

Item 1.	Financial Statements (unaudited)	3

Condensed Consolidated Balance Sheets — ~~April 1,~~As of December 30, 2016 and July ~~3, 2015~~	3

~~Condensed Consolidated Statements of Income — Three and Nine Months Ended April~~ 1, 2016 ~~and April 3, 2015~~	4

Condensed Consolidated Statements of ~~Comprehensive Income — Three~~Operations —Three and ~~Nine~~Six Months Ended ~~April~~December 30, 2016 and January 1, 2016 ~~and April 3, 2015~~	5

Condensed Consolidated Statements of ~~Cash Flows — Nine~~Comprehensive Income (Loss) —Three and Six Months Ended ~~April~~December 30, 2016 and January 1, 2016 ~~and April 3, 2015~~	6

~~Notes to~~ Condensed Consolidated ~~Financial~~ Statements of Cash Flow —Six Months Ended December 30, 2016 and January 1, 2016	7
	Notes to Condensed Consolidated Financial Statements	8
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	2448

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	3259
Item 4.	Controls and Procedures	60

~~Item 4. Controls and Procedures~~	33

PART II. OTHER INFORMATION
Item 1.	Legal Proceedings	3361
Item 1A.
~~Item 1. Legal Proceedings~~ Risk Factors	3461

~~Item 1A. Risk Factors~~	34

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	5791
Item 3.
~~Item 5. Other Information~~ Defaults Upon Senior Securities	5891
Item 4.	Mine Safety Disclosures	91
Item ~~6. Exhibits~~ 5.	Other Information	5891
Item 6.	Exhibits	91



	December 30, 2016		July 1, 2016
	(in millions)
Inventories:
Raw materials and component parts	$	586	$	569
Work-in-process	617		589
Finished goods	882		971
Total inventories	$	2,085	$	2,129



	December 30, 2016			July 1, 2016
	(in millions)
Property, plant and equipment:
Land and buildings	$	1,871		$	1,900
Machinery and equipment	7,064			6,915
Software	174			155
Furniture and fixtures	52			110
Leasehold improvements	314			307
Construction-in-process	119			245
Property, plant and equipment, gross	9,594			9,632
Accumulated depreciation	(6,356		)	(6,129		)
Property, plant and equipment, net	$	3,238		$	3,503



ý	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934



¨o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934


	April 1, 2016			July 3, 2015			December 30, 2016			July 1, 2016
ASSETS
Current assets:
Cash and cash equivalents	$	5,887		$	5,024		$	4,940		$	8,151
Short-term investments	146			262			161			227
Accounts receivable, net	1,254			1,532			2,004			1,461
Inventories	1,227			1,368			2,085			2,129
Other current assets	226			331			416			616
Total current assets	8,740			8,517			9,606			12,584
Property, plant and equipment, net	2,687			2,965			3,238			3,503
Notes receivable and investments in Flash Ventures							1,082			1,171
Goodwill	2,766			2,766			10,005			9,951
Other intangible assets, net	268			332			4,469			5,034
Other non-current assets	486			601			575			619
Total assets	$	14,947		$	15,181		$	28,975		$	32,862
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	1,571		$	1,881		$	2,012		$	1,888
Accounts payable to related parties							175			168
Accrued expenses	579			470			1,001			995
Accrued compensation	282			330			581			392
Accrued warranty	146			150			190			172
Revolving credit facility	—			255
Bridge loan							—			2,995
Current portion of long-term debt	203			156			129			339
Total current liabilities	2,781			3,242			4,088			6,949
Long-term debt	2,000			2,156			12,944			13,660
Other liabilities	557			564			1,211			1,108
Total liabilities	5,338			5,962			18,243			21,717
Commitments and contingencies (Notes 4, 5 and 6)
Commitments and contingencies (Notes 6, 8, 10 and 14)
Shareholders’ equity:
Preferred stock, $.01 par value; authorized — 5 shares; issued and outstanding — none	—			—
Common stock, $.01 par value; authorized — 450 shares; issued — 261 shares; outstanding — 233 and 230 shares, respectively	3			3
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; outstanding — 288 shares and 284 shares, respectively							3			3
Additional paid-in capital	2,454			2,428			4,574			4,429
Accumulated other comprehensive income (loss)	32			(20		)	(197		)	103
Retained earnings	9,363			9,107			8,411			8,848
Treasury stock — common shares at cost; 28 and 31 shares, respectively	(2,243		)	(2,299		)
Treasury stock — common shares at cost; 24 shares and 28 shares, respectively							(2,059		)	(2,238		)
Total shareholders’ equity	9,609			9,219			10,732			11,145
Total liabilities and shareholders’ equity	$	14,947		$	15,181		$	28,975		$	32,862


Note 2.	Accounting Changes and Recent Accounting Pronouncements



	Carrying Amount
	(in millions)
Balance at July 1, 2016	$	9,951
Purchase price adjustments to goodwill	60
Foreign currency translation adjustment	(6		)
Balance at December 30, 2016	$	10,005



	April 1, 2016
	Cost Basis		Unrealized Gains (Losses)		Fair Value
Available-for-sale securities:
Certificates of deposit	$	146	$	—	$	146
Total	$	146	$	—	$	146



	July 3, 2015
	Cost Basis		Unrealized Gains (Losses)		Fair Value
Available-for-sale securities:
U.S. Treasury securities	$	287	$	—	$	287
U.S. Government agency securities	95		—		95
Commercial paper	109		—		109
Certificates of deposit	99		—		99
Total	$	590	$	—	$	590



	Actuarial Pension Gains (Losses)			Foreign Currency Translation Gains (Losses)			Unrealized Gains (Losses) on Foreign Exchange Contracts			Total AOCI
	(in millions)
Balance at July 1, 2016	$	(45	)	$	74		$	74		$	103
OCI before reclassifications	6			(169		)	(98		)	(261		)
Amounts reclassified from AOCI	—			—			(42		)	(42		)
Income tax benefit (expense) related to items of OCI	(2		)	5			—			3
Net current-period OCI	4			(164		)	(140		)	(300		)
Balance at December 30, 2016	$	(41	)	$	(90	)	$	(66	)	$	(197	)



	Cost Basis		Fair Value
Due in less than one year (short-term investments):	$	146	$	146
Total	$	146	$	146



	Three Months Ended					Six Months Ended
AOCI Component	December 30, 2016		January 1, 2016			December 30, 2016		January 1, 2016			Statement of Operations Line Item
	(in millions)
Unrealized holding gain (loss) on cash flow hedging activities:
Foreign exchange contracts	$	16	$	(25	)	$	40	$	(53	)	Cost of revenue
Foreign exchange contracts	—		—			2		—			Research and development
Unrealized holding gain (loss) on cash flow hedging activities	16		(25		)	42		(53		)
Total reclassifications for the period	$	16	$	(25	)	$	42	$	(53	)


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.



	December 30, 2016
	Level 1		Level 2		Level 3		Total
	(in millions)
Assets:
Cash equivalents:
Money market funds	$	1,381	$	—	$	—	$	1,381
Certificates of deposit	—		8		—		8
Total cash equivalents	1,381		8		—		1,389
Short-term investments:
Certificates of deposit	—		137		—		137
Corporate notes and bonds	—		13		—		13
Asset-backed securities	—		7		—		7
Municipal notes and bonds	—		4		—		4
Total short-term investments	—		161		—		161
Long-term investments:
U.S. Treasury securities	2		—		—		2
U.S. Government agency securities	—		5		—		5
International government securities	—		1		—		1
Corporate notes and bonds	—		64		—		64
Asset-backed securities	—		10		—		10
Municipal notes and bonds	—		5		—		5
Total long-term investments	2		85		—		87
Foreign exchange contracts	—		4		—		4
Total assets at fair value	$	1,383	$	258	$	—	$	1,641
Liabilities:
Foreign exchange contracts	$	—	$	178	$	—	$	178
Exchange option	—		—		1		1
Total liabilities at fair value	$	—	$	178	$	1	$	179



	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 equivalents	2,199		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 securities	2		—		—		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 investments	2		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



	2017 Call Options			2020 Call Options			Total
	(in millions)
Fair value at July 1, 2016	$	70		$	1		$	71
Net realized loss	—			(1		)	(1		)
Redemptions	(70		)	—			(70		)
Fair value at December 30, 2016	$	—		$	—		$	—



	2017 Exchange Options			2020 Exchange Options			Total
	(in millions)
Fair value at July 1, 2016	$	87		$	68		$	155
Net realized gain	(3		)	(31		)	(34		)
Redemptions	(83		)	(46		)	(129		)
Net unrealized loss	—			9			9
Fair value at December 30, 2016	$	1		$	—		$	1



	December 30, 2016				July 1, 2016
	Carrying Value		Fair Value		Carrying Value		Fair Value
	(in millions)
Secured Notes	$	1,831	$	2,093	$	1,828	$	2,044
Unsecured Notes	3,237		3,978		3,229		3,575
Term Loan A	4,068		4,120		4,061		4,161
U.S. Term Loan B	—		—		3,546		3,773
U.S. Term Loan B-1	2,980		3,028		—		—
Euro Term Loan B⁽¹⁾	—		—		960		981
Euro Term Loan B-1⁽¹⁾	927		946		—		—
Bridge Loan	—		—		2,995		3,000
Convertible Debt 2017	—		—		124		125
Convertible Debt 2020	30		31		251		264
Total	$	13,073	$	14,196	$	16,994	$	17,923


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



	Derivative Assets Reported in
	Other Current Assets				Other Non-current Assets
	December 30, 2016		July 1, 2016		December 30, 2016		July 1, 2016
	(in millions)
Foreign exchange forward contracts designated	$	2	$	114	$	—	$	—
Foreign exchange forward contracts not designated	2		12		—		—
Call options	—		70		—		1
Total derivatives	$	4	$	196	$	—	$	1



	Derivative Liabilities Reported in
	Accrued Expenses				Other Liabilities
	December 30, 2016		July 1, 2016		December 30, 2016		July 1, 2016
	(in millions)
Foreign exchange forward contracts designated	$	167	$	23	$	—	$	—
Foreign exchange forward contracts not designated	11		—		—		—
Exchange option	1		141		—		14
Total derivatives	$	179	$	164	$	—	$	14



Derivatives Designated as Hedging Instruments	Gross Amounts of Recognized Assets (Liabilities)			Gross Amounts Offset in the Balance Sheet		Net Amounts of Assets (Liabilities) Presented in the Balance Sheet			Gross Amounts Not Offset in the Balance Sheet				Net Amount
Derivatives Designated as Hedging Instruments	Gross Amounts of Recognized Assets (Liabilities)			Gross Amounts Offset in the Balance Sheet					Financial Instruments		Cash Collateral Received or Pledged		Net Amount
	(in millions)
Foreign exchange forward contracts:
Financial assets	$	2		$	—	$	2		$	—	$	—	$	2
Financial liabilities	(167		)	—		(167		)	—		—		(167		)
Total derivative instruments	$	(165	)	$	—	$	(165	)	$	—	$	—	$	(165	)



	Three Months Ended
Derivatives in Cash Flow Hedging Relationships	Amount of Gain (Loss) Recognized in AOCI on Derivatives					Amount of Gain (Loss) Reclassified from AOCI into Earnings
Derivatives in Cash Flow Hedging Relationships	December 30, 2016			January 1, 2016		December 30, 2016		January 1, 2016
	(in millions)
Foreign exchange forward contracts	$	(119	)	$	13	$	16	$	(25	)



	December 30, 2016
	(in millions)
Notes receivable	$	531
Equity investments	551
Operating lease guarantees	1,102
Prepayments	26
Maximum estimable loss exposure	$	2,210



	Actuarial Pension Gain		Unrealized Gain (Loss) on Foreign Exchange Contracts			Accumulated Other Comprehensive Income (Loss)
Balance at July 3, 2015	$	5	$	(25	)	$	(20	)
Other comprehensive loss before reclassifications	—		(9		)	(9		)
Amounts reclassified from accumulated other comprehensive income (loss)	—		61			61
Net current-period other comprehensive income	—		52			52
Balance at April 1, 2016	$	5	$	27		$	32



	Lease Amounts
	(Japanese yen, in billions)		(U.S. dollar, in millions)
Total guarantee obligations	¥	129	$	1,102



Annual Installments	Payment of Principal Amortization		Purchase Option Exercise Price at Final Lease Terms		Guarantee Amount
	(in millions)
Year 1	$	269	$	47	$	316
Year 2	230		—		230
Year 3	184		71		255
Year 4	108		58		166
Year 5	33		102		135
Total guarantee obligations	$	824	$	278	$	1,102


⁽¹⁾	Restricted stock units (“RSUs”) include performance stock units (“PSUs”)



	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 July 1, 2016	9.0		$	55.74	3.9	$	60
Granted	2.8		44.83
Exercised	(1.5	)	34.56
Canceled or expired	(0.6	)	69.91
Options outstanding at December 30, 2016	9.7		54.86		4.4	187
Exercisable at December 30, 2016	4.8		53.61		2.8	101
Vested and expected to vest after December 30, 2016	9.4		55.00		4.3	180



	Number of Shares		Weighted Average Grant Date Fair Value
	(in millions)
RSUs and PSUs outstanding at July 1, 2016	15.7		$	41.92
Granted	5.5		45.23
Vested	(2.3	)	62.49
Forfeited	(1.4	)	44.06
RSUs and PSUs outstanding at December 30, 2016	17.5		42.82
Expected to vest after December 30, 2016	16.3		42.83