This information should be read 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, Management's Discussion and Analysis of Financial Condition and Results of Operations, contained in our Annual Report on Form 10-K for the year ended June 29, 2012.

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," the "Company" and "WD" 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 regarding industry demand and pricing in the March quarter and the ability of the industry to support this demand;

• expectations concerning the anticipated benefits of our acquisition of Viviti Technologies Ltd., until recently known as Hitachi Global Storage Technologies Holdings Pte. Ltd.;

• demand for hard drives and solid-state drives in the various markets and factors contributing to such demand;

• our plans to continue to develop new products and expand into new storage markets and into emerging economic markets;

• emergence of new storage markets for hard drives;

• emergence of competing storage technologies;

• our quarterly cash dividend policy;

• our share repurchase plans;

• our stock price volatility;

• our belief regarding our compliance with environmental laws and regulations;

• our belief regarding component availability;

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

• 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;

• contributions to our pension plans in fiscal 2013; and

• our beliefs regarding the sufficiency of our cash and cash equivalents to meet our working capital, capital expenditure and other cash needs.

Forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those expressed in the forward-looking statements. You are urged to carefully review the disclosures we make concerning risks and other factors that may affect our business and operating results, including those made in Part II, 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 an industry-leading developer and manufacturer of storage products that enable people to create, manage, experience and preserve digital content. We design and make storage devices, networking equipment and home entertainment products under the WD, HGST and G-Technology brands. We serve each of the primary markets addressing storage opportunities - enterprise and cloud data centers, client, consumer electronics, backup, the Internet and other emerging markets such as automotive and home and small office networking.

We operate our global business through two independent subsidiaries due to regulatory requirements-WD and HGST, both long-time innovators in the storage industry.

Our principal products today are hard drives, which use one or more rotating magnetic disks ("magnetic media") to store and allow fast access to data. Hard drives are today's primary storage medium for digital content. Our hard drives are used in desktop and notebook computers, multiple types of data centers including corporate and cloud data centers, home entertainment equipment and stand-alone consumer storage devices. Our other products include solid-state drives, home entertainment and networking products and applications for smart phones and tablets.

Acquisition

Hitachi Global Storage Technologies Holdings Pte. Ltd. ("HGST") Acquisition

On March 8, 2012 (the "Closing Date"), we, through Western Digital Ireland ("WDI"), our indirect wholly owned subsidiary, completed the acquisition (the "Acquisition") of all the issued and outstanding paid-up share capital of Viviti Technologies Ltd., until recently known as HGST, from Hitachi, Ltd. ("Hitachi"), pursuant to a Stock Purchase Agreement, dated March 7, 2011, among us, WDI, Hitachi and HGST. The Acquisition is intended over time, and subject to compliance with applicable regulatory conditions imposed on the Acquisition, to result in a more efficient and innovative customer-focused storage company. We do not expect to achieve significant operating expense synergies while the regulatory conditions are in effect.

The preliminary, aggregate purchase price of the Acquisition amounted to approximately $4.7 billion and was subject to a post-closing adjustment for changes in the working capital of HGST and certain other payments and expenses. In the three months ended December 28, 2012, we finalized the post-closing adjustment for changes in the working capital of HGST and recorded a $37 million decrease in the purchase price and goodwill. The purchase price consideration remains subject to adjustment based on resolution of a post-closing assumed pension adjustment.

Toshiba Transactions

In connection with the regulatory approval process of the Acquisition, we announced on May 15, 2012 that we had closed a transaction with Toshiba Corporation ("Toshiba") to divest certain 3.5-inch hard drive assets and to purchase Toshiba Storage Device (Thailand) Company Limited, a wholly-owned subsidiary of Toshiba that manufactured hard drives prior to the recent Thailand flooding. The net impact of these two transactions was immaterial to our condensed consolidated financial statements.

Maintenance of Competitive Requirement

In connection with the regulatory approval process of the Acquisition, we agreed to certain conditions required by the Ministry of Commerce of the People's Republic of China ("MOFCOM"), including adopting measures to maintain HGST as an independent competitor until MOFCOM agrees otherwise (with the minimum period being two years). We have worked closely with MOFCOM to finalize an operations plan that outlines in more detail the conditions of the competitive requirement.

Second Quarter Overview

In accordance with U.S. generally accepted accounting principles ("U.S. GAAP"), operating results for HGST prior to the date of the Acquisition are not included in our operating results, affecting our discussion of changes in our revenues and expenses for the periods prior to the Acquisition as compared to the periods after the Acquisition.

For the quarter ended December 28, 2012, we believe that overall hard drive industry shipments totaled approximately 136 million units, up 14% from the prior-year period as the prior-year period reflected the supply constraints across the hard drive industry brought about by the Thailand floods, and down 2% sequentially from the September quarter as a result of a continued soft industry demand driven by macroeconomic uncertainty, weak PC demand and inventory rebalancing by our customers.

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

                                                     Three Months Ended                                 Six Months Ended
                                        Dec. 28,                       Dec. 30,                 Dec. 28,              Dec. 30,
                                          2012                           2011                     2012                  2011
Net revenue                        $ 3,824       100.0 %    $ 1,995       100.0 %          $7,859     100.0 %    $ 4,689       100.0 %
Gross margin                         1,059        27.7          648        32.5             2,252      28.7        1,189        25.4
Total operating expenses               581        15.2          486        24.4             1,182      15.0          768        16.4
Operating income                       478        12.5          162         8.1             1,070      13.6          421         9.0
Net income                             335         8.8          145         7.3               854      10.9          384         8.2

The following is a summary of our financial performance for the second quarter of 2013:

• Consolidated net revenue totaled $3.8 billion.

• 49% of our hard drive revenue was derived from non-compute and enterprise markets, which include CE products, enterprise applications, and branded products, as compared to 33% in the prior-year period.

• Hard drive unit shipments increased by 108% from the prior-year period to 59.2 million units.

• Gross margin decreased to 27.7%, compared to 32.5% for the prior-year period.

• Operating income, including $41 million of employee termination benefits and other charges, was $478 million, an increase of $316 million from the prior-year period.

• We generated $772 million in cash flow from operations in the second quarter of fiscal 2013, and we ended the quarter with $3.8 billion in cash and cash equivalents.

For the quarter ending March 29, 2013, we expect overall hard drive industry shipments to remain flat to slightly down when compared with the December quarter. In addition, we expect our revenue in the March quarter to decrease slightly from the December quarter reflecting the current demand environment, the seasonal change in business mix and the conclusion of our 3.5-inch contract manufacturing arrangement with Toshiba.

Results of Operations

Net Revenue



                                                           Three Months                                           Six Months
                                                               Ended                                                 Ended
(in millions, except percentages and                 Dec. 28,         Dec. 30,         Percentage          Dec. 28,         Dec. 30,         Percentage
average selling price)                                 2012             2011             Change              2012             2011             Change
Net revenue                                         $    3,824       $    1,995                 92 %      $    7,859       $    4,689                 68 %
Average selling price (per unit)*                   $       62       $       69                (10 )%     $       62       $       54                 15 %

Revenues by Geography (%)
Americas                                                    27 %             22 %                                 25 %             20 %
Europe, Middle East and Africa                              23               21                                   20               22
Asia                                                        50               57                                   55               58

Revenues by Channel (%)
OEM                                                         61 %             59 %                                 62 %             56 %
Distributors                                                24               25                                   24               27
Retailers                                                   15               16                                   14               17

Unit Shipments*
Compute                                                   39.0             21.2                                 81.7             62.4
Non-compute                                               13.6              5.6                                 27.4             19.8
Enterprise                                                 6.6              1.7                                 12.6              4.1

Total units shipped                                       59.2             28.5                108 %           121.7             86.3                 41 %

* Based on sales of hard drive units only.

For the quarter ended December 28, 2012, net revenue was $3.8 billion, an increase of 92% from the prior-year period. Total hard drive shipments increased to 59.2 million units for the quarter ended December 28, 2012 as compared to 28.5 million units in the prior-year period. For the six months ended December 28, 2012, net revenue was $7.9 billion, an increase of 68% from the prior-year period. Total hard drive shipments increased to 121.7 million units for the six months ended December 28, 2012, as compared to 86.3 million units for the prior-year period. These increases resulted primarily from the contribution of the acquired operations of HGST. For the quarter ended December 28, 2012, average selling price ("ASP") decreased by $7 from the prior-year period, from $69 to $62. This decrease in ASP was a result of a higher ASP in the prior-year period due to the supply constraints across the hard drive industry brought about by the Thailand floods. For the six months ended December 28, 2012, ASP increased by $8, from $54 to $62. This increase in ASP reflects a lower ASP in the prior-year period preceding the supply constraints across the hard drive industry brought about by the Thailand floods which subsequently increased ASP.

Changes in revenue by geography and channel generally reflect normal fluctuations in market demand and competitive dynamics. However, in the three and six months ended December 28, 2012, our revenue by channel mix reflects a slightly heavier weighting toward OEM as result of the Acquisition. In addition, for both the three and six months ended December 28, 2012, no customer accounted for 10% or more of our net revenue.

In accordance with standard industry practice, we have sales incentive and marketing programs that provide customers with price protection and other incentives or reimbursements that are recorded as a reduction to gross revenue. For the three and six months ended December 28, 2012, these programs represented 9% and 8% of gross revenues, respectively, compared to 1% and 5% in the respective prior-year period. These amounts generally vary according to several factors, including industry conditions, seasonal demand, competitor actions, channel mix and overall availability of product. However, in the respective prior-year periods, sales incentive and marketing programs were significantly reduced due to the supply constraints across the hard drive industry brought about by the Thailand floods.

Gross Margin



                                           Three Months                                       Six Months
                                              Ended                                             Ended
                                     Dec. 28,        Dec. 30,        Percentage        Dec. 28,        Dec. 30,        Percentage
(in millions, except percentages)      2012            2011            Change            2012            2011            Change
Net revenue                         $    3,824      $    1,995                92 %    $    7,859      $    4,689                68 %
Gross margin                             1,059             648                63 %         2,252           1,189                89 %

For the three months ended December 28, 2012, gross margin as a percentage of revenue decreased to 27.7% as compared to 32.5% for the prior-year period. This decrease was a result of a higher gross margin in the prior-year period as a result of increased ASPs due to the supply constraints across the hard drive industry brought about by the Thailand floods. For the six months ended December 28, 2012, gross margin as a percentage of revenue increased to 28.7% as compared to 25.4% for the prior-year period. This increase was primarily a result of product mix, offset by $38 million for amortization of intangibles related to the Acquisition.

Operating Expenses



                                                         Three Months                                       Six Months
                                                             Ended                                             Ended
                                                    Dec. 28,       Dec. 30,        Percentage         Dec. 28,       Dec. 30,        Percentage
(in millions, except percentages)                     2012           2011            Change             2012           2011            Change
R&D expense                                        $      378      $     191                98 %     $      774      $     384               102 %
SG&A expense                                              162             96                69 %            341            185                84 %
Employee termination benefits and other charges            41             -                                  67             -
Charges related to flooding                                -             199                                 -             199

Total operating expenses                           $      581      $     486                         $    1,182      $     768

Research and development ("R&D") expense was $378 million for the three months ended December 28, 2012, an increase of $187 million from the prior-year period. For the six months ended December 28, 2012, R&D expense was $774 million, an increase of $390 million from the prior-year period. These increases were primarily due to the inclusion of HGST's R&D expense as result of the Acquisition, as well as the continued investment in product development to support new programs. As a percentage of net revenue, R&D expense increased to 9.9% and 9.8% in the three and six months ended December 28, 2012, respectively, compared to 9.6% and 8.2% in the respective prior-year periods.

Selling, general and administrative ("SG&A") expense was $162 million for the three months ended December 28, 2012, an increase of $66 million over the prior-year period. For the six months ended December 28, 2012, SG&A expense was $341 million, an increase of $156 million over the prior-year period. These increases were primarily due to the inclusion of HGST's SG&A expense and $11 million for amortization of intangibles as a result of the Acquisition, as well as the expansion of sales and marketing to support new products and growing markets. SG&A expense as a percentage of net revenue decreased to 4.2% and increased to 4.3% in the three and six months ended December 28, 2012, respectively, compared to 4.8% and 3.9% in the respective prior-year periods.

In the second quarter of fiscal 2013, we recorded charges of $41 million consisting of $26 million of employee termination benefits, $12 million of asset impairments and $3 million of contract and other termination costs in order to realign our operations with anticipated market demand. During the six months ended December 28, 2012, we recorded charges of $67 million consisting of $51 million of employee termination benefits, $12 million of asset impairments and $4 million of contract and other termination costs in order to realign our operations with anticipated market demand.

During the three months ended December 30, 2011, we recorded $199 million of charges related to the Thailand flooding, including $109 million of fixed asset impairments, $39 million of recovery charges, $28 million of write-downs of damaged inventory and $23 million in wage continuation during the shutdown period of our facilities.

Voluntary Separation Program

On January 23, 2013, we announced a voluntary separation program (the "Program") for the U.S.-based employees of our WD subsidiary. The Program is intended to help realign our cost structure with a softer demand environment. As we do not know the number or job levels of employees that will participate in the Program, at this time, we are unable to estimate the charges we will incur in connection with the Program, although we expect the charges will consist of cash severance and other related termination benefits. We expect to complete the Program by the first quarter of fiscal 2014.

Other Income (Expense)

Interest income did not change for the three months ended December 28, 2012 compared to the prior-year period. Interest income for the six months ended December 28, 2012 decreased $1 million as compared to the prior-year period primarily due to a lower average daily invested cash balance for the period. Interest and other expense for the three and six months ended December 28, 2012 increased $8 million and $20 million, respectively, as compared to the prior-year periods primarily due to interest on an increased debt balance.

Income Tax Provision

Our income tax provision for the three months ended December 28, 2012 was $133 million as compared to $15 million in the prior-year period. Our income tax provision for the six months ended December 28, 2012 was $192 million as compared to $34 million in the prior-year period. The differences between the effective tax rate and the U.S. Federal statutory rate are primarily due to tax holidays in Malaysia, the Philippines, Singapore and Thailand that expire at various dates from 2013 through 2025, the current year generation of income tax credits and the effect of California Proposition 39 which was passed in November 2012.

On November 6, 2012, California voters approved California Proposition 39, which affects California state income tax apportionment for most multi-state taxpayers for tax years beginning on or after January 1, 2013. This proposition would reduce our future income apportioned to California, making it less likely for us to realize certain California deferred tax assets. As a result, we recorded an $88 million charge to reduce our previously recognized California deferred tax assets as of December 28, 2012.

In the three months ended December 28, 2012, we did not record a change in our liability for unrecognized tax benefits. In the six months ended December 28, 2012, we recorded a net decrease of $4 million in our liability for unrecognized tax benefits. As of December 28, 2012, we had a recorded liability for unrecognized tax benefits of approximately $276 million. Interest and penalties recognized on such amounts were not material.

The Internal Revenue Service ("IRS") has completed its field examination of the federal income tax returns for fiscal years 2006 and 2007 for us. We have also received Revenue Agent Reports ("RARs") from the IRS that seek adjustments to income before income taxes of approximately $970 million in connection with unresolved issues related primarily to transfer pricing and certain other intercompany transactions. We disagree with the proposed adjustments. In May 2011, we filed a protest with the IRS Appeals Office regarding the proposed adjustments. Meetings with the Appeals Office began in February 2012. In January 2012, the IRS commenced an examination of our fiscal years 2008 and 2009 and of the 2007 fiscal period ended September 5, 2007 of Komag, Incorporated ("Komag"), which we acquired on September 5, 2007.

We believe that adequate provision has been made for any adjustments that may result from tax examinations. However, the outcome of tax audits cannot be predicted with certainty. If any issues addressed in our tax audits are resolved in a manner not consistent with management's expectations, we could be required to adjust our provision for income taxes in the period such resolution occurs. As of December 28, 2012, we believe it is reasonably possible that our liability for unrecognized tax benefits will decrease by $54 million within the next twelve months. Any significant change in the amount of our liability for unrecognized tax benefits would most likely result from additional information or settlements relating to the examination of our uncertain tax positions.

On January 2, 2013, the American Taxpayer Relief Act of 2012 ("the Act") was signed into law. One of the provisions of the Act provides a retroactive extension of the research and experimentation tax credit ("R&D credit") through December 31, 2013, which had expired on December 31, 2011. We expect that we will recognize a tax benefit of between $30 and $40 million during the third quarter of fiscal 2013 as a result of the retroactive extension of the R&D credit.

Arbitration Award

As disclosed above in Part I, Item 1, Note 5 in the Notes to Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q, on November 18, 2011, a sole arbitrator ruled against us in an arbitration in Minnesota. The arbitration involves claims brought by Seagate Technology LLC ("Seagate") against us and a now former employee, alleging misappropriation of confidential information and trade secrets. The arbitrator issued an interim award against us in the amount of $525 million plus pre-award interest. On January 23, 2012, the arbitrator issued a final award adding pre-award interest in the amount of $105.4 million, for a total award of $630.4 million. On January 23, 2012, we filed a petition in the District Court of Hennepin County, Minnesota to have the final arbitration award vacated, and a hearing on the petition to vacate was held on March 1, 2012. On October 12, 2012, the District Court of Hennepin County, Minnesota vacated, in full, the $630.4 million final arbitration award and ordered that a rehearing be held concerning certain trade secret claims before a new arbitrator. On October 30, 2012, Seagate initiated an . . .