Search the web
Welcome, Guest
[Sign Out, My Account]
EDGAR_Online

Quotes & Info
Enter Symbol(s):
e.g. YHOO, ^DJI
Symbol Lookup | Financial Search
WDC > SEC Filings for WDC > Form 10-K on 15-Aug-2014All Recent SEC Filings

Show all filings for WESTERN DIGITAL CORP

Form 10-K for WESTERN DIGITAL CORP


15-Aug-2014

Annual Report


Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Forward-Looking Statements
The following discussion and analysis contains forward-looking statements within the meaning of the federal securities laws. You are urged to carefully review our description and examples of forward-looking statements included earlier in this Annual Report on Form 10-K immediately prior to Part I, under the heading "Forward-Looking Statements." 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 Item 1A of this Annual Report on Form 10-K, and any of those made in our other reports filed with 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 solutions that enable consumers, businesses, governments and other organizations to create, manage, experience and preserve digital content. Our product portfolio includes hard disk drives ("HDDs") and solid-state drives ("SSDs"). HDDs are our principal products and are today's primary storage medium for digital content, with the use of solid-state storage products growing rapidly. Our products are marketed under the HGST, WD and G-Technology brand names. We currently operate our global business through two independent subsidiaries due to regulatory requirements - HGST and WD.


Table of Contents

Acquisitions

Acquisition of Virident Systems, Inc. ("Virident")

On October 17, 2013, we acquired Virident, a provider of server-side flash storage solutions for virtualization, database, cloud computing and webscale applications. Virident was fully integrated into our HGST subsidiary and became our wholly owned indirect subsidiary. The purchase price of the acquisition was approximately $613 million, consisting of $598 million which was funded with available cash and $15 million related to the fair value of stock options assumed. The acquisition furthered HGST's strategy to address the rapidly changing needs of enterprise customers by delivering intelligent storage solutions that maximize application performance by leveraging the tightly coupled server, storage and network resources of today's converged datacenter infrastructures. The acquisition of Virident did not have a material impact on our consolidated financial statements for fiscal 2014.

Acquisition of sTec, Inc. ("sTec")

On September 12, 2013, we completed the acquisition of sTec, a provider of enterprise SSDs. As a result of the acquisition, sTec was fully integrated into our HGST subsidiary and became our wholly owned indirect subsidiary. The acquisition augmented HGST's existing solid-state storage capabilities. The purchase price of the acquisition was approximately $336 million, consisting of $325 million which was funded with available cash and $11 million related to the fair value of stock options and restricted stock units ("RSUs") assumed. The acquisition of sTec did not have a material impact on our consolidated financial statements for fiscal 2014.

Acquisition of VeloBit, Inc. ("VeloBit")

On July 9, 2013, we acquired VeloBit, a privately held provider of high-performance storage I/O optimization software. As a result of the acquisition, VeloBit was fully integrated into our HGST subsidiary and became our wholly owned indirect subsidiary. The acquisition built on HGST's strategy to enhance the overall value of datacenter storage by integrating HGST SSDs with software. The acquisition did not have a material impact on our consolidated financial statements for fiscal 2014.
Hitachi Global Storage Technologies Holdings Pte. Ltd. ("HGST") Acquisition On March 8, 2012, we completed the acquisition of Viviti Technologies Ltd., known until shortly before the acquisition as HGST, from Hitachi, Ltd. ("Hitachi"). The acquisition is intended over time, and subject to compliance with the regulatory conditions discussed below under "Maintenance of Competitive Requirement," 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 aggregate purchase price of the HGST acquisition was approximately $4.7 billion, consisting of $4.6 billion funded with $3.7 billion of existing cash and cash from new debt as well as 25 million newly issued shares of our common stock with a fair value of $877 million, and $102 million related to the fair value of stock options, RSUs and cash-settled stock appreciation rights ("SARs") assumed. Toshiba Transactions
In connection with the regulatory approval process of the HGST 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 ("TSDT"), a wholly owned subsidiary of Toshiba that manufactured hard drives prior to the Thailand flooding in 2011. The net impact of these two transactions was immaterial to our consolidated financial statements. In August 2013, we received a $45 million insurance recovery related to the Thailand flooding for the facilities acquired in connection with the acquisition of TSDT. Maintenance of Competitive Requirement
In connection with the regulatory approval process of the HGST 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 from the closing date of March 8, 2012). In March 2014, we submitted an application to MOFCOM requesting that the regulatory restrictions be lifted. At this time, we are awaiting MOFCOM's response to our application.
For additional information on our acquisition, see Part II, Item 8, Note 15 of the Notes to Consolidated Financial Statements included in this Annual Report on Form 10-K.


Table of Contents

Results of Operations
Fiscal 2014 Overview
In accordance with accounting principles generally accepted in the United States ("U.S. GAAP"), operating results for Virident, sTec, VeloBit and HGST, which were acquired on October 17, 2013, September 12, 2013, July 9, 2013 and March 8, 2012, respectively, are included in our operating results only after the respective dates of acquisition.
In 2014, our net revenue decreased by 1% to $15.1 billion on hard drive shipments of 249 million units as compared to $15.4 billion on shipments of 242 million units in 2013. In 2014, 53% of our net revenue was derived from our enterprise applications, branded products and CE products, as compared to 50% in 2013. Hard drive average selling price ("ASP") decreased to $58 in 2014 from $61 in 2013. Gross profit as a percentage of revenue increased to 28.8% in 2014 from 28.4% in 2013. Operating income increased from $1.3 billion in 2013 to $1.8 billion in 2014. Operating income in 2014 included $95 million of employee termination, asset impairment and other charges and $52 million of charges related to an arbitration award as compared to $138 million and $681 million for the same charges in 2013, respectively. As a percentage of net revenue, operating income was 11.8% in 2014 compared to 8.2% in 2013. Net income in 2014 was $1.6 billion, or $6.68 per diluted share, compared to $980 million, or $3.98 per diluted share, in 2013.
For the September quarter, we expect overall hard drive industry shipments to increase from the June quarter's 138 million units primarily as a result of seasonality. We expect our revenue in the September quarter to increase slightly as a result of seasonality and an additional week in our first fiscal quarter of 2015 to realign our fiscal quarter ends. Summary Comparison of 2014, 2013 and 2012 The following table sets forth, for the periods presented, selected summary information from our consolidated statements of income by dollars and percentage of net revenue (in millions, except percentages):

                                                              Years Ended
                                   June 27, 2014             June 28, 2013             June 29, 2012
Net revenue                   $ 15,130       100.0  %   $ 15,351       100.0  %   $ 12,478       100.0  %
Gross profit                     4,360        28.8         4,363        28.4         3,638        29.2
R&D and SG&A                     2,422        16.0         2,278        14.8         1,573        12.6
Charges related to
arbitration award                   52         0.3           681         4.4             -           -
Employee termination, asset
impairment and other
charges                             95         0.6           138         0.9            80         0.6
Charges related to
flooding, net                        -           -             -           -           214         1.7
Operating income                 1,791        11.8         1,266         8.2         1,771        14.2
Other expense, net                 (39 )      (0.3 )         (44 )      (0.3 )         (14 )      (0.1 )
Income before income taxes       1,752        11.6         1,222         8.0         1,757        14.1
Income tax provision               135         0.9           242         1.6           145         1.2
Net income                       1,617        10.7           980         6.4         1,612        12.9


Table of Contents

The following table sets forth, for the periods presented, summary information regarding unit shipments, ASPs and revenues by geography and channel (in millions, except percentages and ASPs):

                                                       Years Ended
                                            June 27,     June 28,     June 29,
                                              2014         2013         2012
Net revenue                                $ 15,130     $ 15,351     $ 12,478
ASPs (per unit)*                           $     58     $     61     $     62
Revenues by Geography (%)
Americas                                         25 %         26 %         23 %
Europe, Middle East and Africa                   21           20           19
Asia                                             54           54           58
Revenues by Channel (%)
Original Equipment Manufacturers ("OEM")         63 %         63 %         63 %
Distributors                                     24           24           25
Retailers                                        13           13           12
Unit Shipments*
Compute                                         157          162          150
Non-compute                                      92           80           52
Total units shipped                             249          242          202


_______________


* Based on sales of hard drive units only.

Fiscal Year 2014 Compared to Fiscal Year 2013 Net Revenue. Net revenue was $15.1 billion for 2014, a decrease of 1% from 2013. ASPs were $58 for 2014, a decrease of $3 from 2013. These decreases were primarily due to modest price declines and a change in product mix, partially offset by an increase in unit shipments. Total hard drive shipments in 2014 increased to 249 million units as compared to 242 million units for the prior year primarily due to strength in our consumer electronics solutions, including gaming consoles.
Changes in revenue by geography and channel generally reflect normal fluctuations in market demand and competitive dynamics.
Consistent with standard industry practice, we have sales incentive and marketing programs that provide customers with price protection and other incentives or reimbursements that are recorded as a reduction to gross revenue. For each of 2014 and 2013, these programs represented 8% of gross revenues. These amounts generally vary according to several factors including industry conditions, seasonal demand, competitor actions, channel mix and overall availability of product.
Gross Profit. Gross profit for 2014 was $4.4 billion, a decrease of $3 million from the prior year. Gross profit as a percentage of net revenue increased to 28.8% in 2014 as compared to 28.4% in 2013. The increase in gross profit as a percentage of net revenue was primarily driven by higher volumes in 2014 as compared to 2013 as well as a continued focus on operational excellence. Operating Expenses. Total research and development ("R&D") expense and selling, general and administrative ("SG&A") expense increased to 16.0% of net revenue in 2014 compared to 14.8% in 2013. R&D expense was $1.7 billion in 2014, an increase of $89 million, or 6%, over the prior year. This increase was primarily due to the inclusion of Virident and sTec's R&D expenses from the dates of acquisition and the continued investment in product development. As a percentage of net revenue, R&D expense increased to 11.0% in 2014 compared to 10.2% in 2013. SG&A expense was $761 million in 2014, an increase of $55 million, or 8%, as compared to 2013. This increase in SG&A expense was primarily due to the inclusion of Virident and sTec's SG&A expenses from the dates of acquisition and the expansion of sales and marketing to support new products and growing markets, partially offset by a $65 million gain on flood-related insurance recovery. SG&A expense as a percentage of net revenue increased to 5.0% in 2014 compared to 4.6% in 2013.
During 2014 and 2013, we recorded $52 million and $681 million, respectively, for charges related to an arbitration award for claims brought against us and a now former employee by Seagate Technology LLC ("Seagate"), alleging misappropriation of confidential information and trade secrets. For further detail see the "Arbitration Award" section below.


Table of Contents

During 2014, we recorded $95 million of employee termination, asset impairment and other charges. These charges consisted of $27 million of employee termination benefits, $62 million of asset impairment charges and $6 million of other charges. During 2013, we recorded $138 million of employee termination, asset impairment and other charges. These charges consisted of $109 million of employee termination benefits, $14 million of asset impairment charges and $15 million of other charges.
Other Income (Expense). Other expense, net was $39 million in 2014 compared to $44 million in 2013. Interest and other income increased from $11 million in 2013 to $17 million in 2014 primarily due to a $3 million gain on the sale of our auction-rate securities in 2014 and a higher average daily invested cash balance for the period. Interest and other expense increased from $55 million in 2013 to $56 million in 2014, primarily due to a $4 million write-off of debt issuance costs associated with lenders that extinguished or reduced their participation in our newly entered into Credit Agreement (as defined below), offset by lower variable interest rates on our average debt balance in 2014. Income Tax Provision. Income tax expense was $135 million in 2014 as compared to $242 million in 2013. Tax expense as a percentage of income before taxes was 7.7% in 2014 compared to 19.8% in 2013. Our income tax provision for 2013 also reflects a tax benefit of $37 million as a result of the retroactive extension of the U.S. Federal research and experimentation tax credit ("R&D credit") that was signed into law on January 2, 2013 as part of the American Taxpayer Relief Act of 2012. The R&D credit, which had previously expired on December 31, 2011, was extended through December 31, 2013. In addition, we recorded an $88 million charge to reduce our previously recognized California deferred tax assets in fiscal 2013 as a result of the enactment of California Proposition 39. California Proposition 39, which was approved by California voters on November 6, 2012, affects California state income tax apportionment for most multi-state taxpayers for tax years beginning on or after January 1, 2013. This proposition reduces our future income apportioned to California, making it less likely for us to realize certain California deferred tax assets. 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 2015 through 2025 and the current year generation of income tax credits.
As of June 27, 2014, we had a recorded liability for unrecognized tax benefits of $300 million. We recognized a net increase of $60 million in our liability for unrecognized tax benefits during 2014. Interest and penalties recognized on such amounts were not material.
The Internal Revenue Service ("IRS") previously completed its field examination of our federal income tax returns for fiscal years 2006 and 2007 and issued Revenue Agent Reports that proposed adjustments to income before income taxes of approximately $970 million primarily related to transfer pricing and intercompany payable balances. We disagreed with the proposed adjustments and filed a protest with the IRS Appeals Office. In June 2013, we reached an agreement with the IRS to resolve the transfer pricing issue. This agreement resulted in a decrease in the amount of net operating loss and tax credits realized, but did not have an impact on our consolidated statements of income. The proposed adjustment relating to intercompany payable balances for fiscal years 2006 and 2007 will be addressed in conjunction with the IRS's examination of our fiscal years 2008 and 2009, which commenced in January 2012. In addition, in January 2012, the IRS commenced an examination of the 2007 fiscal period ended September 5, 2007 of Komag, Incorporated ("Komag"), which was acquired by us on September 5, 2007. In February 2013, the IRS commenced an examination of calendar years 2010 and 2011 of HGST, which was acquired by us on March 8, 2012.

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 June 27, 2014, it was not possible to estimate the amount of change, if any, in the unrecognized tax benefits that is reasonably possible within the next twelve months. Any significant change in the amount of our liability for unrecognized tax benefits would most likely result from additional information or settlements relating to the examination of our tax returns. Arbitration Award
As disclosed below in Part II, Item 8, Note 5 in the Notes to Consolidated Financial Statements included in this Annual Report on Form 10-K, on November 18, 2011, a sole arbitrator ruled against us in an arbitration in Minnesota. The arbitration involves claims brought by 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


Table of Contents

and ordered that a rehearing be held concerning certain trade secret claims before a new arbitrator. On October 30, 2012, Seagate initiated an appeal of the District Court's decision with the Minnesota Court of Appeals. On July 22, 2013, the Minnesota Court of Appeals reversed the District Court's decision and remanded for entry of an order and judgment confirming the arbitration award. We strongly disagree with the decision of the Court of Appeals and believe that the District Court's decision was correct. On August 20, 2013, we filed a petition for review with the Minnesota Supreme Court and, on October 15, 2013, we were informed that the Minnesota Supreme Court granted our petition. The appeal before the Minnesota Supreme Court was fully briefed, and oral argument was held on February 5, 2014. We will continue to vigorously defend ourselves in this matter. In light of uncertainties with respect to this matter, we recorded an accrual of $681 million for this matter in fiscal 2013. This amount was in addition to the $25 million previously accrued in fiscal 2011. In 2014, we recorded an additional $52 million for interest related to the arbitration award. As a result, the total amount accrued of $758 million represents the amount of the final arbitration award, plus interest accrued on the initial arbitration award at the statutory rate of 10% from January 24, 2012 through June 27, 2014.
Fiscal Year 2013 Compared to Fiscal Year 2012 Net Revenue. Net revenue was $15.4 billion for 2013, an increase of 23% from 2012. Total hard drive shipments in 2013 increased to 242 million units as compared to 202 million units for the prior year. The increase in net revenue resulted primarily from the contribution of a full year of HGST operations, partially offset by continued soft industry demand as well as a $1 decrease in ASP from $62 to $61.
Changes in revenue by geography and channel generally reflect normal fluctuations in market demand and competitive dynamics.
Consistent with standard industry practice, we have sales incentive and marketing programs that provide customers with price protection and other incentives or reimbursements that are recorded as a reduction to gross revenue. For 2013, these programs represented 8% of gross revenues compared to 6% in 2012. These amounts generally vary according to several factors including industry conditions, seasonal demand, competitor actions, channel mix and overall availability of product.
Gross Profit. Gross profit for 2013 was $4.4 billion, an increase of $725 million, or 20%, from the prior year. Gross profit as a percentage of net revenue decreased to 28.4% in 2013 from 29.2% in 2012. This percentage decrease was primarily due to a decrease in ASP as well as $101 million of incremental amortization, reflecting a full year of amortization for intangibles related to the acquisition of HGST.
Operating Expenses. Total R&D expense and SG&A expense increased to 14.8% of net revenue in 2013 compared to 12.6% in 2012. R&D expense was $1.6 billion in 2013, an increase of $517 million, or 49%, over the prior year. This increase was primarily due to the inclusion of HGST's R&D expense for the full year period as well as continued investment in product development to support new programs. As a percentage of net revenue, R&D expense increased to 10.2% in 2013 compared to 8.5% in 2012. SG&A expense was $706 million in 2013, an increase of $188 million, or 36%, as compared to 2012. This increase in SG&A expense was primarily due to the inclusion of a full year of HGST's SG&A expense and amortization of intangibles related to the acquisition of HGST, partially offset by the inclusion of acquisition-related expenses in the prior-year period. SG&A expense as a percentage of net revenue increased to 4.6% in 2013 compared to 4.2% in 2012.
During 2013, we recorded a $681 million charge related to an arbitration award for claims brought against us and a now former employee by Seagate, alleging misappropriation of confidential information and trade secrets.
During 2013, we recorded $138 million of employee termination benefits and other charges. These charges consisted of $109 million of employee termination benefits, $14 million of asset impairment charges and $15 million of other charges. During 2012, we recorded $56 million of asset impairment charges, $16 million of contract termination and other exit costs and $8 million of employee termination benefits. In addition, during 2012, we recorded $214 million of net charges related to the flooding in Thailand, including $119 million of fixed asset impairments, $61 million of recovery charges, $28 million of write-downs of damaged inventory and $27 million in wage continuation during the shutdown period of our facilities, partially offset by $21 million of insurance recoveries and other cost reimbursements.
Other Income (Expense). Other expense, net was $44 million in 2013 compared to $14 million in 2012. Interest and other income decreased slightly from $12 million in 2012 to $11 million in 2013 primarily due to a lower average daily invested cash balance for the period. Interest and other expense increased from $26 million in 2012 to $55 million in 2013, primarily due to interest on a higher debt balance since the acquisition of HGST.
Income Tax Provision. Income tax expense was $242 million in 2013 as compared to $145 million in 2012. Tax expense as a percentage of income before taxes was 19.8% in 2013 compared to 8.3% in 2012. Our income tax provision for 2013 also reflects a tax benefit of $37 million as a result of the retroactive extension of the R&D credit that was signed into law


Table of Contents

on January 2, 2013 as part of the American Taxpayer Relief Act of 2012. The R&D credit, which had previously expired on December 31, 2011, was extended through December 31, 2013. In addition, we recorded an $88 million charge to reduce our previously recognized California deferred tax assets in fiscal 2013 as a result of the enactment of California Proposition 39. 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 2014 through 2025, the current year generation of income tax credits and the effect of California Proposition 39.
As of June 28, 2013, we had a recorded liability for unrecognized tax benefits of approximately $240 million. We recognized a net decrease of $40 million in our liability for unrecognized tax benefits during 2013. Interest and penalties recognized on such amounts were not material. Liquidity and Capital Resources
We ended 2014 with total cash and cash equivalents of $4.8 billion, an increase of $495 million from June 28, 2013. The following table summarizes our statements of cash flows for the three years ended June 27, 2014 (in millions):

                                                                   Years Ended
                                                        June 27,     June 28,     June 29,
                                                          2014         2013         2012
Net cash flow provided by (used in):
. . .
  Add WDC to Portfolio     Set Alert         Email to a Friend  
Get SEC Filings for Another Symbol: Symbol Lookup
Quotes & Info for WDC - All Recent SEC Filings
Copyright © 2014 Yahoo! Inc. All rights reserved. Privacy Policy - Terms of Service
SEC Filing data and information provided by EDGAR Online, Inc. (1-800-416-6651). All information provided "as is" for informational purposes only, not intended for trading purposes or advice. Neither Yahoo! nor any of independent providers is liable for any informational errors, incompleteness, or delays, or for any actions taken in reliance on information contained herein. By accessing the Yahoo! site, you agree not to redistribute the information found therein.