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

(Mark One)
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 29, 2019
Or
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                      to                     
Commission file number: 1-8703
 
 

http://api.tenkwizard.com/cgi/image?quest=1&rid=23&ipage=12884376&doc=15
WESTERN DIGITAL CORPORATION
(Exact Name of Registrant as Specified in Its Charter)
 
 
Delaware
33-0956711
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
 
 
5601 Great Oaks Parkway
San Jose, California
95119
(Address of principal executive offices)
(Zip Code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading symbol(s)
Name of each exchange on which registered
Common Stock, $.01 Par Value Per Share
WDC
The Nasdaq Stock Market LLC
 
 
(Nasdaq Global Select Market)
Registrant’s telephone number, including area code: (408) 717-6000
 
 
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ý    No  ¨
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes  ý    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.



Large accelerated filer
ý
Accelerated filer
¨
Non-accelerated filer
¨
Smaller reporting company
¨
Emerging growth company
¨
 
 
 
 
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.    ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  ý
As of the close of business on April 30, 2019, 292,997,704 shares of common stock, par value $0.01 per share, were outstanding.



WESTERN DIGITAL CORPORATION
INDEX

 
 
PAGE NO.
PART I. FINANCIAL INFORMATION
 
 
 
Item 1.
Financial Statements (unaudited)
 
 
Condensed Consolidated Balance Sheets — As of March 29, 2019 and June 29, 2018
 
Condensed Consolidated Statements of Operations — Three and Nine Months Ended March 29, 2019 and March 30, 2018
 
Condensed Consolidated Statements of Comprehensive Income (Loss) — Three and Nine Months Ended March 29, 2019 and March 30, 2018
 
Condensed Consolidated Statements of Cash Flows — Nine Months Ended March 29, 2019 and March 30, 2018
 
Condensed Consolidated Statements of Shareholders' Equity — Nine Months Ended March 29, 2019 and March 30, 2018
 
Notes to Condensed Consolidated Financial Statements
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
Item 4.
Controls and Procedures
 
 
 
PART II. OTHER INFORMATION
Item 1.
Legal Proceedings
Item 1A.
Risk Factors
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
Item 3.
Defaults Upon Senior Securities
Item 4.
Mine Safety Disclosures
Item 5.
Other Information
Item 6.
Exhibits

Unless otherwise indicated, references herein to specific years and quarters are to our fiscal years and fiscal quarters, and references to financial information are on a consolidated basis. As used herein, the terms “we,” “us,” “our,” the “Company,” “WDC” and “Western Digital” refer to Western Digital Corporation and its subsidiaries, unless we state, or the context indicates, otherwise.

WDC, a Delaware corporation, is the parent company of our data storage business. Our principal executive offices are located at 5601 Great Oaks Parkway, San Jose, California 95119. Our telephone number is (408) 717-6000 and our website is www.wdc.com. The information on our website is not incorporated in this Quarterly Report on Form 10‑Q.

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



3

Table of Contents

FORWARD-LOOKING STATEMENTS

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

expectations regarding our Flash Ventures joint venture with Toshiba Memory Corporation, the flash industry and our flash wafer output plans;
our cost and expense reduction actions;
our quarterly cash dividend policy and share repurchase program;
expectations regarding our product development and technology plans;
expectations regarding our future results of operations;
expectations regarding the outcome of legal proceedings in which we are involved;
expectations regarding the impact of the Tax Cuts and Jobs Act enacted on December 22, 2017 on the Company;
expectations regarding the repatriation of funds from our foreign operations;
our beliefs regarding tax benefits and the timing of future payments, if any, relating to the unrecognized tax benefits, and the adequacy of our tax provisions;
expectations regarding capital investments and sources of funding for those investments; and
our beliefs regarding the sufficiency of our available liquidity to meet our working capital, our debt and debt covenants, our dividend plans and our capital expenditure needs.

Forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those expressed in the forward-looking statements. You are urged to carefully review the disclosures we make concerning risks and other factors that may affect our business and operating results, including those made in Part 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. 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.


4

Table of Contents

PART I. FINANCIAL INFORMATION

Item 1.
Financial Statements (unaudited)

WESTERN DIGITAL CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(in millions, except par value)
(Unaudited)
 
March 29,
2019
 
June 29,
2018
ASSETS
Current assets:
 
 
 
Cash and cash equivalents
$
3,682

 
$
5,005

Accounts receivable, net
1,223

 
2,197

Inventories
3,440

 
2,944

Other current assets
557

 
492

Total current assets
8,902

 
10,638

Property, plant and equipment, net
3,031

 
3,095

Notes receivable and investments in Flash Ventures
2,403

 
2,105

Goodwill
10,075

 
10,075

Other intangible assets, net
1,918

 
2,680

Other non-current assets
584

 
642

Total assets
$
26,913

 
$
29,235

LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
 
 
 
Accounts payable
$
1,577

 
$
2,265

Accounts payable to related parties
312

 
259

Accrued expenses
1,645

 
1,274

Accrued compensation
402

 
479

Current portion of long-term debt
276

 
179

Total current liabilities
4,212

 
4,456

Long-term debt
10,309

 
10,993

Other liabilities
2,178

 
2,255

Total liabilities
16,699

 
17,704

Commitments and contingencies (Notes 7, 9, 11 and 14)

 

Shareholders’ equity:
 
 
 
Preferred stock, $0.01 par value; authorized — 5 shares; issued and outstanding — none

 

Common stock, $0.01 par value; authorized — 450 shares; issued — 312 shares; outstanding — 293 shares and 296 shares, respectively
3

 
3

Additional paid-in capital
3,891

 
4,254

Accumulated other comprehensive loss
(55
)
 
(39
)
Retained earnings
7,799

 
8,757

Treasury stock — common shares at cost; 19 shares and 16 shares, respectively
(1,424
)
 
(1,444
)
Total shareholders’ equity
10,214

 
11,531

Total liabilities and shareholders’ equity
$
26,913

 
$
29,235


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

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Table of Contents

WESTERN DIGITAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in millions, except per share amounts)
(Unaudited)
 
Three Months Ended

Nine Months Ended
 
March 29,
2019

March 30,
2018

March 29,
2019

March 30,
2018
Revenue, net
$
3,674

 
$
5,013

 
$
12,935

 
$
15,530

Cost of revenue
3,095

 
3,086

 
9,648

 
9,677

Gross profit
579

 
1,927

 
3,287

 
5,853

Operating expenses:
 
 
 
 
 
 
 
Research and development
544

 
602

 
1,659

 
1,823

Selling, general and administrative
353

 
376

 
1,018

 
1,121

Employee termination, asset impairment, and other charges
76

 
35

 
142

 
135

Total operating expenses
973

 
1,013

 
2,819

 
3,079

Operating income (loss)
(394
)
 
914

 
468

 
2,774

Interest and other income (expense):
 
 
 
 
 
 
 
Interest income
13

 
16

 
43

 
46

Interest expense
(118
)
 
(160
)
 
(352
)
 
(562
)
Other income (expense), net
22

 
(898
)
 
28

 
(902
)
Total interest and other expense, net
(83
)
 
(1,042
)
 
(281
)
 
(1,418
)
Income (loss) before taxes
(477
)

(128
)

187

 
1,356

Income tax expense (benefit)
104

 
(189
)
 
744

 
1,437

Net income (loss)
$
(581
)
 
$
61

 
$
(557
)
 
$
(81
)
 
 
 
 
 
 
 
 
Income (loss) per common share
 
 
 
 
 
 
 
Basic
$
(1.99
)
 
$
0.20

 
$
(1.91
)
 
$
(0.27
)
Diluted
$
(1.99
)
 
$
0.20

 
$
(1.91
)
 
$
(0.27
)
Weighted average shares outstanding:
 
 
 
 
 
 
 
Basic
292

 
298

 
291

 
296

Diluted
292

 
308

 
291

 
296

 
 
 
 
 
 
 
 
Cash dividends declared per share
$
0.50

 
$
0.50

 
$
1.50

 
$
1.50


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

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Table of Contents

WESTERN DIGITAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(in millions)
(Unaudited)
 
Three Months Ended
 
Nine Months Ended
 
March 29,
2019
 
March 30,
2018
 
March 29,
2019
 
March 30,
2018
Net income (loss)
$
(581
)
 
$
61

 
$
(557
)
 
$
(81
)
Other comprehensive income (loss), before tax:
 
 
 
 
 
 
 
Actuarial pension gain

 
1

 
1

 
1

Foreign currency translation adjustment
(2
)
 
76

 
(8
)
 
78

Net unrealized gain (loss) on derivative contracts and available-for-sale securities
(24
)
 
18

 
(18
)
 
31

Total other comprehensive income (loss), before tax
(26
)
 
95

 
(25
)
 
110

Income tax benefit (expense) related to items of other comprehensive income (loss), before tax
6

 
(3
)
 
9

 
(6
)
Other comprehensive income (loss), net of tax
(20
)
 
92

 
(16
)
 
104

Total comprehensive income (loss)
$
(601
)
 
$
153

 
$
(573
)
 
$
23


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

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Table of Contents

WESTERN DIGITAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in millions)
(Unaudited)
 
Nine Months Ended
 
March 29,
2019
 
March 30,
2018
Cash flows from operating activities
 
 
 
Net loss
$
(557
)
 
$
(81
)
Adjustments to reconcile net loss to net cash provided by operations:
 
 
 
Depreciation and amortization
1,396

 
1,567

Stock-based compensation
242

 
299

Deferred income taxes
253

 
(336
)
Loss on disposal of assets
4

 
16

Write-off of issuance costs and amortization of debt discounts
28

 
208

Cash premium on extinguishment of debt

 
720

Non-cash portion of employee termination, asset impairment and other charges

 
16

Other non-cash operating activities, net
19

 
(15
)
Changes in:
 
 
 
Accounts receivable, net
975

 
(58
)
Inventories
(496
)
 
(324
)
Accounts payable
(549
)
 
(41
)
Accounts payable to related parties
53

 
76

Accrued expenses
373

 
(89
)
Accrued compensation
(78
)
 
2

Other assets and liabilities, net
(285
)
 
1,382

Net cash provided by operating activities
1,378

 
3,342

Cash flows from investing activities
 
 
 
Purchases of property, plant and equipment
(722
)
 
(643
)
Proceeds from the sale of property, plant and equipment
3

 
24

Acquisitions, net of cash acquired

 
(99
)
Purchases of investments
(69
)
 
(66
)
Proceeds from sale of investments
49

 
39

Proceeds from maturities of investments
7

 
16

Notes receivable issuances to Flash Ventures
(858
)
 
(1,015
)
Notes receivable proceeds from Flash Ventures
570

 
308

Strategic investments and other, net
(22
)
 
30

Net cash used in investing activities
(1,042
)
 
(1,406
)
Cash flows from financing activities
 
 
 
Issuance of stock under employee stock plans
66

 
146

Taxes paid on vested stock awards under employee stock plans
(109
)
 
(164
)
Repurchases of common stock
(563
)
 
(155
)
Dividends paid to shareholders
(438
)
 
(443
)
Settlement of debt hedge contracts

 
28

Proceeds from (repayment of) revolving credit facility
(500
)
 
500

Repayment of debt
(113
)
 
(14,581
)
Proceeds from debt

 
11,384

Debt issuance costs

 
(52
)
Net cash used in financing activities
(1,657
)
 
(3,337
)
Effect of exchange rate changes on cash
(2
)
 
10

Net decrease in cash and cash equivalents
(1,323
)
 
(1,391
)
Cash and cash equivalents, beginning of year
5,005

 
6,354

Cash and cash equivalents, end of period
$
3,682

 
$
4,963

Supplemental disclosure of cash flow information:
 
 
 
Cash paid for income taxes
$
323

 
$
177

Cash paid for interest
$
355

 
$
633


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

8

Table of Contents

WESTERN DIGITAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(in millions)
 
Common Stock
 
Treasury Stock
 
Additional Paid-In Capital
 
Accumulated Other Comprehensive Income (Loss)
 
Retained Earnings
 
Total Shareholders’ Equity
 
Shares
 
Amount
 
Shares
 
Amount
 
 
 
 
Balance at June 29, 2018
312

 
$
3

 
(16
)
 
$
(1,444
)
 
$
4,254

 
$
(39
)
 
$
8,757

 
$
11,531

Net income

 

 

 

 

 

 
511

 
511

Employee stock plans

 

 
1

 
198

 
(256
)
 

 

 
(58
)
Adoption of New Accounting Standards

 

 

 

 

 

 
56

 
56

Stock-based compensation

 

 

 

 
79

 

 

 
79

Repurchases of common stock

 

 
(8
)
 
(563
)
 

 

 

 
(563
)
Dividends to shareholders

 

 

 

 
8

 

 
(152
)
 
(144
)
Foreign currency translation adjustment

 

 

 

 

 
(37
)
 

 
(37
)
Balance at September 28, 2018
312

 
$
3

 
(23
)
 
$
(1,809
)
 
$
4,085

 
$
(76
)
 
$
9,172

 
$
11,375

Net loss

 

 

 

 

 

 
(487
)
 
(487
)
Employee stock plans

 

 
2

 
159

 
(109
)
 

 

 
50

Stock-based compensation

 

 

 

 
79

 

 

 
79

Dividends to shareholders

 

 

 

 
7

 

 
(153
)
 
(146
)
Actuarial pension gain

 

 

 

 

 
1

 

 
1

Foreign currency translation adjustment

 

 

 

 

 
29

 

 
29

Net unrealized gain on derivative contracts

 

 

 

 

 
11

 

 
11

Balance at December 28, 2018
312

 
$
3

 
(21
)
 
$
(1,650
)
 
$
4,062

 
$
(35
)
 
$
8,532

 
$
10,912

Net loss

 

 

 

 

 

 
(581
)
 
(581
)
Employee stock plans

 

 
2

 
226

 
(261
)
 

 

 
(35
)
Stock-based compensation

 

 

 

 
84

 

 

 
84

Dividends to shareholders

 

 

 

 
6

 

 
(152
)
 
(146
)
Foreign currency translation adjustment

 

 

 

 

 
(1
)
 

 
(1
)
Net unrealized loss on available-for-sale securities

 

 

 

 

 
(19
)
 

 
(19
)
Balance at March 29, 2019
312

 
$
3

 
(19
)
 
$
(1,424
)
 
$
3,891

 
$
(55
)
 
$
7,799

 
$
10,214



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Table of Contents

WESTERN DIGITAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(in millions)
 
Common Stock
 
Treasury Stock
 
Additional Paid-In Capital
 
Accumulated Other Comprehensive Income (Loss)
 
Retained Earnings
 
Total Shareholders’ Equity
 
Shares
 
Amount
 
Shares
 
Amount
 
 
 
 
Balance at June 30, 2017
312

 
$
3

 
(18
)
 
$
(1,666
)
 
$
4,506

 
$
(58
)
 
$
8,633

 
$
11,418

Net income

 

 

 

 

 

 
681

 
681

Employee stock plans

 

 
1

 
156

 
(197
)
 

 

 
(41
)
Adoption of New Accounting Standards

 

 

 

 
(19
)
 

 
70

 
51

Stock-based compensation

 

 

 

 
97

 

 

 
97

Dividends to shareholders

 

 

 

 
9

 

 
(155
)
 
(146
)
Foreign currency translation adjustment

 

 

 

 

 
(4
)
 

 
(4
)
Net unrealized gain on derivative contracts and available-for-sale securities

 

 

 

 

 
3

 

 
3

Balance at September 29, 2017
312

 
$
3

 
(17
)
 
$
(1,510
)
 
$
4,396

 
$
(59
)
 
$
9,229

 
$
12,059

Net loss

 

 

 

 

 

 
(823
)
 
(823
)
Employee stock plans

 

 
2

 
165

 
(92
)
 

 

 
73

Stock-based compensation

 

 

 

 
99

 

 

 
99

Dividends to shareholders

 

 

 

 
7

 

 
(156
)
 
(149
)
Foreign currency translation adjustment

 

 

 

 

 
6

 

 
6

Net unrealized gain on derivative contracts and available-for-sale securities

 

 

 

 

 
7

 

 
7

Balance at December 29, 2017
312

 
$
3

 
(15
)
 
$
(1,345
)
 
$
4,410

 
$
(46
)
 
$
8,250

 
$
11,272

Net income

 

 

 

 

 

 
61

 
61

Employee stock plans

 

 
4

 
319

 
(369
)
 

 

 
(50
)
Stock-based compensation

 

 

 

 
103

 

 

 
103

Equity value of convertible debt issuance, net of deferred taxes

 

 

 

 
125

 

 

 
125

Repurchases of common stock

 

 
(2
)
 
(155
)
 

 

 

 
(155
)
Dividends to shareholders

 

 

 

 
8

 

 
(156
)
 
(148
)
Actuarial pension loss

 

 

 

 

 
1

 

 
1

Foreign currency translation adjustment

 

 

 

 

 
74

 

 
74

Net unrealized gain on derivative contracts and available-for-sale securities

 

 

 

 

 
17

 

 
17

Balance at March 30, 2018
312

 
3

 
(13
)
 
(1,181
)
 
4,277

 
46

 
8,155

 
11,300


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

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Table of Contents

WESTERN DIGITAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Note 1.
Organization and Basis of Presentation

Western Digital Corporation (“Western Digital” or “the Company”) is a leading developer, manufacturer and provider of data storage devices and solutions that address the evolving needs of the information technology industry and the infrastructure that enables the proliferation of data in virtually every other industry. The Company’s broad portfolio of technology and products address the following key markets: Client Devices; Data Center Devices and Solutions; and Client Solutions. The Company also generates license and royalty revenue related to its intellectual property (“IP”), which is included in each of these three categories.

The accounting policies followed by the Company are set forth in Part II, Item 8, Note 1, Organization and Basis of Presentation, of the Notes to Consolidated Financial Statements included in the Company’s Annual Report on Form 10‑K for the fiscal year ended June 29, 2018. In the opinion of management, all adjustments necessary to fairly state the Condensed Consolidated Financial Statements have been made. All such adjustments are of a normal, recurring nature. Certain information and footnote disclosures normally included in the Consolidated Financial Statements prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”) have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). These Condensed Consolidated Financial Statements should be read in conjunction with the Consolidated Financial Statements and the notes thereto included in the Company’s Annual Report on Form 10‑K for the fiscal year ended June 29, 2018. The results of operations for interim periods are not necessarily indicative of results to be expected for the full year.

Fiscal Year

The Company’s fiscal year ends on the Friday nearest to June 30 and typically consists of 52 weeks. Fiscal years 2019, which ends on June 28, 2019, and 2018, which ended on June 29, 2018, are each comprised of 52 weeks, with all quarters presented consisting of 13 weeks. Fiscal year 2020, which ends on July 3, 2020, will be comprised of 53 weeks, with the first quarter consisting of 14 weeks and the remaining quarters consisting of 13 weeks each.

Use of Estimates

Company management has made estimates and assumptions relating to the reporting of certain assets and liabilities in conformity with U.S. GAAP. These estimates and assumptions have been applied using methodologies that are consistent throughout the periods presented. However, actual results could differ materially from these estimates.


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


Note 2.
Recent Accounting Pronouncements

Accounting Pronouncements Recently Adopted

On August 29, 2018, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2018-15, “Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract” (“ASU 2018-15”), to reduce diversity in practice in accounting for the costs of implementing cloud computing arrangements that are service contracts. ASU 2018-15 allows entities to apply the guidance in the FASB Accounting Standards Codification (“ASC”) 350-40 to determine which implementation costs are eligible to be capitalized as assets in a cloud computing arrangement that is considered a service contract. The Company adopted this standard on a prospective basis effective June 30, 2018, the beginning of fiscal year 2019, as allowed by the standard. The adoption of this standard and the costs capitalized for the nine months ended March 29, 2019 were not material to the Company’s Condensed Consolidated Financial Statements.

In February 2018, the FASB issued ASU No. 2018-02, “Income Statement-Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income” (“ASU 2018-02”). ASU 2018-02 allows a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act enacted on December 22, 2017 (the “2017 Act”). Consequently, the amendments eliminate the stranded tax effects resulting from the 2017 Act and will improve the usefulness of information reported to financial statement users. Because the amendments only relate to the reclassification of the income tax effects of the 2017 Act, the underlying guidance that requires that the effect of a change in tax laws or rates be included in income from continuing operations is not affected. For tax effects that are unrelated to the 2017 Act, the Company’s policy to release these from Accumulated other comprehensive loss on an individual item basis rather than a portfolio basis remains unchanged. The Company early adopted this standard effective June 30, 2018 and elected to reclassify stranded tax effects resulting from the 2017 Act from Accumulated other comprehensive loss to Retained earnings. The adoption of this standard did not have a material impact on the Company’s Condensed Consolidated Financial Statements.

In August 2017, the FASB issued ASU No. 2017-12, “Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities” (“ASU 2017-12”). ASU 2017-12 simplifies hedge accounting through changes to both designation and measurement requirements. For hedges that qualify as highly effective, the new standard eliminates the requirement to separately measure and record hedge ineffectiveness with the entire change in fair value of designated hedge reported in the results of operations in the same line item as the hedged item. The Company early adopted this standard effective June 30, 2018, using the modified retrospective approach. The adoption of this standard did not have a material impact on the Company’s Condensed Consolidated Financial Statements.

In May 2017, the FASB issued ASU No. 2017-09, “Compensation-Stock Compensation (Topic 718): Scope of Modification Accounting” (“ASU 2017-09”). ASU 2017-09 provides clarification when a change to the terms or conditions of a share-based payment award must be accounted for as a modification. The new guidance requires modification accounting if the fair value, vesting condition or the classification of the award is not the same immediately before and after a change to the terms and conditions of the award. The Company adopted this standard on a prospective basis effective June 30, 2018. The adoption of this standard did not have a material impact on the Company’s Condensed Consolidated Financial Statements.

In March 2017, the FASB issued ASU No. 2017-07, “Compensation-Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost” (“ASU 2017-07”). ASU 2017-07 requires that the Company report the service cost component in the same line item or items as other compensation costs arising from services rendered by the pertinent employees during the period. In addition, the other components of net benefit cost are now presented in Other income (expense), net in the Condensed Consolidated Statements of Operations. The Company adopted this standard effective June 30, 2018. The adoption of this standard did not have a material impact on the Company’s Condensed Consolidated Financial Statements.

In January 2017, the FASB issued ASU No. 2017-01, “Business Combinations (Topic 805): Clarifying the Definition of a Business” (“ASU 2017-01”). ASU 2017-01 narrows the definition of a “business.” This standard provides guidance to assist entities with evaluating when a set of transferred assets and activities is a business. The Company adopted this standard effective June 30, 2018 and will apply it prospectively to transactions occurring thereafter. The adoption of this standard did not have a material impact on the Company’s Condensed Consolidated Financial Statements.

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



In October 2016, the FASB issued ASU No. 2016-16, “Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory” (“ASU 2016-16”). ASU 2016-16 removes the prohibition in the FASB ASC Topic 740 against the immediate recognition of the current and deferred income tax effects of intra-entity transfers of assets other than inventory. The new standard is intended to reduce the complexity and diversity in practice related to the tax consequences of certain types of intra-entity asset transfers, particularly those involving intellectual property (“IP”). The Company adopted this standard effective June 30, 2018. The adoption of this standard did not have a material impact on the Company’s Condensed Consolidated Financial Statements.

In January 2016, the FASB issued ASU No. 2016-01, “Financial Instruments — Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities” (“ASU 2016-01”). ASU 2016-01 provides guidance related to accounting for equity investments, financial liabilities under the fair value option and the presentation and disclosure requirements for financial instruments. Marketable equity securities previously classified as available-for-sale equity investments are now measured and recorded at fair value with changes in fair value recorded within Other income (expense), net in the Condensed Consolidated Statements of Operations rather than as a component of Other comprehensive income as in prior years. In addition, the FASB clarified guidance related to the valuation allowance assessment when recognizing deferred tax assets resulting from unrealized losses on available-for-sale debt securities. The Company adopted this standard effective June 30, 2018. The adoption of this standard did not have a material impact on the Company’s Condensed Consolidated Financial Statements.

In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers (Topic 606),” which superseded the requirements in ASC 605 “Revenue Recognition” (Topic 605). Topic 606 outlines a comprehensive five-step revenue recognition model based on the principle that an entity should recognize revenue when control of the promised goods or services is transferred to customers at an amount that reflects the consideration to which the Company expects to be entitled in exchange for those goods or services. Topic 606 also requires more detailed disclosures to enable users of financial statements to understand the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. The Company adopted Topic 606 effective June 30, 2018, using the modified retrospective method to all contracts that were not completed contracts as of the beginning of the fiscal year. Results for reporting periods beginning with fiscal year 2019 are presented under Topic 606, while prior period information presented on the financial statements or elsewhere in this Quarterly Report on Form 10-Q is reported under the Company’s historic accounting policies under Topic 605 in effect for that period and is not adjusted to reflect the retrospective effect of the adoption of Topic 606. The cumulative effect of adopting Topic 606 was a post-tax increase to the opening retained earnings of $56 million as of June 30, 2018, which was primarily related to our license and royalty revenue arrangements. These arrangements had no remaining performance obligations but were previously recognized under Topic 605 when they were reported to the Company by its licensees, which was generally one quarter in arrears from the licensees’ sales of the licensed products. Adoption of the standard did not have a material impact on the Company’s financial position, results of operations, and cash flows, as of or for the three and nine months ended March 29, 2019, and the Company expects that the impact of the adoption of the new standard will not be material to its results of operations prospectively. See Note 3, Revenues, for additional disclosures related to this standard.

Recently Issued Accounting Pronouncements Not Yet Adopted

In November 2018, the FASB issued ASU No. 2018-18, “Collaborative Arrangements (Topic 808): Clarifying the Interaction between Topic 808 and Topic 606” (“ASU 2018-18”). ASU 2018-18 clarifies that certain transactions between collaborative arrangement participants should be accounted for as revenue when the collaborative arrangement participant is a customer in the context of a unit of account and precludes recognizing as revenue consideration received from a collaborative arrangement participant if the participant is not a customer. This ASU requires retrospective adoption to the date the Company adopted ASC 606 by recognizing a cumulative-effect adjustment to the opening balance of retained earnings of the earliest annual period presented. The amendments are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019, which for the Company is the first quarter of fiscal 2021. The Company does not expect this update to have a material impact on its Consolidated Financial Statements.


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


In October 2018, the FASB issued ASU No. 2018-16, “Derivatives and Hedging (Topic 815): Inclusion of the Secured Overnight Financing Rate (SOFR) Overnight Index Swap (OIS) Rate as a Benchmark Interest Rate for Hedge Accounting Purposes” (“ASU 2018-16”). ASU 2018-16 allows for the use of the OIS rate based on the SOFR as a U.S. benchmark interest rate for hedge accounting purposes under Topic 815, Derivatives and Hedging. For public entities who have adopted ASU 2017-12, the amendments are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018, which for the Company is the first quarter of fiscal 2020. The Company does not expect this update to have a material impact on its Consolidated Financial Statements.

In June 2016, the FASB issued ASU No. 2016-13, “Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments” (“ASU 2016-13”). ASU 2016-13 seeks to provide financial statement users with more decision-useful information about the expected credit losses on financial instruments, including trade receivables, and other commitments to extend credit held by a reporting entity at each reporting date. The amendments require an entity to replace the incurred loss impairment methodology in current U.S. GAAP with a methodology that reflects current expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. The amendments are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019, which for the Company is the first quarter of fiscal 2021. The Company is currently evaluating the impact this update will have on its Consolidated Financial Statements.

In February 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842)” (“ASU 2016-02”). ASU 2016-02 supersedes ASC 840 “Leases”. The amendments in this update require, among other things, that lessees recognize the following for all leases (unless a policy election is made by class of underlying asset to exclude short-term leases) at the commencement date: (1) a lease liability, which is a lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis; and (2) a right-of-use asset, which is an asset that represents the lessee’s right to use, or the direct use of, a specified asset for the lease term. The FASB issued ASU 2018-11 on July 30, 2018, which allows entities to apply the provisions of ASC 842 at the effective date without adjusting comparative periods. The standard is effective for interim and annual reporting periods beginning after December 15, 2018, with early adoption permitted, and provides optional practical expedients to simplify transition. The Company’s cross-functional project management team continues to identify and evaluate the impact of the amended guidance on the Company's Consolidated Financial Statements and related disclosures, business processes, internal controls, and information systems. The Company has identified its leases and selected a third-party lease accounting software solution. The Company is in the process of implementing its lease accounting software solution and changes to its processes and internal controls to address the new lease standard. The Company’s implementation efforts are progressing as planned. The Company expects to adopt this standard in the first quarter of fiscal 2020 and elect the transition method provided in ASU 2018-11 to apply Topic 842 as of the date of adoption without adjusting comparative periods. The Company also expects to elect the package of practical expedients and not reassess prior conclusions including (a) whether its contracts are or contain a lease, (b) lease classification and (c) capitalization of initial direct costs. The Company continues to evaluate the impact ASU 2016-02 will have on its Consolidated Financial Statements.


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


Note 3.
Revenues

The Company offers a broad range of data storage products that include Client Devices, Data Center Devices and Solutions, and Client Solutions. Client Devices consist of hard disk drives (“HDDs”) and solid state drives (“SSDs”) for computing devices; flash-based embedded storage products; and flash-based memory wafers. Data Center Devices and Solutions consist of high-capacity enterprise HDDs and high-performance enterprise SSDs, data center software and system solutions. Client Solutions consist of HDDs and SSDs embedded into external storage products and removable flash-based products. The Company also generates license and royalty revenues related to its IP patent licenses which are not material.

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

Substantially all of the Company’s revenue is from the sale of tangible products for which the performance obligations are satisfied at a point in time, generally upon delivery. The Company’s services revenue mainly includes post contract customer support, warranty as a service and maintenance contracts. The performance obligations for the Company’s services are generally satisfied ratably over the service period based on the nature of the service provided and contract terms. Similarly, revenue from patent licensing arrangements is recognized based on whether the arrangement provides the customer a right to use or right to access the IP. Revenue for a right to use arrangement is recognized at the time the control of the license is transferred to the customer. Revenue for a right to access arrangement is recognized over the contract period using the time lapse method. For the sales-based royalty arrangements, the Company estimates and recognizes revenue in the period in which customers’ licensable sales occur.

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

The Company provides distributors and retailers (collectively referred to as “resellers”) with limited price protection for inventories held by resellers at the time of published list price reductions and/or a right of return. The Company also provides resellers and original equipment manufacturers (“OEMs”) with other sales incentive programs. The Company uses judgment in its assessment of variable consideration in contracts to be included in the transaction price. The Company uses the expected value method to arrive at the amount of variable consideration. The Company believes the estimate of variable consideration is not constrained and that the expected value method is the appropriate estimate of the amount of variable consideration based on the fact that the Company has a large number of contracts with similar characteristics. The Company’s methodology for the estimates is based on several factors, including anticipated price decreases during the reseller holding period, resellers’ sell-through and inventory levels, estimated amounts to be reimbursed to qualifying customers, historical pricing information, historical and anticipated returns information and customer claim processing. The Company also has programs under which it reimburses qualified distributors and retailers for certain marketing expenditures, which are typically recorded as a reduction of the transaction price and, therefore, of revenue.

An immaterial amount of the Company’s revenue arrangements include more than one performance obligation, which are typically comprised of tangible products, software and support services for multiple distinct licenses. For these multiple-element arrangements, the Company evaluates whether each deliverable is a distinct promise and should be accounted for as a separate performance obligation. If a promised good or service is not distinct in accordance with the revenue guidance, the Company combines that good or service with the other promised goods or services in the arrangement until a distinct bundle of goods is identified. The Company allocates the transaction price to the performance obligations of each distinct product or service, or distinct bundle, based on their relative standalone selling prices. Where a separate standalone selling price is not available, the transaction price is based on the Company’s best estimate of the selling price. The Company uses one or a combination of more than one of the following methods to estimate the standalone selling price: the adjusted market assessment approach, the expected cost plus a margin approach, or another suitable method based on the facts and circumstances.


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


Contract assets represent the Company’s rights to consideration where performance obligations are completed but the customer payments are not due until another performance obligation is satisfied. The Company did not have any contract assets as of either March 29, 2019 or the date of adoption of Topic 606.

The Company incurs sales commissions and other direct incremental costs to obtain sales contracts. The Company has applied the practical expedient to recognize the direct incremental costs of obtaining contracts as an expense when incurred if the amortization period is expected to be one year or less or the amount is not material, with these costs charged to selling, general and administrative expenses. Prior to the adoption of the new revenue standard, the Company’s policy was to expense all contract acquisition costs as incurred. Other direct incremental costs to obtain contracts that have an expected benefit of greater than one year are amortized over the period of expected cash flows from the related contracts, and the amortization expense is recorded as a reduction to revenue. Total capitalized contract costs and the related amortization as of and for the three and nine months ended March 29, 2019 were not material.

Contract liabilities relate to customers’ payments in advance of performance under the contract and primarily relate to remaining performance obligations under support and maintenance contracts. As of March 29, 2019 and the date of adoption of Topic 606, contract liabilities were $46 million and $120 million, respectively, and were reflected in Accrued expenses. Changes in the contract liability balance during the nine months ended March 29, 2019 include $93 million of revenue recognized during the period of which the substantial majority relates to the balance that was deferred at June 29, 2018, partially offset by payments received and billings in advance of satisfying performance obligations.

The Company applies the practical expedients and does not disclose transaction price allocated to the remaining performance obligations for (i) arrangements that have an original expected duration of one year or less, which mainly consist of the support and maintenance contracts, and (ii) variable consideration amounts for sale-based or usage-based royalties for IP license arrangements, which typically range longer than one year. Remaining performance obligations are mainly attributed to right-to-access patent license arrangements and customer support and service contracts which will be recognized over the remaining contract period. The transaction price allocated to the remaining performance obligations as of March 29, 2019 was $204 million, which is mainly attributable to the functional IP license and service arrangements. The Company expects to recognize this amount as revenue as follows: $20 million during the remainder of fiscal 2019, $62 million in fiscal 2020, $47 million in fiscal 2021 and $75 million thereafter.


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


The Company’s disaggregated revenue information is as follows(1):
 
Three Months Ended
 
Nine Months Ended
 
March 29, 2019
 
March 30, 2018
 
March 29, 2019
 
March 30, 2018
 
(in millions, except percentages)
Revenue by End Market
 
 
 
 
 
 
 
Client Devices
$
1,625

 
$
2,311

 
$
6,489

 
$
7,634

Data Center Devices & Solutions
1,245

 
1,660

 
3,765

 
4,463

Client Solutions
804

 
1,042

 
2,681

 
3,433

Total Revenue
$
3,674

 
$
5,013

 
$
12,935

 
$
15,530

 
 
 
 
 
 
 
 
Revenue by Form Factor
 
 
 
 
 
 
 
HDD
$
2,064

 
$
2,640

 
$
6,618

 
$
7,944

Flash-based
1,610

 
2,373

 
6,317

 
7,586

Total Revenue
$
3,674

 
$
5,013

 
$
12,935

 
$
15,530

 
 
 
 
 
 
 
 
Revenue by Geography (%)
 
 
 
 
 
 
 
Americas
29
%
 
28
%
 
26
%
 
27
%
Europe, Middle East and Africa
20

 
19

 
19

 
18

Asia
51

 
53

 
55

 
55

 
 
(1) 
Prior year information is presented in accordance with the accounting guidance in effect during that period and has not been updated for Topic 606. The impact of the adoption of Topic 606 was not material.

The Company’s top 10 customers accounted for 41% and 45% of its net revenue for the three and nine months ended March 29, 2019, respectively, and 44% and 42% of its net revenue for the three and nine months ended March 30, 2018, respectively. For the three and nine months ended March 29, 2019 and March 30, 2018, no single customer accounted for 10% or more of the Company’s net revenue.


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


Note 4.
Supplemental Financial Statement Data

Accounts receivable, net

From time to time, in connection with factoring agreements, the Company sells trade accounts receivable without recourse to third party purchasers in exchange for cash. During the nine months ended March 29, 2019, the Company sold trade accounts receivable and received cash proceeds of $702 million. The discounts on the trade accounts receivable sold during the period were not material and were recorded within Other income (expense), net in the Condensed Consolidated Financial Statements. During the nine months ended March 30, 2018, the Company did not sell any trade accounts receivable.

Inventories
 
March 29,
2019
 
June 29,
2018
 
(in millions)
Inventories:
 
 
 
Raw materials and component parts
$
1,122

 
$
1,048

Work-in-process
955

 
878

Finished goods
1,363

 
1,018

Total inventories
$
3,440

 
$
2,944


Property, plant and equipment, net
 
March 29,
2019
 
June 29,
2018
 
(in millions)
Property, plant, and equipment:
 
 
 
Land
$
307

 
$
306

Buildings and improvements
2,012

 
1,949

Machinery and equipment
7,593

 
7,209

Computer equipment and software
460

 
440

Furniture and fixtures
55

 
48

Construction-in-process
211

 
234

Property, plant and equipment, gross
10,638

 
10,186

Accumulated depreciation
(7,607
)
 
(7,091
)
Property, plant, and equipment, net
$
3,031

 
$
3,095


Goodwill

The Company tests for impairment, at a minimum, on an annual basis or earlier where certain events or changes in circumstances indicate that goodwill may more likely than not be impaired. The Company has experienced fluctuations in the market price of its stock, which resulted in the Company’s market capitalization decreasing below book value for eleven trading days near the end of the second quarter and beginning of the third quarter of fiscal 2019. The fair value of the Company using a market capitalization approach based on the Company’s share price would include a control premium based on recent transactions that have occurred in the technology industry. This indicative fair value exceeded the Company’s book value; therefore, management did not believe that it was more likely than not that goodwill was impaired as of March 29, 2019.


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


The Company’s regularly scheduled annual impairment test is performed as of the first day of its fiscal fourth quarter. The Company uses qualitative factors to determine whether goodwill is more likely than not impaired and whether a quantitative test for impairment is considered necessary. If the Company concludes from the qualitative assessment that goodwill is more likely than not impaired, the Company is required to perform a quantitative assessment to determine the amount of impairment. The Company is required to use judgment when applying the goodwill impairment test, including the identification of reporting units, assignment of assets, liabilities and goodwill to reporting units, and determination of the fair value of each reporting unit. In addition, the estimates used to determine the fair value of reporting units may change based on results of operations, macroeconomic conditions or other factors. The Company is in the process of completing its annual impairment test.

If there are significant decreases in the Company’s stock price in the future or other unfavorable factors, the Company may be required to perform a goodwill impairment assessment, which may result in the recognition of a goodwill impairment that could be material to the Consolidated Financial Statements.

Intangible assets
 
March 29,
2019
 
June 29,
2018
 
(in millions)
Finite-lived intangible assets
$
5,824

 
$
5,818

In-process research and development
72

 
80

Accumulated amortization
(3,978
)
 
(3,218
)
Intangible assets, net
$
1,918

 
$
2,680


As part of prior acquisitions, the Company recorded at the time of the acquisition acquired in-process research and development (“IPR&D”) for projects in progress that had not yet reached technological feasibility. IPR&D is initially accounted for as an indefinite-lived intangible asset. Once a project reaches technological feasibility, the Company reclassifies the balance to existing technology and begins to amortize the intangible asset over its estimated useful life. During the three and nine months ended March 29, 2019, the Company reclassified $8 million of acquired IPR&D to existing technology and commenced amortization over its estimated useful life of 2 years.

Product warranty liability

Changes in the warranty accrual were as follows:
 
Three Months Ended
 
Nine Months Ended
 
March 29,
2019
 
March 30,
2018
 
March 29, 2019
 
March 30, 2018
 
(in millions)
Warranty accrual, beginning of period
$
337

 
$
304

 
$
318

 
$
311

Charges to operations
38

 
43

 
119

 
133

Utilization
(40
)
 
(37
)
 
(108
)
 
(118
)
Changes in estimate related to pre-existing warranties
(4
)
 
(5
)
 
2

 
(21
)
Warranty accrual, end of period
$
331

 
$
305

 
$
331

 
$
305


The current portion of the warranty accrual is classified in Accrued expenses and the long-term portion is classified in Other liabilities as noted below:


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


 
March 29,
2019
 
June 29,
2018
 
(in millions)
Warranty accrual
 
 
 
Current portion
$
179

 
$
168

Long-term portion
152

 
150

Total warranty accrual
$
331

 
$
318


Other liabilities
 
March 29,
2019
 
June 29,
2018
 
(in millions)
Other non-current liabilities:
 
 
 
Non-current net tax payable
$
930

 
$
1,315

Other non-current liabilities
1,248

 
940

Total other non-current liabilities
$
2,178

 
$
2,255


Accumulated other comprehensive income (loss)

Other comprehensive income (loss) (“OCI”), net of tax refers to expenses, gains and losses that are recorded as an element of shareholders’ equity but are excluded from net income. The following table illustrates the changes in the balances of each component of Accumulated other comprehensive income (loss) (“AOCI”):
 
Actuarial Pension Gains (Losses)
 
Foreign Currency Translation Adjustment
 
Unrealized Gains (Losses) on Derivative Contracts
 
Total Accumulated Comprehensive Income (Loss)
 
(in millions)
Balance at June 29, 2018
$
(19
)
 
$
(21
)
 
$
1

 
$
(39
)
Other comprehensive income (loss) before reclassifications
1

 
(8
)
 
(26
)
 
(33
)
Amounts reclassified from accumulated other comprehensive income

 

 
8

 
8

Income tax benefit related to items of other comprehensive loss

 
(1
)
 
10

 
9

Net current-period other comprehensive loss
1

 
(9
)
 
(8
)
 
(16
)
Balance at March 29, 2019
$
(18
)
 
$
(30
)
 
$
(7
)
 
$
(55
)

During the three and nine months ended March 29, 2019 and March 30, 2018, the amounts reclassified out of AOCI related to derivative contracts were not material and substantially all were charged to Cost of revenue in the Condensed Consolidated Statements of Operations.


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


Note 5.
Fair Value Measurements and Investments

The Company’s total cash, cash equivalents and available-for-sale securities was as follows:
 
March 29,
2019
 
June 29,
2018
 
(in millions)
Cash and cash equivalents
$
3,682

 
$
5,005

Short-term available-for-sale securities (included within Other current assets)
15

 
23

Long-term available-for-sale securities (included within Other non-current assets)
104

 
93

Total cash, cash equivalents and available-for-sale securities
$
3,801

 
$
5,121


Financial Instruments Carried at Fair Value

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

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

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

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


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


The following tables present information about the Company’s financial assets and liabilities that are measured at fair value on a recurring basis as of March 29, 2019 and June 29, 2018, and indicate the fair value hierarchy of the valuation techniques utilized to determine such values:
 
March 29, 2019
 
Level 1
 
Level 2
 
Level 3
 
Total
 
(in millions)
Assets:
 
 
 
 
 
 
 
Cash equivalents:
 
 
 
 
 
 
 
Money market funds
$
1,508

 
$

 
$

 
$
1,508

Certificates of deposit

 
6

 

 
6

Total cash equivalents
1,508

 
6

 

 
1,514

Short-term available-for-sale securities:
 
 
 
 
 
 
 
Corporate notes and bonds

 
2

 

 
2

Asset-backed securities

 
6

 

 
6

Municipal notes and bonds


 
6

 

 
6

Equity securities
1

 

 

 
1

Total short-term available-for-sale securities
1

 
14

 

 
15

Long-term available-for-sale securities:
 
 
 
 
 
 
 
U.S. Treasury securities
5

 

 

 
5

U.S. Government agency securities

 
4

 

 
4

International government securities

 
6

 

 
6

Corporate notes and bonds

 
75

 

 
75

Asset-backed securities

 
7

 

 
7

Municipal notes and bonds

 
7

 

 
7

Total long-term available-for-sale securities
5

 
99

 

 
104

Foreign exchange contracts

 
17

 

 
17

Interest rate swap contracts

 
8

 

 
8

Total assets at fair value
$
1,514

 
$
144

 
$

 
$
1,658

Liabilities:
 
 
 
 
 
 
 
Foreign exchange contracts
$

 
$
15

 
$

 
$
15

Interest rate swap contract

 
33

 

 
33

Total liabilities at fair value
$

 
$
48

 
$

 
$
48



22

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


 
June 29, 2018
 
Level 1
 
Level 2
 
Level 3
 
Total
 
(in millions)
Assets:
 
 
 
 
 
 
 
Cash equivalents:
 
 
 
 
 
 
 
Money market funds
$
2,554

 
$

 
$

 
$
2,554

Certificates of deposit

 
4

 

 
4

Total cash equivalents
2,554

 
4

 

 
2,558

Short-term available-for-sale securities:
 
 
 
 
 
 
 
U.S. Treasury securities
3

 

 

 
3

Corporate notes and bonds

 
12

 

 
12

Asset-backed securities

 
4

 

 
4

Municipal notes and bonds

 
2

 

 
2

Equity securities
2

 

 

 
2

Total short-term available-for-sale securities
5

 
18

 

 
23

Long-term available-for-sale securities:
 
 
 
 
 
 
 
U.S. Treasury securities
3

 

 

 
3

U.S. Government agency securities

 
5

 

 
5

International government securities

 
1

 

 
1

Corporate notes and bonds

 
65

 

 
65

Asset-backed securities

 
8

 

 
8

Municipal notes and bonds

 
11

 

 
11

Total long-term available-for-sale securities
3

 
90

 

 
93

Foreign exchange contracts

 
51

 

 
51

Interest rate swap contracts

 
16

 

 
16

Total assets at fair value
$
2,562

 
$
179

 
$

 
$
2,741

Liabilities:
 
 
 
 
 
 
 
Foreign exchange contracts
$

 
$
28

 
$

 
$
28

Total liabilities at fair value
$

 
$
28

 
$

 
$
28


During the three and nine months ended March 29, 2019, the Company had no transfers of financial assets and liabilities between levels.

Available-for-Sale Securities

The cost basis of the Company’s investments classified as available-for-sale securities, individually and in the aggregate, approximated its fair value as of March 29, 2019 and June 29, 2018.

Equity Securities Without a Readily Determinable Fair Value (“RDFV”)

From time to time, the Company enters into certain strategic investments for the promotion of business and strategic objectives. The equity securities of these privately-held companies do not have a RDFV. Under ASU 2016-01, these equity securities are now measured and recorded using the measurement alternative, which is cost minus impairment, if any, plus or minus changes resulting from qualifying observable price changes. In addition, the existing impairment model has been replaced with a new one-step qualitative impairment model. Adjustments resulting from impairments and qualifying observable price changes are recorded in Other income (expense), net in the Condensed Consolidated Statements of Operations. As of March 29, 2019 and June 30, 2018, these investments were not material.

23

Table of Contents

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


Financial Instruments Not Carried at Fair Value

The carrying value of the Company’s revolving credit facility approximates its fair value given the revolving nature of the balance and the variable market interest rate. For financial instruments where the carrying value (which includes principal adjusted for any unamortized issuance costs, and discounts or premiums) differs from fair value (which is based on quoted market prices), the following table represents the related carrying value and fair value for each of the Company’s outstanding financial instruments. Each of the financial instruments presented below was categorized as Level 2 for all periods presented, based on the frequency of trading immediately prior to the end of the third quarter of 2019 and the fourth quarter of 2018, respectively.
 
March 29, 2019
 
June 29, 2018
 
Carrying
Value
 
Fair
Value
 
Carrying
Value
 
Fair
Value
 
(in millions)
0.50% convertible senior notes due 2020
$
32

 
$
34

 
$
31

 
$
34

Variable interest rate Term Loan A-1 maturing 2023
4,889

 
4,771

 
4,982

 
5,013

Variable interest rate U.S. Term Loan B-4 maturing 2023
2,430

 
2,381

 
2,448

 
2,452

1.50% convertible notes due 2024
952

 
970

 
931

 
1,114

4.750% senior unsecured notes due 2026
2,282

 
2,199

 
2,280

 
2,238

Total
$
10,585

 
$
10,355

 
$
10,672

 
$
10,851





24

Table of Contents

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


Note 6.
Derivative Instruments and Hedging Activities

As of March 29, 2019, the Company had outstanding foreign exchange forward contracts that were designated as either cash flow hedges or non-designated hedges. Substantially all of the contract maturity dates of these foreign exchange forward contracts do not exceed 12 months. In addition, the Company had outstanding interest rate swaps that were designated as cash flow hedges. The Company did not have any foreign exchange forward contracts with credit-risk-related contingent features. As of March 29, 2019, the amount of existing net losses related to cash flow hedges recorded in AOCI was not material and the majority is expected to be reclassified to earnings over the next twelve months.

Changes in fair values of the non-designated foreign exchange contracts are recognized in Other income (expense), net and are largely offset by corresponding changes in the fair values of the foreign currency denominated monetary assets and liabilities. For each of the three and nine months ended March 29, 2019 and March 30, 2018, total net realized and unrealized transaction and foreign exchange contract currency gains and losses were not material to the Company’s Condensed Consolidated Financial Statements.

See Note 5, Fair Value Measurements and Investments, for additional disclosures related to the fair value of the Company’s foreign exchange forward contracts.

Netting Arrangements

Under certain provisions and conditions within agreements with counterparties to the Company’s foreign exchange forward contracts, subject to applicable requirements, the Company has the right of offset associated with the Company’s foreign exchange forward contracts and is allowed to net settle transactions of the same currency with a single net amount payable by one party to the other. As of March 29, 2019 and June 29, 2018, the effect of rights of offset was not material and the Company did not offset or net the fair value amounts of derivative instruments in its Condensed Consolidated Balance Sheets.


25

Table of Contents

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


Note 7.
Debt

Debt consisted of the following as of March 29, 2019 and June 29, 2018:

 
March 29,
2019
 
June 29,
2018
 
(in millions)
0.50% convertible senior notes due 2020
$
35

 
$
35

Revolving credit facility maturing 2023

 
500

Variable interest rate Term Loan A-1 maturing 2023
4,896

 
4,991

Variable interest rate U.S. Term Loan B-4 maturing 2023
2,431

 
2,449

1.50% convertible notes due 2024
1,100

 
1,100

4.750% senior unsecured notes due 2026
2,300

 
2,300

Total debt
10,762

 
11,375

Issuance costs and debt discounts
(177
)
 
(203
)
Subtotal
10,585

 
11,172

Less current portion of long-term debt
(276
)
 
(179
)
Long-term debt
$
10,309

 
$
10,993


In November 2018, the Company repaid the previously outstanding borrowings under its revolving credit facility. At March 29, 2019, the Company’s borrowing capacity under the revolving credit facility was $2.25 billion.

The credit agreement governing the Company’s revolving credit facility and term loans (as amended, the “Credit Agreement”) requires the Company to comply with certain financial covenants with respect to the revolving credit facility and Term Loan A-1, consisting of a Leverage Ratio and an Interest Coverage Ratio (each as defined below). These covenants are based upon a trailing twelve-month consolidated adjusted EBITDA as defined in the Credit Agreement (“Adjusted EBITDA”). Adjusted EBITDA is defined as net income (loss) plus interest expense, income tax expense (benefit) and depreciation and amortization as well as other contractual adjustments as provided for in the Credit Agreement. As of March 29, 2019, the Company was in compliance with all financial covenants under the Credit Agreement.

In April 2019, the Company amended the Credit Agreement for the purposes of providing additional flexibility by adjusting the leverage ratio maintenance covenant levels applicable to the term A loan and revolving facilities thereunder and amending the definition of Consolidated Adjusted EBITDA under the financial maintenance covenants to include an addback for certain depreciation related payments with respect to the Company’s Flash Ventures. As amended, the Company is now required to maintain a maximum ratio of total funded debt to trailing twelve-month Adjusted EBITDA (“Leverage Ratio”) at the end of each quarter of 4.25 to 1.00 through the quarter ending October 2, 2020, 4.00 to 1.00 through the quarter ending July 2, 2021, 3.75 to 1.00 through the quarter ending December 31, 2021, 3.50 to 1.00 through the quarter ending July 1, 2022, and 3.25 to 1.00 thereafter. In addition, the Company is required to maintain a minimum ratio of Adjusted EBITDA to interest expense (“Interest Coverage Ratio”), both calculated on a trailing twelve-month basis, at the end of each quarter of 3.50 to 1.00.

The Credit Agreement also requires the Company and its subsidiaries to comply with customary covenants that include, among others, limitations on the incurrence of additional debt, liens on property, acquisitions and investments, loans and guarantees, mergers, consolidations, liquidations and dissolutions, asset sales, dividends and other payments in respect of the Company’s capital stock, prepayments of certain debt, transactions with affiliates and certain modifications of organizational documents and certain debt agreements. In addition, the indentures governing the Company’s 2026 Senior Unsecured Notes and the 2024 Convertible Notes contain restrictive covenants that limit the Company’s and its subsidiaries’ ability to, among other things, consolidate, merge or sell all or substantially all of their assets; create liens; and incur, assume or guarantee additional indebtedness.


26

Table of Contents

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


Note 8.
Pension and Other Post-Retirement Benefit Plans

The Company has pension and other post-retirement benefit plans in various countries. The Company’s principal pension plans are in Japan. All pension and other post-retirement benefit plans outside of the Company’s Japanese defined benefit pension plan (the “Japanese Plan”) are immaterial to the Condensed Consolidated Financial Statements. The expected long-term rate of return on the Japanese Plan assets is 2.5%.

Obligations and Funded Status

The following table presents the unfunded status of the benefit obligations for the Japanese Plan:
 
March 29,
2019
 
June 29,
2018
 
(in millions)
Benefit obligations
$
260

 
$
260

Fair value of plan assets
205

 
200

Unfunded status
$
55

 
$
60


The following table presents the unfunded amounts related to the Japanese Plan as recognized on the Company’s Condensed Consolidated Balance Sheets:
 
March 29,
2019
 
June 29,
2018
 
(in millions)
Current liabilities
$
1

 
$
1

Non-current liabilities
54

 
59

Net amount recognized
$
55

 
$
60


Net periodic benefit costs were not material for the three and nine months ended March 29, 2019.


27

Table of Contents

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


Note 9.
Commitments, Contingencies and Related Parties

Flash Ventures

The Company’s business ventures with Toshiba Memory Corporation (“TMC”) consist of three separate legal entities: Flash Partners Ltd. (“Flash Partners”), Flash Alliance Ltd. (“Flash Alliance”), and Flash Forward Ltd. (“Flash Forward”), collectively referred to as “Flash Ventures”.

The following table presents the notes receivable from, and equity investments in, Flash Ventures as of March 29, 2019 and June 29, 2018:
 
March 29,
2019
 
June 29,
2018
 
(in millions)
Notes receivable, Flash Partners
$
620

 
$
767

Notes receivable, Flash Alliance
599

 
48

Notes receivable, Flash Forward
584

 
700

Investment in Flash Partners
194

 
191

Investment in Flash Alliance
287

 
283

Investment in Flash Forward
119

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