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

(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended October 4, 2019
Or
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
 
 

https://cdn.kscope.io/d1195c9feb22168cb7cd0f15855606f2-wdcorporatelogo1.jpg
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)
 
Registrant’s telephone number, including area code: (408) 717-6000
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)

 
 
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      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      No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.



Large accelerated filer
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 November 1, 2019, 297,404,535 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 October 4, 2019 and June 28, 2019
 
Condensed Consolidated Statements of Operations — Three Months Ended October 4, 2019 and September 28, 2018
 
Condensed Consolidated Statements of Comprehensive Income (Loss) — Three Months Ended October 4, 2019 and September 28, 2018
 
Condensed Consolidated Statements of Cash Flows — Three Months Ended October 4, 2019 and September 28, 2018
 
Condensed Consolidated Statements of Shareholders' Equity — Three Months Ended October 4, 2019 and September 28, 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.

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.



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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 Kioxia Corporation (formerly known as Toshiba Memory Corporation), the flash industry and our flash wafer output plans;
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 repatriation of funds from our foreign operations;
our beliefs regarding tax benefits and the timing of future payments, if any, relating to the unrecognized tax benefits, and the adequacy of our tax provisions;
expectations regarding capital investments and sources of funding for those investments; and
our beliefs regarding the sufficiency of our available liquidity to meet our working capital, debt and capital expenditure needs as well as our dividend plans.

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


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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)
 
October 4,
2019
 
June 28,
2019
ASSETS
Current assets:
 
 
 
Cash and cash equivalents
$
3,248

 
$
3,455

Accounts receivable, net
1,448

 
1,204

Inventories
3,287

 
3,283

Other current assets
517

 
535

Total current assets
8,500

 
8,477

Property, plant and equipment, net
2,796

 
2,843

Notes receivable and investments in Flash Ventures
2,629

 
2,791

Goodwill
10,090

 
10,076

Other intangible assets, net
1,514

 
1,711

Other non-current assets
751

 
472

Total assets
$
26,280

 
$
26,370

LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
 
 
 
Accounts payable
$
1,724

 
$
1,567

Accounts payable to related parties
507

 
331

Accrued expenses
1,374

 
1,296

Accrued compensation
432

 
347

Current portion of long-term debt
251

 
276

Total current liabilities
4,288

 
3,817

Long-term debt
9,961

 
10,246

Other liabilities
2,465

 
2,340

Total liabilities
16,714

 
16,403

Commitments and contingencies (Notes 7, 9, 12 and 15)

 

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 — 298 shares and 295 shares, respectively
3

 
3

Additional paid-in capital
3,728

 
3,851

Accumulated other comprehensive loss
(90
)
 
(68
)
Retained earnings
7,012

 
7,449

Treasury stock — common shares at cost; 14 shares and 17 shares, respectively
(1,087
)
 
(1,268
)
Total shareholders’ equity
9,566

 
9,967

Total liabilities and shareholders’ equity
$
26,280

 
$
26,370


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
 
October 4,
2019

September 28,
2018
Revenue, net
$
4,040

 
$
5,028

Cost of revenue
3,282

 
3,364

Gross profit
758

 
1,664

Operating expenses:
 
 
 
Research and development
574

 
576

Selling, general and administrative
305

 
356

Employee termination, asset impairment, and other charges
8

 
46

Total operating expenses
887

 
978

Operating income (loss)
(129
)
 
686

Interest and other income (expense):
 
 
 
Interest income
12

 
15

Interest expense
(122
)
 
(116
)
Other income (expense), net
2

 
(2
)
Total interest and other expense, net
(108
)
 
(103
)
Income (loss) before taxes
(237
)

583

Income tax expense
39

 
72

Net income (loss)
$
(276
)
 
$
511

 
 
 
 
Income (loss) per common share
 
 
 
Basic
$
(0.93
)
 
$
1.75

Diluted
$
(0.93
)
 
$
1.71

Weighted average shares outstanding:
 
 
 
Basic
296

 
292

Diluted
296

 
298

 
 
 
 
Cash dividends declared per share
$
0.50

 
$
0.50


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

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WESTERN DIGITAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(in millions)
(Unaudited)
 
Three Months Ended
 
October 4,
2019
 
September 28,
2018
Net income (loss)
$
(276
)
 
$
511

Other comprehensive loss, before tax:
 
 
 
Actuarial pension gain
1

 

Foreign currency translation adjustment
5

 
(37
)
Net unrealized loss on derivative contracts and available-for-sale securities
(33
)
 
(1
)
Total other comprehensive loss, before tax
(27
)
 
(38
)
Income tax benefit related to items of other comprehensive loss, before tax
5

 
1

Other comprehensive loss, net of tax
(22
)
 
(37
)
Total comprehensive income (loss)
$
(298
)
 
$
474


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

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WESTERN DIGITAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in millions)
(Unaudited)
 
Three Months Ended
 
October 4,
2019
 
September 28,
2018
Cash flows from operating activities
 
 
 
Net income (loss)
$
(276
)
 
$
511

Adjustments to reconcile net income (loss) to net cash provided by operations:
 
 
 
Depreciation and amortization
406

 
480

Stock-based compensation
77

 
79

Deferred income taxes
(27
)
 
201

Loss on disposal of assets
2

 
2

Write-off of issuance costs and amortization of debt discounts
10

 
9

Other non-cash operating activities, net
(21
)
 
20

Changes in:
 
 
 
Accounts receivable, net
(243
)
 
(22
)
Inventories
(5
)
 
(175
)
Accounts payable
155

 
(77
)
Accounts payable to related parties
176

 
27

Accrued expenses
100

 
34

Accrued compensation
75

 
20

Other assets and liabilities, net
(176
)
 
(404
)
Net cash provided by operating activities
253

 
705

Cash flows from investing activities
 
 
 
Purchases of property, plant and equipment
(145
)
 
(277
)
Acquisitions, net of cash acquired
(22
)
 

Purchases of investments

 
(11
)
Proceeds from sale of investments

 
6

Proceeds from maturities of investments

 
3

Notes receivable issuances to Flash Ventures
(171
)
 
(115
)
Notes receivable proceeds from Flash Ventures
357

 
144

Strategic investments and other, net
15

 
(9
)
Net cash provided by (used in) investing activities
34

 
(259
)
Cash flows from financing activities
 
 
 
Issuance of stock under employee stock plans
26

 
8

Taxes paid on vested stock awards under employee stock plans
(52
)
 
(66
)
Repurchases of common stock

 
(563
)
Dividends paid to shareholders
(147
)
 
(148
)
Repayment of debt
(319
)
 
(38
)
Net cash used in financing activities
(492
)
 
(807
)
Effect of exchange rate changes on cash
(2
)
 
2

Net decrease in cash and cash equivalents
(207
)
 
(359
)
Cash and cash equivalents, beginning of year
3,455

 
5,005

Cash and cash equivalents, end of period
$
3,248

 
$
4,646

Supplemental disclosure of cash flow information:
 
 
 
Cash paid for income taxes
$
67

 
$
191

Cash paid for interest
$
143

 
$
139


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

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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 28, 2019
312

 
$
3

 
(17
)
 
$
(1,268
)
 
$
3,851

 
$
(68
)
 
$
7,449

 
$
9,967

Net loss

 

 

 

 

 

 
(276
)
 
(276
)
Adoption of New Accounting Standard

 

 

 

 

 

 
(5
)
 
(5
)
Employee stock plans

 

 
3

 
181

 
(207
)
 

 

 
(26
)
Stock-based compensation

 

 

 

 
77

 

 

 
77

Dividends to shareholders

 

 

 

 
7

 

 
(156
)
 
(149
)
Actuarial pension gain

 

 

 

 

 
1

 

 
1

Foreign currency translation adjustment

 

 

 

 

 
4

 

 
4

Net unrealized loss on derivative contracts

 

 

 

 

 
(27
)
 

 
(27
)
Balance at October 4, 2019
312

 
$
3

 
(14
)
 
$
(1,087
)
 
$
3,728

 
$
(90
)
 
$
7,012

 
$
9,566



9

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

Adoption of New Accounting Standards

 

 

 

 

 

 
56

 
56

Employee stock plans

 

 
1

 
198

 
(256
)
 

 

 
(58
)
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


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 (“IT”) industry and the infrastructure that enables the proliferation of data in virtually every other industry. The Company creates environments for data to thrive. The Company is driving the innovation needed to help customers capture, preserve, access and transform an ever-increasing diversity of data. Everywhere data lives, from advanced data centers to mobile sensors to personal devices, the Company’s industry-leading solutions deliver the possibilities of data.

The Company’s broad portfolio of technology and products address the following key end markets: Client Devices; Data Center Devices and Solutions; and Client Solutions. It also generates license and royalty revenue from its extensive intellectual property (“IP”), which is included in each of these three end market 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 28, 2019. 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 28, 2019. 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. Approximately every five to six years, the Company reports a 53-week fiscal year to align the fiscal year with the foregoing policy. 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. Fiscal year 2019, which ended on June 28, 2019, was comprised of 52 weeks, with all quarters presented consisting of 13 weeks.

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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Table of Contents

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


Note 2.
Recent Accounting Pronouncements

Accounting Pronouncements Recently Adopted

In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“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 Company adopted this standard effective June 29, 2019, the first day of the fiscal year ending July 3, 2020, and has elected the transition method provided in ASU 2018-11 to apply Topic 842 as of the date of adoption without adjusting comparative periods. The Company has elected the package of practical expedients and did not reassess prior conclusions including (a) whether its contracts are or contain a lease, (b) lease classification and (c) capitalization of initial direct costs. The adoption of Topic 842 resulted in an increase in lease assets and a corresponding increase in lease liabilities on the Condensed Consolidated Balance Sheet of $221 million. The cumulative effect of adopting Topic 842 also included an after-tax decrease to opening retained earnings of $5 million as of June 29, 2019, which was primarily related to previously recorded sublease proceeds on lease exit liabilities for which there was no expected future economic benefit at transition. See Note 10, Leases and Other Commitments, for additional disclosures related to this standard.

In October 2018, the FASB issued ASU No. 2018-16, “Derivatives and Hedging (Topic 815): Inclusion of the Secured Overnight Financing Rate (SOFR) Overnight Index Swap (OIS) Rate as a Benchmark Interest Rate for Hedge Accounting Purposes” (“ASU 2018-16”). ASU 2018-16 allows for the 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. The Company adopted this standard in the first quarter of 2020. The Company’s adoption of ASU 2018-16 did not have a material impact on its Condensed Consolidated Financial Statements.

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 Condensed 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 Condensed Consolidated Financial Statements.


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Table of Contents

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


Note 3.
Revenues

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 October 4, 2019 or June 28, 2019.

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. 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 as of October 4, 2019 and June 28, 2019 as well as the related amortization for the three months ended October 4, 2019 and September 28, 2018 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 October 4, 2019 and June 28, 2019, contract liabilities were not material.

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 October 4, 2019 was $182 million, which is mainly attributable to the functional IP license and service arrangements. The Company expects to recognize this amount as revenue as follows: $50 million during the remainder of fiscal 2020, $50 million in fiscal 2021, $45 million in fiscal 2022 and $37 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:
 
Three Months Ended
 
October 4,
2019
 
September 28, 2018
 
(in millions, except percentages)
Revenue by Product
 
 
 
Hard disk drives (“HDD”)
$
2,408

 
$
2,494

Flash-based
1,632

 
2,534

Total Revenue
$
4,040

 
$
5,028

 
 
 
 
Revenue by End Market
 
 
 
Client Devices
$
1,616

 
$
2,650

Data Center Devices & Solutions
1,532

 
1,446

Client Solutions
892

 
932

Total Revenue
$
4,040

 
$
5,028

 
 
 
 
Revenue by Geography
 
 
 
Americas
$
1,313

 
$
1,281

Europe, Middle East and Africa
779

 
884

Asia
1,948

 
2,863

Total Revenue
$
4,040

 
$
5,028



For the three months ended October 4, 2019, one customer accounted for 11% of the Company’s net revenue and for the three months ended September 28, 2018, two customers accounted for 11% and 10%, respectively, of the Company’s net revenue. For the three months ended October 4, 2019 and September 28, 2018, the Company’s top 10 customers accounted for 43% and 48% of its net revenue, respectively.


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Table of Contents

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 three months ended October 4, 2019 and September 28, 2018, the Company sold trade accounts receivable and received cash proceeds of $85 million and $243 million, respectively. The discounts on the trade accounts receivable sold during the periods were not material and were recorded within Other income (expense), net in the Condensed Consolidated Financial Statements. As of October 4, 2019 and June 28, 2019, the amount of factored receivables that remained outstanding was $85 million and $318 million, respectively.

Inventories
 
October 4,
2019
 
June 28,
2019
 
(in millions)
Inventories:
 
 
 
Raw materials and component parts
$
1,370

 
$
1,142

Work-in-process
900

 
968

Finished goods
1,017

 
1,173

Total inventories
$
3,287

 
$
3,283



Property, plant and equipment, net
 
October 4,
2019
 
June 28,
2019
 
(in millions)
Property, plant, and equipment:
 
 
 
Land
$
294

 
$
294

Buildings and improvements
1,783

 
1,743

Machinery and equipment
7,184

 
7,267

Computer equipment and software
450

 
441

Furniture and fixtures
55

 
56

Construction-in-process
190

 
202

Property, plant and equipment, gross
9,956

 
10,003

Accumulated depreciation
(7,160
)
 
(7,160
)
Property, plant, and equipment, net
$
2,796

 
$
2,843




15

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


Goodwill
 
Carrying Amount
 
(in millions)
Balance at June 28, 2019
$
10,076

Goodwill recorded in connection with an acquisition
14

Balance at October 4, 2019
$
10,090



On September 10, 2019, the Company acquired substantially all the assets of Kazan Networks, Inc., an innovator in high-performance networking and non-volatile memory express over fabrics technology ("NVMe-oF"), and an industry leader in application-specific integrated circuit and adapter solutions to connect storage platforms and systems over ethernet fabrics. The purchase price of this acquisition was $22 million in cash, with net assets acquired primarily consisting of in-process research and development (“IPR&D”) of $8 million and $14 million allocated to goodwill. Goodwill is primarily attributable to the benefits the Company expects to derive from diversifying product offerings in its Data Center Devices and Solutions and Client Solutions end markets as well as the acquired workforce. During the three months ended October 4, 2019, the expenses incurred by the Company related to the acquisition were not material. Revenues and earnings related to this acquisition were not material.

Intangible assets
 
October 4,
2019
 
June 28,
2019
 
(in millions)
Finite-lived intangible assets
$
5,823

 
$
5,824

In-process research and development
80

 
72

Accumulated amortization
(4,389
)
 
(4,185
)
Intangible assets, net
$
1,514

 
$
1,711



As part of prior acquisitions, the Company recorded at the time of the acquisition acquired IPR&D for projects in progress that had not yet reached technological feasibility. IPR&D is initially accounted for as an indefinite-lived intangible asset. Once a project reaches technological feasibility, the Company reclassifies the balance to existing technology and begins to amortize the intangible asset over its estimated useful life.

Product warranty liability

Changes in the warranty accrual were as follows:
 
Three Months Ended
 
October 4,
2019
 
September 28,
2018
 
(in millions)
Warranty accrual, beginning of period
$
350

 
$
318

Charges to operations
49

 
34

Utilization
(48
)
 
(26
)
Changes in estimate related to pre-existing warranties
6

 
(3
)
Warranty accrual, end of period
$
357

 
$
323




16

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


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:

 
October 4,
2019
 
June 28,
2019
 
(in millions)
Warranty accrual
 
 
 
Current portion (included in Accrued expenses)
$
182

 
$
188

Long-term portion (included in Other liabilities)
175

 
162

Total warranty accrual
$
357

 
$
350



Other liabilities
 
October 4,
2019
 
June 28,
2019
 
(in millions)
Other non-current liabilities:
 
 
 
Non-current net tax payable
$
839

 
$
928

Payables related to unrecognized tax benefits
698

 
699

Other non-current liabilities
928

 
713

Total other non-current liabilities
$
2,465

 
$
2,340



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 28, 2019
(53
)
 
4

 
(19
)
 
(68
)
Other comprehensive income (loss) before reclassifications
1

 
5

 
(26
)
 
(20
)
Amounts reclassified from accumulated other comprehensive income (loss)

 

 
(7
)
 
(7
)
Income tax benefit (expense) related to items of other comprehensive income (loss)

 
(1
)
 
6

 
5

Net current-period other comprehensive loss
1

 
4

 
(27
)
 
(22
)
Balance at October 4, 2019
$
(52
)
 
$
8

 
$
(46
)
 
$
(90
)


During the three months ended October 4, 2019 and September 28, 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.


17

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


Note 5.
Fair Value Measurements and Investments

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.

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 October 4, 2019 and June 28, 2019, and indicate the fair value hierarchy of the valuation techniques utilized to determine such values:
 
October 4, 2019
 
Level 1
 
Level 2
 
Level 3
 
Total
 
(in millions)
Assets:
 
 
 
 
 
 
 
Cash equivalents - Money market funds
$
889

 
$

 
$

 
$
889

Foreign exchange contracts

 
22

 

 
22

Total assets at fair value
$
889

 
$
22

 
$

 
$
911

Liabilities:
 
 
 
 
 
 
 
Foreign exchange contracts
$

 
$
18

 
$

 
$
18

Interest rate swap contract

 
88

 

 
88

Total liabilities at fair value
$

 
$
106

 
$

 
$
106


 
June 28, 2019
 
Level 1
 
Level 2
 
Level 3
 
Total
 
(in millions)
Assets:
 
 
 
 
 
 
 
Cash equivalents:
 
 
 
 
 
 
 
Money market funds
$
1,388

 
$

 
$

 
$
1,388

Certificates of deposit

 
17

 

 
17

Total cash equivalents
1,388

 
17

 

 
1,405

Foreign exchange contracts

 
44

 

 
44

Interest rate swap contracts

 
2

 

 
2

Total assets at fair value
$
1,388

 
$
63

 
$

 
$
1,451

Liabilities:
 
 
 
 
 
 
 
Foreign exchange contracts
$

 
$
40

 
$

 
$
40

Interest rate swap contract

 
65

 

 
65

Total liabilities at fair value
$

 
$
105

 
$

 
$
105



During the three months ended October 4, 2019 and September 28, 2018, the Company had no transfers of financial assets and liabilities between levels.

18

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 first quarter of 2020 and the fourth quarter of 2019, respectively.
 
October 4, 2019
 
June 28, 2019
 
Carrying
Value
 
Fair
Value
 
Carrying
Value
 
Fair
Value
 
(in millions)
0.50% convertible senior notes due 2020
$
33

 
$
33

 
$
33

 
$
31

Variable interest rate Term Loan A-1 maturing 2023
4,762

 
4,774

 
4,824

 
4,780

Variable interest rate U.S. Term Loan B-4 maturing 2023
2,168

 
2,167

 
2,424

 
2,370

1.50% convertible notes due 2024
965

 
1,058

 
958

 
986

4.750% senior unsecured notes due 2026
2,284

 
2,351

 
2,283

 
2,263

Total
$
10,212

 
$
10,383

 
$
10,522

 
$
10,430



19

Table of Contents

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


Note 6.
Derivative Instruments and Hedging Activities

As of October 4, 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 pay-fixed interest rate swaps that were designated as cash flow hedges of variable rate interest payments on a portion of its term loans through February 2023.

As of October 4, 2019, the amount of existing net losses related to cash flow hedges recorded in AOCI included $70 million related to the Company’s interest rate swaps that is expected to be reclassified to earnings after twelve months. In addition, as of October 4, 2019, the Company did not have any foreign exchange forward contracts with credit-risk-related contingent features.

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 months ended October 4, 2019 and September 28, 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.

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 October 4, 2019 and June 28, 2019, the effect of rights of offset was not material and the Company did not offset or net the fair value amounts of derivative instruments in its Condensed Consolidated Balance Sheets.


20

Table of Contents

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


Note 7.
Debt

Debt consisted of the following as of October 4, 2019 and June 28, 2019:
 
October 4,
2019
 
June 28,
2019
 
(in millions)
0.50% convertible senior notes due 2020
$
35

 
$
35

Revolving credit facility maturing 2023

 

Variable interest rate Term Loan A-1 maturing 2023
4,771

 
4,834

Variable interest rate U.S. Term Loan B-4 maturing 2023
2,168

 
2,425

1.50% convertible notes due 2024
1,100

 
1,100

4.750% senior unsecured notes due 2026
2,300

 
2,300

Total debt
10,374

 
10,694

Issuance costs and debt discounts
(162
)
 
(172
)
Subtotal
10,212

 
10,522

Less current portion of long-term debt
(251
)
 
(276
)
Long-term debt
$
9,961

 
$
10,246



The credit agreement governing the revolving credit facility and Term Loan A-1 requires the Company to comply with certain financial covenants, consisting of a leverage ratio and an interest coverage ratio. As of October 4, 2019, the Company was in compliance with these financial covenants.

During the three months ended October 4, 2019, the Company made a voluntary prepayment of $250 million on its U.S. Term Loan B-4, which was applied toward the remaining scheduled amortization and the remainder towards the principal due at maturity. As of October 4, 2019, there are no longer any scheduled amortization payments due under the U.S. Term Loan B-4 prior to its maturity on April 29, 2023.

21

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:
 
October 4,
2019
 
June 28,
2019
 
(in millions)
Benefit obligations
$
281

 
$
280

Fair value of plan assets
211

 
208

Unfunded status
$
70

 
$
72



The following table presents the unfunded amounts related to the Japanese Plan as recognized on the Company’s Condensed Consolidated Balance Sheets:
 
October 4,
2019
 
June 28,
2019
 
(in millions)
Current liabilities
$
1

 
$
1

Non-current liabilities
69

 
71

Net amount recognized
$
70

 
$
72



Net periodic benefit costs were not material for the three months ended October 4, 2019 or September 28, 2018.


22

Table of Contents

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


Note 9.
Related Parties and Related Commitments and Contingencies

Flash Ventures

The Company’s business ventures with Kioxia Corporation (formerly known as Toshiba Memory Corporation) (“Kioxia”) 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 October 4, 2019 and June 28, 2019:
 
October 4,
2019
 
June 28,
2019
 
(in millions)
Notes receivable, Flash Partners
$
482

 
$
551

Notes receivable, Flash Alliance
905

 
878

Notes receivable, Flash Forward
617

 
743

Investment in Flash Partners
202

 
200

Investment in Flash Alliance
299

 
296

Investment in Flash Forward
124

 
123

Total notes receivable and investments in Flash Ventures
$
2,629

 
$
2,791



During the three months ended October 4, 2019 and September 28, 2018, the Company made net payments to Flash Ventures of $682 million and $744 million, respectively, for purchased flash-based memory wafers and net loans and investments.

The Company makes, or will make, loans to Flash Ventures to fund equipment investments for new process technologies and additional wafer capacity. The Company aggregates its Flash Ventures’ notes receivable into one class of financing receivables due to the similar ownership interest and common structure in each Flash Venture entity. For all reporting periods presented, no loans were past due and no loan impairments were recorded. The Company’s notes receivable from each Flash Ventures entity, denominated in Japanese yen, are secured by equipment owned by that Flash Ventures entity.

As of October 4, 2019 and June 28, 2019, the Company had accounts payable balances due to Flash Ventures of $507 million and $331 million, respectively.

The Company’s maximum reasonably estimable loss exposure (excluding lost profits) as a result of its involvement with Flash Ventures, based upon the Japanese yen to U.S. dollar exchange rate at October 4, 2019, is presented below. Investments in Flash Ventures are denominated in Japanese yen, and the maximum estimable loss exposure excludes any cumulative translation adjustment due to revaluation from the Japanese yen to the U.S. dollar.
 
October 4,
2019
 
 
Notes receivable
$
2,004

Equity investments
625

Operating lease guarantees
1,694

Inventory and prepayments
359

Maximum estimable loss exposure
$
4,682



23

Table of Contents

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


The Company is obligated to pay for variable costs incurred in producing its share of Flash Ventures’ flash-based memory wafer supply, based on its three month forecast, which generally equals