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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 January 3, 2020
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/ffe66f4a76f467ef63cf34af855fcf43-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 February 4, 2020, 298,931,536 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 January 3, 2020 and June 28, 2019
 
Condensed Consolidated Statements of Operations — Three and Six Months Ended January 3, 2020 and December 28, 2018
 
Condensed Consolidated Statements of Comprehensive Income (Loss) — Three and Six Months Ended January 3, 2020 and December 28, 2018
 
Condensed Consolidated Statements of Cash Flows — Six Months Ended January 3, 2020 and December 28, 2018
 
Condensed Consolidated Statements of Shareholders' Equity — Six Months Ended January 3, 2020 and December 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.



3


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, the flash industry and our flash wafer output plans;
expectations regarding pricing conditions for flash products;
the exit from our Storage Systems business;
expectations regarding our product development and technology plans;
expectations regarding the outcome of legal proceedings in which we are involved;
our quarterly cash dividend policy and share repurchase program;
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.


4


PART I. FINANCIAL INFORMATION

Item 1.
Financial Statements (unaudited)

WESTERN DIGITAL CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(in millions, except par value)
(Unaudited)
 
January 3,
2020
 
June 28,
2019
ASSETS
Current assets:
 
 
 
Cash and cash equivalents
$
3,137

 
$
3,455

Accounts receivable, net
1,791

 
1,204

Inventories
3,122

 
3,283

Other current assets
577

 
535

Total current assets
8,627

 
8,477

Property, plant and equipment, net
2,722

 
2,843

Notes receivable and investments in Flash Ventures
2,321

 
2,791

Goodwill
10,069

 
10,076

Other intangible assets, net
1,311

 
1,711

Other non-current assets
810

 
472

Total assets
$
25,860

 
$
26,370

LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
 
 
 
Accounts payable
$
1,736

 
$
1,567

Accounts payable to related parties
364

 
331

Accrued expenses
1,559

 
1,296

Accrued compensation
537

 
347

Current portion of long-term debt
286

 
276

Total current liabilities
4,482

 
3,817

Long-term debt
9,547

 
10,246

Other liabilities
2,452

 
2,340

Total liabilities
16,481

 
16,403

Commitments and contingencies (Notes 9, 10, 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 — 299 shares and 295 shares, respectively
3

 
3

Additional paid-in capital
3,731

 
3,851

Accumulated other comprehensive loss
(110
)
 
(68
)
Retained earnings
6,717

 
7,449

Treasury stock — common shares at cost; 13 shares and 17 shares, respectively
(962
)
 
(1,268
)
Total shareholders’ equity
9,379

 
9,967

Total liabilities and shareholders’ equity
$
25,860

 
$
26,370


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

5


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

Six Months Ended
 
January 3,
2020

December 28,
2018

January 3,
2020

December 28,
2018
Revenue, net
$
4,234

 
$
4,233

 
$
8,274

 
$
9,261

Cost of revenue
3,299

 
3,189

 
6,581

 
6,553

Gross profit
935

 
1,044

 
1,693

 
2,708

Operating expenses:
 
 
 
 
 
 
 
Research and development
578

 
539

 
1,152

 
1,115

Selling, general and administrative
298

 
309

 
603

 
665

Employee termination, asset impairment, and other charges
9

 
20

 
17

 
66

Total operating expenses
885

 
868

 
1,772

 
1,846

Operating income (loss)
50

 
176

 
(79
)
 
862

Interest and other income (expense):
 
 
 
 
 
 
 
Interest income
8

 
15

 
20

 
30

Interest expense
(105
)
 
(118
)
 
(227
)
 
(234
)
Other income, net
7

 
8

 
9

 
6

Total interest and other expense, net
(90
)
 
(95
)
 
(198
)
 
(198
)
Income (loss) before taxes
(40
)

81


(277
)
 
664

Income tax expense
99

 
568

 
138

 
640

Net income (loss)
$
(139
)
 
$
(487
)
 
$
(415
)
 
$
24

 
 
 
 
 
 
 
 
Income (loss) per common share
 
 
 
 
 
 
 
Basic
$
(0.47
)
 
$
(1.68
)
 
$
(1.40
)
 
$
0.08

Diluted
$
(0.47
)
 
$
(1.68
)
 
$
(1.40
)
 
$
0.08

Weighted average shares outstanding:
 
 
 
 
 
 
 
Basic
298

 
290

 
297

 
291

Diluted
298

 
290

 
297

 
296

 
 
 
 
 
 
 
 
Cash dividends declared per share
$
0.50

 
$
0.50

 
$
1.00

 
$
1.00


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

6


WESTERN DIGITAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(in millions)
(Unaudited)
 
Three Months Ended
 
Six Months Ended
 
January 3,
2020
 
December 28,
2018
 
January 3,
2020
 
December 28,
2018
Net income (loss)
$
(139
)
 
$
(487
)
 
$
(415
)
 
$
24

Other comprehensive income (loss), before tax:
 
 
 
 
 
 
 
Actuarial pension gain
2

 
1

 
3

 
1

Foreign currency translation adjustment
(15
)
 
31

 
(10
)
 
(6
)
Net unrealized gain (loss) on derivative contracts and available-for-sale securities
(6
)
 
7

 
(39
)
 
6

Total other comprehensive income (loss), before tax
(19
)
 
39

 
(46
)
 
1

Income tax benefit (expense) related to items of other comprehensive income (loss), before tax
(1
)
 
2

 
4

 
3

Other comprehensive income (loss), net of tax
(20
)
 
41

 
(42
)
 
4

Total comprehensive income (loss)
$
(159
)
 
$
(446
)
 
$
(457
)
 
$
28


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

7


WESTERN DIGITAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in millions)
(Unaudited)
 
Six Months Ended
 
January 3,
2020
 
December 28,
2018
Cash flows from operating activities
 
 
 
Net income (loss)
$
(415
)
 
$
24

Adjustments to reconcile net income (loss) to net cash provided by operations:
 
 
 
Depreciation and amortization
805

 
952

Stock-based compensation
154

 
158

Deferred income taxes
(42
)
 
281

Loss (gain) on disposal of assets
(12
)
 
1

Amortization of debt discounts
20

 
19

Other non-cash operating activities, net
(20
)
 
37

Changes in:
 
 
 
Accounts receivable, net
(587
)
 
482

Inventories
155

 
(483
)
Accounts payable
170

 
(256
)
Accounts payable to related parties
33

 
51

Accrued expenses
327

 
254

Accrued compensation
191

 
(134
)
Other assets and liabilities, net
(269
)
 
(212
)
Net cash provided by operating activities
510

 
1,174

Cash flows from investing activities
 
 
 
Purchases of property, plant and equipment
(305
)
 
(500
)
Proceeds from the sale of property, plant and equipment

 
3

Acquisitions, net of cash acquired
(22
)
 

Purchases of investments

 
(33
)
Proceeds from sale of investments

 
13

Proceeds from maturities of investments

 
7

Notes receivable issuances to Flash Ventures
(224
)
 
(508
)
Notes receivable proceeds from Flash Ventures
690

 
312

Strategic investments and other, net
21

 
(19
)
Net cash provided by (used in) investing activities
160

 
(725
)
Cash flows from financing activities
 
 
 
Issuance of stock under employee stock plans
72

 
61

Taxes paid on vested stock awards under employee stock plans
(54
)
 
(69
)
Repurchases of common stock

 
(563
)
Dividends paid to shareholders
(296
)
 
(292
)
Repayment of debt
(707
)
 
(75
)
Repayment of revolving credit facility

 
(500
)
Net cash used in financing activities
(985
)
 
(1,438
)
Effect of exchange rate changes on cash
(3
)
 
(3
)
Net decrease in cash and cash equivalents
(318
)
 
(992
)
Cash and cash equivalents, beginning of year
3,455

 
5,005

Cash and cash equivalents, end of period
$
3,137

 
$
4,013

Supplemental disclosure of cash flow information:
 
 
 
Cash paid for income taxes
$
181

 
$
264

Cash paid for interest
$
206

 
$
216


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

8


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

Net loss

 

 

 

 

 

 
(139
)
 
(139
)
Employee stock plans

 

 
1

 
125

 
(81
)
 

 

 
44

Stock-based compensation

 

 

 

 
77

 

 

 
77

Dividends to shareholders

 

 

 

 
7

 

 
(156
)
 
(149
)
Actuarial pension gain

 

 

 

 

 
1

 

 
1

Foreign currency translation adjustment

 

 

 

 

 
(13
)
 

 
(13
)
Net unrealized loss on derivative contracts

 

 

 

 

 
(8
)
 

 
(8
)
Balance at January 3, 2020
312

 
$
3

 
(13
)
 
$
(962
)
 
$
3,731

 
$
(110
)
 
$
6,717

 
$
9,379



9


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

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


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

10


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. The Company 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.


11


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 as of June 29, 2019. 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 proceed assumptions 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.


12


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 January 3, 2020 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 January 3, 2020 and June 28, 2019 as well as the related amortization for the three and six months ended January 3, 2020 and December 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 January 3, 2020 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 January 3, 2020 was $140 million, which is mainly attributable to the functional IP license and service arrangements. The Company expects to recognize this amount as revenue as follows: $24 million during the remainder of fiscal 2020, $43 million in fiscal 2021, $40 million in fiscal 2022 and $33 million thereafter.


13


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


The Company’s disaggregated revenue information is as follows:
 
Three Months Ended
 
Six Months Ended
 
January 3,
2020
 
December 28, 2018
 
January 3,
2020
 
December 28, 2018
 
(in millions)
Revenue by Product
 
 
 
 
 
 
 
Hard disk drives (“HDD”)
$
2,396

 
$
2,060

 
$
4,804

 
$
4,554

Flash-based
1,838

 
2,173

 
3,470

 
4,707

Total Revenue
$
4,234

 
$
4,233

 
$
8,274

 
$
9,261

 
 
 
 
 
 
 
 
Revenue by End Market
 
 
 
 
 
 
 
Client Devices
$
1,797

 
$
2,214

 
$
3,413

 
$
4,864

Data Center Devices & Solutions
1,489

 
1,074

 
3,021

 
2,520

Client Solutions
948

 
945

 
1,840

 
1,877

Total Revenue
$
4,234

 
$
4,233

 
$
8,274

 
$
9,261

 
 
 
 
 
 
 
 
Revenue by Geography
 
 
 
 
 
 
 
Americas
$
1,296

 
$
1,015

 
$
2,609

 
$
2,296

Europe, Middle East and Africa
811

 
817

 
1,590

 
1,701

Asia
2,127

 
2,401

 
4,075

 
5,264

Total Revenue
$
4,234

 
$
4,233

 
$
8,274

 
$
9,261



The Company’s top 10 customers accounted for 44% and 43% of its net revenue for the three and six months ended January 3, 2020, respectively, and 47% of its net revenue for both the three and six months ended December 28, 2018. For the three and six months ended January 3, 2020 and December 28, 2018, no single customer accounted for 10% or more of the Company’s net revenue.


14


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 six months ended January 3, 2020 and December 28, 2018, the Company sold trade accounts receivable and received cash proceeds of $198 million and $370 million, respectively. The discounts on the trade accounts receivable sold during the periods were not material and were recorded within Other income, net in the Condensed Consolidated Statements of Operations. As of January 3, 2020 and June 28, 2019, the amount of factored receivables that remained outstanding was $113 million and $318 million, respectively.

Inventories
 
January 3,
2020
 
June 28,
2019
 
(in millions)
Inventories:
 
 
 
Raw materials and component parts
$
1,334

 
$
1,142

Work-in-process
847

 
968

Finished goods
941

 
1,173

Total inventories
$
3,122

 
$
3,283



Property, plant and equipment, net
 
January 3,
2020
 
June 28,
2019
 
(in millions)
Property, plant and equipment:
 
 
 
Land
$
294

 
$
294

Buildings and improvements
1,806

 
1,743

Machinery and equipment
7,171

 
7,267

Computer equipment and software
447

 
441

Furniture and fixtures
55

 
56

Construction-in-process
184

 
202

Property, plant and equipment, gross
9,957

 
10,003

Accumulated depreciation
(7,235
)
 
(7,160
)
Property, plant and equipment, net
$
2,722

 
$
2,843



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

Goodwill recorded in connection with an acquisition
14

Reduction in goodwill in connection with disposition of business
(20
)
Foreign currency translation adjustment
(1
)
Balance at January 3, 2020
$
10,069




15


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


Acquisition

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. The expenses incurred by the Company related to the acquisition as well as the revenues and earnings related to the acquisition were not material to the Condensed Consolidated Financial Statements.

Dispositions

In September 2019, the Company announced the sale of its IntelliFlash business and intention to exit Storage Systems, which consists of IntelliFlash and ActiveScale. These actions will allow the Company to redirect investments to other high value priorities. In November 2019, the Company completed its sale of IntelliFlash for a price of $28 million, to be collected over the next three years. The sale of the IntelliFlash business included an immaterial amount of inventory, other tangible and intangible assets, and goodwill and resulted in a gain of approximately $17 million recorded in Employee termination, asset impairment, and other charges in the Condensed Consolidated Statements of Operations for both the three and six months ended January 3, 2020. Additionally, in February 2020, the Company entered into an agreement for the sale of ActiveScale. The net assets sold and the proceeds from the sale of ActiveScale were not material. The revenues and expenses related to these businesses were not material to the Condensed Consolidated Financial Statements and did not qualify to be reported as discontinued operations. The operating results of these businesses have and will be reflected in the Company’s results from continuing operations in the Condensed Consolidated Statements of Operations for all periods presented through the date of disposition.

Intangible assets
 
January 3,
2020
 
June 28,
2019
 
(in millions)
Finite-lived intangible assets
$
5,798

 
$
5,824

In-process research and development
80

 
72

Accumulated amortization
(4,567
)
 
(4,185
)
Intangible assets, net
$
1,311

 
$
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.


16


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


Product warranty liability

Changes in the warranty accrual were as follows:
 
Three Months Ended
 
Six Months Ended
 
January 3,
2020
 
December 28,
2018
 
January 3,
2020
 
December 28, 2018
 
(in millions)
Warranty accrual, beginning of period
$
357

 
$
323

 
$
350

 
$
318

Charges to operations
50

 
47

 
99

 
81

Utilization
(35
)
 
(42
)
 
(83
)
 
(68
)
Changes in estimate related to pre-existing warranties
6

 
9

 
12

 
6

Warranty accrual, end of period
$
378

 
$
337

 
$
378

 
$
337



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:

 
January 3,
2020
 
June 28,
2019
 
(in millions)
Warranty accrual
 
 
 
Current portion (included in Accrued expenses)
$
193

 
$
188

Long-term portion (included in Other liabilities)
185

 
162

Total warranty accrual
$
378

 
$
350



Other liabilities
 
January 3,
2020
 
June 28,
2019
 
(in millions)
Other liabilities:
 
 
 
Non-current net tax payable
$
839

 
$
928

Payables related to unrecognized tax benefits
708

 
699

Other non-current liabilities
905

 
713

Total other liabilities
$
2,452

 
$
2,340




17


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


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
3

 
(10
)
 
(20
)
 
(27
)
Amounts reclassified from accumulated other comprehensive income (loss)