Document/ExhibitDescriptionPagesSize 1: 10-Q Quarterly Report HTML 952K
2: EX-10.1 Material Contract HTML 33K
3: EX-10.2 Material Contract HTML 85K
4: EX-31.1 Certification -- §302 - SOA'02 HTML 29K
5: EX-31.2 Certification -- §302 - SOA'02 HTML 29K
6: EX-32.1 Certification -- §906 - SOA'02 HTML 26K
7: EX-32.2 Certification -- §906 - SOA'02 HTML 26K
14: R1 Cover Page HTML 78K
15: R2 Condensed Consolidated Balance Sheets HTML 114K
16: R3 Condensed Consolidated Balance Sheets HTML 45K
(Parenthetical)
17: R4 Condensed Consolidated Statements of Operations HTML 88K
18: R5 Condensed Consolidated Statements of Comprehensive HTML 55K
Loss
19: R6 Condensed Consolidated Statements of Cash Flows HTML 115K
20: R7 Condensed Consolidated Statements of Shareholders' HTML 68K
Equity
21: R8 Organization and Basis of Presentation HTML 33K
22: R9 Recent Accounting Pronouncements HTML 37K
23: R10 Revenues HTML 56K
24: R11 Supplemental Financial Statement Data HTML 104K
25: R12 Fair Value Measurements and Investments HTML 100K
26: R13 Derivatives Instruments and Hedging Activities HTML 30K
27: R14 Debt HTML 42K
28: R15 Pensions and Other Post-Retirement Benefit Plans HTML 47K
29: R16 Related Parties and Related Commitments and HTML 68K
Contingencies
30: R17 Leases and Other Commitments HTML 57K
31: R18 Shareholders' Equity HTML 85K
32: R19 Income Tax Expense HTML 43K
33: R20 Net Loss Per Common Share HTML 39K
34: R21 Employee Termination, Asset Impairment and Other HTML 50K
Charges
35: R22 Legal Proceedings HTML 28K
36: R23 Organization and Basis of Presentation (Policies) HTML 52K
37: R24 Revenues (Tables) HTML 50K
38: R25 Supplemental Financial Statement Data (Tables) HTML 117K
39: R26 Fair Value Measurements and Investments (Tables) HTML 98K
40: R27 Debt (Tables) HTML 41K
41: R28 Pensions and Other Post-Retirement Benefit Plans HTML 45K
(Tables)
42: R29 Related Parties and Related Commitments and HTML 66K
Contingencies (Tables)
43: R30 Leases and Other Commitments (Tables) HTML 59K
44: R31 Shareholders' Equity (Tables) HTML 89K
45: R32 Income Tax Expense (Tables) HTML 33K
46: R33 Net Loss Per Common Share (Tables) HTML 37K
47: R34 Employee Termination, Asset Impairment and Other HTML 50K
Charges (Tables)
48: R35 Organization and Basis of Presentation (Details) HTML 27K
49: R36 Revenues - Revenue Remaining Performance HTML 37K
Obligation (Details)
50: R37 Revenues - Disaggregation of Revenue (Details) HTML 47K
51: R38 Revenues - Additional Information (Details) HTML 34K
52: R39 Supplemental Financial Statement Data - Additional HTML 32K
Information (Details)
53: R40 Supplemental Financial Statement Data - Inventory HTML 35K
(Details)
54: R41 Supplemental Financial Statement Data - Property, HTML 46K
Plant and Equipment (Details)
55: R42 Supplemental Financial Statement Data - Goodwill HTML 30K
Roll Forward (Details)
56: R43 Supplemental Financial Statement Data - Intangible HTML 34K
Assets (Details)
57: R44 Supplemental Financial Statement Data - Warranty HTML 34K
Accrual Roll Forward (Details)
58: R45 Supplemental Financial Statement Data - Total HTML 31K
Warranty Accrual (Details)
59: R46 Supplemental Financial Statement Data - Other HTML 33K
Liabilities (Details)
60: R47 Supplemental Financial Statement Data - HTML 56K
Accumulated Other Comprehensive Income Roll
Forward (Details)
61: R48 Fair Value Measurements and Investments - HTML 65K
Financial Assets and Liabilities Measured at Fair
Value on Recurring Basis (Detail)
62: R49 Fair Value Measurements and Investments - Debt HTML 54K
Instrument Fair Value (Details)
63: R50 Derivatives Instruments and Hedging Activities HTML 27K
(Details)
64: R51 Debt - Schedule of Debt (Details) HTML 52K
65: R52 Debt - Additional Information (Details) HTML 29K
66: R53 Pensions and Other Post-Retirement Benefit Plans - HTML 27K
Additional Information (Details)
67: R54 Pensions and Other Post-Retirement Benefit Plans - HTML 34K
Obligations and Funded Status (Details)
68: R55 Pensions and Other Post-Retirement Benefit Plans - HTML 35K
Unfunded Amounts Recognized on Consolidated
Balance Sheets (Details)
69: R56 Related Parties and Related Commitments and HTML 72K
Contingencies - Additional Information (Details)
70: R57 Related Parties and Related Commitments and HTML 41K
Contingencies - Equity Investments (Details)
71: R58 Related Parties and Related Commitments and HTML 41K
Contingencies - Maximum Loss Exposure (Details)
72: R59 Related Parties and Related Commitments and HTML 30K
Contingencies - JV Lease Guarantees (Details)
73: R60 Related Parties and Related Commitments and HTML 48K
Contingencies - Joint Venture Lease Amounts
(Details)
74: R61 Leases and Other Commitments - Supplemental HTML 54K
Balance Sheet (Details)
75: R62 Leases and Other Commitments - Supplemental Cash HTML 32K
Flow (Details)
76: R63 Leases and Other Commitments - Long-Term HTML 38K
Commitments (Details)
77: R64 Shareholders' Equity - Stock-Based Compensation HTML 45K
Expense (Details)
78: R65 Shareholders' Equity - Unrecognized Share-based HTML 34K
Compensation (Details)
79: R66 Shareholders' Equity - Stock Option Activity HTML 62K
(Details)
80: R67 Shareholders' Equity - Restricted Stock Units And HTML 51K
Performance Share Units (Details)
81: R68 Shareholders' Equity - Share Repurchase Program HTML 32K
(Details)
82: R69 Income Tax Expense - Tax Expense and Effective Tax HTML 35K
Rate (Details)
83: R70 Income Tax Expense - Additional Information HTML 52K
(Details)
84: R71 Net Loss Per Common Share (Details) HTML 43K
85: R72 Employee Termination, Asset Impairment and Other HTML 34K
Charges - Expense Recognition (Details)
86: R73 Employee Termination, Asset Impairment and Other HTML 40K
Charges - Business Realignment Activities
(Details)
88: XML IDEA XML File -- Filing Summary XML 162K
13: XML XBRL Instance -- wdc-20201002_htm XML 1.86M
87: EXCEL IDEA Workbook of Financial Reports XLSX 95K
9: EX-101.CAL XBRL Calculations -- wdc-20201002_cal XML 259K
10: EX-101.DEF XBRL Definitions -- wdc-20201002_def XML 559K
11: EX-101.LAB XBRL Labels -- wdc-20201002_lab XML 1.64M
12: EX-101.PRE XBRL Presentations -- wdc-20201002_pre XML 952K
8: EX-101.SCH XBRL Schema -- wdc-20201002 XSD 180K
89: JSON XBRL Instance as JSON Data -- MetaLinks 391± 579K
90: ZIP XBRL Zipped Folder -- 0000106040-20-000061-xbrl Zip 319K
(Exact Name of Registrant as Specified in Its Charter)
iDelaware
i33-0956711
(State
or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
i5601 Great Oaks Parkway
iSan
Jose,
iCalifornia
i95119
(Address
of principal executive offices)
(Zip Code)
Registrant’s telephone number, including area code: (i408) i717-6000
Securities registered pursuant to Section 12(b) of the Act:
Title
of each class
Trading symbol(s)
Name of each exchange on which registered
iCommon Stock, $.01 Par Value Per Share
iWDC
iThe
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. iYes☒ 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). iYes☒ 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.
iLarge
accelerated filer
Accelerated filer
Non-accelerated filer
Smaller reporting company
Emerging growth company
☒
☐
☐
i☐
i☐
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 i☐ No ý
As
of the close of business on October 30, 2020, i304,245,045 shares of common stock, par value $0.01 per share, were outstanding.
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, California95119. 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.
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 the effects of the COVID-19 pandemic and measures intended to reduce its spread;
•expectations regarding our Flash Ventures joint venture with Kioxia Corporation, the flash industry and our flash wafer output plans;
•expectations regarding the outcome of legal proceedings in which we are involved;
•our reinvestment in the business and ongoing deleveraging efforts;
•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.
These forward-looking statements are based on information available to the Company as of the date of this Quarterly Report on Form 10-Q and are based on management’s current views and assumptions.They are conditioned upon and involve a number of risks, uncertainties and other factors that could cause actual results or performance to differ materially from those expressed in the forward-looking statements.These risks and uncertainties include, but are not limited to:
•future
responses to and effects of the COVID-19 pandemic;
•volatility in global economic conditions;
•impact of business and market conditions;
•impact of competitive products and pricing;
•our development and introduction of products based on new technologies and expansion into new data storage markets;
•risks associated with cost saving initiatives, restructurings, acquisitions, divestitures, mergers, joint ventures and our strategic relationships;
•difficulties or delays in manufacturing or other supply chain disruptions;
•hiring
and retention of key employees;
•our high level of debt and other financial obligations;
•changes to our relationships with key customers;
•disruptions in operations from cyberattacks or other system security risks;
•actions by competitors; and
•risks associated with compliance with changing legal and regulatory requirements and the outcome of legal proceedings.
You are urged to carefully review the disclosures we make concerning these risks and review the additional disclosures we make concerning material risks and other factors that may affect
the outcome of our forward-looking statements and our business and operating results, including those made in Part I, Item 1A of our Annual Report on Form 10-K for the fiscal year ended July 3, 2020 (the “2020 Annual Report on Form 10-K”) and any of those made in our other reports filed with the Securities and Exchange Commission, including under “Risk Factors” in Item 1A of subsequent Annual Reports on Form 10-K and Quarterly Reports on Form 10-Q that may from time to time amend, supplement or supersede the risks and uncertainties disclosed in the 2020 Annual Report on Form 10-K. You are cautioned not to place undue reliance on the forward-looking statements included in this Quarterly Report on Form 10-Q, which speak only as of the date of this document. We do not intend, and undertake no obligation, to update or revise these forward-looking statements to reflect events or circumstances after the date of
this document or to reflect the occurrence of unanticipated events, except as required by law.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1. iOrganization
and Basis of Presentation
i
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 July 3, 2020. 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 July 3, 2020. The results of operations for interim periods are not necessarily indicative of results to be expected for the full year.
iFiscal
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 2021, which ends on July 2, 2021, will be comprised of 52 weeks, with all quarters presented consisting of 13 weeks. Fiscal year 2020, which ended on July 3, 2020, was comprised of 53 weeks, with the first quarter consisting of 14 weeks and the remaining quarters consisting of 13 weeks each.
i
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 with consideration given to the potential impacts of the coronavirus disease 2019 (“COVID-19”) pandemic. However, actual results could differ materially from these estimates and be significantly affected by the severity and duration of the pandemic, the extent of actions to contain or treat COVID-19, how quickly and to what extent normal economic and operating activity can resume, and the severity and duration of the global economic downturn that results from the pandemic.
i
Segment
Information
The Company manufactures, markets, and sells data storage devices and solutions in the U.S. and in foreign countries through its sales personnel, dealers, distributors, retailers, and subsidiaries. Historically, the Company has managed and reported under a single operating segment. Late in the first quarter of fiscal 2021, the Chief Executive Officer, who is the Company’s Chief Operating Decision Maker (“CODM”), announced a decision to reorganize the
Company’s business by forming two separate product business units: flash-based products and hard disk drives (“HDD”). Beginning in the second fiscal quarter, the Company is in the process of transitioning to this new operating model and discrete information has not yet been established to align with the new business structure. Management expects to finalize its assessment of its operating segments when the transition is completed, which is expected to be by the end of fiscal 2021.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Note 2. iRecent Accounting Pronouncements
i
Accounting
Pronouncements Recently Adopted
In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Updates (“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 adopted this standard effective July 4, 2020 (the beginning of fiscal 2021) with no material impact on its Condensed Consolidated Financial Statements.
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 Accounting Standards Codification (ASC) 606 by recognizing a cumulative-effect adjustment to the opening balance of retained earnings of the earliest annual period presented. The Company adopted this standard effective July 4, 2020 (the beginning of fiscal 2021) with no material impact on its Condensed Consolidated Financial Statements.
Recently Issued Accounting
Pronouncements Not Yet Adopted
In December 2019, the FASB issued ASU No. 2019-12, “Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes” (“ASU 2019-12”). ASU 2019-12 removes certain exceptions for recognizing deferred taxes for investments, performing intraperiod allocation and calculating income taxes in interim periods. The ASU also adds guidance to reduce complexity in certain areas, including recognizing deferred taxes for tax goodwill and allocating taxes to members of a consolidated group. This ASU is effective for fiscal years (and interim periods within those fiscal years) beginning after December 15, 2020, which for the Company is the first quarter of fiscal 2022. Early adoption is permitted. The
Company does not expect this update to have a material impact on its Condensed Consolidated Financial Statements.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Note 3. iRevenues
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 2, 2020 or July 3, 2020.
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. 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 as of October 2, 2020 and July 3, 2020 as well as the related amortization for the three months ended October 2, 2020 and October 4, 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 October 2, 2020 and July 3, 2020, 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 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 2, 2020 was $i102 million,
which is mainly attributable to the functional IP license and service arrangements. The Company expects to recognize this amount as revenue as follows: $i31 million during the remainder of fiscal 2021, $i40
million in fiscal 2022, and $i31 million in fiscal 2023 and thereafter.
The
Company’s top 10 customers accounted for i44% of its net revenue for the three months ended October 2, 2020, and i43% of its net revenue for the three months ended
October 4, 2019. For the three months ended October 2, 2020, no single customer accounted for 10% of the Company’s net revenue, and for the three months ended October 4, 2019, one customer accounted for i11% of the Company’s net revenue.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Note 4. iSupplemental 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 2, 2020 and October 4, 2019, the Company sold trade accounts receivable and received cash proceeds of $i128
million and $i85 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 October 2, 2020 and July 3, 2020, the amount of factored receivables that remained outstanding was $i128
million and $i113 million, respectively.
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.
Changes
in estimate related to pre-existing warranties
(i21)
i6
Warranty
accrual, end of period
$
i391
$
i357
The
current portion of the warranty accrual is classified in Accrued expenses and the long-term portion is classified in Other liabilitiesas noted below:
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Accumulated other comprehensive income (loss)
Accumulated other comprehensive income (loss) (“AOCI”), net of tax refers to expenses, gains and losses that are recorded as an element of shareholders’ equity but are excluded from net income. iThe
following table illustrates the changes in the balances of each component of AOCI:
During
the three months ended October 2, 2020 and October 4, 2019, the amounts reclassified out of AOCI related to derivative contracts were substantially all charged to Cost of revenue in the Condensed Consolidated Statements of Operations.
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS — (Continued)
Note 5. iFair Value Measurements and Investments
Financial Instruments Carried at Fair Value
i
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.
i
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 2, 2020 and July 3, 2020, and indicate the fair value hierarchy of the valuation
techniques utilized to determine such values:
During
the three months ended October 2, 2020 and October 4, 2019, the Company had no transfers of financial assets and liabilities between levels and there were no changes in valuation techniques and the inputs used in the fair value measurement.
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. iFor 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 2021 and the fourth quarter of 2020, respectively.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Note 6. iDerivative Instruments and Hedging Activities
As of October 2, 2020, 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 2, 2020, the amount
of existing net losses related to cash flow hedges recorded in AOCI included $i70 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 2, 2020, 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, 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 2, 2020 and October 4, 2019, 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 2, 2020 and July 3, 2020, 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.
Variable
interest rate Term Loan A-1 maturing 2023
i4,520
i4,583
Variable
interest rate Term Loan B-4 maturing 2023
i1,543
i1,693
ii1.50/%
convertible notes due 2024
i1,100
i1,100
ii4.75/%
senior unsecured notes due 2026
i2,300
i2,300
Total
debt
i9,498
i9,711
Issuance
costs and debt discounts
(i126)
(i136)
Subtotal
i9,372
i9,575
Less
current portion of long-term debt
(i286)
(i286)
Long-term
debt
$
i9,086
$
i9,289
/
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 2, 2020, the Company was in compliance with these financial covenants.
During the three months ended October 2, 2020, the Company made a voluntary prepayment of $i150
million on its Term Loan B-4. Subsequent to October 2, 2020, the i0.50% convertible notes due 2020 were settled in full in accordance with their terms.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Note 8. iPension 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, Thailand and the Philippines. All pension and other post-retirement benefit plans outside of the Company’s Japan, Thailand and Philippines defined benefit pension plans (the “Pension Plans”) are immaterial to the Condensed Consolidated Financial Statements. The expected long-term rate of return on the Pension Plans assets is i2.5%.
Obligations
and Funded Status
i
The following table presents the unfunded status of the benefit obligations for the Pension Plans:
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Note 9. iRelated
Parties and Related Commitments and Contingencies
Flash Ventures
The Company’s business ventures with Kioxia 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”.
i
The
following table presents the notes receivable from, and equity investments in, Flash Ventures as of October 2, 2020 and July 3, 2020:
Total notes receivable and investments in Flash
Ventures
$
i1,746
$
i1,875
/
During
the three months ended October 2, 2020 and October 4, 2019, the Company made net payments to Flash Ventures of $i981 million and $i682
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 2, 2020 and July 3, 2020, the Company had Accounts payable balances due to Flash Ventures of $i404 million and $i407
million, respectively.
i
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 2, 2020, 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.
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 i50% of
Flash Ventures’ output. In addition, the Company is obligated to pay for half of Flash Ventures’ fixed costs regardless of the output the Company chooses to purchase. The Company is not able to estimate its total wafer purchase commitment obligation beyond its rolling three-month purchase commitment because the price is determined by reference to the future cost of producing the semiconductor wafers. In addition, the Company is committed to fund i49.9%
to i50.0% of each Flash Ventures entity’s capital investments to the extent that each Flash Ventures entity’s operating cash flow is insufficient to fund these investments.
In June 2019, an unexpected power outage incident occurred at the flash-based memory manufacturing facilities operated in Yokkaichi, Japan. The power outage incident impacted the facilities and process tools and resulted in damage to flash wafers in production and a reduction in the
Company’s flash wafer availability. As a result of this incident, the Company incurred charges of $i68 million for the three months ended October 4, 2019, which were recorded in Cost of revenue and primarily consisted of unabsorbed manufacturing overhead costs. During the three months ended October 2, 2020, the
Company received a recovery of $i30 million related to this incident from its insurance carriers, which was recorded in Cost of revenue. The Company continues to pursue recovery of its losses associated with this event; however, the total amount of recovery cannot be estimated at this time.
In May 2019, the
Company entered into additional agreements with Kioxia to extend Flash Ventures to a new wafer fabrication facility, known as “K1,” located in Kitakami, Japan. The primary purpose of K1 is to provide clean room space to continue the transition of existing flash-based wafer capacity to newer technology nodes. Output from the initial production line at K1 began in the third quarter of fiscal year 2020, although meaningful output from K1 is not expected to begin until the end of calendar 2020. The Company has paid for most of its share of initial K1 equipment investments and relocation costs. Other period expenses associated with the initial production ramp at K1 are expected to begin trailing off toward the end of calendar year 2020 as output increases. The Company also agreed to prepay an aggregate
of approximately $i360 million over a i3-year period beginning in the first half of fiscal year 2020 toward K1 building depreciation, to be credited against future wafer charges. As of October 2, 2020, remaining committed prepayments
totaled $i178 million.
Inventory Purchase Commitments with Flash Ventures. Purchase orders placed under Flash Ventures for up to three months are binding and cannot be canceled.
Research and Development Activities.The Company participates in
common research and development (“R&D”) activities with Kioxia and is contractually committed to a minimum funding level. R&D commitments are immaterial to the Condensed Consolidated Financial Statements.
Off-Balance Sheet Liabilities
Flash Ventures sells to and leases back from a consortium of financial institutions a portion of its tools and has entered into equipment lease agreements of which the Company guarantees half or all of the outstanding obligations under each lease agreement. The lease agreements are subject to customary covenants and cancellation events related to Flash Ventures and each of the guarantors. The occurrence of a cancellation event could result in an acceleration of Flash Ventures’ obligations
and a call on the Company’s guarantees.
i
The following table presents the Company’s portion of the remaining guarantee obligations under the Flash Ventures’ lease facilities in both Japanese yen and U.S. dollar-equivalent, based upon the Japanese yen to U.S. dollar exchange rate as of October 2, 2020.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
i
The following table details the breakdown of the Company’s remaining guarantee obligations between the principal amortization and the purchase option exercise price at the end of the term of the Flash Ventures lease agreements, in annual installments as
of October 2, 2020 in U.S. dollars, based upon the Japanese yen to U.S. dollar exchange rate as of October 2, 2020:
Annual Installments
Payment of Principal Amortization
Purchase Option Exercise Price at Final
Lease Terms
Guarantee Amount
(in millions)
Remaining nine months of 2021
$
i407
$
i80
$
i487
2022
i469
i51
i520
2023
i356
i69
i425
2024
i194
i123
i317
2025
i55
i113
i168
Thereafter
i15
i72
i87
Total
guarantee obligations
$
i1,496
$
i508
$
i2,004
/
The
Company and Kioxia have agreed to mutually contribute to, and indemnify each other and Flash Ventures for, environmental remediation costs or liability resulting from Flash Ventures’ manufacturing operations in certain circumstances. The Company has not made any indemnification payments, nor recorded any indemnification receivables, under any such agreements. As of October 2, 2020, no amounts have been accrued in the Condensed Consolidated Financial Statements with respect to these indemnification agreements.
Unis Venture
The Company has a joint venture with Unisplendour Corporation
Limited and Unissoft (Wuxi) Group Co. Ltd. (“Unis”), referred to as the “Unis Venture”, to market and sell the Company’s products in China and to develop data storage systems for the Chinese market in the future. The Unis Venture is i49% owned by the Company and i51%
owned by Unis. The Company accounts for its investment in the Unis Venture under the equity method of accounting. Revenue on products distributed by the Unis Venture is recognized upon sell through to third-party customers. For the three months ended October 2, 2020 and October 4, 2019, the Company recognized approximately i2%
and i1%, respectively, of its consolidated revenue on products distributed by the Unis Venture. The outstanding accounts receivable due from and investment in the Unis Venture were i6% and i4%
of Accounts receivable, net as of October 2, 2020 and July 3, 2020, respectively.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Note 10. iLeases
and Other Commitments
Leases
The Company leases certain domestic and international facilities and data center space under long-term, non-cancelable operating leases that expire at various dates through 2034. These leases include no material variable or contingent lease payments. Operating lease assets and liabilities are recognized based on the present value of the remaining lease payments discounted using the Company’s incremental borrowing rate. Operating lease assets also include prepaid lease payments minus any lease incentives. Extension or termination options present in the
Company’s lease agreements are included in determining the right-of-use asset and lease liability when it is reasonably certain the Company will exercise those options. Lease expense is recognized on a straight-line basis over the lease term. iThe following table summarizes supplemental balance sheet information related to operating leases as of October 2, 2020:
Lease
Amounts
Minimum lease payments by fiscal year:
(in millions)
Remaining nine months of 2021
$
i35
2022
i35
2023
i29
2024
i29
2025
i27
Thereafter
i144
Total
future minimum lease payments
i299
Less: Imputed Interest
(i56)
Present
value of lease liabilities
i243
Less: Current portion (included in Accrued expenses)
i37
Long-term
operating lease liabilities (included in Other liabilities)
$
i206
Operating
lease right-of-use assets (included in Other non-current assets)
$
i228
Weighted
average remaining lease term in years
i9.0
Weighted average discount rate
i4.2
%
i
The
following table summarizes supplemental disclosures of operating cost and cash flow information related to operating leases:
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Purchase Agreements and Other Commitments
In the normal course of business, the Company enters into purchase orders with suppliers for the purchase of components used to manufacture its products. These purchase orders generally cover forecasted component supplies needed for production during the next quarter, are recorded as a liability upon receipt of the components, and generally may be changed or canceled at any time prior to shipment of the components. The
Company also enters into long-term agreements with suppliers that contain fixed future commitments, which are contingent on certain conditions such as performance, quality and technology of the vendor’s components. iAs of October 2, 2020, the Company had the following minimum long-term commitments:
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Note 11. iShareholders’ Equity
Stock-based Compensation Expense
i
The
following tables present the Company’s stock-based compensation for equity-settled awards by type (i.e., stock options, restricted stock units (“RSUs”), restricted stock unit awards with performance conditions or market conditions (“PSUs”), and rights to purchase shares of common stock under the Company’s Employee Stock Purchase Plan (“ESPP”)) and financial statement line as well as the related tax benefit included in the Company’s Condensed Consolidated Statements of Operations:
Windfall
tax benefits and tax deficiencies for shortfalls related to the vesting and exercise of stock-based awards, which are recognized as a component of the Company’s Income tax expense, were not material for the periods presented.
Compensation cost related to unvested stock options, RSUs, PSUs, and rights to purchase shares of common stock under the ESPP will generally be amortized on a straight-line basis over the remaining average service period. iThe
following table presents the unamortized compensation cost and weighted average service period of all unvested outstanding awards as of October 2, 2020:
Unamortized Compensation Costs
Weighted Average Service Period
(in millions)
(years)
RSUs
and PSUs (1)
$
i743
i3.0
ESPP
i29
i0.8
Total
unamortized compensation cost
$
i772
(1) Weighted average service period assumes the performance metrics are met for the PSUs.
RSUs
and PSUs are generally settled in an equal number of shares of the Company’s common stock at the time of vesting of the units.
Stock Repurchase Program
The Company’s Board of Directors has authorized a stock repurchase program for the repurchase of up to $i5.0
billion of the Company’s common stock, which authorization is effective through July 25, 2023. The Company did not make any stock repurchases during the three months ended October 2, 2020 and has not repurchased any shares of its common stock pursuant to its stock repurchase program since the first quarter of fiscal 2019. The remaining amount available to be repurchased under the Company’s current stock repurchase program as of October 2, 2020 was $i4.5 billion.
Repurchases under the stock repurchase program may be made in the open market or in privately negotiated transactions and may be made under a Rule 10b5-1 plan. The Company expects stock repurchases to be funded principally by operating cash flows.
Dividends to Shareholders
The Company issued a quarterly cash dividend from the first quarter of fiscal 2013 up to the third quarter of fiscal 2020. In April 2020, the Company suspended its dividend to reinvest in the business and to support its ongoing deleveraging efforts.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Note 12. iIncome Tax Expense
On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) was enacted in response to the COVID-19 pandemic
in the U.S. The CARES Act, among other things, allows net operating losses arising in tax years 2018, 2019, and 2020 to be carried back to each of the five preceding taxable years to generate a refund of previously paid income taxes and increases the business interest expense limitation from 30% to 50% of adjusted taxable income for tax years 2019 and 2020. Additionally, countries around the world continue to implement emergency tax measures to provide relief similar to the CARES Act. The Company at present does not expect that any of the provisions of the CARES Act or the emergency tax measures around the world would result in a material cash benefit. However, the Company continues to monitor and evaluate the regulatory and interpretive guidance related to the CARES Act as well as in other jurisdictions.
The Tax Cuts and Jobs Act (the “2017 Act”), enacted on December 22, 2017, includes a broad range of tax reform proposals affecting businesses. The Company completed its accounting for the tax effects of the enactment of the 2017 Act during the second quarter of fiscal 2019. However, the U.S. Treasury and the Internal Revenue Service (“IRS”) have issued tax guidance on certain provisions of the 2017 Act since the enactment date, and the Company anticipates the issuance of additional regulatory and interpretive guidance. The Company applied a reasonable interpretation of
the 2017 Act along with the then-available guidance in finalizing its accounting for the tax effects of the 2017 Act. Any additional regulatory or interpretive guidance would constitute new information, which may require further refinements to the Company’s estimates in future periods.
i
The following table presents the Company’s
Income tax expense and the effective tax rate:
The
primary drivers of the difference between the effective tax rate for the three months ended October 2, 2020 and the U.S. Federal statutory rate of 21% are the relative mix of earnings and losses by jurisdiction, the deduction for foreign derived intangible income, credits and tax holidays in Malaysia, the Philippines and Thailand that will expire at various dates during fiscal years 2021 through 2030. In addition, the effective tax rate for the three months ended October 2, 2020 includes the discrete effects of net tax deficiencies from shortfalls of $i11 million
related to the vesting of stock-based awards and additional tax expense of $i10 million from the re-measurement of purchase accounting deferred tax liabilities due to restructuring activities. The discrete items have no impact on the amount of income taxes paid by the Company.
The
primary drivers of the difference between the effective tax rate for the three months ended October 4, 2019 and the U.S. Federal statutory rate of 21% are the relative mix of earnings and losses by jurisdiction, the deduction for foreign derived intangible income, credits, and tax holidays in Malaysia, Philippines and Thailand that expired or will expire at various dates during fiscal years 2020 through 2030.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The IRS previously completed its field examination of the Company’s federal income tax returns for fiscal years 2008 through 2012 and proposed certain adjustments. As previously disclosed, the Company received Revenue Agent Reports from the IRS for fiscal years 2008 through 2009, proposing adjustments relating to transfer pricing with the Company’s foreign subsidiaries
and intercompany payable balances. The Company disagrees with the proposed adjustments and in September 2015, filed a protest with the IRS Appeals Office and received the IRS rebuttal in July 2016. The Company and the IRS Appeals Office did not reach a settlement on the disputed matters. On June 28, 2018, the IRS issued a statutory notice of deficiency with respect to the disputed matters for fiscal years 2008 through 2009, seeking to increase the Company’s U.S. taxable income by an amount that would result in additional federal tax through fiscal year 2009 totaling approximately $i516
million, subject to interest and penalties. The Company filed a petition with the U.S. Tax Court in September 2018. On December 10, 2018, the IRS issued a statutory notice of deficiency with respect to fiscal years 2010 through 2012, seeking to increase the Company’s U.S. taxable income by an amount that would result in additional federal tax for fiscal years 2010 through 2012 totaling approximately $i549
million, subject to interest and penalties. Approximately $i535 million of the total additional federal tax for fiscal years 2010 through 2012 relates to proposed adjustments for transfer pricing with the Company’s foreign subsidiaries, intercompany payable balances and the utilization
of certain tax attributes. The Company filed a petition with the U.S. Tax Court in March 2019. The U.S. Tax Court consolidated the case for fiscal years 2008 through 2009 with the case for fiscal years 2010 through 2012. On May 4, 2020, the IRS filed with the U.S. Tax Court Amendments to Answer to assert penalties totaling $i340 million on the proposed adjustments relating to transfer pricing with respect to fiscal years 2008
through 2009 and fiscal years 2010 through 2012. In September 2020, the IRS proposed adjustments relating to transfer pricing with the Company’s foreign subsidiaries for fiscal years 2013 through 2015 that, if sustained, would result in additional federal tax totaling approximately $i271 million. The Company
disagrees with the proposed adjustments. The Company continues to believe that its tax positions are properly supported and will vigorously contest the position taken by the IRS.
The Company believes that adequate provision has been made for any adjustments that may result from tax examinations. However, the outcome of tax examinations cannot be predicted with certainty. If any issues addressed in the Company’s tax examinations are resolved in a manner not consistent with management’s expectations, the Company could be required to adjust its provision
for income taxes in the period such resolution occurs. As of October 2, 2020, it was not possible to estimate the amount of change, if any, in the unrecognized tax benefits that is reasonably possible within the next twelve months. Any significant change in the amount of the Company’s liability for unrecognized tax benefits would most likely result from additional information or settlements relating to the examination of the Company’s tax returns.
As of October 2, 2020, the liability for unrecognized tax benefits (excluding accrued interest and penalties) was approximately $i711
million. Accrued interest and penalties related to unrecognized tax benefits as of October 2, 2020 was approximately $i141 million. Of these amounts, approximately $i715
million could result in potential cash payments. The Company is not able to provide a reasonable estimate of the timing of future tax payments related to these obligations.
The
Company computes basic loss per common share using Net loss and the weighted average number of common shares outstanding during the period. Diluted loss per common share is computed using Net loss and the weighted average number of common shares and potentially dilutive common shares outstanding during the period. Potentially dilutive common shares include dilutive outstanding employee stock options, RSUs and PSUs, and rights to purchase shares of common stock under the Company’s ESPP. For the three months ended October 2, 2020 and the three months ended October 4, 2019, the Company recorded net losses, and all shares subject to outstanding equity awards have been excluded for those periods because
including them would be anti-dilutive.
Total
employee termination, asset impairment, and other charges
$
i23
$
i8
/
Business
Realignment
The Company periodically incurs charges as part of the integration process of recent acquisitions and to realign its operations with anticipated market demand, primarily consisting of organization rationalization designed to streamline its business, reduce its cost structure and focus its resources.
The following table presents an analysis of the components of the activity against the reserve during the three months ended October 2, 2020:
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Note 15. iLegal Proceedings
Tax
For disclosures regarding statutory notices of deficiency issued by the IRS on June
28, 2018 and December 10, 2018, and petitions filed by the Company with the U.S. Tax Court in September 2018 and March 2019, see Note 12, Income Tax Expense.
Other Matters
In the normal course of business, the Company is subject to legal proceedings, lawsuits and other claims. Although the ultimate aggregate amount of probable monetary liability or financial impact with respect to these other matters is subject to many uncertainties, management believes that any monetary liability or financial impact to the
Company from these matters, individually and in the aggregate, would not be material to the Company’s financial condition, results of operations or cash flows. However, any monetary liability and financial impact to the Company from these matters could differ materially from the Company’s expectations.
Item 2. Management’s
Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis contains forward-looking statements within the meaning of the federal securities laws, and should be read in conjunction with the disclosures we make concerning risks and other factors that may affect our business and operating results. You should read this information in conjunction with the unaudited Condensed Consolidated Financial Statements and the notes thereto included in this Quarterly Report on Form 10-Q, and the audited Consolidated Financial Statements and notes thereto included in Part II, Item 8 of our Annual Report on Form 10‑K for the fiscal year ended July 3, 2020. See also “Forward-Looking Statements” immediately prior to Part I, Item 1 in this Quarterly Report on Form 10-Q.
Unless
otherwise indicated, references herein to specific years and quarters are to our fiscal years and fiscal quarters. As used herein, the terms “we,”“us,”“our,” and the “Company” refer to Western Digital Corporation and its subsidiaries.
We are 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. We create environments for data to thrive. We drive 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, our industry-leading solutions deliver the possibilities of data.
Our broad portfolio of technology and products address the following key end markets: Client Devices; Data Center Devices and Solutions; and Client Solutions. We also generate license and royalty revenue from our extensive intellectual property (“IP”), which is included in each of these three end market categories.
Our fiscal year ends on the Friday nearest to June 30 and typically consists of 52 weeks. Approximately every five to six years, we report a 53-week fiscal
year to align the fiscal year with the foregoing policy. Fiscal year 2021, which ends on July 2, 2021, will be comprised of 52 weeks, with all quarters presented consisting of 13 weeks. Fiscal year 2020, which ended on July 3, 2020, was comprised of 53 weeks, with the first quarter consisting of 14 weeks and the remaining quarters consisting of 13 weeks each.
Key Developments
Business Structure
Late in the first quarter of fiscal 2021, we announced a decision to reorganize our business by forming two separate product business
units: flash-based products and hard disk drive (“HDD”). The new structure is intended to provide each business unit with focus and responsibility for identifying current and future customer requirements while driving the strategy, roadmap, pricing and overall profitability for their respective product areas. Beginning in the second fiscal quarter, we are in the process of transitioning to this new operating model and discrete information has not yet been established to align with the new business structure. We are developing new reporting processes to support the new business structure and evaluating the impact of these changes on our discussion and analysis of our financial condition and results of operations in the future.
COVID-19 Pandemic
In March 2020, the World Health Organization declared COVID-19
a pandemic, and the United States declared a national emergency. In the intervening months, COVID-19 has spread globally and led governments and other authorities around the world, including federal, state and local authorities in the United States, to impose measures intended to reduce its spread, including restrictions on freedom of movement and business operations such as travel bans, border closings, business limitations and closures (subject to exceptions for essential operations and businesses), quarantines and shelter-in-place orders. Although some of these governmental restrictions have since been lifted or scaled back, a recent surge of COVID-19 infections has resulted in the re-imposition of certain restrictions and may lead to other restrictions being re-implemented in response to efforts to reduce the spread of COVID-19. These measures may remain in place for a significant amount of time. In light of these events, we have taken actions to protect the health
and safety of our employees while continuing to serve our global customers as an essential business. We have implemented more thorough sanitation practices as outlined by health organizations and instituted social distancing policies at our locations around the world, including working from home, limiting the number of employees attending meetings, reducing the number of people in our sites at any one time, and suspending employee travel. In addition, the responses to COVID-19 taken by others in the supply chain have impacted our operations. As
a result, we have incurred charges of approximately $28 million during the three months ended October 2,
2020, primarily related to higher logistics costs, which were recorded in cost of revenue.
As an essential business, we continue to provide products and solutions that enable the proliferation of data and facilitate the sharing of information remotely, which has become more critical as much of the world is interacting from areas of self-isolation. Generally, demand for our products remains solid. During the three months ended October 2, 2020, we experienced lower sales in some of our capacity enterprise and Client Devices products as customers absorbed purchases made in recent quarters but we also experienced increased sales in retail as COVID-19 restrictions eased, more brick and mortar businesses resumed operations, the work and learn from home trend increased hard drive demand for desktops and notebooks, and gaming increased. Looking forward,
we see positive indications of the progression of 5G ramp and the growth of gaming. We also currently expect retail demand to be solid in the near term and HDD to improve as customers absorb recent purchases and we ramp sales as we complete new product qualifications. However, the COVID-19 environment remains dynamic and we cannot predict the duration of the pandemic and how demand may change as it develops.
We will continue to actively monitor the situation and may take further actions altering our business operations that we determine are in the best interests of our employees, customers, partners, suppliers, and stakeholders, or as required by federal, state, or local authorities. See “The COVID-19 pandemic could adversely affect our business, results of operations and financial condition” in Part I, Item 1A, Risk
Factors, of our Annual Report on Form 10-K for the fiscal year ended July 3, 2020 for more information regarding the risks we face as a result of the COVID-19 pandemic.
Flash Ventures
Through our three business ventures with Kioxia Corporation (“Kioxia”), referred to as “Flash Ventures”, we and Kioxia operate flash-based memory wafer manufacturing facilities in Japan. We are obligated to pay for variable costs incurred in producing our share of Flash Ventures’ flash-based memory wafer supply, based on our three-month forecast, which generally equals 50% of Flash Ventures’ output. In addition, we are obligated to pay for half of Flash Ventures’ fixed costs regardless of the output we choose to purchase. We are also obligated
to fund 49.9% to 50% of each Flash Ventures entity’s capital investments to the extent that Flash Ventures entity’s operating cash flow is insufficient to fund these investments. We also co-develop flash technologies (including process technology and memory design) with Kioxia and contribute IP for Flash Ventures’ use.
Since its inception, Flash Ventures’ primary manufacturing site has been located in Yokkaichi, Japan, which currently includes five wafer fabrication facilities. Production levels at the Yokkaichi site were temporarily reduced as a result of an unexpected power outage incident that occurred in the Yokkaichi region on June 15, 2019. The power outage incident impacted the facilities and process tools and resulted in damage to flash wafers in production. The incident resulted in a reduction of our flash wafer availability
by approximately 4 exabytes. As a result of this power outage incident, we incurred charges of $68 million recorded in Cost of revenue in the three months ended October 4, 2019, which primarily consisted of unabsorbed manufacturing overhead costs. During the three months ended October 2, 2020, we received a recovery of $30 million related to this incident from our insurance carriers, which was recorded in Cost of revenue. We continue to pursue recovery of our losses associated with this event; however, the total amount of recovery cannot be estimated at this time.
In May 2019, we entered into additional agreements with Kioxia to extend Flash Ventures to a new wafer fabrication facility, known as “K1,” located in Kitakami, Japan. The primary purpose of K1 is to provide clean room
space to continue the transition of existing flash-based wafer capacity to newer technology nodes. Output from the initial production line at K1 began in the third quarter of fiscal year 2020, although meaningful output from K1 is not expected to begin until the end of calendar 2020. We have paid for most of our share of initial K1 equipment investments and relocation costs. Other period expenses associated with the initial production ramp at K1 are expected to begin trailing off toward the end of calendar year 2020 as output increases. Other period expenses associated with the initial production ramp at K1 will begin trailing off as output increases toward the end of the calendar year. We also agreed to prepay an aggregate of approximately $360 million over a 3-year period beginning in the first half of fiscal year 2020 toward K1 building depreciation, to be credited against future wafer charges. As of October 2, 2020,
remaining committed prepayments totaled $178 million.
In October 2020, Kioxia announced the start of construction of the shell for a new fabrication facility in Yokkaichi, Japan, referred to as “Y7”. We expect to continue Flash Ventures investments into Y7 in due course, following the completion of agreements with Kioxia governing the construction and operation of the new facility and according to then-prevailing market trends.
The following table sets forth, for the periods presented, selected summary information from our Condensed Consolidated Statements of Operations by dollars and percentage of net revenue(1):
Net revenue decreased 2.9% for the three months ended October 2, 2020 compared to the three months ended October 4, 2019. The decrease in net revenue for the three months ended October 2, 2020 from the comparable period in the prior year reflects lower volumes of memory for HDD products and more competitive pricing for both HDD and flash products, which contributed approximately 9 and 5 percentage points of decline, respectively, and which were partially offset by higher volumes of flash products sold. Client Devices revenue increased 20% year over year. Higher volumes of flash memory contributed 38 percentage points of growth, primarily from client compute SSD due to increased demand for SSD-based notebook and desktop products
resulting from work from home and remote learning trends as well as significant growth in gaming as upcoming game consoles transition from hard drive-based storage solutions to flash. These increases were partially offset by lower average pricing on both HDD and flash products. Our revenue for Data Center Devices and Solutions decreased 26% year over year, which predominantly reflected lower volumes of both HDD and flash-based products as Cloud and OEM customers absorbed some of the capacity purchased in recent quarters and as we continued to ramp up new product transitions in hard drive and flash-based storage solutions. Client Solutions revenue decreased 5% year over year with more competitive pricing driving approximately 8 percentage points of decline, primarily in retail flash products, partially offset by volume growth in both flash and hard drive-based products driven by increased demand for our products that support both remote learning and work from home applications.
The
changes in net revenue by geography reflect an increase in Asia primarily driven by our increased sales of mobility products to manufacturers in the Asia region, and a decrease in the Americas driven by lower sales of capacity enterprise products.
Our top 10 customers accounted for 44% and 43% of our net revenue for the three months ended October 2, 2020 and October 4, 2019, respectively. For the three months ended October 2, 2020, no single customer accounted for 10% or more of our net revenue. For the three months ended October 4, 2019, one customer accounted for 11% of our net revenue.
Consistent with standard industry practice, we have sales incentive and marketing programs that provide customers with price protection and other incentives or reimbursements that are recorded as a reduction to gross revenue. For the three months ended October 2, 2020 and October 4, 2019, these programs represented 18% and 15%, respectively, of gross revenues, and adjustments to revenue due to changes in accruals for these programs have generally averaged less than 1% of gross revenue year over year. The amounts attributed to our sales incentive and marketing programs generally vary according to several factors including industry conditions, list pricing strategies, seasonal demand, competitor actions, channel mix and overall availability of products. Changes in future customer demand and market conditions
may require us to adjust our incentive programs as a percentage of gross revenue.
Gross Profit and Gross Margin
Gross profit increased by $146 million for the three months ended October 2, 2020 from the comparable period in the prior year, which primarily reflects the power outage charges of $68 million incurred in the prior year, the $30 million partial recovery in the current year, a $19 million decrease in charges in the current year related to amortization expense on acquired intangible assets and reduced manufacturing costs. These improvements were partially offset by COVID-19 related costs incurred in the current quarter.
Gross margin increased approximately 4
percentage points for the three months ended October 2, 2020 from the comparable period in the prior year, which primarily reflects the impacts of the lower charges noted above as well as reduced manufacturing costs as we ramp production of new products. Over the near term, we expect gross margin to be constrained by lower-margin retail products but expect improved gross margins over the longer term as we complete new product qualifications and ramp production on higher capacity drives.
Operating Expenses
Research and development (“R&D”) expense decreased $19 million for the three months ended October 2, 2020 from the comparable period in the prior year primarily reflecting additional expense related to
the additional week in the prior year.
Selling, general and administrative (“SG&A”) expense decreased $49 million for the three months ended October 2, 2020 from the comparable period in the prior year primarily reflecting a $10 million reduction of expenses related to the additional week in the prior year, approximately $10 million in lower costs in the current year for travel and entertainment and marketing expenses as a result of COVID-19 as well as savings from the exit of our storage systems business and our cost reduction actions.
Employee termination, asset impairment and other charges increased from the comparable period in the prior year as we
initiated incremental actions to align our operations with current market demand. For information regarding employee termination, asset impairment and other charges, see Part I, Item 1, Note 14, Employee Termination, Asset Impairment and Other Charges, of the Notes to Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q.
Interest and Other Income (Expense)
The decrease in total interest and other expense, net for the three months ended October 2, 2020 primarily reflects lower interest expense resulting from the pay-down of principal on our debt and lower index rates.
The Tax Cuts and Jobs Act (the “2017 Act”) includes a broad range of tax reform proposals affecting businesses. We completed our accounting for the tax effects of the enactment of the 2017 Act during the second quarter of fiscal 2019. However, the U.S. Treasury and the Internal Revenue Service (“IRS”) have issued tax guidance on certain provisions of the 2017 Act since the enactment date, and we anticipate the issuance of additional regulatory and interpretive guidance. We applied a reasonable interpretation of the 2017 Act along with the then-available guidance in finalizing our accounting for the tax effects of the 2017 Act. Any additional regulatory or interpretive guidance would constitute new information, which may require further refinements
to our estimates in future periods.
The following table sets forth income tax information from our Condensed Consolidated Statements of Operations by dollar and effective tax rate:
The primary drivers of the difference between the effective tax rate for the three
months ended October 2, 2020 and the U.S. Federal statutory rate of 21% are the relative mix of earnings and losses by jurisdiction, the deduction for foreign derived intangible income, credits and tax holidays in Malaysia, the Philippines and Thailand that will expire at various dates during fiscal years 2021 through 2030. In addition, the effective tax rate for the three months ended October 2, 2020 includes the discrete effects of net tax deficiencies from shortfalls of $11 million related to the vesting of stock-based awards and additional tax expense of $10 million from the re-measurement of purchase accounting deferred tax liabilities due to restructuring activities. The discrete items have no impact on the amount of income taxes paid by us.
The primary driver of the difference between
the effective tax rate for the three months ended October 4, 2019 and the U.S. Federal statutory rate of 21% are the relative mix of earnings and losses by jurisdiction, the deduction for foreign derived intangible income, credits, and tax holidays in Malaysia, Philippines and Thailand that expired or will expire at various dates during fiscal years 2020 through 2030.
Our future effective tax rate is subject to future regulatory developments and changes in the mix of our U.S. earnings compared to foreign earnings. Our total tax expense in future fiscal years may also vary as a result of discrete items such as excess tax benefits or deficiencies.
For additional information regarding Income tax expense (benefit), see Part I, Item 1, Note 12, Income
Tax Expense, of the Notes to Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q.
Liquidity and Capital Resources
The following table summarizes our statements of cash flows:
We believe our cash, cash equivalents and cash generated from operations as well as our available credit facilities will be sufficient to meet our working capital, debt and capital expenditure needs for at least the next twelve months. Our ability to sustain our
working capital position is subject to a number of risks that we discuss in Part I, Item 1A, Risk Factors, in our Annual Report on Form 10-K for the fiscal year ended July 3, 2020.
During fiscal 2021, we expect expenditures for property, plant and equipment for our company plus our portion of the capital expenditures by our Flash Ventures joint venture with Kioxia for its operations to aggregate approximately $3.1 billion. After consideration of the Flash Ventures’ lease financing of its capital expenditures and net operating cash flow, we expect net cash used for our purchases of property, plant and equipment and net activity in notes receivable relating to Flash Ventures to be a cash outflow of approximately
$1.3 billion during fiscal 2021. The total expected cash to be used could vary depending on the timing and completion of various capital projects and the availability, timing and terms of related financing.
During fiscal 2019, we determined that it was our intention to repatriate all of our foreign undistributed earnings as a result of the 2017 Act, except a portion of our foreign undistributed earnings, which could result in additional federal taxes based on interpretive guidance issued by the IRS. After consideration of this interpretative guidance affecting the taxation of a certain portion of our foreign undistributed earnings, we determined that we do not intend to repatriate this portion of our foreign undistributed earnings and did not establish an accrual for this liability.
A
total of $1.97 billion and $2.60 billion of our Cash and cash equivalents was held outside of the U.S. as of October 2, 2020 and October 4, 2019, respectively. As a result of the change in our permanent reinvestment assertion, there are no material tax consequences that were not previously accrued for on the repatriation of this cash.
Operating Activities
Cash flow from operating activities primarily consists of net income, adjusted for non-cash charges, plus or minus changes in operating assets and liabilities. This represents our principal source of cash. Net cash used for changes in operating assets and liabilities was $43 million for the three months ended October 2,
2020, as compared to $82 million of net cash used for changes in operating assets and liabilities for the three months ended October 4, 2019. Changes in our operating assets and liabilities are largely affected by our working capital requirements, which are dependent on the effective management of our cash conversion cycle as well as timing of payments for taxes. Our cash conversion cycle measures how quickly we can convert our products into cash through sales. The cash conversion cycles were as follows:
Changes
in days sales outstanding (“DSO”) are generally due to the linearity of shipments. Changes in days in inventory (“DIO”) are generally related to the timing of inventory builds. Changes in days payables outstanding (“DPO”) are generally related to production volume and the timing of purchases during the period. From time to time, we modify the timing of payments to our vendors. We make modifications primarily to manage our vendor relationships and to manage our cash flows, including our cash balances. Generally, we make the payment term modifications through negotiations with our vendors or by granting to, or receiving from, our vendors’ payment term accommodations.
For the three months ended October 2, 2020, DSO increased by 14 days over the prior year, primarily reflecting the timing of shipments and customer collections.
We have seen no significant deterioration in our receivables as a result of COVID-19. DIO increased by 3 days over the prior year, primarily reflecting higher stocking levels of HDD inventory. With supply chains experiencing disruptions as a result of COVID-19, we are taking actions to ensure that we have the components we need to build products and are stocking higher levels of inventory so that we can ship by ocean and reduce higher cost air freight. DPO increased by 4 days over the prior year, primarily reflecting resumptions of flash production volumes as well as routine variations in the timing of purchases and payments during the period.
Net cash used in investing activities for the three months ended October 2, 2020 primarily consisted of a $163 million net decrease in notes receivable issuances to Flash Ventures, partially offset by $337 million of capital expenditures. Net cash used in investing activities for the three months ended October 4, 2019 primarily consisted of $277 million of capital expenditures and a net $186 million decrease in notes receivable issuances to Flash Ventures to fund its capital expansion.
Our cash equivalents are primarily invested in money market funds that invest in U.S. Treasury securities and U.S. Government agency securities. In addition, from time to time, we invest directly in U.S. Treasury securities,
U.S. and international government agency securities, certificates of deposit, asset backed securities and corporate and municipal notes and bonds.
Financing Activities
During the three months ended October 2, 2020, net cash used in financing activities primarily consisted of $213 million for repayment of debt, which included a $150 million voluntary prepayment on our Term Loan B-4, and $41 million for taxes paid on vested stock awards under employee stock plans. Net cash used in financing activities for the three months ended October 4, 2019 primarily consisted of $319 million for the repayment of our debt, $147 million to pay dividends on our common stock and $52 million for taxes paid on vested stock awards under
employee stock plans.
In April 2020, we suspended our dividend to reinvest in the business and to support our ongoing deleveraging efforts. We will reevaluate our dividend policy as our leverage ratio improves.
Other than the commitments related to Flash Ventures incurred in the normal course of business and certain indemnification provisions (see “Short
and Long-term Liquidity-Contractual Obligations and Commitments” below), we do not have any other material off-balance sheet financing arrangements or liabilities, guarantee contracts, retained or contingent interests in transferred assets, or any other obligation arising out of a material variable interest in an unconsolidated entity. We do not have any majority-owned subsidiaries that are not included in the Condensed Consolidated Financial Statements. Additionally, with the exception of Flash Ventures and our joint venture with Unisplendour Corporation Limited and Unissoft (Wuxi) Group Co. Ltd. (“Unis”), referred to as the “Unis Venture”, we do not have an interest in, or relationships with, any variable interest entities. For additional information regarding our off-balance
sheet arrangements, see Part I, Item 1, Note 9, Related Parties and Related Commitments and Contingencies, of the Notes to Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q.
The following is
a summary of our known contractual cash obligations and commercial commitments as of October 2, 2020:
Total
Remaining nine months of 2021
2022-2023
2024-2025
Beyond
2025
(in millions)
Long-term debt, including current portion(1)
$
9,498
$
223
$
5,875
$
1,100
$
2,300
Interest
on debt
1,039
182
513
235
109
Flash Ventures related commitments(2)
6,420
2,643
2,590
1,014
173
Operating
leases
299
35
64
56
144
Purchase obligations and other commitments
4,370
2,556
1,154
470
190
Mandatory
Deemed Repatriation Tax
925
—
210
417
298
Total
$
22,551
$
5,639
$
10,406
$
3,292
$
3,214
(1)Principal
portion of debt, excluding discounts and issuance costs.
(2)Includes reimbursement for depreciation and lease payments on owned and committed equipment, funding commitments for loans and equity investments and payments for other committed expenses, including R&D and building depreciation. Funding commitments assume no additional operating lease guarantees. Additional operating lease guarantees can reduce funding commitments.
Debt
In addition to our existing debt, we have $2.25 billion available for borrowing under our revolving credit facility, subject to customary conditions under the credit agreement. Additional information regarding our indebtedness, including information about availability under our revolving credit facility and the principal
repayment terms, interest rates, covenants and other key terms of our outstanding indebtedness, is included in Part I, Item 1, Note 6, Debt, of the Notes to Condensed Consolidated Financial Statements in this Quarterly Report on Form 10-Q and in Part II, Item 8, Note 7, Debt, of the Notes to Consolidated Financial Statements included in our Annual Report on Form 10-K for the fiscal year ended July 3, 2020. The credit agreement governing our revolving credit facility and Term Loan A-1 requires us to comply with certain financial covenants, consisting of a leverage ratio and an interest coverage ratio. As of October 2, 2020, we were in compliance with these financial covenants.
Flash Ventures
Flash
Ventures sells to and leases back from a consortium of financial institutions a portion of its tools and has entered into equipment lease agreements of which we guarantee half or all of the outstanding obligations under each lease agreement. The leases are subject to customary covenants and cancellation events that relate to Flash Ventures and each of the guarantors. The occurrence of a cancellation event could result in an acceleration of the lease obligations and a call on our guarantees. As of October 2, 2020, we were in compliance with all covenants under these Japanese lease facilities. See Part I, Item 1, Note 9, Related Parties and Related Commitments and Contingencies, of the Notes to Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q for information regarding Flash Ventures.
Purchase
Obligations and Other Commitments
In the normal course of business, we enter into purchase orders with suppliers for the purchase of components used to manufacture our products. These purchase orders generally cover forecasted component supplies needed for production during the next quarter, are recorded as a liability upon receipt of the components, and generally may be changed or canceled at any time prior to shipment of the components. We also enter into long-term agreements with suppliers that contain fixed future commitments, which are contingent on certain conditions such as performance, quality and technology of the vendor’s components. These arrangements are included under “Purchase obligations and other commitments” in the table above.
The following is a summary of our estimated mandatory deemed repatriation tax obligations that are payable in the following fiscal years (in millions):
For
additional information regarding our estimate of the total tax liability for the mandatory deemed repatriation tax, see Part II, Item 8, Note 13, Income Tax Expense, of the Notes to Consolidated Financial Statements included in our Annual Report on Form 10-K for the fiscal year ended June 28, 2019.
Unrecognized Tax Benefits
As of October 2, 2020, the liability for unrecognized tax benefits (excluding accrued interest and penalties) was approximately $711 million. Accrued interest and penalties related to unrecognized tax benefits as of October 2, 2020 was approximately $141 million. Of these amounts, approximately $715
million could result in potential cash payments. We are not able to provide a reasonable estimate of the timing of future tax payments related to these obligations.
Interest Rate Swap
We have generally held a balance of fixed and variable rate debt. At October 2, 2020, we had $6.06 billion of variable rate debt, comprising 64% of the par value of our debt. To balance the portfolio and moderate our exposure to fluctuations in interest rates underlying our variable debt, we entered into pay-fixed interest rate swaps on $2.00 billion notional amount, which effectively converts a portion of our term loan to fixed rates through February 2023. After giving effect to the $2.00 billion of interest rate swaps, we effectively had $4.06 billion of Long-term debt
subject to variations in interest rates and a one percent increase in the variable rate of interest would increase annual interest expense by $41 million.
We purchase foreign exchange contracts to hedge the impact of foreign currency fluctuations on certain underlying assets, liabilities and commitments for Operating expenses and product costs denominated in foreign currencies. For a description of our current foreign exchange contract commitments, see Part I, Item 1, Note 6, Derivative
Instruments and Hedging Activities, of the Notes to Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q.
Indemnifications
In the ordinary course of business, we may provide indemnifications of varying scope and terms to customers, vendors, lessors, business partners and other parties with respect to certain matters, including, but not limited to, losses arising out of our breach of agreements, products or services to be provided by us, environmental compliance or from IP infringement claims made by third parties. In addition, we have entered into indemnification agreements with our directors and certain of our officers that will require us, among other things, to indemnify them against certain liabilities that may arise by reason of their status or
service as directors or officers. We maintain director and officer insurance, which may cover certain liabilities arising from our obligation to indemnify our directors and officers in certain circumstances.
It is not possible to determine the maximum potential amount under these indemnification agreements due to the limited history of prior indemnification claims and the unique facts and circumstances involved in each particular agreement. Such indemnification agreements may not be subject to maximum loss clauses. Historically, we have not incurred material costs as a result of obligations under these agreements.
Our Board of Directors has authorized a stock repurchase program for the repurchase of up to $5.0 billion of our common stock, which authorization is effective through July 25, 2023. We did not make any stock repurchases during the three months ended October 2, 2020 and have not repurchased any shares of our common stock pursuant to our stock repurchase program since the first quarter of fiscal 2019. Although we will reevaluate the repurchasing of our common stock when appropriate, there can be no assurance if, when or at what level we may resume such activity. The remaining amount available to be repurchased under our current stock repurchase program as of October 2, 2020 was $4.5 billion. Repurchases under the stock repurchase
program may be made in the open market or in privately negotiated transactions and may be made under a Rule 10b5-1 plan.
Cash Dividend
We issued a quarterly cash dividend from the first quarter of fiscal 2013 through the third quarter of fiscal 2020. In April 2020, we suspended our dividend to reinvest in the business and to support our ongoing deleveraging efforts. We will reevaluate our dividend policy as our leverage ratio improves.
Recent Accounting Pronouncements
For a description of recently issued and adopted accounting pronouncements, including
the respective dates of adoption and expected effects on our results of operations and financial condition, see Part I, Item 1, Note 2, Recent Accounting Pronouncements, of the Notes to Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q.
Critical Accounting Policies and Estimates
We have prepared the accompanying unaudited Condensed Consolidated Financial Statements in accordance with accounting principles generally accepted in the United States (U.S. GAAP). The preparation of the financial statements requires the use of judgments and estimates that affect the reported amounts of revenues, expenses, assets, liabilities and shareholders’
equity. We have adopted accounting policies and practices that are generally accepted in the industry in which we operate. If these estimates differ significantly from actual results, the impact to the Condensed Consolidated Financial Statements may be material.
There have been no material changes in our critical accounting policies and estimates from those disclosed in our Annual Report on Form 10‑K for the fiscal year ended July 3, 2020. Please refer to Part II, Item 7 of our Annual Report on Form 10‑K for the fiscal year ended July 3, 2020 for a discussion of our critical accounting policies and estimates.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
There have been no material changes to our market risk during the three months ended October 2, 2020. For a discussion of our exposure to market risk, see Part II, Item 7A, “Quantitative and Qualitative Disclosures About Market Risk” in our Annual Report on Form 10-K for the fiscal year ended July 3, 2020.
Item 4. Controls
and Procedures
As required by Rule 13a-15(b) promulgated by the Securities and Exchange Commission under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as such term is defined in Rule 13a-15(e) under the Exchange Act) as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of the end of the period covered by this Quarterly Report on Form 10-Q, our disclosure controls and procedures were effective.
There
were no changes in our internal control over financial reporting that occurred during our most recently completed fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
We are implementing an enterprise resource planning (“ERP”) system on a worldwide basis, which is expected to improve the efficiency of certain financial and related transactional processes. The gradual implementation is expected to occur in phases over the next several years. We have completed the implementation of certain processes, including the financial consolidation and reporting, fixed assets, supplier management and indirect procure-to-pay processes, and have revised and updated the related controls. These changes did not materially affect our internal control over financial reporting. As we implement the remaining functionality
under this ERP system over the next several years, we will continue to assess the impact on our internal control over financial reporting.
We have described under the heading “Risk Factors” in Part I, Item 1A of our Annual Report on Form 10-K for the fiscal year ended July 3, 2020 risks and uncertainties that could cause our actual results of operations and financial condition to vary materially from past, or from anticipated future, results of operations and financial condition. There have been no material changes from these risk factors previously described in our Annual Report on Form 10-K for the fiscal year ended July 3, 2020. These risks and uncertainties are not the only risks facing us. Additional risks and uncertainties not presently known to us or that we currently
deem immaterial may also adversely affect our business, financial condition, results of operations or the market price of our common stock.
The exhibits listed in the Exhibit Index below are filed with, or incorporated by reference in, this Quarterly
Report on Form 10-Q, as specified in the Exhibit List, from exhibits previously filed with the Securities and Exchange Commission. Certain agreements listed in the Exhibit Index that we have filed or incorporated by reference may contain representations and warranties by us or our subsidiaries. These representations and warranties have been made solely for the benefit of the other party or parties to such agreements and (i) may have been qualified by disclosures made to such other party or parties, (ii) were made only as of the date of such agreements or such other date(s) as may be specified in such agreements and are subject to more recent developments, which may not be fully reflected in our public disclosures, (iii) may reflect
the allocation of risk among the parties to such agreements and (iv) may apply materiality standards different from what may be viewed as material to investors. Accordingly, these representations and warranties may not describe the actual state of affairs at the date hereof and should not be relied upon.
Amended
and Restated Certificate of Incorporation of Western Digital Corporation, as amended to date (Filed as Exhibit 3.1 to the Company’s Quarterly Report on Form 10-Q (File No. 1-08703) with the Securities and Exchange Commission on February 8, 2006)
Amended and Restated By-Laws
of Western Digital Corporation, as amended effective as of May 2, 2018 (Filed as Exhibit 3.1 to the Company’s Current Report on Form 8-K (File No. 1-08703) with the Securities and Exchange Commission on May 7, 2018)
Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002**
101.INS
XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document
Cover
Page Interactive Data File - formatted in Inline XBRL and contained in Exhibit 101
† Filed with this report.
* Management contract or compensatory plan or arrangement required to be filed as an exhibit pursuant to applicable rules of the Securities and Exchange Commission.
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Quarterly Report on Form 10-Q to be signed on its behalf by the undersigned, thereunto duly authorized.
