Western Digital 2015 Annual Report Download - page 47

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Changes in net revenue by geography and channel generally reflect normal fluctuations in market demand and
competitive dynamics.
Consistent with standard industry practice, we have sales incentive and marketing programs that provide custom-
ers with price protection and other incentives or reimbursements that are recorded as a reduction to gross revenue. For
2015 and 2014, these programs represented 10% and 8% of gross revenues, respectively. These amounts generally
vary according to several factors including industry conditions, seasonal demand, competitor actions, channel mix and
overall availability of products.
Gross Profit. Gross profit for 2015 was $4.2 billion, a decrease of $139 million from the prior year. The decrease
was primarily due to lower volume. Gross profit as a percentage of net revenue remained relatively flat at 29.0% in
2015 as compared to 28.8% in 2014.
Operating Expenses.
Research and development (“R&D”) expense was $1.6 billion in 2015, a decrease of $15 million, or 1%, over the
prior year. This slight decrease was primarily due to lower incentive compensation, partially offset by an additional
week in fiscal 2015 and additional expenses related to our acquisitions.
Selling, general and administrative (“SG&A”) expense was $773 million in 2015, an increase of $12 million, or
2%, as compared to 2014. Adjusting for a $37 million flood-related insurance recovery in 2015 compared to a $65
million flood-related insurance recovery in 2014, SG&A expense decreased $16 million, or 2% compared to 2014.
This slight decrease was primarily due to lower incentive compensation, partially offset by an additional week in fiscal
2015 and additional expenses related to our acquisitions.
During 2015 and 2014, we recorded $15 million and $52 million, respectively, for charges related to the Seagate
matter. For further details see, Part II, Item 8, Note 5 of the Notes to Consolidated Financial Statements in this
Annual Report on Form 10-K.
During 2015, we recorded $176 million of employee termination, asset impairment and other charges. These
charges consisted of $82 million of employee termination costs, $82 million of asset impairment charges and $12
million of contract termination and other charges. During 2014, we recorded $95 million of employee termination,
asset impairment and other charges. These charges consisted of $27 million of employee termination costs, $62 mil-
lion of asset impairment charges and $6 million of contract termination and other charges.
Other Expense, net. Other expense, net was $34 million in 2015 compared to $39 million in 2014. Interest and
other income decreased to $15 million in 2015 from $17 million in 2014, primarily due a $3 million gain on the sale
of our auction-rate securities in 2014. Interest and other expense decreased to $49 million in 2015, from $56 million
in 2014, primarily due to a $4 million write-off of debt issuance costs in 2014.
Income Tax Provision. Income tax expense was $112 million in 2015 as compared to $135 million in 2014. Tax
expense as a percentage of income before taxes was 7.1% in 2015 compared to 7.7% in 2014. Our income tax provi-
sion for 2015 reflects a tax benefit of $27 million as a result of the retroactive extension of the U.S. Federal research
and development tax credit (the “R&D credit”) that was signed into law on December 19, 2014. The differences
between the effective tax rate and the U.S. Federal statutory rate are primarily due to tax holidays in Malaysia, the
Philippines, Singapore and Thailand that expire at various dates from 2016 through 2025 and the current year gen-
eration of income tax credits.
As of July 3, 2015, we had a recorded liability for unrecognized tax benefits of $350 million. We recognized a
net increase of $50 million in our liability for unrecognized tax benefits during 2015. Interest and penalties recog-
nized on such amounts were not material.
The Internal Revenue Service (“IRS”) previously completed its field examination of our federal income tax
returns for fiscal years 2006 and 2007, and we and the IRS reached agreement with respect to all matters except on
the proposed adjustments to income before income taxes relating to intercompany payable balances. The proposed
adjustments relating to intercompany payable balances for fiscal years 2006 and 2007 are addressed in conjunction
with the IRS’s examination of our fiscal years 2008 and 2009, which commenced in January 2012. We received a
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