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Notice of Proposed Adjustment (“NOPA”) from the IRS for fiscal year 2009 relating to intercompany payable balan-
ces and two NOPAs from the IRS for fiscal years 2008 and 2009 relating to transfer pricing with our foreign sub-
sidiaries. The NOPAs relating to intercompany payable balances and transfer pricing with our foreign subsidiaries
propose to increase our U.S. taxable income, which would result in additional federal tax expense of approximately
$72 million and $723 million, respectively, subject to interest. We disagree with the proposed adjustments, believe
that the tax positions are properly supported and will vigorously contest the position taken by the IRS. In January
2012, the IRS commenced an examination of the 2007 fiscal period ended September 5, 2007 of Komag,
Incorporated, which we acquired on September 5, 2007. The IRS examined calendar years 2010 and 2011 of HGST,
which was acquired by us on March 8, 2012, and completed the examination with no material adjustments.
We believe 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 our tax
examinations are resolved in a manner not consistent with management’s expectations, we could be required to adjust
our provision for income taxes in the period such resolution occurs. As of July 3, 2015, it is 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 our liability for unrecognized tax benefits would most likely result
from additional information or settlements relating to the examination of our tax returns.
Fiscal Year 2014 Compared to Fiscal Year 2013
Net Revenue. Net revenue was $15.1 billion for 2014, a decrease of 1% from 2013. ASPs were $58 for 2014, a
decrease of $3 from 2013. These decreases were primarily due to modest price declines and a change in product mix,
partially offset by an increase in unit shipments. Total hard drive shipments in 2014 increased to 249 million units as
compared to 242 million units for the prior year primarily due to strength in our CE solutions, including gaming
consoles.
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
each of 2014 and 2013, these programs represented 8% of gross revenues. These amounts generally vary according to
several factors including industry conditions, seasonal demand, competitor actions, channel mix and overall avail-
ability of product.
Gross Profit. Gross profit for 2014 was $4.4 billion, a decrease of $3 million from the prior year. Gross profit as
a percentage of net revenue increased to 28.8% in 2014 as compared to 28.4% in 2013. The increase in gross profit as
a percentage of net revenue was primarily driven by higher volumes in 2014 as compared to 2013 as well as a con-
tinued focus on operational excellence.
Operating Expenses.
R&D expense was $1.7 billion in 2014, an increase of $89 million, or 6%, over the prior year. This increase was
primarily due to the inclusion of Virident and sTec’s R&D expenses from the dates of acquisition and the continued
investment in product development. As a percentage of net revenue, R&D expense increased to 11.0% in 2014 com-
pared to 10.2% in 2013.
SG&A expense was $761 million in 2014, an increase of $55 million, or 8%, as compared to 2013. This increase
in SG&A expense was primarily due to the inclusion of Virident and sTec’s SG&A expenses from the dates of acquis-
ition and the expansion of sales and marketing to support new products and growing markets, partially offset by a $65
million gain on flood-related insurance recovery. SG&A expense as a percentage of net revenue increased to 5.0% in
2014 compared to 4.6% in 2013.
During 2014 and 2013, we recorded $52 million and $681 million, respectively, for charges related to the Sea-
gate matter. For further detail see, Part II, Item 8, Note 5 of the Notes to Consolidated Financial Statements included
in this Annual Report on Form 10-K.
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