Western Digital 2014 Annual Report Download - page 47

During 2014 and 2013, we recorded $52 million and $681 million, respectively, for charges related to an arbi-
tration award for claims brought against us and a now former employee by Seagate Technology LLC (“Seagate”), alleg-
ing misappropriation of confidential information and trade secrets. For further detail see the “Arbitration Award”
section below.
During 2014, we recorded $95 million of employee termination, asset impairment and other charges. These
charges consisted of $27 million of employee termination benefits, $62 million of asset impairment charges and $6
million of other charges. During 2013, we recorded $138 million of employee termination, asset impairment and
other charges. These charges consisted of $109 million of employee termination benefits, $14 million of asset
impairment charges and $15 million of other charges.
Other Income (Expense). Other expense, net was $39 million in 2014 compared to $44 million in 2013. Interest
and other income increased from $11 million in 2013 to $17 million in 2014 primarily due to a $3 million gain on
the sale of our auction-rate securities in 2014 and a higher average daily invested cash balance for the period. Interest
and other expense increased from $55 million in 2013 to $56 million in 2014, primarily due to a $4 million write-off
of debt issuance costs associated with lenders that extinguished or reduced their participation in our newly entered
into Credit Agreement (as defined below), offset by lower variable interest rates on our average debt balance in 2014.
Income Tax Provision. Income tax expense was $135 million in 2014 as compared to $242 million in 2013. Tax
expense as a percentage of income before taxes was 7.7% in 2014 compared to 19.8% in 2013. Our income tax provi-
sion for 2013 also reflects a tax benefit of $37 million as a result of the retroactive extension of the U.S. Federal
research and experimentation tax credit (“R&D credit”) that was signed into law on January 2, 2013 as part of the
American Taxpayer Relief Act of 2012. The R&D credit, which had previously expired on December 31, 2011, was
extended through December 31, 2013. In addition, we recorded an $88 million charge to reduce our previously
recognized California deferred tax assets in fiscal 2013 as a result of the enactment of California Proposition 39. Cal-
ifornia Proposition 39, which was approved by California voters on November 6, 2012, affects California state income
tax apportionment for most multi-state taxpayers for tax years beginning on or after January 1, 2013. This proposition
reduces our future income apportioned to California, making it less likely for us to realize certain California deferred
tax assets. 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 2015 through 2025
and the current year generation of income tax credits.
As of June 27, 2014, we had a recorded liability for unrecognized tax benefits of $300 million. We recognized a
net increase of $60 million in our liability for unrecognized tax benefits during 2014. 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 issued Revenue Agent Reports that proposed adjustments to income before
income taxes of approximately $970 million primarily related to transfer pricing and intercompany payable balances.
We disagreed with the proposed adjustments and filed a protest with the IRS Appeals Office. In June 2013, we
reached an agreement with the IRS to resolve the transfer pricing issue. This agreement resulted in a decrease in the
amount of net operating loss and tax credits realized, but did not have an impact on our consolidated statements of
income. The proposed adjustment relating to intercompany payable balances for fiscal years 2006 and 2007 will be
addressed in conjunction with the IRS’s examination of our fiscal years 2008 and 2009, which commenced in January
2012. In addition, in January 2012, the IRS commenced an examination of the 2007 fiscal period ended September 5,
2007 of Komag, Incorporated (“Komag”), which was acquired by us on September 5, 2007. In February 2013, the IRS
commenced an examination of calendar years 2010 and 2011 of HGST, which was acquired by us on March 8, 2012.
We believe that adequate provision has been made for any adjustments that may result from tax examinations.
However, the outcome of tax audits cannot be predicted with certainty. If any issues addressed in our tax audits 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 June 27, 2014, 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 sig-
nificant 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.
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