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Arbitration Award
As disclosed below in Part II, Item 8, Note 5 in the Notes to Consolidated Financial Statements included in this
Annual Report on Form 10-K, on November 18, 2011, a sole arbitrator ruled against us in an arbitration in
Minnesota. The arbitration involves claims brought by Seagate against us and a now former employee, alleging mis-
appropriation of confidential information and trade secrets. The arbitrator issued an interim award against us in the
amount of $525 million plus pre-award interest. On January 23, 2012, the arbitrator issued a final award adding pre-
award interest in the amount of $105.4 million, for a total award of $630.4 million. On January 23, 2012, we filed a
petition in the District Court of Hennepin County, Minnesota to have the final arbitration award vacated, and a hear-
ing on the petition to vacate was held on March 1, 2012. On October 12, 2012, the District Court of Hennepin
County, Minnesota vacated, in full, the $630.4 million final arbitration award and ordered that a rehearing be held
concerning certain trade secret claims before a new arbitrator. On October 30, 2012, Seagate initiated an appeal of the
District Court’s decision with the Minnesota Court of Appeals. On July 22, 2013, the Minnesota Court of Appeals
reversed the District Court’s decision and remanded for entry of an order and judgment confirming the arbitration
award. We strongly disagree with the decision of the Court of Appeals and believe that the District Court’s decision
was correct. On August 20, 2013, we filed a petition for review with the Minnesota Supreme Court and, on
October 15, 2013, we were informed that the Minnesota Supreme Court granted our petition. The appeal before the
Minnesota Supreme Court was fully briefed, and oral argument was held on February 5, 2014. We will continue to
vigorously defend ourselves in this matter. In light of uncertainties with respect to this matter, we recorded an accrual
of $681 million for this matter in fiscal 2013. This amount was in addition to the $25 million previously accrued in
fiscal 2011. In 2014, we recorded an additional $52 million for interest related to the arbitration award. As a result,
the total amount accrued of $758 million represents the amount of the final arbitration award, plus interest accrued
on the initial arbitration award at the statutory rate of 10% from January 24, 2012 through June 27, 2014.
Fiscal Year 2013 Compared to Fiscal Year 2012
Net Revenue. Net revenue was $15.4 billion for 2013, an increase of 23% from 2012. Total hard drive ship-
ments in 2013 increased to 242 million units as compared to 202 million units for the prior year. The increase in net
revenue resulted primarily from the contribution of a full year of HGST operations, partially offset by continued soft
industry demand as well as a $1 decrease in ASP from $62 to $61.
Changes in 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
2013, these programs represented 8% of gross revenues compared to 6% in 2012. These amounts generally vary
according to several factors including industry conditions, seasonal demand, competitor actions, channel mix and
overall availability of product.
Gross Profit. Gross profit for 2013 was $4.4 billion, an increase of $725 million, or 20%, from the prior year.
Gross profit as a percentage of net revenue decreased to 28.4% in 2013 from 29.2% in 2012. This percentage decrease
was primarily due to a decrease in ASP as well as $101 million of incremental amortization, reflecting a full year of
amortization for intangibles related to the acquisition of HGST.
Operating Expenses. Total R&D expense and SG&A expense increased to 14.8% of net revenue in 2013 compared
to 12.6% in 2012. R&D expense was $1.6 billion in 2013, an increase of $517 million, or 49%, over the prior year.
This increase was primarily due to the inclusion of HGST’s R&D expense for the full year period as well as continued
investment in product development to support new programs. As a percentage of net revenue, R&D expense increased
to 10.2% in 2013 compared to 8.5% in 2012. SG&A expense was $706 million in 2013, an increase of $188 million,
or 36%, as compared to 2012. This increase in SG&A expense was primarily due to the inclusion of a full year of
HGST’s SG&A expense and amortization of intangibles related to the acquisition of HGST, partially offset by the
inclusion of acquisition-related expenses in the prior-year period. SG&A expense as a percentage of net revenue
increased to 4.6% in 2013 compared to 4.2% in 2012.
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