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Based on sales of hard drive units only.
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
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. In addition, as a result of our acquisition of HGST, our revenue by channel mix has become
more heavily weighted toward OEM.
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.
Operating Expenses.
Total research and development ("R&D") expense and selling, general and administrative
("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, 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.
During 2013, we recorded a $681 million charge related to an arbitration award for claims brought against us
and a now former employee by Seagate Technology LLC ("Seagate"), alleging misappropriation of confidential
information and trade secrets. For further detail see "Arbitration Award" section below.
During 2013, we recorded $138 million of employee termination benefits and other charges. These charges con-
sisted of $109 million of employee termination benefits, $14 million of asset impairment charges and $15 million of
other charges. During 2012, we recorded $56 million of asset impairment charges, $16 million of contract termi-
nation and other exit costs and $8 million of employee termination benefits. In addition, during 2012, we recorded
$214 million of net charges related to the flooding in Thailand, including $119 million of fixed asset impairments,
$61 million of recovery charges, $28 million of write-downs of damaged inventory and $27 million in wage con-
tinuation during the shutdown period of our facilities, offset by $21 million of insurance recoveries and other cost
Other Income (Expense).
Other expense, net was $44 million in 2013 compared to $14 million in 2012. Interest
expense increased from $26 million in 2012 to $55 million in 2013, primarily due to interest on a higher debt bal-
ance since the Acquisition. Interest income decreased slightly from $12 million in 2012 to $11 million in 2013 pri-
marily due to a lower average daily invested cash balance for the period.
Income Tax Provision.
Income tax expense was $242 million in 2013 as compared to $145 million in 2012. Tax
expense as a percentage of income before taxes was 19.8% in 2013 compared to 8.3% in 2012. 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