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tinue to vigorously defend this matter. Nevertheless, in light of uncertainties, including the fact that the review of the
Court of Appeals decision by the Minnesota Supreme Court is discretionary, we recorded an accrual of $681 million
for this matter in our financial statements for the three months ended June 28, 2013. This amount is in addition to
the $25 million previously accrued in the fourth quarter of fiscal 2011. The total amount accrued of $706 million
represents the amount of the final arbitration award, plus interest accrued on the initial arbitration award at the stat-
utory rate of 10% from January 24, 2012 through June 28, 2013.
Fiscal Year 2012 Compared to Fiscal Year 2011
Net Revenue.
Net revenue was $12.5 billion for 2012, an increase of 31% from 2011. Operations from HGST
contributed $3.1 billion in net revenue. Total hard drive shipments in 2012 decreased to 202 million units as com-
pared to 207 million units for the prior year. The increase in net revenue resulted primarily from a $17 increase in
ASP from $45 to $62, partially offset by lower shipments. These changes were as a result of the severe supply con-
straints across the hard drive industry brought about by the Thailand floods.
Changes in revenue by geography and channel generally reflect normal fluctuations in market demand and
competitive dynamics. However, during 2012, changes in revenue by geography and channel reflected our efforts to
allocate products to our customers as a result of the flooding in Thailand by balancing their immediate needs with
their prevailing inventory positions in order to maximize the availability of hard drive products to the end customer
within the shortest time horizon. In addition, as a result of our acquisition of HGST, our revenue by channel mix has
become more heavily weighted toward OEM.
In accordance with standard industry practice, we have sales incentive and marketing programs that provide
customers with price protection and other incentives or reimbursements that are recorded as a reduction to gross rev-
enue. For 2012, these programs represented 6% of gross revenues compared to 11% in 2011. This decrease was
mainly driven by the severe supply constraints brought about by the Thailand floods. These amounts generally vary
according to several factors including industry conditions, seasonal demand, competitor actions, channel mix and
overall availability of product.
Gross Margin.
Gross margin for 2012 was $3.6 billion, an increase of $1.8 billion, or 103%, from the prior
year. Gross margin as a percentage of net revenue increased to 29.2% in 2012 from 18.8% in 2011. This percentage
increase was primarily due to an increase in ASP brought about by the impact of the Thailand flooding, offset by $91
million for costs recognized upon the sale of inventory that was written-up to fair value and $48 million for amor-
tization of intangibles related to the Acquisition.
Operating Expenses.
Total R&D expense and SG&A expense increased to 12.6% of net revenue in 2012 compared
to 10.6% in 2011. R&D expense was $1.1 billion in 2012, an increase of $352 million, or 50%, over the prior year.
This increase in R&D expense was primarily due to increased expense related to the business of HGST and the con-
tinued investment in product development to support new programs. As a percentage of net revenue, R&D expense
increased to 8.5% in 2012 compared to 7.4% in 2011. SG&A expense was $518 million in 2012, an increase of
$211 million, or 69%, as compared to 2011. This increase in SG&A expense was primarily due to increased expense
related to the business of HGST, the expansion of sales and marketing to support new products and growing markets,
$37 million of incremental expenses related to the acquisition of HGST and $15 million for amortization of
intangibles related to the Acquisition. SG&A expense as a percentage of net revenue increased to 4.2% in 2012 com-
pared to 3.2% in 2011.
During 2012, we recorded $214 million of net charges related to the flooding in Thailand, including $119 mil-
lion of fixed asset impairments, $61 million of recovery charges, $28 million of write-downs of damaged inventory
and $27 million in wage continuation during the shutdown period of our facilities, offset by $21 million of insurance
recoveries and other cost reimbursements.
In addition, during the fourth quarter of 2012, we recorded $56 million of asset impairment charges, $16 mil-
lion of contract termination and other exit costs and $8 million of employee termination benefits.
Other Income (Expense).
Other expense, net was $14 million in 2012 compared to $1 million in 2011. Interest
expense increased from $10 million in 2011 to $26 million in 2012, primarily due to interest on a higher debt bal-
ance and a $5 million increase in debt commitment fees incurred prior to the closing of the Acquisition, offset by $4