Shareholders’ Equity

2017 Performance Incentive Plan

The types of awards that may be granted under the Western Digital Corporation Amended and Restated 2017 Performance Incentive Plan (“2017 Performance Incentive Plan”) include stock options, SARs, RSUs, PSUs, stock bonuses and other forms of awards granted or denominated in the Company’s common stock or units of the Company’s common stock, as well as cash bonus awards. Persons eligible to receive awards under the 2017 Performance Incentive Plan include officers and employees of the Company or any of its subsidiaries, directors of the Company and certain consultants and advisors to the Company or any of its subsidiaries. The vesting of awards under the 2017 Performance Incentive Plan is determined at the date of grant. Each award expires on a date determined at the date of grant; however, the maximum term of options and SARs under the 2017 Performance Incentive Plan is ten years after the grant date of the award. RSUs granted under the 2017 Performance Incentive Plan typically vest over periods ranging from one to four years from the date of grant. PSUs are granted to certain employees and vest only after the achievement of pre-determined performance metrics and completion of requisite service periods. Once the performance metrics are met, vesting of PSUs is generally subject to continued service by the employee. To the extent available, the Company issues shares out of treasury stock upon the vesting of awards, the exercise of employee stock options and the purchase of shares pursuant to the ESPP.

Outstanding RSU and PSU awards have dividend equivalent rights which entitle holders of such outstanding awards to the same dividend value per share as holders of common stock. Dividend equivalent rights are subject to the same vesting and other terms and conditions as the corresponding unvested RSUs and PSUs. Dividend equivalent rights are accumulated and paid in additional shares when the underlying shares vest.

As of June 29, 2018, the maximum number of shares of the Company’s common stock that was authorized for award grants under the 2017 Performance Incentive Plan was 80.5 million shares. Shares issued in respect of stock options and SARs granted under the 2017 Performance Incentive Plan count against the plan’s share limit on a one-for-one basis, whereas currently, shares issued in respect of any other type of award granted count against the plan’s share limit as 1.72 shares for every one share issued in connection with such award. The 2017 Performance Incentive Plan was extended in 2013 and will terminate on August 4, 2025 unless terminated earlier by the Company’s Board of Directors (the “Board”).

Employee Stock Purchase Plan

Under the Company’s ESPP, eligible employees may authorize payroll deductions of up to 10% of their eligible compensation, subject to IRS limitations, during prescribed offering periods to purchase shares of the Company’s common stock at 95% of the fair market value of common stock on either the first day of that offering period or on the applicable exercise date, whichever is less. A participant may participate in only one offering period at a time, and a new offering period generally begins each June 1st and December 1st. Each offering period is generally 24 months and consists of four exercise dates (each, generally six months following the start of the offering period or the preceding exercise date, as the case may be). If the fair market value of the Company’s common stock is less on a given exercise date than on the date of grant, employee participation in that offering period ends and participants are automatically re-enrolled in the next new offering period.

During 2018, 2017 and 2016, the Company issued 2.5 million, 2.3 million, and 1.3 million shares, respectively, for aggregate purchase amounts of $119 million, $105 million, and $68 million, respectively.

Stock-based Compensation Expense

The following tables present the Company’s stock-based compensation for equity-settled awards by type and financial statement line as well as the related tax benefit included in the Company’s Consolidated Statements of Operations:



	2018			2017			2016
	(in millions)
Options	$	25		$	41		$	55
Restricted and performance stock units	325			330			123
Employee stock purchase plan	27			23			13
Subtotal	377			394			191
Tax benefit	(66		)	(105		)	(48		)
Total	$	311		$	289		$	143



	2018			2017			2016
	(in millions)
Cost of revenue	$	49		$	49		$	21
Research and development	170			173			76
Selling, general and administrative	157			161			85
Employee termination, asset impairment, and other charges	1			11			9
Subtotal	377			394			191
Tax benefit	(66		)	(105		)	(48		)
Total	$	311		$	289		$	143

Compensation cost related to unvested stock options, RSU, PSU and ESPP will generally be amortized on a straight-line basis over the remaining average service period. The following table presents the unamortized compensation cost and weighted average service period of all unvested outstanding awards as of June 29, 2018:



	Unamortized Compensation Costs		Weighted Average Service Period
	(in millions)		(years)
Options	$	25	1.8
RSUs and PSUs ⁽¹⁾	464		2.1
ESPP	51		1.5
Total unamortized compensation cost	$	540


⁽¹⁾	Weighted average service period assumes the performance metrics are met for the PSUs.

Plan Activities

Stock Options

The following table summarizes stock option activity under the Company’s incentive plans:



	Number of Shares		Weighted Average Exercise Price Per Share		Weighted Average Remaining Contractual Life	Aggregate Intrinsic Value
	(in millions)				(in years)	(in millions)
Options outstanding at July 3, 2015	6.8		$	50.00
Granted	1.7		82.68
Assumed	2.9		38.37
Exercised	(1.7	)	27.43			$	57
Canceled or expired	(0.7	)	66.03
Options outstanding at July 1, 2016	9.0		55.74
Granted	2.8		44.83
Exercised	(3.5	)	37.72			120
Canceled or expired	(0.9	)	71.31
Options outstanding at June 30, 2017	7.4		$	58.14
Exercised	(2.2	)	44.52			$	99
Canceled or expired	(0.4	)	60.85
Options outstanding at June 29, 2018	4.8		$	64.23	3.7	$	94
Exercisable at June 29, 2018	3.0		$	70.70	3.1	$	47

RSUs and PSUs

The following table summarizes RSU and PSU activity under the Company’s incentive plans:



	Number of Shares		Weighted Average Grant Date Fair Value		Aggregate Intrinsic Value at Vest Date
	(in millions)				(in millions)
RSUs and PSUs outstanding at July 3, 2015	3.0		$	73.80
Granted	2.7		61.32
Assumed	12.5		32.14
Vested	(2.0	)	56.11		$	144
Forfeited	(0.5	)	62.09
RSUs and PSUs outstanding at July 1, 2016	15.7		41.92
Granted	6.0		44.13
Vested	(5.9	)	46.98		399
Forfeited	(2.1	)	43.89
RSUs and PSUs outstanding at June 30, 2017	13.7		$	45.01
Granted	6.3		74.68
Vested	(6.3	)	45.20		$	552
Forfeited	(1.1	)	50.35
RSUs and PSUs outstanding at June 29, 2018	12.6		$	58.31

RSUs and PSUs are generally settled in an equal number of shares of the Company’s common stock at the time of vesting of the units.

Fair Value Valuation Assumptions

Stock Option Grants — Binomial Model

The fair value of stock options granted is estimated using a binomial option-pricing model. The binomial model requires the input of highly subjective assumptions. The Company uses historical data to estimate exercise, employee termination and expected stock price volatility within the binomial model. The risk-free rate for periods within the contractual life of the option is based on the U.S. Treasury yield curve in effect at the time of grant. No options were granted in 2018. The fair value of stock options granted in 2017 and 2016 was estimated using the following weighted average assumptions:



	2017	2016
Suboptimal exercise factor	2.69	2.71
Range of risk-free interest rates	0.59% to 1.42%	0.25% to 2.09%
Range of expected stock price volatility	0.35 to 0.49	0.28 to 0.49
Weighted-average expected volatility	0.40	0.35
Post-vesting termination rate	1.71%	0.47%
Dividend yield	3.42%	2.61%
Fair value	$13.72	$22.54
Weighted-average expected term (in years)	3.6	4.7

RSU and PSU Grants

The fair value of the Company’s RSU and PSU awards granted, excluding unvested RSU awards assumed through acquisitions, was based upon the closing price of the Company’s stock price on the date of grant.

ESPP — Black-Scholes-Merton Model

The fair value of ESPP purchase rights issued is estimated at the date of grant of the purchase rights using the Black-Scholes-Merton option-pricing model. The Black-Scholes-Merton option-pricing model requires the input of highly subjective assumptions such as the expected stock price volatility and the expected period until options are exercised. Purchase rights under the ESPP are generally granted on either June 1st or December 1st of each year.

The fair values of all outstanding ESPP purchase rights have been estimated at the date of grant using a Black-Scholes-Merton option-pricing model with the following weighted average assumptions:



	2018	2017	2016
Weighted-average expected term (in years)	1.24	1.26	1.27
Risk-free interest rate	2.25%	0.81%	0.82%
Stock price volatility	0.35	0.42	0.38
Dividend yield	2.42%	4.02%	3.92%
Fair value	$16.89	$10.06	$9.91

Stock Repurchase Program

The Company’s Board of Directors previously authorized $5.00 billion for the repurchase of the Company’s common stock. In 2018, the Company repurchased 7.1 million shares for a total cost of $591 million. Subsequent to June 29, 2018 and through July 25, 2018, the Company repurchased an additional 0.8 million shares for a total cost of $61 million. On July 25, 2018, the Company’s Board of Directors authorized a new $5.00 billion share repurchase program that is effective through July 25, 2023, replacing all prior programs. Repurchases under the stock repurchase program may be made in the open market or in privately negotiated transactions and may be made under a Rule 10b5-1 plan. The Company expects stock repurchases to be funded principally by operating cash flows. Subsequent to July 25, 2018 and through August 22, 2018, the Company repurchased an additional 5.9 million shares for a total cost of $404 million under this new program.

Stock Reserved for Issuance

The following table summarizes all common stock reserved for issuance at June 29, 2018:



	Number of Shares
	(in millions)
Outstanding awards and shares available for award grants	36
ESPP	5
Total	41

Dividends to Shareholders

Since the first quarter of 2013, the Company has issued a quarterly cash dividend. During the year ended June 29, 2018, the Company declared aggregate cash dividends of $2.00 per share on its outstanding common stock totaling $592 million, of which $148 million was paid on July 16, 2018.

On August 1, 2018, the Board declared a cash dividend of $0.50 per share to shareholders of record as of September 28, 2018, which will be paid on October 15, 2018. The Company may modify, suspend or cancel its cash dividend policy in any manner and at any time.