Shareholders Equity

12 Months Ended

Jul. 01, 2011

Note 8. Shareholders’ Equity

Stock Incentive Plans

The Company maintains four stock-based incentive plans (collectively referred to as the “Stock Plans”): the amended and restated 2004 Performance Incentive Plan, the Employee Stock Option Plan, the Broad-Based Stock Incentive Plan and the Stock Option Plan for Non-Employee Directors. No new awards may be granted under the Employee Stock Option Plan, the Broad-Based Stock Incentive Plan or the Stock Option Plan for Non-Employee Directors (collectively referred to as the “Prior Stock Plans”). As of July 1, 2011, options to purchase 1.2 million shares of the Company’s common stock remained outstanding and exercisable under the Prior Stock Plans. Other than for such options, no restricted stock or other awards were outstanding under the Prior Stock Plans as of July 1, 2011. Options granted under the Prior Stock Plans expire either five or ten years from the date of grant.

The types of awards that may be granted under the 2004 Performance Incentive Plan include stock options, stock appreciation rights, restricted stock units (“RSUs”), 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 2004 Performance Incentive Plan include officers or 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 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 stock appreciation rights under the 2004 Performance Incentive Plan is ten years after the grant date of the award. RSUs granted under the 2004 Performance Incentive Plan typically vest over periods ranging from one to five years from the date of grant.

As of July 1, 2011, the maximum number of shares of the Company’s common stock that was authorized for award grants under the 2004 Performance Incentive Plan was 37.2 million shares. Any shares subject to awards under the Prior Stock Plans that are canceled, forfeited or otherwise terminate without having vested or been exercised, as applicable, will become available for other award grants under the 2004 Performance Incentive Plan. Shares issued in respect of stock options and stock appreciation rights granted under the 2004 Performance Incentive Plan count against the plan’s share limit on a one-for-one basis, whereas shares issued in respect of any other type of award granted under the plan count against the plan’s share limit as 1.35 shares for every one share actually issued in connection with such award. The 2004 Performance Incentive Plan will terminate on September 20, 2014 unless terminated earlier by the Company’s Board of Directors.

Employee Stock Purchase Plan

The Company maintains an ESPP. Under the ESPP, eligible employees may authorize payroll deductions of up to 10% of their eligible compensation 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.

Stock-based Compensation Expense

The Company recognized in expense $37 million, $37 million and $24 million for stock-based compensation related to the vesting of options granted by the Company under the Stock Plans and the ESPP in 2011, 2010 and 2009, respectively. As of July 1, 2011, total compensation cost related to unvested stock options granted under the Stock Plans and ESPP rights issued to employees but not yet recognized was $60 million and will be amortized on a straight-line basis over a weighted average service period of approximately 2.2 years.

The Company recognized in expense $32 million, $23 million and $23 million related to restricted stock and restricted stock unit awards granted under the Stock Plans that vested during 2011, 2010 and 2009, respectively. As of July 1, 2011, the aggregate unamortized fair value of all unvested restricted stock unit awards granted under the Stock Plans was $41 million, which will be recognized on a straight-line basis over a weighted average vesting period of approximately 1.3 years.

Stock Option Activity

The following table summarizes stock option activity under the Stock Plans over the last three fiscal years (in millions, except per share amounts and remaining contractual lives):


						Weighted Average
				Weighted Average		Remaining		Aggregate
	Number			Exercise Price		Contractual Life		Intrinsic
	of Shares			Per Share		(in years)		Value

Options outstanding at June 27, 2008		8.0		$	14.92
Granted		4.2			20.02
Exercised		(0.6	)		9.59
Canceled or expired		(0.3	)		20.10

Options outstanding at July 3, 2009		11.3		$	17.00
Granted		1.4			36.06
Exercised		(3.1	)		14.67
Canceled or expired		(0.2	)		22.78

Options outstanding at July 2, 2010		9.4		$	20.61
Granted		2.5			26.59
Exercised		(1.4	)		16.83
Canceled or expired		(0.3	)		26.21

Options outstanding at July 1, 2011		10.2		$	22.49		4.6	$	145

Exercisable at July 1, 2011		5.5		$	19.36		3.8	$	95

Vested and expected to vest after July 1, 2011		10.1		$	22.43		4.5	$	144

If an option has an exercise price that is less than the quoted price of the Company’s common stock at the particular time, the aggregate intrinsic value of that option at that time is calculated based on the difference between the exercise price of the options and the quoted price of the Company’s common stock at that time. As of July 1, 2011, the Company had options outstanding to purchase an aggregate of 10.1 million shares with an exercise price below the quoted price of the Company’s stock on that date resulting in an aggregate intrinsic value of $145 million at that date. During 2011, 2010 and 2009, the aggregate intrinsic value of options exercised under the Stock Plans was $25 million, $72 million and $8 million, respectively, determined as of the date of exercise.

The following table summarizes information about options outstanding and exercisable under the Stock Plans as of July 1, 2011 (in millions, except per share amounts):


		Options Outstanding						Options Exercisable
				Weighted Average
				Remaining
Range of		Number		Contractual Life		Weighted Average		Number		Weighted Average
Exercise Prices		of Shares		(in years)		Exercise Price		of Shares		Exercise Price

$	2.10 – $13.76		1.6		2.5	$	8.98		1.6	$	8.97
$	13.95 – $20.55		2.2		4.6		17.59		1.4		18.11
$	21.29 – $25.95		2.3		4.2		23.89		1.6		23.70
$	26.17 – $26.17		2.2		6.2		26.17		—		26.17
$	27.64 – $40.66		1.9		4.9		33.91		0.9		32.85

			10.2		4.6	$	22.49		5.5	$	19.36

Fair Value Disclosure — 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 including the expected stock price volatility, the expected price multiple at which employees are likely to exercise stock options and the expected employee termination rate. The Company uses historical data to estimate option 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. The fair value of stock options granted during the three years ended July 1, 2011 was estimated using the following weighted average assumptions:


	2011	2010	2009

Suboptimal exercise factor	1.81	1.73	1.73
Range of risk-free interest rates	0.20% to 2.90%	0.31% to 3.40%	0.38% to 3.44%
Range of expected stock price volatility	0.39 to 0.59	0.40 to 0.72	0.43 to 0.77
Weighted average expected volatility	0.52	0.57	0.55
Post-vesting termination rate	2.44%	3.57%	4.02%
Dividend yield	—	—	—
Fair value	$11.42	$17.09	$9.05

The weighted average expected term of the Company’s stock options granted during 2011, 2010 and 2009 was 4.7 years, 4.6 years and 4.9 years, respectively.

Fair Value Disclosure — 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 was developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable. 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 current ESPP provisions are granted on either June 1 or December 1 of each year.

The fair values of all ESPP purchase rights granted on or prior to July 1, 2011 have been estimated at the date of grant using a Black-Scholes-Merton option-pricing model with the following weighted average assumptions:


	ESPP
	2011			2010			2009

Option life (in years)		1.25			1.24			1.30
Risk-free interest rate		0.44	%		0.57	%		0.65	%
Stock price volatility		0.44			0.53			0.63
Dividend yield		—			—			—
Fair value	$	8.36		$	10.02		$	3.61

RSU Activity

The following table summarizes RSU activity (in millions, except weighted average grant date fair value):


				Weighted Average
	Number			Grant Date
	of Shares			Fair Value

RSUs outstanding at June 27, 2008		2.8		$	21.75
Granted		0.9			22.84
Vested		(0.5	)		23.18
Canceled or expired		(0.1	)		22.62

RSUs outstanding at July 3, 2009		3.1		$	21.80
Granted		1.2			38.42
Vested		(1.1	)		20.60
Canceled or expired		(0.1	)		27.84

RSUs outstanding at July 2, 2010		3.1		$	28.43
Granted		1.0			26.75
Vested		(0.8	)		24.03
Canceled or expired		(0.2	)		32.41

RSUs outstanding at July 1, 2011		3.1		$	28.85

Expected to vest after July 1, 2011		2.9		$	28.82

The fair value of each RSU is the market price of our stock on the date of grant. The aggregate value of RSUs that became fully-vested during 2011 and 2010 was $23 million and $43 million, respectively, determined as of the vest date. RSUs are generally payable in an equal number of shares of the Company’s common stock at the time of vesting of the units. The grant-date fair value of the shares underlying the restricted stock awards at the date of grant was $26 million, $45 million and $19 million in 2011, 2010 and 2009, respectively. These amounts are being recognized to expense over the corresponding vesting periods. For purposes of valuing these awards, the Company has assumed a forfeiture rate of 1.82%, 1.55%, and 0.0% during 2011, 2010, and 2009, respectively, based on a historical analysis indicating forfeitures for these types of awards.

Stock Repurchase Program

The Company’s Board of Directors previously authorized the repurchase of $750 million of common stock in open market transactions under a stock repurchase program through March 31, 2013. Since the inception of this program in 2005, through July 1, 2011, the Company has repurchased 20 million shares of its common stock for a total cost of $334 million. The Company repurchased 1.8 million shares for a total cost of $50 million during 2011. The Company may continue to repurchase stock as the Company deems appropriate and market conditions allow. The Company expects stock repurchases to be funded principally by operating cash flows.

Stock Purchase Rights

On April 6, 2001, the Company adopted a plan to protect shareholders’ rights in the event of a proposed takeover of the Company (the “2001 Rights Plan”). The 2001 Rights Plan expired on April 6, 2011. During the term of the 2001 Rights Plan, each share of the Company’s outstanding common stock carried one Right to Purchase Series A Junior Participating Preferred Stock (the “Right”). The Right enabled the holder, under certain circumstances, to purchase Series A Junior Participating Preferred Stock of Western Digital at an exercise price of $50.00 per share ten days after a person or group publicly announced it had acquired or had tendered an offer for 15%, or more, of the Company’s outstanding common stock. The Rights were redeemable by the Company at $0.001 per Right.

Stock Reserved for Issuance

The following table summarizes all shares of common stock reserved for issuance at July 1, 2011 (in millions):


	Number
	of Shares

Maximum shares issuable in connection with:
Outstanding awards and shares available for award grants		25.4
ESPP		3.5

Total		28.9