WESTERN DIGITAL CORP - Quarter Report: 2024 March (Form 10-Q)

Item 5.

Other Information

Item 6.Exhibits

Unless otherwise indicated, references herein to specific years and quarters are to our fiscal years and fiscal quarters, and references to financial information are on a consolidated basis. As used herein, the terms “we,” “us,” “our,” the “Company,” “WDC” and “Western Digital” refer to Western Digital Corporation and its subsidiaries, unless we state, or the context indicates, otherwise.

WDC, a Delaware corporation, is the parent company of our data storage business. Our principal executive offices are located at 5601 Great Oaks Parkway, San Jose, California 95119. Our telephone number is (408) 717-6000.

Western Digital, the Western Digital logo, SanDisk, and WD are registered trademarks or trademarks of Western Digital or its affiliates in the U.S. and/or other countries. All other trademarks, registered trademarks and/or service marks, indicated or otherwise, are the property of their respective owners.

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FORWARD-LOOKING STATEMENTS

This document contains forward-looking statements within the meaning of the federal securities laws. Any statements that do not relate to historical or current facts or matters are forward-looking statements. You can identify some of the forward-looking statements by the use of forward-looking words, such as “may,” “will,” “could,” “would,” “project,” “believe,” “anticipate,” “expect,” “estimate,” “continue,” “potential,” “plan,” “forecast,” and the like, or the use of future tense. Statements concerning current conditions may also be forward-looking if they imply a continuation of current conditions. Examples of forward-looking statements include, but are not limited to, statements concerning: expectations regarding our plan to separate our HDD and Flash business units; the global macroeconomic environment; expectations regarding demand trends and market conditions for our products; expectations regarding long-term growth opportunities; expectations related to our agreed sale of a portion of our equity interest in SanDisk Semiconductor (Shanghai) Co. Ltd.; expectations regarding our product development and technology plans; expectations regarding capital expenditure plans and investments, including relating to our Flash Ventures joint venture with Kioxia Corporation (“Kioxia”); expectations regarding our effective tax rate and our unrecognized tax benefits; our ability to improve through-cycle profitability; and our beliefs regarding our capital allocation plans and the sufficiency of our available liquidity and access to capital markets to meet our working capital, debt and capital expenditure needs.

These forward-looking statements are based on management’s current expectations, represent the most current information available to the Company as of the date of this Quarterly Report on Form 10-Q and are subject to a number of risks, uncertainties and other factors that could cause actual results or performance to differ materially from those expressed or implied in the forward-looking statements. These risks and uncertainties include, but are not limited to:

•volatility in global or regional economic conditions and our responsive actions thereto;

•operational, financial and legal challenges and difficulties inherent in implementing a separation of the company's HDD and Flash businesses;

•the final approval of the separation by the company's board of directors;

•dependence on a limited number of suppliers or disruptions in our supply chain;

•the outcome, timing and impact of the planned separation of our HDD and Flash business units, including with respect to customer and supplier relationships, contractual restrictions, stock price volatility and the diversion of management’s attention from ongoing business operations and opportunities;

•future responses to and effects of public health crises;

•the impact of business and market conditions;

•damage or disruption to our operations or to those of our suppliers;

•hiring and retention of key employees;

•compromise, damage or interruption from cybersecurity incidents or other data or system security risks;

•product defects;

•our reliance on strategic relationships with key partners, including Kioxia;

•the competitive environment, including actions by our competitors, and the impact of competitive products and pricing;

•our development and introduction of products based on new technologies and expansion into new data storage markets;

•risks associated with cost saving initiatives, restructurings, acquisitions, divestitures, mergers, joint ventures and our strategic relationships;

•changes to our relationships with key customers;

•our ability to respond to market and other changes in our distribution channel and retail market;

•our level of debt and other financial obligations;

•changes in tax laws or unanticipated tax liabilities;

•fluctuations in currency exchange rates in connection with our international operations;

•risks associated with compliance with changing legal and regulatory requirements and the outcome of legal proceedings;

•risks associated with our goals relating to environmental, social and governance matters, including the company’s ability to meet its GHG emissions reduction and other ESG goals;

•our reliance on intellectual property and other proprietary information; and

•the other risks and uncertainties disclosed in Part I, Item 1A of our Annual Report on Form 10-K for the year ended June 30, 2023 (the “2023 Annual Report on Form 10-K”), as amended, supplemented or superseded in our other reports filed with the Securities and Exchange Commission, including under “Risk Factors” in Item 1A of our subsequent Quarterly Reports on Form 10-Q.

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You are urged to carefully review the disclosures we make concerning these risks and review the additional disclosures we make concerning material risks and other factors that may affect the outcome of our forward-looking statements and our business and operating results, including those made in Part I, Item 1A of our 2023 Annual Report on Form 10-K and any of those made in our other reports filed with the Securities and Exchange Commission, including under “Risk Factors” in Item 1A of subsequent Annual Reports on Form 10-K and Quarterly Reports on Form 10-Q that may from time to time amend, supplement or supersede the risks and uncertainties disclosed in the 2023 Annual Report on Form 10-K. You are cautioned not to place undue reliance on the forward-looking statements included in this Quarterly Report on Form 10-Q, which speak only as of the date of this document. We do not intend, and undertake no obligation, to update or revise these forward-looking statements to reflect new information or events after the date of this document or to reflect the occurrence of unanticipated events, except as required by law.

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PART I. FINANCIAL INFORMATION

Item 1. Financial Statements (unaudited)

WESTERN DIGITAL CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(in millions, except par value)

(Unaudited)

March 29,
2024

June 30,
2023

ASSETS

Current assets:

Cash and cash equivalents

Accounts receivable, net

Inventories

Other current assets

Total current assets

Property, plant and equipment, net

Notes receivable and investments in Flash Ventures

Goodwill

Other intangible assets, net

Other non-current assets

Total assets

LIABILITIES, CONVERTIBLE PREFERRED STOCK AND SHAREHOLDERS’ EQUITY

Current liabilities:

Accounts payable

Accounts payable to related parties

Accrued expenses

Income taxes payable

Accrued compensation

Current portion of long-term debt

Total current liabilities

Long-term debt

Other liabilities

Total liabilities

Commitments and contingencies (Notes 9, 10, 12 and 16)

par value; authorized — shares; issued and outstanding — shares; aggregate liquidation preference of $ and $, respectively

Shareholders’ equity:

The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.

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WESTERN DIGITAL CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in millions)

(Unaudited)


	Nine Months Ended
	March 29, 2024		March 31, 2023
Cash flows from operating activities
Net loss	$	()	$	()
Adjustments to reconcile net loss to net cash used in operations:
Depreciation and amortization
Stock-based compensation
Deferred income taxes	()
Gain on disposal of assets	()		()
Non-cash asset impairment
Gain on repurchase of debt	()
Amortization of debt issuance costs and discounts

Other non-cash operating activities, net			()
Changes in:
Accounts receivable, net	()
Inventories			()
Accounts payable			()
Accounts payable to related parties			()
Accrued expenses	()		()
Income taxes payable	()
Accrued compensation			()
Other assets and liabilities, net	()		()
Net cash used in operating activities	()		()
Cash flows from investing activities
Purchases of property, plant and equipment	()		()
Proceeds from the sale of property, plant and equipment





Notes receivable issuances to Flash Ventures	()		()
Notes receivable proceeds from Flash Ventures
Strategic investments and other, net
Net cash provided by (used in) investing activities			()
Cash flows from financing activities
Issuance of stock under employee stock plans
Taxes paid on vested stock awards under employee stock plans	()		()
Net proceeds from convertible preferred stock	()



Purchase of capped calls	()
Repurchases of debt	()
Repayments of debt	()		()
Proceeds from debt
Debt issuance costs	()		()

Net cash provided by financing activities
Effect of exchange rate changes on cash	()		()
Net decrease in cash and cash equivalents	()		()
Cash and cash equivalents, beginning of year
Cash and cash equivalents, end of period	$		$
Supplemental disclosure of cash flow information:
Cash paid for income taxes	$		$
Cash paid for interest	$		$

Accumulated Other Comprehensive Loss Retained EarningsTotal Shareholders’ EquitySharesAmountSharesAmount— ()()) — — — — )— — ()— ) — — $()$ $

The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.

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WESTERN DIGITAL CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CONVERTIBLE PREFERRED STOCK AND SHAREHOLDERS’ EQUITY

(in millions)

(Unaudited)

)) )

Accumulated Other Comprehensive Loss

Retained Earnings

Total Shareholders’ Equity

Amount

()

—

()

—

()

—

()

—

()

—

()

—

()

—

()

—

()

—

()

—

()

—

()

—

()

—

()

The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.

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WESTERN DIGITAL CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 1.

reportable segments: flash-based products (“Flash”) and hard disk drives (“HDD”).

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WESTERN DIGITAL CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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WESTERN DIGITAL CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 2.

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WESTERN DIGITAL CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 3.

$ $ $ HDD Total net revenue$ $ $ $ Gross profit:Flash$ $()$ $ HDD Total gross profit for segments Unallocated corporate items:Stock-based compensation expense()()()()Amortization of acquired intangible assets() ()()Recovery from contamination incident Total unallocated corporate items()()()()Consolidated gross profit$ $ $ $ Gross margin:Flash %()% % %HDD % % % %Consolidated gross margin % % % %

Disaggregated Revenue

The Company’s broad portfolio of technology and products address multiple end markets. Cloud is comprised primarily of products for public or private cloud environments and end customers. Through the Client end market, the Company provides its original equipment manufacturer (“OEM”) and channel customers a broad array of high-performance flash and hard drive solutions across personal computer, mobile, gaming, automotive, virtual reality headsets, at-home entertainment, and industrial spaces. The Consumer end market is highlighted by the Company’s broad range of retail and other end-user products, which capitalize on the strength of the Company’s product brand recognition and vast points of presence around the world.

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WESTERN DIGITAL CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

$ $ $ Client Consumer

Total revenue

$ $ $ $

Revenue by geography

Asia$ $ $ $ Americas Europe, Middle East and Africa

Total revenue

$ $ $ $

The Company’s top 10 customers accounted for % and % of its net revenue for each of the three and nine months ended March 29, 2024 and % and % of its net revenue for the three and nine months ended March 31, 2023, respectively. For the three and nine months ended March 29, 2024 and March 31, 2023, no single customer accounted for 10% or more of the Company’s net revenue.

Goodwill

Goodwill is not amortized. Instead, it is tested for impairment annually as of the beginning of the Company’s fourth quarter, or more frequently if events or changes in circumstances indicate that goodwill may be impaired. Management performed goodwill impairment assessments for each segment and concluded that there were no indications of impairment for the periods presented.

$ $ Foreign currency translation adjustment()()()

The current portion of the warranty accrual is classified in Accrued expenses and the long-term portion is classified in Other liabilities as noted below:

March 29,
2024

June 30,
2023

(in millions)

Warranty accrual:

Current portion (included in Accrued expenses)

Long-term portion (included in Other liabilities)

Total warranty accrual

Total Accumulated Comprehensive Loss(in millions)) )()$()

During the three and nine months ended March 29, 2024, the amounts reclassified out of AOCL were losses related to foreign exchange contracts that were substantially charged to Cost of revenue in the Condensed Consolidated Statements of Operations.

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WESTERN DIGITAL CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 5.

$ $ $

Short-term investments - Certificates of deposit

Foreign exchange contracts Total assets at fair value$ $ $ $ Liabilities:Foreign exchange contracts$ $ $ $ Total liabilities at fair value$ $ $ $

June 30, 2023

Level 1

Level 2

Level 3

Total

(in millions)

Assets:

Cash equivalents - Money market funds

Foreign exchange contracts

Total assets at fair value

Liabilities:

Foreign exchange contracts

Total liabilities at fair value

During the periods presented, the Company had no transfers of financial assets and liabilities between levels and there were no changes in valuation techniques or the inputs used in the fair value measurement.

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WESTERN DIGITAL CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

% convertible notes due 2024$ $ $ $

Variable interest rate Delayed Draw Term Loan due 2024

% senior unsecured notes due 2026

Variable interest rate Term Loan A-2 maturing 2027

% convertible notes due 2028

% senior notes due 2029

% senior notes due 2032

Total$ $ $ $

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WESTERN DIGITAL CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 6.

months. As of March 29, 2024, the Company did not have any derivative contracts with credit-risk-related contingent features.

Changes in fair values of the non-designated foreign exchange contracts are recognized in Other income, net and are largely offset by corresponding changes in the fair values of the foreign currency-denominated monetary assets and liabilities. For each of the three and nine months ended March 29, 2024 and March 31, 2023, total net realized and unrealized transaction and foreign exchange contract currency gains and losses were not material to the Company’s Condensed Consolidated Financial Statements.

Unrealized gains or losses on designated cash flow hedges are recognized in AOCL. For more information regarding cash flow hedges, see Note 4, Supplemental Financial Statement Data – Accumulated other comprehensive loss.

Netting Arrangements

Under certain provisions and conditions within agreements with counterparties to the Company’s foreign exchange forward contracts, subject to applicable requirements, the Company has the right of offset associated with the Company’s foreign exchange forward contracts and is allowed to net settle transactions of the same currency with a single net amount payable by one party to the other. As of March 29, 2024 and June 30, 2023, the effect of rights of offset was not material and the Company did not offset or net the fair value amounts of derivative instruments in its Condensed Consolidated Balance Sheets.

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WESTERN DIGITAL CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 7.

% convertible notes due 2024$ $ (in millions)

$ Non-current liabilities Net amount recognized$ $

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WESTERN DIGITAL CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 9.

separate legal entities: Flash Partners Ltd. (“Flash Partners”), Flash Alliance Ltd. (“Flash Alliance”), and Flash Forward Ltd. (“Flash Forward”), collectively referred to as “Flash Ventures”.

$ Notes receivable, Flash Alliance Notes receivable, Flash Forward Investment in Flash Partners Investment in Flash Alliance Investment in Flash Forward Total notes receivable and investments in Flash Ventures$ $

During the three and nine months ended March 29, 2024 and March 31, 2023, the Company made net payments to Flash Ventures of $ billion and $ billion, and $ billion and $ billion, respectively, for purchased flash-based memory wafers and net loans.

The Company makes, or will make, loans to Flash Ventures to fund equipment investments for new process technologies and additional wafer capacity. The Company aggregates its Flash Ventures’ notes receivable into one class of financing receivables due to the similar ownership interest and common structure in each Flash Venture entity. For all reporting periods presented, no loans were past due and no loan impairments were recorded. The Company’s notes receivable from each Flash Ventures entity, denominated in Japanese yen, are secured by equipment owned by that Flash Ventures entity.

As of March 29, 2024 and June 30, 2023, the Company had accounts payable balances due to Flash Ventures of $ million and $ million, respectively.

Equity investments Operating lease guarantees Inventory and prepayments Maximum estimable loss exposure$

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WESTERN DIGITAL CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

% of Flash Ventures’ output. In addition, the Company is obligated to pay for half of Flash Ventures’ fixed costs regardless of the output the Company chooses to purchase. The Company is not able to estimate its total wafer purchase commitment obligation beyond its rolling three-month purchase commitment because the price is determined by reference to the future cost of producing the semiconductor wafers. In addition, the Company is committed to fund % to % of each Flash Ventures entity’s capital investments to the extent that each Flash Ventures entity’s operating cash flow is insufficient to fund these investments.

Flash Ventures has historically operated near % of its manufacturing capacity. As a result of flash market conditions, during the second half of 2023 and the first two quarters of 2024, the Company temporarily reduced its utilization of its share of Flash Ventures’ manufacturing capacity to an abnormally low level during that period to more closely align the Company’s flash-based wafer supply with projected demand. During the nine months ended March 29, 2024, the Company incurred costs of $ million associated with the reduction in utilization related to Flash Ventures, which was recorded as a charge to Cost of revenue. such charges were incurred during the three months ended March 29, 2024 nor the three and nine months ended March 31, 2023.

In February 2022, contamination of certain material used in manufacturing processes occurred at Flash Ventures’ fabrication facilities in both Yokkaichi and Kitakami, Japan which resulted in damage to inventory units in production, a temporary disruption to production operations and a reduction in the Company’s flash wafer availability. During 2022, the Company incurred charges of $ million related to this contamination incident that were recorded in Cost of revenue and primarily consisted of scrapped inventory and rework costs, decontamination and other costs needed to restore the facilities to normal capacity, as well as charges for under absorption of overhead costs. During the three months ended December 29, 2023, the Company received a recovery of $ million related to this incident from its insurance carriers, which was recorded in Cost of revenue. The Company continues to pursue recovery of its remaining losses associated with this event; however, the total amount of recovery cannot be estimated at this time.

The Company has facility agreements with Kioxia related to the construction and operation of Kioxia’s “K1” 300-millimeter wafer fabrication facility in Kitakami, Japan and a wafer fabrication facility in Yokkaichi, Japan, referred to as “Y7”. In connection with the start-up of these facilities, the Company has made prepayments toward future building depreciation. As of March 29, 2024, such prepayments aggregated $ million and will be credited against future wafer charges.

Inventory Purchase Commitments with Flash Ventures. Purchase orders placed under Flash Ventures for up to three months are binding and cannot be canceled.

Research and Development Activities. The Company participates in common research and development (“R&D”) activities with Kioxia and is contractually committed to a minimum funding level. R&D commitments are immaterial to the Condensed Consolidated Financial Statements.

Off-Balance Sheet Liabilities

Flash Ventures sells to and leases back from a consortium of financial institutions a portion of its tools and has entered into equipment lease agreements of which the Company guarantees half or all of the outstanding obligations under each lease agreement. The lease agreements are subject to customary covenants and cancellation events related to Flash Ventures and each of the guarantors. The occurrence of a cancellation event could result in an acceleration of Flash Ventures’ obligations and a call on the Company’s guarantees.

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WESTERN DIGITAL CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

$ $ 2025 2026 2027 2028 2029 Total guarantee obligations$ $ $

The Company and Kioxia have agreed to mutually contribute to, and indemnify each other and Flash Ventures for, environmental remediation costs or liability resulting from Flash Ventures’ manufacturing operations in certain circumstances. The Company has not made any indemnification payments, nor recorded any indemnification receivables, under any such agreements. As of March 29, 2024, no amounts had been accrued in the Condensed Consolidated Financial Statements with respect to these indemnification agreements.

Unis Venture

The Company has a joint venture with Unisplendour Corporation Limited and Unissoft (Wuxi) Group Co. Ltd. (“Unis”), referred to as the “Unis Venture”, to market and sell the Company’s products in China and to develop data storage systems for the Chinese market in the future. The Unis Venture is % owned by the Company and % owned by Unis. The Company accounts for its investment in the Unis Venture under the equity method of accounting. Revenue on products distributed by the Unis Venture is recognized upon sell through to third-party customers. For both the three and nine months ended March 29, 2024, the Company recognized approximately % of its consolidated revenue on products distributed by the Unis Venture. For both the three and nine months ended March 31, 2023, the Company recognized approximately % of its consolidated revenue on products distributed by the Unis Venture. The outstanding accounts receivable due from the Unis Venture were % and % of Accounts receivable, net as of both March 29, 2024 and June 30, 2023, respectively.

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WESTERN DIGITAL CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 10.

2025 2026 2027 2028 Thereafter Total future minimum lease payments Less: Imputed interest Present value of lease liabilities

Less: Current portion (included in Accrued expenses)

Long-term operating lease liabilities (included in Other liabilities )

Operating lease right-of-use assets (included in Other non-current assets)

$ Weighted average remaining lease term in yearsWeighted average discount rate %

Any shortfalls or excess windfall tax benefits and tax deficiencies for shortfalls related to the vesting and exercise of stock-based awards, which are recognized as a component of the Company’s Income tax expense, were not material for the periods presented.

Compensation cost related to unvested RSUs, PSUs, and rights to purchase shares of common stock under the ESPP are generally amortized on a straight-line basis over the remaining average service period.

RSUs and PSUs

$ Granted Vested() $ Forfeited() RSUs and PSUs outstanding at March 29, 2024 $

()$()$() (in millions)

The following table presents an analysis of the components of these activities against the reserve during the nine months ended March 29, 2024:

Employee Termination Benefits

Contract Termination and Other

Total

(in millions)

Accrual balance at June 30, 2023

Charges

Cash payments

()

Accrual balance at March 29, 2024

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WESTERN DIGITAL CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 15.

to days and payment terms that the Company negotiates with its suppliers are not impacted by whether a supplier participates in the program. The Company does not provide any guarantees to any third parties and no assets are pledged in connection with the arrangements.

The Company’s outstanding payment obligations to vendors eligible to participate under its supplier finance program were $ million and $ million as of March 29, 2024 and June 30, 2023, respectively, and are included within Accounts payable on the Company’s Condensed Consolidated Balance Sheets.

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WESTERN DIGITAL CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 16.

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WESTERN DIGITAL CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 17.

)$ $()Interest and other expense:Interest income Interest expense() ()Other income, net Total interest and other expense, net() ()Loss before taxes() ()Income tax expense Net loss() ()Less: cumulative dividends allocated to preferred shareholders Net loss attributable to common shareholders$()$ $() Net loss per common share:Basic$()$ $()Diluted$()$ $()

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WESTERN DIGITAL CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

)$ $()Interest and other expense:Interest income Interest expense() ()Other income, net Total interest and other expense, net() ()Loss before taxes() ()Income tax expense () Net loss() ()Less: cumulative dividends allocated to preferred shareholders Net loss attributable to common shareholders$()$ $() Net loss per common share:Basic$()$ $()Diluted$()$ $()

Three Months Ended March 31, 2023

Condensed Consolidated Statement of Comprehensive Loss

As Previously Reported

Adjustment

As Revised

(in millions)

Net loss

()

Other comprehensive income, before tax:

Actuarial pension loss

()

Foreign currency translation adjustment

()

Net unrealized gain on derivative contracts

Total other comprehensive income, before tax

()

Income tax expense related to items of other comprehensive income, before tax

()

Other comprehensive income, net of tax

()

Total comprehensive loss

()

Nine Months Ended March 31, 2023

Condensed Consolidated Statement of Comprehensive Loss

As Previously Reported

Adjustment

As Revised

(in millions)

Net loss

()

Other comprehensive income, before tax:

Actuarial pension loss

()

Foreign currency translation adjustment

Net unrealized gain on derivative contracts

Total other comprehensive income, before tax

Income tax expense related to items of other comprehensive income, before tax

()

Other comprehensive income, net of tax

Total comprehensive loss

()

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WESTERN DIGITAL CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

)$ $()Deferred income taxes () Other non-cash operating activities, net ()()Other assets and liabilities, net() ()

Net cash used in operating activities

() ()

Condensed Consolidated Statement of Shareholders’ Equity

As Previously Reported

Adjustment

As Revised

(in millions)

Retained earnings as of March 31, 2023

Accumulated other comprehensive loss as of March 31, 2023

()

Foreign currency translation adjustment for the three months ended March 31, 2023

()

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis contains forward-looking statements within the meaning of the federal securities laws, and should be read in conjunction with the disclosures we make concerning risks and other factors that may affect our business and operating results. You should read this information in conjunction with the unaudited Condensed Consolidated Financial Statements and the notes thereto included in this Quarterly Report on Form 10-Q, and the audited Consolidated Financial Statements and notes thereto included in Part II, Item 8 of our Annual Report on Form 10‑K for the fiscal year ended June 30, 2023. See also “Forward-Looking Statements” immediately prior to Part I, Item 1 in this Quarterly Report on Form 10-Q.

Unless otherwise indicated, references herein to specific years and quarters are to our fiscal years and fiscal quarters. As used herein, the terms “we,” “us,” “our,” and the “Company” refer to Western Digital Corporation and its subsidiaries.

Our Company

We are on a mission to unlock the potential of data by harnessing the possibility to use it. We are a leading developer, manufacturer, and provider of data storage devices based on both NAND flash and hard disk drive technologies. With dedicated flash-based products (“Flash”) and hard disk drives (“HDD”) business units driving advancements in storage technologies, our broad and ever-expanding portfolio delivers powerful Flash and HDD storage solutions for everyone from students, gamers, and home offices to the largest enterprises and public clouds to capture, preserve, access, and transform an ever-increasing diversity of data.

Our broad portfolio of technology and products address our multiple end markets: “Cloud”, “Client” and “Consumer”. Cloud represents a large and growing end market comprised primarily of products for public or private cloud environments and enterprise customers. Through the Client end market, we provide our original equipment manufacturer (“OEM”) and channel customers a broad array of high-performance flash and hard drive solutions across personal computer, mobile, gaming, automotive, virtual reality headsets, at-home entertainment, and industrial spaces. The Consumer end market is highlighted by our broad range of retail and other end-user products, which capitalize on the strength of our product brand recognition and vast points of presence around the world.

Our fiscal year ends on the Friday nearest to June 30 and typically consists of 52 weeks. Approximately every five to six years, we report a 53-week fiscal year to align the fiscal year with the foregoing policy. Fiscal year 2024, which will end on June 28, 2024, and fiscal year 2023, which ended on June 30, 2023, are each comprised of 52 weeks, with all quarters presented consisting of 13 weeks.

Key Developments

Separation of Business Units

On October 30, 2023, we announced that our Board of Directors had completed its strategic review of our business and, after evaluating a comprehensive range of alternatives, authorized us to pursue a plan to separate our HDD and Flash business units to create two independent, public companies. We believe the separation will better position each business unit to execute innovative technology and product development, capitalize on unique growth opportunities, extend respective leadership positions, and operate more efficiently with distinct capital structures. The completion of the planned separation is subject to certain conditions, including final approval by our Board of Directors. Significant effort is underway towards completion of the separation of the businesses and we are targeting to complete the separation in the second half of calendar year 2024.

Operational Update

In recent quarters, macroeconomic factors such as inflation, higher interest rates and recession concerns had softened demand for our products, with certain customers reducing purchases as they adjusted their production levels and right-size their inventories. As a result, we and our industry experienced a supply-demand imbalance, which resulted in reduced shipments and negatively impacted pricing, particularly in Flash. To adapt to these conditions, we implemented measures to reduce operating expenses and to proactively manage supply and inventory to align with demand and improve our capital efficiency, while continuing to deploy innovative products. These actions have enabled us to scale back on capital expenditures, consolidate production lines and reduce production bit growth since the beginning of 2023 in order to better align with market demand. These actions resulted in incremental charges for employee termination, asset impairment and other, and manufacturing underutilization charges in Flash and HDD. In the current quarter, we began to see signs of a recovery in supply-demand balance. We believe digital transformation will continue to drive improved market conditions in the near term and long-term growth for data storage in both Flash and HDD.

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We will continue to actively monitor developments impacting our business and may take additional responsive actions that we determine to be in the best interest of our business and stakeholders.

See Part I, Item 1A, Risk Factors, of our Annual Report on Form 10-K for the year ended June 30, 2023 and Part II, Item 1A, Risk Factors, of our Quarterly Report on Form 10-Q for the three months ended September 29, 2023 and our Quarterly Report on Form 10-Q for the three months ended December 29, 2023 for more information regarding the risks we face as a result of macroeconomic conditions and supply chain disruptions.

Agreement to Sell a Majority Interest in a Subsidiary

In March 2024, our wholly-owned subsidiary, SanDisk China Limited (“SanDisk China”) entered into an Equity Purchase Agreement to sell 80% of its equity interest in SanDisk Semiconductor (Shanghai) Co. Ltd. (“SDSS”), our indirect wholly-owned subsidiary to JCET Management Co., Ltd. (“JCET”), a wholly-owned subsidiary of JCET Group Co., Ltd., a Chinese publicly listed company, thereby forming a joint venture between SanDisk China and JCET (the “Transaction”). Closing of the transaction is subject to the satisfaction or waiver of certain conditions, after which, JCET will own 80% of the equity interest in SDSS, with SanDisk China owning the remaining 20%. Following the Closing, we expect to enter into various ancillary agreements, including (i) a shareholders agreement governing the joint venture relationships from and after the Closing; (ii) a supply agreement with the joint venture to supply us with certain flash-based products currently produced by SDSS, which may include flash memory cards, embedded flash products, and flash components; and (iii) an intellectual property license agreement granting SDSS certain intellectual property rights on a royalty-free basis for use in manufacturing products on our behalf for the term of and pursuant to the Supply Agreement.

Financing Activities

In August 2023, we drew $600 million principal amount (the “Delayed Draw Term Loan”) under a loan agreement we entered into in January 2023 and amended in June 2023, which allowed us to draw a single loan of up to $600 million through August 14, 2023. Proceeds from this loan were primarily used for payments on our tax liability to the Internal Revenue Service (“IRS”) for the years 2008 through 2012. During the nine months ended March 29, 2024, we repaid $300 million of the principal amount of the Delayed Draw Term Loan. The remaining outstanding borrowings on this loan will mature on June 28, 2024.

On November 3, 2023, we issued $1.60 billion aggregate principal amount of convertible senior notes, which bear interest at an annual rate of 3.00% and mature on November 15, 2028, unless earlier repurchased, redeemed or converted (the “2028 Convertible Notes”). We received net proceeds of approximately $1.56 billion after issuance costs. Contemporaneously with the issuance of the 2028 Convertible Notes, we entered into individually negotiated transactions with certain holders of our existing 1.50% convertible senior notes due February 1, 2024 (the “2024 Convertible Notes”) to repurchase approximately $508 million aggregate principal amount of such notes at an immaterial discount using net proceeds from the offering of the 2028 Convertible Notes. In connection with the issuance of the 2028 Convertible Notes, we also used approximately $155 million of the net proceeds from the offering to pay the cost of entering into capped call contracts with a cap price of approximately $70.26 to hedge the potential dilution impact of the conversion feature. On February 1, 2024, we used a portion of the remaining net proceeds from the offering of the 2028 Convertible Notes to settle the remaining 2024 Convertible Notes in accordance with their original terms for an aggregate cash principal payment of $592 million plus interest.

During the three months ended March 29, 2024, we drew and repaid $300 million principal amount under our $2.25 billion revolving credit facility maturing in January 2027.

Additional information regarding our indebtedness, including the principal repayment terms, interest rates, covenants and other key terms of our outstanding indebtedness, is included in Part II, Item 8, Note 8, Debt, of the Notes to Consolidated Financial Statements in our Annual Report on Form 10-K for the fiscal year ended June 30, 2023 and Note 7, Debt, of the Notes to Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q.

Sale-Leaseback

In September 2023, we completed a sale and leaseback of our facility in Milpitas, California. We received net proceeds of $191 million in cash and recorded a gain of $85 million on the sale. We are leasing back the facility at an annual lease rate of $16 million for the first year, increasing by 3% per year thereafter through January 1, 2039. The lease includes three 5-year renewal options and one 4-year renewal option for the ability to extend through December 2057.

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Asset Impairment and Contract Termination Costs

In connection with the actions described in “Operational Update” above, we reassessed our existing capacity development plans and made a decision in the first quarter of 2024 to cancel certain projects, including projects to expand capacity in our Penang, Malaysia facility. This resulted in a $94 million impairment of existing construction in progress and other assets and recognition of $29 million for certain contract termination costs during the nine months ended March 29, 2024.

Tax Resolution

As previously disclosed, we had previously reached a final agreement with the IRS and received notices of deficiency with respect to years 2008 through 2012 and in February 2024, also reached a final agreement for resolving the notices of proposed adjustments with respect to years 2013 through 2015. During the nine months ended March 29, 2024, we made payments aggregating $523 million for tax and interest with respect to years 2008 through 2012 and have a remaining liability of $182 million as of March 29, 2024 related to all years from 2008 through 2015. We expect to pay any remaining balance with respect to this matter within the next twelve months. Additional information regarding these settlements and our assessment of the potential tax and interest payments we expect to pay in connection with the settlements is provided in our discussion of Income tax expense in our “Results of Operations” below, as well as in Part I, Item 1, Note 12, Income Tax Expense, of the Notes to Condensed Consolidated Financial Statements, and in the “Short- and Long-term Liquidity – Unrecognized Tax Benefits” section below.

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Results of Operations

Third Quarter and Nine Month Overview

The following table sets forth, for the periods presented, selected summary information from our Condensed Consolidated Statements of Operations by dollars and percentage of net revenue(1):


	March 29, 2024				March 31, 2023				$ Change		% Change
Revenue, net	$	3,457	100.0	%	$	2,803	100.0	%	$	654	23	%
Cost of revenue	2,456		71.0		2,517		89.8		(61)		(2)
Gross profit	1,001		29.0		286		10.2		715		250
Operating expenses:
Research and development	494		14.3		476		17.0		18		4
Selling, general and administrative	203		5.9		242		8.6		(39)		(16)
Employee termination, asset impairment, and other	8		0.2		40		1.4		(32)		(80)
Business separation costs	23		0.7		—		—		23
Total operating expenses	728		21.1		758		27.0		(30)		(4)
Operating income (loss)	273		7.9		(472)		(16.8)		745		(158)
Interest and other expense:
Interest income	10		0.3		10		0.4		—		—
Interest expense	(108)		(3.1)		(80)		(2.9)		(28)		35
Other income, net	3		0.1		14		0.5		(11)		(79)
Total interest and other expense, net	(95)		(2.7)		(56)		(2.0)		(39)		70
Income (loss) before taxes	178		5.1		(528)		(18.8)		706		(134)
Income tax expense	43		1.2		43		1.5		—		—
Net income (loss)	135		3.9		(571)		(20.4)		706		(124)
Less: cumulative dividends allocated to preferred shareholders	15		0.4		9		0.3		6		67
Less: income attributable to preferred shareholders	7		0.2		—		—		7		n/a
Net income (loss) attributable to common shareholders	$	113	3.3	%	$	(580)	(20.7)	%	$	693	(119)	%

(1) Percentages may not total due to rounding.

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	March 29, 2024				March 31, 2023				$ Change		% Change
Revenue, net	$	9,239	100.0	%	$	9,646	100.0	%	$	(407)	(4)	%
Cost of revenue	7,647		82.8		7,851		81.4		(204)		(3)
Gross profit	1,592		17.2		1,795		18.6		(203)		(11)
Operating expenses:
Research and development	1,369		14.8		1,551		16.1		(182)		(12)
Selling, general and administrative	608		6.6		739		7.7		(131)		(18)
Employee termination, asset impairment, and other	89		1.0		140		1.5		(51)		(36)
Business separation costs	59		0.6		—		—		59
Total operating expenses	2,125		23.0		2,430		25.2		(305)		(13)
Operating loss	(533)		(5.8)		(635)		(6.6)		102		(16)
Interest and other expense:
Interest income	30		0.3		15		0.2		15		100
Interest expense	(314)		(3.4)		(223)		(2.3)		(91)		41
Other income, net	54		0.6		27		0.3		27		100
Total interest and other expense, net	(230)		(2.5)		(181)		(1.9)		(49)		27
Loss before taxes	(763)		(8.3)		(816)		(8.5)		53		(6)
Income tax expense	74		0.8		159		1.6		(85)		(53)
Net loss	(837)		(9.1)		(975)		(10.1)		138		(14)
Less: cumulative dividends allocated to preferred shareholders	44		0.5		9		0.1		35		389
Less: income attributable to preferred shareholders	—		—		—		—		—		n/a
Net loss attributable to common shareholders	$	(881)	(9.5)	%	$	(984)	(10.2)	%	$	103	(10)	%

(1) Percentages may not total due to rounding.

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The following table sets forth, for the periods presented, a summary of our segment information:


	Three Months Ended						Nine Months Ended
	March 29, 2024			March 31, 2023			March 29, 2024			March 31, 2023
	$ in millions
Revenue, net:
Flash	$	1,705		$	1,307		$	4,926		$	4,686
HDD	1,752			1,496			4,313			4,960
Total net revenue	$	3,457		$	2,803		$	9,239		$	9,646
Gross profit:
Flash	$	467		$	(65)		$	437		$	597
HDD	545			363			1,157			1,237

Unallocated corporate items:
Stock-based compensation expense	(11)			(12)			(37)			(38)
Amortization of acquired intangible assets	(1)			—			(2)			(1)



Recovery from contamination incident	1			—			37			—

Total unallocated corporate items	(11)			(12)			(2)			(39)
Consolidated gross profit	$	1,001		$	286		$	1,592		$	1,795
Gross margin:
Flash	27.4		%	(5.0)		%	8.9		%	12.7		%
HDD	31.1		%	24.3		%	26.8		%	24.9		%
Consolidated gross margin	29.0		%	10.2		%	17.2		%	18.6		%

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The following table sets forth for the periods presented, summary information regarding our disaggregated revenue:



	Three Months Ended				Nine Months Ended
	March 29, 2024		March 31, 2023		March 29, 2024		March 31, 2023







	(in millions)
Revenue by end market
Cloud	$	1,553	$	1,205	$	3,496	$	4,258
Client	1,174		975		3,443		3,293
Consumer	730		623		2,300		2,095
Total revenue	$	3,457	$	2,803	$	9,239	$	9,646

Revenue by geography
Asia	$	1,740	$	1,353	$	4,990	$	4,533
Americas	1,154		935		2,620		3,448
Europe, Middle East and Africa	563		515		1,629		1,665
Total revenue	$	3,457	$	2,803	$	9,239	$	9,646

Nine Months Ended March 29,
2024March 31,
2023(in millions)Net cash provided by (used in):Operating activities$(660)$(340)Investing activities31 (620)Financing activities506 856 Effect of exchange rate changes on cash(6)(3)

Net decrease in cash and cash equivalents

$(129)$(107)

We had previously reached a final agreement with the IRS and received notices of deficiency with respect to years 2008 through 2012 and in February 2024, also reached a final agreement for resolving the notices of proposed adjustments with respect to years 2013 through 2015. During the nine months ended March 29, 2024, the Company made payments of $363 million for tax and $160 million for interest with respect to years 2008 through 2012 and recorded adjustments to align with IRS calculations, resulting in a remaining liability of $182 million as of March 29, 2024, related to all years from 2008 through 2015. The Company expects to pay any remaining balance with respect to this matter within the next twelve months.

In connection with settlements for the years 2008 through 2015, we expect to realize reductions to our mandatory deemed repatriation tax obligations and tax savings from interest deductions in future years aggregating to $164 million. Of this amount, $34 million of interest savings from the interest paid with respect to years 2008 through 2012 is classified as a deferred tax asset due to interest expense limitation rules. See Part I, Item 1, Note 12, Income Tax Expense, of the Notes to Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q for further details.

We have an existing shelf registration statement (the “Shelf Registration Statement”) filed with the Securities and Exchange Commission that expires in August 2024, which allows us to offer and sell shares of common stock, preferred stock, warrants, and debt securities. We may use the Shelf Registration Statement or other capital sources, including other offerings of equity or debt securities or the credit markets, to satisfy future financing needs, including planned or unanticipated capital expenditures, investments, debt repayments or other expenses. Any such additional financing will be subject to market conditions and may not be available on terms acceptable to us or at all.

As noted previously, we have been scaling back on capital expenditures, consolidating production lines and reducing bit growth to align with market demand. We reduced our expenditures for property, plant and equipment for our company plus our portion of the capital expenditures by our Flash Ventures joint venture with Kioxia for its operations to approximately $1.4 billion in 2023 from approximately $1.5 billion in 2022. After consideration of the Flash Ventures’ lease financing of its capital expenditures and net operating cash flow, we reduced our net cash used for our purchases of property, plant and equipment and net activity in notes receivable relating to Flash Ventures to $793 million in 2023 from $1.2 billion in 2022. We currently expect the capital expenditures for 2024 to be less than 2023.

We believe our Cash and cash equivalents and our available revolving credit facility will be sufficient to meet our working capital, debt and capital expenditure needs for at least the next twelve months and for the foreseeable future thereafter. We believe we can also access the various debt capital markets to further supplement our liquidity position if necessary. Our ability to sustain our working capital position is subject to a number of risks that we discuss in Part II, Item 1A, Risk Factors, in this Quarterly Report on Form 10-Q and in Part I, Item 1A, Risk Factors, in our Annual Report on Form 10-K for the year ended June 30, 2023.

A total of $1.51 billion and $1.28 billion of our Cash and cash equivalents was held by our foreign subsidiaries as of March 29, 2024 and June 30, 2023, respectively. There are no material tax consequences that have not been accrued for on the repatriation of this cash.

Our cash equivalents are primarily invested in money market funds that invest in U.S. Treasury securities and U.S. Government agency securities. In addition, from time to time, we also invest directly in certificates of deposit, asset-backed securities and corporate and municipal notes and bonds.

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Operating Activities

Net cash provided by or used in operating activities primarily consists of net income or loss, adjusted for non-cash charges, plus or minus changes in operating assets and liabilities. Net cash used for changes in operating assets and liabilities was $405 million for the nine months ended March 29, 2024, as compared to $296 million for the nine months ended March 31, 2023, which largely reflects payments made on the IRS matter, partially offset by a decrease in net operating assets and liabilities resulting from the reduction in volume of our business, as discussed above. Changes in our operating assets and liabilities are largely affected by our working capital requirements, which are dependent on our volume of business and the effective management of our cash conversion cycle as well as the timing of payments for taxes. During the nine months ended March 29, 2024, the change in operating assets and liabilities included payments to the IRS of $523 million, including interest, as discussed in “Short- and Long-term Liquidity – Unrecognized Tax Benefits” section below. Our cash conversion cycle measures how quickly we can convert our products into cash through sales. The cash conversion cycles were as follows (in days):


	Three Months Ended
	March 29, 2024	March 31, 2023
Days sales outstanding	47	52
Days in inventory	119	144
Days payable outstanding	(63)	(57)
Cash conversion cycle	103	139

Changes in days sales outstanding (“DSO”) are generally due to the timing of shipments. Changes in days in inventory (“DIO”) are generally related to the timing of inventory builds, including staging of inventory to meet expected future demand. Changes in days payable outstanding (“DPO”) are generally related to production volume and the timing of purchases during the period. From time to time, we modify the timing of payments to our vendors. We make modifications primarily to manage our vendor relationships and to manage our cash flows, including our cash balances. Generally, we make payment term modifications through negotiations with our vendors or by granting to, or receiving from, our vendors’ payment term accommodations.

For the three months ended March 29, 2024, DSO decreased by 5 days from the comparable period in the prior year, primarily reflecting the timing of shipments and customer collections. DIO decreased by 25 days from the comparable period in the prior year, primarily reflecting lower inventory cycle time, which reduces the inventory levels needed to meet customer orders, and an increase in products shipped. DPO increased by 6 days from the comparable period in the prior year primarily due to routine variations in the timing of purchases and payments during the period as well as slightly more favorable payment terms.

Investing Activities

Net cash provided by investing activities for the nine months ended March 29, 2024 primarily consisted of $207 million in net proceeds from activity related to Flash Ventures, partially offset by $176 million in capital expenditures, net of proceeds from disposals of assets, which includes the proceeds from the sale-leaseback of our Milpitas, California facility. Net cash used in investing activities for the nine months ended March 31, 2023 primarily consisted of $688 million in capital expenditures, partially offset by $46 million in net proceeds from activity related to Flash Ventures.

Financing Activities

During the nine months ended March 29, 2024, net cash provided by financing activities primarily consisted of $2.50 billion in proceeds from the issuance of the 2028 Convertible Notes, the drawdown of the Delayed Draw Term Loan and draws on the revolving credit facility. These sources were partially offset by $505 million used to repurchase a portion of the 2024 Convertible Notes; $1.27 billion used for the repayment of draws on the revolving credit facility, payments on the Delayed Draw Term Loan, scheduled payments on the Term Loan A-2, and settlement of the remaining 2024 Convertible Notes; and $155 million for the purchase of capped calls to hedge the potential dilution impact of the conversion feature of the 2028 Convertible Notes. During the nine months ended March 31, 2023, cash flows from financing activities primarily consisted of proceeds of $882 million from the issuance of our convertible preferred stock. In addition, we drew and repaid $1.18 billion under our revolving credit facility within the prior year period.

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Off-Balance Sheet Arrangements

Other than the commitments related to Flash Ventures incurred in the normal course of business and certain indemnification provisions (see “Short- and Long-term Liquidity – Purchase Obligations and Other Commitments” below), we do not have any other material off-balance sheet financing arrangements or liabilities, guarantee contracts, retained or contingent interests in transferred assets, or any other obligation arising out of a material variable interest in an unconsolidated entity. We do not have any majority-owned subsidiaries that are not included in the Condensed Consolidated Financial Statements. Additionally, with the exception of Flash Ventures and our joint venture with Unisplendour Corporation Limited and Unissoft (Wuxi) Group Co. Ltd., we do not have an interest in, or relationships with, any variable interest entities. For additional information regarding our off-balance sheet arrangements, see Part I, Item 1, Note 9, Related Parties and Related Commitments and Contingencies, of the Notes to Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q.

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Short- and Long-term Liquidity

Material Cash Requirements

In addition to cash requirements for unrecognized tax benefits and dividend rights with respect to the Series A Preferred Stock discussed below, the following is a summary of our known material cash requirements, including those for capital expenditures, as of March 29, 2024:


	Total		1 Year (Remaining Three Months of 2024)		2-3 Years (2025-2026)		4-5 Years (2027-2028)		More than 5 Years (Beyond 2028)
	(in millions)


Long-term debt, including current portion(1)	$	7,825	$	338	$	2,600	$	3,887	$	1,000
Interest on debt	1,151		79		734		238		100
Flash Ventures related commitments(2)	2,463		322		1,576		572		(7)
Operating leases	593		17		135		112		329
Purchase obligations and other commitments	522		45		268		79		130
Mandatory deemed repatriation tax	466		—		466		—		—
Total	$	13,020	$	801	$	5,779	$	4,888	$	1,552

(1)Principal portion of debt, excluding issuance costs.

(2)Includes reimbursement for depreciation and lease payments on owned and committed equipment, funding commitments for loans and equity investments and payments for other committed expenses, including R&D and building depreciation. Funding commitments assume no additional operating lease guarantees. Additional operating lease guarantees can reduce funding commitments.

Dividend rights

On January 31, 2023, we issued an aggregate of 900,000 shares of Series A Preferred Stock for an aggregate purchase price of $900 million. These shares are entitled to cumulative preferred dividends. See Part II, Item 8, Note 13, Shareholders’ Equity and Convertible Preferred Stock, of the Notes to the Consolidated Financial Statements in our Annual Report on Form 10-K for the year ended June 30, 2023 and Part I, Item 1, Note 11, Shareholders’ Equity and Convertible Preferred Stock, of the Notes to Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q for more information regarding the dividend provisions.

Debt

As described in “Key Developments – Financing Activities” above, we undertook several liability-management actions during the second and third quarters of 2024, including the issuance of the 2028 Convertible Notes, the repurchase and/or settlement of our remaining outstanding 2024 Convertible Notes and the partial repayment of the Delayed Term Loan.

The 2028 Convertible Notes are convertible at the option of any holder at an initial conversion price of approximately $52.20 per share of common stock beginning August 15, 2028. Prior to that date, if the trading price of our common stock remains above 130% of the conversion price for at least 20 trading days (whether or not consecutive) during the 30 consecutive trading-day period prior to the end of a quarter, holders of the 2028 Convertible Notes would have the right to convert the 2028 Convertible Notes during the next succeeding calendar quarter. The 2028 Convertible Notes are also convertible prior to that date upon the occurrence of certain corporate events. Upon any conversion of the 2028 Convertible Notes, we will pay cash for the aggregate principal amount of the notes to be converted and pay or deliver, as the case may be, cash, shares of our common stock or a combination thereof, at our election, in respect of the remainder, if any, of our conversion obligation in excess of the aggregate principal amount of the notes being converted.

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In addition to our existing debt, as of March 29, 2024, we had $2.24 billion available for borrowing under our revolving credit facility until January 2027, subject to customary conditions under the loan agreement. The agreements governing our credit facilities each include limits on secured indebtedness and certain types of unsecured subsidiary indebtedness and require us and certain of our subsidiaries to provide guarantees and collateral to the extent the conditions providing for such guarantees and collateral are met. Additional information regarding our indebtedness, including information about availability under our revolving credit facility and the principal repayment terms, interest rates, covenants, collateral and other key terms of our outstanding indebtedness, is included in Part II, Item 8, Note 8, Debt, of the Notes to the Consolidated Financial Statements included in our Annual Report on Form 10-K for the year ended June 30, 2023 and Note 7, Debt, of the Notes to Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q.

The loan agreements governing our revolving credit facility, our Term Loan A-2 maturing 2027, and our Delayed Draw Term Loan require us to comply with certain financial covenants, consisting of a leverage ratio, and a minimum liquidity requirement. As of March 29, 2024, we were in compliance with these financial covenants.

Flash Ventures

Flash Ventures sells to and leases back from a consortium of financial institutions a portion of its tools and has entered into equipment lease agreements of which we guarantee half or all of the outstanding obligations under each lease agreement. The leases are subject to customary covenants and cancellation events that relate to Flash Ventures and each of the guarantors. The occurrence of a cancellation event could result in an acceleration of the lease obligations and a call on our guarantees. As of March 29, 2024, we were in compliance with all covenants under these Japanese lease facilities. See Part I, Item 1, Note 9, Related Parties and Related Commitments and Contingencies, of the Notes to Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q for information regarding Flash Ventures.

Purchase Obligations and Other Commitments

In the normal course of business, we enter into purchase orders with suppliers for the purchase of components used to manufacture our products. These purchase orders generally cover forecasted component supplies needed for production during the next quarter, are recorded as a liability upon receipt of the components, and generally may be changed or canceled at any time prior to shipment of the components. We also enter into long-term agreements with suppliers that contain fixed future commitments, which are contingent on certain conditions such as performance, quality and technology of the vendor’s components. These arrangements are included under “Purchase obligations and other commitments” in the table above.

Mandatory Deemed Repatriation Tax

The following is a summary of our estimated mandatory deemed repatriation tax obligations that are payable in the following years:


	March 29, 2024
	(in millions)
2025	$	265
2026	201
Total	$	466

Unrecognized Tax Benefits

As of March 29, 2024, the liability for unrecognized tax benefits (excluding accrued interest and penalties) was $708 million. Accrued interest and penalties related to unrecognized tax benefits are recognized in liabilities for uncertain tax positions and are recorded in the provision for income taxes. Accrued interest and penalties included in our liability related to unrecognized tax benefits as of March 29, 2024 was $173 million. Of these amounts, approximately $719 million could result in potential cash payments.

As noted above, we had previously reached a final agreement with the IRS regarding notices of deficiency with respect to years 2008 through 2012 and in February 2024, also reached a final agreement for resolving the notices of proposed adjustments with respect to years 2013 through 2015. During the nine months ended March 29, 2024, we made payments of $363 million for tax and $160 million for interest with respect to years 2008 through 2012 and recorded adjustments to align with IRS calculations, resulting in a remaining liability of $182 million as of March 29, 2024 related to all years from 2008 through 2015. We expect to pay any remaining balance with respect to this matter within the next twelve months.

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In connection with settlements for the years 2008 through 2015, we expect to realize reductions to our mandatory deemed repatriation tax obligations and tax savings from interest deductions in future years aggregating to approximately $164 million. Of this amount, $34 million of interest savings from the interest paid with respect to years 2008 through 2012 is classified as a deferred tax asset due to interest expense limitation rules.

Mandatory Research and Development Expense Capitalization

Since the beginning of 2023, the 2017 Act has required us to capitalize and amortize R&D expenses rather than expensing them in the year incurred, which is expected to result in materially higher cash tax payments in future profitable periods, if not repealed or otherwise modified.

Foreign Exchange Contracts

We purchase foreign exchange contracts to hedge the impact of foreign currency fluctuations on certain underlying assets, liabilities and commitments for Operating expenses and product costs denominated in foreign currencies. See Part I, Item 3, Quantitative and Qualitative Disclosures About Market Risk included in this Quarterly Report on Form 10-Q for additional information.

Indemnifications

In the ordinary course of business, we may provide indemnifications of varying scope and terms to customers, vendors, lessors, business partners and other parties with respect to certain matters, including, but not limited to, losses arising out of our breach of agreements, products or services to be provided by us, environmental compliance or from intellectual property infringement claims made by third parties. In addition, we have entered into indemnification agreements with our directors and certain of our officers that require us, among other things, to indemnify them against certain liabilities that may arise by reason of their status or service as directors or officers. We maintain director and officer insurance, which may cover certain liabilities arising from our obligation to indemnify our directors and officers in certain circumstances.

It is not possible to determine the maximum potential amount under these indemnification agreements due to the limited history of prior indemnification claims and the unique facts and circumstances involved in each particular agreement. Such indemnification agreements may not be subject to maximum loss clauses. Historically, we have not incurred material costs as a result of obligations under these agreements.

Recent Accounting Pronouncements

For a description of recently issued and adopted accounting pronouncements, including the respective dates of adoption and expected effects on our results of operations and financial condition, see Part I, Item 1, Note 2, Recent Accounting Pronouncements, of the Notes to Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q.

Critical Accounting Policies and Estimates

We have prepared the accompanying unaudited Condensed Consolidated Financial Statements in accordance with accounting principles generally accepted in the United States (U.S. GAAP). The preparation of the financial statements requires the use of judgments and estimates that affect the reported amounts of revenues, expenses, assets, liabilities and shareholders’ equity. We have adopted accounting policies and practices that are generally accepted in the industry in which we operate. If these estimates differ significantly from actual results, the impact to the Condensed Consolidated Financial Statements may be material.

There have been no material changes in our critical accounting policies and estimates from those disclosed in our Annual Report on Form 10‑K for the year ended June 30, 2023. Please refer to Part II, Item 7 of our Annual Report on Form 10‑K for the year ended June 30, 2023 for a discussion of our critical accounting policies and estimates.

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Item 3. Quantitative and Qualitative Disclosures About Market Risk

Except as disclosed below, there have been no material changes to our market risk during the nine months ended March 29, 2024. See Part II, Item 7A, Quantitative and Qualitative Disclosures About Market Risk in our Annual Report on Form 10-K for the year ended June 30, 2023 for further information about our exposure to market risk.

Foreign Currency Risk

We performed sensitivity analyses as of March 29, 2024 and June 30, 2023 using a modeling technique that measures the change in the fair values arising from a hypothetical 10% adverse movement in the levels of foreign currency exchange rates relative to the U.S. dollar, with all other variables held constant. The analyses cover all of our foreign currency derivative contracts used to offset the underlying exposures. The foreign currency exchange rates used in performing the sensitivity analyses were based on market rates in effect at March 29, 2024 and June 30, 2023. The sensitivity analyses indicated that a hypothetical 10% adverse movement in foreign currency exchange rates relative to the U.S. dollar would result in a foreign exchange fair value loss of $255 million and $285 million at March 29, 2024 and June 30, 2023, respectively.

Interest Rate Risk

We have generally held a balance of fixed and variable rate debt. As of March 29, 2024, our variable rate debt outstanding consisted of our Term Loan A-2 and Delayed Draw Term Loan, which are based on various index rates as discussed further in Note 7, Debt, of the Notes to Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q. As of March 29, 2024, the outstanding balance on our variable rate debt was $2.9 billion and a one percent increase in the variable rate of interest would increase annual interest expense by $29 million.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

As required by Rule 13a-15(b) promulgated by the Securities and Exchange Commission under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as such term is defined in Rule 13a-15(e) under the Exchange Act) as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of the end of the period covered by this Quarterly Report on Form 10-Q, our disclosure controls and procedures were effective.

Changes in Internal Controls over Financial Reporting

There has been no change in our internal control over financial reporting during the third quarter of fiscal year 2024 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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PART II. OTHER INFORMATION

Item 1. Legal Proceedings

See Note 12, Income Tax Expense, of the Notes to Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q for disclosures regarding the status of statutory notices of deficiency issued by the IRS with regards to tax years 2008 through 2015, including the reaching of a final agreement for resolving the notices of proposed adjustments with respect to years 2013 through 2015.

Item 1A. Risk Factors

We have described under the heading “Risk Factors” in Part I, Item 1A of our Annual Report on Form 10-K for the year ended June 30, 2023 a number of risks and uncertainties that could cause our actual results of operations and financial condition to vary materially from past, or from anticipated future, results of operations and financial condition. Except as discussed below, there have been no material changes from these risk factors previously described in Part I, Item 1A of our Annual Report on Form 10-K for the year ended June 30, 2023, as updated by the risk factors described in Part II, Item 1A of our Quarterly Reports on Form 10-Q for the quarters ended September 29, 2023, and December 29, 2023. These risks and uncertainties are not the only risks facing us. Additional risks and uncertainties not presently known to us or that we currently deem immaterial may also adversely affect our business, financial condition, results of operations or the market price of our common stock.

Item 5. Other Information

Insider Trading Arrangements

Except as described below, during the third quarter, none of our directors or officers (as defined in Rule 16a-1(f) of the Exchange Act) , modified or a trading arrangement for the purchase or sale of securities that was intended to satisfy the affirmative defense conditions of Rule 10b5-1(c) of the Exchange Act (“Rule 10b5-1 Plan”) or constituted a “non-Rule 10b5-1 trading arrangement”:

•, a former of the Company who left the Company effective January 12, 2024, a Rule 10b5-1 Plan on .

Additional Guarantors

On April 26, 2024, SanDisk Corporation (“SDC”) and SanDisk Technologies, Inc. (“SDT” and, together with SDC, the “Additional Guarantors”), each wholly-owned subsidiaries of Western Digital Corporation, entered into agreements (the “Additional Guarantees”) to unconditionally guarantee the obligations under the loan agreements governing our revolving credit facility, our Term Loan A-2 maturing 2027, and our Delayed Draw Term Loan (collectively, the “Credit Facilities”), subject to certain exceptions.

As required under the indenture dated as of February 13, 2019 (the “Senior Notes Indenture”) and pursuant to the second supplemental indenture dated as of April 26, 2024, the Additional Guarantors will also guarantee the obligations under our 4.750% Senior Notes due 2026, for so long as and to the extent required under the terms of the Senior Notes Indenture. As required under the indenture dated as of November 3, 2023 (the “Convertible Notes Indenture”) and pursuant to the first supplemental indenture dated as of April 26, 2024, the Additional Guarantors will also guarantee the obligations under our 2028 Convertible Notes, for so long as and to the extent required under the terms of the Convertible Notes Indenture.

In connection with entering into the Additional Guarantees, the Additional Guarantors also entered into agreements to secure the obligations under the Credit Facilities on a first-priority basis (subject to permitted liens) by a lien on substantially all the assets and properties of the Additional Guarantors (the “Additional Collateral”), subject to certain exceptions. The obligations our 2.850% Senior Notes due 2029 and 3.100% Senior Notes due 2032 will be secured by the Additional Collateral on an equal and ratable basis to the obligations under the Credit Facilities for so long as and to the extent required under the terms of the indenture and first supplemental indenture governing such notes.

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Item 6. Exhibits

The exhibits listed in the Exhibit Index below are filed with, or incorporated by reference in, this Quarterly Report on Form 10-Q, as specified in the Exhibit List, from exhibits previously filed with the Securities and Exchange Commission. Certain agreements listed in the Exhibit Index that we have filed or incorporated by reference may contain representations and warranties by us or our subsidiaries. These representations and warranties have been made solely for the benefit of the other party or parties to such agreements and (i) may have been qualified by disclosures made to such other party or parties, (ii) were made only as of the date of such agreements or such other date(s) as may be specified in such agreements and are subject to more recent developments, which may not be fully reflected in our public disclosures, (iii) may reflect the allocation of risk among the parties to such agreements and (iv) may apply materiality standards different from what may be viewed as material to investors. Accordingly, these representations and warranties may not describe the actual state of affairs at the date hereof and should not be relied upon.

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EXHIBIT INDEX


Exhibit Number						Description
3.1						Amended and Restated Certificate of Incorporation of Western Digital Corporation, as amended to date (Filed as Exhibit 3.1 to the Company’s Quarterly Report on Form 10-Q (File No. 1-08703) with the Securities and Exchange Commission on February 8, 2006)
3.2						Certificate of Designations, Preferences and Rights of Series A Convertible Perpetual Preferred Stock (Filed as Exhibit 3.1 to the Company’s Current Report on Form 8-K (File No. 1-08703) with the Securities and Exchange Commission on February 1, 2023)
3.3						Amended and Restated By-Laws of Western Digital Corporation, as amended effective as of February 10, 2021 (Filed as Exhibit 3.1 to the Company’s Current Report on Form 8-K (File No. 1-08703) with the Securities and Exchange Commission on February 12, 2021)
10.1						Joint Venture Restructure Agreement, dated as of January 29, 2009, by and among SanDisk Corporation, SanDisk (Ireland) Limited, SanDisk (Cayman) Limited, Toshiba Corporation, Flash Partners Limited and Flash Alliance Limited†#
10.2						Equity Purchase Agreement, dated as of March 4, 2024, by and among, SanDisk China Limited and JCET Management Co., Ltd.†
31.1						Certification of Principal Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002†
31.2						Certification of Principal Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002†
32.1						Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002**
32.2						Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002**
101.INS						XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document
101.SCH						XBRL Taxonomy Extension Schema Document†
101.CAL						XBRL Taxonomy Extension Calculation Linkbase Document†
101.LAB						XBRL Taxonomy Extension Label Linkbase Document†
101.PRE						XBRL Taxonomy Extension Presentation Linkbase Document†
101.DEF						XBRL Taxonomy Extension Definition Linkbase Document†
104						Cover Page Interactive Data File - formatted in Inline XBRL and contained in Exhibit 101

† Filed with this report.

** Furnished with this report.

# As permitted by Regulation S-K, Item 601(b)(10)(iv) of the Securities Exchange Act of 1934, as amended, certain confidential portions of this exhibit have been redacted from the publicly filed document.

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Quarterly Report on Form 10-Q to be signed on its behalf by the undersigned thereunto duly authorized.


			WESTERN DIGITAL CORPORATION

			By:			/s/ Gene Zamiska
						Gene Zamiska
						Senior Vice President, Global Accounting and Chief Accounting Officer
						(Principal Accounting Officer and Duly Authorized Officer)

Dated: April 29, 2024

WESTERN DIGITAL CORP - Quarter Report: 2024 March (Form 10-Q)

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