Western Digital 10Q 2024 Q3 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)


☒			QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 29, 2024


☐			TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission file number: 1-8703

WESTERN DIGITAL CORPORATION

(Exact Name of Registrant as Specified in Its Charter)

Delaware

33-0956711

(State or other jurisdiction of
incorporation or organization)

(I.R.S. Employer Identification No.)

5601 Great Oaks Parkway

San Jose,

California

95119

(Address of principal executive offices)

(Zip Code)

Registrant’s telephone number, including area code: (408) 717-6000

Securities registered pursuant to Section 12(b) of the Act:


Title of each class	Trading symbol(s)	Name of each exchange on which registered
Common Stock, $0.01 Par Value Per Share	WDC	The Nasdaq Stock Market LLC
		(Nasdaq Global Select Market)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ¨

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company

Emerging growth company

☒

☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ý

As of the close of business on April 22, 2024, 326,524,668 shares of common stock, par value $0.01 per share, were outstanding.

WESTERN DIGITAL CORPORATION

INDEX


		PAGE NO.
PART I. FINANCIAL INFORMATION

Item 1.	Financial Statements (unaudited)
	Condensed Consolidated Balance Sheets — As of March 29, 2024 and June 30, 2023	6
	Condensed Consolidated Statements of Operations — Three and Nine Months Ended March 29, 2024 and March 31, 2023	7
	Condensed Consolidated Statements of Comprehensive Loss — Three and Nine Months Ended March 29, 2024 and March 31, 2023	8
	Condensed Consolidated Statements of Cash Flows — Nine Months Ended March 29, 2024 and March 31, 2023	9
	Condensed Consolidated Statements of Convertible Preferred Stock and Shareholders' Equity — Nine Months Ended March 29, 2024 and March 31, 2023	10
	Notes to Condensed Consolidated Financial Statements	12
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	42
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	59
Item 4.	Controls and Procedures	59

PART II. OTHER INFORMATION
Item 1.	Legal Proceedings	60
Item 1A.	Risk Factors	60



Item 5.	Other Information	60
Item 6.	Exhibits	61

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	$	1,894	$	2,023
Accounts receivable, net	1,800		1,598
Inventories	3,215		3,698
Other current assets	623		567
Total current assets	7,532		7,886
Property, plant and equipment, net	3,253		3,620
Notes receivable and investments in Flash Ventures	1,099		1,410
Goodwill	10,034		10,037
Other intangible assets, net	78		80
Other non-current assets	1,805		1,513
Total assets	$	23,801	$	24,546
LIABILITIES, CONVERTIBLE PREFERRED STOCK AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	1,400	$	1,293
Accounts payable to related parties	310		292
Accrued expenses	972		1,288
Income taxes payable	476		999
Accrued compensation	445		349
Current portion of long-term debt	450		1,213
Total current liabilities	4,053		5,434
Long-term debt	7,318		5,857
Other liabilities	1,433		1,415
Total liabilities	12,804		12,706
Commitments and contingencies (Notes 9, 10, 12 and 16)
Convertible preferred stock, $0.01 par value; authorized — 5 shares; issued and outstanding — 1 shares; aggregate liquidation preference of $968 and $924, respectively	876		876
Shareholders’ equity:

Common stock, $0.01 par value; authorized — 450 shares; issued and outstanding — 326 shares and 322 shares, respectively	3		3
Additional paid-in capital	4,018		3,936
Accumulated other comprehensive loss	(636)		(548)
Retained earnings	6,736		7,573
Total shareholders’ equity	10,121		10,964
Total liabilities, convertible preferred stock and shareholders’ equity	$	23,801	$	24,546

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

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WESTERN DIGITAL CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in millions, except per share amounts)

(Unaudited)


	Three Months Ended				Nine Months Ended
	March 29, 2024		March 31, 2023		March 29, 2024		March 31, 2023
Revenue, net	$	3,457	$	2,803	$	9,239	$	9,646
Cost of revenue	2,456		2,517		7,647		7,851
Gross profit	1,001		286		1,592		1,795
Operating expenses:
Research and development	494		476		1,369		1,551
Selling, general and administrative	203		242		608		739
Employee termination, asset impairment, and other	8		40		89		140
Business separation costs	23		—		59		—
Total operating expenses	728		758		2,125		2,430
Operating income (loss)	273		(472)		(533)		(635)
Interest and other expense:
Interest income	10		10		30		15
Interest expense	(108)		(80)		(314)		(223)
Other income, net	3		14		54		27
Total interest and other expense, net	(95)		(56)		(230)		(181)
Income (loss) before taxes	178		(528)		(763)		(816)
Income tax expense	43		43		74		159
Net income (loss)	135		(571)		(837)		(975)
Less: cumulative dividends allocated to preferred shareholders	15		9		44		9
Less: income attributable to preferred shareholders	7		—		—		—
Net income (loss) attributable to common shareholders	$	113	$	(580)	$	(881)	$	(984)

Net income (loss) per common share:
Basic	$	0.35	$	(1.82)	$	(2.72)	$	(3.09)
Diluted	$	0.34	$	(1.82)	$	(2.72)	$	(3.09)

Weighted average shares outstanding:
Basic	326		319		324		318
Diluted	335		319		324		318

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

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WESTERN DIGITAL CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(in millions)

(Unaudited)


	Three Months Ended				Nine Months Ended
	March 29, 2024		March 31, 2023		March 29, 2024		March 31, 2023
Net income (loss)	$	135	$	(571)	$	(837)	$	(975)
Other comprehensive income (loss), before tax:
Actuarial pension gain (loss)	—		(1)		—		(1)
Foreign currency translation adjustment	(75)		(8)		(55)		11


Net unrealized gain (loss) on derivative contracts	(86)		21		(45)		233
Total other comprehensive income (loss), before tax	(161)		12		(100)		243
Income tax benefit (expense) related to items of other comprehensive income (loss), before tax	18		(6)		12		(39)
Other comprehensive income (loss), net of tax	(143)		6		(88)		204
Total comprehensive loss	$	(8)	$	(565)	$	(925)	$	(771)

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	$	(837)	$	(975)
Adjustments to reconcile net loss to net cash used in operations:
Depreciation and amortization	430		643
Stock-based compensation	226		246
Deferred income taxes	(120)		30
Gain on disposal of assets	(87)		(7)
Non-cash asset impairment	99		18
Gain on repurchase of debt	(4)		—
Amortization of debt issuance costs and discounts	14		9

Other non-cash operating activities, net	24		(8)
Changes in:
Accounts receivable, net	(202)		1,213
Inventories	483		(341)
Accounts payable	211		(442)
Accounts payable to related parties	18		(54)
Accrued expenses	(310)		(484)
Income taxes payable	(524)		144
Accrued compensation	97		(169)
Other assets and liabilities, net	(178)		(163)
Net cash used in operating activities	(660)		(340)
Cash flows from investing activities
Purchases of property, plant and equipment	(371)		(702)
Proceeds from the sale of property, plant and equipment	195		14





Notes receivable issuances to Flash Ventures	(184)		(496)
Notes receivable proceeds from Flash Ventures	391		542
Strategic investments and other, net	—		22
Net cash provided by (used in) investing activities	31		(620)
Cash flows from financing activities
Issuance of stock under employee stock plans	40		49
Taxes paid on vested stock awards under employee stock plans	(66)		(69)
Net proceeds from convertible preferred stock	(5)		882



Purchase of capped calls	(155)		—
Repurchases of debt	(505)		—
Repayments of debt	(1,267)		(1,180)
Proceeds from debt	2,500		1,180
Debt issuance costs	(36)		(6)

Net cash provided by financing activities	506		856
Effect of exchange rate changes on cash	(6)		(3)
Net decrease in cash and cash equivalents	(129)		(107)
Cash and cash equivalents, beginning of year	2,023		2,327
Cash and cash equivalents, end of period	$	1,894	$	2,220
Supplemental disclosure of cash flow information:
Cash paid for income taxes	$	874	$	181
Cash paid for interest	$	321	$	252

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)


	Convertible Preferred Stock			Common Stock			Additional Paid-In Capital	Accumulated Other Comprehensive Loss		Retained Earnings		Total Shareholders’ Equity
	Shares	Amount		Shares	Amount
Balance at June 30, 2023	1	$	876	322	$	3		$	3,936	$	(548)	$	7,573	$	10,964
Net loss	—	—		—	—			—		—		(685)		(685)

Employee stock plans	—	—		2	—			(43)		—		—		(43)
Stock-based compensation	—	—		—	—			77		—		—		77








Foreign currency translation adjustment	—	—		—	—			—		(38)		—		(38)
Net unrealized loss on derivative contracts	—	—		—	—			—		(45)		—		(45)
Balance at September 29, 2023	1	$	876	324	$	3		$	3,970	$	(631)	$	6,888	$	10,230
Net loss	—	—		—	—			—		—		(287)		(287)
Employee stock plans	—	—		2	—			33		—		—		33
Stock-based compensation	—	—		—	—			72		—		—		72







Purchase of capped calls related to the issuance of convertible notes, net of tax	—	—		—	—			(118)		—		—		(118)

Foreign currency translation adjustment	—	—		—	—			—		58		—		58
Net unrealized gain on derivative contracts	—	—		—	—			—		80		—		80
Balance at December 29, 2023	1	$	876	326	$	3		$	3,957	$	(493)	$	6,601	$	10,068
Net income	—	—		—	—			—		—		135		135

Employee stock plans	—	—		—	—			(16)		—		—		(16)
Stock-based compensation	—	—		—	—			77		—		—		77








Foreign currency translation adjustment	—	—		—	—			—		(75)		—		(75)
Net unrealized loss on derivative contracts	—	—		—	—			—		(68)		—		(68)
Balance at March 29, 2024	1	$	876	326	$	3		$	4,018	$	(636)	$	6,736	$	10,121

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)


	Convertible Preferred Stock			Common Stock			Additional Paid-In Capital	Accumulated Other Comprehensive Loss		Retained Earnings		Total Shareholders’ Equity
	Shares	Amount		Shares	Amount
Balance at July 1, 2022	—	$	—	315	$	3		$	3,733	$	(579)	$	9,166	$	12,323
Adoption of new accounting standards	—	—		—	—			(128)		—		91		(37)
Net income	—	—		—	—			—		—		47		47
Employee stock plans	—	—		3	—			(50)		—		—		(50)
Stock-based compensation	—	—		—	—			86		—		—		86








Foreign currency translation adjustment	—	—		—	—			—		(87)		—		(87)
Net unrealized loss on derivative contracts	—	—		—	—			—		(60)		—		(60)
Balance at September 30, 2022	—	$	—	318	$	3		$	3,641	$	(726)	$	9,304	$	12,222
Net loss	—	—		—	—			—		—		(451)		(451)

Employee stock plans	—	—		1	—			43		—		—		43
Stock-based compensation	—	—		—	—			86		—		—		86








Foreign currency translation adjustment	—	—		—	—			—		117		—		117
Net unrealized gain on derivative contracts	—	—		—	—			—		228		—		228
Balance at December 30, 2022	—	$	—	319	$	3		$	3,770	$	(381)	$	8,853	$	12,245
Net loss	—	—		—	—			—		—		(571)		(571)

Issuance of convertible preferred stock, net of issuance costs	1	876		—	—			—		—		—		—
Employee stock plans	—	—		1	—			(13)		—		—		(13)
Stock-based compensation	—	—		—	—			74		—		—		74







Actuarial pension gain	—	—		—	—			—		(1)		—		(1)
Foreign currency translation adjustment	—	—		—	—			—		(9)		—		(9)
Net unrealized gain on derivative contracts	—	—		—	—			—		16		—		16
Balance at March 31, 2023	1	$	876	320	$	3		$	3,831	$	(375)	$	8,282	$	11,741

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. Organization and Basis of Presentation

Western Digital Corporation (“Western Digital” or the “Company”) is a leading developer, manufacturer, and provider of data storage devices and solutions based on both NAND flash and hard disk drive technologies.

The Company’s broad portfolio of technology and products address the following key end markets: Cloud, Client and Consumer. The Company also generates immaterial license and royalty revenue from its extensive intellectual property portfolio, which is included in each of these three end market categories.

The accounting policies followed by the Company are set forth in Part II, Item 8, Note 1, Organization and Basis of Presentation, of the Notes to Consolidated Financial Statements included in the Company’s Annual Report on Form 10‑K for the year ended June 30, 2023. In the opinion of management, all adjustments necessary to fairly state the Condensed Consolidated Financial Statements have been made. Such adjustments consist of items of a normal, recurring nature as well as the revisions discussed further below. Certain information and footnote disclosures normally included in the Consolidated Financial Statements prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”) have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). These Condensed Consolidated Financial Statements should be read in conjunction with the Consolidated Financial Statements and the notes thereto included in the Company’s Annual Report on Form 10‑K for the year ended June 30, 2023. The results of operations for interim periods are not necessarily indicative of results to be expected for the full year.

Fiscal Year

The Company’s fiscal year ends on the Friday nearest to June 30 and typically consists of 52 weeks. Approximately every five to six years, the Company reports 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.

Segment Reporting

The Company manufactures, markets, and sells data storage devices and solutions in the United States (“U.S.”) and in foreign countries through its sales personnel, dealers, distributors, retailers, and subsidiaries. The Company manages and reports under two reportable segments: flash-based products (“Flash”) and hard disk drives (“HDD”).

The Chief Executive Officer, who is the Company’s Chief Operating Decision Maker (“CODM”), evaluates the performance of the Company and makes decisions regarding the allocation of resources based on each operating segment’s net revenue and gross margin. Because of the integrated nature of the Company’s production and distribution activities, separate segment asset measures are either not available or not used as a basis for the CODM to evaluate the performance of or to allocate resources to the segments.

Business Separation Costs

On October 30, 2023, the Company announced that its Board of Directors had completed its strategic review of its business and, after evaluating a comprehensive range of alternatives, authorized the Company to pursue a plan to separate its Flash and HDD business units to create two independent, public companies. As a result of the plan, the Company incurred separation and transition costs and expects to incur such costs through the completion of the separation of the businesses, which the Company targets in the second half of calendar year 2024. The separation and transition costs are recorded within Business separation costs in the Condensed Consolidated Statements of Operations.

Use of Estimates

Company management has made estimates and assumptions relating to the reporting of certain assets and liabilities in conformity with U.S. GAAP. These estimates and assumptions have been applied using methodologies that are consistent throughout the periods presented with consideration given to the potential impacts of current macroeconomic conditions. However, actual results could differ materially from these estimates.

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WESTERN DIGITAL CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Revision of Previously Issued Financial Statements

As previously disclosed in the Company’s Quarterly Report on Form 10-Q for the period ended December 28, 2023, in connection with the preparation of its Condensed Consolidated Financial Statements as of and for the three and six months ended December 29, 2023, the Company identified certain errors related to the Company’s reporting and recording of its interests in its equity method investments in Flash Partners Ltd., Flash Alliance Ltd., and Flash Forward Ltd. (collectively, “Flash Ventures”). The errors related to unadjusted differences between Flash Ventures’ application of Japanese generally accepted accounting principles to certain lease-related transactions compared to the applicable U.S. generally accepted accounting principles. These unadjusted differences resulted in differences in the equity in earnings from these entities recognized by the Company in Other income (expense), net and the carrying value of the Company’s equity method investments in Flash Ventures.

Based on an analysis of quantitative and qualitative factors in accordance with SAB No. 99, “Materiality,” and SAB No. 108, “Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements,” and as described further in Note 17, Revision of Previously Issued Financial Statements, the Company evaluated the errors and determined the related impacts were not material to its financial statements for the prior periods when they occurred, but that correcting the cumulative errors in the period detected would have been material to the Company's results of operations for that period. Accordingly, the Company has revised previously reported financial information presented herein for such immaterial errors. A summary of revisions to the Condensed Consolidated Financial Statements presented herein is included for comparative purposes in Note 17, Revision of Previously Issued Financial Statements.

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WESTERN DIGITAL CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 2. Recent Accounting Pronouncements

Accounting Pronouncements Recently Adopted

In September 2022, the Financial Accounting Standards Board (“FASB”) issued an accounting standards update (“ASU”) No. 2022-04, “Liabilities-Supplier Finance Programs (Subtopic 405-50): Disclosure of Supplier Finance Program Obligations”, which requires annual and interim disclosures for entities that use supplier finance programs in connection with the purchase of goods and services. The ASU requires the Company to provide disclosure of outstanding obligations to such suppliers for all balance sheet dates presented beginning with the Company’s first quarter of 2024 and to provide certain rollforward information related to those obligations beginning in the Company’s first fiscal quarter of 2025. The ASU does not affect the recognition, measurement, or financial statement presentation of supplier finance program obligations. The Company adopted the guidance on the first day of fiscal year 2024, except for the rollforward information, which the Company is compiling and intends to provide beginning in fiscal year 2025. See Note 15, Supplier Finance Program, of the Notes to Condensed Consolidated Financial Statements for information regarding the supplier finance program.

Recently Issued Accounting Pronouncements Not Yet Adopted

In November 2023, the FASB issued ASU No. 2023-07, “Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures”, which expands on segment reporting requirements primarily through enhanced disclosures surrounding significant segment expenses. The ASU expands on existing segment reporting requirements to require that a public entity disclose, on an annual and interim basis, significant segment expenses that are regularly provided to an entity's CODM, a description of other segment items by reportable segment, and any additional measures of a segment's profit or loss used by the CODM when deciding how to allocate resources. These incremental disclosures will be required beginning with the Company’s financial statements for the year ending June 27, 2025. The Company expects to provide any required disclosures at that time.

In December 2023, the FASB issued ASU 2023-09, “Income Taxes (Topic 740): Improvements to Income Tax Disclosures”. The ASU calls for enhanced income tax disclosure requirements surrounding the tabular rate reconciliation and income taxes paid. The amendments are effective for the Company’s fiscal year 2026, with early adoption permitted. The Company is currently compiling the information required for these disclosures. These incremental disclosures will be required beginning with the Company’s financial statements for the year ending June 27, 2025. The Company expects to provide any required disclosures at that time.

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WESTERN DIGITAL CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 3. Business Segments, Geographic Information, and Concentrations of Risk

The following table summarizes the operating performance of the Company’s reportable segments:


	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
Total gross profit for segments	1,012			298			1,594			1,834
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		%

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)

The Company’s disaggregated revenue information is as follows:



	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

The Company’s top 10 customers accounted for 42% and 38% of its net revenue for each of the three and nine months ended March 29, 2024 and 49% and 45% 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. The following table provides a summary of goodwill activity for the period:


	Flash		HDD		Total
	(in millions)
Balance at June 30, 2023	$	5,716	$	4,321	$	10,037

Foreign currency translation adjustment	(2)		(1)		(3)

Balance at March 29, 2024	$	5,714	$	4,320	$	10,034

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WESTERN DIGITAL CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 4. Supplemental Financial Statement Data

Accounts receivable, net

From time to time, in connection with factoring agreements, the Company sells trade accounts receivable without recourse to third-party purchasers in exchange for cash. During the nine months ended March 29, 2024 and March 31, 2023, the Company sold trade accounts receivable aggregating $623 million and $626 million, respectively. The discounts on the trade accounts receivable sold were not material and were recorded within Other income, net in the Condensed Consolidated Statements of Operations. As of March 29, 2024 and June 30, 2023, the amount of factored receivables that remained outstanding was $102 million and $150 million, respectively.

Inventories


	March 29, 2024		June 30, 2023
	(in millions)
Inventories:
Raw materials and component parts	$	1,666	$	2,096
Work-in-process	1,045		979
Finished goods	504		623
Total inventories	$	3,215	$	3,698

Property, plant and equipment, net


	March 29, 2024		June 30, 2023
	(in millions)
Property, plant and equipment:
Land	$	235	$	269
Buildings and improvements	1,826		1,955
Machinery and equipment	8,655		8,704
Computer equipment and software	473		470
Furniture and fixtures	54		54
Construction-in-process	793		798
Property, plant and equipment, gross	12,036		12,250
Accumulated depreciation	(8,783)		(8,630)
Property, plant and equipment, net	$	3,253	$	3,620

Other intangible assets, net

As part of prior acquisitions, the Company recorded at the time of the acquisition acquired in-process research and development (“IPR&D”) for projects in progress that had not yet reached technological feasibility. IPR&D is initially accounted for as an indefinite-lived intangible asset. Once a project reaches technological feasibility, the Company reclassifies the balance to existing technology and begins to amortize the intangible asset over its estimated useful life. During the three months ended December 29, 2023, one IPR&D project reached technological feasibility and $8 million was reclassified from IPR&D to existing technology and commenced amortization over an estimated useful life of three years. As of March 29, 2024 and June 30, 2023, IPR&D included in intangible assets, net was $72 million and $80 million, respectively.

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WESTERN DIGITAL CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Product warranty liability

Changes in the warranty accrual were as follows:


	Three Months Ended				Nine Months Ended
	March 29, 2024		March 31, 2023		March 29, 2024		March 31, 2023
	(in millions)
Warranty accrual, beginning of period	$	202	$	289	$	244	$	345

Charges to operations	28		26		76		83
Utilization	(29)		(43)		(112)		(137)
Changes in estimate related to pre-existing warranties	2		—		(5)		(19)
Warranty accrual, end of period	$	203	$	272	$	203	$	272

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)	$	47	$	97
Long-term portion (included in Other liabilities)	156		147
Total warranty accrual	$	203	$	244

Other liabilities


	March 29, 2024		June 30, 2023
	(in millions)
Other liabilities:
Non-current net tax payable	$	201	$	464
Non-current portion of unrecognized tax benefits	552		408
Other non-current liabilities	680		543
Total other liabilities	$	1,433	$	1,415

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WESTERN DIGITAL CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Accumulated other comprehensive loss

Accumulated other comprehensive loss (“AOCL”), net of tax refers to expenses, gains and losses that are recorded as an element of shareholders’ equity but are excluded from net income. The following table illustrates the changes in the balances of each component of AOCL:


	Actuarial Pension Losses		Foreign Currency Translation Adjustment		Unrealized Losses on Derivative Contracts		Total Accumulated Comprehensive Loss
	(in millions)















Balance at June 30, 2023	$	(2)	$	(389)	$	(157)	$	(548)
Other comprehensive loss before reclassifications	—		(55)		(196)		(251)
Amounts reclassified from accumulated other comprehensive loss	—		—		151		151
Income tax benefit related to items of other comprehensive loss	—		1		11		12
Net current-period other comprehensive loss	—		(54)		(34)		(88)
Balance at March 29, 2024	$	(2)	$	(443)	$	(191)	$	(636)

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.

As of March 29, 2024, substantially all existing net losses related to cash flow hedges recorded in AOCL are expected to be reclassified to earnings within the next twelve months. In addition, as of March 29, 2024, the Company did not have any foreign exchange forward contracts with credit-risk-related contingent features.

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WESTERN DIGITAL CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 5. Fair Value Measurements and Investments

Financial Instruments Carried at Fair Value

Financial assets and liabilities that are remeasured and reported at fair value at each reporting period are classified and disclosed in one of the following three levels:

Level 1. Quoted prices in active markets for identical assets or liabilities.

Level 2. Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

Level 3. Inputs that are unobservable for the asset or liability and that are significant to the fair value of the assets or liabilities.

The following tables present information about the Company’s financial assets and liabilities that are measured at fair value on a recurring basis as of March 29, 2024 and June 30, 2023, and indicate the fair value hierarchy of the valuation techniques utilized to determine such values:


	March 29, 2024
	Level 1		Level 2		Level 3		Total
	(in millions)
Assets:

Cash equivalents - Money market funds	$	333	$	—	$	—	$	333



Short-term investments - Certificates of deposit	27		—		—		27














Foreign exchange contracts	—		9		—		9


Total assets at fair value	$	360	$	9	$	—	$	369
Liabilities:
Foreign exchange contracts	$	—	$	142	$	—	$	142


Total liabilities at fair value	$	—	$	142	$	—	$	142


	June 30, 2023
	Level 1		Level 2		Level 3		Total
	(in millions)
Assets:

Cash equivalents - Money market funds	$	371	$	—	$	—	$	371


















Foreign exchange contracts	—		35		—		35


Total assets at fair value	$	371	$	35	$	—	$	406
Liabilities:
Foreign exchange contracts	$	—	$	192	$	—	$	192


Total liabilities at fair value	$	—	$	192	$	—	$	192

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)

Financial Instruments Not Carried at Fair Value

For financial instruments where the carrying value (which includes principal adjusted for any unamortized issuance costs, and discounts or premiums) differs from fair value (which is based on quoted market prices), the following table represents the related carrying value and fair value for each of the Company’s outstanding financial instruments. Each of the financial instruments presented below was categorized as Level 2 for all periods presented, based on the frequency of trading immediately prior to the end of the third quarter of 2024 and the fourth quarter of 2023, respectively.


	March 29, 2024				June 30, 2023
	Carrying Value		Fair Value		Carrying Value		Fair Value
	(in millions)
1.50% convertible notes due 2024	$	—	$	—	$	1,099	$	1,067
Variable interest rate Delayed Draw Term Loan due 2024	300		300		—		—
4.75% senior unsecured notes due 2026	2,295		2,253		2,293		2,193
Variable interest rate Term Loan A-2 maturing 2027	2,615		2,556		2,687		2,661
3.00% convertible notes due 2028	1,566		2,351		—		—
2.85% senior notes due 2029	496		436		496		400
3.10% senior notes due 2032	496		403		495		371
Total	$	7,768	$	8,299	$	7,070	$	6,692

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WESTERN DIGITAL CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 6. Derivative Instruments and Hedging Activities

As of March 29, 2024, the Company had outstanding foreign exchange forward contracts that were designated as either cash flow hedges or non-designated hedges. Substantially all of the contract maturity dates of these foreign exchange forward contracts do not exceed 12 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. Debt

Debt consisted of the following:


	March 29, 2024		June 30, 2023
	(in millions)













1.50% convertible notes due 2024	$	—	$	1,100

Variable interest rate Delayed Draw Term Loan due 2024	300		—
4.75% senior unsecured notes due 2026	2,300		2,300
Variable interest rate Term Loan A-2 maturing 2027	2,625		2,700
3.00% convertible notes due 2028	1,600		—
2.85% senior notes due 2029	500		500
3.10% senior notes due 2032	500		500
Total debt	7,825		7,100
Issuance costs	(57)		(30)
Subtotal	7,768		7,070
Less current portion of long-term debt	(450)		(1,213)
Long-term debt	$	7,318	$	5,857

In August 2023, the Company drew $600 million of principal amount (the “Delayed Draw Term Loan”) under a loan agreement entered into in January 2023 and amended in June 2023 (the “Delayed Draw Term Loan Agreement”), which allowed the Company to draw a single loan of up to $600 million through August 14, 2023. The Delayed Draw Term Loan will mature on June 28, 2024. The Company repaid $300 million principal amount of the Delayed Draw Term Loan during the nine months ended March 29, 2024.

The Delayed Draw Term Loan bears interest, at the Company’s option, at a per annum rate equal to either (x) the Adjusted Term SOFR Rate (as defined in the Delayed Draw Term Loan Agreement) plus an applicable margin varying from 1.750% to 2.625% or (y) a base rate plus an applicable margin varying from 0.750% to 1.625%, in each case depending on the corporate family ratings of the Company from at least two of Standard & Poor’s Ratings Services, Moody’s Investors Service, Inc. and Fitch Ratings, Inc. (the “Credit Rating Agencies”). The all-in interest rate for the Delayed Draw Term Loan as of March 29, 2024 was 7.550%.

During the three and nine months ended March 29, 2024, the Company made scheduled repayments of the Term Loan A-2 of $38 million and $75 million, respectively. The Term Loan A-2 Loan bears interest, at the Company’s option, at a per annum rate equal to either (x) the Adjusted Term SOFR (as defined in the loan agreement governing the Term Loan A-2) plus an applicable margin varying from 1.125% to 2.000% or (y) a base rate plus an applicable margin varying from 0.125% to 1.000%, in each case depending on the corporate family ratings of the Company from at least two of the Credit Rating Agencies, with an initial interest rate of Adjusted Term SOFR plus 1.500%. The all-in interest rate for Term Loan A-2 as of March 29, 2024 was 6.930%.

During the three and nine months ended March 29, 2024, the Company drew and repaid $300 million principal amount under its $2.25 billion revolving credit facility maturing in January 2027 (the “2027 Revolving Credit Facility”).

On March 25, 2024, the Company issued a standby letter of credit of $15 million, which reduced the Company’s 2027 Revolving Credit Facility’s capacity by the same amount to $2.24 billion as of March 29, 2024.

The loan agreements governing the Company’s 2027 Revolving Credit Facility, Term Loan A-2 maturing 2027, and the Delayed Draw Term Loan require the Company to comply with certain financial covenants, consisting of a leverage ratio, and a minimum liquidity requirement. As of March 29, 2024, the Company was in compliance with these financial covenants.

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WESTERN DIGITAL CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

On November 3, 2023, the Company 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”). The Company is not required to make principal payments on the 2028 Convertible Notes prior to the maturity date. The 2028 Convertible Notes are jointly and severally guaranteed by each of the Company’s wholly-owned subsidiaries that guarantees the 4.75% senior unsecured notes due 2026 (currently, Western Digital Technologies, Inc.).

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 the Company’s 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, the Company 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 the Company’s common stock or a combination thereof, at the Company’s election, in respect of the remainder, if any, of its conversion obligation in excess of the aggregate principal amount of the notes being converted.

Net proceeds from the 2028 Convertible Notes were approximately $1,563 million after deducting issuance costs of approximately $37 million. Debt issuance costs are amortized to interest expense over the term of the 2028 Convertible Notes.

Contemporaneously with the issuance of the 2028 Convertible Notes, the Company entered into individually negotiated transactions with certain holders of the Company’s existing 2024 Convertible Notes to repurchase approximately $508 million aggregate principal amount of such notes at an immaterial discount.

In connection with the issuance of the 2028 Convertible Notes, the Company also entered into privately negotiated capped call transactions with certain counterparties (the “Capped Calls”). The Capped Calls each have a strike price of approximately $52.20 per share, subject to certain adjustments, which correspond to the initial conversion price of the 2028 Convertible Notes. The Capped Calls have initial cap prices of $70.26 per share, subject to certain adjustments. The Capped Calls cover, subject to anti-dilution adjustments, approximately 8 million shares of the Company’s common stock. The Company has the option to settle the Capped Calls in either shares, cash or a combination thereof. The Capped Calls are generally intended to reduce or offset the potential dilution to the Company’s common stock upon any conversion of the 2028 Convertible Notes with such reduction or offset, as the case may be, subject to a cap based on the cap price. However, if the market price per share of the Company’s common stock, as measured under the terms of the Capped Calls, exceeds the cap prices of the Capped Calls, there would nevertheless be dilution and/or there would not be an offset of such cash payments, in each case, to the extent that such market price exceeds the cap price of the Capped Calls. The Capped Calls are separate transactions, and not part of the terms of the 2028 Convertible Notes. As these transactions meet certain accounting criteria, the Capped Calls are recorded in stockholders’ equity and are not accounted for as derivatives. The cost of the Capped Calls of $155 million, net of $37 million in deferred tax assets, was recorded as a decrease to Additional paid-in capital on the Company’s Condensed Consolidated Balance Sheets as of March 29, 2024.

On February 1, 2024, the Company settled all remaining 2024 Convertible Notes in accordance with their original terms for an aggregate cash principal payment of $592 million plus interest.

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WESTERN DIGITAL CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 8. Pension and Other Post-Retirement Benefit Plans

The Company has pension and other post-retirement benefit plans in various countries. The Company’s principal pension plans are in Japan, Thailand and the Philippines. All pension and other post-retirement benefit plans outside of the Company’s Japan, Thailand and the Philippines defined benefit pension plans (the “Pension Plans”) are immaterial to the Condensed Consolidated Financial Statements. The expected long-term rate of return on the Pension Plans assets is 2.5%.

Obligations and Funded Status

The following table presents the unfunded status of the benefit obligations for the Pension Plans:


	March 29, 2024		June 30, 2023
	(in millions)











Benefit obligation at end of period	$	258	$	273









Fair value of plan assets at end of period	176		185
Unfunded status	$	82	$	88

The following table presents the unfunded amounts related to the Pension Plans as recognized on the Company’s Condensed Consolidated Balance Sheets:


	March 29, 2024		June 30, 2023
	(in millions)
Current liabilities	$	1	$	1
Non-current liabilities	81		87
Net amount recognized	$	82	$	88

Net periodic benefit costs were not material for the three and nine months ended March 29, 2024.

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WESTERN DIGITAL CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 9. Related Parties and Related Commitments and Contingencies

Flash Ventures

The Company’s business ventures with Kioxia Corporation (“Kioxia”) consist of three 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”.

The following table presents the notes receivable from, and equity investments in, Flash Ventures:


	March 29, 2024		June 30, 2023
	(in millions)
Notes receivable, Flash Partners	$	—	$	37
Notes receivable, Flash Alliance	—		48
Notes receivable, Flash Forward	556		709
Investment in Flash Partners	157		161
Investment in Flash Alliance	234		276
Investment in Flash Forward	152		179
Total notes receivable and investments in Flash Ventures	$	1,099	$	1,410

During the three and nine months ended March 29, 2024 and March 31, 2023, the Company made net payments to Flash Ventures of $0.7 billion and $2.5 billion, and $1.2 billion and $3.2 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 $310 million and $292 million, respectively.

The Company’s maximum reasonably estimable loss exposure (excluding lost profits) as a result of its involvement with Flash Ventures, based upon the Japanese yen to U.S. dollar exchange rate at March 29, 2024, is presented below. Investments in Flash Ventures are denominated in Japanese yen, and the maximum estimable loss exposure excludes any cumulative translation adjustment due to revaluation from the Japanese yen to the U.S. dollar.


	March 29, 2024
	(in millions)
Notes receivable	$	556
Equity investments	543
Operating lease guarantees	1,431
Inventory and prepayments	1,046
Maximum estimable loss exposure	$	3,576

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WESTERN DIGITAL CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The Company is obligated to pay for variable costs incurred in producing its share of Flash Ventures’ flash-based memory wafer supply, based on its three-month forecast, which generally equals 50% 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 49.9% to 50.0% 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 100% 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 $249 million associated with the reduction in utilization related to Flash Ventures, which was recorded as a charge to Cost of revenue. No 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 $207 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 $36 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 $496 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.

The following table presents the Company’s portion of the remaining guarantee obligations under the Flash Ventures’ lease facilities in both Japanese yen and U.S. dollar-equivalent, based upon the Japanese yen to U.S. dollar exchange rate as of March 29, 2024.


	Lease Amounts
	(Japanese yen, in billions)		(U.S. dollar, in millions)
Total guarantee obligations	¥	216	$	1,431

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WESTERN DIGITAL CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The following table details the breakdown of the Company’s remaining guarantee obligations between the principal amortization and the purchase option exercise price at the end of the term of the Flash Ventures lease agreements, in annual installments as of March 29, 2024 in U.S. dollars, based upon the Japanese yen to U.S. dollar exchange rate as of March 29, 2024:


Annual Installments	Payment of Principal Amortization		Purchase Option Exercise Price at Final Lease Terms		Guarantee Amount
	(in millions)
Remaining three months of 2024	$	110	$	27	$	137
2025	290		79		369
2026	359		119		478
2027	154		101		255
2028	50		97		147
2029	6		39		45
Total guarantee obligations	$	969	$	462	$	1,431

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 49% owned by the Company and 51% 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 4% 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 3% of its consolidated revenue on products distributed by the Unis Venture. The outstanding accounts receivable due from the Unis Venture were 10% and 8% 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. Leases and Other Commitments

Leases

The Company leases certain domestic and international facilities and data center space under long-term, non-cancelable operating leases that expire at various dates through 2039. These leases include no material variable or contingent lease payments. Operating lease assets and liabilities are recognized based on the present value of the remaining lease payments discounted using the Company’s incremental borrowing rate. Operating lease assets also include prepaid lease payments minus any lease incentives. Extension or termination options present in the Company’s lease agreements are included in determining the right-of-use asset and lease liability when it is reasonably certain the Company will exercise those options. Lease expense is recognized on a straight-line basis over the lease term.

The following table summarizes supplemental balance sheet information related to operating leases as of March 29, 2024:


	Lease Amounts
	($ in millions)
Minimum lease payments by year:
Remaining three months of 2024	$	17
2025	67
2026	68
2027	60
2028	52
Thereafter	329
Total future minimum lease payments	593
Less: Imputed interest	164
Present value of lease liabilities	429
Less: Current portion (included in Accrued expenses)	47
Long-term operating lease liabilities (included in Other liabilities )	$	382

Operating lease right-of-use assets (included in Other non-current assets)	$	408

Weighted average remaining lease term in years	10.0
Weighted average discount rate	6.0		%

The following table summarizes supplemental disclosures of operating cost and cash flow information related to operating leases:


	Three Months Ended				Nine Months Ended
	March 29, 2024		March 31, 2023		March 29, 2024		March 31, 2023
	(in millions)
Cost of operating leases	$	15	$	15	$	47	$	43
Cash paid for operating leases	17		12		49		38
Operating lease assets obtained in exchange for operating lease liabilities	1		10		178		14

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WESTERN DIGITAL CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Sale-Leaseback

In September 2023, the Company completed a sale and leaseback of its facility in Milpitas, California. The Company received net proceeds of $191 million in cash and recorded a gain of $85 million on the sale. In connection with the sale, the Company agreed to lease 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. The supplemental balance sheet information and supplemental disclosures of operating cost and cash flow information related to the lease are included in the tables above.

Purchase Agreements and Other Commitments

In the normal course of business, the Company enters into purchase orders with suppliers for the purchase of components used to manufacture its 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. The Company also enters 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. As of March 29, 2024, the Company had the following minimum long-term commitments:


	Long-Term Commitments
	(in millions)
Year:
Remaining three months of 2024	$	45
2025	172
2026	96
2027	59
2028	20
Thereafter	130
Total	$	522

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WESTERN DIGITAL CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 11. Shareholders’ Equity and Convertible Preferred Stock

Stock-based Compensation Expense

The following tables present the Company’s stock-based compensation for equity-settled awards by type (i.e. restricted stock units (“RSUs”), restricted stock unit awards with performance conditions or market conditions (“PSUs”), and rights to purchase shares of common stock under the Company’s Employee Stock Purchase Plan (“ESPP”)) and financial statement line as well as the related tax benefit included in the Company’s Condensed Consolidated Statements of Operations:


	Three Months Ended				Nine Months Ended
	March 29, 2024		March 31, 2023		March 29, 2024		March 31, 2023
	(in millions)

RSUs and PSUs	$	65	$	63	$	198	$	217
ESPP	12		11		28		29
Total	$	77	$	74	$	226	$	246


	Three Months Ended				Nine Months Ended
	March 29, 2024		March 31, 2023		March 29, 2024		March 31, 2023
	(in millions)
Cost of revenue	$	11	$	12	$	37	$	38
Research and development	36		37		102		116
Selling, general and administrative	30		25		87		92

Subtotal	77		74		226		246
Tax benefit	(10)		(11)		(30)		(35)
Total	$	67	$	63	$	196	$	211

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. The following table presents the unamortized compensation cost and weighted average service period of all unvested outstanding awards as of March 29, 2024:


	Unamortized Compensation Costs		Weighted Average Service Period
	(in millions)		(years)

RSUs and PSUs (1)	$	454	2.4
ESPP	33		0.7
Total unamortized compensation cost	$	487

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

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WESTERN DIGITAL CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Plan Activities

Stock Options

The following table summarizes stock option activity under the Company’s incentive plans. As of March 29, 2024, there were no remaining outstanding options.


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






























Options outstanding at June 30, 2023	0.3	$	44.95	0.10



Canceled or expired	(0.3)	44.95
Options outstanding at March 29, 2024	—	$	—

RSUs and PSUs

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


	Number of Shares	Weighted Average Grant Date Fair Value		Aggregate Intrinsic Value at Vest Date
	(in millions)			(in millions)






























RSUs and PSUs outstanding at June 30, 2023	13.8	$	46.56
Granted	5.7	38.31

Vested	(4.9)	47.62		$	228
Forfeited	(1.4)	45.76
RSUs and PSUs outstanding at March 29, 2024	13.2	$	43.36

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

Convertible Preferred Stock

On January 31, 2023, the Board of Directors of the Company authorized the designation of 900,000 shares of Series A Convertible Perpetual Preferred Stock, par value $0.01 per share (the “Preferred Shares”), from the Company’s existing five million authorized but unissued shares of preferred stock and issued the Preferred Shares through a private placement for an aggregate purchase price of $900 million, less issuance costs of $24 million. The Preferred Shares accrue a cumulative preferred dividend at an annual rate of 6.25% per annum (increasing to 7.25% per annum on January 31, 2030 and to 8.25% per annum on January 31, 2033) compounded on a quarterly basis. The Preferred Shares also participate in any dividends declared for common shareholders on an as-converted equivalent basis. No dividends have been declared or paid since the issuance of the Preferred Shares. As of March 29, 2024 and June 30, 2023, unpaid and cumulative dividends payable with respect to the Preferred Shares were $68 million and $24 million, respectively.

As of March 29, 2024 and June 30, 2023, the Preferred Shares outstanding had an aggregate liquidation preference of $968 million and $924 million, respectively, and would have been convertible, if otherwise permitted, into approximately 20 million shares of common stock on each such date.

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WESTERN DIGITAL CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 12. Income Tax Expense

The Tax Cuts and Jobs Act (the “2017 Act”), enacted on December 22, 2017, includes a broad range of tax reform proposals affecting businesses. The Company completed its accounting for the tax effects of the enactment of the 2017 Act during the second quarter of 2019. However, the U.S. Treasury and the Internal Revenue Service (“IRS”) have issued tax guidance on certain provisions of the 2017 Act since the enactment date, and the Company anticipates the issuance of additional regulatory and interpretive guidance. The Company applied a reasonable interpretation of the 2017 Act along with the then-available guidance in finalizing its accounting for the tax effects of the 2017 Act. Any additional regulatory or interpretive guidance would constitute new information, which may require further refinements to the Company’s estimates in future periods.

On August 16, 2022, President Biden signed into law the Inflation Reduction Act of 2022, which contained significant law changes related to tax, climate, energy, and health care. The tax measures include, among other things, a corporate alternative minimum tax (“CAMT”) of 15% on corporations with three-year average annual adjusted financial statement income (“AFSI”) exceeding $1.0 billion. The corporate alternative minimum tax is effective for the Company beginning with fiscal year 2024. The Company is not subject to the CAMT of 15% for fiscal year 2024 as its average annual AFSI did not exceed $1.0 billion for the preceding three-year period.

The following table presents the Company’s Income tax expense and the effective tax rate:


	Three Months Ended					Nine Months Ended
	March 29, 2024			March 31, 2023		March 29, 2024			March 31, 2023
	($ in millions)
Income (loss) before taxes	$	178		(528)		$	(763)		(816)
Income tax expense	43			43		74			159
Effective tax rate	24		%	(8)	%	(10)		%	(19)	%

Beginning in 2023, the 2017 Act requires the Company to capitalize and amortize R&D expenses rather than expensing them in the year incurred. The tax effects related to the capitalization of R&D expenses are included in the effective tax rate for the three and nine months ended March 29, 2024 and March 31, 2023.

The primary drivers of the difference between the effective tax rate for the three and nine months ended March 29, 2024 and the U.S. Federal statutory rate of 21% are the relative mix of earnings and losses by jurisdiction, the deduction for foreign-derived intangible income, credits, and tax holidays in Malaysia, the Philippines and Thailand that have or will expire at various dates during years 2024 through 2031. On November 1, 2023, one of the Company’s tax holidays in Malaysia expired. The Company has applied for an extension and anticipates this extension, if granted, will be applied retroactively and begin on November 2, 2023. Because the exact terms of the extension are not currently known, the Company is applying the Malaysia corporate statutory tax rate on the expired tax holiday income. If a retroactive extension is granted, the Company will make an adjustment to its effective tax rate in that period. The effective tax rate for the three and nine months ended March 29, 2024 includes the discrete effect of a net increase of $35 million and $48 million to the liability for unrecognized tax benefits, which includes interest and offsetting tax benefits, related to transfer pricing matters, withholding taxes and certain tax deductions. This is offset in part by a net decrease of $7 million and $34 million to the liability for unrecognized tax benefits for the three and nine months ended March 29, 2024, which includes interest and offsetting tax benefits, as a result of adjustments to align with IRS calculations.

The primary drivers of the difference between the effective tax rate for the three and nine months ended March 31, 2023 and the U.S. Federal statutory rate of 21% are the relative mix of earnings and losses by jurisdiction, the deduction for foreign-derived intangible income, credits, and tax holidays in Malaysia, the Philippines and Thailand.

Uncertain Tax Positions

With the exception of certain unrecognized tax benefits that are directly associated with the tax position taken, unrecognized tax benefits are presented gross in the Condensed Consolidated Balance Sheets.

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WESTERN DIGITAL CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The following is a tabular reconciliation of the total amounts of unrecognized tax benefits excluding accrued interest and penalties for the nine months ended March 29, 2024 (in millions):


Accrual balance at June 30, 2023	$	1,021
Gross increases related to current year tax positions	23
Gross increases related to prior year tax positions	56
Gross decreases related to prior year tax positions	(28)
Settlements	(363)
Lapse of statute of limitations	(1)
Accrual balance at March 29, 2024	$	708

In addition to the amounts noted above, interest and penalties related to unrecognized tax benefits are recognized in liabilities recorded for uncertain tax positions and are recorded in the provision for income taxes. Accrued interest and penalties included in the Company’s liability related to unrecognized tax benefits as of March 29, 2024 were $173 million. Of the aggregate unrecognized tax benefits, including interest and penalties, as of March 29, 2024, approximately $719 million could result in potential cash payments and the Company believes it is reasonably likely that payments of approximately $182 million may be made within the next twelve months and has classified that portion of these unrecognized tax benefits, including interest, in Income taxes payable on the Condensed Consolidated Balance Sheets as of March 29, 2024. The remaining payables related to unrecognized tax benefits are included in Other liabilities on the Condensed Consolidated Balance Sheets as of March 29, 2024.

The Company 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, 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, the Company expects to realize reductions to its 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 the 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.

The Company believes that adequate provision has been made for any adjustments that may result from any other tax examinations. However, the outcome of such tax examinations cannot be predicted with certainty. If any issues addressed in the Company’s tax examinations are resolved in a manner not consistent with management’s expectations, the Company could be required to adjust its provision for income taxes in the period such resolution occurs. As of March 29, 2024, with the exception of the IRS matter discussed above, it was not possible to estimate the amount of change, if any, in the unrecognized tax benefits that is reasonably possible within the next twelve months. Any significant change in the amount of the Company’s liability for unrecognized tax benefits would most likely result from additional information or settlements relating to the examination of the Company’s tax returns.

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WESTERN DIGITAL CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 13. Net Income (Loss) Per Common Share

The following table presents the computation of basic and diluted income (loss) per common share:


	Three Months Ended				Nine Months Ended
	March 29, 2024		March 31, 2023			March 29, 2024		March 31, 2023
	(in millions, except per share data)
Net income (loss)	$	135	$	(571)		$	(837)	$	(975)
Less: cumulative dividends on Preferred Stock	15		9			44		9
Less: income attributable to participating securities(1)	7		—			—		—
Net income (loss) attributable to common shareholders	$	113	$	(580)		$	(881)	$	(984)


Weighted average shares outstanding:
Basic	326		319			324		318
RSUs, PSUs, ESPP, and the convertible notes	9		—			—		—
Diluted	335		319			324		318
Net income (loss) per common share
Basic	$	0.35	$	(1.82)		$	(2.72)	$	(3.09)
Diluted	$	0.34	$	(1.82)		$	(2.72)	$	(3.09)
Anti-dilutive potential common shares excluded	—		15			13		15

(1) Preferred Stock represents participating securities because they participate in any dividends on shares of common stock on a pari passu, pro rata basis. Preferred Stock does not participate in undistributed net losses.

Basic net income (loss) per share attributable to common shareholders is computed using (i) net income (loss) less (ii) dividends paid to holders of Preferred Shares less (iii) net income (loss) attributable to participating securities divided by (iv) weighted average basic shares outstanding. Diluted net income or loss per share attributable to common shareholders is computed as (i) basic net income (loss) attributable to common shareholders plus (ii) diluted adjustments to income allocable to participating securities divided by (iii) weighted average diluted shares outstanding. The "if-converted" method is used to determine the dilutive impact for the convertible notes and the Preferred Shares. The treasury stock method is used to determine the dilutive impact of unvested equity awards.

Potentially dilutive common shares include dilutive outstanding employee stock options, RSUs and PSUs, rights to purchase shares of common stock under the Company’s ESPP, shares issuable in connection with the Company’s convertible notes, and the Preferred Shares. For the three months ended March 29, 2024, all common shares subject to outstanding equity awards are included in the calculation of diluted shares based on the Company’s average stock price during the period. For the three months ended March 31, 2023 and the nine months ended March 29, 2024 and March 31, 2023, the Company recorded a net loss, and all shares subject to outstanding equity awards were excluded from the calculation of diluted shares for those periods because their impact would have been anti-dilutive.

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WESTERN DIGITAL CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 14. Employee Termination, Asset Impairment, and Other

Business Realignment

The Company periodically incurs charges as part of the integration process of recent acquisitions and to realign its operations with anticipated market demand, primarily consisting of organization rationalization designed to streamline its business, reduce its cost structure and focus its resources. In this regard, in the nine months ended March 29, 2024, the Company reassessed existing capacity development plans and made a decision to cancel certain projects, including projects to expand capacity in its Penang, Malaysia facility, resulting in the impairment of existing construction in progress, other assets and the recognition of a liability for certain contract termination costs. The Company has also taken actions to reduce the amount of capital invested in facilities, including the sale-leaseback of its facility in Milpitas, California in September 2023. The Company recorded the following net charges related to these actions for the periods noted below:


	Three Months Ended				Nine Months Ended
	March 29, 2024		March 31, 2023		March 29, 2024		March 31, 2023
	(in millions)




Employee termination benefits	$	1	$	40	$	44	$	125









Contract termination and other	2		—		31		—
Asset impairments	5		—		99		15

Gain on sale-leaseback of facility	—		—		(85)		—


Total employee termination, asset impairment, and other charges	$	8	$	40	$	89	$	140

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	$	31	$	5	$	36
Charges	44		31		75
Cash payments	(74)		(9)		(83)

Accrual balance at March 29, 2024	$	1	$	27	$	28

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WESTERN DIGITAL CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 15. Supplier Finance Program

The Company maintains a voluntary supplier finance program that provides participating suppliers with enhanced receivable options. The program allows participating suppliers of the Company, at their sole discretion and cost, to sell their receivables due from the Company to a third-party financial institution and receive early payment at terms negotiated between the supplier and the third-party financial institution. The Company’s vendor payment terms and amounts are not impacted by a supplier’s decision to participate in this program.

The Company’s current payment terms with its suppliers under these programs generally range from 60 to 90 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 $37 million and $38 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. Legal Proceedings

Tax

For disclosures regarding the status of statutory notices of deficiency issued by the IRS with regard to tax years 2008 through 2015, see Note 12, Income Tax Expense.

Other Matters

In the normal course of business, the Company is subject to legal proceedings, lawsuits and other claims. Although the ultimate aggregate amount of probable monetary liability or financial impact with respect to these other matters is subject to many uncertainties, management believes that any monetary liability or financial impact to the Company from these matters, individually and in the aggregate, would not be material to the Company’s financial condition, results of operations or cash flows. However, any monetary liability and financial impact to the Company from these matters could differ materially from the Company’s expectations.

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WESTERN DIGITAL CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 17. Revision of Previously Issued Financial Statements

As described in Note 1, in connection with the preparation of its Condensed Consolidated Financial Statements as of and for the three and six months ended December 29, 2023, the Company identified certain errors related to the Company’s reporting and recording of its interests in its equity method investments in Flash Ventures. These errors related to unadjusted differences between the Flash Ventures’ application of Japanese generally accepted accounting principles to certain lease-related transactions compared to the applicable U.S. generally accepted accounting principles. These unadjusted differences resulted in differences in the equity in earnings from these entities recognized by the Company in Other income (expense), net and the carrying value of the Company’s equity method investments in Flash Ventures.

The following tables provide a summary of the revisions made to the Company’s Condensed Consolidated Financial Statements for the periods presented.


	Three Months Ended March 31, 2023
Condensed Consolidated Statement of Operations	As Previously Reported		Adjustment		As Revised
	(in millions, except per share amounts)









Operating loss	$	(472)	$	—	$	(472)
Interest and other expense:
Interest income	10		—		10
Interest expense	(80)		—		(80)
Other income, net	13		1		14
Total interest and other expense, net	(57)		1		(56)
Loss before taxes	(529)		1		(528)
Income tax expense	43		—		43
Net loss	(572)		1		(571)
Less: cumulative dividends allocated to preferred shareholders	9		—		9
Net loss attributable to common shareholders	$	(581)	$	1	$	(580)

Net loss per common share:
Basic	$	(1.82)	$	—	$	(1.82)
Diluted	$	(1.82)	$	—	$	(1.82)

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)


	Nine Months Ended March 31, 2023
Condensed Consolidated Statement of Operations	As Previously Reported		Adjustment		As Revised
	(in millions, except per share amounts)








Operating loss	$	(635)	$	—	$	(635)
Interest and other expense:
Interest income	15		—		15
Interest expense	(223)		—		(223)
Other income, net	13		14		27
Total interest and other expense, net	(195)		14		(181)
Loss before taxes	(830)		14		(816)
Income tax expense	161		(2)		159
Net loss	(991)		16		(975)
Less: cumulative dividends allocated to preferred shareholders	9		—		9
Net loss attributable to common shareholders	$	(1,000)	$	16	$	(984)

Net loss per common share:
Basic	$	(3.14)	$	0.05	$	(3.09)
Diluted	$	(3.14)	$	0.05	$	(3.09)


	Three Months Ended March 31, 2023
Condensed Consolidated Statement of Comprehensive Loss	As Previously Reported		Adjustment		As Revised
	(in millions)
Net loss	$	(572)	$	1	$	(571)
Other comprehensive income, before tax:
Actuarial pension loss	(1)		—		(1)
Foreign currency translation adjustment	(7)		(1)		(8)
Net unrealized gain on derivative contracts	21		—		21
Total other comprehensive income, before tax	13		(1)		12
Income tax expense related to items of other comprehensive income, before tax	(6)		—		(6)
Other comprehensive income, net of tax	7		(1)		6
Total comprehensive loss	$	(565)	$	—	$	(565)


	Nine Months Ended March 31, 2023
Condensed Consolidated Statement of Comprehensive Loss	As Previously Reported		Adjustment		As Revised
	(in millions)
Net loss	$	(991)	$	16	$	(975)
Other comprehensive income, before tax:
Actuarial pension loss	(1)		—		(1)
Foreign currency translation adjustment	8		3		11
Net unrealized gain on derivative contracts	233		—		233
Total other comprehensive income, before tax	240		3		243
Income tax expense related to items of other comprehensive income, before tax	(48)		9		(39)
Other comprehensive income, net of tax	192		12		204
Total comprehensive loss	$	(799)	$	28	$	(771)

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WESTERN DIGITAL CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)


	Nine Months Ended March 31, 2023
Condensed Consolidated Statement of Cash Flows	As Previously Reported		Adjustment		As Revised
	(in millions)
Cash flows from operating activities
Net loss	$	(991)	$	16	$	(975)
Deferred income taxes	34		(4)		30
Other non-cash operating activities, net	6		(14)		(8)
Other assets and liabilities, net	(165)		2		(163)
Net cash used in operating activities	(340)		—		(340)


Condensed Consolidated Statement of Shareholders’ Equity	As Previously Reported		Adjustment		As Revised
	(in millions)
Retained earnings as of March 31, 2023	$	8,139	$	143	$	8,282


Accumulated other comprehensive loss as of March 31, 2023	(362)		(13)		(375)
Foreign currency translation adjustment for the three months ended March 31, 2023	(8)		(1)		(9)

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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):


	Three Months Ended
	March 29, 2024				March 31, 2023				$ Change		% Change
	$ in millions
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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	Nine Months Ended
	March 29, 2024				March 31, 2023				$ Change		% Change
	$ in millions
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

Net Revenue

Comparison of Three and Nine Months Ended March 29, 2024 to Three and Nine Months Ended March 31, 2023

The increase in consolidated net revenue for the three months ended March 29, 2024 from the comparable period in the prior year reflected growth in exabytes shipped and a better pricing environment, resulting from a recent improvement in the supply-demand balance as discussed in the “Key Developments – Operational Update” section above. The decrease in consolidated net revenue for the nine months ended March 29, 2024 from the comparable period in the prior year reflected the impact of the supply-demand imbalance in the first half of the year prior to the recent improvement in supply-demand conditions.

Flash revenue increased 30% for the three months ended March 29, 2024 from the comparable period in the prior year, reflecting a 20% increase in exabytes sold and a 10% increase in average selling prices per gigabyte. The increase in exabytes sold was due to improved demand from our OEM customers in our Client end market and from products across our Consumer and Cloud end market. The increase in average selling prices per gigabyte was due to improved pricing as we started to see demand stabilizing. Flash revenue increased 5% for the nine months ended March 29, 2024 from the comparable period in the prior year, reflecting a 30% increase in exabytes sold, partially offset by a 19% decline in average selling prices per gigabyte. The increase in exabytes sold was attributable to the same factors described above for the three-month period while the decline in average selling prices per gigabyte for the period was due to the supply-demand imbalance in the first half of the year, prior to the recent improvement in supply-demand conditions, as described above.

HDD revenue increased 17% for the three months ended March 29, 2024 from the comparable period in the prior year, as a result of a 25% increase in exabytes sold, partially offset by a 6% decline in average selling prices per gigabyte. The increase in exabytes sold reflected an increase in shipments of our high capacity enterprise drives. The decline in average selling prices per gigabyte was due to a shift in the product mix to larger capacity drives. HDD revenue decreased 13% for the nine months ended March 29, 2024 from the comparable period in the prior year, as a result of a 9% decrease in exabytes sold, which was primarily driven by lower shipments to customers in our Cloud end market in the first half of the year as they adjusted their production levels and right-sized their inventories, and a 5% decline in average selling prices per gigabyte primarily attributable to a shift in product mix.

Cloud revenue increased 29% for the three months ended March 29, 2024 from the comparable period in the prior year, reflecting a 35% increase in exabytes sold, partially offset by a 5% decline in average selling prices per gigabyte. The increase in exabytes sold was driven by higher shipments of our high capacity enterprise HDD products. The decline in average selling prices per gigabyte was primarily due to a shift in the product mix to those larger capacity drives. Cloud revenue decreased 18% for the nine months ended March 29, 2024 from the comparable period in the prior year, which reflected a 9% decrease in exabytes sold and a 10% decline in average selling prices per gigabyte attributable to the supply-demand imbalance in the first half of the year as described above.

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Client revenue increased 20% for the three months ended March 29, 2024 from the comparable period in the prior year, reflecting a 24% increase in average selling prices per gigabyte, partially offset by a 3% decrease in exabytes sold. The increase in average selling prices per gigabyte over the prior year period was primarily due to improved pricing in Flash. The decrease in exabytes sold reflected a small lag in recovery in this end market and timing of shipments as many OEMs transition to newer Flash products. Client revenue increased 5% for the nine months ended March 29, 2024 from the comparable period in the prior year, reflecting a 17% increase in exabytes sold, partially offset by an 11% decline in average selling prices per gigabyte. The increase in exabytes sold was primarily driven by an increase in SSD shipments into PC applications and the decline in average selling prices per gigabyte was primarily due to the decline in Flash pricing caused by the supply-demand imbalance in the first half of the year as described above.

Consumer revenue increased 17% for the three months ended March 29, 2024 from the comparable period in the prior year, reflecting an increase in average selling prices per gigabyte while exabytes sold remained relatively consistent overall with a decrease in HDD bit shipments largely offsetting an increase in flash bit shipments. The increase in average selling prices per gigabyte was driven by improved pricing in Flash and more favorable product mix. Consumer revenue increased 10% for the nine months ended March 29, 2024 from the comparable period in the prior year, reflecting an 8% increase in exabytes sold and a 2% increase in average selling prices per gigabyte. The increase in exabytes sold was primarily driven by improved demand across our products in Flash, partially offset by a decline in HDD shipments. The increase in average selling prices per gigabyte was primarily due to a shift in product mix, partially offset by the decline in Flash pricing caused by the supply-demand imbalance in the first half of the year as described above.

The allocation of our net revenue by geography for the three months ended March 29, 2024 was relatively consistent with the comparable period in the prior year. The changes in net revenue by geography for nine months ended March 29, 2024 from the comparable period in the prior year reflected higher revenue in the first half of the year from Cloud customers in the Asia region, particularly in China and a decline in the Americas as certain large customers reduced purchases to align their inventories with current market demand.

Our top 10 customers accounted for 42% of our net revenue for the three months ended March 29, 2024, compared to 49% of our net revenue for the three months ended March 31, 2023. Our top 10 customers accounted for 38% of our net revenue for the nine months ended March 29, 2024, compared to 45% of our net revenue for the nine months ended March 31, 2023. For each of the three and nine months ended March 29, 2024 and March 31, 2023, no single customer accounted for 10% or more of our net revenue.

Consistent with standard industry practice, we have sales incentive and marketing programs that provide customers with price protection and other incentives or reimbursements that are recorded as a reduction to gross revenue. These programs represented 13% and 17% of gross revenue for the three and nine months ended March 29, 2024, respectively. The amounts attributed to our sales incentive and marketing programs generally vary according to several factors, including industry conditions, list pricing strategies, seasonal demand, competitor actions, channel mix and overall availability of products. Changes in future customer demand and market conditions may require us to adjust our incentive programs as a percentage of gross revenue.

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Gross Profit and Gross Margin

Consolidated gross profit increased by $715 million for the three months ended March 29, 2024 from the comparable period in the prior year, which primarily reflected better pricing in Flash as well as lower charges for unabsorbed manufacturing overhead costs in the current period of approximately $16 million, all in HDD, as a result of the reduced utilization of our manufacturing capacity, compared to $275 million of such charges in the same period in the prior year ($213 million in Flash and $62 million in HDD). Consolidated gross margin increased 19 percentage points year over year, with approximately 9 percentage points of the increase due to the lower underutilization charges in the current period and the remainder driven by better pricing in Flash as noted above. Flash gross margin increased by approximately 32 percentage points year over year, with approximately 16 percentage points of the increase due to the lower underutilization charges in the current period as noted above and the remainder driven by the higher average selling prices per gigabyte. HDD gross margin increased by 7 percentage points year over year, with approximately 3 percentage points of the increase due to the lower underutilization charges in the current period as noted above and the remainder driven by better product mix.

Consolidated gross profit decreased by $203 million for the nine months ended March 29, 2024 from the comparable period in the prior year, which was primarily driven by the decline in pricing, particularly in Flash as mentioned above. Consolidated gross margin remained flat for the nine months ended March 29, 2024 from the comparable period in the prior year. Flash gross margin decreased by approximately 4 percentage points year over year, primarily driven by the lower average selling prices per gigabyte. HDD gross margin increased by 2 percentage point year over year, primarily driven by better product mix.

Operating Expenses

Research and development (“R&D”) expense increased $18 million for the three months ended March 29, 2024 from the comparable period in the prior year. The increase was primarily driven by a $26 million increase in compensation and benefits due to higher variable compensation, partially offset by lower headcount, and a $9 million decrease due to reductions in R&D project spending. R&D expense decreased $182 million for the nine months ended March 29, 2024 from the comparable period in the prior year. The decline was primarily driven by an $88 million decrease in compensation and benefits due to lower headcount, partially offset by higher variable compensation, a $94 million decrease due to lower depreciation expenses and reductions in R&D project spending as well as other savings as we took actions to reduce expenses in the current environment.

Selling, general and administrative (“SG&A”) expense decreased $39 million for the three months ended March 29, 2024 from the comparable period in the prior year. The decline was primarily driven by a $39 million decrease in intangible amortization expense, as certain assets became fully amortized, and a $15 million decrease in strategic review costs, partially offset by an $18 million increase in compensation and benefits due to higher variable compensation. SG&A expense decreased $131 million for the nine months ended March 29, 2024 from the comparable period in the prior year. The decline was primarily driven by a $116 million decrease in intangible amortization expense, a $19 million decrease in compensation and benefits due to lower headcount, and a $13 million decrease in sales and marketing expenses, partially offset by a $22 million increase in strategic review costs and a $12 million increase in material purchases.

Employee termination, asset impairment and other charges decreased $32 million for the three months ended March 29, 2024 from the comparable period in the prior year, reflecting fewer restructuring actions taken in the current period. Employee termination, asset impairment and other charges decreased $51 million for the nine months ended March 29, 2024 from the comparable period in the prior year. The decrease primarily reflected fewer restructuring actions taken and a gain on the sale-leaseback of our Milpitas, California facility, partially offset by higher contract termination charges and asset impairments caused by project cancellations. For information regarding Employee termination, asset impairment and other, see Part I, Item 1, Note 14, Employee Termination, Asset Impairment, and Other of the Notes to Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q.

Business separation costs were $23 million for the three months ended March 29, 2024, primarily reflecting outside service fees to support the planned separation of our Flash and HDD businesses. Business separation costs were $59 million for the nine months ended March 29, 2024 primarily reflecting the charges similar to those noted for the three months ended March 29, 2024, as well as $33 million of charges incurred earlier in the year for stamp duties associated with establishing new legal entities to support the planned separation of our Flash and HDD businesses.

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Interest and Other Expense

Total interest and other expense, net increased $39 million for the three months ended March 29, 2024 from the comparable period in the prior year, primarily reflecting $28 million of higher interest expense resulting from increases in interest rates and a higher outstanding debt balance. Total interest and other expense, net increased $49 million for the nine months ended March 29, 2024 from the comparable period in the prior year, primarily reflecting $91 million of higher interest expense resulting from increases in interest rates and the higher outstanding debt balance, partially offset by higher other income, net, of $27 million, driven primarily by a net gain on our strategic investments, and $15 million of higher interest income due to higher interest rates.

Income Tax Expense

The Tax Cuts and Jobs Act (the “2017 Act”) includes a broad range of tax reform proposals affecting businesses. We completed our accounting for the tax effects of the enactment of the 2017 Act during the second quarter of fiscal 2019. However, the U.S. Treasury and the IRS have issued tax guidance on certain provisions of the 2017 Act since the enactment date, and we anticipate the issuance of additional regulatory and interpretive guidance. We applied a reasonable interpretation of the 2017 Act along with the then-available guidance in finalizing our accounting for the tax effects of the 2017 Act. Any additional regulatory or interpretive guidance would constitute new information, which may require further refinements to our estimates in future periods.

On August 16, 2022, President Biden signed into law the Inflation Reduction Act of 2022, which contained significant legal changes related to tax, climate, energy, and health care. The tax measures include, among other things, a corporate alternative minimum tax (“CAMT”) of 15% on corporations with three-year average annual adjusted financial statement income (“AFSI”) exceeding $1.0 billion. The CAMT is effective for us beginning with fiscal year 2024. We are not subject to the CAMT of 15% for fiscal year 2024 as our annual average AFSI did not exceed $1.0 billion for the preceding three-year period.

The following table sets forth Income tax information from our Condensed Consolidated Statements of Operations by dollar and effective tax rate:


	Three Months Ended				Nine Months Ended
	March 29, 2024		March 31, 2023		March 29, 2024		March 31, 2023
	$ in millions
Income (loss) before taxes	$	178	$	(528)	$	(763)	$	(816)
Income tax expense	43		43		74		159
Effective tax rate	24%		(8)%		(10)%		(19)%

Beginning in 2023, the 2017 Act has required us to capitalize and amortize R&D expenses rather than expensing them in the year incurred. The tax effects related to the capitalization of R&D expenses are included in the effective tax rate for the three and nine months ended March 29, 2024, and March 31, 2023, but did not have a material impact on our effective tax rate. The primary drivers of the difference between the effective tax rate for the three and nine months ended March 29, 2024 and the U.S. Federal statutory rate of 21% are the relative mix of earnings and losses by jurisdiction, the deduction for foreign-derived intangible income, credits, and tax holidays in Malaysia, the Philippines and Thailand that have or will expire at various dates during fiscal years 2024 through 2031. On November 1, 2023, one of our tax holidays in Malaysia expired. We have applied for an extension and anticipate it will apply retroactively and begin on November 2, 2023. Because the exact terms of the extension are not currently known, we are applying the Malaysia corporate statutory tax rate on the expired tax holiday income. If a retroactive extension is granted, we will make an adjustment to our effective tax rate in that period. The effective tax rate for the three and nine months ended March 29, 2024 includes the discrete effect of a net increase of $35 million and $48 million, respectively, to the liability for unrecognized tax benefits, which includes interest and offsetting tax benefits, related to transfer pricing matters, withholding taxes and certain tax deductions. This is offset in part by a net decrease of $7 million and $34 million, respectively, to the liability for unrecognized tax benefits for the three and nine months ended March 29, 2024, which includes interest and offsetting tax benefits, as a result of adjustments to align with IRS calculations.

The primary drivers of the difference between the effective tax rate for the three and nine months ended March 31, 2023 and the U.S. Federal statutory rate of 21% were the relative mix of earnings and losses by jurisdiction, the deduction for foreign derived intangible income, credits, and tax holidays in Malaysia, the Philippines and Thailand.

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Our future effective tax rate is subject to future regulatory developments and changes in the mix of our U.S. earnings compared to foreign earnings. The 2017 Act requires us to capitalize and amortize R&D expenses rather than expensing them in the year incurred. As described above, these capitalized expenses are included in our effective tax rate for the three and nine months ended March 29, 2024, but did not have a material impact on the effective tax rate in those periods due to our reduced profitability. Mandatory capitalization of R&D is expected to materially increase our effective tax rate and taxes paid in future periods, if not repealed or otherwise modified. In addition, our total tax expense in future years may also vary as a result of discrete items such as excess tax benefits or deficiencies.

For additional information regarding Income tax expense, 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.

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Liquidity and Capital Resources

The following table summarizes our statements of cash flows:



	Nine Months Ended
	March 29, 2024		March 31, 2023
	(in millions)
Net cash provided by (used in):
Operating activities	$	(660)	$	(340)
Investing activities	31		(620)
Financing activities	506		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) adopted, modified or terminated 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”:

•Michael Ray, a former Executive Vice President, Chief Legal Officer and Secretary of the Company who left the Company effective January 12, 2024, terminated a Rule 10b5-1 Plan on February 23, 2024.

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

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Western Digital (WDC) 10-Q2024 Q3 Quarterly report

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