Item 1. Financial Statements (unaudited)

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Item 1. Financial Statements (unaudited)

WESTERN DIGITAL CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(in millions, except par value)

(Unaudited)


	December 29, 2023		June 30, 2023
ASSETS
Current assets:
Cash and cash equivalents	$	2,481	$	2,023
Accounts receivable, net	1,523		1,598
Inventories	3,216		3,698
Other current assets	618		567
Total current assets	7,838		7,886
Property, plant and equipment, net	3,315		3,620
Notes receivable and investments in Flash Ventures	1,344		1,410
Goodwill	10,037		10,037
Other intangible assets, net	79		80
Other non-current assets	1,772		1,513
Total assets	$	24,385	$	24,546
LIABILITIES, CONVERTIBLE PREFERRED STOCK AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	1,504	$	1,293
Accounts payable to related parties	251		292
Accrued expenses	1,037		1,288
Income taxes payable	506		999
Accrued compensation	353		349
Current portion of long-term debt	1,042		1,213
Total current liabilities	4,693		5,434
Long-term debt	7,351		5,857
Other liabilities	1,397		1,415
Total liabilities	13,441		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 $953 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	3,957		3,936
Accumulated other comprehensive loss	(493)		(548)
Retained earnings	6,601		7,573
Total shareholders’ equity	10,068		10,964
Total liabilities, convertible preferred stock and shareholders’ equity	$	24,385	$	24,546

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

WESTERN DIGITAL CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in millions, except per share amounts)

(Unaudited)


	Three Months Ended				Six Months Ended
	December 29, 2023		December 30, 2022		December 29, 2023		December 30, 2022
Revenue, net	$	3,032	$	3,107	$	5,782	$	6,843
Cost of revenue	2,540		2,579		5,191		5,334
Gross profit	492		528		591		1,509
Operating expenses:
Research and development	444		523		875		1,075
Selling, general and administrative	198		250		405		497
Employee termination, asset impairment, and other	24		76		81		100
Business separation costs	36		—		36		—
Total operating expenses	702		849		1,397		1,672
Operating loss	(210)		(321)		(806)		(163)
Interest and other expense:
Interest income	12		3		20		5
Interest expense	(108)		(73)		(206)		(143)
Other income, net	47		10		51		13
Total interest and other expense, net	(49)		(60)		(135)		(125)
Loss before taxes	(259)		(381)		(941)		(288)
Income tax expense	28		70		31		116
Net loss	(287)		(451)		(972)		(404)
Less: cumulative dividends allocated to preferred shareholders	14		—		29		—

Net loss attributable to common shareholders	$	(301)	$	(451)	$	(1,001)	$	(404)

Net loss per common share:
Basic	$	(0.93)	$	(1.42)	$	(3.09)	$	(1.27)
Diluted	$	(0.93)	$	(1.42)	$	(3.09)	$	(1.27)

Weighted average shares outstanding:
Basic	325		318		324		317
Diluted	325		318		324		317

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

WESTERN DIGITAL CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(in millions)

(Unaudited)


	Three Months Ended				Six Months Ended
	December 29, 2023		December 30, 2022		December 29, 2023		December 30, 2022
Net loss	$	(287)	$	(451)	$	(972)	$	(404)
Other comprehensive income, before tax:

Foreign currency translation adjustment	58		106		20		19


Net unrealized gain on derivative contracts	99		288		41		212
Total other comprehensive income, before tax	157		394		61		231
Income tax expense related to items of other comprehensive income, before tax	(19)		(49)		(6)		(33)
Other comprehensive income, net of tax	138		345		55		198
Total comprehensive loss	$	(149)	$	(106)	$	(917)	$	(206)

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

WESTERN DIGITAL CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in millions)

(Unaudited)


	Six Months Ended
	December 29, 2023		December 30, 2022
Cash flows from operating activities
Net loss	$	(972)	$	(404)
Adjustments to reconcile net loss to net cash provided by (used in) operations:
Depreciation and amortization	290		430
Stock-based compensation	149		172
Deferred income taxes	(68)		21
Loss (Gain) on disposal of assets	(87)		1
Non-cash portion of asset impairment	95		15
Gain on repurchases of debt	(4)		—
Amortization of debt issuance costs and discounts	9		5

Other non-cash operating activities, net	(28)		56
Changes in:
Accounts receivable, net	75		899
Inventories	482		(135)
Accounts payable	299		(521)
Accounts payable to related parties	(41)		49
Accrued expenses	(246)		(226)
Income taxes payable	(494)		156
Accrued compensation	4		(162)
Other assets and liabilities, net	(181)		(315)
Net cash provided by (used in) operating activities	(718)		41
Cash flows from investing activities
Purchases of property, plant and equipment	(274)		(578)
Proceeds from the sale of property, plant and equipment	193		—




Proceeds from dispositions of business	—		7
Notes receivable issuances to Flash Ventures	(184)		(235)
Notes receivable proceeds from Flash Ventures	263		317
Strategic investments and other, net	26		7
Net cash provided by (used in) investing activities	24		(482)
Cash flows from financing activities
Issuance of stock under employee stock plans	40		48
Taxes paid on vested stock awards under employee stock plans	(50)		(55)
Net proceeds from convertible preferred stock	(5)		—



Purchase of capped calls	(155)		—
Repurchases of debt	(505)		—
Repayments of debt	(338)		(1,180)
Proceeds from debt	2,200		1,180
Debt issuance costs	(36)		(5)

Net cash provided by (used in) financing activities	1,151		(12)
Effect of exchange rate changes on cash	1		(3)
Net increase (decrease) in cash and cash equivalents	458		(456)
Cash and cash equivalents, beginning of year	2,023		2,327
Cash and cash equivalents, end of period	$	2,481	$	1,871
Supplemental disclosure of cash flow information:
Cash paid for income taxes	$	791	$	192
Cash paid for interest	$	182	$	138

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

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

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

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

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

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 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 HDD and Flash 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.

WESTERN DIGITAL CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Revision of Previously Issued Financial Statements

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, the “Flash Ventures”). The 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 the 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 current period would be material to the Company's results of operations for the three and six months ended December 29, 2023. Accordingly, the Company has revised previously reported financial information for such immaterial errors. A summary of revisions to previously reported financial information presented herein for comparative purposes is included in Note 17, Revision of Previously Issued Financial Statements.

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.

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						Six Months Ended
	December 29, 2023			December 30, 2022			December 29, 2023			December 30, 2022
	$ in millions
Net revenue:
Flash	$	1,665		$	1,657		$	3,221		$	3,379
HDD	1,367			1,450			2,561			3,464
Total net revenue	$	3,032		$	3,107		$	5,782		$	6,843
Gross profit:
Flash	$	131		$	240		$	(30)		$	662
HDD	339			300			612			874
Total gross profit for segments	470			540			582			1,536
Unallocated corporate items:
Stock-based compensation expense	(13)			(12)			(26)			(26)
Amortization of acquired intangible assets	(1)			—			(1)			(1)
Recovery from contamination incident	36			—			36			—



Total unallocated corporate items	22			(12)			9			(27)
Consolidated gross profit	$	492		$	528		$	591		$	1,509
Gross margin:
Flash	7.9		%	14.5		%	(0.9)		%	19.6		%
HDD	24.8		%	20.7		%	23.9		%	25.2		%

Consolidated gross margin	16.2		%	17.0		%	10.2		%	22.1		%

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.

WESTERN DIGITAL CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The Company’s disaggregated revenue information is as follows:



	Three Months Ended				Six Months Ended
	December 29, 2023		December 30, 2022		December 29, 2023		December 30, 2022
	(in millions)





Revenue by End Market
Cloud	$	1,071	$	1,224	$	1,943	$	3,053
Client	1,122		1,089		2,269		2,318
Consumer	839		794		1,570		1,472
Total Revenue	$	3,032	$	3,107	$	5,782	$	6,843

Revenue by Geography
Asia	$	1,699	$	1,494	$	3,250	$	3,180
Americas	804		1,090		1,466		2,513
Europe, Middle East and Africa	529		523		1,066		1,150
Total Revenue	$	3,032	$	3,107	$	5,782	$	6,843

The Company’s top 10 customers accounted for 39% of its net revenue for each of the three and six months ended December 29, 2023 and 47% and 48% of its net revenue for the three and six months ended December 30, 2022, respectively. For the three and six months ended December 29, 2023 and December 30, 2022, 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	1		(1)		—

Balance at December 29, 2023	$	5,717	$	4,320	$	10,037

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 six months ended December 29, 2023 and December 30, 2022, the Company sold trade accounts receivable aggregating $392 million and $391 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 December 29, 2023 and June 30, 2023, the amount of factored receivables that remained outstanding was $115 million and $150 million, respectively.

Inventories


	December 29, 2023		June 30, 2023
	(in millions)
Inventories:
Raw materials and component parts	$	1,692	$	2,096
Work-in-process	966		979
Finished goods	558		623
Total inventories	$	3,216	$	3,698

Property, plant and equipment, net


	December 29, 2023		June 30, 2023
	(in millions)
Property, plant and equipment:
Land	$	235	$	269
Buildings and improvements	1,828		1,955
Machinery and equipment	8,684		8,704
Computer equipment and software	472		470
Furniture and fixtures	55		54
Construction-in-process	771		798
Property, plant and equipment, gross	12,045		12,250
Accumulated depreciation	(8,730)		(8,630)
Property, plant and equipment, net	$	3,315	$	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 December 29, 2023 and June 30, 2023, IPR&D included in intangible assets, net was $72 million and $80 million, respectively.

WESTERN DIGITAL CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Product warranty liability

Changes in the warranty accrual were as follows:


	Three Months Ended				Six Months Ended
	December 29, 2023		December 30, 2022		December 29, 2023		December 30, 2022
	(in millions)
Warranty accrual, beginning of period	$	218	$	340	$	244	$	345

Charges to operations	26		25		48		57
Utilization	(40)		(60)		(83)		(94)
Changes in estimate related to pre-existing warranties	(2)		(16)		(7)		(19)
Warranty accrual, end of period	$	202	$	289	$	202	$	289

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:


	December 29, 2023		June 30, 2023
	(in millions)
Warranty accrual:
Current portion (included in Accrued expenses)	$	50	$	97
Long-term portion (included in Other liabilities)	152		147
Total warranty accrual	$	202	$	244

Other liabilities


	December 29, 2023		June 30, 2023
	(in millions)
Other liabilities:
Non-current net tax payable	$	199	$	464
Non-current portion of unrecognized tax benefits	501		408
Other non-current liabilities	697		543
Total other liabilities	$	1,397	$	1,415

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	—		20		(35)		(15)
Amounts reclassified from accumulated other comprehensive loss	—		—		76		76
Income tax expense related to items of other comprehensive loss	—		1		(7)		(6)
Net current-period other comprehensive loss	—		21		34		55
Balance at December 29, 2023	$	(2)	$	(368)	$	(123)	$	(493)

During the three and six months ended December 29, 2023, 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 December 29, 2023, 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 December 29, 2023, the Company did not have any foreign exchange forward contracts with credit-risk-related contingent features.

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 December 29, 2023 and June 30, 2023, and indicate the fair value hierarchy of the valuation techniques utilized to determine such values:


	December 29, 2023
	Level 1		Level 2		Level 3		Total
	(in millions)
Assets:

Cash equivalents - Money market funds	$	568	$	—	$	—	$	568


















Foreign exchange contracts	—		39		—		39


Total assets at fair value	$	568	$	39	$	—	$	607
Liabilities:
Foreign exchange contracts	$	—	$	87	$	—	$	87


Total liabilities at fair value	$	—	$	87	$	—	$	87


	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.

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 second quarter of 2024 and the fourth quarter of 2023, respectively.


	December 29, 2023				June 30, 2023
	Carrying Value		Fair Value		Carrying Value		Fair Value
	(in millions)
1.50% convertible notes due 2024	$	592	$	589	$	1,099	$	1,067
Variable interest rate Delayed Draw Term Loan due 2024	300		301		—		—
4.75% senior unsecured notes due 2026	2,295		2,257		2,293		2,193
Variable interest rate Term Loan A-2 maturing 2027	2,651		2,583		2,687		2,661
3.00% convertible notes due 2028	1,564		1,960		—		—
2.85% senior notes due 2029	496		430		496		400
3.10% senior notes due 2032	495		399		495		371
Total	$	8,393	$	8,519	$	7,070	$	6,692

WESTERN DIGITAL CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 6. Derivative Instruments and Hedging Activities

As of December 29, 2023, 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 December 29, 2023, 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 six months ended December 29, 2023 and December 30, 2022, 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 December 29, 2023 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.

WESTERN DIGITAL CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 7. Debt

Debt consisted of the following:


	December 29, 2023		June 30, 2023
	(in millions)













1.50% convertible notes due 2024	$	592	$	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	2,662		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	8,454		7,100
Issuance costs	(61)		(30)
Subtotal	8,393		7,070
Less current portion of long-term debt	(1,042)		(1,213)
Long-term debt	$	7,351	$	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 quarter ended December 29, 2023.

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 December 29, 2023 was 7.582%.

During the three months ended December 29, 2023, the Company made a $38 million scheduled repayment of the Term Loan A-2. 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 December 29, 2023 was 6.966%.

The loan agreements governing the Company’s 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, a minimum liquidity and a free cash flow requirement. As of December 29, 2023, the Company was in compliance with these financial covenants.

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.).

WESTERN DIGITAL CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The 2028 Convertible Notes are convertible at an initial conversion price of approximately $52.20 per share of common stock. Prior to August 15, 2028, the 2028 Convertible Notes are convertible only upon the occurrence of certain events and during certain periods. Upon any conversion of the 2028 Convertible Notes, the Company will pay cash up to 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. As of December 29, 2023, unamortized debt issuance costs were $36 million.

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 December 29, 2023.

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.

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:


	December 29, 2023		June 30, 2023
	(in millions)











Benefit obligation at end of period	$	273	$	273









Fair value of plan assets at end of period	188		185
Unfunded status	$	85	$	88

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


	December 29, 2023		June 30, 2023
	(in millions)
Current liabilities	$	1	$	1
Non-current liabilities	84		87
Net amount recognized	$	85	$	88

Net periodic benefit costs were not material for the three and six months ended December 29, 2023.

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:


	December 29, 2023		June 30, 2023
	(in millions)
Notes receivable, Flash Partners	$	9	$	37
Notes receivable, Flash Alliance	28		48
Notes receivable, Flash Forward	689		709
Investment in Flash Partners	168		161
Investment in Flash Alliance	279		276
Investment in Flash Forward	171		179
Total notes receivable and investments in Flash Ventures	$	1,344	$	1,410

During the three and six months ended December 29, 2023 and December 30, 2022, the Company made net payments to Flash Ventures of $0.8 billion and $1.8 billion, and $1.0 billion and $2.0 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 December 29, 2023 and June 30, 2023, the Company had accounts payable balances due to Flash Ventures of $251 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 December 29, 2023, 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.


	December 29, 2023
	(in millions)
Notes receivable	$	726
Equity investments	618
Operating lease guarantees	1,609
Inventory and prepayments	1,058
Maximum estimable loss exposure	$	4,011

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, the Company temporarily reduced its utilization of its share of Flash Ventures’ manufacturing capacity to an abnormally low level to more closely align the Company’s flash-based wafer supply with projected demand. During the three and six months ended December 29, 2023, the Company incurred costs of $107 million and $249 million, respectively, 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 and six months ended December 30, 2022.

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 December 29, 2023, such prepayments aggregated $549 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 December 29, 2023.


	Lease Amounts
	(Japanese yen, in billions)		(U.S. dollar, in millions)
Total guarantee obligations	¥	228	$	1,609

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 December 29, 2023 in U.S. dollars, based upon the Japanese yen to U.S. dollar exchange rate as of December 29, 2023:


Annual Installments	Payment of Principal Amortization		Purchase Option Exercise Price at Final Lease Terms		Guarantee Amount
	(in millions)
Remaining six months of 2024	$	237	$	57	$	294
2025	300		84		384
2026	362		127		489
2027	150		108		258
2028	47		104		151
2029	3		30		33
Total guarantee obligations	$	1,099	$	510	$	1,609

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 December 29, 2023, 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 the three and six months ended December 29, 2023, the Company recognized approximately 4% and 3% of its consolidated revenue, respectively, on products distributed by the Unis Venture. For both the three and six months ended December 30, 2022, 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 8% of Accounts receivable, net as of both December 29, 2023 and June 30, 2023.

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 December 29, 2023:


	Lease Amounts
	($ in millions)
Minimum lease payments by year:
Remaining six months of 2024	$	34
2025	67
2026	68
2027	60
2028	51
Thereafter	330
Total future minimum lease payments	610
Less: Imputed interest	170
Present value of lease liabilities	440
Less: Current portion (included in Accrued expenses)	47
Long-term operating lease liabilities (included in Other liabilities )	$	393

Operating lease right-of-use assets (included in Other non-current assets)	$	418

Weighted average remaining lease term in years	10.2
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				Six Months Ended
	December 29, 2023		December 30, 2022		December 29, 2023		December 30, 2022
	(in millions)
Cost of operating leases	$	17	$	14	$	31	$	28
Cash paid for operating leases	17		12		32		26
Operating lease assets obtained in exchange for operating lease liabilities	9		—		177		4

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 December 29, 2023, the Company had the following minimum long-term commitments:


	Long-Term Commitments
	(in millions)
Year:
Remaining six months of 2024	$	148
2025	267
2026	73
2027	49
2028	20
Thereafter	130
Total	$	687

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				Six Months Ended
	December 29, 2023		December 30, 2022		December 29, 2023		December 30, 2022
	(in millions)

RSUs and PSUs	$	68	$	79	$	133	$	154
ESPP	4		7		16		18
Total	$	72	$	86	$	149	$	172


	Three Months Ended				Six Months Ended
	December 29, 2023		December 30, 2022		December 29, 2023		December 30, 2022
	(in millions)
Cost of revenue	$	13	$	12	$	26	$	26
Research and development	32		40		66		79
Selling, general and administrative	27		34		57		67

Subtotal	72		86		149		172
Tax benefit	(10)		(11)		(20)		(24)
Total	$	62	$	75	$	129	$	148

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 will generally be amortized on a straight-line basis over the remaining average service period. The following table presents the unamortized compensation cost and weighted average service period of all unvested outstanding awards as of December 29, 2023:


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

RSUs and PSUs (1)	$	516	2.6
ESPP	45		1.0
Total unamortized compensation cost	$	561

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

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 December 29, 2023, 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 December 29, 2023	—	$	—

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	5.6	38.04

Vested	(4.0)	47.65		$	173
Forfeited	(1.0)	46.58
RSUs and PSUs outstanding at December 29, 2023	14.4	$	43.56

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 December 29, 2023 and June 30, 2023, unpaid and cumulative dividends payable with respect to the Preferred Shares were $53 million and $24 million, respectively.

As of December 29, 2023 and June 30, 2023, the Preferred Shares outstanding had an aggregate liquidation preference of $953 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.

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						Six Months Ended
	December 29, 2023			December 30, 2022			December 29, 2023			December 30, 2022
	($ in millions)
Loss before taxes	$	(259)		$	(381)		$	(941)		$	(288)
Income tax expense	28			70			31			116
Effective tax rate	(11)		%	(18		%)	(3)		%	(40		%)

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 six months ended December 29, 2023, but did not have a material impact on the Company’s effective tax rate.

The primary drivers of the difference between the effective tax rate for the three and six months ended December 29, 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 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 six months ended December 29, 2023 includes the discrete effect of a net decrease of $30 million to the liability for unrecognized tax benefits, 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 six months ended December 30, 2022 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.

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 six months ended December 29, 2023 (in millions):


Accrual balance at June 30, 2023	$	1,021
Gross increases related to current year tax positions	4
Gross increases related to prior year tax positions	19
Gross decreases related to prior year tax positions	(3)
Settlements	(363)
Lapse of statute of limitations	(1)
Accrual balance at December 29, 2023	$	677

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 December 29, 2023 were $161 million. Of the aggregate unrecognized tax benefits, including interest and penalties, as of December 29, 2023, approximately $671 million could result in potential cash payments and the Company believes it is reasonably likely that payments of approximately $187 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 December 29, 2023. The remaining payables related to unrecognized tax benefits are included in Other liabilities on the Condensed Consolidated Balance Sheets as of December 29, 2023.

The Company reached a final agreement with the IRS regarding notices of deficiency with respect to years 2008 through 2012 and tentatively reached a basis for resolving the notices of proposed adjustments with respect to years 2013 through 2015. During the six months ended December 29, 2023, 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 $187 million as of December 29, 2023 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 $168 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 December 29, 2023, 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.

WESTERN DIGITAL CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 13. Net Loss Per Common Share

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


	Three Months Ended				Six Months Ended
	December 29, 2023		December 30, 2022			December 29, 2023		December 30, 2022
	(in millions, except per share data)
Net loss	$	(287)	$	(451)		$	(972)	$	(404)
Less: cumulative dividends on Preferred Stock	14		—			29		—

Net loss attributable to common shareholders	$	(301)	$	(451)		$	(1,001)	$	(404)


Weighted average shares outstanding:
Basic	325		318			324		317

Diluted	325		318			324		317
Net loss per common share
Basic	$	(0.93)	$	(1.42)		$	(3.09)	$	(1.27)
Diluted	$	(0.93)	$	(1.42)		$	(3.09)	$	(1.27)
Anti-dilutive potential common shares excluded	14		15			14		15

Basic net loss per share attributable to common shareholders is computed using (i) net loss less (ii) dividends paid to holders of Preferred Shares less (iii) net 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 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 and six months ended December 29, 2023 and December 30, 2022, 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.

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 six months ended December 29, 2023, the Company reassessed existing capacity development plans and made a decision to cancel certain projects to expand capacity in its Penang, Malaysia facility, resulting in the impairment of existing construction in progress 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				Six Months Ended
	December 29, 2023		December 30, 2022		December 29, 2023		December 30, 2022
	(in millions)




Employee termination benefits	$	24	$	61	$	43	$	85









Contract termination and other	—		—		29		—
Asset impairments	—		15		94		15

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


Total employee termination, asset impairment, and other charges	$	24	$	76	$	81	$	100

The following table presents an analysis of the components of these activities against the reserve during the six months ended December 29, 2023:


	Employee Termination Benefits		Contract Termination and Other		Total
	(in millions)
Accrual balance at June 30, 2023	$	31	$	5	$	36
Charges	43		29		72
Cash payments	(57)		(3)		(60)

Accrual balance at December 29, 2023	$	17	$	31	$	48

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 $36 million and $38 million as of December 29, 2023 and June 30, 2023, respectively, and are included within Accounts payable on the Company’s Condensed Consolidated Balance Sheets.

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.

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 the 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 December 30, 2022
Condensed Consolidated Statement of Operations	As Previously Reported		Adjustment		As Revised
	(in millions, except per share amounts)









Operating loss	$	(321)	$	—	$	(321)
Interest and other expense:
Interest income	3		—		3
Interest expense	(73)		—		(73)
Other income, net	6		4		10
Total interest and other expense, net	(64)		4		(60)
Loss before taxes	(385)		4		(381)
Income tax expense	61		9		70
Net loss	$	(446)	$	(5)	$	(451)

Net loss per common share:
Basic	$	(1.40)	$	(0.02)	$	(1.42)
Diluted	$	(1.40)	$	(0.02)	$	(1.42)


	Six Months Ended December 30, 2022
Condensed Consolidated Statement of Operations	As Previously Reported		Adjustment		As Revised
	(in millions, except per share amounts)








Operating loss	$	(163)	$	—	$	(163)
Interest and other expense:
Interest income	5		—		5
Interest expense	(143)		—		(143)
Other income, net	—		13		13
Total interest and other expense, net	(138)		13		(125)
Loss before taxes	(301)		13		(288)
Income tax expense	118		(2)		116
Net loss	$	(419)	$	15	$	(404)

Net loss per common share:
Basic	$	(1.32)	$	0.05	$	(1.27)
Diluted	$	(1.32)	$	0.05	$	(1.27)

WESTERN DIGITAL CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)


	Three Months Ended December 30, 2022
Condensed Consolidated Statement of Comprehensive Loss	As Previously Reported		Adjustment		As Revised
	(in millions)
Net loss	$	(446)	$	(5)	$	(451)
Other comprehensive income, before tax:

Foreign currency translation adjustment	95		11		106
Net unrealized gain on derivative contracts	288		—		288
Total other comprehensive income, before tax	383		11		394
Income tax expense related to items of other comprehensive income, before tax	(58)		9		(49)
Other comprehensive income, net of tax	325		20		345
Total comprehensive loss	$	(121)	$	15	$	(106)


	Six Months Ended December 30, 2022
Condensed Consolidated Statement of Comprehensive Loss	As Previously Reported		Adjustment		As Revised
	(in millions)
Net loss	$	(419)	$	15	$	(404)
Other comprehensive income, before tax:
Foreign currency translation adjustment	15		4		19
Net unrealized gain on derivative contracts	212		—		212
Total other comprehensive income, before tax	227		4		231
Income tax expense related to items of other comprehensive income, before tax	(42)		9		(33)
Other comprehensive income, net of tax	185		13		198
Total comprehensive loss	$	(234)	$	28	$	(206)


	Six Months Ended December 30, 2022
Condensed Consolidated Statement of Cash Flows	As Previously Reported		Adjustment		As Revised
	(in millions)
Cash flows from operating activities
Net loss	$	(419)	$	15	$	(404)



Deferred income taxes	25		(4)		21



Other non-cash operating activities, net	69		(13)		56








Other assets and liabilities, net	(317)		2		(315)
Net cash provided by operating activities	41		—		41

WESTERN DIGITAL CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)


Condensed Consolidated Statement of Shareholders’ Equity	As Previously Reported		Adjustment		As Revised
	(in millions)
Retained earnings as of:

July 1, 2022	$	9,039	$	127	$	9,166
December 30, 2022	8,711		142		8,853
Accumulated other comprehensive loss as of:
July 1, 2022	(554)		(25)		(579)
December 30, 2022	(369)		(12)		(381)
Foreign currency translation adjustment for the three months ended:
September 30, 2022	(80)		(7)		(87)
December 30, 2022	97		20		117


	As of June 30, 2023
Condensed Consolidated Balance Sheet	As Previously Reported		Adjustment		As Revised
	(in millions)








Notes receivable and investments in Flash Ventures	$	1,297	$	113	$	1,410


Other non-current assets	1,509		4		1,513
Total assets	24,429		117		24,546


















Accumulated other comprehensive loss	(516)		(32)		(548)
Retained earnings	7,424		149		7,573
Total shareholders’ equity	10,847		117		10,964
Total liabilities, convertible preferred stock and shareholders’ equity	24,429		117		24,546

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