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 31, 2023

Or

☐ 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 26, 2023, 319,937,433 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 31, 2023 and July 1, 2022	5
	Condensed Consolidated Statements of Operations — Three and Nine Months Ended March 31, 2023 and April 1, 2022	6
	Condensed Consolidated Statements of Comprehensive Income (Loss) — Three and Nine Months Ended March 31, 2023 and April 1, 2022	7
	Condensed Consolidated Statements of Cash Flows — Nine Months Ended March 31, 2023 and April 1, 2022	8
	Condensed Consolidated Statements of Convertible Preferred Stock and Shareholders' Equity — Nine Months Ended March 31, 2023 and April 1, 2022	9
	Notes to Condensed Consolidated Financial Statements	11
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	39
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	53
Item 4.	Controls and Procedures	53
PART II. OTHER INFORMATION
Item 1.	Legal Proceedings	54
Item 1A.	Risk Factors	54
Item 6.	Exhibits	56

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.

3

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 the impact of the network security incident; the global macroeconomic environment; expectations regarding supply chain conditions and constraints; expectations regarding demand trends and market conditions for our products and expected future financial performance; expectations regarding our product momentum and product development and technology plans; expectations regarding capital expenditure plans and investments, including relating to our Flash Ventures joint venture with Kioxia Corporation (“Kioxia”), and sources of funding for those expenditures; expectations regarding our effective tax rate and our unrecognized tax benefits; and our beliefs regarding the sufficiency of our available liquidity 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 in the forward-looking statements. These risks and uncertainties include, but are not limited to:

•volatility in global economic conditions;

•future responses to and effects of the COVID-19 pandemic or other similar global health crises;

•impact of business and market conditions;

•the outcome and impact of our ongoing strategic review, including with respect to customer and supplier relationships, regulatory and contractual restrictions, stock price volatility and the diversion of management’s attention from ongoing business operations and opportunities;

•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;

•difficulties or delays in manufacturing or other supply chain disruptions;

•hiring and retention of key employees;

•our level of debt and other financial obligations;

•changes to our relationships with key customers;

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

•actions by competitors;

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

•the other risks and uncertainties disclosed in Part I, Item 1A of our Annual Report on Form 10-K for the year ended July 1, 2022 (the “2022 Annual Report on Form 10-K”).

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 2022 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 2022 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.

4

PART I. FINANCIAL INFORMATION

Item 1.    Financial Statements (unaudited)

WESTERN DIGITAL CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(in millions, except par value)

(Unaudited)

	March 31, 2023		July 1, 2022
ASSETS
Current assets:
Cash and cash equivalents	$	2,220	$	2,327
Accounts receivable, net	1,591		2,804
Inventories	3,979		3,638
Other current assets	693		684
Total current assets	8,483		9,453
Property, plant and equipment, net	3,668		3,670
Notes receivable and investments in Flash Ventures	1,379		1,396
Goodwill	10,041		10,041
Other intangible assets, net	97		213
Other non-current assets	1,483		1,486
Total assets	$	25,151	$	26,259
LIABILITIES, CONVERTIBLE PREFERRED STOCK AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	1,307	$	1,902
Accounts payable to related parties	265		320
Accrued expenses	1,158		1,636
Income taxes payable	1,013		869
Accrued compensation	343		510
Current portion of long-term debt	1,175		—
Total current liabilities	5,261		5,237
Long-term debt	5,898		7,022
Other liabilities	1,505		1,779
Total liabilities	12,664		14,038
Commitments and contingencies (Notes 10, 11, 13 and 16)
Convertible preferred stock, $0.01 par value; authorized — 5 shares; issued and outstanding — 0.9 shares and 0 shares, respectively	876		—
Shareholders’ equity:
Common stock, $0.01 par value; authorized — 450 shares; issued and outstanding — 320 shares and 315 shares, respectively	3		3
Additional paid-in capital	3,831		3,733
Accumulated other comprehensive loss	(362)		(554)
Retained earnings	8,139		9,039
Total shareholders’ equity	11,611		12,221
Total liabilities, convertible preferred stock and shareholders’ equity	$	25,151	$	26,259

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

5

WESTERN DIGITAL CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in millions, except per share amounts)

(Unaudited)

	Three Months Ended				Nine Months Ended
	March 31, 2023		April 1, 2022		March 31, 2023		April 1, 2022
Revenue, net	$	2,803	$	4,381	$	9,646	$	14,265
Cost of revenue	2,517		3,200		7,851		9,836
Gross profit	286		1,181		1,795		4,429
Operating expenses:
Research and development	476		572		1,551		1,725
Selling, general and administrative	242		281		739		851
Employee termination, asset impairment, and other charges	40		4		140		24
Total operating expenses	758		857		2,430		2,600
Operating income (loss)	(472)		324		(635)		1,829
Interest and other income (expense):
Interest income	10		1		15		4
Interest expense	(80)		(75)		(223)		(229)
Other income, net	13		12		13		8
Total interest and other expense, net	(57)		(62)		(195)		(217)
Income (loss) before taxes	(529)		262		(830)		1,612
Income tax expense	43		237		161		413
Net income (loss)	(572)		25		(991)		1,199
Less: cumulative dividends allocated to preferred shareholders	9		—		9		—
Net income (loss) attributable to common shareholders	$	(581)	$	25	$	(1,000)	$	1,199
Income (loss) per common share:
Basic	$	(1.82)	$	0.08	$	(3.14)	$	3.84
Diluted	$	(1.82)	$	0.08	$	(3.14)	$	3.79
Weighted average shares outstanding:
Basic	319		313		318		312
Diluted	319		316		318		316

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

6

WESTERN DIGITAL CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(in millions)

(Unaudited)

	Three Months Ended				Nine Months Ended
	March 31, 2023		April 1, 2022		March 31, 2023		April 1, 2022
Net income (loss)	$	(572)	$	25	$	(991)	$	1,199
Other comprehensive income (loss), before tax:
Actuarial pension gain (loss)	(1)		1		(1)		2
Foreign currency translation adjustment	(7)		(82)		8		(123)
Net unrealized gain (loss) on derivative contracts and available-for-sale securities	21		(74)		233		(51)
Total other comprehensive income (loss), before tax	13		(155)		240		(172)
Income tax benefit (expense) related to items of other comprehensive income (loss), before tax	(6)		15		(48)		12
Other comprehensive income (loss), net of tax	7		(140)		192		(160)
Total comprehensive income (loss)	$	(565)	$	(115)	$	(799)	$	1,039

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

7

WESTERN DIGITAL CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in millions)

(Unaudited)

	Nine Months Ended
	March 31, 2023		April 1, 2022
Cash flows from operating activities
Net income (loss)	$	(991)	$	1,199
Adjustments to reconcile net income (loss) to net cash provided by operations:
Depreciation and amortization	643		708
Stock-based compensation	246		249
Deferred income taxes	34		41
Gain on disposal of assets	(7)		(14)
Non-cash portion of asset impairment	18		—
Amortization of debt issuance costs and discounts	9		34
Other non-cash operating activities, net	6		42
Changes in:
Accounts receivable, net	1,213		(96)
Inventories	(341)		(45)
Accounts payable	(442)		(100)
Accounts payable to related parties	(54)		(2)
Accrued expenses	(484)		2
Income taxes payable	144		(50)
Accrued compensation	(169)		(149)
Other assets and liabilities, net	(165)		(234)
Net cash (used in) provided by operating activities	(340)		1,585
Cash flows from investing activities
Purchases of property, plant and equipment	(702)		(842)
Proceeds from the sale of property, plant and equipment	14		13
Notes receivable issuances to Flash Ventures	(496)		(496)
Notes receivable proceeds from Flash Ventures	542		519
Strategic investments and other, net	22		(16)
Net cash used in investing activities	(620)		(822)
Cash flows from financing activities
Issuance of stock under employee stock plans	49		62
Taxes paid on vested stock awards under employee stock plans	(69)		(85)
Net proceeds from convertible preferred stock	882		—
Repayments of debt	(1,180)		(3,471)
Proceeds from debt	1,180		1,894
Debt issuance costs	(6)		(23)
Net cash provided by (used in) financing activities	856		(1,623)
Effect of exchange rate changes on cash	(3)		(5)
Net decrease in cash and cash equivalents	(107)		(865)
Cash and cash equivalents, beginning of year	2,327		3,370
Cash and cash equivalents, end of period	$	2,220	$	2,505
Supplemental disclosure of cash flow information:
Cash paid for income taxes	$	181	$	376
Cash paid for interest	$	252	$	221
Noncash exchange of TLA-1 notes for TLA-2 notes	$	—	$	2,104

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

8

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	$	(554)	$	9,039	$	12,221
Net income	—	—		—	—		—		—		27		27
Adoption of new accounting standards	—	—		—	—		(128)		—		91		(37)
Employee stock plans	—	—		3	—		(50)		—		—		(50)
Stock-based compensation	—	—		—	—		86		—		—		86
Foreign currency translation adjustment	—	—		—	—		—		(80)		—		(80)
Net unrealized loss on derivative contracts	—	—		—	—		—		(60)		—		(60)
Balance at September 30, 2022	—	—		318	3		3,641		(694)		9,157		12,107
Net loss	—	—		—	—		—		—		(446)		(446)
Employee stock plans	—	—		1	—		43		—		—		43
Stock-based compensation	—	—		—	—		86		—		—		86
Foreign currency translation adjustment	—	—		—	—		—		97		—		97
Net unrealized gain on derivative contracts	—	—		—	—		—		228		—		228
Balance at December 30, 2022	—	—		319	3		3,770		(369)		8,711		12,115
Net loss	—	—		—	—		—		—		(572)		(572)
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	—	—		—	—		—		(8)		—		(8)
Net unrealized gain on derivative contracts	—	—		—	—		—		16		—		16
Balance at March 31, 2023	1	$	876	320	$	3	$	3,831	$	(362)	$	8,139	$	11,611

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

9

WESTERN DIGITAL CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CONVERTIBLE PREFERRED STOCK AND SHAREHOLDERS’ EQUITY

(in millions)

(Unaudited)

	Common Stock			Treasury Stock			Additional Paid-In Capital		Accumulated Other Comprehensive Loss		Retained Earnings		Total Shareholders’ Equity
	Shares	Amount		Shares	Amount
Balance at July 2, 2021	312	$	3	(4)	$	(232)	$	3,608	$	(197)	$	7,539	$	10,721
Net income	—	—		—	—		—		—		610		610
Employee stock plans	—	—		3	207		(283)		—		—		(76)
Stock-based compensation	—	—		—	—		76		—		—		76
Actuarial pension gain	—	—		—	—		—		1		—		1
Foreign currency translation adjustment	—	—		—	—		—		4		—		4
Net unrealized gain on derivative contracts	—	—		—	—		—		25		—		25
Balance at October 1, 2021	312	3		(1)	(25)		3,401		(167)		8,149		11,361
Net income	—	—		—	—		—		—		564		564
Employee stock plans	1	—		1	25		31		—		—		56
Stock-based compensation	—	—		—	—		87		—		—		87
Foreign currency translation adjustment	—	—		—	—		—		(45)		—		(45)
Net unrealized loss on derivative contracts	—	—		—	—		—		(5)		—		(5)
Balance at December 31, 2021	313	3		—	—		3,519		(217)		8,713		12,018
Net income	—	—		—	—		—		—		25		25
Employee stock plans	—	—		—	—		(5)		—		—		(5)
Stock-based compensation	—	—		—	—		86		—		—		86
Actuarial pension gain	—	—		—	—		—		1		—		1
Foreign currency translation adjustment	—	—		—	—		—		(82)		—		(82)
Net unrealized gain on derivative contracts	—	—		—	—		—		(59)		—		(59)
Balance at April 1, 2022	313	$	3	—	$	—	$	3,600	$	(357)	$	8,738	$	11,984

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

10

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 flash-based products (“Flash”) and hard disk drives (“HDD”) technologies. With dedicated Flash and HDD business units driving advancements in storage technologies, the Company creates and drives innovations needed to help customers capture, preserve, access, and transform an ever-increasing diversity of data.

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 July 1, 2022. In the opinion of management, all adjustments necessary to fairly state the Condensed Consolidated Financial Statements have been made. All such adjustments are of a normal, recurring nature. 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 July 1, 2022. 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 years 2023, which ends on June 30, 2023, and 2022, which ended on July 1, 2022, 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 and HDD.

The Company’s Chief Operating Decision Maker (“CODM”) evaluates performance of the Company and makes decisions regarding 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 not available or reviewed by the CODM to evaluate the performance of or to allocate resources to the segments.

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.

Income (Loss) per Common Share

The Company computes net income (loss) per common share using a two-class method when shares are issued that meet the definition of participating securities. The two-class method determines net income (loss) per common share for each class of common stock and participating securities according to dividends declared or accumulated and participation rights in undistributed earnings. The two-class method requires undistributed earnings for the period to be allocated between common stock and participating securities based upon their respective rights to receive dividends as if all income for the period had been distributed. The Company’s convertible preferred stock contractually entitles the holders of such shares to participate in dividends but does not contractually require the holders of such shares to participate in the Company’s losses.

11

WESTERN DIGITAL CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 2.    Recent Accounting Pronouncements

Accounting Pronouncements Recently Adopted

In August 2020, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2020-06, “Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity” (“ASU 2020-06”). ASU 2020-06 reduces the number of accounting models for convertible debt instruments and convertible preferred stock and results in fewer instruments with embedded conversion features being separately recognized from the host contract as compared with prior standards. Those instruments that do not have a separately recognized embedded conversion feature will no longer recognize a debt issuance discount related to such a conversion feature and would recognize less interest expense on a periodic basis. Additionally, the ASU amends the calculation of the share dilution impact related to a conversion feature and eliminates the treasury method as an option. The Company adopted the new standard effective July 2, 2022, the first day of the year ending June 30, 2023, using the modified retrospective method. On the date of adoption, the Company recorded a reduction in Additional Paid-In Capital of $128 million, a reduction of unamortized debt discount of $48 million, a reduction of deferred income tax liabilities of $11 million, and an increase to retained earnings of $91 million for the after-tax impact of previously recognized amortization of the debt discount associated with the Company’s convertible senior notes.

In November 2021, the FASB issued ASU No. 2021-10, “Government Assistance (Topic 832): Disclosures by Business Entities about Government Assistance” (“ASU 2021-10”). ASU 2021-10 increases the transparency of government assistance received by requiring most business entities to disclose information about government assistance received, including (1) the types of assistance, (2) the entity’s accounting for the assistance, and (3) the effect of the assistance on an entity’s financial statements. This ASU is effective for fiscal years (and interim periods within those fiscal years) beginning after December 15, 2021, which for the Company is the first quarter of 2023. The Company adopted this ASU on July 2, 2022, the first day of the year ending June 30, 2023, and the adoption did not have a material impact on its Condensed Consolidated Financial Statements.

Recently Issued Accounting Pronouncements Not Yet Adopted

In September 2022, the FASB issued ASU No. 2022-04, “Liabilities-Supplier Finance Programs (Subtopic 405-50): Disclosure of Supplier Finance Program Obligations”. This guidance requires annual and interim disclosures for entities that use supplier finance programs in connection with the purchase of goods and services. The ASU is effective for fiscal years beginning after December 15, 2022, which for the Company is the first quarter of 2024, with early adoption permitted, except for the amendment on rollforward information, which is effective for fiscal years beginning after December 15, 2023. The Company is currently evaluating the extent of the impact of this ASU on its Condensed Consolidated Financial Statements.

12

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 31, 2023			April 1, 2022			March 31, 2023			April 1, 2022
	$ in millions
Net revenue:
Flash	$	1,307		$	2,243		$	4,686		$	7,353
HDD	1,496			2,138			4,960			6,912
Total net revenue	$	2,803		$	4,381		$	9,646		$	14,265
Gross profit:
Flash	$	(65)		$	798		$	597		$	2,665
HDD	363			592			1,237			2,061
Total gross profit for segments	298			1,390			1,834			4,726
Unallocated corporate items:
Stock-based compensation expense	(12)			(13)			(38)			(36)
Amortization of acquired intangible assets	—			—			(1)			(65)
Contamination related charges	—			(203)			—			(203)
Recoveries from a power outage incident	—			7			—			7
Total unallocated corporate items	(12)			(209)			(39)			(297)
Consolidated gross profit	$	286		$	1,181		$	1,795		$	4,429
Gross margin:
Flash	(5.0)		%	35.6		%	12.7		%	36.2		%
HDD	24.3		%	27.7		%	24.9		%	29.8		%
Consolidated gross margin	10.2		%	27.0		%	18.6		%	31.0		%

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, which the Company believes it is uniquely positioned to address as the only provider of both Flash and HDD. 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 31, 2023		April 1, 2022		March 31, 2023		April 1, 2022
	(in millions)
Revenue by End Market
Cloud	$	1,205	$	1,774	$	4,258	$	5,919
Client	975		1,732		3,293		5,439
Consumer	623		875		2,095		2,907
Total Revenue	$	2,803	$	4,381	$	9,646	$	14,265
Revenue by Geography
Asia	$	1,353	$	2,400	$	4,533	$	7,685
Americas	935		1,377		3,448		4,398
Europe, Middle East and Africa	515		604		1,665		2,182
Total Revenue	$	2,803	$	4,381	$	9,646	$	14,265

The Company’s top 10 customers accounted for 49% and 45% of its net revenue for the three and nine months ended March 31, 2023, respectively, and 44% and 43% of its net revenue for the three and nine months ended April 1, 2022, respectively. For the three and nine months ended March 31, 2023 and April 1, 2022, no single customer accounted for 10% or more of the Company’s net revenue.

Goodwill

The following table provides a summary of goodwill activity for the period:

	Flash		HDD		Total
	(in millions)
Balance at July 1, 2022	$	5,718	$	4,323	$	10,041
Foreign currency translation adjustment	—		—		—
Balance at March 31, 2023	$	5,718	$	4,323	$	10,041

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. The Company uses qualitative factors to determine whether goodwill is more-likely-than-not impaired and whether a quantitative test for impairment is considered necessary. If the Company concludes from the qualitative assessment that goodwill is more-likely-than-not-impaired, the Company is required to perform a quantitative approach to determine the amount of impairment.

As of December 30, 2022, management identified several continuing factors, including changes in macroeconomic conditions and recent declines of the Company’s market stock price, that warranted quantitative analyses of impairments for both the Flash and HDD reporting units as of such date. The fair value of each operating segment was based on a weighting of two valuation methodologies: an income approach and a market approach.

The income approach was based on the present value of the projected discounted cash flows (“DCF”) expected to be generated by the operating segment. Those projections required the use of significant estimates and assumptions specific to the reporting unit as well as those based on general economic conditions, which included, among other factors, revenue growth rates, gross margins, operating costs, capital expenditures, assumed tax rates and other assumptions deemed reasonable by management. The present value was based on applying a weighted average cost of capital (“WACC”) which considered long-term interest rates and cost of equity based on the Company’s risk profile.

14

WESTERN DIGITAL CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The market approach was based on a guideline company method, which analyzed market multiples of revenue and earnings before interest, taxes, depreciation and amortization (“EBITDA”) for a group of comparable public companies.

The Company reconciled the aggregated estimated fair value of both operating segments to the Company’s market capitalization, including consideration of a control premium representing the estimated amount a market participant would pay to obtain a controlling interest in the Company.

As of December 30, 2022, the fair value derived from those valuation methodologies exceeded the carrying value by 9% and 28% for Flash and HDD, respectively.

Management performed a goodwill impairment assessment for both reporting units as of the third quarter ended March 31, 2023. The assessment considered the continuing macroeconomic environment, industry conditions, reporting unit performance and revised forecasts, and determined there were no events or circumstances from prior quarter’s quantitative assessment that rise to a level that would more-likely-than-not reduce the fair value of the reporting units below their carrying value; therefore, no quantitative goodwill impairment analysis was performed. There were no impairment charges recorded for the three and nine months ended March 31, 2023.

The Company is required to use judgment when assessing goodwill for impairment, including evaluating the impact of industry and macroeconomic conditions, the determination of the fair value of each reporting unit and the assignment of assets and liabilities to reporting units. In addition, the estimates used to determine the fair value of reporting units as well as their actual carrying value may change based on future changes in the Company’s results of operations, macroeconomic conditions or other factors. Changes in these estimates could materially affect the Company’s assessment of the fair value and goodwill impairment. In addition, if negative macroeconomic conditions continue or worsen or the Company’s stock price decreases for a sustained period of time, goodwill could become impaired, which could result in an impairment charge and materially adversely affect the Company’s financial condition and results of operations.

15

WESTERN DIGITAL CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 4.    Revenues

Contract assets represent the Company’s rights to consideration where performance obligations are completed but the customer payments are not due until another performance obligation is satisfied. The Company did not have any contract assets as of either March 31, 2023 or July 1, 2022. Contract liabilities relate to customers’ payments in advance of performance under the contract and primarily relate to remaining performance obligations under professional service and support and maintenance contracts. Contract liabilities as of March 31, 2023 and July 1, 2022 and changes in contract liabilities for the nine months ended March 31, 2023 and April 1, 2022 were not material.

The Company incurs sales commissions and other direct incremental costs to obtain sales contracts. The Company has applied the practical expedient to recognize the direct incremental costs of obtaining contracts as an expense when incurred if the amortization period is expected to be one year or less or the amount is not material, with these costs charged to Selling, general and administrative expenses. The Company had no direct incremental costs to obtain contracts that have an expected benefit of greater than one year.

The Company applies the practical expedients and does not disclose transaction price allocated to the remaining performance obligations for (i) arrangements that have an original expected duration of one year or less, which mainly consist of the support and maintenance contracts, and (ii) variable consideration amounts for sale-based or usage-based royalties for intellectual property license arrangements, which typically range longer than one year. Remaining performance obligations are mainly attributed to right-to-access patent license arrangements, professional service arrangements and customer support and service contracts which will be recognized over the remaining contract period. The transaction price allocated to the remaining performance obligations as of March 31, 2023 was not material.

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