Sandisk Corp 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations The following discussion and analysis contains forward-looking statements within the meaning of the federal securities laws and should be read in conjunction with the disclosures we make concerning risks and other factors that may affect our business and operating results. You should read this information in conjunction with the unaudited Condensed Consolidated Financial Statements and the notes thereto included in this Quarterly Report on Form 10-Q and the audited Combined Financial Statements and notes thereto for the fiscal year ended June 28, 2024, included in our Registration Statement on Form 10, filed with the United States (“U.S.”) Securities and Exchange Commission (“SEC”) on November 25, 2024, and as further amended thereafter and declared effective on January 31, 2025 (as amended, the “Form 10”). See also “Forward-Looking Statements” immediately prior to Part I, Item 1 in this Quarterly Report on Form 10-Q. Unless otherwise indicated, references herein to specific years and quarters are to our fiscal years and fiscal quarters. As used herein, the terms “we,” “us,” “our,” and the “Company” refer to Sandisk Corporation and its subsidiaries. Overview The Company is a leading developer, manufacturer and provider of data storage devices and solutions based on NAND flash technology. With a differentiated innovation engine driving advancements in storage and semiconductor technologies, our broad and ever-expanding portfolio delivers powerful flash storage solutions for everyone from students, gamers and home offices to the largest enterprises and public clouds to capture, preserve, access, and transform an ever-increasing diversity of data. Our solutions include a broad range of solid-state drives (“SSD”), embedded products, removable cards, universal serial bus drives and wafers and components. Our broad portfolio of technology and products addresses multiple end markets of “Cloud,” “Client,” and “Consumer.” Through the Client end market, we provide our original equipment manufacturer (“OEM”) and channel customers a broad array of high-performance flash solutions across personal computer, mobile, gaming, automotive, virtual reality headsets, at-home entertainment, and industrial spaces. The Consumer end market is highlighted by our broad range of retail and other end-user products, which capitalize on the strength of our product brand recognition and vast points of presence around the world. The Cloud end market is comprised primarily of products for public or private cloud environments and end customers. Our fiscal year ends on the Friday nearest to June 30 and typically consists of 52 weeks. Approximately every five to six years, we report a 53-week fiscal year to align the fiscal year with the foregoing policy. Fiscal year 2025, which will end on June 27, 2025, and fiscal year 2024, which ended on June 28, 2024, are each comprised of 52 weeks, with all quarters presented consisting of 13 weeks. Separation of Business Units On October 30, 2023, Western Digital Corporation (“WDC”) announced that its board of directors (the “WDC Board of Directors”) authorized management to pursue a plan to separate the Company into an independent public company. The separation received final approval by the WDC Board of Directors and was completed on February 21, 2025. Prior to February 21, 2025, the Company was wholly owned by WDC. On February 21, 2025, WDC executed the spin-off of the Company through WDC’s pro rata distribution of 80.1% of the outstanding shares of common stock of the Company to holders of WDC’s common stock. Each WDC stockholder received one-third (1/3) of one share of the Company’s common stock for each share of WDC’s common stock held by such WDC stockholder as of February 12, 2025, the record date of the distribution. Upon completion of the separation, WDC owned 19.9% of the outstanding shares of the Company’s common stock, which WDC is expected to retain for a period of up to twelve months following the distribution. Following the distribution, the Company became an independent publicly listed company, and on February 24, 2025, the Company began trading as an independent publicly traded company under the stock symbol “SNDK” on Nasdaq. SanDisk Semiconductor (Shanghai) Co. Ltd. (“SDSS”) As discussed in Part I, Item 1, Note 10, Related Parties and Related Commitments and Contingencies of the Notes to the Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q, on September 28, 2024, prior to the separation, WDC’s wholly-owned subsidiary, SanDisk China Limited (“SanDisk China”) completed the sale of 80% of its equity interest in SDSS to JCET Management Co., Ltd. (“JCET”), a wholly-owned subsidiary of JCET Group Co., Ltd., a Chinese publicly listed company, thereby forming a venture between SanDisk China and JCET (the “SDSS Venture”). The transaction resulted in a pre-tax gain of $34 million. 33 Table of Contents Subsequent to, and in connection with, the sale of SDSS, the Company entered into a five-year supply agreement with SDSS to purchase certain flash-based products with a minimum annual commitment of $550 million. As a result of this transaction, we expect to incur a modest reduction in annual operating expenses and a reduction in annual capital expenditures related to the assembly and testing of flash-based products. We also anticipate that the transition to a contract manufacturing model through SDSS will result in a small increase in our annual cost of revenue for flash-based products. Sale-Leaseback In September 2023, WDC completed a sale and leaseback of its facility in Milpitas, California, and received net proceeds of $191 million in cash. A substantial majority of these assets are associated with the Company, and as a result, $134 million of the net proceeds from the sale-leaseback transaction were allocated to us on a relative square footage basis. The property is being leased back to the Company at a total annual rate of $16 million for the first year and increasing by 3% per year thereafter through January 1, 2039. The lease includes three five-year renewal options and one four-year renewal option for the ability to extend through December 2057. The associated operating lease liability and right-of-use asset for this facility has been included in the Condensed Consolidated Balance Sheets as of March 28, 2025 and June 28, 2024. This facility is utilized in the Company’s operations, and the total lease expense has been allocated to the Company based on the continued usage of the facility. Goodwill Impairment As discussed in Part I, Item 1, Note 5, Supplemental Financial Statement Data of the Notes to the Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q, subsequent to the separation, the Company performed a quantitative analysis of potential impairment of goodwill and long-lived assets, in accordance with Accounting Standards Codification (“ASC”) No. 350, Intangibles - Goodwill and Other. That analysis indicated that the estimated carrying value of our reporting unit exceeded its fair value. As a result, the Company has recorded a goodwill impairment charge of $1.8 billion for the three months ended March 28, 2025 . Financing Activities Prior to the separation, the Company received financing from certain of WDC’s subsidiaries in the form of borrowings under revolving credit agreements and promissory notes to fund activities primarily related to Flash Ventures. Additional information regarding our outstanding notes due to (from) Western Digital Corporation is included in Part 1, Item 1, Note 9, Related Parties and Related Commitments and Contingencies of the Notes to Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q. As discussed in Part I, Item 1, Note 8, Debt of the Notes to the Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q, on February 21, 2025, the Company entered into a loan agreement comprised of a seven-year Term Loan B facility in an aggregate principal amount of $2 billion (the “Term Loan Facility”) and a five-year revolving credit facility (the “Revolving Credit Facility”) in an aggregate principal amount of $1.5 billion with $150 million for letters of credit. On February 21, 2025, the Company borrowed $2 billion under its Term Loan Facility. The Company used a portion of the proceeds of the borrowing to make a net distribution payment of $1.5 billion to WDC , with the remainder to be used for general corporate purposes of the Company. The proceeds of the Revolving Credit Facility may be used by the Company for working capital and general corpor ate purposes. As of March 28, 2025 , the Company has drawn no amounts under the Revolving Credit Facility. Operational Update During the first half of 2024, macroeconomic factors such as inflation, changes in interest rates, and recession concerns softened demand of our products. As a result, we and our industry experienced a supply-demand imbalance, which resulted in reduced shipments and negatively impacted pricing during those periods. To adapt to these conditions, we implemented measures to reduce operating expenses and proactively manage supply and inventory to align with demand and improve our capital efficiency while continuing to deploy innovative products. These actions enabled us to scale back on capital expenditures, consolidate production lines, and reduce production, which resulted in incremental charges for employee termination and charges for unabsorbed manufacturing overhead costs due to the underutilization of facilities as we temporarily scaled back production. 34 Table of Contents In the first half of fiscal 2025, we saw an improvement in the supply and demand dynamic, leading to improved revenues. The increase in demand resulted in increased revenue and gross margin in the first and second quarter of fiscal 2025 from the comparable period in the prior year. Recently, we have been experiencing what we believe is a mid-cycle slowdown. During the third quarter of fiscal year 2025, we incurred charges for unabsorbed manufacturing overhead costs due to reduced utilization of our manufacturing capacity totaling $24 million, and we anticipate to incur additional charges as we moderate production levels to align with demand for our products in the remainder of fiscal 2025. Additionally, the United States has recently announced changes to U.S. trade policy, including increased tariffs on imported goods. Currently, the majority of our products sold in the U.S. are exempt from tariffs, but additional tariff increases or the loss of applicable exemptions would increase the cost of goods sold for our products sold in the U.S., which could negatively impact our margins and financial performance. Increases in the price of our products in response to increased costs may adversely impact demand for those products in the U.S., which could also negatively impact our performance and financial results. Future trade policies and regulations in the U.S. and other countries, the terms of any trade arrangements that may be negotiated between the U.S. and other countries, the scope, amount, or duration of tariffs that may be imposed by any country, and the impact of these factors on our business are uncertain and may contribute to increased costs and reduced demand for our products, each of which could harm our financial performance. With regard to technological advances, we anticipate that digital transformation, including the artificial intelligence data-cycle, will drive improved market conditions in the long term for our data storage products. We will continue to actively monitor developments impacting our business and may take additional responsive actions that we determine to be in the best interest of our business and stakeholders. Basis of Presentation On February 21, 2025, the Company became a standalone publicly traded company, and its financial statements are now presented on a consolidated basis. Prior to the separation, the Company’s historical combined financial statements were derived from WDC’s consolidated financial statements and accounting records and prepared as if the Company existed on a standalone basis. The financial statements for all periods presented, including the historical results of the Company prior to February 21, 2025, are now referred to as “Consolidated Financial Statements” and have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”). The following discussion reflects the Company’s financial condition and results of operations as set forth in the unaudited Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q. The unaudited Condensed Consolidated Statements of Operations include all revenues and costs directly attributable to the Company, including costs for facilities, functions, and services used by the Company. Prior to the separation, the Company’s business had historically functioned together with the other businesses controlled by WDC. Accordingly, the Company relied on WDC’s corporate overhead and other support functions for its business. Therefore, certain corporate overhead and shared costs were allocated to the Company including (i) certain general and administrative expenses related to WDC’s support functions that are provided on a centralized basis within WDC (e.g., expenses for corporate facilities, executive oversight, treasury, finance, legal, human resources, compliance, information technology, employee benefit plans, stock compensation plans and other corporate functions), and (ii) certain operations support costs incurred by WDC, including product sourcing, maintenance and support services, and other supply chain functions. These expenses were specifically identified, when possible, or allocated based on revenues, headcount, usage or other allocation methods that are considered to be a reasonable reflection of the utilization of services provided or benefit received. While management considers that such allocations were made on a reasonable basis consistent with benefits received, the Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q may not be indicative of our future performance, do not necessarily include the actual expenses that would have been incurred by us and may not reflect our results of operations, financial position, and cash flows had we been a separate, standalone company during the periods presented. For additional information, see Part I, Item 1, Note 1, Organization and Basis of Presentation of the Notes to Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q. 35 Table of Contents Results of Operations Overview The following table sets forth, for the periods presented, selected summary information from our Condensed Consolidated Statements of Operations by dollars and percentage of net revenue (1) : Three Months Ended March 28, 2025 March 29, 2024 $ Change % Change (in millions, except percentages) Revenue, net $ 1,695 100.0 % $ 1,705 100.0 % $ (10) (1) % Cost of revenue 1,313 77.5 1,242 72.8 71 6 % Gross profit 382 22.5 463 27.2 (81) (18) % Operating expenses: Research and development 285 16.8 277 16.2 8 3 Selling, general and administrative 139 8.2 107 6.3 32 30 Goodwill impairment 1,830 108.0 — — 1,830 n/a Business separation costs 9 0.5 12 0.7 (3) (25) Employee termination and other — — 2 0.1 (2) (100) Total operating expenses 2,263 133.5 398 23.3 1,865 469 Operating income (loss) (1,881) (111.0) 65 3.9 (1,946) (2994) Interest and other expense: Interest income 6 0.4 3 0.2 3 100 Interest expense (16) (0.9) (9) (0.5) (7) (78) Other expense, net (10) (0.6) (5) (0.3) (5) (100) Total interest and other expense, net (20) (1.1) (11) (0.6) (9) (82) Income (loss) before taxes (1,901) (112.1) 54 3.3 (1,955) (3620) Income tax expense 32 1.9 27 1.6 5 19 Net income (loss) $ (1,933) (114.0) $ 27 1.7 $ (1,960) (7,259) % 36 Table of Contents Nine Months Ended March 28, 2025 March 29, 2024 $ Change % Change (in millions, except percentages) Revenue, net $ 5,454 100.0 % $ 4,903 100.0 % $ 551 11 % Cost of revenue 3,740 68.6 4,467 91.1 (727) (16) Gross profit 1,714 31.4 436 8.9 1,278 293 Operating expenses: Research and development 847 15.5 763 15.6 84 11 Selling, general and administrative 411 7.5 338 6.9 73 22 Goodwill impairment 1,830 33.6 — — 1,830 n/a Business separation costs 50 0.9 46 0.9 4 9 Employee termination and other 5 0.1 (44) (0.9) 49 111 Gain on business divestiture (34) (0.6) — — (34) n/a Total operating expenses 3,109 57.0 1,103 22.5 2,006 182 Operating income (loss) (1,395) (25.6) (667) (13.6) (728) (109) Interest and other expense: Interest income 11 0.2 9 0.2 2 22 Interest expense (22) (0.4) (31) (0.6) 9 29 Other expense, net (55) (1.0) (11) (0.2) (44) (400) Total interest and other expense, net (66) (1.2) (33) (0.6) (33) (100) Income (loss) before taxes (1,461) (26.8) (700) (14.2) (761) (109) Income tax expense 157 2.9 92 1.9 65 71 Net income (loss) $ (1,618) (29.7) $ (792) (16.1) $ (826) (104) % (1) Percentage may not total due to rounding. The following table sets forth, for the periods presented, summary information regarding our disaggregated revenue: Three Months Ended Nine Months Ended March 28, 2025 March 29, 2024 March 28, 2025 March 29, 2024 (in millions) Revenue by end market: Cloud $ 197 $ 97 $ 747 $ 155 Client 927 1,035 3,024 3,002 Consumer 571 573 1,683 1,746 Total revenue $ 1,695 $ 1,705 $ 5,454 $ 4,903 Revenue by geography: Asia $ 1,038 $ 1,140 $ 3,274 $ 3,313 Americas 375 272 1,207 759 Europe, Middle East and Africa 282 293 973 831 Total revenue $ 1,695 $ 1,705 $ 5,454 $ 4,903 The Company’s broad portfolio of technology and products addresses multiple end markets. Cloud represents a large and growing end market comprised primarily of products for public or private cloud environments and enterprise customers. Through the Client end market, the Company provides its OEM and channel customers a broad array of high-performance flash 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. 37 Table of Contents Net Revenue Net revenue decreased 1% in the three months ended March 28, 2025 from the comparable period in the prior year, primarily due to an 11% decrease in average selling prices (“ASP”) per gigabyte due to pricing pressure caused by market oversupply, partially offset by a 13% increase in exabytes sold due to stronger demand in our Cloud end market. Net revenue increased 11% in the nine months ended March 28, 2025 from the comparable period in the prior year, primarily due to a 12% increase in ASP per gigabyte due to improved pricing as the supply-demand balance improved, partially offset by a 1% decrease in exabytes sold due to softer demand in the Client and Consumer end markets . Cloud revenue increased 103% in the three months ended March 28, 2025 from the comparable period in the prior year , primarily due to a 75% increase in exabytes sold due to increased enterprise SSD shipments to data center customers and a 16% increase in ASP per gigabyte due to improved pricing. Cloud revenue increased 382% in the nine months ended March 28, 2025 from the comparable period in the prior year, primarily due to a 256% increase in exabytes sold and a 26% increase in ASP per gigabyte. Client revenue decreased 10% in the three months ended March 28, 2025 from the comparable period in the prior year, primarily due to a 13% decrease in ASP per gigab yte due to pricing pressure, partially offset by a 5% increase in exabytes sold, primarily due to increased shipments to gaming customers . Cli ent revenue increased 1% in the nine months ended March 28, 2025 from the comparable period in the prior year primarily due to a 17% increase in ASP per gigabyte due to improved pricing, partially offset by a 15% decrease in exabytes sold mostly due to a decrease in demand. Consumer revenue remained flat in the three months ended March 28, 2025 compared to the comparable period in the prior year, primarily due to a 15% increase in exabytes sold, offset by a 15% decrease in ASP per gigabyte due to pricing pressure. Consumer revenue decreased 4% in the nine months ended March 28, 2025 from the comparable period in the prior year, primarily due to a 4% decrease in ASP per gigabyte and 1% decrease in exabytes sold. The changes in net revenue by geography in the three and nine months ended March 28, 2025 from the comparable period in the prior year primarily reflected higher revenue in the Asia region from Client customers. Consistent with standard industry practice, we offer sales incentive and marketing programs that provide customers with price protection and other incentives or reimbursements that are recorded as a reduction to gross revenue. For the three months ended March 28, 2025 and March 29, 2024, these programs represented 19% and 16%, respectively, of gross revenues. For the nine months ended March 28, 2025 and March 29, 2024, these programs represented 19% and 21%, respectively, of gross revenues. The amounts attributed to our sales incentive and marketing programs generally vary according to several factors, including industry conditions, list pricing strategies, seasonal demand, competitor actions, channel mix and overall availability of products. Changes in future customer demand and market conditions may require us to adjust our incentive programs as a percentage of gross revenue. Gross Profit and Gross Margin Gross profit decreased $81 million for the three months ended March 28, 2025 from the comparable period in the prior year, primarily due to a decrease in revenue due to lower ASP, a $29 million increase in start-up costs related to the construction of our K2 facility, and a $24 millio n charge as a result of the reduced utilization of our manufacturing capacity not incurred in the comparable period in the prior year. Gross profit increased $1,278 million for the nine months ended March 28, 2025 from the comparable period in the prior year, primarily due to improved pricing, a favorable product mix, and a decrease in manufacturing underutilization charges incurred in the three months ended March 28, 2025 compared to the comparable prior year period, partially offset by a $36 million insurance recoveries received in the nine months ended March 29, 2024 for losses incurred due to a contamination incident in 2022. In the nine months ended March 29, 2024, we recognized a $249 million charge as a result of the reduced utilization of our manufacturing capacity as compared to an underutilization charge of $24 million incurred in the three months ended March 28, 2025. Gross profit margin decreased by 5% for the three months ended March 28, 2025 from the comparable period in the prior year, primarily due to a decline in revenue and a charge as a result of the reduced utilization of our manufacturing capacity for which a similar charge was not incurred in the comparable period in the prior year. Gross profit margin increased by 23% for the nine months ended March 28, 2025 from the comparable period in the prior year, primarily due to improved pricing, a favorable product mix, and a prior year charge as a result of the reduced utilization of our manufacturing capacity . 38 Table of Contents Operating Expenses Research and development (“R&D”) expenses increased $8 million in the three months ended March 28, 2025 from the comparable period in the prior year, primarily due to a $4 million increase in material purchases and a $4 million increase in spending for R&D projects as we continue to invest in innovation. R&D expenses increased $84 million in the nine months ended March 28, 2025 from the comparable period in the prior year, primarily due to a $46 million increase in compensation and benefits due to higher variable compensation, including short-term incentives, which were not incurred in the comparable period in the prior year, and increased headcount, a $20 million increase in material purchases, a $13 million increase in spending for R&D projects, and a $5 million increase in Flash Venture R&D commitments as we continue to invest in innovation. Selling, general and administrative expenses increased $32 million in the three months ended March 28, 2025 from the comparable period in the prior year, primarily due to a $25 million increase in compensation and benefits mainly due to higher headcount and higher variable compensation, including short-term incentives and separation bonuses, and a $8 million increase in rent expense, primarily due to new leases entered in connection with the separation from WDC . Selling, general and administrative expenses increased $73 million in the nine months ended March 28, 2025 from the comparable period in the prior year, primarily due to a $52 million increase in compensation and benefits due to higher variable compensation, including short-term incentives, which were not incurred in the comparable period in the prior year, and increased headcount, a $24 million increase in legal and outside service fees, a $9 million increase in sales and marketing expenses, a $8 million increase in rent expense, primarily due to new leases entered in connection with the separation from WDC, partially offset by a $20 million decrease in strategic review costs. Employee termination and other charges decreased $2 million in the three months ended March 28, 2025 from the comparable period in the prior year, as there were no restructuring actions taken in the current period. Employee termination and other charges increased $49 million in the nine months ended March 28, 2025 from the comparable period in the prior year, primarily due to a $60 million gain on the sale-leaseback of a facility in the prior period, partially offset by a $11 million decrease in employee termination costs as a result of fewer restructuring actions taken in the current period. For additional information regarding employee termination and other charges, see Part I, Item 1, Note 15, Employee Termination and Other Charges of the Notes to Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q, Goodwill impairment Goodwill impairment increased $1.8 billion in the three and nine months ended March 28, 2025 from the comparable period in the prior year due to an impairment charge resulting from the difference between the carrying value of our reporting unit and its fair value. Business separation costs Business separation costs decreased $3 million in the three months ended March 28, 2025 from the comparable period in the prior year, primarily due to completion of the separation from WDC. Business separation costs increased $4 million in the nine months ended March 28, 2025 from the comparable period in the prior year, primary due to an increase in outside service fees to support the execution of the separation from WDC. Gain on business divestiture Gain on business divestiture increased $34 million in the nine months ended March 28, 2025 from the comparable period in the prior year due to the pre-tax gain on the sale of SDSS. Interest and Other Expense, net Interest and other expense, net increased $9 million in the three months ended March 28, 2025 from the comparable period in the prior year , primarily due to a $15 million increase in interest expense from our Term Loan Facility and a $3 million increase in losses on our equity investments, partially offset by a $7 million decrease in interest expense on borrowings due to WDC and a $2 million increase in interest income arising from the accretion of the present value discount on the outstanding SDSS consideration receivable. 39 Table of Contents Interest and other expense, net increased $33 million in the nine months ended March 28, 2025 from the comparable period in the prior year, primarily due to a $26 million increase in foreign exchange losses, a $23 million increase in losses on our equity investments, and a $15 million increase in interest expense from our Term Loan Facility, partially offset by a $21 million decrease in interest expense on borrowings due to WDC, a $6 million increase in interest income arising from the accretion of the present value discount on the outstanding SDSS consideration receivable and a $5 million increase in other income due to an increase in available cash. Income Tax Expense On August 16, 2022, the Inflation Reduction Act of 2022 was signed into law, which contained significant changes to laws 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. We do not expect to be subject to the CAMT of 15% for fiscal year 2025 as our average annual AFSI did not exceed $1.0 billion for the preceding three-year period. On December 20, 2021, the Organization for Economic Co-operation and Development G20 Inclusive Framework on Base Erosion and Profit Shifting released Model Global Anti-Base Erosion rules under Pillar Two (“Pillar Two”). Several non-U.S. jurisdictions have either enacted legislation or announced their intention to enact future legislation to adopt certain or all components of Pillar Two, some of which are effective for the Company in fiscal year 2025. For fiscal year 2025, we currently expect to be able to meet certain transitional safe harbors and do not expect any material Pillar Two taxes. As more jurisdictions adopt this legislation in fiscal year 2026, there may be material increases in our future tax obligations in certain jurisdictions. The following table presents the Company’s Income tax expense and the effective tax rate: Three Months Ended Nine Months Ended March 28, 2025 March 29, 2024 March 28, 2025 March 29, 2024 (in millions) Income (loss) before taxes $ (1,901) $ 54 $ (1,461) $ (700) Income tax expense 32 27 157 92 Effective tax rate (2) % 50 % (11) % (13) % The relative mix of earnings and losses by jurisdiction, the goodwill impairment, the deduction for foreign-derived intangible income, credits and tax holidays in Malaysia that will expire at various dates during years 2028 through 2031 resulted in decreases to the effective tax rate below the U.S. statutory rate for the three and nine months ended March 28, 2025. For additional information regarding income tax expense, see Part I, Item 1, Note 14, Income Tax Expense of the Notes to the Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q. Financial condition, liquidity and capital resources The following table summarizes our Condensed Consolidated Statements of Cash Flows of March 28, 2025 and March 29, 2024: Nine Months Ended March 28, 2025 March 29, 2024 (in millions) Net cash provided by (used in): Operating activities $ (10) $ (179) Investing activities 573 213 Financing activities 620 51 Effect of exchange rate changes on cash (4) — Net increase in cash and cash equivalents $ 1,179 $ 85 As noted previously, we have been scaling back on capital expenditures, consolidating production lines and reducing bit growth to align with market demand . We continue to be cautious in our capital investment and expect our cash capital expenditures in fiscal 2025 to be higher than in fiscal 2024, but remain below our fiscal 2023 expenditures. We believe our cash and cash equivalents will be sufficient to meet our working capital needs for at least the next twelve months and for the foreseeable future thereafter. We believe we can also access the various capital markets to further supplement our liquidity position if necessary. Our ability to sustain our working capital position is subject to a number of risks that we discuss under the heading “Risk Factors” included in the Form 10. 40 Table of Contents A total of $1.1 billion and $321 million of our cash and cash equivalents were held outside of the U.S. as of March 28, 2025 and June 28, 2024 respectively. There are no material tax consequences that were not previously accrued for the repatriation of this cash. Operating Activities Net cash used in operating activities primarily consists of net income or loss, adjusted for non-cash charges, plus or minus changes in operating assets and liabilities. Net cash used as a result of changes in operating assets and liabilities was $436 million in the nine months ended March 28, 2025, as compared to $267 million net cash provided in the nine months ended March 29, 2024, reflecting an increase in the volume of our business, as discussed above. Changes in our operating assets and liabilities are largely affected by our working capital requirements, which are dependent on the volume of our business and the effective management of our cash conversion cycle as well as timing of payments for taxes. Our cash conversion cycle measures how quickly we can convert our products into cash through sales. The cash conversion cycles were as follows (in days): Three Months Ended March 28, 2025 March 29, 2024 Days sales outstanding 53 43 Days in inventory 150 127 Days payable outstanding (53) (51) Cash conversion cycle 150 119 Changes in days sales outstanding, or DSO, are generally due to the timing of shipments. Changes in days in inventory, or DIO, are generally related to the timing of inventory builds. Changes in days payables outstanding, or DPO, are generally related to production volume and the timing of purchases during the period. From time to time, we modify the timing of payments to our vendors. We make modifications primarily to manage our vendor relationships and to manage our cash flows, including our cash balances. Generally, we make payment term modifications through negotiations with our vendors or by granting to, or receiving from, our vendors’ payment term accommodations. For the three months ended March 28, 2025, DSO increased 10 days over the three months ended March 29, 2024, reflecting lower accounts receivable factoring and the timing of shipments and customer collections. During the three months ended March 28, 2025, DIO increased 23 days over the three months ended March 29, 2024, primarily reflecting lower consumption of inventory in the current period. DPO increased 2 days over the comparable period in the prior year, primarily due to routine variations in the timing of purchases and payments during the period. Investing Activities Net cash provided by investing activities in the nine months ended March 28, 2025 primarily consisted of $401 million in net proceeds from our sale of a majority interest in one of our subsidiaries and $330 million in net proceeds from activity related to Flash Ventures, partially offset by $159 million in capital expenditures. Net cash provided by investing activities in the nine months ended March 29, 2024 primarily consisted of $134 million of proceeds from the sale-leaseback of our Milpitas, California facility and $207 million in net proceeds from activity related to Flash Ventures, partially offset by $128 million in capital expenditures. Financing Activities Net cash provided by financing activities in the nine months ended March 28, 2025 primarily consisted of $1,970 million in proceeds from borrowings from the Term Loan Facility, $550 million proceeds from borrowings on notes due to WDC, and $101 million proceeds from principal repayments on notes due from WDC, partially offset by $1,887 million transferred to WDC, $76 million in net repayments on notes due to WDC and $32 million debt issuance discount. Net cash provided by financing activities in the nine months ended March 29, 2024 primarily consisted of $340 million net transfers from WDC, partially offset by $187 million in origination of notes due from WDC and $102 million in net repayments on notes due to WDC. 41 Table of Contents Off-Balance Sheet Arrangements Other than the Flash Ventures and SDSS-related commitments incurred in the normal course of business and certain indemnification provisions (see “Short-and-Long-term Liquidity - Purchase Obligations and Other Commitments” below), we do not have any other material off-balance sheet financing arrangements or liabilities, guarantee contracts, retained or contingent interests in transferred assets, or any other obligations arising out of a material variable interest in an unconsolidated entity. We do not have any majority-owned subsidiaries that are not included in the Condensed Consolidated Financial Statements. Additionally, with the exception of Flash Ventures, the SDSS Venture and the Unis Venture, we do not have an interest in, or relationships with, any variable interest entities. For additional information regarding our off-balance sheet arrangements, see Part I, Item I, Note 10, Related Parties and Related Commitments and Contingencies of the Notes to the Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q. Short-and-Long-term Liquidity Material Cash Requirements as of March 28, 2025 The following is a summary of our known material cash requirements, including those for capital expenditures, as of March 28, 2025: Total Remaining three months of 2025 2-3 Years (2026-2027) 4-5 Years (2028-2029) More than 5 Years (Beyond 2029) (in millions) Long-term debt, including current portion (1) $ 2,000 $ 5 $ 40 $ 40 $ 1,915 Interest on debt 989 37 296 284 372 Flash Ventures related commitments (2) 4,592 940 2,606 877 169 Operating leases 335 9 72 52 202 Purchase obligations and other commitments 2,781 26 955 1,140 660 Total $ 10,697 $ 1,017 $ 3,969 $ 2,393 $ 3,318 (1) Principal portion of debt, excluding issuance costs. (2) Includes reimbursement for depreciation and lease payments on owned and committed equipment, funding commitments for loans and equity investments and payments for other committed expenses, including research and development and building depreciation. Funding commitments assume no additional operating lease guarantees. Additional operating lease guarantees can reduce funding commitments. Debt In connection with the separation, on February 21, 2025 , the Company entered into a loan agreement comprised of a $1.5 billion revolving credit facility, which was undrawn at the separation date, and a $2 billion term loan facility due in 2032. The Company used a portion of the proceeds received from the term loan facility, as well as cash on hand, to make a net distribution payment of $1.5 billion t o WDC in exchange for assets, liabilities and certain legal entities of WDC associated with the Company. As of March 28, 2025 , the Company was in compliance with the loan agreement financial covenant that requires the Company to maintain a maximum Leverage Ratio. Additional information regarding our indebtedness, including information about availability under our revolving credit facility and the principal repayment terms, interest rates, covenants, collateral and other key terms of our outstanding indebtedness, is included in Part I, Item I Note 8, Debt of the Notes to Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q. Flash Ventures Flash Ventures sells to, and leases back from, a consortium of financial institutions a portion of its tools and has entered into equipment lease agreements, of which we guarantee half or all of the outstanding obligations under each lease agreement. The leases are subject to customary covenants and cancellation events that relate to Flash Ventures and each of the guarantors. The occurrence of a cancellation event could result in an acceleration of the lease obligations and a call on our guarantees. As of March 28, 2025, and as of June 28, 2024, we were in compliance with all covenants under these Japanese lease facilities. See Part I, Item 1, Note 10, Related Parties and Related Commitments and Contingencies of the Notes to the Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q for information regarding Flash Ventures. 42 Table of Contents Purchase Obligations and Other Commitments In the normal course of business, we enter into purchase orders with suppliers for the purchase of components used to manufacture our products. These purchase orders generally cover forecasted component supplies needed for production during the next quarter, are recorded as a liability upon receipt of the components, and generally may be changed or canceled at any time prior to shipment of the components. We also enter into long-term agreements with suppliers that contain fixed future commitments, which are contingent on certain conditions such as performance, quality and technology of the vendor’s components. These arrangements are included under “Purchase obligations and other commitments” in the table above. Unrecognized Tax Benefits As of March 28, 2025, our liability for unrecognized tax benefits (excluding accrued interest and penalties) was approximately $127 million. Accrued interest and penalties included in the Company’s liability related to unrecognized tax benefits as of March 28, 2025 and June 28, 2024 was $4 million and $9 million, respectively. Of these amounts, approximately $131 million could result in potential cash payments. Foreign Exchange Contracts We purchase foreign exchange contracts to hedge the impact of foreign currency fluctuations on certain underlying assets, liabilities and commitments for operating expenses and product costs denominated in foreign currencies. See Part I, Item 3, Quantitative and Qualitative Disclosures About Market Risk included in this Quarterly Report on Form 10-Q for additional information. Indemnifications Concurrent with the separation, the Company and WDC entered into a Tax Matters Agreement under which the Company and WDC agreed to indemnify each other for 50% of certain tax positions. As a result of this agreement, the Company recorded a tax indemnification liability of $112 million on February 21, 2025, which was recognized as an adjustment to the Net investment from Western Digital Corporation. This liability was subsequently reduced by approximately $2 million, reflecting the outstanding balance as of March 28, 2025. The remaining tax indemnification liability of $110 million is classified as Other liabilities in the Condensed Consolidated Balance Sheets as of March 28, 2025. In the ordinary course of business, we may provide indemnifications of varying scope and terms to customers, vendors, lessors, business partners, and other parties with respect to certain matters, including, but not limited to, losses arising out of our breach of agreements, products or services to be provided by us, environmental compliance, or intellectual property infringement claims made by third parties. In addition, we have entered into indemnification agreements with our directors and certain of our officers that will require us, among other things, to indemnify them against certain liabilities that may arise by reason of their status or service as directors or officers. We maintain director and officer insurance, which may cover certain liabilities arising from our obligation to indemnify our directors and officers in certain circumstances. It is not possible to determine the maximum potential amount under these indemnification agreements due to the limited history of prior indemnification claims and the unique facts and circumstances involved in each particular agreement. Such indemnification agreements may not be subject to maximum loss clauses. Historically, we have not incurred material costs as a result of obligations under these agreements. Recent Accounting Pronouncements For a description of recently issued and adopted accounting pronouncements, including the respective dates of adoption and expected effects on our results of operations and financial condition, see Part I, Item 1, Note 2, Recent Accounting Pronouncements of the Notes to Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q. Critical Accounting Estimates We have prepared the accompanying unaudited Condensed Consolidated Financial Statements in accordance with accounting principles generally accepted in the United States. The preparation of the financial statements requires the use of judgments and estimates that affect the reported amounts of revenues, expenses, assets, and liabilities. We have adopted accounting policies and practices that are generally accepted in the industry in which we operate. If these estimates differ significantly from actual results, the impact to the Condensed Consolidated Financial Statements may be material. Except as discussed below, there have been no material changes in our critical accounting policies and estimates from those disclosed in our Registration Statement on Form 10, filed with the Securities and Exchange Commission for the year ended June 28, 2024. 43 Table of Contents Goodwill and Other Long-Lived Assets Goodwill attributed to the Company represents the amount by which the purchase price of businesses acquired in a business combination exceeded the estimated fair value of acquired net assets. 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 assessment to determine the amount of impairment. The Company is required to use judgment when assessing goodwill for impairment, including evaluating the impact of industry and macroeconomic conditions and the determination of the fair value of the reporting unit. In addition, the estimates and assumptions used to determine the fair value as well as the 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 and assumptions could materially affect the Company’s assessment of the fair value and goodwill impairment. In addition, if negative macroeconomic conditions continue or worsen, goodwill could become impaired, which could result in an impairment charge and materially adversely affect the Company’s financial condition and results of operations. Subsequent to the completion of the separation, the Company identified potential impairment indicators related to macroeconomic indicators, industry developments, the trading price of the Company’s common stock and resulting market capitalization that warranted a quantitative impairment analysis of long-lived assets and goodwill. Subsequently, the Company performed a quantitative test, which indicated that the carrying value of our reporting unit exceeded its estimated fair value, resulting in the recognition of a $1.8 billion impairment charge as of, and for the period ended, March 28, 2025, which was recorded in the accompanying Condensed Consolidated Statements of Operations. The tests for goodwill and long-lived asset impairment are further explained in Part I, Item 1, Note 5, Supplemental Financial Statement Data of the Notes to Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q. Determining the fair value used in our impairment calculations involves using significant estimates and assumptions, including revenue forecasts, terminal growth rate, tax rate, and a weighted average cost of capital adjusted for company-specific risk. These estimates and assumptions are based on the most current information available to the Company, and there is no assurance that these estimates and assumptions will accurately predict future outcomes. If our assumptions are not realized, or if any of these assumptions change due to changes in economic conditions, the Company’s results of operations, or other factors, it is possible that an additional impairment charge may be recorded. 44 Table of Contents