What changed in this filing

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Item 8. Financial Statements and Supplementary Data

2021-08-27 compared with 2020-08-28 · 213 added, 355 removed, 1268 unchanged (31% of the section changed)

Financial Statements and Supplementary Data

Index to Financial Statements and Financial Statement Schedule

Index to Financial Statements

Consolidated Financial Statements:

Report of Independent Registered Public Accounting Firm 47

Consolidated Balance Sheets — As of July 3, 2020 and June 28, 2019 53

Consolidated Balance Sheets — As of July 2, 2021 and July 3, 2020 49

Consolidated Statements of Operations — Three Years Ended July 2, 2021 50

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Opinions on the Consolidated Financial Statements and Internal Control Over Financial Reporting

We have audited the accompanying consolidated balance sheets of Western Digital Corporation and subsidiaries (the Company) as of July 3, 2020 and June 28, 2019, the related consolidated statements of operations, comprehensive income (loss), cash flows, and shareholders’ equity for each of the years in the three-year period ended July 3, 2020, and the related notes (collectively, the consolidated financial statements).

We have audited the accompanying consolidated balance sheets of Western Digital Corporation and subsidiaries (the Company) as of July 2, 2021 and July 3, 2020, the related consolidated statements of operations, comprehensive income (loss), cash flows and shareholders’ equity for each of the years in the three-year period ended July 2, 2021, and the related notes (collectively, the consolidated financial statements).

We also have audited the Company’s internal control over financial reporting as of July 2, 2021, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of July 3, 2020 and June 28, 2019, and the results of its operations and its cash flows for each of the years in the three-year period ended July 3, 2020, in conformity with U.S.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of July 2, 2021 and July 3, 2020, and the results of its operations and its cash flows for each of the years in the three-year period ended July 2, 2021, in conformity with U.S.

generally accepted accounting principles.

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The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that:

(1) relates to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgment.

(1) relates to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments.

The communication of a critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.

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Evaluating the assumptions used by the Company to estimate the variable consideration, specifically anticipated price decreases based on historical pricing information, current pricing trends, and channel inventory levels during the expected reseller holding period, required a higher degree of auditor judgment due to the uncertainty involved in the estimate.

The primary procedures performed to address this critical audit matter include the following.

We tested certain internal controls over the Company’s process of determining the variable consideration, including controls related to the development of the assumption of anticipated price decreases during the reseller holding period.

The following are the primary procedures we performed to address this critical audit matter.

We evaluated the design and tested the operating effectiveness of certain internal controls related to the Company’s process of determining the variable consideration for sales to resellers, including controls related to the development of the assumption of anticipated price decreases during the reseller holding period.

We evaluated the Company’s ability to accurately estimate the assumptions used to determine the variable consideration by comparing historically recorded variable consideration to actual subsequent payments and credits.

We developed an expectation of the variable consideration for resellers based on historically recorded variable consideration and compared it to the actual variable consideration.

We developed an expectation of the variable consideration for resellers based on subsequent payments and credits issued and compared it to the actual variable consideration.

We developed an expectation of the variable consideration for resellers based on historically recorded variable consideration, subsequent payments and credits issued and then compared our expectation to the actual variable consideration recorded.

We have served as the Company’s auditor since 1970.

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(in millions, except par value)

2020 June 28,

Current assets:

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2020 June 28,

2019 June 29,

Revenue, net $ 16,922 $ 16,736 $ 16,569

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Interest expense ( 326 ) ( 413 ) ( 469 )

Other income (expense), net 4 38 ( 916 )

Other income, net 26 4 38

Total interest and other expense, net ( 293 ) ( 381 ) ( 374 )

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2020 June 28,

2019 June 29,

Net income (loss) $ 821 $ ( 250 ) $ ( 754 )

Other comprehensive income (loss), before tax:

Actuarial pension loss ( 1 ) ( 39 ) ( 2 )

Other comprehensive loss, before tax:

Actuarial pension gain (loss) 27 ( 1 ) ( 39 )

Foreign currency translation adjustment ( 36 ) ( 7 ) 28

Net unrealized gain (loss) on derivative contracts and available-for-sale securities ( 93 ) ( 39 ) 7

Total other comprehensive income (loss), before tax ( 101 ) ( 50 ) 23

Income tax benefit (expense) related to items of other comprehensive income (loss), before tax 12 21 ( 4 )

Other comprehensive income (loss), net of tax ( 89 ) ( 29 ) 19

Net unrealized loss on derivative contracts ( 33 ) ( 93 ) ( 39 )

Total other comprehensive loss, before tax ( 42 ) ( 101 ) ( 50 )

Income tax benefit related to items of other comprehensive loss, before tax 2 12 21

Other comprehensive loss, net of tax ( 40 ) ( 89 ) ( 29 )

Total comprehensive income (loss) $ 781 $ ( 339 ) $ ( 783 )

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2020 June 28,

2019 June 29,

Cash flows from operating activities

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Loss (gain) on disposal of assets ( 70 ) ( 7 ) 39

Non-cash portion of employee termination, asset impairment and other charges — — 16

Amortization of debt discounts 40 38 221

Cash premium on extinguishment of debt — — 720

Amortization of debt issuance costs and discounts 40 40 38

Other non-cash operating activities, net ( 6 ) 6 ( 8 )

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Dividends paid to shareholders — ( 595 ) ( 584 )

Settlement of debt hedge contracts — — 28

Repayment of government grants ( 9 ) — —

Repayment of debt ( 886 ) ( 982 ) ( 181 )

Proceeds from debt — — 13,840

Borrowings from (repayment of) revolving credit facility — ( 500 ) 500

Repayment of revolving credit facility — — ( 500 )

Debt issuance costs — — ( 4 )

1 unchanged sentence

Effect of exchange rate changes on cash 6 ( 1 ) 4

Net decrease in cash and cash equivalents ( 407 ) ( 1,550 ) ( 1,349 )

Net increase (decrease) in cash and cash equivalents 322 ( 407 ) ( 1,550 )

Cash and cash equivalents, beginning of year 3,048 3,455 5,005

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Balance at June 29, 2018 312 $ 3 ( 16 ) $ ( 1,444 ) $ 4,254 $ ( 39 ) $ 8,757 $ 11,531

Net income — — — — — — 675 675

Adoption of new accounting standards — — — — ( 19 ) — 70 51

Net loss — — — — — — ( 754 ) ( 754 )

Employee stock plans — — 7 739 ( 736 ) — — 3

Adoption of new accounting standards — — — — — — 56 56

Stock-based compensation — — — — 306 — — 306

Equity value of convertible debt issuance, net of deferred taxes — — — — 125 — — 125

Repurchases of common stock — — ( 8 ) ( 563 ) — — — ( 563 )

2 unchanged sentences

Foreign currency translation adjustment — — — — — 25 — 25

Net unrealized gain on derivative contracts and available-for-sale securities — — — — — 2 — 2

Net unrealized loss on derivative contracts — — — — — ( 20 ) — ( 20 )

Balance at June 28, 2019 312 3 ( 17 ) ( 1,268 ) 3,851 ( 68 ) 7,449 9,967

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Stock-based compensation — — — — 308 — — 308

Repurchases of common stock — — ( 8 ) ( 563 ) — — — ( 563 )

Dividends to shareholders — — — — 20 — ( 469 ) ( 449 )

2 unchanged sentences

Net unrealized loss on derivative contracts — — — — — ( 78 ) — ( 78 )

Balance at June 28, 2019 312 3 ( 17 ) ( 1,268 ) 3,851 ( 68 ) 7,449 9,967

Net loss — — — — — — ( 250 ) ( 250 )

Balance at July 3, 2020 312 3 ( 10 ) ( 737 ) 3,717 ( 157 ) 6,725 9,551

Net income — — — — — — 821 821

Adoption of New Accounting Standard — — — — — — ( 7 ) ( 7 )

Employee stock plans — — 6 505 ( 427 ) — — 78

Adoption of new accounting standards — — — — — — ( 5 ) ( 5 )

Stock-based compensation — — — — 318 — — 318

Dividends to shareholders — — — — 20 — ( 469 ) ( 449 )

Actuarial pension loss — — — — — ( 5 ) — ( 5 )

Actuarial pension gain — — — — — 23 — 23

Foreign currency translation adjustment — — — — — ( 36 ) — ( 36 )

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and Client Solutions.

The Company also generates license and royalty revenue from its extensive intellectual property (“IP”), which is included in each of these three end market categories.

The Company also generates license and royalty revenue from its extensive intellectual property (“IP”) portfolio, which is included in each of these three end market categories.

Basis of Presentation

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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 2020, which ended on July 3, 2020, is comprised of 53 weeks, with the first quarter consisting of 14 weeks and the remaining quarters consisting of 13 weeks each.

Fiscal years 2019, which ended on June 28, 2019, and 2018, which ended on June 29, 2018, are each comprised of 52 weeks, with all quarters presented consisting of 13 weeks.

Fiscal years 2021 and 2019, which ended on July 2, 2021 and June 28, 2019, respectively, are comprised of 52 weeks, with all quarters presented consisting of 13 weeks.

Fiscal year 2020, which ended on July 3, 2020, was comprised of 53 weeks, with the first quarter consisting of 14 weeks and the remaining quarters consisting of 13 weeks each.

Basis of Consolidation

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Company management has made estimates and assumptions relating to the reporting of certain assets and liabilities in conformity with U.S.

These estimates and assumptions have been applied using methodologies that are consistent throughout the periods presented with consideration given to the potential impacts of the coronavirus disease 2019 (“COVID-19”) pandemic.

However, actual results could differ materially from these estimates and be significantly affected by the severity and duration of the pandemic, the extent of actions to contain or treat COVID-19, how quickly and to what extent normal economic and operating activity can resume, and the severity and duration of the global economic downturn that results from the pandemic.

However, actual results could differ materially from these estimates and be significantly affected by the severity and duration of the pandemic, the extent of actions to contain or treat COVID-19, the timing, distribution, efficacy and public acceptance of vaccines around the world, any possible resurgence of COVID-19, including the emergence of more contagious or vaccine-resistant variants and how quickly and to what extent normal economic and operating activity can resume.

Cash Equivalents

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Cash equivalents are carried at cost plus accrued interest, which approximates fair value.

Table of Conte n t s

WESTERN DIGITAL CORPORATION

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The equity method of accounting is used if the Company’s ownership interest is greater than or equal to 20% but less than a majority or where the Company has the ability to exercise significant influence over operating and financial policies.

The Company’s equity in the earnings or losses in equity-method investments is recognized in Other income (expense), net, in the Consolidated Statements of Operations.

The Company’s equity in the earnings or losses in equity-method investments is recognized in Other income, net, in the Consolidated Statements of Operations.

If the Company’s ownership interest is less than 20% and the Company does not have the ability to exercise significant influence over operating and financial policies of the investee, the Company accounts for these investments at fair value, or if these equity securities do not have a readily determinable fair value, these securities are measured and recorded using the measurement alternative under Accounting Standards Update (“ASU”) No.

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Leasehold improvements are amortized over the lesser of the estimated useful lives of the assets or the related lease terms.

Table of Conte n t s

WESTERN DIGITAL CORPORATION

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If impairment is indicated, the impairment is measured as the amount by which the carrying amount of the assets exceeds the fair value of the assets.

Table of Conte n t s

WESTERN DIGITAL CORPORATION

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The Company adopted Topic 606 effective June 30, 2018, using the modified retrospective method to all contracts that were not completed contracts as of the beginning of the fiscal year.

Results for reporting periods beginning with fiscal year 2019 are presented under Topic 606, while prior period information presented on the financial statements or elsewhere in this Annual Report on Form 10-K is reported under the Company’s historic accounting policies under Topic 605 in effect for those periods and is not adjusted to reflect the retrospective effect of the adoption of Topic 606.

The cumulative effect of adopting Topic 606 was a post-tax increase to the opening retained earnings of $ 56 million as of June 30, 2018, which was primarily related to the Company’s license and royalty revenue arrangements.

18 unchanged sentences

For the sales-based royalty arrangements, the Company estimates and recognizes revenue in the period in which customers’ licensable sales occur.

Table of Conte n t s

WESTERN DIGITAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The Company’s customer payment terms are typically less than two months from the date control over the product or service is transferred to the customer.

1 unchanged sentence

The financing components of contracts with payment terms were not material.

WESTERN DIGITAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The Company provides distributors and retailers (collectively referred to as “resellers”) with limited price protection for inventories held by resellers at the time of published list price reductions.

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The Company uses the expected value method to arrive at the amount of variable consideration.

The Company is constraining variable consideration until the likelihood of a significant revenue reversal is not probable and believes that the expected value method is the appropriate estimate of the amount of variable consideration based on the fact that the Company has a large number of contracts with similar characteristics.

The Company constrains variable consideration until the likelihood of a significant revenue reversal is not probable and believes that the expected value method is the appropriate estimate of the amount of variable consideration based on the fact that the Company has a large number of contracts with similar characteristics.

For sales to OEMs, the Company’s methodology for estimating variable consideration is based on the amount of consideration expected to be earned based on the OEMs’ volume of purchases from the Company or other agreed upon sales incentive programs.

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Marketing development program costs are typically recorded as a reduction of the transaction price and, therefore, of revenue.

The Company nets sales rebates against open customer receivable balances if the criteria to offset are met;

otherwise they are recorded within other accrued liabilities.

The Company nets sales rebates against open customer receivable balances if the criteria to offset are met, otherwise they are recorded within other accrued liabilities.

An immaterial amount of the Company’s revenue arrangements include contracts that contain more than one performance obligation, which are typically comprised of tangible products, software and support services for multiple distinct licenses.

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the adjusted market assessment approach, the expected cost plus a margin approach, or another suitable method based on the facts and circumstances.

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 July 3, 2020 or June 28, 2019.

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.

Other direct incremental costs to obtain contracts that have an expected benefit of greater than one year are amortized over the period of expected cash flows from the related contracts, and the amortization expense is recorded as a reduction to revenue.

Total capitalized contract costs and the related amortization as of July 3, 2020 and June 28, 2019 and for the years then ended were not material.

Table of Conte n t s

The Company records an allowance for doubtful accounts by analyzing specific customer accounts and assessing the risk of loss based on insolvency or other collection issues.

In addition, the Company routinely analyzes the various receivable aging categories to establish reserves based on a combination of past due receivables and expected future losses.

If the financial condition of a significant customer deteriorates resulting in its inability to pay its accounts when due, or if the Company’s overall loss trajectory changes significantly, an adjustment in the Company’s allowance for doubtful accounts would be required, which could materially affect operating results.

WESTERN DIGITAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Contract liabilities relate to customers’ payments in advance of performance under the contract and primarily relate to remaining performance obligations under support and maintenance contracts.

As of July 3, 2020 and June 28, 2019, contract liabilities were $ 3 million and $ 43 million, respectively, and were reflected in Accrued expenses.

Changes in the contract liability balance during fiscal years 2020 and 2019 include $ 24 million and $ 104 million, respectively, of revenue recognized during the respective periods, of which the substantial majority relates to the balances that were deferred at the end of the respective previous years, June 28, 2019 and June 29, 2018, partially offset by payments received and billings in advance of satisfying performance obligations.

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 IP license arrangements, which typically range longer than one year.

Remaining performance obligations are mainly attributed to right-to-access patent license 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 July 3, 2020 was $ 112 million, which is mainly attributable to the functional IP license and service arrangements.

The Company expects to recognize this amount as revenue as follows:

$ 41 million in fiscal 2021, $ 40 million in fiscal 2022, $ 31 million in fiscal 2023 and thereafter.

The Company records an allowance for doubtful accounts by analyzing specific customer accounts and assessing the risk of loss based on insolvency, disputes or other collection issues.

In addition, the Company routinely analyzes the different receivable aging categories and establishes reserves based on a combination of past due receivables and expected future losses based primarily on its historical levels of bad debt losses.

If the financial condition of a significant customer deteriorates resulting in its inability to pay its accounts when due, or if the Company’s overall loss history changes significantly, an adjustment in the Company’s allowance for doubtful accounts would be required, which could materially affect operating results.

The Company records an accrual for estimated warranty costs when revenue is recognized.

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Such changes are generally a result of differences between forecasted and actual return rate experience and costs to repair and could differ significantly from the estimates.

Table of Conte n t s

WESTERN DIGITAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Litigation and Other Contingencies

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The Company accounts for interest and penalties related to income taxes as a component of the provision for income taxes.

WESTERN DIGITAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The Company recognizes liabilities for uncertain tax positions based on a two-step process.

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Potentially dilutive common shares include dilutive outstanding employee stock options, restricted stock unit awards (“RSU”), restricted stock unit awards with performance conditions or market conditions (“PSU”), rights to purchase shares of common stock under the Company’s Employee Stock Purchase Plan (“ESPP”) and shares issuable in connection with convertible debt.

Table of Conte n t s

WESTERN DIGITAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Stock-based Compensation

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The Company does not purchase foreign exchange contracts for speculative or trading purposes.

The Company had foreign exchange contracts with commercial banks for British pound sterling, European euro, Japanese yen, Malaysian ringgit, Philippine peso, Singapore dollar and Thai baht, which had an aggregate notional amount of $ 4.62 billion and $ 5.71 billion at July 3, 2020 and June 28, 2019, respectively.

The Company had foreign exchange contracts with commercial banks for British pound sterling, European euro, Japanese yen, Malaysian ringgit, Philippine peso, Thai baht, Korean won and Israeli shekel, which had an aggregate notional amount of $ 4.88 billion and $ 4.62 billion at July 2, 2021 and July 3, 2020, respectively.

WESTERN DIGITAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

If the derivative is designated as a cash flow hedge and is determined to be highly effective, the change in fair value of the derivative is initially deferred in Other comprehensive income (loss), net of tax.

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The Company determined the ineffectiveness associated with its cash flow hedges to be immaterial to the Consolidated Financial Statements for all years presented.

A change in the fair value of undesignated hedges is recognized in earnings in the period incurred and is reported in Other income (expense), net.

Table of Conte n t s

WESTERN DIGITAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

A change in the fair value of undesignated hedges is recognized in earnings in the period incurred and is reported in Other income, net.

Pensions and Other Post-Retirement Benefit Plans

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The Company reports the service cost component in the same line item or items as other compensation costs arising from services rendered by the pertinent employees during the period.

In addition, the other components of net benefit cost are presented in Other income (expense), net in the Consolidated Statements of Operations.

Table of Conte n t s

In addition, the other components of net benefit cost are presented in Other income, net in the Consolidated Statements of Operations.

WESTERN DIGITAL CORPORATION

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Accounting Pronouncements Recently Adopted

In February 2016, the FASB issued ASU No.

2016-02, “Leases (Topic 842)” (“ASU 2016-02”).

ASU 2016-02 supersedes ASC 840 “Leases”.

The amendments in this update require, among other things, that lessees recognize the following for all leases (unless a policy election is made by class of underlying asset to exclude short-term leases) at the commencement date:

(1) a lease liability, which is a lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis;

and (2) a right-of-use asset, which is an asset that represents the lessee’s right to use, or the direct use of, a specified asset for the lease term.

The FASB issued ASU 2018-11, “Leases (Topic 842):

Targeted Improvements” (“ASU 2018-11”), on July 30, 2018, which allows entities to apply the provisions of ASC 842 at the effective date without adjusting comparative periods.

The Company adopted this standard effective June 29, 2019, the first day of the fiscal year ending July 3, 2020, and has elected the transition method provided in ASU 2018-11 to apply Topic 842 as of the date of adoption without adjusting comparative periods.

The Company has elected the package of practical expedients and did not reassess prior conclusions including (a) whether its contracts are or contain a lease, (b) lease classification and (c) capitalization of initial direct costs.

The adoption of Topic 842 resulted in an increase in lease assets and a corresponding increase in lease liabilities on the Consolidated Balance Sheet of $ 221 million as of June 29, 2019.

The cumulative effect of adopting Topic 842 also included an after-tax decrease to opening retained earnings of $ 5 million as of June 29, 2019, which was primarily related to previously recorded sublease proceed assumptions on lease exit liabilities for which there was no expected future economic benefit at transition.

See Note 9, Leases and Other Commitments , for additional disclosures related to this standard.

In October 2018, the FASB issued ASU No.

2018-16, “Derivatives and Hedging (Topic 815):

Inclusion of the Secured Overnight Financing Rate (SOFR) Overnight Index Swap (OIS) Rate as a Benchmark Interest Rate for Hedge Accounting Purposes” (“ASU 2018-16”).

ASU 2018-16 allows for the use of the OIS rate based on the SOFR as a U.S.

benchmark interest rate for hedge accounting purposes under Topic 815, Derivatives and Hedging.

The Company adopted this standard in the first quarter of 2020.

The Company’s adoption of ASU 2018-16 did not have a material impact on its Consolidated Financial Statements.

In June 2016, the FASB issued ASU No.

2016-13, “Financial Instruments—Credit Losses (Topic 326):

Measurement of Credit Losses on Financial Instruments” (“ASU 2016-13”).

ASU 2016-13 seeks to provide financial statement users with more decision-useful information about the expected credit losses on financial instruments, including trade receivables, and other commitments to extend credit held by a reporting entity at each reporting date.

The amendments require an entity to replace the incurred loss impairment methodology in current U.S.

GAAP with a methodology that reflects current expected credit losses and requires consideration of a broader

range of reasonable and supportable information to inform credit loss estimates.

The amendments are effective for fiscal years (and interim periods within those fiscal years) beginning after December 15, 2019, which for the Company was the first quarter of fiscal 2021.

The Company adopted this standard effective July 4, 2020 (the beginning of fiscal 2021) with no material impact on its Consolidated Financial Statements.

In November 2018, the FASB issued ASU No.

2018-18, “Collaborative Arrangements (Topic 808):

Clarifying the Interaction between Topic 808 and Topic 606” (“ASU 2018-18”).

ASU 2018-18 clarifies that certain transactions between collaborative arrangement participants should be accounted for as revenue when the collaborative arrangement participant is a customer in the context of a unit of account and precludes recognizing as revenue consideration received from a collaborative arrangement participant if the participant is not a customer.

This ASU requires retrospective adoption to the date the Company adopted ASC 606 by recognizing a cumulative-effect adjustment to the opening balance of retained earnings of the earliest annual period presented.

The Company adopted this standard effective July 4, 2020 (the beginning of fiscal 2021) with no material impact on its Consolidated Financial Statements.

Recently Issued Accounting Pronouncements Not Yet Adopted

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The Company does not expect this update to have a material impact on its Consolidated Financial Statements.

In November 2018, the FASB issued ASU No.

2018-18, “Collaborative Arrangements (Topic 808):

Clarifying the Interaction between Topic 808 and Topic 606” (“ASU 2018-18”).

The amendments are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019, which for the Company is the first quarter of fiscal 2021.

The Company does not expect this update to have a material impact on its Consolidated Financial Statements.

Table of Conte n t s

In August 2020, the FASB issued 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 current 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.

For instruments that do not have a component mandatorily settled in cash, the change will likely result in a higher amount of share dilution in the calculation of earnings per share.

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 fiscal 2023, with early adoption permitted beginning in the first quarter of fiscal 2022.

The Company is currently assessing the impact and timing of adoption of this ASU.

WESTERN DIGITAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

In June 2016, the FASB issued ASU No.

2016-13, “Financial Instruments - Credit Losses (Topic 326):

Measurement of Credit Losses on Financial Instruments” (“ASU 2016-13”).

The amendments require an entity to replace the incurred loss impairment methodology in current U.S.

GAAP with a methodology that reflects current expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates.

The amendments are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019, which for the Company is the first quarter of fiscal 2021.

The Company does not expect this update to have a material impact on its Consolidated Financial Statements.

Table of Conte n t s

The Company’s disaggregated revenue information is as follows:

2021 2020 2019

(in millions)

Revenue by Product

HDD $ 8,216 $ 8,967 $ 8,746

Flash-based 8,706 7,769 7,823

Total Revenue $ 16,922 $ 16,736 $ 16,569

Revenue by End Market

Client Devices $ 8,255 $ 7,160 $ 8,095

Data Center Devices & Solutions 4,950 6,228 5,038

Client Solutions 3,717 3,348 3,436

Total Revenue $ 16,922 $ 16,736 $ 16,569

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 July 2, 2021 or July 3, 2020.

Contract liabilities relate to customers’ payments in advance of performance under the contract and primarily relate to remaining performance obligations under support and maintenance contracts.

Contract liabilities as of July 2, 2021 and July 3, 2020 and changes in contract liabilities during fiscal years 2021 and 2020 were not material.

The Company incurs sales commissions and other direct incremental costs to obtain sales contracts.

Total capitalized contract costs and the related amortization as of July 2, 2021 and July 3, 2020 and for the years then ended, were not material.

The transaction price allocated to the remaining performance obligations as of July 2, 2021 was $ 71 million, which is mainly attributable to the functional IP license and service arrangements.

The Company expects to recognize this amount as revenue as follows:

$ 40 million in fiscal 2022, $ 30 million in fiscal 2023, and $ 1 million in fiscal 2024 and thereafter.

WESTERN DIGITAL CORPORATION

3 unchanged sentences

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.

In 2020, 2019 and 2018, the Company sold trade accounts receivable and received cash proceeds of $ 411 million, $ 1.02 billion and $ 57 million, respectively.

The discounts on the trade accounts receivable sold during the periods were not material and were recorded within Other income (expense), net in the Consolidated Statements of Operations.

As of July 3, 2020 and June 28, 2019, the amount of factored receivables that remained outstanding was $ 113 million and $ 318 million, respectively.

2020 June 28,

In 2021, 2020 and 2019, the Company sold trade accounts receivable and received cash proceeds of $ 233 million, $ 411 million and $ 1.02 billion, respectively.

The discounts on the trade accounts receivable sold during the periods were not material and were recorded within Other income, net in the Consolidated Statements of Operations.

As of July 2, 2021 and July 3, 2020, the amount of factored receivables that remained outstanding was $ 0 million and $ 113 million, respectively.

(in millions)

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Property, plant and equipment, net

2020 June 28,

(in millions)

10 unchanged sentences

Depreciation expense of property, plant and equipment totaled $ 726 million, $ 797 million and $ 844 million in 2021, 2020 and 2019, respectively.

Table of Conte n t s

WESTERN DIGITAL CORPORATION

3 unchanged sentences

Balance at June 28, 2019 $ 10,076

Goodwill recorded in connection with acquisitions 14

Purchase price adjustments to goodwill ( 21 )

Foreign currency translation adjustment ( 2 )

Balance at June 28, 2019 $ 10,076

Goodwill recorded in connection with an acquisition 14

Reduction in goodwill in connection with disposition of business ( 21 )

Balance at July 3, 2020 10,067

Foreign currency translation adjustment ( 1 )

Balance at July 2, 2021 $ 10,066

On September 10, 2019, the Company acquired substantially all the assets of Kazan Networks, Inc., an innovator in high-performance networking and non-volatile memory express over fabrics technology ("NVMe-oF"), and an industry leader in application-specific integrated circuit and adapter solutions to connect storage platforms and systems over ethernet fabrics.

On September 10, 2019, the Company acquired substantially all the assets of Kazan Networks, Inc., an innovator in high-performance networking and non-volatile memory express over fabrics technology, and an industry leader in application-specific integrated circuit and adapter solutions to connect storage platforms and systems over ethernet fabrics.

The purchase price of this acquisition was $ 22 million in cash, with net assets acquired primarily consisting of IPR&D of $ 8 million and $ 14 million allocated to Goodwill.

10 unchanged sentences

The operating results of these businesses have been reflected in the Company’s results from continuing operations in the Consolidated Statements of Operations for all periods presented through the date of disposition.

Table of Conte n t s

WESTERN DIGITAL CORPORATION

1 unchanged sentence

Intangible assets

The following tables present intangible assets as of July 3, 2020 and June 28, 2019:

The following tables present intangible assets as of July 2, 2021 and July 3, 2020:

Weighted Average Amortization Period Gross Carrying Amount Accumulated Amortization Net Carrying Amount

7 unchanged sentences

Total intangible assets $ 5,588 $ ( 5,146 ) $ 442

June 28, 2019

Weighted Average Amortization Period Gross Carrying Amount Accumulated Amortization Net Carrying Amount

3 unchanged sentences

Customer relationships 6 616 ( 423 ) 193

Other 2 180 ( 180 ) —

Leasehold interests 31 29 ( 7 ) 22

11 unchanged sentences

Intangible asset amortization $ 486 $ 769 $ 968

Table of Conte n t s

WESTERN DIGITAL CORPORATION

27 unchanged sentences

Total other liabilities $ 2,067 $ 2,416

Table of Conte n t s

WESTERN DIGITAL CORPORATION

6 unchanged sentences

Balance at June 28, 2019 $ ( 53 ) $ 4 $ ( 19 ) $ ( 68 )

Other comprehensive income (loss) before reclassifications ( 39 ) 28 ( 48 ) ( 59 )

Amounts reclassified from accumulated other comprehensive income (loss) — — 9 9

Income tax benefit (expense) related to items of other comprehensive income (loss) 5 ( 3 ) 19 21

Net current-period other comprehensive income (loss) ( 34 ) 25 ( 20 ) ( 29 )

Balance at June 28, 2019 $ ( 53 ) $ 4 $ ( 19 ) $ ( 68 )

Other comprehensive loss before reclassifications ( 1 ) ( 7 ) ( 87 ) ( 95 )

3 unchanged sentences

Balance at July 3, 2020 ( 58 ) ( 2 ) ( 97 ) ( 157 )

During 2020, 2019 and 2018, the amounts reclassified out of AOCI related to derivative contracts were substantially all charged to Cost of revenue in the Consolidated Statements of Operations.

Table of Conte n t s

Other comprehensive income (loss) before reclassifications 27 ( 36 ) 42 33

Amounts reclassified from accumulated other comprehensive income (loss) — — ( 75 ) ( 75 )

Income tax benefit (expense) related to items of other comprehensive income (loss) ( 4 ) — 6 2

Net current-period other comprehensive income (loss) 23 ( 36 ) ( 27 ) ( 40 )

Balance at July 2, 2021 $ ( 35 ) $ ( 38 ) $ ( 124 ) $ ( 197 )

During 2021, the amounts reclassified out of AOCI included losses of $ 50 million on interest rate swap contracts that were charged to Interest expense and losses of $ 25 million related to foreign exchange contracts that were substantially all charged to Cost of revenue in the Consolidated Statements of Operations.

During 2020, the amounts reclassified out of AOCI primarily related to foreign exchange contracts and were substantially all charged to Cost of revenue in the Consolidated Statements of Operations.

WESTERN DIGITAL CORPORATION

8 unchanged sentences

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 July 3, 2020 and June 28, 2019, and indicate the fair value hierarchy of the valuation techniques utilized to determine such values:

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 July 2, 2021 and July 3, 2020, and indicate the fair value hierarchy of the valuation techniques utilized to determine such values:

Level 1 Level 2 Level 3 Total

6 unchanged sentences

Total liabilities at fair value $ — $ 145 $ — $ 145

June 28, 2019

Level 1 Level 2 Level 3 Total

(in millions)

Cash equivalents:

Money market funds $ 1,388 $ — $ — $ 1,388

Certificates of deposit — 17 — 17

Total cash equivalents 1,388 17 — 1,405

Cash equivalents - Money market funds $ 1,079 $ — $ — $ 1,079

Foreign exchange contracts — 28 — 28

Interest rate swap contracts — 2 — 2

Total assets at fair value $ 1,079 $ 28 $ — $ 1,107

2 unchanged sentences

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

Table of Conte n t s

WESTERN DIGITAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Money Market Funds.

3 unchanged sentences

Money market funds are valued based on quoted market prices.

Certificates of Deposit.

The Company’s certificates of deposit are investments which are held in custody by a third party.

Certificates of deposit are valued using fixed interest rates.

WESTERN DIGITAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Foreign Exchange Contracts.

12 unchanged sentences

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 fourth quarter of 2021 and the fourth quarter of 2020, respectively.

July 3, 2020 June 28, 2019

July 2, 2021 July 3, 2020

Value Carrying

9 unchanged sentences

Total $ 8,725 $ 9,169 $ 9,575 $ 9,624

Table of Conte n t s

WESTERN DIGITAL CORPORATION

6 unchanged sentences

In addition, as of July 2, 2021, the Company did not have any foreign exchange forward contracts with credit-risk-related contingent features.

Changes in fair values of the non-designated foreign exchange contracts are recognized in Other income (expense), net and are largely offset by corresponding changes in the fair values of the foreign currency denominated monetary assets and liabilities.

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 2021, 2020 and 2019, total net realized and unrealized transaction and foreign exchange contract currency gains and losses were not material to the Company’s Consolidated Financial Statements.

1 unchanged sentence

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 July 3, 2020 and June 28, 2019, 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 Consolidated Balance Sheets.

Table of Conte n t s

As of July 2, 2021 and July 3, 2020, 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 Consolidated Balance Sheets.

WESTERN DIGITAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Debt consisted of the following as of July 3, 2020 and June 28, 2019:

2020 June 28,

Debt consisted of the following as of July 2, 2021 and July 3, 2020:

(in millions)

10 unchanged sentences

The Company has a credit agreement originally entered into on April 29, 2016 and most recently amended in July 2020 (as amended, the “Credit Agreement”), that provides for, among other things, (i) a $ 2.25 billion revolving credit facility maturing in 2023 (the “Revolving Facility”), (ii) a term loan A-1 due 2023 (the “Term Loan A-1”), and (iii) a term loan B-4 due 2023 (the “Term Loan B-4”).

Borrowings under the revolving credit facility bear interest at a rate equal to, at the Company’s option, either an adjusted London Interbank Offered Rate (“LIBOR”) rate, subject to a 0.00 % floor, plus an applicable margin varying from 1.125 % to 2.000 % or a base rate plus an applicable margin varying from 0.125 % to 1.000 %, in each case depending on the Company’s corporate credit ratings.

Borrowings under the revolving credit facility bear interest at a rate equal to, at the Company’s option, either an adjusted LIBOR rate, subject to a 0.00 % floor, plus an applicable margin varying from 1.125 % to 2.000 % or a base rate plus an applicable margin varying from 0.125 % to 1.000 %, in each case depending on the Company’s corporate credit ratings.

During 2018, the Company repaid the previously outstanding borrowings under its revolving credit facility.

13 unchanged sentences

The Company is not required to make principal payments on the 2024 Convertible Notes prior to the maturity date.

The 2024 Convertible Notes are jointly and severally guaranteed by certain material domestic subsidiaries of the Company.

Table of Conte n t s

The 2024 Convertible Notes are jointly and severally guaranteed by the Company’s wholly owned subsidiary, Western Digital Technologies (“WDT”).

WESTERN DIGITAL CORPORATION

3 unchanged sentences

Prior to November 1, 2023, holders may convert their 2024 Convertible Notes based on variations in market price of the Company’s common stock in relation to the conversion price or the trading price of the 2024 Convertible Notes or upon the occurrence of specified corporate events.

On or after February 5, 2021, the Company may redeem all or part of the 2024 Convertible Notes, at its option, if the market price of the Company’s stock achieves certain levels.

As of July 2, 2021, none of the conditions allowing holders of the Convertible Notes to convert had been met.

Since February 5, 2021, the Company may redeem all or part of the 2024 Convertible Notes, at its option, if the market price of the Company’s stock achieves certain levels.

The Company separately accounts for the liability and equity components of the 2024 Convertible Notes.

6 unchanged sentences

The Company is not required to make principal payments on the 2026 Senior Unsecured Notes prior to the maturity date.

The 2026 Senior Unsecured Notes are jointly and severally guaranteed by certain material domestic subsidiaries of the Company.

The 2026 Senior Unsecured Notes are jointly and severally guaranteed by WDT.

The 2026 Senior Unsecured Notes issuance costs are amortized to interest expense over the term of the 2026 Senior Unsecured Notes and as of July 2, 2021, issuance costs of $ 12 million remained unamortized.

The Company assumed the 0.5 % convertible senior notes due October 15, 2020 (the “2020 Convertible Notes”) in connection with its acquisition of SanDisk Corporation (“SanDisk”), pursuant to an Agreement and Plan of Merger, on May 12, 2016.

As of July 3, 2020, $ 35 million principal amount of the 2020 Convertible Notes was outstanding and had a conversion rate of 10.9006 units of reference property per $1,000 principal amount of the 2020 Convertible Notes, corresponding to 2.6020 shares of the Company’s common stock and $ 735.79 of cash, subject to adjustments under the indenture.

On and after July 15, 2020 until the close of business on the second scheduled trading day immediately preceding the maturity date of October 15, 2020, holders may convert their 2020 Convertible Notes into the reference property by following the procedures set out in the indenture.

The 2020 Convertible Notes issuance costs are amortized to interest expense over the term of the 2020 Convertible Notes and as of July 3, 2020, issuance costs of less than $ 1 million remained unamortized.

The Revolving Facility, Term Loan A-1 and Term Loan B-4 are unconditionally guaranteed by each of the guarantors under the Credit Agreement and are secured on a first-priority basis (subject to permitted liens) by a lien on the same collateral that secure the other loans under the Credit Agreement;

provided that the security and guarantees will be automatically suspended upon certain conditions.

In October 2020, the 0.5 % convertible senior notes due 2020 were settled in full for cash in accordance with their terms.

The Revolving Facility, Term Loan A-1 and Term Loan B-4 are unconditionally guaranteed by WDT under the Credit Agreement and are secured on a first-priority basis (subject to permitted liens) by a lien on the same collateral that secure the other loans under the Credit Agreement;

provided that the security and guarantee will be automatically suspended upon certain conditions.

The Credit Agreement requires the Company to comply with certain financial covenants with respect to the Revolving Facility and Term Loan A-1, consisting of a Leverage Ratio and an Interest Coverage Ratio (each as defined below).

Consolidated Adjusted EBITDA is defined as net income (loss) plus interest expense, income tax expense (benefit) and depreciation and amortization, as well as other contractual adjustments as provided for in the Credit Agreement, including, for purposes of the financial covenants, an addback for certain depreciation-related payments made to the Company’s Flash Ventures.

The Company is required to maintain a maximum ratio of total funded debt to trailing twelve-month Consolidated Adjusted EBITDA (“Leverage Ratio”) at the end of each quarter of 4.25 to 1.00 through the quarter ending October 2, 2020, 4.00 to 1.00 through the quarter ending July 2, 2021, 3.75 to 1.00 through the quarter ending December 31, 2021, 3.50 to 1.00 through the quarter ending July 1, 2022, and 3.25 to 1.00 thereafter.

The Company was required to maintain a maximum ratio of total funded debt to trailing twelve-month Consolidated Adjusted EBITDA (“Leverage Ratio”) at the end of each quarter of 4.25 to 1.00 through the quarter ended October 2, 2020 and 4.00 to 1.00 through the quarter ended July 2, 2021, and is required to maintain a maximum Leverage Ratio of 3.75 to 1.00 through the quarter ending December 31, 2021, 3.50 to 1.00 through the quarter ending July 1, 2022, and 3.25 to 1.00 thereafter.

In addition, the Company is required to maintain a minimum ratio of Consolidated Adjusted EBITDA to interest expense (“Interest Coverage Ratio”), both calculated on a trailing twelve-month basis, at the end of each quarter of 3.50 to 1.00.

As of July 2, 2021, the Company was in compliance with all financial covenants under the Credit Agreement.

Table of Conte n t s

The Credit Agreement also requires the Company and its subsidiaries to comply with customary covenants that include, among others, limitations on the incurrence of additional debt, liens on property, acquisitions and investments, loans and guarantees, mergers, consolidations, liquidations and dissolutions, asset sales, dividends and other payments in respect of the Company’s capital stock, prepayments of certain debt, transactions with affiliates and certain modifications of organizational documents and certain debt agreements.

In addition, the indentures governing the Company’s 2026 Senior Unsecured Notes and the 2024 Convertible Notes contain restrictive covenants that limit the Company’s and its subsidiaries’ ability to, among other

WESTERN DIGITAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

things, consolidate, merge or sell all or substantially all of their assets;

create liens;

8 unchanged sentences

Net carrying value $ 8,725

Table of Conte n t s

WESTERN DIGITAL CORPORATION

27 unchanged sentences

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

2020 June 28,

(in millions)

3 unchanged sentences

The accumulated benefit obligation for the Pension Plans was $ 359 million at July 2, 2021.

As of July 3, 2020, actuarial losses for the Pension Plans of $ 67 million are included in Accumulated other comprehensive loss in the Consolidated Balance Sheet.

As of July 2, 2021, actuarial gains for the Pension Plans of $ 27 million are included in Accumulated other comprehensive loss in the Consolidated Balance Sheet.

There were no material prior service credits for the defined benefit pension plans recognized in Accumulated other comprehensive loss in the Consolidated Balance Sheet as of July 2, 2021.

Net periodic benefit costs were not material for 2021, 2020, and 2019.

Table of Conte n t s

WESTERN DIGITAL CORPORATION

24 unchanged sentences

Historical return patterns and correlations, consensus return forecasts and other relevant financial factors are analyzed periodically by the investment advisor so as to ensure that the expected long-term rate of return is reasonable and appropriate.

Table of Conte n t s

WESTERN DIGITAL CORPORATION

1 unchanged sentence

Fair Value Measurements

The following tables present the Pension Plans’ major asset categories and their associated fair values as of July 3, 2020 and June 28, 2019:

The following tables present the Pension Plans’ major asset categories and their associated fair values and net asset values as of July 2, 2021 and July 3, 2020:

Level 1 Level 2 Level 3 Total

(in millions)

Plan assets measured at fair value:

Equity commingled/mutual funds (1)(2)

2 unchanged sentences

Fixed income commingled/mutual funds (1)(3)

Cash equivalents and short-term investments 12 — — 12

Fair value of plan assets $ — $ 196 $ — $ 196

June 28, 2019

Plan assets measured at net asset value:

Real estate investment trust $ 30

Level 1 Level 2 Level 3 Total

20 unchanged sentences

These assets are classified as either Level 1 or Level 2.

Table of Conte n t s

WESTERN DIGITAL CORPORATION

1 unchanged sentence

The Company’s expected employer contributions for 2022 and annual benefit payments over the next five years for its Pension Plans are not expected to be material.

Table of Conte n t s

WESTERN DIGITAL CORPORATION

25 unchanged sentences

The primary purpose of K1 is to provide clean room space to continue the transition of existing flash-based wafer capacity to newer technology nodes.

Output from the initial production line at K1 began in the third quarter of fiscal year 2020, although meaningful output from K1 is not expected to begin until the end of calendar 2020.

The Company has paid for most of its share of initial K1 equipment investments and relocation costs.

Other period expenses associated with the initial production ramp at K1 will begin trailing off as output increases toward the end of calendar year 2020.

The Company also agreed to prepay an aggregate of approximately $ 360 million over a 3 -year period beginning in the first half of fiscal year 2020 toward K1 building depreciation, to be credited against future wafer charges.

K1 is now fully operational.

In connection with the start-up of this facility, the Company agreed to prepay an aggregate of approximately $ 360 million over a 3 -year period beginning in the first half of fiscal year 2020 toward K1 building depreciation, to be credited against future wafer charges.

As of July 2, 2021, remaining committed prepayments totaled $ 77 million.

5 unchanged sentences

The Company concluded, based upon its 49.9 % ownership, the voting structure and the manner in which the day-to-day operations are conducted for each entity within Flash Ventures, that the Company lacked the power to direct most of the activities that most significantly impact the economic performance of each entity within Flash Ventures.

Table of Conte n t s

WESTERN DIGITAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The following table presents the notes receivable from, and equity investments in, Flash Ventures as of July 3, 2020 and June 28, 2019:

2020 June 28,

The following table presents the notes receivable from, and equity investments in, Flash Ventures as of July 2, 2021 and July 3, 2020:

(in millions)

11 unchanged sentences

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 July 3, 2020 and June 28, 2019, the Company had Accounts payable balances due to Flash Ventures of $ 407 million and $ 331 million, respectively.

As of July 2, 2021 and July 3, 2020, the Company had Accounts payable balances due to Flash Ventures of $ 398 million and $ 407 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.

1 unchanged sentence

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.

(in millions)

Notes receivable $ 965

3 unchanged sentences

Maximum estimable loss exposure $ 4,271

As of July 3, 2020 and June 28, 2019, the Company’s retained earnings included undistributed earnings of Flash Ventures of $ 24 million and $ 14 million, respectively.

As of July 2, 2021 and July 3, 2020, the Company’s retained earnings included undistributed earnings of Flash Ventures of $ 33 million and $ 24 million, respectively.

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.

2 unchanged sentences

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 Flash Ventures entity’s operating cash flow is insufficient to fund these investments.

Table of Conte n t s

WESTERN DIGITAL CORPORATION

6 unchanged sentences

As a result of this incident, the Company incurred charges of $ 68 million and $ 145 million in 2020 and 2019, respectively, which were recorded in Cost of revenue and primarily consisted of the write-off of damaged inventory and unabsorbed manufacturing overhead costs.

The Company continues to pursue recovery of its losses associated with this event;

however, the total amount of recovery cannot be estimated at this time.

In 2021, the Company recovered $ 75 million related to this incident from its insurance carriers, which was recorded in Cost of revenue.

Inventory Purchase Commitments with Flash Ventures.

14 unchanged sentences

Total guarantee obligations ¥ 220 $ 1,973

Table of Conte n t s

WESTERN DIGITAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

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 July 2, 2021 in U.S.

7 unchanged sentences

2025 115 107 222

2025 36 111 147

Thereafter 4 34 38

2026 and thereafter 64 162 226

Total guarantee obligations $ 1,474 $ 499 $ 1,973

WESTERN DIGITAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

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.

6 unchanged sentences

Revenue on products distributed by the Unis Venture is recognized upon sell through to third-party customers.

For both the years ended July 3, 2020 and June 28, 2019, the Company recognized less than 2 % of its consolidated revenue on products distributed by the Unis Venture.

The outstanding accounts receivable due from and investment in the Unis Venture were less than 5 % of Accounts receivable, net as of both July 3, 2020 and June 28, 2019.

Table of Conte n t s

For the years ended July 2, 2021, July 3, 2020 and June 28, 2019, the Company recognized approximately 3 %, 1 %, and 1 % of its consolidated revenue on products distributed by the Unis Venture, respectively.

The outstanding accounts receivable due from and investment in the Unis Venture were 5 % and 4 % of Accounts receivable, net as of both July 2, 2021 and July 3, 2020, respectively.

WESTERN DIGITAL CORPORATION

29 unchanged sentences

Cost of operating leases $ 50 $ 55 $ 47

Table of Conte n t s

WESTERN DIGITAL CORPORATION

13 unchanged sentences

The property is being leased back over a term of 15 years at an annual lease rate of $ 7 million for the first year and increasing by 3 % per year thereafter.

The lease includes four 5 -year renewal options for the ability to extend up to 20 years.

Table of Conte n t s

The lease includes four 5 -year renewal options for the ability to extend up to an additional 20 years.

WESTERN DIGITAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Business Segment, Revenue Information, Geographic Information and Concentration of Risk

Business Segment, Geographic Information, and Concentration of Risk

The Company manufactures, markets, and sells data storage devices and solutions in the U.S.

and in foreign countries through its sales personnel, dealers, distributors, retailers, and subsidiaries.

Based upon the management structure under the current operating model, the Company determined that the Company’s Chief Operating Decision Maker, its Chief Executive Officer, evaluates performance of the Company and makes decisions regarding allocation of resources based on total Company results.

As a result, the Company concluded it operates in one segment, data storage devices and solutions.

The following table summarizes the Company’s revenue by end market product category, between Client Devices (mobile, desktop, gaming and digital video hard drives, SSDs, embedded products and wafers);

Data Center Devices and Solutions (capacity and performance enterprise HDDs, enterprise SSDs, data center software and system solutions);

and Client Solutions (removable products, hard drive content solutions and flash content solutions):

The Company’s disaggregated revenue information is as follows:

2020 2019 2018

(in millions)

Revenue by Product

HDD $ 8,967 $ 8,746 $ 10,698

Flash-based 7,769 7,823 9,949

Total Revenue $ 16,736 $ 16,569 $ 20,647

Revenue by End Market

Client Devices $ 7,160 $ 8,095 $ 10,108

Data Center Devices & Solutions 6,228 5,038 6,075

Client Solutions 3,348 3,436 4,464

Total Revenue 16,736 16,569 20,647

Historically, the Company has managed and reported under a single operating segment.

Late in the first quarter of fiscal 2021, the Chief Executive Officer, who is the Company’s Chief Operating Decision Maker, announced a decision to reorganize the Company’s business by forming two separate product business units:

flash-based products and hard disk drives.

To align the new operating model and business structure, the Company is making management organizational changes and implementing new reporting modules and processes to provide discrete information to manage the business.

Management expects to finalize its assessment of its operating segments when the implementations and transitions are completed, which is expected to be in the first quarter of fiscal 2022.

The Company’s operations outside the United States include manufacturing facilities in China, Japan, Malaysia, the Philippines and Thailand, as well as sales offices throughout the Americas, Asia Pacific, Europe and the Middle East.

12 unchanged sentences

License and royalty revenue is attributed to countries based upon the location of the headquarters of the licensee.

Table of Conte n t s

WESTERN DIGITAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(in millions)

8 unchanged sentences

(1) Long-lived assets include property, plant and equipment and are attributed to the geographic location in which they are located.

WESTERN DIGITAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Customer Concentration and Credit Risk

The Company sells its products to computer manufacturers, resellers and retailers throughout the world.

The Company sells its products to computer manufacturers, cloud service providers, resellers and retailers throughout the world.

For each of 2021, 2020 and 2019, no customer accounted for 10% or more of the Company’s net revenue.

3 unchanged sentences

At any given point in time, the total amount outstanding from any one of a number of its customers may be individually significant to the Company’s financial results.

As of July 3, 2020, one customer, Kingston Technology Company, accounted for 10 % of the Company’s net accounts receivable.

As of June 28, 2019, two customers, Dell Technologies Inc.

and Huawei Investment & Holding Co., accounted for 14 % and 10 %, respectively, of the Company’s net accounts receivable.

As of July 3, 2020 and June 28, 2019, the Company had net accounts receivable of $ 2.4 billion and $ 1.2 billion, respectively, and reserves for potential credit losses were not material as of each period end.

As of July 2, 2021 and July 3, 2020, the Company had net accounts receivable of $ 2.3 billion and $ 2.4 billion, respectively, and one customer, Kingston Technology Company, accounted for 12 % and 10 %, respectively, of the Company’s net accounts receivable.

Reserves for potential credit losses were not material as of each period end.

The Company also has cash equivalent and investment policies that limit the amount of credit exposure to any one financial institution or investment instrument and requires that investments be made only with financial institutions or in investment instruments evaluated as highly credit-worthy.

8 unchanged sentences

The Company does not have long-term contracts with some of these subcontractors and cannot directly control product delivery schedules or manufacturing processes.

This could lead to product shortages or quality

Table of Conte n t s

WESTERN DIGITAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

assurance problems that could increase the manufacturing costs of the Company’s products and have material adverse effects on the Company’s operating results.

Table of Conte n t s

WESTERN DIGITAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

This could lead to product shortages or quality assurance problems that could increase the manufacturing costs of the Company’s products and have material adverse effects on the Company’s operating results.

Western Digital Corporation 401(k) Plan

2 unchanged sentences

Eligible employees receive employer matching contributions immediately upon hire unless the individual is covered by a collective bargaining agreement, provides services as a consultant, intern, independent contractor, leased or temporary employee, or otherwise is not treated as a common-law employee.

Eligible employees are generally able to contribute up to 30 % of their eligible compensation on a pre-tax basis or 10 % of their eligible compensation on an after-tax basis subject to Internal Revenue Service (“IRS”) limitations.

Eligible employees are generally able to contribute up to 75 % of their eligible compensation on a combined pre-tax and Roth basis, 10 % on a combined pre-tax catch-up and Roth catch-up basis, and 10 % on a non-Roth after-tax basis subject to Internal Revenue Service (“IRS”) limitations.

The Company makes a basic matching contribution equal to 50 % of each eligible participant’s contribution that does not exceed 6 % of the eligible participant’s annual compensation in the year of contribution.

3 unchanged sentences

For 2021, 2020 and 2019, the Company made Plan contributions of $ 34 million, $ 33 million and $ 34 million, respectively.

Table of Conte n t s

WESTERN DIGITAL CORPORATION

23 unchanged sentences

During 2021, 2020 and 2019, the Company issued 3.2 million, 3.0 million, and 2.6 million shares, respectively, for aggregate purchase amounts of $ 115 million, $ 107 million and $ 102 million, respectively.

Table of Conte n t s

WESTERN DIGITAL CORPORATION

6 unchanged sentences

RSUs and PSUs 282 268 263

Employee stock purchase plan 33 27 27

ESPP 36 33 27

Total $ 318 $ 308 $ 306

4 unchanged sentences

Selling, general and administrative 105 94 103

Employee termination, asset impairment, and other charges — — 1

Subtotal 318 308 306

1 unchanged sentence

Total $ 271 $ 263 $ 256

Windfall tax benefits related to the vesting and exercise of stock-based awards, which are recognized as a component of the Company’s Income tax expense, were immaterial for the periods presented.

Windfall tax benefits 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.

6 unchanged sentences

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

Table of Conte n t s

WESTERN DIGITAL CORPORATION

11 unchanged sentences

Canceled or expired ( 0.4 ) 88.58

Options outstanding at June 28, 2019 3.9 65.72

Options outstanding at July 3, 2020 2.7 69.16

Exercised ( 0.4 ) 44.34 $ 6

1 unchanged sentence

Options outstanding at July 2, 2021 1.5 $ 72.84 1.20 $ 15

Exercisable at July 3, 2020 2.6 $ 70.10 2.1 $ —

No options were granted in 2021, 2020 or 2019.

All outstanding options were exercisable at July 2, 2021.

RSUs and PSUs

10 unchanged sentences

Forfeited ( 1.3 ) 63.33

RSUs and PSUs outstanding at June 28, 2019 11.6 62.07

RSUs and PSUs outstanding at July 3, 2020 13.3 60.92

Granted 8.8 40.40

3 unchanged sentences

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.

Table of Conte n t s

WESTERN DIGITAL CORPORATION

28 unchanged sentences

The Company issued a quarterly cash dividend from the first quarter of fiscal 2013 up to the third quarter of fiscal 2020.

During the year ended July 3, 2020, the Company declared aggregate cash dividends of $ 1.50 per share on its outstanding common stock totaling $ 449 million.

In April 2020, the Company suspended its dividend to reinvest in the business and to support its ongoing deleveraging efforts.

Table of Conte n t s

WESTERN DIGITAL CORPORATION

20 unchanged sentences

Income tax expense $ 106 $ 204 $ 467

On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) was enacted in response to the COVID-19 pandemic in the U.S.

The CARES Act, among other things, allows NOLs arising in tax years 2018, 2019, and 2020 to be carried back to each of the five preceding taxable years to generate a refund of previously paid income taxes and increases the business interest expense limitation from 30% to 50% of adjusted taxable income for tax years 2019 and 2020.

Additionally, countries around the world continue to implement emergency tax measures to provide relief similar to the CARES Act.

The provisions of the CARES Act and the emergency tax measures around the world did not result in a material cash benefit to the Company.

However, the Company continues to monitor and evaluate the regulatory and interpretive guidance related to the CARES Act as well as in other jurisdictions.

The Tax Cuts and Jobs Act (the “2017 Act”) includes a broad range of tax reform proposals affecting businesses.

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 fiscal 2019.

3 unchanged sentences

Any additional regulatory or interpretive guidance would constitute new information, which may require further refinements to the Company’s estimates in future periods.

Table of Conte n t s

On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) was enacted in response to the COVID-19 pandemic in the U.S.

The CARES Act, among other things, allows net operating losses arising in tax years 2018, 2019, and 2020 to be carried back to each of the five preceding taxable years to generate a refund of previously paid income taxes and increases the business interest expense limitation from 30% to 50% of adjusted taxable income for tax years 2019 and 2020.

Additionally, countries around the world implemented emergency tax measures to provide relief similar to the CARES Act.

The Company at present does not expect that any of the provisions of the CARES Act or the emergency tax measures around the world would result in a material cash benefit.

On December 27, 2020, the Consolidated Appropriations Act (the “Appropriations Act”) was enacted to fund the federal government through their fiscal year, extend certain expiring tax provisions and provide additional emergency relief to individuals and businesses related to the COVID-19 pandemic in the U.S.

The Company at present does not expect any of the provisions of the Appropriations Act to have a material impact on its Consolidated Financial Statements.

WESTERN DIGITAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

On March 11, 2021, the American Rescue Plan Act of 2021 (the “Rescue Act”) was enacted to provide additional emergency relief to individuals and businesses related to the COVID-19 pandemic in the U.S.

The Rescue Act includes certain business-related provisions, which the Company at present does not expect to have a material impact on its Consolidated Financial Statements.

The Company continues to monitor and evaluate the regulatory and interpretive guidance related to the CARES Act, the Appropriations Act and the Rescue Act, as well as legislation in other jurisdictions.

Deferred Taxes

Temporary differences and carryforwards, which give rise to a significant portion of deferred tax assets and liabilities were as follows:

2020 June 28,

(in millions)

2 unchanged sentences

Accrued compensation and benefits not currently deductible 143 130

Deferred revenue 128 —

Net operating loss carryforward 196 251

10 unchanged sentences

Valuation allowances ( 558 ) ( 624 )

Deferred tax liabilities, net $ ( 45 ) $ ( 138 )

The net deferred tax asset valuation allowance increased by $ 5 million in each of 2020 and 2019.

Deferred tax assets (liabilities), net $ 188 $ ( 45 )

The net deferred tax asset valuation allowance decreased by $ 66 million primarily due to an increase in the deferred tax liability for state taxes on the unremitted earnings of certain non-U.S.

entities that would be offset by existing business tax credits carryforwards.

The assessment of valuation allowances against deferred tax assets requires estimations and significant judgment.

1 unchanged sentence

After weighing both the positive and negative evidence available, including, but not limited to, earnings history, projected future outcomes, industry and market trends and the nature of each of the deferred tax assets, the Company determined that it is able to realize most of its deferred tax assets with the exception of certain loss and credit carryforwards.

Table of Conte n t s

The Company is permanently reinvested with respect to certain foreign earnings.

There is no unrecognized deferred tax liability associated with the repatriation of these foreign undistributed earnings as it can be achieved without additional federal tax consequences.

WESTERN DIGITAL CORPORATION

1 unchanged sentence

Effective Tax Rate

Under the 2017 Act, the reduction of the U.S.

federal corporate tax rate from 35% to 21% became effective January 1, 2018, requiring companies to use a blended rate for their fiscal 2018 tax year by applying a pro-rated percentage of the number of days before and after the January 1, 2018 effective date.

This results in the use of an estimated annual effective tax rate of approximately 28 % for the Company’s U.S.

federal corporate tax rate for fiscal year 2018.

For fiscal year 2019 and beyond, the Company will utilize the enacted U.S.

federal corporate tax rate of 21 %.

Reconciliation of the U.S.

20 unchanged sentences

Foreign income tax credits ( 5 ) 191 23

Federal R&D credits 147 24 ( 4 )

R&D tax credits ( 8 ) 147 24

Other 2 ( 22 ) 2

Effective tax rate 11 % ( 443 ) % ( 163 ) %

Table of Conte n t s

WESTERN DIGITAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Tax Holidays and Carryforwards

7 unchanged sentences

Federal NOL (Pre 2017 Act Generation) $ 661 2022 to 2038

Federal NOL (Post 2017 Act Generation) — No expiration

State NOL 369 2022 to 2038

4 unchanged sentences

The Company expects the total amount of federal and state credits ultimately realized will be reduced as a result of these provisions by $ 27 million and $ 2 million, respectively.

WESTERN DIGITAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

As of July 2, 2021, the Company had varying amounts of foreign NOL carryforwards that do not expire or, if not used, expire in various years, depending on the country.

2 unchanged sentences

(in millions)

Malaysia $ 167 2025 to 2027

Japan 127 2023 to 2026

Belgium $ 120 No expiration

China 103 2022 to 2025

Japan 111 2024 to 2031

Malaysia 72 2025 to 2027

Spain 51 No expiration

Netherlands 12 2025 to 2026

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 Consolidated Balance Sheets.

Table of Conte n t s

WESTERN DIGITAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The following is a tabular reconciliation of the total amounts of unrecognized tax benefits excluding accrued interest and penalties:

10 unchanged sentences

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 July 3, 2020, June 28, 2019 and June 29, 2018 was $ 137 million, $ 123 million and $ 110 million, respectively.

Included within long-term liabilities in the Consolidated Balance Sheets are the Company’s payables related to unrecognized tax benefits, including accrued interest and penalties, of $ 720 million, $ 699 million, and $ 508 million as of July 3, 2020, June 28, 2019 and June 29, 2018, respectively.

The entire balance of the gross unrecognized tax benefits as of July 3, 2020, June 28, 2019 and June 29, 2018, if recognized, would affect the effective tax rate.

Accrued interest and penalties included in the Company’s liability related to unrecognized tax benefits as of July 2, 2021, July 3, 2020 and June 28, 2019 was $ 138 million, $ 137 million and $ 123 million, respectively.

Included within long-term liabilities in the Consolidated Balance Sheets are the Company’s payables related to unrecognized tax benefits, including accrued interest and penalties, of $ 750 million, $ 720 million, and $ 699 million as of July 2, 2021, July 3, 2020 and June 28, 2019, respectively.

The entire balance of the gross unrecognized tax benefits as of July 2, 2021, July 3, 2020 and June 28, 2019, if recognized, would affect the effective tax rate.

The Company files U.S.

4 unchanged sentences

In the major foreign jurisdictions where there is no tax holiday, the Company could be subject to examination in China for calendar years 2011 through 2020, in Ireland for calendar year 2015 through fiscal year 2020, in India for fiscal years 2008 through 2020, in Israel for calendar year 2016 through fiscal year 2020 and in Japan for fiscal years 2013 through 2020.

The IRS previously completed its field examination of the Company’s federal income tax returns for fiscal years 2008 through 2012 and proposed certain adjustments.

As previously disclosed, the Company received Revenue Agent Reports from the IRS for fiscal years 2008 through 2009, proposing adjustments relating to transfer pricing with the Company’s foreign subsidiaries and intercompany payable balances.

The Company disagrees with the proposed adjustments and in September 2015 filed a protest with the IRS Appeals Office and received the IRS rebuttal in July 2016.

The Company and the IRS Appeals Office did not reach a settlement on the disputed matters.

On June 28, 2018, the IRS issued a statutory notice of deficiency with respect to the disputed matters for fiscal years 2008 through 2009, seeking to increase the Company’s U.S.

taxable income by an amount that would result in additional federal tax through fiscal year 2009 totaling approximately $ 516 million, subject to interest and penalties.

The Company filed a petition with the U.S.

Tax Court in September 2018.

On December 10, 2018, the IRS issued a statutory notice of deficiency with respect to fiscal years 2010 through 2012, seeking to increase the Company’s U.S.

taxable income by an amount that would result in additional federal tax for fiscal years 2010 through 2012 totaling approximately $ 549 million, subject to interest and penalties.

Approximately $ 535 million of the total additional federal tax for fiscal years 2010 through 2012 relates to proposed adjustments for transfer pricing with the Company’s foreign subsidiaries, intercompany payable balances and the utilization of certain tax attributes.

The Company filed a petition with the U.S.

Tax Court in March 2019.

Tax Court consolidated the case for fiscal years 2008 through 2009 with the case for fiscal years 2010 through 2012.

On May 4, 2020, the IRS filed with the U.S.

Tax Court Amendments to Answer to assert penalties totaling $ 340 million on the proposed adjustments relating to transfer pricing with respect to fiscal years 2008 through 2009 and fiscal years 2010 through 2012.

The Company continues to believe that its tax positions are properly supported and will vigorously contest the position taken by the IRS.

Table of Conte n t s

WESTERN DIGITAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

As previously disclosed, the IRS issued statutory notices of deficiency with respect to adjustments relating to transfer pricing with the Company’s foreign subsidiaries and intercompany payable balances for fiscal years 2008 through 2009 and fiscal years 2010 through 2012.

The Company filed petitions with the U.S.

Tax Court with respect to the statutory notices of deficiency for fiscal years 2008 through 2009 and the fiscal years 2010 through 2012.

Tax Court consolidated the case for fiscal years 2008 through 2009 with the case for fiscal years 2010 through 2012.

In May 2020, the IRS filed with the U.S.

Tax Court Amendments to Answer to assert penalties totaling $ 340 million on the proposed adjustments relating to transfer pricing with respect to fiscal years 2008 through 2012.

In June 2021, the IRS filed with the U.S.

Tax Court Second Amendments to Answer to assert additional adjustments relating to transfer pricing with the Company’s foreign subsidiaries for fiscal years 2008 through 2009 and fiscal years 2010 through 2012.

The Second Amendments to Answer replace the amounts asserted in the statutory notices of deficiency.

With its Second Amendments to Answer, the IRS seeks to increase the Company’s U.S.

taxable income by amounts that would result in additional federal income tax liabilities totaling approximately $ 335 million for fiscal years 2008 through 2009 and approximately $ 922 million for fiscal years 2010 through 2012, subject to interest and the IRS’s claim for penalties.

In September 2020 and December 2020, the IRS proposed adjustments relating to transfer pricing with the Company’s foreign subsidiaries and intercompany payable balances for fiscal years 2013 through 2015 that, if sustained, would result in additional federal income tax liabilities totaling approximately $ 343 million for those fiscal years.

In March 2021, the IRS asserted penalties totaling $ 109 million on the proposed adjustments relating to transfer pricing with respect to fiscal years 2013 through 2015.

The Company disagrees with the proposed adjustments relating to transfer pricing and related penalties, and continues to believe that its tax positions are properly supported and will vigorously contest the position taken by the IRS.

Also in March 2021, the Company and the IRS tentatively reached a basis for resolving the intercompany payable balances matter for all fiscal years at issue and the impact was not material to the Consolidated Financial Statements.

The Company believes that adequate provision has been made for any adjustments that may result from tax examinations.

3 unchanged sentences

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.

Table of Conte n t s

WESTERN DIGITAL CORPORATION

18 unchanged sentences

For 2020 and 2019, the Company recorded net loss, and all shares subject to outstanding equity awards have been excluded for those periods because including them would be anti-dilutive.

Table of Conte n t s

WESTERN DIGITAL CORPORATION

1 unchanged sentence

Employee Termination, Asset Impairment and Other Charges

The Company recorded the following charges related to employee terminations benefits, asset impairment, and other charges:

The Company recorded the following charges related to employee termination benefits, asset impairment, and other charges:

2021 2020 2019

3 unchanged sentences

Business Realignment 28 44 144

Restructuring Plan 2016 — — 92

Total employee termination and other charges 28 49 166

Asset impairment:

Restructuring Plan 2016 — — 16

Total asset impairment — — 16

Stock-based compensation accelerations and adjustments:

Business Realignment — — 1

Total stock-based compensation accelerations and adjustments — — 1

Gain on disposition of assets:

5 unchanged sentences

The Company substantially completed the closure in fiscal year 2019.

The following table presents an analysis of the components of the restructuring charges, payments and adjustments made against the reserve during the year ended July 3, 2020:

Employee Termination Benefits Contract Termination and Other Total

(in millions)

Accrual balance at June 28, 2019 $ 30 $ 2 $ 32

Charges 3 2 5

Cash payments ( 26 ) ( 4 ) ( 30 )

Accrual balance at July 3, 2020 $ 7 $ — $ 7

Table of Conte n t s

WESTERN DIGITAL CORPORATION

2 unchanged sentences

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 addition to the amounts recognized under Business Realignment as presented above, the Company recognized $ 5 million of accelerated depreciation on facility assets in Cost of revenue and Operating expenses in the Consolidated Statements of Operations for the year ended July 3, 2020.

The Company may also record credits related to gains upon sale of property in connection with these activities.

The Company recognized gains related to the disposition of assets associated with these activities $ 75 million and $ 17 million for 2021 and 2020, respectively.

The following table presents an analysis of the components of the activity against the reserve during the year ended July 2, 2021:

1 unchanged sentence

(in millions)

Accrual balance at June 28, 2019 $ 37 $ 8 $ 45

Accrual balance at July 3, 2020 $ 13 $ — $ 13

Charges 25 3 28

1 unchanged sentence

Accrual balance at July 2, 2021 $ 2 $ — $ 2

Restructuring Plan 2016

In 2016, the Company initiated a set of actions relating to the restructuring plan associated with the integration of substantial portions of its HGST and WD subsidiaries (“Restructuring Plan 2016”).

Restructuring Plan 2016 consisted of asset and footprint reductions, product road map consolidation and organization rationalization.

These actions were substantially completed in fiscal year 2018.

Table of Conte n t s

WESTERN DIGITAL CORPORATION

1 unchanged sentence

Legal Proceedings

For disclosures regarding statutory notices of deficiency issued by the IRS on June 28, 2018 and December 10, 2018, and petitions filed by the Company with the U.S.

Tax Court in September 2018 and March 2019, see Note 13, Income Tax Expense.

For disclosures regarding statutory notices of deficiency issued by the IRS on June 28, 2018 and December 10, 2018, petitions filed by the Company with the U.S.

Tax Court in September 2018 and March 2019, additional penalties asserted by the IRS in March 2021 and a tentative resolution with respect to certain matters, see Note 14, Income Tax Expense.

Other Matters

2 unchanged sentences

However, any monetary liability and financial impact to the Company from these matters could differ materially from the Company’s expectations.

Table of Conte n t s

WESTERN DIGITAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Quarterly Results of Operations (unaudited)

First Second Third Fourth

(in millions, except per share amounts)

Revenue, net $ 4,040 $ 4,234 $ 4,175 $ 4,287

Gross profit 758 935 1,005 1,083

Operating income (loss) ( 129 ) 50 153 261

Net income (loss) ( 276 ) ( 139 ) 17 148

Basic income (loss) per common share ( 0.93 ) ( 0.47 ) 0.06 0.49

Diluted income (loss) per common share ( 0.93 ) ( 0.47 ) 0.06 0.49

First Second Third Fourth

(in millions, except per share amounts)

Revenue, net $ 5,028 $ 4,233 $ 3,674 $ 3,634

Gross profit 1,664 1,044 579 465

Operating income (loss) 686 176 ( 394 ) ( 381 )

Net income (loss) 511 ( 487 ) ( 581 ) ( 197 )

Basic income (loss) per common share 1.75 ( 1.68 ) ( 1.99 ) ( 0.67 )

Diluted income (loss) per common share 1.71 ( 1.68 ) ( 1.99 ) ( 0.67 )

Changes in and Disagreements With Accountants on Accounting and Financial Disclosure

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 8. Financial Statements and Supplementary Data