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Item 1. Financial Statements

2022-05-04 compared with 2022-02-03 · 194 added, 157 removed, 632 unchanged (36% of the section changed)

46 unchanged sentences

(in millions, except per share amounts)

Three Months Ended Six Months Ended

2021 January 1,

2021 December 31,

2021 January 1,

Three Months Ended Nine Months Ended

2022 April 2,

2021 April 1,

2022 April 2,

Revenue, net $ 4,381 $ 4,137 $ 14,265 $ 12,002

10 unchanged sentences

Interest expense ( 75 ) ( 81 ) ( 229 ) ( 246 )

Other income (loss), net ( 6 ) 6 ( 4 ) 15

Other income, net 12 11 8 26

Total interest and other expense, net ( 62 ) ( 68 ) ( 217 ) ( 214 )

10 unchanged sentences

WESTERN DIGITAL CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(in millions)

Three Months Ended Six Months Ended

2021 January 1,

2021 December 31,

2021 January 1,

Three Months Ended Nine Months Ended

2022 April 2,

2021 April 1,

2022 April 2,

Net income $ 25 $ 197 $ 1,199 $ 199

Other comprehensive income (loss), before tax:

Other comprehensive loss, before tax:

Actuarial pension gain 1 2 2 4

Foreign currency translation adjustment ( 82 ) ( 95 ) ( 123 ) ( 29 )

Net unrealized gain (loss) on derivative contracts and available-for-sale securities ( 10 ) 20 23 50

Total other comprehensive income (loss), before tax ( 55 ) 55 ( 17 ) 118

Income tax benefit (expense) related to items of other comprehensive income (loss), before tax 5 ( 4 ) ( 3 ) ( 11 )

Other comprehensive income (loss), net of tax ( 50 ) 51 ( 20 ) 107

Total comprehensive income $ 514 $ 113 $ 1,154 $ 109

Net unrealized loss on derivative contracts and available-for-sale securities ( 74 ) ( 84 ) ( 51 ) ( 34 )

Total other comprehensive loss, before tax ( 155 ) ( 177 ) ( 172 ) ( 59 )

Income tax benefit related to items of other comprehensive loss, before tax 15 17 12 6

Other comprehensive loss, net of tax ( 140 ) ( 160 ) ( 160 ) ( 53 )

Total comprehensive income (loss) $ ( 115 ) $ 37 $ 1,039 $ 146

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

2 unchanged sentences

(in millions)

Six Months Ended

2021 January 1,

Nine Months Ended

2022 April 2,

Cash flows from operating activities

4 unchanged sentences

Deferred income taxes 41 ( 41 )

Loss on disposal of assets 1 1

Gain on disposal of assets ( 14 ) ( 65 )

Amortization of debt discounts 34 30

50 unchanged sentences

Balance at December 31, 2021 313 3 — — 3,519 ( 217 ) 8,713 12,018

Net income — — — — — — 25 25

Employee stock plans — — — — ( 5 ) — — ( 5 )

Stock-based compensation — — — — 86 — — 86

Actuarial pension gain — — — — — 1 — 1

Foreign currency translation adjustment — — — — — ( 82 ) — ( 82 )

Net unrealized loss on derivative contracts — — — — — ( 59 ) — ( 59 )

Balance at April 1, 2022 313 $ 3 — $ — $ 3,600 $ ( 357 ) $ 8,738 $ 11,984

WESTERN DIGITAL CORPORATION

19 unchanged sentences

Balance at January 1, 2021 312 3 ( 6 ) ( 390 ) 3,546 ( 50 ) 6,720 9,829

Net income — — — — — — 197 197

Employee stock plans — — — 26 ( 26 ) — — —

Stock-based compensation — — — — 83 — — 83

Actuarial pension gain — — — — — 2 — 2

Foreign currency translation adjustment — — — — — ( 95 ) — ( 95 )

Net unrealized gain on derivative contracts — — — — — ( 67 ) — ( 67 )

Balance at April 2, 2021 312 $ 3 ( 6 ) $ ( 364 ) $ 3,603 $ ( 210 ) $ 6,917 $ 9,949

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

19 unchanged sentences

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 ongoing COVID-19 pandemic.

However, actual results could differ materially from these estimates and be significantly affected by the severity and duration of the COVID-19 pandemic, the extent of actions to contain or treat COVID-19, the timing, distribution, efficacy and public acceptance of vaccines around the world, additional surges 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.

WESTERN DIGITAL CORPORATION

31 unchanged sentences

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

hard disk drives (“HDD”) and flash-based products (“Flash”).

flash-based products (“Flash”) and hard disk drives (“HDD”).

To align with the new operating model and business structure, the Company made management organizational changes and implemented new reporting modules and processes to provide discrete information to manage the business.

Effective July 3, 2021, the Company’s management finalized its assessment of the Company’s operating segments and concluded that the Company now has two reportable segments:

HDD and Flash.

Flash and HDD.

The CODM evaluates performance of the Company and makes decisions regarding allocation of resources based on each operating segment’s net revenue and gross margin, which are summarized below.

1 unchanged sentence

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

Three Months Ended Six Months Ended

2021 January 1,

2021 December 31,

2021 January 1,

HDD $ 2,213 $ 1,909 $ 4,774 $ 3,753

Three Months Ended Nine Months Ended

2022 April 2,

2021 April 1,

2022 April 2,

Flash $ 2,243 $ 2,175 $ 7,353 $ 6,287

HDD 2,138 1,962 6,912 5,715

Total net revenue $ 4,381 $ 4,137 $ 14,265 $ 12,002

Gross profit:

HDD $ 677 $ 488 $ 1,469 $ 971

Flash $ 798 $ 653 $ 2,665 $ 1,752

HDD 592 491 2,061 1,462

Total gross profit for segments 1,390 1,144 4,726 3,214

Unallocated corporate items:

Amortization of acquired intangible assets ( 26 ) ( 109 ) ( 65 ) ( 254 )

Contamination related charges ( 203 ) — ( 203 ) —

Stock-based compensation expense ( 13 ) ( 14 ) ( 36 ) ( 41 )

Charges related to a power outage incident and related recovery — 45 — 75

Amortization of acquired intangible assets — ( 39 ) ( 65 ) ( 293 )

Recoveries from a power outage incident 7 — 7 75

Total unallocated corporate items ( 209 ) ( 53 ) ( 297 ) ( 259 )

1 unchanged sentence

Gross margin:

HDD 30.6 % 25.6 % 30.8 % 25.9 %

Flash 35.6 % 30.0 % 36.2 % 27.9 %

HDD 27.7 % 25.0 % 29.8 % 25.6 %

Consolidated gross margin 27.0 % 26.4 % 31.0 % 24.6 %

4 unchanged sentences

In the fiscal first quarter of 2022, the Company refined the end markets it reports to be Cloud, Client and Consumer.

Cloud represents a large and growing end market comprised primarily of products for public or private cloud environments and end customers, which the Company believes it is uniquely positioned to address as the only provider of both hard drive and flash products.

Through the Client end market, the Company provides its original equipment manufacturer (“OEM”) and channel customers a broad array of high-performance flash and hard drive solutions across personal computer, mobile, gaming, automotive, virtual reality headsets, at-home entertainment, and industrial spaces.

1 unchanged sentence

The Company’s disaggregated revenue information is as follows:

Three Months Ended Six Months Ended

2021 January 1,

2021 December 31,

2021 January 1,

Three Months Ended Nine Months Ended

2022 April 2,

2021 April 1,

2022 April 2,

(in millions)

5 unchanged sentences

Revenue by Geography

Asia $ 2,400 $ 2,215 $ 7,685 $ 6,702

Americas 1,377 1,009 4,398 3,033

Europe, Middle East and Africa 604 913 2,182 2,267

Asia 2,610 2,273 5,285 4,487

Total Revenue $ 4,381 $ 4,137 $ 14,265 $ 12,002

The Company’s top 10 customers accounted for 46 % and 44 % of its net revenue for the three and six months ended December 31, 2021, respectively, and 43 % and 41 % of its net revenue for the three and six months ended January 1, 2021, respectively.

For the three and six months ended December 31, 2021 and January 1, 2021, no single customer accounted for 10% or more of the Company’s net revenue.

The Company’s top 10 customers accounted for 44 % and 43 % of its net revenue for the three and nine months ended April 1, 2022, respectively, and 42 % and 40 % of its net revenue for the three and nine months ended April 2, 2021, respectively.

For the three and nine months ended April 1, 2022 and April 2, 2021, no single customer accounted for 10% or more of the Company’s net revenue.

In connection with the Company’s determination of its reportable segments, effective July 3, 2021, the Company allocated its goodwill between its segments based on the estimated relative fair values of the business units.

In addition, management performed a goodwill impairment assessment for each segment and concluded there were no impairment indicators as of both the beginning and end of the six months ended December 31, 2021.

In addition, management performed a goodwill impairment assessment for each segment and concluded there were no impairment indicators as of both the beginning and end of the nine months ended April 1, 2022.

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

HDD Flash Total

Flash HDD Total

(in millions)

1 unchanged sentence

Foreign currency translation adjustment ( 3 ) ( 2 ) ( 5 )

Balance at December 31, 2021 $ 4,328 $ 5,737 $ 10,065

Balance at April 1, 2022 $ 5,735 $ 4,326 $ 10,061

WESTERN DIGITAL CORPORATION

1 unchanged sentence

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 December 31, 2021 or July 2, 2021.

The Company did not have any contract assets as of either April 1, 2022 or July 2, 2021.

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

1 unchanged sentence

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 as of December 31, 2021 and July 2, 2021 as well as the related amortization for the three and six months ended December 31, 2021 and January 1, 2021 were not material.

Total capitalized contract costs as of April 1, 2022 and July 2, 2021 as well as the related amortization for the three and nine months ended April 1, 2022 and April 2, 2021 were not material.

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 December 31, 2021 and July 2, 2021, contract liabilities were not material.

As of April 1, 2022 and July 2, 2021, contract liabilities were not material.

The Company applies the practical expedients and does not disclose transaction price allocated to the remaining performance obligations for (i) arrangements that have an original expected duration of one year or less, which mainly consist of the support and maintenance contracts, and (ii) variable consideration amounts for sale-based or usage-based royalties for intellectual property (“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 December 31, 2021 was $ 51 million, which is mainly attributable to the functional IP license and service arrangements.

The transaction price allocated to the remaining performance obligations as of April 1, 2022 was $ 42 million, which is mainly attributable to the functional IP license and service arrangements.

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

5 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.

The Company did not sell any trade accounts receivable during the six months ended December 31, 2021.

During the six months ended January 1, 2021, the Company sold trade accounts receivable for cash proceeds of $ 173 million.

During the nine months ended April 1, 2022 and April 2, 2021, the Company sold trade accounts receivable and received cash proceeds of $ 100 million and $ 233 million, respectively.

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

There were no factored receivables outstanding as of December 31, 2021 and July 2, 2021.

As of April 1, 2022 and July 2, 2021, the amount of factored receivables that remained outstanding was $ 100 million and $ 0 , respectively.

(in millions)

28 unchanged sentences

Changes in the warranty accrual were as follows:

Three Months Ended Six Months Ended

2021 January 1,

2021 December 31,

2021 January 1,

Three Months Ended Nine Months Ended

2022 April 2,

2021 April 1,

2022 April 2,

(in millions)

27 unchanged sentences

Amounts reclassified from accumulated other comprehensive income (loss) — — 121 121

Income tax expense related to items of other comprehensive income (loss) — — ( 3 ) ( 3 )

Income tax benefit related to items of other comprehensive income (loss) — — 12 12

Net current-period other comprehensive income (loss) 2 ( 123 ) ( 39 ) ( 160 )

Balance at December 31, 2021 $ ( 34 ) $ ( 79 ) $ ( 104 ) $ ( 217 )

During the three and six months ended December 31, 2021, the amounts reclassified out of AOCI were losses related to foreign exchange contracts and interest rate swap contracts.

Losses reclassified out of AOCI related to foreign exchange contracts were $ 32 million and $ 69 million, respectively, and were substantially charged to Cost of revenue in the Condensed Consolidated Statements of Operations.

Losses reclassified out of AOCI related to interest rate swap contracts were $ 12 million and $ 25 million, respectively, and were charged to Interest expense in the Condensed Consolidated Statements of Operations.

As of December 31, 2021, the amount of existing net losses related to cash flow hedges recorded in AOCI included $ 5 million related to the Company’s interest rate swaps that is expected to be reclassified to earnings after twelve months.

In addition, as of December 31, 2021, the Company did not have any foreign exchange forward contracts with credit-risk-related contingent features.

Balance at April 1, 2022 $ ( 33 ) $ ( 161 ) $ ( 163 ) $ ( 357 )

During the three and nine months ended April 1, 2022, the amounts reclassified out of AOCI were losses related to foreign exchange contracts and interest rate swap contracts.

Losses reclassified out of AOCI related to foreign exchange contracts were $ 14 million and $ 83 million, for the three and nine months ended April 1, 2022, respectively, and were substantially charged to Cost of revenue in the Condensed Consolidated Statements of Operations.

Losses reclassified out of AOCI related to interest rate swap contracts were $ 13 million and $ 38 million, for the three and nine months ended April 1, 2022, respectively, and were charged to Interest expense in the Condensed Consolidated Statements of Operations.

As of April 1, 2022, substantially all of existing net losses related to cash flow hedges recorded in AOCI are expected to be reclassified to earnings within the next twelve months.

In addition, as of April 1, 2022, the Company did not have any foreign exchange forward contracts with credit-risk-related contingent features.

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 December 31, 2021 and July 2, 2021, and indicate the fair value hierarchy of the valuation techniques utilized to determine such values:

December 31, 2021

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 April 1, 2022 and July 2, 2021, and indicate the fair value hierarchy of the valuation techniques utilized to determine such values:

April 1, 2022

Level 1 Level 2 Level 3 Total

14 unchanged sentences

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

During the three and six months ended December 31, 2021 and January 1, 2021, the Company had no transfers of financial assets and liabilities between levels and there were no changes in valuation techniques or the inputs used in the fair value measurement.

During the periods presented, the Company had no transfers of financial assets and liabilities between levels and there were no changes in valuation techniques or the inputs used in the fair value measurement.

WESTERN DIGITAL CORPORATION

2 unchanged sentences

For financial instruments where the carrying value (which includes principal adjusted for any unamortized issuance costs, and discounts or premiums) differs from fair value (which is based on quoted market prices), the following table represents the related carrying value and fair value for each of the Company’s outstanding financial instruments.

Each of the financial instruments presented below was categorized as Level 2 for all periods presented, based on the frequency of trading immediately prior to the end of the second quarter of fiscal 2022 and the fourth quarter of fiscal 2021, respectively.

December 31, 2021 July 2, 2021

Each of the financial instruments presented below was categorized as Level 2 for all periods presented, based on the frequency of trading immediately prior to the end of the third quarter of fiscal 2022 and the fourth quarter of fiscal 2021, respectively.

April 1, 2022 July 2, 2021

Value Carrying

6 unchanged sentences

2,290 2,342 2,288 2,556

Variable interest rate Term Loan A-2 maturing 2027 2,843 2,802 — —

2.85 % senior unsecured notes due 2029

4 unchanged sentences

Derivative Instruments and Hedging Activities

As of December 31, 2021, the Company had outstanding foreign exchange forward contracts that were designated as either cash flow hedges or non-designated hedges.

As of April 1, 2022, the Company had outstanding foreign exchange forward contracts that were designated as either cash flow hedges or non-designated hedges.

Substantially all of the contract maturity dates of these foreign exchange forward contracts do not exceed 12 months.

In addition, the Company had outstanding pay-fixed interest rate swaps that were designated as cash flow hedges of variable rate interest payments on a portion of its term loans through February 2023.

In addition, the Company had outstanding pay-fixed interest rate swaps that were designated as cash flow hedges of variable rate interest payments through February 2023, on a portion of its term loans.

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

For each of the three and six months ended December 31, 2021 and January 1, 2021, total net realized and unrealized transaction and foreign exchange contract currency gains and losses were not material to the Company’s Condensed Consolidated Financial Statements.

For each of the three and nine months ended April 1, 2022 and April 2, 2021, total net realized and unrealized transaction and foreign exchange contract currency gains and losses were not material to the Company’s Condensed Consolidated Financial Statements.

Unrealized gains or losses on designated cash flow hedges are recognized in AOCI.

For more information regarding cash flow hedges, see Part I, Item 1, Note 5.

Supplemental Information - Accumulated other comprehensive income (losses) , of the Notes to the Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q.

Supplemental Information - Accumulated other comprehensive income (loss) , of the Notes to the Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q.

Netting Arrangements

Under certain provisions and conditions within agreements with counterparties to the Company’s foreign exchange forward contracts, subject to applicable requirements, the Company has the right of offset associated with the Company’s foreign exchange forward contracts and is allowed to net settle transactions of the same currency with a single net amount payable by one party to the other.

As of December 31, 2021 and July 2, 2021, the effect of rights of offset was not material and the Company did not offset or net the fair value amounts of derivative instruments in its Condensed Consolidated Balance Sheets.

As of April 1, 2022 and July 2, 2021, the effect of rights of offset was not material and the Company did not offset or net the fair value amounts of derivative instruments in its Condensed Consolidated Balance Sheets.

WESTERN DIGITAL CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Debt consisted of the following as of December 31, 2021 and July 2, 2021:

Debt consisted of the following as of April 1, 2022 and July 2, 2021:

(in millions)

3 unchanged sentences

4.75 % senior unsecured notes due 2026

Variable interest rate Term Loan A-2 maturing 2027 2,850 —

2.85 % senior unsecured notes due 2029

5 unchanged sentences

Long-term debt $ 7,087 $ 8,474

In October 2021, the Company voluntarily prepaid the remaining principal balance of its Term Loan B-4 in accordance with its terms.

In December 2021, the Company issued $ 500 million aggregate principal amount of 2.850 % senior unsecured notes due February 1, 2029 (the “ 2029 Notes ”) and issued $ 500 million aggregate principal amount of 3.100 % senior unsecured notes due February 1, 2032 (the “ 2032 Notes ”) pursuant to the terms of an indenture, dated as of December 10, 2021 (the “Base Indenture”) between the Company and U.S.

4 unchanged sentences

The Company is not required to make principal payments on either the 2029 Notes or 2032 Notes prior to their maturity dates.

Issuance costs and discounts are amortized to interest expense over their respective terms and as of December 31, 2021, unamortized issuance costs and discounts were $ 5 million for the 2029 Notes and $ 6 million for the 2032 Notes.

During the six months ended December 31, 2021, the Company voluntarily paid $ 1.09 billion to prepay the remaining principal balance of its Term Loan B-4 in accordance with its terms.

In addition, during the three months ended December 31, 2021, the Company repaid $ 1.27 billion of the outstanding principal balance on its Term Loan A-1 in accordance with its terms to reduce the remaining outstanding principal balance to $ 3.0 billion using proceeds from the issuance of the 2029 Notes and the 2032 Notes and using cash on hand.

Subsequent to the end of the second quarter of fiscal 2022, on January 7, 2022, the Company entered into a restatement agreement (“Restatement Agreement”) to amend and restate the Loan Agreement, originally dated as of April 29, 2016 (including subsequent amendments and the Restatement Agreement, collectively, the “Loan Agreement”), to provide for, among other things, (i) the issuance of a new $ 3.0 billion Term Loan A-2 maturing in January 2027 (the “Term Loan A-2”) to replace our previously existing Term Loan A-1;

and (ii) the availability of a new $ 2.25 billion revolving credit facility maturing in January 2027 (the “2027 Revolving Facility”) to replace our previously existing $ 2.25 billion revolving credit facility and (iii) additional covenant flexibility and other modifications.

The obligations under the Loan Agreement will be the senior unsecured obligations of the Company and will not benefit from any collateral or subsidiary guarantees.

During the six months ended December 31, 2021, the Company made scheduled principal payments of $ 126 million and voluntary prepayments of $ 1.21 billion on the outstanding principal balance on its Term Loan A-1 in accordance with its terms to reduce the remaining outstanding principal balance to $ 3.00 billion.

Payments were made using proceeds from the issuance of the 2029 Notes and the 2032 Notes and available cash on hand.

On January 7, 2022, the Company entered into a restatement agreement (“Restatement Agreement”) to amend and restate the Loan Agreement, originally dated as of April 29, 2016 (including subsequent amendments and the Restatement Agreement, collectively, the “Loan Agreement”), to provide for, among other things, (i) the issuance of a new $ 3.00 billion Term Loan A-2 maturing in January 2027 (the “Term Loan A-2”) to replace its previously existing Term Loan A-1;

and (ii) the availability of a new $ 2.25 billion revolving credit facility maturing in January 2027 (the “2027 Revolving Facility”) to replace its previously existing $ 2.25 billion revolving credit facility and (iii) additional covenant flexibility and other modifications.

The obligations under the Loan Agreement are the senior unsecured obligations of the Company and do not benefit from any collateral or subsidiary guarantees.

The Term Loan A-2 Loan bears interest, at the Company’s option, at a per annum rate equal to either (x) the Adjusted Term Secured Overnight Financing Rate (“SOFR”) (as defined in the Loan Agreement) plus an applicable margin varying from 1.125 % to 2.000 % or (y) a base rate plus an applicable margin varying from 0.125 % to 1.000 %, in each case depending on the corporate family ratings of the Company from at least two of Standard & Poor’s Ratings Services (“S&P”), Moody’s Investors Service, Inc.

1 unchanged sentence

(“Fitch”), with an initial interest rate of Adjusted Term SOFR plus 1.375 %.

The Term Loan A-2 will amortize in equal quarterly installments of (i) 0.625 % per quarter during the first through the fourth

The Term Loan A-2 amortizes in quarterly installments of $ 19 million for each of the first four quarters beginning the quarter ending July 1, 2022 through the quarter ending March 31, 2023;

$ 38 million per quarter thereafter;

and the remaining balance payable January 7, 2027.

WESTERN DIGITAL CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

full fiscal quarters following the date of the Restatement Agreement (the “Restatement Effective Date”) and (ii) 1.25 % per quarter for the fifth through the nineteenth full fiscal quarters following the Restatement Effective Date, with the remaining balance payable on the date that is five years after the Restatement Effective Date.

Loans under the 2027 Revolving Facility bear interest at a per annum rate, at the Company’s option, equal to either (x) the Adjusted Term SOFR Rate (as defined in the Loan Agreement) plus an applicable margin varying from 1.125 % to 2.000 % or (y) a base rate plus an applicable margin varying from 0.125 % to 1.000 %, in each case depending on the corporate family ratings of the Company from at least two of S&P, Moody’s and Fitch, with an initial rate of Adjusted Term SOFR plus 1.375 %.

The Company will also pay an unused commitment fee on the 2027 Revolving Facility ranging from 0.120 % to 0.350 % based on the corporate family ratings of the Company from at least two of S&P, Moody’s and Fitch, with an initial unused commitment fee of 0.200 %.

Prior to its restatement on January 7, 2022, the Loan Agreement required the Company to comply with certain financial covenants, consisting of a leverage ratio and an interest coverage ratio.

As of December 31, 2021, the Company was in compliance with these financial covenants.

Following its restatement on January 7, 2022, the covenants under the Loan Agreement were simplified and the interest coverage ratio requirement was removed.

The Company is also required to pay an unused commitment fee on the 2027 Revolving Facility ranging from 0.120 % to 0.350 % based on the corporate family ratings of the Company from at least two of S&P, Moody’s and Fitch, with an initial unused commitment fee of 0.200 %.

Issuance costs and discounts are amortized to interest expense over their respective terms, and as of April 1, 2022, unamortized issuance costs and discounts were $ 5 million for the 2029 Notes, $ 6 million for the 2032 Notes, and $ 7 million for the Term Loan A-2.

In accordance with the Loan Agreement, the Company is required to comply with a leverage ratio financial covenant.

As of April 1, 2022, the Company was in compliance with this financial covenant.

WESTERN DIGITAL CORPORATION

16 unchanged sentences

Net amount recognized $ 129 $ 132

Net periodic benefit costs were not material for the three and six months ended December 31, 2021.

Net periodic benefit costs were not material for the three and nine months ended April 1, 2022.

WESTERN DIGITAL CORPORATION

7 unchanged sentences

(“Flash Forward”), collectively referred to as “Flash Ventures”.

The following table presents the notes receivable from, and equity investments in, Flash Ventures as of December 31, 2021 and July 2, 2021:

The following table presents the notes receivable from, and equity investments in, Flash Ventures as of April 1, 2022 and July 2, 2021:

(in millions)

6 unchanged sentences

Total notes receivable and investments in Flash Ventures $ 1,417 $ 1,586

During the three and six months ended December 31, 2021 and during the three and six months ended January 1, 2021, the Company made net payments to Flash Ventures of $ 1.11 billion and $ 2.30 billion, and $ 1.21 billion and $ 2.19 billion, respectively, for purchased flash-based memory wafers and net loans.

During the three and nine months ended April 1, 2022 and during the three and nine months ended April 2, 2021, the Company made net payments to Flash Ventures of $ 1.1 billion and $ 3.4 billion, and $ 1.1 billion and $ 3.3 billion, respectively, for purchased flash-based memory wafers and net loans.

The Company makes, or will make, loans to Flash Ventures to fund equipment investments for new process technologies and additional wafer capacity.

2 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 December 31, 2021 and July 2, 2021, the Company had Accounts payable balances due to Flash Ventures of $ 389 million and $ 398 million, respectively.

As of April 1, 2022 and July 2, 2021, the Company had Accounts payable balances due to Flash Ventures of $ 396 million and $ 398 million, respectively.

The Company’s maximum reasonably estimable loss exposure (excluding lost profits) as a result of its involvement with Flash Ventures, based upon the Japanese yen to U.S.

dollar exchange rate at December 31, 2021, is presented below.

dollar exchange rate at April 1, 2022, is presented below.

Investments in Flash Ventures are denominated in Japanese yen, and the maximum estimable loss exposure excludes any cumulative translation adjustment due to revaluation from the Japanese yen to the U.S.

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

In January 2022, the Company entered into additional agreements regarding Flash Ventures’ investment in a new wafer fabrication facility currently under construction in Yokkaichi, Japan, referred to as “Y7”.

The primary purpose of Y7 is to provide clean room space to continue the transition of existing flash-based wafer capacity to newer flash technology nodes.

The Company is committed to pay, among other items, future building depreciation prepayments of $ 482 million as follows:

$ 142 million in fiscal year 2022, $ 314 million in fiscal year 2023 and $ 26 million in fiscal year 2024, to be credited against future wafer charges.

In June 2019, an unexpected power outage incident occurred at the flash-based memory manufacturing facilities operated in Yokkaichi, Japan.

The power outage incident impacted the facilities and process tools and resulted in damage to flash wafers in production and a reduction in the Company’s flash wafer availability.

During the three and six months ended January 1, 2021, the Company recovered $ 45 million and $ 75 million, respectively, related to this incident from its insurance carriers, which was recorded in Cost of revenue.

During the three and nine months ended April 1, 2022, the Company recovered $ 7 million related to this incident from insurance carriers.

During the three and nine months ended April 2, 2021, the Company recovered $ 45 million and $ 75 million, respectively, related to this incident from insurance carriers.

Recoveries related to the incident were recorded in Cost of revenue.

In February 2022, contamination of certain material used in manufacturing processes occurred at both the Yokkaichi and Kitakami, Japan fabrication facilities, resulting in damage to inventory units in production, a temporary disruption to production operations and a reduction in the Company’s flash wafer availability.

During the three and nine months ended April 1, 2022, the Company incurred charges of $ 203 million related to this contamination incident that were recorded in Cost of revenue, which primarily consisted of scrapped inventory and rework costs, decontamination and other costs needed to restore the facilities to normal capacity, and under absorption of overhead costs.

The Company is evaluating potential options for recovery.

Inventory Purchase Commitments with Flash Ventures.

9 unchanged sentences

dollar-equivalent, based upon the Japanese yen to U.S.

dollar exchange rate as of December 31, 2021.

dollar exchange rate as of April 1, 2022.

Lease Amounts

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NOTES TO CONDENSED 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 December 31, 2021 in U.S.

dollars, based upon the Japanese yen to U.S.

dollar exchange rate as of December 31, 2021:

dollar exchange rate as of April 1, 2022:

Annual Installments Payment of Principal Amortization Purchase Option Exercise Price at Final Lease Terms Guarantee Amount

(in millions)

Remaining six months of 2022 $ 304 $ — $ 304

Remaining three months of 2022 $ 150 $ — $ 150

2023 516 59 575

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The Company has not made any indemnification payments, nor recorded any indemnification receivables, under any such agreements.

As of December 31, 2021, no amounts have been accrued in the Condensed Consolidated Financial Statements with respect to these indemnification agreements.

As of April 1, 2022, no amounts have been accrued in the Condensed Consolidated Financial Statements with respect to these indemnification agreements.

The Company has a joint venture with Unisplendour Corporation Limited and Unissoft (Wuxi) Group Co.

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

For both the three and six months ended December 31, 2021, the Company recognized approximately 4 % of its consolidated revenue on products distributed by the Unis Venture.

For both the three and six months ended January 1, 2021, the Company recognized approximately 3 % of its consolidated revenue on products distributed by the Unis Venture.

The outstanding accounts receivable due from the Unis Venture were 7 % and 6 % of Accounts receivable, net as of December 31, 2021 and July 2, 2021, respectively.

For both the three and nine months ended April 1, 2022, the Company recognized approximately 5 % of its consolidated revenue on products distributed by the Unis Venture.

For both the three and nine months ended April 2, 2021, the Company recognized approximately 3 % of its consolidated revenue on products distributed by the Unis Venture.

The outstanding accounts receivable due from the Unis Venture were 6 % and 5 % of Accounts receivable, net for April 1, 2022 and July 2, 2021, respectively.

WESTERN DIGITAL CORPORATION

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Lease expense is recognized on a straight-line basis over the lease term.

The following table summarizes supplemental balance sheet information related to operating leases as of December 31, 2021:

The following table summarizes supplemental balance sheet information related to operating leases as of April 1, 2022:

Lease Amounts

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($ in millions)

Remaining six months of 2022 $ 27

Remaining three months of 2022 $ 14

Thereafter 188

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

Three Months Ended Six Months Ended

2021 January 1,

2021 December 31,

2021 January 1,

Three Months Ended Nine Months Ended

2022 April 2,

2021 April 1,

2022 April 2,

(in millions)

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The Company also enters into long-term agreements with suppliers that contain fixed future commitments, which are contingent on certain conditions such as performance, quality and technology of the vendor’s components.

As of December 31, 2021, the Company had the following minimum long-term commitments:

As of April 1, 2022, the Company had the following minimum long-term commitments:

Long-term commitments

(in millions)

Remaining six months of 2022 $ 343

Remaining three months of 2022 $ 162

Thereafter 170

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Stock-based Compensation Expense

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

Three Months Ended Six Months Ended

2021 January 1,

2021 December 31,

2021 January 1,

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

Three Months Ended Nine Months Ended

2022 April 2,

2021 April 1,

2022 April 2,

(in millions)

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Total $ 86 $ 83 $ 249 $ 239

Three Months Ended Six Months Ended

2021 January 1,

2021 December 31,

2021 January 1,

Three Months Ended Nine Months Ended

2022 April 2,

2021 April 1,

2022 April 2,

(in millions)

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Windfall tax benefits and tax deficiencies for shortfalls related to the vesting and exercise of stock-based awards, which are recognized as a component of the Company’s Income tax expense, were not material for the periods presented.

Compensation cost related to unvested stock options, RSUs, PSUs, and rights to purchase shares of common stock under the ESPP will generally be amortized on a straight-line basis over the remaining average service period.

The following table presents the unamortized compensation cost and weighted average service period of all unvested outstanding awards as of December 31, 2021:

Compensation cost related to unvested RSUs, PSUs, and rights to purchase shares of common stock under the ESPP will generally be amortized on a straight-line basis over the remaining average service period.

The following table presents the unamortized compensation cost and weighted average service period of all unvested outstanding awards as of April 1, 2022:

Unamortized Compensation Costs Weighted Average Service Period

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The following table summarizes stock option activity under the Company’s incentive plans.

All outstanding options were exercisable at December 31, 2021:

All outstanding options were exercisable at April 1, 2022:

Number of Shares Weighted Average Exercise Price Per Share Weighted Average Remaining Contractual Life Aggregate Intrinsic Value

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Canceled or expired ( 0.4 ) 98.24

Options outstanding at December 31, 2021 1.0 66.15 1.0 9

Options outstanding at April 1, 2022 0.9 65.97 0.77 2

RSUs and PSUs

6 unchanged sentences

Forfeited ( 1.7 ) 51.77

RSUs and PSUs outstanding at December 31, 2021 15.4 53.32

RSUs and PSUs outstanding at April 1, 2022 15.0 53.33

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.

1 unchanged sentence

The Company’s Board of Directors has authorized a stock repurchase program for the repurchase of up to $ 5.0 billion of the Company’s common stock, which authorization is effective through July 25, 2023.

The Company did not make any stock repurchases during the six months ended December 31, 2021 and has not repurchased any shares of its common stock pursuant to its stock repurchase program since the first quarter of fiscal 2019.

The remaining amount available to be repurchased under the Company’s current stock repurchase program as of December 31, 2021 was $ 4.50 billion.

The Company did not make any stock repurchases during the nine months ended April 1, 2022 and has not repurchased any shares of its common stock pursuant to its stock repurchase program since the first quarter of fiscal 2019.

The remaining amount available to be repurchased under the Company’s current stock repurchase program as of April 1, 2022 was $ 4.5 billion.

Repurchases under the stock repurchase program may be made in the open market or in privately negotiated transactions and may be made under a Rule 10b5-1 plan.

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

Three Months Ended Six Months Ended

2021 January 1,

2021 December 31,

2021 January 1,

Three Months Ended Nine Months Ended

2022 April 2,

2021 April 1,

2022 April 2,

($ in millions)

2 unchanged sentences

Effective tax rate 90 % 21 % 26 % 40 %

The primary drivers of the difference between the effective tax rate for the three and six months ended December 31, 2021 and the U.S.

The primary drivers of the difference between the effective tax rate for the three and nine months ended April 1, 2022 and the U.S.

Federal statutory rate of 21%, are the relative mix of earnings and losses by jurisdiction, the deduction for foreign derived intangible income, credits, and tax holidays in Malaysia, the Philippines and Thailand that will expire at various dates during fiscal years 2024 through 2031.

In addition, the effective tax rate for the three and six months ended December 31, 2021 includes the discrete effect of an increase to unrecognized tax benefits as a result of ongoing discussions with various taxing authorities of $ 8 million and $ 25 million, respectively.

The primary drivers of the difference between the effective tax rate for the three and six months ended January 1, 2021 and the U.S.

In addition, the effective tax rate for the three and nine months ended April 1, 2022 includes the discrete effect of a net increase to the liability for unrecognized tax benefits, which includes interest and offsetting tax benefits, as a result of ongoing discussions with various taxing authorities of $ 194 million and $ 219 million, respectively.

The primary drivers of the difference between the effective tax rate for the three and nine months ended April 2, 2021 and the U.S.

Federal statutory rate of 21% are the relative mix of earnings and losses by jurisdiction, the deduction for foreign derived intangible income, credits, and tax holidays in Malaysia, Philippines and Thailand.

In addition, the effective tax rate for the six months ended January 1, 2021 includes the discrete effects of net tax deficiencies from shortfalls of $ 12 million related to the vesting of stock-based awards and additional tax expense of $ 10 million from the re-measurement of certain deferred tax liabilities due to restructuring activities.

The discrete items had no impact on the amount of income taxes paid by the Company.

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 2012.

In addition, the effective tax rate for the three and nine months ended April 2, 2021 includes discrete effects for increases to unrecognized tax benefits of $ 35 million as a result of ongoing discussions with various taxing authorities that are offset in part by a release of certain unrecognized tax benefits of $ 22 million as a result of business realignment activities.

The effective tax rate for the nine months ended April 2, 2021 also includes the discrete effects of net tax deficiencies from shortfalls of $ 11 million related to the vesting of stock-based awards and additional tax expense of $ 10 million from the re-measurement of deferred tax liabilities due to restructuring activities, which have no impact on the amount of income taxes paid by the Company.

As previously disclosed, the IRS issued statutory notices of deficiency and notices of proposed adjustments with respect to transfer pricing with the Company’s foreign subsidiaries and intercompany payable balances for fiscal years 2008 through 2015.

The Company filed petitions with the U.S.

Tax Court with respect to these notices.

Through January 2022, the IRS has filed various Amendments to Answer with the U.S.

Tax Court which (i) assert adjustments relating to transfer pricing with the Company’s foreign subsidiaries for fiscal years 2008 through 2012 that would result in additional federal income tax liabilities totaling approximately $ 1.26 billion for fiscal years 2008 through 2012, and (ii) assert penalties totaling $ 340 million on the proposed adjustments relating to transfer pricing with respect to fiscal years 2008 through 2012.

In addition, 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.

Tax Court covering fiscal years 2008 through 2012, for which it had received statutory notices of deficiency, while fiscal years 2013 through 2015 remain in the jurisdiction of the IRS’s Examination function.

The IRS has filed various Amendments to Answer with the U.S.

Tax Court which, together with the notices of proposed adjustments, would result in additional federal income tax liabilities totaling approximately $ 1.6 billion and penalties totaling $ 449 million with respect to fiscal years 2008 through 2015.

During the three months ended April 1, 2022, in preparation for trial in May 2022, new information became available which required the Company to re-measure its unrecognized tax benefits for which an additional tax expense of $ 224 million, including interest, was recorded.

Uncertain Tax Positions

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

WESTERN DIGITAL CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

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

However, the outcome of tax examinations cannot be predicted with certainty.

The following is a tabular reconciliation of the total amounts of unrecognized tax benefits excluding accrued interest and penalties for the nine months ended April 1, 2022 (in millions):

Accrual balance at July 2, 2021

Gross increases related to current year tax positions 7

Gross increases related to prior year tax positions 216

Gross decreases related to prior year tax positions ( 57 )

Settlements ( 2 )

Lapse of statute of limitations ( 5 )

Accrual balance at April 1, 2022

As of April 1, 2022, the liability for unrecognized tax benefits (excluding accrued interest and penalties) was $ 907 million.

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 April 1, 2022 was $ 231 million.

Of these amounts, approximately $ 996 million could result in potential cash payments.

Subsequent to April 1, 2022, the Company and the IRS tentatively reached a basis for resolving the statutory notices of deficiency and notices of proposed adjustments with respect to fiscal years 2008 through 2015 subject to the parties entering into final stipulations and a closing agreement.

As a result, the trial originally scheduled to take place in May 2022 has been cancelled.

The tentative basis for resolution would incrementally increase the liability for unrecognized tax benefits, including interest and offsetting tax benefits, by approximately $ 80 million to $ 100 million.

Including this incremental increase, the Company expects to pay tax and interest totaling approximately $ 600 million to $ 700 million within the next twelve months, which the Company expects to be partially offset by reductions to its mandatory deemed repatriation tax obligations aggregating to approximately $ 100 million in later years.

The Company is not able to provide a reasonable estimate of the timing of future tax and interest payments related to the remaining unrecognized tax benefits.

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

However, the outcome of such tax examinations cannot be predicted with certainty.

If any issues addressed in the Company’s tax examinations are resolved in a manner not consistent with management’s expectations, the Company could be required to adjust its provision for income taxes in the period such resolution occurs.

As of December 31, 2021, it was not possible to estimate the amount of change, if any, in the unrecognized tax benefits that is reasonably possible within the next twelve months.

Any significant change in the amount of the Company’s liability for unrecognized tax benefits would most likely result from additional information or settlements relating to the examination of the Company’s tax returns.

As of December 31, 2021, the liability for unrecognized tax benefits (excluding accrued interest and penalties) was approximately $ 772 million.

Accrued interest and penalties related to unrecognized tax benefits as of December 31, 2021 was approximately $ 135 million.

Of these amounts, approximately $ 772 million could result in potential cash payments.

The Company is not able to provide a reasonable estimate of the timing of future tax payments related to these obligations.

WESTERN DIGITAL CORPORATION

2 unchanged sentences

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

Three Months Ended Six Months Ended

2021 January 1,

2021 December 31,

2021 January 1,

Three Months Ended Nine Months Ended

2022 April 2,

2021 April 1,

2022 April 2,

(in millions, except per share data)

17 unchanged sentences

The Company recorded the following charges related to these actions:

Three Months Ended Six Months Ended

2021 January 1,

2021 December 31,

2021 January 1,

Three Months Ended Nine Months Ended

2022 April 2,

2021 April 1,

2022 April 2,

(in millions)

2 unchanged sentences

Total employee termination, asset impairment, and other charges $ 4 $ ( 68 ) $ 24 $ ( 43 )

The following table presents an analysis of the components of these activities against the reserve during the six months ended December 31, 2021:

The following table presents an analysis of the components of these activities against the reserve during the nine months ended April 1, 2022:

Employee Termination Benefits

2 unchanged sentences

Cash payments ( 20 )

Accrual balance at December 31, 2021 $ 8

Accrual balance at April 1, 2022 $ 4

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, 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 13, Income Tax Expense.

For disclosures regarding statutory notices of deficiency issued by the IRS in June 2018 and December 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 further Amendments to Answers filed by the IRS in June 2021 and January 2022, and a tentative resolution with respect to certain matters, see Note 13, Income Tax Expense.

Other Matters

3 unchanged sentences

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-Q

Item 1. Financial Statements