What changed in this filing

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Item 8. Financial Statements and Supplementary Data

2022-08-25 compared with 2021-08-27 · 360 added, 343 removed, 1138 unchanged (38% of the section changed)

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Consolidated Financial Statements:

Report of Independent Registered Public Accounting Firm 47

Report of Independent Registered Public Accounting Firm (Auditor Firm ID:

Consolidated Balance Sheets — As of July 1, 2022 and July 2, 2021 51

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Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Critical Audit Matter

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 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.

Critical Audit Matters

The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that:

(1) relate 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 critical audit matters 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 matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.

Assessment of variable consideration for sales to resellers

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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 evaluated the Company’s ability to reasonably 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, subsequent payments and credits issued and then compared our expectation to the actual variable consideration recorded.

Goodwill Re-allocation - Fair Value of the Reporting Units

As discussed in Notes 1 and 3 to the consolidated financial statements, historically, the Company had been managed and reported under a single operating segment.

In 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 (Flash) and hard disk drives (HDD).

To align 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 operating segments:

Flash and HDD.

In connection with the Company’s determination of its operating segments, effective July 3, 2021, the Company determined that its operating segments were also its reporting units and re-allocated its goodwill between its reporting units based on the estimated relative fair values of the reporting units, with $4,328 million allocated to the HDD reporting unit and $5,738 million allocated to the Flash reporting unit.

We identified the assessment of the fair value of the reporting units as of July 3, 2021 as a critical audit matter.

Subjective auditor judgment was required in assessing the forecasted revenue and forecasted cost of revenue assumptions used in the income approach to estimate the fair value of the reporting units.

The assessment of these assumptions was challenging due to the degree of uncertainty related to the forecasted revenue and cost of revenue.

Differences in judgment used to determine these assumptions could have a significant effect on the reporting units’ estimated fair value and the resulting re-allocation of goodwill.

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 to estimate the

reporting units’ fair value, including controls related to the determination of the forecasted revenue and forecasted cost of revenue assumptions for the reporting units.

We evaluated the Company’s forecasted revenue and cost of revenue assumptions by:

• comparing the forecasted revenue and cost of revenue to the Company’s budget,

• comparing the forecasted revenue and cost of revenue to actual revenue and cost of revenue recorded subsequent to the measurement date,

• comparing the forecasted revenue growth rate to the actual revenue growth rate in prior years,

• comparing the forecasted cost of revenue to actual cost of revenue in prior years,

• comparing the forecasted revenue growth rate to the forecasted revenue growth rate projected for peer companies and the industry, as well as other economic data, and

• comparing the forecasted gross margin to historical gross margin for peer companies.

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

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Accrued expenses 1,636 1,390

Income taxes payable 869 263

Accrued compensation 510 634

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authorized — 450 shares;

issued — 312 shares in 2021 and 2020;

issued — 315 shares in 2022 and 312 shares in 2021;

outstanding — 315 shares in 2022 and 308 shares in 2021

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0 shares in 2022 and 4 shares in 2021

( 232 ) ( 737 )

Total shareholders’ equity 12,221 10,721

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(in millions, except per share amounts)

2020 June 28,

Revenue, net $ 18,793 $ 16,922 $ 16,736

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(in millions)

2020 June 28,

Net income (loss) $ 1,500 $ 821 $ ( 250 )

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(in millions)

2020 June 28,

Cash flows from operating activities

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Deferred income taxes 114 ( 242 ) ( 82 )

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

Gain on disposal of assets ( 16 ) ( 70 ) ( 7 )

Gain on business divestiture ( 9 ) — —

Amortization of debt issuance costs and discounts 44 40 40

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Accrued expenses 246 257 103

Income taxes payable ( 74 ) 95 81

Accrued compensation ( 123 ) 162 124

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Acquisitions, net of cash acquired — — ( 22 )

Purchases of investments — — ( 79 )

Proceeds from sale of investments — — 175

Proceeds from maturities of investments — — 7

Proceeds from dispositions of business 32 — —

Notes receivable issuances to Flash Ventures ( 809 ) ( 541 ) ( 353 )

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Taxes paid on vested stock awards under employee stock plans ( 90 ) ( 56 ) ( 72 )

Repurchases of common stock — — ( 563 )

Dividends paid to shareholders — — ( 595 )

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Repayment of debt ( 3,621 ) ( 886 ) ( 982 )

Repayment of revolving credit facility — — ( 500 )

Proceeds from debt 1,894 — —

Debt issuance costs ( 23 ) — —

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Cash paid for interest $ 245 $ 283 $ 372

Noncash exchange of Term Loan A-1 for Term Loan A-2 $ 2,104 $ — $ —

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

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

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

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

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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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Net income — — — — — — 1,500 1,500

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

Employee stock plans 3 — 4 232 ( 201 ) — — 31

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The Company’s broad portfolio of technology and products address the following key end markets:

Client Devices;

Data Center Devices and Solutions;

and Client Solutions.

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.

Cloud, Client and Consumer.

The Company also generates immaterial 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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The Company’s significant accounting policies are summarized below.

Reclassifications

Certain reclassifications have been made to prior period amounts in the Consolidated Financial Statements to conform to the current period presentation.

These reclassifications did not have a material impact on previously reported amounts.

The Company’s fiscal year ends on the Friday nearest to June 30 and typically consists of 52 weeks.

Approximately every five to six years, the Company reports a 53-week fiscal year to align the fiscal year with the foregoing policy.

Fiscal years 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.

Approximately every five to six years, we report a 53-week fiscal year to align the fiscal year with the foregoing policy.

Fiscal years 2022 and 2021, which ended on July 1, 2022 and July 2, 2021, 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.

Unless otherwise indicated, references herein to specific years and quarters are to fiscal years and fiscal quarters, and references to financial information are on a consolidated basis.

Segment Reporting

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.

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

In 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:

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

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 operating segments:

flash-based products and hard disk drives.

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.

Because of the integrated nature of the Company’s production and distribution activities, separate segment asset measures are either not available or not used as a basis for the CODM to evaluate the performance of or to allocate resources to the segments.

WESTERN DIGITAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Basis of Consolidation

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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 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.

However, actual results could differ materially from these estimates.

Cash Equivalents

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Government agency securities as well as bank certificates of deposit with original maturities at purchase of three months or less.

These deposits are typically in excess of U.S.

insured limits.

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

WESTERN DIGITAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Equity Investments

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The Company does not consolidate any cost method investment or equity method investment entities.

WESTERN DIGITAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Fair Value of Financial Instruments

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

WESTERN DIGITAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Business Combinations

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The Company’s assessment of IPR&D also includes consideration of the risk of the projects not achieving technological feasibility.

WESTERN DIGITAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Goodwill and Other Long-Lived Assets

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Instead, it is tested for impairment on an annual basis or more frequently whenever events or changes in circumstances indicate that goodwill may be impaired.

The Company performs an annual impairment test as of the beginning of its fiscal fourth quarter.

The Company performs an annual impairment test as of the beginning of its fourth quarter.

The Company uses qualitative factors to determine whether goodwill is more likely than not impaired and whether a quantitative test for impairment is considered necessary.

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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.

WESTERN DIGITAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Other long-lived intangible assets are amortized over their estimated useful lives based on the pattern in which the economic benefits are expected to be received.

Other long-lived assets are depreciated or amortized over their estimated useful lives based on the pattern in which the economic benefits are expected to be received.

Long-lived assets are tested for recoverability whenever events or changes in circumstances indicate that their carrying amounts may not be recoverable.

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Revenue and Accounts Receivable

In May 2014, the Financial Accounting Standards Board (“FASB”) issued ASU No.

2014-09, “Revenue from Contracts with Customers (Topic 606),” which superseded the requirements in Accounting Standards Codification (“ASC”) 605 “Revenue Recognition” (Topic 605)”.

Topic 606 outlines a comprehensive five-step revenue recognition model based on the principle that an entity should recognize revenue when control of the promised goods or services is transferred to customers at an amount that reflects the consideration to which the Company expects to be entitled in exchange for those goods or services.

Topic 606 also requires more detailed disclosures to enable users of financial statements to understand the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers.

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.

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.

These arrangements had no remaining performance obligations but were previously recognized under Topic 605 when they were reported to the Company by its licensees, which was generally one quarter in arrears from the licensees’ sales of the licensed products.

Adoption of the standard did not have a material impact on the Company’s financial position, results of operations, and cash flows.

The Company offers a broad range of data storage products that include Client Devices, Data Center Devices and Solutions, and Client Solutions.

Client Devices consist of hard disk drives (“HDDs”) and solid state drives (“SSDs”) for computing devices;

flash-based embedded storage products;

and flash-based memory wafers.

Data Center Devices and Solutions consist of high-capacity enterprise HDDs and high-performance enterprise SSDs, data center software and system solutions.

Client Solutions consist of HDDs and SSDs embedded into external storage products and removable flash-based products.

The Company also generates license and royalty revenue related to its IP patent licenses.

The Company recognizes revenue when it satisfies a performance obligation by transferring control over a product or service to the customer.

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Substantially all of the Company’s revenue is from the sale of tangible products for which the performance obligations are satisfied at a point in time, generally upon delivery.

The Company’s services revenue mainly includes post contract customer support, warranty as a service and maintenance contracts.

The Company’s services revenue mainly includes professional service arrangements and post contract customer support, warranty as a service and maintenance contracts.

The performance obligations for the Company’s services are generally satisfied ratably over the service period based on the nature of the service provided and contract terms.

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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.

For these contracts with multiple performance obligations, the Company evaluates whether each deliverable is a distinct promise and should be accounted for as a separate performance obligation.

For contracts with multiple performance obligations, the Company evaluates whether each deliverable is a distinct promise and should be accounted for as a separate performance obligation.

If a promised good or service is not distinct in accordance with the revenue guidance, the Company combines that good or service with the other promised goods or services in the arrangement until a distinct bundle of goods is identified.

The Company allocates the transaction price to the performance obligations of each distinct product or service, or distinct bundle, based on their relative standalone selling prices.

Where a separate standalone selling price is not available, the transaction price is based on the Company’s best estimate of the standalone selling price.

The Company uses one or a combination of more than one of the following methods to estimate the standalone selling price:

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

If applicable, the Company allocates the transaction price to the performance obligations of each distinct product or service, or distinct bundle, based on their relative standalone selling prices.

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.

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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)

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.

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.

WESTERN DIGITAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Stock-based Compensation

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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 $ 6.07 billion and $ 4.88 billion at July 1, 2022 and July 2, 2021, 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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Recognized gains and losses on foreign exchange contracts are reported in Cost of revenue and Operating expenses, and presented within cash flows from operating activities.

The Company accounts for its interest rate swaps as designated cash flow hedges to mitigate variations in interest payments under a portion of its LIBOR-based term loans due to variations in the LIBOR index.

The Company pays interest monthly at a fixed rate and receives interest monthly at the LIBOR rate on the notional amount of the contract with realized gains or losses recognized in Interest expense.

The Company accounts for its interest rate swaps as designated cash flow hedges to mitigate variations in interest payments under a portion of its Secured Overnight Financing Rate (“SOFR”)-based term loans.

The Company pays interest monthly at a fixed rate and receives interest monthly at the SO FR on the notional amoun t of the contract with realized gains or losses recognized in Interest expense.

Hedge effectiveness is measured by comparing the hedging instrument’s cumulative change in fair value from inception to maturity to the underlying exposure’s terminal value.

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

WESTERN DIGITAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Pensions and Other Post-Retirement Benefit Plans

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The Company amortizes unrecognized actuarial gains and losses and prior service costs on a straight-line basis over the remaining estimated average service life of the participants.

The measurement date for the plans is the Company’s fiscal year-end.

The measurement date for the plans is the Company’s year-end.

The Company recognizes the funded status of its defined benefit pension and post-retirement plans in the Consolidated Balance Sheets, with actuarial changes in the funded status recognized through accumulated other comprehensive income (loss) in the year in which such changes occur.

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

Effective June 29, 2019, the first day of the year ended July 3, 2020, the Company adopted ASU No.

2016-02, “Leases (Topic 842)” (“ASU 2016-02”) which resulted in an after-tax decrease to opening retained earnings of $ 5 million for the cumulative effect of adoption, primarily due to previously recorded sublease proceed assumptions on lease exit liabilities for which there was no expected future economic benefit at transition.

The Company leases certain domestic and international facilities and data center space under long-term, non-cancelable operating leases that expire at various dates through 2034.

These leases include no material variable or contingent lease payments.

Operating lease assets and liabilities are recognized based on the present value of the remaining lease payments discounted using the Company’s incremental borrowing rate.

Operating lease assets also include prepaid lease payments minus any lease incentives.

Extension or termination options present in the Company’s lease agreements are included in determining the right-of-use asset and lease liability when it is reasonably certain the Company will exercise that option.

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

WESTERN DIGITAL CORPORATION

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Accounting Pronouncements Recently Adopted

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

In December 2019, the FASB issued ASU No.

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The ASU also adds guidance to reduce complexity in certain areas, including recognizing deferred taxes for tax goodwill and allocating taxes to members of a consolidated group.

This ASU is effective for fiscal years (and interim periods within those fiscal years) beginning after December 15, 2020, which for the Company is the first quarter of fiscal 2022.

Early adoption is permitted.

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

The Company adopted this ASU on July 3, 2021, the first day of the year ended July 1, 2022, with no material impact on its Consolidated Financial Statements.

Recently Issued Accounting Pronouncements Not Yet Adopted

In August 2020, the FASB issued ASU No.

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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.

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.

The Company adopted the new standard effective July 2, 2022, the first day of the year ending June 30, 2023, using the modified retrospective method.

On the date of adoption, the Company recorded a reduction in Additional Paid-In Capital of $ 128 million, a reduction of unamortized debt discount of $ 48 million, a reduction of deferred income tax liabilities of $ 11 million, and an increase to retained earnings of $ 91 million retained earnings for 2023 for the after-tax impact of previously recognized amortization of the debt discount associated with the Co mpany’s convertible senior notes.

In November 2021, the FASB issued ASU No.

2021-10, “Government Assistance (Topic 832):

Disclosures by Business Entities about Government Assistance” (“ASU 2021-10”).

ASU 2021-10 increases the transparency of government assistance received by requiring most business entities to disclose information about government assistance received, including (1) the types of assistance, (2) the entity’s accounting for the assistance, and (3) the effect of the assistance on an entity’s financial statements.

This ASU is effective for fiscal years (and interim periods within those fiscal years) beginning after December 15, 2021, which for the Company is the first quarter of 2023.

Early adoption is permitted.

The Company expects to adopt this standard in the first quarter of 2023 and does not expect any material impact from the adoption of this standard.

WESTERN DIGITAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Business Segments, Geographic Information, and Concentrations of Risk

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

2022 2021 2020

(in millions, except percentages)

Flash $ 9,753 $ 8,706 $ 7,769

HDD 9,040 8,216 8,967

Total net revenue $ 18,793 $ 16,922 $ 16,736

Gross profit:

Flash $ 3,527 $ 2,611 $ 1,903

HDD 2,661 2,221 2,602

Total gross profit for segments 6,188 4,832 4,505

Unallocated corporate items:

Amortization of acquired intangible assets ( 66 ) ( 331 ) ( 610 )

Stock-based compensation expense ( 48 ) ( 55 ) ( 51 )

Contamination related charges ( 207 ) — —

Recoveries from a power outage incident 7 75 ( 68 )

Total unallocated corporate items ( 314 ) ( 311 ) ( 724 )

Consolidated gross profit $ 5,874 $ 4,521 $ 3,781

Gross margin:

Flash 36.2 % 30.0 % 24.5 %

HDD 29.4 % 27.0 % 29.0 %

Consolidated gross margin 31.3 % 26.7 % 22.6 %

In addition, management performed a goodwill impairment assessment for each segment and concluded there were no impairment indicators as of July 1, 2022.

In May 2022, the Company made a decision to exit its RISC-V development operations and completed the sale of the portion of its business for a price of $ 25 million.

The sale of this business included the transfer of a small number of employees and an immaterial amount of other tangible and intangible assets as well as goodwill.

The transaction resulted in a gain of approximately $ 9 million recorded in Employee termination, asset impairment, and other charges in the Consolidated Statements of Operations for the fiscal year ended July 1, 2022.

The revenues and expenses related to this business were not material to the Consolidated Financial Statements and did not qualify to be reported as a discontinued operation.

The operating results of this business 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.

WESTERN DIGITAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

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

Flash HDD Total

(in millions)

Balance at July 2, 2021 $ 5,738 $ 4,328 $ 10,066

Reduction in goodwill in connection with disposition of business ( 14 ) — ( 14 )

Foreign currency translation adjustment ( 6 ) ( 5 ) ( 11 )

Balance at July 1, 2022 $ 5,718 $ 4,323 $ 10,041

Disaggregated Revenue

The Company’s broad portfolio of technology and products address multiple end markets.

In 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 enterprise customers, which the Company believes it is uniquely positioned to address as the only provider of both Flash and HDD.

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

The Consumer end market is highlighted by the Company’s broad range of retail and other end-user products, which capitalize on the strength of the Company’s product brand recognition and vast points of presence around the world.

The Company’s disaggregated revenue information is as follows:

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(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

Cloud $ 8,017 $ 5,723 $ 7,018

Client 7,076 7,281 6,335

Consumer 3,700 3,918 3,383

Total Revenue $ 18,793 $ 16,922 $ 16,736

WESTERN DIGITAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

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.

The following tables summarize the Company’s operations by geographic area:

2022 2021 2020

(in millions)

Net revenue (1)

United States $ 5,411 $ 3,789 $ 4,679

China 4,525 4,339 4,075

Hong Kong 3,645 3,624 2,592

Rest of Asia 1,884 1,492 1,699

Europe, Middle East and Africa 2,872 3,061 2,926

Other 456 617 765

Total $ 18,793 $ 16,922 $ 16,736

(1) Net revenue is attributed to geographic regions based on the ship-to location of the customer.

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

(in millions)

Long-lived assets (1)

United States $ 1,130 $ 1,068

Malaysia 831 632

China 441 395

Thailand 816 651

Rest of Asia 406 398

Europe, Middle East and Africa 46 44

Total $ 3,670 $ 3,188

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

Customer Concentration and Credit Risk

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

For each of 2022, 2021 and 2020, no customer accounted for 10% or more of the Company’s net revenue.

For 2022, 2021 and 2020, the Company’s top 10 customers accounted for 45 %, 39 %, and 42 % respectively, of the Company’s net revenue.

The Company performs ongoing credit evaluations of its customers’ financial condition and generally requires no collateral.

The Company maintains allowances for potential credit losses, and such losses have historically been within management’s expectations.

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 1, 2022, the Company had net accounts receivable of $ 2.8 billion, and no customer accounted for 10% or more of the Company’s outstanding accounts receivable.

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

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

WESTERN DIGITAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

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.

Supplier Concentration

All of the Company’s Flash require silicon wafers for the memory and controller components.

The Company’s flash memory wafers are currently supplied almost entirely from Flash Ventures (as defined in Note 10) and the Company’s controller wafers are all manufactured by third-party sources.

The failure of any of these sources to deliver silicon wafers could have a material adverse effect on the Company’s business, financial condition and results of operations.

In addition, some key components are purchased from single source vendors for which alternative sources are currently not available.

Shortages could occur in these essential materials due to an interruption of supply or increased demand in the industry.

If the Company was unable to procure certain of such materials, the Company’s sales could decline, which could have a material adverse effect upon its results of operations.

The Company also relies on third-party subcontractors to assemble and test a portion of its products.

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 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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

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 1, 2022 or July 2, 2021.

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.

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

Contract liabilities as of July 1, 2022 and July 2, 2021 and changes in contract liabilities during 2022 and 2021 were not material.

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

The Company has applied the practical expedient to recognize the direct incremental costs of obtaining contracts as an expense when incurred if the amortization period is expected to be one year or less or the amount is not material, with these costs charged to Selling, general and administrative expenses.

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 2, 2021 and July 3, 2020 and for the years then ended, were not material.

The Company had no direct incremental costs to obtain contracts that have an expected benefit of greater than one year.

The Company applies the practical expedients and does not disclose transaction price allocated to the remaining performance obligations for (i) arrangements that have an original expected duration of one year or less, which mainly consist of the support and maintenance contracts, and (ii) variable consideration amounts for sale-based or usage-based royalties for 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 2, 2021 was $ 71 million, which is mainly attributable to the functional IP license and service arrangements.

Remaining performance obligations are mainly attributed to right-to-access patent license arrangements, professional service arrangements and customer support and service contracts which will be recognized over the remaining contract period.

The transaction price allocated to the remaining performance obligations as of July 1, 2022 was $ 45 million, which is mainly attributable to the functional IP license and professional 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.

$ 43 million in 2023, and $ 2 million in 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 2021, 2020 and 2019, the Company sold trade accounts receivable and received cash proceeds of $ 233 million, $ 411 million and $ 1.02 billion, respectively.

In 2022, 2021 and 2020, the Company sold trade accounts receivable and received cash proceeds of $ 400 million, $ 233 million and $ 411 million, 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.

17 unchanged sentences

Property, plant and equipment, net $ 3,670 $ 3,188

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

WESTERN DIGITAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Carrying Amount

(in millions)

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 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, 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.

Goodwill is primarily attributable to the benefits the Company expects to derive from diversifying product offerings in its Data Center Devices and Solutions and Client Solutions end markets as well as the acquired workforce.

The expenses incurred by the Company related to the acquisition as well as the revenues and earnings related to the acquisition were not material to the Consolidated Financial Statements.

In September 2019, the Company announced its intention to exit storage systems, which consisted of IntelliFlash and ActiveScale.

These actions allow the Company to redirect investments to other high value priorities.

In November 2019, the Company completed its sale of IntelliFlash for a price of $ 28 million, to be collected over the next three years .

The sale of the IntelliFlash business included an immaterial amount of inventory, other tangible and intangible assets, and goodwill;

and resulted in a gain of approximately $ 17 million recorded in Employee termination, asset impairment, and other charges in the Consolidated Statements of Operations for the year ended July 3, 2020.

Additionally, in March 2020, the Company completed the sale of ActiveScale.

The net assets sold and the proceeds from the sale of ActiveScale were not material.

The revenues and expenses related to these businesses were not material to the Consolidated Financial Statements and did not qualify to be reported as discontinued operations.

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.

Depreciation expense for property, plant and equipment totaled $ 708 million, $ 726 million and $ 797 million in 2022, 2021 and 2020, respectively.

WESTERN DIGITAL CORPORATION

29 unchanged sentences

Intangible asset amortization $ 221 $ 486 $ 769

The remaining $ 133 million estimated future amortization expense for intangible assets currently subject to amortization as of July 1, 2022, will be fully recognized in 2023.

WESTERN DIGITAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The following table presents estimated future amortization expense for intangible assets currently subject to amortization as of July 2, 2021:

Future Intangible Asset Amortization Expenses

(in millions)

2024 and thereafter 7

Total future amortization expense $ 362

Product warranty liability

17 unchanged sentences

Non-current net tax payable $ 659 $ 684

Payables related to unrecognized tax benefits 750 720

Non-current portion of unrecognized tax benefits 477 750

Other non-current liabilities 643 633

7 unchanged sentences

(in millions)

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

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

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

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

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

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

Net current-period other comprehensive loss ( 5 ) ( 6 ) ( 78 ) ( 89 )

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

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

4 unchanged sentences

Balance at July 1, 2022 $ ( 11 ) $ ( 277 ) $ ( 266 ) $ ( 554 )

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.

During 2022 and 2021, the amounts reclassified out of AOCI included losses of $ 125 million and $ 50 million related to foreign exchange contracts and losses of $ 47 million and $ 25 million related to interest rate swaps, respectively.

The losses related to interest rate swaps were charged to interest expense and losses related to foreign contracts were substantially all charged to cost of revenue in the Consolidated Statements of Operations.

WESTERN DIGITAL CORPORATION

13 unchanged sentences

Foreign exchange contracts — 61 — 61

Interest rate swap contracts — 3 — 3

Total assets at fair value $ 266 $ 64 $ — $ 330

Foreign exchange contracts $ — $ 316 $ — $ 316

Interest rate swap contract — 80 — 80

Total liabilities at fair value $ — $ 316 $ — $ 316

5 unchanged sentences

Foreign exchange contracts $ — $ 65 $ — $ 65

Interest rate swap contract — 133 — 133

Interest rate swap contracts — 80 — 80

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

23 unchanged sentences

(in millions)

0.50 % convertible senior notes due 2020

$ — $ — $ 34 $ 30

Variable interest rate Term Loan A-1 maturing 2023 4,327 4,346 4,576 4,474

Variable interest rate Term Loan B-4 maturing 2023 1,093 1,094 1,692 1,656

1.50 % convertible notes due 2024

2 unchanged sentences

2,291 2,205 2,288 2,556

Variable interest rate Term Loan A-2 maturing 2027 2,693 2,621 — —

2.85 % senior unsecured notes due 2029

3.10 % senior unsecured notes due 2032

Variable interest rate Term Loan B-4 — — 1,093 1,094

Variable interest rate Term Loan A-1 — — 4,327 4,346

Total $ 7,022 $ 6,667 $ 8,725 $ 9,169

5 unchanged sentences

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.

As of July 2, 2021, the amount of existing net losses related to cash flow hedges recorded in AOCI included $ 30 million related to the Company’s interest rate swaps that is expected to be reclassified to earnings after twelve months.

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

As of July 1, 2022, the Company did not have any derivative contracts with credit-risk-related contingent features.

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

7 unchanged sentences

(in millions)

0.50 % convertible senior notes due 2020

Variable interest rate Term Loan A-1 maturing 2023 4,332 4,583

Variable interest rate Term Loan B-4 maturing 2023 1,093 1,693

1.50 % convertible notes due 2024

$ 1,100 $ 1,100

4.75 % senior unsecured notes due 2026

Variable interest rate Term Loan A-2 maturing 2027 2,700 —

2.85 % senior unsecured notes due 2029

3.10 % senior unsecured notes due 2032

Variable interest rate Term Loan A-1 — 4,332

Variable interest rate Term Loan B-4 — 1,093

Total debt 7,100 8,825

3 unchanged sentences

Long-term debt $ 7,022 $ 8,474

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 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.

At July 2, 2021, the Company’s borrowing capacity under the revolving credit facility was $ 2.25 billion.

The Term Loan A-1 bears 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.

Currently the Company has selected the LIBOR rate option, and the applicable rate was 1.60 % as of July 2, 2021.

Principal payments are due in quarterly installments of 1.250 % per quarter through December 2022, with the remaining balance payable on February 27, 2023.

The Term Loan A-1 issuance costs are amortized to interest expense over the term of the loan, and as of July 2, 2021, issuance costs of $ 5 million remained unamortized.

The Term Loan B-4 bears interest at a rate equal to, at the Company’s option, either an adjusted LIBOR rate, subject to a 0.00 % floor, plus 1.75 % or a base rate plus 0.75 %.

Currently the Company has selected the LIBOR rate option, and the applicable interest rate was 1.85 % as of July 2, 2021.

During 2021, the Company made aggregate voluntary prepayments of $ 600 million on its Term Loan B-4, which was applied toward the remaining scheduled amortization and the remainder towards the principal due at maturity.

As of July 2, 2021, there are no longer any scheduled amortization payments due under the Term Loan B-4 prior to its maturity on April 29, 2023.

As of July 2, 2021, issuance costs of less than $ 1 million remained unamortized.

On July 19, 2021, the Company made an incremental voluntary prepayment of $ 150 million on its Term Loan B-4.

On January 7, 2022, the Company entered into a restatement agreement (the “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 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.

(“Moody’s”) and Fitch Ratings, Inc.

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

During 2022, the Company made scheduled and voluntary principal payments aggregating $ 300 million on its Term Loan A-2.

$ 150 million was applied toward scheduled amortization through the quarter ending September 29, 2023 and the remainder towards the principal due at maturity.

As of July 1, 2022, the remaining balance of Term Loan A-2 amortizes in quarterly installments of $ 38 million per quarter beginning with the quarter ending December 29, 2023;

and the remaining balance payable at maturity on January 7, 2027.

Issuance costs for Term Loan A-2 are amortized to interest expense over its term and unamortized costs were $ 7 million as of July 1, 2022.

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 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 %.

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

WESTERN DIGITAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

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

Bank National Association, as trustee (the “Trustee”), as supplemented by the first supplemental indenture dated as of December 10, 2021 (the “First Supplemental Indenture”) between the Company and the Trustee.

As used herein, “Indenture” means the Base Indenture, as supplemented by the First Supplemental Indenture.

The Indenture contains certain restrictive covenants which are subject to a number of limitations and exceptions.

Interest for both the 2029 Senior Unsecured Notes and 2032 Senior Unsecured Notes is payable on February 1 and August 1 of each year.

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

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

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

In February 2018, the Company issued $ 1.10 billion aggregate principal amount of convertible senior notes due February 1, 2024 (the “2024 Convertible Notes”).

1 unchanged sentence

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 the Company’s wholly owned subsidiary, Western Digital Technologies (“WDT”).

WESTERN DIGITAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The 2024 Convertible Notes are convertible into cash, shares of the Company’s common stock, or a combination thereof at an initial conversion price of $ 121.91 per share of common stock.

Holders of the 2024 Convertible Notes may freely convert their 2024 Convertible Notes on or after November 1, 2023 until the close of business on the business day immediately preceding the maturity date.

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.

As of July 1, 2022, the Company is required to settle any conversion value with the principal amount of the 2024 Convertible Notes settled in cash and any excess value in cash, shares of the Company’s common stock, or a combination thereof, pursuant to the terms of an indenture, dated as of February 13, 2018 between the Company, HGST, Inc., WD Media, LLC, Western Digital (Fremont), LLC, Western Digital Technologies, Inc.

Bank National Association, as trustee (the “Trustee”), as supplemented by the first supplemental indenture dated as of June 30, 2022 (the “First Supplemental Indenture”) between the Company and the Trustee.

Prior to June 30, 2022, any conversion value on the 2024 Convertible Notes could be settled in cash, shares of the Company’s common stock, or a combination thereof.

As of July 1, 2022, 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.

Through July 1, 2022, the Company had separately accounted for the liability and equity components of the 2024 Convertible Notes.

The value of the liability component as of the date of issuance was recognized at the present value of its cash flows using a discount rate of 4.375 %, the Company’s borrowing rate at the date of the issuance for a similar debt instrument without the conversion feature, resulting in a debt discount of $ 165 million, which was allocated to equity as the value of the conversion feature.

2 unchanged sentences

As of July 1, 2022, debt discount and issuance costs of $ 52 million remained unamortized.

See Note 2, Recent Accounting pronouncements, for a discussion of a change in accounting that became effective July 2, 2022.

In February 2018, the Company issued $ 2.30 billion aggregate principal amount of senior unsecured notes due February 15, 2026 (the “2026 Senior Unsecured Notes”).

1 unchanged sentence

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 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.

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 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.

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

Issuance costs for the 2026 Senior Unsecured Notes are amortized to interest expense over the term of the 2026 Senior Unsecured Notes and as of July 1, 2022, issuance costs of $ 9 million remained unamortized.

WESTERN DIGITAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

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

The Loan Agreement requires the Company to comply with a maximum total funded debt to trailing twelve-month Consolidated Adjusted EBITDA ratio financial covenant.

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 Loan Agreement, including, for purposes of the financial covenants, an addback for certain depreciation-related payments made to the Company’s Flash Ventures.

As of July 1, 2022, the Company was in compliance with these financial covenants under the Loan Agreement.

The Loan 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, certain asset sales, mergers, consolidations, liquidations and dissolutions.

In addition, the indentures governing the Company’s 2026 Senior Unsecured Notes, 2029 Senior Unsecured Notes, 2032 Senior Unsecured Notes and the 2024 Convertible Notes each contain various restrictive covenants, which include limitations on the Company’s and its subsidiaries’ ability to, among other things, consolidate, merge or sell all or substantially all of their assets;

create liens;

42 unchanged sentences

The accumulated benefit obligation for the Pension Plans was $ 294 million at July 1, 2022.

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.

As of July 1, 2022, the Accumulated Other Income pension balance was $ 13 million.

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 1, 2022.

37 unchanged sentences

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

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

Plan assets measured at net asset value:

Real estate investment trust $ 30

Net plan assets subject to leveling — 158 — 158

Real estate investment trust at net asset value 31

Total investments at fair value $ — $ 158 $ — $ 189

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 $ 12 $ 203 $ — $ 215

Net plan assets subject to leveling — 196 — 196

Real estate investment trust at net asset value 30

Total investments at fair value $ — $ 196 $ — $ 226

(1) Commingled funds represent pooled institutional investments.

40 unchanged sentences

Production of flash-based wafers in Y6 started in 2018.

The Company also has a facility agreement with Kioxia related to the construction and operation of Kioxia’s “K1” 300-milimeter wafer fabrication facility in Kitakami, Japan.

The Company also has a facility agreement with Kioxia related to the construction and operation of Kioxia’s “K1” 300-millimeter wafer fabrication facility in Kitakami, Japan.

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.

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.

In connection with the start-up of this facility, as of July 1, 2022, the Company has made prepayments toward future K1 building depreciation aggregating approximately $ 360 million which are to be credited against future wafer charges.

As of July 1, 2022, there were no remaining committed prepayments.

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 aggregating approximately $ 290 million as follows:

$ 268 million in 2023 and $ 22 million in 2024, to be credited against future wafer charges.

WESTERN DIGITAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The Company accounts for its ownership position of each entity within Flash Ventures under the equity method of accounting.

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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.

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 1, 2022 and July 2, 2021:

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As of July 1, 2022 and July 2, 2021, the Company’s retained earnings included undistributed earnings of Flash Ventures of $ 43 million and $ 33 million, respectively.

WESTERN DIGITAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

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.

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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.

WESTERN DIGITAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Flash Ventures has historically operated near 100 % of its manufacturing capacity.

During 2019, as a result of flash business conditions, the Company temporarily reduced its utilization of its share of Flash Ventures’ manufacturing capacity to an abnormally low level to more closely align the Company’s flash-based wafer supply with the projected demand.

In 2019, the Company incurred costs of $ 264 million associated with the reduction in utilization, which was recorded as a charge to 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 2022, the Company incurred charges of $ 207 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.

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

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

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.

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

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

In 2022 and 2021, the Company recovered $ 7 million and $ 75 million, respectively, related to this incident from the utility and its insurance carriers, which was recorded in cost of revenue.

Inventory Purchase Commitments with Flash Ventures.

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Total guarantee obligations ¥ 238 $ 1,760

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 1, 2022 in U.S.

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Total guarantee obligations $ 1,277 $ 483 $ 1,760

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.

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

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.

For the years ended July 1, 2022, July 2, 2021 and July 3, 2020, the Company recognized approximately 4 %, 3 %, and 1 % of its consolidated revenue on products distributed by the Unis Venture, respectively.

The outstanding accounts receivable due from the Unis Venture were 5 % of Accounts receivable, net as of both July 1, 2022 and July 2, 2021.

WESTERN DIGITAL CORPORATION

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Leases and Other Commitments

The Company leases certain domestic and international facilities and data center space under long-term, non-cancelable operating leases that expire at various dates through 2034.

These leases include no material variable or contingent lease payments.

Operating lease assets and liabilities are recognized based on the present value of the remaining lease payments discounted using the Company’s incremental borrowing rate.

Operating lease assets also include prepaid lease payments minus any lease incentives.

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 July 1, 2022:

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Total $ 1,349

Sale-Leaseback

In April 2019, the Company completed a sale and leaseback of its manufacturing facility in Fremont, California.

The Company received proceeds from the sale of $ 115 million and recognized a loss of $ 25 million.

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 an additional 20 years.

WESTERN DIGITAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

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.

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 following tables summarize the Company’s operations by geographic area:

2021 2020 2019

(in millions)

Net revenue (1)

United States $ 3,789 $ 4,679 $ 3,602

China 4,339 4,075 3,861

Hong Kong 3,624 2,592 3,122

Rest of Asia 1,492 1,699 2,116

Europe, Middle East and Africa 3,061 2,926 3,109

Other 617 765 759

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

(1) Net revenue is attributed to geographic regions based on the ship-to location of the customer.

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

(in millions)

Long-lived assets (1)

United States $ 1,068 $ 949

Malaysia 632 643

China 395 373

Thailand 651 472

Rest of Asia 398 366

Europe, Middle East and Africa 44 51

Total $ 3,188 $ 2,854

(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, 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.

For 2021, 2020 and 2019, the Company’s top 10 customers accounted for 39 %, 42 %, and 45 %, respectively, of the Company’s net revenue.

The Company performs ongoing credit evaluations of its customers’ financial condition and generally requires no collateral.

The Company maintains allowances for potential credit losses, and such losses have historically been within management’s expectations.

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 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.

Supplier Concentration

All of the Company’s flash memory system products require silicon wafers for the memory and controller components.

The Company’s flash memory wafers are currently supplied almost entirely from Flash Ventures and the controller wafers are all manufactured by third-party sources.

The failure of any of these sources to deliver silicon wafers could have a material adverse effect on the Company’s business, financial condition and results of operations.

In addition, some key components are purchased from single source vendors for which alternative sources are currently not available.

Shortages could occur in these essential materials due to an interruption of supply or increased demand in the industry.

If the Company was unable to procure certain of such materials, the Company’s sales could decline, which could have a material adverse effect upon its results of operations.

The Company also relies on third-party subcontractors to assemble and test a portion of its products.

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

Western Digital Corporation 401(k) Plan

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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 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.

Through December 31, 2021, eligible employees were 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.

Effective January 1, 2022, eligible employees are generally able to contribute up to 85 % of their eligible compensation on a combined pre-tax and Roth basis regardless of age, and 10 % of their eligible compensation on an after-tax basis by payroll withholding.

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.

The Company’s employer matching contributions vest over a two-year graded period.

Prior to January 1, 2022, the Company’s employer matching contributions vested over a two-year graded period through December 31, 2021 with all unvested contributions vesting on December 31, 2021 and, effective January 1, 2022, the Company’s employer matching contributions vest immediately.

The Company may suspend matching contributions at any time at its discretion.

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Shareholders’ Equity

2017 Performance Incentive Plan

The types of awards that may be granted under the Western Digital Corporation Amended and Restated 2017 Performance Incentive Plan (as amended, the “2017 Performance Incentive Plan”) include stock options, stock appreciation rights (“SARs”), RSUs, PSUs, stock bonuses and other forms of awards granted or denominated in the Company’s common stock or units of the Company’s common stock, as well as cash bonus awards.

Persons eligible to receive awards under the 2017 Performance Incentive Plan include officers and employees of the Company or any of its subsidiaries, directors of the Company and certain consultants and advisors to the Company or any of its subsidiaries.

The vesting of awards under the 2017 Performance Incentive Plan is determined at the date of grant.

2021 Long-Term Incentive Plan

In November 2021, stockholders approved the Western Digital Corporation 2021 Long-Term Incentive Plan (the “2021 Plan”).

Upon the effective date of the 2021 Plan, no new awards were granted under the Western Digital Corporation Amended and Restated 2017 Performance Incentive Plan (the “2017 Plan”).

The aggregate maximum number of shares of the Company’s common stock that may be issued pursuant to awards from the 2021 Plan may not exceed (a) 9.5 million shares, less (b) one share of common stock for each share of common stock granted under a prior plan on or after September 5, 2021 and prior to the 2021 Plan’s effective date, plus (c) any shares of common stock subject to outstanding awards under a prior plan as of the effective date that on or after the effective date are forfeited, terminated, expire, lapse without being exercised (to the extent applicable), or are otherwise reacquired by the Company.

Any shares subject to awards under the 2017 Plan that are cancelled, forfeited, or otherwise terminate without having vested or been exercised, as applicable, will become available for award grants under the 2021 Plan.

The types of awards that may be granted under the 2021 Plan include stock options, stock appreciation rights (“SARs”), RSUs, PSUs, restricted stock and other forms of awards granted or denominated in the Company’s common stock or units of the Company’s common stock, as well as cash awards.

Persons eligible to receive awards under the 2021 Plan include officers and employees of the Company or any of its subsidiaries, directors of the Company and certain consultants and advisors to the Company or any of its subsidiaries.

The vesting of awards under the 2021 Plan and the 2017 Plan is determined at the date of grant.

Each award expires on a date determined at the date of grant;

however, the maximum term of options and SARs under the 2017 Performance Incentive Plan is ten years after the grant date of the award.

RSUs granted under the 2017 Performance Incentive Plan typically vest over periods ranging from one to four years from the date of grant.

however, the maximum term of options and SARs is ten years after the grant date of the award.

RSUs typically vest over periods ranging from two to four years from the date of grant.

PSUs are granted to certain employees and vest only after the achievement of pre-determined performance conditions or market conditions and completion of requisite service periods.

Once the performance conditions or market conditions are met, vesting of PSUs is generally subject to continued service by the employee.

To the extent available, the Company issues shares out of treasury stock upon the vesting of awards, the exercise of employee stock options and the purchase of shares pursuant to the ESPP.

Currently, there are outstanding awards that may vest under the 2017 Plan as well as outstanding awards of stock options under the SanDisk Corporation 2013 Incentive Plan, a plan assumed in connection with the acquisition of SanDisk Corporation, which may affect dilution.

Outstanding RSU and PSU awards have dividend equivalent rights which entitle holders of such outstanding awards to the same dividend value per share as holders of common stock.

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Dividend equivalent rights are accumulated and paid in additional shares when the underlying shares vest.

As of July 2, 2021, the maximum number of shares of the Company’s common stock that was authorized for award grants under the 2017 Performance Incentive Plan was 105.6 million shares.

Shares issued in respect of stock options and SARs granted under the 2017 Performance Incentive Plan count against the plan’s share limit on a one -for-one basis, whereas currently, shares issued in respect of any other type of award granted count against the plan’s share limit as 1.72 shares for every one share issued in connection with such award.

The 2017 Performance Incentive Plan will terminate on August 4, 2025 unless terminated earlier by the Company’s Board of Directors.

As of July 1, 2022, the maximum number of shares of the Company’s common stock that was authorized for award grants under the 2021 Plan was 10.8 million shares.

Shares issued in respect of all awards granted under the 2021 Plan count against the 2021 Plan’s share limit on a one -for-one basis, whereas under the 2017 Plan, shares issued in respect of awards other than stock options and SARs granted count against the 2017 Plan’s share limit as 1.72 shares for every one share issued in connection with such award.

The 2021 Plan will terminate on November 22, 2031 unless terminated earlier by the Company’s Board of Directors.

Employee Stock Purchase Plan

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If the fair market value of the Company’s common stock is less on a given exercise date than on the date of grant, employee participation in that offering period ends and participants are automatically re-enrolled in the next new offering period.

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.

During 2022, 2021 and 2020, the Company issued 2.1 million, 3.2 million, and 3.0 million shares, respectively, under the ESPP for aggregate purchase amounts of $ 113 million, $ 115 million and $ 107 million, respectively.

To the extent available, the Company may issue shares out of treasury stock upon the vesting of awards, the exercise of employee stock options and the purchase of shares pursuant to the ESPP.

WESTERN DIGITAL CORPORATION

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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 remaining compensation cost related to unvested stock options is immaterial as of July 2, 2021.

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

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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

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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

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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.

For the year ended July 2, 2021, the Company did no t make any stock repurchases and has no t repurchased any shares of its common stock pursuant to its stock repurchase program since the first quarter of fiscal 2019.

For the year ended July 1, 2022, the Company did no t make any stock repurchases and has no t repurchased any shares of its common stock pursuant to its stock repurchase program since the first quarter of 2019.

Although the Company will reevaluate the repurchasing of common stock when appropriate, there can be no assurance if, when or at what level the Company may resume such activity.

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Dividends to Shareholders

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

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

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

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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.

The Company completed its accounting for the tax effects of the enactment of the 2017 Act during the second quarter of 2019.

However, the U.S.

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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.

The provisions of the CARES Act and the emergency tax measures around the world did not 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.

The provisions of the Appropriations Act did not result in a material impact on the Company’s Consolidated Financial Statements.

WESTERN DIGITAL CORPORATION

1 unchanged sentence

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 Rescue Act includes certain business-related provisions, which did not have a material impact on the Company’s 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.

On August 16, 2022, President Biden signed into law the Inflation Reduction Act of 2022, which contained significant law changes related to tax, climate, energy, and health care.

The tax measures include, among other things, a corporate alternative minimum tax of 15%.

The corporate alternative minimum tax will not be effective for the Company until fiscal year 2024 and the Company is currently evaluating the potential effects of these legislative changes.

Deferred Taxes

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Valuation allowances ( 580 ) ( 558 )

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.

Deferred tax assets, net $ 100 $ 188

The net deferred tax asset valuation allowance increased by $ 22 million primarily due to an increase from the generation of additional business state tax credits carryforwards during the year ended July 1, 2022.

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

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permanent differences — 1 ( 26 )

Impact of 2017 Act:

One-time mandatory deemed repatriation tax — — ( 41 )

Re-measurement of deferred taxes — — 2

IRS Tentative Settlement 15 — —

Change in valuation allowance 1 ( 7 ) ( 12 )

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Tax Holidays and Carryforwards

A substantial portion of the Company’s manufacturing operations in Malaysia, the Philippines and Thailand operate under various tax holidays and tax incentive programs which expired or will expire in whole or in part at various dates during fiscal years 2021 through 2031.

A substantial portion of the Company’s manufacturing operations in Malaysia, the Philippines and Thailand operate under various tax holidays and tax incentive programs, which will expire in whole or in part at various dates during 2024 through 2031.

Certain of the holidays may be extended if specific conditions are met.

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(in millions)

Malaysia $ 122 2025 to 2028

Belgium 106 No expiration

Japan 84 2024 to 2031

Malaysia 72 2025 to 2027

Spain 46 No expiration

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Lapse of statute of limitations ( 5 ) ( 7 ) ( 8 )

Acquisitions — — —

Unrecognized tax benefit, ending balance $ 1,047 $ 748 $ 717

As of July 1, 2022, July 2, 2021 and July 3, 2020, the portion of the gross unrecognized tax benefits, if recognized, that would affect the effective tax rate is $ 903 million, $ 612 million, and $ 583 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 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.

Accrued interest and penalties included in the Company’s liability related to unrecognized tax benefits as of July 1, 2022, July 2, 2021 and July 3, 2020 was $ 254 million, $ 138 million and $ 137 million, respectively.

As of July 1, 2022, July 2, 2021 and July 3, 2020, the Company’s payables related to unrecognized tax benefits, including accrued interest and penalties, were $ 1.16 billion, $ 750 million, and $ 720 million, respectively.

The Company believes it is reasonably likely that payments of approximately $ 600 million to $ 700 million may be made within the next twelve months and have classified that portion of these unrecognized tax benefits, including interest, in Income taxes payable on the Consolidated Balance Sheets as of July 1, 2022.

The remaining payables related to unrecognized tax benefits are included in Other liabilities on the Consolidated Balance Sheets as of July 1, 2022, July 2, 2021 and July 3, 2020.

WESTERN DIGITAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The Company files U.S.

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state and foreign tax returns.

For both federal and state tax returns, with few exceptions, the Company is subject to examination for fiscal years 2013 through 2020.

For both federal and state tax returns, with few exceptions, the Company is subject to examination for 2013 through 2020.

The Company is no longer subject to examination by the IRS for periods prior to 2012, although carry forwards generated prior to those periods may still be adjusted upon examination by the IRS or state taxing authority if they either have been or will be used in a subsequent period.

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.

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.

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

In the major foreign jurisdictions where there is no tax holiday, the Company could be subject to examination in China for calendar years 2012 through 2021, in Ireland for calendar year 2018 through fiscal year 2021, in India for fiscal years 2008 through 2021, in Israel for calendar year 2016 through fiscal year 2021 and in Japan for fiscal years 2015 through 2021, in Malaysia for fiscal years 2014 through 2021, in Thailand for fiscal years 2012 through 2021, in Singapore for fiscal years 2018 through 2021, and in the United Kingdom for fiscal years 2017 through 2021.

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 years 2008 through 2015.

In September 2018 and March 2019, the Company filed petitions with the U.S.

Tax Court covering years 2008 through 2012, for which it had received statutory notices of deficiency, while 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 years 2008 through 2015.

In May 2022, the Company and the IRS tentatively reached a settlement for resolving the statutory notices of deficiency and notices of proposed adjustments with respect to 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 was cancelled.

The tentative settlement for resolution incrementally increased the liability for unrecognized tax benefits, including interest and offsetting tax benefits, by $ 324 million.

Including this incremental increase, the Company expects to pay tax and interest totaling approximately $ 600 million to $ 700 million, which the Company expects to be partially offset by future reductions to its mandatory deemed repatriation tax obligations and tax savings from interest deductions aggregating to approximately $ 100 to $ 150 million.

While the Company continues to work with the IRS to come to a final agreement on the federal tax and interest calculations, the Company is uncertain as to when a final agreement will be reached and the exact timing of when any payments will be made.

However, the Company believes it is reasonably likely that these payments may be made within the next twelve months and have classified that portion of these unrecognized tax benefits, including interest in Income taxes payable on its Consolidated Balance Sheet as of July 1,2022.

This classification and amount may be subject to change in the next twelve months depending on when the Company is able to reach a final agreement with the IRS.

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 July 2, 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 July 1, 2022, with the exception of the tentative settlement, 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 relating to the examination of the Company’s tax returns.

WESTERN DIGITAL CORPORATION

17 unchanged sentences

For 2022, the Company excluded common shares subject to outstanding equity awards from the calculation of diluted shares because their impact would have been anti-dilutive based on the Company’s average stock price during the period.

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.

For 2020, 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.

WESTERN DIGITAL CORPORATION

7 unchanged sentences

Business Realignment 50 28 44

Total employee termination and other charges 28 49 166

Employee termination benefits 50 28 49

Gain on disposition of assets:

Business Realignment ( 7 ) ( 75 ) ( 17 )

Total gain on disposition of assets ( 75 ) ( 17 ) —

Asset impairments and losses (gains) on disposal of assets ( 7 ) ( 75 ) ( 17 )

Total employee termination, asset impairment, and other charges $ 43 $ ( 47 ) $ 32

1 unchanged sentence

In July 2018, the Company announced the closing of its HDD manufacturing facility in Kuala Lumpur, Malaysia, in order to reduce its manufacturing costs and consolidate HDD operations into Thailand.

The Company substantially completed the closure in fiscal year 2019.

WESTERN DIGITAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The Company substantially completed the closure in 2019.

Business Realignment

2 unchanged sentences

The Company recognized gains related to the disposition of assets associated with these activities $ 7 million and $ 75 million for 2022 and 2021, respectively.

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

Employee Termination Benefits Contract Termination and Other Total

The following table presents an analysis of the components of the activity against the reserve, which consisted entirely of employee termination benefits, during the year ended July 1, 2022:

Employee Termination Benefits

(in millions)

Accrual balance at July 2, 2021 $ 2

Charges 25 3 28

Cash payments ( 35 )

4 unchanged sentences

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.

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 14, Income Tax Expense.

Other Matters

4 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-K

Item 8. Financial Statements and Supplementary Data