What changed in this filing

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Item 7. Management’s Discussion and Analysis

2023-08-22 compared with 2022-08-25 · 170 added, 168 removed, 207 unchanged (62% of the section changed)

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We are on a mission to unlock the potential of data by harnessing the possibility to use it.

We are a leading developer, manufacturer, and provider of data storage devices based on both flash-based products (“Flash”) and hard disk drives (“HDD”) technologies.

With dedicated business units driving advancements in NAND flash and magnetic recording technologies, we create and drive innovations needed to help customers capture, preserve, access, and transform an ever-increasing diversity of data.

Our broad portfolio of technology and products address multiple end markets.

In 2022, we refined the end markets we report to be “Cloud”, “Client” and “Consumer”.

We are a leading developer, manufacturer, and provider of data storage devices based on both NAND flash and hard disk drive technologies.

With dedicated flash-based products (“Flash”) and hard disk drives (“HDD”) business units driving advancements in storage technologies, our broad and ever-expanding portfolio delivers powerful Flash and HDD storage solutions for everyone from students, gamers, and home offices to the largest enterprises and public clouds to capture, preserve, access, and transform an ever-increasing diversity of data.

Our broad portfolio of technology and products address our multiple end markets:

“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 we believe we are uniquely positioned to address as the only provider of both Flash and HDD.

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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.

Fiscal years 2023, 2022, and 2021, which ended on June 30, 2023, July 1, 2022, and July 2, 2021, respectively, each comprised 52 weeks, with all quarters presented consisting of 13 weeks.

Key Developments

Business Structure and Strategic Alternatives

In 2021, we made and announced the decision to reorganize our business by forming two separate product business units:

Flash and HDD.

The new structure is intended to provide each business unit with focus and responsibility for identifying current and future customer requirements while driving the strategy, roadmap, pricing and overall profitability for their respective product areas.

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

Effective July 3, 2021, management finalized its assessment of our operating segments and concluded that we now have two reportable segments:

Flash and HDD.

Network Security Incident

As previously disclosed, on March 26, 2023, we identified a network security incident in which an unauthorized third party gained access to a number of our systems.

Upon discovery of the incident, we implemented incident response efforts, which included taking various systems and services offline as a proactive measure to secure our business operations and initiating an investigation with the assistance of leading outside security and forensic experts.

In collaboration with outside forensic experts, we confirmed that an unauthorized party obtained a copy of a Western Digital database used for our online store that contained some personal information of our online store customers.

This information included customer names, billing and shipping addresses, email addresses and telephone numbers.

In addition, the database contained, in encrypted format, hashed and salted passwords and partial credit card numbers.

We have provided notifications to impacted customers and relevant governmental authorities.

The incident, together with the incident response efforts discussed above, resulted in some disruptions to our business operations, including manufacturing, sales, fulfillment and general corporate activities.

We were able to stabilize core operations after a short period of time and brought impacted systems back online in order of operational priority.

The incident did not have a material impact on the financial results in 2023.

Investigation, recovery, and remediation expenses, including costs for forensics activities, third-party consulting and service providers, outside legal advisors, and other IT professionals, as a result of the network security incident were not material to the Consolidated Financial Statements.

We maintain cyber insurance, subject to certain deductibles and policy limitations, typical for our size and industry.

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Strategic Alternatives

In June 2022, we announced that we are reviewing potential strategic alternatives aimed at further optimizing long-term value for stockholders.

The Executive Committee of our Board of Directors is overseeing the assessment process and evaluating a range of alternatives, including options for separating our Flash and HDD business units.

In conjunction with that review process, we announced that we had entered into a letter agreement with Elliott Investment Management L.P.

(“Elliott”), which had disclosed in May 2022 a $1 billion investment in our Company and called for a full strategic review of our business.

We are actively working with financial advisors and our legal counsel in this strategic review process.

As of June 30, 2023, we are still actively working with financial advisors and our legal counsel in this strategic review process.

Tax Resolution

As previously disclosed, we have received statutory notices of deficiency and notices of proposed adjustments from the Internal Revenue Service (“IRS”) wi th respect to 2008 through 2015.

During 2022 , new information became available which required us to re-measure our unrecognized tax benefits for this IRS matter.

We and the IRS tentatively reached a settlement for resolving this matter.

Additional information is provided in our discussion of Income tax expense in our results of operations below, as well as in Part I, Item 1, Note 14, Income Tax Expense , of the Notes to the Consolidated Financial Statements, and in the “Short- and Long-Term Liquidity - Unrecognized Tax Benefits” section below.

Flash Ventures Contamination Incident

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

During 2022, we incurred charges of $207 million related to this contamination incident that were recorded in cost of revenue and 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.

We are evaluating potential options for recovery.

As disclosed in previous periods, we have received statutory notices of deficiency and notices of proposed adjustments from the Internal Revenue Service (“IRS”) with respect to 2008 through 2015.

During the third quarter of 2023, we and the IRS reached an agreement on the federal tax and interest calculations with respect to the years 2008 through 2012 and a tentative settlement for the years 2013 through 2015.

Additional information is provided in our discussion of Income tax expense in our results of operations below, as well as in Part II, Item 8, Note 14, Income Tax Expense , of the Notes to the Consolidated Financial Statements, and in the “Short- and Long-Term Liquidity - Unrecognized Tax Benefits” section below.

Financing Activities

During 2022, we continued to execute on our commitment to reduce our overall debt levels and Fitch Ratings, Inc.

raised our Company credit rating to investment grade in December 2021.

We fully repaid our Term Loan B-4 in October 2021 and shortly thereafter initiated a series of transactions to further reduce our debt levels and better stagger the maturities of our debt.

In December 2021, we issued $500 million aggregate principal amount of 2.850% senior unsecured notes due February 1, 2029 (the “ 2029 Notes ”) and we issued $500 million aggregate principal amount of 3.100% senior unsecured notes due February 1, 2032 (the “ 2032 Notes ”).

We used the proceeds from these note offerings and available cash to voluntarily repay $1.21 billion of our Term Loan A-1 and reduce the principal amount to $3.0 billion as of December 31, 2021.

In January 2022, we amended and restated our existing loan agreement to provide for, among other things:

(i) the issuance of a new $3.0 billion Term Loan A-2 maturing in January 2027 to replace our previously existing Term Loan A-1;

(ii) the availability of a new $2.25 billion revolving credit facility maturing in January 2027 to replace our previously existing $2.25 billion revolving credit facility;

and (iii) additional covenant flexibility and other modifications.

As of July 1, 2022, over 80% of the principal amount of our debt is now due in 2026 or later.

We believe this new debt structure gives us greater financial stability and flexibility to manage our business over the longer term.

New Flash Ventures Fabrication Facility

In January 2022, we 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 first phase of construction of Y7 is complete and output is expected to commence in the first half of 2023.

We are committed to pay, among other items, future building depreciation prepayments of approximately $268 million in 2023 and $22 million in 2024, to be credited against future wafer charges.

COVID-19 Pandemic and Operational Update

As the ongoing COVID-19 pandemic has evolved, we have implemented and maintained more thorough sanitation practices as outlined by health organizations and supported vaccination efforts.

We continually monitor and update our practices based on recommendations from health organizations to ensure the continued safety of our employees and business partners.

In addition, the responses to COVID-19 taken by others in the supply chain have contributed to the increases in the costs of their services, which have in turn impacted our operations.

We incurred incremental charges primarily related to logistics, absorption, and other factory-related costs of approximately $248 million and $127 million , during 2022 and 2021, respectively, which were recorded in Cost of revenue.

The technology hardware and semiconductor industries faced supply chain disruptions and component shortages during 2022, which negatively impacted both our customers’ ability to ship products and our ability to build products.

In order to meet our end customers’ demand, we are incurring increased component costs, which primarily impacted our hard drive gross margins in 2022.

Additionally, the global economy has recently experienced significant volatility and disruptions impacted by increases in inflation rates, Russia’s invasion of Ukraine and rising fuel prices, rising interest rates, declines in consumer confidence, declines in economic growth, and uncertainty about economic stability.

We are seeing our PC OEM customers aggressively right-size their inventory to reflect current demand conditions, which will impact our business in this market in the second half of the calendar year.

While we ultimately expect that the impact of these conditions will be transitory, the severity and duration of the impact of these conditions on our business is dynamic and cannot be predicted.

In December 2022 and in June 2023, we amended the loan agreement governing our Term Loan A-2 and revolving credit facility to provide additional financial flexibility as we navigate through the current dynamic economic environment.

The amendments modified our financial covenant requirements, including modifying the leverage ratio requirements, and introducing a minimum liquidity covenant applicable through the quarter ending September 27, 2024 and a minimum free cash flow requirement applicable through the quarter ending December 29, 2023.

The amendment also accelerates the due date for amounts outstanding under the loan agreement from January 7, 2027 to November 2, 2023 if, as of that date, our cash and cash equivalents plus available unused capacity under our credit facilities do not exceed by $1.40 billion the sum of the outstanding balance of our 1.50% convertible notes due 2024 plus the outstanding principal amount of any other debt maturing within twelve months.

In January 2023, we entered into a new delayed draw term loan agreement, which was then amended in June 2023.

As amended, the agreement allowed us to draw a loan of up to $600 million which we exercised in full in August 2023 (the “Delayed Draw Term Loan”).

Borrowings on this loan will mature on June 28, 2024 or such earlier date that conditions for acceleration of amounts due under the loan agreement governing our Term Loan A-2 and revolving credit facility have been triggered as described above.

Also in January, 2023, we issued an aggregate of 900,000 shares of Series A Preferred Stock for an aggregate purchase price of $900 million.

We believe these transactions will provide us with greater financial flexibility to manage our business.

Additional information regarding our indebtedness, including the principal repayment terms, interest rates, covenants and other key terms of our outstanding indebtedness, and additional information on the terms of our convertible preferred shares is included in Part II, Item 8, Note 8, Debt , and Note 13, Shareholders’ Equity and Convertible Preferred Stock , of the Notes to Consolidated Financial Statements in this Annual Report on Form 10-K.

Operational Update

Macroeconomic factors such as inflation, higher interest rates and recession concerns have softened demand for our products, with certain customers reducing purchases as they adjust their production levels and right-size their inventories.

As a result, we and our industry are experiencing a supply-demand imbalance, which has resulted in reduced shipments and negatively impacted pricing, particularly in Flash.

While supply-demand imbalance has somewhat stabilized beginning in the third quarter of 2023, particularly in Client and Consumer, we continue to face a dynamic market environment.

To adapt to these conditions, since the beginning of 2023, we have scaled back on capital expenditures, consolidated production lines and reduced bit growth to align with market demand and implemented measures to reduce operating expenses.

This has resulted in incremental charges for employee termination, asset impairment and other charges and manufacturing underutilization charges in Flash and HDD in 2023, and is expected to impact near-term results.

However, we believe digital transformation will continue to drive long-term growth for data storage in both Flash and HDD and believe that the actions we are taking will position us to capitalize on market conditions when they improve to address long-term growth opportunities in data storage across all our end markets.

We will continue to actively monitor developments impacting our business and may take additional responsive actions that we determine to be in the best interest of our business and stakeholders.

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We believe we have made significant progress in strengthening our product portfolio to meet our customers’ growing and evolving storage needs.

Our BiCS5 based products continue to play a significant role in driving top line results across our end markets as we move further along the product roadmap.

Additionally, OptiNAND and shingled magnetic recording (“SMR”) technologies are progressing as planned as we have commenced commercial shipments on a number of OptiNand-based products and are undergoing qualifications of our latest 26-terabyte SMR drive.

For our next generation 3D-flash technology, we continued commercial shipment of consumer flash devices based on our 162-layer BiCS6 technology as we expect to start ramping the technology towards the end of calendar year 2022.

We are also aware of the ongoing trends in the HDD Client market as PCs shift from using HDD to Flash technology.

As a result, we have and are still undergoing actions to restructure our HDD manufacturing footprint to reflect this market dynamic.

We will continue to actively monitor these situations and may take further actions altering our business operations that we determine are in the best interests of our employees, customers, partners, suppliers, and stakeholders, or as required by federal, state, or local authorities.

See Part I, Item 1A, Risk Factors , of this Annual Report on Form 10-K for more information regarding the risks we face as a result of the COVID-19 pandemic, supply chain disruptions and current macroeconomic conditions.

Russia Sanctions

In February 2022, the U.S.

and other countries imposed sanctions on Russia.

In accordance with these sanctions, we have ceased shipments to distributors for customers located in Russia.

Our revenue from distributors for customers in Russia have not been significant.

We have no material assets or operations in Russia.

Our new industry-leading 22-terabyte conventional magnetic recording drives and 26-terabyte shingled magnetic recording drives, utilizing OptiNAND technology, have commenced commercial shipments.

We also have commenced product sampling of our latest 28-terabyte Ultra SMR drive, which built upon proven ePMR and UltraSMR technology, with full feature and performance compatibility, as well as the reliability trusted by our customers worldwide.

During 2023, we announced BiCS8 node, the newest 3D-flash memory technology based on a chip-bonded-to-array architecture.

See Part I, Item 1A, Risk Factors , of this Annual Report on Form 10-K for more information regarding the risks we face as a result of macroeconomic conditions, and supply chain disruptions.

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Results of Operations

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Total operating expenses 3,172 25.8 3,483 18.5 3,301 19.5

Operating income 2,391 12.7 1,220 7.2 335 2.0

Interest and other income (expense):

Operating income (loss) (1,285) (10.4) 2,391 12.7 1,220 7.2

Interest and other income:

Interest income 24 0.2 6 — 7 —

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Other income, net 13 0.1 30 0.2 26 0.2

Total interest and other expense, net (268) (1.4) (293) (1.7) (381) (2.3)

Total interest and other income, net (275) (2.2) (268) (1.4) (293) (1.7)

Income (loss) before taxes (1,560) (12.7) 2,123 11.3 927 5.5

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Net income (loss) (1,706) (13.8) 1,500 8.0 821 4.9

(1) Percentages may not total due to rounding.

cumulative dividends allocated to preferred shareholders 24 0.2 — — — —

Net income (loss) attributable to common shareholders $ (1,730) (14.0) % $ 1,500 8.0 % $ 821 4.9 %

(1) Percentage may not total due to rounding.

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The following table sets forth, for the periods presented, a summary of our segment information:

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Unallocated corporate items:

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

Stock-based compensation expense (49) (48) (55)

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

Contamination related charges — (207) —

Recoveries from a power outage incident — 7 75

Other (2) — —

Total unallocated corporate items (51) (314) (311)

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Exabytes Shipped 501 645 541

Net revenue increase d 11 % in 2022 compared to 2021, which reflects increases in exabytes of Flash and HDD sold as further discussed below.

The net revenue increases driven by exabyte growth were partially offset by declines in the average price per gigabyte of storage for both Flash and HDD as product mix shifted to more efficient, high-capacity drives.

Despite the temporary disruption to our Flash production from the contamination event at Flash Ventures’ fabrication facilities in both Yokkaichi and Kitakami, Japan, Flash revenue increased 12% in 2022 compared to 2021, primarily driven by a 21% increase in exabytes sold, partially offset by a decline in the average price per gigabyte as product mix shifted to more efficient, high-capacity drives.

The higher exabytes sold primarily reflected the growth in Cloud and the ramp of our latest BiCS5 flash solutions.

Higher volume was also driven by strong demand in gaming along with a growing brand recognition of WD_Black based products in our Consumer market.

HDD revenue increased 10% in 2022, compared to 2021, primarily driven by a 19% increase in exabytes sold, partially offset by a decline in the average price per gigabyte as product mix shifted to more efficient higher-capacity drives.

The increase in exabytes sold was due to continued demand for our latest generation energy assisted drives among our public and private cloud customers as discussed below.

The increase in Cloud was partly offset by a decline in HDD exabytes sold in our Client and Consumer end markets due to continued pressure in the commercial channel related to component issues impacting our customers’ ability to ship product and greater component sourcing constraints within our own operations, and customers transitioning to client SSD.

The increase in Cloud revenue in 2022 compared to 2021 was led by the demand increase for HDD capacity enterprise drives, including growth in our 18-terabyte capacity drives and ramp of our 20-terabyte and 22-terabyte capacity drives.

Additionally, revenue from Flash for enterprise SSD applications more than doubled in 2022 compared to 2021.

In Client, the decrease in revenue in 2022 compared to 2021, primarily reflected a mid-30% decrease in client HDD revenue, as a result of the supply chain disruptions noted previously, as well as lower shipments of PCs toward the end of 2022, partially offset by an increase in Flash revenue due to the ramp of 5G phones.

In Consumer, the decrease in revenues in 2022 compared to 2021 reflected declines in HDD as a result of short-term demand weakness tied to macroeconomic factors, as well as COVID-related measures.

The changes in net revenue by geography in 2022, compared to 2021 are primarily related to growth in Asia driven by the ramp in 5G products as well as routine variations in the mix of business.

Net revenue decrease d 34% in 2023 compared to 2022, primarily reflecting the supply-demand imbalance and macroeconomic pressures described in the “Operational Update” above.

Flash revenue decreased 38% in 2023 compared to 2022, substantially all driven by a decline in the average selling prices per gigabyte across all our end markets.

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HDD revenue decreased 31% in 2023, compared to 2022, primarily driven by an approximately 26% decrease in exabytes sold and a decline in the average selling prices.

The decrease in exabytes sold was primarily driven by lower shipments to customers in our Cloud end market and to a lesser extent in Client and Consumer end markets.

The 34% decrease in Cloud revenue in 2023 compared to 2022, reflects approximately 25 percentage points driven by a decline in HDD revenue as customers reduced purchases to right-size their inventories, and approximately 9 percentage points driven by a decline in Flash revenue resulting primarily from a decrease in shipments, as well as from lower average selling prices of our flash-based products.

In Client, the 39% decrease in revenue in 2023 compared to 2022 reflects approximately 34 percentage points driven by a decline in Flash revenue due to pricing pressure across Flash and approximately 5 percentage points driven by a decline in HDD shipments.

In Consumer, the 26% decrease in revenues in 2023 compared to 2022, was relatively evenly split between decreases in average selling price per gigabyte in Flash and a decline in retail HDD shipments.

The changes in net revenue by geography in 2023, compared to 2022, primarily reflect a larger decline in Asia from lower Client revenue from OEMs in this region as they reduced purchases to align with current market demand, as well as routine variations in the mix of business.

For 2023, 2022 and 2021, our top 10 customers accounted for 43%, 45% and 39%, respectively, of our net revenue.

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Gross Profit and Gross Margin

Consolidated gross profit increased $1.35 billion, or 30%, in 2022 compared to 2021, which reflects the increase in revenue in both Flash and HDD, the shift in product mix to more efficient higher-capacity drives, and cost efficiencies as we ramped production on new products, as well as a $265 million decrease in charges in the current period related to amortization expense on acquired intangible assets, some of which became fully amortized.

These improvements were partially offset by the contamination related charges of $207 million noted above.

Consolidated gross margin increased 4.6 percentage points over the prior year with Flash gross margin up 6.2 percentage points and HDD gross margin up 2.4 percentage points, which primarily reflected cost reductions as we ramped production on newer products.

Consolidated gross margin also increased as a result of a shift in product mix to higher-margin flash drives.

Consolidated gross profit decreased $3.99 billion, or 68%, in 2023 compared to 2022, which reflected the decrease in revenue described above as well as an aggregate of approximately $605 million for manufacturing underutilization and related charges and a write-down of certain Flash inventory to the lower of cost or market value ($404 million in Flash and $201 million in HDD), partially offset by $207 million of charges related to a contamination event in the Flash Ventures’ fabrication facilities incurred in the prior year, and a $66 million decrease in charges related to amortization expense on acquired intangible assets, some of which became fully amortized in 2023.

Consolidated gross margin decreased 16 percentage points over the prior year with approximately 4 percentage points of the decline due to the net charges noted above and the remainder driven by the lower average selling prices per gigabyte in Flash.

Flash gross margin decreased by 29.1 percentage points year over year, substantially driven by lower average selling prices per gigabyte in Flash with approximately 4 percentage points driven by year-over-year changes in the charges noted above.

HDD gross margin decreased by 5.3 percentage points year over year, with approximately 3 percentage points of the decline due to the underutilization charges noted above and the remainder primarily reflecting lower average selling prices per gigabyte and variation in the mix of products.

Operating Expenses

R&D expense increased $80 million in 2022 compared to 2021 as we continued to invest in new technologies.

The primary drivers of the year-over-year change were increases in headcount and annual merit compensation, which accounted for approximately $30 million of the overall increase, as well as a similarly sized increase in material use due to an increase in projects.

Selling, general and administrative (“SG&A”) expense in 2022 was relatively flat compared to 2021 as we tightly managed costs in light of a dynamic macroeconomic environment.

The losses recognized in Employee termination, asset impairment and other charges compared to the gains in the prior year primarily reflect lower gains on the disposal of assets associated with our business realignment activities, partially offset by higher employee termination and other charges associated with our business realignment activities.

R&D expense decreased $314 million or 14% in 2023 compared to 2022, which reflects reductions in headcount and variable compensation expense as well as savings resulting from our actions to reduce expenses in the current dynamic economic environment.

Selling, general and administrative (“SG&A”) expense decreased $147 million or 13% in 2023 compared to 2022, which reflects reductions in headcount, variable compensation expense and professional fees as well as savings resulting from our actions to reduce expenses in the current dynamic economic environment.

Employee termination, asset impairment and other charges increased $150 million compared to 2022, primarily due to restructuring actions taken to adjust our cost structure to align with the current demand environment.

For additional information regarding employee termination, asset impairment and other charges, see Part II, Item 8, Note 16, Employee Termination, Asset Impairment, and Other Charges , of the Notes to Consolidated Financial Statements included in this Annual Report on Form 10-K.

Interest and Other Income (Expense)

The decreases in total interest and other expense, net in 2022 compared to 2021 primarily reflects a decrease in interest expense resulting from the pay-down of principal on our debt during 2022.

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Interest and Other Income

The total interest and other income, net in 2023 was relatively flat compared to 2022, which reflected higher interest expense as a result of increases in interest rates and lower other income, partially offset by $29 million of lower amortization of the debt discount as a result of the adoption of ASU 2020-06 (as defined and described in Note 2, Recent Accounting Pronouncements , of the Notes to Consolidated Financial Statements included in this Annual Report on Form 10-K) and higher interest income on our cash and investments due to higher interest rates.

Income Tax Expense

The Tax Cuts and Jobs Act (the “2017 Act”), enacted on December 22, 2017, includes a broad range of tax reform proposals affecting businesses.

We completed our accounting for the tax effects of the enactment of the 2017 Act during the second quarter of 2019.

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

We completed our accounting for the tax effects of the enactment of the 2017 Act during the second quarter of fiscal 2019.

However, the U.S.

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

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 (“CAMT”) of 15% on corporations with three-year average annual adjusted financial statement income (“AFSI”) exceeding $1.00 billion.

The CAMT will be effective for us beginning with fiscal year 2024.

We are currently evaluating the potential effects of these legislative changes.

The following table sets forth Income tax information from our Consolidated Statement of Operations by dollar and effective tax rate:

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Effective tax rate (9) % 29 % 11 %

Beginning in 2023, the 2017 Act requires us to capitalize and amortize R&D expenses rather than expensing them in the year incurred.

The tax effects related to the capitalization of R&D expenses are included in Income tax expense, but did not have a material impact on our effective tax rate.

The primary drivers of the difference between the effective tax rate for 2023 and the U.S.

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

In addition, the effective tax rate for 2022 includes a net increase to the liability for unrecognized tax benefits, which includes interest and offsetting tax benefits, as a result of ongoing discussions with various taxing authorities of $352 million.

This amount includes $324 million related to the effects of the tentative settlement with the IRS resolving the statutory notices of deficiency and notices of proposed adjustments with respect to 2008 through 2015.

The primary drivers of the difference between the effective tax rate for 2022 and the U.S.

Federal statutory rate of 21% are the relative mix of earnings and losses by jurisdiction, the deduction for foreign derived intangible income, credits, and tax holidays in Malaysia, Philippines and Thailand that will expire at various dates during 2021 through 2031.

In addition, the effective tax rate for 2022 includes a net increase of $352 million to the liability for unrecognized tax benefits, which includes interest and offsetting tax benefits, as a result of our discussions with various taxing authorities.

This amount includes $324 million related to the effects of the final settlement with the IRS resolving the statutory notices of deficiency with respect to 2008 through 2012 and the tentative settlement reached with the IRS resolving the notices of proposed adjustments with respect to 2013 through 2015.

Our future effective tax rate is subject to future regulatory developments and changes in the mix of our U.S.

earnings compared to foreign earnings.

In particular, beginning in 2023, the 2017 Act requires us to capitalize and amortize research and development expenses rather than expensing them in year incurred, which is expected to both materially increase our effective tax rate and materially reduce our operating cash flows, if not repealed or otherwise modified.

Our total tax expense in future years may also vary as a result of discrete items such as excess tax benefits or deficiencies.

For additional information regarding Income tax expense (benefit), see Part II, Item 8, Note 14, Income Tax Expense , of the Notes to Consolidated Financial Statements included in this Annual Report on Form 10-K.

A discussion of our results of operations for 2020, including a comparison of such results of operations to 2021, is included in Part II, Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations , included in our Annual Report on Form 10-K for the year ended July 2, 2021 filed with the Securities and Exchange Commission o n August 27, 2021.

For additional information regarding Income tax expense, see Part II, Item 8, Note 14, Income Tax Expense , of the Notes to Consolidated Financial Statements included in this Annual Report on Form 10-K.

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A discussion of our results of operations for 2021, including a comparison of such results of operations to 2022, is included in Part II, Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations , included in our Annual Report on Form 10-K for the year ended July 1, 2022 filed with the Securities and Exchange Commission on August 25, 2022.

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Liquidity and Capital Resources

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Net increase (decrease) in cash and cash equivalents $ (304) $ (1,043) $ 322

We 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.

We expect to pay tax and interest totaling approximat ely $600 million to $700 million , which we expect to be partially offset by future reductions to our mandatory deemed repatriation tax obligations and tax savings from interest deductions aggregating to approximately $100 to $150 million.

We reached a final agreement with the IRS and received notices of deficiency with respect to years 2008 through 2012.

In addition, we have tentatively reached a basis for resolving the notices of proposed adjustments with respect to years 2013 through 2015.

As of June 30, 2023, we have recognized a liability for tax and interest of $753 million related to all years from 2008 through 2015.

We expect to pay $523 million in the first quarter of 2024 with respect to years 2008 through 2012 and expect to pay any remaining balance with respect to this matter within the next twelve months.

In connection with settlements for years 2008 through 2015, we expect to realize reductions to our mandatory deemed repatriation tax obligations and tax savings from interest deductions in future years aggregating to approximately $160 million to $180 million.

See Part I, Item 1, Note 14, Income Tax Expense for further details.

As further explained under Key Developments - Financing Activities above, we have taken recent actions to reduce our overall debt levels and extend the average maturity.

Following these actions, we have reduced the outstanding principal amount of our debt by approximately $1.73 billion since July 2, 2021 and over 80% of the principal amount is now due in 2026 or later.

We also have an existing shelf registration statement (the “Shelf Registration Statement”) filed with the Securities and Exchange Commission that expires in August 2024, which allows us to offer and sell shares of common stock, preferred stock, warrants, and debt securities.

We used the Shelf Registration Statement to complete our offering of $1.0 billion aggregate principal amount of senior unsecured notes in December 2021, and we may use the Shelf Registration Statement or other capital sources, including other offerings of equity or debt securities or the credit markets, to satisfy future financing needs, including planned or unanticipated capital expenditures, investments, debt repayments or other expenses.

The $1.10 billion principal amount of our 1.50% convertible notes due 2024 will mature on February 1, 2024, and we are required to settle any conversion value with the principal amount settled in cash and any excess in cash, shares of the Company’s common stock, or a combination thereof pursuant to the terms of the indenture, dated as of February 13, 2018.

See Part I, Item 1, Note 8, Debt for further details.

As further described under “Key Developments - Financing Activities” above, in December 2022 and June 2023, we modified certain financial covenant requirements in the loan agreement governing our Term Loan A-2 and revolving credit facility.

In addition, in January 2023, we entered into a delayed draw term loan agreement, which was then amended in June 2023 and fully drawn in the amount of $600 million in August 2023.

In January 2023, we also issued an aggregate of 900,000 shares of Series A Preferred Stock for an aggregate purchase price of $900 million.

We believe these transactions will provide us with greater financial flexibility to manage our business.

We have an existing shelf registration statement (the “Shelf Registration Statement”) filed with the Securities and Exchange Commission that expires in August 2024, which allows us to offer and sell shares of common stock, preferred stock, warrants, and debt securities.

We may use the Shelf Registration Statement or other capital sources, including other offerings of equity or debt securities or the credit markets, to satisfy future financing needs, including planned or unanticipated capital expenditures, investments, debt repayments or other expenses.

Any such additional financing will be subject to market conditions and may not be available on terms acceptable to us or at all.

During 2023, we expect expenditures for property, plant and equipment for our company plus our portion of the capital expenditures by our Flash Ventures joint venture with Kioxia for its operations to aggregate to $3.2 billion.

After consideration of the Flash Ventures’ lease financing of its capital expenditures and net operating cash flow, we expect net cash used for our purchases of property, plant and equipment and net activity in notes receivable relating to Flash Ventures to be a cash outflow of approximately $1.6 billion during 2023.

The total expected cash to be used could vary depending on the timing and completion of various capital projects and the availability, timing and terms of related financing.

We believe our cash, cash equivalents and cash generated from operations as well as our available credit facilities will be sufficient to meet our working capital, debt, capital expenditure needs and other cash material cash requirements for at least the next twelve months and the foreseeable future.

As noted previously, we have been scaling back on capital expenditures, consolidating production lines and reducing bit growth to align with market demand.

We reduced our expenditures for property, plant and equipment for our company plus our portion of the capital expenditures by our Flash Ventures joint venture with Kioxia for its operations to approximately $1.4 billion in 2023 from approximately $1.5 billion in 2022.

After consideration of the Flash Ventures’ lease financing of its capital expenditures and net operating cash flow, we reduced our net cash used for our purchases of property, plant and equipment and net activity in notes receivable relating to Flash Ventures to $793 million in 2023 from $1.2 billion in 2022.

We expect the capital expenditures for 2024 to be less than 2023.

We believe our cash, and cash equivalents including the proceeds from the drawdown of the Delayed Draw Term Loan, as discussed in “Key Developments - Financing Activities” above, as well as our available revolving credit facility, will be sufficient to meet our working capital, debt and capital expenditure needs for at least the next twelve months and for the foreseeable future thereafter, as we navigate the current market downturn before returning to profitable operations and positive cash flows when the market normalizes.

We believe we can also access the various capital markets to further supplement our liquidity position if necessary.

Our ability to sustain our working capital position is subject to a number of risks that we discuss in Part I, Item 1A, Risk Factors , in this Annual Report on Form 10-K.

A total of $1.82 billion and $1.99 billion of our cash and cash equivalents was held outside of the U.S.

as of July 1, 2022 and July 2, 2021, respectively.

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A total of $1.28 billion and $1.82 billion of our cash and cash equivalents were held outside of the U.S.

as of June 30, 2023 and July 1, 2022, respectively.

There are no material tax consequences that were not previously accrued for on the repatriation of this cash.

Our cash equivalents are primarily invested in money market funds that invest in U.S.

Treasury securities and U.S.

Government agency securities.

In addition, from time to time, we also invest directly in certificates of deposit, asset-backed securities and corporate and municipal notes and bonds.

Operating Activities

Cash flow from operating activities primarily consists of net income, adjusted for non-cash charges, plus or minus changes in operating assets and liabilities.

This represents our principal source of cash.

Net cash used for changes in operating assets and liabilities was $1.08 billion for 2022, as compared to $175 million for 2021.

Net cash provided by or used in operating activities primarily consists of net income or loss, adjusted for non-cash charges, plus or minus changes in operating assets and liabilities.

Net cash provided by changes in operating assets and liabilities was $90 million for 2023, as compared to $1.08 billion for 2022, which reflects the reduction in the volume of our business.

Changes in our operating assets and liabilities are largely affected by our working capital requirements, which are dependent on the effective management of our cash conversion cycle as well as timing of payments for taxes.

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Generally, we make the payment term modifications through negotiations with our vendors or by granting to, or receiving from, our vendors’ payment term accommodations.

For 2022, DSO increased by 14 days over the prior year, reflecting timing of shipments, as well as more favorable customer terms in the prior year, partially offset by a decrease of approximately 6 days for higher factoring of receivables.

We have seen no significant deterioration in our receivables as a result of COVID-19 or other market conditions.

DIO increased by 9 days over the prior fiscal year, reflecting higher stocking levels of raw materials to minimize the risk of supply chain disruptions.

DPO increased 3 days over the prior year, primarily reflecting routine variations in the timing of purchases and payments during the period.

DSO decreased by 2 days over the prior year, reflecting timing of shipments and customer collections.

DIO increased by 23 days over the prior year, primarily reflecting a decline in products shipped in light of the current market environment.

DPO decreased 10 days over the prior year, primarily due to reductions in production volume and capital expenditures as well as routine variations in the timing of purchases and payments during the period.

Investing Activities

N et cash used in investing activities in 2022 primarily consisted of $1.1 billion in capital expenditures and a $91 million net increase in notes receivable issuance to Flash Ventures.

Net cash used by investing activities in 2021 primarily consisted of a $1.1 billion of capital expenditures, partially offset by a $231 million net decrease in notes receivable issuances to Flash Ventures.

Our cash equivalents are primarily invested in money market funds that invest in U.S.

Treasury securities and U.S.

Government agency securities.

N et cash used in investing activities in 2023 primarily consisted of $821 million in capital expenditures, partially offset by a $14 million net decrease in notes receivable issuance to Flash Ventures and $14 million in net proceeds from the sale of property, plant, and equipment.

Net cash used in investing activities in 2022 primarily consisted of a $1.12 billion of capital expenditures, partially offset by a $91 million net increase in notes receivable issuances to Flash Ventures.

Financing Activities

During 2022, net cash used in financing activities primarily related to our efforts to reduce our overall level of debt.

See “ Key Development - Financing Activities ” above for additional discussion.

Net cash used in financing activities in 2021 primarily consisted of $886 million for repayment of debt, which included $600 million in voluntary prepayments on our Term Loan B-4, and $56 million for taxes paid on vested stock awards under employee stock plans, partially offset by $134 million of cash from the issuance of stock under our employee stock plans.

During 2023, net cash provided by financing activities primarily consisted of $881 million from the issuance of Series A Preferred Stock and $93 million from issuance of stock under employee stock plans, partially offset by $80 million used for taxes paid on vested stock awards under employee stock plans.

In addition, we drew and repaid $1.18 billion under our revolving credit facility within the period.

Cash used in financing activities in 2022 primarily consisted of $3.62 billion for repayment of debt, as well as $122 million for taxes paid on vested stock awards under employee stock plans, partially offset by net proceeds of $1.87 billion from the issuance of new debt and $90 million from the issuance of stock under employee stock plans.

A discussion of our cash flows for the year ended July 2, 2021 is included in Part II, Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources , included in our Annual Report on Form 10-K for the year ended July 1, 2022 filed with the Securities and Exchange Commission on August 25, 2022.

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Off-Balance Sheet Arrangements

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For additional information regarding our off-balance sheet arrangements, see Part II, Item 8, Note 10, Related Parties and Related Commitments and Contingencies , of the Notes to Consolidated Financial Statements included in this Annual Report on Form 10-K.

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Short- and Long-term Liquidity

Material Cash Commitments

The following is a summary of our known material cash commitments, including those for capital expenditures, as of July 1, 2022:

Material Cash Requirements

In addition to cash requirements for unrecognized tax benefits and dividend rights with respect to the Series A Preferred Stock discussed below, the following is a summary of our known material cash requirements, including those for capital expenditures, as of June 30, 2023:

Total 1 Year (2024) 2-3 Years (2025-2026) 4-5 Years (2027-2028) More than 5 Years (Beyond 2028)

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Additional operating lease guarantees can reduce funding commitments.

In addition to our existing debt, we have $2.25 billion available for borrowing under our revolving credit facility until January 2027, subject to customary conditions under the loan agreement.

Dividend rights

On January 31, 2023, we issued an aggregate of 900,000 shares of Series A Preferred Stock for an aggregate purchase price of $900 million.

These shares are entitled to cumulative preferred dividends.

See Part II, Item 8, Note 13, Shareholders’ Equity and Convertible Preferred Stock , of the Notes to Consolidated Financial Statements included in this Annual Report on Form 10-K for more information regarding the dividend provisions.

In addition to our existing debt, as of June 30, 2023 , we had $2.25 billion available for borrowing under our revolving credit facility until January 2027, subject to customary conditions under the loan agreement.

Furthermore, we drew the Delayed Draw Term Loan in the amount of $600 million as noted in “Key Developments - Financing Activities”.

The agreements governing these credit facilities each include limits on secured indebtedness and certain types of unsecured subsidiary indebtedness and require certain of our subsidiaries to provide guarantees and collateral to the extent the conditions providing for such guarantees and collateral are met.

Additional information regarding our indebtedness, including information about availability under our revolving credit facility and the principal repayment terms, interest rates, covenants and other key terms of our outstanding indebtedness, is included in Part II, Item 8, Note 8, Debt , of the Notes to Consolidated Financial Statements included in this Annual Report on Form 10-K.

The loan agreement governing our revolving credit facility and our term loan A-2 due 2027 requires us to comply with a leverage ratio financial covenant.

As of July 1, 2022, we were in compliance with this financial covenant.

Our delayed draw term loan agreement and the loan agreement governing our revolving credit facility and our term loan A-2 due 2027 require us to comply with certain financial covenants, consisting of a leverage ratio, a minimum liquidity and a free cash flow requirements.

As of June 30, 2023, we were in compliance with these financial covenants.

Flash Ventures

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The occurrence of a cancellation event could result in an acceleration of the lease obligations and a call on our guarantees.

As of July 1, 2022, we were in compliance with all covenants under these Japanese lease facilities.

As of June 30, 2023, we were in compliance with all covenants under these Japanese lease facilities.

See Part II, Item 8, Note 10, Related Parties and Related Commitments and Contingencies , of the Notes to Consolidated Financial Statements included in this Annual Report on Form 10-K for information regarding Flash Ventures.

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Purchase Obligations and Other Commitments

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

These arrangements are included under “Purchase obligations” in the table above.

These arrangements are included under “Purchase obligations and other commitments” in the table above.

Mandatory Deemed Repatriation Tax

The following is a summary of our estimated mandatory deemed repatriation tax obligations under the 2017 Act that are payable in the following fiscal years (in millions):

The following is a summary of our estimated mandatory deemed repatriation tax obligations under the 2017 Act that are payable in the following years (in millions):

For additional information regarding our estimate of the total tax liability for the mandatory deemed repatriation tax, see Part II, Item 8, Note 13, Income Tax Expense , of the Notes to Consolidated Financial Statements included in our Annual Report on Form 10-K for the year ended June 28, 2019.

Unrecognized Tax Benefits

As of July 1, 2022, the liability for unrecognized tax benefits (excluding accrued interest and penalties) was approximately $1.05 billion.

Accrued interest and penalties related to unrecognized tax benefits as of July 1, 2022 was approximately $254 million.

As of June 30, 2023, the liability for unrecognized tax benefits (excluding accrued interest and penalties) was approximately $1.02 billion.

Accrued interest and penalties related to unrecognized tax benefits as of June 30, 2023, were approximately $289 million.

Of these amounts, approximately $1.14 billion could result in potential cash payments.

With the exception of the tentative settlement, we are not able to provide a reasonable estimate of the timing of future tax payments related to these obligations.

During 2022, we 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, we expect to pay tax and interest totaling approximately $600 million to $700 million, which we expect to be partially offset by future reductions to our mandatory deemed repatriation tax obligations and tax savings from interest deductions aggregating to approximately $100 to $150 million.

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

However, we believe it is reasonably likely that 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 our 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 we are able to reach a final agreement with the IRS.

As noted above, we reached a final agreement with the IRS and received notices of deficiency with respect to years 2008 through 2012.

In addition, we have tentatively reached a basis for resolving the notices of proposed adjustments with respect to years 2013 through 2015.

As of June 30, 2023, we have recognized a liability for tax and interest of $753 million related to all years from 2008 through 2015.

We expect to pay $523 million in the first quarter of 2024 with respect to years 2008 through 2012 and expect to pay any remaining balance with respect to this matter within the next twelve months.

See Part I, Item 1, Note 14, Income Tax Expense for further details.

Mandatory Research and Development Expense Capitalization

Beginning in 2023, the 2017 Act requires us to capitalize and amortize research and development expenses rather than expensing them in the year incurred, which is expected to result in materially higher cash tax payments, if not repealed or otherwise modified.

Interest Rate Risk

We have generally held a balance of fixed and variable rate debt.

As of July 1, 2022, we had reduced the amount of variable rate debt to $2.70 billion from $5.43 billion as of July 2, 2021.

As of July 1, 2022, a one percent increase in the variable rate of interest would increase annual interest expense by $27 million.

We currently have pay-fixed interest rate swaps of $2.0 billion notional amount, which would mitigate the impact of fluctuations in variable interest rates through February 2023.

Beginning in 2023, the 2017 Act requires us to capitalize and amortize research and development expenses rather than expensing them in the year incurred, which is expected to result in higher cash tax payments once we return to profitability.

Foreign Exchange Contracts

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For a description of our current foreign exchange contract commitments, see Part II, Item 8, Note 7, Derivative Instruments and Hedging Activities , of the Notes to Consolidated Financial Statements included in this Annual Report on Form 10-K.

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Indemnifications

In the ordinary course of business, we may provide indemnifications of varying scope and terms to customers, vendors, lessors, business partners and other parties with respect to certain matters, including, but not limited to, losses arising out of our breach of agreements, products or services to be provided by us, environmental compliance, or from IP infringement claims made by third parties.

In addition, we have entered into indemnification agreements with our directors and certain of our officers that will require us, among other things, to indemnify them against certain liabilities that may arise by reason of their status or service as directors or officers.

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Historically, we have not incurred material costs as a result of obligations under these agreements.

Stock Repurchase Program

Our Board of Directors has authorized a stock repurchase program for the repurchase of up to $5.00 billion of our common stock, which authorization is effective through July 25, 2023.

For the year ended July 1, 2022, we d id not make any stock repurchases and have not repurchased any shares of our common stock pursuant to our stock repurch ase program since the first quarter of 2019.

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

The remaining amount available to be repurchased under our current stock repurchase program as of July 1, 2022 was $4.50 billion.

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

Cash Dividend

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Estimating the impact of these factors requires significant judgment and differences between the estimated and actual amounts of variable consideration can be significant.

We value inventories at the lower of cost (first-in, first-out) or net realizable value.

We record inventory write-downs for the valuation of inventory at the lower of cost or net realizable value by analyzing market conditions and estimates of future sales prices as compared to inventory costs and inventory balances.

We evaluate inventory balances for excess quantities and obsolescence on a regular basis by analyzing estimated demand, inventory on hand, sales levels and other information and reduce inventory balances to net realizable value for excess and obsolete inventory based on this analysis.

Unanticipated changes in technology or customer demand could result in a decrease in demand for one or more of our products, which may require a write down of inventory that could materially affect operating results.

While adjustments to these reserves have generally not been material, in 2019, we recorded a charge to Cost of Sales of $110 million primarily to reduce component inventory to net realizable value as a result of a sudden change in demand for certain products.

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We value inventories at the lower of cost or net realizable value (“NRV”), with cost determined on a first-in, first-out basis.

We record inventory write-downs of our inventory to lower of cost or net realizable value or for obsolete or excess inventory based on assumptions, which requires significant judgement.

The determination of NRV involves estimating the average selling prices less any selling expenses of inventory based on market conditions and customer demand.

To estimate the average selling prices and selling expenses of inventory, we review historical sales, future demand, economic conditions, contract prices and other information.

We periodically perform an excess and obsolete analysis of our inventory based on assumptions, which includes changes in business and economic conditions, changes in technology and projected demand of our products.

If in any period we anticipate a change in those assumptions to be less favorable than our previous estimates, additional inventory write-downs may be required and could materially and negatively impact our gross margin.

If in any period, we can sell inventories that had been written down to a level below the realized selling price in previous period, higher gross profit would be recognized in that period.

While adjustments to these reserves have generally not been material, in 2023, we recorded a charge to Cost of revenue of $130 million, primarily to reduce component inventory to net realizable value as a result of a sudden change in demand for certain products.

We account for income taxes under the asset and liability method, which provides that deferred tax assets and liabilities be recognized for temporary differences between the financial reporting basis and the tax basis of our assets and liabilities and expected benefits of utilizing net operating loss and tax credit carryforwards.

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Each quarter, we evaluate the need for a valuation allowance for our deferred tax assets and we adjust the valuation allowance so that we record net deferred tax assets only to the extent that we conclude it is more likely than not that these deferred tax assets will be realized.

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

We continue to assess and adjust its valuation allowance based on operating results and market conditions.

We account for interest and penalties related to income taxes as a component of the provision for income taxes.

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Goodwill is not amortized.

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.

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

We perform our annual impairment test as of the first day of our fourth quarter for each reporting unit.

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

If we conclude from the qualitative assessment that goodwill is more likely than not impaired, we are required to perform a quantitative approach to determine the amount of impairment.

We are required to use judgment when applying the goodwill impairment test, including in the identification of our reporting units.

As disclosed in Part II, Item 8.

Note 3, Business Segments, Geographic Information, and Concentrations of Risk, of the Notes to Consolidated Financial Statements in this Annual Report on Form 10-K, our management identified several factors that warranted a quantitative analysis of impairment for both the Flash and HDD reporting units during 2023.

As disclosed, we are required to use judgment when applying the goodwill impairment test, including in the identification of our reporting units.

We also make judgments and assumptions in the assignment of assets and liabilities to our reporting units, assignment of goodwill to reporting units and determination of the fair value of each reporting unit.

In addition, the estimates used to determine the fair value of each of our reporting unit may change based on results of operations, macroeconomic conditions or other factors.

In addition, the estimates used to determine the fair value of each of our reporting units may change based on results of operations, macroeconomic conditions or other factors.

Changes in these estimates could materially affect our assessment of the fair value and go odwill impairment for each reporting unit.

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Our recent assessments have indicated that fair value exceeds carrying value by a reasonable margin and we have not identified any impairment indicators for our reporting units.

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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 7. Management’s Discussion and Analysis