What changed in this filing

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Item 8. Financial Statements and Supplementary Data

2023-08-22 compared with 2022-08-25 · 395 added, 362 removed, 1136 unchanged (40% of the section changed)

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

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

Consolidated Statements of Operations — Three Years Ended July 1, 2022 52

Consolidated Statements of Comprehensive Income (Loss) — Three Years Ended July 1, 2022 53

Consolidated Statements of Cash Flows — Three Years Ended July 1, 2022 54

Consolidated Statements of Shareholders' Equity — Three Years Ended July 1, 2022 55

Consolidated Balance Sheets — As of June 30, 2023 and July 1, 2022 53

Consolidated Statements of Operations — Three Years Ended June 30, 2023 54

Consolidated Statements of Comprehensive Income (Loss) — Three Years Ended June 30, 2023 55

Consolidated Statements of Cash Flows — Three Years Ended June 30, 2023 56

Consolidated Statements of Convertible Preferred Stock and Shareholders' Equity — Three Years Ended June 30, 2023 57

Notes to Consolidated Financial Statements

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Report of Independent Registered Public Accounting Firm

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

We have audited the accompanying consolidated balance sheets of Western Digital Corporation and subsidiaries (the Company) as of July 1, 2022 and July 2, 2021, the related consolidated statements of operations, comprehensive income (loss), cash flows and shareholders’ equity for each of the years in the three-year period ended July 1, 2022, and the related notes (collectively, the consolidated financial statements).

We also have audited the Company’s internal control over financial reporting as of July 1, 2022, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of July 1, 2022 and July 2, 2021, and the results of its operations and its cash flows for each of the years in the three-year period ended July 1, 2022, in conformity with U.S.

We have audited the accompanying consolidated balance sheets of Western Digital Corporation and subsidiaries (the Company) as of June 30, 2023 and July 1, 2022, the related consolidated statements of operations, comprehensive income (loss), cash flows, convertible preferred stock and shareholders’ equity for each of the years in the three-year period ended June 30, 2023, and the related notes (collectively, the consolidated financial statements).

We also have audited the Company’s internal control over financial reporting as of June 30, 2023, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of June 30, 2023 and July 1, 2022, and the results of its operations and its cash flows for each of the years in the three-year period ended June 30, 2023, in conformity with U.S.

generally accepted accounting principles.

Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of July 1, 2022, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.

Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of June 30, 2023, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.

Change in Accounting Principle

As discussed in Note 2 to the consolidated financial statements, the Company has changed its method of accounting for convertible debt instruments and convertible preferred stock as of July 2, 2022 due to the adoption of Accounting Standards Update No.

2020-06, “Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40):

Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity”.

Basis for Opinions

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Definition and Limitations of Internal Control Over Financial Reporting

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.

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accepted accounting principles.

A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company;

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As discussed in Note 1 to the consolidated financial statements, the Company provides resellers with price protection and other sales incentive programs.

The Company uses judgment in its assessment of variable consideration in contracts to be included in the transaction price.

The Company uses judgment in its assessment of variable consideration related to these items in contracts to be included in the transaction price.

The Company’s estimate of variable consideration for sales to resellers is based on several factors, including historical pricing information, current pricing trends, and channel inventory levels.

We identified the assessment of variable consideration for sales to resellers as a critical audit matter.

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

A high degree of subjective auditor judgment was required to evaluate the Company’s historical pricing information and the level of channel inventory used to determine variable consideration for sales to resellers.

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

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

We evaluated the Company’s ability to 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.

We evaluated the design and tested the operating effectiveness of certain internal controls related to the Company’s process for determining the variable consideration, including certain controls related to historical pricing information and the level of channel inventory.

We evaluated historical pricing by inspecting a sample of customer contracts with resellers and comparing the sales incentives earned during the year to the sales incentive program terms and conditions and recalculating amounts paid to the resellers.

We tested the channel inventory levels by comparing the on-hand inventory amounts for a sample of resellers to information obtained from the resellers and evaluated the reasonableness of reconciling items.

Goodwill Impairment Assessment of the Company’s Reporting Units

As discussed in Note 3 to the consolidated financial statements, the goodwill balance as of June 30, 2023 was $10,037 million.

The Company tests goodwill for impairment on an annual basis as of the beginning of its fourth quarter or more frequently if events or changes in circumstances indicate that the goodwill may be impaired.

The Company performed a quantitative assessment as of the end of the first and second quarters of fiscal 2023 and again as of its annual goodwill impairment test date, and the fair value of each reporting unit was measured based on a combination of valuation techniques, including an income approach and a market approach.

Based on the Company’s analysis, the fair value of both reporting units was in excess of the carrying values and therefore, did not result in any goodwill impairment.

We identified the assessment of goodwill for impairment for the Company’s reporting units as a critical audit matter.

A high degree of subjective auditor judgment was required to evaluate the forecasted revenue, including revenue growth rates, forecasted cost of goods sold, and the company-specific risk premium 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 future market and economic conditions.

Differences in judgment used to determine these assumptions could have a significant effect on the Company’s assessment of the fair value of the reporting units.

Additionally, evaluating the company-specific risk premium assumption required specialized skills and knowledge.

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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 evaluated the design and tested the operating effectiveness of certain internal controls over the Company’s goodwill impairment process, including controls over the development of the forecasted revenue, forecasted cost of goods sold, and the company-specific risk premium assumptions.

We evaluated the Company’s forecasted revenue by comparing it to historical results and revenue growth rates projected for peer companies and the industry.

We evaluated the Company’s forecasted cost of goods sold by comparing it to historical results and by comparing the forecasted gross margin to historical gross margin for peer companies and the industry.

In addition, we involved valuation professionals with specialized skills and knowledge, who assisted in evaluating the company-specific risk premium by comparing management’s financial projections to publicly available forecasts of comparable companies and the Company’s actual operating results in prior years.

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

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August 21, 2023

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WESTERN DIGITAL CORPORATION

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Total assets $ 24,429 $ 26,259

LIABILITIES AND SHAREHOLDERS’ EQUITY

LIABILITIES, CONVERTIBLE PREFERRED STOCK AND SHAREHOLDERS’ EQUITY

Current liabilities:

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Commitments and contingencies (Notes 10, 11, 14 and 17)

Shareholders’ equity:

Preferred stock, $ 0.01 par value;

Convertible preferred stock, $ 0.01 par value;

authorized — 5 shares;

issued and outstanding — none

issued and outstanding — 1 shares in 2023 and 0 shares in 2022;

aggregate liquidation preference of $ 933 and $ 0 as of June 30, 2023 and June 30, 2022, respectively

Shareholders’ equity:

Common stock, $ 0.01 par value;

authorized — 450 shares;

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

outstanding — 315 shares in 2022 and 308 shares in 2021

issued and outstanding — 322 shares in 2023 and 315 shares in 2022

Additional paid-in capital 3,936 3,733

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Retained earnings 7,424 9,039

Treasury stock — common shares at cost;

0 shares in 2022 and 4 shares in 2021

Total shareholders’ equity 10,847 12,221

Total liabilities and shareholders’ equity $ 26,259 $ 26,132

Total liabilities, convertible preferred stock and shareholders’ equity $ 24,429 $ 26,259

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

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WESTERN DIGITAL CORPORATION

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Total operating expenses 3,172 3,483 3,301

Operating income 2,391 1,220 335

Interest and other income (expense):

Operating income (loss) ( 1,285 ) 2,391 1,220

Interest and other income:

Interest income 24 6 7

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Other income, net 13 30 26

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

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

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

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Net income (loss) ( 1,706 ) 1,500 821

cumulative dividends allocated to preferred shareholders 24 — —

Net income (loss) attributable to common shareholders $ ( 1,730 ) $ 1,500 $ 821

Income (loss) per common share

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Diluted 318 316 309

Cash dividends declared per share $ — $ — $ 1.50

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

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WESTERN DIGITAL CORPORATION

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Net income (loss) $ ( 1,706 ) $ 1,500 $ 821

Other comprehensive loss, before tax:

Actuarial pension gain (loss) 26 27 ( 1 )

Other comprehensive gain (loss), before tax:

Actuarial pension gain 12 26 27

Foreign currency translation adjustment ( 81 ) ( 239 ) ( 36 )

Net unrealized loss on derivative contracts ( 180 ) ( 33 ) ( 93 )

Total other comprehensive loss, before tax ( 393 ) ( 42 ) ( 101 )

Income tax benefit related to items of other comprehensive loss, before tax 36 2 12

Other comprehensive loss, net of tax ( 357 ) ( 40 ) ( 89 )

Net unrealized gain (loss) on derivative contracts 138 ( 180 ) ( 33 )

Total other comprehensive gain (loss), before tax 69 ( 393 ) ( 42 )

Income tax benefit (expense) related to items of other comprehensive gain (loss), before tax ( 31 ) 36 2

Other comprehensive gain (loss), net of tax 38 ( 357 ) ( 40 )

Total comprehensive income (loss) $ ( 1,668 ) $ 1,143 $ 781

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

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WESTERN DIGITAL CORPORATION

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

Non-cash portion of asset impairment 19 — —

Gain on business divestiture — ( 9 ) —

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Other assets and liabilities, net ( 185 ) ( 349 ) ( 266 )

Net cash provided by operating activities 1,880 1,898 824

Net cash provided by (used in) operating activities ( 408 ) 1,880 1,898

Cash flows from investing activities

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Proceeds from the sale of property, plant and equipment 14 15 143

Acquisitions, net of cash acquired — — ( 22 )

Proceeds from dispositions of business — 32 —

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Strategic investments and other, net 31 ( 26 ) 7

Net cash provided by (used in) investing activities ( 1,192 ) ( 765 ) 278

Net cash used in investing activities ( 762 ) ( 1,192 ) ( 765 )

Cash flows from financing activities

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Taxes paid on vested stock awards under employee stock plans ( 80 ) ( 90 ) ( 56 )

Dividends paid to shareholders — — ( 595 )

Net proceeds from convertible preferred stock 881 — —

Repayment of government grants — — ( 9 )

Repayment of debt ( 1,180 ) ( 3,621 ) ( 886 )

Proceeds from debt 1,894 — —

Proceeds from debt issuance 1,180 1,894 —

Debt issuance costs ( 19 ) ( 23 ) —

Net cash used in financing activities ( 1,718 ) ( 817 ) ( 1,508 )

Net cash provided by (used in) financing activities 875 ( 1,718 ) ( 817 )

Effect of exchange rate changes on cash ( 9 ) ( 13 ) 6

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

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WESTERN DIGITAL CORPORATION

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

CONSOLIDATED STATEMENTS OF CONVERTIBLE PREFERRED STOCK AND SHAREHOLDERS’ EQUITY

(in millions)

Common Stock Treasury Stock Additional Paid-In Capital Accumulated Other Comprehensive Income (Loss) Retained Earnings Total Shareholders’ Equity

Shares Amount Shares Amount

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

Net loss — — — — — — ( 250 ) ( 250 )

Employee stock plans — — 7 531 ( 462 ) — — 69

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

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

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

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

Foreign currency translation adjustment — — — — — ( 6 ) — ( 6 )

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

Convertible Preferred Stock Common Stock Treasury Stock Additional Paid-In Capital Accumulated Other Comprehensive Loss Retained Earnings Total Shareholders’ Equity

Shares Amount Shares Amount Shares Amount

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

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Balance at July 1, 2022 — — 315 3 — — 3,733 ( 554 ) 9,039 12,221

Net loss — — — — — — — — ( 1,706 ) ( 1,706 )

Adoption of new accounting standard — — — — — — ( 128 ) — 91 ( 37 )

Employee stock plans — — 7 — — — 13 — — 13

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

Issuance of convertible preferred stock, net of issuance costs 1 876 — — — — — — — —

Actuarial pension gain — — — — — — — 9 — 9

Foreign currency translation adjustment — — — — — — — ( 80 ) — ( 80 )

Net unrealized gain on derivative contracts — — — — — — — 109 — 109

Balance at June 30, 2023 1 $ 876 322 $ 3 — $ — $ 3,936 $ ( 516 ) $ 7,424 $ 10,847

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

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Organization and Basis of Presentation

Western Digital Corporation (“Western Digital” or “the Company”) is a leading developer, manufacturer, and provider of data storage devices and solutions that address the evolving needs of the information technology (“IT”) industry and the infrastructure that enables the proliferation of data in virtually every other industry.

The Company creates environments for data to thrive.

The Company is driving the innovation needed to help customers capture, preserve, access and transform an ever-increasing diversity of data.

Everywhere data lives, from advanced data centers to mobile sensors to personal devices, the Company’s industry-leading solutions deliver the possibilities of data.

Western Digital Corporation (“Western Digital” or the “Company”) is a leading developer, manufacturer, and provider of data storage devices and solutions based on both NAND flash and hard disk drive technologies.

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

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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, 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.

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

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.

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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:

The Company manages and reports under two reportable segments:

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.

The Chief Executive Officer, who is the Company’s Chief Operating Decision Maker (“CODM”), evaluates the performance of the Company and makes decisions regarding the 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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dollar as the functional currency.

Gains or losses resulting from remeasurement of these accounts from local currencies into U.S.

Gains or losses resulting from the remeasurement of these accounts from local currencies into U.S.

dollars were immaterial to the Consolidated Financial Statements.

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dollars using the exchange rate at each balance sheet date for assets and liabilities and a weighted average exchange rate for each period for statement of operations items.

Translation adjustments are recorded in accumulated other comprehensive income, a component of shareholders’ equity.

Translation adjustments are recorded in Accumulated other comprehensive loss, a component of shareholders’ equity.

Use of Estimates

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

These estimates and assumptions have been applied using methodologies that are consistent throughout the periods presented with consideration given to the potential impacts of the ongoing COVID-19 pandemic.

However, actual results could differ materially from these estimates.

WESTERN DIGITAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Cash Equivalents

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

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

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

The Company’s equity in the earnings or losses in equity-method investments is recognized in Other income, net, in the Consolidated Statements of Operations and were immaterial for all years presented.

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

2016-01, “Financial Instruments — Overall (Subtopic 825-10):

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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

The carrying amounts of cash equivalents, accounts receivable, accounts payable and accrued expenses approximate fair value for all periods presented because of the short-term maturity of these assets and liabilities.

The carrying value of notes receivable from Flash Ventures also approximates fair value for all periods presented because they bear variable market rates of interest.

The fair value of investments that are not accounted for under the equity method is based on appropriate market information.

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

WESTERN DIGITAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Property, Plant and Equipment

Property and equipment are carried at cost less accumulated depreciation and amortization.

Property, plant, and equipment are carried at cost less accumulated depreciation and amortization.

The cost of property, plant and equipment is depreciated over the estimated useful lives of the respective assets.

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

Business Combinations

The application of acquisition accounting to a business combination requires that the Company identify the individual assets acquired and liabilities assumed and estimate the fair value of each.

The fair value of assets acquired and liabilities assumed in a business acquisition are recognized at the acquisition date using a combination of valuation techniques, with the purchase price exceeding the fair values being recognized as goodwill.

Determining fair value of identifiable assets, particularly intangibles, liabilities acquired and contingent obligations assumed requires management to make estimates.

In certain circumstances, the allocations of the excess purchase price are based upon preliminary estimates and assumptions and subject to revision when the Company receives final information, including appraisals and other analyses.

Accordingly, the measurement period for such purchase price allocations will end when the information, or the facts and circumstances, becomes available, but will not exceed twelve months.

The Company will recognize measurement-period adjustments during the period of resolution, including the effect on earnings of any amounts that would have been recorded in previous periods if the accounting had been completed at the acquisition date.

Goodwill and intangible assets often represent a significant portion of the assets acquired in a business combination.

The Company recognizes the fair value of an acquired intangible apart from goodwill whenever the intangible arises from contractual or other legal rights, or when it can be separated or divided from the acquired entity and sold, transferred, licensed, rented or exchanged, either individually or in combination with a related contract, asset or liability.

Intangible assets consist primarily of technology, customer relationships, and trade name and trademarks acquired in business combinations and in-process research and development (“IPR&D”).

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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The Company is required to use judgment when applying the goodwill impairment test, including the identification of reporting units, assignment of assets, liabilities and 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 reporting units may change based on results of operations, macroeconomic conditions or other factors.

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

Changes in these estimates could materially affect the Company’s assessment of the fair value and goodwill impairment.

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IPR&D is an intangible asset accounted as an indefinite-lived asset until the completion or abandonment of the associated research and development effort.

During the development period, the Company conducts an IPR&D impairment test annually and whenever events or changes in facts and circumstances indicate that it is more likely than not that the IPR&D is impaired.

Events which might indicate impairment include, but are not limited to, adverse cost factors, strategic decisions made in response to economic, market, and competitive conditions, and the impact of the economic environment the Company and on its customer base.

During the development period, the Company conducts an IPR&D impairment test at least annually or whenever events or changes in facts and circumstances indicate that it is more likely than not that the IPR&D is impaired.

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.

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The transaction price to be recognized as revenue is adjusted for variable consideration, such as sales incentives, and excludes amounts collected on behalf of third parties, including taxes imposed by governmental authorities.

The Company’s performance obligations are typically not constrained based on the Company’s history with similar transactions and that uncertainties are resolved in a fairly short period of time.

The Company’s performance obligations are typically not considered constrained based on the Company’s history with similar transactions and the fact that uncertainties are resolved in a fairly short period of time.

WESTERN DIGITAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

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.

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

WESTERN DIGITAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

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

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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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The actual liability for unrealized tax benefits in any such contingency may be materially different from the Company’s estimates, which could result in the need to record additional liabilities for unrecognized tax benefits or potentially adjust previously-recorded liabilities for unrealized tax benefits, and may materially affect the Company’s operating results.

Income per Common Share

The Company computes basic income per common share using net income and the weighted average number of common shares outstanding during the period.

Diluted income per common share is computed using net income and the weighted average number of common shares and potentially dilutive common shares outstanding during the period.

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)

Net Income (Loss) Per Common Share

The Company computes net income (loss) per common share using a two-class method when shares are issued that meet the definition of participating securities.

The two-class method determines net income (loss) per common share for each class of common stock and participating securities according to dividends declared or accumulated and participation rights in undistributed earnings.

The two-class method requires undistributed earnings for the period to be allocated between common stock and participating securities based upon their respective rights to receive dividends as if all income for the period had been distributed.

The Company’s convertible preferred stock contractually entitles the holders of such shares to participate in dividends but does not contractually require the holders of such shares to participate in the Company’s losses.

The Company computes basic income (loss) per common share by dividing net income (loss) attributable to common shareholders by the weighted average number of common shares outstanding during the period.

Diluted income (loss) per common share is computed by using diluted net income (loss) attributable to common shareholders, the weighted average number of common shares and potentially dilutive securities outstanding during the period using the treasury stock method or the “if-converted” method based on the nature of the securities.

Potentially dilutive common shares include dilutive outstanding employee stock options, restricted stock unit awards (“RSUs”) and restricted stock unit awards with performance conditions or market conditions (“PSUs”), rights to purchase shares of common stock under the Company’s Employee Stock Purchase Plan (“ESPP”), shares issuable in connection with the 1.50 % convertible notes due 2024, and the convertible preferred stock.

Stock-based Compensation

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The Company’s other comprehensive income (loss), net of tax is primarily comprised of unrealized gains or losses on foreign exchange contracts and interest rate swap agreements designated as cash flow hedges, foreign currency translation, and actuarial gains or losses related to pensions.

WESTERN DIGITAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Derivative Contracts

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

The Company had foreign exchange contracts with commercial banks for British pound sterling, European euro, Japanese yen, Malaysian ringgit, Philippine peso, 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.

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 $ 5.66 billion and $ 6.07 billion at June 30, 2023 and July 1, 2022, respectively.

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 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.

The Company previously had interest rate swaps which were accounted for as designated cash flow hedges to mitigate variations in interest payments under a portion of its variable rate term loans.

The Company paid interest monthly at a fixed rate and received interest monthly at the applicable index rate 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 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.

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

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

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Accounting Pronouncements Recently Adopted

In December 2019, the FASB issued ASU No.

2019-12, “Income Taxes (Topic 740):

Simplifying the Accounting for Income Taxes” (“ASU 2019-12”).

ASU 2019-12 removes certain exceptions for recognizing deferred taxes for investments, performing intraperiod allocation and calculating income taxes in interim periods.

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.

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.

In August 2020, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No.

2020-06, “Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40):

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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.

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 for 2023 for the after-tax impact of previously recognized amortization of the debt discount associated with the Co mpany’s convertible senior notes.

Amortization of debt discount included in Interest expense in the Consolidated Statements of Operations, under the previous accounting method was $ 29 million and $ 27 million in 2022 and 2021, respectively.

In November 2021, the FASB issued ASU No.

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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.

The Company adopted this standard on July 2, 2022, the first day of fiscal 2023 and the adoption did not have a material impact on its Consolidated Financial Statements.

Recently Issued Accounting Pronouncements Not Yet Adopted

In September 2022, the FASB issued ASU No.

2022-04, “Liabilities-Supplier Finance Programs (Subtopic 405-50):

Disclosure of Supplier Finance Program Obligations”.

This guidance requires entities that use supplier finance programs in connection with the purchase of goods and services to provide interim disclosures of the amount of outstanding supplier-financed purchases and annual disclosure of rollforward information related to those programs.

The ASU is effective for fiscal years beginning after December 15, 2022, which for the Company is the first quarter of 2024 (except for the amendment on rollforward information, which is effective for fiscal years beginning after December 15, 2023, which for the Company is the first quarter of 2025), with early adoption permitted.

The Company is currently compiling the information required for these disclosures.

WESTERN DIGITAL CORPORATION

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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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Consolidated gross margin 15.3 % 31.3 % 26.7 %

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.

Cloud is comprised primarily of products for public or private cloud environments and end customers, which the Company believes it is uniquely positioned to address as the only provider of both Flash and HDD.

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

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.

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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:

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For 2023, 2022 and 2021, the Company’s top 10 customers accounted for 43 %, 45 %, and 39 %, 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 performs ongoing credit evaluations of its customers’ financial condition to manage collection risk, in some cases supplemented by 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.

As of June 30, 2023, the Company had net accounts receivable of $ 1.60 billion, and two customers, Arrow Electronics, Inc.

and Apple, Inc., accounted for 15 % and 13 %, respectively, of the Company’s outstanding accounts receivable.

As of July 1, 2022, the Company had net accounts receivable of $ 2.80 billion, and no customer accounted for more than 10% or more of the Company’s net accounts receivable.

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

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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.

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

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

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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.

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

Flash HDD Total

(in millions)

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

Foreign currency translation adjustment ( 2 ) ( 2 ) ( 4 )

Balance at June 30, 2023 $ 5,716 $ 4,321 $ 10,037

Goodwill is not amortized.

Instead, it is tested for impairment annually as of the beginning of the Company’s fourth quarter, or more frequently if events or changes in circumstances indicate that goodwill may be impaired.

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

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

Management performed its annual goodwill impairment assessment for both reporting units as of the first day of its fourth quarter ended June 30, 2023.

During 2023, after considering changes in industry and macroeconomic conditions, management performed quantitative analyses of impairments for both the Flash and HDD reporting units as of the end of the first and second quarter of 2023 and again as part of its annual impairment assessment as of the first day of the Company’s fourth quarter ended June 30, 2023.

In each of these analyses, the fair value of each operating segment was based on a weighting of two valuation methodologies:

an income approach and a market approach.

The income approach was based on the present value of the projected discounted cash flows (“DCF”) expected to be generated by the operating segment.

Those projections required the use of significant estimates and assumptions specific to the reporting unit as well as those based on general economic conditions, which included, among other factors, revenue growth rates, gross margins, operating costs, capital expenditures, assumed tax rates and other assumptions deemed reasonable by management.

The present value was based on applying a weighted average cost of capital (“WACC”) which considered long-term interest rates and cost of equity based on the Company’s risk profile.

The market approach was based on a guideline company method, which analyzed market multiples of revenue and earnings before interest, taxes, depreciation and amortization (“EBITDA”) for a group of comparable public companies.

WESTERN DIGITAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The Company reconciled the aggregated estimated fair value of both operating segments to the Company’s market capitalization, including consideration of a control premium representing the estimated amount a market participant would pay to obtain a controlling interest in the Company.

In connection with the Company’s annual goodwill impairment assessment performed as of the first day of the fourth quarter ended June 30, 2023, the fair value derived from those valuation methodologies exceeded the carrying value by 20 % and 35 % for Flash and HDD, respectively.

Accordingly, there were no impairment charges recorded in 2023.

The Company also did no t incur any impairment charges for 2022 or 2021.

The Company is required to use judgment when assessing goodwill for impairment, including evaluating the impact of industry and macroeconomic conditions, the determination of the fair value of each reporting unit and the assignment of assets and liabilities to reporting units.

In addition, the estimates used to determine the fair value of reporting units as well as their actual carrying value may change based on future changes in the Company’s results of operations, macroeconomic conditions or other factors.

Changes in these estimates could materially affect the Company’s assessment of the fair value and goodwill impairment.

In addition, if negative macroeconomic conditions continue or worsen or the Company’s stock price decreases for a sustained period of time, goodwill could become impaired, which could result in an impairment charge and materially adversely affect the Company’s financial condition and results of operations.

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.

The Company did not have any contract assets as of either June 30, 2023 or July 1, 2022.

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.

Contract liabilities as of June 30, 2023 and July 1, 2022 and changes in contract liabilities during 2023 and 2022 were not material.

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

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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:

$ 43 million in 2023, and $ 2 million in 2024 and thereafter.

The transaction price allocated to the remaining performance obligations as of June 30, 2023 was not material.

WESTERN DIGITAL CORPORATION

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

In 2023, 2022 and 2021, the Company sold trade accounts receivable aggregating $ 776 million, $ 400 million and $ 233 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.

As of July 1, 2022 and July 2, 2021, the amount of factored receivables that remained outstanding was $ 300 million and $ 0 million , respectively.

As of June 30, 2023 and July 1, 2022, the amount of factored receivables that remained outstanding was $ 150 million and $ 300 million, respectively.

(in millions)

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Intangible assets

The following tables present intangible assets as of July 1, 2022 and July 2, 2021:

The following tables present intangible assets as of June 30, 2023 and July 1, 2022:

June 30, 2023

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

(in years) (in millions)

Finite-lived:

Existing technology 3 $ 4,231 $ ( 4,231 ) $ —

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(in years) (in millions)

Finite-lived:

Existing technology 3 $ 4,231 $ ( 4,231 ) $ —

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Intangible assets are amortized over the estimated useful lives based on the pattern in which the economic benefits are expected to be received.

Intangible asset amortization was as follows:

2022 2021 2020

(in millions)

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.

Amortization expense for intangible assets subject to amortization totaled $ 133 million, $ 221 million, and $ 486 million in 2023, 2022 and 2021, respectively.

As of June 30, 2023, all finite-lived intangible assets were fully amortized.

WESTERN DIGITAL CORPORATION

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Accumulated other comprehensive income (loss)

Accumulated other comprehensive income (loss) (“AOCI”), net of tax refers to expenses, gains and losses that are recorded as an element of shareholders’ equity but are excluded from net income.

The following table illustrates the changes in the balances of each component of AOCI:

Actuarial Pension Gains (Losses) Foreign Currency Translation Adjustment Unrealized Gains (Losses) on Derivative Contracts Total Accumulated Comprehensive Income (Loss)

Accumulated other comprehensive loss

Accumulated other comprehensive loss (“AOCL”), net of tax, refers to expenses, gains and losses that are recorded as an element of shareholders’ equity but are excluded from net income.

The following table illustrates the changes in the balances of each component of AOCL:

Actuarial Pension Losses Foreign Currency Translation Adjustment Unrealized Losses on Derivative Contracts Total Accumulated Comprehensive Loss

(in millions)

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Amounts reclassified from accumulated other comprehensive loss — — 172 172

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

Income tax benefit (expense) related to items of other comprehensive income (loss) ( 2 ) — 38 36

Net current-period other comprehensive income (loss) 24 ( 239 ) ( 142 ) ( 357 )

1 unchanged sentence

Other comprehensive income (loss) before reclassifications 12 ( 81 ) ( 213 ) ( 282 )

Amounts reclassified from accumulated other comprehensive income (loss) — — 172 172

Amounts reclassified from accumulated other comprehensive loss — — 351 351

Income tax benefit (expense) related to items of other comprehensive income (loss) ( 3 ) 1 ( 29 ) ( 31 )

Net current-period other comprehensive income (loss) 9 ( 80 ) 109 38

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

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.

Balance at June 30, 2023 $ ( 2 ) $ ( 357 ) $ ( 157 ) $ ( 516 )

During 2023 and 2022, the amounts reclassified out of AOCL included gains of $ 10 million and losses of $ 47 million, respectively, related to interest rate swaps and losses of $ 361 million and $ 125 million, respectively, related to foreign exchange contracts.

The gains and 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

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Inputs that are unobservable for the asset or liability and that are significant to the fair value of the assets or liabilities.

The following tables present information about the Company’s financial assets and liabilities that are measured at fair value on a recurring basis as of July 1, 2022 and July 2, 2021, and indicate the fair value hierarchy of the valuation techniques utilized to determine such values:

The following tables present information about the Company’s financial assets and liabilities that are measured at fair value on a recurring basis as of June 30, 2023 and July 1, 2022, and indicate the fair value hierarchy of the valuation techniques utilized to determine such values:

June 30, 2023

Level 1 Level 2 Level 3 Total

2 unchanged sentences

Foreign exchange contracts — 35 — 35

Interest rate swap contracts — 3 — 3

Total assets at fair value $ 371 $ 35 $ — $ 406

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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 contracts — 80 — 80

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

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Interest Rate Swaps.

The Company’s interest rate swaps are long-term contracts to hedge the Company’s variable rate debt risk.

Interest rate swaps are valued based on estimated present value of future cash flows model.

The Company’s interest rate swaps were long-term contracts to hedge the Company’s variable rate debt risk.

Interest rate swaps were valued based on estimated present value of future cash flows model.

The market-based observable inputs for the model include interest rate curves and credit valuation adjustments based on published credit default swap curves.

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Each of the financial instruments presented below was categorized as Level 2 for all periods presented, based on the frequency of trading immediately prior to the end of the fourth quarter of 2023 and the fourth quarter of 2022, respectively.

July 1, 2022 July 2, 2021

June 30, 2023 July 1, 2022

Value Carrying

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Variable interest rate Term Loan A-2 maturing 2027 2,687 2,661 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

2.85 % senior notes due 2029

496 400 495 412

3.10 % senior notes due 2032

495 371 495 389

Total $ 7,070 $ 6,692 $ 7,022 $ 6,667

2 unchanged sentences

Derivative Instruments and Hedging Activities

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

As of June 30, 2023, the Company had outstanding foreign exchange forward contracts that were designated as either cash flow hedges or non-designated hedges.

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

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

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

As of June 30, 2023, 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.

For each of 2023, 2022 and 2021, total net realized and unrealized transaction and foreign exchange contract currency gains and losses were not material to the Company’s Consolidated Financial Statements.

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

For more information regarding cash flow hedges, see Note 5, Supplemental Financial Statement Data - Accumulated other comprehensive loss.

Netting Arrangements

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

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

As of June 30, 2023 and July 1, 2022, the effect of rights of offset was not material and the Company did not offset or net the fair value amounts of derivative instruments in its Consolidated Balance Sheets.

WESTERN DIGITAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

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

Debt consisted of the following as of June 30, 2023 and July 1, 2022:

(in millions)

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

2.85 % senior notes due 2029

3.10 % senior notes due 2032

Total debt 7,100 7,100

3 unchanged sentences

Long-term debt $ 5,857 $ 7,022

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.

During the year ended June 30, 2023, the Company entered into a first amendment (“Amendment No.

1”) and a second amendment (“Amendment No.

2”, and together with Amendment No.

1, the “Credit Agreement Amendments”) to the Company’s Amended and Restated Loan Agreement, dated as of January 7, 2022 which governs the Term-Loan A-2 and the revolving credit facility maturing in January 2027 (as amended, the “Credit Agreement”).

The Credit Agreement Amendments, among other things, (a) modified the leverage ratio requirements, and (b) introduced a minimum liquidity covenant applicable through the Company’s quarter ending September 27, 2024 and a minimum free cash flow requirement applicable through the Company’s quarter ending December 29, 2023.

The Credit Agreement Amendments also accelerate the due date for amounts outstanding under the Credit Agreement from January 7, 2027 to November 2, 2023 if, as of that date, the Company does not have cash and cash equivalents plus available unused capacity under its 2027 Revolving Facility (as defined below) that is at least $ 1.40 billion plus the aggregate principal amount of indebtedness that matures within 12 months of such date (including the 2024 Convertible Notes and the Delayed Draw Term Loan (as such terms are defined below)).

As amended, the Company is required to comply with maintaining a maximum ratio (“Leverage Ratio”) of total funded debt to Consolidated Adjusted EBITDA (as defined in the Credit Agreement) at the end of each quarter as follows:

Quarter ending Leverage ratio

June 30, 2023 5.50 to 1.00

September 29, 2023 N/A (1) to 1.00

December 29, 2023 N/A (1) to 1.00

March 29, 2024 6.25 to 1.00

June 28, 2024 5.25 to 1.00

September 27, 2024 5.00 to 1.00

December 27, 2024 4.50 to 1.00

March 28, 2025 4.00 to 1.00

June 25, 2025 3.75 to 1.00

Thereafter 3.25 to 1.00

(1) Leverage ratio is not required.

WESTERN DIGITAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

For the purpose of the Leverage Ratio, Consolidated Adjusted EBITDA is calculated on a trailing twelve-month basis, except that for the quarters ending March 29, 2024, June 28, 2024 and September 27, 2024, Consolidated Adjusted EBITDA shall be:

(a) for the quarter ending March 29, 2024, Consolidated Adjusted EBITDA for such quarter multiplied by four, (b) for the quarter ending June 28, 2024, Consolidated Adjusted EBITDA for such quarter and the immediately preceding quarter multiplied by two and (c) for the quarter ending September 27, 2024, Consolidated Adjusted EBITDA for such quarter and the two immediately preceding quarters multiplied by four-thirds.

In addition, the Credit Agreement requires the Company and its subsidiaries to maintain minimum liquidity (defined as the sum of cash and cash equivalents plus available unused capacity under its 2027 Revolving Facility less the aggregate principal amount of indebtedness that matures within 12 months of such date, excluding indebtedness under the Delayed Draw Term Loan Agreement (as defined below)) of $ 2.00 billion at the end of each quarter through September 23, 2024, and Free Cash Flow (as defined in the Credit Agreement) of no less than $( 550 ) million as of June 30, 2023, $( 500 ) million as of September 29, 2023 and $( 500 ) million as of December 29, 2023;

provided that if Free Cash Flow is greater than the amount noted as of the applicable quarter end date, the amount by which Free Cash Flow exceeds the stated amount may be carried forward to subsequent quarters such that the minimum Free Cash Flow amount for such fiscal quarter is increased by the amount of such excess.

As of June 30, 2023, the Company was in compliance with all financial covenants under the Credit Agreement.

The Credit Agreement also requires the Company 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.

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.

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$ 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.

The annualized interest rate for Term Loan A-2 as of June 30, 2023 was 6.557 %.

As of June 30, 2023, 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 is 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 $ 13 million as of June 30, 2023.

During the year ended June 30, 2023, the Company drew and repaid $ 1.18 billion principal amount under its $ 2.25 billion revolving credit facility maturing in January 2027 (the “2027 Revolving Facility”).

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.

In January 2023, the Company entered into a loan agreement (the “Delayed Draw Term Loan Agreement”), which allowed the Company to draw a single loan of up to $ 875 million through June 30, 2023.

In June 2023, the Company entered into a first amendment and a second amendment to the Delayed Draw Term Loan Agreement (as amended, the “Amended Delayed Draw Term Loan Agreement”), which together extended the term loan commitments under the Delayed Draw Term Loan Agreement until August 14, 2023, and reduced the term loan commitments from $ 875 million to $ 600 million (the “Delayed Draw Term Loan”).

As of June 30, 2023, the Company had not drawn on the Delayed Draw Term Loan.

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 August 2023, the Company drew the Delayed Draw Term Loan in the amount of $ 600 million.

The principal amount of the Delayed Draw Term Loan will mature on June 28, 2024.

However, the due date will be accelerated to November 2, 2023, if, as of that date, the Company does not have cash and cash equivalents plus available unused capacity under its 2027 Revolving Facility that is at least $ 1.40 billion plus the aggregate principal amount of indebtedness that matures within 12 months (including the 2024 Convertible Notes (as defined below) and the Delayed Draw Term Loan).

The Delayed Draw Term Loan bears interest, at the Company’s option, at a per annum rate equal to either (x) the Adjusted Term SOFR Rate (as defined in the Amended Delayed Draw Term Loan Agreement) plus an applicable margin varying from 1.750 % to 2.625 % or (y) a base rate plus an applicable margin varying from 0.750 % to 1.625 %, in each case depending on the corporate family ratings of the Company from at least two of the Credit Rating Agencies (as defined in the Amended Delayed Draw Term Loan Agreement).

The Company pays an unused commitment fee on the Delayed Draw Term Loan Agreement of 0.200 %.

The key covenants, limitations and requirements provided under the Credit Agreement noted above also apply to the Amended Delayed Draw Term Loan Agreement.

In December 2021, the Company issued $ 500 million aggregate principal amount of 2.850 % senior notes due February 1, 2029 (the “2029 Senior Notes”) and issued $ 500 million aggregate principal amount of 3.100 % senior notes due February 1, 2032 (the “2032 Senior 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 “Senior Notes Trustee”), as supplemented by the first supplemental indenture dated as of December 10, 2021 (the “Senior Notes First Supplemental Indenture”) between the Company and the Senior Notes Trustee.

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

Interest for both the 2029 Senior Notes and 2032 Senior 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 Notes or 2032 Senior Notes prior to their maturity dates.

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

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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.

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 “ Convertible Notes Trustee”), as supplemented by the first supplemental indenture dated as of June 30, 2022 between the Company and the Convertible Notes Trustee.

As of June 30, 2023, 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.

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.

The 2024 Convertible Notes debt issuance costs were approximately $ 18 million, of which $ 15 million was allocated to the debt component and $ 3 million was allocated to equity.

The debt discount and issuance costs are amortized to interest expense over the term of the 2024 Convertible Notes.

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.

As described in Note 2, Recent Accounting Pronouncements , the Company adopted ASU 2020-06 effective July 2, 2022, using a modified retrospective method, which resulted in the elimination of the originally recorded debt discount associated with the conversion feature on the 2024 Convertible Notes.

As of June 30, 2023, debt discount and issuance costs of $ 2 million remained unamortized.

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”).

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

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.

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 June 30, 2023, issuance costs of $ 7 million remained unamortized.

WESTERN DIGITAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

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;

The indentures and supplemental indentures, as applicable, governing the Company’s 2029 Senior Notes, 2032 Senior Notes, 2026 Senior Unsecured Notes and the 2024 Convertible Notes each contain various restrictive covenants, which can 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;

and incur, assume or guarantee additional indebtedness.

and incur, assume or guarantee additional indebtedness, and are subject to a number of limitations and exceptions.

In connection with the amendments discussed above, the 2027 Revolving Facility, Term Loan A-2, and the Delayed Draw Term Loan (the “Credit Facilities”) have been unconditionally guaranteed by Western Digital Technologies, Inc.

(the “Initial Guarantor”) and are secured on a first-priority basis (subject to permitted liens) by a lien on substantially all assets and properties of the Company and the Initial Guarantor (the “Collateral”), subject to certain exceptions.

Furthermore, the obligations under the Company’s 2.850 % Senior Notes due 2029 and 3.100 % Senior Notes due 2032 have been secured by the Collateral on an equal and ratable basis to the obligations under the Credit Facilities for so long as and to the extent required under the terms of the Indenture, and the obligations under the Company’s 2026 Senior Unsecured Notes have been guaranteed by the Initial Guarantor pursuant to the First Supplemental Indenture dated as of June 20, 2023 (the “2026 Senior Notes First Supplemental Indenture”) for so long as and to the extent required under the terms of the indenture governing such notes and the 2026 Senior Notes First Supplemental Indenture.

Future Debt Payments

As of July 1, 2022, required annual future debt payments were as follows:

As of June 30, 2023, the required annual future debt payments were as follows:

Future Debt Payments

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All pension and other post-retirement benefit plans outside of the Company’s Japan, Thailand and the Philippines defined benefit pension plans (the “Pension Plans”) are immaterial to the Consolidated Financial Statements.

The expected long-term rate of return on the Pension Plans’ assets is 2.5 %.

Obligations and Funded Status

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Net amount recognized $ 88 $ 105

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

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.

The accumulated benefit obligation for the Pension Plans was $ 273 million at June 30, 2023.

As of June 30, 2023, the accumulated other income pension balance was $ 2 million.

There were no material prior service credits for the Pension Plans recognized in Accumulated other comprehensive loss in the Consolidated Balance Sheet as of June 30, 2023.

Net periodic benefit costs were not material for 2023, 2022, and 2021.

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The Company’s estimates of future rates of return on assets is based in large part on the projected rate of return from the respective investment managers using a long-term view of historical returns, as well as actuarial recommendations using the most current generational and mortality tables and rates.

As of July 1, 2022, Pension Plan assets materially consisted of plan assets related to the Japan Pension Plan and as such the assumption used herein is primarily related to the Japan Pension Plan.

As of June 30, 2023, the Pension Plans’ assets materially consisted of plan assets related to the Japan pension plan and as such the assumption used herein is primarily related to the Japan pension plan.

The Company develops the rate of compensation increase assumptions using local compensation practices and historical rates of increases.

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Fair Value Measurements

The following tables present the Pension Plans’ major asset categories and their associated fair values and net asset values as of July 1, 2022 and July 2, 2021:

The following tables present the Pension Plans’ major asset categories and their associated fair values and net asset values as of June 30, 2023 and July 1, 2022:

June 30, 2023

Level 1 Level 2 Level 3 Total

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K1 is now fully operational.

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”.

In connection with the start-up of this facility, the Company has made prepayments toward future K1 building depreciation.

As of June 30, 2023, approximately $ 220 million of such prepayments were available to be credited against future wafer charges.

In January 2022, the Company entered into additional agreements regarding Flash Ventures’ investment in a new wafer fabrication facility 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.

The first phase of construction of Y7 is now complete and has commenced output.

The Company is committed to pay, among other things, the remainder of prepayments toward future Y7 building depreciation aggregating approximately $ 21 million in 2024.

The prepayments can be used as credit against future wafer charges.

As of June 30, 2023, approximately $ 355 million of prepayments were available to be credited against future wafer charges.

WESTERN DIGITAL CORPORATION

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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.

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

The following table presents the notes receivable from, and equity investments in, Flash Ventures as of June 30, 2023 and July 1, 2022:

(in millions)

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The Company’s notes receivable from each Flash Ventures entity, denominated in Japanese yen, are secured by equipment owned by that Flash Ventures entity.

As of July 1, 2022 and July 2, 2021, the Company had Accounts payable balances due to Flash Ventures of $ 320 million and $ 398 million, respectively.

As of June 30, 2023 and July 1, 2022, the Company had Accounts payable balances due to Flash Ventures of $ 292 million and $ 320 million, respectively.

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

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

dollar exchange rate at June 30, 2023, is presented below.

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

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Maximum estimable loss exposure $ 4,138

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.

As of June 30, 2023 and July 1, 2022, the Company’s retained earnings included cumulative undistributed earnings of Flash Ventures of $ 55 million and $ 43 million, respectively.

WESTERN DIGITAL CORPORATION

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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.

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

During 2023, 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 projected demand.

In 2023, the Company incurred costs of $ 286 million associated with the reduction in utilization related to Flash Ventures, 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 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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dollar-equivalent, based upon the Japanese yen to U.S.

dollar exchange rate as of July 1, 2022.

dollar exchange rate as of June 30, 2023.

Lease Amounts

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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.

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

dollar exchange rate as of July 1, 2022:

dollar exchange rate as of June 30, 2023:

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

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2027 115 106 221

2027 and thereafter 39 113 152

2028 29 102 131

Total guarantee obligations $ 1,189 $ 505 $ 1,694

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

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

As of June 30, 2023, no amounts have been accrued in the Consolidated Financial Statements with respect to these indemnification agreements.

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

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

For 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.

For the years ended June 30, 2023, July 1, 2022 and July 2, 2021, the Company recognized approximately 3 %, 4 %, and 3 % of its consolidated revenue on products distributed by the Unis Venture, respectively.

The outstanding accounts receivable due from the Unis Venture were 8 % and 5 % of Accounts receivable, net as of June 30, 2023 and July 1, 2022, respectively.

WESTERN DIGITAL CORPORATION

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Leases and Other Commitments

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

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 those options.

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 June 30, 2023:

Lease Amounts

Minimum lease payments by fiscal year:

Minimum lease payments by year:

(in millions)

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Weighted average discount rate 4.2 %

The following table summarizes supplemental disclosures of operating cost and cash flow information related to operating leases for the year ended July 1, 2022:

The following table summarizes supplemental disclosures of operating cost and cash flow information related to operating leases for the year ended June 30, 2023:

(in millions)

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

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

As of June 30, 2023, the Company had the following minimum long-term commitments:

Long-term commitments

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Thereafter 130

Total $ 1,349

WESTERN DIGITAL CORPORATION

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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.

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.

The Company may make 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.

Furthermore, the Company’s employer matching contributions vest immediately.

Contributions, including the Company’s matching contribution to the Plan, are recorded as soon as administratively possible after the Company makes payroll deductions from Plan participants.

Effective February 18, 2023, the Company announced its decision to suspend matching contributions.

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

For 2023, 2022 and 2021, the Company made Plan contributions of $ 22 million, $ 36 million and $ 34 million, respectively.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Shareholders’ Equity

Shareholders’ Equity and Convertible Preferred Stock

2021 Long-Term Incentive Plan

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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.

The 2021 Plan was amended in 2023 to increase the number of shares available for issuance under the plan by 2.8 million shares of common stock.

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) 12.0 million shares of common stock plus (b) 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.

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

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.

As of June 30, 2023, there were 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 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.

As of June 30, 2023, the maximum number of shares of the Company’s common stock that was authorized for award grants under the 2021 Plan was 17.0 million shares, which includes shares of common stock subject to outstanding awards under certain prior plans as of the effective date of the 2021 Plan that have been forfeited, terminated, expired, lapsed without being exercised or were otherwise reacquired by the Company.

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.

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During 2023, 2022 and 2021, the Company issued 2.7 million, 2.1 million, and 3.2 million shares, respectively, under the ESPP for aggregate purchase amounts of $ 92 million, $ 113 million and $ 115 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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

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.

Stock-based Compensation Expense

2 unchanged sentences

(in millions)

Options $ — $ — $ 7

RSUs and PSUs $ 283 $ 286 $ 282

9 unchanged sentences

Total $ 275 $ 278 $ 271

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

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

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

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

The following table presents the unamortized compensation cost and weighted average service period of all unvested outstanding awards as of June 30, 2023:

Unamortized Compensation Costs Weighted Average Service Period

10 unchanged sentences

(in millions) (in years) (in millions)

Options outstanding at June 28, 2019 3.9 $ 65.72

Exercised ( 0.8 ) 43.26 $ 12

Canceled or expired ( 0.4 ) 88.58

Options outstanding at July 3, 2020 2.7 $ 69.16

5 unchanged sentences

Options outstanding at July 1, 2022 0.9 66.76

Canceled or expired ( 0.6 ) 80.72

Options outstanding at June 30, 2023 0.3 $ 44.95 0.10

No options were granted in 2023, 2022 or 2021.

All outstanding options were exercisable at July 1, 2022.

All outstanding options were exercisable at June 30, 2023.

RSUs and PSUs

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(in millions) (in millions)

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

9 unchanged sentences

Forfeited ( 1.6 ) 54.56

RSUs and PSUs outstanding at July 1, 2022 15.4 $ 52.89

RSUs and PSUs outstanding at June 30, 2023 13.8 $ 46.56

RSUs and PSUs are generally settled in an equal number of shares of the Company’s common stock at the time of vesting of the units.

4 unchanged sentences

The fair value of the Company’s RSU and PSU awards with a performance condition is determined based upon the closing price of the Company’s stock price on the date of grant.

The fair value of PSU awards with a market condition is estimated using a Monte Carlo simulation model on the date of grant using historical volatility.

The fair value of PSU awards with a market condition is estimated using a Monte Carlo simulation model on the date of grant.

ESPP — Black-Scholes-Merton Model

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Fair value $ 9.70 $ 15.56 $ 21.59

Convertible Preferred Stock

On January 31, 2023, the Board of Directors of the Company authorized the designation of 900,000 shares of Series A Convertible Perpetual Preferred Stock, par value $ 0.01 per share (the “Preferred Shares”), from the Company’s existing five million authorized but unissued shares of preferred stock and issued the Preferred Shares through a private placement for an aggregate purchase price of $ 900 million, less issuance costs of $ 24 million.

Dividend provisions

The Preferred Shares will have a stated value of $ 1,000 per share and accrue a cumulative preferred dividend at an annual rate of 6.25 % per annum (increasing to 7.25 % per annum on January 31, 2030 and to 8.25 % per annum on January 31, 2033) compounded on a quarterly basis.

The Preferred Shares will also participate in any dividends declared for common shareholders on an as-converted equivalent basis.

As of June 30, 2023, (i) no dividends have been declared or paid since the issuance of the Preferred Shares, and (ii) unpaid and cumulative dividends payable with respect to the Preferred Shares were $ 24 million.

WESTERN DIGITAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Conversion rights

The Preferred Shares will be convertible into shares of the Company’s common stock at an initial conversion rate of $ 47.75 per share (the “Conversion Price”) (subject to anti-dilution adjustments and certain other one-time adjustments upon the occurrence of various specified spin-off transactions) applied to the aggregate sum of the stated value of the Preferred Shares plus any cumulative accrued but unpaid dividends (the “Accumulated Stated Value”).

In the event of a standalone spin-off transaction, the holders of Preferred Shares may have one third of their Preferred Shares converted to a similar class of preferred shares of the spin-off entity.

The Preferred Shares will be convertible at the option of the holder upon the earlier of on January 31, 2024, and the date a specified spin-off transaction is completed, unless the Company enters into a definitive agreement with respect to a sale, merger or combination of the spun-off entity, in which case the twelve ( 12 ) month period will be extended until the earlier of the consummation of such transaction or the termination of the definitive agreement.

The Preferred Shares will be convertible at the option of the Company after January 31, 2026 if the closing price per share of the Company’s common stock exceeds 150 % of the Conversion Price for at least 20 out of 30 consecutive trading days immediately prior to the Company’s conversion notice.

As of June 30, 2023, the Preferred Shares outstanding would have been convertible, if otherwise permitted, into 19 million shares of common stock.

After January 31, 2030, the Company will have the right, but not the obligation, to redeem the Preferred Shares for an amount in cash equal to 110 % of the Accumulated Stated Value.

Redemption is contingently mandatory in the event of a fundamental change in the business as defined in the designation of the Preferred Shares.

The Preferred Shares has been classified as mezzanine equity in the Company’s Condensed Consolidated Balance Sheets because, in the event of certain fundamental change in the business that are not solely within the control of the Company, the Preferred Shares would become redeemable at the option of the holders.

The Company did not adjust the carrying values of the Preferred Shares to the current redemption value of such shares since a liquidation event was not probable at any of the balance sheet dates.

Subsequent adjustments to increase or decrease the carrying values to the ultimate redemption value will be made only if and when it becomes probable that such a fundamental change in the business will occur.

The Preferred Shares will vote, to the extent permitted under the Nasdaq listing rules, on an as-converted equivalent basis along with holders of the Company’s common stock.

Liquidation preference

In the event of any voluntary or involuntary liquidation, holders of the Preferred Shares will be senior to the holders of the Company’s common stock and the liquidation preference is the greater of (i) the sum of an amount in cash equal to 110 % of the Accumulated Stated Value plus accrued and unpaid dividends and (ii) the payment that the holders of Preferred Shares would have received had all Preferred Shares been converted into common stock immediately prior to such liquidation, before any distributions are made to common shareholders and all other classes of junior capital stock of the Company.

As of June 30, 2023, the total aggregate liquidation preference was $ 924 million.

Stock Repurchase Program

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 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.

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

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

The Company’s Board of Directors previously authorized a stock repurchase program for the repurchase of up to $ 5.00 billion of the Company’s common stock, which expired on July 25, 2023.

For the year ended June 30, 2023, and through the expiration date of the program, the Company did no t make any stock repurchases.

WESTERN DIGITAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Stock Reserved for Issuance

The following table summarizes all common stock reserved for issuance at July 1, 2022:

The following table summarizes all common stock reserved for issuance at June 30, 2023:

Number of Shares

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Income (loss) before taxes $ ( 1,560 ) $ 2,123 $ 927

Income Tax Expense (Benefit)

The components of the income tax expense (benefit) were as follows:

Income Tax Expense

The components of the income tax expense were as follows:

2023 2022 2021

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However, the U.S.

Treasury and the IRS have issued tax guidance on certain provisions of the 2017 Act since the enactment date, and the Company anticipates the issuance of additional regulatory and interpretive guidance.

Treasury and the Internal Revenue Services (“IRS”) have issued tax guidance on certain provisions of the 2017 Act since the enactment date, and the Company anticipates the issuance of additional regulatory and interpretive guidance.

The Company applied a reasonable interpretation of the 2017 Act along with the then-available guidance in finalizing its accounting for the tax effects of the 2017 Act.

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

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

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

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

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

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 corporate alternative minimum tax will be effective for the Company beginning with 2024 and the Company is currently evaluating the potential effects of these legislative changes.

WESTERN DIGITAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

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

The Rescue Act includes certain business-related provisions, which 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

4 unchanged sentences

Accrued compensation and benefits not currently deductible 88 114

Deferred revenue — 128

Net operating loss carryforward 183 195

11 unchanged sentences

Deferred tax assets, net $ 111 $ 100

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.

27 unchanged sentences

R&D tax credits 5 ( 4 ) ( 8 )

return to provision ( 2 ) — ( 3 )

Other ( 3 ) 2 5

2 unchanged sentences

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.

Certain tax holidays and tax incentive programs may be extended if specific conditions are met.

The net impact of these tax holidays and tax incentives was an increase to the Company’s net earnings by $ 140 million, or $ 0.44 per diluted share, $ 566 million, or $ 1.79 per diluted share, and $ 390 million, or $ 1.26 per diluted share, in 2023, 2022, and 2021, respectively.

As of July 1, 2022, the Company had varying amounts of federal and state NOL/tax credit carryforwards that do not expire or, if not used, expire in various years.

As of June 30, 2023, the Company had varying amounts of federal and state NOL/tax credit carryforwards that do not expire or, if not used, expire in various years.

Following is a summary of the Company’s federal and state NOL/tax credit carryforwards and the related expiration dates of these NOL/tax credit carryforwards:

10 unchanged sentences

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

As of July 1, 2022, the Company had varying amounts of foreign NOL carryforwards that do not expire or, if not used, expire in various years, depending on the country.

As of June 30, 2023, the Company had varying amounts of foreign NOL carryforwards that do not expire or, if not used, expire in various years, depending on the country.

The major jurisdictions that the Company receives foreign NOL carryforwards and the related amounts and expiration dates of these NOL carryforwards are as follows:

18 unchanged sentences

Unrecognized tax benefit, ending balance $ 1,021 $ 1,047 $ 748

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.

As of June 30, 2023, July 1, 2022 and July 2, 2021, the portion of the gross unrecognized tax benefits, if recognized, that would affect the effective tax rate is $ 855 million, $ 903 million, and $ 612 million, respectively.

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 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.

Accrued interest and penalties included in the Company’s liability related to unrecognized tax benefits as of June 30, 2023, July 1, 2022 and July 2, 2021 was $ 289 million, $ 254 million and $ 138 million, respectively.

As of June 30, 2023, July 1, 2022 and July 2, 2021, the Company’s payables related to unrecognized tax benefits, including accrued interest and penalties, were $ 1.14 billion, $ 1.16 billion, and $ 750 million, respectively.

The Company believes it is reasonably likely that payments of approximately $ 720 million to $ 760 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 June 30, 2023.

The remaining payables related to unrecognized tax benefits are included in Other liabilities on the Consolidated Balance Sheets as of June 30, 2023, July 1, 2022 and July 2, 2021.

WESTERN DIGITAL CORPORATION

5 unchanged sentences

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 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.

In the following major foreign jurisdictions where there is no tax holiday, the Company could be subject to examination as noted below:

Jurisdiction Period Subject to Examination

China (calendar) 2013-2022

Ireland (fiscal) 2019-2022

India (fiscal) 2009-2022

Israel (fiscal) 2014-2022

Japan (fiscal) 2016-2022

Malaysia (fiscal) 2015-2022

Thailand (fiscal) 2013-2022

Singapore (fiscal) 2019-2022

United Kingdom (fiscal) 2021-2022

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

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

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

The Company expects to pay $ 523 million in the first quarter of 2024 with respect to years 2008 and 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, the Company expects to realize reductions to its mandatory deemed repatriation tax obligations and tax savings from interest deductions in future years aggregating to approximately $ 160 million to $ 180 million.

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

1 unchanged sentence

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 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.

As of June 30, 2023, with the exception of the tentative settlement with the IRS, 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.

6 unchanged sentences

Net income (loss) $ ( 1,706 ) $ 1,500 $ 821

cumulative dividends allocated to preferred shareholders 24 — —

Net income (loss) attributable to common shareholders $ ( 1,730 ) $ 1,500 $ 821

Weighted average shares outstanding:

6 unchanged sentences

Anti-dilutive potential common shares excluded 14 3 5

The Company computes basic income (loss) per common share using Net income (loss) and the Weighted average number of common shares outstanding during the period.

Diluted income (loss) per common share is computed using Net income (loss) and the Weighted average number of common shares and potentially dilutive common shares outstanding during the period.

Potentially dilutive common shares include dilutive outstanding employee stock options, RSUs and PSUs, and rights to purchase shares of common stock under the Company’s ESPP.

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, 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.

Basic income (loss) per share attributable to common shareholders is computed using (i) net income (loss) less (ii) dividends paid to holders of Preferred Shares less (iii) net income (loss) attributable to participating securities divided by (iv) weighted average basic shares outstanding.

Diluted net income (loss) per share attributable to common shareholders is computed as (i) basic net income (loss) attributable to common shareholders plus (ii) diluted adjustments to income allocable to participating securities divided by (iii) weighted average diluted shares outstanding.

The “if-converted” method is used to determine the dilutive impact for the shares issuable in connection with the 1.50 % convertible notes due 2024 and the convertible preferred stock, and the treasury stock method is used to determine the dilutive impact of outstanding employee stock options, RSUs, PSUs, and rights to purchase shares of common stock under the ESPP.

For 2023, the Company recorded a net loss and all shares subject to outstanding equity awards were excluded from the calculation of diluted shares for the period because their impact would have been anti-dilutive.

For 2022 and 2021, the Company excluded common shares subject to certain 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 those periods.

WESTERN DIGITAL CORPORATION

1 unchanged sentence

Employee Termination, Asset Impairment, and Other Charges

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

Business Realignment

The Company periodically incurs charges to realign its operations with anticipated market demand, primarily consisting of organization rationalization designed to streamline its business, reduce its cost structure and focus its resources.

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

The Company recognized gains related to the disposition of assets associated with these activities of $ 8 million, $ 7 million and $ 75 million for 2023, 2022 and 2021, respectively.

The Company recorded the following charges related to these actions:

2023 2022 2021

(in millions)

Employee termination and other charges:

Closure of Foreign Manufacturing Facilities $ — $ — $ 5

Business Realignment 50 28 44

Employee termination benefits $ 176 $ 50 $ 28

Gain on disposition of assets:

Business Realignment ( 7 ) ( 75 ) ( 17 )

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

Asset impairments and other charges (gains) 17 ( 7 ) ( 75 )

Total employee termination, asset impairment, and other charges $ 193 $ 43 $ ( 47 )

Closure of Foreign Manufacturing Facilities

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 2019.

Business Realignment

The Company periodically incurs charges as part of the integration process of recent acquisitions and to realign its operations with anticipated market demand, primarily consisting of organization rationalization designed to streamline its business, reduce its cost structure and focus its resources.

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

The Company recognized gains related to the disposition of assets associated with these activities $ 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, which consisted entirely of employee termination benefits, during the year ended July 1, 2022:

The following table presents an analysis of the components of these activities against the reserve during the year ended June 30, 2023:

Employee Termination Benefits

2 unchanged sentences

Cash payments ( 162 )

Accrual balance at July 1, 2022 $ 17

Accrual balance at June 30, 2023 $ 31

WESTERN DIGITAL CORPORATION

1 unchanged sentence

Legal Proceedings

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

Tax Court in September 2018 and March 2019, additional penalties asserted by the IRS in March 2021 and 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.

For disclosures regarding statutory notices of deficiency issued by the IRS on June 28, 2018 and December 10, 2018, and the status of resolution with respect to certain matters, see Note 14, Income Tax Expense.

Other Matters

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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 8. Financial Statements and Supplementary Data