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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q

(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2022
Or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                      to                     
Commission file number: 1-8703

https://cdn.kscope.io/2d1f66037a8d3009cbdec40ff2587ccc-wdc-20220930_g1.gif
WESTERN DIGITAL CORPORATION
(Exact Name of Registrant as Specified in Its Charter)
Delaware33-0956711
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer Identification No.)
5601 Great Oaks ParkwaySan Jose,California95119
(Address of principal executive offices)(Zip Code)
Registrant’s telephone number, including area code: (408) 717-6000
Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading symbol(s)Name of each exchange on which registered
Common Stock, $0.01 Par Value Per ShareWDCThe Nasdaq Stock Market LLC
 (Nasdaq Global Select Market)
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes      No  ¨
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes      No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company”



in Rule 12b-2 of the Exchange Act.
Large accelerated filerAccelerated filerNon-accelerated filerSmaller reporting companyEmerging growth company

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.    
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes      No  ý
As of the close of business on October 26, 2022, 317,650,295 shares of common stock, par value $0.01 per share, were outstanding.



WESTERN DIGITAL CORPORATION
INDEX
PAGE NO.
PART I. FINANCIAL INFORMATION
Item 1.Financial Statements (unaudited)
Condensed Consolidated Balance Sheets — As of September 30, 2022 and July 1, 2022
Condensed Consolidated Statements of Operations — Three Months Ended September 30, 2022 and October 1, 2021
Condensed Consolidated Statements of Comprehensive Income (Loss) — Three Months Ended September 30, 2022 and October 1, 2021
Condensed Consolidated Statements of Cash Flows — Three Months Ended September 30, 2022 and October 1, 2021
Condensed Consolidated Statements of Shareholders' Equity — Three Months Ended September 30, 2022 and October 1, 2021
Notes to Condensed Consolidated Financial Statements
Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 3.Quantitative and Qualitative Disclosures About Market Risk
Item 4.Controls and Procedures
PART II. OTHER INFORMATION
Item 1.Legal Proceedings
Item 1A.Risk Factors
Item 6.Exhibits

Unless otherwise indicated, references herein to specific years and quarters are to our fiscal years and fiscal quarters, and references to financial information are on a consolidated basis. As used herein, the terms “we,” “us,” “our,” the “Company,” “WDC” and “Western Digital” refer to Western Digital Corporation and its subsidiaries, unless we state, or the context indicates, otherwise.

WDC, a Delaware corporation, is the parent company of our data storage business. Our principal executive offices are located at 5601 Great Oaks Parkway, San Jose, California 95119. Our telephone number is (408) 717-6000.

Western Digital, the Western Digital logo, SanDisk, and WD are registered trademarks or trademarks of Western Digital or its affiliates in the U.S. and/or other countries. All other trademarks, registered trademarks and/or service marks, indicated or otherwise, are the property of their respective owners.


3

Table of Contents
FORWARD-LOOKING STATEMENTS

This document contains forward-looking statements within the meaning of the federal securities laws. Any statements that do not relate to historical or current facts or matters are forward-looking statements. You can identify some of the forward-looking statements by the use of forward-looking words, such as “may,” “will,” “could,” “would,” “project,” “believe,” “anticipate,” “expect,” “estimate,” “continue,” “potential,” “plan,” “forecast,” and the like, or the use of future tense. Statements concerning current conditions may also be forward-looking if they imply a continuation of current conditions. Examples of forward-looking statements include, but are not limited to, statements concerning: expectations regarding the global macroeconomic environment; the effects of the COVID-19 pandemic; expectations regarding supply chain conditions and constraints; expectations regarding demand trends and market conditions for our products and expected future financial performance; expectations regarding our product momentum and product development and technology plans; expectations regarding capital expenditure plans and investments, including relating to our Flash Ventures joint venture with Kioxia Corporation (“Kioxia”), and sources of funding for those expenditures; expectations regarding our effective tax rate and our unrecognized tax benefits; and our beliefs regarding the sufficiency of our available liquidity to meet our working capital, debt and capital expenditure needs.

These forward-looking statements are based on management’s current expectations, represent the most current information available to the Company as of the date of this Quarterly Report on Form 10-Q and are subject to a number of risks, uncertainties and other factors that could cause actual results or performance to differ materially from those expressed in the forward-looking statements. These risks and uncertainties include, but are not limited to:

volatility in global economic conditions;
future responses to and effects of the COVID-19 pandemic or other similar global health crises;
impact of business and market conditions;
the outcome and impact of our ongoing strategic review, including with respect to customer and supplier relationships, regulatory and contractual restrictions, stock price volatility and the diversion of management’s attention from ongoing business operations and opportunities;
impact of competitive products and pricing;
our development and introduction of products based on new technologies and expansion into new data storage markets;
risks associated with cost saving initiatives, restructurings, acquisitions, divestitures, mergers, joint ventures and our strategic relationships;
difficulties or delays in manufacturing or other supply chain disruptions;
hiring and retention of key employees;
our level of debt and other financial obligations;
changes to our relationships with key customers;
disruptions in operations from cybersecurity incidents or other system security risks;
actions by competitors;
risks associated with compliance with changing legal and regulatory requirements and the outcome of legal proceedings; and
the other risks and uncertainties disclosed in Part I, Item 1A of our Annual Report on Form 10-K for the year ended July 1, 2022 (the “2022 Annual Report on Form 10-K”).

You are urged to carefully review the disclosures we make concerning these risks and review the additional disclosures we make concerning material risks and other factors that may affect the outcome of our forward-looking statements and our business and operating results, including those made in Part I, Item 1A of our 2022 Annual Report on Form 10-K and any of those made in our other reports filed with the Securities and Exchange Commission, including under “Risk Factors” in Item 1A of subsequent Annual Reports on Form 10-K and Quarterly Reports on Form 10-Q that may from time to time amend, supplement or supersede the risks and uncertainties disclosed in the 2022 Annual Report on Form 10-K. You are cautioned not to place undue reliance on the forward-looking statements included in this Quarterly Report on Form 10-Q, which speak only as of the date of this document. We do not intend, and undertake no obligation, to update or revise these forward-looking statements to reflect new information or events after the date of this document or to reflect the occurrence of unanticipated events, except as required by law.
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PART I. FINANCIAL INFORMATION

Item 1.    Financial Statements (unaudited)

WESTERN DIGITAL CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(in millions, except par value)
(Unaudited)
September 30,
2022
July 1,
2022
ASSETS
Current assets:
Cash and cash equivalents$2,049 $2,327 
Accounts receivable, net2,422 2,804 
Inventories3,862 3,638 
Other current assets738 684 
Total current assets9,071 9,453 
Property, plant and equipment, net3,718 3,670 
Notes receivable and investments in Flash Ventures1,219 1,396 
Goodwill10,037 10,041 
Other intangible assets, net174 213 
Other non-current assets1,467 1,486 
Total assets$25,686 $26,259 
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable$1,686 $1,902 
Accounts payable to related parties295 320 
Accrued expenses1,592 1,636 
Income taxes payable986 869 
Accrued compensation407 510 
Total current liabilities4,966 5,237 
Long-term debt7,071 7,022 
Other liabilities1,542 1,779 
Total liabilities13,579 14,038 
Commitments and contingencies (Notes 10, 11, 13 and 16)
Shareholders’ equity:
Common stock, $0.01 par value; authorized — 450 shares; issued — 318 shares and 315 shares, respectively; outstanding — 318 shares and 315 shares, respectively
3 3 
Additional paid-in capital3,641 3,733 
Accumulated other comprehensive loss(694)(554)
Retained earnings9,157 9,039 
Total shareholders’ equity12,107 12,221 
Total liabilities and shareholders’ equity$25,686 $26,259 

The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
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WESTERN DIGITAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in millions, except per share amounts)
(Unaudited)
Three Months Ended
September 30,
2022
October 1,
2021
Revenue, net$3,736 $5,051 
Cost of revenue2,755 3,386 
Gross profit981 1,665 
Operating expenses:
Research and development552 578 
Selling, general and administrative247 291 
Employee termination, asset impairment, and other charges24 18 
Total operating expenses823 887 
Operating income158 778 
Interest and other income (expense):
Interest income2 2 
Interest expense(70)(78)
Other income (expense), net(6)2 
Total interest and other expense, net(74)(74)
Income before taxes84 704 
Income tax expense57 94 
Net income$27 $610 
Income per common share:
Basic$0.09 $1.97 
Diluted$0.08 $1.93 
Weighted average shares outstanding:
Basic316 310 
Diluted319 316 

The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
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WESTERN DIGITAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(in millions)
(Unaudited)
Three Months Ended
September 30,
2022
October 1,
2021
Net income$27 $610 
Other comprehensive income (loss), before tax:
Actuarial pension gain 1 
Foreign currency translation adjustment(80)4 
Net unrealized gain (loss) on derivative contracts and available-for-sale securities(76)33 
Total other comprehensive income (loss), before tax(156)38 
Income tax benefit (expense) related to items of other comprehensive income (loss), before tax16 (8)
Other comprehensive income (loss), net of tax(140)30 
Total comprehensive income (loss)$(113)$640 

The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
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WESTERN DIGITAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in millions)
(Unaudited)
Three Months Ended
September 30,
2022
October 1,
2021
Cash flows from operating activities
Net income$27 $610 
Adjustments to reconcile net income to net cash provided by operations:
Depreciation and amortization216 250 
Stock-based compensation86 76 
Deferred income taxes(42)27 
Gain on disposal of assets1  
Amortization of debt issuance costs and discounts3 10 
Other non-cash operating activities, net44 (12)
Changes in:
Accounts receivable, net382 (188)
Inventories(224)73 
Accounts payable(125)(41)
Accounts payable to related parties(25)(20)
Accrued expenses(44)(1)
Income taxes payable117 (35)
Accrued compensation(104)(67)
Other assets and liabilities, net(306)(161)
Net cash provided by operating activities6 521 
Cash flows from investing activities
Purchases of property, plant and equipment(320)(245)
Notes receivable issuances to Flash Ventures(84)(165)
Notes receivable proceeds from Flash Ventures183 113 
Strategic investments and other, net(3)(15)
Net cash used in investing activities(224)(312)
Cash flows from financing activities
Issuance of stock under employee stock plans 2 
Taxes paid on vested stock awards under employee stock plans(50)(78)
Repayment of debt (213)
Repayments of revolving credit facility(300) 
Proceeds from revolving credit facility300  
Net cash used in financing activities(50)(289)
Effect of exchange rate changes on cash(10) 
Net decrease in cash and cash equivalents(278)(80)
Cash and cash equivalents, beginning of year2,327 3,370 
Cash and cash equivalents, end of period$2,049 $3,290 
Supplemental disclosure of cash flow information:
Cash paid for income taxes$134 $221 
Cash paid for interest$106 $99 

The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
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WESTERN DIGITAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(in millions)
(Unaudited)
Common StockTreasury StockAdditional Paid-In CapitalAccumulated Other Comprehensive LossRetained EarningsTotal Shareholders’ Equity
SharesAmountSharesAmount
Balance at July 1, 2022315 $3  $ $3,733 $(554)$9,039 $12,221 
Net income— — — — — — 27 27 
Adoption of new accounting standards— — — — (128)— 91 (37)
Employee stock plans3 — — — (50)— — (50)
Stock-based compensation— — — — 86 — — 86 
Foreign currency translation adjustment— — — — — (80)— (80)
Net unrealized loss on derivative contracts— — — — — (60)— (60)
Balance at September 30, 2022318 $3  $ $3,641 $(694)$9,157 $12,107 

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

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WESTERN DIGITAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(in millions)
(Unaudited)
Common StockTreasury StockAdditional Paid-In CapitalAccumulated Other Comprehensive LossRetained EarningsTotal Shareholders’ Equity
SharesAmountSharesAmount
Balance at July 2, 2021312 $3 (4)$(232)$3,608 $(197)$7,539 $10,721 
Net income— — — — — — 610 610 
Employee stock plans— — 3 207 (283)— — (76)
Stock-based compensation— — — — 76 — — 76 
Actuarial pension gain— — — — — 1 — 1 
Foreign currency translation adjustment— — — — — 4 — 4 
Net unrealized gain on derivative contracts— — — — — 25 — 25 
Balance at October 1, 2021312 $3 (1)$(25)$3,401 $(167)$8,149 $11,361 

The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
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WESTERN DIGITAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Note 1.    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 based on both flash-based products (“Flash”) and hard disk drives (“HDD”) technologies. With dedicated Flash and HDD business units driving advancements in memory technologies, the Company creates and drives innovations needed to help customers capture, preserve, access, and transform an ever-increasing diversity of data.

The accounting policies followed by the Company are set forth in Part II, Item 8, Note 1, Organization and Basis of Presentation, of the Notes to Consolidated Financial Statements included in the Company’s Annual Report on Form 10‑K for the year ended July 1, 2022. In the opinion of management, all adjustments necessary to fairly state the Condensed Consolidated Financial Statements have been made. All such adjustments are of a normal, recurring nature. Certain information and footnote disclosures normally included in the Consolidated Financial Statements prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”) have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). These Condensed Consolidated Financial Statements should be read in conjunction with the Consolidated Financial Statements and the notes thereto included in the Company’s Annual Report on Form 10‑K for the year ended July 1, 2022. The results of operations for interim periods are not necessarily indicative of results to be expected for the full year.

Fiscal Year

The Company’s fiscal year ends on the Friday nearest to June 30 and typically consists of 52 weeks. Approximately every five to six years, the Company reports a 53-week fiscal year to align the fiscal year with the foregoing policy. Fiscal years 2023, which ends on June 30, 2023, and 2022, which ended on July 1, 2022, are each comprised of 52 weeks, with all quarters presented consisting of 13 weeks.

Segment Reporting

The Company manufactures, markets, and sells data storage devices and solutions in the U.S. and in foreign countries through its sales personnel, dealers, distributors, retailers, and subsidiaries. The Company manages and reports under two reportable segments: Flash and HDD.

The Company’s Chief Operating Decision Maker (“CODM”) evaluates performance of the Company and makes decisions regarding allocation of resources based on each operating segment’s net revenue and gross margin. Because of the integrated nature of the Company’s production and distribution activities, separate segment asset measures are not available or reviewed by the CODM to evaluate the performance of or to allocate resources to the segments.

Use of Estimates

Company management has made estimates and assumptions relating to the reporting of certain assets and liabilities in conformity with U.S. GAAP. These estimates and assumptions have been applied using methodologies that are consistent throughout the periods presented with consideration given to the potential impacts of current macroeconomic conditions. However, actual results could differ materially from these estimates.


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WESTERN DIGITAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 2.    Recent Accounting Pronouncements

Accounting Pronouncements Recently Adopted

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): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity” (“ASU 2020-06”). ASU 2020-06 reduces the number of accounting models for convertible debt instruments and convertible preferred stock and results in fewer instruments with embedded conversion features being separately recognized from the host contract as compared with prior standards. Those instruments that do not have a separately recognized embedded conversion feature will no longer recognize a debt issuance discount related to such a conversion feature and would recognize less interest expense on a periodic basis. Additionally, the ASU amends the calculation of the share dilution impact related to a conversion feature and eliminates the treasury method as an option. 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 for the after-tax impact of previously recognized amortization of the debt discount associated with the Company’s convertible senior notes.

In November 2021, the FASB issued ASU No. 2021-10, “Government Assistance (Topic 832): Disclosures by Business Entities about Government Assistance” (“ASU 2021-10”). ASU 2021-10 increases the transparency of government assistance received by requiring most business entities to disclose information about government assistance received, including (1) the types of assistance, (2) the entity’s accounting for the assistance, and (3) the effect of the assistance on an entity’s financial statements. This ASU is effective for fiscal years (and interim periods within those fiscal years) beginning after December 15, 2021, which for the Company is the first quarter of 2023. The Company adopted this ASU on July 2, 2022, the first day of the year ending June 30, 2023, and the adoption did not have a material impact on its Condensed Consolidated Financial Statements.




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WESTERN DIGITAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 3.    Business Segments, Geographic Information, and Concentrations of Risk

The following table summarizes the operating performance of the Company’s reportable segments:
Three Months Ended
September 30,
2022
October 1,
2021
(in millions, except percentages)
Net revenue:
Flash$1,722 $2,490 
HDD2,014 2,561 
Total net revenue$3,736 $5,051 
Gross profit:
Flash$422 $921 
HDD574 792 
Total gross profit for segments996 1,713 
Unallocated corporate items:
Stock-based compensation expense(14)(9)
Amortization of acquired intangible assets(1)(39)
Total unallocated corporate items(15)(48)
Consolidated gross profit$981 $1,665 
Gross margin:
Flash24.5 %37.0 %
HDD28.5 %30.9 %
Consolidated gross margin26.3 %33.0 %

Disaggregated Revenue

The Company’s broad portfolio of technology and products address multiple end markets. Cloud represents a large and growing end market comprised primarily of products for public or private cloud environments and end customers, which the Company believes it is uniquely positioned to address as the only provider of both 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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WESTERN DIGITAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The Company’s disaggregated revenue information is as follows:
Three Months Ended
September 30,
2022
October 1,
2021
(in millions)
Revenue by End Market
Cloud$1,829 $2,225 
Client1,229 1,853 
Consumer678 973 
Total Revenue$3,736 $5,051 
Revenue by Geography
Asia$1,686 $2,675 
Americas1,423 1,614 
Europe, Middle East and Africa627 762 
Total Revenue$3,736 $5,051 

The Company’s top 10 customers accounted for 52% of its net revenue for the three months ended September 30, 2022, and 43% of its net revenue for the three months ended October 1, 2021. For the three months ended September 30, 2022 and October 1, 2021, no single customer accounted for 10% or more of the Company’s net revenue.

Goodwill

The following table provides a summary of goodwill activity for the period:
FlashHDDTotal
(in millions)
Balance at July 1, 2022$5,718 $4,323 $10,041 
Foreign currency translation adjustment(2)(2)(4)
Balance at September 30, 2022$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

As of September 30, 2022, management identified several factors, including changes in macroeconomic conditions and a recent decline of the Company’s market stock price, that warranted a quantitative analysis of impairment for both the Flash and HDD reporting units as of that date. 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.
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WESTERN DIGITAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

We 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.

As of September 30, 2022, the fair value derived from those valuation methodologies exceeded the carrying value by 7% and 32% for Flash and HDD, respectively, and no impairment was recognized.

The Company is required to use judgment when applying the goodwill impairment test, including the assignment of assets and liabilities 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 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 results of operations.
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WESTERN DIGITAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 4.    Revenues

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 September 30, 2022 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 September 30, 2022 and July 1, 2022 and changes in contract liabilities for the three months ended September 30, 2022 and October 1, 2021 were not material.

The Company incurs sales commissions and other direct incremental costs to obtain sales contracts. The Company has applied the practical expedient to recognize the direct incremental costs of obtaining contracts as an expense when incurred if the amortization period is expected to be one year or less or the amount is not material, with these costs charged to Selling, general and administrative expenses. The Company had no direct incremental costs to obtain contracts that have an expected benefit of greater than one year.

The Company applies the practical expedients and does not disclose transaction price allocated to the remaining performance obligations for (i) arrangements that have an original expected duration of one year or less, which mainly consist of the support and maintenance contracts, and (ii) variable consideration amounts for sale-based or usage-based royalties for intellectual property (“IP”) license arrangements, which typically range longer than one year. Remaining performance obligations are mainly attributed to right-to-access patent license arrangements, 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 September 30, 2022 was $26 million, which is mainly attributable to the functional IP license and professional service arrangements. The Company expects to recognize substantially all of this amount as revenue within the next twelve months.



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WESTERN DIGITAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 5.    Supplemental Financial Statement Data

Accounts receivable, net

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. During the three months ended September 30, 2022, the Company sold trade accounts receivable aggregating $291 million. The Company did not sell any trade accounts receivable during the three months ended October 1, 2021. The discounts on the trade accounts receivable sold were not material and were recorded within Other income (expense), net in the Condensed Consolidated Statements of Operations. As of September 30, 2022 and July 1, 2022, the amount of factored receivables that remained outstanding was $291 million and $300 million, respectively.

Inventories
September 30,
2022
July 1,
2022
(in millions)
Inventories:
Raw materials and component parts$1,809 $1,603 
Work-in-process1,130 1,162 
Finished goods923 873 
Total inventories$3,862 $3,638 

Property, plant and equipment, net
September 30,
2022
July 1,
2022
(in millions)
Property, plant and equipment:
Land$269 $269 
Buildings and improvements1,945 1,920 
Machinery and equipment8,734 8,642 
Computer equipment and software499 494 
Furniture and fixtures54 54 
Construction-in-process642 591 
Property, plant and equipment, gross12,143 11,970 
Accumulated depreciation(8,425)(8,300)
Property, plant and equipment, net$3,718 $3,670 

Other Intangible assets
September 30,
2022
July 1,
2022
(in millions)
Other Intangible assets:
Finite-lived intangible assets$5,715 $5,493 
In-process research and development80 80 
Accumulated amortization(5,621)(5,360)
Other Intangible assets, net$174 $213 

As part of prior acquisitions, the Company recorded at the time of the acquisition acquired in-process research and development (“IPR&D”) for projects in progress that had not yet reached technological feasibility. IPR&D is initially accounted for as an indefinite-lived intangible asset. Once a project reaches technological feasibility, the Company reclassifies the balance to existing technology and begins to amortize the intangible asset over its estimated useful life.
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WESTERN DIGITAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Product warranty liability

Changes in the warranty accrual were as follows:
Three Months Ended
September 30,
2022
October 1,
2021
(in millions)
Warranty accrual, beginning of period$345 $363 
Charges to operations32 40 
Utilization(34)(23)
Changes in estimate related to pre-existing warranties(3)(10)
Warranty accrual, end of period$340 $370 

The current portion of the warranty accrual is classified in Accrued expenses and the long-term portion is classified in Other liabilities as noted below:
September 30,
2022
July 1,
2022
(in millions)
Warranty accrual:
Current portion (included in Accrued expenses)$144 $162 
Long-term portion (included in Other liabilities)196 183 
Total warranty accrual$340 $345 

Other liabilities
September 30,
2022
July 1,
2022
(in millions)
Other liabilities:
Non-current net tax payable$460 $659 
Non-current portion of unrecognized tax benefits453 477 
Other non-current liabilities629 643 
Total other liabilities$1,542 $1,779 

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WESTERN DIGITAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Accumulated other comprehensive loss

Accumulated other comprehensive 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 LossesForeign Currency Translation AdjustmentUnrealized Losses on Derivative ContractsTotal Accumulated Comprehensive Loss
(in millions)
Balance at July 1, 2022$(11)$(277)$(266)$(554)
Other comprehensive loss before reclassifications (80)(140)(220)
Amounts reclassified from accumulated other comprehensive loss  64 64 
Income tax benefit related to items of other comprehensive loss  16 16 
Net current-period other comprehensive loss (80)(60)(140)
Balance at September 30, 2022$(11)$(357)$(326)$(694)

During the three months ended September 30, 2022, the amounts reclassified out of AOCI were losses related to foreign exchange contracts and interest rate swap contracts. Losses reclassified out of AOCI related to foreign exchange contracts were $62 million for the three months ended September 30, 2022 that were substantially charged to Cost of revenue in the Condensed Consolidated Statements of Operations. Losses reclassified out of AOCI related to interest rate swap contracts were $2 million for the three months ended September 30, 2022 that were charged to Interest expense in the Condensed Consolidated Statements of Operations.

As of September 30, 2022, substantially all of existing net losses related to cash flow hedges recorded in AOCI are expected to be reclassified to earnings within the next twelve months. In addition, as of September 30, 2022, the Company did not have any foreign exchange forward contracts with credit-risk-related contingent features.

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WESTERN DIGITAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 6.    Fair Value Measurements and Investments

Financial Instruments Carried at Fair Value

Financial assets and liabilities that are remeasured and reported at fair value at each reporting period are classified and disclosed in one of the following three levels:

Level 1.    Quoted prices in active markets for identical assets or liabilities.

Level 2.    Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

Level 3.    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 September 30, 2022 and July 1, 2022, and indicate the fair value hierarchy of the valuation techniques utilized to determine such values:
September 30, 2022
 Level 1Level 2Level 3Total
(in millions)
Assets:
Cash equivalents - Money market funds$322 $ $ $322 
Foreign exchange contracts 48  48 
Interest rate swap contracts 11  11 
Total assets at fair value$322 $59 $ $381 
Liabilities:
Foreign exchange contracts$ $329 $ $329 
Total liabilities at fair value$ $329 $ $329 
July 1, 2022
 Level 1Level 2Level 3Total
(in millions)
Assets:
Cash equivalents - Money market funds$266 $ $ $266 
Foreign exchange contracts 61  61 
Interest rate swap contracts 3  3 
Total assets at fair value$266 $64 $ $330 
Liabilities:
Foreign exchange contracts$ $316 $ $316 
Total liabilities at fair value$ $316 $ $316 

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

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WESTERN DIGITAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Financial Instruments Not Carried at Fair Value

For financial instruments where the carrying value (which includes principal adjusted for any unamortized issuance costs, and discounts or premiums) differs from fair value (which is based on quoted market prices), the following table represents the related carrying value and fair value for each of the Company’s outstanding financial instruments. Each of the financial instruments presented below was categorized as Level 2 for all periods presented, based on the frequency of trading immediately prior to the end of the first quarter of 2023 and the fourth quarter of 2022, respectively.
September 30, 2022July 1, 2022
Carrying
Value
Fair
Value
Carrying
Value
Fair
Value
(in millions)
1.50% convertible notes due 2024
$1,097 $1,047 $1,048 $1,040 
4.75% senior unsecured notes due 2026
2,291 2,134 2,291 2,205 
Variable interest rate Term Loan A-2 maturing 20272,693 2,634 2,693 2,621 
2.85% senior unsecured notes due 2029
495 389 495 412 
3.10% senior unsecured notes due 2032
495 342 495 389 
     Total$7,071 $6,546 $7,022 $6,667 

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WESTERN DIGITAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 7.    Derivative Instruments and Hedging Activities

As of September 30, 2022, the Company had outstanding foreign exchange forward contracts that were designated as either cash flow hedges or non-designated hedges. Substantially all of the contract maturity dates of these foreign exchange forward contracts do not exceed 12 months. In addition, the Company had outstanding pay-fixed interest rate swaps that were designated as cash flow hedges of variable rate interest payments through February 2023, on a portion of its term loans.

Changes in fair values of the non-designated foreign exchange contracts are recognized in Other income (expense), net and are largely offset by corresponding changes in the fair values of the foreign currency denominated monetary assets and liabilities. For each of the three months ended September 30, 2022 and October 1, 2021, total net realized and unrealized transaction and foreign exchange contract currency gains and losses were not material to the Company’s Condensed Consolidated Financial Statements.

Unrealized gains or losses on designated cash flow hedges are recognized in AOCI. For more information regarding cash flow hedges, see Part I, Item 1, Note 5, Supplemental Financial Statement Data - Accumulated other comprehensive loss, of the Notes to the Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q.

Netting Arrangements

Under certain provisions and conditions within agreements with counterparties to the Company’s foreign exchange forward contracts, subject to applicable requirements, the Company has the right of offset associated with the Company’s foreign exchange forward contracts and is allowed to net settle transactions of the same currency with a single net amount payable by one party to the other. As of September 30, 2022 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 Condensed Consolidated Balance Sheets.

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WESTERN DIGITAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 8.    Debt

Debt consisted of the following:
September 30,
2022
July 1,
2022
(in millions)
1.50% convertible notes due 2024
$1,100 $1,100 
4.75% senior unsecured notes due 2026
2,300 2,300 
Variable interest rate Term Loan A-2 maturing 20272,700 2,700 
2.85% senior unsecured notes due 2029
500 500 
3.10% senior unsecured notes due 2032
500 500 
Total debt7,100 7,100 
Issuance costs and debt discounts(29)(78)
Long-term debt$7,071