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 ~~December 31, 2021~~September 30, 2022


☐			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

WESTERN DIGITAL CORPORATION

(Exact Name of Registrant as Specified in Its Charter)

Delaware

33-0956711

(State or other jurisdiction of
incorporation or organization)

(I.R.S. Employer Identification No.)

5601 Great Oaks Parkway

San Jose,

California

95119

(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 class	Trading symbol(s)	Name of each exchange on which registered
Common Stock, $0.01 Par Value Per Share	WDC	The 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 filer

Accelerated filer

Non-accelerated filer

Smaller reporting company

Emerging 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 ~~January 27,~~October 26, 2022, ~~312,917,687~~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 ~~December 31, 2021~~September 30, 2022 and July ~~2, 2021~~1, 2022	5
	Condensed Consolidated Statements of Operations — Three ~~and Six~~ Months Ended ~~December 31, 2021~~September 30, 2022 and ~~January~~October 1, 2021	6
	Condensed Consolidated Statements of Comprehensive Income (Loss) — Three ~~and Six~~ Months Ended ~~December 31, 2021~~September 30, 2022 and ~~January~~October 1, 2021	7
	Condensed Consolidated Statements of Cash Flows — ~~Six~~Three Months Ended ~~December 31, 2021~~September 30, 2022 and ~~January~~October 1, 2021	8
	Condensed Consolidated Statements of Shareholders' Equity — ~~Six~~Three Months Ended ~~December 31, 2021~~September 30, 2022 and ~~January~~October 1, 2021	9
	Notes to Condensed Consolidated Financial Statements	11
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	37
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	5250
Item 4.	Controls and Procedures	5250

PART II. OTHER INFORMATION
Item 1.	Legal Proceedings	5351
Item 1A.	Risk Factors	5351



~~Item 5.~~	~~Other Information~~	53
Item 6.	Exhibits	5452

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, ~~G-Technology,~~ 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.

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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 and measures intended to reduce its spread;~~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;~~

•~~volatility in~~pandemic or other similar global ~~economic conditions;~~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 ~~substantial~~ level of debt and other financial obligations;

•changes to our relationships with key customers;

•disruptions in operations from ~~cyberattacks~~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 ~~fiscal~~ year ended July ~~2, 2021~~1, 2022 (the ~~“2021~~“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 ~~2021~~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 ~~2021~~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)


		December 31, 2021		July 2, 2021			September 30, 2022		July 1, 2022
ASSETS	ASSETS					ASSETS
Current assets:	Current assets:					Current assets:
Cash and cash equivalents	Cash and cash equivalents	$	2,531	$	3,370	Cash and cash equivalents	$	2,049	$	2,327
Accounts receivable, net	Accounts receivable, net	2,743		2,257		Accounts receivable, net	2,422		2,804
Inventories	Inventories	3,647		3,616		Inventories	3,862		3,638
Other current assets	Other current assets	614		514		Other current assets	738		684
Total current assets	Total current assets	9,535		9,757		Total current assets	9,071		9,453
Property, plant and equipment, net	Property, plant and equipment, net	3,367		3,188		Property, plant and equipment, net	3,718		3,670
Notes receivable and investments in Flash Ventures	Notes receivable and investments in Flash Ventures	1,553		1,586		Notes receivable and investments in Flash Ventures	1,219		1,396
Goodwill	Goodwill	10,065		10,066		Goodwill	10,037		10,041
Other intangible assets, net	Other intangible assets, net	300		442		Other intangible assets, net	174		213
Other non-current assets	Other non-current assets	1,205		1,093		Other non-current assets	1,467		1,486
Total assets	Total assets	$	26,025	$	26,132	Total assets	$	25,686	$	26,259
LIABILITIES AND SHAREHOLDERS’ EQUITY	LIABILITIES AND SHAREHOLDERS’ EQUITY					LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:	Current liabilities:					Current liabilities:
Accounts payable	Accounts payable	$	2,022	$	1,934	Accounts payable	$	1,686	$	1,902
Accounts payable to related parties	Accounts payable to related parties	389		398		Accounts payable to related parties	295		320
Accrued expenses	Accrued expenses	1,700		1,653		Accrued expenses	1,592		1,636
Income taxes payable						Income taxes payable	986		869
Accrued compensation	Accrued compensation	567		634		Accrued compensation	407		510
Current portion of long-term debt		251		251

Total current liabilities	Total current liabilities	4,929		4,870		Total current liabilities	4,966		5,237
Long-term debt	Long-term debt	7,057		8,474		Long-term debt	7,071		7,022
Other liabilities	Other liabilities	2,021		2,067		Other liabilities	1,542		1,779
Total liabilities	Total liabilities	14,007		15,411		Total liabilities	13,579		14,038
Commitments and contingencies (Notes 10, 11, 13 and 16)	Commitments and contingencies (Notes 10, 11, 13 and 16)	0		0		Commitments and contingencies (Notes 10, 11, 13 and 16)
Shareholders’ equity:	Shareholders’ equity:					Shareholders’ equity:
Preferred stock, $0.01 par value; authorized — 5 shares; issued and outstanding — none		—		—
Common stock, $0.01 par value; authorized — 450 shares; issued — 313 shares and 312 shares, respectively; outstanding — 313 shares and 308 shares, respectively		3		3

Common stock, $0.01 par value; authorized — 450 shares; issued — 318 shares and 315 shares, respectively; outstanding — 318 shares and 315 shares, respectively						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 capital	Additional paid-in capital	3,519		3,608		Additional paid-in capital	3,641		3,733
Accumulated other comprehensive loss	Accumulated other comprehensive loss	(217)		(197)		Accumulated other comprehensive loss	(694)		(554)
Retained earnings	Retained earnings	8,713		7,539		Retained earnings	9,157		9,039
Treasury stock — common shares at cost; 0 shares and 4 shares, respectively		—		(232)

Total shareholders’ equity	Total shareholders’ equity	12,018		10,721		Total shareholders’ equity	12,107		12,221
Total liabilities and shareholders’ equity	Total liabilities and shareholders’ equity	$	26,025	$	26,132	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				Six Months Ended					Three Months Ended
		December 31, 2021		January 1, 2021		December 31, 2021		January 1, 2021			September 30, 2022		October 1, 2021
Revenue, net	Revenue, net	$	4,833	$	3,943	$	9,884	$	7,865	Revenue, net	$	3,736	$	5,051
Cost of revenue	Cost of revenue	3,250		2,983		6,636		6,001		Cost of revenue	2,755		3,386
Gross profit	Gross profit	1,583		960		3,248		1,864		Gross profit	981		1,665
Operating expenses:	Operating expenses:									Operating expenses:
Research and development	Research and development	575		535		1,153		1,090		Research and development	552		578
Selling, general and administrative	Selling, general and administrative	279		265		570		521		Selling, general and administrative	247		291
Employee termination, asset impairment, and other charges	Employee termination, asset impairment, and other charges	2		2		20		25		Employee termination, asset impairment, and other charges	24		18
Total operating expenses	Total operating expenses	856		802		1,743		1,636		Total operating expenses	823		887
Operating income	Operating income	727		158		1,505		228		Operating income	158		778
Interest and other income (expense):	Interest and other income (expense):									Interest and other income (expense):
Interest income	Interest income	1		2		3		4		Interest income	2		2
Interest expense	Interest expense	(76)		(81)		(154)		(165)		Interest expense	(70)		(78)
Other income (loss), net		(6)		6		(4)		15
Other income (expense), net										Other income (expense), net	(6)		2
Total interest and other expense, net	Total interest and other expense, net	(81)		(73)		(155)		(146)		Total interest and other expense, net	(74)		(74)
Income before taxes	Income before taxes	646		85		1,350		82		Income before taxes	84		704
Income tax expense	Income tax expense	82		23		176		80		Income tax expense	57		94
Net income	Net income	$	564	$	62	$	1,174	$	2	Net income	$	27	$	610

Income per common share:	Income per common share:									Income per common share:
Basic	Basic	$	1.81	$	0.20	$	3.77	$	0.01	Basic	$	0.09	$	1.97
Diluted	Diluted	$	1.79	$	0.20	$	3.73	$	0.01	Diluted	$	0.08	$	1.93

Weighted average shares outstanding:	Weighted average shares outstanding:									Weighted average shares outstanding:
Basic	Basic	312		305		311		304		Basic	316		310
Diluted	Diluted	315		307		315		305		Diluted	319		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				Six Months Ended				Three Months Ended
		December 31, 2021		January 1, 2021		December 31, 2021		January 1, 2021				September 30, 2022		October 1, 2021
Net income	Net income	$	564	$	62	$	1,174	$	2		Net income	$	27	$	610
Other comprehensive income (loss), before tax:	Other comprehensive income (loss), before tax:										Other comprehensive income (loss), before tax:
Actuarial pension gain	Actuarial pension gain	—		1		1		2			Actuarial pension gain	—		1
Foreign currency translation adjustment	Foreign currency translation adjustment	(45)		34		(41)		66			Foreign currency translation adjustment	(80)		4

Net unrealized gain (loss) on derivative contracts and available-for-sale securities	Net unrealized gain (loss) on derivative contracts and available-for-sale securities	(10)		20		23		50			Net unrealized gain (loss) on derivative contracts and available-for-sale securities	(76)		33
Total other comprehensive income (loss), before tax	Total other comprehensive income (loss), before tax	(55)		55		(17)		118			Total other comprehensive income (loss), before tax	(156)		38
Income tax benefit (expense) related to items of other comprehensive income (loss), before tax	Income tax benefit (expense) related to items of other comprehensive income (loss), before tax	5		(4)		(3)		(11)			Income tax benefit (expense) related to items of other comprehensive income (loss), before tax	16		(8)
Other comprehensive income (loss), net of tax	Other comprehensive income (loss), net of tax	(50)		51		(20)		107			Other comprehensive income (loss), net of tax	(140)		30
Total comprehensive income		$	514	$	113	$	1,154	$	109
Total comprehensive income (loss)											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)


		Six Months Ended					Three Months Ended
		December 31, 2021		January 1, 2021			September 30, 2022		October 1, 2021
Cash flows from operating activities	Cash flows from operating activities					Cash flows from operating activities
Net income	Net income	$	1,174	$	2	Net income	$	27	$	610
Adjustments to reconcile net income to net cash provided by operations:	Adjustments to reconcile net income to net cash provided by operations:					Adjustments to reconcile net income to net cash provided by operations:
Depreciation and amortization	Depreciation and amortization	492		710		Depreciation and amortization	216		250
Stock-based compensation	Stock-based compensation	163		156		Stock-based compensation	86		76
Deferred income taxes	Deferred income taxes	38		(5)		Deferred income taxes	(42)		27
Loss on disposal of assets		1		1
Gain on disposal of assets						Gain on disposal of assets	1		—

Amortization of debt discounts		21		20
Amortization of debt issuance costs and discounts						Amortization of debt issuance costs and discounts	3		10

Other non-cash operating activities, net	Other non-cash operating activities, net	13		(18)		Other non-cash operating activities, net	44		(12)
Changes in:	Changes in:					Changes in:
Accounts receivable, net	Accounts receivable, net	(486)		546		Accounts receivable, net	382		(188)
Inventories	Inventories	(30)		(505)		Inventories	(224)		73
Accounts payable	Accounts payable	96		70		Accounts payable	(125)		(41)
Accounts payable to related parties	Accounts payable to related parties	(9)		(13)		Accounts payable to related parties	(25)		(20)

Accrued expenses	Accrued expenses	47		78		Accrued expenses	(44)		(1)
Income taxes payable						Income taxes payable	117		(35)
Accrued compensation	Accrued compensation	(66)		51		Accrued compensation	(104)		(67)
Other assets and liabilities, net	Other assets and liabilities, net	(267)		(305)		Other assets and liabilities, net	(306)		(161)
Net cash provided by operating activities	Net cash provided by operating activities	1,187		788		Net cash provided by operating activities	6		521
Cash flows from investing activities	Cash flows from investing activities					Cash flows from investing activities
Purchases of property, plant and equipment	Purchases of property, plant and equipment	(551)		(576)		Purchases of property, plant and equipment	(320)		(245)
Proceeds from the sale of property, plant and equipment		12		39

Notes receivable issuances to Flash Ventures	Notes receivable issuances to Flash Ventures	(337)		(252)		Notes receivable issuances to Flash Ventures	(84)		(165)
Notes receivable proceeds from Flash Ventures	Notes receivable proceeds from Flash Ventures	320		346		Notes receivable proceeds from Flash Ventures	183		113
Strategic investments and other, net	Strategic investments and other, net	(13)		7		Strategic investments and other, net	(3)		(15)
Net cash used in investing activities	Net cash used in investing activities	(569)		(436)		Net cash used in investing activities	(224)		(312)
Cash flows from financing activities	Cash flows from financing activities					Cash flows from financing activities
Issuance of stock under employee stock plans	Issuance of stock under employee stock plans	60		63		Issuance of stock under employee stock plans	—		2
Taxes paid on vested stock awards under employee stock plans	Taxes paid on vested stock awards under employee stock plans	(80)		(43)		Taxes paid on vested stock awards under employee stock plans	(50)		(78)

Repayment of debt	Repayment of debt	(2,425)		(461)		Repayment of debt	—		(213)
Proceeds from debt		998		—

Debt issuance costs		(9)		—
Other		—		(9)
Repayments of revolving credit facility						Repayments of revolving credit facility	(300)		—
Proceeds from revolving credit facility						Proceeds from revolving credit facility	300		—

Net cash used in financing activities	Net cash used in financing activities	(1,456)		(450)		Net cash used in financing activities	(50)		(289)
Effect of exchange rate changes on cash	Effect of exchange rate changes on cash	(1)		6		Effect of exchange rate changes on cash	(10)		—
Net decrease in cash and cash equivalents	Net decrease in cash and cash equivalents	(839)		(92)		Net decrease in cash and cash equivalents	(278)		(80)
Cash and cash equivalents, beginning of year	Cash and cash equivalents, beginning of year	3,370		3,048		Cash and cash equivalents, beginning of year	2,327		3,370
Cash and cash equivalents, end of period	Cash and cash equivalents, end of period	$	2,531	$	2,956	Cash and cash equivalents, end of period	$	2,049	$	3,290
Supplemental disclosure of cash flow information:	Supplemental disclosure of cash flow information:					Supplemental disclosure of cash flow information:
Cash paid for income taxes	Cash paid for income taxes	$	312	$	251	Cash paid for income taxes	$	134	$	221
Cash paid for interest	Cash paid for interest	$	129	$	144	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 Stock			Treasury Stock			Additional Paid-In Capital		Accumulated Other Comprehensive Loss		Retained Earnings		Total Shareholders’ Equity
	Shares	Amount		Shares	Amount
Balance at July 1, 2022	315	$	3	—	$	—	$	3,733	$	(554)	$	9,039	$	12,221
Net income	—	—		—	—		—		—		27		27
Adoption of new accounting standards	—	—		—	—		(128)		—		91		(37)
Employee stock plans	3	—		—	—		(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, 2022	318	$	3	—	$	—	$	3,641	$	(694)	$	9,157	$	12,107

Common Stock Treasury Stock Additional Paid-In Capital Accumulated Other Comprehensive Income (Loss) Retained Earnings Total Shareholders’ Equity
Shares Amount Shares Amount
Balance at July 2, 2021 312 $ 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, 2021 312 3 (1) (25) 3,401 (167) 8,149 11,361
Net income — — — — — — 564 564
Employee stock plans 1 — 1 25 31 — — 56
Stock-based compensation — — — — 87 — — 87
Foreign currency translation adjustment — — — — — (45) — (45)
Net unrealized loss on derivative contracts — — — — — (5) — (5)
Balance at December 31, 2021 313 $ 3 — $ — $ 3,519 $ (217) $ 8,713 $ 12,018

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)

Common Stock Treasury Stock Additional Paid-In Capital Accumulated Other Comprehensive Income (Loss) Retained Earnings Total Shareholders’ Equity
Shares Amount Shares Amount
Balance at July 3, 2020 312 $ 3 (10) $ (737) $ 3,717 $ (157) $ 6,725 $ 9,551
Net loss — — — — — — (60) (60)
Adoption of new accounting standards — — — — — — (7) (7)
Employee stock plans — — 2 216 (256) — — (40)
Stock-based compensation — — — — 76 — — 76
Actuarial pension gain — — — — — 1 — 1
Foreign currency translation adjustment — — — — — 32 — 32
Net unrealized gain on derivative contracts — — — — — 23 — 23
Balance at October 2, 2020 312 3 (8) (521) 3,537 (101) 6,658 9,576
Net income — — — — — — 62 62
Employee stock plans — — 2 131 (71) — — 60
Stock-based compensation — — — — 80 — — 80
Actuarial pension gain — — — — — 1 — 1
Foreign currency translation adjustment — — — — — 34 — 34
Net unrealized gain on derivative contracts — — — — — 16 — 16
Balance at January 1, 2021 312 $ 3 (6) $ (390) $ 3,546 $ (50) $ 6,720 $ 9,829
(Unaudited)


	Common Stock			Treasury Stock			Additional Paid-In Capital		Accumulated Other Comprehensive Loss		Retained Earnings		Total Shareholders’ Equity
	Shares	Amount		Shares	Amount
Balance at July 2, 2021	312	$	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, 2021	312	$	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 ~~that address~~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 ~~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~~and drives innovations 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.

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

Segment Reporting

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 ~~the ongoing COVID-19 pandemic.~~current macroeconomic conditions. However, actual results could differ materially from these estimates and be significantly affected by the severity and duration of the COVID-19 pandemic, the extent of actions to contain or treat COVID-19, the timing, distribution, efficacy and public acceptance of vaccines around the world, additional surges of COVID-19, including the emergence of more contagious or vaccine-resistant variants, and how quickly and to what extent normal economic and operating activity can resume.estimates.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS ~~— (Continued)~~

(Unaudited)

Note 2. Recent Accounting Pronouncements

Accounting Pronouncements Recently Adopted

In ~~December 2019,~~August 2020, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“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, which is the beginning of fiscal 2022, and its adoption did not have a material impact on the Company’s Condensed Consolidated Financial Statements.

~~Recently Issued Accounting Pronouncements Not Yet Adopted~~

~~In August 2020, the FASB issued 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 ~~current~~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. ~~For instruments that do not have a component mandatorily settled in cash, the change will likely result in a higher amount of share dilution in the calculation of earnings per share.~~ The Company ~~expects to adopt this ASU in~~adopted the new standard effective July 2, 2022, the first ~~quarter~~day of ~~fiscal~~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 ~~is currently assessing~~an increase to retained earnings of $91 million for the after-tax impact of ~~adoption.~~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 ~~fiscal~~ 2023. ~~Early adoption is permitted.~~ The Company ~~is currently assessing~~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 ~~and timing of adoption of this ASU.~~on its Condensed Consolidated Financial Statements.

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WESTERN DIGITAL CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS ~~— (Continued)~~

(Unaudited)

Note 3. Business Segments, Geographic Information, and Concentrations of Risk

~~Note 3. Segment Information~~

The Company manufactures, markets, and sells data storage devices and solutions in the U.S. and in foreign countries through its sales personnel, dealers, distributors, retailers, and subsidiaries. Historically, the Company had been managed and reported under a single operating segment. Late in the first quarter of fiscal 2021, the Chief Executive Officer, who is the Company’s Chief Operating Decision Maker (“CODM”), announced a decision to reorganize the Company’s business by forming 2 separate product business units: hard disk drives (“HDD”) and flash-based products (“Flash”). To align with the new operating model and business structure, the Company made management organizational changes and implemented new reporting modules and processes to provide discrete information to manage the business. Effective July 3, 2021, the Company’s management finalized its assessment of the Company’s operating segments and concluded that the Company now has 2 reportable segments: HDD and Flash.

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

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

Three Months Ended Six Months Ended
December 31,
2021 January 1,
2021 December 31,
2021 January 1,
2021
Net revenue:
HDD $ 2,213 $ 1,909 $ 4,774 $ 3,753
Flash 2,620 2,034 5,110 4,112
Total net revenue $ 4,833 $ 3,943 $ 9,884 $ 7,865
Gross profit:
HDD $ 677 $ 488 $ 1,469 $ 971
Flash 946 551 1,867 1,099
Total gross profit for segments 1,623 1,039 3,336 2,070
Unallocated corporate items:
Amortization of acquired intangible assets (26) (109) (65) (254)
Stock-based compensation expense (14) (15) (23) (27)
Charges related to a power outage incident and related recovery — 45 — 75
Total unallocated corporate items (40) (79) (88) (206)
Consolidated gross profit $ 1,583 $ 960 $ 3,248 $ 1,864
Gross margin:
HDD 30.6 % 25.6 % 30.8 % 25.9 %
Flash 36.1 % 27.1 % 36.5 % 26.7 %
Consolidated gross margin 32.8 % 24.3 % 32.9 % 23.7 %

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~~WESTERN DIGITAL CORPORATION~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)~~


	Three Months Ended
	September 30, 2022			October 1, 2021
	(in millions, except percentages)
Net revenue:
Flash	$	1,722		$	2,490
HDD	2,014			2,561
Total net revenue	$	3,736		$	5,051
Gross profit:
Flash	$	422		$	921
HDD	574			792
Total gross profit for segments	996			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:
Flash	24.5		%	37.0		%
HDD	28.5		%	30.9		%
Consolidated gross margin	26.3		%	33.0		%

Disaggregated Revenue

The Company’s broad portfolio of technology and products address multiple end markets. ~~In the fiscal first quarter of 2022, the Company refined the end markets it reports to be Cloud, Client and Consumer.~~ Cloud represents a large and growing end market comprised primarily of products for public or private cloud environments and end customers, which the Company believes it is uniquely positioned to address as the only provider of both ~~hard drive~~Flash and ~~flash products.~~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				Six Months Ended				Three Months Ended
		December 31, 2021		January 1, 2021		December 31, 2021		January 1, 2021				September 30, 2022		October 1, 2021
		(in millions)								(in millions)

Revenue by End Market	Revenue by End Market										Revenue by End Market
Cloud	Cloud	$	1,920	$	1,014	$	4,145	$	2,305		Cloud	$	1,829	$	2,225
Client	Client	1,854		1,869		3,707		3,619			Client	1,229		1,853
Consumer	Consumer	1,059		1,060		2,032		1,941			Consumer	678		973
Total Revenue	Total Revenue	$	4,833	$	3,943	$	9,884	$	7,865		Total Revenue	$	3,736	$	5,051

Revenue by Geography	Revenue by Geography										Revenue by Geography
Asia											Asia	$	1,686	$	2,675
Americas	Americas	$	1,407	$	945	$	3,021	$	2,024		Americas	1,423		1,614
Europe, Middle East and Africa	Europe, Middle East and Africa	816		725		1,578		1,354			Europe, Middle East and Africa	627		762
Asia		2,610		2,273		5,285		4,487
Total Revenue	Total Revenue	$	4,833	$	3,943	$	9,884	$	7,865		Total Revenue	$	3,736	$	5,051

The Company’s top 10 customers accounted for ~~46% and 44%~~52% of its net revenue for the three ~~and six~~ months ended ~~December 31, 2021, respectively,~~September 30, 2022, and 43% ~~and 41%~~ of its net revenue for the three ~~and six~~ months ended ~~January~~October 1, ~~2021, respectively.~~2021. For the three ~~and six~~ months ended ~~December 31, 2021~~September 30, 2022 and ~~January~~October 1, 2021, no single customer accounted for 10% or more of the Company’s net revenue.

Goodwill

In connection with the Company’s determination of its reportable segments, effective July 3, 2021, the Company allocated its goodwill between its segments based on the estimated relative fair values of the business units. In addition, management performed a goodwill impairment assessment for each segment and concluded there were no impairment indicators as of both the beginning and end of the six months ended December 31, 2021. 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 September 30, 2022	$	5,716	$	4,321	$	10,037

HDD Flash Total
(in millions)
Balance at July 3, 2021 $ 4,328 $ 5,738 $ 10,066
Foreign currency translation adjustment — (1) (1)
Balance at December 31, 2021 $ 4,328 $ 5,737 $ 10,065
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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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS ~~— (Continued)~~

(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 ~~December 31,~~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 endedSeptember 30, 2022 and October 1, 2021 ~~or July 2, 2021.~~ were not material.

The Company incurs sales commissions and other direct incremental costs to obtain sales contracts. The Company has applied the practical expedient to recognize the direct incremental costs of obtaining contracts as an expense when incurred if the amortization period is expected to be one year or less or the amount is not material, with these costs charged to Selling, general and administrative expenses. ~~Other~~The Company had no direct incremental costs to obtain contracts that have an expected benefit of greater than one year are amortized over the period of expected cash flows from the related contracts, and the amortization expense is recorded as a reduction to revenue. Total capitalized contract costs as of December 31, 2021 and July 2, 2021 as well as the related amortization for the three and six months ended December 31, 2021 and January 1, 2021 were not material.year.

Contract liabilities relate to customers’ payments in advance of performance under the contract and primarily relate to remaining performance obligations under support and maintenance contracts. As of December 31, 2021 and July 2, 2021, contract liabilities were not material.

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 ~~December 31, 2021~~September 30, 2022 was ~~$51~~$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 ~~as follows: $20 million during~~within the ~~remainder of fiscal 2022, $30 million in fiscal 2023, and $1 million in fiscal 2024 and thereafter.~~next twelve months.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS ~~— (Continued)~~

(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 ~~six~~three months ended ~~December 31,~~October 1, 2021. ~~During the six months ended January 1, 2021, the Company sold trade accounts receivable for cash proceeds of $173 million.~~ 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. ~~There were no~~As of September 30, 2022 and July 1, 2022, the amount of factored receivables that remained outstanding ~~as of December 31, 2021~~was $291 million and ~~July 2, 2021.~~$300 million, respectively.

Inventories


		December 31, 2021		July 2, 2021			September 30, 2022		July 1, 2022
		(in millions)					(in millions)
Inventories:	Inventories:					Inventories:
Raw materials and component parts	Raw materials and component parts	$	1,685	$	1,623	Raw materials and component parts	$	1,809	$	1,603
Work-in-process	Work-in-process	1,013		1,088		Work-in-process	1,130		1,162
Finished goods	Finished goods	949		905		Finished goods	923		873
Total inventories	Total inventories	$	3,647	$	3,616	Total inventories	$	3,862	$	3,638

Property, plant and equipment, net


		December 31, 2021		July 2, 2021			September 30, 2022		July 1, 2022
		(in millions)					(in millions)
Property, plant and equipment:	Property, plant and equipment:					Property, plant and equipment:
Land	Land	$	273	$	278	Land	$	269	$	269
Buildings and improvements	Buildings and improvements	1,870		1,854		Buildings and improvements	1,945		1,920
Machinery and equipment	Machinery and equipment	8,287		7,860		Machinery and equipment	8,734		8,642
Computer equipment and software	Computer equipment and software	466		440		Computer equipment and software	499		494
Furniture and fixtures	Furniture and fixtures	53		51		Furniture and fixtures	54		54
Construction-in-process	Construction-in-process	486		476		Construction-in-process	642		591
Property, plant and equipment, gross	Property, plant and equipment, gross	11,435		10,959		Property, plant and equipment, gross	12,143		11,970
Accumulated depreciation	Accumulated depreciation	(8,068)		(7,771)		Accumulated depreciation	(8,425)		(8,300)
Property, plant and equipment, net	Property, plant and equipment, net	$	3,367	$	3,188	Property, plant and equipment, net	$	3,718	$	3,670

Other Intangible assets


		December 31, 2021		July 2, 2021			September 30, 2022		July 1, 2022
		(in millions)					(in millions)
Other Intangible assets:						Other Intangible assets:
Finite-lived intangible assets	Finite-lived intangible assets	$	5,508	$	5,508	Finite-lived intangible assets	$	5,715	$	5,493
In-process research and development	In-process research and development	80		80		In-process research and development	80		80
Accumulated amortization	Accumulated amortization	(5,288)		(5,146)		Accumulated amortization	(5,621)		(5,360)
Intangible assets, net		$	300	$	442
Other Intangible assets, net						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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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS ~~— (Continued)~~

(Unaudited)

Product warranty liability

Changes in the warranty accrual were as follows:


		Three Months Ended				Six Months Ended						Three Months Ended
		December 31, 2021		January 1, 2021		December 31, 2021		January 1, 2021				September 30, 2022		October 1, 2021
		(in millions)								(in millions)
Warranty accrual, beginning of period	Warranty accrual, beginning of period	$	370	$	391	$	363	$	408		Warranty accrual, beginning of period	$	345	$	363

Charges to operations	Charges to operations	36		24		76		59			Charges to operations	32		40
Utilization	Utilization	(28)		(24)		(51)		(55)			Utilization	(34)		(23)
Changes in estimate related to pre-existing warranties	Changes in estimate related to pre-existing warranties	(27)		(25)		(37)		(46)			Changes in estimate related to pre-existing warranties	(3)		(10)
Warranty accrual, end of period	Warranty accrual, end of period	$	351	$	366	$	351	$	366		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:


		December 31, 2021		July 2, 2021				September 30, 2022		July 1, 2022
		(in millions)				(in millions)
Warranty accrual:	Warranty accrual:						Warranty accrual:
Current portion (included in Accrued expenses)	Current portion (included in Accrued expenses)	$	166	$	175		Current portion (included in Accrued expenses)	$	144	$	162
Long-term portion (included in Other liabilities)	Long-term portion (included in Other liabilities)	185		188			Long-term portion (included in Other liabilities)	196		183
Total warranty accrual	Total warranty accrual	$	351	$	363		Total warranty accrual	$	340	$	345

Other liabilities


		December 31, 2021		July 2, 2021			September 30, 2022		July 1, 2022
		(in millions)					(in millions)
Other liabilities:	Other liabilities:					Other liabilities:
Non-current net tax payable	Non-current net tax payable	$	572	$	684	Non-current net tax payable	$	460	$	659
Payables related to unrecognized tax benefits		772		750
Non-current portion of unrecognized tax benefits						Non-current portion of unrecognized tax benefits	453		477
Other non-current liabilities	Other non-current liabilities	677		633		Other non-current liabilities	629		643
Total other liabilities	Total other liabilities	$	2,021	$	2,067	Total other liabilities	$	1,542	$	1,779

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS ~~— (Continued)~~

(Unaudited)

Accumulated other comprehensive ~~income (loss)~~loss

Accumulated other comprehensive ~~income (loss)~~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)
(in millions)
Balance at July 2, 2021 $ (35) $ (38) $ (124) $ (197)
Other comprehensive income (loss) before reclassifications 1 (41) (71) (111)
Amounts reclassified from accumulated other comprehensive income (loss) — — 94 94
Income tax expense related to items of other comprehensive income (loss) — — (3) (3)
Net current-period other comprehensive income (loss) 1 (41) 20 (20)
Balance at December 31, 2021 $ (34) $ (79) $ (104) $ (217)


	Actuarial Pension Losses		Foreign Currency Translation Adjustment		Unrealized Losses on Derivative Contracts		Total 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 ~~and six~~ months ended ~~December 31, 2021,~~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 ~~$32~~$62 million ~~and $69 million, respectively, and~~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 ~~$12~~$2 million ~~and $25 million, respectively, and~~for the three months ended September 30, 2022 that were charged to Interest expense in the Condensed Consolidated Statements of Operations.

As of ~~December 31, 2021, the amount~~September 30, 2022, substantially all of existing net losses related to cash flow hedges recorded in AOCI ~~included $5 million related to the Company’s interest rate swaps that is~~are expected to be reclassified to earnings ~~after~~within the next twelve months. In addition, as of ~~December 31, 2021,~~September 30, 2022, the Company did not have any foreign exchange forward contracts with credit-risk-related contingent features.

1819

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WESTERN DIGITAL CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS ~~— (Continued)~~

(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 ~~December 31, 2021~~September 30, 2022 and July ~~2, 2021,~~1, 2022, and indicate the fair value hierarchy of the valuation techniques utilized to determine such values:


		December 31, 2021									September 30, 2022
		Level 1		Level 2		Level 3		Total			Level 1		Level 2		Level 3		Total
		(in millions)									(in millions)
Assets:	Assets:									Assets:

Cash equivalents - Money market funds	Cash equivalents - Money market funds	$	71	$	—	$	—	$	71	Cash equivalents - Money market funds	$	322	$	—	$	—	$	322

Foreign exchange contracts	Foreign exchange contracts	—		22		—		22		Foreign exchange contracts	—		48		—		48

Interest rate swap contracts										Interest rate swap contracts	—		11		—		11

Total assets at fair value	Total assets at fair value	$	71	$	22	$	—	$	93	Total assets at fair value	$	322	$	59	$	—	$	381
Liabilities:	Liabilities:									Liabilities:
Foreign exchange contracts	Foreign exchange contracts	$	—	$	86	$	—	$	86	Foreign exchange contracts	$	—	$	329	$	—	$	329
Interest rate swap contracts		—		48		—		48

Total liabilities at fair value	Total liabilities at fair value	$	—	$	134	$	—	$	134	Total liabilities at fair value	$	—	$	329	$	—	$	329


		July 2, 2021									July 1, 2022
		Level 1		Level 2		Level 3		Total			Level 1		Level 2		Level 3		Total
		(in millions)									(in millions)
Assets:	Assets:									Assets:

Cash equivalents - Money market funds	Cash equivalents - Money market funds	$	1,283	$	—	$	—	$	1,283	Cash equivalents - Money market funds	$	266	$	—	$	—	$	266

Foreign exchange contracts	Foreign exchange contracts	—		14		—		14		Foreign exchange contracts	—		61		—		61

Interest rate swap contracts										Interest rate swap contracts	—		3		—		3

Total assets at fair value	Total assets at fair value	$	1,283	$	14	$	—	$	1,297	Total assets at fair value	$	266	$	64	$	—	$	330
Liabilities:	Liabilities:									Liabilities:
Foreign exchange contracts	Foreign exchange contracts	$	—	$	65	$	—	$	65	Foreign exchange contracts	$	—	$	316	$	—	$	316
Interest rate swap contracts		—		80		—		80

Total liabilities at fair value	Total liabilities at fair value	$	—	$	145	$	—	$	145	Total liabilities at fair value	$	—	$	316	$	—	$	316

During the ~~three and six months ended December 31, 2021 and January 1, 2021,~~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.

1920

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS ~~— (Continued)~~

(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 ~~second~~first quarter of ~~fiscal 2022~~2023 and the fourth quarter of ~~fiscal 2021,~~2022, respectively.


		December 31, 2021				July 2, 2021					September 30, 2022				July 1, 2022
		Carrying Value		Fair Value		Carrying Value		Fair Value			Carrying Value		Fair Value		Carrying Value		Fair Value
		(in millions)									(in millions)

Variable interest rate Term Loan A-1 maturing 2023		$	2,998	$	3,006	$	4,327	$	4,346

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

1.50% convertible notes due 2024	1.50% convertible notes due 2024	1,032		1,116		1,017		1,173		1.50% convertible notes due 2024	$	1,097	$	1,047	$	1,048	$	1,040

4.75% senior unsecured notes due 2026	4.75% senior unsecured notes due 2026	2,289		2,516		2,288		2,556		4.75% senior unsecured notes due 2026	2,291		2,134		2,291		2,205
Variable interest rate Term Loan A-2 maturing 2027										Variable interest rate Term Loan A-2 maturing 2027	2,693		2,634		2,693		2,621
2.85% senior unsecured notes due 2029	2.85% senior unsecured notes due 2029	495		505		—		—		2.85% senior unsecured notes due 2029	495		389		495		412
3.10% senior unsecured notes due 2032	3.10% senior unsecured notes due 2032	494		504		—		—		3.10% senior unsecured notes due 2032	495		342		495		389

Total	Total	$	7,308	$	7,647	$	8,725	$	9,169	Total	$	7,071	$	6,546	$	7,022	$	6,667

2021

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WESTERN DIGITAL CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS ~~— (Continued)~~

(Unaudited)

Note 7. Derivative Instruments and Hedging Activities

As of ~~December 31, 2021,~~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 through February 2023.~~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 ~~and six~~ months ended ~~December 31, 2021~~September 30, 2022 and ~~January~~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, ~~Item1,~~Item 1, Note 5.5, Supplemental ~~Information~~Financial Statement Data - Accumulated other comprehensive ~~income (losses)~~loss, of the Notes to the Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q.

Netting Arrangements

Under certain provisions and conditions within agreements with counterparties to the Company’s foreign exchange forward contracts, subject to applicable requirements, the Company has the right of offset associated with the Company’s foreign exchange forward contracts and is allowed to net settle transactions of the same currency with a single net amount payable by one party to the other. As of ~~December 31, 2021~~September 30, 2022 and July ~~2, 2021,~~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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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS ~~— (Continued)~~

(Unaudited)

Note 8. Debt

Debt consisted of the ~~following as of December 31, 2021 and July 2, 2021:~~following:
December 31,
2021 July 2,
2021
(in millions)
Variable interest rate Term Loan A-1 maturing 2023 $ 3,000 $ 4,332
Variable interest rate Term Loan B-4 maturing 2023 — 1,093
1.50% convertible notes due 2024 1,100 1,100
4.75% senior unsecured notes due 2026 2,300 2,300
2.85% senior unsecured notes due 2029 500 —
3.10% senior unsecured notes due 2032 500 —
Total debt 7,400 8,825
Issuance costs and debt discounts (92) (100)
Subtotal 7,308 8,725
Less current portion of long-term debt (251) (251)
Long-term debt $ 7,057 $ 8,474

~~In December 2021, the Company issued $500 million aggregate principal amount of 2.850% senior unsecured notes due February 1, 2029 (the “2029 Notes”) and issued $500 million aggregate principal amount of 3.100% senior unsecured notes due February 1, 2032 (the “2032 Notes~~”) pursuant to the terms of an indenture, dated as of December 10, 2021 (the “Base Indenture”) between the Company and U.S. 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 Notes~~ ~~and~~ ~~2032 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 Notes or 2032 Notes~~ prior to their maturity dates. Issuance costs and discounts are amortized to interest expense over their respective terms and as of December 31, 2021, unamortized issuance costs and discounts were $5 million for the 2029 Notes and $6 million for the 2032 Notes.


	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 2027	2,700		2,700
2.85% senior unsecured notes due 2029	500		500
3.10% senior unsecured notes due 2032	500		500

Total debt	7,100		7,100
Issuance costs and debt discounts	(29)		(78)


Long-term debt	$	7,071	$	7,022

During the ~~six months ended December 31, 2021, the Company voluntarily paid $1.09 billion to prepay the remaining principal balance of its Term Loan B-4 in accordance with its terms. In addition, during the~~ three months ended December 31, 2021, the Company repaid $1.27 billion of the outstanding principal balance on its Term Loan A-1 in accordance with its terms to reduce the remaining outstanding principal balance to $3.0 billion using proceeds from the issuance of the 2029 Notes and the 2032 Notes and using cash on hand.

~~Subsequent to the end of the second quarter of fiscal 2022, on January 7,~~September 30, 2022, the Company ~~entered into a restatement agreement (“Restatement Agreement”) to amend~~drew and restate the Loan Agreement, originally dated as of April 29, 2016 (including subsequent amendments and the Restatement Agreement, collectively, the “Loan Agreement”), to provide for, among other things, (i) the issuance of a new $3.0 billion Term Loan A-2 maturing in January 2027 (the “Term Loan A-2”) to replace our previously existing Term Loan A-1; and (ii) the availability of a newrepaid $300 million principal amount under its $2.25 billion revolving credit facility maturing in January 2027 (the “2027 Revolving Credit Facility”) ~~to replace our previously existing $2.25 billion revolving credit facility and (iii) additional covenant flexibility and other modifications.~~. The ~~obligations under the Loan Agreement will be the senior unsecured obligations~~terms of the ~~Company~~credit agreement governing the 2027 Revolving Credit Facility and ~~will not benefit from any collateral or subsidiary guarantees.~~

~~The~~ Term Loan A-2 Loan bears interest, at the Company’s option, at a per annum rate equal to either (x) the Adjusted Term Secured Overnight Financing Rate (“SOFR”) (as defined in the Loan Agreement) plus an applicable margin varying from 1.125% to 2.000% or (y) a base rate plus an applicable margin varying from 0.125% to 1.000%, in each case depending on the corporate family ratings of the Company from at least two of Standard & Poor’s Ratings Services (“S&P”), Moody’s Investors Service, Inc. (“Moody’s”) and Fitch Ratings, Inc. (“Fitch”), with an initial interest rate of Adjusted Term SOFR plus 1.375%. The Term Loan A-2 will amortize in equal quarterly installments of (i) 0.625% per quarter during the first through the fourth

~~Table of Contents~~

~~WESTERN DIGITAL CORPORATION~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)~~

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

Loans under the 2027 Revolving Facility bear interest at a per annum rate, at the Company’s option, equal to either (x) the Adjusted Term SOFR Rate (as defined in the Loan Agreement) plus an applicable margin varying from 1.125% to 2.000% or (y) a base rate plus an applicable margin varying from 0.125% to 1.000%, in each case depending on the corporate family ratings of the Company from at least two of S&P, Moody’s and Fitch, with an initial rate of Adjusted Term SOFR plus 1.375%. The Company will also pay an unused commitment fee on the 2027 Revolving Facility ranging from 0.120% to 0.350% based on the corporate family ratings of the Company from at least two of S&P, Moody’s and Fitch, with an initial unused commitment fee of 0.200%.

~~Prior to its restatement on January 7, 2022, the Loan Agreement required~~requires the Company to comply with ~~certain financial covenants, consisting of~~ a leverage ratio ~~and an interest coverage ratio.~~financial covenant. As of ~~December 31, 2021,~~September 30, 2022, the Company was in compliance with ~~these~~this financial ~~covenants. Following its restatement on January 7, 2022, the covenants under the Loan Agreement were simplified and the interest coverage ratio requirement was removed.~~covenant.

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 its 1.50% convertible notes due 2024.

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WESTERN DIGITAL CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS ~~— (Continued)~~

(Unaudited)

Note 9. Pension and Other Post-Retirement Benefit Plans

The Company has pension and other post-retirement benefit plans in various countries. The Company’s principal pension plans are in Japan, Thailand and the Philippines. 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 Condensed Consolidated Financial Statements. The expected long-term rate of return on the Pension Plans assets is 2.5%.

Obligations and Funded Status

The following table presents the unfunded status of the benefit obligations for the Pension Plans:


		December 31, 2021		July 2, 2021				September 30, 2022		July 1, 2022
		(in millions)				(in millions)

Benefit obligation at end of period	Benefit obligation at end of period	$	353	$	359		Benefit obligation at end of period	$	275	$	294

Fair value of plan assets at end of period	Fair value of plan assets at end of period	223		227			Fair value of plan assets at end of period	177		189
Unfunded status	Unfunded status	$	130	$	132		Unfunded status	$	98	$	105

The following table presents the unfunded amounts related to the Pension Plans as recognized on the Company’s Condensed Consolidated Balance Sheets:


		December 31, 2021		July 2, 2021			September 30, 2022		July 1, 2022
		(in millions)					(in millions)
Current liabilities	Current liabilities	$	1	$	1	Current liabilities	$	1	$	1
Non-current liabilities	Non-current liabilities	129		131		Non-current liabilities	97		104
Net amount recognized	Net amount recognized	$	130	$	132	Net amount recognized	$	98	$	105

Net periodic benefit costs were not material for the three ~~and six~~ months ended ~~December 31, 2021.~~September 30, 2022.

Table of ~~Contents~~Content s

WESTERN DIGITAL CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS ~~— (Continued)~~

(Unaudited)

Note 10. Related Parties and Related Commitments and Contingencies

Flash Ventures

The Company’s business ventures with Kioxia Corporation (“Kioxia”) consist of 3three separate legal entities: Flash Partners Ltd. (“Flash Partners”), Flash Alliance Ltd. (“Flash Alliance”), and Flash Forward Ltd. (“Flash Forward”), collectively referred to as “Flash Ventures”.

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


		December 31, 2021		July 2, 2021			September 30, 2022		July 1, 2022
		(in millions)					(in millions)
Notes receivable, Flash Partners	Notes receivable, Flash Partners	$	92	$	191	Notes receivable, Flash Partners	$	6	$	27
Notes receivable, Flash Alliance	Notes receivable, Flash Alliance	161		213		Notes receivable, Flash Alliance	62		55
Notes receivable, Flash Forward	Notes receivable, Flash Forward	694		561		Notes receivable, Flash Forward	658		793
Investment in Flash Partners	Investment in Flash Partners	194		199		Investment in Flash Partners	158		166
Investment in Flash Alliance	Investment in Flash Alliance	284		293		Investment in Flash Alliance	229		243
Investment in Flash Forward	Investment in Flash Forward	128		129		Investment in Flash Forward	106		112
Total notes receivable and investments in Flash Ventures	Total notes receivable and investments in Flash Ventures	$	1,553	$	1,586	Total notes receivable and investments in Flash Ventures	$	1,219	$	1,396

During the three ~~and six~~ months ended ~~December 31, 2021~~September 30, 2022 and ~~during the three and six months ended January~~October 1, 2021, the Company made net payments to Flash Ventures of ~~$1.11~~$1.0 billion, and ~~$2.30 billion, and $1.21 billion and $2.19~~$1.2 billion, respectively, for purchased flash-based memory wafers and net loans.

The Company makes, or will make, loans to Flash Ventures to fund equipment investments for new process technologies and additional wafer capacity. The Company aggregates its Flash Ventures’ notes receivable into one class of financing receivables due to the similar ownership interest and common structure in each Flash Venture entity. For all reporting periods presented, no loans were past due and no loan impairments were recorded. The Company’s notes receivable from each Flash Ventures entity, denominated in Japanese yen, are secured by equipment owned by that Flash Ventures entity.

As of ~~December 31, 2021~~September 30, 2022 and July ~~2, 2021,~~1, 2022, the Company had ~~Accounts~~account payable balances due to Flash Ventures of ~~$389~~$295 million and ~~$398~~$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 ~~December 31, 2021,~~September 30, 2022, is presented below. Investments in Flash Ventures are denominated in Japanese yen, and the maximum estimable loss exposure excludes any cumulative translation adjustment due to revaluation from the Japanese yen to the U.S. dollar.


	~~December 31,~~September 30, ~~2021~~2022
	(in millions)
Notes receivable	$	~~947~~726
Equity investments	~~606~~493
Operating lease guarantees	~~1,964~~1,684
Inventory and prepayments	~~865~~1,022
Maximum estimable loss exposure	$	~~4,382~~3,925

Table of ~~Contents~~Content s

WESTERN DIGITAL CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS ~~— (Continued)~~

(Unaudited)

The Company is obligated to pay for variable costs incurred in producing its share of Flash Ventures’ flash-based memory wafer supply, based on its three-month forecast, which generally equals 50% of Flash Ventures’ output. In addition, the Company is obligated to pay for half of Flash Ventures’ fixed costs regardless of the output the Company chooses to purchase. The Company is not able to estimate its total wafer purchase commitment obligation beyond its rolling three-month purchase commitment because the price is determined by reference to the future cost of producing the semiconductor wafers. In addition, the Company is committed to fund 49.9% to 50.0% of each Flash Ventures entity’s capital investments to the extent that each Flash Ventures entity’s operating cash flow is insufficient to fund these investments.

In ~~June 2019, an unexpected power outage incident occurred at~~January 2022, the ~~flash-based memory manufacturing facilities operated~~Company entered into additional agreements regarding Flash Ventures’ investment in a new wafer fabrication facility currently under construction in Yokkaichi, ~~Japan.~~Japan, referred to as “Y7”. The ~~power outage incident impacted~~primary purpose of Y7 is to provide clean room space to continue the ~~facilities~~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 $203 million as follows: $182 million for the remaining nine months of 2023 and ~~process tools and resulted~~$21 million in ~~damage~~2024, to ~~flash wafers in production and a reduction in the Company’s flash~~be credited against future wafer availability. During the three and six months ended January 1, 2021, the Company recovered $45 million and $75 million, respectively, related to this incident from its insurance carriers, which was recorded in Cost of revenue.charges.

Inventory Purchase Commitments with Flash Ventures. Purchase orders placed under Flash Ventures for up to three months are binding and cannot be canceled.

Research and Development Activities. The Company participates in common research and development (“R&D”) activities with Kioxia and is contractually committed to a minimum funding level. R&D commitments are immaterial to the Condensed Consolidated Financial Statements.

Off-Balance Sheet Liabilities

Flash Ventures sells to and leases back from a consortium of financial institutions a portion of its tools and has entered into equipment lease agreements of which the Company guarantees half or all of the outstanding obligations under each lease agreement. The lease agreements are subject to customary covenants and cancellation events related to Flash Ventures and each of the guarantors. The occurrence of a cancellation event could result in an acceleration of Flash Ventures’ obligations and a call on the Company’s guarantees.

The following table presents the Company’s portion of the remaining guarantee obligations under the Flash Ventures’ lease facilities in both Japanese yen and U.S. dollar-equivalent, based upon the Japanese yen to U.S. dollar exchange rate as of ~~December 31, 2021.~~September 30, 2022.
Lease Amounts
(Japanese yen, in billions) (U.S. dollar, in millions)
Total guarantee obligations ¥ 226 $ 1,964


	Lease Amounts
	(Japanese yen, in billions)		(U.S. dollar, in millions)
Total guarantee obligations	¥	243	$	1,684

Table of ~~Contents~~Content s

WESTERN DIGITAL CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS ~~— (Continued)~~

(Unaudited)

The following table details the breakdown of the Company’s remaining guarantee obligations between the principal amortization and the purchase option exercise price at the end of the term of the Flash Ventures lease agreements, in annual installments as of ~~December 31, 2021~~September 30, 2022 in U.S. dollars, based upon the Japanese yen to U.S. dollar exchange rate as of ~~December 31, 2021:~~September 30, 2022:


Annual Installments	Annual Installments	Payment of Principal Amortization		Purchase Option Exercise Price at Final Lease Terms		Guarantee Amount		Annual Installments	Payment of Principal Amortization		Purchase Option Exercise Price at Final Lease Terms		Guarantee Amount
		(in millions)							(in millions)
Remaining six months of 2022		$	304	$	—	$	304
2023		507		63		570
Remaining nine months of 2023								Remaining nine months of 2023	$	371	$	50	$	421
2024	2024	353		113		466		2024	376		90		466
2025	2025	161		103		264		2025	203		82		285
2026	2026	124		156		280		2026	199		124		323
Thereafter		15		65		80
2027								2027	53		106		159
2028 and thereafter								2028 and thereafter	3		27		30
Total guarantee obligations	Total guarantee obligations	$	1,464	$	500	$	1,964	Total guarantee obligations	$	1,205	$	479	$	1,684

The Company and Kioxia have agreed to mutually contribute to, and indemnify each other and Flash Ventures for, environmental remediation costs or liability resulting from Flash Ventures’ manufacturing operations in certain circumstances. The Company has not made any indemnification payments, nor recorded any indemnification receivables, under any such agreements. As of ~~December 31, 2021,~~September 30, 2022, no amounts have been accrued in the Condensed Consolidated Financial Statements with respect to these indemnification agreements.

Unis Venture

The Company has a joint venture with Unisplendour Corporation Limited and Unissoft (Wuxi) Group Co. Ltd. (“Unis”), referred to as the “Unis Venture”, to market and sell the Company’s products in China and to develop data storage systems for the Chinese market in the future. The Unis Venture is 49% owned by the Company and 51% owned by Unis. The Company accounts for its investment in the Unis Venture under the equity method of accounting. Revenue on products distributed by the Unis Venture is recognized upon sell through to third-party customers. For ~~both~~ the three ~~and six~~ months ended ~~December 31, 2021,~~September 30, 2022, the Company recognized approximately 4%3% of its consolidated revenue on products distributed by the Unis Venture. For ~~both~~ the three ~~and six~~ months ended ~~January~~October 1, 2021, the Company recognized approximately 3%5% of its consolidated revenue on products distributed by the Unis Venture. The outstanding accounts receivable due from the Unis Venture were 7%6% and 6% 5% of Accounts receivable, net ~~as of December 31, 2021~~for September 30, 2022 and July ~~2, 2021,~~1, 2022, respectively.

Table of ~~Contents~~Content s

WESTERN DIGITAL CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS ~~— (Continued)~~

(Unaudited)

Note 11. Leases and Other Commitments

Leases

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 ~~December 31, 2021:~~September 30, 2022:


		Lease Amounts				Lease Amounts
Minimum lease payments by fiscal year:		($ in millions)
Remaining six months of 2022		$	27
2023		47
						($ in millions)
Minimum lease payments by year:					Minimum lease payments by year:
Remaining nine months of 2023					Remaining nine months of 2023	$	36
2024	2024	46			2024	46
2025	2025	43			2025	44
2026	2026	42			2026	44
2027					2027	39
Thereafter	Thereafter	188			Thereafter	147
Total future minimum lease payments	Total future minimum lease payments	393			Total future minimum lease payments	356
Less: Imputed Interest		58
Less: Imputed interest					Less: Imputed interest	51
Present value of lease liabilities	Present value of lease liabilities	335			Present value of lease liabilities	305
Less: Current portion (included in Accrued expenses)		42
Long-term operating lease liabilities (included in Other liabilities)		$	293
Less: Current portion (included in Accrued expenses)					Less: Current portion (included in Accrued expenses)	40
Long-term operating lease liabilities (included in Other liabilities )					Long-term operating lease liabilities (included in Other liabilities )	$	265

Operating lease right-of-use assets (included in Other non-current assets)		$	318
Operating lease right-of-use assets (included in Other non-current assets)					Operating lease right-of-use assets (included in Other non-current assets)	$	288

Weighted average remaining lease term in years	Weighted average remaining lease term in years	8.7			Weighted average remaining lease term in years	8.2
Weighted average discount rate	Weighted average discount rate	3.4		%	Weighted average discount rate	3.4		%

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


		Three Months Ended				Six Months Ended					Three Months Ended
		December 31, 2021		January 1, 2021		December 31, 2021		January 1, 2021			September 30, 2022		October 1, 2021
		(in millions)									(in millions)
Cost of operating leases	Cost of operating leases	$	14	$	12	$	27	$	25	Cost of operating leases	$	14	$	13
Cash paid for operating leases	Cash paid for operating leases	12		14		24		26		Cash paid for operating leases	14		12
Operating lease assets obtained in exchange for operating lease liabilities	Operating lease assets obtained in exchange for operating lease liabilities	11		20		123		27		Operating lease assets obtained in exchange for operating lease liabilities	4		112

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WESTERN DIGITAL CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS ~~— (Continued)~~

(Unaudited)

Purchase Agreements and Other Commitments

In the normal course of business, the Company enters into purchase orders with suppliers for the purchase of components used to manufacture its products. These purchase orders generally cover forecasted component supplies needed for production during the next quarter, are recorded as a liability upon receipt of the components, and generally may be changed or canceled at any time prior to shipment of the components. The Company also enters into long-term agreements with suppliers that contain fixed future commitments, which are contingent on certain conditions such as performance, quality and technology of the vendor’s components. As of ~~December 31, 2021,~~September 30, 2022, the Company had the following minimum long-term commitments:


		Long-term commitments			Long-Term Commitments
		(in millions)			(in millions)
Fiscal year:
Remaining six months of 2022		$	343
2023		550
Year:				Year:
Remaining nine months of 2023				Remaining nine months of 2023	$	385
2024	2024	296		2024	325
2025	2025	148		2025	180
2026	2026	20		2026	53
2027				2027	46
Thereafter	Thereafter	170		Thereafter	150
Total	Total	$	1,527	Total	$	1,139

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WESTERN DIGITAL CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS ~~— (Continued)~~

(Unaudited)

Note 12. Shareholders’ Equity

Stock-based Compensation Expense

The following tables present the Company’s stock-based compensation for equity-settled awards by type (i.e., ~~stock options,~~ restricted stock units (“RSUs”), restricted stock unit awards with performance conditions or market conditions (“PSUs”), and rights to purchase shares of common stock under the Company’s Employee Stock Purchase Plan (“ESPP”)) and financial statement line as well as the related tax benefit included in the Company’s Condensed Consolidated Statements of Operations:
Three Months Ended Six Months Ended
December 31,
2021 January 1,
2021 December 31,
2021 January 1,
2021
(in millions)
RSUs and PSUs $ 78 $ 72 $ 145 $ 139
ESPP 9 8 18 17
Total $ 87 $ 80 $ 163 $ 156


	Three Months Ended
	September 30, 2022		October 1, 2021
	(in millions)

RSUs and PSUs	$	75	$	67
ESPP	11		9
Total	$	86	$	76


		Three Months Ended				Six Months Ended						Three Months Ended
		December 31, 2021		January 1, 2021		December 31, 2021		January 1, 2021				September 30, 2022		October 1, 2021
		(in millions)								(in millions)
Cost of revenue	Cost of revenue	$	14	$	15	$	23	$	27		Cost of revenue	$	14	$	9
Research and development	Research and development	43		40		83		79			Research and development	39		40
Selling, general and administrative	Selling, general and administrative	30		25		57		50			Selling, general and administrative	33		27

Subtotal	Subtotal	87		80		163		156			Subtotal	86		76
Tax benefit	Tax benefit	(13)		(9)		(28)		(20)			Tax benefit	(13)		(15)
Total	Total	$	74	$	71	$	135	$	136		Total	$	73	$	61

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

Compensation cost related to unvested ~~stock options,~~ RSUs, PSUs, and rights to purchase shares of common stock under the ESPP will generally be amortized on a straight-line basis over the remaining average service period. The following table presents the unamortized compensation cost and weighted average service period of all unvested outstanding awards as of ~~December 31, 2021:~~September 30, 2022:


		Unamortized Compensation Costs		Weighted Average Service Period		Unamortized Compensation Costs		Weighted Average Service Period
		(in millions)		(years)		(in millions)		(years)

RSUs and PSUs (1)	RSUs and PSUs (1)	$	664	2.5	RSUs and PSUs (1)	$	655	2.6
ESPP	ESPP	81		1.7	ESPP	51		1.0
Total unamortized compensation cost	Total unamortized compensation cost	$	745		Total unamortized compensation cost	$	706

(1) Weighted average service period assumes the performance metrics are met for the PSUs.

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WESTERN DIGITAL CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS ~~— (Continued)~~

(Unaudited)

Plan Activities

Stock Options

The following table summarizes stock option activity under the Company’s incentive plans. All outstanding options were exercisable at ~~December 31, 2021:~~September 30, 2022:
Number of Shares Weighted Average Exercise Price Per Share Weighted Average Remaining Contractual Life Aggregate Intrinsic Value
(in millions) (in years) (in millions)
Options outstanding at July 2, 2021 1.5 $ 72.84 1.2 $ 15
Exercised (0.1) 43.57 2
Canceled or expired (0.4) 98.85
Options outstanding at December 31, 2021 1.0 66.15 1.0 9


	Number of Shares	Weighted Average Exercise Price Per Share		Weighted Average Remaining Contractual Life
	(in millions)			(in years)

























Options outstanding at July 1, 2022	0.9	$	66.76	0.54



Canceled or expired	(0.5)	84.39
Options outstanding at September 30, 2022	0.4	$	45.08	0.81

RSUs and PSUs

The following table summarizes RSU and PSU activity under the Company’s incentive plans:


		Number of Shares	Weighted Average Grant Date Fair Value		Aggregate Intrinsic Value at Vest Date			Number of Shares	Weighted Average Grant Date Fair Value	Aggregate Intrinsic Value at Vest Date
		(in millions)			(in millions)			(in millions)		(in millions)

RSUs and PSUs outstanding at July 2, 2021		16.1	$	50.12

RSUs and PSUs outstanding at July 1, 2022							RSUs and PSUs outstanding at July 1, 2022	15.4	52.89
Granted	Granted	5.1	63.39				Granted	4.5	43.79

Vested	Vested	(4.6)	53.93		$	285	Vested	(4.3)	53.28	$	186
Forfeited	Forfeited	(1.2)	51.71				Forfeited	(0.6)	62.12
RSUs and PSUs outstanding at December 31, 2021		15.4	53.32
RSUs and PSUs outstanding at September 30, 2022							RSUs and PSUs outstanding at September 30, 2022	15.0	49.71

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.

Stock Repurchase Program

The Company’s Board of Directors has authorized a stock repurchase program for the repurchase of up to ~~$5.00~~$5.0 billion of the Company’s common stock, which authorization is effective through July 25, 2023. The Company did not make any stock repurchases during the ~~six~~three months ended ~~December 31, 2021~~September 30, 2022 and has not repurchased any shares of its common stock pursuant to its stock repurchase program since the first quarter of fiscal 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 ~~December 31, 2021~~September 30, 2022 was ~~$4.50~~$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 expects stock repurchases to be funded principally by operating cash flows.~~

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WESTERN DIGITAL CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS ~~— (Continued)~~

(Unaudited)

Note 13. Income Tax Expense

The Tax Cuts and Jobs Act (the “2017 Act”), enacted on December 22, 2017, includes a broad range of tax reform proposals affecting businesses. The Company completed its accounting for the tax effects of the enactment of the 2017 Act during the second quarter of fiscal 2019. However, the U.S. Treasury and the Internal Revenue Service (“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 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% on corporations with three-year average annual adjusted financial statement income exceeding $1 billion. 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.

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


		Three Months Ended						Six Months Ended							Three Months Ended
		December 31, 2021			January 1, 2021			December 31, 2021			January 1, 2021				September 30, 2022			October 1, 2021
		($ in millions)													($ in millions)
Income before taxes	Income before taxes	$	646		$	85		$	1,350		$	82		Income before taxes	$	84		$	704
Income tax expense	Income tax expense	82			23			176			80			Income tax expense	57			94
Effective tax rate	Effective tax rate	13		%	27		%	13		%	98		%	Effective tax rate	68		%	13		%

Beginning in fiscal year 2023, the 2017 Act requires the Company to capitalize and amortize research and development expenses rather than expensing them in the year incurred. The ~~primary drivers~~tax effects related to the capitalization of ~~the difference between~~research and development expenses are included in the effective tax rate for the three ~~and six~~ months ended ~~December 31, 2021 and the U.S. Federal statutory rate of 21%, are~~September 30, 2022. This impact, together with the relative mix of earnings and losses by jurisdiction, the deduction for foreign derived intangible income, credits, and tax holidays in Malaysia, the Philippines and Thailand that will expire at various dates during fiscal years 2024 through ~~2031. In addition,~~2031 are the primary drivers of the difference between the effective tax rate for the three ~~and six~~ months ended ~~December 31, 2021 includes~~September 30, 2022 and the ~~discrete effect~~U.S. Federal statutory rate of ~~an increase to unrecognized tax benefits as a result of ongoing discussions with various taxing authorities of $8 million and $25 million, respectively.~~21%.

The primary drivers of the difference between the effective tax rate for the three ~~and six~~ months ended ~~January~~October 1, 2021 and the U.S. Federal statutory rate of 21% are the relative mix of earnings and losses by jurisdiction, the deduction for foreign derived intangible income, credits, and tax holidays in Malaysia, the Philippines and Thailand. In addition, the effective tax rate for the ~~six~~three months ended ~~January~~October 1, 2021 ~~includes~~included the discrete ~~effects~~effect of ~~net~~an increase to unrecognized tax ~~deficiencies from shortfalls~~benefits of ~~$12~~$16 million as a result of ongoing discussions with various taxing authorities.

Uncertain Tax Positions

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

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WESTERN DIGITAL CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The following is a tabular reconciliation of the total amounts of unrecognized tax benefits excluding accrued interest and penalties for the three months ended September 30, 2022 (in millions):


Accrual balance at July 1, 2022	$	1,047
Gross increases related to current year tax positions	2

Gross decreases related to prior year tax positions	(18)
Settlements	(2)
Lapse of statute of limitations	(3)
Accrual balance at September 30, 2022	$	1,026

As of September 30, 2022, the liability for unrecognized tax benefits (excluding accrued interest and penalties) was $1.03 billion. Interest and penalties related to unrecognized tax benefits are recognized in liabilities recorded for uncertain tax positions and are recorded in the ~~vesting~~provision for income taxes. Accrued interest and penalties included in the Company’s liability related to unrecognized tax benefits as of stock-based awards and additional tax expense of $10 million from the re-measurement of certain deferred tax liabilities due to restructuring activities. The discrete items had no impact on the amount of income taxes paid by the Company.September 30, 2022 was $264 million. Of these amounts, approximately $1.15 billion could result in potential cash payments.

As previously disclosed, the IRS issued statutory notices of deficiency and notices of proposed adjustments with respect ~~to adjustments relating~~ to transfer pricing with the Company’s foreign subsidiaries and intercompany payable balances for ~~fiscal~~ years 2008 through ~~2012. The~~2015. In September 2018 and March 2019, the Company filed petitions with the U.S. Tax Court ~~with respect to these notices. Through January 2022,~~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, ~~(i) assert adjustments relating to transfer pricing~~together with the ~~Company’s foreign subsidiaries for fiscal years 2008 through 2012 that~~notices of proposed adjustments, would result in additional federal income tax liabilities totaling approximately ~~$1.26~~$1.6 billion ~~for fiscal~~and penalties totaling $449 million with respect to years 2008 through ~~2012, and (ii) assert penalties totaling $340 million on the proposed adjustments relating to transfer pricing with respect to fiscal years 2008 through 2012.~~2015. In addition, the IRS proposed adjustments relating to transfer pricing with the Company’s foreign subsidiaries and intercompany payable balances for fiscal years 2013 through 2015 that, if sustained, would result in additional federal income tax liabilities totaling approximately $343 million for those fiscal years. In March 2021, the IRS asserted penalties totaling $109 million on the proposed adjustments relating to transfer pricing with respect to fiscal years 2013 through 2015. The Company disagrees with the proposed adjustments relating to transfer pricing and related penalties, and continues to believe that its tax positions are properly supported and will vigorously contest the position taken by the IRS. Also in March 2021,May 2022, the Company and the IRS tentatively reached a ~~basis~~settlement for resolving the ~~intercompany payable balances matter~~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. Based on the tentative settlement for ~~all fiscal years at issue~~resolution, 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 million 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 ~~impact was not material~~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 Condensed Consolidated Balance Sheets as of September 30, 2022. This classification and amount may be subject to change in the ~~Consolidated Financial Statements.~~next twelve months depending on when the Company is able to reach a final agreement with the IRS.

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~~WESTERN DIGITAL CORPORATION~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)~~

The Company believes that adequate provision has been made for any adjustments that may result from any other tax examinations. However, the outcome of such tax examinations cannot be predicted with certainty. If any issues addressed in the Company’s tax examinations are resolved in a manner not consistent with management’s expectations, the Company could be required to adjust its provision for income taxes in the period such resolution occurs. ~~As of December 31, 2021, it was not possible to estimate the amount of change, if any, in the unrecognized tax benefits that is reasonably possible within the next twelve months.~~ Any significant change in the amount of the Company’s liability for unrecognized tax benefits would most likely result from additional information or settlements relating to the examination of the Company’s tax returns.

As of December 31, 2021, the liability for unrecognized tax benefits (excluding accrued interest and penalties) was approximately $772 million. Accrued interest and penalties related to unrecognized tax benefits as of December 31, 2021 was approximately $135 million. Of these amounts, approximately $772 million could result in potential cash payments. The Company is not able to provide a reasonable estimate of the timing of future tax payments related to these obligations.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS ~~— (Continued)~~

(Unaudited)

Note 14. Net Income Per Common Share

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


		Three Months Ended				Six Months Ended					Three Months Ended
		December 31, 2021		January 1, 2021			December 31, 2021		January 1, 2021				September 30, 2022		October 1, 2021
		(in millions, except per share data)									(in millions, except per share data)
Net income	Net income	$	564	$	62		$	1,174	$	2		Net income	$	27	$	610
Weighted average shares outstanding:	Weighted average shares outstanding:											Weighted average shares outstanding:
Basic	Basic	312		305			311		304			Basic	316		310
Employee stock options, RSUs, PSUs and ESPP		3		2			4		1
Basic and diluted		315		307			315		305
Income per common share:
Employee stock options, RSUs, PSUs, and ESPP												Employee stock options, RSUs, PSUs, and ESPP	3		6
Diluted												Diluted	319		316
Income per common share												Income per common share
Basic	Basic	$	1.81	$	0.20		$	3.77	$	0.01		Basic	$	0.09	$	1.97
Diluted	Diluted	$	1.79	$	0.20		$	3.73	$	0.01		Diluted	$	0.08	$	1.93
Anti-dilutive potential common shares excluded	Anti-dilutive potential common shares excluded	5		8			3		10			Anti-dilutive potential common shares excluded	8		1

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, RSUs and PSUs, and rights to purchase shares of common stock under the Company’s ESPP. For the three months ended September 30, 2022 and October 1, 2021, 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.

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WESTERN DIGITAL CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS ~~— (Continued)~~

(Unaudited)

Note 15. Employee Termination, Asset Impairment, and Other Charges

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 recorded the following charges related to these actions:


		Three Months Ended				Six Months Ended						Three Months Ended
		December 31, 2021		January 1, 2021		December 31, 2021		January 1, 2021				September 30, 2022		October 1, 2021
		(in millions)								(in millions)

Employee termination benefits	Employee termination benefits	$	3	$	2	$	18	$	25		Employee termination benefits	$	24	$	15

Asset impairments and losses (gains) on disposal of assets		(1)		—		2		—

Asset impairments and losses on disposal of assets											Asset impairments and losses on disposal of assets	—		3

Total employee termination, asset impairment, and other charges	Total employee termination, asset impairment, and other charges	$	2	$	2	$	20	$	25		Total employee termination, asset impairment, and other charges	$	24	$	18

The following table presents an analysis of the components of these activities against the reserve during the ~~six~~three months ended ~~December 31, 2021:~~September 30, 2022:


	Employee Termination Benefits
	(in millions)








Accrual balance at July ~~2, 2021~~1, 2022	$	217
Charges	1824
Cash payments	~~(12)~~(28)

Accrual balance at ~~December 31, 2021~~September 30, 2022	$	813

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WESTERN DIGITAL CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS ~~— (Continued)~~

(Unaudited)

Note 16. Legal Proceedings

Tax

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 13, Income Tax ~~Expense.~~Expense.

Other Matters

In the normal course of business, the Company is subject to legal proceedings, lawsuits and other claims. Although the ultimate aggregate amount of probable monetary liability or financial impact with respect to these other matters is subject to many uncertainties, management believes that any monetary liability or financial impact to the Company from these matters, individually and in the aggregate, would not be material to the Company’s financial condition, results of operations or cash flows. However, any monetary liability and financial impact to the Company from these matters could differ materially from the Company’s expectations.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis contains forward-looking statements within the meaning of the federal securities laws, and should be read in conjunction with the disclosures we make concerning risks and other factors that may affect our business and operating results. You should read this information in conjunction with the unaudited Condensed Consolidated Financial Statements and the notes thereto included in this Quarterly Report on Form 10-Q, and the audited Consolidated Financial Statements and notes thereto included in Part II, Item 8 of our Annual Report on Form 10‑K for the fiscal year ended July ~~2, 2021.~~1, 2022. See also “Forward-Looking Statements” immediately prior to Part I, Item 1 in this Quarterly Report on Form 10-Q.

Unless otherwise indicated, references herein to specific years and quarters are to our fiscal years and fiscal quarters. As used herein, the terms “we,” “us,” “our,” and the “Company” refer to Western Digital Corporation and its subsidiaries.

Our Company

We are on a mission to unlock the potential of data by harnessing the possibility to use it. We are a leading developer, manufacturer, and provider of data storage devices ~~and solutions that address the evolving needs of information technology~~based on both flash-based products (“~~IT”~~Flash”) and ~~the infrastructure that enables the proliferation of data~~hard disk drives (“HDD”) technologies. With dedicated business units driving advancements in ~~virtually every industry. We~~NAND flash and magnetic recording technologies, we create ~~environments for data to thrive. We are driving the innovation~~and drive innovations 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, our industry-leading solutions deliver the possibilities~~ of data.

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

Key Developments

~~Financing Activities~~Strategic Alternatives

In June 2022, we announced that we are reviewing potential strategic alternatives aimed at further optimizing long-term value for stockholders. The Executive Committee of our Board of Directors is overseeing the assessment process and evaluating a range of alternatives, including options for separating our Flash and HDD business units. In conjunction with that review process, we announced that we had entered into a letter agreement with Elliott Investment Management L.P., which had disclosed in May 2022 a $1 billion investment in our Company and called for a full strategic review of our business. As of September 30, 2022, we are still actively working with financial advisors and our legal counsel in this strategic review process.

Tax Resolution

InAs previously disclosed, we have received statutory notices of deficiency and notices of proposed adjustments from the ~~second quarter of fiscal~~Internal Revenue Service (“IRS”) with respect to 2008 through 2015. During 2022, new information became available which required us to re-measure our unrecognized tax benefits for this IRS matter. Additionally, during 2022, we ~~continued to execute on our commitment to reduce our overall debt levels~~ and ~~fully repaid our Term Loan B-4. In December 2021, Fitch Ratings, Inc. raised our Company credit rating to investment grade. We then initiated~~the IRS tentatively reached a series of transactions to further reduce our debt levels and better stagger the maturities of our debt. In December 2021, we issued $500 million aggregate principal amount of 2.850% senior unsecured notes due February 1, 2029 (the “~~2029 Notes”) and issued $500 million aggregate principal amount of 3.100% senior unsecured notes due February 1, 2032 (the “2032 Notes~~”). We used the proceeds from these notes offerings and available cash to voluntarily repay $1.21 billion of our Term Loan A-1 and reduce its principal amount to $3.0 billion as of December 31, 2021. In January 2022, we amended and restated our existing loan agreement to providesettlement for among other things: (i) the issuance of a new $3.0 billion Term Loan A-2 maturing in January 2027 to replace our previously existing Term Loan A-1; (ii) the availability of a new $2.25 billion revolving credit facility maturing in January 2027 to replace our previously existing $2.25 billion revolving credit facility; and (iii) additional covenant flexibility and other modifications. Upon completion of these transactions, over 85% of the principal amount of our debt is now due in 2026 or later. We believeresolving this ~~new debt structure gives us greater financial stability and flexibility to manage our business over the longer term.~~

matter. Additional information ~~regarding~~is provided in our ~~indebtedness, including the principal repayment terms, interest rates, covenants and other key terms~~discussion of Income tax expense in our ~~outstanding indebtedness, is included~~results of operations below, as well as in Part I, Item 1, Note 8,13, ~~Debt,~~ ~~of the Notes to Condensed Consolidated Financial Statements in this Quarterly Report on Form 10-Q and in Part II, Item 8, Note 6,~~ ~~Debt~~Income Tax Expense, of the Notes to the Condensed Consolidated Financial Statements, ~~included~~and in the “Short- and Long-Term Liquidity-Unrecognized Tax Benefits” section below.

Operational and COVID-19 Pandemic Update

Macroeconomic factors such as inflation, higher interest rates and recession concerns have softened demand for our ~~Annual Report on Form 10-K~~products, with certain customers reducing purchases as they adjust their production levels and right-size their inventories. As a result, we and our industry are experiencing a supply-demand imbalance, which has negatively impacted pricing, particularly in Flash and is expected to result in reduced shipments and increased absorption charges in HDD in future quarters. However, we believe digital transformation will continue to drive long-term growth for ~~the fiscal year ended July 2, 2021.~~data storage across all three of our end markets.

We believe we have made significant progress in strengthening our product portfolio to meet our customers’ growing and evolving storage needs. Our BiCS5 based products continue to play a significant role in driving top line results across our end markets. Additionally, hard drive products utilizing OptiNAND and shingled magnetic recording (“SMR”) technologies have

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~~Business Structure~~commenced commercial shipments and our latest 26-terabyte SMR drives are undergoing qualifications at multiple cloud and OEM customers. We continued commercial shipment of consumer flash devices based on our next generation 3D-flash technology, but are pushing out our BiCS6 transition as compared to prior targets to reduce our capital expenditures for 2023 in light of market conditions. We are also aware of the ongoing trends in the HDD Client market as PCs shift from using HDD to Flash technology and as a result, we have and are still undergoing actions to restructure our HDD manufacturing footprint to reflect this market dynamic, including a sharp reduction in our client hard drive production capacity of approximately 40%.

~~Historically, our company had been managed and reported under a single operating segment. Late~~The COVID-19 environment remains dynamic with outbreaks in the first quarter of fiscal 2021, the Chief Executive Officer, who is our Chief Operating Decision Maker, announced a decision to reorganize our business by forming two separate product business units: hard disk drives (“HDD”) and flash-based products (“Flash”).various geographies. The new structure is intended to provide each business unit with focus and responsibility for identifying current and future customer requirements while driving the strategy, roadmap, pricing and overall profitability for their respective product areas. To align with the new operating model and business structure, we made management organizational changes and implemented new reporting modules and processes to provide discrete information to manage the business. Effective July 3, 2021, management finalized its assessment of our operating segments and concluded that we now have two reportable segments: HDD and Flash.

Our broad portfolio of technology and products address multiple end markets. In the fiscal first quarter of 2022, we refined the end markets we report to be “Cloud”, “Client” and “Consumer”. Cloud represents a large and growing end market comprised primarily of products for public or private cloud environments and end customers, which we believe we are uniquely positioned to address as the only provider of both hard drive and flash products. Through the Client end market, we provide our 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 our broad range of retail and other end-user products, which capitalize on the strength of our product brand recognition and vast points of presence around the world.

~~The discussion and analysis included under~~ ~~Results of Operations~~ ~~below reflects our new business unit structure and end markets discussed above.~~

~~COVID-19 Pandemic and Operational Update~~

As the ongoing COVID-19 pandemic has evolved, we have implemented and maintained more thorough sanitation practices as outlined by health organizations and supported vaccination efforts. As we begin to phase in a return to site for more employees, we are monitoring and adopting practices recommended by health organizations to ensure the continued safety of our employees and business partners. In addition, the responses to COVID-19 taken by ourselves and others in the supply chain have ~~increased~~contributed to increases in the costs of their services which ~~have~~ in turn impacted our ~~operations. We incurred incremental charges primarily related to logistics, absorption and other factory-related~~operations, but these costs ~~of approximately $70 million and $126 million, and $33 million and $61 million during the three and six months ended December 31, 2021 and January 1, 2021, respectively, which were recorded~~have now been normalized in ~~Cost of revenue.~~

~~The technology hardware and semiconductor industries continued to face supply chain disruptions during the quarter that negatively impacted both~~ our customers’ ability to ship products, and our ability to build products. In order to meet our end customers’ demand, we are incurring increased component costs in addition to COVID-related expenses, which we expect to weigh primarily on our hard drive gross margins through the first half of calendar year 2022. While these supply disruptions may continue for the near term, we ultimately expect that they will be transitory as demand for our products has remained solid during the COVID-19 pandemic, with work-from-home, distance learning, and at home entertainment driving demand for cloud environments, new devices, and retail products.operating results.

~~The COVID-19 environment remains dynamic and we~~We will continue to actively monitor the situation and may take further actions altering our business operations that we determine are in the best interests of our employees, customers, partners, suppliers, and stakeholders, or as required by federal, state, or local authorities. See “Adverse global or regional conditions could harm our business,” “The COVID-19 pandemic could negatively affect our business” and “We are dependent on a limited number of qualified suppliers who provide critical services, materials or components, and a disruption in our supply chain could negatively affect our business” in Part I, Item 1A, Risk Factors, of our Annual Report on Form 10-K for the ~~fiscal~~ year ended July ~~2, 2021~~1, 2022 for more information regarding the risks we face as a result of macroeconomic conditions, the COVID-19 pandemic and supply chain disruptions.

~~Flash Ventures~~Russia Sanctions

In ~~October 2020, Kioxia announced~~February 2022, the ~~start of construction of the shell~~U.S. and other countries imposed sanctions on Russia. In accordance with these sanctions, we have ceased shipments to distributors for ~~a new fabrication facility~~customers located in ~~Yokkaichi, Japan, referred to as “Y7”.~~Russia. Our revenue from distributors for customers in Russia have not been significant. We ~~expect to continue Flash Ventures investments into Y7~~have no material assets or operations in ~~due course.~~Russia.

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Results of Operations

~~Second~~First Quarter ~~and First Half~~ Overview

The following table sets forth, for the periods presented, selected summary information from our Condensed Consolidated Statements of Operations by dollars and percentage of net revenue(1):


		Three Months Ended												Three Months Ended
		December 31, 2021				January 1, 2021				$ Change		% Change			September 30, 2022				October 1, 2021						$ Change			% Change
		($ in millions)												($ in millions)
Revenue, net	Revenue, net	$	4,833	100.0	%	$	3,943	100.0	%	$	890	23	%							Revenue, net		$	3,736		100.0	%		$	5,051		100.0	%	$	(1,315)	(26)	%
Cost of revenue	Cost of revenue	3,250		67.2		2,983		75.7		267		9								Cost of revenue		2,755			73.7			3,386			67.0		(631)		(19)
Gross profit	Gross profit	1,583		32.8		960		24.3		623		65								Gross profit		981			26.3			1,665			33.0		(684)		(41)
Operating Expenses:
Operating expenses:																Operating expenses:
Research and development	Research and development	575		11.9		535		13.6		40		7								Research and development		552			14.8			578			11.4		(26)		(4)
Selling, general and administrative	Selling, general and administrative	279		5.8		265		6.7		14		5								Selling, general and administrative		247			6.6			291			5.8		(44)		(15)
Employee termination, asset impairment, and other charges	Employee termination, asset impairment, and other charges	2		—		2		0.1		—		—								Employee termination, asset impairment, and other charges		24			0.6			18			0.4		6		33
Total operating expenses	Total operating expenses	856		17.7		802		20.3		54		7								Total operating expenses		823			22.0			887			17.6		(64)		(7)
Operating income	Operating income	727		15.0		158		4.0		569		360								Operating income		158			4.2			778			15.4		(620)		(80)
Interest and other income (expense):	Interest and other income (expense):																			Interest and other income (expense):
Interest income	Interest income	1		—		2		0.1		(1)		(50)								Interest income		2			0.1			2			—		—		—
Interest expense	Interest expense	(76)		(1.6)		(81)		(2.1)		5		(6)								Interest expense		(70)			(1.9)			(78)			(1.5)		8		(10)
Other income (loss), net		(6)		(0.1)		6		0.2		(12)		(200)
Other income (expense), net																Other income (expense), net	(6)	(0.2)			2			—			(8)			(400)
Total interest and other expense, net	Total interest and other expense, net	(81)		(1.7)		(73)		(1.9)		(8)		11								Total interest and other expense, net		(74)			(2.0)			(74)			(1.5)		—		—
Income before taxes	Income before taxes	646		13.4		85		2.2		561		660								Income before taxes		84			2.2			704			13.9		(620)		(88)
Income tax expense	Income tax expense	82		1.7		23		0.6		59		257								Income tax expense		57			1.5			94			1.9		(37)		(39)
Net income	Net income	$	564	11.7		$	62	1.6		502		810								Net income		$	27		0.7	%		$	610		12.1	%	$	(583)	(96)	%

~~(1)~~ ~~Percentages may not total due to rounding.~~

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Six Months Ended
December 31,
2021 January 1,
2021 $ Change % Change
($ in millions)
Revenue, net $ 9,884 100.0 % $ 7,865 100.0 % $ 2,019 26 %
Cost of revenue 6,636 67.1 6,001 76.3 635 11
Gross profit 3,248 32.9 1,864 23.7 1,384 74
Operating Expenses:
Research and development 1,153 11.7 1,090 13.9 63 6
Selling, general and administrative 570 5.8 521 6.6 49 9
Employee termination, asset impairment, and other charges 20 0.2 25 0.3 (5) (20)
Total operating expenses 1,743 17.6 1,636 20.8 107 7
Operating income 1,505 15.2 228 2.9 1,277 560
Interest and other income (expense):
Interest income 3 — 4 0.1 (1) (25)
Interest expense (154) (1.6) (165) (2.1) 11 (7)
Other income (expense), net (4) — 15 0.2 (19) (127)
Total interest and other expense, net (155) (1.6) (146) (1.9) (9) 6
Income before taxes 1,350 13.7 82 1.0 1,268 1,546
Income tax expense 176 1.8 80 1.0 96 120
Net income $ 1,174 11.9 $ 2 — 1,172 58,600

(1) Percentages may not total due to rounding.

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

Three Months Ended Six Months Ended
December 31,
2021 January 1,
2021 December 31,
2021 January 1,
2021
($ in millions)
Net revenue:
HDD $ 2,213 $ 1,909 $ 4,774 $ 3,753
Flash 2,620 2,034 5,110 4,112
Total net revenue $ 4,833 $ 3,943 $ 9,884 $ 7,865
Gross profit:
HDD $ 677 $ 488 $ 1,469 $ 971
Flash 946 551 1,867 1,099
Total gross profit for segments 1,623 1,039 3,336 2,070
Unallocated corporate items:
Amortization of acquired intangible assets (26) (109) (65) (254)
Stock-based compensation expense (14) (15) (23) (27)
Charges related to cost savings initiatives — — — —
Recovery related to a power outage incident — 45 — 75
Other — — — —
Total unallocated corporate items (40) (79) (88) (206)
Consolidated gross profit $ 1,583 $ 960 $ 3,248 $ 1,864
Gross margin:
HDD 30.6 % 25.6 % 30.8 % 25.9 %
Flash 36.1 % 27.1 % 36.5 % 26.7 %
Consolidated gross margin 32.8 % 24.3 % 32.9 % 23.7 %

~~The Company’s disaggregated revenue information is as follows:~~

Three Months Ended Six Months Ended
December 31,
2021 January 1,
2021 December 31,
2021 January 1,
2021
(in millions)
Revenue by End Market
Cloud $ 1,920 $ 1,014 $ 4,145 $ 2,305
Client 1,854 1,869 3,707 3,619
Consumer 1,059 1,060 2,032 1,941
Total Revenue $ 4,833 $ 3,943 $ 9,884 $ 7,865
Revenue by Geography
Americas $ 1,407 $ 945 $ 3,021 $ 2,024
Europe, Middle East and Africa 816 725 1,578 1,354
Asia 2,610 2,273 5,285 4,487
Total Revenue $ 4,833 $ 3,943 $ 9,884 $ 7,865


	Three Months Ended
	September 30, 2022			October 1, 2021
	($ in millions)
Net revenue:
Flash	$	1,722		$	2,490
HDD	2,014			2,561
Total net revenue	$	3,736		$	5,051
Gross profit:
Flash	$	422		$	921
HDD	574			792

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:
Flash	24.5		%	37.0		%
HDD	28.5		%	30.9		%
Consolidated gross margin	26.3		%	33.0		%

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The following table sets forth for the periods presented, summary information regarding our disaggregated revenue:



	Three Months Ended
	September 30, 2022		October 1, 2021







	(in millions)
Revenue by End Market
Cloud	$	1,829	$	2,225
Client	1,229		1,853
Consumer	678		973
Total Revenue	$	3,736	$	5,051

Revenue by Geography
Asia	$	1,686	$	2,675
Americas	1,423		1,614
Europe, Middle East and Africa	627		762
Total Revenue	$	3,736	$	5,051

Net Revenue

Comparison of Three Months Ended September 30, 2022 to Three Months Ended October 1, 2021

The ~~increases~~decrease in consolidated net revenue for the three ~~and six~~ months ended ~~December 31, 2021~~September 30, 2022 from the comparable ~~periods~~period in the prior year ~~reflect increases~~reflects decreases in exabytes shipments of ~~HDD~~Flash and ~~Flash~~HDD sold as certain customers reduced purchases as they adjusted their production levels and right-sized their inventories. Revenue also declined as a result of lower average selling prices. These items are further discussed ~~below. The revenue increases driven~~below in our discussion by ~~exabyte growth were partially offset by declines in the average price per gigabyte of storage for both HDD and Flash as product mix shifted.~~segment.

~~HDD~~Flash revenue ~~increased 16%~~decreased 31% for the three months ended ~~December 31, 2021~~September 30, 2022 from the comparable period in the prior year, primarily driven by a ~~27% increase in exabytes sold, partially offset by a~~26% decline in the average selling price ~~per gigabyte as noted above.~~with the remainder driven by a decrease in exabytes sold. The ~~increase~~decline in average selling price was primarily due to pricing pressure caused by macroeconomic headwinds and a supply-demand imbalance in the current period. The decrease in exabytes sold ~~was due to continued demand for our latest generation energy assisted drives among our public~~reflected customers reducing purchases as they adjusted their production levels and private cloud customers. The strong demand in Cloud was partly offset by a decline in HDD exabytes sold in our Client and Consumer end markets due to pressure in the commercial channel related to component issues impacting our customers’ ability to ship product and greater component sourcing constraints within our own operations, and customers transitioning to client SSD. right-sized their inventories.

HDD revenue ~~increased 27%~~decreased 21% for the ~~six~~three months ended ~~December 31, 2021~~September 30, 2022 from the comparable period in the prior year, primarily driven by a ~~40% increase~~12% decrease in exabytes sold ~~partially offset~~with the remainder driven by a decline in the average ~~price per gigabyte as noted above.~~selling price. The ~~increase in exabytes for the six-month period was largely attributable to the same factors noted above for the three-month period.~~

~~Flash revenue increased 29% for the three months ended December 31, 2021 from the comparable period in the prior year, primarily driven by a 37% increase~~decline in exabytes sold ~~partially offset by a~~was spread evenly across customers in our cloud, client, and consumer end markets due to the macroeconomic pressures noted earlier and our end customers right-sizing their inventories. The decline in the average selling price ~~per gigabyte as noted above. The~~largely reflected the shift in mix to higher exabytes sold was due to strong demand in Cloud for our latest generation of enterprise SSD products and the ramp of new 5G-based mobile phones incorporating our latest BiCS5 flash solutions in the Client market. Higher volume was also driven by strong demand in gaming along with a growing brand recognition of WD_Black based products in our Consumer market. Flash revenue increased 24% for the six months ended December 31, 2021 from the comparable period in the prior year, primarily driven by a 33% increase in exabytes sold, partially offset by a decline in the average price per gigabyte as noted above. The increase in exabytes for the six-month period was largely attributable to the same factors noted above for the three-month period.capacity drives.

The ~~increase~~decrease in Cloud revenue for the three months ended December 31, 2021 from the comparable period in the prior year was led by demand for HDD capacity enterprise drives, including growth in our 18-terabyte capacity drives and enterprise SSDs, as we continued to ramp sales of our latest generation products. However, the supply chain disruptions previously noted contributed to a decline in exabyte shipments and a decline in revenues compared to the first quarter of fiscal 2022. In Client, the slight decrease in revenues for the three months ended December 31, 2021September 30, 2022 from the comparable period in the prior year reflected declines in both ~~client SSD~~Flash and ~~client~~ HDD ~~revenue,~~capacity enterprise drives as ~~a result of~~customers reduced purchases to right-size their inventories. In Client, the ~~supply chain disruptions noted previously, partially offset by the ramp of 5G phones. In Consumer,~~decrease in revenue for the three months ended December 31, 2021 was relatively flat with the comparable period in the prior year with a shift in mix from HDD to flash reflecting stronger demand in gaming along with a growing brand recognition of WD_Black.

~~The increase in Cloud revenue for the six months ended December 31, 2021~~September 30, 2022 from the comparable period in the prior year resulted primarily ~~reflects~~from a decline in Flash revenue as a result of lower pricing, while a reduction in purchases by PC OEMs to adjust their inventories to current production levels also contributed to the ~~same drivers noted above~~revenue decline. In Consumer, the decrease in revenue for the ~~three-month period. In Client, the slight increase in revenues for the six~~three months ended ~~December 31, 2021~~September 30, 2022 from the comparable period in the prior year reflected ~~growth in mobile (led by 5G growth),~~lower Flash pricing and ~~growth in gaming, automotive, IOT, and industrial applications in the first quarter of fiscal 2022, partially offset by declines in both client SSD and client~~lower retail HDD revenue, as a result of the supply chain disruptions noted previously. In Consumer, the increase in revenue for the six months ended December 31, 2021 from the comparable period in the prior year primarily reflected stronger demand in gaming along with a growing brand recognition of WD_Black.shipments.

The changes in net revenue by geography for ~~both~~ the three ~~and six~~ months ended ~~December 31, 2021~~September 30, 2022 from the comparable ~~periods~~period in the prior year ~~reflect~~reflected a larger decline in Asia from lower Client revenue from OEMs in this region as well as routine variations in the mix of business.

Our top 10 customers accounted for ~~46% and 44%~~52% of our net revenue for the three ~~and six~~ months ended ~~December 31, 2021, respectively,~~September 30, 2022, compared to 43% ~~and 41%~~ of our net revenue for the three ~~and six~~ months ended ~~January~~October 1, ~~2021, respectively.~~2021. For each of the three ~~and six~~ months ended ~~December 31, 2021~~September 30, 2022 and ~~January~~October 1, 2021, no single customer accounted for 10% or more of our net revenue.

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Consistent with standard industry practice, we have sales incentive and marketing programs that provide customers with price protection and other incentives or reimbursements that are recorded as a reduction to gross revenue. These programs represented ~~18% of gross revenues for both the three and six months ended December 31, 2021, and 20% and~~ 19% of gross ~~revenues~~revenue for the three ~~and six~~ months ended ~~January~~September 30, 2022, and 18% of gross revenue for the three months ended October 1, ~~2021, respectively. Adjustments due to changes in accruals for these programs have generally averaged less than 1% of gross revenue year over year.~~2021. The amounts attributed to our sales incentive

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and marketing programs generally vary according to several factors including industry conditions, list pricing strategies, seasonal demand, competitor actions, channel mix and overall availability of products. Changes in future customer demand and market conditions may require us to adjust our incentive programs as a percentage of gross revenue.

We believe we have made significant progress in strengthening our product portfolio. We have qualified our enterprise SSD products at three cloud titans and two OEMs, and commenced commercial shipments of 20 terabyte hard drives based on OptiNAND technology. Additionally, we are seeing an increase in customer interest in adopting SMR technology and expect multiple cloud titans to deploy SMR drives in higher volume later in this calendar year. In client SSD, we plan to launch new products in the fiscal third quarter and enterprise SSD products later in the year, both based on BiCS5 technology. For our next generation 3D-flash, we began initial commercial shipment of consumer flash devices based on our 162-layer BiCS6. Furthermore, we qualified and commenced revenue shipment of client SSDs based on QLC and BiCS5 technology in the fiscal second quarter. While still early in its evolution, we believe our next generation BiCS6 node will play an important role in the adoption of QLC in the future. We expect these developments to contribute to further revenue growth as supply chain disruptions begin to abate.

Gross Profit and Gross Margin

Consolidated gross profit ~~increased~~decreased by ~~$623~~$684 million for the three months ended ~~December 31, 2021~~September 30, 2022 from the comparable period in the prior year, which reflects the ~~increase~~decrease in revenue in both ~~HDD and~~ Flash and reduced costs as we ramped production on newer products, as well as an $83 million decrease in charges in the current period related to amortization expense on acquired intangible assets, some of which became fully amortized.HDD. Consolidated gross margin ~~increased 8.5~~decreased 6.7 percentage points for the three months ended ~~December 31, 2021~~September 30, 2022 from the comparable period in the prior year, which primarily reflects lower average price per gigabyte in Flash and HDD, partially offset by cost reductions as ~~we ramped production on newer products, the lower charges for amortization of acquired intangible assets noted above,~~mix shifted to higher capacity drives. Flash and ~~a shift in product mix to higher-margin flash drives.~~ HDD ~~and Flash~~ gross margin ~~increased~~decreased by ~~5.0~~12.5 and ~~9.0~~2.4 percentage points year over year, respectively, each reflecting the lower average price per gigabyte, partially offset by cost reductions as ~~we ramped production on newer products.~~

Consolidated gross profit increased by $1.38 billion for the six months ended December 31, 2021 from the comparable period in the prior year, which reflects the increase in revenue in both HDD and Flash, as well as a $189 million decrease in charges in the current period relatedmix shifted to amortization expense on acquired intangible assets, some of which became fully amortized. Consolidated gross margin increased 9.2 percentage points for the six months ended December 31, 2021 from the comparable period in the prior year, which reflects higher ~~gross margin in both HDD and Flash, the lower charges for amortization of acquired intangible assets noted above, and a shift in product mix to higher-margin flash~~capacity drives. ~~HDD and Flash gross margin increased by 4.9 and 9.8 percentage points year over year, respectively, reflecting cost reductions as we ramped production on newer products.~~

Operating Expenses

Research and development (“R&D”) expense ~~increased $40~~decreased $26 million for the three months ended ~~December 31, 2021~~September 30, 2022 from the comparable period in the prior year. The ~~primary increases include approximately $20 million in employee compensation costs~~decrease was primarily due to ~~merit increases~~a reduction in variable compensation expenses.

Selling, general and ~~increased headcount and approximately $10 million of higher engineering-related costs due to timing of projects. R&D~~administrative (“SG&A”) expense ~~increased $63~~decreased $44 million for the ~~six~~three months ended ~~December 31, 2021~~September 30, 2022 from the comparable period in the prior ~~year~~year. The decline was primarily driven by a reduction in expenses related to outside services, compensation and ~~primarily reflected higher employee compensation costs due~~benefits, and material use as we took actions to ~~merit increases, increased headcount and higher variable compensation.~~

~~Selling, general and administrative (“SG&A”) expense increased $14 million for the three months ended December 31, 2021 from the comparable period~~reduce expenses in the ~~prior~~ ~~year.~~ The increase primarily reflected small increases in employee compensation costs due to merit increases as well as a small increase in professional services. SG&A expense increased $49 million for the six months ended December 31, 2021 from the comparable period in the prior ~~year.~~ The increase primarily reflected approximately $25 million related to higher professional services and approximately $20 million of higher employee compensation cost due to merit increases and higher variable compensation.current environment.

Employee termination, asset impairment and other charges ~~were relatively flat~~of $24 million for ~~both~~ the three ~~and six month periods compared~~months ended September 30, 2022 reflects restructuring actions initiated in the current year to adjust our cost structure to align with the ~~prior year and reflect minor actions taken in each period.~~current demand environment. For information regarding Employee termination, asset impairment and other charges, see Part I, Item 1, Note 15, Employee Termination, Asset Impairment, and Other Charges of the Notes to Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q.

Interest and Other Income (Expense)

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Total interest and other expense, net for the three ~~and six~~ months ended ~~December 31, 2021 increased slightly~~September 30, 2022 was flat compared to the prior year ~~reflecting higher foreign exchange losses partially offset by~~due to lower interest expense primarily resulting from the pay-down of principal on our ~~debt.~~debt, offset by higher losses on foreign currency transactions.

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Income Tax Expense

The Tax Cuts and Jobs Act (the “2017 Act”) includes a broad range of tax reform proposals affecting businesses. We completed our accounting for the tax effects of the enactment of the 2017 Act during the second quarter of fiscal 2019. However, the U.S. Treasury and the Internal Revenue Service (“IRS”) have issued tax guidance on certain provisions of the 2017 Act since the enactment date, and we anticipate the issuance of additional regulatory and interpretive guidance. We applied a reasonable interpretation of the 2017 Act along with the then-available guidance in finalizing our 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 our estimates in future periods.

On August 16, 2022, President Biden signed into law the Inflation Reduction Act of 2022, which contained significant law changes related to tax, climate, energy, and health care. The tax measures include, among other things, a corporate alternative minimum tax of 15% on corporations with three-year average annual adjusted financial statement income exceeding $1 billion. The corporate alternative minimum tax will not be effective for us until fiscal year 2024. We are currently evaluating the potential effects of these legislative changes.

The following table sets forth income tax information from our Condensed Consolidated Statements of Operations by dollar and effective tax rate:


		Three Months Ended						Six Months Ended							Three Months Ended
		December 31, 2021			January 1, 2021			December 31, 2021			January 1, 2021				September 30, 2022			October 1, 2021
		($ in millions)													($ in millions)
Income before taxes	Income before taxes	$	646		$	85		$	1,350		$	82		Income before taxes	$	84		$	704
Income tax expense	Income tax expense	82			23			176			80			Income tax expense	57			94
Effective tax rate	Effective tax rate	13		%	27		%	13		%	98		%	Effective tax rate	68		%	13		%

Beginning in fiscal year 2023, the 2017 Act requires us to capitalize and amortize research and development expenses rather than expensing them in the year incurred. The ~~primary drivers~~tax effects related to the capitalization of ~~the difference between~~research and development expenses are included in the effective tax rate for the three ~~and six~~ months ended ~~December 31, 2021 and the U.S. Federal statutory rate of 21%, are~~September 30, 2022. This impact, together with the relative mix of earnings and losses by jurisdiction, the deduction for foreign derived intangible income, credits, and tax holidays in Malaysia, the Philippines and Thailand that will expire at various dates during fiscal years 2024 through ~~2031. In addition,~~2031 are the primary drivers of the difference between the effective tax rate for ~~both~~ the three ~~and six~~ months ended ~~December 31, 2021 includes~~September 30, 2022 and the ~~discrete effect~~U.S. Federal statutory rate of ~~an increase to unrecognized tax benefits as a result of ongoing discussions with various taxing authorities of $8 million and $25 million, respectively.~~21%.

The primary drivers of the difference between the effective tax rate for the three ~~and six~~ months ended ~~January~~October 1, 2021 and the U.S. Federal statutory rate of 21% are the relative mix of earnings and losses by jurisdiction, the deduction for foreign derived intangible income, credits, and tax holidays in Malaysia, the Philippines and Thailand. In addition, the effective tax rate for the three ~~and six~~ months ended ~~January~~October 1, 2021 ~~includes~~included the discrete ~~effects~~effect of ~~net~~an increase to unrecognized tax ~~deficiencies from shortfalls~~benefits of ~~$12~~$16 million ~~related to the vesting~~as a result of stock-based awards and additional tax expense of $10 million from the re-measurement of certain deferred tax liabilities due to restructuring activities. The discrete items had no impact on the amount of income taxes paid.ongoing discussions with various taxing authorities.

Our future effective tax rate is subject to future regulatory developments and changes in the mix of our U.S. earnings compared to foreign earnings. ~~Our~~The 2017 Act requires us to capitalize and amortize research and development expenses rather than expensing them in the year incurred, which, as described above, increased our effective tax rate for the three months ended September 30, 2022 and is expected to materially increase our effective tax rate and taxes paid, if not repealed or otherwise modified. In addition, our total tax expense in future ~~fiscal~~ years may also vary as a result of discrete items such as excess tax benefits or deficiencies.

For additional information regarding Income tax expense, see Part I, Item 1, Note 13, Income Tax Expense, of the Notes to Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q.

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Liquidity and Capital Resources

The following table summarizes our statements of cash flows:


		Six Months Ended						Three Months Ended
		December 31, 2021		January 1, 2021				September 30, 2022		October 1, 2021
		(in millions)				(in millions)
Net cash provided by (used in):	Net cash provided by (used in):						Net cash provided by (used in):
Operating activities	Operating activities	$	1,187	$	788		Operating activities	$	6	$	521
Investing activities	Investing activities	(569)		(436)			Investing activities	(224)		(312)
Financing activities	Financing activities	(1,456)		(450)			Financing activities	(50)		(289)
Effect of exchange rate changes on cash	Effect of exchange rate changes on cash	(1)		6			Effect of exchange rate changes on cash	(10)		—
Net decrease in cash and cash equivalents	Net decrease in cash and cash equivalents	$	(839)	$	(92)		Net decrease in cash and cash equivalents	$	(278)	$	(80)

We ~~believe~~and the IRS tentatively reached a basis for resolving the statutory notices of deficiency and notices of proposed adjustments with respect to fiscal years 2008 through 2015. We expect to pay tax and interest totaling approximately $600 million to $700 million, which we expect to be partially offset by future reductions to our ~~cash, cash equivalents~~mandatory deemed repatriation tax obligations and ~~cash generated~~tax savings from ~~operations as well as our available credit facilities will be sufficient~~interest deductions aggregating to ~~meet our working capital, debt and capital expenditure needs for at least the next twelve months. Our ability~~approximately $100 to ~~sustain our working capital position is subject to a number of risks that we discuss in~~$150 million. See Part I, Item ~~1A,~~1, Note 13, ~~Risk Factors,~~Income Tax Expense, of the Notes to Condensed Consolidated Financial Statements included in ~~our Annual~~this Quarterly Report on Form ~~10-K~~10-Q for ~~the fiscal year ended July 2, 2021.~~further details.

~~As further explained under~~ ~~Key Developments- Financing Activities~~ above, we have taken recent actions to reduce our overall debt levels and extend the average maturity. Following these actions, we have reduced the outstanding principal amount of our debt by approximately $1.43 billion since October 1, 2021 and over 85% of the principal amount is now due in 2026 or later. We ~~also~~ have an existing a shelf registration statement (the “Shelf Registration Statement”) filed with the Securities and Exchange Commission that expires in August 2024, which allows us to offer and sell shares of common stock, preferred stock, warrants, and debt securities. We ~~used the Shelf Registration Statement to complete our offering of $1.00 billion aggregate principal amount of senior unsecured notes in December 2021, and we~~ may use the Shelf Registration Statement or other capital sources, including other offerings of equity or debt securities or the credit markets, to satisfy future financing needs, including planned or unanticipated capital expenditures, investments, debt repayments or other expenses. Any such additional financing will be subject to market conditions and may not be available on terms acceptable to us or at all.

Webelieve our cash, cash equivalents and cash generated from operations as well as our available credit facilities will be sufficient to satisfy our IRS obligation and meet our working capital, debt and capital expenditure needs for at least the next twelve months. We believe we can also access the various debt capital markets to further to supplement our liquidity position. Our ability to sustain our working capital position is subject to a number of risks that we discuss in Part I, Item 1A, Risk Factors, in our Annual Report on Form 10-K for the year ended July 1, 2022.

During ~~fiscal 2022,~~2023, we expect expenditures for property, plant and equipment for our company plus our portion of the capital expenditures by our Flash Ventures joint venture with Kioxia for its operations to aggregate ~~approximately $3.0~~to $2.7 billion. After consideration of the Flash Ventures’ lease financing of its capital expenditures and net operating cash flow, we ~~now~~ expect net cash used for our purchases of property, plant and equipment and net activity in notes receivable relating to Flash Ventures to be a cash outflow of approximately ~~$1.5~~$1.3 billion during ~~fiscal 2022.~~2023. The total expected cash to be used could vary depending on the timing and completion of various capital projects and the availability, timing and terms of related financing.

A total of ~~$1.84~~$1.53 billion and ~~$1.97~~$2.41 billion of our Cash and cash equivalents was held ~~outside of the U.S.~~by our foreign subsidiaries as of ~~December 31, 2021~~September 30, 2022 and ~~January~~October 1, 2021, respectively. There are no material tax consequences that were not previously accrued for on the repatriation of this cash.

Our cash equivalents are primarily invested in money market funds that invest in U.S. Treasury securities and U.S. Government agency securities. In addition, from time to time, we also invest directly in certificates of deposit, asset backed securities and corporate and municipal notes and bonds.

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Operating Activities

Cash flow from operating activities primarily consists of net income, adjusted for non-cash charges, plus or minus changes in operating assets and liabilities. This represents our principal source of cash. Net cash used for changes in operating assets and liabilities was ~~$715~~$329 million for the ~~six~~three months ended ~~December 31, 2021,~~September 30, 2022, as compared to ~~$78~~$440 million for the ~~six~~three months ended ~~January~~October 1, 2021. Changes in our operating assets and liabilities are largely affected by our working capital requirements, which are dependent on the effective management of our cash conversion cycle as well as timing of payments for taxes. Our cash conversion cycle measures how quickly we can convert our products into cash through sales. The cash conversion cycles were as follows (in days):


		Three Months Ended		Three Months Ended
		December 31, 2021	January 1, 2021			September 30, 2022	October 1, 2021
Days sales outstanding	Days sales outstanding	52	42		Days sales outstanding	59	44
Days in inventory	Days in inventory	102	109		Days in inventory	128	95
Days payables outstanding	Days payables outstanding	(68)	(71)		Days payables outstanding	(65)	(61)
Cash conversion cycle	Cash conversion cycle	86	80		Cash conversion cycle	122	78

Changes in days sales outstanding (“DSO”) are generally due to the timing of shipments. Changes in days in inventory (“DIO”) are generally related to the timing of inventory builds, ~~and~~including staging of inventory to meet expected future demand. Changes in days payables outstanding (“DPO”) are generally related to production volume and the timing of purchases during the period. From time to time, we ~~negotiate to~~ modify the timing of payments to our ~~vendors~~vendors. We make modifications primarily to manage our vendor relationships and to manage our cash flows, including our cash balances. Generally, we make the payment term modifications through negotiations with our vendors or by granting to, or receiving from, our vendors’ payment term accommodations.

For the three months ended ~~December 31, 2021,~~September 30, 2022, DSO increased by 1015 days from the comparable period in the prior year, primarily reflecting the timing of shipments and customer collections. DIO increased by 33 days from the comparable period in the prior year primarily reflecting a decline in products shipped. DPO increased by 4 days from the comparable period in the prior year primarily due to routine variations in the timing of purchases and payments during the period. We have seen no significant deterioration in our receivables as a result of COVID-19. DIO and DPO decreased by 7 days and 3 days, respectively, from the comparable period in the prior year primarily reflecting improved supply chain management in the HDD business, as well as routine variations in the timing of purchases and payments during the period.COVID-19 or other market conditions.

Investing Activities

Net cash used in investing activities for the ~~six~~three months ended ~~December 31,~~September 30, 2022 primarily consisted of $320 million in capital expenditures partially offset by a $99 million net decrease in notes receivable issuances to Flash Ventures. Net cash used in investing activities for the three months ended October 1, 2021 primarily consisted of ~~$551~~$245 million in capital expenditures, ~~and~~partially offset by a ~~$17~~$52 million net increase in notes receivable issuances to Flash Ventures to fund its capital expansion. Net cash used in investing activities for the six months ended January 1, 2021 primarily consisted of $576 million in capital expenditures, partially offset by a $94 million net decrease in notes receivable issuances to Flash Ventures to fund its capital expansion.

Financing Activities

During the ~~six~~three months ended ~~December 31, 2021, net~~September 30, 2022, cash flows from financing activities primarily consisted of $50 million used for taxes paid on vested stock awards under employee stock plans, while we drew and repaid $300 million under our revolving credit facility within the period. Net cash used in financing activities for the three months ended October 1, 2021 primarily consisted of ~~$2.43 billion~~$213 million for the repayment of our debt, which included ~~$1.09 billion to voluntarily repay~~a $150 million voluntary prepayment on our Term Loan B-4, ~~in full, scheduled principal payments of $126 million~~ and ~~a voluntary prepayment of $1.21 billion on our Term Loan A-1, as well as $80~~$78 million for taxes paid on vested stock awards under employee stock plans offset by net proceeds of $989 million from the issuance of new debt, which was used to fund a portion of the voluntary prepayment on Term Loan A-1, and $60 million from the issuance of stock under employee stock plans. Net cash used in financing activities for the six months ended months ended January 1, 2021 primarily consisted of $461 million for the repayment of our debt, which included a $300 million voluntary prepayment on our Term Loan B-4.

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Off-Balance Sheet Arrangements

Other than the commitments related to Flash Ventures incurred in the normal course of business and certain indemnification provisions (see “Short and Long-term ~~Liquidity-Contractual~~Liquidity-Purchase Obligations and Other Commitments” below), we do not have any other material off-balance sheet financing arrangements or liabilities, guarantee contracts, retained or contingent interests in transferred assets, or any other obligation arising out of a material variable interest in an unconsolidated entity. We do not have any majority-owned subsidiaries that are not included in the Condensed Consolidated Financial Statements. Additionally, with the exception of Flash Ventures and our joint venture with Unisplendour Corporation Limited and Unissoft (Wuxi) Group Co. Ltd., we do not have an interest in, or relationships with, any variable interest entities. For additional information regarding our off-balance sheet arrangements, see Part I, Item 1, Note 10, Related Parties and Related Commitments and Contingencies, of the Notes to Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q.

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Short- and Long-term Liquidity

~~Contractual Obligations and~~Material Cash Commitments

The following is a summary of our known ~~contractual~~material cash ~~obligations and commercial~~ commitments, including those for capital expenditures, as of ~~December 31, 2021:~~September 30, 2022:


		Total		Remaining six months of 2022		2023-2024		2025-2026		Beyond 2026			Total		1 Year (Remaining Nine Months of 2023)		2-3 Years (2024-2025)		4-5 Years (2026-2027)		More than 5 Years (Beyond 2027)
		(in millions)											(in millions)

Long-term debt, including current portion(1)	Long-term debt, including current portion(1)	$	7,400	$	126	$	3,974	$	2,300	$	1,000	Long-term debt, including current portion(1)	$	7,100	$	—	$	1,363	$	4,738	$	999
Interest on debt	Interest on debt	831		103		376		278		74		Interest on debt	1,157		169		541		341		106
Flash Ventures related commitments(2)	Flash Ventures related commitments(2)	6,049		2,105		2,587		1,136		221		Flash Ventures related commitments(2)	5,048		2,311		1,980		847		(90)
Operating leases	Operating leases	393		27		93		85		188		Operating leases	356		36		90		83		147
Purchase obligations and other commitments	Purchase obligations and other commitments	3,770		2,215		1,217		168		170		Purchase obligations and other commitments	3,588		2,380		959		99		150
Mandatory Deemed Repatriation Tax	Mandatory Deemed Repatriation Tax	819		—		284		535		—		Mandatory Deemed Repatriation Tax	659		—		404		255		—
Total	Total	$	19,262	$	4,576	$	8,531	$	4,502	$	1,653	Total	$	17,908	$	4,896	$	5,337	$	6,363	$	1,312

(1)Principal portion of debt, excluding discounts and issuance costs.

(2)Includes reimbursement for depreciation and lease payments on owned and committed equipment, funding commitments for loans and equity investments and payments for other committed expenses, including R&D and building depreciation. Funding commitments assume no additional operating lease guarantees. Additional operating lease guarantees can reduce funding commitments.

Debt

~~Following the transactions described under~~ ~~Key Developments- Financing Activities~~, we have outstanding $3.3 billion aggregate principal amount of senior unsecured notes with maturities between 2026 and 2032, $3.0 billion principal amount of a new Term Loan A-2 that will mature in January 2027 and $1.1 billion of 1.5% convertible notes due 2024. In addition to our existing debt, as of September 30, 2022, we ~~have~~had $2.25 billion available for borrowing under our revolving credit facility until January 2027, subject to customary conditions under the loan agreement. ~~See~~ ~~Key Developments- Financing Activities~~ ~~above for further information.~~ Additional information regarding our indebtedness, including information about ~~availability under our revolving credit facility and the~~ principal repayment terms, interest rates, covenants and other key terms of our outstanding indebtedness, is included in Part ~~I, Item 1, Note 8,~~ ~~Debt,~~ ~~of the Notes to Condensed Consolidated Financial Statements in this Quarterly Report on Form 10-Q and in Part~~ II, Item 8, Note 6,8, Debt, of the Notes to Consolidated Financial Statements included in our Annual Report on Form 10-K for the ~~fiscal~~ year ended July ~~2, 2021.~~

~~Table~~1, 2022. The loan agreement governing our revolving credit facility and our Term Loan A-2 due 2027 requires us to comply with a leverage ratio financial covenant. As of ~~Contents~~

~~We may issue additional debt securities~~September 30, 2022, we were in ~~the future that may be guaranteed by our 100% owned domestic subsidiary, Western Digital Technologies, Inc. (“Guarantor” and, together~~compliance with Western Digital Corporation, the “Obligor Group”). Such guarantees may be full and unconditional, joint and several, on a secured or unsecured, subordinated or unsubordinated basis, and may be subject to certain customary guarantor release conditions. We conduct operations almost entirely through our subsidiaries. Accordingly, the Obligor Group’s cash flow and ability to service any guaranteed registered debt securities will depend on the earnings of our subsidiaries and the distribution of those earnings to the Obligor Group, including the earnings of the non-guarantor subsidiaries, whether by dividends, loans or otherwise. Holders of such guaranteed registered debt securities would have a direct claim only against the Obligor Group.

~~The following tables include summarized~~this financial information for the Obligor Group. The information for the Obligor Group is presented on combined basis, excluding intercompany balances and transactions between the Company and the Guarantor and excluding investments in and equity in the earnings of non-guarantor subsidiaries. The Obligor Group’s amounts due from, amounts due to, and transactions with non-guarantor subsidiaries have been presented in separate line items in the tables below.

~~The assets and liabilities of the Obligor Group include the following:~~

December 31,
2021 July 2,
2021
(in millions)
Current assets (excluding net intercompany receivable from non-guarantor subsidiaries) $ 2,429 $ 2,898
Non-current assets 1,848 1,903
Net intercompany payable to non-guarantor subsidiaries 1,110 463
Current liabilities 2,379 2,325
Non-current liabilities 8,289 9,726

~~The operating results and transactions with non-guarantor subsidiaries of the Obligor Group include the following:~~

Six Months Ended Year Ended
December 31,
2021 July 2,
2021
(in millions)
Net sales $ 4,253 $ 12,378
Gross profit 1,124 1,861
Operating income 77 142
Net income (loss) (15) 377
Intercompany revenue 1,234 5,190
Net intercompany interest expense (income) (22) 23
Intercompany dividends 105 528

covenant.

Flash Ventures

Flash Ventures sells to and leases back from a consortium of financial institutions a portion of its tools and has entered into equipment lease agreements of which we guarantee half or all of the outstanding obligations under each lease agreement. The leases are subject to customary covenants and cancellation events that relate to Flash Ventures and each of the guarantors. The occurrence of a cancellation event could result in an acceleration of the lease obligations and a call on our guarantees. As of ~~December 31, 2021,~~September 30, 2022, we were in compliance with all covenants under these Japanese lease facilities. See Part I, Item 1, Note 10, Related Parties and Related Commitments and Contingencies, of the Notes to Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q for information regarding Flash Ventures.

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Purchase Obligations and Other Commitments

In the normal course of business, we enter into purchase orders with suppliers for the purchase of components used to manufacture our products. These purchase orders generally cover forecasted component supplies needed for production during the next quarter, are recorded as a liability upon receipt of the components, and generally may be changed or canceled at any time prior to shipment of the components. We also enter into long-term agreements with suppliers that contain fixed future commitments, which are contingent on certain conditions such as performance, quality and technology of the vendor’s components. These arrangements are included under “Purchase obligations and other commitments” in the table above.

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Mandatory Deemed Repatriation Tax

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


		December 31, 2021			September 30, 2022
					(in millions)
2023		$	106

2024	2024	178		2024	$	199
2025	2025	238		2025	205
2026	2026	297		2026	255

Total	Total	$	819	Total	$	659

For additional information regarding our estimate of the total tax liability for the mandatory deemed repatriation tax, see Part II, Item 8, Note ~~14,~~13, Income Tax Expense, of the Notes to Consolidated Financial Statements included in our Annual Report on Form 10-K for the ~~fiscal~~ year ended ~~July 2, 2021.~~June 28, 2019.

Unrecognized Tax Benefits

As of ~~December 31, 2021,~~September 30, 2022, the liability for unrecognized tax benefits (excluding accrued interest and penalties) was ~~approximately $772 million.~~$1.03 billion. Accrued interest and penalties related to unrecognized tax benefits are recognized in liabilities for uncertain tax positions and are recorded in the provision for income taxes. Accrued interest and penalties included in our liability related to unrecognized tax benefits as of ~~December 31, 2021~~September 30, 2022 was ~~approximately $135~~$264 million. Of these amounts, approximately ~~$772 million~~$1.15 billion could result in potential cash payments. We

As previously disclosed, the IRS issued statutory notices of deficiency and notices of proposed adjustments with respect to transfer pricing with our foreign subsidiaries and intercompany payable balances for years 2008 through 2015. In September 2018 and March 2019, we filed petitions with the U.S. Tax Court covering years 2008 through 2012, for which we 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, we and the IRS tentatively reached a settlement for resolving the statutory notices of deficiency and notices of proposed adjustments with respect to years 2008 through 2015 subject to the parties entering into final stipulations and a closing agreement. Based on the tentative settlement for resolution, we expect to pay tax and interest totaling approximately $600 million to $700 million, which we expect to be partially offset by future reductions to our mandatory deemed repatriation tax obligations and tax savings from interest deductions aggregating to approximately $100 to $150 million. While we continue to work with the IRS to come to a final agreement on the federal tax and interest calculations, we are ~~not~~uncertain as to when a final agreement will be reached and the exact timing of when any payments will be made. However, we believe it is reasonably likely that 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 our Condensed Consolidated Balance Sheets as of September 30, 2022. This classification and amount may be subject to change in the next twelve months depending on when we are able to ~~provide~~reach a ~~reasonable estimate of~~final agreement with the ~~timing of future~~IRS.

Mandatory Research and Development Expense Capitalization

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

Interest Rate Swap

We have generally held a balance of fixed and variable rate debt and periodically have used interest rate swaps to hedge a portion of our fixed rate debt. As of September 30, 2022, our only variable rate debt outstanding was our Term Loan A-2 on which we had pay-fixed interest rate swaps of $2 billion notional amount that would mitigate the impact of fluctuations in variable interest rates on this loan through February 2023. See Part I, Item 3, Quantitative and Qualitative Disclosures About Market Risks included in this in this Quarterly Report on Form 10-Q for additional information.

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Foreign Exchange Contracts

We purchase foreign exchange contracts to hedge the impact of foreign currency fluctuations on certain underlying assets, liabilities and commitments for Operating expenses and product costs denominated in foreign currencies. ~~For a description of our current foreign exchange contract commitments, see~~See Part I, Item ~~1, Note 7,~~3, ~~Derivative Instruments~~Quantitative and ~~Hedging Activities~~Qualitative Disclosures About Market Risks~~, of the Notes to Condensed Consolidated Financial Statements~~ included in this Quarterly Report on Form ~~10-Q.~~10-Q for additional information.

Indemnifications

In the ordinary course of business, we may provide indemnifications of varying scope and terms to customers, vendors, lessors, business partners and other parties with respect to certain matters, including, but not limited to, losses arising out of our breach of agreements, products or services to be provided by us, environmental compliance or from intellectual property (“IP”) infringement claims made by third parties. In addition, we have entered into indemnification agreements with our directors and certain of our officers that will require us, among other things, to indemnify them against certain liabilities that may arise by reason of their status or service as directors or officers. We maintain director and officer insurance, which may cover certain liabilities arising from our obligation to indemnify our directors and officers in certain circumstances.

It is not possible to determine the maximum potential amount under these indemnification agreements due to the limited history of prior indemnification claims and the unique facts and circumstances involved in each particular agreement. Such indemnification agreements may not be subject to maximum loss clauses. Historically, we have not incurred material costs as a result of obligations under these agreements.

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Stock Repurchase Program

Our Board of Directors has authorized a stock repurchase program for the repurchase of up to $5.0 billion of our common stock, which authorization is effective through July 25, 2023. We did not make any stock repurchases during the ~~six~~three months ended ~~December 31, 2021~~September 30, 2022 and have not repurchased any shares of our common stock pursuant to our stock repurchase program since the first quarter of fiscal 2019. Although we will reevaluate the repurchasing of our common stock when appropriate, there can be no assurance if, when or at what level we may resume such activity. The remaining amount available to be repurchased under our current stock repurchase program as of ~~December 31, 2021~~September 30, 2022 was ~~$4.50~~$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.

Recent Accounting Pronouncements

For a description of recently issued and adopted accounting pronouncements, including the respective dates of adoption and expected effects on our results of operations and financial condition, see Part I, Item 1, Note 2, Recent Accounting Pronouncements, of the Notes to Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q.

Critical Accounting Policies and Estimates

We have prepared the accompanying unaudited Condensed Consolidated Financial Statements in accordance with accounting principles generally accepted in the United States (U.S. GAAP). The preparation of the financial statements requires the use of judgments and estimates that affect the reported amounts of revenues, expenses, assets, liabilities and shareholders’ equity. We have adopted accounting policies and practices that are generally accepted in the industry in which we operate. If these estimates differ significantly from actual results, the impact to the Condensed Consolidated Financial Statements may be material.

There have been no material changes in our critical accounting policies and estimates from those disclosed in our Annual Report on Form 10‑K for the ~~fiscal~~ year ended July ~~2, 2021.~~1, 2022. Please refer to Part II, Item 7 of our Annual Report on Form 10‑K for the ~~fiscal~~ year ended July ~~2, 2021~~1, 2022 for a discussion of our critical accounting policies and estimates. In addition, as disclosed in Part I, Item 1, Note 3, Business Segments, Geographic Information, and Concentrations of Risk, of the Notes to Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q, as of September 30, 2022, our management identified several factors that warranted a quantitative analysis of impairment for both the Flash and HDD reporting units as of that date. Please refer to that disclosure for additional information on the estimates included in our assessment.

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Item 3. Quantitative and Qualitative Disclosures About Market Risk

Except as disclosed below, there have been no material changes to our market risk during the three months ended~~December 31, 2021~~September 30, 2022. See Part II, Item 7A, Quantitative and Qualitative Disclosures About Market Risks in our Annual Report on Form 10-K for the ~~fiscal~~ year ended July ~~2, 2021~~1, 2022 for further information about our exposure to market risk.

Foreign Currency Risk

WeDue to macroeconomic changes and volatility experienced in the foreign exchange market recently, we believe sensitivity analysis is more informative in representing the potential impact to the portfolio as a result of market movement. Therefore, we have performed sensitivity analyses as of ~~December 31, 2021~~September 30, 2022 and July ~~2, 2021~~1, 2022 using a modeling technique that measures the change in the fair values arising from a hypothetical 10% adverse ~~movement~~movement in the levels of foreign currency exchange rates relative to the U.S. dollar, with all other variables held constant. The analyses cover all of our foreign currency derivative contracts used to offset the underlying exposures. The foreign currency exchange rates used in performing the sensitivity analyses were based on market rates in effect at ~~December 31, 2021~~September 30, 2022 and July ~~2, 2021.~~1, 2022. The sensitivity analyses indicated that a hypothetical 10% adverse movement in foreign currency exchange rates relative to the U.S. dollar would result in a foreign exchange fair value loss of ~~$294~~$303 million and ~~$183~~$306 million at ~~December 31, 2021~~September 30, 2022 and July ~~2, 2021,~~1, 2022, respectively.

Interest Rate Risk

We have generally held a balance of fixed and variable rate debt. As of ~~December 31, 2021, we had reduced the amount of~~September 30, 2022, our only variable rate debt outstanding was our Term Loan A-2, which bears interest, at the Company’s option, at a per annum rate equal to ~~$3.0 billion~~either (x) the Adjusted Term Secured Overnight Financing Rate (“SOFR”) (as defined in the Loan Agreement) plus an applicable margin varying from ~~$5.43 billion as~~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 ~~July 2, 2021.~~ the Company from at least two of Standard & Poor’s Ratings Services, Moody’s Investors Service, Inc. and Fitch Ratings, Inc., with an initial interest rate of Adjusted Term SOFR plus 1.375%.

As of ~~December 31, 2021,~~September 30, 2022, the outstanding balance on our Term Loan A-2 was $2.7 billion and a one percent increase in the variable rate of interest would increase annual interest expense by ~~$30~~$27 million. We currently have pay-fixed interest rate swaps ~~on $2.00~~of $2 billion notional amount ~~which~~that would ~~help~~ mitigate the impact of fluctuations in variable interest rates through February 2023.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

As required by Rule 13a-15(b) promulgated by the Securities and Exchange Commission under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as such term is defined in Rule 13a-15(e) under the Exchange Act) as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of the end of the period covered by this Quarterly Report on Form 10-Q, our disclosure controls and procedures were effective.

Changes in Internal Controls over Financial Reporting

There has been no change in our internal control over financial reporting during the ~~second~~first quarter of ~~fiscal 2022~~2023 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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PART II. OTHER INFORMATION

Item 1. Legal Proceedings

See Note 13, Income Tax Expense, of the Notes to Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q for disclosures regarding statutory notices of deficiency issued by the IRS onin 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.

Item 1A. Risk Factors

We have described under the heading “Risk Factors” in Part I, Item 1A of our Annual Report on Form 10-K for the ~~fiscal~~ year ended July ~~2, 2021~~1, 2022 risks and uncertainties that could cause our actual results of operations and financial condition to vary materially from past, or from anticipated future, results of operations and financial condition. There have been no material changes from these risk factors previously described in our Annual Report on Form 10-K for the ~~fiscal~~ year ended July ~~2, 2021.~~1, 2022. These risks and uncertainties are not the only risks facing us. Additional risks and uncertainties not presently known to us or that we currently deem immaterial may also adversely affect our business, financial condition, results of operations or the market price of our common stock.

~~Item 5.~~ ~~Other Information~~

~~Disclosure Pursuant to Section 13(r) of the Securities Exchange Act of 1934~~

On March 2, 2021, the U.S. government designated the Russian Federal Security Service (the “FSB”) as a blocked party under Executive Order 13382; however, on the same day, the U.S. Department of the Treasury’s Office of Foreign Assets Control issued General License No. 1B (the “OFAC General License”), which generally authorizes U.S. companies to engage in certain transactions and dealings with the FSB necessary and ordinarily incident to requesting or obtaining licenses, permits, certifications or notifications issued or registered by the FSB for the importation, distribution or use of information technology products in the Russian Federation.

In the normal course of business, as permitted and authorized by the OFAC General License, the Company or its subsidiaries file notifications with, or apply for import licenses and permits from, the FSB as required pursuant to Russian encryption product import controls for the purpose of enabling the Company or its subsidiaries or their channel partners to import and distribute certain products in the Russian Federation. There are no gross revenues or net profits directly associated with these activities, and the Company and its subsidiaries do not distribute or sell products or provide services to the FSB. The Company expects that we or our subsidiaries will continue to file notifications with and apply for import licenses and permits from the FSB to qualify our products for importation and distribution in the Russian Federation if and as permitted by applicable U.S. law, including the OFAC General License.

~~Entry into Separation Agreement~~

On February 1, 2022, we entered into a Separation and General Release Agreement with Robert K. Eulau, Executive Vice President and Chief Financial Officer (the “Separation Agreement”). Mr. Eulau has agreed to continue in an advisory capacity through May 1, 2022 to assist with the transition of his duties and responsibilities. Pursuant to the Separation Agreement, Mr. Eulau will receive the Tier I severance benefits to which he is entitled pursuant to the terms and conditions of our Amended and Restated Executive Severance Plan, the material terms of which have been previously disclosed and a copy previously filed with the SEC (the “Separation Benefits”). Mr. Eulau’s receipt of the Separation Benefits is subject to his non-revocation of a general release of claims included in the Separation Agreement and compliance with the terms of the Separation Agreement, including certain non-solicitation and cooperation provisions.

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Item 6. Exhibits

The exhibits listed in the Exhibit Index below are filed with, or incorporated by reference in, this Quarterly Report on Form 10-Q, as specified in the Exhibit List, from exhibits previously filed with the Securities and Exchange Commission. Certain agreements listed in the Exhibit Index that we have filed or incorporated by reference may contain representations and warranties by us or our subsidiaries. These representations and warranties have been made solely for the benefit of the other party or parties to such agreements and (i) may have been qualified by disclosures made to such other party or parties, (ii) were made only as of the date of such agreements or such other date(s) as may be specified in such agreements and are subject to more recent developments, which may not be fully reflected in our public disclosures, (iii) may reflect the allocation of risk among the parties to such agreements and (iv) may apply materiality standards different from what may be viewed as material to investors. Accordingly, these representations and warranties may not describe the actual state of affairs at the date hereof and should not be relied upon.

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EXHIBIT INDEX


Exhibit Number						Description
3.1						Amended and Restated Certificate of Incorporation of Western Digital Corporation, as amended to date (Filed as Exhibit 3.1 to the Company’s Quarterly Report on Form 10-Q (File No. 1-08703) with the Securities and Exchange Commission on February 8, 2006)
3.2						Amended and Restated By-Laws of Western Digital Corporation, as amended effective as of February 10, 2021 (Filed as Exhibit 3.1 to the Company’s Current Report on Form 8-K (File No. 1-08703) with the Securities and Exchange Commission on February 12, 2021)
4 .110.1						Indenture, dated as of December 10, 2021, between Western Digital Corporation and U.S. Bank National Association, as trustee (Filed as Exhibit 4.1 to the Company’s Current Report on Form 8-K (File No. 1-08703) with the Securities and Exchange Commission on December 10, 2021)
4 .2						~~First Supplemental Indenture (including~~ Form of 2.850% Senior Notes due 2029 and Form of 3.100% Senior Notes due 2032), dated as of December 10, 2021, between Western Digital Corporation and U.S. Bank National Association, as trustee (Filed as Exhibit 4.2 to the Company’s Current Report on Form 8-K (File No. 1-08703) with the Securities and Exchange Commission on December 10, 2021)
~~10.1~~						Western Digital Corporation 2021 Long-Term Incentive Plan, adopted as of August 18, 2021 (Filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K (File No. 1-08703) with the Securities and Exchange Commission on November 18, 2021)*
~~10.2~~						~~Form~~Notice of Grant ~~Notice for~~of Performance Stock Units and Performance Stock Unit Award ~~(TSR Measure)~~Agreement under the Western Digital Corporation 2021 Long-Term Incentive Plan†*
~~10.3~~						Form of Grant Notice for Performance Stock Unit Award (Financial Measures) under the Western Digital Corporation 2021 Long-Term Incentive Plan†*
~~10.4~~						Form of Grant Notice for Restricted Stock Unit Award – Vice President and Above, under the Western Digital Corporation 2021 Long-Term Incentive Plan†*
~~10.5~~						Western Digital Corporation 2021 Long-Term Incentive Plan Non-Employee Director Restricted Stock Unit Grant Program, as amended November 22, 2021†*
~~10.6~~						~~Flash Alliance Master Agreement, dated as of July 7, 2006, by and among SanDisk Corporation, Toshiba Corporation and SanDisk (Ireland) Limited†#~~
~~10.7~~						~~Operating Agreement of Flash Alliance, Ltd., dated as of July 7, 2006, by and between Toshiba Corporation and SanDisk (Ireland) Limited†#~~
31.1						Certification of Principal Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002†
31.2						Certification of Principal Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002†
32.1						Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002**
32.2						Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002**
101.INS						XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document
101.SCH						XBRL Taxonomy Extension Schema Document†
101.CAL						XBRL Taxonomy Extension Calculation Linkbase Document†
101.LAB						XBRL Taxonomy Extension Label Linkbase Document†
101.PRE						XBRL Taxonomy Extension Presentation Linkbase Document†
101.DEF						XBRL Taxonomy Extension Definition Linkbase Document†
104						Cover Page Interactive Data File - formatted in Inline XBRL and contained in Exhibit 101

† Filed with this report.

* Management contract or compensatory plan or arrangement required to be filed as an exhibit pursuant to applicable rules of the Securities and Exchange Commission.

** Furnished with this report.

#As permitted by Regulation S-K, Item 601(b)(10)(iv) of the Securities Exchange Act of 1934, as amended, certain confidential portions of this exhibit have been redacted from the publicly filed document.

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Quarterly Report on Form 10-Q to be signed on its behalf by the undersigned thereunto duly authorized.


			WESTERN DIGITAL CORPORATION

			By:			/s/ Gene Zamiska
						Gene Zamiska
						Senior Vice President, Global Accounting and Chief Accounting Officer
						(Principal Accounting Officer)

Dated: ~~February 3,~~November 2, 2022

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















Balance at July 2, 2021	$	(35)	$	(38)	$	(124)	$	(197)
Other comprehensive income (loss) before reclassifications	1		(41)		(71)		(111)
Amounts reclassified from accumulated other comprehensive income (loss)	—		—		94		94
Income tax expense related to items of other comprehensive income (loss)	—		—		(3)		(3)
Net current-period other comprehensive income (loss)	1		(41)		20		(20)
Balance at December 31, 2021	$	(34)	$	(79)	$	(104)	$	(217)


	Six Months Ended		Year Ended
	December 31, 2021		July 2, 2021
	(in millions)
Net sales	$	4,253	$	12,378
Gross profit	1,124		1,861
Operating income	77		142
Net income (loss)	(15)		377
Intercompany revenue	1,234		5,190
Net intercompany interest expense (income)	(22)		23
Intercompany dividends	105		528