Western Digital(WDC) - 2024 Q3 - Quarterly Report

PART I. FINANCIAL INFORMATION Item 1. Financial Statements (unaudited) This section presents Western Digital's unaudited condensed consolidated financial statements and detailed notes for the periods ended March 29, 2024, and March 31, 2023 Condensed Consolidated Balance Sheets This section provides a snapshot of the company's financial position, detailing assets, liabilities, and equity as of March 29, 2024, and June 30, 2023 Condensed Consolidated Balance Sheets (in millions) | Metric | March 29, 2024 | June 30, 2023 | | :-------------------------------- | :------------- | :------------ | | Cash and cash equivalents | $1,894 | $2,023 | | Accounts receivable, net | $1,800 | $1,598 | | Inventories | $3,215 | $3,698 | | Total current assets | $7,532 | $7,886 | | Property, plant and equipment, net | $3,253 | $3,620 | | Total assets | $23,801 | $24,546 | | Accounts payable | $1,400 | $1,293 | | Total current liabilities | $4,053 | $5,434 | | Long-term debt | $7,318 | $5,857 | | Total liabilities | $12,804 | $12,706 | | Total shareholders' equity | $10,121 | $10,964 | - Total assets decreased by $745 million from $24,546 million at June 30, 2023, to $23,801 million at March 29, 2024[20] - Total liabilities increased by $98 million from $12,706 million at June 30, 2023, to $12,804 million at March 29, 2024[20] - Total shareholders' equity decreased by $843 million from $10,964 million at June 30, 2023, to $10,121 million at March 29, 2024[20] Condensed Consolidated Statements of Operations This section presents the company's revenues, expenses, and net income or loss for the three and nine months ended March 29, 2024, and March 31, 2023 Three Months Ended March 29, 2024 vs March 31, 2023 (in millions, except per share amounts) | Metric | March 29, 2024 | March 31, 2023 | Change | % Change | | :----------------------------------- | :------------- | :------------- | :----- | :------- | | Revenue, net | $3,457 | $2,803 | $654 | 23.3% | | Gross profit | $1,001 | $286 | $715 | 250.0% | | Operating income (loss) | $273 | $(472) | $745 | (157.8)% | | Net income (loss) attributable to common shareholders | $113 | $(580) | $693 | (119.5)% | | Diluted EPS | $0.34 | $(1.82) | $2.16 | (118.7)% | Nine Months Ended March 29, 2024 vs March 31, 2023 (in millions, except per share amounts) | Metric | March 29, 2024 | March 31, 2023 | Change | % Change | | :----------------------------------- | :------------- | :------------- | :----- | :------- | | Revenue, net | $9,239 | $9,646 | $(407) | (4.2)% | | Gross profit | $1,592 | $1,795 | $(203) | (11.3)% | | Operating loss | $(533) | $(635) | $102 | (16.1)% | | Net loss attributable to common shareholders | $(881) | $(984) | $103 | (10.5)% | | Diluted EPS | $(2.72) | $(3.09) | $0.37 | (11.9)% | - For the three months ended March 29, 2024, net income attributable to common shareholders was $113 million, a significant improvement from a net loss of $(580) million in the prior year period[22] - For the nine months ended March 29, 2024, the net loss attributable to common shareholders improved to $(881) million from $(984) million in the prior year period[22] Condensed Consolidated Statements of Comprehensive Loss This section details the company's net income or loss and other comprehensive income or loss components for the three and nine months ended March 29, 2024, and March 31, 2023 Three Months Ended March 29, 2024 vs March 31, 2023 (in millions) | Metric | March 29, 2024 | March 31, 2023 | Change | | :----------------------------------- | :------------- | :------------- | :----- | | Net income (loss) | $135 | $(571) | $706 | | Foreign currency translation adjustment | $(75) | $(8) | $(67) | | Net unrealized gain (loss) on derivative contracts | $(86) | $21 | $(107) | | Total comprehensive loss | $(8) | $(565) | $557 | Nine Months Ended March 29, 2024 vs March 31, 2023 (in millions) | Metric | March 29, 2024 | March 31, 2023 | Change | | :----------------------------------- | :------------- | :------------- | :----- | | Net loss | $(837) | $(975) | $138 | | Foreign currency translation adjustment | $(55) | $11 | $(66) | | Net unrealized gain on derivative contracts | $(45) | $233 | $(278) | | Total comprehensive loss | $(925) | $(771) | $(154) | - Total comprehensive loss significantly improved to $(8) million for the three months ended March 29, 2024, from $(565) million in the prior year period[25] - For the nine months ended March 29, 2024, total comprehensive loss increased to $(925) million from $(771) million in the prior year period[25] Condensed Consolidated Statements of Cash Flows This section outlines the company's cash inflows and outflows from operating, investing, and financing activities for the nine months ended March 29, 2024, and March 31, 2023 Nine Months Ended March 29, 2024 vs March 31, 2023 (in millions) | Metric | March 29, 2024 | March 31, 2023 | Change | | :----------------------------------- | :------------- | :------------- | :----- | | Net loss | $(837) | $(975) | $138 | | Depreciation and amortization | $430 | $643 | $(213) | | Net cash used in operating activities | $(660) | $(340) | $(320) | | Net cash provided by (used in) investing activities | $31 | $(620) | $651 | | Net cash provided by financing activities | $506 | $856 | $(350) | | Net decrease in cash and cash equivalents | $(129) | $(107) | $(22) | | Cash paid for income taxes | $874 | $181 | $693 | | Cash paid for interest | $321 | $252 | $69 | - Net cash used in operating activities increased to $(660) million for the nine months ended March 29, 2024, from $(340) million in the prior year period[28] - Net cash provided by (used in) investing activities significantly improved to $31 million for the nine months ended March 29, 2024, from $(620) million used in the prior year period[28] Condensed Consolidated Statements of Convertible Preferred Stock and Shareholders' Equity This section details changes in the company's convertible preferred stock and shareholders' equity for the periods ended March 29, 2024, and June 30, 2023 Changes in Shareholders' Equity (in millions) | Metric | June 30, 2023 | March 29, 2024 | Change | | :----------------------------------- | :------------ | :------------- | :----- | | Convertible Preferred Stock | $876 | $876 | $0 | | Common Stock | $3 | $3 | $0 | | Additional Paid-In Capital | $3,936 | $4,018 | $82 | | Accumulated Other Comprehensive Loss | $(548) | $(636) | $(88) | | Retained Earnings | $7,573 | $6,736 | $(837) | | Total Shareholders' Equity | $10,964 | $10,121 | $(843) | - Total shareholders' equity decreased from $10,964 million at June 30, 2023, to $10,121 million at March 29, 2024[29] - Retained earnings decreased by $837 million, primarily due to net losses, from $7,573 million at June 30, 2023, to $6,736 million at March 29, 2024[29] - Accumulated other comprehensive loss increased to $(636) million at March 29, 2024, from $(548) million at June 30, 2023, mainly due to foreign currency translation adjustments and unrealized losses on derivative contracts[29][64] Notes to Condensed Consolidated Financial Statements This section provides detailed explanations and supplementary information to the condensed consolidated financial statements, covering accounting policies, segment reporting, debt, equity, and income taxes Note 1. Organization and Basis of Presentation This note describes Western Digital's business, reporting segments, planned business separation, and revisions to previously issued financial statements - Western Digital is a leading developer, manufacturer, and provider of data storage devices and solutions based on NAND flash and hard disk drive technologies, serving Cloud, Client, and Consumer end markets[34][35] - The company manages and reports under two segments: Flash-based products ("Flash") and hard disk drives ("HDD")[38] - On October 30, 2023, the Board authorized a plan to separate Flash and HDD business units into two independent public companies, targeting completion in the second half of calendar year 2024, incurring related separation and transition costs[40] - The company revised previously reported financial information due to errors in reporting equity method investments in Flash Ventures, specifically unadjusted differences between Japanese GAAP and U.S. GAAP for certain lease-related transactions[42][43] Note 2. Recent Accounting Pronouncements This note outlines recently adopted and upcoming accounting standards, including disclosures for supplier finance programs, segment reporting, and income taxes - Adopted ASU 2022-04, "Liabilities-Supplier Finance Programs," in Q1 FY24, requiring annual and interim disclosures for supplier finance program obligations, with rollforward information to be provided starting FY25[46] - ASU 2023-07, "Segment Reporting," which expands segment reporting requirements for significant segment expenses, will be effective for FY25[47] - ASU 2023-09, "Income Taxes," enhancing income tax disclosure requirements, will be effective for FY26, with early adoption permitted[48] Note 3. Business Segments, Geographic Information, and Concentrations of Risk This note details the financial performance of Flash and HDD segments, revenue by end market and geography, and concentrations of risk Segment Operating Performance (Three Months Ended, in millions) | Metric | March 29, 2024 | March 31, 2023 | Change | % Change | | :----------------------------------- | :------------- | :------------- | :----- | :------- | | Revenue, net: | | | | | | Flash | $1,705 | $1,307 | $398 | 30.5% | | HDD | $1,752 | $1,496 | $256 | 17.1% | | Total net revenue | $3,457 | $2,803 | $654 | 23.3% | | Gross profit: | | | | | | Flash | $467 | $(65) | $532 | (818.5)% | | HDD | $545 | $363 | $182 | 50.1% | | Consolidated gross profit | $1,001 | $286 | $715 | 250.0% | | Gross margin: | | | | | | Flash | 27.4% | (5.0)% | 32.4 pp | | | HDD | 31.1% | 24.3% | 6.8 pp | | | Consolidated gross margin | 29.0% | 10.2% | 18.8 pp | | Segment Operating Performance (Nine Months Ended, in millions) | Metric | March 29, 2024 | March 31, 2023 | Change | % Change | | :----------------------------------- | :------------- | :------------- | :----- | :------- | | Revenue, net: | | | | | | Flash | $4,926 | $4,686 | $240 | 5.1% | | HDD | $4,313 | $4,960 | $(647) | (13.0)% | | Total net revenue | $9,239 | $9,646 | $(407) | (4.2)% | | Gross profit: | | | | | | Flash | $437 | $597 | $(160) | (26.8)% | | HDD | $1,157 | $1,237 | $(80) | (6.5)% | | Consolidated gross profit | $1,592 | $1,795 | $(203) | (11.3)% | | Gross margin: | | | | | | Flash | 8.9% | 12.7% | (3.8) pp | | | HDD | 26.8% | 24.9% | 1.9 pp | | | Consolidated gross margin | 17.2% | 18.6% | (1.4) pp | | Revenue by End Market (in millions) | End Market | Q3 FY24 | Q3 FY23 | 9M FY24 | 9M FY23 | | :--------- | :------ | :------ | :------ | :------ | | Cloud | $1,553 | $1,205 | $3,496 | $4,258 | | Client | $1,174 | $975 | $3,443 | $3,293 | | Consumer | $730 | $623 | $2,300 | $2,095 | Revenue by Geography (in millions) | Geography | Q3 FY24 | Q3 FY23 | 9M FY24 | 9M FY23 | | :-------- | :------ | :------ | :------ | :------ | | Asia | $1,740 | $1,353 | $4,990 | $4,533 | | Americas | $1,154 | $935 | $2,620 | $3,448 | | Europe, Middle East and Africa | $563 | $515 | $1,629 | $1,665 | - The company's top 10 customers accounted for 42% of its net revenue for the three months ended March 29, 2024, down from 49% in the comparable prior year period[54] - Total goodwill was $10,034 million as of March 29, 2024, with no indications of impairment[55] Note 4. Supplemental Financial Statement Data This note provides additional details on accounts receivable, inventories, property, plant and equipment, warranty accruals, and accumulated other comprehensive loss - The company sold trade accounts receivable aggregating $623 million during the nine months ended March 29, 2024, with $102 million remaining outstanding as of that date[58] Inventories (in millions) | Category | March 29, 2024 | June 30, 2023 | | :------------------------ | :------------- | :------------ | | Raw materials and component parts | $1,666 | $2,096 | | Work-in-process | $1,045 | $979 | | Finished goods | $504 | $623 | | Total inventories | $3,215 | $3,698 | - Property, plant and equipment, net, decreased to $3,253 million as of March 29, 2024, from $3,620 million at June 30, 2023[60] - The total warranty accrual decreased to $203 million as of March 29, 2024, from $244 million at June 30, 2023[62] - Accumulated other comprehensive loss (AOCL) increased to $(636) million as of March 29, 2024, from $(548) million at June 30, 2023, primarily due to foreign currency translation adjustments and unrealized losses on derivative contracts[64] Note 5. Fair Value Measurements and Investments This note details financial instruments carried at fair value and those not carried at fair value, including debt instruments, as of March 29, 2024 Financial Instruments Carried at Fair Value (March 29, 2024, in millions) | Category | Level 1 | Level 2 | Level 3 | Total | | :-------------------------------- | :------ | :------ | :------ | :---- | | Assets: | | | | | | Cash equivalents - Money market funds | $333 | — | — | $333 | | Short-term investments - Certificates of deposit | $27 | — | — | $27 | | Foreign exchange contracts | — | $9 | — | $9 | | Total assets at fair value | $360 | $9 | — | $369 | | Liabilities: | | | | | | Foreign exchange contracts | — | $142 | — | $142 | | Total liabilities at fair value | — | $142 | — | $142 | Financial Instruments Not Carried at Fair Value (March 29, 2024, in millions) | Debt Instrument | Carrying Value | Fair Value | | :----------------------------------- | :------------- | :--------- | | 1.50% convertible notes due 2024 | $— | $— | | Variable interest rate Delayed Draw Term Loan due 2024 | $300 | $300 | | 4.75% senior unsecured notes due 2026 | $2,295 | $2,253 | | Variable interest rate Term Loan A-2 maturing 2027 | $2,615 | $2,556 | | 3.00% convertible notes due 2028 | $1,566 | $2,351 | | 2.85% senior notes due 2029 | $496 | $436 | | 3.10% senior notes due 2032 | $496 | $403 | | Total | $7,768 | $8,299 | Note 6. Derivative Instruments and Hedging Activities This note describes the company's use of foreign exchange forward contracts for hedging and their impact on financial statements - The company uses foreign exchange forward contracts designated as cash flow hedges or non-designated hedges, with most contract maturity dates not exceeding 12 months[72] - Net realized and unrealized transaction and foreign exchange contract currency gains and losses were not material to the Condensed Consolidated Financial Statements for the periods presented[73] - Unrealized gains or losses on designated cash flow hedges are recognized in Accumulated Other Comprehensive Loss (AOCL)[74] Note 7. Debt This note details the company's debt instruments, including convertible notes and term loans, and compliance with financial covenants as of March 29, 2024 Debt (in millions) | Debt Instrument | March 29, 2024 | June 30, 2023 | | :----------------------------------- | :------------- | :------------ | | 1.50% convertible notes due 2024 | $— | $1,100 | | Variable interest rate Delayed Draw Term Loan due 2024 | $300 | $— | | 4.75% senior unsecured notes due 2026 | $2,300 | $2,300 | | Variable interest rate Term Loan A-2 maturing 2027 | $2,625 | $2,700 | | 3.00% convertible notes due 2028 | $1,600 | $— | | 2.85% senior notes due 2029 | $500 | $500 | | 3.10% senior notes due 2032 | $500 | $500 | | Total debt | $7,825 | $7,100 | | Long-term debt | $7,318 | $5,857 | - The company issued $1.60 billion aggregate principal amount of 3.00% convertible senior notes due 2028 on November 3, 2023, with an initial conversion price of approximately $52.20 per share[83][84] - The company repurchased approximately $508 million of its 2024 Convertible Notes and settled the remaining $592 million on February 1, 2024[86][88] - In connection with the 2028 Convertible Notes, the company entered into capped call transactions for $155 million to hedge potential dilution, recorded as a decrease to Additional paid-in capital[87] - The company was in compliance with all financial covenants (leverage ratio and minimum liquidity) for its loan agreements as of March 29, 2024[81] Note 8. Pension and Other Post-Retirement Benefit Plans This note provides information on the unfunded status of the company's pension plans and the expected long-term rate of return on assets Pension Plan Unfunded Status (in millions) | Metric | March 29, 2024 | June 30, 2023 | | :----------------------------------- | :------------- | :------------ | | Benefit obligation at end of period | $258 | $273 | | Fair value of plan assets at end of period | $176 | $185 | | Unfunded status | $82 | $88 | - The unfunded status of the company's principal pension plans decreased to $82 million as of March 29, 2024, from $88 million at June 30, 2023[92] - The expected long-term rate of return on the Pension Plans assets is 2.5%[91] Note 9. Related Parties and Related Commitments and Contingencies This note details the company's notes receivable and investments in Flash Ventures, maximum loss exposure, and lease guarantee obligations Notes Receivable and Investments in Flash Ventures (in millions) | Category | March 29, 2024 | June 30, 2023 | | :----------------------------------- | :------------- | :------------ | | Notes receivable, Flash Partners | $— | $37 | | Notes receivable, Flash Alliance | $— | $48 | | Notes receivable, Flash Forward | $556 | $709 | | Investment in Flash Partners | $157 | $161 | | Investment in Flash Alliance | $234 | $276 | | Investment in Flash Forward | $152 | $179 | | Total notes receivable and investments in Flash Ventures | $1,099 | $1,410 | - The company's maximum reasonably estimable loss exposure from Flash Ventures was $3,576 million as of March 29, 2024, including notes receivable, equity investments, operating lease guarantees, and inventory/prepayments[100] - During the nine months ended March 29, 2024, the company incurred $249 million in costs associated with the temporary reduction in Flash Ventures' manufacturing capacity utilization, recorded as a charge to Cost of revenue[103] - The company received a $36 million insurance recovery during the three months ended December 29, 2023, related to the February 2022 contamination incident at Flash Ventures' facilities[104] Flash Ventures Lease Guarantee Obligations (U.S. dollar, in millions) | Annual Installments | Payment of Principal Amortization | Purchase Option Exercise Price at Final Lease Terms | Guarantee Amount | | :----------------------------------- | :-------------------------------- | :------------------------------------------ | :--------------- | | Remaining three months of 2024 | $110 | $27 | $137 | | 2025 | $290 | $79 | $369 | | 2026 | $359 | $119 | $478 | | 2027 | $154 | $101 | $255 | | 2028 | $50 | $97 | $147 | | 2029 | $6 | $39 | $45 | | Total guarantee obligations | $969 | $462 | $1,431 | - Revenue on products distributed by the Unis Venture (49% owned by the company) accounted for approximately 4% of consolidated revenue for both the three and nine months ended March 29, 2024[112] Note 10. Leases and Other Commitments This note provides details on operating lease liabilities, right-of-use assets, the Milpitas sale-leaseback, and long-term commitments Operating Lease Information (March 29, 2024, in millions) | Metric | Amount | | :----------------------------------- | :----- | | Present value of lease liabilities | $429 | | Long-term operating lease liabilities | $382 | | Operating lease right-of-use assets | $408 | | Weighted average remaining lease term | 10.0 years | | Weighted average discount rate | 6.0% | - The company completed a sale and leaseback of its Milpitas, California facility in September 2023, receiving $191 million in net proceeds and recording an $85 million gain on the sale[117] Long-Term Commitments (in millions) | Year | Amount | | :----------------------------------- | :----- | | Remaining three months of 2024 | $45 | | 2025 | $172 | | 2026 | $96 | | 2027 | $59 | | 2028 | $20 | | Thereafter | $130 | | Total | $522 | Note 11. Shareholders' Equity and Convertible Preferred Stock This note details stock-based compensation expense, unamortized compensation costs, outstanding RSUs and PSUs, and cumulative preferred stock dividends Stock-Based Compensation Expense (in millions) | Category | Q3 FY24 | Q3 FY23 | 9M FY24 | 9M FY23 | | :----------------------------------- | :------ | :------ | :------ | :------ | | RSUs and PSUs | $65 | $63 | $198 | $217 | | ESPP | $12 | $11 | $28 | $29 | | Total | $77 | $74 | $226 | $246 | Unamortized Compensation Cost (March 29, 2024, in millions) | Category | Unamortized Compensation Costs | Weighted Average Service Period (years) | | :----------------------------------- | :----------------------------- | :-------------------------------------- | | RSUs and PSUs | $454 | 2.4 | | ESPP | $33 | 0.7 | | Total unamortized compensation cost | $487 | | - As of March 29, 2024, there were no remaining outstanding stock options[123][124] - The company had 13.2 million RSUs and PSUs outstanding as of March 29, 2024, with a weighted average grant date fair value of $43.36[125] - Unpaid and cumulative dividends payable with respect to the Series A Convertible Perpetual Preferred Stock were $68 million as of March 29, 2024[126] Note 12. Income Tax Expense This note presents income tax expense, effective tax rates, IRS settlement details, and the impact of R&D expense capitalization Income Tax Expense and Effective Tax Rate (in millions) | Metric | Q3 FY24 | Q3 FY23 | 9M FY24 | 9M FY23 | | :----------------------------------- | :------ | :------ | :------ | :------ | | Income (loss) before taxes | $178 | $(528) | $(763) | $(816) | | Income tax expense | $43 | $43 | $74 | $159 | | Effective tax rate | 24% | (8)% | (10)% | (19)% | - The effective tax rate for Q3 FY24 was 24% (vs. (8)% in Q3 FY23) and for 9M FY24 was (10)% (vs. (19)% in 9M FY23)[131] - The company reached final agreements with the IRS for tax years 2008-2015, making payments of $363 million for tax and $160 million for interest during 9M FY24 for years 2008-2012, with a remaining liability of $182 million as of March 29, 2024[137] - The company expects to realize approximately $164 million in reductions to mandatory deemed repatriation tax obligations and tax savings from interest deductions in future years due to these settlements[138] - The 2017 Act's requirement to capitalize and amortize R&D expenses is expected to materially increase cash tax payments in future profitable periods if not repealed or modified[131] Note 13. Net Income (Loss) Per Common Share This note details basic and diluted net income or loss per common share and weighted average shares outstanding for the periods presented Net Income (Loss) Per Common Share (in millions, except per share data) | Metric | Q3 FY24 | Q3 FY23 | 9M FY24 | 9M FY23 | | :----------------------------------- | :------ | :------ | :------ | :------ | | Net income (loss) attributable to common shareholders | $113 | $(580) | $(881) | $(984) | | Basic EPS | $0.35 | $(1.82) | $(2.72) | $(3.09) | | Diluted EPS | $0.34 | $(1.82) | $(2.72) | $(3.09) | | Weighted average shares outstanding (Diluted) | 335 | 319 | 324 | 318 | - For the three months ended March 29, 2024, diluted EPS was $0.34, a significant improvement from $(1.82) in the prior year period[142] - For the three months ended March 29, 2024, 9 million dilutive potential common shares were included in the diluted EPS calculation; for other periods with net losses, anti-dilutive shares were excluded[142][143] Note 14. Employee Termination, Asset Impairment, and Other This note outlines charges related to employee termination benefits, asset impairments, contract termination, and the gain on sale-leaseback of a facility Employee Termination, Asset Impairment, and Other Charges (in millions) | Category | Q3 FY24 | Q3 FY23 | 9M FY24 | 9M FY23 | | :----------------------------------- | :------ | :------ | :------ | :------ | | Employee termination benefits | $1 | $40 | $44 | $125 | | Contract termination and other | $2 | $— | $31 | $— | | Asset impairments | $5 | $— | $99 | $15 | | Gain on sale-leaseback of facility | $— | $— | $(85) | $— | | Total charges | $8 | $40 | $89 | $140 | - Total charges for employee termination, asset impairment, and other decreased to $8 million for Q3 FY24 (from $40 million in Q3 FY23) and to $89 million for 9M FY24 (from $140 million in 9M FY23)[145] - The 9M FY24 charges included $99 million for asset impairments and $31 million for contract termination costs, partially offset by an $85 million gain on the sale-leaseback of the Milpitas facility[145] Note 15. Supplier Finance Program This note describes the company's voluntary supplier finance program and outstanding payment obligations to participating vendors - The company maintains a voluntary supplier finance program allowing participating suppliers to sell their receivables to a third-party financial institution for early payment[147] - Outstanding payment obligations to eligible vendors under this program were $37 million as of March 29, 2024, included within Accounts payable[149] - The company does not provide any guarantees to third parties, and no assets are pledged in connection with these arrangements[148] Note 16. Legal Proceedings This note refers to tax-related legal proceedings and management's assessment of other legal matters' financial impact - For disclosures regarding the status of statutory notices of deficiency issued by the IRS with regard to tax years 2008 through 2015, refer to Note 12, Income Tax Expense[152] - Management believes that any monetary liability or financial impact from other legal proceedings would not be material to the company's financial condition, results of operations, or cash flows[153] Note 17. Revision of Previously Issued Financial Statements This note explains the revision of prior financial statements due to errors in reporting equity method investments in Flash Ventures - The company identified errors related to reporting and recording its interests in equity method investments in Flash Ventures, specifically unadjusted differences between Japanese GAAP and U.S. GAAP for certain lease-related transactions[156] - These errors resulted in differences in the equity in earnings from Flash Ventures recognized in Other income (expense), net, and the carrying value of the investments[156] - The errors were deemed immaterial to prior periods but material if corrected in the period detected, leading to the revision of previously reported financial information[43] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's perspective on Western Digital's financial condition, operational updates, financing activities, and detailed analysis of revenue, gross profit, and liquidity Our Company This section describes Western Digital as a leading provider of data storage devices based on NAND flash and hard disk drive technologies, serving Cloud, Client, and Consumer markets - Western Digital is a leading developer, manufacturer, and provider of data storage devices based on NAND flash and hard disk drive technologies[167] - The company's broad portfolio addresses Cloud, Client, and Consumer end markets[168] Key Developments This section outlines significant strategic and operational events, including the planned business separation, responses to macroeconomic conditions, a subsidiary sale agreement, recent financing activities, a sale-leaseback transaction, asset impairment charges, and the resolution of tax matters Separation of Business Units This section details the Board's plan to separate HDD and Flash business units into two independent public companies by the second half of calendar year 2024 - On October 30, 2023, the Board authorized a plan to separate the HDD and Flash business units into two independent public companies, targeting completion in the second half of calendar year 2024[170] - The separation aims to better position each business unit for innovative technology, growth opportunities, leadership, and efficient operations with distinct capital structures[170] Operational Update This section discusses macroeconomic impacts on demand and pricing, company measures to reduce expenses, and signs of recovery in supply-demand balance - Macroeconomic factors led to softened demand, supply-demand imbalance, and negative pricing, particularly in Flash[171] - The company implemented measures to reduce operating expenses, manage supply and inventory, and improve capital efficiency[171] - Signs of recovery in supply-demand balance began in the current quarter, with digital transformation expected to drive long-term growth[171] Agreement to Sell a Majority Interest in a Subsidiary This section describes the agreement to sell 80% of SanDisk Semiconductor (Shanghai) Co. Ltd. to JCET Management Co., Ltd., forming a joint venture - In March 2024, SanDisk China Limited agreed to sell 80% of its equity interest in SanDisk Semiconductor (Shanghai) Co. Ltd. (SDSS) to JCET Management Co., Ltd., forming a joint venture[174] - The transaction is subject to certain conditions, and post-closing agreements will include a shareholders agreement, a supply agreement for flash-based products, and an intellectual property license agreement[174] Financing Activities This section details recent financing activities, including drawing and repaying a Delayed Draw Term Loan, issuing convertible notes, and repurchasing existing notes - Drew $600 million from a Delayed Draw Term Loan in August 2023, repaid $300 million during 9M FY24, with the remaining balance maturing on June 28, 2024[175] - Issued $1.60 billion aggregate principal amount of 3.00% convertible senior notes due 2028 on November 3, 2023, with net proceeds of approximately $1.56 billion[176] - Repurchased approximately $508 million of existing 2024 Convertible Notes and settled the remaining $592 million on February 1, 2024[176] - Used $155 million of net proceeds from the 2028 Convertible Notes offering to purchase capped call contracts to hedge potential dilution[176] Sale-Leaseback This section describes the sale and leaseback of the Milpitas, California facility, generating net cash proceeds and recording a gain on the sale - Completed a sale and leaseback of its Milpitas, California facility in September 2023, receiving $191 million in net cash proceeds and recording an $85 million gain on the sale[179] - The lease terms include an annual rate of $16 million for the first year, increasing by 3% annually through January 1, 2039, with renewal options extending through December 2057[179] Asset Impairment and Contract Termination Costs This section outlines asset impairment charges and contract termination costs resulting from reassessed capacity development plans and project cancellations - Reassessed capacity development plans and canceled certain projects, including the Penang, Malaysia facility expansion, in Q1 FY24[180] - This resulted in a $94 million impairment of construction in progress and other assets, and $29 million for certain contract termination costs during the nine months ended March 29, 2024[180] Tax Resolution This section details final agreements with the IRS for tax years 2008-2015, including payments made and remaining liabilities - Reached final agreements with the IRS for tax years 2008-2012 and 2013-2015[181] - Made payments aggregating $523 million for tax and interest during the nine months ended March 29, 2024, for years 2008-2012[181] - A remaining liability of $182 million as of March 29, 2024, related to all years from 2008 through 2015, is expected to be paid within the next twelve months[181] Results of Operations This section analyzes the company's net revenue, gross profit, operating expenses, interest, and income tax for the three and nine months ended March 29, 2024, compared to prior periods Third Quarter and Nine Month Overview (Consolidated) This section provides a consolidated overview of net revenue, gross profit, operating income, and net income for the three and nine months ended March 29, 2024 Consolidated Financial Performance (Three Months Ended, in millions) | Metric | March 29, 2024 | March 31, 2023 | $ Change | % Change | | :----------------------------------- | :------------- | :------------- | :------- | :------- | | Revenue, net | $3,457 | $2,803 | $654 | 23% | | Gross profit | $1,001 | $286 | $715 | 250% | | Operating income (loss) | $273 | $(472) | $745 | (158)% | | Net income (loss) attributable to common shareholders | $113 | $(580) | $693 | (119)% | Consolidated Financial Performance (Nine Months Ended, in millions) | Metric | March 29, 2024 | March 31, 2023 | $ Change | % Change | | :----------------------------------- | :------------- | :------------- | :------- | :------- | | Revenue, net | $9,239 | $9,646 | $(407) | (4)% | | Gross profit | $1,592 | $1,795 | $(203) | (11)% | | Operating loss | $(533) | $(635) | $102 | (16)% | | Net loss attributable to common shareholders | $(881) | $(984) | $103 | (10)% | - Consolidated net revenue increased 23% for the three months ended March 29, 2024, but decreased 4% for the nine months ended March 29, 2024, compared to the prior year periods[183][185] - Operating income turned positive at $273 million for Q3 FY24, a significant improvement from an operating loss of $(472) million in Q3 FY23[183] Segment Information (Flash, HDD) This section details the operating performance, including revenue, gross profit, and gross margin, for the Flash and HDD segments Segment Operating Performance (Three Months Ended, in millions) | Metric | March 29, 2024 | March 31, 2023 | Change | % Change | | :----------------------------------- | :------------- | :------------- | :----- | :------- | | Flash Revenue | $1,705 | $1,307 | $398 | 30.5% | | Flash Gross Profit | $467 | $(65) | $532 | (818.5)% | | Flash Gross Margin | 27.4% | (5.0)% | 32.4 pp | | | HDD Revenue | $1,752 | $1,496 | $256 | 17.1% | | HDD Gross Profit | $545 | $363 | $182 | 50.1% | | HDD Gross Margin | 31.1% | 24.3% | 6.8 pp | | Segment Operating Performance (Nine Months Ended, in millions) | Metric | March 29, 2024 | March 31, 2023 | Change | % Change | | :----------------------------------- | :------------- | :------------- | :----- | :------- | | Flash Revenue | $4,926 | $4,686 | $240 | 5.1% | | Flash Gross Profit | $437 | $597 | $(160) | (26.8)% | | Flash Gross Margin | 8.9% | 12.7% | (3.8) pp | | | HDD Revenue | $4,313 | $4,960 | $(647) | (13.0)% | | HDD Gross Profit | $1,157 | $1,237 | $(80) | (6.5)% | | HDD Gross Margin | 26.8% | 24.9% | 1.9 pp | | - Flash revenue increased 30.5% for Q3 FY24, while HDD revenue increased 17.1% in the same period[187] - Flash gross profit significantly improved to $467 million in Q3 FY24 from a loss of $(65) million in Q3 FY23[187] Disaggregated Revenue (End Market, Geography) This section presents the company's revenue disaggregated by end market (Cloud, Client, Consumer) and geographic region for the periods presented Revenue by End Market (in millions) | End Market | Q3 FY24 | Q3 FY23 | 9M FY24 | 9M FY23 | | :--------- | :------ | :------ | :------ | :------ | | Cloud | $1,553 | $1,205 | $3,496 | $4,258 | | Client | $1,174 | $975 | $3,443 | $3,293 | | Consumer | $730 | $623 | $2,300 | $2,095 | Revenue by Geography (in millions) | Geography | Q3 FY24 | Q3 FY23 | 9M FY24 | 9M FY23 | | :-------- | :------ | :------ | :------ | :------ | | Asia | $1,740 | $1,353 | $4,990 | $4,533 | | Americas | $1,154 | $935 | $2,620 | $3,448 | | Europe, Middle East and Africa | $563 | $515 | $1,629 | $1,665 | - Cloud revenue increased 29% for Q3 FY24, Client revenue increased 20%, and Consumer revenue increased 17%[188] - Asia revenue increased 29% for Q3 FY24, Americas revenue increased 23%, and Europe, Middle East and Africa revenue increased 9%[188] Net Revenue Analysis This section analyzes changes in consolidated and segment net revenue, driven by exabytes shipped, pricing, and product mix for the periods presented - Consolidated net revenue increased 23% for Q3 FY24 due to growth in exabytes shipped and a better pricing environment, reflecting an improvement in the supply-demand balance[189] - Flash revenue increased 30% for Q3 FY24, driven by a 20% increase in exabytes sold and a 10% increase in average selling prices per gigabyte, due to improved demand[190] - HDD revenue increased 17% for Q3 FY24, resulting from a 25% increase in exabytes sold, partially offset by a 6% decline in average selling prices per gigabyte due to a shift in product mix[191] - Cloud revenue increased 29% for Q3 FY24, driven by higher shipments of high-capacity enterprise HDD products[192] - Client revenue increased 20% for Q3 FY24, primarily reflecting a 24% increase in average selling prices per gigabyte due to improved Flash pricing[193] - Consumer revenue increased 17% for Q3 FY24, driven by an increase in average selling prices per gigabyte due to improved Flash pricing and a more favorable product mix[194] Gross Profit and Gross Margin Analysis This section analyzes changes in consolidated and segment gross profit and gross margin, driven by pricing, underutilization charges, and product mix - Consolidated gross profit increased by $715 million for Q3 FY24, with gross margin increasing by 19 percentage points YoY, primarily due to better Flash pricing and lower unabsorbed manufacturing overhead costs[199] - Flash gross margin increased by approximately 32 percentage points YoY in Q3 FY24, driven by lower underutilization charges and higher average selling prices per gigabyte[199] - HDD gross margin increased by 7 percentage points YoY in Q3 FY24, due to lower underutilization charges and a better product mix[199] - Consolidated gross profit decreased by $203 million for 9M FY24, primarily driven by the decline in pricing, particularly in Flash[200] Operating Expenses Analysis This section analyzes changes in research and development, selling, general and administrative expenses, employee termination, asset impairment, and business separation costs - Research and development (R&D) expense increased $18 million for Q3 FY24, primarily due to higher variable compensation, partially offset by lower headcount and reduced project spending[201] - Selling, general and administrative (SG&A) expense decreased $39 million for Q3 FY24, mainly due to lower intangible amortization and strategic review costs, partially offset by increased compensation[202] - Employee termination, asset impairment, and other charges decreased $32 million for Q3 FY24, reflecting fewer restructuring actions[203] - Business separation costs were $23 million for Q3 FY24, primarily for outside service fees to support the planned separation of Flash and HDD businesses[204] Interest and Other Expense Analysis This section analyzes changes in interest and other expense, net, primarily due to interest rates, debt balances, and other income - Total interest and other expense, net, increased $39 million for Q3 FY24, primarily reflecting $28 million of higher interest expense due to increased interest rates and a higher outstanding debt balance[205] - For 9M FY24, total interest and other expense, net, increased $49 million, mainly due to $91 million higher interest expense, partially offset by $27 million higher other income and $15 million higher interest income[205] Income Tax Expense Analysis This section analyzes income tax expense, effective tax rates, and the impact of unrecognized tax benefits and R&D expense capitalization Income Tax Information (in millions) | Metric | Q3 FY24 | Q3 FY23 | 9M FY24 | 9M FY23 | | :----------------------------------- | :------ | :------ | :------ | :------ | | Income (loss) before taxes | $178 | $(528) | $(763) | $(816) | | Income tax expense | $43 | $43 | $74 | $159 | | Effective tax rate | 24% | (8)% | (10)% | (19)% | - The effective tax rate for Q3 FY24 was 24% (vs. (8)% in Q3 FY23) and for 9M FY24 was (10)% (vs. (19)% in 9M FY23)[208] - The effective tax rate for Q3 and 9M FY24 includes a net increase of $35 million and $48 million, respectively, to the liability for unrecognized tax benefits, partially offset by decreases from IRS calculation alignments[208] - The mandatory capitalization and amortization of R&D expenses, as required by the 2017 Act, is expected to materially increase cash tax payments in future profitable periods[210] Liquidity and Capital Resources This section discusses Western Digital's cash flow, material cash requirements, debt, off-balance sheet arrangements, and liquidity, including tax and R&D impacts Statements of Cash Flows Summary This section summarizes net cash provided by or used in operating, investing, and financing activities for the nine months ended March 29, 2024 Net Cash Provided by (Used in) Activities (Nine Months Ended, in millions) | Activity | March 29, 2024 | March 31, 2023 | | :----------------------------------- | :------------- | :------------- | | Operating activities | $(660) | $(340) | | Investing activities | $31 | $(620) | | Financing activities | $506 | $856 | | Effect of exchange rate changes on cash | $(6) | $(3) | | Net decrease in cash and cash equivalents | $(129) | $(107) | - Net cash used in operating activities increased to $(660) million for 9M FY24, largely due to $523 million in tax and interest payments related to IRS settlements[213] - Net cash provided by investing activities significantly improved to $31 million for 9M FY24 from $(620) million used in 9M FY23[213] - The company expects capital expenditures for 2024 to be less than 2023, reflecting efforts to scale back and consolidate production lines[216] - Management believes current cash and available revolving credit facility will be sufficient to meet working capital, debt, and capital expenditure needs for at least the next twelve months and the foreseeable future[217] Short- and Long-term Liquidity (Material Cash Requirements) This section details the company's material cash requirements, including long-term debt, interest, Flash Ventures commitments, and mandatory deemed repatriation tax Material Cash Requirements as of March 29, 2024 (in millions) | Category | Total | Remaining Three Months of 2024 | 2-3 Years (2025-2026) | 4-5 Years (2027-2028) | More than 5 Years (Beyond 2028) | | :----------------------------------- | :---- | :----------------------------- | :-------------------- | :-------------------- | :------------------------------ | | Long-term debt, including current portion | $7,825 | $338 | $2,600 | $3,887 | $1,000 | | Interest on debt | $1,151 | $79 | $734 | $238 | $100 | | Flash Ventures related commitments | $2,463 | $322 | $1,576 | $572 | $(7) | | Operating leases | $593 | $17 | $135 | $112 | $329 | | Purchase obligations and other commitments | $522 | $45 | $268 | $79 | $130 | | Mandatory deemed repatriation tax | $466 | $0 | $466 | $0 | $0 | | Total | $13,020 | $801 | $5,779 | $4,888 | $1,552 | - Total material cash requirements were $13,020 million as of March 29, 2024, with $801 million due in the remaining three months of 2024[225] - Long-term debt, including the current portion, accounts for $7,825 million of the total cash requirements[225] - Flash Ventures related commitments represent $2,463 million of the total, and mandatory deemed repatriation tax obligations total $466 million, payable in 2025 and 2026[225] Operating Activities Cash Flow Analysis This section analyzes net cash used for changes in operating assets and liabilities and improvements in the cash conversion cycle - Net cash used for changes in operating assets and liabilities was $405 million for 9M FY24, compared to $296 million for 9M FY23, largely reflecting payments made on the IRS matter[220] - The cash conversion cycle improved to 103 days for Q3 FY24 from 139 days for Q3 FY23[220] - Days sales outstanding (DSO) decreased by 5 days, days in inventory (DIO) decreased by 25 days, and days payable outstanding (DPO) increased by 6 days for Q3 FY24 compared to the prior year period[221] Investing Activities Cash Flow Analysis This section analyzes net cash provided by investing activities, driven by Flash Ventures proceeds and capital expenditures - Net cash provided by investing activities was $31 million for 9M FY24, a significant improvement from $620 million used in 9M FY23[222] - This was primarily driven by $207 million in net proceeds from Flash Ventures activity, partially offset by $176 million in capital expenditures, net of proceeds from asset disposals (including the Milpitas sale-leaseback)[222] Financing Activities Cash Flow Analysis This section analyzes net cash provided by financing activities, including debt issuance, repayments, and capped call purchases - Net cash provided by financing activities was $506 million for 9M FY24, down from $856 million for 9M FY23[223] - Sources included $2.50 billion from the issuance of 2028 Convertible Notes, the drawdown of the Delayed Draw Term Loan, and draws on the revolving credit facility[223] - Uses included $505 million to repurchase 2024 Convertible Notes, $1.27 billion for debt repayments, and $155 million for the purchase of capped calls[223] Off-Balance Sheet Arrangements This section confirms the absence of material off-balance sheet financing arrangements, except for Flash Ventures commitments and indemnification provisions - The company has no other material off-balance sheet financing arrangements or liabilities, guarantee contracts, or retained/contingent interests in transferred assets, other than Flash Ventures commitments and certain indemnification provisions[224] - Flash Ventures and the Unis Venture are the only variable interest entities in which the company has an interest[224] Dividend Rights This section states that the Series A Preferred Stock is entitled to cumulative preferred dividends - The Series A Preferred Stock, issued in January 2023, is entitled to cumulative preferred dividends[226] Debt This section details liability-management actions, convertible note terms, available credit, and compliance with financial covenants - The company undertook several liability-management actions in Q2 and Q3 FY24, including issuing 2028 Convertible Notes, repurchasing/settling 2024 Convertible Notes, and partially repaying the Delayed Term Loan[227] - The 2028 Convertible Notes are convertible at the option of any holder from August 15, 2028, or earlier under certain conditions, with the company having the option to settle in cash, common stock, or a combination[228] - As of March 29, 2024, $2.24 billion was available for borrowing under the revolving credit facility until January 2027[229] - The company was in compliance with all financial covenants (leverage ratio and minimum liquidity) for its credit facilities as of March 29, 2024[230] Flash Ventures This section describes the company's guarantees for Flash Ventures' equipment lease agreements and compliance with covenants - The company guarantees half or all of the outstanding obligations under Flash Ventures' equipment lease agreements[231] - As of March 29, 2024, the company was in compliance with all covenants under these Japanese lease facilities[231] Purchase Obligations and Other Commitments This section describes the company's purchase orders and long-term agreements with fixed future commitments - The company enters into purchase orders for components (generally cancellable prior to shipment) and long-term agreements with fixed future commitments contingent on certain conditions[232] Mandatory Deemed Repatriation Tax This section details estimated mandatory deemed repatriation tax obligations and their payment schedule Mandatory Deemed Repatriation Tax Obligations (March 29, 2024, in millions) | Year | Amount | | :--- | :----- | | 2025 | $265 | | 2026 | $201 | | Total | $466 | - Estimated mandatory deemed repatriation tax obligations total $466 million, payable in 2025 and 2026[233] Unrecognized Tax Benefits This section details the liability for unrecognized tax benefits, including accrued interest and penalties, and potential cash payments - The liability for unrecognized tax benefits (excluding accrued interest and penalties) was $708 million as of March 29, 2024, with accrued interest and penalties of $173 million[234] - Approximately $719 million of the aggregate unrecognized tax benefits, including interest and penalties, could result in potential cash payments[234] - A remaining liability of $182 million related to IRS settlements for years 2008-2015 is expected to be paid within the next twelve months[235] - The company expects to realize approximately $164 million in reductions to mandatory deemed repatriation tax obligations and tax savings from interest deductions due to these settlements[236] Mandatory Research and Development Expense Capitalization This section highlights the impact of the 2017 Act's R&D expense capitalization requirement on future cash tax payments - Since the beginning of 2023, the 2017 Act requires capitalization and amortization of R&D expenses, which is expected to result in materially higher cash tax payments in future profitable periods if not repealed or modified[237] Foreign Exchange Contracts This section describes the company's use of foreign exchange contracts to hedge against currency fluctuations on assets, liabilities, and commitments - The company purchases 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[238] Indemnifications This section describes the company's indemnification provisions to various parties and the historical immateriality of associated costs - The company provides indemnifications to customers, vendors, lessors, business partners, and officers/directors for various matters, including breach of agreements, products/services, environmental compliance, or intellectual property infringement claims[239] - The maximum potential amount under these indemnification agreements is not determinable, but historically, the company has not incurred material costs[240] Recent Accounting Pronouncements This section refers to Note 2 of the Condensed Consolidated Financial Statements for details on recently issued and adopted accounting pronouncements - For a description of recently issued and adopted accounting pronouncements, refer to Part I, Item 1, Note 2 of the Condensed Consolidated Financial Statements[241] Critical Accounting Policies and Estimates This section confirms no material changes in the company's critical accounting policies and estimates since the prior annual report - There have been no material changes in the company's critical accounting policies and estimates from those disclosed in its Annual Report on Form 10-K for the year ended June 30, 2023[243] Item 3. Quantitative and Qualitative Disclosures About Market Risk This section details the company's exposure to market risks, specifically foreign currency risk and interest rate risk, and provides sensitivity analyses for potential financial impacts Foreign Currency Risk This section details the company's exposure to foreign currency risk and provides a sensitivity analysis for potential financial impacts - 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 $255 million as of March 29, 2024 (compared to $285 million at June 30, 2023)[245] Interest Rate Risk This section details the company's exposure to interest rate risk and provides a sensitivity analysis for potential financial impacts - As of March 29, 2024, the company had $2.9 billion in variable rate debt outstanding[246] - A one percent increase in the variable rate of interest would increase annual interest expense by $29 million[246] Item 4. Controls and Procedures This section reports on the effectiveness of the company's disclosure controls and procedures and confirms no material changes in internal controls over financial reporting during the third quarter of fiscal year 2024 Evaluation of Disclosure Controls and Procedures This section reports on the effectiveness of the company's disclosure controls and procedures - The Chief Executive Officer and Chief Financial Officer concluded that the company's disclosure controls and procedures were effective as of March 29, 2024[247] Changes in Internal Controls over Financial Reporting This section confirms no material changes in internal controls over financial reporting during the third quarter of fiscal year 2024 - There has been no change in internal control over financial reporting during the third quarter of fiscal year 2024 that has materially affected, or is reasonably likely to materially affect, internal control over financial reporting[248] PART II. OTHER INFORMATION Item 1. Legal Proceedings This section refers to the detailed disclosures on tax-related legal proceedings in Note 12 of the financial statements Item 1A. Risk Factors This section confirms no material changes to previously disclosed risk factors, while acknowledging the potential for additional unknown risks Item 5. Other Information This section provides updates on insider trading arrangements and the addition of new guarantors for the company's debt obligations Insider Trading Arrangements This section reports the termination of a Rule 10b5-1 Plan by a former Executive Vice President - Michael Ray, a former Executive Vice President, Chief Legal Officer, and Secretary, terminated a Rule 10b5-1 Plan on February 23, 2024[253] Additional Guarantors This section details the addition of SanDisk Corporation and SanDisk Technologies, Inc. as unconditional guarantors for the company's debt obligations - On April 26, 2024, SanDisk Corporation (SDC) and SanDisk Technologies, Inc. (SDT) became unconditional guarantors for the company's revolving credit facility, Term Loan A-2, and Delayed Draw Term Loan[254] - The Additional Guarantors will also guarantee obligations under the 4.750% Senior Notes due 2026 and the 2028 Convertible Notes[255] - The obligations under the credit facilities and certain senior notes will be secured by a first-priority lien on substantially all the assets and properties of the Additional Guarantors[256] Item 6. Exhibits This section lists all exhibits filed with or incorporated by reference into the Quarterly Report on Form 10-Q, including corporate governance documents, joint venture agreements, certifications, and XBRL data files SIGNATURES This section contains the required signatures for the Quarterly Report on Form 10-Q, confirming its due authorization and filing