Western Digital Corporation

01/30/2026 | Press release | Distributed by Public on 01/30/2026 05:02

Quarterly Report for Quarter Ending January 2, 2026 (Form 10-Q)

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 2025 Annual Report on Form 10-K. 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 a leading developer, manufacturer, and provider of data storage devices and solutions based on hard disk drive ("HDD") technology. We leverage our capability in the HDD industry primarily for the cloud and hyperscale data center markets. HDDs are critical components in the worldwide data infrastructure market, powering the digital economy. HDDs provide reliable, cost-effective, high-capacity storage needs for a wide range of applications, ranging from cloud data centers, enterprise storage systems, edge computing, video surveillance, to client and consumer.
Our broad portfolio of technology and products addresses our customers' storage needs through multiple end markets: "Cloud," "Client" and "Consumer". Cloud is comprised primarily of products for public or private cloud environments and enterprise customers. Through the Client end market, we provide our OEM and channel customers a broad array of high-performance HDD solutions across desktop and notebooks. The Consumer end market provides a 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.
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 year 2026, which will end on July 3, 2026, will be comprised of 53 weeks, with the first quarter consisting of 14 weeks and the remaining quarters consisting of 13 weeks each. Fiscal year 2025, which ended on June 27, 2025, was comprised of 52 weeks, with all quarters presented consisting of 13 weeks.
Key Developments
Separation of Business Units
On February 21, 2025 (the "Separation Date"), we completed the separation of our HDD and Flash business units (the "Separation") to create two independent public companies, with Western Digital continuing our existing HDD business and Sandisk Corporation ("Sandisk"), formerly a wholly-owned subsidiary of the Company, holding the Flash business. We believe the Separation has better positioned us as a pure-play HDD company that can execute innovative technology and product development, capitalize on unique growth opportunities, extend our leadership position, operate more efficiently, and pursue capital allocation strategies to maximize long-term shareholder value. As part of the Separation, we initially retained 28.8 million shares of Sandisk common stock, of which 21.3 million shares were used in the three months ended June 27, 2025 in a tax-free exchange to reduce approximately $800 million principal amount of our term loan A-3. We expect to monetize our remaining stake in Sandisk to further reduce our debt within one year from the Separation Date.
Prior period information provided herein is presented on a continuing operations basis to reflect the impact of the Separation. See Part I, Item 1, Note 4, Discontinued Operations, of the Notes to Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q for additional information regarding the Separation.
Macroeconomic Conditions and Outlook
The increasing long-term demand for data storage in the cloud is benefiting our HDD business. The adoption of artificial intelligence ("AI") and workloads driven by hybrid data is driving additional growth in data storage as well. This creates an accelerated demand for high-capacity drives, resulting in greater manufacturing complexity and longer production lead times. In response, customers are partnering with us earlier to support their future growth requirements and are extending the duration of their commercial arrangements.
The United States has been making changes to its trade policy, including increasing tariffs on imports, in some cases significantly. Several of these tariff actions have been followed by announcements of limited exemptions, temporary pauses or other changes. These actions have caused substantial uncertainty and have also resulted in retaliatory measures. Our business and results of operations have not been materially impacted through the second quarter of 2026 as a result of these tariff actions, but we are actively monitoring developments and exploring opportunities to mitigate potential future tariff and retaliatory actions. For additional information, please see Part I, Item 1A, Risk Factors, included in our 2025 Annual Report on Form 10-K.
Results of Operations
Second 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
January 2,
2026 		December 27,
2024 		$ Change % Change
($ in millions)
Revenue, net $ 3,017 100.0 % $ 2,409 100.0 % $ 608 25 %
Cost of revenue 1,637 54.3 1,502 62.3 135 9
Gross profit 1,380 45.7 907 37.7 473 52
Operating expenses:
Research and development 289 9.6 225 9.3 64 28
Selling, general and administrative 128 4.2 132 5.5 (4) (3)
Business realignment charges 55 1.8 (10) (0.4) 65 (650)
Total operating expenses 472 15.6 347 14.4 125 36
Operating income
908 30.1 560 23.2 348 62
Interest and other income (expense):
Interest income 12 0.4 9 0.4 3 33
Interest expense (54) (1.8) (93) (3.9) 39 (42)
Gain on retained interest in Sandisk
1,103 36.6 - - 1,103 n/a
Other income (expense), net (7) (0.2) (10) (0.4) 3 30
Total interest and other income (expense), net 1,054 34.9 (94) (3.9) 1,148 (1,221)
Income before taxes 1,962 65.0 466 19.3 1,496 321
Income tax expense
120 4.0 - - 120 n/a
Net income from continuing operations
$ 1,842 61.1 % $ 466 19.3 % $ 1,376 295 %
(1) Percentages may not total due to rounding.
Six Months Ended
January 2,
2026 		December 27,
2024 		$ Change % Change
($ in millions)
Revenue, net $ 5,835 100.0 % $ 4,621 100.0 % $ 1,214 26 %
Cost of revenue 3,228 55.3 2,908 62.9 320 11
Gross profit 2,607 44.7 1,713 37.1 894 52
Operating expenses:
Research and development 583 10.0 487 10.5 96 20
Selling, general and administrative 266 4.6 336 7.3 (70) (21)
Litigation matter - - 3 0.1 (3) (100)
Business realignment charges 58 1.0 (7) (0.2) 65 (929)
Total operating expenses 907 15.5 819 17.7 88 11
Operating income 1,700 29.1 894 19.3 806 90
Interest and other income (expense):
Interest income 29 0.5 16 0.3 13 81
Interest expense (113) (1.9) (192) (4.2) 79 (41)
Gain on retained interest in Sandisk 1,714 29.4 - - 1,714 n/a
Other income (expense), net (31) (0.5) (9) (0.2) (22) 244
Total interest and other income (expense), net 1,599 27.4 (185) (4.0) 1,784 (964)
Income before taxes 3,299 56.5 709 15.3 2,590 365
Income tax expense 275 4.7 90 1.9 185 206
Net income from continuing operations $ 3,024 51.8 % $ 619 13.4 % $ 2,405 389 %
(1) Percentages may not total due to rounding.
The following table sets forth for the periods presented, summary information regarding our disaggregated revenue:
Three Months Ended Six Months Ended
January 2,
2026 		December 27,
2024 		January 2,
2026 		December 27,
2024
(in millions)
Revenue by end market
Cloud $ 2,673 $ 2,096 $ 5,183 $ 4,005
Client 176 140 322 279
Consumer 168 173 330 337
Total revenue
$ 3,017 $ 2,409 $ 5,835 $ 4,621
Revenue by geography(1)
Americas $ 1,291 $ 1,039 $ 2,391 $ 2,286
Asia 1,117 910 2,292 1,596
Europe, Middle East and Africa 609 460 1,152 739
Total revenue
$ 3,017 $ 2,409 $ 5,835 $ 4,621
(1) Net revenue is attributed to geographic regions based on the ship-to location of the customer.
Net Revenue
Comparison of Three and Six Months Ended January 2, 2026 to Three and Six Months Ended December 27, 2024
Net revenue increased by 25% for the three months ended January 2, 2026 from the comparable period in the prior year, driven by a 22% increase in exabytes sold and a 2% increase in average selling price per exabyte. The increase in exabytes sold was driven by strong demand for our high-capacity enterprise products. The increase in average selling price per exabyte was due to improved pricing on our higher capacity drives. Net revenue increased by 26% for the six months ended January 2, 2026 from the comparable period in the prior year, driven by a 23% increase in exabytes sold and a 3% increase in average selling price per exabyte. The increase in exabytes sold and increase in average selling price per exabyte were attributable to the same factors noted for the three-month period above.
Cloud revenue increased by 28% for the three months ended January 2, 2026 from the comparable period in the prior year, driven by a 24% increase in exabytes sold and a 3% increase in average selling price per exabyte. The increase in exabytes sold was driven by strong demand for our high-capacity enterprise products. The increase in average selling price per exabyte was due to improved pricing on our higher capacity drives. Cloud revenue increased by 29% for the six months ended January 2, 2026 from the comparable period in the prior year, driven by a 25% increase in exabytes sold and a 3% increase in average selling price per exabyte. The increase in exabytes sold and increase in average selling price per exabyte were attributable to the same factors noted for the three-month period above.
Client revenue increased by 26% for the three months ended January 2, 2026 from the comparable period in the prior year, driven by a 17% increase in average selling price per exabyte and a 7% increase in exabytes sold. The increase in average selling price per exabyte was due to a shift in product mix to our higher capacity drives. The increase in exabytes sold was driven by strong demand. Client revenue increased by 15% for the six months ended January 2, 2026 from the comparable period in the prior year, driven by a 18% increase in average selling price per exabyte, partially offset by a 2% decrease in exabytes sold. The increase in average selling price per exabyte was due to a shift in product mix to our higher capacity drives. The decrease in exabytes sold was driven by lower demand in the first three months of the year.
Consumer revenue decreased by 3% for the three months ended January 2, 2026 from the comparable period in the prior year, driven by a 5% decrease in exabytes sold, partially offset by a 3% increase in average selling price per exabyte, both of which reflect variations in product mix and demand. Consumer revenue decreased by 2% for the six months ended January 2, 2026 from the comparable period in the prior year, driven by a 2% decrease in average selling price per exabyte while volume remained relatively flat, which reflects routine variations in product mix and demand.
The mix of net revenue by geography for the three months ended January 2, 2026 was relatively consistent with the comparable period in the prior year. The mix of net revenue by geography for the six months ended January 2, 2026 compared to the comparable period in the prior year reflects higher revenue in the Asia and Europe, Middle East and Africa regions as customers expanded data center capacity in these regions in the first three months of the year.
Our top 10 customers accounted for 76% and 77%, respectively, of our net revenue for the three and six months ended January 2, 2026, compared to 67% and 65%, respectively, of our net revenue for the three and six months ended December 27, 2024. For the three months ended January 2, 2026, three customers accounted for 15%, 14%, and 14%, respectively, of our net revenue, and for the three months ended December 27, 2024, two customers accounted for 18% and 13%, respectively, of our net revenue. For the six months ended January 2, 2026, three customers accounted for 17%, 15%, and 14%, respectively, of our net revenue, and for the six months ended December 27, 2024, two customers accounted for 18% and 11%, respectively, of our net revenue.
Gross Profit and Gross Margin
Gross profit increased by $473 million for the three months ended January 2, 2026 from the comparable period in the prior year, due to an increased volume of shipments, a lower cost structure on our newer generation products and improved pricing on our higher capacity drives. Gross margin increased by 8 percentage points year over year, primarily due to a lower cost structure on our newer generation products and improved pricing on our higher capacity drives. Gross profit increased by $894 million for the six months ended January 2, 2026 from the comparable period in the prior year and gross margin increased by 8 percentage points year over year, primarily due to the same factors noted for the three-month period above.
Operating Expenses
Research and development ("R&D") expense increased by $64 million for the three months ended January 2, 2026 from the comparable period in the prior year. The increase was attributable to higher variable compensation, as a result of our company performance and further investment for innovation, technology and product development. R&D expense increased by $96 million for the six months ended January 2, 2026 from the comparable period in the prior year. The increase was driven by the same factors noted for the three-month period above. In future periods, we expect modest increases in R&D as we continue to innovate and develop higher capacity and performance HDD.
Selling, general and administrative ("SG&A") expense was relatively flat for the three months ended January 2, 2026 from the comparable period in the prior year, which reflects approximately $30 million of higher variable compensation, as a result of our company performance, offset by general corporate overhead roles in the prior year that have since transferred to Sandisk and were not backfilled after the Separation. SG&A expense decreased by $70 million for the six months ended January 2, 2026 from the comparable period in the prior year. The decrease reflects $37 million of lower compensation and benefits in the first three months of the year, which was driven by certain general corporate overhead roles in the prior year that have since transferred to Sandisk and were not backfilled after the Separation. The decrease also reflects $30 million of lower service fees resulting from reduced marketing activities and legal costs in the first three months of the year.
For information regarding litigation matters, see Part I, Item 1, Note 14, Legal Proceedings,of the Notes to Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q.
For information regarding Business realignment charges, see Part I, Item 1, Note 10, Business Realignment Charges,of the Notes to Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q.
Interest and Other Income (Expense)
Total interest and other income (expense), changed by $1.15 billion for the three months ended January 2, 2026 from the comparable period in the prior year. The change reflects an unrealized gain of $1.10 billion on our retained interest in Sandisk based on the mark-to-market value as of January 2, 2026, and lower interest expense of $39 million, which reflects the reduction in our debt. Total interest and other income (expense), changed by $1.78 billion for the six months ended January 2, 2026 from the comparable period in the prior year. The change primarily reflects an unrealized gain of $1.71 billion on our retained interest in Sandisk based on the mark-to-market value as of January 2, 2026, and lower interest expense of $79 million, which reflects the reduction in our debt.
Income Taxes
Previously, the Tax Cuts and Jobs Act of 2017 ("TCJA") eliminated the ability to deduct R&D expenditures in the year incurred, requiring capitalization and amortization under Internal Revenue Code Section 174. On July 4, 2025, the One Big Beautiful Bill Act of 2025 ("OBBBA") was signed into law, which includes broad tax reform provisions that extend and modify key elements of the TCJA. Notably, the new legislation now allows an option for the immediate expensing of domestic R&D expenditures, beginning with 2026. The legislation also includes favorable modifications to international tax provisions, including changes to the Global Intangible Low-Taxed Income regime and enhancements to the Foreign-Derived Deduction Eligible Income ("FDDEI") deduction that will become effective for us in 2027.
On August 16, 2022, the Inflation Reduction Act of 2022 was signed into law, which contained, among other things, a corporate alternative minimum tax ("CAMT") of 15% on corporations with three-year average annual adjusted financial statement income ("AFSI") exceeding $1.0 billion. Although CAMT became effective for us beginning with 2024, we were not subject to CAMT for 2024 and 2025. We do not expect to be subject to CAMT in 2026 as our annual average AFSI did not exceed $1.0 billion for the preceding three-year period.
On December 20, 2021, the Organization for Economic Co-operation and Development G20 ("OECD/G20") Inclusive Framework on Base Erosion and Profit Shifting released Model Global Anti-Base Erosion rules under Pillar Two. Several non-U.S. jurisdictions have either enacted legislation or announced their intention to enact future legislation to adopt certain or all components of Pillar Two, also known as Global Minimum Tax ("GMT"). For 2026, we are subject to GMT in Malaysia, Thailand, and the Philippines.
The following table presents our Income tax expense and the effective tax rate:
Three Months Ended Six Months Ended
January 2,
2026 		December 27,
2024 		January 2,
2026 		December 27,
2024
($ in millions)
Income before taxes $ 1,962 $ 466 $ 3,299 $ 709
Income tax expense
120 - 275 90
Effective tax rate 6% -% 8% 13%
The primary drivers of the difference between the effective tax rate for the three and six months ended January 2, 2026 and the U.S. Federal statutory rate of 21% are the relative mix of earnings and losses by jurisdiction, the deduction for FDDEI, tax credits, and the gain on the retained interest in Sandisk being tax-free due to the Separation of the Flash business. These resulted in decreases to our effective tax rate below the U.S. Federal statutory rate for the three and six months ended January 2, 2026. Our income tax provision for the three and six months ended January 2, 2026 includes GMT for Malaysia as well as Thailand and the Philippines, countries for which we maintain tax holidays.
The primary drivers of the difference between the effective tax rate for the three and six months ended December 27, 2024 and the U.S. Federal statutory rate of 21% were the relative mix of earnings and losses by jurisdiction, tax credits, and tax holidays in Thailand and the Philippines. In addition, the effective tax rate for the six months ended December 27, 2024 includes the discrete effect of a net decrease of $30 million to the liability for unrecognized tax benefits, which includes interest and offsetting tax benefits, as a result of adjustments to align with U.S. Internal Revenue Service ("IRS") calculations.
Liquidity and Capital Resources
The following table summarizes our statements of cash flows. Cash flows for the prior year period are presented on a consolidated basis and activity related to discontinued operations has not been segregated. See Part I, Item 1, Note 4, Discontinued Operations, of the Notes to Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q for additional cash flow information related to our discontinued operations.
Six Months Ended
January 2,
2026 		December 27,
2024
(in millions)
Net cash provided by (used in):
Operating activities $ 1,417 $ 437
Investing activities (173) 78
Financing activities (1,381) (103)
Effect of exchange rate changes on cash (2) -
Net increase (decrease) in cash and cash equivalents $ (139) $ 412
In August 2024, we filed a shelf registration statement (the "Shelf Registration Statement") with the Securities and Exchange Commission that expires in August 2027. The Shelf Registration Statement allows us to offer and sell shares of common stock, preferred stock, warrants, and debt securities. We may use the Shelf Registration Statement or other capital sources, including other offerings of equity or debt securities or the credit markets, to satisfy future financing needs, including planned or unanticipated capital expenditures, investments, debt repayments or other expenses. Any such additional financing will be subject to market conditions and may not be available on terms acceptable to us or at all.
We currently expect our capital expenditures for 2026 to be approximately 4% to 6% of our net revenue.
We believe our cash and cash equivalents and our available 2027 Revolving Credit Facility (as defined below) will be sufficient to meet our working capital, debt, dividend and capital expenditure needs for at least the next twelve months and for the foreseeable future thereafter. We believe we can also access the various debt and equity capital markets to further supplement our liquidity position if necessary. Our ability to sustain our working capital position is subject to a number of risks that we discuss in Part II, Item 1A, Risk Factors, in this Quarterly Report on Form 10-Q and in Part I, Item 1A, Risk Factors, in our 2025 Annual Report on Form 10-K.
A total of $1.35 billion and $0.98 billion of our cash and cash equivalents was held by our foreign subsidiaries as of January 2, 2026 and June 27, 2025, respectively. There are no material tax consequences that were not previously accrued for on the repatriation of this cash.
Our cash equivalents are primarily invested in money market funds that invest in U.S. Treasury securities and U.S. Government agency securities. In addition, from time to time, we also invest directly in certificates of deposit, asset-backed securities and corporate and municipal notes and bonds.
Operating Activities
Net cash provided by operating activities primarily consists of net income, adjusted for non-cash charges, plus or minus changes in operating assets and liabilities. Net cash used for changes in operating assets and liabilities was $275 million for the six months ended January 2, 2026, compared to $1.04 billion for the six months ended December 27, 2024. The year over year decrease largely reflects a $232 million improvement in timing and collection of accounts receivable, a $127 million improvement from accrued compensation resulting from amount and timing of payment of variable compensation, and a $906 million improvement in other assets and liabilities driven by the timing of recognition and realization of income taxes receivable. These were partially offset by a $520 million increase in cash used driven by the timing of recognition and payment of income taxes.
Investing Activities
Net cash used in investing activities for the six months ended January 2, 2026 primarily consisted of $165 million in capital expenditures. Net cash provided by investing activities for the six months ended December 27, 2024 primarily consisted of $191 million in net proceeds from our sale of a majority interest in one of our subsidiaries and $92 million in net proceeds from activity related to Flash Ventures, partially offset by $208 million in capital expenditures, net of proceeds from disposals of assets.
Financing Activities
Net cash used in financing activities for the six months ended January 2, 2026 primarily consisted of $1.17 billion for share repurchases, $87 million for dividends on our common stock and Preferred Shares, $95 million for taxes paid on vested stock awards under employee stock plans, and $63 million for scheduled repayments on our term loan. These uses were partially offset by $32 million of proceeds from the issuance of stock under employee stock plans. Net cash used in financing activities for the six months ended December 27, 2024 primarily consisted of $225 million for repayment of amounts borrowed under the revolving credit facility and scheduled repayments on our term loan and $80 million for taxes paid on vested stock awards under employee stock plans, partially offset by $150 million of proceeds from drawing on the revolving credit facility and $52 million of proceeds from the issuance of stock under employee stock plans.
Off-Balance Sheet Arrangements
Other than certain indemnification provisions (see "Short- and Long-term 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, we do not have an interest in, or relationships with, any variable interest entities.
Short- and Long-term Liquidity
Material Cash Requirements
The following is a summary of our known material cash requirements as of January 2, 2026. In addition, see the discussions further below related to liability for unrecognized tax benefits, litigation matters, cash dividend program, dividend rights with respect to the Preferred Shares, global minimum tax, foreign exchange contracts and indemnifications.
Total 1 Year (Remaining Six Months of 2026) 2-3 Years (2027-2028) 4-5 Years (2029-2030) More than 5 Years (Beyond 2030)
(in millions)
Long-term debt, including current portion(1)
$ 4,686 $ 2,163 $ 1,523 $ 500 $ 500
Interest on debt 394 95 199 69 31
Operating leases 171 19 64 39 49
Purchase obligations and other commitments 88 32 56 - -
Total $ 5,339 $ 2,309 $ 1,842 $ 608 $ 580
(1)Principal portion of debt, excluding issuance costs.
Liability for Unrecognized Tax Benefits
As of January 2, 2026, the liability for unrecognized tax benefits (excluding accrued interest and penalties) was $607 million. 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 January 2, 2026 was $97 million. Of these amounts, approximately $130 million could result in potential cash payments to be made within the next twelve months.
Litigation Matters
For additional information on our litigation matters, see Part I, Item 1, Note 14,Legal Proceedings, of the Notes to Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q.
Cash Dividend Program
On April 29, 2025, our Board of Directors authorized the adoption of a cash dividend program. Under the cash dividend program, holders of our common stock will receive dividends when and as declared by our Board of Directors. During the three months ended January 2, 2026, we paid cash dividends of $0.125 per share of our outstanding common stock, totaling $43 million, plus $1 million paid to holders of our Preferred Shares in accordance with their participation rights. During the six months ended January 2, 2026, we paid aggregate cash dividends of $0.225 per share of our outstanding common stock, totaling $77 million, plus $2 million paid to holders of our Preferred Shares in accordance with their participation rights.
Subsequent to quarter-end, on January 28, 2026, our Board of Directors declared a cash dividend of $0.125 per share of our common stock, which will be paid on March 18, 2026 to our shareholders of record as of the close of business on March 5, 2026.
We may modify, suspend, or cancel our cash dividend program in any manner and at any time. The amount of future dividends under our cash dividend program, and the declaration and payment thereof, will be based upon all relevant factors, including our financial position, results of operations, cash flows, capital requirements and restrictions under our Loan Agreement and other financing agreements, and shall be in compliance with applicable law.
Dividend Rights
As of January 2, 2026, 235,000 shares of our Preferred Shares remained outstanding. These shares are entitled to cumulative preferred dividends and will also participate in any dividends declared for common shareholders on an as-converted equivalent basis. See Part II, Item 8, Note 12, Shareholders' Equity and Convertible Preferred Stock,of the Notes to Consolidated Financial Statements in our 2025 Annual Report on Form 10-K and Part I, Item 1, Note 12, Shareholders' Equity and Convertible Preferred Stock, of the Notes to Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q for more information regarding the dividend provisions.
Debt
As described in Part I, Item 1, Note 7, Debt, of the Notes to Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q, the Company issued $1.60 billion aggregate principal amount of convertible senior notes in November 2023, which bear interest at an annual rate of 3.00% and mature on November 15, 2028 (the "2028 Convertible Notes"). The 2028 Convertible Notes are convertible at the option of any holder beginning August 15, 2028 at a conversion price of approximately $37.74 per share of common stock (as adjusted in accordance with the indenture as a result of the Separation and the payment of dividends on the Company's common stock). Prior to August 15, 2028, if the trading price of our common stock remains above 130% of the conversion price for at least 20 trading days (whether or not consecutive) during the 30 consecutive trading-day period prior to the end of a calendar quarter, holders of the 2028 Convertible Notes would have the right to convert the 2028 Convertible Notes during the next succeeding calendar quarter. The 2028 Convertible Notes are also convertible prior to August 15, 2028 upon the occurrence of certain corporate events. Upon any conversion of the 2028 Convertible Notes, we will pay cash for the aggregate principal amount of the notes to be converted and pay or deliver, as the case may be, cash, shares of our common stock or a combination thereof, at our election, in respect of the remainder, if any, of our conversion obligation in excess of the aggregate principal amount of the notes being converted. On or after November 15, 2026, we may redeem for cash, at par plus accrued interest, all or any portion of the 2028 Convertible Notes, at our option, if the last reported sale price of our common stock has been at least 130% of the conversion price then in effect for at least 10 trading days during any 20 consecutive trading day period immediately preceding the date of our redemption notice.
The sale price conditional conversion feature of the 2028 Convertible Notes was triggered during the calendar quarter ended December 31, 2025 and, accordingly, the holders of the 2028 Convertible Notes have the right to convert the notes during the succeeding calendar quarter ending March 31, 2026. As a result, the 2028 Convertible Notes have been classified in Current portion of long-term debt in the Condensed Consolidated Financial Statements as of January 2, 2026. The Company will continue to evaluate the conversion feature quarterly to determine if the 2028 Convertible Notes remain convertible in future periods.
In addition to our outstanding debt, as of January 2, 2026, we had $1.25 billion available for borrowing under our revolving credit facility maturing in January 2027 (the "2027 Revolving Credit Facility"), subject to customary conditions under the Loan Agreement. The agreements governing our credit facilities each include limits on secured indebtedness and certain types of unsecured subsidiary indebtedness and require us and certain of our subsidiaries to provide guarantees and collateral to the extent the conditions providing for such guarantees and collateral are met. The Loan Agreement requires us to comply with a financial leverage ratio covenant. As of January 2, 2026, we were in compliance with the financial covenant. Additional information regarding our indebtedness, including information about availability under our 2027 Revolving Credit Facility and the principal repayment terms, interest rates, covenants, collateral and other key terms of our outstanding indebtedness, is included in Part II, Item 8, Note 8, Debt, of the Notes to Consolidated Financial Statements included in our 2025 Annual Report on Form 10-K and Note 7, Debt, of the Notes to Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q.
We may issue additional debt securities in the future that may be guaranteed by our 100% owned domestic subsidiary, Western Digital Technologies, Inc. ("Guarantor" and, together 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 financial information for the Obligor Group. The financial information for the Obligor Group is presented on combined basis, excluding intercompany balances and transactions between the Company and the Guarantor, excluding net intercompany balances between the Obligor Group and non-guarantor subsidiaries, 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:
January 2,
2026 		June 27,
2025
(in millions)
Current assets $ 4,281 $ 2,992
Non-current assets 4,478 4,553
Net intercompany payables to non-guarantor subsidiaries (924) (1,543)
Current liabilities 3,310 3,800
Non-current liabilities 2,822 2,873
The operating results of the Obligor Group include the following:
Six Months Ended Year Ended
January 2,
2026 		June 27,
2025
(in millions)
Net sales $ 2,457 $ 5,249
Gross profit 973 1,941
Operating income 252 279
Net income (loss) 1,665 (320)
Results for the Obligor Group include the following transactions with non-guarantor subsidiaries:
Six Months Ended Year Ended
January 2,
2026 		June 27,
2025
(in millions)
Intercompany revenue $ 3,499 $ 1,378
Net intercompany interest income (expense)
(5) 4
Intercompany dividend income 33 2,215
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.
Global Minimum Tax
As of January 2, 2026, we have accrued GMT of $42 million that are not expected to be paid until the second quarter of 2028.
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. See Part I, Item 3, Quantitative and Qualitative Disclosures About Market Risk, included in this Quarterly Report on Form 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 infringement claims made by third parties. In addition, we have entered into indemnification agreements with our directors and certain of our officers that 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.
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 2025 Annual Report on Form 10-K. Please refer to Part II, Item 7 of our 2025 Annual Report on Form 10-K for a discussion of our critical accounting policies and estimates.
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