WDCWestern Digital

We note your discussion on page 38 regarding a $605 million charge for manufacturing underutilization and related charges and a write-down of certain Flash inventory to lower of cost or market value. Please tell us, and revise to clarify, what is meant by "manufacturing underutilization and related charges." In addition, where you discuss the risks and uncertainties with regard to your strategic relationships on

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page 16 and seasonality and cyclicality on page 18, revise to include a separate quantified discussion of charges related to inventory write-downs and manufacturing underutilization to add context to such risks.

We respectfully advise the Staff that in our “Operational Update” included on page 35 in the Management’s Discussion and Analysis of Financial

Condition and Results of Operations section of the Form 10-K, we noted several macroeconomic factors that had created a supply-demand imbalance, which resulted in reduced shipments and negatively impacted pricing of our products, particularly in Flash.

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In response to these conditions and to reduce our bit growth to align our supply with the projected market demand, we temporarily reduced the utilization of our manufacturing capacity to an abnormally low level. For 2023, we disclosed $605 million for manufacturing underutilization and related charges and a write-down of certain flash inventory. This amount consisted of charges of $497 million for unabsorbed manufacturing overhead costs as a result of the reduced utilization of our manufacturing capacity and charges of $108 million to write-down our inventory as a result of decreases in market pricing.

While we described the macroeconomic factors and our resulting actions that resulted in the manufacturing underutilization and related charges, the

Staff’s comment highlights that we could have provided more clarity for our readers about the nature of these charges and we will revise in future filings.

In further response to the Staff’s comment, we will also update the risk factors referenced by the Staff’s comment in our next Quarterly Report on

Form 10-Q and applicable future filings to include a quantified discussion of the inventory write-downs and manufacturing underutilization charges to add context to those risks (added disclosure is displayed below in bold and underlined; deleted disclosure is displayed as a strike-through):

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We rely substantially on strategic relationships with various partners, including Kioxia, which subjects us to risks and uncertainties that could harm our business.

We have entered into and expect to continue to enter into strategic relationships with various partners for product development, manufacturing, sales growth and the supply of technologies, components, equipment and materials for use in our product design and manufacturing, including our business ventures with Kioxia. We depend on Flash Ventures for the development and manufacture of flash-based memory. Our strategic relationships, including Flash Ventures, are subject to various risks that could harm the value of our investments, our revenue and costs, our future rate of spending, our technology plans and our future growth opportunities.

Substantially all of our flash-based memory is supplied by Flash Ventures, which limits our ability to respond to market demand and supply changes and makes our financial results particularly susceptible to variations from our forecasts and expectations. AFor example, we are contractually obligated to pay for 50% of the fixed costs of Flash Ventures regardless of whether we order any flash-based memory, and our orders placed with Flash Ventures on a three-month rolling basis are binding. As a result, a failure to accurately forecast supply and demand could cause us to over-invest or under-invest in inventory, technology transitions or the expansion of Flash Ventures’ capacity. Over-investment by us or our competitors couldcan result in excess supply, which could cause and lead to significant decreases in our product prices, significant excess, obsolete inventory or inventory write-downs or underutilization charges, and the potential impairment of our investments in Flash Ventures. We are contractually obligated to pay for 50% of the fixed costs of Flash Ventures regardless of whether we order any flash-based memory, and our orders placed with Flash Ventures on a three-month rolling basis are binding. For example, in 2023, we incurred charges for unabsorbed manufacturing overhead costs as a result of the reduced utilization of our manufacturing capacity and charges to write-down our inventory as a result of decreases in market pricing, which together aggregated to $404 million for our Flash business. These charges were attributable to a significant imbalance of supply and demand and our actions taken in response thereto. On the other hand, if we under-invest in Flash Ventures, or otherwise grow or transition Flash Ventures’ capacity too slowly, we may not have enough supply of flash-based memory, or the right type of flash-based memory, to meet demand on a timely and cost-effective basis, and we may lose opportunities for revenue, gross margin and market share as a result. If our supply is limited, we might make strategic decisions with respect to the allocation of our supply among our products and customers, which could result in less favorable gross margins or damage customer relationships.

Our control over the operations of our business ventures may be limited, and our interests could diverge from our strategic partners’ interests regarding ongoing and future activities. For example, under the Flash Ventures agreements, we cannot unilaterally direct most of Flash Ventures’ activities, and we have limited ability to source or fabricate flash outside of Flash

Ventures. Flash Ventures requires significant investments by both Kioxia and us for technology transitions and capacity expansions, and our business could be harmed if our technology roadmap and investment plans are not sufficiently aligned with

Kioxia’s. Lack of alignment with Kioxia with respect to Flash Ventures could negatively impact our ability to react quickly to changes in the market, or to stay at the forefront of technological advancement. Misalignment could arise due to changes in Kioxia’s strategic priorities, management, ownership or access to capital, which have changed in recent years and could continue to change. Kioxia’s stakeholders may include, or have included in the past, competitors, customers, a private equity firm, government entities or public stockholders. Kioxia’s management changes, ownership and capital structure could lead to delays in decision-making, disputes or changes in strategic direction that could negatively impact the strategic partnership, and therefore us. There may exist conflicts of interest between Kioxia’s stakeholders and Flash Ventures or us with respect to, among other things, protecting and growing Flash Ventures’ business, IP and competitively sensitive confidential information.

Together with Kioxia, we fund a portion of the investments required for Flash Ventures through lease financings. Continued availability of lease financings for Flash Ventures is not guaranteed and could be limited by several factors, including investor capacity and risk allocation policies, our or Kioxia’s financial performance and changes to our or Kioxia’s business, ownership or corporate structure. To the extent that lease financings are not accessible on favorable terms or at all, more cash would be required to fund investments.

Our strategic relationships are subject to additional risks that could harm our business, including, but not limited to, the following:

• failure by our strategic partners to comply with applicable laws or employ effective internal controls;

difficulties and delays in product and technology development at, ramping production at, and transferring technology to, our strategic partners;

declining financial performance of our strategic partners, including failure by our strategic partners to timely fund capital investments with us or otherwise meet their commitments, including paying amounts owed to us or third parties when due;

we may lose the rights to, or ability to independently manufacture, certain technology or products being developed or manufactured by strategic partners, including if any of them is acquired by another company, files for bankruptcy or experiences financial or other losses;

a bankruptcy event involving a strategic partner could result in structural changes to or termination of the strategic partnership; and changes in tax or regulatory requirements may necessitate changes to the agreements governing our strategic partnerships.

We experience sales seasonality and cyclicality, which could cause our operating results to fluctuate. In addition, accurately forecasting demand has become more difficult, which could harm our business.

Sales of many of our products tend to be seasonal and subject to supply-demand cycles. Changes in seasonal and cyclical supply and demand patterns have made it, and could continue to make it, more difficult for us to forecast demand. Changes in the product or channel mix of our business can also impact seasonal and cyclical patterns. For example, we often ship a high percentage of our total quarterly sales in the third month of the quarter, which makes it difficult for us to forecast our financial results before the end of each quarter. As a result of the above or other factors, our forecast of financial results for a given quarter may differ materially from our actual financial results.

The variety and volume of products we manufacture are based in part on accurately forecasting market and customer demand for our products.

Accurately forecasting demand has become increasingly difficult for us, our customers and our suppliers due to volatility in global economic conditions, end market dynamics and industry consolidation, resulting in less availability of historical market data for certain product segments. Further, for many of our OEM customers utilizing just-in-time inventory, we do not generally require firm order commitments and instead receive a periodic forecast of requirements, which may prove to be inaccurate. In addition, because our products are designed to be largely interchangeable with competitors’ products, our demand forecasts may be impacted significantly by the strategic actions of our competitors. As forecasting demand becomes more difficult, the risk that our forecasts are not in line with demand increases. This has caused, and may in the future cause, our forecasts to exceed actual market demand, resulting in periods of product oversupply, excess inventory, asset underutilization of manufacturing capacity and price decreases, which has impacted and could further impact our sales, ASPs and gross margin or require us to incur additional inventory write-downs or additional charges for unabsorbed manufacturing overhead, thereby negatively affecting our operating results and our financial condition. For example, in 2023 we incurred charges for unabsorbed manufacturing overhead costs as a result of the reduced utilization of our manufacturing capacity and charges to write-down our inventory as a result of decreases in market pricing, which together aggregated to

$605 million. These charges were attributable to a significant imbalance of supply and demand and our actions taken in response thereto. If market demand increases significantly beyond our forecasts or beyond our ability to add manufacturing capacity, then we may not be able to satisfy customer product needs, possibly resulting in a loss of market share if our competitors are able to meet customer demands. In addition, some of our components have long lead-times, requiring us to place orders several months in advance of anticipated demand. Such long lead-times increase the risk of excess inventory, potentially resulting in inventory write-downs, or loss of sales in the event our forecasts vary substantially from actual demand.

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We refer to your October 28, 2019 response letter where you indicated your intent to include a quantified discussion of units sold, average selling prices or other metrics to the extent relevant to further promote an understanding of your results of operations.

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Given the significant impact that macroeconomic factors have had on your recent operations, please revise to include a quantified discussion of units sold and average selling prices for both your Flash and HDD products as provided in the Quarterly Facts Sheets of your Earnings Presentation to provide further context to your results of operations discussion, or explain why you do not believe this information is relevant to an understanding of the significant declines in your revenue and profit margins. In addition, where a material change is attributed to two or more factors, including any offsetting factors, revise throughout your results of operations discussion to ensure you include a quantified discussion of each factor and avoid using terms such as "primarily" or "substantially all" in favor of specific quantification. Refer to Item 303(b) of Regulation S-X.

We respectfully acknowledge the Staff’s comment and note that our revenue can be impacted by changes in the volume of exabytes sold as well as changes in our realized average selling price per gigabyte. Since our October 28, 2019 response, we have enhanced our disclosures to provide quantification of the relative impact of changes in volume and pricing on revenue for both our Flash and HDD business units.

As described on page 38 of the Form 10-K, HDD revenue declined 31% from 2022 to 2023.

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In our discussion of results, we disclosed that the primary driver of this revenue decrease was a 26% decrease in exabytes sold, which represented approximately 26 of the 31 percentage points of year-over-year decline with the remaining decline attributable to a decline in realized average selling price per gigabyte of approximately 7%. We believed the quantification of the change in volume as disclosed, the primary driver of the change in revenue for HDD, provided the material information most relevant to investors, but the Staff’s comment highlights to us that we also could have further quantified the decline in our realized average selling price per gigabyte.

For our Flash business unit, as described on page 37 of the Form 10-K, the primary driver of the change in revenue from 2022 to 2023 was pricing. The change in volume was not meaningful, and was less than 1 percent. While we disclosed that substantially all of the year-over-year decline in revenue of 38% resulted from the decline in the average selling price per gigabyte, we also acknowledge that we could have quantified the actual percentage point change in pricing.

In each case, while our discussion focused on the impact of the material driver (volume or pricing), in light of the Staff’s comment, we will revise future disclosures to more clearly quantify the changes in both volume and pricing.

In addition, in response to the second part of the Staff’s comment, we will continue to assess and revise the disclosure in our future filings to include a quantified discussion, to the extent applicable and reasonably practicable, of the factors, including any offsetting factors, that have contributed to a material change in a particular financial statement line item. We respectfully advise the

Staff that if quantification is not reasonably practical to explain a particular line item change, we plan to narratively describe the relative contribution of the applicable factors.

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We note your segment results presentation includes a line item for "Total gross profit for segments." Please revise to remove this total as it creates a non-GAAP measure that should not be included in the financial statement footnotes. Similar revisions should be made in your Form 10-Q filings. Refer to Item 10(e)(1)(ii)(C) of Regulation S-K.

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In closing, we remind you that the company and its management are responsible for the accuracy and adequacy of their disclosures, notwithstanding any review, comments, action or absence of action by the staff.

We respectfully acknowledge the Staff’s comment. As discussed in a phone conversation with our legal counsel, we note that ASC 280-10-50-30 (b) provides the following guidance: “A public entity shall provide reconciliations of…the total of the reportable segments’ measures of profit or loss to the public entity’s consolidated income before income taxes and discontinued operations.” With regards to our disclosure of segment gross profit, we interpreted the above guidance to require disclosure of the total of the reportable segment gross profit, which we then reconciled to the corresponding

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consolidated gross profit for our company.

We believe that our presentation is consistent with ASC guidance on this point.

We acknowledge that the reconciliation table included in Note 3 does not reconcile down to “Income (loss) before taxes”; however, no other items of income or expense included in our consolidated statements of operations are allocated to the measure of profit for our segments. As such, we believe the reconciliation of total gross profit for segments to the consolidated gross profit provided in the table in our Note 3, together with the consolidated statements of operations in our filing, provide users of our financial statements with the information necessary to clearly tie to our consolidated “Income (loss) before taxes” without adding redundant information to the table in Note 3.

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In the fourth quarter fiscal 2019 earnings presentation you present non-GAAP gross margin amounts as well as various metrics such as units sold and average selling prices for both your HDD and Flash products. Tell us how you use this information in managing your business and revise to include a quantified discussion of such measures or explain to us what other measures management uses to manage your business.

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We refer you to Item 303(a) of Regulation S-K and Section III.B.1 of SEC Release 33-8350.

We respectfully advise the Staff that we regularly evaluate our disclosure of metrics that may be meaningful to our investors in understanding our business. Such an evaluation is challenging due to the complexity of our evolving business as we have integrated our past acquisitions into one vertically-integrated business model. Moreover, information provided in our quarterly earnings presentations has evolved over time in response to questions raised by analysts that follow our industry.

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Items that management considers key measures in the management of our business, such as revenue by end market (e.g., Client Devices, Client Solutions and Data Center Devices & Solutions), revenue by technology (e.g., HDD and Flash), cash flows, exabytes shipped and working capital days, are regularly provided in our quarterly earnings presentations and are included in the Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) section of our periodic reports filed with the Commission.

Other metrics presented as part of our quarterly earnings presentations, such as units sold and average selling prices, are supplemental in nature and are provided for the convenience of analysts to help them build their own financial models. We have considered the Commission’s guidance in Section III.B.1 of SEC Release 33-8350. While management may consider one or more of these measures to be an indicator of or a contributor to the company’s financial performance in selected periods, generally management does not rely on any of these measures as a key performance measure to analyze the company’s financial results or to manage our business. We also do not believe that disclosure of these metrics conveys material information that promotes an understanding of the operating performance of the company, and therefore we do not view these metrics as key performance indicators for our business and generally do not disclose information about these metrics in MD&A. However, to the extent that any of these metrics is considered a material contributing factor to our results of operations in any reporting period, we have disclosed, and intend to continue to disclose, information about these metrics that we consider relevant to explaining our results of operations, including when necessary to disclose whether any material change in our revenues is attributable to changes in prices or changes in the volume of goods sold as required by Item 303(a)(3)(iii) of Regulation S-K.

Finally, please note that we have only recently begun presenting non-GAAP gross margin broken down between HDD and Flash technology products in our quarterly earnings presentations. While this information also has been primarily presented for the convenience of analysts to help them build their own financial models, management recently has begun reviewing this information during periodic business reviews to supplement its review of total company gross margin. We continuously evaluate this and other measures as to whether disclosure of this information in MD&A would be meaningful to our investors in understanding our business. To the extent that this information is considered a material contributing factor to our results of operations in any prospective reporting period, we intend to disclose information about these metrics to explain our results of operations.

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We further note the HDD and Flash non-GAAP gross margin amounts you disclose in such presentation. Please revise to include a reconciliation for each non-GAAP measure to the most directly comparable GAAP measure. In this regard, you should include a separate reconciliation for each of HDD gross margin and Flash gross margin. Refer to Regulation G.

As noted in our response to the previous comment, we have only recently begun presenting a breakdown of non-GAAP gross margin between HDD and Flash technology in our quarterly earnings presentations. Given the vertically-integrated nature of our business, we manage and analyze the various reconciling items between GAAP and non-GAAP gross margin only at a total company level.

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We do not assign any of these reconciling items to either HDD or Flash technology products gross margins, as such allocation is not tracked or readily determinable from our systems of record, nor considered meaningful to management. Accordingly, the gross margin break-down between HDD and Flash is not available on a GAAP basis.

In our fiscal 2019 quarterly earnings presentations, we provided detailed reconciliations of our total GAAP gross profit to our total non-GAAP gross profit in both dollars and as a percentage of revenue. We also presented a break-down of total non-GAAP gross margin percentage into its HDD and Flash technology components. To further clarify, these components are simply subsets of the reconciled total non-GAAP gross profit reflected as a percentage of revenue. We believe that the reconciliation we provided complies with the guidance provided in Regulation G, with the sum of non-GAAP HDD and Flash gross margins reconciled to total gross margin, which is the most directly comparable GAAP measure.

We acknowledge that the reconciliation of GAAP gross margin percentage to non-GAAP gross margin percentage that we provided in our quarterly earnings presentations could be made easier to understand, including clarification that the HDD and Flash gross margins are a further breakdown of total non-GAAP gross margin, as well as providing details on how the GAAP and non-GAAP gross margin percentages are computed. With the objective of providing better transparency regarding this reconciliation and the related disclosure of GAAP and non-GAAP margin percentages, we prospectively will modify this reconciliation beginning with our quarterly earnings presentation for the quarter ending October 4, 2019. An example of this modified reconciliation using recent quarterly information is provided below.

Example reconciliation:

Reconciliation of GAAP to Non-GAAP gross profit

Three months ended

3/29/2019

6/28/2019

Gross profit

$

579

465

Amortization of acquired intangible assets

188

166

Stock-based compensation expense

Charges related to cost saving initiatives

-

Manufacturing underutilization charges

148

Power outage charges

145

Other

Non-GAAP gross profit

928

880

Breakdown of non-GAAP gross profit by technology

HDD

591

599

Flash

337

281

Total non-GAAP gross profit

Breakdown of revenue by technology

HDD revenue

2,064

2,128

Flash revenue

1,610

1,506

Total revenue

3,674

3,634

Consolidated GAAP gross margin(1)

15.8

%

12.8

Consolidated non-GAAP gross margin(2)

25.3

24.2

Non-GAAP HDD gross margin(3)

28.6

28.1

Non-GAAP Flash gross margin(4)

20.9

18.7

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(1) Consolidated GAAP gross margin is calculated by dividing gross profit by total revenue.

(2) Consolidated non-GAAP gross margin is calculated by dividing total non-GAAP gross profit by total revenue.

(3) Non-GAAP HDD gross margin is calculated by dividing the portion of non-GAAP gross profit relating to the Company’s HDD products by HDD revenue.

(4) Non-GAAP Flash gross margin is calculated by dividing the portion of non-GAAP gross profit relating to the Company’s Flash products by Flash revenue.

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You indicate in your response to prior comment 1 that measures such as units sold and average selling prices may be indicators of or contributors to the company’s financial performance, however, you do not believe disclosure of these metrics conveys material information that promotes an understanding of the company’s operating performance.

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However, we note that your results of operations discussion focuses on the change in products sold and average selling prices and the impact of those changes on revenue by end market. Given such emphasis, please further explain why you believe a quantified discussion of such measures would not provide investors with a better understanding of your operating results. Refer to Section III.B.1 of SEC Release 33-8350.

We respectfully advise the Staff that, while our management does not rely on units sold and average selling prices as key performance indicators that we use to analyze the company’s financial results or to manage our business, we acknowledge that these measures may contribute materially to the company’s financial performance in selected periods.

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In such event, and as we stated in our prior response letter, we intend to disclose information about these measures that we consider relevant to explaining our results of operations and as necessary to comply with the disclosure requirement in Item 303(a)(3)(iii) of Regulation S-K. In accordance with the Staff’s comment, as part of future filings, we will include a quantified discussion of units sold, average selling prices or other metrics to the extent relevant to further promote an understanding of their impact on our results of operations.

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You disclose that the decrease in Client Devices revenue was driven by lower average selling prices per gigabyte for flash-based products and lower sales of HDD products and flash-based mobile products. As another example, you indicate the decrease in Client Solutions revenue was driven by lower average selling prices of flash-based products and lower sales of retail HDD products.

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Where a material change in a line item is attributed to two or more factors, including any offsetting factors, the contribution of each identified factor should be described in quantified terms, if reasonably practicable. Please revise your disclosures in future filings accordingly. Similar revisions should be considered throughout your results of operations disclosures, such as in your discussion of the change in research and development and selling, general and administrative expenses. Refer to Item 303(a)(3)(ii) of Regulation S-K and Section III.D of SEC Release No. 33-6835.

We respectfully acknowledge the Staff’s comment. In future periodic filings, where a material change in a line item is attributed to two or more factors in our results of operations discussion, we will disclose the contribution of each identified factor in quantified terms to the extent reasonably practicable. We respectfully advise the Staff that, while we believe we can enhance the quantification provided with respect to our consolidated results, such quantification at a more detailed level by end market, product line or otherwise may not always be reasonably practicable.

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If quantification is not reasonably practicable, we plan to narratively describe the relative contribution of the applicable factors.

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