Shareholders’ Equity and Convertible Preferred Stock

12 Months Ended

Jun. 30, 2023

Share-Based Payment Arrangement [Abstract]

Shareholders’ Equity and Convertible Preferred Stock

Shareholders’ Equity and Convertible Preferred Stock

2021 Long-Term Incentive Plan

In November 2021, stockholders approved the Western Digital Corporation 2021 Long-Term Incentive Plan (the “2021 Plan”). Upon the effective date of the 2021 Plan, no new awards were granted under the Western Digital Corporation Amended and Restated 2017 Performance Incentive Plan (the “2017 Plan”). The 2021 Plan was amended in 2023 to increase the number of shares available for issuance under the plan by 2.8 million shares of common stock. The aggregate maximum number of shares of the Company’s common stock that may be issued pursuant to awards from the 2021 Plan may not exceed (a) 12.0 million shares of common stock plus (b) any shares of common stock subject to outstanding awards under a prior plan as of the effective date that on or after the effective date are forfeited, terminated, expire, lapse without being exercised (to the extent applicable), or are otherwise reacquired by the Company. Any shares subject to awards under the 2017 Plan that are cancelled, forfeited, or otherwise terminate without having vested or been exercised, as applicable, will become available for award grants under the 2021 Plan. The types of awards that may be granted under the 2021 Plan include stock options, stock appreciation rights (“SARs”), RSUs, PSUs, restricted stock and other forms of awards granted or denominated in the Company’s common stock or units of the Company’s common stock, as well as cash awards. Persons eligible to receive awards under the 2021 Plan include officers and employees of the Company or any of its subsidiaries, directors of the Company and certain consultants and advisors to the Company or any of its subsidiaries. The vesting of awards under the 2021 Plan and the 2017 Plan is determined at the date of grant. Each award expires on a date determined at the date of grant; however, the maximum term of options and SARs is ten years after the grant date of the award. RSUs typically vest over periods ranging from two to four years from the date of grant. PSUs are granted to certain employees and vest only after the achievement of pre-determined performance conditions or market conditions and completion of requisite service periods. Once the performance conditions or market conditions are met, vesting of PSUs is generally subject to continued service by the employee. As of June 30, 2023, there were outstanding awards that may vest under the 2017 Plan as well as outstanding awards of stock options under the SanDisk Corporation 2013 Incentive Plan, a plan assumed in connection with the acquisition of SanDisk Corporation, which may affect dilution.

Outstanding RSU and PSU awards have dividend equivalent rights which entitle holders of such outstanding awards to the same dividend value per share as holders of common stock. Dividend equivalent rights are subject to the same vesting and other terms and conditions as the corresponding unvested RSUs and PSUs. Dividend equivalent rights are accumulated and paid in additional shares when the underlying shares vest.

As of June 30, 2023, the maximum number of shares of the Company’s common stock that was authorized for award grants under the 2021 Plan was 17.0 million shares, which includes shares of common stock subject to outstanding awards under certain prior plans as of the effective date of the 2021 Plan that have been forfeited, terminated, expired, lapsed without being exercised or were otherwise reacquired by the Company. Shares issued in respect of all awards granted under the 2021 Plan count against the 2021 Plan’s share limit on a one-for-one basis, whereas under the 2017 Plan, shares issued in respect of awards other than stock options and SARs granted count against the 2017 Plan’s share limit as 1.72 shares for every one share issued in connection with such award. The 2021 Plan will terminate on November 22, 2031, unless terminated earlier by the Company’s Board of Directors.

Employee Stock Purchase Plan

Under the Company’s ESPP, eligible employees may authorize payroll deductions of up to 10% of their eligible compensation, subject to IRS limitations, during prescribed offering periods to purchase shares of the Company’s common stock at 95% of the fair market value of common stock either at the beginning of that offering period or on the applicable exercise date, whichever is less. A participant may participate in only one offering period at a time, and a new offering period generally begins each June 1st and December 1st. Each offering period is generally 24 months and consists of four exercise dates (each, generally six months following the start of the offering period or the preceding exercise date, as the case may be). If the fair market value of the Company’s common stock is less on a given exercise date than on the date of grant, employee participation in that offering period ends and participants are automatically re-enrolled in the next new offering period.

During 2023, 2022 and 2021, the Company issued 2.7 million, 2.1 million, and 3.2 million shares, respectively, under the ESPP for aggregate purchase amounts of $92 million, $113 million and $115 million, respectively.

To the extent available, the Company may issue shares out of treasury stock upon the vesting of awards, the exercise of employee stock options and the purchase of shares pursuant to the ESPP.

Stock-based Compensation Expense

The following tables present the Company’s stock-based compensation for equity-settled awards by type and financial statement line as well as the related tax benefit included in the Company’s Consolidated Statements of Operations:

	2023		2022		2021
	(in millions)
RSUs and PSUs	$	283	$	286	$	282
ESPP	35		40		36
Total	$	318	$	326	$	318

	2023		2022		2021
	(in millions)
Cost of revenue	$	49	$	48	$	55
Research and development	152		167		158
Selling, general and administrative	117		111		105
Subtotal	318		326		318
Tax benefit	(43)		(48)		(47)
Total	$	275	$	278	$	271

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

Compensation cost related to unvested RSUs, PSUs, and rights to purchase shares of common stock under the ESPP will generally be amortized on a straight-line basis over the remaining average service period. The following table presents the unamortized compensation cost and weighted average service period of all unvested outstanding awards as of June 30, 2023:

	Unamortized Compensation Costs		Weighted Average Service Period
	(in millions)		(years)
RSUs and PSUs (1)	$	464	2.2
ESPP	67		1.4
Total unamortized compensation cost	$	531

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

Plan Activities

Stock Options

The following table summarizes stock option activity under the Company’s incentive plans:

	Number of Shares	Weighted Average Exercise Price Per Share		Weighted Average Remaining Contractual Life	Aggregate Intrinsic Value
	(in millions)			(in years)	(in millions)
Options outstanding at July 3, 2020	2.7	$	69.16
Exercised	(0.4)	44.34			$	6
Canceled or expired	(0.8)	75.42
Options outstanding at July 2, 2021	1.5	72.84
Exercised	(0.2)	43.80			$	3
Canceled or expired	(0.4)	97.65
Options outstanding at July 1, 2022	0.9	66.76
Canceled or expired	(0.6)	80.72
Options outstanding at June 30, 2023	0.3	$	44.95	0.10

No options were granted in 2023, 2022 or 2021. All outstanding options were exercisable at June 30, 2023.

RSUs and PSUs

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

	Number of Shares	Weighted Average Grant Date Fair Value		Aggregate Intrinsic Value at Vest Date
	(in millions)			(in millions)
RSUs and PSUs outstanding at July 3, 2020	13.3	$	60.92
Granted	8.8	40.40
Vested	(4.5)	60.18		$	196
Forfeited	(1.5)	55.74
RSUs and PSUs outstanding at July 2, 2021	16.1	50.12
Granted	6.9	60.00
Vested	(5.2)	54.27		$	317
Forfeited	(2.4)	52.14
RSUs and PSUs outstanding at July 1, 2022	15.4	52.89
Granted	6.6	41.27
Vested	(6.6)	54.05		$	274
Forfeited	(1.6)	54.56
RSUs and PSUs outstanding at June 30, 2023	13.8	$	46.56

RSUs and PSUs are generally settled in an equal number of shares of the Company’s common stock at the time of vesting of the units.

Fair Value Valuation Assumptions

RSU and PSU Grants

The fair value of the Company’s RSU and PSU awards with a performance condition is determined based upon the closing price of the Company’s stock price on the date of grant. The fair value of PSU awards with a market condition is estimated using a Monte Carlo simulation model on the date of grant.

ESPP — Black-Scholes-Merton Model

The fair value of ESPP purchase rights issued is estimated at the date of grant of the purchase rights using the Black-Scholes-Merton option-pricing model. The Black-Scholes-Merton option-pricing model requires the input of assumptions such as the expected stock price volatility and the expected period until options are exercised. Purchase rights under the ESPP are generally granted on either June 1st or December 1st of each year.

The fair values of ESPP purchase rights have been estimated at the date of grant using a Black-Scholes-Merton option-pricing model with the following weighted average assumptions:

	2023	2022	2021
Weighted-average expected term (in years)	1.25	1.25	1.25
Risk-free interest rate	4.52%	1.42%	0.10%
Stock price volatility	0.46	0.48	0.56
Dividend yield	—%	—%	—%
Fair value	$9.70	$15.56	$21.59

Convertible Preferred Stock

On January 31, 2023, the Board of Directors of the Company authorized the designation of 900,000 shares of Series A Convertible Perpetual Preferred Stock, par value $0.01 per share (the “Preferred Shares”), from the Company’s existing five million authorized but unissued shares of preferred stock and issued the Preferred Shares through a private placement for an aggregate purchase price of $900 million, less issuance costs of $24 million.

Dividend provisions

The Preferred Shares will have a stated value of $1,000 per share and accrue a cumulative preferred dividend at an annual rate of 6.25% per annum (increasing to 7.25% per annum on January 31, 2030 and to 8.25% per annum on January 31, 2033) compounded on a quarterly basis. The Preferred Shares will also participate in any dividends declared for common shareholders on an as-converted equivalent basis. As of June 30, 2023, (i) no dividends have been declared or paid since the issuance of the Preferred Shares, and (ii) unpaid and cumulative dividends payable with respect to the Preferred Shares were $24 million.

Conversion rights

The Preferred Shares will be convertible into shares of the Company’s common stock at an initial conversion rate of $47.75 per share (the “Conversion Price”) (subject to anti-dilution adjustments and certain other one-time adjustments upon the occurrence of various specified spin-off transactions) applied to the aggregate sum of the stated value of the Preferred Shares plus any cumulative accrued but unpaid dividends (the “Accumulated Stated Value”). In the event of a standalone spin-off transaction, the holders of Preferred Shares may have one third of their Preferred Shares converted to a similar class of preferred shares of the spin-off entity. The Preferred Shares will be convertible at the option of the holder upon the earlier of on January 31, 2024, and the date a specified spin-off transaction is completed, unless the Company enters into a definitive agreement with respect to a sale, merger or combination of the spun-off entity, in which case the twelve (12) month period will be extended until the earlier of the consummation of such transaction or the termination of the definitive agreement. The Preferred Shares will be convertible at the option of the Company after January 31, 2026 if the closing price per share of the Company’s common stock exceeds 150% of the Conversion Price for at least 20 out of 30 consecutive trading days immediately prior to the Company’s conversion notice. As of June 30, 2023, the Preferred Shares outstanding would have been convertible, if otherwise permitted, into 19 million shares of common stock.

Redemption

After January 31, 2030, the Company will have the right, but not the obligation, to redeem the Preferred Shares for an amount in cash equal to 110% of the Accumulated Stated Value. Redemption is contingently mandatory in the event of a fundamental change in the business as defined in the designation of the Preferred Shares.

The Preferred Shares has been classified as mezzanine equity in the Company’s Condensed Consolidated Balance Sheets because, in the event of certain fundamental change in the business that are not solely within the control of the Company, the Preferred Shares would become redeemable at the option of the holders. The Company did not adjust the carrying values of the Preferred Shares to the current redemption value of such shares since a liquidation event was not probable at any of the balance sheet dates. Subsequent adjustments to increase or decrease the carrying values to the ultimate redemption value will be made only if and when it becomes probable that such a fundamental change in the business will occur.

Voting right

The Preferred Shares will vote, to the extent permitted under the Nasdaq listing rules, on an as-converted equivalent basis along with holders of the Company’s common stock.

Liquidation preference

In the event of any voluntary or involuntary liquidation, holders of the Preferred Shares will be senior to the holders of the Company’s common stock and the liquidation preference is the greater of (i) the sum of an amount in cash equal to 110% of the Accumulated Stated Value plus accrued and unpaid dividends and (ii) the payment that the holders of Preferred Shares would have received had all Preferred Shares been converted into common stock immediately prior to such liquidation, before any distributions are made to common shareholders and all other classes of junior capital stock of the Company. As of June 30, 2023, the total aggregate liquidation preference was $924 million.

Stock Repurchase Program

The Company’s Board of Directors previously authorized a stock repurchase program for the repurchase of up to $5.00 billion of the Company’s common stock, which expired on July 25, 2023. For the year ended June 30, 2023, and through the expiration date of the program, the Company did not make any stock repurchases.

Stock Reserved for Issuance

The following table summarizes all common stock reserved for issuance at June 30, 2023:

	Number of Shares
	(in millions)
Outstanding awards and shares available for award grants	24
ESPP	7
Total	31

Dividends to Shareholders

The Company issued a quarterly cash dividend from the first quarter of 2013 up to the third quarter of 2020. In April 2020, the Company suspended its dividend to reinvest in the business and to support its ongoing deleveraging efforts.