Table of Contents

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC  20549

 

FORM 10-Q

 

x                QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended October 1, 2010

 

o                   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from:          to         

 

Commission File Number 001-31560

 

SEAGATE TECHNOLOGY PUBLIC LIMITED COMPANY

(Exact name of registrant as specified in its charter)

 

Ireland

 

98-0648577

(State or other jurisdiction of

 

(I.R.S. Employer

incorporation or organization)

 

Identification Number)

 

Arthur Cox Building, Earlsfort Terrace

Dublin 2, Ireland

(Address of Principal Executive Offices)

 

Telephone:  (353) (1) 618-0517

(Registrant’s Telephone Number, Including Area Code)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.   Yes x No o

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes x No o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” and “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.  (Check one):

 

Large accelerated filer: x

 

Accelerated filer: o

 

 

 

Non-accelerated filer: o

 

Smaller reporting company: o

(Do not check if a smaller reporting company)

 

 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o No x

 

As of October 27, 2010, 472,685,331 shares of the registrant’s ordinary shares, par value $0.00001 per share, were issued and outstanding.

 

 

 



Table of Contents

 

INDEX

 

SEAGATE TECHNOLOGY PLC

 

 

 

 

PAGE NO.

 

 

 

 

PART I

FINANCIAL INFORMATION

 

 

 

 

 

 

Item 1.

Financial Statements

 

 

 

 

 

 

 

Condensed Consolidated Balance Sheets ¾ October 1, 2010 and July 2, 2010 (Unaudited)

 

3

 

 

 

 

 

Condensed Consolidated Statements of Operations ¾ Three Months ended October 1, 2010 and October 2, 2009 (Unaudited)

 

4

 

 

 

 

 

Condensed Consolidated Statements of Cash Flows ¾ Three Months ended October 1, 2010 and October 2, 2009 (Unaudited)

 

5

 

 

 

 

 

Condensed Consolidated Statement of Shareholders’ Equity ¾ Three Months ended October 1, 2010 (Unaudited)

 

6

 

 

 

 

 

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

7

 

 

 

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

27

 

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

 

37

 

 

 

 

Item 4.

Controls and Procedures

 

39

 

 

 

 

PART II

OTHER INFORMATION

 

 

 

 

 

 

Item 1.

Legal Proceedings

 

40

 

 

 

 

Item 1A.

Risk Factors

 

40

 

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

 

41

 

 

 

 

Item 3.

Defaults Upon Senior Securities

 

41

 

 

 

 

Item 4.

(Removed and Reserved)

 

41

 

 

 

 

Item 5.

Other Information

 

41

 

 

 

 

Item 6.

Exhibits

 

42

 

 

 

 

 

SIGNATURES

 

50

 

2



Table of Contents

 

PART I

FINANCIAL INFORMATION

 

ITEM 1.   FINANCIAL STATEMENTS

 

SEAGATE TECHNOLOGY PLC

CONDENSED CONSOLIDATED BALANCE SHEETS

(In millions)

(Unaudited)

 

 

 

October 1,
2010

 

July 2,
2010
(a)

 

ASSETS

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

1,783

 

$

2,263

 

Short-term investments

 

283

 

252

 

Restricted cash and investments

 

102

 

114

 

Accounts receivable, net

 

1,511

 

1,400

 

Inventories

 

743

 

757

 

Deferred income taxes

 

125

 

118

 

Other current assets

 

609

 

514

 

Total current assets

 

5,156

 

5,418

 

Property, equipment and leasehold improvements, net

 

2,275

 

2,263

 

Deferred income taxes

 

379

 

395

 

Other assets, net

 

178

 

171

 

 

 

 

 

 

 

Total assets

 

$

7,988

 

$

8,247

 

 

 

 

 

 

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Accounts payable

 

$

1,776

 

$

1,780

 

Accrued employee compensation

 

127

 

263

 

Accrued warranty

 

181

 

189

 

Accrued expenses

 

466

 

422

 

Accrued income taxes

 

6

 

14

 

Current portion of long-term debt

 

560

 

329

 

Total current liabilities

 

3,116

 

2,997

 

 

 

 

 

 

 

Long-term accrued warranty

 

172

 

183

 

Long-term accrued income taxes

 

62

 

59

 

Other non-current liabilities

 

101

 

111

 

Long-term debt, less current portion

 

1,614

 

2,173

 

 

 

 

 

 

 

Total liabilities

 

5,065

 

5,523

 

 

 

 

 

 

 

Commitments and contingencies (See Notes 10 and 12)

 

 

 

 

 

Shareholders’ equity:

 

 

 

 

 

Ordinary shares and additional paid-in capital

 

3,873

 

3,851

 

Accumulated other comprehensive income (loss)

 

24

 

(4

)

Retained earnings (accumulated deficit)

 

(974

)

(1,123

)

Total shareholders’ equity

 

2,923

 

2,724

 

 

 

 

 

 

 

Total liabilities and shareholders’ equity

 

$

7,988

 

$

8,247

 

 


(a) The information in this column was derived from the Company’s audited Consolidated Balance Sheet as of July 2, 2010.

 

See Notes to Condensed Consolidated Financial Statements.

 

3



Table of Contents

 

SEAGATE TECHNOLOGY PLC

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In millions, except per share data)

(Unaudited)

 

 

 

For the Three Months Ended

 

 

 

October 1,
2010

 

October 2,
2009

 

 

 

 

 

 

 

Revenue

 

$

2,697

 

$

2,663

 

 

 

 

 

 

 

Cost of revenue

 

2,147

 

2,010

 

Product development

 

209

 

208

 

Marketing and administrative

 

105

 

106

 

Amortization of intangibles

 

1

 

8

 

Restructuring and other, net

 

4

 

46

 

Impairment of long-lived assets

 

¾

 

64

 

Total operating expenses

 

2,466

 

2,442

 

 

 

 

 

 

 

Income from operations

 

231

 

221

 

 

 

 

 

 

 

Interest income

 

2

 

1

 

Interest expense

 

(46

)

(45

)

Other, net

 

(34

)

3

 

Other expense, net

 

(78

)

(41

)

 

 

 

 

 

 

Income before income taxes

 

153

 

180

 

Provision for income taxes

 

4

 

1

 

Net income

 

$

149

 

$

179

 

 

 

 

 

 

 

Net income per share:

 

 

 

 

 

Basic

 

$

0.32

 

$

0.36

 

Diluted

 

0.31

 

0.35

 

Number of shares used in per share calculations:

 

 

 

 

 

Basic

 

471

 

494

 

Diluted

 

487

 

512

 

 

See Notes to Condensed Consolidated Financial Statements.

 

4



Table of Contents

 

SEAGATE TECHNOLOGY PLC

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In millions)

(Unaudited)

 

 

 

For the Three Months Ended

 

 

 

October 1,
2010

 

October 2,
2009

 

OPERATING ACTIVITIES

 

 

 

 

 

Net income

 

$

149

 

$

179

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

Depreciation and amortization

 

189

 

204

 

Share-based compensation

 

13

 

11

 

Loss on redemption of debt

 

24

 

¾

 

Impairment of long-lived assets

 

¾

 

64

 

Deferred income taxes

 

8

 

1

 

Other non-cash operating activities, net

 

(7

)

3

 

 

 

 

 

 

 

Changes in operating assets and liabilities:

 

 

 

 

 

Accounts receivable, net

 

(111

)

(209

)

Inventories

 

14

 

(35

)

Accounts payable

 

159

 

112

 

Accrued employee compensation

 

(136

)

(2

)

Accrued expenses, income taxes and warranty

 

10

 

(70

)

Other assets and liabilities

 

(67

)

20

 

Net cash provided by operating activities

 

245

 

278

 

 

 

 

 

 

 

INVESTING ACTIVITIES

 

 

 

 

 

Acquisition of property, equipment and leasehold improvements

 

(358

)

(89

)

Purchases of short-term investments

 

(80

)

(41

)

Sales of short-term investments

 

38

 

1

 

Maturities of short-term investments

 

11

 

57

 

Change in restricted cash and investments

 

12

 

10

 

Other investing activities, net

 

(2

)

(2

)

Net cash used in investing activities

 

(379

)

(64

)

 

 

 

 

 

 

FINANCING ACTIVITIES

 

 

 

 

 

Proceeds from short-term borrowings

 

¾

 

15

 

Repayment of short-term borrowings

 

¾

 

(150

)

Repayments of long-term debt and capital lease obligations

 

(362

)

(334

)

Change in restricted cash and investments

 

¾

 

332

 

Proceeds from issuance of ordinary shares under employee stock plans

 

16

 

26

 

Net cash used in financing activities

 

(346

)

(111

)

 

 

 

 

 

 

Increase (decrease) in cash and cash equivalents

 

(480

)

103

 

Cash and cash equivalents at the beginning of the period

 

2,263

 

1,427

 

Cash and cash equivalents at the end of the period

 

$

1,783

 

$

1,530

 

 

See Notes to Condensed Consolidated Financial Statements.

 

5



Table of Contents

 

SEAGATE TECHNOLOGY PLC

CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY

 

For the Three Months Ended October 1, 2010

(In millions)

(Unaudited)

 

 

 

Number
of
Ordinary
Shares

 

Par
Value
of
Shares

 

Additional
Paid-in
Capital

 

Accumulated
Other

Comprehensive
Income (Loss)

 

Retained
Earnings
(Accumulated
Deficit)

 

Total

 

Balance at July 2, 2010

 

470

 

$

 

$

3,851

 

$

(4

)

$

(1,123

)

$

2,724

 

Comprehensive income (loss), net of tax:

 

 

 

 

 

 

 

 

 

 

 

 

 

Change in unrealized gain (loss) on marketable securities, net

 

 

 

 

1

 

 

1

 

Change in unrealized gain (loss) on cash flow hedges, net

 

 

 

 

27

 

 

27

 

Net income

 

 

 

 

 

149

 

149

 

Comprehensive income

 

 

 

 

 

 

 

 

 

 

 

177

 

Issuance of ordinary shares under employee stock plans

 

2

 

 

16

 

 

 

16

 

Adjustment to equity component of convertible debt upon redemption

 

 

 

(7

)

 

 

(7

)

Share-based compensation

 

 

 

13

 

 

 

13

 

Balance at October 1, 2010

 

472

 

$

 

$

3,873

 

$

24

 

$

(974

)

$

2,923

 

 

See Notes to Condensed Consolidated Financial Statements.

 

6



Table of Contents

 

SEAGATE TECHNOLOGY PLC

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

 

1.  Basis of Presentation and Summary of Significant Accounting Policies

 

Organization and Basis of Presentation and Consolidation

 

Effective as of July 3, 2010, Seagate Technology public limited company, an Irish public limited company, (“Seagate-Ireland”, “Seagate” or the “Company”) became the successor to Seagate Technology, an exempted company incorporated with limited liability under the laws of the Cayman Islands (“Seagate-Cayman”).  In connection with the reorganization, all issued and outstanding Seagate-Cayman common shares were cancelled and ceased to exist, and Seagate-Ireland issued ordinary shares on a one-for-one basis to the holders of Seagate-Cayman common shares for each Seagate-Cayman common share that was cancelled.  For presentation purposes, unless otherwise noted, common shares prior to the reorganization and ordinary shares subsequent to the reorganization are referred to herein as ordinary shares (see Note 8).

 

The Company designs, manufactures, markets and sells hard disk drives.  Hard disk drives, which are commonly referred to as disk drives or hard drives, are used as the primary medium for storing electronic data. The Company produces a broad range of disk drive products addressing enterprise applications, where its products are primarily used in enterprise servers, mainframes and workstations; client compute applications, where its products are used in desktop and notebook computers; and client non-compute applications, where its products are used in a wide variety of devices such as digital video recorders (DVRs), and other consumer electronic devices such as personal data backup systems, portable external storage systems and digital media systems. The Company sells its disk drives primarily to major original equipment manufacturers (OEMs), distributors and retailers. In addition to manufacturing and selling disk drives, the Company provides storage services for small- to medium-sized businesses, including online backup, data protection and recovery solutions.

 

The Condensed Consolidated Financial Statements include the accounts of the Company and all of its wholly-owned subsidiaries, after elimination of intercompany transactions and balances. The Condensed Consolidated Financial Statements have been prepared by the Company and have not been audited.  Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States (GAAP) have been condensed or omitted pursuant to such rules and regulations.  The Condensed Consolidated Financial Statements reflect, in the opinion of management, all adjustments necessary to summarize fairly the consolidated financial position, results of operations, cash flows and shareholders’ equity for the periods presented.  Such adjustments are of a normal and recurring nature.  The Company’s Consolidated Financial Statements for the fiscal year ended July 2, 2010 are included in its Annual Report on Form 10-K as filed with the United States Securities and Exchange Commission (SEC) on August 20, 2010.  The Company believes that the disclosures included in the unaudited Condensed Consolidated Financial Statements, when read in conjunction with its Consolidated Financial Statements as of July 2, 2010 and the notes thereto, are adequate to make the information presented not misleading.

 

The results of operations for the three months ended October 1, 2010, are not necessarily indicative of the results of operations to be expected for any subsequent interim period in the Company’s fiscal year ending July 1, 2011. The Company operates and reports financial results on a fiscal year of 52 or 53 weeks ending on the Friday closest to June 30. The three months ended October 1, 2010 and October 2, 2009 consisted of 13 weeks each.  Fiscal year 2011 will be comprised of 52 weeks and will end on July 1, 2011.

 

Critical Accounting Policies and Use of Estimates

 

The preparation of financial statements in accordance with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the Company’s consolidated financial statements and accompanying notes. Actual results could differ materially from those estimates. The methods, estimates and judgments the Company uses in applying its most critical accounting policies have a significant impact on the results the Company reports in its consolidated financial statements. The SEC has defined the most critical accounting policies as the ones that are most important to the portrayal of a company’s financial condition and results of operations, and require a company to make its most difficult and subjective judgments, often as a result of the need to make estimates of matters that are highly uncertain at the time of estimation. Based on this definition, the Company’s most critical policies include: establishment of sales program accruals, establishment of warranty accruals, the accounting for income taxes and the accounting for goodwill and other long-lived assets. These policies, as well as the estimates and judgments involved, are discussed further below. The Company also has other accounting policies and

 

7



Table of Contents

 

SEAGATE TECHNOLOGY PLC

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

 

accounting estimates relating to uncollectible customer accounts, valuation of inventory, valuation of share-based payments and restructuring and exit costs. The Company believes that these other accounting policies and accounting estimates either do not generally require it to make estimates and judgments that are as difficult or as subjective, or it is less likely that they would have a material impact on the Company’s reported results of operations for a given period.

 

Since the Company’s fiscal year ended July 2, 2010, there have been no significant changes in the Company’s critical accounting policies and estimates.  Please refer to Note 1 of “Financial Statements and Supplementary Data” contained in Part II, Item 8 of the Company’s Annual Report on Form 10-K for the fiscal year ended July 2, 2010, as filed with the SEC on August 20, 2010, for a discussion of the Company’s critical accounting policies and estimates.

 

Accounting Changes

 

In October 2009, the FASB issued ASU No. 2009-13, Revenue Recognition (ASC Topic 605) — Multiple-Deliverable Revenue Arrangements, a consensus of the FASB Emerging Issues Task Force.  This guidance modifies the fair value requirements of ASC subtopic 605-25, Revenue Recognition-Multiple Element Arrangements by allowing the use of the best estimate of selling price (BESP) in addition to vendor-specific objective evidence (VSOE) and verifiable objective evidence (VOE) (now referred to as TPE standing for third-party evidence) for determining the selling price of a deliverable. A vendor is now required to use its best estimate of the selling price when VSOE or TPE of the selling price cannot be determined. In addition, the residual method of allocating arrangement consideration is no longer permitted.  The Company implemented the provisions of this guidance as of July 3, 2010 on a prospective basis for all new or materially modified arrangements entered into on or after that date. The adoption of this guidance did not have a material impact on the Company’s consolidated financial statements.

 

In October 2009, the FASB issued ASU No. 2009-14, Software (ASC Topic 985) — Certain Revenue Arrangements That Include Software Elements, a consensus of the FASB Emerging Issues Task Force.  This guidance modifies the scope of ASC subtopic 985-605, Software-Revenue Recognition to exclude from its requirements (a) non-software components of tangible products and (b) software components of tangible products that are sold, licensed, or leased with tangible products when the software components and non-software components of the tangible product function together to deliver the tangible product’s essential functionality.  The Company implemented the provisions of this guidance as of July 3, 2010 on a prospective basis for all new or materially modified arrangements entered into on or after that date. The adoption of this guidance did not have a material impact on the Company’s consolidated financial statements.

 

8



Table of Contents

 

SEAGATE TECHNOLOGY PLC

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

 

2.  Balance Sheet Information

 

Investments

 

The Company’s short-term investments are primarily comprised of readily marketable debt securities with remaining maturities of more than 90 days at the time of purchase. With the exception of restricted investments, the Company has classified its entire investment portfolio as available-for-sale and has recognized its investments at fair value with unrealized gains and losses included in Accumulated other comprehensive income (loss), which is a component of shareholders’ equity. The amortized cost of debt securities is adjusted for amortization of premiums and accretion of discounts to maturity. Such amortization and accretion are included in interest income. Realized gains and losses are included in Other, net. The cost of securities sold is based on the specific identification method.

 

The Company’s available-for-sale securities include investments in auction rate securities.  Beginning in fiscal year 2008, the Company’s auction rate securities failed to settle at auction and have continued to fail through October 1, 2010.  Since the Company continues to earn interest on its auction rate securities at the maximum contractual rate, there have been no payment defaults with respect to such securities, and they are all collateralized, the Company expects to recover the entire amortized cost basis of these auction rate securities. The Company does not intend to sell these securities and has concluded it is not more likely than not that the Company will be required to sell the securities before the recovery of their amortized cost basis. As such, the Company believes the impairments totaling $2 million are not other-than-temporary and therefore have been recorded in Accumulated other comprehensive income (loss). Given the uncertainty as to when the liquidity issues associated with these securities will improve, these securities were classified as long-term investments in the Company’s Condensed Consolidated Balance Sheets.

 

The following is a summary of the fair value of available-for-sale securities at October 1, 2010:

 

(Dollars in millions)

 

Amortized
Cost

 

Unrealized
Gain/
(Loss)

 

Fair
Value

 

Commercial paper

 

$

1,077

 

$

 

$

1,077

 

Money market funds

 

554

 

 

554

 

U.S. treasuries and agency bonds

 

143

 

1

 

144

 

Corporate bonds

 

50

 

 

50

 

Asset-backed securities

 

43

 

 

43

 

Certificates of deposit

 

25

 

 

25

 

Sovereigns and supranationals

 

21

 

 

21

 

Auction rate securities

 

19

 

(2

)

17

 

Total

 

$

1,932

 

$

(1

)

$

1,931

 

Included in Cash and cash equivalents

 

 

 

 

 

$

1,631

 

Included in Short-term investments

 

 

 

 

 

283

 

Included in Other assets, net

 

 

 

 

 

17

 

Total

 

 

 

 

 

$

1,931

 

 

As of October 1, 2010, with the exception of the Company’s auction rate securities, the Company had no available-for-sale securities that had been in a continuous unrealized loss position for a period greater than 12 months and determined no available-for-sale securities were other-than-temporarily impaired.

 

The fair value of the Company’s investments in debt securities at October 1, 2010, by remaining contractual maturity, was as follows:

 

(Dollars in millions)

 

Amortized
Cost

 

Fair
Value

 

 

 

 

Due in less than 1 year

 

$

1,846

 

$

1,847

 

 

 

 

Due in 1 to 3 years

 

67

 

67

 

 

 

 

Thereafter

 

19

 

17

 

 

 

 

Total

 

$

1,932

 

$

1,931

 

 

 

 

 

9



Table of Contents

 

SEAGATE TECHNOLOGY PLC

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

 

The following is a summary of the fair value of available-for-sale securities at July 2, 2010:

 

(Dollars in millions)

 

Amortized
Cost

 

Unrealized
Gain/
(Loss)

 

Fair
Value

 

Commercial paper

 

$

1,231

 

$

 

$

1,231

 

Money market funds

 

833

 

 

833

 

U.S. treasuries and agency bonds

 

154

 

1

 

155

 

Asset-backed securities

 

45

 

 

45

 

Corporate bonds

 

41

 

 

41

 

Certificates of deposit

 

25

 

 

25

 

Sovereigns and supranationals

 

20

 

 

20

 

Auction rate securities

 

19

 

(2

)

17

 

Municipal bonds

 

3

 

 

3

 

Total

 

$

2,371

 

$

(1

)

$

2,370

 

Included in Cash and cash equivalents

 

 

 

 

 

$

2,101

 

Included in Short-term investments

 

 

 

 

 

252

 

Included in Other assets, net

 

 

 

 

 

17

 

Total

 

 

 

 

 

$

2,370

 

 

As of July 2, 2010, with the exception of the Company’s auction rate securities, the Company had no available-for-sale securities that had been in a continuous unrealized loss position for a period greater than 12 months and determined no available-for-sale securities were other-than-temporarily impaired.

 

Restricted Cash and Investments

 

As of October 1, 2010, the Company’s restricted cash and investments of $102 million consisted of $78 million in cash and investments held in trust for payment of its deferred compensation plan liabilities and $24 million in cash and investments held as collateral at banks for various performance obligations. As of July 2, 2010, the Company’s restricted cash and investments of $114 million consisted of $76 million in cash and investments held in trust for payment of its deferred compensation plan liabilities and $38 million in cash and investments held as collateral at banks for various performance obligations.

 

Inventories

 

(Dollars in millions)

 

October 1,
2010

 

July 2,
2010

 

Raw materials and components

 

$

244

 

$

263

 

Work-in-process

 

152

 

145

 

Finished goods

 

347

 

349

 

 

 

$

743

 

$

757

 

 

Other Current Assets

 

(Dollars in millions)

 

October 1,
2010

 

July 2,
2010

 

Vendor non-trade receivables

 

$

375

 

$

351

 

Other

 

234

 

163

 

 

 

$

609

 

$

514

 

 

Other current assets include non-trade receivables from certain manufacturing vendors resulting from the sale of components to these vendors, who use the components to manufacture completed sub-assemblies that they sell back to the Company. The Company does not reflect the sale of these components in Revenue and does not recognize any profits on these sales. The costs of the completed sub-assemblies are included in inventory upon purchase from the vendors.

 

10



Table of Contents

 

SEAGATE TECHNOLOGY PLC

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

 

Property, Equipment and Leasehold Improvements, net

 

(Dollars in millions)

 

October 1,
2010

 

July 2,
2010

 

Property, equipment and leasehold improvements

 

$

7,032

 

$

6,842

 

Accumulated depreciation and amortization

 

(4,757

)

(4,579

)

 

 

$

2,275

 

$

2,263

 

 

3.  Restructuring and Exit Costs

 

The Company’s significant restructuring plans are described below. All restructuring charges are reported in Restructuring and other, net on the Condensed Consolidated Statements of Operations, unless otherwise noted.

 

During the first quarter of fiscal year 2011, the Company recorded restructuring charges and adjustments of $4 million, comprised primarily of charges related to the planned closure of the Company’s Ang Mo Kio (AMK) manufacturing operations in Singapore (the “AMK Plan”).

 

2010 Plan. From inception of the Company’s restructuring plans announced in fiscal year 2010 as a result of the ongoing focus on cost efficiencies in all areas of its business, the Company has recorded $4 million related to employee termination costs. The Company made cash payments of $2 million relating to this plan during the three months ended October 1, 2010. These plans were substantially complete by the first quarter of fiscal year 2011.

 

AMK Plan. In August 2009, the Company announced that it will close its AMK facility in Singapore. The Company expects to complete the closure during fiscal year 2011. The hard drive manufacturing operations will be relocated to other existing Seagate facilities and the Company’s Asia International Headquarters (IHQ) will remain in Singapore. This closure and relocation is part of the Company’s ongoing focus on cost efficiencies in all areas of its business and is intended to facilitate leveraging manufacturing investments across fewer sites. The Company does not expect the closure to meaningfully change production capacity.  The Company currently estimates total restructuring charges of approximately $60 million, all in cash, including approximately $40 million for severance, approximately $10 million for the relocation of manufacturing equipment, and approximately $10 million for other plant closure and relocation costs. From the inception of this plan through October 1, 2010, the Company has recorded restructuring charges of approximately $41 million. During the three months ended October 1, 2010, the Company accrued restructuring charges of $1 million related to an adjustment to estimated post-employment benefits and $1 million for other exit costs for the AMK Plan. The Company made cash payments of $4 million relating to this plan during the three months ended October 1, 2010.

 

Other Restructuring and Exit Costs. Through October 1, 2010, the Company has recorded restructuring charges of approximately $118 million, net of adjustments, related to its previously announced closures of Pittsburgh, Pennsylvania and Milpitas, California facilities, and also has recorded certain exit costs aggregating $270 million related to its acquisition of Maxtor. During the three months ended October 1, 2010, the Company recorded restructuring charges of $2 million related to facility lease obligations and made cash payments of $4 million on these restructuring plans. The remaining balance of $44 million, as of October 1, 2010, is primarily associated with the exit of certain facilities or facility lease obligations. Payment of these exits costs are expected to continue through the end of fiscal year 2017.

 

The following table summarizes the Company’s restructuring activities for the three months ended October 1, 2010:

 

(Dollars in millions)

 

Employee
Benefits

 

Operating
Leases

 

Other
Exit
Costs

 

Total

 

All Restructuring Activities

 

 

 

 

 

 

 

 

 

Accrual balances at July 2, 2010

 

$

38

 

$

46

 

$

 

$

84

 

Restructuring charges

 

 

2

 

1

 

3

 

Cash payments

 

(5

)

(4

)

(1

)

(10

)

Adjustments

 

1

 

 

 

1

 

Accrual balances at October 1, 2010

 

$

34

 

$

44

 

$

 

$

78

 

 

11



Table of Contents

 

SEAGATE TECHNOLOGY PLC

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

 

Of the $78 million balance in accrued restructuring at October 1, 2010, $49 million is included in Accrued expenses and $29 million is included in Other non-current liabilities on the accompanying Condensed Consolidated Balance Sheet.

 

4.  Debt and Convertible Notes

 

Long-Term Debt

 

$600 Million Aggregate Principal Amount of 6.375% Senior Notes due October 2011 (the “2011 Notes”).  The 2011 Notes are included in Current portion of long-term debt on the Condensed Consolidated Balance Sheet at October 1, 2010.

 

$600 Million Aggregate Principal Amount of 6.875% Senior Notes due May 2020 (the “2020 Notes”).  The 2020 Notes were issued by the Company’s subsidiary, Seagate HDD Cayman, in fiscal year 2010. The obligations under the 2020 Notes were fully and unconditionally guaranteed, on a senior unsecured basis, by Seagate-Cayman through July 2, 2010. On July 3, 2010, Seagate-Cayman entered into a Supplemental Indenture (the “Supplemental Indenture”) with Seagate HDD Cayman, Seagate-Ireland, and Wells Fargo Bank, National Association, as trustee (the “Trustee”), whereby Seagate-Ireland agreed to fully and unconditionally guarantee the 2020 Notes and Seagate-Cayman was released from all obligations and covenants thereunder.

 

$55 Million Aggregate Principal Amount of 5.75% Subordinated Debentures due March 2012 (the “5.75% Debentures”).  During the three months ended October 1, 2010, the Company redeemed the entire outstanding aggregate principal amount of the 5.75% Debentures for cash at 100% of their principal amount, plus accrued and unpaid interest to the redemption date for approximately $34 million.  The Company recorded a loss on the redemption of approximately $2 million, which is included in Other, net on the Company’s Condensed Consolidated Statement of Operations for the three months ended October 1, 2010.

 

Convertible Notes

 

$326 Million Aggregate Principal Amount of 2.375% Convertible Senior Notes due August 2012 (the “2.375% Notes”).  During the three months ended October 1, 2010, the Company redeemed the entire $326 million outstanding aggregate principal amount of the 2.375% Notes for cash at a redemption price equal to 100.68% of their principal amount, plus accrued and unpaid interest to the redemption date for approximately $328 million. The Company recorded a loss on the redemption of approximately $22 million, which is included in Other, net on the Company’s Condensed Consolidated Statement of Operations for the three months ended October 1, 2010.

 

5.  Income Taxes

 

The income tax provision of $4 million recorded in the three months ended October 1, 2010 included approximately $10 million of discrete tax benefits, primarily from the release of tax reserves associated with the expiration of certain statutes of limitations.  In addition, the $11 million discrete income tax benefit from the loss recognized on the redemption of debt was offset by a corresponding increase in the valuation allowance for U.S. deferred tax assets.

 

The Company’s provision for income taxes recorded for the three months ended October 1, 2010 differed from the provision for income taxes that would be derived by applying the Irish statutory rate of 25% to income before income taxes, primarily due to the net effect of (i) the indefinite reinvestment of the Company’s earnings outside of Ireland, (ii) tax benefits related to tax holiday and tax incentive programs, (iii) tax expense related to intercompany transactions, (iv) an increase in valuation allowance for U.S. deferred tax assets and (v) the release of tax reserves as a result of the expiration of statutes of limitations.

 

The income tax provision for the three months ended October 2, 2009 included approximately $11 million of discrete tax benefits, primarily associated with the reversal of valuation allowance previously recorded for certain foreign deferred tax assets and the release of tax reserves associated with the expiration of certain statutes of limitations.

 

During the three months ended October 2, 2009, which was prior to the Company’s reorganization, the Company’s publicly traded parent was incorporated in the Cayman Islands and not subject to income tax. The income tax provision recorded for the three months ended October 2, 2009 differed from the provision for income taxes that would be derived

 

12



Table of Contents

 

SEAGATE TECHNOLOGY PLC

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

 

by applying a notional U.S. 35% rate to income before income taxes primarily due to the net effect of (i) tax benefits related to tax holiday and tax incentive programs, (ii) a decrease in valuation allowance for certain foreign deferred tax assets, (iii) a decrease in certain tax reserves and (iv) tax expense related to intercompany transactions.

 

6.  Derivative Financial Instruments

 

The Company is exposed to foreign currency exchange rate, interest rate, and to a lesser extent, equity price risks relating to its ongoing business operations. The Company enters into foreign currency forward exchange contracts in order to manage the foreign currency exchange rate risk on forecasted expenses denominated in foreign currencies and to mitigate the remeasurement risk of certain foreign currency denominated liabilities.  The Company’s accounting policies for these instruments are based on whether the instruments are classified as designated or non-designated hedging instruments. The Company records all derivatives on the Condensed Consolidated Balance Sheets at fair value. The effective portions of cash flow hedges are recorded in Accumulated other comprehensive income (loss) until the hedged item is recognized in earnings. Derivatives that are not designated as hedging instruments and the ineffective portions of cash flow hedges are adjusted to fair value through earnings.

 

The effective portions of unrealized net gains (losses) on cash flow hedges are included as a component of Accumulated other comprehensive income (loss).  As of October 1, 2010 and July 2, 2010, the Company had unrealized net gains on cash flow hedges of approximately $30 million and $3 million, respectively.

 

The Company dedesignates its cash flow hedges when the forecasted hedged transactions are realized or it is probable the forecasted hedged transaction will not occur in the initially identified time period. At such time, the associated gains and losses deferred in Accumulated other comprehensive income (loss) are reclassified into earnings in the same period that the underlying hedged transaction is included in earnings. Any subsequent changes in the fair value of such derivative instruments are immediately reflected in earnings. As of October 1, 2010, the Company’s existing foreign currency forward exchange contracts mature within 12 months. The deferred amount currently recorded in Accumulated other comprehensive income (loss) expected to be recognized into earnings over the next 12 months is a net gain of $31 million.

 

The following tables show the total notional value of the Company’s outstanding foreign currency forward exchange contracts as of October 1, 2010 and July 2, 2010:

 

As of October 1, 2010

 

(Dollars in millions)

 

Contracts Qualifying as Hedges

 

Contracts Not Qualifying as Hedges

 

Thai baht

 

$

558

 

$

188

 

Singapore dollars

 

129

 

11

 

Czech koruna

 

 

13

 

 

 

$

687

 

$

212

 

 

As of July 2, 2010

 

(Dollars in millions)

 

Contracts Qualifying as Hedges

 

Contracts Not Qualifying as Hedges

 

Thai baht

 

$

406

 

$

163

 

Singapore dollars

 

84

 

8

 

Japanese yen

 

1

 

 

Czech koruna

 

 

10

 

 

 

$

491

 

$

181

 

 

The Company is subject to equity market risks due to changes in the fair value of the notional investments selected by its employees as part of its Non-qualified Deferred Compensation Plan — the Seagate Deferred Compensation Plan (the “SDCP”). The Company has entered into a Total Return Swap (TRS) in order to manage the equity market risks associated with the SDCP liabilities. The Company pays a floating rate, based on LIBOR plus an interest rate spread, on the notional amount of the TRS. The TRS is designed to substantially offset changes in the SDCP liability due to changes in the value of the investment options made by employees. As of October 1, 2010, the notional investments underlying the TRS amounted to $77 million. The contract term of the TRS is approximately one year and is settled on a

 

13



Table of Contents

 

SEAGATE TECHNOLOGY PLC

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

 

monthly basis, therefore limiting counterparty performance risk. As of October 1, 2010, the Company had $5 million pledged to the counterparty, recorded as restricted cash, in accordance with the current terms of the TRS.  Additional collateral may be posted contingent on the counterparty’s exposure to the market value of the TRS.  The collateral amount and the interest rate spread could vary depending on the Company’s credit rating.  For example, if the Company’s credit rating declines, the Company will be required to post additional collateral.  The Company did not designate the TRS as a hedge. Rather, the Company records all changes in the fair value of the TRS to earnings to offset the market value changes of the SDCP liabilities.

 

The following tables show the Company’s derivative instruments measured at fair value as reflected in the Condensed Consolidated Balance Sheets as of October 1, 2010 and July 2, 2010:

 

Fair Values of Derivative Instruments as of October 1, 2010

 

 

 

Asset Derivatives

 

Liability Derivatives

 

(Dollars in millions)

 

Balance
Sheet
Location

 

Fair
Value

 

Balance
Sheet
Location

 

Fair
Value

 

Derivatives designated as hedging instruments:

 

 

 

 

 

 

 

 

 

Foreign currency forward exchange contracts

 

Other current assets

 

$

32

 

Accrued expenses

 

$

 

 

 

 

 

 

 

 

 

 

 

Derivatives not designated as hedging instruments:

 

 

 

 

 

 

 

 

 

Foreign currency forward exchange contracts

 

Other current assets

 

$

14

 

Accrued expenses

 

$

 

Total return swap

 

Other current assets

 

 

Accrued expenses

 

 

Total derivatives

 

 

 

$

46

 

 

 

$

 

 

Fair Values of Derivative Instruments as of July 2, 2010

 

 

 

Asset Derivatives

 

Liability Derivatives

 

(Dollars in millions)

 

Balance
Sheet
Location

 

Fair
Value

 

Balance
Sheet
Location

 

Fair
Value

 

Derivatives designated as hedging instruments:

 

 

 

 

 

 

 

 

 

Foreign currency forward exchange contracts

 

Other current assets

 

$

5

 

Accrued expenses

 

$

 

 

 

 

 

 

 

 

 

 

 

Derivatives not designated as hedging instruments:

 

 

 

 

 

 

 

 

 

Foreign currency forward exchange contracts

 

Other current assets

 

$

2

 

Accrued expenses

 

$

 

Total return swap

 

Other current assets

 

 

Accrued expenses

 

(1

)

Total derivatives

 

 

 

$

7

 

 

 

$

(1

)

 

14



Table of Contents

 

SEAGATE TECHNOLOGY PLC

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

 

The following tables show the effect of the Company’s derivative instruments on Other comprehensive income (OCI) and the Condensed Consolidated Statement of Operations for the three months ended October 1, 2010:

 

Derivatives Designated as Cash Flow
Hedges

 

Amount of
Gain or
(Loss)
Recognized
in OCI on
Derivative
(Effective
Portion)

 

Location of
Gain or (Loss)
Reclassified
from
Accumulated
OCI into
Income
(Effective
Portion)

 

Amount of
Gain or
(Loss)
Reclassified
from
Accumulated
OCI into
Income
(Effective
Portion)

 

Location of
Gain or (Loss)
Recognized in
Income on
Derivative
(Ineffective
Portion and
Amount
Excluded
from
Effectiveness
Testing)

 

Amount of
Gain or
(Loss)
Recognized
in Income
(Ineffective
Portion and
Amount
Excluded
from
Effectiveness
Testing) 
(a)

 

(Dollars in millions)

 

 

 

 

 

 

 

 

 

 

 

Foreign currency forward exchange contracts

 

$

32

 

Cost of revenue

 

$

5

 

Cost of revenue

 

$

¾

 

 

Derivatives Not Designated as Hedging Instruments

 

Location of Gain or (Loss) Recognized in
Income on Derivative

 

Amount of Gain or (Loss)
Recognized in Income on
Derivative

 

Foreign currency forward exchange contracts

 

Other, net

 

$

16

 

Total return swap

 

Operating expenses

 

$

8

 

 

 

 

 

$

24

 

 


(a)       The amount of gain or (loss) recognized in income includes $0 related to the ineffective portion of the hedging relationships and $0 related to the amount excluded from the assessment of hedge effectiveness, for the three months ended October 1, 2010.

 

The following tables show the effect of the Company’s derivative instruments on OCI and the Condensed Consolidated Statement of Operations for the three months ended October 2, 2009:

 

Derivatives Designated as Cash Flow
Hedges

 

Amount of
Gain or
(Loss)
Recognized
in OCI on
Derivative
(Effective
Portion)

 

Location of
Gain or (Loss)
Reclassified
from
Accumulated
OCI into
Income
(Effective
Portion)

 

Amount of
Gain or
(Loss)
Reclassified
from
Accumulated
OCI into
Income
(Effective
Portion)

 

Location of
Gain or (Loss)
Recognized in
Income on
Derivative
(Ineffective
Portion and
Amount
Excluded
from
Effectiveness
Testing)

 

Amount of
Gain or
(Loss)
Recognized
in Income
(Ineffective
Portion and
Amount
Excluded
from
Effectiveness
Testing) (a)

 

(Dollars in millions)

 

 

 

 

 

 

 

 

 

 

 

Foreign currency forward exchange contracts

 

$

6

 

Cost of revenue

 

$

 

Cost of revenue

 

$

 

 

Derivatives Not Designated as Hedging Instruments

 

Location of Gain or (Loss) Recognized in
Income on Derivative

 

Amount of Gain or (Loss)
Recognized in Income on
Derivative

 

Foreign currency forward exchange contracts

 

Other, net

 

$

4

 

Total return swap

 

Operating expenses

 

$

9

 

 

 

 

 

$

13

 

 


(a)       The amount of gain or (loss) recognized in income includes $0 related to the ineffective portion of the hedging relationships and $0 related to the amount excluded from the assessment of hedge effectiveness, for the three months ended October 2, 2009.

 

15



Table of Contents

 

SEAGATE TECHNOLOGY PLC

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

 

7.  Fair Value

 

Measurement of Fair Value

 

Fair value is defined as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining the fair value measurements for assets and liabilities required to be recorded at fair value, the Company considers the principal or most advantageous market in which it would transact and it considers assumptions that market participants would use when pricing the asset or liability.

 

Fair Value Hierarchy

 

A fair value hierarchy is based on whether the market participant assumptions used in determining fair value are obtained from independent sources (observable inputs) or reflects the Company’s own assumptions of market participant valuation (unobservable inputs). A financial instrument’s categorization within the fair value hierarchy is based upon the lowest level of input that is significant to the fair value measurement. The three levels of inputs that may be used to measure fair value:

 

Level 1 — Quoted prices in active markets that are unadjusted and accessible at the measurement date for identical, unrestricted assets or liabilities;

 

Level 2 — Quoted prices for identical assets and liabilities in markets that are inactive; quoted prices for similar assets and liabilities in active markets or financial instruments for which significant inputs are observable, either directly or indirectly; or

 

Level 3 — Prices or valuations that require inputs that are both unobservable and significant to the fair value measurement.

 

The Company considers an active market to be one in which transactions for the asset or liability occur with sufficient frequency and volume to provide pricing information on an ongoing basis, and views an inactive market as one in which there are few transactions for the asset or liability, the prices are not current, or price quotations vary substantially either over time or among market makers.  Where appropriate the Company’s or the counterparty’s non-performance risk is considered in determining the fair values of liabilities and assets, respectively.

 

16



Table of Contents

 

SEAGATE TECHNOLOGY PLC

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

 

Items Measured at Fair Value on a Recurring Basis

 

The following table presents the Company’s assets and liabilities that are measured at fair value on a recurring basis, excluding accrued interest components, as of October 1, 2010:

 

 

 

Fair Value Measurements at Reporting Date Using

 

(Dollars in millions)

 

Quoted
Prices in
Active
Markets for
Identical
Instruments

(Level 1)

 

Significant
Other

Observable
Inputs

(Level 2)

 

Significant
Unobservable
Inputs

(Level 3)

 

Total
Balance

 

Assets:

 

 

 

 

 

 

 

 

 

Commercial paper

 

$

 

$

1,077

 

$

 

$

1,077

 

Money market funds

 

554

 

 

 

554

 

U.S. treasuries and agency bonds

 

 

144

 

 

144

 

Corporate bonds

 

 

50

 

 

50

 

Asset-backed securities

 

 

43

 

 

43

 

Certificates of deposit

 

 

25

 

 

25

 

Sovereigns and supranationals

 

 

21

 

 

21

 

Total cash equivalents and short-term investments

 

554

 

1,360

 

 

1,914

 

 

 

 

 

 

 

 

 

 

 

Restricted cash and investments:

 

 

 

 

 

 

 

 

 

Money market funds

 

97

 

 

 

97

 

Certificates of deposit

 

 

5

 

 

5

 

Auction rate securities

 

 

 

17

 

17

 

Derivative assets

 

 

46

 

 

46

 

Total assets

 

$

651

 

$

1,411

 

$

17

 

$

2,079

 

 

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

Derivative liabilities

 

$

 

$

 

$

 

$

 

Total liabilities

 

$

 

$

 

$

 

$

 

 

 

 

Fair Value Measurements at Reporting Date Using

 

(Dollars in millions)

 

Quoted
Prices in
Active
Markets for
Identical
Instruments
(Level 1)

 

Significant
Other
Observable
Inputs
(Level 2)

 

Significant
Unobservable
Inputs
(Level 3)

 

Total
Balance

 

Assets:

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

554

 

$

1,077

 

$

 

$

1,631

 

Short-term investments

 

 

283

 

 

283

 

Restricted cash and investments

 

97

 

5

 

 

102

 

Other current assets

 

 

46

 

 

46

 

Other assets, net

 

 

 

17

 

17

 

Total assets

 

$

651

 

$

1,411

 

$

17

 

$

2,079

 

 

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

Accrued expenses

 

$

 

$

 

$

 

$

 

Total liabilities

 

$

 

$

 

$

 

$

 

 

17



Table of Contents

 

SEAGATE TECHNOLOGY PLC

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

 

The following table presents the Company’s assets and liabilities that are measured at fair value on a recurring basis, excluding accrued interest components, as of July 2, 2010:

 

 

 

Fair Value Measurements at Reporting Date Using

 

(Dollars in millions)

 

Quoted
Prices in
Active
Markets for
Identical
Instruments

(Level 1)

 

Significant
Other

Observable
Inputs

(Level 2)

 

Significant
Unobservable
Inputs

(Level 3)

 

Total
Balance

 

Assets:

 

 

 

 

 

 

 

 

 

Commercial paper

 

$

 

$

1,231

 

$

 

$

1,231

 

Money market funds

 

833

 

 

 

833

 

U.S. treasuries and agency bonds

 

 

155

 

 

155

 

Asset-backed securities

 

 

45

 

 

45

 

Corporate bonds

 

 

41

 

 

41

 

Certificates of deposit

 

 

25

 

 

25

 

Sovereigns and supranationals

 

 

20

 

 

20

 

Municipal bonds

 

 

3

 

 

3

 

Total cash equivalents and short-term investments

 

833

 

1,520

 

 

2,353

 

 

 

 

 

 

 

 

 

 

 

Restricted cash and investments:

 

 

 

 

 

 

 

 

 

Money market funds

 

76

 

 

 

76

 

Certificates of deposit

 

 

5

 

 

5

 

Auction rate securities

 

 

 

17

 

17

 

Derivative assets

 

 

7

 

 

7

 

Total assets

 

$

909

 

$

1,532

 

$

17

 

$

2,458

 

 

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

Derivative liabilities

 

$

 

$

(1

)

$

 

$

(1

)

Total liabilities

 

$

 

$

(1

)

$

 

$

(1

)

 

 

 

Fair Value Measurements at Reporting Date Using

 

(Dollars in millions)

 

Quoted
Prices in
Active
Markets for
Identical
Instruments
(Level 1)

 

Significant
Other
Observable
Inputs
(Level 2)

 

Significant
Unobservable
Inputs
(Level 3)

 

Total
Balance

 

Assets:

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

833

 

$

1,268

 

$

 

$

2,101

 

Short-term investments

 

 

252

 

 

252

 

Restricted cash and investments

 

76

 

5

 

 

81

 

Other current assets

 

 

7

 

 

7

 

Other assets, net

 

 

 

17

 

17

 

Total assets

 

$

909

 

$

1,532

 

$

17

 

$

2,458

 

Liabilities:

 

 

 

 

 

 

 

 

 

Accrued expenses

 

$

 

$

(1

)

$

 

$

(1

)

Total liabilities

 

$

 

$

(1

)

$

 

$

(1

)

 

18



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SEAGATE TECHNOLOGY PLC

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

 

Level 1 assets consist of money market funds for which quoted prices are available in an active market.

 

The Company classifies items in Level 2 if the financial asset or liability is valued using observable inputs. The Company uses observable inputs including quoted prices in active markets for similar assets or liabilities.  Level 2 assets include: agency bonds, corporate bonds, commercial paper, municipal bonds, and U.S. Treasuries. These debt investments are priced using observable inputs and valuation models which vary by asset class.  The Company uses a pricing service to assist in determining the fair values of all of its cash equivalents and short-term investments.  For the cash equivalents and short-term investments in the Company’s portfolio, multiple pricing sources are generally available.  The pricing service uses inputs from multiple industry standard data providers or other third party sources and various methodologies, such as weighting and models, to determine the appropriate price at the measurement date.  The Company corroborates the prices obtained from the pricing service against other independent sources and, as of October 1, 2010, has not found it necessary to make any adjustments to the prices obtained. The Company’s derivative financial instruments are also classified within Level 2.  The Company’s derivative financial instruments consist of foreign currency forward exchange contracts and the TRS.  The Company recognizes derivative financial instruments in its consolidated financial statements at fair value.  The Company determines the fair value of these instruments by considering the estimated amount it would pay or receive to terminate these agreements at the reporting date.

 

The Company’s Level 3 assets consist of auction rate securities with a par value of approximately $19 million, all of which are collateralized by student loans guaranteed by the Federal Family Education Loan Program. Beginning in fiscal year 2008, these securities failed to settle at auction and have continued to fail through October 1, 2010. Since there is no active market for these securities, the Company valued them using a discounted cash flow model. The valuation model is based on the income approach and reflects both observable and significant unobservable inputs.

 

The table below presents a reconciliation of assets measured at fair value on a recurring basis, excluding accrued interest components, using significant unobservable inputs (Level 3) for the three months ended October 1, 2010:

 

 

 

Fair Value Measurements
Using Significant
Unobservable Inputs

(Level 3)

 

(Dollars in millions)

 

Auction Rate Securities

 

Balance at July 2, 2010

 

$

17

 

Total net gains (losses) (realized and unrealized):

 

 

 

Realized gains (losses)(1)

 

 

Unrealized gains (losses)(2)

 

 

Balance at October 1, 2010

 

$

17

 

 


(1)

Realized gains (losses) on auction rate securities are recorded in Other, net on the Condensed Consolidated Statements of Operations.

(2)

Unrealized gains (losses) on auction rate securities are recorded as a separate component of Other comprehensive income (loss) in Accumulated other comprehensive income (loss), which is a component of Shareholders’ Equity.

 

19



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SEAGATE TECHNOLOGY PLC

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

 

Other Fair Value Disclosures

 

The Company’s debt is carried at amortized cost.  The fair value of the Company’s debt is derived from quoted prices in active markets in the following table in order of priority:

 

 

 

October 1, 2010

 

July 2, 2010

 

(Dollars in millions)

 

Carrying
Amount

 

Estimated
Fair Value

 

Carrying
Amount

 

Estimated
Fair Value

 

Capital Leases

 

$

1

 

$

1

 

$

2

 

$

2

 

10.0% Senior Secured Second-Priority Notes due May 2014

 

415

 

507

 

413

 

490

 

6.375% Senior Notes due October 2011

 

559

 

578

 

559

 

577

 

5.75% Subordinated Debentures due March 2012

 

 

 

31

 

33

 

2.375% Convertible Senior Notes due August 2012

 

 

 

298

 

329

 

6.8% Senior Notes due October 2016

 

599

 

619

 

599

 

587

 

6.875% Senior Notes due May 2020

 

600

 

585

 

600

 

574

 

 

 

2,174

 

2,290

 

2,502

 

2,592

 

Less current portion of long-term debt

 

(560

)

(579

)

(329

)

(362

)

Long-term debt, less current portion

 

$

1,614

 

$

1,711

 

$

2,173

 

$

2,230

 

 

8.          Shareholders’ Equity

 

Share Capital

 

On July 3, 2010, the Company consummated its previously announced reorganization pursuant to which Seagate-Ireland became the publicly traded parent of the Seagate corporate family. In connection with the reorganization, all issued and outstanding Seagate-Cayman common shares were cancelled and ceased to exist, and Seagate-Ireland issued ordinary shares on a one-for-one basis to the holders of Seagate-Cayman common shares for each Seagate-Cayman common share that was cancelled. In addition, Seagate-Ireland assumed Seagate-Cayman’s equity incentive related plans, sub-plans and agreements, including, but not limited to, the Seagate Technology 2001 Share Option Plan, the Amended Seagate Technology 2004 Share Compensation Plan, the Seagate Technology Employee Stock Purchase Plan, the Maxtor Corporation 2005 Performance Incentive Plan, the Maxtor Corporation Amended and Restated 1996 Stock Option Plan, and the Quantum Corporation Supplemental Stock Option Plan.

 

The Company’s authorized share capital is $13,500 and consists of 1,250,000,000 ordinary shares, par value $0.00001, of which 472,174,943 shares were outstanding as of October 1, 2010 and 100,000,000 preferred shares, par value $0.00001, of which none were issued or outstanding as of October 1, 2010.

 

Ordinary shares—Holders of ordinary shares are entitled to receive dividends when and as declared by the Company’s board of directors (the “Board of Directors”). Upon any liquidation, dissolution, or winding up of the Company, after required payments are made to holders of preferred shares, any remaining assets of the Company will be distributed ratably to holders of the preferred and ordinary shares. Holders of shares are entitled to one vote per share on all matters upon which the ordinary shares are entitled to vote, including the election of directors.

 

Preferred shares—The Company is authorized to issue up to a total of 100,000,000 preferred shares in one or more series, without shareholder approval. The Board of Directors is authorized to establish from time to time the number of shares to be included in each series, and to fix the rights, preferences and privileges of the shares of each wholly unissued series and any of its qualifications, limitations or restrictions. The Board of Directors can also increase or decrease the number of shares of a series, but not below the number of shares of that series then outstanding, without any further vote or action by the shareholders.

 

The Board of Directors may authorize the issuance of preferred shares with voting or conversion rights that could harm the voting power or other rights of the holders of the ordinary shares. The issuance of preferred shares, while providing flexibility in connection with possible acquisitions and other corporate purposes, could, among other things, have the effect of delaying, deferring or preventing a change in control of the Company and might harm the market price

 

20



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SEAGATE TECHNOLOGY PLC

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

 

of its ordinary shares and the voting and other rights of the holders of ordinary shares. As of October 1, 2010, there were no preferred shares outstanding.

 

Issuance of Ordinary Shares

 

During the three months ended October 1, 2010, the Company issued approximately 0.5 million of its ordinary shares from the exercise of stock options, release of restricted units and performance shares and approximately 1.5 million of its ordinary shares related to employee stock purchases.

 

Seagate Technology plc 2001 Share Option Plan (the “SOP”). A maximum of 100 million ordinary shares are issuable under the SOP. Options granted to employees generally vest as follows: 25% of the options on the first anniversary of the vesting commencement date and the remaining 75% proportionately each month over the next 36 months. Options granted under the SOP were granted at fair market value, with options granted up through September 5, 2004 expiring ten years from the date of grant and options granted subsequent to September 5, 2004 expiring seven years from the date of grant. As of October 1, 2010, there were approximately 1 million ordinary shares available for issuance under the SOP.

 

Seagate Technology plc 2004 Share Compensation Plan (the “SCP”). A maximum of 63.5 million ordinary shares are issuable under the SCP, including 10 million authorized for issuance of share awards and restricted units. Share awards and restricted units granted to employees generally vest 25% annually. Options granted to employees generally vest as follows: 25% of the options on the first anniversary of the vesting commencement date and the remaining 75% proportionately each month over the next 36 months. As of October 1, 2010, there were approximately 15 million ordinary shares available for issuance under the SCP.

 

Seagate Technology plc Stock Purchase Plan (the “ESPP”). There are 40 million ordinary shares authorized to be issued under the ESPP. In no event shall the total number of shares issued under the ESPP exceed 75 million ordinary shares. The ESPP consists of a six-month offering period with a maximum issuance of 1.5 million ordinary shares per offering period. The ESPP permits eligible employees to purchase ordinary shares through payroll deductions generally at 85% of the fair market value of the ordinary shares. As of October 1, 2010, there were approximately 8.5 million ordinary shares available for issuance under the ESPP.

 

Repurchases of Equity Securities

 

The Company did not repurchase any of its shares during the three months ended October 1, 2010.

 

9.  Compensation

 

The Company recorded approximately $13 million and $11 million of stock-based compensation during the three months ended October 1, 2010 and October 2, 2009, respectively.

 

On September 13, 2010, the Company granted performance-based restricted units to its senior executive officers under the SCP.  A single restricted unit represents the right to receive a single ordinary share of the Company.  The performance-based restricted units vest after the end of the performance period of three years from the grant date.  Vesting is subject to both the continued employment of the participant by the Company and the achievement of certain performance goals established by the Compensation Committee of the Company’s Board of Directors.  The performance goals are a three-year average return on invested capital (ROIC) goal and a relative total shareholder return (TSR) goal, which is based on the Company’s common shares measured against a benchmark TSR of a peer group over the same three-year period.  A percentage of the performance-based restricted units may vest only if at least the minimum ROIC goal is met regardless of whether the TSR goal is met.  The number of stock units to vest will range from 0% to 200% of the targeted 324,310 units.  In evaluating the fair value of the performance-based restricted stock unit, the Company used a Monte Carlo simulation on the grant date, taking the TSR goal into consideration, and determined the fair value to be $12.13 per unit.  Compensation expense related to the performance-based restricted units is only recorded in a period if it is probable that the ROIC goal will be met, and it is to be recorded at the expected level of achievement.  Compensation expense related to these restricted units for the three months ended October 1, 2010 was not material.

 

21



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SEAGATE TECHNOLOGY PLC

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

 

10.  Guarantees

 

Indemnifications to Officers and Directors

 

The Company has entered into indemnification agreements with the officers and directors of the Company and its subsidiaries (each, an “Indemnitee”). The agreements provide indemnification in addition to any of an Indemnitee’s indemnification rights under the Company’s Articles of Association, applicable law or otherwise, and indemnifies an Indemnitee for certain expenses (including attorneys’ fees), judgments, fines and settlement amounts actually and reasonably incurred by him or her in any action or proceeding, including any action by or in the right of the Company or any of its subsidiaries, arising out of his or her service as a director, officer, employee or agent of the Company or any of its subsidiaries or of any other entity to which he or she provides services at the Company’s request. However, an Indemnitee shall not be indemnified under the indemnification agreement for (i) any fraud or dishonesty in the performance of Indemnitee’s duty to the Company or the applicable subsidiary of the Company or (ii) Indemnitee’s conscious, intentional or willful failure to act honestly, lawfully and in good faith with a view to the best interests of the Company or the applicable subsidiary of the Company. In addition, the indemnification agreement provides that the Company will advance expenses incurred by an Indemnitee in connection with enforcement of the indemnification agreement or with the investigation, settlement or appeal of any action or proceeding against him or her as to which he or she could be indemnified. The nature of the indemnification obligations prevents the Company from making a reasonable estimate of the maximum potential amount it could be required to pay on behalf of its officers and directors. Historically, the Company has not made any significant indemnification payments under such agreements and no amount has been accrued in the accompanying condensed consolidated financial statements with respect to these indemnification obligations.

 

Intellectual Property Indemnification Obligations

 

The Company has entered into agreements with customers and suppliers that include limited intellectual property indemnification obligations that are customary in the industry. These guarantees generally require the Company to compensate the other party for certain damages and costs incurred as a result of third party intellectual property claims arising from these transactions. The nature of the intellectual property indemnification obligations prevents the Company from making a reasonable estimate of the maximum potential amount it could be required to pay to its customers and suppliers. Historically, the Company has not made any significant indemnification payments under such agreements and no amount has been accrued in the accompanying condensed consolidated financial statements with respect to these indemnification obligations.

 

Product Warranty

 

The Company estimates probable product warranty costs at the time revenue is recognized. The Company generally warrants its products for a period of one to five years. The Company uses estimated repair or replacement costs and uses statistical modeling to estimate product return rates in order to determine its warranty obligation. In addition, estimated settlements for customer compensatory claims relating to product quality issues, if any, are accrued as warranty expense. Changes in the Company’s product warranty liability during the three months ended October 1, 2010 and October 2, 2009 were as follows:

 

 

 

For the Three Months Ended

 

(Dollars in millions)

 

October 1,
2010

 

October 2,
2009

 

Balance, beginning of period

 

$

372

 

$

437

 

Warranties issued

 

49

 

61

 

Repairs and replacements

 

(48

)

(63

)

Changes in liability for pre-existing warranties, including expirations

 

(20

)

(17

)

Balance, end of period

 

$

353

 

$

418

 

 

22



Table of Contents

 

SEAGATE TECHNOLOGY PLC

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

 

11.  Earnings Per Share

 

Basic earnings per share is computed by dividing income available to shareholders by the weighted-average number of shares outstanding during the period. Diluted earnings per share is computed by dividing income available to shareholders by the weighted-average number of shares outstanding during the period increased to include the number of additional shares that would have been outstanding if the potentially dilutive securities had been issued. Potentially dilutive securities include outstanding options, shares to be purchased under the ESPP, and unvested restricted stock units. The dilutive effect of potentially dilutive securities is reflected in diluted earnings per share by application of the treasury stock method. Under the treasury stock method, an increase in fair market value of the Company’s share price can result in a greater dilutive effect from potentially dilutive securities.

 

The following table sets forth the computation of basic and diluted net income per share:

 

 

 

For the Three Months Ended

 

(Dollars in millions, except per share data)

 

October 1,
2010

 

October 2,
2009

 

Numerator:

 

 

 

 

 

Net income

 

$

149

 

$

179

 

 

 

 

 

 

 

Number of shares used in per share calculations:

 

 

 

 

 

Weighted-average shares outstanding

 

471

 

495

 

Weighted-average nonvested shares

 

 

(1

)

Total shares for purpose of calculating basic net income per share

 

471

 

494

 

Weighted-average effect of dilutive securities:

 

 

 

 

 

Dilutive potential shares related to employee equity award plans

 

16

 

18

 

Dilutive potential shares:

 

16

 

18

 

Total shares for purpose of calculating diluted net income per share

 

487

 

512

 

 

 

 

 

 

 

Net income per share:

 

 

 

 

 

Basic net income per share

 

$

0.32

 

$

0.36

 

Diluted net income per share

 

$

0.31

 

$

0.35

 

 

The following potential shares were excluded from the computation of diluted net income per share, as their effect would have been anti-dilutive:

 

 

 

For the Three Months Ended

 

(In millions)

 

October 1,
2010

 

October 2,
2009

 

Employee equity award plans

 

24

 

38

 

6.8% Convertible Senior Notes due April 2010

 

 

3

 

 

23



Table of Contents

 

SEAGATE TECHNOLOGY PLC

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

 

12.  Legal, Environmental and Other Contingencies

 

The Company assesses the probability of an unfavorable outcome of all its material litigation, claims, or assessments to determine whether a liability had been incurred and whether it is probable that one or more future events will occur confirming the fact of the loss. In the event that an unfavorable outcome is determined to be probable and the amount of the loss can be reasonably estimated, the Company establishes an accrual for the litigation, claim or assessment. Litigation is inherently uncertain and may result in adverse rulings or decisions. Additionally, the Company may enter into settlements or be subject to judgments that may, individually or in the aggregate, have a material adverse effect on its results of operations. Accordingly, actual results could differ materially.

 

Intellectual Property Litigation

 

Convolve, Inc. (“Convolve”) and Massachusetts Institute of Technology (“MIT”) v. Seagate Technology LLC, et al. —On July 13, 2000, Convolve and MIT filed suit against Compaq Computer Corporation and the Company in the U.S. District Court for the Southern District of New York, alleging infringement of U.S. Patent Nos. 4,916,635, “Shaping Command Inputs to Minimize Unwanted Dynamics” (the ‘635 patent) and U.S. Patent No. 5,638,267, “Method and Apparatus for Minimizing Unwanted Dynamics in a Physical System” (the ‘267 patent), misappropriation of trade secrets, breach of contract, tortious interference with contract and fraud relating to Convolve and MIT’s Input Shaping® and Convolve’s Quick and Quiet™ technology. The plaintiffs claimed their technology is incorporated in Seagate’s sound barrier technology, which was publicly announced on June 6, 2000. The complaint seeks injunctive relief, $800 million in compensatory damages and unspecified punitive damages, including willful infringement.

 

On November 6, 2001, the U.S. Patent and Trademark Office (USPTO) issued to Convolve US Patent No. 6,314,473, “System for Removing Selected Unwanted Frequencies in Accordance with Altered Settings in a User Interface of a Data Storage Device,” (the ‘473 patent”). Convolve filed an amended complaint on January 16, 2002, alleging defendants infringe this patent.

 

The ‘635 patent expired on September 12, 2008.  The court ruled in 2010 that the ‘267 patent was out of the case.  No trial date has been set in the litigation. The Company believes the claims are without merit, and intends to defend against them vigorously.

 

Siemens, AG v. Seagate Technology (Ireland)—On December 2, 2008, Siemens served Seagate Technology (Ireland), an indirect wholly-owned subsidiary of Seagate Technology, with a writ of summons alleging infringement of European Patent (UK) No. 0 674 769 (the EU ‘769 patent), which is the European counterpart to US Patent No. 5,686,838 upon which Siemens had sued Seagate Technology in the United States. The suit was filed in the High Court of Justice in Northern Ireland, Chancery Division. Siemens alleges that giant magnetoresistive (GMR), tunnel magnetoresistive (TMR), and tunnel giant magnetoresistive (TGMR) products designed and manufactured by Seagate Technology (Ireland) infringe the EU ‘769 patent. Trial on liability issues was completed in June 2010, and the Company awaits the court’s decision. The Company believes the claims are without merit.

 

Qimonda AG v. LSI Corporation, et al.—On December 19, 2008, the US International Trade Commission (ITC) instituted an investigation under section 337 of the Tariff Act of 1930, as amended, at the request of complainant Qimonda AG, naming LSI Corporation and six Seagate Technology entities as respondents. The complaint alleges that LSI Corporation and Seagate import products into the US that infringe seven Qimonda patents relating to the design and manufacture of semiconductor integrated chips. The ITC trial was held in June 2009. On October 14, 2009, the Administrative Law Judge issued an Initial Determination finding the Qimonda patents either invalid, not infringed, or both.  Qimonda appealed to the ITC Commission, who ruled on January 29, 2010, that the patents were either invalid, not infringed, or both. On March 31, 2010, Qimonda noticed an appeal of the Commissions’ ruling to the Court of Appeals for the Federal Circuit. The Company intends to vigorously oppose the appeal.

 

Collins, et al. v. Seagate Technology, et al.—On July 15, 2009, Carl Collins and Farzin Davanloo filed a complaint in the US District Court for the Eastern District of Texas, Marshall Division, against Seagate Technology, Seagate Technology LLC, and 19 other hard drive, computer, and retail companies. The complaint alleges that unspecified hard disk drives and components thereof infringe US patent Nos. 5,411,797 (the ‘797 patent) and 5,478,650 (the ‘650 patent), both entitled “Nanophase Diamond Films.”  On October 4, 2010, the case was dismissed with prejudice against the Seagate entities pursuant to a confidential settlement agreement.

 

24



Table of Contents

 

SEAGATE TECHNOLOGY PLC

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

 

Alexander Shukh v. Seagate Technology—Former Seagate engineer Alexander Shukh filed a complaint and an amended complaint against Seagate in Minnesota federal court, alleging, among other things, employment discrimination based on his Belarussian national origin and wrongful failure to name him as an inventor on several patents and patent applications. Mr. Shukh’s employment was terminated as part of a company-wide reduction in force in fiscal year 2009. He seeks damages in excess of $75 million. The Company believes the claims are without merit and intends to vigorously defend this case.

 

Siemens GmbH v. Seagate Technology (Germany)—On March 26, 2010, Siemens commenced proceedings against Seagate Technology GmbH, the Netherlands branch office of Seagate Technology International, and Seagate Technology LLC in the Dusseldorf District Court in Germany. The complaint alleges infringement of European Patent Number 0 674 769 (the “EU ‘769 Patent”), which corresponds to the patent in suit in the earlier U.S. litigation, which resulted in a complete jury verdict in Seagate’s favor, and in litigation currently pending in Northern Ireland.  Siemens seeks a declaration that the EU ‘769 Patent is infringed by GMR and TMR products, removal of all infringing inventory, damages in an unstated amount, and costs. The Company intends to vigorously oppose this action.

 

Environmental Matters

 

The Company’s operations are subject to U.S. and foreign laws and regulations relating to the protection of the environment, including those governing discharges of pollutants into the air and water, the management and disposal of hazardous substances and wastes and the cleanup of contaminated sites. Some of the Company’s operations require environmental permits and controls to prevent and reduce air and water pollution, and these permits are subject to modification, renewal and revocation by issuing authorities.

 

The Company has established environmental management systems and continually updates its environmental policies and standard operating procedures for its operations worldwide. The Company believes that its operations are in material compliance with applicable environmental laws, regulations and permits. The Company budgets for operating and capital costs on an ongoing basis to comply with environmental laws. If additional or more stringent requirements are imposed on the Company in the future, it could incur additional operating costs and capital expenditures.

 

Some environmental laws, such as the Comprehensive Environmental Response Compensation and Liability Act of 1980 (as amended, the “Superfund” law) and its state equivalents, can impose liability for the cost of cleanup of contaminated sites upon any of the current or former site owners or operators or upon parties who sent waste to these sites, regardless of whether the owner or operator owned the site at the time of the release of hazardous substances or the lawfulness of the original disposal activity. The Company has been identified as a potentially responsible party at several sites. At each of these sites, the Company has an assigned portion of the financial liability based on the type and amount of hazardous substances disposed of by each party at the site and the number of financially viable parties. The Company has fulfilled its responsibilities at some of these sites and remains involved in only a few at this time.

 

While the Company’s ultimate costs in connection with these sites is difficult to predict with complete accuracy, based on its current estimates of cleanup costs and its expected allocation of these costs, the Company does not expect costs in connection with these sites to be material.

 

The Company may be subject to various state, federal and international laws and regulations governing the environment, including those restricting the presence of certain substances in electronic products. For example, the European Union (“EU”) enacted the Restriction of the Use of Certain Hazardous Substances in Electrical and Electronic Equipment, which prohibits the use of certain substances, including lead, in certain products, including disk drives, put on the market after July 1, 2006. Similar legislation has been or may be enacted in other jurisdictions, including in the United States, Canada, Mexico, China and Japan.

 

25



Table of Contents

 

SEAGATE TECHNOLOGY PLC

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

 

If the Company or its suppliers fails to comply with the substance restrictions, recycle requirements or other environmental requirements as they are enacted worldwide, it could have a materially adverse effect on the Company’s business.

 

Other Matters

 

The Company is involved in a number of other judicial and administrative proceedings incidental to its business, and the Company may be involved in various legal proceedings arising in the normal course of its business in the future. Although occasional adverse decisions or settlements may occur, the Company believes that the final disposition of such matters will not have a material adverse effect on its financial position or results of operations.

 

26



Table of Contents

 

ITEM 2.   MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

The following is a discussion of the financial condition and results of operations for our fiscal quarters ended October 1, 2010, July 2, 2010 and October 2, 2009 herein referred to as the “September 2010 quarter”, the “June 2010 quarter” and the “September 2009 quarter”, respectively. Unless the context indicates otherwise, as used herein, the terms “we,” “us,” “Seagate,” the “Company” and “our” refer to Seagate Technology plc, an Irish public limited company, and its subsidiaries. References to “$” are to United States dollars.

 

You should read this discussion in conjunction with financial information and related notes included elsewhere in this report. We operate and report financial results on a fiscal year of 52 or 53 weeks ending on the Friday closest to June 30. The September 2010, June 2010 and September 2009 quarters were all 13 weeks.  Except as noted, references to any fiscal year mean the twelve-month period ending on the Friday closest to June 30 of that year.

 

Some of the statements and assumptions included in this Quarterly Report on Form 10-Q are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 or Section 21E of the Securities Exchange Act of 1934, each as amended, including, in particular, statements about our plans, strategies and prospects and estimates of industry growth for the fiscal quarter ending December 31, 2010 (the “December 2010 quarter”) and beyond. These statements identify prospective information and include words such as “expects,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “projects” and similar expressions. These forward-looking statements are based on information available to us as of the date of this report. Current expectations, forecasts and assumptions involve a number of risks, uncertainties and other factors that could cause actual results to differ materially from those anticipated by these forward-looking statements. Such risks, uncertainties and other factors may be beyond our control. In particular, the decline in global economic conditions poses a risk to our operating and financial performance as consumers and businesses have, and may continue to, defer purchases in response to tighter credit and negative financial conditions. Such risks and uncertainties also include the impact of the variable demand, particularly in view of current business and economic conditions; dependence on our ability to successfully qualify, manufacture and sell our disk drive products in increasing volumes on a cost-effective basis and with acceptable quality, particularly our new disk drive products with lower cost structures; the impact of competitive product announcements; our ability to achieve projected cost savings; and our ability to rapidly increase our manufacturing capacity in pace with our competitors if demand for disk drives increases.  We also encourage you to read our Annual Report on Form 10-K and 10-K/A as filed with the U.S. Securities and Exchange Commission (SEC) on August 20, 2010 and October 6, 2010, respectively, which contain information concerning risk, uncertainties and other factors that could cause results to differ materially from those projected in the forward-looking statements. These forward-looking statements should not be relied upon as representing our views as of any subsequent date and we undertake no obligation to update forward-looking statements to reflect events or circumstances after the date they were made.

 

Our Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A) is provided in addition to the accompanying condensed consolidated financial statements and notes to assist readers in understanding our results of operations, financial condition, and cash flows. MD&A is organized as follows:

 

·                  Our Company.  Overview of our business.

·                  Overview of the September 2010 quarter.  The September 2010 quarter summary and trends.

·                  Results of Operations. Analysis of our financial results comparing the September 2010 quarter to the June 2010 quarter and the September 2009 quarter.

·                  Liquidity and Capital Resources. An analysis of changes in our balance sheets and cash flows, and discussion of our financial condition including the credit quality of our investment portfolio and potential sources of liquidity.

·                  Off-Balance-Sheet Arrangements. An explanation of off-balance-sheet arrangements.

·                  Critical Accounting Policies. Accounting policies and estimates that we believe are important to understanding the assumptions and judgments incorporated in our reported financial results.

 

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Our Company

 

We are the world’s leading provider of hard disk drives based on revenue. We design, manufacture, market and sell hard disk drives. Hard disk drives commonly referred to as disk drives, hard drives or HDDs, are devices that store digitally encoded data on rapidly rotating disks with magnetic surfaces. The performance attributes of disk drives, including their cost effectiveness and high storage capacities have resulted in disk drives being used as the primary medium for storing electronic data.

 

We produce a broad range of disk drive products addressing enterprise applications, where our products are designed for enterprise servers, mainframes and workstations; client compute applications, where our products are designed for desktop and notebook computers; and client non-compute applications, where our products are designed for a wide variety of end user devices such as digital video recorders (DVRs), personal data backup systems, portable external storage systems and digital media systems.  In addition to manufacturing and selling disk drives, we provide data storage services for small- to medium-sized businesses, including online backup, data protection and recovery solutions.

 

Effective as of July 3, 2010, Seagate Technology public limited company, an Irish public limited company, (“Seagate-Ireland”) became the successor to Seagate Technology, an exempted company incorporated with limited liability under the laws of the Cayman Islands (“Seagate-Cayman”).  In connection with the reorganization, all issued and outstanding Seagate-Cayman common shares were cancelled and ceased to exist, and Seagate-Ireland issued ordinary shares on a one-for-one basis to the holders of Seagate-Cayman common shares for each Seagate-Cayman common share that was cancelled.

 

Overview of the September 2010 Quarter

 

Revenue in the September 2010 quarter of $2.7 billion was relatively flat when compared to the June 2010 and September 2009 quarters. We shipped 49.2 million units during the September 2010 quarter, which represented an increase of 5% and 6% as compared to the June 2010 and September 2009 quarters, respectively. Unit shipments and revenue in the September 2010 quarter reflected a less than normal seasonal increase in demand as well as a competitive pricing environment. The competitive pricing environment was the main contributing factor to our gross margin decline to 20% from 27% and 25% in the June 2010 and September 2009 quarters, respectively.

 

We generated operating cash flows of $245 million in the September 2010 quarter. We also used approximately $361 million in cash for the redemption of long-term debt and $358 million in cash for capital expenditures.

 

Demand Trends for Disk Drives

 

Disk Drives for Enterprise Storage.  We define enterprise storage as disk drives designed for mission critical applications and nearline applications. We believe the total available market (TAM) for enterprise disk drives for the September 2010 quarter was approximately 13 million units, an increase of 5% and 23%, as compared to the June 2010 and September 2009 quarters, respectively. We believe that the increase in the TAM from the September 2009 quarter was primarily due to data centers resuming their previously deferred purchases of information technology equipment.

 

Disk Drives for Client Compute.    We define client compute applications as disk drives designed for the traditional desktop and mobile compute applications. We believe that the client compute TAM for the September 2010 quarter was approximately 124 million units, an increase of 4% and 3% as compared to the June 2010 and September 2009 quarters, respectively. We believe the demand for client compute storage in the September 2010 quarter was impacted by continued weakness in consumer spending.

 

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Disk Drives for Client Non-Compute. We define client non-compute applications as disk drives designed for consumer electronic devices such as DVRs and gaming devices and disk drives used for direct-attached storage (DAS).  We believe the client non-compute TAM in the September 2010 quarter was approximately 28 million units, an increase of 3% from the June 2010 quarter.

 

Price Erosion

 

We believe the competitive pricing environment was due primarily to the continued weakness in consumer spending in the U.S. and Europe, and ample availability of hard disk drives during the quarter.

 

Seasonality

 

The disk drive industry traditionally experiences seasonal variability in demand with higher levels of demand in the second half of the calendar year. This seasonality is driven by consumer spending in the back-to-school season from late summer to fall and the traditional holiday shopping season from fall to winter. In addition, corporate demand is typically higher during the second half of the calendar year. In the September 2010 quarter, we believe seasonality was muted by the continued weakness in consumer spending in the U.S. and Europe.

 

Other Significant Events

 

On July 27, 2010, we redeemed our 5.75% Subordinated Debentures due March 2012 (the “5.75% Debentures”) for cash at 100% of their principal amount, plus accrued and unpaid interest to the redemption date for approximately $34 million.

 

On August 20, 2010, we redeemed our 2.375% Convertible Senior Notes due August 2012 (the “2.375% Notes”) for cash at 100.68% of their principal amount, plus accrued and unpaid interest to the redemption date for approximately $328 million.

 

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Results of Operations

 

We list in the table below the Condensed Consolidated Statements of Operations by dollars and as a percentage of revenue for the periods indicated.

 

 

 

For the Three Months Ended

 

(in millions)

 

October 1,
2010

 

July 2,
2010

 

October 2,
2009

 

 

 

 

 

 

 

 

 

Revenue

 

$

2,697

 

$

2,656

 

$

2,663

 

Cost of revenue

 

2,147

 

1,928

 

2,010

 

 

 

 

 

 

 

 

 

Gross margin

 

550

 

728

 

653

 

 

 

 

 

 

 

 

 

Product development

 

209

 

219

 

208

 

Marketing and administrative

 

105

 

115

 

106

 

Amortization of intangibles

 

1

 

4

 

8

 

Restructuring and other, net

 

4

 

16

 

46

 

Impairment of long-lived assets

 

 

(6

)

64

 

 

 

 

 

 

 

 

 

Income from operations

 

231

 

380

 

221

 

Other expense, net

 

(78

)

(40

)

(41

)

 

 

 

 

 

 

 

 

Income before income taxes

 

153

 

340

 

180

 

Provision for (benefit from) income taxes

 

4

 

(39

)

1

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

149

 

$

379

 

$

179

 

 

 

 

 

 

 

For the Three Months Ended

 

(as a percentage of revenue)

 

October 1,
2010

 

July 2,
2010

 

October 2,
2009

 

 

 

 

 

 

 

 

 

Revenue

 

100

%

100

%

100

%

Cost of revenue

 

80

 

73

 

75

 

 

 

 

 

 

 

 

 

Gross margin

 

20

 

27

 

25

 

 

 

 

 

 

 

 

 

Product development

 

8

 

8

 

8

 

Marketing and administrative

 

4

 

4

 

4

 

Amortization of intangibles

 

 

 

 

Restructuring and other, net

 

 

1

 

2

 

Impairment of long-lived assets