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 April 3, 2015

 

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)

 

38/39 Fitzwilliam Square

Dublin 2, Ireland

(Address of principal executive offices)

 

Telephone:  (353) (1) 234-3136

(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 the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

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 April 28, 2015, 317,381,531 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

3

 

 

 

 

Condensed Consolidated Balance Sheets — April 3, 2015 and June 27, 2014 (Unaudited)

3

 

 

 

 

Condensed Consolidated Statements of Operations — Three and Nine Months ended April 3, 2015 and March 28, 2014 (Unaudited)

4

 

 

 

 

Condensed Consolidated Statements of Comprehensive Income — Three and Nine Months ended April 3, 2015 and March 28, 2014 (Unaudited)

5

 

 

 

 

Condensed Consolidated Statements of Cash Flows — Nine Months ended April 3, 2015 and March 28, 2014 (Unaudited)

6

 

 

 

 

Condensed Consolidated Statement of Shareholders’ Equity — Nine Months ended April 3, 2015 (Unaudited)

7

 

 

 

 

Notes to Condensed Consolidated Financial Statements (Unaudited)

8

 

 

 

Item 2.

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

27

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

34

 

 

 

Item 4.

Controls and Procedures

35

 

 

 

PART II

OTHER INFORMATION

 

 

 

 

Item 1.

Legal Proceedings

36

 

 

 

Item 1A.

Risk Factors

36

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

36

 

 

 

Item 3.

Defaults Upon Senior Securities

36

 

 

 

Item 4.

Mine Safety Disclosures

36

 

 

 

Item 5.

Other Information

36

 

 

 

Item 6.

Exhibits

36

 

 

 

 

SIGNATURES

37

 

2



Table of Contents

 

PART I

FINANCIAL INFORMATION

ITEM 1.  FINANCIAL STATEMENTS

SEAGATE TECHNOLOGY PLC

CONDENSED CONSOLIDATED BALANCE SHEETS

(In millions)

(Unaudited)

 

 

 

April 3,
 2015

 

June 27,
 2014

 

ASSETS

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

2,604

 

$

2,634

 

Short-term investments

 

6

 

20

 

Restricted cash and investments

 

4

 

4

 

Accounts receivable, net

 

1,769

 

1,729

 

Inventories

 

1,083

 

985

 

Deferred income taxes

 

121

 

126

 

Other current assets

 

244

 

279

 

Total current assets

 

5,831

 

5,777

 

Property, equipment and leasehold improvements, net

 

2,182

 

2,136

 

Goodwill

 

871

 

537

 

Other intangible assets, net

 

410

 

359

 

Deferred income taxes

 

499

 

499

 

Other assets, net

 

243

 

184

 

Total Assets

 

$

10,036

 

$

9,492

 

LIABILITIES AND EQUITY

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Accounts payable

 

$

1,683

 

$

1,549

 

Accrued employee compensation

 

256

 

296

 

Accrued warranty

 

147

 

148

 

Accrued expenses

 

483

 

405

 

Current portion of long-term debt

 

474

 

 

Total current liabilities

 

3,043

 

2,398

 

Long-term accrued warranty

 

126

 

125

 

Long-term accrued income taxes

 

34

 

90

 

Other non-current liabilities

 

185

 

127

 

Long-term debt

 

3,457

 

3,920

 

Total Liabilities

 

6,845

 

6,660

 

Commitments and contingencies (See Notes 11 and 13)

 

 

 

 

 

Equity:

 

 

 

 

 

Seagate Technology plc Shareholders’ Equity:

 

 

 

 

 

Ordinary shares and additional paid-in capital

 

5,696

 

5,511

 

Accumulated other comprehensive loss

 

(33

)

(2

)

Accumulated deficit

 

(2,472

)

(2,677

)

Total Seagate Technology plc Shareholders’ Equity

 

3,191

 

2,832

 

Noncontrolling interest

 

 

 

Total Equity

 

3,191

 

2,832

 

Total Liabilities and Equity

 

$

10,036

 

$

9,492

 

 

The information as of June 27, 2014 was derived from the Company’s audited Consolidated Balance Sheet as of June 27, 2014.

 

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

 

For the Nine Months Ended

 

 

 

April 3,
2015

 

March 28,
2014

 

April 3,
2015

 

March 28,
2014

 

Revenue

 

$

3,330

 

$

3,406

 

$

10,811

 

$

10,423

 

Cost of revenue

 

2,375

 

2,447

 

7,778

 

7,502

 

Product development

 

346

 

297

 

1,029

 

903

 

Marketing and administrative

 

219

 

190

 

654

 

561

 

Amortization of intangibles

 

33

 

26

 

95

 

71

 

Restructuring and other, net

 

14

 

2

 

24

 

20

 

Gain on arbitration award, net

 

 

 

(620

)

 

Total operating expenses

 

2,987

 

2,962

 

8,960

 

9,057

 

Income from operations

 

343

 

444

 

1,851

 

1,366

 

Interest income

 

1

 

1

 

4

 

7

 

Interest expense

 

(48

)

(52

)

(152

)

(145

)

Other, net

 

8

 

(3

)

118

 

44

 

Other income (expense), net

 

(39

)

(54

)

(30

)

(94

)

Income before income taxes

 

304

 

390

 

1,821

 

1,272

 

Provision for (benefit from) income taxes

 

13

 

(5

)

216

 

22

 

Net income

 

291

 

395

 

1,605

 

1,250

 

Less: Net income attributable to noncontrolling interest

 

 

 

 

 

Net income attributable to Seagate Technology plc

 

$

291

 

$

395

 

$

1,605

 

$

1,250

 

Net income per share attributable to Seagate Technology plc ordinary shareholders:

 

 

 

 

 

 

 

 

 

Basic

 

$

0.90

 

$

1.21

 

$

4.92

 

$

3.68

 

Diluted

 

0.88

 

1.17

 

4.81

 

3.56

 

Number of shares used in per share calculations:

 

 

 

 

 

 

 

 

 

Basic

 

323

 

327

 

326

 

340

 

Diluted

 

330

 

338

 

334

 

351

 

Cash dividends declared per Seagate Technology plc ordinary share

 

$

0.54

 

$

0.43

 

$

1.51

 

$

1.24

 

 

See Notes to Condensed Consolidated Financial Statements.

 

4



Table of Contents

 

SEAGATE TECHNOLOGY PLC

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In millions)

(Unaudited)

 

 

 

For the Three Months Ended

 

For the Nine Months Ended

 

 

 

April 3,
2015

 

March 28,
2014

 

April 3,
2015

 

March 28,
2014

 

Net income

 

$

291

 

$

395

 

$

1,605

 

$

1,250

 

Other comprehensive income (loss), net of tax:

 

 

 

 

 

 

 

 

 

Cash flow hedges

 

 

 

 

 

 

 

 

 

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

 

(3

)

1

 

(12

)

 

Less: reclassification for amounts included in net income

 

7

 

 

9

 

 

Net change

 

4

 

1

 

(3

)

 

Marketable securities

 

 

 

 

 

 

 

 

 

Change in net unrealized gain (loss) on marketable securities

 

 

 

 

1

 

Less: reclassification for amounts included in net income

 

 

 

 

 

Net change

 

 

 

 

1

 

Post-retirement plans

 

 

 

 

 

 

 

 

 

Change in unrealized gain (loss) on post-retirement plans

 

 

 

 

1

 

Less: reclassification for amounts included in net income

 

 

 

 

 

Net change

 

 

 

 

1

 

Foreign currency translation adjustments

 

(12

)

4

 

(28

)

9

 

Total other comprehensive income (loss), net of tax

 

(8

)

5

 

(31

)

11

 

Comprehensive income

 

283

 

400

 

1,574

 

1,261

 

Less: Comprehensive income attributable to noncontrolling interest

 

 

 

 

 

Comprehensive income attributable to Seagate Technology plc

 

$

283

 

$

400

 

$

1,574

 

$

1,261

 

 

See Notes to Condensed Consolidated Financial Statements.

 

5



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SEAGATE TECHNOLOGY PLC

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In millions)

(Unaudited)

 

 

 

For the Nine Months Ended

 

 

 

April 3,
2015

 

March 28,
2014

 

OPERATING ACTIVITIES

 

 

 

 

 

Net income

 

$

1,605

 

$

1,250

 

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

 

 

 

 

 

Depreciation and amortization

 

629

 

668

 

Share-based compensation

 

106

 

87

 

Deferred income taxes

 

(3

)

(17

)

(Gain) loss on sale of property and equipment

 

1

 

(6

)

Gain on sale of investments

 

 

(32

)

Loss on redemption and repurchase of debt

 

52

 

7

 

Other non-cash operating activities, net

 

(9

)

16

 

Changes in operating assets and liabilities:

 

 

 

 

 

Restricted cash and investments

 

 

104

 

Accounts receivable, net

 

(36

)

32

 

Inventories

 

(61

)

8

 

Accounts payable

 

149

 

(274

)

Accrued employee compensation

 

(40

)

(123

)

Accrued expenses, income taxes and warranty

 

(9

)

16

 

Vendor non-trade receivables

 

30

 

204

 

Other assets and liabilities

 

5

 

41

 

Net cash provided by operating activities

 

2,419

 

1,981

 

INVESTING ACTIVITIES

 

 

 

 

 

Acquisition of property, equipment and leasehold improvements

 

(546

)

(428

)

Proceeds from the sale of strategic investments

 

 

72

 

Purchases of short-term investments

 

(5

)

(87

)

Sales of short-term investments

 

4

 

463

 

Maturities of short-term investments

 

19

 

61

 

Cash used in acquisition of business

 

(450

)

 

Other investing activities, net

 

(90

)

(29

)

Net cash (used in) provided by investing activities

 

(1,068

)

52

 

FINANCING ACTIVITIES

 

 

 

 

 

Redemption and repurchase of debt

 

(536

)

(64

)

Net proceeds from issuance of long-term debt

 

498

 

791

 

Repurchases of ordinary shares

 

(907

)

(1,886

)

Dividends to shareholders

 

(493

)

(417

)

Proceeds from issuance of ordinary shares under employee stock plans

 

91

 

98

 

Other financing activities, net

 

(12

)

(5

)

Net cash used in financing activities

 

(1,359

)

(1,483

)

Effect of foreign currency exchange rate changes on cash and cash equivalents

 

(22

)

1

 

Increase (decrease) in cash and cash equivalents

 

(30

)

551

 

Cash and cash equivalents at the beginning of the period

 

2,634

 

1,708

 

Cash and cash equivalents at the end of the period

 

$

2,604

 

$

2,259

 

 

See Notes to Condensed Consolidated Financial Statements.

 

6



Table of Contents

 

SEAGATE TECHNOLOGY PLC

CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY

 

For the Nine Months Ended April 3, 2015

(In millions)

(Unaudited)

 

 

 

 

 

Seagate Technology plc Ordinary Shareholders

 

 

 

 

 

Total
Equity

 

Number
of
Ordinary
Shares

 

Par Value
of Shares

 

Additional
Paid-in
Capital

 

Accumulated
Other
Comprehensive
Loss

 

Accumulated
Deficit

 

Total

 

Noncontrolling
Interest

 

Balance at June 27, 2014

 

$

2,832

 

327

 

$

 

$

5,511

 

$

(2

)

$

(2,677

)

$

2,832

 

$

 

Net income

 

1,605

 

 

 

 

 

 

 

 

 

1,605

 

1,605

 

 

Other comprehensive income (loss)

 

(31

)

 

 

 

 

 

 

(31

)

 

 

(31

)

 

 

Issuance of ordinary shares under employee stock plans

 

91

 

6

 

 

 

91

 

 

 

 

 

91

 

 

 

Repurchases of ordinary shares

 

(907

)

(15

)

 

 

 

 

 

 

(907

)

(907

)

 

 

Dividends to shareholders

 

(493

)

 

 

 

 

 

 

 

 

(493

)

(493

)

 

 

Share-based compensation

 

106

 

 

 

 

 

106

 

 

 

 

 

106

 

 

 

Other

 

(12

)

 

 

 

 

(12

)

 

 

 

 

(12

)

 

 

Balance at April 3, 2015

 

$

3,191

 

318

 

$

 

$

5,696

 

$

(33

)

$

(2,472

)

$

3,191

 

$

 

 

See Notes to Condensed Consolidated Financial Statements.

 

7



Table of Contents

 

SEAGATE TECHNOLOGY PLC

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

1.              Basis of Presentation and Summary of Significant Accounting Policies

 

Organization

 

The Company is a leading provider of electronic data storage solutions. Its principal products are hard disk drives, commonly referred to as disk drives, hard drives or HDDs. Hard disk drives are devices that store digitally encoded data on rapidly rotating disks with magnetic surfaces. Disk drives are used as the primary medium for storing electronic data. In addition to HDDs, we produce a broad range of electronic data storage products including solid state hybrid drives (“SSHD”) and solid state drives (“SSD”).

 

The Company’s products are designed for enterprise servers and storage systems in mission critical and nearline applications; client compute applications, where its products are designed primarily for desktop and mobile computing; and client non-compute applications, where its 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.

 

The Company continues to make strategic investments in order to expand its storage solutions, enter new market adjacencies, and expand its technical expertise. As a result of recent acquisitions, the Company’s product and solution portfolio for the enterprise data storage industry includes storage enclosures, integrated application platforms and high performance computing (“HPC”) data storage solutions. The Company’s storage subsystems supports a range of high-speed interconnect technologies to meet demanding cost and performance specifications. The Company’s modular subsystem architecture allows it to support many segments within the networked storage market by enabling different specifications of storage subsystem designs to be created from a standard set of interlocking technology modules.

 

In addition to manufacturing and selling data storage products, the Company provides data storage services for small to medium-sized businesses, including online backup, data protection and recovery solutions.

 

Basis of Presentation and Consolidation

 

The unaudited condensed consolidated financial statements include the accounts of the Company and all its wholly-owned and majority-owned subsidiaries, after elimination of intercompany transactions and balances.

 

The preparation of financial statements in accordance with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the Company’s condensed 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 condensed consolidated financial statements. The condensed consolidated financial statements reflect, in the opinion of management, all material adjustments necessary to present fairly the condensed consolidated financial position, results of operations, comprehensive income, 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 June 27, 2014, are included in its Annual Report on Form 10-K as filed with the United States Securities and Exchange Commission (“SEC”) on August 7, 2014. 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 June 27, 2014, and the notes thereto, are adequate to make the information presented not misleading.

 

The results of operations for the three and nine months ended April 3, 2015, 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 3, 2015. 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 and nine months ended April 3, 2015 consisted of 13 weeks and 40 weeks, respectively. The three and nine months ended March 28, 2014 consisted of 13 weeks and 39 weeks, respectively.  Fiscal year 2015 will be comprised of 53 weeks and will end on July 3, 2015. The fiscal quarters ended April 3, 2015, January 2, 2015, and March 28, 2014, are also referred to herein as the “March 2015 quarter”, the “December 2014 quarter”, and the “March 2014 quarter”, respectively.

 

Summary of Significant Accounting Policies

 

There have been no significant changes in our significant accounting policies. 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 June 27, 2014, as filed with the SEC on August 7, 2014 for a discussion of the Company’s other significant accounting policies.

 

8



Table of Contents

 

Recently Issued Accounting Pronouncements

 

In May 2014, the FASB issued ASU 2014-09 (ASC Topic 606), Revenue from Contracts with Customers. The ASU outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. It also requires entities to disclose both quantitative and qualitative information that enable financial statements users to understand the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. The ASU, as currently proposed, will be effective for the Company’s first quarter of fiscal year 2019. The Company is in the process of assessing the impact, if any, of ASU 2014-09 on its consolidated financial statements.

 

In April 2015, the FASB issued ASU 2015-03 (ASC Subtopic 835-30), Interest-Imputation of Interest: Simplifying the Presentation of Debt Issuance Costs. The amendments in this ASU require that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability. The amendments in this ASU are effective for fiscal years, and interim periods within those years, beginning after December 15, 2015. Early adoption is permitted for financial statements that have not been previously issued. The adoption of this new guidance will not have a material impact on the Company’s consolidated financial statements and disclosures.

 

2.              Balance Sheet Information

 

Investments

 

The following table summarizes, by major type, the fair value and amortized cost of the Company’s investments as of April 3, 2015:

 

(Dollars in millions)

 

Amortized
Cost

 

Unrealized
Gain/(Loss)

 

Fair
Value

 

Available-for-sale securities:

 

 

 

 

 

 

 

Money market funds

 

$

705

 

$

 

$

705

 

Corporate bonds

 

6

 

 

6

 

Certificates of deposit

 

1,485

 

 

1,485

 

 

 

$

2,196

 

$

 

$

2,196

 

 

 

 

 

 

 

 

 

Included in Cash and cash equivalents

 

 

 

 

 

$

2,186

 

Included in Short-term investments

 

 

 

 

 

6

 

Included in Restricted cash and investments

 

 

 

 

 

4

 

Total

 

 

 

 

 

$

2,196

 

 

As of April 3, 2015, the Company’s Restricted cash and investments consisted of $4 million in cash and investments held as collateral at banks for various performance obligations.

 

As of April 3, 2015, the Company had no available-for-sale securities that had been in a continuous unrealized loss position for a period greater than 12 months. The Company determined that no available-for-sale securities were other-than-temporarily impaired as of April 3, 2015.

 

The fair value and amortized cost of the Company’s investments classified as available-for-sale at April 3, 2015, by remaining contractual maturity were as follows:

 

(Dollars in millions)

 

Amortized
Cost

 

Fair
Value

 

Due in less than 1 year

 

$

2,190

 

$

2,190

 

Due in 1 to 5 years

 

6

 

6

 

Thereafter

 

 

 

Total

 

$

2,196

 

$

2,196

 

 

9



Table of Contents

 

The following table summarizes, by major type, the fair value and amortized cost of the Company’s investments as of June 27, 2014:

 

(Dollars in millions)

 

Amortized
Cost

 

Unrealized
Gain/(Loss)

 

Fair
Value

 

Available-for-sale securities:

 

 

 

 

 

 

 

Money market funds

 

$

793

 

$

 

$

793

 

Commercial paper

 

1,261

 

 

1,261

 

Corporate bonds

 

6

 

 

6

 

Certificates of deposit

 

273

 

 

273

 

Total

 

$

2,333

 

$

 

$

2,333

 

 

 

 

 

 

 

 

 

Included in Cash and cash equivalents

 

 

 

 

 

$

2,309

 

Included in Short-term investments

 

 

 

 

 

20

 

Included in Restricted cash and investments

 

 

 

 

 

4

 

Total

 

 

 

 

 

$

2,333

 

 

As of June 27, 2014, the Company had no available-for-sale securities that had been in a continuous unrealized loss position for a period greater than 12 months. The Company determined no available-for-sale securities were other-than-temporarily impaired as of June 27, 2014.

 

Inventories

 

The following table provides details of the inventory balance sheet item:

 

(Dollars in millions)

 

April 3,
2015

 

June 27,
2014

 

Raw materials and components

 

$

366

 

$

324

 

Work-in-process

 

288

 

267

 

Finished goods

 

429

 

394

 

 

 

$

1,083

 

$

985

 

 

Property, Equipment and Leasehold Improvements, net

 

The components of property, equipment and leasehold improvements, net, were as follows:

 

(Dollars in millions)

 

April 3,
2015

 

June 27,
2014

 

Property, equipment and leasehold improvements

 

$

9,403

 

$

8,979

 

Accumulated depreciation and amortization

 

(7,221

)

(6,843

)

 

 

$

2,182

 

$

2,136

 

 

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Accumulated Other Comprehensive Income (Loss) (“AOCI”)

 

The components of AOCI, net of tax, were as follows:

 

(Dollars in millions)

 

Unrealized
Gains (Losses)
on Cash Flow
Hedges

 

Unrealized
Gains (Losses)
on Marketable
Securities (a)

 

Unrealized
Gains (Losses)
on post-
retirements

 

Foreign
currency
translation
adjustments

 

Total

 

Balance at June 27, 2014

 

$

(1

)

$

 

$

(10

)

$

9

 

$

(2

)

Other comprehensive income (loss) before reclassifications

 

(12

)

 

 

(28

)

(40

)

Amounts reclassified from AOCI

 

9

 

 

 

 

9

 

Other comprehensive income (loss)

 

(3

)

 

 

(28

)

(31

)

Balance at April 3, 2015

 

$

(4

)

$

 

$

(10

)

$

(19

)

$

(33

)

 

 

 

 

 

 

 

 

 

 

 

 

Balance at June 28, 2013

 

$

 

$

(3

)

$

(10

)

$

 

$

(13

)

Other comprehensive income (loss) before reclassifications

 

 

1

 

1

 

9

 

11

 

Amounts reclassified from AOCI

 

 

 

 

 

 

Other comprehensive income (loss)

 

 

1

 

1

 

9

 

11

 

Balance at March 28, 2014

 

$

 

$

(2

)

$

(9

)

$

9

 

$

(2

)

 


(a) The cost of a security sold or the amount reclassified out of AOCI into earnings was determined using specific identification.

 

3.              Debt

 

Short-Term Borrowings

 

On January 15, 2015, the Company and its subsidiary, Seagate HDD Cayman, entered into the Third Amendment to the 2011 Credit Agreement which increased the commitments available under the senior secured revolving credit facility (the “Revolving Credit Facility”) from $500 million to $700 million and also extended the maturity date on the Credit Agreement until January 15, 2020, provided that if the Company does not have Investment Grade Ratings (as defined in the Credit Agreement) on August 15, 2018, then the maturity date will be August 16, 2018 unless certain extension conditions have been satisfied. The loans made under the Credit Agreement will bear interest at a rate of LIBOR plus a variable margin that will be determined based on the corporate credit rating of the Company. The Company and certain of its material subsidiaries fully and unconditionally guarantee the Revolving Credit Facility. The Revolving Credit Facility is available for cash borrowings and for the issuance of letters of credit up to a sub-limit of $75 million. As of April 3, 2015, no borrowings had been drawn or letters of credit utilized under the Revolving Credit Facility.

 

Long-Term Debt

 

$600 million Aggregate Principal Amount of 6.8% Senior Notes due October 2016 (the “2016 Notes”). The interest on the 2016 Notes was payable semi-annually on April 1 and October 1 of each year. The issuer under the 2016 Notes was Seagate HDD Cayman, and the obligations under the 2016 Notes were unconditionally guaranteed by certain of the Company’s significant subsidiaries. During the December 2014 quarter, the 2016 Notes were fully extinguished through repurchase and redemption for cash at a premium to their principal amount, plus accrued and unpaid interest.

 

$800 million Aggregate Principal Amount of 3.75% Senior Notes due November 2018 (the “2018 Notes”). The interest on the 2018 Notes is payable semi-annually on May 15 and November 15 of each year. The issuer under the 2018 Notes is Seagate HDD Cayman, and the obligations under the 2018 Notes are fully and unconditionally guaranteed, on a senior unsecured basis, by the Company.

 

$600 million Aggregate Principal Amount of 6.875% Senior Notes due May 2020 (the “2020 Notes”). The interest on the 2020 Notes is payable semi-annually on May 1 and November 1 of each year. The issuer under the 2020 Notes is Seagate HDD Cayman, and the obligations under the 2020 Notes are fully and unconditionally guaranteed, on a senior unsecured basis, by the Company. During the March 2015 quarter, the Company repurchased $1 million aggregate principal amount of its 2020 Notes for cash at a premium to their principal amount, plus accrued and unpaid interest. On April 7, 2015, Seagate HDD Cayman announced that it will redeem all of its remaining outstanding 2020 Notes. The Notes will be redeemed on May 7, 2015 (the “Redemption Date”) at a redemption price equal to $1,034.38 per $1,000 principal amount of the 2020 Notes redeemed plus accrued and unpaid interest from the interest payment date of May 1, 2015 to the Redemption Date. As a result, the 2020 Notes are classified as Current portion of long-term debt on the Company’s Condensed Consolidated Balance Sheet at April 3, 2015.

 

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$600 million Aggregate Principal Amount of 7.00% Senior Notes due November 2021 (the “2021 Notes”). The interest on the 2021 Notes is payable semi-annually on January 1 and July 1 of each year. The issuer under the 2021 Notes is Seagate HDD Cayman, and the obligations under the 2021 Notes are fully and unconditionally guaranteed, on a senior unsecured basis, by the Company.

 

$1 billion Aggregate Principal Amount of 4.75% Senior Notes due June 2023 (the “2023 Notes”). The interest on the 2023 Notes is payable semi-annually on June 1 and December 1 of each year. The issuer under the 2023 Notes is Seagate HDD Cayman, and the obligations under the 2023 Notes are fully and unconditionally guaranteed, on a senior unsecured basis, by the Company.

 

$1 billion Aggregate Principal Amount of 4.75% Senior Notes due January 2025 (the “2025 Notes”). The interest on the 2025 Notes is payable semi-annually on January 1 and July 1 of each year, which commenced on January 1, 2015. The issuer under the 2025 Notes is Seagate HDD Cayman, and the obligations under the 2025 Notes are fully and unconditionally guaranteed, on a senior unsecured basis, by the Company.

 

$500 million Aggregate Principal Amount of 5.75% Senior Notes due December 1, 2034 (the “2034 Notes”). On December 2, 2014, Seagate HDD Cayman issued, in a private placement, $500 million in aggregate principal amount of 5.75% Senior Notes due 2034 which mature on December 1, 2034. The interest on the Notes is payable semi-annually on June 1 and December 1 of each year, commencing on June 1, 2015. At any time before June 1, 2034, Seagate HDD Cayman may redeem some or all of the Notes at a “make-whole” redemption price. The ‘‘make-whole’’ redemption price will be equal to (1) 100% of the principal amount of the Notes redeemed, plus (2) the excess, if any of (x) the sum of the present values of the remaining scheduled payments of principal and interest on the Notes being redeemed, discounted to the redemption date on a semi-annual basis at a rate equal to the sum of the Treasury Rate plus 50 basis points, minus accrued and unpaid interest, if any, on the Notes being redeemed to, but excluding, the redemption date over (y) the principal amount of the Notes being redeemed, plus (3) accrued and unpaid interest, if any, on the Notes being redeemed to, but excluding, the redemption date. At any time on or after June 1, 2034, the Company may redeem some or all of the Notes at a redemption price equal to 100% of the principal amount of the Notes redeemed, plus accrued and unpaid interest, if any, to, but excluding, the redemption date. The issuer under the 2034 Notes is Seagate HDD Cayman, and the obligations under the 2034 Notes are fully and unconditionally guaranteed, on a senior unsecured basis, by the Company.

 

At April 3, 2015, future principal payments on long-term debt were as follows (in millions):

 

Fiscal Year

 

Amount

 

Remainder of 2015

 

$

474

 

2016

 

 

2017

 

 

2018

 

 

2019

 

800

 

Thereafter

 

2,659

 

 

 

$

3,933

 

 

4.              Income Taxes

 

The Company recorded an income tax provision of $13 million and $216 million in the three and nine months ended April 3, 2015, respectively. The income tax provision for the nine months ended April 3, 2015, included approximately $181 million of net tax expense due to the final audit assessment received from the Jiangsu Province State Tax Bureau of the People’s Republic of China (China assessment) for calendar years 2007 through 2013.

 

The Company’s income tax provision recorded for the three and nine months ended April 3, 2015 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) tax benefits related to non-U.S. earnings generated in jurisdictions that are subject to tax holidays or tax incentive programs and are considered indefinitely reinvested outside of Ireland, (ii) tax expense associated with the China assessment recorded in the three months ended January 2, 2015, and (iii) a decrease in valuation allowance for certain U.S. deferred tax assets.

 

During the nine months ended April 3, 2015, the Company’s unrecognized tax benefits excluding interest and penalties decreased by $39 million primarily due to (i) reductions associated with audit settlements of $45 million, (ii) increases in current year unrecognized tax benefits of $8 million, (iii) reductions associated with the expiration of certain statutes of limitations of $4 million, and (iv) net increases associated with changes in prior years’ positions of $2 million.

 

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The unrecognized tax benefits that, if recognized, would impact the effective tax rate were $76 million at April 3, 2015, subject to certain future valuation allowance reversals. During the 12 months beginning April 4, 2015, the Company expects that its unrecognized tax benefits could be reduced by approximately $3 million as a result of the expiration of certain statutes of limitation.

 

The Company is subject to taxation in many jurisdictions globally and is required to file U.S. federal, U.S. state and non-U.S. income tax returns. In June 2014, the Company received the Revenue Agent’s Report and Notices of Proposed Adjustments for its U.S. federal income tax returns for fiscal years 2008, 2009 and 2010. The Company is currently contesting certain of these proposed adjustments through the IRS Appeals Office. The Company believes that the resolution of these disputed issues will not have a material impact on its financial statements. As discussed above, on December 31, 2014, the Company received the final audit assessment from the Jiangsu Province State Tax Bureau of the People’s Republic of China. The assessment was related to tax and interest associated with changes to the Company’s tax filings for calendar years 2007 through 2013.

 

The Company recorded an income tax benefit and an income tax provision of $5 million and $22 million in the three and nine months ended March 28, 2014, respectively. The income tax benefit for the three months ended March 28, 2014 included $14 million of net discrete tax benefits related to releases of tax reserves due to audit settlements. The income tax provision recorded for the nine months ended March 28, 2014 included $7 million of net discrete tax benefits for the reversal of a portion of the U.S. valuation allowance recorded in prior periods and a net decrease in tax reserves related to audit settlements offset by tax reserves on non-U.S. tax positions taken in prior fiscal years.

 

The Company’s income tax provision recorded for the three and nine months ended March 28, 2014 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) tax benefits related to non-U.S. earnings generated in jurisdictions that are subject to tax holidays or tax incentive programs and are considered indefinitely reinvested outside of Ireland and (ii) a decrease in valuation allowance for certain U.S. deferred tax assets.

 

5.              Acquisitions

 

LSI’s Flash Business

 

On September 2, 2014, the Company completed the acquisition of certain assets and liabilities of LSI Corporation’s (“LSI”) Accelerated Solutions Division and Flash Components Division (collectively, the “Flash Business”) from Avago Technologies Limited for $450 million in cash. The transaction is expected to strengthen Seagate’s strategy to deliver a full suite of storage solutions, providing Seagate with established enterprise PCIe flash and SSD controller capabilities to deliver solutions for the growing flash storage market.

 

The following table summarizes the estimated fair values of the assets acquired and liabilities assumed at the acquisition date:

 

(Dollars in millions)

 

Amount

 

Inventories

 

$

37

 

Property, plant and equipment

 

22

 

Intangible assets

 

141

 

Other assets

 

6

 

Goodwill

 

337

 

Total assets

 

543

 

Liabilities

 

(93

)

Total liabilities

 

(93

)

Total

 

$

450

 

 

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Table of Contents

 

The following table shows the fair value of the separately identifiable intangible assets at the time of acquisition and the weighted-average period over which intangible assets within each category will be amortized:

 

(Dollars in millions)

 

Fair Value

 

Weighted-
Average
Amortization
Period

 

Existing technology

 

$

84

 

3.5 years

 

Customer relationships

 

40

 

3.8 years

 

Trade names

 

17

 

4.5 years

 

Total acquired identifiable intangible assets

 

$

141

 

 

 

 

The goodwill recognized is primarily attributable to the benefits the Company expects to derive from enhanced market opportunities, and is not deductible for income tax purposes.

 

The Company incurred approximately $1 million of expenses related to the acquisition of LSI’s Flash Business during the nine months ended April 3, 2015, which are included within Marketing and administrative expense on the Consolidated Statement of Operations.

 

The amounts of revenue and earnings of LSI’s Flash Business included in the Company’s Consolidated Statement of Operations from the acquisition date are not significant.

 

Xyratex Ltd

 

On March 31, 2014, the Company acquired all of the outstanding shares of Xyratex Ltd (“Xyratex”), a leading provider of data storage technology. The Company paid $13.25 per share, or approximately $376 million in cash for the acquisition. The acquisition of Xyratex further strengthens the Company’s vertically integrated supply and manufacturing chain for disk drives and provides access to important capital requirements, as well as expands the Company’s storage solutions portfolio.

 

The following table summarizes the estimated fair values of the assets acquired and liabilities assumed at the acquisition date:

 

(Dollars in millions)

 

Amount

 

Cash and cash equivalents

 

$

91

 

Accounts receivable, net

 

67

 

Inventories

 

111

 

Other current and non-current assets

 

28

 

Property, plant and equipment

 

55

 

Intangible assets

 

80

 

Goodwill

 

60

 

Total assets

 

492

 

Accounts payable and accrued expenses

 

(116

)

Total liabilities

 

(116

)

Total

 

$

376

 

 

The accounts receivable of $67 million are net of an immaterial allowance at March 31, 2014.

 

The following table shows the fair value of the separately identifiable intangible assets at the time of acquisition and the weighted-average period over which intangible assets within each category will be amortized:

 

(Dollars in millions)

 

Fair Value

 

Weighted-
Average
Amortization
Period

 

Existing technology

 

$

23

 

5.5 years

 

Customer relationships

 

18

 

3.9 years

 

Total amortizable intangible assets acquired

 

41

 

4.8 years

 

In-process research and development

 

39

 

 

 

Total acquired identifiable intangible assets

 

$

80

 

 

 

 

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Table of Contents

 

The goodwill recognized is primarily attributable to the synergies expected to arise from the acquisition, and is not deductible for income tax purposes.

 

The Company incurred a total of $10 million of expenses related to the acquisition of Xyratex in fiscal year 2014, which are included within Marketing and administrative expense on the Consolidated Statement of Operations.

 

The amounts of revenue and earnings of Xyratex included in the Company’s Consolidated Statement of Operations from the acquisition date are not significant.

 

6.              Goodwill and Other Intangible Assets

 

Goodwill

 

The changes in the carrying amount of goodwill for the nine months ended April 3, 2015, are as follows:

 

(Dollars in millions)

 

Amount

 

Balance at June 27, 2014

 

$

537

 

Goodwill acquired

 

337

 

Foreign currency translation effect

 

(3

)

Balance at April 3, 2015

 

$

871

 

 

Other Intangible Assets

 

Other intangible assets consist primarily of existing technology, customer relationships, in-process research and development and trade names acquired in business combinations. With the exception of in-process research and development, acquired intangibles are amortized on a straight-line basis over the respective estimated useful lives of the assets. Amortization is charged to Operating expenses in the Condensed Consolidated Statements of Operations. In-process research and development has been determined to have an indefinite useful life and is not amortized, but instead tested for impairment annually or more frequently if events or changes in circumstance indicate that the asset might be impaired. If the carrying amount of in-process research and development exceeds its fair value, an impairment loss is recognized in an amount equal to that excess. There were no impairment charges recognized for in-process research and development. Upon completion of the in-process research and development, the related assets will be accounted for as existing technology and will be amortized over their useful life.

 

The carrying value of other intangible assets subject to amortization as of April 3, 2015, is set forth in the following table:

 

(Dollars in millions)

 

Gross Carrying
Amount

 

Accumulated
Amortization

 

Net Carrying
Amount

 

Weighted Average
Remaining Useful Life

 

Existing technology

 

$

173

 

$

(55

)

$

118

 

3.6 years

 

Customer relationships

 

486

 

(259

)

227

 

2.6 years

 

Trade names

 

27

 

(5

)

22

 

3.4 years

 

Other intangible assets

 

28

 

(3

)

25

 

4.4 years

 

Total amortizable other intangible assets

 

$

714

 

$

(322

)

$

392

 

3.1 years

 

 

The carrying value of in-process research and development not subject to amortization was $18 million on April 3, 2015.

 

The carrying value of other intangible assets subject to amortization as of June 27, 2014 is set forth in the following table:

 

(Dollars in millions)

 

Gross Carrying
Amount

 

Accumulated
Amortization

 

Net Carrying
Amount

 

Weighted Average
Remaining Useful Life

 

Existing technology

 

$

68

 

$

(18

)

$

50

 

2.9 years

 

Customer relationships

 

450

 

(192

)

258

 

3.3 years

 

Trade names

 

10

 

(1

)

9

 

3.1 years

 

Other intangible assets

 

4

 

(1

)

3

 

4.4 years

 

Total amortizable other intangible assets

 

$

532

 

$

(212

)

$

320

 

3.2 years

 

 

The carrying value of in-process research and development not subject to amortization was $39 million on June 27, 2014.

 

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Table of Contents

 

For the three and nine months ended April 3, 2015, amortization expense of other intangible assets was $40 million and $112 million.  For the three and nine months ended March 28, 2014, amortization expense of other intangible assets was $26 million and $103 million.  As of April 3, 2015, expected amortization expense for other intangible assets for each of the next five fiscal years and thereafter is as follows:

 

(Dollars in millions)

 

Amount

 

Remainder of 2015

 

$

40

 

2016

 

139

 

2017

 

120

 

2018

 

60

 

2019

 

22

 

Thereafter

 

11

 

 

 

$

392

 

 

7.              Derivative Financial Instruments

 

The Company is exposed to market risks due to the volatility of interest rates, foreign currency exchange rates, and bond markets. The Company enters into foreign currency forward exchange contracts 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 in the Condensed Consolidated Balance Sheets at fair value. The changes in the fair values of the effective portions of designated 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 amount of net unrealized losses on cash flow hedges was $4 million and $1 million as of April 3, 2015 and June 27, 2014, respectively.

 

The Company dedesignates its cash flow hedges when the forecasted hedged transactions are realized or it is probable the forecasted hedged transactions 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 immediately into earnings and any subsequent changes in the fair value of such derivative instruments are immediately reflected in earnings. The Company did not recognize any net gains or losses related to the loss of hedge designation on discontinued cash flow hedges during the three and nine months ended April 3, 2015. As of April 3, 2015, 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 $5 million.

 

The following tables show the total notional value of the Company’s outstanding foreign currency forward exchange contracts as of April 3, 2015 and June 27, 2014:

 

 

 

As of April 3, 2015

 

(Dollars in millions)

 

Contracts
Designated as
Hedges

 

Contracts Not
Designated as
Hedges

 

Thai Baht

 

$

 

$

36

 

Singapore Dollars

 

80

 

41

 

Chinese Renminbi

 

31

 

16

 

Euro

 

 

11

 

 

 

$

111

 

$

104

 

 

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Table of Contents

 

 

 

As of June 27, 2014

 

(Dollars in millions)

 

Contracts
Designated as
Hedges

 

Contracts Not
Designated as
Hedges

 

Thai Baht

 

$

 

$

143

 

British Pound Sterling

 

25

 

 

Malaysian Ringgit

 

9

 

 

 

 

$

34

 

$

143

 

 

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”). In the quarter ended December 27, 2013, the Company 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 April 3, 2015, the notional investments underlying the TRS amounted to $98 million. The contract term of the TRS is through January 2016 and is settled on a monthly basis, therefore limiting counterparty performance risk. 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 Sheet as of April 3, 2015 and June 27, 2014:

 

 

 

As of April 3, 2015

 

 

 

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

 

$

 

Accrued expenses

 

$

(5

)

Derivatives not designated as hedging instruments:

 

 

 

 

 

 

 

 

 

Foreign currency forward exchange contracts

 

Other current assets

 

$

 

Accrued expenses

 

$

(3

)

Total return swap

 

Other current assets

 

 

Accrued expenses

 

 

Total derivatives

 

 

 

$

 

 

 

$

(8

)

 

 

 

As of June 27, 2014

 

 

 

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

 

$

3

 

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

 

 

Total derivatives

 

 

 

$

5

 

 

 

$

 

 

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Table of Contents

 

The following tables show the effect of the Company’s derivative instruments on the Condensed Consolidated Statement of Comprehensive Income and the Condensed Consolidated Statement of Operations for the three and nine months ended April 3, 2015:

 

(Dollars in millions)

 

 

 

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

 

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

 

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

 

Location of
Gain or (Loss)
Recognized in
Income on
Derivatives
(Ineffective
Portion and
Amount
Excluded

 

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

 

Derivatives Designated as
Hedging Instruments

 

For the
Three
Months

 

For the
Nine
Months

 

Income
(Effective
Portion)

 

For the
Three
Months

 

For the
Nine
Months

 

from
Effectiveness
Testing)

 

For the
Three
Months

 

For the
Nine
Months

 

Foreign currency forward exchange contracts

 

$

(3

)

$

(13

)

Cost of revenue

 

$

(7

)

$

(9

)

Cost of revenue

 

$

1

 

$

1

 

 

 

 

Location of Gain or

 

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

 

Derivatives Not Designated as Hedging Instruments

 

(Loss) Recognized in
Income on Derivative

 

For the Three
Months

 

For the Nine
Months

 

Foreign currency forward exchange contracts

 

Other, net

 

$

1

 

$

(4

)

Total return swap

 

Operating expenses

 

$

2

 

$

2

 

 


(a)   The amount of gain or (loss) recognized in income represents $0 related to the ineffective portion of the hedging relationships and $1 million related to the amount excluded from the assessment of hedge effectiveness for the three and nine months ended April 3, 2015, respectively.

 

The following tables show the effect of the Company’s derivative instruments on the Condensed Consolidated Statement of Comprehensive Income and the Condensed Consolidated Statement of Operations for the three and nine months ended March 28, 2014:

 

(Dollars in millions)

 

 

 

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

 

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

 

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

 

Location of
Gain or (Loss)
Recognized in
Income on
Derivatives
(Ineffective
Portion and
Amount
Excluded

 

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

 

Derivatives Designated as
Hedging Instruments

 

For the
Three
Months

 

For the
Nine
Months

 

Income
(Effective
Portion)

 

For the
Three
Months

 

For the
Nine
Months

 

from
Effectiveness
Testing)

 

For the
Three
Months

 

For the
Nine
Months

 

Foreign currency forward exchange contracts

 

$

1

 

$

 

Cost of revenue

 

$

 

$

 

Cost of revenue

 

$

 

$

 

 

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Table of Contents

 

 

 

Location of Gain or

 

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

 

Derivatives Not Designated as Hedging Instruments

 

(Loss) Recognized in
Income on Derivatives

 

For the Three
Months

 

For the Nine
Months

 

Foreign currency forward exchange contracts

 

Other, net

 

$

1

 

$

(4

)

 


(a)   The amount of gain or (loss) recognized in income represents $0 related to the ineffective portion of the hedging relationship and $0 related to the amount excluded from the assessment of hedge effectiveness for the three and nine months ended March 28, 2014.

 

8.              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.

 

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Table of Contents

 

Items Measured at Fair Value on a Recurring Basis

 

The following tables present the Company’s assets and liabilities, by financial instrument type and balance sheet line item that are measured at fair value on a recurring basis, excluding accrued interest components, as of April 3, 2015:

 

 

 

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:

 

 

 

 

 

 

 

 

 

Money market funds

 

$

705

 

$

 

$

 

$

705

 

Certificates of deposit

 

 

1,481

 

 

1,481

 

Corporate bonds

 

 

6

 

 

6

 

Total cash equivalents and short-term investments

 

705

 

1,487

 

 

2,192

 

Restricted cash and investments:

 

 

 

 

 

 

 

 

 

Certificates of deposit

 

 

4

 

 

4

 

Total assets

 

$

705

 

$

1,491

 

$

 

$

2,196

 

Liabilities:

 

 

 

 

 

 

 

 

 

Derivative liabilities

 

$

 

$

8

 

$

 

$

8

 

Total liabilities

 

$

 

$

8

 

$

 

$

8

 

 

 

 

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

 

$

705

 

$

1,481

 

$

 

$

2,186

 

Short-term investments

 

 

6

 

 

6

 

Restricted cash and investments

 

 

4

 

 

4

 

Total assets

 

$

705

 

$

1,491

 

$

 

$

2,196

 

Liabilities:

 

 

 

 

 

 

 

 

 

Accrued expenses

 

$

 

$

8

 

$

 

$

8

 

Total liabilities

 

$

 

$

8

 

$

 

$

8

 

 

20



Table of Contents

 

The following tables present the Company’s assets and liabilities, by financial instrument type and balance sheet line item that are measured at fair value on a recurring basis, excluding accrued interest components, as of June 27, 2014:

 

 

 

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:

 

 

 

 

 

 

 

 

 

Money market funds

 

$

793

 

$

 

$

 

$

793

 

Commercial paper

 

 

1,261

 

 

1,261

 

Certificates of deposit

 

 

269

 

 

269

 

Corporate bonds

 

 

6

 

 

6

 

Total cash equivalents and short-term investments

 

793

 

1,536

 

 

2,329

 

Restricted cash and investments:

 

 

 

 

 

 

 

 

 

Certificates of deposit

 

 

4

 

 

4

 

Derivative assets

 

 

5

 

 

5

 

Total assets

 

$

793

 

$

1,545

 

$

 

$

2,338

 

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

 

$

793

 

$

1,516

 

$

 

$

2,309

 

Short-term investments

 

 

20

 

 

20

 

Restricted cash and investments

 

 

4

 

 

4

 

Other assets, net

 

 

5

 

 

5

 

Total assets

 

$

793

 

$

1,545

 

$

 

$

2,338

 

Liabilities:

 

 

 

 

 

 

 

 

 

Accrued expenses

 

$

 

$

 

$

 

$

 

Total liabilities

 

$

 

$

 

$

 

$

 

 

The Company classifies items in Level 1 if the financial assets consist of securities 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 April 3, 2015, 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 condensed 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.

 

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Table of Contents

 

The Company enters into certain strategic investments for the achievement of business and strategic objectives. Strategic investments in equity securities where the Company does not have the ability to exercise significant influence over the investees, are included in Other assets, net in the Condensed Consolidated Balance Sheets, are recorded at cost and are periodically analyzed to determine whether or not there are indicators of impairment. The carrying value of the Company’s strategic investments at April 3, 2015 and June 27, 2014 totaled $105 million and $46 million, respectively, and consisted primarily of privately held equity securities without a readily determinable fair value.

 

Other Fair Value Disclosures

 

The Company’s debt is carried at amortized cost. The fair value of the Company’s debt is derived using the closing price as of the date of valuation, which takes into account the yield curve, interest rates, and other observable inputs. Accordingly, these fair value measurements are categorized as Level 2. The following table presents the fair value and amortized cost of the Company’s debt in order of maturity:

 

 

 

April 3, 2015

 

June 27, 2014

 

(Dollars in millions)

 

Carrying
Amount

 

Estimated
Fair Value

 

Carrying
Amount

 

Estimated
Fair Value

 

6.8% Senior Notes due October 2016

 

$

 

$

 

$

335

 

$

374

 

3.75% Senior Notes due November 2018

 

800

 

832

 

800

 

820

 

6.875% Senior Notes due May 2020

 

474

 

492

 

534

 

578

 

7.00% Senior Notes due November 2021

 

159

 

172

 

251

 

284

 

4.75% Senior Notes due June 2023

 

1,000

 

1,052

 

1,000

 

1,009

 

4.75% Senior Notes due January 2025

 

1,000

 

1,040

 

1,000

 

995

 

5.75% Senior Notes due December 2034

 

498

 

542

 

 

 

Long-term debt

 

$

3,931

 

$

4,130

 

$

3,920

 

$

4,060

 

 

9.              Equity

 

Share Capital

 

The Company’s authorized share capital is $13,500 and consists of 1,250,000,000 ordinary shares, par value $0.00001, of which 318,076,549 shares were outstanding as of April 3, 2015, and 100,000,000 preferred shares, par value $0.00001, of which none were issued or outstanding as of April 3, 2015.

 

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 may issue preferred shares in one or more series, up to the authorized amount, 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 of its ordinary shares and the voting and other rights of the holders of ordinary shares.

 

Repurchases of Equity Securities

 

On July 24, 2013, the Board of Directors authorized the Company to repurchase an additional $2.5 billion of its outstanding ordinary shares.

 

All repurchases are effected as redemptions in accordance with the Company’s Articles of Association.

 

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Table of Contents

 

As of April 3, 2015, $0.6 billion remained available for repurchase under the existing repurchase authorization limit.

 

The following table sets forth information with respect to repurchases of the Company’s shares during the nine months ended April 3, 2015:

 

(In millions)

 

Number of
Shares
Repurchased

 

Dollar Value
of Shares
Repurchased

 

Repurchased during the three months ended October 3, 2014

 

3

 

$

183

 

Repurchased during the three months ended January 2, 2015 (1)

 

0

 

18

 

Repurchased during the three months ended April 3, 2015

 

12

 

 

706

 

Fiscal year repurchased through April 3, 2015

 

15

 

$

907

 

 


(1) A total of 0.3 million shares were repurchased during the three months ended January 2, 2015.

 

On April 22, 2015, the Board of Directors authorized the Company to repurchase an additional $2.5 billion of its outstanding ordinary shares.

 

10.       Compensation

 

The Company recorded approximately $33 million and $106 million of stock-based compensation expense during the three and nine months ended April 3, 2015, respectively. The Company recorded approximately $30 million and $87 million of stock-based compensation expense during the three and nine months ended March 28, 2014, respectively.

 

11.       Guarantees

 

Indemnifications to Officers and Directors

 

On May 4, 2009,  Seagate Technology, an exempted company incorporated with limited liability under the laws of the Cayman Islands (“Seagate-Cayman”), then the parent company, entered into a new form of indemnification agreement (the “Revised Indemnification Agreement”) with its officers and directors of Seagate-Cayman and its subsidiaries (each, an “Indemnitee”). The Revised Indemnification Agreement provides indemnification in addition to any of Indemnitee’s indemnification rights under Seagate-Cayman’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 Seagate-Cayman or any of its subsidiaries, arising out of his or her service as a director, officer, employee or agent of Seagate-Cayman or any of its subsidiaries or of any other entity to which he or she provides services at Seagate-Cayman’s request. However, an Indemnitee shall not be indemnified under the Revised Indemnification Agreement for (i) any fraud or dishonesty in the performance of Indemnitee’s duty to Seagate-Cayman or the applicable subsidiary of Seagate-Cayman 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 Seagate-Cayman or the applicable subsidiary of Seagate-Cayman. In addition, the Revised Indemnification Agreement provides that Seagate-Cayman will advance expenses incurred by an Indemnitee in connection with enforcement of the Revised 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.

 

On July 3, 2010, pursuant to a corporate reorganization, the common shareholders of Seagate-Cayman became ordinary shareholders of Seagate Technology plc (the “Company”) and Seagate-Cayman became a wholly owned subsidiary of the Company, as described more fully in the Current Report on Form 8-K filed by the Company on July 6, 2010 (the “Redomestication”). On July 27, 2010, in connection with the Redomestication, the Company, as sole shareholder of Seagate-Cayman, approved a form of deed of indemnity (the “Deed of Indemnity”), which provides for the indemnification by Seagate-Cayman of any director, officer, employee or agent of the Company, Seagate-Cayman or any subsidiary of the Company (each, a “Deed Indemnitee”), in addition to any of a Deed Indemnitee’s indemnification rights under the Company’s Articles of Association, applicable law or otherwise, with a similar scope to the Revised Indemnification Agreement. Seagate-Cayman entered into the Deed of Indemnity with certain Deed Indemnitees effective as of July 3, 2010 and continues to enter into the Deed of Indemnity with additional Deed Indemnitees from time to time.

 

The nature of these 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 consolidated financial statements with respect to these indemnification obligations.

 

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Table of Contents

 

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 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 1 to 5 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. Changes in the Company’s product warranty liability during the three and nine months ended April 3, 2015 and March 28, 2014 were as follows:

 

 

 

For the Three Months Ended

 

For the Nine Months Ended

 

(Dollars in millions)

 

April 3,
2015

 

March 28,
2014

 

April 3,
2015

 

March 28,
2014

 

Balance, beginning of period

 

$

282

 

$

300

 

$

273

 

$

320

 

Warranties issued

 

36

 

43

 

116

 

139

 

Repairs and replacements

 

(45

)

(55

)

(145

)

(174

)

Changes in liability for pre-existing warranties, including expirations

 

 

(2

)

21

 

1

 

Warranty liability assumed from business acquisitions

 

 

 

8

 

 

Balance, end of period

 

$

273

 

$

286

 

$

273

 

$

286

 

 

12.       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 and the number of additional shares that would have been outstanding if the potentially dilutive securities had been issued. Potentially dilutive securities include outstanding options, unvested restricted share units and shares to be purchased under the ESPP. 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 attributable to the shareholders of Seagate Technology plc:

 

 

 

For the Three Months Ended

 

For the Nine Months Ended

 

(In millions, except per share data)

 

April 3,
2015

 

March 28,
2014

 

April 3,
2015

 

March 28,
2014

 

Numerator:

 

 

 

 

 

 

 

 

 

Net income attributable to Seagate Technology plc

 

$

291

 

$

395

 

$

1,605

 

$

1,250

 

Number of shares used in per share calculations:

 

 

 

 

 

 

 

 

 

Total shares for purposes of calculating basic net income per share attributable to Seagate Technology plc

 

323

 

327

 

326

 

340

 

Weighted-average effect of dilutive securities:

 

 

 

 

 

 

 

 

 

Employee equity award plans

 

7

 

11

 

8

 

11

 

Total shares for purpose of calculating diluted net income per share attributable to Seagate Technology plc

 

330

 

338

 

334

 

351

 

Net income per share attributable to Seagate Technology plc shareholders:

 

 

 

 

 

 

 

 

 

Basic

 

$

0.90

 

$

1.21

 

$

4.92

 

$

3.68

 

Diluted

 

$

0.88

 

$

1.17

 

$

4.81

 

$

3.56

 

 

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Table of Contents

 

The anti-dilutive shares related to employee equity award plans that were excluded from the computation of diluted net income per share attributable to Seagate Technology plc were immaterial for the three and nine months ended April 3, 2015 and March 28, 2014.

 

13.       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. In addition, in the event an unfavorable outcome is determined to be less than probable, but reasonably possible, the Company will disclose an estimate of the possible loss or range of such loss; however, when a reasonable estimate cannot be made, the Company will provide disclosure to that effect. 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 Seagate Technology LLC in the U.S. District Court for the Southern District of New York, alleging infringement of U.S. Patent Nos. 4,916,635 (the “‘635 patent”) and U.S. Patent No. 5,638,267 (the “‘267 patent”), misappropriation of trade secrets, breach of contract, and other claims. In the complaint, the plaintiffs requested injunctive relief, $800 million in compensatory damages and unspecified punitive damages, including for willful infringement. On January 16, 2002, Convolve filed an amended complaint, alleging defendants infringe US Patent No. 6,314,473 (the “‘473 patent”). The district court ruled in 2010 that the ‘267 patent was out of the case.

 

On August 16, 2011, the district court granted in part and denied in part the Company’s motion for summary judgment. On July 1, 2013, the U.S. Court of Appeals for the Federal Circuit: 1) affirmed the district court’s summary judgment rulings that Seagate did not misappropriate any of the alleged trade secrets and that the asserted claims of the ‘635 patent are invalid; 2) reversed and vacated the district court’s summary judgment of non-infringement with respect to the ‘473 patent; and 3) remanded the case for further proceedings on the ‘473 patent. On July 11, 2014, the district court granted the Company’s summary judgment motion regarding Convolve’s only remaining cause of action, which alleged infringement of the ‘473 patent. The court entered judgment in favor of the Company on July 14, 2014. Convolve filed a notice of appeal on August 13, 2014. The court of appeals has not yet set a date for oral argument. In view of the rulings made by the district court and the Court of Appeals and the uncertainty regarding the amount of damages, if any, that could be awarded Convolve in this matter, the Company does not believe that it is currently possible to determine a reasonable estimate of the possible range of loss related to this matter.

 

Alexander Shukh v. Seagate Technology—On February 12, 2010, Alexander Shukh filed a complaint against the Company in the U.S. District Court for the District of Minnesota, alleging, among other things, emp