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 1, 2016

 

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 25, 2016, 298,483,729 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 1, 2016 and July 3, 2015 (Unaudited)

3

 

 

 

 

Condensed Consolidated Statements of Operations — Three and Nine Months ended April 1, 2016 and April 3, 2015 (Unaudited)

4

 

 

 

 

Condensed Consolidated Statements of Comprehensive Income (Loss) — Three and Nine Months ended April 1, 2016 and April 3, 2015 (Unaudited)

5

 

 

 

 

Condensed Consolidated Statements of Cash Flows — Nine Months ended April 1, 2016 and April 3, 2015 (Unaudited)

6

 

 

 

 

Condensed Consolidated Statement of Shareholders’ Equity — Nine Months ended April 1, 2016 (Unaudited)

7

 

 

 

 

Notes to Condensed Consolidated Financial Statements (Unaudited)

8

 

 

 

Item 2.

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

30

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

37

 

 

 

Item 4.

Controls and Procedures

38

 

 

 

PART II

OTHER INFORMATION

 

 

 

 

Item 1.

Legal Proceedings

39

 

 

 

Item 1A.

Risk Factors

39

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

39

 

 

 

Item 3.

Defaults Upon Senior Securities

39

 

 

 

Item 4.

Mine Safety Disclosures

39

 

 

 

Item 5.

Other Information

40

 

 

 

Item 6.

Exhibits

40

 

 

 

 

SIGNATURES

41

 

2



Table of Contents

 

PART I

FINANCIAL INFORMATION

ITEM 1.  FINANCIAL STATEMENTS

SEAGATE TECHNOLOGY PLC

CONDENSED CONSOLIDATED BALANCE SHEETS

(In millions)

(Unaudited)

 

 

 

April 1,
2016

 

July 3,
2015

 

ASSETS

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

1,193

 

$

2,479

 

Short-term investments

 

6

 

6

 

Accounts receivable, net

 

1,250

 

1,735

 

Inventories

 

928

 

993

 

Deferred income taxes

 

 

122

 

Other current assets

 

223

 

233

 

Total current assets

 

3,600

 

5,568

 

Property, equipment and leasehold improvements, net

 

2,165

 

2,278

 

Goodwill

 

1,238

 

874

 

Other intangible assets, net

 

492

 

370

 

Deferred income taxes

 

619

 

496

 

Other assets, net

 

260

 

259

 

Total Assets

 

$

8,374

 

$

9,845

 

LIABILITIES AND EQUITY

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Accounts payable

 

$

1,504

 

$

1,540

 

Accrued employee compensation

 

170

 

256

 

Accrued warranty

 

108

 

135

 

Accrued expenses

 

477

 

412

 

Total current liabilities

 

2,259

 

2,343

 

Long-term accrued warranty

 

97

 

113

 

Long-term accrued income taxes

 

28

 

33

 

Other non-current liabilities

 

177

 

183

 

Long-term debt

 

4,130

 

4,155

 

Total Liabilities

 

6,691

 

6,827

 

Commitments and contingencies (See Notes 12 and 14)

 

 

 

 

 

Equity:

 

 

 

 

 

Seagate Technology plc Shareholders’ Equity:

 

 

 

 

 

Ordinary shares and additional paid-in capital

 

5,903

 

5,734

 

Accumulated other comprehensive loss

 

(28

)

(30

)

Accumulated deficit

 

(4,192

)

(2,686

)

Total Equity

 

1,683

 

3,018

 

Total Liabilities and Equity

 

$

8,374

 

$

9,845

 

 

The information as of July 3, 2015 was derived from the Company’s audited Consolidated Balance Sheet as of July 3, 2015.

 

See Notes to Condensed Consolidated Financial Statements.

 

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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 1,
2016

 

April 3,
2015

 

April 1,
2016

 

April 3,
2015

 

Revenue

 

$

2,595

 

$

3,330

 

$

8,506

 

$

10,811

 

Cost of revenue

 

2,071

 

2,375

 

6,553

 

7,778

 

Product development

 

298

 

346

 

930

 

1,029

 

Marketing and administrative

 

150

 

219

 

491

 

654

 

Amortization of intangibles

 

29

 

33

 

94

 

95

 

Restructuring and other, net

 

20

 

14

 

95

 

24

 

Gain on arbitration award, net

 

 

 

 

(620

)

Total operating expenses

 

2,568

 

2,987

 

8,163

 

8,960

 

Income from operations

 

27

 

343

 

343

 

1,851

 

Interest income

 

1

 

1

 

2

 

4

 

Interest expense

 

(47

)

(48

)

(142

)

(152

)

Other, net

 

28

 

8

 

18

 

118

 

Other (expense) income, net

 

(18

)

(39

)

(122

)

(30

)

Income before income taxes

 

9

 

304

 

221

 

1,821

 

Provision for income taxes

 

30

 

13

 

43

 

216

 

Net income (loss)

 

$

(21

)

$

291

 

$

178

 

$

1,605

 

Net income (loss) per share:

 

 

 

 

 

 

 

 

 

Basic

 

$

(0.07

)

$

0.90

 

$

0.59

 

$

4.92

 

Diluted

 

(0.07

)

0.88

 

0.59

 

4.81

 

Number of shares used in per share calculations:

 

 

 

 

 

 

 

 

 

Basic

 

298

 

323

 

300

 

326

 

Diluted

 

298

 

330

 

303

 

334

 

Cash dividends declared per ordinary share

 

$

0.63

 

$

0.54

 

$

1.80

 

$

1.51

 

 

See Notes to Condensed Consolidated Financial Statements.

 

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SEAGATE TECHNOLOGY PLC

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(In millions)

(Unaudited)

 

 

 

For the Three Months Ended

 

For the Nine Months Ended

 

 

 

April 1,
2016

 

April 3,
2015

 

April 1,
2016

 

April 3,
2015

 

Net income (loss)

 

$

(21

)

$

291

 

$

178

 

$

1,605

 

Other comprehensive income (loss), net of tax:

 

 

 

 

 

 

 

 

 

Cash flow hedges

 

 

 

 

 

 

 

 

 

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

 

(1

)

(3

)

(3

)

(12

)

Less: reclassification for amounts included in net income

 

 

7

 

2

 

9

 

Net change

 

(1

)

4

 

(1

)

(3

)

Marketable securities

 

 

 

 

 

 

 

 

 

Change in net unrealized gain (loss) on marketable securities

 

 

 

 

 

Less: reclassification for amounts included in net income

 

 

 

 

 

Net change

 

 

 

 

 

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

 

5

 

(12

)

2

 

(28

)

Total other comprehensive income (loss), net of tax

 

4

 

(8

)

2

 

(31

)

Comprehensive income (loss)

 

$

(17

)

$

283

 

$

180

 

$

1,574

 

 

See Notes to Condensed Consolidated Financial Statements.

 

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SEAGATE TECHNOLOGY PLC

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In millions)

(Unaudited)

 

 

 

For the Nine Months Ended

 

 

 

April 1,
2016

 

April 3,
2015

 

OPERATING ACTIVITIES

 

 

 

 

 

Net income

 

$

178

 

$

1,605

 

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

 

 

 

 

 

Depreciation and amortization

 

615

 

629

 

Share-based compensation

 

95

 

106

 

Impairment of long-lived assets

 

25

 

 

Deferred income taxes

 

1

 

(3

)

Loss on sale of property and equipment

 

 

1

 

(Gain) loss on redemption and repurchase of debt

 

(3

)

52

 

Other non-cash operating activities, net

 

13

 

(9

)

Changes in operating assets and liabilities:

 

 

 

 

 

Accounts receivable, net

 

531

 

(36

)

Inventories

 

85

 

(61

)

Accounts payable

 

(31

)

149

 

Accrued employee compensation

 

(92

)

(40

)

Accrued expenses, income taxes and warranty

 

1

 

(9

)

Vendor non-trade receivables

 

17

 

30

 

Other assets and liabilities

 

(24

)

5

 

Net cash provided by operating activities

 

1,411

 

2,419

 

INVESTING ACTIVITIES

 

 

 

 

 

Acquisition of property, equipment and leasehold improvements

 

(441

)

(546

)

Purchases of short-term investments

 

 

(5

)

Sales of short-term investments

 

 

4

 

Maturities of short-term investments

 

 

19

 

Cash used in acquisition of business, net of cash acquired

 

(634

)

(450

)

Other investing activities, net

 

10

 

(90

)

Net cash used in investing activities

 

(1,065

)

(1,068

)

FINANCING ACTIVITIES

 

 

 

 

 

Redemption and repurchase of debt

 

(22

)

(536

)

Net proceeds from issuance of long-term debt

 

 

498

 

Taxes paid related to net share settlement of equity awards

 

(55

)

 

Repurchases of ordinary shares

 

(1,090

)

(907

)

Dividends to shareholders

 

(539

)

(493

)

Proceeds from issuance of ordinary shares under employee stock plans

 

78

 

91

 

Other financing activities, net

 

(4

)

(12

)

Net cash used in financing activities

 

(1,632

)

(1,359

)

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

 

 

(22

)

(Decrease) in cash and cash equivalents

 

(1,286

)

(30

)

Cash and cash equivalents at the beginning of the period

 

2,479

 

2,634

 

Cash and cash equivalents at the end of the period

 

$

1,193

 

$

2,604

 

 

See Notes to Condensed Consolidated Financial Statements.

 

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SEAGATE TECHNOLOGY PLC

CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY

For the Nine Months Ended April 1, 2016

(In millions)

(Unaudited)

 

 

 

Number
of
Ordinary
Shares

 

Par Value
of Shares

 

Additional
Paid-in
Capital

 

Accumulated
Other
Comprehensive
Loss

 

Accumulated
Deficit

 

Total

 

Balance at July 3, 2015

 

315

 

$

 

$

5,734

 

$

(30

)

$

(2,686

)

$

3,018

 

Net income

 

 

 

 

 

178

 

178

 

Other comprehensive income

 

 

 

 

2

 

 

2

 

Issuance of ordinary shares under employee stock plans

 

7

 

 

78

 

 

 

78

 

Repurchases of ordinary shares

 

(23

)

 

 

 

(1,090

)

(1,090

)

Tax withholding related to vesting of restricted stock units

 

(1

)

 

 

 

(55

)

(55

)

Dividends to shareholders

 

 

 

 

 

(539

)

(539

)

Share-based compensation

 

 

 

95

 

 

 

95

 

Other

 

 

 

(4

)

 

 

(4

)

Balance at April 1, 2016

 

298

 

$

 

$

5,903

 

$

(28

)

$

(4,192

)

$

1,683

 

 

See Notes to Condensed Consolidated Financial Statements.

 

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SEAGATE TECHNOLOGY PLC

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

1.              Basis of Presentation and Summary of Significant Accounting Policies

 

Organization

 

Seagate Technology plc (the “Company”) is a leading provider of electronic data storage technology and solutions. Its principal products are hard disk drives, commonly referred to as disk drives, hard drives or HDDs. In addition to HDDs, it produces a broad range of electronic data storage products including solid state hybrid drives (“SSHD”), solid state drives (“SSD”), PCIe cards and SATA controllers. Its storage technology portfolio also includes storage subsystems, high performance computing (“HPC”) solutions, and data storage services.

 

Hard disk drives are devices that store digitally encoded data on rapidly rotating disks with magnetic surfaces. Disk drives continue to be the primary medium of mass data storage due to their performance attributes, high quality and cost effectiveness. Complementing existing data center storage architecture, solid-state storage devices use integrated circuit assemblies as memory to store data, and most SSDs use NAND-based flash memory. In addition to HDDs and SSDs, SSHDs combine the features of SSDs and HDDs in the same unit, containing a large hard disk drive and an SSD cache to improve performance of frequently accessed data.

 

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, digital media systems and surveillance systems.

 

The Company’s product and solution portfolio for the enterprise data storage industry includes storage enclosures, integrated application platforms and HPC data storage solutions. Its storage subsystems support a range of high-speed interconnect technologies to meet demanding cost and performance specifications. Its 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.

 

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 (loss), cash flows and shareholders’ equity for the periods presented. Such adjustments are of a normal and recurring nature. Certain prior period amounts in the condensed consolidated financial statements and notes to the condensed consolidated financial statements have been reclassified to conform to the current period’s presentation.

 

The Company’s Consolidated Financial Statements for the fiscal year ended July 3, 2015, are included in its Annual Report on Form 10-K as filed with the United States Securities and Exchange Commission (“SEC”) on August 11, 2015. 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 3, 2015, 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 1, 2016, 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, 2016. 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 1, 2016 consisted of 13 weeks and 39 weeks, respectively. The three and nine months ended April 3, 2015 consisted of 13 weeks and 40 weeks, respectively.  Fiscal year 2016 will be comprised of 52 weeks and will end on July 1, 2016. The fiscal quarters ended April 1, 2016, January 1, 2016, and April 3, 2015, are also referred to herein as the “March 2016 quarter”, the “December 2015 quarter”, and the “March 2015 quarter”, respectively.

 

Summary of Significant Accounting Policies

 

There have been no significant changes in the Company’s 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

 

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ended July 3, 2015, as filed with the SEC on August 11, 2015 for a discussion of the Company’s other significant accounting policies.

 

Recently Issued Accounting Pronouncements

 

In May 2014, August 2015, and April 2016, the FASB issued ASU 2014-09 (ASC Topic 606), Revenue from Contracts with Customers, ASU 2015-14 (ASC Topic 606) Revenue from Contracts with Customers, Deferral of the Effective Date, and ASU 2016-10 (ASC Topic 606) Revenue from Contracts with Customers, Identifying Performance Obligations and Licensing, respectively. ASC Topic 606 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 amendments in these ASUs are effective for fiscal years, and interim periods within those years, beginning after December 15, 2017. Early adoption is permitted for annual periods beginning after December 15, 2016. The Company is in the process of assessing the impact, if any, on its consolidated financial statements.

 

In April 2015 and August 2015, the FASB issued ASU 2015-03 (ASC Subtopic 835-30), Interest-Imputation of Interest: Simplifying the Presentation of Debt Issuance Costs and ASU 2015-15 (ASC Subtopic 835-30), Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements- Amendments to SEC Paragraphs Pursuant to Staff Announcement at June 18, 2015 EITF Meeting, respectively. The ASUs require that debt issuance costs related to a recognized debt liability, with the exception of those related to line-of-credit arrangements, be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability. The amendments in these ASUs 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 is not expected to have a material impact on the Company’s consolidated financial statements and disclosures.

 

In July 2015, the FASB issued ASU 2015-11 (ASC Topic 330), Inventory: Simplifying the Measurement of Inventory. The amendments in this ASU require inventory measurement at the lower of cost and net realizable value. The amendments in this ASU are effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. Early adoption is permitted by all entities as of the beginning of an interim or annual reporting period. The Company is in the process of assessing the impact, if any, of this ASU on its consolidated financial statements.

 

In September 2015, the FASB issued ASU 2015-16 (ASC Topic 805), Business Combinations Simplifying the Accounting for Measurement-Period Adjustments. The amendments in this update require that an acquirer recognize measurement period adjustments in the period in which the adjustments are determined. The income effects of such measurement period adjustments are to be recorded in the same period’s financial statements but calculated as if the accounting had been completed as of the acquisition date. The impact of measurement period adjustments to earnings that relate to prior period financial statements are to be presented separately on the income statement or disclosed by line item. The amendments in this update are for fiscal years, including interim periods within those fiscal years, beginning after December 15, 2015. Early adoption is permitted for public business entities for reporting periods for which financial statements have not yet been issued. The adoption of this new guidance is not expected to have a material impact on the Company’s consolidated financial statements and disclosures.

 

In November 2015, the FASB issued ASU 2015-17 (ASC Topic 740), Income Taxes Balance Sheet Classification of Deferred Taxes. The amendments in this Update are effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. Early adoption is permitted by all entities as of the beginning of an interim or annual reporting period. The Company early adopted this ASU for the December 2015 quarter on a prospective basis. See footnote 4 for disclosure of the financial statement impact of this adoption.

 

In January 2016, the FASB issued ASU 2016-01 (ASC Subtopic 825-10), Financial Instruments- Overall Recognition and Measurement of Financial Assets and Financial Liabilities. The amendments in this ASU require entities to measure all investments in equity securities at fair value with changes recognized through net income. This requirement does not apply to investments that qualify for the equity method of accounting, to those that result in consolidation of the investee, or for which the entity meets a practicability exception to fair value measurement. Additionally, the amendments eliminate certain disclosure requirements related to financial instruments measured at amortized cost and add disclosures related to the measurement categories of financial assets and financial liabilities. The amendments in this ASU are effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Early adoption is permitted for only certain portions of the ASU. The Company is in the process of assessing the impact, if any, on its consolidated financial statements.

 

In February 2016, the FASB issued ASU 2016-02 (ASC Topic 842), Leases.  The ASU amends a number of aspects of lease accounting, including requiring lessees to recognize operating leases with a term greater than one year on their balance sheet as a right-of-use asset and corresponding lease liability, measured at the present value of the lease payments. The

 

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amendments in this ASU are effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption is permitted.  The Company is in the process of assessing the impact on its consolidated financial statements.

 

In March 2016, the FASB issued ASU 2016-09 (ASC Topic 718), Stock Compensation  — Improvements to Employee Share-Based Payment Accounting. The amendments in this ASU are intended to simplify several areas of accounting for share based compensation arrangements, including the income tax consequences, classification on the consolidated statement of cash flows and treatment of forfeitures.  The amendments in this ASU are effective for annual periods beginning after December 15, 2016, and interim periods within those annual periods. Early adoption is permitted.  The Company is in the process of assessing the impact, if any, of this ASU on its consolidated financial statements.

 

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 1, 2016:

 

(Dollars in millions)

 

Amortized
Cost

 

Unrealized
Gain/(Loss)

 

Fair
Value

 

Available-for-sale securities:

 

 

 

 

 

 

 

Money market funds

 

$

705

 

$

 

$

705

 

Certificates of deposit

 

5

 

 

5

 

Corporate bonds

 

6

 

 

6

 

 

 

$

716

 

$

 

$

716

 

 

 

 

 

 

 

 

 

Included in Cash and cash equivalents

 

 

 

 

 

$

703

 

Included in Short-term investments

 

 

 

 

 

6

 

Included in Other current assets

 

 

 

 

 

7

 

Total

 

 

 

 

 

$

716

 

 

As of April 1, 2016, the Company’s Other current assets included $7 million in restricted cash and investments held as collateral at banks for various performance obligations.

 

As of April 1, 2016, the Company had no material 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 1, 2016.

 

The fair value and amortized cost of the Company’s investments classified as available-for-sale at April 1, 2016, by remaining contractual maturity were as follows:

 

(Dollars in millions)

 

Amortized
Cost

 

Fair
Value

 

Due in less than 1 year

 

$

710

 

$

710

 

Due in 1 to 5 years

 

6

 

6

 

Thereafter

 

 

 

Total

 

$

716

 

$

716

 

 

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

 

(Dollars in millions)

 

Amortized
Cost

 

Unrealized
Gain/(Loss)

 

Fair
Value

 

Available-for-sale securities:

 

 

 

 

 

 

 

Money market funds

 

$

1,203

 

$

 

$

1,203

 

Certificates of deposit

 

867

 

 

867

 

Corporate bonds

 

6

 

 

6

 

Total

 

$

2,076

 

$

 

$

2,076

 

 

 

 

 

 

 

 

 

Included in Cash and cash equivalents

 

 

 

 

 

$

2,063

 

Included in Short-term investments

 

 

 

 

 

6

 

Included in Other current assets

 

 

 

 

 

7

 

Total

 

 

 

 

 

$

2,076

 

 

As of July 3, 2015, the Company’s Other current assets included $7 million in restricted cash and investments held as collateral at banks for various performance obligations.

 

As of July 3, 2015, the Company had no material 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 July 3, 2015.

 

Inventories

 

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

 

(Dollars in millions)

 

April 1,
2016

 

July 3,
2015

 

Raw materials and components

 

$

353

 

$

352

 

Work-in-process

 

243

 

239

 

Finished goods

 

332

 

402

 

 

 

$

928

 

$

993

 

 

Property, Equipment and Leasehold Improvements, net

 

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

 

(Dollars in millions)

 

April 1,
2016

 

July 3,
2015

 

Property, equipment and leasehold improvements

 

$

9,808

 

$

9,630

 

Accumulated depreciation and amortization

 

(7,643

)

(7,352

)

 

 

$

2,165

 

$

2,278

 

 

In the three and nine months ended April 1, 2016, the Company determined it would discontinue the use of certain manufacturing property and equipment in the short-term, and that certain other manufacturing property and equipment was permanently impaired, and as a result recognized a charge of $32 million from the write-off and accelerated depreciation of of these fixed assets. This amount was recorded in Cost of revenue in the Condensed Consolidated Statement of Operations. In the three and nine months ended April 3, 2015, the Company did not record any material impairment charges.

 

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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-
retirement
plans

 

Foreign
currency
translation
adjustments

 

Total

 

Balance at July 3, 2015

 

$

1

 

$

 

$

(15

)

$

(16

)

$

(30

)

Other comprehensive income (loss) before reclassifications

 

(3

)

 

1

 

2

 

 

Amounts reclassified from AOCI

 

2

 

 

 

 

2

 

Other comprehensive income (loss)

 

(1

)

 

1

 

2

 

2

 

Balance at April 1, 2016

 

$

 

$

 

$

(14

)

$

(14

)

$

(28

)

 

 

 

 

 

 

 

 

 

 

 

 

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

)

 


(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

 

The credit agreement entered into by the Company and its subsidiary Seagate HDD Cayman on January 18, 2011 and subsequently amended (the “Revolving Credit Facility”) provides the Company with a $700 million senior secured revolving credit facility. The term of the Revolving Credit Facility is through January 15, 2020, provided that if the Company does not have Investment Grade Ratings (as defined in the Revolving Credit Facility) 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 Revolving Credit Facility 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, subject to compliance with certain covenants and other customary conditions to borrowing, and for the issuance of letters of credit up to a sub-limit of $75 million.

 

The Revolving Credit Facility, as amended, includes three financial covenants: (1) minimum cash, cash equivalents and marketable securities; (2) a fixed charge coverage ratio; and (3) a net leverage ratio.  On April 28, 2016, the Revolving Credit Agreement was amended in order to increase the allowable net leverage ratio to adjust for our current financial liquidity position.  We were in compliance with the modified covenants as of April 1, 2016 and expect to be in compliance for the next 12 months.

 

As of April 1, 2016, no borrowings had been drawn or letters of credit utilized under the Revolving Credit Facility.

 

Long-Term Debt

 

$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 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.

 

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$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. 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.

 

$700 million Aggregate Principal Amount of 4.875% Senior Notes due June 2027 (the “2027 Notes”). The interest on the Notes is payable semi-annually on June 1 and December 1 of each year, which commenced on December 1, 2015. The issuer under the 2027 Notes is Seagate HDD Cayman, and the obligations under the 2027 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 2034 (the “2034 Notes”). The interest on the 2034 Notes is payable semi-annually on June 1 and December 1 of each year. 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. During the March 2016 quarter, the Company repurchased $10 million aggregate principal amount of its 2034 Notes for cash at a discount to their principal amount, plus accrued and unpaid interest. The Company recorded a gain on the repurchase of approximately $3 million, which is included in Other, net in the Company’s Condensed Consolidated Statement of Operations.

 

At April 1, 2016, future principal payments on long-term debt were as follows (in millions):

 

Fiscal Year

 

Amount

 

Remainder of 2016

 

$

 

2017

 

 

2018

 

 

2019

 

800

 

2020

 

 

Thereafter

 

3,333

 

 

 

$

4,133

 

 

4.              Income Taxes

 

The Company recorded an income tax provision of $30 million and $43 million in the three and nine months ended April 1, 2016, respectively. The income tax provision for the nine months ended April 1, 2016 included approximately $2 million of net discrete tax provision associated with prior year tax adjustments offset by the release of tax reserves due to the expiration of certain statutes of limitation.

 

The Company’s income tax provision recorded for the three and nine months ended April 1, 2016 differed from the provision from 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.

 

Consistent with the intent of ASU 2015-17 to simplify the presentation of deferred income taxes, the Company elected to adopt ASU 2015-17 on a prospective basis as of the second quarter, fiscal year 2016.  Prior periods were not retrospectively adjusted. As a result of this change in accounting principle, $120 million of the Company’s deferred tax assets were reclassified from current to non-current.

 

During the nine months ended April 1, 2016, the Company’s unrecognized tax benefits excluding interest and penalties decreased by approximately $4 million to $79 million. The unrecognized tax benefits that, if recognized, would impact the effective tax rate was $79 million at April 1, 2016, subject to certain future valuation allowance reversals. During the 12 months beginning April 2, 2016, the Company expects that its unrecognized tax benefits could be reduced by approximately $24 million primarily 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. On April 4, 2016, the IRS approved the audit settlement reached in December 2015 regarding all disputed issues associated with the Company’s U.S. federal income tax returns for fiscal years 2008, 2009 and 2010. This audit settlement did not have a material impact on the Company’s financial statements.  As a result of this settlement and the expiration of certain statutes of

 

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limitation, the Company is no longer subject to tax examination of U.S. federal income tax returns for years prior to fiscal year 2012.

 

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.

 

5.              Acquisitions

 

Dot Hill Systems Corp.

 

On October 6, 2015, the Company acquired all of the outstanding shares of Dot Hill Systems Corp. (“Dot Hill”), a supplier of software and hardware storage systems. The Company paid $9.75 per share, or $674 million, in cash for the acquisition. The acquisition of Dot Hill further expands the Company’s OEM-focused cloud storage systems business and advances the Company’s strategic efforts.

 

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

 

$

40

 

Accounts receivable, net

 

48

 

Inventories

 

21

 

Other current and non-current assets

 

7

 

Property, plant and equipment

 

10

 

Intangible assets

 

252

 

Goodwill

 

364

 

Total assets

 

742

 

Accounts payable, accrued expenses and other

 

(68

)

Total liabilities

 

(68

)

Total

 

$

674

 

 

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

 

(Dollars in millions)

 

Fair Value

 

Weighted-
Average
Amortization
Period

 

Existing technology

 

$

164

 

5.0 years

 

Customer relationships

 

71

 

7.0 years

 

Trade names

 

3

 

5.0 years

 

Total amortizable intangible assets acquired

 

238

 

5.5 years

 

In-process research and development

 

14

 

 

 

Total acquired identifiable intangible assets

 

$

252

 

 

 

 

The recognized goodwill, which is not deductible for income tax purposes, is primarily attributable to cost synergies expected to arise after the acquisition and the benefits the Company expects to derive from enhanced market opportunities.

 

The expenses related to the acquisition of Dot Hill in for the nine months ended April 1, 2016, which are included within Marketing and administrative expense on the Consolidated Statement of Operations, are not significant.

 

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

 

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 intended 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

 

 

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

 

3.7 years

 

 

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 were included within Marketing and administrative expense on the Company’s Condensed 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 through April 3, 2015 were 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.

 

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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 following table shows the fair value of the separately identifiable intangible assets at the time of acquisition and the period over which each intangible asset 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

 

 

 

 

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

 

6.              Goodwill and Other Intangible Assets

 

Goodwill

 

The changes in the carrying amount of goodwill for the nine months ended April 1, 2016, are as follows:

 

(Dollars in millions)

 

Amount

 

Balance at July 3, 2015

 

$

874

 

Goodwill acquired (a)

 

364

 

Foreign currency translation effect

 

 

Balance at April 1, 2016

 

$

1,238

 

 


(a) Amount represents goodwill recognized from the Dot Hill acquisition.

 

Other Intangible Assets

 

Other intangible assets consist primarily of existing technology, customer relationships and in-process research and development 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 circumstances 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

 

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recognized for in-process research and development. Upon completion of the in-process research and development, the related assets will be accounted for as finite-lived intangible assets, and will be amortized over their useful lives.

 

The carrying value of other intangible assets subject to amortization as of April 1, 2016, 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

 

$

311

 

$

(75

)

$

236

 

4.3 years

 

Customer relationships

 

511

 

(306

)

205

 

3.3 years

 

Trade names

 

29

 

(12

)

17

 

2.8 years

 

Other intangible assets

 

28

 

(8

)

20

 

3.4 years

 

Total amortizable other intangible assets

 

$

879

 

$

(401

)

$

478

 

3.8 years

 

 

The carrying value of in-process research and development not subject to amortization was $14 million as of April 1, 2016.

 

The carrying value of other intangible assets subject to amortization as of July 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

 

$

191

 

$

(69

)

$

122

 

4.1 years

 

Customer relationships

 

487

 

(282

)

205

 

2.4 years

 

Trade names

 

27

 

(7

)

20

 

3.2 years

 

Other intangible assets

 

27

 

(4

)

23

 

4.2 years

 

Total amortizable other intangible assets

 

$

732

 

$

(362

)

$

370

 

3.1 years

 

 

For the three and nine months ended April 1, 2016, amortization expense of other intangible assets was $44 million and $131 million, respectively. For the three and nine months ended April 3, 2015, amortization expense of other intangible assets was $40 million and $112 million.  As of April 1, 2016, 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 2016

 

$

43

 

2017

 

166

 

2018

 

108

 

2019

 

68

 

2020

 

50

 

Thereafter

 

43

 

 

 

$

478

 

 

7.   Restructuring and Exit Costs

 

For the three and nine months ended April 1, 2016, the Company recorded restructuring charges of approximately $20 million and $95 million, respectively, comprised primarily of charges related to employee termination costs and facility exit costs associated with restructuring of our work force during the fiscal year.  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.

 

September 2015 Plan -  On September 4, 2015, the Company committed to a restructuring plan (the “September 2015 Plan”) intended to realign its cost structure with the current macroeconomic business environment. The September 2015 Plan included reducing worldwide headcount by approximately 1,000 employees. The September 2015 Plan was largely completed by the fiscal quarter ended January 1, 2016. For the nine months ended April 1, 2016, the Company recorded total restructuring charges of approximately $65 million related to the September 2015 Plan, comprised of approximately $57 million for employee termination costs and $8 million facility exit costs, respectively.  The Company did not record any material restructuring charges related to the September 2015 Plan in the three months ended April 1, 2016.  For the three and nine months ended April 1, 2016, the Company

 

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made cash payments of $7 million and $53 million, respectively, comprised primarily of employee termination costs related to the September 2015 Plan.

 

February 2016 Plan -  On February 15, 2016, the Company committed to a restructuring plan (the “February 2016 Plan”) intended to align our manufacturing footprint with current macroeconomic conditions. The February 2016 Plan included reducing worldwide headcount by approximately 2,000 employees. The February 2016 Plan was largely completed by the fiscal quarter ended April 1, 2016. For the three and nine months ended April 1, 2016, the Company recorded total restructuring charges of approximately $15 million related to the February 2016 Plan, comprised of approximately $14 million for employee termination costs and $1 million facility exit costs, respectively. For the three and nine months ended April 1, 2016, the Company made cash payments of $14 million, comprised primarily of employee termination costs related to the February 2016 Plan.

 

Other Restructuring and Exit Costs -  For the three and nine months ended April 1, 2016, the Company recorded restructuring charges of approximately $5 million and $15 million, respectively, and made cash payments of $8 million and $26 million, respectively, related to other restructuring plans.

 

8.   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 in the Condensed Consolidated Balance Sheets at fair value.  The changes in the fair value of the effective portions of designated cash flow hedges are recorded in Accumulated other comprehensive 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 amounts of net unrealized gain or loss on cash flow hedges were immaterial as of April 1, 2016 and July 3, 2015.

 

The Company de-designates 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 1, 2016. As of April 1, 2016, the Company’s existing foreign currency forward exchange contracts mature within 12 months. The deferred amount currently recorded in Accumulated other comprehensive loss expected to be recognized into earnings over the next 12 months is immaterial.

 

The following tables show the total notional value of the Company’s outstanding foreign currency forward exchange contracts as of April 1, 2016 and July 3, 2015:

 

 

 

As of April 1, 2016

 

(Dollars in millions)

 

Contracts
Designated as
Hedges

 

Contracts Not
Designated as
Hedges

 

British Pound Sterling

 

$

20

 

$

7

 

 

 

$

20

 

$

7

 

 

 

 

As of July 3, 2015

 

(Dollars in millions)

 

Contracts
Designated as
Hedges

 

Contracts Not
Designated as
Hedges

 

British Pound Sterling

 

$

35

 

$

 

Singapore dollars

 

23

 

42

 

Thai Baht

 

18

 

48

 

Malaysian Ringgit

 

12

 

15

 

Chinese Renminbi

 

5

 

16

 

Euro

 

 

13

 

 

 

$

93

 

$

134

 

 

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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 fiscal year 2014, 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 1, 2016, the notional investments underlying the TRS amounted to $94 million. The contract term of the TRS was through January 2016, and is settled on a monthly basis, therefore limiting counterparty performance risk. The Company renewed the contract term through January 2017 under materially the same terms. 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 1, 2016 and July 3, 2015:

 

 

 

As of April 1, 2016

 

 

 

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

 

$

(1

)

Derivatives not designated as hedging instruments:

 

 

 

 

 

 

 

 

 

Foreign currency forward exchange contracts

 

Other current assets

 

 

Accrued expenses

 

 

Total return swap

 

Other current assets

 

 

Accrued expenses

 

 

Total derivatives

 

 

 

$

 

 

 

$

(1

)

 

 

 

As of July 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

 

$

2

 

Accrued expenses

 

$

(1

)

Derivatives not designated as hedging instruments:

 

 

 

 

 

 

 

 

 

Foreign currency forward exchange contracts

 

Other current assets

 

 

Accrued expenses

 

(3

)

Total return swap

 

Other current assets

 

1

 

Accrued expenses

 

 

Total derivatives

 

 

 

$

3

 

 

 

$

(4

)

 

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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 (Loss) and the Condensed Consolidated Statement of Operations for the three and nine months ended April 1, 2016:

 

(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

)

$

(3

)

Cost of revenue

 

$

 

$

(2

)

Cost of revenue

 

$

 

$

 

 

 

 

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

 

$

 

$

(4

)

Total return swap

 

Operating expenses

 

1

 

(3

)

 


(a)   The amount of gain or (loss) recognized in income represents $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 and nine months ended April 1, 2016, respectively.

 

The following tables show the effect of the Company’s derivative instruments on the Condensed Consolidated Statement of Comprehensive Income (Loss) and the Condensed Consolidated Statement of Operations for the three and nine months 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

 

 

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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

)

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 April 3, 2015, respectively.

 

9.              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 1, 2016:

 

 

 

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

 

$

703

 

$

 

$

 

$

703

 

Certificates of deposit

 

 

 

 

 

Corporate bonds

 

 

6

 

 

6

 

Total cash equivalents and short-term investments

 

703

 

6

 

 

709

 

Restricted cash and investments:

 

 

 

 

 

 

 

 

 

Money market funds

 

2

 

 

 

2

 

Certificates of deposit

 

 

5

 

 

5

 

Total assets

 

$

705

 

$

11

 

$

 

$

716

 

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

 

$

703

 

$

 

$

 

$

703

 

Short-term investments

 

 

6

 

 

6

 

Other current assets

 

2

 

5

 

 

7

 

Total assets

 

$

705

 

$

11

 

$

 

$

716

 

Liabilities:

 

 

 

 

 

 

 

 

 

Accrued expenses

 

$

 

$

(1

)

$

 

$

(1

)

Total liabilities

 

$

 

$

(1

)

$

 

$

(1

)

 

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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 July 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

 

$

1,201

 

$

 

$

 

$

1,201

 

Certificates of deposit

 

 

862

 

 

862

 

Corporate bonds

 

 

6

 

 

6

 

Total cash equivalents and short-term investments

 

1,201

 

868

 

 

2,069

 

Restricted cash and investments:

 

 

 

 

 

 

 

 

 

Money market funds

 

2

 

 

 

2

 

Certificates of deposit

 

 

5

 

 

5

 

Derivative assets

 

 

3

 

 

3

 

Total assets

 

$

1,203

 

$

876

 

$

 

$

2,079

 

Liabilities:

 

 

 

 

 

 

 

 

 

Derivative liabilities

 

$

 

$

(4

)

$

 

$

(4

)

Total liabilities

 

$

 

$

(4

)

$

 

$

(4

)

 

 

 

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

 

$

1,201

 

$

862

 

$

 

$

2,063

 

Short-term investments

 

 

6

 

 

6

 

Other current assets

 

2

 

8

 

 

10

 

Total assets

 

$

1,203

 

$

876

 

$

 

$

2,079

 

Liabilities:

 

 

 

 

 

 

 

 

 

Accrued expenses

 

$

 

$

(4

)

$

 

$

(4

)

Total liabilities

 

$

 

$

(4

)

$

 

$

(4

)

 

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, U.S. Treasuries and certificates of deposits. 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 1, 2016, 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

 

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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.

 

As of April 1, 2016 and July 3, 2015, the Company had no Level 3 assets or liabilities measured at fair value on a recurring basis.

 

Items Measured at Fair Value on a Non-Recurring Basis

 

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 recorded at cost and are included in Other assets, net in the Condensed Consolidated Balance Sheets, 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 1, 2016 and July 3, 2015 totaled $112 million and $120 million, respectively, and consisted primarily of privately held equity securities without a readily determinable fair value.

 

In the three and nine months ended April 1, 2016, the Company determined that certain equity investments accounted for under the cost method were other-than-temporarily impaired, and recognized a charge of $2 million and $12 million, respectively, in order to write down the carrying amount of the investments to zero.  Since there was no active market for the equity securities of the investee, the Company estimated fair value of the investee by analyzing the underlying cash flows and future prospects of the investee. These amounts were recorded in Other, net in the Condensed Consolidated Statement of Operations for the three and nine months ended April 1, 2016. The Company did not record any material impairment charges in the three and nine months ended April 3, 2015.

 

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 1, 2016

 

July 3, 2015

 

(Dollars in millions)

 

Carrying
Amount

 

Estimated
Fair Value

 

Carrying
Amount

 

Estimated
Fair Value

 

3.75% Senior Notes due November 2018

 

$

800

 

$

804

 

$

800

 

$

828

 

7.00% Senior Notes due November 2021

 

158

 

164

 

158

 

170

 

4.75% Senior Notes due June 2023

 

990

 

826

 

1,000

 

1,016

 

4.75% Senior Notes due January 2025

 

995

 

787

 

1,000

 

995

 

4.875% Senior Notes due June 2027

 

698

 

518

 

698

 

675

 

5.75% Senior Notes due December 2034

 

489

 

356

 

499

 

491

 

Long-term debt

 

$

4,130

 

$

3,455

 

$

4,155

 

$

4,175

 

Less short-term borrowings and current portion of long-term debt

 

 

 

 

 

Long-term debt, less current portion

 

$

4,130

 

$

3,455

 

$

4,155

 

$

4,175

 

 

10.       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 298,459,787 shares were outstanding as of April 1, 2016, and 100,000,000 preferred shares, par value $0.00001, of which none were issued or outstanding as of April 1, 2016.

 

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

 

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Table of Contents

 

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 $2.5 billion of its outstanding ordinary shares.

 

On April 22, 2015, the Board of Directors authorized the Company to repurchase an additional $2.0 billion of its outstanding ordinary shares.

 

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

 

As of April 1, 2016, $1.8 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 1, 2016:

 

(In millions)

 

Number of Shares
Repurchased

 

Dollar Value of Shares
Repurchased

 

Repurchases of Ordinary Shares

 

23

 

$

1,090

 

Tax Withholding Related to Vesting of Equity Awards

 

1

 

55

 

Total

 

24

 

$

1,145

 

 

11.       Compensation

 

The Company recorded approximately $30 million and $95 million of stock-based compensation expense during the three and nine months ended April 1, 2016, respectively. 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.

 

12. 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,

 

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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.

 

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 1, 2016 and April 3, 2015 were as follows:

 

 

 

For the Three Months Ended

 

For the Nine Months Ended

 

(Dollars in millions)

 

April 1,
2016

 

April 3,
2015

 

April 1,
2016

 

April 3,
2015

 

Balance, beginning of period

 

$

223

 

$

282

 

$

248

 

$

273

 

Warranties issued

 

30

 

36

 

96

 

116

 

Repairs and replacements

 

(37

)

(45

)

(118

)

(145

)

Changes in liability for pre-existing warranties, including expirations

 

(11

)

 

(23

)

21

 

Warranty liability assumed from business acquisitions

 

 

 

2

 

8

 

Balance, end of period

 

$

205

 

$

273

 

$

205

 

$

273

 

 

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13.       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 1,
2016

 

April 3,
2015

 

April 1,
2016

 

April 3,
2015

 

Numerator:

 

 

 

 

 

 

 

 

 

Net income (loss)

 

$

(21

)

$

291

 

$

178

 

$

1,605

 

Number of shares used in per share calculations:

 

 

 

 

 

 

 

 

 

Total shares for purposes of calculating basic net income (loss) per share

 

298

 

323

 

300

 

326

 

Weighted-average effect of dilutive securities:

 

 

 

 

 

 

 

 

 

Employee equity award plans

 

 

7

 

3

 

8

 

Total shares for purpose of calculating diluted net income (loss) per share

 

298

 

330

 

303

 

334

 

Net income (loss) per share:

 

 

 

 

 

 

 

 

 

Basic

 

$

(0.07

)

$

0.90

 

$

0.59

 

$

4.92

 

Diluted

 

(0.07

)

0.88

 

0.59

 

4.81

 

 

The anti-dilutive shares related to employee equity award plans that were excluded from the computation of diluted net income (loss) were 4 million and 2 million for the three and nine months ended April 1, 2016, respectively, and immaterial for the three and nine months ended April 3, 2015.

 

14.       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 district court entered

 

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judgment in favor of the Company on July 14, 2014. Convolve filed a notice of appeal on August 13, 2014. On February 10, 2016, the U.S. Court of Appeals for the Federal Circuit: 1) affirmed the district court’s summary judgment of no direct infringement by Seagate because Seagate’s ATA/SCSI disk drives do not meet the “user interface” limitation of the asserted claims of the ‘473 patent; 2) affirmed the district court’s summary judgment of non-infringement by Compaq’s products as to claims 1, 3, and 5 of the ‘473 patent because Compaq’s F10 BIOS interface does not meet the “commands” limitation of those claims; 3) vacated the district court’s summary judgment of non-infringement by Compaq’s accused products as to claims 7-15 of the ‘473 patent; 4) reversed the district court’s summary judgment of non-infringement based on intervening rights; and 5) remanded the case to the district court for further proceedings on the ‘473 patent. 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, employment discrimination based on his Belarusian 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. On March 31, 2014, the district court granted Seagate’s summary judgment motion and entered judgment in favor of Seagate. Mr. Shukh filed a notice of appeal on April 7, 2014. On October 2, 2015, the court of appeals vacated and remanded the district court’s grant of summary judgment on Mr. Shukh’s claim for correction of inventorship and affirmed the district court’s grant of summary judgment as to all other claims. On October 29, 2015, Mr. Shukh filed a petition for rehearing en banc with the court of appeals; the petition was denied on December 17, 2015. On March 16, 2016, Shukh filed a petition for writ of certiorari to the U.S. Supreme Court. In view of the uncertainty regarding the amount of damages, if any, that could be awarded 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.

 

LEAP Co., Ltd. v. Seagate Singapore International Headquarters Pte. Ltd. and Nippon Seagate Inc. - On July 4, 2012, LEAP Co., Ltd. filed a lawsuit in the Tokyo District Court of Japan against Seagate Singapore International Headquarters Pte. Ltd., Nippon Seagate Inc. and Buffalo Inc. alleging wrongful termination of purchase agreements and other claims, and seeking approximately $38 million in damages. On March 16, 2016, the Company and LEAP reached a settlement.  As a result of the settlement, this litigation between the Company and LEAP has ended.  There is no damage or loss to the Company related to this matter.

 

Enova Technology Corporation v. Seagate Technology (US) Holdings, Inc., et al.-On June 5, 2013, Enova Technology Corporation (“Enova”) filed a complaint against Seagate Technology (US) Holdings, Inc. and Seagate Technology LLC in the U.S. District Court for the District of Delaware alleging infringement of U.S. Patent No. 7,136,995, “Cryptographic Device,” and U.S. Patent No. 7,900,057, “Cryptographic Serial ATA Apparatus and Method.” The complaint seeks unspecified compensatory damages, enhanced damages, injunctive relief, attorneys’ fees, and other relief. On April 27, 2015, the district court ordered a stay of the case, in view of proceedings regarding the ‘995 and ‘057 Patents before the Patent Trial and Appeal Board (“PTAB”) of the U.S. Patent and Trademark Office. The Company believes the claims are without merit and intends to vigorously defend this case. On September 2, 2015, PTAB issued its final written decision that claims 1-15 of the ‘995 Patent are held unpatentable. On December 18, 2015, PTAB issued its final written decisions that claims 1-32 and 40-53 of the ‘057 Patent are held unpatentable. On February 4, 2016, PTAB issued its final written decision that claims 33-39 of the ‘057 Patent are held unpatentable. Enova has appealed PTAB’s decisions on the ‘995 Patent and the 057 Patent to the U.S. Court of Appeals for the Federal Circuit. A hearing before the court of appeals