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 2, 2010

 

o

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

 

For the transition period from:          to         

 

Commission File Number 001-31560

 

SEAGATE TECHNOLOGY

(Exact name of registrant as specified in its charter)

 

Cayman Islands

 

98-0355609

(State or other jurisdiction of

 

(I.R.S. Employer

incorporation or organization)

 

Identification Number)

 

P.O.  Box 309, Ugland House

Grand Cayman KY1-1104, Cayman Islands

(Address of Principal Executive Offices)

 

Telephone:  (345) 949-8066

(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 o No o

 

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

 

Large accelerated filer: x

 

Accelerated filer: o

 

 

 

Non-accelerated filer: o

 

Smaller reporting company: o

(Do not check if a smaller reporting company)

 

 

 

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

 

As of April 29, 2010, 487,436,503 shares of the registrant’s common shares, par value $0.00001 per share, were issued and outstanding.

 

 

 


 


Table of Contents

 

INDEX

 

SEAGATE TECHNOLOGY

 

 

 

PAGE NO.

 

 

 

PART I

FINANCIAL INFORMATION

 

 

 

 

Item 1.

Financial Statements

 

 

 

 

 

Condensed Consolidated Balance Sheets ¾ April 2, 2010 (Unaudited) and July 3, 2009

3

 

 

 

 

Condensed Consolidated Statements of Operations ¾ Three and Nine Months ended April 2, 2010 and April 3, 2009 (Unaudited)

4

 

 

 

 

Condensed Consolidated Statements of Cash Flows ¾ Nine Months ended April 2, 2010 and April 3, 2009 (Unaudited)

5

 

 

 

 

Condensed Consolidated Statement of Shareholders’ Equity ¾ Nine Months ended April 2, 2010 (Unaudited)

6

 

 

 

 

Notes to Condensed Consolidated Financial Statements (Unaudited)

7

 

 

 

Item 2.

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

39

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

52

 

 

 

Item 4.

Controls and Procedures

53

 

 

 

PART II

OTHER INFORMATION

 

 

 

 

Item 1.

Legal Proceedings

54

 

 

 

Item 1A.

Risk Factors

54

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

55

 

 

 

Item 3.

Defaults Upon Senior Securities

55

 

 

 

Item 4.

Submission of Matters to a Vote of Securityholders

55

 

 

 

Item 5.

Other Information

55

 

 

 

Item 6.

Exhibits

56

 

 

 

 

SIGNATURES

66

 

2



Table of Contents

 

PART I

FINANCIAL INFORMATION

 

ITEM 1.                FINANCIAL STATEMENTS

 

SEAGATE TECHNOLOGY

CONDENSED CONSOLIDATED BALANCE SHEETS

(In millions)

(Unaudited)

 

 

 

April 2,
2010

 

July 3,
2009
(a)

 

ASSETS

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

2,062

 

$

1,427

 

Short-term investments

 

214

 

114

 

Restricted cash and investments

 

103

 

508

 

Accounts receivable, net

 

1,451

 

1,033

 

Inventories

 

685

 

587

 

Deferred income taxes

 

81

 

97

 

Other current assets

 

560

 

528

 

Total current assets

 

5,156

 

4,294

 

Property, equipment and leasehold improvements, net

 

2,054

 

2,229

 

Deferred income taxes

 

384

 

372

 

Other assets, net

 

153

 

192

 

 

 

 

 

 

 

Total Assets

 

$

7,747

 

$

7,087

 

 

 

 

 

 

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Short-term borrowings

 

$

¾

 

$

350

 

Accounts payable

 

1,895

 

1,573

 

Accrued employee compensation

 

214

 

144

 

Accrued warranty

 

193

 

213

 

Accrued expenses

 

445

 

483

 

Accrued income taxes

 

12

 

10

 

Current portion of long-term debt

 

377

 

421

 

Total current liabilities

 

3,136

 

3,194

 

Long-term accrued warranty

 

201

 

224

 

Long-term accrued income taxes

 

60

 

69

 

Other non-current liabilities

 

95

 

120

 

Long-term debt, less current portion

 

1,598

 

1,926

 

 

 

 

 

 

 

Total Liabilities

 

5,090

 

5,533

 

 

 

 

 

 

 

Commitments and contingencies (See Notes 10 and 12)

 

 

 

 

 

 

 

 

 

 

 

Shareholders’ equity:

 

 

 

 

 

Common shares and additional paid-in capital

 

3,827

 

3,708

 

Accumulated other comprehensive income (loss)

 

(1

)

(6

)

Retained earnings (accumulated deficit)

 

(1,169

)

(2,148

)

Total Shareholders’ Equity

 

2,657

 

1,554

 

 

 

 

 

 

 

Total Liabilities and Shareholders’ Equity

 

$

7,747

 

$

7,087

 

 


(a)    The information in this column was derived from the Company’s audited Consolidated Balance Sheet as of July 3, 2009, as adjusted due to a required change in the accounting for convertible debt instruments implemented in the first quarter of fiscal year 2010, applied on a retrospective basis.

 

See Notes to Condensed Consolidated Financial Statements.

 

3



Table of Contents

 

SEAGATE TECHNOLOGY

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In millions, except per share data)

(Unaudited)

 

 

 

For the Three Months Ended

 

For the Nine Months Ended

 

 

 

April 2,
2010

 

April 3,
2009
(a)

 

April 2,
2010

 

April 3,
2009
(a)

 

 

 

 

 

 

 

 

 

 

 

Revenue

 

$

3,049

 

$

2,150

 

$

8,738

 

$

7,452

 

 

 

 

 

 

 

 

 

 

 

Cost of revenue

 

2,148

 

1,997

 

6,261

 

6,457

 

Product development

 

224

 

243

 

658

 

738

 

Marketing and administrative

 

105

 

134

 

323

 

424

 

Amortization of intangibles

 

8

 

13

 

23

 

41

 

Restructuring and other, net

 

4

 

25

 

50

 

126

 

Impairment of goodwill and long-lived assets

 

¾

 

¾

 

64

 

2,320

 

Total operating expenses

 

2,489

 

2,412

 

7,379

 

10,106

 

 

 

 

 

 

 

 

 

 

 

Income (loss) from operations

 

560

 

(262

)

1,359

 

(2,654

)

 

 

 

 

 

 

 

 

 

 

Interest income

 

2

 

3

 

4

 

15

 

Interest expense

 

(41

)

(37

)

(127

)

(102

)

Other, net

 

1

 

5

 

(7

)

(17

)

Other income (expense), net

 

(38

)

(29

)

(130

)

(104

)

 

 

 

 

 

 

 

 

 

 

Income (loss) before income taxes

 

522

 

(291

)

1,229

 

(2,758

)

Provision for (benefit from) income taxes

 

4

 

(16

)

(1

)

284

 

Net income (loss)

 

$

518

 

$

(275

)

$

1,230

 

$

(3,042

)

 

 

 

 

 

 

 

 

 

 

Net income (loss) per share:

 

 

 

 

 

 

 

 

 

Basic

 

$

1.05

 

$

(0.56

)

$

2.48

 

$

(6.25

)

Diluted

 

1.00

 

(0.56

)

2.38

 

(6.25

)

Number of shares used in per share calculations:

 

 

 

 

 

 

 

 

 

Basic

 

493

 

489

 

495

 

487

 

Diluted

 

520

 

489

 

519

 

487

 

 

 

 

 

 

 

 

 

 

 

Dividends declared per share

 

$

¾

 

$

0.03

 

$

¾

 

$

0.27

 

 


(a)    As adjusted due to a required change in the accounting for convertible debt instruments implemented in the first quarter of fiscal year 2010, applied on a retrospective basis.

 

See Notes to Condensed Consolidated Financial Statements.

 

4



Table of Contents

 

SEAGATE TECHNOLOGY

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In millions)

(Unaudited)

 

 

 

For the Nine Months Ended

 

 

 

April 2,
2010

 

April 3,
2009
(a)

 

OPERATING ACTIVITIES

 

 

 

 

 

Net income (loss)

 

$

1,230

 

$

(3,042

)

Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:

 

 

 

 

 

Depreciation and amortization

 

584

 

707

 

Stock-based compensation

 

38

 

70

 

Impairment of goodwill and long-lived assets

 

64

 

2,320

 

Deferred income taxes

 

10

 

295

 

Other non-cash operating activities, net

 

22

 

(1

)

Changes in operating assets and liabilities:

 

 

 

 

 

Accounts receivable

 

(418

)

534

 

Inventories

 

(98

)

368

 

Accounts payable

 

242

 

(263

)

Accrued employee compensation

 

70

 

(323

)

Accrued expenses and warranty

 

(124

)

(150

)

Other assets and liabilities

 

(12

)

116

 

Net cash provided by (used in) operating activities

 

1,608

 

631

 

 

 

 

 

 

 

INVESTING ACTIVITIES

 

 

 

 

 

Acquisition of property, equipment and leasehold improvements

 

(372

)

(553

)

Purchases of short-term investments

 

(278

)

(124

)

Maturities and sales of short-term investments

 

176

 

146

 

Decrease in restricted cash and investments

 

26

 

 

Proceeds from sale of investment in equity securities

 

 

11

 

Other investing activities, net

 

1

 

8

 

Net cash provided by (used in) investing activities

 

(447

)

(512

)

 

 

 

 

 

 

FINANCING ACTIVITIES

 

 

 

 

 

Proceeds from short-term borrowings

 

15

 

350

 

Repayment of short-term borrowings

 

(365

)

 

Repayment of long-term debt

 

(385

)

(20

)

Decrease in restricted cash and investments

 

379

 

 

Proceeds from exercise of employee stock options and employee stock purchase plan

 

81

 

45

 

Repurchases of common shares

 

(251

)

 

Dividends to shareholders

 

 

(132

)

Net cash provided by (used in) financing activities

 

(526

)

243

 

Increase (decrease) in cash and cash equivalents

 

635

 

362

 

Cash and cash equivalents at the beginning of the period

 

1,427

 

990

 

Cash and cash equivalents at the end of the period

 

$

2,062

 

$

1,352

 

 

 

 

 

 

 

Supplemental Disclosure of Cash Flow Information

 

 

 

 

 

Cash paid for interest

 

$

114

 

$

108

 

Cash paid for income taxes, net of refunds

 

7

 

9

 

 


(a)    As adjusted due to a required change in the accounting for convertible debt instruments implemented in the first quarter of fiscal year 2010, applied on a retrospective basis.

 

See Notes to Condensed Consolidated Financial Statements.

 

5



Table of Contents

 

SEAGATE TECHNOLOGY

CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY

 

For the Nine Months Ended April 2, 2010

(In millions)

(Unaudited)

 

 

 

Number
of
Common
Shares

 

Par
Value
of
Shares

 

Additional
Paid-in
Capital

 

Accumulated
Other

Comprehensive
Income (Loss)

 

Retained
Earnings
(Accumulated
Deficit)

 

Total

 

Balance at July 3, 2009 (a)

 

493

 

$

 

$

3,708

 

$

(6

)

$

(2,148

)

$

1,554

 

Comprehensive income, net of tax:

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

5

 

 

5

 

Net income

 

 

 

 

 

1,230

 

1,230

 

Comprehensive income

 

 

 

 

 

 

 

 

 

 

 

1,235

 

Issuance of common shares related to employee stock options and employee stock purchase plan

 

9

 

 

81

 

 

 

81

 

Repurchases of common shares

 

(13

)

 

 

 

(251

)

(251

)

Stock-based compensation

 

 

 

38

 

 

 

38

 

Balance at April 2, 2010

 

489

 

$

 

$

3,827

 

$

(1

)

$

(1,169

)

$

2,657

 

 


(a)    The information in this row was derived from the Company’s audited Consolidated Statement of Shareholders’ Equity as of July 3, 2009, as adjusted due to a required change in the accounting for convertible debt instruments implemented in the first quarter of fiscal year 2010, applied on a retrospective basis.

 

See Notes to Condensed Consolidated Financial Statements.

 

6


 


Table of Contents

 

SEAGATE TECHNOLOGY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

1.  Summary of Significant Accounting Policies

 

Basis of Presentation and Consolidation

 

The Condensed Consolidated Financial Statements include the accounts of Seagate Technology (“Seagate” or the “Company”) and all its wholly-owned subsidiaries, after elimination of intercompany transactions and balances. The Condensed Consolidated Financial Statements have been prepared by the Company and have not been audited.  Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States (GAAP) have been condensed or omitted pursuant to such rules and regulations.  The Condensed Consolidated Financial Statements reflect, in the opinion of management, all adjustments necessary to summarize fairly the consolidated financial position, results of operations, cash flows and shareholders’ equity for the periods presented.  Such adjustments are of a normal and recurring nature.  The Company’s Consolidated Financial Statements for the fiscal year ended July 3, 2009 are included in its Annual Report on Form 10-K as filed with the United States Securities and Exchange Commission (SEC) on August 19, 2009.  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, 2009 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 2, 2010, are not necessarily indicative of the results of operations to be expected for any subsequent interim period in the Company’s fiscal year ending July 2, 2010.

 

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 2, 2010 consisted of 13 weeks and 39 weeks, respectively.  The three and nine months ended April 3, 2009 consisted of 13 weeks and 40 weeks, respectively. Fiscal year 2010 will be comprised of 52 weeks and will end on July 2, 2010.

 

Critical Accounting Policies and Use of Estimates

 

The preparation of financial statements in accordance with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the Company’s 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 SEC has defined the most critical accounting policies as the ones that are most important to the portrayal of the Company’s financial condition and results of operations, and require the Company to make its most difficult and subjective judgments, often as a result of the need to make estimates of matters that are highly uncertain at the time of estimation. Based on this definition, the Company’s most critical policies include: establishment of sales program accruals, establishment of warranty accruals, valuation of deferred tax assets as well as the valuation of intangibles and goodwill. The Company also has other key accounting policies and accounting estimates relating to uncollectible customer accounts, valuation of inventory, and valuation of share-based payments. The Company believes that these other accounting policies and accounting estimates either do not generally require it to make estimates and judgments that are as difficult or as subjective, or it is less likely that they would have a material impact on the Company’s reported results of operations for a given period.

 

Since the Company’s fiscal year ended July 3, 2009, there have been no significant changes in the Company’s critical accounting policies and estimates.  Please refer to Note 1 of “Financial Statements and Supplementary Data” contained in Part II, Item 8 of the Company’s Annual Report on Form 10-K for the fiscal year ended July 3, 2009, as filed with the SEC on August 19, 2009, for a discussion of the Company’s critical accounting policies and estimates.

 

Change in Method of Accounting for Convertible Debt Instruments

 

On July 4, 2009, the Company implemented changes to the accounting for its convertible debt instruments on a retrospective basis.  See Note 4 for further details.

 

7



Table of Contents

 

SEAGATE TECHNOLOGY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

 

1.  Summary of Significant Accounting Policies (continued)

 

Recently Issued Accounting Pronouncements

 

In October 2009, the FASB issued Accounting Standards Update (ASU) No. 2009-14, Software (Accounting Standards Codification (ASC) Topic 985) - Certain Revenue Arrangements That Include Software Elements, a consensus of the FASB Emerging Issues Task Force.  This guidance modifies the scope of ASC subtopic 965-605, Software-Revenue Recognition to exclude from its requirements (a) non-software components of tangible products and (b) software components of tangible products that are sold, licensed, or leased with tangible products when the software components and non-software components of the tangible product function together to deliver the tangible product’s essential functionality.  This update requires expanded qualitative and quantitative disclosures and is effective for the Company’s first quarter of fiscal year 2011. However, early adoption is allowed.  The Company is currently evaluating the impact of adopting this update on its consolidated results of operations and financial position.

 

In October 2009, the FASB issued ASU No. 2009-13, Revenue Recognition (ASC Topic 605) - Multiple-Deliverable Revenue Arrangements, a consensus of the FASB Emerging Issues Task Force.  This guidance modifies the fair value requirements of ASC subtopic 605-25, Revenue Recognition-Multiple Element Arrangements by allowing the use of the “best estimate of selling price” in addition to vendor-specific objective evidence (VSOE) and verifiable objective evidence (VOE) (now referred to as TPE standing for third-party evidence) for determining the selling price of a deliverable. A vendor is now required to use its best estimate of the selling price when VSOE or TPE of the selling price cannot be determined. In addition, the residual method of allocating arrangement consideration is no longer permitted.  This update requires expanded qualitative and quantitative disclosures and is effective for the Company’s first quarter of fiscal year 2011. However, early adoption is allowed.  The Company is currently evaluating the impact of adopting this update on its consolidated results of operations and financial position.

 

In August 2009, FASB issued ASU No. 2009-05, Fair Value Measurements and Disclosures (ASC Topic 820) — Measuring Liabilities at Fair Value. This update requires clarification for circumstances in which a quoted price in an active market for the identical liability is not available, a reporting entity is required to measure fair value using one or more of the following techniques: 1) a valuation technique that uses either the quoted price of the identical liability when traded as an asset or quoted prices for similar liabilities or similar liabilities when traded as an asset; or 2) another valuation technique that is consistent with the principles in ASC Topic 820 such as the income and market approach to valuation. The amendments in this update also clarify that when estimating the fair value of a liability, a reporting entity is not required to include a separate input or adjustment to other inputs relating to the existence of a restriction that prevents the transfer of the liability. This update further clarifies that if the fair value of a liability is determined by reference to a quoted price in an active market for an identical liability, that price would be considered a Level 1 measurement in the fair value hierarchy. Similarly, if the identical liability has a quoted price when traded as an asset in an active market, it is also a Level 1 fair value measurement if no adjustments to the quoted price of the asset are required. This update was effective for the Company’s second quarter of fiscal year 2010.  The adoption of ASU No. 2009-05 did not have a material impact on the Company’s consolidated results of operations and financial position.

 

In January 2010, FASB issued ASU No. 2010-06, Fair Value Measurements and Disclosures (ASC Topic 820) — Improving Disclosures About Fair Value Measurements. The ASU requires new disclosures about transfers into and out of Levels 1 and 2 and separate disclosures about purchases, sales, issuances, and settlements relating to Level 3 measurements. It also clarifies existing fair value disclosures about the level of disaggregation and about inputs and valuation techniques used to measure fair value.  The new disclosures and clarifications of existing disclosures are effective for the Company’s third quarter of fiscal year 2010, except for the disclosures about purchases, sales, issuances, and settlements relating to Level 3 measurements, which are effective for the Company’s first quarter of fiscal year 2012.  Other than requiring additional disclosures, the adoption of this new guidance will not have a material impact on the Company’s consolidated results of operations and financial position.

 

8



Table of Contents

 

SEAGATE TECHNOLOGY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

 

2.  Balance Sheet Information

 

Investments

 

The Company has classified its entire investment portfolio as available-for-sale. Available-for-sale securities are classified as cash equivalents or short-term investments and are stated at fair value with unrealized gains and losses included in Accumulated other comprehensive income (loss), which is a component of shareholders' equity. Realized gains and losses are included in other income (expense). The cost of securities sold is based on the specific identification method.

 

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

 

(Dollars in millions)

 

Amortized
Cost

 

Unrealized
Gain/
(Loss)

 

Fair
Value

 

Money market funds

 

$

756

 

$

 

$

756

 

Commercial paper

 

1,087

 

 

1,087

 

U.S. treasuries and agency bonds

 

140

 

1

 

141

 

Corporate bonds

 

78

 

 

78

 

International treasuries

 

10

 

 

10

 

Certificates of deposit

 

25

 

 

25

 

Auction rate securities

 

20

 

(2

)

18

 

Municipal bonds

 

4

 

 

4

 

Total

 

$

2,120

 

$

(1

)

$

2,119

 

Included in cash and cash equivalents

 

 

 

 

 

$

1,887

 

Included in short term investments

 

 

 

 

 

214

 

Included in other assets, net

 

 

 

 

 

18

 

Total

 

 

 

 

 

$

2,119

 

 

As of April 2, 2010, with the exception of the Company’s auction rate securities, the Company had no marketable securities that had been in a continuous unrealized loss position for a period greater than 12 months and determined no marketable securities were other-than-temporarily impaired (see Note 7).

 

The fair value of the Company’s investment in debt securities at April 2, 2010, by remaining contractual maturity, was as follows:

 

(Dollars in millions)

 

Amortized
Cost

 

Unrealized
Gain/
(Loss)

 

Fair
Value

 

Due in less than 1 year

 

$

2,035

 

$

 

$

2,035

 

Due in 1 to 3 years

 

65

 

1

 

66

 

Thereafter

 

20

 

(2

)

18

 

Total

 

$

2,120

 

$

(1

)

$

2,119

 

 

The following is a summary of the fair value of available-for-sale securities at July 3, 2009:

 

(Dollars in millions)

 

Amortized
Cost

 

Unrealized
Gain/
(Loss)

 

Fair
Value

 

Money market funds

 

$

914

 

$

 

$

914

 

Commercial paper

 

348

 

 

348

 

U.S. treasuries and agency bonds

 

52

 

1

 

53

 

Certificates of deposit

 

50

 

 

50

 

Auction rate securities

 

21

 

(3

)

18

 

Corporate bonds

 

16

 

 

16

 

Municipal bonds

 

14

 

 

14

 

Total

 

$

1,415

 

$

(2

)

$

1,413

 

Included in cash and cash equivalents

 

 

 

 

 

$

1,281

 

Included in short term investments

 

 

 

 

 

114

 

Included in other assets, net

 

 

 

 

 

18

 

Total

 

 

 

 

 

$

1,413

 

 

9



Table of Contents

 

SEAGATE TECHNOLOGY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

 

2. Balance Sheet Information (continued)

 

The fair value of the Company’s investment in debt securities at July 3, 2009, by remaining contractual maturity, was as follows:

 

(Dollars in millions)

 

Amortized
Cost

 

Unrealized
Gain/
(Loss)

 

Fair
Value

 

Due in less than 1 year

 

$

1,364

 

$

 

$

1,364

 

Due in 1 to 3 years

 

30

 

1

 

31

 

Thereafter

 

21

 

(3

)

18

 

Total

 

$

1,415

 

$

(2

)

$

1,413

 

 

As of July 3, 2009, with the exception of the Company’s auction rate securities, the Company had no marketable securities that had been in a continuous unrealized loss position for a period greater than 12 months and determined no marketable securities were other-than-temporarily impaired (see Note 7).

 

Restricted Cash and Investments

 

As of April 2, 2010, the Company’s restricted cash and investments of $103 million consisted of $74 million cash held in trust for payment of its deferred compensation plan liabilities and $29 million in cash collateral held at banks for various performance obligations. As of July 3, 2009, the Company’s restricted cash and investments of $508 million consisted primarily of $380 million of proceeds from the issuance of the Company’s 10% Senior Secured Second-Priority Notes due May 2014 held in escrow for repayment or repurchase of debt, $85 million of cash held in trust for payment of its deferred compensation plan liabilities, and $43 million in cash collateral held at banks for various performance obligations.

 

Accounts Receivable, net

 

(Dollars in millions)

 

April 2,
2010

 

July 3,
2009

 

Accounts receivable

 

$

1,461

 

$

1,043

 

Allowance for doubtful accounts

 

(10

)

(10

)

 

 

$

1,451

 

$

1,033

 

 

Inventories

 

(Dollars in millions)

 

April 2,
2010

 

July 3,
2009

 

Raw materials and components

 

$

241

 

$

201

 

Work-in-process

 

159

 

120

 

Finished goods

 

285

 

266

 

 

 

$

685

 

$

587

 

 

Other Current Assets

 

(Dollars in millions)

 

April 2,
2010

 

July 3,
2009

 

Vendor non-trade receivables

 

$

367

 

$

326

 

Other

 

193

 

202

 

 

 

$

560

 

$

528

 

 

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

 

10



Table of Contents

 

SEAGATE TECHNOLOGY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

 

2. Balance Sheet Information (continued)

 

Property, Equipment and Leasehold Improvements, net

 

(Dollars in millions)

 

April 2,
2010

 

July 3,
2009

 

Property, equipment and leasehold improvements

 

$

6,516

 

$

6,267

 

Accumulated depreciation and amortization

 

(4,462

)

(4,038

)

 

 

$

2,054

 

$

2,229

 

 

3.  Restructuring and Exit Costs

 

The following table summarizes the Company’s restructuring activities for the nine months ended April 2, 2010:

 

(Dollars in millions)

 

Employee
Benefits

 

Operating
Leases

 

Other
Exit
Costs

 

Total

 

All Restructuring Activities

 

 

 

 

 

 

 

 

 

Accrual balances at July 3, 2009

 

$

61

 

$

40

 

$

¾

 

$

101

 

Restructuring charges

 

37

 

6

 

3

 

46

 

Cash payments

 

(52

)

(4

)

(2

)

(58

)

Accrual balances at October 2, 2009

 

46

 

42

 

1

 

89

 

Restructuring charges

 

1

 

1

 

1

 

3

 

Cash payments

 

(2

)

(4

)

(1

)

(7

)

Adjustments

 

(3

)

¾

 

¾

 

(3

)

Accrual balances at January 1, 2010

 

42

 

39

 

1

 

82

 

Restructuring charges

 

3

 

 

1

 

4

 

Cash payments

 

(3

)

(4

)

(2

)

(9

)

Accrual balances at April 2, 2010

 

$

42

 

$

35

 

$

 

$

77

 

 

Of the $77 million accrued restructuring balance at April 2, 2010, $55 million is included in Accrued expenses and $22 million is included in Other non-current liabilities on the accompanying Condensed Consolidated Balance Sheet. All restructuring charges are reported in Restructuring and other, net on the Condensed Consolidated Statements of Operations.  The Company’s significant restructuring plans are described below.

 

2010 Plan.  During the three months ended April 2, 2010, the Company recorded $3 million related to employee termination costs for a new plan as a result of the Company’s ongoing focus on cost efficiencies in all areas of its business.

 

AMK Plan. In August 2009, the Company announced that it will close its AMK facility in Singapore by the end of calendar year 2010. The hard drive manufacturing operations will be relocated to other existing Seagate facilities and the Company’s Asia International Headquarters (IHQ) will remain in Singapore. This closure and relocation is part of the Company’s ongoing focus on cost efficiencies in all areas of its business and is intended to facilitate leveraging manufacturing investments across fewer sites. The Company does not expect the closure to meaningfully change production capacity.  The Company currently estimates total restructuring charges of approximately $80 million, all in cash, including approximately $60 million for severance, approximately $10 million for the relocation of manufacturing equipment, and approximately $10 million for other plant closure and relocation costs.  During the nine months ended April 2, 2010, the Company accrued total restructuring charges of $38 million related to estimated post-employment benefits for the AMK Plan.  No cash payments were made relating to this plan during the nine months ended April 2, 2010.

 

January and May 2009 Plans. From inception of the Company’s restructuring plans announced in January and May of 2009 through April 2, 2010, the Company has recorded restructuring charges of approximately $167 million primarily related to post employment benefits. These plans are expected to result in total restructuring charges of approximately $170 million. The Company made cash payments of $4 million and $59 million relating to these plans during the three and nine months ended April 2, 2010, respectively. The January and May 2009 Plans were substantially complete by April 2, 2010.

 

11



Table of Contents

 

SEAGATE TECHNOLOGY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

 

3.  Restructuring and Exit Costs (continued)

 

Pittsburgh and Milpitas Closures.  The Company announced the closure of its research facility in Pittsburgh, Pennsylvania and its media manufacturing facility in Milpitas, California in September 2008 and July 2008, respectively. Operations at these facilities ceased during fiscal year 2009. From the inception of these plans through April 2, 2010, the Company has recorded restructuring related charges of approximately $108 million, including $1 million and $9 million of restructuring costs recorded in the three and nine months ended April 2, 2010, respectively. These closures are expected to result in total charges of approximately $110 million. The Company made cash payments of $2 million and $7 million relating to these plans during the three and nine months ended April 2, 2010, respectively.  The remaining balance of $11 million as of April 2, 2010 is associated with facility lease obligations. Payment of these exit costs are expected to continue through the end of fiscal year 2017.

 

Maxtor and Other.  The Company recorded certain exit costs aggregating $265 million through April 2, 2010 related to its acquisition of Maxtor Corporation (“Maxtor”). During the three and nine months ended April 2, 2010, the Company made cash payments on these restructuring plans of $3 million and $8 million, respectively.  The remaining balance of $23 million, as of April 2, 2010, is primarily associated with the exit of certain facilities. Payment of these exit costs are expected to continue through the end of fiscal year 2016.

 

4.  Debt and Convertible Notes

 

Short-term Borrowings

 

During the nine months ended April 2, 2010, the Company entered into $15 million of short-term borrowings, which were repaid in the three months ended April 2, 2010.

 

Convertible Notes

 

On July 4, 2009, the Company implemented a change in accounting in accordance with ASC 470-20, Debt with Conversion and Other Options (formerly FSP APB 14-1, Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement)), for its convertible debt instruments on a retrospective basis to separately account for its convertible debt in two parts, (i) a debt component which was recorded upon acquisition at the estimated fair value of a similar debt instrument without the debt-for-equity conversion feature; and (ii) an equity component that was included in paid-in capital and represents the estimated fair value of the conversion feature at issuance.  The bifurcation of the debt and equity components resulted in a discounted carrying value of the debt component compared to the principal amount.  The discount is accreted to the carrying value of the debt component through interest expense over the expected life of the debt using the effective interest method.

 

The 6.8% Convertible Senior Notes due April 2010 (the “6.8% Notes”) require semi-annual interest payments payable on April 30 and October 30.  The 6.8% Notes were originally assumed in the business combination with Maxtor on May 19, 2006 and were recorded as long-term debt at par value of $136 million and a substantial premium of $17 million, which was recorded to Additional paid-in capital.  The debt component of the 6.8% Notes at acquisition was determined to be $136 million, based on the contractual cash flows discounted at 6.8%, which was the estimated rate of a comparable non-convertible debt instrument as of May 19, 2006.  As a result, implementation of the new requirements had no effect on the accounting for the 6.8% Notes.  On April 30, 2010, the Company repaid the remaining balance of $77 million in cash for its 6.8% Notes upon maturity.

 

The 2.375% Convertible Senior Notes due August 2012 (the “2.375% Notes”) require semi-annual interest payments payable on February 15 and August 15.  The 2.375% Notes were originally assumed in the business combination with Maxtor on May 19, 2006 and were recorded as Current portion of long-term debt at par value of $326 million and a substantial premium of $157 million, which was recorded to Additional paid-in capital.  The debt component of the 2.375% Notes at acquisition was determined to be $252 million, based on the contractual cash flows discounted at 6.9%, which was the estimated rate of a comparable non-convertible debt instrument as of May 19, 2006.  As a result of implementing the new standard, $74 million was recorded as an increase to Additional paid-in capital and a corresponding debt discount as of the date of acquisition.

 

12



Table of Contents

 

SEAGATE TECHNOLOGY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

 

4.  Debt and Convertible Notes (continued)

 

The following illustrates the retrospective impact of implementing the provisions of the change in accounting for convertible debt on the previously stated Condensed Consolidated Statement of Operations for the three and nine months ended April 3, 2009:

 

Retrospective Impact on the Condensed Consolidated Statement of Operations

 

 

 

Three Months Ended April 3, 2009

 

Nine Months Ended April 3, 2009

 

(Dollars in millions)

 

As
Originally
Stated

 

Effect of
Change in
Accounting

 

Restated

 

As
Originally
Stated

 

Effect of
Change in
Accounting

 

Restated

 

Impairment of goodwill and long-lived assets

 

$

¾

 

$

¾

 

$

¾

 

$

2,290

 

$

30

 

$

2,320

 

Interest expense

 

(35

)

(2

)

(37

)

(95

)

(7

)

(102

)

Net income (loss)

 

(273

)

(2

)

(275

)

(3,005

)

(37

)

(3,042

)

Net income (loss) per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

(0.56

)

$

 

$

(0.56

)

$

(6.17

)

$

(0.08

)

$

(6.25

)

Diluted

 

(0.56

)

 

(0.56

)

(6.17

)

(0.08

)

(6.25

)

 

There was no net impact resulting from this accounting change on the Company’s cash flows from operating activities, investing activities or financing activities as reflected in the Condensed Consolidated Statements of Cash Flows.

 

The following table presents information regarding the equity and liability components of the 2.375% and 6.8% Notes as of April 2, 2010 and July 3, 2009:

 

 

 

As of

 

(Dollars in millions)

 

April 2,
2010

 

July 3,
2009
Restated

 

 

 

 

 

 

 

2.375% Notes

 

 

 

 

 

Principal amount

 

$

326

 

$

326

 

Unamortized discount

 

(32

)

(40

)

Liability component

 

$

294

 

$

286

 

Equity component

 

$

231

 

$

231

 

6.8% Notes

 

 

 

 

 

Principal amount and liability component

 

$

77

 

$

116

 

Equity component

 

$

17

 

$

17

 

 

The remaining discount on the 2.375% Notes will continue to be amortized until maturity of the 2.375% Notes in August 2012.  The effective interest rate, contractual interest expense and amortization of debt discount for the 2.375% Notes for the three and nine months ended April 2, 2010 and April 3, 2009 were as follows:

 

 

 

The Three Months Ended

 

The Nine Months Ended

 

(Dollars in millions, except for percentages)

 

April 2,
2010

 

April 3, 2009
Restated

 

April 2,
2010

 

April 3,
2009
Restated

 

 

 

 

 

 

 

 

 

 

 

Effective interest rate

 

6.9

%

6.9

%

6.9

%

6.9

%

Interest expense – contractual

 

$

2

 

$

2

 

$

6

 

$

6

 

Interest expense – amortization of debt discount due to change in accounting

 

$

3

 

$

3

 

$

9

 

$

9

 

 

13


 

 

 

 

 

 


Table of Contents

 

SEAGATE TECHNOLOGY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

 

4.  Debt and Convertible Notes (continued)

 

The 2.375% and 6.8% Notes may, subject to certain conditions, be converted into the Company’s common shares based on a conversion rate of 60.2074 and 30.1733 shares, respectively, per $1,000 principal amount of notes, which represents a conversion price of approximately $16.61 and $33.14 per share, respectively.  As of April 2, 2010, the conversion value exceeded the principal value on the 2.375% Notes by approximately $47 million. The 2.375% Notes are convertible as of April 3, 2010, as the Company’s shares traded above 110% of the conversion price for at least 20 consecutive trading days of the last 30 trading days of the third quarter of fiscal year 2010. As a result, the 2.375% Notes have been reclassified as Current portion of long-term debt on the Company’s Condensed Consolidated Balance Sheet at April 2, 2010. As of April 2, 2010, the principal value exceeded the conversion value on the 6.8% Notes.

 

5.  Income Taxes

 

The income tax provision for the three months ended April 2, 2010 included approximately $11 million of discrete tax benefits primarily for reversal of valuation allowance previously recorded for certain non-U.S. deferred tax assets and release of tax reserves as a result of the U.S. 9th Circuit Court of Appeals’ affirmation of the Tax Court decision in Xilinx v Commissioner. The income tax benefit recognized for the nine months ended April 2, 2010 included approximately $39 million of discrete tax benefits primarily for the release of tax reserves associated with settlements, expiration of certain statutes of limitations, and the U.S. 9th Circuit Court decision, as described above, the reversal of valuation allowance previously recorded for certain non-U.S. deferred tax assets, and U.S. federal income tax legislative changes.

 

The Company’s income tax provision and benefit recorded for the three and nine months ended April 2, 2010 differed from the provision for income taxes that would be derived by applying a notional U.S. 35% rate to income before income taxes primarily due to the net effect of (i) tax benefits related to tax holiday and tax incentive programs, (ii) a decrease in valuation allowance for certain non-U.S. deferred tax assets, (iii) tax expense related to intercompany transactions, and (iv) release of certain tax reserves as described above.

 

During the three months ended April 2, 2010, the Company’s unrecognized tax benefits excluding interest and penalties decreased by $2 million to $114 million. The unrecognized tax benefits that, if recognized, would impact the effective tax rate was $114 million as of April 2, 2010, subject to certain future valuation allowance reversals.  During the 12 months beginning April 3, 2010, the Company expects to reduce its unrecognized tax benefits by approximately $5 million primarily as a result of the expiration of certain statutes of limitations.

 

The income tax benefit recognized for the comparative three months ended April 3, 2009 resulted primarily from the reversal of a portion of the income tax expense the Company previously recorded in the six months ended January 2, 2009 as a result of reductions in forecasted income from operations conducted in certain jurisdictions. The income tax provision for the comparative nine months ended April 3, 2009 included a deferred tax charge of $271 million associated with increased valuation allowance recorded for U.S. federal and state deferred tax assets associated with reductions in the Company’s forecasted U.S. taxable income. The goodwill impairment charges recorded in the comparative nine months ended April 3, 2009 resulted in no tax benefits. As of the close of the period ended April 3, 2009, the Company was forecasting losses in certain jurisdictions, including the U.S., for which tax benefits for the losses could not be recognized.  Pursuant to the accounting guidance provided in ASC 740-270-30-36a, Income Taxes, Interim Reporting (formerly FASB Interpretation No. 18, Accounting for Income Taxes in Interim Periods), the Company was required to exclude these loss jurisdictions from its overall estimated annual effective rate calculation and determine a separately computed effective tax rate for each loss jurisdiction.

 

The income tax benefit recognized for the comparative three months ended April 3, 2009 differed from the provision for income taxes that would be derived by applying a notional U.S. 35% rate to losses before income taxes primarily due to the net effect of (i) applying the provisions of ASC 740-270-30-36a as described above, (ii) the tax benefit related to tax holiday and tax incentive programs, (iii) tax expense related to intercompany transactions, and (iv) an increase in the Company’s valuation allowance for certain deferred tax assets. The income tax provision recorded for the comparative nine months ended April 3, 2009 differed from the provision for income taxes that would be derived by applying a notional U.S. 35% rate to income before income taxes primarily due to the net effect of (i) goodwill impairment charges with no associated tax benefit, (ii) an increase in the Company’s valuation allowance for certain deferred tax assets, (iii) the tax benefit related to the tax holidays and tax incentive programs, and (iv) tax expense related to intercompany transactions.

 

14



Table of Contents

 

SEAGATE TECHNOLOGY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

 

6.  Derivative Financial Instruments

 

The Company is exposed to foreign currency exchange rate, interest rate, and to a lesser extent, equity price risks relating to its ongoing business operations. The Company enters into foreign currency forward exchange contracts in order to manage the foreign currency exchange rate risk on forecasted expenses denominated in foreign currencies and to mitigate the remeasurement risk of certain foreign currency denominated liabilities.  The Company’s unrealized net losses on cash flow hedges included in Other comprehensive income (loss) (OCI) as of April 2, 2010 and July 3, 2009, respectively, were not material.

 

The Company dedesignates its cash flow hedges when the forecasted hedged transactions are realized or it is probable the forecasted hedged transaction will not occur in the initially identified time period. At such time, the associated gains and losses deferred in OCI are reclassified into earnings in the same period that the underlying hedged transaction is included in earnings. Any subsequent changes in the fair value of such derivative instruments are immediately reflected in earnings. As of April 2, 2010, the Company’s existing foreign currency forward exchange contracts are expected to mature within 12 months. The deferred amount currently recorded in OCI and expected to be recognized into earnings is not material.

 

As of April 2, 2010, the total notional value of the Company’s outstanding foreign currency forward exchange contracts was:

 

(Dollars in millions)

 

Contracts Qualifying as Hedges
Under ASC 815

 

Contracts Not Qualifying as Hedges
 Under ASC 815

 

Thai baht

 

$

260

 

$

193

 

Singapore dollars

 

65

 

12

 

Euro

 

10

 

 

Yen

 

6

 

 

Czech koruna

 

 

11

 

British pounds

 

1

 

 

 

 

$

342

 

$

216

 

 

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 (NQDC) plan. In the quarter ended July 3, 2009, the Company entered into a Total Return Swap (TRS) in order to manage the equity market risks associated with the NQDC plan 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 NQDC plan liability due to changes in the value of the investment options made by employees. As of April 2, 2010, the notional investments underlying the TRS amounted to $80 million. The contract term of the TRS is one year and is settled on a monthly basis therefore limiting counterparty performance risk. The terms of the TRS required the Company to pledge initial collateral of $18 million to the counterparty for the term of the contract. During the quarter ended April 2, 2010, the amount required to be pledged on an ongoing basis was decreased to $9 million. Additional collateral may be posted contingent on the counterparty’s exposure to the market value of the TRS.  The cash pledged is recorded as restricted cash. The Company did not designate the TRS as a hedge in accordance with ASC 815, Derivatives and Hedging (previously SFAS 161, Disclosures About Derivative Instruments and Hedging Activities). Rather, the Company records all changes in the fair value of the TRS to earnings to offset the market value changes of the NQDC plan liabilities.

 

15



Table of Contents

 

SEAGATE TECHNOLOGY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

 

6.  Derivative Financial Instruments (continued)

 

The following table shows the Company’s derivative instruments measured at gross fair value as reflected in the Condensed Consolidated Balance Sheet as of April 2, 2010:

 

Fair Values of Derivative Instruments

 

 

 

Asset Derivatives

 

Liability Derivatives

 

(Dollars in millions)

 

Balance
Sheet
Location

 

Fair
Value

 

Balance
Sheet
Location

 

Fair
Value

 

Derivatives designated as hedging instruments under ASC 815:

 

 

 

 

 

 

 

 

 

Foreign currency forward exchange contracts

 

Other current assets

 

$

5

 

Accrued expenses

 

$

(1

)

 

 

 

 

 

 

 

 

 

 

Derivatives not designated as hedging instruments under ASC 815:

 

 

 

 

 

 

 

 

 

Foreign currency forward exchange contracts

 

Other current assets

 

$

6

 

Accrued expenses

 

$

 

Total return swap

 

Other current liabilities

 

1

 

Accrued expenses

 

 

Total derivatives

 

 

 

$

12

 

 

 

$

(1

)

 

The following tables show the effect of the Company’s derivative instruments on OCI and the Condensed Consolidated Statement of Operations for the three and nine months ended April 2, 2010:

 

The Effect of Derivative Instruments on the Statement of Operations

for the Three and Nine Months Ended April 2, 2010

 

 

 

 

 

 

 

 

 

 

 

 

 

Location of

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gain or (Loss)

 

 

 

 

 

 

 

 

 

 

 

Location of

 

 

 

 

 

Recognized in

 

Amount of Gain or

 

 

 

 

 

 

 

Gain or (Loss)

 

Amount of Gain or

 

Income on

 

(Loss) Recognized in

 

 

 

Amount of Gain or

 

Reclassified

 

(Loss) Reclassified from

 

Derivative

 

Income (Ineffective

 

 

 

(Loss) Recognized in

 

from

 

Accumulated OCI into

 

(Ineffective

 

Portion and Amount

 

 

 

OCI on Derivatives

 

Accumulated

 

Income (Effective

 

Portion and

 

Excluded from

 

 

 

(Effective Portion)

 

OCI into

 

Portion)

 

Amount

 

Effectiveness Testing) (a)

 

 

 

For the

 

For the

 

Income

 

For the

 

For the

 

Excluded from

 

For the

 

For the

 

Derivatives Designated as Cash

 

Three

 

Nine

 

(Effective

 

Three

 

Nine

 

Effectiveness

 

Three

 

Nine

 

Flow Hedges under ASC 815

 

Months

 

Months

 

Portion)

 

Months

 

Months

 

Testing)

 

Months

 

Months

 

(Dollars in millions)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign exchange forward contracts

 

$

6

 

$

11

 

Cost of revenue

 

$

2

 

$

6

 

Cost of revenue

 

$

 

$

1

 

 

16



Table of Contents

 

SEAGATE TECHNOLOGY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

 

6.  Derivative Financial Instruments (continued)

 

 

 

 

 

Amount of Gain or (Loss) Recognized in Income on

 

 

 

Location of Gain or (Loss)

 

Derivatives

 

Derivatives Not Designated as Hedging Instruments

 

Recognized in Income on

 

For the Three

 

For the Nine

 

under ASC 815

 

Derivatives

 

Months

 

Months

 

(Dollars in millions)

 

 

 

 

 

 

 

Foreign exchange forward contracts

 

Other, net

 

$

8

 

$

12

 

Total return swap

 

Operating expenses

 

4

 

17

 

 

 

 

 

$

12

 

$

29

 

 


(a) The amount of gain or (loss) recognized in income represents $0 million 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 2, 2010, respectively.

 

Net foreign currency losses included in the determination of consolidated net income (loss) were approximately $2 million for the three months ended April 2, 2010. Net foreign currency gains included in the determination of consolidated net income (loss) were approximately $4 million for the nine months ended April 2, 2010.

 

The following tables show the effect of the Company’s derivative instruments on OCI and the Condensed Consolidated Statement of Operations for the three and nine months ended April 3, 2009:

 

The Effect of Derivative Instruments on the Statement of Operations

for the Three and Nine Months Ended April 3, 2009

 

 

 

 

 

 

 

 

 

 

 

 

 

Location of

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gain or (Loss)

 

 

 

 

 

 

 

 

 

 

 

Location of

 

 

 

 

 

Recognized in

 

Amount of Gain or

 

 

 

 

 

 

 

Gain or (Loss)

 

Amount of Gain or

 

Income on

 

(Loss) Recognized in

 

 

 

Amount of Gain or

 

Reclassified

 

(Loss) Reclassified from

 

Derivative

 

Income (Ineffective

 

 

 

(Loss) Recognized in

 

from

 

Accumulated OCI into

 

(Ineffective

 

Portion and Amount

 

 

 

OCI on Derivatives

 

Accumulated

 

Income (Effective

 

Portion and

 

Excluded from

 

 

 

(Effective Portion)

 

OCI into

 

Portion)

 

Amount

 

Effectiveness Testing) (a)

 

Derivatives Designated as Cash

 

For the

 

For the

 

Income

 

For the

 

For the

 

Excluded from

 

For the

 

For the

 

Flow Hedges under ASC 815

 

Three

 

Nine

 

(Effective

 

Three

 

Nine

 

Effectiveness

 

Three

 

Nine

 

(formerly FAS 133)

 

Months

 

Months

 

Portion)

 

Months

 

Months

 

Testing)

 

Months

 

Months

 

(Dollars in millions)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign exchange forward contracts

 

$

(4

)

$

(27

)

Cost of revenue

 

$

(11

)

$

(32

)

Cost of revenue

 

$

 

$

(1

)

 

17



Table of Contents

 

SEAGATE TECHNOLOGY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

 

6.  Derivative Financial Instruments (continued)

 

Derivatives Not Designated as

 

Location of Gain or (Loss)

 

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

 

Hedging Instruments under ASC
815 (formerly FAS 133)

 

Recognized in Income on
Derivatives

 

For the Three
 Months

 

For the Nine
Months

 

(Dollars in millions)

 

 

 

 

 

 

 

Foreign exchange forward contracts

 

Other, net

 

$

 

$

(25

)

 


(a) The amount of gain or (loss) recognized in income represents $0 million related to the ineffective portion of the hedging relationships and $0 million and $1 million related to the amount excluded from the assessment of hedge effectiveness, for the three and nine months ended April 3, 2009, respectively.

 

Net foreign currency losses included in the determination of consolidated net income (loss) were approximately $1 million and $8 million for the three and nine months ended April 3, 2009, respectively.

 

As of July 3, 2009, the total notional value of the Company’s outstanding foreign currency forward exchange contracts was:

 

(Dollars in millions)

 

Contracts Qualifying as Hedges
Under ASC 815

 

Contracts Not Qualifying as Hedges
Under ASC 815

 

Thai baht

 

$

104

 

$

64

 

Singapore dollars

 

24

 

3

 

Czech koruna

 

 

8

 

 

 

$

128

 

$

75

 

 

The following table shows the Company’s derivative instruments measured at gross fair value as reflected in the Condensed Consolidated Balance Sheet as of July 3, 2009:

 

Fair Values of Derivative Instruments

 

 

 

Asset Derivatives

 

Liability Derivatives

 

(Dollars in millions)

 

Balance
Sheet
Location

 

Fair
Value

 

Balance
Sheet
Location

 

Fair
Value

 

Derivatives designated as hedging instruments under ASC 815:

 

 

 

 

 

 

 

 

 

Foreign currency forward exchange contracts

 

Other current assets

 

$

1

 

Accrued expenses

 

$

¾

 

 

 

 

 

 

 

 

 

 

 

Derivatives not designated as hedging instruments under ASC 815:

 

 

 

 

 

 

 

 

 

Foreign currency forward exchange contracts

 

Other current assets

 

$

¾

 

Accrued expenses

 

$

¾

 

Total return swap

 

Other current liabilities

 

¾

 

Accrued expenses

 

(1

)

Total derivatives

 

 

 

$

1

 

 

 

$

(1

)

 

18



Table of Contents

 

SEAGATE TECHNOLOGY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

 

7.  Fair Value

 

For assets and liabilities recorded at fair value, the Company bases the determination of fair value upon exit price, representing the amount that would be received on the sale of an asset or paid to transfer a liability in an orderly transaction between market participants.  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.

 

As of July 4, 2009, the Company adopted the provisions of ASC 820, Fair Value Measurements and Disclosures (previously SFAS 157, Fair Value) that apply to non-financial assets and liabilities measured at fair value on a non-recurring basis, thereby applying the fair value disclosure requirements to both the financial and non-financial assets and liabilities of the Company.  The adoption of these provisions did not have a material impact on the Company’s consolidated results of operations and financial condition.

 

ASC 820 establishes a consistent framework for measuring fair value whereby inputs used in valuation techniques are assigned a hierarchical level.  The assignment to a level is based on whether the market participant assumptions used in determining fair value are obtained from independent sources (observable inputs) or reflect the Company’s own assumptions of market participant valuation (unobservable inputs).  Categorization within the fair value hierarchy is determined by the lowest level of input that is significant to the fair value measurement. The following are the hierarchical levels of inputs 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 significant inputs that 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.

 

19



Table of Contents

 

SEAGATE TECHNOLOGY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

 

7.  Fair Value (continued)

 

Items Measured at Fair Value on a Recurring Basis

 

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

 

 

 

Fair Value Measurements at Reporting Date Using

 

(Dollars in millions)

 

Quoted
Prices in
Active
Markets for
Identical
Instruments

(Level 1)

 

Significant
Other

Observable
Inputs

(Level 2)

 

Significant
Unobservable
Inputs

(Level 3)

 

Total
Balance

 

Assets:

 

 

 

 

 

 

 

 

 

Money market funds

 

$

756

 

$

 

$

 

$

756

 

Commercial paper

 

 

1,087

 

 

1,087

 

U.S. treasuries and agency bonds

 

 

141

 

 

141

 

Corporate bonds

 

 

78

 

 

78

 

International treasuries

 

 

10

 

 

10

 

Municipal bonds

 

 

4

 

 

4

 

Total Cash Equivalents and Marketable Securities

 

756

 

1,320

 

 

2,076

 

 

 

 

 

 

 

 

 

 

 

Restricted Cash and Investments:

 

 

 

 

 

 

 

 

 

Money market funds

 

83

 

 

 

83

 

Certificates of deposit

 

 

6

 

 

6

 

Auction rate securities

 

 

 

18

 

18

 

Derivative assets

 

 

12

 

 

12

 

Total Assets

 

$

839

 

$

1,338

 

$

18

 

$

2,195

 

 

 

 

 

 

 

 

 

 

 

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

 

$

756

 

$

1,106

 

$

 

$

1,862

 

Short-term investments

 

 

214

 

 

214

 

Restricted cash and investments

 

83

 

6

 

 

89

 

Other current assets

 

 

12

 

 

12

 

Other assets, net

 

 

 

18

 

18

 

Total Assets

 

$

839

 

$

1,338

 

$

18

 

$

2,195

 

Liabilities:

 

 

 

 

 

 

 

 

 

Accrued expenses

 

$

 

$

(1

)

$

 

$

(1

)

Total Liabilities

 

$

 

$

(1

)

$

 

$

(1

)

 

20


 

 

 


Table of Contents

 

SEAGATE TECHNOLOGY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

 

7.  Fair Value (continued)

 

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

 

The Company classifies items in Level 2 if the financial asset or liability is valued using observable inputs. The Company uses observable inputs including quoted prices in active markets for similar assets or liabilities.  Level 2 assets include: agency bonds, corporate bonds, commercial paper, municipal bonds, and U.S. Treasuries. These debt investments are priced using observable inputs and valuation models which vary by asset class.  The Company uses a pricing service to assist in determining the fair values of all of its cash equivalents and marketable securities.  For the cash equivalents and marketable securities 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 2, 2010, has not found it necessary to make any adjustments to the prices obtained. The Company’s derivative financial instruments are also classified within Level 2.  The Company’s derivative financial instruments consist of foreign currency forward exchange contracts and a total return swap.  The Company recognizes derivative financial instruments in its consolidated financial statements at fair value in accordance with ASC 815.  The Company determines the fair value of these instruments by considering the estimated amount it would pay or receive to terminate these agreements at the reporting date.

 

The Company’s Level 3 assets consist of auction rate securities with a par value of approximately $20  million, all of which are collateralized by student loans guaranteed by the Federal Family Education Loan Program. Beginning in the fiscal quarter ended March 28, 2008, these securities failed to settle at auction and have continued to fail through April 2, 2010. Since there is no active market for these securities, the Company valued them using a pricing model provided by a third party valuation firm. The valuation model is based on the income approach and reflects both observable and significant unobservable inputs.  Since the Company continues to earn interest on its auction rate securities at the maximum contractual rate, there have been no payment defaults with respect to such securities, and they are all collateralized, the Company expects to recover the entire amortized cost basis of these auction rate securities. The Company does not intend to sell these securities and has concluded it is not more likely than not that the Company will be required to sell the securities before the recovery of their amortized cost basis. As such, the Company believes the impairments totaling $2 million are not other-than-temporary and therefore have been recorded in Accumulated other comprehensive income (loss). Given the uncertainty as to when the liquidity issues associated with these securities will improve, these securities were classified as long-term investments in the Company’s Condensed Consolidated Balance Sheets.

 

21



Table of Contents

 

SEAGATE TECHNOLOGY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

 

7.  Fair Value (continued)

 

The table below presents a reconciliation of all assets and liabilities measured at fair value on a recurring basis, excluding accrued interest components, using significant unobservable inputs (Level 3) for the nine months ended April 2, 2010:

 

 

 

Fair Value Measurements
Using Significant
Unobservable Inputs

(Level 3)

 

(Dollars in millions)

 

Auction Rate Securities

 

Balance at July 3, 2009

 

$

18

 

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

 

 

 

Realized gains (losses)(1)

 

 

Unrealized gains (losses) (2)

 

 

Balance at April 2, 2010

 

$

18

 

 


(1)

 

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

(2)

 

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

 

Items Measured at Fair Value on a Non-Recurring Basis

 

The following table presents the Company’s assets and liabilities that are measured at fair value on a non-recurring basis as of April 2, 2010.

 

 

 

Fair Value Measurements at Reporting Date Using

 

(Dollars in millions)

 

Quoted
Prices in
Active
Markets for
Identical
Instruments

(Level 1)

 

Significant
Other

Observable
Inputs

(Level 2)

 

Significant
Unobservable
Inputs

(Level 3)

 

Total
Balance

 

Assets:

 

 

 

 

 

 

 

 

 

Assets held for sale

 

$

 

$

 

$

11

 

$

11

 

Equity investment

 

$

 

$

 

$

4

 

$

4

 

 

On September 29, 2009, the Company committed to a plan to sell certain equipment related to certain research activities that have ceased.  The Company expects the sale of these assets to be completed no later than the end of its first quarter of fiscal year 2011.  The Company recognized a charge of $64 million in Impairment of long-lived assets in its Condensed Consolidated Statement of Operations for the nine months ended April 2, 2010 in order to write down the carrying amount of these assets to estimated fair value less costs to sell.  The Company used a combination of the market and cost approaches in order to determine the fair value of assets held for sale.  The methodology employed involved applying market derived factors, which represented the discount that a market participant would expect to pay for a used asset based on estimated replacement cost.  The discounts applied to replacement costs, which consider all forms of physical, functional and economic obsolescence, were obtained from discussions with brokers and other market participants.  As the valuation of the Company’s assets held for sale contain unobservable inputs, they have been classified as Level 3.  These Assets held for sale are included in Other current assets on the Condensed Consolidated Balance Sheet as of April 2, 2010.

 

As of January 1, 2010, the Company determined that one of its equity investments accounted for under the cost method was other-than-temporarily impaired.  As such, the Company recognized a charge of $13 million in Other, net in its Condensed Consolidated Statements of Operations for the nine months ended April 2, 2010 in order to write down the carrying amount of the investment to estimated fair value.  Since there is no active market for the equity securities of the investee, the Company estimated fair value of the investee by using the market approach to estimate the fair value of its underlying intellectual property assets.

 

22



Table of Contents

 

SEAGATE TECHNOLOGY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

 

7.  Fair Value (continued)

 

Other Fair Value Disclosures

 

The Company’s debt is carried at cost.  The following table represents the fair value of the Company’s debt:

 

 

 

April 2, 2010

 

July 3, 2009(a)

 

(Dollars in millions)

 

Carrying
Amount

 

Estimated
Fair Value

 

Carrying
Amount

 

Estimated
Fair Value

 

 

 

 

 

 

 

 

 

 

 

LIBOR Based Credit Facility

 

$

 

$

 

$

350

 

$

350

 

Capital Leases

 

2

 

2

 

 

 

10.0% Senior Secured Second-Priority Notes due May 2014

 

413

 

489

 

410

 

445

 

Floating Rate Senior Notes due October 2009

 

 

 

300

 

299

 

6.8% Convertible Senior Notes due April 2010

 

77

 

77

 

116

 

116

 

6.375% Senior Notes due October 2011

 

559

 

580

 

599

 

581

 

5.75% Subordinated Debentures due March 2012

 

31

 

32

 

37

 

35

 

2.375% Convertible Senior Notes due August 2012

 

294

 

376

 

286

 

283

 

6.8% Senior Notes due October 2016

 

599

 

606

 

599

 

550

 

 

 

1,975

 

2,162

 

2,697

 

2,659

 

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

 

(377

)

(458

)

(771

)

(769

)

Long-term debt, less current portion

 

$

1,598

 

$

1,704

 

$

1,926

 

$

1,890

 

 


(a)           As adjusted due to a required change in the accounting for convertible debt instruments implemented in the first quarter of fiscal year 2010, applied on a retrospective basis.

 

8.   Shareholders’ Equity

 

Issuance of Common Shares

 

During the nine months ended April 2, 2010, the Company issued approximately 5 million of its common shares from the exercise of stock options and approximately 4 million of its common shares related to the Company’s Employee Stock Purchase Plan (“ESPP”).

 

Seagate Technology 2001 Share Option Plan — As of April 2, 2010, there were approximately 3 million common shares available for issuance under the Seagate Technology 2001 Share Option Plan.

 

Seagate Technology 2004 Stock Compensation Plan — As of April 2, 2010, there were approximately 17 million common shares available for issuance under the Seagate Technology 2004 Stock Compensation Plan.

 

Stock Purchase Plan —As of April 2, 2010, there were approximately 10 million common shares available for issuance under the ESPP.

 

23



Table of Contents

 

SEAGATE TECHNOLOGY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

 

8.  Shareholders’ Equity (continued)

 

Repurchases of Equity Securities

 

The Company’s February 2008 stock repurchase plan expired on January 31, 2010.

 

On January 27, 2010, the Company’s Board of Directors authorized an Anti-Dilution Share Repurchase Program, which was publicly announced on February 1, 2010.  The repurchase program authorizes the Company to repurchase its common shares to offset increases in diluted shares, such as those caused by employee stock plans and convertible debt, used in the determination of diluted net income per share.  The timing and number of shares to be repurchased by the Company will be dependent on general business and market conditions, cash flows generated by future operations, the price of its common shares, cash requirements for other investing and financing activities, and maintaining compliance with its debt covenants. Repurchases may be made through open market or in privately negotiated transactions, pursuant to Rule 10b5-1 trading plans or other available means, such as by way of an accelerated share repurchase program, through block trades or through the purchase of call options or the sale of put options.  Additionally, there is no minimum or maximum number of shares to be repurchased under the program and the authority for the Anti-Dilution Share Repurchase Program will continue until terminated by the Company’s Board of Directors.

 

Share repurchases during the three months ended April 2, 2010, were as follows:

 

January 2010 Anti-Dilution Share Repurchase Program

 

(In millions, except average price paid per share)

 

Total
Number of
Shares
Purchased

 

Average Price
Paid per
Share

 

Total Number of
Shares Purchased
Under Publicly
Announced Plans
or Programs

 

Approximate
Dollar Value
of Shares
Purchased Under
the Plans
or Programs

 

January 2, 2010 through January 29, 2010

 

 

$

 

</