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 December 30, 2011

 

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

incorporation or organization)

 

(I.R.S. Employer

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 January 25, 2012, 448,725,600 shares of the registrant’s ordinary shares, par value $0.00001 per share, were issued and outstanding.

 

 

 



Table of Contents

 

INDEX

 

SEAGATE TECHNOLOGY PLC

 

 

 

 

PAGE NO.

 

 

 

 

PART I

FINANCIAL INFORMATION

 

 

 

 

 

 

Item 1.

Financial Statements

 

 

 

 

 

 

 

Condensed Consolidated Balance Sheets ¾ December 30, 2011 and July 1, 2011 (Unaudited)

 

3

 

 

 

 

 

Condensed Consolidated Statements of Operations ¾ Three and Six Months ended December 30, 2011 and December 31, 2010 (Unaudited)

 

4

 

 

 

 

 

Condensed Consolidated Statements of Cash Flows ¾ Six Months ended December 30, 2011 and December 31, 2010 (Unaudited)

 

5

 

 

 

 

 

Condensed Consolidated Statement of Shareholders’ Equity ¾ Six Months ended December 30, 2011 (Unaudited)

 

6

 

 

 

 

 

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

7

 

 

 

 

Item 2.

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

 

28

 

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

 

36

 

 

 

 

Item 4.

Controls and Procedures

 

37

 

 

 

 

PART II

OTHER INFORMATION

 

 

 

 

 

 

Item 1.

Legal Proceedings

 

38

 

 

 

 

Item 1A.

Risk Factors

 

38

 

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

 

40

 

 

 

 

Item 3.

Defaults Upon Senior Securities

 

41

 

 

 

 

Item 4.

Mine Safety Disclosures

 

41

 

 

 

 

Item 5.

Other Information

 

41

 

 

 

 

Item 6.

Exhibits

 

42

 

 

 

 

 

SIGNATURES

 

43

 

2



Table of Contents

 

PART I

FINANCIAL INFORMATION

 

ITEM 1.  FINANCIAL STATEMENTS

 

SEAGATE TECHNOLOGY PLC

CONDENSED CONSOLIDATED BALANCE SHEETS

(In millions)

(Unaudited)

 

 

 

December 30,
2011

 

July 1, 2011(a)

 

ASSETS

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

1,825

 

$

2,677

 

Short-term investments

 

407

 

474

 

Restricted cash and investments

 

93

 

102

 

Accounts receivable, net

 

1,627

 

1,495

 

Inventories

 

827

 

872

 

Deferred income taxes

 

99

 

99

 

Other current assets

 

522

 

706

 

Total current assets

 

5,400

 

6,425

 

Property, equipment and leasehold improvements, net

 

2,210

 

2,245

 

Goodwill

 

468

 

31

 

Other intangible assets

 

576

 

1

 

Deferred income taxes

 

376

 

374

 

Other assets, net

 

141

 

149

 

Total Assets

 

$

9,171

 

$

9,225

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Accounts payable

 

$

1,461

 

$

2,063

 

Accrued employee compensation

 

255

 

199

 

Accrued warranty

 

218

 

189

 

Accrued expenses

 

438

 

452

 

Current portion of long-term debt

 

 

560

 

Total current liabilities

 

2,372

 

3,463

 

Long-term accrued warranty

 

183

 

159

 

Long-term accrued income taxes

 

75

 

67

 

Other non-current liabilities

 

151

 

121

 

Long-term debt, less current portion

 

2,925

 

2,952

 

Total Liabilities

 

5,706

 

6,762

 

 

 

 

 

 

 

Commitments and contingencies (See Notes 11 and 13)

 

 

 

 

 

 

 

 

 

 

 

Shareholders’ equity:

 

 

 

 

 

Ordinary shares and additional paid-in capital

 

4,628

 

3,980

 

Accumulated other comprehensive loss

 

(13

)

(6

)

Accumulated deficit

 

(1,150

)

(1,511

)

Total Shareholders’ Equity

 

3,465

 

2,463

 

Total Liabilities and Shareholders’ Equity

 

$

9,171

 

$

9,225

 

 


(a) The information in this column was derived from the Company’s audited Consolidated Balance Sheet as of July 1, 2011.

 

See Notes to Condensed Consolidated Financial Statements.

 

3



Table of Contents

 

SEAGATE TECHNOLOGY PLC

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In millions, except per share data)

(Unaudited)

 

 

 

For the Three Months Ended

 

For the Six Months Ended

 

 

 

December 30,
2011

 

December 31,
2010

 

December 30,
2011

 

December 31,
2010

 

 

 

 

 

 

 

 

 

 

 

Revenue

 

$

3,195

 

$

2,719

 

$

6,007

 

$

5,417

 

 

 

 

 

 

 

 

 

 

 

Cost of revenue

 

2,185

 

2,190

 

4,448

 

4,338

 

Product development

 

259

 

213

 

467

 

422

 

Marketing and administrative

 

141

 

102

 

245

 

206

 

Amortization of intangibles

 

2

 

1

 

3

 

2

 

Restructuring and other, net

 

3

 

7

 

3

 

11

 

Total operating expenses

 

2,590

 

2,513

 

5,166

 

4,979

 

 

 

 

 

 

 

 

 

 

 

Income from operations

 

605

 

206

 

841

 

438

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

2

 

2

 

3

 

4

 

Interest expense

 

(58

)

(46

)

(127

)

(92

)

Other, net

 

9

 

13

 

(8

)

(22

)

Other expense, net

 

(47

)

(31

)

(132

)

(110

)

 

 

 

 

 

 

 

 

 

 

Income before income taxes

 

558

 

175

 

709

 

328

 

Provision for (benefit from) income taxes

 

(5

)

25

 

6

 

29

 

Net income

 

$

563

 

$

150

 

$

703

 

$

299

 

 

 

 

 

 

 

 

 

 

 

Net income per share:

 

 

 

 

 

 

 

 

 

Basic

 

$

1.32

 

$

0.32

 

$

1.66

 

$

0.64

 

Diluted

 

1.28

 

0.31

 

1.61

 

0.61

 

Number of shares used in per share calculations:

 

 

 

 

 

 

 

 

 

Basic

 

427

 

469

 

424

 

470

 

Diluted

 

439

 

486

 

436

 

487

 

 

 

 

 

 

 

 

 

 

 

Cash dividends declared per share

 

$

0.18

 

$

 

$

0.36

 

$

 

 

See Notes to Condensed Consolidated Financial Statements.

 

4



Table of Contents

 

SEAGATE TECHNOLOGY PLC

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In millions)

(Unaudited)

 

 

 

For the Six Months Ended

 

 

 

December 30,
2011

 

December 31,
2010

 

OPERATING ACTIVITIES

 

 

 

 

 

Net income

 

$

703

 

$

299

 

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

 

 

 

 

 

Depreciation and amortization

 

373

 

379

 

Share-based compensation

 

26

 

26

 

Loss on redemption of debt

 

5

 

24

 

(Gain) loss on sale of property and equipment

 

(14

)

(3

)

Deferred income taxes

 

(4

)

27

 

Other non-cash operating activities, net

 

10

 

(6

)

 

 

 

 

 

 

Changes in operating assets and liabilities:

 

 

 

 

 

Accounts receivable, net

 

(130

)

9

 

Inventories

 

181

 

(51

)

Accounts payable

 

(500

)

243

 

Accrued employee compensation

 

56

 

(134

)

Accrued expenses, income taxes and warranty

 

(34

)

20

 

Other assets and liabilities

 

207

 

(81

)

Net cash provided by operating activities

 

879

 

752

 

 

 

 

 

 

 

INVESTING ACTIVITIES

 

 

 

 

 

Acquisition of property, equipment and leasehold improvements

 

(361

)

(560

)

Purchases of short-term investments

 

(309

)

(145

)

Sales of short-term investments

 

260

 

96

 

Maturities of short-term investments

 

115

 

13

 

Change in restricted cash and investments

 

9

 

17

 

Cash used in acquisition of Samsung HDD assets and liabilities

 

(561

)

 

Other investing activities, net

 

4

 

(1

)

Net cash used in investing activities

 

(843

)

(580

)

 

 

 

 

 

 

FINANCING ACTIVITIES

 

 

 

 

 

Repayments of long-term debt and capital lease obligations

 

(594

)

(362

)

Net proceeds from issuance of long-term debt

 

 

736

 

Repurchases of ordinary shares

 

(191

)

(305

)

Proceeds from issuance of ordinary shares under employee stock plans

 

51

 

24

 

Dividends to shareholders

 

(154

)

 

Net cash (used in) provided by financing activities

 

(888

)

93

 

 

 

 

 

 

 

(Decrease) increase in cash and cash equivalents

 

(852

)

265

 

Cash and cash equivalents at the beginning of the period

 

2,677

 

2,263

 

Cash and cash equivalents at the end of the period

 

$

1,825

 

$

2,528

 

 

See Notes to Condensed Consolidated Financial Statements.

 

5



Table of Contents

 

SEAGATE TECHNOLOGY PLC

CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY

 

For the Six Months Ended December 30, 2011

(In millions)

(Unaudited)

 

 

 

Number
of
Ordinary
Shares

 

Par Value
of Shares

 

Additional
Paid-in
Capital

 

Accumulated
Other
Comprehensive
Income (Loss)

 

Accumulated
Deficit

 

Total

 

Balance at July 1, 2011

 

425

 

$

 

$

3,980

 

$

(6

)

$

(1,511

)

$

2,463

 

Comprehensive income, net of tax:

 

 

 

 

 

 

 

 

 

 

 

 

 

Change in unrealized loss on cash flow hedges, net

 

 

 

 

(7

)

 

(7

)

Change in unrealized loss on marketable securities, net

 

 

 

 

(1

)

 

(1

)

Change in unrealized loss on post-retirement plan costs

 

 

 

 

1

 

 

1

 

Net income

 

 

 

 

 

703

 

703

 

Comprehensive income

 

 

 

 

 

 

 

 

 

 

 

696

 

Issuance of ordinary shares under employee stock plans

 

8

 

 

51

 

 

 

51

 

Issuance of ordinary shares, in connection with the acquisition of Samsung HDD assets and liabilities

 

45

 

 

569

 

 

 

569

 

Tax benefit from exercise of stock options

 

 

 

2

 

 

 

2

 

Repurchases of ordinary shares

 

(13

)

 

 

 

(191

)

(191

)

Dividends to shareholders

 

 

 

 

 

(151

)

(151

)

Share-based compensation

 

 

 

26

 

 

 

26

 

Balance at December 30, 2011

 

465

 

$

 

$

4,628

 

$

(13

)

$

(1,150

)

$

3,465

 

 

See Notes to Condensed Consolidated Financial Statements.

 

6



Table of Contents

 

1.  Basis of Presentation and Summary of Significant Accounting Policies

 

Organization

 

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

 

Basis of Presentation and Consolidation

 

The unaudited condensed consolidated financial statements include the accounts of the Company and all its wholly-owned subsidiaries, after elimination of intercompany transactions and balances. The preparation of financial statements in accordance with accounting principles generally accepted in the United States also requires management to make estimates and assumptions that affect the amounts reported in the Company’s consolidated financial statements and accompanying notes. Actual results could differ materially from those estimates. The methods, estimates and judgments the Company uses in applying its most critical accounting policies have a significant impact on the results the Company reports in its consolidated financial statements. The consolidated financial statements reflect, in the opinion of management, all material adjustments necessary to present 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 1, 2011 are included in its Annual Report on Form 10-K as filed with the United States Securities and Exchange Commission (SEC) on August 17, 2011. 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 1, 2011 and the notes thereto, are adequate to make the information presented not misleading.

 

The results of operations for the three and six months ended December 30, 2011, are not necessarily indicative of the results of operations to be expected for any subsequent interim period in the Company’s fiscal year ending June 29, 2012. 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 six months ended December 30, 2011 and December 31, 2010 consisted of 13 weeks and 26 weeks, respectively.  Fiscal year 2012 will be comprised of 52 weeks and will end on June 29, 2012.

 

Summary of Significant Accounting Policies

 

Since the Company’s fiscal year ended July 1, 2011, there have been no significant changes in the Company’s significant accounting policies other than the policy for testing impairment of goodwill discussed below. 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 1, 2011, as filed with the SEC on August 17, 2011, for a discussion of the Company’s other significant accounting policies.

 

Impairment of Goodwill and Other Long-lived Assets — In September 2011, the FASB issued ASU No. 2011-08, Intangibles — Goodwill and Other (ASC Topic 350) — Testing Goodwill for Impairment. The ASU allows companies the option to perform a qualitative assessment in determining whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount, including goodwill. Based on the qualitative assessment, if the fair value of a reporting unit is not less than its carrying amount then the Company is not required to perform the two-step goodwill impairment test. The Company has early adopted the ASU in the first quarter of fiscal year 2012. As required by the new ASU, the Company tests goodwill of its reporting units for impairment whenever events occur or circumstances change, such as an adverse change in business climate or a decline in the overall industry, that would more likely than not reduce the fair value of a reporting unit below its carrying amount, including goodwill.

 

7



Table of Contents

 

Newly Adopted and Recently Issued Accounting Pronouncements

 

In December 2011, the FASB issued ASU No. 2011-11, Balance Sheet (ASC Topic 210) — Disclosures about Offsetting Assets and Liabilities. The ASU requires enhanced disclosures on offsetting, including disclosing gross and net information about instruments and transactions eligible for offset and instruments and transactions subject to an agreement similar to a master netting agreement.  The ASU is effective for the Company’s first quarter of fiscal year 2014 and requires the enhanced disclosures for all comparative periods presented.  Other than requiring additional disclosures, the adoption of this new guidance will not have a material impact on the Company’s consolidated financial statements.

 

2.  Balance Sheet Information

 

Investments

 

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

 

As of December 30, 2011, the Company’s restricted cash and investments consisted of $75 million in cash equivalents and investments held in trust for payment of its non-qualified deferred compensation plan liabilities and $18 million in cash and investments held as collateral at banks for various performance obligations. As of July 1, 2011, the Company’s restricted cash and investments consisted of $84 million in cash equivalents and investments held in trust for payment of its non-qualified deferred compensation plan liabilities and $18 million in cash and investments held as collateral at banks for various performance obligations.

 

The following table summarizes, by major type, the fair value and amortized cost of the Company’s investments as of December 30, 2011:

 

(Dollars in millions)

 

Amortized
Cost

 

Unrealized
Gain/(Loss)

 

Fair
Value

 

Available-for-sale securities:

 

 

 

 

 

 

 

Money market funds

 

$

1,310

 

$

 

$

1,310

 

Commercial paper

 

346

 

 

346

 

Corporate bonds

 

209

 

(1

)

208

 

U.S. treasuries and agency bonds

 

91

 

 

91

 

Auction rate securities

 

17

 

(2

)

15

 

Other debt securities

 

133

 

1

 

134

 

 

 

2,106

 

(2

)

2,104

 

Trading securities

 

79

 

(4

)

75

 

Total

 

$

2,185

 

$

(6

)

$

2,179

 

 

 

 

 

 

 

 

 

Included in Cash and cash equivalents

 

 

 

 

 

$

1,664

 

Included in Short-term investments

 

 

 

 

 

407

 

Included in Restricted cash and investments

 

 

 

 

 

93

 

Included in Other assets, net

 

 

 

 

 

15

 

Total

 

 

 

 

 

$

2,179

 

 

8



Table of Contents

 

The Company’s available-for-sale securities include investments in auction rate securities.  Beginning in fiscal year 2008, the Company’s auction rate securities failed to settle at auction and have continued to fail through December 30, 2011.  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.  Given the uncertainty as to when the liquidity issues associated with these securities will improve, these securities are classified within Other assets, net in the Company’s Condensed Consolidated Balance Sheets.

 

As of December 30, 2011, with the exception of the Company’s auction rate securities, the Company had no available-for-sale securities that had been in a continuous unrealized loss position for a period greater than 12 months.  The Company determined no available-for-sale securities were other-than-temporarily impaired as of December 30, 2011.

 

The fair value and amortized cost of the Company’s investments in debt securities classified as available-for-sale at December 30, 2011 by remaining contractual maturity were as follows:

 

(Dollars in millions)

 

Amortized
Cost

 

Fair
Value

 

Due in less than 1 year

 

$

1,766

 

$

1,766

 

Due in 1 to 3 years

 

323

 

323

 

Thereafter

 

17

 

15

 

Total

 

$

2,106

 

$

2,104

 

 

The following table summarizes, by major type, the fair value and amortized cost of the Company’s investments as of July 1, 2011:

 

(Dollars in millions)

 

Amortized
Cost

 

Unrealized
Gain/(Loss)

 

Fair
Value

 

Available-for-sale securities:

 

 

 

 

 

 

 

Commercial paper

 

$

1,729

 

$

 

$

1,729

 

Money market funds

 

815

 

 

815

 

U.S. treasuries and agency bonds

 

190

 

 

190

 

Certificates of deposit

 

136

 

 

136

 

Corporate bonds

 

116

 

 

116

 

Auction rate securities

 

18

 

(2

)

16

 

Other debt securities

 

96

 

 

96

 

 

 

3,100

 

(2

)

3,098

 

Trading securities

 

80

 

4

 

84

 

Total

 

$

3,180

 

$

2

 

$

3,182

 

 

 

 

 

 

 

 

 

Included in Cash and cash equivalents

 

 

 

 

 

$

2,590

 

Included in Short-term investments

 

 

 

 

 

474

 

Included in Restricted cash and investments

 

 

 

 

 

102

 

Included in Other assets, net

 

 

 

 

 

16

 

Total

 

 

 

 

 

$

3,182

 

 

9



Table of Contents

 

As of July 1, 2011, with the exception of the Company’s auction rate securities, the Company had no available-for-sale securities that had been in a continuous unrealized loss position for a period greater than 12 months.  The Company determined no available-for-sale securities were other-than-temporarily impaired as of July 1, 2011.

 

Inventories

 

(Dollars in millions)

 

December 30,
2011

 

July 1,
2011

 

Raw materials and components

 

$

408

 

$

286

 

Work-in-process

 

162

 

201

 

Finished goods

 

257

 

385

 

 

 

$

827

 

$

872

 

 

Other Current Assets

 

(Dollars in millions)

 

December 30,
2011

 

July 1,
2011

 

Vendor non-trade receivables

 

$

385

 

$

519

 

Other

 

137

 

187

 

 

 

$

522

 

$

706

 

 

Other current assets include 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 in revenue and does not recognize any profits on these sales. The costs of the completed sub-assemblies are included in inventory upon purchase from the vendors.

 

Property, Equipment and Leasehold Improvements, net

 

(Dollars in millions)

 

December 30,
2011

 

July 1,
2011

 

Property, equipment and leasehold improvements

 

$

7,672

 

$

7,383

 

Accumulated depreciation and amortization

 

(5,462

)

(5,138

)

 

 

$

2,210

 

$

2,245

 

 

3.  Debt

 

Short-Term Borrowings

 

On January 18, 2011, the Company and its subsidiary, Seagate HDD Cayman (“the Borrower”), entered into a credit agreement which provides for a $350 million senior secured revolving credit facility. Seagate Technology plc and certain of its material subsidiaries fully and unconditionally guarantee, on a senior secured basis, the revolving credit facility. The revolving credit facility matures in January 2015. The $350 million revolving credit facility is available for cash borrowings and for the issuance of letters of credit up to a sub-limit of $75 million. As of December 30, 2011, no borrowings have been drawn under the revolving credit facility, and $4 million had been utilized for letters of credit.

 

Long-Term Debt

 

$600 Million Aggregate Principal Amount of 6.375% Senior Notes due October 2011 (the “2011 Notes”).  The 2011 Notes matured on October 1, 2011 and the Company repaid the entire outstanding principal amount of $559 million, plus accrued and unpaid interest on October 3, 2011.

 

$430 Million Aggregate Principal Amount of 10.00% Senior Secured Second-Priority Notes due May 2014 (the “2014 Notes”). The interest on the 2014 Notes is payable semi-annually on May 1 and November 1 of each year. The issuer under the 2014 Notes is Seagate Technology International, and the obligations under the 2014 Notes are unconditionally guaranteed by the Company and certain of its significant subsidiaries. In addition, the obligations under the 2014 Notes are secured by a second-priority lien on substantially all of the Company’s tangible and intangible assets. The indenture governing the 2014 Notes contains covenants that limit the Company’s ability, and

 

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the ability of certain of its subsidiaries, (subject to certain exceptions) to: incur additional debt or issue certain preferred shares, create liens, enter into mergers, pay dividends, redeem or repurchase debt or shares, and enter into certain transactions with the Company’s shareholders or affiliates. In the first six months of fiscal year 2012, the Company repurchased $30 million aggregate principal amount of its 2014 Notes for cash at a premium to their principal amount, plus accrued and unpaid interest. The Company recorded a loss on the redemption of approximately $5 million, which is included in Other, net in the Company’s Condensed Consolidated Statements of Operations for the six months ended December 30, 2011. The 2014 Notes are included in Long-term debt, less current portion in the Condensed Consolidated Balance Sheet at December 30, 2011.

 

$600 Million Aggregate Principal Amount of 6.8% Senior Notes due October 2016 (the “2016 Notes”).  The interest on the 2016 Notes is payable semi-annually on April 1 and October 1 of each year. The issuer under the 2016 Notes is Seagate Technology HDD Cayman, and the obligations under the 2016 Notes are unconditionally guaranteed by certain of the Company’s significant subsidiaries. The 2016 Notes are included in Long-term debt, less current portion in the Condensed Consolidated Balance Sheet at December 30, 2011.

 

$750 Million Aggregate Principal Amount of 7.75% Senior Notes due December 2018 (the “2018 Notes”). The interest on the 2018 Notes is payable semi-annually on June 15 and December 15 of each year. The issuer under the 2018 Notes is Seagate Technology HDD Cayman and the obligations under the 2018 Notes are fully and unconditionally guaranteed, on a senior unsecured basis, by certain of the Company’s significant subsidiaries. The 2018 Notes are included in Long-term debt, less current portion in the Condensed Consolidated Balance Sheet at December 30, 2011.

 

$600 Million Aggregate Principal Amount of 6.875% Senior Notes due May 2020 (the “2020 Notes”).  The interest on the 2020 Notes is payable semi-annually on May 1 and November 1 of each year. The issuer under the 2020 Notes is Seagate Technology HDD Cayman, and the obligations under the 2020 Notes are fully and unconditionally guaranteed, on a senior unsecured basis, by the Company. The 2020 Notes are included in Long-term debt, less current portion in the Condensed Consolidated Balance Sheet at December 30, 2011.

 

$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 2018 Notes is Seagate Technology HDD Cayman and the obligations under the 2021 Notes are fully and unconditionally guaranteed, on a senior unsecured basis, by certain of the Company’s significant subsidiaries. The 2021 Notes are included in Long-term debt, less current portion in the Condensed Consolidated Balance Sheet at December 30, 2011.

 

At December 30, 2011, future principal payments on long-term debt were as follows (in millions):

 

Fiscal Year

 

 

 

2012

 

$

 

2013

 

 

2014

 

385

 

2015

 

 

2016

 

 

Thereafter

 

2,550

 

 

 

$

2,935

 

 

4. Income Taxes

 

The income tax benefit of $5 million recorded for the three months ended December 30, 2011 included $7 million of tax benefit from the reversal of a portion of the U.S. valuation allowance recorded in prior periods.  The income tax provision of $6 million recorded for the six months ended December 30, 2011 included approximately $10 million of discrete tax benefits from the reversal of a portion of the U.S. valuation allowance recorded in prior periods and the release of tax reserves associated with the expiration of certain statutes of limitation.

 

The Company’s income tax benefit and provision recorded for the three and six months ended December 30, 2011 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

 

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generated in jurisdictions that are subject to tax holidays or tax incentive programs and are considered indefinitely reinvested outside of Ireland, (ii) a decrease in valuation allowance for certain U.S. deferred tax assets,  (iii) the release of tax reserves as a result of the expiration of statutes of limitation, and (iv) tax expense related to intercompany transactions.

 

The Company recorded an income tax provision of $25 million and $29 million for the three and six months ended December 31, 2010, respectively. The income tax provision for the three and six months ended December 31, 2010 included approximately $1 million and $11 million of discrete tax benefits, respectively, primarily from the release of tax reserves associated with the expiration of certain statutes of limitations.  In addition, $11 million of discrete income tax benefits from the loss recognized on the redemption of debt was offset by a corresponding increase in the valuation allowance for U.S. deferred tax assets.

 

The Company’s provision for income taxes recorded for the three and six months ended December 31, 2010 differed from the provision for income taxes that would be derived by applying the Irish statutory rate of 25% to income before income taxes primarily due to the net effect of (i) 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) an increase in valuation allowance for U.S. deferred tax assets, (iii) tax expense related to intercompany transactions, and (iv) the release of tax reserves as a result of the expiration of statutes of limitation.

 

On December 17, 2010, the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (the 2010 Tax Relief Act) was enacted. The 2010 Tax Relief Act includes business incentives to invest in machinery and equipment, and retroactively reinstated the R&D tax credit through December 31, 2011 from December 31, 2009. These business incentives had no immediate impact on the Company’s income tax provision due to the existing valuation allowances for certain U.S. deferred tax assets.

 

5. Acquisitions

 

On December 19, 2011, the Company completed the acquisition of Samsung Electronics Co., Ltd’s (“Samsung”) hard disk drive (“HDD”) business pursuant to an Asset Purchase Agreement (“APA”) by which the Company acquired certain assets and liabilities of Samsung relating to the research and development, manufacture and sale of hard-disk drives. The transaction and related agreements are expected to improve the Company’s position as a supplier of 2.5-inch products; position the Company to better address rapidly evolving opportunities in markets including, but not limited to, mobile computing, cloud computing and solid state storage; expand the Company’s customer access in China and Southeast Asia; and accelerate time to market for new products.

 

The acquisition-date fair value of the consideration transferred totaled $1,140 million, which consisted of $571 million of cash, $10 million of which was paid as a deposit upon signing the APA in the fourth quarter of fiscal year 2011, and 45.2 million ordinary shares with a fair value of $569 million.  The fair value of the ordinary shares issued was determined based on the closing market price of the Company’s ordinary shares on the acquisition date, less a 16.5% discount for lack of marketability as the shares issued are subject to a restriction that limits their trade or transfer for approximately a one year period.

 

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The following table summarizes the preliminary estimated fair values of the assets acquired and liabilities assumed at the acquisition date (in millions):

 

Inventories

 

$

141

 

Equipment

 

73

 

Intangible assets

 

580

 

Other assets

 

21

 

Total identifiable assets acquired

 

815

 

Warranty liability

 

(69

)

Other liabilities

 

(43

)

Total liabilities assumed

 

(112

)

Net identifiable assets acquired

 

703

 

Goodwill

 

437

 

Net assets acquired

 

$

1,140

 

 

The amount noted above for warranty is provisional, being an estimate calculated on the basis of projected product failure rates and timing of product returns during the warranty period. Seagate assumed product warranty obligations from Samsung on products sold prior to the acquisition. These products are warranted for up to three years from the original shipment date. The estimate of the warranty liability is subject to a significant degree of subjectivity since the Company does not have experience with Samsung products. If actual return rates differ materially from the Company’s estimate, or if there is an epidemic failure of drives for which Seagate assumed warranty obligations, the fair value of the warranty liability may need to be reestimated during the measurement period, which may be up to one year following the acquisition date.

 

The Company received a patent portfolio that may have value apart from being an enabling technology that is included within the fair value of Intangible assets – Existing technology.  However, the Company has not received all information regarding these patents that is necessary for the completion of a review to determine the extent of encumbrances and the scope of their application.  Therefore, provisionally, no separately identifiable value has been recognized for the patent portfolio.

 

As part of the acquisition, the Company assumed certain vendor-related and other obligations and contingent liabilities.  Due to the nature of these obligations and contingent liabilities, the Company has not received sufficient information needed to determine the fair value of these obligations.

 

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:

 

 

 

 

 

Weighted-

 

 

 

 

 

Average

 

 

 

 

 

Amortization

 

(Dollars in millions)

 

Fair Value

 

Period

 

 

 

 

 

 

 

Existing technology

 

$

137

 

2.0 years

 

Customer relationships

 

399

 

5.8 years

 

Total amortizable intangible assets acquired

 

536

 

4.8 years

 

In-process research and development

 

44

 

 

 

Total acquired identifiable intangible assets

 

$

580

 

 

 

 

The $437 million of goodwill recognized is attributable primarily to the benefits the Company expects to derive from enhanced scale and efficiency to better serve its markets and expanded customer presence in China and Southeast Asia.  Except for approximately $4 million of goodwill relating to assembled workforce in Korea, none of the goodwill is expected to be deductible for income tax purposes.  As of December 30, 2011, there were no changes in the recognized amounts of goodwill resulting from the acquisition of Samsung’s HDD business.

 

The Company incurred $17 million and $29 million of expenses related to the acquisition of Samsung for the three and six months ended December 30, 2011, which are included within marketing and administrative expense on the Condensed Consolidated Statement of Operations.

 

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Table of Contents

 

The amounts of revenue and earnings of the acquired assets of Samsung’s HDD business included in the Company’s Condensed Consolidated Statement of Operations from the acquisition date during the three and six months ended December 30, 2011 were as follows:

 

 

 

For the Three

 

For the Six

 

(Dollars in millions)

 

Months Ended

 

Months Ended

 

Revenue

 

$

36

 

$

36

 

Net loss

 

(5

)

(5

)

 

The unaudited pro forma financial results presented below for the three and six months ended December 30, 2011 and December 31, 2010 include the effects of pro forma adjustments as if the acquisition date occurred as of the beginning of the prior fiscal year on July 3, 2010. The pro forma results combine the historical results of the Company for the three and six months periods ended December 30, 2011 and December 31, 2010, respectively, and the historical results of the acquired assets and liabilities of Samsung’s HDD business, and include the effects of certain fair value adjustments and the elimination of certain activities excluded from the transaction. The pro forma financial information is presented for informational purposes only and is not necessarily indicative of the results of operations that would have been achieved if the acquisition had taken place at the beginning of the earliest period presented, nor does it intend to be a projection of future results.

 

 

 

For the Three Months Ended

 

For the Six Months Ended

 

 

 

December 30,

 

December 31,

 

December 30,

 

December 31,

 

(Dollars in millions)

 

2011

 

2010

 

2011

 

2010

 

Revenue

 

$

3,800

 

$

3,490

 

$

7,217

 

$

6,959

 

Net income

 

526

 

137

 

597

 

270

 

 

The pro forma results for the three and six months ended December 30, 2011 include adjustments of $33 million and $65 million, respectively, to reflect the additional depreciation and amortization that would have been charged assuming the fair value adjustments to property, plant and equipment and intangible assets had been applied on July 3, 2010. The pro forma results for the three and six months ended December 31, 2010, include adjustments of $29 million and $56 million, respectively, to reflect the additional depreciation and amortization that would have been charged assuming the fair value adjustments to property, plant and equipment and intangible assets had been applied on July 3, 2010.

 

6.  Goodwill and Other Intangible Assets

 

The changes in the carrying amount of goodwill for the six months ended December 30, 2011 are as follows:

 

(Dollars in millions)

 

 

 

Balance as of July 1, 2011

 

$

31

 

Goodwill acquired

 

437

 

Balance as of December 30, 2011

 

$

468

 

 

The carrying value of other intangible assets subject to amortization as of December 30, 2011 is set forth in the following table:

 

 

 

Gross Carrying

 

Accumulated

 

Net Carrying

 

Weighted Average

 

(Dollars in millions)

 

Amount

 

Amortization

 

Amount

 

Remaining Useful Life

 

Amortizable other intangible assets:

 

 

 

 

 

 

 

 

 

Existing technology

 

$

137

 

$

(2

)

$

135

 

2.0 years

 

Customer relationships

 

399

 

(2

)

397

 

5.7 years

 

Total amortizable other intangible assets

 

$

536

 

$

(4

)

$

532

 

4.8 years

 

 

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Table of Contents

 

The carrying value of other intangible assets subject to amortization as of July 1, 2011 is set forth in the following table:

 

 

 

Gross Carrying

 

Accumulated

 

Net Carrying

 

Weighted Average

 

(Dollars in millions)

 

Amount

 

Amortization

 

Amount

 

Remaining Useful Life

 

Customer relationships

 

$

3

 

$

(2

)

$

1

 

0.5 year

 

 

The carrying value of In-process research and development was $44 million and $0 as of December 30, 2011and July 1, 2011, respectively.

 

For the three and six months ended December 30, 2011, amortization expense of other intangible assets was $5 million and $5 million, respectively. For the three and six months ended December 31, 2010, amortization expense of other intangible assets was $2 million and $5 million, respectively. As of December 30, 2011, expected amortization expense for other intangible assets for each of the next five years and thereafter is as follows:

 

(Dollars in millions)

 

 

 

 

 

 

 

Remainder of 2012

 

$

69

 

2013

 

139

 

2014

 

103

 

2015

 

71

 

2016

 

64

 

Thereafter

 

86

 

 

 

$

532

 

 

7.  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 to manage the foreign currency exchange rate risk on forecasted expenses denominated in foreign currencies and to mitigate the remeasurement risk of certain foreign currency denominated liabilities.  The Company’s accounting policies for these instruments are based on whether the instruments are classified as designated or non-designated hedging instruments. The Company records all derivatives in the Condensed Consolidated Balance Sheets at fair value. The changes in the fair values of the effective portions of designated cash flow hedges are recorded in Accumulated other comprehensive 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.  As of December 30, 2011 and July 1, 2011, the Company had a net unrealized loss and a net unrealized gain on cash flow hedges of approximately $5 million and $2 million, respectively.

 

The Company dedesignates its cash flow hedges when the forecasted hedged transactions are realized or it is probable the forecasted hedged transactions will not occur in the initially identified time period. At such time, the associated gains and losses deferred in Accumulated other comprehensive 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 material net gains or losses related to the loss of hedge designation on discontinued cash flow hedges during the three and six months ended December 30, 2011 and December 31, 2010. As of December 30, 2011, the Company’s existing foreign currency forward exchange contracts mature within 12 months. The deferred amount currently recorded in Accumulated other comprehensive loss and expected to be recognized into earnings over the next 12 months is a net loss of $5 million.

 

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Table of Contents

 

The following tables show the total notional value of the Company’s outstanding foreign currency forward exchange contracts as of December 30, 2011 and July 1, 2011:

 

 

 

As of December 30, 2011

 

 

 

Contracts

 

Contracts Not

 

 

 

Designated as

 

Designated as

 

(Dollars in millions)

 

Hedges

 

Hedges

 

Thai baht

 

$

 

$

210

 

Singapore dollars

 

117

 

9

 

Chinese Renminbi

 

35

 

 

Czech koruna

 

 

11

 

 

 

$

152

 

$

230

 

 

 

 

As of July 1, 2011

 

 

 

Contracts

 

Contracts Not

 

 

 

Designated as

 

Designated as

 

(Dollars in millions)

 

Hedges

 

Hedges

 

Thai baht

 

$

98

 

$

235

 

Singapore dollars

 

212

 

9

 

Chinese Renminbi

 

78

 

 

Czech koruna

 

 

11

 

 

 

$

388

 

$

255

 

 

The following table shows the Company’s derivative instruments measured at fair value as reflected in the Condensed Consolidated Balance Sheet as of December 30, 2011:

 

Fair Values of Derivative Instruments as of December 30, 2011

 

 

 

Asset Derivatives

 

Liability Derivatives

 

 

 

Balance Sheet

 

 

 

Balance Sheet

 

 

 

(Dollars in millions)

 

Location

 

Fair Value

 

Location

 

Fair Value

 

Derivatives designated as hedging instruments:

 

 

 

 

 

 

 

 

 

Foreign currency forward exchange contracts

 

Other current assets

 

$

 

Accrued expenses

 

$

(5

)

Derivatives not designated as hedging instruments:

 

 

 

 

 

 

 

 

 

Foreign currency forward exchange contracts

 

Other current assets

 

1

 

Accrued expenses

 

(4

)

Total derivatives

 

 

 

$

1

 

 

 

$

(9

)

 

The following table shows the Company’s derivative instruments measured at fair value as reflected in the Condensed Consolidated Balance Sheet as of July 1, 2011:

 

Fair Values of Derivative Instruments as of July 1, 2011

 

 

 

Asset Derivatives

 

Liability Derivatives

 

 

 

Balance Sheet

 

 

 

Balance Sheet

 

 

 

(Dollars in millions)

 

Location

 

Fair Value

 

Location

 

Fair Value

 

Derivatives designated as hedging instruments:

 

 

 

 

 

 

 

 

 

Foreign currency forward exchange contracts

 

Other current assets

 

$

4

 

Accrued expenses

 

$

(2

)

Derivatives not designated as hedging instruments:

 

 

 

 

 

 

 

 

 

Foreign currency forward exchange contracts

 

Other current assets

 

1

 

Accrued expenses

 

(4

)

Total derivatives

 

 

 

$

5

 

 

 

$

(6

)

 

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Table of Contents

 

The following tables show the effect of the Company’s derivative instruments on Other comprehensive income (“OCI”) and the Condensed Consolidated Statement of Operations for the three and six months ended December 30, 2011:

 

 

 

 

 

 

 

 

 

Amount of

 

 

 

Amount of

 

 

 

Amount of

 

 

 

Gain or (Loss)

 

Location of

 

Gain or (Loss)

 

 

 

Gain or (Loss)

 

Location of

 

Reclassified from

 

Gain or (Loss)

 

Recognized in Income

 

 

 

Recognized in OCI

 

Gain or (Loss)

 

Accumulated OCI

 

Recognized in Income

 

(Ineffective Portion and

 

 

 

on Derivative

 

Reclassified from

 

into Income

 

on Derivative

 

Amount Excluded from

 

 

 

(Effective Portion)

 

Accumulated OCI

 

(Effective Portion)

 

(Ineffective Portion and

 

Effectiveness Testing) (a)

 

 

 

For the Three

 

For the Six

 

into Income

 

For the Three

 

For the Six

 

Amount Excluded from

 

For the Three

 

For the Six

 

Derivatives Designated as Cash Flow Hedges

 

Months

 

Months

 

(Effective Portion)

 

Months

 

Months

 

Effectiveness Testing)

 

Months

 

Months

 

Foreign currency forward exchange contracts

 

$

3

 

$

(11

)

Cost of revenue

 

$

(4

)

$

(4

)

Cost of revenue

 

$

 

$

 

 

 

 

 

 

Amount of

 

 

 

Location of

 

Gain or (Loss)

 

 

 

Gain or (Loss)

 

Recognized in Income

 

 

 

Recognized in

 

on Derivative

 

 

 

Income on

 

For the Three

 

For the Six

 

Derivatives Not Designated as Hedging Instruments

 

Derivative

 

Months

 

Months

 

Foreign currency forward exchange contracts

 

Other, net

 

$

 

$

(4

)

 


(a) The amount of gain or (loss) recognized in income represents $0 related to the ineffective portion of the hedging relations and $0 related to the amount excluded from the assessment of hedge effectiveness, for the three and six months ended December 30, 2011, respectively.

 

The following tables show the effect of the Company’s derivative instruments on Other comprehensive income (“OCI”) and the Condensed Consolidated Statement of Operations for the three and six months ended December 31, 2010:

 

 

 

 

 

 

 

 

 

Amount of

 

 

 

Amount of

 

 

 

Amount of

 

 

 

Gain or (Loss)

 

Location of

 

Gain or (Loss)

 

 

 

Gain or (Loss)

 

Location of

 

Reclassified from

 

Gain or (Loss)

 

Recognized in Income

 

 

 

Recognized in OCI

 

Gain or (Loss)

 

Accumulated OCI

 

Recognized in Income

 

(Ineffective Portion and

 

 

 

on Derivative

 

Reclassified from

 

into Income

 

on Derivative

 

Amount Excluded from

 

 

 

(Effective Portion)

 

Accumulated OCI

 

(Effective Portion)

 

(Ineffective Portion and

 

Effectiveness Testing) (a)

 

 

 

For the Three

 

For the Six

 

into Income

 

For the Three

 

For the Six

 

Amount Excluded from

 

For the Three

 

For the Six

 

Derivatives Designated as Cash Flow Hedges

 

Months

 

Months

 

(Effective Portion)

 

Months

 

Months

 

Effectiveness Testing)

 

Months

 

Months

 

Foreign currency forward exchange contracts

 

$

4

 

$

36

 

Cost of revenue

 

$

16

 

$

21

 

Cost of revenue

 

$

1

 

$

1

 

 

 

 

 

 

 

Amount of

 

 

 

Location of

 

Gain or (Loss)

 

 

 

Gain or (Loss)

 

Recognized in Income

 

 

 

Recognized in

 

on Derivative

 

 

 

Income on

 

For the Three

 

For the Six

 

Derivatives Not Designated as Hedging Instruments

 

Derivative

 

Months

 

Months

 

Foreign currency forward exchange contracts

 

Other, net

 

$

4

 

$

20

 

Total return swap

 

Operating expenses

 

6

 

14

 

 

 

 

 

$

10

 

$

34

 

 


(a) The amount of gain or (loss) recognized in income represents $0 related to the ineffective portion of the hedging relations and $1 million related to the amount excluded from the assessment of hedge effectiveness, for the three and six months ended December 31, 2010, respectively.

 

8.  Fair Value

 

Measurement of Fair Value

 

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

 

Fair Value Hierarchy

 

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

 

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

 

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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.

 

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 December 30, 2011:

 

 

 

Fair Value Measurements at Reporting Date Using

 

 

 

 

 

Significant

 

 

 

 

 

 

 

Quoted Prices

 

Other

 

 

 

 

 

 

 

in Active Markets for

 

Observable

 

Significant

 

 

 

 

 

Identical Instruments

 

Inputs

 

Unobservable Inputs

 

Total

 

(Dollars in millions)

 

(Level 1)

 

(Level 2)

 

(Level 3)

 

Balance

 

Assets:

 

 

 

 

 

 

 

 

 

Commercial paper

 

$

 

$

346

 

$

 

$

346

 

Money market funds

 

1,293

 

 

 

1,293

 

U.S. treasuries and agency bonds

 

 

91

 

 

91

 

Corporate bonds

 

 

208

 

 

208

 

Other debt securities

 

 

133

 

 

133

 

Total cash equivalents and short-term investments

 

1,293

 

778

 

 

2,071

 

 

 

 

 

 

 

 

 

 

 

Restricted cash and investments:

 

 

 

 

 

 

 

 

 

Mutual funds

 

67

 

 

 

67

 

Other debt securities

 

25

 

1

 

 

26

 

Auction rate securities

 

 

 

15

 

15

 

Derivative assets

 

 

1

 

 

1

 

Total assets

 

$

1,385

 

$

780

 

$

15

 

$

2,180

 

 

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

Derivative liabilities

 

$

 

$

(9

)

$

 

$

(9

)

Total liabilities

 

$

 

$

(9

)

$

 

$

(9

)

 

 

 

Fair Value Measurements at Reporting Date Using

 

 

 

 

 

Significant

 

 

 

 

 

 

 

Quoted Prices

 

Other

 

 

 

 

 

 

 

in Active Markets for

 

Observable

 

Significant

 

 

 

 

 

Identical Instruments

 

Inputs

 

Unobservable Inputs

 

Total

 

(Dollars in millions)

 

(Level 1)

 

(Level 2)

 

(Level 3)

 

Balance

 

Assets:

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

1,293

 

$

371

 

$

 

$

1,664

 

Short-term investments

 

 

407

 

 

407

 

Restricted cash and investments

 

92

 

1

 

 

93

 

Other current assets

 

 

1

 

 

1

 

Other assets, net

 

 

 

15

 

15

 

Total assets

 

$

1,385

 

$

780

 

$

15

 

$

2,180

 

 

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

Accrued expenses

 

$

 

$

(9

)

$

 

$

(9

)

Total liabilities

 

$

 

$

(9

)

$

 

$

(9

)

 

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Table of Contents

 

The following table presents the Company’s assets and liabilities that are measured at fair value on a recurring basis, excluding accrued interest components, as of July 1, 2011:

 

 

 

Fair Value Measurements at Reporting Date Using

 

 

 

 

 

Significant

 

 

 

 

 

 

 

Quoted Prices

 

Other

 

 

 

 

 

 

 

in Active Markets for

 

Observable

 

Significant

 

 

 

 

 

Identical Instruments

 

Inputs

 

Unobservable Inputs

 

Total

 

(Dollars in millions)

 

(Level 1)

 

(Level 2)

 

(Level 3)

 

Balance

 

Assets:

 

 

 

 

 

 

 

 

 

Commercial paper

 

$

 

$

1,729

 

$

 

$

1,729

 

Money market funds

 

800

 

 

 

800

 

U.S. treasuries and agency bonds

 

 

190

 

 

190

 

Certificates of deposit

 

 

133

 

 

133

 

Corporate bonds

 

 

116

 

 

116

 

Other debt securities

 

 

96

 

 

96

 

Total cash equivalents and short-term investments

 

800

 

2,264

 

 

3,064

 

 

 

 

 

 

 

 

 

 

 

Restricted cash and investments:

 

 

 

 

 

 

 

 

 

Mutual funds

 

81

 

 

 

81

 

Other debt securities

 

19

 

2

 

 

21

 

Auction rate securities

 

 

 

16

 

16

 

Derivative assets

 

 

5

 

 

5

 

Total assets

 

$

900

 

$

2,271

 

$

16

 

$

3,187

 

 

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

Derivative liabilities

 

$

 

$

(6

)

$

 

$

(6

)

Total liabilities

 

$

 

$

(6

)

$

 

$

(6

)

 

 

 

Fair Value Measurements at Reporting Date Using

 

 

 

 

 

Significant

 

 

 

 

 

 

 

Quoted Prices

 

Other

 

 

 

 

 

 

 

in Active Markets for

 

Observable

 

Significant

 

 

 

 

 

Identical Instruments

 

Inputs

 

Unobservable Inputs

 

Total

 

(Dollars in millions)

 

(Level 1)

 

(Level 2)

 

(Level 3)

 

Balance

 

Assets:

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

800

 

$

1,790

 

$

 

$

2,590

 

Short-term investments

 

 

474

 

 

474

 

Restricted cash and investments

 

100

 

2

 

 

102

 

Other current assets

 

 

5

 

 

5

 

Other assets, net

 

 

 

16

 

16

 

Total assets

 

$

900

 

$

2,271

 

$

16

 

$

3,187

 

 

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

Accrued expenses

 

$

 

$

(6

)

$

 

$

(6

)

Total liabilities

 

$

 

$

(6

)

$

 

$

(6

)

 

Level 1 assets consist of money market funds and mutual 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, certificates of deposit, international government securities, asset backed securities, mortgage backed securities and U.S. Treasuries. These debt investments are priced using observable inputs and valuation models which vary by asset class.  The Company uses a pricing service to assist in determining the fair values of all of its cash equivalents and short-term investments.  For the cash equivalents and short-term investments in the Company’s portfolio, multiple pricing sources are generally available.  The pricing service uses inputs from multiple industry standard data providers or other third party sources and various methodologies, such as weighting and models, to determine the appropriate price at the measurement date.  The Company corroborates the prices obtained from the pricing service against other independent sources and, as of December 30, 2011, 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.  The Company recognizes derivative financial instruments in its condensed consolidated financial statements at fair value.  The Company determines the fair value of these instruments by considering the estimated amount it would pay or receive to terminate these agreements at the reporting date.

 

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The Company’s Level 3 assets consist of auction rate securities with a par value of approximately $17 million, all of which are collateralized by student loans guaranteed by the Federal Family Education Loan Program. Beginning in fiscal year 2008, these securities failed to settle at auction and have continued to fail through December 30, 2011. Since there is no active market for these securities, the Company valued them using a discounted cash flow model. The valuation model is based on the income approach and reflects both observable and significant unobservable inputs.

 

The table below presents a reconciliation of assets measured at fair value on a recurring basis, excluding accrued interest components, using significant unobservable inputs (Level 3) for the six months ended December 30, 2011:

 

(Dollars in millions)

 

Auction Rate
Securities

 

Balance at July 1, 2011

 

$

16

 

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

 

 

 

Realized gains (losses)(1)

 

 

Unrealized gains (losses)(2)

 

 

Sales and Settlements

 

(1

)

Balance at December 30, 2011

 

$

15

 

 


(1)            Realized gains (losses) on auction rate securities are recorded in Other, net in 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

 

 

 

Fair Value Measurements 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:

 

 

 

 

 

 

 

 

 

Equity investment

 

$

 

$

 

$

5

 

$

5

 

 

The Company enters into certain strategic investments for the promotion of business and strategic objectives. Strategic investments are included in Other assets, net in the Condensed Consolidated Balance Sheets, are recorded at cost and are periodically analyzed to determine whether or not there are indicators of impairment. The carrying value of the Company’s strategic investments at December 30, 2011 and July 1, 2011 totaled $26 million and $27 million, respectively.

 

There were no impairment charges recognized for the three months ended December 30, 2011. During the first quarter of fiscal year 2012, the Company determined that an equity investment accounted for under the cost method was other-than-temporarily impaired, and recognized a charge of $7 million, in order to write down the carrying amount of the investment to its estimated fair value. The amount was recorded in Other, net in the Condensed Consolidated Statements of Operations. There were no impairment charges recognized for the three and six months ended December 31, 2010. Since there was no active market for the equity securities of the investee, the Company estimated fair value of the investee by using the market approach which was then used to estimate the Company’s applicable portion of the fair value of its underlying intellectual property assets at the end of the second quarter of fiscal 2012.

 

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Other Fair Value Disclosures

 

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

 

 

 

December 30, 2011

 

July 1, 2011

 

(Dollars in millions)

 

Carrying
Amount

 

Estimated
Fair Value

 

Carrying
Amount

 

Estimated
Fair Value

 

 

 

 

 

 

 

 

 

 

 

Capital Lease

 

$

 

$

 

$

1

 

$