Form 10-Q
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 March 28, 2008

 

¨ 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

incorporation or organization)

 

(I.R.S. Employer

Identification Number)

P.O. Box 309GT

Ugland House, South Church Street

George Town, Grand Cayman

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  ¨

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

Large accelerated filer:  x            Accelerated filer:  ¨            Non-accelerated filer:  ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act):

                        Yes  ¨    No  x

As of April 24, 2008, 484,686,580 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 — March 28, 2008 (Unaudited) and June 29, 2007    3
   Condensed Consolidated Statements of Operations — Three and Nine Months ended March 28, 2008 and March 30, 2007 (Unaudited)    4
   Condensed Consolidated Statements of Cash Flows — Nine Months ended March 28, 2008 and March 30, 2007 (Unaudited)    5
   Condensed Consolidated Statement of Shareholders’ Equity — Nine Months ended March 28, 2008 (Unaudited)    6
   Notes to Condensed Consolidated Financial Statements (Unaudited)    7

Item 2.

   Management’s Discussion and Analysis of Financial Condition and Results of Operations    42

Item 3.

   Quantitative and Qualitative Disclosures About Market Risk    61

Item 4.

   Controls and Procedures    63

PART II  OTHER INFORMATION

  

Item 1.

   Legal Proceedings    63

Item 1A.

   Risk Factors    67

Item 2.

   Unregistered Sales of Equity Securities and Use of Proceeds    86

Item 6.

   Exhibits    87
   SIGNATURES    91

 

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PART I

FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS

SEAGATE TECHNOLOGY

CONDENSED CONSOLIDATED BALANCE SHEETS

(In millions)

(Unaudited)

 

     March 28,
2008
   June 29,
2007 (a)
 
ASSETS      

Cash and cash equivalents

   $ 1,143    $ 988  

Short-term investments

     140      156  

Accounts receivable, net

     1,351      1,383  

Inventories

     1,073      794  

Deferred income taxes

     225      196  

Other current assets

     675      284  
               

Total Current Assets

     4,607      3,801  

Property, equipment and leasehold improvements, net

     2,357      2,278  

Goodwill

     2,366      2,300  

Other intangible assets, net

     132      188  

Deferred income taxes

     659      574  

Other assets, net

     292      331  
               

Total Assets

   $ 10,413    $ 9,472  
               
LIABILITIES      

Accounts payable

   $ 1,915    $ 1,301  

Accrued employee compensation

     380      157  

Accrued expenses

     803      786  

Accrued income taxes

     11      75  

Current portion of long-term debt

     345      330  
               

Total Current Liabilities

     3,454      2,649  

Other non-current liabilities

     399      353  

Long-term accrued income taxes

     212      —    

Long-term debt, less current portion

     1,685      1,733  
               

Total Liabilities

     5,750      4,735  

Commitments and contingencies

     
SHAREHOLDERS’ EQUITY      

Common shares and additional paid-in capital

     3,464      3,204  

Accumulated other comprehensive income (loss)

     6      (4 )

Retained earnings

     1,193      1,537  
               

Total Shareholders’ Equity

     4,663      4,737  
               

Total Liabilities and Shareholders’ Equity

   $ 10,413    $ 9,472  
               

 

(a) The information in this column was derived from the Company’s audited Consolidated Balance Sheet as of June 29, 2007.

See notes to Condensed Consolidated Financial Statements.

 

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SEAGATE TECHNOLOGY

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In millions, except per share data)

(Unaudited)

 

     For the Three Months Ended     For the Nine Months Ended  
     March 28,
2008
    March 30,
2007
    March 28,
2008
    March 30,
2007
 

Revenue

   $ 3,104     $ 2,828     $ 9,809     $ 8,616  

Cost of revenue

     2,288       2,225       7,295       7,025  

Product development

     254       214       758       683  

Marketing and administrative

     164       126       484       446  

Amortization of intangibles

     15       13       41       36  

Restructuring and other, net

     20       3       52       —    
                                

Total operating expenses

     2,741       2,581       8,630       8,190  
                                

Income from operations

     363       247       1,179       426  

Interest income

     16       15       51       59  

Interest expense

     (30 )     (33 )     (96 )     (107 )

Other, net

     —         1       13       11  
                                

Other income (expense), net

     (14 )     (17 )     (32 )     (37 )
                                

Income before income taxes

     349       230       1,147       389  

Provision for income taxes

     5       18       45       18  
                                

Net income

   $ 344     $ 212     $ 1,102     $ 371  
                                

Net income per share:

        

Basic

   $ 0.68     $ 0.39     $ 2.11     $ 0.66  

Diluted

     0.65       0.37       2.02       0.62  

Number of shares used in per share calculations:

        

Basic

     507       546       522       564  

Diluted

     530       577       549       595  

Dividends declared per share

   $ 0.10     $ 0.10     $ 0.30     $ 0.28  

See notes to Condensed Consolidated Financial Statements.

 

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SEAGATE TECHNOLOGY

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In millions)

(Unaudited)

 

     For the Nine Months Ended  
     March 28,
2008
    March 30,
2007
 

OPERATING ACTIVITIES

    

Net income

   $ 1,102     $ 371  

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

    

Depreciation and amortization

     631       650  

Stock-based compensation

     86       101  

In-process research and development

     4       4  

Allowance for doubtful accounts receivable

     (3 )     42  

Redemption charges on 8% Senior Notes due 2009

     —         19  

Excess tax benefits from exercise of stock options

     (2 )     —    

Other non-cash operating activities, net

     8       16  

Changes in operating assets and liabilities:

    

Accounts receivable

     (8 )     48  

Inventories

     (279 )     68  

Accounts payable

     614       (295 )

Accrued expenses, employee compensation and warranty

     147       (431 )

Accrued income taxes

     (17 )     15  

Other assets and liabilities

     (140 )     (38 )
                

Net cash provided by operating activities

     2,143       570  
                

INVESTING ACTIVITIES

    

Acquisition of property, equipment and leasehold improvements

     (637 )     (688 )

Proceeds from sales of fixed assets

     29       29  

Purchases of short-term investments

     (439 )     (322 )

Maturities and sales of short-term investments

     425       851  

Acquisitions, net of cash and cash equivalents acquired

     (78 )     (178 )

Other investing activities, net

     15       (44 )
                

Net cash used in investing activities

     (685 )     (352 )
                

FINANCING ACTIVITIES

    

Net proceeds from issuance of long-term debt

     —         1,477  

Repayment of debt

     (34 )     (5 )

Redemption of 8% Senior Notes due 2009

     —         (400 )

Redemption premium on 8% Senior Notes due 2009

     —         (16 )

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

     172       207  

Dividends to shareholders

     (159 )     (158 )

Excess tax benefits from exercise of stock options

     2       —    

Repurchases of common shares and payments made under prepaid forward agreements

     (1,284 )     (1,324 )
                

Net cash used in financing activities

     (1,303 )     (219 )
                

Increase (decrease) in cash and cash equivalents

     155       (1 )

Cash and cash equivalents at the beginning of the period

     988       910  
                

Cash and cash equivalents at the end of the period

   $ 1,143     $ 909  
                

Supplemental Disclosure of Cash Flow Information

    

Cash paid for interest

   $ 71     $ 35  

Cash paid for income taxes, net of refunds

     28       24  

See notes to Condensed Consolidated Financial Statements.

 

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SEAGATE TECHNOLOGY

CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY

Nine Months Ended March 28, 2008

(In millions)

(Unaudited)

 

     Number
of
Common
Shares
    Par
Value
of
Shares
   Additional
Paid-in
Capital
   Accumulated
Other

Comprehensive
Income (Loss)
    Retained
Earnings
    Total  

Balance at June 29, 2007

   535     $ —      $ 3,204    $ (4 )   $ 1,537     $ 4,737  

Cumulative effect adjustment to adopt recognition and measurement provisions of FASB Interpretation No. 48 (See Note 3)

   —         —        —        —         (3 )     (3 )

Comprehensive income, net of tax:

              

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

   —         —        —        1       —         1  

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

   —         —        —        9       —         9  

Net income

   —         —        —        —         1,102       1,102  
                    

Comprehensive income

                 1,112  

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

   14       —        172      —         —         172  

Dividends to shareholders

   —         —        —        —         (159 )     (159 )

Repurchases of common shares

   (55 )     —        —        —         (1,284 )     (1,284 )

Tax benefit from exercise of stock options

   —         —        2      —         —         2  

Stock-based compensation

   —         —        86      —         —         86  
                                            

Balance at March 28, 2008

   494     $ —      $ 3,464    $ 6     $ 1,193     $ 4,663  
                                            

See notes to Condensed Consolidated Financial Statements.

 

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SEAGATE TECHNOLOGY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1. Summary of Significant Accounting Policies

Nature of Operations — Seagate Technology (“Seagate” or the “Company”) designs, manufactures and markets rigid disc drives. Rigid disc drives, which are commonly referred to as disc drives or hard drives, are used as the primary medium for storing electronic information in systems ranging from desktop and notebook computers and consumer electronics devices to data centers delivering information over corporate networks and the Internet. The Company produces a broad range of disc drive products addressing enterprise applications, where its products are primarily used in enterprise servers, mainframes and workstations; desktop applications, where its products are used in desktop computers; mobile computing applications, where its products are used in notebook computers; and consumer electronics applications, where its products are used in digital video recorders and gaming devices. The Company sells its disc drives primarily to major original equipment manufacturers (OEMs), distributors and retailers. In addition to manufacturing and selling disc drives and branded storage products under the Seagate and Maxtor brands, the Company provides data storage services for small to medium size businesses, including online backup, data protection and recovery solutions.

Basis of Presentation and Consolidation — The Condensed Consolidated Financial Statements include the accounts of 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 have been condensed or omitted pursuant to such rules and regulations. The Condensed Consolidated Financial Statements reflect, in the opinion of management, all material 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 recurring nature. The Company’s Consolidated Financial Statements for the fiscal year ended June 29, 2007 are included in its Annual Report on Form 10-K as filed with the United States Securities and Exchange Commission (“SEC”) on August 27, 2007. The Company believes that the disclosures included in the unaudited Condensed Consolidated Financial Statements, when read in conjunction with its Consolidated Financial Statements as of June 29, 2007 and the notes thereto, are adequate to make the information presented not misleading.

The results of operations for the three and nine months ended March 28, 2008, are not necessarily indicative of the operating results to be expected for any subsequent interim period in the Company’s fiscal year ending June 27, 2008.

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 quarters ended March 28, 2008 and March 30, 2007 were 13 weeks. Fiscal year 2008 will be comprised of 52 weeks and will end on June 27, 2008.

 

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SEAGATE TECHNOLOGY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

1. Summary of Significant Accounting Policies (continued)

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 operating results, 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 June 29, 2007, there have been no significant changes in the Company’s critical accounting policies and estimates other than the adoption of Financial Accounting Standards Board (FASB) Interpretation No. 48, Accounting for Uncertainty in Income Taxes, an Interpretation of FASB Statement No. 109 (FIN 48) – see Note 3. Please refer to “Management’s Discussion and Analysis of Financial Condition and Results of Operations” contained in Part II, Item 7 of the Company’s Annual Report on Form 10-K for the fiscal year ended June 29, 2007, as filed with the SEC on August 27, 2007, for a discussion of the Company’s critical accounting policies and estimates.

 

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SEAGATE TECHNOLOGY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

1. Summary of Significant Accounting Policies (continued)

Net Income Per Share

In accordance with the provisions of FASB Statement (SFAS) No. 128, Earnings per Share (SFAS No. 128), the following table sets forth the computation of basic and diluted net income per share for the three and nine months ended March 28, 2008 and March 30, 2007:

 

     For the Three Months Ended     For the Nine Months Ended  
     March 28,
2008
    March 30,
2007
    March 28,
2008
    March 30,
2007
 
     (in millions, except per share data)  

Numerator:

        

Net income

   $ 344     $ 212     $ 1,102     $ 371  

Adjustment for interest expense on 6.8% convertible senior notes due April 2010

     2       —         7       —    
                                

Net income, adjusted

   $ 346     $ 212     $ 1,109     $ 371  
                                

Denominator:

        

Weighted-average common shares outstanding

     509       548       524       566  

Weighted-average nonvested shares

     (2 )     (2 )     (2 )     (2 )
                                

Total shares for purpose of calculating basic net income per share

     507       546       522       564  

Weighted-average effect of dilutive securities:

        

Dilution from employee stock options

     15       24       18       25  

Dilution from nonvested shares

     —         1       —         1  

2.375% convertible senior notes due August 2012

     4       6       5       5  

6.8% convertible senior notes due April 2010

     4       —         4       —    
                                

Potential dilutive common shares:

     23       31       27       31  
                                

Total shares for purpose of calculating diluted net income per share

     530       577       549       595  
                                

Net Income per share:

        

Basic net income per share

   $ 0.68     $ 0.39     $ 2.11     $ 0.66  
                                

Diluted net income per share

   $ 0.65     $ 0.37     $ 2.02     $ 0.62  
                                

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

 

     For the Three Months Ended    For the Nine Months Ended
     March 28,
2008
   March 30,
2007
   March 28,
2008
   March 30,
2007
     (in millions)

Stock options

   27    19    22    19

6.8% convertible senior notes due April 2010

   —      4    —      4

 

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SEAGATE TECHNOLOGY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

2. Balance Sheet Information

 

      March 28,
2008
    June 29,
2007
 
     (in millions)  

Accounts Receivable, net

  

Accounts receivable

   $ 1,396     $ 1,433  

Allowance for doubtful accounts receivable

     (45 )     (50 )
                
   $ 1,351     $ 1,383  
                
      March 28,
2008
    June 29,
2007
 
     (in millions)  

Inventories

  

Raw materials and components

   $ 346     $ 277  

Work-in-process

     114       85  

Finished goods

     613       432  
                
   $ 1,073     $ 794  
                
      March 28,
2008
    June 29,
2007
 
     (in millions)  

Other Current Assets

  

Vendor non-trade receivables

   $ 469     $ 110  

Other current assets

     206       174  
                
   $ 675     $ 284  
                

The Company has 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.

 

      March 28,
2008
    June 29,
2007
 
     (in millions)  

Property, Equipment and Leasehold Improvements, net

  

Property, equipment and leasehold improvements

   $ 5,594     $ 5,104  

Accumulated depreciation and amortization

     (3,237 )     (2,826 )
                
   $ 2,357     $ 2,278  
                
      March 28,
2008
    June 29,
2007
 
     (in millions)  

Accrued Warranty

  

Short-term accrued warranty included in Accrued expenses on the balance sheet

   $ 240     $ 233  

Long-term accrued warranty included in Other non- current liabilities on the balance sheet

     222       197  
                
   $ 462     $ 430  
                

 

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SEAGATE TECHNOLOGY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

2. Balance Sheet Information (continued)

Long-Term Debt and Credit Facilities

Revolving Credit Facility. As of March 28, 2008, there were no borrowings under the Company’s $500 million revolving credit facility and the Company had utilized $58 million of the $100 million sub-limit for outstanding letters of credit and bankers’ guarantees. As of March 28, 2008, the Company is in compliance with all the covenants under the credit agreement that governs the Company’s revolving credit facility.

Derivative Financial Instruments. The Company hedges portions of its forecasted expenditures denominated in foreign currencies with forward exchange contracts. At March 28, 2008, the total notional value of the Company’s outstanding foreign currency forward exchange contracts was approximately $409 million comprised of approximately $20 million to purchase British pounds, $75 million to purchase Singapore dollars, $13 million to purchase Chinese yuan, $5 million to purchase Japanese yen, $15 million to purchase Czech koruna, $11 million to purchase Malaysian ringgit, and $270 million to purchase Thai baht. At March 28, 2008, the fair value of the Company’s outstanding forward exchange contracts was approximately $13 million.

Investment Securities. As of March 28, 2008, the Company held auction rate securities in the amount of $31 million, all of which are collateralized by pools of student loans guaranteed by the Federal Family Education Loan Program. During the quarter ended March 28, 2008, the Company’s auction rate securities failed to settle at auction. The Company did not record any impairment losses during the quarter and nine months ended March 28, 2008, as they were not significant. Given the Company’s holdings of cash, cash equivalents and short-term investments, its expected operating cash flows and its access to funds through its corporate credit facility, the Company has the ability and intent to hold these securities until liquidity returns to this market or maturity of the securities. As a result, the Company reclassified $31 million in auction rate securities from short-term investments to long-term investments as of March 28, 2008. The Company will continue to analyze its auction rate securities each reporting period for impairment and it may be required to record an impairment charge if it is determined that there is a decline in the fair value which is other than temporary.

 

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SEAGATE TECHNOLOGY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

3. Income Taxes

The Company is a foreign holding company incorporated in the Cayman Islands with foreign and U.S. subsidiaries that operate in multiple taxing jurisdictions. As a result, the Company’s worldwide operating income either is subject to varying rates of tax or is exempt from tax due to tax holiday or tax incentive programs the Company operates under in China, Malaysia, Singapore, Switzerland and Thailand. These tax holidays or incentives are scheduled to expire in whole or in part at various dates through 2020.

The income tax provision recorded for the three and nine months ended March 28, 2008, differs 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) the tax benefit related to the aforementioned tax holiday and tax incentive programs, (ii) a decrease in the Company’s valuation allowance for U.S. deferred tax assets, and (iii) the tax expense related to intercompany transactions. The income tax benefit recorded for the three and nine months ended March 30, 2007 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) the tax benefit related to the aforementioned tax holiday and tax incentive programs, (ii) an increase in the Company’s valuation allowance for U.S. deferred tax assets, and (iii) foreign tax benefits recorded during the period relating to reductions in previously accrued taxes and reductions in valuation allowances for certain foreign deferred tax assets.

Based on the Company’s foreign ownership structure, and subject to (i) potential future increases in the valuation allowance for deferred tax assets and (ii) limitations imposed by Internal Revenue Code Section 382 (IRC Sec. 382) on usage of certain tax attributes (further described below), the Company anticipates that its effective tax rate in future periods will generally be less than the U.S. federal statutory rate. Dividend distributions received from the Company’s U.S. subsidiaries may be subject to U.S. withholding taxes when, and if distributed. Deferred tax liabilities have not been recorded on unremitted earnings of certain foreign subsidiaries, as these earnings will not be subject to tax in the Cayman Islands or U.S. federal income tax if remitted to the Company’s foreign parent holding company.

As of March 28, 2008, the Company has recorded net deferred tax assets of $884 million. The realization of $798 million of these deferred tax assets is primarily dependent on the Company’s ability to generate sufficient U.S. and certain foreign taxable income in future periods. Although realization is not assured, the Company’s management believes that it is more likely than not that these deferred tax assets will be realized. The amount of deferred tax assets considered realizable, however, may increase or decrease in subsequent quarters, when the Company reevaluates its estimates of future taxable income.

As a result of the Maxtor acquisition, Maxtor underwent a change in ownership within the meaning of Section 382 of the Internal Revenue Code on May 19, 2006. In general, IRC Sec. 382 places annual limitations on the use of certain tax attributes such as net operating losses and tax credit carryovers in existence at the ownership change date. The annual limitation for this change is $110 million. Certain amounts of these attributes may be accelerated into the first five years following the acquisition pursuant to IRC Section 382 and published notices.

On January 3, 2005, the Company underwent a change in ownership under IRC Sec. 382 due to the sale of common shares to the public by its then largest shareholder, New SAC. Based on an independent valuation as of January 3, 2005, the annual limitation for this change is $44.8 million. To the extent management believes it is more likely than not that the deferred tax assets associated with tax attributes subject to this IRC Sec. 382 limitation will not be realized, a valuation allowance has been provided.

 

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SEAGATE TECHNOLOGY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

3. Income Taxes (continued)

Unrecognized Tax Benefits

Effective at the beginning of the first quarter of fiscal year 2008, the Company adopted FIN 48. FIN 48 contains a two-step approach to recognizing and measuring uncertain tax positions accounted for in accordance with FASB Statement No. 109, Accounting for Income Taxes. The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates that it is more likely than not that the tax position will be sustained on audit, including resolution of any related appeals or litigation processes. The second step is to measure the tax benefit as the largest amount that is more than 50% likely of being realized upon ultimate settlement.

As a result of the implementation of FIN 48, the Company increased its liability for net unrecognized tax benefits at the date of adoption. The Company accounted for the increase primarily as a cumulative effect of a change in accounting principle that resulted in a decrease to retained earnings of $3 million and an increase to goodwill of $25 million. The total amount of gross unrecognized tax benefits as of the date of adoption was $385 million excluding interest and penalties. Of these unrecognized tax benefits, $63 million would reduce the effective tax rate upon recognition.

The Company’s policy to include interest and penalties related to unrecognized tax benefits within the provision for taxes on the Condensed Consolidated Statements of Operations did not change as a result of implementing the provisions of FIN 48. As of the date of adoption of FIN 48, the Company had accrued approximately $19 million for the payment of interest and penalties relating to unrecognized tax benefits. This accrual increased by $3 million to approximately $22 million as of March 28, 2008.

During the nine months ending March 28, 2008, the Company’s unrecognized tax benefits decreased by $8 million. During the quarter ending March 28, 2008, the Company recorded a discrete tax benefit of approximately $13 million related to the recognition of foreign uncertain tax benefits as a result of new information obtained during the quarter. Also, during the quarter ending March 28, 2008, the Company recorded approximately $11 million of foreign uncertain tax benefits resulting in a reduction of the Maxtor goodwill as a result of the expiration of certain foreign statutes of limitation for pre-acquisition periods.

During the 12 months beginning March 29, 2008, the Company expects to reduce its unrecognized tax benefits by approximately $27 million as a result of the expiration of certain statutes of limitation. The Company does not believe it is reasonably possible that other unrecognized tax benefits will materially change in the next 12 months. However, the resolution and/or timing of closure on open audits are highly uncertain as to when these events occur.

The Company files U.S. federal, U.S. state, and foreign tax returns. The statutes of limitation for U.S. Federal returns are open for fiscal year 2003 and forward. The Internal Revenue Service has completed its examination of fiscal years ending in 2003 and 2004. For state and foreign tax returns, the Company is generally no longer subject to tax examinations for years prior to fiscal year 2001.

 

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SEAGATE TECHNOLOGY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

4. Restructuring and Exit Costs

Ongoing Restructuring Activities

At June 29, 2007, the Company’s accrued restructuring balance was $9 million.

For the three months ended March 28, 2008, the Company recorded additional restructuring charges of $12 million, primarily related to the planned closure of its Limavady, Northern Ireland operations as part of its ongoing focus on cost efficiencies in all areas of its business. The restructuring charges associated with the Limavady facility were primarily comprised of approximately $8 million in charges related to employee termination costs.

During the nine months ended March 28, 2008, the Company recorded restructuring charges of $44 million, of which $35 million related to the restructuring plan associated with the planned closure of its Limavady, Northern Ireland operations. The restructuring charges associated with the Limavady facility were comprised of approximately $18 million in charges related to expected grant repayments, employee termination costs of approximately $14 million and approximately $3 million in charges related to impaired equipment as a result of the restructuring plan. The Company currently expects to complete the closure of its Limavady facility by the end of its second quarter of fiscal year 2009, with additional restructuring charges of approximately $20 million to $25 million to be recorded over the next three quarters, resulting in aggregate restructuring charges of approximately $55 million to $60 million. The remaining $9 million in restructuring charges were primarily comprised of employee termination costs as a result of plans to continue the alignment of the Company’s global workforce with existing and anticipated business requirements around the world. The Company expects these restructuring activities to be completed by the end of its first quarter of fiscal year 2009.

The accrued restructuring balance of $38 million at March 28, 2008, is included in Accrued expenses on the accompanying Condensed Consolidated Balance Sheet. The following table summarizes the Company’s restructuring activities for the nine months ended March 28, 2008:

 

     Severance and
Benefits
    Grant
Repayment
   Impaired
Equipment
    Total  
     (in millions)  

Accrual balances, June 29, 2007

   $ 9     $ —      $ —       $ 9  

Restructuring charges

     23       18      3       44  

Cash payments

     (12 )     —        —         (12 )

Non-cash charges and adjustments

     —         —        (3 )     (3 )
                               

Accrual balances, March 28, 2008

   $ 20     $ 18    $ —       $ 38  
                               

 

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SEAGATE TECHNOLOGY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

4. Restructuring and Exit Costs (continued)

Exit Liabilities Recognized in Connection with Business Combinations

Under Emerging Issues Task Force 95-3, Recognition of Liabilities in Connection with a Business Combination, the Company accrued certain exit costs relating to employee severance, planned exit of leased or owned excess facilities and the cancellation or settlement of contractual obligations that will not provide any future economic benefit. At June 29, 2007, the Company’s accrued liability for such exit costs was $33 million, comprised primarily of remaining excess facilities obligations. During the nine months ended March 28, 2008, the Company paid $12 million of the accrued exit costs and had adjustments decreasing the liability by $1 million. The Company expects the remaining costs associated with the exit of certain facilities to continue to the end of fiscal year 2012. The accrued exit costs balance is $20 million at March 28, 2008, of which $4 million is included in Accrued expenses and $16 million is included in Other non-current liabilities on the Condensed Consolidated Balance Sheet.

 

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SEAGATE TECHNOLOGY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

5. Acquisitions

In December 2007, the Company completed its acquisition of MetaLINCS, Inc. (“MetaLINCS”) in an all cash transaction valued at approximately $74 million. MetaLINCS provides enterprise level E-Discovery software that helps companies respond to litigation and regulatory issues which requires them to search large volumes of electronic data for relevant information. The purpose of the acquisition was to expand on the Company’s software and services offerings. The purchase price has been allocated to the tangible and intangible assets acquired and liabilities assumed based on their respective estimated fair values on the acquisition date as follows (in millions):

 

Tangible assets acquired and liabilities assumed

   $ (1 )

Identifiable intangible assets

     12  

In-process research and development

     4  

Goodwill

     59  
        

Total purchase price

   $ 74  
        

Tangible net assets were valued at their respective carrying amounts as the Company believes that these amounts approximated their current fair values at the acquisition date. The fair value of identifiable intangible assets acquired reflects management’s estimates based on, among other factors, use of established valuation methods. Such assets include existing technology, customer relationships and trade names. Identifiable intangible assets are amortized over their estimated remaining useful lives. The Company assigned $4 million to the value of MetaLINCS’ in-process research and development projects as at the acquisition date, all of which was written off in the period of acquisition. Goodwill of approximately $59 million represents the excess of the purchase price over the fair value of the net tangible and identifiable intangible assets acquired. For the three or nine months ended March 28, 2008, the effects of the MetaLINCS acquisition were not material to the Company’s Condensed Consolidated Financial Statements either individually or in aggregate, and as such, pro forma financial information has not been presented.

The recorded values and estimated useful lives of the intangibles acquired from MetaLINCS were:

 

     Estimated
Fair

Value
   Weighted
Average

Useful Life
     (in millions)    (in years)

Existing technology

   $ 7    4.0

Customer relationships

     3    4.0

Trade names

     1    4.0

Other

     1    2.0
         

Total acquired identifiable intangible assets

   $ 12    3.9
         

 

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SEAGATE TECHNOLOGY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

6. Goodwill and Other Intangible Assets

Goodwill

At March 28, 2008, the Company’s goodwill totaled approximately $2.4 billion, of which approximately $2.2 billion relates to the Maxtor acquisition. During the nine months ended March 28, 2008 goodwill increased by approximately $66 million, primarily due to goodwill acquired in the MetaLINCS acquisition (see Note 5) and the cumulative effect of the adoption of FIN 48 (see Note 3, Unrecognized Tax Benefits).

Other Intangible Assets

Other intangible assets consist primarily of existing technology, customer relationships and trade names acquired in business combinations. Acquired intangibles are amortized on a straight-line basis over the respective estimated useful lives of the assets. The net carrying value of intangible assets at March 28, 2008 and June 29, 2007 was $132 million and $188 million, respectively. Accumulated amortization of intangibles was $252 million and $185 million at March 28, 2008 and June 29, 2007, respectively. The carrying value of intangible assets at March 28, 2008 is set forth in the following table:

 

     Gross Carrying
Amount
   Accumulated
Amortization
    Net Carrying
Amount
   Weighted Average
Remaining Useful Life
     (in millions)    (in millions)     (in millions)    (in years)

Existing technology

   $ 181    $ (149 )   $ 32    2.6

Customer relationships

     156      (79 )     77    2.0

Trade names

     37      (16 )     21    2.2

Patents and licenses

     9      (8 )     1    7.1

Other

     1      —         1    1.9
                        

Total acquired identifiable intangible assets

   $ 384    $ (252 )   $ 132    2.2
                        

In the nine months ended March 28, 2008 and March 30, 2007, amortization expense for other intangible assets was $74 million and $129 million, respectively. Amortization of the existing technology intangible is charged to Cost of revenue while the amortization of the other intangible assets is included in Operating expenses in the Condensed Consolidated Statements of Operations. During the nine months ended March 28, 2008, the Company recorded a write-off of in-process research and development related to the acquisition of MetaLINCS in the amount of $4 million, which is included in Product development in the Condensed Consolidated Statement of Operations.

 

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SEAGATE TECHNOLOGY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

7. Stock-Based Compensation

Stock-Based Benefit Plans

The Company’s stock-based benefit plans have been established to promote the Company’s long-term growth and financial success by providing incentives to its employees, directors, and consultants through grants of share-based awards. The provisions of the Company’s stock-based benefit plans, which allow for the grant of various types of equity-based awards, are also intended to provide greater flexibility to maintain the Company’s competitive ability to attract, retain and motivate participants for the benefit of the Company and its shareholders.

Seagate Technology 2004 Stock Compensation Plan — As of March 28, 2008, there were approximately 29.7 million shares available for issuance under the Seagate Technology 2004 Stock Compensation Plan.

At the Company’s 2007 Annual General Meeting on October 25, 2007, the Company’s shareholders approved the issuance of 925,000 performance shares to senior officers of the Company. Subject to continued employment, these performance shares will vest based upon the achievement of certain earnings per share performance objectives as defined in the performance bonus agreements. The requisite service periods for these awards do not commence until fiscal year 2009. As such, no compensation expense was recognized during the three and nine months ended March 28, 2008.

Stock Purchase Plan — On January 31, 2008, the Company issued approximately 1.9 million common shares under its Employee Stock Purchase Plan (“ESPP”), with a weighted-average purchase price of $17.23. On July 31, 2007, the Company issued approximately 1.6 million common shares under its ESPP, with a weighted-average purchase price of $19.98. As of March 28, 2008, there were approximately 8.9 million common shares available for issuance under the ESPP.

Determining Fair Value of Stock Options

The Company estimates the fair value of stock options granted using the Black-Scholes-Merton option-pricing formula and a single option award approach. This fair value is then amortized on a straight-line basis over the requisite service periods of the awards, which is generally the vesting period or the remaining service (vesting) period.

 

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SEAGATE TECHNOLOGY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

7. Stock-Based Compensation (continued)

The fair value of the Company’s stock options granted to employees for the three and nine months ended March 28, 2008 and March 30, 2007, was estimated using the following weighted-average assumptions:

 

     For the Three Months Ended     For the Nine Months Ended  
     March 28,
2008
    March 30,
2007
    March 28,
2008
    March 30,
2007
 

Option Plan Shares

        

Expected term (in years)

     4.0       4.0       4.0       4.0  

Volatility

     35 %     38 %     35 – 36 %     38 – 39 %

Expected dividend rate

     2.0 – 2.5 %     1.5 – 1.6 %     1.5 – 2.5 %     1.4 – 1.9 %

Risk-free interest rate

     2.3 %     4.5 %     2.3 – 4.2 %     4.4 – 4.7 %

Estimated annual forfeitures

     4.5 %     4.5 %     4.5 %     4.5 %

Weighted-average fair value

   $ 7.52     $ 8.43     $ 7.54     $ 7.44  

ESPP Plan Shares

        

Expected term (in years)

     0.5       0.5       0.5       0.5  

Volatility

     36 %     33 %     31 – 36 %     33 – 34 %

Expected dividend rate

     2.3 %     1.5 %     1.7 – 2.3  %     1.4 – 1.5 %

Risk-free interest rate

     2.0 %     5.2 %     2.0 – 5.0  %     5.0 – 5.2 %

Weighted-average fair value

   $ 4.93     $ 6.29     $ 4.67     $ 5.80  

Stock Compensation Expense

Stock Compensation Expense — The Company recorded $28 million and $86 million of stock-based compensation during the three and nine months ended March 28, 2008, respectively. Of the $86 million recorded in the nine months ended March 28, 2008, $12 million related to stock options assumed and nonvested shares exchanged in the Maxtor acquisition. The Company recorded approximately $32 million and $101 million of stock-based compensation during the three and nine months ended March 30, 2007, respectively. Of the $101 million recorded in the nine months ended March 30, 2007, $24 million related to stock options assumed and nonvested shares exchanged in the Maxtor acquisition. The Company has made an estimate of expected forfeitures and is recognizing compensation costs only for those equity awards expected to vest.

Excess Tax Benefits from Stock Options — In accordance with guidance in SFAS No. 123 (Revised 2004), Share-Based Payment, the cash flows resulting from excess tax benefits (tax benefits related to the excess of proceeds from employee exercises of stock options over the stock-based compensation cost recognized for those options) are classified as financing cash flows. The Company recorded approximately $2 million of excess tax benefits as a financing cash inflow during the nine months ended March 28, 2008.

 

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SEAGATE TECHNOLOGY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

8. Guarantees

Indemnifications of Officers and Directors

The Company has entered into indemnification agreements with the members of its board of directors to indemnify them to the extent permitted by law against any and all liabilities, costs, expenses, amounts paid in settlement and damages incurred by the directors as a result of any lawsuit, or any judicial, administrative or investigative proceeding in which the directors are sued as a result of their service as members of the Company’s board of directors.

Intellectual Property Indemnification Obligations

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

Product Warranty

The Company estimates and accrues product warranty costs at the time revenue is recognized. The Company generally warrants its products for periods from one to five years. The Company uses estimated repair or replacement costs and uses statistical modeling to estimate product return rates in order to determine its warranty obligations. In addition, estimated settlements for customer compensatory claims relating to product quality issues, if any, are accrued as warranty expense. Changes in the Company’s product warranty liability during the three and nine months ended March 28, 2008 and March 30, 2007 were as follows:

 

     For the Three Months Ended     For the Nine Months Ended  
     March 28,
2008
    March 30,
2007
    March 28,
2008
    March 30,
2007
 
     (in millions)  

Balance, beginning of period

   $ 457     $ 457     $ 430     $ 445  

Warranties issued

     64       50       190       164  

Repairs and replacements

     (60 )     (91 )     (197 )     (235 )

Changes in liability for pre - existing warranties, including expirations and customer compensatory claims

     1       21       39       63  
                                

Balance, end of period

   $ 462     $ 437     $ 462     $ 437  
                                

 

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SEAGATE TECHNOLOGY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

9. Equity

Issuance of Common Shares

During the nine months ended March 28, 2008, the Company issued approximately 10 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.

Repurchases of Equity Securities

During the three months ended March 28, 2008, the Company repurchased approximately 36 million of its common shares through open market repurchases at an average price of $21.79 for a total of approximately $784 million. The Company repurchased approximately $474 million under the $2.5 billion August 2006 stock repurchase plan and approximately $310 million under a new plan announced on February 4, 2008, to repurchase up to an additional $2.5 billion of the Company’s outstanding common shares over 24 months.

During the nine months ended March 28, 2008, the Company repurchased approximately 55 million of its common shares through open market repurchases at an average price of $23.12 for a total of approximately $1.3 billion. The Company repurchased approximately $974 million under the $2.5 billion August 2006 stock repurchase plan and approximately $310 million under a new plan announced on February 4, 2008, to repurchase up to an additional $2.5 billion of the Company’s outstanding common shares over 24 months. As of March 28, 2008, the Company had no amounts remaining under the August 2006 stock repurchase plan and had approximately $2.2 billion remaining under the February 2008 stock repurchase plan.

During April 2008, the Company, under a Rule 10b5-1 qualified stock repurchase plan, repurchased approximately 9.1 million of its common shares through open market repurchases at an average price of $21.36 for a total of approximately $195 million, leaving approximately $2.0 billion remaining under the February 2008 stock repurchase plan.

10. Litigation

See Part II, Item 1, “Legal Proceedings.”

 

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SEAGATE TECHNOLOGY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

11. Recently Issued Accounting Pronouncements

In March 2008, the FASB issued Statement No. 161, Disclosures about Derivative Instruments and Hedging Activities—an amendment of FASB Statement No. 133, (SFAS No. 161). The standard is intended to enhance the current disclosure framework in Statement 133, Accounting for Derivative Instruments and Hedging Activities. The standard requires that objectives for using derivative instruments be disclosed in terms of underlying risk and accounting designation. This disclosure better conveys the purpose of derivative use in terms of the risks that the entity is intending to manage. Disclosing the fair values of derivative instruments and their gains and losses in a tabular format should provide a more complete picture of the location in an entity’s financial statements of both the derivative positions existing at period end and the effect of using derivatives during the reporting period. Disclosing information about credit-risk-related contingent features should provide information on the potential effect on an entity’s liquidity from using derivatives. Finally, SFAS No. 161 requires cross-referencing within the footnotes, which should help users of financial statements locate important information about derivative instruments. SFAS No. 161 is effective for fiscal years and interim periods beginning after November 15, 2008, with early adoption encouraged. The Company is currently evaluating the impact of the pending adoption of SFAS No. 161 on its results of operations and financial condition.

In December 2007, the FASB issued Statement No. 160, Noncontrolling Interests in Consolidated Financial Statements, an amendment of ARB No. 51 (SFAS No. 160). The standard changes the accounting for noncontrolling (minority) interests in consolidated financial statements including the requirements to classify noncontrolling interests as a component of consolidated stockholders’ equity, and the elimination of “minority interest” accounting in results of operations with earnings attributable to noncontrolling interests reported as part of consolidated earnings. Additionally, SFAS No. 160 revises the accounting for both increases and decreases in a parent’s controlling ownership interest. SFAS No. 160 is effective for fiscal years beginning after December 15, 2008, with early adoption prohibited. The Company is currently evaluating the impact of the pending adoption of SFAS No. 160 on its results of operations and financial condition.

In December 2007, the FASB issued Statement No. 141 (revised), Business Combinations (SFAS No. 141(R)). The standard changes the accounting for business combinations including the measurement of acquirer shares issued in consideration for a business combination, the recognition of contingent consideration, the accounting for pre-acquisition gain and loss contingencies, the recognition of capitalized in-process research and development, the accounting for acquisition-related restructuring cost accruals, the treatment of acquisition related transaction costs and the recognition of changes in the acquirer’s income tax valuation allowance. SFAS No. 141(R) is effective for fiscal years beginning after December 15, 2008, with early adoption prohibited. The Company is currently evaluating the impact of the pending adoption of SFAS 141(R) on its results of operations and financial condition.

In June 2007, the FASB ratified Emerging Issues Task Force (EITF) 07-3, Accounting for Nonrefundable Advance Payments for Goods or Services Received for Use in Future Research and Development Activities (EITF 07-3). EITF 07-3 requires that nonrefundable advance payments for goods or services that will be used or rendered for future research and development activities be deferred and capitalized and recognized as an expense as the goods are delivered or the related services are performed. EITF 07-3 is effective, on a prospective basis, for fiscal years beginning after December 15, 2007. The Company is currently evaluating the impact of the pending adoption of EITF 07-3 on its results of operations and financial condition.

 

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SEAGATE TECHNOLOGY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities (SFAS No. 159). SFAS No. 159 permits companies to choose to measure certain financial instruments and other items at fair value. The standard requires that unrealized gains and losses are reported in earnings for items measured using the fair value option. SFAS No. 159 is effective for the Company beginning in the first quarter of fiscal year 2009. The Company is currently evaluating the effect that the adoption of SFAS No. 159 will have on its results of operations and financial condition.

In September 2006, the FASB issued SFAS No. 158, Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans — An Amendment of FASB No. 87, 88, 106 and 132(R) (SFAS No. 158). One provision of SFAS No. 158 requires that the funded status of defined benefit postretirement plans be recognized on a company’s balance sheet, and that changes in the funded status be reflected in comprehensive income, and is effective for fiscal years ending after December 15, 2006. The Company adopted this provision of SFAS No. 158 in its fiscal year ended June 29, 2007 and the adoption did not result in a material impact on its Condensed Consolidated Statements of Operations or financial condition. SFAS No. 158 also requires companies to measure the funded status of the plan as of the date of its fiscal year-end, effective for fiscal years ending after December 15, 2008. The Company expects to adopt the measurement provisions of SFAS No. 158 in its fiscal year 2010, effective July 4, 2009. The Company does not expect the adoption of the measurement provisions of SFAS No. 158 to have a significant impact on its results of operations and financial condition.

In September 2006, the FASB issued Statement No. 157, Fair Value Measurements (SFAS No. 157), which defines fair value, establishes a framework for measuring fair value and expands fair value measurement disclosures. SFAS No. 157 is effective for fiscal years beginning after November 15, 2007. In February 2008, the FASB issued FASB Staff Position No. FAS 157-1, Application of FASB Statement No. 157 to FASB Statement No. 13 and Other Accounting Pronouncements That Address Fair Value Measurements for Purposes of Lease Classification or Measurement under Statement 13 and FASB Staff Position No. FAS 157-2, Effective Date of FASB Statement No. 157. Collectively, the Staff Positions defer the effective date of SFAS No. 157 to fiscal years beginning after November 15, 2008, for nonfinancial assets and nonfinancial liabilities except for items that are recognized or disclosed at fair value on a recurring basis at least annually, and amend the scope of SFAS No. 157. The Company is currently evaluating the impact of the pending adoption of SFAS No. 157 on its results of operations and financial condition.

 

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SEAGATE TECHNOLOGY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

12. Condensed Consolidating Financial Information

The Company has guaranteed obligations of Seagate Technology HDD Holdings (“HDD”) under senior notes totaling $1.5 billion comprised of $300 million aggregate principal amount of Floating Rate Senior Notes due October 2009 (the “2009 Notes”), $600 million aggregate principal amount of 6.375% Senior Notes due October 2011 (the “2011 Notes”) and $600 million aggregate principal amount of 6.8% Senior Notes due October 2016 (the “2016 Notes”, and together with the 2009 Notes and the 2011 Notes, the “Senior Notes”), on a full and unconditional basis, and prior to October 25, 2006 when the Company’s 8% Senior Notes due May 2009 (“8% Notes”) were redeemed, the Company had guaranteed HDD’s obligations under the 8% Notes. The following tables present parent guarantor, subsidiary issuer and combined non-guarantors Condensed Consolidating Balance Sheets of the Company and its subsidiaries at March 28, 2008 and June 29, 2007, the Condensed Consolidating Statements of Operations for the three and nine months ended March 28, 2008 and March 30, 2007, and the Condensed Consolidating Statements of Cash Flows for the nine months ended March 28, 2008 and March 30, 2007. The information classifies the Company’s subsidiaries into Seagate Technology-parent company guarantor, HDD-subsidiary issuer, and the Combined Non-Guarantors based upon the classification of those subsidiaries. Under each of these instruments, dividends paid by HDD or its restricted subsidiaries would constitute restricted payments and loans between the Company and HDD or its restricted subsidiaries would constitute affiliate transactions. Certain intercompany balances have been reclassified to conform to the current presentation.

 

24


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SEAGATE TECHNOLOGY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

12. Condensed Consolidating Financial Information (continued)

Consolidating Balance Sheet

March 28, 2008

(In millions)

 

     Seagate
Technology
Parent
Company
Guarantor
   HDD
Subsidiary
Issuer
   Combined
Non-
Guarantors
   Eliminations     Seagate
Technology
Consolidated

Cash and cash equivalents

   $ 34    $ —      $ 1,109    $ —       $ 1,143

Short-term investments

     —        —        140      —         140

Accounts receivable, net

     —        —        1,355      (4 )     1,351

Intercompany receivable

     —        —        23      (23 )     —  

Inventories

     —        —        1,073      —         1,073

Other current assets

     —        —        900      —         900
                                   

Total Current Assets

     34      —        4,600      (27 )     4,607

Property, equipment and leasehold improvements, net

     —        —        2,357      —         2,357

Goodwill

     —        —        2,366      —         2,366

Other intangible assets, net

     —        —        132      —         132

Equity investment in HDD

     7,597      —        —        (7,597 )     —  

Equity investments in Non-Guarantors

     —        6,156      284      (6,440 )     —  

Intercompany note receivable

     —        2,968      628      (3,596 )     —  

Other assets, net

     —        14      937      —         951
                                   

Total Assets

   $ 7,631    $ 9,138    $ 11,304    $ (17,660 )   $ 10,413
                                   

Accounts payable

   $ —      $ —      $ 1,919    $ (4 )   $ 1,915

Intercompany payable

     —        —        23      (23 )     —  

Accrued employee compensation

     —        —        380      —         380

Accrued expenses

     —        44      759      —         803

Accrued income taxes

     —        —        11      —         11

Current portion of long-term debt

     —        —        345      —         345
                                   

Total Current Liabilities

     —        44      3,437      (27 )     3,454

Other non-current liabilities

     —        —        399      —         399

Intercompany note payable

     2,968      —        628      (3,596 )     —  

Long-term accrued income taxes

     —        —        212      —         212

Long-term debt, less current portion

     —        1,497      188      —         1,685

Liability for deficit of Maxtor

     —        —        593      (593 )     —  
                                   

Total Liabilities

     2,968      1,541      5,457      (4,216 )     5,750
                                   

Shareholders’ Equity

     4,663      7,597      5,847      (13,444 )     4,663
                                   

Total Liabilities and Shareholders’ Equity

   $ 7,631    $ 9,138    $ 11,304    $ (17,660 )   $ 10,413
                                   

 

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Table of Contents

SEAGATE TECHNOLOGY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

12. Condensed Consolidating Financial Information (continued)

Consolidating Balance Sheet

June 29, 2007

(In millions)

 

     Seagate
Technology
Parent
Company
Guarantor
   HDD
Subsidiary
Issuer
   Combined
Non-
Guarantors
   Eliminations     Seagate
Technology
Consolidated

Cash and cash equivalents

   $ 4    $ —      $ 984    $ —       $ 988

Short-term investments

     —        —        156      —         156

Accounts receivable, net

     —        —        1,401      (18 )     1,383

Intercompany receivable

     —        —        30      (30 )     —  

Inventories

     —        —        794      —         794

Other current assets

     —        —        480      —         480
                                   

Total Current Assets

     4      —        3,845      (48 )     3,801

Property, equipment and leasehold improvements, net

     —        —        2,278      —         2,278

Goodwill

     —        —        2,300      —         2,300

Other intangible assets, net

     —        —        188      —         188

Equity investment in HDD

     6,401      —        —        (6,401 )     —  

Equity investments in Non-Guarantors

     —        6,244      292      (6,536 )     —  

Intercompany note receivable

     —        1,661      541      (2,202 )     —  

Other assets, net

     —        17      888      —         905
                                   

Total Assets

   $ 6,405    $ 7,922    $ 10,332    $ (15,187 )   $ 9,472
                                   

Accounts payable

   $ —      $ —      $ 1,319    $ (18 )   $ 1,301

Intercompany payable

     6      —        24      (30 )     —  

Accrued employee compensation

     —        —        157      —         157

Accrued expenses

     1      25      760      —         786

Accrued income taxes

     —        —        75      —         75

Current portion of long-term debt

     —        —        330      —         330
                                   

Total Current Liabilities

     7      25      2,665      (48 )     2,649

Other non-current liabilities

     —        —        353      —         353

Intercompany note payable

     1,661      —        541      (2,202 )     —  

Long-term debt, less current portion

     —        1,496      237      —         1,733

Liability for deficit of Maxtor

     —        —        543      (543 )     —  
                                   

Total Liabilities

     1,668      1,521      4,339      (2,793 )     4,735
                                   

Shareholders’ Equity

     4,737      6,401      5,993      (12,394 )     4,737
                                   

Total Liabilities and Shareholders’ Equity

   $ 6,405    $ 7,922    $ 10,332    $ (15,187 )   $ 9,472
                                   

 

26


Table of Contents

SEAGATE TECHNOLOGY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

12. Condensed Consolidating Financial Information (continued)

Consolidating Statement of Operations

Three Months Ended March 28, 2008

(In millions)

 

     Seagate
Technology
Parent
Company
Guarantor
   HDD
Subsidiary
Issuer
    Combined
Non-
Guarantors
    Eliminations     Seagate
Technology
Consolidated
 

Revenue

   $ —      $ —       $ 3,104     $ —       $ 3,104  

Cost of revenue

     —        —         2,288       —         2,288  

Product development

     —        —         254       —         254  

Marketing and administrative

        —         164       —         164  

Amortization of intangibles

     —        —         15       —         15  

Restructuring and other, net

     —        —         20       —         20  
                                       

Total operating expenses

     —        —         2,741       —         2,741  
                                       

Income from operations

     —        —         363       —         363  

Interest income

     —        —         24       (8 )     16  

Interest expense

     —        (22 )     (16 )     8       (30 )

Equity in income of HDD

     344      —         —         (344 )     —    

Equity in income (loss) of Non-Guarantors

     —        366       (8 )     (358 )     —    
                                       

Other income (expense), net

     344      344       —         (702 )     (14 )
                                       

Income before income taxes

     344      344       363       (702 )     349  

Provision for income taxes

     —        —         5       —         5  
                                       

Net income

   $ 344    $ 344     $ 358     $ (702 )   $ 344  
                                       

 

27


Table of Contents

SEAGATE TECHNOLOGY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

12. Condensed Consolidating Financial Information (continued)

Consolidating Statement of Operations

Nine Months Ended March 28, 2008

(In millions)

 

     Seagate
Technology
Parent
Company
Guarantor
    HDD
Subsidiary
Issuer
    Combined
Non-
Guarantors
    Eliminations     Seagate
Technology
Consolidated
 

Revenue

   $ —       $ —       $ 9,809     $ —       $ 9,809  

Cost of revenue

     —         —         7,295       —         7,295  

Product development

     —         —         758       —         758  

Marketing and administrative

     1       —         483       —         484  

Amortization of intangibles

     —         —         41       —         41  

Restructuring and other, net

     —         —         52       —         52  
                                        

Total operating expenses

     1       —         8,629       —         8,630  
                                        

(Loss) income from operations

     (1 )     —         1,180       —         1,179  

Interest income

     —         —         79       (28 )     51  

Interest expense

     —         (69 )     (55 )     28       (96 )

Equity in income of HDD

     1,103       —         —         (1,103 )     —    

Equity in income (loss) of Non-Guarantors

     —         1,172       (55 )     (1,117 )     —    

Other, net

     —         —         13       —         13  
                                        

Other income (expense), net

     1,103       1,103       (18 )     (2,220 )     (32 )
                                        

Income before income taxes

     1,102       1,103       1,162       (2,220 )     1,147  

Provision for income taxes

     —         —         45       —         45  
                                        

Net income

   $ 1,102     $ 1,103     $ 1,117     $ (2,220 )   $ 1,102  
                                        

 

28


Table of Contents

SEAGATE TECHNOLOGY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

12. Condensed Consolidating Financial Information (continued)

Consolidating Statement of Cash Flows

Nine Months Ended March 28, 2008

(In millions)

 

     Seagate
Technology
Parent
Company
Guarantor
    HDD
Subsidiary
Issuer
    Combined
Non-
Guarantors
    Eliminations     Seagate
Technology
Consolidated
 

OPERATING ACTIVITIES

          

Net income

   $ 1,102     $ 1,103     $ 1,117     $ (2,220 )   $ 1,102  

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

          

Depreciation and amortization

     —         —         631       —         631  

Stock-based compensation

     —         —         86       —         86  

Equity in (income) of HDD

     (1,103 )     —         —         1,103       —    

Equity in (income) loss of Non-Guarantors

     —         (1,172 )     55       1,117       —    

Other non-cash operating activities, net

     —         4       3       —         7  

Changes in operating assets and liabilities, net

     (5 )     17       305       —         317  
                                        

Net cash (used in) provided by operating activities

     (6 )     (48 )     2,197       —         2,143  

INVESTING ACTIVITIES

          

Acquisition of property, equipment and leasehold improvements

     —         —         (637 )     —         (637 )

Purchase of short-term investments

     —         —         (439 )     —         (439 )

Maturities and sales of short-term investments

     —         —         425       —         425  

Acquisitions, net of cash and cash equivalents acquired

     —         —         (78 )     —         (78 )

Other investing activities, net

     —         —         44       —         44  
                                        

Net cash used in investing activities

     —         —         (685 )     —         (685 )

FINANCING ACTIVITIES

          

Loan from HDD to Parent

     1,307       (1,307 )     —         —         —    

Repayment of debt

     —         —         (34 )     —         (34 )

Investment by HDD in Non-Guarantor

     —         (5 )     5       —         —    

Distribution from Non-Guarantor to HDD

     —         1,360       (1,360 )     —         —    

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

     172       —         —         —         172  

Dividends to shareholders

     (159 )     —         —         —         (159 )

Repurchase of common shares

     (1,284 )     —         —         —         (1,284 )

Other financing activities, net

     —         —         2       —         2  
                                        

Net cash provided by (used in) financing activities

     36       48       (1,387 )     —         (1,303 )
                                        

Increase in cash and cash equivalents

     30       —         125       —         155  

Cash and cash equivalents at the beginning of the period

     4       —         984       —         988  
                                        

Cash and cash equivalents at the end of the period

   $ 34     $ —       $ 1,109     $ —       $ 1,143  
                                        

 

29


Table of Contents

SEAGATE TECHNOLOGY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

12. Condensed Consolidating Financial Information (continued)

Consolidating Statement of Operations

Three Months Ended March 30, 2007

(In millions)

 

     Seagate
Technology
Parent
Company
Guarantor
   HDD
Subsidiary
Issuer
    Combined
Non-
Guarantors
    Eliminations     Seagate
Technology
Consolidated
 

Revenue

   $ —      $ —       $ 2,882     $ (54 )   $ 2,828  

Cost of revenue

     —        —         2,279       (54 )     2,225  

Product development

     —        —         214       —         214  

Marketing and administrative

     —        —         126       —         126  

Amortization of intangibles

     —        —         13       —         13  

Restructuring

     —        —         3       —         3  
                                       

Total operating expenses

     —        —         2,635       (54 )     2,581  
                                       

Income from operations

     —        —         247       —         247  

Interest income

     —        2       22       (9 )     15  

Interest expense

     —        (25 )     (17 )     9       (33 )

Equity in income of HDD

     212      —         —         (212 )     —    

Equity in income of Non-Guarantors

     —        235       26       (261 )     —    

Other, net

     —        —         1       —         1  
                                       

Other income (expense), net

     212      212       32       (473 )     (17 )
                                       

Income before income taxes

     212      212       279       (473 )     230  

Provision for income taxes

     —        —         18       —         18  
                                       

Net income

   $ 212    $ 212     $ 261     $ (473 )   $ 212  
                                       

 

30


Table of Contents

SEAGATE TECHNOLOGY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

12. Condensed Consolidating Financial Information (continued)

Consolidating Statement of Operations

Nine Months Ended March 30, 2007

(In millions)

 

     Seagate
Technology
Parent
Company
Guarantor
    HDD
Subsidiary
Issuer
    Combined
Non-
Guarantors
    Eliminations     Seagate
Technology
Consolidated
 

Revenue

   $ —       $ —       $ 9,534     $ (918 )   $ 8,616  

Cost of revenue

     —         —         7,943       (918 )     7,025  

Product development

     —         —         683       —         683  

Marketing and administrative

     2       —         444       —         446  

Amortization of intangibles

     —         —         36       —         36  
                                        

Total operating expenses

     2       —         9,106       (918 )     8,190  
                                        

(Loss) income from operations

     (2 )     —         428       —         426  

Interest income

     1       20       81       (43 )     59  

Interest expense

     (2 )     (97 )     (51 )     43       (107 )

Equity in income of HDD

     374       —         —         (374 )     —    

Equity in income (loss) of Non-Guarantors

     —         451       (516 )     65       —    

Other, net

     —         —         11       —         11  
                                        

Other income (expense), net

     373       374       (475 )     (309 )     (37 )
                                        

Income (loss) before income taxes

     371       374       (47 )     (309 )     389  

Provision for income taxes

     —         —         18       —         18  
                                        

Net income (loss)

   $ 371     $ 374     $ (65 )   $ (309 )   $ 371  
                                        

 

31


Table of Contents

SEAGATE TECHNOLOGY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

12. Condensed Consolidating Financial Information (continued)

Consolidating Statement of Cash Flows

Nine Months Ended March 30, 2007

(In millions)

 

     Seagate
Technology
Parent
Company
Guarantor
    HDD
Subsidiary
Issuer
    Combined
Non-
Guarantors
    Eliminations     Seagate
Technology
Consolidated
 

OPERATING ACTIVITIES

          

Net income (loss)

   $ 371     $ 374     $ (65 )   $ (309 )   $ 371  

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

          

Depreciation and amortization

     —         —         650       —         650  

Stock-based compensation

     —         —         101       —         101  

Allowance for doubtful accounts receivable

     —         —         42       —         42  

Redemption of 8% Senior Notes due 2009

     —         19       —         —         19  

In-process research and development

     —         —         4       —         4  

Equity in income of HDD

     (374 )     —         —         374       —    

Equity in (income) loss of Non-Guarantors

     —         (451 )     516       (65 )     —    

Other non-cash operating activities, net

     —         1       15       —         16  

Changes in operating assets and liabilities, net

     (24 )     39       (648 )     —         (633 )
                                        

Net cash (used in) provided by operating activities

     (27 )     (18 )     615       —         570  

INVESTING ACTIVITIES

          

Acquisition of property, equipment and leasehold improvements

     —         —         (688 )     —         (688 )

Proceeds from sales of fixed assets

     —         —         29       —         29  

Purchase of short-term investments

     —         (85 )     (237 )     —         (322 )

Maturities and sales of short-term investments

     —         85       766       —         851  

Acquisitions, net of cash and cash equivalents acquired

     —         —         (178 )     —         (178 )

Other investing activities, net

     —         —         (44 )     —         (44 )
                                        

Net cash used in investing activities

     —         —         (352 )     —         (352 )

FINANCING ACTIVITIES

          

Net proceeds from issuance of long-term debt

     —         1,477       —         —         1,477  

Repayment of debt

     —         —         (5 )     —         (5 )

Redemption of 8% Senior Notes due 2009

     —         (400 )     —         —         (400 )

Redemption premium on 8% Senior Notes due 2009

     —         (16 )     —         —         (16 )

Loan from HDD to Parent

     1,310       (1,310 )     —         —         —    

Loan repayment to HDD from Non-Guarantor

     —         329       (329 )     —         —    

Loan repayment to Non-Guarantor from HDD

     —         (839 )     839       —         —    

Distribution from Non-Guarantor to HDD

     —         859       (859 )     —         —    

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

     207       —         —         —         207  

Dividends to shareholders

     (158 )     —         —         —         (158 )

Repurchases of common shares and payments made under prepaid forward agreements

     (1,324 )     —         —         —         (1,324 )
                                        

Net cash provided by (used in) financing activities

     35       100       (354 )     —         (219 )
                                        

Increase (decrease) in cash and cash equivalents

     8       82       (91 )     —         (1 )

Cash and cash equivalents at the beginning of the period

     —         1       909       —         910  
                                        

Cash and cash equivalents at the end of the period

   $ 8     $ 83     $ 818     $ —       $ 909  
                                        

 

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SEAGATE TECHNOLOGY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

12. Condensed Consolidating Financial Information (continued)

On May 19, 2006, in connection with the acquisition of Maxtor, the Company, Maxtor and the trustee under the indenture for the 2.375% Notes and 6.8% Notes entered into a supplemental indenture pursuant to which such notes became convertible into the Company’s common shares. In addition, the Company agreed to fully and unconditionally guarantee the 2.375% Notes and 6.8% Notes on a senior unsecured basis. The Company’s obligations under its guarantee rank in right of payment with all of its existing and future senior unsecured indebtedness. The indenture does not contain any financial covenants and does not restrict Maxtor from paying dividends, incurring additional indebtedness or issuing or repurchasing its other securities. The following tables present parent guarantor, subsidiary issuer and combined non-guarantors Condensed Consolidating Balance Sheets of the Company and its subsidiaries at March 28, 2008 and June 29, 2007, the Condensed Consolidating Statements of Operations for the three and nine months ended March 28, 2008 and March 30, 2007, and the Condensed Consolidating Statements of Cash Flows for the nine months ended March 28, 2008 and March 30, 2007. The information classifies the Company’s subsidiaries into Seagate Technology-parent company guarantor, Maxtor-subsidiary issuer and the Combined Non-Guarantors based on the classification of those subsidiaries under the terms of the 2.375% Notes and 6.8% Notes. Certain intercompany balances have been reclassified to conform to the current presentation.

 

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SEAGATE TECHNOLOGY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

12. Condensed Consolidating Financial Information (continued)

Consolidating Balance Sheet

March 28, 2008

(In millions)

 

     Seagate
Technology
Parent
Company
Guarantor
   Maxtor
Subsidiary
Issuer
    Combined
Non-
Guarantors
   Eliminations     Seagate
Technology
Consolidated

Cash and cash equivalents

   $ 34    $ 1     $ 1,108    $ —       $ 1,143

Short-term investments

     —        —         140      —         140

Accounts receivable, net

     —        —         1,355      (4 )     1,351

Intercompany receivable

     —        —         23      (23 )     —  

Inventories

     —          1,073      —         1,073

Other current assets

     —        120       780      —         900
                                    

Total Current Assets

     34      121       4,479      (27 )     4,607

Property, equipment and leasehold improvements, net

     —        5       2,352      —         2,357

Goodwill

     —        —         2,366      —         2,366

Other intangible assets, net

     —        —         132      —         132

Equity investments in Non-Guarantors

     7,597      284       6,156      (14,037 )     —  

Intercompany note receivable

     —        —         3,596      (3,596 )     —  

Other assets, net

     —        378       573      —         951
                                    

Total Assets

   $ 7,631    $ 788     $ 19,654    $ (17,660 )   $ 10,413
                                    

Accounts payable

   $ —      $ 4     $ 1,915    $ (4 )   $ 1,915

Intercompany payable

     —        23       —        (23 )     —  

Accrued employee compensation

     —        —         380      —         380

Accrued expenses

     —        22       781      —         803

Accrued income taxes

     —        6       5      —         11

Current portion of long-term debt

     —        330       15      —         345
                                    

Total Current Liabilities

        385       3,096      (27 )     3,454

Other non-current liabilities

     —        64       335      —         399

Intercompany note payable

     2,968      628       —        (3,596 )     —  

Long-term accrued income taxes

     —        132       80      —         212

Long-term debt, less current portion

     —        172       1,513      —         1,685

Liability for deficit of Maxtor

     —        —         593      (593 )     —  
                                    

Total Liabilities

     2,968      1,381       5,617      (4,216 )     5,750
                                    

Shareholders’ Equity (Deficit)

     4,663      (593 )     14,037      (13,444 )     4,663
                                    

Total Liabilities and Shareholders’ Equity

   $ 7,631    $ 788     $ 19,654    $ (17,660 )   $ 10,413
                                    

 

34


Table of Contents

SEAGATE TECHNOLOGY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

12. Condensed Consolidating Financial Information (continued)

Consolidating Balance Sheet

June 29, 2007

(In millions)

 

     Seagate
Technology
Parent
Company
Guarantor
   Maxtor
Subsidiary
Issuer
    Combined
Non-
Guarantors
   Eliminations     Seagate
Technology
Consolidated

Cash and cash equivalents

   $ 4    $ 3     $ 981    $ —       $ 988

Short-term investments

     —        —         156      —         156

Accounts receivable, net

     —        —         1,401      (18 )     1,383

Intercompany receivable

     —        —         30      (30 )     —  

Inventories

     —        3       791      —         794

Other current assets

     —        74       406      —         480
                                    

Total Current Assets

     4      80       3,765      (48 )     3,801

Property, equipment and leasehold improvements, net

     —        17       2,261      —         2,278

Goodwill

     —        —         2,300      —         2,300

Other intangible assets, net

     —        —         188      —         188

Equity investments in Non-Guarantors

     6,401      292       6,244      (12,937 )     —  

Intercompany note receivable

     —        —         2,202      (2,202 )     —  

Other assets, net

     —        308       597      —         905
                                    

Total Assets

   $ 6,405    $ 697     $ 17,557    $ (15,187 )   $ 9,472
                                    

Accounts payable

   $ —      $ 18     $ 1,301    $ (18 )   $ 1,301

Intercompany payable

     6      24       —        (30 )     —  

Accrued employee compensation

     —        —         157      —         157

Accrued expenses

     1      58       727      —         786

Accrued income taxes

     —        14       61      —         75

Current portion of long-term debt

     —        330       —        —         330
                                    

Total Current Liabilities

     7      444       2,246      (48 )     2,649

Other non-current liabilities

     —        79       274      —         353

Intercompany note payable

     1,661      541       —        (2,202 )     —  

Long-term debt, less current portion

     —        176       1,557      —         1,733

Liability for deficit of Maxtor

     —        —         543      (543 )     —  
                                    

Total Liabilities

     1,668      1,240       4,620      (2,793 )     4,735
                                    

Shareholders’ Equity (Deficit)

     4,737      (543 )     12,937      (12,394 )     4,737
                                    

Total Liabilities and Shareholders’ Equity

   $ 6,405    $ 697     $ 17,557    $ (15,187 )   $ 9,472
                                    

 

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SEAGATE TECHNOLOGY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

12. Condensed Consolidating Financial Information (continued)

Consolidating Statement of Operations

Three Months Ended March 28, 2008

(In millions)

 

     Seagate
Technology
Parent
Company
Guarantor
   Maxtor
Subsidiary
Issuer
    Combined
Non-
Guarantors
    Eliminations     Seagate
Technology
Consolidated
 

Revenue

   $ —      $ 1     $ 3,103     $ —       $ 3,104  

Cost of revenue

     —        2       2,286       —         2,288  

Product development

     —        2       252       —         254  

Marketing and administrative

     —        1       163       —         164  

Amortization of intangibles

     —        —         15       —         15  

Restructuring and other, net

     —        —         20       —         20  
                                       

Total operating expenses

     —        5       2,736       —         2,741  
                                       

Income (loss) from operations

     —        (4 )     367       —         363  

Interest income

     —        —         24       (8 )     16  

Interest expense

     —        (15 )     (23 )     8       (30 )

Equity in loss of Maxtor

     —        —         (12 )     12       —    

Equity in income of Non-Guarantors

     344      4       366       (714 )     —    

Other, net

     —        4       (4 )     —         —    
                                       

Other income (expense), net

     344      (7 )     351       (702 )     (14 )
                                       

Income (loss) before income taxes

     344      (11 )     718       (702 )     349  

Provision for income taxes

     —        1       4       —         5  
                                       

Net income (loss)

   $ 344    $ (12 )   $ 714     $ (702 )   $ 344  
                                       

 

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SEAGATE TECHNOLOGY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

12. Condensed Consolidating Financial Information (continued)

Consolidating Statement of Operations

Nine Months Ended March 28, 2008

(In millions)

 

     Seagate
Technology
Parent
Company
Guarantor
    Maxtor
Subsidiary
Issuer
    Combined
Non-
Guarantors
    Eliminations     Seagate
Technology
Consolidated
 

Revenue

   $ —       $ 9     $ 9,800     $ —       $ 9,809  

Cost of revenue

     —         12       7,283       —         7,295  

Product development

     —         7       751       —         758  

Marketing and administrative

     1       7       476       —         484  

Amortization of intangibles

     —         —         41       —         41  

Restructuring and other, net

     —         —         52       —         52  
                                        

Total operating expenses

     1       26       8,603       —         8,630  
                                        

(Loss) income from operations

     (1 )     (17 )     1,197       —         1,179  

Interest income

     —         —         79       (28 )     51  

Interest expense

     —         (49 )     (75 )     28       (96 )

Equity in loss of Maxtor

     —         —         (58 )     58       —    

Equity in income of Non-Guarantors

     1,103       3       1,172       (2,278 )     —    

Other, net

     —         6       7       —         13  
                                        

Other income (expense), net

     1,103       (40 )     1,125       (2,220 )     (32 )
                                        

Income (loss) before income taxes

     1,102       (57 )     2,322       (2,220 )     1,147  

Provision for income taxes

     —         1       44       —         45  
                                        

Net income (loss)

   $ 1,102     $ (58 )   $ 2,278     $ (2,220 )   $ 1,102  
                                        

 

37


Table of Contents

SEAGATE TECHNOLOGY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

12. Condensed Consolidating Financial Information (continued)

Consolidating Statement of Cash Flows

Nine Months Ended March 28, 2008

(In millions)

 

     Seagate
Technology
Parent
Company
Guarantor
    Maxtor
Subsidiary
Issuer
    Combined
Non-
Guarantors
    Eliminations     Seagate
Technology
Consolidated
 

OPERATING ACTIVITIES

          

Net income (loss)

   $ 1,102     $ (58 )   $ 2,278     $ (2,220 )   $ 1,102  

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

          

Depreciation and amortization

     —         3       628       —         631  

Stock-based compensation

     —         11       75       —         86  

Equity in loss of Maxtor

     —         —         58       (58 )     —    

Equity in (income) loss of Non-Guarantors

     (1,103 )     (3 )     (1,172 )     2,278       —    

Other non-cash operating activities, net

     —         7       —         —         7  

Changes in operating assets and liabilities, net

     (5 )     (61 )     383       —         317  
                                        

Net cash (used in) provided by operating activities

     (6 )     (101 )     2,250       —         2,143  

INVESTING ACTIVITIES

          

Acquisition of property, equipment and leasehold improvements

     —         —         (637 )     —         (637 )

Purchase of short-term investments

     —         —         (439 )     —         (439 )

Maturities and sales of short-term investments

     —         —         425       —         425  

Acquisitions, net of cash and cash equivalents acquired

     —         —         (78 )     —         (78 )

Other investing activities, net

     —         7       37       —         44  
                                        

Net cash used in investing activities

     —         7       (692 )     —         (685 )

FINANCING ACTIVITIES

          

Loan from Non-Guarantor to Parent

     1,307       —         (1,307 )     —         —    

Repayment of debt

     —         (5 )     (29 )     —         (34 )

Loan from Non-Guarantor to Maxtor

     —         87       (87 )     —         —    

Distribution from Non-Guarantor to HDD

     —         —         (1,360 )     1,360       —    

Distribution to HDD from Non-Guarantor

     —         —         1,360       (1,360 )     —    

Distribution from Non-Guarantor to Maxtor

     —         10       (10 )     —         —    

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

     172       —         —         —         172  

Dividends to shareholders

     (159 )     —         —         —         (159 )

Repurchases of common shares

     (1,284 )     —         —         —         (1,284 )

Other financing activities, net

     —         —         2       —         2  
                                        

Net cash provided by (used in) financing activities

     36       92       (1,431 )     —         (1,303 )
                                        

Increase (decrease) in cash and cash equivalents

     30       (2 )     127       —         155  

Cash and cash equivalents at the beginning of the period

     4       3       981       —         988  
                                        

Cash and cash equivalents at the end of the period

   $ 34     $ 1     $ 1,108     $ —       $ 1,143  
                                        

 

38


Table of Contents

SEAGATE TECHNOLOGY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

12. Condensed Consolidating Financial Information (continued)

Consolidating Statement of Operations

Three Months Ended March 30, 2007

(In millions)

 

     Seagate
Technology
Parent
Company
Guarantor
   Maxtor
Subsidiary
Issuer
    Combined
Non-
Guarantors
    Eliminations     Seagate
Technology
Consolidated
 

Revenue

   $ —      $ 82     $ 2,800     $ (54 )   $ 2,828  

Cost of revenue

     —        75       2,204       (54 )     2,225  

Product development

     —        3       211       —         214  

Marketing and administrative

     —        6       120       —         126  

Amortization of intangibles

     —        —         13       —         13  

Restructuring

     —        —         3       —         3  
                                       

Total operating expenses

     —        84       2,551       (54 )     2,581  
                                       

(Loss) income from operations

     —        (2 )     249       —         247  

Interest income

     —        —         25       (10 )     15  

Interest expense

     —        (16 )     (27 )     10       (33 )

Equity in income of Maxtor

     —        —         4       (4 )     —    

Equity in income (loss) of Non-Guarantors

     212      22       234       (468 )     —    

Other, net

     —        —         1       —         1  
                                       

Other income (expense), net

     212      6       237       (472 )     (17 )
                                       

Income before income taxes

     212      4       486       (472 )     230  

Provision for income taxes

     —        —         18       —         18  
                                       

Net income

   $ 212    $ 4     $ 468     $ (472 )   $ 212  
                                       

 

39


Table of Contents

SEAGATE TECHNOLOGY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

12. Condensed Consolidating Financial Information (continued)

Consolidating Statement of Operations

Nine Months Ended March 30, 2007

(In millions)

 

     Seagate
Technology
Parent
Company
Guarantor
    Maxtor
Subsidiary
Issuer
    Combined
Non-
Guarantors
    Eliminations     Seagate
Technology
Consolidated
 

Revenue

   $ —       $ 343     $ 9,191     $ (918 )   $ 8,616  

Cost of revenue

     —         426       7,517       (918 )     7,025  

Product development

     —         10       673       —         683  

Marketing and administrative

     2       29       415       —         446  

Amortization of intangibles

     —         7       29       —         36  
                                        

Total operating expenses

     2       472       8,634       (918 )     8,190  
                                        

(Loss) income from operations

     (2 )     (129 )     557       —         426  

Interest income

     1       1       99       (42 )     59  

Interest expense

     (2 )     (48 )     (99 )     42       (107 )

Equity in loss of Maxtor

     —         —         (346 )     346       —    

Equity in income (loss) of Non-Guarantors

     374       (170 )     452       (656 )     —    

Other, net

     —         —         11       —         11  
                                        

Other income (expense), net

     373       (217 )     117       (310 )     (37 )
                                        

Income (loss) before income taxes

     371       (346 )     674       (310 )     389  

Provision for income taxes

     —         —         18       —         18  
                                        

Net income (loss)

   $ 371     $ (346 )   $ 656     $ (310 )   $ 371  
                                        

 

40


Table of Contents

SEAGATE TECHNOLOGY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

12. Condensed Consolidating Financial Information (continued)

Consolidating Statement of Cash Flows

Nine Months Ended March 30, 2007

(In millions)

 

     Seagate
Technology
Parent
Company
Guarantor
    Maxtor
Subsidiary
Issuer
    Combined
Non-
Guarantors
    Eliminations     Seagate
Technology
Consolidated
 

OPERATING ACTIVITIES

          

Net income (loss)

   $ 371     $ (346 )