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 September 28, 2012

 

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

 

For the transition period from:                  to

 

Commission File Number 001-31560

 

SEAGATE TECHNOLOGY PUBLIC LIMITED COMPANY

(Exact name of registrant as specified in its charter)

 

Ireland

 

98-0648577

(State or other jurisdiction of

 

(I.R.S. Employer

incorporation or organization)

 

Identification Number)

 

38/39 Fitzwilliam Square

Dublin 2, Ireland

(Address of principal executive offices)

 

Telephone:  (353) (1) 234-3136

(Registrant’s telephone number, including area code)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x  No o

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x  No o

 

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

 

Large accelerated filer: x

 

Accelerated filer: o

 

 

 

Non-accelerated filer: o

 

Smaller reporting company: o

(Do not check if a smaller reporting company)

 

 

 

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

 

As of October 26, 2012, 377,494,162 shares of the registrant’s ordinary shares, par value $0.00001 per share, were issued and outstanding.

 

 

 



Table of Contents

 

INDEX

 

SEAGATE TECHNOLOGY PLC

 

 

 

PAGE NO.

 

 

 

PART I

FINANCIAL INFORMATION

 

 

 

 

Item 1.

Financial Statements

 

 

 

 

 

Condensed Consolidated Balance Sheets — September 28, 2012 and June 29, 2012 (Unaudited)

3

 

 

 

 

Condensed Consolidated Statements of Operations — Three Months ended September 28, 2012 and September 30, 2011 (Unaudited)

4

 

 

 

 

Condensed Consolidated Statements of Comprehensive Income — Three Months ended September 28, 2012 and September 30, 2011 (Unaudited)

5

 

 

 

 

Condensed Consolidated Statements of Cash Flows — Three Months ended September 28, 2012 and September 30, 2011 (Unaudited)

6

 

 

 

 

Condensed Consolidated Statement of Shareholders’ Equity — Three Months ended September 28, 2012 (Unaudited)

7

 

 

 

 

Notes to Condensed Consolidated Financial Statements (Unaudited)

8

 

 

 

Item 2.

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

29

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

35

 

 

 

Item 4.

Controls and Procedures

37

 

 

 

PART II

OTHER INFORMATION

 

 

 

 

Item 1.

Legal Proceedings

38

 

 

 

Item 1A.

Risk Factors

38

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

38

 

 

 

Item 3.

Defaults Upon Senior Securities

38

 

 

 

Item 4.

Mine Safety Disclosures

38

 

 

 

Item 5.

Other Information

38

 

 

 

Item 6.

Exhibits

39

 

 

 

 

SIGNATURES

40

 

 

2



Table of Contents

 

PART I

FINANCIAL INFORMATION

 

ITEM 1.  FINANCIAL STATEMENTS

 

SEAGATE TECHNOLOGY PLC

CONDENSED CONSOLIDATED BALANCE SHEETS

(In millions)

(Unaudited)

 

 

 

September 28,
2012

 

June 29,
2012

 

ASSETS

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

1,894

 

$

1,707

 

Short-term investments

 

476

 

411

 

Restricted cash and investments

 

100

 

93

 

Accounts receivable, net

 

1,684

 

2,319

 

Inventories

 

845

 

909

 

Deferred income taxes

 

112

 

104

 

Other current assets

 

638

 

767

 

Total current assets

 

5,749

 

6,310

 

Property, equipment and leasehold improvements, net

 

2,243

 

2,284

 

Goodwill

 

475

 

463

 

Other intangible assets, net

 

517

 

506

 

Deferred income taxes

 

403

 

396

 

Other assets, net

 

135

 

147

 

Total Assets

 

$

9,522

 

$

10,106

 

LIABILITIES AND EQUITY

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Accounts payable

 

$

1,808

 

$

2,286

 

Accrued employee compensation

 

217

 

344

 

Accrued warranty

 

209

 

235

 

Accrued expenses

 

516

 

531

 

Current portion of long-term debt

 

3

 

 

Total current liabilities

 

2,753

 

3,396

 

Long-term accrued warranty

 

128

 

128

 

Long-term accrued income taxes

 

87

 

84

 

Other non-current liabilities

 

152

 

138

 

Long-term debt, less current portion

 

2,867

 

2,863

 

Total Liabilities

 

5,987

 

6,609

 

Commitments and contingencies (See Notes 11 and 13)

 

 

 

 

 

Equity:

 

 

 

 

 

Seagate Technology plc Shareholders’ Equity:

 

 

 

 

 

Ordinary shares and additional paid-in capital

 

5,124

 

4,950

 

Accumulated other comprehensive income (loss)

 

17

 

(9

)

Accumulated deficit

 

(1,658

)

(1,444

)

Total Seagate Technology plc Shareholders’ Equity

 

3,483

 

3,497

 

Noncontrolling interest

 

52

 

 

Total Equity

 

3,535

 

3,497

 

Total Liabilities and Equity

 

$

9,522

 

$

10,106

 

 

The information as of June 29, 2012 was derived from the Company’s audited Consolidated Balance Sheet as of June 29, 2012.

 

See Notes to Condensed Consolidated Financial Statements.

 

3



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SEAGATE TECHNOLOGY PLC

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In millions, except per share data)

(Unaudited)

 

 

 

For the Three Months Ended

 

 

 

September 28,
2012

 

September 30,
2011

 

Revenue

 

$

3,732

 

$

2,811

 

Cost of revenue

 

2,671

 

2,262

 

Product development

 

268

 

208

 

Marketing and administrative

 

150

 

105

 

Amortization of intangibles

 

19

 

 

Restructuring and other, net

 

 

 

Total operating expenses

 

3,108

 

2,575

 

Income from operations

 

624

 

236

 

Interest income

 

2

 

1

 

Interest expense

 

(55

)

(69

)

Other, net

 

29

 

(16

)

Other expense, net

 

(24

)

(84

)

Income before income taxes

 

600

 

152

 

Provision for income taxes

 

18

 

12

 

Net income

 

582

 

140

 

Less: Net income attributable to noncontrolling interest

 

 

 

Net income attributable to Seagate Technology plc

 

$

582

 

$

140

 

 

 

 

 

 

 

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

 

 

 

 

 

Basic

 

$

1.48

 

$

0.33

 

Diluted

 

1.42

 

0.32

 

Number of shares used in per share calculations:

 

 

 

 

 

Basic

 

394

 

421

 

Diluted

 

409

 

433

 

Cash dividends declared per Seagate Technology plc ordinary share

 

$

0.32

 

$

0.18

 

 

See Notes to Condensed Consolidated Financial Statements.

 

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SEAGATE TECHNOLOGY PLC

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In millions)

(Unaudited)

 

 

 

For the Three Months Ended

 

 

 

September 28,
2012

 

September 30,
2011

 

Net Income

 

$

582

 

$

140

 

Other comprehensive income, net of tax

 

 

 

 

 

Cash flow hedges

 

 

 

 

 

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

 

 

(14

)

Less: reclassification for amounts included in net income

 

 

 

Net change

 

 

(14

)

Marketable securities

 

 

 

 

 

Change in unrealized gain (loss)

 

27

 

(1

)

Less: reclassification for amounts included in net income

 

(1

)

 

Net change

 

26

 

(1

)

Post-retirement plans

 

 

 

 

 

Change in unrealized loss on post-retirement plan

 

 

1

 

Less: reclassification for amounts included in net income

 

 

 

Net change

 

 

1

 

Change in foreign currency translation adjustments

 

1

 

 

Total other comprehensive income, net of tax

 

27

 

(14

)

Comprehensive income

 

609

 

126

 

Less: Comprehensive income attributable to noncontrolling interest

 

1

 

 

Comprehensive income attributable to Seagate Technology plc

 

$

608

 

$

126

 

 

See Notes to Condensed Consolidated Financial Statements.

 

5



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SEAGATE TECHNOLOGY PLC

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In millions)

(Unaudited)

 

 

 

For the Three Months Ended

 

 

 

September 28,
2012

 

September 30,
2011

 

OPERATING ACTIVITIES

 

 

 

 

 

Net income

 

$

582

 

$

140

 

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

 

 

 

 

 

Depreciation and amortization

 

212

 

182

 

Share-based compensation

 

17

 

12

 

Loss on redemption of debt

 

 

5

 

Gain on sale of property and equipment

 

(6

)

(10

)

Gain on sale of strategic investments

 

(33

)

 

Deferred income taxes

 

(5

)

 

Other non-cash operating activities, net

 

 

10

 

Changes in operating assets and liabilities:

 

 

 

 

 

Accounts receivable, net

 

648

 

49

 

Inventories

 

110

 

47

 

Accounts payable

 

(373

)

(298

)

Accrued employee compensation

 

(132

)

(57

)

Accrued expenses, income taxes and warranty

 

(57

)

12

 

Other assets and liabilities

 

169

 

68

 

Net cash provided by operating activities

 

1,132

 

160

 

INVESTING ACTIVITIES

 

 

 

 

 

Acquisition of property, equipment and leasehold improvements

 

(263

)

(218

)

Proceeds from the sale of property and equipment

 

4

 

8

 

Proceeds from the sale of strategic investments

 

41

 

 

Purchases of short-term investments

 

(74

)

(254

)

Sales of short-term investments

 

64

 

214

 

Maturities of short-term investments

 

5

 

87

 

Cash used in acquisition of LaCie S.A., net of cash acquired

 

(36

)

 

Change in restricted cash and investments

 

(6

)

14

 

Net cash used in investing activities

 

(265

)

(149

)

FINANCING ACTIVITIES

 

 

 

 

 

Repayments of long-term debt and capital lease obligations

 

 

(34

)

Repurchases of ordinary shares

 

(639

)

(128

)

Escrow deposit for acquisition of noncontrolling shares of LaCie S.A.

 

(72

)

 

Proceeds from issuance of ordinary shares under employee stock plans

 

157

 

26

 

Dividends to shareholders

 

(127

)

(78

)

Net cash used in financing activities

 

(681

)

(214

)

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

 

1

 

 

Increase (decrease) in cash and cash equivalents

 

187

 

(203

)

Cash and cash equivalents at the beginning of the period

 

1,707

 

2,677

 

Cash and cash equivalents at the end of the period

 

$

1,894

 

$

2,474

 

 

See Notes to Condensed Consolidated Financial Statements.

 

6



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SEAGATE TECHNOLOGY PLC

CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY

 

For the Three Months Ended September 28, 2012

(In millions)

(Unaudited)

 

 

 

 

 

Seagate Technology plc Ordinary Shareholders

 

 

 

 

 

Total Equity

 

Number
of
Ordinary
Shares

 

Par Value
of Shares

 

Additional
Paid-in
Capital

 

Accumulated
Other
Comprehensive
Income (Loss)

 

Accumulated
Deficit

 

Total

 

Noncontrolling
Interest

 

Balance at June 29, 2012

 

$

3,497

 

396

 

$

 

$

4,950

 

$

(9

)

$

(1,444

)

$

3,497

 

$

 

Net income

 

582

 

 

 

 

 

 

 

 

 

582

 

582

 

 

Other comprehensive income

 

27

 

 

 

 

 

 

 

26

 

 

 

26

 

1

 

Issuance of ordinary shares under employee stock plans

 

157

 

10

 

 

157

 

 

 

157

 

 

Repurchases of ordinary shares

 

(669

)

(20

)

 

 

 

(669

)

(669

)

 

Dividends to shareholders

 

(127

)

 

 

 

 

(127

)

(127

)

 

Share-based compensation

 

17

 

 

 

17

 

 

 

17

 

 

Acquisition of majority shares of LaCie S.A.

 

72

 

 

 

 

 

 

 

72

 

Purchase of additional subsidiary shares from noncontrolling interest

 

$

(21

)

 

$

 

$

 

$

 

$

 

$

 

$

(21

)

Balance at September 28, 2012

 

$

3,535

 

386

 

$

 

$

5,124

 

$

17

 

$

(1,658

)

$

3,483

 

$

52

 

 

See Notes to Condensed Consolidated Financial Statements.

 

7



Table of Contents

 

1.              Basis of Presentation and Summary of Significant Accounting Policies

 

Organization

 

The Company is a leading provider of data storage products. Its principal products are hard disk drives, commonly referred to as disk drives, hard drives or HDDs. Hard disk drives are devices that store digitally encoded data on rapidly rotating disks with magnetic surfaces. Disk drives are used as the primary medium for storing electronic data.

 

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

 

Basis of Presentation and Consolidation

 

The unaudited condensed consolidated financial statements include the accounts of the Company and all its wholly-owned and majority-owned subsidiaries, after elimination of intercompany transactions and balances. The preparation of financial statements in accordance with accounting principles generally accepted in the United States also requires management to make estimates and assumptions that affect the amounts reported in the Company’s consolidated financial statements and accompanying notes. Actual results could differ materially from those estimates. The methods, estimates and judgments the Company uses in applying its most critical accounting policies have a significant impact on the results the Company reports in its consolidated financial statements. The consolidated financial statements reflect, in the opinion of management, all material adjustments necessary to present fairly the consolidated financial position, results of operations, comprehensive income, cash flows and shareholders’ equity for the periods presented. Such adjustments are of a normal and recurring nature.  The Company’s Consolidated Financial Statements for the fiscal year ended June 29, 2012, are included in its Annual Report on Form 10-K as filed with the United States Securities and Exchange Commission (SEC) on August 8, 2012. 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, 2012, and the notes thereto, are adequate to make the information presented not misleading.

 

The results of operations for the three months ended September 28, 2012, are not necessarily indicative of the results of operations to be expected for any subsequent interim period in the Company’s fiscal year ending June 28, 2013. The Company operates and reports financial results on a fiscal year of 52 or 53 weeks ending on the Friday closest to June 30. The three months ended September 28, 2012 and September 30, 2011 each consisted of 13 weeks.  Fiscal year 2013 will be comprised of 52 weeks and will end on June 28, 2013.

 

Summary of Significant Accounting Policies

 

Pursuant to our adoption of Accounting Standards Update No. 2011-05, Comprehensive Income (Topic 220)-Presentation of Comprehensive Income and Accounting Standards Update No. 2011-12, Comprehensive Income (Topic 220)-Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05, we elected to present separate consolidated statements of comprehensive income. Other than the revised indefinite lived intangible asset impairment testing described below, there have been no  significant changes in our significant accounting policies. Please refer to Note 1 of “Financial Statements and Supplementary Data” contained in Part II, Item 8 of the Company’s Annual Report on Form 10-K for the fiscal year ended June 29, 2012, as filed with the SEC on August 8, 2012 for a discussion of the Company’s other significant accounting policies.

 

Recently Issued Accounting Pronouncements

 

In July 2012, the FASB issued ASU No. 2012-02, Intangibles Goodwill and Other (ASC Topic 350) Testing Indefinite-Lived Intangible Assets for Impairment.  The ASU allows companies the option to perform a qualitative assessment in determining whether it is more likely than not that an indefinite-lived intangible asset is impaired as a basis for determining whether it is necessary to perform the quantitative impairment test.  The Company has early adopted the ASU in the first quarter of fiscal year 2013.  As required by the new ASU, the Company tests indefinite-lived intangible assets for impairment whenever events occur or circumstances change, such as declining financial performance, deterioration in the environment in which the entity operates or deteriorating macroeconomic conditions that have a negative effect on future expected earnings and cash flows that could affect significant inputs used to determine the fair value of the indefinite-lived intangible asset.  The adoption of this new guidance did not have an impact on the Company’s consolidated financial statements.

 

8



Table of Contents

 

2.              Balance Sheet Information

 

Investments

 

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

 

As of September 28, 2012, the Company’s Restricted cash and investments consisted of $78 million in cash equivalents and investments held in trust for payment of its non-qualified deferred compensation plan liabilities and $22 million in cash and investments held as collateral at banks for various performance obligations. As of June 29, 2012, the Company’s Restricted cash and investments consisted of $73 million in cash equivalents and investments held in trust for payment of its non-qualified deferred compensation plan liabilities and $20 million in cash and investments held as collateral at banks for various performance obligations.

 

The following table summarizes, by major type, the fair value and amortized cost of the Company’s investments as of September 28, 2012:

 

(Dollars in millions)

 

Amortized
Cost

 

Unrealized
Gain/(Loss)

 

Fair
Value

 

Available-for-sale securities:

 

 

 

 

 

 

 

Money market funds

 

$

1,372

 

$

 

$

1,372

 

Commercial paper

 

296

 

 

296

 

Corporate bonds

 

206

 

2

 

208

 

U.S. treasuries and agency bonds

 

105

 

 

105

 

Certificates of deposit

 

116

 

 

116

 

Auction rate securities

 

17

 

(2

)

15

 

Equity securities

 

19

 

24

 

43

 

Other debt securities

 

99

 

1

 

100

 

 

 

2,230

 

25

 

2,255

 

Trading securities

 

75

 

3

 

78

 

Total

 

$

2,305

 

$

28

 

$

2,333

 

 

 

 

 

 

 

 

 

Included in Cash and cash equivalents

 

 

 

 

 

$

1,742

 

Included in Short-term investments

 

 

 

 

 

476

 

Included in Restricted cash and investments

 

 

 

 

 

100

 

Included in Other assets, net

 

 

 

 

 

15

 

Total

 

 

 

 

 

$

2,333

 

 

The Company’s available-for-sale securities include investments in auction rate securities.  Beginning in fiscal year 2008, the Company’s auction rate securities failed to settle at auction and have continued to fail through September 28, 2012.  Since the Company continues to earn interest on its auction rate securities at the maximum contractual rate, there have been no payment defaults with respect to such securities, and they are all collateralized, the Company expects to recover the entire amortized cost basis of these auction rate securities.  The Company does not intend to sell these securities and has concluded it is not more likely than not that the Company will be required to sell the securities before the recovery of their amortized cost basis.  Given the uncertainty as to when the liquidity issues associated with these securities will improve, these securities are classified within Other assets, net in the Company’s Condensed Consolidated Balance Sheets.

 

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Table of Contents

 

As of September 28, 2012, with the exception of the Company’s auction rate securities, the Company had no material available-for-sale securities that had been in a continuous unrealized loss position for a period greater than 12 months.  The Company determined no available-for-sale securities were other-than-temporarily impaired as of September 28, 2012.

 

The fair value and amortized cost of the Company’s investments classified as available-for-sale at September 28, 2012, by remaining contractual maturity were as follows:

 

(Dollars in millions)

 

Amortized
Cost

 

Fair
Value

 

Due in less than 1 year

 

$

1,840

 

$

1,840

 

Due in 1 to 3 years

 

354

 

357

 

Thereafter

 

17

 

15

 

Total

 

$

2,211

 

$

2,212

 

 

Equity securities which do not have a contractual maturity date are not included in the above table.

 

The following table summarizes, by major type, the fair value and amortized cost of the Company’s investments as of June 29, 2012:

 

(Dollars in millions)

 

Amortized
Cost

 

Unrealized
Gain/(Loss)

 

Fair
Value

 

Available-for-sale securities:

 

 

 

 

 

 

 

Money market funds

 

$

1,158

 

$

 

$

1,158

 

Commercial paper

 

393

 

 

393

 

Corporate bonds

 

208

 

1

 

209

 

U.S. treasuries and agency bonds

 

98

 

1

 

99

 

Certificates of deposit

 

6

 

 

6

 

Auction rate securities

 

17

 

(2

)

15

 

Other debt securities

 

99

 

(1

)

98

 

 

 

1,979

 

(1

)

1,978

 

Trading securities

 

73

 

 

73

 

Total

 

$

2,052

 

$

(1

)

$

2,051

 

 

 

 

 

 

 

 

 

Included in Cash and cash equivalents

 

 

 

 

 

$

1,532

 

Included in Short-term investments

 

 

 

 

 

411

 

Included in Restricted cash and investments

 

 

 

 

 

93

 

Included in Other assets, net

 

 

 

 

 

15

 

Total

 

 

 

 

 

$

2,051

 

 

As of June 29, 2012, with the exception of the Company’s auction rate securities, the Company had no available-for-sale securities that had been in a continuous unrealized loss position for a period greater than 12 months.  The Company determined no available-for-sale securities were other-than-temporarily impaired as of June 29, 2012.

 

Strategic Investments

 

The Company enters into certain strategic investments for the promotion of business and strategic objectives. Strategic investments are included in Other assets, net in the Condensed Consolidated Balance Sheets, are recorded at cost and are periodically analyzed to determine whether or not there are indicators of impairment. The carrying value of the Company’s strategic investments at September 28, 2012 and June 29, 2012 totaled $24 million and $40 million, respectively. The Company sold certain strategic investments during the three months ended September 28, 2012, and recorded a gain of $33 million in Other, net in the Condensed Consolidated Statements of Operations for the three months ended September 28, 2012.  In addition, a strategic investment with a cost basis of $8 million was transferred to short-term investments and classified as available-for-sale as the investee shares are now publicly traded.

 

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Table of Contents

 

Inventories

 

(Dollars in millions)

 

September 28,
2012

 

June 29,
2012

 

Raw materials and components

 

$

216

 

$

265

 

Work-in-process

 

198

 

245

 

Finished goods

 

431

 

399

 

 

 

$

845

 

$

909

 

 

Other Current Assets

 

(Dollars in millions)

 

September 28,
2012

 

June 29,
2012

 

Vendor non-trade receivables

 

$

404

 

$

601

 

Other

 

234

 

166

 

 

 

$

638

 

$

767

 

 

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

 

Property, Equipment and Leasehold Improvements, net 

 

(Dollars in millions)

 

September 28,
2012

 

June 29,
2012

 

Property, equipment and leasehold improvements

 

$

8,101

 

$

8,020

 

Accumulated depreciation and amortization

 

(5,858

)

(5,736

)

 

 

$

2,243

 

$

2,284

 

 

3.              Debt

 

Short-Term Borrowings

 

On January 18, 2011, the Company and its subsidiary, Seagate HDD Cayman (“the Borrower”), entered into a credit agreement which provides for a $350 million senior secured revolving credit facility. Seagate Technology plc and certain of its material subsidiaries fully and unconditionally guarantee, on a senior secured basis, the revolving credit facility. The revolving credit facility matures in January 2015. The $350 million revolving credit facility is available for cash borrowings and for the issuance of letters of credit up to a sub-limit of $75 million. As of September 28, 2012, no borrowings have been drawn under the revolving credit facility, and $2 million had been utilized for letters of credit.

 

Long-Term Debt

 

$430 million Aggregate Principal Amount of 10.00% Senior Secured Second-Priority Notes due May 2014 (the “2014 Notes”). The interest on the 2014 Notes is payable semi-annually on May 1 and November 1 of each year. The issuer under the 2014 Notes is Seagate Technology International, and the obligations under the 2014 Notes are unconditionally guaranteed by the Company and certain of its significant subsidiaries. In addition, the obligations under the 2014 Notes are secured by a second-priority lien on substantially all of the Company’s tangible and intangible assets. The indenture governing the 2014 Notes contains covenants that limit the Company’s ability, and the ability of certain of its subsidiaries, (subject to certain exceptions) to incur additional debt or issue certain preferred shares, create liens, enter into mergers, pay dividends, redeem or repurchase debt or shares, and enter into certain transactions with the Company’s shareholders or affiliates.

 

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$600 million Aggregate Principal Amount of 6.8% Senior Notes due October 2016 (the “2016 Notes”).  The interest on the 2016 Notes is payable semi-annually on April 1 and October 1 of each year. The issuer under the 2016 Notes is Seagate Technology HDD Cayman, and the obligations under the 2016 Notes are unconditionally guaranteed by certain of the Company’s significant subsidiaries.

 

$750 million Aggregate Principal Amount of 7.75% Senior Notes due December 2018 (the “2018 Notes”). The interest on the 2018 Notes is payable semi-annually on June 15 and December 15 of each year. The issuer under the 2018 Notes is Seagate Technology HDD Cayman and the obligations under the 2018 Notes are fully and unconditionally guaranteed, on a senior unsecured basis, by certain of the Company’s significant subsidiaries.

 

$600 million Aggregate Principal Amount of 6.875% Senior Notes due May 2020 (the “2020 Notes”).  The interest on the 2020 Notes is payable semi-annually on May 1 and November 1 of each year. The issuer under the 2020 Notes is Seagate Technology HDD Cayman, and the obligations under the 2020 Notes are fully and unconditionally guaranteed, on a senior unsecured basis, by the Company.

 

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

 

Other As part of our acquisition of LaCie S.A. during the three months ended September 28, 2012, long-term debt of $6 million was acquired, of which $3 million is classified as current.

 

At September 28, 2012, future principal payments on long-term debt were as follows (in millions):

 

Fiscal Year

 

 

 

Remainder of 2013

 

$

2

 

2014

 

322

 

2015

 

2

 

2016

 

 

2017

 

600

 

Thereafter

 

1,950

 

 

 

$

2,876

 

 

4.              Income Taxes

 

The income tax provision of $18 million recorded in the three months ended September 28, 2012 included approximately $7 million of net discrete tax expense primarily associated with the reversal of prior period tax benefits.

 

The Company’s provision for income taxes recorded for the three months ended September 28, 2012 differed from the provision for income taxes that would be derived by applying the Irish statutory rate of 25% to income before income taxes, primarily due to the net effect of (i) tax benefits related to non-U.S. earnings generated in jurisdictions that are subject to tax holidays or tax incentive programs and are considered indefinitely reinvested outside of Ireland and (ii) a decrease in valuation allowance for certain U.S. deferred tax assets.

 

During the three months ended September 28, 2012, the Company’s unrecognized tax benefits excluding interest and penalties increased by $11 million to $146 million. The unrecognized tax benefits that, if recognized, would impact the effective tax rate were $146 million at September 28, 2012, subject to certain future valuation allowance reversals. During the 12 months beginning September 29, 2012, the Company expects to reduce its unrecognized tax benefits by approximately $5 million primarily as a result of the expiration of certain statutes of limitation.

 

The income tax provision of $12 million recorded in the three months ended September 30, 2011 included approximately $2 million of net discrete tax benefits from the release of tax reserves associated with the expiration of certain statutes of limitation.

 

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The Company’s provision for income taxes recorded for the three months ended September 30, 2011 differed from the provision for income taxes that would be derived by applying the Irish statutory rate of 25% to income before income taxes, primarily due to the net effect of (i) tax benefits related to non-U.S. earnings generated in jurisdictions that are subject to tax holidays or tax incentive programs and are considered indefinitely reinvested outside of Ireland, (ii) a decrease in valuation allowance for certain deferred tax assets, (iii) the release of tax reserves as a result of the expiration of statutes of limitation, and (iv) tax expense related to intercompany transactions.

 

5.              Acquisitions

 

LaCie S.A.

 

On August 3, 2012 the Company acquired 23,382,904 (or approximately 64.5%) of the outstanding shares of LaCie S.A. (“LaCie”) for a price of €4.05 per share with a price supplement of €0.12 per share, which is payable if the Company successfully acquires at least 95% of the outstanding shares of LaCie within 6 months of the acquisition.  Of the amount paid at the acquisition date, €9 million may be refunded to the Company if the selling shareholder is no longer employed with the Company after 36 months from the acquisition date, and is accounted for as compensation cost to be recognized over the same period.  The transaction and related agreements are expected to accelerate the Company’s growth strategy in the expanding consumer storage market, particularly in Europe, Japan and in premium distribution channels.

 

The acquisition-date fair value of the consideration transferred for the business combination totaled $111 million, including cash paid of $107 million, and contingent consideration of $4 million.

 

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

 

Cash and cash equivalents

 

$

71

 

Accounts receivable

 

29

 

Marketable Securities

 

27

 

Inventories

 

46

 

Other current and non-current assets

 

19

 

Property, plant and equipment

 

12

 

Intangible assets

 

46

 

Goodwill

 

12

 

Total Assets

 

262

 

Accounts payable and accrued expenses

 

(73

)

Current and non-current portion of long-term debt

 

(6

)

Total liabilities

 

(79

)

Noncontrolling interest

 

(72

)

Total

 

$

111

 

 

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

 

(Dollars in millions)

 

Fair Value

 

Weighted-
Average
Amortization
Period

 

Customer relationships

 

$

32

 

5.0 years

 

Existing technology

 

1

 

5.0 years

 

Trade name

 

13

 

5.0 years

 

Total acquired identifiable intangible assets

 

$

46

 

 

 

 

The goodwill recognized is attributable primarily to the benefits the Company expects to derive from LaCie’s brand recognition and the acquired workforce, and is not deductible for income tax purposes.  The acquisition date fair value of the noncontrolling interest is based on the market price of their publicly traded shares as of the first trading date subsequent to the acquisition, as the shares did not trade on the acquisition date.

 

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The amounts assigned to assets acquired and liabilities assumed in the acquisition are preliminary and subject to revision as more detailed analyses are completed and additional information about fair value of assets and liabilities becomes available, including information relating to our valuation of identified intangible assets.

 

The Company incurred $1 million of expenses related to the acquisition of LaCie during the three months ended September 28, 2012, which are included within Marketing and administrative expense on the Condensed Consolidated Statement of Operations.

 

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

 

The Company deposited $72 million into an escrow account with the intention of acquiring the remaining publicly held shares of LaCie through public and private transactions, including a tender offer (the “Tender Offer”), which commenced on September 21, 2012, and concluded on October 18, 2012.  As of September 28, 2012, a total of $21 million of the Company’s deposit had been used to acquire an additional 10% of the outstanding shares of LaCie at a price of €4.50 per share.

 

Samsung Hard Disk Drive (“HDD”) Operations

 

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

 

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

 

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

 

Inventories

 

$

141

 

Equipment

 

76

 

Intangible assets

 

580

 

Other assets

 

28

 

Total identifiable assets acquired

 

825

 

Warranty liability

 

(72

)

Other liabilities

 

(45

)

Total liabilities assumed

 

(117

)

Net identifiable assets acquired

 

708

 

Goodwill

 

432

 

Net assets acquired

 

$

1,140

 

 

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Table of Contents

 

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

 

(Dollars in millions)

 

Fair Value

 

Weighted-
Average
Amortization
Period

 

Existing technology

 

$

137

 

2.0 years

 

Customer relationships

 

399

 

5.8 years

 

Total amortizable intangible assets acquired

 

536

 

4.8 years

 

In-process research and development

 

44

 

 

 

Total acquired identifiable intangible assets

 

$

580

 

 

 

 

Since acquisition date, the Company recorded adjustments to the preliminary fair value of certain assets acquired and liabilities assumed with the Samsung HDD business that resulted in a net decrease of $5 million to Goodwill. These adjustments included a $7 million increase in Other assets for spare parts and a $3 million increase to Equipment, offset by a $3 million increase in Warranty liability and a $2 million increase in Other liabilities related to certain assumed vendor obligations.   No adjustments to the preliminary fair value of assets acquired and liabilities assumed with the Samsung HDD business were recorded in the quarter ended September 28, 2012.

 

The amount noted above for warranty is provisional, being an estimate calculated on the basis of projected product failure rates and timing of product returns during the warranty period. Seagate assumed product warranty obligations from Samsung on products sold prior to the acquisition. These products are warranted for up to three years from the original shipment date. The estimate of the warranty liability is subject to a significant degree of subjectivity since the Company has limited experience with Samsung products. If actual return rates differ materially from the Company’s estimate, or if there is an epidemic failure of drives for which Seagate assumed warranty obligations, the fair value of the warranty liability may need to be reestimated during the measurement period, which may be up to one year following the acquisition date.

 

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

 

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

 

The $432 million of goodwill recognized is attributable primarily to the benefits the Company expects to derive from enhanced scale and efficiency to better serve its markets and expanded customer presence in China and Southeast Asia.  Except for approximately $4 million of goodwill relating to assembled workforce in Korea, none of the goodwill is expected to be deductible for income tax purposes.

 

The unaudited pro forma financial results presented below for the three months ended September 30, 2011, include the effects of pro forma adjustments as if the acquisition date occurred as of the beginning of the prior fiscal year on July 2, 2011. The pro forma results combine the historical results of the Company for the three months ended September 30, 2011 and the historical results of the acquired assets and liabilities of Samsung’s HDD business, and include the effects of certain fair value adjustments and the elimination of certain activities excluded from the transaction. The pro forma financial information is presented for informational purposes only and is not necessarily indicative of the results of operations that would have been achieved if the acquisition had taken place at the beginning of the earliest period presented, nor is it intended to be a projection of future results.

 

 

 

For the Three Months Ended

 

(Dollars in millions)

 

September 30, 2011

 

Revenue

 

$

3,416

 

Net income

 

87

 

 

The pro forma results for the three months ended September 30, 2011, include adjustments of $33 million to reflect the additional depreciation and amortization that would have been charged assuming the fair value adjustments to property, plant and equipment and intangible assets had been applied on July 2, 2011.

 

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Table of Contents

 

6.              Goodwill and Other Intangible Assets

 

The changes in the carrying amount of goodwill for the three months ended September 28, 2012, are as follows:

 

(Dollars in millions)

 

 

 

Balance as of June 29, 2012

 

$

463

 

Goodwill acquired

 

12

 

Balance as of September 28, 2012

 

$

475

 

 

The carrying value of other intangible assets subject to amortization as of September 28, 2012, is set forth in the following table:

 

(Dollars in millions)

 

Gross Carrying
Amount

 

Accumulated
Amortization

 

Net Carrying
Amount

 

Weighted Average
Remaining Useful Life

 

Existing technology

 

$

138

 

$

(54

)

$

84

 

1.2 years

 

Customer relationships

 

431

 

(56

)

375

 

5.0 years

 

Trade name

 

14

 

 

14

 

4.8 years

 

Total amortizable other intangible assets

 

$

583

 

$

(110

)

$

473

 

3.9 years

 

 

The carrying value of other intangible assets subject to amortization as of June 29, 2012 is set forth in the following table:

 

(Dollars in millions)

 

Gross Carrying
Amount

 

Accumulated
Amortization

 

Net Carrying
Amount

 

Weighted Average
Remaining Useful Life

 

Existing technology

 

$

137

 

$

(37

)

$

100

 

1.5 years

 

Customer relationships

 

399

 

(37

)

362

 

5.2 years

 

Total amortizable other intangible assets

 

$

536

 

$

(74

)

$

462

 

4.4 years

 

 

The carrying value of the Company’s non-amortized In-process research and development was $44 million as of September 28, 2012 and June 29, 2012.

 

For the three months ended September 28, 2012, amortization expense of other intangible assets was $36 million. For the three months ended September 30, 2011, amortization expense of other intangible assets was $1 million. As of September 28, 2012, expected amortization expense for other intangible assets for each of the next five years and thereafter is as follows:

 

(Dollars in millions)

 

 

 

Remainder of 2013

 

$

111

 

2014

 

112

 

2015

 

80

 

2016

 

73

 

2017

 

68

 

Thereafter

 

29

 

 

 

$

473

 

 

7.              Derivative Financial Instruments

 

The Company is exposed to foreign currency exchange rate, interest rate, and to a lesser extent, equity price risks relating to its ongoing business operations. The Company enters into foreign currency forward exchange contracts to manage the foreign currency exchange rate risk on forecasted expenses denominated in foreign currencies and to mitigate the remeasurement risk of certain foreign currency denominated liabilities.  The Company’s accounting policies for these instruments are based on whether the instruments are classified as designated or non-designated hedging instruments. The

 

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Table of Contents

 

Company records all derivatives in the Condensed Consolidated Balance Sheets at fair value. The changes in the fair values of the effective portions of designated cash flow hedges are recorded in Accumulated other comprehensive loss until the hedged item is recognized in earnings. Derivatives that are not designated as hedging instruments and the ineffective portions of cash flow hedges are adjusted to fair value through earnings.   The amount of net unrealized gains (losses) on cash flow hedges was not material as of September 28, 2012 and June 29, 2012.

 

The Company dedesignates its cash flow hedges when the forecasted hedged transactions are realized or it is probable the forecasted hedged transactions will not occur in the initially identified time period. At such time, the associated gains and losses deferred in Accumulated other comprehensive loss are reclassified immediately into earnings and any subsequent changes in the fair value of such derivative instruments are immediately reflected in earnings. The Company did not recognize any net gains or losses related to the loss of hedge designation on discontinued cash flow hedges during the three months ended September 28, 2012. As of September 28, 2012, the Company’s existing foreign currency forward exchange contracts mature within 12 months. The deferred amount currently recorded in Accumulated other comprehensive income and expected to be recognized into earnings over the next 12 months is immaterial.

 

The following tables show the total notional value of the Company’s outstanding foreign currency forward exchange contracts as of September 28, 2012 and June 29, 2012:

 

 

 

As of September 28, 2012

 

(Dollars in millions)

 

Contracts
Designated as
Hedges

 

Contracts Not
Designated as
Hedges

 

Thai baht

 

$

 —

 

$

 64

 

Singapore dollars

 

34

 

12

 

Chinese renminbi

 

47

 

 

Czech koruna

 

 

2

 

 

 

$

 81

 

$

 78

 

 

 

 

As of June 29, 2012

 

(Dollars in millions)

 

Contracts
Designated as
Hedges

 

Contracts Not
Designated as
Hedges

 

Thai baht

 

$

 

$

252

 

Singapore dollars

 

50

 

21

 

Chinese renminbi

 

27

 

 

Czech koruna

 

 

7

 

 

 

$

77

 

$

280

 

 

The following table shows the Company’s derivative instruments measured at fair value as reflected in the Condensed Consolidated Balance Sheet as of September 28, 2012:

 

Fair Values of Derivative Instruments as of September 28, 2012

 

 

 

Asset Derivatives

 

Liability Derivatives

 

(Dollars in millions)

 

Balance Sheet
Location

 

Fair Value

 

Balance Sheet
Location

 

Fair Value

 

Derivatives designated as hedging instruments:

 

 

 

 

 

 

 

 

 

Foreign currency forward exchange contracts

 

Other current assets

 

$

 

Accrued expenses

 

$

 

Derivatives not designated as hedging instruments:

 

 

 

 

 

 

 

 

 

Foreign currency forward exchange contracts

 

Other current assets

 

1

 

Accrued expenses

 

 

Total derivatives

 

 

 

$

1

 

 

 

$

 

 

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Table of Contents

 

The following table shows the Company’s derivative instruments measured at fair value as reflected in the Condensed Consolidated Balance Sheet as of June 29, 2012:

 

Fair Values of Derivative Instruments as of June 29, 2012

 

 

 

Asset Derivatives

 

Liability Derivatives

 

(Dollars in millions)

 

Balance Sheet
Location

 

Fair Value

 

Balance Sheet
Location

 

Fair Value

 

Derivatives designated as hedging instruments:

 

 

 

 

 

 

 

 

 

Foreign currency forward exchange contracts

 

Other current assets

 

$

 

Accrued expenses

 

$

 

Derivatives not designated as hedging instruments:

 

 

 

 

 

 

 

 

 

Foreign currency forward exchange contracts

 

Other current assets

 

1

 

Accrued expenses

 

(2

)

Total derivatives

 

 

 

$

1

 

 

 

$

(2

)

 

The following tables show the effect of the Company’s derivative instruments on the Condensed Consolidated Statement of Comprehensive Income and the Condensed Consolidated Statement of Operations for the three months ended September 28, 2012:

 

(Dollars in millions)

 

Derivatives Designated as Cash Flow Hedges

 

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

 

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

 

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

 

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

 

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

 

Foreign currency forward exchange contracts

 

$

 

Cost of revenue

 

$

 

Cost of revenue

 

$

 

 

Derivatives Not Designated as Hedging Instruments

 

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

 

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

 

Foreign currency forward exchange contracts

 

Other, net

 

$

2

 

 


(a)                                 The amount of gain or (loss) recognized in income represents $0 related to the ineffective portion of the hedging relationship and $0 related to the amount excluded from the assessment of hedge effectiveness, for the three months ended September 28, 2012.

 

The following tables show the effect of the Company’s derivative instruments on the Condensed Consolidated Statement of Comprehensive Income and the Condensed Consolidated Statement of Operations for the three months ended September 30, 2011:

 

(Dollars in millions)

 

Derivatives Designated as Cash Flow Hedges

 

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

 

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

 

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

 

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

 

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

 

Foreign currency forward exchange contracts

 

$

(14

)

Cost of revenue

 

$

 

Cost of revenue

 

$

 

 

Derivatives Not Designated as Hedging Instruments

 

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

 

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

 

Foreign currency forward exchange contracts

 

Other, net

 

$

(4

)

 

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

 

8.              Fair Value

 

Measurement of Fair Value

 

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

 

Fair Value Hierarchy

 

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

 

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

 

Level 2 — Quoted prices for identical assets and liabilities in markets that are inactive; quoted prices for similar assets and liabilities in active markets or financial instruments for which significant inputs are observable, either directly or indirectly; or

 

Level 3 — Prices or valuations that require inputs that are both unobservable and significant to the fair value measurement.

 

The Company considers an active market to be one in which transactions for the asset or liability occur with sufficient frequency and volume to provide pricing information on an ongoing basis, and views an inactive market as one in which there are few transactions for the asset or liability, the prices are not current, or price quotations vary substantially either over time or among market makers.  Where appropriate the Company’s or the counterparty’s non-performance risk is considered in determining the fair values of liabilities and assets, respectively.

 

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Table of Contents

 

Items Measured at Fair Value on a Recurring Basis

 

The following table presents the Company’s assets and liabilities that are measured at fair value on a recurring basis, excluding accrued interest components, as of September 28, 2012:

 

 

 

Fair Value Measurements at Reporting Date Using

 

(Dollars in millions)

 

Quoted
Prices in
Active
Markets for
Identical
Instruments
(Level 1)

 

Significant
Other
Observable
Inputs
(Level 2)

 

Significant
Unobservable
Inputs
(Level 3)

 

Total
Balance

 

Assets:

 

 

 

 

 

 

 

 

 

Money market funds

 

$

1,355

 

$

 

$

 

$

1,355

 

Equity Securities

 

43

 

 

 

43

 

Commercial paper

 

 

296

 

 

296

 

Corporate bonds

 

 

208

 

 

208

 

U.S. treasuries and agency bonds

 

 

105

 

 

105

 

Certificates of deposit

 

 

111

 

 

111

 

Other debt securities

 

 

100

 

 

100

 

Total cash equivalents and short-term investments

 

1,398

 

820

 

 

2,218

 

Restricted cash and investments:

 

 

 

 

 

 

 

 

 

Mutual Funds

 

71

 

 

 

71

 

Other debt securities

 

24

 

5

 

 

29

 

Auction rate securities

 

 

 

15

 

15

 

Derivative assets

 

$

 

$

1

 

$

 

$

1

 

Total assets

 

$

1,493

 

$

826

 

$

15

 

$

2,334

 

 

 

 

Fair Value Measurements at Reporting Date Using

 

(Dollars in millions)

 

Quoted
Prices in
Active
Markets for
Identical
Instruments
(Level 1)

 

Significant
Other
Observable
Inputs
(Level 2)

 

Significant
Unobservable
Inputs
(Level 3)

 

Total
Balance

 

Assets:

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

1,355

 

$

387

 

$

 

$

1,742

 

Short-term investments

 

43

 

433

 

 

476

 

Restricted cash and investments

 

95

 

5

 

 

100

 

Other current assets

 

 

1

 

 

1

 

Other assets, net

 

 

 

15

 

15

 

Total assets

 

$

1,493

 

$

826

 

$

15

 

$

2,334

 

 

The following table presents the Company’s assets and liabilities that are measured at fair value on a recurring basis, excluding accrued interest components, as of June 29, 2012:

 

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Fair Value Measurements at Reporting Date Using

 

(Dollars in millions)

 

Quoted
Prices in
Active
Markets for
Identical
Instruments
(Level 1)

 

Significant
Other
Observable
Inputs
(Level 2)

 

Significant
Unobservable
Inputs
(Level 3)

 

Total
Balance

 

Assets:

 

 

 

 

 

 

 

 

 

Money market funds

 

$

1,140

 

$

 

$

 

$

1,140

 

Commercial paper

 

 

393

 

 

393

 

Corporate bonds

 

 

209

 

 

209

 

U.S. treasuries and agency bonds

 

 

99

 

 

99

 

Certificates of deposit

 

 

4

 

 

4

 

Other debt securities

 

 

99

 

 

99

 

Total cash equivalents and short-term investments

 

1,140

 

804

 

 

1,944

 

Restricted cash and investments:

 

 

 

 

 

 

 

 

 

Mutual Funds

 

66

 

 

 

66

 

Other debt securities

 

25

 

2

 

 

27

 

Auction rate securities

 

 

 

15

 

15

 

Derivative assets

 

 

2

 

 

2

 

Total assets

 

$

1,231

 

$

808

 

$

15

 

$

2,054

 

Liabilities:

 

 

 

 

 

 

 

 

 

Derivative liabilities

 

$

 

$

(2

)

$

 

$

(2

)

Total liabilities

 

$

 

$

(2

)

$

 

$

(2

)

 

 

 

Fair Value Measurements at Reporting Date Using

 

(Dollars in millions)

 

Quoted
Prices in
Active
Markets for
Identical
Instruments
(Level 1)

 

Significant
Other
Observable
Inputs
(Level 2)

 

Significant
Unobservable
Inputs
(Level 3)

 

Total
Balance

 

Assets:

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

1,140

 

$

393

 

$

 

$

1,533

 

Short-term investments

 

 

411

 

 

411

 

Restricted cash and investments

 

91

 

2

 

 

93

 

Other current assets

 

 

2

 

 

2

 

Other assets, net

 

 

 

15

 

15

 

Total assets

 

$

1,231

 

$

808

 

$

15

 

$

2,054

 

Liabilities:

 

 

 

 

 

 

 

 

 

Accrued expenses

 

$

 

$

(2

)

$

 

$

(2

)

Total liabilities

 

$

 

$

(2

)

$

 

$

(2

)

 

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

 

The Company classifies items in Level 2 if the financial asset or liability is valued using observable inputs. The Company uses observable inputs including quoted prices in active markets for similar assets or liabilities.  Level 2 assets include: agency bonds, corporate bonds, commercial paper, municipal bonds, certificates of deposit, international government securities, asset backed securities, mortgage backed securities and U.S. Treasuries. These debt investments are priced using observable inputs and valuation models which vary by asset class.  The Company uses a pricing service to assist in determining the fair values of all of its cash equivalents and short-term investments.  For the cash equivalents and short-term investments in the Company’s

 

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portfolio, multiple pricing sources are generally available.  The pricing service uses inputs from multiple industry standard data providers or other third party sources and various methodologies, such as weighting and models, to determine the appropriate price at the measurement date.  The Company corroborates the prices obtained from the pricing service against other independent sources and, as of September 28, 2012, has not found it necessary to make any adjustments to the prices obtained. The Company’s derivative financial instruments are also classified within Level 2.  The Company’s derivative financial instruments consist of foreign currency forward exchange contracts.  The Company recognizes derivative financial instruments in its condensed consolidated financial statements at fair value.  The Company determines the fair value of these instruments by considering the estimated amount it would pay or receive to terminate these agreements at the reporting date.

 

The Company’s Level 3 assets consist of auction rate securities with a par value of approximately $17 million, all of which are collateralized by student loans guaranteed by the Federal Family Education Loan Program. Beginning in fiscal year 2008, these securities failed to settle at auction and have continued to fail through September 28, 2012. Since there is no active market for these securities, the Company valued them using a discounted cash flow model. The valuation model is based on the income approach and reflects both observable and significant unobservable inputs.

 

The table below presents a reconciliation of assets measured at fair value on a recurring basis, excluding accrued interest components, using significant unobservable inputs (Level 3) for the three months ended September 28, 2012:

 

(Dollars in millions)

 

Auction Rate
Securities

 

Balance at June 29, 2012

 

$

 15

 

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

 

 

 

Realized gains (losses)(1)

 

 

Unrealized gains (losses)(2)

 

 

Sales and Settlements

 

 

Balance at September 28, 2012

 

$

 15

 

 


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

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

 

Other Fair Value Disclosures

 

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

 

 

 

September 28, 2012

 

June 29, 2012

 

(Dollars in millions)

 

Carrying
Amount

 

Estimated
Fair Value

 

Carrying
Amount

 

Estimated
Fair Value

 

10.0% Senior Secured Second-Priority Notes due May 2014

 

$

315

 

$

351

 

$

314

 

$

359

 

6.8% Senior Notes due October 2016

 

599

 

672

 

599

 

662

 

7.75% Senior Notes due December 2018

 

750

 

832

 

750

 

836

 

6.875% Senior Notes due May 2020

 

600

 

642

 

600

 

639

 

7.00% Senior Notes due November 2021

 

600

 

647

 

600

 

650

 

Other

 

6

 

6

 

 

 

 

 

2,870

 

3,150

 

2,863

 

3,146

 

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

 

(3

)

(3

)

 

 

Long-term debt, less current portion

 

$

2,867

 

$

3,147

 

$

2,863

 

$

3,146

 

 

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Table of Contents

 

9.              Equity

 

Share Capital

 

The Company’s authorized share capital is $13,500 and consists of 1,250,000,000 ordinary shares, par value $0.00001, of which 385,961,717 shares were outstanding as of September 28, 2012, and 100,000,000 preferred shares, par value $0.00001, of which none were issued or outstanding as of September 28, 2012.

 

Ordinary shares—Holders of ordinary shares are entitled to receive dividends when and as declared by the Company’s board of directors (the “Board of Directors”). Upon any liquidation, dissolution, or winding up of the Company, after required payments are made to holders of preferred shares, any remaining assets of the Company will be distributed ratably to holders of the preferred and ordinary shares. Holders of shares are entitled to one vote per share on all matters upon which the ordinary shares are entitled to vote, including the election of directors.

 

Preferred shares—The Company may issue preferred shares in one or more series, up to the authorized amount, without shareholder approval. The Board of Directors is authorized to establish from time to time the number of shares to be included in each series, and to fix the rights, preferences and privileges of the shares of each wholly unissued series and any of its qualifications, limitations or restrictions. The Board of Directors can also increase or decrease the number of shares of a series, but not below the number of shares of that series then outstanding, without any further vote or action by the shareholders.

 

The Board of Directors may authorize the issuance of preferred shares with voting or conversion rights that could harm the voting power or other rights of the holders of the ordinary shares. The issuance of preferred shares, while providing flexibility in connection with possible acquisitions and other corporate purposes, could, among other things, have the effect of delaying, deferring or preventing a change in control of the Company and might harm the market price of its ordinary shares and the voting and other rights of the holders of ordinary shares.

 

Repurchases of Equity Securities

 

On January 25, 2012, the Board of Directors authorized the Company to repurchase an additional $1 billion of its outstanding ordinary shares (“the January 2012 Share Repurchase Program”).

 

On April 26, 2012, the Board of Directors authorized the Company to repurchase $2.5 billion of its outstanding ordinary shares.

 

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

 

As of September 28, 2012, $1.9 billion remained available for repurchase under the existing repurchase authorization limit.

 

The following tables set forth information with respect to repurchase of the Company’s shares made during the current fiscal year:

 

(In millions)

 

Number of
Shares
Repurchased

 

Dollar Value
of Shares
Repurchased

 

Repurchased during the three months ended September 28, 2012

 

20

 

$

669

 

Repurchased through September 28, 2012

 

20

 

$

669

 

 

10.       Compensation

 

The Company recorded approximately $17 million and $12 million of stock-based compensation during the three months ended September 28, 2012 and September 30, 2011, respectively.

 

On August 1, 2012, the Company granted performance-based options and restricted share units to its CEO.  The performance-based options cliff vest after three years and are contingent upon continued service and the attainment of a minimum 40% total shareholder return (“TSR”), inclusive of dividends and share price appreciation, over a three-year performance period, which TSR must be sustained for a minimum of 30 consecutive trading days.  The performance-based restricted share units cliff vest after three years and are contingent upon continued service and the attainment of a minimum 40% TSR over a three-year performance period, which TSR must be sustained for a minimum of 30 consecutive trading days.  Compensation expense related to these restricted units for the three months ended September 28, 2012 was not material.

 

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11.       Guarantees

 

Indemnifications to Officers and Directors

 

On May 4, 2009, Seagate Technology, an exempted company incorporated with limited liability under the laws of the Cayman Islands (“Seagate-Cayman”), then the parent company, entered into a new form of indemnification agreement (the “Revised Indemnification Agreement”) with its officers and directors of Seagate-Cayman and its subsidiaries (each, an “Indemnitee”). The Revised Indemnification Agreement provides indemnification in addition to any of Indemnitee’s indemnification rights under Seagate-Cayman’s Articles of Association, applicable law or otherwise, and indemnifies an Indemnitee for certain expenses (including attorneys’ fees), judgments, fines and settlement amounts actually and reasonably incurred by him or her in any action or proceeding, including any action by or in the right of Seagate-Cayman or any of its subsidiaries, arising out of his or her service as a director, officer, employee or agent of Seagate-Cayman or any of its subsidiaries or of any other entity to which he or she provides services at Seagate-Cayman’s request. However, an Indemnitee shall not be indemnified under the Revised Indemnification Agreement for (i) any fraud or dishonesty in the performance of Indemnitee’s duty to Seagate-Cayman or the applicable subsidiary of Seagate-Cayman or (ii) Indemnitee’s conscious, intentional or willful failure to act honestly, lawfully and in good faith with a view to the best interests of Seagate-Cayman or the applicable subsidiary of Seagate-Cayman. In addition, the Revised Indemnification Agreement provides that Seagate-Cayman will advance expenses incurred by an Indemnitee in connection with enforcement of the Revised Indemnification Agreement or with the investigation, settlement or appeal of any action or proceeding against him or her as to which he or she could be indemnified.

 

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

 

The nature of these indemnification obligations prevents the Company from making a reasonable estimate of the maximum potential amount it could be required to pay on behalf of its officers and directors. Historically, the Company has not made any significant indemnification payments under such agreements and no amount has been accrued in the accompanying condensed consolidated financial statements with respect to these indemnification obligations.

 

Intellectual Property Indemnification Obligations

 

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

 

Product Warranty

 

The Company estimates probable product warranty costs at the time revenue is recognized. The Company generally warrants its products for a period of 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 obligation.  Changes in the Company’s product warranty liability during the three months ended September 28, 2012 were as follows:

 

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For the Three Months Ended

 

(Dollars in millions)

 

September 28,
2012

 

September 30,
2011

 

Balance, beginning of period

 

$

363

 

$

348

 

Warranties issued

 

48

 

43

 

Repairs and replacements

 

(84

)

(58

)

Changes in liability for pre-existing warranties, including expirations

 

7

 

1

 

Warranty liability assumed from LaCie S.A.

 

3

 

 

Balance, end of period

 

$

337

 

$

334

 

 

12.       Earnings Per Share

 

Basic earnings per share is computed by dividing income available to shareholders by the weighted-average number of shares outstanding during the period. Diluted earnings per share is computed by dividing income available to shareholders by the weighted-average number of shares outstanding during the period and the number of additional shares that would have been outstanding if the potentially dilutive securities had been issued. Potentially dilutive securities include outstanding options, shares to be purchased under the ESPP, and unvested restricted share units. The dilutive effect of potentially dilutive securities is reflected in diluted earnings per share by application of the treasury stock method. Under the treasury stock method, an increase in fair market value of the Company’s share price can result in a greater dilutive effect from potentially dilutive securities. The following table sets forth the computation of basic and diluted net income per share attributable to the shareholders of Seagate Technology plc:

 

 

 

For the Three Months Ended

 

(Dollars in millions, except per share data)

 

September 28,
2012

 

September 30,
2011

 

Numerator:

 

 

 

 

 

Net income attributable to Seagate Technology plc

 

$

582

 

$

140

 

Number of shares used in per share calculations:

 

 

 

 

 

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

 

394

 

421

 

Weighted-average effect of dilutive securities:

 

 

 

 

 

Employee equity award plans

 

15

 

12

 

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

 

409

 

433

 

Net income per share attributable to Seagate Technology plc shareholders:

 

 

 

 

 

Basic

 

$

1.48

 

$

0.33

 

Diluted

 

$

1.42

 

$

0.32

 

 

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

 

 

 

For the Three Months Ended

 

(In millions)

 

September 28,
2012

 

September 30,
2011

 

Employee equity award plans

 

 

16

 

 

13.       Legal, Environmental and Other Contingencies

 

The Company assesses the probability of an unfavorable outcome of all its material litigation, claims, or assessments to determine whether a liability had been incurred and whether it is probable that one or more future events will occur confirming the fact of the loss. In the event that an unfavorable outcome is determined to be probable and the amount of the loss can be

 

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Table of Contents

 

reasonably estimated, the Company establishes an accrual for the litigation, claim or assessment. In addition, in the event an unfavorable outcome is determined to be less than probable, but reasonably possible, the Company will disclose an estimate of the possible loss or range of such loss; however, when a reasonable estimate cannot be made, the Company will provide disclosure to that effect. Litigation is inherently uncertain and may result in adverse rulings or decisions. Additionally, the Company may enter into settlements or be subject to judgments that may, individually or in the aggregate, have a material adverse effect on its results of operations. Accordingly, actual results could differ materially.

 

Intellectual Property Litigation

 

Convolve, Inc. (“Convolve”) and Massachusetts Institute of Technology (“MIT”) v. Seagate Technology LLC, et al.—On July 13, 2000, Convolve and MIT filed suit against Compaq Computer Corporation and Seagate Technology LLC in the U.S. District Court for the Southern District of New York, alleging infringement of U.S. Patent Nos. 4,916,635, “Shaping Command Inputs to Minimize Unwanted Dynamics” (the ‘635 patent) and U.S. Patent No. 5,638,267, “Method and Apparatus for Minimizing Unwanted Dynamics in a Physical System” (the ‘267 patent), misappropriation of trade secrets, breach of contract, tortious interference with contract and fraud relating to Convolve and MIT’s Input Shaping® and Convolve’s Quick and Quiet™ technology. The plaintiffs claimed their technology is incorporated in the Company’s sound barrier technology, which was publicly announced on June 6, 2000. The complaint seeks injunctive relief, $800 million in compensatory damages and unspecified punitive damages, including for willful infringement and willful and malicious misappropriation. If willful infringement is found by the jury, the court may assess, in addition to compensatory damages for the infringement, punitive damages in an amount up to three times the amount of such compensatory damages. If willful and malicious misappropriation is found by the jury, the court may assess, in addition to compensatory damages for the misappropriation, punitive damages in an amount up to two times the amount of such compensatory damages. On November 6, 2001, the U.S. Patent and Trademark Office (“USPTO”) issued to Convolve US Patent No. 6,314,473, “System for Removing Selected Unwanted Frequencies in Accordance with Altered Settings in a User Interface of a Data Storage Device,” (the ‘473 patent”). Convolve filed an amended complaint on January 16, 2002, alleging defendants infringe this patent. The ‘635 patent expired on September 12, 2008. The court ruled in 2010 that the ‘267 patent was out of the case.

 

On August 16, 2011, the court granted in part and denied in part the Company’s motion for summary judgment. The court granted summary judgment in favor of the Company on all patent infringement claims and on 11 of the 15 remaining alleged trade secrets at issue. The court also denied Convolve’s request for enhanced damages as moot and dismissed Convolve’s request for injunctive relief. Following this ruling, the parties entered into a stipulation to conditionally dismiss without prejudice the remaining claims in order to facilitate an appeal of the August 16, 2011 order by Convolve to the U.S. Court of Appeals for the Federal Circuit. Pursuant to this stipulation, the court entered a final judgment on October 4, 2011. Convolve filed its notice of appeal to the U.S. Court of Appeals for the Federal Circuit on November 3, 2011. A hearing before the Court of Appeals has been scheduled for December 5, 2012. In view of the court’s August 16, 2011 ruling and the uncertainty regarding the amount of damages, if any, that could be awarded Convolve in this matter, the Company does not believe that it is currently possible to determine a reasonable estimate of the possible range of loss related to this matter.

 

Alexander Shukh v. Seagate Technology—On February 12, 2010, former Seagate engineer Alexander Shukh filed a complaint and an amended complaint against the Company in Minnesota federal court, alleging, among other things, employment discrimination based on his Belarusian national origin and wrongful failure to name him as an inventor on several patents and patent applications. Mr. Shukh’s employment was terminated as part of a company-wide reduction in force in fiscal year 2009. He seeks damages in excess of $75 million. The Company believes the claims are without merit and intends to vigorously defend this case. Trial is scheduled to begin July 1, 2013. In view of the uncertainty regarding the amount of damages, if any, that could be awarded in this matter, the Company does not believe that it is currently possible to determine a reasonable estimate of the possible range of loss related to this matter.

 

Rembrandt Data Storage, LP v. Seagate Technology LLC—On November 10, 2010, Rembrandt Data Storage, LP filed suit against Seagate Technology LLC in the U.S. District Court for the Western District of Wisconsin alleging infringement of U.S. Patent No. 5,995,342 C1, “Thin Film Heads Having Solenoid Coils,” and U.S. Patent No. 6,195,232, “Low-Noise Toroidal Thin Film Head With Solenoidal Coil.” The complaint seeks unspecified compensatory damages, enhanced damages, injunctive relief, and attorneys’ fees and costs. On March 2, 2012, the district court granted Seagate’s motion for summary judgment of non-infringement and entered judgment in favor of Seagate. On March 7, 2012, Rembrandt appealed to the U.S. Court of Appeals for the Federal Circuit. A hearing before the Court of Appeals has been scheduled for December 6, 2012. In view of the court’s March 2, 2012 ruling and the uncertainty regarding the amount of damages, if any, that could be awarded Rembrandt in this matter, the Company does not believe that it is currently possible to determine a reasonable estimate of the possible loss or possible range of loss related to this matter.

 

Rambus, Inc. ITC Investigation re Certain Semiconductor Chips and Products Containing the Same—On December 1, 2010, Rambus, Inc. filed a complaint with the International Trade Commission seeking an investigation pursuant to Section 337 of the Tariff Act of 1930, as amended. The complaint names Seagate Technology LLC and numerous other respondents,

 

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including LSI, Inc. and ST Microelectronics, Inc., alleging that Seagate products incorporate semiconductor products made by LSI and STMicroelectronics that infringe various patents owned by Rambus. The ITC initiated an investigation on December 29, 2010. Rambus seeks an order to exclude entry of infringing products into the U.S. and a cease and desist order. On July 25, 2012, the ITC gave notice that it had determined to terminate the investigation with a finding of no violation of Section 337 by Seagate and the other respondents. On September 21, 2012, Rambus filed a notice of appeal to the U.S. Court of Appeals for the Federal Circuit. A hearing before the Court of Appeals has not yet been scheduled.  In light of the July 25, 2012 notice and the nature of the relief sought, the Company does not believe that it is currently possible to determine a reasonable estimate of the possible loss or range of loss, or other possible adverse result, if any, that may be incurred with respect to this matter.

 

LEAP Co., Ltd. v. Seagate Singapore International Headquarters Pte. Ltd. and Nippon Seagate Inc.—On July 4, 2012, LEAP Co., Ltd. filed a lawsuit in the Tokyo District Court of Japan against Seagate Singapore International Headquarters Pte. Ltd., Nippon Seagate Inc. and Buffalo Inc. alleging wrongful termination of purchase agreements and other claims, and seeking approximately $38 million in damages. The Company believes the claims are without merit and intends to vigorously defend this case. In view of the uncertainty regarding the amount of damages, if any, that could be awarded in this matter, the Company does not believe that it is currently possible to determine a reasonable estimate of the possible range of loss related to this matter.

 

Realtek Semiconductor Corporation ITC Investigation re Certain Integrated Circuit Chips and Products Containing the Same-On September 19, 2012, Realtek Semiconductor Corporation filed a complaint with the International Trade Commission seeking an investigation pursuant to Section 337 of the Tariff Act of 1930, as amended.  The complaint names LSI Corporation and Seagate Technology as respondents and alleges infringement of U.S. patents relating to integrated circuit chips that include bond pad structures. Realtek seeks an order to exclude entry of infringing integrated circuit chips and products containing the infringing integrated circuit chips into the U.S. and a cease and desist order. The ITC initiated an investigation on October 18, 2012.  In view of the uncertainty regarding the possible outcome of this case and the nature of the relief sought, the Company does not believe that it is currently possible to determine a reasonable estimate of the possible loss or range of loss, or other possible adverse result, if any, that may be incurred with respect to this matter.

 

Environmental Matters

 

The Company’s operations are subject to U.S. and foreign laws and regulations relating to the protection of the environment, including those governing discharges of pollutants into the air and water, the management and disposal of hazardous substances and wastes and the cleanup of contaminated sites. Some of the Company’s operations require environmental permits and controls to prevent and reduce air and water pollution, and these permits are subject to modification, renewal and revocation by issuing authorities.

 

The Company has established environmental management systems and continually updates its environmental policies and standard operating procedures for its operations worldwide. The Company believes that its operations are in material compliance with applicable environmental laws, regulations and permits. The Company budgets for operating and capital costs on an ongoing basis to comply with environmental laws. If additional or more stringent requirements are imposed on the Company in the future, it could incur additional operating costs and capital expenditures.

 

Some environmental laws, such as the Comprehensive Environmental Response Compensation and Liability Act of 1980 (as amended, the “Superfund” law) and its state equivalents, can impose liability for the cost of cleanup of contaminated sites upon any of the current or former site owners or operators or upon parties who sent waste to these sites, regardless of whether the owner or operator owned the site at the time of the release of hazardous substances or the lawfulness of the original disposal activity. The Company has been identified as a potentially responsible party at several sites. At each of these sites, the Company has an assigned portion of the financial liability based on the type and amount of hazardous substances disposed of by each party at the site and the number of financially viable parties. The Company has fulfilled its responsibilities at some of these sites and remains involved in only a few at this time.

 

While the Company’s ultimate costs in connection with these sites is difficult to predict with complete accuracy, based on its current estimates of cleanup costs and its expected allocation of these costs, the Company does not expect costs in connection with these sites to be material.

 

The Company may be subject to various state, federal and international laws and regulations governing the environment, including those restricting the presence of certain substances in electronic products. For example, the European Union (“EU”) enacted the Restriction of the Use of Certain Hazardous Substances in Electrical and Electronic Equipment, which prohibits the use of certain substances, including lead, in certain products, including disk drives, put on the market after July 1, 2006. Similar legislation has been or may be enacted in other jurisdictions, including in the United States, Canada, Mexico, Taiwan, China, Japan and others. The European Union REACH Directive (Registration, Evaluation, Authorization, and Restriction of Chemicals, EC 1907/2006) also restricts substances of very high concern (“SVHCs”) in products. If the Company or its suppliers fails to comply with the substance restrictions, recycle requirements or other environmental requirements as they are enacted worldwide, it could have a materially adverse effect on the Company’s business.

 

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Other Matters

 

The Company is involved in a number of other judicial and administrative proceedings incidental to its business, and the Company may be involved in various legal proceedings arising in the normal course of its business in the future. Although occasional adverse decisions or settlements may occur, the Company believes that the final disposition of such matters will not have a material adverse effect on its financial position or results of operations.

 

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ITEM 2.            MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

The following is a discussion of the financial condition and results of operations for our fiscal quarters ended September 28, 2012, June 29, 2012 and September 30, 2011, referred to herein as the “September 2012 quarter”, the “June 2012 quarter” and the “September 2011 quarter”, respectively. Unless the context indicates otherwise, as used herein, the terms “we,” “us,” “Seagate,” the “Company” and “our” refer to Seagate Technology plc, an Irish public limited company, and its subsidiaries. References to “$” are to United States dollars.

 

You should read this discussion in conjunction with financial information and related notes included elsewhere in this report. We operate and report financial results on a fiscal year of 52 or 53 weeks ending on the Friday closest to June 30. The September 2012, June 2012, and September 2011 quarters were all 13 weeks.  Except as noted, references to any fiscal year mean the twelve-month period ending on the Friday closest to June 30 of that year.

 

Some of the statements and assumptions included in this Quarterly Report on Form 10-Q are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 or Section 21E of the Securities Exchange Act of 1934, each as amended, including, in particular, statements about our plans, strategies and prospects and estimates of industry growth for the fiscal year ending June 28, 2013 and beyond. These statements identify prospective information and include words such as “expects,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “projects,” and similar expressions. These forward-looking statements are based on information available to us as of the date of this Quarterly Report on Form 10-Q and are based on management’s current views and assumptions. These forward-looking statements are conditioned upon and also involve a number of known and unknown risks, uncertainties and other factors that could cause actual results, performance or events to differ materially from those anticipated by these forward-looking statements. Such risks, uncertainties and other factors may be beyond our control and may pose a risk to our operating and financial condition. Such risks and uncertainties include, but are not limited to: uncertainty in global economic conditions, as consumers and businesses may defer purchases in response to tighter credit and financial news; the impact of variable demand and the adverse pricing environment for disk drives, particularly in view of current business and economic conditions; dependence on our ability to successfully qualify, manufacture and sell our disk drive products in increasing volumes on a cost-effective basis and with acceptable quality, particularly the new disk drive products with lower cost structures; the impact of competitive product announcements and possible excess industry supply with respect to particular disk drive products; our ability to achieve projected cost savings in connection with restructuring plans; and the risk that we will incur significant incremental costs in connection with the implementation of our recently executed transactions with Samsung or that we will not achieve the benefits expected from such transactions (see Part I, Item 1. Financial Statements-Note 5. Acquisitions in this Form 10-Q). We also encourage you to read our Annual Report on Form 10-K for the year ended June 29, 2012, which contains information concerning risk, uncertainties and other factors that could cause results to differ materially from those projected in the forward-looking statements and this Form 10-Q. These forward-looking statements should not be relied upon as representing our views as of any subsequent date and we undertake no obligation to update forward-looking statements to reflect events or circumstances after the date they were made.

 

Our Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is provided in addition to the accompanying condensed consolidated financial statements and notes to assist readers in understanding our results of operations, financial condition, and cash flows. Our MD&A is organized as follows:

 

·                  Our Company.  Overview of our business.

·                  Overview of the September 2012 quarter. The September 2012 quarter summary and trends.

·                  Results of Operations. An analysis of our financial results comparing the September 2012 quarter to the June 2012 quarter and the September 2011 quarter.

·                  Liquidity and Capital Resources. An analysis of changes in our balance sheets and cash flows, and discussion of our financial condition including the credit quality of our investment portfolio and potential sources of liquidity.

·                  Critical Accounting Policies. Accounting policies and estimates that we believe are important to understanding the assumptions and judgments incorporated in our reported financial results.

 

Our Company

 

We are a leading provider of electronic data storage products. Our principal products are hard disk drives, commonly referred to as disk drives, hard drives or HDDs. Hard disk drives are devices that store digitally encoded data on rapidly rotating disks with magnetic surfaces. Disk drives continue to be the primary medium of mass data storage due to their performance attributes, high quality, cost effectiveness and energy efficiencies.

 

We produce a broad range of electronic data storage products addressing enterprise applications, where our products are designed for enterprise servers, mainframes and workstations; client compute applications, where our products are designed for desktop and notebook computers; and client non-compute applications, where our products are designed for a wide variety of

 

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end user devices such as digital video recorders (DVRs), gaming consoles, personal data backup systems, portable external storage systems and digital media systems. In addition to manufacturing and selling disk drives, we provide data storage services for small- to medium-sized businesses, including online backup, data protection and recovery solutions.

 

Overview of the September 2012 Quarter

 

In the September 2012 quarter we shipped 58 million units during the quarter, generating $3,732 million in revenue and $1,132 million in operating cash flow.  We repurchased approximately 20 million of our ordinary shares during the quarter for approximately $669 million. Additionally, we acquired a controlling interest in LaCie S.A. (“LaCie”) for approximately $107 million in cash.

 

Results of Operations

 

We list in the table below the Condensed Consolidated Statements of Operations by dollars and as a percentage of revenue for the periods indicated.

 

 

 

For the Three Months Ended

 

(Dollars in millions)

 

September 28,
2012

 

June 29,
2012

 

September 30,
2011

 

Revenue

 

$

3,732

 

$

4,482

 

$

2,811

 

Cost of revenue

 

2,671

 

2,998

 

2,262

 

Gross margin

 

1,061

 

1,484

 

549

 

Product development

 

268

 

269

 

208

 

Marketing and administrative

 

150

 

140

 

105

 

Amortization of intangibles

 

19

 

18

 

 

Restructuring and other, net

 

 

 

 

Income from operations

 

624

 

1,057

 

236

 

Other income (expense), net

 

(24

)

(44

)

(84

)

Income before income taxes

 

600

 

1,013

 

152

 

 

 

 

 

 

 

 

 

Provision for (benefit from) income taxes

 

18

 

 

12

 

Net income

 

582

 

1,013

 

140

 

Less: Net income attributable to noncontrolling interest

 

 

 

 

Net income attributable to Seagate Technology plc

 

$

582

 

$

1,013

 

$

140

 

 

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For the Three Months Ended

 

 

 

September 28,
2012

 

June 29,
2012

 

September 30,
2011

 

Revenue

 

100

%

100

%

100

%

Cost of revenue

 

72

 

67

 

80

 

Gross margin

 

28

 

33

 

20

 

Product development

 

7

 

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