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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 October 2, 2009

 

 

o

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

 

For the transition period from:          to         

 

Commission File Number 001-31560

 

SEAGATE TECHNOLOGY

(Exact name of registrant as specified in its charter)

 

Cayman Islands

 

98-0355609

(State or other jurisdiction of

 incorporation or organization)

 

(I.R.S. Employer

Identification Number)

 

 

 

 

P.O.  Box 309, Ugland House

Grand Cayman KY1-1104, Cayman Islands

(Address of Principal Executive Offices)

 

Telephone:  (345) 949-8066

(Registrant’s Telephone Number, Including Area Code)

 

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

 

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

 

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

 

Large accelerated filer: x

 

Accelerated filer: o

 

 

 

Non-accelerated filer: o

 

Smaller reporting company: o

(Do not check if a smaller reporting company)

 

 

 

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

 

As of October 30, 2009, 497,950,186 shares of the registrant’s common shares, par value $0.00001 per share, were issued and outstanding.

 

 

 



Table of Contents

 

INDEX

 

SEAGATE TECHNOLOGY

 

 

 

 

PAGE NO.

PART I

FINANCIAL INFORMATION

 

 

 

 

 

 

Item 1.

Financial Statements

 

 

 

 

 

 

 

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

 

3

 

 

 

 

 

Condensed Consolidated Statements of Operations ¾ Three Months ended October 2, 2009 and October 3, 2008 (Unaudited)

 

4

 

 

 

 

 

Condensed Consolidated Statements of Cash Flows ¾ Three Months ended October 2, 2009 and October 3, 2008 (Unaudited)

 

5

 

 

 

 

 

Condensed Consolidated Statement of Shareholders’ Equity ¾ Three Months ended October 2, 2009 (Unaudited)

 

6

 

 

 

 

 

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

7

 

 

 

 

Item 2.

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

 

40

 

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

 

51

 

 

 

 

Item 4.

Controls and Procedures

 

52

 

 

 

 

PART II

OTHER INFORMATION

 

 

 

 

 

 

Item 1.

Legal Proceedings

 

53

 

 

 

 

Item 1A.

Risk Factors

 

53

 

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

 

53

 

 

 

 

Item 3.

Defaults Upon Senior Securities

 

53

 

 

 

 

Item 4.

Submission of Matters to a Vote of Securityholders

 

53

 

 

 

 

Item 5.

Other Information

 

54

 

 

 

 

Item 6.

Exhibits

 

55

 

 

 

 

 

SIGNATURES

 

64

 

2



Table of Contents

 

PART I

FINANCIAL INFORMATION

 

ITEM 1.                FINANCIAL STATEMENTS

 

SEAGATE TECHNOLOGY

CONDENSED CONSOLIDATED BALANCE SHEETS

(In millions)

(Unaudited)

 

 

 

October 2,
2009

 

July 3,
2009
(a)

 

ASSETS

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

1,530

 

$

1,427

 

Short-term investments

 

96

 

114

 

Restricted cash and investments

 

166

 

508

 

Accounts receivable, net

 

1,242

 

1,033

 

Inventories

 

622

 

587

 

Deferred income taxes

 

99

 

97

 

Other current assets

 

552

 

528

 

Total current assets

 

4,307

 

4,294

 

Property, equipment and leasehold improvements, net

 

2,039

 

2,229

 

Deferred income taxes

 

369

 

372

 

Other assets, net

 

184

 

192

 

 

 

 

 

 

 

Total Assets

 

$

6,899

 

$

7,087

 

 

 

 

 

 

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Short-term borrowings

 

$

215

 

$

350

 

Accounts payable

 

1,674

 

1,573

 

Accrued employee compensation

 

142

 

144

 

Accrued warranty

 

206

 

213

 

Accrued expenses

 

440

 

483

 

Accrued income taxes

 

13

 

10

 

Current portion of long-term debt

 

107

 

421

 

Total current liabilities

 

2,797

 

3,194

 

Long-term accrued warranty

 

212

 

224

 

Long-term accrued income taxes

 

67

 

69

 

Other non-current liabilities

 

134

 

120

 

Long-term debt, less current portion

 

1,910

 

1,926

 

 

 

 

 

 

 

Total Liabilities

 

5,120

 

5,533

 

 

 

 

 

 

 

Commitments and contingencies

 

 

 

 

 

 

 

 

 

 

 

SHAREHOLDERS’ EQUITY

 

 

 

 

 

Shareholders’ equity:

 

 

 

 

 

Common shares and additional paid-in capital

 

3,748

 

3,708

 

Accumulated other comprehensive income (loss)

 

 

(6

)

Retained earnings (accumulated deficit)

 

(1,969

)

(2,148

)

Total Shareholders’ Equity

 

1,779

 

1,554

 

 

 

 

 

 

 

Total Liabilities and Shareholders’ Equity

 

$

6,899

 

$

7,087

 

 


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

 

See Notes to Condensed Consolidated Financial Statements.

 

3



Table of Contents

 

SEAGATE TECHNOLOGY

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In millions, except per share data)

(Unaudited)

 

 

 

For the Three Months Ended

 

 

 

October 2,
2009

 

October 3,
2008 (a)

 

 

 

 

 

 

 

Revenue

 

$

2,663

 

$

3,033

 

 

 

 

 

 

 

Cost of revenue

 

2,010

 

2,507

 

Product development

 

208

 

260

 

Marketing and administrative

 

106

 

148

 

Amortization of intangibles

 

8

 

14

 

Restructuring and other, net

 

46

 

23

 

Impairment of long-lived assets

 

64

 

 

Total operating expenses

 

2,442

 

2,952

 

 

 

 

 

 

 

Income from operations

 

221

 

81

 

 

 

 

 

 

 

Interest income

 

1

 

7

 

Interest expense

 

(45

)

(33

)

Other, net

 

3

 

(14

)

Other income (expense), net

 

(41

)

(40

)

 

 

 

 

 

 

Income before income taxes

 

180

 

41

 

Provision for (benefit from) for income taxes

 

1

 

(16

)

Net income

 

$

179

 

$

57

 

 

 

 

 

 

 

Net income per share:

 

 

 

 

 

Basic

 

$

0.36

 

$

0.12

 

Diluted

 

$

0.35

 

$

0.12

 

Number of shares used in per share calculations:

 

 

 

 

 

Basic

 

494

 

485

 

Diluted

 

512

 

494

 

 

 

 

 

 

 

Cash dividends declared per share

 

$

 

$

0.12

 

 


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

 

See Notes to Condensed Consolidated Financial Statements.

 

4



Table of Contents

 

SEAGATE TECHNOLOGY

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In millions)

(Unaudited)

 

 

 

For the Three Months Ended

 

 

 

October 2,
2009

 

October 3,
2008 (a)

 

OPERATING ACTIVITIES

 

 

 

 

 

Net income

 

$

179

 

$

57

 

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

 

 

 

 

 

Depreciation and amortization

 

204

 

253

 

Stock-based compensation

 

11

 

27

 

Impairment of long-lived assets

 

64

 

 

Other non-cash operating activities, net

 

4

 

(8

)

Changes in operating assets and liabilities:

 

 

 

 

 

Accounts receivable

 

(209

)

16

 

Inventories

 

(35

)

36

 

Accounts payable

 

112

 

278

 

Accrued employee compensation

 

(2

)

(287

)

Accrued warranty

 

(19

)

 

Accrued expenses

 

(54

)

26

 

Other assets and liabilities

 

23

 

(94

)

Net cash provided by operating activities

 

278

 

304

 

 

 

 

 

 

 

INVESTING ACTIVITIES

 

 

 

 

 

Acquisition of property, equipment and leasehold improvements

 

(89

)

(280

)

Purchases of short-term investments

 

(41

)

(90

)

Maturities and sales of short-term investments

 

58

 

93

 

Decrease in restricted cash and investments

 

10

 

 

Other investing activities, net

 

(2

)

12

 

Net cash used in investing activities

 

(64

)

(265

)

 

 

 

 

 

 

FINANCING ACTIVITIES

 

 

 

 

 

Proceeds from short-term borrowings

 

15

 

 

Repayment of short-term borrowings

 

(150

)

 

Retirements and maturities of long-term debt

 

(334

)

 

Decrease in restricted cash and investments

 

332

 

 

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

 

26

 

35

 

Dividends to shareholders

 

 

(59

)

Net cash used in financing activities

 

(111

)

(24

)

 

 

 

 

 

 

Increase in cash and cash equivalents

 

103

 

15

 

Cash and cash equivalents at the beginning of the period

 

1,427

 

990

 

Cash and cash equivalents at the end of the period

 

$

1,530

 

$

1,005

 

 

 

 

 

 

 

Supplemental Disclosure of Cash Flow Information

 

 

 

 

 

Cash paid for interest

 

$

49

 

$

50

 

Cash paid for income taxes, net of refunds

 

1

 

2

 

 


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

 

See Notes to Condensed Consolidated Financial Statements.

 

5



Table of Contents

 

SEAGATE TECHNOLOGY

CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY

 

Three Months Ended October 2, 2009

(In millions)

(Unaudited)

 

 

 

Number
of
Common
Shares

 

Par
Value
of
Shares

 

Additional
Paid-in
Capital

 

Accumulated Other
Comprehensive
Income (Loss)

 

Retained
Earnings
(Accumulated
Deficit)

 

Total

 

Balance at July 3, 2009 (a)

 

493

 

$

 

$

3,708

 

$

(6

)

$

(2,148

)

$

1,554

 

Comprehensive income, net of tax:

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

6

 

 

6

 

Net income

 

 

 

 

 

179

 

179

 

Comprehensive income

 

 

 

 

 

 

 

 

 

 

 

185

 

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

 

4

 

 

29

 

 

 

29

 

Stock-based compensation

 

 

 

11

 

 

 

11

 

Balance at October 2, 2009

 

497

 

$

 

$

3,748

 

$

 

$

(1,969

)

$

1,779

 

 


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

 

See Notes to Condensed Consolidated Financial Statements.

 

6



Table of Contents

 

SEAGATE TECHNOLOGY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

1.  Summary of Significant Accounting Policies

 

Basis of Presentation and Consolidation

 

The Condensed Consolidated Financial Statements include the accounts of the Company and all its wholly-owned subsidiaries, after elimination of intercompany transactions and balances. The Condensed Consolidated Financial Statements have been prepared by the Company and have not been audited.  Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted pursuant to such rules and regulations.  The Condensed Consolidated Financial Statements reflect, in the opinion of management, all material adjustments necessary to summarize fairly the consolidated financial position, results of operations, cash flows and shareholders’ equity for the periods presented.  Such adjustments are of a normal recurring nature.  The Company’s Consolidated Financial Statements for the fiscal year ended July 3, 2009 are included in its Annual Report on Form 10-K as filed with the United States Securities and Exchange Commission (SEC) on August 19, 2009.  The Company believes that the disclosures included in the unaudited Condensed Consolidated Financial Statements, when read in conjunction with its Consolidated Financial Statements as of July 3, 2009 and the notes thereto, are adequate to make the information presented not misleading.

 

The results of operations for the three months ended October 2, 2009, are not necessarily indicative of the results of operations to be expected for any subsequent interim period in the Company’s fiscal year ending July 2, 2010.

 

The Company operates and reports financial results on a fiscal year of 52 or 53 weeks ending on the Friday closest to June 30. The quarters ended October 2, 2009 and October 3, 2008 were 13 weeks and 14 weeks, respectively.  Fiscal year 2010 will be comprised of 52 weeks and will end on July 2, 2010.

 

Critical Accounting Policies and Use of Estimates

 

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

 

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

 

Change in Method of Accounting for Convertible Debt Instruments

 

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

 

7



Table of Contents

 

SEAGATE TECHNOLOGY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

1.  Summary of Significant Accounting Policies (continued)

 

Recently Issued Accounting Pronouncements

 

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

 

In October 2009, the FASB issued ASU No. 2009-13, Revenue Recognition (ASC Topic 605) - Multiple-Deliverable Revenue Arrangements, a consensus of the FASB Emerging Issues Task Force.  This guidance modifies the fair value requirements of ASC subtopic 605-25, Revenue Recognition-Multiple Element Arrangements by allowing the use of the “best estimate of selling price” in addition to vendor-specific objective evidence (VSOE) and verifiable objective evidence (VOE) (now referred to as TPE standing for third-party evidence) for determining the selling price of a deliverable. A vendor is now required to use its best estimate of the selling price when VSOE or TPE of the selling price cannot be determined. In addition, the residual method of allocating arrangement consideration is no longer permitted.  In October 2009, the FASB also issued ASU No. 2009-14, Software (ASC Topic 985) - Certain Revenue Arrangements That Include Software Elements, a consensus of the FASB Emerging Issues Task Force.  This guidance modifies the scope of ASC subtopic 965-605, Software-Revenue Recognition to exclude from its requirements (a) non-software components of tangible products and (b) software components of tangible products that are sold, licensed, or leased with tangible products when the software components and non-software components of the tangible product function together to deliver the tangible product’s essential functionality.  This update requires expanded qualitative and quantitative disclosures and is effective for the Company’s first quarter of fiscal year 2011. However, early adoption is allowed.  The Company is currently evaluating the impact of adopting this update on its consolidated financial statements.

 

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

 

8



Table of Contents

 

SEAGATE TECHNOLOGY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

2.  Balance Sheet Information

 

Investments

 

The following is a summary of the fair value of available-for-sale securities at October 2, 2009:

 

(Dollars in millions)

 

Amortized
Cost

 

Unrealized
Gain/

(Loss)

 

Fair
Value

 

U.S. treasuries and agency bonds

 

$

98

 

$

1

 

$

99

 

Corporate bonds

 

28

 

 

28

 

Municipal bonds

 

14

 

 

14

 

Auction rate securities

 

21

 

(3

)

18

 

Commercial paper

 

254

 

 

254

 

Certificates of deposit

 

46

 

 

46

 

Money market funds

 

1,047

 

 

1,047

 

Total

 

$

1,508

 

$

(2

)

$

1,506

 

Included in cash and cash equivalents

 

 

 

 

 

$

1,392

 

Included in short term investments

 

 

 

 

 

96

 

Included in long term investments

 

 

 

 

 

18

 

 

 

 

 

 

 

$

1,506

 

 

As of October 2, 2009, with the exception of the Company’s auction rate securities, the Company had no marketable securities that had been in a continuous unrealized loss position for a period greater than 12 months and determined no investments were other-than-temporarily impaired (see Note 7).

 

The fair value of the Company’s investment in debt securities at October 2, 2009, by remaining contractual maturity, is as follows:

 

(Dollars in millions)

 

Amortized
Cost

 

Unrealized
Gain/

(Loss)

 

Fair
Value

 

Due in less than 1 year

 

$

1,459

 

$

 

$

1,459

 

Due in 1 to 3 years

 

28

 

1

 

29

 

Thereafter

 

21

 

(3

)

18

 

Total

 

$

1,508

 

$

(2

)

$

1,506

 

 

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

 

(Dollars in millions)

 

Amortized
Cost

 

Unrealized
Gain/

(Loss)

 

Fair
Value

 

U.S. treasuries and agency bonds

 

$

52

 

$

1

 

$

53

 

Corporate bonds

 

16

 

 

16

 

Municipal bonds

 

14

 

 

14

 

Auction rate securities

 

21

 

(3

)

18

 

Commercial paper

 

348

 

 

348

 

Certificates of deposit

 

50

 

 

50

 

Money market funds

 

914

 

 

914

 

Total

 

$

1,415

 

$

(2

)

$

1,413

 

Included in cash and cash equivalents

 

 

 

 

 

$

1,281

 

Included in short term investments

 

 

 

 

 

114

 

Included in long term investments

 

 

 

 

 

18

 

 

 

 

 

 

 

$

1,413

 

 

9



Table of Contents

 

SEAGATE TECHNOLOGY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

2.  Balance Sheet Information (continued)

 

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

 

(Dollars in millions)

 

Amortized
Cost

 

Unrealized
Gain/

(Loss)

 

Fair
Value

 

Due in less than 1 year

 

$

1,364

 

$

 

$

1,364

 

Due in 1 to 3 years

 

30

 

1

 

31

 

Thereafter

 

21

 

(3

)

18

 

Total

 

$

1,415

 

$

(2

)

$

1,413

 

 

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

 

Restricted Cash and Investments

 

        As of October 2, 2009, the Company’s restricted cash and investments consisted of $85 million for cash held in trust for payment of its deferred compensation plan liabilities, $47 million of proceeds from the issuance of its 10% Senior Secured Second-Priority Notes due May 2014 (“10% Notes”) held in escrow for the repayment or repurchase of debt, and $34 million in cash collateral held at banks for various performance obligations.

 

Accounts Receivable

 

(Dollars in millions)

 

October 2,
2009

 

July 3,
2009

 

Accounts receivable

 

$

 1,252

 

$

 1,043

 

Allowance for doubtful accounts

 

(10

)

(10

)

 

 

$

 1,242

 

$

1,033

 

 

Inventories

 

(Dollars in millions)

 

October 2,
2009

 

July 3,
2009

 

Raw materials and components

 

$

 217

 

$

 201

 

Work-in-process

 

135

 

120

 

Finished goods

 

270

 

266

 

 

 

$

 622

 

$

 587

 

 

Other Current Assets

 

(Dollars in millions)

 

October 2,
2009

 

July 3,
2009

 

Vendor non-trade receivables

 

$

 340

 

$

 326

 

Other

 

212

 

202

 

 

 

$

 552

 

$

 528

 

 

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

 

10



Table of Contents

 

SEAGATE TECHNOLOGY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

2.  Balance Sheet Information (continued)

 

Property, Equipment and Leasehold Improvements, net

 

(Dollars in millions)

 

October 2,
2009

 

July 3,
2009

 

Property, equipment and leasehold improvements

 

$

 6,189

 

$

 6,267

 

Accumulated depreciation and amortization

 

(4,150

)

(4,038

)

 

 

$

 2,039

 

$

 2,229

 

 

3.  Restructuring and Exit Costs

 

The Company’s significant restructuring plans are described below. All restructuring charges are reported in Restructuring and other, net on the Condensed Consolidated Statements of Operations, unless otherwise noted.

 

During the first quarter of fiscal year 2010, the Company recorded restructuring charges of $46 million, comprised mainly of charges related to the planned closure of the Company’s Ang Mo Kio (AMK) manufacturing operations in Singapore (the “AMK Plan”).

 

AMK Plan. In August 2009, the Company announced that it will close its AMK facility in Singapore by the end of  calendar year 2010. The hard drive manufacturing operations will be relocated to other existing Seagate facilities and the Company’s Asia International Headquarters (IHQ) will remain in Singapore. This closure and relocation is part of the Company’s ongoing focus on cost efficiencies in all areas of its business and is intended to facilitate leveraging manufacturing investments across fewer sites. The Company does not expect the closure to meaningfully change production capacity.  The Company currently estimates total restructuring charges of approximately $80 million, all in cash, including approximately $60 million for severance, approximately $10 million for the relocation of manufacturing equipment, and approximately $10 million for other plant closure and relocation costs. During the three months ended October 2, 2009, the Company accrued total restructuring charges of $37 million related to estimated post-employment benefits for the AMK Plan.  No cash payments were made relating to this plan during the three months ended October 2, 2009.

 

January and May 2009 Plans. From inception of the Company’s restructuring plans announced in January and May of 2009 through October 2, 2009, the Company has recorded restructuring charges of approximately $169 million primarily related to post employment benefits. These plans are expected to result in total restructuring charges of approximately $172 million. During the three months ended October 2, 2009, the Company recorded restructuring charges of $1 million related to other exit costs. The Company made cash payments of $52 million relating to these plans during the three months ended October 2, 2009. Payment of the remaining accrued balance of $10 million is expected to be largely completed by January 1, 2010.

 

Pittsburgh and Milpitas Closures.  The Company announced the closure of its research facility in Pittsburgh, Pennsylvania and its media manufacturing facility in Milpitas, California in September 2008 and July 2008, respectively. Operations at these facilities ceased during fiscal year 2009. During the three months ended October 2, 2009, the Company recorded approximately $6 million of restructuring charges related to additional Pittsburgh lease obligations and approximately $2 million of other exit costs. From the inception of these plans through October 2, 2009, the Company has recorded restructuring charges of approximately $105 million, net of adjustments.  These closures are expected to result in total charges of approximately $110 million. The Company made cash payments of $4 million related to these plans during the three months ended October 2, 2009. The remaining balance of $12 million as of October 2, 2009 is associated with facility lease obligations. Payment of these exit costs are expected to continue through the end of fiscal year 2017.

 

Maxtor and Other.  The Company recorded certain exit costs aggregating $265 million through fiscal year 2009 related to its acquisition of Maxtor. The Company made cash payments of $2 million related to these plans during the three months ended October 2, 2009. The remaining balance of $27 million, as of October 2, 2009, is associated with the exit of certain facilities. Payment of these exit costs are expected to continue through the end of fiscal year 2016.

 

11



Table of Contents

 

SEAGATE TECHNOLOGY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

3.  Restructuring and Exit Costs (continued)

 

The following table summarizes the Company’s restructuring activities for the three months ended October 2, 2009:

 

(Dollars in millions)

 

Employee
Benefits

 

Operating
Leases

 

Other
Exit
Costs

 

Total

 

All Restructuring Activities

 

 

 

 

 

 

 

 

 

Accrual balances at July 3, 2009

 

$

 61

 

$

 40

 

$

 —

 

$

 101

 

 Restructuring charges

 

37

 

6

 

3

 

46

 

 Cash payments

 

(52

)

(4

)

(2

)

(58

)

 Adjustments

 

 

 

 

 

Accrual balances at October 2, 2009

 

$

 46

 

$

 42

 

$

 1

 

$

 89

 

 

Of the $89 million accrued restructuring balance at October 2, 2009, $37 million is included in Accrued expenses and $52 million is included in Other non-current liabilities on the accompanying Condensed Consolidated Balance Sheet.

 

4.  Debt and Convertible Notes

 

Short-term Borrowings

 

During the three months ended October 2, 2009, the Company entered into $15 million of short-term borrowings.

 

Convertible Notes

 

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

 

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

 

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

 

12



Table of Contents

 

SEAGATE TECHNOLOGY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

4.  Debt and Convertible Notes (continued)

 

The following illustrates the retrospective impact of implementing the provisions of the change in accounting for convertible debt on the Condensed Consolidated Balance Sheet as of July 3, 2009 and on the previously stated Condensed Consolidated Statement of Operations for the three months ended October 3, 2008:

 

Retrospective Impact on the Condensed Consolidated Balance Sheet as of July 3, 2009

 

(Dollars in millions)

 

As Originally
Stated

 

Effect of Change in
Accounting

 

Restated

 

Current assets:

 

 

 

 

 

 

 

Deferred income taxes

 

$

 94

 

$

 3

 

$

 97

 

Non-current assets:

 

 

 

 

 

 

 

Deferred income taxes

 

$

375

 

$

(3

)

$

372

 

Non-current liabilities:

 

 

 

 

 

 

 

Long-term debt, less current portion

 

$

1,956

 

$

(30

)

$

1,926

 

Stockholders’ equity:

 

 

 

 

 

 

 

Additional paid-in capital

 

$

3,647

 

$

61

 

$

3,708

 

Accumulated deficit

 

$

(2,117

)

$

(31

)

$

(2,148

)

 

Retrospective Impact on the Condensed Consolidated Statement of Operations

for the Three Months Ended October 3, 2008

 

(Dollars in millions)

 

As Originally
Stated

 

Effect of Change in Accounting

 

Restated

 

Interest expense

 

$

 (30

)

$

 (3

)

$

 (33

)

Net income (loss)

 

$

60

 

$

(3

)

$

57

 

 

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

 

The following table presents information regarding the equity and liability components of the 2.375% and 6.8% Notes:

 

 

 

As of

 

(Dollars in millions)

 

October 2,
2009

 

July 3,
2009

 

 

 

 

 

Restated

 

2.375% Notes

 

 

 

 

 

Principal amount

 

$

 326

 

$

 326

 

Unamortized discount

 

(38

)

(41

)

Liability component

 

$

 288

 

$

 285

 

Equity component

 

$

 231

 

$

 231

 

6.8% Notes

 

 

 

 

 

Principal amount and liability component

 

$

 104

 

$

 116

 

Equity component

 

$

 17

 

$

 17

 

 

13



Table of Contents

 

SEAGATE TECHNOLOGY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

4.  Debt and Convertible Notes (continued)

 

The remaining discount on the 2.375% Notes will continue to be amortized until maturity of the 2.375% Notes in August 2012.  The effective interest rate, contractual interest expense and amortization of debt discount for the 2.375% Notes for the three months ended October 2, 2009 and October 3, 2008 were as follows:

 

 

 

The Three Months Ended

 

(Dollars in millions, except for percentages)

 

October 2,
2009

 

October 3,
2008

 

 

 

 

 

Restated

 

Effective interest rate

 

6.9

%

6.9

%

Interest expense – contractual

 

$

 2

 

$

 2

 

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

 

$

 3

 

$

 3

 

 

The 2.375% and 6.8% Notes may, subject to certain conditions, be converted into the Company’s common shares based on a conversion rate of 60.2074 and 30.1733 shares, respectively, per $1,000 principal amount of notes, which represents a conversion price of approximately $16.61 and $33.14 per share, respectively.  As of October 2, 2009, these notes were not convertible and the principal values exceeded the conversion values.

 

5.  Income Taxes

 

The income tax provision of $1 million recorded in the three months ended October 2, 2009 included approximately $11 million of discrete tax benefits primarily associated with reversal of valuation allowance previously recorded for certain foreign deferred tax assets and releases of tax reserves resulting from the expiration of certain statutes of limitations. The income tax benefit of $16 million recorded in the three months ended October 3, 2008 included discrete items associated with release of tax reserves and monetization of research tax credits.

 

The Company’s provision for income taxes recorded for the three months ended October 2, 2009 differed from the provision for income taxes that would be derived by applying a notional U.S. 35% rate to income before income taxes primarily due to the net effect of (i) tax benefits related to tax holiday and tax incentive programs, (ii) a decrease in valuation allowance for certain foreign deferred tax assets, (iii) a decrease in certain tax reserves, and (iv) tax expense related to intercompany transactions.

 

The tax rate differential for the three months ended October 3, 2008 was primarily due to the net effect of (i) tax benefits related to tax holiday and tax incentive programs, (ii) a decrease in valuation allowance for U.S. deferred tax assets attributable in part to tax legislation enacted during the period, (iii) tax expense related to intercompany transactions, and (iv) U.S. and foreign tax benefits recorded during the quarter related to reductions in tax reserves due to settlement of tax audits and expiration of certain statutes of limitations.

 

During the three months ended October 2, 2009, the Company’s unrecognized tax benefits excluding interest and penalties remained at $118 million. The unrecognized tax benefits that, if recognized, would impact the effective tax rate was $118 million as of October 2, 2009 subject to certain future valuation allowance reversals.  During the 12 months beginning October 3, 2009, the Company expects to reduce its unrecognized tax benefits by approximately $10 million as a result of tax positions being effectively settled and the expiration of certain statutes of limitations.

 

14



Table of Contents

 

SEAGATE TECHNOLOGY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

6.  Derivative Financial Instruments

 

The Company is exposed to foreign currency exchange rate, interest rate, and to a lesser extent, equity price risks relating to its ongoing business operations. The Company enters into various foreign currency forward exchange contracts in order to manage the foreign currency exchange rate risk on forecasted expenses denominated in foreign currencies and to mitigate the remeasurement risk of certain foreign currency denominated liabilities.  The Company had an unrealized net gain on cash flow hedges of $5 million and a net loss of $1 million included in Other comprehensive income (loss) (OCI) as of October 2, 2009 and July 3, 2009, respectively.

 

The Company dedesignates its cash flow hedges when the forecasted hedged transactions are realized or it is probable the forecasted hedged transaction will not occur in the initially identified time period. At such time, the associated gains and losses deferred in Other comprehensive income (loss) are reclassified immediately into earnings. Any subsequent changes in the fair value of such derivative instruments are also reflected in earnings. As of October 2, 2009, the Company’s existing foreign currency forward exchange contracts are expected to mature within 12 months and the deferred amount currently recorded in Other comprehensive income (loss) and expected to be recognized into earnings is approximately $5 million.

 

As of October 2, 2009, the total notional value of the Company’s outstanding foreign currency forward exchange contracts was:

 

(Dollars in millions)

 

Contracts Qualifying as Hedges
Under ASC 815

 

Contracts Not Qualifying as Hedges
Under ASC 815

 

Thai baht

 

$

273

 

$

175

 

Singapore dollars

 

37

 

 

British pounds

 

7

 

1

 

Czech koruna

 

 

3

 

 

 

$

317

 

$

179

 

 

The Company is subject to equity market risks due to changes in the fair value of the notional investments selected by its employees as part of its non-qualified deferred compensation (NQDC) plan. In the quarter ended July 3, 2009, the Company entered into a Total Return Swap (TRS) in order to manage the equity market risks associated with the NQDC plan liabilities. The Company pays a floating rate, based on LIBOR plus a spread, on the notional amount of the TRS. The TRS is designed to substantially offset changes in the NQDC plan liability due to changes in the value of the investment options made by employees. As of October 2, 2009, the notional investments underlying the TRS amounted to $76 million. The contract term of the TRS is one year and is settled on a monthly basis therefore limiting counterparty performance risk. The terms of the TRS require the Company to pledge initial collateral of $18 million to the counterparty for the term of the contract. Additional collateral may be posted contingent on the counterparty’s exposure to the market value of the TRS. As of October 2, 2009, the Company had pledged collateral of $18 million to the counterparty and recorded the cash pledged as restricted cash. The Company did not designate the TRS as a hedge in accordance with ASC 815, Derivatives and Hedging. Rather, the Company records all changes in the fair value of the TRS to earnings to offset the market value changes of the NQDC plan liabilities.

 

15



Table of Contents

 

SEAGATE TECHNOLOGY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

6.  Derivative Financial Instruments (continued)

 

The following table shows the Company’s derivative instruments measured at gross fair value as reflected in the Condensed Consolidated Balance Sheet as of October 2, 2009:

 

Fair Values of Derivative Instruments

 

 

 

Asset Derivatives

 

Liability Derivatives

 

(Dollars in millions)

 

Balance
Sheet
Location

 

Fair
Value

 

Balance
Sheet
Location

 

Fair
Value

 

Derivatives designated as hedging instruments under ASC 815:

 

 

 

 

 

 

 

 

 

Foreign currency forward exchange contracts

 

Other
current
assets

 

$

6

 

Accrued
expenses

 

$

 

 

 

 

 

 

 

 

 

 

 

Derivatives not designated as hedging instruments under ASC 815:

 

 

 

 

 

 

 

 

 

Foreign currency forward exchange contracts

 

Other
current
assets

 

$

4

 

Accrued
expenses

 

$

 

Total return swap

 

Other
current
liabilities

 

 

Accrued
expenses

 

(2

)

Total derivatives

 

 

 

$

10

 

 

 

$

(2

)

 

The following tables show the effect of the Company’s derivative instruments on Other comprehensive income (loss) and the Condensed Consolidated Statement of Operations for the three months ended October 2, 2009:

 

(Dollars in millions)

 

Derivatives Designated as Cash Flow
Hedges under ASC 815

 

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

 

$

6

 

Cost of revenue

 

$

 

Cost of revenue

 

$

 

 

Derivatives Not Designated as Hedging Instruments
under ASC 815

 

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

 

Total return swap

 

Operating expenses

 

$

9

 

 

 

 

 

$

13

 

 


(a)   The amount of gain or (loss) recognized in income represents $0 related to the ineffective portion of the hedging relationships and $0.4 million related to the amount excluded from the assessment of hedge effectiveness.

 

Net foreign currency transaction gains included in the determination of consolidated net income were $4 million for the three months ended October 2, 2009 and net foreign currency transaction losses were $6 million for the three months ended October 3, 2008.

 

16



Table of Contents

 

SEAGATE TECHNOLOGY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

6.  Derivative Financial Instruments (continued)

 

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

 

(Dollars in millions)

 

Contracts Qualifying as Hedges
Under ASC 815

 

Contracts Not Qualifying as Hedges
Under ASC 815

 

Thai baht

 

$

104

 

$

64

 

Singapore dollars

 

24

 

3

 

Czech koruna

 

 

8

 

 

 

$

128

 

$

75

 

 

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

 

Fair Values of Derivative Instruments

 

 

 

Asset Derivatives

 

Liability Derivatives

 

(Dollars in millions)

 

Balance
Sheet
Location

 

Fair
Value

 

Balance
Sheet
Location

 

Fair
Value

 

Derivatives designated as hedging instruments under ASC 815:

 

 

 

 

 

 

 

 

 

Foreign currency forward exchange contracts

 

Other
current
assets

 

$

1

 

Accrued
expenses

 

$

 

 

 

 

 

 

 

 

 

 

 

Derivatives not designated as hedging instruments under ASC 815:

 

 

 

 

 

 

 

 

 

Foreign currency forward exchange contracts

 

Other
current
assets

 

$

 

Accrued
expenses

 

$

 

Total return swap

 

Other
current
liabilities

 

 

Accrued
expenses

 

(1

)

Total derivatives

 

 

 

$

1

 

 

 

$

(1

)

 

7.  Fair Value

 

For assets and liabilities recorded at fair value, the Company bases the determination of fair value upon exit price, representing the amount that would be received on the sale of an asset or paid to transfer a liability in an orderly transaction between market participants.  The Company considers the principal or most advantageous market in which it would transact and it considers assumptions that market participants would use when pricing the asset or liability.

 

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

 

17



Table of Contents

 

SEAGATE TECHNOLOGY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

7.  Fair Value (continued)

 

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

 

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

 

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

 

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

 

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

 

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 October 2, 2009:

 

 

 

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

 

$

1,047

 

$

 

$

 

$

1,047

 

Certificates of deposit

 

 

35

 

 

35

 

Agency bonds

 

 

27

 

 

27

 

Corporate bonds

 

 

28

 

 

28

 

Commercial paper

 

 

254

 

 

254

 

Municipal bonds

 

 

14

 

 

14

 

U.S. treasuries

 

 

72

 

 

72

 

Total Cash Equivalents and Marketable Securities

 

1,047

 

430

 

 

1,477

 

 

 

 

 

 

 

 

 

 

 

Restricted Cash and Investments:

 

 

 

 

 

 

 

 

 

Money market funds

 

132

 

 

 

132

 

Certificates of deposit

 

 

6

 

 

6

 

Auction rate securities

 

 

 

18

 

18

 

Derivative assets

 

 

10

 

 

10

 

Total Assets

 

$

1,179

 

$

446

 

$

18

 

$

1,643

 

 

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

Derivative liabilities

 

$

 

$

(2

)

$

 

$

(2

)

Total Liabilities

 

$

 

$

(2

)

$

 

$

(2

)

 

18



Table of Contents

 

SEAGATE TECHNOLOGY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

7.  Fair Value (continued)

 

 

 

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

 

$

1,047

 

$

334

 

$

 

$

1,381

 

Short-term investments

 

 

96

 

 

96

 

Restricted cash and investments

 

132

 

6

 

 

138

 

Other assets, net(1)

 

 

10

 

18

 

28

 

Total Assets

 

$

1,179

 

$

446

 

$

18

 

$

1,643

 

Liabilities:

 

 

 

 

 

 

 

 

 

Accrued expenses(2)

 

$

 

$

(2

)

$

 

$

(2

)

Total Liabilities

 

$

 

$

(2

)

$

 

$

(2

)

 


(1)   Amount represents the fair value of foreign currency exchange forward contracts and the fair value of the auction rate securities as of October 2, 2009.

 

(2)   Amount represents the fair value of the Company’s Total Return Swap as of October 2, 2009.

 

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

 

The Company classifies items in Level 2 if the financial asset or liability is valued using observable inputs. The Company uses observable inputs including quoted prices in active markets for similar assets or liabilities.  Level 2 assets include: agency bonds, corporate bonds, commercial paper, municipal bonds, and U.S. Treasuries. These debt investments are priced using observable inputs and valuation models which vary by asset class.  The Company uses a pricing service to assist in determining the fair values of all of its cash equivalents and marketable securities.  For the cash equivalents and marketable securities in the Company’s portfolio, multiple pricing sources are generally available.  The pricing service uses inputs from multiple industry standard data providers or other third party sources and various methodologies, such as weighting and models, to determine the appropriate price at the measurement date.  The Company corroborates the prices obtained from the pricing service against other independent sources and, as of October 2, 2009, has not found it necessary to make any adjustments to the prices obtained. The Company’s derivative financial instruments are also classified within Level 2.  The Company’s derivative financial instruments consist of foreign currency forward exchange contracts and a total return swap.  The Company recognizes derivative financial instruments in its consolidated financial statements at fair value in accordance with ASC 815.  The Company determines the fair value of these instruments by considering the estimated amount it would pay or receive to terminate these agreements at the reporting date.

 

19



Table of Contents

 

SEAGATE TECHNOLOGY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

7.  Fair Value (continued)

 

The Company’s Level 3 assets consist of auction rate securities with a par value of approximately $21 million, all of which are collateralized by student loans guaranteed by the Federal Family Education Loan Program. Beginning in the fiscal quarter ended March 28, 2008, these securities failed to settle at auction and have continued to fail through the fiscal quarter ended October 2, 2009. Since there is no active market for these securities, the Company valued them using a pricing model provided by a third party valuation firm. The valuation model is based on the income approach and reflects both observable and significant unobservable inputs.  Since the Company continues to earn interest on its auction rate securities at the maximum contractual rate, there have been no payment defaults with respect to such securities, and they are all collateralized, the Company expects to recover the entire amortized cost basis of these auction rate securities. The Company does not intend to sell these securities and has concluded it is not more likely than not that the Company will be required to sell the securities before the recovery of their amortized cost basis. As such, the Company believes the impairments totaling $3 million are not other than temporary and therefore have been recorded in Accumulated other comprehensive income (loss) and these securities are classified as Long-term investments in the Company’s Condensed Consolidated Balance Sheets. Given the uncertainty as to when the liquidity issues associated with these securities will improve, these securities were classified as long-term investments.

 

The table below presents a reconciliation of all assets and liabilities measured at fair value on a recurring basis, excluding accrued interest components, using significant unobservable inputs (Level 3) for the three months ended October 2, 2009:

 

 

 

Fair Value Measurements
Using Significant
Unobservable Inputs

(Level 3)

 

(Dollars in millions)

 

Auction Rate Securities

 

Balance at July 3, 2009

 

$

18

 

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

 

 

 

Realized gains (losses)(1)

 

 

Unrealized gains (losses) (2)

 

 

Balance at October 2, 2009

 

$

18

 

 


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

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

 

Items Measured at Fair Value on a Non-Recurring Basis

 

The following table presents the Company’s assets and liabilities that are measured at fair value on a non-recurring basis as of October 2, 2009.

 

 

 

Fair Value Measurements at Reporting Date Using

 

(Dollars in millions)

 

Quoted
Prices in
Active
Markets for
Identical
Instruments

(Level 1)

 

Significant
Other

Observable
Inputs

(Level 2)

 

Significant
Unobservable
Inputs

(Level 3)

 

Total
Balance

 

Assets:

 

 

 

 

 

 

 

 

 

Assets held for sale

 

$

 

$

 

$

11

 

$

11

 

 

20



Table of Contents

 

SEAGATE TECHNOLOGY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

7.  Fair Value (continued)

 

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

 

Other Fair Value Disclosures

 

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

 

 

 

October 2, 2009

 

July 3, 2009

 

(Dollars in millions)

 

Carrying
Amount

 

Estimated
Fair Value

 

Carrying
Amount

 

Estimated
Fair Value

 

 

 

 

 

 

 

 

 

 

 

LIBOR Based Credit Facility

 

$

200

 

$

200

 

$

350

 

$

350

 

10.0% Senior Secured Second-Priority Notes due May 2014

 

411

 

469

 

410

 

445

 

Floating Rate Senior Notes due October 2009

 

 

 

300

 

299

 

6.8% Convertible Senior Notes due April 2010

 

104

 

105

 

116

 

116

 

6.375% Senior Notes due October 2011

 

579

 

586

 

599

 

581

 

5.75% Subordinated Debentures due March 2012

 

36

 

37

 

37

 

35

 

2.375% Convertible Senior Notes due August 2012

 

288

 

334

 

316

 

283

 

6.8% Senior Notes due October 2016

 

599

 

546

 

599

 

550

 

Floating Rate Short-term Borrowings

 

15

 

15

 

 

 

 

 

2,232

 

2,292

 

2,727

 

2,659

 

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

 

(322

)

(324

)

(771

)

(769

)

Long-term debt, less current portion

 

$

1,910

 

$

1,968

 

$

1,956

 

$

1,890

 

 

21



Table of Contents

 

SEAGATE TECHNOLOGY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

8.   Shareholders’ Equity

 

Issuance of Common Shares

 

During the three months ended October 2, 2009, the Company issued approximately 2 million of its common shares from the exercise of stock options and approximately 2.5 million of its common shares related to the Company’s Employee Stock Purchase Plan (“ESPP”).

 

Seagate Technology 2001 Share Option Plan — As of October 2, 2009, there were approximately 3 million common shares available for issuance under the Seagate Technology 2001 Share Option Plan.

 

Seagate Technology 2004 Stock Compensation Plan — As of October 2, 2009, there were approximately 15 million common shares available for issuance under the Seagate Technology 2004 Stock Compensation Plan.

 

Stock Purchase Plan —As of October 2, 2009, there were approximately 11 million common shares available for issuance under the ESPP.

 

Repurchases of Equity Securities

 

The Company did not repurchase any of its common shares during the three months ended October 2, 2009.  As of October 2, 2009, the Company had approximately $2.0 billion remaining under the authorized $2.5 billion February 2008 stock repurchase plan, which expires in February 2010.

 

9.   Stock-Based Compensation

 

The Company recorded $11 million and $27 million of stock-based compensation during the three months ended October 2, 2009 and October 3, 2008, respectively.

 

22



Table of Contents

 

SEAGATE TECHNOLOGY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

10.   Guarantees

 

Indemnifications of Officers and Directors

 

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

 

Intellectual Property Indemnification Obligations

 

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

 

Product Warranty

 

The Company estimates and accrues product warranty costs at the time revenue is recognized. The Company generally warrants its products for periods from one to five years. The Company uses estimated repair or replacement costs and uses statistical modeling to estimate product return rates in order to determine its warranty obligations. In addition, estimated settlements for customer compensatory claims relating to product quality issues, if any, are accrued as warranty expense. Changes in the Company’s product warranty liability during the three months ended October 2, 2009 and October 3, 2008 were as follows:

 

 

 

For the Three Months Ended

 

(Dollars in millions)

 

October 2,
2009

 

October 3,
2008

 

Balance, beginning of period

 

$

437

 

$

445

 

Warranties issued

 

61

 

78

 

Repairs and replacements

 

(63

)

(69

)

Changes in liability for pre- existing warranties, including expirations

 

(17

)

(9

)

Balance, end of period

 

$

418

 

$

445

 

 

23



Table of Contents

 

SEAGATE TECHNOLOGY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

11.   Earnings Per Share

 

In accordance with ASC 260, Earnings per Share (previously SFAS 128, Earnings per Share), the following table sets forth the computation of basic and diluted net income (loss) per share:

 

 

 

For the Three Months Ended

 

(Dollars in millions, except per share data)

 

October 2,
2009

 

October 3,
2008

 

 

 

 

 

 

 

Numerator:

 

 

 

 

 

Net income

 

$

179

 

$

60

 

 

 

 

 

 

 

Denominator:

 

 

 

 

 

Weighted-average common shares outstanding

 

495

 

487

 

Weighted-average nonvested shares

 

(1

)

(2

)

Total shares for purpose of calculating basic net income per share

 

494

 

485

 

 

 

 

 

 

 

Weighted-average effect of dilutive securities:

 

 

 

 

 

Nonvested shares

 

 

 

Dilution from employee stock options

 

18

 

9

 

Dilutive potential common shares:

 

18

 

9

 

Total shares for purpose of calculating diluted net income per share

 

512

 

494

 

 

 

 

 

 

 

Net income per share:

 

 

 

 

 

Basic net income per share

 

$

0.36

 

$

0.12

 

Diluted net income per share

 

$

0.35

 

$

0.12

 

 

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

 

 

 

For the Three Months Ended

 

(in millions)

 

October 2,
2009

 

October 3,
2008

 

 

 

 

 

 

 

Stock options

 

38

 

39

 

Nonvested shares

 

 

1

 

6.8% convertible senior notes

 

3

 

4

 

 

24



Table of Contents

 

SEAGATE TECHNOLOGY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

12.  Legal, Environmental and Other Contingencies

 

In accordance with ASC 450, Contingencies (previously SFAS No. 5, Accounting for Contingencies), the Company assesses the probability of an unfavorable outcome of all its material litigation, claims, or assessments to determine whether a liability had been incurred and whether it is probable that one or more future events will occur confirming the fact of the loss. In the event that an unfavorable outcome is determined to be probable and the amount of the loss can be reasonably estimated, the Company establishes an accrual for the litigation, claim or assessment. 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 adverse effect on its results of operations. Accordingly, actual results could differ materially.

 

Intellectual Property Litigation

 

Convolve, Inc. 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 the Company 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 Seagate’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 willful infringement.

 

On November 6, 2001, the U.S. Patent and Trademark Office (USPTO) issued 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”) to Convolve. Convolve filed an amended complaint on January 16, 2002, alleging defendants’ infringement of this patent

 

Plaintiffs eventually indicated they would not prosecute the ‘267 patent in this case. On March 29, 2006, the court granted summary judgment for Seagate that Convolve’s fraud, tortious interference with contract, unfair competition and breach of confidence claims are preempted by the California Uniform Trade Secrets Act (CUTSA). The court also held that while Convolve’s claim for breach of the covenant of good faith and fair dealing is not preempted by the CUTSA, no tort damages are available. The court entered an order on July 14, 2006, that Convolve has no evidence to prove its claims regarding 10 alleged trade secrets, precluding Convolve from proceeding at trial on those claims, and precluding Convolve from alleging violations of the 10 alleged trade secrets by either defendant prior to December 7, 2005.

 

At Seagate’s request, the USPTO determined that both patents in suit had substantial new issues of patentability and ordered reexamination of the patents. The court denied the Company’s motion to stay the federal case pending patent reexamination. On December 2, 2008, the USPTO issued a reexamination certificate for the ‘473 patent in which nine of the claims asserted in this litigation were determined to be patentable as amended and three asserted claims were confirmed. On June 8, 2009, the USPTO issued an initial office action in a second reexamination proceeding rejecting as unpatentable all 12 claims of the ‘473 patent that are asserted in the litigation. The Company awaits a final office action with respect to the ‘473 patent. A final office action issued in the ‘635 reexamination in which five asserted claims were confirmed as patentable and three asserted claims were finally rejected. On September 21, 2009, the USPTO ordered another reexamination of the asserted claims of the ‘635 patent on grounds that there are substantial new questions of patentability.  The ‘635 patent expired on September 12, 2008. No trial date has been set in the litigation. The Company believes the claims are without merit, and intends to defend against them vigorously.

 

25



Table of Contents

 

SEAGATE TECHNOLOGY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

12.  Legal, Environmental and Other Contingencies (Continued)

 

Siemens, AG v. Seagate Technology—On August 23, 2006, Siemens, AG, a German corporation, filed a complaint against Seagate Technology in the U.S. District Court for the Central District of California alleging infringement of U.S. Patent No. 5,686,838 (the ‘838 patent) entitled “Magnetoresistive Sensor Having at Least a Layer System and a Plurality of Measuring Contacts Disposed Thereon, and a Method of Producing the Sensor.” The suit alleged that Seagate drives incorporating Giant Magnetic Resistive (GMR) sensors infringe the ‘838 patent. The complaint sought damages in an unstated amount, an accounting, preliminary and permanent injunctions, prejudgment interest, enhanced damages for alleged willful infringement and attorney fees and costs. Siemens amended its complaint to add Tunnel Magnetic Resistive (TMR) sensors to the case. On May 9, 2008, the court entered summary judgment that TMR sensors are not covered by the ‘838 patent, thus eliminating TMR products from the case. On September 23, 2008, the court entered summary judgment that Seagate drives incorporating GMR sensors are covered by the ‘838 patent. Trial began on November 12, 2008, and a jury returned a verdict in favor of Seagate on December 23, 2008, finding the ‘838 patent invalid on grounds of both anticipation and obviousness. Judgment was entered by the court in Seagate’s favor on January 30, 2009, and Siemens’ post-trial motions were all denied. Siemens has appealed to the Federal Circuit Court of Appeals.  The Company believes the appeal is without merit and has opposed it.

 

Siemens, AG v. Seagate Technology (Ireland)—On December 2, 2008, Siemens served Seagate Technology (Ireland) with a writ of summons alleging infringement of European Patent (UK) No. 0 674 769 (the EU ‘769 patent), which is the European counterpart to US Patent No. 5,686,838 upon which Siemens had sued Seagate Technology in the United States. The suit was filed in the High Court of Justice in Northern Ireland, Chancery Division. Siemens alleges that giant magnetoresistive (GMR), tunnel magnetoresistive (TMR), and tunnel giant magnetoresistive (TGMR) products designed and manufactured by Seagate Technology (Ireland) infringe the EU’769 patent. Trial is set for May 2010. The Company believes the claims are without merit and intends to defend against them vigorously.

 

Qimonda AG v, LSI Corporation, et al.—On December 19, 2008, the US International Trade Commission (ITC) instituted an investigation under section 337 of the Tariff Act of 1930, as amended, at the request of complainant Qimonda AG, naming LSI Corporation and six Seagate Technology entities as respondents. The complaint alleges that LSI and Seagate import products into the US that infringe seven Qimonda patents relating to the design and manufacture of semiconductor integrated chips. The Company filed an answer on January 16, 2009. The ITC trial was held in June 2009. On October 14, 2009, the Administrative Law Judge issued an Initial Determination finding the Qimonda patents either invalid, not infringed, or both.  The target date for completion of the investigation and, if a violation of the law is found, issuance of any remedy is February 16, 2010. The Company intends to vigorously defend the infringement allegations.

 

Collins, et al. v. Seagate technology, et al.—On July 15, 2009, Carl Collins and Farzin Davanloo filed a complaint against Seagate Technology, Seagate Technology LLC and 19 other hard drive, computer, and retail companies. The complaint alleges that unspecified hard disk drives and components thereof infringe US patent Nos. 5,411,797 (the ‘797 patent) and 5,478,650 (the ‘650 patent), both entitled “Nanophase Diamond Films.” The case is pending in the US District Court for the Eastern District of Texas, Marshall Division. The complaint seeks unspecified damages and an injunction. The Company filed an answer to the complaint on September 8, 2009, denying all material allegations and asserting affirmative defenses.

 

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.

 

26



Table of Contents

 

SEAGATE TECHNOLOGY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

13. Condensed Consolidating Financial Information

 

The Company has guaranteed obligations of Seagate Technology HDD Holdings (“HDD”) under senior notes totaling $1.2 billion comprised of $600 million aggregate principal amount of 6.375% Senior Notes due October 2011 (the “2011 Notes”) and $600 million aggregate principal amount of 6.8% Senior Notes due October 2016 (the “2016 Notes”, and together with the 2011 Notes, the “Senior Notes”), on a full and unconditional basis. Prior to October 1, 2009 when the Company’s $300 million Floating Rate Senior Notes due October 2009 (the “2009 Notes”) were repaid, the Company had guaranteed HDD’s obligations under the 2009 Notes. The following tables present parent guarantor, subsidiary issuer and combined non-guarantors Condensed Consolidating Balance Sheets of the Company and its subsidiaries at October 2, 2009 and July 3, 2009, and the Condensed Consolidating Statements of Operations and the Condensed Consolidating Statements of Cash Flows for the three months ended October 2, 2009 and October 3, 2008. The information classifies the Company’s subsidiaries into Seagate Technology-parent company guarantor, HDD-subsidiary issuer, and the Combined Non-Guarantors based upon the classification of those subsidiaries. Under each of these instruments, dividends paid by HDD or its restricted subsidiaries would constitute restricted payments and loans between the Company and HDD or its restricted subsidiaries would constitute affiliate transactions.

 

Consolidating Balance Sheet

October 2, 2009

(In millions)

 

 

 

Seagate
Technology
Parent
Company
Guarantor

 

HDD
Subsidiary
Issuer

 

Combined
Non-
Guarantors

 

Eliminations

 

Seagate
Technology
Consolidated

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

39

 

$

 

$

1,491

 

$

 

$

1,530

 

Short-term investments

 

 

 

96

 

 

96

 

Restricted cash and investments

 

 

 

166

 

 

166

 

Accounts receivable, net

 

 

 

1,242

 

 

1,242

 

Intercompany receivable

 

8

 

 

 

(8

)

 

Inventories

 

 

 

622

 

 

622

 

Other current assets

 

3

 

 

648

 

 

651

 

Total Current Assets

 

50

 

 

4,265

 

(8

)

4,307

 

Property, equipment and leasehold improvements, net

 

 

 

2,039

 

 

2,039

 

Equity investment in HDD

 

5,010

 

 

 

(5,010

)

 

Equity investments in Non-Guarantors

 

 

3,104

 

 

(3,104

)

 

Intercompany note receivable

 

 

3,277

 

 

(3,277

)

 

Other assets, net

 

 

14

 

539

 

 

553

 

Total Assets

 

$

5,060

 

$

6,395

 

$

6,843

 

$

(11,399

)

$

6,899

 

Short-term borrowings

 

$

 

$

200

 

$

15

 

$

 

$

215

 

Accounts payable

 

 

 

1,674

 

 

1,674

 

Intercompany payable

 

 

 

8

 

(8

)

 

Accrued employee compensation

 

 

 

142

 

 

142

 

Accrued expenses

 

4

 

1

 

641

 

 

646

 

Accrued income taxes

 

 

 

13

 

 

13

 

Current portion of long-term debt

 

 

 

107

 

 

107

 

Total Current Liabilities

 

4

 

201

 

2,600

 

(8

)

2,797

 

Other non-current liabilities

 

 

 

346

 

 

346

 

Intercompany note payable

 

3,277