UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 30,September 28, 2018
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from: to
Commission File Number001-31560
SEAGATE TECHNOLOGY PUBLIC LIMITED COMPANY
(Exact name of registrant as specified in its charter)
| Ireland | 98-0648577 | |
| (State or other jurisdiction of | ||
| incorporation or organization) | (I.R.S. Employer Identification Number) |
38/39 Fitzwilliam Square
Dublin 2, Ireland
(Address of principal executive offices)
Telephone: (353)(1) 234-3136
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes ☒ No ☐
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 RegulationS-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 ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, anon-accelerated filer, or a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”filer,” and “smaller reporting company” and “emerging growth company” inRule 12b-2 of the Exchange Act.
| Large accelerated filer: | ☒ | Accelerated filer: | ☐ | |||
| Non-accelerated filer: | ☐ | Smaller reporting company: | ☐ | |||
| Emerging growth company: | ☐ | |||||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined inRule 12b-2 of the Exchange Act).
Yes ☐ No ☒
As of April 25,October 29, 2018, 287,062,166286,201,437 of the registrant’s ordinary shares, par value $0.00001 per share, were issued and outstanding.
SEAGATE TECHNOLOGY PLC
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PART I | ||||||
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Notes to Condensed Consolidated Financial Statements (Unaudited) | 9 | |||||
Management’s Discussion and Analysis of Financial Condition and Results of Operations | ||||||
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PART II | ||||||
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2
FINANCIAL INFORMATION
| ITEM 1. | FINANCIAL STATEMENTS |
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Note 1. Basis of Presentation and Summary of Significant Accounting Policies | 9 | |||
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See Notes to Condensed Consolidated Financial Statements.
3
SEAGATE TECHNOLOGY PLC
CONDENSED CONSOLIDATED BALANCE SHEETS
(In millions)
(Unaudited)
| March 30, 2018 | June 30, 2017 | September 28, 2018 | June 29, 2018 | |||||||||||||
| ASSETS | ||||||||||||||||
Current assets: | ||||||||||||||||
Cash and cash equivalents | $ | 2,926 | $ | 2,539 | $ | 1,942 | $ | 1,853 | ||||||||
Accounts receivable, net | 1,076 | 1,199 | 1,202 | 1,184 | ||||||||||||
Inventories | 1,002 | 982 | 1,116 | 1,053 | ||||||||||||
Other current assets | 243 | 321 | 263 | 220 | ||||||||||||
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Total current assets | 5,247 | 5,041 | 4,523 | 4,310 | ||||||||||||
Property, equipment and leasehold improvements, net | 1,720 | 1,875 | 1,789 | 1,792 | ||||||||||||
Investment in debt security | 1,259 | 1,275 | ||||||||||||||
Goodwill | 1,238 | 1,238 | 1,237 | 1,237 | ||||||||||||
Other intangible assets, net | 204 | 281 | 169 | 188 | ||||||||||||
Deferred income taxes | 398 | 609 | 416 | 417 | ||||||||||||
Other assets, net | 205 | 224 | 185 | 191 | ||||||||||||
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Total Assets | $ | 9,012 | $ | 9,268 | $ | 9,578 | $ | 9,410 | ||||||||
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| LIABILITIES AND EQUITY | ||||||||||||||||
Current liabilities: | ||||||||||||||||
Accounts payable | $ | 1,645 | $ | 1,626 | $ | 1,776 | $ | 1,728 | ||||||||
Accrued employee compensation | 188 | 237 | 174 | 253 | ||||||||||||
Accrued warranty | 110 | 113 | 110 | 112 | ||||||||||||
Current portion of long-term debt | 503 | — | 499 | 499 | ||||||||||||
Accrued expenses | 609 | 650 | 616 | 598 | ||||||||||||
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Total current liabilities | 3,055 | 2,626 | 3,175 | 3,190 | ||||||||||||
Long-term accrued warranty | 125 | 120 | 122 | 125 | ||||||||||||
Long-term accrued income taxes | 10 | 15 | 11 | 10 | ||||||||||||
Othernon-current liabilities | 139 | 122 | 102 | 100 | ||||||||||||
Long-term debt, less current portion | 4,319 | 5,021 | 4,322 | 4,320 | ||||||||||||
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Total Liabilities | 7,648 | 7,904 | 7,732 | 7,745 | ||||||||||||
Commitments and contingencies (See Notes 12, 14 and 15) | ||||||||||||||||
Commitments and contingencies (See Notes 12 and 14) | ||||||||||||||||
Shareholders’ Equity: | ||||||||||||||||
Ordinary shares and additionalpaid-in capital | 6,347 | 6,152 | 6,427 | 6,377 | ||||||||||||
Accumulated other comprehensive loss | (8 | ) | (17 | ) | (12 | ) | (16 | ) | ||||||||
Accumulated deficit | (4,975 | ) | (4,771 | ) | (4,569 | ) | (4,696 | ) | ||||||||
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Total Equity | 1,364 | 1,364 | 1,846 | 1,665 | ||||||||||||
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Total Liabilities and Equity | $ | 9,012 | $ | 9,268 | $ | 9,578 | $ | 9,410 | ||||||||
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The information as of June 30, 201729, 2018 was derived from the Company’s audited Consolidated Balance Sheet as of June 30, 2017.29, 2018.
See Notes to Condensed Consolidated Financial Statements.
4
SEAGATE TECHNOLOGY PLC
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In millions, except per share data)
(Unaudited)
| For the Three Months Ended | For the Nine Months Ended | For the Three Months Ended | ||||||||||||||||||||||
| March 30, 2018 | March 31, 2017 | March 30, 2018 | March 31, 2017 | September 28, 2018 | September 29, 2017 | |||||||||||||||||||
Revenue | $ | 2,803 | $ | 2,674 | $ | 8,349 | $ | 8,365 | $ | 2,991 | $ | 2,632 | ||||||||||||
Cost of revenue | 1,956 | 1,858 | 5,889 | 5,857 | 2,078 | 1,896 | ||||||||||||||||||
Product development | 254 | 324 | 767 | 944 | 266 | 263 | ||||||||||||||||||
Marketing and administrative | 135 | 150 | 422 | 457 | 115 | 145 | ||||||||||||||||||
Amortization of intangibles | 6 | 28 | 47 | 85 | 6 | 22 | ||||||||||||||||||
Restructuring and other, net | 11 | 48 | 95 | 164 | 23 | 51 | ||||||||||||||||||
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Total operating expenses | 2,362 | 2,408 | 7,220 | 7,507 | 2,488 | 2,377 | ||||||||||||||||||
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Income from operations | 441 | 266 | 1,129 | 858 | 503 | 255 | ||||||||||||||||||
Interest income | 10 | 5 | 23 | 7 | 24 | 7 | ||||||||||||||||||
Interest expense | (60 | ) | (60 | ) | (182 | ) | (160 | ) | (58 | ) | (61 | ) | ||||||||||||
Other, net | 2 | 1 | (18 | ) | (10 | ) | (1 | ) | (13 | ) | ||||||||||||||
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Other expense, net | (48 | ) | (54 | ) | (177 | ) | (163 | ) | (35 | ) | (67 | ) | ||||||||||||
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Income before income taxes | 393 | 212 | 952 | 695 | 468 | 188 | ||||||||||||||||||
Provision for income taxes | 12 | 18 | 231 | 37 | 18 | 7 | ||||||||||||||||||
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Net income | $ | 381 | $ | 194 | $ | 721 | $ | 658 | $ | 450 | $ | 181 | ||||||||||||
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Net income per share: | ||||||||||||||||||||||||
Basic | $ | 1.33 | $ | 0.66 | $ | 2.50 | $ | 2.22 | $ | 1.57 | $ | 0.62 | ||||||||||||
Diluted | 1.31 | 0.65 | 2.48 | 2.20 | 1.54 | 0.62 | ||||||||||||||||||
Number of shares used in per share calculations: | ||||||||||||||||||||||||
Basic | 286 | 296 | 288 | 297 | 287 | 290 | ||||||||||||||||||
Diluted | 291 | 300 | 291 | 299 | 292 | 292 | ||||||||||||||||||
Cash dividends declared per ordinary share | $ | 0.63 | $ | 0.63 | $ | 1.89 | $ | 1.89 | $ | 0.63 | $ | 0.63 | ||||||||||||
See Notes to Condensed Consolidated Financial Statements.
5
SEAGATE TECHNOLOGY PLC
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In millions)
(Unaudited)
| For the Three Months Ended | For the Nine Months Ended | For the Three Months Ended | ||||||||||||||||||||||
| March 30, 2018 | March 31, 2017 | March 30, 2018 | March 31, 2017 | September 28, 2018 | September 29, 2017 | |||||||||||||||||||
Net income | $ | 381 | $ | 194 | $ | 721 | $ | 658 | $ | 450 | $ | 181 | ||||||||||||
Other comprehensive income (loss), net of tax: | ||||||||||||||||||||||||
Cash flow hedges | ||||||||||||||||||||||||
Change in net unrealized gain (loss) on cash flow hedges | — | 1 | — | (2 | ) | 3 | — | |||||||||||||||||
Less: reclassification for amounts included in net income | — | 1 | — | 2 | (1 | ) | — | |||||||||||||||||
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Net change | — | 2 | — | — | 2 | — | ||||||||||||||||||
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Marketable securities | ||||||||||||||||||||||||
Change in net unrealized gain (loss) on marketable securities | — | — | — | — | ||||||||||||||||||||
Change in net unrealized gain (loss) onavailable-for-sale debt securities | — | — | ||||||||||||||||||||||
Less: reclassification for amounts included in net income | — | — | — | — | — | — | ||||||||||||||||||
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Net change | — | — | — | — | — | — | ||||||||||||||||||
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Change in unrealized gain (loss) on post-retirement plans | — | — | — | — | — | — | ||||||||||||||||||
Less: reclassification for amounts included in net income | — | 1 | — | 1 | — | — | ||||||||||||||||||
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Net change | — | 1 | — | 1 | — | — | ||||||||||||||||||
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Foreign currency translation adjustments | 3 | 3 | 9 | (3 | ) | 2 | 4 | |||||||||||||||||
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Total other comprehensive income (loss), net of tax | 3 | 6 | 9 | (2 | ) | 4 | 4 | |||||||||||||||||
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Comprehensive income | $ | 384 | $ | 200 | $ | 730 | $ | 656 | $ | 454 | $ | 185 | ||||||||||||
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See Notes to Condensed Consolidated Financial Statements.
6
SEAGATE TECHNOLOGY PLC
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)
(Unaudited)
| For the Nine Months Ended | For the Three Months Ended | |||||||||||||||
| March 30, 2018 | March 31, 2017 | September 28, 2018 | September 29, 2017 | |||||||||||||
OPERATING ACTIVITIES | ||||||||||||||||
Net income | $ | 721 | $ | 658 | $ | 450 | $ | 181 | ||||||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||||||||||
Depreciation and amortization | 461 | 573 | 134 | 161 | ||||||||||||
Share-based compensation | 85 | 110 | 18 | 32 | ||||||||||||
Impairment of long-lived assets | — | 35 | ||||||||||||||
Deferred income taxes | 209 | 12 | 2 | (3 | ) | |||||||||||
Othernon-cash operating activities, net | 9 | 17 | (18 | ) | 1 | |||||||||||
Changes in operating assets and liabilities: | ||||||||||||||||
Accounts receivable, net | 124 | 165 | (9 | ) | (10 | ) | ||||||||||
Vendor receivables | 54 | 32 | ||||||||||||||
Inventories | (20 | ) | (170 | ) | (66 | ) | (32 | ) | ||||||||
Accounts payable | 74 | 124 | 119 | (30 | ) | |||||||||||
Accrued employee compensation | (49 | ) | 61 | (79 | ) | (87 | ) | |||||||||
Accrued expenses, income taxes and warranty | (24 | ) | 69 | 45 | 16 | |||||||||||
Other assets and liabilities | 1 | (13 | ) | (9 | ) | 8 | ||||||||||
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Net cash provided by operating activities | 1,645 | 1,673 | 587 | 237 | ||||||||||||
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INVESTING ACTIVITIES | ||||||||||||||||
Acquisition of property, equipment and leasehold improvements | (270 | ) | (330 | ) | (177 | ) | (124 | ) | ||||||||
Proceeds from the sale of fixed assets | 2 | — | ||||||||||||||
Proceeds from sale of properties previously classified as held for sale | 43 | — | 6 | — | ||||||||||||
Maturities of short-term investments | — | 6 | ||||||||||||||
Purchases of strategic investments | (5 | ) | — | |||||||||||||
Other investing activities, net | (14 | ) | (13 | ) | — | (8 | ) | |||||||||
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Net cash used in investing activities | (239 | ) | (337 | ) | (176 | ) | (132 | ) | ||||||||
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FINANCING ACTIVITIES | ||||||||||||||||
Dividends to shareholders | (181 | ) | (184 | ) | ||||||||||||
Repurchases of ordinary shares | (150 | ) | (166 | ) | ||||||||||||
Taxes paid related to net share settlement of equity awards | (27 | ) | (20 | ) | ||||||||||||
Proceeds from issuance of ordinary shares under employee stock plans | 32 | 29 | ||||||||||||||
Redemption and repurchase of debt | (209 | ) | (97 | ) | — | (22 | ) | |||||||||
Net proceeds from issuance of long-term debt | — | 1,232 | ||||||||||||||
Taxes paid related to net share settlement of equity awards | (22 | ) | (25 | ) | ||||||||||||
Repurchases of ordinary shares | (361 | ) | (248 | ) | ||||||||||||
Dividends to shareholders | (545 | ) | (374 | ) | ||||||||||||
Proceeds from issuance of ordinary shares under employee stock plans | 110 | 83 | ||||||||||||||
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Net cash (used in) provided by financing activities | (1,027 | ) | 571 | |||||||||||||
Net cash used in financing activities | (326 | ) | (363 | ) | ||||||||||||
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Effect of foreign currency exchange rate changes on cash, cash equivalents, and restricted cash | 8 | (8 | ) | |||||||||||||
Effect of foreign currency exchange rate changes on cash, cash equivalents and restricted cash | 3 | 4 | ||||||||||||||
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Increase in cash, cash equivalents, and restricted cash | 387 | 1,899 | ||||||||||||||
Cash, cash equivalents, and restricted cash at the beginning of the period | 2,543 | 1,132 | ||||||||||||||
Increase (decrease) in cash, cash equivalents and restricted cash | 88 | (254 | ) | |||||||||||||
Cash, cash equivalents and restricted cash at the beginning of the period | 1,857 | 2,543 | ||||||||||||||
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Cash, cash equivalents, and restricted cash at the end of the period | $ | 2,930 | $ | 3,031 | ||||||||||||
Cash, cash equivalents and restricted cash at the end of the period | $ | 1,945 | $ | 2,289 | ||||||||||||
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See Notes to Condensed Consolidated Financial Statements.
7
SEAGATE TECHNOLOGY PLC
CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY
For the NineThree Months Ended March 30,September 28, 2018
(In millions)
(Unaudited)
| Number of Ordinary Shares | Par Value of Shares | Additional Paid-in Capital | Accumulated Other Comprehensive Loss | Accumulated Deficit | Total | Number of Ordinary Shares | Par Value of Shares | Additional Paid-in Capital | Accumulated Other Comprehensive Loss | Accumulated Deficit | Total | |||||||||||||||||||||||||||||||||||||
Balance at June 30, 2017 | 292 | $ | — | $ | 6,152 | $ | (17 | ) | $ | (4,771 | ) | $ | 1,364 | |||||||||||||||||||||||||||||||||||
Balance at June 29, 2018 | 287 | $ | — | $ | 6,377 | $ | (16 | ) | $ | (4,696 | ) | $ | 1,665 | |||||||||||||||||||||||||||||||||||
Cumulative effect of adoption of new revenue standard (See Note 1) | 34 | 34 | ||||||||||||||||||||||||||||||||||||||||||||||
Net income | 721 | 721 | 450 | 450 | ||||||||||||||||||||||||||||||||||||||||||||
Other comprehensive income | 9 | 9 | 4 | 4 | ||||||||||||||||||||||||||||||||||||||||||||
Issuance of ordinary shares under employee stock plans | 6 | 110 | 110 | 3 | 32 | 32 | ||||||||||||||||||||||||||||||||||||||||||
Repurchases of ordinary shares | (10 | ) | (361 | ) | (361 | ) | (3 | ) | (150 | ) | (150 | ) | ||||||||||||||||||||||||||||||||||||
Tax withholding related to vesting of restricted stock units | (1 | ) | (22 | ) | (22 | ) | (1 | ) | (27 | ) | (27 | ) | ||||||||||||||||||||||||||||||||||||
Dividends to shareholders | (542 | ) | (542 | ) | (180 | ) | (180 | ) | ||||||||||||||||||||||||||||||||||||||||
Share-based compensation | 85 | 85 | 18 | 18 | ||||||||||||||||||||||||||||||||||||||||||||
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Balance at March 30, 2018 | 287 | $ | — | $ | 6,347 | $ | (8 | ) | $ | (4,975 | ) | $ | 1,364 | |||||||||||||||||||||||||||||||||||
Balance at September 28, 2018 | 286 | $ | — | $ | 6,427 | $ | (12 | ) | $ | (4,569 | ) | $ | 1,846 | |||||||||||||||||||||||||||||||||||
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See Notes to Condensed Consolidated Financial Statements.
8
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
| 1. | Basis of Presentation and Summary of Significant Accounting Policies |
Organization
Seagate Technology plc (the “Company”) is a leading provider of data storage technology and solutions. Its principal products are hard disk drives, commonly referred to as disk drives, hard drives or HDDs. In addition to HDDs, the Company produces a broad range of data storage products including solid state drives (“SSD”) and their related controllers, solid state hybrid drives (“SSHD”SSDs”) and storage subsystems.
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 and cost effectiveness. Complementing existing data center storage architecture, solid-state storage devices use integrated circuit assemblies as memory to store data, withand most SSDs using NAND-baseduse NAND flash memory. In addition to HDDs and SSDs, SSHDs combine the features of SSDs and HDDs in the same unit, containing a large hard disk drive and an SSD cache to improve performance of frequently accessed data.
The Company’s HDD products are designed for mission critical and nearline applications in enterprise servers and storage systems; edge compute / client compute applications, where its products are designed primarily for desktop and mobile computing; and edgenon-compute /client non-compute applications, where its products are designed for a wide variety of end user devices such as portable external storage systems, surveillance systems, digital video recorders (“DVRs”), network-attached storage (“NAS”), digital video recorders (“DVRs”) and gaming consoles. The Company’s SSD products mainly include serial attached SCSI (“SAS”) andNon-Volatile Memory Express (“NVMe”) SSDs.
The Company’s cloudenterprise data solutions (formerly referred to as the “cloud systems and solutions extend innovation from the device into the information infrastructure, onsite and in the cloud. Itssolutions”) portfolio includes modular original equipment manufacturers (“OEM”) storage systemsand scale-out storage servers.
Basis of Presentation and Consolidation
The Company’s 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 U.S. generally accepted accounting principles 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 condensed consolidated financial statements reflect, in the opinion of management, all material adjustments necessary to present fairly the condensed 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. Certain prior period amounts in the condensed consolidated financial statements and notes to the condensed consolidated financial statements have been reclassified to conform to the current period’s presentation.
The Company’s consolidated financial statements for the fiscal year ended June 30, 2017,29, 2018, are included in its Annual Report onForm 10-K as filed with the United States Securities and Exchange Commission (“SEC”) on August 4, 2017.3, 2018. 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 30, 2017,29, 2018, and the notes thereto, are adequate to make the information presented not misleading.
The results of operations for the three and nine months ended March 30,September 28, 2018 are not necessarily indicative of the results of operations to be expected for any subsequent interim period or for the Company’s fiscal year ending June 29, 2018.28, 2019. The Company operates and reports financial results on a fiscal year of 52 or 53 weeks ending on the Friday closest to June 30. Both the three and nine months ended March 30,September 28, 2018 and the three and nine months ended March 31,September 29, 2017 consisted of 13 weeks and 39 weeks, respectively.weeks. Fiscal year 2018,2019, which ends on June 29, 2018,28, 2019, and fiscal year 2017,2018, which ended on June 30, 2017,29, 2018, are both comprised of 52 weeks. The fiscal quarters ended March 30,September 28, 2018, DecemberJune 29, 2017,2018, and March 31,September 29, 2017, are also referred to herein as the “March“September 2018 quarter”,quarter ”, the “December 2017“June 2018 quarter”, and the “March“September 2017 quarter”, respectively.
Summary of Significant Accounting Policies
ThereExcept for the change in the Company’s revenue recognition policy described below, there have been no significantmaterial changes into the Company’s significant accounting policies. Please refer topolicies disclosed in Note 1 - Basis of Presentation and Summary of Significant Accounting Policies of “Financial Statements and Supplementary Data” contained in Part II, Item 8 of the Company’s Annual Report onForm 10-K for the fiscal year ended June 30, 2017,29, 2018, as filed with the SEC on August 4, 2017 for3, 2018.
Revenue Recognition
Effective June 30, 2018, the Company adopted a discussionnew revenue recognition policy in accordance with Accounting Standard Codification (“ASC”) 606, Revenue from Contracts with Customers, using the modified retrospective transition approach as discussed in the section titledRecently Adopted Accounting Pronouncements in this Note 1. Prior to fiscal year 2019, the revenue recognition policy was based on ASC 605,Revenue Recognition. Under ASC 606, the Company determines revenue recognition through the following steps: (1) identification of the contract with a customer; (2) identification of the performance obligations in the contract; (3) determination of the transaction price; (4) allocation of the transaction price to the performance obligations in the contract; and (5) recognition of revenue when, or as, the Company satisfies a performance obligation.
Revenue from sales of products is generally recognized upon transfer of control to customers in an amount that reflects the consideration the Company expects to receive in exchange for those products, net of sales taxes. This typically occurs upon shipment from the Company. When applicable, the Company includes shipping charges billed to customers in Revenue and includes the related shipping costs in Cost of revenue on the Company’s significant accounting policies.
The Company records estimated variable consideration at the time of revenue recognition as a reduction to net revenue. Variable consideration generally consists of sales incentive programs, such as price protection and volume incentives aimed at increasing customer demand. For OEM sales, rebates are typically established by estimating the most likely amount of consideration expected to be received based on an OEM customer’s volume of purchases from Seagate or other agreed upon rebate programs. For the distribution and retailing channel, these programs typically involve estimating the most likely amount of rebates related to a customer’s level of sales, order size, advertising or point of sale activity as well as the expected value of price protection adjustments based on historical analysis and forecasted pricing environment. Marketing development program costs are accrued and recorded as a reduction to revenue at the same time that the related revenue is recognized.
9Practical Expedient and Exemptions
Recently Issued Accounting Pronouncements
In May 2014, August 2015, April 2016, MayFebruary 2016 and December 2016,July 2018, the Financial Accounting Standards Board (“FASB”) issued Accounting Standard Update(“ASU”) 2014-09 (ASC Topic 606), Revenue from Contracts with Customers, ASU 2015-14 (ASC Topic 606) Revenue from Contracts with Customers, Deferral of the Effective Date, ASU 2016-10 (ASC Topic 606) Revenue from Contracts with Customers, Identifying Performance Obligations and Licensing,ASU 2016-12 (ASC Topic 606) Revenue from Contracts with Customers, Narrow-Scope Improvements and Practical Expedients, andASU 2016-20 (ASC Topic 606) Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers, respectively. ASC Topic 606 outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. It also requires entities to disclose both quantitative and qualitative information that enable financial statements users to understand the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. The Company is required to adopt the guidance in the first quarter of fiscal year 2019. This standard may be applied retrospectively to all prior periods presented, or retrospectively with a cumulative adjustment to retained earnings in the year of adoption (“modified retrospective transition approach”). Based on its assessment, the Company plans to adopt the new revenue standard in the first quarter of fiscal year 2019, utilizing the modified retrospective method of transition. While management has not yet completed its assessment of the impact of adopting this new standard on the Company’s consolidated financial statements, the Company expects the adoption of the new standard will result in the recognition of revenue generally uponshipment (sell-in basis) for sales of products to certain direct retail customers and customers in certain indirect retail channels which are currently being recognized on a sell-through basis. Accordingly, the Company will need to estimate variable consideration (e.g. rebates) related to customer incentives on these arrangements. These changes are not expected to have a material impact on the Company’s condensed consolidated financial statements.
In January 2016, the FASB issuedASU 2016-01 (ASCSubtopic 825-10), Financial Instruments—Overall Recognition and Measurement of Financial Assets and Financial Liabilities,as amended by ASU2018-03,Financial Instruments—Overall: Technical Correction and Improvements,issued in February 2018. The amendments in these ASUs require entities to measure all investments in equity securities at fair value with changes recognized through net income. This requirement does not apply to investments that qualify for the equity method of accounting, to those that result in consolidation of the investee, or for which the entity meets a practicability exception to fair value measurement. Additionally, the amendments eliminate certain disclosure requirements related to financial instruments measured at amortized cost and add disclosures related to the measurement categories of financial assets and financial liabilities. The Company is required to adopt the guidance in the first quarter of fiscal year 2019. Early adoption is permitted for only certain portions of the ASU. The Company expects to elect the measurement alternative for measurement of equity investments, defined as cost, less impairments, if any, plus or minus changes resulting from observable price changes in orderly transactions for an identical or similar investment in the same issuer (the “Price Changes”) until the equity investments’ fair value becomes readily determinable. The amount of the impact to equity investments will depend on any Price Changes observed after adoption in the first quarter of fiscal year 2019.
In February 2016, the FASB issuedASU 2016-02 (ASC Topic 842), Leases. This ASU amends2018-10,Codification Improvements to Topic 842, andLeases, ASU2018-11,Leases (ASC Topic 842), Target improvements, respectively. These ASUs amend a number of aspects of lease accounting, including requiring lessees to recognize operating leases with a term greater than one year on their balance sheet asa right-of-use asset and corresponding lease liability, measured at the present value of the lease payments. The Company is requiredplans to adopt this guidance in the first quarter of fiscal year 2020. Early adoption is permitted. The Company is in the process of assessing the impact of this ASUthese ASUs on its condensed consolidated financial statements.
In June 2016, the FASB issuedASU 2016-13 (ASC Topic 326), Financial Instruments—Instruments - Credit Losses: Measurement of Credit Losses on Financial Instruments. This ASU amends the requirement on the measurement and recognition of expected credit losses for financial assets held. The Company is required to adopt this guidance in the first quarter of fiscal year 2021. Early adoption in the first quarter of fiscal year 2020 is permitted. The Company is in the process of assessing the impact of this ASU on its condensed consolidated financial statements.
In January 2017, the FASB issuedASU 2017-01 (ASC Topic 805), Business Combination: Clarifying the Definition of a Business. The amendments in this ASU change the definition of a business to assist with evaluating when a set of transferred assets and activities is a business. The Company plans to adopt the guidance in the first quarter of fiscal year 2019. Early adoption is permitted. The Company is in the process of assessing the impact of this ASU on its condensed consolidated financial statements.
In May 2017, the FASB issuedASU 2017-09 (ASC Topic 718), Stock Compensation: Scope of Modification Accounting. The amendments in this ASU provide guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting. The Company plans to adopt the guidance in the first quarter of fiscal year 2019. The Company is in the process of assessing the impact of this ASU on its condensed consolidated financial statements.
10
In August 2017, the FASB issuedASU 2017-12 (ASC Topic 815), Derivatives and Hedging: Targeted Improvements to Accounting for Hedging Activities. The amendments in this ASU were issued to simplify existing guidance in order to allow companies to more accurately present the economic effects of risk management activities in the financial statements. The amended guidance will eliminate the separate measurement and presentation of hedge ineffectiveness. The Company is required to adopt the guidancepermitted in the first quarter of fiscal year 2020. Early adoption is permitted. The Company is in the process of assessing the impact of this ASU on its condensed consolidated financial statements.
In February 2018, the FASB issued ASU2018-02 (ASC Topic 220), Income Statement—Reporting Comprehensive Income: Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. This ASU was issued following the enactment of the U.S. Tax Cuts and Jobs Act of 2017 (the “Act”“Tax Act”) and permits entities to elect a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Act. The Company is required to adopt thethis guidance in the first quarter of fiscal year 2020. Early adoption is permitted. The Company is in the process of assessing the impact of this ASU on its condensed consolidated financial statements.
In August 2018, the FASB issued ASU2018-15 (ASC Subtopic350-40), Intangibles - Goodwill and Other -Internal-Use Software - Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That is a Service Contract. This ASU aligns the accounting for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the accounting for implementation costs incurred to develop or obtaininternal-use software. The Company is required to adopt the guidance in the first quarter of fiscal year 2021. Early adoption is permitted. The Company is in the process of assessing the impact of this ASU on its condensed consolidated financial statements.
Recently Adopted Accounting Pronouncements
In July 2015,May 2014, the FASB issued ASUASU 2015-11 (ASC2014-09 (ASC Topic 330)606), Inventory: SimplifyingRevenue from Contracts with Customers, and FASB also issued certain interpretive clarifications on this new guidance which outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes the Measurementrevenue recognition guidance under ASC 605. It also requires entities to disclose both quantitative and qualitative information that enable financial statements users to understand the nature, amount, timing, and uncertainty of Inventory. The amendments in this ASU require inventory measurement at the lower of costrevenue and net realizable value.cash flows arising from contracts with customers. This ASU became effective and was adopted by the Company in the September 20172018 quarter retrospectively with a cumulative adjustment to accumulated deficit at the date of adoption (“modified retrospective transition approach”). The Company has completed the adoption and implemented policies, processes and controls to support the new standard’s measurement and disclosure requirements.
The Company applied the ASC 606 using a modified retrospective transition approach to all contracts that were not completed as of June 29, 2018. Results for reporting periods beginning June 30, 2018 are presented under ASC 606, while prior period amounts were not adjusted and continue to be reported under the historical accounting standard. As a result of the adoption, the Company identified a change in revenue recognition timing on its product sales made to certain retail customers and started to recognize revenue when the Company transfers control to the applicable customers rather than deferring recognition until those customers sell the products. In addition, the Company established accruals for the variable consideration related to customer incentives on these arrangements. On the date of initial adoption, the Company removed the related deferred income on the product sales made to these customers and recorded estimates of the accrual for variable consideration through a prospective basis.cumulative adjustment to accumulated deficit. The cumulative effect of the change to the Company’s Condensed Consolidated Balance Sheet from the adoption of ASC 606 was as follows:
(Dollars in millions) | As of June 29, 2018 | Effect of adoption of ASC 606 | As of June 30, 2018 | |||||||||
Accounts receivable, net | $ | 1,184 | $ | 9 | $ | 1,193 | ||||||
Inventory | $ | 1,053 | $ | (9 | ) | $ | 1,044 | |||||
Accrued expenses | $ | 598 | $ | (34 | ) | $ | 564 | |||||
Accumulated deficit | $ | (4,696 | ) | $ | 34 | $ | (4,662 | ) | ||||
The impact of applying the new accounting standard on the Company’s condensed consolidated financial statements for the September 2018 quarter was not material.
In January 2016, the FASB issuedASU 2016-01 (ASCSubtopic 825-10), Financial Instruments—Overall Recognition and Measurement of Financial Assets and Financial Liabilities,as amended by ASU2018-03,Financial Instruments—Overall: Technical Correction and Improvements,issued in February 2018. The amendments in these ASUs require entities to measure all equity investments at fair value with changes recognized through net income. Additionally, the amendments eliminate certain disclosure requirements related to financial instruments measured at amortized cost and add disclosures related to the measurement categories of financial assets and financial liabilities. These ASUs became effective and were adopted by the Company in the September 2018 quarter. For equity investments without readily determinable fair value, the Company elected the measurement alternative for measurement of equity investments, defined as cost, less impairments, if any, plus or minus changes resulting from observable price changes in orderly transactions for an identical or similar investment in the same issuer until the equity investments’ fair value becomes readily determinable. The adoption of this guidance had no material impact on the Company’s condensed consolidated financial statements and disclosures.
In March 2016,January 2017, the FASB issuedASU 2016-092017-01 (ASC Topic 718805),), Stock Compensation—Improvements to Employee Share-Based Payment Accounting. Business Combination: Clarifying the Definition of a Business. The amendments in this ASU are intendedchange the definition of a business to simplify several areasassist with evaluating when a set of accounting for share-based compensation arrangements, includingtransferred assets and activities is a business. The Company adopted the income tax consequences, classification on the consolidated statement of cash flows and treatment of forfeitures. This ASU became effective and was adopted by the Companyguidance in the September 20172018 quarter. Upon adoption, excess tax benefits or deficiencies from share-based award activity are reflected in the condensed consolidated statements of operations as a component of the provision for income taxes, whereas they previously were recognized in the Shareholder’s equity in the condensed consolidated balance sheets. The Company also elected to continue to account for share-based compensation expense net of estimated forfeitures. The adoption of this ASU resulted in an increase in deferred tax assets relating to net operating losses of approximately $0.6 billion, offset by an equivalent increase in the valuation allowance with no impact to retained earnings. The adoption of this guidance had no material impact on the Company’s condensed consolidated financial statements and disclosures.
In October 2016,May 2017, the FASB issuedASU 2016-162017-09 (ASC Topic 740)718), Income Taxes: Intra-Entity TransfersStock Compensation: Scope of Assets Other Than InventoryModification Accounting. The amendments in this ASU provide guidance about which changes to the terms or conditions of a share-based payment award require the recognition of the income tax consequences for intra-entity transfers of assets other than inventory when the transfer occurs.an entity to apply modification accounting. The Company elected to adopt this ASUadopted the guidance in the September 2017 quarter on a modified retrospective basis with2018 quarter. The adoption of this guidance had no material impact on the Company’sits condensed consolidated financial statements and disclosures.
| 2. | Balance Sheet Information |
InvestmentsAvailable-for-sale Debt Securities
The following table summarizes, by major type, the fair value and amortized cost of the Company’s investments as of March 30,September 28, 2018:
(Dollars in millions) | Amortized Cost | Unrealized Gain/(Loss) | Fair Value | Amortized Cost | Unrealized Gain/(Loss) | Fair Value | ||||||||||||||||||
Available-for-sale securities: | ||||||||||||||||||||||||
Available-for-sale debt securities: | ||||||||||||||||||||||||
Money market funds | $ | 1,261 | $ | — | $ | 1,261 | $ | 801 | $ | — | $ | 801 | ||||||||||||
Time deposits and certificates of deposit | 292 | — | 292 | 428 | — | 428 | ||||||||||||||||||
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Total | $ | 1,553 | $ | — | $ | 1,553 | $ | 1,229 | $ | — | $ | 1,229 | ||||||||||||
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Included in Cash and cash equivalents | $ | 1,549 | $ | 1,226 | ||||||||||||||||||||
Included in Other current assets | 4 | 3 | ||||||||||||||||||||||
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Total | $ | 1,553 | $ | 1,229 | ||||||||||||||||||||
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As of March 30,September 28, 2018, the Company’s Other current assets included $3 million in restricted cash and investments held as collateral at banks for various performance obligations.
As of September 28, 2018, the Company had no materialavailable-for-sale debt securities that had been in a continuous unrealized loss position for a period greater than 12 months. The Company determined noavailable-for-sale debt securities were other-than-temporarily impaired as of September 28, 2018.
The fair value and amortized cost of the Company’s debt securities investments classified asavailable-for-sale as of September 28, 2018, by remaining contractual maturity were as follows:
(Dollars in millions) | Amortized Cost | Fair Value | ||||||
Due in less than 1 year | $ | 1,229 | $ | 1,229 | ||||
Due in 1 to 5 years | — | — | ||||||
Due in 6 to 10 years | — | — | ||||||
Thereafter | — | — | ||||||
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Total | $ | 1,229 | $ | 1,229 | ||||
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The following table summarizes, by major type, the fair value and amortized cost of the Company’s investments as of June 29, 2018:
(Dollars in millions) | Amortized Cost | Unrealized Gain/(Loss) | Fair Value | |||||||||
Available-for-sale securities: | ||||||||||||
Money market funds | $ | 621 | $ | — | $ | 621 | ||||||
Time deposits and certificates of deposit | 395 | — | 395 | |||||||||
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Total | $ | 1,016 | $ | — | $ | 1,016 | ||||||
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Included in Cash and cash equivalents | $ | 1,012 | ||||||||||
Included in Other current assets | 4 | |||||||||||
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Total | $ | 1,016 | ||||||||||
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As of June 29, 2018, the Company’s Other current assets included $4 million in restricted cash and investments held as collateral at banks for various performance obligations.
11
As of March 30,June 29, 2018, the Company had no materialavailable-for-sale securities that had been in a continuous unrealized loss position for a period greater than 12 months. The Company determined noavailable-for-sale securities were other-than-temporarily impaired as of March 30,June 29, 2018.
The fair value and amortized cost of the Company’s investments classified asavailable-for-sale as of March 30, 2018, by remaining contractual maturity were as follows:
(Dollars in millions) | Amortized Cost | Fair Value | ||||||
Due in less than 1 year | $ | 1,553 | $ | 1,553 | ||||
Due in 1 to 5 years | — | — | ||||||
Due in 6 to 10 years | — | — | ||||||
Thereafter | — | — | ||||||
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Total | $ | 1,553 | $ | 1,553 | ||||
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The following table summarizes, by major type, the fair value and amortized cost of the Company’s investments as of June 30, 2017:
(Dollars in millions) | Amortized Cost | Unrealized Gain/(Loss) | Fair Value | |||||||||
Available-for-sale securities: | ||||||||||||
Money market funds | $ | 594 | $ | — | $ | 594 | ||||||
Time deposits and certificates of deposit | 584 | — | 584 | |||||||||
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Total | $ | 1,178 | $ | — | $ | 1,178 | ||||||
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Included in Cash and cash equivalents | $ | 1,174 | ||||||||||
Included in Other current assets | 4 | |||||||||||
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Total | $ | 1,178 | ||||||||||
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As of June 30, 2017, the Company’s Other current assets included $4 million in restricted cash and investments held as collateral at banks for various performance obligations.
As of June 30, 2017, the Company had no materialavailable-for-sale securities that had been in a continuous unrealized loss position for a period greater than 12 months. The Company determined noavailable-for-sale securities were other-than-temporarily impaired as of June 30, 2017.
Cash, Cash Equivalents and Restricted Cash
The following table provides a summary of cash, cash equivalents and restricted cash reported within the Company’s Condensed Consolidated Balance Sheets that reconciles to the corresponding amount in theits Condensed Consolidated Statements of Cash Flows:
(Dollars in millions) | March 30, 2018 | June 30, 2017 | March 31, 2017 | July 1, 2016 | ||||||||||||
Cash and cash equivalents | $ | 2,926 | $ | 2,539 | $ | 3,026 | $ | 1,125 | ||||||||
Restricted cash included in Other current assets | 4 | 4 | 5 | 7 | ||||||||||||
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Total cash, cash equivalents, and restricted cash shown in the Statements of Cash Flows | $ | 2,930 | $ | 2,543 | $ | 3,031 | $ | 1,132 | ||||||||
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12
(Dollars in millions) | September 28, 2018 | June 29, 2018 | September 29, 2017 | June 30, 2017 | ||||||||||||
Cash and cash equivalents | $ | 1,942 | $ | 1,853 | $ | 2,285 | $ | 2,539 | ||||||||
Restricted cash included in Other current assets | 3 | 4 | 4 | 4 | ||||||||||||
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Total cash, cash equivalents and restricted cash shown in the Statements of Cash Flows | $ | 1,945 | $ | 1,857 | $ | 2,289 | $ | 2,543 | ||||||||
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Inventories
The following table provides details of the inventory balance sheet item:
(Dollars in millions) | March 30, 2018 | June 30, 2017 | September 28, 2018 | June 29, 2018 | ||||||||||||
Raw materials and components | $ | 308 | $ | 350 | $ | 325 | $ | 329 | ||||||||
Work-in-process | 322 | 257 | 375 | 347 | ||||||||||||
Finished goods | 372 | 375 | 416 | 377 | ||||||||||||
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Total inventories | $ | 1,002 | $ | 982 | $ | 1,116 | $ | 1,053 | ||||||||
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Property, Equipment and Leasehold Improvements, net
The components of property, equipment and leasehold improvements, net, were as follows:
(Dollars in millions) | March 30, 2018 | June 30, 2017 | September 28, 2018 | June 29, 2018 | ||||||||||||
Property, equipment and leasehold improvements | $ | 9,436 | $ | 9,633 | $ | 9,586 | $ | 9,525 | ||||||||
Accumulated depreciation and amortization | (7,716 | ) | (7,758 | ) | (7,797 | ) | (7,733 | ) | ||||||||
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Property, equipment and leasehold improvements, net | $ | 1,720 | $ | 1,875 | $ | 1,789 | $ | 1,792 | ||||||||
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Investment in Debt Security
As of September 28, 2018 and June 29, 2018, the Company had approximately $1.3 billion investment innon-convertible preferred stock of Toshiba Memory Corporation (“TMC”, formerly known as “K.K. Pangea”). The investment, with a contractual maturity of six years starting from May 31, 2018, is accounted for asa held-to-maturity debt security, carried at cost and adjusted for amortization of transaction costs into interest income. Additionally, the debt security has a contractualpayment-in-kind (“PIK”) income which will be paid in cash upon redemption of the investment. PIK income computed at the contractual rate is accrued into Interest income in the Company’s Condensed Consolidated Statement of Operations and added to the carrying value of the Investment in debt security on its Condensed Consolidated Balance Sheets. For the three months ended September 28, 2018, the PIK income earned was $16 million. No impairment was identified as of September 28, 2018 and June 29, 2018. Please refer to Note 8 - Fair Value for more details.
Accrued Expenses
The following table provides details of the accrued expenses balance sheet item:
(Dollars in millions) | March 30, 2018 | June 30, 2017 | September 28, 2018 | June 29, 2018 | ||||||||||||
Dividends payable | $ | 181 | $ | 184 | $ | 180 | $ | 181 | ||||||||
Other accrued expenses | 428 | 466 | 436 | 417 | ||||||||||||
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Total accrued expenses | $ | 609 | $ | 650 | $ | 616 | $ | 598 | ||||||||
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Accumulated Other Comprehensive Income (Loss) (“AOCI”)
The components of AOCI, net of tax, were as follows:
(Dollars in millions) | Unrealized Gains (Losses) on Cash Flow Hedges | Unrealized Gains (Losses) on Marketable Securities | Unrealized Gains (Losses) on Post- Retirement Plans | Foreign Currency Translation Adjustments | Total | |||||||||||||||
Balance at June 30, 2017 | $ | — | $ | — | $ | (5 | ) | $ | (12 | ) | $ | (17 | ) | |||||||
Other comprehensive income (loss) before reclassifications | — | — | — | 9 | 9 | |||||||||||||||
Amounts reclassified from AOCI | — | — | — | — | — | |||||||||||||||
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Other comprehensive income (loss) | — | — | — | 9 | 9 | |||||||||||||||
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Balance at March 30, 2018 | $ | — | $ | — | $ | (5 | ) | $ | (3 | ) | $ | (8 | ) | |||||||
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Balance at July 1, 2016 | $ | (1 | ) | $ | — | $ | (7 | ) | $ | (17 | ) | $ | (25 | ) | ||||||
Other comprehensive income (loss) before reclassifications | (2 | ) | — | — | (3 | ) | (5 | ) | ||||||||||||
Amounts reclassified from AOCI | 2 | — | 1 | — | 3 | |||||||||||||||
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Other comprehensive income (loss) | — | — | 1 | (3 | ) | (2 | ) | |||||||||||||
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Balance at March 31, 2017 | $ | (1 | ) | $ | — | $ | (6 | ) | $ | (20 | ) | $ | (27 | ) | ||||||
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(Dollars in millions) | Unrealized Gains (Losses) on Cash Flow Hedges | Unrealized Gains (Losses) on Available-for-Sale Debt Securities | Unrealized Gains (Losses) on Post- Retirement Plans | Foreign Currency Translation Adjustments | Total | |||||||||||||||
Balance at June 29, 2018 | $ | — | $ | — | $ | (4 | ) | $ | (12 | ) | $ | (16 | ) | |||||||
Other comprehensive income (loss) before reclassifications | 3 | — | — | 2 | 5 | |||||||||||||||
Amounts reclassified from AOCI | (1 | ) | — | — | — | (1 | ) | |||||||||||||
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Other comprehensive income (loss) | 2 | — | — | 2 | 4 | |||||||||||||||
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Balance at September 28, 2018 | $ | 2 | $ | — | $ | (4 | ) | $ | (10 | ) | $ | (12 | ) | |||||||
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Balance at June 30, 2017 | $ | — | $ | — | $ | (5 | ) | $ | (12 | ) | $ | (17 | ) | |||||||
Other comprehensive income (loss) before reclassifications | — | — | — | 4 | 4 | |||||||||||||||
Amounts reclassified from AOCI | — | — | — | — | — | |||||||||||||||
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Other comprehensive income (loss) | — | — | — | 4 | 4 | |||||||||||||||
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Balance at September 29, 2017 | $ | — | $ | — | $ | (5 | ) | $ | (8 | ) | $ | (13 | ) | |||||||
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13
| 3. | Debt |
Short-Term Borrowings
The credit agreement entered into by the Company and its subsidiary Seagate HDD Cayman on January 18, 2011 and subsequently amended (the “Revolving Credit Facility”) provides the Company with a $700 million senior secured revolving credit facility. The term of the Revolving Credit Facility is through January 15, 2020, provided that if the Company does not have Investment Grade Ratings (as defined in the Revolving Credit Facility) on August 15, 2018, then the maturity date will be August 16, 2018 unless certain extension conditions have been satisfied.2020. The loans made under the Revolving Credit Facility will bear interest at a rate of LIBOR plus a variable margin that will be determined based on the corporate credit rating of the Company. The Company and certain of its material subsidiaries fully and unconditionally guarantee the Revolving Credit Facility. The Revolving Credit Facility is available for cash borrowings, subject to compliance with certain covenants and other customary conditions to borrowing, and for the issuance of letters of credit up to asub-limit of $75 million.
The Revolving Credit Facility, as amended, includes three financial covenants: (1) minimum cash, cash equivalents and marketable securities; (2) a fixed charge coverage ratio; and (3) a net leverage ratio. On April 27, 2016, the Revolving Credit Agreement was amended in order to increase the allowable net leverage ratio to allow for higher net leverage levels. The Company was in compliance with the modified covenants as of March 30,September 28, 2018 and expects to be in compliance for the next 12 months.
As of March 30,September 28, 2018, no borrowings had been drawn or letters of credit utilized under the Revolving Credit Facility.
Long-Term Debt
$800 million Aggregate Principal Amount of 3.75% Senior Notes due November 2018 (the “2018 Notes”). The interest on the 2018 Notes is payable semi-annually on May 15 and November 15 of each year. The issuer under the 2018 Notes is Seagate HDD Cayman, and the obligations under the 2018 Notes are fully and unconditionally guaranteed, on a senior unsecured basis, by the Company. During the three and nine months ended March 30, 2018,September 2017 quarter, the Company repurchased $56 million and $206$22 million aggregate principal amount of the 2018 Notes respectively, for cash at a premium to their principal amount, plus accrued and unpaid interest. The Company recorded aan immaterial loss of approximately $1 million and $3 million on repurchasesthe repurchase during the three and nine months ended March 30, 2018, respectively,September 29, 2017, which is included in Other, net on the Compnay’s Condensed Consolidated Statements of Operations. There were no repurchases during the three months ended September 28, 2018. The remainder of the 2018 Notes arewere classified as Current portion of long-term debt on the Company’s Condensed Consolidated Balance SheetSheets at March 30,September 28, 2018 and June 29, 2018.
$750 million Aggregate Principal Amount of 4.25% Senior Notes due March 2022 (the “2022 Notes”). The interest on the 2022 Notes is payable semi-annually on March 1 and September 1 of each year. The issuer under the 2022 Notes is Seagate HDD Cayman, and the obligations under the 2022 Notes are fully and unconditionally guaranteed, on a senior unsecured basis, by the Company.
$1 billion Aggregate Principal Amount of 4.75% Senior Notes due June 2023 (the “2023 Notes”). The interest on the 2023 Notes is payable semi-annually on June 1 and December 1 of each year. The issuer under the 2023 Notes is Seagate HDD Cayman, and the obligations under the 2023 Notes are fully and unconditionally guaranteed, on a senior unsecured basis, by the Company.
$500 million Aggregate Principal Amount of 4.875% Senior Notes due March 2024 (the “2024 Notes”). The interest on the 2024 Notes is payable semi-annually on March 1 and September 1 of each year. The issuer under the 2024 Notes is Seagate HDD Cayman, and the obligations under the 2024 Notes are fully and unconditionally guaranteed, on a senior unsecured basis, by the Company.
$1 billion Aggregate Principal Amount of 4.75% Senior Notes due January 2025 (the “2025 Notes”). The interest on the 2025 Notes is payable semi-annually on January 1 and July 1 of each year. The issuer under the 2025 Notes is Seagate HDD Cayman, and the obligations under the 2025 Notes are fully and unconditionally guaranteed, on a senior unsecured basis, by the Company.
$700 million Aggregate Principal Amount of 4.875% Senior Notes due June 2027 (the “2027 Notes”). The interest on the Notes is payable semi-annually on June 1 and December 1 of each year. The issuer under the 2027 Notes is Seagate HDD Cayman, and the obligations under the 2027 Notes are fully and unconditionally guaranteed, on a senior unsecured basis, by the Company.
$500 million Aggregate Principal Amount of 5.75% Senior Notes due December 2034 (the “2034 Notes”). The interest on the 2034 Notes is payable semi-annually on June 1 and December 1 of each year. The issuer under the 2034 Notes is Seagate HDD Cayman, and the obligations under the 2034 Notes are fully and unconditionally guaranteed, on a senior unsecured basis, by the Company.
14
At March 30,September 28, 2018, future principal payments on long-term debt were as follows (in millions):
Fiscal Year | Amount | Amount | ||||||
Remainder of 2018 | $ | — | ||||||
2019 | 504 | |||||||
Remainder of 2019 | $ | 499 | ||||||
2020 | — | — | ||||||
2021 | — | — | ||||||
2022 | 750 | 750 | ||||||
2023 | 951 | |||||||
Thereafter | 3,613 | 2,662 | ||||||
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Total | $ | 4,867 | $ | 4,862 | ||||
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| 4. | Income Taxes |
The Company recordedCompany’s income tax provisionsprovision of $12 million and $231$18 million in the three and nine months ended March 30, 2018, respectively. The income tax provision for the three and nine months ended March 30,September 28, 2018 included approximately $2$1 million of net discrete tax benefit and approximately $195 million of net discrete expense, respectively. The discrete items for the nine months ended March 30, 2018 are primarily associated with the revaluation of U.S. deferred tax assets as a result of the enactment of the Act on December 22, 2017, partially offset by the recognition of previously unrecognized tax benefits associated with the expiration of certain statutes of limitation.expense.
The Company’s income tax provision recorded for the three and nine months ended March 30,September 28, 2018 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 tonon-U.S. earnings generated in jurisdictions that are subject to tax incentive programs and are considered indefinitely reinvested outside of Ireland and (ii) a reduction in the net U.S. deferred tax assets associated with revaluation to a lower U.S. tax rate.
During the nine months ended March 30, 2018, the Company’s unrecognized tax benefits excluding interest and penalties decreased by approximately $15 million to $59 million. The unrecognized tax benefits that, if recognized, would impact the effective tax rate were $59 million at March 30, 2018, subject to certain future changes in valuation allowance. During the twelve months beginning March 31, 2018, the Company expects that its unrecognized tax benefits could be reduced by approximately $19 million, primarily as a result of the expiration of certain statutes of limitation.
The Company recorded an income tax provision of $18 million and $37 million in the three and nine months ended March 31, 2017, respectively. The income tax provision for the three and nine months ended March 31, 2017 included approximately $8 million of net discrete tax expense and approximately $3 million of net discrete tax expense, respectively. The discrete items are primarily associated with changes in valuation allowances offset by release of tax reserves due to the expiration of certain statutes of limitation and prior year tax adjustments.
The Company’s income tax provision recorded for the three and nine months ended March 31, 2017 differed from the provision from 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 tonon-U.S. earnings generated in jurisdictions that are subject to tax incentive programs and are considered indefinitely reinvested outside of Ireland and (ii) restructuring expenses with no associated tax benefits, and (iii) a net decrease in valuation allowance for certain deferred tax assets.
During the three months ended September 28, 2018, the Company’s unrecognized tax benefits excluding interest and penalties increased by approximately $2 million to $62 million. The unrecognized tax benefits that, if recognized, would impact the effective tax rate were $62 million at September 28, 2018, subject to certain future valuation allowance reversals. During the twelve months beginning September 29, 2018, the Company expects that its unrecognized tax benefits could be reduced by approximately $19 million, primarily as a result of the expiration of certain statutes of limitation.
The Company’s income tax provision of $7 million in the three months ended September 29, 2017 included approximately $1 million of net discrete tax expense.
The Company’s income tax provision recorded for the three months ended September 29, 2017 differed from the provision from 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 tonon-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 deferred tax assets.
On December 22, 2017, the Tax Act was enacted into law in the United States. The Tax Act significantly revisedrevises U.S. corporate income tax law by, among other things, lowering U.S. corporate income tax rates from 35% to 21%, implementing a territorial tax system, and imposing aone-time transition tax on deemed repatriated earnings ofnon-U.S. subsidiaries.
The U.S. tax law changes, including limitations on various business deductions such as executive compensation under Internal Revenue Code §162(m), will not impact the Company’s tax expense in the short-term due to the Company’s large net operating loss and tax credit carryovers and associated valuation allowance. The Tax Act’s new international rules, including the Global IntangibleLow-Taxed Income the(“GILTI”), Foreign Derived Intangible Income (“FDII”), and the Base Erosion Anti-Avoidance Tax (“BEAT”) are not expected to have a material impact oneffective beginning in fiscal year 2019. For fiscal year 2019, the Company’s financial statements. However,Company has included these assessments are based on preliminary review and analysiseffects of the Tax Act in its financial statements and are subject to change asconcluded the Company continues to evaluate these highly complex rules as additional interpretive guidance is issued.impact will not be material.
Pursuant to SEC Staff Accounting Bulletin (“SAB”) 118 (regarding the application of ASC 740,Income Taxes (“ASC 740”) associated with the enactment of the Tax Act), the Company recorded an adjusted provisional tax expense of approximately $4 million and $212 millionbelieves its accounting under ASC 740 for the three and nine months ended March 30, 2018, respectively, tore-measure its U.S. deferred tax assets at the newly enacted 21% tax rate. The tax expense remains provisional because the Company continues to evaluate the impact of various domestic and international provisions of the Tax Act as well as the impact of additional guidance that may be provided. This provisional tax expense increased the Company’s effective tax rate for the three and nine months ended March 30, 2018 to approximately 3% and 24%, respectively. The other U.S. tax changes are not expected to impact the Company’s tax expense in the short-term due the Company’s large net operating loss and tax credit carryovers.
15
| 5. |
Dot Hill Systems Corp.
On October 6, 2015, the Company acquired all of the outstanding shares of Dot Hill Systems Corp. (“Dot Hill”), a supplier of software and hardware storage systems. The Company paid $9.75 per share, or $674 million, in cash for the acquisition. The acquisition of Dot Hill further expands the Company’sOEM-focused cloud storage systems business and advances the Company’s strategic efforts.
The following table summarizes the estimated fair values of the assets acquired and liabilities assumed at the acquisition date:
(Dollars in millions) | Amount | |||
Cash and cash equivalents | $ | 40 | ||
Accounts receivable, net | 48 | |||
Inventories | 21 | |||
Other current andnon-current assets | 7 | |||
Property, plant and equipment | 10 | |||
Intangible assets | 252 | |||
Goodwill | 364 | |||
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Total assets | 742 | |||
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Accounts payable, accrued expenses and other | (68 | ) | ||
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Total liabilities | (68 | ) | ||
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Total | $ | 674 | ||
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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 | $ | 164 | 5.0 years | |||||
Customer relationships | 71 | 7.0 years | ||||||
Trade names | 3 | 5.0 years | ||||||
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Total amortizable intangible assets acquired | 238 | 5.5 years | ||||||
In-process research and development | 14 | |||||||
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Total acquired identifiable intangible assets | $ | 252 | ||||||
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The recognized goodwill, which is not deductible for income tax purposes, is primarily attributable to cost synergies expected to arise after the acquisition and the benefits the Company expects to derive from enhanced market opportunities.
| Goodwill and Other Intangible Assets |
Goodwill
The changes in the carrying amount of goodwill for the ninethree months ended March 30,September 28, 2018, are as follows:
(Dollars in millions) | Amount | |||
Balance at June 30, 2017 | $ | 1,238 | ||
Goodwill acquired | — | |||
Goodwill disposed | (1 | ) | ||
Foreign currency translation effect | 1 | |||
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Balance at March 30, 2018 | $ | 1,238 | ||
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16
(Dollars in millions) | Amount | |||
Balance at June 29, 2018 | $ | 1,237 | ||
Goodwill acquired | — | |||
Goodwill disposed | — | |||
Foreign currency translation effect | — | |||
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Balance at September 28, 2018 | $ | 1,237 | ||
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Other Intangible Assets
Other intangible assets consist primarily of existing technology, customer relationships and trade names acquired in business combinations. Intangibles are amortized on a straight-line basis over the respective estimated useful lives of the assets. Amortization is charged to Operating expenses in the Company’s Condensed Consolidated Statements of Operations.
The carrying value of other intangible assets subject to amortization, excluding fully amortized intangible assets, as of March 30,September 28, 2018, is set forth in the following table:
(Dollars in millions) | Gross Carrying Amount | Accumulated Amortization | Net Carrying Amount | Weighted-Average Remaining Useful Life | Gross Carrying Amount | Accumulated Amortization | Net Carrying Amount | Weighted-Average Remaining Useful Life | ||||||||||||||||||||||||
Existing technology | $ | 279 | $ | (153 | ) | $ | 126 | 2.7 years | $ | 256 | $ | (158 | ) | $ | 98 | 2.3 years | ||||||||||||||||
Customer relationships | 89 | (39 | ) | 50 | 4.2 years | 89 | (46 | ) | 43 | 3.8 years | ||||||||||||||||||||||
Trade name | 17 | (12 | ) | 5 | 1.5 years | 17 | (14 | ) | 3 | 1.1 years | ||||||||||||||||||||||
Other intangible assets | 40 | (17 | ) | 23 | 2.5 years | 45 | (20 | ) | 25 | 3.0 years | ||||||||||||||||||||||
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Total amortizable other intangible assets | $ | 425 | $ | (221 | ) | $ | 204 | 3.0 years | $ | 407 | $ | (238 | ) | $ | 169 | 2.8 years | ||||||||||||||||
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The carrying value of other intangible assets subject to amortization, excluding fully amortized intangible assets, as of June 30, 2017,29, 2018, is set forth in the following table:
(Dollars in millions) | Gross Carrying Amount | Accumulated Amortization | Net Carrying Amount | Weighted-Average Remaining Useful Life | Gross Carrying Amount | Accumulated Amortization | Net Carrying Amount | Weighted-Average Remaining Useful Life | ||||||||||||||||||||||||
Existing technology | $ | 280 | $ | (112 | ) | $ | 168 | 3.6 years | $ | 256 | $ | (145 | ) | $ | 111 | 2.5 years | ||||||||||||||||
Customer relationships | 487 | (395 | ) | 92 | 3.4 years | 89 | (42 | ) | 47 | 4.0 years | ||||||||||||||||||||||
Trade name | 27 | (19 | ) | 8 | 2.1 years | 17 | (13 | ) | 4 | 1.3 years | ||||||||||||||||||||||
Other intangible assets | 29 | (16 | ) | 13 | 2.6 years | 45 | (19 | ) | 26 | 3.0 years | ||||||||||||||||||||||
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Total amortizable other intangible assets | $ | 823 | $ | (542 | ) | $ | 281 | 3.4 years | $ | 407 | $ | (219 | ) | $ | 188 | 2.9 years | ||||||||||||||||
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For the three and nine months ended March 30,September 28, 2018 and September 29, 2017, the amortization expense of other intangible assets were $21$19 million and $90 million, respectively. For the three and nine months ended March 31, 2017, the amortization expense of other intangible assets was $42 million and $126$36 million, respectively. As of March 30,September 28, 2018, expected amortization expense for other intangible assets for each of the next five fiscal years and thereafter is as follows:
(Dollars in millions) | Amount | Amount | ||||||
Remainder of 2018 | $ | 21 | ||||||
2019 | 76 | |||||||
Remainder of 2019 | $ | 58 | ||||||
2020 | 52 | 57 | ||||||
2021 | 24 | 29 | ||||||
2022 | 16 | 20 | ||||||
2023 | 5 | |||||||
Thereafter | 15 | — | ||||||
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Total | $ | 204 | $ | 169 | ||||
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Restructuring and Exit Costs |
For the three and nine months ended March 30,September 28, 2018 and September 29, 2017, the Company recorded restructuring charges of approximately $11$23 million and $95$51 million, respectively, comprised primarily of charges related to workforce reduction costs and facilities and other exit costs associated with the restructuring of its workforce during the fiscal year.workforce. The Company’s significant restructuring plans are described below. All restructuring charges are reported in Restructuring and other, net on the Company’s Condensed Consolidated Statements of Operations.
December 2017 Plan -— On December 8, 2017, the Company committed to a restructuring plan (the “December 2017 Plan”) to reduce its cost structure. The December 2017 Plan included reducing the Company’s global headcount by approximately 500 employees. The December 2017 Plan is expected to bewas substantially completed by the end of fiscal year 2018.
17
July 2017 Plan - — On July 25, 2017, the Company committed to a restructuring plan (the “July 2017 Plan”) to reduce its cost structure. The July 2017 Plan included reducing the Company’s global headcount by approximately 600 employees. The July 2017 Plan was largelysubstantially completed by the end of the September 2017 quarter.during fiscal year 2018.
March 2017 Plan - — On March 9, 2017, the Company committed to a restructuring plan (the “March 2017 Plan”) in connection with the continued consolidation of its global footprint. The Company closed its design center in Korea, resulting in the reduction of the Company’s headcount by approximately 300 employees. The March 2017 Plan was largelysubstantially completed by the end of fiscal year 2017.
July 2016 Plan - — On July 11, 2016, the Company committed to a restructuring plan (the “July 2016 Plan”) for continued consolidation of its global footprint across Asia, EMEA and the Americas. The July 2016 Plan included reducing worldwide headcount by approximately 6,500 employees. The July 2016 Plan was largelysubstantially completed by the end of the December 2017 quarter.
In addition, during fiscal year 2017,2018.
The following table summarizes the Company committed to sell certain land and buildings primarily in Asia as partCompany’s restructuring activities under all of the March 2017 and July 2016Company’s active restructuring plans which accordingly met the criteria to be classified as assets held for sale and were reclassified to Other current assets on the Condensed Consolidated Balance Sheets at that time. During the quarter ended March 30, 2018, the Company sold certain of these properties, which were previously classified as assets held for sale and recognized a gain of approximately $1 million, which was included in Restructuring and other, net in the Condensed Consolidated Statements of Operations. See Note 9. Fair Value for additional information.
The Company’s restructuring activity for the three and nine months ended March 30, 2018 is summarized as follows:September 28, 2018:
| December 2017 Plan | July 2017 Plan | March 2017 Plan | July 2016 Plan | Other Plans | ||||||||||||||||||||||||||||||||||||||||
(Dollars in millions) | Workforce Reduction Costs | Facilities and Other Exit Costs | Workforce Reduction Costs | Facilities and Other Exit Costs | Workforce Reduction Costs | Facilities and Other Exit Costs | Workforce Reduction Costs | Facilities and Other Exit Costs | Workforce Reduction Costs | Facilities and Other Exit Costs | Total | |||||||||||||||||||||||||||||||||
| Accrual balances at June 30, 2017 | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | 22 | $ | 2 | $ | 6 | $ | 13 | $ | 43 | ||||||||||||||||||||||
Restructuring charges | 27 | 4 | 38 | 4 | — | — | 1 | 12 | 2 | — | 88 | |||||||||||||||||||||||||||||||||
Cash payments | (18 | ) | (1 | ) | (37 | ) | (3 | ) | (1 | ) | — | (21 | ) | (13 | ) | (8 | ) | (2 | ) | (104 | ) | |||||||||||||||||||||||
Adjustments | (2 | ) | — | (1 | ) | — | 2 | — | 2 | (1 | ) | — | 7 | 7 | ||||||||||||||||||||||||||||||
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| Accrual balances at March 30, 2018 | $ | 7 | $ | 3 | $ | — | $ | 1 | $ | 1 | $ | — | $ | 4 | $ | — | $ | — | $ | 18 | $ | 34 | ||||||||||||||||||||||
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| Total costs incurred to date as of March 30, 2018 | $ | 25 | $ | 4 | $ | 37 | $ | 4 | $ | 31 | $ | 3 | $ | 82 | $ | 31 | $ | 228 | $ | 58 | $ | 503 | ||||||||||||||||||||||
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| Total expected charges to be incurred as of March 30, 2018 | $ | 1 | $ | 1 | $ | — | $ | — | $ | — | $ | 1 | $ | — | $ | 1 | $ | — | $ | — | $ | 4 | ||||||||||||||||||||||
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| Restructuring charges for the three months ended March 30, 2018 | $ | (2 | ) | $ | 4 | $ | — | $ | — | $ | — | $ | — | $ | — | $ | 2 | $ | — | $ | 7 | $ | 11 | |||||||||||||||||||||
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| December 2017 Plan | July 2017 Plan | March 2017 Plan | July 2016 Plan | Other Plans | ||||||||||||||||||||||||||||||||||||||||
(Dollars in millions) | Workforce Reduction Costs | Facilities and Other Exit Costs | Workforce Reduction Costs | Facilities and Other Exit Costs | Workforce Reduction Costs | Facilities and Other Exit Costs | Workforce Reduction Costs | Facilities and Other Exit Costs | Workforce Reduction Costs | Facilities and Other Exit Costs | Total | |||||||||||||||||||||||||||||||||
| Accrual balances at June 29, 2018 | $ | 5 | $ | 4 | $ | — | $ | 1 | $ | 1 | $ | — | $ | 2 | $ | — | $ | 11 | $ | 18 | $ | 42 | ||||||||||||||||||||||
Restructuring charges | — | 1 | — | — | — | — | — | 2 | 19 | 2 | 24 | |||||||||||||||||||||||||||||||||
Cash payments | (4 | ) | (2 | ) | — | — | — | — | (1 | ) | (1 | ) | (10 | ) | (2 | ) | (20 | ) | ||||||||||||||||||||||||||
Adjustments | — | (1 | ) | — | — | — | — | — | — | — | — | (1 | ) | |||||||||||||||||||||||||||||||
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| Accrual balances at September 28, 2018 | $ | 1 | $ | 2 | $ | — | $ | 1 | $ | 1 | $ | — | $ | 1 | $ | 1 | $ | 20 | $ | 18 | $ | 45 | ||||||||||||||||||||||
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| Total costs incurred to date as of September 28, 2018 | $ | 26 | $ | 6 | $ | 37 | $ | 4 | $ | 31 | $ | 3 | $ | 82 | $ | 36 | $ | 259 | $ | 61 | $ | 545 | ||||||||||||||||||||||
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| Total expected charges to be incurred as of September 28, 2018 | $ | — | $ | 1 | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | 3 | $ | 4 | ||||||||||||||||||||||
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Derivative Financial Instruments |
The Company is exposed to foreign currency exchange rate, interest rate, and to a lesser extent, equity market risks relating to its ongoing business operations. From time to time, the Company enters into cash flow hedges in the form of foreign currency forward exchange contracts in order to manage the foreign currency exchange rate risk on forecasted expenses and investments denominated in foreign currencies. The Company’s accounting policies for these instruments are based on whether the instruments are classified asdesignated ornon-designated hedging instruments. The Company records all derivatives in theits Condensed Consolidated Balance Sheets at fair value. The changes in the fair value of thehighly effective portions of designated cash flow hedges are recorded in Accumulated other comprehensive loss on the Condensed Consolidated Balance Sheets until the hedged item is recognized in earnings.
Derivatives that are not designated as hedging instruments and the ineffective portions of cash flow hedgesor are not assessed to be highly effective are adjusted to fair value through earnings. The amount of net unrealized gain on cash flow hedges was $2 million as of September 28, 2018 and less than $1 million as of June 29, 2018.
TheCompanyde-designates its its cash flow hedges when the forecasted hedged transactions are realizedaffect earnings 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 on the Company’s Condensed Consolidated Balance Sheets are reclassified immediately into earnings and any subsequent changes in the fair value of such derivative instruments are immediately reflected in earnings. The Company recognized a net gain of $1 million in Other expense, net related to the loss of hedge designation on discontinued cash flow hedges during the three months ended September 28, 2018. 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 and nine months ended March 30, 2018.September 29, 2017.
AsOther derivatives not designated as hedging instruments consist of March 30, 2018 and June 30, 2017,foreign currency forward exchange contracts that the Company had nouses to hedge the foreign currency exposure on the investment in debt security and forecasted expenditures denominated in currency other than the U.S. dollar. The Company recognizes gains and losses on these contracts, as well as the related costs in Other, net on its Condensed Consolidated Statement of Operations along with foreign currency gains and losses on investment in debt security, and deferred gains of derivatives in Other current assets on the Condensed Consolidated Balance Sheets.
The following tables show the total notional value of the Company’s outstanding foreign currency forward exchange contracts.
| As of September 28, 2018 | ||||||||
(Dollars in millions) | Contracts Designated as Hedges | Contracts Not Designated as Hedges | ||||||
Thai Baht | $ | 37 | $ | 19 | ||||
Singapore Dollars | 50 | 25 | ||||||
Chinese Renminbi | 30 | — | ||||||
British Pound Sterling | 31 | 12 | ||||||
Japanese Yen | 44 | 1,332 | ||||||
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18
| As of June 29, 2018 | ||||||||
(Dollars in millions) | Contracts Designated as Hedges | Contracts Not Designated as Hedges | ||||||
Japanese Yen | $ | 66 | $ | 1,310 | ||||
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 ofits Non-qualified Deferred Compensation Plan—the Seagate Deferred Compensation Plan (the “SDCP”). In fiscal year 2014, the Company entered into a Total Return Swap (“TRS”) in order to manage the equity market risks associated with the SDCP liabilities. The Company pays a floating rate, based on LIBOR plus an interest rate spread, on the notional amount of the TRS. The TRS is designed to substantially offset changes in the SDCP liability due to changes in the value of the investment options made by employees. As of March 30,September 28, 2018, the notional investments underlying the TRS amounted to $113$120 million. The contract term of the TRS is through January 2019 and is settled on a monthly basis, therefore limiting counterparty performance risk. The Company did not designate the TRS as a hedge. Rather, the Company records all changes in the fair value of the TRS to earnings to offset the market value changes of the SDCP liabilities.
As
The following tables show the Company’s derivative instruments measured at gross fair value as reflected in its Condensed Consolidated Balance Sheet as of March 30,September 28, 2018 and June 30,29, 2018:
| As of September 28, 2018 | ||||||||||||||||
| Derivative Assets | Derivative Liabilities | |||||||||||||||
(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 | $ | 4 | Accrued expenses | $ | (1 | ) | |||||||||
Derivatives not designated as hedging instruments: | ||||||||||||||||
Foreign currency forward exchange contracts | Other current assets | 50 | Accrued expenses | — | ||||||||||||
Total return swap | Other current assets | — | Accrued expenses | — | ||||||||||||
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| |||||||||||||
Total derivatives | $ | 54 | $ | (1 | ) | |||||||||||
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| |||||||||||||
| As of June 29, 2018 | ||||||||||||||||
| Derivative Assets | Derivative Liabilities | |||||||||||||||
(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 | 10 | Accrued expenses | — | ||||||||||||
Total return swap | Other current assets | — | Accrued expenses | — | ||||||||||||
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Total derivatives | $ | 10 | $ | — | ||||||||||||
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The following tables show the effect of the Company’s derivative instruments on its Condensed Consolidated Statements of Comprehensive Income and the Condensed Consolidated Statements of Operations for the three months ended September 28, 2018:
Derivatives Not Designated as Hedging Instruments | Location of Gain or (Loss) Recognized in Income on Derivatives | Amount of Gain or (Loss) Recognized in Income on Derivatives | ||||
Foreign currency forward exchange contracts | Other, net | $ | 41 | |||
Total return swap | Operating expenses | $ | 4 | |||
(Dollars in millions) Derivatives Designated as Hedging Instruments | Amount of Gain (Loss) Recognized in OCI on Derivatives (Effective Portion) | Location of Gain (Loss) Reclassified from Accumulated OCI into Income (Effective Portion) | Amount of Gain (Loss) Reclassified from Accumulated OCI into Income (Effective Portion) | Location of Gain (Loss) Recognized in Income on Derivatives (Ineffective Portion and Amount Excluded from Effectiveness Testing) | Amount of Gain (Loss) Recognized in Income (Ineffective Portion and Amount Excluded from Effectiveness Testing) (a) | |||||||||||||||
Foreign currency forward exchange contracts | $ | 3 | Other expense, net | $ | 1 | Other expense, net | $ | — | ||||||||||||
As of September 29, 2017, the Company had no outstanding foreign currency forward exchange contracts and the gross fair value of the TRS reflected in the condensed consolidated balance sheetsCondensed Consolidated Balance Sheet was immaterial.
The following tables showtable shows the effect of the Company’s derivative instruments on theits Condensed Consolidated Statements of Comprehensive Income and the Condensed Consolidated StatementsStatement of Operations for the three and nine months ended March 30, 2018:
(Dollars in millions) Derivatives Not Designated as Hedging Instruments | Location of Gain (Loss) Recognized in Income on Derivatives | Amount of Gain (Loss) Recognized in Income on Derivatives | ||||||||
| For the Three Months | For the Nine Months | |||||||||
Foreign currency forward exchange contracts | Other, net | $ | — | $ | — | |||||
Total return swap | Operating expenses | (2 | ) | 5 | ||||||
The following tables show the effect of the Company’s derivative instruments on the Condensed Consolidated Statements of Comprehensive Income and the Condensed Consolidated Statements of Operations for the three and nine months ended March 31,September 29, 2017:
(Dollars in millions) Derivatives Designated as Hedging Instruments | Amount of Gain (Loss) Recognized in OCI on Derivatives (Effective Portion) | Location of Gain (Loss) Reclassified from Accumulated OCI into Income (Effective Portion) | Amount of Gain (Loss) Reclassified from Accumulated OCI into Income (Effective Portion) | Location of Gain (Loss) Recognized in Income on Derivatives (Ineffective Portion and Amount Excluded from Effectiveness Testing) | Amount of Gain (Loss) Recognized in Income (Ineffective Portion and Amount Excluded from Effectiveness Testing) (a) | |||||||||||||||||||||||||||
| For the Three Months | For the Nine Months | For the Three Months | For the Nine Months | For the Three Months | For the Nine Months | |||||||||||||||||||||||||||
Foreign currency forward exchange contracts | $ | 1 | $ | (2 | ) | Cost of revenue | $ | (1 | ) | $ | (2 | ) | Cost of revenue | $ | — | $ | — | |||||||||||||||
Derivatives Not Designated as Hedging Instruments | Location of Gain (Loss) Recognized in Income on Derivatives | Amount of Gain (Loss) Recognized in Income on Derivatives | ||||||||
| For the Three Months | For the Nine Months | |||||||||
Foreign currency forward exchange contracts | Other, net | $ | 4 | $ | 1 | |||||
Total return swap | Operating expenses | 4 | 8 | |||||||
Derivatives Not Designated as Hedging Instruments | Location of Gain or (Loss) Recognized in Income on Derivatives | Amount of Gain or (Loss) Recognized in Income on Derivatives | ||||
Foreign currency forward exchange contracts | Other, net | $ | — | |||
Total return swap | Operating expenses | $ | 3 | |||
19
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 are:
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’snon-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 tables present the Company’s assets and liabilities, by financial instrument type and balance sheet line item that are measured at fair value on a recurring basis, excluding accrued interest components, as of March 30,September 28, 2018:
| Fair Value Measurements at Reporting Date Using | 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 | 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 | $ | 1,260 | $ | — | $ | — | $ | 1,260 | $ | 801 | $ | — | $ | — | $ | 801 | ||||||||||||||||
Time deposits and certificates of deposit | — | 289 | — | 289 | — | 425 | — | 425 | ||||||||||||||||||||||||
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Total cash equivalents | 1,260 | 289 | — | 1,549 | 801 | 425 | — | 1,226 | ||||||||||||||||||||||||
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Restricted cash and investments: | ||||||||||||||||||||||||||||||||
Money market funds | 1 | — | — | 1 | — | — | — | — | ||||||||||||||||||||||||
Time deposits and certificates of deposit | — | 3 | — | 3 | — | 3 | — | 3 | ||||||||||||||||||||||||
Derivative Assets | — | 54 | — | 54 | ||||||||||||||||||||||||||||
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| |||||||||||||||||||||||||
Total assets | $ | 1,261 | $ | 292 | $ | — | $ | 1,553 | $ | 801 | $ | 482 | $ | — | $ | 1,283 | ||||||||||||||||
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Liabilities: | ||||||||||||||||||||||||||||||||
Derivative liabilities | $ | — | $ | (1 | ) | $ | — | $ | (1 | ) | ||||||||||||||||||||||
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| |||||||||||||||||||||||||||||
Total liabilities | $ | — | $ | (1 | ) | $ | — | $ | (1 | ) | ||||||||||||||||||||||
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| |||||||||||||||||||||||||||||
20
| 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 | $ | 1,260 | $ | 289 | $ | — | $ | 1,549 | ||||||||
Other current assets | 1 | 3 | — | 4 | ||||||||||||
|
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|
|
|
|
|
| |||||||||
Total assets | $ | 1,261 | $ | 292 | $ | — | $ | 1,553 | ||||||||
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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: | ||||||||||||||||
Cash and cash equivalents | $ | 801 | $ | 425 | $ | — | $ | 1,226 | ||||||||
Other current assets | — | 57 | — | 57 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Total assets | $ | 801 | $ | 482 | $ | — | $ | 1,283 | ||||||||
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|
|
|
|
|
| |||||||||
Liabilities: | ||||||||||||||||
Accrued expenses | $ | — | $ | (1 | ) | $ | — | $ | (1 | ) | ||||||
|
|
|
|
|
|
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| |||||||||
Total liabilities | $ | — | $ | (1 | ) | $ | — | $ | (1 | ) | ||||||
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| |||||||||
The following tables present the Company’s assets and liabilities, by financial instrument type and balance sheet line item that are measured at fair value on a recurring basis, excluding accrued interest components, as of June 30, 2017:29, 2018:
| Fair Value Measurements at Reporting Date Using | 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 | 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 | $ | 593 | $ | — | $ | — | $ | 593 | $ | 620 | $ | — | $ | — | $ | 620 | ||||||||||||||||
Time deposits and certificates of deposit | — | 581 | — | 581 | — | 392 | — | 392 | ||||||||||||||||||||||||
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|
|
|
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| |||||||||||||||||||||||||
Total cash equivalents | 593 | 581 | — | 1,174 | 620 | 392 | — | 1,012 | ||||||||||||||||||||||||
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|
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|
| |||||||||||||||||||||||||
Restricted cash and investments: | ||||||||||||||||||||||||||||||||
Money market funds | 1 | — | — | 1 | 1 | — | — | 1 | ||||||||||||||||||||||||
Time deposits and certificates of deposit | — | 3 | — | 3 | — | 3 | — | 3 | ||||||||||||||||||||||||
Derivative assets | — | 10 | — | 10 | ||||||||||||||||||||||||||||
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| |||||||||||||||||||||||||
Total assets | $ | 594 | $ | 584 | $ | — | $ | 1,178 | $ | 621 | $ | 405 | $ | — | $ | 1,026 | ||||||||||||||||
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| |||||||||||||||||||||||||
| Fair Value Measurements at Reporting Date Using | 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 | 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 | $ | 593 | $ | 581 | $ | — | $ | 1,174 | $ | 620 | $ | 392 | $ | — | $ | 1,012 | ||||||||||||||||
Other current assets | 1 | 3 | — | 4 | 1 | 13 | — | 14 | ||||||||||||||||||||||||
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Total assets | $ | 594 | $ | 584 | $ | — | $ | 1,178 | $ | 621 | $ | 405 | $ | — | $ | 1,026 | ||||||||||||||||
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The Company classifies items in Level 1 if the financial 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, U.S. Treasuries, time deposits and certificates of deposit. 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 value of all of its cash equivalents.equivalents and short-term investments. For the cash equivalents and short-term investments in the Company’s portfolio, multiple pricing sources are generally available. The pricing service uses inputs from multiple industry standard data providers or other third party sources and various methodologies, such as weighting and models, to determine the appropriate price at the measurement date. The Company corroborates the prices obtained from the pricing service against other independent sources and, as of March 30,September 28, 2018, has not found it necessary to make any adjustments to the prices obtained.
21
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 the TRS. 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.
As of March 30,September 28, 2018 and June 30, 2017,29, 2018, the Company had no Level 3 assets or liabilities measured at fair value on a recurring basis.
Items Measured at Fair Value on aNon-Recurring Basis
From time to time, the Company enters into certain strategic investments for the promotion of business and strategic objectives. These strategic investments primarily include cost basis investments representing those where the Company does not have the ability to exercise significant influence as well as equity method investments representing those where the Company does have the ability to exercise significant influence but does not have control. These investments are included in Other assets, net in the Company’s Condensed Consolidated Balance Sheet,Sheets, and are periodically analyzed to determine whether or not there are indicators of impairment.
Prior to fiscal year 2019, the Company’s strategic investments in privately-held companies without readily determinable fair values were accounted for under the cost method and were recorded at historical cost at the time of investment, with adjustments to the balance only in the event of impairment. Effective June 30, 2018, the Company adopted ASU2016-01, Financial Instruments, which changed the way the Company accounts for equity investments, excluding investments that qualify for the equity method of accounting. The Company’s equity investments in privately-held companies without readily determinable fair values are now measured using the measurement alternative, defined by ASC 321,Investments - Equity Securities, as cost, less impairments, and adjusted up or down based on observable price changes in orderly transactions for identical or similar investments of the same issuer. Any adjustments resulting from impairments and/or observable price changes are recorded as Other, net in the Company’s Condensed Consolidated Statements of Operations.
As of September 28, 2018 and June 29, 2018, the carrying value of the Company’s strategic investments at March 30, 2018were $107 million and June 30, 2017 was $125$118 million, at both dates, and consisted primarily of privately held equity securities without a readily determinable fair value.
respectively. For the three and nine months ended March 30,September 28, 2018 and September 29, 2017, the Company determined that a certaindid not have any equity investmentinvestments accounted for under the cost method wasthat were other-than-temporarily impaired and recorded a charge of $3 million in order to write down the carrying amount of the investment to its fair value. For the nine months ended March 31, 2017, the Company recognized an impairment charge of $25 million on a strategic investment. For the three months ended March 31, 2017, the Company did not record any impairment charges. Since there wasThere were no active market forupward or downward adjustments on equity investments as a result of adoption of measurement alternative during the equity securities of the investee, the Company estimated fair value of the investee by analyzing the underlying cash flows and future prospects of the investee. These amounts were recorded in Other, net in the Condensed Consolidated Statements of Operations.September 2018 quarter.
As of September 28, 2018 and June 30, 2017,29, 2018, the Company had $77$26 million of held for sale land and buildingsbuilding (collectively, the “properties”“property”) primarily in Asia included in Other current assets on theits Condensed Consolidated Balance Sheet.Sheets. The respective propertiesproperty to be sold met the criteria to be classified as held for sale duringat the quarters ended March 31, 2017 and June 30,end of fiscal year 2017. Depreciation relatedDuring the September 2018 quarter, the Company accepted an offer to sell the properties ceased as of the date these were determinedproperty to a third party. The sale is expected to be held for sale. Duringcompleted by the end of fiscal year 2017, the Company recorded2019, subject to government approval and customary closing conditions. No impairment charges of $35 million in order to write down the carrying amount of such properties to their estimated fair values less costs to sell. The impairment charges were recorded in Operating expenses in the Condensed Consolidated Statements of Operations. No additional impairment charges related to these properties were recorded duringwas identified for the three and nine months ended March 30, 2018. The fair values were measured with the assistance of third-party valuation models which used inputs such as comparable market data for similar land sale transactions adjusted for differences in comparable properties to derive the estimated fair value of the subject propertiesSeptember 28, 2018 and the cost approach valuation techniques for buildings as part of the analysis. The fair value measurement was categorized as Level 3 as significant unobservable inputs were used in the valuation analysis. In the quarter ended March 30, 2018, the Company completed the sale of certain of these properties and recorded a gain of approximately $1 million, which was included in Restructuring and other, net in the Condensed Consolidated Statements of Operations. As of March 30, 2018, the Company had $36 million of properties that continued to be included in Other current assets on the Condensed Consolidated Balance Sheet.September 29, 2017.
22
Other Fair Value Disclosures
The Company’s investment in a debt security, classifiedas held-to-maturity, represents sharesof non-convertible preferred stock of TMC. This debt security has a maturity date of six years starting from May 31, 2018 and is classified as Investment in debt security on the Company’s Condensed Consolidated Balance Sheets. The debt security is recorded at amortized cost and its fair value approximated the carrying value at June 29, 2018. As of September 28, 2018, the fair value of this investment was $1,289 million with an unrealized gain of $30 million on the carrying value of $1,259 million. The fair value was determined utilizing Level 2 inputs such as discount rates and yield terms of similar types of securities issued by comparable companies.
The Company’s debt is carried at amortized cost. The estimated fair value of the Company’s debt is derived using the closing price of the same debt instruments 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:
| March 30, 2018 | June 30, 2017 | September 28, 2018 | June 29, 2018 | |||||||||||||||||||||||||||||
(Dollars in millions) | Carrying Amount | Estimated Fair Value | Carrying Amount | Estimated Fair Value | Carrying Amount | Estimated Fair Value | Carrying Amount | Estimated Fair Value | ||||||||||||||||||||||||
3.75% Senior Notes due November 2018 | $ | 504 | $ | 507 | $ | 710 | $ | 726 | $ | 499 | $ | 500 | $ | 499 | $ | 501 | ||||||||||||||||
4.25% Senior Notes due March 2022 | 749 | 741 | 748 | 765 | 749 | 746 | 749 | 743 | ||||||||||||||||||||||||
4.75% Senior Notes due June 2023 | 951 | 954 | 951 | 987 | 951 | 950 | 951 | 942 | ||||||||||||||||||||||||
4.875% Senior Notes due March 2024 | 497 | 498 | 497 | 511 | 497 | 492 | 497 | 489 | ||||||||||||||||||||||||
4.75% Senior Notes due January 2025 | 975 | 953 | 975 | 984 | 975 | 937 | 975 | 936 | ||||||||||||||||||||||||
4.875% Senior Notes due June 2027 | 695 | 660 | 695 | 698 | 695 | 655 | 695 | 650 | ||||||||||||||||||||||||
5.75% Senior Notes due December 2034 | 489 | 467 | 489 | 488 | 489 | 443 | 489 | 441 | ||||||||||||||||||||||||
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| |||||||||||||||||||||||||
| $ | 4,860 | $ | 4,780 | $ | 5,065 | $ | 5,159 | $ | 4,855 | $ | 4,723 | $ | 4,855 | $ | 4,702 | |||||||||||||||||
Less: debt issuance costs | (38 | ) | — | (44 | ) | — | (34 | ) | — | (36 | ) | — | ||||||||||||||||||||
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Long-term debt, net of debt issuance costs | $ | 4,822 | $ | 4,780 | $ | 5,021 | $ | 5,159 | $ | 4,821 | $ | 4,723 | $ | 4,819 | $ | 4,702 | ||||||||||||||||
Less: current portion of long-term debt, net of debt issuance costs of $1 million | (503 | ) | (507 | ) | — | — | ||||||||||||||||||||||||||
Less: current portion of long-term debt, net of debt issuance costs | (499 | ) | (500 | ) | (499 | ) | (501 | ) | ||||||||||||||||||||||||
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| |||||||||||||||||||||||||
Long-term debt, less current portion | $ | 4,319 | $ | 4,273 | $ | 5,021 | $ | 5,159 | $ | 4,322 | $ | 4,223 | $ | 4,320 | $ | 4,201 | ||||||||||||||||
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23
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 287,026,396286,127,032 shares were outstanding as of March 30,September 28, 2018, and 100,000,000 preferred shares, par value $0.00001, of which none were issued or outstanding as of March 30,September 28, 2018.
Ordinary shares— – Holders of ordinary shares are entitled to receive dividends as and when 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 April 22, 2015, 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 March 30,September 28, 2018, $0.9$0.7 billion remained available for repurchase under the existing repurchase authorization limit.
The following table sets forth information with respect to repurchases of the Company’s shares during the ninethree months ended March 30,September 28, 2018:
(In millions) | Number of Shares Repurchased | Dollar Value of Shares Repurchased | Number of Shares Repurchased | Dollar Value of Shares Repurchased | ||||||||||||
Repurchases of ordinary shares | 10 | $ | 361 | 3 | $ | 150 | ||||||||||
Tax withholding related to vesting of equity awards | 1 | 22 | 1 | 27 | ||||||||||||
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Total | 11 | $ | 383 | 4 | $ | 177 | ||||||||||
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| 10. | Revenue |
The following table provides information about disaggregated revenue by sales channel and geographical region for the Company’s single reportable segment:
| For the Three Months Ended | ||||||||
(Dollars in million) | September 28, 2018 | September 29, 2017 | ||||||
Revenues by Channel | ||||||||
OEMs | $ | 2,138 | $ | 1,834 | ||||
Distributors | 534 | 434 | ||||||
Retailers | 319 | 364 | ||||||
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Total | $ | 2,991 | $ | 2,632 | ||||
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Revenues by Geography(1) | ||||||||
Americas | $ | 1,006 | $ | 875 | ||||
EMEA | 517 | 472 | ||||||
Asia Pacific | 1,468 | 1,285 | ||||||
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| |||||
Total | $ | 2,991 | $ | 2,632 | ||||
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| (1) | Revenue is attributed to countries based on bill from locations. |
| 11. | Share-based Compensation |
The Company recorded approximately $26$18 million and $85$32 million of share-based compensation expense during the three and nine months ended March 30,September 28, 2018 respectively. The Company recorded approximately $37 million and $110 million of share-based compensation expense during the three and nine months ended March 31,September 29, 2017, respectively.
| 12. | Guarantees |
Indemnifications toof 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-
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CaymanSeagate-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”)the Company and Seagate-Cayman became a wholly owned subsidiary of the Company, as described more fully in the Current Report onForm8-K filed 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 indemnification rights of a Deed Indemnitee’s indemnification rightsIndemnitee 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 DeedDeeds of Indemnity with certain Deed Indemnitees effective as of July 3, 2010 and continues to enter into the DeedDeeds 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 condensedCompany’s 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 accompanyingCompany’s condensed 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 1 to 5 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 and nine months ended March 30,September 28, 2018 and March 31,September 29, 2017 were as follows:
| For the Three Months Ended | For the Nine Months Ended | |||||||||||||||
(Dollars in millions) | March 30, 2018 | March 31, 2017 | March 30, 2018 | March 31, 2017 | ||||||||||||
Balance, beginning of period | $ | 236 | $ | 222 | $ | 233 | $ | 206 | ||||||||
Warranties issued | 36 | 32 | 111 | 97 | ||||||||||||
Repairs and replacements | (26 | ) | (28 | ) | (80 | ) | (87 | ) | ||||||||
Changes in liability forpre-existing warranties, including expirations | (11 | ) | (3 | ) | (29 | ) | 7 | |||||||||
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Balance, end of period | $ | 235 | $ | 223 | $ | 235 | $ | 223 | ||||||||
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| For the Three Months Ended | ||||||||
(Dollars in millions) | September 28, 2018 | September 29, 2017 | ||||||
Balance, beginning of period | $ | 237 | $ | 233 | ||||
Warranties issued | 34 | 35 | ||||||
Repairs and replacements | (25 | ) | (27 | ) | ||||
Changes in liability forpre-existing warranties, including expirations | (14 | ) | (11 | ) | ||||
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Balance, end of period | $ | 232 | $ | 230 | ||||
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| 13. | 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, unvested restricted stock units and performance-based share units and shares to be purchased under the Employee Stock Purchase Plan (“ESPP”). 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 the Company:
| For the Three Months Ended | For the Nine Months Ended | For the Three Months Ended | ||||||||||||||||||||||
(In millions, except per share data) | March 30, 2018 | March 31, 2017 | March 30, 2018 | March 31, 2017 | September 28, 2018 | September 29, 2017 | ||||||||||||||||||
Numerator: | ||||||||||||||||||||||||
Net income | $ | 381 | $ | 194 | $ | 721 | $ | 658 | $ | 450 | $ | 181 | ||||||||||||
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Number of shares used in per share calculations: | ||||||||||||||||||||||||
Total shares for purposes of calculating basic net income per share | 286 | 296 | 288 | 297 | 287 | 290 | ||||||||||||||||||
Weighted-average effect of dilutive securities: | ||||||||||||||||||||||||
Employee equity award plans | 5 | 4 | 3 | 2 | 5 | 2 | ||||||||||||||||||
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Total shares for purpose of calculating diluted net income per share | 291 | 300 | 291 | 299 | 292 | 292 | ||||||||||||||||||
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Net income per share: | ||||||||||||||||||||||||
Basic | $ | 1.33 | $ | 0.66 | $ | 2.50 | $ | 2.22 | $ | 1.57 | $ | 0.62 | ||||||||||||
Diluted | $ | 1.31 | $ | 0.65 | $ | 2.48 | $ | 2.20 | $ | 1.54 | $ | 0.62 | ||||||||||||
The anti-dilutive shares related to employee equity award plans that were excluded from the computation of diluted net income per share were approximatelyless than 1 million for the three and nine months ended March 30,September 28, 2018, and approximately 1 million and 2 million for the three and nine months ended March 31, 2017, respectively.September 29, 2017.
| 14. | 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 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 No. 4,916,635 (the “‘635 patent”) and U.S. Patent No. 5,638,267 (the “‘267 patent”), misappropriation of trade secrets, breach of contract, and other claims. On January 16, 2002, Convolve filed an amended complaint, alleging defendants infringewere infringing U.S. Patent No. 6,314,473 (the “‘473 patent”). The district court ruled in 2010 that the ‘267 patent was out of the case.
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On August 16, 2011, the district court granted in part and denied in part the Company’s motion for summary judgment. On July 1, 2013, the U.S. Court of Appeals for the Federal Circuit: 1) affirmed the district court’s summary judgment rulings that Seagate did not misappropriate any of the alleged trade secrets and that the asserted claims of the ‘635 patent are invalid; 2) reversed and vacated the district court’s summary judgmentof non-infringement with respect to the ‘473 patent; and 3) remanded the case for further proceedings on the ‘473 patent. On July 11, 2014, the district court granted the Company’s further summary judgment motion regarding the ‘473 patent. On February 10, 2016, the U.S. Court of Appeals for the Federal Circuit: 1) affirmed the district court’s summary judgment of no direct infringement by Seagate because Seagate’s ATA/SCSI disk drives do not meet the “user interface” limitation of the asserted claims of the ‘473 patent; 2) affirmed the district court’s summary judgmentof non-infringement by Compaq’s products as to claims 1, 3, and 5 of the ‘473 patent because Compaq’s F10 BIOS interface does not meet the “commands” limitation of those claims; 3) vacated the district court’s summary judgmentof non-infringement by Compaq’s accused products as toclaims 7-15 of the ‘473 patent; 4) reversed the district court’s summary judgmentof non-infringement based on intervening rights; and 5) remanded the case to the district court for further proceedings on the ‘473 patent. In view of the rulings made by the district court and the Court of Appeals 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.
Enova Technology Corporation v. Seagate Technology (US) Holdings, Inc., et al.On June 5, 2013, Enova Technology Corporation (“Enova”) filed a complaint against Seagate Technology (US) Holdings, Inc. and Seagate Technology LLC in the U.S. District Court for the District of Delaware alleging infringement of U.S. Patent No. 7,136,995 (the “‘995 patent”), “Cryptographic Device,” and U.S. Patent No. 7,900,057 (the “‘057 patent”), “Cryptographic Serial ATA Apparatus and Method.” The Company believes the claims are without merit and intends to vigorously defend this case. On April 27, 2015, the district court ordered a stay of the case, in view of proceedings regarding the ‘995 and ‘057 patents before the Patent Trial and Appeal Board (“PTAB”) of the U.S. Patent and Trademark Office. On September 2, 2015, PTAB issued its final written decision thatclaims 1-15 of the ‘995 patent are held unpatentable. On December 18, 2015, PTAB issued its final written decisions thatclaims 1-32 and 40-53 of the ‘057 patent are held unpatentable. On February 4, 2016, PTAB issued its final written decision thatclaims 33-39 of the ‘057 patent are held unpatentable. Enova appealed PTAB’s decisions on the ‘995 patent and the ‘057 patent to the U.S. Court of Appeals for the Federal Circuit. On March 20, 2017, the court of appeals issued its judgment affirming PTAB’s decision on the ‘995 patent. On September 6, 2017, the court of appeals issued its judgment affirming PTAB’s decision on the ‘057 patent. On November 27, 2017, Enova filed a petition for writ of certiorari with the U.S. Supreme Court challenging the court of appeals’ decision on the ‘057 Patent. The Supreme Court denied the petition on April 30, 2018. The district court case remains stayed. In light of the Supreme Court’s denial of the petition, the Company does not expect to incur a loss in this matter.
Lambeth Magnetic Structures LLC v. Seagate Technology (US) Holdings, Inc., et al.On April 29, 2016, Lambeth Magnetic Structures LLC filed a complaint against Seagate Technology (US) Holdings, Inc. and Seagate Technology LLC in the U.S. District Court for the Western District of Pennsylvania, alleging infringement of U.S. Patent No. 7,128,988, “Magnetic Material Structures, Devices and Methods.” The Company believes the claims asserted in the complaint are without merit and intends to vigorously defend this case. The court issued its claim construction ruling on October 18, 2017. No trial date has been set. 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 ofWhile the possible range of loss relatedfor this matter remains uncertain, the Company estimates the amount of loss to this matter.be immaterial to the financial statements.
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.
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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 responsible or 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 and server storage products, 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.
Other Matters
The Company is involved in a number of other judicial, regulatory or administrative proceedings and investigations incidental to its business, and the Company may be involved in such proceedings and investigations 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.
| 15. |
Investment commitment to acquire interest in preferred stock.On September 28, 2017, the Company entered into an Equity Commitment Letter (“ECL”) with a consortium of investors led by Bain Capital Private Equity for the acquisition of Toshiba Memory Corporation (“TMC”). The ECL contemplates that, upon the closing of the acquisition, the Company or one of its subsidiaries would purchase up to JPY 139.5 billion (approximately USD 1.31 billion based on an exchange rate as of March 30, 2018), of a newly issuednon-convertible preferred stock of a newly formed company, K. K. Pangea, for the purpose of acquiring TMC. The closing of the acquisition is subject to regulatory approvals and other closing conditions.
| Subsequent Events |
Dividend Declared
On May 1,November 2, 2018, the Company’s Board of Directors declared a quarterly cash dividend of $0.63 per share, which will be payable on July 5, 2018January 2, 2019 to shareholders of record as of the close of business on June 20,December 19, 2018.
Share Repurchases
On October 29, 2018, the Company’s Board of Directors authorized the repurchase of $2.3 billion of its outstanding ordinary shares.
| ITEM 2. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
The following is a discussion of the financial condition, changes in financial condition, and results of operations for our fiscal quarters ended March 30,September 28, 2018, DecemberJune 29, 20172018 and March 31,September 29, 2017, referred to herein as the “March“September 2018 quarter,” the “December 2017“June 2018 quarter,” and the “March“September 2017 quarter,” respectively. We operate and report financial results on a fiscal year of 52 or 53 weeks ending on the Friday closest to June 30. The MarchSeptember 2018, December 2017June 2018 and MarchSeptember 2017 quarters were all 13 weeks.
You should read this discussion in conjunction with financial information and related notes included elsewhere in this report. Unless the context indicates otherwise, as used herein, the terms “we,” “us,” “Seagate,” the “Company” and “our” refer to Seagate Technology plc, an Irish public limited company, and its subsidiaries. References to “$” are to United States dollars.
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Some of the statements and assumptions included in this Quarterly Reporton 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, (the “Exchange Act”), each as amended, including, in particular, statements about our plans, strategies and prospects, demand for our products, shifts in technology, estimates of industry growth, our ability to effectively manage our debt obligations and our cash liquidity position, our restructuring efforts, the impactsufficiency of our sources of cash to meet our cash needs for the U.S. Tax Cuts and Jobs Act onnext 12 months, our financial statements,expectations regarding capital expenditures, the potential impact of trade barriers such as import/export duties and restrictions, tariffs and quotas;quotas, and potential corresponding actions by the other countries in which the Company conducts its business, changes in the regulatory regime governing the flow of data across international borders, and the impact of the 2017 U.S. Tax Cuts and Jobs Act (the “Tax Act”) on our financial statements and the projected costs savings for the fiscal quarter and the fiscal year ending June 29, 2018 and beyond.28, 2019. These statements identify prospective information and may include words such as “expects,” “intends,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “projects,” “may,” “will,” or negativesnegative of these words, variations of these words and comparable terminology. These forward-looking statements are based on information available to the Company as of the date of this Quarterly Reporton 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:
the uncertainty in global economic conditions, the impact of the variable demand and adverse pricing environment for disk drives, any regulatory, legal, logistical or other impediments to our ability to execute on our restructuring efforts, our ability to achieve projected cost savings in connection with our restructuring plans and consolidation of our manufacturing activities; 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; possible excess industry supply with respect to particular disk drive products; disruptions to our supply chain or production capabilities; political conditions;
the development and introduction of products based on new technologies and expansion into new data storage markets;
the impact of competitive product announcements and unexpected advances in competing technologies or changes in market trends;
the impact of variable demand and an adverse pricing environment for storage products;
any regulatory, legal, logistical or other impediments to the Company’s ability to execute on its restructuring efforts;
the Company’s ability to achieve projected cost savings in connection with its restructuring plans and consolidation of its manufacturing activities;
the Company’s ability to effectively manage its debt obligations and comply with certain covenants in its credit facilities with respect to financial ratios and financial condition tests and maintain a favorable cash liquidity position;
the Company’s ability to successfully qualify, manufacture and sell its storage products, particularly the new disk drive products with lower cost structures, in increasing volumes on a cost-effective basis and with acceptable quality;
possible excess industry supply both with respect to particular disk drive products and competing alternative storage technology solutions;
disruptions to the Company’s supply chain or production capabilities;
consolidation trends in the data storage industry;
fluctuations in interest rates;
currency fluctuations that may impact ourthe Company’s margins, and international sales and transactions; results of operations;
fluctuations in the value of the Company’s investments and the associated investment income;
the impact of trade barriers imposed by the U.S. government, such as import/export duties and restrictions, tariffs and quotas, and potential corresponding actions by other countries in which the Company conducts its business;
the evolving legal, regulatory and administrative climate in the international markets where the Company operates including changes in regulations relating to privacy and protection of data and environmental matters; and
cyber-attacks or other data breaches that disrupt ourthe Company’s operations or resultsresult in the dissemination of proprietary or confidential information and cause reputational harm; loss of significant customers and/or suppliers; our abilityharm, and the cybersecurity threats and vulnerabilities associated with the Company’s infrastructure updates to comply with certain covenants in our credit facilities with respect to financial ratios and financial condition tests; the riskof non-compliance with the legal, regulatory, administrative and environmental regimes in the markets where we operate; and fluctuations in interest rates. its information technology systems.
Information concerning risks, uncertainties and other factors that could cause results to differ materially from those projected in such forward-looking statements is also set forth in “Item 1A. Risk Factors” of the Annual Reporton Form 10-K for the fiscal year ended June 30, 2017,29, 2018, which we encourage you to carefully read. These forward-looking statements should not be relied upon as representing our views as of any date subsequent to the date on which they were made and we undertake no obligation to update forward-looking statements to reflect new information or future 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. MD&A is organized as follows:
| • | Our Company. Overview of our business. |
| • | Overview of the |
| • | Results of Operations. An analysis of our financial results comparing the |
| • | Liquidity and Capital Resources. An analysis of changes in our balance sheet 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 data storage technology and solutions. Our principal products are hard disk drives, commonly referred to as disk drives, hard drives or HDDs. In addition to HDDs, we produce a broad range of data storage products including solid state drives (“SSD”) and their related controllers, solid state hybrid drives (“SSHD”) and storage subsystems.
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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 and cost effectiveness. Complementing existing data center storage architecture, solid-state storage devices use integrated circuit assemblies as memory to store data, withand most SSDs using NAND-baseduse NAND flash memory. In addition to HDDs and SSDs, SSHDs combine the features of SSDs and HDDs in the same unit, containing a large hard disk drive and an SSD cache to improve performance of frequently accessed data.
Our HDD products are designed for mission critical and nearline applications in enterprise servers and storage systems; edge compute / client compute applications, where our products are designed primarily for desktop and mobile computing; and edgenon-compute /client non-compute applications, where our products are designed for a wide variety of end user devices such as portable external storage systems, surveillance systems, network-attached storage (“NAS”), digital video recorders (“DVRs”), network-attached storage (“NAS”) and gaming consoles. Our SSD products mainly include serial attached SCSI (“SAS”) andNon-Volatile Memory Express (“NVMe”) SSDs.
Our cloudenterprise data solutions (formerly referred to as the “cloud systems and solutions extend innovation from the device into the information infrastructure, onsite and in the cloud. Oursolutions”) portfolio includes modular original equipment manufacturer (“OEM”) storage systemsand scale-out storage servers.
Overview of the MarchSeptember 2018 Quarter
During the MarchSeptember 2018 quarter, we shipped 8799 exabytes of HDD storage capacity. We generated revenue of approximately $2.8$3.0 billion, gross margin of 30%31% and our operating cash flow was $558$587 million. We paid $179$181 million in dividends and $57repurchased 3 million for the repurchase of certain of our outstanding debt.ordinary shares for $150 million.
Results of Operations
We list in the tables below summarized information from our Condensed Consolidated Statements of Operations by dollars and as a percentage of revenue:
| For the Three Months Ended | For the Nine Months Ended | For the Three Months Ended | ||||||||||||||||||||||||||||||
(Dollars in millions) | March 30, 2018 | December 29, 2017 | March 31, 2017 | March 30, 2018 | March 31, 2017 | September 28, 2018 | June 29, 2018 | September 29, 2017 | ||||||||||||||||||||||||
Revenue | $ | 2,803 | $ | 2,914 | $ | 2,674 | $ | 8,349 | $ | 8,365 | $ | 2,991 | $ | 2,835 | $ | 2,632 | ||||||||||||||||
Cost of revenue | 1,956 | 2,037 | 1,858 | 5,889 | 5,857 | 2,078 | 1,931 | 1,896 | ||||||||||||||||||||||||
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Gross margin | 847 | 877 | 816 | 2,460 | 2,508 | 913 | 904 | 736 | ||||||||||||||||||||||||
Product development | 254 | 250 | 324 | 767 | 944 | 266 | 259 | 263 | ||||||||||||||||||||||||
Marketing and administrative | 135 | 142 | 150 | 422 | 457 | 115 | 140 | 145 | ||||||||||||||||||||||||
Amortization of intangibles | 6 | 19 | 28 | 47 | 85 | 6 | 6 | 22 | ||||||||||||||||||||||||
Restructuring and other, net | 11 | 33 | 48 | 95 | 164 | 23 | (6 | ) | 51 | |||||||||||||||||||||||
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Income from operations | 441 | 433 | 266 | 1,129 | 858 | 503 | 505 | 255 | ||||||||||||||||||||||||
Other expense, net | (48 | ) | (62 | ) | (54 | ) | (177 | ) | (163 | ) | (35 | ) | (39 | ) | (67 | ) | ||||||||||||||||
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Income before income taxes | 393 | 371 | 212 | 952 | 695 | 468 | 466 | 188 | ||||||||||||||||||||||||
Provision for income taxes | 12 | 212 | 18 | 231 | 37 | 18 | 5 | 7 | ||||||||||||||||||||||||
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Net income | $ | 381 | $ | 159 | $ | 194 | $ | 721 | $ | 658 | $ | 450 | $ | 461 | $ | 181 | ||||||||||||||||
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| For the Three Months Ended | For the Nine Months Ended | For the Three Months Ended | ||||||||||||||||||||||||||||||
| March 30, 2018 | December 29, 2017 | March 31, 2017 | March 30, 2018 | March 31, 2017 | September 28, 2018 | June 29, 2018 | September 29, 2017 | ||||||||||||||||||||||||
Revenue | 100 | % | 100 | % | 100 | % | 100 | % | 100 | % | 100% | 100% | 100% | |||||||||||||||||||
Cost of revenue | 70 | 70 | 69 | 71 | 70 | 69 | 68 | 72 | ||||||||||||||||||||||||
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Gross margin | 30 | 30 | 31 | 29 | 30 | 31 | 32 | 28 | ||||||||||||||||||||||||
Product development | 9 | 9 | 12 | 9 | 11 | 9 | 9 | 10 | ||||||||||||||||||||||||
Marketing and administrative | 5 | 5 | 6 | 5 | 6 | 4 | 5 | 6 | ||||||||||||||||||||||||
Amortization of intangibles | — | — | 1 | 1 | 1 | — | — | 1 | ||||||||||||||||||||||||
Restructuring and other, net | — | 1 | 2 | 1 | 2 | 1 | — | 2 | ||||||||||||||||||||||||
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Income from operations | 16 | 15 | 10 | 13 | 10 | 17 | 18 | 10 | ||||||||||||||||||||||||
Other expense, net | (2 | ) | (3 | ) | (2 | ) | (2 | ) | (2 | ) | (1) | (2) | (3) | |||||||||||||||||||
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Income before income taxes | 14 | 12 | 8 | 11 | 8 | 16 | 16 | 7 | ||||||||||||||||||||||||
Provision for income taxes | — | 7 | 1 | 2 | — | 1 | — | — | ||||||||||||||||||||||||
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Net income | 14 | % | 5 | % | 7 | % | 9 | % | 8 | % | 15% | 16% | 7% | |||||||||||||||||||
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Revenue
The following table summarizes HDD information regarding consolidated revenues by channel and geography, HDD average drive selling prices (“ASPs”), and HDD exabytes shipped, and revenues by channel and geography:shipped:
| For the Three Months Ended | For the Nine Months Ended | For the Three Months Ended | ||||||||||||||||||||||||||||||
| March 30, 2018 | December 29, 2017 | March 31, 2017 | March 30, 2018 | March 31, 2017 | September 28, 2018 | June 29, 2018 | September 29, 2017 | ||||||||||||||||||||||||
ASPs (per unit) | $ | 70 | $ | 68 | $ | 67 | $ | 67 | $ | 67 | ||||||||||||||||||||||
Exabytes Shipped | 87 | 88 | 65 | 245 | 200 | |||||||||||||||||||||||||||
Revenues by Channel (%) | ||||||||||||||||||||||||||||||||
OEMs | 69 | % | 67 | % | 66 | % | 67 | % | 67 | % | 71 | % | 73 | % | 70 | % | ||||||||||||||||
Distributors | 17 | % | 17 | % | 19 | % | 17 | % | 18 | % | 18 | % | 17 | % | 16 | % | ||||||||||||||||
Retailers | 14 | % | 16 | % | 15 | % | 16 | % | 15 | % | 11 | % | 10 | % | 14 | % | ||||||||||||||||
Revenues by Geography (%) | ||||||||||||||||||||||||||||||||
Americas | 29 | % | 26 | % | 30 | % | 27 | % | 31 | % | 34 | % | 36 | % | 33 | % | ||||||||||||||||
EMEA | 17 | % | 19 | % | 17 | % | 18 | % | 17 | % | 17 | % | 15 | % | 18 | % | ||||||||||||||||
Asia Pacific | 54 | % | 55 | % | 53 | % | 55 | % | 52 | % | 49 | % | 49 | % | 49 | % | ||||||||||||||||
HDD ASPs (per unit) | $ | 70 | $ | 72 | $ | 64 | ||||||||||||||||||||||||||
HDD Exabytes Shipped | 99 | 93 | 70 | |||||||||||||||||||||||||||||
Revenue in the March 2018 quarter decreased by $111 million from the December 2017 quarter as a result of lower seasonal demand in the consumer and client markets and price erosion, partially offset by higher exabytes shipped in the enterprise market.
Compared to the March 2017 quarter, revenue in the MarchSeptember 2018 quarter increased by $129$156 million from the June 2018 quarter as a result of an increase in exabytes shipped driven primarily in the enterprise market,by higher seasonal demand for our client and consumer markets, partially offset by price erosion.
Revenue forin the nine months ended MarchSeptember 2018 quarter decreased modestlyincreased by $359 million from the nine months ended MarchSeptember 2017 quarter as a result of price erosion, partially offset by an increase in exabytes shipped.shipped driven primarily by higher demand for our enterprise and client markets, partially offset by price erosion.
We maintain various sales programs such as channel rebates and price masking. Sales programs were approximately 12%11%, 12% and 11% of gross drive revenue for the MarchSeptember 2018 quarter, December 2017June 2018 quarter and MarchSeptember 2017 quarter, respectively. Adjustments to revenues due to under or over accruals for sales programs related to revenues reported in prior quarterly periods were less than 1% of quarterly gross revenue in all periods presented.
Cost of Revenue and Gross Margin
| For the Three Months Ended | For the Nine Months Ended | For the Three Months Ended | ||||||||||||||||||||||||||||||
(Dollars in millions) | March 30, 2018 | December 29, 2017 | March 31, 2017 | March 30, 2018 | March 31, 2017 | September 28, 2018 | June 29, 2018 | September 29, 2017 | ||||||||||||||||||||||||
Cost of revenue | $ | 1,956 | $ | 2,037 | $ | 1,858 | $ | 5,889 | $ | 5,857 | $ | 2,078 | $ | 1,931 | $ | 1,896 | ||||||||||||||||
Gross margin | 847 | 877 | 816 | 2,460 | 2,508 | 913 | 904 | 736 | ||||||||||||||||||||||||
Gross margin percentage | 30 | % | 30 | % | 31 | % | 29 | % | 30 | % | 31 | % | 32 | % | 28 | % | ||||||||||||||||
Gross margin as a percentage of revenue for the MarchSeptember 2018 quarter remained flatdecreased by approximately 100 basis points from the December 2017 quarter.
June 2018 quarter primarily due to a decline in prices for NAND flash memory and general price erosion. Compared to the corresponding three and nine months ended MarchSeptember 2017 quarter, gross margin as a percentage of revenue for the three and nine months ended March 2018 quarter decreasedincreased by 100300 basis points in both periods, primarily driven by price erosion, partially offset by favorable product mix and cost containment efforts.improved factory utilization as a result of higher demand for our enterprise and client markets, partially offset by a decline in prices for NAND flash memory and general price erosion.
In the MarchSeptember 2018 quarter, total warranty cost was 0.9%0.7% of revenue and included a favorable change in estimates of prior warranty accruals of less than 0.4%0.5% of revenue primarily due to improvements in return rates on newer generation products. Warranty cost related to new shipments was 1.3%1.2%, 1.4%1.3% and 1.2%1.3% of revenue for each of the MarchSeptember 2018, December 2017June 2018 and MarchSeptember 2017 quarters, respectively.
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Operating Expenses
| For the Three Months Ended | For the Nine Months Ended | For the Three Months Ended | ||||||||||||||||||||||||||||||
(Dollars in millions) | March 30, 2018 | December 29, 2017 | March 31, 2017 | March 30, 2018 | March 31, 2017 | September 28, 2018 | June 29, 2018 | September 29, 2017 | ||||||||||||||||||||||||
Product development | $ | 254 | $ | 250 | $ | 324 | $ | 767 | $ | 944 | $ | 266 | $ | 259 | $ | 263 | ||||||||||||||||
Marketing and administrative | 135 | 142 | 150 | 422 | 457 | 115 | 140 | 145 | ||||||||||||||||||||||||
Amortization of intangibles | 6 | 19 | 28 | 47 | 85 | 6 | 6 | 22 | ||||||||||||||||||||||||
Restructuring and other, net | 11 | 33 | 48 | 95 | 164 | 23 | (6 | ) | 51 | |||||||||||||||||||||||
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Operating expenses | $ | 406 | $ | 444 | $ | 550 | $ | 1,331 | $ | 1,650 | $ | 410 | $ | 399 | $ | 481 | ||||||||||||||||
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Product development expense. Product development expense for the MarchSeptember 2018 quarter remained essentiallyrelatively flat compared to the June 2018 quarter and the September 2017 quarter.
Marketing and administrative expense. Marketing and administrative expense for the September 2018 quarter decreased by $25 million from the December 2017 quarter.June 2018 quarter primarily due to a $13 million decrease in variable compensation and share-based compensation expenses, a $5 million decrease in salaries and employee benefits as a result of the restructuring of our workforce in prior periods and a $7 million decrease in other general expenses due to related operational efficiencies.
Compared to the MarchSeptember 2017 quarter, product developmentMarketing and administrative expense in the March 2018 quarter decreased by $70$30 million primarily due to a $31$13 million decrease in salaries and employee benefits as a result of the restructuring of our workforce in prior periods, a $32$9 million decrease in other general expenses due to related operational efficiencies and a $7an $8 million decrease in variable compensation and share-based compensation expenses.
Compared to the corresponding nine months ended March 2017 quarter, product development expense for the nine months ended March 2018 quarter decreased by $177 million due to a $68 million decrease in salaries and employee benefits as a result of the restructuring of our workforce in prior periods, a $78 million decrease due to related operational efficiencies and a $31 million decrease in variable compensation and share-based compensation expenses.
Marketing and administrative expense. Marketing and administrative expense for the March 2018 quarter decreased by $7 million from the December 2017 quarter primarily due to a $4 million decrease due to operational efficiencies and a $2 million decrease in variable compensation expense.
Compared to the March 2017 quarter, Marketing and administrative expense in the March 2018 quarter decreased by $15 million due to a $17 million decrease in salaries and employee benefits as a result of the restructuring of our workforce in prior periods, a $6 million decrease in variable compensation and share-based compensation expenses, partially offset by an increase in other general expenses.
Compared to the corresponding nine months ended March 2017 quarter, Marketing and administrative expense for the nine months ended March 2018 quarter decreased by $35 million due to a $30 million decrease in salaries and employee benefits as a result of the restructuring of our workforce in prior periods, a $17 million decrease in variable compensation and share-based compensation expenses, partially offset by a $12 million increase in other general expenses.
Amortization of intangibles. Amortization of intangibles for the three and nine months ended MarchSeptember 2018 quarter remained flat compared to the June 2018 quarter. Amortization of intangibles for the September 2018 quarter decreased by $13$16 million $22 million and $38 million as compared tofrom the three months ended DecemberSeptember 2017 quarter and the three and nine months ended March 2017 quarter, respectively, due to certain intangible assets reaching the end of their useful life.
Restructuring and other, net.Restructuring and other, net for the nine months ended MarchSeptember 2018 quarter was comprised of charges primarily of restructuring chargesrelated to reduce our global workforce by 1,100 employees. There was no new restructuring plan in the March 2018 quarter.a voluntary early exit program.
Restructuring and other, net for the threeJune 2018 quarter included a gain of $24 million from the sale of certain properties previously classified as held for sale, offset by restructuring charges announced in prior periods.
Restructuring and nine months ended Marchother, net for the September 2017 quarter was primarily comprised of restructuring charges to reduce our global workforce by 300 and 6,800 employees, respectively. Each of these restructuring activities have reduced our workforce as we consolidated our global footprint across Asia, EMEA and the Americas. See “Part I, Item 1. Financial Statements—Note 7. Restructuring and Exit Costs” for more details.600 employees.
32
Other Expense, Net
| For the Three Months Ended | For the Nine Months Ended | For the Three Months Ended | ||||||||||||||||||||||||||||||
(Dollars in millions) | March 30, 2018 | December 29, 2017 | March 31, 2017 | March 30, 2018 | March 31, 2017 | September 28, 2018 | June 29, 2018 | September 29, 2017 | ||||||||||||||||||||||||
Other expense, net | $ | (48 | ) | $ | (62 | ) | $ | (54 | ) | $ | (177 | ) | $ | (163 | ) | $ | (35 | ) | $ | (39 | ) | $ | (67 | ) | ||||||||
Other expense, net decreased by $14$4 million from the December 2017June 2018 quarter primarily due to an $11 million increase in interest income on investment in a $9debt security, offset by a $5 million gain from net favorableincrease in losses due to unfavorable changes in foreign currency exchange rates, a $3 million increase in interest income, a $2 million decrease in loss on repurchase of debt, partially offset by a $3 million charge related to the impairment of a strategic investment.rates.
Compared to Marchthe September 2017 quarter, Other expense, net decreased by $6$32 million in the March 2018 quarter primarily due to a $9$16 million gain from net increase in gains due to favorable changes in foreign currency exchange rates and a $4 million increase in interest income, partially offset by a $6 million net increase in losses related to strategic investments.
Other expense, net for the nine months ended March 2018 quarter increased by $14 million from the corresponding period in the prior year, primarily due to a $22 million net increase in interest expense on the issuance of $1.25 billion Senior Notes in the March 2017 quarter offset by repurchase of certain debts, a $17 million loss from net unfavorable changes in foreign currency exchange rates, a $3 million loss on repurchase of debts, partially offset by a $16 million increase in interest income andon investment in a $16 million net decrease in losses related to strategic investments.debt security.
Income Taxes
| For the Three Months Ended | For the Nine Months Ended | For the Three Months Ended | ||||||||||||||||||||||||||||||
(Dollars in millions) | March 30, 2018 | December 29, 2017 | �� | March 31, 2017 | March 30, 2018 | March 31, 2017 | September 28, 2018 | June 29, 2018 | September 29, 2017 | |||||||||||||||||||||||
Provision for income taxes | $ | 12 | $ | 212 | $ | 18 | $ | 231 | $ | 37 | $ | 18 | $ | 5 | $ | 7 | ||||||||||||||||
We recorded income tax provisions of $12 million and $231 million in the three and nine months ended March 2018 quarter, respectively. TheOur income tax provision of $18 million for the three and nine months ended MarchSeptember 2018 quarter included approximately $2$1 million of net discrete tax benefit and approximately $195 million of net discrete expense, respectively. The discrete items for the nine months ended March 2018 quarter are primarily associated with the revaluation of U.S. deferred tax assets as a result of the enactment of the U.S. Tax Cuts and Jobs Act (the “Act”) on December 22, 2017, partially offset by the recognition of previously unrecognized tax benefits associated with the expiration of certain statutes of limitation.expense.
Our income tax provision recorded for the three and nine months ended MarchSeptember 2018 quarter differed from the provision forfrom 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 relatedtonon-U.S. earnings 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 reductiondecrease in the net U.S.valuation allowance for certain deferred tax assets associated with revaluation to a lower U.S. tax rate.assets.
During the ninethree months ended MarchSeptember 28, 2018 quarter, our unrecognized tax benefits excluding interest and penalties decreasedincreased by approximately $15$2 million to $59$62 million. The unrecognized tax benefits that, if recognized, would impact the effective tax rate were $59$62 million at March 30,September 28, 2018, subject to certain future changes in valuation allowance.allowance reversals. During the twelve12 months beginning March 31,September 29, 2018, we expect that our unrecognized tax benefits could be reduced by approximately $19 million, primarily as a result of the expiration of certain statutes of limitation.
Our income tax provision of $7 million recorded for the nine months ended MarchSeptember 2017 quarter included approximately $3$1 million of net discrete tax expense, primarily associated with changes in valuation allowances offset by the release of tax reserves due to the expiration of certain statutes of limitation, and prior year tax adjustments.expense.
Our income tax provision recorded for the three and nine months ended MarchSeptember 2017 quarter differed from the provision from 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 relatedtonon-U.S. earnings earnings generated in jurisdictions that are subject to tax holidays or tax incentive programs and are considered indefinitely reinvested outside of Ireland and (ii) restructuring expenses with no associated tax benefits, and (iii) a net decrease in valuation allowance for certain deferred tax assets.
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On December 22, 2017, the Tax Act was enacted into law in the United States. The Tax Act significantly revisedrevises U.S. corporate income tax law by, among other things, lowering U.S. corporate income tax rates from 35% to 21%, implementing a territorial tax system, and imposing aone-time transition tax on deemed repatriated earnings ofnon-U.S. subsidiaries.
The U.S. tax law changes, including limitations on various business deductions such as executive compensation under Internal Revenue Code §162(m), will not impact our tax expense in the short-term due to our large net operating loss and tax credit carryovers and associated valuation allowance. The Tax Act’s new international rules, including the Global IntangibleLow-Taxed Income the(“GILTI”), Foreign Derived Intangible Income (“FDII”), and the Base Erosion Anti-Avoidance Tax (“BEAT”) are not expected toeffective beginning in fiscal year 2019. For fiscal year 2019, we have a material impact onincluded these effects of the Tax Act in our financial statements. However, these assessments are based on preliminary reviewstatements and analysis ofhave concluded the Act and are subject to change as we continue to evaluate these highly complex rules as additional interpretive guidance is issued.impact will not be material.
Pursuant to SEC Staff Accounting Bulletin (“SAB”) 118 (regarding the application of ASC 740 associated with the enactment of the Tax Act), we recorded an adjusted provisional tax expense of approximately $4 million and $212 millionbelieve our accounting under ASC 740 for the three and nine months ended March 30, 2018, respectively, tore-measure our U.S. deferred tax assets at the newly enacted 21% tax rate. The tax expense remains provisional because we continue to evaluate the impact of various domestic and international provisions of the Tax Act as well as the impact of additional guidance that may be provided. This provisional tax expense increased our effective tax rate for the three and nine months ended March 30, 2018 to approximately 3% and 24%, respectively. The other U.S. tax changes are not expected to impact our tax expense in the short-term due our large net operating loss and tax credit carryovers.is now complete.
Liquidity and Capital Resources
The following sections discuss our principal liquidity requirements, as well as our sources and uses of cash and our liquidity and capital resources. Our cash and cash equivalents are maintained in investments with remaining maturities of 90 days or less at the time of purchase. Our short-term investments consist primarily of money market funds, time deposits and certificates of deposit. The principal objectives of our investment policy are the preservation of principal and maintenance of liquidity. We believe our cash equivalents and short-term investments are liquid and accessible. We operate in some countries that have restrictive regulations over the movement of cash and/or foreign exchange across their borders. However, we believe our sources of cash have been and will continue to be sufficient to meet our cash needs for the next 12 months. We are not aware of any downgrades, losses or other significant deterioration in the fair value of our cash equivalents or short-term investments.investments and we do not believe the fair value of our short-term investments has significantly changed from the values reported as of September 28, 2018.
Cash and Cash Equivalents
(Dollars in millions) | March 30, 2018 | June 30, 2017 | Change | September 28, 2018 | June 29, 2018 | Change | ||||||||||||||||||
Cash and cash equivalents | $ | 2,926 | $ | 2,539 | $ | 387 | $ | 1,942 | $ | 1,853 | $ | 89 | ||||||||||||
Our cash and cash equivalents increased from June 30, 201729, 2018 as a result of an increase in the net cash provided by operating activities, partially offset by net cash outflows for dividends paid to our shareholders repurchaseof $181 million, capital expenditures of $177 million and repurchases of our ordinary shares capital expenditures, and repayments of long-term debt.$150 million.
Cash Provided by Operating Activities
Cash provided by operating activities for the ninethree months ended March 30,September 28, 2018 of $1,645was $587 million and includes the effects of net income adjusted fornon-cash items including depreciation, amortization, deferred income taxes primarily due to the remeasurement of our U.S. deferred tax assets at the lower corporate tax rate, share-based compensation and:
an increase of $66 million in inventory, primarily due to an increase in units built.
Cash Used in Investing Activities
Cash used in investing activities for the ninethree months ended March 30,September 28, 2018 was $239$176 million, which was primarily attributable to the payments for the purchase of property, equipment and leasehold improvements of $270 million, partially offset by the proceeds of $43 million from the sale of certain properties previously classified as held for sale.$177 million.
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Cash Used in Financing Activities
Cash used in financing activities of $1,027$326 million for the ninethree months ended March 30,September 28, 2018 was primarily attributable to the following activities:
$545181 million in dividend payments;
$361150 million paid to repurchase ordinary shares; and
$209 million of repayments of long-term debt; and
partially offset by $110$32 million in proceeds from the issuance of ordinary shares under employee stock plans.
Liquidity Sources, Cash Requirements and Commitments
Our primary sources of liquidity as of March 30,September 28, 2018 consisted of: (1) approximately $2.9$1.9 billion in cash and cash equivalents, (2) cash we expect to generate from operations and (3) a $700 million senior revolving credit facility.
As of March 30,September 28, 2018, no borrowings had been drawn under the revolving credit facility or had been utilized for letters of credit issued under this credit facility. The line of credit is available for borrowings, subject to compliance with financial covenants and other customary conditions to borrowing.
The credit agreement that governs our revolving credit facility, as amended, includes three financial covenants: (1) minimum cash, cash equivalents and marketable securities; (2) a fixed charge coverage ratio; and (3) a net leverage ratio. On April 28, 2016, the Revolving Credit Agreement was amended in order to increase the allowable net leverage ratio to adjust for our financial liquidity position. The term of the revolving credit facility is through January 15, 2020 provided that if we do not have Investment Grade Ratings (as defined in the revolving credit facility) on August 15, 2018, then the maturity date will be August 16, 2018 unless certain extension conditions have been satisfied.2020. We were in compliance with the modified covenants as of March 30,September 28, 2018 and expect to be in compliance for the next 12 months.
Our liquidity requirements are primarily to meet our working capital, product development and capital expenditure needs, to fund scheduled payments of principal and interest on our indebtedness, and to fund our quarterly dividend and any future strategic investments. Our ability to fund these requirements will depend on our future cash flows, which are determined by future operating performance, and therefore, subject to prevailing global macroeconomic conditions and financial, business and other factors, some of which are beyond our control.
For fiscal year 2018,2019, we expect capital expenditures to be less than 5%remain below our long-term targeted range of 6% to 8% of revenue.
From time to time we may repurchase any of our outstanding notes in open market or privately negotiated purchases or otherwise, or we may repurchase outstanding notes pursuant to the terms of the applicable indenture.
Dividends declared in the MarchSeptember 2018 quarter of $181$180 million were subsequently paid on April 4,October 3, 2018. The Company’s Board of Directors declared a quarterly cash dividend of $0.63 per share on May 1,November 2, 2018, which is payable on July 5, 2018January 2, 2019 to shareholders of record at the close of business on June 20,December 19, 2018.
From time to time we may repurchase any of our outstanding ordinary shares through private, open market, tender offers broker-assisted purchases or broker-assisted purchases.other means. As of March 30,September 28, 2018, $0.9$0.7 billion remained available for repurchase under our existing repurchase authorization limit. All repurchases are effected as redemptions in accordance with the Company’s Articles of Association.
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Contractual Obligations and Commitments
Our contractual cash obligations and commitments as On October 29, 2018, the Board of March 30, 2018, have been summarized inDirectors authorized the table below:
| Fiscal Year(s) | ||||||||||||||||||||
(Dollars in millions) | Total | Remainder of 2018 | 2019-2020 | 2021-2022 | Thereafter | |||||||||||||||
Contractual Cash Obligations: | ||||||||||||||||||||
Long-term debt | $ | 4,867 | $ | — | $ | 504 | $ | 750 | $ | 3,613 | ||||||||||
Interest payments on debt | 1,667 | 62 | 430 | 420 | 755 | |||||||||||||||
Purchase obligations (1) | 827 | 713 | 114 | — | — | |||||||||||||||
Operating leases (2) | 118 | 5 | 25 | 13 | 75 | |||||||||||||||
Capital expenditures | 238 | 120 | 118 | — | — | |||||||||||||||
Other funding requirements(3) | 26 | 7 | 19 | — | — | |||||||||||||||
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Subtotal | 7,743 | 907 | 1,210 | 1,183 | 4,443 | |||||||||||||||
Commitments: | ||||||||||||||||||||
Letters of credit or bank guarantees | 103 | 11 | 91 | 1 | — | |||||||||||||||
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Total | $ | 7,846 | $ | 918 | $ | 1,301 | $ | 1,184 | $ | 4,443 | ||||||||||
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On September 28, 2017, we entered into an Equity Commitment Letter (“ECL”) with a consortium of investors led by Bain Capital Private Equity for the acquisition of Toshiba Memory Corporation (“TMC”). The ECL contemplates that, upon the closing of the acquisition, we or oneadditional $2.3 billion of our subsidiaries would purchase up to JPY 139.5 billion (approximately USD 1.31 billion based on an exchange rate as of March 30, 2018), of a newly issuednon-convertible preferred stock of a newly formed company, K. K. Pangea, for the purpose of acquiring TMC. The closing of the acquisition is subject to regulatory approvals and other closing conditions.outstanding ordinary shares.
As of March 30, 2018, we had a liability for unrecognized tax benefits and an accrual for the payment of related interest totaling $8 million, none of which is expected to be settled within one year. Outside of one year, we are unable to make a reasonably reliable estimate of when cash settlement with a taxing authority will occur.
Critical Accounting Policies
Our discussion and analysis of financial condition and results of operations are based upon our condensed consolidated financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles. The preparation of such statements requires us to make estimates and assumptions that affect the reported amounts of revenues and expenses during the reporting period and the reported amounts of assets and liabilities as of the date of the financial statements. Our estimates are based on historical experience and other assumptions that we consider to be appropriate in the circumstances. However, actual future results may vary from our estimates.
Since our fiscal year ended June 30, 2017,Other than as described in Note 1. “Basis of Presentation and Summary of Significant Accounting Policies” in the notes to the condensed consolidated financial statements, there have been no other material changes in our critical accounting policies and estimates. Refer to “Management’s Discussion and Analysis of Financial Condition and Results of Operations” contained in Part II, Item 7 of our Annual Report onForm 10-K for the fiscal year ended June 30, 2017,29, 2018, as filed with the SEC on August 4, 2017,3, 2018, for a discussion of our critical accounting policies and estimates.
Recent Accounting Pronouncements
See “Part I, Item 1. Financial Statements—Note 1. Basis of Presentation and Summary of Significant Accounting Policies” for information regarding the effect of new accounting pronouncements on our financial statements.
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| ITEM 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
We have exposure to market risks due to the volatility of interest rates, foreign currency exchange rates, credit rating changes, equity and bond markets. A portion of these risks may be hedged, but fluctuations could impact our results of operations, financial position and cash flows.
Interest Rate Risk. Our exposure to market risk for changes in interest rates relates primarily to our cash investment portfolio.portfolio including investment in debt security in Toshiba Memory Corporation (“TMC”, formerly known as “K.K. Pangea”). As of March 30,September 28, 2018, we had no impairment for our investment in debt security and we hadno available-for-sale debtsecurities that had been in a continuous unrealized loss position for a period greater than 12 months. The CompanyWe determinedno available-for-sale debt securities were other-than-temporarily impaired as of March 30,September 28, 2018. We currently do not use derivative financial instruments in our investment portfolio.
We have fixed-ratefixed rate debt obligations. We enter into these debt obligations to supportfor general corporate purposes including capital expenditures and working capital needs.
The table below presents principal amounts and related weighted-average interest rates by year of maturity for our investment portfolio and debt obligations as of March 30,September 28, 2018.
| Fiscal Years Ended | Fiscal Years Ended | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
(Dollars in millions, except percentages) | 2018 | 2019 | 2020 | 2021 | 2022 | Thereafter | Total | Fair Value at March 30, 2018 | 2019 | 2020 | 2021 | 2022 | 2023 | Thereafter | Total | Fair Value at September 28, 2018 | ||||||||||||||||||||||||||||||||||||||||||||||||
Assets | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Cash equivalents: | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Floating rate | $ | 1,229 | $ | — | $ | — | $ | — | $ | — | $ | — | $ | 1,229 | $ | 1,229 | ||||||||||||||||||||||||||||||||||||||||||||||||
Average interest rate | 2.46 | % | 2.46 | % | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Investment in debt security including accrued PIK income: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Fixed rate | $ | 1,553 | $ | — | $ | — | $ | — | $ | — | $ | — | $ | 1,553 | $ | 1,553 | $ | — | $ | — | $ | — | $ | — | $ | — | $ | 1,255 | $ | 1,255 | $ | 1,289 | ||||||||||||||||||||||||||||||||
Average interest rate | 1.68 | % | 1.68 | % | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Total fixed income | $ | 1,553 | $ | — | $ | — | $ | — | $ | — | $ | — | $ | 1,553 | $ | 1,553 | ||||||||||||||||||||||||||||||||||||||||||||||||
Average interest rate | 1.68 | % | 1.68 | % | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Fixed interest rate | 5.00 | % | 5.00 | % | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Debt | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Fixed rate | $ | — | $ | 504 | $ | — | $ | — | $ | 750 | $ | 3,613 | $ | 4,867 | $ | 4,780 | $ | 499 | $ | — | $ | — | $ | 750 | $ | 951 | $ | 2,662 | $ | 4,862 | $ | 4,723 | ||||||||||||||||||||||||||||||||
Average interest rate | 3.75 | % | 4.25 | % | 4.93 | % | 4.70 | % | 3.75 | % | 4.25 | % | 4.75 | % | 4.99 | % | 4.70 | % | ||||||||||||||||||||||||||||||||||||||||||||||
Foreign Currency Exchange Risk. From time to time, we may enter into foreign currency forward exchange contracts to manage exposure related to certain foreign currency commitments and anticipated foreign currency denominated expenditures. Our policy prohibits us from entering into derivative financial instruments for speculative or trading purposes. At this time, we have not identified any material exposure associated with the potential changes related to the British vote to exit the European Union.
We hedge portions of our foreign currency denominated balance sheet positions with foreign currency forward exchange contracts to reduce the risk that our earnings will be adversely affected by changes in currency exchange rates. The changesOur foreign currency forward exchange contracts include an aggregate notional amount of 139.5 billion Japanese Yen ($1.3 billion at September 28, 2018 and June 29, 2018), to hedge foreign exchange fluctuations of our investment principalin non-convertible preferred stock debt security of TMC. We did not designate these contracts as hedges under ASC 815, Derivatives and Hedging and, therefore, the change in fair value of these hedges arecontracts is recognized in earnings in the same period as the gains and losses from the remeasurement of the assets and liabilities. TheseAll foreign currency forward exchange contracts are not designated as hedging instruments under ASC 815,Derivatives and Hedging.We had no outstanding foreign currency forward exchange contracts as of March 30, 2018.discussed above mature within 12 months.
We evaluate hedging effectiveness prospectively and retrospectivelyretrospectively. Our foreign currency forward exchange contracts include a notional amount of approximately 7 billion Japanese Yen ($66 million at June 29, 2018), to hedge the PIK income related to TMC investment, which is designated as a cash flow hedge. As of September 29, 2018, $22 million wasde-designated and record any ineffective portion of the hedging instrumentsincluded in Cost of revenue on the Condensed Consolidated Statements of Operations. contracts not designated as hedges.
We did not have any material net gains (losses)or losses recognized in Cost of revenueOther expense, net for cash flow hedges due to hedge ineffectiveness or discontinued cash flow hedges during the three and nine months ended March 30,September 28, 2018.
The table below provides information as of September 28, 2018 about our foreign currency forward exchange contracts. The table is provided in U.S. dollar equivalent amounts and presents the notional amounts (at the contract exchange rates) and the weighted-average contractual foreign currency exchange rates.
(Dollars in millions, except weighted-average contract rate) | Notional Amount | Weighted- Average Contract Rate | Estimated Fair Value(1) | |||||||||
Foreign currency forward exchange contracts: | ||||||||||||
Thai Baht | $ | 56 | $ | 33.14 | $ | 1 | ||||||
Singapore Dollars | 75 | 1.36 | — | |||||||||
Chinese Renminbi | 30 | 6.77 | (1 | ) | ||||||||
British Pound Sterling | 43 | 0.77 | 1 | |||||||||
Japanese Yen | 1,376 | 106.50 | 52 | |||||||||
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Total | $ | 1,580 | $ | 53 | ||||||||
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| (1) | Equivalent to the unrealized net gain (loss) on existing contracts. |
Other Market Risks. We have exposure to counterparty credit downgrades in the form of credit risk related to our foreign currency forward exchange contracts and our fixed income portfolio. We monitor and limit our credit exposure for our foreign currency forward exchange contracts by performing ongoing credit evaluations. We also manage the notional amount of contracts entered into with any one counterparty, and we maintain limits on maximum tenor of contracts based on the credit rating of the financial institution. Additionally, the investment portfolio is diversified and structured to minimize credit risk.
Changes in our corporate issuer credit ratings have minimal impact on our near term financial results, but downgrades may negatively impact our future transaction costsability to raise capital, increase the cost of such capital and our ability to execute transactions with various counterparties.
We have an investment in debt security of $1.3 billion carried at amortized cost. We review our debt security for impairment when events and circumstances indicate a decline in fair value of such asset below carrying value is other-than-temporary.
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We are subject to equity market risks due to changes in the fair value of the notional investments selected by our employees as part of our Seagate Deferred Compensation Plan (the “SDCP”). In fiscal year 2014, we entered into a Total Return Swap (“TRS”) in order to manage the equity market risks associated with the SDCP liabilities. We pay a floating rate, based on LIBOR plus an interest rate spread, on the notional amount of the TRS. The TRS is designed to substantially offset changes in the SDCP liability due to
changes in the value of the investment options made by employees. See “Part I, Item 1. Financial Statements—Note 8.7. Derivative Financial Instruments” of this Quarterly Report onForm 10-Q.
| ITEM 4. | CONTROLS AND PROCEDURES |
As required by the Exchange Act Rule13a-15, as of March 30,September 28, 2018 we carried out an evaluation under the supervision and with the participation of our management, including our chief executive officer and chief financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this Quarterly Report. Based on the evaluation, our management, including our chief executive officer and chief financial officer, concluded that our disclosure controls and procedures are effective as of March 30,September 28, 2018.
In connection with our adoption of the new revenue recognition standard in the September 2018 quarter, we implemented internal controls to ensure that the necessary revenue contracts, policies and process flows were reviewed to identify the impact of adoption. There were no significant changes to our internal control over financial reporting due to the adoption of the new revenue recognition standard. During the quarter ended March 30,September 28, 2018, there were no other changes in our internal control over financial reporting that materially affected, or were reasonably likely to materially affect, our internal control over financial reporting.
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OTHER INFORMATION
| ITEM 1. | LEGAL PROCEEDINGS |
For a discussion of legal proceedings, see “Part I, Item 1. Financial Statements—Note 14. Legal, Environmental and Other Contingencies” of this Quarterly Report onForm 10-Q.
| ITEM 1A. | RISK FACTORS |
There have been no material changes to the description of the risk factors associated with our business previously disclosed in Part I, Item 1A, “Risk Factors” in our Annual Report onForm 10-K for the fiscal year ended June 30, 2017.29, 2018. In addition to the other information set forth in this report, you should carefully consider the risk factors discussed in our Annual Report onForm 10-K as they could materially affect our business, financial condition and future results.
The Risk Factors are not the only risks facing us. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially and adversely affect our business, financial condition or operating results.
| ITEM 2. | UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS |
Repurchase of Equity Securities
All repurchases are effected as redemptions in accordance with the Company’s Articles of Association.
On April 22, 2015, the Board of Directors authorized the Company to repurchase $2.5 billion of its outstanding ordinary shares.
As of March 30,September 28, 2018, $0.9$0.7 billion remained available for repurchase under the existing repurchase authorization limit. There is no expiration date on this authorization. On October 29, 2018, the Board of Directors authorized the repurchase of an additional $2.3 billion of our outstanding ordinary shares.
The following table sets forth information with respect to all repurchases of our shares made during the fiscal quarter ended March 30,September 28, 2018, including statutory tax withholdings related to vesting of employee equity awards:
(In millions, except average price paid per share) | Total Number of Shares Repurchased (1) | Average Price Paid per Share (1) | Total Number of Shares Repurchased as Part of Publicly Announced Plans or Programs | Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs (1) | ||||||||||||
December 30, 2017 through January 26, 2018 | — | $ | 52.84 | — | $ | 888 | ||||||||||
January 27, 2018 through February 23, 2018 | — | 51.92 | — | 888 | ||||||||||||
February 24, 2018 to March 30, 2018 | — | 60.98 | — | 887 | ||||||||||||
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Total | — | $ | 55.53 | — | $ | 887 | ||||||||||
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(In millions, except average price paid per share) | Total Number of Shares Repurchased(1) | Average Price Paid per Share(1) | Total Number of Shares Repurchased as Part of Publicly Announced Plans or Programs | Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs(1) | ||||||||||||
June 30, 2018 through July 27, 2018 | — | $ | 56.60 | — | $ | 886 | ||||||||||
July 28, 2018 through August 24, 2018 | — | 54.46 | — | 886 | ||||||||||||
August 25, 2018 through September 28, 2018 | 4 | 49.36 | 4 | 709 | ||||||||||||
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Total | 4 | 4 | $ | 709 | ||||||||||||
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| (1) | Repurchase of shares |
| ITEM 3. | DEFAULTS UPON SENIOR SECURITIES |
None.
| ITEM 4. | MINE SAFETY DISCLOSURES |
Not applicable.
| ITEM 5. | OTHER INFORMATION |
Not applicableEffective October 30, 2018, Stephen J. Luczo transitioned from his role as Executive Chairman and will serve as a non-employee director and as the Chairman of the Board of Directors.
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| ITEM 6. | EXHIBITS |
See Exhibit Index on the page to this Quarterly Report for a list of exhibits to this Quarterly Report, which Exhibit Index is incorporated herein by reference.
EXHIBIT INDEX
| † | The certifications attached as Exhibit 32.1 that accompany this Quarterly Report on Form10-Q, are not deemed filed with the Securities and Exchange Commission and are not to be incorporated by reference into any filing of Seagate Technology plc under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, whether made before or after the date of this Form10-Q, irrespective of any general incorporation language contained in such filing. |
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Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| SEAGATE TECHNOLOGY PUBLIC LIMITED COMPANY | ||||||
| DATE: | BY: | /s/ | ||||
Interim Chief
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| DATE: | BY: | /s/ | ||||
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