ITEM 1. BUSINESS
We are a leading provider of electronic 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 electronic data storage products including solid state hybrid drives ("SSHD"), solid state drives
("SSD"), PCIe cards and SATA
controllers. Our storage technology portfolio also includes storage subsystems, and high performance computing ("HPC") solutions.
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, and most SSDs use NAND-based 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
products are designed for mission critical and nearline applications in enterprise servers and storage systems; client compute applications, where our products are designed primarily
for desktop and mobile computing; and client non-compute applications, where our products are designed for a wide variety of end user devices such as digital video recorders ("DVRs"), personal data
backup systems, portable external storage systems, digital media systems and surveillance systems.
Our
Cloud Systems and Solutions builds on the Seagate legacy to extend innovation from the device into the information infrastructure, onsite and in the cloud. Our approach to data
management supports HPC, open source and software-defined solutions. Our portfolio includes HPC storage solutions, modular original equipment manufacturers ("OEM") storage systems and scale-out
storage systems.
Industry Overview
The electronic data storage industry is comprised of companies that manufacture components or subcomponents designed for electronic
data storage devices and companies that provide storage solutions, software and services for enterprise cloud, big data and computing platforms.
The principal markets served by the electronic data storage industry are:
Enterprise Storage.
We define enterprise storage as dedicated storage area networks and hyperscale cloud storage environments.
Enterprise data
centers run solutions which are designed for mission critical performance and nearline high capacity applications.
Mission
critical applications are defined as those that are vital to the operation of large-scale enterprise work loads, requiring high performance and high reliability storage
solutions. We expect the market for mission critical enterprise storage solutions to continue to be driven by enterprises utilizing dedicated storage area networks. Our storage solutions are comprised
principally of high performance enterprise class disk drives with sophisticated firmware and communications technologies.
Nearline
applications are defined as those which require high capacity and energy efficient storage solutions. We expect such applications, which include storage for cloud computing,
content delivery and backup services, will continue to grow and drive demand for solutions designed with these attributes. With the increased requirements for storage driven by the creation and
consumption of media-rich digital
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content,
we expect the increased exabyte demand will require further build-out of data centers by cloud service providers and other enterprises which utilize high capacity nearline devices.
Enterprise
SAS SSDs are designed to deliver superior performance, reliability and enterprise features to meet the demands of I/O-intensive applications, with potential for substantial
power savings. PCIe accelerator cards are designed to optimize enterprise applications with a persistent, high-performance, high-capacity memory design. Accelerated flash also targets flash and
software to accelerate any server virtualized deployment and moves any big data to the realm of real time. From industry solutions perspective, PCIe cards are changing the storage architecture in many
industries including the financial sector, government, telecommunications and media and entertainment.
Client Compute.
We define client compute applications as solutions designed for desktop and mobile compute applications ranging from
traditional
laptops, tablets and convertible systems. We believe that the demand resulting from the proliferation of digital content will continue to maintain demand for the client compute market. As the storage
of digital content in the cloud becomes more prominent and accessible, some client compute applications rely less on built-in storage, which is supplemented by cloud computing solutions and branded
external hard drives.
Client Non-Compute.
We define client non-compute applications as solutions designed for consumer electronic devices and disk drives
used for external
storage and network attached storage ("NAS"). Disk drives designed for consumer electronic devices are primarily used in applications such as DVRs and surveillance systems that require a higher
capacity, low cost-per-gigabyte storage solution. Disk drives for external storage and NAS devices are designed for purposes such as personal data backup and portable external storage, and to augment
storage capacity in the consumer's current desktop, notebook, tablet or DVR devices. We believe the proliferation and personal creation of media-rich digital content will continue to create increasing
consumer demand for higher capacity storage solutions.
Cloud Systems and Solutions.
We define cloud systems and solutions as applications that provide cloud based solutions to businesses for
the purpose
of HPC, scale-out storage solutions and modular systems. Systems can contain HDDs and SSDs and can offer file management systems, software, and even compute power.
Participants
in the electronic data storage industry include:
Major subcomponent manufacturers.
Companies that manufacture components or subcomponents used in electronic data storage devices or
solutions include
companies that supply spindle motors, heads and media, application specific integrated circuits ("ASICs").
Hardware storage solutions manufacturers.
Companies that transform components into storage products include disk drive manufacturers and
semiconductor storage manufacturers which include integrating flash memory into storage products such as SSDs.
System integrators.
Companies, such as OEMs, that bundle and package storage solutions into client compute, client non-compute or
enterprise
applications as well as enterprise storage solutions. Distributors that integrate storage hardware and software into end-user applications and Cloud Service Providers ("CSP") that provide cloud based
solutions to businesses for the purpose of HPC, scale-out storage solutions and modular systems that are also included in this category.
Storage services.
Companies that provide and host services and solutions, which include storage, backup, archiving, recovery and
discovery of
electronic data.
Hyperscale Data Centers.
Increasingly, large hyperscale data center companies are designing their own storage subsystems and having
those built by
contract manufacturers for use inside their own data centers. This trend is reshaping the storage system and subsystem market and driving innovation in system design and changes in the competitive
landscape of the large storage system vendors.
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The continued advancement of the cloud, the proliferation of a variety of mobile devices globally, development of the Internet of
Things ("IoT"), increasingly pervasive use of video surveillance, evolution of consumer electronic devices, and enterprise use of big data analytics are driving the growth of digital content. Factors
contributing to this growth include:
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Creation, sharing, and consumption of media-rich digital content, such as high-resolution photos, high definition video, and digital
music through smart phones, tablets, digital cameras, personal video cameras, DVRs, gaming consoles or other digital devices;
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Creation, aggregation and distribution of digital content through services and other offerings such as Facebook®,
Instagram®, iTunes®, Netflix®, Google® and YouTube®;
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New surveillance systems which feature higher resolution digital cameras and thus require larger data storage capacities;
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Creation and collection of data through the evolution of the IoT ecosystem, big data analytics and new technology trends such as
self-driving cars and drones;
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Build out of large numbers of cloud data centers by cloud service providers and private companies transitioning on-site data centers
into the cloud;
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Protection of increased digital content through redundant storage on backup devices and externally provided storage services.
As
a result of these factors, the nature and volume of content being created requires greater storage, which is more efficiently and economically facilitated by higher capacity storage
devices in order to store, manage, distribute, analyze and backup such content. We expect this to support the growth in demand for electronic data storage solutions in developed and emerging economies
well into the future.
The
amount of data created as well as where and how data is stored continues to evolve with the proliferation of mobile devices, the growth of cloud computing, and the evolving IoT. In
addition, the economics of storage infrastructure are also evolving with the utilization of public and private hyper-scale storage and open-source solutions reducing the total cost of ownership of
storage while increasing the speed and efficiency with which customers can leverage massive computing and storage devices. Accordingly, we expect these trends will continue to create significant
demand for electronic data storage solutions going forward.
We believe that continued growth in digital content requires increasingly higher storage capacity in order to store, aggregate, host,
distribute, analyze, manage, backup and use such content. We also believe that as architectures evolve to serve the growing commercial and consumer user base throughout the world, the manner which
hard drives are delivered to market and utilized by our customers will evolve as well.
We
believe that in the foreseeable future the traditional enterprise and client compute markets that require high capacity storage solutions, and the data intensive client non-compute
markets will continue to be best served by hard disk drives due to the industry's ability to deliver the most cost effective, reliable and energy efficient mass storage devices. Furthermore, the
increased use of client non-compute devices that both consume media-rich digital content streamed from the cloud and create rich digital content that is stored in the cloud, increases the demand for
high capacity hard disk drives in enterprise Nearline applications.
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We
also believe that as hard disk drive capacities continue to increase, unit demand does not reflect the increase in Exabytes demand. In recent years, this trend has resulted in demand
for fewer units, but with higher average capacity per drive.
From time to time the HDD industry has experienced periods of imbalance between supply and demand. To the extent that the disk drive
industry builds or maintains capacity based on expectations of demand that do not materialize, price erosion may become more pronounced. Conversely, during periods where demand exceeds supply, price
erosion is generally muted.
Our Business
Disk Drive Technology
The design and manufacturing of disk drives depends on highly advanced technology and manufacturing techniques and therefore requires
high levels of research and development spending and capital equipment investments. We design, fabricate and assemble a number of the most important components found in our disk drives, including
read/write heads and recording media. Our design and manufacturing operations are based on technology platforms that are used to produce various disk drive products that serve multiple data storage
applications and markets. Our core technology platforms are focused around the areal density of media and read/write head technologies. Using an integrated platform design and manufacturing leverage
approach allows us to deliver a portfolio of disk drive products to service a wide range of electronic data storage applications and industries.
Disk
drives that we manufacture are commonly differentiated by the following key characteristics:
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storage capacity, commonly expressed in gigabytes ("GB") or terabytes ("TB"), which is the amount of data that can be stored on the
disk drive;
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spindle rotation speed, commonly expressed in revolutions per minute ("RPM"), which has an effect on speed of access to data;
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interface transfer rate, commonly expressed in megabytes per second, which is the rate at which data moves between the disk drive and
the computer controller;
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average seek time, commonly expressed in milliseconds, which is the time needed to position the heads over a selected track on the
disk surface;
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data transfer rate, commonly expressed in megabytes per second, which is the rate at which data is transferred to and from the disk
drive;
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input/output operations per second ("IOPS"), commonly expressed in megabytes per second, which is the maximum number of reads and
writes to a storage location;
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product quality and reliability, commonly expressed in annualized return rates; and
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energy efficiency, commonly measured by the power output necessary to operate the disk drive.
Areal
density is a measure of storage capacity per square inch on the recording surface of a disk. The storage capacity of a disk drive is determined by the number of disks it contains
as well as the areal density capability of these disks. We have been pursuing, and will continue to pursue, a number of technologies to increase areal densities across the entire range of our products
for expanding disk drive capacities and reducing the number of disks and heads per drive to further reduce product costs.
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Manufacturing
We design and produce our own read/write heads and recording media, which are critical technologies for disk drives. This integrated
approach enables us to lower costs and to improve the functionality of components so that they work together efficiently.
We
believe that because of our vertical design and manufacturing strategy, we are well suited to take advantage of the opportunities to leverage the close interdependence of components
for disk drives. Our manufacturing efficiency and flexibility are critical elements of our integrated business strategy. We continuously seek to improve our manufacturing efficiency and reduce
manufacturing cost by:
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employing manufacturing automation;
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improving product quality and reliability;
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integrating our supply chain with suppliers and customers to enhance our demand visibility and reduce our working capital
requirements;
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coordinating between our manufacturing group and our research and development organization to rapidly achieve volume manufacturing;
and
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operating our facilities at optimal capabilities.
A
vertically integrated model, however, tends to have less flexibility when demand moderates as it exposes us to higher unit costs as capacity utilization is not optimized.
Components and Raw Materials
Disk drives incorporate certain components, including a head disk assembly and a printed circuit board mounted to the head disk
assembly, which are sealed inside a rigid base and top cover containing the recording components in a contamination controlled environment. We maintain a highly integrated approach to our business by
designing and manufacturing a significant portion of the components we view as critical to our products, such as recording heads and media.
Read/Write Heads.
The function of the read/write head is to scan across the disk as it spins, magnetically recording or reading
information. The
tolerances of recording heads are extremely demanding and require state-of-the-art equipment and processes. Our read/write heads are manufactured with thin-film and photolithographic processes similar
to those used to produce semiconductor integrated circuits, though challenges in magnetic film properties and topographical structures are unique to the disk drive industry. We perform all primary
stages of design and manufacture of read/write heads at our facilities.
We use a combination of internally manufactured and externally sourced read/write heads, the mix of which varies based on product mix, technology and our internal capacity levels.
Media.
Information is written to the media, or disk, as it rotates at very high speeds past the read/write head. The media is made from
non-magnetic
material, usually aluminum alloy or glass, and is coated with thin layers of magnetic materials. We use a combination of internally manufactured and externally sourced finished media and aluminum
substrates, the mix of which varies based on product mix, technology and our internal capacity levels. We purchase all of our glass substrates from third parties.
Printed Circuit Board Assemblies.
The printed circuit board assemblies ("PCBAs") are comprised of standard and custom ASICs and
ancillary electronic
control chips. The ASICs control the movement of data to and from the read/write heads and through the internal controller and interface, which communicates with the host computer. The ASICs and
control chips form electronic circuitry that delivers instructions to a head positioning mechanism called an actuator to guide the heads to the selected track of a disk where the data is recorded or
retrieved. Disk drive manufacturers use one or more industry standard interfaces such as serial advanced technology architecture ("SATA"); small computer system interface
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("SCSI");
serial attached SCSI ("SAS"); or Fibre Channel ("FC") to communicate to the host systems. We outsource to third parties the manufacture and assembly of the PCBAs used in our disk drives. We
do not manufacture any ASICs, but we participate in their proprietary design.
Head Disk Assembly.
The head disk assembly consists of one or more disks attached to a spindle assembly powered by a spindle motor that
rotates the
disks at a high constant speed around a hub. Read/write heads, mounted on an arm assembly, similar in concept to that of a record player, fly extremely close to each disk surface and record data on
and retrieve it from concentric tracks in the magnetic layers of the rotating disks. The read/write heads are mounted vertically on an E-shaped assembly ("E-block") that is actuated by a voice-coil
motor to allow the heads to move from track to track. The E-block and the recording media are mounted inside the head disk assembly. We purchase spindle motors from outside vendors and from time to
time participate in the design of the motors that go into our products. We use a combination of internally manufactured and externally sourced head disk assemblies.
Disk Drive Assembly.
Following the completion of the head disk assembly, it is mated to the PCBA, and the completed unit goes through
extensive
defect mapping and testing prior to packaging and shipment. Disk drive assembly and test operations occur primarily at facilities located in China and Thailand. We perform subassembly and component
manufacturing operations at our facilities in China, Malaysia, Northern Ireland, Singapore, Thailand and in the United States. In addition, third parties manufacture and assemble components and disk
drive assemblies for us in various countries worldwide.
Suppliers of Components and Industry Constraints.
There are a limited number of independent suppliers of components, such as recording
heads and
media, available to disk drive manufacturers. Vertically integrated disk drive manufacturers, who manufacture their own components, are less dependent on external component suppliers than less
vertically integrated disk drive manufacturers.
Commodity and Other Manufacturing Costs.
The production of disk drives requires rare earth elements, precious metals, scarce alloys and
industrial
commodities, which are subject to fluctuations in prices and the supply of which has at times been constrained. In addition to increased costs of components and commodities, volatility in fuel costs
may also increase our costs related to commodities, manufacturing and freight. As a result, we may increase our use of ocean shipments to help offset any increase in freight costs.
Products
We offer a broad range of storage solutions for the enterprise, data center, client compute and client non-compute applications. We
offer more than one product within each product category and differentiate products on the basis of price, performance, form factor, capacity, interface, power consumption efficiency, security
features, and other customer integration requirements. Our industry is characterized by continuous and significant advances in technology which contribute to rapid product life cycles. We list our
main current product offerings below.
Enterprise Performance HDDs.
Our 10,000 and 15,000 RPM Enterprise Performance disk drives feature increased throughput and improved
energy
efficiency, targeted at high random performance server application needs. Performance 10,000 RPM HDDs ship in storage capacities ranging from 300GB to 1.8TB, and our 15,000 RPM HDDs ship in storage
capacities ranging from 146GB to 600GB.
Enterprise Capacity and Archive HDDs.
Our Enterprise Capacity disk drives ship in 2.5-inch and 3.5-inch form factors and in storage
capacities of up
to 10TB that rotate at 7,200 RPM speeds. These products are designed for bulk data storage and server environments that require high capacity, enterprise reliability, energy efficiency, integrated
security, and SATA and SAS interfaces. Our Archive HDDs
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provide
up to 8TB of low-cost storage designed specifically for active archive storage environments in cloud data centers where very low cost and power are paramount.
Enterprise SSDs.
Available in capacities up to 3.8TB, the SSD features 12GB per second SAS, and delivers the speed and consistency
needed for
demanding enterprise storage and server applications. We also offer our Nytro family of accelerator cards with capacities up to 4TB.
Desktop HDDs and SSHDs.
Our 3.5-inch desktop drives ship in both traditional HDD and SSHD configurations and offer up to 8TB of
capacity. Desktop
drives are designed for applications such as personal computers and workstations.
Mobile HDDs and SSHDs.
Our family of laptop drives ship in a variety of form factors (5mm to 9.5mm drive height), capacities (up to
4TB) and
technologies (HDD and SSHD) to support mobile needs. Used in applications ranging from traditional laptops, convertible systems and external storage, our drives are built to address a range of
performance needs and sizes for affordable, high capacity storage.
Video HDDs.
Our Video HDDs are used in video applications like DVR's and media centers. These disk drives are optimized for video
streaming in
always-on applications with capacities up to 4TB to support leading-edge digital entertainment.
Surveillance HDDs.
Our surveillance drives are built to support the high-write workload of an always-on, always-recording video
surveillance system.
These surveillance optimized drives are built to support the growing needs of the surveillance market with support for multiple hard drive ("HD") streams and capacities up to 10TB.
NAS HDDs.
Our NAS drives are built to support the performance and reliability demanded by small and medium businesses, and incorporate
interface
software with custom-built error recovery controls, power settings, and vibration tolerance. Our NAS HDD solutions are available in capacities up to 10TB.
Branded Solutions.
Our external backup storage solutions are shipped under the Backup Plus and Expansion product lines, as well as
under the Maxtor
and LaCie brand names. These product lines are available in capacities up to 48TB, respectively. Our Seagate and LaCie Wireless drives provide tablet and smartphone users with additional storage for
media content, with capacities up to 2TB. Our NAS and Personal Cloud solutions provide centralized network storage in capacities up to 32TB and secure, anywhere file access for users on-the-go.
Customers
We sell our products to major OEMs, distributors and retailers.
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The
following table summarizes our revenue by channel and by geography:
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Fiscal Years Ended
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July 1,
2016
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July 3,
2015
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June 27,
2014
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Revenues by Channel (%)
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OEM
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70
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%
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71
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%
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68
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%
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Distributors
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16
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%
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|
17
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%
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|
20
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%
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Retail
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14
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%
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12
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%
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12
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%
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Revenues by Geography (%)
(1)
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Americas
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29
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%
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28
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%
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27
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%
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EMEA
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|
17
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%
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17
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%
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19
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%
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Asia Pacific
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|
54
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%
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55
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%
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54
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%
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-
(1)
-
Revenue
is attributed to countries based on the shipping location.
OEM
customers typically enter into master purchase agreements with us. These agreements provide for pricing, volume discounts, order lead times, product support obligations and other
terms and conditions including sales programs offered to promote selected products. Deliveries are scheduled only after receipt of purchase orders. In addition, with limited lead-time, customers may
defer most purchase orders without significant penalty. Anticipated orders from many of our customers have in the past failed to materialize or OEM delivery schedules have been deferred or altered as
a result of changes in their business needs.
Our
distributors generally enter into non-exclusive agreements for the resale of our products. They typically furnish us with a non-binding indication of their near-term requirements and
product deliveries are generally scheduled accordingly. The agreements and related sales programs typically provide the distributors with limited right of return and price protection rights. In
addition, we offer sales programs to distributors on a quarterly and periodic basis to promote the sale of selected products in the sales channel.
Our
retail channel consists of our branded storage products sold to retailers either by us directly or by our distributors. Retail sales made by us or our distributors typically require
greater marketing support, sales incentives and price protection periods.
In
fiscal years 2016, 2015 and 2014, Dell Inc. accounted for approximately 12%, 14% and 13% of consolidated revenue, respectively. In fiscal year 2015 and 2014, Hewlett-Packard
Company accounted for approximately 12% and 13% of consolidated revenue, respectively. In fiscal year 2016, HP Inc.,
formerly known as Hewlett-Packard Company, completed its separation with Hewlett Packard Enterprise Company, and each company accounted for less than 10% of our consolidated revenue. See
"Item 1A. Risk Factors-Risks Related to Our Business-We may be adversely affected by the loss of, or reduced, delayed or canceled purchases by, one or more of our larger customers."
Competition
We compete primarily with manufacturers of hard drives used in the enterprise, client compute and client non-compute applications. We
are also a supplier of Enterprise SSDs, PCIe accelerator cards, cloud storage solutions, HDD test equipment, and storage subsystems through our acquisitions. The markets that we participate in are
highly competitive. Disk drive manufacturers compete for a limited number of major disk drive customers but also compete with other companies in the electronic data storage industry that provide SSDs
and PCIe technology. Some of the principal factors used by customers to differentiate among electronic data storage solutions manufacturers are storage capacity, product performance, product quality
and reliability, price per unit and price per gigabyte, time-to-market and time-to-volume leadership, storage/retrieval access times, data transfer rates, form factor, product warranty and support
capabilities, supply continuity and flexibility, power consumption, total cost of ownership, and brand. While different
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markets
and customers place varying levels of emphasis on these factors, we believe that our products are competitive with respect to many of these factors in the markets that we currently address.
Principal Disk Drive Competitors.
There are three companies in the electronic data storage industry that manufacture disk
drives:
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Seagate, selling the Seagate, LaCie, Maxtor and Samsung brands;
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Western Digital Corporation, operating the Western Digital and Hitachi Global Storage Technologies subsidiaries; and
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Toshiba Corporation
Other Competition.
We are seeing direct competition from SSD's that is adversely impacting demand for HDD in some markets including
Notebook and
Enterprise Mission Critical. We expect that this trend will continue although we believe both product types will be required in the market to satisfy the growing demand for electronic data storage.
Price Erosion.
Historically, our industry has been characterized by price declines for disk drive products with comparable capacity,
performance and
feature sets ("like-for-like products"). Price declines for like-for-like products ("price erosion") have been more pronounced during periods of:
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economic contraction in which competitors may use discounted pricing to attempt to maintain or gain market share;
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few new product introductions when competitors have comparable or alternative product offerings; and
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industry supply exceeding demand.
Disk
drive manufacturers typically attempt to offset price erosion with an improved mix of disk drive products characterized by higher capacity, better performance and additional feature
sets and product cost reductions.
We
believe the HDD industry experienced benign price erosion in fiscal year 2014, whereas price erosion increased in fiscal years 2015 and 2016.
Product Life Cycles and Changing Technology.
Success in our industry has been dependent to a large extent on the ability to balance the
introduction
and transition of new products with time-to-volume, performance, capacity and quality metrics at a competitive price, level of service and support that our customers expect. Generally, the drive
manufacturer that introduces a new product first benefits from improved product mix, favorable profit margins and less pricing pressure until comparable products are introduced. Changing technology
also necessitates on-going investments in research and development, which may be difficult to recover due to rapid product life cycles and economic declines. Further, there is a continued need to
successfully execute product transitions and new product introductions, as factors such as quality, reliability and manufacturing yields continue to be of significant competitive importance.
Seasonality
The disk drive industry traditionally experiences seasonal variability in demand with higher levels of demand in the second half of the
calendar year. This seasonality is driven by consumer spending in the back-to-school season from late summer to fall and the traditional holiday shopping season from fall to winter. We believe fiscal
year 2015 reflected seasonality consistent with historical patterns, whereas in fiscal year 2014 our industry experienced more muted seasonal patterns as supply and demand were relatively in balance.
In fiscal year 2016, beyond traditional seasonality, variability of sales was a reflection of more cyclical demand from CSPs based on the timing of large systems installations and the shift of the
underlying technology.
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Research and Development
We are committed to developing new component technologies, products and alternative storage technologies. Our research and development
focus is designed to bring new products to market in high volume, with quality attributes that our customers expect, before our competitors. Part of our product development strategy is to leverage a
design platform and/or subsystem within product families to serve different market needs. This platform strategy allows for more efficient resource utilization, leverages best design practices,
reduces exposure to changes in demand, and allows for achievement of lower costs through purchasing economies. Our advanced technology integration effort focuses disk drive and component research on
recording subsystems, including read/write heads and recording media; market-specific product technology; and technology focused towards new business opportunities. The primary purpose of our advanced
technology integration effort is to ensure timely availability of mature component technologies to our product development teams as well as allowing us to leverage and coordinate those technologies in
the design centers across our products in order to take advantage of opportunities in the marketplace. During fiscal years 2016, 2015 and 2014, we had product development expenses of approximately
$1,237 million, $1,353 million and $1,226 million, respectively, which represented 11%, 10% and 9% of our consolidated revenue, respectively.
Patents and Licenses
As of July 1, 2016, we had approximately 5,000 U.S. patents and 1,300 patents issued in various foreign jurisdictions as well as
approximately 1,500 U.S. and 1,200 foreign patent applications pending. The number of patents and patent applications will vary at any given time as part of our ongoing patent portfolio management
activity. Due to the rapid technological change that characterizes the electronic data storage industry, we believe that, in addition to patent protection, the improvement of existing products,
reliance upon trade secrets, protection of unpatented proprietary know-how and development of new products are also important to our business in establishing and maintaining a competitive advantage.
Accordingly, we intend to continue our efforts to broadly protect our intellectual property, including obtaining patents, where available, in connection with our research and development program.
We
have patent licenses with a number of companies. Additionally, as part of our normal intellectual property practices, we may be engaged in negotiations with other major electronic
data storage companies and component manufacturers with respect to patent licenses.
The
electronic data storage industry is characterized by significant litigation relating to patent and other intellectual property rights. Because of rapid technological development in
the electronic data storage
industry, some of our products have been, and in the future could be, alleged to infringe existing patents of third parties. From time to time, we receive claims that our products infringe patents of
third parties. Although we have been able to resolve some of those claims or potential claims by obtaining licenses or rights under the patents in question without a material adverse affect on us,
other claims have resulted in adverse decisions or settlements. In addition, other claims are pending, which if resolved unfavorably to us could have a material adverse effect on our business and
results of operations. For more information on these claims, see "Item 8. Financial Statements and Supplementary DataNote 14. Legal, Environmental and Other Contingencies."
The costs of engaging in intellectual property litigation in the past have been, and in the future may be, substantial, irrespective of the merits of the claim or the outcome.
Backlog
In view of industry practice, whereby customers may cancel or defer orders with little or no penalty, we believe backlog in the disk
drive industry is of limited indicative value in estimating future performance and results.
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Environmental Matters
Our 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 our 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.
We
have established environmental management systems and continually update environmental policies and standard operating procedures for our operations worldwide. We believe that our
operations are in material compliance with applicable environmental laws, regulations and permits. We budget for operating and capital costs on an ongoing basis to comply with environmental laws. If
additional or more stringent requirements are imposed on us in the future, we could incur additional operating costs and capital expenditures.
Some
environmental laws, such as the Comprehensive Environmental Response Compensation and Liability Act of 1980 (as amended, the "Superfund" law) and its state equivalents, can impose
liability for the cost of cleanup of contaminated sites upon any of the current or former site owners or operators or upon parties who sent waste to these sites, regardless of whether the owner or
operator owned the site at the time of the release of hazardous substances or the lawfulness of the original disposal activity. We have been identified as a potentially responsible party at several
sites. At each of these sites, we have 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. We have fulfilled our responsibilities at some of these sites and remain involved in only a few at this time.
While
our ultimate costs in connection with these sites is difficult to predict with complete accuracy, based on current estimates of cleanup costs and our expected allocation of these
costs, we do not expect costs in connection with these sites to be material.
We
may be subject to various state, federal and international laws and regulations governing the environment, including those restricting the presence of certain substances in electronic
products. For example, the European Union ("EU") enacted the Restriction of the Use of Certain Hazardous Substances in Electrical and Electronic Equipment, which prohibits the use of certain
substances, including lead, in certain products, including disk drives, put on the market after July 1, 2006. Similar legislation has been or may be enacted in other jurisdictions, including in
the United States, Canada, Mexico, Taiwan, China, Japan and others. The European Union REACH Directive (Registration, Evaluation, Authorization, and Restriction of Chemicals, EC 1907/2006) also
restricts substances of very high concern ("SVHCs") in products.
Employees
At July 1, 2016, we employed approximately 45,500 employees and temporary employees worldwide, of which approximately 36,100
were located in our Asian operations. We believe that our future success will depend in part on our ability to attract and retain qualified employees at all levels. We believe that our employee
relations are good.
Financial Information
Financial information for our reportable business segment and about geographic areas is set forth in "Item 8. Financial
Statements and Supplementary Data-Note 13. Business Segment and Geographic Information."
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Corporate Information
Seagate Technology public limited company, is a public limited company organized under the laws of Ireland.
Available Information
Availability of Reports.
We are a reporting company under the Securities Exchange Act of 1934, as amended (the "1934 Exchange Act"),
and we file
reports, proxy statements and other information with the U.S. Securities and Exchange Commission (the "SEC"). The public may read and copy any of our filings at the SEC's Public Reference Room at
100 F Street, NE, Washington, DC 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. Because we make filings to the SEC
electronically, the public may access this information at the SEC's website: www.sec.gov. This site contains reports, proxies and information statements and other information regarding issuers that
file electronically with the SEC.
Web Site Access.
Our website is www.seagate.com. We make available, free of charge at the "Investors" section of our website, Annual
Reports on
Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the 1934
Exchange Act as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC. Reports of beneficial ownership filed pursuant to Section 16(a) of the
1934 Exchange Act are also available on our web site.
Investors
and others should note that we routinely use the Investors section of our website to announce material information to investors and the marketplace. While not all of the
information that the Company posts on its corporate website is of a material nature, some information could be deemed to be material. Accordingly, the Company encourages investors, the media, and
others interested in the Company to review the information that it shares on www.seagate.com. Information in, or that can be accessed through, our web site is not incorporated into this
Form 10-K.
Executive Officers
The following sets forth the name, age and position of each of the persons who were serving as executive officers as of
August 5, 2016. There are no family relationships among any of our executive officers.
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Name
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Age
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Positions
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Stephen J. Luczo
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59
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Chairman and Chief Executive Officer
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William D. Mosley
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49
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President and Chief Operating Officer
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Philip G. Brace
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45
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President, Cloud Systems and Electronics Solutions
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David H. Morton Jr.
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44
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Executive Vice President, Finance and Chief Financial Officer
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Regan J. MacPherson
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53
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Senior Vice President, General Counsel and Secretary
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Mark Re
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56
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Senior Vice President, Chief Technology Officer
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Stephen
J. Luczo. Mr. Luczo, 59, has served as our CEO since January 2009 and as Chairman of the Board since 2002. Mr. Luczo joined Seagate in October 1993 as Senior Vice
President of Corporate Development. In September 1997, he was promoted to President and Chief Operating Officer of Seagate Technology (Seagate Technology plc's predecessor) and, in July 1998,
he was promoted to CEO at which time he joined the Board as a director of Seagate Technology. Mr. Luczo resigned as CEO effective as of July 2004, but remained as Chairman of the Board. He
served as non-employee Chairman from October 2006 to January 2009. From October 2006 until he rejoined us in January 2009, Mr. Luczo was a private investor. Mr. Luczo also served as our
President from January 2009 until October 2013. Prior to joining Seagate in 1993, Mr. Luczo was Senior Managing Director of the Global Technology Group of Bear,
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Stearns & Co. Inc.,
an investment banking firm, from February 1992 to October 1993. Mr. Luczo served on the board of directors of Microsoft Corporation from May 2012 to
March 2014.
William
D. Mosley. Mr. Mosley, 49, was promoted to our President, Chief Operating Officer on June 27, 2016. He was previously our President, Operations and Technology from
October 2013 to June 2016 and our Executive Vice President, Operations from March 2011 until October 2013. Prior to that, he served as Executive Vice President, Sales and Marketing from September 2009
through March 2011; Executive Vice President, Sales, Marketing and Product Line Management from February 2009 to September 2009; Senior Vice President, Global Disk Storage Operations from 2007 to
2009; and Vice President, Research and Development, Engineering from 2002 to 2007.
Philip
G. Brace. Mr. Brace, 45, has served as our President, Cloud Systems and Electronics Solutions since July 2015. Mr. Brace joined Seagate in September 2014 as
Executive Vice President and Chief Technology Officer of Silicon Solutions, and was promoted to Interim President of Cloud Systems and Electronics Solutions on April 30, 2015. He was previously
employed by LSI Corporation ("LSI") from August 2005 through September 2014. At LSI, he was the Executive Vice President of the Storage Solutions Group from July 2012 to September 2014, Senior Vice
President and General Manager from January 2009 to July 2012, and Senior Vice President of Corporate Planning and Marketing from August 2005 to January 2009.
David
H. Morton Jr. Mr. Morton, 44, assumed the role of Executive Vice President and Chief Financial Officer on October 21, 2015. He was previously our Senior Vice
President, Finance, Treasurer and Principal Accounting Officer from April 2014 to October 2015 and our Vice President, Finance, Treasurer and Principal Accounting Officer from October 2009 to April
2014; Vice President of Finance, Sales and Marketing from March 2009 to October 2009; Vice President of Sales Operations from July 2007 to March 2009; Vice President of Finance, Storage Markets from
October 2006 to July 2007; Executive Director of Consumer Electronics Finance from October 2005 to October 2006; and Executive Director of Corporate FP&A from June 2004 to October 2005.
Regan
J. MacPherson. Ms. MacPherson, 53, has served as our Senior Vice President and General Counsel since March 2015. She was previously our Vice President and Interim General
Counsel from March 2015 to August 2015 and our Deputy General Counsel from September 2013 until August 2015. Prior to that, she was Assistant General Counsel from 2010 through 2013, Associate General
Counsel from 2008 to 2010 and a Senior Manager in Legal from 2005 to 2008.
Mark
Re. Mr. Re, 56, has served as our Senior Vice President and Chief Technology Officer since July 2013. Prior to that, he served as our Vice President, Research, from August
2003 to August 2006. Mr. Re currently serves on the Scientific Advisory Board for the Data Storage Institute, as well as on the Advanced Storage Technology Consortium.
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ITEM 1A. RISK FACTORS
If we fail to predict demand accurately for our products in any quarter, we may not be able to
recapture the cost of our investments.
Our industry operates primarily on quarterly purchasing cycles, with much of the order flow in any given quarter typically coming at
the end of that quarter. Our manufacturing
process requires us to make significant product-specific investments in inventory in each quarter for that quarter's production. Since we typically receive the bulk of our orders late in a quarter
after we have made our investments, there is a risk that our orders will not be sufficient to allow us to recapture the costs of our investment before the products resulting from that investment have
become obsolete. We cannot assure you that we will be able to accurately predict demand in the future.
Our
revenues in any quarter are substantially dependent upon customer orders in that quarter. We attempt to project future orders based in part on estimates from our major customers. Our
customers' estimated requirements are not always accurate and we therefore cannot predict our quarterly revenues with any degree of certainty. In addition, we derive a portion of our revenues in each
quarter from a number of relatively large orders. If one or more of our major customers decide to defer a purchase order or delays product acceptance in any given quarter, this is likely to result in
reduced total revenues for that quarter.
The
difficulty in forecasting demand also increases the difficulty in anticipating our inventory requirements, which may cause us to over-produce finished goods, resulting in inventory
write-offs, or under-produce finished goods, adversely affecting our ability to meet customer requirements and our market share. Additionally, the risk of inventory write-offs could increase if we
were to continue to hold higher inventory levels. We cannot be certain that we will be able to recover the costs associated with increased inventory.
Other
factors that may negatively impact our ability to recapture the cost of investments in any given quarter include:
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the impact of variable demand and an aggressive pricing environment for disk drives;
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the impact of competitive product announcements and possible excess industry supply both with respect to particular disk drive
products and with respect to competing alternative storage technology solutions such as SSDs in tablet, notebook and enterprise compute applications;
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our inability to reduce our fixed costs to match sales in any quarter because of our vertical manufacturing strategy, which means that
we make more capital investments than we would if we were not vertically integrated;
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dependence on our ability to successfully qualify, manufacture and sell in increasing volumes on a cost-effective basis and with
acceptable quality our disk drive products, particularly the new disk drive products with lower cost structures;
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uncertainty in the amount of purchases from our distributor customers who from time to time constitute a large portion of our total
sales;
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our product mix and the related margins of the various products;
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accelerated reduction in the price of our disk drives due to technological advances and/or an oversupply of disk drives in the market
and shifting trends in demand which can create supply and demand imbalances;
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manufacturing delays or interruptions, particularly at our manufacturing facilities in China, Malaysia, Northern Ireland, Singapore,
Thailand, the United Kingdom, or the United States;
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limited access to components that we obtain from a single or a limited number of suppliers;
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the impact of changes in foreign currency exchange rates on the cost of producing our products and the effective price of our products
to foreign consumers; and
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operational issues arising out of the increasingly automated nature of our manufacturing processes.
In
addition, the demand for client non-compute products can be even more volatile and unpredictable than the demand for client compute products. In some cases, our products manufactured
for client non-compute applications are uniquely configured for a single customer's application, which creates a risk of unwanted and unsellable inventory if the anticipated volumes are not realized.
This potential for unpredictable volatility is increased by the possibility of competing alternative storage technologies like flash memory meeting the customers' cost and capacity metrics, resulting
in a rapid shift in demand from our products and disk drive technology, generally, to alternative storage technologies. Unpredictable fluctuations in demand for our products or rapid shifts in demand
from our products to alternative storage technologies in new client non-compute applications could materially adversely impact our future results of operations.
Market acceptance of new product introductions cannot be accurately predicted, and our results of
operations will suffer if there is less demand for our new products than is anticipated.
The markets for our products are characterized by rapid technological change, frequent new product introductions and technology
enhancements, uncertain product life cycles and changes in customer demand. The success of our new product introductions is dependent on a number of factors, including market acceptance, our ability
to manage the risks associated with product transitions, the effective management of inventory levels in line with anticipated product demand and the risk that our new products will have quality
problems or other defects in the early stages of introduction that were not anticipated in the design of those products. Accordingly, we cannot accurately determine the ultimate effect that our new
products will have on our results of operations.
Historically,
our results of operations have substantially depended upon our ability to be among the first-to-maturity with new product offerings. Our market share and results of
operations in the future may be adversely affected if we fail to:
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consistently maintain our time-to-maturity performance with our new products;
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produce these products in sufficient volume;
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qualify these products with key customers on a timely basis by meeting our customers' performance and quality specifications; or
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achieve acceptable manufacturing yields, quality and costs with these products.
In
addition, the success of our new product introductions is dependent upon our ability to qualify as a primary source of supply with our OEM customers. In order for our products to be
considered by our customers for qualification, we must be among the leaders in time-to-market with those new products. Once a product is accepted, any failure or delay in the qualification process or
a requirement that we requalify can result in our losing sales to that customer until new products are introduced. The limited number of high-volume OEMs magnifies the effect of missing a
product qualification opportunity. These risks are further magnified because we expect competitive pressures to result in declining sales, eroding prices, and declining gross margins on our current
generation products. If the delivery of our products is delayed, our OEM customers may use our competitors' products to meet their production requirements. We cannot assure that we will be among the
leaders in time-to-market with new products or that we will be able to successfully qualify new products with our customers in the future.
We
face the related risk that consumers and businesses may wait to make their purchases if they want to buy a new product that has been shipped or announced but not yet released. If this
were to occur, we may be unable to sell our existing inventory of products that may be less efficient and cost effective
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compared
to new products. As a result, even if we are among the first-to-maturity with a given product, subsequent introductions or announcements by our competitors of new products could cause us to
lose revenue and not achieve a positive return on our investment in existing products and inventory.
If
we cannot successfully deliver competitive products, our future results of operations may be adversely affected.
Our industries are highly competitive and our failure to anticipate and respond to technological and
market developments could harm our ability to compete.
We operate in markets that are highly competitive and subject to rapid change and that are significantly affected by new product
introductions, substantial price erosion and lower prices as part of a strategy to gain or retain market share and customers. Should these practices continue, we may need to continually reduce our
prices for existing products to retain our market share, which could adversely affect our results of operations.
Our
ability to offset the effect of price erosion through new product introductions at higher average prices is diminished to the extent competitors introduce products into particular
markets ahead of our similar, competing products. Our ability to offset the effect of price erosion is also diminished during times when supply exceeds demand for a particular product.
Market
share for our products can be negatively affected by our customers' diversifying their sources of supply as our competitors enter the market for particular products, as well as by
our ability to ramp volume production of new product offerings. When our competitors successfully introduce product offerings that are competitive with our recently introduced products, our customers
may quickly diversify their sources of supply. Any significant decline in our market share in any of our principal market applications would adversely affect our results of operations.
Our
principal sources of competition include:
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disk drive manufacturers, such as Western Digital Corporation and Toshiba;
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companies providing storage subsystems and components to OEMs;
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electronic manufacturing services ("EMS") companies acquiring the necessary skills and intellectual property to enter the enterprise
data storage marketplace;
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other high performance computing ("HPC") data storage providers; and
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collaborations between in-house development teams of existing and potential customers and a combination of EMS, contract electronic
manufacturing ("CEM") or emerging technology companies.
We
also experience competition from other companies that produce alternative storage technologies like flash memory, where increasing capacity, decreasing cost, energy efficiency and
improvements in performance ruggedness have resulted in competition with our lower capacity, smaller form factor disk drives. This competition has traditionally been in the markets for handheld
consumer electronics applications and now it also includes solid state drives ("SSDs") for tablet, notebook and enterprise compute applications. Certain customers for both notebook and enterprise
compute applications are adopting SSDs as alternatives to hard drives in certain applications. Further adoption of these alternative storage technologies may impact the competitiveness of our product
portfolio and reduce our market share and adversely affect our results of operation.
The
markets for our data storage system products are also characterized by technological change driven in part by the adoption of new industry standards. These standards provide
mechanisms to ensure technology component interoperability can occur and may reduce our capability for differentiation or innovation and our affected products would revert to commodity status. This
could lower the barriers to
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entry
to our market away from our specialist research and development skills and enable entry for the general-purpose design skills found in some large EMS and CEM companies. Commodity markets are
driven by extremely low margins and very aggressive competitive pricing. If our market becomes more commoditized and we fail to deliver innovative value-added alternatives to our customers, we will
have difficulty competing against the larger EMS and CEM companies. If we are unable to compete successfully against our current and future competitors, we could experience profit margin reductions or
loss of market share, which could significantly harm our financial condition.
If we do not develop products in time to keep pace with technological changes, our results of
operations will be adversely affected.
Our customers have demanded new generations of disk drive products as advances in computer hardware and software have created the need
for improved storage products, with features such as increased storage capacity, improved performance and reliability and lower cost. We, and our competitors, have developed improved products, and we
will need to continue to do so in the future. Such product development requires significant investments in research and development. We cannot assure you that we will be able to successfully complete
the design or introduction of new products in a timely manner, that we will be able to manufacture new products in sufficient volumes with acceptable manufacturing yields, that we will be able to
successfully market these new products or that these products will perform to specifications on a long-term basis. In addition, the impact of slowing areal density growth may adversely impact our
ability to be successful.
When
we develop new products with higher capacity and more advanced technology, our results of operations may decline because the increased difficulty and complexity associated with
producing these products increases the likelihood of reliability, quality or operability problems. If our products suffer increases in failures, are of low quality or are not reliable, customers may
reduce their purchases of our products and our manufacturing rework and scrap costs and service and warranty costs may increase. In addition, a decline in the reliability of our products may make us
less competitive as compared with other disk drive manufacturers or competing technologies.
Changes in demand for computer systems and storage subsystems may in the future cause a decline in
demand for our products.
Our products are components in computers, data storage systems, and consumer electronics devices. The demand for these products has
been volatile. Unexpected slowdowns in demand for computer systems, storage subsystems or consumer electronics devices generally cause sharp declines in demand for our products. Declines in consumer
spending could have a material adverse effect on demand for our products and services and on our financial condition and results of operations.
While
sales to Client Non-Compute and Cloud Systems and Solutions markets are becoming a more significant source of revenue, sales to the Client Compute market remain an important part
of our business. The Client Compute market, however, has been, and we expect it to continue to be, adversely affected by the growth of tablet computers, smart phones and similar devices and that
perform many of the same capabilities as computers, the lengthening of product life cycles and macroeconomic conditions. We believe that the deterioration of the Client Compute market has accelerated
recently, and that this accelerated deterioration may continue or further accelerate, which could cause our operating results to suffer. Additionally, if demand in the Client Compute market is worse
than expected as a result of these or other conditions, demand for our products in the Client Compute market may decrease at a faster rate and our operating results may be adversely affected.
The
Enterprise Storage market has been adversely affected by the growth of the utilization of NAND flash in mission critical applications. This deterioration of the Enterprise Storage
market could cause our operating results to suffer.
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Causes
of declines in demand for our products in the past have included weakness in macroeconomic environments, announcements or introductions of major new operating systems or
semiconductor improvements or changes in consumer preferences, such as the shift to mobile devices. We believe these announcements and introductions have from time to time caused consumers to defer
their purchases and made inventory obsolete. Whenever an oversupply of our products causes participants in our industry to have higher than anticipated inventory levels, we experience even more
intense price competition from other manufacturers than usual.
Increases in the areal density of disk drives may outpace customers' demand for storage capacity.
The rate of increase in areal density, or storage capacity per square inch on a disk, may be greater than the increase in our
customers' demand for aggregate storage capacity, particularly in certain market applications like client compute. As a result, our customers' storage capacity needs may be satisfied with lower
priced, low capacity disk drives. These factors could decrease our sales, especially when combined with continued price erosion, which could adversely affect our results of operations.
We may not be successful in our efforts to grow our cloud systems and solutions business.
We have made and are continuing to make investments to expand and develop our cloud systems and solutions business. Our cloud systems
and solutions business is subject to the following risks:
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the cloud systems and solutions market may develop more slowly than we expect;
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-
we may not be able to offer compelling solutions to enterprises and consumers; and
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our cloud systems and solutions business generally has a long and unpredictable sales cycle, and growth in this business is likely to
depend on relatively large customer orders, which may increase the variability of our results of operations and the difficulty of matching revenues with expenses.
Our
results of operations and share price may be adversely affected if we are not successful in our efforts to grow our cloud computing business as anticipated. In addition, our growth
in this sector may
bring us into closer competition with some of our customers or potential customers, which may decrease their willingness to do business with us.
Changes in the macroeconomic environment have negatively impacted, and may continue to, negatively
impact our results of operations.
Due to the continuing uncertainty about current macroeconomic conditions affecting consumer and enterprise spending, we believe our
customers may postpone spending in response to tighter credit, unemployment, negative financial news and/or declines in income or asset values, which could have a material adverse effect on the demand
for our products. Continuing high unemployment rates, low levels of consumer liquidity, risk of default on sovereign debt and volatility in credit and equity markets have weakened consumer confidence
and decreased consumer and enterprise spending in many regions around the world. Other factors that could influence demand include conditions in the residential real estate and mortgage markets, labor
and healthcare costs, access to credit, consumer confidence and other macroeconomic factors affecting consumer spending behavior. These and other economic factors could have a material adverse effect
on demand for our products and on our financial condition and operating results.
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Our quarterly results of operations fluctuate, sometimes significantly, from period to period, and
may cause our share price to decline.
In the past, our quarterly revenue and results of operations have fluctuated, sometimes significantly, from period to period. These
fluctuations, which we expect to continue, may be occasioned by a variety of factors, including:
-
-
current uncertainty in global economic conditions may pose a risk to the overall economy;
-
-
adverse changes in the level of economic activity in the major regions in which we do business;
-
-
competitive pressures resulting in lower selling prices by our competitors targeted to encourage shifting of customer demand;
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delays or problems in our introduction of new products, particularly new disk drives with lower cost structures, the inability to
achieve high production yields or delays in customer qualification or initial product quality issues;
-
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changes in purchasing patterns by our distributor customers;
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application of new or revised industry standards;
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disruptions in our supply chain;
-
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increased costs or adverse changes in availability of supplies of raw materials or components;
-
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the impact of corporate restructuring activities that we have and may continue to engage in;
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changes in the demand for the computer systems and data storage products that contain our products due to seasonality, economic
conditions and other factors;
-
-
changes in purchases from period to period by our primary customers;
-
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shifting trends in customer demand which, when combined with overproduction of particular products, particularly when the industry is
served by multiple suppliers, results in unfavorable supply/demand imbalances;
-
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our high proportion of fixed costs, including research and development expenses;
-
-
any impairments in goodwill or other long-lived assets;
-
-
announcements of new products, services or technological innovations by us or our competitors; and
-
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adverse changes in the performance of our products.
As
a result, we believe that quarter-to-quarter comparisons of our revenue and results of operations may not be meaningful, and that these comparisons may not be an accurate indicator of
our future
performance. Our results of operations in one or more future quarters may fail to meet the expectations of investment research analysts or investors, which could cause an immediate and significant
decline in the trading price of our ordinary shares.
Because we experience seasonality in the sales of our products, our results of operations will
generally be adversely impacted during the second half of our fiscal year.
Sales of computer systems, storage subsystems and consumer electronics tend to be seasonal, and therefore we expect to continue to
experience seasonality in our business as we respond to variations in our customers' demand for our products. In particular, we anticipate that sales of our products will continue to be lower during
the second half of our fiscal year. In the client compute and client non-compute market applications of our disk drive business, this seasonality is partially attributable to the historical trend in
our
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results
derived from our customers' increased sales of desktop computers, notebook computers, and consumer electronics during the back-to-school and winter holiday season. In the enterprise market our
sales are seasonal because of the capital budgeting and purchasing cycles of our end users. Since our working capital needs peak during periods in which we are increasing production in anticipation of
orders that have not yet been received, our results of operations will fluctuate seasonally even if the forecasted demand for our products proves accurate. Furthermore, it is difficult for us to
evaluate the degree to which this seasonality may affect our business in future periods because of the rate and unpredictability of product transitions and new product introductions, particularly in
the client non-compute market, as well as macroeconomic conditions.
We have a long and unpredictable sales cycle for enterprise data storage solutions.
Our enterprise data storage solutions are technically complex and we typically supply them in high quantities to a small number of
customers. Many of our products are also tailored to meet the specific requirements of individual customers, and are often integrated by our customers into the systems and products that they sell.
Factors that affect the length of our sales cycle include:
-
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the time required for testing and evaluating our products before they are deployed;
-
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the size of the deployment; and
-
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the degree of system configuration necessary to deploy our products.
As
a result, our sales cycle for enterprise data storage solutions is often in excess of one year, and the length of our sales cycle is frequently unpredictable. In addition, the
emerging and evolving nature of the market for the products that we sell may lead prospective customers to postpone their purchasing decisions. We invest resources and incur costs during this cycle
that may not be recovered if we do not successfully conclude sales. These factors lead to difficulty in matching revenues with expenses, and to increased expenditures which together may adversely
impact our results of operations.
We may be adversely affected by the loss of, or reduced, delayed or canceled purchases by, one or
more of our larger customers.
Some of our key customers account for a large portion of our disk drive revenue. While we have longstanding relationships with many of
our customers, if any of our key customers were to significantly reduce their purchases from us, our results of operations would be adversely affected. While sales to major customers may vary from
period to period, a major customer that permanently discontinues or significantly reduces its relationship with us could be difficult to replace. In line with industry practice, new customers usually
require that we pass a lengthy and rigorous qualification process at the customer's cost. Accordingly, it may be difficult or costly for us to attract new major customers. Additionally, mergers,
acquisitions, consolidations or other significant transactions involving our customers generally entail risks to our business. If a significant transaction involving any of our key customers results
in the loss of or reduction in purchases by these key customers, it could have a materially adverse effect on our business, results of operations, financial condition and prospects.
We are dependent on sales to distributors and retailers, which may increase price erosion and the
volatility of our sales.
A substantial portion of our sales has been to distributors of disk drive products. Certain of our distributors may also market other
products that compete with our products. Product qualification programs in this distribution channel are limited, which increases the number of competing products that are available to satisfy demand,
particularly in times of lengthening product cycles. As a result, purchasing decisions in this channel are based largely on price, terms and product availability. Sales volumes through this channel
are also less predictable and subject to greater volatility than sales to our OEM customers. In
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addition,
deterioration in business and economic conditions could exacerbate price erosion and volatility as distributors lower prices to compensate for lower demand and higher inventory levels. Our
distributors' ability to access credit for purposes of funding their operations may also affect purchases of our products by these customers.
If
distributors reduce their purchases of our products or prices decline significantly in the distribution channel or if distributors experience financial difficulties or terminate their
relationships with us, our revenues and results of operations would be adversely affected.
We
believe that industry demand for storage products in the long-term is increasing due to the proliferation of media-rich digital content in consumer applications and is fueling
increased consumer demand for storage. This has led to the expansion of our branded solutions such as external storage products to provide additional storage capacity and to secure data in case of
disaster or system failure, or to provide independent storage solutions for multiple users in home or small business environments. Consumer spending on retail sales of our branded solutions has
deteriorated in some markets and may continue to do so if poor global economic conditions continue and higher levels of unemployment persist. This could have a material adverse effect on demand for
our products and services and on our financial condition and results of operations.
In
addition, such retail sales of our branded solutions traditionally experience seasonal variability in demand with higher levels of demand in the first half of our fiscal year driven
by consumer spending in the back-to-school season from late summer to fall and the traditional holiday shopping season from fall to winter. Additionally, our ability to reach such consumers depends on
us maintaining effective working relationships with major retailers and distributors. Failure to anticipate consumer demand for
our branded solutions as well as an inability to maintain effective working relationships with retail and online distributors may adversely impact our future results of operations.
Our international sales and manufacturing operations subject us to risks related to disruptions in
foreign markets, currency exchange fluctuations, longer payment cycles, seasonality, limitations imposed by a variety of legal and regulatory regimes, potential adverse tax consequences, increased
costs, our customers' credit and access to capital, health-related risks, and access to personnel.
We have significant sales and manufacturing operations in foreign countries, including manufacturing facilities, sales personnel and
customer support operations. We have manufacturing facilities in China, Malaysia, Northern Ireland, Singapore and Thailand, in addition to those in the United States. A substantial portion of our
client compute disk drive assembly occurs in our facility in China.
Our
international operations are subject to economic risks inherent in doing business in foreign countries, including the following:
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Disruptions in Foreign Markets.
Disruptions in financial
markets and the deterioration of the underlying economic conditions in the past in some countries, including those in Asia, United Kingdom and the European Union have had an impact on our sales to
customers located in, or whose end-user customers are located in, these countries.
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Fluctuations in Currency Exchange Rates.
Prices for our
products are denominated predominately in U.S. dollars, even when sold to customers that are located outside the United States. An increase in the value of the dollar could increase the real cost to
our customers of our products in those markets outside of the U.S. where we sell in dollars. This could adversely impact our sales and market share in such areas or increase pressure on us to lower
our price, and adversely impact our profit margins. A weakened dollar could increase the cost of expenses such as payroll, utilities, tax, and marketing expenses, as well as overseas capital
expenditures. Any of these events could have a material adverse effect on our results of operations. We may attempt to manage the impact of foreign currency exchange rate changes by, among other
things, entering into foreign currency
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forward
exchange contracts. However, these contracts may not cover our full exposure and subject us to certain counterparty credit risks. See "Item 7A.Quantitative and Qualitative Disclosures
About Market Risk-Foreign Currency Exchange Risk" of this report for additional information about our foreign currency exchange risk.
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Longer Payment Cycles.
Our customers outside of the
United States are often allowed longer time periods for payment than our U.S. customers. This increases the risk of nonpayment due to the possibility that the financial condition of particular
customers may worsen during the course of the payment period.
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Seasonality.
Seasonal reductions in the business
activities of our customers during the summer months, particularly in Europe, typically result in lower earnings during those periods.
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Legal and Regulatory Limitations.
Our international
operations are affected by limitations on imports, tariffs, duties, currency exchange control regulations, price controls, export control laws, including the trade and economic sanctions administered
by the Office of Foreign Assets Control, and other restraints on trade. In addition, the governments of many countries, including China, Malaysia, Northern Ireland, Singapore and Thailand, in which we
have significant operating assets, have exercised and continue to exercise significant influence over many aspects of their domestic economies and international trade. Although we have implemented
policies and procedures designed to ensure compliance, there can be no assurance that our employees, contractors, or agents will not violate these or other applicable laws and regulations to which we
may be subject. Violations of these laws and regulations could lead to significant penalties, including restraints on our export or import privileges, monetary fines, criminal proceedings and
regulatory or other actions that could materially adversely affect our results of operations.
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Potential Adverse Tax Consequences.
Our international
operations create a risk of potential adverse tax consequences, including imposition of withholding or other taxes on payments by our subsidiaries. In addition, our taxable income in any jurisdiction
is dependent upon acceptance of our operational practices and intercompany transfer pricing by local tax authorities as being on an arm's length basis. Due to inconsistencies in application of the
arm's length standard among taxing authorities, as well as a lack of adequate treaty-based protection, transfer pricing challenges by tax authorities could, if successful, substantially increase our
income tax expense. We are subject to tax audits around the world, and are under audit in various jurisdictions, and such jurisdictions may assess additional income tax against us. Although we believe
our tax positions are reasonable, the final determination of tax audits could be materially different from our recorded income tax provisions and accruals. The ultimate results of an audit could have
a material adverse effect on our operating results or cash flows in the period or periods for which that determination is made and could result in increases to our overall tax expense in subsequent
periods. In light of the ongoing fiscal challenges many countries are facing, various levels of government are increasingly focused on tax reform and other legislative action to increase tax revenue.
In addition, the Organization for Economic Cooperation and Development's Base Erosion and Profit Shifting recommendations are reshaping international tax rules in numerous countries. These actual and
potential changes in the relevant tax laws applicable to corporate multinationals along with potential changes in accounting and other laws, regulations, administrative practices, principles, and
interpretations could increase the risk of double taxation, cause increased tax audit activity, and could impact our effective tax rate.
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Increased Costs.
The shipping and transportation costs
associated with our international operations are typically higher than those associated with our U.S. operations, resulting in decreased operating margins in some foreign countries.
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Credit and Access to Capital Risks.
Our international
customers could have reduced access to working capital due to higher interest rates, reduced bank lending resulting from contractions in the
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Access to Personnel.
There is substantial competition for qualified and capable personnel in certain jurisdictions in which we operate,
including
China, which may make it difficult for us to recruit and retain qualified employees in sufficient numbers. Increased difficulty in recruiting or retaining sufficient and adequate personnel in our
international operations may lead to increased manufacturing and employment compensation costs, which could adversely affect our results of operations.
We could suffer a loss of revenue and increased costs, exposure to significant liability,
reputational harm, and other serious negative consequences if we sustain cyber-attacks or other data security breaches that disrupt our operations or result in the dissemination of proprietary or
confidential information about us or our customers or other third-parties.
Our operations are dependent upon our ability to protect our computer equipment and the electronic data stored in our databases from
damage by, among other things, earthquake, fire, natural disasters, accidents, power disruptions, telecommunications failures, acts of terrorism or war, employee misconduct, physical or electronic
break-ins, cyber-attacks, or similar events or disruptions. We manage and store various proprietary information and sensitive or confidential data relating to our operations. In addition, our
outsourcing services and cloud computing businesses routinely process, store, and transmit large amounts of data for our customers and vendors, including sensitive and personally identifiable
information. As our operations become more automated and increasingly interdependent, our exposure to the risks posed by these types of events will increase. We have been, and will likely continue to
be, subject to computer viruses or other malicious codes, cyber-attacks, or other computer-related attempts to breach the information technology ("IT") systems we use for these purposes. We may also
be subject to IT system failures and network disruptions due to these factors. Experienced computer programmers and hackers may be able to penetrate our network security and misappropriate or
compromise our confidential information or that of third-parties, create system disruptions, or cause shutdowns. Computer programmers and hackers also may be able to develop and deploy viruses, worms,
and other malicious software programs that attack our products or otherwise exploit any security vulnerabilities of our products. In addition, sophisticated hardware and operating system software and
applications that we produce or procure from third-parties may contain defects in design or manufacture, including "bugs" and other problems that could unexpectedly interfere with the operation of the
system.
The
costs to us to eliminate or address the foregoing security problems and security vulnerabilities before or after a cyber-incident could be significant. System redundancy may be
ineffective or
inadequate, and our disaster recovery planning may not be sufficient for all eventualities. Our remediation efforts may not be successful and could result in interruptions, delays, or cessation of
service, and loss of existing or potential customers that may impede our sales, manufacturing, distribution, or other critical functions. We could lose existing or potential customers for outsourcing
services or other IT solutions in connection with any actual or perceived security vulnerabilities in our products. In addition, breaches of our security measures and the unapproved dissemination of
proprietary information or sensitive or confidential data about us or our customers or other third-parties, could expose us, our vendors and customers, or other third-parties affected to a risk of
loss or misuse of this information, result in litigation and potential liability for us, damage our brand and reputation, or otherwise harm our business. In addition, we rely in certain limited
capacities on third-party data management providers whose possible security problems and security vulnerabilities may have similar effects on us.
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We are subject to laws, rules, and regulations in the U.S. and other countries relating to the collection, use, and security of user data. In many cases, these
laws apply not only to third-party transactions, but also to transfers of information between us and our subsidiaries, and among us, our subsidiaries and other parties with which we have commercial
relations. Our ability to execute transactions and to possess and use personal information and data in conducting our business subjects us to legislative and regulatory burdens that may require us to
notify vendors, customers or employees of a data security breach. We have incurred, and will continue to incur, significant expenses to comply with mandatory privacy and security standards and
protocols imposed by law, regulation, industry standards, or contractual obligations. These laws, protocols and standards continue to develop and may be inconsistent from jurisdiction to jurisdiction.
Complying with emerging and changing international requirements may cause us to incur substantial costs or require us to change our business practices. If we fail to comply with applicable federal,
state or international privacy-related or data protection laws we may be subject to proceedings by governmental entities and incur penalties or significant legal liability.
If we do not control our fixed costs, we will not be able to compete effectively in our industry.
We continually seek to make our cost structure and business processes more efficient. We are focused on increasing workforce
flexibility and scalability, and improving overall competitiveness by leveraging our global capabilities, as well as external talent and skills, worldwide. Our strategy involves, to a substantial
degree, increasing revenue and product volume while at the same time controlling operating expenses. If we do not control our operating expenses, our ability to compete in the marketplace may be
impaired. In the past, activities to reduce operating costs have included closures and transfers of facilities, significant personnel reductions and efforts to increase automation.
If we experience shortages or delays in the receipt of, or cost increases in, critical components,
equipment or raw materials necessary to manufacture our products, we may suffer lower operating margins, production delays and other material adverse effects.
The cost, quality and supply of components, subassemblies, certain equipment and raw materials used to manufacture our products and key
components like recording media and heads are critical to our success. The equipment we use to manufacture our products and components is frequently custom made and comes from a few suppliers and the
lead times required to obtain manufacturing equipment can be significant. Particularly important for our products include read/write heads, aluminum or glass substrates for recording media, ASICs,
spindle motors, printed circuit boards, and suspension assemblies.
We
rely on sole suppliers or a limited number of suppliers for some of these components that we do not manufacture, including aluminum and glass substrates, read/write heads, ASICs,
spindle motors, printed circuit boards, and suspension assemblies. Many of such component suppliers are geographically concentrated, in particular, in Thailand, which makes our supply chain more
vulnerable to regional disruptions such as the severe flooding in Thailand in October 2011, which had a material impact on the production and availability of many components. If our vendors for these
components are unable to meet our cost, quality, and supply requirements, we could experience a shortage in supply or an increase in production costs, which would adversely affect our results of
operations.
Certain
rare earth elements are critical in the manufacture of our products. We purchase components that contain rare earth elements from a number of countries, including the People's
Republic of China. We cannot predict whether any nation will impose regulations, quotas or embargoes upon the rare earth elements incorporated into our products that would restrict the worldwide
supply of such metals or increase their cost. We have experienced increased costs and production delays when we were unable to obtain the necessary equipment or sufficient quantities of some
components, and/or have been forced to pay higher prices or make volume purchase commitments or advance deposits for some components, equipment or raw materials that were in short supply in the
industry in general. If any
major supplier were to restrict the supply available to us or increase the cost of the rare earth elements used in our products, we
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could
experience a shortage in supply or an increase in production costs, which would adversely affect our results of operations.
Consolidation
among component manufacturers has resulted and may continue to result in some component manufacturers exiting the industry or not making sufficient investments in research
to develop new components.
If
there is a shortage of, or delay in supplying us with, critical components, equipment or raw materials, then:
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it is likely that our suppliers would raise their prices and, if we could not pass these price increases to our customers, our
operating margin would decline;
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-
we might have to reengineer some products, which would likely cause production and shipment delays, make the reengineered products
more costly and provide us with a lower rate of return on these products;
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-
we would likely have to allocate the components we receive to certain of our products and ship less of others, which could reduce our
revenues and could cause us to lose sales to customers who could purchase more of their required products from manufacturers that either did not experience these shortages or delays or that made
different allocations; and
-
-
we might be late in shipping products, causing potential customers to make purchases from our competitors, thus causing our revenue
and operating margin to decline.
We
cannot assure you that we will be able to obtain critical components in a timely and economic manner.
We
often aim to lead the market in new technology deployments and leverage unique and customized technology from single source suppliers who are early adopters in the emerging market.
Our options in supplier selection in these cases are limited and the supplier based technology may consequently be single sourced until wider adoption of the technology occurs and any necessary
licenses become available. In such cases any technical issues in the supplier's technology may cause us to delay shipments of our new technology deployments and therefore harm our financial position.
If revenues fall or customer demand decreases significantly, we may not meet all of our purchase
commitments to certain suppliers.
From time to time, we enter into long-term, non-cancelable purchase commitments or make large up-front investments with certain
suppliers in order to secure certain components or technologies for the production of our products or to supplement our internal manufacturing capacity for certain components. If our actual revenues
in the future are lower than our projections or if customer demand decreases significantly below our projections, we may not meet all of our purchase commitments with these suppliers. As a result, it
is possible that our revenues will not be sufficient to recoup our up-front investments, in which case we will have to shift output from our internal manufacturing facilities to these suppliers or
make penalty-type payments under these contracts.
Conflict minerals regulations may cause us to incur additional expenses and could limit the supply
and increase the cost of certain metals used in manufacturing our products.
In August 2012, the SEC adopted rules establishing additional disclosure and reporting requirements regarding the use of specified
minerals, or conflict minerals, that are necessary to the functionality or production of products manufactured or contracted to be manufactured. These rules will require us to determine, disclose and
report whether or not such conflict minerals originate from the Democratic Republic of the Congo or an adjoining country. The most recent report was filed on May 27, 2016. These rules could
affect our ability to source certain materials used in our products at competitive prices and
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could
impact the availability of certain minerals used in the manufacture of our products, including gold, tantalum, tin and tungsten. As there may be only a limited number of suppliers of "conflict
free" minerals, we cannot be sure that we will be able to obtain necessary conflict free minerals in sufficient quantities or at competitive prices. Our customers, including our OEM customers, may
require that our products be free of conflict minerals, and our revenues and margins may be harmed if we are unable to procure conflict free minerals at a reasonable price, or at all, or are unable to
pass through any increased costs associated with meeting these demands. Additionally, we may face reputational challenges with our customers and other stakeholders if we are unable to sufficiently
verify the origins of all minerals used in our products through the due diligence procedures that we implement. We may also face challenges with government regulators and our customers and suppliers
if we are unable to sufficiently verify that the metals used in our products are conflict free. We expect that there may be material costs associated with complying with the disclosure requirements,
such as costs related to determining the source of certain minerals used in our products, as well as costs related to possible changes to products, processes, or sources of supply as a consequence of
such verification and disclosure requirements.
The loss of key executive officers and employees could negatively impact our business prospects.
Our future performance depends to a significant degree upon the continued service of key members of management as well as marketing,
sales and product development personnel. The loss of one or more of our key personnel may have a material adverse effect on our business, results of operations and financial condition. We believe our
future success will also depend in large part upon our ability to attract, retain and further motivate highly skilled management, marketing, sales and product development personnel. We have
experienced intense competition for personnel, and we cannot assure you that we will be able to retain our key employees or that we will be successful in attracting, assimilating and retaining
personnel in the future.
Due to the complexity of our products, some defects may only become detectable after deployment.
Our products are highly complex and are designed to operate in and form part of larger complex networks and storage systems. Defects in
our products, or in the networks and systems of which they form a part, directly or indirectly, have resulted in and may in the future result in:
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increased costs and product delays until complex solution level interoperability issues are resolved;
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costs associated with the remediation of any problems attributable to our products;
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loss of or delays in revenues;
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loss of customers;
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failure to achieve market acceptance and loss of market share;
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increased service and warranty costs; and
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increased insurance costs.
Defects
in our products could also result in legal actions by our customers for property damage, injury or death. Product liability claims could exceed the level of insurance coverage
that we have obtained to cover defects in our products. Any significant uninsured claims could significantly harm our financial condition.
Political events, war, terrorism, natural disasters, public health issues and other circumstances
could materially adversely affect our results of operations and financial condition.
War, terrorism, geopolitical uncertainties, natural disasters, public health issues, and other business interruptions have caused and
could cause damage or disruption to international commerce and the global
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economy,
and thus could have a strong negative effect on our business, our suppliers, logistics providers, manufacturing vendors and customers. Our business operations are subject to interruption by
natural disasters such as floods and earthquakes, fire, power shortages, terrorist attacks, other hostile acts, labor disputes, public health issues, and other events beyond our control. Such events
could decrease demand for our products, make it difficult or impossible for us to make and deliver products to our customers, or to receive components from our suppliers, and create delays and
inefficiencies in our supply chain. In the event of a natural disaster, losses and significant recovery time could be required to resume operations and our financial condition and operating results
could be materially adversely affected. Should major public health issues, including pandemics, arise, we could be negatively affected by stringent employee travel restrictions, additional limitations
in freight services, governmental actions limiting the movement of products between regions, delays in production ramps of new products, and disruptions in our operations and some of our key
customers.
Macroeconomic
developments like the withdrawal of United Kingdom from the European Union, the debt crisis in certain countries in the European Union and slowing economies in parts of
Asia and South America could negatively affect our business, operating results or financial condition which, in turn, could adversely affect our stock price. A general weakening of, and related
declining corporate confidence in, the global economy or the curtailment in government or corporate spending could cause current or potential customers to reduce their IT budgets or be unable to fund
hardware systems, which could cause customers to delay, decrease or cancel purchases of our products or cause customers not to pay us or to delay paying us for previously purchased products and
services.
Failure to comply with applicable environmental laws and regulations could have a material adverse
effect on our business, results of operations and financial condition.
The sale and manufacturing of products in certain states and countries may subject us and our suppliers to state, federal and
international laws and regulations governing protection of the environment, including those governing discharges of pollutants into the air and water, the management and disposal of hazardous
substances and wastes, the cleanup of contaminated sites, restrictions on the presence of certain substances in electronic products and the responsibility for environmentally safe disposal or
recycling. We endeavor to ensure that we and our suppliers comply with all applicable environmental laws and regulations, however, compliance may increase our operating costs and otherwise impact
future financial results. If additional or more stringent requirements are imposed on us in the future, we could incur additional operating costs and capital expenditures. If we fail to comply with
applicable environmental laws, regulations, initiatives, or standards of conduct, our customers may refuse to purchase our products and we could be subject to fines, penalties and possible prohibition
of sales of our products into one or more states or countries, liability to our customers and damage to our reputation, which could result in a material adverse effect on the financial condition or
results of operations.
Any cost reduction initiatives that we undertake may not deliver the results we expect, and these
actions may adversely affect our business.
On June 27, 2016 and July 11, 2016 we announced restructuring plans to be substantially completed by the end of fiscal
year 2017. In addition, management will continue to evaluate our global footprint and cost structure, and additional restructuring plans are expected to be formalized. As a result of our
restructuring, we may experience a loss of continuity, loss of accumulated knowledge, disruptions to our operations and/or inefficiency during transitional periods. Any cost-cutting measures could
impact employee retention. In addition, we cannot be sure that the cost reduction and global footprint consolidation will be successful in reducing our overall expenses as we expect or that additional
costs will not offset any such reductions or global footprint consolidation. If our operating costs are higher than we expect or if we do not maintain adequate control of our costs and expenses, our
result of operations may suffer.
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Our ability to use our net operating loss and tax credit carryforwards might be limited.
The use of a portion of our U.S. net operating loss and tax credit carryforwards is subject to annual limitations pursuant to U.S. tax
law. Section 382 of the U.S. Internal Revenue Code generally imposes an annual limitation on the amount of net operating loss or tax credit carryforwards that might be used to offset taxable
income when a corporation has undergone significant changes in ownership. As a result, future changes in ownership could put further limitations on the availability of our net operating loss or tax
credit carryforwards.
Deterioration in global credit and financial market conditions could negatively impact the value of
our current portfolio of cash equivalents or short-term investments and our ability to meet our financing objectives.
Our cash and cash equivalents are maintained in highly liquid investments with remaining maturities of 90 days or less at the
time of purchase. Our short-term investments consist primarily of readily marketable debt securities with remaining maturities of more than 90 days at the time of purchase. Our investment
policy has as its principal objectives the preservation of principal and maintenance of liquidity. We mitigate default risk by investing in high-quality investment grade securities, limiting the time
to maturity and by monitoring the counter-parties and underlying obligors closely.
While
as of the date of this filing, we are not aware of any material downgrades, losses, or other significant deterioration in the fair value of our cash equivalents or short-term
investments, no assurance can be given that future deterioration in conditions of the global credit and financial markets would not negatively impact our current portfolio of cash equivalents or
short-term investments or our ability to meet our financing objectives.
We are at times subject to intellectual property legal proceedings and claims which could cause us
to incur significant additional costs or prevent us from selling our products, and which could adversely affect our results of operations and financial condition.
We are subject from time-to-time to legal proceedings and claims, including claims of alleged infringement of the patents, trademarks
and other intellectual property rights of third parties by us, or our customers, in connection with their use of our products. Intellectual property litigation can be expensive and time-consuming,
regardless of the merits of any claim, and could divert our management's attention from operating our business. In addition, intellectual property lawsuits are subject to inherent uncertainties due to
the complexity of the technical issues involved,
which may cause actual results to differ materially from our expectations. Patent litigation has increased due to the current uncertainty of the law and the increasing competition and overlap of
product functionality in the field. Some of the actions that we face from time-to-time seek injunctions against the sale of our products and/or substantial monetary damages, which if granted or
awarded, could materially harm our business, financial condition and operating results.
We
cannot be certain that our products do not and will not infringe issued patents or other intellectual property rights of others. We may not be aware of currently filed patent
applications that relate to our products or technology. If patents are later issued on these applications, we may be liable for infringement. If our products were found to infringe the intellectual
property rights of others, we could be required to pay substantial damages, cease the manufacture, use and sale of infringing products in one or more geographic locations, expend significant resources
to develop non-infringing technology, discontinue the use of specific processes or obtain licenses to the technology infringed. We might not be able to obtain the necessary licenses on acceptable
terms, or at all, or be able to reengineer our products successfully to avoid infringement. Any of the foregoing could cause us to incur significant costs and prevent us from selling our products,
which could adversely affect our results of operations and financial condition. See "Item 8. Financial Statements and Supplementary Data-Note 14. Legal, Environmental and Other
Contingencies" contained in this report for a description of pending intellectual property proceedings.
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We may be unable to protect our intellectual property rights, which could adversely affect our
business, financial condition and results of operations.
We rely on a combination of patent, trademark, copyright and trade secret laws, confidentiality procedures and licensing arrangements
to protect our IP rights. In the past, we have been involved in significant and expensive disputes regarding our IP rights and those of others, including claims that we may be infringing patents,
trademarks and other IP rights of third-parties. We expect that we will be involved in similar disputes in the future.
There
can be no assurance that:
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any of our existing patents will continue to be held valid, if challenged;
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-
patents will be issued for any of our pending applications;
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-
any claims allowed from existing or pending patents will have sufficient scope or strength to protect us;
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-
our patents will be issued in the primary countries where our products are sold in order to protect our rights and potential
commercial advantage;
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we will be able to protect our trade secrets and other proprietary information through confidentiality agreements with our customers,
suppliers and employees and through other security measures; and
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others will not gain access to our trade secrets.
In
addition, our competitors may be able to design their products around our patents and other proprietary rights. Enforcement of our rights often requires litigation. If we bring a
patent infringement action and are not successful, our competitors would be able to use similar technology to compete with us. Moreover, the defendant in such an action may successfully countersue us
for infringement of their patents or assert a counterclaim that our patents are invalid or unenforceable.
Furthermore,
we have significant operations and sales in foreign countries where intellectual property laws and enforcement policies are often less developed, less stringent or more
difficult to enforce than in the United States.
We may not be able to identify suitable strategic alliances, acquisitions, joint ventures or
investment opportunities, to successfully acquire and integrate companies that provide complementary products or technologies or to realize the anticipated benefits of such transactions.
Our growth strategy involves pursuing strategic alliances with, making acquisitions of, forming joint ventures with or making
investments in other companies that are complementary to our business. There is substantial competition for attractive strategic alliance, acquisition, joint venture and investment candidates.
Accordingly, we may not be able to identify suitable strategic alliances, acquisition, joint venture, or investment candidates. Even if we can identify them, we cannot assure you that we will be able
to partner with, acquire or invest in suitable candidates, or integrate acquired technologies or operations successfully into our existing technologies and operations. Moreover, our ability to finance
potential strategic alliances, acquisitions, joint ventures or investments will be limited by our high degree of leverage, the covenants contained in the instruments that govern our outstanding
indebtedness, and any agreements governing any other debt we may incur.
If
we are successful in forming strategic alliances or acquiring, forming joint ventures or making investments in other companies, any of these transactions may have an adverse effect on
our results of operations, particularly while the operations of an acquired business are being integrated. It is also likely that integration of acquired companies would lead to the loss of key
employees from those companies or the loss of customers of those companies. In addition, the integration of any acquired companies would
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require
substantial attention from our senior management, which may limit the amount of time available to be devoted to our day-to-day operations or to the execution of our strategy. Growth by
strategic alliance, acquisition, joint venture or investment involves an even higher degree of risk to the extent we combine new product offerings and enter new markets in which we have limited
experience, and no assurance can be given that acquisitions of entities with new or alternative business models will be successfully integrated or achieve their stated objectives. There can be no
assurance that we will realize the anticipated benefits of any strategic alliance, acquisition, joint venture or investment that we make or, if we do, how long it will take to achieve such benefits.
Furthermore,
the expansion of our business involves the risk that we might not manage our growth effectively, that we would incur additional debt to finance these acquisitions or
investments, that we may have impairment of goodwill or acquired intangible assets associated with these acquisitions and that we would incur substantial charges relating to the write-off of
in-process research and development, similar to that which we incurred in connection with several of our prior acquisitions.
Each of these items could have a material adverse effect on our financial condition and results of operations.
In
addition, we could issue additional ordinary shares in connection with future strategic alliances, acquisitions, joint ventures or investments. Issuing shares in connection with such
transactions would have the effect of diluting your ownership percentage of the ordinary shares and could cause the price of our ordinary shares to decline.
Servicing our indebtedness requires a significant amount of cash, and we may not have sufficient
cash flow from our business to pay our substantial debt.
We are leveraged and have significant debt service obligations. Our significant debt and debt service requirements could adversely
affect our ability to operate our business and may limit our ability to take advantage of potential business opportunities. For example, our high level of debt presents the following
risks:
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we are required to use a substantial portion of our cash flow from operations to pay principal and interest on our debt, thereby
reducing the availability of our cash flow to fund working capital, capital expenditures, product development efforts, strategic acquisitions, investments and alliances, and other general corporate
requirements;
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-
our substantial leverage increases our vulnerability to economic downturns and adverse competitive and industry conditions and could
place us at a competitive disadvantage compared to those of our competitors that are less leveraged;
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-
our debt service obligations could limit our flexibility in planning for, or reacting to, changes in our business and our industry and
could limit our ability to pursue other business opportunities, borrow more money for operations or capital in the future and implement our business strategies;
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our level of debt may restrict us from raising additional financing on satisfactory terms to fund working capital, capital
expenditures, product development efforts, strategic acquisitions, investments and alliances, and other general corporate requirements; and
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-
covenants in our debt instruments limit our ability to pay future dividends or make other restricted payments and investments.
In
the event that we need to refinance all or a portion of our outstanding debt as it matures, we may not be able to obtain terms as favorable as the terms of our existing debt or
refinance our existing debt at all. If prevailing interest rates or other factors existing at the time of refinancing result in higher interest rates upon refinancing, then the interest expense
relating to the refinanced debt would increase. Furthermore, if any rating agency changes our credit rating or outlook, our debt and equity securities could
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be
negatively affected, which could adversely affect our ability to refinance existing debt or raise additional capital.
In
addition, our business may not generate cash flow in an amount sufficient to enable us to pay the principal of, or interest on, our indebtedness or to fund our other liquidity needs,
including working capital, capital expenditures, product development efforts, strategic acquisitions, investments and alliances and other general corporate requirements.
Our
ability to generate cash is subject to general economic, financial, competitive, legislative, regulatory and other factors that are beyond our control. We cannot assure you
that:
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-
our business will generate sufficient cash flow from operations;
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-
we will continue to realize the cost savings, revenue growth and operating improvements that result from the execution of our
long-term strategic plan; or
-
-
future sources of funding will be available to us in amounts sufficient to enable us to fund our liquidity needs.
If
we cannot fund our liquidity needs, we will have to take actions such as reducing or delaying capital expenditures, product development efforts, strategic acquisitions, investments
and alliances, and other general corporate requirements. We cannot assure you that any of these remedies could, if necessary, be effected on commercially reasonable terms, or at all, or that they
would permit us to meet our scheduled debt service obligations. In addition if we incur additional debt, the risks associated with our substantial leverage, including the risk that we will be unable
to service our debt or generate enough cash flow to fund our liquidity needs, could intensify.
The price of our ordinary shares may be volatile and could decline significantly.
The stock market, in general, and the market for technology stocks in particular, has recently experienced volatility that has often
been unrelated to the operating performance of companies. If these market or industry-based fluctuations continue, the trading price of our ordinary shares could decline significantly independent of
our actual operating performance, and you could lose all or a substantial part of your investment. The market price of our ordinary shares could fluctuate significantly in response to several factors,
including among others:
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-
general uncertainty in stock market conditions occasioned by global economic conditions, negative financial news and the continued
instability of several large financial institutions;
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actual or anticipated variations in our results of operations;
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announcements of innovations, new products or significant price reductions by us or our competitors, including those competitors who
offer alternative storage technology solutions;
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our failure to meet the performance estimates of investment research analysts;
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the timing of announcements by us or our competitors of significant contracts or acquisitions;
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general stock market conditions;
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the occurrence of major catastrophic events;
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changes in financial estimates by investment research analysts;
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changes in the credit ratings of our indebtedness by rating agencies; and
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the sale of our ordinary shares held by certain equity investors or members of management.
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Any decision to reduce or discontinue the payment of cash dividends to our shareholders or the
repurchase of our ordinary shares pursuant to our previously announced share repurchase program could cause the market price of our ordinary shares to decline significantly.
Although we have announced targeted regular cash dividend amounts and a share repurchase program, we are under no obligation to pay
cash dividends to our shareholders in the future at the announced targeted levels or at all or to repurchase our ordinary shares at any particular price or at all. The declaration and payment of any
future dividends is at the discretion of our Board of Directors and our previously announced share repurchase program may be suspended or discontinued at any time. Our payment of quarterly cash
dividends and the repurchase of our ordinary shares pursuant to our share repurchase program are subject to, among other things, our financial position and results of operations, available cash and
cash flow, capital and regulatory requirements, market and economic conditions, our ordinary share price, and other factors. Any reduction or discontinuance by us of the payment of quarterly cash
dividends or the repurchase of our ordinary shares pursuant to our share repurchase program could cause the market price of our ordinary shares to decline significantly. Moreover, in the event our
payment of quarterly cash dividends or repurchases of our ordinary shares are reduced or discontinued, our failure to resume such activities at historical levels could result in a persistent lower
market valuation of our ordinary shares.
Significant fluctuations in the market price of our ordinary shares could result in securities class
action claims against us.
Significant price and value fluctuations have occurred with respect to the publicly traded securities of technology companies. The
price of our ordinary shares is likely to be volatile in the future. In the past, following periods of decline in the market price of a company's securities, class action lawsuits have often been
pursued against that company. If similar litigation were pursued against us, it could result in substantial costs and a diversion of management's attention and resources, which could materially
adversely affect our results of operations, financial condition and liquidity.