The information as of June 30, 2017 was derived from the Companys audited Consolidated Balance
Sheet as of June 30, 2017.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1.
|
Basis of Presentation and Summary of Significant Accounting Policies
|
Organization
Seagate Technology plc (the Company) is a leading provider of data storage technology and solutions. Its principal
products are hard disk drives, commonly referred to as disk drives, hard drives or HDDs. In addition to HDDs, the Company produces a broad range of data storage products including solid state drives (SSD) and their related controllers,
solid state hybrid drives (SSHD) and storage subsystems.
Hard disk drives are devices that store digitally
encoded data on rapidly rotating disks with magnetic surfaces. Disk drives continue to be the primary medium of mass data storage due to their performance attributes, high quality and cost effectiveness. Complementing existing data center storage
architecture, solid-state storage devices use integrated circuit assemblies as memory to store data with most SSDs using 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.
The Companys products
are designed for mission critical and nearline applications in enterprise servers and storage systems; edge / client compute applications, where its products are designed primarily for desktop and mobile computing; and edge /
client non-compute
applications, where its products are designed for a wide variety of end user devices such as portable external storage systems, surveillance systems, network-attached storage
(NAS), digital video recorders (DVRs) and gaming consoles.
The Companys cloud systems and
solutions extend innovation from the device into the information infrastructure, onsite and in the cloud. Its portfolio includes modular original equipment manufacturers (OEM) storage systems
and scale-out storage
servers.
Basis of Presentation and Consolidation
The unaudited condensed consolidated financial statements include the accounts of the Company and all its wholly-owned and
majority-owned subsidiaries, after elimination of intercompany transactions and balances.
The preparation of financial
statements in accordance with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the Companys condensed consolidated financial statements and accompanying
notes. Actual results could differ materially from those estimates. The methods, estimates and judgments the Company uses in applying its most critical accounting policies have a significant impact on the results the Company reports in its condensed
consolidated financial statements. The condensed consolidated financial statements reflect, in the opinion of management, all material adjustments necessary to present fairly the condensed consolidated financial position, results of operations,
comprehensive income, cash flows and shareholders equity for the periods presented. Such adjustments are of a normal and recurring nature. Certain prior period amounts in the condensed consolidated financial statements and notes to the
condensed consolidated financial statements have been reclassified to conform to the current periods presentation.
The Companys Consolidated Financial Statements for the fiscal year ended June 30, 2017, are included in its Annual
Report on
Form 10-K
as filed with the United States Securities and Exchange Commission (SEC) on August 4, 2017. The Company believes that the disclosures included in the unaudited
condensed consolidated financial statements, when read in conjunction with its Consolidated Financial Statements as of June 30, 2017, and the notes thereto, are adequate to make the information presented not misleading.
The results of operations for the three months ended September 29, 2017, are not necessarily indicative of the results of
operations to be expected for any subsequent interim period in the Companys fiscal year ending June 29, 2018. The Company operates and reports financial results on a fiscal year of 52 or 53 weeks ending on the Friday closest to
June 30. Both the three months ended September 29, 2017 and September 30, 2016 consisted of 13 weeks. Fiscal year 2018 will be comprised of 52 weeks and will end on June 29, 2018. The fiscal quarters ended September 29,
2017, June 30, 2017, and September 30, 2016, are also referred to herein as the September 2017 quarter, the June 2017 quarter, and the September 2016 quarter, respectively.
Summary of Significant Accounting Policies
There have been no significant changes in the Companys significant accounting policies. Please refer to Note 1 of
Financial Statements and Supplementary Data contained in Part II, Item 8 of the Companys Annual Report on
Form 10-K
for the fiscal year ended June 30, 2017, as filed
with the SEC on August 4, 2017 for a discussion of the Companys other significant accounting policies.
9
Recently Issued Accounting Pronouncements
In May 2014, August 2015, April 2016, May 2016 and December 2016, the Financial Accounting Standards Board (FASB)
issued
ASU 2014-09 (ASC
Topic 606)
, Revenue from Contracts with Customers,
ASU 2015-14 (ASC
Topic 606)
Revenue from
Contracts with Customers, Deferral of the Effective Date,
ASU 2016-10 (ASC
Topic 606)
Revenue from Contracts with Customers, Identifying Performance Obligations and
Licensing
,
ASU 2016-12 (ASC
Topic 606)
Revenue from Contracts with Customers, Narrow-Scope Improvements and Practical Expedients,
and
ASU 2016-20 (ASC
Topic 606)
Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers
,
respectively.
ASC Topic 606 outlines a
single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. It also requires entities to disclose both
quantitative and qualitative information that enable financial statements users to understand the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. The Company is required to adopt the guidance
in the first quarter of fiscal 2019. This standard may be applied retrospectively to all prior periods presented, or retrospectively with a cumulative adjustment to retained earnings in the year of adoption (modified retrospective transition
approach). Based on its assessment, the Company plans to adopt the new revenue standard in the first quarter of fiscal 2019, utilizing the modified retrospective method of transition. While management has not yet completed its assessment
of the impact of adopting this new standard on the Companys consolidated financial statements, the Company expects the adoption of the new standard will result in the recognition of revenues generally upon
shipment (sell-in basis)
for sales of products to certain direct retail customers and customers in certain indirect retail channels which are currently being recognized on a sell-through basis.
Accordingly, the Company will need to estimate variable consideration (e.g. rebates) related to customer incentives on these arrangements. These changes are not expected to have a material impact on the Companys condensed consolidated
financial statements.
In January 2016, the FASB issued
ASU 2016-01 (ASC
Subtopic 825-10),
Financial InstrumentsOverall Recognition and Measurement of Financial Assets and Financial Liabilities.
The amendments in this ASU require entities to
measure all investments in equity securities at fair value with changes recognized through net income. This requirement does not apply to investments that qualify for the equity method of accounting, to those that result in consolidation of the
investee, or for which the entity meets a practicability exception to fair value measurement. Additionally, the amendments eliminate certain disclosure requirements related to financial instruments measured at amortized cost and add disclosures
related to the measurement categories of financial assets and financial liabilities. The Company is required to adopt the guidance in the first quarter of fiscal 2019. Early adoption is permitted for only certain portions of the ASU. The Company is
in the process of assessing the impact of this ASU on its condensed consolidated financial statements.
In February 2016,
the FASB issued
ASU 2016-02 (ASC
Topic 842),
Leases
. The ASU amends a number of aspects of lease accounting, including requiring lessees to recognize operating leases with a term greater
than one year on their balance sheet as
a right-of-use
asset and corresponding lease liability, measured at the present value of the lease payments. The Company is
required to adopt the guidance in the first quarter of fiscal 2020. Early adoption is permitted. The Company is in the process of assessing the impact of this ASU on its condensed consolidated financial statements.
In January 2017, the FASB issued
ASU 2017-01 (ASC
Topic
805),
Business Combination: Clarifying the Definition of a Business
. The amendments in this ASU change the definition of a business to assist with evaluating when a set of transferred assets and activities is a business. The Company is
required to adopt the guidance in the first quarter of fiscal 2019. Early adoption is permitted. The Company is in the process of assessing the impact of this ASU on its condensed consolidated financial statements.
In May 2017, the FASB issued
ASU 2017-09 (ASC
Topic 718),
Stock
Compensation: Scope of Modification Accounting
. The amendments in this ASU provide guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting. The Company is required
to adopt the guidance in the first quarter of fiscal 2019. Early adoption is permitted. The Company is in the process of assessing the impact of this ASU on its condensed consolidated financial statements.
Recently Adopted Accounting Pronouncements
In July 2015, the FASB issued
ASU 2015-11 (ASC
Topic
330),
Inventory: Simplifying the Measurement of Inventory.
The amendments in this ASU require inventory measurement at the lower of cost and net realizable value. This ASU became effective and was adopted by the Company in
the September 2017 quarter on a prospective basis. The adoption of this guidance had no material impact on the Companys condensed consolidated financial statements and disclosures.
10
In March 2016, the FASB issued
ASU 2016-09 (ASC
Topic 718
), Stock CompensationImprovements to Employee Share-Based Payment Accounting.
The amendments in this ASU are intended to simplify several areas of
accounting for share-based compensation arrangements, including the income tax consequences, classification on the consolidated statement of cash flows and treatment of forfeitures. This ASU became effective and was adopted by the Company in the
September 2017 quarter. Upon adoption, excess tax benefits or deficiencies from share-based award activity are reflected in the condensed consolidated statements of operations as a component of the provision for income taxes, whereas they previously
were recognized in the Shareholders equity in the condensed consolidated balance sheets. The Company also elected to continue to account for share-based compensation expense net of estimated forfeitures. The adoption of this ASU resulted in an
increase in deferred tax assets relating to net operating losses of approximately $0.6 billion, offset by an equivalent increase in the valuation allowance with no impact to retained earnings. The adoption of this guidance had no material
impact on the Companys condensed consolidated financial statements and disclosures.
In October 2016, the FASB
issued
ASU 2016-16 (ASC
Topic 740),
Income Taxes: Intra-Entity Transfers of Assets Other Than Inventory
. The amendments in this ASU require the recognition of the income tax consequences
for intra-entity transfers of assets other than inventory when the transfer occurs. The Company elected to adopt this ASU in the September 2017 quarter on a modified retrospective basis with no material impact on the Companys condensed
consolidated financial statements and disclosures.
2.
|
Balance Sheet Information
|
Investments
The following table summarizes, by major type, the fair value and amortized cost of the Companys investments as of
September 29, 2017:
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in millions)
|
|
Amortized
Cost
|
|
|
Unrealized
Gain/(Loss)
|
|
|
Fair
Value
|
|
Available-for-sale
securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market funds
|
|
$
|
623
|
|
|
$
|
|
|
|
$
|
623
|
|
Time deposits and certificates of deposit
|
|
|
207
|
|
|
|
|
|
|
|
207
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
830
|
|
|
$
|
|
|
|
$
|
830
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Included in Cash and cash equivalents
|
|
|
|
|
|
|
|
|
|
$
|
826
|
|
Included in Other current assets
|
|
|
|
|
|
|
|
|
|
|
4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
$
|
830
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 29, 2017, the Companys Other current assets included
$4 million in restricted cash and investments held as collateral at banks for various performance obligations.
As of
September 29, 2017, the Company had no material
available-for-sale
securities that had been in a continuous unrealized loss position for a period greater than 12
months. The Company determined that no
available-for-sale
securities were other-than-temporarily impaired as of September 29, 2017.
The fair value and amortized cost of the Companys investments classified as
available-for-sale
as of September 29, 2017, by remaining contractual maturity were as follows:
|
|
|
|
|
|
|
|
|
(Dollars in millions)
|
|
Amortized
Cost
|
|
|
Fair
Value
|
|
Due in less than 1 year
|
|
$
|
830
|
|
|
$
|
830
|
|
Due in 1 to 5 years
|
|
|
|
|
|
|
|
|
Due in 6 to 10 years
|
|
|
|
|
|
|
|
|
Thereafter
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
830
|
|
|
$
|
830
|
|
|
|
|
|
|
|
|
|
|
11
The following table summarizes, by major type, the fair value and amortized cost
of the Companys investments as of June 30, 2017:
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in millions)
|
|
Amortized
Cost
|
|
|
Unrealized
Gain/(Loss)
|
|
|
Fair
Value
|
|
Available-for-sale
securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market funds
|
|
$
|
594
|
|
|
$
|
|
|
|
$
|
594
|
|
Time deposits and certificates of deposit
|
|
|
584
|
|
|
|
|
|
|
|
584
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,178
|
|
|
$
|
|
|
|
$
|
1,178
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Included in Cash and cash equivalents
|
|
|
|
|
|
|
|
|
|
$
|
1,174
|
|
Included in Other current assets
|
|
|
|
|
|
|
|
|
|
|
4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
$
|
1,178
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of June 30, 2017, the Companys Other current assets included $4 million in
restricted cash and investments held as collateral at banks for various performance obligations.
As of June 30,
2017, the Company had no material
available-for-sale
securities that had been in a continuous unrealized loss position for a period greater than 12 months. The
Company determined no
available-for-sale
securities were other-than-temporarily impaired as of June 30, 2017.
Cash, Cash Equivalents, and Restricted Cash
The following table provides a summary of cash, cash equivalents, and restricted cash reported within the Condensed
Consolidated Balance Sheets that reconciles to the corresponding amount in the Condensed Consolidated Statements of Cash Flows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in millions)
|
|
September 29,
2017
|
|
|
June 30,
2017
|
|
|
September 30,
2016
|
|
|
July 1,
2016
|
|
Cash and cash equivalents
|
|
$
|
2,285
|
|
|
$
|
2,539
|
|
|
$
|
1,489
|
|
|
$
|
1,125
|
|
Restricted cash included in Other current assets
|
|
|
4
|
|
|
|
4
|
|
|
|
6
|
|
|
|
7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cash, cash equivalents, and restricted cash shown in the Statements of Cash Flows
|
|
$
|
2,289
|
|
|
$
|
2,543
|
|
|
$
|
1,495
|
|
|
$
|
1,132
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Inventories
The following table provides details of the inventory balance sheet item:
|
|
|
|
|
|
|
|
|
(Dollars in millions)
|
|
September 29,
2017
|
|
|
June 30,
2017
|
|
Raw materials and components
|
|
$
|
327
|
|
|
$
|
350
|
|
Work-in-process
|
|
|
275
|
|
|
|
257
|
|
Finished goods
|
|
|
412
|
|
|
|
375
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,014
|
|
|
$
|
982
|
|
|
|
|
|
|
|
|
|
|
Property, Equipment and Leasehold Improvements, net
The components of property, equipment and leasehold improvements, net, were as follows:
|
|
|
|
|
|
|
|
|
(Dollars in millions)
|
|
September 29,
2017
|
|
|
June 30,
2017
|
|
Property, equipment and leasehold improvements
|
|
$
|
9,529
|
|
|
$
|
9,633
|
|
Accumulated depreciation and amortization
|
|
|
(7,712)
|
|
|
|
(7,758)
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,817
|
|
|
$
|
1,875
|
|
|
|
|
|
|
|
|
|
|
12
Accrued Expenses
The following table provides details of the accrued expenses balance sheet item:
|
|
|
|
|
|
|
|
|
(Dollars in millions)
|
|
September 29,
2017
|
|
|
June 30,
2017
|
|
Dividends payable
|
|
$
|
182
|
|
|
$
|
184
|
|
Other accrued expenses
|
|
|
476
|
|
|
|
466
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
658
|
|
|
$
|
650
|
|
|
|
|
|
|
|
|
|
|
Accumulated Other Comprehensive Income (Loss) (AOCI)
The components of AOCI, net of tax, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in millions)
|
|
Unrealized
Gains (Losses)
on Cash Flow
Hedges
|
|
|
Unrealized
Gains (Losses)
on Marketable
Securities
|
|
|
Unrealized
Gains (Losses)
on Post-
Retirement
Plans
|
|
|
Foreign
Currency
Translation
Adjustments
|
|
|
Total
|
|
Balance at June 30, 2017
|
|
$
|
|
|
|
$
|
|
|
|
$
|
(5
|
)
|
|
$
|
(12
|
)
|
|
$
|
(17
|
)
|
Other comprehensive income (loss) before reclassifications
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4
|
|
|
|
4
|
|
Amounts reclassified from AOCI
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4
|
|
|
|
4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at September 29, 2017
|
|
$
|
|
|
|
$
|
|
|
|
$
|
(5
|
)
|
|
$
|
(8
|
)
|
|
$
|
(13
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at July 1, 2016
|
|
$
|
(1
|
)
|
|
$
|
|
|
|
$
|
(7
|
)
|
|
$
|
(17
|
)
|
|
$
|
(25
|
)
|
Other comprehensive income (loss) before reclassifications
|
|
|
(1
|
)
|
|
|
|
|
|
|
|
|
|
|
1
|
|
|
|
|
|
Amounts reclassified from AOCI
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at September 30, 2016
|
|
$
|
(1
|
)
|
|
$
|
|
|
|
$
|
(7
|
)
|
|
$
|
(16
|
)
|
|
$
|
(24
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-Term Borrowings
The credit agreement entered into by the Company and its subsidiary Seagate HDD Cayman on January 18, 2011 and
subsequently amended (the Revolving Credit Facility) provides the Company with a $700 million senior secured revolving credit facility. The term of the Revolving Credit Facility is through January 15, 2020, provided that if the
Company does not have Investment Grade Ratings (as defined in the Revolving Credit Facility) on August 15, 2018, then the maturity date will be August 16, 2018 unless certain extension conditions have been satisfied. The loans made under
the Revolving Credit Facility will bear interest at a rate of LIBOR plus a variable margin that will be determined based on the corporate credit rating of the Company. The Company and certain of its material subsidiaries fully and unconditionally
guarantee the Revolving Credit Facility. The Revolving Credit Facility is available for cash borrowings, subject to compliance with certain covenants and other customary conditions to borrowing, and for the issuance of letters of credit up to a
sub-limit
of $75 million.
The Revolving Credit Facility, as amended, includes
three financial covenants: (1) minimum cash, cash equivalents and marketable securities; (2) a fixed charge coverage ratio; and (3) a net leverage ratio. On April 27, 2016, the Revolving Credit Agreement was amended in order to
increase the allowable net leverage ratio to allow for higher net leverage levels. The Company was in compliance with the modified covenants as of September 29, 2017 and expects to be in compliance for the next 12 months.
As of September 29, 2017, no borrowings had been drawn or letters of credit utilized under the Revolving Credit Facility.
13
Long-Term Debt
$800
million Aggregate Principal Amount of 3.75% Senior Notes due November
2018 (the
2018 Notes).
The interest on the 2018 Notes is payable semi-annually on May 15 and November 15 of each year. The issuer under the 2018 Notes is Seagate HDD Cayman, and the obligations under the 2018 Notes are fully and
unconditionally guaranteed, on a senior unsecured basis, by the Company. During the September 2017 quarter, the Company repurchased $22 million aggregate principal amount of the 2018 Notes for cash at a premium to their principal amount, plus
accrued and unpaid interest. The Company recorded an immaterial loss on the repurchase during the three months ended September 29, 2017, which is included in Other, net on the Condensed Consolidated Statements of Operations.
$750
million Aggregate Principal Amount of 4.25% Senior Notes due March
2022 (the
2022 Notes)
. The interest on the 2022 Notes is payable semi-annually on March 1 and September 1 of each year. The issuer under the 2022 Notes is Seagate HDD Cayman, and the obligations under the 2022 Notes are fully and
unconditionally guaranteed, on a senior unsecured basis, by the Company.
$1
billion Aggregate
Principal Amount of 4.75% Senior Notes due June 2023 (the 2023 Notes).
The interest on the 2023 Notes is payable semi-annually on June 1 and December 1 of each year. The issuer under the 2023 Notes is Seagate HDD Cayman,
and the obligations under the 2023 Notes are fully and unconditionally guaranteed, on a senior unsecured basis, by the Company.
$500
million Aggregate Principal Amount of 4.875% Senior Notes due March
2024 (the
2024 Notes).
The interest on the 2024 Notes is payable semi-annually on March 1 and September 1 of each year. The issuer under the 2024 Notes is Seagate HDD Cayman, and the obligations under the 2024 Notes are fully and
unconditionally guaranteed, on a senior unsecured basis, by the Company.
$1
billion Aggregate
Principal Amount of 4.75% Senior Notes due January 2025 (the 2025 Notes)
. The interest on the 2025 Notes is payable semi-annually on January 1 and July 1 of each year. The issuer under the 2025 Notes is Seagate HDD Cayman,
and the obligations under the 2025 Notes are fully and unconditionally guaranteed, on a senior unsecured basis, by the Company.
$700
million Aggregate Principal Amount of 4.875% Senior Notes due June 2027 (the 2027
Notes)
. The interest on the Notes is payable semi-annually on June 1 and December 1 of each year. The issuer under the 2027 Notes is Seagate HDD Cayman, and the obligations under the 2027 Notes are fully and unconditionally
guaranteed, on a senior unsecured basis, by the Company.
$500
million Aggregate Principal Amount of
5.75% Senior Notes due December 2034 (the 2034 Notes)
. The interest on the 2034 Notes is payable semi-annually on June 1 and December 1 of each year. The issuer under the 2034 Notes is Seagate HDD Cayman, and the
obligations under the 2034 Notes are fully and unconditionally guaranteed, on a senior unsecured basis, by the Company.
At September 29, 2017, future principal payments on long-term debt were as follows (in millions):
|
|
|
|
|
Fiscal Year
|
|
Amount
|
|
Remainder of 2018
|
|
$
|
|
|
2019
|
|
|
688
|
|
2020
|
|
|
|
|
2021
|
|
|
|
|
2022
|
|
|
750
|
|
Thereafter
|
|
|
3,613
|
|
|
|
|
|
|
Total
|
|
$
|
5,051
|
|
|
|
|
|
|
The Companys income tax provision of $7 million in the three months ended September 29, 2017 included
approximately $1 million of net discrete tax expense.
The Companys income tax provision recorded for the three
months ended September 29, 2017 differed from the provision from income taxes that would be derived by applying the Irish statutory rate of 25% to income before income taxes, primarily due to the net effect of (i) tax benefits related to
non-U.S.
earnings generated in jurisdictions that are subject to tax holidays or tax incentive programs and are considered indefinitely reinvested outside of Ireland and (ii) a decrease in valuation allowance
for certain deferred tax assets.
14
During the three months ended September 29, 2017, the Companys
unrecognized tax benefits excluding interest and penalties decreased by approximately $1 million to $73 million. The unrecognized tax benefits that, if recognized, would impact the effective tax rate were $73 million as of
September 29, 2017, subject to certain future valuation allowance reversals. During the 12 months beginning September 30, 2017, the Company expects that its unrecognized tax benefits could be reduced by approximately $4 million,
primarily as a result of the expiration of certain statutes of limitation.
The Companys income tax provision of
$6 million in the three months ended September 30, 2016 included approximately $5 million of net discrete tax benefits, primarily associated with the release of tax reserves associated with the expiration of certain statutes of
limitation.
The Companys income tax provision recorded for the three months ended September 30, 2016 differed
from the provision from income taxes that would be derived by applying the Irish statutory rate of 25% to income before income taxes, primarily due to the net effect of (i) tax benefits related to
non-U.S.
earnings generated in jurisdictions that are subject to tax holidays or tax incentive programs and are considered indefinitely reinvested outside of Ireland and (ii) a decrease in valuation
allowance for certain deferred tax assets.
Dot Hill Systems Corp.
On October 6, 2015, the Company acquired all of the outstanding shares of Dot Hill Systems Corp. (Dot Hill), a
supplier of software and hardware storage systems. The Company paid $9.75 per share, or $674 million, in cash for the acquisition. The acquisition of Dot Hill further expands the Companys
OEM-focused
cloud storage systems business and advances the Companys strategic efforts.
The following table summarizes the estimated fair values of the assets acquired and liabilities assumed at the acquisition
date:
|
|
|
|
|
(Dollars in millions)
|
|
Amount
|
|
Cash and cash equivalents
|
|
$
|
40
|
|
Accounts receivable, net
|
|
|
48
|
|
Inventories
|
|
|
21
|
|
Other current and
non-current
assets
|
|
|
7
|
|
Property, plant and equipment
|
|
|
10
|
|
Intangible assets
|
|
|
252
|
|
Goodwill
|
|
|
364
|
|
|
|
|
|
|
Total assets
|
|
|
742
|
|
|
|
|
|
|
Accounts payable, accrued expenses and other
|
|
|
(68
|
)
|
|
|
|
|
|
Total liabilities
|
|
|
(68
|
)
|
|
|
|
|
|
Total
|
|
$
|
674
|
|
|
|
|
|
|
The following table shows the fair value of the separately identifiable intangible assets at
the time of acquisition and the period over which each intangible asset will be amortized:
|
|
|
|
|
|
|
|
|
(Dollars in millions)
|
|
Fair Value
|
|
|
Weighted-
Average
Amortization
Period
|
|
Existing technology
|
|
$
|
164
|
|
|
|
5.0 years
|
|
Customer relationships
|
|
|
71
|
|
|
|
7.0 years
|
|
Trade names
|
|
|
3
|
|
|
|
5.0 years
|
|
|
|
|
|
|
|
|
|
|
Total amortizable intangible assets acquired
|
|
|
238
|
|
|
|
5.5 years
|
|
In-process
research and development
|
|
|
14
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total acquired identifiable intangible assets
|
|
$
|
252
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The recognized goodwill, which is not deductible for income tax purposes, is primarily
attributable to cost synergies expected to arise after the acquisition and the benefits the Company expects to derive from enhanced market opportunities.
15
6.
|
Goodwill and Other Intangible Assets
|
Goodwill
The changes in the carrying amount of goodwill for the three months ended September 29, 2017, are as follows:
|
|
|
|
|
(Dollars in millions)
|
|
Amount
|
|
Balance at June 30, 2017
|
|
$
|
1,238
|
|
Goodwill acquired
|
|
|
|
|
Goodwill disposed
|
|
|
(1
|
)
|
Foreign currency translation effect
|
|
|
|
|
|
|
|
|
|
Balance at September 29, 2017
|
|
$
|
1,237
|
|
|
|
|
|
|
Other Intangible Assets
Other intangible assets consist primarily of existing technology, customer relationships and trade names acquired in business
combinations. Intangibles are amortized on a straight-line basis over the respective estimated useful lives of the assets. Amortization is charged to Operating expenses in the Condensed Consolidated Statements of Operations.
The carrying value of other intangible assets subject to amortization, excluding fully amortized intangible assets, as of
September 29, 2017, is set forth in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in millions)
|
|
Gross Carrying
Amount
|
|
|
Accumulated
Amortization
|
|
|
Net Carrying
Amount
|
|
|
Weighted-Average
Remaining Useful Life
|
|
Existing technology
|
|
$
|
279
|
|
|
$
|
(124)
|
|
|
$
|
155
|
|
|
|
3.4 years
|
|
Customer relationships
|
|
|
457
|
|
|
|
(385)
|
|
|
|
72
|
|
|
|
3.7 years
|
|
Trade name
|
|
|
17
|
|
|
|
(10)
|
|
|
|
7
|
|
|
|
2.0 years
|
|
Other intangible assets
|
|
|
35
|
|
|
|
(14)
|
|
|
|
21
|
|
|
|
2.4 years
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total amortizable other intangible assets
|
|
$
|
788
|
|
|
$
|
(533)
|
|
|
$
|
255
|
|
|
|
3.4 years
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The carrying value of other intangible assets subject to amortization as of June 30, 2017
is set forth in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in millions)
|
|
Gross Carrying
Amount
|
|
|
Accumulated
Amortization
|
|
|
Net Carrying
Amount
|
|
|
Weighted-Average
Remaining Useful Life
|
|
Existing technology
|
|
$
|
280
|
|
|
$
|
(112)
|
|
|
$
|
168
|
|
|
|
3.6 years
|
|
Customer relationships
|
|
|
487
|
|
|
|
(395)
|
|
|
|
92
|
|
|
|
3.4 years
|
|
Trade name
|
|
|
27
|
|
|
|
(19)
|
|
|
|
8
|
|
|
|
2.1 years
|
|
Other intangible assets
|
|
|
29
|
|
|
|
(16)
|
|
|
|
13
|
|
|
|
2.6 years
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total amortizable other intangible assets
|
|
$
|
823
|
|
|
$
|
(542)
|
|
|
$
|
281
|
|
|
|
3.4 years
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three months ended September 29, 2017 and September 30, 2016, the
amortization expense of other intangible assets were $36 million and $42 million, respectively. As of September 29, 2017, expected amortization expense for other intangible assets for each of the next five fiscal years and thereafter
is as follows:
|
|
|
|
|
(Dollars in millions)
|
|
Amount
|
|
Remainder of 2018
|
|
$
|
73
|
|
2019
|
|
|
71
|
|
2020
|
|
|
53
|
|
2021
|
|
|
25
|
|
2022
|
|
|
17
|
|
Thereafter
|
|
|
16
|
|
|
|
|
|
|
Total
|
|
$
|
255
|
|
|
|
|
|
|
16
7.
|
Restructuring and Exit Costs
|
For the three months ended September 29, 2017, the Company recorded restructuring charges of approximately
$51 million, comprised primarily of charges related to workforce reduction costs and facility exit costs associated with the restructuring of its workforce during the fiscal year. The Companys significant restructuring plans are described
below. All restructuring charges are reported in Restructuring and other, net on the Condensed Consolidated Statements of Operations.
July 2017 Plan -
On July 25, 2017, the Company committed to a restructuring plan (the July 2017 Plan)
to reduce its cost structure. The July 2017 Plan included reducing the Companys global headcount by approximately 600 employees. The July 2017 Plan was largely completed by the end of the September 2017 quarter.
March 2017 Plan -
On March 9, 2017, the Company committed to a restructuring plan (the March 2017
Plan) in connection with the continued consolidation of its global footprint. The Company closed its design center in Korea, resulting in the reduction of the Companys headcount by approximately 300 employees. The March 2017 Plan was
largely completed by the end of fiscal year 2017.
July 2016 Plan -
On July 11, 2016, the Company committed to
a restructuring plan (the July 2016 Plan) for continued consolidation of its global footprint across Asia, EMEA and the Americas. The July 2016 Plan included reducing worldwide headcount by approximately 6,500 employees. The July 2016
Plan was largely completed by the end of fiscal year 2017.
In addition, during fiscal year 2017, the Company committed to
sell certain land and buildings primarily in Asia as part of the March 2017 and July 2016 plans which accordingly met the criteria to be classified as assets held for sale and were reclassified to Other current assets at that time. These assets
remained included in Other current assets on the Condensed Consolidated Balance Sheet as of September 29, 2017.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
July 2017 Plan
|
|
|
March 2017 Plan
|
|
|
July 2016 Plan
|
|
|
Other Plans
|
|
|
|
|
(Dollars in millions)
|
|
Workforce
Reduction
Costs
|
|
|
Facilities
and
Other
Exit
Costs
|
|
|
Workforce
Reduction
Costs
|
|
|
Facilities
and
Other
Exit
Costs
|
|
|
Workforce
Reduction
Costs
|
|
|
Facilities
and
Other
Exit
Costs
|
|
|
Workforce
Reduction
Costs
|
|
|
Facilities
and
Other
Exit
Costs
|
|
|
Total
|
|
Accrual balances at June 30, 2017
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
22
|
|
|
$
|
2
|
|
|
$
|
6
|
|
|
$
|
13
|
|
|
$
|
43
|
|
Restructuring charges
|
|
|
38
|
|
|
|
4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6
|
|
|
|
2
|
|
|
|
|
|
|
|
50
|
|
Cash payments
|
|
|
(14
|
)
|
|
|
(3
|
)
|
|
|
|
|
|
|
|
|
|
|
(16
|
)
|
|
|
(7
|
)
|
|
|
(4
|
)
|
|
|
(2
|
)
|
|
|
(46
|
)
|
Adjustments
|
|
|
|
|
|
|
|
|
|
|
1
|
|
|
|
|
|
|
|
1
|
|
|
|
|
|
|
|
(1
|
)
|
|
|
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrual balances at September 29, 2017
|
|
$
|
24
|
|
|
$
|
1
|
|
|
$
|
1
|
|
|
$
|
|
|
|
$
|
7
|
|
|
$
|
1
|
|
|
$
|
3
|
|
|
$
|
11
|
|
|
$
|
48
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total costs incurred to date as of September 29, 2017
|
|
$
|
38
|
|
|
$
|
4
|
|
|
$
|
30
|
|
|
$
|
3
|
|
|
$
|
80
|
|
|
$
|
26
|
|
|
$
|
227
|
|
|
$
|
50
|
|
|
$
|
458
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expected costs to be incurred as of September 29, 2017
|
|
$
|
|
|
|
$
|
3
|
|
|
$
|
1
|
|
|
$
|
|
|
|
$
|
2
|
|
|
$
|
6
|
|
|
$
|
|
|
|
$
|
3
|
|
|
$
|
15
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8.
|
Derivative Financial Instruments
|
The Company is exposed to foreign currency exchange rate, interest rate, and to a lesser extent, equity market risks relating
to its ongoing business operations. The Company enters into foreign currency forward exchange contracts in order to manage the foreign currency exchange rate risk on forecasted expenses denominated in foreign currencies. The Companys
accounting policies for these instruments are based on whether the instruments are classified as designated or
non-designated
hedging instruments. The Company records all derivatives in the Condensed
Consolidated Balance Sheets at fair value. The changes in the fair value of the effective portions of designated cash flow hedges are recorded in Accumulated other comprehensive loss until the hedged item is recognized in earnings. Derivatives that
are not designated as hedging instruments and the ineffective portions of cash flow hedges are adjusted to fair value through earnings. The Company has no outstanding cash flow hedges as of September 29, 2017 and June 30, 2017.
The Company dedesignates its cash flow hedges when the forecasted hedged transactions are realized or it is probable the
forecasted hedged transactions will not occur in the initially identified time period. At such time, the associated gains and losses deferred in Accumulated other comprehensive loss are reclassified immediately into earnings and any subsequent
changes in the fair value of such derivative instruments are immediately reflected in earnings. The Company did not recognize any net gains or losses related to the loss of hedge designation on discontinued cash flow hedges during the three months
ended September 29, 2017.
17
As of September 29, 2017 and June 30, 2017, the Company does not have
outstanding foreign currency forward exchange contracts.
The Company is subject to equity market risks due to changes in
the fair value of the notional investments selected by its employees as part of
its Non-qualified Deferred
Compensation Planthe Seagate Deferred Compensation Plan (the SDCP). In
fiscal year 2014, the Company entered into a Total Return Swap (TRS) in order to manage the equity market risks associated with the SDCP liabilities. The Company pays a floating rate, based on LIBOR plus an interest rate spread, on the
notional amount of the TRS. The TRS is designed to substantially offset changes in the SDCP liability due to changes in the value of the investment options made by employees. As of September 29, 2017, the notional investments underlying the TRS
amounted to $114 million. The contract term of the TRS is through January 2018 and is settled on a monthly basis, therefore limiting counterparty performance risk. The Company did not designate the TRS as a hedge. Rather, the Company records
all changes in the fair value of the TRS to earnings to offset the market value changes of the SDCP liabilities.
As of
September 29, 2017 and June 30, 2017, the Company has no outstanding foreign currency forward exchange contracts and the gross fair value of the TRS reflected in the Condensed Consolidated Balance Sheets, respectively, is immaterial.
The following tables show the effect of the Companys derivative instruments on the Condensed Consolidated Statement of
Comprehensive Income and the Condensed Consolidated Statement of Operations for the three months ended September 29, 2017.
|
|
|
|
|
|
|
(Dollars in millions)
Derivatives Not Designated as Hedging Instruments
|
|
Location of Gain or
(Loss) Recognized in
Income on Derivatives
|
|
Amount of Gain or
(Loss) Recognized in
Income on Derivatives
|
|
Foreign currency forward exchange contracts
|
|
Other, net
|
|
$
|
|
|
Total return swap
|
|
Operating expenses
|
|
|
3
|
|
The following tables show the effect of the Companys derivative instruments on the
Condensed Consolidated Statement of Comprehensive Income and the Condensed Consolidated Statement of Operations for the three months ended September 30, 2016:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in millions)
Derivatives Designated as Hedging Instruments
|
|
Amount of
Gain or
(Loss)
Recognized
in OCI on
Derivatives
(Effective
Portion)
|
|
|
Location of
Gain or (Loss)
Reclassified
from
Accumulated
OCI
into
Income
(Effective
Portion)
|
|
|
Amount of
Gain or
(Loss)
Reclassified
from
Accumulated
OCI
into
Income
(Effective
Portion)
|
|
|
Location of
Gain or (Loss)
Recognized in
Income on
Derivatives
(Ineffective
Portion
and
Amount Excluded
from
Effectiveness
Testing)
|
|
|
Amount of
Gain
or (Loss)
Recognized
in
Income
(Ineffective
Portion
and
Amount
Excluded
from
Effectiveness
Testing) (a)
|
|
Foreign currency forward exchange contracts
|
|
$
|
(1
|
)
|
|
|
Cost of revenue
|
|
|
$
|
(1
|
)
|
|
|
Cost of revenue
|
|
|
$
|
|
|
|
|
|
|
|
|
|
Derivatives Not Designated as Hedging Instruments
|
|
Location of Gain or
(Loss) Recognized in
Income on Derivatives
|
|
Amount of Gain or
(Loss) Recognized in
Income on Derivatives
|
|
Foreign currency forward exchange contracts
|
|
Other, net
|
|
$
|
(1
|
)
|
Total return swap
|
|
Operating expenses
|
|
|
3
|
|
(a)
|
The amount of gain or (loss) recognized in income related to the ineffective portion of the hedging
relationships and the amount excluded from the assessment of hedge effectiveness were less than $1 million for the three months ended September 30, 2016.
|
18
Measurement of Fair Value
Fair value is defined as the price that would be received from selling an asset or paid to transfer a liability in an orderly
transaction between market participants at the measurement date. When determining the fair value measurements for assets and liabilities required to be recorded at fair value, the Company considers the principal or most advantageous market in which
it would transact and it considers assumptions that market participants would use when pricing the asset or liability.
Fair Value
Hierarchy
A fair value hierarchy is based on whether the market participant assumptions used in determining fair value
are obtained from independent sources (observable inputs) or reflects the Companys own assumptions of market participant valuation (unobservable inputs). A financial instruments categorization within the fair value hierarchy is based
upon the lowest level of input that is significant to the fair value measurement. The three levels of inputs that may be used to measure fair value are:
Level 1 Quoted prices in active markets that are unadjusted and accessible at the measurement date for identical,
unrestricted assets or liabilities;
Level 2 Quoted prices for identical assets and liabilities in markets that
are inactive; quoted prices for similar assets and liabilities in active markets or financial instruments for which significant inputs are observable, either directly or indirectly; or
Level 3 Prices or valuations that require inputs that are both unobservable and significant to the fair value measurement.
The Company considers an active market to be one in which transactions for the asset or liability occur with sufficient
frequency and volume to provide pricing information on an ongoing basis, and views an inactive market as one in which there are few transactions for the asset or liability, the prices are not current, or price quotations vary substantially either
over time or among market makers. Where appropriate the Companys or the counterpartys
non-performance
risk is considered in determining the fair values of liabilities and assets, respectively.
Items Measured at Fair Value on a Recurring Basis
The following tables present the Companys assets and liabilities, by financial instrument type and balance sheet line
item that are measured at fair value on a recurring basis, excluding accrued interest components, as of September 29, 2017:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at Reporting Date Using
|
|
(Dollars in millions)
|
|
Quoted Prices
in Active
Markets for
Identical
Instruments
(Level 1)
|
|
|
Significant
Other
Observable
Inputs
(Level 2)
|
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
|
Total
Balance
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market funds
|
|
$
|
622
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
622
|
|
Time deposits
|
|
|
|
|
|
|
204
|
|
|
|
|
|
|
|
204
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cash equivalents
|
|
|
622
|
|
|
|
204
|
|
|
|
|
|
|
|
826
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted cash and investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market funds
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
1
|
|
Time deposits and certificates of deposit
|
|
|
|
|
|
|
3
|
|
|
|
|
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
623
|
|
|
$
|
207
|
|
|
$
|
|
|
|
$
|
830
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
19
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at Reporting Date Using
|
|
(Dollars in millions)
|
|
Quoted Prices
in Active
Markets for
Identical
Instruments
(Level 1)
|
|
|
Significant
Other
Observable
Inputs
(Level 2)
|
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
|
Total
Balance
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
622
|
|
|
$
|
204
|
|
|
$
|
|
|
|
$
|
826
|
|
Other current assets
|
|
|
1
|
|
|
|
3
|
|
|
|
|
|
|
|
4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
623
|
|
|
$
|
207
|
|
|
$
|
|
|
|
$
|
830
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following tables present the Companys assets and liabilities, by financial instrument type and
balance sheet line item that are measured at fair value on a recurring basis, excluding accrued interest components, as of June 30, 2017:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at Reporting Date Using
|
|
(Dollars in millions)
|
|
Quoted Prices
in Active
Markets for
Identical
Instruments
(Level 1)
|
|
|
Significant
Other
Observable
Inputs
(Level 2)
|
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
|
Total
Balance
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market funds
|
|
$
|
593
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
593
|
|
Time deposits
|
|
|
|
|
|
|
581
|
|
|
|
|
|
|
|
581
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cash equivalents
|
|
|
593
|
|
|
|
581
|
|
|
|
|
|
|
|
1,174
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted cash and investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market funds
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
1
|
|
Time deposits and certificates of deposit
|
|
|
|
|
|
|
3
|
|
|
|
|
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
594
|
|
|
$
|
584
|
|
|
$
|
|
|
|
$
|
1,178
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at Reporting Date Using
|
|
(Dollars in millions)
|
|
Quoted Prices
in Active
Markets for
Identical
Instruments
(Level 1)
|
|
|
Significant
Other
Observable
Inputs
(Level 2)
|
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
|
Total
Balance
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
593
|
|
|
$
|
581
|
|
|
$
|
|
|
|
$
|
1,174
|
|
Other current assets
|
|
|
1
|
|
|
|
3
|
|
|
|
|
|
|
|
4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
594
|
|
|
$
|
584
|
|
|
$
|
|
|
|
$
|
1,178
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company classifies items in Level 1 if the financial assets consist of securities for
which quoted prices are available in an active market.
The Company classifies items in Level 2 if the financial
asset or liability is valued using observable inputs. The Company uses observable inputs including quoted prices in active markets for similar assets or liabilities. Level 2 assets include: agency bonds, corporate bonds, commercial paper,
municipal bonds, U.S. Treasuries, time deposits and certificates of deposit. These debt investments are priced using observable inputs and valuation models which vary by asset class. The Company uses a pricing service to assist in determining the
fair values of all of its cash equivalents. For the cash equivalents and short-term investments in the Companys portfolio, multiple pricing sources are generally available. The pricing service uses inputs from multiple industry standard data
providers or other third party sources and various methodologies, such as weighting and models, to determine the appropriate price at the measurement date. The Company corroborates the prices obtained from the pricing service against other
independent sources and, as of September 29, 2017, has not found it necessary to make any adjustments to the prices obtained. The Companys derivative financial instruments are also classified within Level 2. The Companys
derivative financial instruments consist of foreign currency forward exchange contracts and the TRS. The Company recognizes derivative financial instruments in its consolidated financial statements at fair value. The Company determines the fair
value of these instruments by considering the estimated amount it would pay or receive to terminate these agreements at the reporting date.
20
As of September 29, 2017 and June 30, 2017, the Company
had no Level 3 assets or liabilities measured at fair value on a recurring basis.
Items Measured at Fair Value on a
Non-Recurring
Basis
From time to time, the Company enters into certain strategic
investments for the promotion of business and strategic objectives. These strategic investments primarily include cost basis investments representing those where the Company does not have the ability to exercise significant influence as well as
equity method investments representing those where the Company does have the ability to exercise significant influence but does not have control. These investments are included in Other assets, net in the Condensed Consolidated Balance Sheets, and
are periodically analyzed to determine whether or not there are indicators of impairment. The carrying value of the Companys strategic investments at September 29, 2017 and June 30, 2017 totaled $125 million at both dates, and
consisted primarily of privately held equity securities without a readily determinable fair value.
For the three months
ended September 29, 2017 and September 30, 2016, the Company did not have any equity investments accounted for under the cost method that were other-than-temporarily impaired and did not record any impairment charges.
As of September 29, 2017 and June 30, 2017, the Company has $77 million held for sale assets included in Other
current assets on the Condensed Consolidated Balance Sheets, which primarily consisted of $37 million of land and building in Korea and $26 million of land and building in China, with the remainder of the balance comprised of property at
other locations (collectively, the properties). The respective properties to be sold met the criteria to be classified as held for sale during the quarters ended March 31, 2017 and June 30, 2017. Depreciation related
to the properties ceased as of the date these were determined to be held for sale. During fiscal year 2017, the Company recorded impairment charges of $35 million to write down the carrying amount of such properties to their estimated fair
values less costs to sell. The impairment charges were recorded in Operating expenses in the Consolidated Statement of Operations. No additional impairment charges related to these properties were recorded during the September 2017 quarter. The fair
values were measured with the assistance of third-party valuation models which used inputs such as comparable market data for similar land sale transactions adjusted for differences in comparable properties to derive the estimated fair value of the
subject properties and the cost approach valuation techniques for buildings as part of the analysis. The fair value measurement was categorized as Level 3 as significant unobservable inputs were used in the valuation analysis.
Other Fair Value Disclosures
The Companys debt is carried at amortized cost. The fair value of the Companys debt is derived using the closing price as of
the date of valuation, which takes into account the yield curve, interest rates and other observable inputs. Accordingly, these fair value measurements are categorized as Level 2. The following table presents the fair value and amortized
cost of the Companys debt in order of maturity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 29, 2017
|
|
|
June 30, 2017
|
|
(Dollars in millions)
|
|
Carrying
Amount
|
|
|
Estimated
Fair Value
|
|
|
Carrying
Amount
|
|
|
Estimated
Fair Value
|
|
3.75% Senior Notes due November 2018
|
|
$
|
688
|
|
|
$
|
701
|
|
|
$
|
710
|
|
|
$
|
726
|
|
4.25% Senior Notes due March 2022
|
|
|
748
|
|
|
|
746
|
|
|
|
748
|
|
|
|
765
|
|
4.75% Senior Notes due June 2023
|
|
|
951
|
|
|
|
963
|
|
|
|
951
|
|
|
|
987
|
|
4.875% Senior Notes due March 2024
|
|
|
497
|
|
|
|
493
|
|
|
|
497
|
|
|
|
511
|
|
4.75% Senior Notes due January 2025
|
|
|
975
|
|
|
|
949
|
|
|
|
975
|
|
|
|
984
|
|
4.875% Senior Notes due June 2027
|
|
|
695
|
|
|
|
659
|
|
|
|
695
|
|
|
|
698
|
|
5.75% Senior Notes due December 2034
|
|
|
489
|
|
|
|
459
|
|
|
|
489
|
|
|
|
488
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
5,043
|
|
|
$
|
4,970
|
|
|
$
|
5,065
|
|
|
$
|
5,159
|
|
Less: debt issuance costs
|
|
|
(41
|
)
|
|
|
|
|
|
|
(44
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt, net of debt issuance costs
|
|
$
|
5,002
|
|
|
$
|
4,970
|
|
|
$
|
5,021
|
|
|
$
|
5,159
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
21
Share Capital
The Companys authorized share capital is $13,500 and consists of 1,250,000,000 ordinary shares, par value $0.00001, of
which 289,261,062 shares were outstanding as of September 29, 2017, and 100,000,000 preferred shares, par value $0.00001, of which none were issued or outstanding as of September 29, 2017.
Ordinary shares
Holders of ordinary shares are entitled to receive dividends as and when declared by the
Companys board of directors (the Board of Directors). Upon any liquidation, dissolution, or winding up of the Company, after required payments are made to holders of preferred shares, any remaining assets of the Company will be
distributed ratably to holders of the preferred and ordinary shares. Holders of shares are entitled to one vote per share on all matters upon which the ordinary shares are entitled to vote, including the election of directors.
Preferred shares
The Company may issue preferred shares in one or more series, up to the authorized amount,
without shareholder approval. The Board of Directors is authorized to establish from time to time the number of shares to be included in each series, and to fix the rights, preferences and privileges of the shares of each wholly unissued series and
any of its qualifications, limitations or restrictions. The Board of Directors can also increase or decrease the number of shares of a series, but not below the number of shares of that series then outstanding, without any further vote or action by
the shareholders.
The Board of Directors may authorize the issuance of preferred shares with voting or conversion rights
that could harm the voting power or other rights of the holders of the ordinary shares. The issuance of preferred shares, while providing flexibility in connection with possible acquisitions and other corporate purposes, could, among other things,
have the effect of delaying, deferring or preventing a change in control of the Company and might harm the market price of its ordinary shares and the voting and other rights of the holders of ordinary shares.
Repurchases of Equity Securities
On April 22, 2015, the Board of Directors authorized the Company to repurchase $2.5 billion of its outstanding
ordinary shares.
All repurchases are effected as redemptions in accordance with the Companys Articles of
Association.
As of September 29, 2017, $1.1 billion remained available for repurchase under the existing
repurchase authorization limit.
The following table sets forth information with respect to repurchases of the
Companys shares during the three months ended September 29, 2017:
|
|
|
|
|
|
|
|
|
(In millions)
|
|
Number of Shares
Repurchased
|
|
|
Dollar Value of
Shares
Repurchased
|
|
Repurchases of ordinary shares
|
|
|
5
|
|
|
$
|
166
|
|
Tax withholding related to vesting of equity awards
|
|
|
1
|
|
|
|
20
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
6
|
|
|
$
|
186
|
|
|
|
|
|
|
|
|
|
|
11.
|
Share-based Compensation
|
The Company recorded approximately $32 million and $40 million of share-based compensation expense during the three
months ended September 29, 2017 and September 30, 2016, respectively.
Indemnifications to Officers and Directors
On May 4, 2009, Seagate Technology, an exempted company incorporated with limited liability under the laws of the Cayman
Islands (Seagate-Cayman), then the parent company, entered into a new form of indemnification agreement (the Revised Indemnification Agreement) with its officers and directors of Seagate-Cayman and its subsidiaries (each, an
Indemnitee). The Revised Indemnification Agreement provides indemnification in addition to any of Indemnitees indemnification rights under Seagate-Caymans Articles of Association, applicable law or otherwise, and indemnifies
an Indemnitee for certain expenses (including attorneys fees), judgments, fines and settlement amounts actually and reasonably incurred by him or her in any action or proceeding, including any action by or in the right of Seagate-Cayman or any
of its subsidiaries, arising out of his or her service as a director, officer, employee or agent of Seagate-Cayman or any of its subsidiaries or of any other entity to which he or she provides services at Seagate-Caymans request. However, an
Indemnitee shall not be indemnified under the Revised Indemnification Agreement for (i) any fraud or dishonesty in the performance of Indemnitees duty to Seagate-Cayman or the applicable subsidiary of Seagate-Cayman or
(ii) Indemnitees conscious, intentional or willful failure to act honestly, lawfully and in good faith with a
view to the best
interests of Seagate-Cayman or the applicable subsidiary of Seagate-Cayman. In addition, the Revised Indemnification Agreement provides that Seagate-Cayman will advance expenses incurred by an Indemnitee in connection with enforcement of the Revised
Indemnification Agreement or with the investigation, settlement or appeal of any action or proceeding against him or her as to which he or she could be indemnified.
22
On July 3, 2010, pursuant to a corporate reorganization, the common
shareholders of Seagate-Cayman became ordinary shareholders of Seagate Technology plc (the Company) and Seagate-Cayman became a wholly owned subsidiary of the Company, as described more fully in the Current Report on Form
8-K
filed by the Company on July 6, 2010 (the Redomestication). On July 27, 2010, in connection with the Redomestication, the Company, as sole shareholder of Seagate-Cayman, approved a form of
deed of indemnity (the Deed of Indemnity), which provides for the indemnification by Seagate-Cayman of any director, officer, employee or agent of the Company, Seagate-Cayman or any subsidiary of the Company (each, a Deed
Indemnitee), in addition to any of a Deed Indemnitees indemnification rights under the Companys Articles of Association, applicable law or otherwise, with a similar scope to the Revised Indemnification Agreement. Seagate-Cayman
entered into the Deed of Indemnity with certain Deed Indemnitees effective as of July 3, 2010 and continues to enter into the Deed of Indemnity with additional Deed Indemnitees from time to time.
The nature of these indemnification obligations prevents the Company from making a reasonable estimate of the maximum
potential amount it could be required to pay on behalf of its officers and directors. Historically, the Company has not made any significant indemnification payments under such agreements and no amount has been accrued in the accompanying condensed
consolidated financial statements with respect to these indemnification obligations.
Intellectual Property Indemnification Obligations
The Company has entered into agreements with customers and suppliers that include limited intellectual property
indemnification obligations that are customary in the industry. These guarantees generally require the Company to compensate the other party for certain damages and costs incurred as a result of third party intellectual property claims arising from
these transactions. The nature of the intellectual property indemnification obligations prevents the Company from making a reasonable estimate of the maximum potential amount it could be required to pay to its customers and suppliers. Historically,
the Company has not made any significant indemnification payments under such agreements and no amount has been accrued in the accompanying condensed consolidated financial statements with respect to these indemnification obligations.
Product Warranty
The Company estimates probable product warranty costs at the time revenue is recognized. The Company generally warrants its
products for a period of 1 to 5 years. The Company uses estimated repair or replacement costs and uses statistical modeling to estimate product return rates in order to determine its warranty obligation. Changes in the Companys product
warranty liability during the three months ended September 29, 2017 and September 30, 2016 were as follows:
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended
|
|
(Dollars in millions)
|
|
September 29,
2017
|
|
|
September 30,
2016
|
|
Balance, beginning of period
|
|
$
|
233
|
|
|
$
|
206
|
|
Warranties issued
|
|
|
35
|
|
|
|
31
|
|
Repairs and replacements
|
|
|
(27)
|
|
|
|
(30)
|
|
Changes in liability for
pre-existing
warranties,
including expirations
|
|
|
(11)
|
|
|
|
9
|
|
|
|
|
|
|
|
|
|
|
Balance, end of period
|
|
$
|
230
|
|
|
$
|
216
|
|
|
|
|
|
|
|
|
|
|
23
Basic earnings per share is computed by dividing income available to shareholders by the weighted-average number of shares
outstanding during the period. Diluted earnings per share is computed by dividing income available to shareholders by the weighted-average number of shares outstanding during the period and the number of additional shares that would have been
outstanding if the potentially dilutive securities had been issued. Potentially dilutive securities include outstanding options, unvested restricted stock units and shares to be purchased under the Employee Stock Purchase Plan (ESPP).
The dilutive effect of potentially dilutive securities is reflected in diluted earnings per share by application of the treasury stock method. Under the treasury stock method, an increase in fair market value of the Companys share price can
result in a greater dilutive effect from potentially dilutive securities. The following table sets forth the computation of basic and diluted net income per share attributable to the shareholders of the Company:
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For the Three Months Ended
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(In millions, except per share data)
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September 29,
2017
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September 30,
2016
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Numerator:
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Net income
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$
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181
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$
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167
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Number of shares used in per share calculations:
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Total shares for purposes of calculating basic net income per share
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290
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299
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Weighted-average effect of dilutive securities:
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Employee equity award plans
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2
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2
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Total shares for purpose of calculating diluted net income per share
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292
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301
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Net income per share:
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Basic
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$
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0.62
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$
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0.56
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Diluted
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$
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0.62
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$
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0.55
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The anti-dilutive shares related to employee equity award plans that were excluded from the
computation of diluted net income per share were 2 million and 3 million for the three months ended September 29, 2017 and September 30, 2016, respectively.
14.
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Legal, Environmental and Other Contingencies
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The Company assesses the probability of an unfavorable outcome of all its material litigation, claims, or assessments to
determine whether a liability had been incurred and whether it is probable that one or more future events will occur confirming the fact of the loss. In the event that an unfavorable outcome is determined to be probable and the amount of the loss
can be reasonably estimated, the Company establishes an accrual for the litigation, claim or assessment. In addition, in the event an unfavorable outcome is determined to be less than probable, but reasonably possible, the Company will disclose an
estimate of the possible loss or range of such loss; however, when a reasonable estimate cannot be made, the Company will provide disclosure to that effect. Litigation is inherently uncertain and may result in adverse rulings or decisions.
Additionally, the Company may enter into settlements or be subject to judgments that may, individually or in the aggregate, have a material adverse effect on its results of operations. Accordingly, actual results could differ materially.
Intellectual Property Litigation
Convolve,
Inc. (Convolve) and Massachusetts Institute of Technology (MIT) v.
Seagate Technology
LLC, et al.
On July 13, 2000, Convolve and MIT filed suit against Compaq Computer Corporation and Seagate Technology LLC in the U.S. District Court for the Southern District of New York, alleging
infringement of U.S. Patent No. 4,916,635 (the 635 patent) and U.S. Patent No. 5,638,267 (the 267 patent), misappropriation of trade secrets, breach of contract, and other claims. On January 16,
2002, Convolve filed an amended complaint, alleging defendants infringe U.S. Patent No. 6,314,473 (the 473 patent). The district court ruled in 2010 that the 267 patent was out of the case.
On August 16, 2011, the district court granted in part and denied in part the Companys motion for summary judgment.
On July 1, 2013, the U.S. Court of Appeals for the Federal Circuit: 1) affirmed the district courts summary judgment rulings that Seagate did not misappropriate any of the alleged trade secrets and that the asserted claims of the
635 patent are invalid; 2) reversed and vacated the district courts summary judgment
of non-infringement with
respect to the 473 patent; and 3) remanded the case for
further proceedings on the 473 patent. On July 11, 2014, the district court granted the Companys further summary judgment motion regarding the 473 patent. On February 10, 2016, the U.S. Court of Appeals for the Federal
Circuit: 1) affirmed the district courts summary judgment of no direct infringement by Seagate because Seagates ATA/SCSI disk drives do not meet the user interface limitation of the asserted claims of the 473 patent; 2)
affirmed the district courts summary judgment
of non-infringement by
Compaqs products as to claims 1, 3, and 5 of the 473 patent because Compaqs F10 BIOS interface does not
meet the commands limitation of those claims; 3) vacated the district courts summary judgment
of non-infringement by
Compaqs accused products as to
claims 7-15 of
the 473 patent; 4) reversed the district courts summary judgment
of non-infringement based
on intervening rights; and 5)
remanded the case to the district court for further proceedings on the 473 patent. In view of the rulings made by the district court and the Court of Appeals and the uncertainty regarding the amount of damages, if any, that could be awarded
Convolve in this matter, the Company does not believe that it is currently possible to determine a reasonable estimate of the possible range of loss related to this matter.
24
Enova Technology Corporation v. Seagate Technology (US) Holdings, Inc., et al.
On June 5, 2013, Enova Technology Corporation (Enova) filed a complaint against Seagate Technology (US) Holdings, Inc. and Seagate Technology LLC in the U.S. District Court for the District of Delaware alleging
infringement of U.S. Patent No. 7,136,995 (the 995 patent), Cryptographic Device, and U.S. Patent No. 7,900,057 (the 057 patent), Cryptographic Serial ATA Apparatus and
Method. The Company believes the claims are without merit and intends to vigorously defend this case. On April 27, 2015, the district court ordered a stay of the case, in view of proceedings regarding the 995 and
057 patents before the Patent Trial and Appeal Board (PTAB) of the U.S. Patent and Trademark Office. On September 2, 2015, PTAB issued its final written decision that
claims 1-15 of
the 995 patent are held unpatentable. On December 18, 2015, PTAB issued its final written decisions that
claims 1-32 and 40-53 of
the 057 patent are held unpatentable. On February 4, 2016, PTAB issued its final written decision that
claims 33-39 of
the 057 patent are held unpatentable. Enova appealed PTABs decisions on the 995 patent and the 057 patent to the U.S. Court of Appeals for the Federal
Circuit. On March 20, 2017, the court of appeals issued its judgment affirming PTABs decision on the 995 patent. On September 6, 2017, the court of appeals issued its judgment affirming PTABs decision on the 057
patent. In view of the uncertainty regarding the amount of damages, if any, that could be awarded in this matter, the Company does not believe that it is currently possible to determine a reasonable estimate of the possible range of loss related to
this matter.
Lambeth Magnetic Structures LLC v. Seagate Technology (US) Holdings, Inc., et al.
On April 29,
2016, Lambeth Magnetic Structures LLC filed a complaint against Seagate Technology (US) Holdings, Inc. and Seagate Technology LLC in the U.S. District Court for the Western District of Pennsylvania, alleging infringement of U.S. Patent
No. 7,128,988, Magnetic Material Structures, Devices and Methods. The Company believes the claims asserted in the complaint are without merit and intends to vigorously defend this case. The court issued its claim construction ruling
on October 18, 2017. No trial date has been set. In view of the uncertainty regarding the amount of damages, if any, that could be awarded in this matter, the Company does not believe that it is currently possible to determine a reasonable
estimate of the possible range of loss related to this matter.
Environmental Matters
The Companys operations are subject to U.S. and foreign laws and regulations relating to the protection of the
environment, including those governing discharges of pollutants into the air and water, the management and disposal of hazardous substances and wastes and the cleanup of contaminated sites. Some of the Companys operations require environmental
permits and controls to prevent and reduce air and water pollution, and these permits are subject to modification, renewal and revocation by issuing authorities.
The Company has established environmental management systems and continually updates its environmental policies and standard
operating procedures for its operations worldwide. The Company believes that its operations are in material compliance with applicable environmental laws, regulations and permits. The Company budgets for operating and capital costs on an ongoing
basis to comply with environmental laws. If additional or more stringent requirements are imposed on the Company in the future, it could incur additional operating costs and capital expenditures.
Some environmental laws, such as the Comprehensive Environmental Response Compensation and Liability Act of 1980 (as amended,
the Superfund law) and its state equivalents, can impose liability for the cost of cleanup of contaminated sites upon any of the current or former site owners or operators or upon parties who sent waste to these sites, regardless of
whether the owner or operator owned the site at the time of the release of hazardous substances or the lawfulness of the original disposal activity. The Company has been identified as a potentially responsible party at several sites. At each of
these sites, the Company has an assigned portion of the financial liability based on the type and amount of hazardous substances disposed of by each party at the site and the number of financially viable parties. The Company has fulfilled its
responsibilities at some of these sites and remains involved in only a few at this time.
While the Companys
ultimate costs in connection with these sites is difficult to predict with complete accuracy, based on its current estimates of cleanup costs and its expected allocation of these costs, the Company does not expect costs in connection with these
sites to be material.
25
The Company may be subject to various state, federal and international laws and
regulations governing the environment, including those restricting the presence of certain substances in electronic products. For example, the European Union (EU) enacted the Restriction of the Use of Certain Hazardous Substances in
Electrical and Electronic Equipment, which prohibits the use of certain substances, including lead, in certain products, including disk drives and server storage products, put on the market after July 1, 2006. Similar legislation has been or
may be enacted in other jurisdictions, including in the United States, Canada, Mexico, Taiwan, China, Japan and others. The European Union REACH Directive (Registration, Evaluation, Authorization, and Restriction of Chemicals, EC 1907/2006) also
restricts substances of very high concern (SVHCs) in products. If the Company or its suppliers fails to comply with the substance restrictions, recycle requirements or other environmental requirements as they are enacted worldwide, it
could have a materially adverse effect on the Companys business.
Other Matters
The Company is involved in a number of other judicial, regulatory or administrative proceedings and investigations incidental
to its business, and the Company may be involved in such proceedings arising in the normal course of its business in the future. Although occasional adverse decisions or settlements may occur, the Company believes that the final disposition of such
matters will not have a material adverse effect on its financial position or results of operations.
Investment commitment to acquire preferred equity securities
On September 28, 2017, the Company entered into an Equity Commitment Letter (ECL) with a consortium of
investors led by Bain Capital Private Equity for the acquisition of Toshiba Memory Corporation (TMC). The ECL contemplates that, upon the closing of the acquisition, the Company or one of its subsidiaries would purchase up to JPY
139.5 billion (approximately USD 1.25 billion based on current exchange rates), of a newly issued
non-convertible
preferred equity security of a newly formed company, K. K. Pangea, for the purpose of
acquiring TMC. The closing of the acquisition is subject to regulatory approvals and other closing conditions.
Dividend Declared
On October 23, 2017, the Companys Board of Directors approved and declared a quarterly cash dividend of $0.63 per
share, which will be payable on January 3, 2018 to shareholders of record as of the close of business on December 20, 2017.
26