Quarterly Report (10-q)

Date : 02/05/2020 @ 11:04AM
Source : Edgar (US Regulatory)
Stock : Seagate Technology PLC (STX)
Quote : 47.53  1.77 (3.87%) @ 3:50PM

Quarterly Report (10-q)

Seagate Technology 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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
____________________________ 
FORM 10-Q
___________________________ 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended January 3, 2020
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the transition period from:                to                
Commission File Number 001-31560
 _______________________________________
SEAGATE TECHNOLOGY PUBLIC LIMITED COMPANY
(Exact name of registrant as specified in its charter)
 _______________________________________
Ireland   98-0648577
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization)   Identification Number)
38/39 Fitzwilliam Square
Dublin 2, Ireland
(Address of principal executive offices)
D02 NX53
(Zip Code)
 
Telephone: (353) (1) 234-3136
(Registrant’s telephone number, including area code)
_______________________________________ 
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Trading Symbol(s) Name of each exchange
on which registered
Ordinary Shares, par value $0.00001 per share STX The NASDAQ Global Select Market
_______________________________________ 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer Accelerated filer: 
Non-accelerated filer: Smaller reporting company: 
Emerging growth company:
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes No
As of January 31, 2020, 260,956,046 of the registrant’s ordinary shares, par value $0.00001 per share, were issued and outstanding.




INDEX
SEAGATE TECHNOLOGY PLC

      PAGE NO.   
       
   
 
3
   
4
   
5
6
   
7
   
8
   
10
 
29
 
37
 
38
 
 
38
 
38
 
39
 
39
 
39
 
39
 
40
   
41

2

PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Table of Contents Page
4
5
6
7
8
10
10
12
15
16
16
17
18
21
24
24
25
26
27
28

See Notes to Condensed Consolidated Financial Statements.
3


SEAGATE TECHNOLOGY PLC
CONDENSED CONSOLIDATED BALANCE SHEETS
(In millions)

  January 3,
2020
June 28,
2019
(unaudited)
ASSETS    
Current assets:    
Cash and cash equivalents $ 1,744    $ 2,220   
Accounts receivable, net 1,112    989   
Inventories 1,148    970   
Other current assets 148    184   
Total current assets 4,152    4,363   
Property, equipment and leasehold improvements, net 2,049    1,869   
Goodwill 1,237    1,237   
Other intangible assets, net 83    111   
Deferred income taxes 1,119    1,114   
Other assets, net 292    191   
Total Assets $ 8,932    $ 8,885   
LIABILITIES AND EQUITY    
Current liabilities:    
Accounts payable $ 1,870    $ 1,420   
Accrued employee compensation 191    169   
Accrued warranty 80    91   
Current portion of long-term debt   —   
Accrued expenses 553    552   
Total current liabilities 2,700    2,232   
Long-term accrued warranty 89    104   
Long-term accrued income taxes    
Other non-current liabilities 175    130   
Long-term debt 4,135    4,253   
Total Liabilities 7,102    6,723   
Commitments and contingencies (See Notes 11 and 13)
Shareholders’ Equity:
Ordinary shares and additional paid-in capital 6,667    6,545   
Accumulated other comprehensive loss (33)   (34)  
Accumulated deficit (4,804)   (4,349)  
Total Equity 1,830    2,162   
  Total Liabilities and Equity $ 8,932    $ 8,885   




See Notes to Condensed Consolidated Financial Statements.
4


SEAGATE TECHNOLOGY PLC
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In millions, except per share data)
(Unaudited)
  For the Three Months Ended For the Six Months Ended
  January 3,
2020
December 28,
2018
January 3,
2020
December 28,
2018
Revenue $ 2,696    $ 2,715    $ 5,274    $ 5,706   
 
Cost of revenue 1,938    1,921    3,845    3,999   
Product development 250    246    505    512   
Marketing and administrative 120    120    242    235   
Amortization of intangibles       11   
Restructuring and other, net —      17    30   
Total operating expenses 2,312    2,299    4,617    4,787   
 
Income from operations 384    416    657    919   
 
Interest income   22    15    46   
Interest expense (48)   (56)   (103)   (114)  
Other, net (4)   16    (35)   15   
Other expense, net (48)   (18)   (123)   (53)  
 
Income before income taxes 336    398    534    866   
Provision for income taxes 18    14    16    32   
Net income $ 318    $ 384    $ 518    $ 834   
 
Net income per share:
Basic $ 1.21    $ 1.35    $ 1.96    $ 2.92   
Diluted 1.20    1.34    1.93    2.88   
Number of shares used in per share calculations:    
Basic 262    285    264    286   
Diluted 265    287    268    290   
Cash dividends declared per ordinary share
$ 0.65    $ 0.63    $ 1.28    $ 1.26   


See Notes to Condensed Consolidated Financial Statements.
5


SEAGATE TECHNOLOGY PLC
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In millions)
(Unaudited)
  For the Three Months Ended For the Six Months Ended
  January 3,
2020
December 28,
2018
January 3,
2020
December 28,
2018
Net income $ 318    $ 384    $ 518    $ 834   
Other comprehensive income (loss), net of tax:
Cash flow hedges
Change in net unrealized gain (loss) on cash flow hedges   (4)     (1)  
Less: reclassification for amounts included in net income   (1)     (2)  
Net change   (5)     (3)  
Foreign currency translation adjustments   (4)   (2)   (2)  
Total other comprehensive income (loss), net of tax   (9)     (5)  
Comprehensive income $ 325    $ 375    $ 519    $ 829   


See Notes to Condensed Consolidated Financial Statements.
6


SEAGATE TECHNOLOGY PLC
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)
(Unaudited)
  For the Six Months Ended   
  January 3,
2020
December 28,
2018
OPERATING ACTIVITIES    
Net income $ 518    $ 834   
Adjustments to reconcile net income to net cash provided by operating activities:  
Depreciation and amortization 185    272   
Share-based compensation 53    45   
Deferred income taxes (4)    
Other non-cash operating activities, net 47    (44)  
Changes in operating assets and liabilities:  
Accounts receivable, net (124)   135   
Inventories (172)   (47)  
Accounts payable 458    (240)  
Accrued employee compensation 22    (89)  
Accrued expenses, income taxes and warranty (38)   (16)  
Other assets and liabilities (9)   24   
Net cash provided by operating activities 936    875   
INVESTING ACTIVITIES    
Acquisition of property, equipment and leasehold improvements (341)   (304)  
Proceeds from settlement of foreign currency forward exchange contracts —    66   
Proceeds from sale of strategic investments —    10   
Proceeds from the sale of assets    
Purchases of investments (45)   (8)  
Net cash used in investing activities (385)   (230)  
FINANCING ACTIVITIES  
Redemption and repurchase of debt (645)   (499)  
Dividends to shareholders (335)   (361)  
Repurchases of ordinary shares (600)   (286)  
Taxes paid related to net share settlement of equity awards (39)   (30)  
Net proceeds from issuance of long-term debt 498    —   
Proceeds from issuance of ordinary shares under employee stock plans 69    35   
Other financing activities, net (2)   —   
Net cash used in financing activities (1,054)   (1,141)  
Effect of foreign currency exchange rate changes on cash, cash equivalents and restricted cash (2)   (1)  
Decrease in cash, cash equivalents and restricted cash (505)   (497)  
Cash, cash equivalents and restricted cash at the beginning of the period 2,251    1,857   
Cash, cash equivalents and restricted cash at the end of the period $ 1,746    $ 1,360   


See Notes to Condensed Consolidated Financial Statements.
7


SEAGATE TECHNOLOGY PLC
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY 
For the Three Months Ended January 3, 2020 and December 28, 2018
(In millions)
(Unaudited)
Number
of
Ordinary
Shares
Par Value
of Shares
Additional
Paid-in
Capital
Accumulated
Other
Comprehensive
Loss
Accumulated
Deficit
Total
Balance at October 4, 2019 263    $ —    $ 6,610    $ (40)   $ (4,800)   $ 1,770   
Net income 318    318   
Other comprehensive income
   
Issuance of ordinary shares under employee stock plans
  30    30   
Repurchases of ordinary shares
(3)   (150)   (150)  
Tax withholding related to vesting of restricted stock units
(2)   (2)  
Dividends to shareholders
(170)   (170)  
Share-based compensation
27    27   
Balance at January 3, 2020 261    $ —    $ 6,667    $ (33)   $ (4,804)   $ 1,830   

  Number
of
Ordinary
Shares
Par Value
of Shares
Additional
Paid-in
Capital
Accumulated
Other
Comprehensive
Loss
Accumulated
Deficit
Total
Balance at September 28, 2018 286    $ —    $ 6,427    $ (12)   $ (4,569)   $ 1,846   
Net income 384    384   
Other comprehensive loss
(9)   (9)  
Issuance of ordinary shares under employee stock plans
   
Repurchases of ordinary shares
(3)   (136)   (136)  
Tax withholding related to vesting of restricted stock units
(3)   (3)  
Dividends to shareholders
(178)   (178)  
Share-based compensation
27    27   
Balance at December 28, 2018 283    $ —    $ 6,457    $ (21)   $ (4,502)   $ 1,934   

See Notes to Condensed Consolidated Financial Statements.
8


SEAGATE TECHNOLOGY PLC
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
For the Six Months Ended January 3, 2020 and December 28, 2018
(In millions)
(Unaudited)
Number
of
Ordinary
Shares
Par Value
of Shares
Additional
Paid-in
Capital
Accumulated
Other
Comprehensive
Loss
Accumulated
Deficit
Total
Balance at June 28, 2019 269    $ —    $ 6,545    $ (34)   $ (4,349)   $ 2,162   
Impact of adopting new lease standard (Note 1) (2)   (2)  
Net income 518    518   
Other comprehensive income
   
Issuance of ordinary shares under employee stock plans
  69    69   
Repurchases of ordinary shares
(12)   (597)   (597)  
Tax withholding related to vesting of restricted stock units
(1)   (39)   (39)  
Dividends to shareholders
(335)   (335)  
Share-based compensation
53    53   
Balance at January 3, 2020 261    $ —    $ 6,667    $ (33)   $ (4,804)   $ 1,830   

  Number
of
Ordinary
Shares
Par Value
of Shares
Additional
Paid-in
Capital
Accumulated
Other
Comprehensive
Loss
Accumulated
Deficit
Total
Balance at June 29, 2018 287    $ —    $ 6,377    $ (16)   $ (4,696)   $ 1,665   
Cumulative effect of adoption of new revenue standard 34    34   
Net income 834    834   
Other comprehensive loss
(5)   (5)  
Issuance of ordinary shares under employee stock plans
  35    35   
Repurchases of ordinary shares
(6)   (286)   (286)  
Tax withholding related to vesting of restricted stock units
(1)   (30)   (30)  
Dividends to shareholders
(358)   (358)  
Share-based compensation
45    45   
Balance at December 28, 2018 283    $ —    $ 6,457    $ (21)   $ (4,502)   $ 1,934   


See Notes to Condensed Consolidated Financial Statements.
9


SEAGATE TECHNOLOGY PLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1.Basis of Presentation and Summary of Significant Accounting Policies
Organization
Seagate Technology plc (“STX”) and its subsidiaries (collectively, unless the context otherwise indicates, 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 (“SSDs”), solid state hybrid drives (“SSHDs”) and storage subsystems.
HDDs are devices that store digitally encoded data on rapidly rotating disks with magnetic surfaces. HDDs continue to be the primary medium of mass data storage due to their performance attributes, reliability, high quality and cost effectiveness. Complementing existing data center storage architecture, SSDs use integrated circuit assemblies as memory to store data, and most SSDs use NAND flash memory. In addition to HDDs and SSDs, SSHDs combine the features of SSDs and HDDs in the same unit, containing a high capacity HDD and a smaller SSD acting as a cache to improve performance of frequently accessed data.
The Company’s HDD products are designed for both mass capacity storage and legacy markets. Mass capacity storage supports high capacity, low-cost storage applications, including nearline, video and image applications and network-attached storage (“NAS”). Legacy markets include mission critical, desktop, notebook, digital video recorders (“DVRs”), gaming consoles and consumer applications. These markets were previously categorized as enterprise servers and storage systems, edge non-compute applications, and edge compute applications. The Company’s SSD product portfolio is mainly comprised of Serial Attached SCSI (“SAS”) and Non-Volatile Memory Express (“NVMe”) and is designed primarily for applications in enterprise servers and storage systems.
The Company’s enterprise data solutions (“EDS”) portfolio includes storage subsystems for enterprises, cloud service providers, scale-out storage servers and original equipment manufacturers (“OEMs”).
Basis of Presentation and Consolidation
The Company’s unaudited condensed consolidated financial statements include the accounts of the Company and all its wholly-owned and majority-owned subsidiaries, after elimination of intercompany transactions and balances.
The preparation of financial statements in accordance with the United States (“U.S.”) generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the Company’s condensed consolidated financial statements and accompanying notes. Actual results could differ materially from those estimates. The methods, estimates and judgments the Company uses in applying its most critical accounting policies have a significant impact on the results the Company reports in its condensed consolidated financial statements.
The Company’s consolidated financial statements for the fiscal year ended June 28, 2019 are included in its Annual Report on Form 10-K, as filed with the U.S. Securities and Exchange Commission (“SEC”) on August 2, 2019. The Company believes that the disclosures included in these unaudited condensed consolidated financial statements, when read in conjunction with its consolidated financial statements as of June 28, 2019, and the notes thereto, are adequate to make the information presented not misleading.
Fiscal Year
The Company operates and reports financial results on a fiscal year of 52 or 53 weeks ending on the Friday closest to June 30. In fiscal years with 53 weeks, the first quarter consists of 14 weeks and the remaining quarters consist of 13 weeks each. The three and six months ended January 3, 2020 consisted of 13 weeks and 27 weeks, respectively, and the three and six months ended December 28, 2018 consisted of 13 weeks and 26 weeks, respectively. Fiscal year 2020, which ends on July 3, 2020, is comprised of 53 weeks and fiscal year 2019, which ended on June 28, 2019, was comprised of 52 weeks. The fiscal quarters ended January 3, 2020, October 4, 2019 and December 28, 2018, are also referred to herein as the “December 2019 quarter”, the “September 2019 quarter” and the “December 2018 quarter”, respectively. The results of operations for the three and six months ended January 3, 2020 are not necessarily indicative of the results of operations to be expected for any subsequent interim period or for the Company’s fiscal year ending July 3, 2020.
Summary of Significant Accounting Policies
Except for the change in the Company’s other long-lived assets and leases policies described below, there have been no material changes to the Company’s significant accounting policies disclosed in Note 1. Basis of Presentation and Summary of Significant Accounting Policies of “Financial Statements and Supplementary Data” contained in Part II, Item 8. of the Company’s Annual Report on Form 10-K for the fiscal year ended June 28, 2019, as filed with the SEC on August 2, 2019.
10

Other Long-Lived Assets
In accordance with its policy, the Company reviews the estimated useful lives of its fixed assets on an ongoing basis. This review indicated that the actual lives of certain manufacturing equipment at its manufacturing facilities were longer than the estimated useful lives used for depreciation purposes in the Company’s condensed consolidated financial statements. As a result, effective June 29, 2019, the Company changed its estimate of the useful lives of its manufacturing equipment from a range of three to five years to a range of three to seven years. The effect of this change in estimate increased the net income by $42 million and $65 million for the three and six months ended January 3, 2020, respectively, and increased the diluted earnings per share by $0.16 and $0.24 for the three and six months ended January 3, 2020, respectively.
Leases
Effective June 29, 2019, the Company adopted a new accounting policy for leases in accordance with Accounting Standard Codification (“ASC”) 842, Leases, using the modified retrospective approach. Accordingly, the Company applied the new lease accounting standard prospectively to leases existing or commencing on or after June 29, 2019. The Company elected to apply the practical expedients which allow for not reassessing whether existing contracts contain leases, the classification of existing leases and whether the existing initial direct costs meet the new definition. In addition, the Company elected to combine lease and non-lease components for facility leases and to not recognize right-of-use (“ROU”) assets and lease liabilities for leases with an initial term of 12 months or less on the balance sheet.
The Company determines if an arrangement is a lease or contains a lease at inception. ROU assets are included in Other assets, net and lease liabilities are included in Accrued expenses and Other non-current liabilities on the Company’s Condensed Consolidated Balance Sheets. ROU assets represent the Company’s right to use an underlying asset for the lease term and the corresponding lease liabilities represent its obligation to make lease payments arising from the lease.
Lease liabilities are measured at the present value of the remaining lease payments and ROU assets are based on the lease liability, adjusted for lease prepayments, lease incentives received and the lessee’s initial direct costs. As the Company’s leases do not provide an implicit rate, the net present value of future minimum lease payments is determined using the Company’s estimated incremental borrowing rate based on the information available at the lease commencement date. Additionally, the Company’s lease term may include options to extend or terminate the lease. These options are reflected in the ROU asset and lease liability when it is reasonably certain that the Company will exercise the option. The Company’s lease agreements do not contain any material residual value guarantees.
The Company recognizes lease expense on a straight-line basis over the lease term. Variable lease payments not dependent on an index or a rate primarily consist of common area maintenance charges, are expensed as incurred, and are not included in the ROU asset and lease liability calculation. The total operating and variable lease costs were included in operating expenses in the Company’s Condensed Consolidated Statements of Operations.
Recently Adopted Accounting Pronouncements
In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standard Update (“ASU”) 2016-02 (ASC Topic 842), Leases, and subsequently issued certain interpretive clarifications on this new guidance which amend a number of aspects of lease accounting, including requiring a lessee to recognize an ROU asset and corresponding lease liability for operating leases and enhanced disclosures. As of June 29, 2019, adoption of the standard resulted in the recognition of ROU assets and corresponding current and non-current lease liabilities of $115 million, $17 million and $57 million, respectively, on the Company’s Condensed Consolidated Balance Sheet, primarily relating to real estate operating leases. The adoption of this ASU did not have a material impact on the Company’s other condensed consolidated financial statements. For information regarding the impact of ASC 842 adoption, see Summary of Significant Accounting Policies - Leases above and Note 5. Leases.
In February 2018, the FASB issued ASU 2018-02 (ASC Topic 220), Income Statement—Reporting Comprehensive Income: Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. This ASU was issued following the enactment of the U.S. Tax Cuts and Jobs Act of 2017 (the “Tax Act”) and permits entities to elect a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Act. This ASU became effective and the Company adopted the guidance in the September 2019 quarter. The Company has elected not to reclassify the stranded amounts. The adoption of this guidance did not have a material impact on its condensed consolidated financial statements and disclosures.
11

Recently Issued Accounting Pronouncements
In August 2018, the FASB issued ASU 2018-15 (ASC Subtopic 350-40), Intangibles - Goodwill and Other - Internal-Use Software - Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That is a Service Contract. This ASU aligns the accounting for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the accounting for implementation costs incurred to develop or obtain internal-use software. The Company is required to adopt the guidance in the first quarter of fiscal year 2021. Early adoption is permitted. The Company is in the process of assessing the impact of this ASU on its consolidated financial statements.
In June 2016, the FASB issued ASU 2016-13 (ASC Topic 326), Financial Instruments—Credit Losses: Measurement of Credit Losses on Financial Instruments. This ASU amends the requirement on the measurement and recognition of expected credit losses for financial assets held. The Company is required to adopt this guidance in the first quarter of fiscal year 2021. The Company is in the process of assessing the impact of this ASU on its consolidated financial statements.
In December 2019, the FASB issued ASU 2019-12 (ASC Topic 740), Simplifying the Accounting for Income Taxes. This ASU simplifies accounting for income taxes by removing certain exceptions to the general principles and amending existing guidance to improve consistent application. The Company is required to adopt this guidance in the first quarter of fiscal year 2022. Early adoption is permitted. The Company is in the process of assessing the impact of this ASU on its consolidated financial statements.

2.Balance Sheet Information
Available-for-sale Debt Securities
The following table summarizes, by major type, the fair value and amortized cost of the Company’s investments as of January 3, 2020:
(Dollars in millions) Amortized
Cost
Unrealized
Gain/(Loss)
Fair
Value
Available-for-sale debt securities:      
Money market funds $ 571    $ —    $ 571   
Time deposits and certificates of deposit 101    —    101   
Other debt securities 14    —    14   
Total $ 686    $ —    $ 686   
Included in Cash and cash equivalents     $ 670   
Included in Other current assets      
Included in Other assets, net 14   
Total     $ 686   
 
As of January 3, 2020, the Company’s Other current assets included $2 million in restricted cash and investments held as collateral at banks for various performance obligations.
As of January 3, 2020, the Company had no material available-for-sale debt securities that had been in a continuous unrealized loss position for a period greater than 12 months. The Company determined no available-for-sale debt securities were other-than-temporarily impaired as of January 3, 2020.
The fair value and amortized cost of the Company’s investments classified as available-for-sale debt securities as of January 3, 2020, by remaining contractual maturity were as follows:
(Dollars in millions) Amortized
Cost
Fair
Value
Due in less than 1 year $ 672    $ 672   
Due in 1 to 5 years    
Due in 6 to 10 years —    —   
Thereafter    
Total $ 686    $ 686   

12

The following table summarizes, by major type, the fair value and amortized cost of the Company’s investments as of June 28, 2019:
(Dollars in millions) Amortized
Cost
Unrealized
Gain/(Loss)
Fair
Value
Available-for-sale debt securities:      
Money market funds $ 417    $ —    $ 417   
Time deposits and certificates of deposit 133    —    133   
Other debt securities   —     
Total $ 557    $ —    $ 557   
Included in Cash and cash equivalents     $ 548   
Included in Other current assets      
Included in Other assets, net  
Total     $ 557   

As of June 28, 2019, the Company’s Other current assets included $2 million in restricted cash and investments held as collateral at banks for various performance obligations.
As of June 28, 2019, the Company had no material available-for-sale debt securities that had been in a continuous unrealized loss position for a period greater than 12 months. The Company determined no available-for-sale debt securities were other-than-temporarily impaired as of June 28, 2019.
Cash, Cash Equivalents and Restricted Cash
The following table provides a summary of cash, cash equivalents and restricted cash reported on the Company’s Condensed Consolidated Balance Sheets that reconciles to the corresponding amount in its Condensed Consolidated Statements of Cash Flows:
(Dollars in millions) January 3,
2020
June 28,
2019
December 28,
2018
June 29,
2018
Cash and cash equivalents $ 1,744    $ 2,220    $ 1,357    $ 1,853   
Restricted cash included in Other current assets   31       
Total cash, cash equivalents and restricted cash presented on the Statements of Cash Flows $ 1,746    $ 2,251    $ 1,360    $ 1,857   

As of June 28, 2019, the Company’s Other current assets included $31 million in restricted cash and cash equivalents in an escrow account for the sale of certain properties and cash equivalents held as collateral at banks for various performance obligations.
Inventories
The following table provides details of the inventory balance sheet item:
(Dollars in millions) January 3,
2020
June 28,
2019
Raw materials and components $ 346    $ 336   
Work-in-process 365    217   
Finished goods 437    417   
Total inventories $ 1,148    $ 970   

13

Property, Equipment and Leasehold Improvements, net
The components of property, equipment and leasehold improvements, net, were as follows:
(Dollars in millions) January 3,
2020
June 28,
2019
Property, equipment and leasehold improvements $ 10,095    $ 9,835   
Accumulated depreciation and amortization (8,046)   (7,966)  
Property, equipment and leasehold improvements, net $ 2,049    $ 1,869   
 
Accrued Expenses
The following table provides details of the accrued expenses balance sheet item:
(Dollars in millions) January 3,
2020
June 28,
2019
Dividends payable $ 170    $ 170   
Other accrued expenses 383    382   
Total accrued expenses $ 553    $ 552   

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 Available-for-Sale Debt Securities Unrealized Gains/(Losses) on Post-Retirement Plans Foreign Currency Translation Adjustments Total
Balance at June 28, 2019 $ —    $ —    $ (20)   $ (14)   $ (34)  
Other comprehensive income (loss) before reclassifications
  —    —    (2)   —   
Amounts reclassified from AOCI   —    —    —     
Other comprehensive income (loss)   —    —    (2)    
Balance at January 3, 2020 $   $ —    $ (20)   $ (16)   $ (33)  
Balance at June 29, 2018 $ —    $ —    $ (4)   $ (12)   $ (16)  
Other comprehensive loss before reclassifications
(1)   —    —    (2)   (3)  
Amounts reclassified from AOCI (2)   —    —    —    (2)  
Other comprehensive loss (3)   —    —    (2)   (5)  
Balance at December 28, 2018 $ (3)   $ —    $ (4)   $ (14)   $ (21)  


14

3.Debt
Credit Agreement
The Company’s subsidiary, Seagate HDD Cayman, entered into a credit agreement (the “Credit Agreement”) on February 20, 2019, which was most recently amended on September 16, 2019. The Credit Agreement provides an up to $1.5 billion senior unsecured revolving credit facility (“Revolving Credit Facility”) and a term loan facility in an aggregate principal amount of $500 million (“Term Loan”). The Revolving Credit Facility has a final maturity of February 20, 2024 and the Term Loan has a final maturity date of September 16, 2025. The loans made under the Revolving Credit Facility and the Term Loan will bear interest at a rate of the London Interbank Offered Rate (“LIBOR”) plus a variable margin for each facility that will be determined based on the corporate credit rating of the Company. STX and certain of its material subsidiaries fully and unconditionally guarantee both the Revolving Credit Facility and the Term Loan. The Revolving Credit Facility also allows such facility to increase by an additional $100 million, provided that (i) there has been, and will be after giving effect to such increase, no default, (ii) the increase is at least $25 million, and (iii) the existing commitments under such facility receive 0.50% most favored nation protection. An aggregate amount of up to $75 million of the Revolving Credit Facility is available for the issuance of letters of credit, and an aggregate amount of up to $50 million of such facility is also available for swing line loans.
On September 17, 2019, Seagate HDD Cayman borrowed the $500 million principal amount under the Term Loan and the proceeds were used to repurchase a portion of its outstanding senior notes. The Term Loan is repayable in quarterly installments of 1.25% of the original principal amount beginning on December 31, 2020, with the remaining balance payable upon maturity.
The Credit Agreement includes three financial covenants: (1) interest coverage ratio, (2) total leverage ratio, and (3) a minimum liquidity amount. The Company was in compliance with the covenants as of January 3, 2020 and expects to be in compliance for the next 12 months.
As of January 3, 2020, no borrowings were drawn and no letters of credit or swing line loans had been utilized under the Revolving Credit Facility.
Other Long-Term Debt
$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 STX. On September 18, 2019, the principal amount of approximately $250 million was repurchased pursuant to cash tender offers for certain senior notes (the Tender Offers”). The Company recorded a loss of $10 million during the six months ended January 3, 2020, which was included in Other, net in the Company’s Condensed Consolidated Statements of Operations.
$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 STX. On September 18, 2019, the principal amount of $200 million was repurchased pursuant to the Tender Offers. The Company recorded a loss of $10 million during the six months ended January 3, 2020, which was included in Other, net in the Company’s Condensed Consolidated Statements of Operations.
$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 STX.
$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 STX. On September 18, 2019, the principal amount of approximately $170 million was repurchased pursuant to the Tender Offers. The Company recorded a loss of $8 million during the six months ended January 3, 2020, which was included in Other, net in the Company’s Condensed Consolidated Statements of Operations.
$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 STX.
15

$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 STX.
At January 3, 2020, future principal payments on long-term debt were as follows (in millions):
Fiscal Year Amount
Remainder of 2020 $ —   
2021 19   
2022 525   
2023 766   
2024 525   
Thereafter 2,336   
Total $ 4,171   

4.Income Taxes
The Company recorded income tax provisions of $18 million and $16 million in the three and six months ended January 3, 2020, respectively. The discrete items in the income tax provision were not material for the three months ended January 3, 2020. The income tax provision for the six months ended January 3, 2020 included approximately $10 million of net discrete tax benefits, primarily associated with net excess tax benefits related to share-based compensation expense.
The Company’s income tax provision recorded for the three and six months ended January 3, 2020 differed from the provision for income taxes that would be derived by applying the Irish statutory rate of 25% to income before income taxes, primarily due to the net effect of tax benefits related to (i) non-Irish earnings generated in jurisdictions that are subject to tax incentive programs and are considered indefinitely reinvested outside of Ireland and (ii) current year generation of research credits.
During the six months ended January 3, 2020, the Company’s unrecognized tax benefits excluding interest and penalties increased by approximately $3 million to $86 million; substantially all of which would impact the effective tax rate, if recognized, subject to certain future valuation allowance reversals. During the twelve months beginning January 4, 2020, the Company expects that its unrecognized tax benefits could be reduced by an immaterial amount as a result of the expiration of certain statutes of limitation.
During the three months ended January 3, 2020, there has been various tax legislation passed which become effective in the Company’s fiscal years 2020 and 2021. Tax legislation effective in fiscal year 2020 has no impact to the Company’s financial statements. For tax legislation effective beginning fiscal year 2021, the Company is in the process of assessing the impact of these tax law changes to the consolidated financial statements.
The Company recorded income tax provisions of $14 million and $32 million in the three and six months ended December 28, 2018, respectively. The income tax provision for the three and six months ended December 28, 2018 included approximately $5 million and $4 million of net discrete tax benefits, respectively, primarily associated with the recognition of previously unrecognized tax benefits related to the expiration of certain statutes of limitation.
The Company’s income tax provision recorded for the three and six months ended December 28, 2018 differed from the provision for income taxes that would be derived by applying the Irish statutory rate of 25% to income before income taxes, primarily due to the net effect of (i) tax benefits related to non-Irish earnings generated in jurisdictions that are subject to tax incentive programs and are considered indefinitely reinvested outside of Ireland and (ii) a decrease in valuation allowance for certain deferred tax assets.

5.Leases
The Company is a lessee in several operating leases related to real estate facilities for warehouse and office space.
The Company’s lease arrangements comprise operating leases with various expiration dates through 2082. The lease term includes the non-cancelable period of the lease, adjusted for options to extend or terminate the lease when it is reasonably certain that an option will be exercised.
16

Operating lease costs include short-term lease costs and are shown net of immaterial sublease income. The components of lease costs and other information related to leases were as follows:
(Dollars in millions) For the Three Months Ended January 3, 2020 For the Six Months Ended January 3, 2020
Operating lease cost $   $ 11   
Variable lease cost    
Total lease cost $   $ 13   
Operating cash outflows from operating leases $   $  

January 3,
2020
Weighted-average remaining lease term 12.9 years
Weighted-average discount rate 6.29  %

ROU assets and lease liabilities are included on the Company’s Condensed Consolidated Balance Sheet as follows:
(Dollars in millions) Balance Sheet Location January 3,
2020
ROU assets Other assets, net $ 109   
Current lease liabilities Accrued expenses $ 14   
Non-current lease liabilities Other non-current liabilities $ 55   

At January 3, 2020, future lease payments included in the measurement of lease liabilities were as follows (in millions):
Fiscal Year Amount
Remainder of 2020 $  
2021 16   
2022 14   
2023 10   
2024  
Thereafter 105   
Total lease payments 156   
Less: imputed interest (87)  
Present value of lease liabilities $ 69   


6.Restructuring and Exit Costs
The Company recorded net restructuring charges of approximately $17 million for the six months ended January 3, 2020. Restructuring charges were not material for the three months ended January 3, 2020. The Company’s restructuring plans are comprised primarily of charges related to workforce reduction costs and facilities and other exit costs. All restructuring charges are reported in Restructuring and other, net on the Company’s Condensed Consolidated Statements of Operations.
The following table summarizes the Company’s restructuring activities under all of the Company’s active restructuring plans for the six months ended January 3, 2020:
17

Restructuring Plans
(Dollars in millions) Workforce Reduction Costs Facilities and Other Exit Costs Total
Accrual balances at June 28, 2019 $ 13    $ 17    $ 30   
Lease adoption adjustment —    (11)   (11)  
Restructuring charges 20      21   
Cash payments (15)   (3)   (18)  
Adjustments (4)   —    (4)  
Accrual balances at January 3, 2020
$ 14    $   $ 18   
Total costs incurred to date as of January 3, 2020
$ 474    $ 118    $ 592   
Total expected charges to be incurred as of January 3, 2020
$ —    $   $  


7.Derivative Financial Instruments
The Company is exposed to foreign currency exchange rate, interest rate, and to a lesser extent, equity market risks relating to its ongoing business operations. From time to time, the Company enters into cash flow hedges in the form of foreign currency forward exchange contracts. The objective of foreign currency forward exchange contracts is to manage the foreign currency exchange rate risk on forecasted expenses and investments denominated in foreign currencies.
In the September 2019 quarter, the Company entered into certain interest rate swap agreements with a notional amount of $500 million to convert the variable interest rate on its Term Loan to fixed interest rates. The contracts will mature on September 16, 2025. The objective of the interest rate swap agreements is to eliminate the variability of interest payment cash flows associated with variable interest rates. The Company designated the interest rate swaps as cash flow hedges.
The Company’s 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 on its Condensed Consolidated Balance Sheets at fair value. The changes in the fair value of highly effective 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 or are not assessed to be highly effective are adjusted to fair value through earnings. The amount of net unrealized gain on cash flow hedges was $3 million as of January 3, 2020 and the amount of net unrealized loss on cash flow hedges was not material as of June 28, 2019. As of January 3, 2020, the amount of existing net gains related to cash flow hedges recorded in Accumulated other comprehensive loss included $3 million that is expected to be reclassified to earnings within twelve months.
The Company de-designates its cash flow hedges when the forecasted hedged transactions affect earnings or it is probable the forecasted hedged transactions will not occur in the initially identified time period. At such time, the associated gains and losses deferred in Accumulated other comprehensive loss on the Company’s Condensed Consolidated Balance Sheets are reclassified into earnings and any subsequent changes in the fair value of such derivative instruments are immediately reflected in earnings. The Company recognized a net loss of $1 million in Other expense, net related to the loss of hedge designation on discontinued cash flow hedges during the three and six months ended January 3, 2020. The Company recognized a net gain of $1 million and $2 million in Other expense, net related to the loss of hedge designation on discontinued cash flow hedges during the three and six months ended December 28, 2018, respectively.
Other derivatives not designated as hedging instruments consist of foreign currency forward exchange contracts that the Company uses to hedge the foreign currency exposure on forecasted expenditures denominated in currencies other than the U.S. dollar. The Company recognizes gains and losses on these contracts, as well as the related costs in Other, net on its Condensed Consolidated Statements of Operations.
The following tables show the total notional value of the Company’s outstanding foreign currency forward exchange contracts as of January 3, 2020 and June 28, 2019. All of the foreign currency forward exchange contracts mature within 12 months.
  As of January 3, 2020
(Dollars in millions) Contracts
Designated as
Hedges
Contracts Not
Designated as
Hedges
Singapore Dollar $ 26    $ 32   
Chinese Renminbi 10    20   
$ 36    $ 52   

18

  As of June 28, 2019
(Dollars in millions) Contracts
Designated as
Hedges
Contracts Not
Designated as
Hedges
Singapore Dollar $ 60    $ 40   
Chinese Renminbi 79    20   
British Pound Sterling   12   
$ 145    $ 72   

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 plan: the Seagate Deferred Compensation Plan (the “SDCP”). In fiscal year 2014, the Company entered into a Total Return Swap (“TRS”) in order to manage the equity market risks associated with the SDCP liabilities. The Company pays a floating rate, based on LIBOR plus an interest rate spread, on the notional amount of the TRS. The TRS is designed to substantially offset changes in the SDCP liability due to changes in the value of the investment options made by employees. As of January 3, 2020, the notional investments underlying the TRS amounted to $124 million. The contract term of the TRS is through January 2021 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.
The following tables show the Company’s derivative instruments measured at gross fair value as reflected on its Condensed Consolidated Balance Sheets as of January 3, 2020 and June 28, 2019:
As of January 3, 2020
  Derivative Assets Derivative Liabilities
(Dollars in millions) Balance Sheet
Location
Fair
Value
Balance Sheet
Location
Fair
Value
Derivatives designated as hedging instruments:        
Foreign currency forward exchange contracts Other current assets $   Accrued expenses $ —   
Interest rate swap Other current assets   Accrued expenses —   
Derivatives not designated as hedging instruments:    
Foreign currency forward exchange contracts Other current assets —    Accrued expenses —   
Total derivatives   $     $ —   

As of June 28, 2019
  Derivative Assets Derivative Liabilities
(Dollars in millions) Balance Sheet
Location
Fair
Value
Balance Sheet
Location
Fair
Value
Derivatives designated as hedging instruments:        
Foreign currency forward exchange contracts Other current assets $ —    Accrued expenses $ —   
Derivatives not designated as hedging instruments:    
Foreign currency forward exchange contracts Other current assets