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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC  20549

 

FORM 10-Q

 

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

 

For the quarterly period ended December 31, 2010

 

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

 

For the transition period from:          to         

 

Commission File Number 001-31560

 

SEAGATE TECHNOLOGY 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)

 

Arthur Cox Building, Earlsfort Terrace

Dublin 2, Ireland

(Address of Principal Executive Offices)

 

Telephone:  (353) (1) 618-0517

(Registrant’s Telephone Number, Including Area Code)

 

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

 

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

 

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

 

Large accelerated filer: x		Accelerated filer: o
Non-accelerated filer: o		Smaller reporting company: o
(Do not check if a smaller reporting company)

 

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

 

As of January 26, 2011, 452,967,750 shares of the registrant’s ordinary shares, par value $0.00001 per share, were issued and outstanding.

 

 

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INDEX

 

SEAGATE TECHNOLOGY PLC

 

		PAGE NO.
PART I	FINANCIAL INFORMATION
Item 1.	Financial Statements
	Condensed Consolidated Balance Sheets ¾ December 31, 2010 and July 2, 2010 (Unaudited)	3
	Condensed Consolidated Statements of Operations ¾ Three and Six Months ended December 31, 2010 and January 1, 2010 (Unaudited)	4
	Condensed Consolidated Statements of Cash Flows ¾ Six Months ended December 31, 2010 and January 1, 2010 (Unaudited)	5
	Condensed Consolidated Statement of Shareholders’ Equity ¾ Six Months ended December 31, 2010 (Unaudited)	6
	Notes to Condensed Consolidated Financial Statements (Unaudited)	7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	30
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	40
Item 4.	Controls and Procedures	41
PART II	OTHER INFORMATION
Item 1.	Legal Proceedings	42
Item 1A.	Risk Factors	42
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	44
Item 3.	Defaults Upon Senior Securities	44
Item 4.	(Removed and Reserved)	44
Item 5.	Other Information	44
Item 6.	Exhibits	45
	SIGNATURES	55

 

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PART I

FINANCIAL INFORMATION

 

ITEM 1.                FINANCIAL STATEMENTS

 

SEAGATE TECHNOLOGY PLC

CONDENSED CONSOLIDATED BALANCE SHEETS

(In millions)

(Unaudited)

 

		December 31, 2010			July 2, 2010 (a)
ASSETS
Current assets:
Cash and cash equivalents		$	2,528		$	2,263
Short-term investments		286			252
Restricted cash and investments		97			114
Accounts receivable, net		1,392			1,400
Inventories		808			757
Deferred income taxes		112			118
Other current assets		603			514
Total current assets		5,826			5,418
Property, equipment and leasehold improvements, net		2,262			2,263
Deferred income taxes		376			395
Other assets, net		194			171
Total assets		$	8,658		$	8,247
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable		$	1,832		$	1,780
Accrued employee compensation		129			263
Accrued warranty		194			189
Accrued expenses		453			422
Accrued income taxes		10			14
Current portion of long-term debt		560			329
Total current liabilities		3,178			2,997
Long-term accrued warranty		173			183
Long-term accrued income taxes		57			59
Other non-current liabilities		109			111
Long-term debt, less current portion		2,365			2,173
Total liabilities		5,882			5,523
Commitments and contingencies (See Notes 10 and 12)
Shareholders’ equity:
Ordinary shares and additional paid-in capital		3,894			3,851
Accumulated other comprehensive income (loss)		11			(4		)
Retained earnings (accumulated deficit)		(1,129		)	(1,123		)
Total shareholders’ equity		2,776			2,724
Total liabilities and shareholders’ equity		$	8,658		$	8,247

 

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(a) The information in this column was derived from the Company’s audited Consolidated Balance Sheet as of July 2, 2010.

 

See Notes to Condensed Consolidated Financial Statements.

 

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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
		December 31, 2010			January 1, 2010			December 31, 2010			January 1, 2010
Revenue		$	2,719		$	3,027		$	5,417		$	5,690
Cost of revenue		2,190			2,104			4,338			4,114
Product development		213			227			422			434
Marketing and administrative		102			110			206			217
Amortization of intangibles		1			8			2			16
Restructuring and other, net		7			¾			11			46
Impairment of long-lived assets		¾			¾			¾			64
Total operating expenses		2,513			2,449			4,979			4,891
Income from operations		206			578			438			799
Interest income		2			1			4			2
Interest expense		(46		)	(41		)	(92		)	(87		)
Other, net		13			(11		)	(22		)	(7		)
Other income (expense), net		(31		)	(51		)	(110		)	(92		)
Income before income taxes		175			527			328			707
Provision for (benefit from) income taxes		25			(6		)	29			(5		)
Net income		$	150		$	533		$	299		$	712
Net income per share:
Basic		$	0.32		$	1.07		$	0.64		$	1.43
Diluted		0.31			1.03			0.61			1.38
Number of shares used in per share calculations:
Basic		469			498			470			496
Diluted		486			520			487			518

 

See Notes to Condensed Consolidated Financial Statements.

 

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SEAGATE TECHNOLOGY PLC

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In millions)

(Unaudited)

 

		For the Six Months Ended
		December 31, 2010			January 1, 2010
OPERATING ACTIVITIES
Net income		$	299		$	712
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		379			396
Share-based compensation		26			25
Loss on redemption of debt		24			¾
Impairment of long-lived assets		¾			64
Deferred income taxes		27			6
Other non-cash operating activities, net		(9		)	22
Changes in operating assets and liabilities:
Accounts receivable, net		9			(300		)
Inventories		(51		)	(58		)
Accounts payable		243			229
Accrued employee compensation		(134		)	63
Accrued expenses, income taxes and warranty		20			(87		)
Other assets and liabilities		(81		)	(41		)
Net cash provided by operating activities		752			1,031
INVESTING ACTIVITIES
Acquisition of property, equipment and leasehold improvements		(560		)	(192		)
Purchases of short-term investments		(145		)	(190		)
Sales of short-term investments		96			22
Maturities of short-term investments		13			79
Change in restricted cash and investments		17			11
Other investing activities, net		(1		)	(3		)
Net cash used in investing activities		(580		)	(273		)
FINANCING ACTIVITIES
Proceeds from short-term borrowings		¾			15
Repayment of short-term borrowings		¾			(350		)
Repayments of long-term debt and capital lease obligations		(362		)	(380		)
Net proceeds from issuance of long-term debt		736			¾
Repurchases of ordinary shares		(305		)	¾
Change in restricted cash and investments		¾			379
Proceeds from issuance of ordinary shares under employee stock plans		24			42
Net cash provided by (used in) financing activities		93			(294		)
Increase in cash and cash equivalents		265			464
Cash and cash equivalents at the beginning of the period		2,263			1,427
Cash and cash equivalents at the end of the period		$	2,528		$	1,891

 

See Notes to Condensed Consolidated Financial Statements.

 

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SEAGATE TECHNOLOGY PLC

CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY

 

For the Six Months Ended December 31, 2010

(In millions)

(Unaudited)

 

		Number of Ordinary Shares		Par Value of Shares			Additional Paid-in Capital			Accumulated Other Comprehensive Income (Loss)			Retained Earnings (Accumulated Deficit)			Total
Balance at July 2, 2010		470		$	—		$	3,851		$	(4	)	$	(1,123	)	$	2,724
Comprehensive income (loss), net of tax:
Change in unrealized gain (loss) on cash flow hedges, net		—		—			—			15			—			15
Net income		—		—			—			—			299			299
Comprehensive income																314
Issuance of ordinary shares under employee stock plans		4		—			24			—			—			24
Share repurchase		(21	)	—			—			—			(305		)	(305		)
Adjustment to equity component of convertible debt upon redemption		—		—			(7		)	—			—			(7		)
Share-based compensation		—		—			26			—			—			26
Balance at December 31, 2010		453		$	—		$	3,894		$	11		$	(1,129	)	$	2,776

 

See Notes to Condensed Consolidated Financial Statements.

 

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SEAGATE TECHNOLOGY PLC

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

1.  Basis of Presentation and Summary of Significant Accounting Policies

 

Organization and Basis of Presentation and Consolidation

 

Effective as of July 3, 2010, Seagate Technology public limited company, an Irish public limited company, (“Seagate-Ireland”, “Seagate” or the “Company”) became the successor to Seagate Technology, an exempted company incorporated with limited liability under the laws of the Cayman Islands (“Seagate-Cayman”).  In connection with the reorganization, all issued and outstanding Seagate-Cayman common shares were cancelled and ceased to exist, and Seagate-Ireland issued ordinary shares on a one-for-one basis to the holders of Seagate-Cayman common shares for each Seagate-Cayman common share that was cancelled.  For presentation purposes, unless otherwise noted, common shares prior to the reorganization and ordinary shares subsequent to the reorganization are referred to herein as ordinary shares (see Note 8).

 

The Company designs, manufactures, markets and sells hard disk drives.  Hard disk drives, which are commonly referred to as disk drives or hard drives, are used as the primary medium for storing electronic data. The Company produces a broad range of disk drive products addressing enterprise applications, where its products are primarily used in enterprise servers, mainframes and workstations; client compute applications, where its products are used in desktop and notebook computers; and client non-compute applications, where its products are used in a wide variety of devices such as digital video recorders (DVRs), and other consumer electronic devices such as personal data backup systems, portable external storage systems and digital media systems. The Company sells its disk drives primarily to major original equipment manufacturers (OEMs), distributors and retailers. In addition to manufacturing and selling disk drives, the Company provides storage services for small- to medium-sized businesses, including online backup, data protection and recovery solutions.

 

The Condensed Consolidated Financial Statements include the accounts of the Company and all of its wholly-owned subsidiaries, after elimination of intercompany transactions and balances. The Condensed Consolidated Financial Statements have been prepared by the Company and have not been audited.  Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States (GAAP) have been condensed or omitted pursuant to such rules and regulations.  The Condensed Consolidated Financial Statements reflect, in the opinion of management, all adjustments necessary to summarize fairly the consolidated financial position, results of operations, cash flows and shareholders’ equity for the periods presented.  Such adjustments are of a normal and recurring nature.  The Company’s Consolidated Financial Statements for the fiscal year ended July 2, 2010 are included in its Annual Report on Form 10-K as filed with the United States Securities and Exchange Commission (SEC) on August 20, 2010.  The Company believes that the disclosures included in the unaudited Condensed Consolidated Financial Statements, when read in conjunction with its Consolidated Financial Statements as of July 2, 2010 and the notes thereto, are adequate to make the information presented not misleading.

 

The results of operations for the three and six months ended December 31, 2010, are not necessarily indicative of the results of operations to be expected for any subsequent interim period in the Company’s fiscal year ending July 1, 2011. The Company operates and reports financial results on a fiscal year of 52 or 53 weeks ending on the Friday closest to June 30. The three and six months ended December 31, 2010 and January 1, 2010, consisted of 13 weeks and 26 weeks, respectively.  Fiscal year 2011 will be comprised of 52 weeks and will end on July 1, 2011.

 

Critical Accounting Policies and Use of Estimates

 

The preparation of financial statements in accordance with GAAP requires management to make estimates and assumptions that affect the amounts reported in the Company’s 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 consolidated financial statements. The SEC has defined the most critical accounting policies as the ones that are most important to the portrayal of a company’s financial condition and results of operations, and require a company to make its most difficult and subjective judgments, often as a result of the need to make estimates of matters that are highly uncertain at the time of estimation. Based on this definition, the Company’s most critical policies include: establishment of sales program accruals, establishment of warranty accruals, the accounting for income taxes and the accounting for goodwill and other long-lived assets. The Company also has other accounting policies and accounting estimates relating to uncollectible customer accounts, valuation of inventory, valuation of share-based payments and restructuring and exit costs.

 

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SEAGATE TECHNOLOGY PLC

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

 

The Company believes that these other accounting policies and accounting estimates either do not generally require it to make estimates and judgments that are as difficult or as subjective, or it is less likely that they would have a material impact on the Company’s reported results of operations for a given period.

 

Since the Company’s fiscal year ended July 2, 2010, there have been no significant changes in the Company’s critical accounting policies and estimates.  Please refer to Note 1 of “Financial Statements and Supplementary Data” contained in Part II, Item 8 of the Company’s Annual Report on Form 10-K for the fiscal year ended July 2, 2010, as filed with the SEC on August 20, 2010, for a discussion of the Company’s critical accounting policies and estimates.

 

Accounting Changes

 

In October 2009, the FASB issued ASU No. 2009-13, Revenue Recognition (ASC Topic 605) — Multiple-Deliverable Revenue Arrangements , a consensus of the FASB Emerging Issues Task Force.  This guidance modifies the fair value requirements of ASC subtopic 605-25, Revenue Recognition-Multiple Element Arrangements by allowing the use of the best estimate of selling price (BESP) in addition to vendor-specific objective evidence (VSOE) and verifiable objective evidence (VOE) (now referred to as TPE standing for third-party evidence) for determining the selling price of a deliverable. A vendor is now required to use its best estimate of the selling price when VSOE or TPE of the selling price cannot be determined. In addition, the residual method of allocating arrangement consideration is no longer permitted.  The Company implemented the provisions of this guidance as of July 3, 2010 on a prospective basis for all new or materially modified arrangements entered into on or after that date. The adoption of this guidance did not have a material impact on the Company’s consolidated financial statements.

 

In October 2009, the FASB issued ASU No. 2009-14, Software (ASC Topic 985) — Certain Revenue Arrangements That Include Software Elements , a consensus of the FASB Emerging Issues Task Force.  This guidance modifies the scope of ASC subtopic 985-605, Software-Revenue Recognition to exclude from its requirements (a) non-software components of tangible products and (b) software components of tangible products that are sold, licensed, or leased with tangible products when the software components and non-software components of the tangible product function together to deliver the tangible product’s essential functionality.  The Company implemented the provisions of this guidance as of July 3, 2010 on a prospective basis for all new or materially modified arrangements entered into on or after that date. The adoption of this guidance did not have a material impact on the Company’s consolidated financial statements.

 

2.  Balance Sheet Information

 

Investments

 

The Company’s short-term investments are primarily comprised of readily marketable debt securities with remaining maturities of more than 90 days at the time of purchase. With the exception of restricted investments, the Company has classified its entire investment portfolio as available-for-sale and has recognized its investments at fair value with unrealized gains and losses included in Accumulated other comprehensive income (loss), which is a component of shareholders’ equity. The amortized cost of debt securities is adjusted for amortization of premiums and accretion of discounts to maturity. Such amortization and accretion are included in interest income. Realized gains and losses are included in Other, net. The cost of securities sold is based on the specific identification method.

 

The Company’s available-for-sale securities include investments in auction rate securities.  Beginning in fiscal year 2008, the Company’s auction rate securities failed to settle at auction and have continued to fail through December 31, 2010.  Since the Company continues to earn interest on its auction rate securities at the maximum contractual rate, there have been no payment defaults with respect to such securities, and they are all collateralized, the Company expects to recover the entire amortized cost basis of these auction rate securities. The Company does not intend to sell these securities and has concluded it is not more likely than not that the Company will be required to sell the securities before the recovery of their amortized cost basis. As such, the Company believes the impairments totaling $2 million are not other-than-temporary and therefore have been recorded in Accumulated other comprehensive income (loss). Given the uncertainty as to when the liquidity issues associated with these securities will improve, these securities were classified as long-term investments in the Company’s Condensed Consolidated Balance Sheets.

 

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SEAGATE TECHNOLOGY PLC

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

 

The following is a summary of the fair value of available-for-sale securities at December 31, 2010:

 

(Dollars in millions)		Amortized Cost			Unrealized Gain/ (Loss)			Fair Value
Commercial paper		$	1,754		$	—		$	1,754
Money market funds		640			—			640
U.S. treasuries and agency bonds		139			—			139
Corporate bonds		47			—			47
Asset-backed securities		42			—			42
Certificates of deposit		25			—			25
Sovereigns and supranationals		20			—			20
Auction rate securities		19			(2		)	17
Municipal bonds		13			—			13
Total		$	2,699		$	(2	)	$	2,697
Included in Cash and cash equivalents								$	2,394
Included in Short-term investments								286
Included in Other assets, net								17
Total								$	2,697

 

As of December 31, 2010, with the exception of its auction rate securities, the Company had no available-for-sale securities that had been in a continuous unrealized loss position for a period longer than 12 months.  The Company also determined that no available-for-sale securities were other-than-temporarily impaired as of December 31, 2010.

 

The fair value of the Company’s investments in debt securities classified as available-for-sale at December 31, 2010, by remaining contractual maturity was as follows:

 

(Dollars in millions)		Amortized Cost			Fair Value
Due in less than 1 year		$	2,602		$	2,602
Due in 1 to 3 years		78			78
Thereafter		19			17
Total		$	2,699		$	2,697

 

The following is a summary of the fair value of available-for-sale securities at July 2, 2010:

 

(Dollars in millions)		Amortized Cost			Unrealized Gain/ (Loss)			Fair Value
Commercial paper		$	1,231		$	—		$	1,231
Money market funds		833			—			833
U.S. treasuries and agency bonds		154			1			155
Asset-backed securities		45			—			45
Corporate bonds		41			—			41
Certificates of deposit		25			—			25
Sovereigns and supranationals		20			—			20
Auction rate securities		19			(2		)	17
Municipal bonds		3			—			3
Total		$	2,371		$	(1	)	$	2,370
Included in Cash and cash equivalents								$	2,101
Included in Short-term investments								252
Included in Other assets, net								17
Total								$	2,370

 

As of July 2, 2010, with the exception of its auction rate securities, the Company had no available-for-sale securities that had been in a continuous unrealized loss position for a period longer than 12 months.  The Company also determined that no available-for-sale securities were other-than-temporarily impaired as of July 2, 2010.

 

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SEAGATE TECHNOLOGY PLC

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

 

Restricted Cash and Investments

 

As of December 31, 2010, the Company’s restricted cash and investments of $97 million consisted of $76 million in cash and investments held in trust for payment of its non-qualified deferred compensation plan liabilities and $21 million in cash and investments held as collateral at banks for various performance obligations. As of July 2, 2010, the Company’s restricted cash and investments of $114 million consisted of $76 million in cash and investments held in trust for payment of its non-qualified deferred compensation plan liabilities and $38 million in cash and investments held as collateral at banks for various performance obligations.

 

Inventories

 

(Dollars in millions)		December 31, 2010			July 2, 2010
Raw materials and components		$	266		$	263
Work-in-process		159			145
Finished goods		383			349
		$	808		$	757

 

Other Current Assets

 

(Dollars in millions)		December 31, 2010			July 2, 2010
Vendor non-trade receivables		$	401		$	351
Other		202			163
		$	603		$	514

 

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

 

Property, Equipment and Leasehold Improvements, net

 

(Dollars in millions)		December 31, 2010			July 2, 2010
Property, equipment and leasehold improvements		$	7,170		$	6,842
Accumulated depreciation and amortization		(4,908		)	(4,579		)
		$	2,262		$	2,263

 

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SEAGATE TECHNOLOGY PLC

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

 

3.  Restructuring and Exit Costs

 

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

 

California Facility Consolidation. During the three and six months ended December 31, 2010, the Company recorded restructuring charges of $3 million related to lease termination costs for the Company’s Sunnyvale, California facility as a result of the Company’s planned consolidation of its California facilities. The Company made cash payments of $3 million related to these plans during the three and six months ended December 31, 2010.

 

2010 Plan. From inception of the Company’s restructuring plans announced in fiscal year 2010 as a result of the ongoing focus on cost efficiencies in all areas of its business, the Company has recorded $4 million related to employee termination costs. The Company made cash payments of $2 million relating to this plan during the three months ended October 1, 2010. This plan was substantially complete by the first quarter of fiscal year 2011.

 

AMK Plan. In August 2009, the Company announced that it will close its Ang Mo Kio (AMK) facility in Singapore (the “AMK Plan”). The Company expects to complete the closure during fiscal year 2011. The hard drive manufacturing operations will be relocated to other existing Seagate facilities and the Company’s Asia International Headquarters will remain in Singapore. This closure and relocation is part of the Company’s ongoing focus on cost efficiencies in all areas of its business and is intended to facilitate leveraging manufacturing investments across fewer sites. The Company does not expect the closure to meaningfully change production capacity.  The Company currently estimates total restructuring charges of approximately $60 million, all in cash, including approximately $40 million for severance, approximately $10 million for the relocation of manufacturing equipment, and approximately $10 million for other plant closure and relocation costs. From the inception of this plan through December 31, 2010 the Company has recorded restructuring charges of approximately $43 million. During the six months ended December 31, 2010, the Company recorded restructuring charges of $2 million related to an adjustment to estimated post-employment benefits and $2 million for other exit costs for the AMK Plan. The Company made cash payments of $10 million relating to this plan during the six months ended December 31, 2010.

 

Other Restructuring and Exit Costs. Through December 31, 2010, the Company has recorded restructuring charges of approximately $120 million, net of adjustments, related to the previously announced closures of its Pittsburgh, Pennsylvania and Milpitas, California facilities, and also has recorded certain exit costs aggregating $270 million related to its acquisition of Maxtor. During the six months ended December 31, 2010, the Company recorded restructuring charges of $4 million related to facility lease obligations and made cash payments of $10 million on these restructuring plans. The remaining balance of $40 million, as of December 31, 2010, is primarily associated with the exit of certain facilities or facility lease obligations. Payment of these exits costs are expected to continue through the end of fiscal year 2017.

 

During the three months ended December 31, 2010, the Company recorded restructuring charges and adjustments of $7 million, comprised primarily of charges related to closure of the Company’s Sunnyvale facility and to the planned closure of the Company’s AMK manufacturing operations in Singapore. The following table summarizes the Company’s restructuring activities for the six months ended December 31, 2010:

 

(Dollars in millions)		Employee Benefits			Operating Leases			Other Exit Costs			Total
All Restructuring Activities
Accrual balances at July 2, 2010		$	38		$	46		$	¾		$	84
Restructuring charges		¾			2			1			3
Cash payments		(5		)	(4		)	(1		)	(10		)
Adjustments		1			¾			¾			1
Accrual balances at October 1, 2010		34			44			¾			78
Restructuring charges		1			3			1			5
Cash payments		(6		)	(8		)	(1		)	(15		)
Adjustments		1			1			¾			2
Accrual balances at December 31, 2010		$	30		$	40		$	¾		$	70

 

Of the $70 million balance in accrued restructuring at December 31, 2010, $41 million is included in Accrued

 

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SEAGATE TECHNOLOGY PLC

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

 

expenses and $29 million is included in Other non-current liabilities on the accompanying Condensed Consolidated Balance Sheet.

 

4.  Debt and Convertible Notes

 

Long-Term Debt

 

$750 Million Aggregate Principal Amount of 7.75% Senior Notes due December 2018 (the “2018 Notes”) .  On December 14, 2010, the Company’s subsidiary, Seagate HDD Cayman, completed the sale of $750 million aggregate principal amount of the 2018 Notes in a private placement exempt from the registration requirements of the Securities Act of 1933, as amended. The obligations under the 2018 Notes are fully and unconditionally guaranteed, on a senior unsecured basis, by the Company. The net proceeds from the offering of the 2018 Notes were approximately $736 million, which the Company intends to use for general corporate purposes, which may include the repayment, redemption and/or repurchase of a portion of its outstanding indebtedness. The 2018 Notes bear interest at the rate of 7.75% per year, payable semi-annually on June 15 and December 15 of each year. The 2018 Notes are redeemable at any time after December 15, 2014 at the option of the Company in whole or in part, on not less than 30, nor more than 60 days notice, at a “make-whole” premium redemption price. The “make-whole” redemption price will be equal to the greater of (1) 100% of the principal amount of the notes being redeemed, or (2) the sum of the present values of the remaining scheduled payments of principal and interest on the 2018 Notes being redeemed, discounted at the redemption date on a semi-annual basis at a rate equal to the sum of the applicable Treasury rate plus 50 basis points.

 

$600 Million Aggregate Principal Amount of 6.375% Senior Notes due October 2011 (the “2011 Notes”) .  The 2011 Notes are included in Current portion of long-term debt on the Condensed Consolidated Balance Sheet at December 31, 2010.

 

$600 Million Aggregate Principal Amount of 6.875% Senior Notes due May 2020 (the “2020 Notes”) .  The 2020 Notes were issued by the Company’s subsidiary, Seagate HDD Cayman, in fiscal year 2010. The obligations under the 2020 Notes were fully and unconditionally guaranteed, on a senior unsecured basis, by Seagate-Cayman through July 2, 2010. On July 3, 2010, Seagate-Cayman entered into a Supplemental Indenture (the “Supplemental Indenture”) with Seagate HDD Cayman, Seagate-Ireland, and Wells Fargo Bank, National Association, as trustee (the “Trustee”), whereby Seagate-Ireland agreed to fully and unconditionally guarantee the 2020 Notes and Seagate-Cayman was released from all obligations and covenants thereunder.

 

$55 Million Aggregate Principal Amount of 5.75% Subordinated Debentures due March 2012 (the “5.75% Debentures”) .  On July 27, 2010, the Company redeemed the entire outstanding aggregate principal amount of the 5.75% Debentures for cash at 100% of their principal amount, plus accrued and unpaid interest to the redemption date for approximately $34 million.  The Company recorded a loss on the redemption of approximately $2 million, which is included in Other, net on the Company’s Condensed Consolidated Statement of Operations for the six months ended December 31, 2010.

 

Convertible Notes

 

$326 Million Aggregate Principal Amount of 2.375% Convertible Senior Notes due August 2012 (the “2.375% Notes”).   On August 19, 2010, the Company redeemed the entire $326 million outstanding aggregate principal amount of the 2.375% Notes for cash at a redemption price equal to 100.68% of their principal amount, plus accrued and unpaid interest to the redemption date for approximately $328 million. The Company recorded a loss on the redemption of approximately $22 million, which is included in Other, net on the Company’s Condensed Consolidated Statement of Operations for the six months ended December 31, 2010.

 

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SEAGATE TECHNOLOGY PLC

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

 

5.  Income Taxes

 

The Company recorded an income tax provision of $25 million and $29 million for the three and six months ended December 31, 2010, respectively. The income tax provision for the three and six months ended December 31, 2010 included approximately $1 million and $11 million of discrete tax benefits, respectively, primarily from the release of tax reserves associated with the expiration of certain statutes of limitations.  In addition, $11 million of discrete income tax benefits from the loss recognized on the redemption of debt was offset by a corresponding increase in the valuation allowance for U.S. deferred tax assets.

 

The Company’s provision for income taxes recorded for the three and six months ended December 31, 2010 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) the indefinite reinvestment of the Company’s earnings outside of Ireland, (ii) tax benefits related to tax holiday and tax incentive programs, (iii) an increase in valuation allowance for U.S. deferred tax assets, (iv) tax expense related to intercompany transactions and (v) the release of tax reserves as a result of the expiration of statutes of limitations.

 

On December 17, 2010, the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (the 2010 Tax Relief Act) was enacted. The 2010 Tax Relief Act includes business incentives to invest in machinery and equipment, and retroactively reinstated the R&D tax credit through December 31, 2011 from December 31, 2009. These business incentives had no immediate impact on the Company’s income tax provision due to existing valuation allowances for certain U.S. deferred tax assets.

 

During the six months ended December 31, 2010, the Company’s unrecognized tax benefits excluding interest and penalties increased by $8 million to $123 million. The unrecognized tax benefits that, if recognized, would impact the effective tax rate was $123 million as of December 31, 2010, subject to certain future valuation allowance reversals.  During the 12 months beginning January 1, 2011, the Company expects to reduce its unrecognized tax benefits by approximately $7 million primarily as a result of the expiration of certain statutes of limitations.

 

The income tax benefit recognized for the three and six months ended January 1, 2010 included approximately $16 million and $27 million, respectively, of discrete tax benefits, primarily for U.S. federal income tax legislative changes, release of tax reserves for settlements and expiration of certain statutes of limitations, and the reversal of valuation allowance previously recorded for certain non-U.S. deferred tax assets.

 

The Worker, Homeownership, and Business Assistance Act of 2009 (WHBA) was enacted on November 6, 2009. This law allowed the Company to elect an increased carryback period for net operating losses (NOL’s) incurred in 2008 or 2009. Approximately $11 million of income tax benefits were recognized as a result of this legislative change in the three months ended January 1, 2010.

 

During the six months ended January 1, 2010, which was prior to the Company’s reorganization, the Company’s publicly traded parent was incorporated in the Cayman Islands and not subject to income tax. The income tax benefit recorded for the three and six months ended January 1, 2010 differed from the provision (benefit)  for income taxes that would be derived by applying a notional U.S. 35% rate to income before income taxes primarily due to the net effect of (i) tax benefits related to tax holiday and tax incentive programs, (ii) a decrease in valuation allowance for certain foreign deferred tax assets, (iii) tax expense related to intercompany transactions, and (iv) tax benefits from U.S. federal income tax legislative changes and the release of certain tax reserves.

 

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SEAGATE TECHNOLOGY PLC

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

 

6.  Derivative Financial Instruments

 

The Company is exposed to foreign currency exchange rate, interest rate, and to a lesser extent, equity price risks relating to its ongoing business operations. The Company enters into foreign currency forward exchange contracts in order to manage the foreign currency exchange rate risk on forecasted expenses denominated in foreign currencies and to mitigate the remeasurement risk of certain foreign currency denominated liabilities.  The Company’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 the Condensed Consolidated Balance Sheets at fair value. The effective portions of cash flow hedges are recorded in Accumulated other comprehensive income (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 effective portions of unrealized net gains (losses) on cash flow hedges are included as a component of Accumulated other comprehensive income (loss).  As of December 31, 2010 and July 2, 2010, the Company had unrealized net gains on cash flow hedges of approximately $18 million and $3 million, respectively.

 

The Company dedesignates its cash flow hedges when the forecasted hedged transactions are realized or it is probable the forecasted hedged transaction will not occur in the initially identified time period. At such time, the associated gains and losses deferred in Accumulated other comprehensive income (loss) are reclassified into earnings in the same period that the underlying hedged transaction is included in earnings. Any subsequent changes in the fair value of such derivative instruments are immediately reflected in earnings. As of December 31, 2010, the Company’s existing foreign currency forward exchange contracts mature within 12 months. The deferred amount currently recorded in Accumulated other comprehensive income (loss) expected to be recognized into earnings over the next 12 months is a net gain of $19 million.

 

The following tables show the total notional value of the Company’s outstanding foreign currency forward exchange contracts as of December 31, 2010 and July 2, 2010:

 

As of December 31, 2010

 

(Dollars in millions)		Contracts Qualifying as Hedges			Contracts Not Qualifying as Hedges
Thai baht		$	487		$	227
Singapore dollars		136			24
Czech koruna		¾			14
		$	623		$	265

 

As of July 2, 2010

 

(Dollars in millions)		Contracts Qualifying as Hedges			Contracts Not Qualifying as Hedges
Thai baht		$	406		$	163
Singapore dollars		84			8
Japanese yen		1			—
Czech koruna		—			10
		$	491		$	181

 

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SEAGATE TECHNOLOGY PLC

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

 

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”). The Company has 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 December 31, 2010, the notional investments underlying the TRS amounted to $83 million. The contract term of the TRS is approximately one year and is settled on a monthly basis, therefore limiting counterparty performance risk. As of December 31, 2010, the Company had approximately $5 million pledged to the counterparty and recorded as restricted cash, in accordance with the current terms of the TRS.  Additional collateral may be posted contingent on the counterparty’s exposure to the market value of the TRS.  The collateral amount and the interest rate spread could vary depending on the Company’s credit rating.  For example, if the Company’s credit rating declines, the Company will be required to post additional collateral.  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 fair value as reflected in the Condensed Consolidated Balance Sheets as of December 31, 2010 and July 2, 2010:

 

Fair Values of Derivative Instruments as of December 31, 2010

 

		Asset Derivatives					Liability Derivatives
(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		$	21		Accrued expenses		$	—
Derivatives not designated as hedging instruments:
Foreign currency forward exchange contracts		Other current assets		$	9		Accrued expenses		$	—
Total return swap		Other current assets		—			Accrued expenses		—
Total derivatives				$	30				$	—

 

Fair Values of Derivative Instruments as of July 2, 2010

 

		Asset Derivatives					Liability Derivatives
(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		$	5		Accrued expenses		$	—
Derivatives not designated as hedging instruments:
Foreign currency forward exchange contracts		Other current assets		$	2		Accrued expenses		$	—
Total return swap		Other current assets		—			Accrued expenses		(1		)
Total derivatives				$	7				$	(1	)

 

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SEAGATE TECHNOLOGY PLC

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

 

The following tables show the effect of the Company’s derivative instruments on Other comprehensive income (OCI) and the Condensed Consolidated Statement of Operations for the three and six months ended December 31, 2010:

 

The Effect of Derivative Instruments on the Statement of Operations

for the Three and Six Months Ended December 31, 2010

 

(Dollars in millions)

 

Derivatives Designated		Amount of Gain or (Loss) Recognized in OCI on Derivative (Effective Portion)						Location of Gain or (Loss) Reclassified from Accumulated OCI into		Amount of Gain or (Loss) Reclassified from Accumulated OCI into Income (Effective Portion)						Location of Gain or (Loss) Recognized in Income on Derivative (Ineffective Portion and Amount		Amount of Gain or (Loss) Recognized in Income (Ineffective Portion and Amount Excluded from Effectiveness Testing)  (a)
as Cash Flow Hedges		For the Three Months			For the Six Months			Income (Effective Portion)		For the Three Months			For the Six Months			Excluded from Effectiveness Testing)		For the Three Months			For the Six Months
Foreign exchange forward contracts		$	4		$	36		Cost of revenue		$	16		$	21		Cost of revenue		$	1		$	1

 

		Location of Gain or		Amount of Gain or (Loss) Recognized in Income on Derivative
Derivatives Not Designated as Hedging Instruments		(Loss) Recognized in Income on Derivative		For the Three Months			For the Six Months
Foreign exchange forward contracts		Other, net		$	4		$	20
Total return swap		Operating expenses		6			14
				$	10		$	34

 

(a) The amount of gain or (loss) recognized in income represents $0 related to the ineffective portion of the hedging relationships and $1 million related to the amount excluded from the assessment of hedge effectiveness, for both the three and six months ended December 31, 2010, respectively.

 

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SEAGATE TECHNOLOGY PLC

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

 

The following tables show the effect of the Company’s derivative instruments on OCI and the Condensed Consolidated Statement of Operations for the three and six months ended January 1, 2010:

 

The Effect of Derivative Instruments on the Statement of Operations

for the Three and Six Months Ended January 1, 2010

 

(Dollars in millions)

 

Derivatives Designated		Amount of Gain or (Loss) Recognized in OCI on Derivative (Effective Portion)						Location of Gain or (Loss) Reclassified from Accumulated OCI into		Amount of Gain or (Loss) Reclassified from Accumulated OCI into Income (Effective Portion)						Location of Gain or (Loss) Recognized in Income on Derivative (Ineffective Portion and Amount		Amount of Gain or (Loss) Recognized in Income (Ineffective Portion and Amount Excluded from Effectiveness Testing)  (a)
as Cash Flow Hedges		For the Three Months			For the Six Months			Income (Effective Portion)		For the Three Months			For the Six Months			Excluded from Effectiveness Testing)		For the Three Months			For the Six Months
Foreign exchange forward contracts		$	(1	)	$	5		Cost of revenue		$	4		$	4		Cost of revenue		$	1		$	1

 

		Location of Gain or		Amount of Gain or (Loss) Recognized in Income on Derivative
Derivatives Not Designated as Hedging Instruments		(Loss) Recognized in Income on Derivative		For the Three Months			For the Six Months
Foreign exchange forward contracts		Other, net		$	—		$	4
Total return swap		Operating expenses		5			14
				$	5		$	18

 

(a) The amount of gain or (loss) recognized in income represents $0 related to the ineffective portion of the hedging relationships and $1 million related to the amount excluded from the assessment of hedge effectiveness, for both the three and six months ended January 1, 2010, respectively.

 

17