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Seagate Technology
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STX 2019-06-28
Part I
Item 1. Business
Item 1A. Risk Factors
Item 1B. Unresolved Staff Comments
Item 2. Properties
Item 3. Legal Proceedings
Item 4. Mine Safety Disclosures
Part II
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Item 6. Selected Financial Data
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Item 8. Financial Statements and Supplementary Data
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Item 9A. Controls and Procedures
Item 9B. Other Information
Part III
Item 10. Directors, Executive Officers and Corporate Governance
Item 11. Executive Compensation
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Item 13. Certain Relationships and Related Transactions, and Director Independence
Item 14. Principal Accountant Fees and Services
Part IV
Item 15. Exhibits and Financial Statement Schedules
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Seagate Technology Earnings 2019-06-28

STX 10K Annual Report

Balance SheetIncome StatementCash Flow

10-K 1 d733907d10k.htm 10-K 10-K
Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

 

 

(Mark One)

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

For the fiscal year ended June 28, 2019

OR

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

For the transition period from                  to                 

Commission File No. 001-31560

SEAGATE TECHNOLOGY PUBLIC LIMITED COMPANY

(Exact name of registrant as specified in its charter)

 

Ireland   98-0648577
(State or other jurisdiction of incorporation or organization)   (I.R.S. Employer Identification Number)

38/39 Fitzwilliam Square

Dublin 2, Ireland

(Address of principal executive offices)

D02 NX53

(Zip Code)

Registrant’s telephone number, including area code: (353) (1) 234-3136

 

 

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

Securities registered pursuant to Section 12(g) of the Act: None

 

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

    YES      NO  

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.

    YES      NO  

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, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “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 Act).

    YES      NO  

The aggregate market value of the voting and non-voting ordinary shares held by non-affiliates of the registrant as of December 28, 2018, the last business day of the registrant’s most recently completed second fiscal quarter, was approximately $10.9 billion based upon the closing price reported for such date by the NASDAQ.

The number of outstanding ordinary shares of the registrant as of July 29, 2019 was 269,037,767.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the definitive proxy statement to be filed with the Securities and Exchange Commission pursuant to Regulation 14A relating to the registrant’s Annual General Meeting of Shareholders, to be held on October 29, 2019, will be incorporated by reference in this Form 10-K in response to Items 10, 11, 12, 13 and 14 of Part III. The definitive proxy statement will be filed with the SEC no later than 120 days after the registrant’s fiscal year ended June 28, 2019.


Table of Contents

SEAGATE TECHNOLOGY PLC

TABLE OF CONTENTS

 

Item

      Page No.  
  PART I  

1.

 

Business

    3  

1A.

 

Risk Factors

    14  

1B.

 

Unresolved Staff Comments

    29  

2.

 

Properties

    30  

3.

 

Legal Proceedings

    30  

4.

 

Mine Safety Disclosures

    30  
  PART II  

5.

 

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

    31  

6.

 

Selected Financial Data

    32  

7.

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

    35  

7A.

 

Quantitative and Qualitative Disclosures About Market Risk

    47  

8.

 

Financial Statements and Supplementary Data

    49  

9.

 

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

    95  

9A.

 

Controls and Procedures

    95  

9B.

 

Other Information

    95  
  PART III  

10.

 

Directors, Executive Officers and Corporate Governance

    96  

11.

 

Executive Compensation

    96  

12.

 

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

    96  

13.

 

Certain Relationships and Related Transactions, and Director Independence

    96  

14.

 

Principal Accountant Fees and Services

    96  
  PART IV  

15.

 

Exhibits and Financial Statement Schedules

    97  
 

EXHIBIT INDEX

    98  
 

SIGNATURES

    107  


Table of Contents

PRESENTATION OF FINANCIAL AND OTHER INFORMATION

In this Annual Report on Form 10-K (the “Form 10-K”), unless the context indicates otherwise, as used herein, the terms “we,” “us,” “Seagate,” the “Company” and “our” refer to Seagate Technology public limited company (“plc”), an Irish public limited company, and its subsidiaries. References to “$” are to United States dollars.

We have compiled the market size information in this Form 10-K using statistics and other information obtained from several third-party sources.

Various amounts and percentages used in this Form 10-K have been rounded and, accordingly, they may not total 100%.

Seagate, Seagate Technology, LaCie, Maxtor and the Spiral Logo, are trademarks or registered trademarks of Seagate Technology LLC or one of its affiliated companies in the United States and/or other countries. All other trademarks or registered trademarks are the property of their respective owners.

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

Some of the statements and assumptions included in this Annual Report on Form 10-K are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 or Section 21E of the Securities Exchange Act of 1934, each as amended, including, in particular, statements about our plans, strategies and prospects, demand for our products, shifts in technology, estimates of industry growth, our ability to effectively manage our debt obligations and our cash liquidity position, our restructuring efforts, the sufficiency of our sources of cash to meet our cash needs for the next 12 months, our expectations regarding capital expenditures, the potential impact of trade barriers or regulatory actions, such as import/export duties and restrictions, tariffs and quotas imposed by the U.S. or other countries in which the Company conducts its business and changes in the regulatory regime governing the flow of data across international borders for the fiscal year ended July 3, 2020. These statements identify prospective information and may include words such as “expects,” “intends,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “projects,” “may,” “will” or negative of these words, variations of these words and comparable terminology. These forward-looking statements are based on information available to the Company as of the date of this Annual Report on Form 10-K and are based on management’s current views and assumptions. These forward-looking statements are conditioned upon and also involve a number of known and unknown risks, uncertainties and other factors that could cause actual results, performance or events to differ materially from those anticipated by these forward-looking statements. Such risks, uncertainties and other factors may be beyond our control and may pose a risk to our operating and financial condition. Such risks and uncertainties include, but are not limited to:

 

   

the uncertainty in global economic and political conditions;

 

   

the development and introduction of products based on new technologies and expansion into new data storage markets;

 

   

the impact of competitive product announcements and unexpected advances in competing technologies or changes in market trends;

 

   

the impact of variable demand and an adverse pricing environment for storage products;

 

   

the Company’s ability to achieve projected cost savings in connection with its restructuring plans and consolidation of its manufacturing activities;

 

   

the Company’s ability to effectively manage its debt obligations and comply with certain covenants in its credit facilities with respect to financial ratios and financial condition tests, and maintain a favorable cash liquidity position;

 

   

the Company’s ability to successfully qualify, manufacture and sell its storage products, particularly new disk drive products with lower cost structures, in increasing capacities on a cost-effective basis and with acceptable quality;

 

   

possible excess industry supply both with respect to particular storage products and competing alternative storage technology solutions;

 

   

disruptions to the Company’s supply chain or production capabilities;

 

   

consolidation trends in the data storage industry;

 

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fluctuations in interest rates;

 

   

currency fluctuations that may impact the Company’s margins, international sales and results of operations;

 

   

fluctuations in the value of the Company’s investments and the associated investment income;

 

   

the impact of trade barriers such as import/export duties and restrictions, tariffs and quotas, imposed by the U.S. or other countries in which the Company conducts its business;

 

   

the evolving legal, regulatory and administrative climate in the international markets where the Company operates, including changes in regulations relating to privacy and protection of data and environmental matters; and

 

   

cyber-attacks or other data breaches that disrupt the Company’s operations or result in the dissemination of proprietary or confidential information and cause reputational harm, and the cybersecurity threats and vulnerabilities associated with the Company’s infrastructure updates to its information technology systems.

Information concerning risks, uncertainties and other factors that could cause results to differ materially from those projected in such forward-looking statements is also set forth in “Item 1A. Risk Factors” of this Annual Report on Form 10-K, which we encourage you to carefully read. These forward-looking statements should not be relied upon as representing our views as of any date subsequent to the date on which they were made and we undertake no obligation to update forward-looking statements to reflect new information or future events or circumstances after the date they were made.

 

Seagate Technology public limited company | 2019 Form 10-K | 2


Table of Contents

PART I

 

ITEM 1.

BUSINESS

We are a leading provider of data storage technology and solutions. Our principal products are hard disk drives, commonly referred to as disk drives, hard drives or HDDs. In addition to HDDs, we produce a broad range of data storage products including solid state drives (“SSDs”), solid state hybrid drives (“SSHDs”) and storage subsystems.

Hard disk drives are devices that store digitally encoded data on rapidly rotating disks with magnetic surfaces. Disk drives continue to be the primary medium of mass data storage due to their performance attributes, reliability, high quality and cost effectiveness. Complementing existing data center storage architecture, solid state drives 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 hard disk drive and a smaller SSD acting as a cache to improve performance of frequently accessed data.

Our HDD products are designed for nearline and mission critical applications in enterprise servers and storage systems; edge non-compute applications, where our products are designed for a wide variety of end user devices such as portable external storage systems, surveillance systems, network-attached storage (“NAS”), digital video recorders (“DVRs”) and gaming consoles; and edge compute applications, where our products are designed primarily for desktop and mobile computing. Our SSD product portfolio is mainly comprised of Serial Attached SCSI (“SAS”) and Non-Volatile Memory Express (“NVMe”) and is designed for applications in enterprise servers and storage systems.

Our enterprise data solutions (“EDS”) portfolio includes storage subsystems for enterprises, cloud service providers, scale-out storage servers and original equipment manufacturers (“OEMs”).

Industry Overview

Data Storage Industry

The data storage industry includes companies that manufacture components or subcomponents designed for data storage devices and companies that provide storage solutions, software and services for enterprise cloud, big data, computing platforms and consumer markets. The rapid growth in data generation and the intelligent application of data are driving demand for data storage. As more data is created at endpoints outside traditional data centers and requires processing at the edge, the need for data storage and management has also increased. Examples of this include autonomous vehicles, smart manufacturing systems and smart cities. We believe the proliferation and personal creation of media-rich digital content, further enabled by fifth-generation wireless (“5G”), the edge, the Internet of things (“IoT”) and artificial intelligence (“AI”), will continue to create demand for higher capacity storage solutions. The new ecosystem is expected to require increasing amounts of data storage both at the edge and in enterprises that store the data.

Markets

The principal data storage markets include:

Enterprise Storage. We define enterprise storage as dedicated storage area networks and hyperscale cloud storage environments. Enterprise and cloud data centers run solutions which are designed for nearline, mission critical and enterprise SSD applications.

Nearline applications are defined as those which require high capacity and energy efficient storage solutions. We expect such applications, which include storage for cloud computing, content delivery and backup services, will continue to grow and drive exabyte demand. Additionally, with the increased requirements for storage capacity and performance driven by the creation and consumption of media-rich content, we expect that the increased exabyte demand will require further buildout of data centers by cloud service providers (“CSPs”) and other enterprises that use high-capacity nearline devices.

Mission critical applications are defined as those that use high performance enterprise class HDDs and SSDs with sophisticated firmware. Enterprise storage is vital to the operation of large-scale enterprise workloads, requiring high performance and high reliability storage solutions. We expect the market for mission critical enterprise storage solutions to continue to be driven by enterprises utilizing dedicated storage area networks.

 

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Edge Non-Compute. We define edge non-compute applications as solutions designed primarily for consumer electronic devices that require a higher capacity, low cost-per-gigabyte storage solution, including surveillance, NAS, DVRs and gaming. Consumer solutions support a variety of consumer and industrial needs with internal and external storage solutions. Disk Drives for external storage are designed for purposes such as portable external storage, and to augment storage capacity in the consumer’s current desktop, notebook, tablet or mobile phone device.

Edge Compute. We define edge compute applications as solutions designed for desktop and mobile compute applications ranging from traditional laptops to convertible systems. Some edge compute applications rely less on built-in storage and instead rely on cloud storage for long-term archiving.

Enterprise Data Solutions. We define enterprise data solutions as applications that provide end-to-end solutions to businesses for the purpose of modular systems and scale-out storage. Applications can contain HDDs and SSDs and may offer file management systems, software and compute power, enabling both private and public clouds.

Participants in the data storage industry include:

Major subcomponent manufacturers. Companies that manufacture components or subcomponents used in data storage devices or solutions include companies that supply spindle motors, heads and media, and application specific integrated circuits (“ASICs”).

Storage device manufacturers. Companies that transform components into storage products include disk drive manufacturers and semiconductor storage manufacturers which integrate flash memory into storage products such as SSDs.

Storage solutions manufacturers and system integrators. Companies, such as OEMs, that bundle and package storage solutions, distributors that integrate storage hardware and software into end-user applications, CSPs that provide cloud based solutions to businesses for the purpose of scale-out storage solutions and modular systems, and producers of solutions such as storage racks.

Hyperscale data centers. Large hyperscale data center companies, many of which are CSPs, are increasingly designing their own storage subsystems and having them built by contract manufacturers for use inside their own data centers. This trend is reshaping the storage system and subsystem market and driving innovation in system design and changes in the competitive landscape of large storage system vendors.

Storage services. Companies that provide and host services and solutions, which include storage, backup, archiving, recovery and discovery of data.

Demand for Data Storage

The International Data Corporation (“IDC”) forecasted in its 2018 Digitization of the World study that the global datasphere will grow from 33 zettabytes in 2018 to 175 zettabytes by 2025. According to IDC, we are fast approaching a new era of the data age, which we expect will have a positive impact on storage demand. The digital transformation has given rise to many new applications, all of which rely on faster access to and a secure storage of an increasing amount of data.

As more applications require real-time decision making, more data processing and storage is moving near the edge of the network, which we believe will result in a buildup in private and edge cloud environments that will enable fast and secure access to data throughout the IoT ecosystem.

Factors contributing to the growth of digital content include:

 

   

Creation, sharing and consumption of media-rich content, such as high-resolution photos, high definition videos and digital music through smart phones, tablets, digital cameras, personal video cameras, DVRs, gaming consoles or other digital devices;

 

   

Increasing use of video surveillance and the emergence of new surveillance systems which feature higher resolution digital cameras and thus require larger data storage capacities;

 

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Creation and collection of data through the development and evolution of the IoT ecosystem, big data analytics, artificial intelligence and new technology trends such as self-driving cars and drones, smart manufacturing, and smart cities;

 

   

The growing need for analysis of and action upon data created at the edge instead of processing and analyzing such data at data centers, which is particularly the case in verticals such as autonomous vehicles, property monitoring systems, smart manufacturing and others;

 

   

Continued advancement of the cloud, including the build out of large numbers of cloud data centers by CSPs and private companies transitioning on-site data centers into the cloud; and

 

   

Need for protection of increased digital content through redundant storage on backup devices and externally provided storage services.

As a result of these factors, we anticipate that the nature and volume of content being created will require greater storage capability, which is more efficiently and economically facilitated by higher capacity storage devices in order to store, aggregate, host, distribute, analyze, manage, protect, backup and use such content.

In addition, the economics of storage infrastructure are also evolving with the utilization of public and private hyperscale storage and open-source solutions reducing the total cost of ownership of storage while increasing the speed and efficiency with which customers can leverage massive computing and storage devices. Accordingly, we expect these trends will continue to create significant demand for data storage solutions going forward.

Demand Trends

We believe that continued growth in digital content creation requires increasingly higher storage capacity in order to store, aggregate, host, distribute, analyze, manage, protect, back up and use such content. We also believe that as architectures evolve to serve the growing commercial and consumer user base throughout the world, the storage solutions will evolve as well.

We expect increased data creation will lead to the expansion of the need for storage in the form of HDDs, EDS and SSDs. While the advance of solid state technology in many end markets is expected to increase, we believe that in the foreseeable future, cloud, traditional enterprise, edge non-compute and edge compute markets that require high-capacity storage solutions will be best served by hard disk drives due to their ability to deliver the most cost effective, reliable and energy-efficient mass storage devices. We also believe that as hard disk drive capacities continue to increase, a focus exclusively on unit demand does not reflect the increase in demand for exabytes. As demand for higher capacity drives increases, the demand profile has shifted to reflect fewer total HDD units, but with higher average capacity per drive and higher overall exabyte demand.

Industry Supply Balance

From time to time, the storage industry has experienced periods of imbalance between supply and demand. To the extent that the storage industry builds or maintains capacity based on expectations of demand that do not materialize, price erosion may become more pronounced. Conversely, during periods where demand exceeds supply, price erosion is generally muted.

Our Business

Data Storage Technologies

The design and manufacturing of HDDs depends on highly advanced technology and manufacturing techniques. Therefore, it requires high levels of research and development spending and capital equipment investments. We design, fabricate and assemble a number of the most important components in our disk drives, including read/write heads and recording media. Our design and manufacturing operations are based on technology platforms that are used to produce various disk drive products that serve multiple data storage applications and markets. Our core technology platforms, including upcoming innovations like the throughput-optimizing MACH.2 and the high-capacity enabling heated-assisted magnetic reading (“HAMR”), are focused around the areal density of media and read/write head technologies. This design and manufacturing approach allows us to deliver a portfolio of disk drive products to service a wide range of data storage applications and industries.

 

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Disk drives that we manufacture are commonly differentiated by the following key characteristics:

 

   

input/output operations per second (“IOPS”), commonly expressed in megabytes per second, which is the maximum number of reads and writes to a storage location;

 

   

storage capacity, commonly expressed in terabytes (“TB”), which is the amount of data that can be stored on the disk drive;

 

   

spindle rotation speed, commonly expressed in revolutions per minute (“RPM”), which has an effect on speed of access to data;

 

   

interface transfer rate, commonly expressed in megabytes per second, which is the rate at which data moves between the disk drive and the computer controller;

 

   

average seek time, commonly expressed in milliseconds, which is the time needed to position the heads over a selected track on the disk surface;

 

   

data transfer rate, commonly expressed in megabytes per second, which is the rate at which data is transferred to and from the disk drive;

 

   

product quality and reliability, commonly expressed in annualized return rates; and

 

   

energy efficiency, commonly measured by the power output necessary to operate the disk drive.

Areal density is measured by storage capacity per square inch on the recording surface of a disk. The storage capacity of a disk drive is determined by the size and number of disks it contains as well as the areal density capability of these disks.

We also offer SSDs as part of our storage solutions portfolio. Our portfolio includes devices with SAS and NVMe interfaces. The SSDs differ from HDDs in that they are without mechanical parts.

SSDs store data on NAND flash memory cells, or metal-oxide semiconductor transistors using a charge on a capacitor to represent a binary digit. SSD technology offers fast access to data and robust performance. SSDs complement mission-critical enterprise applications, hyperscale applications, high-density data centers, cloud environments and web servers.

The SSHDs that we manufacture contain a technology that fuses some features of SSDs and HDDs. They include high capacity HDDs with flash memory that acts as a cache to improve performance of frequently accessed data.

Manufacturing

We design and produce our own read/write heads and recording media, which are critical technologies for disk drives. This integrated approach enables us to lower costs and to improve the functionality of components so that they work together efficiently.

We believe that because of our vertical design and manufacturing strategy, we are well suited to take advantage of the opportunities to leverage the close interdependence of components for disk drives. Our manufacturing efficiency and flexibility are critical elements of our integrated business strategy. We continuously seek to improve our manufacturing efficiency and reduce manufacturing costs by:

 

   

employing manufacturing automation;

 

   

employing machine learning algorithms and artificial intelligence;

 

   

improving product quality and reliability;

 

   

integrating our supply chain with suppliers and customers to enhance our demand visibility and reduce our working capital requirements;

 

   

coordinating between our manufacturing group and our research and development organization to rapidly achieve volume manufacturing; and

 

   

operating our facilities at optimal capabilities.

 

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A vertically integrated model, however, tends to have less flexibility when demand moderates as it exposes us to higher unit costs when capacity utilization is not optimized.

Components and Raw Materials

Disk drives incorporate certain components, including a head disk assembly and a printed circuit board mounted to the head disk assembly, which are sealed inside a rigid base and top cover containing the recording components in a contamination controlled environment. We maintain a highly integrated approach to our business by designing and manufacturing a significant portion of the components we view as critical to our products, such as read/write heads and recording media.

Read/Write Heads. The function of the read/write head is to scan across the disk as it spins, magnetically recording or reading information. The tolerances of read/write heads are extremely demanding and require state-of-the-art equipment and processes. Our read/write heads are manufactured with thin-film and photolithographic processes similar to those used to produce semiconductor integrated circuits, though challenges related to magnetic film properties and topographical structures are unique to the disk drive industry. We perform all primary stages of design and manufacture of read/write heads at our facilities. We use a combination of internally manufactured and externally sourced read/write heads, the mix of which varies based on product mix, technology and our internal capacity levels.

Media. Data is written to or read from the media, or disk, as it rotates at very high speeds past the read/write head. The media is made from non-magnetic substrates, usually an aluminum alloy or glass and is coated with thin layers of magnetic materials. We use a combination of internally manufactured and externally sourced finished media and aluminum substrates, the mix of which varies based on product mix, technology and our internal capacity levels. We purchase all of our glass substrates from third parties.

Printed Circuit Board Assemblies. The printed circuit board assemblies (“PCBAs”) are comprised of standard and custom ASICs and ancillary electronic control chips. The ASICs control the movement of data to and from the read/write heads and through the internal controller and interface, which communicates with the host computer. The ASICs and control chips form electronic circuitry that delivers instructions to a head positioning mechanism called an actuator to guide the heads to the selected track of a disk where the data is recorded or retrieved. Disk drive manufacturers use one or more industry standard interfaces such as serial advanced technology architecture (“SATA”), small computer system interface (“SCSI”), or SAS to communicate to the host systems.

Head Disk Assembly. The head disk assembly consists of one or more disks attached to a spindle assembly powered by a spindle motor that rotates the disks at a high constant speed around a hub. Read/write heads, mounted on an arm assembly, similar in concept to that of a record player, fly extremely close to each disk surface and record data on and retrieve it from concentric tracks in the magnetic layers of the rotating disks. The read/write heads are mounted vertically on an E-shaped assembly (“E-block”) that is actuated by a voice-coil motor to allow the heads to move from track to track. The E-block and the recording media are mounted inside the head disk assembly. We purchase spindle motors from outside vendors and from time to time participate in the design of the motors that go into our products.

Disk Drive Assembly. Following the completion of the head disk assembly, it is mated to the PCBA, and the completed unit goes through extensive defect mapping and machine learning prior to packaging and shipment. Disk drive assembly and machine learning operations occur primarily at our facilities located in China and Thailand. We perform subassembly and component manufacturing operations at our facilities in China, Malaysia, Northern Ireland, Singapore, Thailand and the United States.

Contract Manufacturing. We outsource the manufacturing and assembly of certain components and products to third parties in various countries worldwide. This includes outsourcing the PCBAs used in our disk drives, SSDs and storage subsystems. We continue to participate in the design of our components and products and are directly involved in qualifying key suppliers and components used in our products.

Suppliers of Components and Industry Constraints. There are a limited number of independent suppliers of components, such as recording heads and media, available to disk drive manufacturers. Vertically integrated disk drive manufacturers, who

 

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manufacture their own components, are less dependent on external component suppliers than less vertically integrated disk drive manufacturers. However, our business has been adversely affected by our suppliers’ capacity constraints in the past and this could occur again.

Commodity and Other Manufacturing Costs. The production of disk drives requires rare earth elements, precious metals, scarce alloys and industrial commodities, which are subject to fluctuations in price and the supply of which has at times been constrained. In addition to increased costs of components and commodities, volatility in fuel costs may also increase our costs related to commodities, manufacturing and freight. As a result, we may increase our use of alternative shipment methods to help offset any increase in freight costs, and we will continually review various forms of shipments and routes in order to minimize the exposure to higher freight costs.

Products

We offer a broad range of storage solutions for enterprise, data center, edge non-compute and edge compute applications. We offer more than one product within each product category and differentiate products on the basis of capacity, performance, product quality, reliability, price, form factor, interface, power consumption efficiency, security features and other customer integration requirements. Our industry is characterized by continuous and significant advances in technology which contribute to rapid product life cycles. Currently our product offerings include:

Enterprise Storage

Enterprise Capacity. Our enterprise capacity hard drives ship in 2.5-inch and 3.5-inch form factors and in storage capacities of up to 16TB. These products are designed for mass capacity data storage, server environments and cloud systems that require high capacity, enterprise reliability, energy efficiency and integrated security. They are available in SATA and SAS interfaces. We also offer low-cost storage options designed specifically for active archive storage environments.

Enterprise Performance HDDs and SSDs. We continue to support 10,000 and 15,000 RPM HDDs, which enable increased throughput and improve energy efficiency. Our enterprise SSDs are available in capacities up to 15TB with endurance options up to 10 drive writes per day (“DWPD”) and various interfaces. Our SSDs deliver the speed and consistency needed for demanding enterprise storage and server applications.

Edge Non-Compute Applications

Surveillance. Our surveillance HDDs are built to support the high-write workload of an always-on, always-recording video surveillance system. These surveillance optimized drives are built to support the growing needs of the surveillance market with support for multiple streams and capacities up to 16TB.

NAS. Our NAS drives are built to support the performance and reliability demanded by small and medium businesses, and incorporate interface software with custom-built health management, error recovery controls, power settings and vibration tolerance. Our NAS HDD solutions are available in capacities up to 16TB.

Video. Our Video HDDs are used in video applications like DVRs and media centers. These disk drives are optimized for video streaming in always-on applications with capacities up to 4TB to support leading-edge digital entertainment.

Gaming. Gaming HDDs are specifically optimized for console gaming usage. These products are designed to enhance the gaming experience during game-load and game-play and are available in capacities up to 8TB.

Consumer Solutions. Our external storage solutions are shipped under the Seagate Backup Plus and Expansion product lines, as well as under the LaCie and Maxtor brand names. These product lines are available in capacities up to 168TB. We strive to deliver the best customer experience, by leveraging our core technologies, offering services such as Seagate Recovery Services (data recovery) and partnering with leading brands such as Xbox, Sony and Adobe.

Edge Compute Applications

Desktop HDDs. Our 3.5-inch desktop drives ship in both traditional HDD and SSHD configurations and offer up to 14TB of capacity. Desktop drives are designed for applications such as personal computers and workstations.

 

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Mobile HDDs. Our 2.5-inch laptop drives ship in a variety of capacities (up to 5TB) and technologies (HDD and SSHD) to support mobile needs. Used in applications ranging from traditional laptops, convertible systems and external storage, our drives are built to address a range of performance needs and sizes for affordable, high capacity storage.

Customers

We sell our products to major OEMs, distributors and retailers.

OEM customers, including large hyperscale data center companies, typically enter into master purchase agreements with us. These agreements provide for pricing, volume discounts, order lead times, product support obligations and other terms and conditions including sales programs offered to promote selected products. Deliveries are scheduled only after receipt of purchase orders. In addition, with limited lead-time, customers may defer most purchase orders without significant penalty. Anticipated orders from many of our customers have in the past failed to materialize or OEM delivery schedules have been deferred or altered as a result of changes in their business needs.

Our distributors generally enter into non-exclusive agreements for the resale of our products. They typically furnish us with a non-binding indication of their near-term requirements and product deliveries are generally scheduled accordingly. The agreements and related sales programs typically provide the distributors with limited rights of return and price protection rights. In addition, we offer sales programs to distributors on a quarterly and periodic basis to promote the sale of selected products in the sales channel.

Our retail channel consists of our branded storage products sold to retailers either by us directly or by our distributors. Retail sales made by us or our distributors typically require greater marketing support, sales incentives and price protection periods.

See “Item 8. Financial Statements and Supplementary Data—Note 13. Business Segment and Geographic Information” contained in this report for a description of our major customers.

Competition

We compete primarily with manufacturers of hard drives used in the enterprise, edge non-compute and edge compute applications and with other companies in the data storage industry that provide SSDs and EDS. Some of the principal factors used by customers to differentiate among data storage solutions manufacturers are storage capacity, product performance, product quality and reliability, price per unit and price per terabyte, storage/retrieval access times, data transfer rates, form factor, product warranty and support capabilities, supply continuity and flexibility, power consumption, total cost of ownership and brand. While different markets and customers place varying levels of emphasis on these factors, we believe that our products are competitive with respect to many of these factors in the markets that we currently address.

Principal Competitors. We compete with manufacturers of storage solutions and the principal manufacturers in the data storage solution industry include:

 

   

Seagate, selling the Seagate, LaCie and Maxtor brands;

 

   

Micron Technology, Inc.;

 

   

Samsung Electronics;

 

   

SK hynix, Inc.;

 

   

Toshiba Memory Holdings Corporation;

 

   

Toshiba Corporation; and

 

   

Western Digital Corporation, operating the Western Digital and Hitachi Global Storage Technologies subsidiaries and SanDisk.

 

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Price Erosion. Historically, our industry has been characterized by price declines for data storage products with comparable capacity, performance and feature sets (“like-for-like products”). Price declines for like-for-like products (“price erosion”) tend to be more pronounced during periods of:

 

   

economic contraction in which competitors may use discounted pricing to attempt to maintain or gain market share;

 

   

few new product introductions when competitors have comparable or alternative product offerings; and

 

   

industry supply exceeding demand.

Data storage manufacturers typically attempt to offset price erosion with an improved mix of data storage products characterized by higher capacity, better performance and additional feature sets and product cost reductions.

We believe the data storage industry experienced modest price erosion in fiscal years 2019, 2018 and 2017.

Product Life Cycles and Changing Technology. Success in our industry has been dependent to a large extent on the ability to balance the introduction and transition of new products with time-to-volume, performance, capacity and quality metrics at a competitive price, level of service and support that our customers expect. Generally, the drive manufacturer that introduces a new product first benefits from improved product mix, favorable profit margins and less pricing pressure until comparable products are introduced. Changing technology also necessitates on-going investments in research and development, which may be difficult to recover due to rapid product life cycles and economic declines. Further, there is a continued need to successfully execute product transitions and new product introductions, as factors such as quality, reliability and manufacturing yields continue to be of significant competitive importance.

Seasonality

The disk drive industry traditionally experiences seasonal variability in demand with higher levels of demand in the second half of the calendar year. This seasonality is driven by consumer spending in the back-to-school season from late summer to fall and the traditional holiday shopping season from fall to winter. Beyond traditional seasonality, variability of sales can be related to the timing of IT spending or a reflection of cyclical demand from CSPs based on the timing of their procurement and deployment requirements and the supply and demand balance of other components such as NAND and DRAM.

Research and Development

We are committed to developing new component technologies, products and alternative storage technologies. Our research and development focus is designed to bring new products to market in high volume, with quality attributes that our customers expect, before our competitors. Part of our product development strategy is to leverage a design platform and/or subsystem within product families to serve different market needs. This platform strategy allows for more efficient resource utilization, leverages best design practices, reduces exposure to changes in demand, and allows for achievement of lower costs through purchasing economies. Our advanced technology integration effort focuses disk drive and component research on recording subsystems, including read/write heads and recording media; market-specific product technology; and technology we believe may lead to new business opportunities. The primary purpose of our advanced technology integration effort is to ensure timely availability of mature component technologies for our product development teams as well as to allow us to leverage and coordinate those technologies in the design centers across our products in order to take advantage of opportunities in the marketplace.

Patents and Licenses

As of June 28, 2019, we had approximately 6,000 U.S. patents and 1,300 patents issued in various foreign jurisdictions as well as approximately 900 U.S. and 500 foreign patent applications pending. The number of patents and patent applications will vary at any given time as part of our ongoing patent portfolio management activity. Due to the rapid technological change that characterizes the data storage industry, we believe that, in addition to patent protection, the improvement of existing products, reliance upon trade secrets, protection of unpatented proprietary know-how and development of new products are also important to our business in establishing and maintaining a competitive advantage. Accordingly, we intend to continue our efforts to broadly protect our intellectual property, including obtaining patents, where available, in connection with our research and development program.

 

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The data storage industry is characterized by significant litigation arising from time to time relating to patent and other intellectual property rights. From time to time, we receive claims that our products infringe patents of third parties. Although we have been able to resolve some of those claims or potential claims without a material adverse effect on us, other claims have resulted in adverse decisions or settlements. In addition, other claims are pending, which if resolved unfavorably to us could have a material adverse effect on our business and results of operations. For more information on these claims, see “Item 8. Financial Statements and Supplementary Data—Note 14. Legal, Environmental and Other Contingencies.” The costs of engaging in intellectual property litigation in the past have been, and in the future may be, substantial, irrespective of the merits of the claim or the outcome.

Backlog

In view of industry practice, whereby customers may cancel or defer orders with little or no penalty, we believe backlog for our business is of limited indicative value in estimating future performance and results.

Environmental Matters

Our operations are subject to U.S. and foreign laws and regulations relating to the protection of the environment, including those governing discharges of pollutants into the air and water, the management and disposal of hazardous substances and wastes and the cleanup of contaminated sites. Some of our operations require environmental permits and controls to prevent and reduce air and water pollution, and these permits are subject to modification, renewal and revocation by issuing authorities.

We have established environmental management systems and continually update environmental policies and standard operating procedures for our operations worldwide. We believe that our operations are in material compliance with applicable environmental laws, regulations and permits. We budget for operating and capital costs on an ongoing basis to comply with environmental laws. If additional or more stringent requirements are imposed on us in the future, we could incur additional operating costs and capital expenditures.

Some environmental laws, such as the Comprehensive Environmental Response Compensation and Liability Act of 1980 (as amended, the “Superfund” law) and its state equivalents, can impose liability for the cost of cleanup of contaminated sites upon any of the current or former site owners or operators or upon parties who sent waste to these sites, regardless of whether the owner or operator owned the site at the time of the release of hazardous substances or the lawfulness of the original disposal activity. We have been identified as a responsible or potentially responsible party at several sites. At each of these sites, we have an assigned portion of the financial liability based on the type and amount of hazardous substances disposed of by each party at the site and the number of financially viable parties. We have fulfilled our responsibilities at some of these sites and remain involved in only a few at this time.

While our ultimate costs in connection with these sites are difficult to predict, based on current estimates of cleanup costs and our expected allocation of these costs, we do not expect costs in connection with these sites to be material.

We may be subject to various state, federal and international laws and regulations governing environmental matters, including those restricting the presence of certain substances in electronic products. For example, the European Union (“EU”) has enacted the Restriction of the Use of Certain Hazardous Substances in Electrical and Electronic Equipment, which prohibits the use of certain substances, including lead, in certain products, including disk drives and server storage products, put on the market after July 1, 2006. Similar legislation has been or may be enacted in other jurisdictions, including in the United States, Canada, Mexico, Taiwan, China, Japan and others. The European Union REACH Directive (Registration, Evaluation, Authorization, and Restriction of Chemicals, EC 1907/2006) also restricts substances of very high concern (“SVHCs”) in products.

Employees

At June 28, 2019, we employed approximately 40,500 employees and temporary employees worldwide, of which approximately 33,500 were located in our Asia operations. We believe that our future success will depend in part on our ability to attract and retain qualified employees at all levels. We believe that our employee relations are good.

 

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Financial Information

Financial information for our reportable business segment and about geographic areas is set forth in “Item 8. Financial Statements and Supplementary Data-Note 13. Business Segment and Geographic Information.

Corporate Information

Seagate Technology public limited company is a public limited company organized under the laws of Ireland.

Available Information

Availability of Reports. We are a reporting company under the Securities Exchange Act of 1934, as amended (the “1934 Exchange Act”), and we file reports, proxy statements and other information with the U.S. Securities and Exchange Commission (the “SEC”). Because we make filings to the SEC electronically, the public may access this information at the SEC’s website: www.sec.gov. This site contains reports, proxies and information statements and other information regarding issuers that file electronically with the SEC.

Website Access. Our website is www.seagate.com. We make available, free of charge at the “Investor Relations” section of our website (investors.seagate.com), our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the 1934 Exchange Act as soon as reasonably practicable after we electronically file such materials with, or furnish them to, the SEC. Reports of beneficial ownership filed pursuant to Section 16(a) of the 1934 Exchange Act are also available on our website.

Investors. Investors and others should note that we routinely use the Investor Relations section of our website to announce material information to investors and the marketplace. While not all of the information that the Company posts on its corporate website is of a material nature, some information could be deemed to be material. Accordingly, the Company encourages investors, the media and others interested in the Company to review the information that it shares on www.seagate.com. Information in, or that can be accessed through, our website is not incorporated into this Form 10-K.

Executive Officers

The following sets forth the name, age and position of each of the persons who were serving as executive officers as of August 2, 2019. There are no family relationships among any of our executive officers.

 

Name

   Age     

Positions

William D. Mosley

     52     

Director and Chief Executive Officer

Gianluca Romano

     50     

Executive Vice President and Chief Financial Officer

James J. Murphy(a)

     60     

Executive Vice President, Worldwide Sales and Marketing

Jeffrey D. Nygaard

     55     

Executive Vice President, Global Operations

Katherine E. Schuelke

     56     

Senior Vice President, Chief Legal Officer and Corporate Secretary

 

(a)

Mr. Murphy is leaving the Company and will remain for an interim transition period until December 31, 2019.

William D. Mosley, 52, has served as our Chief Executive Officer (“CEO”) since October 2017 and as a member of the Board since July 25, 2017. He was previously our President and Chief Operating Officer (“COO”) from June 2016 to September 2017. He also served as our President of Operations and Technology from October 2013 to June 2016 and as our Executive Vice President of Operations from March 2011 until October 2013. Prior to these positions, Dr. Mosley served as Executive Vice President, Sales and Marketing from February 2009 through March 2011; Senior Vice President of Global Disk Storage Operations from 2007 to 2009; and Vice President of Research and Development, Engineering from 2002 to 2007. He joined Seagate in 1996 as a Senior Engineer with a PhD in solid state physics. From 1996 to 2002, he served at Seagate in varying roles of increasing responsibility until his promotion to Vice President.

Gianluca Romano, 50, has served as our Executive Vice President and Chief Financial Officer since January 2019. From October 2011 to December 2018, Mr. Romano served as Corporate Vice President, Business Finance and Accounting at Micron Technology, Inc. Prior to his role at Micron, Mr. Romano served as Vice President Finance, Corporate Controller at Numonyx, Inc. from 2008 to 2010. From 1994 until 2008, Mr. Romano held various finance positions at STMicroelectronics, most recently as Group Vice-President, Central & North Europe Finance Director, Shared Accounting Services Director.

 

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James J. Murphy, 60, has served as our Executive Vice President of Worldwide Sales and Marketing since January 2017. From 2003 to 2016, Mr. Murphy was employed by Western Digital Corporation where he served in a variety of executive leadership roles including President of Western Digital Corporation, Executive Vice President of Worldwide Sales & Sales Operations, and Vice President of Asia Pacific sales. Mr. Murphy began his career with IBM in 1984 in the sales organization, where he held a number of sales roles with increasing responsibilities over a seven-year period.

Jeffrey D. Nygaard, 55, has served as our Executive Vice President, Operations, Product Development and Technology Development since November 2018. Mr. Nygaard also served as our Executive Vice President, Global Operations from October 2017 to November 2018; Senior Vice President, Global Operations and Supply Chain from March 2017 to October 2017; Senior Vice President, Recording Head Operations from May 2013 to February 2017; Vice President Slider, HGA, HSA Operations from 2011 to April 2013; Vice President and Country Manager, Thailand and Penang Operations from 2009 to 2011; Vice President and Country Manager, Thailand Operations and Asia Drive Engineering from 2006 to 2009; and Vice President, Product and Process Development from 2004 to 2006. From 1994 to 2006, Mr. Nygaard served in varying roles of increasing responsibilities in engineering at Seagate until his promotion to Vice President. Mr. Nygaard began his career with Raytheon and IBM where he held positions as a design engineer and senior engineer.

Katherine E. Schuelke, 56, has served as our Senior Vice President, Chief Legal Officer and Corporate Secretary since June 2017. From 2011 to January 2016, Ms. Schuelke was the Senior Vice President, General Counsel and Secretary at Altera Corporation (“Altera”). Prior to that, Ms. Schuelke was Vice President, General Counsel, and Secretary at Altera from 2001 to 2011. At Altera, she held other positions of increasing responsibility from 1996 through 2001. Ms. Schuelke began her career at an international law firm.

 

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ITEM 1A.

RISK FACTORS

We operate in highly competitive markets and our failure to anticipate and respond to technological changes and other market developments, including price, could harm our ability to compete.

We face intense competition in the data storage industry. Our principal sources of competition include:

 

   

disk drive and SSD manufacturers, such as Micron Technology, Inc., Samsung Electronics, SK hynix, Inc., Toshiba Corporation, Toshiba Memory Holdings Corporation and Western Digital Corporation; and

 

   

companies that provide storage subsystems and components to OEMs, including electronic manufacturing services (“EMS”) and contract electronic manufacturing (“CEM”).

The markets for our data storage products are characterized by technological change, which is driven in part by the adoption of new industry standards. These standards provide mechanisms to ensure technology component interoperability but they also hinder our ability to innovate or differentiate our products. When this occurs, our products may be deemed commodities, which could result in downward pressure on prices.

We also experience competition from other companies that produce alternative storage technologies such as flash memory, where increasing capacity, decreasing cost, energy efficiency and improvements in performance have resulted in increased competition with our lower capacity, smaller form factor disk drives. Some customers for both enterprise and edge compute applications have adopted SSDs as an alternative to hard drives in certain applications. Further adoption of alternative storage technologies may impact the competitiveness of our product portfolio and reduce our market share. Any resulting increase in competition could have a material adverse effect on our business, financial condition and results of operations.

In addition, the barriers to entry into our markets could be lowered, allowing large EMS and CEM companies that utilize general-purpose design skills to enter our markets and reduce the value of our specialized research and design skills. If our markets become more commoditized and we fail to deliver innovative, alternative products to our customers or match the price declines or cost efficiencies, we will have difficulty competing against the large EMS and CEM companies. This could result in lower profit margins or a loss of market share. Any significant decline in our market share in any of our principal markets would adversely affect our results of operations.

We must plan our investments in our products and incur costs before we have customer orders or know about the market conditions at the time the products are produced. If we fail to predict demand accurately for our products or if the markets for our products change, we may be unable to meet demand or we may have insufficient demand, which may materially adversely affect our financial condition and results of operations.

Our industry operates primarily on quarterly purchasing cycles, with most of the orders typically coming at the end of each quarter. Our manufacturing process requires us to make significant product-specific investments in inventory each quarter for production in that quarter or a specific quarter in the future. As a result, we incur inventory and manufacturing costs in advance of anticipated sales that may never materialize or that may be substantially lower than expected. If actual demand for our products is lower than the forecast, we may also experience higher inventory carrying costs, manufacturing rework costs and product obsolescence. Conversely, if we underestimate demand, we may have insufficient inventory to satisfy demand and may have to forego sales.

Other factors that may affect our ability to anticipate or meet the demand for our products and adversely affect our results of operations include:

 

   

competitive product announcements or technological advances that result in excess supply when customers cancel purchases in anticipation of newer products;

 

   

variable demand resulting from unanticipated upward or downward pricing pressures;

 

   

our ability to successfully qualify, manufacture and sell our data storage products;

 

   

changes in our product mix, which may adversely affect our gross margins;

 

   

manufacturing delays or interruptions, particularly at our manufacturing facilities in China, Malaysia, Northern Ireland, Singapore, Thailand or the United States;

 

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limited access to components that we obtain from a single or a limited number of suppliers; and

 

   

the impact of changes in foreign currency exchange rates on the cost of producing our products and the effective price of our products to foreign consumers.

In addition, we derive a portion of our revenues in each quarter from a number of relatively large orders. If one or more of our key customers decides to defer or cancel a purchase order or delay product acceptance in any given quarter, our revenues for that quarter may be significantly reduced and fall below our expectations. Conversely, if one of our key customers unexpectedly increases its orders, we may be unable to produce the additional product volumes in a timely manner or take advantage of any overall increased market demand. This could damage our customer relationships and reputation, which may adversely affect our results of operations.

Changes in demand for computer systems and storage subsystems may in the future cause a decline in demand for our products.

Our products are components in computers, data storage systems and consumer electronic devices. Historically, the demand for these products has been volatile. Unexpected slowdowns in demand for computers, storage subsystems or consumer electronic devices generally result in sharp declines in demand for our products. Declines in consumer spending on the systems and devices that incorporate our products could have a material adverse effect on demand for our products and on our financial condition and results of operations.

Sales to the edge compute market remain an important part of our business. This market, however, has been, and we expect it to continue to be, adversely affected by:

 

   

announcements or introductions of major new operating systems or semiconductor improvements or shifts in consumer preferences and behavior, such as the shift to tablet computers, smart phones, NAND flash memory or similar devices;

 

   

longer product life cycles; and

 

   

changes in macroeconomic conditions that cause consumers to spend less, such as the imposition of new tariffs and increased laws and regulations.

We believe these announcements and introductions from time to time have caused consumers to defer or cancel their purchases, making certain inventory obsolete. Whenever an oversupply of products in the market causes participants in our industry to have higher than anticipated inventory levels, we experience even more intense price competition from other manufacturers than usual, which may materially adversely affect our financial results. We believe that the deterioration of demand for disk drives in the edge compute market has accelerated, and this deterioration may continue or further accelerate, which could cause our operating results to suffer.

In addition, the demand for edge non-compute products is volatile. This volatility may be exacerbated by competing alternative storage technologies, such as flash memory, which meet customers’ cost and capacity metrics. Unpredictable fluctuations in demand for our products or rapid shifts in demand from our products to alternative storage technologies in new edge non-compute applications could materially adversely impact our future results of operations.

The Enterprise Storage market for disk drives has been adversely affected by the growth of the utilization of NAND flash memory in mission critical applications. This deterioration of the Enterprise Storage disk drive market could cause our operating results to suffer. An acceleration of the pace of migration of the Enterprise Storage market to NAND flash memory products may materially adversely affect our financial results.

We are dependent on our long-term investments to manufacture adequate products. Our investment decisions in adding new assembly and test capacity require significant planning and lead-time, and a failure to accurately forecast demand for our products could cause us to over-invest or under-invest, which would lead to excess capacity, under-utilization charges, impairments or loss of sales and revenue opportunities.

 

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Our ability to increase our revenue and maintain our market share depends on our ability to successfully introduce and achieve market acceptance of new products on a timely basis.

The markets for our products are characterized by rapid technological change, frequent new product introductions and technology enhancements, uncertain product life cycles and changes in customer demand.

Historically, our results of operations have substantially depended upon our ability to be among the first-to-market with new data storage product offerings. We may face technological, operational and financial challenges in developing new products. In addition, our investments in new product development may not yield the anticipated benefits. Our market share and results of operations in the future may be adversely affected if we fail to:

 

   

consistently maintain our time-to-market performance with our new products;

 

   

produce these products in adequate volume;

 

   

qualify these products with key customers on a timely basis by meeting our customers’ performance and quality specifications; or

 

   

achieve acceptable manufacturing yields, quality and costs with these products.

Accordingly, we cannot accurately determine the ultimate effect that our new products will have on our results of operations. Our failure to accurately anticipate customers’ needs and accurately identify the shift in technological changes could materially adversely affect our long-term financial results.

In addition, the limited number of high-volume OEMs magnifies the potential effect of missing a product qualification opportunity. If the delivery of our products is delayed, our OEM customers may use our competitors’ products to meet their production requirements.

We cannot assure you that we will be among the leaders in time-to-market with new products or that we will be able to successfully qualify new products with our customers in the future. If our new products are not successful, our future results of operations may be adversely affected.

If our products do not keep pace with technological changes, our results of operations will be adversely affected.

Our customers demand new generations of storage products as advances in computer hardware and software have created the need for improved storage products, with features such as increased storage capacity, enhanced security, improved performance and reliability and lower cost. We, and our competitors, have developed improved products, and we will need to continue to do so in the future. If we are unable to develop new products, identify business strategies and timely introduce competitive product offerings to meet technological shifts, our business and results of operations may be adversely affected.

When we develop new products with higher capacity and more advanced technology, our results of operations may decline because the increased difficulty and complexity associated with producing these products increases the likelihood of reliability, quality or operability problems. If our products experience increases in failure rates, are of low quality or are not reliable, customers may reduce their purchases of our products, our factory utilization may decrease and our manufacturing rework and scrap costs and our service and warranty costs may increase. In addition, a decline in the reliability of our products may make it more difficult for us to effectively compete with our competitors.

Additionally, we may be unable to produce new products that have higher capacities and more advanced technologies in the volumes and timeframes that are required to meet customer demand. We are transitioning to key areal density recording technologies that use HAMR technology to increase HDD capacities. If our transitions to more advanced technologies, including the transition to HDDs utilizing HAMR technology, require development and production cycles that are longer than anticipated or if we otherwise fail to implement new HDD technologies successfully, we may lose sales and market share, which could significantly harm our financial results.

 

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We may not be able to generate sufficient cash flows from operations and our investments to meet our liquidity requirements, including servicing our indebtedness.

Our business may not generate sufficient cash flows to enable us to meet our liquidity requirements, including working capital, capital expenditures, product development efforts, investments, servicing our indebtedness and other general corporate requirements. If we cannot fund our liquidity requirements, we may have to reduce or delay capital expenditures, product development efforts, investments and other general corporate expenditures. We cannot assure you that any of these remedies would, if necessary, be effected on commercially reasonable terms, or at all, or that they would permit us to meet our obligations.

We are leveraged and require significant amounts of cash to service our debt. Our debt and debt service requirements could adversely affect our ability to operate our business and may limit our ability to take advantage of potential business opportunities and reduce our options for capital allocation. Our high level of debt presents the following risks:

 

   

we are required to use a substantial portion of our cash flow from operations to pay principal and interest on our debt, thereby reducing the availability of our cash flow to fund working capital, capital expenditures, product development efforts, strategic acquisitions, investments and alliances and other general corporate requirements;

 

   

our substantial leverage increases our vulnerability to economic downturns and adverse competitive and industry conditions and could place us at a competitive disadvantage compared to those of our competitors that are less leveraged;

 

   

our debt service obligations could limit our flexibility in planning for, or reacting to, changes in our business and our industry and could limit our ability to pursue other business opportunities, borrow more money for operations or capital in the future and implement our business strategies;

 

   

our level of debt may restrict us from raising additional financing on satisfactory terms to fund working capital, capital expenditures, product development efforts, strategic acquisitions, investments and alliances and other general corporate requirements; and

 

   

covenants in our debt instruments limit our ability to pay future dividends or make other restricted payments and investments.

In addition, in the event that we need to refinance all or a portion of our outstanding debt as it matures or incur additional debt to fund our operations, we may not be able to obtain terms as favorable as the terms of our existing debt or refinance our existing debt at all. If prevailing interest rates or other factors result in higher interest rates upon refinancing, then the interest expense relating to the refinanced debt would increase. Furthermore, if any rating agency changes our credit rating or outlook, our debt and equity securities could be negatively affected, which could adversely affect our ability to refinance existing debt or raise additional capital.

We may not be successful in our efforts to grow our EDS and SSD revenues.

We have made and continue to make investments to grow our EDS and SSD revenues. Our ability to grow EDS and SSD revenues is subject to the following risks:

 

   

we may be unable to accurately estimate and predict data center capacity and requirements;

 

   

we may not be able to offer compelling solutions to enterprises and consumers; and

 

   

our cloud systems revenues generally have a longer sales cycle, and growth is likely to depend on relatively large customer orders, which may increase the variability of our results of operations and the difficulty of matching revenues with expenses.

Our results of operations and share price may be adversely affected if we are not successful in our efforts to grow our revenues as anticipated. In addition, our growth in these markets may bring us into closer competition with some of our customers or potential customers, which may decrease their willingness to do business with us.

 

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Changes in the macroeconomic environment may in the future negatively impact our results of operations.

Changes in macroeconomic conditions may affect consumer and enterprise spending, and as a result, our customers may postpone spending in response to volatility in credit and equity markets, negative financial news and/or declines in income or asset values, all of which may have a material adverse effect on the demand for our products. Other factors that could have a material adverse effect on demand for our products and on our financial condition and results of operations include conditions in the labor market, healthcare costs, access to credit, consumer confidence and other macroeconomic factors affecting consumer spending behavior.

Macroeconomic developments such as the pending withdrawal of the United Kingdom from the European Union, slowing economies in parts of Asia and South America or increased tariffs between the U.S. and China, Mexico and other countries could negatively affect our business, operating results or financial condition which, in turn, could adversely affect the price of our ordinary shares. A general weakening of, and related declining corporate confidence in, the global economy or the curtailment in government or corporate spending could cause current or potential customers to reduce their IT budgets or be unable to fund data storage systems, which could cause customers to delay, decrease or cancel purchases of our products or cause customers not to pay us or to delay paying us for previously purchased products and services.

Our quarterly results of operations fluctuate, sometimes significantly, from period to period, and may cause our share price to decline.

Our quarterly revenue and results of operations may fluctuate, sometimes significantly, from period to period. These fluctuations, which we expect to continue, may be precipitated by a variety of factors, including:

 

   

uncertainty in global economic and political conditions which may pose a risk to the overall economy and adversely affect our customers’ purchasing behavior;

 

   

adverse changes in the level of economic activity in the major regions in which we do business;

 

   

competitive pressures resulting in lower selling prices by our competitors which may shift demand away from our products toward those of our competitors;

 

   

delays or problems in our introduction of new, more cost-effective products, the inability to achieve high production yields or delays in customer qualification or initial product quality issues;

 

   

changes in purchasing patterns of our customers;

 

   

application of new or revised industry standards;

 

   

disruptions in our supply chain;

 

   

increased costs or adverse changes in availability of supplies of raw materials or components;

 

   

the impact of corporate restructuring activities that we have and may continue to engage in;

 

   

changes in the demand for the computer systems and data storage products that contain our products due to seasonality, economic conditions and other factors;

 

   

shifting trends in customer demand which, when combined with overproduction of particular products, particularly when the industry is served by multiple suppliers, results in unfavorable supply and demand imbalances;

 

   

our high proportion of fixed costs, including research and development expenses;

 

   

any impairments in goodwill or other long-lived assets;

 

   

announcements of new products, services or technological innovations by us or our competitors;

 

   

changes in tax laws, regulatory requirements, including export regulations or tariffs, or accounting standards; and

 

   

adverse changes in the performance of our products.

As a result, we believe that quarter-to-quarter and year-over-year comparisons of our revenue and results of operations may not be meaningful, and that these comparisons may not be an accurate indicator of our future performance. Our results of operations in one or more future quarters may fail to meet the expectations of investment research analysts or investors, which could cause an immediate and significant decline in our market value.

 

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We experience seasonal declines in the sales of our products during the second half of our fiscal year which may adversely affect our results of operations.

Sales of computers, storage subsystems and consumer electronic devices tend to be seasonal, and therefore, we expect to continue to experience seasonality in our business as we respond to variations in our customers’ demand for our products. In particular, we anticipate that sales of our products will continue to be lower during the second half of our fiscal year. In the edge compute and edge non-compute market applications of our data storage business, this seasonality is partially attributable to the historical trend of our customers’ increased sales of desktop computers, notebook computers and consumer electronics during the back-to-school and winter holiday season. In the enterprise storage market, our sales are seasonal because of the capital budgeting and purchasing cycles of our end users. We also experience seasonal reductions in the business activities of our customers during the summer months, particularly in Europe, and the impact of international holidays like Chinese New Year, typically result in lower earnings during those periods. Since our working capital needs peak during periods in which we are increasing production in anticipation of orders that have not yet been received, our results of operations will fluctuate seasonally even if the forecasted demand for our products proves accurate. Furthermore, it is difficult for us to evaluate the degree to which this seasonality may affect our business in future periods because of the rate and unpredictability of product transitions and new product introductions, particularly in the edge non-compute market, as well as macroeconomic conditions.

We have a long and unpredictable sales cycle for enterprise data storage solutions, which impairs our ability to accurately predict our financial and operating results in any periods and may adversely affect our ability to forecast the need for investments and expenditures.

Our enterprise data storage solutions are technically complex and we typically supply them in high quantities to a small number of customers. Many of our products are also tailored to meet the specific requirements of individual customers, and are often integrated by our customers into the systems and products that they sell. Factors that affect the length of our sales cycle include:

 

   

the time required for developing, testing and evaluating our products before they are deployed;

 

   

the size of the deployment; and

 

   

the complexity of system configuration necessary to deploy our products.

As a result, our sales cycle for enterprise data storage solutions is often in excess of one year and frequently unpredictable. Given the length of development and unpredictability of the sales cycle, we may be unable to accurately forecast product demand, which may result in lost sales or excess inventory and associated inventory reserves or write-downs, each of which could harm our business, financial condition and results of operations.

We may be adversely affected by the loss of, or reduced, delayed or canceled purchases by, one or more of our key customers.

Some of our key customers account for a large portion of our revenue. While we have long-standing relationships with many of our customers, if any of our key customers were to significantly reduce their purchases from us, our results of operations would be adversely affected. Although sales to key customers may vary from period to period, a key customer that permanently discontinues or significantly reduces its relationship with us could be difficult to replace. In line with industry practice, new key customers usually require that we pass a lengthy and rigorous qualification process at the customer’s expense. Accordingly, it may be difficult or costly for us to attract new key customers.

Additionally, if there is consolidation among our customer base, our customers may be able to command increased leverage in negotiating prices and other terms of sale, which could adversely affect our profitability. Furthermore, if, as a result of increased leverage, customer pressures require us to reduce our pricing such that our gross margins are diminished, it might not be feasible to sell our products to a particular customer, which could result in a decrease in our revenue. Consolidation among our customer base may also lead to reduced demand for our products, replacement of our products by the combined entity with those of our competitors and cancellations of orders, each of which could adversely affect our operating results. If a significant transaction involving any of our key customers results in the loss of or reduction in purchases by these key customers, it could have a materially adverse effect on our business, results of operations and financial condition.

 

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We are dependent on sales to distributors and retailers, which may increase price erosion and the volatility of our sales.

A substantial portion of our sales has been to distributors of disk drive products. Certain of our distributors may also market other products that compete with our products. Product qualification programs in this distribution channel are limited, which increases the number of competing products that are available to satisfy demand, particularly in times of lengthening product cycles. As a result, purchasing decisions in this channel are based largely on price, terms and product availability. Sales volumes through this channel are also less predictable and subject to greater volatility than sales to our OEM customers. In addition, deterioration in business and economic conditions could exacerbate price erosion and volatility as distributors lower prices to compensate for lower demand and higher inventory levels. Our distributors’ ability to access credit for purposes of funding their operations may also affect purchases of our products by these customers. If distributors reduce their purchases of our products or prices decline significantly in this distribution channel or if distributors experience financial difficulties or terminate their relationships with us, our revenues and results of operations would be adversely affected.

In addition, retail sales of our consumer solutions traditionally experience seasonal variability in demand with higher levels of demand in the first half of our fiscal year driven by consumer spending in the back-to-school season from late summer to fall and the traditional holiday shopping season from fall to winter. Our ability to reach such consumers depends on us maintaining effective working relationships with major retailers and distributors. Failure to anticipate consumer demand for our branded solutions as well as an inability to maintain effective working relationships with retail and online distributors may adversely impact our future results of operations.

Our international sales and manufacturing operations subject us to risks that may adversely affect our business related to disruptions in foreign markets, currency exchange fluctuations, longer payment cycles, potential adverse tax consequences, increased costs, our customers’ credit and access to capital, health-related risks, investment risks, tariffs, privacy and protection of data and access to personnel.

We have significant sales and manufacturing operations in foreign countries, including manufacturing facilities, sales personnel and customer support operations. We have manufacturing facilities in China, Malaysia, Northern Ireland, Singapore and Thailand, in addition to those in the United States. Additionally, the manufacturing of some of our products is concentrated in certain geographical locations. The production of certain drive subassemblies are limited to Thailand and the production of media is limited to Singapore. Disruptions in the economic, environmental, political, legal or regulatory landscape in these countries may have a material adverse impact on our manufacturing operations.

Our international operations are subject to economic risks inherent in doing business in foreign countries, including the following:

 

   

Disruptions in Foreign Markets. Disruptions in financial markets and the deterioration of the underlying economic conditions in the past in some countries, including those in Asia, United Kingdom and the European Union have had an impact on our sales to customers located in, or whose end-user customers are located in, these countries.

 

   

Fluctuations in Currency Exchange Rates. Prices for our products are denominated predominantly in U.S. dollars, even when sold to customers that are located outside the United States. An increase in the value of the dollar could increase the real cost to our customers of our products in those markets outside of the U.S. where we sell in dollars. This could adversely impact our sales and market share in such areas or increase pressure on us to lower our price, and adversely impact our profit margins. A weakened dollar could increase the effective cost of expenses such as payroll, utilities, tax and marketing expenses, as well as overseas capital expenditures. Any of these events could have a material adverse effect on our results of operations. We may attempt to manage the impact of foreign currency exchange rate changes by, among other things, entering into foreign currency forward exchange contracts which could be designated as cash flow hedges or not designated as hedging instruments. In addition, our hedges may be ineffective, may expire and not be renewed or may not offset any or more than a portion of the adverse financial impact resulting from currency variations. The hedging activities may not cover our full exposure, subject us to certain counterparty credit risks and may impact our results of operations. See “Item 7A. Quantitative and Qualitative Disclosures About Market Risk—Foreign Currency Exchange Risk” of this report for additional information about our foreign currency exchange risk.

 

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Longer Payment Cycles. Our customers outside of the United States are sometimes allowed longer time periods for payment than our U.S. customers. This increases the risk of nonpayment due to the possibility that the financial condition of particular customers may worsen during the course of the payment period.

 

   

Potential Adverse Tax Consequences. Our international operations create a risk of potential adverse tax consequences, including imposition of withholding or other taxes on payments by our subsidiaries. In addition, our taxable income in any jurisdiction is dependent upon acceptance of our operational practices and intercompany transfer pricing by local tax authorities as being on an arm’s length basis. Due to inconsistencies in application of the arm’s length standard among taxing authorities, as well as a lack of adequate treaty-based protection, transfer pricing challenges by tax authorities could, if successful, substantially increase our income tax expense. We are subject to tax audits around the world, and are under audit in various jurisdictions, and such jurisdictions may assess additional income tax against us. Although we believe our tax positions are reasonable, the final determination of tax audits could be materially different from our recorded income tax provisions and accruals. The ultimate results of an audit could have a material adverse effect on our operating results or cash flows in the period or periods for which that determination is made and could result in increases to our overall tax expense in subsequent periods. In light of the ongoing fiscal challenges many countries are facing, various levels of government are increasingly focused on tax reform and other legislative action to increase tax revenue. In addition, the Organization for Economic Cooperation and Development’s Base Erosion and Profit Shifting recommendations are reshaping international tax rules in numerous countries. These actual and potential changes in the relevant tax laws applicable to corporate multinationals along with potential changes in accounting and other laws, regulations, administrative practices, principles and interpretations could increase the risk of double taxation, cause increased tax audit activity, and could impact our effective tax rate.

 

   

Increased Costs. The shipping and transportation costs associated with our international operations are typically higher than those associated with our U.S. operations, resulting in decreased operating margins in some foreign countries. Volatility in fuel costs, political instability or constrained in air transportation may lead us to develop alternative shipment methods, which could disrupt our ability to receive raw materials in, or ship finished product from and as a result our business and operating results may be harmed.

 

   

Credit and Access to Capital Risks. Our international customers could have reduced access to working capital due to higher interest rates, reduced bank lending resulting from contractions in the money supply or the deterioration in the customer’s or its bank’s financial condition or the inability to access other financing.

 

   

Global Health Outbreaks. The occurrence of a pandemic disease may adversely impact our operations and some of our key customers. Such diseases could also potentially disrupt the timeliness and reliability of the distribution network we rely on.

 

   

Privacy and Protection of Data. Our business is subject to a number of laws, rules and regulations in the countries where we operate pertaining to the collection, processing, security, use, retention and transfer information about our customers, consumers and employees. For example, the General Data Protection Regulation, which is in effect in the European Union (“EU”), applies to our operations. In the U.S., numerous federal and state laws, rules and regulations apply to our data handling practices. For example, California recently enacted legislation, the California Consumer Privacy Act (“CCPA”) which will, among other things, require new disclosures to California consumers and afford such consumers new abilities to opt-out of certain sales of personal information when it goes into effect on January 1, 2020. The CCPA was amended in September 2018, and it is unclear whether this legislation will be modified again or how it will be interpreted. The effects of this legislation potentially are wide-ranging and may require us to modify our data processing practices and policies and incur substantial compliance-related costs and expenses. Additionally, other states in the U.S. have proposed or enacted similar laws and regulations relating to privacy and data protection. Laws, rules and regulations relating to privacy and data protection evolve frequently and their scope may continually change, through new legislation, amendments to existing legislation and changes in enforcement, and may be inconsistent from one jurisdiction to another. Compliance with various laws, rules and regulations relating to privacy and data protection may require us to change our data practices, which could result in increased costs, require significant changes to our business and operations and otherwise have an adverse effect on our business and results of operations. Violations of privacy or data protection laws could result in adverse effects on our business and results of operations including damage to our brand and reputation, significant financial penalties and liability, governmental investigations and proceedings, and unanticipated changes to our data handling and processing practices.

 

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Access to Personnel. There is substantial competition for qualified and capable personnel in certain jurisdictions in which we operate, including the U.S., Thailand, China and Singapore, which may make it difficult for us to recruit and retain qualified employees in sufficient numbers. The reductions in workforce that result from our historical restructurings have made and may continue to make it difficult for us to recruit and retain personnel. Increased difficulty in recruiting or retaining sufficient and adequate personnel in our international operations may lead to increased manufacturing and employment compensation costs, which could adversely affect our results of operations.

Our business is subject to various laws, regulations and governmental policies that may cause us to incur significant expense.

Our business is subject to regulation under a wide variety of U.S. federal and state and non-U.S. laws, regulations and policies. There can be no assurance that laws, regulations and policies will not be changed in ways that will require us to modify our business model and objectives or affect our returns on investments by restricting existing activities and products, subjecting them to escalating costs or prohibiting them outright. In particular, legislative, regulatory or other areas of significance for our businesses that U.S. and non-U.S. governments have focused and continue to focus on include antitrust and competition law, improper payments, data privacy and sovereignty, currency exchange controls that could restrict the movement of liquidity from particular jurisdictions, trade controls or tariffs on imports and exports in the U.S. or other countries, complex economic sanctions and the enactment of U.S. tax reform and potential further changes to tax laws may have an effect on our corporate structure, operations, sales, liquidity, capital requirements, effective tax rate and performance. In China, Malaysia, Northern Ireland, Singapore and Thailand, in which we have significant operating assets, and the European Union have exercised and continue to exercise significant influence over many aspects of their domestic economies including, but not limited to, fair competition, tax practices, anti-corruption, anti-trust, price controls and international trade.

In addition, regulation or government scrutiny may impact the requirements for marketing our products and slow our ability to introduce new products, resulting in an adverse impact on our business. Although we have implemented policies and procedures designed to ensure compliance, there can be no assurance that our employees, contractors or agents will not violate these or other applicable laws, rules and regulations to which we may be subject. Violations of these laws and regulations could lead to significant penalties, restraints on our export or import privileges, monetary fines, government investigations, disruption of our operating activities, damage to our reputation and corporate brand, criminal proceedings and regulatory or other actions that could materially adversely affect our results of operations. The political and media scrutiny surrounding a governmental investigation for the violation of such laws, even if an investigation does not result in a finding of violation, could cause us significant expense and collateral consequences, including reputational harm, that could have an adverse impact on our business, operating results and financial condition.

Changes in U.S. trade policy, including the imposition of tariffs and the resulting consequences, may have a material adverse impact on our business and results of operations.

The U.S. government has adopted a new approach to trade policy including in some cases to renegotiate, or potentially terminate, certain existing bilateral or multi-lateral trade agreements. The U.S. government has also imposed tariffs on certain foreign goods, including information and communication technology products. These measures may materially increase costs for goods imported into the United States. This in turn could require us to materially increase prices to our customers which may reduce demand, or, if we are unable to increase prices to adequately address any tariffs, quotas or duties result in lowering our margin on products sold. Changes in U.S. trade policy have resulted in, and could result in more, U.S. trading partners adopting responsive trade policies, including imposition of increased tariffs, quotas or duties, making it more difficult or costly for us to export our products to those countries. The implementation of a border tax, tariff or higher customs duties on our products manufactured abroad or components that we import into the U.S., or any potential corresponding actions by other countries in which we do business, could negatively impact our financial performance.

 

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We could suffer a loss of revenue and increased costs, exposure to significant liability including legal and regulatory consequences, reputational harm and other serious negative consequences if we encounter cyber-attacks, ransomware or other cyber security breaches that disrupt our operations or result in the dissemination of proprietary or confidential information about us or our customers or other third parties.

Our operations are dependent upon our ability to protect our computer equipment and the electronic data stored in our databases. We manage and store various proprietary information and sensitive or confidential data relating to our operations. As our operations become more automated and increasingly interdependent, our exposure to the risks posed by storage and maintenance of data will increase. The measures we have implemented to secure our computer equipment and electronic data may be vulnerable to employee error, hacking, malfeasance, system error or other irregularities and may not be sufficient for all eventualities. The insurance coverage we maintain that is intended to address certain data security risks, may be insufficient to cover all types of claims or losses that may arise. We have been, and will likely continue to be, subject to computer viruses or other malicious codes, cyber-attacks or other computer-related attempts to breach the information technology (“IT”) systems we use for these purposes. We may also be subject to IT system failures and network disruptions due to these factors. Experienced computer programmers and hackers may be able to penetrate our network security, misappropriate or compromise our confidential information or that of third-parties, create system disruptions or cause shutdowns. Computer programmers and hackers also may be able to develop and deploy viruses, worms and other malicious software programs that attack our products or otherwise exploit any security vulnerabilities of our products. Such attempts are increasing in technical sophistication, number and ability to evade detection or to obscure such activities. Although we take steps to protect against and detect such attempts, our efforts may not be sufficient for all eventualities. In addition, sophisticated hardware and operating system software and applications that we produce or procure from third-parties may contain defects in design or manufacture, including “bugs” and other problems that could unexpectedly interfere with the operation of the system.

The costs to us to eliminate or address the foregoing security problems and security vulnerabilities before or after a cyber-incident could be significant. System redundancy may be ineffective or inadequate, and our disaster recovery planning may not be sufficient for all eventualities. Our remediation efforts may not be successful and could result in interruptions, delays or cessation of service, and loss of existing or potential customers that may impede our sales, manufacturing, distribution or other critical functions. We could lose existing or potential customers for outsourcing services or other IT solutions in connection with any actual or perceived security vulnerabilities in our products. Some of our products contain encryption and other measures to protect third-party content stored on our products. Such measures may be compromised, breached or circumvented by sophisticated attackers and losses or unauthorized access to or releases of confidential information may occur. Breaches of our security measures and the unapproved dissemination of proprietary information or sensitive or confidential data about us or our customers or other third-parties, could expose us, our vendors and customers or other third-parties affected to a risk of loss or misuse of this information, result in litigation or governmental investigations and potential liability for us, damage our brand and reputation or otherwise harm our business. Failure to meet our contractual obligations to promote information security with certain customers may result in liability, including additional costs, indemnification claims, litigation and damage to our brand and reputation. In addition, we rely in certain limited capacities on third-party data management providers whose possible security problems and security vulnerabilities may have similar effects on us. Our business, brand and reputation could also be adversely affected by media or other reports of perceived security vulnerabilities in our products, network or processes, even if unsubstantiated.

We are subject to laws, rules and regulations in the U.S., U.K., EU and other countries relating to the collection, use, and security of user data. In many cases, these laws apply not only to third-party transactions, but also to transfers of information between us and our subsidiaries, and among us, our subsidiaries and other parties with which we have commercial relations. Our ability to execute transactions and to possess and use personal information and data in conducting our business subjects us to legislative and regulatory burdens that may require us to notify vendors, customers or employees of a data security breach. We have incurred, and will continue to incur, significant expenses to comply with mandatory privacy and security standards and protocols imposed by law, regulation, industry standards, or contractual obligations. These laws, protocols and standards continue to develop and may be inconsistent from jurisdiction to jurisdiction. Complying with emerging and changing international requirements may cause us to incur substantial costs or require us to change our business practices. If we fail to comply with applicable federal, state or international privacy-related or data protection laws we may be subject to proceedings by governmental entities and incur penalties, significant legal liability or reputational harm.

 

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We must successfully maintain and upgrade our IT systems, and our failure to do so could have a material adverse effect on our business, financial condition and results of operations.

From time to time, we expand and improve our IT systems to support our business going forward. Consequently, we are in the process of implementing, and will continue to invest in and implement, modifications and upgrades to our IT systems and procedures, including making changes to legacy systems or acquiring new systems with new functionality, and building new policies, procedures, training programs and monitoring tools. These types of activities subject us to inherent costs and risks associated with changing and acquiring these systems, including capital expenditures, additional operating expenses, demands on management time and other risks and costs of delays or difficulties in transitioning to or integrating new systems into our current systems. These implementations, modifications and upgrades may not result in productivity improvements at a level that outweighs the costs of implementation, or at all. In addition, difficulties with implementing new technology systems, delays in our timeline for planned improvements, significant system failures or our inability to successfully modify our IT systems to respond to changes in our business needs may cause disruptions in our business operations and have a material adverse effect on our business, financial condition and results of operations.

If we experience shortages or delays in the receipt of, or cost increases in, critical components, equipment or raw materials necessary to manufacture our products, we may suffer lower operating margins, production delays and other material adverse effects.

The cost, quality and supply of components, subassemblies, certain equipment and raw materials used to manufacture our products and key components like recording media and heads are critical to our success. The equipment we use to manufacture our products and components is frequently custom made and comes from a few suppliers and the lead times required to obtain manufacturing equipment can be significant. Particularly important for our products are components such as read/write heads, substrates for recording media, ASICs, spindle motors, printed circuit boards, suspension assemblies and NAND flash memory.

We rely on sole suppliers or a limited number of suppliers for some or all of these components that we do not manufacture, including substrates for recording media, read/write heads, ASICs, spindle motors, printed circuit boards, suspension assemblies and NAND flash memory. Many of such component suppliers are geographically concentrated which makes our supply chain more vulnerable to regional disruptions such as severe weather, acts of terrorism and an unpredictable geopolitical climate which may have a material impact on the production and availability of many components. If our vendors for these components are unable to meet our cost, quality and supply requirements, continue to remain financially viable or fulfill their contractual commitments and obligations, we could experience a shortage in supply or an increase in production costs, which would materially adversely affect our results of operations.

Certain rare earth elements are critical in the manufacture of our products. We purchase components that contain rare earth elements from a number of countries, including China. We cannot predict whether any nation will impose regulations or trade barriers including tariffs, duties, quotas or embargoes upon the rare earth elements incorporated into our products that would restrict the worldwide supply of such metals or increase their cost. We have experienced increased costs and production delays when we were unable to obtain the necessary equipment or sufficient quantities of some components, and/or have been forced to pay higher prices or make volume purchase commitments or advance deposits for some components, equipment or raw materials that were in short supply in the industry in general. Further, if our customers experience shortages of components or materials used in their products it could result in a decrease in demand for our products and have an adverse effect on our results of operations. If any major supplier were to restrict the supply available to us or increase the cost of the rare earth elements used in our products, we could experience a shortage in supply or an increase in production costs, which would adversely affect our results of operations.

From time to time, we may be subject to litigation, government investigations or governmental proceedings, which may adversely impact our results of operations and financial condition.

From time to time, we may be involved in various legal, regulatory or administrative investigations, negotiations or proceedings arising in the normal course of business. In the event of litigation, government investigations or governmental proceedings, we are subject to the inherent risks and uncertainties that may result if outcomes differ from our expectations. In the event of adverse outcomes in any litigation, investigation or government proceeding, we could be required to pay substantial damages, fines or penalties and cease certain practices or activities, which could materially harm our business.

 

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The costs associated with litigation and government investigations can also be unpredictable depending on the complexity and length of time devoted to such litigation or investigation. Litigation, investigations or government proceedings may also divert the efforts and attention of our key personnel, which could also harm our business.

If we do not control our fixed costs, we will not be able to compete effectively in our industry.

We continually seek to make our cost structure and business processes more efficient. We are focused on increasing workforce flexibility and scalability, and improving overall competitiveness by leveraging our global capabilities, as well as external talent and skills, worldwide. Our strategy involves, to a substantial degree, increasing revenue and exabytes volume while at the same time controlling operating expenses. If we do not control our operating expenses, our ability to compete in the marketplace may be impaired. In the past, activities to reduce operating costs have included closures and transfers of facilities, significant personnel reductions, restructuring efforts and efforts to increase automation. Our restructuring efforts may not yield the intended benefits and may be unsuccessful or disruptive to our business operations which may materially adversely affect our financial results.

Consolidation among component manufacturers has resulted and may continue to result in some component manufacturers exiting the industry or not making sufficient investments to develop new components.

If there is a shortage of, or delay in supplying us with, critical components, equipment or raw materials, then:

 

   

it is likely that our suppliers would raise their prices and, if we could not pass these price increases to our customers, our operating margin would decline;

 

   

we may have to reengineer some products, which would likely cause production and shipment delays, make the reengineered products more costly and provide us with a lower rate of return on these products;

 

   

we would likely have to allocate the components we receive to certain of our products and ship less of others, which could reduce our revenues and could cause us to lose sales to customers who could purchase more of their required products from manufacturers that either did not experience these shortages or delays or that made different allocations; and

 

   

we may be late in shipping products, causing potential customers to make purchases from our competitors, thus causing our revenue and operating margin to decline.

We cannot assure you that we will be able to obtain critical components in a timely and economic manner. Many of our suppliers’ manufacturing facilities are fully utilized. If they fail to invest in capacity or in the required timeframe, such failure would have an impact on our ability to ramp new products, and may result in a loss of revenue or market share if our competitors did not utilize the same components and were not affected.

We often aim to lead the market in new technology deployments and leverage unique and customized technology from single source suppliers who are early adopters in the emerging market. Our options in supplier selection in these cases are limited and the supplier based technology may consequently be single sourced until wider adoption of the technology occurs and any necessary licenses become available. In such cases, any technical issues in the supplier’s technology may cause us to delay shipments of our new technology deployments and harm our financial position.

If revenues fall or customer demand decreases significantly, we may not meet all of our purchase commitments to certain suppliers.

From time to time, we enter into long-term, non-cancelable purchase commitments or make large up-front investments with certain suppliers in order to secure certain components or technologies for the production of our products or to supplement our internal manufacturing capacity for certain components. If our actual revenues in the future are lower than our projections or if customer demand decreases significantly below our projections, we may not meet all of our purchase commitments with these suppliers. As a result, it is possible that our revenues will not be sufficient to recoup our up-front investments, in which case we will have to shift output from our internal manufacturing facilities to these suppliers or make penalty-type payments under the terms of these contracts. Additionally, because our markets are volatile, competitive and subject to rapid technology and price changes, we face inventory and other asset risks in the event we do not fully utilize firm purchase commitments.

 

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The loss of key executive officers and employees could negatively impact our business prospects.

Our future performance depends to a significant degree upon the continued service of key members of management as well as marketing, sales and product development personnel. The loss of one or more of our key personnel may have a material adverse effect on our business, results of operations and financial condition. We believe our future success will also depend in large part upon our ability to attract, retain and further motivate highly skilled management, marketing, sales and product development personnel. We have experienced intense competition for personnel, and we cannot assure you that we will be able to retain our key employees or that we will be successful in attracting, assimilating and retaining personnel in the future.

Due to the complexity of our products, some defects may only become detectable after deployment.

Our products are highly complex and are designed to operate in and form part of larger complex networks and storage systems. Our products may contain a defect or be perceived as containing a defect by our customers, as a result of improper use or maintenance. Lead times required to manufacture certain components are significant, and a quality excursion may take significant time and resources to remediate. Defects in our products, third-party components or in the networks and systems of which they form a part, directly or indirectly, have resulted in and may in the future result in:

 

   

increased costs and product delays until complex solution level interoperability issues are resolved;

 

   

costs associated with the remediation of any problems attributable to our products;

 

   

loss of or delays in revenues;

 

   

loss of customers;

 

   

failure to achieve market acceptance and loss of market share;

 

   

increased service and warranty costs; and

 

   

increased insurance costs.

Defects in our products could also result in legal actions by our customers for property damage, injury or death. Such legal actions, including but not limited to product liability claims could exceed the level of insurance coverage that we have obtained. Any significant uninsured claims could significantly harm our financial condition.

We may pursue strategic alliances, acquisitions, joint ventures and investment opportunities that involve risks that could adversely affect our results of operations.

From time to time, we pursue strategic alliances, acquisitions, joint ventures and investments in other companies that are complementary to our business. There is substantial competition for attractive strategic alliance, acquisition, joint venture and investment candidates. Therefore, we may not be able to identify suitable strategic alliances, acquisition, joint venture, or investment candidates. Even if we can identify them, the terms on which we are able to consummate a transaction may not be commercially reasonable for us to pursue. We cannot assure you that we will be able to partner with, acquire or invest in suitable candidates, or integrate acquired technologies or operations successfully into our existing technologies and operations. Moreover, our ability to finance potential strategic alliances, acquisitions, joint ventures or investments may be limited by our leverage level, the covenants contained in the instruments that govern our outstanding indebtedness, and any agreements governing any other debt we may incur. In addition, our cash reserves could diminish significantly as a result of any acquisitions, joint ventures, strategic alliances or other investments we pursue. Even if we are successful in forming strategic alliances or acquiring, forming joint ventures with or making investments in other companies, we cannot be certain that we will realize the anticipated benefits or synergies of any strategic alliance, acquisition, joint venture or investment that we pursue.

Political events, war, terrorism, natural disasters, public health issues and other circumstances could materially adversely affect our results of operations and financial condition.

War, terrorism, geopolitical uncertainties, natural disasters, public health issues and other business interruptions have caused and could cause damage or disruption to international commerce and the global economy, and thus could have a strong negative effect on our business, our suppliers, logistics providers, manufacturing vendors and customers. Our business

 

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operations are subject to interruption by natural disasters such as floods and earthquakes, fires, power or water shortages, terrorist attacks, other hostile acts, labor disputes, public health issues and other events beyond our control. Such events may decrease demand for our products, make it difficult or impossible for us to make and deliver products to our customers or to receive components from our suppliers, and create delays and inefficiencies in our supply chain. In the event of a natural disaster, losses and significant recovery time could be required to resume operations and our financial condition and operating results could be materially adversely affected. Should major public health issues, including pandemics, arise, we could be negatively affected by stringent employee travel restrictions, additional limitations in freight services, governmental actions limiting the movement of products between regions, delays in production ramps of new products and disruptions in our operations and some of our key customers.

Failure to comply with applicable environmental laws and regulations, customer requirements and regulations regarding conflicts minerals and other laws and regulations applicable to our business could have a material adverse effect on our business, results of operations and financial condition.

The sale and manufacturing of products in certain states and countries may subject us and our suppliers to state, federal and international laws and regulations governing protection of the environment, including those governing discharges of pollutants into the air and water, the management and disposal of hazardous substances and wastes, the cleanup of contaminated sites, restrictions on the presence of certain substances in electronic products and the responsibility for environmentally safe disposal or recycling. We endeavor to ensure that we and our suppliers comply with all applicable environmental laws and regulations, however, compliance may increase our operating costs and otherwise impact future financial results. If additional or more stringent requirements are imposed on us in the future, we could incur additional operating costs and capital expenditures. If we fail to comply with applicable environmental laws, regulations, initiatives, or standards of conduct, our customers may refuse to purchase our products and we could be subject to fines, penalties and possible prohibition of sales of our products into one or more states or countries, liability to our customers and damage to our reputation, which could result in a material adverse effect on our financial condition or results of operations.

SEC rules require certain disclosures regarding the use of specified minerals, or conflict minerals that are necessary to the functionality or production of products manufactured or contracted to be manufactured. These rules could affect our ability to source, directly or indirectly, certain materials used in our products at competitive prices and could impact the availability of certain minerals used in the manufacture of our products, including gold, tantalum, tin and tungsten. As there may be only a limited number of suppliers of “conflict free” minerals, we cannot be sure that we will be able to obtain necessary conflict free minerals in sufficient quantities or at competitive prices. Our customers, including our OEM customers, may require that our products be free of conflict minerals, and our revenues and margins may be harmed if we are unable to procure conflict free minerals at a reasonable price, or at all, or are unable to pass through any increased costs associated with meeting these demands. We may also face challenges with government regulators and our customers and suppliers if we are unable to sufficiently verify that the metals used in our products are conflict free. Furthermore, our customers and manufacturing stakeholders may place increased demands on our compliance framework which may in turn negatively impact our relationships with our suppliers. If we are unable to comply with requirements regarding the use of conflict and other minerals, our business, financial condition or results of operations may be materially adversely affected.

Any cost reduction initiatives that we undertake may not deliver the results we expect, and these actions may adversely affect our business.

From time to time, we engage in restructuring plans that may result in workforce reduction and consolidation of our real estate facilities and our manufacturing footprint. In addition, management will continue to evaluate our global footprint and cost structure, and additional restructuring plans are expected to be formalized. As a result of our restructuring, we may experience a loss of continuity, loss of accumulated knowledge, disruptions to our operations and inefficiency during transitional periods. Additionally, global footprint consolidation and reduction in excess capacity may result in us being unable to respond to increases in forecasted volume of customer demand and loss of revenue opportunity if our competitors have underutilized factories. Any cost-cutting measures could impact employee retention. In addition, we cannot be sure that the cost reduction and global footprint consolidation will be successful in reducing our overall expenses as we expect or that additional costs will not offset any such reductions or global footprint consolidation. If our operating costs are higher than we expect or if we do not maintain adequate control of our costs and expenses, our results of operations may be adversely affected.

 

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Our ability to use our net operating loss and tax credit carryforwards might be limited.

The use of a portion of our U.S. net operating loss and tax credit carryforwards is subject to annual limitations pursuant to U.S. tax law. Sections 382 and 383 of the U.S. Internal Revenue Code generally impose annual limitations on the amount of net operating loss and tax credit carryforwards that might be used to offset taxable income when a corporation has undergone significant changes in ownership. As a result, future changes in ownership could put further limitations on the availability of our net operating loss or tax credit carryforwards. See “Item 8. Financial Statements and Supplementary Data—Note 7. Income Taxes” contained in this report for, among other things, a description of current net operating loss and tax credit carryforward limitations.

We are at times subject to intellectual property legal proceedings and claims which could cause us to incur significant additional costs or prevent us from selling our products, and which could adversely affect our results of operations and financial condition.

We are subject from time-to-time to legal proceedings and claims, including claims of alleged infringement of the patents, trademarks and other intellectual property rights of third parties by us, or our customers, in connection with their use of our products. Intellectual property litigation can be expensive and time-consuming, regardless of the merits of any claim, and could divert our management’s attention from operating our business. In addition, intellectual property lawsuits are subject to inherent uncertainties due to the complexity of the technical issues involved, which may cause actual results to differ materially from our expectations. Patent litigation has increased due to the current uncertainty of the law and the increasing competition and overlap of product functionality in the field. Some of the actions that we face from time-to-time seek injunctions against the sale of our products and/or substantial monetary damages, which if granted or awarded, could materially harm our business, financial condition and operating results.

We cannot be certain that our products do not and will not infringe issued patents or other intellectual property rights of others. We may not be aware of currently filed patent applications that relate to our products or technology. If patents are later issued on these applications, we may be liable for infringement. If our products were found to infringe the intellectual property rights of others, we could be required to pay substantial damages, cease the manufacture, use and sale of infringing products in one or more geographic locations, expend significant resources to develop non-infringing technology, discontinue the use of specific processes or obtain licenses to the technology infringed. We might not be able to obtain the necessary licenses on acceptable terms, or at all, or be able to reengineer our products successfully to avoid infringement. Any of the foregoing could cause us to incur significant costs and prevent us from selling our products, which could adversely affect our results of operations and financial condition. See “Item 8 Financial Statements and Supplementary Data-Note 14. Legal, Environmental and Other Contingencies” contained in this report for a description of pending intellectual property proceedings.

We may be unable to protect our intellectual property rights, which could adversely affect our business, financial condition and results of operations.

We rely on a combination of patent, trademark, copyright and trade secret laws, confidentiality procedures and licensing arrangements to protect our intellectual property rights. In the past, we have been involved in significant and expensive disputes regarding our intellectual property rights and those of others, including claims that we may be infringing patents, trademarks and other intellectual property rights of third-parties. We expect that we will be involved in similar disputes in the future.

There can be no assurance that:

 

   

any of our existing patents will continue to be held valid, if challenged;

 

   

patents will be issued for any of our pending applications;

 

   

any claims allowed from existing or pending patents will have sufficient scope or strength to protect us;

 

   

our patents will be issued in the primary countries where our products are sold in order to protect our rights and potential commercial advantage;

 

   

we will be able to protect our trade secrets and other proprietary information through confidentiality agreements with our customers, suppliers and employees and through other security measures; and

 

   

others will not gain access to our trade secrets.

 

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In addition, our competitors may be able to design their products around our patents and other proprietary rights. Enforcement of our rights often requires litigation. If we bring a patent infringement action and are not successful, our competitors would be able to use similar technology to compete with us. Moreover, the defendant in such an action may successfully counter sue us for infringement of their patents or assert a counterclaim that our patents are invalid or unenforceable.

Furthermore, we have significant operations and sales in foreign countries where intellectual property laws and enforcement policies are often less developed, less stringent or more difficult to enforce than in the United States. Therefore, we cannot be certain that we will be able to protect our intellectual property rights in jurisdictions outside the United States.

The price of our ordinary shares may be volatile and could decline significantly.

The market price of our ordinary shares has experienced price fluctuations and could be subject to wide fluctuations in the future. The market price of our ordinary shares may fluctuate significantly in response to several factors including:

 

   

general uncertainty in stock market conditions occasioned by global economic conditions and negative financial news unrelated to our business or industry;

 

   

the timing and amount of our share repurchases;

 

   

actual or anticipated variations in our results of operations;

 

   

announcements of innovations, new products or significant price reductions by us or our competitors, including those competitors who offer alternative storage technology solutions;

 

   

our failure to meet our guidance or the performance estimates of investment research analysts;

 

   

the timing of announcements by us or our competitors of significant contracts or acquisitions;

 

   

significant announcements by or changes in financial condition of a large customer, if any;

 

   

general stock market conditions;

 

   

the occurrence of major catastrophic events;

 

   

changes in financial estimates by investment research analysts;

 

   

actual or anticipated changes in the credit ratings of our indebtedness by rating agencies; and

 

   

the sale of our ordinary shares held by certain equity investors or members of management.

Market price fluctuations of our ordinary shares could impact the value of our equity compensation, which could affect our ability to recruit and retain employees. In addition, in the past, following periods of decline in the market price of a company’s securities, class action lawsuits have often been pursued against that company. If similar litigation were pursued against us, it could result in substantial costs and a diversion of management’s attention and resources, which could materially adversely affect our results of operations, financial condition and liquidity.

Any decision to reduce or discontinue the payment of cash dividends to our shareholders or the repurchase of our ordinary shares pursuant to our previously announced share repurchase program could cause the market price of our ordinary shares to decline significantly.

Although historically we have announced regular cash dividend payments and a share repurchase program, we are under no obligation to pay cash dividends to our shareholders in the future at historical levels or at all or to repurchase our ordinary shares at any particular price or at all. The declaration and payment of any future dividends is at the discretion of our Board of Directors and our previously announced share repurchase program may be suspended or discontinued at any time. Our payment of quarterly cash dividends and the repurchase of our ordinary shares pursuant to our share repurchase program are subject to, among other things, our financial position and results of operations, available cash and cash flow, capital and regulatory requirements, market and economic conditions, our ordinary share price and other factors. Any reduction or discontinuance by us of the payment of quarterly cash dividends or the repurchase of our ordinary shares pursuant to our share repurchase program could cause the market price of our ordinary shares to decline significantly. Moreover, in the event our payment of quarterly cash dividends or repurchases of our ordinary shares are reduced or discontinued, our failure to resume such activities at historical levels could result in a persistent lower market valuation of our ordinary shares.

 

ITEM 1B.

UNRESOLVED STAFF COMMENTS

None.

 

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ITEM 2.

PROPERTIES

Our principal executive offices are located in Ireland. Our principal manufacturing facilities are located in China, Malaysia, Northern Ireland, Singapore, Thailand and the United States. Our principal product development facilities are located in California, Colorado, Minnesota and Singapore. Our leased facilities are occupied under leases that expire on various dates through 2082.

Our main material manufacturing, product development and marketing and administrative facilities at June 28, 2019 are as follows:

 

Location

  

Building(s)

Owned or Leased

   Approximate
Square Footage
    

Primary Use

United States         

California

   Owned/Leased      554,000      Product development, marketing and administrative and operational offices

Colorado

   Owned/Leased      528,000      Product development

Minnesota

   Owned/Leased      1,096,000      Manufacture of recording heads and product development

Europe

        

Northern Ireland

        

Springtown

   Owned      479,000      Manufacture of recording heads

Asia

        

China

        

Wuxi

   Leased      704,000      Manufacture of drives and drive subassemblies

Malaysia

        

Johor

   Owned(1)      631,000      Manufacture of substrates

Singapore

        

Woodlands

   Owned/Leased(1)      1,511,000      Manufacture of media

Ayer Rajah

   Owned(1)      410,000      Product development

Thailand

        

Korat

   Owned/Leased      2,731,000      Manufacture of drives and drive subassemblies

Teparuk

   Owned/Leased      422,000      Manufacture of drive subassemblies

 

(1)

Land leases for these facilities expire on various dates through 2068.

As of June 28, 2019, we owned or leased a total of approximately 11.0 million square feet of space worldwide. The 11.0 million square feet of owned or leased space includes a total of 1.3 million square feet that is currently unoccupied. Substantially all of this unoccupied space relates to owned facilities that are being actively marketed for disposition. We believe that our existing properties are in good operating condition and are suitable for the operations for which they are used.

 

ITEM 3.

LEGAL PROCEEDINGS

See “Item 8. Financial Statements and Supplementary Data—Note 14. Legal, Environmental and Other Contingencies.”

 

ITEM 4.

MINE SAFETY DISCLOSURES

Not applicable.

 

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PART II

 

ITEM 5.

MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Market Information

Our ordinary shares trade on the NASDAQ Global Select Market under the symbol “STX.”

As of July 29, 2019, there were approximately 561 holders of record of our ordinary shares. We did not sell any of our equity securities during fiscal year 2019 that were not registered under the Securities Act of 1933, as amended.

Performance Graph

The performance graph below shows the cumulative total shareholder return on our ordinary shares for the period from June 27, 2014 to June 28, 2019. This is compared with the cumulative total return of the Dow Jones US Computer Hardware Index and the Standard & Poor’s 500 Stock Index (“S&P 500”) over the same period. The graph assumes that on June 27, 2014, $100 was invested in our ordinary shares and $100 was invested in each of the other two indices, with dividends reinvested on the date of payment without payment of any commissions. Dollar amounts in the graph are rounded to the nearest whole dollar. The performance shown in the graph represents past performance and should not be considered an indication of future performance.

COMPARISON OF 60 MONTH

CUMULATIVE TOTAL RETURN*

Among Seagate Technology plc, The S&P 500 Index

And The Down Jones US Computer Hardware Index

 

 

LOGO

 

     6/27/2014      7/3/2015      7/1/2016      6/30/2017      6/29/2018      6/28/2019  

Seagate Technology plc

   $   100.00      $ 88.99      $ 53.45      $ 81.70      $ 114.86      $   103.67  

S&P 500

     100.00          107.36          110.67          128.04          144.43        157.30  

Dow Jones US Computer Hardware

     100.00        122.81        98.01        145.23        183.74        192.41  

 

*

$100 invested on 6/27/2014 in stock and in indices, including reinvestment of dividends.

Copyright © 2019 Bloomberg Finance L.P. All rights reserved.

 

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Dividends

Our ability to pay dividends in the future will be subject to, among other things, general business conditions within the data storage industry, our financial results, the impact of paying dividends on our credit ratings and legal and contractual restrictions on the payment of dividends by our subsidiaries to us or by us to our ordinary shareholders, including restrictions imposed by covenants on our debt instruments.

Repurchases of Our Equity Securities

On October 29, 2018, our Board of Directors authorized the repurchase of an additional $2.3 billion of our outstanding ordinary shares and as a result, we had an aggregate authority to repurchase approximately $3.0 billion of its ordinary shares. As of June 28, 2019, $2.2 billion remained available for repurchase under the existing repurchase authorization limits. All repurchases are effected as redemptions in accordance with our Articles of Association. There is no expiration date on our repurchase authorizations.

The following table sets forth information with respect to all repurchases of our shares made during the fiscal year ended June 28, 2019, including shares withheld for statutory tax withholdings related to vesting of employee equity awards:

 

Period

(In millions, except average price paid per share)

  Total
Number of
Shares
Purchased(1)
    Average
Price
Paid per
Share (1)
    Total Number
of Shares
Purchased
as Part of
Publicly
Announced
Plans or
Programs
    Approximate
Dollar Value
of Shares
that May
Yet Be
Purchased
Under the
Plans or
Programs (1)
 

1st Quarter through 3rd Quarter of Fiscal Year 2019

    14     $ 45.74       14     $ 2,544  

March 30, 2019 through April 26, 2019

    —         —         —         2,544  

April 27, 2019 through May 24, 2019

    3       46.32       3       2,421  

May 25, 2019 through June 28, 2019

    5       44.57       5       2,190  
 

 

 

     

 

 

   

 

 

 

Through 4th Quarter of Fiscal Year 2019

    22         22     $ 2,190  
 

 

 

     

 

 

   

 

 

 

 

(1) 

Repurchase of shares including tax withholdings.

 

ITEM 6.

SELECTED FINANCIAL DATA

The following selected consolidated financial data set forth below is not necessarily indicative of results of future operations, and should be read in conjunction with “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the Consolidated Financial Statements and related notes thereto included in “Item 8. Financial Statements and Supplementary Data” of this Annual Report on Form 10-K, which are incorporated herein by reference, to fully understand factors that may affect the comparability of the information presented below.

 

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The Consolidated Statements of Operations data for the fiscal years ended June 28, 2019, June 29, 2018 and June 30, 2017, and the Consolidated Balance Sheets data as of June 28, 2019 and June 29, 2018, are derived from our audited Consolidated Financial Statements appearing elsewhere in this Annual Report on Form 10-K. The Consolidated Statements of Operations data for the fiscal years ended July 1, 2016 and July 3, 2015, and the Consolidated Balance Sheets data at June 30, 2017, July 1, 2016 and July 3, 2015, are derived from our audited Consolidated Financial Statements that are not included in this Annual Report on Form 10-K.

 

     Fiscal Years Ended  

(Dollars in millions, except per share data)

   June 28,
2019
     June 29,
2018
     June 30,
2017
     July 1,
2016
     July 3,
2015
 

Revenue

   $ 10,390      $ 11,184      $ 10,771      $ 11,160      $ 13,739  

Gross margin

     2,932        3,364        3,174        2,615        3,809  

Income from operations

     1,487        1,634        1,054        445        2,058  

Net income(a)

     2,012        1,182        772        248        1,742  

Total assets(b)

     8,885        9,410        9,268        8,213        9,801  

Total debt(b)

     4,253        4,819        5,021        4,091        4,111  

Equity

   $ 2,162      $ 1,665      $ 1,364      $ 1,593      $ 3,018  
              

Net income per share:

              

Basic

   $ 7.13      $ 4.10      $ 2.61      $ 0.83      $ 5.38  

Diluted

     7.06        4.05        2.58        0.82        5.26  

Number of shares used in per share calculations:

              

Basic

     282        288        296        299        324  

Diluted

     285        292        299        302        331  

Cash dividends declared per ordinary share

   $ 2.52      $ 2.52      $ 2.52      $ 2.43      $ 2.05  

 

(a)

The Company recorded an income tax benefit of $640 million for fiscal year 2019. The Company’s fiscal year 2019 income tax benefit included a net tax benefit of $761 million primarily associated with the release of valuation allowance on deferred tax assets driven by improvements in its profitability outlook in the U.S., including its efforts to structurally and operationally align its EDS business with the rest of the Company.

(b)

The Company adopted ASU 2015-03, Interest—Imputation of interest: Simplifying the presentation of debt issuance costs, in fiscal year 2017 on a retrospective basis. The adoption of this guidance resulted in a reduction to Other assets, net and Long-term debt previously disclosed as of the fiscal years ended 2015 and 2016 by $44 million and $39 million, respectively, within the Consolidated Balance Sheets.

Supplementary Financial Data (Unaudited)

Quarterly Data

The Company operated and reported financial results based on 13-week quarters in fiscal years 2019 and 2018, which ended on the Friday closest to September 30, December 31, March 31 and June 30.

 

     Fiscal Year 2019 Quarters Ended  

(In millions, except per share data)

   June 28,
2019
     March 29,
2019
     December 28,
2018
     September 28,
2018
 

Revenue

   $ 2,371      $ 2,313      $ 2,715      $ 2,991  

Gross margin

     624        601        794        913  

Income from operations

     332        236        416        503  

Net income (a)

     983        195        384        450  

Net income per share:

           

Basic

   $ 3.57      $ 0.69      $ 1.35      $ 1.57  

Diluted

     3.54        0.69        1.34        1.54  

 

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     Fiscal Year 2018 Quarters Ended  

(In millions, except per share data)

   June 29,
2018
     March 30,
2018
     December 29,
2017
     September 29,
2017
 

Revenue

   $ 2,835      $ 2,803      $ 2,914      $ 2,632  

Gross margin

     904        847        877        736  

Income from operations

     505        441        433        255  

Net income

     461        381        159        181  

Net income per share:

           

Basic

   $ 1.61      $ 1.33      $ 0.55      $ 0.62  

Diluted

     1.57        1.31        0.55        0.62  

 

(a)

The Company recorded an income tax benefit of $692 million in the quarter ended June 28, 2019. The Company’s quarter ended June 28, 2019 income tax benefit included a net tax benefit of $761 million primarily associated with the release of valuation allowance on deferred tax assets driven by improvements in its profitability outlook in the U.S., including its efforts to structurally and operationally align its EDS business with the rest of the Company.

 

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ITEM 7.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following is a discussion of the Company’s financial condition, changes in financial condition and results of operations for the fiscal years ended June 28, 2019, June 29, 2018 and June 30, 2017.

You should read this discussion in conjunction with “Item 6. Selected Financial Data” and “Item 8. Financial Statements and Supplementary Data” included elsewhere in this Annual Report on Form 10-K. Except as noted, references to any fiscal year mean the twelve-month period ending on the Friday closest to June 30 of that year. Accordingly, fiscal year 2019 comprised 52 weeks and ended on June 28, 2019. Fiscal year 2018 comprised 52 weeks and ended on June 29, 2018. Fiscal year 2017 comprised 52 weeks and ended on June 30, 2017. Fiscal year 2020 will be comprised of 53 weeks and will end on July 3, 2020. Fiscal year 2026 will also be comprised of 53 weeks and will end on July 3, 2026.

Our Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is provided in addition to the accompanying consolidated financial statements and notes to assist readers in understanding our results of operations, financial condition and cash flows. Our MD&A is organized as follows:

 

   

Fiscal Year 2019 Summary. Overview of financial and other highlights affecting us in fiscal year 2019.

 

   

Results of Operations. Analysis of our financial results comparing fiscal years 2019 and 2018 to the prior-year periods.

 

   

Liquidity and Capital Resources. Analysis of changes in our balance sheets and cash flows, and discussion of our financial condition including potential sources of liquidity.

 

   

Contractual Obligations and Off-Balance Sheet Arrangements. Overview of contractual obligations and contingent liabilities and commitments outstanding as of June 28, 2019 and an explanation of off-balance sheet arrangements.

 

   

Critical Accounting Estimates. Accounting estimates that we believe are important to understanding the assumptions and judgments incorporated in our reported financial results.

 

   

For an overview of our business, see “Part I—Item 1. Business—Overview.”

Fiscal Year 2019 Summary

During fiscal year 2019, we shipped 347 exabytes of HDD storage capacity. We generated revenue of $10.4 billion and gross margins of 28% and our operating cash flow was $1.8 billion. We received $1.3 billion from Toshiba Memory Holdings Corporation (“TMHC”, formerly known as “K.K. Pangea”) for the redemption of all of the outstanding shares of non-convertible preferred stock of TMHC held by us. We repurchased approximately 21 million of our ordinary shares for $963 million, paid $819 million for the repurchase of certain of our outstanding debt and paid $713 million in dividends. We entered into a new senior unsecured revolving credit facility (the “2019 Revolving Credit Facility”) and have $1.5 billion available as of June 28, 2019.

 

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Results of Operations

We list in the tables below summarized information from our Consolidated Statements of Operations by dollar amounts and as a percentage of revenue:

 

     Fiscal Years Ended  

(Dollars in millions)

   June 28,
2019
     June 29,
2018
     June 30,
2017
 

Revenue

   $   10,390      $   11,184      $   10,771  

Cost of revenue

     7,458        7,820        7,597  
  

 

 

    

 

 

    

 

 

 

Gross margin

     2,932        3,364        3,174  

Product development

     991        1,026        1,232  

Marketing and administrative

     453        562        606  

Amortization of intangibles

     23        53        104  

Restructuring and other, net

     (22      89        178  
  

 

 

    

 

 

    

 

 

 

Income from operations

     1,487        1,634        1,054  

Other expense, net

     (115      (216      (239
  

 

 

    

 

 

    

 

 

 

Income before income taxes

     1,372        1,418        815  

(Benefit) provision for income taxes

     (640      236        43  
  

 

 

    

 

 

    

 

 

 

Net income

   $ 2,012      $ 1,182      $ 772  
  

 

 

    

 

 

    

 

 

 

 

     Fiscal Years Ended  
     June 28,
2019
    June 29,
2018
    June 30,
2017
 

Revenue

     100     100     100

Cost of revenue

     72       70       71  
  

 

 

   

 

 

   

 

 

 

Gross margin

     28       30       29  

Product development

     10       9       11  

Marketing and administrative

     4       5       5  

Amortization of intangibles

     —         —         1  

Restructuring and other, net

     —         1       2  
  

 

 

   

 

 

   

 

 

 

Income from operations

     14       15       10  

Other expense, net

     (1     (2     (2
  

 

 

   

 

 

   

 

 

 

Income before income taxes

     13       13       8  

(Benefit) provision for income taxes

     (6     2       1  
  

 

 

   

 

 

   

 

 

 

Net income

     19     11     7
  

 

 

   

 

 

   

 

 

 

 

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The following table summarizes information regarding consolidated revenue by channel and geography, HDD price per terabyte and HDD exabytes shipped:

 

     Fiscal Years Ended  
     June 28,
2019
    June 29,
2018
    June 30,
2017
 

Revenue by Channel (%)

      

OEMs

     70     70     70

Distributors

     17     17     17

Retailers

     13     13     13

Revenue by Geography (%) (1)

      

Americas

     32     33     33

EMEA

     19     18     20

Asia Pacific

     49     49     47

HDD Price per Terabyte

   $ 30     $ 33     $ 41  

HDD Exabytes Shipped

     347       338       263  

 

 

(1)

Revenue is attributed to countries based on the bill from location.

Fiscal Year 2019 Compared to Fiscal Year 2018

Revenue

 

     Fiscal Years Ended  

(Dollars in millions)

   June 28,
2019
     June 29,
2018
     Change      %
Change
 

Revenue

   $ 10,390      $ 11,184      $ (794      (7 )% 

Revenue in fiscal year 2019 decreased approximately 7% or $0.8 billion, from fiscal year 2018, primarily due to less favorable market conditions during the first half of the fiscal year and price erosion, partially offset by an increase in exabytes shipped.

Cost of Revenue and Gross Margin

 

     Fiscal Years Ended  

(Dollars in millions)

   June 28,
2019
    June 29,
2018
    Change      %
Change
 

Cost of revenue

   $ 7,458     $ 7,820     $ (362      (5 )% 

Gross margin

     2,932       3,364       (432      (13 )% 

Gross margin percentage

     28     30     

For fiscal year 2019, gross margin as a percentage of revenue decreased compared to the prior fiscal year due to price erosion partially offset by improved product mix.

 

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Operating Expenses

 

     Fiscal Years Ended  

(Dollars in millions)

   June 28,
2019
     June 29,
2018
     Change      %
Change
 

Product development

   $ 991      $ 1,026      $ (35      (3 )% 

Marketing and administrative

     453        562        (109      (19 )% 

Amortization of intangibles

     23        53        (30      (57 )% 

Restructuring and other, net

     (22      89        (111      (125 )% 
  

 

 

    

 

 

    

 

 

    

Operating expenses

   $   1,445      $   1,730      $ (285   
  

 

 

    

 

 

    

 

 

    

Product Development Expense. Product development expenses for fiscal year 2019 decreased by $35 million from fiscal year 2018 primarily due to a $38 million decrease in variable compensation expense, partially offset by a $5 million increase in other employee benefits.

Marketing and Administrative Expense. Marketing and administrative expenses for fiscal year 2019 decreased by $109 million from fiscal year 2018 primarily due to a $27 million decrease in salaries and related benefits as a result of the restructuring of our workforce in prior periods, a $44 million decrease in other general expenses due to related operational efficiencies, a $24 million decrease in variable compensation expense and a $14 million decrease in share-based compensation expense.

Amortization of Intangibles. Amortization of intangibles for fiscal year 2019 decreased by $30 million, as compared to fiscal year 2018, due to certain intangible assets reaching the end of their useful lives.

Restructuring and Other, net. Restructuring and other, net for fiscal year 2019 was comprised primarily of a $75 million net gain from the sale of a certain property partially offset by charges related to a voluntary early exit program.

Restructuring and other, net for fiscal year 2018 was comprised primarily of restructuring charges to reduce our workforce by approximately 1,100 employees. Restructuring and other, net also included a gain of $25 million from the sale of certain properties during fiscal year 2018.

Other expense, net

 

     Fiscal Years Ended  

(Dollars in millions)

   June 28,
2019
     June 29,
2018
     Change      %
Change
 

Other expense, net

   $ (115    $ (216    $ 101        (47 )% 

Other expense, net for fiscal year 2019 decreased by $101 million, as compared to fiscal year 2018 mainly due to a $56 million increase in interest income on our investment in a debt security, a $37 million net increase in gains on settlement of derivatives and a $13 million net decrease in interest expense due to the repayment of certain long-term debt.

Income Taxes

 

     Fiscal Years Ended  

(Dollars in millions)

   June 28,
2019
     June 29,
2018
     Change      %
Change
 

(Benefit) provision for income taxes

   $ (640    $ 236      $ (876      (371 )% 

We recorded an income tax benefit of $640 million for fiscal year 2019 compared to an income tax provision of $236 million for fiscal year 2018. Our fiscal year 2019 income tax benefit included a net tax benefit of $761 million primarily

 

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associated with the release of valuation allowance on deferred tax assets driven by improvements in our profitability outlook in the U.S., including our efforts to structurally and operationally align our EDS business with the rest of the Company. Our fiscal year 2018 income tax provision included approximately $204 million of tax expense associated with the revaluation of U.S. deferred tax assets as a result of the enactment of the U.S. Tax Cuts and Jobs Act (“the Tax Act”) on December 22, 2017, offset by the reversal of previously recorded unrecognized tax benefits of $7 million, and certain non-recurring items.

Our Irish tax resident parent holding company owns various U.S. and non-U.S. subsidiaries that operate in multiple non-Irish income tax jurisdictions. Our worldwide operating income is either subject to varying rates of income tax or is exempt from income tax due to tax incentive programs we operate under in Malaysia, Singapore and Thailand. These tax incentives are scheduled to expire in whole or in part at various dates through 2025. Certain tax incentives may be extended if specific conditions are met.

Our income tax benefit recorded for fiscal year 2019 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) a decrease in valuation allowance for certain deferred tax assets, primarily driven by improvements in our profitability outlook in the U.S.; and (ii) tax benefits related to non-U.S. earnings generated in jurisdictions that are subject to tax incentive programs and are considered indefinitely reinvested outside of Ireland. Our income tax provision recorded for fiscal year 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-U.S. earnings generated in jurisdictions that are subject to tax incentive programs and are considered indefinitely reinvested outside of Ireland; and (ii) a reduction in the net U.S. deferred tax assets associated with revaluation to a lower U.S. tax rate.

Based on our non-U.S. ownership structure and subject to (i) potential future increases in our valuation allowance for deferred tax assets; and (ii) a future change in our intention to indefinitely reinvest earnings from our subsidiaries outside of Ireland, we anticipate that our effective tax rate in future periods will generally be less than the Irish statutory rate.

The Tax Act significantly revised U.S. corporate income tax law by, among other things, lowering U.S. corporate income tax rates from 35% to 21%, implementing a territorial tax system, and imposing a one-time transition tax on deemed repatriated earnings of non-U.S. subsidiaries.

The U.S. tax law changes, including limitations on various business deductions such as executive compensation under Internal Revenue Code §162(m), will not materially impact our current tax expense in the short-term due to our large net operating loss and tax credit carryovers. The Tax Act’s new international rules, including Global Intangible Low-Taxed Income (“GILTI”), Foreign Derived Intangible Income (“FDII”) and Base Erosion Anti-Avoidance Tax (“BEAT”), are effective beginning in fiscal year 2019. For fiscal year 2019, we have included these effects of the Tax Act in our financial statements and concluded the impact is not material.

As of the quarter ended September 28, 2018, pursuant to SEC Staff Accounting Bulletin (“SAB”) 118 (regarding the application of Accounting Standards Codification (“ASC”) 740—Income Taxes associated with the enactment of the Tax Act), we had considered SAB 118 and concluded our accounting under ASC 740 for the provisions of the Tax Act was complete. There were no adjustments deemed necessary in fiscal year 2019.

Fiscal Year 2018 Compared to Fiscal Year 2017

Revenue

 

     Fiscal Years Ended  

(Dollars in millions)

   June 29,
2018
     June 30,
2017
     Change      %
Change
 

Revenue

   $ 11,184      $ 10,771      $ 413        4%  

Revenue in fiscal year 2018 increased approximately 4% or $0.4 billion, from fiscal year 2017, as a result of an increase in exabytes shipped driven primarily by higher demand for our high capacity HDD product portfolio, partially offset by price erosion.

 

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Cost of Revenue and Gross Margin

 

     Fiscal Years Ended  

(Dollars in millions)

   June 29,
2018
    June 30,
2017
    Change      %
Change
 

Cost of revenue

   $ 7,820     $ 7,597     $ 223        3%  

Gross margin

     3,364       3,174       190        6%  

Gross margin percentage

     30     29     

For fiscal year 2018, gross margin as a percentage of revenue increased by 100 basis points compared to the prior fiscal year due to favorable product mix and improved factory utilization as a result of higher demand for our high capacity HDD product portfolio, partially offset by price erosion.

Operating Expenses

 

     Fiscal Years Ended  

(Dollars in millions)

   June 29,
2018
     June 30,
2017
     Change      %
Change
 

Product development

   $ 1,026      $ 1,232      $ (206      (17)%  

Marketing and administrative

     562        606        (44      (7)%  

Amortization of intangibles

     53        104        (51      (49)%  

Restructuring and other, net

     89        178        (89      (50)%  
  

 

 

    

 

 

    

 

 

    

Operating expenses

   $ 1,730      $ 2,120      $ (390   
  

 

 

    

 

 

    

 

 

    

Product Development Expense. Product development expenses for fiscal year 2018 decreased by $206 million from fiscal year 2017 primarily due to a $97 million decrease in salaries and related benefits as a result of the restructuring of our workforce in prior periods, an $83 million decrease due to related operational efficiencies and a $26 million decrease due to impairment charges related to the closure of our Korea design center in fiscal year 2017, which did not recur in fiscal year 2018.

Marketing and Administrative Expense. Marketing and administrative expenses for fiscal year 2018 decreased by $44 million from fiscal year 2017 primarily due to a $54 million decrease in salaries and related benefits as a result of the restructuring of our workforce in prior periods, partially offset by an increase in other general expenses.

Amortization of Intangibles. Amortization of intangibles for fiscal year 2018 decreased by $51 million, as compared to fiscal year 2017, due to certain intangible assets reaching the end of their useful lives.

Restructuring and Other, net. Restructuring and other, net for fiscal year 2018 was comprised primarily of restructuring charges recorded during the fiscal quarters ended September 29, 2017 and December 29, 2017 to reduce our workforce by approximately 1,100 employees. Restructuring and other, net also included a gain of $25 million from the sale of certain properties previously classified as held for sale.

Restructuring and other, net for fiscal year 2017 was comprised of restructuring charges recorded during the fiscal quarters ended September 30, 2016 and March 31, 2017 to reduce our workforce by approximately 6,800 employees, as we continue to consolidate our global footprint across Asia, EMEA and the Americas.

Other expense, net

 

     Fiscal Years Ended  

(Dollars in millions)

   June 29,
2018
     June 30,
2017
     Change      %
Change
 

Other expense, net

   $ (216    $ (239    $ 23        (10 )% 

 

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Other expense, net for fiscal year 2018 decreased by $23 million, as compared to fiscal year 2017 due to a $26 million increase in interest income primarily driven by higher interest rates, a $9 million net decrease in losses related to strategic investments and a $6 million net decrease in losses due to favorable changes in foreign currency exchange rates, partially offset by an $18 million net increase in interest expense due to the issuance of $1.25 billion of Senior Notes in fiscal year 2017 and reduced by the subsequent repurchase of certain debt.

Income Taxes

 

     Fiscal Years Ended  

(Dollars in millions)

   June 29,
2018
     June 30,
2017
     Change      %
Change
 

Provision for income taxes

   $ 236      $ 43      $ 193        449

We recorded an income tax provision of $236 million for fiscal year 2018 compared to an income tax provision of $43 million for fiscal year 2017. Our fiscal year 2018 income tax provision included approximately $204 million of tax expense associated with the revaluation of U.S. deferred tax assets as a result of the enactment of the Tax Act on December 22, 2017, offset by the reversal of previously recorded unrecognized tax benefits of $7 million, and certain non-recurring items. Our fiscal year 2017 income tax provision included approximately $2 million of net tax expense associated with various non-recurring items.

Our income tax provision recorded for fiscal year 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-U.S. earnings generated in jurisdictions that are subject to tax incentive programs and are considered indefinitely reinvested outside of Ireland; and (ii) a reduction in the net U.S. deferred tax assets associated with revaluation to a lower U.S. tax rate. Our income tax provision recorded for fiscal year 2017 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-U.S. earnings generated in jurisdictions that are subject to tax incentive programs and are considered indefinitely reinvested outside of Ireland; (ii) a decrease in valuation allowance for certain deferred tax assets; and (iii) permanent differences.

Liquidity and Capital Resources

The following sections discuss our principal liquidity requirements, as well as our sources and uses of cash and our liquidity and capital resources. Our cash and cash equivalents are maintained in investments with remaining maturities of 90 days or less at the time of purchase. Our short-term investments consist primarily of money market funds, time deposits and certificates of deposit. The principal objectives of our investment policy are the preservation of principal and maintenance of liquidity. We believe our cash equivalents and short-term investments are liquid and accessible. We operate in some countries that have restrictive regulations over the movement of cash and/or foreign exchange across their borders. However, we believe our sources of cash have been and will continue to be sufficient to meet our cash needs for the next 12 months. We are not aware of any downgrades, losses or other significant deterioration in the fair value of our cash equivalents or short-term investments and we do not believe the fair value of our short-term investments has significantly changed from the values reported as of June 28, 2019.

Cash and Cash Equivalents

 

     As of  

(Dollars in millions)

   June 28,
2019
     June 29,
2018
     Change  

Cash and cash equivalents

   $ 2,220      $ 1,853      $ 367  

Our cash and cash equivalents increased by $367 million from June 29, 2018 as a result of net cash flow of $1.8 billion provided by operating activities and $1.3 billion cash inflows from the redemption of investment in non-convertible preferred stock of TMHC, offset by payments for capital expenditures of $602 million, net cash outflows for repurchase of our ordinary

 

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shares of $963 million, dividends paid out to shareholders of $713 million and net repayment of long-term debt of $574 million. The following table summarizes results from the Consolidated Statement of Cash Flows for the periods indicated:

 

     Fiscal Years Ended  

(Dollars in millions)

   June 28,
2019
     June 29,
2018
     June 30,
2017
 

Net cash flow provided by (used in):

        

Operating activities

   $ 1,761      $ 2,113      $ 1,916  

Investing activities

     846        (1,588      (459

Financing activities

     (2,212      (1,211      (46

Effect of foreign currency exchange rates

     (1      —          —    
  

 

 

    

 

 

    

 

 

 

Net increase (decrease) in cash, cash equivalents and restricted cash

   $ 394      $ (686    $ 1,411  
  

 

 

    

 

 

    

 

 

 

Cash Provided by Operating Activities

Cash provided by operating activities for fiscal year 2019 was approximately $1.8 billion and includes the effects of net income adjusted for non-cash items including depreciation, amortization, share-based compensation, a release of valuation allowance related to our U.S. deferred tax assets and:

 

   

a decrease of $204 million in accounts receivable, primarily due to lower revenue; and

 

   

a decrease of $80 million in inventories, primarily due to a decrease in units built; partially offset by

 

   

a decrease of $268 million in accounts payable, primarily due to a decrease in direct material purchases; and

 

   

a decrease of $84 million in accrued employee compensation, primarily due to a decrease in our variable compensation expense.

Cash provided by operating activities for fiscal year 2018 was approximately $2.1 billion and includes the effects of net income adjusted for non-cash items including depreciation and amortization, deferred income taxes primarily due to the remeasurement of our U.S. deferred tax assets at the lower corporate tax rate, share-based compensation and:

 

   

an increase of $65 million in accounts payable, primarily due to timing of payments of capital expenditures; and

 

   

a decrease of $71 million in vendor receivables, primarily due to improved collections; partially offset by

 

   

an increase of $71 million in inventories, primarily due to an increase in units built.

Cash provided by operating activities for fiscal year 2017 was approximately $1.9 billion and includes the effects of net income adjusted for non-cash items including depreciation and amortization, share-based compensation and:

 

   

a decrease of $122 million in accounts receivable, primarily due to a decrease in revenue and improved collections; and

 

   

an increase of $121 million in accounts payable, primarily due to timing of payments for material purchases; partially offset by

 

   

an increase of $114 million in inventories, primarily due to an increase in units built in connection with our manufacturing footprint consolidating activities.

Cash Provided by (Used in) Investing Activities

In fiscal year 2019, we received $0.8 billion for net cash investing activities, which was primarily due to proceeds of $1.3 billion from the redemption of an investment in non-convertible preferred stock of TMHC and the proceeds of $144 million primarily from the sale of certain properties, partially offset by the payments for the purchase of property, equipment and leasehold improvements of approximately $602 million.

 

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In fiscal year 2018, we used $1.6 billion for net cash investing activities, which was primarily due to our investment in the TMHC debt security of $1.3 billion and the payments for the purchase of property, equipment and leasehold improvements of approximately $366 million, partially offset by the proceeds of $69 million from the sale of properties.

In fiscal year 2017, we used $459 million for net cash investing activities, which was primarily due to payments for the purchase of property, equipment and leasehold improvements of approximately $434 million.

Cash Used in Financing Activities

Net cash used in financing activities of $2.2 billion for fiscal year 2019 was primarily attributable to the following activities:

 

   

$963 million in payments for repurchases of ordinary shares;

 

   

$713 million in dividend payments; and

 

   

$574 million net repayment of long-term debt.

Net cash used in financing activities of $1.2 billion for fiscal year 2018 was primarily attributable to the following activities:

 

   

$726 million in dividend payments;

 

   

$361 million in payments for repurchases of ordinary shares; and

 

   

$214 million of repayments of long-term debt; offset by

 

   

$113 million in proceeds from the issuance of ordinary shares under employee stock plans.

Net cash used in financing activities of $46 million for fiscal year 2017 was primarily attributable to the following activities:

 

   

net proceeds of $1.2 billion received from issuance of $750 million of 4.25% Senior Notes due 2022 and $500 million of 4.875% Senior Notes due 2024;

 

   

$86 million in proceeds from the issuance of ordinary shares under employee stock plans; offset by

 

   

$561 million in dividend payments;

 

   

$460 million in payments for repurchases of ordinary shares; and

 

   

$316 million of redemption and repurchase of long-term debt.

Liquidity Sources

Our primary sources of liquidity as of June 28, 2019, consist of: (1) approximately $2.2 billion in cash and cash equivalents, (2) cash we expect to generate from operations and (3) $1.5 billion available for borrowing from our 2019 Revolving Credit Facility.

On February 20, 2019, we terminated our senior unsecured revolving credit facility scheduled to expire on January 15, 2020, under which we were able to draw up to $700 million. Upon termination, we and our subsidiary Seagate HDD Cayman entered into the 2019 Revolving Credit Facility, which provides us with a $1.3 billion senior unsecured revolving credit facility. On May 28, 2019, we increased our 2019 Revolving Credit Facility from $1.3 billion to $1.5 billion. The 2019 Revolving Credit Facility also allows us to increase the facility by up to an aggregate of $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 the facility receive 0.50% most favored nation protection.

As of June 28, 2019, no borrowings were drawn and no letters of credit or swing line loans had been utilized under the 2019 Revolving Credit Facility.

The 2019 Revolving Credit Facility includes three financial covenants: (1) interest coverage ratio, (2) total leverage ratio and (3) a minimum liquidity amount. The 2019 Revolting Credit Facility has a final maturity of February 20, 2024.

 

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As of June 28, 2019, cash and cash equivalents held by non-Irish subsidiaries was $2.2 billion. This amount is potentially subject to taxation in Ireland upon repatriation by means of a dividend into our Irish parent. However, it is our intent to indefinitely reinvest earnings of non-Irish subsidiaries outside of Ireland and our current plans do not demonstrate a need to repatriate such earnings by means of a taxable Irish dividend. Should funds be needed in the Irish parent company and should we be unable to fund parent company activities through means other than a taxable Irish dividend, we would be required to accrue and pay Irish taxes on such dividend.

We believe that our sources of cash will be sufficient to fund our operations and meet our cash requirements for at least the next 12 months.

Cash Requirements and Commitments

Our liquidity requirements are primarily to meet our working capital, product development and capital expenditure needs, to fund scheduled payments of principal and interest on our indebtedness, and to fund our quarterly dividend and any future strategic investments. Our ability to fund these requirements will depend on our future cash flows, which are determined by future operating performance, and therefore, subject to prevailing global macroeconomic conditions and financial, business and other factors, some of which are beyond our control.

On July 30, 2019, our Board of Directors declared a quarterly cash dividend of $0.63 per share, which will be payable on October 9, 2019 to shareholders of record as of the close of business on September 25, 2019.

As of June 28, 2019, we were in compliance with all of the covenants under our debt agreements. Based on our current outlook, we expect to be in compliance with the covenants in our debt agreements over the next 12 months.

The carrying value of our debt as of June 28, 2019 and June 29, 2018 was $4.3 billion and $4.8 billion, respectively. The table below presents the principal amounts of our outstanding debt:

 

     As of  

(Dollars in millions)

   June 28,
2019
     June 29,
2018
     Change  

3.75% Senior Notes due November 2018

   $ —        $ 499      $ (499

4.25% Senior Notes due March 2022

     750        750        —    

4.75% Senior Notes due June 2023

     941        951        (10

4.875% Senior Notes due March 2024

     500        500        —    

4.75% Senior Notes due January 2025

     920        975        (55

4.875% Senior Notes due June 2027

     690        697        (7

5.75% Senior Notes due December 2034

     490        490        —    
  

 

 

    

 

 

    

 

 

 
   $ 4,291      $ 4,862      $ (571
  

 

 

    

 

 

    

 

 

 

From time to time, we may repurchase any of our outstanding ordinary shares through private, open market, or broker assisted purchases, tender offers, or other means. During fiscal year 2019, we repurchased approximately 22 million of our ordinary shares including shares withheld for statutory tax withholdings related to vesting of employee equity awards. See “Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities-Repurchases of Our Equity Securities.” As of June 28, 2019, $2.2 billion remained available for repurchase under our existing repurchase authorization limit. All repurchases are effected as redemptions in accordance with our Articles of Association.

For fiscal year 2020, we expect capital expenditures to be within our long-term targeted range of 6% to 8% of revenue. We require substantial amounts of cash to fund any increased working capital requirements, future capital expenditures, scheduled payments of principal and interest on our indebtedness and payments of dividends. We will continue to evaluate and manage the retirement and replacement of existing debt and associated obligations, including evaluating the issuance of new debt securities, exchanging existing debt securities for other debt securities and retiring debt pursuant to privately negotiated transactions, open market purchases, tender offers or other means or otherwise. In addition, we may selectively pursue strategic alliances, acquisitions, joint ventures and investments, which may require additional capital.

 

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Contractual Obligations and Commitments

Our contractual cash obligations and commitments as of June 28, 2019, are summarized in the table below:

 

            Fiscal Year(s)  

(Dollars in millions)

   Total      2020      2021-2022      2023-2024      Thereafter  

Contractual Cash Obligations:

              

Long-term debt

   $ 4,291      $ —        $ 750      $ 1,441      $ 2,100  

Interest payments on debt

     1,364        206        412        305        441  

Purchase obligations (1)

     1,382        1,170        35        53        124  

Operating leases (2)

     125        20        26        13        66  

Capital expenditures

     322        299        23        —          —    

Other funding requirements (3)

     12        11        1        —          —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Subtotal

     7,496        1,706        1,247        1,812        2,731  

Commitments:

              

Letters of credit or bank guarantees

     105        93        1        —          11  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 7,601      $ 1,799      $ 1,248      $ 1,812      $ 2,742  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1)

Purchase obligations are defined as contractual obligations for the purchase of goods or services, which are enforceable and legally binding on us, and that specify all significant terms.

 

(2)

Includes total future minimum rent expense under non-cancelable leases for both occupied and vacated facilities (rent expense is shown net of sublease income).

 

(3)

Consists of funding requirements related to strategic commitments.

As of June 28, 2019, we had a liability for unrecognized tax benefits and an accrual for the payment of related interest totaling $4 million, none of which is expected to be settled within one year. Outside of one year, we are unable to make a reasonably reliable estimate of when cash settlement with a taxing authority will occur.

Off-Balance Sheet Arrangements

As of June 28, 2019, we did not have any material off-balance sheet arrangements (as defined in Item 303(a)(4)(ii) of Regulation S-K).

Critical Accounting Policies and Estimates

The methods, estimates and judgments we use in applying our most critical accounting policies have a significant impact on the results we report in our consolidated financial statements. The SEC has defined the most critical accounting policies as the ones that are most important to the portrayal of our financial condition and operating results, and require us to make our 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, our most critical accounting policies include: Revenue—Sales Program Accruals, Warranty, Income taxes and Assessing Goodwill and Other Long-lived Assets for Impairment. Below, we discuss these policies further, as well as the estimates and judgments involved. We also have other accounting policies and accounting estimates relating to uncollectible customer accounts, valuation of inventories, valuation of share-based payments and restructuring. We believe that these other accounting policies and accounting estimates either do not generally require us 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 our reported results of operations for a given period.

Revenue—Sales Program Accruals. We record estimated variable consideration at the time of revenue recognition as a reduction to revenue. Variable consideration generally consists of sales incentive programs, such as price protection and volume incentives aimed at increasing customer demand. For OEM sales, rebates are typically established by estimating the most likely amount of consideration expected to be received based on an OEM customer’s volume of purchases from us or other agreed upon rebate programs. For the distribution and retail channel, these sales incentive programs typically involve

 

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estimating the most likely amount of rebates related to a customer’s level of sales, order size, advertising or point of sale activity as well as the expected value of price protection adjustments based on historical analysis and forecasted pricing environment. In fiscal years 2019, 2018 and 2017, total sales programs were approximately 11% of gross revenue. Adjustments to revenues due to under or over accruals for sales programs related to revenues reported in prior quarterly periods were less than 1% of gross revenue in fiscal years 2019, 2018 and 2017.

Warranty. We estimate probable product warranty costs at the time revenue is recognized. We generally provide a warranty on our products for a period of 1 to 5 years. Our warranty provision considers estimated product failure rates and trends (including the timing of product returns during the warranty periods), and estimated repair or replacement costs related to product quality issues, if any. We also exercise judgment in estimating our ability to sell refurbished products. Our judgment is subject to a greater degree of subjectivity with respect to newly introduced products because of limited experience with those products upon which to base our warranty estimates.

Income Taxes. We make certain estimates and judgments in determining income tax expense for financial statement purposes. These estimates and judgments occur in the calculation of tax credits, recognition of income and deductions and calculation of specific tax assets and liabilities, which arise from differences in the timing of recognition of revenue and expense for income tax and financial statement purposes, as well as tax liabilities associated with uncertain tax positions. The calculation of tax liabilities involves uncertainties in the application of complex tax rules and the potential for future adjustment of our uncertain tax positions by the Internal Revenue Service or other tax jurisdictions. If estimates of these tax liabilities are greater or less than actual results, an additional tax provision or benefit will result. The deferred tax assets we record each period depend primarily on our ability to generate future taxable income in the United States and certain non-U.S. jurisdictions. Each period, we evaluate the need for a valuation allowance for our deferred tax assets and, if necessary, adjust the valuation allowance so that net deferred tax assets are recorded only to the extent we conclude it is more likely than not that these deferred tax assets will be realized. If our outlook for future taxable income changes significantly, our assessment of the need for, and the amount of, a valuation allowance may also change.

Assessing Goodwill and Other Long-lived Assets for Impairment. We perform a qualitative assessment in the fourth quarter of each fiscal year, or more frequently if indicators of potential impairment exist, to determine if any events or circumstances exist, such as an adverse change in business climate or a decline in the overall industry that would indicate that it would more likely than not reduce the fair value of a reporting unit below its carrying amount. Based on the qualitative assessment, if it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, then the Company is not required to perform the quantitative goodwill impairment test. If it is determined in the qualitative assessment that the fair value of a reporting unit is more likely than not below its carrying amount, including goodwill, then we perform a quantitative impairment test. The quantitative goodwill impairment test is performed by comparing the fair value of a reporting unit with its carrying amount. Any excess in the carrying value of a reporting unit’s goodwill over its fair value is recognized as an impairment loss, limited to the total amount of goodwill allocated to that reporting unit.

We evaluate other long-lived assets, including property, equipment and leasehold improvements and other intangible assets subject to amortization, for recoverability whenever events or changes in circumstances indicate that the carrying values of those assets may not be recoverable. We assess the recoverability of an asset group by determining if the carrying value of the asset group exceeds the sum of the projected undiscounted cash flows expected to result from the use and eventual disposition of the assets over the remaining economic life of the primary asset in the asset group. If the recoverability assessment indicates that the carrying value of the asset group is not recoverable, we will estimate the fair value of the asset group and compare it to its carrying value. The excess of the carrying value over the fair value is allocated pro rata to derive the adjusted carrying value of each asset in the asset group. The adjusted carrying value of each asset in the asset group is not reduced below its fair value.

Recent Accounting Pronouncements

See “Item 8. Financial Statements and Supplementary Data—Note 1. Basis of Presentation and Summary of Significant Accounting Policies” for information regarding the effect of new accounting pronouncements on our financial statements.

 

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ITEM 7A.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We have exposure to market risks due to the volatility of interest rates, foreign currency exchange rates, credit rating changes and equity and bond markets. A portion of these risks may be hedged, but fluctuations could impact our results of operations, financial position and cash flows.

Interest Rate Risk. Our exposure to market risk for changes in interest rates relates primarily to our cash investment portfolio. As of June 28, 2019, we had no available-for-sale debt securities that had been in a continuous unrealized loss position for a period greater than 12 months. We determined no available-for-sale debt securities were other-than-temporarily impaired as of June 28, 2019.

We have fixed rate debt obligations. We enter into debt obligations for general corporate purposes including capital expenditures and working capital needs.

The table below presents principal amounts and related fixed or weighted-average interest rates by year of maturity for our investment portfolio and debt obligations as of June 28, 2019.

 

     Fiscal Years Ended              

(Dollars in millions, except percentages)

   2020     2021     2022     2023     2024     Thereafter     Total     Fair Value at
June 28,
2019
 
Assets                 

Cash equivalents:

                

Floating rate

   $ 580     $ —       $ —       $ —       $ —       $ —       $ 580     $ 580  

Average interest rate

     2.42               2.42  

Other debt securities

                

Fixed rate

   $ —       $ 3     $ —       $ —       $ —       $ 4     $ 7     $ 7  

Average interest rate

       5.00             5.00  
Debt                 

Fixed rate

   $ —       $ —       $ 750     $ 941     $ 500     $ 2,100     $ 4,291     $ 4,349  

Average interest rate

         4.25     4.75     4.88     5.02     4.81  

Foreign Currency Exchange Risk. From time to time, we may enter into foreign currency forward exchange contracts to manage exposure related to certain foreign currency commitments and anticipated foreign currency denominated expenditures. Our policy prohibits us from entering into derivative financial instruments for speculative or trading purposes. At this time, we have not identified any material exposure associated with the potential changes related to the British vote to exit the European Union.

We hedge portions of our foreign currency denominated balance sheet positions with foreign currency forward exchange contracts to reduce the risk that our earnings will be adversely affected by changes in currency exchange rates. The change in fair value of these contracts is recognized in earnings in the same period as the gains and losses from the remeasurement of the assets and liabilities. All these foreign currency forward exchange contracts mature within 12 months.

We did not have any material net gains (losses) recognized in Cost of revenue, or Other, net for cash flow hedges due to hedge ineffectiveness or discontinued cash flow hedges during the fiscal years 2019 and 2018.

 

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The table below provides information as of June 28, 2019 about our foreign currency forward exchange contracts. The table is provided in U.S. dollar equivalent amounts and presents the notional amounts (at the contract exchange rates) and the weighted-average contractual foreign currency exchange rates.

 

(Dollars in millions, except average contract rate)

   Notional
Amount
     Average
Contract

Rate
     Estimated
Fair
Value(1)
 

Foreign currency forward exchange contracts:

        

Singapore Dollar

   $ 100      $ 1.36      $ 1  

Chinese Renminbi

     99      $ 6.84        (1

British Pound Sterling

     18      $ 0.80        —    
  

 

 

       

 

 

 

Total

   $ 217         $ —    
  

 

 

       

 

 

 

 

(1)

Equivalent to the unrealized net gain (loss) on existing contracts.

Other Market Risks. We have exposure to counterparty credit downgrades in the form of credit risk related to our foreign currency forward exchange contracts and our fixed income portfolio. We monitor and limit our credit exposure for our foreign currency forward exchange contracts by performing ongoing credit evaluations. We also manage the notional amount of contracts entered into with any one counterparty, and we maintain limits on maximum tenor of contracts based on the credit rating of the financial institution. Additionally, the investment portfolio is diversified and structured to minimize credit risk.

Changes in our corporate issuer credit ratings have minimal impact on our near term financial results, but downgrades may negatively impact our future ability to raise capital, increase the cost of such capital and our ability to execute transactions with various counterparties.

We are subject to equity market risks due to changes in the fair value of the notional investments selected by our employees as part of our Non-qualified Deferred Compensation Plans—the Seagate Deferred Compensation Plans (the “SDCPs”). We entered into a Total Return Swap (“TRS”) in order to manage the equity market risks associated with the SDCPs liabilities. We pay a floating rate, based on the London Inter-Bank Offered Rate (“LIBOR”) plus an interest rate spread, on the notional amount of the TRS. The TRS is designed to substantially offset changes in the SDCPs liabilities due to changes in the value of the investment options made by employees. See “Item 8. Financial Statements and Supplementary Data—Note 8. Derivative Financial Instruments” of this Report on Form 10-K.

 

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ITEM 8.

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

 

Table of Contents

   Page  

Consolidated Balance Sheets

     50  

Consolidated Statements of Operations

     51  

Consolidated Statements of Comprehensive Income

     52  

Consolidated Statements of Cash Flows

     53  

Consolidated Statements of Shareholders’ Equity

     54  

Notes to Consolidated Financial Statements

     55  

Note 1.    Basis of Presentation and Summary of Significant Accounting Policies

     55  

Note 2.   Balance Sheet Information

     61  

Note 3.   Revenue

     65  

Note 4.   Goodwill and Other Intangible Assets

     65  

Note 5.   Restructuring and Exit Costs

     66  

Note 6.   Debt

     67  

Note 7.   Income Taxes

     70  

Note 8.   Derivative Financial Instruments

     74  

Note 9.   Fair Value

     76  

Note 10.   Shareholders’ Equity

     80  

Note 11.   Share-Based Compensation

     81  

Note 12.   Earnings Per Share

     87  

Note 13.   Business Segment and Geographic Information

     87  

Note 14.   Legal, Environmental and Other Contingencies

     88  

Note 15.   Commitments

     90  

Note 16.   Guarantees

     90  

Note 17.   Subsequent Events

     92  

Report of Independent Registered Public Accounting Firm

     93  

 

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SEAGATE TECHNOLOGY PLC

CONSOLIDATED BALANCE SHEETS

(In millions, except share and per share data)

 

     June 28,
2019
     June 29,
2018
 
ASSETS

 

Current assets:

     

Cash and cash equivalents

   $ 2,220      $ 1,853  

Accounts receivable, net

     989        1,184  

Inventories

     970        1,053  

Other current assets

     184        220  
  

 

 

    

 

 

 

Total current assets

     4,363        4,310  

Property, equipment and leasehold improvements, net

     1,869        1,792  

Investment in debt security

     —          1,275  

Goodwill

     1,237        1,237  

Other intangible assets, net

     111        188  

Deferred income taxes

     1,114        417  

Other assets, net

     191        191  
  

 

 

    

 

 

 

Total Assets

   $ 8,885      $ 9,410  
  

 

 

    

 

 

 
LIABILITIES AND EQUITY

 

Current liabilities:

     

Accounts payable

   $ 1,420      $ 1,728  

Accrued employee compensation

     169        253  

Accrued warranty

     91        112  

Current portion of long-term debt

     —          499  

Accrued expenses

     552        598  
  

 

 

    

 

 

 

Total current liabilities

     2,232        3,190  

Long-term accrued warranty

     104        125  

Long-term accrued income taxes

     4        10  

Other non-current liabilities

     130        100  

Long-term debt, less current portion

     4,253        4,320  
  

 

 

    

 

 

 

Total Liabilities

     6,723        7,745  

Commitments and contingencies (See Notes 14 and 15)

     

Shareholders’ Equity:

     

Preferred shares, $0.00001 par value per share—100,000,000 authorized; no shares issued or outstanding

     —          —    

Ordinary shares, $0.00001 par value per share—1,250,000,000 authorized; 269,097,971 issued and outstanding at June 28, 2019 and 287,170,363 issued and outstanding at June 29, 2018

     —          —    

Additional paid-in capital

     6,545        6,377  

Accumulated other comprehensive loss

     (34      (16

Accumulated deficit

     (4,349      (4,696
  

 

 

    

 

 

 

Total Shareholders’ Equity

     2,162        1,665  
  

 

 

    

 

 

 

Total Liabilities and Shareholders’ Equity

   $ 8,885      $ 9,410  
  

 

 

    

 

 

 

See notes to consolidated financial statements.

 

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SEAGATE TECHNOLOGY PLC

CONSOLIDATED STATEMENTS OF OPERATIONS

(In millions, except per share data)

 

     Fiscal Years Ended  
     June 28,
2019
     June 29,
2018
     June 30,
2017
 

Revenue

   $ 10,390      $ 11,184      $ 10,771  
        

Cost of revenue

     7,458        7,820        7,597  

Product development

     991        1,026        1,232  

Marketing and administrative

     453        562        606  

Amortization of intangibles

     23        53        104  

Restructuring and other, net

     (22      89        178  
  

 

 

    

 

 

    

 

 

 

Total operating expenses

     8,903        9,550        9,717  
  

 

 

    

 

 

    

 

 

 
        

Income from operations

     1,487        1,634        1,054  
        

Interest income

     84        38        12  

Interest expense

     (224      (236      (222

Other, net

     25        (18      (29
  

 

 

    

 

 

    

 

 

 

Other expense, net

     (115      (216      (239
  

 

 

    

 

 

    

 

 

 

Income before income taxes

     1,372        1,418        815  

(Benefit) provision for income taxes

     (640      236        43  
  

 

 

    

 

 

    

 

 

 

Net income

   $ 2,012      $ 1,182      $ 772  
  

 

 

    

 

 

    

 

 

 
        

Net income per share:

        

Basic

   $ 7.13      $ 4.10      $ 2.61  

Diluted

     7.06        4.05        2.58  

Number of shares used in per share calculations:

        

Basic

     282        288        296  

Diluted

     285        292        299  

Cash dividends declared per ordinary share

   $ 2.52      $ 2.52      $ 2.52  

See notes to consolidated financial statements.

 

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SEAGATE TECHNOLOGY PLC

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In millions)

 

     Fiscal Years Ended  
     June 28,
2019
     June 29,
2018
     June 30,
2017
 

Net income

   $ 2,012      $ 1,182      $ 772  

Other comprehensive income (loss), net of tax:

        

Cash flow hedges

        

Change in net unrealized (loss) gain on cash flow hedges

     —          —          (3

Less: reclassification for amounts included in net income

     —          —          4  
  

 

 

    

 

 

    

 

 

 

Net change

     —          —          1  
  

 

 

    

 

 

    

 

 

 

Marketable securities

        

Change in net unrealized gain (loss) on available-for-sale debt securities

     —          —          —    

Less: reclassification for amounts included in net income

     —          —          —    
  

 

 

    

 

 

    

 

 

 

Net change

     —          —          —    
  

 

 

    

 

 

    

 

 

 

Post-retirement plans

        

Change in unrealized gain (loss) on post-retirement plans

     (16      1        —    

Less: reclassification for amounts included in net income

     —          —          2  
  

 

 

    

 

 

    

 

 

 

Net change

     (16      1        2  
  

 

 

    

 

 

    

 

 

 

Foreign currency translation adjustments

     (2      —          5  
  

 

 

    

 

 

    

 

 

 

Total other comprehensive income (loss), net of tax

     (18      1        8  
  

 

 

    

 

 

    

 

 

 

Comprehensive income

   $ 1,994      $ 1,183      $ 780  
  

 

 

    

 

 

    

 

 

 

See notes to consolidated financial statements.

 

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SEAGATE TECHNOLOGY PLC

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In millions)

 

     Fiscal Years Ended  
     June 28,
2019
     June 29,
2018
     June 30,
2017
 
OPERATING ACTIVITIES         

Net income

   $ 2,012      $ 1,182      $ 772  

Adjustments to reconcile net income to net cash provided by operating activities:

        

Depreciation and amortization

     541        598        749  

Share-based compensation

     99        112        137  

Impairment of assets

     3        —          42  

Deferred income taxes

     (690      193        3  

Other non-cash operating activities, net

     (97      (11      27  

Changes in operating assets and liabilities:

        

Accounts receivable, net

     204        16        122  

Inventories

     80        (71      (114

Accounts payable

     (268      65        121  

Accrued employee compensation

     (84      16        53  

Accrued expenses, income taxes and warranty

     (81      (46      47  

Other assets and liabilities

     42        59        (43
  

 

 

    

 

 

    

 

 

 

Net cash provided by operating activities

     1,761        2,113        1,916  
  

 

 

    

 

 

    

 

 

 
INVESTING ACTIVITIES         

Acquisition of property, equipment and leasehold improvements

     (602      (366      (434

Proceeds from the sale of assets

     144        71        —    

Proceeds from settlement of foreign currency forward exchange contracts

     29        —          —    

Purchase of debt security

     —          (1,279      —    

Proceeds from redemption of debt security

     1,283        —          —    

Purchases of strategic investments

     (18      —          (37

Proceeds from sale of strategic investments

     10        —          —    

Maturities of short-term investments

     —          —          6  

Other investing activities, net

     —          (14      6  
  

 

 

    

 

 

    

 

 

 

Net cash provided by (used in) investing activities

     846        (1,588      (459
  

 

 

    

 

 

    

 

 

 
FINANCING ACTIVITIES         

Redemption and repurchase of debt

     (819      (214      (316

Dividends to shareholders

     (713      (726      (561

Repurchases of ordinary shares

     (963      (361      (460

Taxes paid related to net share settlement of equity awards

     (31      (23      (27

Net proceeds from issuance of long-term debt

     245        —          1,232  

Proceeds from issuance of ordinary shares under employee stock plans

     69        113        86  
  

 

 

    

 

 

    

 

 

 

Net cash used in financing activities

     (2,212      (1,211      (46
  

 

 

    

 

 

    

 

 

 

Effect of foreign currency exchange rate changes on cash, cash equivalents and restricted cash

     (1      —          —    
  

 

 

    

 

 

    

 

 

 

Increase (decrease) in cash, cash equivalents and restricted cash

     394        (686      1,411  

Cash, cash equivalents and restricted cash at the beginning of the year

     1,857        2,543        1,132  
  

 

 

    

 

 

    

 

 

 

Cash, cash equivalents and restricted cash at the end of the year

   $ 2,251      $ 1,857      $ 2,543  
  

 

 

    

 

 

    

 

 

 
Supplemental Disclosure of Cash Flow Information         

Cash paid for interest

   $ 223      $ 237      $ 172  

Cash paid for income taxes, net of refunds

   $ 39      $ 43      $ 33  

See notes to consolidated financial statements.

 

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SEAGATE TECHNOLOGY PLC

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

For Fiscal Years Ended June 28, 2019, June 29, 2018 and June 30, 2017

(In millions)

 

     Number
of
Ordinary
Shares
     Par Value
of Shares
     Additional
Paid-in
Capital
     Accumulated
Other
Comprehensive
Loss
     Accumulated
Deficit
     Total  

Balance at, July 1, 2016

     299      $ —        $ 5,929      $ (25    $ (4,311    $ 1,593  

Net income

                 772        772  

Other comprehensive income

              8           8  

Issuance of ordinary shares under employee stock plans

     6           86              86  

Repurchases of ordinary shares

     (12               (460      (460

Tax withholding related to vesting of restricted stock units

     (1               (27      (27

Dividends to shareholders

                 (745      (745

Share-based compensation

           137              137  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Balance at, June 30, 2017

     292        —          6,152        (17      (4,771      1,364  

Net income

                 1,182        1,182  

Other comprehensive income

              1           1  

Issuance of ordinary shares under employee stock plans

     6           113              113  

Repurchases of ordinary shares

     (10               (361      (361

Tax withholding related to vesting of restricted stock units

     (1               (23      (23

Dividends to shareholders

                 (723      (723

Share-based compensation

           112              112  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Balance at, June 29, 2018

     287        —          6,377        (16      (4,696      1,665  

Cumulative effect of adoption of new revenue standard (Note 1)

                 34        34  

Net income

                 2,012        2,012  

Other comprehensive loss

              (18         (18

Issuance of ordinary shares under employee stock plans

     4           69              69  

Repurchases of ordinary shares

     (21               (966      (966

Tax withholding related to vesting of restricted stock units

     (1               (31      (31

Dividends to shareholders

                 (702      (702

Share-based compensation

           99              99  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Balance at, June 28, 2019

     269      $ —        $ 6,545      $ (34    $ (4,349    $ 2,162  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

See notes to consolidated financial statements.

 

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SEAGATE TECHNOLOGY PLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

1.

Basis of Presentation and Summary of Significant Accounting Policies

Organization

Seagate Technology plc (the “Company”) is a leading provider of data storage technology and solutions. Its principal products are hard disk drives, commonly referred to as disk drives, hard drives or HDDs. In addition to HDDs, the Company produces a broad range of data storage products including solid state drives (“SSDs”), solid state hybrid drives (“SSHDs”) and storage subsystems.

Basis of Presentation and Consolidation

The consolidated financial statements include the accounts of the Company and all its wholly-owned and majority-owned subsidiaries, after elimination of intercompany transactions and balances.

The preparation of financial statements in accordance with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the Company’s 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.

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. Accordingly, fiscal years 2019, 2018 and 2017 were comprised of 52 weeks ended on June 28, 2019, June 29, 2018 and June 30, 2017, respectively. All references to years in these Notes to Consolidated Financial Statements represent fiscal years unless otherwise noted. Fiscal year 2020 will be comprised of 53 weeks and will end on July 3, 2020. Fiscal year 2026 will also be comprised of 53 weeks and will end on July 3, 2026.

Summary of Significant Accounting Policies

Cash and Cash Equivalents. The Company considers all highly liquid investments with a remaining maturity of 90 days or less at the time of purchase to be cash equivalents. Cash equivalents are carried at cost, which approximates fair value.

Restricted Cash and Cash Equivalents. Restricted cash and cash equivalents represent cash and cash equivalents that are restricted as to withdrawal or use for other than current operations.

Short-Term Investments. The Company has short-term investments that are primarily comprised of money market funds, time deposits and certificates of deposits. The Company has classified its marketable securities as available-for-sale and they are stated at fair value with unrealized gains and losses included in Accumulated other comprehensive loss, which is a component of Shareholders’ Equity. The Company evaluates the available-for sale securities in an unrealized loss position for other-than-temporary impairment. Realized gains and losses are included in Other, net on the Company’s Consolidated Statements of Operations. The cost of securities sold is based on the specific identification method.

Allowances for Doubtful Accounts. The Company maintains allowances for uncollectible accounts receivable based upon expected collectability. This reserve is established based upon historical trends, global macroeconomic conditions and an analysis of specific exposures. The provision for doubtful accounts is recorded as a charge to Marketing and administrative expense on the Company’s Consolidated Statements of Operations.

Inventories. Inventories are valued at the lower of cost (using the first-in, first-out method) and net realizable value. Net realizable value is based upon the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation. Adjustments to reduce cost of inventories to its net realizable value are made, if required, for estimated excess or obsolescence determined primarily by future demand forecasts.

 

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Property, Equipment and Leasehold Improvements. Property, equipment and leasehold improvements are stated at cost. Equipment and buildings are depreciated using the straight-line method over the estimated useful lives of the assets. Leasehold improvements are amortized using the straight-line method over the shorter of the estimated life of the asset or the remaining term of the lease. The costs of additions and substantial improvements to property, equipment and leasehold improvements, which extend the economic life of the underlying assets, are capitalized. The cost of maintenance and repairs to property, equipment and leasehold improvements is expensed as incurred.

Goodwill. The Company performs a qualitative assessment in the fourth quarter of each year, or more frequently if indicators of potential impairment exist, to determine if any events or circumstances exist, such as an adverse change in business climate or a decline in the overall industry that would indicate that it would more likely than not reduce the fair value of a reporting unit below its carrying amount, including goodwill. If it is determined in the qualitative assessment that the fair value of a reporting unit is more likely than not below its carrying amount, including goodwill, then the Company will perform a quantitative impairment test. The quantitative goodwill impairment test is performed by comparing the fair value of a reporting unit with its carrying amount. Any excess in the carrying value of a reporting unit’s goodwill over its fair value is recognized as an impairment loss, limited to the total amount of goodwill allocated to that reporting unit.

Other Long-lived Assets. The Company tests other long-lived assets, including property, equipment and leasehold improvements and other intangible assets subject to amortization, for recoverability whenever events or changes in circumstances indicate that the carrying value of those assets may not be recoverable. The Company performs a recoverability test to assess the recoverability of an asset group. If the recoverability test indicates that the carrying value of the asset group is not recoverable, the Company will estimate the fair value of the asset group and the excess of the carrying value over the fair value is allocated pro rata to derive the adjusted carrying value of assets in the asset group. The adjusted carrying value of each asset in the asset group is not reduced below its fair value.

The Company tests other intangible assets not subject to amortization whenever events occur or circumstances change, such as declining financial performance, deterioration in the environment in which the entity operates or deteriorating macroeconomic conditions that have a negative effect on future expected earnings and cash flows that could affect significant inputs used to determine the fair value of the indefinite-lived intangible asset.

Assets Held for Sale. The Company classifies its long-lived assets to be sold as held for sale in the period (i) it has approved and committed to a plan to sell the asset, (ii) the asset is available for immediate sale in its present condition, (iii) an active program to locate a buyer and other actions required to sell the asset have been initiated, (iv) the sale of the asset is probable, (v) the asset is being actively marketed for sale at a price that is reasonable in relation to its current fair value and (vi) it is unlikely that significant changes to the plan will be made or that the plan will be withdrawn. The Company initially measures a long-lived asset that is classified as held for sale at the lower of its carrying value or fair value less any costs to sell. Any loss resulting from this measurement is recognized in the period in which the held for sale criteria are met. Conversely, gains are not recognized on the sale of a long-lived asset until the date of sale. Upon designation as an asset held for sale, the Company stops recording depreciation expense on the asset. The Company assesses the fair value of a long-lived asset less any costs to sell at each reporting period and until the asset is no longer classified as held for sale.

Investment in Debt Security and Payment-in-Kind (“PIK”) Income. The Company had a debt investment in non-convertible preferred stock of Toshiba Memory Holdings Corporation (“TMHC”, formerly known as “K.K. Pangea”) that was fully redeemed by TMHC in June 2019. The Company classified the investment as held-to-maturity as it had the positive intent and ability to hold the security until maturity. This held-to-maturity investment was carried at amortized cost and recorded as Investment in debt security on the Consolidated Balance Sheets.

Transaction costs incurred by the Company to acquire this investment were capitalized and amortized as a reduction of interest income on the Consolidated Statements of Operations over the respective term of the investment. The investment contained a PIK income provision, which represented contractual interest that was due upon redemption, and was accrued and recorded as Interest income each reporting period and added to the carrying value of the Investment in debt security.

Derivative Financial Instruments. The Company records all derivatives on the balance sheet at fair value and establishes criteria for designation and effectiveness of hedging relationships. The Company continues to exclude the change in forward points from the assessment of hedge effectiveness and recognizes the excluded component in Other, net in the Consolidated

 

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Statements of Operations. Foreign currency forward exchange contracts not designated as hedge instruments are used to economically hedge the foreign currency exposure in the value of an investment denominated in currency other than U.S. dollar. The Company recognizes the unrealized gains and losses due to the changes in the fair value of these contracts in Other, net in the Consolidated Statements of Operations along with the foreign currency gains and losses on remeasurement of such investment.

Warranty. The Company estimates probable product warranty costs at the time revenue is recognized. The Company generally provides warranty on its products for a period of 1 to 5 years. The Company’s warranty provision considers estimated product failure rates and trends (including the timing of product returns during the warranty periods), and estimated repair or replacement costs related to product quality issues, if any. The Company also exercises judgment in estimating its ability to sell refurbished products. The Company’s judgment is subject to a greater degree of subjectivity with respect to newly introduced products because of limited experience with those products upon which to base our warranty estimates.

Revenue Recognition, Sales Returns and Allowances, and Sales Incentive Programs. Effective June 30, 2018, the Company adopted a new revenue recognition policy in accordance with Accounting Standard Codification (“ASC”) 606, Revenue from Contracts with Customers, using the modified retrospective transition approach as discussed in the section titled Recently Adopted Accounting Pronouncements in this Note 1. Prior to fiscal year 2019, the revenue recognition policy was in accordance with ASC 605, Revenue Recognition. Under ASC 606, the Company determines revenue recognition through the following steps: (1) identification of the contract with a customer; (2) identification of the performance obligations in the contract; (3) determination of the transaction price; (4) allocation of the transaction price to the performance obligations in the contract; and (5) recognition of revenue when, or as, the Company satisfies a performance obligation.

Revenue from sales of products is generally recognized upon transfer of control to customers in an amount that reflects the consideration the Company expects to receive in exchange for those products, net of sales taxes. This typically occurs upon shipment from the Company. When applicable, the Company includes shipping charges billed to customers in Revenue and includes the related shipping costs in Cost of revenue on the Company’s Consolidated Statements of Operations.

The Company records estimated variable consideration at the time of revenue recognition as a reduction to revenue. Variable consideration generally consists of sales incentive programs, such as price protection and volume incentives aimed at increasing customer demand. For OEM sales, rebates are typically established by estimating the most likely amount of consideration expected to be received based on an OEM customer’s volume of purchases from Seagate or other agreed upon rebate programs. For the distribution and retail channel, these programs typically involve estimating the most likely amount of rebates related to a customer’s level of sales, order size, advertising or point of sale activity as well as the expected value of price protection adjustments based on historical analysis and forecasted pricing environment. Marketing development program costs are accrued and recorded as a reduction to revenue at the same time that the related revenue is recognized.

The Company elected a practical expedient to expense sales commissions as incurred because the amortization period would have been one year or less. These costs are recorded as Marketing and administrative on the Company’s Consolidated Statements of Operations.

Restructuring Costs. The timing of recognition for severance costs depends on whether employees are required to render service until they are terminated in order to receive the termination benefits. If employees are required to render service until they are terminated in order to receive the termination benefits, a liability is recognized ratably over the future service period. Otherwise, a liability is recognized when management has committed to a restructuring plan and has communicated those actions to employees. Employee termination benefit costs covered by existing benefit arrangements are recognized when management has committed to a restructuring plan and the severance costs are probable and estimable.

Advertising Expense. The cost of advertising is expensed as incurred. Advertising costs were approximately $22 million, $28 million and $16 million in fiscal years 2019, 2018 and 2017, respectively.

Share-Based Compensation. The Company has elected to apply the with-and-without method to assess the realization of related excess tax benefits. The Company also elected to continue to account for share-based compensation expense net of estimated forfeitures.

 

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Accounting for Income Taxes. The Company makes certain estimates and judgments in determining income tax expense for financial statement purposes. These estimates and judgments occur in the calculation of tax credits, recognition of income and deductions and calculation of specific tax assets and liabilities, which arise from differences in the timing of recognition of revenue and expense for income tax and financial statement purposes, as well as tax liabilities associated with uncertain tax positions. The calculation of tax liabilities involves uncertainties in the application of complex tax rules and the potential for future adjustment of the Company’s uncertain tax positions by the Internal Revenue Service or other tax jurisdictions. If estimates of these tax liabilities are greater or less than actual results, an additional tax provision or benefit will result. The deferred tax assets the Company records each period depend primarily on the Company’s ability to generate future taxable income in the United States and certain non-U.S. jurisdictions. Each period, the Company evaluates the need for a valuation allowance for its deferred tax assets and, if necessary, adjusts the valuation allowance so that net deferred tax assets are recorded only to the extent the Company concludes it is more likely than not that these deferred tax assets will be realized. If the Company’s outlook for future taxable income changes significantly, the Company’s assessment of the need for, and the amount of, a valuation allowance may also change.

Financial Instruments Remeasurement. Effective June 30, 2018, the Company adopted ASU 2016-01, Financial Instruments, which changed the way the Company accounts for equity investments that do not qualify for the equity method of accounting. Prior to fiscal year 2019, the Company’s investments in privately-held companies without readily determinable fair value were accounted for under the cost method and were recorded at historical cost at the time of investment, with adjustments to the balance only when impairment occur. Upon adoption of ASU 2016-01, the Company’s equity investment in privately-held companies without readily determinable fair values are now measured using the measurement alternative method as cost, less impairments, and adjusted up or down based on observable price changes in orderly transactions for identical or similar investments of the same issuer. Any adjustments resulting from impairments and/or observable price changes are recorded as Other, net in the Company’s Consolidated Statements of Operations.

Comprehensive Income. The Company presents comprehensive income in a separate statement. Comprehensive income is comprised of net income and other gains and losses affecting equity that are excluded from net income.

Foreign Currency Remeasurement and Translation. The U.S. dollar is the functional currency for the majority of the Company’s foreign operations. Monetary assets and liabilities denominated in foreign currencies are remeasured into the functional currency of the subsidiary at the balance sheet date. The gains and losses from the remeasurement of foreign currency denominated balances into the functional currency of the subsidiary are included in Other, net on the Company’s Consolidated Statements of Operations. The Company’s subsidiaries that use the U.S. dollar as their functional currency remeasure monetary assets and liabilities at exchange rates in effect at the end of each period, and nonmonetary assets and liabilities at historical rates.

The Company translates the assets and liabilities of its non-U.S. dollar functional currency subsidiaries into U.S. dollars using exchange rates in effect at the end of each period. Revenue and expenses for these subsidiaries are translated using rates that approximate those in effect during the period. Gains and losses from these translations are recognized in foreign currency translation included in Accumulated other comprehensive loss, which is a component of Shareholders’ Equity.

Concentrations

Concentration of Credit Risk. The Company’s customer base for disk drive products is concentrated with a small number of customers. The Company does not generally require collateral or other security to support accounts receivable. To reduce credit risk, the Company performs ongoing credit evaluations on its customers’ financial condition. The Company establishes allowances for doubtful accounts based upon factors surrounding the credit risk of customers, historical trends and other information. Dell Inc. accounted for more than 10% of the Company’s accounts receivable as of June 28, 2019 and June 29, 2018.

Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of cash equivalents, investments and foreign currency forward exchange contracts. The Company mitigates concentrations of credit risk in its investments through diversifications, by investing in highly-rated securities and/or major multinational companies.

In entering into foreign currency forward exchange contracts, the Company assumes the risk that might arise from the possible inability of counterparties to meet the terms of their contracts. The counterparties to these contracts are major

 

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multinational commercial and investment banks, and the Company has not incurred and does not expect any losses as a result of counterparty defaults.

Supplier Concentration. Certain of the raw materials, components and equipment used by the Company in the manufacture of its products are available from single-sourced vendors. Shortages could occur in these essential materials and components due to an interruption of supply or increased demand in the industry. If the Company were unable to procure certain materials, components or equipment at acceptable prices, it would be required to reduce its manufacturing operations, which could have a material adverse effect on its results of operations. In addition, the Company may make prepayments to certain suppliers or enter into minimum volume commitment agreements. Should these suppliers be unable to deliver on their obligations or experience financial difficulty, the Company may not be able to recover these prepayments.

Recently Issued 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 amends a number of aspects of lease accounting, including requiring lessee to recognize a right-of-use (“ROU”) asset and corresponding lease liability for operating leases and enhanced disclosures. The lease liability is measured at the present value of the remaining lease payments and the ROU asset will be based on the lease liability and is adjusted for lease prepayments, lease incentives received and the lessee’s initial direct costs.

The Company will adopt this ASU effective June 29, 2019 using the modified retrospective method. The Company will elect the practical expedients which allows for not reassessing whether existing contracts contain leases, the classifications of existing leases and whether the existing initial direct costs meet the new definition. In addition, the Company will elect to combine lease and non-lease components for facility leases and to keep leases with an initial term of 12 months or less off the balance sheet.

While the Company will continue to evaluate the effect of adopting this guidance on its consolidated financial statements and related disclosures, the Company expects to recognize ROU assets and corresponding lease liabilities of approximately $114 million and $74 million, respectively, on the Consolidated Balance Sheet, primarily relating to real estate operating leases. The Company does not expect the adoption of this ASU to have a material impact on its other 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. Early adoption in the first quarter of fiscal year 2020 is permitted. The Company is in the process of assessing the impact of this ASU on its consolidated financial statements.

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. The Company is required to adopt the guidance in the first quarter of fiscal 2020. The adoption of ASU 2018-02 is not expected to have a material effect on its consolidated financial statements.

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.

Recently Adopted Accounting Pronouncements

In May 2014, the FASB issued ASU 2014-09 (ASC Topic 606), Revenue from Contracts with Customers, and FASB also issued certain interpretive clarifications on this new guidance which outlines a single comprehensive model for entities to use in

 

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accounting for revenue arising from contracts with customers and supersedes the revenue recognition guidance under ASC 605. It also requires entities to disclose both quantitative and qualitative information that enable financial statements users to understand the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. This ASU became effective and was adopted by the Company in the quarter ended September 28, 2018 under the modified retrospective approach with a cumulative adjustment to accumulated deficit at the date of adoption. The Company has completed the adoption and implemented policies, processes and controls to support the new standard’s measurement and disclosure requirements.

The Company applied ASC 606 using a modified retrospective transition approach to all contracts that were not completed as of June 29, 2018. Results for reporting periods beginning June 30, 2018 are presented under ASC 606, while prior period amounts were not adjusted and continue to be reported under the historical accounting standard. As a result of the adoption, the Company identified a change in revenue recognition timing on its product sales made to certain retail customers and started to recognize revenue when the Company transfers control to the applicable customers rather than deferring recognition until those customers sell the products. In addition, the Company established accruals for the variable consideration related to customer incentives on these arrangements. On the date of initial adoption, the Company removed the related deferred income on the product sales made to these customers and recorded estimates of the accrual for variable consideration through a cumulative adjustment to accumulated deficit. The cumulative effect of the change to the Company’s Consolidated Balance Sheet from the adoption of ASC 606 was as follows:

 

(Dollars in millions)

   As of June 29,
2018
     Effect of
adoption of

ASC 606
     As of June 30,
2018
 

Accounts receivable, net

   $ 1,184      $ 9      $ 1,193  

Inventories

   $ 1,053      $ (9    $ 1,044  

Accrued expenses

   $ 598      $ (34    $ 564  

Accumulated deficit

   $ (4,696    $ 34      $ (4,662

The impact of applying the new accounting standard on the Company’s consolidated financial statements for the year ended June 28, 2019 was not material.

In January 2016, the FASB issued ASU 2016-01 (ASC Subtopic 825-10), Financial Instruments—Overall Recognition and Measurement of Financial Assets and Financial Liabilities, as amended by ASU 2018-03, Financial Instruments—Overall: Technical Correction and Improvements, issued in February 2018. The amendments in these ASUs require entities to measure all equity investments at fair value with changes recognized through net income. Additionally, the amendments eliminate certain disclosure requirements related to financial instruments measured at amortized cost and add disclosures related to the measurement categories of financial assets and financial liabilities. These ASUs became effective and were adopted by the Company in the quarter ended September 28, 2018. For equity investments without readily determinable fair value, the Company elected the measurement method as cost, less impairments, and adjusted up or down based on observable price changes in orderly transactions for an identical or similar investment in the same issuer. The adoption of this guidance had no impact on the Company’s consolidated financial statements and disclosures.

In January 2017, the FASB issued ASU 2017-01 (ASC Topic 805), Business Combination: Clarifying the Definition of a Business. The amendments in this ASU change the definition of a business to assist with evaluating when a set of transferred assets and activities is a business. The Company adopted the guidance in the quarter ended September 28, 2018. The adoption of this guidance had no impact on the Company’s consolidated financial statements and disclosures.

In May 2017, the FASB issued ASU 2017-09 (ASC Topic 718), Stock Compensation: Scope of Modification Accounting. The amendments in this ASU provide guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting. The Company adopted the guidance in the quarter ended September 28, 2018. The adoption of this guidance had no impact on its consolidated financial statements and disclosures.

 

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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 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

     7        —          7  
  

 

 

    

 

 

    

 

 

 

Total

   $ 557      $ —        $ 557  
  

 

 

    

 

 

    

 

 

 

Included in Cash and cash equivalents

         $ 548  

Included in Other current assets

           2  

Included in Other assets, net

           7  
        

 

 

 

Total

         $ 557  
        

 

 

 

As of June 28, 2019, the Company’s Other current assets included $2 million in restricted cash equivalents 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.

The fair value and amortized cost of the Company’s investments classified as available-for-sale at June 28, 2019 by remaining contractual maturity were as follows:

 

(Dollars in millions)

   Amortized
Cost
     Fair
Value
 

Due in less than 1 year

   $ 550      $ 550  

Due in 1 to 5 years

     3        3  

Due in 6 to 10 years

     —          —    

Thereafter

     4        4  
  

 

 

    

 

 

 

Total

   $ 557      $ 557  
  

 

 

    

 

 

 

 

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The following table summarizes, by major type, the fair value and amortized cost of the Company’s investments as of June 29, 2018:

 

(Dollars in millions)

   Amortized
Cost
     Unrealized
Gain/
(Loss)
     Fair
Value
 

Available-for-sale securities:

        

Money market funds

   $ 621      $ —        $ 621  

Time deposits and certificates of deposits

     395        —          395  
  

 

 

    

 

 

    

 

 

 

Total

   $ 1,016      $ —        $ 1,016  
  

 

 

    

 

 

    

 

 

 

Included in Cash and cash equivalents

         $ 1,012  

Included in Other current assets

           4  
        

 

 

 

Total

         $ 1,016  
        

 

 

 

As of June 29, 2018, the Company’s Other current assets included $4 million in restricted cash and investments held as collateral at banks for various performance obligations.

As of June 29, 2018, the Company had no available-for-sale securities that had been in a continuous unrealized loss position for a period greater than 12 months. The Company determined no available-for-sale securities were other-than-temporarily impaired as of June 29, 2018.

Cash, Cash Equivalents and Restricted Cash

The following table provides a summary of cash, cash equivalents and restricted cash reported within the Consolidated Balance Sheets that reconciles to the corresponding amount in the Consolidated Statements of Cash Flows:

 

(Dollars in millions)

   June 28,
2019
     June 29,
2018
     June 30,
2017
     July 1,
2016
 

Cash and cash equivalents

   $ 2,220      $ 1,853      $ 2,539      $ 1,125  

Restricted cash included in Other current assets

     31        4        4        7  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total cash, cash equivalents and restricted cash shown in the Statements of Cash Flows

   $ 2,251      $ 1,857      $ 2,543      $ 1,132  
  

 

 

    

 

 

    

 

 

    

 

 

 

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.

Accounts Receivable, net

The following table provides details of the accounts receivable, net balance sheet item:

 

(Dollars in millions)

   June 28,
2019
     June 29,
2018
 

Accounts receivable

   $ 993      $ 1,188  

Allowances for doubtful accounts

     (4      (4
  

 

 

    

 

 

 

Account receivable, net

   $ 989      $ 1,184  
  

 

 

    

 

 

 

 

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Activity in the allowances for doubtful accounts is as follows:

 

(Dollars in millions)

   Balance at
Beginning of
Period
     Charges
(Credit)  to
Operations
     Deductions (a)      Balance at
End of
Period
 

Fiscal year ended June 30, 2017

   $ 9        (4      —        $ 5  

Fiscal year ended June 29, 2018

   $ 5        —          (1    $ 4  

Fiscal year ended June 28, 2019

   $ 4        —          —        $ 4  

 

(a) 

Uncollectible accounts written off, net of recoveries.

Inventories

The following table provides details of the inventory balance sheet item:

 

(Dollars in millions)

   June 28,
2019
     June 29,
2018
 

Raw materials and components

   $ 336      $ 329  

Work-in-process

     217        347  

Finished goods

     417        377  
  

 

 

    

 

 

 

Total inventories

   $ 970      $ 1,053  
  

 

 

    

 

 

 

Property, Equipment and Leasehold Improvements, net

The components of property, equipment and leasehold improvements, net were as follows:

 

(Dollars in millions)

   Useful Life
in Years
     June 28,
2019
     June 29,
2018
 

Land and land improvements

      $ 48      $ 55  

Equipment

     3 – 5        7,726        7,472  

Buildings and leasehold improvements

     Up to 30        1,795        1,805  

Construction in progress

        266        193  
     

 

 

    

 

 

 
        9,835        9,525  

Less: accumulated depreciation and amortization

        (7,966      (7,733
     

 

 

    

 

 

 

Property, equipment and leasehold improvements, net

      $ 1,869      $ 1,792  
     

 

 

    

 

 

 

Depreciation expense, which includes amortization of leasehold improvements, was $464 million, $487 million and $581 million for fiscal years 2019, 2018 and 2017, respectively. Interest on borrowings related to eligible capital expenditures is capitalized as part of the cost of the qualified assets and amortized over the estimated useful lives of the assets. During fiscal years 2019, 2018 and 2017, the Company capitalized interest of $3 million, $1 million and $4 million, respectively.

In fiscal year 2019, the Company did not have any material write-offs or accelerated depreciation of fixed assets. In fiscal year 2018, the Company recognized a charge of $7 million from the write-off and accelerated depreciation of certain fixed assets, of which $1 million, $4 million and $2 million was recorded to Cost of revenue, Product development and Marketing and administrative, respectively, in the Consolidated Statement of Operations. In fiscal year 2017, the Company determined it would discontinue the use of certain manufacturing property and equipment in the short-term, and that certain other buildings, land and manufacturing property and equipment were permanently impaired. As a result, the Company recognized charges of $72 million in fiscal year 2017 from the write-off and accelerated depreciation of these fixed assets, including $35 million impairment on land and buildings classified as held for sale under Other current assets in the Consolidated Balance Sheet. Please refer to Note 9. Fair Value for more details.

 

Seagate Technology public limited company | 2019 Form 10-K | 63


Table of Contents

Investment in Debt Security

On May 31, 2018, the Company invested approximately $1.3 billion in non-convertible preferred stock of Toshiba Memory Corporation (“TMC”, formerly known as “K.K. Pangea”), a subsidiary of Toshiba Memory Holdings Corporation (“TMHC”), with a consortium of investors led by Bain Capital Private Equity. The Company’s investment in TMC was subsequently transferred to TMHC. On June 17, 2019, the Company received approximately $1.3 billion in cash from TMHC for the redemption of all the outstanding shares of non-convertible preferred stock of TMHC held by the Company. The proceeds from the redemption include the original principal and accrued PIK income. As of June 29, 2018, no impairment was identified and the fair value of the investment was determined to approximate its carrying value at amortized cost. In fiscal years 2019 and 2018, the PIK income earned was $61 million and $5 million, respectively.

Accrued Expenses

The following table provides details of the accrued expenses balance sheet item:

 

(Dollars in millions)

   June 28,
2019
     June 29,
2018
 

Dividends payable

   $ 170      $ 181  

Other accrued expenses

     382        417  
  

 

 

    

 

 

 

Total

   $ 552      $ 598  
  

 

 

    

 

 

 

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 30, 2017

   $ —        $ —        $ (5    $ (12    $ (17

Other comprehensive income (loss) before reclassifications

     —          —          1        —          1  

Amounts reclassified from AOCI

     —          —          —          —          —    

Other comprehensive income (loss)

     —          —          1        —          1  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Balance at June 29, 2018

     —          —          (4      (12      (16

Other comprehensive income (loss) before reclassifications

     —          —          (16      (2      (18

Amounts reclassified from AOCI

     —          —          —          —          —