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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
____________________________ 
FORM 10-Q
____________________________ 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended October 4, 2019
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
  For the transition period from:                to                
Commission File Number 001-31560
 _______________________________________
SEAGATE TECHNOLOGY PUBLIC LIMITED COMPANY
(Exact name of registrant as specified in its charter)
 _______________________________________
Ireland
 
98-0648577
(State or other jurisdiction of
 
(I.R.S. Employer
incorporation or organization)
 
Identification Number)
 38/39 Fitzwilliam Square
Dublin 2Ireland
(Address of principal executive offices)
D02 NX53
(Zip Code)
 
Telephone: (353) (1) 234-3136
(Registrant’s telephone number, including area code)
_______________________________________ 
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
 
Trading Symbol(s)
 
Name of each exchange
on which registered
Ordinary Shares, par value $0.00001 per share
 
STX
 
The NASDAQ Global Select Market
_______________________________________ 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes  No 
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).  Yes  No 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
Accelerated filer: 
Non-accelerated filer:
Smaller reporting company: 
Emerging growth company:
 
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes  No 
As of October 28, 2019, 262,711,116 of the registrant’s ordinary shares, par value $0.00001 per share, were issued and outstanding.
 




INDEX
 SEAGATE TECHNOLOGY PLC

 
 
 
PAGE NO.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

2

Table of Contents

PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Table of Contents
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


See Notes to Condensed Consolidated Financial Statements.
3


Table of Contents

SEAGATE TECHNOLOGY PLC
CONDENSED CONSOLIDATED BALANCE SHEETS
(In millions)
 
October 4,
2019
 
June 28,
2019
 
(unaudited)
 
 
ASSETS
 

 
 

Current assets:
 

 
 

Cash and cash equivalents
$
1,784

 
$
2,220

Accounts receivable, net
1,065

 
989

Inventories
1,041

 
970

Other current assets
141

 
184

Total current assets
4,031

 
4,363

Property, equipment and leasehold improvements, net
1,991

 
1,869

Goodwill
1,237

 
1,237

Other intangible assets, net
97

 
111

Deferred income taxes
1,128

 
1,114

Other assets, net
254

 
191

Total Assets
$
8,738

 
$
8,885

LIABILITIES AND EQUITY
 

 
 

Current liabilities:
 

 
 

Accounts payable
$
1,750

 
$
1,420

Accrued employee compensation
149

 
169

Accrued warranty
86

 
91

Accrued expenses
564

 
552

Total current liabilities
2,549

 
2,232

Long-term accrued warranty
98

 
104

Long-term accrued income taxes
3

 
4

Other non-current liabilities
178

 
130

Long-term debt
4,140

 
4,253

Total Liabilities
6,968

 
6,723

Commitments and contingencies (See Notes 11 and 13)
 
 
 
Shareholders’ Equity:
 
 
 
    Ordinary shares and additional paid-in capital
6,610

 
6,545

    Accumulated other comprehensive loss
(40
)
 
(34
)
    Accumulated deficit
(4,800
)
 
(4,349
)
Total Equity
1,770

 
2,162

  Total Liabilities and Equity
$
8,738

 
$
8,885





See Notes to Condensed Consolidated Financial Statements.
4


Table of Contents

SEAGATE TECHNOLOGY PLC
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In millions, except per share data)
(Unaudited)
 
For the Three Months Ended
 
October 4,
2019
 
September 28,
2018
Revenue
$
2,578

 
$
2,991

 
 
 
 
Cost of revenue
1,907

 
2,078

Product development
255

 
266

Marketing and administrative
122

 
115

Amortization of intangibles
4

 
6

Restructuring and other, net
17

 
23

Total operating expenses
2,305

 
2,488

 
 
 
 
Income from operations
273

 
503

 
 
 
 
Interest income
11

 
24

Interest expense
(55
)
 
(58
)
Other, net
(31
)
 
(1
)
Other expense, net
(75
)
 
(35
)
 
 
 
 
Income before income taxes
198

 
468

(Benefit) provision for income taxes
(2
)
 
18

Net income
$
200

 
$
450

 
 
 
 
Net income per share:
 
 
 
Basic
$
0.75

 
$
1.57

Diluted
0.74

 
1.54

Number of shares used in per share calculations:
 

 
 

Basic
266

 
287

Diluted
270

 
292

Cash dividends declared per ordinary share
$
0.63

 
$
0.63




See Notes to Condensed Consolidated Financial Statements.
5


Table of Contents

SEAGATE TECHNOLOGY PLC
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In millions)
(Unaudited)
 
For the Three Months Ended
 
October 4,
2019
 
September 28,
2018
Net income
$
200

 
$
450

Other comprehensive income (loss), net of tax:
 
 
 
Cash flow hedges
 
 
 
Change in net unrealized gain (loss) on cash flow hedges
(1
)
 
3

Less: reclassification for amounts included in net income

 
(1
)
Net change
(1
)
 
2

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

 

Less: reclassification for amounts included in net income

 

Net change

 

Foreign currency translation adjustments
(5
)
 
2

Total other comprehensive income (loss), net of tax
(6
)
 
4

Comprehensive income
$
194

 
$
454





See Notes to Condensed Consolidated Financial Statements.
6


Table of Contents

SEAGATE TECHNOLOGY PLC
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)
(Unaudited)
 
For the Three Months Ended
 
October 4,
2019
 
September 28,
2018
OPERATING ACTIVITIES
 

 
 

Net income
$
200

 
$
450

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

 
 
Depreciation and amortization
92

 
134

Share-based compensation
26

 
18

Deferred income taxes
(12
)
 
2

Other non-cash operating activities, net
44

 
(18
)
Changes in operating assets and liabilities:
 

 
 
Accounts receivable, net
(77
)
 
(9
)
Inventories
(65
)
 
(66
)
Accounts payable
281

 
119

Accrued employee compensation
(20
)
 
(79
)
Accrued expenses, income taxes and warranty
(7
)
 
45

Other assets and liabilities
(6
)
 
(9
)
Net cash provided by operating activities
456

 
587

INVESTING ACTIVITIES
 

 
 

Acquisition of property, equipment and leasehold improvements
(147
)
 
(177
)
Proceeds from sale of properties previously classified as held for sale

 
6

Purchases of strategic investments
(4
)
 
(5
)
Net cash used in investing activities
(151
)
 
(176
)
FINANCING ACTIVITIES
 

 
 
Redemption and repurchase of debt
(645
)
 

Dividends to shareholders
(170
)
 
(181
)
Repurchases of ordinary shares
(450
)
 
(150
)
Taxes paid related to net share settlement of equity awards
(37
)
 
(27
)
Net proceeds from issuance of long-term debt
498

 

Proceeds from issuance of ordinary shares under employee stock plans
39

 
32

Net cash used in financing activities
(765
)
 
(326
)
Effect of foreign currency exchange rate changes on cash, cash equivalents and restricted cash
(5
)
 
3

(Decrease) increase in cash, cash equivalents and restricted cash
(465
)
 
88

Cash, cash equivalents and restricted cash at the beginning of the period
2,251

 
1,857

Cash, cash equivalents and restricted cash at the end of the period
$
1,786

 
$
1,945


See Notes to Condensed Consolidated Financial Statements.
7


Table of Contents

SEAGATE TECHNOLOGY PLC
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY 
For the Three Months Ended October 4, 2019 and September 28, 2018
(In millions)
(Unaudited) 
 
 
Number
of
Ordinary
Shares
 
Par Value
of Shares
 
Additional
Paid-in
Capital
 
Accumulated
Other
Comprehensive
Loss
 
Accumulated
Deficit
 
Total
Balance at June 28, 2019
 
269

 
$

 
$
6,545

 
$
(34
)
 
$
(4,349
)
 
$
2,162

Impact of adopting new lease standard (Note 1)
 
 
 
 
 
 
 
 
 
(2
)
 
(2
)
Net income
 


 


 


 


 
200

 
200

Other comprehensive loss
 


 


 


 
(6
)
 


 
(6
)
Issuance of ordinary shares under employee stock plans
 
4

 


 
39

 


 


 
39

Repurchases of ordinary shares
 
(9
)
 


 


 


 
(447
)
 
(447
)
Tax withholding related to vesting of restricted stock units
 
(1
)
 


 


 


 
(37
)
 
(37
)
Dividends to shareholders
 


 


 


 


 
(165
)
 
(165
)
Share-based compensation
 


 


 
26

 


 


 
26

Balance at October 4, 2019
 
263

 
$

 
$
6,610

 
$
(40
)
 
$
(4,800
)
 
$
1,770

 
 
Number
of
Ordinary
Shares
 
Par Value
of Shares
 
Additional
Paid-in
Capital
 
Accumulated
Other
Comprehensive
Loss
 
Accumulated
Deficit
 
Total
Balance at June 29, 2018
 
287

 
$

 
$
6,377

 
$
(16
)
 
$
(4,696
)
 
$
1,665

Cumulative effect of adoption of new revenue standard
 


 


 


 


 
34

 
34

Net income
 


 


 


 


 
450

 
450

Other comprehensive income
 


 


 


 
4

 


 
4

Issuance of ordinary shares under employee stock plans
 
3

 


 
32

 


 


 
32

Repurchases of ordinary shares
 
(3
)
 


 


 


 
(150
)
 
(150
)
Tax withholding related to vesting of restricted stock units
 
(1
)
 


 


 


 
(27
)
 
(27
)
Dividends to shareholders
 


 


 


 


 
(180
)
 
(180
)
Share-based compensation
 


 


 
18

 


 


 
18

Balance at September 28, 2018
 
$
286

 
$

 
$
6,427

 
$
(12
)
 
$
(4,569
)
 
$
1,846




See Notes to Condensed Consolidated Financial Statements.
8


Table of Contents

SEAGATE TECHNOLOGY PLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1.
Basis of Presentation and Summary of Significant Accounting Policies
Organization
Seagate Technology plc (“STX”) and its subsidiaries (collectively, unless the context otherwise indicates, the “Company”) is a leading provider of data storage technology and solutions. Its principal products are hard disk drives, commonly referred to as disk drives, hard drives or HDDs. In addition to HDDs, the Company produces a broad range of data storage products including solid state drives (“SSDs”), solid state hybrid drives (“SSHDs”) and storage subsystems.
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.
The Company’s HDD products are designed for nearline and mission critical applications in enterprise servers and storage systems; edge non-compute applications, where its products are designed for a wide variety of end user devices such as portable external storage systems, video and image applications, including surveillance systems, network-attached storage (“NAS”), digital video recorders (“DVRs”) and gaming consoles; and edge compute applications, where its products are designed primarily for desktop and mobile computing. The Company’s 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.
The Company’s enterprise data solutions (“EDS”) portfolio includes storage subsystems for enterprises, cloud service providers, scale-out storage servers and original equipment manufacturers (“OEMs”).
Basis of Presentation and Consolidation
The Company’s unaudited condensed consolidated financial statements include the accounts of the Company and all its wholly-owned and majority-owned subsidiaries, after elimination of intercompany transactions and balances.
The preparation of financial statements in accordance with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the Company’s condensed consolidated financial statements and accompanying notes. Actual results could differ materially from those estimates. The methods, estimates and judgments the Company uses in applying its most critical accounting policies have a significant impact on the results the Company reports in its condensed consolidated financial statements.
The Company’s consolidated financial statements for the fiscal year ended June 28, 2019, are included in its Annual Report on Form 10-K, as filed with the United States Securities and Exchange Commission (“SEC”) on August 2, 2019. The Company believes that the disclosures included in these unaudited condensed consolidated financial statements, when read in conjunction with its consolidated financial statements as of June 28, 2019, and the notes thereto, are adequate to make the information presented not misleading.
Fiscal Year
The Company operates and reports financial results on a fiscal year of 52 or 53 weeks ending on the Friday closest to June 30. The three months ended October 4, 2019 consisted of 14 weeks and the three months ended September 28, 2018 consisted of 13 weeks. Fiscal year 2020, which ends on July 3, 2020, is comprised of 53 weeks and fiscal year 2019, which ended on June 28, 2019, is comprised of 52 weeks. The fiscal quarters ended October 4, 2019, June 28, 2019 and September 28, 2018, are also referred to herein as the “September 2019 quarter”, the “June 2019 quarter”, and the “September 2018 quarter”, respectively. The results of operations for the three months ended October 4, 2019 are not necessarily indicative of the results of operations to be expected for any subsequent interim period or for the Company’s fiscal year ending July 3, 2020.
Summary of Significant Accounting Policies
Except for the change in the Company’s other long-lived assets and leases policies described below, there have been no material changes to the Company’s significant accounting policies disclosed in Note 1 - Basis of Presentation and Summary of Significant Accounting Policies of “Financial Statements and Supplementary Data” contained in Part II, Item 8 of the Company’s Annual Report on Form 10-K for the fiscal year ended June 28, 2019, as filed with the SEC on August 2, 2019.


9

Table of Contents

Other Long-Lived Assets
In accordance with its policy, the Company reviews the estimated useful lives of its fixed assets on an ongoing basis. This review indicated that the actual lives of certain manufacturing equipment at its manufacturing facilities were longer than the estimated useful lives used for deprecation purposes in the Company’s condensed consolidated financial statements. As a result, effective June 29, 2019, the Company changed its estimate of the useful lives of its manufacturing equipment from a range of three to five years to a range of three to seven years. The effect of this change in estimate increased the September 2019 quarter net income by $23 million and diluted earnings per share by $0.09.

Leases
Effective June 29, 2019, the Company adopted a new accounting policy for leases in accordance with Accounting Standard Codification (“ASC”) 842, Leases, using the modified retrospective approach. Accordingly, the Company applied the new lease accounting standard prospectively to leases existing or commencing on or after June 29, 2019. The Company elected to apply the practical expedients which allow for not reassessing whether existing contracts contain leases, the classification of existing leases and whether the existing initial direct costs meet the new definition. In addition, the Company elected to combine lease and non-lease components for facility leases and to not recognize right-of-use (“ROU”) assets and lease liabilities for leases with an initial term of 12 months of less on the balance sheet.

The Company determines if an arrangement is a lease or contains a lease at inception. ROU assets are included in Other assets, net and lease liabilities are included in Accrued expenses and Other non-current liabilities on the Company’s Condensed Consolidated Balance Sheets. ROU assets represent the Company’s right to use an underlying asset for the lease term and the corresponding lease liabilities represent its obligation to make lease payments arising from the lease.

Lease liabilities are measured at the present value of the remaining lease payments and ROU assets are based on the lease liability, adjusted for lease prepayments, lease incentives received and the lessee’s initial direct costs. As the Company’s leases do not provide an implicit rate, the net present value of future minimum lease payments is determined using the Company’s estimated incremental borrowing rate based on the information available at the lease commencement date. Additionally, the Company’s lease term may include options to extend or terminate the lease. These options are reflected in the ROU asset and lease liability when it is reasonably certain that the Company will exercise the option. The Company’s lease agreements do not contain any material residual value guarantees.
 
The Company recognizes lease expense on a straight-line basis over the lease term. Variable lease payments not dependent on an index or a rate primarily consist of common area maintenance charges, are expensed as incurred, and are not included in the ROU asset and lease liability calculation. The total operating and variable lease costs were included in operating expenses in the Company’s Condensed Consolidated Statements of Operations.

Recently Adopted Accounting Pronouncements
In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standard Update (“ASU”) 2016-02 (ASC Topic 842), Leases and subsequently issued certain interpretive clarifications on this new guidance which amends a number of aspects of lease accounting, including requiring a lessee to recognize an ROU asset and corresponding lease liability for operating leases and enhanced disclosures. As of June 29, 2019, adoption of the standard resulted in the recognition of ROU assets and corresponding current and non-current lease liabilities of $115 million, $17 million and $57 million, respectively, on the Company’s Condensed Consolidated Balance Sheet, primarily relating to real estate operating leases. The adoption of this ASU did not have a material impact on the Company’s other condensed consolidated financial statements. For information regarding the impact of ASC 842 adoption, see Summary of Significant Accounting Policies - Leases above and Note 5. Leases.

In February 2018, the FASB issued ASU 2018-02 (ASC Topic 220), Income Statement—Reporting Comprehensive Income: Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. This ASU was issued following the enactment of the U.S. Tax Cuts and Jobs Act of 2017 (the “Tax Act”) and permits entities to elect a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Act. This ASU became effective and the Company adopted the guidance in the September 2019 quarter. The Company has elected not to reclassify the stranded amounts. The adoption of this guidance did not have a material impact on its condensed consolidated financial statements and disclosures.

Recently Issued Accounting Pronouncements 
In August 2018, the FASB issued ASU 2018-15 (ASC Subtopic 350-40), Intangibles - Goodwill and Other - Internal-Use Software - Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That is a Service

10

Table of Contents

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 condensed consolidated financial statements.

In June 2016, the FASB issued ASU 2016-13 (ASC Topic 326), Financial Instruments—Credit Losses: Measurement of Credit Losses on Financial Instruments. This ASU amends the requirement on the measurement and recognition of expected credit losses for financial assets held. The Company is required to adopt this guidance in the first quarter of fiscal year 2021. The Company is in the process of assessing the impact of this ASU on its condensed consolidated financial statements.

2.
Balance Sheet Information
Available-for-sale Debt Securities
The following table summarizes, by major type, the fair value and amortized cost of the Company’s investments as of October 4, 2019
(Dollars in millions)
 
Amortized
Cost
 
Unrealized
Gain/(Loss)
 
Fair
Value
Available-for-sale debt securities:
 
 

 
 

 
 

Money market funds
 
$
471

 
$

 
$
471

Time deposits and certificates of deposit
 
351

 

 
351

Other debt securities
 
10

 

 
10

Total
 
$
832

 
$

 
$
832

 
 
 
 
 
 
 
Included in Cash and cash equivalents
 
 

 
 

 
$
820

Included in Other current assets
 
 

 
 

 
2

Included in Other assets, net
 
 
 
 
 
10

Total
 
 

 
 

 
$
832

 
As of October 4, 2019, the Company’s Other current assets included $2 million in restricted cash and investments held as collateral at banks for various performance obligations.
As of October 4, 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 October 4, 2019.
The fair value and amortized cost of the Company’s investments classified as available-for-sale debt securities as of October 4, 2019, by remaining contractual maturity were as follows:
(Dollars in millions)
 
Amortized
Cost
 
Fair
Value
Due in less than 1 year
 
$
822

 
$
822

Due in 1 to 5 years
 
6

 
6

Due in 6 to 10 years
 

 

Thereafter
 
4

 
4

Total
 
$
832

 
$
832



The following table summarizes, by major type, the fair value and amortized cost of the Company’s investments as of June 28, 2019

11

Table of Contents

(Dollars in millions)
 
Amortized
Cost
 
Unrealized
Gain/(Loss)
 
Fair
Value
Available-for-sale 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 and investments held as collateral at banks for various performance obligations.
As of June 28, 2019, the Company had no material available-for-sale securities that had been in a continuous unrealized loss position for a period greater than 12 months. The Company determined no available-for-sale securities were other-than-temporarily impaired as of June 28, 2019.
Cash, Cash Equivalents and Restricted Cash
The following table provides a summary of cash, cash equivalents and restricted cash reported on the Company’s Condensed Consolidated Balance Sheets that reconciles to the corresponding amount in its Condensed Consolidated Statements of Cash Flows:
(Dollars in millions)
 
October 4,
2019
 
June 28,
2019
 
September 28,
2018
 
June 29,
2018
Cash and cash equivalents
 
$
1,784

 
$
2,220

 
$
1,942

 
$
1,853

Restricted cash included in Other current assets
 
2

 
31

 
3

 
4

Total cash, cash equivalents and restricted cash presented on the Statements of Cash Flows
 
$
1,786

 
$
2,251

 
$
1,945

 
$
1,857


Inventories
The following table provides details of the inventory balance sheet item: 
(Dollars in millions)
 
October 4,
2019
 
June 28,
2019
Raw materials and components
 
$
352

 
$
336

Work-in-process
 
305

 
217

Finished goods
 
384

 
417

Total inventories
 
$
1,041

 
$
970


Property, Equipment and Leasehold Improvements, net
The components of property, equipment and leasehold improvements, net, were as follows:
(Dollars in millions)
 
October 4,
2019
 
June 28,
2019
Property, equipment and leasehold improvements
 
$
9,994

 
$
9,835

Accumulated depreciation and amortization
 
(8,003
)
 
(7,966
)
Property, equipment and leasehold improvements, net
 
$
1,991

 
$
1,869

 

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Accrued Expenses
The following table provides details of the accrued expenses balance sheet item: 
(Dollars in millions)
 
October 4,
2019
 
June 28,
2019
Dividends payable
 
$
165

 
$
170

Other accrued expenses
 
399

 
382

Total accrued expenses
 
$
564

 
$
552


Accumulated Other Comprehensive Income (Loss) (“AOCI”)
The components of AOCI, net of tax, were as follows:
(Dollars in millions)
 
Unrealized Gains/(Losses) on Cash Flow Hedges
 
Unrealized Gains/(Losses) on Available-for-Sale Debt Securities
 
Unrealized Gains/(Losses) on Post-Retirement Plans
 
Foreign Currency Translation Adjustments
 
Total
Balance at June 28, 2019
 
$

 
$

 
$
(20
)
 
$
(14
)
 
$
(34
)
Other comprehensive income (loss) before reclassifications
 
(1
)
 

 

 
(5
)
 
(6
)
Amounts reclassified from AOCI
 

 

 

 

 

Other comprehensive income (loss)
 
(1
)
 

 

 
(5
)
 
(6
)
Balance at October 4, 2019
 
$
(1
)
 
$

 
$
(20
)
 
$
(19
)
 
$
(40
)
 
 
 
 
 
 
 
 
 
 
 
Balance at June 29, 2018
 
$

 
$

 
$
(4
)
 
$
(12
)
 
$
(16
)
Other comprehensive income (loss) before reclassifications
 
3

 

 

 
2

 
5

Amounts reclassified from AOCI
 
(1
)
 

 

 

 
(1
)
Other comprehensive income (loss)
 
2

 

 

 
2

 
4

Balance at September 28, 2018
 
$
2

 
$

 
$
(4
)
 
$
(10
)
 
$
(12
)


3.
Debt
Credit Agreement
The Company’s subsidiary, Seagate HDD Cayman, entered into a credit agreement (the “Credit Agreement”) on February 20, 2019, which was most recently amended on September 16, 2019. The Credit Agreement provides an up to $1.5 billion senior unsecured revolving credit facility (Revolving Credit Facility”) and a term loan facility in an aggregate principal amount of $500 million (Term Loan”). The Revolving Credit Facility has a final maturity of February 20, 2024 and the Term Loan has a final maturity date of September 16, 2025. The loans made under the Revolving Credit Facility and the Term Loan will bear interest at a rate of the London Interbank Offered Rate (“LIBOR”) plus a variable margin for each facility that will be determined based on the corporate credit rating of the Company. STX and certain of its material subsidiaries fully and unconditionally guarantee both the Revolving Credit Facility and the Term Loan. The Revolving Credit Facility also allows such facility to increase by an additional $100 million, provided that (i) there has been, and will be after giving effect to such increase, no default, (ii) the increase is at least $25 million, and (iii) the existing commitments under such facility receive 0.50% most favored nation protection. An aggregate amount of up to $75 million of the Revolving Credit Facility is available for the issuance of letters of credit, and an aggregate amount of up to $50 million of such facility is also available for swing line loans.
On September 17, 2019, Seagate HDD Cayman borrowed the $500 million principal amount under the Term Loan and the proceeds were used to repurchase a portion of its outstanding senior notes. The Term Loan is repayable in quarterly installments of 1.25% of the original principal amount beginning on December 31, 2020, with the remaining balance payable upon maturity.
The Credit Agreement includes three financial covenants: (1) interest coverage ratio, (2) total leverage ratio, and (3) a minimum liquidity amount. The Company was in compliance with the covenants as of October 4, 2019 and expects to be in compliance for the next 12 months.


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As of October 4, 2019, no borrowings were drawn and no letters of credit or swing line loans had been utilized under the Revolving Credit Facility.
Other Long-Term Debt
$750 million Aggregate Principal Amount of 4.25% Senior Notes due March 2022 (the “2022 Notes”). The interest on the 2022 Notes is payable semi-annually on March 1 and September 1 of each year. The issuer under the 2022 Notes is Seagate HDD Cayman, and the obligations under the 2022 Notes are fully and unconditionally guaranteed, on a senior unsecured basis, by STX. On September 18, 2019, the principal amount of approximately $250 million was repurchased pursuant to cash tender offers for certain senior notes (the Tender Offers”). The Company recorded a loss of $10 million, which was included in Other, net in the Company’s Condensed Consolidated Statements of Operations.
$1 billion Aggregate Principal Amount of 4.75% Senior Notes due June 2023 (the “2023 Notes”). The interest on the 2023 Notes is payable semi-annually on June 1 and December 1 of each year. The issuer under the 2023 Notes is Seagate HDD Cayman, and the obligations under the 2023 Notes are fully and unconditionally guaranteed, on a senior unsecured basis, by STX. On September 18, 2019, the principal amount of $200 million was repurchased pursuant to the Tender Offers. The Company recorded a loss of $10 million, which was included in Other, net in the Company’s Condensed Consolidated Statements of Operations.
$500 million Aggregate Principal Amount of 4.875% Senior Notes due March 2024 (the “2024 Notes”).The interest on the 2024 Notes is payable semi-annually on March 1 and September 1 of each year. The issuer under the 2024 Notes is Seagate HDD Cayman, and the obligations under the 2024 Notes are fully and unconditionally guaranteed, on a senior unsecured basis, by STX.
$1 billion Aggregate Principal Amount of 4.75% Senior Notes due January 2025 (the “2025 Notes”). The interest on the 2025 Notes is payable semi-annually on January 1 and July 1 of each year. The issuer under the 2025 Notes is Seagate HDD Cayman, and the obligations under the 2025 Notes are fully and unconditionally guaranteed, on a senior unsecured basis, by STX. On September 18, 2019, the principal amount of approximately $170 million was repurchased pursuant to the Tender Offers. The Company recorded a loss of $8 million, which was included in Other, net in the Company’s Condensed Consolidated Statements of Operations.
$700 million Aggregate Principal Amount of 4.875% Senior Notes due June 2027 (the “2027 Notes”). The interest on the Notes is payable semi-annually on June 1 and December 1 of each year. The issuer under the 2027 Notes is Seagate HDD Cayman, and the obligations under the 2027 Notes are fully and unconditionally guaranteed, on a senior unsecured basis, by STX.
$500 million Aggregate Principal Amount of 5.75% Senior Notes due December 2034 (the “2034 Notes”). The interest on the 2034 Notes is payable semi-annually on June 1 and December 1 of each year. The issuer under the 2034 Notes is Seagate HDD Cayman, and the obligations under the 2034 Notes are fully and unconditionally guaranteed, on a senior unsecured basis, by STX.
At October 4, 2019, future principal payments on long-term debt were as follows (in millions):
Fiscal Year
 
Amount
Remainder of 2020
 
$

2021
 
19

2022
 
525

2023
 
766

2024
 
525

Thereafter
 
2,336

Total
 
$
4,171

 
4.
Income Taxes
The Company’s income tax benefit of $2 million for the three months ended October 4, 2019 included approximately $11 million of net discrete tax benefit of which $8 million was associated with net excess tax benefits related to share-based compensation expense.

The Company’s income tax provision recorded for the three months ended October 4, 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 tax benefits related to (i) non-Irish earnings generated in jurisdictions that are subject to tax incentive programs and are considered indefinitely reinvested outside of Ireland and (ii) current year generation of research credits.


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During the three months ended October 4, 2019, the Company’s unrecognized tax benefits excluding interest and penalties increased by approximately $2 million to $85 million. The unrecognized tax benefits that, if recognized, would impact the effective tax rate were $85 million at October 4, 2019, subject to certain future valuation allowance reversals. During the twelve months beginning October 5, 2019, the Company expects that its unrecognized tax benefits could be reduced by an immaterial amount, as a result of expected cash payments to tax authorities.

The Company’s income tax provision of $18 million for the three months ended September 28, 2018 included approximately $1 million of net discrete tax expense.

The Company’s income tax provision recorded for the three months ended September 28, 2018 differed from the provision for income taxes that would be derived by applying the Irish statutory rate of 25% to income before income taxes, primarily due to the net effect of (i) tax benefits related to non-Irish earnings generated in jurisdictions that are subject to tax incentive programs and are considered indefinitely reinvested outside of Ireland and (ii) a decrease in valuation allowance for certain deferred tax assets.

5.
Leases
The Company is a lessee in several operating leases related to real estate facilities for warehouse and office space.
The Company’s lease arrangements comprise operating leases with various expiration dates through 2082. The lease term includes the non-cancelable period of the lease, adjusted for options to extend or terminate the lease when it is reasonably certain that an option will be exercised.
Operating lease costs include short-term lease costs and are shown net of immaterial sublease income. The components of lease costs and other information related to leases were as follows:
(Dollars in millions)
 
For the Three Months Ended October 4, 2019
Operating lease cost
 
$
6

Variable lease cost
 
1

Total lease cost
 
$
7

 
 
 
Operating cash outflows from operating leases
 
$
4

 
 
 
Weighted-average remaining lease term
 
12.8 years

Weighted-average discount rate
 
6.41
%


ROU assets and lease liabilities are included on the Company’s Condensed Consolidated Balance Sheet as follows:
(Dollars in millions)
 
Balance Sheet Location
 
October 4,
2019
ROU assets
 
Other assets, net
 
$
111

Current lease liabilities
 
Accrued expenses
 
$
15

Non-current lease liabilities
 
Other non-current liabilities
 
$
56



At October 4, 2019, future lease payments included in the measurement of lease liabilities were as follows (in millions):

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Fiscal Year
 
Amount
Remainder of 2020
 
$
11

2021
 
15

2022
 
14

2023
 
10

2024
 
5

Thereafter
 
104

Total lease payments
 
159

Less: imputed interest
 
(88
)
Present value of lease liabilities
 
$
71



6.
Restructuring and Exit Costs
For the three months ended October 4, 2019, and September 28, 2018, the Company recorded restructuring charges of approximately $17 million and $23 million, respectively, comprised primarily of charges related to workforce reduction costs and facilities and other exit costs. The Company’s significant restructuring plans are described below. All restructuring charges are reported in Restructuring and other, net on the Company’s Condensed Consolidated Statements of Operations.
December 2017 Plan - On December 8, 2017, the Company committed to a restructuring plan (the “December 2017 Plan”) to reduce its cost structure. The December 2017 Plan included reducing the Company’s global headcount by approximately 500 employees. The December 2017 Plan was substantially completed by the end of fiscal year 2018.
The following table summarizes the Company’s restructuring activities under all of the Company’s active restructuring plans for the three months ended October 4, 2019:
 
 
December 2017 Plan
 
Other Plans
 
 
(Dollars in millions)
 
Workforce Reduction Costs
 
Facilities and Other Exit Costs
 
Workforce Reduction Costs
 
Facilities and Other Exit Costs
 
Total
Accrual balances at June 28, 2019
 
$

 
$
1

 
$
13

 
$
16

 
$
30

Lease adoption adjustment
 

 

 

 
(11
)
 
(11
)
Restructuring charges
 

 

 
17

 

 
17

Cash payments
 

 

 
(13
)
 
(1
)
 
(14
)
Adjustments
 

 

 

 

 

Accrual balances at October 4, 2019
 
$

 
$
1

 
$
17

 
$
4

 
$
22

Total costs incurred to date as of October 4, 2019
 
$
26

 
$
8

 
$
449

 
$
109

 
$
592

Total expected charges to be incurred as of October 4, 2019
 
$

 
$

 
$
1

 
$

 
$
1



7.
Derivative Financial Instruments
The Company is exposed to foreign currency exchange rate, interest rate, and to a lesser extent, equity market risks relating to its ongoing business operations. From time to time, the Company enters into cash flow hedges in the form of foreign currency forward exchange contracts. The objective of foreign currency forward exchange contracts is to manage the foreign currency exchange rate risk on forecasted expenses and investments denominated in foreign currencies.
In the September 2019 quarter, the Company entered into certain interest rate swap agreements with a notional amount of $500 million to convert the variable interest rate on its Term Loan to fixed interest rates. The contracts were effective as of October 4, 2019 and will mature on September 16, 2025. The objective of the interest rate swap agreements is to eliminate the variability of interest payment cash flows associated with variable interest rates. The Company designated the interest rate swaps as cash flow hedges.
The Company’s accounting policies for these instruments are based on whether the instruments are classified as designated or non-designated hedging instruments. The Company records all derivatives on its Condensed Consolidated Balance Sheets at fair value. The changes in the fair value of highly effective designated cash flow hedges are recorded in Accumulated

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other comprehensive loss until the hedged item is recognized in earnings. Derivatives that are not designated as hedging instruments or are not assessed to be highly effective are adjusted to fair value through earnings. The amount of net unrealized loss on cash flow hedges was not material as of October 4, 2019 and as of June 28, 2019.
The Company de-designates its cash flow hedges when the forecasted hedged transactions affect earnings or it is probable the forecasted hedged transactions will not occur in the initially identified time period. At such time, the associated gains and losses deferred in Accumulated other comprehensive loss on the Company’s Condensed Consolidated Balance Sheets are reclassified immediately into earnings and any subsequent changes in the fair value of such derivative instruments are immediately reflected in earnings. The Company did not recognize any material amounts related to the loss of hedge designation on discontinued cash flow hedges during the three months ended October 4, 2019 and September 28, 2018, respectively.
Other derivatives not designated as hedging instruments consist of foreign currency forward exchange contracts that the Company uses to hedge the foreign currency exposure on forecasted expenditures denominated in currency other than the U.S. dollar. The Company recognizes gains and losses on these contracts, as well as the related costs in Other, net on its Condensed Consolidated Statements of Operations. Deferred gains and deferred losses on derivatives are recognized in Other current assets and Accrued expenses, respectively, on the Condensed Consolidated Balance Sheets.
The following tables show the total notional value of the Company’s outstanding foreign currency forward exchange contracts and interest rate swaps as of October 4, 2019 and June 28, 2019. All of the foreign currency forward exchange contracts mature within 12 months.
 
 
As of October 4, 2019
(Dollars in millions)
 
Contracts
Designated as
Hedges
 
Contracts Not
Designated as
Hedges
Singapore Dollar
 
$
58

 
$
46

Chinese Renminbi
 
30

 
30

British Pound Sterling
 

 
6

 
 
$
88

 
$
82

 
 
As of June 28, 2019
(Dollars in millions)
 
Contracts
Designated as
Hedges
 
Contracts Not
Designated as
Hedges
Singapore Dollar
 
$
60

 
$
40

Chinese Renminbi
 
79

 
20

British Pound Sterling
 
6

 
12

 
 
$
145

 
$
72

The Company is subject to equity market risks due to changes in the fair value of the notional investments selected by its employees as part of its Non-qualified Deferred Compensation Plan—the Seagate Deferred Compensation Plan (the “SDCP”). In fiscal year 2014, the Company entered into a Total Return Swap (“TRS”) in order to manage the equity market risks associated with the SDCP liabilities. The Company pays a floating rate, based on LIBOR plus an interest rate spread, on the notional amount of the TRS. The TRS is designed to substantially offset changes in the SDCP liability due to changes in the value of the investment options made by employees. As of October 4, 2019, the notional investments underlying the TRS amounted to $117 million. The contract term of the TRS is through January 2020 and is settled on a monthly basis, therefore limiting counterparty performance risk. The Company does not designate the TRS as a hedge. Rather, the Company records all changes in the fair value of the TRS to earnings to offset the market value changes of the SDCP liabilities.

The following tables show the Company’s derivative instruments measured at gross fair value as reflected on its Condensed Consolidated Balance Sheets as of October 4, 2019 and June 28, 2019:

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Table of Contents

 
 
As of October 4, 2019
 
 
Derivative Assets
 
Derivative Liabilities
(Dollars in millions)
 
Balance Sheet
Location
 
Fair
Value
 
Balance Sheet
Location
 
Fair
Value
Derivatives designated as hedging instruments:
 
 
 
 
 
 
 
 
Foreign currency forward exchange contracts
 
Other current assets
 
$

 
Accrued expenses
 
$
(2
)
Derivatives not designated as hedging instruments:
 
 
 
 
 
 
 
 
Foreign currency forward exchange contracts
 
Other current assets
 

 
Accrued expenses
 
(2
)
Total derivatives
 
 
 
$

 
 
 
$
(4
)
 
 
As of June 28, 2019
 
 
Derivative Assets
 
Derivative Liabilities
(Dollars in millions)
 
Balance Sheet
Location
 
Fair
Value
 
Balance Sheet
Location
 
Fair
Value
Derivatives designated as hedging instruments:
 
 
 
 
 
 
 
 
Foreign currency forward exchange contracts
 
Other current assets
 
$

 
Accrued expenses
 
$

Derivatives not designated as hedging instruments: