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Transcript of SEAGATE TECHNOLOGY PLC - AnnualReports.com
SEAGATE TECHNOLOGY PLC
FORM 10-K(Annual Report)
Filed 08/05/16 for the Period Ending 07/01/16
Telephone (353) (1) 234-3136
CIK 0001137789Symbol STX
SIC Code 3572 - Computer Storage DevicesIndustry Computer Storage Devices
Sector TechnologyFiscal Year 06/28
http://www.edgar-online.com© Copyright 2016, EDGAR Online, Inc. All Rights Reserved.
Distribution and use of this document restricted under EDGAR Online, Inc. Terms of Use.
UsetheselinkstorapidlyreviewthedocumentTABLEOFCONTENTSPARTIV
TableofContents
UNITEDSTATESSECURITIESANDEXCHANGECOMMISSION
Washington,D.C.20549
FORM10-K
SEAGATETECHNOLOGYPUBLICLIMITEDCOMPANY(Exactnameofregistrantasspecifiedinitscharter)
SecuritiesregisteredpursuanttoSection12(b)oftheAct:
TitleofEachClass NameofEachExchangeonWhichRegistered
OrdinaryShares,parvalue$0.00001pershare TheNASDAQGlobalSelectMarket
SecuritiesregisteredpursuanttoSection12(g)oftheAct:None
Indicatebycheckmarkiftheregistrantisawell-knownseasonedissuer,asdefinedinRule405oftheSecuritiesAct.YESýNOo
IndicatebycheckmarkiftheregistrantisnotrequiredtofilereportspursuanttoSection13orSection15(d)oftheSecuritiesExchangeActof1934.YESoNOý
Indicatebycheckmarkwhethertheregistrant(1)hasfiledallreportsrequiredtobefiledbySection13or15(d)oftheSecuritiesExchangeActof1934duringthepreceding12months(orforsuchshorterperiodthattheregistrantwasrequiredtofilesuchreports),and(2)hasbeensubjecttosuchfilingrequirementsforthepast90days.YESýNOo
IndicatebycheckmarkwhethertheregistranthassubmittedelectronicallyandpostedonitscorporateWebsite,ifany,everyInteractiveDataFilerequiredtobesubmittedandpostedpursuanttoRule405ofRegulationS-T(§229.405ofthischapter)duringthepreceding12months(orforsuchshorterperiodthatthe
(MarkOne)
ý ANNUALREPORTPURSUANTTOSECTION13OR15(d)OFTHESECURITIESEXCHANGEACTOF1934
ForthefiscalyearendedJuly1,2016OR
o TRANSITIONREPORTPURSUANTTOSECTION13OR15(d)OFTHESECURITIESEXCHANGEACTOF1934
ForthetransitionperiodfromtoCommissionFileNo.001-31560
Ireland 98-0648577(Stateorotherjurisdictionofincorporationororganization)
(I.R.S.EmployerIdentificationNumber)
38/39FitzwilliamSquareDublin2,Ireland
(Addressofprincipalexecutiveoffices)
Registrant'stelephonenumber,includingareacode:(353)(1)234-3136
registrantwasrequiredtosubmitandpostsuchfiles).YESýNOo
IndicatebycheckmarkifdisclosureofdelinquentfilerspursuanttoItem405ofRegulationS-K(§229.405ofthischapter)isnotcontainedherein,andwillnotbecontained,tothebestofregistrant'sknowledge,indefinitiveproxyorinformationstatementsincorporatedbyreferenceinPartIIIofthisForm10-KoranyamendmenttothisForm10-K.ý
Indicatebycheckmarkwhethertheregistrantisalargeacceleratedfiler,anacceleratedfiler,anon-acceleratedfiler,orasmallerreportingcompany.Seethedefinitionsof"largeacceleratedfiler,""acceleratedfiler"and"smallerreportingcompany"inRule12b-2oftheExchangeAct.(Checkone):
Indicatebycheckmarkwhethertheregistrantisashellcompany(asdefinedinRule12b-2oftheExchangeAct).YESoNOý
Theaggregatemarketvalueofthevotingandnon-votingordinarysharesheldbynon-affiliatesoftheregistrantasofJanuary1,2016,thelastbusinessdayoftheregistrant'smostrecentlycompletedsecondfiscalquarter,wasapproximately$11.0billionbasedupontheclosingpricereportedforsuchdatebytheNASDAQ.
ThenumberofoutstandingordinarysharesoftheregistrantasofJuly29,2016was298,609,231.
DOCUMENTSINCORPORATEDBYREFERENCE
PortionsofthedefinitiveproxystatementtobefiledwiththeSecuritiesandExchangeCommissionpursuanttoRegulation14Arelatingtotheregistrant'sAnnualGeneralMeetingofShareholders,tobeheldonOctober19,2016,willbeincorporatedbyreferenceinthisForm10-KinresponsetoItems10,11,12,13and14ofPartIII.ThedefinitiveproxystatementwillbefiledwiththeSECnolaterthan120daysaftertheregistrant'sfiscalyearendedJuly1,2016.
Largeacceleratedfilerý Acceleratedfilero Non-acceleratedfilero(Donotcheckifa
smallerreportingcompany)
Smallerreportingcompanyo
TableofContents
SEAGATETECHNOLOGYPLC
TABLEOFCONTENTS
Item PageNo. PARTI
1.
Business 5
1A.
RiskFactors 18
1B.
UnresolvedStaffComments 36
2.
Properties 37
3.
LegalProceedings 37
4.
MineSafetyDisclosures 37
PARTII
5.
MarketforRegistrant'sCommonEquity,RelatedStockholderMattersandIssuerPurchasesofEquitySecurities
38
6.
SelectedFinancialData 41
7.
Management'sDiscussionandAnalysisofFinancialConditionandResultsofOperations 43
7A.
QuantitativeandQualitativeDisclosuresAboutMarketRisk 60
8.
FinancialStatementsandSupplementaryData 63
9.
ChangesinandDisagreementswithAccountantsonAccountingandFinancialDisclosure 117
9A.
ControlsandProcedures 117
9B.
OtherInformation 118
PARTIII
10.
Directors,ExecutiveOfficersandCorporateGovernance 119
11.
ExecutiveCompensation 119
12.
SecurityOwnershipofCertainBeneficialOwnersandManagementandRelatedStockholderMatters 119
2
13. CertainRelationshipsandRelatedTransactions,andDirectorIndependence 119
14.
PrincipalAccountantFeesandServices 119
PARTIV
15.
ExhibitsandFinancialStatementSchedules 120
SIGNATURES
121
EXHIBITINDEX
123
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PRESENTATIONOFFINANCIALANDOTHERINFORMATION
InthisAnnualReportonForm10-K(the"Form10-K"),unlessthecontextindicatesotherwise,asusedherein,theterms"we,""us,""Seagate,"the"Company"and"our"refertoSeagateTechnologypubliclimitedcompany("plc"),anIrishpubliclimitedcompany,anditssubsidiaries.Referencesto"$"aretoUnitedStatesdollars.
WehavecompiledthemarketsizeinformationinthisForm10-Kusingstatisticsandotherinformationobtainedfromseveralthird-partysources.
VariousamountsandpercentagesusedinthisForm10-Khavebeenroundedand,accordingly,theymaynottotal100%.
Seagate,SeagateTechnology,Lacie,Xyratex,DotHill,theSpiralLogo,aretrademarksorregisteredtrademarksofSeagateTechnologyLLCoroneofitsaffiliatedcompaniesintheUnitedStatesand/orothercountries.Allothertrademarksorregisteredtrademarksarethepropertyoftheirrespectiveowners.
CAUTIONARYNOTEREGARDINGFORWARD-LOOKINGSTATEMENTS
SomeofthestatementsandassumptionsincludedinthisAnnualReportonForm10-Kareforward-lookingstatementswithinthemeaningofSection27AoftheSecuritiesActof1933orSection21EoftheSecuritiesExchangeActof1934,eachasamended,including,inparticular,statementsaboutourplans,strategiesandprospectsandestimatesofindustrygrowthforthefiscalquarterendingSeptember30,2016andthefiscalyearendingJune30,2017andbeyond.Thesestatementsidentifyprospectiveinformationandmayincludewordssuchas"expects,""intends,""plans,""anticipates,""believes,""estimates,""predicts,""projects"andsimilarexpressions.Theseforward-lookingstatementsarebasedoninformationavailabletotheCompanyasofthedateofthisAnnualReportonForm10-Kandarebasedonmanagement'scurrentviewsandassumptions.Theseforward-lookingstatementsareconditioneduponandalsoinvolveanumberofknownandunknownrisks,uncertaintiesandotherfactorsthatcouldcauseactualresults,performanceoreventstodiffermateriallyfromthoseanticipatedbytheseforward-lookingstatements.Suchrisks,uncertaintiesandotherfactorsmaybebeyondourcontrolandmayposearisktoouroperatingandfinancialcondition.Suchrisksanduncertaintiesinclude,butarenotlimitedto:
• theuncertaintyinglobaleconomicconditions;
• theimpactofvariabledemandandtheadversepricingenvironmentfordiskdrives,particularlyinviewofcurrentbusinessandeconomicconditions;
• theCompany'sabilitytosuccessfullyqualify,manufactureandsellitsdiskdriveproductsinincreasingvolumesonacost-effectivebasisandwithacceptablequality,particularlythenewdiskdriveproductswithlowercoststructures;
• theimpactofcompetitiveproductannouncements;
• theCompany'sabilitytoachieveprojectedcostsavingsinconnectionwithrestructuringplans
• fluctuationsininterestratescurrencyfluctuationsthatmayimpacttheCompany'smarginsandinternationalsales;
• possibleexcessindustrysupplywithrespecttoparticulardiskdriveproducts;
• disruptionstoitssupplychainorproductioncapabilities;
• unexpectedadvancesincompetingtechnologies;
• thedevelopmentandintroductionofproductsbasedonnewtechnologiesandexpansionintonewdatastoragemarkets;and
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• cyber-attacksorotherdatabreachesthatdisruptitsoperationsorresultsinthedisseminationofproprietaryorconfidentialinformation.
Informationconcerningrisks,uncertaintiesandotherfactorsthatcouldcauseresultstodiffermateriallyfromthoseprojectedinsuchforward-lookingstatementsisalsosetforthin"Item1A.RiskFactors"ofthisAnnualReportonForm10K,whichweencourageyoutocarefullyread.Theseforward-lookingstatementsshouldnotberelieduponasrepresentingourviewsasofanysubsequentdateandweundertakenoobligationtoupdateforward-lookingstatementstoreflecteventsorcircumstancesafterthedatetheyweremade.
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PARTI
ITEM1.BUSINESS
Wearealeadingproviderofelectronicdatastoragetechnologyandsolutions.Ourprincipalproductsareharddiskdrives,commonlyreferredtoasdiskdrives,harddrivesorHDDs.InadditiontoHDDs,weproduceabroadrangeofelectronicdatastorageproductsincludingsolidstatehybriddrives("SSHD"),solidstatedrives("SSD"),PCIecardsandSATAcontrollers.Ourstoragetechnologyportfolioalsoincludesstoragesubsystems,andhighperformancecomputing("HPC")solutions.
Harddiskdrivesaredevicesthatstoredigitallyencodeddataonrapidlyrotatingdiskswithmagneticsurfaces.Diskdrivescontinuetobetheprimarymediumofmassdatastorageduetotheirperformanceattributes,highqualityandcosteffectiveness.Complementingexistingdatacenterstoragearchitecture,solid-statestoragedevicesuseintegratedcircuitassembliesasmemorytostoredata,andmostSSDsuseNAND-basedflashmemory.InadditiontoHDDsandSSDs,SSHDscombinethefeaturesofSSDsandHDDsinthesameunit,containingalargeharddiskdriveandanSSDcachetoimproveperformanceoffrequentlyaccesseddata.
Ourproductsaredesignedformissioncriticalandnearlineapplicationsinenterpriseserversandstoragesystems;clientcomputeapplications,whereourproductsaredesignedprimarilyfordesktopandmobilecomputing;andclientnon-computeapplications,whereourproductsaredesignedforawidevarietyofenduserdevicessuchasdigitalvideorecorders("DVRs"),personaldatabackupsystems,portableexternalstoragesystems,digitalmediasystemsandsurveillancesystems.
OurCloudSystemsandSolutionsbuildsontheSeagatelegacytoextendinnovationfromthedeviceintotheinformationinfrastructure,onsiteandinthecloud.OurapproachtodatamanagementsupportsHPC,opensourceandsoftware-definedsolutions.OurportfolioincludesHPCstoragesolutions,modularoriginalequipmentmanufacturers("OEM")storagesystemsandscale-outstoragesystems.
IndustryOverview
ElectronicDataStorageIndustry
Theelectronicdatastorageindustryiscomprisedofcompaniesthatmanufacturecomponentsorsubcomponentsdesignedforelectronicdatastoragedevicesandcompaniesthatprovidestoragesolutions,softwareandservicesforenterprisecloud,bigdataandcomputingplatforms.
Markets
Theprincipalmarketsservedbytheelectronicdatastorageindustryare:
EnterpriseStorage.Wedefineenterprisestorageasdedicatedstorageareanetworksandhyperscalecloudstorageenvironments.Enterprisedatacentersrunsolutionswhicharedesignedformissioncriticalperformanceandnearlinehighcapacityapplications.
Missioncriticalapplicationsaredefinedasthosethatarevitaltotheoperationoflarge-scaleenterpriseworkloads,requiringhighperformanceandhighreliabilitystoragesolutions.Weexpectthemarketformissioncriticalenterprisestoragesolutionstocontinuetobedrivenbyenterprisesutilizingdedicatedstorageareanetworks.Ourstoragesolutionsarecomprisedprincipallyofhighperformanceenterpriseclassdiskdriveswithsophisticatedfirmwareandcommunicationstechnologies.
Nearlineapplicationsaredefinedasthosewhichrequirehighcapacityandenergyefficientstoragesolutions.Weexpectsuchapplications,whichincludestorageforcloudcomputing,contentdeliveryandbackupservices,willcontinuetogrowanddrivedemandforsolutionsdesignedwiththeseattributes.Withtheincreasedrequirementsforstoragedrivenbythecreationandconsumptionofmedia-richdigital
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content,weexpecttheincreasedexabytedemandwillrequirefurtherbuild-outofdatacentersbycloudserviceprovidersandotherenterpriseswhichutilizehighcapacitynearlinedevices.
EnterpriseSASSSDsaredesignedtodeliversuperiorperformance,reliabilityandenterprisefeaturestomeetthedemandsofI/O-intensiveapplications,withpotentialforsubstantialpowersavings.PCIeacceleratorcardsaredesignedtooptimizeenterpriseapplicationswithapersistent,high-performance,high-capacitymemorydesign.Acceleratedflashalsotargetsflashandsoftwaretoaccelerateanyservervirtualizeddeploymentandmovesanybigdatatotherealmofrealtime.Fromindustrysolutionsperspective,PCIecardsarechangingthestoragearchitectureinmanyindustriesincludingthefinancialsector,government,telecommunicationsandmediaandentertainment.
ClientCompute.Wedefineclientcomputeapplicationsassolutionsdesignedfordesktopandmobilecomputeapplicationsrangingfromtraditionallaptops,tabletsandconvertiblesystems.Webelievethatthedemandresultingfromtheproliferationofdigitalcontentwillcontinuetomaintaindemandfortheclientcomputemarket.Asthestorageofdigitalcontentinthecloudbecomesmoreprominentandaccessible,someclientcomputeapplicationsrelylessonbuilt-instorage,whichissupplementedbycloudcomputingsolutionsandbrandedexternalharddrives.
ClientNon-Compute.Wedefineclientnon-computeapplicationsassolutionsdesignedforconsumerelectronicdevicesanddiskdrivesusedforexternalstorageandnetworkattachedstorage("NAS").DiskdrivesdesignedforconsumerelectronicdevicesareprimarilyusedinapplicationssuchasDVRsandsurveillancesystemsthatrequireahighercapacity,lowcost-per-gigabytestoragesolution.DiskdrivesforexternalstorageandNASdevicesaredesignedforpurposessuchaspersonaldatabackupandportableexternalstorage,andtoaugmentstoragecapacityintheconsumer'scurrentdesktop,notebook,tabletorDVRdevices.Webelievetheproliferationandpersonalcreationofmedia-richdigitalcontentwillcontinuetocreateincreasingconsumerdemandforhighercapacitystoragesolutions.
CloudSystemsandSolutions.WedefinecloudsystemsandsolutionsasapplicationsthatprovidecloudbasedsolutionstobusinessesforthepurposeofHPC,scale-outstoragesolutionsandmodularsystems.SystemscancontainHDDsandSSDsandcanofferfilemanagementsystems,software,andevencomputepower.
Participantsintheelectronicdatastorageindustryinclude:
Majorsubcomponentmanufacturers.Companiesthatmanufacturecomponentsorsubcomponentsusedinelectronicdatastoragedevicesorsolutionsincludecompaniesthatsupplyspindlemotors,headsandmedia,applicationspecificintegratedcircuits("ASICs").
Hardwarestoragesolutionsmanufacturers.CompaniesthattransformcomponentsintostorageproductsincludediskdrivemanufacturersandsemiconductorstoragemanufacturerswhichincludeintegratingflashmemoryintostorageproductssuchasSSDs.
Systemintegrators.Companies,suchasOEMs,thatbundleandpackagestoragesolutionsintoclientcompute,clientnon-computeorenterpriseapplicationsaswellasenterprisestoragesolutions.Distributorsthatintegratestoragehardwareandsoftwareintoend-userapplicationsandCloudServiceProviders("CSP")thatprovidecloudbasedsolutionstobusinessesforthepurposeofHPC,scale-outstoragesolutionsandmodularsystemsthatarealsoincludedinthiscategory.
Storageservices.Companiesthatprovideandhostservicesandsolutions,whichincludestorage,backup,archiving,recoveryanddiscoveryofelectronicdata.
HyperscaleDataCenters.Increasingly,largehyperscaledatacentercompaniesaredesigningtheirownstoragesubsystemsandhavingthosebuiltbycontractmanufacturersforuseinsidetheirowndatacenters.Thistrendisreshapingthestoragesystemandsubsystemmarketanddrivinginnovationinsystemdesignandchangesinthecompetitivelandscapeofthelargestoragesystemvendors.
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DemandforElectronicDataStorage
Thecontinuedadvancementofthecloud,theproliferationofavarietyofmobiledevicesglobally,developmentoftheInternetofThings("IoT"),increasinglypervasiveuseofvideosurveillance,evolutionofconsumerelectronicdevices,andenterpriseuseofbigdataanalyticsaredrivingthegrowthofdigitalcontent.Factorscontributingtothisgrowthinclude:
• Creation,sharing,andconsumptionofmedia-richdigitalcontent,suchashigh-resolutionphotos,highdefinitionvideo,anddigitalmusicthroughsmartphones,tablets,digitalcameras,personalvideocameras,DVRs,gamingconsolesorotherdigitaldevices;
• Creation,aggregationanddistributionofdigitalcontentthroughservicesandotherofferingssuchasFacebook®,Instagram®,iTunes®,Netflix®,Google®andYouTube®;
• Newsurveillancesystemswhichfeaturehigherresolutiondigitalcamerasandthusrequirelargerdatastoragecapacities;
• CreationandcollectionofdatathroughtheevolutionoftheIoTecosystem,bigdataanalyticsandnewtechnologytrendssuchasself-drivingcarsanddrones;
• Buildoutoflargenumbersofclouddatacentersbycloudserviceprovidersandprivatecompaniestransitioningon-sitedatacentersintothecloud;
• Protectionofincreaseddigitalcontentthroughredundantstorageonbackupdevicesandexternallyprovidedstorageservices.
Asaresultofthesefactors,thenatureandvolumeofcontentbeingcreatedrequiresgreaterstorage,whichismoreefficientlyandeconomicallyfacilitatedbyhighercapacitystoragedevicesinordertostore,manage,distribute,analyzeandbackupsuchcontent.Weexpectthistosupportthegrowthindemandforelectronicdatastoragesolutionsindevelopedandemergingeconomieswellintothefuture.
Theamountofdatacreatedaswellaswhereandhowdataisstoredcontinuestoevolvewiththeproliferationofmobiledevices,thegrowthofcloudcomputing,andtheevolvingIoT.Inaddition,theeconomicsofstorageinfrastructurearealsoevolvingwiththeutilizationofpublicandprivatehyper-scalestorageandopen-sourcesolutionsreducingthetotalcostofownershipofstoragewhileincreasingthespeedandefficiencywithwhichcustomerscanleveragemassivecomputingandstoragedevices.Accordingly,weexpectthesetrendswillcontinuetocreatesignificantdemandforelectronicdatastoragesolutionsgoingforward.
DemandTrendsforDiskDrives
Webelievethatcontinuedgrowthindigitalcontentrequiresincreasinglyhigherstoragecapacityinordertostore,aggregate,host,distribute,analyze,manage,backupandusesuchcontent.Wealsobelievethatasarchitecturesevolvetoservethegrowingcommercialandconsumeruserbasethroughouttheworld,themannerwhichharddrivesaredeliveredtomarketandutilizedbyourcustomerswillevolveaswell.
Webelievethatintheforeseeablefuturethetraditionalenterpriseandclientcomputemarketsthatrequirehighcapacitystoragesolutions,andthedataintensiveclientnon-computemarketswillcontinuetobebestservedbyharddiskdrivesduetotheindustry'sabilitytodeliverthemostcosteffective,reliableandenergyefficientmassstoragedevices.Furthermore,theincreaseduseofclientnon-computedevicesthatbothconsumemedia-richdigitalcontentstreamedfromthecloudandcreaterichdigitalcontentthatisstoredinthecloud,increasesthedemandforhighcapacityharddiskdrivesinenterpriseNearlineapplications.
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Wealsobelievethatasharddiskdrivecapacitiescontinuetoincrease,unitdemanddoesnotreflecttheincreaseinExabytesdemand.Inrecentyears,thistrendhasresultedindemandforfewerunits,butwithhigheraveragecapacityperdrive.
IndustrySupplyBalance
FromtimetotimetheHDDindustryhasexperiencedperiodsofimbalancebetweensupplyanddemand.Totheextentthatthediskdriveindustrybuildsormaintainscapacitybasedonexpectationsofdemandthatdonotmaterialize,priceerosionmaybecomemorepronounced.Conversely,duringperiodswheredemandexceedssupply,priceerosionisgenerallymuted.
OurBusiness
DiskDriveTechnology
Thedesignandmanufacturingofdiskdrivesdependsonhighlyadvancedtechnologyandmanufacturingtechniquesandthereforerequireshighlevelsofresearchanddevelopmentspendingandcapitalequipmentinvestments.Wedesign,fabricateandassembleanumberofthemostimportantcomponentsfoundinourdiskdrives,includingread/writeheadsandrecordingmedia.Ourdesignandmanufacturingoperationsarebasedontechnologyplatformsthatareusedtoproducevariousdiskdriveproductsthatservemultipledatastorageapplicationsandmarkets.Ourcoretechnologyplatformsarefocusedaroundthearealdensityofmediaandread/writeheadtechnologies.Usinganintegratedplatformdesignandmanufacturingleverageapproachallowsustodeliveraportfolioofdiskdriveproductstoserviceawiderangeofelectronicdatastorageapplicationsandindustries.
Diskdrivesthatwemanufacturearecommonlydifferentiatedbythefollowingkeycharacteristics:
• storagecapacity,commonlyexpressedingigabytes("GB")orterabytes("TB"),whichistheamountofdatathatcanbestoredonthediskdrive;
• spindlerotationspeed,commonlyexpressedinrevolutionsperminute("RPM"),whichhasaneffectonspeedofaccesstodata;
• interfacetransferrate,commonlyexpressedinmegabytespersecond,whichistherateatwhichdatamovesbetweenthediskdriveandthecomputercontroller;
• averageseektime,commonlyexpressedinmilliseconds,whichisthetimeneededtopositiontheheadsoveraselectedtrackonthedisksurface;
• datatransferrate,commonlyexpressedinmegabytespersecond,whichistherateatwhichdataistransferredtoandfromthediskdrive;
• input/outputoperationspersecond("IOPS"),commonlyexpressedinmegabytespersecond,whichisthemaximumnumberofreadsandwritestoastoragelocation;
• productqualityandreliability,commonlyexpressedinannualizedreturnrates;and
• energyefficiency,commonlymeasuredbythepoweroutputnecessarytooperatethediskdrive.
Arealdensityisameasureofstoragecapacitypersquareinchontherecordingsurfaceofadisk.Thestoragecapacityofadiskdriveisdeterminedbythenumberofdisksitcontainsaswellasthearealdensitycapabilityofthesedisks.Wehavebeenpursuing,andwillcontinuetopursue,anumberoftechnologiestoincreasearealdensitiesacrosstheentirerangeofourproductsforexpandingdiskdrivecapacitiesandreducingthenumberofdisksandheadsperdrivetofurtherreduceproductcosts.
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Manufacturing
Wedesignandproduceourownread/writeheadsandrecordingmedia,whicharecriticaltechnologiesfordiskdrives.Thisintegratedapproachenablesustolowercostsandtoimprovethefunctionalityofcomponentssothattheyworktogetherefficiently.
Webelievethatbecauseofourverticaldesignandmanufacturingstrategy,wearewellsuitedtotakeadvantageoftheopportunitiestoleveragethecloseinterdependenceofcomponentsfordiskdrives.Ourmanufacturingefficiencyandflexibilityarecriticalelementsofourintegratedbusinessstrategy.Wecontinuouslyseektoimproveourmanufacturingefficiencyandreducemanufacturingcostby:
• employingmanufacturingautomation;
• improvingproductqualityandreliability;
• integratingoursupplychainwithsuppliersandcustomerstoenhanceourdemandvisibilityandreduceourworkingcapitalrequirements;
• coordinatingbetweenourmanufacturinggroupandourresearchanddevelopmentorganizationtorapidlyachievevolumemanufacturing;and
• operatingourfacilitiesatoptimalcapabilities.
Averticallyintegratedmodel,however,tendstohavelessflexibilitywhendemandmoderatesasitexposesustohigherunitcostsascapacityutilizationisnotoptimized.
ComponentsandRawMaterials
Diskdrivesincorporatecertaincomponents,includingaheaddiskassemblyandaprintedcircuitboardmountedtotheheaddiskassembly,whicharesealedinsidearigidbaseandtopcovercontainingtherecordingcomponentsinacontaminationcontrolledenvironment.Wemaintainahighlyintegratedapproachtoourbusinessbydesigningandmanufacturingasignificantportionofthecomponentsweviewascriticaltoourproducts,suchasrecordingheadsandmedia.
Read/WriteHeads.Thefunctionoftheread/writeheadistoscanacrossthediskasitspins,magneticallyrecordingorreadinginformation.Thetolerancesofrecordingheadsareextremelydemandingandrequirestate-of-the-artequipmentandprocesses.Ourread/writeheadsaremanufacturedwiththin-filmandphotolithographicprocessessimilartothoseusedtoproducesemiconductorintegratedcircuits,thoughchallengesinmagneticfilmpropertiesandtopographicalstructuresareuniquetothediskdriveindustry.Weperformallprimarystagesofdesignandmanufactureofread/writeheadsatourfacilities.Weuseacombinationofinternallymanufacturedandexternallysourcedread/writeheads,themixofwhichvariesbasedonproductmix,technologyandourinternalcapacitylevels.
Media.Informationiswrittentothemedia,ordisk,asitrotatesatveryhighspeedspasttheread/writehead.Themediaismadefromnon-magneticmaterial,usuallyaluminumalloyorglass,andiscoatedwiththinlayersofmagneticmaterials.Weuseacombinationofinternallymanufacturedandexternallysourcedfinishedmediaandaluminumsubstrates,themixofwhichvariesbasedonproductmix,technologyandourinternalcapacitylevels.Wepurchaseallofourglasssubstratesfromthirdparties.
PrintedCircuitBoardAssemblies.Theprintedcircuitboardassemblies("PCBAs")arecomprisedofstandardandcustomASICsandancillaryelectroniccontrolchips.TheASICscontrolthemovementofdatatoandfromtheread/writeheadsandthroughtheinternalcontrollerandinterface,whichcommunicateswiththehostcomputer.TheASICsandcontrolchipsformelectroniccircuitrythatdeliversinstructionstoaheadpositioningmechanismcalledanactuatortoguidetheheadstotheselectedtrackofadiskwherethedataisrecordedorretrieved.Diskdrivemanufacturersuseoneormoreindustrystandardinterfacessuchasserialadvancedtechnologyarchitecture("SATA");smallcomputersysteminterface
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("SCSI");serialattachedSCSI("SAS");orFibreChannel("FC")tocommunicatetothehostsystems.WeoutsourcetothirdpartiesthemanufactureandassemblyofthePCBAsusedinourdiskdrives.WedonotmanufactureanyASICs,butweparticipateintheirproprietarydesign.
HeadDiskAssembly.Theheaddiskassemblyconsistsofoneormoredisksattachedtoaspindleassemblypoweredbyaspindlemotorthatrotatesthedisksatahighconstantspeedaroundahub.Read/writeheads,mountedonanarmassembly,similarinconcepttothatofarecordplayer,flyextremelyclosetoeachdisksurfaceandrecorddataonandretrieveitfromconcentrictracksinthemagneticlayersoftherotatingdisks.Theread/writeheadsaremountedverticallyonanE-shapedassembly("E-block")thatisactuatedbyavoice-coilmotortoallowtheheadstomovefromtracktotrack.TheE-blockandtherecordingmediaaremountedinsidetheheaddiskassembly.Wepurchasespindlemotorsfromoutsidevendorsandfromtimetotimeparticipateinthedesignofthemotorsthatgointoourproducts.Weuseacombinationofinternallymanufacturedandexternallysourcedheaddiskassemblies.
DiskDriveAssembly.Followingthecompletionoftheheaddiskassembly,itismatedtothePCBA,andthecompletedunitgoesthroughextensivedefectmappingandtestingpriortopackagingandshipment.DiskdriveassemblyandtestoperationsoccurprimarilyatfacilitieslocatedinChinaandThailand.WeperformsubassemblyandcomponentmanufacturingoperationsatourfacilitiesinChina,Malaysia,NorthernIreland,Singapore,ThailandandintheUnitedStates.Inaddition,thirdpartiesmanufactureandassemblecomponentsanddiskdriveassembliesforusinvariouscountriesworldwide.
SuppliersofComponentsandIndustryConstraints.Therearealimitednumberofindependentsuppliersofcomponents,suchasrecordingheadsandmedia,availabletodiskdrivemanufacturers.Verticallyintegrateddiskdrivemanufacturers,whomanufacturetheirowncomponents,arelessdependentonexternalcomponentsuppliersthanlessverticallyintegrateddiskdrivemanufacturers.
CommodityandOtherManufacturingCosts.Theproductionofdiskdrivesrequiresrareearthelements,preciousmetals,scarcealloysandindustrialcommodities,whicharesubjecttofluctuationsinpricesandthesupplyofwhichhasattimesbeenconstrained.Inadditiontoincreasedcostsofcomponentsandcommodities,volatilityinfuelcostsmayalsoincreaseourcostsrelatedtocommodities,manufacturingandfreight.Asaresult,wemayincreaseouruseofoceanshipmentstohelpoffsetanyincreaseinfreightcosts.
Products
Weofferabroadrangeofstoragesolutionsfortheenterprise,datacenter,clientcomputeandclientnon-computeapplications.Weoffermorethanoneproductwithineachproductcategoryanddifferentiateproductsonthebasisofprice,performance,formfactor,capacity,interface,powerconsumptionefficiency,securityfeatures,andothercustomerintegrationrequirements.Ourindustryischaracterizedbycontinuousandsignificantadvancesintechnologywhichcontributetorapidproductlifecycles.Welistourmaincurrentproductofferingsbelow.
EnterpriseStorage
EnterprisePerformanceHDDs.Our10,000and15,000RPMEnterprisePerformancediskdrivesfeatureincreasedthroughputandimprovedenergyefficiency,targetedathighrandomperformanceserverapplicationneeds.Performance10,000RPMHDDsshipinstoragecapacitiesrangingfrom300GBto1.8TB,andour15,000RPMHDDsshipinstoragecapacitiesrangingfrom146GBto600GB.
EnterpriseCapacityandArchiveHDDs.OurEnterpriseCapacitydiskdrivesshipin2.5-inchand3.5-inchformfactorsandinstoragecapacitiesofupto10TBthatrotateat7,200RPMspeeds.Theseproductsaredesignedforbulkdatastorageandserverenvironmentsthatrequirehighcapacity,enterprisereliability,energyefficiency,integratedsecurity,andSATAandSASinterfaces.OurArchiveHDDs
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provideupto8TBoflow-coststoragedesignedspecificallyforactivearchivestorageenvironmentsinclouddatacenterswhereverylowcostandpowerareparamount.
EnterpriseSSDs.Availableincapacitiesupto3.8TB,theSSDfeatures12GBpersecondSAS,anddeliversthespeedandconsistencyneededfordemandingenterprisestorageandserverapplications.WealsoofferourNytrofamilyofacceleratorcardswithcapacitiesupto4TB.
ClientCompute
DesktopHDDsandSSHDs.Our3.5-inchdesktopdrivesshipinbothtraditionalHDDandSSHDconfigurationsandofferupto8TBofcapacity.Desktopdrivesaredesignedforapplicationssuchaspersonalcomputersandworkstations.
MobileHDDsandSSHDs.Ourfamilyoflaptopdrivesshipinavarietyofformfactors(5mmto9.5mmdriveheight),capacities(upto4TB)andtechnologies(HDDandSSHD)tosupportmobileneeds.Usedinapplicationsrangingfromtraditionallaptops,convertiblesystemsandexternalstorage,ourdrivesarebuilttoaddressarangeofperformanceneedsandsizesforaffordable,highcapacitystorage.
ClientNon-Compute
VideoHDDs.OurVideoHDDsareusedinvideoapplicationslikeDVR'sandmediacenters.Thesediskdrivesareoptimizedforvideostreaminginalways-onapplicationswithcapacitiesupto4TBtosupportleading-edgedigitalentertainment.
SurveillanceHDDs.Oursurveillancedrivesarebuilttosupportthehigh-writeworkloadofanalways-on,always-recordingvideosurveillancesystem.Thesesurveillanceoptimizeddrivesarebuilttosupportthegrowingneedsofthesurveillancemarketwithsupportformultipleharddrive("HD")streamsandcapacitiesupto10TB.
NASHDDs.OurNASdrivesarebuilttosupporttheperformanceandreliabilitydemandedbysmallandmediumbusinesses,andincorporateinterfacesoftwarewithcustom-builterrorrecoverycontrols,powersettings,andvibrationtolerance.OurNASHDDsolutionsareavailableincapacitiesupto10TB.
BrandedSolutions.OurexternalbackupstoragesolutionsareshippedundertheBackupPlusandExpansionproductlines,aswellasundertheMaxtorandLaCiebrandnames.Theseproductlinesareavailableincapacitiesupto48TB,respectively.OurSeagateandLaCieWirelessdrivesprovidetabletandsmartphoneuserswithadditionalstorageformediacontent,withcapacitiesupto2TB.OurNASandPersonalCloudsolutionsprovidecentralizednetworkstorageincapacitiesupto32TBandsecure,anywherefileaccessforuserson-the-go.
Customers
WesellourproductstomajorOEMs,distributorsandretailers.
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Thefollowingtablesummarizesourrevenuebychannelandbygeography:
OEMcustomerstypicallyenterintomasterpurchaseagreementswithus.Theseagreementsprovideforpricing,volumediscounts,orderleadtimes,productsupportobligationsandothertermsandconditionsincludingsalesprogramsofferedtopromoteselectedproducts.Deliveriesarescheduledonlyafterreceiptofpurchaseorders.Inaddition,withlimitedlead-time,customersmaydefermostpurchaseorderswithoutsignificantpenalty.AnticipatedordersfrommanyofourcustomershaveinthepastfailedtomaterializeorOEMdeliveryscheduleshavebeendeferredoralteredasaresultofchangesintheirbusinessneeds.
Ourdistributorsgenerallyenterintonon-exclusiveagreementsfortheresaleofourproducts.Theytypicallyfurnishuswithanon-bindingindicationoftheirnear-termrequirementsandproductdeliveriesaregenerallyscheduledaccordingly.Theagreementsandrelatedsalesprogramstypicallyprovidethedistributorswithlimitedrightofreturnandpriceprotectionrights.Inaddition,weoffersalesprogramstodistributorsonaquarterlyandperiodicbasistopromotethesaleofselectedproductsinthesaleschannel.
Ourretailchannelconsistsofourbrandedstorageproductssoldtoretailerseitherbyusdirectlyorbyourdistributors.Retailsalesmadebyusorourdistributorstypicallyrequiregreatermarketingsupport,salesincentivesandpriceprotectionperiods.
Infiscalyears2016,2015and2014,DellInc.accountedforapproximately12%,14%and13%ofconsolidatedrevenue,respectively.Infiscalyear2015and2014,Hewlett-PackardCompanyaccountedforapproximately12%and13%ofconsolidatedrevenue,respectively.Infiscalyear2016,HPInc.,formerlyknownasHewlett-PackardCompany,completeditsseparationwithHewlettPackardEnterpriseCompany,andeachcompanyaccountedforlessthan10%ofourconsolidatedrevenue.See"Item1A.RiskFactors-RisksRelatedtoOurBusiness-Wemaybeadverselyaffectedbythelossof,orreduced,delayedorcanceledpurchasesby,oneormoreofourlargercustomers."
Competition
Wecompeteprimarilywithmanufacturersofharddrivesusedintheenterprise,clientcomputeandclientnon-computeapplications.WearealsoasupplierofEnterpriseSSDs,PCIeacceleratorcards,cloudstoragesolutions,HDDtestequipment,andstoragesubsystemsthroughouracquisitions.Themarketsthatweparticipateinarehighlycompetitive.DiskdrivemanufacturerscompeteforalimitednumberofmajordiskdrivecustomersbutalsocompetewithothercompaniesintheelectronicdatastorageindustrythatprovideSSDsandPCIetechnology.Someoftheprincipalfactorsusedbycustomerstodifferentiateamongelectronicdatastoragesolutionsmanufacturersarestoragecapacity,productperformance,productqualityandreliability,priceperunitandpricepergigabyte,time-to-marketandtime-to-volumeleadership,storage/retrievalaccesstimes,datatransferrates,formfactor,productwarrantyandsupportcapabilities,supplycontinuityandflexibility,powerconsumption,totalcostofownership,andbrand.Whiledifferent
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FiscalYearsEnded
July1,2016
July3,2015
June27,2014
RevenuesbyChannel(%) OEM 70% 71% 68%Distributors 16% 17% 20%Retail 14% 12% 12%
RevenuesbyGeography(%)(1) Americas 29% 28% 27%EMEA 17% 17% 19%AsiaPacific 54% 55% 54%
(1) Revenueisattributedtocountriesbasedontheshippinglocation.
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marketsandcustomersplacevaryinglevelsofemphasisonthesefactors,webelievethatourproductsarecompetitivewithrespecttomanyofthesefactorsinthemarketsthatwecurrentlyaddress.
PrincipalDiskDriveCompetitors.Therearethreecompaniesintheelectronicdatastorageindustrythatmanufacturediskdrives:
• Seagate,sellingtheSeagate,LaCie,MaxtorandSamsungbrands;
• WesternDigitalCorporation,operatingtheWesternDigitalandHitachiGlobalStorageTechnologiessubsidiaries;and
• ToshibaCorporation
OtherCompetition.WeareseeingdirectcompetitionfromSSD'sthatisadverselyimpactingdemandforHDDinsomemarketsincludingNotebookandEnterpriseMissionCritical.Weexpectthatthistrendwillcontinuealthoughwebelievebothproducttypeswillberequiredinthemarkettosatisfythegrowingdemandforelectronicdatastorage.
PriceErosion.Historically,ourindustryhasbeencharacterizedbypricedeclinesfordiskdriveproductswithcomparablecapacity,performanceandfeaturesets("like-for-likeproducts").Pricedeclinesforlike-for-likeproducts("priceerosion")havebeenmorepronouncedduringperiodsof:
• economiccontractioninwhichcompetitorsmayusediscountedpricingtoattempttomaintainorgainmarketshare;
• fewnewproductintroductionswhencompetitorshavecomparableoralternativeproductofferings;and
• industrysupplyexceedingdemand.
Diskdrivemanufacturerstypicallyattempttooffsetpriceerosionwithanimprovedmixofdiskdriveproductscharacterizedbyhighercapacity,betterperformanceandadditionalfeaturesetsandproductcostreductions.
WebelievetheHDDindustryexperiencedbenignpriceerosioninfiscalyear2014,whereaspriceerosionincreasedinfiscalyears2015and2016.
ProductLifeCyclesandChangingTechnology.Successinourindustryhasbeendependenttoalargeextentontheabilitytobalancetheintroductionandtransitionofnewproductswithtime-to-volume,performance,capacityandqualitymetricsatacompetitiveprice,levelofserviceandsupportthatourcustomersexpect.Generally,thedrivemanufacturerthatintroducesanewproductfirstbenefitsfromimprovedproductmix,favorableprofitmarginsandlesspricingpressureuntilcomparableproductsareintroduced.Changingtechnologyalsonecessitateson-goinginvestmentsinresearchanddevelopment,whichmaybedifficulttorecoverduetorapidproductlifecyclesandeconomicdeclines.Further,thereisacontinuedneedtosuccessfullyexecuteproducttransitionsandnewproductintroductions,asfactorssuchasquality,reliabilityandmanufacturingyieldscontinuetobeofsignificantcompetitiveimportance.
Seasonality
Thediskdriveindustrytraditionallyexperiencesseasonalvariabilityindemandwithhigherlevelsofdemandinthesecondhalfofthecalendaryear.Thisseasonalityisdrivenbyconsumerspendingintheback-to-schoolseasonfromlatesummertofallandthetraditionalholidayshoppingseasonfromfalltowinter.Webelievefiscalyear2015reflectedseasonalityconsistentwithhistoricalpatterns,whereasinfiscalyear2014ourindustryexperiencedmoremutedseasonalpatternsassupplyanddemandwererelativelyinbalance.Infiscalyear2016,beyondtraditionalseasonality,variabilityofsaleswasareflectionofmorecyclicaldemandfromCSPsbasedonthetimingoflargesystemsinstallationsandtheshiftoftheunderlyingtechnology.
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ResearchandDevelopment
Wearecommittedtodevelopingnewcomponenttechnologies,productsandalternativestoragetechnologies.Ourresearchanddevelopmentfocusisdesignedtobringnewproductstomarketinhighvolume,withqualityattributesthatourcustomersexpect,beforeourcompetitors.Partofourproductdevelopmentstrategyistoleverageadesignplatformand/orsubsystemwithinproductfamiliestoservedifferentmarketneeds.Thisplatformstrategyallowsformoreefficientresourceutilization,leveragesbestdesignpractices,reducesexposuretochangesindemand,andallowsforachievementoflowercoststhroughpurchasingeconomies.Ouradvancedtechnologyintegrationeffortfocusesdiskdriveandcomponentresearchonrecordingsubsystems,includingread/writeheadsandrecordingmedia;market-specificproducttechnology;andtechnologyfocusedtowardsnewbusinessopportunities.Theprimarypurposeofouradvancedtechnologyintegrationeffortistoensuretimelyavailabilityofmaturecomponenttechnologiestoourproductdevelopmentteamsaswellasallowingustoleverageandcoordinatethosetechnologiesinthedesigncentersacrossourproductsinordertotakeadvantageofopportunitiesinthemarketplace.Duringfiscalyears2016,2015and2014,wehadproductdevelopmentexpensesofapproximately$1,237million,$1,353millionand$1,226million,respectively,whichrepresented11%,10%and9%ofourconsolidatedrevenue,respectively.
PatentsandLicenses
AsofJuly1,2016,wehadapproximately5,000U.S.patentsand1,300patentsissuedinvariousforeignjurisdictionsaswellasapproximately1,500U.S.and1,200foreignpatentapplicationspending.Thenumberofpatentsandpatentapplicationswillvaryatanygiventimeaspartofourongoingpatentportfoliomanagementactivity.Duetotherapidtechnologicalchangethatcharacterizestheelectronicdatastorageindustry,webelievethat,inadditiontopatentprotection,theimprovementofexistingproducts,relianceupontradesecrets,protectionofunpatentedproprietaryknow-howanddevelopmentofnewproductsarealsoimportanttoourbusinessinestablishingandmaintainingacompetitiveadvantage.Accordingly,weintendtocontinueoureffortstobroadlyprotectourintellectualproperty,includingobtainingpatents,whereavailable,inconnectionwithourresearchanddevelopmentprogram.
Wehavepatentlicenseswithanumberofcompanies.Additionally,aspartofournormalintellectualpropertypractices,wemaybeengagedinnegotiationswithothermajorelectronicdatastoragecompaniesandcomponentmanufacturerswithrespecttopatentlicenses.
Theelectronicdatastorageindustryischaracterizedbysignificantlitigationrelatingtopatentandotherintellectualpropertyrights.Becauseofrapidtechnologicaldevelopmentintheelectronicdatastorageindustry,someofourproductshavebeen,andinthefuturecouldbe,allegedtoinfringeexistingpatentsofthirdparties.Fromtimetotime,wereceiveclaimsthatourproductsinfringepatentsofthirdparties.Althoughwehavebeenabletoresolvesomeofthoseclaimsorpotentialclaimsbyobtaininglicensesorrightsunderthepatentsinquestionwithoutamaterialadverseaffectonus,otherclaimshaveresultedinadversedecisionsorsettlements.Inaddition,otherclaimsarepending,whichifresolvedunfavorablytouscouldhaveamaterialadverseeffectonourbusinessandresultsofoperations.Formoreinformationontheseclaims,see"Item8.FinancialStatementsandSupplementaryData—Note14.Legal,EnvironmentalandOtherContingencies."Thecostsofengaginginintellectualpropertylitigationinthepasthavebeen,andinthefuturemaybe,substantial,irrespectiveofthemeritsoftheclaimortheoutcome.
Backlog
Inviewofindustrypractice,wherebycustomersmaycancelordeferorderswithlittleornopenalty,webelievebackloginthediskdriveindustryisoflimitedindicativevalueinestimatingfutureperformanceandresults.
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EnvironmentalMatters
OuroperationsaresubjecttoU.S.andforeignlawsandregulationsrelatingtotheprotectionoftheenvironment,includingthosegoverningdischargesofpollutantsintotheairandwater,themanagementanddisposalofhazardoussubstancesandwastesandthecleanupofcontaminatedsites.Someofouroperationsrequireenvironmentalpermitsandcontrolstopreventandreduceairandwaterpollution,andthesepermitsaresubjecttomodification,renewalandrevocationbyissuingauthorities.
Wehaveestablishedenvironmentalmanagementsystemsandcontinuallyupdateenvironmentalpoliciesandstandardoperatingproceduresforouroperationsworldwide.Webelievethatouroperationsareinmaterialcompliancewithapplicableenvironmentallaws,regulationsandpermits.Webudgetforoperatingandcapitalcostsonanongoingbasistocomplywithenvironmentallaws.Ifadditionalormorestringentrequirementsareimposedonusinthefuture,wecouldincuradditionaloperatingcostsandcapitalexpenditures.
Someenvironmentallaws,suchastheComprehensiveEnvironmentalResponseCompensationandLiabilityActof1980(asamended,the"Superfund"law)anditsstateequivalents,canimposeliabilityforthecostofcleanupofcontaminatedsitesuponanyofthecurrentorformersiteownersoroperatorsoruponpartieswhosentwastetothesesites,regardlessofwhethertheowneroroperatorownedthesiteatthetimeofthereleaseofhazardoussubstancesorthelawfulnessoftheoriginaldisposalactivity.Wehavebeenidentifiedasapotentiallyresponsiblepartyatseveralsites.Ateachofthesesites,wehaveanassignedportionofthefinancialliabilitybasedonthetypeandamountofhazardoussubstancesdisposedofbyeachpartyatthesiteandthenumberoffinanciallyviableparties.Wehavefulfilledourresponsibilitiesatsomeofthesesitesandremaininvolvedinonlyafewatthistime.
Whileourultimatecostsinconnectionwiththesesitesisdifficulttopredictwithcompleteaccuracy,basedoncurrentestimatesofcleanupcostsandourexpectedallocationofthesecosts,wedonotexpectcostsinconnectionwiththesesitestobematerial.
Wemaybesubjecttovariousstate,federalandinternationallawsandregulationsgoverningtheenvironment,includingthoserestrictingthepresenceofcertainsubstancesinelectronicproducts.Forexample,theEuropeanUnion("EU")enactedtheRestrictionoftheUseofCertainHazardousSubstancesinElectricalandElectronicEquipment,whichprohibitstheuseofcertainsubstances,includinglead,incertainproducts,includingdiskdrives,putonthemarketafterJuly1,2006.Similarlegislationhasbeenormaybeenactedinotherjurisdictions,includingintheUnitedStates,Canada,Mexico,Taiwan,China,Japanandothers.TheEuropeanUnionREACHDirective(Registration,Evaluation,Authorization,andRestrictionofChemicals,EC1907/2006)alsorestrictssubstancesofveryhighconcern("SVHCs")inproducts.
Employees
AtJuly1,2016,weemployedapproximately45,500employeesandtemporaryemployeesworldwide,ofwhichapproximately36,100werelocatedinourAsianoperations.Webelievethatourfuturesuccesswilldependinpartonourabilitytoattractandretainqualifiedemployeesatalllevels.Webelievethatouremployeerelationsaregood.
FinancialInformation
Financialinformationforourreportablebusinesssegmentandaboutgeographicareasissetforthin"Item8.FinancialStatementsandSupplementaryData-Note13.BusinessSegmentandGeographicInformation."
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CorporateInformation
SeagateTechnologypubliclimitedcompany,isapubliclimitedcompanyorganizedunderthelawsofIreland.
AvailableInformation
AvailabilityofReports.WeareareportingcompanyundertheSecuritiesExchangeActof1934,asamended(the"1934ExchangeAct"),andwefilereports,proxystatementsandotherinformationwiththeU.S.SecuritiesandExchangeCommission(the"SEC").ThepublicmayreadandcopyanyofourfilingsattheSEC'sPublicReferenceRoomat100FStreet,NE,Washington,DC20549.ThepublicmayobtaininformationontheoperationofthePublicReferenceRoombycallingtheSECat1-800-SEC-0330.BecausewemakefilingstotheSECelectronically,thepublicmayaccessthisinformationattheSEC'swebsite:www.sec.gov.Thissitecontainsreports,proxiesandinformationstatementsandotherinformationregardingissuersthatfileelectronicallywiththeSEC.
WebSiteAccess.Ourwebsiteiswww.seagate.com.Wemakeavailable,freeofchargeatthe"Investors"sectionofourwebsite,AnnualReportsonForm10-K,QuarterlyReportsonForm10-Q,CurrentReportsonForm8-KandamendmentstothosereportsfiledorfurnishedpursuanttoSection13(a)or15(d)ofthe1934ExchangeActassoonasreasonablypracticableafterweelectronicallyfilesuchmaterialwith,orfurnishitto,theSEC.ReportsofbeneficialownershipfiledpursuanttoSection16(a)ofthe1934ExchangeActarealsoavailableonourwebsite.
InvestorsandothersshouldnotethatweroutinelyusetheInvestorssectionofourwebsitetoannouncematerialinformationtoinvestorsandthemarketplace.WhilenotalloftheinformationthattheCompanypostsonitscorporatewebsiteisofamaterialnature,someinformationcouldbedeemedtobematerial.Accordingly,theCompanyencouragesinvestors,themedia,andothersinterestedintheCompanytoreviewtheinformationthatitsharesonwww.seagate.com.Informationin,orthatcanbeaccessedthrough,ourwebsiteisnotincorporatedintothisForm10-K.
ExecutiveOfficers
Thefollowingsetsforththename,ageandpositionofeachofthepersonswhowereservingasexecutiveofficersasofAugust5,2016.Therearenofamilyrelationshipsamonganyofourexecutiveofficers.
StephenJ.Luczo.Mr.Luczo,59,hasservedasourCEOsinceJanuary2009andasChairmanoftheBoardsince2002.Mr.LuczojoinedSeagateinOctober1993asSeniorVicePresidentofCorporateDevelopment.InSeptember1997,hewaspromotedtoPresidentandChiefOperatingOfficerofSeagateTechnology(SeagateTechnologyplc'spredecessor)and,inJuly1998,hewaspromotedtoCEOatwhichtimehejoinedtheBoardasadirectorofSeagateTechnology.Mr.LuczoresignedasCEOeffectiveasofJuly2004,butremainedasChairmanoftheBoard.Heservedasnon-employeeChairmanfromOctober2006toJanuary2009.FromOctober2006untilherejoinedusinJanuary2009,Mr.Luczowasaprivateinvestor.Mr.LuczoalsoservedasourPresidentfromJanuary2009untilOctober2013.PriortojoiningSeagatein1993,Mr.LuczowasSeniorManagingDirectoroftheGlobalTechnologyGroupofBear,
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Name Age PositionsStephenJ.Luczo 59 ChairmanandChiefExecutiveOfficerWilliamD.Mosley 49 PresidentandChiefOperatingOfficerPhilipG.Brace 45 President,CloudSystemsandElectronicsSolutionsDavidH.MortonJr. 44 ExecutiveVicePresident,FinanceandChiefFinancialOfficerReganJ.MacPherson 53 SeniorVicePresident,GeneralCounselandSecretaryMarkRe 56 SeniorVicePresident,ChiefTechnologyOfficer
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Stearns&Co.Inc.,aninvestmentbankingfirm,fromFebruary1992toOctober1993.Mr.LuczoservedontheboardofdirectorsofMicrosoftCorporationfromMay2012toMarch2014.
WilliamD.Mosley.Mr.Mosley,49,waspromotedtoourPresident,ChiefOperatingOfficeronJune27,2016.HewaspreviouslyourPresident,OperationsandTechnologyfromOctober2013toJune2016andourExecutiveVicePresident,OperationsfromMarch2011untilOctober2013.Priortothat,heservedasExecutiveVicePresident,SalesandMarketingfromSeptember2009throughMarch2011;ExecutiveVicePresident,Sales,MarketingandProductLineManagementfromFebruary2009toSeptember2009;SeniorVicePresident,GlobalDiskStorageOperationsfrom2007to2009;andVicePresident,ResearchandDevelopment,Engineeringfrom2002to2007.
PhilipG.Brace.Mr.Brace,45,hasservedasourPresident,CloudSystemsandElectronicsSolutionssinceJuly2015.Mr.BracejoinedSeagateinSeptember2014asExecutiveVicePresidentandChiefTechnologyOfficerofSiliconSolutions,andwaspromotedtoInterimPresidentofCloudSystemsandElectronicsSolutionsonApril30,2015.HewaspreviouslyemployedbyLSICorporation("LSI")fromAugust2005throughSeptember2014.AtLSI,hewastheExecutiveVicePresidentoftheStorageSolutionsGroupfromJuly2012toSeptember2014,SeniorVicePresidentandGeneralManagerfromJanuary2009toJuly2012,andSeniorVicePresidentofCorporatePlanningandMarketingfromAugust2005toJanuary2009.
DavidH.MortonJr.Mr.Morton,44,assumedtheroleofExecutiveVicePresidentandChiefFinancialOfficeronOctober21,2015.HewaspreviouslyourSeniorVicePresident,Finance,TreasurerandPrincipalAccountingOfficerfromApril2014toOctober2015andourVicePresident,Finance,TreasurerandPrincipalAccountingOfficerfromOctober2009toApril2014;VicePresidentofFinance,SalesandMarketingfromMarch2009toOctober2009;VicePresidentofSalesOperationsfromJuly2007toMarch2009;VicePresidentofFinance,StorageMarketsfromOctober2006toJuly2007;ExecutiveDirectorofConsumerElectronicsFinancefromOctober2005toOctober2006;andExecutiveDirectorofCorporateFP&AfromJune2004toOctober2005.
ReganJ.MacPherson.Ms.MacPherson,53,hasservedasourSeniorVicePresidentandGeneralCounselsinceMarch2015.ShewaspreviouslyourVicePresidentandInterimGeneralCounselfromMarch2015toAugust2015andourDeputyGeneralCounselfromSeptember2013untilAugust2015.Priortothat,shewasAssistantGeneralCounselfrom2010through2013,AssociateGeneralCounselfrom2008to2010andaSeniorManagerinLegalfrom2005to2008.
MarkRe.Mr.Re,56,hasservedasourSeniorVicePresidentandChiefTechnologyOfficersinceJuly2013.Priortothat,heservedasourVicePresident,Research,fromAugust2003toAugust2006.Mr.RecurrentlyservesontheScientificAdvisoryBoardfortheDataStorageInstitute,aswellasontheAdvancedStorageTechnologyConsortium.
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ITEM1A.RISKFACTORS
Ifwefailtopredictdemandaccuratelyforourproductsinanyquarter,wemaynotbeabletorecapturethecostofourinvestments.
Ourindustryoperatesprimarilyonquarterlypurchasingcycles,withmuchoftheorderflowinanygivenquartertypicallycomingattheendofthatquarter.Ourmanufacturingprocessrequiresustomakesignificantproduct-specificinvestmentsininventoryineachquarterforthatquarter'sproduction.Sincewetypicallyreceivethebulkofourorderslateinaquarterafterwehavemadeourinvestments,thereisariskthatourorderswillnotbesufficienttoallowustorecapturethecostsofourinvestmentbeforetheproductsresultingfromthatinvestmenthavebecomeobsolete.Wecannotassureyouthatwewillbeabletoaccuratelypredictdemandinthefuture.
Ourrevenuesinanyquarteraresubstantiallydependentuponcustomerordersinthatquarter.Weattempttoprojectfutureordersbasedinpartonestimatesfromourmajorcustomers.Ourcustomers'estimatedrequirementsarenotalwaysaccurateandwethereforecannotpredictourquarterlyrevenueswithanydegreeofcertainty.Inaddition,wederiveaportionofourrevenuesineachquarterfromanumberofrelativelylargeorders.Ifoneormoreofourmajorcustomersdecidetodeferapurchaseorderordelaysproductacceptanceinanygivenquarter,thisislikelytoresultinreducedtotalrevenuesforthatquarter.
Thedifficultyinforecastingdemandalsoincreasesthedifficultyinanticipatingourinventoryrequirements,whichmaycauseustoover-producefinishedgoods,resultingininventorywrite-offs,orunder-producefinishedgoods,adverselyaffectingourabilitytomeetcustomerrequirementsandourmarketshare.Additionally,theriskofinventorywrite-offscouldincreaseifweweretocontinuetoholdhigherinventorylevels.Wecannotbecertainthatwewillbeabletorecoverthecostsassociatedwithincreasedinventory.
Otherfactorsthatmaynegativelyimpactourabilitytorecapturethecostofinvestmentsinanygivenquarterinclude:
• theimpactofvariabledemandandanaggressivepricingenvironmentfordiskdrives;
• theimpactofcompetitiveproductannouncementsandpossibleexcessindustrysupplybothwithrespecttoparticulardiskdriveproductsandwithrespecttocompetingalternativestoragetechnologysolutionssuchasSSDsintablet,notebookandenterprisecomputeapplications;
• ourinabilitytoreduceourfixedcoststomatchsalesinanyquarterbecauseofourverticalmanufacturingstrategy,whichmeansthatwemakemorecapitalinvestmentsthanwewouldifwewerenotverticallyintegrated;
• dependenceonourabilitytosuccessfullyqualify,manufactureandsellinincreasingvolumesonacost-effectivebasisandwithacceptablequalityourdiskdriveproducts,particularlythenewdiskdriveproductswithlowercoststructures;
• uncertaintyintheamountofpurchasesfromourdistributorcustomerswhofromtimetotimeconstitutealargeportionofourtotalsales;
• ourproductmixandtherelatedmarginsofthevariousproducts;
• acceleratedreductioninthepriceofourdiskdrivesduetotechnologicaladvancesand/oranoversupplyofdiskdrivesinthemarketandshiftingtrendsindemandwhichcancreatesupplyanddemandimbalances;
• manufacturingdelaysorinterruptions,particularlyatourmanufacturingfacilitiesinChina,Malaysia,NorthernIreland,Singapore,Thailand,theUnitedKingdom,ortheUnitedStates;
• limitedaccesstocomponentsthatweobtainfromasingleoralimitednumberofsuppliers;
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• theimpactofchangesinforeigncurrencyexchangeratesonthecostofproducingourproductsandtheeffectivepriceofourproductstoforeignconsumers;and
• operationalissuesarisingoutoftheincreasinglyautomatednatureofourmanufacturingprocesses.
Inaddition,thedemandforclientnon-computeproductscanbeevenmorevolatileandunpredictablethanthedemandforclientcomputeproducts.Insomecases,ourproductsmanufacturedforclientnon-computeapplicationsareuniquelyconfiguredforasinglecustomer'sapplication,whichcreatesariskofunwantedandunsellableinventoryiftheanticipatedvolumesarenotrealized.Thispotentialforunpredictablevolatilityisincreasedbythepossibilityofcompetingalternativestoragetechnologieslikeflashmemorymeetingthecustomers'costandcapacitymetrics,resultinginarapidshiftindemandfromourproductsanddiskdrivetechnology,generally,toalternativestoragetechnologies.Unpredictablefluctuationsindemandforourproductsorrapidshiftsindemandfromourproductstoalternativestoragetechnologiesinnewclientnon-computeapplicationscouldmateriallyadverselyimpactourfutureresultsofoperations.
Marketacceptanceofnewproductintroductionscannotbeaccuratelypredicted,andourresultsofoperationswillsufferifthereislessdemandforournewproductsthanisanticipated.
Themarketsforourproductsarecharacterizedbyrapidtechnologicalchange,frequentnewproductintroductionsandtechnologyenhancements,uncertainproductlifecyclesandchangesincustomerdemand.Thesuccessofournewproductintroductionsisdependentonanumberoffactors,includingmarketacceptance,ourabilitytomanagetherisksassociatedwithproducttransitions,theeffectivemanagementofinventorylevelsinlinewithanticipatedproductdemandandtheriskthatournewproductswillhavequalityproblemsorotherdefectsintheearlystagesofintroductionthatwerenotanticipatedinthedesignofthoseproducts.Accordingly,wecannotaccuratelydeterminetheultimateeffectthatournewproductswillhaveonourresultsofoperations.
Historically,ourresultsofoperationshavesubstantiallydependeduponourabilitytobeamongthefirst-to-maturitywithnewproductofferings.Ourmarketshareandresultsofoperationsinthefuturemaybeadverselyaffectedifwefailto:
• consistentlymaintainourtime-to-maturityperformancewithournewproducts;
• producetheseproductsinsufficientvolume;
• qualifytheseproductswithkeycustomersonatimelybasisbymeetingourcustomers'performanceandqualityspecifications;or
• achieveacceptablemanufacturingyields,qualityandcostswiththeseproducts.
Inaddition,thesuccessofournewproductintroductionsisdependentuponourabilitytoqualifyasaprimarysourceofsupplywithourOEMcustomers.Inorderforourproductstobeconsideredbyourcustomersforqualification,wemustbeamongtheleadersintime-to-marketwiththosenewproducts.Onceaproductisaccepted,anyfailureordelayinthequalificationprocessorarequirementthatwerequalifycanresultinourlosingsalestothatcustomeruntilnewproductsareintroduced.Thelimitednumberofhigh-volumeOEMsmagnifiestheeffectofmissingaproductqualificationopportunity.Theserisksarefurthermagnifiedbecauseweexpectcompetitivepressurestoresultindecliningsales,erodingprices,anddeclininggrossmarginsonourcurrentgenerationproducts.Ifthedeliveryofourproductsisdelayed,ourOEMcustomersmayuseourcompetitors'productstomeettheirproductionrequirements.Wecannotassurethatwewillbeamongtheleadersintime-to-marketwithnewproductsorthatwewillbeabletosuccessfullyqualifynewproductswithourcustomersinthefuture.
Wefacetherelatedriskthatconsumersandbusinessesmaywaittomaketheirpurchasesiftheywanttobuyanewproductthathasbeenshippedorannouncedbutnotyetreleased.Ifthisweretooccur,wemaybeunabletosellourexistinginventoryofproductsthatmaybelessefficientandcosteffective
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comparedtonewproducts.Asaresult,evenifweareamongthefirst-to-maturitywithagivenproduct,subsequentintroductionsorannouncementsbyourcompetitorsofnewproductscouldcauseustoloserevenueandnotachieveapositivereturnonourinvestmentinexistingproductsandinventory.
Ifwecannotsuccessfullydelivercompetitiveproducts,ourfutureresultsofoperationsmaybeadverselyaffected.
Ourindustriesarehighlycompetitiveandourfailuretoanticipateandrespondtotechnologicalandmarketdevelopmentscouldharmourabilitytocompete.
Weoperateinmarketsthatarehighlycompetitiveandsubjecttorapidchangeandthataresignificantlyaffectedbynewproductintroductions,substantialpriceerosionandlowerpricesaspartofastrategytogainorretainmarketshareandcustomers.Shouldthesepracticescontinue,wemayneedtocontinuallyreduceourpricesforexistingproductstoretainourmarketshare,whichcouldadverselyaffectourresultsofoperations.
Ourabilitytooffsettheeffectofpriceerosionthroughnewproductintroductionsathigheraveragepricesisdiminishedtotheextentcompetitorsintroduceproductsintoparticularmarketsaheadofoursimilar,competingproducts.Ourabilitytooffsettheeffectofpriceerosionisalsodiminishedduringtimeswhensupplyexceedsdemandforaparticularproduct.
Marketshareforourproductscanbenegativelyaffectedbyourcustomers'diversifyingtheirsourcesofsupplyasourcompetitorsenterthemarketforparticularproducts,aswellasbyourabilitytorampvolumeproductionofnewproductofferings.Whenourcompetitorssuccessfullyintroduceproductofferingsthatarecompetitivewithourrecentlyintroducedproducts,ourcustomersmayquicklydiversifytheirsourcesofsupply.Anysignificantdeclineinourmarketshareinanyofourprincipalmarketapplicationswouldadverselyaffectourresultsofoperations.
Ourprincipalsourcesofcompetitioninclude:
• diskdrivemanufacturers,suchasWesternDigitalCorporationandToshiba;
• companiesprovidingstoragesubsystemsandcomponentstoOEMs;
• electronicmanufacturingservices("EMS")companiesacquiringthenecessaryskillsandintellectualpropertytoentertheenterprisedatastoragemarketplace;
• otherhighperformancecomputing("HPC")datastorageproviders;and
• collaborationsbetweenin-housedevelopmentteamsofexistingandpotentialcustomersandacombinationofEMS,contractelectronicmanufacturing("CEM")oremergingtechnologycompanies.
Wealsoexperiencecompetitionfromothercompaniesthatproducealternativestoragetechnologieslikeflashmemory,whereincreasingcapacity,decreasingcost,energyefficiencyandimprovementsinperformanceruggednesshaveresultedincompetitionwithourlowercapacity,smallerformfactordiskdrives.Thiscompetitionhastraditionallybeeninthemarketsforhandheldconsumerelectronicsapplicationsandnowitalsoincludessolidstatedrives("SSDs")fortablet,notebookandenterprisecomputeapplications.CertaincustomersforbothnotebookandenterprisecomputeapplicationsareadoptingSSDsasalternativestoharddrivesincertainapplications.Furtheradoptionofthesealternativestoragetechnologiesmayimpactthecompetitivenessofourproductportfolioandreduceourmarketshareandadverselyaffectourresultsofoperation.
Themarketsforourdatastoragesystemproductsarealsocharacterizedbytechnologicalchangedriveninpartbytheadoptionofnewindustrystandards.Thesestandardsprovidemechanismstoensuretechnologycomponentinteroperabilitycanoccurandmayreduceourcapabilityfordifferentiationorinnovationandouraffectedproductswouldreverttocommoditystatus.Thiscouldlowerthebarriersto
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entrytoourmarketawayfromourspecialistresearchanddevelopmentskillsandenableentryforthegeneral-purposedesignskillsfoundinsomelargeEMSandCEMcompanies.Commoditymarketsaredrivenbyextremelylowmarginsandveryaggressivecompetitivepricing.Ifourmarketbecomesmorecommoditizedandwefailtodeliverinnovativevalue-addedalternativestoourcustomers,wewillhavedifficultycompetingagainstthelargerEMSandCEMcompanies.Ifweareunabletocompetesuccessfullyagainstourcurrentandfuturecompetitors,wecouldexperienceprofitmarginreductionsorlossofmarketshare,whichcouldsignificantlyharmourfinancialcondition.
Ifwedonotdevelopproductsintimetokeeppacewithtechnologicalchanges,ourresultsofoperationswillbeadverselyaffected.
Ourcustomershavedemandednewgenerationsofdiskdriveproductsasadvancesincomputerhardwareandsoftwarehavecreatedtheneedforimprovedstorageproducts,withfeaturessuchasincreasedstoragecapacity,improvedperformanceandreliabilityandlowercost.We,andourcompetitors,havedevelopedimprovedproducts,andwewillneedtocontinuetodosointhefuture.Suchproductdevelopmentrequiressignificantinvestmentsinresearchanddevelopment.Wecannotassureyouthatwewillbeabletosuccessfullycompletethedesignorintroductionofnewproductsinatimelymanner,thatwewillbeabletomanufacturenewproductsinsufficientvolumeswithacceptablemanufacturingyields,thatwewillbeabletosuccessfullymarketthesenewproductsorthattheseproductswillperformtospecificationsonalong-termbasis.Inaddition,theimpactofslowingarealdensitygrowthmayadverselyimpactourabilitytobesuccessful.
Whenwedevelopnewproductswithhighercapacityandmoreadvancedtechnology,ourresultsofoperationsmaydeclinebecausetheincreaseddifficultyandcomplexityassociatedwithproducingtheseproductsincreasesthelikelihoodofreliability,qualityoroperabilityproblems.Ifourproductssufferincreasesinfailures,areoflowqualityorarenotreliable,customersmayreducetheirpurchasesofourproductsandourmanufacturingreworkandscrapcostsandserviceandwarrantycostsmayincrease.Inaddition,adeclineinthereliabilityofourproductsmaymakeuslesscompetitiveascomparedwithotherdiskdrivemanufacturersorcompetingtechnologies.
Changesindemandforcomputersystemsandstoragesubsystemsmayinthefuturecauseadeclineindemandforourproducts.
Ourproductsarecomponentsincomputers,datastoragesystems,andconsumerelectronicsdevices.Thedemandfortheseproductshasbeenvolatile.Unexpectedslowdownsindemandforcomputersystems,storagesubsystemsorconsumerelectronicsdevicesgenerallycausesharpdeclinesindemandforourproducts.Declinesinconsumerspendingcouldhaveamaterialadverseeffectondemandforourproductsandservicesandonourfinancialconditionandresultsofoperations.
WhilesalestoClientNon-ComputeandCloudSystemsandSolutionsmarketsarebecomingamoresignificantsourceofrevenue,salestotheClientComputemarketremainanimportantpartofourbusiness.TheClientComputemarket,however,hasbeen,andweexpectittocontinuetobe,adverselyaffectedbythegrowthoftabletcomputers,smartphonesandsimilardevicesandthatperformmanyofthesamecapabilitiesascomputers,thelengtheningofproductlifecyclesandmacroeconomicconditions.WebelievethatthedeteriorationoftheClientComputemarkethasacceleratedrecently,andthatthisaccelerateddeteriorationmaycontinueorfurtheraccelerate,whichcouldcauseouroperatingresultstosuffer.Additionally,ifdemandintheClientComputemarketisworsethanexpectedasaresultoftheseorotherconditions,demandforourproductsintheClientComputemarketmaydecreaseatafasterrateandouroperatingresultsmaybeadverselyaffected.
TheEnterpriseStoragemarkethasbeenadverselyaffectedbythegrowthoftheutilizationofNANDflashinmissioncriticalapplications.ThisdeteriorationoftheEnterpriseStoragemarketcouldcauseouroperatingresultstosuffer.
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Causesofdeclinesindemandforourproductsinthepasthaveincludedweaknessinmacroeconomicenvironments,announcementsorintroductionsofmajornewoperatingsystemsorsemiconductorimprovementsorchangesinconsumerpreferences,suchastheshifttomobiledevices.Webelievetheseannouncementsandintroductionshavefromtimetotimecausedconsumerstodefertheirpurchasesandmadeinventoryobsolete.Wheneveranoversupplyofourproductscausesparticipantsinourindustrytohavehigherthananticipatedinventorylevels,weexperienceevenmoreintensepricecompetitionfromothermanufacturersthanusual.
Increasesinthearealdensityofdiskdrivesmayoutpacecustomers'demandforstoragecapacity.
Therateofincreaseinarealdensity,orstoragecapacitypersquareinchonadisk,maybegreaterthantheincreaseinourcustomers'demandforaggregatestoragecapacity,particularlyincertainmarketapplicationslikeclientcompute.Asaresult,ourcustomers'storagecapacityneedsmaybesatisfiedwithlowerpriced,lowcapacitydiskdrives.Thesefactorscoulddecreaseoursales,especiallywhencombinedwithcontinuedpriceerosion,whichcouldadverselyaffectourresultsofoperations.
Wemaynotbesuccessfulinoureffortstogrowourcloudsystemsandsolutionsbusiness.
Wehavemadeandarecontinuingtomakeinvestmentstoexpandanddevelopourcloudsystemsandsolutionsbusiness.Ourcloudsystemsandsolutionsbusinessissubjecttothefollowingrisks:
• thecloudsystemsandsolutionsmarketmaydevelopmoreslowlythanweexpect;
• wemaynotbeabletooffercompellingsolutionstoenterprisesandconsumers;and
• ourcloudsystemsandsolutionsbusinessgenerallyhasalongandunpredictablesalescycle,andgrowthinthisbusinessislikelytodependonrelativelylargecustomerorders,whichmayincreasethevariabilityofourresultsofoperationsandthedifficultyofmatchingrevenueswithexpenses.
Ourresultsofoperationsandsharepricemaybeadverselyaffectedifwearenotsuccessfulinoureffortstogrowourcloudcomputingbusinessasanticipated.Inaddition,ourgrowthinthissectormaybringusintoclosercompetitionwithsomeofourcustomersorpotentialcustomers,whichmaydecreasetheirwillingnesstodobusinesswithus.
Changesinthemacroeconomicenvironmenthavenegativelyimpacted,andmaycontinueto,negativelyimpactourresultsofoperations.
Duetothecontinuinguncertaintyaboutcurrentmacroeconomicconditionsaffectingconsumerandenterprisespending,webelieveourcustomersmaypostponespendinginresponsetotightercredit,unemployment,negativefinancialnewsand/ordeclinesinincomeorassetvalues,whichcouldhaveamaterialadverseeffectonthedemandforourproducts.Continuinghighunemploymentrates,lowlevelsofconsumerliquidity,riskofdefaultonsovereigndebtandvolatilityincreditandequitymarketshaveweakenedconsumerconfidenceanddecreasedconsumerandenterprisespendinginmanyregionsaroundtheworld.Otherfactorsthatcouldinfluencedemandincludeconditionsintheresidentialrealestateandmortgagemarkets,laborandhealthcarecosts,accesstocredit,consumerconfidenceandothermacroeconomicfactorsaffectingconsumerspendingbehavior.Theseandothereconomicfactorscouldhaveamaterialadverseeffectondemandforourproductsandonourfinancialconditionandoperatingresults.
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Ourquarterlyresultsofoperationsfluctuate,sometimessignificantly,fromperiodtoperiod,andmaycauseoursharepricetodecline.
Inthepast,ourquarterlyrevenueandresultsofoperationshavefluctuated,sometimessignificantly,fromperiodtoperiod.Thesefluctuations,whichweexpecttocontinue,maybeoccasionedbyavarietyoffactors,including:
• currentuncertaintyinglobaleconomicconditionsmayposearisktotheoveralleconomy;
• adversechangesinthelevelofeconomicactivityinthemajorregionsinwhichwedobusiness;
• competitivepressuresresultinginlowersellingpricesbyourcompetitorstargetedtoencourageshiftingofcustomerdemand;
• delaysorproblemsinourintroductionofnewproducts,particularlynewdiskdriveswithlowercoststructures,theinabilitytoachievehighproductionyieldsordelaysincustomerqualificationorinitialproductqualityissues;
• changesinpurchasingpatternsbyourdistributorcustomers;
• applicationofneworrevisedindustrystandards;
• disruptionsinoursupplychain;
• increasedcostsoradversechangesinavailabilityofsuppliesofrawmaterialsorcomponents;
• theimpactofcorporaterestructuringactivitiesthatwehaveandmaycontinuetoengagein;
• changesinthedemandforthecomputersystemsanddatastorageproductsthatcontainourproductsduetoseasonality,economicconditionsandotherfactors;
• changesinpurchasesfromperiodtoperiodbyourprimarycustomers;
• shiftingtrendsincustomerdemandwhich,whencombinedwithoverproductionofparticularproducts,particularlywhentheindustryisservedbymultiplesuppliers,resultsinunfavorablesupply/demandimbalances;
• ourhighproportionoffixedcosts,includingresearchanddevelopmentexpenses;
• anyimpairmentsingoodwillorotherlong-livedassets;
• announcementsofnewproducts,servicesortechnologicalinnovationsbyusorourcompetitors;and
• adversechangesintheperformanceofourproducts.
Asaresult,webelievethatquarter-to-quartercomparisonsofourrevenueandresultsofoperationsmaynotbemeaningful,andthatthesecomparisonsmaynotbeanaccurateindicatorofourfutureperformance.Ourresultsofoperationsinoneormorefuturequartersmayfailtomeettheexpectationsofinvestmentresearchanalystsorinvestors,whichcouldcauseanimmediateandsignificantdeclineinthetradingpriceofourordinaryshares.
Becauseweexperienceseasonalityinthesalesofourproducts,ourresultsofoperationswillgenerallybeadverselyimpactedduringthesecondhalfofourfiscalyear.
Salesofcomputersystems,storagesubsystemsandconsumerelectronicstendtobeseasonal,andthereforeweexpecttocontinuetoexperienceseasonalityinourbusinessaswerespondtovariationsinourcustomers'demandforourproducts.Inparticular,weanticipatethatsalesofourproductswillcontinuetobelowerduringthesecondhalfofourfiscalyear.Intheclientcomputeandclientnon-computemarketapplicationsofourdiskdrivebusiness,thisseasonalityispartiallyattributabletothehistoricaltrendinour
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resultsderivedfromourcustomers'increasedsalesofdesktopcomputers,notebookcomputers,andconsumerelectronicsduringtheback-to-schoolandwinterholidayseason.Intheenterprisemarketoursalesareseasonalbecauseofthecapitalbudgetingandpurchasingcyclesofourendusers.Sinceourworkingcapitalneedspeakduringperiodsinwhichweareincreasingproductioninanticipationofordersthathavenotyetbeenreceived,ourresultsofoperationswillfluctuateseasonallyeveniftheforecasteddemandforourproductsprovesaccurate.Furthermore,itisdifficultforustoevaluatethedegreetowhichthisseasonalitymayaffectourbusinessinfutureperiodsbecauseoftherateandunpredictabilityofproducttransitionsandnewproductintroductions,particularlyintheclientnon-computemarket,aswellasmacroeconomicconditions.
Wehavealongandunpredictablesalescycleforenterprisedatastoragesolutions.
Ourenterprisedatastoragesolutionsaretechnicallycomplexandwetypicallysupplytheminhighquantitiestoasmallnumberofcustomers.Manyofourproductsarealsotailoredtomeetthespecificrequirementsofindividualcustomers,andareoftenintegratedbyourcustomersintothesystemsandproductsthattheysell.Factorsthataffectthelengthofoursalescycleinclude:
• thetimerequiredfortestingandevaluatingourproductsbeforetheyaredeployed;
• thesizeofthedeployment;and
• thedegreeofsystemconfigurationnecessarytodeployourproducts.
Asaresult,oursalescycleforenterprisedatastoragesolutionsisofteninexcessofoneyear,andthelengthofoursalescycleisfrequentlyunpredictable.Inaddition,theemergingandevolvingnatureofthemarketfortheproductsthatwesellmayleadprospectivecustomerstopostponetheirpurchasingdecisions.Weinvestresourcesandincurcostsduringthiscyclethatmaynotberecoveredifwedonotsuccessfullyconcludesales.Thesefactorsleadtodifficultyinmatchingrevenueswithexpenses,andtoincreasedexpenditureswhichtogethermayadverselyimpactourresultsofoperations.
Wemaybeadverselyaffectedbythelossof,orreduced,delayedorcanceledpurchasesby,oneormoreofourlargercustomers.
Someofourkeycustomersaccountforalargeportionofourdiskdriverevenue.Whilewehavelongstandingrelationshipswithmanyofourcustomers,ifanyofourkeycustomersweretosignificantlyreducetheirpurchasesfromus,ourresultsofoperationswouldbeadverselyaffected.Whilesalestomajorcustomersmayvaryfromperiodtoperiod,amajorcustomerthatpermanentlydiscontinuesorsignificantlyreducesitsrelationshipwithuscouldbedifficulttoreplace.Inlinewithindustrypractice,newcustomersusuallyrequirethatwepassalengthyandrigorousqualificationprocessatthecustomer'scost.Accordingly,itmaybedifficultorcostlyforustoattractnewmajorcustomers.Additionally,mergers,acquisitions,consolidationsorothersignificanttransactionsinvolvingourcustomersgenerallyentailriskstoourbusiness.Ifasignificanttransactioninvolvinganyofourkeycustomersresultsinthelossoforreductioninpurchasesbythesekeycustomers,itcouldhaveamateriallyadverseeffectonourbusiness,resultsofoperations,financialconditionandprospects.
Wearedependentonsalestodistributorsandretailers,whichmayincreasepriceerosionandthevolatilityofoursales.
Asubstantialportionofoursaleshasbeentodistributorsofdiskdriveproducts.Certainofourdistributorsmayalsomarketotherproductsthatcompetewithourproducts.Productqualificationprogramsinthisdistributionchannelarelimited,whichincreasesthenumberofcompetingproductsthatareavailabletosatisfydemand,particularlyintimesoflengtheningproductcycles.Asaresult,purchasingdecisionsinthischannelarebasedlargelyonprice,termsandproductavailability.SalesvolumesthroughthischannelarealsolesspredictableandsubjecttogreatervolatilitythansalestoourOEMcustomers.In
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addition,deteriorationinbusinessandeconomicconditionscouldexacerbatepriceerosionandvolatilityasdistributorslowerpricestocompensateforlowerdemandandhigherinventorylevels.Ourdistributors'abilitytoaccesscreditforpurposesoffundingtheiroperationsmayalsoaffectpurchasesofourproductsbythesecustomers.
Ifdistributorsreducetheirpurchasesofourproductsorpricesdeclinesignificantlyinthedistributionchannelorifdistributorsexperiencefinancialdifficultiesorterminatetheirrelationshipswithus,ourrevenuesandresultsofoperationswouldbeadverselyaffected.
Webelievethatindustrydemandforstorageproductsinthelong-termisincreasingduetotheproliferationofmedia-richdigitalcontentinconsumerapplicationsandisfuelingincreasedconsumerdemandforstorage.Thishasledtotheexpansionofourbrandedsolutionssuchasexternalstorageproductstoprovideadditionalstoragecapacityandtosecuredataincaseofdisasterorsystemfailure,ortoprovideindependentstoragesolutionsformultipleusersinhomeorsmallbusinessenvironments.Consumerspendingonretailsalesofourbrandedsolutionshasdeterioratedinsomemarketsandmaycontinuetodosoifpoorglobaleconomicconditionscontinueandhigherlevelsofunemploymentpersist.Thiscouldhaveamaterialadverseeffectondemandforourproductsandservicesandonourfinancialconditionandresultsofoperations.
Inaddition,suchretailsalesofourbrandedsolutionstraditionallyexperienceseasonalvariabilityindemandwithhigherlevelsofdemandinthefirsthalfofourfiscalyeardrivenbyconsumerspendingintheback-to-schoolseasonfromlatesummertofallandthetraditionalholidayshoppingseasonfromfalltowinter.Additionally,ourabilitytoreachsuchconsumersdependsonusmaintainingeffectiveworkingrelationshipswithmajorretailersanddistributors.Failuretoanticipateconsumerdemandforourbrandedsolutionsaswellasaninabilitytomaintaineffectiveworkingrelationshipswithretailandonlinedistributorsmayadverselyimpactourfutureresultsofoperations.
Ourinternationalsalesandmanufacturingoperationssubjectustorisksrelatedtodisruptionsinforeignmarkets,currencyexchangefluctuations,longerpaymentcycles,seasonality,limitationsimposedbyavarietyoflegalandregulatoryregimes,potentialadversetaxconsequences,increasedcosts,ourcustomers'creditandaccesstocapital,health-relatedrisks,andaccesstopersonnel.
Wehavesignificantsalesandmanufacturingoperationsinforeigncountries,includingmanufacturingfacilities,salespersonnelandcustomersupportoperations.WehavemanufacturingfacilitiesinChina,Malaysia,NorthernIreland,SingaporeandThailand,inadditiontothoseintheUnitedStates.AsubstantialportionofourclientcomputediskdriveassemblyoccursinourfacilityinChina.
Ourinternationaloperationsaresubjecttoeconomicrisksinherentindoingbusinessinforeigncountries,includingthefollowing:
• DisruptionsinForeignMarkets.Disruptionsinfinancialmarketsandthedeteriorationoftheunderlyingeconomicconditionsinthepastinsomecountries,includingthoseinAsia,UnitedKingdomandtheEuropeanUnionhavehadanimpactonoursalestocustomerslocatedin,orwhoseend-usercustomersarelocatedin,thesecountries.
• FluctuationsinCurrencyExchangeRates.PricesforourproductsaredenominatedpredominatelyinU.S.dollars,evenwhensoldtocustomersthatarelocatedoutsidetheUnitedStates.AnincreaseinthevalueofthedollarcouldincreasetherealcosttoourcustomersofourproductsinthosemarketsoutsideoftheU.S.wherewesellindollars.Thiscouldadverselyimpactoursalesandmarketshareinsuchareasorincreasepressureonustolowerourprice,andadverselyimpactourprofitmargins.Aweakeneddollarcouldincreasethecostofexpensessuchaspayroll,utilities,tax,andmarketingexpenses,aswellasoverseascapitalexpenditures.Anyoftheseeventscouldhaveamaterialadverseeffectonourresultsofoperations.Wemayattempttomanagetheimpactofforeigncurrencyexchangeratechangesby,amongotherthings,enteringintoforeigncurrency
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forwardexchangecontracts.However,thesecontractsmaynotcoverourfullexposureandsubjectustocertaincounterpartycreditrisks.See"Item7A.QuantitativeandQualitativeDisclosuresAboutMarketRisk-ForeignCurrencyExchangeRisk"ofthisreportforadditionalinformationaboutourforeigncurrencyexchangerisk.
• LongerPaymentCycles.OurcustomersoutsideoftheUnitedStatesareoftenallowedlongertimeperiodsforpaymentthanourU.S.customers.Thisincreasestheriskofnonpaymentduetothepossibilitythatthefinancialconditionofparticularcustomersmayworsenduringthecourseofthepaymentperiod.
• Seasonality.Seasonalreductionsinthebusinessactivitiesofourcustomersduringthesummermonths,particularlyinEurope,typicallyresultinlowerearningsduringthoseperiods.
• LegalandRegulatoryLimitations.Ourinternationaloperationsareaffectedbylimitationsonimports,tariffs,duties,currencyexchangecontrolregulations,pricecontrols,exportcontrollaws,includingthetradeandeconomicsanctionsadministeredbytheOfficeofForeignAssetsControl,andotherrestraintsontrade.Inaddition,thegovernmentsofmanycountries,includingChina,Malaysia,NorthernIreland,SingaporeandThailand,inwhichwehavesignificantoperatingassets,haveexercisedandcontinuetoexercisesignificantinfluenceovermanyaspectsoftheirdomesticeconomiesandinternationaltrade.Althoughwehaveimplementedpoliciesandproceduresdesignedtoensurecompliance,therecanbenoassurancethatouremployees,contractors,oragentswillnotviolatetheseorotherapplicablelawsandregulationstowhichwemaybesubject.Violationsoftheselawsandregulationscouldleadtosignificantpenalties,includingrestraintsonourexportorimportprivileges,monetaryfines,criminalproceedingsandregulatoryorotheractionsthatcouldmateriallyadverselyaffectourresultsofoperations.
• PotentialAdverseTaxConsequences.Ourinternationaloperationscreateariskofpotentialadversetaxconsequences,includingimpositionofwithholdingorothertaxesonpaymentsbyoursubsidiaries.Inaddition,ourtaxableincomeinanyjurisdictionisdependentuponacceptanceofouroperationalpracticesandintercompanytransferpricingbylocaltaxauthoritiesasbeingonanarm'slengthbasis.Duetoinconsistenciesinapplicationofthearm'slengthstandardamongtaxingauthorities,aswellasalackofadequatetreaty-basedprotection,transferpricingchallengesbytaxauthoritiescould,ifsuccessful,substantiallyincreaseourincometaxexpense.Wearesubjecttotaxauditsaroundtheworld,andareunderauditinvariousjurisdictions,andsuchjurisdictionsmayassessadditionalincometaxagainstus.Althoughwebelieveourtaxpositionsarereasonable,thefinaldeterminationoftaxauditscouldbemateriallydifferentfromourrecordedincometaxprovisionsandaccruals.Theultimateresultsofanauditcouldhaveamaterialadverseeffectonouroperatingresultsorcashflowsintheperiodorperiodsforwhichthatdeterminationismadeandcouldresultinincreasestoouroveralltaxexpenseinsubsequentperiods.Inlightoftheongoingfiscalchallengesmanycountriesarefacing,variouslevelsofgovernmentareincreasinglyfocusedontaxreformandotherlegislativeactiontoincreasetaxrevenue.Inaddition,theOrganizationforEconomicCooperationandDevelopment'sBaseErosionandProfitShiftingrecommendationsarereshapinginternationaltaxrulesinnumerouscountries.Theseactualandpotentialchangesintherelevanttaxlawsapplicabletocorporatemultinationalsalongwithpotentialchangesinaccountingandotherlaws,regulations,administrativepractices,principles,andinterpretationscouldincreasetheriskofdoubletaxation,causeincreasedtaxauditactivity,andcouldimpactoureffectivetaxrate.
• IncreasedCosts.TheshippingandtransportationcostsassociatedwithourinternationaloperationsaretypicallyhigherthanthoseassociatedwithourU.S.operations,resultingindecreasedoperatingmarginsinsomeforeigncountries.
• CreditandAccesstoCapitalRisks.Ourinternationalcustomerscouldhavereducedaccesstoworkingcapitalduetohigherinterestrates,reducedbanklendingresultingfromcontractionsinthe
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moneysupplyorthedeteriorationinthecustomer'soritsbank'sfinancialcondition,ortheinabilitytoaccessotherfinancing.
• GlobalHealthOutbreaks.Theoccurrenceofapandemicdiseasemayadverselyimpactouroperations,andsomeofourkeycustomers.Suchdiseasescouldalsopotentiallydisruptthetimelinessandreliabilityofthedistributionnetworkwerelyon.
AccesstoPersonnel.Thereissubstantialcompetitionforqualifiedandcapablepersonnelincertainjurisdictionsinwhichweoperate,includingChina,whichmaymakeitdifficultforustorecruitandretainqualifiedemployeesinsufficientnumbers.Increaseddifficultyinrecruitingorretainingsufficientandadequatepersonnelinourinternationaloperationsmayleadtoincreasedmanufacturingandemploymentcompensationcosts,whichcouldadverselyaffectourresultsofoperations.
Wecouldsufferalossofrevenueandincreasedcosts,exposuretosignificantliability,reputationalharm,andotherseriousnegativeconsequencesifwesustaincyber-attacksorotherdatasecuritybreachesthatdisruptouroperationsorresultinthedisseminationofproprietaryorconfidentialinformationaboutusorourcustomersorotherthird-parties.
Ouroperationsaredependentuponourabilitytoprotectourcomputerequipmentandtheelectronicdatastoredinourdatabasesfromdamageby,amongotherthings,earthquake,fire,naturaldisasters,accidents,powerdisruptions,telecommunicationsfailures,actsofterrorismorwar,employeemisconduct,physicalorelectronicbreak-ins,cyber-attacks,orsimilareventsordisruptions.Wemanageandstorevariousproprietaryinformationandsensitiveorconfidentialdatarelatingtoouroperations.Inaddition,ouroutsourcingservicesandcloudcomputingbusinessesroutinelyprocess,store,andtransmitlargeamountsofdataforourcustomersandvendors,includingsensitiveandpersonallyidentifiableinformation.Asouroperationsbecomemoreautomatedandincreasinglyinterdependent,ourexposuretotherisksposedbythesetypesofeventswillincrease.Wehavebeen,andwilllikelycontinuetobe,subjecttocomputervirusesorothermaliciouscodes,cyber-attacks,orothercomputer-relatedattemptstobreachtheinformationtechnology("IT")systemsweuseforthesepurposes.WemayalsobesubjecttoITsystemfailuresandnetworkdisruptionsduetothesefactors.Experiencedcomputerprogrammersandhackersmaybeabletopenetrateournetworksecurityandmisappropriateorcompromiseourconfidentialinformationorthatofthird-parties,createsystemdisruptions,orcauseshutdowns.Computerprogrammersandhackersalsomaybeabletodevelopanddeployviruses,worms,andothermalicioussoftwareprogramsthatattackourproductsorotherwiseexploitanysecurityvulnerabilitiesofourproducts.Inaddition,sophisticatedhardwareandoperatingsystemsoftwareandapplicationsthatweproduceorprocurefromthird-partiesmaycontaindefectsindesignormanufacture,including"bugs"andotherproblemsthatcouldunexpectedlyinterferewiththeoperationofthesystem.
Thecoststoustoeliminateoraddresstheforegoingsecurityproblemsandsecurityvulnerabilitiesbeforeorafteracyber-incidentcouldbesignificant.Systemredundancymaybeineffectiveorinadequate,andourdisasterrecoveryplanningmaynotbesufficientforalleventualities.Ourremediationeffortsmaynotbesuccessfulandcouldresultininterruptions,delays,orcessationofservice,andlossofexistingorpotentialcustomersthatmayimpedeoursales,manufacturing,distribution,orothercriticalfunctions.WecouldloseexistingorpotentialcustomersforoutsourcingservicesorotherITsolutionsinconnectionwithanyactualorperceivedsecurityvulnerabilitiesinourproducts.Inaddition,breachesofoursecuritymeasuresandtheunapproveddisseminationofproprietaryinformationorsensitiveorconfidentialdataaboutusorourcustomersorotherthird-parties,couldexposeus,ourvendorsandcustomers,orotherthird-partiesaffectedtoariskoflossormisuseofthisinformation,resultinlitigationandpotentialliabilityforus,damageourbrandandreputation,orotherwiseharmourbusiness.Inaddition,werelyincertainlimitedcapacitiesonthird-partydatamanagementproviderswhosepossiblesecurityproblemsandsecurityvulnerabilitiesmayhavesimilareffectsonus.
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Wearesubjecttolaws,rules,andregulationsintheU.S.andothercountriesrelatingtothecollection,use,andsecurityofuserdata.Inmanycases,theselawsapplynotonlytothird-partytransactions,butalsototransfersofinformationbetweenusandoursubsidiaries,andamongus,oursubsidiariesandotherpartieswithwhichwehavecommercialrelations.Ourabilitytoexecutetransactionsandtopossessandusepersonalinformationanddatainconductingourbusinesssubjectsustolegislativeandregulatoryburdensthatmayrequireustonotifyvendors,customersoremployeesofadatasecuritybreach.Wehaveincurred,andwillcontinuetoincur,significantexpensestocomplywithmandatoryprivacyandsecuritystandardsandprotocolsimposedbylaw,regulation,industrystandards,orcontractualobligations.Theselaws,protocolsandstandardscontinuetodevelopandmaybeinconsistentfromjurisdictiontojurisdiction.Complyingwithemergingandchanginginternationalrequirementsmaycauseustoincursubstantialcostsorrequireustochangeourbusinesspractices.Ifwefailtocomplywithapplicablefederal,stateorinternationalprivacy-relatedordataprotectionlawswemaybesubjecttoproceedingsbygovernmentalentitiesandincurpenaltiesorsignificantlegalliability.
Ifwedonotcontrolourfixedcosts,wewillnotbeabletocompeteeffectivelyinourindustry.
Wecontinuallyseektomakeourcoststructureandbusinessprocessesmoreefficient.Wearefocusedonincreasingworkforceflexibilityandscalability,andimprovingoverallcompetitivenessbyleveragingourglobalcapabilities,aswellasexternaltalentandskills,worldwide.Ourstrategyinvolves,toasubstantialdegree,increasingrevenueandproductvolumewhileatthesametimecontrollingoperatingexpenses.Ifwedonotcontrolouroperatingexpenses,ourabilitytocompeteinthemarketplacemaybeimpaired.Inthepast,activitiestoreduceoperatingcostshaveincludedclosuresandtransfersoffacilities,significantpersonnelreductionsandeffortstoincreaseautomation.
Ifweexperienceshortagesordelaysinthereceiptof,orcostincreasesin,criticalcomponents,equipmentorrawmaterialsnecessarytomanufactureourproducts,wemaysufferloweroperatingmargins,productiondelaysandothermaterialadverseeffects.
Thecost,qualityandsupplyofcomponents,subassemblies,certainequipmentandrawmaterialsusedtomanufactureourproductsandkeycomponentslikerecordingmediaandheadsarecriticaltooursuccess.Theequipmentweusetomanufactureourproductsandcomponentsisfrequentlycustommadeandcomesfromafewsuppliersandtheleadtimesrequiredtoobtainmanufacturingequipmentcanbesignificant.Particularlyimportantforourproductsincluderead/writeheads,aluminumorglasssubstratesforrecordingmedia,ASICs,spindlemotors,printedcircuitboards,andsuspensionassemblies.
Werelyonsolesuppliersoralimitednumberofsuppliersforsomeofthesecomponentsthatwedonotmanufacture,includingaluminumandglasssubstrates,read/writeheads,ASICs,spindlemotors,printedcircuitboards,andsuspensionassemblies.Manyofsuchcomponentsuppliersaregeographicallyconcentrated,inparticular,inThailand,whichmakesoursupplychainmorevulnerabletoregionaldisruptionssuchastheseverefloodinginThailandinOctober2011,whichhadamaterialimpactontheproductionandavailabilityofmanycomponents.Ifourvendorsforthesecomponentsareunabletomeetourcost,quality,andsupplyrequirements,wecouldexperienceashortageinsupplyoranincreaseinproductioncosts,whichwouldadverselyaffectourresultsofoperations.
Certainrareearthelementsarecriticalinthemanufactureofourproducts.Wepurchasecomponentsthatcontainrareearthelementsfromanumberofcountries,includingthePeople'sRepublicofChina.Wecannotpredictwhetheranynationwillimposeregulations,quotasorembargoesupontherareearthelementsincorporatedintoourproductsthatwouldrestricttheworldwidesupplyofsuchmetalsorincreasetheircost.Wehaveexperiencedincreasedcostsandproductiondelayswhenwewereunabletoobtainthenecessaryequipmentorsufficientquantitiesofsomecomponents,and/orhavebeenforcedtopayhigherpricesormakevolumepurchasecommitmentsoradvancedepositsforsomecomponents,equipmentorrawmaterialsthatwereinshortsupplyintheindustryingeneral.Ifanymajorsupplierweretorestrictthesupplyavailabletousorincreasethecostoftherareearthelementsusedinourproducts,we
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couldexperienceashortageinsupplyoranincreaseinproductioncosts,whichwouldadverselyaffectourresultsofoperations.
Consolidationamongcomponentmanufacturershasresultedandmaycontinuetoresultinsomecomponentmanufacturersexitingtheindustryornotmakingsufficientinvestmentsinresearchtodevelopnewcomponents.
Ifthereisashortageof,ordelayinsupplyinguswith,criticalcomponents,equipmentorrawmaterials,then:
• itislikelythatoursupplierswouldraisetheirpricesand,ifwecouldnotpassthesepriceincreasestoourcustomers,ouroperatingmarginwoulddecline;
• wemighthavetoreengineersomeproducts,whichwouldlikelycauseproductionandshipmentdelays,makethereengineeredproductsmorecostlyandprovideuswithalowerrateofreturnontheseproducts;
• wewouldlikelyhavetoallocatethecomponentswereceivetocertainofourproductsandshiplessofothers,whichcouldreduceourrevenuesandcouldcauseustolosesalestocustomerswhocouldpurchasemoreoftheirrequiredproductsfrommanufacturersthateitherdidnotexperiencetheseshortagesordelaysorthatmadedifferentallocations;and
• wemightbelateinshippingproducts,causingpotentialcustomerstomakepurchasesfromourcompetitors,thuscausingourrevenueandoperatingmargintodecline.
Wecannotassureyouthatwewillbeabletoobtaincriticalcomponentsinatimelyandeconomicmanner.
Weoftenaimtoleadthemarketinnewtechnologydeploymentsandleverageuniqueandcustomizedtechnologyfromsinglesourcesupplierswhoareearlyadoptersintheemergingmarket.Ouroptionsinsupplierselectioninthesecasesarelimitedandthesupplierbasedtechnologymayconsequentlybesinglesourceduntilwideradoptionofthetechnologyoccursandanynecessarylicensesbecomeavailable.Insuchcasesanytechnicalissuesinthesupplier'stechnologymaycauseustodelayshipmentsofournewtechnologydeploymentsandthereforeharmourfinancialposition.
Ifrevenuesfallorcustomerdemanddecreasessignificantly,wemaynotmeetallofourpurchasecommitmentstocertainsuppliers.
Fromtimetotime,weenterintolong-term,non-cancelablepurchasecommitmentsormakelargeup-frontinvestmentswithcertainsuppliersinordertosecurecertaincomponentsortechnologiesfortheproductionofourproductsortosupplementourinternalmanufacturingcapacityforcertaincomponents.Ifouractualrevenuesinthefuturearelowerthanourprojectionsorifcustomerdemanddecreasessignificantlybelowourprojections,wemaynotmeetallofourpurchasecommitmentswiththesesuppliers.Asaresult,itispossiblethatourrevenueswillnotbesufficienttorecoupourup-frontinvestments,inwhichcasewewillhavetoshiftoutputfromourinternalmanufacturingfacilitiestothesesuppliersormakepenalty-typepaymentsunderthesecontracts.
Conflictmineralsregulationsmaycauseustoincuradditionalexpensesandcouldlimitthesupplyandincreasethecostofcertainmetalsusedinmanufacturingourproducts.
InAugust2012,theSECadoptedrulesestablishingadditionaldisclosureandreportingrequirementsregardingtheuseofspecifiedminerals,orconflictminerals,thatarenecessarytothefunctionalityorproductionofproductsmanufacturedorcontractedtobemanufactured.Theseruleswillrequireustodetermine,discloseandreportwhetherornotsuchconflictmineralsoriginatefromtheDemocraticRepublicoftheCongooranadjoiningcountry.ThemostrecentreportwasfiledonMay27,2016.Theserulescouldaffectourabilitytosourcecertainmaterialsusedinourproductsatcompetitivepricesand
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couldimpacttheavailabilityofcertainmineralsusedinthemanufactureofourproducts,includinggold,tantalum,tinandtungsten.Astheremaybeonlyalimitednumberofsuppliersof"conflictfree"minerals,wecannotbesurethatwewillbeabletoobtainnecessaryconflictfreemineralsinsufficientquantitiesoratcompetitiveprices.Ourcustomers,includingourOEMcustomers,mayrequirethatourproductsbefreeofconflictminerals,andourrevenuesandmarginsmaybeharmedifweareunabletoprocureconflictfreemineralsatareasonableprice,oratall,orareunabletopassthroughanyincreasedcostsassociatedwithmeetingthesedemands.Additionally,wemayfacereputationalchallengeswithourcustomersandotherstakeholdersifweareunabletosufficientlyverifytheoriginsofallmineralsusedinourproductsthroughtheduediligenceproceduresthatweimplement.Wemayalsofacechallengeswithgovernmentregulatorsandourcustomersandsuppliersifweareunabletosufficientlyverifythatthemetalsusedinourproductsareconflictfree.Weexpectthattheremaybematerialcostsassociatedwithcomplyingwiththedisclosurerequirements,suchascostsrelatedtodeterminingthesourceofcertainmineralsusedinourproducts,aswellascostsrelatedtopossiblechangestoproducts,processes,orsourcesofsupplyasaconsequenceofsuchverificationanddisclosurerequirements.
Thelossofkeyexecutiveofficersandemployeescouldnegativelyimpactourbusinessprospects.
Ourfutureperformancedependstoasignificantdegreeuponthecontinuedserviceofkeymembersofmanagementaswellasmarketing,salesandproductdevelopmentpersonnel.Thelossofoneormoreofourkeypersonnelmayhaveamaterialadverseeffectonourbusiness,resultsofoperationsandfinancialcondition.Webelieveourfuturesuccesswillalsodependinlargepartuponourabilitytoattract,retainandfurthermotivatehighlyskilledmanagement,marketing,salesandproductdevelopmentpersonnel.Wehaveexperiencedintensecompetitionforpersonnel,andwecannotassureyouthatwewillbeabletoretainourkeyemployeesorthatwewillbesuccessfulinattracting,assimilatingandretainingpersonnelinthefuture.
Duetothecomplexityofourproducts,somedefectsmayonlybecomedetectableafterdeployment.
Ourproductsarehighlycomplexandaredesignedtooperateinandformpartoflargercomplexnetworksandstoragesystems.Defectsinourproducts,orinthenetworksandsystemsofwhichtheyformapart,directlyorindirectly,haveresultedinandmayinthefutureresultin:
• increasedcostsandproductdelaysuntilcomplexsolutionlevelinteroperabilityissuesareresolved;
• costsassociatedwiththeremediationofanyproblemsattributabletoourproducts;
• lossofordelaysinrevenues;
• lossofcustomers;
• failuretoachievemarketacceptanceandlossofmarketshare;
• increasedserviceandwarrantycosts;and
• increasedinsurancecosts.
Defectsinourproductscouldalsoresultinlegalactionsbyourcustomersforpropertydamage,injuryordeath.Productliabilityclaimscouldexceedthelevelofinsurancecoveragethatwehaveobtainedtocoverdefectsinourproducts.Anysignificantuninsuredclaimscouldsignificantlyharmourfinancialcondition.
Politicalevents,war,terrorism,naturaldisasters,publichealthissuesandothercircumstancescouldmateriallyadverselyaffectourresultsofoperationsandfinancialcondition.
War,terrorism,geopoliticaluncertainties,naturaldisasters,publichealthissues,andotherbusinessinterruptionshavecausedandcouldcausedamageordisruptiontointernationalcommerceandtheglobal
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economy,andthuscouldhaveastrongnegativeeffectonourbusiness,oursuppliers,logisticsproviders,manufacturingvendorsandcustomers.Ourbusinessoperationsaresubjecttointerruptionbynaturaldisasterssuchasfloodsandearthquakes,fire,powershortages,terroristattacks,otherhostileacts,labordisputes,publichealthissues,andothereventsbeyondourcontrol.Sucheventscoulddecreasedemandforourproducts,makeitdifficultorimpossibleforustomakeanddeliverproductstoourcustomers,ortoreceivecomponentsfromoursuppliers,andcreatedelaysandinefficienciesinoursupplychain.Intheeventofanaturaldisaster,lossesandsignificantrecoverytimecouldberequiredtoresumeoperationsandourfinancialconditionandoperatingresultscouldbemateriallyadverselyaffected.Shouldmajorpublichealthissues,includingpandemics,arise,wecouldbenegativelyaffectedbystringentemployeetravelrestrictions,additionallimitationsinfreightservices,governmentalactionslimitingthemovementofproductsbetweenregions,delaysinproductionrampsofnewproducts,anddisruptionsinouroperationsandsomeofourkeycustomers.
MacroeconomicdevelopmentslikethewithdrawalofUnitedKingdomfromtheEuropeanUnion,thedebtcrisisincertaincountriesintheEuropeanUnionandslowingeconomiesinpartsofAsiaandSouthAmericacouldnegativelyaffectourbusiness,operatingresultsorfinancialconditionwhich,inturn,couldadverselyaffectourstockprice.Ageneralweakeningof,andrelateddecliningcorporateconfidencein,theglobaleconomyorthecurtailmentingovernmentorcorporatespendingcouldcausecurrentorpotentialcustomerstoreducetheirITbudgetsorbeunabletofundhardwaresystems,whichcouldcausecustomerstodelay,decreaseorcancelpurchasesofourproductsorcausecustomersnottopayusortodelaypayingusforpreviouslypurchasedproductsandservices.
Failuretocomplywithapplicableenvironmentallawsandregulationscouldhaveamaterialadverseeffectonourbusiness,resultsofoperationsandfinancialcondition.
Thesaleandmanufacturingofproductsincertainstatesandcountriesmaysubjectusandoursupplierstostate,federalandinternationallawsandregulationsgoverningprotectionoftheenvironment,includingthosegoverningdischargesofpollutantsintotheairandwater,themanagementanddisposalofhazardoussubstancesandwastes,thecleanupofcontaminatedsites,restrictionsonthepresenceofcertainsubstancesinelectronicproductsandtheresponsibilityforenvironmentallysafedisposalorrecycling.Weendeavortoensurethatweandoursupplierscomplywithallapplicableenvironmentallawsandregulations,however,compliancemayincreaseouroperatingcostsandotherwiseimpactfuturefinancialresults.Ifadditionalormorestringentrequirementsareimposedonusinthefuture,wecouldincuradditionaloperatingcostsandcapitalexpenditures.Ifwefailtocomplywithapplicableenvironmentallaws,regulations,initiatives,orstandardsofconduct,ourcustomersmayrefusetopurchaseourproductsandwecouldbesubjecttofines,penaltiesandpossibleprohibitionofsalesofourproductsintooneormorestatesorcountries,liabilitytoourcustomersanddamagetoourreputation,whichcouldresultinamaterialadverseeffectonthefinancialconditionorresultsofoperations.
Anycostreductioninitiativesthatweundertakemaynotdelivertheresultsweexpect,andtheseactionsmayadverselyaffectourbusiness.
OnJune27,2016andJuly11,2016weannouncedrestructuringplanstobesubstantiallycompletedbytheendoffiscalyear2017.Inaddition,managementwillcontinuetoevaluateourglobalfootprintandcoststructure,andadditionalrestructuringplansareexpectedtobeformalized.Asaresultofourrestructuring,wemayexperiencealossofcontinuity,lossofaccumulatedknowledge,disruptionstoouroperationsand/orinefficiencyduringtransitionalperiods.Anycost-cuttingmeasurescouldimpactemployeeretention.Inaddition,wecannotbesurethatthecostreductionandglobalfootprintconsolidationwillbesuccessfulinreducingouroverallexpensesasweexpectorthatadditionalcostswillnotoffsetanysuchreductionsorglobalfootprintconsolidation.Ifouroperatingcostsarehigherthanweexpectorifwedonotmaintainadequatecontrolofourcostsandexpenses,ourresultofoperationsmaysuffer.
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Ourabilitytouseournetoperatinglossandtaxcreditcarryforwardsmightbelimited.
TheuseofaportionofourU.S.netoperatinglossandtaxcreditcarryforwardsissubjecttoannuallimitationspursuanttoU.S.taxlaw.Section382oftheU.S.InternalRevenueCodegenerallyimposesanannuallimitationontheamountofnetoperatinglossortaxcreditcarryforwardsthatmightbeusedtooffsettaxableincomewhenacorporationhasundergonesignificantchangesinownership.Asaresult,futurechangesinownershipcouldputfurtherlimitationsontheavailabilityofournetoperatinglossortaxcreditcarryforwards.
Deteriorationinglobalcreditandfinancialmarketconditionscouldnegativelyimpactthevalueofourcurrentportfolioofcashequivalentsorshort-terminvestmentsandourabilitytomeetourfinancingobjectives.
Ourcashandcashequivalentsaremaintainedinhighlyliquidinvestmentswithremainingmaturitiesof90daysorlessatthetimeofpurchase.Ourshort-terminvestmentsconsistprimarilyofreadilymarketabledebtsecuritieswithremainingmaturitiesofmorethan90daysatthetimeofpurchase.Ourinvestmentpolicyhasasitsprincipalobjectivesthepreservationofprincipalandmaintenanceofliquidity.Wemitigatedefaultriskbyinvestinginhigh-qualityinvestmentgradesecurities,limitingthetimetomaturityandbymonitoringthecounter-partiesandunderlyingobligorsclosely.
Whileasofthedateofthisfiling,wearenotawareofanymaterialdowngrades,losses,orothersignificantdeteriorationinthefairvalueofourcashequivalentsorshort-terminvestments,noassurancecanbegiventhatfuturedeteriorationinconditionsoftheglobalcreditandfinancialmarketswouldnotnegativelyimpactourcurrentportfolioofcashequivalentsorshort-terminvestmentsorourabilitytomeetourfinancingobjectives.
Weareattimessubjecttointellectualpropertylegalproceedingsandclaimswhichcouldcauseustoincursignificantadditionalcostsorpreventusfromsellingourproducts,andwhichcouldadverselyaffectourresultsofoperationsandfinancialcondition.
Wearesubjectfromtime-to-timetolegalproceedingsandclaims,includingclaimsofallegedinfringementofthepatents,trademarksandotherintellectualpropertyrightsofthirdpartiesbyus,orourcustomers,inconnectionwiththeiruseofourproducts.Intellectualpropertylitigationcanbeexpensiveandtime-consuming,regardlessofthemeritsofanyclaim,andcoulddivertourmanagement'sattentionfromoperatingourbusiness.Inaddition,intellectualpropertylawsuitsaresubjecttoinherentuncertaintiesduetothecomplexityofthetechnicalissuesinvolved,whichmaycauseactualresultstodiffermateriallyfromourexpectations.Patentlitigationhasincreasedduetothecurrentuncertaintyofthelawandtheincreasingcompetitionandoverlapofproductfunctionalityinthefield.Someoftheactionsthatwefacefromtime-to-timeseekinjunctionsagainstthesaleofourproductsand/orsubstantialmonetarydamages,whichifgrantedorawarded,couldmateriallyharmourbusiness,financialconditionandoperatingresults.
Wecannotbecertainthatourproductsdonotandwillnotinfringeissuedpatentsorotherintellectualpropertyrightsofothers.Wemaynotbeawareofcurrentlyfiledpatentapplicationsthatrelatetoourproductsortechnology.Ifpatentsarelaterissuedontheseapplications,wemaybeliableforinfringement.Ifourproductswerefoundtoinfringetheintellectualpropertyrightsofothers,wecouldberequiredtopaysubstantialdamages,ceasethemanufacture,useandsaleofinfringingproductsinoneormoregeographiclocations,expendsignificantresourcestodevelopnon-infringingtechnology,discontinuetheuseofspecificprocessesorobtainlicensestothetechnologyinfringed.Wemightnotbeabletoobtainthenecessarylicensesonacceptableterms,oratall,orbeabletoreengineerourproductssuccessfullytoavoidinfringement.Anyoftheforegoingcouldcauseustoincursignificantcostsandpreventusfromsellingourproducts,whichcouldadverselyaffectourresultsofoperationsandfinancialcondition.See"Item8.FinancialStatementsandSupplementaryData-Note14.Legal,EnvironmentalandOtherContingencies"containedinthisreportforadescriptionofpendingintellectualpropertyproceedings.
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Wemaybeunabletoprotectourintellectualpropertyrights,whichcouldadverselyaffectourbusiness,financialconditionandresultsofoperations.
Werelyonacombinationofpatent,trademark,copyrightandtradesecretlaws,confidentialityproceduresandlicensingarrangementstoprotectourIPrights.Inthepast,wehavebeeninvolvedinsignificantandexpensivedisputesregardingourIPrightsandthoseofothers,includingclaimsthatwemaybeinfringingpatents,trademarksandotherIPrightsofthird-parties.Weexpectthatwewillbeinvolvedinsimilardisputesinthefuture.
Therecanbenoassurancethat:
• anyofourexistingpatentswillcontinuetobeheldvalid,ifchallenged;
• patentswillbeissuedforanyofourpendingapplications;
• anyclaimsallowedfromexistingorpendingpatentswillhavesufficientscopeorstrengthtoprotectus;
• ourpatentswillbeissuedintheprimarycountrieswhereourproductsaresoldinordertoprotectourrightsandpotentialcommercialadvantage;
• wewillbeabletoprotectourtradesecretsandotherproprietaryinformationthroughconfidentialityagreementswithourcustomers,suppliersandemployeesandthroughothersecuritymeasures;and
• otherswillnotgainaccesstoourtradesecrets.
Inaddition,ourcompetitorsmaybeabletodesigntheirproductsaroundourpatentsandotherproprietaryrights.Enforcementofourrightsoftenrequireslitigation.Ifwebringapatentinfringementactionandarenotsuccessful,ourcompetitorswouldbeabletousesimilartechnologytocompetewithus.Moreover,thedefendantinsuchanactionmaysuccessfullycountersueusforinfringementoftheirpatentsorassertacounterclaimthatourpatentsareinvalidorunenforceable.
Furthermore,wehavesignificantoperationsandsalesinforeigncountrieswhereintellectualpropertylawsandenforcementpoliciesareoftenlessdeveloped,lessstringentormoredifficulttoenforcethanintheUnitedStates.
Wemaynotbeabletoidentifysuitablestrategicalliances,acquisitions,jointventuresorinvestmentopportunities,tosuccessfullyacquireandintegratecompaniesthatprovidecomplementaryproductsortechnologiesortorealizetheanticipatedbenefitsofsuchtransactions.
Ourgrowthstrategyinvolvespursuingstrategicallianceswith,makingacquisitionsof,formingjointventureswithormakinginvestmentsinothercompaniesthatarecomplementarytoourbusiness.Thereissubstantialcompetitionforattractivestrategicalliance,acquisition,jointventureandinvestmentcandidates.Accordingly,wemaynotbeabletoidentifysuitablestrategicalliances,acquisition,jointventure,orinvestmentcandidates.Evenifwecanidentifythem,wecannotassureyouthatwewillbeabletopartnerwith,acquireorinvestinsuitablecandidates,orintegrateacquiredtechnologiesoroperationssuccessfullyintoourexistingtechnologiesandoperations.Moreover,ourabilitytofinancepotentialstrategicalliances,acquisitions,jointventuresorinvestmentswillbelimitedbyourhighdegreeofleverage,thecovenantscontainedintheinstrumentsthatgovernouroutstandingindebtedness,andanyagreementsgoverninganyotherdebtwemayincur.
Ifwearesuccessfulinformingstrategicalliancesoracquiring,formingjointventuresormakinginvestmentsinothercompanies,anyofthesetransactionsmayhaveanadverseeffectonourresultsofoperations,particularlywhiletheoperationsofanacquiredbusinessarebeingintegrated.Itisalsolikelythatintegrationofacquiredcompanieswouldleadtothelossofkeyemployeesfromthosecompaniesorthelossofcustomersofthosecompanies.Inaddition,theintegrationofanyacquiredcompanieswould
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requiresubstantialattentionfromourseniormanagement,whichmaylimittheamountoftimeavailabletobedevotedtoourday-to-dayoperationsortotheexecutionofourstrategy.Growthbystrategicalliance,acquisition,jointventureorinvestmentinvolvesanevenhigherdegreeofrisktotheextentwecombinenewproductofferingsandenternewmarketsinwhichwehavelimitedexperience,andnoassurancecanbegiventhatacquisitionsofentitieswithneworalternativebusinessmodelswillbesuccessfullyintegratedorachievetheirstatedobjectives.Therecanbenoassurancethatwewillrealizetheanticipatedbenefitsofanystrategicalliance,acquisition,jointventureorinvestmentthatwemakeor,ifwedo,howlongitwilltaketoachievesuchbenefits.
Furthermore,theexpansionofourbusinessinvolvestheriskthatwemightnotmanageourgrowtheffectively,thatwewouldincuradditionaldebttofinancetheseacquisitionsorinvestments,thatwemayhaveimpairmentofgoodwilloracquiredintangibleassetsassociatedwiththeseacquisitionsandthatwewouldincursubstantialchargesrelatingtothewrite-offofin-processresearchanddevelopment,similartothatwhichweincurredinconnectionwithseveralofourprioracquisitions.Eachoftheseitemscouldhaveamaterialadverseeffectonourfinancialconditionandresultsofoperations.
Inaddition,wecouldissueadditionalordinarysharesinconnectionwithfuturestrategicalliances,acquisitions,jointventuresorinvestments.Issuingsharesinconnectionwithsuchtransactionswouldhavetheeffectofdilutingyourownershippercentageoftheordinarysharesandcouldcausethepriceofourordinarysharestodecline.
Servicingourindebtednessrequiresasignificantamountofcash,andwemaynothavesufficientcashflowfromourbusinesstopayoursubstantialdebt.
Weareleveragedandhavesignificantdebtserviceobligations.Oursignificantdebtanddebtservicerequirementscouldadverselyaffectourabilitytooperateourbusinessandmaylimitourabilitytotakeadvantageofpotentialbusinessopportunities.Forexample,ourhighlevelofdebtpresentsthefollowingrisks:
• wearerequiredtouseasubstantialportionofourcashflowfromoperationstopayprincipalandinterestonourdebt,therebyreducingtheavailabilityofourcashflowtofundworkingcapital,capitalexpenditures,productdevelopmentefforts,strategicacquisitions,investmentsandalliances,andothergeneralcorporaterequirements;
• oursubstantialleverageincreasesourvulnerabilitytoeconomicdownturnsandadversecompetitiveandindustryconditionsandcouldplaceusatacompetitivedisadvantagecomparedtothoseofourcompetitorsthatarelessleveraged;
• ourdebtserviceobligationscouldlimitourflexibilityinplanningfor,orreactingto,changesinourbusinessandourindustryandcouldlimitourabilitytopursueotherbusinessopportunities,borrowmoremoneyforoperationsorcapitalinthefutureandimplementourbusinessstrategies;
• ourlevelofdebtmayrestrictusfromraisingadditionalfinancingonsatisfactorytermstofundworkingcapital,capitalexpenditures,productdevelopmentefforts,strategicacquisitions,investmentsandalliances,andothergeneralcorporaterequirements;and
• covenantsinourdebtinstrumentslimitourabilitytopayfuturedividendsormakeotherrestrictedpaymentsandinvestments.
Intheeventthatweneedtorefinancealloraportionofouroutstandingdebtasitmatures,wemaynotbeabletoobtaintermsasfavorableasthetermsofourexistingdebtorrefinanceourexistingdebtatall.Ifprevailinginterestratesorotherfactorsexistingatthetimeofrefinancingresultinhigherinterestratesuponrefinancing,thentheinterestexpenserelatingtotherefinanceddebtwouldincrease.Furthermore,ifanyratingagencychangesourcreditratingoroutlook,ourdebtandequitysecuritiescould
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benegativelyaffected,whichcouldadverselyaffectourabilitytorefinanceexistingdebtorraiseadditionalcapital.
Inaddition,ourbusinessmaynotgeneratecashflowinanamountsufficienttoenableustopaytheprincipalof,orintereston,ourindebtednessortofundourotherliquidityneeds,includingworkingcapital,capitalexpenditures,productdevelopmentefforts,strategicacquisitions,investmentsandalliancesandothergeneralcorporaterequirements.
Ourabilitytogeneratecashissubjecttogeneraleconomic,financial,competitive,legislative,regulatoryandotherfactorsthatarebeyondourcontrol.Wecannotassureyouthat:
• ourbusinesswillgeneratesufficientcashflowfromoperations;
• wewillcontinuetorealizethecostsavings,revenuegrowthandoperatingimprovementsthatresultfromtheexecutionofourlong-termstrategicplan;or
• futuresourcesoffundingwillbeavailabletousinamountssufficienttoenableustofundourliquidityneeds.
Ifwecannotfundourliquidityneeds,wewillhavetotakeactionssuchasreducingordelayingcapitalexpenditures,productdevelopmentefforts,strategicacquisitions,investmentsandalliances,andothergeneralcorporaterequirements.Wecannotassureyouthatanyoftheseremediescould,ifnecessary,beeffectedoncommerciallyreasonableterms,oratall,orthattheywouldpermitustomeetourscheduleddebtserviceobligations.Inadditionifweincuradditionaldebt,therisksassociatedwithoursubstantialleverage,includingtheriskthatwewillbeunabletoserviceourdebtorgenerateenoughcashflowtofundourliquidityneeds,couldintensify.
Thepriceofourordinarysharesmaybevolatileandcoulddeclinesignificantly.
Thestockmarket,ingeneral,andthemarketfortechnologystocksinparticular,hasrecentlyexperiencedvolatilitythathasoftenbeenunrelatedtotheoperatingperformanceofcompanies.Ifthesemarketorindustry-basedfluctuationscontinue,thetradingpriceofourordinarysharescoulddeclinesignificantlyindependentofouractualoperatingperformance,andyoucouldloseallorasubstantialpartofyourinvestment.Themarketpriceofourordinarysharescouldfluctuatesignificantlyinresponsetoseveralfactors,includingamongothers:
• generaluncertaintyinstockmarketconditionsoccasionedbyglobaleconomicconditions,negativefinancialnewsandthecontinuedinstabilityofseverallargefinancialinstitutions;
• actualoranticipatedvariationsinourresultsofoperations;
• announcementsofinnovations,newproductsorsignificantpricereductionsbyusorourcompetitors,includingthosecompetitorswhoofferalternativestoragetechnologysolutions;
• ourfailuretomeettheperformanceestimatesofinvestmentresearchanalysts;
• thetimingofannouncementsbyusorourcompetitorsofsignificantcontractsoracquisitions;
• generalstockmarketconditions;
• theoccurrenceofmajorcatastrophicevents;
• changesinfinancialestimatesbyinvestmentresearchanalysts;
• changesinthecreditratingsofourindebtednessbyratingagencies;and
• thesaleofourordinarysharesheldbycertainequityinvestorsormembersofmanagement.
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Anydecisiontoreduceordiscontinuethepaymentofcashdividendstoourshareholdersortherepurchaseofourordinarysharespursuanttoourpreviouslyannouncedsharerepurchaseprogramcouldcausethemarketpriceofourordinarysharestodeclinesignificantly.
Althoughwehaveannouncedtargetedregularcashdividendamountsandasharerepurchaseprogram,weareundernoobligationtopaycashdividendstoourshareholdersinthefutureattheannouncedtargetedlevelsoratallortorepurchaseourordinarysharesatanyparticularpriceoratall.ThedeclarationandpaymentofanyfuturedividendsisatthediscretionofourBoardofDirectorsandourpreviouslyannouncedsharerepurchaseprogrammaybesuspendedordiscontinuedatanytime.Ourpaymentofquarterlycashdividendsandtherepurchaseofourordinarysharespursuanttooursharerepurchaseprogramaresubjectto,amongotherthings,ourfinancialpositionandresultsofoperations,availablecashandcashflow,capitalandregulatoryrequirements,marketandeconomicconditions,ourordinaryshareprice,andotherfactors.Anyreductionordiscontinuancebyusofthepaymentofquarterlycashdividendsortherepurchaseofourordinarysharespursuanttooursharerepurchaseprogramcouldcausethemarketpriceofourordinarysharestodeclinesignificantly.Moreover,intheeventourpaymentofquarterlycashdividendsorrepurchasesofourordinarysharesarereducedordiscontinued,ourfailuretoresumesuchactivitiesathistoricallevelscouldresultinapersistentlowermarketvaluationofourordinaryshares.
Significantfluctuationsinthemarketpriceofourordinarysharescouldresultinsecuritiesclassactionclaimsagainstus.
Significantpriceandvaluefluctuationshaveoccurredwithrespecttothepubliclytradedsecuritiesoftechnologycompanies.Thepriceofourordinarysharesislikelytobevolatileinthefuture.Inthepast,followingperiodsofdeclineinthemarketpriceofacompany'ssecurities,classactionlawsuitshaveoftenbeenpursuedagainstthatcompany.Ifsimilarlitigationwerepursuedagainstus,itcouldresultinsubstantialcostsandadiversionofmanagement'sattentionandresources,whichcouldmateriallyadverselyaffectourresultsofoperations,financialconditionandliquidity.
ITEM1B.UNRESOLVEDSTAFFCOMMENTS
None.
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ITEM2.PROPERTIES
OurcompanyheadquartersarelocatedinIreland,whileourU.S.executiveofficesarelocatedinCupertino,California.OurprincipalmanufacturingfacilitiesarelocatedinChina,Malaysia,NorthernIreland,Singapore,ThailandandtheUnitedStates.OurprincipalproductdevelopmentfacilitiesarelocatedinCalifornia,Colorado,Minnesota,SingaporeandSouthKorea.Ourleasedfacilitiesareoccupiedunderleasesthatexpireatvarioustimesthrough2082.
Ourmainmaterialmanufacturing,productdevelopmentandmarketingandadministrativefacilitiesatJuly1,2016areasfollows:
AsofJuly1,2016,weownedorleasedatotalofapproximately12.2millionsquarefeetofspaceworldwide.Weoccupiedapproximately7.4millionsquarefeetforthepurposeofmanufacturing,2.4millionsquarefeetforproductdevelopment,2.2millionsquarefeetformarketingandadministrativepurposes.Includedinthe12.2millionsquarefeetofownedorleasedspaceisatotalof0.2millionsquarefeetthatiscurrentlyunoccupied.Webelievethatourexistingpropertiesareingoodoperatingconditionandaresuitablefortheoperationsforwhichtheyareused.Duringfiscalyear2016,certainofourmanufacturingfacilitiesexperiencedunderutilization,however,asofJuly1,2016,noneofourmanufacturingfacilitieswereexperiencingsignificantunderutilization.
ITEM3.LEGALPROCEEDINGS
See"Item8.FinancialStatementsandSupplementaryData—Note14.Legal,EnvironmentalandOtherContingencies."
ITEM4.MINESAFETYDISCLOSURES
Notapplicable.
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Location Building(s)
OwnedorLeased ApproximateSquareFootage PrimaryUse
UnitedStates California Owned/Leased 842,000 ProductdevelopmentandmarketingandadministrativeColorado Owned/Leased 664,000 ProductdevelopmentMinnesota Owned/Leased 1,144,000 Manufactureofrecordingheadsandproductdevelopment
Europe NorthernIreland Springtown Owned 479,000 Manufactureofrecordingheads
Asia China Suzhou Owned(1) 1,103,000 ManufactureofdrivesWuxi Leased 704,000 Manufactureofdrivesanddrivesubassemblies
Malaysia Johor Owned(1) 631,000 ManufactureofsubstratesPenang Owned(1) 402,000 ManufactureofdrivesubassembliesSeremban Owned/Leased(1) 299,000 Manufactureoftestequipmentandsystems
Singapore Woodlands Owned/Leased(1) 1,504,000 ManufactureofmediaSciencePark Owned/Leased 410,000 ProductdevelopmentAMK Leased 225,000 Marketingandadministrative
Thailand Korat Owned/Leased 1,767,000 ManufactureofdrivesanddrivesubassembliesTeparuk Owned/Leased 362,000 Manufactureofdrivesubassemblies
Korea Suwon Owned 220,000 Productdevelopment
(1) Landleasesforthesefacilitiesexpireatvaryingdatesthrough2067.
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PARTII
ITEM5.MARKETFORREGISTRANT'SCOMMONEQUITY,RELATEDSTOCKHOLDERMATTERSANDISSUERPURCHASESOFEQUITYSECURITIES
MarketInformation
OursharestradeontheNASDAQGlobalSelectMarketunderthesymbol"STX."Thehighandlowsalespricesofourshares,asreportedbytheNASDAQGlobalSelectMarket,aresetforthbelowfortheperiodsindicated.
AsofJuly29,2016therewereapproximately650holdersofrecordofourordinaryshares.Wedidnotsellanyofourequitysecuritiesduringfiscalyear2016thatwerenotregisteredundertheSecuritiesActof1933,asamended.
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PriceRange FiscalQuarter High Low QuarterendedOctober3,2014 $ 63.27 $ 54.38QuarterendedJanuary2,2015 $ 69.40 $ 50.44QuarterendedApril3,2015 $ 66.90 $ 51.05QuarterendedJuly3,2015 $ 60.09 $ 46.84QuarterendedOctober2,2015 $ 52.88 $ 41.59QuarterendedJanuary1,2016 $ 49.50 $ 32.38QuarterendedApril1,2016 $ 37.45 $ 26.25QuarterendedJuly1,2016 $ 35.79 $ 18.42
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PerformanceGraph
TheperformancegraphbelowshowsthecumulativetotalshareholderreturnonourordinarysharesfortheperiodfromJuly1,2011toJuly1,2016.ThisiscomparedwiththecumulativetotalreturnoftheDowJonesUSComputerHardwareIndexandtheStandard&Poor's500StockIndexoverthesameperiod.ThegraphassumesthatonJuly1,2011,$100wasinvestedinourordinarysharesand$100wasinvestedineachoftheothertwoindices,withdividendsreinvestedonthedateofpaymentwithoutpaymentofanycommissions.Dollaramountsinthegraphareroundedtothenearestwholedollar.Theperformanceshowninthegraphrepresentspastperformanceandshouldnotbeconsideredanindicationoffutureperformance.
Copyright©2,016BloombergFinanceL.P.Allrightsreserved.
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7/1/2011 6/29/2012 6/28/2013 6/27/2014 7/3/2015 7/1/2016 SeagateTechnologyplc 100.00 157.75 298.61 392.94 344.01 185.84S&P500 100.00 103.93 125.32 156.19 168.87 174.77DowJonesUSComputerHardware 100.00 131.29 102.88 155.52 190.99 152.43
* $100investedon7/1/11instockandinindices,includingreinvestmentofdividends.
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Dividends
Ourabilitytopaydividendsinthefuturewillbesubjectto,amongotherthings,generalbusinessconditionswithinthediskdriveindustry,ourfinancialresults,theimpactofpayingdividendsonourcreditratingsandlegalandcontractualrestrictionsonthepaymentofdividendsbyoursubsidiariestousorbyustoourordinaryshareholders,includingrestrictionsimposedbycovenantsonourdebtinstruments.
Thefollowingweredividendspaidinthelasttwofiscalyears:
RecordDate PaidDate DividendperShare
August8,2014 August22,2014 $ 0.43November11,2014 November25,2014 $ 0.54February10,2015 February24,2015 $ 0.54
May1,2015 May15,2015 $ 0.54August11,2015 August25,2015 $ 0.54November6,2015 November20,2015 $ 0.63February9,2016 February23,2016 $ 0.63May10,2016 May24,2016 $ 0.63September21,
2016 October5,2016 $ 0.63
FromtheclosingofourinitialpublicofferinginDecember2002through2016,wehavepaiddividends,pursuanttoourdividendpolicythenineffect,totalingapproximately$3.8billionintheaggregate.
RepurchasesofOurEquitySecurities
OnJuly24,2013,theBoardofDirectorsauthorizedtheCompanytorepurchase$2.5billionofitsoutstandingordinaryshares.OnApril22,2015theBoardofDirectorsauthorizedthecompanytorepurchaseanadditional$2.5billionofitsoutstandingordinaryshares.AsofJuly1,2016,$1.8billionremainedavailableforrepurchaseundertheexistingrepurchaseauthorizationlimits.AllrepurchasesareeffectedasredemptionsinaccordancewiththeCompany'sArticlesofAssociation.Thereisnoexpirationdateontheseauthorizations.
ThefollowingtablesetsforthinformationwithrespecttoallrepurchasesofoursharesmadeduringthefiscalyearendedJuly1,2016:
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Period
TotalNumberofShares
Purchased
AveragePricePaidperShare
TotalNumberofShares
PurchasedasPartofPublicly
AnnouncedPlansorPrograms
ApproximateDollarValueof
SharesPurchasedUnder
thePlansorPrograms
ApproximateDollarValueofSharesthatMay
YetBePurchasedUnder
thePlansorPrograms
(Inmillions,exceptaveragepricepaidpershare) 1stQuarterthrough3rdQuarterofFiscalYear2016 24 $ 47.49 24 $ 1,145 $ 1,758April2,2016throughApril29,2016 — 27.49 — — 1,758April30,2016throughMay27,2016 — 19.41 — — 1,758May28,2016throughJuly1,2016 — 23.12 — 1 1,757
Through4thQuarterofFiscalYear2016 24 $ 47.45 24 $ 1,146 $ 1,757
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ITEM6.SELECTEDFINANCIALDATA
Thefollowingselectedconsolidatedfinancialdatasetforthbelowisnotnecessarilyindicativeofresultsoffutureoperations,andshouldbereadinconjunctionwith"Item7.Management'sDiscussionandAnalysisofFinancialConditionandResultsofOperations"andtheConsolidatedFinancialStatementsandrelatednotestheretoincludedin"Item8.FinancialStatementsandSupplementaryData"ofthisAnnualReportonForm10-K,whichareincorporatedhereinbyreference,tofullyunderstandfactorsthatmayaffectthecomparabilityoftheinformationpresentedbelow.
TheConsolidatedStatementsofOperationsdataforthefiscalyearsendedJuly1,2016,July3,2015andJune27,2014,andtheConsolidatedBalanceSheetsdataasofJuly1,2016andJuly3,2015,arederivedfromourauditedConsolidatedFinancialStatementsappearingelsewhereinthisAnnualReportonForm10-K.TheConsolidatedStatementsofOperationsdataforthefiscalyearsendedJune28,2013andJune29,2012,andtheConsolidatedBalanceSheetsdataatJune27,2014,June28,2013andJune29,2012,arederivedfromourauditedConsolidatedFinancialStatementsthatarenotincludedinthisAnnualReportonForm10-K.
SupplementaryFinancialData(Unaudited)
QuarterlyData
TheCompanyoperatedandreportedfinancialresultsbasedona13-weekquartersinfiscalyear2016,whichendedontheFridayclosesttoSeptember30,December31,March31,andJune30.TheCompanyoperatedandreportedfinancialresultsbasedona14-weekquarterinitsfirstquarteroffiscalyear2015
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FiscalYearsEnded
(Dollarsinmillions,exceptpersharedata) July1,2016
July3,2015
June27,2014
June28,2013
June29,2012
Revenue $ 11,160 $ 13,739 $ 13,724 $ 14,351 $ 14,939Grossmargin 2,615 3,809 3,846 3,940 4,684Incomefromoperations 445 2,058 1,776 2,091 3,108Netincome 248 1,742 1,570 1,838 2,862Totalassets 8,252 9,845 9,492 9,243 10,106Totaldebt 4,130 4,155 3,920 2,777 2,863Equity $ 1,593 $ 3,018 $ 2,832 $ 3,506 $ 3,497
Netincomepershare: Basic $ 0.83 $ 5.38 $ 4.66 $ 4.97 $ 6.72Diluted 0.82 5.26 4.52 4.81 6.49
Numberofsharesusedinpersharecomputations: Basic 299 324 337 370 426Diluted 302 331 347 382 441
Cashdividendsdeclaredpershare $ 2.43 $ 2.05 $ 1.67 $ 1.40 $ 0.86
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endingontheFridayclosesttoSeptember30,2015and13-weekquartersfortheremainingquartersoffiscalyear2015.
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FiscalYear2016QuartersEnded
(Inmillions,exceptpersharedata) July1,2016
April1,2016
January1,2016
October2,2015
Revenue $ 2,654 $ 2,595 $ 2,986 $ 2,925Grossmargin 662 524 741 689Incomefromoperations 103 27 229 86Netincome(loss) 70 (21) 165 34Netincome(loss)pershare: Basic $ 0.23 $ (0.07) $ 0.55 $ 0.11Diluted 0.23 (0.07) 0.55 0.11
FiscalYear2015QuartersEnded
(Inmillions,exceptpersharedata) July3,2015
April3,2015
January2,2015
October3,2014
Revenue $ 2,927 $ 3,330 $ 3,696 $ 3,785Grossmargin 776 955 1,027 1,051Incomefromoperations 206 343 1,053 456Netincome 138 291 933 381Netincomepershare: Basic $ 0.44 $ 0.90 $ 2.84 $ 1.17Diluted 0.43 0.88 2.78 1.13
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ITEM7.MANAGEMENT'SDISCUSSIONANDANALYSISOFFINANCIALCONDITIONANDRESULTSOFOPERATIONS
ThefollowingisadiscussionoftheCompany'sfinancialcondition,changesinfinancialconditionandresultsofoperationsforthefiscalyearsended,July1,2016,July3,2015andJune27,2014.
Youshouldreadthisdiscussioninconjunctionwith"Item6.SelectedFinancialData"and"Item8.FinancialStatementsandSupplementaryData"includedelsewhereinthisAnnualReportonForm10-K.Exceptasnoted,referencestoanyfiscalyearmeanthetwelve-monthperiodendingontheFridayclosesttoJune30ofthatyear.Accordingly,fiscalyear2016comprised52weeksandendedonJuly1,2016.Fiscalyear2015comprised53weeksandendedonJuly3,2015.Fiscalyear2014comprised52weeksandendedonJune27,2014.Fiscalyear2017willbe52weeksandwillendonJune30,2017.
SomeofthestatementsandassumptionsincludedinthisAnnualReportonForm10-Kareforward-lookingstatementswithinthemeaningofSection27AoftheSecuritiesActof1933orSection21EoftheSecuritiesExchangeActof1934,eachasamended,including,inparticular,statementsaboutourplans,strategiesandprospectsandestimatesofindustrygrowthforthefiscalquarterendingSeptember30,2016andthefiscalyearendingJune30,2017andbeyond.Thesestatementsidentifyprospectiveinformationandmayincludewordssuchas"expects,""intends,""plans,""anticipates,""believes,""estimates,""predicts,""projects"andsimilarexpressions.Theseforward-lookingstatementsarebasedoninformationavailabletotheCompanyasofthedateofthisAnnualReportonForm10-Kandarebasedonmanagement'scurrentviewsandassumptions.Theseforward-lookingstatementsareconditioneduponandalsoinvolveanumberofknownandunknownrisks,uncertaintiesandotherfactorsthatcouldcauseactualresults,performanceoreventstodiffermateriallyfromthoseanticipatedbytheseforward-lookingstatements.Suchrisks,uncertaintiesandotherfactorsmaybebeyondourcontrolandmayposearisktoouroperatingandfinancialcondition.Suchrisksanduncertaintiesinclude,butarenotlimitedto:uncertaintyinglobaleconomicconditions,theimpactofthevariabledemandandadversepricingenvironmentfordiskdrives,particularlyinviewofcurrentbusinessandeconomicconditions;ourabilitytosuccessfullyqualify,manufactureandsellourdiskdriveproductsinincreasingvolumesonacost-effectivebasisandwithacceptablequality,particularlythenewdiskdriveproductswithlowercoststructures;theimpactofcompetitiveproductannouncements;ourabilitytoachieveprojectedcostsavingsinconnectionwithrestructuringplans;possibleexcessindustrysupplywithrespecttoparticulardiskdriveproducts;disruptionstooursupplychainorproductioncapabilities;unexpectedadvancesincompetingtechnologies;thedevelopmentandintroductionofproductsbasedonnewtechnologiesandexpansionintonewdatastoragemarkets;currencyfluctuationsthatmayimpacttheCompany'smarginsandinternationalsales;cyber-attacksorotherdatabreachesthatdisruptitsoperationsorresultsinthedisseminationofproprietaryorconfidentialinformation;andfluctuationsininterestrates.Informationconcerningrisks,uncertaintiesandotherfactorsthatcouldcauseresultstodiffermateriallyfromthoseprojectedinsuchforward-lookingstatementsisalsosetforthin"Item1A.RiskFactors"ofthisAnnualReportonForm10-K,whichweencourageyoutocarefullyread.Theseforward-lookingstatementsshouldnotberelieduponasrepresentingourviewsasofanysubsequentdateandweundertakenoobligationtoupdateforward-lookingstatementstoreflecteventsorcircumstancesafterthedatetheyweremade.ThefollowingisadiscussionofthefinancialconditionandresultsofoperationsforthefiscalyearsendedJuly1,2016,July3,2015andJune27,2014.
OurManagement'sDiscussionandAnalysisofFinancialConditionandResultsofOperations("MD&A")isprovidedinadditiontotheaccompanyingconsolidatedfinancialstatementsandnotestoassistreadersinunderstandingourresultsofoperations,financialcondition,andcashflows.MD&Aisorganizedasfollows:
• OurCompany.Discussionofourbusiness.
• BusinessOverview.Discussionofindustrytrendsandtheirimpactonourbusiness.
• FiscalYear2016Summary.Overviewoffinancialandotherhighlightsaffectingusforfiscalyear2016.
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• ResultsofOperations.Analysisofourfinancialresultscomparingfiscalyear2016to2015andcomparingfiscalyears2015to2014.
• LiquidityandCapitalResources.Ananalysisofchangesinourbalancesheetsandcashflows,anddiscussionofourfinancialconditionincludingthecreditqualityofourinvestmentportfolioandpotentialsourcesofliquidity.
• ContractualObligationsandOff-BalanceSheetArrangements.OverviewofcontractualobligationsandcontingentliabilitiesandcommitmentsoutstandingasofJuly1,2016andanexplanationofoff-balancesheetarrangements.
• CriticalAccountingEstimates.Accountingestimatesthatwebelieveareimportanttounderstandingtheassumptionsandjudgmentsincorporatedinourreportedfinancialresults.
OurCompany
Wearealeadingproviderofelectronicdatastoragetechnologyandsolutions.Ourprincipalproductsareharddiskdrives,commonlyreferredtoasdiskdrives,harddrivesorHDDs.InadditiontoHDDs,weproduceabroadrangeofelectronicdatastorageproductsincludingsolidstatehybriddrives("SSHD"),solidstatedrives("SSD"),PCIecardsandSATAcontrollers.Ourstoragetechnologyportfolioalsoincludesstoragesubsystems,andhighperformancecomputing("HPC")solutions.
Harddiskdrivesaredevicesthatstoredigitallyencodeddataonrapidlyrotatingdiskswithmagneticsurfaces.Diskdrivescontinuetobetheprimarymediumofmassdatastorageduetotheirperformanceattributes,highqualityandcosteffectiveness.Complementingexistingdatacenterstoragearchitecture,solid-statestoragedevicesuseintegratedcircuitassembliesasmemorytostoredata,andmostSSDsuseNAND-basedflashmemory.InadditiontoHDDsandSSDs,SSHDscombinethefeaturesofSSDsandHDDsinthesameunit,containingalargeharddiskdriveandanSSDcachetoimproveperformanceoffrequentlyaccesseddata.
Ourproductsaredesignedformissioncriticalandnearlineapplicationsinenterpriseserversandstoragesystems;clientcomputeapplications,whereourproductsaredesignedprimarilyfordesktopandmobilecomputing;andclientnon-computeapplications,whereourproductsaredesignedforawidevarietyofenduserdevicessuchasdigitalvideorecorders("DVRs"),personaldatabackupsystems,portableexternalstoragesystems,digitalmediasystemsandsurveillancesystems.
OurCloudSystemsandSolutionsbuildsontheSeagatelegacytoextendinnovationfromthedeviceintotheinformationinfrastructure,onsiteandinthecloud.OurapproachtodatamanagementsupportsHPC,opensourceandsoftware-definedsolutions.OurportfolioincludesHPCstoragesolutions,modularoriginalequipmentmanufacturers("OEM")storagesystemsandscale-outstoragesystems.
BusinessOverview
Ourindustryischaracterizedbyseveraltrendsandfactorsthathaveamaterialimpactonourstrategicplanning,financialconditionandresultsofoperations.
DemandforElectronicDataStorage
Thecontinuedadvancementofthecloud,theproliferationofavarietyofmobiledevicesglobally,developmentoftheInternetofThings("IoT"),increasinglypervasiveuseofvideosurveillance,evolutionofconsumerelectronicdevices,andenterpriseuseofbigdataanalyticsaredrivingthegrowthofdigitalcontent.Factorscontributingtothisgrowthinclude:
• Creation,sharing,andconsumptionofmedia-richdigitalcontent,suchashigh-resolutionphotos,highdefinitionvideo,anddigitalmusicthroughsmartphones,tablets,digitalcameras,personalvideocameras,DVRs,gamingconsolesorotherdigitaldevices;
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• Creation,aggregationanddistributionofdigitalcontentthroughservicesandotherofferingssuchasFacebook®,Instagram®,iTunes®,Netflix®,Google®andYouTube®;
• Newsurveillancesystemswhichfeaturehigherresolutiondigitalcamerasandthusrequirelargerdatastoragecapacities;
• CreationandcollectionofdatathroughtheevolutionoftheIoTecosystem,bigdataanalyticsandnewtechnologytrendssuchasself-drivingcarsanddrones;
• Buildoutoflargenumbersofclouddatacentersbycloudserviceprovidersandprivatecompaniestransitioningon-sitedatacentersintothecloud;
• Protectionofincreaseddigitalcontentthroughredundantstorageonbackupdevicesandexternallyprovidedstorageservices.
Asaresultofthesefactors,thenatureandvolumeofcontentbeingcreatedrequiresgreaterstorage,whichismoreefficientlyandeconomicallyfacilitatedbyhighercapacitystoragedevicesinordertostore,manage,distribute,analyzeandbackupsuchcontent.Weexpectthistosupportthegrowthindemandforelectronicdatastoragesolutionsindevelopedandemergingeconomieswellintothefuture.
Theamountofdatacreatedaswellaswhereandhowdataisstoredcontinuestoevolvewiththeproliferationofmobiledevices,thegrowthofcloudcomputing,andtheevolvingIoT.Inaddition,theeconomicsofstorageinfrastructurearealsoevolvingwiththeutilizationofpublicandprivatehyper-scalestorageandopen-sourcesolutionsreducingthetotalcostofownershipofstoragewhileincreasingthespeedandefficiencywithwhichcustomerscanleveragemassivecomputingandstoragedevices.Accordingly,weexpectthesetrendswillcontinuetocreatesignificantdemandforelectronicdatastoragesolutionsgoingforward.
DemandTrendsforDiskDrives
Webelievethatcontinuedgrowthindigitalcontentrequiresincreasinglyhigherstoragecapacityinordertostore,aggregate,host,distribute,analyze,manage,backupandusesuchcontent.Wealsobelievethatasarchitecturesevolvetoservethegrowingcommercialandconsumeruserbasethroughouttheworld,themannerwhichharddrivesaredeliveredtomarketandutilizedbyourcustomerswillevolveaswell.
Webelievethatintheforeseeablefuturethetraditionalenterpriseandclientcomputemarketsthatrequirehighcapacitystoragesolutions,andthedataintensiveclientnon-computemarketswillcontinuetobebestservedbyharddiskdrivesduetotheindustry'sabilitytodeliverthemostcosteffective,reliableandenergyefficientmassstoragedevices.Furthermore,theincreaseduseofclientnon-computedevicesthatbothconsumemedia-richdigitalcontentstreamedfromthecloudandcreaterichdigitalcontentthatisstoredinthecloud,increasesthedemandforhighcapacityharddiskdrivesinenterpriseNearlineapplications.
Wealsobelievethatasharddiskdrivecapacitiescontinuetoincrease,unitdemanddoesnotreflecttheincreaseinExabytesdemand.Inrecentyears,thistrendhasresultedindemandforfewerunits,butwithhigheraveragecapacityperdrive.
IndustrySupplyBalance
FromtimetotimetheHDDindustryhasexperiencedperiodsofimbalancebetweensupplyanddemand.Totheextentthatthediskdriveindustrybuildsormaintainscapacitybasedonexpectationsofdemandthatdonotmaterialize,priceerosionmaybecomemorepronounced.Conversely,duringperiodswheredemandexceedssupply,priceerosionisgenerallymuted.
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PriceErosion.
Historically,ourindustryhasbeencharacterizedbypricedeclinesfordiskdriveproductswithcomparablecapacity,performanceandfeaturesets("like-for-likeproducts").Pricedeclinesforlike-for-likeproducts("priceerosion")havebeenmorepronouncedduringperiodsof:
• economiccontractioninwhichcompetitorsmayusediscountedpricingtoattempttomaintainorgainmarketshare;
• fewnewproductintroductionswhencompetitorshavecomparableoralternativeproductofferings;and
• industrysupplyexceedingdemand.
Diskdrivemanufacturerstypicallyattempttooffsetpriceerosionwithanimprovedmixofdiskdriveproductscharacterizedbyhighercapacity,betterperformanceandadditionalfeaturesetsandproductcostreductions.
WebelievetheHDDindustryexperiencedbenignpriceerosioninfiscalyear2014,whereaspriceerosionincreasedinfiscalyears2015and2016.
ProductLifeCyclesandChangingTechnology.Successinourindustryhasbeendependenttoalargeextentontheabilitytobalancetheintroductionandtransitionofnewproductswithtime-to-volume,performance,capacityandqualitymetricsatacompetitiveprice,levelofserviceandsupportthatourcustomersexpect.Generally,thedrivemanufacturerthatintroducesanewproductfirstbenefitsfromimprovedproductmix,favorableprofitmarginsandlesspricingpressureuntilcomparableproductsareintroduced.Changingtechnologyalsonecessitateson-goinginvestmentsinresearchanddevelopment,whichmaybedifficulttorecoverduetorapidproductlifecyclesandeconomicdeclines.Further,thereisacontinuedneedtosuccessfullyexecuteproducttransitionsandnewproductintroductions,asfactorssuchasquality,reliabilityandmanufacturingyieldscontinuetobeofsignificantcompetitiveimportance.
Seasonality
Thediskdriveindustrytraditionallyexperiencesseasonalvariabilityindemandwithhigherlevelsofdemandinthesecondhalfofthecalendaryear.Thisseasonalityisdrivenbyconsumerspendingintheback-to-schoolseasonfromlatesummertofallandthetraditionalholidayshoppingseasonfromfalltowinter.Webelievefiscalyear2015reflectedseasonalityconsistentwithhistoricalpatterns,whereasinfiscalyear2014ourindustryexperiencedmoremutedseasonalpatternsassupplyanddemandwererelativelyinbalance.Infiscalyear2016,beyondtraditionalseasonality,variabilityofsaleswasareflectionofmorecyclicaldemandfromCSPsbasedonthetimingoflargesystemsinstallationsandtheshiftoftheunderlyingtechnology.
FiscalYear2016Summary
Duringthefiscalyear2016,weshipped169millionunitstotaling233exabytes,generatingrevenueof$11.2billionandgrossmarginsof23%ofrevenue.Ouroperatingcashflowwas$1.7billion.Werepurchasedapproximately24millionofourordinarysharesduringtheyearforapproximately$1.1billion,paiddividendsduringtheyearof$727million,andcompletedouracquisitionofDotHillSystemsCorp.("DotHill"),asupplierofsoftwareandhardwarestoragesystemsfor$674millionincash.
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ResultsofOperations
WelistinthetablesbelowsummarizedinformationfromourConsolidatedStatementsofOperationsbydollarsandasapercentageofrevenue:
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FiscalYearsEnded
(Dollarsinmillions) July1,2016
July3,2015
June27,2014
Revenue $ 11,160 $ 13,739 $ 13,724Costofrevenue 8,545 9,930 9,878Grossmargin 2,615 3,809 3,846Productdevelopment 1,237 1,353 1,226Marketingandadministrative 635 857 722Amortizationofintangibles 123 129 98Restructuringandother,net 175 32 24Gainonarbitrationaward,net — (620) —Incomefromoperations 445 2,058 1,776Otherincome(expense),net (171) (88) (220)
Incomebeforeincometaxes 274 1,970 1,556Provisionfor(benefitfrom)incometaxes 26 228 (14)
Netincome $ 248 $ 1,742 $ 1,570
FiscalYearsEnded
July1,2016
July3,2015
June27,2014
Revenue 100% 100% 100%Costofrevenue 77 72 72Grossmargin 23 28 28Productdevelopment 11 10 9Marketingandadministrative 6 7 5Amortizationofintangibles 1 1 1Restructuringandother,net 2 — —Gainonarbitrationaward,net — (5) —Incomefromoperations 4 15 13Otherincome(expense),net (2) (1) (2)
Incomebeforeincometaxes 2 14 11Provisionfor(benefitfrom)incometaxes — 2 —
Netincome 2% 12% 11%
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Thefollowingtablesummarizesinformationregardingaveragedrivesellingprices("ASPs")excludingstoragesystems;drivevolumeshipments,exabytesshipped,andrevenuesbychannelandgeography:
FiscalYear2016ComparedtoFiscalYear2015
Revenue
Revenueinfiscalyear2016decreasedapproximately19%or$2.6billion,fromfiscalyear2015,asaresultofadecreaseinshipmentsby43millionunitsandpriceerosion,whichwereduetolowerdemandintheclientcomputemarketandreduceddemandformissioncriticalHDDenterpriseproducts,partiallyoffsetbyimprovedproductmix.
CostofRevenueandGrossMargin
Forfiscalyear2016,grossmarginasapercentageofrevenuedecreasedby500basispointscomparedtothepriorfiscalyearduetopriceerosionandreduceddemandinlegacyharddrivesresultinginunderutilizationofcertainfactories,partiallyoffsetbyimprovedproductmixinthesecondhalfoffiscalyear2016.
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FiscalYearsEnded
(Inmillions,exceptpercentages,exabytesandASPs) July1,2016
July3,2015
June27,2014
UnitShipments: Enterprise 32 36 31ClientCompute 93 132 144ClientNon-Compute 44 44 45
TotalUnitsShipped 169 212 220ASPs(perunit) $ 61 $ 61 $ 61ExabytesShipped 233 228 202
RevenuesbyChannel(%) OEMs 70% 71% 68%Distributors 16% 17% 20%Retailers 14% 12% 12%
RevenuesbyGeography(%) Americas 29% 28% 27%EMEA 17% 17% 19%AsiaPacific 54% 55% 54%
FiscalYearsEnded
(Dollarsinmillions) July1,2016
July3,2015 Change
%Change
Revenue $ 11,160 $ 13,739 $ (2,579) (19)%
FiscalYearsEnded
(Dollarsinmillions) July1,2016
July3,2015 Change
%Change
Costofrevenue $ 8,545 $ 9,930 $ (1,385) (14)%Grossmargin $ 2,615 $ 3,809 $ (1,194) (31)%Grossmarginpercentage 23% 28%
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OperatingExpenses
ProductDevelopmentExpense.Productdevelopmentexpensesforfiscalyear2016decreasedfromfiscalyear2015duetoadecreaseinsalariesandotheremployeebenefitsof$63millionasaresultoftherestructuringofourworkforcebeginninginthesecondhalfoffiscalyear2015,a$29milliondecreaseinvariablecompensation,andothercostreductionefforts,partiallyoffsetbytheconsolidationofDotHillinfiscalyear2016andLSI'sFlashBusinessinfiscalyear2015.
MarketingandAdministrativeExpense.Marketingandadministrativeexpensesforfiscalyear2016decreasedfromfiscalyear2015primarilyduetoadecreaseinsalariesandotheremployeebenefitsof$82millionasaresultofarestructuringofourworkforcebeginninginthesecondhalfoffiscalyear2015,a$45milliondecreaseinvariablecompensationandstock-basedcompensation,a$33millionreductioninadvertisingduetothecompletionofcertainpromotionalandbrandingactivitiesinfiscalyear2016,andincreasedoperationalefficienciesinourbusiness.
AmortizationofIntangibles.Amortizationofintangiblesforfiscalyear2016decreasedby$6million,ascomparedtofiscalyear2015,asaresultofcertainintangibleassetsreachingtheendoftheirusefullives,partiallyoffsetbytheamortizationofintangiblesacquiredfromtheDotHillacquisitioninfiscal2016.
RestructuringandOther,net.Restructuringandother,netforfiscalyear2016wascomprisedofrestructuringchargesrecordedduringtheSeptember2015quarter,March2016quarterandJune2016quarter,toreduceourworkforcebyapproximately4,600employeesandalignourmanufacturingfootprintwithcurrentmacroeconomicconditions.
Restructuringandother,netforfiscalyear2015wasduetochargestoreduceourworkforceasaresultofourongoingfocusoncostefficienciesinallareasofourbusiness.
Gainonarbitrationaward,net.Gainonarbitrationaward,netforfiscalyear2015wasrelatedtothefinalawardamountof$630million,lesslitigationandotherrelatedcostsof$10million,intheCompany'scaseagainstWesternDigitalforthemisappropriationoftheCompany'stradesecrets.
Otherincome(expense),net
Otherincome(expense),netforfiscalyear2016increasedby$83million,ascomparedtofiscalyear2015primarilyduetotheabsenceofpartialreceiptof$143millionforinterestaccruedonthefinalarbitrationawardamountintheCompany'scaseagainstWesternDigitalinfiscalyear2015comparedto$33millioninfiscalyear2016,anda$33millionchangeinforeigncurrencyremeasurementrelatedtonetgainsandlossesfromchangesinforeignexchangerates,whichweremorepronouncedintheprioryear,partiallyoffsetby$74millionoflossesfromtheearlyredemptionsandrepurchasesofdebtinfiscalyear2015comparedtoa$3milliongainfromtheearlyredemptionsandrepurchasesofdebtinfiscalyear2016.
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FiscalYearsEnded
(Dollarsinmillions) July1,2016
July3,2015 Change
%Change
Productdevelopment $ 1,237 $ 1,353 $ (116) (9)%Marketingandadministrative 635 857 (222) (26)%Amortizationofintangibles 123 129 (6) (5)%Restructuringandother,net 175 32 143 447%Gainonarbitrationaward,net — (620) 620 (100)%Operatingexpenses $ 2,170 $ 1,751 $ 419
FiscalYearsEnded
(Dollarsinmillions) July1,2016
July3,2015 Change
%Change
Otherincome(expense),net $ (171) $ (88) $ (83) 94%
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IncomeTaxes
Werecordedanincometaxprovisionof$26millionforfiscalyear2016comparedtoanincometaxprovisionof$228millionforfiscalyear2015.Ourfiscalyear2016incometaxprovisionincludedapproximately$22millionofincometaxbenefitsprimarilyassociatedwiththereleaseoftaxreservesduetotheexpirationofcertainstatutesoflimitation.Ourfiscalyear2015incometaxprovisionincludedapproximately$193millionofnetincometaxexpenseduetothefinalauditassessmentreceivedfromtheJiangsuProvinceStateTaxBureauofthePeople'sRepublicofChina(Chinaassessment)forcalendaryears2007through2013.
OurIrishtaxresidentparentholdingcompanyownsvariousU.S.andnon-U.S.subsidiariesthatoperateinmultiplenon-Irishincometaxjurisdictions.OurworldwideoperatingincomeiseithersubjecttovaryingratesofincometaxorisexemptfromincometaxduetotaxholidayprogramsweoperateunderinMalaysia,SingaporeandThailand.Thesetaxholidaysarescheduledtoexpireinwholeorinpartatvariousdatesthrough2024.
Ourincometaxprovisionrecordedforfiscalyear2016differedfromtheprovisionforincometaxesthatwouldbederivedbyapplyingtheIrishstatutoryrateof25%toincomebeforeincometaxes,primarilyduetotheneteffectof(i)taxbenefitsrelatedtonon-U.S.earningsgeneratedinjurisdictionsthataresubjecttotaxholidaysortaxincentiveprogramsandareconsideredindefinitelyreinvestedoutsideofIreland,(ii)taxbenefitsassociatedwiththereversalofpreviouslyrecordedtaxes,and(iii)adecreaseinvaluationallowanceforcertaindeferredtaxassets.TheacquisitionofDotHillSystemCorporationdidnothaveamaterialimpactonoureffectivetaxrate.Ourincometaxprovisionrecordedforfiscalyear2015differedfromtheprovisionforincometaxesthatwouldbederivedbyapplyingtheIrishstatutoryrateof25%toincomebeforeincometaxes,primarilyduetotheneteffectof(i)taxbenefitsrelatedtonon-U.S.earningsgeneratedinjurisdictionsthataresubjecttotaxholidaysortaxincentiveprogramsandareconsideredindefinitelyreinvestedoutsideofIreland,(ii)taxexpenseassociatedwiththeChinaassessmentrecordedduringtheDecember2014quarter,and(iii)anincreaseinvaluationallowanceforcertaindeferredtaxassets.TheacquisitionofLSI'sFlashBusinessdidnothaveamaterialimpactonoureffectivetaxrate.
OnDecember18,2015,theProtectingAmericansfromTaxHikes("PATH")Actof2015wasenacted.Among,otherprovisions,thePATHActretroactivelyreinstatedandpermanentlyextendedthefederalResearchandDevelopment("R&D")taxcreditfromDecember31,2014.ThepermanentextensionoftheR&DcredithadnoimmediateimpactonourincometaxprovisionduetovaluationallowancesonourU.S.deferredtaxassets.NoneoftheotherPATHActchangeshadamaterialimpactonourincometaxprovision.
Basedonournon-U.S.ownershipstructureandsubjectto(i)potentialfutureincreasesinourvaluationallowancefordeferredtaxassets;and(ii)afuturechangeinourintentiontoindefinitelyreinvestearningsfromoursubsidiariesoutsideofIreland,weanticipatethatoureffectivetaxrateinfutureperiodswillgenerallybelessthantheIrishstatutoryrate.
AtJuly1,2016,ourdeferredtaxassetvaluationallowancewasapproximately$984million.
AtJuly1,2016,wehadnetdeferredtaxassetsof$606million.TherealizationofthesedeferredtaxassetsisprimarilydependentonourabilitytogeneratesufficientU.S.andcertainnon-U.S.taxableincomeinfutureperiods.Althoughrealizationisnotassured,webelievethatitismorelikelythannotthatthesedeferredtaxassetswillberealized.Theamountofdeferredtaxassetsconsideredrealizable,however,mayincreaseordecreaseinsubsequentperiodswhenwere-evaluatetheunderlyingbasisforourestimatesoffutureU.S.andcertainnon-U.S.taxableincome.
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FiscalYearsEnded
(Dollarsinmillions) July1,2016
July3,2015 Change
%Change
Provisionforincometaxes $ 26 $ 228 $ (202) (89)%
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AsofJuly1,2016,approximately$677millionofourU.S.netoperatinglossesand$99millionofourtaxcreditcarryforwardsaresubjecttoannuallimitationsfrom$1millionto$45millionpursuanttoU.S.taxlaw.
AsofJuly1,2016andJuly3,2015,wehadapproximately$70millionand$83million,respectively,ofunrecognizedtaxbenefitsexcludinginterestandpenalties.Theamountofunrecognizedtaxbenefitsthat,ifrecognized,wouldimpacttheeffectivetaxrateare$70millionand$83millionasofJuly1,2016andJuly3,2015,respectively,subjecttocertainfuturevaluationallowanceoffsets.
ItisourpolicytoincludeinterestandpenaltiesrelatedtounrecognizedtaxbenefitsintheprovisionforincometaxesonourConsolidatedStatementsofOperations.Duringfiscalyear2016,werecognizedanetincometaxbenefitforinterestandpenaltiesof$8millionascomparedtoanetincometaxexpenseforinterestandpenaltiesof$26millionduringfiscalyear2015and$8millionduringfiscalyear2014.AsofJuly1,2016,wehad$12millionofaccruedinterestandpenaltiesrelatedtounrecognizedtaxbenefitscomparedto$20millioninfiscalyear2015.
DuringthefiscalyearendedJuly1,2016,ourunrecognizedtaxbenefitsexcludinginterestandpenaltiesdecreasedbyapproximately$13millionprimarilydueto(i)reductionsassociatedwiththeexpirationofcertainstatutesoflimitationof$27million,(ii)increasesincurrentyearunrecognizedtaxbenefitsof$11million,(iii)netincreasesinprioryears'unrecognizedtaxbenefitsof$4million,(iv)netreductionsfromotheractivity,includingnon-U.S.exchangegains,of$1million.
Duringthe12monthsbeginningJuly2,2016,weexpectthatourunrecognizedtaxbenefitscouldbereducedbyapproximately$16millionasaresultoftheexpirationofcertainstatutesoflimitation.
WearesubjecttotaxationinmanyjurisdictionsgloballyandarerequiredtofileU.S.federal,U.S.state,andnon-U.Sincometaxreturns.OnApril4,2016,theIRSapprovedtheauditsettlementreachedinDecember2015regardingalldisputedissuesassociatedwithourU.S.federalincometaxreturnsforfiscalyears2008,2009and2010.Thisauditsettlementdidnothaveamaterialimpactonourfinancialstatements.
WearenolongersubjecttotaxexaminationofU.S.federalincometaxreturnsforyearspriortofiscalyear2013.WithrespecttoU.S.stateandnon-U.S.incometaxreturns,wearegenerallynolongersubjecttotaxexaminationforyearsendingpriortofiscalyear2005.
FiscalYear2015ComparedtoFiscalYear2014
Revenue
Revenueinfiscalyear2015remainedflatfromfiscalyear2014,asaresultofrevenuecontributedfromouracquisitionsofXyratexandLSI'sFlashBusinessandafavorableproductmix,partiallyoffsetbya4%decreaseinunitsshippedandmoderatepriceerosion.
CostofRevenueandGrossMargin
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FiscalYearsEnded
(Dollarsinmillions) July3,2015
June27,2014 Change
%Change
Revenue $ 13,739 $ 13,724 $ 15 0.1%
FiscalYearsEnded
(Dollarsinmillions) July3,2015
June27,2014 Change
%Change
Costofrevenue $ 9,930 $ 9,878 $ 52 1%Grossmargin $ 3,809 $ 3,846 $ (37) (1)%Grossmarginpercentage 28% 28%
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Forfiscalyear2015,grossmarginasapercentageofrevenueremainedflatfromthepriorfiscalyearasaresultofimprovedproductmixandcostsavingsduetoincreasedoperationalefficiencies,offsetbymoderatepriceerosion.
OperatingExpenses
ProductDevelopmentExpense.Productdevelopmentexpensesforfiscalyear2015increasedfromfiscalyear2014mostlyduetoanincreaseinheadcountrelatedcostsof$111millionattributedtotheconsolidationofXyratexandLSI'sFlashBusinessaswellasa53-weekfiscalyearin2015comparedto52weeksin2014.
MarketingandAdministrativeExpense.Marketingandadministrativeexpensesforfiscalyear2015increasedfromfiscalyear2014primarilyduetoanincreaseinheadcountrelatedcostsof$50millionattributedtotheconsolidationofXyratexandLSI'sFlashBusiness,non-recurringlegalcostreimbursementreceivedinfiscalyear2014of$24million,aswellasa53-weekfiscalyearin2015comparedto52weeksin2014.
AmortizationofIntangibles.Amortizationofintangiblesforfiscalyear2015increasedby$31million,ascomparedtofiscalyear2014,asaresultoftheacquisitionsofLSI'sFlashBusinessandXyratex.
RestructuringandOther,net.Restructuringandother,netforfiscalyear2015increasedby$8million,ascomparedtofiscalyear2014primarilyduetoarestructuringchargerecordedduringtheMarch2015quartertoreduceworkforceasaresultofourongoingfocusoncostefficienciesinallareasofourbusiness.
Gainonarbitrationaward,net.Gainonarbitrationaward,netforfiscalyear2015increasedfromfiscalyear2014duetofinalawardreceivedintheamountof$630million,lesslitigationandotherrelatedcostsof$10million,intheCompany'scaseagainstWesternDigitalforthemisappropriationoftheCompany'stradesecrets.
Otherincome(expense),net
Otherincome(expense),netforfiscalyear2015decreasedby$132million,ascomparedtofiscalyear2014primarilyduetothepartialpaymentof$143millionforinterestaccruedonthefinalarbitrationawardamountinourcaseagainstWesternDigitalandadecreaseinlossesfromearlyredemptionandrepurchaseofdebtof$15million,partiallyoffsetbya$12millionincreaseininterestexpense.
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FiscalYearsEnded
(Dollarsinmillions) July3,2015
June27,2014 Change
%Change
Productdevelopment $ 1,353 $ 1,226 $ 127 10%Marketingandadministrative 857 722 135 19%Amortizationofintangibles 129 98 31 32%Restructuringandother,net 32 24 8 33%Gainonarbitrationaward,net (620) — (620) (100)%Operatingexpenses $ 1,751 $ 2,070 $ (319)
FiscalYearsEnded
(Dollarsinmillions) July3,2015
June27,2014 Change
%Change
Otherincome(expense),net $ (88) $ (220) $ 132 (60)%
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IncomeTaxes
Werecordedanincometaxprovisionof$228millionforfiscalyear2015comparedtoanincometaxbenefitof$14millionforfiscalyear2014.Ourfiscalyear2015incometaxprovisionincludedapproximately$193millionofnetincometaxexpenseduetothefinalauditassessmentreceivedfromtheJiangsuProvinceStateTaxBureauofthePeople'sRepublicofChina(Chinaassessment)forcalendaryears2007through2013.Ourfiscalyear2014benefitfromincometaxesincluded$58millionofincometaxbenefitsrelatedtothereversalofaportionofthevaluationallowancesrecordedinpriorperiodsandanetdecreaseintaxreservesrelatedtoauditsettlementsoffsetbytaxreservesonnon-U.S.taxpositionstakeninpriorfiscalyears.
Ourincometaxprovisionrecordedforfiscalyear2015differedfromtheprovisionforincometaxesthatwouldbederivedbyapplyingtheIrishstatutoryrateof25%toincomebeforeincometaxes,primarilyduetotheneteffectof(i)taxbenefitsrelatedtonon-U.S.earningsgeneratedinjurisdictionsthataresubjecttotaxholidaysortaxincentiveprogramsandareconsideredindefinitelyreinvestedoutsideofIreland,(ii)taxexpenseassociatedwiththeChinaassessmentrecordedduringtheDecember2014quarter,and(iii)anincreaseinvaluationallowanceforcertaindeferredtaxassets.TheacquisitionofLSI'sFlashBusinessdidnothaveamaterialimpactonoureffectivetaxrate.Ourincometaxbenefitrecordedforfiscalyear2014differedfromtheprovisionforincometaxesthatwouldbederivedbyapplyingtheIrishstatutoryrateof25%toincomebeforeincometaxes,primarilyduetotheneteffectof(i)taxbenefitsrelatedtonon-U.S.earningsgeneratedinjurisdictionsthataresubjecttotaxholidaysortaxincentiveprogramsandareconsideredindefinitelyreinvestedoutsideofIreland,and(ii)adecreaseinvaluationallowanceforcertaindeferredtaxassets.TheacquisitionofXyratexdidnothaveamaterialimpactonoureffectivetaxrateinfiscalyear2014.Fiscalyear2014includedavaluationallowancereleaseassociatedwithpost-acquisitionrestructuring.
LiquidityandCapitalResources
Thefollowingsectionsdiscussourprincipalliquidityrequirements,aswellasoursourcesandusesofcashandourliquidityandcapitalresources.Ourcashandcashequivalentsaremaintainedininvestmentswithremainingmaturitiesof90daysorlessatthetimeofpurchase.Ourshort-terminvestmentsconsistprimarilyofmoneymarketfundsandcertificatesofdeposits.Theprincipalobjectivesofourinvestmentpolicyarethepreservationofprincipalandmaintenanceofliquidity.Webelieveourcashequivalentsandshort-terminvestmentsareliquidandaccessible.Weoperateinsomecountriesthathaverestrictiveregulationsoverthemovementofcashand/orforeignexchangeacrosstheirborders.However,theserestrictionshavenotimpededourabilitytoconductourbusiness,nordoweexpectthemtointhenext12months.Wearenotawareofanydowngrades,lossesorothersignificantdeteriorationinthefairvalueofourcashequivalentsorshort-terminvestmentsandwedonotbelievethefairvalueofourshort-terminvestmentshassignificantlychangedfromthevaluesreportedasofJuly1,2016.
CashandCashEquivalentsandShort-termInvestments
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FiscalYearsEnded
(Dollarsinmillions) July3,2015
June27,2014 Change
%Change
Provisionfor(benefitfrom)incometaxes $ 228 $ (14) $ 242 1,729%
Asof
(Dollarsinmillions) July1,2016
July3,2015 Change
Cashandcashequivalents $ 1,125 $ 2,479 $ (1,354)Short-terminvestments 6 6 —Total $ 1,131 $ 2,485 $ (1,354)
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Ourcashandcashequivalentsandshort-terminvestmentsdecreasedfromJuly3,2015asaresultofnetcashoutflowsfortheacquisitionofDotHillof$674million,repurchaseofourordinarysharesof$1.1billion,dividendspaidtoourshareholdersof$727million,andcapitalexpendituresof$587million.Thesecashoutflowswerepartiallyoffsetbyournetcashprovidedbyoperatingactivities.Thefollowingtablesummarizesresultsfromthestatementofcashflowsfortheperiodsindicated:
CashProvidedbyOperatingActivities
Cashprovidedbyoperatingactivitiesforfiscalyear2016wasapproximately$1.7billionandincludestheeffectsofnetincomeadjustedfornon-cashitemsincludingdepreciationandamortization,stock-basedcompensation,and:
• adecreaseinrevenueacceleratingareductioninthecashconversioncycle,leadingtoadecreaseinworkingcapital.
Cashprovidedbyoperatingactivitiesforfiscalyear2015wasapproximately$2.6billionandincludestheeffectsofnetincomeadjustedfornon-cashitemsincludingdepreciation,amortization,stock-basedcompensation.Netincomeincludes:
• apartialpaymentof$773millionforthearbitrationawardandrelatedaccruedinterestreceivedfromWesternDigital;and
• a$225millionpaymentrelatedtothefinalauditassessmentreceivedfromtheJiangsuProvinceStateTaxBureauofthePeople'sRepublicofChinafortaxandinterestassociatedwithchangestoourtaxfilingsforthecalendaryears2007through2013.
Cashprovidedbyoperatingactivitiesforfiscalyear2014wasapproximately$2.6billionandincludestheeffectsofnetincomeadjustedfornon-cashitemsincludingdepreciation,amortization,stock-basedcompensation,and:
• adecreaseof$217millioninvendornon-tradereceivablesprimarilyrelatedtoachangeinthecontractualrelationshipwithsomeofourcontractmanufacturerswhichreducedthevolumeofcomponentswesoldtothem;
• adecreaseof$190millioninaccountspayableduetoachangeinthecontractualrelationshipwithsomeofourcontractmanufacturerswhichresultedinareductionindirectmaterialspurchasedandsubsequentlysoldtoourcontractmanufacturers;and
• adecreaseof$104millioninrestrictedcashandinvestmentsprimarilyduetotherestrictedcashandinvestmentsheldinarabbitrustbeingreplacedwithastandbyletterofcredit.
CashUsedinInvestingActivities
Infiscalyear2016,weused$1.2billionfornetcashinvestingactivities,whichwasprimarilyduetopaymentsforthepurchaseofproperty,equipmentandleaseholdimprovementsofapproximately$587millionandtheacquisitionofDotHill,netofcashacquiredfor$634million.
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FiscalYearsEnded
(Dollarsinmillions) July1,2016
July3,2015
June27,2014
Netcashflowprovidedby(usedin): Operatingactivities $ 1,680 $ 2,647 $ 2,558Investingactivities (1,211) (1,287) (322)Financingactivities (1,820) (1,495) (1,311)Effectofforeigncurrencyexchangerates (3) (20) 1
Net(decrease)increaseincashandcashequivalents $ (1,354) $ (155) $ 926
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Infiscalyear2015,weused$1.3billionfornetcashinvestingactivities,whichwasprimarilyduetopaymentsforthepurchaseofproperty,equipmentandleaseholdimprovementsofapproximately$747millionandtheacquisitionofLSI'sFlashBusinessfor$450million.
Infiscalyear2014,weused$0.3billionfornetcashinvestingactivities,whichwasprimarilyduetopaymentsforproperty,equipmentandleaseholdimprovementsofapproximately$559millionandtheacquisitionofXyratexfor$285million,partiallyoffsetby$508millionofproceedsfromsalesofshort-terminvestments.
CashUsedinFinancingActivities
Netcashusedinfinancingactivitiesof$1.8billionforfiscalyear2016wasprimarilyattributabletothefollowingactivities:
• $1.1billionpaidtorepurchase24millionofourordinaryshares;and
• $0.7billionindividendspaidtoourshareholders.
Netcashusedinfinancingactivitiesof$1.5billionforfiscalyear2015wasprimarilyattributabletothefollowingactivities:
• $1.1billionpaidtorepurchase19millionofourordinaryshares;
• $1.0billionfortherepurchaseandredemptionoflong-termdebt;
• $0.7billionindividendspaidtoourshareholders;partiallyoffsetby
• proceedsof$1.2billionfromaggregatecashgeneratedfromtheissuanceofour5.75%SeniorNotesdue2034and4.875%SeniorNotesdue2027.
Netcashusedinfinancingactivitiesof$1.3billionforfiscalyear2014wasattributabletothefollowingactivities:
• $1.9billionpaidtorepurchase41millionofourordinaryshares;
• $0.7billionfortherepurchaseandredemptionoflong-termdebt;
• $0.6billionindividendspaidtoourshareholders;partiallyoffsetby
• proceedsof$1.8billionfromaggregatecashgeneratedfromtheissuanceofour3.75%SeniorNotesduein2018and4.75%SeniorNotesduein2025.
LiquiditySources
OurprimarysourcesofliquidityasofJuly1,2016,consistedof:(1)approximately$1.1billionincashandcashequivalents,andshort-terminvestments,(2)cashweexpecttogeneratefromoperationsand(3)a$700millionseniorrevolvingcreditfacility.
AsofJuly1,2016,noborrowingshadbeendrawnundertherevolvingcreditfacilityorhadbeenutilizedforlettersofcreditissuedunderthiscreditfacility.Thelineofcreditisavailableforborrowings,subjecttocompliancewithfinancialcovenantsandothercustomaryconditionstoborrowing.
Thecreditagreementthatgovernsourrevolvingcreditfacility,asamended,containscertaincovenantsthatwemustsatisfyinordertoremainincompliancewiththecreditagreement,asamended.Theagreementincludesthreefinancialcovenants:(1)minimumcash,cashequivalentsandmarketablesecurities;(2)afixedchargecoverageratio;and(3)anetleverageratio.OnApril28,2016,theRevolvingCreditAgreementwasamendedinordertoincreasetheallowablenetleverageratiotoadjustforourcurrentfinancialliquidityposition.WewereincompliancewiththemodifiedcovenantsasofJuly1,2016andexpecttobeincomplianceforthenext12months.
AsofJuly1,2016,cashandcashequivalentsheldbynon-Irishsubsidiarieswas$1.1billion.ThisamountispotentiallysubjecttotaxationinIrelanduponrepatriationbymeansofadividendintoourIrishparent.However,itisourintenttoindefinitelyreinvestearningsofnon-Irishsubsidiariesoutsideof
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IrelandandourcurrentplansdonotdemonstrateaneedtorepatriatesuchearningsbymeansofataxableIrishdividend.ShouldfundsbeneededintheIrishparentcompanyandshouldwebeunabletofundparentcompanyactivitiesthroughmeansotherthanataxableIrishdividend,wewouldberequiredtoaccrueandpayIrishtaxesonsuchdividend.
Webelievethatoursourcesofcashwillbesufficienttofundouroperationsandmeetourcashrequirementsforatleastthenext12months.
CashRequirementsandCommitments
Ourliquidityrequirementsareprimarilytomeetourworkingcapital,productdevelopmentandcapitalexpenditureneeds,tofundscheduledpaymentsofprincipalandinterestonourindebtedness,andtofundourdividend.Ourabilitytofundtheserequirementswilldependonourfuturecashflows,whicharedeterminedbyfutureoperatingperformance,andtherefore,subjecttoprevailingglobalmacroeconomicconditionsandfinancial,businessandotherfactors,someofwhicharebeyondourcontrol.
OnAugust2,2016,ourBoardofDirectorsapprovedaquarterlycashdividendof$0.63pershare,whichwillbepayableonOctober5,2016toshareholdersofrecordasofthecloseofbusinessonSeptember21,2016.
AsofJuly1,2016,wewereincompliancewithallofthecovenantsunderourdebtagreements.Basedonourcurrentoutlook,weexpecttobeincompliancewiththecovenantsofourdebtagreementsoverthenext12months.
Thecarryingvalueofourlong-termdebtasofJuly1,2016andJuly3,2015was$4.1billionand$4.2billion,respectively.Thetablebelowpresentstheprincipalamountsofouroutstandinglong-termdebt:
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Asof
(Dollarsinmillions) July1,2016
July3,2015 Change
3.75%SeniorNotesdueNovember2018 $ 800 $ 800 $ —7.00%SeniorNotesdueNovember2021 158 158 —4.75%SeniorNotesdueJune2023 990 1,000 (10)4.75%SeniorNotesdueJanuary2025 995 1,000 (5)4.875%SeniorNotesDueJune2027 700 700 —5.75%SeniorNotesDueDecember2034 490 500 (10)Total $ 4,133 $ 4,158 $ (25)
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Fromtimetotimewemayrepurchaseanyofouroutstandingordinarysharesthroughprivate,openmarket,tenderoffers,brokerassistedpurchasesorothermeans.Duringfiscalyear2016,werepurchasedapproximately24millionofourordinaryshares.See"Item5.MarketforRegistrant'sCommonEquity,RelatedStockholderMattersandIssuerPurchasesofEquitySecurities-RepurchasesofOurEquitySecurities."AsofJuly1,2016,$1.8billionremainedavailableforrepurchaseunderourexistingrepurchaseauthorizationlimit.AllrepurchasesareeffectedasredemptionsinaccordancewiththeCompany'sArticlesofAssociation.
Forfiscalyear2017,weexpectcapitalexpenditurestobebelowourlong-termtargetedrangeof6%to8%ofrevenue.Werequiresubstantialamountsofcashtofundscheduledpaymentsofprincipalandinterestonourindebtedness,futurecapitalexpendituresandanyincreasedworkingcapitalrequirements.Wewillcontinuetoevaluateandmanagetheretirementandreplacementofexistingdebtandassociatedobligations,includingevaluatingtheissuanceofnewdebtsecurities,exchangingexistingdebtsecuritiesforotherdebtsecuritiesandretiringdebtpursuanttoprivatelynegotiatedtransactions,openmarketpurchases,tenderoffersorothermeansorotherwise.Inaddition,wemayselectivelypursuestrategicalliances,acquisitionsandinvestments,whichmayrequireadditionalcapital.
ContractualObligationsandCommitments
OurcontractualcashobligationsandcommitmentsasofJuly1,2016,havebeensummarizedinthetablebelow:
AsofJuly1,2016,wehadaliabilityforunrecognizedtaxbenefitsandanaccrualforthepaymentofrelatedinteresttotaling$13million,noneofwhichisexpectedtobesettledwithinoneyear.Outsideofoneyear,weareunabletomakeareasonablyreliableestimateofwhencashsettlementwithataxingauthoritywilloccur.
Off-BalanceSheetArrangements
AsofJuly1,2016,wedidnothaveanymaterialoff-balancesheetarrangements(asdefinedinItem303(a)(4)(ii)ofRegulationS-K).
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FiscalYear(s)
(Dollarsinmillions) Total 2017 2018-2019
2020-2021 Thereafter
ContractualCashObligations: Long-termdebt $ 4,133 $ — $ 800 $ — $ 3,333Interestpaymentsondebt 1,761 198 381 334 848Purchaseobligations(2) 713 713 — — —Operatingleases(1) 168 27 38 21 82Capitalexpenditures 110 110 — — —Otherfundingrequirements(3) 44 12 24 8 —Subtotal 6,929 1,060 1,243 363 4,263
Commitments: Lettersofcreditorbankguarantees 108 108 — — —Total $ 7,037 $ 1,168 $ 1,243 $ 363 $ 4,263
(1) Includestotalfutureminimumrentexpenseundernon-cancelableleasesforbothoccupiedandvacatedfacilities(rentexpenseisshownnetofsubleaseincome).
(2) Purchaseobligationsaredefinedascontractualobligationsforthepurchaseofgoodsorservices,whichareenforceableandlegallybindingonus,andthatspecifyallsignificantterms.
(3) Consistsoffundingrequirementsrelatedtostrategiccommitments.
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CriticalAccountingPolicies
Themethods,estimatesandjudgmentsweuseinapplyingourmostcriticalaccountingpolicieshaveasignificantimpactontheresultswereportinourconsolidatedfinancialstatements.TheSEChasdefinedthemostcriticalaccountingpoliciesastheonesthataremostimportanttotheportrayalofourfinancialconditionandoperatingresults,andrequireustomakeourmostdifficultandsubjectivejudgments,oftenasaresultoftheneedtomakeestimatesofmattersthatarehighlyuncertainatthetimeofestimation.Basedonthisdefinition,ourmostcriticalpoliciesinclude:establishmentofsalesprogramaccruals,establishmentofwarrantyaccruals,accountingforincometaxes,andtheaccountingforgoodwillandotherlong-livedassets.Below,wediscussthesepoliciesfurther,aswellastheestimatesandjudgmentsinvolved.Wealsohaveotheraccountingpoliciesandaccountingestimatesrelatingtouncollectiblecustomeraccounts,valuationofinventory,valuationofshare-basedpaymentsandrestructuring.Webelievethattheseotheraccountingpoliciesandaccountingestimateseitherdonotgenerallyrequireustomakeestimatesandjudgmentsthatareasdifficultorassubjective,oritislesslikelythattheywouldhaveamaterialimpactonourreportedresultsofoperationsforagivenperiod.
EstablishmentofSalesProgramAccruals.WeestablishcertaindistributorandOEMsalesprogramsaimedatincreasingcustomerdemand.ForOEMsales,rebatesaretypicallybasedonanOEMcustomer'svolumeofpurchasesorotheragreeduponrebateprograms.Forthedistributionchannel,theseprogramstypicallyinvolverebatesrelatedtoadistributor'slevelofsales,ordersize,advertisingorpointofsaleactivityandpriceprotectionadjustments.Weprovidefortheseobligationsatthetimethatrevenueisrecordedbasedonestimatedrequirements.Weestimatethesecontra-revenuerebatesandadjustmentsbasedonvariousfactors,includingpricereductionsduringtheperiodreported,estimatedfuturepriceerosion,customerorders,distributorsell-throughandinventorylevels,programparticipation,customerclaimsubmittalsandsalesreturns.Ourestimatesreflectcontractualarrangementsbutalsoourjudgmentrelatingtovariablessuchascustomerclaimratesandattainmentofprogramgoals,andinventoryandsell-throughlevelsreportedbyourdistributioncustomers.Currently,ourdistributors'inventoriesarewithinthehistoricalrange.
Whilewebelievewehavesufficientexperienceandknowledgeofthemarketandcustomerbuyingpatternstoreasonablyestimatesuchrebatesandadjustments,actualmarketconditionsorcustomerbehaviorcoulddifferfromourexpectations.Asaresult,actualpaymentsundertheseprograms,whichmayspreadoverseveralmonthsaftertherelatedsale,mayvaryfromtheamountaccrued.Accordingly,revenuesandmarginsintheperiodinwhichtheadjustmentoccursmaybeaffected.
Significantactualvariationsinanyofthefactorsuponwhichwebaseourcontra-revenueestimatescouldhaveamaterialeffectonouroperatingresults.Infiscalyear2016,salesprogramswereapproximately13%ofgrossrevenue.Forfiscalyears2015and2014,totalsalesprogramsrangedfrom8%to10%ofgrossrevenues.Adjustmentstorevenuesduetounderoroveraccrualsforsalesprogramsrelatedtorevenuesreportedinpriorquarterlyperiodswereapproximately0.1%ofgrossrevenueinfiscalyear2016andaveraged0.3%ofquarterlygrossrevenueforfiscalyear2015through2014.Anyfutureshiftsintheindustrysupply-demandbalanceaswellasotherfactorsmayresultinamorecompetitivepricingenvironmentandmaycausesalesprogramsasapercentageofgrossrevenuetoincreasefromthecurrentorhistoricallevels.Ifsuchrebatesandincentivestrendupwards,revenuesandmarginsmaybereduced.
EstablishmentofWarrantyAccruals.Weestimateprobableproductwarrantycostsatthetimerevenueisrecognized.Wegenerallywarrantourproductsforaperiodof1to5years.Ourwarrantyprovisionconsidersestimatedproductfailureratesandtrends(includingthetimingofproductreturnsduringthewarrantyperiods),andestimatedrepairorreplacementcostsrelatedtoproductqualityissues,ifany.Wealsoexercisejudgmentinestimatingourabilitytosellcertainrepairedproducts.Shouldactualexperienceinanyfutureperioddiffersignificantlyfromourestimates,ourfutureresultsofoperationscouldbemateriallyaffected.Ourjudgmentissubjecttoagreaterdegreeofsubjectivitywithrespectto
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newlyintroducedproductsbecauseoflimitedexperiencewiththoseproductsuponwhichtobaseourwarrantyestimates.
Theactualresultswithregardtowarrantyexpenditurescouldhaveanadverseorfavorableeffectonourresultsofoperationsiftheactualrateofunitfailure,thecosttorepairaunit,ortheactualcostrequiredtosatisfycustomerclaimsdiffersfromthoseestimatesweusedindeterminingthewarrantyaccrual.Sincewetypicallyoutsourceourwarrantyrepairs,ourrepaircostissubjecttoperiodicnegotiationswithvendorsandmayvaryfromourestimates.Wealsoexercisejudgmentinestimatingourabilitytosellcertainrepairedproducts.Totheextentsuchsalesfallbelowourforecast,warrantycostwillbeadverselyimpacted.
Wereviewourwarrantyaccrualquarterlyforproductsshippedinpriorperiodsandwhicharestillunderwarranty.Anychangesintheestimatesunderlyingtheaccrualmayresultinadjustmentsthatimpactthecurrentperiodgrossmarginsandincome.Infiscalyears2016,2015and2014netchangesinestimatesofpriorwarrantyaccrualsasapercentageofrevenuewereimmaterial.Ourtotalwarrantycostwas1.0%,1.1%and1.3%ofrevenueduringfiscalyears2016,2015and2014,respectively,whilewarrantycostrelatedtonewshipments(exclusiveoftheimpactofre-estimatesofpre-existingliabilities)were1.1%,1.1%and1.3%respectively,forthesameperiods.Changesinanticipatedfailureratesofspecificproductsandsignificantchangesinrepairorreplacementcostshavehistoricallybeenthemajorreasonsforsignificantchangesinpriorestimates.Anyfuturechangesinfailureratesofcertainproducts,aswellaschangesinrepaircostsorthecostofreplacementparts,mayresultinincreasedordecreasedwarrantyaccruals.
AccountingforIncomeTaxes.WeaccountforincometaxespursuanttoAccountingStandardsCodification("ASC")Topic740("ASC740"),IncomeTaxes.Inapplying,ASC740,wemakecertainestimatesandjudgmentsindeterminingincometaxexpenseforfinancialstatementpurposes.Theseestimatesandjudgmentsoccurinthecalculationoftaxcredits,recognitionofincomeanddeductionsandcalculationofspecifictaxassetsandliabilities,whicharisefromdifferencesinthetimingofrecognitionofrevenueandexpensefortaxandfinancialstatementpurposes,aswellastaxliabilitiesassociatedwithuncertaintaxpositions.ThecalculationoftaxliabilitiesinvolvesuncertaintiesintheapplicationofcomplextaxrulesandthepotentialforfutureadjustmentofouruncertaintaxpositionsbytheInternalRevenueServiceorothertaxjurisdictions.Ifestimatesofthesetaxliabilitiesaregreaterorlessthanactualresults,anadditionaltaxbenefitorprovisionwillresult.ThedeferredtaxassetswerecordeachperioddependprimarilyonourabilitytogeneratefuturetaxableincomeintheUnitedStatesandcertainnon-U.S.jurisdictions.Eachperiod,weevaluatetheneedforavaluationallowanceforourdeferredtaxassetsand,ifnecessary,weadjustthevaluationallowancesothatnetdeferredtaxassetsarerecordedonlytotheextentweconcludeitismorelikelythannotthatthesedeferredtaxassetswillberealized.Ifouroutlookforfuturetaxableincomechangessignificantly,ourassessmentoftheneedforavaluationallowancemayalsochange.
AssessingGoodwillandOtherLong-livedAssetsforImpairment.WeaccountforgoodwillinaccordancewithASCTopic350,Intangibles—GoodwillandOther.AspermittedbyASC350,weperformaqualitativeassessmentinthefourthquarterofeachyear,ormorefrequentlyifindicatorsofpotentialimpairmentexist,todetermineifanyeventsorcircumstancesexist,suchasanadversechangeinbusinessclimateoradeclineintheoverallindustrythatwouldindicatethatitwouldmorelikelythannotreducethefairvalueofareportingunitbelowitscarryingamount.Basedonthequalitativeassessment,ifitisnotmorelikelythannotthatthefairvalueofareportingunitislessthanitscarryingamount,thentheCompanyisnotrequiredtoperformthetwo-stepgoodwillimpairmenttest.Ifitisdeterminedinthequalitativeassessmentthatthefairvalueofareportingunitismorelikelythannotbelowitscarryingamount,includinggoodwill,thenweperformaquantitativetwo-stepimpairmenttest.Thefirststep,identifyingapotentialimpairment,comparesthefairvalueofareportingunitwithitscarryingamount,includinggoodwill.Ifthecarryingvalueofthereportingunitexceedsitsfairvalue,thesecondstepwouldneedtobeconducted.Thesecondstep,measuringtheimpairmentloss,comparestheimpliedfairvalueof
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thereportingunitgoodwillwiththecarryingamountofthatgoodwill.Anyexcessofthereportingunitgoodwillcarryingvalueoveritsimpliedfairvalueisrecognizedasanimpairmentloss.
InaccordancewithASC360-05-4,ImpairmentorDisposalofLong-livedAssets,wetestotherlong-livedassets,includingproperty,equipmentandleaseholdimprovementsandotherintangibleassetssubjecttoamortization,forrecoverabilitywhenevereventsorchangesincircumstancesindicatethatthecarryingvaluesofthoseassetsmaynotberecoverable.Weassesstherecoverabilityofanassetgroupbydeterminingifthecarryingvalueoftheassetgroupexceedsthesumoftheprojectedundiscountedcashflowsexpectedtoresultfromtheuseandeventualdispositionoftheassetsovertheremainingeconomiclifeoftheprimaryassetintheassetgroup.Iftherecoverabilitytestindicatesthatthecarryingvalueoftheassetgroupisnotrecoverable,wewillestimatethefairvalueoftheassetgroupandcompareittoitscarryingvalue.Theexcessofthecarryingvalueoverthefairvalueisallocatedproratatoderivetheadjustedcarryingvalueofeachassetintheassetgroup.Theadjustedcarryingvalueofeachassetintheassetgroupisnotreducedbelowitsfairvalue.
RecentAccountingPronouncements
See"Item8.FinancialStatementsandSupplementaryData—Note1.BasisofPresentationandSummaryofSignificantAccountingPolicies"forinformationregardingtheeffectofnewaccountingpronouncementsonourfinancialstatements.
ITEM7A.QUANTITATIVEANDQUALITATIVEDISCLOSURESABOUTMARKETRISK
Wehaveexposuretomarketrisksduetothevolatilityofinterestrates,foreigncurrencyexchangerates,equityandbondmarkets.Aportionoftheserisksarehedged,butfluctuationscouldimpactourresultsofoperations,financialpositionandcashflows.Additionally,wehaveexposuretodowngradesinthecreditratingsofourcounterpartiesaswellasexposurerelatedtoourcreditratingchanges.
InterestRateRisk.Ourexposuretomarketriskforchangesininterestratesrelatesprimarilytoourinvestmentportfolio.AsofJuly1,2016,theCompanyhadnomaterialavailable-for-salesecuritiesthathadbeeninacontinuousunrealizedlosspositionforaperiodgreaterthan12months.TheCompanydeterminednomaterialavailable-for-salesecuritieswereother-than-temporarilyimpairedasofJuly1,2016.Wecurrentlydonotusederivativefinancialinstrumentsinourinvestmentportfolio.
Wehavefixedratedebtobligations.Weenterintodebtobligationsforgeneralcorporatepurposesincludingcapitalexpendituresandworkingcapitalneeds.
Thetablebelowpresentsprincipalamountsandrelatedweighted-averageinterestratesbyyearofmaturityforourinvestmentportfolioanddebtobligationsasofJuly1,2016.
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FiscalYearsEnded
ForeignCurrencyExchangeRisk.Wemayenterintoforeigncurrencyforwardexchangecontractstomanageexposurerelatedtocertainforeigncurrencycommitmentsandanticipatedforeigncurrencydenominatedexpenditures.Ourpolicyprohibitsusfromenteringintoderivativefinancialinstrumentsforspeculativeortradingpurposes.
Wealsohedgeaportionofourforeigncurrencydenominatedbalancesheetpositionswithforeigncurrencyforwardexchangecontractstoreducetheriskthatourearningswillbeadverselyaffectedbychangesincurrencyexchangerates.Thechangesinfairvalueofthesehedgesarerecognizedinearningsinthesameperiodasthegainsandlossesfromtheremeasurementoftheassetsandliabilities.TheseforeigncurrencyforwardexchangecontractsarenotdesignatedashedginginstrumentsunderASC815,DerivativesandHedging.Alltheseforeigncurrencyforwardcontractsmaturewithin12months.
WeevaluatehedgingeffectivenessprospectivelyandretrospectivelyandrecordanyineffectiveportionofthehedginginstrumentsinCostofrevenueontheConsolidatedStatementsofOperations.Wedidnothaveanymaterialnetgains(losses)recognizedinCostofrevenueforcashflowhedgesduetohedgeineffectivenessordiscontinuedcashflowhedgesduringthefiscalyears2016and2015.
ThetablebelowprovidesinformationasofJuly1,2016aboutourforeigncurrencyforwardexchangecontracts.ThetableisprovidedinU.S.dollarequivalentamountsandpresentsthenotionalamounts(atthecontractexchangerates)andtheweighted-averagecontractualforeigncurrencyexchangerates.
OtherMarketRisks.Wehaveexposuretocounterpartycreditdowngradesintheformofcreditriskrelatedtoourforeigncurrencyforwardexchangecontractsandourfixedincomeportfolio.Wemonitorandlimitourcreditexposureforourforeigncurrencyforwardexchangecontractsbyperformingongoingcreditevaluations.Wealsomanagethenotionalamountofcontractsenteredintowithanyonecounterparty,andwemaintainlimitsonmaximumtenorofcontractsbasedonthecreditratingofthefinancialinstitution.Additionally,theinvestmentportfolioisdiversifiedandstructuredtominimizecredit
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(Dollarsinmillions,exceptpercentages) 2017 2018 2019 2020 2021 Thereafter Total
FairValueat
July1,2016 Assets Cashequivalents: Fixedrate $ 762 $ — $ — $ — $ — $ — $ 762 $ 762Averageinterestrate 0.35% 0.35%
Short-terminvestments: Fixedrate $ 5 $ — $ — $ — $ 1 $ — $ 6 $ 6Averageinterestrate 10.69% 3.08% 9.36%
Totalfixedincome $ 767 $ — $ — $ — $ 1 $ — $ 768 $ 768Averageinterestrate 0.42% 3.08% 0.45% 0.42%
Debt Fixedrate $ — $ — $ 800 $ — $ — $ 3,333 $ 4,133 $ 3,491Averageinterestrate 3.75% 5.03% 4.78%
(Dollarsinmillions,exceptaveragecontractrate) NotionalAmount
AverageContractRate
EstimatedFair
Value(1) Foreigncurrencyforwardexchangecontracts: BritishPoundSterling $ 57 1.42 $ (3)Total $ 57 $ (3)
(1) Equivalenttotheunrealizednetgain(loss)onexistingcontracts.
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risk.AsofJuly1,2016,wehadnomaterialcreditexposurerelatedtoourforeigncurrencyforwardexchangecontracts.Changesinourcorporateissuercreditratingshaveminimalimpactonourfinancialresults,butdowngradesmaynegativelyimpactourfuturetransactioncostsandourabilitytoexecutetransactionswithvariouscounterparties.
WearesubjecttoequitymarketrisksduetochangesinthefairvalueofthenotionalinvestmentsselectedbyouremployeesaspartofourSeagateDeferredCompensationPlan(the"SDCP").Infiscalyear2014,theCompanyenteredintoaTotalReturnSwap("TRS")inordertomanagetheequitymarketrisksassociatedwiththeSDCPliabilities.TheCompanypaysafloatingrate,basedonLIBORplusaninterestratespread,onthenotionalamountoftheTRS.TheTRSisdesignedtosubstantiallyoffsetchangesintheSDCPliabilityduetochangesinthevalueoftheinvestmentoptionsmadebyemployees.
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ITEM8.FINANCIALSTATEMENTSANDSUPPLEMENTARYDATA
SEAGATETECHNOLOGYPLC
CONSOLIDATEDBALANCESHEETS(Inmillions,exceptshareandpersharedata)
Seenotestoconsolidatedfinancialstatements.
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July1,2016
July3,2015
ASSETS Currentassets: Cashandcashequivalents $ 1,125 $ 2,479Short-terminvestments 6 6Accountsreceivable,net 1,318 1,735Inventories 868 993Deferredincometaxes — 122Othercurrentassets 216 233
Totalcurrentassets 3,533 5,568Property,equipmentandleaseholdimprovements,net 2,160 2,278Goodwill 1,237 874Otherintangibleassets,net 448 370Deferredincometaxes 616 496Otherassets,net 258 259
TotalAssets $ 8,252 $ 9,845LIABILITIESANDEQUITY
Currentliabilities: Accountspayable $ 1,517 $ 1,540Accruedemployeecompensation 184 256Accruedwarranty 104 135Accruedexpenses 444 412
Totalcurrentliabilities 2,249 2,343Long-termaccruedwarranty 102 113Long-termaccruedincometaxes 14 33Othernon-currentliabilities 164 183Long-termdebt,lesscurrentportion 4,130 4,155
TotalLiabilities 6,659 6,827Commitmentsandcontingencies(SeeNotes14and15)
Equity: SeagateTechnologyplcshareholders'equity: Preferredshares,$0.00001parvaluepershare—100,000,000authorized;nosharesissuedoroutstanding — —
Ordinaryshares,$0.00001parvaluepershare—1,250,000,000authorized;298,572,217issuedandoutstandingatJuly1,2016and315,445,536issuedandoutstandingatJuly3,2015 — —
Additionalpaid-incapital 5,929 5,734Accumulatedothercomprehensiveloss (25) (30)Accumulateddeficit (4,311) (2,686)TotalSeagateTechnologyplcShareholders'Equity 1,593 3,018
Noncontrollinginterest — —TotalEquity 1,593 3,018TotalLiabilitiesandEquity $ 8,252 $ 9,845
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SEAGATETECHNOLOGYPLC
CONSOLIDATEDSTATEMENTSOFOPERATIONS(Inmillions,exceptpersharedata)
Seenotestoconsolidatedfinancialstatements.
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FiscalYearsEnded
July1,2016
July3,2015
June27,2014
Revenue $ 11,160 $ 13,739 $ 13,724Costofrevenue 8,545 9,930 9,878Productdevelopment 1,237 1,353 1,226Marketingandadministrative 635 857 722Amortizationofintangibles 123 129 98Restructuringandother,net 175 32 24Gainonarbitrationaward,net — (620) —Totaloperatingexpenses 10,715 11,681 11,948
Incomefromoperations 445 2,058 1,776Interestincome 3 6 8Interestexpense (193) (207) (195)Other,net 19 113 (33)Otherincome(expense),net (171) (88) (220)
Incomebeforeincometaxes 274 1,970 1,556Provisionfor(benefitfrom)incometaxes 26 228 (14)Netincome 248 1,742 1,570Less:Netincomeattributabletononcontrollinginterest — — —
NetincomeattributabletoSeagateTechnologyplc $ 248 $ 1,742 $ 1,570NetincomepershareattributabletoSeagateTechnologyplcordinaryshareholders: Basic $ 0.83 $ 5.38 $ 4.66Diluted 0.82 5.26 4.52
Numberofsharesusedinpersharecalculations: Basic 299 324 337Diluted 302 331 347
CashdividendsdeclaredperSeagateTechnologyplcordinaryshare $ 2.43 $ 2.05 $ 1.67
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SEAGATETECHNOLOGYPLC
CONSOLIDATEDSTATEMENTSOFCOMPREHENSIVEINCOME(Inmillions)
Seenotestoconsolidatedfinancialstatements.
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FiscalYearsEnded
July1,2016
July3,2015
June27,2014
Netincome $ 248 $ 1,742 $ 1,570Othercomprehensiveincome(loss),netoftax:
Cashflowhedges Changeinnetunrealized(loss)gainoncashflowhedges (4) (11) (1)Less:reclassificationforamountsincludedinnetincome 2 13 —Netchange (2) 2 (1)
Marketablesecurities Changeinnetunrealizedgain(loss)onmarketablesecurities — — 1Less:reclassificationforamountsincludedinnetincome — — 2Netchange — — 3
Post-retirementplans Changeinunrealizedgain(loss)onpost-retirementplans 8 (5) 1Less:reclassificationforamountsincludedinnetincome — — —Netchange 8 (5) 1
Foreigncurrencytranslationadjustments Foreigncurrencytranslationadjustments (1) (25) 8
Totalothercomprehensiveincome(loss),netoftax 5 (28) 11Comprehensiveincome 253 1,714 1,581Less:Comprehensiveincomeattributabletononcontrollinginterest — — —
ComprehensiveincomeattributabletoSeagateTechnologyplc $ 253 $ 1,714 $ 1,581
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SEAGATETECHNOLOGYPLC
CONSOLIDATEDSTATEMENTSOFCASHFLOWS(Inmillions)
Seenotestoconsolidatedfinancialstatements.
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FiscalYearsEnded
July1,2016
July3,2015
June27,2014
OPERATINGACTIVITIES Netincome $ 248 $ 1,742 $ 1,570Adjustmentstoreconcilenetincometonetcashprovidedbyoperatingactivities: Depreciationandamortization 815 841 879Share-basedcompensation 120 137 118(Gain)lossonredemptionandrepurchaseofdebt (3) 74 81Gainonsaleofinvestments — — (32)Loss(gain)onsaleofpropertyandequipment — 2 (4)Impairmentoflong-livedassets 26 — —Deferredincometaxes (2) 2 (67)Othernon-cashoperatingactivities,net 12 (9) 14Changesinoperatingassetsandliabilities: Restrictedcashandinvestments — (3) 104Accountsreceivable,net 464 (2) 4Inventories 145 29 (20)Accountspayable (24) (58) (190)Accruedemployeecompensation (78) (40) (55)Accruedexpenses,incometaxesandwarranty (42) (112) (80)Vendornon-tradereceivables — 47 217Otherassetsandliabilities (1) (3) 19Netcashprovidedbyoperatingactivities 1,680 2,647 2,558
INVESTINGACTIVITIES Acquisitionofproperty,equipmentandleaseholdimprovements (587) (747) (559)Proceedsfromthesaleofpropertyandequipment — — 3Proceedsfromthesaleofstrategicinvestments 1 — 72Purchasesofshort-terminvestments — (5) (88)Salesofshort-terminvestments — 4 508Maturitiesofshort-terminvestments — 19 61Cashusedinacquisitionofbusinesses,netofcashacquired (634) (453) (285)Otherinvestingactivities,net 9 (105) (34)
Netcashusedininvestingactivities (1,211) (1,287) (322)FINANCINGACTIVITIES Netproceedsfromissuanceoflong-termdebt — 1,196 1,781Redemptionandrepurchaseofdebt (22) (1,026) (725)Taxespaidrelatedtonetsharesettlementofequityawards (56) — —Repurchasesofordinaryshares (1,090) (1,087) (1,912)Dividendstoshareholders (727) (664) (557)Proceedsfromissuanceofordinarysharesunderemployeestockplans 79 98 107Otherfinancingactivities,net (4) (12) (5)
Netcashusedinfinancingactivities (1,820) (1,495) (1,311)Effectofforeigncurrencyexchangeratechangesoncashandcashequivalents (3) (20) 1
(Decrease)increaseincashandcashequivalents (1,354) (155) 926Cashandcashequivalentsatthebeginningoftheyear 2,479 2,634 1,708Cashandcashequivalentsattheendoftheyear $ 1,125 $ 2,479 $ 2,634SupplementalDisclosureofCashFlowInformation
Cashpaidforinterest $ 200 $ 216 $ 198Cashpaidforincometaxes,netofrefunds $ 40 $ 285 $ 50
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SEAGATETECHNOLOGYPLC
CONSOLIDATEDSTATEMENTSOFSHAREHOLDERS'EQUITY
ForFiscalYearsEndedJuly1,2016,July3,2015andJune27,2014(Inmillions)
Seenotestoconsolidatedfinancialstatements.
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SeagateTechnologyplcOrdinaryShareholders
TotalEquity
NumberofOrdinaryShares
ParValueofShares
AdditionalPaid-inCapital
AccumulatedOther
ComprehensiveLoss
AccumulatedDeficit Total
NoncontrollingInterest
Balanceat,June28,2013 $ 3,506 359 $ — $ 5,286 $ (13) $ (1,778) $ 3,495 $ 11Netincome 1,570 1,570 1,570 —Othercomprehensiveincome 11 10 10 1Issuanceofordinarysharesunderemployeestockplans 107 9 107 107
Repurchasesofordinaryshares (1,912) (41) (1,912) (1,912)
Dividendstoshareholders (557) (557) (557) Share-basedcompensation 118 118 118 Purchaseofadditionalsubsidiarysharesfromnoncontrollinginterest (11) 1 1 (12)
Balanceat,June27,2014 2,832 327 — 5,511 (2) (2,677) 2,832 —Netincome 1,742 1,742 1,742 —Othercomprehensiveloss (28) (28) (28) —Issuanceofordinarysharesunderemployeestockplans 98 7 98 98
Repurchasesofordinaryshares (1,087) (19) (1,087) (1,087)
Dividendstoshareholders (664) (664) (664) Share-basedcompensation 137 137 137 Other (12) (12) — (12) —Balanceat,July3,2015 3,018 315 — 5,734 (30) (2,686) 3,018 —Netincome 248 248 248 —Othercomprehensiveincome 5 5 5 —Issuanceofordinarysharesunderemployeestockplans 79 8 79 79
Repurchasesofordinaryshares (1,090) (23) (1,090) (1,090)
Taxwithholdingrelatedtovestingofrestrictedstockunits (56) (1) (56) (56)
Dividendstoshareholders (727) (727) (727) Share-basedcompensation 120 120 120 Other (4) (4) — (4) —Balanceat,July1,2016 $ 1,593 299 $ — $ 5,929 $ (25) $ (4,311) $ 1,593 $ —
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SEAGATETECHNOLOGYPLC
NOTESTOCONSOLIDATEDFINANCIALSTATEMENTS
1.BasisofPresentationandSummaryofSignificantAccountingPolicies
Organization
SeagateTechnologyplc(the"Company")isaleadingproviderofelectronicdatastoragetechnologyandsolutions.Ourprincipalproductsareharddiskdrives,commonlyreferredtoasdiskdrives,harddrivesorHDDs.InadditiontoHDDs,weproduceabroadrangeofelectronicdatastorageproductsincludingsolidstatehybriddrives("SSHD"),solidstatedrives("SSD"),PCIecardsandSATAcontrollers.Ourstoragetechnologyportfolioalsoincludesstoragesubsystems,andhighperformancecomputing("HPC")solutions.
Harddiskdrivesaredevicesthatstoredigitallyencodeddataonrapidlyrotatingdiskswithmagneticsurfaces.Diskdrivescontinuetobetheprimarymediumofmassdatastorageduetotheirperformanceattributes,highqualityandcosteffectiveness.Complementingexistingdatacenterstoragearchitecture,solid-statestoragedevicesuseintegratedcircuitassembliesasmemorytostoredata,andmostSSDsuseNAND-basedflashmemory.InadditiontoHDDsandSSDs,SSHDscombinethefeaturesofSSDsandHDDsinthesameunit,containingalargeharddiskdriveandanSSDcachetoimproveperformanceoffrequentlyaccesseddata.
TheCompany'sproductsaredesignedformissioncriticalandnearlineapplicationsinenterpriseserversandstoragesystems;clientcomputeapplications,whereourproductsaredesignedprimarilyfordesktopandmobilecomputing;andclientnon-computeapplications,whereourproductsaredesignedforawidevarietyofenduserdevicessuchasdigitalvideorecorders("DVRs"),personaldatabackupsystems,portableexternalstoragesystems,digitalmediasystemsandsurveillancesystems.
TheCompany'sCloudSystemsandSolutionsbuildsontheSeagatelegacytoextendinnovationfromthedeviceintotheinformationinfrastructure,onsiteandinthecloud.OurapproachtodatamanagementsupportsHPC,opensourceandsoftware-definedsolutions.OurportfolioincludesHPCstoragesolutions,modularoriginalequipmentmanufacturers("OEM")storagesystemsandscale-outstoragesystems.
BasisofPresentationandConsolidation
TheconsolidatedfinancialstatementsincludetheaccountsoftheCompanyandallitswholly-ownedandmajority-ownedsubsidiaries,aftereliminationofintercompanytransactionsandbalances.
ThepreparationoffinancialstatementsinaccordancewithU.S.generallyacceptedaccountingprinciplesalsorequiresmanagementtomakeestimatesandassumptionsthataffecttheamountsreportedintheCompany'sconsolidatedfinancialstatementsandaccompanyingnotes.Actualresultscoulddiffermateriallyfromthoseestimates.Themethods,estimatesandjudgmentstheCompanyusesinapplyingitsmostcriticalaccountingpolicieshaveasignificantimpactontheresultstheCompanyreportsinitsconsolidatedfinancialstatements.
TheCompanyoperatesandreportsfinancialresultsonafiscalyearof52or53weeksendingontheFridayclosesttoJune30.Accordingly,fiscalyear2016comprised52weeksandendedonJuly1,2016.Fiscalyears2015and2014werecomprisedof53and52weeksandendedonJuly3,2015,andJune27,2014,respectively.AllreferencestoyearsintheseNotestoConsolidatedFinancialStatementsrepresentfiscalyearsunlessotherwisenoted.Fiscalyear2017willbe52weeksandwillendonJune30,2017.
SummaryofSignificantAccountingPolicies
Cash,CashEquivalentsandShort-TermInvestments.TheCompanyconsidersallhighlyliquidinvestmentswitharemainingmaturityof90daysorlessatthetimeofpurchasetobecashequivalents.
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SEAGATETECHNOLOGYPLC
NOTESTOCONSOLIDATEDFINANCIALSTATEMENTS—(Continued)
Cashequivalentsarecarriedatcost,whichapproximatesfairvalue.TheCompany'sshort-terminvestmentsareprimarilycomprisedofmoneymarketfunds,certificatesofdeposits,andotherinterest-bearingbankdeposits.TheCompanyhasclassifieditsmarketablesecuritiesasavailable-for-saleandtheyarestatedatfairvaluewithunrealizedgainsandlossesincludedinAccumulatedothercomprehensiveincome(loss),whichisacomponentofShareholders'Equity.TheCompanyevaluatestheavailable-forsalesecuritiesinanunrealizedlosspositionforother-than-temporaryimpairment.RealizedgainsandlossesareincludedinOther,net.Thecostofsecuritiessoldisbasedonthespecificidentificationmethod.
RestrictedCashandInvestments.Restrictedcashandinvestmentsrepresentcashandcashequivalentsandinvestmentsthatarerestrictedastowithdrawaloruseforotherthancurrentoperations.
AllowancesforDoubtfulAccounts.TheCompanymaintainsanallowanceforuncollectibleaccountsreceivablebaseduponexpectedcollectability.Thisreserveisestablishedbaseduponhistoricaltrends,globalmacroeconomicconditionsandananalysisofspecificexposures.TheprovisionfordoubtfulaccountsisrecordedasachargetoMarketingandadministrativeexpense.
Inventory.Inventoriesarevaluedatthelowerofcost(usingthefirst-in,first-outmethod)ormarket.Marketvalueisbaseduponanestimatedaveragesellingpricereducedbyestimatedcostofcompletionanddisposal.
Property,EquipmentandLeaseholdImprovements.Property,equipmentandleaseholdimprovementsarestatedatcost.Equipmentandbuildingsaredepreciatedusingthestraight-linemethodovertheestimatedusefullivesoftheassets.Leaseholdimprovementsareamortizedusingthestraight-linemethodovertheshorteroftheestimatedlifeoftheassetortheremainingtermofthelease.Thecostsofadditionsandsubstantialimprovementstoproperty,equipmentandleaseholdimprovements,whichextendtheeconomiclifeoftheunderlyingassets,arecapitalized.Thecostofmaintenanceandrepairstoproperty,equipmentandleaseholdimprovementsareexpensedasincurred.
AssessmentofGoodwillandOtherLong-livedAssetsforImpairment.TheCompanyaccountsforgoodwillinaccordancewithAccountingStandardsCodification("ASC")Topic350("ASC350"),Intangibles—GoodwillandOther.Duringfiscalyear2012,theCompanyadoptedAccountingStandardUpdate("ASU")No.2011-08,Intangibles—GoodwillandOther(ASCTopic350)—TestingGoodwillforImpairment.TheCompanyperformsaqualitativeassessmentinthefourthquarterofeachyear,ormorefrequentlyifindicatorsofpotentialimpairmentexist,todetermineifanyeventsorcircumstancesexist,suchasanadversechangeinbusinessclimateoradeclineintheoverallindustrythatwouldindicatethatitwouldmorelikelythannotreducethefairvalueofareportingunitbelowitscarryingamount,includinggoodwill.Ifitisdeterminedinthequalitativeassessmentthatthefairvalueofareportingunitismorelikelythannotbelowitscarryingamount,includinggoodwill,thentheCompanyperformsaquantitativetwo-stepimpairmenttest.Thefirststep,identifyingapotentialimpairment,comparesthefairvalueofareportingunitwithitscarryingamount,includinggoodwill.Ifthecarryingvalueofthereportingunitexceedsitsfairvalue,thesecondstepwouldneedtobeconducted.Thesecondstep,measuringtheimpairmentloss,comparestheimpliedfairvalueofthereportingunitgoodwillwiththecarryingamountofthatgoodwill.Anyexcessofthereportingunitgoodwillcarryingvalueoveritsimpliedfairvalueisrecognizedasanimpairmentloss.
TheCompanytestsotherlong-livedassets,includingproperty,equipmentandleaseholdimprovementsandotherintangibleassetssubjecttoamortization,forrecoverabilitywhenevereventsorchangesincircumstancesindicatethatthecarryingvalueofthoseassetsmaynotberecoverable.TheCompanyperformsarecoverabilitytesttoassesstherecoverabilityofanassetgroup.Iftherecoverabilitytestindicatesthatthecarryingvalueoftheassetgroupisnotrecoverable,theCompanywillestimatethe
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SEAGATETECHNOLOGYPLC
NOTESTOCONSOLIDATEDFINANCIALSTATEMENTS—(Continued)
fairvalueoftheassetgroupandtheexcessofthecarryingvalueoverthefairvalueisallocatedproratatoderivetheadjustedcarryingvalueofassetsintheassetgroup.Theadjustedcarryingvalueofeachassetintheassetgroupisnotreducedbelowitsfairvalue.
TheCompanytestsotherintangibleassetsnotsubjecttoamortizationwhenevereventsoccurorcircumstanceschange,suchasdecliningfinancialperformance,deteriorationintheenvironmentinwhichtheentityoperatesordeterioratingmacroeconomicconditionsthathaveanegativeeffectonfutureexpectedearningsandcashflowsthatcouldaffectsignificantinputsusedtodeterminethefairvalueoftheindefinite-livedintangibleasset.
DerivativeFinancialInstruments.TheCompanyappliestherequirementsofASCTopic815("ASC815"),DerivativesandHedging.ASC815requiresthatallderivativesberecordedonthebalancesheetatfairvalueandestablishescriteriafordesignationandeffectivenessofhedgingrelationships.
EstablishmentofWarrantyAccruals.TheCompanyestimatesprobableproductwarrantycostsatthetimerevenueisrecognized.TheCompanygenerallywarrantsitsproductsforaperiodof1to5years.TheCompany'swarrantyprovisionconsidersestimatedproductfailureratesandtrends(includingthetimingofproductreturnsduringthewarrantyperiods),andestimatedrepairorreplacementcostsrelatedtoproductqualityissues,ifany.TheCompanyalsoexercisesjudgmentinestimatingitsabilitytosellcertainrepairedproducts.Shouldactualexperienceinanyfutureperioddiffersignificantlyfromitsestimates,theCompany'sfutureresultsofoperationscouldbemateriallyaffected.
RevenueRecognition,SalesReturnsandAllowances,andSalesIncentivePrograms.TheCompany'srevenuerecognitionpolicycomplieswithASCTopic605(ASC605),RevenueRecognition.Revenuefromsalesofproducts,includingsalestodistributioncustomers,isgenerallyrecognizedwhentitleandriskoflosshaspassedtothebuyer,whichtypicallyoccursuponshipmentfromtheCompanyorthirdpartywarehousefacilities,persuasiveevidenceofanarrangementexists,includingafixedordeterminablepricetothebuyer,andwhencollectabilityisreasonablyassured.Revenuefromsalesofproductstocertaindirectretailcustomersandtocustomersincertainindirectretailchannelsisrecognizedonasell-throughbasis.
TheCompanyrecordsestimatedproductreturnsatthetimeofshipment.TheCompanyalsoestimatesreductionstorevenueforsalesincentiveprograms,suchaspriceprotection,andvolumeincentives,andrecordssuchreductionswhenrevenueisrecorded.TheCompanyestablishescertaindistributorandOEMsalesprogramsaimedatincreasingcustomerdemand.ForOEMsales,rebatesaretypicallybasedonanOEMcustomer'svolumeofpurchasesfromSeagateorotheragreeduponrebateprograms.Forthedistributionchannel,theseprogramstypicallyinvolverebatesrelatedtoadistributor'slevelofsales,ordersize,advertisingorpointofsaleactivityandpriceprotectionadjustments.TheCompanyprovidesfortheseobligationsatthetimethatrevenueisrecordedbasedonestimatedrequirements.Marketingdevelopmentprogramsarerecordedasareductiontorevenue.
ShippingandHandling.TheCompanyincludescostsrelatedtoshippingandhandlinginCostofrevenueforallperiodspresented.
RestructuringCosts.TheCompanyrecordsrestructuringactivitiesincludingcostsforone-timeterminationbenefitsinaccordancewithASCTopic420("ASC420"),ExitorDisposalCostObligations.ThetimingofrecognitionforseverancecostsaccountedforunderASC420dependsonwhetheremployeesarerequiredtorenderserviceuntiltheyareterminatedinordertoreceivetheterminationbenefits.Ifemployeesarerequiredtorenderserviceuntiltheyareterminatedinordertoreceivetheterminationbenefits,aliabilityisrecognizedratablyoverthefutureserviceperiod.Otherwise,aliabilityisrecognized
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whenmanagementhascommittedtoarestructuringplanandhascommunicatedthoseactionstoemployees.EmployeeterminationbenefitscoveredbyexistingbenefitarrangementsarerecordedinaccordancewithASCTopic712,Non-retirementPostemploymentBenefits.Thesecostsarerecognizedwhenmanagementhascommittedtoarestructuringplanandtheseverancecostsareprobableandestimable.
AdvertisingExpense.Thecostofadvertisingisexpensedasincurred.Advertisingcostswereapproximately$31million,$64millionand$52millioninfiscalyears2016,2015and2014,respectively.
Stock-BasedCompensation.TheCompanyaccountsforstock-basedcompensationundertheprovisionsofASCTopic718(ASC718),Compensation-StockCompensation.TheCompanyhaselectedtoapplythewith-and-withoutmethodtoassesstherealizationofrelatedexcesstaxbenefits.
AccountingforIncomeTaxes.TheCompanyaccountsforincometaxespursuanttoASCTopic740("ASC740"),IncomeTaxes.InapplyingASC740,theCompanymakescertainestimatesandjudgmentsindeterminingincometaxexpenseforfinancialstatementpurposes.Theseestimatesandjudgmentsoccurinthecalculationoftaxcredits,recognitionofincomeanddeductionsandcalculationofspecifictaxassetsandliabilities,whicharisefromdifferencesinthetimingofrecognitionofrevenueandexpenseforincometaxandfinancialstatementpurposes,aswellastaxliabilitiesassociatedwithuncertaintaxpositions.ThecalculationoftaxliabilitiesinvolvesuncertaintiesintheapplicationofcomplextaxrulesandthepotentialforfutureadjustmentoftheCompany'suncertaintaxpositionsbytheInternalRevenueServiceorothertaxjurisdictions.Ifestimatesofthesetaxliabilitiesaregreaterorlessthanactualresults,anadditionaltaxbenefitorprovisionwillresult.ThedeferredtaxassetstheCompanyrecordseachperioddependprimarilyontheCompany'sabilitytogeneratefuturetaxableincomeintheUnitedStatesandcertainnon-U.S.jurisdictions.Eachperiod,theCompanyevaluatestheneedforavaluationallowanceforitsdeferredtaxassetsand,ifnecessary,adjuststhevaluationallowancesothatnetdeferredtaxassetsarerecordedonlytotheextenttheCompanyconcludesitismorelikelythannotthatthesedeferredtaxassetswillberealized.IftheCompany'soutlookforfuturetaxableincomechangessignificantly,theCompany'sassessmentoftheneedfor,andtheamountof,avaluationallowancemayalsochange.
ComprehensiveIncome.TheCompanypresentscomprehensiveincomeinaseparatestatement.Comprehensiveincomeiscomprisedofnetincomeandothergainsandlossesaffectingequitythatareexcludedfromnetincome.
ForeignCurrencyRemeasurementandTranslation.TheU.S.dollaristhefunctionalcurrencyforthemajorityoftheCompany'sforeignoperations.Monetaryassetsandliabilitiesdenominatedinforeigncurrenciesareremeasuredintothefunctionalcurrencyofthesubsidiaryatthebalancesheetdate.ThegainsandlossesfromtheremeasurementofforeigncurrencydenominatedbalancesintothefunctionalcurrencyofthesubsidiaryareincludedinOther,netontheCompany'sConsolidatedStatementsofOperations.TheCompanyhad$1millioninremeasurementlossesinfiscalyear2016with$33millionand$8millioninremeasurementgainsinfiscalyears2015and2014,respectively.
TheCompanytranslatestheassetsandliabilitiesofitsnon-U.S.dollarfunctionalcurrencysubsidiariesintoU.S.dollarsusingexchangeratesineffectattheendofeachperiod.Revenueandexpensesforthesesubsidiariesaretranslatedusingratesthatapproximatethoseineffectduringtheperiod.GainsandlossesfromthesetranslationsarerecognizedinforeigncurrencytranslationincludedinAccumulatedOthercomprehensiveincome(loss),whichisacomponentofshareholders'equity.TheCompany'ssubsidiariesthatusetheU.S.dollarastheirfunctionalcurrencyremeasuremonetaryassetsandliabilitiesatexchangeratesineffectattheendofeachperiod,andinventories,property,andnonmonetaryassetsandliabilitiesathistoricalrates.GainsandlossesfromtheseremeasurementswerenotsignificantandhavebeenincludedintheCompany'sresultsofoperations.
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Concentrations
ConcentrationofCreditRisk.TheCompany'scustomerbasefordiskdriveproductsisconcentratedwithasmallnumberofOEMsanddistributors.TheCompanydoesnotgenerallyrequirecollateralorothersecuritytosupportaccountsreceivable.Toreducecreditrisk,theCompanyperformsongoingcreditevaluationsonitscustomers'financialcondition.TheCompanyestablishesanallowancefordoubtfulaccountsbaseduponfactorssurroundingthecreditriskofcustomers,historicaltrendsandotherinformation.Hewlett-PackardCompanyandDellInc.eachaccountedformorethan10%oftheCompany'saccountsreceivableasofJuly1,2016.
FinancialinstrumentsthatpotentiallysubjecttheCompanytoconcentrationsofcreditriskconsistprimarilyofcashequivalents,short-terminvestmentsandforeigncurrencyforwardexchangecontracts.TheCompanyfurthermitigatesconcentrationsofcreditriskinitsinvestmentsthroughdiversification,bylimitingitsinvestmentsinthedebtsecuritiesofasingleissuer,andinvestinginhighlyratedsecurities.
Inenteringintoforeigncurrencyforwardexchangecontracts,theCompanyassumestheriskthatmightarisefromthepossibleinabilityofcounterpartiestomeetthetermsoftheircontracts.Thecounterpartiestothesecontractsaremajormultinationalcommercialbanks,andtheCompanyhasnotincurredanddoesnotexpectanylossesasaresultofcounterpartydefaults.
SupplierConcentration.Certainoftherawmaterials,componentsandequipmentusedbytheCompanyinthemanufactureofitsproductsareavailablefromasolesupplieroralimitednumberofsuppliers.Shortagescouldoccurintheseessentialmaterialsandcomponentsduetoaninterruptionofsupplyorincreaseddemandintheindustry.IftheCompanywereunabletoprocurecertainmaterials,componentsorequipmentatacceptableprices,itwouldberequiredtoreduceitsmanufacturingoperations,whichcouldhaveamaterialadverseeffectonitsresultsofoperations.Inaddition,theCompanymaymakeprepaymentstocertainsuppliers.Shouldthesesuppliersbeunabletodeliverontheirobligationsorexperiencefinancialdifficulty,theCompanymaynotbeabletorecovertheseprepayments.
RecentAccountingPronouncements
InMay2014,August2015,April2016andMay2016,theFinancialAccountingStandardsBoard("FASB")issuedASU2014-09(ASCTopic606),RevenuefromContractswithCustomers,ASU2015-14(ASCTopic606)RevenuefromContractswithCustomers,DeferraloftheEffectiveDate,ASU2016-10(ASCTopic606)RevenuefromContractswithCustomers,IdentifyingPerformanceObligationsandLicensing,andASU2016-12(ASCTopic606)RevenuefromContractswithCustomers,Narrow-ScopeImprovementsandPracticalExpedients,respectively.ASCTopic606outlinesasinglecomprehensivemodelforentitiestouseinaccountingforrevenuearisingfromcontractswithcustomersandsupersedesmostcurrentrevenuerecognitionguidance,includingindustry-specificguidance.Italsorequiresentitiestodisclosebothquantitativeandqualitativeinformationthatenablefinancialstatementsuserstounderstandthenature,amount,timing,anduncertaintyofrevenueandcashflowsarisingfromcontractswithcustomers.TheamendmentsintheseASUsareeffectiveforfiscalyears,andinterimperiodswithinthoseyears,beginningafterDecember15,2017.EarlyadoptionispermittedforannualperiodsbeginningafterDecember15,2016.Thisstandardmaybeappliedretrospectivelytoallpriorperiodspresented,orretrospectivelywithacumulativeadjustmenttoretainedearningsintheyearofadoption.TheCompanyisintheprocessofassessingtheimpact,ifany,onitsconsolidatedfinancialstatementsandplanstoadoptthemodifiedretrospectivetransitionapproach.
InApril2015andAugust2015,theFASBissuedASU2015-03(ASCSubtopic835-30),Interest-ImputationofInterest:SimplifyingthePresentationofDebtIssuanceCostsandASU2015-15(ASC
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Subtopic835-30),PresentationandSubsequentMeasurementofDebtIssuanceCostsAssociatedwithLine-of-CreditArrangements-AmendmentstoSECParagraphsPursuanttoStaffAnnouncementatJune18,2015EITFMeeting,respectively.TheASUsrequirethatdebtissuancecostsrelatedtoarecognizeddebtliability,withtheexceptionofthoserelatedtoline-of-creditarrangements,bepresentedinthebalancesheetasadirectdeductionfromthecarryingamountofthatdebtliability.TheamendmentsintheseASUsareeffectiveforfiscalyears,andinterimperiodswithinthoseyears,beginningafterDecember15,2015.Earlyadoptionispermittedforfinancialstatementsthathavenotbeenpreviouslyissued.TheadoptionofthisnewguidanceisnotexpectedtohaveamaterialimpactontheCompany'sconsolidatedfinancialstatementsanddisclosures.
InJuly2015,theFASBissuedASU2015-11(ASCTopic330),Inventory:SimplifyingtheMeasurementofInventory.TheamendmentsinthisASUrequireinventorymeasurementatthelowerofcostandnetrealizablevalue.TheamendmentsinthisASUareeffectiveforfiscalyearsbeginningafterDecember15,2016,includinginterimperiodswithinthosefiscalyears.Earlyadoptionispermittedbyallentitiesasofthebeginningofaninterimorannualreportingperiod.TheCompanyisintheprocessofassessingtheimpact,ifany,ofthisASUonitsconsolidatedfinancialstatements.
InSeptember2015,theFASBissuedASU2015-16(ASCTopic805),BusinessCombinationsSimplifyingtheAccountingforMeasurement-PeriodAdjustments.Theamendmentsinthisupdaterequirethatanacquirerrecognizemeasurementperiodadjustmentsintheperiodinwhichtheadjustmentsaredetermined.Theincomeeffectsofsuchmeasurementperiodadjustmentsaretoberecordedinthesameperiod'sfinancialstatementsbutcalculatedasiftheaccountinghadbeencompletedasoftheacquisitiondate.Theimpactofmeasurementperiodadjustmentstoearningsthatrelatetopriorperiodfinancialstatementsaretobepresentedseparatelyontheincomestatementordisclosedbylineitem.Theamendmentsinthisupdateareforfiscalyears,includinginterimperiodswithinthosefiscalyears,beginningafterDecember15,2015.Earlyadoptionispermittedforpublicbusinessentitiesforreportingperiodsforwhichfinancialstatementshavenotyetbeenissued.TheadoptionofthisnewguidanceisnotexpectedtohaveamaterialimpactontheCompany'sconsolidatedfinancialstatementsanddisclosures.
InNovember2015,theFASBissuedASU2015-17(ASCTopic740),IncomeTaxesBalanceSheetClassificationofDeferredTaxes.TheamendmentsinthisUpdateareeffectiveforfiscalyearsbeginningafterDecember15,2016,includinginterimperiodswithinthosefiscalyears.Earlyadoptionispermittedbyallentitiesasofthebeginningofaninterimorannualreportingperiod.TheCompanyearlyadoptedthisASUfortheDecember2015quarteronaprospectivebasis.See"Note7.IncomeTaxes"fordisclosureofthefinancialstatementimpactofthisadoption.
InJanuary2016,theFASBissuedASU2016-01(ASCSubtopic825-10),FinancialInstruments—OverallRecognitionandMeasurementofFinancialAssetsandFinancialLiabilities.TheamendmentsinthisASUrequireentitiestomeasureallinvestmentsinequitysecuritiesatfairvaluewithchangesrecognizedthroughnetincome.Thisrequirementdoesnotapplytoinvestmentsthatqualifyfortheequitymethodofaccounting,tothosethatresultinconsolidationoftheinvestee,orforwhichtheentitymeetsapracticabilityexceptiontofairvaluemeasurement.Additionally,theamendmentseliminatecertaindisclosurerequirementsrelatedtofinancialinstrumentsmeasuredatamortizedcostandadddisclosuresrelatedtothemeasurementcategoriesoffinancialassetsandfinancialliabilities.TheamendmentsinthisASUareeffectiveforfiscalyearsbeginningafterDecember15,2017,includinginterimperiodswithinthosefiscalyears.EarlyadoptionispermittedforonlycertainportionsoftheASU.TheCompanyisintheprocessofassessingtheimpact,ifany,onitsconsolidatedfinancialstatements.
InFebruary2016,theFASBissuedASU2016-02(ASCTopic842),Leases.TheASUamendsanumberofaspectsofleaseaccounting,includingrequiringlesseestorecognizeoperatingleaseswitha
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termgreaterthanoneyearontheirbalancesheetasaright-of-useassetandcorrespondingleaseliability,measuredatthepresentvalueoftheleasepayments.TheamendmentsinthisASUareeffectiveforfiscalyearsbeginningafterDecember15,2018,includinginterimperiodswithinthosefiscalyears.Earlyadoptionispermitted.TheCompanyisintheprocessofassessingtheimpactonitsconsolidatedfinancialstatements.
InMarch2016,theFASBissuedASU2016-09(ASCTopic718),StockCompensation—ImprovementstoEmployeeShare-BasedPaymentAccounting.TheamendmentsinthisASUareintendedtosimplifyseveralareasofaccountingforshare-basedcompensationarrangements,includingtheincometaxconsequences,classificationontheconsolidatedstatementofcashflowsandtreatmentofforfeitures.TheamendmentsinthisASUareeffectiveforannualperiodsbeginningafterDecember15,2016,andinterimperiodswithinthoseannualperiods.Earlyadoptionispermitted.TheCompanyisintheprocessofassessingtheimpact,ifany,ofthisASUonitsconsolidatedfinancialstatements.
2.BalanceSheetInformation
Investments
Thefollowingtablesummarizes,bymajortype,thefairvalueandamortizedcostoftheCompany'sinvestmentsasofJuly1,2016:
AsofJuly1,2016,theCompany'sOthercurrentassetsincludedof$7millioninrestrictedcashandinvestmentsheldascollateralatbanksforvariousperformanceobligations
AsofJuly1,2016,theCompanyhadnomaterialavailable-for-salesecuritiesthathadbeeninacontinuousunrealizedlosspositionforaperiodgreaterthan12months.TheCompanydeterminednoavailable-for-salesecuritieswereother-than-temporarilyimpairedasofJuly1,2016.
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(Dollarsinmillions) Amortized
Cost UnrealizedGain/(Loss)
FairValue
Available-for-salesecurities: Moneymarketfunds $ 318 $ — $ 318Corporatebonds 6 — 6Certificatesofdeposit 444 — 444Total $ 768 $ — $ 768
IncludedinCashandcashequivalents $ 755IncludedinShort-terminvestments 6IncludedinOthercurrentassets 7Total $ 768
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NOTESTOCONSOLIDATEDFINANCIALSTATEMENTS—(Continued)
ThefairvalueandamortizedcostoftheCompany'sinvestmentsclassifiedasavailable-for-saleatJuly1,2016byremainingcontractualmaturitywasasfollows:
Equitysecuritieswhichdonothaveacontractualmaturitydatearenotincludedintheabovetable.
Thefollowingtablesummarizes,bymajortype,thefairvalueandamortizedcostoftheCompany'sinvestmentsasofJuly3,2015:
AsofJuly3,2015,theCompany'sOthercurrentassetsincludedof$7millioninrestrictedcashandinvestmentsheldascollateralatbanksforvariousperformanceobligations.
AsofJuly3,2015,theCompanyhadnoavailable-for-salesecuritiesthathadbeeninacontinuousunrealizedlosspositionforaperiodgreaterthan12months.TheCompanydeterminednoavailable-for-salesecuritieswereother-than-temporarilyimpairedasofJuly3,2015.
AccountsReceivable,net
Thefollowingtableprovidesdetailsoftheaccountsreceivable,netbalancesheetitem:
75
(Dollarsinmillions) Amortized
Cost FairValue
Dueinlessthan1year $ 767 $ 767Duein1to5years 1 1Duein5to10years — —Thereafter — —Total $ 768 $ 768
(Dollarsinmillions) Amortized
Cost UnrealizedGain/(Loss)
FairValue
Available-for-salesecurities: Moneymarketfunds $ 1,203 $ — $ 1,203Corporatebonds 6 — 6Certificatesofdeposit 867 — 867Total $ 2,076 $ — $ 2,076
IncludedinCashandcashequivalents $ 2,063IncludedinShort-terminvestments 6IncludedinOthercurrentassets 7
Total $ 2,076
(Dollarsinmillions) July1,2016
July3,2015
Accountsreceivable $ 1,327 $ 1,744Allowancefordoubtfulaccounts (9) (9)
$ 1,318 $ 1,735
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NOTESTOCONSOLIDATEDFINANCIALSTATEMENTS—(Continued)
Activityintheallowancefordoubtfulaccountsisasfollows:
Inventories
Thefollowingtableprovidesdetailsoftheinventorybalancesheetitem:
OtherCurrentAssets
Thefollowingtableprovidesdetailsoftheothercurrentassetsbalancesheetitem:
Othercurrentassetsincludenon-tradereceivablesfromcertainmanufacturingvendorsresultingfromthesaleofcomponentstothesevendorswhomanufacturecompletedsub-assembliesorfinishedgoodsfortheCompany.TheCompanydoesnotreflectthesaleofthesecomponentsinrevenueanddoesnotrecognizeanyprofitsonthesesales.Thecostsofthecompletedsub-assembliesareincludedininventoryuponpurchasefromthevendors.
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(Dollarsinmillions)
BalanceatBeginningof
Period
Charges(Credit)toOperations
Deductions(a)
BalanceatEndofPeriod
FiscalyearendedJune27,2014 $ 8 4 — $ 12FiscalyearendedJuly3,2015 $ 12 — (3) $ 9FiscalyearendedJuly1,2016 $ 9 1 (1) $ 9
(a) Uncollectibleaccountswrittenoff,netofrecoveries.
(Dollarsinmillions) July1,2016
July3,2015
Rawmaterialsandcomponents $ 307 $ 352Work-in-process 297 239Finishedgoods 264 402
$ 868 $ 993
(Dollarsinmillions) July1,2016
July3,2015
Vendornon-tradereceivables $ 66 $ 66Other 150 167
$ 216 $ 233
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SEAGATETECHNOLOGYPLC
NOTESTOCONSOLIDATEDFINANCIALSTATEMENTS—(Continued)
Property,EquipmentandLeaseholdImprovements,net
Thecomponentsofproperty,equipmentandleaseholdimprovements,netwereasfollows:
Depreciationexpense,whichincludesamortizationofleaseholdimprovements,was$641million,$689millionand$748millionforfiscalyears2016,2015and2014,respectively.Interestonborrowingsrelatedtoeligiblecapitalexpendituresiscapitalizedaspartofthecostofthequalifiedassetsandamortizedovertheestimatedusefullivesoftheassets.Duringfiscalyears2016,2015and2014,theCompanycapitalizedinterestof$13million,$15millionand$7million,respectively.
Duringfiscalyearended2016,theCompanydetermineditwoulddiscontinuetheuseofcertainmanufacturingpropertyandequipmentintheshort-term,andthatcertainothermanufacturingpropertyandequipmentwaspermanentlyimpaired,andasaresultrecognizedachargeof$53millionfromthewrite-offandaccelerateddepreciationofofthesefixedassets.ThisamountwasrecordedinCostofrevenueintheConsolidatedStatementofOperations.TheCompanydidnotrecordanymaterialimpairmentchargesinfiscalyears2015and2014.
AccumulatedOtherComprehensiveIncome(Loss)("AOCI")
ThecomponentsofAOCI,netoftax,wereasfollows:
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(Dollarsinmillions) UsefulLifeinYears
July1,2016
July3,2015
Landandlandimprovements $ 69 $ 48Equipment 3–5 7,681 7,440Buildingsandleaseholdimprovements Upto48 1,900 1,595Constructioninprogress 234 547
9,884 9,630Less:accumulateddepreciationandamortization (7,724) (7,352)
$ 2,160 $ 2,278
(Dollarsinmillions)
UnrealizedGains(Losses)onCashFlow
Hedges
UnrealizedGains(Losses)onMarketableSecurities(a)
UnrealizedGains(Losses)
onPost-RetirementPlans
ForeignCurrencyTranslationAdjustments Total
BalanceatJune27,2014 $ (1) $ — $ (10) $ 9 $ (2)Othercomprehensiveincome(loss)beforereclassifications (11) — (5) (25) (41)
AmountsreclassifiedfromAOCI 13 — — — 13Othercomprehensiveincome(loss) 2 — (5) (25) (28)BalanceatJuly3,2015 1 — (15) (16) (30)Othercomprehensiveincome(loss)beforereclassifications (4) — 8 (1) 3
AmountsreclassifiedfromAOCI 2 — — — 2Othercomprehensiveincome(loss) (2) — 8 (1) 5BalanceatJuly1,2016 $ (1) $ — $ (7) $ (17) $ (25)
(a) ThecostofasecuritysoldortheamountreclassifiedoutofAOCIintoearningswasdeterminedusingthespecificidentificationmethod.
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NOTESTOCONSOLIDATEDFINANCIALSTATEMENTS—(Continued)
3.Acquisitions
DotHillSystemsCorp.
OnOctober6,2015,theCompanyacquiredalloftheoutstandingsharesofDotHillSystemsCorp.("DotHill"),asupplierofsoftwareandhardwarestoragesystems.TheCompanypaid$9.75pershare,or$674million,incashfortheacquisition.TheacquisitionofDotHillfurtherexpandstheCompany'sOEM-focusedcloudstoragesystemsbusinessandadvancestheCompany'sstrategicefforts.
Thefollowingtablesummarizestheestimatedfairvaluesoftheassetsacquiredandliabilitiesassumedattheacquisitiondate:
Thefollowingtableshowsthefairvalueoftheseparatelyidentifiableintangibleassetsatthetimeofacquisitionandtheperiodoverwhicheachintangibleassetwillbeamortized:
Therecognizedgoodwill,whichisnotdeductibleforincometaxpurposes,isprimarilyattributabletocostsynergiesexpectedtoariseaftertheacquisitionandthebenefitstheCompanyexpectstoderivefromenhancedmarketopportunities.
TheexpensesrelatedtotheacquisitionofDotHillforthefiscalyearendedJuly1,2016,whichareincludedwithinMarketingandadministrativeexpenseontheConsolidatedStatementofOperations,arenotsignificant.
TheamountsofrevenueandearningsofDotHillincludedintheCompany'sConsolidatedStatementofOperationsfromtheacquisitiondatewerenotsignificant.
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(Dollarsinmillions) Amount Cashandcashequivalents $ 40Accountsreceivable,net 48Inventories 21Othercurrentandnon-currentassets 7Property,plantandequipment 10Intangibleassets 252Goodwill 364Totalassets 742
Accountspayable,accruedexpensesandother (68)Totalliabilities (68)Total $ 674
(Dollarsinmillions) FairValue
Weighted-AverageAmortization
Period Existingtechnology $ 164 5.0yearsCustomerrelationships 71 7.0yearsTradenames 3 5.0yearsTotalamortizableintangibleassetsacquired 238 5.5years
In-processresearchanddevelopment 14 Totalacquiredidentifiableintangibleassets $ 252
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SEAGATETECHNOLOGYPLC
NOTESTOCONSOLIDATEDFINANCIALSTATEMENTS—(Continued)
LSI'sFlashBusiness
OnSeptember2,2014,theCompanycompletedtheacquisitionofcertainassetsandliabilitiesofLSICorporation's("LSI")AcceleratedSolutionsDivisionandFlashComponentsDivision(collectively,the"FlashBusiness")fromAvagoTechnologiesLimitedfor$450millionincash.ThetransactionisintendedtostrengthenSeagate'sstrategytodeliverafullsuiteofstoragesolutions,providingSeagatewithestablishedenterprisePCIeflashandSSDcontrollercapabilitiestodeliversolutionsforthegrowingflashstoragemarket.
Thefollowingtablesummarizestheestimatedfairvaluesoftheassetsacquiredandliabilitiesassumedattheacquisitiondate:
Thefollowingtableshowsthefairvalueoftheseparatelyidentifiableintangibleassetsatthetimeofacquisitionandtheweighted-averageperiodoverwhichintangibleassetswithineachcategorywillbeamortized:
ThegoodwillrecognizedisprimarilyattributabletothebenefitstheCompanyexpectstoderivefromenhancedmarketopportunities,andisnotdeductibleforincometaxpurposes.
TheCompanyincurredapproximately$1millionofexpensesrelatedtotheacquisitionofLSI'sFlashBusinessinfiscalyear2015,whichareincludedwithinMarketingandadministrativeexpenseontheConsolidatedStatementofOperations.
TheamountsofrevenueandearningsofLSI'sFlashBusinessincludedintheCompany'sConsolidatedStatementofOperationsfromtheacquisitiondatethroughtheendoffiscalyearendedJuly3,2015werenotsignificant.
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(Dollarsinmillions) Amount Inventories $ 37Property,plantandequipment 22Intangibleassets 141Otherassets 6Goodwill 337Totalassets 543
Liabilities (93)Totalliabilities (93)Total $ 450
(Dollarsinmillions) FairValue
Weighted-AverageAmortization
Period Existingtechnology $ 84 3.5yearsCustomerrelationships 40 3.8yearsTradenames 17 4.5yearsTotalacquiredidentifiableintangibleassets $ 141
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NOTESTOCONSOLIDATEDFINANCIALSTATEMENTS—(Continued)
XyratexLtd
OnMarch31,2014,theCompanyacquiredalloftheoutstandingsharesofXyratexLtd("Xyratex"),aleadingproviderofdatastoragetechnology.TheCompanypaid$13.25pershare,orapproximately$376millionincashfortheacquisition.TheacquisitionofXyratexfurtherstrengthenstheCompany'sverticallyintegratedsupplyandmanufacturingchainfordiskdrivesandprovidesaccesstoimportantcapitalrequirements,aswellasexpandstheCompany'sstoragesolutionsportfolio.
Thefollowingtablesummarizestheestimatedfairvaluesoftheassetsacquiredandliabilitiesassumedattheacquisitiondate:
Thefollowingtableshowsthefairvalueoftheseparatelyidentifiableintangibleassetsatthetimeofacquisitionandtheperiodoverwhicheachintangibleassetwillbeamortized:
Thegoodwillrecognizedisprimarilyattributabletothesynergiesexpectedtoariseaftertheacquisition,andisnotdeductibleforincometaxpurposes.
TheCompanyincurredatotalof$10millionofexpensesrelatedtotheacquisitionofXyratexinfiscalyear2014,whichareincludedwithinMarketingandadministrativeexpenseontheConsolidatedStatementofOperations.
TheamountsofrevenueandearningsofXyratexincludedintheCompany'sConsolidatedStatementofOperationsfromtheacquisitiondatethroughtheendoffiscalyearendedJune27,2014werenotsignificant.
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(Dollarsinmillions) Amount Cashandcashequivalents $ 91Accountsreceivable,net 67Inventories 111Othercurrentandnon-currentassets 28Property,plantandequipment 55Intangibleassets 80Goodwill 60Totalassets 492
Accountspayableandaccruedexpenses (116)Totalliabilities (116)Total $ 376
(Dollarsinmillions) FairValue
Weighted-AverageAmortization
PeriodExistingtechnology $ 23 5.5yearsCustomerrelationships 18 3.9yearsTotalamortizableintangibleassetsacquired 41 4.8years
In-processresearchanddevelopment 39 Totalacquiredidentifiableintangibleassets $ 80
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NOTESTOCONSOLIDATEDFINANCIALSTATEMENTS—(Continued)
4.GoodwillandOtherIntangibleAssets
Goodwill
Thechangesinthecarryingamountofgoodwillareasfollows:
OtherIntangibleAssets
Otherintangibleassetsconsistprimarilyofexistingtechnology,customerrelationships,in-processresearchanddevelopment("IPR&D")andtradenamesacquiredinbusinesscombinations.WiththeexceptionofIPR&D,acquiredintangiblesareamortizedonastraight-linebasisovertherespectiveestimatedusefullivesoftheassets.AmortizationischargedtoOperatingexpensesintheConsolidatedStatementsofOperations.IPR&Dhasbeendeterminedtohaveanindefiniteusefullifeandisnotamortized,butinsteadtestedforimpairmentannuallyormorefrequentlyifeventsorchangesincircumstanceindicatethattheassetmightbeimpaired.IfthecarryingamountofIPR&Dexceedsitsfairvalue,animpairmentlossisrecognizedinanamountequaltothatexcess.TherewerenoimpairmentchargesrecognizedforIPR&D.UponcompletionoftheIPR&D,therelatedassetswillbeaccountedforasafinite-livedintangibleasset,andwillbeamortizedoveritsusefullife.
Infiscalyears2016,2015and2014,amortizationexpenseforotherintangibleassetswas$174million,$152millionand$131million,respectively.
ThecarryingvalueofotherintangibleassetssubjecttoamortizationasofJuly1,2016,issetforthinthefollowingtable:
ThecarryingvalueofIPR&Dnotsubjecttoamortizationwas$14milliononJuly1,2016.
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(Dollarsinmillions) Amount AsofJune27,2014 $ 537Goodwillacquired 339Foreigncurrencytranslationeffect (2)AsofJuly3,2015 $ 874Goodwillacquired 364Goodwilldisposed (1)Foreigncurrencytranslationeffect —AsofJuly1,2016 $ 1,237
(Dollarsinmillions) GrossCarrying
Amount AccumulatedAmortization
NetCarryingAmount
WeightedAverageRemainingUsefulLife
Existingtechnology $ 297 $ (79) $ 218 4.1yearsCustomerrelationships 510 (328) 182 3.2yearsTradename 29 (14) 15 2.6yearsOtherintangibleassets 29 (10) 19 3.2years
Totalamortizableotherintangibleassets $ 865 $ (431) $ 434 3.6years
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NOTESTOCONSOLIDATEDFINANCIALSTATEMENTS—(Continued)
ThecarryingvalueofotherintangibleassetssubjecttoamortizationasofJuly3,2015issetforthinthefollowingtable:
ThecarryingvalueofIPR&Dnotsubjecttoamortizationwas$0milliononJuly3,2015.
AsofJuly1,2016,expectedamortizationexpenseforotherintangibleassetsforeachofthenextfiveyearsandthereafterisasfollows:
5.RestructuringandExitCosts
Duringfiscalyears2016,2015and2014,theCompanyrecordedrestructuringchargesof$175million,$32millionand$24million,respectively,comprisedprimarilyofchargesrelatedtoemployeeterminationcostsandfacilityexitcostsassociatedwithrestructuringofourworkforceduringeachfiscalyear.TheCompany'ssignificantrestructuringplansaredescribedbelow.AllrestructuringchargesarereportedinRestructuringandother,netontheConsolidatedStatementsofOperations.
June2016Plan—OnJune27,2016,theCompanycommittedtoarestructuringplan(the"June2016Plan")aspartoftheCompany'seffortstoreduceitscoststructuretoalignwiththecurrentmacroeconomicconditions.TheJune2016Planincludedreducingworldwideheadcountbyapproximately1,600employees.TheJune2016PlanisexpectedtobelargelycompletedbytheendoftheSeptember2016quarter.Duringfiscalyear2016,theCompanyrecordedtotalrestructuringchargesofapproximately$69millionrelatedtotheJune2016Plan,comprisedofemployeeterminationcosts.TheCompanymadecashpaymentsof$24millioninfiscalyear2016,comprisedofemployeeterminationcostsrelatedtotheJune2016Plan.
February2016Plan—OnFebruary15,2016,theCompanycommittedtoarestructuringplan(the"February2016Plan")intendedtoalignourmanufacturingfootprintwithcurrentmacroeconomicconditions.TheFebruary2016Planincludedreducingworldwideheadcountbyapproximately2,000employees.TheFebruary2016PlanwaslargelycompletedbythefiscalquarterendedApril1,2016.Duringfiscalyear2016,theCompanyrecordedtotalrestructuringchargesandmadecashpaymentsof
82
(Dollarsinmillions) GrossCarrying
Amount AccumulatedAmortization
NetCarryingAmount
WeightedAverageRemainingUsefulLife
Existingtechnology $ 191 $ (69) $ 122 4.1yearsCustomerrelationships 487 (282) 205 2.4yearsTradename 27 (7) 20 3.2yearsOtherintangibleassets 27 (4) $ 23 4.2years
Totalamortizableotherintangibleassets $ 732 $ (362) $ 370 3.1years
(Dollarsinmillions) Amount 2017 $ 1662018 1062019 682020 502021 23Thereafter 21
$ 434
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NOTESTOCONSOLIDATEDFINANCIALSTATEMENTS—(Continued)
approximately$15millionrelatedtotheFebruary2016Plan,comprisedprimarilyofemployeeterminationcosts.
September2015Plan—OnSeptember4,2015,theCompanycommittedtoarestructuringplan(the"September2015Plan")intendedtorealignitscoststructurewiththecurrentmacroeconomicbusinessenvironment.TheSeptember2015Planincludedreducingworldwideheadcountbyapproximately1,000employees.TheSeptember2015PlanwaslargelycompletedbythefiscalquarterendedJanuary1,2016.Duringfiscalyear2016,theCompanyrecordedtotalrestructuringchargesofapproximately$65millionrelatedtotheSeptember2015Plan,comprisedofapproximately$57millionforemployeeterminationcostsand$8millionfacilityexitcosts,respectively.TheCompanymadecashpaymentsof$59million,comprisedprimarilyofemployeeterminationcostsrelatedtotheSeptember2015Plan.
Fiscal2015Plan—Duringfiscalyear2015,theCompanyrecordedemployeeterminationcostsof$25millionandmadecashpaymentsof$16millionassociatedwithareductionintheworkforce.The2015Planwaslargelycompletedbyfiscalyear2015.TheCompanydidnotrecordanymaterialrestructuringchargesrelatedtothe2015Planduringfiscalyear2016.
OtherRestructuringandExitCosts—Duringfiscalyear2016,theCompanyrecordedrestructuringchargesofapproximately$26million,comprisedofapproximately$12millionforemployeeterminationcostsand$14millionfacilityexitcosts.TheCompanymadecashpaymentsof$33million,comprisedofapproximately$19millionforemployeeterminationcostsand$14millionfacilityexitcostsrelatedtootherrestructuringplans.
ThefollowingtablesummarizestheCompany'srestructuringactivitiesunderalloftheCompany'sactiverestructuringplansforfiscalyears2016,2015and2014:
Oftheaccruedrestructuringbalanceof$63millionatJuly1,2016,$61millionisincludedinAccruedexpensesand$2millionisincludedinOthernon-currentliabilitiesintheCompany'sConsolidatedBalanceSheet.Oftheaccruedrestructuringbalanceofapproximately$19millionatJuly3,2015,$15millionisincludedinAccruedexpensesand$4millionisincludedinOthernon-currentliabilitiesintheCompany'sConsolidatedBalanceSheet.
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(Dollarsinmillions)
Post-Employment
Benefits OperatingLeases
OtherExitCosts Total
AllRestructuringActivities AccrualbalancesatJune28,2013 $ 2 $ 15 $ — $ 17Restructuringcharges 18 3 2 23Cashpayments (20) (5) (2) (27)Adjustments 2 (1) — 1
AccrualbalancesatJune27,2014 2 12 — 14Restructuringcharges 23 3 4 30Cashpayments (17) (6) (4) (27)Adjustments 3 (1) — 2
AccrualbalancesatJuly3,2015 11 8 — 19Restructuringcharges 151 14 10 175Cashpayments (113) (8) (10) (131)Adjustments 1 (1) — —
AccrualbalancesatJuly1,2016 $ 50 $ 13 $ — $ 63
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NOTESTOCONSOLIDATEDFINANCIALSTATEMENTS—(Continued)
6.Debt
Short-TermBorrowings
ThecreditagreemententeredintobytheCompanyanditssubsidiarySeagateHDDCaymanonJanuary18,2011andsubsequentlyamended(the"RevolvingCreditFacility")providestheCompanywitha$700millionseniorsecuredrevolvingcreditfacility.ThetermoftheRevolvingCreditFacilityisthroughJanuary15,2020,providedthatiftheCompanydoesnothaveInvestmentGradeRatings(asdefinedintheRevolvingCreditFacility)onAugust15,2018,thenthematuritydatewillbeAugust16,2018unlesscertainextensionconditionshavebeensatisfied.TheloansmadeundertheRevolvingCreditFacilitywillbearinterestatarateofLIBORplusavariablemarginthatwillbedeterminedbasedonthecorporatecreditratingoftheCompany.TheCompanyandcertainofitsmaterialsubsidiariesfullyandunconditionallyguaranteetheRevolvingCreditFacility.TheRevolvingCreditFacilityisavailableforcashborrowings,subjecttocompliancewithcertaincovenantsandothercustomaryconditionstoborrowing,andfortheissuanceoflettersofcredituptoasub-limitof$75million.TheRevolvingCreditFacility,asamended,includesthreefinancialcovenants:(1)minimumcash,cashequivalentsandmarketablesecurities;(2)afixedchargecoverageratio;and(3)anetleverageratio.OnApril27,2016,theRevolvingCreditAgreementwasamendedinordertoincreasetheallowablenetleverageratiotoallowforhighernetleveragelevels.TheCompanywereincompliancewiththemodifiedcovenantsasofJuly1,2016andexpecttobeincomplianceforthenext12months.AsofJuly1,2016,noborrowingshadbeendrawnorlettersofcreditutilizedundertheRevolvingCreditFacility.
Long-TermDebt
$600millionAggregatePrincipalAmountof6.8%SeniorNotesdueOctober2016(the"2016Notes").OnSeptember20,2006,theCompany'ssubsidiary,SeagateTechnologyHDDHoldings,completedthesaleof$600millionaggregateprincipalamountofthe2016Notes,inaprivateplacementexemptfromtheregistrationrequirementsoftheSecuritiesActof1933,asamended.Theinterestonthe2016Notesispayablesemi-annuallyonApril1andOctober1ofeachyear.Theissuerunderthe2016NotesisSeagateHDDCayman,andtheobligationsunderthe2016NotesareunconditionallyguaranteedbycertainoftheCompany'ssignificantsubsidiaries.The2016NotesareredeemableattheoptionoftheCompanyinwholeorinpart,onnotlessthan30,normorethan60daysnotice,ata"make-whole"premiumredemptionprice.The"make-whole"redemptionpricewillbeequaltothegreaterof(1)100%oftheprincipalamountofthenotesbeingredeemed,or(2)thesumofthepresentvaluesoftheremainingscheduledpaymentsofprincipalandinterestonthe2016Notesbeingredeemed,discountedattheredemptiondateonasemi-annualbasisatarateequaltothesumoftheapplicableTreasuryrateplus50basispoints.DuringtheDecember2014quarter,the2016Noteswerefullyextinguishedthroughrepurchaseandredemptionforcashatapremiumtotheirprincipalamount,plusaccruedandunpaidinterest.TheCompanyrecordedalossontherepurchaseandredemptionofapproximately$34million,whichisincludedinOther,netintheCompany'sConsolidatedStatementofOperations.
$800millionAggregatePrincipalAmountof3.75%SeniorNotesdueNovember2018(the"2018Notes").OnNovember5,2013,SeagateHDDCayman,issued$800millioninaggregateprincipalamountof3.75%SeniorNotes,whichmatureonNovember15,2018,inaprivateplacement.TheinterestontheNotesispayablesemi-annuallyonMay15andNovember15ofeachyear.TheNotesareredeemableattheoptionofSeagateHDDCaymaninwholeorinpart,onnotlessthan30,normorethan60days'notice,ata"make-whole"premiumredemptionprice.The"make-whole"premiumredemptionpricewillbeequaltothegreaterof(1)100%oftheprincipalamountofthenotesbeingredeemed,or(2)thesumofthepresentvaluesoftheremainingschedulepaymentsofprincipalandinterestontheNotesbeingredeemed,
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discountedattheredemptiondateonasemi-annualbasisatarateequaltothesumoftheapplicableTreasuryrateplus50basispoints.Accruedandunpaidinterest,ifanywillbepaidto,butexcluding,theredemptiondate.TheNotesarefullyandunconditionallyguaranteedbytheCompanyonaseniorunsecuredbasis.
$600millionAggregatePrincipalAmountof6.875%SeniorNotesdueMay2020(the"2020Notes").OnMay13,2010,theCompany'ssubsidiary,SeagateHDDCayman,completedthesaleof$600millionaggregateprincipalamountofthe2020Notes,inaprivateplacementexemptfromtheregistrationrequirementsoftheSecuritiesActof1933,asamended.Theobligationsunderthe2020Notesarefullyandunconditionallyguaranteed,onaseniorunsecuredbasis,bytheCompany.Theinterestonthe2020Notesispayablesemi-annuallyonMay1andNovember1ofeachyear.The2020NoteswereredeemableanytimepriortoMay1,2015attheoptionoftheCompany,inwholeorinpart,ataredemptionpriceof100%oftheprincipalamountplusan"applicablepremium"andaccruedandunpaidinterest,ifany,totheredemptiondate.The"applicablepremium"wasequaltothegreaterof(1)1%oftheprincipalamountofthe2020Notes,or(2)theexcess,ifany,of(a)thepresentvalueoftheredemptionpriceonMay1,2015plusinterestpaymentsduethroughMay1,2015,discountedattheapplicableTreasuryrateasoftheredemptiondateplus50basispoints;over(b)theprincipalamountofsuchnote.The2020NotesareredeemableatanytimeonorafterMay1,2015atvariouspricesexpressedasapercentageofprincipalamount,assetforthintheindentures,plusaccruedandunpaidinterest,ifany,totheredemptiondate.Theissuerunderthe2020NotesisSeagateHDDCayman,andtheobligationsunderthe2020Notesarefullyandunconditionallyguaranteed,onaseniorunsecuredbasis,bytheCompany.Duringfiscalyear2014,theCompanyrepurchased$66millionaggregateprincipalamountofits2020Notesforcashatapremiumtotheirprincipalamount,plusaccruedandunpaidinterest.TheCompanyrecordedalossontherepurchaseofapproximately$7million,whichisincludedinOther,netintheCompany'sConsolidatedStatementofOperations.Duringfiscalyear2015,the2020Noteswerefullyextinguishedthroughrepurchaseandredemptionforcashatapremiumtotheirprincipalamount,plusaccruedandunpaidinterest.TheCompanyrecordedalossontherepurchaseofapproximately$26million,whichisincludedinOther,netintheCompany'sConsolidatedStatementofOperations.
$600millionAggregatePrincipalAmountof7.00%SeniorNotesdueNovember2021(the"2021Notes").OnMay18,2011,theCompany'ssubsidiary,SeagateHDDCayman,completedthesaleof$600millionaggregateprincipalamountofthe2021Notes,inaprivateplacementexemptfromtheregistrationrequirementsoftheSecuritiesActof1933,asamended.Theobligationsunderthe2021Notesarefullyandunconditionallyguaranteed,onaseniorunsecuredbasis,bytheCompany.Theinterestonthe2021Notesispayablesemi-annuallyonJanuary1andJuly1ofeachyear.The2021NotesareredeemableanytimepriortoMay1,2016attheoptionoftheCompany,inwholeorinpart,ataredemptionpriceof100%oftheprincipalamountplusan"applicablepremium"andaccruedandunpaidinterest,ifany,totheredemptiondate.The"applicablepremium"willbeequaltothegreaterof(1)1%oftheprincipalamountofthe2021Notes,or(2)theexcess,ifany,of(a)thepresentvalueoftheredemptionpriceonMay1,2016plusinterestpaymentsduethroughMay1,2016,discountedattheapplicableTreasuryrateasoftheredemptiondateplus50basispoints;over(b)theprincipalamountofsuchnote.The2021NotesareredeemableatanytimeonorafterMay1,2016atvariouspricesexpressedasapercentageofprincipalamount,assetforthintheindentures,plusaccruedandunpaidinterest,ifany,totheredemptiondate.Inaddition,anytimebeforeMay1,2014,theCompanymayredeemupto35%oftheprincipalamountwiththenetcashproceedsfrompermittedsalesoftheCompany'sstockataredemptionpriceof107%oftheprincipalamountplusaccruedinteresttotheredemptiondate.Theissuerunderthe2021NotesisSeagateHDDCaymanandtheobligationsunderthe2021Notesarefullyandunconditionallyguaranteed,onaseniorunsecuredbasis,bytheCompany.Duringfiscalyear2014,theCompanyrepurchased$349million
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NOTESTOCONSOLIDATEDFINANCIALSTATEMENTS—(Continued)
aggregateprincipalamountofits2021Notesforcashatapremiumtotheirprincipalamount,plusaccruedandunpaidinterest.TheCompanyrecordedalossontherepurchaseofapproximately$54million,whichisincludedinOther,netintheCompany'sConsolidatedStatementofOperations.Duringfiscalyear2015,theCompanyrepurchased$93millionaggregateprincipalamountofits2021Notesforcashatapremiumtotheirprincipalamount,plusaccruedandunpaidinterest.TheCompanyrecordedalossontherepurchaseofapproximately$13million,whichisincludedinOther,netintheCompany'sConsolidatedStatementofOperations.Duringfiscalyear2016,theCompanyrepurchased$1millionaggregateprincipalamountofits2021Notesforcashatapremiumtotheirprincipalamount,plusaccruedandunpaidinterest.Thelossrecordedontherepurchasewasimmaterial,whichisincludedinOther,netintheCompany'sConsolidatedStatementofOperations.
$1billionAggregatePrincipalAmountof4.75%SeniorNotesdueJune2023(the"2023Notes").OnMay22,2013,SeagateHDDCayman,issued$1billioninaggregateprincipalamountof4.75%SeniorNotes,whichmatureonJune1,2023,inaprivateplacement.Theobligationsunderthe2023Notesarefullyandunconditionallyguaranteed,onaseniorunsecuredbasis,bytheCompany.Theinterestonthe2023Notesispayablesemi-annuallyonJune1andDecember1ofeachyear.The2023NotesareredeemableattheoptionoftheCompanyinwholeorinpart,onnotlessthan30,normorethan60daysnotice,ata"make-whole"premiumredemptionprice.The"make-whole"redemptionpricewillbeequaltothegreaterof(1)100%oftheprincipalamountofthenotesbeingredeemed,or(2)thesumofthepresentvaluesoftheremainingscheduledpaymentsofprincipalandinterestonthe2023Notesbeingredeemed,discountedattheredemptiondateonasemi-annualbasisatarateequaltothesumoftheapplicableTreasuryrateplus50basispoints.Accruedandunpaidinterest,ifany,willbepaidto,butexcluding,theredemptiondate.Duringfiscalyear2016,theCompanyrepurchased$10millionaggregateprincipalamountofits2023Notesforcashatadiscounttotheirprincipalamount,plusaccruedandunpaidinterest.Thelossrecordedontherepurchasewasimmaterial,whichisincludedinOther,netintheCompany'sConsolidatedStatementofOperations.
$1billionAggregateprincipalamountof4.75%SeniorNotesdueJanuary2025(the"2025Notes").OnMay28,2014,SeagateHDDCaymanissued,inaprivateplacement,$1billioninaggregateprincipalamountof4.75%SeniorNotesdue2025,whichmatureonJanuary1,2025.TheinterestontheNoteswillbepayableincashsemiannuallyonJanuary1andJuly1ofeachyear,commencingonJanuary1,2015.Atanytime,uponnotlessthan30normorethan60days'notice,SeagateHDDmayredeemsomeoralloftheNotesata"make-whole"redemptionprice.The"make-whole"redemptionpricewillbeequaltothegreaterof(1)100%oftheprincipalamountoftheNotesredeemed,and(2)thesumofthepresentvaluesoftheremainingscheduledpaymentsofprincipalandinterestontheNotesbeingredeemed,discountedtotheredemptiondateonasemi-annualbasisatarateequaltothesumoftheTreasuryRateplus50basispoints.Accruedandunpaidinterest,ifany,willbepaidto,butexcluding,theredemptiondate.TheNotesarefullyandunconditionallyguaranteedbytheCompanyonaseniorunsecuredbasis.Duringfiscalyear2016,theCompanyrepurchased$5millionaggregateprincipalamountofits2025Notesforcashatadiscounttotheirprincipalamount,plusaccruedandunpaidinterest.Thegainrecordedontherepurchasewasimmaterial,whichisincludedinOther,netintheCompany'sConsolidatedStatementofOperations.
$500millionAggregatePrincipalAmountof5.75%SeniorNotesdueDecember,2034(the"2034Notes").OnDecember2,2014,SeagateHDDCaymanissued,inaprivateplacement,$500millioninaggregateprincipalamountof5.75%SeniorNotes,whichmatureonDecember1,2034.TheinterestontheNotesispayablesemi-annuallyonJune1andDecember1ofeachyear,commencingonJune1,2015.AtanytimebeforeJune1,2034,SeagateHDDCaymanmayredeemsomeoralloftheNotesata"make-whole"redemptionprice.The"make-whole"redemptionpricewillbeequalto(1)100%oftheprincipalamountoftheNotesredeemed,plus(2)theexcess,ifanyof(x)thesumofthepresentvaluesoftheremaining
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NOTESTOCONSOLIDATEDFINANCIALSTATEMENTS—(Continued)
scheduledpaymentsofprincipalandinterestontheNotesbeingredeemed,discountedtotheredemptiondateonasemi-annualbasisatarateequaltothesumoftheTreasuryRateplus50basispoints,minusaccruedandunpaidinterest,ifany,ontheNotesbeingredeemedto,butexcluding,theredemptiondateover(y)theprincipalamountoftheNotesbeingredeemed,plus(3)accruedandunpaidinterest,ifany,ontheNotesbeingredeemedto,butexcluding,theredemptiondate.AtanytimeonorafterJune1,2034,theCompanymayredeemsomeoralloftheNotesataredemptionpriceequalto100%oftheprincipalamountoftheNotesredeemed,plusaccruedandunpaidinterest,ifany,to,butexcluding,theredemptiondate.Theissuerunderthe2034NotesisSeagateHDDCayman,andtheobligationsunderthe2034Notesarefullyandunconditionallyguaranteed,onaseniorunsecuredbasis,bytheCompany.Duringfiscalyear2016,theCompanyrepurchased$10millionaggregateprincipalamountofits2034Notesforcashatadiscounttotheirprincipalamount,plusaccruedandunpaidinterest.TheCompanyrecordedagainontherepurchaseofapproximately$3million,whichisincludedinOther,netintheCompany'sConsolidatedStatementofOperations.
$700millionAggregatePrincipalAmountof4.875%SeniorNotesdueJune,2027(the"2027Notes").OnMay14,2015,SeagateHDDCaymanissued,inaprivateplacement,$700millioninaggregateprincipalamountof4.875%SeniorNotes,whichmatureonJune1,2027.TheinterestontheNotesispayablesemi-annuallyonJune1andDecember1ofeachyear,commencingonDecember1,2015.AtanytimebeforeMarch1,2027,SeagateHDDCaymanmayredeemsomeoralloftheNotesata"make-whole"redemptionprice.The"make-whole"redemptionpricewillbeequalto(1)100%oftheprincipalamountoftheNotesredeemed,plus(2)theexcess,ifanyof(x)thesumofthepresentvaluesoftheremainingscheduledpaymentsofprincipalandinterestontheNotesbeingredeemed,discountedtotheredemptiondateonasemi-annualbasisatarateequaltothesumoftheTreasuryRateplus40basispoints,minusaccruedandunpaidinterest,ifany,ontheNotesbeingredeemedto,butexcluding,theredemptiondateover(y)theprincipalamountoftheNotesbeingredeemed,plus(3)accruedandunpaidinterest,ifany,ontheNotesbeingredeemedto,butexcluding,theredemptiondate.AtanytimeonorafterMarch1,2027,theCompanymayredeemsomeoralloftheNotesataredemptionpriceequalto100%oftheprincipalamountoftheNotesredeemed,plusaccruedandunpaidinterest,ifany,to,butexcluding,theredemptiondate.Theissuerunderthe2027NotesisSeagateHDDCayman,andtheobligationsunderthe2027Notesarefullyandunconditionallyguaranteed,onaseniorunsecuredbasis,bytheCompany.
AtJuly1,2016,futureprincipalpaymentsonlong-termdebtwereasfollows(inmillions):
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FiscalYear Amount 2017 $ —2018 —2019 8002020 —2021 —Thereafter 3,333
$ 4,133
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SEAGATETECHNOLOGYPLC
NOTESTOCONSOLIDATEDFINANCIALSTATEMENTS—(Continued)
7.IncomeTaxes
Theprovisionfor(benefitfrom)incometaxesconsistedofthefollowing:
Incomebeforeincometaxesconsistedofthefollowing:
OnDecember18,2015,theProtectingAmericansfromTaxHikes("PATH")Actof2015wasenacted.Among,otherprovisions,thePATHActretroactivelyreinstatedandpermanentlyextendedthefederalResearchandDevelopment("R&D")taxcreditfromDecember31,2014.ThepermanentextensionoftheR&DcredithadnoimmediateimpactontheCompany'sincometaxprovisionduetovaluationallowancesonitsU.S.deferredtaxassets.NoneoftheotherPATHActchangeshadamaterialimpactontheCompany'sincometaxprovision.
TheCompanyrecorded$0.6million,$2.0millionand$0.3millionofexcesstaxbenefitsassociatedwithstockoptiondeductionsinfiscalyears2016,2015and2014,respectively.
88
FiscalYearsEnded
(Dollarsinmillions) July1,2016
July3,2015
June27,2014
Currentincometaxexpense(benefit): U.S.Federal $ 1 $ — $ (12)U.S.State 2 4 3Non-U.S. 25 222 62
TotalCurrent 28 226 53Deferredincometaxexpense(benefit): U.S.Federal — (6) (43)U.S.State — (2) 2Non-U.S. (2) 10 (26)
TotalDeferred (2) 2 (67)Provisionfor(benefitfrom)incometaxes $ 26 $ 228 $ (14)
FiscalYearsEnded
(Dollarsinmillions) July1,2016
July3,2015
June27,2014
U.S. $ — $ 101 $ 149Non-U.S. 274 1,869 1,407
$ 274 $ 1,970 $ 1,556
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NOTESTOCONSOLIDATEDFINANCIALSTATEMENTS—(Continued)
Deferredincometaxesreflectthenettaxeffectsoftemporarydifferencesbetweenthecarryingamountsofassetsandliabilitiesforfinancialreportingpurposesandtheamountsusedforincometaxpurposes.ThesignificantcomponentsoftheCompany'sdeferredtaxassetsandliabilitieswereasfollows:
ConsistentwiththeintentofASU2015-17tosimplifythepresentationofdeferredincometaxes,theCompanyelectedtoadoptASU2015-17onaprospectivebasisasofthesecondquarter,fiscalyear2016.Priorperiodswerenotretrospectivelyadjusted.Asaresultofthischangeinaccountingprinciple,theCompany'scurrentdeferredtaxassetswerereclassifiedtonon-current.
Thedeferredtaxassetvaluationallowanceincreasedby$55millionand$41millioninfiscalyears2016and2015,respectively,anddecreasedby$101millioninfiscalyear2014.
AtJuly1,2016,theCompanyrecorded$606millionofnetdeferredtaxassets.TherealizationofthesedeferredtaxassetsisprimarilydependentontheCompany'sabilitytogeneratesufficientU.S.andcertainnon-U.S.taxableincomeinfutureperiods.Althoughrealizationisnotassured,theCompany'smanagementbelievesitismorelikelythannotthatthesedeferredtaxassetswillberealized.Theamountofdeferredtaxassetsconsideredrealizable,however,mayincreaseordecreaseinsubsequentperiodswhentheCompanyreevaluatestheunderlyingbasisforitsestimatesoffutureU.S.andcertainnon-U.S.taxableincome.
89
FiscalYearsEnded
(Dollarsinmillions) July1,2016
July3,2015
Deferredtaxassets Accruedwarranty $ 74 $ 88Inventorycarryingvalueadjustments 32 43Receivableallowance 11 16Accruedcompensationandbenefits 85 106Depreciation 173 171Restructuringaccruals 14 4Otheraccrualsanddeferreditems 50 31Netoperatinglossesandtaxcreditcarry-forwards 1,252 1,099Otherassets 2 5Totaldeferredtaxassets 1,693 1,563
Valuationallowance (984) (929)Netdeferredtaxassets 709 634
Deferredtaxliabilities Unremittedearningsofcertainnon-U.S.entities (11) (6)Acquisition-relateditems (92) (15)Otherliabilities — (1)Totaldeferredtaxliabilities (103) (22)Totalnetdeferredtaxassets $ 606 $ 612
AsReportedontheBalanceSheet Currentassets—deferredincometaxes $ — $ 122Non-currentassets—deferredincometaxes 616 496Othernon-currentliabilities (10) (6)Totalnetdeferredincometaxes $ 606 $ 612
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NOTESTOCONSOLIDATEDFINANCIALSTATEMENTS—(Continued)
AtJuly1,2016,theCompanyhadU.S.federal,stateandnon-U.S.taxnetoperatinglosscarryforwardsofapproximately$3.4billion,$2.1billionand$121million,respectivelywhichwillexpireatvariousdatesbeginninginfiscalyear2018,ifnotutilized.U.S.statenetoperatinglosscarryforwardsofapproximately$104millionarescheduledtoexpireinfiscalyear2017.AtJuly1,2016,theCompanyhadU.S.federalandstatetaxcreditcarryforwardsof$437millionand$96million,respectively,whichwillexpireatvariousdatesbeginninginfiscalyear2018,ifnotutilized.
AsofJuly1,2016,approximately$677millionoftheCompany'sU.S.netoperatinglossesand$99millionofitstaxcreditcarryforwardsaresubjecttoannuallimitationsfrom$1millionto$45millionpursuanttoU.S.taxlaw.
Forpurposesofthereconciliationbetweentheprovisionfor(benefitfrom)incometaxesatthestatutoryrateandtheeffectivetaxrate,theIrishstatutoryrateof25%wasappliedasfollows:
AsubstantialportionoftheCompany'soperationsinMalaysia,Singapore,andThailandoperateundervarioustaxholidayprograms,whichexpireinwholeorinpartatvariousdatesthrough2024.Certainofthetaxholidaysmaybeextendedifspecificconditionsaremet.ThenetimpactofthesetaxholidayprogramswastoincreasetheCompany'snetincomebyapproximately$67millioninfiscalyear2016($0.22pershare,diluted),toincreasetheCompany'snetincomebyapproximately$349millioninfiscalyear2015($1.05pershare,diluted),andtoincreasetheCompany'snetincomebyapproximately$289millioninfiscalyear2014($0.83pershare,diluted).
TheCompanyconsistsofanIrishtaxresidentparentholdingcompanywithvariousU.S.andnon-U.S.subsidiariesthatoperateinmultiplenon-Irishtaxingjurisdictions.Theamountoftemporarydifferences(includingundistributedearnings)relatedtooutsidebasisdifferencesinthestockofnon-IrishresidentsubsidiariesconsideredindefinitelyreinvestedoutsideofIrelandforwhichIrishincometaxeshavenotbeenprovidedasofJuly1,2016,wasapproximately$1.6billion.IfsuchamountwereremittedtoIrelandasadividend,itislikelythattaxat25%orapproximately$400millionwouldresult.
AsofJuly1,2016andJuly3,2015,theCompanyhadapproximately$70millionand$83million,respectively,ofunrecognizedtaxbenefitsexcludinginterestandpenalties.Theamountofunrecognizedtaxbenefitsthat,ifrecognized,wouldimpacttheeffectivetaxrateare$70millionand$83millionasofJuly1,2016andJuly3,2015,respectively,subjecttocertainfuturevaluationallowanceoffsets.
90
FiscalYearsEnded
(Dollarsinmillions) July1,2016
July3,2015
June27,2014
Provisionatstatutoryrate $ 69 $ 493 $ 389NetU.S.federalandstateincometaxes 3 7 3Permanentdifferences 10 2 3Valuationallowance (1) 15 (100)Non-U.S.losseswithnotaxbenefits 1 2 8Non-U.S.earningstaxedatlessthanstatutoryrate (37) (463) (313)Auditassessment — 173 —Reversalofpreviouslyrecordedtaxes (19) (5) (19)Otherindividuallyimmaterialitems — 4 15Provisionfor(benefitfrom)incometaxes $ 26 $ 228 $ (14)
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NOTESTOCONSOLIDATEDFINANCIALSTATEMENTS—(Continued)
ThefollowingtablesummarizestheactivityrelatedtotheCompany'sgrossunrecognizedtaxbenefits:
ItistheCompany'spolicytoincludeinterestandpenaltiesrelatedtounrecognizedtaxbenefitsintheprovisionforincometaxesontheConsolidatedStatementsofOperations.Duringfiscalyear2016,theCompanyrecognizednetincometaxbenefitforinterestandpenaltiesof$8millionascomparedtonetincometaxexpenseof$26millionduringfiscalyear2015,andincometaxexpenseof$8millionduringfiscalyear2014.AsofJuly1,2016,theCompanyhad$12millionofaccruedinterestandpenaltiesrelatedtounrecognizedtaxbenefitscomparedto$20millioninfiscalyear2015.
Duringthe12monthsbeginningJuly2,2016,theCompanyexpectsthatitsunrecognizedtaxbenefitscouldbereducedbyapproximately$16millionasaresultoftheexpirationofcertainstatutesoflimitation.
TheCompanyissubjecttotaxationinmanyjurisdictionsgloballyandisrequiredtofileU.S.federal,U.S.stateandnon-U.S.incometaxreturns.OnApril4,2016,theIRSapprovedtheauditsettlementreachedinDecember2015regardingalldisputedissuesassociatedwiththeCompany'sU.S.federalincometaxreturnsforfiscalyears2008,2009and2010.ThisauditsettlementdidnothaveamaterialimpactontheCompany'sfinancialstatements.
TheCompanyisnolongersubjecttoexaminationofitsU.S.federalincometaxreturnsforyearspriortofiscalyear2013.WithrespecttoU.S.stateandnon-U.S.incometaxreturns,theCompanyisgenerallynolongersubjecttotaxexaminationforyearsendingpriortofiscalyear2005.
8.DerivativeFinancialInstruments
TheCompanyisexposedtoforeigncurrencyexchangerate,interestrate,andtoalesserextent,equitypricerisksrelatingtoitsongoingbusinessoperations.TheCompanyentersintoforeigncurrencyforwardexchangecontractsinordertomanagetheforeigncurrencyexchangerateriskonforecastedexpensesdenominatedinforeigncurrenciesandtomitigatetheremeasurementriskofcertainforeigncurrencydenominatedliabilities.TheCompany'saccountingpoliciesfortheseinstrumentsarebasedonwhethertheinstrumentsareclassifiedasdesignatedornon-designatedhedginginstruments.TheCompanyrecordsallderivativesintheConsolidatedBalanceSheetsatfairvalue.ThechangesinthefairvalueoftheeffectiveportionsofdesignatedcashflowhedgesarerecordedinAccumulatedothercomprehensivelossuntilthehedgeditemisrecognizedinearnings.Derivativesthatarenotdesignatedashedginginstrumentsandtheineffectiveportionsofcashflowhedgesareadjustedtofairvaluethroughearnings.Theamountofnet
91
FiscalYearsEnded
(Dollarsinmillions) July1,2016
July3,2015
June27,2014
Balanceofunrecognizedtaxbenefitsatthebeginningoftheyear $ 83 $ 115 $ 157Grossincreasefortaxpositionsofprioryears 12 12 10Grossdecreasefortaxpositionsofprioryears (8) (4) (64)Grossincreasefortaxpositionsofcurrentyear 11 9 13Grossdecreasefortaxpositionsofcurrentyear — — —Settlements — (45) —Lapseofstatutesoflimitation (27) (3) (3)Non-U.S.exchange(gain)/loss (1) (1) 2
Balanceofunrecognizedtaxbenefitsattheendoftheyear $ 70 $ 83 $ 115
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NOTESTOCONSOLIDATEDFINANCIALSTATEMENTS—(Continued)
unrealizedlossoncashflowhedgeswas$2millionasofJuly1,2016andtheamountofnetunrealizedgainoncashflowhedgeswas$1millionasofJuly3,2015.
TheCompanydedesignatesitscashflowhedgeswhentheforecastedhedgedtransactionsarerealizedoritisprobabletheforecastedhedgedtransactionswillnotoccurintheinitiallyidentifiedtimeperiod.Atsuchtime,theassociatedgainsandlossesdeferredinAccumulatedothercomprehensivelossarereclassifiedimmediatelyintoearningsandanysubsequentchangesinthefairvalueofsuchderivativeinstrumentsareimmediatelyreflectedinearnings.TheCompanydidnotrecognizeanymaterialnetgainsorlossesrelatedtothelossofhedgedesignationondiscontinuedcashflowhedgesduringfiscalyears2016,2015and2014.AsofJuly1,2016,theCompany'sexistingforeigncurrencyforwardexchangecontractsmaturewithin12months.ThedeferredamountcurrentlyrecordedinAccumulatedothercomprehensivelossexpectedtoberecognizedintoearningsoverthenext12monthsisimmaterial.
ThefollowingtablesshowthetotalnotionalvalueoftheCompany'soutstandingforeigncurrencyforwardexchangecontractsasofJuly1,2016andJuly3,2015:
TheCompanyissubjecttoequitymarketrisksduetochangesinthefairvalueofthenotionalinvestmentsselectedbyitsemployeesaspartofitsNon-qualifiedDeferredCompensationPlan—theSeagateDeferredCompensationPlan(the"SDCP").InthequarterendedDecember27,2013,theCompanyenteredintoaTotalReturnSwap("TRS")inordertomanagetheequitymarketrisksassociatedwiththeSDCPliabilities.TheCompanypaysafloatingrate,basedonLIBORplusaninterestratespread,onthenotionalamountoftheTRS.TheTRSisdesignedtosubstantiallyoffsetchangesintheSDCPliabilityduetochangesinthevalueoftheinvestmentoptionsmadebyemployees.AsofJuly1,2016,thenotionalinvestmentsunderlyingtheTRSamountedto$94million.ThecontracttermoftheTRSisthroughJanuary2016andissettledonamonthlybasis,thereforelimitingcounterpartyperformancerisk.TheCompanyrenewedthecontracttermthroughJanuary2017undermateriallythesameterms.TheCompanydidnotdesignatetheTRSasahedge.Rather,theCompanyrecordsallchangesinthefairvalueoftheTRStoearningstooffsetthemarketvaluechangesoftheSDCPliabilities.
92
AsofJuly1,2016 (Dollarsinmillions) ContractsDesignatedasHedges ContractsNotDesignatedasHedges BritishPoundSterling $ 47 $ 10
AsofJuly3,2015 (Dollarsinmillions) ContractsDesignatedasHedges ContractsNotDesignatedasHedges ThaiBaht $ 18 $ 48SingaporeDollars 23 42ChineseRenminbi 5 16Euro — 13BritishPoundSterling 35 —MalaysianRinggit 12 15
$ 93 $ 134
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SEAGATETECHNOLOGYPLC
NOTESTOCONSOLIDATEDFINANCIALSTATEMENTS—(Continued)
ThefollowingtablesshowtheCompany'sderivativeinstrumentsmeasuredatgrossfairvalueasreflectedintheConsolidatedBalanceSheetsasofJuly1,2016andJuly3,2015:
93
AsofJuly1,2016 AssetDerivatives LiabilityDerivatives
(Dollarsinmillions)
BalanceSheet
Location FairValue
BalanceSheet
Location FairValue
Derivativesdesignatedashedginginstruments: Foreigncurrencyforwardexchangecontracts Othercurrentassets $ — Accruedexpenses $ (2)
Derivativesnotdesignatedashedginginstruments: Foreigncurrencyforwardexchangecontracts Othercurrentassets — Accruedexpenses (1)Totalreturnswap Othercurrentassets 3 Accruedexpenses —
Totalderivatives $ 3 $ (3)
AsofJuly3,2015 AssetDerivatives LiabilityDerivatives
(Dollarsinmillions)
BalanceSheet
Location FairValue
BalanceSheet
Location FairValue
Derivativesdesignatedashedginginstruments: Foreigncurrencyforwardexchangecontracts Othercurrentassets $ 2 Accruedexpenses $ (1)
Derivativesnotdesignatedashedginginstruments: Foreigncurrencyforwardexchangecontracts Othercurrentassets — Accruedexpenses (3)Totalreturnswap Othercurrentassets 1 Accruedexpenses —
Totalderivatives $ 3 $ (4)
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SEAGATETECHNOLOGYPLC
NOTESTOCONSOLIDATEDFINANCIALSTATEMENTS—(Continued)
ThefollowingtablesshowtheeffectoftheCompany'sderivativeinstrumentsontheConsolidatedStatementofComprehensiveIncomeandtheConsolidatedStatementsofOperationsforthefiscalyearendedJuly1,2016:
ThefollowingtablesshowtheeffectoftheCompany'sderivativeinstrumentsontheConsolidatedStatementofComprehensiveIncomeandtheConsolidatedStatementsofOperationsforthefiscalyearendedJuly3,2015:
94
(Dollarsinmillions)DerivativesDesignatedasCashFlowHedges
AmountofGainor(Loss)
RecognizedinOCIonDerivatives(EffectivePortion)
LocationofGainor(Loss)
Reclassifiedfrom
AccumulatedOCIintoIncome(EffectivePortion)
AmountofGainor(Loss)Reclassified
fromAccumulatedOCIintoIncome(EffectivePortion)
LocationofGainor(Loss)
RecognizedinIncomeonDerivatives(IneffectivePortionand
AmountExcludedfrom
EffectivenessTesting)
AmountofGain
or(Loss)Recognizedin
Income(IneffectivePortionandAmount
ExcludedfromEffectivenessTesting)(a)
Foreigncurrencyforwardexchangecontracts $ (4) Costofrevenue $ (2) Costofrevenue $ —
DerivativesNotDesignatedasHedgingInstruments
LocationofGainor(Loss)RecognizedinIncomeonDerivatives
AmountofGainor(Loss)RecognizedinIncomeonDerivatives
Foreigncurrencyforwardexchangecontracts Other,net $ (5)Totalreturnswap Operatingexpenses $ (1)
(a) TheamountsofgainsorlossesrecognizedinincomerelatedtotheineffectiveportionofthehedgingrelationshipsandtotheamountexcludedfromtheassessmentofhedgeeffectivenesswereimmaterialforthefiscalyearendedJuly1,2016.
(Dollarsinmillions)DerivativesDesignatedasCashFlowHedges
AmountofGainor(Loss)
RecognizedinOCIonDerivatives(EffectivePortion)
LocationofGainor(Loss)
Reclassifiedfrom
AccumulatedOCIintoIncome(EffectivePortion)
AmountofGainor(Loss)Reclassified
fromAccumulatedOCIintoIncome(EffectivePortion)
LocationofGainor(Loss)
RecognizedinIncomeonDerivatives(IneffectivePortionand
AmountExcludedfrom
EffectivenessTesting)
AmountofGain
or(Loss)Recognizedin
Income(IneffectivePortionandAmount
ExcludedfromEffectivenessTesting)(a)
Foreigncurrencyforwardexchangecontracts $ (11)
Costofrevenue $ (13) Costofrevenue $ 1
DerivativesNotDesignatedasHedgingInstruments
LocationofGainor(Loss)RecognizedinIncomeonDerivatives
AmountofGainor(Loss)RecognizedinIncomeonDerivatives
Foreigncurrencyforwardexchangecontracts Other,net $ (4)Totalreturnswap Operatingexpenses $ —
(a) TheamountsofgainsorlossesrecognizedinincomerelatedtotheineffectiveportionofthehedgingrelationshipswereimmaterialforthefiscalyearendedJuly3,2015.Theamountofgainsrecognizedinincomerelatedtotheamountexcludedfromtheassessmentofhedgeeffectivenesswas$1millionforthefiscalyearendedJuly3,2015.
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SEAGATETECHNOLOGYPLC
NOTESTOCONSOLIDATEDFINANCIALSTATEMENTS—(Continued)
9.FairValue
MeasurementofFairValue
Fairvalueisdefinedasthepricethatwouldbereceivedfromsellinganassetorpaidtotransferaliabilityinanorderlytransactionbetweenmarketparticipantsatthemeasurementdate.Whendeterminingthefairvaluemeasurementsforassetsandliabilitiesrequiredtoberecordedatfairvalue,theCompanyconsiderstheprincipalormostadvantageousmarketinwhichitwouldtransactanditconsidersassumptionsthatmarketparticipantswouldusewhenpricingtheassetorliability.
FairValueHierarchy
Afairvaluehierarchyisbasedonwhetherthemarketparticipantassumptionsusedindeterminingfairvalueareobtainedfromindependentsources(observableinputs)orreflectstheCompany'sownassumptionsofmarketparticipantvaluation(unobservableinputs).Afinancialinstrument'scategorizationwithinthefairvaluehierarchyisbaseduponthelowestlevelofinputthatissignificanttothefairvaluemeasurement.Thethreelevelsofinputsthatmaybeusedtomeasurefairvalue:
Level1—Quotedpricesinactivemarketsthatareunadjustedandaccessibleatthemeasurementdateforidentical,unrestrictedassetsorliabilities;
Level2—Quotedpricesforidenticalassetsandliabilitiesinmarketsthatareinactive;quotedpricesforsimilarassetsandliabilitiesinactivemarketsorfinancialinstrumentsforwhichsignificantinputsareobservable,eitherdirectlyorindirectly;or
Level3—Pricesorvaluationsthatrequireinputsthatarebothunobservableandsignificanttothefairvaluemeasurement.
TheCompanyconsidersanactivemarkettobeoneinwhichtransactionsfortheassetorliabilityoccurwithsufficientfrequencyandvolumetoprovidepricinginformationonanongoingbasis,andviewsaninactivemarketasoneinwhichtherearefewtransactionsfortheassetorliability,thepricesarenotcurrent,orpricequotationsvarysubstantiallyeitherovertimeoramongmarketmakers.WhereappropriatetheCompany'sorthecounterparty'snon-performanceriskisconsideredindeterminingthefairvaluesofliabilitiesandassets,respectively.
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SEAGATETECHNOLOGYPLC
NOTESTOCONSOLIDATEDFINANCIALSTATEMENTS—(Continued)
ItemsMeasuredatFairValueonaRecurringBasis
ThefollowingtablepresentstheCompany'sassetsandliabilitiesthataremeasuredatfairvalueonarecurringbasis,excludingaccruedinterestcomponents,asofJuly1,2016:
96
FairValueMeasurementsatReportingDateUsing
(Dollarsinmillions)
QuotedPricesinActiveMarketsforIdenticalInstruments(Level1)
SignificantOther
ObservableInputs(Level2)
SignificantUnobservable
Inputs(Level3)
TotalBalance
Assets: Moneymarketfunds $ 316 $ — $ — $ 316Certificatesofdeposit — 439 — 439Corporatebonds — 6 — 6
Totalcashequivalentsandshort-terminvestments 316 445 — 761Restrictedcashandinvestments: Moneymarketfunds 2 — — 2Certificatesofdeposit — 5 — 5
Derivativeassets — 3 — 3Totalassets $ 318 $ 453 $ — $ 771Liabilities: Derivativeliabilities $ — $ (3) $ — $ (3)
Totalliabilities $ — $ (3) $ — $ (3)
FairValueMeasurementsatReportingDateUsing
(Dollarsinmillions)
QuotedPricesinActiveMarketsforIdenticalInstruments(Level1)
SignificantOther
ObservableInputs(Level2)
SignificantUnobservable
Inputs(Level3)
TotalBalance
Assets: Cashandcashequivalents $ 316 $ 439 $ — $ 755Short-terminvestments — 6 — 6Othercurrentassets 2 8 — 10
Totalassets $ 318 $ 453 $ — $ 771Liabilities: Accruedexpenses $ — $ (3) $ — $ (3)
Totalliabilities $ — $ (3) $ — $ (3)
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SEAGATETECHNOLOGYPLC
NOTESTOCONSOLIDATEDFINANCIALSTATEMENTS—(Continued)
ThefollowingtablepresentstheCompany'sassetsandliabilitiesthataremeasuredatfairvalueonarecurringbasis,excludingaccruedinterestcomponents,asofJuly3,2015:
TheCompanyclassifiesitemsinLevel1ifthefinancialassetsconsistofsecuritiesforwhichquotedpricesareavailableinanactivemarket.
TheCompanyclassifiesitemsinLevel2ifthefinancialassetorliabilityisvaluedusingobservableinputs.TheCompanyusesobservableinputsincludingquotedpricesinactivemarketsforsimilarassetsorliabilities.Level2assetsinclude:agencybonds,corporatebonds,commercialpaper,municipalbonds,U.S.Treasuriesandcertificatesofdeposits.Thesedebtinvestmentsarepricedusingobservableinputsandvaluationmodelswhichvarybyassetclass.TheCompanyusesapricingservicetoassistindeterminingthefairvaluesofallofitscashequivalentsandshort-terminvestments.Forthecashequivalentsandshort-terminvestmentsintheCompany'sportfolio,multiplepricingsourcesaregenerallyavailable.Thepricingserviceusesinputsfrommultipleindustrystandarddataprovidersorotherthirdpartysourcesandvariousmethodologies,suchasweightingandmodels,todeterminetheappropriatepriceatthe
97
FairValueMeasurementsatReportingDateUsing
(Dollarsinmillions)
QuotedPricesinActiveMarketsforIdenticalInstruments(Level1)
SignificantOther
ObservableInputs(Level2)
SignificantUnobservable
Inputs(Level3)
TotalBalance
Assets: Moneymarketfunds $ 1,201 $ — $ — $ 1,201Certificatesofdeposit — 862 — 862Corporatebonds — 6 — 6
Totalcashequivalentsandshort-terminvestments 1,201 868 — 2,069RestrictedCashandInvestments: Moneymarketfunds 2 — — 2Otherdebtsecurities — 5 — 5
Derivativeassets — 3 — 3Totalassets $ 1,203 $ 876 $ — $ 2,079Liabilities: Derivativeliabilities $ — $ (4) $ — $ (4)
Totalliabilities $ — $ (4) $ — $ (4)
FairValueMeasurementsatReportingDateUsing
(Dollarsinmillions)
QuotedPricesinActiveMarketsforIdenticalInstruments(Level1)
SignificantOther
ObservableInputs(Level2)
SignificantUnobservable
Inputs(Level3)
TotalBalance
Assets: Cashandcashequivalents $ 1,201 $ 862 $ — $ 2,063Short-terminvestments — 6 — 6Othercurrentassets 2 8 — 10
Totalassets $ 1,203 $ 876 $ — $ 2,079Liabilities: Accruedexpenses $ — $ (4) $ — $ (4)
Totalliabilities $ — $ (4) $ — $ (4)
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SEAGATETECHNOLOGYPLC
NOTESTOCONSOLIDATEDFINANCIALSTATEMENTS—(Continued)
measurementdate.TheCompanycorroboratesthepricesobtainedfromthepricingserviceagainstotherindependentsourcesand,asofJuly1,2016,hasnotfounditnecessarytomakeanyadjustmentstothepricesobtained.TheCompany'sderivativefinancialinstrumentsarealsoclassifiedwithinLevel2.TheCompany'sderivativefinancialinstrumentsconsistofforeigncurrencyforwardexchangecontractsandtheTRS.TheCompanyrecognizesderivativefinancialinstrumentsinitsconsolidatedfinancialstatementsatfairvalue.TheCompanydeterminesthefairvalueoftheseinstrumentsbyconsideringtheestimatedamountitwouldpayorreceivetoterminatetheseagreementsatthereportingdate.
AsofJuly1,2016andJuly3,2015,wehadnoLevel3assetsorliabilities.
ItemsMeasuredatFairValueonaNon-RecurringBasis
TheCompanyentersintocertainstrategicinvestmentsforthepromotionofbusinessandstrategicobjectives.StrategicinvestmentsinequitysecuritieswheretheCompanydoesnothavetheabilitytoexercisesignificantinfluenceovertheinvestees,includedinOtherassets,netintheConsolidatedBalanceSheets,arerecordedatcostandareperiodicallyanalyzedtodeterminewhetherornotthereareindicatorsofimpairment.ThecarryingvalueoftheCompany'sstrategicinvestmentsatJuly1,2016andJuly3,2015totaled$113millionand$120million,respectively,andconsistedprimarilyofprivatelyheldequitysecuritieswithoutareadilydeterminablefairvalue.
Duringthefiscalyears2016,2015and2014,theCompanydeterminedthatcertainofitsequityinvestmentsaccountedforunderthecostmethodwereother-than-temporarilyimpaired,andrecognizedchargesof$13million,$7millionand$2million,respectively,inordertowritedownthecarryingamountoftheinvestmentstoitsestimatedfairvalue.TheseamountswererecordedinOther,netintheConsolidatedStatementsofOperations.Sincetherewasnoactivemarketfortheequitysecuritiesoftheinvestee,theCompanyestimatedfairvalueoftheinvesteebyanalyzingtheunderlyingcashflowsandfutureprospectsoftheinvestee.
OtherFairValueDisclosures
TheCompany'sdebtiscarriedatamortizedcost.ThefairvalueoftheCompany'sdebtisderivedusingtheclosingpriceofthesamedebtinstrumentsasofthedateofvaluation,whichtakesintoaccounttheyieldcurve,interestrates,andotherobservableinputs.Accordingly,thesefairvaluemeasurementsarecategorizedasLevel2.ThefollowingtablepresentsthefairvalueandamortizedcostoftheCompany'sdebtinorderofmaturity:
98
July1,2016 July3,2015
(Dollarsinmillions) CarryingAmount
EstimatedFairValue
CarryingAmount
EstimatedFairValue
3.75%SeniorNotesdueNovember2018 $ 800 $ 804 $ 800 $ 8287.00%SeniorNotesdueNovember2021 158 164 158 1704.75%SeniorNotesdueJune2023 990 857 1,000 1,0164.75%SeniorNotesdueJanuary2025 995 795 1,000 9954.875%SeniorNotesdueJune2027 698 514 698 6755.75%SeniorNotesdueDecember2034 489 357 499 491
4,130 3,491 4,155 4,175Lessshort-termborrowingsandcurrentportionoflong-termdebt — — — —Long-termdebt,lesscurrentportion $ 4,130 $ 3,491 $ 4,155 $ 4,175
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SEAGATETECHNOLOGYPLC
NOTESTOCONSOLIDATEDFINANCIALSTATEMENTS—(Continued)
10.Shareholders'Equity
ShareCapital
TheCompany'sauthorizedsharecapitalis$13,500andconsistsof1,250,000,000ordinaryshares,parvalue$0.00001,ofwhich298,572,217shareswereoutstandingasofJuly1,2016,and100,000,000preferredshares,parvalue$0.00001,ofwhichnonewereissuedoroutstandingasofJuly1,2016.
Ordinaryshares—HoldersofordinarysharesareentitledtoreceivedividendswhenandasdeclaredbytheCompany'sboardofdirectors(the"BoardofDirectors").Uponanyliquidation,dissolution,orwindingupoftheCompany,afterrequiredpaymentsaremadetoholdersofpreferredshares,anyremainingassetsoftheCompanywillbedistributedratablytoholdersofthepreferredandordinaryshares.Holdersofsharesareentitledtoonevotepershareonallmattersuponwhichtheordinarysharesareentitledtovote,includingtheelectionofdirectors.
Preferredshares—TheCompanymayissuepreferredsharesinoneormoreseries,uptotheauthorizedamount,withoutshareholderapproval.TheBoardofDirectorsisauthorizedtoestablishfromtimetotimethenumberofsharestobeincludedineachseries,andtofixtherights,preferencesandprivilegesofthesharesofeachwhollyunissuedseriesandanyofitsqualifications,limitationsorrestrictions.TheBoardofDirectorscanalsoincreaseordecreasethenumberofsharesofaseries,butnotbelowthenumberofsharesofthatseriesthenoutstanding,withoutanyfurthervoteoractionbytheshareholders.
TheBoardofDirectorsmayauthorizetheissuanceofpreferredshareswithvotingorconversionrightsthatcouldharmthevotingpowerorotherrightsoftheholdersoftheordinaryshares.Theissuanceofpreferredshares,whileprovidingflexibilityinconnectionwithpossibleacquisitionsandothercorporatepurposes,could,amongotherthings,havetheeffectofdelaying,deferringorpreventingachangeincontroloftheCompanyandmightharmthemarketpriceofitsordinarysharesandthevotingandotherrightsoftheholdersofordinaryshares.
RepurchasesofEquitySecurities
OnJuly24,2013,theBoardofDirectorsauthorizedtheCompanytorepurchaseanadditional$2.5billionofitsoutstandingordinaryshares.
OnApril22,2015,theBoardofDirectorsauthorizedtheCompanytorepurchaseanadditional$2.5billionofitsoutstandingordinaryshares.
AllrepurchasesareeffectedasredemptionsinaccordancewiththeCompany'sArticlesofAssociation.
AsofJuly1,2016,$1.8billionremainedavailableforrepurchaseundertheexistingrepurchaseauthorizationlimit.
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SEAGATETECHNOLOGYPLC
NOTESTOCONSOLIDATEDFINANCIALSTATEMENTS—(Continued)
ThefollowingtablesetsforthinformationwithrespecttorepurchasesoftheCompany'sordinarysharesduringfiscalyears2016,2015and2014:
11.Compensation
Stock-BasedCompensationPlans
TheCompany'sstock-basedcompensationplanshavebeenestablishedtopromotetheCompany'slong-termgrowthandfinancialsuccessbyprovidingincentivestoitsemployees,directors,andconsultantsthroughgrantsofshare-basedawards.TheprovisionsoftheCompany'sstock-basedbenefitplans,whichallowforthegrantofvarioustypesofequity-basedawards,arealsointendedtoprovidegreaterflexibilitytomaintaintheCompany'scompetitiveabilitytoattract,retainandmotivateparticipantsforthebenefitoftheCompanyanditsshareholders.
SeagateTechnologyplc2012EquityIncentivePlan(the"EIP").OnOctober26,2011,theshareholdersapprovedtheEIPandauthorizedtheissuanceofuptoatotalof27.0millionordinaryshares,parvalue$0.0001pershare,plusanysharesremainingavailableforgrantundertheSeagateTechnologyplc2004ShareCompensationPlan(the"SCP")asoftheeffectivedateoftheEIP(whichwasequalto11.0millionordinarysharesasoftheeffectivedateoftheEIPandwhichwillincreasebysuchadditionalnumberofsharesaswillbereturnedtothesharereserveinrespectofawardspreviouslygrantedundertheSCP)(together,the"ShareReserve").OnOctober22,2014,theshareholdersauthorizedtheissuancefromtheEIPofanadditional25millionordinaryshares,parvalue$0.0001pershare.AnysharesthataresubjecttooptionsorshareappreciationrightsgrantedundertheEIPwillbecountedagainsttheShareReserveasoneshareforeveryonesharegranted,andanysharesthataresubjecttorestrictedsharebonusawards,restrictedshareunits,performancesharebonusawardsorperformanceshareawards(collectively,"Full-ValueShareAwards")willgenerallybecountedagainsttheShareReserveastwoandfive-tenthssharesforeveryonesharegranted.AsofJuly1,2016,therewereapproximately32.7millionordinarysharesavailableforissuanceundertheEIP.
DotHillSystems2009EquityIncentivePlan(the"DHEIP").SeagateTechnologyplcacquiredtheDotHillSystems2009EquityIncentivePlaneffectiveOctober6,2015.TheCompanyassumedtheremainingauthorizedbutunusedsharereserveofapproximately2millionshares,basedontheconversionratio,fromtheDHEIPontheacquisitiondate.AnysharesthataresubjecttooptionsorshareappreciationrightsgrantedundertheDHEIPwillbecountedagainsttheShareReserveasoneshareforeveryonesharegranted,andanysharesthataresubjecttorestrictedsharebonusawards,restrictedshareunits,
100
(Inmillions)
NumberofShares
Repurchased
DollarValueofShares
Repurchased CumulativerepurchasedthroughJune28,2013 244 $ 5,486Repurchasedinfiscalyear2014 41 1,912CumulativerepurchasedthroughJune27,2014 285 7,398Repurchasedinfiscalyear2015 19 1,087CumulativerepurchasedthroughJuly3,2015 304 8,485Repurchasedinfiscalyear2016(a) 24 1,146CumulativerepurchasedthroughJuly1,2016 328 $ 9,631
(a) Includingnetsharesettlementof$56millionfor1millionsharesinconnectionwithtaxwithholdingrelatedtovestingofrestrictedstockunits.
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SEAGATETECHNOLOGYPLC
NOTESTOCONSOLIDATEDFINANCIALSTATEMENTS—(Continued)
performancesharebonusawardsorperformanceshareawards(collectively,"Full-ValueShareAwards")willgenerallybecountedagainsttheShareReserveasoneandfive-tenthssharesforeveryonesharegranted.AsofJuly1,2016,therewereapproximately1millionordinarysharesavailableforissuanceundertheDHEIP.
SeagateTechnologyplcEmployeeStockPurchasePlan(the"ESPP").Thereare50.0millionordinarysharesauthorizedtobeissuedundertheESPP.InnoeventshallthetotalnumberofsharesissuedundertheESPPexceed75.0millionordinaryshares.TheESPPconsistsofasix-monthofferingperiodwithamaximumissuanceof1.5millionordinarysharesperofferingperiod.TheESPPpermitseligibleemployeestopurchaseordinarysharesthroughpayrolldeductionsgenerallyat85%ofthefairmarketvalueoftheordinaryshares.AsofJuly1,2016therewereapproximately6.8millionordinarysharesavailableforissuanceundertheESPP.
EquityAwards
Full-ValueShareAwards(e.g.restrictedshareunits)generallyvestoveraperiodofthreetofouryears,withcliffvestingofaportionofeachawardoccurringannually.Optionsgenerallyvestasfollows:25%oftheoptionswillvestonthefirstanniversaryofthevestingcommencementdateandtheremaining75%willvestratablyeachmonththereafteroverthenext36months.OptionsgrantedundertheEIPandSCPhaveanexercisepriceequaltotheclosingpriceoftheCompany'sordinarysharesondateofgrant.
TheCompanygrantedperformanceawardstoitsseniorexecutiveofficersundertheSCPandtheEIPwherevestingissubjecttoboththecontinuedemploymentoftheparticipantbytheCompanyandtheachievementofcertainperformancegoalsestablishedbytheCompensationCommitteeoftheCompany'sBoardofDirectors,includingmarketbasedperformancegoals.AsingleawardrepresentstherighttoreceiveasingleordinaryshareoftheCompany.Duringfiscalyears2016,2015and2014,theCompanygranted0.4million,0.3millionand0.4millionperformanceawards,respectively,whereperformanceismeasuredbasedonathree-yearaveragereturnoninvestedcapital("ROIC")goalandarelativetotalshareholderreturn("TSR")goal,whichisbasedontheCompany'sordinarysharesmeasuredagainstabenchmarkTSRofapeergroupoverthesamethree-yearperiod(the"TSR/ROIC"awards).Theseawardsvestaftertheendoftheperformanceperiodofthreeyearsfromthegrantdate.ApercentageoftheseunitsmayvestonlyifatleasttheminimumROICgoalismetregardlessofwhethertheTSRgoalismet.Thenumberofstockunitstovestwillrangefrom0%to200%ofthetargetedunits.Inevaluatingthefairvalueoftheseunits,theCompanyusedaMonteCarlosimulationonthegrantdate,takingthemarket-basedTSRgoalintoconsideration.CompensationexpenserelatedtotheseunitsisonlyrecordedinaperiodifitisprobablethattheROICgoalwillbemet,anditistoberecordedattheexpectedlevelofachievement.
TheCompanyalsogranted0.2million,0.4millionand0.3millionperformanceawardsduringfiscalyears2016,2015and2014respectively,toitsseniorexecutiveofficerswhicharesubjecttoaperformancegoalrelatedtotheCompany'sadjustedearningspershare(the"AEPS"awards).Theseawardshaveamaximumseven-yearvestingperiod,with25%annualvestingstartingonthefirstanniversaryofthegrantdate.Iftheperformancegoalisnotachieved,vestingisdelayedtoafollowingyearinwhichtheAEPSgoalisachieved.Anyunvestedawardsfromprioryearsmayvestcumulativelyinafutureyearwithintheseven-yearvestingperiodiftheannualAEPSgoalisachievedduringasubsequentyear.IftheAEPSgoalhasnotbeenmetbytheendofthesevenyearperiod,anyunvestedshareswillbeforfeited.
Duringfiscalyear2016and2015,theCompanydidnotgrantanyperformance-basedoptionsandperformancebasedrestrictedshareunitstoitsCEO.
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SEAGATETECHNOLOGYPLC
NOTESTOCONSOLIDATEDFINANCIALSTATEMENTS—(Continued)
DeterminingFairValueofSeagateTechnologyStockPlans
Valuationandamortizationmethod—TheCompanyestimatesthefairvalueofstockoptionsgrantedusingtheBlack-Scholes-Mertonvaluationmodelandasingleoptionawardapproach.Thisfairvalueisthenamortizedonastraight-linebasisovertherequisiteserviceperiodsoftheawards,whichisgenerallythevestingperiodortheremainingservice(vesting)period.
ExpectedTerm—ExpectedtermrepresentstheperiodthattheCompany'sstock-basedawardsareexpectedtobeoutstandingandwasdeterminedbasedonhistoricalexperienceofsimilarawards,givingconsiderationtothecontractualtermsofthestock-basedawards,vestingschedulesandexpectationsoffutureemployeebehaviorasinfluencedbychangestothetermsofitsstock-basedawards.
ExpectedVolatility—TheCompanyusesacombinationoftheimpliedvolatilityofitstradedoptionsandhistoricalvolatilityofitsshareprice.
ExpectedDividend—TheBlack-Scholes-Mertonvaluationmodelcallsforasingleexpecteddividendyieldasaninput.Thedividendyieldisdeterminedbydividingtheexpectedpersharedividendduringthecomingyearbythegrantdateshareprice.TheexpecteddividendassumptionisbasedontheCompany'scurrentexpectationsaboutitsanticipateddividendpolicy.Also,becausetheexpecteddividendyieldshouldreflectmarketplaceparticipants'expectations,theCompanydoesnotincorporatechangesindividendsanticipatedbymanagementunlessthosechangeshavebeencommunicatedtoorotherwiseareanticipatedbymarketplaceparticipants.
Risk-FreeInterestRate—TheCompanybasestherisk-freeinterestrateusedintheBlack-Scholes-MertonvaluationmodelontheimpliedyieldcurrentlyavailableonU.S.Treasuryzero-couponissueswithanequivalentremainingterm.WheretheexpectedtermoftheCompany'sstock-basedawardsdonotcorrespondwiththetermsforwhichinterestratesarequoted,theCompanyperformedastraight-lineinterpolationtodeterminetheratefromtheavailabletermmaturities.
FairValue—ThefairvalueoftheCompany'snonvestedawardsandperformanceawardssubjecttoanAEPSconditionforfiscalyears2016,2015,and2014,isthepricepershareoftheCompany'scommonstockonthegrantdate.Theweighted-averagegrantdatefairvalueofawardsgrantedareasfollows:
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FiscalYears 2016 2015 2014 Nonvestedawards: Weighted-averagefairvalue $ 41.47 $ 58.93 $ 41.18
Performanceawards: Weighted-averagefairvalue $ 42.09 $ 59.51 $ 48.69
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NOTESTOCONSOLIDATEDFINANCIALSTATEMENTS—(Continued)
ThefairvalueoftheCompany'ssharesrelatedtooptionsgrantedtoemployees,sharesissuedfromtheESPPandperformanceawardssubjecttoTSR/ROICconditionsforfiscalyears2016,2015and2014wereestimatedusingthefollowingassumptions:
StockCompensationExpense
TheCompanyrecorded$120million,$137millionand$118millionofshare-basedcompensationduringfiscalyears2016,2015,and2014,respectively.Managementhasmadeanestimateofexpectedforfeituresandisrecognizingcompensationcostsonlyforthoseequityawardsexpectedtovest.Whenestimatingforfeitures,theCompanyconsidersvoluntaryterminationbehavioraswellasanalysisofactualforfeitedawards.
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FiscalYears 2016 2015 2014Options Expectedterm(inyears) 2.1–4.2 4.2 4.2Volatility 33–48% 33–35% 35–41%Weighted-averagevolatility 36% 34% 40%Expecteddividendrate 4.6–11.0% 2.9–4.0% 3.1–3.8%Weighted-averageexpecteddividendrate 5.6% 3.0% 3.7%Risk-freeinterestrate 0.6–1.5% 1.1–1.5% 1.2–1.4%Weighted-averagefairvalue $12.28 $12.98 $10.41
ESPP Expectedterm(inyears) 0.5 0.5 0.5Volatility 28–46% 28–29% 34–36%Weighted-averagevolatility 39% 28% 35%Expecteddividendrate 4.6–8.3% 3.0–3.8% 3.3–3.5%Weighted-averageexpecteddividendrate 6.9% 3.4% 3.4%Risk-freeinterestrate 0.5% 0.1% 0.1%Weighted-averagefairvalue $9.08 $12.21 $10.46
Performancerestrictedshareawardssubjecttomarketcondition Expectedterm(inyears) 3.00 3.00 3.00Weighted-averagevolatility 30% 40% 46%Expecteddividendrate 4.3% 2.8% 3.8%Risk-freeinterestrate 1.1% 1.1% 0.9%Weighted-averagefairvalue $47.34 $58.31 $37.51
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NOTESTOCONSOLIDATEDFINANCIALSTATEMENTS—(Continued)
StockOptionActivity
TheCompanyissuesnewordinarysharesuponexerciseofstockoptions.Thefollowingisasummaryofoptionactivities:
TheaggregateintrinsicvalueiscalculatedasthedifferencebetweentheexercisepriceoftheunderlyingawardsandthequotedpriceoftheCompany'sordinarysharesfortheoptionsthatwerein-the-moneyatJuly1,2016.Duringfiscalyears2016,2015,and2014,theaggregateintrinsicvalueofoptionsexercisedundertheCompany'sstockoptionplanswas$44million,$92millionand$140million,respectively,determinedasofthedateofoptionexercise.Theaggregatefairvalueofoptionsvestedduringfiscalyear2016wasapproximately$18million.
AtJuly1,2016,thetotalcompensationcostrelatedtooptionsgrantedtoemployeesbutnotyetrecognizedwasapproximately$28million,netofestimatedforfeituresofapproximately$1million.Thiscostisbeingamortizedonastraight-linebasisoveraweighted-averageremainingtermofapproximately2.5yearsandwillbeadjustedforsubsequentchangesinestimatedforfeitures.
NonvestedAwardsActivity
Thefollowingisasummaryofnonvestedawardactivitieswhichdonotcontainaperformancecondition:
AtJuly1,2016,thetotalcompensationcostrelatedtononvestedawardsgrantedtoemployeesbutnotyetrecognizedwasapproximately$133million,netofestimatedforfeituresofapproximately$7million.
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Options NumberofShares
Weighted-AverageExercisePrice
Weighted-AverageRemainingContractual
Term
AggregateIntrinsicValue
(Inmillions) (Inyears) (DollarsInmillions) OutstandingatJuly3,2015 4.9 $ 27.94 3.6 $ 110Granted 2.6 $ 35.86 Exercised (1.5) $ 8.32 Forfeitures (0.4) $ 47.03 Expirations (0.2) 46.43 OutstandingatJuly1,2016 5.4 $ 34.91 4.6 $ 14VestedandexpectedtovestatJuly1,2016 5.3 $ 34.93 4.6 $ 14ExercisableatJuly1,2016 2.5 $ 27.46 3.2 $ 12
NonvestedAwards NumberofShares
Weighted-AverageGrant-Date
FairValue (Inmillions) NonvestedatJuly3,2015 5.2 $ 39.73Granted 2.4 $ 41.47Forfeitures (0.7) $ 45.04Vested (2.1) $ 30.95NonvestedatJuly1,2016 4.8 $ 39.95
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NOTESTOCONSOLIDATEDFINANCIALSTATEMENTS—(Continued)
Thiscostisbeingamortizedonastraight-linebasisoveraweighted-averageremainingtermof2.4yearsandwillbeadjustedforsubsequentchangesinestimatedforfeitures.Theaggregatefairvalueofnonvestedawardsvestedduringfiscalyear2016wasapproximately$102million.
PerformanceAwards
Thefollowingisasummaryofnonvestedawardactivitieswhichcontainaperformancecondition:
AtJuly1,2016,thetotalcompensationcostrelatedtoperformanceawardsgrantedtoemployeesbutnotyetrecognizedwasapproximately$23million.Thiscostisbeingamortizedonastraight-linebasisoveraweighted-averageremainingtermof3.5years.
ESPP
Duringfiscalyears2016,2015and2014,theaggregateintrinsicvalueofsharespurchasedundertheCompany'sESPPwasapproximately$12million,$15millionand$26millionrespectively.AtJuly1,2016,thetotalcompensationcostrelatedtooptionstopurchasetheCompany'sordinarysharesundertheESPPbutnotyetrecognizedwasapproximately$1.7million.Thiscostwillbeamortizedonastraight-linebasisoveraweighted-averageperiodofapproximatelyonemonth.Duringfiscalyear2016,theCompanyissued2.1millionordinaryshareswithaweighted-averagepurchasepriceof$31.54pershare.
Tax-DeferredSavingsPlan
TheCompanyhasatax-deferredsavingsplan,theSeagate401(k)Plan(the"40l(k)plan"),forthebenefitofqualifiedemployees.The40l(k)planisdesignedtoprovideemployeeswithanaccumulationoffundsatretirement.Qualifiedemployeesmayelecttomakecontributionstothe401(k)planonabi-weeklybasis.Pursuanttothe401(k)plan,theCompanymatches50%ofemployeecontributions,upto6%ofcompensation,subjecttomaximumannualcontributionsof$4,500perparticipatingemployee.Duringfiscalyears2016,2015,and2014,theCompanymadematchingcontributionsof$19million,$18millionand$16million,respectively.
DeferredCompensationPlan
OnJanuary1,2001,theCompanyadoptedtheSDCPforthebenefitofeligibleemployees.Thisplanisdesignedtopermitcertaindiscretionaryemployercontributions,inexcessofthetaxlimitsapplicabletothe401(k)planandtopermitemployeedeferralsinexcessofcertaintaxlimits.InthequarterendedDecember27,2013,theCompanyenteredintoaTRSinordertomanagetheequitymarketrisksassociatedwiththeSDCPliabilities.See"Note8.DerivativeFinancialInstruments"containedinthisreportforadditionalinformationabouttheTRS.
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PerformanceAwards NumberofShares
Weighted-AverageGrant-Date
FairValue (Inmillions) PerformanceunitsatJuly3,2015 2.1 $ 61.12Granted 0.6 $ 45.68Forfeitures (0.2) $ 53.99Vested (1.1) $ 27.05PerformanceunitsatJuly1,2016 1.4 $ 47.41
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NOTESTOCONSOLIDATEDFINANCIALSTATEMENTS—(Continued)
12.EarningsPerShare
Thefollowingtablesetsforththecomputationofbasicanddilutednetincomepershare:
Thefollowingpotentialshareswereexcludedfromthecomputationofdilutednetincomepershareastheireffectwouldhavebeenanti-dilutive:
13.BusinessSegmentandGeographicInformation
TheCompanyhasconcludedthatitsmanufactureanddistributionofelectronicstoragesolutionsconstitutesonereportingsegment.TheCompany'smanufacturingoperationsarebasedontechnologyplatformsthatareusedtoproducevariouselectronicstoragesolutionsthatservemultipleapplicationsandmarkets.TheCompany'smaintechnologyplatformsareprimarilyfocusedaroundarealdensityofmediaandread/writeheadtechnologies.Inaddition,theCompanyalsoinvestsincertainothertechnologyplatformsincludingmotors,servoformattingread/writechannels,solidstateandothertechnologies.TheCompanyhasdeterminedthatitsChiefExecutiveOfficeristheCompany'schiefoperatingdecisionmaker("CODM")asheisresponsibleforreviewingandapprovinginvestmentsintheCompany'stechnologyplatformsandmanufacturinginfrastructure.
Infiscalyears2016,2015and2014,DellInc.accountedforapproximately12%,14%and13%ofconsolidatedrevenue,respectively.Infiscalyears2015and2014,Hewlett-PackardCompanyaccountedforapproximately12%and13%ofconsolidatedrevenue,respectively.Infiscalyear2016,HPInc.,formerlyknownasHewlett-PackardCompany,completeditsseparationwithHewlettPackardEnterpriseCompany,andeachcompanyaccountedforlessthan10%ofourconsolidatedrevenue.Noothercustomeraccountedformorethan10%ofconsolidatedrevenueinanyyearpresented.
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FiscalYearsEnded
(Inmillions,exceptpersharedata) July1,2016
July3,2015
June27,2014
Numerator: NetincomeattributabletoSeagateTechnologyplc $ 248 $ 1,742 $ 1,570
Numberofsharesusedinpersharecalculations: TotalsharesforpurposesofcalculatingbasicnetincomepershareattributabletoSeagateTechnologyplc 299 324 337
Weighted-averageeffectofdilutivesecurities: Employeeequityawardplans 3 7 10
TotalsharesforpurposeofcalculatingdilutednetincomepershareattributabletoSeagateTechnologyplc 302 331 347
NetincomepershareattributabletoSeagateTechnologyplcshareholders: Basic $ 0.83 $ 5.38 $ 4.66Diluted $ 0.82 $ 5.26 $ 4.52
FiscalYearsEnded
(Inmillions) July1,2016
July3,2015
June27,2014
Employeeequityawardplans 3 — —
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NOTESTOCONSOLIDATEDFINANCIALSTATEMENTS—(Continued)
Otherlong-livedassetsconsistofproperty,equipmentandleaseholdimprovements,otherintangibleassets,capitalleases,equityinvestmentsandothernon-currentassetsasrecordedbytheCompany'soperationsineacharea.
ThefollowingtablesummarizestheCompany'soperationsbygeographicarea:
14.Legal,EnvironmentalandOtherContingencies
TheCompanyassessestheprobabilityofanunfavorableoutcomeofallitsmateriallitigation,claims,orassessmentstodeterminewhetheraliabilityhadbeenincurredandwhetheritisprobablethatoneormorefutureeventswilloccurconfirmingthefactoftheloss.Intheeventthatanunfavorableoutcomeisdeterminedtobeprobableandtheamountofthelosscanbereasonablyestimated,theCompanyestablishesanaccrualforthelitigation,claimorassessment.Inaddition,intheeventanunfavorableoutcomeisdeterminedtobelessthanprobable,butreasonablypossible,theCompanywilldiscloseanestimateofthepossiblelossorrangeofsuchloss;however,whenareasonableestimatecannotbemade,theCompanywillprovidedisclosuretothateffect.Litigationisinherentlyuncertainandmayresultinadverserulingsordecisions.Additionally,theCompanymayenterintosettlementsorbesubjecttojudgmentsthatmay,individuallyorintheaggregate,haveamaterialadverseeffectonitsresultsofoperations.Accordingly,actualresultscoulddiffermaterially.
IntellectualPropertyLitigation
Convolve,Inc.("Convolve")andMassachusettsInstituteofTechnology("MIT")v.SeagateTechnologyLLC,etal.—OnJuly13,2000,ConvolveandMITfiledsuitagainstCompaqComputerCorporationandSeagateTechnologyLLCintheU.S.DistrictCourtfortheSouthernDistrictofNewYork,alleginginfringementofU.S.PatentNos.4,916,635(the"'635patent")andU.S.PatentNo.5,638,267(the"'267patent"),misappropriationoftradesecrets,breachofcontract,andotherclaims.Inthecomplaint,theplaintiffsrequestedinjunctiverelief,$800millionincompensatorydamagesand
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FiscalYearsEnded
(Dollarsinmillions) July1,2016
July3,2015
June27,2014
Revenuefromexternalcustomers(a): Singapore $ 5,354 $ 6,844 $ 6,828UnitedStates 3,376 3,929 3,679TheNetherlands 1,813 2,291 2,652Other 617 675 565Consolidated $ 11,160 $ 13,739 $ 13,724
Long-livedassets: UnitedStates $ 1,029 $ 725 $ 500Singapore 726 900 788Thailand 349 328 398Malaysia 201 248 146China 115 138 167Other 444 568 680Consolidated $ 2,864 $ 2,907 $ 2,679
(a) Revenueisattributedtocountriesbasedontheshippinglocation.
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unspecifiedpunitivedamages,includingforwillfulinfringement.OnJanuary16,2002,Convolvefiledanamendedcomplaint,allegingdefendantsinfringeUSPatentNo.6,314,473(the"'473patent").Thedistrictcourtruledin2010thatthe'267patentwasoutofthecase.
OnAugust16,2011,thedistrictcourtgrantedinpartanddeniedinparttheCompany'smotionforsummaryjudgment.OnJuly1,2013,theU.S.CourtofAppealsfortheFederalCircuit:1)affirmedthedistrictcourt'ssummaryjudgmentrulingsthatSeagatedidnotmisappropriateanyoftheallegedtradesecretsandthattheassertedclaimsofthe'635patentareinvalid;2)reversedandvacatedthedistrictcourt'ssummaryjudgmentofnon-infringementwithrespecttothe'473patent;and3)remandedthecaseforfurtherproceedingsonthe'473patent.OnJuly11,2014,thedistrictcourtgrantedtheCompany'ssummaryjudgmentmotionregardingConvolve'sonlyremainingcauseofaction,whichallegedinfringementofthe'473patent.ThedistrictcourtenteredjudgmentinfavoroftheCompanyonJuly14,2014.ConvolvefiledanoticeofappealonAugust13,2014.OnFebruary10,2016,theU.S.CourtofAppealsfortheFederalCircuit:1)affirmedthedistrictcourt'ssummaryjudgmentofnodirectinfringementbySeagatebecauseSeagate'sATA/SCSIdiskdrivesdonotmeetthe"userinterface"limitationoftheassertedclaimsofthe'473patent;2)affirmedthedistrictcourt'ssummaryjudgmentofnon-infringementbyCompaq'sproductsastoclaims1,3,and5ofthe'473patentbecauseCompaq'sF10BIOSinterfacedoesnotmeetthe"commands"limitationofthoseclaims;3)vacatedthedistrictcourt'ssummaryjudgmentofnon-infringementbyCompaq'saccusedproductsastoclaims7-15ofthe'473patent;4)reversedthedistrictcourt'ssummaryjudgmentofnon-infringementbasedoninterveningrights;and5)remandedthecasetothedistrictcourtforfurtherproceedingsonthe'473patent.InviewoftherulingsmadebythedistrictcourtandtheCourtofAppealsandtheuncertaintyregardingtheamountofdamages,ifany,thatcouldbeawardedConvolveinthismatter,theCompanydoesnotbelievethatitiscurrentlypossibletodetermineareasonableestimateofthepossiblerangeoflossrelatedtothismatter.
AlexanderShukhv.SeagateTechnology—OnFebruary12,2010,AlexanderShukhfiledacomplaintagainsttheCompanyintheU.S.DistrictCourtfortheDistrictofMinnesota,alleging,amongotherthings,employmentdiscriminationbasedonhisBelarusiannationaloriginandwrongfulfailuretonamehimasaninventoronseveralpatentsandpatentapplications.Mr.Shukh'semploymentwasterminatedaspartofacompany-widereductioninforceinfiscalyear2009.Heseeksdamagesinexcessof$75million.OnMarch31,2014,thedistrictcourtgrantedSeagate'ssummaryjudgmentmotionandenteredjudgmentinfavorofSeagate.Mr.ShukhfiledanoticeofappealonApril7,2014.OnOctober2,2015,thecourtofappealsvacatedandremandedthedistrictcourt'sgrantofsummaryjudgmentonMr.Shukh'sclaimforcorrectionofinventorshipandaffirmedthedistrictcourt'sgrantofsummaryjudgmentastoallotherclaims.OnOctober29,2015,Mr.Shukhfiledapetitionforrehearingenbancwiththecourtofappeals;thepetitionwasdeniedonDecember17,2015.OnMarch16,2016,ShukhfiledapetitionforwritofcertioraritotheU.S.SupremeCourt;thepetitionwasdeniedonJune27,2016.Inviewoftheuncertaintyregardingtheamountofdamages,ifany,thatcouldbeawardedinthismatter,theCompanydoesnotbelievethatitiscurrentlypossibletodetermineareasonableestimateofthepossiblerangeoflossrelatedtothismatter.
LEAPCo.,Ltd.v.SeagateSingaporeInternationalHeadquartersPte.Ltd.andNipponSeagateInc.—OnJuly4,2012,LEAPCo.,Ltd.filedalawsuitintheTokyoDistrictCourtofJapanagainstSeagateSingaporeInternationalHeadquartersPte.Ltd.,NipponSeagateInc.andBuffaloInc.allegingwrongfulterminationofpurchaseagreementsandotherclaims,andseekingapproximately$38millionindamages.OnMarch16,2016,theCompanyandLEAPreachedasettlement.Asaresultofthesettlement,thislitigationbetweentheCompanyandLEAPhasended.ThereisnodamageorlosstotheCompanyrelatedtothismatter.
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EnovaTechnologyCorporationv.SeagateTechnology(US)Holdings,Inc.,etal.—OnJune5,2013,EnovaTechnologyCorporation("Enova")filedacomplaintagainstSeagateTechnology(US)Holdings,Inc.andSeagateTechnologyLLCintheU.S.DistrictCourtfortheDistrictofDelawarealleginginfringementofU.S.PatentNo.7,136,995,"CryptographicDevice,"andU.S.PatentNo.7,900,057,"CryptographicSerialATAApparatusandMethod."Thecomplaintseeksunspecifiedcompensatorydamages,enhanceddamages,injunctiverelief,attorneys'fees,andotherrelief.OnApril27,2015,thedistrictcourtorderedastayofthecase,inviewofproceedingsregardingthe'995and'057PatentsbeforethePatentTrialandAppealBoard("PTAB")oftheU.S.PatentandTrademarkOffice.TheCompanybelievestheclaimsarewithoutmeritandintendstovigorouslydefendthiscase.OnSeptember2,2015,PTABissueditsfinalwrittendecisionthatclaims1-15ofthe'995Patentareheldunpatentable.OnDecember18,2015,PTABissueditsfinalwrittendecisionsthatclaims1-32and40-53ofthe'057Patentareheldunpatentable.OnFebruary4,2016,PTABissueditsfinalwrittendecisionthatclaims33-39ofthe'057Patentareheldunpatentable.EnovahasappealedPTAB'sdecisionsonthe'995Patentandthe'057PatenttotheU.S.CourtofAppealsfortheFederalCircuit.Ahearingbeforethecourtofappealshasnotyetbeenscheduled.Inviewoftheuncertaintyregardingtheamountofdamages,ifany,thatcouldbeawardedinthismatter,theCompanydoesnotbelievethatitiscurrentlypossibletodetermineareasonableestimateofthepossiblerangeoflossrelatedtothismatter.
SeagateTechnologyLLCv.WesternDigitalCorp.—OnOctober8,2014,theMinnesotaSupremeCourtruledthatthearbitrationawardinfavoroftheCompanyinitscaseagainstWesternDigitalforthemisappropriationoftheCompany'stradesecretsshouldbeconfirmed.Inthearbitrationaward,issuedonJanuary23,2012,thearbitratordeterminedthatWesternDigitalanditsformeremployeehadmisappropriatedtheCompany'stradesecrets.ThearbitratorawardedtheCompany$525millionincompensatorydamagesand,afteraddinginterest,issuedafinalawardof$630million.Interestonthefinalawardhasbeenaccruingat10%.OnOctober14,2014,theCompanyreceivedapartialpaymentfromWesternDigitalintheamountof$773million.DuringthequarterendedJanuary2,2015,theamountofthefinalaward,lesslitigationandotherrelatedcosts,wasrecordedbytheCompanyinGainonarbitrationaward,net,andtheremainingamountreceivedwasrecordedinOther,net.OnApril7,2015,theHennepinCountyDistrictCourtofMinnesota("districtcourt")deniedSeagate'smotionforentryofjudgmentforanamountofadditionalinterestowingonthearbitrationaward.OnJanuary25,2016,theMinnesotaCourtofAppealsreversedandremandedthedistrictcourt'sorderregardingtheunpaidinterest.OnJanuary27,2016,theCompanyreceivedafurtherpaymentfromWesternDigitalintheamountof$33million,whichwastheremainingbalanceofinterestowedonthefinalaward.ThisamountwasrecordedinOther,netintheCondensedConsolidatedStatementofOperationsforthethreeandninemonthsendedApril1,2016.OnJanuary29,2016,thepartiesfiledastipulationofdismissalwiththedistrictcourt,endingthelitigation.
LambethMagneticStructuresLLCv.SeagateTechnology(US)Holdings,Inc.,etal.—OnApril29,2016,LambethMagneticStructuresLLCfiledacomplaintagainstSeagateTechnology(US)Holdings,Inc.andSeagateTechnologyLLCintheU.S.DistrictCourtfortheWesternDistrictofPennsylvania,alleginginfringementofU.S.PatentNo.7,128,988,"MagneticMaterialStructures,DevicesandMethods."Thecomplaintseeksunspecifiedcompensatorydamages,enhanceddamages,injunctiverelief,attorneys'fees,andotherrelief.TheCompanybelievestheclaimsassertedinthecomplaintarewithoutmeritandintendstovigorouslydefendthiscase.Inviewoftheuncertaintyregardingtheamountofdamages,ifany,thatcouldbeawardedinthismatter,theCompanydoesnotbelievethatitiscurrentlypossibletodetermineareasonableestimateofthepossiblerangeoflossrelatedtothismatter.
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EnvironmentalMatters
TheCompany'soperationsaresubjecttoU.S.andforeignlawsandregulationsrelatingtotheprotectionoftheenvironment,includingthosegoverningdischargesofpollutantsintotheairandwater,themanagementanddisposalofhazardoussubstancesandwastesandthecleanupofcontaminatedsites.SomeoftheCompany'soperationsrequireenvironmentalpermitsandcontrolstopreventandreduceairandwaterpollution,andthesepermitsaresubjecttomodification,renewalandrevocationbyissuingauthorities.
TheCompanyhasestablishedenvironmentalmanagementsystemsandcontinuallyupdatesitsenvironmentalpoliciesandstandardoperatingproceduresforitsoperationsworldwide.TheCompanybelievesthatitsoperationsareinmaterialcompliancewithapplicableenvironmentallaws,regulationsandpermits.TheCompanybudgetsforoperatingandcapitalcostsonanongoingbasistocomplywithenvironmentallaws.IfadditionalormorestringentrequirementsareimposedontheCompanyinthefuture,itcouldincuradditionaloperatingcostsandcapitalexpenditures.
Someenvironmentallaws,suchastheComprehensiveEnvironmentalResponseCompensationandLiabilityActof1980(asamended,the"Superfund"law)anditsstateequivalents,canimposeliabilityforthecostofcleanupofcontaminatedsitesuponanyofthecurrentorformersiteownersoroperatorsoruponpartieswhosentwastetothesesites,regardlessofwhethertheowneroroperatorownedthesiteatthetimeofthereleaseofhazardoussubstancesorthelawfulnessoftheoriginaldisposalactivity.TheCompanyhasbeenidentifiedasapotentiallyresponsiblepartyatseveralsites.Ateachofthesesites,theCompanyhasanassignedportionofthefinancialliabilitybasedonthetypeandamountofhazardoussubstancesdisposedofbyeachpartyatthesiteandthenumberoffinanciallyviableparties.TheCompanyhasfulfilleditsresponsibilitiesatsomeofthesesitesandremainsinvolvedinonlyafewatthistime.
WhiletheCompany'sultimatecostsinconnectionwiththesesitesisdifficulttopredictwithcompleteaccuracy,basedonitscurrentestimatesofcleanupcostsanditsexpectedallocationofthesecosts,theCompanydoesnotexpectcostsinconnectionwiththesesitestobematerial.
TheCompanymaybesubjecttovariousstate,federalandinternationallawsandregulationsgoverningtheenvironment,includingthoserestrictingthepresenceofcertainsubstancesinelectronicproducts.Forexample,theEuropeanUnion("EU")enactedtheRestrictionoftheUseofCertainHazardousSubstancesinElectricalandElectronicEquipment,whichprohibitstheuseofcertainsubstances,includinglead,incertainproducts,includingdiskdrivesandserverstorageproducts,putonthemarketafterJuly1,2006.Similarlegislationhasbeenormaybeenactedinotherjurisdictions,includingintheUnitedStates,Canada,Mexico,Taiwan,China,Japanandothers.TheEuropeanUnionREACHDirective(Registration,Evaluation,Authorization,andRestrictionofChemicals,EC1907/2006)alsorestrictssubstancesofveryhighconcern("SVHCs")inproducts.IftheCompanyoritssuppliersfailstocomplywiththesubstancerestrictions,recyclerequirementsorotherenvironmentalrequirementsastheyareenactedworldwide,itcouldhaveamateriallyadverseeffectontheCompany'sbusiness.
OtherMatters
TheCompanyisinvolvedinanumberofotherjudicialandadministrativeproceedingsincidentaltoitsbusiness,andtheCompanymaybeinvolvedinvariouslegalproceedingsarisinginthenormalcourseofitsbusinessinthefuture.Althoughoccasionaladversedecisionsorsettlementsmayoccur,theCompanybelievesthatthefinaldispositionofsuchmatterswillnothaveamaterialadverseeffectonitsfinancialpositionorresultsofoperations.
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15.Commitments
Leases.TheCompanyleasescertainproperty,facilitiesandequipmentundernon-cancelableleaseagreements.Landandfacilityleasesexpireatvariousdatesthrough2082andcontainvariousprovisionsforrentaladjustmentsincluding,incertaincases,aprovisionbasedonincreasesintheConsumerPriceIndex.Also,certainleasesprovideforrenewaloftheleaseattheCompany'soptionatexpirationofthelease.AlloftheleasesrequiretheCompanytopaypropertytaxes,insuranceandnormalmaintenancecosts.
Futureminimumleasepaymentsforoperatingleases(includingaccruedleasepaymentsrelatingtorestructuringplans)withinitialorremainingtermsofoneyearormorewereasfollowsatJuly1,2016(leasepaymentsareshownnetofsubleaseincome):
Totalrentexpenseforallland,facilityandequipmentoperatingleases,netofsubleaseincome,was$43million,$50millionand$39millionforfiscalyears2016,2015and2014,respectively.Totalsubleaserentalincomeforfiscalyears2016,2015and2014was$3million,$3millionand$2million,respectively.TheCompanysubleasesaportionofitsfacilitiesthatitconsiderstobeinexcessofcurrentrequirements.AsofJuly1,2016,totalfutureleaseincometoberecognizedfortheCompany'sexistingsubleasesisapproximately$12million.
CapitalExpenditures.TheCompany'snon-cancelablecommitmentsforconstructionofmanufacturingandproductdevelopmentfacilitiesandpurchasesofequipmentapproximated$110millionatJuly1,2016.
16.Guarantees
IndemnificationstoOfficersandDirectors
OnMay4,2009,SeagateTechnology,anexemptedcompanyincorporatedwithlimitedliabilityunderthelawsoftheCaymanIslands("Seagate-Cayman"),thentheparentcompany,enteredintoanewformofindemnificationagreement(the"RevisedIndemnificationAgreement")withitsofficersanddirectorsofSeagate-Caymananditssubsidiaries(each,an"Indemnitee").TheRevisedIndemnificationAgreementprovidesindemnificationinadditiontoanyofIndemnitee'sindemnificationrightsunderSeagate-Cayman'sArticlesofAssociation,applicablelaworotherwise,andindemnifiesanIndemniteeforcertainexpenses(includingattorneys'fees),judgments,finesandsettlementamountsactuallyandreasonablyincurredbyhimorherinanyactionorproceeding,includinganyactionbyorintherightofSeagate-Caymanoranyofitssubsidiaries,arisingoutofhisorherserviceasadirector,officer,employeeoragentofSeagate-CaymanoranyofitssubsidiariesorofanyotherentitytowhichheorsheprovidesservicesatSeagate-Cayman'srequest.However,anIndemniteeshallnotbeindemnifiedundertheRevisedIndemnificationAgreementfor(i)anyfraudordishonestyintheperformanceofIndemnitee'sdutyto
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FiscalYearsEnding OperatingLeases (Dollarsinmillions) 2017 $ 272018 222019 162020 122021 9Thereafter 82
$ 168
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SEAGATETECHNOLOGYPLC
NOTESTOCONSOLIDATEDFINANCIALSTATEMENTS—(Continued)
Seagate-CaymanortheapplicablesubsidiaryofSeagate-Caymanor(ii)Indemnitee'sconscious,intentionalorwillfulfailuretoacthonestly,lawfullyandingoodfaithwithaviewtothebestinterestsofSeagate-CaymanortheapplicablesubsidiaryofSeagate-Cayman.Inaddition,theRevisedIndemnificationAgreementprovidesthatSeagate-CaymanwilladvanceexpensesincurredbyanIndemniteeinconnectionwithenforcementoftheRevisedIndemnificationAgreementorwiththeinvestigation,settlementorappealofanyactionorproceedingagainsthimorherastowhichheorshecouldbeindemnified.
OnJuly3,2010,pursuanttoacorporatereorganization,thecommonshareholdersofSeagate-CaymanbecameordinaryshareholdersofSeagateTechnologyplc(the"Company")andSeagate-CaymanbecameawhollyownedsubsidiaryoftheCompany,asdescribedmorefullyintheCurrentReportonForm8-KfiledbytheCompanyonJuly6,2010(the"Redomestication").OnJuly27,2010,inconnectionwiththeRedomestication,theCompany,assoleshareholderofSeagate-Cayman,approvedaformofdeedofindemnity(the"DeedofIndemnity"),whichprovidesfortheindemnificationbySeagate-Caymanofanydirector,officer,employeeoragentoftheCompany,Seagate-CaymanoranysubsidiaryoftheCompany(each,a"DeedIndemnitee"),inadditiontoanyofaDeedIndemnitee'sindemnificationrightsundertheCompany'sArticlesofAssociation,applicablelaworotherwise,withasimilarscopetotheRevisedIndemnificationAgreement.Seagate-CaymanenteredintotheDeedofIndemnitywithcertainDeedIndemniteeseffectiveasofJuly3,2010andcontinuestoenterintotheDeedofIndemnitywithadditionalDeedIndemniteesfromtimetotime.
ThenatureoftheseindemnificationobligationspreventstheCompanyfrommakingareasonableestimateofthemaximumpotentialamountitcouldberequiredtopayonbehalfofitsofficersanddirectors.Historically,theCompanyhasnotmadeanysignificantindemnificationpaymentsundersuchagreementsandnoamounthasbeenaccruedintheaccompanyingconsolidatedfinancialstatementswithrespecttotheseindemnificationobligations.
IntellectualPropertyIndemnificationObligations
TheCompanyhasenteredintoagreementswithcustomersandsuppliersthatincludelimitedintellectualpropertyindemnificationobligationsthatarecustomaryintheindustry.TheseguaranteesgenerallyrequiretheCompanytocompensatetheotherpartyforcertaindamagesandcostsincurredasaresultofthirdpartyintellectualpropertyclaimsarisingfromthesetransactions.ThenatureoftheintellectualpropertyindemnificationobligationspreventstheCompanyfrommakingareasonableestimateofthemaximumpotentialamountitcouldberequiredtopaytoitscustomersandsuppliers.Historically,theCompanyhasnotmadeanysignificantindemnificationpaymentsundersuchagreementsandnoamounthasbeenaccruedintheaccompanyingconsolidatedfinancialstatementswithrespecttotheseindemnificationobligations.
ProductWarranty
TheCompanyestimatesprobableproductwarrantycostsatthetimerevenueisrecognized.TheCompanygenerallywarrantsitsproductsforaperiodof1to5years.TheCompanyusesestimatedrepairorreplacementcostsandusesstatisticalmodelingtoestimateproductreturnratesinordertodetermine
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SEAGATETECHNOLOGYPLC
NOTESTOCONSOLIDATEDFINANCIALSTATEMENTS—(Continued)
itswarrantyobligation.ChangesintheCompany'sproductwarrantyliabilityduringthefiscalyearsendedJuly1,2016,July3,2015andJune27,2014wereasfollows:
17.RelatedPartyTransactions
SamsungElectronicsCo.Ltd.("Samsung")InconnectionwiththeCompany'sacquisitionoftheSamsungHDDbusiness,SamsungbecameashareholderoftheCompanyandappointedoneofitsexecutivestotheCompany'sBoardofDirectors.OnOctober22,2013,SamsungfiledanamendmenttoitsSchedule13Dindicatingthatitholdslessthan5%oftheCompany'soutstandingshares.Dr.Seh-WoongJeongwasappointedtoourBoardofDirectorsbySamsungandjoinedourBoardofDirectorsonApril26,2012.HeretiredfromourBoardofDirectorsonOctober22,2014andceasedtobearelatedparty.TheCompanyrecordedrevenueof$216millionfromsalestoSamsungforfiscalyear2014.TheCompanymadepaymentstoSamsunginfiscalyears2014of$318million,relatedtopurchasesofcomponentsandservices.
MicrosoftCorporation("Microsoft")TheCompany'sChairmanandChiefExecutiveOfficeralsoservedontheboardofMicrosoftuntilMarch2014uponhisresignationandMicrosoftceasedtobearelatedparty.TheCompanyrecordedrevenueof$208millionfromsalestoMicrosoftforfiscalyears2014.TheCompanymadepaymentstoMicrosoftinfiscalyears2014of$1millionrelatedtopurchasesoflicensedsoftware.
18.SubsequentEvents
July2016RestructuringPlan
OnJuly11,2016,theCompanycommittedtoanadditionalrestructuringplan(the"July2016Plan")forcontinuedconsolidationofitsglobalfootprintacrossAsia,EMEAandtheAmericas.TheJuly2016Planincludedreducingworldwideheadcountbyapproximately6,500employees.TheJuly2016Plan,whichtheCompanyexpectstobelargelycompletedbytheendoffiscalyear2017,isexpectedtoresultintotalpretaxchargesofapproximately$164millioninfiscalyear2017.Thesechargesareexpectedtoconsistofcashexpendituresofapproximately$82millionofemployeeterminationcostsand$51millionofotherexitcosts,aswellasothernon-cashchargesofapproximately$31million.
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FiscalYearsEnded
(Inmillions) July1,2016
July3,2015
June27,2014
Balance,beginningofperiod $ 248 $ 273 $ 320Warrantiesissued 125 147 177Repairsandreplacements (152) (187) (228)Changesinliabilityforpre-existingwarranties,includingexpirations (17) 7 1Warrantyliabilityassumedfromacquisitions 2 8 3
Balance,endofperiod $ 206 $ 248 $ 273
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REPORTOFINDEPENDENTREGISTEREDPUBLICACCOUNTINGFIRM
TheBoardofDirectorsandShareholdersofSeagateTechnologypubliclimitedcompany
WehaveauditedtheaccompanyingconsolidatedbalancesheetsofSeagateTechnologypubliclimitedcompany(plc)asofJuly1,2016andJuly3,2015,andtherelatedconsolidatedstatementsofoperations,comprehensiveincome,shareholders'equityandcashflowsforeachofthethreeyearsintheperiodendedJuly1,2016.ThesefinancialstatementsaretheresponsibilityoftheCompany'smanagement.Ourresponsibilityistoexpressanopiniononthesefinancialstatementsbasedonouraudits.
WeconductedourauditsinaccordancewiththestandardsofthePublicCompanyAccountingOversightBoard(UnitedStates).Thosestandardsrequirethatweplanandperformtheaudittoobtainreasonableassuranceaboutwhetherthefinancialstatementsarefreeofmaterialmisstatement.Anauditincludesexamining,onatestbasis,evidencesupportingtheamountsanddisclosuresinthefinancialstatements.Anauditalsoincludesassessingtheaccountingprinciplesusedandsignificantestimatesmadebymanagement,aswellasevaluatingtheoverallfinancialstatementpresentation.Webelievethatourauditsprovideareasonablebasisforouropinion.
Inouropinion,thefinancialstatementsreferredtoabovepresentfairly,inallmaterialrespects,theconsolidatedfinancialpositionofSeagateTechnologyplcatJuly1,2016andJuly3,2015,andtheconsolidatedresultsofitsoperationsanditscashflowsforeachofthethreeyearsintheperiodendedJuly1,2016,inconformitywithU.S.generallyacceptedaccountingprinciples.
Wealsohaveaudited,inaccordancewiththestandardsofthePublicCompanyAccountingOversightBoard(UnitedStates),SeagateTechnologyplc'sinternalcontroloverfinancialreportingasofJuly1,2016,basedoncriteriaestablishedinInternalControl-IntegratedFrameworkissuedbytheCommitteeofSponsoringOrganizationsoftheTreadwayCommission(2013framework)andourreportdatedAugust5,2016expressedanunqualifiedopinionthereon.
SanJose,CaliforniaAugust5,2016
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/s/ERNST&YOUNGLLP
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REPORTOFINDEPENDENTREGISTEREDPUBLICACCOUNTINGFIRM
TheBoardofDirectorsandShareholdersofSeagateTechnologypubliclimitedcompany
WehaveauditedSeagateTechnologypubliclimitedcompany(plc)'sinternalcontroloverfinancialreportingasofJuly1,2016,basedoncriteriaestablishedinInternalControl—IntegratedFrameworkissuedbytheCommitteeofSponsoringOrganizationsoftheTreadwayCommission(2013framework)(theCOSOcriteria).SeagateTechnologyplc'smanagementisresponsibleformaintainingeffectiveinternalcontroloverfinancialreporting,andforitsassessmentoftheeffectivenessofinternalcontroloverfinancialreportingincludedintheaccompanyingManagement'sReportonInternalControloverFinancialReporting.OurresponsibilityistoexpressanopinionontheCompany'sinternalcontroloverfinancialreportingbasedonouraudit.
WeconductedourauditinaccordancewiththestandardsofthePublicCompanyAccountingOversightBoard(UnitedStates).Thosestandardsrequirethatweplanandperformtheaudittoobtainreasonableassuranceaboutwhethereffectiveinternalcontroloverfinancialreportingwasmaintainedinallmaterialrespects.Ourauditincludedobtaininganunderstandingofinternalcontroloverfinancialreporting,assessingtheriskthatamaterialweaknessexists,testingandevaluatingthedesignandoperatingeffectivenessofinternalcontrolbasedontheassessedrisk,andperformingsuchotherproceduresasweconsiderednecessaryinthecircumstances.Webelievethatourauditprovidesareasonablebasisforouropinion.
Acompany'sinternalcontroloverfinancialreportingisaprocessdesignedtoprovidereasonableassuranceregardingthereliabilityoffinancialreportingandthepreparationoffinancialstatementsforexternalpurposesinaccordancewithgenerallyacceptedaccountingprinciples.Acompany'sinternalcontroloverfinancialreportingincludesthosepoliciesandproceduresthat(1)pertaintothemaintenanceofrecordsthat,inreasonabledetail,accuratelyandfairlyreflectthetransactionsanddispositionsoftheassetsofthecompany;(2)providereasonableassurancethattransactionsarerecordedasnecessarytopermitpreparationoffinancialstatementsinaccordancewithgenerallyacceptedaccountingprinciples,andthatreceiptsandexpendituresofthecompanyarebeingmadeonlyinaccordancewithauthorizationsofmanagementanddirectorsofthecompany;and(3)providereasonableassuranceregardingpreventionortimelydetectionofunauthorizedacquisition,use,ordispositionofthecompany'sassetsthatcouldhaveamaterialeffectonthefinancialstatements.
Becauseofitsinherentlimitations,internalcontroloverfinancialreportingmaynotpreventordetectmisstatements.Also,projectionsofanyevaluationofeffectivenesstofutureperiodsaresubjecttotheriskthatcontrolsmaybecomeinadequatebecauseofchangesinconditions,orthatthedegreeofcompliancewiththepoliciesorproceduresmaydeteriorate.
Inouropinion,SeagateTechnologyplcmaintained,inallmaterialrespects,effectiveinternalcontroloverfinancialreportingasofJuly1,2016,basedontheCOSOcriteria.
Wealsohaveaudited,inaccordancewiththestandardsofthePublicCompanyAccountingOversightBoard(UnitedStates),theconsolidatedbalancesheetsofSeagateTechnologyplcasofJuly1,2016andJuly3,2015,andtherelatedconsolidatedstatementsofoperations,comprehensiveincome,shareholders'equityandcashflowsforeachofthethreeyearsintheperiodendedJuly1,2016andourreportdatedAugust5,2016expressedanunqualifiedopinionthereon.
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SUPPLEMENTARYFINANCIALDATA(UNAUDITED)
Forquarterlyfinancialdatasee"PartII,Item6.SelectedFinancialData."
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ITEM9.CHANGESINANDDISAGREEMENTSWITHACCOUNTANTSONACCOUNTINGANDFINANCIALDISCLOSURE
Notapplicable.
ITEM9A.CONTROLSANDPROCEDURES
ConclusionsRegardingDisclosureControlsandProcedures
Ourchiefexecutiveofficerandourchieffinancialofficerhaveconcluded,basedontheevaluationoftheeffectivenessofourdisclosurecontrolsandprocedures(asdefinedinRules13a-15(e)and15d-15(e)oftheSecuritiesExchangeActof1934,asamended)byourmanagement,withtheparticipationofourchiefexecutiveofficerandourchieffinancialofficer,thatourdisclosurecontrolsandprocedureswereeffectiveasofJuly1,2016.
Management'sReportonInternalControloverFinancialReporting
Ourmanagementisresponsibleforestablishingandmaintainingadequateinternalcontroloverfinancialreporting(asdefinedinRules13a-15(f)and15d-15(f)undertheSecuritiesExchangeActof1934,asamended).Underthesupervisionandwiththeparticipationofourmanagement,includingourchiefexecutiveofficerandchieffinancialofficer,weconductedanevaluationoftheeffectivenessofourinternalcontroloverfinancialreportingbasedontheframeworkinInternalControl-IntegratedFramework(2013)issuedbytheCommitteeofSponsoringOrganizationsoftheTreadwayCommission,orCOSO.
Basedonourevaluationunderthe2013frameworkinInternalControl—IntegratedFramework,ourmanagementhasconcludedthatourinternalcontroloverfinancialreportingwaseffectiveasofJuly1,2016.TheeffectivenessofourinternalcontroloverfinancialreportingasofJuly1,2016hasbeenauditedbyErnst&YoungLLP,theindependentregisteredpublicaccountingfirmthatauditedourfinancialstatementsincludedinthisForm10-K,asstatedintheirreportthatisincludedherein.
ChangesinInternalControloverFinancialReporting
Therewerenochangesinourinternalcontroloverfinancialreportingduringourfourthfiscalquarterthathavemateriallyaffected,orarereasonablylikelytomateriallyaffect,ourinternalcontroloverfinancialreporting.
LimitationsontheEffectivenessofControls
Ourmanagement,includingourchiefexecutiveofficerandchieffinancialofficer,doesnotexpectthatourdisclosurecontrolsandproceduresorourinternalcontrolswillpreventallerrorsandallfraud.Acontrolsystem,nomatterhowwellconceivedandoperated,canprovideonlyreasonable,notabsolute,assurancethattheobjectivesofthecontrolsystemaremet.Further,thedesignofacontrolsystemmustreflectthefactthatthereareresourceconstraints,andthebenefitsofcontrolsmustbeconsideredrelativetotheircosts.Ourdisclosurecontrolsandproceduresandourinternalcontrolshavebeendesignedtoprovidereasonableassuranceofachievingtheirobjectives.Becauseoftheinherentlimitationsinallcontrolsystems,noevaluationofcontrolscanprovideabsoluteassurancethatallcontrolissuesandinstancesoffraud,ifany,withinSeagatehavebeendetected.Anevaluationwasperformedunderthesupervisionandwiththeparticipationofourmanagement,includingourchiefexecutiveofficerandchieffinancialofficer,oftheeffectivenessofthedesignandoperationofourdisclosurecontrolsandproceduresasofJuly1,2016.Basedonthatevaluation,ourmanagement,includingourchiefexecutiveofficerandchieffinancialofficer,concludedthatourdisclosurecontrolsandprocedureswereeffectiveatthereasonableassurancelevel.
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PARTIII
ITEM10.DIRECTORS,EXECUTIVEOFFICERSANDCORPORATEGOVERNANCE
TheinformationregardingourdirectorsandcompliancewithSection16(a)oftheSecuritiesExchangeActof1934,asamended,setforthinthesectionsentitled"Proposal1—ElectionofDirectors,""CorporateGovernance"and"Section16(A)BeneficialOwnershipReportingCompliance,"inourProxyStatementtobefiledwiththeCommissionwithin120daysoftheendofourfiscalyearpursuanttoGeneralInstructionG(3)toForm10-Kareherebyincorporatedbyreferenceinthissection.Inaddition,theinformationsetforthinPartIofthisreportunder"Item1.Business—ExecutiveOfficers"isalsoincorporatedbyreferenceinthissection.
WehaveadoptedaCodeofEthicsthatappliestotheChiefExecutiveofficer,theChiefFinancialOfficer,andtheprincipalaccountingofficerorcontrollerorpersonsperformingsimilarfunctions.ThisCodeofEthicsispostedonourWebsite.TheInternetaddressforourWebsiteiswww.seagate.com,andtheCodeofEthicsmaybefoundfromourmainWebpagebyclickingfirston"Investors,"nexton"CorporateGovernance"andthenon"CodeofEthics."
WeintendtosatisfyanydisclosurerequirementsunderItem5.05ofForm8-Kregardinganamendmentto,orwaiverfrom,aprovisionofthisCodeofEthicsbypostingsuchinformationonourWebsite,attheInternetaddressandlocationspecifiedabove.
ITEM11.EXECUTIVECOMPENSATION
TheinformationregardingexecutivecompensationrequiredbythisItem11setforthinthesectionentitled"CompensationofNamedExecutiveOfficers"inourProxyStatementtobefiledwiththeCommissionwithin120daysoftheendofourfiscalyearpursuanttoGeneralInstructionG(3)toForm10-Kisherebyincorporatedbyreferenceinthissection.
ITEM12.SECURITYOWNERSHIPOFCERTAINBENEFICIALOWNERSANDMANAGEMENTANDRELATEDSTOCKHOLDERMATTERS
TheinformationregardingsecurityownershipbeneficialownersandmanagementandrelatedshareholdersandequitycompensationplansrequiredbythisItem12setforthinthesectionsentitled"SecurityOwnershipofCertainBeneficialOwnersandManagement"and"EquityCompensationPlanInformation,"respectively,inourProxyStatementtobefiledwiththeCommissionwithin120daysoftheendofourfiscalyearpursuanttoGeneralInstructionG(3)toForm10-Kisherebyincorporatedbyreferenceinthissection.
ITEM13.CERTAINRELATIONSHIPSANDRELATEDTRANSACTIONS,ANDDIRECTORINDEPENDENCE
Theinformationregardingcertainrelationships,relatedtransactionsanddirectorindependencerequiredbythisItem13setforthinthesectionentitled"CertainRelationshipsandRelatedTransactions"inourProxyStatementtobefiledwiththeCommissionwithin120daysoftheendofourfiscalyearpursuanttoGeneralInstructionG(3)toForm10-Kisherebyincorporatedbyreferenceinthissection.
ITEM14.PRINCIPALACCOUNTANTFEESANDSERVICES
TheinformationregardingprincipalaccountantfeesandservicesrequiredbythisItem14setforthinthesectionentitled"FeesoftheIndependentAuditors"inourProxyStatementtobefiledwiththeCommissionwithin120daysoftheendofourfiscalyearpursuanttoGeneralInstructionG(3)toForm10-Kisherebyincorporatedbyreferenceinthissection.
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PARTIV
ITEM15.EXHIBITSANDFINANCIALSTATEMENTSCHEDULES
(a) ThefollowingdocumentsarefiledaspartofthisReport:
1. FinancialStatements.ThefollowingConsolidatedFinancialStatementsofSeagateTechnologyplcandReportofIndependentRegisteredPublicAccountingFirmareincludedinItem8:
2. FinancialStatementSchedules.AllschedulesareomittedbecausetheyarenotapplicableortherequiredinformationisincludedintheFinancialStatementsorinthenotesthereto.
(b) Exhibits.TheinformationrequiredbythisItemissetforthontheExhibitIndex(followingtheSignaturessectionofthisreport)andisincluded,orincorporatedbyreference,inthisAnnualReportonForm10-K.
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PageNo. ConsolidatedBalanceSheets 63
ConsolidatedStatementsofOperations 64
ConsolidatedStatementsofComprehensiveIncome 65
ConsolidatedStatementsofCashFlows 66
ConsolidatedStatementsofShareholders'Equity 67
NotestoConsolidatedFinancialStatements 68
ReportsofIndependentRegisteredPublicAccountingFirm 114
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SIGNATURES
PursuanttotherequirementsofSection13or15(d)oftheSecuritiesExchangeActof1934,theregistranthasdulycausedthisreporttobesignedonitsbehalfbytheundersigned,thereuntodulyauthorized.
Date:August5,2016
POWEROFATTORNEY
KNOWALLPERSONSBYTHESEPRESENTS,thateachpersonwhosesignatureappearsbelowherebyconstitutesandappointsStephenJ.Luczo,DavidH.Morton,Jr.,andReganJ.MacPherson,andeachofthem,ashistrueandlawfulattorneys-in-factandagents,withpowertoactwithorwithouttheothersandwithfullpowerofsubstitutionandresubstitution,todoanyandallactsandthingsandtoexecuteanyandallinstrumentswhichsaidattorneysandagentsandeachofthemmaydeemnecessaryordesirabletoenabletheregistranttocomplywiththeU.S.SecuritiesExchangeActof1934,asamended,andanyrules,regulationsandrequirementsoftheU.S.SecuritiesandExchangeCommissionthereunderinconnectionwiththeregistrant'sAnnualReportonForm10-KforthefiscalyearendedJuly1,2016(the"AnnualReport"),includingspecifically,butwithoutlimitingthegeneralityoftheforegoing,powerandauthoritytosignthenameoftheregistrantandthenameoftheundersigned,individuallyandinhiscapacityasadirectororofficeroftheregistrant,totheAnnualReportasfiledwiththeU.S.SecuritiesandExchangeCommission,toanyandallamendmentsthereto,andtoanyandallinstrumentsordocumentsfiledaspartthereoforinconnectiontherewith;andeachoftheundersignedherebyratifiesandconfirmsallthatsaidattorneysandagentsandeachofthemshalldoorcausetobedonebyvirtuehereof.
PursuanttotherequirementsoftheSecuritiesExchangeActof1934,thisreporthasbeensignedbelowbythefollowingpersonsonbehalfoftheregistrantandinthecapacitiesandonthedatesindicated.
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SEAGATETECHNOLOGYPUBLICLIMITEDCOMPANY
/s/STEPHENJ.LUCZO
(StephenJ.Luczo,ChiefExecutiveOfficer,DirectorandChairmanoftheBoardofDirectors)
Signature Title Date
/s/STEPHENJ.LUCZO
(StephenJ.Luczo)
ChiefExecutiveOfficer,DirectorandChairmanoftheBoardofDirectors(PrincipalExecutiveOfficer)
August5,2016
/s/DAVIDH.MORTON,JR.
(DavidH.Morton,Jr.)
ExecutiveVicePresident,FinanceandChiefFinancialOfficer(PrincipleFinancialandAccountingOfficer)
August5,2016
/s/FRANKJ.BIONDI,JR.
(FrankJ.Biondi,Jr.)
Director August5,2016
/s/MICHAELR.CANNON
(MichaelR.Cannon)
Director August5,2016
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122
Signature Title Date
/s/MEI-WEICHENG
(Mei-WeiCheng)
Director August5,2016
/s/WILLIAMT.COLEMANIII
(WilliamT.ColemanIII)
Director August5,2016
/s/JAYL.GELDMACHER
(JayL.Geldmacher)
Director August5,2016
/s/DAMBISAMOYO
(Dr.DambisaMoyo)
Director August5,2016
/s/KRISTENM.ONKEN
(KristenM.Onken)
Director August5,2016
/s/C.S.PARK
(Dr.C.S.Park)
Director August5,2016
/s/STEPHANIETILENIUS
(StephanieTilenius)
Director August5,2016
/s/EDWARDJ.ZANDER
(EdwardJ.Zander)
Director August5,2016
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EXHIBITINDEX
123
IncorporatedbyReference ExhibitNo. ExhibitDescription Form
FileNo. Exhibit
FilingDate
FiledHerewith
2.1 SchemeofArrangementamongSeagateTechnology("Seagate-Cayman"),SeagateTechnologyplc("Seagate-Ireland")andtheSchemeShareholders(incorporatedbyreferencetoAnnexAtoSeagateTechnology'sDefinitiveProxyStatementonSchedule14AfiledonMarch5,2010)
DEF14A 001-31560
AnnexA 3/5/2010
3.1 MemorandumandArticlesofAssociationofSeagateTechnologyplc,asamendedandrestatedbySpecialResolutiondatedOctober30,2013
8-K 001-31560
3.10 11/1/2013
3.2 CertificateofIncorporationofSeagateTechnologyplc 10-K 001-31560
3.20 8/20/2010
4.1 SpecimenOrdinaryShareCertificate 10-K 001-31560
4.10 8/20/2010
4.2 IndenturedatedSeptember20,2006amongSeagateTechnology,SeagateTechnologyHDDHoldingsandU.S.BankNationalAssociation
8-K 001-31560
4.10 9/21/2006
4.3 FormsofGlobalNotefortheSeniorNotesdue2011andSeniorNotesdue2016ofSeagateTechnologyHDDHoldingsissuedpursuanttotheIndenture
8-K 001-31560
4.10 9/21/2006
4.4 FirstSupplementalIndenture,datedasofMarch1,2010,amongSeagateTechnologyHDDHoldings,SeagateHDDCayman,SeagateTechnologyandU.S.BankNationalAssociation,astrustee,amendingandsupplementingtheIndenture,datedasofSeptember20,2006,amongSeagateTechnologyHDDHoldings,SeagateTechnologyandU.S.BankNationalAssociation,astrustee
8-K 001-31560
10.20 3/3/2010
4.5 IndenturedatedasofMay13,2010,amongSeagateHDDCayman,asIssuer,SeagateTechnology,asGuarantor,andWellsFargoBank,NationalAssociation,asTrustee
8-K 001-31560
4.10 5/14/2010
4.6 RegistrationRightsAgreementdatedasofMay13,2010,amongSeagateHDDCayman,SeagateTechnologyandMorganStanley&Co.IncorporatedandBankofAmericaSecuritiesLLC
8-K 001-31560
4.30 5/14/2010
4.7 SupplementalIndenture,datedasofJuly3,2010,amongSeagateHDDCayman,asissuer,SeagateTechnology,asoriginalguarantor,SeagateTechnologyplc,assuccessorguarantor,andWellsFargoBank,NationalAssociation,astrustee,amendingandsupplementingtheIndenture,datedasofMay13,2010,amongSeagateHDDCayman,asissuer,SeagateTechnology,asguarantor,andWellsFargoBank,NationalAssociation,astrustee
8-K 001-31560
10.10 7/6/2010
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IncorporatedbyReference ExhibitNo. ExhibitDescription Form
FileNo. Exhibit
FilingDate
FiledHerewith
4.8 IndenturedatedasofMay18,2011,amongSeagateHDDCayman,asIssuer,SeagateTechnologyplc,asGuarantor,andWellsFargoBank,NationalAssociation,asTrustee
8-K 001-31560
4.10 5/18/2011
4.9 Formof7.000%SeniorNotedue2021 8-K 001-31560
4.10 5/18/2011
4.10 RegistrationRightsAgreementdatedasofMay18,2011,amongSeagateHDDCayman,SeagateTechnologyplcandMorganStanley&Co.Incorporated
8-K 001-31560
4.30 5/18/2011
4.11 IndenturedatedasofMay22,2013,amongSeagateHDDCayman,asIssuer,SeagateTechnologyplc,asGuarantor,andU.S.BankNationalAssociation,asTrustee
8-K 001-31560
4.10 5/22/2013
4.12 Formof4.75%SeniorNotedue2023 8-K 001-31560
4.10 5/22/2013
4.13 RegistrationRightsAgreementdatedasofMay22,2013,amongSeagateHDDCayman,SeagateTechnologyplcandMorganStanley&Co.LLC.
8-K 001-31560
4.30 5/22/2013
4.14 IndenturedatedasofNovember5,2013,amongSeagateHDDCayman,asIssuer,SeagateTechnologyplc,asGuarantor,andU.S.BankNationalAssociation,asTrustee
8-K 001-31560
4.10 11/5/2013
4.15 Formof3.75%SeniorNotedue2018 8-K 001-31560
4.10 11/5/2013
4.16 RegistrationRightsAgreementdatedasofNovember5,2013,amongSeagateHDDCayman,SeagateTechnologyplcandMorganStanley&Co.LLC.
8-K 001-31560
4.30 11/5/2013
4.17 IndenturedatedasofMay28,2014,amongSeagateHDDCayman,asIssuer,SeagateTechnologyplc,asGuarantor,andU.S.BankNationalAssociation,asTrustee
8-K 001-31560
4.10 5/28/2014
4.18 Formof4.75%SeniorNotedue2025 8-K 001-31560
4.10 5/28/2014
4.19 RegistrationRightsAgreementdatedasofMay28,2014,amongSeagateHDDCayman,SeagateTechnologyplcandMorganStanley&Co.LLC.
8-K 001-31560
4.30 5/28/2014
4.20 IndenturedatedasofDecember2,2014,amongSeagateHDDCayman,asissuer,theCompany,asguarantor,andU.S.BankNationalAssociation,astrustee.
8-K 001-31560
4.10 12/2/2014
4.21 Formof5.75%SeniorNotedue2034 8-K 001-31560
4.10 12/2/2014
4.22 RegistrationRightsAgreementdatedasofDecember2,2014,amongSeagateHDDCayman,theCompanyandMorganStanley&Co.LLC.
8-K 001-31560
4.30 12/2/2014
10.1+ AmendedSeagateTechnologyplc2001ShareOptionPlan 10-K 001-31560
10.10 8/20/2010
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IncorporatedbyReference ExhibitNo. ExhibitDescription Form
FileNo. Exhibit
FilingDate
FiledHerewith
10.2+ SeagateTechnologyplc2001ShareOptionPlanFormofNoticeofStockOptionGrantandOptionAgreement(includesCompensationRecoveryPolicy)
10-K 001-31560
10.30 8/20/2010
10.3+ AmendedSeagateTechnologyplc2004ShareCompensationPlan
10-K 001-31560
10.60 8/20/2010
10.4+ SeagateTechnology2004StockCompensationPlanFormofOptionAgreement(ForOutsideDirectors)
10-Q 001-31560
10.70 11/4/2009
10.5+ SeagateTechnologyplc2004ShareCompensationPlanFormofNoticeofStockOptionGrantandOptionAgreement(includesCompensationRecoveryPolicy)
10-K 001-31560
10.13 8/20/2010
10.6+ SeagateTechnologyplc2004ShareCompensationPlanFormofNoticeofPerformanceShareBonusGrantandAgreement(includesCompensationRecoveryPolicy)
10-K 001-31560
10.16 8/20/2010
10.7+ SeagateTechnologyplc2004ShareCompensationPlanFormofRestrictedShareUnitAgreement(includesCompensationRecoveryPolicy)
10-Q 001-31560
10.19 11/3/2010
10.8+ SeagateTechnologyplc2004ShareCompensationPlanFormofExecutivePerformanceUnitAgreement
10-Q 001-31560
10.56 10/27/2011
10.9+ AmendedandRestatedSeagateTechnologyplc2012EquityIncentivePlan
8-K 001-31560
10.10 10/24/2014
10.10+ 2012EquityIncentivePlanRestrictedShareUnitAgreement(outsidedirectors)
10-K 001-31560
10.29 8/8/2013
10.11+ SeagateTechnologyPublicLimitedCompany2012EquityIncentivePlanExecutivePerformanceUnitAgreement
10-K 001-31560
10.37 8/8/2013
10.12+ SeagateTechnologyPublicLimitedCompany2012EquityIncentivePlanRestrictedShareUnitAgreement
10-K 001-31560
10.38 8/8/2013
10.13+ SeagateTechnologyPublicLimitedCompany2012EquityIncentivePlanOptionAgreement
10-K 001-31560
10.39 8/8/2013
10.14+ SeagateTechnologyplcAmendedandRestatedEmployeeStockPurchasePlan
10-K 001-31560
10.37 8/8/2014
10.15+ DotHillSystemsCorp.2009EquityIncentivePlan,asamended,asassumedbySeagateTechnologyPLCbyDeedPollonOctober21,2015
10-Q 001-31560
10.10 1/29/2016
10.16+ DotHillSystemsCorp.2009EquityIncentivePlan,asamended
10-Q 001-13317
10.10 5/10/2012
10.17+ RestatedSeagateDeferredCompensationPlan 10-Q 001-31560
10.27 5/5/2010
10.18+ FirstAmendmenttoSeagateDeferredCompensationPlan 10-Q 001-31560
10.26 5/5/2010
10.19+ SecondAmendmenttoSeagateDeferredCompensationPlan 10-Q 001-31560
10.21 5/3/2011
TableofContents
126
IncorporatedbyReference ExhibitNo. ExhibitDescription Form
FileNo. Exhibit
FilingDate
FiledHerewith
10.20+ ThirdAmendmenttoSeagateDeferredCompensationPlan 10-Q/A 001-31560
10.56 1/31/2013
10.21+ FourthAmendmenttotheSeagateDeferredCompensationPlan
10-Q 001-31560
10.40 1/30/2015
10.22+ SeagateDeferredCompensationSub-Plan 10-Q 001-31560
10.28 5/5/2010
10.23+ 2015SeagateDeferredCompensationPlan 10-Q 001-31560
10.30 1/30/2015
10.24+ FirstAmendmenttothe2015SeagateDeferredCompensationPlan
10-Q 001-31560
10.10 10/30/2015
10.25+ SeagateTechnologyAmendedandRestatedExecutiveOfficerPerformanceBonusPlan
8-K 001-31560
10.10 11/1/2013
10.26+ FifthAmendedandRestatedSeagateTechnologyExecutiveSeveranceandChangeinControlPlan
10-K 001-31560
10.10 8/8/2014
10.27+ SummarydescriptionofSeagateTechnologyplc'sCompensationPolicyforNon-ManagementMembersoftheBoardofDirectorswithanEffectivedateofOctober30,2013
10-K 001-31560
10.46 8/7/2013
10.28+ OfferLetter,datedasofJanuary29,2009,byandbetweenSeagateTechnologyandStephenJ.Luczo
10-Q 001-31560
10.20 2/10/2009
10.29+ Offerletter,datedasofJuly30,2014,byandbetweenSeagateTechnologyandPhilipBrace
8-K 001-31560
10.10 7/22/2015
10.30+ MemoAgreementwithAlbertA."Rocky"PimenteldatedJanuary27,2016
10-Q 001-31560
10.20 1/29/2016
10.31(a) FormofRevisedIndemnificationAgreementbetweenSeagateTechnologyandthedirectororofficernamedtherein
10-Q 001-31560
10.4(b) 5/6/2009
10.31(b) Indemnity,SubrogationandContributionAgreement,datedasofJanuary18,2011,amongSeagateTechnologyPublicLimitedCompany,SeagateHDDCayman,asBorrower,theSubsidiarypartiestheretoandTheBankofNovaScotia,asAdministrativeAgents
8-K 001-31560
10.10 7/29/2010
10.32 SecondPriorityMortgageofSharesinSeagateTechnology,datedMarch1,2010,betweenSeagateTechnologyplc,asmortgagor,andWellsFargoBank,NationalAssociation,asmortgagee
8-K 001-31560
10.23 3/3/2010
10.33 DeedPollofAssumptionbySeagateTechnologyplc,datedJuly2,2010
8-K 001-31560
10.47 7/6/2010
10.34 CreditAgreement,datedasofJanuary18,2011,amongSeagateTechnologyPublicLimitedCompany,SeagateHDDCayman,asBorrower,thelendinginstitutionsthereto,theBankofNovaScotia,asadministrativeagent,MerrillLynchPierceFennerandSmithIncorporatedandBNPParibasasSyndicationagentsandWellsFargoBank,NationalAssociation,asDocumentationAgent
10-Q 001-31560
10.47 2/3/2011
10.35 FirstAmendment,datedAugust31,2011,totheCreditAgreement,datedasofJanuary18,2011
X
TableofContents
127
IncorporatedbyReference ExhibitNo. ExhibitDescription Form
FileNo. Exhibit
FilingDate
FiledHerewith
10.36 SecondAmendment,datedApril30,2013,totheCreditAgreement,datedasofJanuary18,2011
10-Q 001-31560
10.10 5/24/2013
10.37 ThirdAmendment,datedJanuary15,2015,totheCreditAgreement,datedasofJanuary18,2011
8-K 001-31560
10.10 1/16/2015
10.38 FourthAmendment,datedApril28,2016,totheCreditAgreement,datedasofJanuary18,2011
10-Q 001-31560
10.10 4/29/2016
10.39 U.S.GuaranteeAgreement,datedasofJanuary18,2011,amongSeagateTechnologyPublicLimitedCompany,SeagateHDDCayman,asBorrower,theGuarantorpartiestheretoandTheBankofNovaScotia,asAdministrativeAgent
10-Q 001-31560
10.48 2/2/2011
10.40 Supplementno.1datedFebruary7,2012,totheU.S.Guaranteeagreement,datedasofJanuary18,2011,amongSeagateTechnologyPublicLimitedCompany,SeagateHDDCayman,asBorrower,theGuarantorpartiestheretoandTheBankofNovaScotia,asAdministrativeAgent
10-K 001-31560
10.45 8/8/2012
10.41 Supplementno.2datedFebruary22,2012,totheU.S.Guaranteeagreement,datedasofJanuary18,2011,amongSeagateTechnologyPublicLimitedCompany,SeagateHDDCayman,asBorrower,theGuarantorpartiestheretoandTheBankofNovaScotia,asAdministrativeAgent
10-K 001-31560
10.48 8/8/2012
10.42 Supplementno.3datedMarch19,2012,totheU.S.Guaranteeagreement,datedasofJanuary18,2011,amongSeagateTechnologyPublicLimitedCompany,SeagateHDDCayman,asBorrower,theGuarantorpartiestheretoandTheBankofNovaScotia,asAdministrativeAgent
10-K 001-31560
10.50 8/8/2012
10.43 FirstAmendment,datedApril30,2013,totheU.S.GuaranteeAgreement,datedasofJanuary18,2011
10-Q 001-31560
10.20 5/2/2013
10.44 U.S.SecurityAgreement,datedasofJanuary18,2011,amongSeagateTechnologyPublicLimitedCompany,SeagateHDDCayman,asBorrower,theGuarantorpartiestheretoandTheBankofNovaScotia,asAdministrativeAgent
10-Q 001-31560
10.49 2/3/2011
10.45 U.S.PledgeAgreementDatedasofJanuary18,2011,amongSeagateTechnologyPublicLimitedCompany,SeagateHDDCayman,asBorrower,theSubsidiaryPledgorpartiestheretoandTheBankofNovaScotia,asAdministrativeAgent
10-Q 001-31560
10.52 2/3/2011
10.46 Indemnity,SubrogationandContributionAgreement,datedasofJanuary18,2011,amongSeagateTechnologyPublicLimitedCompany,SeagateHDDCayman,asBorrower,theSubsidiarypartiestheretoandTheBankofNovaScotia,asAdministrativeAgent
10-Q 001-31560
10.52 2/3/2011
TableofContents
128
IncorporatedbyReference ExhibitNo. ExhibitDescription Form
FileNo. Exhibit
FilingDate
FiledHerewith
10.47 SupplementNo.1,datedFebruary7,2012,totheIndemnity,SubrogationandContributionAgreement,datedasofJanuary18,2011,amongSeagateTechnologyPublicLimitedCompany,SeagateHDDCayman,asBorrower,TheSubsidiaryPartiestheretoandTheBankofNovaScotia,asAdministrativeAgent
10-K 001-31560
10.46 8/8/2012
10.48 SupplementNo.2,datedFebruary22,2012,totheIndemnity,SubrogationandContributionAgreement,datedasofJanuary18,2011,amongSeagateTechnologyPublicLimitedCompany,SeagateHDDCayman,asBorrower,TheSubsidiaryPartiestheretoandTheBankofNovaScotia,asAdministrativeAgent
10-K 001-31560
10.49 8/8/2012
10.49 SupplementNo.3,datedMarch192012,totheIndemnity,SubrogationandContributionAgreement,datedasofJanuary18,2011,amongSeagateTechnologyPublicLimitedCompany,SeagateHDDCayman,asBorrower,TheSubsidiaryPartiestheretoandTheBankofNovaScotia,asAdministrativeAgent
10-K 001-31560
10.51 8/8/2012
21.1 ListofSubsidiaries X
23.1 ConsentofIndependentRegisteredPublicAccountingFirm X
24.1 PowerofAttorney(seesignaturepagetothisannualreport) X
31.1 CertificationoftheChiefExecutiveOfficerpursuanttorules13a-14(a)and15d-14(a)undertheSecuritiesExchangeActof1934,asadoptedpursuanttoSection302oftheSarbanes-OxleyActof2002
X
31.2 CertificationoftheChiefFinancialOfficerpursuanttorules13a-14(a)and15d-14(a)undertheSecuritiesExchangeActof1934,asadoptedpursuanttoSection302oftheSarbanes-OxleyActof2002
X
32.1† CertificationoftheChiefExecutiveOfficerandChiefFinancialOfficerpursuanttoRule13a-14(b)and18U.S.C.Section1350,asadoptedpursuanttoSection906oftheSarbanes-OxleyActof2002
X
101.INS XBRLInstanceDocument. X
101.SCH XBRLTaxonomyExtensionSchemaDocument. X
101.CAL XBRLTaxonomyExtensionCalculationLinkbaseDocument. X
101.LAB XBRLTaxonomyExtensionLabelLinkbaseDocument. X
101.PRE XBRLTaxonomyExtensionPresentationLinkbaseDocument.
X
TableofContents
129
IncorporatedbyReference ExhibitNo. ExhibitDescription Form FileNo. Exhibit
FilingDate
FiledHerewith
101.DEF XBRLTaxonomyExtensionDefinitionLinkbaseDocument.
X
+ Managementcontractorcompensatoryplanorarrangement.
† ThecertificationsattachedasExhibit32.1thataccompanythisAnnualReportonForm10-K,arenotdeemedfiledwiththeSecuritiesandExchangeCommissionandarenottobeincorporatedbyreferenceintoanyfilingofSeagateTechnologyplcundertheSecuritiesActof1933,asamended,ortheSecuritiesExchangeActof1934,asamended,whethermadebeforeorafterthedateofthisForm10-K,irrespectiveofanygeneralincorporationlanguagecontainedinsuchfiling.
Exhibit 10.35
[EXECUTIONCOPY]
FIRSTAMENDMENTTOCREDITAGREEMENT
THISFIRSTAMENDMENTTOCREDITAGREEMENT,datedasofAugust31,2011(this“Amendment”),totheExistingCreditAgreement(as
definedbelow)isamongSEAGATETECHNOLOGYPUBLICLIMITEDCOMPANY,anIrishpubliclimitedcompany(“STX”),SEAGATEHDDCAYMAN,anexemptlimitedliabilitycompanyorganizedunderthelawsoftheCaymanIslands(the“Borrower”)andtheLenders(suchcapitalizedterm,andothertermsusedinthispreambleortherecitalstohavethemeaningsprovidedinSection1.2)partieshereto.
WITNESSETH:
WHEREAS,pursuanttotheCreditAgreement,datedasofJanuary18,2011(asamended,supplemented,amendedandrestatedorotherwisemodifiedpriortothedatehereof,the“ExistingCreditAgreement”),amongSTX,theBorrower,theLendersandTheBankofNovaScotiaastheAdministrativeAgent,theLendershaveagreedtomakeLoansandtheIssuingBankshaveagreedtoissueLettersofCredittotheBorrower;
WHEREAS,theBorrowerhasrequested,subjecttothetermsandconditionshereinaftersetforth,thattheLendersamendtheExistingCreditAgreementincertainrespectsasprovidedbelow;and
WHEREAS,theLendershaveagreedtosuchamendmentsonthetermsandconditionscontainedinthisAmendment.
NOW,THEREFORE,forgoodandvaluableconsideration,thereceiptandsufficiencyofwhichisherebyacknowledged,thepartiesheretoherebyagreeasfollows:
ARTICLEIDEFINITIONS
SECTION1.1.CertainDefinitions.Thefollowingterms(whetherornotunderscored)whenusedinthisAmendmentshallhavethefollowingmeanings
(suchmeaningstobeequallyapplicabletothesingularandpluralformthereof):
“Amendment”isdefinedinthepreamble.
“Borrower”isdefinedinthepreamble.
“ExistingCreditAgreement”isdefinedinthefirstrecital.“FirstAmendmentEffectiveDate”isdefinedinSection3.1.“STX”isdefinedinthepreamble.
SECTION1.2.ExistingCreditAgreementDefinedTerms.Unlessotherwisedefinedhereinorthecontextotherwiserequires,termsdefinedinthe
ExistingCreditAgreementandusedinthisAmendmentshallhavethemeaningsgiventothemintheExistingCreditAgreement.
ARTICLEII
AMENDMENTS
EffectiveontheFirstAmendmentEffectiveDate,theExistingCreditAgreementisherebyamendedinaccordancewiththetermsofthisArticle.
SECTION2.1.AmendmenttoArticleI.ArticleIoftheExistingCreditAgreementisherebyamendedinaccordancewithSection2.1.1.
SECTION2.1.1.Clause(b)ofthedefinitionof“Obligations”isherebyamendedinitisentiretytoreadasfollows:
“(b)unlessotherwiseagreedtoinwritingbytheapplicableLenderorAffiliateofaLenderpartythereto,thedueandpunctualpaymentofallobligationsoftheBorroweroranyotherLoanPartyundereachSwapAgreement(itbeingunderstoodthat,forpurposesofthisclause(b),theterm“SwapAgreement”shallnotincludePlatinumLeasesorSwapAgreementspermittedunderclause(c)(i)(B)orclause(c)(ii)ofSection6.06)that(i)isineffectontheEffectiveDatewithacounterpartythatisaLender(oranAffiliateofaLender)asoftheEffectiveDateor(ii)isenteredintoaftertheEffectiveDatewithanycounterpartythatisaLender(oranAffiliateofaLender)atthetimesuchSwapAgreementisenteredinto”
SECTION2.2.AmendmenttoArticleVI.ArticleVIoftheExistingCreditAgreementisherebyamendedinaccordancewithSection2.2.1.
SECTION2.2.1.Section6.06oftheExistingCreditAgreementisherebyamendedinitsentiretytoreadasfollows:
SECTION6.06SwapAgreements.EachofSTXandtheBorrowerwillnot,andwillnotpermitanyofitssubsidiariesto,enterintoanySwapAgreement,except(a)SwapAgreementsenteredintotohedgeormitigateriskstowhichSTX,theBorroweroranySubsidiaryhasactualexposure,(otherthanthoseinrespectofEquityInterestsofSTX,theBorroweroranySubsidiary,whichshallbegovernedbyclause(c)ofthisSection),(b)SwapAgreementsenteredintoinordertoeffectivelycap,collarorexchangeinterestrates(fromfixedtofloatingrates,fromonefloatingratetoanotherfloatingrateorotherwise)withrespecttoanyinterest-bearingliabilityorinvestmentofSTX,theBorroweroranySubsidiary,or(c)(i)SwapAgreementsenteredintobySTX,theBorroweroranySubsidiary,andpayments(ineithercashorEquityInterestsasapplicable)requiredthereunder,(A)inrespectofEquityInterestsinSTXprovidingforpaymentstocurrentorformerdirectors,officersoremployeesofSTX,theBorrowerandanySubsidiaryortheirheirsorestatesand(B)inrespectofEquityInterestsinSTX,theBorroweroranySubsidiaryinconnectionwithanyredemptionorrepurchasebySTXofitsEquityInterests,and(ii)totheextentnotpermittedunderclause(c)(i),anyotherSwapAgreementsenteredintobySTX,theBorroweroranySubsidiary,andpayments(in
eithercashorEquityInterestsasapplicable)requiredthereunderinrespectofEquityInterestsinSTX;provided,thatRestrictedPaymentsrequiredbytheSwapAgreementsenteredintoinrelianceonthisclause(c)shallonlybemadeinthesamecircumstancesunderwhich,andintheamountsthat,STX,theBorrowerandtheSubsidiariesarethenpermittedtomakeRestrictedPaymentspursuanttoSection6.07,andsuchRestrictedPaymentsmadeduringanyfiscalyearshallbedeemedtoreducetheamountofRestrictedPaymentsavailableduringsuchfiscalyearunderSection6.07.
ARTICLEIII
CONDITIONSTOEFFECTIVENESS
SECTION3.1.ThisAmendmentshallbecomeeffectiveuponthedate(the“FirstAmendmentEffectiveDate”)wheneachofthefollowingconditionssetforthinthisArticleshallhavebeensatisfied.
SECTION3.1.1.ExecutionofCounterparts.TheAdministrativeAgentshallhavereceivedcopiesofthisAmendment,dulyexecutedanddeliveredbyanauthorizedofficerorrepresentativeofSTXandoftheBorrowerandonbehalfoftheRequiredLenders.
SECTION3.1.2.FeesandExpenses.TheAdministrativeAgentshallhavereceivedallofitsreasonableanddocumentedfeesandout-of-pocketexpensesincurredinconnectionwiththenegotiation,preparation,executionanddeliveryofthisAmendment,including(totheextentinvoicedinadvance)reasonablefeesanddisbursementsofOrrick,Herrington&SutcliffeLLP,counseltotheAdministrativeAgent.
ARTICLEIVMISCELLANEOUSPROVISIONS
SECTION4.1.RepresentationsandWarranties.ToinducetheLenderstoenterintothisAmendmentSTXandtheBorrowerrepresentandwarranttothe
AdministrativeAgentandtheLendersthatasoftheFirstAmendmentEffectiveDate:
(a)TherepresentationsandwarrantiesofeachLoanPartysetforthintheLoanDocumentstowhichitisapartyaretrueandcorrectinallmaterialrespectsonandasoftheFirstAmendmentEffectiveDate,excepttotheextentsuchrepresentationsandwarrantiesexpresslyrelatetoanearlierdate(inwhichcasesuchrepresentationsandwarrantiesweretrueandcorrectinallmaterialrespectsasofsuchearlierdate).
(b)AsoftheFirstAmendmentEffectiveDate,bothbeforeandaftergivingeffecttothisAmendment,noDefaulthasoccurredandis
continuing.
SECTION4.2.EffectofAmendment.Thepartiesheretoagreeasfollows:
(a)ThisAmendmentshallnotconstituteanamendmentorwaiveroforconsenttoanyprovisionoftheExistingCreditAgreementoranyotherLoanDocumentnotexpresslyreferredtohereinandshallnotbeconstruedasanamendment,waiverorconsenttoanyactiononthepartofaBorrowerthatwouldrequireanamendment,waiverorconsentofthe
AdministrativeAgentortheLendersunderanyoftheLoanDocumentsexceptasexpresslystatedherein.Exceptasexpresslyamendedhereby,theprovisionsoftheExistingCreditAgreementandtheLoanDocumentsshallremainunchangedandshallcontinuetobe,andshallremain,infullforceandeffectinaccordancewiththeirrespectiveterms.
(b)OnandaftertheFirstAmendmentEffectiveDate,eachreferenceintheExistingCreditAgreementto“thisAgreement,”“hereunder,”
“hereof,”“herein,”orwordsoflikeimport,andeachreferencetotheExistingCreditAgreementinanyotherLoanDocumentshallbedeemedareferencetotheExistingCreditAgreementasamendedhereby.ThisAmendment,executedpursuanttotheExistingCreditAgreement,shallconstitutea“LoanDocument”forallpurposesoftheExistingCreditAgreementandtheotherLoanDocumentsandshallbeconstrued,administeredandappliedinaccordancewithallofthetermsandprovisionsoftheCreditAgreement.
SECTION4.3.FeesandExpenses.TheBorroweragreestoreimbursetheAdministrativeAgentforitsreasonableanddocumentedout-of-pocket
expensesinconnectionwiththisAmendment,includingthereasonablefees,chargesanddisbursementsofcounselfortheAdministrativeAgent.
SECTION4.4.SuccessorsandAssigns.ThisAmendmentshallbebindinguponandinuretothebenefitofthepartiesheretoandtheirrespectivesuccessorsandassigns.
SECTION4.5.Headings.TheheadingsofthisAmendmentareforpurposesofreferenceonlyandshallnotlimitorotherwiseaffectthemeaninghereof.
SECTION4.6.Counterparts.ThisAmendmentmaybeexecutedbyoneormoreofthepartiestothisAmendmentonanynumberofseparatecounterparts(includingbyfacsimileorelectroniccopy),eachofwhichwhensoexecutedanddeliveredshallbedeemedanoriginalandallofsaidcounterpartstakentogethershallbedeemedtoconstituteoneandthesameinstrument.
SECTION4.7.GOVERNINGLAW.THISAMENDMENTSHALLBEGOVERNEDBY,ANDCONSTRUEDINACCORDANCEWITH,THELAWSOFTHESTATEOFNEWYORK.
INWITNESSWHEREOF,thepartiesheretohavecausedthisAmendmenttobedulyexecutedanddeliveredbytheirrespectiveproperandduly
authorizedofficersasofthedayandyearfirstabovewritten.
SEAGATETECHNOLOGYPUBLICLIMITEDCOMPANY
By: /s/[illegible]
Title:
SEAGATEHDDCAYMAN
By: /s/[illegible]
Title:
BNPParibas
By: /s/MathewHarvey
Name:MathewHarvey
Title:ManagingDirector
BNPParibas
By: /s/FionaBuckley
Name:FionaBuckley
Title:VicePresident
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Exhibit21.1
SeagateTechnologyPublicLimitedCompanySubsidiariesasofJuly1,2016
SeagateTechnologyPublicLimitedCompany IrelandSeagateTechnology CaymanSeagateTechnology(DublinBranch) IrelandSeagateHDDCayman CaymanSeagateTechnology(US)Holdings,Inc. DelawareEVault,Inc. DelawareEVaultCanadaInc. CanadaEVault(EMEA)B.V. NetherlandsEVaultUKLimited UnitedKingdomEVaultGmbH GermanyEVaultSolutionsPte.Ltd. SingaporeSeagateSolutionsFranceS.A.S. France
DotHillSystemsCorp. DelawareChaparralNetworkStorage,Inc. DelawareDotHillSystemsJapanLtd. JapanDotHillSingaporePte.Ltd. SingaporeDotHillGermanyGmbH GermanyDotHillSystemsEuropeLtd. UnitedKingdomDotHillSystemsHungaryTradeLtd. HungaryDotHillSystemServices(Foshan)Limited ChinaDotHillSystemsTianjinLtd. ChinaDotHillSystemsIsraelLtd. IsraelCloverleafCommunications,Inc. DelawareDotHillIsraelLtd. Israel
SeagateTechnologyAB SwedenSeagateTechnologyAustraliaPty.Limited AustraliaSeagateTechnologyGmbH GermanySeagateTechnology(HongKong)Limited HongKongSeagateTechnologySAS FranceSeagateTechnologyTaiwanLtd. TaiwanSeagateUSLLC DelawareQuintaCorporation CaliforniaSeagateTechnologyLLC DelawareSeagateTechnologyCanadaInc. CanadaSeagateFederal,Inc. DelawareLyveMinds,Inc. DelawareLaCie,Ltd. OregonLaCieAustraliaPtyLtd AustraliaLaCiePeripherals,Inc. Canada
SeagateSystems(US)HoldingsInc. DelawareSeagateSystems(US)Inc. California
SeagateTechnologyInternational CaymanSeagateTechnologyInternational(SingaporeBranch) SingaporeMaxtorGlobalLtd. BermudaMaxtorLuxembourgS.àr.l. LuxembourgMaxtorPeripherals(S)PteLtd SingaporeMaxtorInternationalS.àr.l. Switzerland
SeagateMemoryProductsInternational CaymanSeagateInternational(Johor)Sdn.Bhd. MalaysiaSeagateTechnologyChinaHoldingCompany CaymanSeagateTechnologyManufacturing(HongKong)Limited HongKongSeagateTechnology(Suzhou)Co.,Ltd. China
SeagateTechnologyAsiaHoldings CaymanSeagateTechnologyMedia(Ireland) CaymanPenangSeagateIndustries(M)Sdn.Bhd. Malaysia
SeagateTechnology(Thailand)Limited ThailandSeagateTechnology(Malaysia)HoldingsCompany CaymanLyveMinds,LLC CaymanSeagateTechnologyHDD(India)PrivateLimited IndiaSeagateTechnologyHDD(India)PrivateLimited(PuneBranch) IndiaSeagateTechnologyHDD(India)PrivateLimited(BangaloreBranch) India
SeagateTechnology(Ireland) CaymanSeagateTechnology(Ireland)(SpringtownBranch) UnitedKingdom
SeagateBrasilComércioeRepresentaçãodeProdutosdeInformáticaLtda. BrazilSeagateBrasilComércioeRepresentaçãodeProdutosdeInformáticaLtda.(SaoPauloBranch) BrazilSeagateTechnologyUKLtd. UnitedKingdomSeagateTechnologyUKLtd.(DublinBranch) IrelandSeagateTechnologyUKLtd.(MoscowBranch) RussiaSeagateTechnologyMEADMCC Dubai
SeagateSystems(Bermuda)Limited BermudaSeagateSystems(Malaysia)Sdn.Bhd. MalaysiaSeagateSystems(UK)Limited UnitedKingdomSeagateSystems(UK)Limited(SingaporeBranch) SingaporeSeagateSystems(UK)Limited(ThailandBranch) ThailandSeagateSystems(Havant)Limited UnitedKingdomSeagateSystems(Philippines),Inc. PhilippinesSeagateSystems(México)S.A.deC.V. Mexico
SeagateSystems(Canada)Limited CanadaXyratexTechnology(Wuxi)Co.Ltd. ChinaXyratexTechnology(Wuxi)Co.Ltd.(ShanghaiBranch) ChinaXyratexTechnology(Wuxi)Co.Ltd.(SuzhouBranch) China
SeagateSystems(Singapore)Pte.Limited SingaporeSeagateBusinessCentre(UK)Ltd. UnitedKingdomSeagateBusinessCentre(US)LLC DelawareSeagateBusinessCentre(Singapore)Pte.Ltd. SingaporeSeagateBusinessCentreGmbH GermanySeagateKoreaLtd. KoreaSeagateKoreaLtd.(SeoulBranch) Korea
SeagateSingaporeInternationalHeadquartersPte.Ltd. SingaporeSeagateSingaporeInternationalHeadquartersPte.Ltd.(NetherlandsBranch) NetherlandsSeagateTechnologyInternational(Wuxi)CompanyLimited ChinaSeagateTechnology(Netherlands)B.V. NetherlandsSeagateTechnologyRepublicIrelandLimited IrelandNipponSeagateInc. Japan
SeagateTechnologyServices(Shanghai)Co.,Ltd. ChinaSeagateTechnologyServices(Shanghai)Co.,Ltd.(BeijingBranch) ChinaSeagateTechnologyServices(Shanghai)Co.,Ltd.(ShenzhenBranch) ChinaSeagateTechnologyServices(Shanghai)Co.,Ltd.(DongguanBranch) ChinaSeagateTechnologyServices(Shanghai)Co.,Ltd.(ChengduBranch) ChinaSeagateTechnologyServices(Shanghai)Co.,Ltd.(PudongBranch) China
LaCieGroupS.A.S. FranceLaCieSAS FranceLaCieLtd UnitedKingdomLaCieElectroniqueD2,S.A. SpainLaCieSPRL BelgiumLaCieS.r.l. ItalyLaCieAB SwedenLaCieChinaPte.Ltd. SingaporeLaCieGmbH GermanyLaCieAG SwitzerlandLaCieAsiaLimited HongKong
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Exhibit23.1
ConsentofIndependentRegisteredPublicAccountingFirm
WeconsenttotheincorporationbyreferenceintheRegistrationStatements(FormS-3No.333-186364andFormS-8Nos.333-207313,333-199781,333-184704,333-177609,333-162958,333-139433,333-132420,333-128654,and333-101848)ofSeagateTechnologypubliclimitedcompany(plc)andintherelatedProspectuses,asapplicable,ofourreportsdatedAugust5,2016,withrespecttotheconsolidatedfinancialstatementsofSeagateTechnologyplc,andtheeffectivenessofinternalcontroloverfinancialreportingofSeagateTechnologyplc,includedinthisAnnualReport(Form10-K)fortheyearendedJuly1,2016.
SanJose,CaliforniaAugust5,2016
/s/ERNST&YOUNGLLP
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Exhibit31.1
CERTIFICATION
I,StephenJ.Luczo,certifythat:
1. IhavereviewedthisannualreportonForm10-KofSeagateTechnologyplc;
2. Basedonmyknowledge,thisreportdoesnotcontainanyuntruestatementofamaterialfactoromittostateamaterialfactnecessarytomakethestatementsmade,inlightofthecircumstancesunderwhichsuchstatementsweremade,notmisleadingwithrespecttotheperiodcoveredbythisreport;
3. Basedonmyknowledge,thefinancialstatements,andotherfinancialinformationincludedinthisreport,fairlypresentinallmaterialrespectsthefinancialcondition,resultsofoperationsandcashflowsoftheregistrantasof,andfor,theperiodspresentedinthisreport;
4. Theregistrant'sothercertifyingofficerandIareresponsibleforestablishingandmaintainingdisclosurecontrolsandprocedures(asdefinedinExchangeActRules13a-15(e)and15d-15(e))andinternalcontroloverfinancialreporting(asdefinedinExchangeActRules13a-15(f)and15d-15(f))fortheregistrantandhave:
(a) designedsuchdisclosurecontrolsandprocedures,orcausedsuchdisclosurecontrolsandprocedurestobedesignedunderoursupervision,toensurethatmaterialinformationrelatingtotheregistrant,includingitsconsolidatedsubsidiaries,ismadeknowntousbyotherswithinthoseentities,particularlyduringtheperiodinwhichthisreportisbeingprepared;
(b) designedsuchinternalcontroloverfinancialreporting,orcausedsuchinternalcontroloverfinancialreportingtobedesignedunderoursupervision,toprovidereasonableassuranceregardingthereliabilityoffinancialreportingandthepreparationoffinancialstatementsforexternalpurposesinaccordancewithgenerallyacceptedaccountingprinciples;
(c) evaluatedtheeffectivenessoftheregistrant'sdisclosurecontrolsandproceduresandpresentedinthisreportourconclusionsabouttheeffectivenessofthedisclosurecontrolsandprocedures,asoftheendoftheperiodcoveredbythisreportbasedonsuchevaluation;and
(d) disclosedinthisreportanychangeintheregistrant'sinternalcontroloverfinancialreportingthatoccurredduringtheregistrant'smostrecentfiscalquarter(theregistrant'sfourthfiscalquarterinthecaseofanannualreport)thathasmateriallyaffected,orisreasonablylikelytomateriallyaffect,theregistrant'sinternalcontroloverfinancialreporting;and
5. Theregistrant'sothercertifyingofficerandIhavedisclosed,basedonourmostrecentevaluationofinternalcontroloverfinancialreporting,totheregistrant'sauditorsandtheauditcommitteeoftheregistrant'sboardofdirectors(orpersonsperformingtheequivalentfunctions):
(a) allsignificantdeficienciesandmaterialweaknessesinthedesignoroperationofinternalcontroloverfinancialreportingwhicharereasonablylikelytoadverselyaffecttheregistrant'sabilitytorecord,process,summarizeandreportfinancialinformation;and
(b) anyfraud,whetherornotmaterial,thatinvolvesmanagementorotheremployeeswhohaveasignificantroleintheregistrant'sinternalcontroloverfinancialreporting.
August5,2016 /s/STEPHENJ.LUCZO
Name: StephenJ.Luczo Title: ChiefExecutiveOfficer
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Exhibit31.2
CERTIFICATION
I,DavidH.Morton,Jr.,certifythat:
1. IhavereviewedthisannualreportonForm10-KofSeagateTechnologyplc;
2. Basedonmyknowledge,thisreportdoesnotcontainanyuntruestatementofamaterialfactoromittostateamaterialfactnecessarytomakethestatementsmade,inlightofthecircumstancesunderwhichsuchstatementsweremade,notmisleadingwithrespecttotheperiodcoveredbythisreport;
3. Basedonmyknowledge,thefinancialstatements,andotherfinancialinformationincludedinthisreport,fairlypresentinallmaterialrespectsthefinancialcondition,resultsofoperationsandcashflowsoftheregistrantasof,andfor,theperiodspresentedinthisreport;
4. Theregistrant'sothercertifyingofficerandIareresponsibleforestablishingandmaintainingdisclosurecontrolsandprocedures(asdefinedinExchangeActRules13a-15(e)and15d-15(e))andinternalcontroloverfinancialreporting(asdefinedinExchangeActRules13a-15(f)and15d-15(f))fortheregistrantandhave:
(a) designedsuchdisclosurecontrolsandprocedures,orcausedsuchdisclosurecontrolsandprocedurestobedesignedunderoursupervision,toensurethatmaterialinformationrelatingtotheregistrant,includingitsconsolidatedsubsidiaries,ismadeknowntousbyotherswithinthoseentities,particularlyduringtheperiodinwhichthisreportisbeingprepared;
(b) designedsuchinternalcontroloverfinancialreporting,orcausedsuchinternalcontroloverfinancialreportingtobedesignedunderoursupervision,toprovidereasonableassuranceregardingthereliabilityoffinancialreportingandthepreparationoffinancialstatementsforexternalpurposesinaccordancewithgenerallyacceptedaccountingprinciples;
(c) evaluatedtheeffectivenessoftheregistrant'sdisclosurecontrolsandproceduresandpresentedinthisreportourconclusionsabouttheeffectivenessofthedisclosurecontrolsandprocedures,asoftheendoftheperiodcoveredbythisreportbasedonsuchevaluation;and
(d) disclosedinthisreportanychangeintheregistrant'sinternalcontroloverfinancialreportingthatoccurredduringtheregistrant'smostrecentfiscalquarter(theregistrant'sfourthfiscalquarterinthecaseofanannualreport)thathasmateriallyaffected,orisreasonablylikelytomateriallyaffect,theregistrant'sinternalcontroloverfinancialreporting;and
5. Theregistrant'sothercertifyingofficerandIhavedisclosed,basedonourmostrecentevaluationofinternalcontroloverfinancialreporting,totheregistrant'sauditorsandtheauditcommitteeoftheregistrant'sboardofdirectors(orpersonsperformingtheequivalentfunctions):
(a) allsignificantdeficienciesandmaterialweaknessesinthedesignoroperationofinternalcontroloverfinancialreportingwhicharereasonablylikelytoadverselyaffecttheregistrant'sabilitytorecord,process,summarizeandreportfinancialinformation;and
(b) anyfraud,whetherornotmaterial,thatinvolvesmanagementorotheremployeeswhohaveasignificantroleintheregistrant'sinternalcontroloverfinancialreporting.
August5,2016 /s/DAVIDH.MORTON,JR.
Name: DavidH.Morton,Jr. Title: ExecutiveVicePresident,FinanceandChiefFinancial
Officer
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Exhibit32.1
CERTIFICATIONPURSUANTTO18U.S.C.SECTION1350,
ASADOPTEDPURSUANTTOSECTION906OFTHESARBANES-OXLEYACTOF2002
Thiscertificationisnottobedeemed"filed"forpurposesofSection18oftheSecuritiesExchangeActof1934,asamended,anddoesnotconstituteapartoftheAnnualReportofSeagateTechnologyplc(the"Company")onForm10-KforthefiscalyearendedJuly1,2016,asfiledwiththeSecuritiesandExchangeCommissiononthedatehereof(the"Report").
InconnectionwiththeReportwe,StephenJ.Luczo,ChiefExecutiveOfficeroftheCompany,andDavidH.Morton,Jr.,ChiefFinancialOfficeroftheCompany,certify,pursuantto18U.S.C.§1350,asadoptedpursuantto§906oftheSarbanes-OxleyActof2002,that:
(1)TheReportfullycomplieswiththerequirementsofSection13(a)or15(d)oftheSecuritiesExchangeActof1934;and
(2)TheinformationcontainedintheReportfairlypresents,inallmaterialrespects,thefinancialconditionandresultsofoperationsoftheCompany.
Date:August5,2016 /s/STEPHENJ.LUCZO
StephenJ.LuczoChiefExecutiveOfficer
Date:August5,2016 /s/DAVIDH.MORTON,JR.
DavidH.Morton,Jr.ExecutiveVicePresident,FinanceandChiefFinancialOfficer