Form 10-Q
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q

 

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

For the quarterly period ended April 3, 2009

 

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

For the transition period from:                      to                     

Commission File Number 001-31560

SEAGATE TECHNOLOGY

(Exact name of registrant as specified in its charter)

 

Cayman Islands   98-0355609

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification Number)

P.O. Box 309, Ugland House

Grand Cayman KY1-1104, Cayman Islands

(Address of Principal Executive Offices)

Telephone: (345) 949-8066

(Registrant’s Telephone Number, Including Area Code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes  ¨    No  ¨

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

 

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes  ¨    No  x

As of April 28, 2009, 491,451,496 shares of the registrant’s common shares, par value $0.00001 per share, were issued and outstanding.

 

 

 


Table of Contents

INDEX

SEAGATE TECHNOLOGY

 

          PAGE NO.

PART I

  

FINANCIAL INFORMATION

  

Item 1.

  

Financial Statements

  
  

Condensed Consolidated Balance Sheets April 3, 2009 and June 27, 2008 (Unaudited)

   3
  

Condensed Consolidated Statements of Operations Three and Nine Months ended April 3, 2009 and March 28, 2008 (Unaudited)

   4
  

Condensed Consolidated Statements of Cash Flows Nine Months ended April 3, 2009 and March 28, 2008 (Unaudited)

   5
  

Condensed Consolidated Statement of Shareholders’ Equity Nine Months ended April 3, 2009 (Unaudited)

   6
  

Notes to Condensed Consolidated Financial Statements (Unaudited)

   7

Item 2.

  

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

   57

Item 3.

  

Quantitative and Qualitative Disclosures About Market Risk

   79

Item 4.

  

Controls and Procedures

   83

PART II

  

OTHER INFORMATION

  

Item 1.

  

Legal Proceedings

   84

Item 1A.

  

Risk Factors

   84

Item 2.

  

Unregistered Sales of Equity Securities and Use of Proceeds

   103

Item 3.

  

Defaults Upon Senior Securities

   103

Item 4.

  

Submission of Matters to a Vote of Securityholders

   103

Item 5.

  

Other Information

   103

Item 6.

  

Exhibits

   105
  

SIGNATURES

   110

 

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PART I

FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS

SEAGATE TECHNOLOGY

CONDENSED CONSOLIDATED BALANCE SHEETS

(In millions)

(Unaudited)

 

     April 3,
2009
    June 27,
2008 (a)
 
ASSETS     

Current assets:

    

Cash and cash equivalents

   $ 1,352     $ 990  

Short-term investments

     129       151  

Accounts receivable, net

     872       1,410  

Inventories

     577       945  

Deferred income taxes

     150       274  

Other current assets

     464       502  
                

Total Current Assets

     3,544       4,272  

Property, equipment and leasehold improvements, net

     2,355       2,464  

Goodwill

     31       2,352  

Other intangible assets, net

     62       111  

Deferred income taxes

     453       616  

Other assets, net

     181       305  
                

Total Assets

   $ 6,626     $ 10,120  
                
LIABILITIES AND SHAREHOLDERS’ EQUITY     

Current liabilities:

    

Short-term borrowings

   $ 350     $ —    

Accounts payable

     1,389       1,652  

Accrued employee compensation

     117       440  

Accrued warranty

     216       226  

Accrued expenses

     448       599  

Accrued income taxes

     9       10  

Current portion of long-term debt

     320       360  
                

Total Current Liabilities

     2,849       3,287  

Long-term accrued warranty

     230       219  

Long-term accrued income taxes

     167       210  

Other non-current liabilities

     116       148  

Long-term debt, less current portion

     1,680       1,670  
                

Total Liabilities

     5,042       5,534  
                

Contingencies (See Note 11)

    

Shareholders’ equity:

    

Common shares and additional paid-in capital

     3,628       3,501  

Accumulated other comprehensive income (loss)

     (8 )     (16 )

Retained earnings (accumulated deficit)

     (2,036 )     1,101  
                

Total Shareholders’ Equity

     1,584       4,586  
                

Total Liabilities and Shareholders’ Equity

   $ 6,626     $ 10,120  
                

 

(a) The information in this column was derived from the Company’s audited Consolidated Balance Sheet as of June 27, 2008.

See notes to Condensed Consolidated Financial Statements.

 

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SEAGATE TECHNOLOGY

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In millions, except per share data)

(Unaudited)

 

     For the Three Months Ended     For the Nine Months Ended  
     April 3,
2009
    March 28,
2008
    April 3,
2009
    March 28,
2008
 

Revenue

   $ 2,150     $ 3,104     $ 7,452     $ 9,809  

Cost of revenue

     1,993       2,288       6,448       7,295  

Product development

     243       254       738       758  

Marketing and administrative

     134       164       424       484  

Amortization of intangibles

     13       15       41       41  

Restructuring and other, net

     25       20       126       52  

Impairment of goodwill and other long-lived assets

     —         —         2,290       —    
                                

Total operating expenses

     2,408       2,741       10,067       8,630  
                                

Income (loss) from operations

     (258 )     363       (2,615 )     1,179  

Interest income

     3       16       15       51  

Interest expense

     (35 )     (30 )     (95 )     (96 )

Other, net

     1       —         (26 )     13  
                                

Other income (expense), net

     (31 )     (14 )     (106 )     (32 )
                                

Income (loss) before income taxes

     (289 )     349       (2,721 )     1,147  

Provision for (benefit from)

income taxes

     (16 )     5       284       45  
                                

Net income (loss)

   $ (273 )   $ 344     $ (3,005 )   $ 1,102  
                                

Net income (loss) per share:

        

Basic

   $ (0.56 )   $ 0.68     $ (6.17 )   $ 2.11  

Diluted

     (0.56 )     0.65       (6.17 )     2.02  

Number of shares used in per share calculations:

        

Basic

     489       507       487       522  

Diluted

     489       530       487       549  

Dividends declared per share

   $ 0.03     $ 0.10     $ 0.27     $ 0.30  

See notes to Condensed Consolidated Financial Statements.

 

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SEAGATE TECHNOLOGY

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In millions)

(Unaudited)

 

     For the Nine Months Ended  
     April 3,
2009
    March 28,
2008
 

OPERATING ACTIVITIES

    

Net income (loss)

   $ (3,005 )   $ 1,102  

Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:

    

Depreciation and amortization

     707       631  

Stock-based compensation

     70       86  

Impairment of goodwill and long-lived assets

     2,290       —    

Deferred income taxes

     295       17  

Other non-cash operating activities, net

     (8 )     (10 )

Changes in operating assets and liabilities:

    

Accounts receivable

     534       (8 )

Inventories

     368       (279 )

Accounts payable

     (263 )     614  

Accrued expenses, employee compensation and warranty

     (590 )     147  

Other assets and liabilities

     233       (157 )
                

Net cash provided by (used in) operating activities

     631       2,143  
                

INVESTING ACTIVITIES

    

Acquisition of property, equipment and leasehold improvements

     (553 )     (637 )

Proceeds from sale of fixed assets

     4       29  

Purchases of short-term investments

     (124 )     (439 )

Maturities and sales of short-term investments

     146       425  

Proceeds from sale of investment in equity securities

     11       —    

Acquisitions, net of cash acquired

     —         (78 )

Other investing activities, net

     4       15  
                

Net cash provided by (used in) investing activities

     (512 )     (685 )
                

FINANCING ACTIVITIES

    

Proceeds from short-term borrowings

     350       —    

Repayment of long-term debt

     (20 )     (34 )

Proceeds from exercise of employee stock options and employee stock purchase plan

     45       172  

Dividends to shareholders

     (132 )     (159 )

Repurchases of common shares

     —         (1,284 )

Other financing activities, net

     —         2  
                

Net cash provided by (used in) financing activities

     243       (1,303 )
                

Increase (decrease) in cash and cash equivalents

     362       155  

Cash and cash equivalents at the beginning of the period

     990       988  
                

Cash and cash equivalents at the end of the period

   $ 1,352     $ 1,143  
                

Supplemental Disclosure of Cash Flow Information

    

Cash paid for interest

   $ 108     $ 71  

Cash paid for income taxes, net of refunds

     9       28  

See notes to Condensed Consolidated Financial Statements.

 

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SEAGATE TECHNOLOGY

CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY

Nine Months Ended April 3, 2009

(In millions)

(Unaudited)

 

     Number of
Common
Shares
   Par
Value of
Shares
   Additional
Paid-in
Capital
   Accumulated
Other

Comprehensive
Income (Loss)
    Retained
Earnings
(Accumulated
Deficit)
    Total  

Balance at June 27, 2008

   485    $ —      $ 3,501    $ (16 )   $ 1,101     $ 4,586  

Comprehensive income (loss), net of tax:

               

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

   —        —        —        9       —         9  

Change in unrealized gain (loss) on auction rate securities, net

   —        —        —        (1 )     —         (1 )

Net income (loss)

   —        —        —        —         (3,005 )     (3,005 )
                     

Comprehensive income (loss)

                  (2,997 )

Issuance of common shares related to employee stock options and employee stock purchase plan

   6      —        45      —         —         45  

Fair value of beneficial conversion

feature for convertible debt (See Note 3)

   —        —        12      —         —         12  

Dividends to shareholders

   —        —        —        —         (132 )     (132 )

Stock-based compensation

   —        —        70      —         —         70  
                                           

Balance at April 3, 2009

   491    $ —      $ 3,628    $ (8 )   $ (2,036 )   $ 1,584  
                                           

See notes to Condensed Consolidated Financial Statements.

 

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SEAGATE TECHNOLOGY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

1. Summary of Significant Accounting Policies

Nature of Operations — Seagate Technology (“Seagate” or the “Company”) designs, manufactures, markets and sells hard disk drives. Hard disk drives, which are commonly referred to as disk drives or hard drives, are used as the primary medium for storing electronic information in systems ranging from desktop and notebook computers and consumer electronics devices to data centers delivering information over corporate networks and the Internet. The Company produces a broad range of disk drive products addressing enterprise applications, where its products are primarily used in enterprise servers, mainframes and workstations; desktop applications, where its products are used in desktop computers; mobile computing applications, where its products are used in notebook computers; and consumer electronics applications, where its products are used in a wide variety of digital video recorders (DVRs), gaming devices and other consumer electronic devices that require storage. The Company sells its disk drives primarily to major original equipment manufacturers (OEMs), distributors and retailers. The Company also sells its branded storage solutions under both the Seagate and Maxtor brands.

Basis of Presentation and Consolidation — The Condensed Consolidated Financial Statements include the accounts of the Company and all its wholly-owned subsidiaries, after elimination of intercompany transactions and balances. The Condensed Consolidated Financial Statements have been prepared by the Company and have not been audited. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted pursuant to such rules and regulations. The Condensed Consolidated Financial Statements reflect, in the opinion of management, all material adjustments necessary to summarize fairly the consolidated financial position, results of operations, cash flows and shareholders’ equity for the periods presented. Such adjustments are of a normal recurring nature. The Company’s Consolidated Financial Statements for the fiscal year ended June 27, 2008 are included in its Annual Report on Form 10-K as filed with the United States Securities and Exchange Commission (SEC) on August 13, 2008. The Company believes that the disclosures included in the unaudited Condensed Consolidated Financial Statements, when read in conjunction with its Consolidated Financial Statements as of June 27, 2008 and the notes thereto, are adequate to make the information presented not misleading.

The results of operations for the three and nine months ended April 3, 2009 are not necessarily indicative of the results of operations to be expected for any subsequent interim period in the Company’s fiscal year ending July 3, 2009.

The Company operates and reports financial results on a fiscal year of 52 or 53 weeks ending on the Friday closest to June 30. The three and nine months ended April 3, 2009 consisted of 13 weeks and 40 weeks, respectively. The three and nine months ended March 28, 2008 consisted of 13 weeks and 39 weeks, respectively. Fiscal year 2009 will be comprised of 53 weeks and will end on July 3, 2009.

 

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SEAGATE TECHNOLOGY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

1. Summary of Significant Accounting Policies (continued)

Critical Accounting Policies and Use of Estimates — The preparation of financial statements in accordance with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the Company’s Condensed Consolidated Financial Statements and accompanying notes. Actual results could differ materially from those estimates. The methods, estimates and judgments the Company uses in applying its most critical accounting policies have a significant impact on the results the Company reports in its Condensed Consolidated Financial Statements. The SEC has defined the most critical accounting policies as the ones that are most important to the portrayal of the Company’s financial condition and results of operations, and require the Company to make its most difficult and subjective judgments, often as a result of the need to make estimates of matters that are highly uncertain at the time of estimation. Based on this definition, the Company’s most critical policies include: establishment of sales program accruals, establishment of warranty accruals, valuation of deferred tax assets, as well as the accounting for goodwill and intangible assets. The Company also has other key accounting policies and accounting estimates relating to uncollectible customer accounts, valuation of inventory, and valuation of share-based payments. The Company believes that these other accounting policies and accounting estimates either do not generally require it to make estimates and judgments that are as difficult or as subjective, or it is less likely that they would have a material impact on the Company’s reported results of operations for a given period.

Since the Company’s fiscal year ended June 27, 2008, there have been no significant changes in its critical accounting policies and estimates. Please refer to the Critical Accounting Policies and Use of Estimates in the “Notes to the Consolidated Financial Statements” contained in Part II, Item 8 of the Company’s Annual Report on Form 10-K for the fiscal year ended June 27, 2008, as filed with the SEC on August 13, 2008, for a discussion of the Company’s critical accounting policies and estimates. As the Company incurred impairment charges relating to goodwill and long-lived assets and charges related to deferred tax assets in the three months ended January 2, 2009, the disclosures below provide additional detail related to the policies applicable to the review and determination of the impairment of goodwill and other long-lived assets, and of deferred tax assets.

Impairment of Goodwill and Other Long-lived Assets — The Company accounts for goodwill in accordance with Statement of Financial Accounting Standards (SFAS) No. 142, Goodwill and Other Intangible Assets (SFAS No. 142). As required by SFAS No. 142, the Company tests goodwill of its reporting units for impairment annually during its fourth quarter or whenever events occur or circumstances change, such as an adverse change in business climate or a decline in the overall industry, that would more likely than not reduce the fair value of a reporting unit below its carrying amount.

Testing goodwill for impairment requires a two-step approach under SFAS No. 142. In determining the fair value of its reporting units in step one of its SFAS No. 142 impairment analysis, the Company uses one or both of these commonly accepted valuation methodologies: 1) the income approach, which is based on the present value of discounted cash flows and terminal value projected for the reporting unit, and 2) the market approach, which estimates fair value based on an appropriate valuation multiple of revenue or earnings derived from comparable companies, adjusted by an estimated control premium. The estimated control premium is based on reviewing observable transactions involving controlling interests in comparable companies. The discount rate that the Company uses in the income approach of valuation represents the weighted average cost of capital that the Company believes is reflective of the relevant risk associated with the projected cash flows. The Company may use a weighted average of the fair values determined separately using the income and market approaches if it determines that this will provide a more appropriate estimated fair value of the reporting units.

 

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SEAGATE TECHNOLOGY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

1. Summary of Significant Accounting Policies (continued)

To validate the reasonableness of the reporting unit fair values, the Company reconciles the aggregate fair values of the reporting units determined in step one (as described above) to the enterprise market capitalization to derive the implied control premium.

In performing the reconciliation the Company may, depending on the volatility of the market value of its stock price, use either the stock price on the valuation date or the average stock price over a range of dates around the valuation date. The Company compares the implied control premium to premiums paid in observable recent transactions of comparable companies to determine if the fair values of the reporting units estimated in step one are reasonable.

In accordance with the guidance in SFAS No. 142, the Company has determined that it has two reporting units to which goodwill is assignable: the Hard Disk Drive reporting unit and the Services reporting unit. Each of these reporting units constitutes a business and is the lowest level for which discrete financial information is available and is regularly reviewed by management. The acquired businesses underlying the Company’s goodwill are specific to either the Hard Disk Drive or the Services reporting units and the goodwill amounts are assigned as such. The Services reporting unit represents approximately 1% of the Company’s revenues and total assets.

If step one of the SFAS No. 142 analysis demonstrates that the fair value of either reporting unit is below the carrying value, the Company will proceed to step two of SFAS No. 142. If step two is necessary, the Company will estimate the fair values of all identifiable assets and liabilities of the reporting unit using the income, market or the replacement cost approaches, as appropriate. The excess of the fair value of the reporting unit over the fair values of the identified assets and liabilities is the implied fair value of goodwill. If the fair value of goodwill is lower than the carrying value of the goodwill, an impairment charge is recorded to reduce the carrying value to fair value.

In accordance with SFAS No. 144, Accounting for the Impairment or Disposal of Long-lived Assets (SFAS No. 144), the Company tests other long-lived assets, including property, equipment and leasehold improvements and other intangible assets subject to amortization, for recoverability whenever events or changes in circumstances indicate that the carrying value of those assets may not be recoverable. The Company assesses the recoverability of an asset group by determining if the carrying value of the asset group exceeds the sum of the projected undiscounted cash flows expected to result from the use and eventual disposition of the assets over the remaining economic life of the primary asset in the asset group. If the recoverability test indicates that the carrying value of the asset group is not recoverable, the Company will estimate the fair value of the asset group using the same approaches indicated above for SFAS No. 142 step two and compare it to its carrying value. The excess of the carrying value over the fair value is allocated pro rata to derive the adjusted carrying value. The adjusted carrying value of each asset in the asset group is not reduced below its fair value.

See Note 7 for additional disclosure of these analyses, including the total impairment charges recorded during the quarter ended January 2, 2009.

The process of evaluating the potential impairment of goodwill or long-lived assets is subjective and requires significant judgment on matters such as, but not limited to, the reporting unit at which goodwill should be measured for impairment and the asset group to be tested for recoverability. The Company is also required to make estimates that may significantly impact the outcome of the analyses. Such estimates include, but are not limited to, future operating performance and cash flows, cost of capital, terminal values, control premiums and remaining economic lives of assets.

 

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SEAGATE TECHNOLOGY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

1. Summary of Significant Accounting Policies (continued)

Income Taxes – The deferred tax assets the Company records each period depend primarily on its ability to generate future taxable income in the United States and certain foreign jurisdictions. Each period, the Company evaluates the need for a valuation allowance on its deferred tax assets and, if necessary, adjusts the valuation allowance so that net deferred tax assets are recorded only to the extent the Company concludes it is more likely than not that these deferred tax assets will be realized. If the Company’s outlook for future taxable income changes significantly, its assessment of the need for a valuation allowance may also change. As a result of adverse changes in the Company’s outlook for its future U.S. taxable income, in the December 2008 quarter, the Company completed a reassessment of its valuation allowance against U.S. deferred tax assets. As a result, in the three months ended January 2, 2009, the Company increased the valuation allowance against its deferred tax assets by $271 million.

 

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SEAGATE TECHNOLOGY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

1. Summary of Significant Accounting Policies (continued)

Net Income (Loss) Per Share

In accordance with the provisions of SFAS No. 128, Earnings per Share, the following table sets forth the computation of basic and diluted net income (loss) per share for the three and nine months ended April 3, 2009 and March 28, 2008:

 

     For the Three Months Ended     For the Nine Months Ended  
(Dollars in millions, except per share data)    April 3,
2009
    March 28,
2008
    April 3,
2009
    March 28,
2008
 

Numerator:

        

Net income (loss)

   $ (273 )   $ 344     $ (3,005 )   $ 1,102  

Adjustment for interest expense on 6.8% Convertible Senior Notes due April 2010

     —         2       —         7  
                                

Net income (loss), adjusted

   $ (273 )   $ 346     $ (3,005 )   $ 1,109  
                                

Denominator:

        

Weighted-average common shares outstanding

     491       509       489       524  

Weighted-average nonvested shares

     (2 )     (2 )     (2 )     (2 )
                                

Total shares for purpose of calculating basic net income (loss) per share

     489       507       487       522  

Weighted-average effect of dilutive securities:

        

Dilution from employee stock options

     —         15       —         18  

2.375% Convertible Senior Notes due August 2012

     —         4       —         5  

6.8% Convertible Senior Notes due April 2010

     —         4       —         4  
                                

Dilutive potential common shares:

     —         23       —         27  
                                

Total shares for purpose of calculating diluted net income (loss) per share

     489       530       487       549  
                                

Net Income (loss) per share:

        

Basic net income (loss) per share

   $ (0.56 )   $ 0.68     $ (6.17 )   $ 2.11  
                                

Diluted net income (loss) per share

   $ (0.56 )   $ 0.65     $ (6.17 )   $ 2.02  
                                

The following potential common shares were excluded from the computation of diluted net income (loss) per share, as their effect would have been anti-dilutive:

 

     For the Three Months Ended    For the Nine Months Ended
(in millions)    April 3,
2009
   March 28,
2008
   April 3,
2009
   March 28,
2008

Stock options

   59    27    54    22

Nonvested shares

   2    —      2    —  

6.8% Convertible Senior Notes due April 2010

   4    —      4    —  

 

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SEAGATE TECHNOLOGY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

2. Balance Sheet Information

 

     April 3,
2009
    June 27,
2008
 
     (in millions)  

Accounts Receivable

    

Accounts receivable

   $ 881     $ 1,416  

Allowance for doubtful accounts

     (9 )     (6 )
                
   $ 872     $ 1,410  
                

 

     April 3,
2009
   June 27,
2008
     (in millions)

Inventories

  

Raw materials and components

   $ 206    $ 352

Work-in-process

     110      111

Finished goods

     261      482
             
   $ 577    $ 945
             

 

     April 3,
2009
   June 27,
2008
     (in millions)

Other Current Assets

     

Vendor non-trade receivables

   $ 256    $ 348

Other current assets

     208      154
             
   $ 464    $ 502
             

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

 

      April 3,
2009
    June 27,
2008
 
     (in millions)  

Property, Equipment and Leasehold Improvements, net

    

Property, equipment and leasehold improvements

   $ 6,274     $ 5,845  

Accumulated depreciation and amortization

     (3,919 )     (3,381 )
                
   $ 2,355     $ 2,464  
                

During the nine months ended April 3, 2009, the Company recorded accelerated depreciation charges of $55 million mainly related to the closure of the Milpitas and Pittsburgh facilities.

 

12


Table of Contents

SEAGATE TECHNOLOGY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

2. Balance Sheet Information (continued)

Derivative Financial Instruments. The Company is exposed to certain risks relating to its ongoing business operations. The Company’s primary use of derivative financial instruments is to manage foreign currency exchange rate risk. The Company enters into various foreign currency forward contracts, which generally have maturity dates of up to twelve months in order to manage the foreign currency exchange rate risk on forecasted expenses denominated in foreign currencies and to mitigate the remeasurement risk of certain foreign currency denominated liabilities. All derivatives are recorded at fair value in either Other current assets or Accrued expenses. The Company uses quoted prices to value the Company’s derivative financial instruments. See Note 4 for additional information on the fair value measurement of the Company’s derivative assets and liabilities.

In accordance with SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities (SFAS No. 133), the Company designates a portion of its foreign currency forward contracts as cash flow hedges of forecasted expenses. The remaining foreign currency forward contracts are not designated as accounting hedges under SFAS No. 133 and are accounted for in accordance with SFAS No. 52, Foreign Currency Translation (SFAS No. 52). The Company uses these relationships in order to manage its remeasurement risk related to non-functional currency denominated liabilities.

For derivative instruments that are designated and qualify as a cash flow hedge, the effective portion of the gain or loss on the derivative is reported as a component of Other comprehensive income and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings. Gains and losses on the derivative representing either hedge ineffectiveness or hedge components excluded from the assessment of effectiveness are recognized in current earnings.

The Company dedesignates its cash flow hedges when the forecasted hedged transactions are realized or it is probable the forecasted hedged transaction will not occur in the initially identified time period. At such time, the associated gains and losses deferred in Other comprehensive income are reclassified immediately into earnings. Any subsequent changes in the fair value of such derivative instruments are also reflected in earnings. As of April 3, 2009, the Company’s existing hedged transactions are expected to occur within three months and the Company expects to recognize approximately $3 million in deferred losses currently recorded in Other comprehensive income into earnings in the next twelve months.

Gains or losses recognized in earnings from the Company’s derivative instruments related to manufacturing activities are recorded to Cost of revenue, and other derivative instruments are recorded to Other, net.

As of April 3, 2009, the total notional value of the Company’s outstanding foreign currency forward exchange contracts was:

 

     As of April 3, 2009
(in millions)    Contracts Qualifying as
Hedges Under Statement 133
   Contracts Not Qualifying as
Hedges Under Statement 133

Thai baht

   $    29    $    59

Singapore dollars

           7          25

British pounds

         —            11

Chinese yuan

           6          —  

Czech koruna

         —              6

Japanese yen

           2          —  
         
   $    44    $    101
         

 

13


Table of Contents

SEAGATE TECHNOLOGY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

2. Balance Sheet Information (continued)

The following table shows the Company’s derivative instruments measured at gross fair value as reflected in the Condensed Consolidated Balance Sheet as of April 3, 2009:

Fair Values of Derivative Instruments

 

     As of April 3, 2009  
(in millions)    Asset Derivatives    Liability Derivatives  
   Balance Sheet
Location
   Fair
Value
   Balance
Sheet
Location
   Fair
Value
 

Derivatives designated as hedging instruments under Statement 133

           

Foreign exchange forward contracts

   Other current
assets
   $   —      Accrued
expenses
   $ (2 )
                     

Derivatives not designated as hedging instruments under Statement 133

           

Foreign exchange forward contracts

   Other current
assets
   $ 2    Accrued
expenses
   $ (4 )
                     

Total derivatives

      $ 2       $ (6 )
                     

The following tables show the effect of the Company’s derivative instruments in the Condensed Consolidated Statement of Operations:

The Effect of Derivative Instruments on the Statement of Operations

for the Three and Nine Months Ended April 3, 2009

(in millions)

 

Derivatives

Designated as

Cash Flow Hedges

under FAS133

  Amount of Gain or
(Loss) Recognized in
OCI on Derivative
(Effective Portion)
 

Location of

Gain or (Loss) Reclassified
from Accumulated

OCI into Income (Effective
Portion)

  Amount of Gain or (Loss)
Reclassified from
Accumulated OCI into
Income (Effective Portion)
 

Location of

Gain or (Loss)

Recognized in Income on
Derivative (Ineffective
Portion and Amount
Excluded from
Effectiveness Testing)

  Amount of Gain or
(Loss) Recognized in
Income (Ineffective
Portion and Amount
Excluded from
Effectiveness Testing)

(a)
  For the
3 months

ended
  For the
9 months

ended
    For the
3 months

ended
  For the
9 months

ended
    For the
3 months

ended
  For the
9 months

ended
Foreign exchange forward
contracts
  $(4)   $(27)   Cost of revenue   $(11)   $(32)   Cost of revenue   $ —     $(1)

 

Derivatives Not Designated
as Hedging Instruments
under Statement 133

   Location of Gain or
(Loss) Recognized in
Income on Derivative
   Amount of Gain or (Loss)
Recognized in Income on Derivative
          For the
3 months

ended
    For the
9 months

ended
Foreign exchange forward
contracts
  

Cost of revenue

   $ (2 )   $ (21)
Foreign exchange forward
contracts
   Other, net    $     2     $     (4)
                 
      $ —       $ (25)
                 

 

(a) The amount of gain or (loss) recognized in income represents $0 million related to the ineffective portion of the hedging relationships and $0 million and $(1) million related to the amount excluded from the assessment of hedge effectiveness, for the three and nine months ended April 3, 2009, respectively.

 

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Table of Contents

SEAGATE TECHNOLOGY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

3. Long-Term Debt, Convertible Notes and Credit Facilities

Long-Term Debt

$300 Million Aggregate Principal Amount of Floating Rate Senior Notes due October 2009 (the “2009 Notes”). During the three months ended October 3, 2008, the 2009 Notes became due within 12 months. As such, the balance was reclassified to Current portion of long-term debt.

Convertible Notes

$326 Million Aggregate Principal Amount of 2.375% Convertible Senior Notes due August 2012 (the “2.375% Notes”). As a result of its acquisition of Maxtor on May 19, 2006, the Company assumed the 2.375% Notes that require semi-annual interest payments payable on February 15 and August 15. The 2.375% Notes are convertible into common shares of Seagate Technology at a conversion rate of approximately 60.2074 shares per $1,000 principal amount of the notes, at the option of the holders, at any time during a fiscal quarter if, during the last 30 trading days of the immediately preceding fiscal quarter the common shares trade at a price in excess of 110% of the conversion price for 20 consecutive trading days. Upon conversion, the 2.375% Notes are subject to “net cash” settlement whereby the Company will deliver cash for the lesser of the principal amount of the notes being converted or the “conversion value” of the notes which is calculated by multiplying the conversion rate then in effect by the market price of the Company’s common shares at the time of conversion. To the extent that the conversion value exceeds the principal amount of the 2.375% Notes, the Company will, at its election, pay cash or issue common shares with a value equal to the value of such excess. If the 2.375% Notes are surrendered for conversion, the Company may direct the conversion agent to surrender those notes to a financial institution selected by the Company for exchange, in lieu of conversion, into a number of the Company’s common shares equal to the applicable conversion rate, plus cash for any fractional shares, or cash or a combination of cash and the Company’s common shares in lieu thereof.

During the three months ended October 3, 2008, the 2.375% Notes were convertible and were classified as Current portion of long-term debt on the Company’s Condensed Consolidated Balance Sheet at October 3, 2008. During the three and nine month periods ended April 3, 2009, the Company’s shares did not trade above 110% of the conversion price for at least 20 consecutive trading days of the last 30 trading days of the quarter. As a result, the 2.375% Notes became nonconvertible effective October 4, 2008, and have been reclassified as Long-term debt on the Company’s Condensed Consolidated Balance Sheet as of April 3, 2009. In addition, the payment of dividends to holders of the Company’s common shares have in certain quarters resulted in upward adjustments to the conversion rate of the 2.375% Notes.

The Company evaluates the application of EITF No. 98-5, Accounting for Convertible Securities with Beneficial Conversion Features or Contingently Adjustable Conversion Ratio, (EITF 98-5) and EITF No. 00-27, Application of EITF Issue No. 98-5 to Certain Convertible Instruments, (EITF 00-27), to its convertible notes on a quarterly basis. As of January 2, 2009, the Company concluded that the 2.375% Notes had a beneficial conversion feature. During the three months ended January 2, 2009, the Company recorded a debt discount of approximately $12 million to reflect the beneficial conversion feature of the convertible debt pursuant to EITF 00-27. In accordance with EITF 00-27, the Company evaluated the value of the beneficial conversion feature and recorded the debt discount as a reduction of the carrying amount of the 2.375% Notes and as an addition to additional paid-in capital.

The Company is amortizing the debt discount to interest expense over the term of the debt, using the effective interest method. Amortization of the debt discount for the nine months ended April 3, 2009 was less than $2 million.

 

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Table of Contents

SEAGATE TECHNOLOGY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

3. Long-Term Debt, Convertible Notes and Credit Facilities (continued)

Amendment to Credit Facility

On April 3, 2009, the Company entered into a Second Amended and Restated Credit Agreement with the lenders thereunder (the “Amended Credit Agreement”), which replaced the credit agreement that governed its $500 million senior unsecured revolving credit facility (the “Original Credit Agreement”) and became effective on April 29, 2009. Pursuant to the Amended Credit Agreement, the Company agreed to reduce the lenders’ commitments under the facility to $350 million, in exchange for the relaxation of certain financial covenants. The facility may be further reduced from $350 million by cash proceeds from certain transactions over specified amounts, including certain asset sales and debt and equity issuances, which would require the Company to concurrently reduce its borrowings under the revolving credit facility by such amounts to comply with the reduction in commitments. The obligations under the revolving credit facility will continue to be guaranteed by the Company and will be additionally guaranteed by certain material subsidiaries and secured by a lien on substantially all of the Company’s tangible and intangible assets. The Amended Credit Agreement will mature in September 2011.

As amended, the senior secured revolving credit facility bears interest per annum at a variable rate, at the Company’s option, of LIBOR plus 350 basis points or the Alternate Base Rate plus 250 basis points. The “Alternate Base Rate” is equal to the greatest of (i) the administrative agent’s Prime Rate, (ii) the Federal Funds effective rate plus 50 basis points and (iii) LIBOR for a one-month interest period plus 100 basis points. Borrowings under the senior secured credit facility will continue to be prepayable at any time prior to maturity without penalty, other than customary breakage costs. Current borrowings under the senior secured revolving credit facility bear interest at LIBOR plus 350 basis points.

As of April 3, 2009, the utilization of the senior secured revolving credit facility was $350 million in outstanding loans and approximately $45 million in outstanding letters of credit. In connection with entering into the Amended Credit Agreement, the $350 million in loans remained outstanding and the Company collateralized the $45 million of outstanding letters of credit with cash deposits.

The Original Credit Agreement contained covenants in order to remain in compliance with the agreement. Specifically, the Original Credit Agreement contained three financial covenants: (1) a covenant to maintain minimum cash, cash equivalents and marketable securities; (2) a fixed charge coverage ratio; and (3) a net leverage ratio. As of April 3, 2009, the Company was in compliance with all of the covenants under the Original Credit Agreement. In connection with entering into the Amended Credit Agreement, certain of these covenants were relaxed through the quarter ending January 1, 2010. After January 1, 2010, the financial covenants will revert to their previous levels under the Original Credit Agreement.

 

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Table of Contents

SEAGATE TECHNOLOGY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

4. Fair Value

On June 28, 2008, the Company adopted the provisions of SFAS No. 157, Fair Value Measurements, (SFAS No. 157) for all financial assets and financial liabilities. SFAS No. 157 defines fair value, establishes a framework for measuring fair value, and enhances disclosures about fair value measurements. SFAS No. 157 does not require any new fair value measurements, but applies to other accounting pronouncements that require or permit fair value measurements. The adoption of SFAS No. 157 did not have a material impact on the Company’s consolidated financial statements.

In February 2008, the Financial Accounting Standards Board (FASB) issued FASB Staff Position (FSP) 157-2, Effective Date of FASB Statement No. 157, which delays the effective date of SFAS No.157 for all non-financial assets and non-financial liabilities, except for items recognized or disclosed at fair value on a recurring basis. Accordingly, the Company will not apply the provisions of SFAS No. 157 to non-financial assets and non-financial liabilities until July 2009, the beginning of its next fiscal year.

Measurement of Fair Value

SFAS No. 157 defines fair value as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining the fair value measurements for assets and liabilities required to be recorded at fair value, the Company considers the principal or most advantageous market in which it would transact and it considers assumptions that market participants would use when pricing the asset or liability.

Fair Value Hierarchy

SFAS No. 157 establishes a fair value hierarchy based on whether the market participant assumptions used in determining fair value are obtained from independent sources (observable inputs) or reflect the Company’s own assumptions of market participant valuation (unobservable inputs). A financial instrument’s categorization within the fair value hierarchy is based upon the lowest level of input that is significant to the fair value measurement. SFAS No. 157 establishes three levels of inputs that may be used to measure fair value:

Level 1 – Quoted prices in active markets that are unadjusted and accessible at the measurement date for identical, unrestricted assets or liabilities;

Level 2 – Quoted prices for identical assets and liabilities in markets that are inactive; quoted prices for similar assets and liabilities in active markets or financial instruments for which significant inputs are observable, either directly or indirectly; or

Level 3 – Prices or valuations that require inputs that are both unobservable and significant to the fair value measurement.

The Company considers an active market to be one in which transactions for the asset or liability occur with sufficient frequency and volume to provide pricing information on an ongoing basis, and views an inactive market as one in which there are few transactions for the asset or liability, the prices are not current, or price quotations vary substantially either over time or among market makers. Where appropriate the Company’s or the counterparty’s non-performance risk is considered in determining the fair values of liabilities and assets, respectively.

 

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Table of Contents

SEAGATE TECHNOLOGY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

4. Fair Value (continued)

The adoption of SFAS No. 157 did not have a material impact on the Company’s consolidated net loss for the three and nine months ended April 3, 2009.

Items Measured at Fair Value on a Recurring Basis

The following table presents the Company’s assets and liabilities that are measured at fair value on a recurring basis, excluding accrued interest components, as of April 3, 2009, consistent with the fair value hierarchy provisions of SFAS No. 157.

 

     Fair Value Measurements at Reporting Date Using

(Dollars in millions)

   Quoted
Prices in
Active
Markets for
Identical
Instruments

(Level 1)
   Significant
Other

Observable
Inputs

(Level 2)
   Significant
Unobservable
Inputs

(Level 3)
   Total
Balance

Assets:

           

Money market funds

   $ 1,063    $ —      $ —      $ 1,063

Asset-backed securities

     —        2      —        2

Agency bonds

     —        19      —        19

Corporate bonds

     —        17      —        17

Commercial paper

     —        148      —        148

Municipal bonds

     —        15      —        15

U.S. Treasuries

     —        69      —        69
                           

Total Cash Equivalents and Marketable Securities

     1,063      270      —        1,333
                           

Auction Rate Securities

     —        —        16      16

Derivative Assets(1)

     —        2      —        2
                           

Total Assets

   $ 1,063    $ 272    $ 16    $ 1,351
                           

Liabilities:

           

Derivative Liabilities(2)

   $ —      $ 6    $ —      $ 6
                           

Total Liabilities

   $ —      $ 6    $ —      $ 6
                           

 

(1) The fair value of unrealized gains on Foreign currency forward exchange contracts is classified within Other assets, net in the Condensed Consolidated Balance Sheet as of April 3, 2009.

 

(2) The fair value of unrealized losses on Foreign currency forward exchange contracts is classified within Accrued expenses in the Condensed Consolidated Balance Sheet as of April 3, 2009.

 

18


Table of Contents

SEAGATE TECHNOLOGY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

4. Fair Value (continued)

Reported as:

 

     Fair Value Measurements at Reporting Date Using

(Dollars in millions)

   Quoted
Prices in
Active
Markets for
Identical
Instruments

(Level 1)
   Significant
Other
Observable
Inputs

(Level 2)
   Significant
Unobservable
Inputs

(Level 3)
   Total
Balance
           

Assets:

           

Cash and cash equivalents

   $ 1,063    $ 141    $ —      $ 1,204

Short-term investments

     —        129      —        129

Other assets, net(1)

     —        2      16      18
                           

Total Assets

   $ 1,063    $ 272    $ 16    $ 1,351
                           

Liabilities:

           

Accrued expenses(2)

   $ —      $ 6    $ —      $ 6
                           

Total Liabilities

   $ —      $ 6    $ —      $ 6
                           

 

(1) Amount represents the fair value of Foreign currency forward exchange contracts and the fair value of the auction rate securities as of April 3, 2009.

 

(2) Amount represents the fair value of Foreign currency forward exchange contracts as of April 3, 2009.

Level 1 assets consist of money market funds for which quoted prices are available in an active market.

The Company classifies items in Level 2 if the financial asset or liability is valued using observable inputs. Level 2 assets include: asset-backed securities, agency bonds, corporate bonds, commercial paper, municipal bonds, and U.S. Treasuries. These debt investments are priced using observable inputs and valuation models which vary by asset class. The Company uses a pricing service to assist in determining the fair values of all of its cash equivalents and marketable securities. For the cash equivalents and marketable securities in the Company’s portfolio, multiple pricing sources are generally available. The pricing service uses inputs from multiple industry standard data providers or other third party sources and various methodologies, such as weighting and models, to determine the appropriate price at the measurement date. The Company corroborates the prices obtained from the pricing service against other independent sources and, as of April 3, 2009, has not found it necessary to make any adjustments to the prices obtained. The Company’s derivative financial instruments are also classified within Level 2. The Company’s derivative financial instruments consist of foreign currency forward exchange contracts. The Company recognizes derivative financial instruments in its consolidated financial statements at fair value in accordance with SFAS No. 133. The Company determines the fair value of these instruments by considering the estimated amount it would pay or receive to terminate these agreements at the reporting date. The Company uses observable inputs including quoted prices in active markets for similar assets or liabilities.

 

19


Table of Contents

SEAGATE TECHNOLOGY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

4. Fair Value (continued)

The Company’s Level 3 assets consist of auction rate securities with a par value of approximately $21 million, all of which are collateralized by student loans guaranteed by the Federal Family Education Loan Program. Beginning in the fiscal quarter ended March 28, 2008; these securities failed to settle at auction and have continued to fail through the fiscal quarter ended April 3, 2009. During the fiscal quarter ended April 3, 2009, the Company sold auction rate securities with a par value of $10 million for approximately $8 million, recognizing a $2 million loss on the sale of auction rate securities. As of April 3, 2009, the estimated fair value of the remaining auction rate securities was $16 million which reflects a ratings downgrade within the quarter of two of the three remaining auction rate securities. The Company believes that the impairment totaling approximately $5 million is temporary given its ability and intent to hold these securities until recovery of the cost basis or maturity of these securities. As such, the impairment was recorded in Accumulated other comprehensive income (loss) and these securities were classified as long-term investments.

The table below presents a reconciliation of all assets and liabilities measured at fair value on a recurring basis, excluding accrued interest components, using significant unobservable inputs (Level 3) for the three and nine months ended April 3, 2009:

 

     Fair Value
Measurements Using
Significant Unobservable
Inputs

(Level 3)
 

(Dollars in millions)

   Auction Rate Securities  

Balance at June 27, 2008

   $ —    

Transfers in/(out) of Level 3

     28  
        

Balance at October 3, 2008

   $ 28  
        

Unrealized gains (losses)(1)

     (1 )
        

Balance at January 2, 2009

   $ 27  
        

Total net gains (losses) (realized and unrealized):

  

Realized gains (losses)(2)

     (2 )

Unrealized gains (losses)(1)

     (1 )

Purchases, sales, issuances, settlements

     (8 )

Transfers in/(out) of Level 3

     —    
        

Balance at April 3, 2009

   $ 16  
        

 

(1) Unrealized gains (losses) on auction rate securities are recorded as a separate component of Other comprehensive income (loss) in Accumulated other comprehensive income (loss), which is a component of Shareholders’ Equity.

 

(2) Realized gains (losses) on auction rate securities are recorded in Other, net on the Condensed Consolidated Statement of Operations.

 

20


Table of Contents

SEAGATE TECHNOLOGY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

4. Fair Value (continued)

Other Fair Value Disclosures

In accordance with SFAS No. 107, Disclosures about Fair Value of Financial Instruments, the Company is required to disclose the fair value of its long-term debt at least annually or more frequently if the fair value has changed significantly.

The Company’s debt is carried at cost. The following table represents the fair value of the Company’s debt as of April 3, 2009:

Reported as:

 

     April 3, 2009     June 27, 2008  

(Dollars in millions)

   Carrying
Amount
    Estimated
Fair
Value
    Carrying
Amount
    Estimated
Fair
Value
 

Floating Rate Senior Notes due October 2009

   $ 300     $ 286     $ 300     $ 293  

6.375% Senior Notes due October 2011

     599       456       599       584  

6.8% Senior Notes due October 2016

     599       372       599       555  

6.8% Convertible Senior Notes due April 2010

     135       132       135       142  

5.75% Subordinated debentures due March 2012

     37       28       41       40  

2.375% Convertible Senior Notes due August 2012(1)

     315       220       326       422  

LIBOR Based China Manufacturing Facility Loans

     15       15       30       30  

LIBOR Based Revolving Credit Facility

     350       350       —         —    
                                
   $ 2,350     $ 1,859     $ 2,030     $ 2,066  

Less short-term borrowings and current portion of long-term debt

     (670 )     (654 )     (360 )     (457 )
                                

Long-term debt, less current portion

   $ 1,680     $ 1,205     $ 1,670     $ 1,609  
                                

 

(1) Carrying amount of 2.375% Convertible Senior Notes due August 2012, net of debt discount as a result of the beneficial conversion feature. See Note 3, Long-Term Debt, Convertible Notes and Credit Facilities for further discussion.

 

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Table of Contents

SEAGATE TECHNOLOGY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

5. Income Taxes

The Company is a foreign holding company incorporated in the Cayman Islands with foreign and U.S. subsidiaries that operate in multiple taxing jurisdictions. As a result, the Company’s worldwide operating income either is subject to varying rates of tax or is exempt from tax due to tax holidays or tax incentive programs applicable in China, Malaysia, Singapore, Switzerland and Thailand. These tax holidays or incentives are scheduled to expire in whole or in part at various dates through 2020.

The income tax benefit recognized in the three months ended April 3, 2009 resulted primarily from the reversal of a portion of the income tax expense the Company previously recorded in the six months ended January 2, 2009 as a result of revised forecasts for operations conducted in certain jurisdictions. The income tax provision for the nine months ended April 3, 2009 includes a deferred tax charge of $271 million associated with increased valuation allowance recorded for U.S. federal and state deferred tax assets associated with reductions in the Company’s forecasted U.S. taxable income. The goodwill impairment charges recorded in the nine months ended April 3, 2009 resulted in no tax benefits. As of the close of the period ending April 3, 2009, the Company is forecasting losses in certain jurisdictions, including the U.S., for which tax benefits for the losses cannot be recognized. Pursuant to the accounting guidance provided in FASB Interpretation No. 18, Accounting for Income Taxes in Interim Periods (FIN 18), paragraph 22a, the Company is now required to exclude these loss jurisdictions from its normal overall estimated annual effective rate calculation and determine a separately computed effective tax rate for each loss jurisdiction.

The income tax benefit recorded for the three months ended April 3, 2009 differs from the provision for income taxes that would be derived by applying a notional U.S. 35% rate to losses before income taxes primarily due to the net effect of (i) the effect of applying the provisions of FIN 18 as described above, (ii) the tax benefit related to the aforementioned tax holiday and tax incentive programs, (iii) tax expense related to intercompany transactions, and (iv) an increase in the Company’s valuation allowance for certain deferred tax assets. The income tax provision recorded for the nine months ended April 3, 2009 differs from the provision for income taxes that would be derived by applying a notional U.S. 35% rate to losses before income taxes primarily due to the net effect of (i) goodwill impairment charges with no associated tax benefit, (ii) an increase in the Company’s valuation allowance for certain deferred tax assets, (iii) the tax benefit related to the aforementioned tax holidays and tax incentive programs, and (iv) tax expense related to intercompany transactions. The income tax provision recorded for the three and nine months ended March 28, 2008 differed from the provision for income taxes that would be derived by applying a notional U.S. 35% rate to income before income taxes primarily due to the net effect of (i) the tax benefit related to the aforementioned tax holiday and tax incentive programs, (ii) a decrease in the Company’s valuation allowance for U.S. deferred tax assets, and (iii) the tax expense related to intercompany transactions.

Based on the Company’s foreign ownership structure, and subject to (i) potential future increases in the valuation allowance for deferred tax assets and (ii) limitations imposed by Internal Revenue Code Section 382 on usage of certain tax attributes, the Company anticipates that its effective tax rate in future periods will generally be less than the U.S. federal statutory rate. Dividend distributions received from the Company’s U.S. subsidiaries may be subject to U.S. withholding taxes when, and if distributed. Deferred tax liabilities have not been recorded on unremitted earnings of certain foreign subsidiaries, as these earnings will not be subject to tax in the Cayman Islands or U.S. federal income tax if remitted to the foreign parent holding company of such subsidiaries.

 

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SEAGATE TECHNOLOGY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

5. Income Taxes (continued)

During the three and nine months ending April 3, 2009, several major U.S. tax law changes were taken into account by the Company in computing its income tax provision for the period. On July 30, 2008, the Housing and Economic Recovery Act of 2008 was enacted. Under this law, companies can elect to accelerate a portion of their unused AMT and research tax credits in lieu of the 50-percent “bonus” depreciation enacted in February 2008. The Company concluded that it qualifies for and has elected to accelerate approximately $9 million of R&D credit carryovers to fiscal years 2008 and 2009 of which approximately $8 million of tax benefit was recognized in the three months ending October 3, 2008.

On October 3, 2008, the Emergency Economic Stabilization Act of 2008 was signed into law. Under this law, the R&D credit was retroactively extended through December 31, 2009 from December 31, 2007. This extension has no immediate impact on the Company’s tax provision for the period ending October 3, 2008 due to valuation allowances that were recorded for the U.S. deferred tax assets related to these additional credits.

The California 2008-2009 Budget Bill (AB 1452), enacted on September 30, 2008, resulted in two temporary changes to the California income tax. First, the bill suspends the use of Net Operating Loss (NOL) carryovers for two years, fiscal years 2009 and 2010. Second, the bill limits the use of R&D credit carryovers to no more than 50% of the tax liability before credits. The Company concluded that the California legislative change resulted in no net increase in the Company’s income tax expense in the period ending October 3, 2008.

On February 17, 2009, the American Recovery and Reinvestment Act of 2009 (ARRA) was enacted to extend the acceleration of AMT and Research Credits in lieu of bonus depreciation based on qualified capital additions through the end of calendar year 2009. The Company concluded that it qualifies for and will elect to accelerate approximately $9 million of R&D credit carryovers to fiscal year 2009. The impact of which was recognized as part of the U.S. jurisdictional effective tax rate for the period ending April 3, 2009.

On February 20, 2009, the California 2009-2010 Budget Bill (S.B. X3 15) was signed into law. Effective in fiscal year 2012, the Company intends to make the annual irrevocable election to use a single sales factor for apportionment. Also, effective in fiscal year 2012, the cost of performance provisions with respect to sales of other than tangible personal property are repealed. Instead, services are sourced to the location the services are used. The Company estimates that the combination of these two changes will likely result in a decrease to the effective California tax rate beginning in fiscal year 2012. The reduced California tax rate results in approximately $6 million less future tax benefit associated with California deferred tax assets expected to reverse and be realized for tax purposes in 2012 or later periods. The $6 million additional deferred tax expense was recognized in the period ending April 3, 2009.

As of April 3, 2009, the Company had recorded net deferred tax assets of $603 million. The realization of $538 million of these deferred tax assets is primarily dependent on the Company’s ability to generate sufficient U.S. and certain foreign taxable income in future periods. Although realization is not assured, the Company’s management believed that it is more likely than not that these deferred tax assets will be realized.

 

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SEAGATE TECHNOLOGY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

5. Income Taxes (continued)

During the nine months ending April 3, 2009, the Company’s unrecognized tax benefits excluding interest and penalties decreased by approximately $32 million to $342 million primarily due to (i) reductions associated with audit activity of $6 million, (ii) reductions associated with the expiration of certain statutes of limitation of $23 million, (iii) increases in current year unrecognized tax benefits of $8 million, and (iv) reductions from other activity of $11 million, primarily foreign exchange gains of $10 million. Approximately $22 million of reduction in unrecognized tax benefits during the period was recorded as a reduction to goodwill.

The total unrecognized tax benefits that, if recognized, would impact the effective tax rate were $68 and $146 million as of June 27, 2008 and April 3, 2009, respectively, subject to certain future valuation allowance reversals.

During the 12 months beginning April 4, 2009, the Company expects to reduce its unrecognized tax benefits by approximately $7 million as a result of the expiration of certain statutes of limitation. The Company does not believe it is reasonably possible that other unrecognized tax benefits will materially change in the next 12 months. However, the resolution and/or timing of closure on open audits are highly uncertain as to when these events occur.

The Company files U.S. federal, U.S. state, and foreign tax returns. The Internal Revenue Service (IRS) is currently examining fiscal years 2005 through 2007. For state and foreign tax returns, the Company is generally no longer subject to tax examinations for years prior to fiscal year 2001. The statute of limitation for U.S. Federal returns is open for fiscal year 2005 and forward.

 

6. Restructuring and Exit Costs

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

January 2009 Plan – In January 2009, the Company committed to a restructuring plan intended to realign its cost structure with the current macroeconomic business environment (the “January 2009 Plan”). The January 2009 Plan included reducing worldwide headcount by approximately 4,500 employees, including a 20% reduction in vice-president level employees. The January 2009 Plan is expected to result in total restructuring charges of approximately $103 million and is expected to be largely complete by the end of fiscal year 2009. Under this plan, the Company has recorded $22 million and $101 million during the three and nine months ended April 3, 2009, respectively.

Pittsburgh Closure – In September 2008, the Company announced the closure of its research facility in Pittsburgh, Pennsylvania, as part of the Company’s ongoing focus on cost efficiencies in all areas of its business (the “Pittsburgh Closure”). The Company plans to cease operations at this facility by the end of its fourth quarter of fiscal year 2009 and integrate certain activities into its other research and development facilities located within the United States. During the three months ended April 3, 2009, the Company recorded approximately $1 million of restructuring charges associated with post employment benefits and $2 million related to other exit costs incurred to close the facility. In addition, as a result of the Pittsburgh Closure, the Company recorded approximately $11 million and $25 million during the three and nine months ended April 3, 2009, respectively, related to accelerated asset depreciation recorded as Product development expense on the Condensed Consolidated Statement of Operations. Including the accelerated depreciation expense, the Pittsburgh Closure is expected to result in total charges in the range of $55 million to $60 million.

 

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SEAGATE TECHNOLOGY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

6. Restructuring and Exit Costs (continued)

Milpitas Closure – In July 2008, the Company announced the proposed closure of its media manufacturing facility in Milpitas, California, as part of the Company’s ongoing focus on cost efficiencies in all areas of its business (the “Milpitas Closure”). The Company ceased production at this facility in September 2008 and expects all activities related to the closure to be largely complete by the end of fiscal year 2009. During the three months ended April 3, 2009, the Company recorded approximately $2 million for various other exit costs. From plan inception through April 3, 2009, the Company recorded approximately $20 million of restructuring charges associated with post employment benefits, $2 million related to facility lease costs after operations ceased, and $4 million for various other exit costs. In addition, as a result of the Milpitas closure, the Company has recorded approximately $30 million related to accelerated asset depreciation recorded as Cost of revenue in the first two quarters of fiscal year 2009.

Limavady Closure – In October 2007, the Company announced the closure of its substrate manufacturing facility in Limavady, Northern Ireland, as part of the Company’s ongoing focus on cost efficiencies in all areas of its business (the “Limavady Closure”). The Company ceased production at its Limavady facility during September 2008 and expects all activities related to the closure to be largely complete by the end of fiscal year 2009. During the three months ended April 3, 2009, the Company recorded approximately $1 million in other exit costs, offset by a $4 million adjustment to the accrual established in December 2007 for grant repayments. From plan inception through April 3, 2009, the restructuring charges recorded in connection with the Limavady Closure were primarily related to employee termination benefits of $34 million and approximately $11 million related to other exit costs. Other exit costs included $9 million related to expected grant repayments.

Maxtor – Pursuant to EITF 95-3, Recognition of Liabilities in Connection with a Business Combination (EITF 95-3), the Company recorded certain exit costs aggregating $246 million through fiscal year 2008. The remaining balance of $21 million as of April 3, 2009 is associated with the exit of certain facilities and payment of these exit costs are expected to continue through the end of fiscal year 2016.

 

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SEAGATE TECHNOLOGY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

6. Restructuring and Exit Costs (continued)

The following table summarizes the Company’s restructuring activities for the nine months ended April 3, 2009:

 

(Dollars in millions)

   Employee
Benefits
    Operating
Leases
    Other Exit
Costs
    Total  

January 2009 Plan

        

Accrual balances at June 27, 2008

   $ —       $ —       $ —       $ —    

Restructuring charges

     100       —         1       101  

Cash payments

     (81 )     —         (1 )     (82 )

Adjustments

     —         —         —         —    
                                

Accrual balances at April 3, 2009

   $ 19     $ —       $ —       $ 19  
                                

Site Closures (1)

        

Accrual balances at June 27, 2008

   $ 48     $ —       $ 18     $ 66  

Restructuring charges

     9       2       9       20  

Cash payments

     (50 )       (9 )     (59 )

Adjustments

     (1 )     —         (9 )     (10 )
                                

Accrual balances at April 3, 2009

   $ 6     $ 2     $ 9     $ 17  
                                

Maxtor

        

Accrual balances at June 27, 2008

   $ —       $ 17     $ —       $ 17  

Restructuring charges

     —         —         —         —    

Cash payments

     —         (6 )     —         (6 )

Adjustments

     —         10       —         10  
                                

Accrual balances at April 3, 2009

   $ —       $ 21     $ —       $ 21  
                                

Other

        

Accrual balances at June 27, 2008

   $ 4     $ —       $ —       $ 4  

Restructuring charges

     3       3       —         6  

Cash payments

     (6 )     —         —         (6 )

Adjustments

     (1 )     —         —         (1 )
                                

Accrual balances at April 3, 2009

   $ —       $ 3     $ —       $ 3  
                                

Total Accrual balances for all plans at April 3, 2009

   $ 25     $ 26     $ 9     $ 60  
                                

Total

        

Accrual balances at June 27, 2008(2)

   $ 52     $ 17     $ 18     $ 87  

Restructuring charges

     112       5       10       127  

Cash payments

     (137 )     (6 )     (10 )     (153 )

Adjustments

     (2 )     10       (9 )     (1 )
                                

Accrual balance at April 3, 2009(3)

   $ 25     $ 26     $ 9     $ 60  
                                

 

(1) Closures include the restructuring charges accounted for the closure of the Pittsburgh, Milpitas and Limavady facilities.

 

(2) Of the accrued restructuring balance of approximately $87 million at June 27, 2008, $80 million is included in Accrued expense and $7 million is included in Other non-current liabilities on the accompanying Condensed Consolidated Balance Sheet.

 

(3) Of the accrued restructuring balance of approximately $60 million at April 3, 2009, $43 million is included in Accrued expense and $17 million is included in Other non-current liabilities on the accompanying Condensed Consolidated Balance Sheet.

 

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SEAGATE TECHNOLOGY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

7. Impairment of Goodwill and Long-lived Assets

Goodwill

In accordance with SFAS No. 142, the Company tests goodwill for impairment on an annual basis and, if required, at an interim date should events occur or circumstances change that would more likely than not reduce the fair value of goodwill below its carrying value.

During late November and December 2008, the Company observed a sharp deterioration in the general business environment and in all of its major markets. In response to the indicators of a deteriorating macroeconomic environment and the rapidly declining revenue trends experienced during its second quarter of fiscal 2009, the Company reduced its near-term and long-term financial projections. The Company determined that a significant adverse change in its business climate had occurred, and completed an interim review of goodwill for impairment in accordance with SFAS No. 142 in the quarter ending January 2, 2009.

Based on the interim review described above, in the three months ended January 2, 2009, the Company recorded impairment charges of $2.1 billion for the goodwill of the Hard Disk Drive reporting unit, representing 100% of its carrying value, and $150 million for the goodwill of the Services reporting unit reducing the carrying value to $31 million. These impairment charges were included in Impairment of goodwill and long-lived assets in the Condensed Consolidated Statement of Operations.

The changes in the carrying amount of goodwill by reporting units for the nine months ended April 3, 2009, were as follows:

 

(Dollars in millions)    Hard Disk
Drive
    Services     Total  

Balance at June 27, 2008

   $ 2,169     $ 183     $ 2,352  

Goodwill adjustments(1)

     (32 )     (2 )     (34 )

Impairment charges

     (2,137 )     (150 )     (2,287 )
                        

Balance at April 3, 2009

   $ —       $ 31     $ 31  
                        

 

(1)

Goodwill adjustments during the nine months ended April 3, 2009 primarily consisted of a $25 million reduction in unrecognized tax benefits during the period, which was recorded as a reduction to goodwill.

 

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SEAGATE TECHNOLOGY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

7. Impairment of Goodwill and Long-lived Assets (continued)

Long-lived Assets (Property, equipment, leasehold improvements, and other intangible assets)

In accordance with SFAS No. 144, the Company tests other long-lived assets, including property, equipment and leasehold improvements and other intangible assets, subject to amortization for recoverability whenever events or changes in circumstance indicate that their carrying value may not be recoverable.

The Company determined that the adverse change in the business climate discussed under “Goodwill” above was also an indicator requiring the testing of its long-lived assets for recoverability and performed this test in the three months ended January 2, 2009. In accordance with the guidance in SFAS No. 144, the Company determined that the asset group to be tested for recoverability was at the reporting unit level as it was the lowest level at which cash flows were identifiable. The Company tested the long-lived assets of both the Hard Disk Drive and Services reporting units for recoverability and concluded that the carrying value of the Hard Disk Drive reporting unit was recoverable while that of the Services reporting unit was not.

The Company recorded impairment charges of $3 million for the property and equipment and intangible assets of the Services reporting unit during the nine months ended April 3, 2009. The Company recorded these impairment charges in Impairment of goodwill and long-lived assets in the Condensed Consolidated Statement of Operations. No impairment charge was recorded for the intangible assets or Property, equipment and leasehold improvements of the Hard Disk Drive reporting unit.

As of April 3, 2009, Other intangible assets consisted primarily of existing technology, customer relationships and trade names acquired in business combinations. Acquired intangibles are amortized on a straight-line basis over the respective estimated useful lives of the assets. The net carrying value of intangible assets as of April 3, 2009 and June 27, 2008 was approximately $62 million and $111 million, respectively. Accumulated amortization of intangibles was approximately $321 million and $273 million as of April 3, 2009 and June 27, 2008, respectively.

The carrying value of intangible assets as of April 3, 2009 is set forth in the following table:

 

     Gross
Carrying

Amount
   Accumulated
Amortization
    Net
Carrying

Amount
   Weighted Average
Remaining Useful
Life
(in millions, except years)                    (in years)

Existing technology

   $ 181    $ (163 )   $ 18    2.0

Customer relationships

     156      (123 )     33    1.4

Trade names

     37      (26 )     11    1.3

Patents and licenses

     9      (9 )     —      —  
                          

Total acquired identifiable intangible assets

   $ 383    $ (321 )   $ 62    1.6
                          

In the three and nine months ended April 3, 2009, amortization expense for other intangible assets was approximately $16 million and $48 million, respectively. In the three and nine months ended March 28, 2008, amortization expense for other intangible assets was approximately $26 million and $74 million, respectively. Amortization of the existing technology intangible is charged to Cost of revenue while the amortization of the other intangible assets is included in operating expenses in the Condensed Consolidated Statements of Operations.

 

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SEAGATE TECHNOLOGY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

8. Stock-Based Compensation

Stock-Based Benefit Plans

The Company’s stock-based benefit plans have been established to promote the Company’s long-term growth and financial success by providing incentives to its employees, directors, and consultants through grants of share-based awards. The provisions of the Company’s stock-based benefit plans, which allow for the grant of various types of equity-based awards, are also intended to provide flexibility to maintain the Company’s competitive ability to attract, retain and motivate participants for the benefit of the Company and its shareholders.

Seagate Technology 2004 Stock Compensation Plan — Under the Seagate Technology 2004 Stock Compensation plan a maximum of 63.5 million common shares has been made available for issuance. A maximum of 10 million of these shares can be awarded as nonvested shares or restricted share units. As of April 3, 2009, there were approximately 7.5 million shares available for issuance under the Seagate Technology 2004 Stock Compensation Plan, of which 7.0 million shares were available for issuance as nonvested shares or restricted share units.

The Company granted 30,000 and 162,800 nonvested shares during the three and nine months ended April 3, 2009, respectively. The Company granted 7,258 and 1,088,913 restricted share units during the three and nine months ended April 3, 2009, respectively. The Company also granted 20,024,120 and 25,067,211 non-qualified stock options during the three and nine months ended April 3, 2009, respectively. The Company granted 150,000 and 209,020 performance shares to senior officers of the Company during the three and nine months ended April 3, 2009, respectively.

Stock Purchase Plan — On July 31, 2008, the Company issued approximately 2.5 million common shares under its Employee Stock Purchase Plan (“ESPP”), with a weighted-average purchase price of $12.72 per share. On January 30, 2009, the Company issued approximately 2.5 million common shares under its ESPP, with a weighted-average purchase price of $3.22 per share. As of April 3, 2009, there were approximately 3.9 million common shares available for issuance under the ESPP.

 

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SEAGATE TECHNOLOGY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

8. Stock-Based Compensation (continued)

Determining Fair Value of Equity Awards

The Company estimates the fair value of stock options granted using the Black-Scholes-Merton option-pricing formula and a single option award approach. The fair value for nonvested shares and restricted share units is the share price on the grant date. The fair value for all equity awards is amortized on a straight-line basis over the requisite service periods of the awards, which is generally the vesting period or the remaining service (vesting) period.

The fair value of the Company’s stock options, nonvested shares and restricted share units granted to employees for the three and nine months ended April 3, 2009 and March 28, 2008, was estimated using the following weighted-average assumptions:

 

     For the Three Months Ended    For the Nine Months Ended
     April 3,
2009
   March 28,
2008
   April 3,
2009
   March 28,
2008

Option Plan Shares

           

Expected term (in years)

   4.2 – 4.5    4.0    4.0 – 4.5    4.0

Volatility

   45 –46%    35%    36 – 46%    35 – 36%

Expected dividend rate

   2.6 – 3.6%    2.0 – 2.5%    2.6 – 12.2%    1.5 – 2.5%

Risk-free interest rate

   2.0%    2.3%    1.7 –3.0%    2.3 – 4.2%

Weighted-average fair value

   $1.05    $7.52    $1.43    $7.54

Nonvested Shares

           

Weighted-average fair value

   $3.73    $21.79    $9.90    $24.13

Restricted Share Units

           

Weighted-average fair value

   $4.12    —      $13.48    —  

ESPP Plan Shares

           

Expected term (in years)

   0.5    0.5    0.5    0.5

Volatility

   84%    36%    39 – 84%    31 –36%

Expected dividend rate

   3.0%    2.3%    3.0 –3.2%    1.7 – 2.3%

Risk-free interest rate

   0.4%    2.0%    0.4 –2.0%    2.0 – 5.0%

Weighted-average fair value

   $1.36    $4.93    $2.48    $4.67

 

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SEAGATE TECHNOLOGY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

8. Stock-Based Compensation (continued)

Stock Compensation Expense

Stock Compensation Expense — The Company recorded approximately $17 million and $70 million of stock-based compensation during the three and nine months ended April 3, 2009, respectively. The stock-based compensation during the three months ended April 3, 2009 decreased due to the impact of forfeited awards resulting from employee terminations and reduced ESPP related expense. Of the $70 million recorded in the nine months ended April 3, 2009, approximately $8 million related to stock options assumed and nonvested shares exchanged in the Maxtor acquisition. The Company recorded approximately $28 million and $86 million of stock-based compensation during the three and nine months ended March 28, 2008. Of the $86 million recorded in the nine months ended March 28, 2008, approximately $12 million related to stock options assumed and nonvested shares exchanged in the Maxtor acquisition. The Company has made an estimate of expected forfeitures and is recognizing compensation costs only for those equity awards expected to vest.

Excess Tax Benefits from Stock Options — In accordance with guidance in SFAS No. 123 (Revised 2004), Share-Based Payment, the cash flows resulting from excess tax benefits (tax benefits related to the excess of proceeds from employee exercises of stock options over the stock-based compensation cost recognized for those options) are classified as financing cash flows. The Company did not recognize any excess tax benefits as a financing cash inflow during the nine months ended April 3, 2009. The Company recognized excess tax benefits of approximately $2 million as a financing cash inflow during the nine months ended March 28, 2008.

 

9. Guarantees

Indemnifications of Officers and Directors

The Company has entered into indemnification agreements with the members of its board of directors and officers to indemnify them to the extent permitted by law against any and all liabilities, costs, expenses, amounts paid in settlement and damages incurred by the directors and officers as a result of any lawsuit, or any judicial, administrative or investigative proceeding in which the directors or officers are sued as a result of their service as members of the Company’s board of directors or as officers of the Company.

Intellectual Property Indemnification Obligations

The Company has entered into agreements with customers and suppliers that include limited intellectual property indemnification obligations that are customary in the industry. These guarantees generally require the Company to compensate the other party for certain damages and costs incurred as a result of third party intellectual property claims arising from these transactions. The nature of the intellectual property indemnification obligations prevents the Company from making a reasonable estimate of the maximum potential amount it could be required to pay to its customers and suppliers. Historically, the Company has not made any significant indemnification payments under such agreements and no amount has been accrued in the accompanying Condensed Consolidated Financial Statements with respect to these indemnification obligations.

 

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SEAGATE TECHNOLOGY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

9. Guarantees (continued)

Product Warranty

The Company estimates and accrues product warranty costs at the time revenue is recognized. The Company generally warrants its products for periods from one to five years. The Company uses estimated repair or replacement costs and uses statistical modeling to estimate product return rates in order to determine its warranty obligations. In addition, estimated settlements for customer compensatory claims relating to product quality issues, if any, are accrued as warranty expense. Changes in the Company’s product warranty liability during the three and nine months ended April 3, 2009 and March 28, 2008 were as follows:

 

     For the Three Months Ended     For the Nine Months Ended  
(Dollars in millions)    April 3,
2009
    March 28,
2008
    April 3,
2009
    March 28,
2008
 

Balance, beginning of period

   $ 441     $ 457     $ 445     $ 430  

Warranties issued

     58       64       208       190  

Repairs and replacements

     (60 )     (60 )     (185 )     (197 )

Changes in liability for pre-existing warranties, including expirations

     7       1       (22 )     39  
                                

Balance, end of period

   $ 446     $ 462     $ 446     $ 462  
                                

 

10. Equity

Issuance of Common Shares

During the nine months ended April 3, 2009, the Company issued approximately 1 million of its common shares upon the exercise of stock options and approximately 5 million of its common shares related to the Company’s ESPP.

Repurchases of Equity Securities

The Company did not repurchase any of its common shares during the three and nine months ended April 3, 2009. As of April 3, 2009, the Company had approximately $2.0 billion remaining under the authorized $2.5 billion February 2008 stock repurchase plan.

 

11. Contingencies

In accordance with SFAS No. 5, Accounting for Contingencies, the Company assessed the probability of an unfavorable outcome of all its material litigation, claims or assessments to determine whether a liability had been incurred and whether it is probable that one or more future events will occur confirming the fact of the loss. In the event that an unfavorable outcome is determined to be probable and the amount of the loss can be reasonably estimated, the Company established an accrual for the litigation, claim or assessment. Litigation is inherently uncertain and may result in adverse rulings or decisions. Additionally, the Company may enter into settlements or be subject to judgments that may, individually or in the aggregate, have a material adverse effect on its results of operations. Accordingly, actual results could differ materially.

 

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SEAGATE TECHNOLOGY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

11. Contingencies (continued)

Intellectual Property Litigation

Convolve, Inc. and Massachusetts Institute of Technology (“MIT”) v. Seagate Technology LLC, et al—Between 1998 and 1999, Convolve, Inc., a small privately held technology consulting firm founded by an MIT Ph.D., engaged in discussions with Seagate Technology, Inc. with respect to the potential license of technology that Convolve claimed to own. During that period, the parties entered into non-disclosure agreements. The Company declined Convolve’s offer of a license in late 1999. On July 13, 2000, Convolve and MIT filed suit against Compaq Computer Corporation and the Company in the U.S. District Court for the Southern District of New York, alleging infringement of U.S. Patent Nos. 4,9156,635, “Shaping Command Inputs to Minimize Unwanted Dynamics “ (the “‘635 patent “) and U.S. Patent No. 5,638,267, “Method and Apparatus for Minimizing Unwanted Dynamics in a Physical System” (the ‘267 patent), misappropriation of trade secrets, breach of contract, tortious interference with contract and fraud relating to Convolve and MIT’s Input Shaping® and Convolve’s Quick and Quiet™ technology. The plaintiffs claim their technology is incorporated in Seagate’s sound barrier technology, which was publicly announced on June 6, 2000. The complaint seeks injunctive relief, $800 million in compensatory damages and unspecified punitive damages.

The Company answered the complaint on August 2, 2000 and filed counterclaims for declaratory judgment that two Convolve/MIT patents are invalid and not infringed and that the Company owns any intellectual property based on the information that the Company disclosed to Convolve. The court denied plaintiffs’ motion for expedited discovery and ordered plaintiffs to identify their trade secrets to defendants before discovery could begin. Convolve served a trade secrets disclosure on August 4, 2000, and the Company filed a motion challenging the disclosure statement. On May 3, 2001, the court appointed a special master to review the trade secret issues. The special master resigned on June 5, 2001, and the court appointed another special master on July 26, 2001. After a hearing on its motion challenging the trade secrets disclosure on September 21, 2001, the special master issued a report and recommendation to the court that the trade secret list was insufficient.

Convolve revised the trade secret list, and the court entered an order on January 1, 2002, accepting the special master’s recommendation that this trade secret list was adequate. On November 6, 2001, the U.S. Patent and Trademark Office (USPTO) issued US Patent No. 6,314,473, “System for Removing Selected Unwanted Frequencies in Accordance with Altered Settings in a User Interface of a Data Storage Device.” ( the ‘473 patent”) to Convolve. Convolve filed an amended complaint on January 16, 2002, alleging defendants’ infringement of this patent, and the Company answered and filed counterclaims on February 8, 2002. On July 26, 2002, the Company filed a Rule 11 motion challenging the adequacy of plaintiffs’ pre-filing investigation on the first two patents alleged in the complaint and seeking dismissal of plaintiffs’ claims related to these patents and reimbursement of attorney’s fees. The court denied its motion on May 23, 2003. On May 6, 2003, the USPTO issued to Convolve U.S. Patent No. 6,560,658 B2, entitled “Data Storage Device with Quick and Quiet Modes.” Convolve indicated that it would seek leave of the court to add this patent to the lawsuit, but it never did so. This latest patent is a continuation of a patent currently in the lawsuit (U.S. Patent No. 6,314,473).

 

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SEAGATE TECHNOLOGY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

11. Contingencies (continued)

The Company believes any claims that may relate to this continuation patent would be without merit, regardless of whether such claims were added to the ongoing litigation or asserted against it in a separate lawsuit. Judge John Martin, who was assigned this case, announced his retirement from the federal bench. The case was reassigned to Judge George B. Daniels. On October 14, 2003, the Special Master resigned from the case due to Convolve’s claim that he had a conflict of interest. Magistrate Judge James C. Francis IV was appointed to handle all discovery matters. Plaintiffs eventually dropped the ‘267 patent from the case. The claims construction hearing on ‘635 and ‘473 patents was held on March 30 and 31, 2004. On August 11, 2005, the court entered an order construing the patent claims. Both Seagate and Compaq moved for reconsideration of its claim construction in light of intervening new law in the Federal Circuit’s then-recent decision in Phillips v. AWH Corp., et al., 415 F.3d 1303 (Fed. Cir. 2005). Convolve also moved for clarification. The court denied reconsideration without oral argument on December 7, 2005. The court later granted Convolve’s unopposed clarification motion. On March 29, 2006, the court granted Seagate’s summary judgment motion that Convolve’s fraud, tortious interference with contract, unfair competition and breach of confidence claims are preempted by the California Uniform Trade Secrets Act (CUTSA). The court also held that while Convolve’s claim for breach of the covenant of good faith and fair dealing is not preempted by the CUTSA, no tort damages are available. The court denied its motion for summary judgment on a trade secret issue without prejudice, finding there is an issue of fact that must be decided. Finally, the court entered an order on July 14, 2006, that Convolve has no evidence to prove its claims regarding 10 alleged trade secrets, precluding Convolve from proceeding at trial on those claims, and precluding Convolve from alleging violations of the 10 alleged trade secrets by either defendant prior to December 7, 2005, the date of the hearing.

At Seagate’s request, the USPTO determined that both patents in suit have substantial new issues of patentability and ordered re-examination of the patents. The court denied its motion to stay the case pending patent re-examination. On December 2, 2008, the USPTO issued a re-examination certificate for the ‘473 patent in which nine of the claims asserted in this litigation were determined to be patentable as amended and three asserted claims were confirmed. Another re-examination proceeding for the ‘473 patent is pending and the Company is awaiting an initial office action. A final office action has issued in the ‘635 re-examination in which five asserted claims were confirmed as patentable and three asserted claims were finally rejected. The ‘635 patent expired on September 12, 2008. No specific trial date has been set in the litigation, although the court indicated that the parties should be ready for trial in January 2010. The Company believes the claims are without merit, and intend to defend against them vigorously.

Siemens, AG v. Seagate Technology—On August 23, 2006, Siemens, AG, a German corporation, filed a complaint against Seagate Technology in the U.S. District Court for the Central District of California alleging infringement of U.S. Patent No. 5,686,838 (the ‘838 patent) entitled “Magnetoresistive Sensor Having at Least a Layer System and a Plurality of Measuring Contacts Disposed Thereon, and a Method of Producing the Sensor.” The suit alleges that Seagate drives incorporating Giant Magnetic Resistive (GMR) sensors infringe the ‘838 patent. The complaint seeks damages in an unstated amount, an accounting, preliminary and permanent injunctions, prejudgment interest, enhanced damages for alleged willful infringement and attorney fees and costs. The lawsuit was served on Seagate on September 6, 2006. The Company served an answer to the complaint on November 27, 2006, denying all material allegations and asserting affirmative defenses. Siemens amended its complaint to add Tunnel Magnetic Resistive (TMR) sensors to the case. On May 9, 2008, the court entered summary judgment that TMR sensors are not covered by the ‘838 patent, thus eliminating TMR products from the case. On September 23, 2008, the court entered summary judgment that Seagate drives incorporating GMR sensors are covered by the ‘838 patent. Trial began on November 12, 2008, and a jury returned a verdict in favor of Seagate on December 23, 2008, finding the ‘838 patent invalid on grounds of both anticipation and obviousness. Judgment was entered by the court in Seagate’s favor on January 30, 2009.

 

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SEAGATE TECHNOLOGY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

11. Contingencies (continued)

Siemens, AG v. Seagate Technology (Ireland)—On December 2, 2008, Siemens served Seagate Technology (Ireland) with a writ of summons alleging infringement of European Patent (UK) No. 0 674 769 (the EU ‘769 patent), which is the European counterpart to US Patent No. 5,686,838 upon which Siemens had sued Seagate Technology in the United States. The suit was filed in the High Court of Justice in Northern Ireland, Chancery Division. Siemens alleges that giant magnetoresistive (GMR), tunnel magnetoresistive (TMR), and tunnel giant magnetoresistive (TGMR) products designed and manufactured by Seagate Technology (Ireland) infringe the EU’769 patent. The Company believes the claims are without merit and intends to defend against them vigorously.

Magsil Corporation and Massachusetts Institute of Technology v. Seagate Technology, et al.—On December 12, 2008, Magsil Corporation and Massachusetts Institute of Technology filed a complaint in the US District Court for the District of Delaware against three Seagate entities, Maxtor Corporation, and twelve other hard disc drive and recording head manufacturing companies. The complaint alleges that unspecified hard disc drives and components thereof infringe two US patents: 5,629,922, entitled “Electron Tunneling Device Using Ferromagnetic Thin Films,” and 5,835,314, entitled “Tunnel Junction Device For Storage and Switching of Signals.” The complaint seeks judgment of infringement, an injunction, damages in an unstated amount, interest, and costs. On February 2, 2009, the Seagate entities filed an answer to the complaint, denying all material allegations and asserting affirmative defenses. The Company believes the claims are without merit and intends to defend against them vigorously.

Qimonda AG v, LSI Corporation, et al.—On December 19, 2008, the US International Trade Commission (ITC) instituted an investigation under section 337 of the Tariff Act of 1930, as amended, at the request of complainant Qimonda AG, naming LSI Corporation and six Seagate Technology entities as respondents. The complaint alleges that LSI and Seagate import products into the US that infringe seven Qimonda patents relating to the design and manufacture of semiconductor integrated chips. The ITC set trial for June 1, 2009. The target date for completion of the investigation and, if a violation of the law is found, issuance of any remedy is February 16, 2010. The Company has evaluated the complaint and filed an Answer on January 16, 2009. The Company intends to vigorously defend the infringement allegations.

Other Matters

The Company is involved in a number of other judicial and administrative proceedings incidental to its business, and the Company may be involved in various legal proceedings arising in the normal course of its business in the future. Although occasional adverse decisions or settlements may occur, the Company believes that the final disposition of such matters will not have a material adverse effect on its financial position or results of operations.

 

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SEAGATE TECHNOLOGY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

12. Recently Issued Accounting Pronouncements

In April 2009, the FASB issued FASB Staff Position (FSP) SFAS No. 115-2 and SFAS No. 124-2, Recognition and Presentation of Other-Than-Temporary Impairments (FSP No. 115-2 and SFAS No. 124-2), which provides operational guidance for determining other-than-temporary impairments for debt securities. FSP No. 115-2 and SFAS No. 124-2 is effective for interim and annual periods ending after June 15, 2009 and will be adopted by the Company beginning in the fourth quarter of its fiscal year 2009. The Company is currently evaluating the impact of the pending adoption of FSP No. 115-2 and SFAS No. 124-2 on its consolidated results of operations and financial condition.

In April 2009, the FASB issued FSP SFAS No. 107-1 and Accounting Principles Board Opinions (APB) 28-1, Interim Disclosures about Fair Value of Financial Instruments (FSP SFAS No. 107-1 and APB Opinion No. 28-1), which amends SFAS No. 107 and APB Opinion No. 28, Interim Financial Reporting, to require disclosures about fair value of financial instruments in interim and annual reporting periods. FSP SFAS No. 107-1 and APB Opinion No. 28-1 is effective for interim reporting periods ending after June 15, 2009, and will be adopted by the Company beginning in the first quarter of its fiscal year 2010.

In May 2008, the FASB issued FSP, Accounting Principles Board (APB) Opinion No. 14-1, Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement) (FSP APB No. 14-1), which may require the Company to recognize additional non cash interest expense related to its Convertible Senior Notes in its consolidated statements of operations. FSP APB No. 14-1 requires the issuer to separately account for the liability (debt) and equity (conversion option) components of the instrument in a manner that reflects the issuer’s nonconvertible debt borrowing rate. FSP APB No. 14-1 will be effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. Early adoption is not permitted. FSP APB No. 14-1 must be applied retrospectively to all periods presented pursuant to the guidance of SFAS No. 154, Accounting Changes and Error Corrections (SFAS No. 154). The Company will adopt FSP APB No. 14-1 in its fiscal year 2010, and is currently evaluating the impact of the pending adoption on its consolidated results of operations and financial condition.

In April 2008, the FASB issued FSP FAS 142-3, Determination of the Useful Life of Intangible Assets. FSP FAS 142-3 amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under FASB Statement No. 142, Goodwill and Other Intangible Assets. FSP FAS 142-3 is effective for fiscal years beginning after December 15, 2008, with early adoption prohibited. The Company is currently evaluating the impact of the pending adoption of FSP FAS 142-3 on its fiscal year 2010 consolidated results of operations and financial condition.

In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities, an amendment of FASB Statement No. 133 (SFAS No. 161). SFAS No. 161 requires disclosure of how and why an entity uses derivative instruments, how derivative instruments and related hedged items are accounted for and how derivative instruments and related hedged items affect an entity’s financial position, financial performance, and cash flows. SFAS No. 161 is effective for fiscal years and interim periods beginning after November 15, 2008, with early adoption permitted. The Company implemented SFAS No. 161 in its third fiscal quarter of 2009.

 

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SEAGATE TECHNOLOGY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

12. Recently Issued Accounting Pronouncements (continued)

In December 2007, the FASB issued SFAS No. 141 (revised 2007), Business Combinations (SFAS No. 141(R)). Under SFAS No. 141(R), an entity is required to recognize the assets acquired, liabilities assumed, contractual contingencies, and contingent consideration at their fair value on the acquisition date. It further requires that acquisition-related costs be recognized separately from the acquisition and expensed as incurred; that restructuring costs generally be expensed in periods subsequent to the acquisition date; and that changes in accounting for deferred tax asset valuation allowances and acquired income tax uncertainties after the measurement period be recognized as a component of provision for taxes. In addition, acquired in-process research and development is capitalized as an intangible asset and amortized over its estimated useful life. The adoption of SFAS No. 141(R) will change the Company’s accounting treatment for business combinations on a prospective basis beginning in its first quarter of fiscal year 2010.

In September 2006, the FASB issued SFAS No. 157. In the first quarter of fiscal year 2009, the Company adopted SFAS No. 157, Fair Value Measurements (SFAS No. 157) for all financial assets and financial liabilities and for all non-financial assets and non-financial liabilities recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually). SFAS No. 157 defines fair value, establishes a framework for measuring fair value, and enhances fair value measurement disclosure. The adoption of SFAS No. 157 did not have a significant impact on the Company’s consolidated financial statements, and the resulting fair values calculated under SFAS No. 157 after adoption were not significantly different than the fair values that would have been calculated under previous guidance. See Note 4 for further details on the Company’s fair value measurements.

In February 2008, the FASB issued FASB Staff Position (FSP) No. FAS 157-1, Application of FASB Statement No. 157 to FASB Statement No. 13 and Other Accounting Pronouncements That Address Fair Value Measurements for Purposes of Lease Classification or Measurement under Statement 13 (FSP FAS 152-1) and FSP No. FAS 157-2, Effective Date of FASB Statement No. 157 (FSP FAS 152-2). Collectively, the Staff Positions defer the effective date of SFAS No. 157 to fiscal years beginning after November 15, 2008 for nonfinancial assets and nonfinancial liabilities except for items that are recognized or disclosed at fair value on a recurring basis at least annually, and amend the scope of SFAS No. 157. As described in Note 4, the Company has adopted SFAS No. 157 and the related FASB staff positions except for those items specifically deferred under FSP FAS 157-2. The Company is currently evaluating the impact of the full adoption of SFAS No. 157 on its consolidated results of operations and financial condition.

In April 2009, the FASB issued FSP FAS 157-4, Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly (FSP FAS 157-4). FSP FAS 157-4 amends SFAS No. 157 to provide additional guidance on estimating fair value when the volume and level of transaction activity for an asset or liability have significantly decreased in relation to normal market activity for the asset or liability. FSP FAS 157-4 supersedes FSP No. FAS 157-3, Determining the Fair Value of a Financial Asset When the Market for That Asset is Not Active. FSP FAS 157-4 is effective for interim and annual periods ending after June 15, 2009 and will be adopted by the Company beginning in the fourth quarter of its fiscal year 2009. The Company is currently evaluating the impact of the pending adoption on its consolidated results of operations and financial condition.

 

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SEAGATE TECHNOLOGY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

13. Condensed Consolidating Financial Information

The Company has guaranteed obligations of Seagate Technology HDD Holdings (“HDD”) under senior notes totaling $1.5 billion comprised of $300 million aggregate principal amount of Floating Rate Senior Notes due October 2009 (the “2009 Notes”), $600 million aggregate principal amount of 6.375% Senior Notes due October 2011 (the “2011 Notes”) and $600 million aggregate principal amount of 6.8% Senior Notes due October 2016 (the “2016 Notes”, and together with the 2009 Notes and the 2011 Notes, the “Senior Notes”), on a full and unconditional basis. The following tables present parent guarantor, subsidiary issuer and combined non-guarantors Condensed Consolidating Balance Sheets of the Company and its subsidiaries at April 3, 2009 and June 27, 2008, the Condensed Consolidating Statements of Operations for the three and nine months ended April 3, 2009 and March 28, 2008 and the Condensed Consolidating Statements of Cash Flows for the nine months ended April 3, 2009 and March 28, 2008. The information classifies the Company’s subsidiaries into Seagate Technology-parent company guarantor, HDD-subsidiary issuer, and the Combined Non-Guarantors based upon the classification of those subsidiaries. Under each of these instruments, dividends paid by HDD or its restricted subsidiaries would constitute restricted payments and loans between the Company and HDD or its restricted subsidiaries would constitute affiliate transactions.

 

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SEAGATE TECHNOLOGY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

13. Condensed Consolidating Financial Information (continued)

Consolidating Balance Sheet

April 3, 2009

(In millions)

 

     Seagate
Technology
Parent
Company
Guarantor
   HDD
Subsidiary
Issuer
   Combined
Non-
Guarantors
   Eliminations     Seagate
Technology
Consolidated

Cash and cash equivalents

   $ 8    $ —      $ 1,344    $ —       $ 1,352

Short-term investments

     —        —        129      —         129

Accounts receivable, net

     —        —        872      —         872

Intercompany receivable

     —        —        117      (117 )     —  

Inventories

     —        —        577      —         577

Other current assets

     —        —        614      —         614
                                   

Total Current Assets

     8      —        3,653      (117 )     3,544

Property, equipment and leasehold improvements, net

     —        —        2,355      —         2,355

Goodwill

     —        —        31      —         31

Other intangible assets, net

     —        —        62      —         62

Equity investment in HDD

     4,853      —        —        (4,853 )     —  

Equity investments in Non-Guarantors

     —        3,127      232      (3,359 )     —  

Intercompany note receivable

     —        3,567      700      (4,267 )     —  

Other assets, net

     —        12      622      —         634
                                   

Total Assets

   $ 4,861    $ 6,706    $ 7,655    $ (12,596 )   $ 6,626
                                   

Short-term borrowings

   $ —      $ 350    $ —      $ —       $ 350

Accounts payable

     —        —        1,389      —         1,389

Intercompany payable

     —        —        117      (117 )     —  

Accrued employee compensation

     —        —        117      —         117

Accrued expenses

     —        5      659      —         664

Accrued income taxes

     —        —        9      —         9

Current portion of long-term debt

     —        300      20      —         320
                                   

Total Current Liabilities

     —        655      2,311      (117 )     2,849

Other non-current liabilities

     —        —        346      —         346

Intercompany note payable

     3,277      —        990      (4,267 )     —  

Long-term accrued income taxes

     —        —        167      —         167

Long-term debt, less current portion

     —        1,198      482      —         1,680

Liability for deficit of Maxtor

     —        —        681      (681 )     —  
                                   

Total Liabilities

     3,277      1,853      4,977      (5,065 )     5,042
                                   

Shareholders’ Equity

     1,584      4,853      2,678      (7,531 )     1,584
                                   

Total Liabilities and Shareholders’ Equity

   $ 4,861    $ 6,706    $ 7,655    $ (12,596 )   $ 6,626
                                   

 

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SEAGATE TECHNOLOGY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

13. Condensed Consolidating Financial Information (continued)

Consolidating Balance Sheet

June 27, 2008

(In millions)

 

     Seagate
Technology
Parent
Company
Guarantor
   HDD
Subsidiary
Issuer
   Combined
Non-
Guarantors
   Eliminations     Seagate
Technology
Consolidated
     (In millions)

Cash and cash equivalents

   $ 3    $ —      $ 987    $ —       $ 990

Short-term investments

     —        —        151      —         151

Accounts receivable, net

     —        —        1,410      —         1,410

Intercompany receivable

     —        —        181      (181 )     —  

Inventories

     —        —        945      —         945

Other current assets

     —        —        776      —         776
                                   

Total Current Assets

     3      —        4,450      (181 )     4,272

Property, equipment and leasehold improvements, net

     —        —        2,464      —         2,464

Goodwill

     —        —        2,352      —         2,352

Other intangible assets, net

     —        —        111      —         111

Equity investment in HDD

     7,767      —        —        (7,767 )     —  

Equity investments in Non-Guarantors

     —        6,089      233      (6,322 )     —  

Intercompany note receivable

     —        3,183      652      (3,835 )     —  

Other assets, net

     —        14      907      —         921
                                   

Total Assets

   $ 7,770    $ 9,286    $ 11,169    $ (18,105 )   $ 10,120
                                   

Accounts payable

   $ —      $ —      $ 1,652    $ —       $ 1,652

Intercompany payable

     —        —        181      (181 )     —  

Accrued employee compensation

     —        —        440      —         440

Accrued expenses

     1      22      802      —         825

Accrued income taxes

     —        —        10      —         10

Current portion of long-term debt

     —        —        360      —         360
                                   

Total Current Liabilities

     1      22      3,445      (181 )     3,287

Other non-current liabilities

     —        —        367      —         367

Intercompany note payable

     3,183      —        652      (3,835 )     —  

Long-term accrued income taxes

     —        —        210      —         210

Long-term debt, less current portion

     —        1,497      173      —         1,670

Liability for deficit of Maxtor

     —        —        656      (656 )     —  
                                   

Total Liabilities

     3,184      1,519      5,503      (4,672 )     5,534
                                   

Shareholders’ Equity

     4,586      7,767      5,666      (13,433 )     4,586
                                   

Total Liabilities and Shareholders’ Equity

   $ 7,770    $ 9,286    $ 11,169    $ (18,105 )   $ 10,120
                                   

 

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SEAGATE TECHNOLOGY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

13. Condensed Consolidating Financial Information (continued)

Consolidating Statement of Operations

Three Months Ended April 3, 2009

(In millions)

 

     Seagate
Technology
Parent
Company
Guarantor
    HDD
Subsidiary
Issuer
    Combined
Non-
Guarantors
    Eliminations     Seagate
Technology
Consolidated
 

Revenue

   $ —       $ —       $ 2,150     $ —       $ 2,150  

Cost of revenue

     —         —         1,993       —         1,993  

Product development

     —         —         243       —         243  

Marketing and administrative

     —         —         134       —         134  

Amortization of intangibles

     —         —         13       —         13  

Restructuring and other, net

     —         —         25       —         25  
                                        

Total operating expenses

     —         —         2,408       —         2,408  
                                        

Income (loss) from operations

     —         —         (258 )     —         (258 )

Interest income

     —         2       7       (6 )     3  

Interest expense

     —         (27 )     (14 )     6       (35 )

Equity in income (loss) of HDD

     (273 )     —         —         273       —    

Equity in income (loss) of Non-Guarantors

     —         (248 )     (9 )     257       —    

Other, net

     —         —         1       —         1  
                                        

Other income (expense), net

     (273 )     (273 )     (15 )     530       (31 )
                                        

Income (loss) before income taxes

     (273 )     (273 )     (273 )     530       (289 )

Provision for (benefit from) income taxes

     —         —         (16 )     —         (16 )
                                        

Net income (loss)

   $ (273 )   $ (273 )   $ (257 )   $ 530     $ (273 )
                                        

 

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SEAGATE TECHNOLOGY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

13. Condensed Consolidating Financial Information (continued)

Consolidating Statement of Operations

Nine Months Ended April 3, 2009

(In millions)

 

     Seagate
Technology
Parent
Company
Guarantor
    HDD
Subsidiary
Issuer
    Combined
Non-
Guarantors
    Eliminations     Seagate
Technology
Consolidated
 

Revenue

   $ —       $ —       $ 7,452     $ —       $ 7,452  

Cost of revenue

     —         —         6,448       —         6,448  

Product development

     —         —         738       —         738  

Marketing and administrative

     —         —         424       —         424  

Amortization of intangibles

     —         —         41       —         41  

Restructuring

     —         —         126       —         126  

Impairment of goodwill and long-lived assets

     —         —         2,290       —         2,290  
                                        

Total operating expenses

     —         —         10,067       —         10,067  
                                        

Income (loss) from operations

     —         —         (2,615 )     —         (2,615 )

Interest income

     —         3       35       (23 )     15  

Interest expense

     —         (73 )     (45 )     23       (95 )

Equity in income (loss) of HDD

     (3,005 )     —         —         3,005       —    

Equity in income (loss) of Non-Guarantors

     —         (2,935 )     (82 )     3,017       —    

Other, net

     —         —         (26 )     —         (26 )
                                        

Other income (expense), net

     (3,005 )     (3,005 )     (118 )     6,022       (106 )
                                        

Income (loss) before income taxes

     (3,005 )     (3,005 )     (2,733 )     6,022       (2,721 )

Provision for (benefit from) income taxes

     —         —         284       —         284  
                                        

Net income (loss)

   $ (3,005 )   $ (3,005 )   $ (3,017 )   $ 6,022     $ (3,005 )
                                        

 

42


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SEAGATE TECHNOLOGY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

13. Condensed Consolidating Financial Information (continued)

Consolidating Statement of Cash Flows

Nine Months Ended April 3, 2009

(In millions)

 

     Seagate
Technology
Parent
Company
Guarantor
    HDD
Subsidiary
Issuer
    Combined
Non-
Guarantors
    Eliminations     Seagate
Technology
Consolidated
 

OPERATING ACTIVITIES

          

Net income (loss)

   $ (3,005 )   $ (3,005 )   $ (3,017 )   $ 6,022     $ (3,005 )

Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:

          

Depreciation and amortization

     —         —         707       —         707  

Stock-based compensation

     —         —         70       —         70  

Impairment of goodwill and long-lived assets

     —         —         2,290       —         2,290  

Deferred income taxes

     —         —         295       —         295  

Equity in (income) loss of HDD

     3,005       —         —         (3,005 )     —    

Equity in (income) loss of Non-Guarantors

     —         2,935       82       (3,017 )     —    

Other non-cash operating activities, net

     —         —         (8 )     —         (8 )

Changes in operating assets and liabilities, net

     (2 )     (15 )     299       —         282  
                                        

Net cash provided by (used in) operating activities

     (2 )     (85 )     718       —         631  

INVESTING ACTIVITIES

          

Acquisition of property, equipment and leasehold improvements

     —         —         (553 )     —         (553 )

Purchase of short-term investments

     —         —         (124 )     —         (124 )

Maturities and sales of short-term investments

     —         —         146       —         146  

Other investing activities, net

     —         —         19       —         19  
                                        

Net cash provided by (used in) investing activities

     —         —         (512 )     —         (512 )

FINANCING ACTIVITIES

          

Proceeds from short-term borrowings

     —         350       —         —         350  

Repayment of long-term debt

     —         —         (20 )     —         (20 )

Loan from HDD to Parent

     94       (94 )     —         —         —    

Loan from HDD to Non-Guarantor

     —         (290 )     290       —         —    

Investment by HDD in Non-Guarantor

     —         (5 )     5       —         —    

Distribution from Non-Guarantor to HDD

     —         124       (124 )     —         —    

Proceeds from exercise of employee stock options and employee stock purchase plan

     45       —         —         —         45  

Dividends to shareholders

     (132 )     —         —         —         (132 )
                                        

Net cash provided by (used in) financing activities

     7       85       151       —         243  
                                        

Increase (decrease) in cash and cash equivalents

     5       —         357       —         362  

Cash and cash equivalents at the beginning of the period

     3       —         987       —         990  
                                        

Cash and cash equivalents at the end of the period

   $ 8     $ —       $ 1,344     $ —       $ 1,352  
                                        

 

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SEAGATE TECHNOLOGY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

13. Condensed Consolidating Financial Information (continued)

Consolidating Statement of Operations

Three Months Ended March 28, 2008

(In millions)

 

     Seagate
Technology
Parent
Company
Guarantor
   HDD
Subsidiary
Issuer
    Combined
Non-
Guarantors
    Eliminations     Seagate
Technology
Consolidated
 

Revenue

   $ —      $ —       $ 3,104     $ —       $ 3,104  

Cost of revenue

     —        —         2,288       —         2,288  

Product development

     —        —         254       —         254  

Marketing and administrative

        —         164       —         164  

Amortization of intangibles

     —        —         15       —         15  

Restructuring and other, net

     —        —         20       —         20  
                                       

Total operating expenses

     —        —         2,741       —         2,741  
                                       

Income (loss) from operations

     —        —         363       —         363  

Interest income

     —        —         24       (8 )     16  

Interest expense

     —        (22 )     (16 )     8       (30 )

Equity in income (loss) of HDD

     344      —         —         (344 )     —    

Equity in income (loss) of Non-Guarantors

     —        366       (8 )     (358 )     —    
                                       

Other income (expense), net

     344      344       —         (702 )     (14 )
                                       

Income (loss) before income taxes

     344      344       363       (702 )     349  

Provision for (benefit from) income taxes

     —        —         5       —         5  
                                       

Net income (loss)

   $ 344    $ 344     $ 358     $ (702 )   $ 344  
                                       

 

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Table of Contents

SEAGATE TECHNOLOGY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

13. Condensed Consolidating Financial Information (continued)

Consolidating Statement of Operations

Nine Months Ended March 28, 2008

(In millions)

 

     Seagate
Technology
Parent
Company
Guarantor
    HDD
Subsidiary
Issuer
    Combined
Non-
Guarantors
    Eliminations     Seagate
Technology
Consolidated
 

Revenue

   $ —       $ —       $ 9,809     $ —       $ 9,809  

Cost of revenue

     —         —         7,295       —         7,295  

Product development

     —         —         758       —         758  

Marketing and administrative

     1       —         483       —         484  

Amortization of intangibles

     —         —         41       —         41  

Restructuring and other, net

     —         —         52       —         52  
                                        

Total operating expenses

     1       —         8,629       —         8,630  
                                        

Income (loss) from operations

     (1 )     —         1,180       —         1,179  

Interest income

     —         —         79       (28 )     51  

Interest expense

     —         (69 )     (55 )     28       (96 )

Equity in income (loss) of HDD

     1,103       —         —         (1,103 )     —    

Equity in income (loss) of Non-Guarantors

     —         1,172       (55 )     (1,117 )     —    

Other, net

     —         —         13       —         13  
                                        

Other income (expense), net

     1,103       1,103       (18 )     (2,220 )     (32 )
                                        

Income (loss) before income taxes

     1,102       1,103       1,162       (2,220 )     1,147  

Provision for (benefit from) income taxes

     —         —         45       —         45  
                                        

Net income (loss)

   $ 1,102     $ 1,103     $ 1,117     $ (2,220 )   $ 1,102  
                                        

 

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Table of Contents

SEAGATE TECHNOLOGY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

13. Condensed Consolidating Financial Information (continued)

Consolidating Statement of Cash Flows

Nine Months Ended March 28, 2008

(In millions)

 

     Seagate
Technology
Parent
Company
Guarantor
    HDD
Subsidiary
Issuer
    Combined
Non-
Guarantors
    Eliminations     Seagate
Technology
Consolidated
 

OPERATING ACTIVITIES

          

Net income

   $ 1,102     $ 1,103     $ 1,117     $ (2,220 )   $ 1,102  

Adjustments to reconcile net income to net cash (used in) provided by operating activities:

          

Depreciation and amortization

     —         —         631       —         631  

Stock-based compensation

     —         —         86       —         86  

Deferred income taxes

     —         —         17       —         17  

Equity in (income) of HDD

     (1,103 )     —         —         1,103       —    

Equity in (income) loss of Non-Guarantors

     —         (1,172 )     55       1,117       —    

Other non-cash operating activities, net

     —         4       (14 )     —         (10 )

Changes in operating assets and liabilities, net

     (5 )     17       305       —         317  
                                        

Net cash (used in) provided by operating activities

     (6 )     (48 )     2,197       —         2,143  

INVESTING ACTIVITIES

          

Acquisition of property, equipment and leasehold improvements

     —         —         (637 )     —         (637 )

Purchase of short-term investments

     —         —         (439 )     —         (439 )

Maturities and sales of short-term investments

     —         —         425       —         425  

Acquisitions, net of cash and cash equivalents acquired

     —         —         (78 )     —         (78 )

Other investing activities, net

     —         —         44       —         44  
                                        

Net cash used in investing activities

     —         —         (685 )     —         (685 )

FINANCING ACTIVITIES

          

Loan from HDD to Parent

     1,307       (1,307 )     —         —         —    

Repayment of debt

     —         —         (34 )     —         (34 )

Investment by HDD in Non-Guarantor

     —         (5 )     5       —         —    

Distribution from Non-Guarantor to HDD

     —         1,360       (1,360 )     —         —    

Proceeds from exercise of employee stock options and employee stock purchase plan

     172       —         —         —         172  

Dividends to shareholders

     (159 )     —         —         —         (159 )

Repurchase of common shares

     (1,284 )     —         —         —         (1,284 )

Other financing activities, net

     —         —         2       —         2  
                                        

Net cash provided by (used in) financing activities

     36       48       (1,387 )     —         (1,303 )
                                        

Increase in cash and cash equivalents

     30       —         125       —         155  

Cash and cash equivalents at the beginning of the period

     4       —         984       —         988  
                                        

Cash and cash equivalents at the end of the period

   $ 34     $ —       $ 1,109     $ —       $ 1,143  
                                        

 

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SEAGATE TECHNOLOGY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

13. Condensed Consolidating Financial Information (continued)

On May 19, 2006, in connection with the acquisition of Maxtor, the Company, Maxtor and the trustee under the indentures for the 2.375% Notes and the 6.8% Senior Convertible Notes due 2010 (the “6.8% Notes”) entered into a supplemental indenture pursuant to which such notes became convertible into the Company’s common shares. In addition, the Company agreed to fully and unconditionally guarantee the 2.375% Notes and 6.8% Notes on a senior unsecured basis. The Company’s obligations under its guarantee rank in right of payment with all of its existing and future senior unsecured indebtedness. The indentures do not contain any financial covenants and do not restrict Maxtor from paying dividends, incurring additional indebtedness or issuing or repurchasing its other securities. The following tables present parent guarantor, subsidiary issuer and combined non-guarantors Condensed Consolidating Balance Sheets of the Company and its subsidiaries at April 3, 2009 and June 27, 2008, the Condensed Consolidating Statements of Operations for the three and nine months ended April 3, 2009 and March 28, 2008 and the Condensed Consolidating Statements of Cash Flows for the nine months ended April 3, 2009 and March 28, 2008. The information classifies the Company’s subsidiaries into Seagate Technology-parent company guarantor, Maxtor-subsidiary issuer and the Combined Non-Guarantors based on the classification of those subsidiaries under the terms of the 2.375% Notes and 6.8% Notes.

 

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SEAGATE TECHNOLOGY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

13. Condensed Consolidating Financial Information (continued)

Consolidating Balance Sheet

April 3, 2009

(In millions)

 

     Seagate
Technology
Parent
Company
Guarantor
   Maxtor
Subsidiary
Issuer
    Combined
Non-
Guarantors
   Eliminations     Seagate
Technology
Consolidated

Cash and cash equivalents

   $ 8    $ 1     $ 1,343    $ —       $ 1,352

Short-term investments

     —        —         129      —         129

Accounts receivable, net

     —        —         872      —         872

Intercompany receivable

     —        96       21      (117 )     —  

Inventories

     —        —         577      —         577

Other current assets

     —        54       560      —         614
                                    

Total Current Assets

     8      151       3,502      (117 )     3,544

Property, equipment and leasehold improvements, net

     —        2       2,353      —         2,355

Goodwill

     —        —         31      —         31

Other intangible assets, net

     —        —         62      —         62

Equity investments in Non-Guarantors

     4,853      232       3,127      (8,212 )     —  

Intercompany note receivable

     —        —         4,267      (4,267 )     —  

Other assets, net

     —        351       283      —         634
                                    

Total Assets

   $ 4,861    $ 736     $ 13,625    $ (12,596 )   $ 6,626
                                    

Short-term borrowings

   $ —      $ —       $ 350    $ —       $ 350

Accounts payable

     —        —         1,389      —         1,389

Intercompany payable

     —        21       96      (117 )     —  

Accrued employee compensation

     —        —         117      —         117

Accrued expenses

     —        26       638      —         664

Accrued income taxes

     —        6       3      —         9

Current portion of long-term debt

     —        5       315      —         320
                                    

Total Current Liabilities

     —        58       2,908      (117 )     2,849

Other non-current liabilities

     —        50       296      —         346

Intercompany note payable

     3,277      700       290      (4,267 )     —  

Long-term accrued income taxes

     —        127       40      —         167

Long-term debt, less current portion

     —        482       1,198      —         1,680

Liability for deficit of Maxtor

     —        —         681      (681 )     —  
                                    

Total Liabilities

     3,277      1,417       5,413      (5,065 )     5,042
                                    

Shareholders’ Equity (Deficit)

     1,584      (681 )     8,212      (7,531 )     1,584
                                    

Total Liabilities and Shareholders’ Equity

   $ 4,861    $ 736     $ 13,625    $ (12,596 )   $ 6,626
                                    

 

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SEAGATE TECHNOLOGY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

13. Condensed Consolidating Financial Information (continued)

Consolidating Balance Sheet

June 27, 2008

(In millions)

 

     Seagate
Technology
Parent
Company
Guarantor
   Maxtor
Subsidiary
Issuer
    Combined
Non-
Guarantors
   Eliminations     Seagate
Technology
Consolidated

Cash and cash equivalents

   $ 3    $ 1     $ 986    $ —       $ 990

Short-term investments

     —        —         151      —         151

Accounts receivable, net

     —        —         1,410      —         1,410

Intercompany receivable

     —        181       —        (181 )     —  

Inventories

     —        —         945      —         945

Other current assets

     —        —         776      —         776
                                    

Total Current Assets

     3      182       4,268      (181 )     4,272

Property, equipment and leasehold improvements, net

     —        4       2,460      —         2,464

Goodwill

     —        —         2,352      —         2,352

Other intangible assets, net

     —        —         111      —         111

Equity investments in Non-Guarantors

     7,767      233       6,089      (14,089 )     —  

Intercompany note receivable

     —        —         3,835      (3,835 )     —  

Other assets, net

     —        298       623      —         921
                                    

Total Assets

   $ 7,770    $ 717     $ 19,738    $ (18,105 )   $ 10,120
                                    

Accounts payable

   $ —      $ —       $ 1,652    $ —       $ 1,652

Intercompany payable

     —        —         181      (181 )     —  

Accrued employee compensation

     —        —         440      —         440

Accrued expenses

     1      29       795      —         825

Accrued income taxes

     —        6       4      —         10

Current portion of long-term debt

     —        330       30      —         360
                                    

Total Current Liabilities

     1      365       3,102      (181 )     3,287

Other non-current liabilities

     —        51       316      —         367

Intercompany note payable

     3,183      652       —        (3,835 )     —  

Long-term accrued income taxes

     —        132       78      —         210

Long-term debt, less current portion

     —        173       1,497      —         1,670

Liability for deficit of Maxtor

     —        —         656      (656 )     —  
                                    

Total Liabilities

     3,184      1,373       5,649      (4,672 )     5,534
                                    

Shareholders’ Equity (Deficit)

     4,586      (656 )     14,089      (13,433 )     4,586
                                    

Total Liabilities and Shareholders’ Equity

   $ 7,770    $ 717     $ 19,738    $ (18,105 )   $ 10,120
                                    

 

49


Table of Contents

SEAGATE TECHNOLOGY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

13. Condensed Consolidating Financial Information (continued)

Consolidating Statement of Operations

Three Months Ended April 3, 2009

(In millions)

 

     Seagate
Technology
Parent
Company
Guarantor
    Maxtor
Subsidiary
Issuer
    Combined
Non-
Guarantors
    Eliminations     Seagate
Technology
Consolidated
 

Revenue

   $ —       $ —       $ 2,150     $ —       $ 2,150  

Cost of revenue

     —         1       1,992       —         1,993  

Product development

     —         —         243       —         243  

Marketing and administrative

     —         —         134       —         134  

Amortization of intangibles

     —         —         13       —         13  

Restructuring

     —         —         25       —         25  
                            </