Seagate Technology Holdings 10-Q 2022-09-30

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q

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

For the quarterly period ended September 30, 2022

☐ 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 HOLDINGS PUBLIC LIMITED COMPANY

(Exact name of registrant as specified in its charter)

38/39 Fitzwilliam Square

Dublin 2, Ireland

(Address of principal executive offices)

D02 NX53

(Zip Code)

Telephone: (353) (1) 234-3136

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

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

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

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

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

As of October 24, 2022, 206,454,363 of the registrant’s ordinary shares, par value $0.00001 per share, were issued and outstanding.

INDEX

SEAGATE TECHNOLOGY HOLDINGS PLC

PART I

FINANCIAL INFORMATION

See Notes to Condensed Consolidated Financial Statements.

SEAGATE TECHNOLOGY HOLDINGS PLC

CONDENSED CONSOLIDATED BALANCE SHEETS

(In millions)

See Notes to Condensed Consolidated Financial Statements.

SEAGATE TECHNOLOGY HOLDINGS PLC

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In millions, except per share data)

(Unaudited)

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The following is a discussion of the financial condition, changes in financial condition and results of operations for our fiscal quarters ended September 30, 2022, July 1, 2022 and October 1, 2021, referred to herein as the “September 2022 quarter,” the “June 2022 quarter,” and the “September 2021 quarter,” respectively. We operate and report financial results on a fiscal year of 52 or 53 weeks ending on the Friday closest to June 30. The September 2022 quarter, June 2022 quarter and the September 2021 quarter were each 13 weeks.

You should read this discussion in conjunction with financial information and related notes included elsewhere in this report. Unless the context indicates otherwise, as used herein, the terms “we,” “us,” “Seagate,” the “Company” and “our” refer collectively to Seagate Technology Holdings plc, an Irish public limited company, and its subsidiaries. References to “$” or “dollars” are to United States dollars.

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements provide current expectations of future events based on certain assumptions and include any statement that does not directly relate to any historical fact. Forward-looking statements contained in this Quarterly Report on Form 10-Q include, among other things, statements about our plans, strategies and prospects; market demand for our products; shifts in technology; estimates of industry growth; effects of the economic conditions worldwide resulting from the COVID-19 pandemic; expectations regarding the outcome of the U.S. Commerce Department’s Bureau of Industry and Security’s inquiry and proposed charging letter; our ability to effectively manage our cash liquidity position and debt obligations and comply with the covenants in our credit facilities; our restructuring efforts; the sufficiency of our sources of cash to meet cash needs for the next 12 months; our expectations regarding capital expenditures; and projected cost savings for the fiscal year ending June 30, 2023. Forward-looking statements generally can be identified by words such as “expects,” “intends,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “projects,” “may,” “will,” “will continue,” “can,” “could,” or negative of these words, variations of these words and comparable terminology. However, the absence of these words or similar expressions does not mean that a statement is not forward-looking. These forward-looking statements are based on information available to the Company as of the date of this Quarterly Report on Form 10-Q and are based on management’s current views and assumptions. These forward-looking statements are conditioned upon and involve a number of known and unknown risks, uncertainties and other factors that could cause actual results, performance or events to differ materially from those anticipated by these forward-looking statements. Such risks, uncertainties and other factors may be beyond our control and may pose a risk to our operating and financial condition. Such risks and uncertainties include, but are not limited to:

• the uncertainty in the global economy including higher inflationary pressures, increase in interest rates and other adverse changes in the level of economic activity in the major regions in which we do business;

• changes in or adverse outcomes in the Company’s legal proceedings, including regulatory inquires and investigations and related matters;

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

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

• the impact of variable demand, including ongoing demand variation related to the COVID-19 pandemic, changes in market demand and an adverse pricing environment for storage products;

• the effects of the COVID-19 pandemic and related individual, business and government responses on the global economy and their impact on the Company's business, operations and financial results, including impacts to the Company's supply chain resulting from governments' policies and approaches to containing COVID-19;

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

• the Company’s ability to successfully qualify, manufacture and sell its storage products in increasing volumes on a cost-effective basis and with acceptable quality;

• any price erosion or volatility of sales volumes through the Company’s distributor and retail channel;

• disruptions to the Company’s supply chain or production capabilities, including ongoing shortages of certain materials, any electricity restrictions and increases in logistical, materials and operation costs;

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

• changes in tax laws, such as global tax developments applicable to multinational businesses; the impact of trade barriers, such as import/export duties and restrictions, sanctions, tariffs and quotas, imposed by the U.S. or other countries in which the Company conducts business; the evolving legal and regulatory, economic, environmental and administrative climate in the international markets where the Company operates;

• the effect of geopolitical uncertainties, such as international conflicts, on international commerce, the global economy and/or our business;

• the difficulties in implementing a new global enterprise resource planning system; and

• cyber-attacks or other data breaches that disrupt the Company’s operations or result in the dissemination of proprietary or confidential information and cause reputational harm.

Information concerning these and other risks, uncertainties and factors, among others, that could cause results to differ materially from our expectations statements is also set forth in “Part II, Item 1A. Risk Factors” of this Quarterly Report on Form 10-Q, which we encourage you to carefully read. These forward-looking statements should not be relied upon as representing our views as of any date subsequent to the date on which they were made and we undertake no obligation to update forward-looking statements except as required by law.

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

*•*Overview of the September 2022 quarter. Highlights of events in the September 2022 quarter that impacted our financial position.

*•*Results of Operations. Analysis of our financial results comparing the September 2022 quarter to the June 2022 quarter and the September 2021 quarter.

• Liquidity and Capital Resources. Analysis of changes in our balance sheets and cash flows, discussion of our financial condition including potential sources of liquidity and material cash requirements and their general purpose.

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

For an overview of our business, see “Part I, Item 1. Financial Statements—Note 1. Basis of Presentation and Summary of Significant Accounting Policies—Organization.”

Overview of the September 2022 quarter

During the September 2022 quarter, we shipped 118 exabytes of HDD storage capacity. We generated revenue of approximately $2.0 billion with a gross margin of 24% and our operating cash flow was $245 million. We amended our credit agreement and borrowed an additional $600 million term loan facility. We repurchased approximately 5 million of our ordinary shares for $408 million and paid $147 million in dividends.

Recent Development, Economic Conditions and Challenges

During the September 2022 quarter, the data storage industry and our business were impacted by intensified macroeconomic headwinds. We experienced broad-based delay in customers’ purchase plans, particularly in mass capacity market, given overall macroeconomic slowdowns and supply chain shortages for other non-HDD electronic components. The ongoing economic slowdown in China due to the pandemic-related governmental lockdown measures, as well as the negative impact from the higher inflationary pressures in the consumer markets continued to impact our business during the September 2022 quarter. Additionally, our customers continued to experience demand disruptions, resulting in demand variations across certain of our end markets. These recent reductions in demand have required us to reduce manufacturing production plans and incur manufacturing underutilization charges, which may continue.

We continue to actively monitor the effects and potential impacts of the macroeconomic conditions, pandemic and other factors on all aspects of our business, supply chain, liquidity and capital resources. We are also actively working on opportunities to lower our cost structure, drive further operational efficiencies and maintain supply chain discipline including adjusting our manufacturing production plans, annual capital expenditure plans and other meaningful cost savings measures in response to these business conditions. We are complying with governmental rules and guidelines across all of our sites. We expect these factors will continue to impact our business and results of operations over the near-term. For a further discussion of the uncertainties and risks associated with macroeconomic conditions and the COVID-19 pandemic, among others, see “Part II, Item 1A. Risk Factors” of this Quarterly Report on Form 10-Q.

Results of Operations

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

Revenue

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

(1) Revenue is attributed to geography based on bill from locations.

Revenue in the September 2022 quarter decreased by $593 million from the June 2022 quarter and decreased by $1.1 billion from the September 2021 quarter primarily due to the decrease in exabytes shipped as a result of lower market demand in mass capacity and legacy markets that were impacted by macroeconomic and pandemic-related headwinds. We expect the challenge from the demand environment including the macroeconomic conditions and the pandemic-related impacts will continue to persist in the second quarter of fiscal year 2023.

We maintain various sales incentive programs such as channel and OEM rebates. Sales incentive programs were approximately 18% of gross revenue for the September 2022 quarter, 15% for the June 2022 quarter and 13% for the September 2021 quarter. Adjustments to revenues due to under or over accruals for sales incentive programs related to revenues reported in prior quarterly periods were less than 1% of quarterly gross revenue in all periods presented.

Cost of Revenue and Gross Margin

Gross margin for the September 2022 quarter decreased compared to both the June 2022 quarter and the September 2021 quarter primarily driven by approximately $60 million of factory under-utilization cost associated with lower production levels and pandemic-related lockdown in one of our factories, price erosion and unfavorable product mix as the higher margin mass capacity market declined faster than the legacy markets.

In the September 2022 quarter, total warranty cost was 1.2% of revenue and included an unfavorable change in estimates of prior warranty accruals of 0.6% of revenue primarily due to changes to our estimated future product return rates. Warranty cost related to new shipments was 0.6% and 0.7% of revenue for the September 2022 quarter and September 2021 quarter, respectively.

Operating Expenses

Product development expense. Product development expenses decreased by $13 million in the September 2022 quarter compared to the June 2022 quarter primarily due to a $14 million decrease in variable compensation and related benefit expense and a $4 million decrease in materials, partially offset by an $8 million increase in depreciation expenses.

Product development expenses increased by $1 million in the September 2022 quarter compared to the September 2021 quarter primarily due to a $23 million increase in depreciation expenses and a $3 million increase in materials expense, partially offset by a $22 million decrease in variable compensation and related benefit expense.

Marketing and administrative expense. Marketing and administrative expenses decreased by $20 million for the September 2022 quarter compared to the June 2022 quarter primarily due to a $9 million decrease in variable compensation and related benefit expense, an $8 million decrease in compensation and other employee benefits as a result of a decrease in share-based compensation and a $4 million decrease in outside services expense.

Marketing and administrative expenses decreased by $4 million in the September 2022 quarter compared to the September 2021 quarter primarily due to a $15 million decrease in variable compensation expense and a $3 million decrease in compensation and other employee benefits due to a decrease in share-based compensation, partially offset by a $5 million increase in travel expenses as a result of the easing of pandemic-related travel restrictions, a $2 million increase in outside services expense and a $2 million increase in advertising costs.

Amortization of intangibles. Amortization of intangibles for the September 2022 quarter remained relatively flat compared to the June 2022 quarter and the September 2021 quarter.

Restructuring and other, net. Restructuring and other, net was $9 million in the September 2022 quarter primarily related to cost incurred as part of restructuring of our workforce.

Other Expense, Net

Other expense, net. Other expense, net increased by $1 million for the September 2022 quarter compared to the June 2022 quarter primarily due to a $5 million increase in interest expense and a $2 million increase in foreign exchange remeasurement expense partially offset by a net $6 million higher non-recurring loss from our strategic investments in the June 2022 quarter.

Other expense, net increased by $27 million for the September 2022 quarter compared to the September 2021 quarter primarily due to a $12 million increase in interest expense, a net $10 million higher non-recurring gain from our strategic investments in the September 2021 quarter and a $4 million increase in foreign exchange remeasurement expense.

Income Taxes

We recorded an income tax benefit of $2 million for the three months ended September 30, 2022. The income tax benefit for the three months ended September 30, 2022 included approximately $7 million of net discrete tax benefit, primarily associated with the excess tax benefits related to share-based compensation expense.

On August 16, 2022, the Inflation Reduction Act of 2022 (the “IRA”) was enacted into U.S. law. The legislation includes a new corporate alternative minimum tax (the “CAMT”) of 15% on the adjusted financial statement income (“AFSI”) of corporations with average AFSI exceeding $1.0 billion over a three-year period. The CAMT is effective for us beginning in fiscal year 2024. We assessed the potential impact of the CAMT and do not expect to have a material impact to our financial statements or results of operations.

During the three months ended September 30, 2022, our unrecognized tax benefits excluding interest and penalties increased by approximately $1 million to $115 million, substantially all of which would impact the effective tax rate, if recognized, subject to certain future valuation allowance reversals. We do not expect material changes to our unrecognized tax benefits in the next twelve months beginning October 1, 2022.

We recorded an income tax provision of $7 million for the three months ended October 1, 2021. The income tax provision for the three months ended October 1, 2021 included approximately $10 million of net discrete tax benefit, primarily associated with net excess tax benefits related to share-based compensation expense.

Our income tax provision recorded for the three months ended September 30, 2022 and October 1, 2021 differed from the provision for income taxes that would be derived by applying the Irish statutory rate of 25% to income before income taxes, primarily due to the net effect of tax benefits related to (i) non-Irish earnings generated in jurisdictions that are subject to tax incentive programs and are considered indefinitely reinvested outside of Ireland and (ii) current year generation of research credits.

Liquidity and Capital Resources

The following sections discuss our principal liquidity requirements, as well as our sources and uses of cash and our liquidity and capital resources. Our cash and cash equivalents are maintained in investments with remaining maturities of 90 days or less at the time of purchase. The principal objectives of our investment policy are the preservation of principal and maintenance of liquidity. We believe our cash equivalents are liquid and accessible. We operate in some countries that have restrictive regulations over the movement of cash and/or foreign exchange across their borders. However, we believe our sources of cash will continue to be sufficient to fund our operations and meet our cash requirements for the next 12 months. Although there can be no assurance, we believe that our financial resources, along with controlling our costs, capital expenditures and share repurchase levels, will allow us to manage the ongoing impacts of macroeconomic and pandemic-related headwinds including higher inflationary pressures, inventory adjustments by our customers and the overall market demand disruptions on our business operations for the foreseeable future. However, some challenges to our industry and to our business continue to remain uncertain and cannot be predicted at this time. Consequently, we will continue to evaluate our financial position in light of future developments, particularly those relating to the global economic factors and the pandemic.

We are not aware of any downgrades, losses or other significant deterioration in the fair value of our cash equivalents from the values reported as of September 30, 2022.

Cash and Cash Equivalents

Our cash and cash equivalents as of September 30, 2022 increased by $146 million from July 1, 2022 primarily as a result of net proceeds of $600 million from the issuance of long-term debt and net cash of $245 million provided by operating activities partially offset by the repurchases of our ordinary shares of $408 million, dividends paid to our shareholders of $147 million and payments for capital expenditures of $133 million.

Cash Provided by Operating Activities

Cash provided by operating activities for the three months ended September 30, 2022 was $245 million and includes the effects of net income adjusted for non-cash items including depreciation, amortization, share-based compensation and:

*•*a decrease of $434 million in accounts receivable, primarily due to timing of collections; and

• an increase of $110 million cash proceeds received from the settlement of certain interest rate swap agreements; partially offset by

*•*a decrease of $300 million in accounts payable, primarily due to a decrease in materials purchased;

*•*a decrease of $146 million in accrued employee compensation, primarily due to cash paid to our employees as part of our discretionary spending plans; and

• an increase of $41 million in inventories, primarily due to an increase in materials purchased.

Cash Used in Investing Activities

Cash used in investing activities for the three months ended September 30, 2022 was $133 million, primarily attributable to payments for the purchase of property, equipment and leasehold improvements.

Cash Provided by Financing Activities

Net cash provided by financing activities of $34 million for the three months ended September 30, 2022 was primarily attributable to the following activities:

• $600 million in net proceeds from the issuance of Term Loan A3; and

• $29 million in proceeds from the issuance of ordinary shares under employee stock plans; partially offset by

• $408 million in payments for repurchases of our ordinary shares;

• $147 million in dividend payments; and

• $39 million in payments for taxes related to net share settlement of equity awards.

Liquidity Sources

Our primary sources of liquidity as of September 30, 2022, consist of: (1) approximately $761 million in cash and cash equivalents, (2) cash we expect to generate from operations and (3) $1.75 billion available for borrowing under our Revolving Credit Facility, which is part of the Credit Agreement. On August 18, 2022, we entered into the Sixth Amendment to the Credit Agreement which permits us to increase the revolving loan commitments or obtain new term loans of up to $100 million in aggregate, subject to the satisfaction of certain terms and conditions.

As of September 30, 2022, no borrowings (including swing line loans) were outstanding and no commitments were utilized for letters of credit issued under the Revolving Credit Facility. The Revolving Credit Facility is available for borrowings, subject to compliance with financial covenants and other customary conditions to borrowing.

The Credit Agreement includes three financial covenants: (1) interest coverage ratio, (2) total leverage ratio and (3) a minimum liquidity amount. The term of the Revolving Credit Facility is through October 14, 2026. As of September 30, 2022, we were in compliance with all of the covenants under our debt agreements. We continue to evaluate our debt portfolio and structure to ensure we are able to comply with our financial debt covenants.

We believe that our sources of cash will be sufficient to fund our operations and meet our cash requirements for at least the next 12 months. Our ability to fund liquidity requirements beyond 12 months will depend on our future cash flows, which are determined by future operating performance, and therefore, subject to prevailing global macroeconomic conditions and financial, business and other factors, some of which are beyond our control. For additional information on risks and factors that could impact our ability to fund our operations and meet our cash requirements, including the pandemic, among others, see “Part II, Item 1A. Risk Factors” of this Quarterly Report on Form 10-Q.

Cash Requirements and Commitments

Our liquidity requirements are primarily to meet our working capital, product development and capital expenditure needs, to fund scheduled payments of principal and interest on our indebtedness and to fund our quarterly dividend and any future strategic investments. As of September 30, 2022, our contractual cash requirements have not changed materially since our Annual Report on Form 10-K for the fiscal year ended July 1, 2022, except for long-term debt obligations.

Long-term debt and interest payments on debt

The Sixth Amendment to the Credit Agreement provides for a new Term Loan A3 in the aggregate principal amount of $600 million. Term Loan A3 was borrowed in full at the closing of the Sixth Amendment. Term Loan A3 bears interest at a rate of SOFR plus a variable margin of 1.25% to 2.5%, in each case with such margin being determined based on the corporate credit rating of the Borrower or one of its parent entities. Term Loan A3 is repayable in quarterly installments beginning on December 31, 2022 and is scheduled to mature on July 30, 2027. The Sixth Amendment to the Credit Agreement also replaced the LIBOR interest rates plus variable margin of Term Loans A1 and A2 with the SOFR interest rates plus a variable margin that will be determined based on the corporate credit rating of the Borrower or one of its parent entities.

As of September 30, 2022, the future principal payment obligation on our long-term debt was $6.3 billion, of which $636 million will mature within one year. As of September 30, 2022, future interest payments on these outstanding debt is estimated to be approximately $1.5 billion, of which $293 million is expected to be paid within one year. From time to time, we may repurchase any of our outstanding senior notes in open market or privately negotiated purchases or otherwise, or we may repurchase outstanding senior notes pursuant to the terms of the applicable indenture. Refer to “Item 1. Financial Statements—Note 3. Debt” for more details.

Dividends

During the September 2022 quarter, our Board of Directors declared dividends of $0.70 per share, totaling $145 million, which was paid on October 5, 2022. On October 26, 2022, our Board of Directors declared a quarterly cash dividend of $0.70 per share, payable on January 5, 2023 to shareholders of record at the close of business on December 21, 2022. Our ability to pay dividends in the future will be subject to, among other things, general business conditions within the data storage industry, our financial results, the impact of paying dividends on our credit ratings and legal and contractual restrictions on the payment of dividends by our subsidiaries to us or by us to our ordinary shareholders, including restrictions imposed by covenants on our debt instruments.

Share repurchases

From time to time, at the Company’s discretion, we may repurchase any of our outstanding ordinary shares through private, open market, or broker-assisted purchases, tender offers, or other means, including through the use of derivative transactions. During the September 2022 quarter, we repurchased approximately 6 million of our ordinary shares including shares withheld for statutory tax withholdings related to vesting of employee equity awards. As of September 30, 2022, $1.9 billion remained available for repurchase under our existing repurchase authorization limit. We may limit or terminate the repurchase program at any time. All repurchases are effected as redemptions in accordance with our Constitution.

Other

For fiscal year 2023, we expect capital expenditures to be below our long-term targeted range of 4% to 6% of revenue. We require substantial amounts of cash to fund any increased working capital requirements, future capital expenditures, scheduled payments of principal and interest on our indebtedness and payments of dividends. We will continue to evaluate and manage the retirement and replacement of existing debt and associated obligations, including evaluating the issuance of new debt securities, exchanging existing debt securities for other debt securities and retiring debt pursuant to privately negotiated transactions, open market purchases, tender offers or other means or otherwise. In addition, we may selectively pursue strategic alliances, acquisitions, joint ventures and investments, which may require additional capital.

Subsequent event

On October 24, 2022, our Board of Directors approved and committed to the October 2022 Plan to reduce its cost structure to better align our operational needs to current economic conditions while continuing to support the long-term business strategy. The October 2022 Plan includes reducing our worldwide headcount by approximately 3,000 employees, or 8% of the global workforce, along with other cost saving measures.

The October 2022 Plan, which we expect to be substantially completed by the end of the fiscal second quarter 2023, is expected to result in total pre-tax charges between $60 million and $70 million. These charges are expected to be primarily cash-based and consist of employee severance and other one-time termination benefits.

Critical Accounting Policies

Our discussion and analysis of financial condition and results of operations are based upon our condensed consolidated financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles. The preparation of such statements requires us to make estimates and assumptions that affect the reported amounts of revenues and expenses during the reporting period and the reported amounts of assets and liabilities as of the date of the financial statements. Our estimates are based on historical experience and other assumptions that we consider to be appropriate in the circumstances. However, actual future results may vary from our estimates.

Other than as described in “Part I, Item 1. Financial Statements—Note 1. Basis of Presentation and Summary of Significant Accounting Policies”, there have been no other material changes in our critical accounting policies and estimates. Refer to “Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the fiscal year ended July 1, 2022, as filed with the SEC on August 5, 2022, for a discussion of our critical accounting policies and estimates.

Recent Accounting Pronouncements

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

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

Interest Rate Risk. Our exposure to market risk for changes in interest rates relates primarily to our cash investment portfolio. As of September 30, 2022, we had no available-for-sale debt securities that had been in a continuous unrealized loss position for a period greater than 12 months. We determined no impairment related to credit losses for available-for-sale debt securities as of September 30, 2022.

We have fixed rate and variable rate debt obligations. We enter into debt obligations for general corporate purposes including capital expenditures and working capital needs. Our Term Loans bear interest at a variable rate equal to SOFR plus a variable margin.

We have entered into certain interest rate swap agreements to convert the variable interest rate on the Term Loans to fixed interest rates. The objective of the interest rate swap agreements is to eliminate the variability of interest payment cash flows associated with the variable interest rate under the Term Loans. We designated the interest rate swaps as cash flow hedges. As of September 30, 2022, the aggregate notional amount of the Company’s interest-rate swap contracts was $1.6 billion, of which $600 million will mature in September 2025 and $1 billion will mature in July 2027.

The table below presents principal amounts and related fixed or weighted-average interest rates by year of maturity for our investment portfolio and debt obligations as of September 30, 2022.

Foreign Currency Exchange Risk. From time to time, we may enter into foreign currency forward exchange contracts to manage exposure related to certain foreign currency commitments and anticipated foreign currency denominated expenditures. Our policy prohibits us from entering into derivative financial instruments for speculative or trading purposes.

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

We recognized a net loss of $7 million and gain of $2 million in Cost of revenue and Interest expense, respectively, related to the loss of hedge designation on discontinued cash flow hedges during the three months ended September 30, 2022.

The table below provides information as of September 30, 2022 about our foreign currency forward exchange contracts. The table is provided in dollar equivalent amounts and presents the notional amounts (at the contract exchange rates) and the weighted-average contractual foreign currency exchange rates.

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

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

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

We are subject to equity market risks due to changes in the fair value of the notional investments selected by our employees as part of our non-qualified deferred compensation plan—the SDCP. In fiscal year 2014, we entered into a TRS agreement in order to manage the equity market risks associated with the SDCP liabilities. We pay a floating rate, based on LIBOR plus an interest rate spread, on the notional amount of the TRS. The TRS is designed to substantially offset changes in the SDCP liabilities due to changes in the value of the investment options made by employees. See “Part I, Item 1. Financial Statements—Note 6. Derivative Financial Instruments” of this Quarterly Report on Form 10-Q.

Evaluation of Disclosure Controls and Procedures

As required by the Exchange Act Rule 13a-15, we carried out an evaluation under the supervision and with the participation of our management, including our chief executive officer and chief financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this Quarterly Report. Based on the evaluation, our management, including our chief executive officer and chief financial officer, concluded that our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) are effective as of September 30, 2022.

Changes in Internal Control over Financial Reporting

During the quarter ended September 30, 2022, there were no changes in our internal control over financial reporting that have materially affected, or were reasonably likely to materially affect, our internal control over financial reporting.

PART II

OTHER INFORMATION

**ITEM 1.**LEGAL PROCEEDINGS

For a discussion of legal proceedings, see “Part I, Item 1. Financial Statements—Note 12. Legal, Environmental and Other Contingencies” of this Quarterly Report on Form 10-Q.

Summary of Risk Factors

The following is a summary of the principal risks and uncertainties that could materially adversely affect our business, results of operations, financial condition, cash flows, brand and/or the price of our outstanding ordinary shares, and make an investment in our ordinary shares speculative or risky. You should read this summary together with the more detailed description of each risk factor contained below. The descriptions below include any material changes to and supersede the description of the risk factors affecting our business disclosed in “Part I, Item 1A. Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended July 1, 2022.

Risks Related to our Business, Operations and Industry

• Our ability to increase our revenue and maintain our market share depends on our ability to successfully introduce and achieve market acceptance of new products on a timely basis. If our products do not keep pace with customer requirements, our results of operations will be adversely affected.

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

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

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

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

• Changes in demand for computer systems, data storage subsystems and consumer electronic devices may in the future cause a decline in demand for our products, or an increase in demand for our products that we are unable to meet.

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

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

• We may not be successful in our efforts to grow our systems, SSD and Lyve revenues.

• Our worldwide sales and manufacturing operations subject us to risks that may adversely affect our business related to disruptions in international markets, currency exchange fluctuations, increased costs and global health outbreaks.

• The ongoing COVID-19 pandemic has impacted our business, operating results and financial condition, as well as the operations and financial performance of many of the customers and suppliers in industries that we serve. We are unable to predict the extent to which the pandemic and related effects will adversely impact our business operations, financial performance, results of operations, financial position and the achievement of our strategic objectives.

• If we do not control our costs, we will not be able to compete effectively.

Risks Associated with Supply and Manufacturing

• Shortages or delays in the receipt of, or cost increases in, critical components, equipment or raw materials necessary to manufacture our products, may cause us to suffer lower operating margins, production delays and other material adverse effects.

• Shortages or delays in critical components, as well as reliance on single-source suppliers, can affect our production and development of products and may harm our operating results.

• If revenues fall or customer demand decreases significantly, we may not meet all of our purchase commitments to certain suppliers, which could result in penalties, increased manufacturing costs or excess inventory.

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

Risks Related to Human Capital

• The loss of or inability to attract, retain and motivate key executive officers and employees could negatively impact our business prospects.

• We are subject to risks related to corporate and social responsibility and reputation.

Risks Related to Financial Performance or General Economic Conditions

• Changes in the macroeconomic environment have impacted and may in the future negatively impact our results of operations.

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

• We are subject to counterparty default risks.

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

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

• The effect of geopolitical uncertainties, war, terrorism, natural disasters, public health issues and other circumstances, on national and/ or international commerce and on the global economy, could materially adversely affect our results of operations and financial condition.

Legal, Regulatory and Compliance Risks

• Our business is subject to various laws, regulations, governmental policies, litigation, governmental investigations or governmental proceedings that may cause us to incur significant expense or adversely impact our results or operations and financial condition.

• Some of our products and services are subject to export control laws and other laws affecting the countries in which our products and services may be sold, distributed, or delivered, and any changes to or violation of these laws could have a material adverse effect on our business, results of operations, financial condition and cash flows.

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

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

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

• Our business and certain products and services depend in part on IP and technology licensed from third parties, as well as data centers and infrastructure operated by third parties.

Risks Related to Information Technology, Data and Information Security

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

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

Risks Related to Owning our Ordinary Shares

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

• Any decision to reduce or discontinue the payment of cash dividends to our shareholders or the repurchase of our ordina

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