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Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following is a discussion of the Company’s financial condition, changes in financial condition and results of operations for the fiscal quarters ended September 27, 2024, June 28, 2024 and September 29, 2023, referred to herein as the “September 2024 quarter”, the “June 2024 quarter” and the “September 2023 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 2024 quarter, June 2024 quarter and September 2023 quarter were each 13 weeks.

You should read this discussion in conjunction with financial information and related notes included in this Quarterly Report on Form 10-Q, as well as our Annual Report on Form 10-K for the fiscal year ended June 28, 2024. 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. These statements include, among other things, statements about our plans, programs, strategies and prospects; anticipated shifts in technology and storage industry trends, and anticipated demand for and performance of new storage product introductions; expectations regarding market demand for our products and technologies and our ability to optimize our level of production and meet market and industry expectations and the effects of these future trends on our performance; financial outlook for future periods; expectations regarding our ability to service debt, meet debt and credit agreement covenants and continue to generate free cash flow; expectations regarding our ability to make timely quarterly payments under the Settlement Agreement with BIS; the impact of macroeconomic headwinds and customer inventory adjustments on our business and operations; our cost saving plans, including our ability to execute such plans, the projected savings under such plans and the assumptions on which the plans and projected savings are based; expectations regarding our business strategy and performance; the sufficiency of our sources of cash to meet cash needs for the next 12 months; and our expectations regarding capital expenditures and dividend issuance plans. Forward-looking statements generally can be identified by words such as “expects,” “intends,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “projects,” “should,” “may,” “will,” “will continue,” “can,” “could,” or negative of these words, variations of these words and comparable terminology, in each case, intended to refer to future events or circumstances. However, the absence of these words or similar expressions does not mean that a statement is not forward-looking. 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 subject to known and unknown risks and uncertainties that could cause actual results, performance or events to differ materially from historical experience and our present expectations or projections. Therefore, undue reliance should not be placed on forward-looking statements. These risks and uncertainties include, but are not limited to, those set forth in “Part II, Item 1A. Risk Factors” in this Quarterly Report on Form 10-Q. 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 2024 quarter. Highlights of events in the September 2024 quarter that impacted our financial position.

*•*Results of Operations. Analysis of our financial results comparing the September 2024 quarter to the June 2024 quarter and the September 2023 quarter.

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

  • Critical Accounting Policies and Estimates. Accounting policies and 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 2024 quarter

During the September 2024 quarter, we shipped 138 exabytes of HDD storage capacity. We generated revenue of approximately $2.2 billion with a gross margin of 33%. Our operating cash flow was $95 million and we paid $147 million in dividends.

Recent Developments, Economic Conditions and Challenges

During the September 2024 quarter, revenue growth was driven by continued improvement in cloud customer demand for our high capacity nearline drives along with an increase in demand from the enterprise and OEM markets. We continue to exercise cost discipline and implement pricing actions to improve operational efficiency and profitability. The macroeconomic environment remains dynamic, which may impact our business and results of operations. However, we expect our HDD storage business to benefit from further growth in data demand, including potential demand driven by the adoption of Generative AI applications.

For a further discussion of the uncertainties and business risks, 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 dollar amounts and as a percentage of revenue:

For The Three Months Ended
(Dollars in millions)September 27, 2024June 28, 2024September 29, 2023
Revenue$2,168$1,887$1,454
Cost of revenue1,4541,2871,305
Gross profit714600149
Product development181158171
Marketing and administrative129131105
Restructuring and other, net1(3)2
Income (loss) from operations403314(129)
Other (expense) income, net(87)224(18)
Income (loss) before income taxes316538(147)
Provision for income taxes112537
Net Income (loss)$305$513$(184)
For The Three Months Ended
September 27, 2024June 28, 2024September 29, 2023
Revenue100%100%100%
Cost of revenue676890
Gross margin333210
Product development8812
Marketing and administrative677
Restructuring and other, net———
Operating margin1917(9)
Other (expense) income, net(4)12(1)
Income (loss) before income taxes1529(10)
Provision for income taxes113
Net Income (loss)14%28%(13)%

Revenue

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

For The Three Months Ended
September 27, 2024June 28, 2024September 29, 2023
Revenues by Channel (%)
OEMs81%79%71%
Distributors11%12%18%
Retailers8%9%11%
Revenues by Geography (%) (1)
Asia Pacific40%54%56%
Americas50%36%31%
EMEA10%10%13%
Revenues by Market (%)
Mass capacity80%76%70%
Legacy12%15%19%
Other8%9%11%
HDD Exabytes Shipped by Market
Mass capacity12810479
Legacy101011
Total13811490
HDD Price per Terabyte$15$15$14

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

Revenue in the September 2024 quarter increased by $281 million compared to the June 2024 quarter, primarily due to an increase in mass capacity exabytes shipped as we experienced improved demand for our nearline products, and favorable pricing actions undertaken by the Company.

Revenue in the September 2024 quarter increased by $714 million compared to the September 2023 quarter, primarily due to an increase in mass capacity exabytes shipped as we experienced improved demand for our nearline products, and favorable pricing actions undertaken by the Company.

We maintain various sales incentive programs such as channel and OEM rebates. Sales incentive programs were approximately 13% of gross revenue for the September 2024 quarter, 12% for the June 2024 quarter and 20% for the September 2023 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

For The Three Months Ended
(Dollars in millions)September 27, 2024June 28, 2024September 29, 2023
Cost of revenue$1,454$1,287$1,305
Gross profit714600149
Gross margin33%32%10%

Gross margin for the September 2024 quarter increased compared to the June 2024 quarter, primarily driven by favorable product mix and an improved pricing environment.

Gross margin for the September 2024 quarter increased compared to the September 2023 quarter, primarily driven by favorable product mix and pricing actions undertaken by the Company, as well as $118 million of order cancellation fees, $59 million of factory underutilization charges, and $13 million of accelerated depreciation expense for certain capital equipment in the September 2023 quarter that did not recur.

Warranty cost related to new shipments was 0.7%, 0.7% and 0.9% of revenue for the September 2024 quarter, June 2024 quarter and September 2023 quarter, respectively.

Operating Expenses

For The Three Months Ended
(Dollars in millions)September 27, 2024June 28, 2024September 29, 2023
Product development$181$158$171
Marketing and administrative129131105
Restructuring and other, net1(3)2
Operating expenses$311$286$278

Product Development Expense. Product development expenses increased by $23 million in the September 2024 quarter compared to the June 2024 quarter primarily due to a $19 million increase in compensation and other employee benefits as a result of the variable compensation expense recognized in the September 2024 quarter, and a $3 million increase in materials expense.

Product development expenses increased by $10 million in the September 2024 quarter compared to the September 2023 quarter primarily due to an $11 million increase in compensation and other employee benefits as a result of the variable compensation expense recognized in the September 2024 quarter and temporary salary reductions in the September 2023 quarter, a $1 million increase in equipment expense, a $1 million increase in travel expense and a $1 million increase in lease expense, partially offset by a $5 million decrease in materials expense.

Marketing and Administrative Expense. Marketing and administrative expenses decreased by $2 million in the September 2024 quarter compared to the June 2024 quarter primarily due to an $8 million decrease in outside services expense, partially offset by a $5 million net increase in compensation and other employee benefits due to the variable compensation expense recognized in the September 2024 quarter.

Marketing and administrative expenses increased by $24 million in the September 2024 quarter compared to the September 2023 quarter primarily due to a $20 million increase in compensation and other employee benefits as a result of the variable compensation expense in the September 2024 quarter and temporary salary reductions in the September 2023 quarter and a $2 million increase in travel expense.

Other (Expense) Income, net

For The Three Months Ended
(Dollars in millions)September 27, 2024June 28, 2024September 29, 2023
Other (expense) income, net$(87)$224$(18)

Other (expense) income, net. Other expense, net increased by $311 million in the September 2024 quarter compared to the June 2024 quarter primarily due to a $313 million gain from the sale of System-on-Chip operations in the June 2024 quarter, partially offset by a $7 million decrease in net loss from equity investments.

Other expense, net increased by $69 million in the September 2024 quarter compared to the September 2023 quarter primarily due to a $104 million net gain recognized from the termination of interest rate swaps associated with the repayment of term loans in the September 2023 quarter, partially offset by a $29 million net loss recognized from early redemption of debt in the September 2023 quarter and a $5 million increase in interest income in the September 2024 quarter.

Income Taxes

For the three months ended September 27, 2024 and September 29, 2023, we recorded income tax expense of $11 million and $37 million, respectively. For further discussion, refer to “Part I, Item 1. Financial Statements—Note 4. Income Taxes”.

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 and capital expenditures, will allow us to manage the ongoing impact of 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.

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 27, 2024. For additional information on risks and factors that could impact our ability to fund our operations and meet our cash requirements, see “Part II, Item 1A. Risk Factors” of this Quarterly Report on Form 10-Q.

Cash and Cash Equivalents

As of
(Dollars in millions)September 27, 2024June 28, 2024Change
Cash and cash equivalents$1,239$1,358$(119)

Our cash and cash equivalents as of September 27, 2024 decreased by $119 million from June 28, 2024 primarily as a result of $147 million dividends paid to our shareholders and $68 million payments for capital expenditures, partially offset by net cash of $95 million provided by operating activities.

Cash Provided by Operating Activities

Cash provided by operating activities for the three months ended September 27, 2024 was $95 million and includes the effects of net income adjusted for non-cash items including depreciation, amortization, share-based compensation, and:

  • an increase of $37 million in accrued employee compensation, primarily due to an increase in our variable compensation expense; partially offset by

  • an increase of $199 million in accounts receivable, primarily due to increased revenue; and

  • an increase of $144 million in inventories, primarily due to an increase in purchased materials.

Cash Used in Investing Activities

Net cash used in investing activities for the three months ended September 27, 2024 was $68 million, attributable to payments for the purchase of property, equipment and leasehold improvements.

Cash Used in Financing Activities

Net cash used in financing activities of $146 million for the three months ended September 27, 2024 was primarily attributable to the following activities:

  • $147 million in dividends paid to our shareholders; and

  • $28 million taxes paid related to net share settlement of equity awards; partially offset by

  • $29 million in proceeds from the issuance of ordinary shares under employee stock plans.

Liquidity Sources

Our primary sources of liquidity as of September 27, 2024, consist of: (1) approximately $1.2 billion in cash and cash equivalents, (2) cash we expect to generate from operations and (3) $1.5 billion available for borrowing under our senior unsecured revolving credit facility (“Revolving Credit Facility”), which is part of our Credit Agreement (as defined below).

As of September 27, 2024, 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.

As of September 27, 2024, the Credit Agreement includes two financial covenants: (1) interest coverage ratio and (2) net leverage ratio. We continue to evaluate our debt portfolio and structure to comply with our financial debt covenants. As of September 27, 2024, we were in compliance with all of the covenants under our debt agreements. Refer to “Part I, Item 1. Financial Statements—Note 3. Debt” for more details.

As of September 27, 2024, cash and cash equivalents held by our subsidiaries was $1.2 billion. This amount is potentially subject to taxation in Singapore upon repatriation by means of an intercompany dividend into our parent company, unless certain exemption is given, or a special approval is granted by the Ministry of Finance in Singapore. However, it is our intent to indefinitely reinvest earnings of subsidiaries in excess of the amount paid as dividends to shareholders. Our current plans do not demonstrate a need to repatriate such excess earnings. Should funds be needed in the parent company and should we be unable to fund parent company activities through means other than a taxable repatriation, we would be required to accrue and pay taxes on such dividend.

We believe that our sources of cash will be sufficient to fund our operations and meet our cash requirements for at least the next 12 months. 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, 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 27, 2024, our contractual cash requirements have not changed materially outside of the normal course of business since our fiscal year ended June 28, 2024.

Purchase obligations

Purchase obligations are defined as contractual obligations for the purchase of goods or services, which are enforceable and legally binding on us, and that specify all significant terms. From time to time, we enter into long-term, non-cancelable purchase commitments or make large up-front investments with certain suppliers in order to secure certain components or technologies for the production of our products or to supplement our internal manufacturing capacity for certain components. As of September 27, 2024, we had unconditional purchase obligations of approximately $862 million, primarily related to purchases of inventory components with our suppliers. We expect $809 million of these commitments to be paid within one year. In addition, we also had certain long-term, market share-based, non-cancellable inventory purchase commitments as of September 27, 2024.

We recorded order cancellation fees to terminate certain purchase commitments related to the purchase of inventory components and equipment. As of September 27, 2024, the cumulative unpaid order cancellation fees on the Condensed Consolidated Balance Sheets were $58 million, with $32 million in Accounts payable and $26 million in Accrued expenses, all of which is expected to be paid within one year. In certain instances, our unpaid order cancellation fees may change based on the expected timing or ongoing negotiations with our suppliers.

Long-term debt and interest payments on debt

As of September 27, 2024, the future principal payment obligation on our long-term debt was $5.7 billion, of which $479 million will mature within one year. As of September 27, 2024, future interest payments on this outstanding debt is estimated to be approximately $1.9 billion, of which $312 million is expected to be paid within one year. From time to time, we may repurchase, redeem or otherwise extinguish any of our outstanding senior notes in open market or privately negotiated purchases or otherwise, or we may repurchase or redeem outstanding senior notes pursuant to the terms of the applicable indenture. Refer to “Item 1. Financial Statements—Note 3. Debt” for more details.

BIS settlement penalty

We accrued a settlement penalty of $300 million for fiscal year 2023, related to BIS’ allegations of violations of the U.S. EAR, which were subsequently resolved by the Settlement Agreement in April 2023. As part of the Settlement Agreement with BIS, quarterly payments of $15 million are made over the course of five years beginning October 31, 2023, of which $60 million is expected to be paid within one year and $180 million thereafter. Refer to “Item 1. Financial Statements—Note 11. Legal, Environmental and Other Contingencies” for more details.

Dividends

On October 22, 2024, our Board of Directors declared a quarterly cash dividend of $0.72 per share, which will be payable on January 6, 2025 to shareholders of record as of the close of business on December 15, 2024. 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 our 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. As of September 27, 2024, $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 2025, we expect capital expenditures to be higher than fiscal year 2024. 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.

Critical Accounting Estimates

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. GAAP. 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 June 28, 2024, as filed with the SEC on August 2, 2024, for a discussion of our critical accounting policies and estimates.

Recent Accounting Pronouncements

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

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