filings.toolsItem 6. Selected Financial Data
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Item 6. Selected Financial Data
Financial Highlights
This selected consolidated financial data should be read together with the Consolidated Financial Statements and related Notes contained in this Annual Report on Form 10‑K, as well as the section of this Annual Report on Form 10‑K entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
| June 28, 2019 | June 29, 2018 | June 30, 2017 | July 1, 2016 | July 3, 2015 | |||||||||||||||
| (in millions, except per share and employee data) | |||||||||||||||||||
| Revenue, net | $ | 16,569 | $ | 20,647 | $ | 19,093 | $ | 12,994 | $ | 14,572 | |||||||||
| Gross profit | 3,752 | 7,705 | 6,072 | 3,435 | 4,221 | ||||||||||||||
| Net income (loss) | (754 | ) | 675 | 397 | 242 | 1,465 | |||||||||||||
| Income (loss) per common share: | |||||||||||||||||||
| Basic | $ | (2.58 | ) | $ | 2.27 | $ | 1.38 | $ | 1.01 | $ | 6.31 | ||||||||
| Diluted | $ | (2.58 | ) | $ | 2.20 | $ | 1.34 | $ | 1.00 | $ | 6.18 | ||||||||
| Cash dividends declared per common share | $ | 2.00 | $ | 2.00 | $ | 2.00 | $ | 2.00 | $ | 1.80 | |||||||||
| Working capital | $ | 4,660 | $ | 6,182 | $ | 6,712 | $ | 5,635 | $ | 5,275 | |||||||||
| Total assets | $ | 26,370 | $ | 29,235 | $ | 29,860 | $ | 32,862 | $ | 15,170 | |||||||||
| Long-term debt | $ | 10,246 | $ | 10,993 | $ | 12,918 | $ | 13,660 | $ | 2,149 | |||||||||
| Shareholders’ equity | $ | 9,967 | $ | 11,531 | $ | 11,418 | $ | 11,145 | $ | 9,219 | |||||||||
| Number of employees (1) | 61,800 | 71,600 | 67,600 | 72,900 | 76,400 |
| (1) | Excludes temporary employees and contractors. |
Results for Tegile Systems, Inc., Upthere, Inc., SanDisk Corporation and Amplidata NV, which were acquired on September 15, 2017, August 25, 2017, May 12, 2016 and March 9, 2015, respectively, are included in our operating results only after their respective dates of acquisition.
| Management’s Discussion and Analysis of Financial Conditions and Results of Operations |
Our Company
We are a leading developer, manufacturer and provider of data storage devices and solutions that address the evolving needs of the information technology (“IT”) industry and the infrastructure that enables the proliferation of data in virtually every other industry. We create environments for data to thrive. We drive the innovation needed to help customers capture, preserve, access and transform an ever-increasing diversity of data. Everywhere data lives, from advanced data centers to mobile sensors to personal devices, our industry-leading solutions deliver the possibilities of data.
Our broad portfolio of technology and products address the following key end markets: Client Devices; Data Center Devices and Solutions; and Client Solutions. We also generate license and royalty revenue from our extensive intellectual property (“IP”), which is included in each of these three end market categories.
Our fiscal year ends on the Friday nearest to June 30 and typically consists of 52 weeks. Approximately every five to six years, we report a 53-week fiscal year to align the fiscal year with the foregoing policy. Fiscal years 2019, which ended on June 28, 2019, 2018, which ended on June 29, 2018, and 2017, which ended on June 30, 2017, are each comprised of 52 weeks, with all quarters presented consisting of 13 weeks. Fiscal year 2020, which ends on July 3, 2020, will be comprised of 53 weeks, with the first quarter consisting of 14 weeks and the remaining quarters consisting of 13 weeks each.
Key Developments
Flash Ventures
Through our three business ventures with Toshiba Memory Corporation (“TMC”), referred to as “Flash Ventures”, we and TMC operate flash-based memory wafer manufacturing facilities in Japan. We are obligated to pay for variable costs incurred in producing our share of Flash Ventures’ flash-based memory wafer supply, based on our three month forecast, which generally equals 50% of Flash Ventures’ output. In addition, we are obligated to pay for half of Flash Ventures’ fixed costs regardless of the output we choose to purchase. We are also obligated to fund 49.9% to 50% of Flash Ventures’ capital investments to the extent that Flash Ventures’ operating cash flow is insufficient to fund these investments.
Since its inception, Flash Ventures has been based in a manufacturing site in Yokkaichi, Japan, which currently includes five wafer fabrication facilities. In May 2019, we entered into additional agreements with TMC to extend Flash Ventures to a new wafer fabrication facility, known as “K1,” located in Kitakami, Japan. The primary purpose of K1 is to provide clean room space to continue the transition of existing flash-based wafer capacity to newer technology nodes. Output from the initial production line at K1 is expected in the second half of fiscal year 2020. Meaningful output from K1 is not expected to begin until the first half of fiscal year 2021. Our share of the initial commitment for K1 is expected to result in equipment investments, relocation costs and start-up costs totaling approximately $660 million, to be incurred primarily through the second half of fiscal year 2020. We also agreed to prepay an aggregate of approximately $360 million over a 3-year period beginning in the first half of fiscal year 2020 toward K1 building depreciation, to be credited against future wafer charges.
The flash industry is characterized by cyclicality as it responds to variations in customers’ demand for products and manages production capacity to meet that demand. As technology conversions have matured and manufacturing yields have improved, flash supply has increased relative to demand. As a result, average selling price per gigabyte of flash-based products has declined in recent quarters.
Flash Ventures has historically operated near 100% of its manufacturing capacity. As a result of flash business conditions, we chose to temporarily reduce our utilization of our share of Flash Ventures’ manufacturing capacity at the Yokkaichi site to an abnormally low level through the end of fiscal year 2019 to more closely align our flash-based wafer supply with the projected demand. As a result of this temporary reduction to abnormally low production levels, we incurred costs of $264 million associated with the reduction in utilization, which was recorded as a charge to cost of revenue in the year ended June 28, 2019.
Production levels at the Yokkaichi site have also been reduced as a result of an unexpected power outage incident that occurred in the Yokkaichi region on June 15, 2019. The power outage incident impacted the facilities and process tools and resulted in the damage of flash wafers in production. We expect the incident to result in a reduction of our flash wafer availability of less than 6 exabytes, the majority of which is expected to be contained in the first quarter of fiscal year 2020. As a result of this power outage incident, we incurred aggregate charges of $145 million recorded in cost of revenue for the year ended June 28, 2019, which primarily consisted of the write-off of damaged inventory and unabsorbed manufacturing overhead costs. We expect additional charges of less than $100 million to be recorded in cost of revenue by the end of the first quarter of fiscal 2020. We are pursuing recovery of our losses associated with this event; however, the amount of any recovery cannot be estimated at this time.
Cost and Expense Reduction Actions
During fiscal 2019, we implemented actions to better align our cost and expense structure to near-term business conditions. These actions included accelerating the closure of our HDD manufacturing facility in Kuala Lumpur, Malaysia, reducing other HDD manufacturing costs and other measures to reduce our costs and expenses. We incurred costs of $166 million for the year ended June 28, 2019 in connection with the implementation of these actions and we expect to reduce costs of revenue and operating expenses by $800 million on an annualized basis. The reductions are split approximately equally between cost of revenue and operating expenses. The level of our cost of revenue and operating expenses in any particular period may vary based on differing levels of incentive cash compensation, payroll tax increases, and unexpected or non-recurring costs or expenses, as well as the impact of a 14th week in the first quarter of fiscal 2020.
Results of Operations
Summary Comparison of 2019, 2018 and 2017
The following table sets forth, for the periods presented, selected summary information from our Consolidated Statements of Operations by dollars and percentage of net revenue(1):
| 2019 | 2018 | 2017 | ||||||||||||||||||
| (in millions, except percentages) | ||||||||||||||||||||
| Revenue, net | $ | 16,569 | 100.0 | % | $ | 20,647 | 100.0 | % | $ | 19,093 | 100.0 | % | ||||||||
| Cost of revenue | 12,817 | 77.4 | 12,942 | 62.7 | 13,021 | 68.2 | ||||||||||||||
| Gross profit | 3,752 | 22.6 | 7,705 | 37.3 | 6,072 | 31.8 | ||||||||||||||
| Operating Expenses: | ||||||||||||||||||||
| Research and development | 2,182 | 13.2 | 2,400 | 11.6 | 2,441 | 12.8 | ||||||||||||||
| Selling, general and administrative | 1,317 | 7.9 | 1,473 | 7.1 | 1,445 | 7.6 | ||||||||||||||
| Employee termination, asset impairment, and other charges | 166 | 1.0 | 215 | 1.0 | 232 | 1.2 | ||||||||||||||
| Total operating expenses | 3,665 | 22.1 | 4,088 | 19.8 | 4,118 | 21.6 | ||||||||||||||
| Operating income | 87 | 0.5 | 3,617 | 17.5 | 1,954 | 10.2 | ||||||||||||||
| Interest and other income (expense): | ||||||||||||||||||||
| Interest income | 57 | 0.3 | 60 | 0.3 | 26 | 0.1 | ||||||||||||||
| Interest expense | (469 | ) | (2.8 | ) | (676 | ) | (3.3 | ) | (847 | ) | (4.4 | ) | ||||||||
| Other income, net | 38 | 0.2 | (916 | ) | (4.4 | ) | (364 | ) | (1.9 | ) | ||||||||||
| Total interest and other expense, net | (374 | ) | (2.3 | ) | (1,532 | ) | (7.4 | ) | (1,185 | ) | (6.2 | ) | ||||||||
| Income (loss) before taxes | (287 | ) | (1.7 | ) | 2,085 | 10.1 | 769 | 4.0 | ||||||||||||
| Income tax expense | 467 | 2.8 | 1,410 | 6.8 | 372 | 1.9 | ||||||||||||||
| Net income (loss) | $ | (754 | ) | (4.6 | )% | $ | 675 | 3.3 | % | $ | 397 | 2.1 | % |
| (1) | Percentages may not total due to rounding. |
The following table sets forth, for the periods presented, summary information regarding our revenue(1):
| 2019 | 2018 | 2017 | |||||||||
| (in millions, except percentages) | |||||||||||
| Revenue by Geography: | |||||||||||
| Americas | $ | 4,361 | $ | 5,622 | $ | 5,108 | |||||
| Europe, Middle East and Africa | 3,109 | 3,858 | 3,276 | ||||||||
| Asia | 9,099 | 11,167 | 10,709 | ||||||||
| Total revenue | $ | 16,569 | $ | 20,647 | $ | 19,093 | |||||
| Revenue by End Market: | |||||||||||
| Client Devices | $ | 8,095 | $ | 10,108 | $ | 9,520 | |||||
| Data Center Devices & Solutions | 5,038 | 6,075 | 5,505 | ||||||||
| Client Solutions | 3,436 | 4,464 | 4,068 | ||||||||
| Total revenue | $ | 16,569 | $ | 20,647 | $ | 19,093 | |||||
| Revenue by Form Factor: | |||||||||||
| HDD | $ | 8,746 | $ | 10,698 | $ | 10,640 | |||||
| Flash-based | 7,823 | 9,949 | 8,453 | ||||||||
| Total revenue | $ | 16,569 | $ | 20,647 | $ | 19,093 | |||||
| Exabytes Shipped | 383 | 389 | 313 |
| (1) | Revenue for 2019 is presented in accordance with Accounting Standards Codification (“ASC”) 606. Revenue for 2018 and 2017 is presented in accordance with ASC 605. For information related to our transition from ASC 605 to ASC 606, see Part II, Item 8, Note 1, Organization and Basis of Presentation, of the Notes to Consolidated Financial Statements included in this Annual Report on Form 10-K. |
For each of 2019, 2018 and 2017, no single customer accounted for 10% or more of our net revenue. For 2019, 2018 and 2017, our top 10 customers accounted for 45%, 42% and 36% of our net revenue, respectively.
Fiscal Year 2019 Net Revenue and Gross Margin Compared to Fiscal Year 2018 Net Revenue and Gross Margin
Net Revenue. Net revenue decreased $4.08 billion, or 19.8%, in 2019 compared to 2018, driven by lower average selling prices per gigabyte for flash-based products and lower sales of HDD products. Specifically, Client Devices revenue for the year ended June 28, 2019 decreased 19.9% year over year, primarily driven by lower sales of client HDD products and flash-based mobile products and lower average selling prices per gigabyte of flash-based products. Our revenue for Data Center Devices and Solutions for the year ended June 28, 2019 decreased 17.1% year over year, driven primarily by lower sales of our enterprise SSDs and existing performance enterprise HDDs while our revenue from capacity enterprise HDDs products was similar to the previous year. Client Solutions revenue for the year ended June 28, 2019 decreased 23.0% year over year, primarily driven by lower average selling prices per gigabyte of flash-based products due to the competitive market landscape and lower sales of retail HDD attributed to a lower HDD market with a shift to SSDs.
Changes in net revenue by geography generally reflect normal fluctuations in market demand and competitive dynamics.
Consistent with standard industry practice, we have sales incentive and marketing programs that provide customers with price protection and other incentives or reimbursements that are recorded as a reduction to gross revenue. For 2019, 2018 and 2017, these programs represented 15%, 12% and 12% of gross revenue, respectively, and adjustments to revenue due to changes in accruals for these programs have generally averaged less than 1% of gross revenue over the last three fiscal years. The amounts attributed to our sales incentive and marketing programs generally vary according to several factors including industry conditions, list pricing strategies, seasonal demand, competitor actions, channel mix and overall availability of products. Changes in future customer demand and market conditions may require us to adjust our incentive programs as a percentage of gross revenue.
Gross Profit and Gross Margin. Gross profit decreased $3.95 billion, or 51%, as compared to 2018, primarily as a result of lower average selling prices per gigabyte for flash-based products due to oversupply and competition, flash manufacturing underutilization charges of $264 million, charges related to the power outage incident of $145 million and a charge of $110 million primarily to reduce component inventory to net realizable value for flash-based multi-chip package products that include externally-sourced dynamic random access memory products. These charges were partially offset by lower amortization expense on acquired intangible assets.
Operating Expenses
Fiscal Year 2019 Operating Expenses Compared to Fiscal Year 2018 Operating Expenses
Research and development (“R&D”) expense decreased $218 million, or 9%, compared to 2018, primarily due to lower variable and stock-based compensation expense, as well as savings realized from our expense reduction actions.
Selling, general and administrative (“SG&A”) expense decreased $156 million, or 11%, compared to 2018, primarily due to lower variable compensation expense, as well as savings realized from our expense reduction actions. In addition, we had lower charges related to stock-based compensation expenses, amortization expense on acquired intangible assets, charges related to the implementation of cost-saving initiatives, acquisition-related charges and other charges, which aggregated to $317 million for 2019 compared to $340 million for 2018.
The decrease in employee termination, asset impairment and other charges reflects lower costs for closure of foreign manufacturing facilities and for our 2016 restructuring plan, which were initiated in prior years, partially offset by additional actions associated with the realignment of our business in fiscal year 2019. For additional information regarding employee termination, asset impairment and other charges, see Part II, Item 8, Note 15, Employee Termination, Asset Impairment and Other Charges, of the Notes to Consolidated Financial Statements included in this Annual Report on Form 10-K.
Interest and Other Income (Expense)
Fiscal Year 2019 Interest and Other Income (Expense) Compared to Fiscal Year 2018 Interest and Other Income (Expense)
Total interest and other expense, net decreased $1.16 billion, or 76%, in 2019 primarily due to the loss on extinguishment of debt of $899 million in the prior year as well as lower interest expense resulting from reductions in the principal amount of debt and lower interest rates as a result of changes to our debt facilities in the third and fourth quarters of fiscal 2018, partially offset by increases in the LIBOR interest rate.
Income Tax Expense
The following table sets forth income tax information from our Consolidated Statements of Operations by dollar and effective tax rate:
| 2019 | 2018 | 2017 | |||||||||
| (in millions, except percentages) | |||||||||||
| Income (loss) before taxes | $ | (287 | ) | $ | 2,085 | $ | 769 | ||||
| Income tax expense (benefit) | 467 | 1,410 | 372 | ||||||||
| Effective tax rate | (163 | )% | 68 | % | 48 | % |
The Tax Cuts and Jobs Act (the “2017 Act”), enacted on December 22, 2017, includes a broad range of tax reform proposals affecting businesses, including a reduction in the U.S. federal corporate tax rate from 35% to 21%, a one-time mandatory deemed repatriation tax on earnings of certain foreign subsidiaries that were previously tax deferred and the creation of new taxes on certain foreign earnings.
When initially accounting for the tax effects of the enactment of the 2017 Act, we applied the applicable Securities and Exchange Commission (“SEC”) guidance and made a reasonable estimate of the effects on our existing deferred tax balances and the one-time mandatory deemed repatriation tax required by the 2017 Act. As we finalized the accounting for the tax effects of the enactment of the 2017 Act during the one-year measurement period permitted by applicable SEC guidance, we reflected adjustments to the recorded provisional amounts. During the second quarter of fiscal 2019, we completed our accounting for the tax effects of the enactment of the 2017 Act. Although the U.S. Treasury and the Internal Revenue Service (“IRS”) have issued tax guidance on certain provisions of the 2017 Act since the enactment date, we anticipate the issuance of future additional regulatory and interpretive guidance, even though the one-year measurement period has ended. Although we were able to apply a reasonable interpretation of the law along with any available guidance in finalizing our accounting for the tax effects of the 2017 Act, such future additional regulatory or interpretive guidance would constitute new information which may require further refinements to our estimates in future periods.
The primary driver of the difference between the effective tax rate for the year ended June 28, 2019 and the U.S. Federal statutory rate of 21% is the discrete effect of the finalization of the accounting for the tax effects of the enactment of the 2017 Act. These discrete effects consist of $119 million related to the mandatory deemed repatriation tax and $189 million related to the decision to change our indefinite reinvestment assertion. The remaining difference is attributable primarily to a change in the estimated effective tax rate due to changes in the relative mix of earnings by jurisdiction, partially offset by credits and tax holidays.
The primary drivers for the difference between the effective tax rate for the year ended June 29, 2018 and the blended U.S. Federal statutory rate of 28% are provisional taxes recognized as a result of the 2017 Act and an increase to the valuation allowance for net operating loss carryforwards from restructuring activities, which are partially offset by the 2018 generation of tax credits and tax holidays in Malaysia, Philippines, Singapore and Thailand that expired or will expire at various dates during fiscal years 2018 through 2030. The windfall tax benefits are a result of the adoption of ASU 2016-09, which required us to recognize $78 million of net windfall tax benefits related to vesting and exercises of stock-based awards as a component of our income tax expense for fiscal year 2018.
Our future effective tax rate is subject to future regulatory developments and changes in the mix of our U.S. earnings compared to foreign earnings. Our total tax expense in future fiscal years may also vary as a result of discrete items such as excess tax benefits or deficiencies.
For additional information regarding income tax expense (benefit), see Part II, Item 8, Note 13, Income Tax Expense, of the Notes to Consolidated Financial Statements included in this Annual Report on Form 10-K.
A discussion of our results of operations for the year ended June 30, 2017 is included in Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Results of Operation”, included in our Annual Report on Form 10-K for the year ended June 30, 2017.
Liquidity and Capital Resources
The following table summarizes our statements of cash flows:
| 2019 | 2018 | 2017 | |||||||||
| (in millions) | |||||||||||
| Net cash provided by (used in): | |||||||||||
| Operating activities | $ | 1,547 | $ | 4,205 | $ | 3,437 | |||||
| Investing activities | (1,272 | ) | (1,655 | ) | (636 | ) | |||||
| Financing activities | (1,829 | ) | (3,900 | ) | (4,595 | ) | |||||
| Effect of exchange rate changes on cash | 4 | 1 | (3 | ) | |||||||
| Net decrease in cash and cash equivalents | $ | (1,550 | ) | $ | (1,349 | ) | $ | (1,797 | ) |
We believe our cash, cash equivalents and cash generated from operations as well as our available credit facilities will be sufficient to meet our working capital, debt, dividend and capital expenditure needs for at least the next twelve months. Our ability to sustain our working capital position is subject to a number of risks that we discuss in Part I, Item 1A, Risk Factors, in this Annual Report on Form 10-K.
During fiscal 2020, we expect cash used for purchases of property, plant and equipment and net activity in notes receivable and equity investments relating to our Flash Ventures joint venture with Toshiba Memory Corporation to be less than $500 million. The total expected cash to be used could vary depending on the timing and completion of various capital projects and the availability, timing and terms of related financing.
A total of $2.37 billion and $4.15 billion of our cash and cash equivalents was held outside of the U.S. as of June 28, 2019 and June 29, 2018, respectively. During the second quarter of fiscal 2019, we finalized the accounting for the tax effects of the mandatory deemed repatriation tax on our indefinite reinvestment assertion. After re-evaluating the existing short- and long-term capital allocation polices, we made the determination that it was our intention to repatriate all of our foreign undistributed earnings. Our decision during the second quarter of fiscal 2019 to change our indefinite reinvestment assertion was based on interpretative guidance issued by the IRS through that date related to the ordering and taxation of a repatriation of our foreign undistributed earnings. During the fourth quarter of fiscal 2019, the IRS issued additional interpretative guidance affecting the taxation of a certain portion of our foreign undistributed earnings, which could result in additional federal taxes. After consideration of this additional interpretative guidance, we made the determination that we no longer intend to repatriate this portion of our foreign undistributed earnings and did not establish an accrual for this liability. For additional information regarding our indefinite reinvestment assertion, see Part II, Item 8, Note 13, Income Tax Expense, of the Notes to Consolidated Financial Statements included in this Annual Report on Form 10-K.
Operating Activities
Cash flow from operating activities primarily consists of net income, adjusted for non-cash charges, plus or minus changes in operating assets and liabilities. This represents our principal source of cash. Net cash used for changes in operating assets and liabilities was $260 million for 2019, as compared to net cash provided of $486 million for 2018. The net cash provided by changes in other operating assets and liabilities in 2018 primarily reflects the payable recorded for the mandatory deemed repatriation tax as described in Part II, Item 8, Note 13, Income Tax Expense, of the Notes to Consolidated Financial Statements included in this Annual Report on Form 10-K. Changes in our operating assets and liabilities are also largely affected by our working capital requirements, which are dependent on the effective management of our cash conversion cycle. Our cash conversion cycle measures how quickly we can convert our products into cash through sales. The cash conversion cycles were as follows:
| 2019 | 2018 | 2017 | |||||
| (in days) | |||||||
| Days sales outstanding | 26 | 39 | 37 | ||||
| Days in inventory | 93 | 83 | 65 | ||||
| Days payables outstanding | (54 | ) | (71 | ) | (66) | ||
| Cash conversion cycle | 65 | 51 | 36 |
Changes in days sales outstanding (“DSOs”) are generally due to the linearity of shipments. Changes in days in inventory (“DIOs”) are generally related to the timing of inventory builds. Changes in days payables outstanding (“DPOs”) are generally related to production volume and the timing of purchases during the period. From time to time, we modify the timing of payments to our vendors. We make modifications primarily to manage our vendor relationships and to manage our cash flows, including our cash balances. Generally, we make the payment term modifications through negotiations with our vendors or by granting to, or receiving from, our vendors’ payment term accommodations.
For 2019, DSO decreased by 13 days over the prior year, primarily reflecting the timing of shipments and customer collections and the factoring of receivables. DIO increased by 10 days over the prior year, primarily reflecting increases in hard drive inventory in response to the plant closure in Kuala Lumpur, Malaysia and increases in flash inventory as a result of the recent market imbalance. DPO decreased by 17 days over the prior year, primarily reflecting reductions in flash production volumes as well as routine variations in timing of purchases and payments during the period.
Investing Activities
During 2019, net cash used in investing activities primarily consisted of $876 million of capital expenditures and a net $598 million increase in notes receivable issuances to Flash Ventures to fund its capital expansion, partially offset by net proceeds of $103 million from the sale of investments and $119 million from the sale of property, plant and equipment. Net cash used in investing activities for 2018 primarily consisted of $835 million of capital expenditures, a $742 million net increase in notes receivable issuances to and investments in Flash Ventures and $100 million for acquisitions.
Our cash equivalents are primarily invested in money market funds that invest in U.S. Treasury securities and U.S. Government agency securities as well as bank certificates of deposit. In addition, from time to time, we invest directly in U.S. Treasury securities, U.S. and International Government agency securities, certificates of deposit, asset-backed securities and corporate and municipal notes and bonds.
Financing Activities
During 2019, net cash used in financing activities primarily consisted of $681 million for the repayment of our revolving credit facility and debt, $584 million to pay dividends on our common stock and $563 million for share repurchases. Net cash used in financing activities for 2018 primarily consisted of $17.07 billion in debt repayments, $593 million to pay dividends on our common stock and $591 million for share repurchases, partially offset by net proceeds of $14.28 billion from debt issuances and draws under our revolving credit facility.
A discussion of our liquidity and capital resources for the year ended June 30, 2017 is included in Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources”, included in our Annual Report on Form 10-K for the year ended June 30, 2017.
Off-Balance Sheet Arrangements
Other than the commitments related to Flash Ventures, facility lease commitments incurred in the normal course of business and certain indemnification provisions (see “Short and Long-term Liquidity-Contractual Obligations and Commitments” below), we do not have any other material off-balance sheet financing arrangements or liabilities, guarantee contracts, retained or contingent interests in transferred assets, or any other obligation arising out of a material variable interest in an unconsolidated entity. We do not have any majority-owned subsidiaries that are not included in the Consolidated Financial Statements. Additionally, with the exception of Flash Ventures and our joint venture with Unisplendour Corporation Limited and Unissoft (Wuxi) Group Co. Ltd. (“Unis”), referred to as the “Unis Venture”, we do not have an interest in, or relationships with, any variable interest entities. For additional information regarding our off-balance sheet arrangements, see Part II, Item 8, Note 9, Commitments, Contingencies and Related Parties, of the Notes to Consolidated Financial Statements included in this Annual Report on Form 10-K.
Short and Long-term Liquidity
Contractual Obligations and Commitments
The following is a summary of our known contractual cash obligations and commercial commitments as of June 28, 2019:
| Total | 1 Year (2020) | 2-3 Years (2021-2022) | 4-5 Years (2023-2024) | More than 5 Years (Beyond 2024) | |||||||||||||||
| (in millions) | |||||||||||||||||||
| Long-term debt, including current portion(1) | $ | 10,694 | $ | 276 | $ | 587 | $ | 7,531 | $ | 2,300 | |||||||||
| Interest on debt | 1,902 | 423 | 815 | 445 | 219 | ||||||||||||||
| Flash Ventures related commitments(2) | 5,867 | 2,620 | 2,366 | 808 | 73 | ||||||||||||||
| Operating leases | 291 | 59 | 78 | 38 | 116 | ||||||||||||||
| Purchase obligations and other commitments | 2,977 | 2,050 | 523 | 194 | 210 | ||||||||||||||
| Mandatory Deemed Repatriation Tax | 1,104 | 62 | 199 | 285 | 558 | ||||||||||||||
| Total | $ | 22,835 | $ | 5,490 | $ | 4,568 | $ | 9,301 | $ | 3,476 |
| (1) | Principal portion of debt, excluding discounts and issuance costs. |
| (2) | Includes reimbursement for depreciation and lease payments on owned and committed equipment, funding commitments for loans and equity investments and payments for other committed expenses, including R&D and building depreciation. Funding commitments assume no additional operating lease guarantees. Additional operating lease guarantees can reduce funding commitments. |
Debt
Additional information regarding our indebtedness, including information about availability under our revolving credit facility and the principal repayment terms, interest rates, covenants and other key terms of our outstanding indebtedness, is included in Part II, Item 8, Note 6, Debt, of the Notes to Consolidated Financial Statements included in this Annual Report on Form 10-K.
Flash Ventures
Flash Ventures sells to and leases back from a consortium of financial institutions a portion of its tools and has entered into equipment lease agreements of which we guarantee half or all of the outstanding obligations under each lease agreement. The leases are subject to customary covenants and cancellation events that relate to Flash Ventures and each of the guarantors. The occurrence of a cancellation event could result in an acceleration of the lease obligations and a call on our guarantees. As of June 28, 2019, we were in compliance with all covenants under these Japanese lease facilities. See Part II, Item 8, Note 9, Commitments, Contingencies and Related Parties, of the Notes to Consolidated Financial Statements included in this Annual Report on Form 10-K for information regarding Flash Ventures.
Purchase Obligations and Other Commitments
In the normal course of business, we enter into purchase orders with suppliers for the purchase of components used to manufacture our products. These purchase orders generally cover forecasted component supplies needed for production during the next quarter, are recorded as a liability upon receipt of the components, and generally may be changed or canceled at any time prior to shipment of the components. We also enter into long-term agreements with suppliers that contain fixed future commitments, which are contingent on certain conditions such as performance, quality and technology of the vendor’s components. These arrangements are included under “Purchase obligations” in the table above.
Mandatory Deemed Repatriation Tax
The following is a summary of our estimated mandatory deemed repatriation tax obligations that are payable in the following fiscal years (in millions):
| 2020 | $ | 62 | ||
| 2021 | 99 | |||
| 2022 | 100 | |||
| 2023 | 99 | |||
| 2024 | 186 | |||
| 2025 | 248 | |||
| 2026 | 310 | |||
| Total | $ | 1,104 |
For additional information regarding our estimate of the total tax liability for the mandatory deemed repatriation tax, see Part II, Item 8, Note 13, Income Tax Expense, of the Notes to Consolidated Financial Statements included in this Annual Report on Form 10-K.
Unrecognized Tax Benefits
As of June 28, 2019, the liability for unrecognized tax benefits (excluding accrued interest and penalties) was approximately $695 million. Accrued interest and penalties related to unrecognized tax benefits as of June 28, 2019 was approximately $123 million. Of these amounts, approximately $699 million could result in potential cash payments. We are not able to provide a reasonable estimate of the timing of future tax payments related to these obligations. For additional information regarding our total tax liability for unrecognized tax benefits, see Part II, Item 8, Note 13, Income Tax Expense, of the Notes to Consolidated Financial Statements included in this Annual Report on Form 10-K.
Interest Rate Swap
We have entered into interest rate swap agreements to moderate our exposure to fluctuations in interest rates underlying our variable rate debt. For a description of our current interest rate swaps, see Part II, Item 7A, Quantitative and Qualitative Disclosures About Market Risk included in this Annual Report on Form 10-K.
Foreign Exchange Contracts
We purchase foreign exchange contracts to hedge the impact of foreign currency fluctuations on certain underlying assets, liabilities and commitments for operating expenses and product costs denominated in foreign currencies. For a description of our current foreign exchange contract commitments, see Part II, Item 7A, Quantitative and Qualitative Disclosures About Market Risk and Part II, Item 8, Note 5, Derivative Instruments and Hedging Activities, of the Notes to Consolidated Financial Statements included in this Annual Report on Form 10-K.
Indemnifications
In the ordinary course of business, we may provide indemnifications of varying scope and terms to customers, vendors, lessors, business partners and other parties with respect to certain matters, including, but not limited to, losses arising out of our breach of agreements, products or services to be provided by us, environmental compliance or from IP infringement claims made by third parties. In addition, we have entered into indemnification agreements with our directors and certain of our officers that will require us, among other things, to indemnify them against certain liabilities that may arise by reason of their status or service as directors or officers. We maintain director and officer insurance, which may cover certain liabilities arising from our obligation to indemnify our directors and officers in certain circumstances.
It is not possible to determine the maximum potential amount under these indemnification agreements due to the limited history of prior indemnification claims and the unique facts and circumstances involved in each particular agreement. Such indemnification agreements may not be subject to maximum loss clauses. Historically, we have not incurred material costs as a result of obligations under these agreements.
Stock Repurchase Program
Our Board of Directors previously authorized $5.00 billion for the repurchase of our common stock. On July 25, 2018, our Board of Directors authorized a new $5.00 billion share repurchase program that is effective through July 25, 2023, replacing all prior programs. For the three months ended June 28, 2019, we did not make any stock repurchases. For the year ended June 28, 2019, we repurchased 0.8 million shares for a total cost of $61 million under the previous authorization and 7.6 million shares for a total cost of $502 million under the new authorization. Therefore, our stock repurchases under all stock repurchase authorizations in effect for the year ended June 28, 2019 totaled $563 million. The remaining amount available to be repurchased under our current stock repurchase program as of June 28, 2019 was $4.50 billion. Repurchases under the stock repurchase program may be made in the open market or in privately negotiated transactions and may be made under a Rule 10b5-1 plan. We expect stock repurchases to be funded principally by operating cash flows.
Cash Dividend
Since the first quarter of 2013, we have issued a quarterly cash dividend. During the twelve months ended June 28, 2019, we declared aggregate cash dividends of $2.00 per share on our outstanding common stock totaling $583 million, of which $147 million was paid on July 15, 2019.
On August 7, 2019, we declared a cash dividend of $0.50 per share of our common stock to our shareholders of record as of October 4, 2019, which will be paid on October 22, 2019. We may modify, suspend, or cancel our cash dividend policy in any manner and at any time. The amount of future dividends under our cash dividend policy, and the declaration and payment thereof, will be based upon all relevant factors, including our financial position, results of operations, cash flows, capital requirements and restrictions under our Credit Agreement and other financing agreements, and shall be in compliance with applicable law.
Recent Accounting Pronouncements
For a description of recently issued and adopted accounting pronouncements, including the respective dates of adoption and expected effects on our results of operations and financial condition, see Part II, Item 8, Note 2, Recent Accounting Pronouncements, of the Notes to Consolidated Financial Statements included in this Annual Report on Form 10-K.
Critical Accounting Policies and Estimates
We have prepared the accompanying Consolidated Financial Statements in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”). The preparation of the financial statements requires the use of judgments and estimates that affect the reported amounts of revenue, expenses, assets, liabilities and shareholders’ equity. We have adopted accounting policies and practices that are generally accepted in the industry in which we operate. We believe the following are our most critical accounting policies that affect significant areas and involve judgment and estimates made by us. If these estimates differ significantly from actual results, the impact to Consolidated Financial Statements may be material.
Revenue
We provide distributors and retailers (collectively referred to as “resellers”) with limited price protection for inventories held by resellers at the time of published list price reductions and/or a right of return. We also provide resellers and original equipment manufacturers (“OEMs”) with other sales incentive programs. We use judgment in our assessment of variable consideration in contracts to be included in the transaction price. We use the expected value method to arrive at the amount of variable consideration. We believe the estimate of variable consideration is not constrained and that the expected value method is the appropriate estimate of the amount of variable consideration based on the fact that we have a large number of contracts with similar characteristics. Our methodology for the estimates is based on several factors, including anticipated price decreases during the reseller holding period, resellers’ sell-through and inventory levels, estimated amounts to be reimbursed to qualifying customers, historical pricing information, historical and anticipated returns information and customer claim processing. We also have programs under which we reimburse qualified distributors and retailers for certain marketing expenditures, which are typically recorded as a reduction of the transaction price and, therefore, of revenue. We net sales rebates against open customer receivable balances if the criteria to offset are met, otherwise they are recorded within other accrued liabilities.
Inventories
We value inventories at the lower of cost (first-in, first-out) or net realizable value. We record inventory write-downs for the valuation of inventory at the lower of cost or net realizable value by analyzing market conditions and estimates of future sales prices as compared to inventory costs and inventory balances.
We evaluate inventory balances for excess quantities and obsolescence on a regular basis by analyzing estimated demand, inventory on hand, sales levels and other information and reduce inventory balances to net realizable value for excess and obsolete inventory based on this analysis. Unanticipated changes in technology or customer demand could result in a decrease in demand for one or more of our products, which may require a write down of inventory that could materially affect operating results.
Litigation and Other Contingencies
When we become aware of a claim or potential claim, we assess the likelihood of any loss or exposure. We disclose information regarding each material claim where the likelihood of a loss contingency is probable or reasonably possible. If a loss contingency is probable and the amount of the loss can be reasonably estimated, we record an accrual for the loss. In such cases, there may be an exposure to potential loss in excess of the amount accrued. Where a loss is not probable but is reasonably possible or where a loss in excess of the amount accrued is reasonably possible, we disclose an estimate of the amount of the loss or range of possible losses for the claim if a reasonable estimate can be made, unless the amount of such reasonably possible losses is not material to our financial position, results of operations or cash flows. The ability to predict the ultimate outcome of such matters involves judgments, estimates and inherent uncertainties. The actual outcome of such matters could differ materially from management’s estimates. For additional information, see Part II, Item 8, Note 16, Legal Proceedings, of the Notes to Consolidated Financial Statements included in this Annual Report on Form 10‑K.
Income Taxes
We account for income taxes under the asset and liability method, which provides that deferred tax assets and liabilities be recognized for temporary differences between the financial reporting basis and the tax basis of our assets and liabilities and expected benefits of utilizing net operating loss and tax credit carryforwards. We record a valuation allowance when it is more likely than not that the deferred tax assets will not be realized. Each quarter, we evaluate the need for a valuation allowance for our deferred tax assets and we adjust the valuation allowance so that we record net deferred tax assets only to the extent that we conclude it is more likely than not that these deferred tax assets will be realized. We account for interest and penalties related to income taxes as a component of the provision for income taxes.
We recognize liabilities for uncertain tax positions based on a two-step process. To the extent a tax position does not meet a more-likely-than-not level of certainty, no benefit is recognized in the financial statements. If a position meets the more-likely-than-not level of certainty, it is recognized in the financial statements at the largest amount that has a greater than 50% likelihood of being realized upon ultimate settlement. Interest and penalties related to unrecognized tax benefits are recognized on liabilities recorded for uncertain tax positions and are recorded in our provision for income taxes. The actual liability for unrealized tax benefits in any such contingency may be materially different from our estimates, which could result in the need to record additional liabilities for unrecognized tax benefits or potentially adjust previously-recorded liabilities for unrealized tax benefits and materially affect our operating results.
Goodwill and Other Long-Lived Assets
Goodwill is not amortized. Instead, it is tested for impairment on an annual basis or more frequently whenever events or changes in circumstances indicate that goodwill may be impaired. We perform our annual impairment test as of the first day of our fiscal fourth quarter. We use qualitative factors to determine whether goodwill is more likely than not impaired and whether a quantitative test for impairment is considered necessary. If we conclude from the qualitative assessment that goodwill is more likely than not impaired, we are required to perform a quantitative approach to determine the amount of impairment. We are required to use judgment when applying the goodwill impairment test, including the identification of one or more reporting units. If we had more than one reporting unit, judgment would also be required in the assignment of assets and liabilities to reporting units, assignment of goodwill to reporting units and determination of the fair value of each reporting unit. In addition, the estimates used to determine the fair value of each reporting unit may change based on results of operations, macroeconomic conditions or other factors. Changes in these estimates could materially affect our assessment of the fair value and goodwill impairment for each reporting unit. If our stock price decreases significantly, goodwill could become impaired, which could result in a material charge and adversely affect our results of operations.
Other long-lived intangible assets are amortized over their estimated useful lives based on the pattern in which the economic benefits are expected to be received. Long-lived assets are tested for recoverability whenever events or changes in circumstances indicate that their carrying amounts may not be recoverable. If impairment is indicated, the impairment is measured as the amount by which the carrying amount of the assets exceeds the fair value of the assets. The estimates of fair value require evaluation of future market conditions and product lifecycles as well as projected revenue, earnings and cash flow.
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