Seagate 2006 Annual Report Download - page 44

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Table of Contents
Other factors affecting income — In fiscal year 2007, our operating results were favorably impacted by the
elimination of variable performance-based compensation compared to an expense of $163 million recorded in fiscal
year 2006. We expect that we will incur expenses related to variable performance
-based compensation in fiscal year
2008. Our operating results were also favorably impacted by a $359 million tax adjustment that reflected a change to
our valuation allowance for deferred tax assets (see Note 4 to the Consolidated Financial Statements elsewhere in this
report). Additionally, the proceeds of our $1.5 billion in new long-term debt was used to retire our 8% Senior Notes
previously due 2009 (“8% Notes”) and to buy back shares of our common stock, thereby decreasing our outstanding
common shares by over 40 million shares. Interest expense in fiscal year 2007, excluding $19 million in expenses
related to the retirement of the 8% Notes, was approximately $80 million more than in fiscal year 2006 because of
additional interest expense related to the $1.5 billion in new long-term debt and because the debt assumed from the
Maxtor acquisition represented less than two months of interest in fiscal year 2006. Interest expense, based on the
debt outstanding at the end of fiscal year 2007, will be over $30 million per quarter in fiscal year 2008.
Seasonality
Historically, we have exhibited seasonally lower unit demand during the second half of each fiscal year,
however, there were some recent quarters in fiscal year 2005 and fiscal year 2006 in which these seasonal trends
were moderated. We saw a return to traditional seasonality in fiscal year 2007. For the September 2007 quarter, we
expect to see demand in the desktop, mobile and consumer electronics markets to be seasonally higher than the
June 2007 quarter, while we expect demand in the enterprise market to be flat to slightly up compared to the June
2007 quarter.
Recording Media
The percentage of our requirements for recording media that we produce internally varies from quarter to
quarter. We are continuing to expand our media production facilities in Singapore, and have relocated certain of the
acquired Maxtor media manufacturing equipment to Asia. We do not expect our new media facility in Singapore to
be fully operational until towards the end of fiscal year 2008. Our long-term strategy is to externally purchase no
more than 15% of total recording media requirements.
We purchase approximately 70% of our aluminum substrates for recording media production from third parties.
We are in the process of adding an aluminum substrate manufacturing facility in Johor, Malaysia which will allow us
to decrease our purchases of aluminum substrates from third parties. We also purchase all of our glass substrates
from third parties (mainly in Japan), which are used to manufacture our disc drives for mobile and small form factor
consumer electronics products.
Recently, substantially all of our purchases of recording media and a significant portion of our aluminum
substrates from third-party suppliers have been sourced from Komag, which is in the process of being acquired by
Western Digital. We are engaged in discussions with other suppliers to ensure supply continuity should Komag
decrease its supply to us after the closing of the acquisition by Western Digital.
41
distribution channel, we exited the June 2007 quarter with distribution channel inventory for desktop products
at less than five weeks.
• Consumer — In fiscal year 2007, we shipped a total of 25.3 million disc drives in the consumer electronics
(CE) market, an increase of 40% from fiscal year 2006. During the June 2007 quarter, we shipped 5.0 million
disc drives driven primarily by shipments into gaming applications and DVRs. This represents a 16% and
26% decrease from the year-ago quarter and immediately preceding quarter, respectively. The decrease from
the immediately preceding quarter is mainly due to lower shipments into the DVR and gaming portions of the
CE market. The decrease from the year-ago quarter was mainly driven by a significant reduction in the
number of disc drives shipping into handheld applications and a reduction in gaming shipments, partially off-
set by an increased demand in the DVR portion of the CE market.