Seagate 2006 Annual Report Download - page 47

Table of Contents
The gross margin percentage decrease from fiscal year 2006 was due to the sale of lower margin Maxtor
designed products during the first six months of fiscal year 2007; costs and charges related to our acquisition of
Maxtor during fiscal year 2007 (including integration and retention costs of $54 million, stock-based compensation
of $27 million, amortization of existing technology of $150 million, and an $18 million accrual for the settlement of
customer compensatory claims associated with quality issues related to legacy Maxtor products shipped prior to the
closing of the Maxtor acquisition); and an aggressive pricing environment in fiscal year 2007, particularly in the high
capacity 3.5-inch and mobile markets in the first half of the year, and the low end OEM desktop and mobile markets
in the second half. These effects were partially offset by the elimination of variable performance-
based compensation
for fiscal year 2007, compared to an expense of $76 million recorded in Cost of revenue in fiscal year 2006.
Product Development Expense. Product development expense increased by $99 million, or 12%, for fiscal year
2007 when compared with fiscal year 2006. The increase in product development expense from fiscal year 2006 was
primarily due to increases of $115 million in salaries and benefits resulting from increased staffing levels due in part
to the retention of certain Maxtor employees, and $10 million in stock-based compensation related to the Maxtor
acquisition, $7 million in non-Maxtor stock-based compensation and $4 million in the write-off of
in-process research and development related to our acquisition of EVault, partially offset by the elimination of
variable performance-based compensation for fiscal year 2007, compared to an expense of $46 million in fiscal year
2006.
Marketing and Administrative Expense. Marketing and administrative expense increased by $142 million, or
32%, for fiscal year 2007 when compared with fiscal year 2006. The increase in marketing and administrative
expense from fiscal year 2006 was primarily due to the recording in our first quarter of a $40 million increase in the
provision for doubtful accounts receivable related to eSys Technologies Pte. Ltd. and its related affiliate entities
(“eSys”), previously our largest distributor, an increase of $86 million in salaries and benefits resulting from
increased staffing levels due in part to the retention of certain Maxtor employees, an increase of $5 million in
integration and retention costs related to the Maxtor acquisition, an increase of $11 million in advertising expense
and an increase of $11 million in non-Maxtor stock-based compensation. These increases were partially offset by the
elimination of variable performance-
based compensation for fiscal year 2007, compared to an expense of $41 million
in fiscal year 2006.
Amortization of Intangibles. Amortization of intangibles increased by $42 million primarily due to the
amortization of intangibles acquired in the Maxtor and EVault acquisitions.
Restructuring and Other. During fiscal year 2007, we recorded restructuring costs of approximately
$33 million in connection with our ongoing restructuring activities. These costs were primarily a result of a
restructuring plan established to continue the alignment of our global workforce with existing and anticipated
business requirements, primarily in our U.S. and Far East operations and asset impairments. The restructuring costs
were comprised of employee termination costs of approximately $14 million relating to a reduction in our workforce,
approximately $11 million in charges related to impaired facility improvements and equipment as a result of the
alignment plan, and approximately $8 million in charges related to impaired other intangibles. These restructuring
activities are expected to be completed by the end of fiscal year 2008. Additionally, we reversed $4 million of
restructuring accruals relating to the sale of a surplus building impaired in a prior restructuring.
Net Other Income (Expense). Net other income changed by $103 million from net other income of $50 million
in fiscal year 2006 to net other expense of $53 million in fiscal year 2007. The change from fiscal year 2006 was
primarily due to an increase in interest expense of $81 million related to our new $1.5 billion long-term debt issued
in September 2006, as well as debt acquired in the Maxtor acquisition, and expenses of $19 million incurred in
October 2006 related to the early retirement of our 8% Notes. The $1.5 billion in new long-term debt was used to
retire the 8% Notes and to buy back shares of our common stock. Interest expense in fiscal year 2007, excluding the
expenses related to the early 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.
Income Taxes. We recorded a benefit from income taxes of $352 million for the fiscal year ended June 29,
2007 compared to a provision for income taxes of $84 million for the fiscal year ended June 30, 2006. We are a
foreign holding company incorporated in the Cayman Islands with foreign and U.S. subsidiaries that operate in
multiple taxing jurisdictions. As a result, our worldwide operating income is either subject to varying rates of tax or
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