Business context and reporting period
Seagate Technology plc is a data-storage provider whose principal products are hard disk drives, alongside SSDs, hybrid drives, storage systems and services. This Form 10-Q covers the fiscal first quarter of 2016, the 13 weeks ended October 2, 2015. The comparable quarter ended October 3, 2014 was 14 weeks, which affects year-over-year comparisons.
Financial results and position
Amounts are in U.S. dollars; financial statement figures are in millions unless otherwise noted.
| Metric | Quarter ended Oct. 2, 2015 | Comparable quarter |
|---|---|---|
| Revenue | $2,925 | $3,785 |
| Gross profit / margin | $689 / 24% | $1,051 / 28% |
| Operating income / margin | $86 / 3% | $456 / 12% |
| Net income | $34 | $381 |
| Diluted EPS | $0.11 | $1.13 |
| Operating cash flow | $824 | $602 |
| Capital expenditures | $209 | $172 |
Cash and cash equivalents were $1.915 billion, with $6 million of short-term investments, at October 2, down $564 million in cash from July 3. Current assets were $4.882 billion and current liabilities $2.718 billion. Long-term debt was $4.140 billion; no current portion was reported. The $700 million revolving facility was undrawn, and the company said it was compliant with debt covenants.
Changes versus prior periods
- Revenue was nearly flat sequentially ($2.925 billion versus $2.927 billion), as higher shipments offset price erosion. Year over year it fell $860 million, or about 23%, reflecting fewer units shipped and price erosion.
- Shipments were 47 million drives and 56 exabytes, versus 60 million drives and 60 exabytes a year earlier. Average selling price was $58 per drive, versus $60.
- Gross margin fell to 24% from 27% in the prior quarter and 28% a year earlier. Management cited price erosion and unfavorable product mix sequentially; year over year, price erosion was partly offset by operating efficiencies.
- Net income declined to $34 million from $137 million in the prior quarter and $381 million a year earlier. The current quarter included $59 million of restructuring charges and a $10 million impairment of a strategic investment. The prior-year comparison also included an extra week.
- Operating cash flow increased to $824 million from $602 million a year earlier, supported by lower accounts receivable and higher accounts payable; the filing cites channel mix, improved collections/linearity, payment timing and improved vendor terms.
Outlook, commentary, risks and unusual items
- A restructuring plan announced September 4 targeted approximately 1,000 employee reductions and was expected to be largely complete by the quarter ending January 1, 2016. The company recorded $59 million of related termination costs.
- Fiscal 2016 capital expenditures were expected to be at or below the company’s long-term target of 6%–8% of revenue. No specific revenue or earnings guidance was provided in the filing text.
- After quarter-end, on October 6, Seagate acquired Dot Hill Systems for approximately $696 million in cash. Purchase accounting disclosures were incomplete when the filing was submitted.
- The board approved a quarterly dividend of $0.63 per share on October 21, payable November 20. The quarter’s declared dividend was $0.54 per share; cash dividends paid during the quarter totaled $163 million. Seagate repurchased $983 million of ordinary shares and reported $1.9 billion remaining under its repurchase authorization.
- Management identified risks including variable demand, adverse disk-drive pricing, competition and technology shifts, supply or production disruptions, currency movements, product qualification and manufacturing execution, and whether restructuring savings can be achieved.
- Material legal matters included appeals or ongoing proceedings involving Convolve/MIT, Alexander Shukh, LEAP and Enova; the company said loss ranges could not be reasonably estimated for these matters. The company reported no material expected environmental-site costs. It also noted possible exposure if it or its suppliers fail to meet environmental and restricted-substance requirements.
- Tax benefit was $3 million, including about $4 million of discrete benefits. Unrecognized tax benefits were $79 million; approximately $35 million could be reduced over the next 12 months, primarily through statute expirations.
- Management concluded disclosure controls were effective at quarter-end; no material change in internal control over financial reporting was reported.
Most important facts for investors to verify
- Whether lower drive pricing, product mix and shipment trends persist, and their effect on gross margin and earnings.
- Whether operating cash flow remains strong when the favorable working-capital movements—especially accounts payable timing—normalize.
- Execution, total costs and realized savings from the workforce reduction, and the financial impact of the Dot Hill acquisition.
- Cash deployment and balance-sheet capacity after substantial buybacks and dividends, including debt maturities and covenant headroom.
- Developments in disclosed litigation and tax positions, including outcomes that the company said could not yet be estimated.