Seagate Technology plc — Form 10-Q Summary
Reporting period: Fiscal third quarter ended March 30, 2012 (13 weeks); nine-month year-to-date results are also presented. Amounts are in U.S. dollars unless noted.
Business context
Seagate designs, manufactures and sells hard disk drives for enterprise, client computing and other consumer applications, and provides data-storage services. The quarter’s results reflected recovery from Thailand flooding-related industry supply constraints, favorable pricing, higher shipments and a full quarter of results from the acquired Samsung HDD business.
Financial performance
| Metric | Three months ended Mar. 30, 2012 | Comparable prior-year quarter | Nine months ended Mar. 30, 2012 | Comparable prior-year period |
|---|---|---|---|---|
| Revenue | $4.450 billion | $2.695 billion | $10.457 billion | $8.112 billion |
| Gross margin | $1.641 billion; 37% | $516 million; 19% | $3.200 billion; 31% | $1.595 billion; 20% |
| Operating income | $1.210 billion | $179 million | $2.051 billion | $616 million |
| Net income | $1.146 billion | $93 million | $1.849 billion | $392 million |
| Diluted EPS | $2.48 | $0.21 | $4.16 | $0.83 |
Quarterly operating margin was approximately 27% and net margin approximately 26%, calculated from reported figures. Seagate shipped 60.7 million drives, versus 48.7 million a year earlier; average selling price was $73, versus $55. Management attributed improved gross margins primarily to the full-quarter impact of improved pricing amid constrained industry supply. The quarter’s sales incentives were 3.9% of gross revenue, below the company’s historical 6%–12% range.
For the nine months, operating cash flow was $1.817 billion, compared with $947 million. Investing activities used $965 million, including $561 million net cash paid for the Samsung acquisition and $497 million of capital expenditures. Financing activities used $1.891 billion, including $1.172 billion of share repurchases, $670 million of debt repayments and $266 million of dividends. Management also reported quarterly operating cash flow of $938 million.
Financial position and capital allocation
- At March 30, 2012, cash and cash equivalents were $1.638 billion, short-term investments $408 million and restricted cash and investments $98 million. Cash, cash equivalents and short-term investments totaled approximately $2.0 billion; including restricted amounts, the total was $2.144 billion.
- Total current assets were $6.368 billion and current liabilities $3.154 billion. Accounts receivable rose to $2.478 billion from $1.495 billion at fiscal year-end; management linked the increase to higher revenue and sales occurring later in the quarter.
- Long-term debt, net of current portion, was $2.862 billion; no current portion was reported at quarter-end. The $350 million revolving facility had no cash borrowings, with $4 million used for letters of credit. Seagate reported compliance with debt covenants.
- Cash and cash equivalents declined $1.039 billion from July 1, 2011, primarily reflecting share repurchases, debt repayment, the Samsung acquisition, capital expenditures and dividends, partly offset by operating cash flow.
- The company repurchased 56 million shares for approximately $1.2 billion during the nine months. The board later authorized an additional $2.5 billion repurchase program on April 26, 2012. A $0.25-per-share dividend was declared for payment in May 2012.
Material changes and unusual items
- Samsung acquisition: Completed December 19, 2011, for consideration valued at $1.140 billion: $571 million cash and 45.2 million shares valued at $569 million. The acquired business contributed $448 million of revenue and $66 million of net income in the quarter. Preliminary purchase accounting included $433 million goodwill and $580 million identifiable intangible assets; certain acquired balances remained subject to measurement-period adjustments.
- Supply disruption and pricing: Flooding in Thailand damaged suppliers’ facilities and constrained industry supply. Seagate’s own Thai component and assembly factories were not directly affected, but seven of its ten largest component suppliers had affected factories. Management estimated industry shipments of 145.3 million units in the quarter, still below unconstrained demand.
- Warranty: Seagate shortened standard warranty terms for a number of products in January 2012. Warranty cost on new shipments was 0.9% of quarterly revenue, versus 1.3% in the December 2011 quarter; management expected the change to reduce future warranty costs. Total warranty liability was $375 million at quarter-end.
- Taxes and other items: The nine-month tax provision included approximately $10 million of discrete benefits. The quarter included acquisition-related amortization and a $12 million loss on debt redemption, partly offset in other income by gains on investment sales. Nine-month results also included a $7 million impairment charge on a strategic equity investment.
Outlook, risks and contingencies
Management expected fiscal 2012 capital expenditures to be below its previously stated target range of 6%–8% of revenue. The filing provides no specific revenue or earnings guidance. Management expected the Samsung acquisition to increase manufacturing capacity and product-development expense and anticipated additional integration costs.
Key risks include uncertain HDD demand and pricing, component shortages and supplier concentration in Thailand, the industry’s recovery from flooding, and the ability to qualify and ship products at scale with acceptable cost and quality. Seagate also highlighted risks that Samsung integration costs or liabilities could exceed expectations or anticipated synergies may not be achieved. Chinese regulatory conditions included maintaining Samsung as a separate brand competitor, expanding Samsung HDD production capacity within six months of the decision, and investing at least $800 million annually in combined-business R&D for three years.
Several intellectual-property matters remained unresolved or subject to appeal. Claims included stated damages of $800 million in the Convolve/MIT matter and damages exceeding $75 million in the Shukh matter; Seagate said it could not reasonably estimate possible losses in these cases. Siemens patent disputes in Northern Ireland and Germany were settled confidentially. Environmental site costs were not expected by the company to be material. The filing also identifies cyber and data-security exposure, foreign-exchange and interest-rate risks, and illiquid auction-rate securities: $15 million fair value at quarter-end, with auctions continuing to fail.
Important facts for investors to verify
- How much of the revenue and earnings growth reflects higher HDD pricing and supply constraints versus sustainable demand, and how pricing may evolve as industry supply recovers.
- Whether Seagate can secure critical components and meet customer demand without margin pressure or production delays.
- Integration costs, realized synergies and compliance with the Samsung acquisition’s regulatory conditions, including required R&D investment and capacity expansion.
- Cash conversion and working-capital trends, particularly the sharp increase in receivables, alongside continued share repurchases, dividends and debt service.
- Developments in appealed or unresolved litigation, and the assumptions underlying Samsung-related warranty liabilities and purchase accounting.