Seagate Technology plc — Form 10-Q Summary
Business context and reporting period
Seagate designs, manufactures and sells hard disk drives for enterprise, client-compute and client non-compute markets, and provides storage services to small and medium-sized businesses. This unaudited report covers the quarter and six months ended December 31, 2010, in fiscal 2011; comparable periods ended January 1, 2010. Amounts are in U.S. dollars.
Financial results and liquidity
| Metric | Quarter ended Dec. 31, 2010 | Six months ended Dec. 31, 2010 |
|---|---|---|
| Revenue | $2.719 billion | $5.417 billion |
| Gross margin | $529 million; 19% | $1.079 billion; 20% |
| Operating income | $206 million | $438 million |
| Net income | $150 million | $299 million |
| Diluted earnings per share | $0.31 | $0.61 |
- Quarter shipments were 48.9 million drives; average selling price was $55 per unit.
- Six-month operating cash flow was $752 million, versus $1.031 billion a year earlier. Investing cash use was $580 million, including $560 million of capital expenditures. Financing provided $93 million.
- At December 31, cash and cash equivalents were $2.528 billion and short-term investments were $286 million. Restricted cash and investments were $97 million. The company reported approximately $2.8 billion of cash, cash equivalents and short-term investments.
- Total debt was $2.925 billion, including $560 million classified as current and $2.365 billion long-term. Current assets were $5.826 billion and current liabilities were $3.178 billion.
- Management said liquidity and expected operating cash flows should fund operations and requirements for at least 12 months, and reported compliance with debt covenants.
Material changes versus comparable periods
- Quarter revenue fell 10% year over year, while shipments declined 2%; management attributed the revenue and margin pressure to the industry’s competitive pricing environment from mid-2010.
- Quarter gross margin declined to 19% from 30% a year earlier; operating income fell to $206 million from $578 million, and net income to $150 million from $533 million.
- For the first half, revenue decreased 5% year over year, gross margin fell to 20% from 28%, and net income declined to $299 million from $712 million.
- Client-compute shipments fell year over year, while enterprise and client non-compute shipments increased. Enterprise total addressable market was estimated to have grown year over year; client-compute market was relatively flat.
- Cash and cash equivalents increased $265 million from July 2, 2010. The company issued $750 million of 7.75% notes due 2018, redeemed convertible and subordinated debt, and repurchased 20.7 million shares for $305 million during the quarter. Six-month repurchases totaled $305 million in the cash-flow statement; cumulative repurchases under the program were $889 million.
Outlook, commentary, risks and unusual items
- The filing provides no specific revenue, earnings or shipment forecast. Management’s liquidity outlook is for at least the next 12 months. It cautions that results depend on global economic conditions, variable demand, product qualification and manufacturing execution, competition, and achieving cost savings.
- Management noted traditional second-half calendar-year industry seasonality. Gross margins remained affected by competitive pricing; sales programs returned to approximately 9% of gross revenue in the first half, from approximately 6% in fiscal 2010.
- The company expects to complete the Ang Mo Kio, Singapore facility closure during fiscal 2011. Estimated total charges are approximately $60 million; about $43 million had been recorded through December 31, 2010. Other legacy exit-cost payments may continue through fiscal 2017.
- Other expense included losses of approximately $24 million from redemptions of debt in the first half. The first half also included $11 million of discrete tax benefits, primarily from tax-reserve releases, partly offset by a valuation allowance increase related to debt-redemption tax benefits.
- Material risks include intellectual-property litigation and potential restrictions on product sales, as well as reliance on limited suppliers for critical components. The filing describes claims including Convolve/MIT’s $800 million compensatory-damages demand and a separate claim seeking more than $75 million; the company disputes these claims. It states that environmental-site costs are not expected to be material based on current estimates.
- A $350 million senior secured revolving credit facility was entered into on January 18, 2011; it had no borrowings at the report date. Management reported disclosure controls were effective and no material change in internal control during the quarter.
Important facts for investors to verify
- Whether pricing and product mix stabilize enough to recover gross margin, and how sales-program rebates evolve.
- Upcoming repayment or refinancing needs, particularly the $560 million current portion of debt, and the terms and use of proceeds from the 2018 notes and new revolving facility.
- Capital-spending levels, cash generation, and the scale and timing of share repurchases relative to liquidity and debt obligations.
- Supplier availability and cost for glass substrates and other critical components, and progress and costs of the Singapore closure.
- Developments in pending intellectual-property cases and any change in the company’s assessment of potential exposure.