Seagate Technology Holdings plc — Form 10-Q Summary
Reporting period: Fiscal first quarter ended September 29, 2023 (13 weeks), compared with the three months ended September 30, 2022, unless otherwise noted. Amounts are in U.S. dollars.
Business context and financial performance
Seagate supplies data-storage products and solutions, principally hard disk drives (HDDs). It shipped 90 exabytes of HDD capacity in the quarter. Management said macroeconomic headwinds and customer inventory adjustments continued to restrain near-term demand.
| Metric | Q1 FY2024 | Prior-year quarter |
|---|---|---|
| Revenue | $1.454 billion | $2.035 billion |
| Gross profit / gross margin | $149 million / 10% | $482 million / 24% |
| Operating income (loss) | $(129) million | $107 million |
| Net income (loss) | $(184) million | $29 million |
| Diluted EPS | $(0.88) | $0.14 |
| Cash from operations | $127 million | $245 million |
| Capital expenditures | $70 million | $133 million |
Revenue fell about 29% year over year. HDD exabytes shipped declined to 90 from 118, and HDD price per terabyte was $14 versus $15. Mass-capacity shipments increased sequentially to 79 exabytes from 75, but remained below the prior-year 104.
Financial position, liquidity and capital allocation
- At September 29, 2023, cash and cash equivalents were $795 million; total current assets were $2.636 billion and current liabilities were $2.473 billion.
- Debt, net of issuance costs, was $5.666 billion, compared with $5.451 billion at June 30, 2023. The quarter-end balance-sheet presentation classified all debt as long-term. Future principal payments totaled $5.729 billion; estimated future interest payments were approximately $2.3 billion.
- Seagate issued $1.5 billion of 3.50% convertible notes due 2028 and used proceeds to repay $1.29 billion of variable-rate term loans. It also paid $145 million in dividends. The quarterly dividend was $0.70 per share; a further $0.70 dividend was declared for payment in January 2024.
- The company reported $1.5 billion available under its revolving credit facility, with no borrowings outstanding. It said it was compliant with its amended debt covenants and believed available sources would fund operations and requirements for at least 12 months.
- Operating cash flow was $127 million; after $70 million of capital expenditures, the resulting cash flow was $57 million (calculated). Cash increased by $9 million during the quarter.
Material changes, outlook and unusual items
- Management attributed the sequential revenue decline to weaker legacy-market and non-HDD demand, partly offset by higher mass-capacity shipments. It expects macroeconomic conditions and customer inventory adjustments to continue affecting business and results in the near term; the filing provides no specific revenue or earnings guidance.
- Gross margin declined to 10%, principally reflecting $118 million of supplier order-cancellation fees, $59 million of factory underutilization charges, accelerated depreciation and product mix. The company said fiscal 2024 capital expenditures are expected to be lower than fiscal 2023.
- Results included a $104 million gain on termination of interest-rate swaps and a $29 million loss on early debt redemption. The swap termination followed repayment of the term loans; the company received $25 million cash from the swap counterparty.
- The quarter’s $37 million tax provision included approximately $33 million of net discrete expense, primarily related to a valuation allowance following U.S. tax guidance. A change in estimated useful lives of certain manufacturing equipment increased quarterly net income by approximately $10 million, or diluted EPS by $0.05.
- The company had approximately $3.7 billion of total purchase obligations, including $2.6 billion in long-term commitments. It recorded $118 million in cancellation fees during the quarter; $151 million of cancellation fees remained unpaid at quarter-end.
- A $300 million BIS settlement related to past HDD sales to Huawei is payable in quarterly installments of $15 million over five years beginning October 31, 2023. The company had $60 million classified as accrued expenses and $240 million as other non-current liabilities at quarter-end; required compliance audits are also part of the settlement.
- Risks highlighted include weak or volatile storage demand, customer concentration and order changes, pricing pressure, manufacturing underutilization, supplier commitments, technology transitions, leverage and debt-covenant compliance, and export-control compliance. A securities class action was consolidated; the company said it intends to defend the claims. Management stated that disclosure controls were effective.
Key facts for investors to verify
- Whether demand recovery and production levels improve enough to restore gross margins after supplier cancellation fees and underutilization costs.
- Whether operating cash flow can support debt service, dividends and substantial purchase commitments during continued weak demand.
- The implications of the convertible notes, debt maturities, covenant relief terms and refinancing needs for liquidity and shareholder dilution.
- Timely payment of the BIS settlement and completion of its audit requirements.
- Whether the company’s near-term outlook changes; this filing gives no quantified financial guidance.