Seagate Technology Holdings plc — Q3 FY2023 10-Q
Reporting period: Fiscal quarter ended March 31, 2023 (13 weeks); year-to-date period covers nine months. Seagate is a data-storage provider, principally of hard disk drives (HDDs), serving mass-capacity and legacy markets. Amounts below are in U.S. dollars.
Financial highlights
| Metric | Q3 FY2023 | Comparison |
|---|---|---|
| Revenue | $1.860 billion | Down 34% year over year from $2.802 billion; down $27 million sequentially |
| Gross profit / margin | $319 million / 17% | Prior-year quarter: $806 million / 29%; sequential margin improved from 13% |
| Operating income (loss) | $(315) million; (17)% margin | Prior-year quarter: $429 million; 16% margin |
| Net income (loss) / diluted EPS | $(433) million / $(2.09) | Prior-year quarter: $346 million / $1.56 |
| HDD capacity shipped | 119 exabytes | 154 exabytes in prior-year quarter; mass-capacity shipments were 104 exabytes versus 133 |
Nine-month results: Revenue was $5.782 billion versus $9.033 billion; gross margin was 18% versus 30%; operating loss was $368 million versus operating income of $1.595 billion; and net loss was $437 million versus net income of $1.373 billion. Nine-month diluted EPS was $(2.11) versus $6.08.
Cash flow and liquidity: Operating cash flow was $228 million in Q3 and $724 million for nine months, compared with $1.477 billion in the prior-year nine-month period. Nine-month capital expenditures were $266 million. Cash and cash equivalents were $766 million at March 31, 2023, up from $615 million at July 1, 2022. Current assets were $3.597 billion and current liabilities $3.639 billion.
Debt and capital: Debt was $5.958 billion net of issuance costs, including $1.118 billion classified as current; total principal was approximately $6.0 billion. Shareholders’ deficit was $1.004 billion. Seagate reported compliance with debt covenants and no borrowings under its $1.75 billion revolving facility at quarter-end. The company paid $437 million in dividends and $408 million for share repurchases during the nine months; its repurchase program was paused during the quarter.
Material changes and unusual items
- Year-over-year revenue fell primarily because of lower demand and shipments in mass-capacity and legacy markets, alongside price erosion. Management cited macroeconomic headwinds and customer inventory adjustments.
- Q3 gross margin improved sequentially, mainly because $108 million of order-cancellation fees recorded in the December 2022 quarter did not recur and accelerated depreciation was lower. Year-over-year margin was pressured by price erosion, product mix, $75 million of factory underutilization charges in Q3, and accelerated depreciation.
- The quarter included a $300 million BIS settlement penalty accrual, driving a significant part of the operating loss. On April 18, 2023, Seagate agreed to pay $300 million in quarterly installments of $15 million over five years beginning October 31, 2023, and to conduct three export-compliance audits. A suspended denial order is subject to compliance with the settlement.
- Nine-month results included a $204 million net gain from a debt exchange. Seagate issued $750 million of 9.625% notes due 2032 in exchange for $964 million principal of existing notes. Q3 also included a $3 million gain on debt repurchases.
- Nine-month restructuring and other costs were $110 million. The October 2022 plan was expanded to reduce headcount by approximately 3,480 employees in total. A further plan announced April 20, 2023 is expected to incur approximately $150 million of primarily cash-based charges.
Outlook, risks and contingencies
- Management expects macroeconomic weakness and customer inventory adjustments to continue affecting near-term demand and results. It is adjusting production, costs, capital spending and its business plan to current conditions.
- Management stated that available cash, expected operating cash and the undrawn revolver should be sufficient for operations and requirements over the next 12 months. It also noted that longer-term liquidity depends on future cash flows and economic conditions.
- FY2023 capital expenditures were expected to be at the low end of Seagate’s long-term target range of 4%–6% of revenue. The filing gives no clear numerical revenue or earnings guidance.
- Debt obligations, including approximately $1.1 billion of principal due within one year, and covenant requirements are important liquidity considerations. The company had amended its leverage covenant limits through June 28, 2024 and reported compliance at quarter-end.
- Seagate reported approximately $4.1 billion of unconditional purchase obligations in MD&A, primarily for inventory components, including $1.6 billion expected within one year. It also reported $3.2 billion of unconditional long-term purchase obligations in a financial-statement note; investors should reconcile the different scopes and amounts.
- Key risks include demand and price declines, customer concentration, manufacturing underutilization, supplier and purchase-commitment exposure, export-control compliance, technology execution, and the ability to service debt and maintain liquidity. The BIS settlement requires timely payments and audits.
Important facts for investors to verify
- Whether demand, HDD shipment volumes and pricing stabilize, and whether mass-capacity customer inventory adjustments ease.
- How much of the reported operating loss reflects recurring business conditions versus the $300 million BIS accrual and restructuring costs.
- Cash generation, near-term debt maturities, covenant headroom and the company’s ability to meet purchase commitments and settlement installments.
- Progress and actual costs of the October 2022 and April 2023 restructuring plans, including any operational effects.
- Reconciliation of the $4.1 billion purchase-obligation figure in MD&A with the $3.2 billion long-term figure in the notes.
- Compliance with the BIS settlement’s payment and audit terms; the filing says failure to comply could affect the suspended denial order.