Seagate Technology Holdings plc — Form 10-Q Summary
Reporting period: Fiscal third quarter ended April 1, 2022 (13 weeks); nine-month year-to-date period ended the same date. Comparisons are with the quarter ended April 2, 2021 and, where noted, the preceding quarter ended December 31, 2021. Seagate supplies HDDs and other data-storage products and solutions.
Financial performance and position
| Metric | Q3 FY2022 | Comparable period |
|---|---|---|
| Revenue | $2.802 billion | $2.731 billion in Q3 FY2021; $3.116 billion in Q2 FY2022 |
| Gross profit / margin | $806 million / 29% | $740 million / 27% year over year; $948 million / 30% sequentially |
| Operating income / margin | $429 million / 16% | $386 million / 14% year over year; $580 million / 19% sequentially |
| Net income | $346 million; diluted EPS $1.56 | $329 million; diluted EPS $1.39 year over year |
| Revenue, nine months | $9.033 billion | $7.668 billion in the prior-year period |
| Net income, nine months | $1.373 billion; diluted EPS $6.08 | $832 million; diluted EPS $3.34 in the prior-year period |
Q3 revenue increased about 3% year over year but declined about 10% sequentially. Nine-month revenue rose about 18% year over year. Management attributed the sequential revenue decline chiefly to lower shipments amid weaker demand in legacy and certain mass-capacity markets, pandemic effects and seasonality. Q3 HDD shipments were 154 exabytes versus 140 exabytes a year earlier and 163 exabytes in the prior quarter; HDD price per terabyte was $17 versus $18 a year earlier.
Cash flow: Nine-month operating cash flow was $1.477 billion, versus $1.148 billion a year earlier. Capital expenditures were $309 million; operating cash flow less capital expenditures was approximately $1.168 billion. Cash and cash equivalents were $1.138 billion at quarter-end, down $71 million from July 2, 2021. Nine-month investing cash outflow was $293 million and financing cash outflow was $1.255 billion.
Debt and liquidity: Debt, net of issuance costs, was $5.644 billion, including $30 million current and $5.614 billion long-term, compared with $5.139 billion at July 2, 2021. The company had $1.75 billion available under its revolving credit facility, with no borrowings outstanding. It reported compliance with credit-agreement covenants and expected to remain compliant over the next 12 months. Cash less reported debt was approximately negative $4.5 billion.
Capital returns: In the first nine months, Seagate repurchased $1.313 billion of shares and paid $458 million in dividends. The board declared a further $0.70-per-share dividend on April 27, payable July 7, 2022. At April 1, $2.8 billion remained under the share repurchase authorization.
Material changes and management commentary
- Q3 gross margin fell one percentage point sequentially, which management attributed to price erosion, less favorable product mix, lower exabyte shipments and higher component costs. Year-over-year gross margin improved, primarily on product mix, partly offset by higher component and logistics costs.
- Mass-capacity revenue represented 69% of Q3 revenue, up from 60% a year earlier; legacy represented 23%, down from 32%. OEMs accounted for 77% of quarterly revenue.
- Management cited supply-chain disruption, component shortages (particularly affecting non-HDD products), higher logistics and operating costs, inflation, and customer demand variation. It also noted pandemic-related lockdowns and continuing uncertainty.
- For fiscal 2022, management expected capital expenditures at or below the low end of its long-term target range of 4%–6% of revenue. It stated that available resources were expected to fund operations and cash needs for the next 12 months. The filing provides no specific revenue or EPS forecast.
Risks, contingencies and unusual items
- Other expense included a $13 million net impairment charge related to a strategic investment in Q3. Q3 tax provision of $5 million included approximately $6 million of net discrete tax benefit. Unrecognized tax benefits were $116 million at period-end.
- Q3 warranty cost was 0.9% of revenue, including an unfavorable estimate change on prior accruals equal to 0.2% of revenue. The company cited changes in estimated future product-return rates.
- Risks identified include macroeconomic and geopolitical uncertainty, COVID-19 and supply-chain impacts, component shortages and cost inflation, variable demand and pricing, product qualification and manufacturing execution, currency movements, trade restrictions, cyber incidents, and debt, covenant and liquidity management.
- The company reported $769 million of unconditional long-term purchase obligations, primarily for inventory components. Its broader contractual-obligations table reports $1.831 billion of purchase obligations; investors should review the filing’s definitions and scope for these figures.
- A jury found Seagate did not infringe the asserted patent claims in the Lambeth case; judgment in Seagate’s favor was entered after quarter-end. Seagate and TDK reached an agreement resolving their disputes, and claims against TDK were dismissed with prejudice. The filing does not state the agreement’s financial terms.
- Seagate said it was in material compliance with environmental requirements and did not expect costs at identified cleanup sites to be material. It also disclosed routine indemnification obligations for which a maximum potential amount could not be reasonably estimated.
Important facts for investors to verify
- Whether mass-capacity demand, shipment volumes, product mix and pricing support margins as supply constraints and inflation persist.
- How working-capital movements—particularly higher inventory and accounts receivable—affect future operating cash flow.
- Debt repayment timing, variable-rate exposure, interest-rate swap coverage, revolver availability and ongoing covenant compliance.
- The amount and timing of share repurchases and dividends relative to cash generation and capital requirements.
- Potential effects of the $116 million in unrecognized tax benefits, warranty-estimate changes, investment impairment and disclosed purchase commitments.