Seagate Technology plc — Form 10-Q summary
Reporting period: Fiscal quarter ended January 3, 2020 (13 weeks); six-month period ended the same date (27 weeks). The year-over-year comparatives end December 28, 2018; the six-month comparative covered 26 weeks. Figures are U.S. dollars unless stated otherwise.
Financial performance and position
| Metric | Quarter ended Jan. 3, 2020 | Year-ago quarter | Six months ended Jan. 3, 2020 | Year-ago six months |
|---|---|---|---|---|
| Revenue | $2.696 billion | $2.715 billion | $5.274 billion | $5.706 billion |
| Gross margin | $758 million; 28% | $794 million; 29% | $1.429 billion; 27% | $1.707 billion; 30% |
| Operating income | $384 million | $416 million | $657 million | $919 million |
| Net income | $318 million | $384 million | $518 million | $834 million |
| Diluted earnings per share | $1.20 | $1.34 | $1.93 | $2.88 |
| Operating cash flow | Quarterly value not separately stated here | — | $936 million | $875 million |
Quarterly revenue rose 4.6% from the September 2019 quarter to $2.696 billion, but was down 0.7% year over year. Management attributed sequential growth mainly to higher exabytes shipped, partly offset by price erosion. Shipments were 107 exabytes versus 87 a year earlier; HDD price per terabyte was $23 versus $28. Mass-capacity revenue increased to 49% of quarterly revenue from 39% a year earlier, while legacy revenue declined to 43% from 53%.
Quarterly gross margin improved from 26% in the September quarter, primarily on product mix and lower depreciation, but remained below the year-ago 29%, mainly because of price erosion. Six-month revenue and earnings declined year over year; management cited price erosion and factory underutilization as key pressures on the six-month gross margin.
For the six months, investing cash outflow was $385 million, including $341 million of capital expenditures; financing cash outflow was $1.054 billion. Cash and cash equivalents were $1.744 billion at January 3, 2020, down $476 million from June 28, 2019. Long-term debt, net of issuance costs, was $4.141 billion, including $6 million current. Accounts payable rose to $1.870 billion from $1.420 billion at fiscal year-end, while inventory increased to $1.148 billion from $970 million.
Quarterly dividend declared was $0.65 per share. During the six months, Seagate paid $335 million in dividends and repurchased $600 million of ordinary shares. The company had $1.6 billion remaining under its share repurchase authorization.
Management commentary, outlook and notable items
- Management said available cash, expected operating cash generation and the undrawn $1.5 billion revolving credit facility were sufficient to meet cash needs for the next 12 months. It reported compliance with credit covenants and expected continued compliance over that period.
- Fiscal 2020 capital expenditures were expected to remain within the company’s long-term target of 6%–8% of revenue. The filing does not provide specific revenue or earnings guidance.
- A change in estimated useful lives for certain manufacturing equipment, effective June 29, 2019, increased net income by $42 million in the quarter and $65 million in the six-month period, and diluted EPS by $0.16 and $0.24, respectively. Lower depreciation from this change also supported gross margin.
- Six-month other expense included $30 million of losses on debt repurchases. The company borrowed $500 million under a term loan and used proceeds to repurchase senior notes; total debt repurchases were $645 million. Interest-rate swaps were entered into to fix the term loan’s variable-rate exposure.
- Principal business risks identified include demand variability, pricing pressure, competition and technology shifts, product qualification and manufacturing execution, supply-chain disruption, foreign-exchange movements, trade restrictions, cybersecurity, and the ability to manage debt and liquidity.
- In the Convolve/MIT patent litigation, the company said a possible loss range could not be reasonably estimated. A Lambeth patent case had a June 1, 2020 trial date; the company estimated any loss to be immaterial. Environmental cleanup costs were not expected to be material based on current estimates.
- Unrecognized tax benefits, excluding interest and penalties, were $86 million. The company reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Investor verification points
- Assess how much reported earnings and margin benefited from the longer useful-life estimate, and whether the lower depreciation remains appropriate over time.
- Track HDD pricing, exabyte volumes, market mix, factory utilization and warranty-cost trends; price erosion was a recurring pressure.
- Reconcile cash generation with capital spending, dividends, share repurchases and debt repayment, including the sharp increase in accounts payable and inventory.
- Review debt maturities, interest costs, covenant headroom and the availability of the revolving facility; reported debt fair value exceeded carrying value.
- Monitor the Convolve/MIT litigation, the scheduled Lambeth trial, tax exposures and changes in environmental or other contingencies.