Seagate Technology plc — Form 10-Q Summary
Business context and reporting period
Seagate supplies hard disk drives (HDDs), solid-state drives and storage systems. This filing covers the fiscal quarter and first nine months ended March 29, 2019; each comparable period comprised 13 and 39 weeks, respectively. Amounts below are in U.S. dollars.
Financial performance and position
- Quarter revenue: $2.313 billion, down 17.5% year over year and 14.8% from the prior quarter. HDD shipments were 77 exabytes, versus 87 in each comparison quarter; HDD average selling price was $68, versus $70 a year earlier.
- Quarter profitability: Gross profit was $601 million and gross margin 26%, compared with $847 million and 30% a year earlier. Operating income was $236 million (10% of revenue); net income was $195 million and diluted EPS was $0.69, compared with $381 million and $1.31 in the year-ago quarter.
- Nine-month results: Revenue was $8.019 billion, down 4.0% year over year; gross margin was 29% in both periods. Operating income increased to $1.155 billion from $1.129 billion. Net income rose to $1.029 billion from $721 million, while diluted EPS was $3.57 versus $2.48. The prior-year comparison included a substantial Tax Act-related discrete tax expense.
- Cash flow: Nine-month operating cash flow was $1.313 billion, down from $1.645 billion. Capital expenditures were $451 million, versus $270 million; investing cash outflow was $359 million. Financing cash outflow was $1.417 billion, including share repurchases, dividends and repayment of notes. Cash and cash equivalents fell $465 million from June 29, 2018, to $1.388 billion.
- Liquidity and debt: Current assets were $3.487 billion and current liabilities $2.146 billion. Long-term debt, net of issuance costs, was $4.522 billion; the reported debt carrying amount before issuance costs was $4.557 billion. Seagate had $1.1 billion available under its new $1.3 billion revolving facility after drawing $200 million. It reported covenant compliance and expected to remain compliant over the next 12 months.
- Shareholder returns: The company repurchased 7 million shares for $327 million in the quarter and paid $178 million in dividends. The quarterly dividend was $0.63 per share; the board declared another $0.63 dividend payable July 3, 2019.
Material changes and notable items
- Quarter revenue declined from both comparison periods, primarily because fewer exabytes shipped, demand was lower, and price erosion continued. Management also cited seasonality in the sequential decline.
- Quarter gross margin fell to 26% from 29% in the prior quarter and 30% a year earlier, primarily due to factory underutilization and price erosion.
- Operating expenses were lower year over year, reflecting prior restructuring and operational efficiencies. Nine-month restructuring charges were $39 million, primarily related to a voluntary early exit program; the filing says no new restructuring plan was initiated in the March quarter.
- Cash flow was affected by working-capital movements, including a $366 million decrease in accounts payable and a $108 million decrease in accrued employee compensation.
- The company adopted ASC 606 using the modified retrospective method in fiscal 2019. The adoption increased opening accumulated deficit by $34 million; its effect on current-period statements was not material.
- Seagate held a $1.318 billion investment in Toshiba Memory Corporation preferred stock, recorded as a held-to-maturity debt security. It recognized $47 million of payment-in-kind interest income during the nine months.
Outlook, risks and contingencies
- Management expected fiscal 2019 capital expenditures to remain within its long-term target of 6%–8% of revenue and stated that available cash, operating cash generation and the revolving facility should be sufficient for cash needs over the next 12 months.
- Key stated risks include uncertain global economic and political conditions, variable demand and adverse pricing, competition and technology shifts, excess industry supply, product qualification and manufacturing execution, supply-chain disruption, currency and interest-rate movements, trade barriers, cybersecurity threats, and the ability to achieve restructuring savings and manage debt covenants.
- The company disclosed ongoing intellectual-property litigation, including Convolve/MIT, for which it said a reasonable loss range could not be estimated; it characterized the estimated loss in the Lambeth matter as immaterial. It said environmental-site costs were not expected to be material. Other proceedings are described as incidental to business.
- Unconditional long-term purchase obligations were approximately $196 million, with additional contractual commitments disclosed for debt, interest, purchases, leases and capital expenditures. The filing notes these obligations and commitments are subject to the timing and terms described in the filing.
Important facts for investors to verify
- Whether demand, HDD shipment volumes and pricing stabilized after the reported 77-exabyte quarter, and whether margin pressure from underutilization persisted.
- Whether operating cash generation can support capital spending, dividends and repurchases while maintaining liquidity and covenant compliance.
- The performance, terms, collectability and valuation risks associated with the substantial Toshiba Memory investment and its payment-in-kind interest.
- Progress and remaining exposure in disclosed litigation, environmental matters, purchase commitments and tax contingencies.
- The effect of the new revenue-recognition basis when comparing fiscal 2019 results with prior periods, which were not restated.