Seagate Technology plc — Form 10-Q Summary
Business context and reporting period
Fiscal first quarter ended September 29, 2017 (13 weeks), compared primarily with the 13 weeks ended September 30, 2016. Seagate supplies HDDs, SSDs, hybrid drives, storage systems and related solutions for enterprise, client, retail and cloud markets.
Financial and operating results
| Metric | Quarter ended Sep. 29, 2017 | Comparable prior-year quarter |
|---|---|---|
| Revenue | $2.632 billion | $2.797 billion |
| Gross margin | $736 million; 28% | $801 million; 29% |
| Operating income | $255 million | $221 million |
| Net income | $181 million | $167 million |
| Diluted EPS | $0.62 | $0.55 |
| Operating cash flow | $237 million | $591 million |
- HDD capacity shipped was 70 exabytes, versus 67 exabytes a year earlier; average selling price was $64 per drive, versus $67.
- Cash and cash equivalents were $2.285 billion at quarter-end, down $254 million from June 30, 2017. Long-term debt was $5.002 billion; the filing reports $5.051 billion of principal due, including $688 million in fiscal 2019. Approximate net debt, calculated as debt less cash, was $2.7 billion.
- Current assets were $4.824 billion and current liabilities were $2.458 billion. Capital expenditures were $124 million. Financing cash outflows included $184 million of dividends and $166 million of share repurchases.
- Quarterly dividend declared was $0.63 per share. Seagate repurchased 5 million ordinary shares for $166 million; $1.1 billion remained under the share repurchase authorization.
Material changes versus comparable periods
- Revenue declined $165 million year over year, mainly from price erosion, partly offset by higher shipped capacity. Revenue rose $226 million from the June 2017 quarter as capacity shipped increased, partly offset by price erosion.
- Gross margin was down one percentage point year over year. Management cited price erosion, partly offset by favorable product mix and improved factory utilization from cost reductions.
- Operating income and net income rose year over year despite lower revenue, helped by lower product development, marketing and administrative expenses and lower restructuring charges.
- Operating cash flow fell to $237 million from $591 million year over year. The filing cites, among other factors, cash payments under variable compensation plans, higher inventory and lower accounts payable.
Outlook, commentary, risks and unusual items
- Management said cash sources should be sufficient for the next 12 months and expected fiscal 2018 capital expenditures to be less than 5% of revenue. The filing does not provide a specific revenue or earnings forecast.
- A July 2017 restructuring plan targeted approximately 600 job reductions and was largely completed by quarter-end. Restructuring charges were approximately $51 million; about $15 million of additional costs were expected under the disclosed plans.
- On September 28, 2017, Seagate signed an equity commitment letter contemplating an investment of up to JPY 139.5 billion (approximately $1.25 billion) in non-convertible preferred equity connected with the proposed Toshiba Memory acquisition. Completion was subject to regulatory approvals and other conditions.
- Risks highlighted include variable demand and adverse pricing for disk drives, competition and technology shifts, supply or production disruption, restructuring execution and savings, foreign exchange, cyber incidents, debt covenant compliance, and interest rates. The company was compliant with its credit facility covenants and expected to remain compliant for 12 months.
- Several patent matters remained pending; Seagate said it could not reasonably estimate possible loss ranges for certain cases. Environmental liabilities at identified sites were not expected to be material. The filing reports no material changes to previously disclosed risk factors.
- Warranty costs included a favorable estimate change for prior accruals of less than 0.5% of revenue. Management reported effective disclosure controls and no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether HDD pricing and capacity demand support revenue and gross-margin trends, especially given continued price erosion.
- Whether restructuring savings are achieved and cash flow improves after the quarter’s working-capital outflows.
- The timing, financing, regulatory status and terms of the proposed Toshiba Memory-related investment, including its potential effect on liquidity.
- Debt repayment needs, covenant headroom, and the sustainability of dividends and share repurchases relative to operating cash generation.
- Developments in disclosed litigation and any changes in estimated exposure, for which certain loss ranges were not estimable.