Seagate Technology plc — Q2 FY2017 Form 10-Q
Reporting period: Fiscal quarter and six months ended December 30, 2016. The quarter comprised 13 weeks. Amounts are in U.S. dollars; financial figures are in millions unless stated otherwise.
Business context and results
Seagate supplies data-storage products and solutions, principally hard disk drives, with additional SSD, hybrid-drive, and storage-systems offerings. In the quarter, it shipped 40 million drives, representing 68 exabytes, at a $66 average selling price per unit.
| Metric | Q2 FY2017 | Q2 FY2016 | Six months FY2017 | Six months FY2016 |
|---|---|---|---|---|
| Revenue | $2,894 | $2,986 | $5,691 | $5,911 |
| Gross profit / margin | $891 / 31% | $741 / 25% | $1,692 / 30% | $1,429 / 24% |
| Operating income | $370 | $229 | $592 | $315 |
| Net income | $297 | $165 | $464 | $198 |
| Diluted EPS | $1.00 | $0.55 | $1.55 | $0.65 |
| Operating cash flow | $656 | Not stated here | $1,247 | $1,206 |
Financial position, cash flow, and capital
- At December 30, cash and cash equivalents were $1,716; short-term investments were nil. Current assets were $4,140 and current liabilities $2,681, a current ratio of approximately 1.54.
- Long-term debt was $4,093, with no current portion reported; cash less carrying-value debt was approximately negative $2,377. Debt principal totaled $4,133 before debt issuance costs, including $800 due in fiscal 2019 and $3,333 thereafter.
- For the six months, operating cash flow was $1,247; investing cash outflow was $234, primarily $235 of capital expenditures; financing cash outflow was $413. Cash, cash equivalents, and restricted cash increased $588 to $1,720.
- Six-month financing included $248 of share repurchases and $188 of dividends paid. The company declared $0.63 per share for the quarter; the $186 million dividend declared during the quarter was paid January 4, 2017.
- The $700 million revolving credit facility was undrawn. Seagate reported compliance with its amended covenants and expected to remain compliant for the next 12 months.
Changes versus comparable periods
- Quarterly revenue fell 3% year over year but rose 3% from the September 2016 quarter. Versus the prior-year quarter, unit shipments declined by 6 million, mainly reflecting weaker client-compute demand; improved product mix partly offset unit declines and price erosion.
- Quarterly gross margin improved to 31% from 25% year over year and 29% sequentially. Management attributed the improvement to product mix, factory utilization, workforce reductions, and manufacturing consolidation, partly offset by price erosion.
- Quarterly net income increased to $297 from $165 year over year. Six-month net income rose to $464 from $198, despite lower revenue, alongside higher gross margin and lower operating costs.
- Cash and cash equivalents increased $591 from July 1, while inventory rose $140 to $1,008. Management attributed the inventory increase primarily to higher units built ahead of manufacturing-footprint adjustments.
Outlook, risks, and unusual items
- Management expected fiscal 2017 capital expenditures to be less than 5% of revenue and stated that available liquidity and expected operating cash flows should cover cash needs for the next 12 months. No specific revenue or earnings guidance is stated in the provided filing text.
- The July 2016 restructuring plan targets approximately 6,500 workforce reductions and was expected to be largely completed by fiscal year-end 2017. Six-month restructuring charges were $115, including $82 associated with that plan.
- A $25 strategic-investment impairment charge was recorded in the six months, contributing to other expense. The company also reported $66 of unrecognized tax benefits; approximately $12 could be reduced in the following 12 months, primarily through statute expirations.
- Key disclosed risks include variable drive demand and pricing, competition and technology shifts, manufacturing execution and supply-chain disruption, achieving restructuring savings, covenant compliance, foreign-exchange and interest-rate movements, and cyber incidents.
- Several intellectual-property matters remained unresolved; Seagate said it could not reasonably estimate possible losses in the identified cases. Environmental matters were not expected to be material based on current estimates, though future requirements could increase costs. Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether higher gross margin and operating cash flow are sustainable despite continued price erosion and lower year-over-year shipments.
- Progress, remaining costs, and expected savings from the planned 6,500-person workforce reduction and manufacturing consolidation.
- Inventory growth, working-capital movements, and capital spending against management’s fiscal 2017 expectation.
- Debt maturities, interest obligations, covenant headroom, and the capacity to maintain dividends and repurchases.
- Developments in pending intellectual-property litigation and the potential tax effects of unrecognized tax benefits.