Seagate Technology plc — Form 10-Q Summary
Business context and reporting period. Seagate supplies hard disk drives and broader data-storage products and solutions. This filing covers the 14-week fiscal first quarter ended October 3, 2014; the comparable prior-year quarter was 13 weeks. Financial amounts below are in U.S. dollars, millions unless noted.
Key financial results
| Metric | Quarter ended Oct. 3, 2014 | Prior-year quarter |
|---|---|---|
| Revenue | $3,785 | $3,489 |
| Gross profit / margin | $1,051 / 28% | $975 / 28% |
| Operating income / margin | $456 / 12% | $478 / 14% |
| Net income | $381 | $427 |
| Diluted EPS | $1.13 | $1.16 |
| Operating cash flow | $602 | $682 |
- Revenue increased 8% year over year, with shipments rising to 60 million units from 56 million and exabytes shipped reaching 60 from 49. Average selling price was $60 per unit versus $62.
- Gross margin held at 28%; management said price erosion was offset by improved product mix. Operating income declined despite higher revenue as operating expenses rose.
- Cash capital expenditures were $172 million; operating cash flow less these expenditures was approximately $430 million. Cash used in investing activities was $619 million, including the $450 million LSI Flash Business acquisition.
- At quarter-end, cash and cash equivalents were $2,190, short-term investments $11, and debt $3,809. The $500 million revolving credit facility was undrawn, and the company reported compliance with debt covenants.
Material changes and notable items
- Compared with the prior-year quarter, revenue rose $296 million, while net income fell $46 million and diluted EPS fell $0.03. The current quarter had one additional week, so reported comparisons are not like-for-like.
- Compared with the immediately preceding quarter, revenue increased from $3,301 million to $3,785 million and net income from $320 million to $381 million; the current quarter was also one week longer.
- Seagate completed its $450 million cash acquisition of LSI’s Accelerated Solutions and Flash Components businesses. The acquisition added $337 million of goodwill and $141 million of identifiable intangible assets; its in-quarter revenue and earnings were not significant.
- The company repurchased $183 million of ordinary shares, paid $140 million in dividends, and paid $124 million to repurchase debt. Debt repurchases generated a $14 million loss recorded in other expense.
- Cash and cash equivalents declined $444 million during the quarter, principally reflecting the acquisition, debt and share repurchases, dividends, and capital expenditures, partly offset by operating cash flow.
Outlook, risks and contingencies
- No specific revenue or earnings guidance is provided. Management expected fiscal 2015 capital expenditures to be within its long-term target of 6%–8% of revenue and expected to remain in compliance with debt covenants over the next 12 months.
- The board approved a $0.54-per-share cash dividend for payment November 25, 2014. These post-quarter plans are not quarter-end cash outflows.
- After quarter-end, on October 8, the Minnesota Supreme Court confirmed the arbitration award in Seagate’s trade-secret case against Western Digital. Seagate reported receiving a partial payment of approximately $773 million on October 14. This receipt is subsequent to the reporting date and is not included in quarter-end cash or quarterly cash flows.
- Management identified risks including uncertain global demand, disk-drive pricing pressure, competition, possible excess supply, product qualification and manufacturing execution, quality, and achieving cost savings. It also noted U.S. federal and China tax examinations that could have a material adverse effect; management said it had adequately provided for them.
- Several intellectual-property and other lawsuits remain pending or under appeal. The company stated that it could not reasonably estimate possible losses for certain cases. Environmental compliance and cleanup obligations were also discussed; management did not expect current site costs to be material.
Important facts for investors to verify
- Assess performance on a comparable-week basis and distinguish higher shipments from lower average selling prices.
- Review the cash, earnings, and integration effects of the LSI acquisition, including acquired goodwill and intangible amortization.
- Confirm the timing and accounting treatment of the $773 million Western Digital payment, which arrived after quarter-end.
- Monitor debt levels, planned shareholder returns, and liquidity after the quarter-end payment and other capital-allocation activity.
- Track outcomes of the disclosed tax examinations and litigation, for which some potential losses were not estimable.