Seagate Technology plc — Q2 FY2016 Form 10-Q
Reporting period: Quarter ended January 1, 2016 (13 weeks); six months ended the same date (26 weeks). Comparatives ended January 2, 2015 and covered 14 and 27 weeks, respectively. Seagate makes HDDs and other data-storage products and solutions.
Financial performance and position
| Metric | Quarter | Six months |
|---|---|---|
| Revenue | $2.986 billion, down 19% year over year | $5.911 billion, down 21% |
| Gross margin | 25%, versus 28% | 24%, versus 28% |
| Operating income | $229 million, versus $1.053 billion | $315 million, versus $1.509 billion |
| Net income | $165 million; diluted EPS $0.55 | $198 million; diluted EPS $0.65 |
| Operating cash flow | $382 million | $1.206 billion, versus $2.045 billion |
Quarterly revenue rose from $2.925 billion in the September 2015 quarter, with gross margin up about one percentage point sequentially. The company shipped 46 million drives and 61 exabytes; average selling price was $59 per drive. Year-over-year revenue declines reflected lower shipments and price erosion, particularly weaker personal-computer demand. Quarter shipments fell to 46 million from 57 million a year earlier.
At January 1, cash and cash equivalents were $1.258 billion and short-term investments $6 million, down $1.221 billion combined from July 3, 2015. Long-term debt was $4.140 billion; cash and short-term investments less debt imply net debt of approximately $2.876 billion. No amounts were drawn on the $700 million revolving facility, and Seagate reported compliance with debt covenants. Current assets were $3.931 billion and current liabilities $2.539 billion.
Six-month investing cash outflow was $980 million, including $634 million for Dot Hill and $346 million in capital expenditures. Financing cash outflow was $1.444 billion, including $1.061 billion of share repurchases and $351 million in dividends. The quarter dividend declared was $0.63 per share; $1.8 billion remained under the share-repurchase authorization.
Material changes and unusual items
- Year-over-year profit comparisons are affected by prior-period items: the December 2014 quarter included a net $620 million arbitration-award gain and $143 million of accrued-award interest income. The prior-year six-month tax provision also included approximately $181 million of expense from a China tax assessment.
- Dot Hill was acquired for $674 million cash on October 6, 2015, expanding Seagate’s OEM-focused cloud storage systems business. Goodwill increased by $364 million; Dot Hill’s reported revenue and earnings contribution was not significant.
- A September 2015 restructuring plan targeted approximately 1,000 job reductions and was largely completed by the quarter end. Six-month restructuring charges were $76 million, including $65 million for that plan.
- Seagate recorded a $10 million impairment of a strategic investment during the six months. Its six-month tax provision included approximately $3 million of net discrete tax benefits.
- On January 27, 2016, after quarter end, Seagate received $32.6 million of additional Western Digital arbitration interest; the parties then ended the related litigation.
Outlook, commentary, and risks
Seagate expects FY2016 capital expenditures at or below its long-term target of 6%–8% of revenue. It expects to remain in compliance with debt covenants over the next 12 months. The filing provides no specific revenue or earnings guidance. Management cited variable demand, adverse disk-drive pricing, competition, possible excess supply, execution and quality risks for new products, currency movements, supply-chain disruption, competing technologies, restructuring savings, and interest-rate changes as factors that could affect results.
Material legal matters include appeals or ongoing proceedings involving Convolve/MIT, Shukh, LEAP, and Enova. For these matters, the company said a possible loss range could not currently be reasonably estimated. Seagate did not expect environmental-site costs to be material. It stated there were no material changes to the risk factors in its FY2015 10-K. Management concluded disclosure controls were effective.
Key facts for investors to verify
- Whether demand and pricing stabilize, and whether improved product mix can sustain gross margin.
- Cash generation and liquidity after the Dot Hill acquisition, substantial repurchases, dividends, and capital spending.
- Debt maturities, covenant headroom, and management’s ability to maintain its dividend and capital-return plans.
- Execution of restructuring savings and integration of Dot Hill; monitor amortization and acquisition-related effects.
- Developments in the disclosed litigation and the post-quarter Western Digital interest payment.