Seagate Technology plc — Form 10-Q Summary
Reporting period: Fiscal third quarter and nine months ended March 28, 2014. The quarter comprised 13 weeks. Financial amounts are in U.S. dollars; figures are in millions except per-share data.
Business context and results
Seagate supplies HDDs, SSHDs, SSDs and related storage products and services. In the quarter, it shipped 55 million units totaling 51 exabytes and generated revenue of $3.406 billion.
| Metric | Q3 FY2014 | Q3 FY2013 | Nine months FY2014 | Nine months FY2013 |
|---|---|---|---|---|
| Revenue | $3,406 | $3,526 | $10,423 | $10,927 |
| Gross profit / margin | $959 / 28% | $948 / 27% | $2,921 / 28% | $3,001 / 27% |
| Operating income / margin | $444 / 13% | $465 / 13% | $1,366 / 13% | $1,644 / 15% |
| Net income | $395 | $416 | $1,250 | $1,490 |
| Diluted EPS | $1.17 | $1.13 | $3.56 | $3.86 |
Q3 revenue declined 3% year over year and 3% sequentially. Management attributed the year-over-year decline to lower unit shipments and $2 lower average selling prices, partly offset by favorable product mix. Sequentially, shipments fell 3% and average selling prices declined $1. Average selling price was $61 per unit, versus $63 a year earlier. Gross margin improved year over year as favorable mix and cost savings offset modest price erosion.
Cash flow, debt and liquidity
- Q3 operating cash flow was $443. Nine-month operating cash flow was $1,981, compared with $2,659 in the prior-year period.
- Nine-month investing cash flow was positive $52; capital expenditures were $428. Nine-month financing cash outflow was $1,483.
- At March 28, cash and cash equivalents were $2,259, short-term investments $47, and restricted cash and investments $4. Total current assets were $5,151 against current liabilities of $2,162.
- Long-term debt was $3,514, up from $2,774 at June 28, 2013; the increase reflected issuance of $800 in 3.75% senior notes, partly offset by debt repayments and repurchases. The $500 revolving credit facility was undrawn, and the company reported compliance with debt covenants.
- During the nine months, Seagate repurchased 41 million shares for $1,886 and paid $417 in dividends. The Q3 dividend declared was $0.43 per share.
Changes, outlook and unusual items
- Despite higher Q3 gross margin percentage, year-over-year operating income fell 5% and net income fell 5%. Nine-month revenue declined 5%, net income declined 16%, and diluted EPS declined from $3.86 to $3.56. Quarterly diluted EPS rose from $1.13 to $1.17, alongside a lower weighted-average share count.
- Q3 other expense was $54, including $7 of losses on debt repurchases; the prior quarter included a $32 gain on sale of a strategic investment. Q3 income taxes included $14 of net discrete benefits from audit settlements. Nine-month restructuring expense was $20, primarily associated with a workforce reduction.
- Management expected FY2014 capital expenditures to be below the low end of its long-term target range of 6%–8% of revenue. No specific revenue or earnings guidance was provided in the supplied filing text.
- On March 31, 2014, after quarter-end, Seagate completed its acquisition of Xyratex for approximately $376 in cash. The filing said the acquisition was intended to strengthen vertical integration and expand storage solutions; purchase-accounting disclosures were incomplete.
- Management cited demand uncertainty, price erosion, competition and the need for cost savings as factors affecting results. Key risks include volatile customer demand and forecasting, product qualification and execution, supply-chain constraints, competition from SSDs and other storage technologies, and substantial debt.
- Material legal and tax matters include the Convolve/MIT patent case, for which the company said a loss range could not be reasonably estimated; U.S. and China tax examinations, whose adverse outcome could materially affect results; and other patent and commercial disputes. A court ruled for Seagate in the Shukh case, but the plaintiff appealed. The Realtek ITC administrative law judge issued an initial determination in Seagate’s favor.
Important facts for investors to verify
- Whether HDD shipment volumes, pricing and product mix can offset continued price erosion and demand variability.
- Whether operating cash generation remains sufficient to fund product development, capital needs, dividends, buybacks and debt service.
- The effect of Xyratex integration and its cash cost on leverage, liquidity and future results.
- Developments in the U.S. and China tax examinations and the cited legal proceedings, including matters with no estimable loss range.
- Whether Seagate maintains covenant compliance and the capacity to sustain shareholder distributions amid its debt obligations.