Seagate Technology Holdings Plc (STX) — Form 10-Q Summary
Reporting period: Fiscal second quarter ended January 1, 2021 (13 weeks), with six-month results also reported. The six-month prior-year comparison covered 27 weeks versus 26 weeks in the current period. Amounts are in U.S. dollars.
Business context and results
Seagate supplies data-storage products, principally hard disk drives (HDDs), for mass-capacity and legacy markets. It reported one segment. In the quarter, it shipped 129 exabytes of HDD capacity; mass-capacity shipments were 97 exabytes and legacy shipments 32 exabytes.
| Metric | Quarter ended Jan. 1, 2021 | Prior-year quarter | Six months ended Jan. 1, 2021 | Prior-year six months |
|---|---|---|---|---|
| Revenue | $2.623 billion | $2.696 billion | $4.937 billion | $5.274 billion |
| Gross profit / margin | $696 million / 27% | $758 million / 28% | $1.292 billion / 26% | $1.429 billion / 27% |
| Operating income | $348 million | $384 million | $599 million | $657 million |
| Net income | $280 million | $318 million | $503 million | $518 million |
| Diluted EPS | $1.12 | $1.20 | $1.97 | $1.93 |
| Operating cash flow | $473 million | Not stated in the MD&A excerpt | $770 million | $936 million |
Quarter-over-quarter, revenue rose from $2.314 billion and gross margin from 26%; management attributed the improvement primarily to higher shipments, improved market conditions, seasonality and product mix. Year over year, quarterly revenue fell about 3% and net income about 12%. For the six months, revenue fell about 6% and net income about 3%. Seagate cited price erosion, weaker legacy-market shipments and COVID-related lower demand; growth in mass-capacity shipments partly offset those pressures. HDD price per terabyte was $19, compared with $23 a year earlier.
Quarterly operating margin was 13% and net margin 11%. Six-month operating margin was 12% and net margin 10%. Research and product development spending was $221 million for the quarter and $444 million for six months; six-month spending was down from $505 million a year earlier, primarily due to lower employee costs and the prior-year period’s extra week.
Cash, debt and capital allocation
- Cash and cash equivalents were $1.799 billion at January 1, 2021, versus $1.722 billion at July 3, 2020. Current assets were $4.081 billion and current liabilities $2.621 billion.
- Net cash provided by operations for six months was $770 million, down from $936 million. Capital expenditures were $270 million, and net cash used in investing was $263 million.
- Long-term debt, net of issuance costs, was $5.145 billion, including $25 million current and $5.120 billion long-term, compared with $4.175 billion at fiscal year-end. Seagate issued $1 billion of senior notes in December 2020, including notes due 2029 and 2031.
- No borrowings were outstanding on the revolving credit facility at January 1. The facility then provided up to $1.5 billion; an amendment on January 13, 2021 increased it to $1.725 billion. The company reported compliance with debt covenants and expected continued compliance for the next 12 months.
- For six months, Seagate repurchased approximately 19 million shares for $1.068 billion and paid $334 million in dividends. It had $3.2 billion remaining under its share-repurchase authorization at January 1. The board declared a subsequent quarterly dividend of $0.67 per share.
Outlook, commentary and risks
- Management expected COVID-related supply-chain and demand disruptions, higher logistics and operating costs, factory under-utilization and softer demand in some markets to continue during fiscal 2021. The company said the pandemic’s ultimate business and financial impact remained uncertain.
- Fiscal 2021 capital expenditures were expected to be at or below the long-term target range of 6%–8% of revenue. Management stated that cash, operating cash generation and available credit were expected to meet cash needs for the next 12 months, while noting uncertainty around pandemic developments.
- Key risks identified include volatile demand and pricing, competition and technology shifts, product qualification and manufacturing execution, supply-chain disruption, trade restrictions, currency movements, debt and covenant management, and cybersecurity incidents.
- Contingencies include patent litigation. Seagate said it could not reasonably estimate a possible loss range for the Convolve matter or a newly filed Nidec patent case; it estimated the Lambeth matter’s potential loss to be immaterial. Environmental cleanup costs were not expected to be material based on current estimates.
- Unusual items included a $7 million strategic-investment impairment in the December quarter; the six-month period also included $23 million of upward strategic-investment adjustments and $8 million of investment-sale gain, recorded in the September quarter.
Important facts for investors to verify
- Whether price erosion and COVID-related demand, logistics and supply-chain pressures persist, and whether mass-capacity growth continues to offset legacy-market weakness.
- Whether reported gross-margin improvement quarter over quarter is sustainable, given lower year-over-year margins and the HDD price-per-terabyte decline.
- Cash-flow conversion and working-capital trends, particularly inventory growth and the effect of shipment timing on receivables and payables.
- Debt levels, interest expense, refinancing needs and continued compliance with credit-facility covenants after the new note issuance and facility amendment.
- Capital returned through dividends and share repurchases relative to operating cash generation and investment needs.
- Developments in the disclosed litigation and any changes to loss estimates or contingencies; the filing does not provide clear potential-loss values for certain cases.