Seagate Technology Holdings plc — Form 10-Q Summary
Business context and reporting period
Seagate provides data-storage products and solutions, principally HDDs, as well as SSDs and storage systems. This unaudited report covers the fiscal quarter ended December 28, 2018 (13 weeks) and the six months ended that date. Comparisons are with the prior-year quarter and six-month period; the filing also compares the quarter with the September 28, 2018 quarter.
Key financial metrics
| Metric | Quarter ended Dec. 28, 2018 | Six months ended Dec. 28, 2018 |
|---|---|---|
| Revenue | $2.715 billion | $5.706 billion |
| Gross profit / margin | $794 million / 29% | $1.707 billion / 30% |
| Operating income / margin | $416 million / 15% | $919 million / 16% |
| Net income | $384 million | $834 million |
| Diluted EPS | $1.34 | $2.88 |
| Operating cash flow | $288 million | $875 million |
For the six months, investing cash flow was negative $230 million, including $304 million of capital expenditures; financing cash flow was negative $1.141 billion. Cash and cash equivalents were $1.357 billion at quarter-end, down $496 million from June 29, 2018. Current assets were $3.676 billion and current liabilities $2.300 billion. Long-term debt, net of issuance costs, was $4.324 billion; cash less that debt implies approximately $2.967 billion of net debt, excluding the separate $1.300 billion Toshiba Memory investment. The $700 million revolving facility was undrawn, and Seagate reported covenant compliance.
Material changes versus comparable periods
- Quarterly revenue fell 9% year over year and 9% sequentially. Management attributed the sequential decline mainly to lower HDD capacity shipments amid less favorable market conditions and price erosion; consumer-seasonal demand partly offset this. HDD shipments were 87 exabytes versus 88 a year earlier and 99 sequentially; HDD ASP was $68 versus $68 and $70, respectively.
- Quarterly gross margin declined to 29% from 30% year over year and 31% sequentially, reflecting price erosion and product mix. Six-month revenue rose 3% year over year, and gross margin improved to 30% from 29%, supported by high-capacity HDD demand, product mix and factory utilization, partly offset by price erosion.
- Quarterly net income rose from $159 million a year earlier, while six-month net income rose from $340 million. Comparisons are affected by prior-year tax expense: the 2017 periods included about $197 million of discrete tax expense, primarily from revaluing U.S. deferred tax assets after the Tax Act. 2018 tax provisions were $14 million for the quarter and $32 million for six months.
- Seagate repaid $499 million of 2018 Senior Notes at maturity in November. Six-month dividends paid were $361 million and share repurchases were $286 million. The quarterly dividend remained $0.63 per share; a further $0.63 dividend was declared for payment April 3, 2019.
Outlook, commentary, risks and unusual items
- Management expected fiscal 2019 capital expenditures to remain within its long-term target of 6%–8% of revenue and stated that available cash, operating cash generation and the revolving facility should meet cash needs for the next 12 months.
- Risks identified include uncertain global economic and political conditions, variable demand and adverse pricing, competition and technology shifts, supply-chain or production disruptions, execution of restructuring and cost savings, debt covenant and liquidity management, currency and interest-rate movements, trade restrictions, regulation, and cybersecurity threats.
- There was no new restructuring plan in the quarter. Six-month restructuring charges were approximately $28 million; quarter charges were approximately $5 million. A $2 million impairment on property held for sale was also recorded.
- The company held a $1.3 billion Toshiba Memory non-convertible preferred-stock investment accounted for as a held-to-maturity debt security. Its reported fair value was $1.272 billion, $28 million below carrying value; no other-than-temporary impairment was identified. Six-month payment-in-kind interest income was $31 million.
- ASC 606 adoption changed revenue timing for certain retail sales; prior-period amounts were not restated. The company said the standard’s impact on current-period statements was not material.
- Convolve/MIT patent litigation remained unresolved; Seagate said it could not reasonably estimate a possible loss range. The company considered the estimated loss in a separate Lambeth patent case immaterial. Environmental site costs were not expected to be material based on current estimates.
Important facts for investors to verify
- Whether HDD demand, exabyte shipments, pricing and product mix stabilize, and how those trends affect gross margin.
- Whether operating cash generation remains adequate alongside capital spending, dividends, repurchases and debt service.
- The fair value, impairment assessment and cash realization terms of the Toshiba Memory investment, including its PIK income.
- Debt maturities and covenant headroom, particularly the $750 million due in 2022 and $951 million due in 2023; the filing lists $4.363 billion of future principal payments.
- Developments in the Convolve/MIT and Lambeth litigation, environmental matters and other contingencies, for which outcomes or loss estimates may remain uncertain.
- Execution of the stated fiscal 2019 capex target and management’s 12-month liquidity assessment as business conditions evolve.