Seagate Technology plc — Form 10-Q Summary
Reporting period: Second quarter and six months of fiscal 2013, ended December 28, 2012. The quarter comprised 13 weeks. Unless otherwise noted, amounts are in U.S. dollars.
Business context
Seagate makes hard disk drives for enterprise, client-compute and client non-compute markets, and provides storage services. It shipped 58 million drives in the quarter. The company acquired a controlling interest in LaCie in August 2012 and held approximately 93.5% by quarter-end; LaCie’s reported-period revenue and earnings were not significant. The Samsung HDD acquisition completed in December 2011 contributed a full quarter of product shipments in the year-over-year comparison.
Financial performance
| Metric | Quarter ended Dec. 28, 2012 | Comparable prior-year quarter | Six months ended Dec. 28, 2012 | Comparable prior-year six months |
|---|---|---|---|---|
| Revenue | $3.668 billion | $3.195 billion | $7.400 billion | $6.007 billion |
| Gross margin | $992 million; 27% | $1.010 billion; 32% | $2.053 billion; 28% | $1.559 billion; 26% |
| Operating income | $555 million | $605 million | $1.179 billion | $841 million |
| Net income | $492 million | $563 million | $1.074 billion | $703 million |
| Diluted EPS | $1.30 | $1.28 | $2.73 | $1.61 |
| Cash provided by operating activities | $844 million | Not stated here | $1.976 billion | $879 million |
Quarter revenue declined 1.7% sequentially from $3.732 billion; net income was $582 million in the September 2012 quarter. Year over year, quarterly revenue rose about 15%, while net income fell about 13%. For the six-month period, revenue rose about 23% and net income about 53% year over year.
- Quarter shipments were 58 million, unchanged sequentially and up from 47 million a year earlier. Average selling price was $62 per drive, versus $63 sequentially and $67 a year earlier.
- Management attributed the sequential revenue decline mainly to lower ASPs from price erosion, partly offset by favorable mix. Year-over-year ASP and gross-margin comparisons were affected by tight HDD supply and higher prices following the October 2011 Thailand floods.
- Quarter operating expenses were $437 million, flat sequentially and up from $405 million a year earlier. Intangible amortization rose following the Samsung and LaCie acquisitions. Marketing and administrative expense included a $21 million legal-cost reimbursement.
- Six-month operating cash flow benefited from working-capital movements, including a $683 million decrease in accounts receivable; accounts payable decreased $496 million. Capital expenditures were $427 million for the six months.
Balance sheet, debt and capital allocation
- At December 28, cash and cash equivalents were $1.383 billion, short-term investments $489 million, and restricted cash and investments $98 million. Cash, cash equivalents and short-term investments totaled approximately $1.9 billion, down $241 million from June 29, 2012 when restricted balances are included in the comparison.
- Total debt was $2.818 billion, including $3 million current; the revolving credit facility had no cash borrowings and $2 million of letters of credit outstanding. The next significant scheduled principal maturity was $322 million in fiscal 2014. The company reported compliance with debt and credit-facility covenants and expected continued compliance over the next 12 months.
- Six-month financing cash outflows included $1.510 billion to repurchase 50 million shares, $377 million of cash dividends, and $58 million of debt repayments. The company had $1.0 billion remaining under its share-repurchase authorization at quarter-end. It declared dividends of $1.02 per share for the six months; the quarter included an accelerated $136 million dividend payment.
Outlook, risks and unusual items
- No specific revenue or earnings guidance is provided in the supplied filing text. Management expected fiscal 2013 capital expenditures to be at or below its historical target of 6%–8% of revenue.
- Management identified demand uncertainty, adverse HDD pricing, the ability to qualify and manufacture products at scale and acceptable quality, and competition or excess industry supply as risks. Actual results may differ materially from forward-looking statements.
- The quarter included a $33 million gain on sale of equity investments in the prior September quarter, a $6 million loss on redemption of debt in the December quarter, and a $21 million legal-cost reimbursement. Six-month tax expense was $25 million; the company disclosed $144 million of unrecognized tax benefits, with an expected reduction of about $3 million over the following 12 months.
- Several legal matters remain unresolved. Disclosed claims include Convolve/MIT seeking $800 million, a former employee seeking more than $75 million, and LEAP seeking approximately $38 million. The company stated that it could not reasonably estimate possible losses for certain matters; it did not expect a loss from the Rembrandt matter after an appellate ruling in its favor.
- Auction-rate securities with approximately $17 million par value remained illiquid after repeated failed auctions and were carried at $15 million. Management considered the impairment temporary and expected recovery of amortized cost, but timing of improved liquidity was uncertain.
Important facts for investors to verify
- Whether HDD pricing, ASPs and gross margins stabilize, particularly as industry supply and demand change.
- Whether operating cash flow remains strong after the favorable working-capital effects reported for the first half.
- Planned uses of cash, including repurchases, dividends, capital spending and debt maturities.
- Developments in pending litigation, tax positions and the liquidity or valuation of auction-rate securities.
- Integration and expected contribution of LaCie, and the ongoing amortization burden from acquired intangible assets.