Seagate Technology plc — FY2019 Q1 Form 10-Q
Reporting period: 13 weeks ended September 28, 2018; comparison is with the 13 weeks ended September 29, 2017 unless noted. Seagate supplies HDDs, SSDs, storage subsystems and enterprise storage solutions. Figures are unaudited and in U.S. dollars.
Key financial results
| Metric | Q1 FY2019 | Prior-year quarter | Change / context |
|---|---|---|---|
| Revenue | $2.991 billion | $2.632 billion | Up 13.6% year over year; up from $2.835 billion in the preceding quarter |
| Gross profit / margin | $913 million / 31% | $736 million / 28% | Margin up 300 basis points year over year; down about 100 basis points sequentially |
| Operating income / margin | $503 million / about 17% | $255 million / about 10% | Improved substantially year over year |
| Net income / diluted EPS | $450 million / $1.54 | $181 million / $0.62 | Net income more than doubled year over year; sequential net income was $461 million |
| Operating cash flow | $587 million | $237 million | Capital expenditures were $177 million, implying approximately $410 million of operating cash flow less capex |
| Cash and cash equivalents | $1.942 billion | $1.853 billion at June 29, 2018 | Quarter-end cash-flow-statement total, including restricted cash, was $1.945 billion |
| Debt | $4.862 billion principal | $4.862 billion principal at June 29, 2018 | $499 million due November 2018; $4.821 billion balance-sheet debt net of issuance costs |
Current assets were $4.523 billion and current liabilities $3.175 billion. The $700 million revolving credit facility was undrawn; Seagate reported compliance with its covenants and expected continued compliance for the next 12 months. The company also held a $1.259 billion investment in Toshiba Memory Corporation preferred stock, accounted for as a held-to-maturity debt security; it accrued $16 million of payment-in-kind interest during the quarter.
Changes and operating drivers
- Revenue growth reflected higher HDD capacity shipments: 99 exabytes versus 70 a year earlier and 93 in the preceding quarter. Demand in enterprise and client markets supported year-over-year growth; seasonal client and consumer demand supported sequential growth.
- HDD average selling price was $70 per unit, versus $64 a year earlier and $72 in the preceding quarter. Price erosion partly offset shipment growth.
- Year-over-year gross-margin improvement reflected product mix and better factory utilization, partly offset by NAND price declines and general price erosion. The sequential margin decline was attributed to NAND price declines and general price erosion.
- Marketing and administrative costs fell year over year, with management citing prior workforce restructuring and operational efficiencies. Restructuring charges were $23 million, primarily related to a voluntary early exit program, versus $51 million a year earlier.
- Revenue recognition standard ASC 606 was adopted using the modified retrospective method. The opening balance-sheet adjustment increased accumulated equity by $34 million; management said the standard’s impact on the quarter’s financial statements was not material.
Liquidity, capital returns and outlook
- Management said cash sources were sufficient for expected needs over the next 12 months. Sources included cash, operating cash generation and the undrawn revolver. Cash was partly offset during the quarter by $181 million of dividends, $150 million of share repurchases and $177 million of capital spending.
- For fiscal 2019, capital expenditures were expected to remain below the company’s long-term target of 6%–8% of revenue. No specific revenue or earnings guidance was provided in the supplied filing text.
- The quarterly dividend was $0.63 per share; the board declared another $0.63 dividend payable January 2, 2019. As of quarter-end, $709 million remained under the existing repurchase authorization. On October 29, 2018, the board authorized an additional $2.3 billion of share repurchases.
- Key risks cited include variable storage demand and pricing, competition and technology shifts, supply-chain or production disruptions, restructuring execution and savings, debt and covenant management, currency and interest-rate movements, trade restrictions, regulation, and cybersecurity threats.
Contingencies and unusual items
The $499 million of 3.75% notes classified as current were due in November 2018. Seagate reported no revolver borrowings. A loss range for the Convolve/MIT patent litigation could not be reasonably estimated; the company estimated loss in the Lambeth patent matter to be immaterial. Environmental remediation costs were not expected to be material based on current estimates. The filing also noted that results for this quarter are not necessarily indicative of later periods.
Important facts for investors to verify
- How the November 2018 $499 million note maturity was funded or refinanced, and its effect on subsequent debt and liquidity.
- Whether shipment growth, HDD pricing and gross margins sustain the reported trend, particularly given price erosion and NAND-market exposure.
- Whether management’s capital-spending outlook and restructuring savings are achieved, and how the new $2.3 billion repurchase authorization is executed.
- Developments in the Convolve/MIT litigation and any change in the estimate or disclosure of potential exposure.
- The value, credit quality and eventual repayment terms of the $1.259 billion Toshiba Memory investment, including its accrued payment-in-kind interest.