Seagate Technology plc — Form 10-Q summary
Business and period: Seagate makes HDDs, SSHDs and SSDs for enterprise, client-compute and consumer applications, and provides storage services. This report covers the 13 weeks ended September 27, 2013, the first quarter of fiscal 2014; comparisons are with the prior-year quarter ended September 28, 2012 and, where shown, the quarter ended June 28, 2013. Dollar amounts are in millions unless stated otherwise.
Financial performance and position
| Metric | Quarter ended September 27, 2013 | Comparison and context |
|---|---|---|
| Revenue | $3,489 | Down 6.5% year over year; up from $3,425 in the preceding quarter. |
| Shipments and average selling price | 56 million units; 49 exabytes; $62 per unit | Prior-year shipments were 58 million units, 43 exabytes and $63 per unit. |
| Gross profit and margin | $975; 28% | Prior-year $1,061 and 28%; preceding quarter $939 and 27%. |
| Operating income and margin | $478; 14% | Prior-year $624 and 17%. |
| Net income and diluted EPS | $427; $1.16 | Prior-year $582 and $1.42; net income declined about 27% year over year. |
| Operating cash flow | $682 | Prior-year $1,132. The filing attributes part of current-quarter cash movement to a $115 decrease in accrued employee compensation, mainly performance-compensation payments. |
| Capital expenditures | $161 | Cash used for property, equipment and leasehold improvements. |
| Cash and investments | $2,413 cash and short-term investments; $108 restricted cash and investments | Cash and short-term investments were $2,188 at June 28, 2013. |
| Debt | $2,773 total; $2,772 long-term | No revolving-credit borrowings; $2 utilized for letters of credit. Reported debt fair value was $2,938. |
| Dividend and repurchases | $0.38 declared per share; $182 spent repurchasing about 4 million shares | The board subsequently approved a $0.43-per-share dividend for November 26, 2013. |
Changes, outlook and management commentary
- Year-over-year revenue fell as unit shipments and average selling prices declined, partly offset by a more favorable product mix. Sequential revenue rose on higher unit shipments, partly offset by lower average selling prices.
- Management described the pricing environment as stable and gross margin as consistent with both comparison periods. Product-development spending was $294, up from $268 a year earlier, reflecting investment in storage technologies and headcount. Marketing and administrative expense rose to $181 from $150, mainly due to core-business enhancements and headcount.
- Other expense, net was $38, compared with $24 a year earlier; the prior-year quarter included a gain on strategic-investment sales. The much larger $145 expense in the preceding quarter primarily reflected losses on early debt redemption and repurchases.
- Management expected fiscal 2014 capital expenditures to remain within its long-term target of 6%–8% of revenue. The filing provides no specific revenue or earnings guidance. Future dividends remain at the board’s discretion.
- Liquidity sources included approximately $2.4 billion of cash, cash equivalents and short-term investments, operating cash generation, and a $500 million revolving facility. The company reported compliance with debt covenants and expected to remain compliant over the next 12 months.
- After quarter-end, on October 21, 2013, Seagate repurchased 32.7 million shares from Samsung Electronics for $1.5 billion. This is a significant subsequent capital-allocation event not reflected in September 27 balances.
Risks, contingencies and unusual items
- Management cited uncertainty in global demand, adverse disk-drive pricing, competition, possible excess industry supply, product qualification and manufacturing execution, and achieving restructuring cost savings as risks to results.
- Seagate reported $163 million of unrecognized tax benefits; it expected a reduction of approximately $6 million over the following 12 months, primarily from statute expirations. The quarter’s $13 million tax provision included about $3 million of net discrete tax expense.
- Material litigation included Convolve/MIT patent claims, a former employee’s claims seeking damages exceeding $75 million, LEAP’s claim seeking about $38 million, an ITC investigation involving Realtek, and Enova patent claims. The company disputed the claims and said it could not reasonably estimate possible losses for these matters.
- Auction-rate securities with approximately $17 million par value remained unable to settle at auction; their estimated fair value was $15 million. Seagate considered the impairment temporary and did not expect to need to sell before recovery.
- Warranty liabilities totaled $318 million, including $171 million current and $147 million long-term. Warranty costs on new shipments were 1.4% of revenue, versus 1.3% in each comparison quarter.
- The company disclosed currency, interest-rate, investment and counterparty-credit exposures. It reported disclosure controls were effective and no material changes to internal control over financial reporting during the quarter.
Investor verification priorities
- Assess whether shipment growth and product mix can offset lower average selling prices and year-over-year revenue declines.
- Verify the cash-flow trend and the sustainability of working-capital movements, especially employee-compensation payments.
- Reconcile the October Samsung share repurchase and subsequent dividend with liquidity, debt levels and future capital-allocation plans.
- Review warranty accrual assumptions, the $163 million tax exposure, and developments in the disclosed litigation, for which loss ranges were not estimable.
- Track competitive pricing, industry supply, product execution and the company’s progress against its 6%–8% capital-expenditure target.