Seagate Technology plc — Form 10-Q summary
Business context and reporting period
Seagate designs, manufactures and sells hard disk drives for enterprise, client-compute and client non-compute applications, and provides storage services. This is fiscal 2012’s first quarter, the 13 weeks ended September 30, 2011; comparisons are with the 13 weeks ended October 1, 2010, and, where noted, the quarter ended July 1, 2011. Amounts are in U.S. dollars.
Key financial metrics
| Metric | Quarter ended Sep. 30, 2011 | Year-ago quarter |
|---|---|---|
| Revenue | $2.811 billion | $2.697 billion |
| Gross profit / margin | $549 million / 20% | $550 million / 20% |
| Operating income / margin | $236 million / 8% | $231 million / 8% |
| Net income | $140 million | $149 million |
| Diluted earnings per share | $0.32 | $0.31 |
| Operating cash flow | $160 million | $245 million |
| Capital expenditures | $218 million | $358 million |
Revenue rose about 4% year over year, while net income declined about 6%. Shipments were 50.7 million units versus 49.2 million; average selling price was $55 versus $54. Sequentially, revenue decreased from $2.859 billion and shipments from 52.3 million, while gross margin improved to 20% from 19% and operating income increased from $190 million.
Cash and cash equivalents were $2.474 billion, short-term investments $426 million, and restricted cash and investments $88 million at quarter-end. Total debt carrying value was approximately $3.484 billion, including $560 million current. Operating cash flow less capital expenditures was negative $58 million. Cash and cash equivalents decreased $203 million during the quarter; cash, short-term investments and restricted balances together decreased $265 million.
Material changes and notable items
- Operating cash flow declined to $160 million from $245 million year over year. Management cited a $298 million reduction in accounts payable, principally reflecting the timing of material purchases.
- Interest expense was $69 million versus $46 million a year earlier. Other expense, net was $84 million, including a $5 million loss on repurchasing debt and a $7 million impairment charge on a strategic equity investment.
- Seagate repurchased 9.1 million shares for $128 million and paid $78 million in dividends. The quarter’s statement of operations reports dividends declared of $0.18 per share.
- On October 3, 2011, after quarter-end, Seagate repaid approximately $560 million of 6.375% notes that had matured. The board also approved a $0.18-per-share dividend payable November 18, 2011.
Outlook, risks and contingencies
Management estimated the September-quarter hard-drive total available market at approximately 177 million units, up 8% year over year, and cited long-term storage-capacity demand and cloud adoption as demand drivers. No specific numerical revenue or earnings guidance for the next quarter is provided in the filing.
Severe flooding in Thailand during October disrupted some component suppliers, although Seagate’s Thai factories were operating at full production. Management expected significant production effects and industry supply constraints extending over multiple quarters. The filing identifies this as a material risk to production and financial results.
Seagate expected its proposed acquisition of Samsung’s hard-drive assets to close by calendar year-end 2011. Consideration was $687.5 million in cash plus approximately 45.2 million Seagate shares. EU approval had been received, with other regulatory approvals still pending; specified termination circumstances could trigger fees of $72.5 million or $82.5 million. Seagate expected to fund the cash payment from existing liquidity and operating cash flow.
Management reported compliance with debt covenants at quarter-end and expected continued compliance over the next 12 months, subject to business and macroeconomic conditions. Risks also include variable demand, adverse disk-drive pricing, competition, execution and product-quality challenges, foreign-exchange and interest-rate exposures, and unresolved intellectual-property litigation. The Convolve case remained subject to appeal; other disclosed matters included Siemens, Rembrandt, Rambus and an employment-related suit. The filing states that reasonable loss estimates could not be made for several matters.
Most important facts for investors to verify
- How Thailand supplier disruptions affected Seagate’s component availability, production, shipments and margins in subsequent quarters.
- Whether the Samsung transaction closed, its final funding and share dilution, and whether any termination fee became payable.
- The effect of the October 2011 debt repayment on cash balances, interest expense and near-term liquidity.
- Whether operating cash flow recovered after the accounts-payable timing-related outflow and how capital spending and shareholder distributions were funded.
- Developments in material litigation and supply, pricing, product-quality and covenant risks; the filing does not provide clear estimated loss ranges for several legal matters.