Seagate Technology plc — Q3 FY2011 Form 10-Q
Business and period. Seagate designs, manufactures and sells hard disk drives for enterprise, client-compute and client non-compute markets, and provides storage services. This unaudited filing covers the 13-week quarter ended April 1, 2011, and the first nine months of FY2011. Amounts are in U.S. dollars; financial statement amounts are in millions unless noted.
Financial results and liquidity
| Metric | Q3 FY2011 | Q3 FY2010 | Nine months FY2011 | Nine months FY2010 |
|---|---|---|---|---|
| Revenue | $2,695 | $3,049 | $8,112 | $8,738 |
| Gross profit / margin | $516 / 19% | $901 / 30% | $1,595 / 20% | $2,477 / 28% |
| Operating income | $179 | $560 | $616 | $1,359 |
| Net income | $93 | $518 | $392 | $1,230 |
| Diluted EPS | $0.21 | $1.00 | $0.83 | $2.38 |
- Cash flow: First-nine-month operating cash flow was $947, down from $1,608 a year earlier. Investing used $703, including $685 of capital expenditures; financing used $306. Cash and cash equivalents fell $62 to $2,201.
- Liquidity: Cash, cash equivalents and short-term investments totaled $2,480 at quarter-end; including restricted cash and investments, the total was $2,583. The company reported no draws on its $350 revolving credit facility and compliance with its debt covenants. Management said available sources should fund operations and requirements for at least 12 months.
- Debt: Carrying amount of total debt was approximately $2,912, including $560 current and $2,352 long-term. The $600 principal 6.375% notes due October 2011 were classified as current. Debt fair value was estimated at $3,067.
- Other balance-sheet items: Total assets were $8,280 and shareholders’ equity $2,487. Inventory was $834, up from $757 at July 2, 2010.
Material changes and operating trends
- Quarterly revenue declined 12% year over year but was approximately flat sequentially. Nine-month revenue fell 7% year over year. Management attributed continued pressure to industry competitive pricing.
- Quarterly shipments were 48.7 million units, down 3% year over year and approximately flat sequentially; average selling price was $55 versus $60 a year earlier. Client-compute shipments weakened, while enterprise and client non-compute shipments increased year over year.
- Gross margin fell to 19% from 30% in the comparable quarter. Management cited competitive pricing and the absence of meaningful new product introductions that typically support margins.
- Interest expense rose amid higher average debt balances. Nine-month results also included $26 of losses related to debt redemptions; prior-year results included a $64 long-lived-asset impairment charge and greater restructuring costs.
- In the first nine months, Seagate repurchased 50.2 million shares for $710. Shares outstanding were 426.4 million at April 1, 2011, versus 470 million at July 2, 2010.
Outlook, significant events and risks
- Outlook: No specific numerical earnings or revenue guidance is stated in the supplied filing text. Management noted traditional second-half calendar-year seasonality and expected liquidity to cover at least the next 12 months. It identified variable demand, competitive pricing, product qualification and manufacturing execution, and potential supply-chain disruption as factors that could affect results.
- Samsung transaction: After quarter-end, Seagate agreed to acquire certain Samsung HDD assets and assume related liabilities for $687.5 million in cash and approximately 45.2 million shares, about 9.6% of then-outstanding shares. Closing was expected by year-end 2011, subject to customary conditions and regulatory approvals. In specified termination circumstances, fees of $72.5 million or $82.5 million may apply. Management expected to use operating cash, while retaining the option to raise debt financing.
- Supply and market risks: Management said demand strengthened late in the quarter amid concern about potential Japan earthquake and tsunami-related supply disruption. The filing also identifies reliance on limited suppliers for critical components, including glass substrates, and possible constraints involving rare-earth materials.
- Legal and other contingencies: The company disclosed several unresolved intellectual-property matters, including Convolve/MIT, Siemens, Shukh, Rembrandt and Rambus proceedings. Certain plaintiffs seek substantial or unspecified damages; Seagate said it could not reasonably estimate possible losses for several cases. It reported no expected material environmental-site costs based on current estimates.
- Other notable items: A $0.18-per-share quarterly dividend was approved April 7, payable June 1, 2011. Auction-rate securities with $19 par value remained illiquid after repeated failed auctions and were carried at $17; the company recorded a $2 impairment in other comprehensive income and said it expected recovery of amortized cost.
Key facts for investors to verify
- Whether pricing pressure, product introductions and gross margins improved after the reporting period.
- Samsung transaction approval, closing terms, financing, integration progress, dilution and any termination-fee exposure.
- Debt repayment and refinancing needs, especially the October 2011 notes, and continued compliance with debt covenants.
- Cash conversion, capital spending and the sustainability of share repurchases and dividends given operating performance and acquisition commitments.
- Developments in material IP litigation and any changes to warranty estimates, tax reserves or other contingencies.