Seagate Technology plc — Q3 FY2013 Form 10-Q
Reporting period: Three and nine months ended March 29, 2013; the quarter was 13 weeks. Seagate makes hard disk drives and related storage products for enterprise, client-compute and client non-compute markets, and provides storage services.
Financial performance
Unless noted otherwise, amounts are in millions of dollars. Quarterly comparisons are with the March 30, 2012 quarter; nine-month comparisons are with the corresponding prior-year period.
| Metric | Q3 FY2013 | Q3 FY2012 | Nine months FY2013 | Nine months FY2012 |
|---|---|---|---|---|
| Revenue | $3,526 | $4,450 | $10,927 | $10,457 |
| Gross profit / margin | $948 / 27% | $1,641 / 37% | $3,001 / 27% | $3,200 / 31% |
| Operating income | $465 | $1,210 | $1,644 | $2,051 |
| Net income | $416 | $1,146 | $1,490 | $1,849 |
| Diluted EPS | $1.13 | $2.48 | $3.86 | $4.16 |
| Operating cash flow | $678 | Not clearly provided for the quarter | $2,659 | $1,817 |
- Quarter revenue fell 20.8% year over year and 3.9% from the December 2012 quarter. Seagate shipped 56 million units, at a $63 average selling price (ASP), versus 61 million units and $73 ASP a year earlier. Management attributed the year-over-year decline to lower shipments and the prior-year price benefit from industry supply constraints following Thailand flooding.
- Nine-month revenue increased 4.5%, mainly from higher volume and a full period of Samsung HDD products. Lower ASPs compared with the prior year partly offset that growth.
- Q3 gross margin was 27%, unchanged sequentially but down from 37% a year earlier. Management cited the prior-year supply-driven ASP benefit. Warranty costs on new shipments were 1.4% of revenue, versus 0.9% a year earlier.
- Q3 operating expenses were $483 million. Product development rose year over year with technology investment and headcount costs; marketing and administrative expense increased partly with Samsung and LaCie integration. Nine-month amortization expense was higher following those acquisitions.
- Q3 other expense, net was $35 million, including gains from equity investment sales and $20 million of Thailand-flood insurance proceeds, partly offset by $25 million of losses on early debt redemption and repurchases. Nine-month debt-related losses were $31 million.
Cash, debt and capital allocation
- At March 29, cash and cash equivalents were $1.433 billion, short-term investments $476 million and restricted cash and investments $101 million. Cash plus short-term investments totaled about $1.9 billion, down $201 million from June 29, 2012 when including restricted amounts.
- Nine-month operating cash flow was $2.659 billion; investing activities used $681 million, including $658 million of capital expenditures. Financing activities used $2.253 billion, including $1.612 billion for share repurchases, $421 million for debt repayments/redemptions, $381 million in dividends and $72 million placed in escrow for LaCie shares. Cash declined $274 million to $1.433 billion.
- Long-term debt was $2.478 billion in total principal/carrying amount, including $4 million current. Seagate deposited $351 million to defease its 10% notes due 2014, extinguishing the liability and recording related losses. It repurchased $78 million principal amount of 2018 notes during the first nine months.
- Seagate repurchased 53 million shares for $1.612 billion and paid dividends of $1.02 per share during the nine months; $0.9 billion remained authorized for repurchases at March 29. Q3 dividends declared were zero.
- After quarter-end, the revolving credit facility was amended to increase commitments from $350 million to $500 million, reduce pricing and extend maturity to April 30, 2018. There were no borrowings as of May 1, 2013. The company reported compliance with debt covenants and expected compliance over the next 12 months.
Outlook, risks and unusual items
- For FY2013, management expected capital expenditures at or below its historical target range of 6% to 8% of revenue. The filing provides no specific revenue, earnings or shipment guidance.
- Management highlighted risks from uncertain global demand, disk-drive pricing and industry supply, competition, and the ability to qualify, manufacture and sell new products at scale, cost and acceptable quality. Future cash generation depends on operating performance and broader economic and business conditions.
- LaCie acquisition: Seagate acquired an initial 64.5% stake in August 2012 and had reached approximately 94% ownership by March 29, 2013. LaCie’s reported revenue and earnings contribution was not significant. Purchase accounting remained preliminary.
- Contingencies include patent and other litigation. Disclosed claims include Convolve/MIT seeking $800 million, a former employee seeking more than $75 million, and a Japanese purchase-agreement case seeking approximately $38 million; Seagate said it could not reasonably estimate possible losses for these matters. The company said certain other proceedings were not expected to have a material effect, while noting litigation uncertainty.
- Seagate held auction-rate securities with $17 million par value and $15 million estimated fair value. Auctions had failed since 2008; management expected recovery of amortized cost but the timing of liquidity was uncertain.
- Unrecognized tax benefits were $157 million at quarter-end. Management expected a roughly $4 million reduction over the following 12 months, primarily from statutes of limitation expiring. Disclosure controls were assessed as effective; no material change in internal control was reported.
Most important facts for investors to verify
- Whether unit demand, ASPs and pricing stabilize, given the substantial year-over-year margin decline and management’s cited supply and competition risks.
- Whether elevated warranty costs and acquisition-related operating expenses affect subsequent profitability.
- How cash generation compares with buybacks, dividends, capital spending and debt obligations, and whether covenant compliance is maintained.
- Progress integrating LaCie and the final purchase-accounting outcomes.
- Developments in material litigation and tax positions, for which the filing does not provide clear loss estimates.