Seagate Technology plc — Form 10-Q Summary
Business context and period: Seagate supplies data-storage products, principally hard disk drives (HDDs), with SSDs and enterprise storage solutions. This report covers fiscal Q1 2021, the 13 weeks ended October 2, 2020. The year-earlier quarter had 14 weeks, which affects comparability. Unless stated otherwise, amounts are in U.S. dollars.
Key financial results
| Metric | Q1 FY2021 | Year-earlier quarter |
|---|---|---|
| Revenue | $2.314 billion | $2.578 billion |
| Gross profit / margin | $596 million / 26% | $671 million / 26% |
| Operating income / margin | $251 million / 11% | $273 million / 11% |
| Net income | $223 million | $200 million |
| Diluted EPS | $0.86 | $0.74 |
| Operating cash flow | $297 million | $456 million |
| Capital expenditures | $111 million | $147 million |
Revenue declined about 10% year over year and 8% from the preceding quarter ($2.517 billion). Net income rose about 12% year over year despite lower revenue; the filing cites strategic-investment gains as one contributor to lower other expense. Gross margin remained 26%. Operating cash flow less capital expenditures was approximately $186 million.
Revenue and operations: Seagate shipped 114 exabytes of HDD capacity, versus 98 exabytes a year earlier and 117 in the prior quarter. Mass-capacity shipments were 86 exabytes, versus 64 a year earlier; legacy shipments were 28 versus 34. HDD price per terabyte was $19, down from $24 a year earlier and $20 in the prior quarter. Mass capacity represented 58% of revenue, legacy 34%, and other 8%. OEMs accounted for 69% of revenue.
Financial position and capital allocation
At October 2, 2020, cash and cash equivalents were $1.664 billion, total current assets $3.994 billion, and current liabilities $2.644 billion. Long-term debt was $4.138 billion and current debt $25 million; total debt net of cash was approximately $2.499 billion. The company had $1.5 billion available under its revolving credit facility, with no borrowings drawn, and reported compliance with its financial covenants. Management expected covenant compliance for the next 12 months.
Operating cash flow was down from $456 million a year earlier. Cash generation included a $249 million reduction in accounts receivable, partly offset by a $181 million inventory increase. The company paid $167 million in dividends, repurchased $68 million of shares, and repurchased $13 million of debt during the quarter. A $0.67-per-share dividend was declared after quarter-end, and the board increased share-repurchase authorization by $3.0 billion.
Outlook, commentary, risks and unusual items
- Management expected fiscal 2021 capital expenditures to be at or below its long-term target range of 6%–8% of revenue and said available resources should meet cash needs for the next 12 months. No specific revenue or earnings guidance was provided in the filing text.
- COVID-19 continued to cause supply-chain and demand disruptions, factory under-utilization, higher logistics and operating costs, and softer demand. Management expected effects to continue during fiscal 2021, while noting the eventual impact was uncertain.
- Other expense, net was $30 million, compared with $75 million a year earlier. Q1 included $31 million of strategic-investment gains, including a $23 million upward valuation adjustment and an $8 million gain on sale. This helped earnings and is an unusual item to distinguish from operating performance.
- The June 2020 restructuring plan, including a planned reduction of approximately 500 employees and consolidation of Minnesota facilities, was substantially completed in the quarter. The company reported $1 million of restructuring charges and $7 million of expected future charges under the plan.
- Risks identified include changing global demand and pricing, competition and technology shifts, COVID-19 impacts, supply-chain or production disruptions, trade restrictions, foreign-exchange movements, debt and covenant management, and cyberattacks. The filing also describes ongoing patent litigation; the possible loss in the Convolve matter could not be reasonably estimated. The company considered environmental-site costs not material based on current estimates.
Important facts for investors to verify
- Whether demand, pricing, and COVID-related operating disruptions evolve as management expected, particularly given the revenue and HDD price-per-terabyte declines.
- Whether cash conversion improves after the quarter’s inventory build and lower operating cash flow, and whether capital spending remains within the stated target.
- Debt maturities and refinancing capacity, covenant headroom, and the company’s ability to sustain dividends and buybacks while carrying approximately $4.2 billion of debt.
- The extent to which strategic-investment gains and tax benefits affected reported earnings; the quarter included a $2 million income-tax benefit.
- Developments in the disclosed litigation and other contingencies, for which some potential exposures cannot be estimated clearly from the filing.