Seagate Technology Holdings Plc — Form 10-Q Summary
Reporting period: Fiscal first quarter ended October 4, 2019. The quarter comprised 14 weeks, compared with 13 weeks in the prior-year quarter ended September 28, 2018; this affects comparability. Seagate supplies HDDs, SSDs and related storage products and solutions.
Financial results and liquidity
| Metric | Q1 FY2020 | Prior-year quarter |
|---|---|---|
| Revenue | $2.578 billion | $2.991 billion |
| Gross profit / margin | $671 million / 26% | $913 million / 31% |
| Operating income / margin | $273 million / 11% | $503 million / 17% |
| Net income | $200 million | $450 million |
| Diluted EPS | $0.74 | $1.54 |
| Cash from operations | $456 million | $587 million |
| Capital expenditures | $147 million | $177 million |
- Revenue was down 14% year over year, but up $207 million from the prior quarter. Management attributed the sequential improvement mainly to higher exabyte shipments and improved mix; year-over-year decline reflected less favorable market conditions and price erosion.
- Gross margin was flat sequentially and down five percentage points year over year. HDD price per terabyte was $24, versus $28 a year earlier; HDD shipments were 98 exabytes versus 99 exabytes.
- Cash and cash equivalents were $1.784 billion at quarter-end, down $436 million from June 28, 2019. Current assets were $4.031 billion and current liabilities $2.549 billion.
- Long-term debt, net of issuance costs, was $4.140 billion. The company borrowed $500 million under a term loan and repurchased senior notes with an aggregate principal amount of approximately $620 million. It reported $1.5 billion of undrawn revolving credit capacity and compliance with debt covenants.
- Financing uses included $450 million of ordinary-share repurchases and $170 million of dividends paid. The quarterly dividend declared during the period was $0.63 per share; a subsequent $0.65-per-share dividend was declared for payment in January 2020.
Changes, outlook and key risks
- Compared with the prior-year quarter, revenue, gross profit, operating income and net income declined materially. The current quarter had one more week, so reported comparisons are not like-for-like.
- Management changed the estimated useful lives of certain manufacturing equipment from three-to-five years to three-to-seven years. This estimate change increased quarterly net income by $23 million and diluted EPS by $0.09.
- The quarter included a $30 million loss on repurchases of long-term debt, included in other expense. Restructuring charges were $17 million, primarily related to a voluntary early-exit program.
- Management expected FY2020 capital expenditures to remain within its long-term target of 6%–8% of revenue and stated that available sources of cash should be sufficient for the next 12 months. No revenue or earnings guidance is provided in the supplied filing text.
- Management cited risks including variable demand and pricing pressure, competition and technology shifts, manufacturing and supply-chain execution, debt covenant and liquidity management, foreign exchange, trade restrictions, and cybersecurity. It reported no material changes to the risk factors in its latest annual report.
- Contingencies include patent litigation. The company said a reasonable loss range could not be estimated for the Convolve/MIT matter; it estimated the Lambeth matter’s possible loss to be immaterial. Environmental cleanup costs were not expected to be material based on current estimates.
- The company adopted lease accounting guidance, recognizing $115 million of right-of-use assets and related lease liabilities at adoption; the adoption had no material impact on the other financial statements.
Important facts for investors to verify
- Whether demand, HDD pricing and product mix stabilize, and how those factors affect gross margin.
- The effect of the additional reporting week when comparing results with other periods.
- Cash generation, working-capital movements, capital spending and the capacity to sustain dividends and buybacks.
- Debt maturities, variable-rate exposure and continued compliance with credit-facility covenants.
- The contribution of the useful-life estimate change to reported earnings, and the status or potential exposure of disclosed litigation and tax contingencies.