Seagate Technology plc — Form 10-Q Summary
Reporting period: Fiscal third quarter ended March 31, 2017 (13 weeks), with nine-month results through that date. Financial statements are unaudited. Seagate supplies HDDs, SSDs, hybrid drives, storage systems and related solutions.
Financial performance
- Quarter revenue: $2.674 billion, up 3% from $2.595 billion a year earlier but down from $2.894 billion in the December 2016 quarter. Sequential decline reflected seasonal demand, fewer exabytes shipped and price erosion, partly offset by product mix.
- Profit and margins: Gross profit was $816 million and gross margin 31%, versus $524 million and 20% a year earlier; gross margin was also 31% in the prior quarter. Operating income was $266 million (10% operating margin), compared with $27 million a year earlier and $370 million in the prior quarter. Net income was $194 million versus a $21 million loss a year earlier and $297 million in the prior quarter. Diluted EPS was $0.65, versus a loss of $0.07 a year earlier.
- Nine-month results: Revenue was $8.365 billion, down 2% year over year; gross profit was $2.508 billion and gross margin 30%, compared with $1.953 billion and 23%. Operating income was $858 million versus $343 million; net income was $658 million versus $178 million. Diluted EPS was $2.20 versus $0.59.
- Cash flow: Nine-month operating cash flow was $1.673 billion, up from $1.411 billion. Capital expenditures were $330 million, and investing cash outflow was $337 million. The quarter’s operating cash flow was $426 million.
- Liquidity: Cash and cash equivalents were $3.026 billion at March 31, up from $1.125 billion at July 1, 2016; current assets were $5.460 billion and current liabilities $2.789 billion. The company had an undrawn $700 million revolving facility and reported covenant compliance.
- Debt and capital returns: Debt carrying value was approximately $5.231 billion, including $158 million current; principal obligations totaled $5.286 billion. Seagate issued $750 million of 4.25% notes due 2022 and $500 million of 4.875% notes due 2024, and used $97 million to redeem or repurchase debt during the nine months. Nine-month dividends paid were $374 million; the quarterly dividend declared was $0.63 per share.
- Operating indicators: Seagate shipped 65 exabytes in the quarter versus 56 a year earlier and 68 in the prior quarter. HDD average selling price was $67 per unit versus $60 a year earlier. Asia Pacific accounted for 53% of quarterly revenue.
Material changes and unusual items
- Year-over-year quarterly gross-margin improvement reflected favorable product mix and better factory utilization from cost reductions and manufacturing consolidation, partly offset by price erosion.
- Restructuring and other charges were $48 million for the quarter and $164 million for the nine months. Plans included approximately 6,500 worldwide job reductions under the July 2016 plan and about 300 reductions associated with closing the Korea design center. The Korea property sale led to a $26 million quarterly impairment charge; property impairments totaled $31 million for the nine months.
- Inventory rose to $1.038 billion from $868 million at July 1, 2016. Management attributed the operating cash-flow impact to higher inventory, partly reflecting units built during manufacturing-footprint adjustments.
- Other expense for the quarter was $54 million, including higher interest expense associated with new notes and unfavorable foreign-currency movements. The nine-month period also included a $25 million impairment of a strategic investment.
Outlook, risks and contingencies
- Management said cash sources should be sufficient for the next 12 months and expected fiscal 2017 capital expenditures to be less than 5% of revenue. The filing provides no specific revenue or earnings guidance.
- Management cited risks including variable demand and adverse pricing, industry supply, competition and technology shifts, product qualification and manufacturing execution, supply-chain disruption, restructuring savings, foreign exchange, interest rates, cybersecurity, and debt-covenant compliance.
- The remaining $158 million principal amount of 7.00% notes due 2021 was scheduled for redemption on May 1, 2017 at a premium plus accrued interest. The board declared a $0.63 per-share dividend payable July 5, 2017.
- Seagate reported ongoing patent litigation, including Convolve and Lambeth matters, for which it said potential loss ranges could not be reasonably estimated. Enova’s appeal concerning one patent decision remained pending; another patent decision had been affirmed. A separate Shukh matter was settled confidentially without material financial-statement impact.
- Unrecognized tax benefits were $76 million; the company expected they could decline by approximately $13 million over the following 12 months, mainly from statute-of-limitations expirations. Environmental liabilities were not expected to be material based on current estimates.
Most important facts for investors to verify
- Whether improved gross margins and factory utilization can persist despite pricing pressure and seasonal demand changes.
- Progress and realized savings from restructuring, and the eventual cash costs and asset-sale proceeds related to facility closures.
- Debt refinancing and repayment plans, interest burden, covenant headroom, and the effect of continuing dividends and potential share repurchases on liquidity.
- Inventory levels, shipments, average selling prices, and operating cash conversion in subsequent quarters.
- Developments in the pending litigation and tax matters, for which potential outcomes or settlement amounts may remain uncertain.