Seagate Technology plc — Form 10-Q, Fiscal 2017 Q1
Reporting period: Three months ended September 30, 2016 (13 weeks); comparisons are with the three months ended October 2, 2015 unless noted. Seagate supplies HDDs and other data-storage products and systems.
Financial performance
| Metric | Q1 FY2017 | Prior-year quarter |
|---|---|---|
| Revenue | $2.797 billion | $2.925 billion |
| Gross profit / gross margin | $801 million / 29% | $689 million / 24% |
| Operating income / margin | $221 million / 8% | $86 million / 3% |
| Net income | $167 million | $34 million |
| Diluted EPS | $0.55 | $0.11 |
| Operating cash flow | $592 million | $824 million |
| Capital expenditures | $140 million | $209 million |
Sequentially, revenue rose from $2.654 billion and gross margin increased from 25%; operating income rose from $103 million and net income from $70 million. The company shipped 39 million drives and 67 exabytes, versus 47 million drives and 56 exabytes a year earlier. Average selling price was $67 per drive, compared with $58.
Financial position, liquidity and capital allocation
- At September 30, 2016, cash and cash equivalents were $1.489 billion and short-term investments were $5 million. Current assets were $3.928 billion and current liabilities $2.608 billion.
- Long-term debt was $4.092 billion net of debt issuance costs; gross principal was $4.130 billion. Cash and short-term investments less reported long-term debt imply net debt of approximately $2.6 billion.
- Operating cash flow of $592 million less $140 million of property and equipment purchases implies approximately $452 million of free cash flow; this is a simple calculation from reported figures, not a company-defined measure.
- The $700 million revolving credit facility was undrawn. Seagate reported compliance with its amended covenants and expected to remain compliant over the next 12 months.
- Seagate repurchased $101 million of ordinary shares and paid $23 million in taxes related to equity awards. The board declared a $0.63 quarterly dividend, payable January 4, 2017; the $188 million dividend declared during the quarter was paid October 5, after quarter-end.
Material changes, outlook and unusual items
- Year-over-year revenue declined $128 million, attributed to lower unit shipments and price erosion, partly offset by improved product mix. Sequential revenue increased $143 million, primarily from improved mix and higher shipments of high-capacity enterprise HDDs.
- Gross margin improved year over year and sequentially due to favorable product mix, better factory utilization, workforce reductions and manufacturing consolidation, partly offset year over year by price erosion.
- Restructuring and other charges were $82 million, primarily employee termination and facility-exit costs. The July 2016 plan targeted approximately 6,500 job reductions and was expected to be largely complete by fiscal year-end 2017. A June 2016 plan targeted approximately 1,600 reductions and was largely complete.
- Management expected fiscal 2017 capital expenditures to be less than 5% of revenue and stated that available liquidity and expected operating cash generation should meet cash needs for the next 12 months. The filing gives no specific revenue or earnings guidance.
- The $6 million income-tax provision included approximately $5 million of net discrete tax benefits. Unrecognized tax benefits were $68 million; the company expected these could fall by approximately $11 million in the following 12 months, mainly from statute expirations.
- Key risks cited include variable HDD demand and adverse pricing, industry oversupply, product qualification and manufacturing execution, restructuring savings, competition from new technologies, supply-chain disruption, covenant compliance, foreign exchange, cybersecurity and interest-rate fluctuations. Several intellectual-property cases remained pending; Seagate said it could not reasonably estimate possible losses in certain matters. Environmental cleanup costs were not expected to be material based on current estimates.
Important facts for investors to verify
- Whether improved gross margin and factory utilization can be sustained amid HDD pricing pressure and lower unit shipments.
- Whether the 6,500-person restructuring and manufacturing consolidation deliver expected cost savings, and their cash and operating effects.
- Whether operating cash flow can recover from the prior-year level and fund investment, debt service, dividends and repurchases.
- Debt maturities, covenant headroom and the effect of the 2018 Notes maturity; the filing lists $800 million of principal due in fiscal 2019.
- Developments in pending litigation, tax reserves and the company’s assessment of related exposures.