Seagate Technology plc — Form 10-Q summary
Reporting period: Fiscal second quarter ended December 27, 2013 (13 weeks); comparisons are with the quarter ended December 28, 2012 unless stated otherwise. The six-month period covers the first half of fiscal 2014. Amounts are U.S. dollars.
Business context and financial results
Seagate supplies hard disk drives, hybrid and solid-state drives, and storage services across enterprise, client-compute, and client non-compute markets. In the quarter, it shipped 57 million units, representing 52 exabytes.
| Metric | Quarter ended Dec. 27, 2013 | Comparable prior-year quarter |
|---|---|---|
| Revenue | $3.528 billion | $3.668 billion |
| Gross profit / gross margin | $987 million / 28% | $992 million / 27% |
| Operating income / margin | $444 million / 12% | $555 million / 14% |
| Net income | $428 million | $492 million |
| Diluted EPS | $1.24 | $1.30 |
For the six months ended December 27, revenue was $7.017 billion versus $7.400 billion; net income was $855 million versus $1.074 billion; and diluted EPS was $2.39 versus $2.73. First-half gross margin was 28% versus 28% a year earlier.
Cash flow, debt, and liquidity
- First-half operating cash flow was $1.538 billion, compared with $1.976 billion a year earlier. Investing activities provided $177 million, while financing activities used $1.132 billion.
- Cash and cash equivalents were $2.293 billion at quarter-end; short-term investments were $46 million. Including restricted cash and investments, the total was $2.343 billion.
- Long-term debt was $3.572 billion, up from $2.774 billion at June 28, 2013. Seagate issued $800 million of 3.75% senior notes due November 2018; net proceeds were $791 million. The $500 million revolving facility had no borrowings outstanding, with $2 million used for letters of credit.
- Seagate repurchased 33 million shares for $1.520 billion during the quarter and paid $142 million in dividends. First-half repurchases totaled $1.702 billion and dividends paid totaled $277 million. The board approved a $0.43-per-share dividend payable in February 2014.
Changes and management commentary
- Quarterly revenue was nearly flat sequentially, as slightly higher shipments were offset by modest price erosion. Year over year, revenue fell 4%, primarily due to lower unit shipments, partly offset by favorable product mix. First-half revenue declined 5%, reflecting lower shipments and price erosion, partly offset by product mix.
- Management said quarterly gross margin was consistent with both comparison periods; modest price erosion and improved product mix were offset by unfavorable market mix. Unit average selling price was $62, unchanged year over year.
- Quarterly operating income declined year over year as operating expenses rose. Product development increased with technology investment and headcount; marketing and administrative costs rose, including legal costs and the absence of a $21 million legal-cost reimbursement recorded in the prior-year quarter. A workforce-reduction charge contributed to higher restructuring expense.
- Other expense improved partly because of a $32 million gain from selling a strategic investment. The company also reported foreign-currency remeasurement gains and lower interest expense, partly offset by higher overall debt.
Outlook, risks, and contingencies
- For fiscal 2014, Seagate expected capital expenditures to remain at or below the low end of its long-term target of 6%–8% of revenue. It reported compliance with debt covenants and expected to remain compliant over the following 12 months.
- Seagate agreed in December 2013 to acquire Xyratex for approximately $374 million in cash, with closing expected in the fourth quarter of fiscal 2014. It also completed its acquisition of the remaining LaCie shares during the quarter.
- Management highlighted uncertainty in global economic conditions, variable demand and disk-drive pricing, competition, potential excess industry supply, product qualification and manufacturing execution, and the ability to achieve restructuring savings.
- Material legal matters include Convolve/MIT patent litigation, an employment and inventorship suit seeking more than $75 million, a Japanese contract dispute seeking approximately $38 million, an ITC investigation, and a patent suit seeking unspecified damages. Seagate said it could not reasonably estimate potential losses for these matters. It described environmental cleanup costs as not expected to be material based on current estimates.
- Unrecognized tax benefits were $173 million; the company expected reductions of approximately zero to $30 million over the following 12 months. The filing reported no material changes to previously disclosed risk factors and stated disclosure controls were effective.
Important facts for investors to verify
- Whether demand, shipment volumes, pricing, and product mix support revenue and margin trends in subsequent quarters.
- How the sharp first-half share repurchases and dividends, alongside increased debt, affect liquidity and capital-allocation flexibility.
- The timing, final cost, and expected benefits of the Xyratex acquisition, and integration progress following completion of the LaCie acquisition.
- Developments in the identified legal matters, for which potential loss estimates were not available, and changes in tax reserves.
- Execution of technology investment and restructuring plans, and whether capital spending stays within management’s stated outlook.