Seagate Technology plc — Form 10-Q Summary
Reporting period: Fiscal first quarter of 2011, the 13 weeks ended October 1, 2010. The unaudited filing was signed November 3, 2010. Seagate designs, manufactures and sells hard disk drives for enterprise, client-compute and client non-compute markets, and also provides storage services. Effective July 3, 2010, the Irish company became the publicly traded parent in a reorganization.
Financial results and liquidity
Amounts are in millions of U.S. dollars except per-share data, percentages and unit figures.
| Metric | Quarter ended Oct. 1, 2010 | Prior-year quarter | Change |
|---|---|---|---|
| Revenue | $2,697 | $2,663 | Up 1% |
| Gross profit / gross margin | $550 / 20% | $653 / 25% | Margin down 5 percentage points |
| Operating income / operating margin | $231 / 8% | $221 / 9% | Income up 5% |
| Net income | $149 | $179 | Down 17% |
| Diluted earnings per share | $0.31 | $0.35 | Down 11% |
| Cash provided by operations | $245 | $278 | Down 12% |
- Revenue was also relatively flat sequentially versus the June 2010 quarter ($2,656 million), while gross margin fell from 27% and net income from $379 million. The June-quarter comparison includes a $39 million income tax benefit.
- Seagate shipped 49.2 million drives, up 6% year over year; average selling price was $54 per drive, versus $57. Competitive pricing and sales programs were cited as key margin pressures. Sales programs were approximately 9% of gross revenue, versus 7% in both comparison quarters.
- Operating cash flow was $245 million; investing cash flow was negative $379 million, including $358 million of capital expenditures; financing cash flow was negative $346 million. Cash and cash equivalents declined $480 million during the quarter.
- At October 1, cash and cash equivalents were $1,783 million, short-term investments $283 million, and restricted cash and investments $102 million. Total current assets were $5,156 million and current liabilities $3,116 million.
- Debt carrying value was $2,174 million: $560 million current and $1,614 million long-term. Cash plus short-term investments totaled $2,066 million. The company reported approximately $2.1 billion of primary liquidity and said it expected available sources to fund operations and requirements for at least 12 months; it reported compliance with debt covenants.
Material changes and unusual items
- During the quarter Seagate redeemed $326 million principal of 2.375% convertible notes for approximately $328 million and $55 million principal of 5.75% subordinated debentures for approximately $34 million. The redemptions generated a combined $24 million loss, included in other expense. The $600 million principal 6.375% senior notes due October 2011 remained outstanding.
- Other expense, net was $78 million, compared with $41 million a year earlier, reflecting debt-redemption losses and higher foreign-exchange losses. Income taxes were $4 million and included approximately $10 million of discrete benefits, primarily from releases of tax reserves; the tax benefit associated with debt-redemption losses was offset by a valuation allowance increase.
- Capital expenditures rose to $358 million from $89 million a year earlier. Operating cash flow also reflected a $111 million increase in accounts receivable, a $159 million increase in accounts payable and a $136 million reduction in accrued employee compensation, including payment of $116 million in variable performance-based compensation.
- Cash and cash equivalents plus short-term investments fell from $2,515 million at July 2, 2010 to $2,066 million at October 1, 2010. The filing attributes the decrease primarily to debt redemptions and capital spending, partly offset by operating cash flow.
Outlook, risks and contingencies
- No numerical revenue, margin or earnings guidance is provided. Management described demand as weaker than normal seasonality, citing continued weakness in consumer spending in the U.S. and Europe and a competitive pricing environment with ample drive supply. It noted industry demand varied by market and that enterprise demand had improved year over year.
- Management said it expected to complete closure of the Ang Mo Kio manufacturing facility during fiscal 2011, relocating operations to existing sites without a meaningful change in production capacity. Estimated total cash restructuring charges were approximately $60 million; approximately $41 million had been recorded through October 1.
- Key operating risks include variable demand, price erosion, competition, execution of product qualification and cost reductions, and the ability to increase manufacturing capacity. The filing also highlights potential component and equipment shortages, including glass substrates for small-form-factor drives and rare-earth materials, and dependence on limited suppliers.
- On October 14, 2010, Seagate disclosed an indication of interest regarding a possible going-private transaction. The board was evaluating it and other strategic alternatives; there was no assurance of a formal offer or completed transaction. Management warned that uncertainty or a failed transaction could affect share price, business relationships and financial results. Irish-law restrictions may also limit share repurchases.
- Legal matters include contested intellectual-property claims. Convolve and MIT seek $800 million in compensatory damages and unspecified punitive damages; Seagate disputes the claims. A former employee seeks damages exceeding $75 million. Siemens litigation in Northern Ireland awaited a decision, and related proceedings were pending in Germany. The filing says environmental-site costs are not expected to be material; it does not quantify potential exposure for the cited litigation.
- Seagate reported no material off-balance-sheet arrangements, and management concluded disclosure controls were effective as of October 1, 2010.
Important facts for investors to verify
- Whether competitive pricing and higher sales-program costs continue to pressure gross margin and average selling prices.
- Whether operating cash flow can support elevated capital spending, scheduled debt service and the October 2011 note maturity while maintaining liquidity.
- Whether the company’s demand, shipment and pricing trends improve, particularly in consumer-facing markets, and whether component availability constrains production.
- Developments in the potential going-private transaction, including any formal offer, board decision or effect on ordinary-share trading.
- Updates on material patent and employment litigation, the Ang Mo Kio closure and remaining restructuring obligations.