Seagate Technology plc — Form 10-Q Summary
Reporting period: Fiscal second quarter ended January 2, 2015 (13 weeks); six-month results cover 27 weeks. Comparisons are with the quarter and six months ended December 27, 2013, unless otherwise noted. The prior-year six-month period was 26 weeks. Seagate supplies HDDs, hybrid and solid-state drives, storage systems, and related services.
Key financial results
| Metric | Quarter ended Jan. 2, 2015 | Prior-year quarter | Six months ended Jan. 2, 2015 | Prior-year six months |
|---|---|---|---|---|
| Revenue | $3.696 billion | $3.528 billion | $7.481 billion | $7.017 billion |
| Gross margin | $1.027 billion; 28% | $987 million; 28% | $2.078 billion; 28% | $1.962 billion; 28% |
| Operating income | $1.053 billion, including $620 million arbitration gain | $444 million | $1.509 billion, including $620 million arbitration gain | $922 million |
| Net income | $933 million | $428 million | $1.314 billion | $855 million |
| Diluted EPS | $2.78 | $1.24 | $3.91 | $2.39 |
| Operating cash flow | $1.4 billion, per management; includes arbitration proceeds | Not stated for quarter | $2.045 billion | $1.538 billion |
Quarterly revenue increased about 5% year over year but declined from $3.785 billion in the preceding quarter, reflecting lower shipments and price erosion, partly offset by product mix. Seagate shipped 57 million drives totaling 61 exabytes; average selling price was $61 per drive. Six-month revenue rose about 7%, mainly on higher unit shipments and favorable mix, partly offset by price erosion. Gross margin remained 28%; management cited modest price erosion offset by product mix and efficiency savings.
Reported operating income and earnings include the $620 million net gain from the Western Digital arbitration award. Excluding that gain, quarterly operating income was approximately $433 million (calculated from reported figures), versus $444 million a year earlier. The quarter’s $193 million tax provision included approximately $181 million of net expense related to China’s tax assessment.
Financial position, cash flow, and capital allocation
- At January 2, 2015, cash and cash equivalents were $3.296 billion, short-term investments $6 million, and restricted cash and investments $4 million. Long-term debt was $3.932 billion; cash and cash equivalents less long-term debt was approximately negative $636 million.
- Six-month operating cash flow was $2.045 billion. Investing activities used $853 million, including $387 million for capital expenditures and $450 million for the LSI Flash Business acquisition. Financing activities used $518 million, including $535 million of debt repayments, $317 million of dividends, and $201 million of share repurchases; $498 million of net debt proceeds partly offset these uses.
- Operating cash flow included $773 million received from Western Digital. The reported cash flow also reflects working-capital movements and should not be read as solely recurring operating generation.
- Seagate issued $500 million of 5.75% senior notes due 2034 and extinguished its $600 million 6.8% notes due 2016. Debt carrying value increased from $3.585 billion at June 27, 2014 to $3.932 billion.
- The company declared a $0.54-per-share quarterly dividend in January 2015. At January 2, $1.3 billion remained under its share repurchase authorization.
- On January 15, 2015, the revolving credit facility was increased from $500 million to $700 million and its maturity extended to 2020, subject to stated conditions. No borrowings or letters of credit were outstanding as of January 2; Seagate reported compliance with debt covenants.
Material developments, outlook, and risks
- Western Digital paid $773 million in October 2014 toward the arbitration award and accrued interest. Seagate recorded a $620 million net operating gain; the award was confirmed by the Minnesota Supreme Court. The filing says interest accrued at 10% and the payment included $143 million of accrued interest.
- Seagate completed its $450 million cash acquisition of LSI’s Flash Business in September 2014, adding enterprise flash and SSD controller capabilities. Goodwill recognized was $337 million; the business’s post-acquisition revenue and earnings were not significant. Xyratex, acquired in March 2014, also contributed to higher personnel and amortization expenses.
- China’s tax authority issued a $228 million final assessment for tax and interest relating to 2007–2013 filings; Seagate paid it January 4, 2015. Management said additional future tax expense under the agreement is not expected to materially affect the financial statements. The company is contesting certain U.S. federal tax adjustments and believes their resolution will not have a material impact.
- For fiscal 2015, management expects capital expenditures within its long-term target of 6%–8% of revenue and expects to remain in compliance with debt covenants. The filing provides no specific revenue or earnings guidance.
- Management identified risks including uncertain global demand, disk-drive pricing pressure, excess industry supply, competition, product qualification and manufacturing execution, quality, and achieving restructuring cost savings. Foreign-exchange, interest-rate, and counterparty risks are also disclosed.
- Material legal matters include appeals in the Convolve and Shukh cases, for which Seagate says a loss range cannot currently be reasonably estimated, and the Enova patent case, scheduled for trial in 2016. The company believes environmental-site costs will not be material and states that no material changes were made to previously disclosed risk factors.
Important facts for investors to verify
- How much of reported profit and cash generation is attributable to the nonrecurring arbitration payment and gain, versus underlying operations.
- The ongoing effects of the China tax assessment, future tax arrangements, and unresolved U.S. tax matters.
- Drive shipment trends, average selling prices, sales-program costs, and whether product mix and efficiency gains can continue to offset price erosion.
- Integration and returns from the LSI Flash Business and Xyratex acquisitions, including the effect of acquired intangible amortization and goodwill.
- Debt repayment and refinancing needs, dividend and repurchase commitments, liquidity, and compliance with credit-facility conditions.
- Developments in disclosed litigation, particularly appeals where the filing says potential losses cannot be estimated.