Seagate Technology plc — Fiscal 2018 Third-Quarter 10-Q
Reporting period: 13 weeks ended March 30, 2018; nine-month results cover the 39 weeks ended that date. Unless noted, amounts are U.S. dollars in millions. Seagate supplies HDDs, SSDs, hybrid drives, storage systems and related solutions for enterprise, client and other markets.
Financial performance
| Metric | Quarter ended Mar. 30, 2018 | Year-ago quarter | Nine months ended Mar. 30, 2018 | Year-ago nine months |
|---|---|---|---|---|
| Revenue | $2,803 | $2,674 | $8,349 | $8,365 |
| Gross margin | $847; 30% | $816; 31% | $2,460; 29% | $2,508; 30% |
| Operating income | $441 | $266 | $1,129 | $858 |
| Net income | $381 | $194 | $721 | $658 |
| Diluted EPS | $1.31 | $0.65 | $2.48 | $2.20 |
- Quarterly revenue rose about 5% year over year but declined about 4% sequentially. HDD shipments were 87 exabytes and reported average selling price was $70 per drive.
- Quarterly operating cash flow was $558. For the nine months, operating cash flow was $1,645, capital expenditures were $270, and investing cash outflow was $239.
- Cash and cash equivalents were $2,926 at March 30, 2018, versus $2,539 at June 30, 2017. Current assets were $5,247 and current liabilities $3,055.
- Debt principal totaled $4,867, including $504 due in 2019 and $750 due in 2022; reported debt carrying value, net of issuance costs, was $4,822. The $700 revolving facility was undrawn, and the company reported compliance with its financial covenants.
- Dividends declared were $0.63 per share for the quarter. Nine-month cash dividends paid were $545; ordinary-share repurchases were $361. The company had $900 remaining under its repurchase authorization.
Changes and notable items
- Compared with the year-ago quarter, operating income and net income increased substantially, while gross margin fell one percentage point. Management attributed the margin decline mainly to price erosion, partly offset by product mix and cost controls.
- Nine-month revenue was nearly unchanged year over year, while net income increased. Operating expenses fell, particularly product development costs, reflecting prior workforce reductions, operational efficiencies and lower compensation-related costs.
- Sequentially, revenue declined $111, which management linked to seasonal weakness in consumer and client markets and price erosion, partly offset by greater enterprise shipments. The quarterly gross-margin rate remained at 30%.
- Nine-month income tax expense was $231, including approximately $195 of net discrete expense. The U.S. Tax Cuts and Jobs Act prompted a provisional $212 expense to remeasure U.S. deferred tax assets at the new 21% rate. Management said the estimate remained provisional; the quarterly tax provision was $12.
- Restructuring charges were $95 for the nine months. The December 2017 plan targeted about 500 employees, in addition to a July 2017 plan targeting about 600; the December plan was expected to be substantially complete by fiscal year-end.
Outlook, risks and contingencies
- Management expected fiscal 2018 capital expenditures to be less than 5% of revenue and believed available liquidity and expected operating cash flows would cover cash needs for the next 12 months. No specific revenue or earnings guidance is provided in the supplied filing text.
- The company committed to invest up to approximately $1.31 billion in preferred stock connected with the proposed acquisition of Toshiba Memory Corporation, subject to regulatory approvals and other closing conditions.
- Management identified risks including variable demand and adverse HDD pricing, competition and technology shifts, product qualification and manufacturing execution, supply-chain disruption, customer or supplier concentration, restructuring execution, foreign-exchange and interest-rate movements, cyber incidents, and compliance with debt covenants and regulation.
- Convolve and Lambeth patent disputes remained pending; the company said it could not reasonably estimate possible losses. In the Enova matter, the U.S. Supreme Court denied a petition on April 30, 2018, and Seagate said it did not expect a loss. Environmental cleanup costs were not expected to be material based on current estimates.
- The $800 million 3.75% notes due November 2018 were classified as current debt. The revolving facility’s maturity could accelerate to August 16, 2018 if the company lacked investment-grade ratings on August 15, 2018, absent satisfaction of extension conditions.
Investor verification points
- Track HDD demand, pricing, exabyte shipments and enterprise-market mix against the quarter’s reported growth and margin pressure.
- Verify the timing and funding implications of the November 2018 note maturity, revolving-facility maturity conditions, and Toshiba Memory commitment.
- Monitor whether restructuring savings persist and whether the remaining workforce actions are completed as planned.
- Review final tax accounting for the U.S. tax-law changes and any changes to unrecognized tax benefits.
- Follow developments in the Convolve and Lambeth litigation and any material changes to the company’s stated liquidity outlook.