Seagate Technology plc — Form 10-Q summary
Business context and reporting period
Seagate supplies hard disk drives and other data-storage products and services. This unaudited quarterly report covers the 13 weeks ended April 3, 2015; nine-month results cover 40 weeks, compared with 39 weeks in the prior-year period. Fiscal 2015 was scheduled to end July 3, 2015.
Financial performance and position
| Metric | Three months ended April 3, 2015 | Prior-year comparable quarter | Nine months ended April 3, 2015 | Prior-year comparable period |
|---|---|---|---|---|
| Revenue | $3.330 billion | $3.406 billion | $10.811 billion | $10.423 billion |
| Gross margin | $955 million; 29% | $959 million; 28% | $3.033 billion; 28% | $2.921 billion; 28% |
| Operating income | $343 million | $444 million | $1.851 billion | $1.366 billion |
| Net income | $291 million | $395 million | $1.605 billion | $1.250 billion |
| Diluted EPS | $0.88 | $1.17 | $4.81 | $3.56 |
- Quarterly revenue declined about 2% year over year; net income declined about 26%. Gross margin improved one percentage point, while operating income fell about 23%.
- Nine-month revenue increased about 4% and net income about 28%. The comparison includes a $620 million net gain on the Western Digital arbitration award in fiscal 2015; the award is an unusual, non-recurring contributor to reported results.
- Nine-month operating cash flow was $2.419 billion, versus $1.981 billion. Investing activities used $1.068 billion, including $546 million of capital expenditures and $450 million for the LSI Flash Business acquisition. Financing activities used $1.359 billion.
- At April 3, cash and cash equivalents were $2.604 billion, short-term investments $6 million, and restricted cash and investments $4 million. Total current assets were $5.831 billion and current liabilities $3.043 billion. The $474 million current debt balance reflects the planned redemption of the 2020 notes.
- Total debt carrying amount was approximately $3.931 billion: $474 million current and $3.457 billion long-term. The $700 million revolving facility was undrawn, and Seagate reported compliance with debt covenants. Cash, cash equivalents and short-term investments were below total debt by approximately $1.321 billion.
- Quarterly cash dividends declared were $0.54 per share. Seagate repurchased $907 million of shares in the nine months and had $0.6 billion remaining under the then-current authorization at April 3.
Material changes and management commentary
- Quarterly revenue fell $366 million sequentially, mainly due to lower unit shipments and moderate price erosion, partly offset by favorable product mix. Shipments were 50 million drives and 55 exabytes, versus 57 million drives and 61 exabytes in the prior quarter.
- For the nine-month comparison, management attributed revenue growth primarily to the Xyratex and LSI Flash acquisitions and favorable mix, partly offset by price erosion. Product development and marketing and administrative expenses increased, including costs associated with the acquired businesses.
- Management cited favorable product mix and operating efficiencies as offsets to price erosion. Sales programs were 10.8% of gross drive revenue in the quarter, up from 7.8% in the prior-year quarter.
- The $450 million LSI Flash Business acquisition was completed in September 2014. The company said acquired revenue and earnings included in the period were not significant.
Outlook, risks, contingencies and unusual items
- For fiscal 2015, management expected capital expenditures to remain within its long-term target of 6% to 8% of revenue. The filing provides no specific revenue or earnings guidance.
- Management identified risks including variable demand, adverse disk-drive pricing, industry supply, product qualification and manufacturing execution, competition, currency movements, and achieving restructuring savings. Results are subject to broader economic and business uncertainties.
- The nine-month tax provision included approximately $181 million of expense from a final China tax assessment for 2007–2013; the company reported a related $225 million payment during the March 2015 quarter. Management said future tax expense under the agreement was not expected to materially affect financial statements.
- After receiving $773 million from Western Digital in October 2014, Seagate recorded the net arbitration award gain in the December 2014 quarter. The award followed a trade-secret dispute; interest and related amounts contributed to other income. The reported nine-month results therefore include a substantial unusual item.
- Seagate announced redemption of the remaining $474 million principal amount of 6.875% notes due 2020, at a premium, for May 7, 2015. The filing also reports a new $2.5 billion share-repurchase authorization approved April 22, 2015.
- Disclosed matters include appeals or unresolved proceedings involving Convolve, Shukh, LEAP and Enova; the company said it could not reasonably estimate potential losses for several of these cases. It believed environmental-site costs would not be material. Management reported no material change in previously disclosed risk factors.
- Management concluded disclosure controls were effective as of April 3, 2015; no material change in internal control over financial reporting was reported for the quarter.
Important facts for investors to verify
- How much of nine-month earnings and operating cash flow depended on the Western Digital award and related interest, and how results look excluding those effects.
- The ongoing effects of the China tax assessment, including cash payments, future tax expense and any remaining tax uncertainties.
- Whether shipment levels, pricing, product mix and sales incentives support sustainable margins after the quarter’s sequential revenue decline.
- The cash and debt impact of redeeming the 2020 notes, the expanded repurchase authorization, dividends and planned capital spending.
- Developments in the disclosed litigation and other contingencies, for which potential losses were not clearly estimable in the filing.