Seagate Technology plc — Form 10-Q Summary
Business and period: Seagate supplies hard disk drives and related storage products and services across enterprise, client-compute, and client non-compute markets. This unaudited filing covers the 13 weeks ended September 28, 2012, the first quarter of fiscal 2013. Comparisons below are with the 13 weeks ended September 30, 2011, unless otherwise noted. Dollar amounts are in millions except per-share data.
Key financial results
| Metric | Quarter ended Sep. 28, 2012 | Year-ago quarter | Change |
|---|---|---|---|
| Revenue | $3,732 | $2,811 | +32.8% |
| Gross profit / margin | $1,061 / 28% | $549 / 20% | Margin +8 percentage points |
| Operating income / margin | $624 / 17% | $236 / 8% | +164% |
| Net income | $582 | $140 | +316% |
| Diluted EPS | $1.42 | $0.32 | +$1.10 |
| Operating cash flow | $1,132 | $160 | +$972 |
| Capital expenditures | $263 | $218 | +$45 |
Revenue declined 16.7% from the June 2012 quarter’s $4,482 million; gross margin fell from 33% and operating income from $1,057 million. Seagate shipped 58 million drives, versus 51 million a year earlier and 66 million in the preceding quarter. Average selling price was $63 per drive, up from $55 year over year but down from $67 sequentially. Management attributed the sequential revenue and margin declines chiefly to muted demand, price erosion, and unfavorable product mix; increased average capacity partly offset ASP pressure.
Operating cash flow was $1,132 million. Less $263 million of property and equipment purchases, the resulting cash flow after capital expenditures was approximately $869 million. Cash and cash equivalents were $1,894 million at quarter-end; short-term investments were $476 million and restricted cash and investments were $100 million. Current assets were $5,749 million and current liabilities $2,753 million.
Total debt was approximately $2,870 million, including $3 million classified as current; the company reported $2,867 million of long-term debt. Its $350 million secured revolving credit facility had no cash borrowings outstanding, with $2 million used for letters of credit. Seagate reported compliance with debt covenants. Cash, cash equivalents, and short-term investments totaled $2,370 million, excluding restricted balances.
Material developments and unusual items
- Seagate acquired approximately 64.5% of LaCie on August 3, 2012, for consideration valued at $111 million, including $107 million cash and $4 million contingent consideration. LaCie’s post-acquisition revenue and earnings included in the quarter were not significant. A $72 million escrow deposit was made toward acquiring remaining shares; the tender offer concluded October 18, 2012.
- Net income included a $33 million gain from sales of strategic investments, recorded in “Other, net.” Other expense, net was $24 million, compared with $84 million in the year-ago quarter. The tax provision was $18 million and included approximately $7 million of net discrete tax expense.
- Seagate repurchased approximately 20.5 million shares for $669 million during the quarter. It paid $127 million in dividends and declared a further $0.32-per-share dividend, payable November 29, 2012. The board had authorized $1.9 billion of additional repurchases remaining at quarter-end.
- Warranty costs on new shipments were 1.3% of revenue, versus 0.9% in the prior quarter. Total warranty liability was $337 million at quarter-end.
Outlook, risks, and contingencies
Management expected fiscal 2013 capital expenditures to be at or below its historical target range of 6%–8% of revenue. The filing provides no specific revenue or earnings guidance. Management said it expected to remain in compliance with debt covenants over the next 12 months and considered cash and investments liquid and accessible.
Risks highlighted include uncertain global demand, disk-drive pricing pressure and possible excess industry supply, competition, the ability to qualify and manufacture products at scale and acceptable quality, and realizing expected benefits and cost savings from the Samsung HDD and LaCie transactions. Seagate also cited foreign-exchange, interest-rate, investment-counterparty, and credit-rating exposures. Approximately $15 million of auction-rate securities remained illiquid after repeated failed auctions; the company expected recovery of amortized cost and recorded the impairment as temporary.
Material legal matters included appeals in the Convolve/MIT and Rembrandt patent disputes, a former employee’s claim seeking more than $75 million, a Japanese lawsuit seeking approximately $38 million, and a newly initiated ITC investigation involving Realtek. The company said it could not reasonably estimate possible losses for these matters. It reported no material changes to the risk factors in its prior Form 10-K, and management concluded disclosure controls were effective.
Important facts for investors to verify
- Whether the quarter’s strong year-over-year growth and cash generation are sustainable amid sequentially lower demand, shipments, ASP, and margins.
- How much reported earnings depended on the $33 million strategic-investment gain and favorable tax factors; the reported tax provision was substantially below the 25% Irish statutory rate.
- LaCie tender-offer completion, final acquisition accounting, and the costs and benefits of integrating LaCie and the Samsung HDD business.
- Debt maturities, covenant headroom, and the effect of continued share repurchases and dividends on liquidity.
- Developments in the disclosed litigation, warranty obligations, and the recovery and liquidity status of auction-rate securities.