Seagate Technology plc — Form 10-Q Summary
Reporting period: Fiscal second quarter and first six months ended December 30, 2011; the quarter comprised 13 weeks. Amounts are in U.S. dollars.
Business context and period performance
Seagate designs, manufactures and sells hard disk drives (HDDs), and also provides storage services. Results this quarter were strongly affected by Thailand flooding that disrupted industry suppliers, constrained HDD supply and drove higher selling prices. Seagate’s own Thai factories were not directly affected, but seven of its ten largest component suppliers had inundated factories.
Financial and operating metrics
| Metric | Three months ended Dec. 30, 2011 | Comparable period | Six months ended Dec. 30, 2011 | Comparable period |
|---|---|---|---|---|
| Revenue | $3.195 billion | $2.719 billion | $6.007 billion | $5.417 billion |
| Gross margin | $1.010 billion; 32% | $529 million; 19% | $1.559 billion; 26% | $1.079 billion; 20% |
| Operating income | $605 million; 19% of revenue | $206 million; 7% | $841 million; 14% | $438 million; 8% |
| Net income | $563 million | $150 million | $703 million | $299 million |
| Diluted EPS | $1.28 | $0.31 | $1.61 | $0.61 |
| Operating cash flow | $719 million | Not separately stated in the provided text | $879 million | $752 million |
Quarterly shipments were 46.9 million units versus 48.9 million a year earlier; reported average selling price rose to $67 from $55. The company estimated industry shipments at 119 million units, down from 167.3 million in the comparable quarter. For the six months, shipments were 97.6 million versus 98.1 million and average selling price was $61 versus $54.
At December 30, cash and cash equivalents were $1.825 billion, short-term investments $407 million and restricted cash/investments $93 million. Total current assets were $5.400 billion and current liabilities $2.372 billion. Long-term debt was $2.925 billion, with no current portion; the $350 million revolving facility had no cash borrowings and $4 million in letters of credit. Seagate reported compliance with debt covenants and expected to remain compliant over the next 12 months.
Six-month cash uses included $843 million net investing cash flow, including $361 million of capital expenditures and $561 million cash paid for the Samsung acquisition; and $888 million net financing cash flow, including $594 million of debt repayments, $191 million of share repurchases and $154 million of dividends. Cash and cash equivalents declined by $852 million to $1.825 billion; cash, short-term investments and restricted cash/investments together declined by $928 million to $2.325 billion.
Material changes and unusual items
- Compared with the year-ago quarter, revenue increased about 18%, net income about 275%, and gross margin rose 13 percentage points. Management attributed the stronger pricing and margins primarily to supply shortages following the Thailand floods; lower capacity utilization from component shortages partly offset the pricing benefit.
- Seagate completed its acquisition of Samsung’s HDD business on December 19, 2011. Consideration was valued at $1.140 billion: $571 million cash and 45.2 million Seagate shares valued at $569 million. Preliminary purchase accounting included $437 million goodwill and $580 million acquired intangibles. The acquired business contributed $36 million revenue and a $5 million net loss after acquisition.
- Samsung-related acquisition and integration costs were $17 million for the quarter and $29 million for the six months. Product development and marketing/administrative expense also increased year over year, with variable compensation contributing to the increases.
- The six-month tax provision was $6 million, including approximately $10 million of discrete benefits from valuation-allowance reversals and release of tax reserves. The quarter recorded a $5 million tax benefit.
- Seagate repaid the $559 million outstanding principal of its 2011 notes at maturity and repurchased $30 million principal of its 2014 notes, recording a $5 million redemption loss. A $7 million strategic investment impairment was also recorded during the first half.
Outlook, risks and contingencies
Management expected calendar-year 2012 HDD unit demand to exceed supply and the exabyte-demand shortfall to become more pronounced than the unit shortfall. This outlook was based on supply-chain disruption and demand estimates, not formal earnings guidance; the filing provides no specific revenue, EPS or margin forecast. Seagate expected the Samsung acquisition to increase manufacturing capacity and product-development expense and anticipated further integration costs.
Risks include continued component shortages and supplier concentration in Thailand, potential supply-chain recovery delays, variable demand and pricing, competition or excess industry supply, and the ability to qualify and deliver products at acceptable cost and quality. Samsung integration, realization of synergies, and assumed liabilities are also risks. Chinese approval conditions include maintaining the Samsung HDD brand as a separate competitor, expanding Samsung HDD production capacity within six months of the decision, and investing at least $800 million annually in combined HDD R&D for three years.
Several intellectual-property matters had uncertain or unestimable potential losses, including Convolve/MIT, Shukh, Rembrandt and a Rambus ITC investigation. The company said it could not reasonably estimate potential loss ranges for these matters. Siemens patent disputes in the UK and Germany were settled confidentially on January 30, 2012. The company considered current environmental-site costs not material. Acquired Samsung warranty obligations are provisional and subject to estimation uncertainty; Seagate also shortened standard warranty terms for a number of products in January 2012, which it expected to reduce future warranty costs.
Following quarter-end, the board declared a $0.25 per-share dividend payable March 1, 2012 and authorized an additional $1 billion share-repurchase program. Disclosure controls were assessed as effective at period-end.
Most important facts for investors to verify
- Whether HDD supply and pricing recover as expected, and how that affects shipment volumes, average selling prices and margins.
- Progress integrating Samsung’s HDD business, associated costs and liabilities, and compliance with the Chinese approval conditions.
- Supplier recovery and concentration risks in Thailand, including availability and cost of critical components.
- Cash generation and liquidity after the acquisition, debt repayments, dividends and repurchases; also confirm covenant headroom and future debt maturities.
- Developments in unquantified litigation and the accuracy of acquired-product warranty estimates.