10-QPeriod: Q2 FY2017

Seagate Technology Holdings plc Quarterly Report for Q2 Ended Dec 30, 2016

Filed January 26, 2017For Securities:STX

Summary

Seagate Technology Holdings plc reported strong performance in the quarter ended December 29, 2016, with revenue increasing to $2.9 billion and gross margin improving significantly to 31%. This improvement was driven by a favorable product mix and better factory utilization stemming from cost-saving restructuring initiatives. Operating cash flow was robust at $656 million, supporting substantial shareholder returns through $147 million in share repurchases and $188 million in dividends paid. The company shipped 40 million drive units, generating 68 exabytes of storage. While overall unit shipments saw a slight year-over-year decline compared to the prior year's comparable quarter, a shift in product mix towards higher-value enterprise solutions and a decrease in the weighting towards lower-margin OEM sales contributed to the improved profitability. Management indicated confidence in meeting financial covenants and sufficient liquidity for the next 12 months.

Financial Highlights

53 data points
Beta

Revenue

$2.89B

30.8% Gross Margin

Net Income

$297.00M

10.3% Net Margin

EPS (Diluted)

$1.00

Total Assets

$8.56B

Cash & Equivalents

$1.72B

Free Cash Flow

$561.00M

Financial Statements
Beta
Revenue$2.89B
Cost of Revenue$2.00B
Gross Profit$891.00M
R&D Expenses$305.00M
SG&A Expenses$155.00M
Operating Expenses$2.52B
Operating Income$370.00M
Interest Expense$50.00M
Net Income$297.00M
EPS (Basic)$1.00
EPS (Diluted)$1.00
Shares Outstanding (Basic)296.00M
Shares Outstanding (Diluted)298.00M

Key Highlights

  • 1Revenue for the December 2016 quarter was $2.9 billion, an increase from the prior quarter, driven by improved product mix and seasonal demand.
  • 2Gross margin improved to 31% from 25% in the prior year's comparable quarter, attributed to favorable product mix and manufacturing cost efficiencies from restructuring.
  • 3Operating cash flow remained strong at $656 million for the quarter.
  • 4The company returned $335 million to shareholders through $147 million in share repurchases and $188 million in dividends.
  • 5Total drive unit shipments were 40 million, with 68 exabytes of capacity delivered.
  • 6Management expects to remain in compliance with financial covenants for its revolving credit facility.
  • 7A strategic investment impairment charge of $25 million negatively impacted 'Other expense, net' for the quarter.

Frequently Asked Questions

The gross margin improved to 31% due to a more favorable product mix and improved utilization of factories. These efficiencies were a result of ongoing workforce reductions and manufacturing consolidation activities, which helped offset price erosion in the market.

Seagate maintains approximately $1.7 billion in cash and cash equivalents, expects to generate cash from operations, and has a $700 million senior revolving credit facility. The company was in compliance with its amended financial covenants on the credit facility and expects to remain so for the next 12 months, indicating a stable liquidity position.

Restructuring charges were significant in prior periods, particularly related to workforce reductions and manufacturing consolidation. These efforts contributed to improved factory utilization and cost savings, which in turn positively impacted gross margin in the December 2016 quarter. Operating expenses also showed reductions in salaries and benefits due to these restructurings.

The filing reiterates risks previously disclosed in the 10-K, including variable demand and pricing in the disk drive market, competitive pressures, supply chain disruptions, currency fluctuations, and cyber-attack risks. While the company is focused on managing these, they remain potential headwinds.