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STX > SEC Filings for STX > Form 10-Q on 29-Oct-2013All Recent SEC Filings

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Form 10-Q for SEAGATE TECHNOLOGY PLC


29-Oct-2013

Quarterly Report


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

The following is a discussion of the financial condition and results of operations for our fiscal quarters ended September 27, 2013, June 28, 2013, and September 28, 2012, referred to herein as the "September 2013 quarter", the "June 2013 quarter" and the "September 2012 quarter", respectively. Unless the context indicates otherwise, as used herein, the terms "we," "us," "Seagate," the "Company" and "our" refer to Seagate Technology plc, an Irish public limited company, and its subsidiaries. References to "$" are to United States dollars.

You should read this discussion in conjunction with financial information and related notes included elsewhere in this report. We operate and report financial results on a fiscal year of 52 or 53 weeks ending on the Friday closest to June 30. The September 2013, June 2013, and September 2012 quarters were all 13 weeks. Except as noted, references to any fiscal year mean the twelve-month period ending on the Friday closest to June 30 of that year.

Some of the statements and assumptions included in this Quarterly Report on Form 10-Q are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 or Section 21E of the Securities Exchange Act of 1934, each as amended, including, in particular, statements about our plans, strategies and prospects and estimates of industry growth for the fiscal year ending June 27, 2014 and beyond. These statements identify prospective information and include words such as "expects," "plans," "anticipates," "believes," "estimates," "predicts," "projects," and similar expressions. These forward-looking statements are based on information available to us as of the date of this Quarterly Report on Form 10-Q and are based on management's current views and assumptions. These forward-looking statements are conditioned upon and also involve a number of known and unknown risks, uncertainties and other factors that could cause actual results, performance or events to differ materially from those anticipated by these forward-looking statements. Such risks, uncertainties and other factors may be beyond our control and may pose a risk to our operating and financial condition. Such risks and uncertainties include, but are not limited to: uncertainty in global economic conditions, as consumers and businesses may defer purchases in response to tighter credit and financial news; the impact of variable demand and the adverse pricing environment for disk drives, particularly in view of current business and economic conditions; dependence on our ability to successfully qualify, manufacture and sell our disk drive products in increasing volumes on a cost-effective basis and with acceptable quality, particularly the new disk drive products with lower cost structures; the impact of competitive product announcements; possible excess industry supply with respect to particular disk drive products and our ability to achieve projected cost savings in connection with restructuring plans. We also encourage you to read our Annual Report on Form 10-K for the year ended June 28, 2013, which contains information concerning risk, uncertainties and other factors that could cause results to differ materially from those projected in the forward-looking statements and this Form 10-Q. These forward-looking statements should not be relied upon as representing our views as of any subsequent date and we undertake no obligation to update forward-looking statements to reflect events or circumstances after the date they were made.

Our Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") is provided in addition to the accompanying condensed consolidated financial statements and notes to assist readers in understanding our results of operations, financial condition, and cash flows. Our MD&A is organized as follows:

          Our Company. Overview of our business.

          Overview of the September 2013 quarter. The September 2013 quarter
summary.

          Results of Operations. An analysis of our financial results comparing

the September 2013 quarter to the June 2013 quarter and the September 2012 quarter.

Liquidity and Capital Resources. An analysis of changes in our balance sheets and cash flows, and discussion of our financial condition including the credit quality of our investment portfolio and potential sources of liquidity.

Critical Accounting Policies. Accounting policies and estimates that we believe are important to understanding the assumptions and judgments incorporated in our reported financial results.

Our Company

We are a leading provider of electronic data storage products. Our principal products are hard disk drives, commonly referred to as disk drives, hard drives or HDDs. Hard disk drives are devices that store digitally encoded data on rapidly rotating disks with magnetic surfaces. Disk drives continue to be the primary medium of mass data storage due to their performance attributes, high quality and cost effectiveness.

We produce a broad range of electronic data storage products including HDDs, solid state hybrid drives (SSHD) and solid state drives (SSD), which address enterprise applications, where our products are designed for enterprise servers, mainframes and workstations; client compute applications, where our products are designed primarily for desktop and notebook computers; and client non-compute applications, where our products are designed for a wide variety of end user devices such as digital video recorders (DVRs), personal data backup systems, portable external storage systems and digital media systems. In addition to manufacturing and selling data storage products, we provide data storage services for small to medium-sized businesses, including online backup, data protection and recovery solutions.


Overview of the September 2013 Quarter

During the September 2013 quarter, we shipped 56 million units totaling 49 exabytes, generating revenue of $3,489 million and gross margin of 28% of revenue. Our operating cash flows were $682 million. We repurchased approximately 4 million of our ordinary shares during the quarter for approximately $182 million and paid dividends of $135 million.

Results of Operations



We list in the table below summarized information from our Condensed
Consolidated Statements of Operations by dollars and as a percentage of revenue
for the periods indicated.



                                                  For the Three Months Ended
                                      September 27,        June 28,        September 28,
(Dollars in millions)                     2013               2013              2012
Revenue                              $         3,489    $        3,425    $         3,732
Cost of revenue                                2,514             2,486              2,671
Gross margin                                     975               939              1,061
Product development                              294               294                268
Marketing and administrative                     181               176                150
Amortization of intangibles                       20                20                 19
Restructuring and other, net                       2                 1                  -
Income from operations                           478               448                624
Other expense, net                               (38 )            (145 )              (24 )
Income before income taxes                       440               303                600
Provision for (benefit from)
income taxes                                      13               (45 )               18
Net income                                       427               348                582
Less: Net income attributable to
noncontrolling interest                            -                 -                  -
Net income attributable to
Seagate Technology plc               $           427    $          348    $           582


                                               For the Three Months Ended
                                     September 27,      June 28,      September 28,
                                         2013             2013            2012
Revenue                                        100 %           100 %            100 %
Cost of revenue                                 72              73               72
Gross margin                                    28              27               28
Product development                              9               9                7
Marketing and administrative                     5               5                4
Amortization of intangibles                      -               -                -
Restructuring and other, net                     -               -                -
Income from operations                          14              13               17
Other expense, net                              (1 )            (4 )             (1 )
Income before income taxes                      13               9               16
Provision for (benefit from)
income taxes                                     -              (1 )              -
Net income                                      13              10               16
Less: Net income attributable to
noncontrolling interest                          -               -                -
Net income attributable to
Seagate Technology plc                          13 %            10 %             16 %

Revenue



The following table summarizes information regarding revenue, volume shipments,
average selling prices (ASPs) and revenues by channel and geography:



                                      For the Three Months Ended
(In millions, except         September 27,      June 28,     September 28,
percentages and ASPs)            2013             2013           2012
Net Revenue                 $         3,489    $    3,425   $         3,732
Unit Shipments:
Enterprise                                8            10                 6
Client Compute                           36            34                41
Client Non-Compute                       12            10                11
Total Units Shipped                      56            54                58
ASPs (per unit)             $            62    $       63   $            63
Exabytes Shipped                         49            47                43
Revenues by Channel (%)
OEMs                                     68 %          71 %              66 %
Distributors                             21 %          18 %              24 %
Retailers                                11 %          10 %              10 %
Revenues by Geography (%)
Americas                                 29 %          30 %              25 %
EMEA                                     18 %          17 %              17 %
Asia Pacific                             53 %          53 %              58 %

We generated revenue of $3,489 million in the September 2013 quarter, shipping 56 million units with ASPs of $62 per unit. Revenue increased compared to the June 2013 quarter due to an increase in units shipped, partially offset by decrease in ASPs.

Revenue decreased compared to the September 2012 quarter due to decrease in units shipped and a decrease in ASPs, partially offset by a favorable product mix in the September 2013 quarter.


We maintain various sales programs such as point-of-sale rebates, sales price adjustments and price protection, aimed at increasing customer demand. During the September 2013 quarter, sales programs were approximately 7.8% of gross revenue, which is within our historical range of 6%-10%. Adjustments to revenues due to under or over accruals for sales programs related to revenues reported in prior quarterly periods have averaged of 0.4% of quarterly gross revenue for fiscal years 2012 and 2013, and were 0.7% of quarterly gross revenue in the September 2013 quarter.

Cost of Revenue and Gross Margin



                                    For the Three Months Ended
                           September 27,      June 28,     September 28,
(Dollars in millions)          2013             2013           2012
Cost of revenue           $         2,514    $    2,486   $         2,671
Gross margin                          975           939             1,061
Gross margin percentage                28 %          27 %              28 %

Gross margins as a percentage of revenue are consistent when compared to both the June 2013 quarter and the September 2012 quarter. These margins reflect a stable pricing environment.

In the September 2013 quarter, total warranty cost was 1.6% of revenue and net of unfavorable changes in estimates of prior warranty accruals, approximately 0.2% of revenue. Warranty cost related to new shipments was 1.4% of revenue compared to 1.3% in the June 2013 quarter, and 1.3% in the September 2012 quarter.

Operating Expenses



                                         For the Three Months Ended
                                September 27,     June 28,      September 28,
(Dollars in millions)               2013            2013            2012
Product development            $           294    $     294    $           268
Marketing and administrative               181          176                150
Amortization of intangibles                 20           20                 19
Restructuring and other, net                 2            1                  -
Operating expenses             $           497    $     491    $           437

Product development expense. Product development expense for the September 2013 quarter remained flat when compared to the June 2013 quarter. Compared to the September 2012 quarter, product development expense increased due to investments in storage technologies and headcount related expenses.

Marketing and administrative expense. Marketing and administrative expense for the September 2013 quarter remained stable when compared to the June 2013 quarter. Compared to the September 2012 quarter , marketing and administrative expense increased due to an increase in enhancement of our core business operations and increased headcount related expenses.

Amortization of intangibles. Amortization of intangibles for the September 2013 quarter remained consistent with the June 2013 quarter and the September 2012 quarter.

Restructuring and Other, net. Restructuring and other, net for the September 2013 quarter was not material and primarily related to previously announced restructuring plans.


Other expense, net

                                   For the Three Months Ended
                         September 27,      June 28,      September 28,
(Dollars in millions)        2013             2013            2012
Other expense, net      $           (38 )  $     (145 )  $           (24 )

Other expense, net decreased during the September 2013 quarter as compared to the June 2013 quarter primarily due to losses recognized on early redemption and repurchase of debt during the June 2013 quarter and the reduction in interest expense from the early redemption of these debts, partially offset by interest expense incurred from the issuance of our 4.75% Senior Notes in the June 2013 quarter. Other expense, net for the September 2012 quarter included a gain on sale of certain strategic investments.

Income taxes

                                                 For the Three Months Ended
                                   September 27,          June 28,         September 28,
(Dollars in millions)                   2013                2013                2012
Provision for (benefit from)
income taxes                      $             13     $          (45 )   $             18

Our income tax provision recorded for the September 2013 quarter included approximately $3 million of net discrete tax expense primarily associated with recently enacted tax legislation. The income tax benefit in the fourth quarter of fiscal year 2013 was primarily associated with the valuation allowance release related to certain U.S. deferred tax assets.

Our income tax provision for the September 2013 quarter differed from the provision for income taxes that would be derived by applying the Irish statutory rate of 25% to income before income taxes, primarily due to the net effect of
(i) tax benefits related to non-U.S. earnings generated in jurisdictions that are subject to tax holidays or tax incentive programs and are considered indefinitely reinvested outside of Ireland and (ii) a decrease in valuation allowance for certain U.S. deferred tax assets.

The IRS and Treasury Department on September 13, 2013, released final regulations under Sections 162(a) and 263(a) on the deduction and capitalization of expenditures related to tangible personal property (the final repair regulations). The entirety of the final repair regulations apply to our first quarter of fiscal year 2015. Application of these regulations is not expected to have a material impact on our consolidated financial statements.

During the September 2013 quarter, our unrecognized tax benefits excluding interest and penalties increased by $6 million to $163 million. The unrecognized tax benefits that, if recognized, would impact the effective tax rate was $163 million at September 27, 2013, subject to certain future valuation allowance reversals. During the 12 months beginning September 28, 2013, we expect to reduce our unrecognized tax benefits by approximately $6 million primarily as a result of the expiration of certain statutes of limitation.

Our income tax provision recorded for the September 2012 quarter included approximately $7 million of net discrete tax expense primarily associated with the reversal of prior period tax benefits.

Our income tax provision for the September 2012 quarter differed from the provision for income taxes that would be derived by applying the Irish statutory rate of 25% to income before income taxes, primarily due to the net effect of
(i) tax benefits related to non-U.S. earnings generated in jurisdictions that are subject to tax holidays or tax incentive programs and are considered indefinitely reinvested outside of Ireland and (ii) a decrease in valuation allowance for certain U.S. deferred tax assets.

Liquidity and Capital Resources

The following sections discuss our principal liquidity requirements, as well as our sources and uses of cash and our liquidity and capital resources. Our cash and cash equivalents are maintained in investments with remaining maturities of 90 days or less at the time of purchase. Our short-term investments consist of readily marketable securities with remaining maturities of more than 90 days at the time of purchase. The principal objectives of our investment policy are the preservation of principal and maintenance of liquidity. We intend to maintain a highly liquid portfolio by investing only in those marketable securities that we believe have active secondary or resale markets. We believe our cash equivalents and short-term investments are liquid and accessible. We operate in some countries that have restrictive regulations over the movement of cash and/or foreign exchange across their borders. However, these restrictions have not impeded our ability to conduct our business, nor do we expect them to in the next 12 months. We are not aware of any downgrades, losses or other significant deterioration in the fair value of our cash equivalents or short-term investments and accordingly, we do not believe the fair value of our short-term investments has significantly changed from the values reported as of September 27, 2013.


Cash and Cash Equivalents, Short-term Investments, and Restricted Cash and
Investments



                                   September 27,     June 28,
(Dollars in millions)                  2013            2013       Change
Cash and cash equivalents         $         1,924   $    1,708   $    216
Short-term investments                        489          480          9
Restricted cash and investments               108          101          7
Total                             $         2,521   $    2,289   $    232

Our cash and cash equivalents, short-term investments and restricted cash and investments increased from June 28, 2013 as a result of cash flow from operations during the quarter, partially offset by the repurchase of our ordinary shares, capital expenditures, and dividends paid to our shareholders.

Cash Provided by Operating Activities

Cash provided by operating activities for the three months ended September 27, 2013 of $682 million includes the effects of net income adjusted for non-cash items including depreciation, amortization, and share-based compensation, and decrease of $115 million in accrued employee compensation primarily due to the payment of variable performance-based compensation in the September 2013 quarter.

Cash Used in Investing Activities

During the three months ended September 27, 2013, we used $186 million of cash in investing activities, which was primarily attributable to payments for property, equipment and leasehold improvements of $161 million.

Cash Used in Financing Activities

Net cash used in financing activities of $282 million for the three months ended September 27, 2013 was primarily attributable to approximately $182 million paid to repurchase 4 million of our ordinary shares and dividend payments of $135 million.

Liquidity Sources, Cash Requirements and Commitments

Our primary sources of liquidity as of September 27, 2013, consisted of:
(1) approximately $2.4 billion in cash, cash equivalents, and short-term investments, (2) cash we expect to generate from operations and (3) a $500 million senior revolving credit facility. We also had $108 million in restricted cash and investments, of which $87 million was related to our employee deferred compensation liabilities under our non-qualified deferred compensation plan.

As of September 27, 2013, no borrowings have been drawn under the revolving credit facility, and $2 million had been utilized for letters of credit. The line of credit is available for borrowings, subject to compliance with financial covenants and other customary conditions to borrowings.

The credit agreement that governs our revolving credit facility, as amended, contains certain covenants that we must satisfy in order to remain in compliance with the credit agreement, as amended. The agreement also includes three financial covenants: (1) minimum cash, cash equivalents and marketable securities; (2) a fixed charge coverage ratio; and (3) a net leverage ratio. As of September 27, 2013, we were in compliance with all of the covenants under our Revolving Credit Facility and debt agreements. Based on our current outlook, we expect to be in compliance with the covenants of our debt agreements over the next 12 months.

Our liquidity requirements are primarily to meet our working capital, research and development and capital expenditure needs, to fund scheduled payments of principal and interest on our indebtedness, and to fund our quarterly dividend. Our ability to fund these requirements will depend on our future cash flows, which are determined by future operating performance, and therefore, subject to prevailing global macroeconomic conditions and financial, business and other factors, some of which are beyond our control.


For fiscal year 2014, we expect capital expenditures to remain within our long-term targeted range of 6% to 8% of revenue.

From time to time we may repurchase any of our outstanding notes in open market or privately negotiated purchases or otherwise, or may repurchase outstanding notes pursuant to the terms of the applicable indenture.

On October 23, 2013, our Board of Directors (the "Board") approved a cash dividend of $0.43 per share, payable on November 26, 2013 to shareholders of record as of the close of business on November 12, 2013. The payment of any future quarterly dividends will be at the discretion of the Board and will be dependent upon our financial position, results of operations, available cash, cash flow, capital requirements and other factors deemed relevant by the Board.

From time to time we may repurchase any of our outstanding ordinary shares in the open market or through broker assisted purchases. As of September 27, 2013, $3.2 billion remained available for repurchase under our existing repurchase authorization limit. All repurchases are effected as redemptions in accordance with the Company's Articles of Association.

On October 21, 2013, we repurchased 32.7 million ordinary shares from Samsung Electronics Co., Ltd. for a total purchase price of $1.5 billion.

Critical Accounting Policies

Our discussion and analysis of financial condition and results of operations are based upon our Condensed Consolidated Financial Statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of such statements requires us to make estimates and assumptions that affect the reported amounts of revenues and expenses during the reporting period and the reported amounts of assets and liabilities as of the date of the financial statements. Our estimates are based on historical experience and other assumptions that we consider to be appropriate in the circumstances. However, actual future results may vary from our estimates.

Since our fiscal year ended June 28, 2013, there have been no material changes in our critical accounting policies and estimates other than the Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income discussed in Part I, Item 1. Financial Statements-Note 1. Basis of Presentation and Summary of Significant Accounting Policies in this Form 10-Q. Please refer to "Management's Discussion and Analysis of Financial Condition and Results of Operations" contained in Part II, Item 7 of our Annual Report on Form 10-K for the fiscal year ended June 28, 2013, as filed with the SEC on August 7, 2013, for a discussion of our critical accounting policies and estimates.

Recent Accounting Pronouncements

See Part I, Item 1. Financial Statements-Note 1. Basis of Presentation and Summary of Significant Accounting Policies for information regarding the effect of new accounting pronouncements on our financial statements.

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