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Seagate Technology Reports Fiscal Second Quarter 2015 Financial Results

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Seagate Technology plc (NASDAQ:STX) (the “Company” or “Seagate”) today reported financial results for the second quarter of fiscal year 2015 ended January 2, 2015. For the second quarter, the Company reported revenue of approximately $3.7 billion, gross margin of 27.8%, net income of $933 million and diluted earnings per share of $2.78. On a non-GAAP basis, which excludes the net impact of certain items, including a $620 million net gain on the arbitration award, Seagate reported gross margin of 28.2%, net income of $452 million and diluted earnings per share of $1.35. For a detailed reconciliation of GAAP to non-GAAP results, see the accompanying financial tables.

During the second quarter, the Company generated approximately $1.4 billion in operating cash flow, paid cash dividends of $177 million and repurchased approximately 0.3 million ordinary shares for $18 million. There were 329 million ordinary shares issued and outstanding as of the end of the quarter. Cash, cash equivalents, restricted cash, and short-term investments totaled approximately $3.3 billion at the end of the quarter.

“Seagate’s second fiscal quarter performance is the result of consistent execution and our solid competitive positioning in the storage technology marketplace,” said Steve Luczo, Seagate’s chairman and chief executive officer. “In addition, our cash flow generation remains strong as we continue to effectively balance investing in our business with returning capital to shareholders.”

Seagate has issued a Supplemental Financial Information document. The Supplemental Financial Information is available on Seagate’s Investors website at www.seagate.com/investors.

Quarterly Cash Dividend

The Board of Directors has approved a quarterly cash dividend of $0.54 per share, which will be payable on February 24, 2015 to shareholders of record as of the close of business on February 10, 2015. The payment of any future quarterly dividends will be at the discretion of the Board and will be dependent upon Seagate’s financial position, results of operations, available cash, cash flow, capital requirements and other factors deemed relevant by the Board.

Investor Communications

Seagate management will hold a public webcast today at 6:00 a.m. Pacific Time that can be accessed on its Investors website at www.seagate.com/investors. During today’s webcast, the Company will provide an outlook for its third fiscal quarter of 2015 including key underlying assumptions.

Replay

A replay will be available beginning today at approximately 9:00 a.m. Pacific Time at www.seagate.com/investors.

About Seagate

Seagate is a world leader in hard disk drives and storage solutions. Learn more at www.seagate.com.

Cautionary Note Regarding Forward-Looking Statements

This press release contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and 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 quarter ending April 3, 2015 and beyond as well as our plans with respect to future dividend payments. These statements identify prospective information and may include words such as “expects,” “intends,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “projects” and similar expressions. These forward-looking statements are based on information available to the Company as of the date of this press release 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 the Company’s control and may pose a risk to the Company’s operating and financial condition. Such risks and uncertainties include, but are not limited to: the uncertainty in global economic conditions, as consumers and businesses may defer purchases in response to tighter credit and financial news; the impact of the variable demand and adverse pricing environment for disk drives, particularly in view of current business and economic conditions; the Company’s ability to successfully qualify, manufacture and sell its 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; the Company’s ability to achieve projected cost savings in connection with restructuring plans and fluctuations in interest rates. Information concerning risks, uncertainties and other factors that could cause results to differ materially from the expectations described in this press release is contained in the Company’s Annual Report on Form 10-K filed with the U.S. Securities and Exchange Commission on August 7, 2014, the “Risk Factors” section of which is incorporated into this press release by reference, and other documents filed with or furnished to the Securities and Exchange Commission. These forward-looking statements should not be relied upon as representing the Company’s views as of any subsequent date and the Company undertakes no obligation to update forward-looking statements to reflect events or circumstances after the date they were made.

The inclusion of Seagate’s website address in this press release is intended to be an inactive textual reference only and not an active hyperlink. The information contained in, or that can be accessed through, Seagate’s website is not part of this press release.

SEAGATE TECHNOLOGY PLC
CONDENSED CONSOLIDATED BALANCE SHEETS
(In millions)
(Unaudited)
January 2, June 27,
2015 2014 (a)
ASSETS
Current assets:
Cash and cash equivalents $ 3,296 $ 2,634
Short-term investments 6 20
Restricted cash and investments 4 4
Accounts receivable, net 1,829 1,729
Inventories 1,129 985
Deferred income taxes 123 126
Other current assets 245 279
Total current assets 6,632 5,777
Property, equipment and leasehold improvements, net 2,155 2,136
Goodwill 872 537
Other intangible assets, net 449 359
Deferred income taxes 498 499
Other assets, net 208 184
Total Assets $ 10,814 $ 9,492
LIABILITIES AND EQUITY
Current liabilities:
Accounts payable $ 1,736 $ 1,549
Accrued employee compensation 272 296
Accrued warranty 153 148
Accrued expenses 658 405
Total current liabilities 2,819 2,398
Long-term accrued warranty 129 125
Long-term accrued income taxes 33 90
Other non-current liabilities 186 127
Long-term debt 3,932 3,920
Total Liabilities 7,099 6,660
Equity:
Total Equity 3,715 2,832
Total Liabilities and Equity $ 10,814 $ 9,492

(a) The information as of June 27, 2014 was derived from the Company’s audited Consolidated Balance Sheet as of June 27, 2014.

SEAGATE TECHNOLOGY PLC
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In millions, except per share data)
(Unaudited)
For the Three Months Ended For the Six Months Ended
January 2, December 27, January 2, December 27,
2015 2013 2015 2013
Revenue $ 3,696 $ 3,528 $ 7,481 $ 7,017
Cost of revenue 2,669 2,541 5,403 5,055
Product development 341 312 683 606
Marketing and administrative 218 190 434 371
Amortization of intangibles 32 25 62 45
Restructuring and other, net 3 16 10 18
Gain on arbitration award, net (620 ) (620 )
Total operating expenses 2,643 3,084 5,972 6,095
Income from operations 1,053 444 1,509 922
Interest income 1 1 3 6
Interest expense (50 ) (49 ) (104 ) (93 )
Other, net 122 46 109 47
Other income (expense), net 73 (2 ) 8 (40 )
Income before income taxes 1,126 442 1,517 882
Provision for income taxes 193 14 203 27
Net income $ 933 $ 428 $ 1,314 $ 855
Net income per share attributable to Seagate Technology plc ordinary shareholders:
Basic $ 2.84 $ 1.27 $ 4.02 $ 2.46
Diluted 2.78 1.24 3.91 2.39
Number of shares used in per share calculations:
Basic 328 336 327 347
Diluted 336 346 336 357

Cash dividends declared per Seagate Technology plc ordinary share

$ 0.54 $ 0.43 $ 0.97 $ 0.81
SEAGATE TECHNOLOGY PLC
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)
(Unaudited)
For the Six Months Ended
January 2, December 27,
2015 2013
OPERATING ACTIVITIES
Net income $ 1,314 $ 855
Adjustments to reconcile net income to net cash provided by operating activities:

Depreciation and amortization

426 457
Share-based compensation 73 57
Deferred income taxes (4 ) (15 )
(Gain) loss on sale of property and equipment 1 (4 )
Gain on sale of investments (32 )
Loss on redemption and repurchase of debt 52
Other non-cash operating activities, net 2 8
Changes in operating assets and liabilities:
Restricted cash and investments 104
Accounts receivable, net (99 ) 51
Inventories (107 ) (94 )
Accounts payable 209 (46 )
Accrued employee compensation (24 ) (68 )
Accrued expenses, income taxes and warranty 167 41
Vendor non-trade receivables 28 199
Other assets and liabilities 7 25
Net cash provided by operating activities 2,045 1,538
INVESTING ACTIVITIES
Acquisition of property, equipment and leasehold improvements (387 ) (304 )
Proceeds from the sale of strategic investments 72
Purchases of short-term investments (5 ) (87 )
Sales of short-term investments 4 463
Maturities of short-term investments 19 61
Cash used in acquisition of business (450 )
Other investing activities, net (34 ) (28 )
Net cash (used in) provided by investing activities (853 ) 177
FINANCING ACTIVITIES
Redemption and repurchase of debt (535 )
Net proceeds from issuance of long-term debt 498 791
Repurchases of ordinary shares (201 ) (1,702 )
Dividends to shareholders (317 ) (277 )
Proceeds from issuance of ordinary shares under employee stock plans 49 61
Other financing activities, net (12 ) (5 )
Net cash used in financing activities (518 ) (1,132 )
Effect of foreign currency exchange rate changes on cash and cash equivalents (12 ) 2
Increase in cash and cash equivalents 662 585
Cash and cash equivalents at the beginning of the period 2,634 1,708
Cash and cash equivalents at the end of the period $ 3,296 $ 2,293

Use of non-GAAP financial information

To supplement the condensed consolidated financial statements presented in accordance with generally accepted accounting principles (GAAP), the Company provides non-GAAP measures of net income, diluted net income per share, gross margin, gross margin as a percentage of revenue, operating margin, operating expenses, and operating income which are adjusted from results based on GAAP to exclude certain expenses, gains and losses. These non-GAAP financial measures are provided to enhance the user’s overall understanding of the Company’s current financial performance and our prospects for the future. Specifically, the Company believes non-GAAP results provide useful information to both management and investors as these non-GAAP results exclude certain expenses, gains and losses that we believe are not indicative of our core operating results and because we believe they are generally consistent with financial models and estimates published by financial analysts who follow the Company.

These non-GAAP results are some of the primary measurements management uses to assess the Company’s performance, allocate resources and plan for future periods. Reported non-GAAP results should only be considered as supplemental to results prepared in accordance with GAAP, and not considered as a substitute for, or superior to, GAAP results. These non-GAAP measures may differ from the non-GAAP measures reported by other companies in our industry.

SEAGATE TECHNOLOGY PLC
ADJUSTMENTS TO GAAP NET INCOME AND DILUTED NET INCOME PER SHARE
(In millions, except per share amounts)
(Unaudited)
For the Three For the Six
Months Ended Months Ended
January 2, 2015 January 2, 2015
GAAP net income $ 933 $ 1,314
Non-GAAP adjustments:
Cost of revenue A 14 26
Product development B 6 10
Marketing and administrative B 7 11
Amortization of intangibles C 32 62
Restructuring and other, net D 3 10
Gain on arbitration award, net E (620 ) (620 )
Other income (expense), net F (104 ) (89 )
Provision for income taxes G 181 181
Non-GAAP net income $ 452 $ 905
Diluted net income per share:
GAAP $ 2.78 $ 3.91
Non-GAAP $ 1.35 $ 2.69
Shares used in diluted net income per share calculation $ 336 $ 336
A For the three and six months ended January 2, 2015, Cost of revenue on a GAAP basis totaled $2.7 billion and $5.4 billion, while non-GAAP Cost of revenue, which excludes the net impact of certain adjustments, was $2.7 billion and $5.4 billion, respectively. The non-GAAP adjustments include amortization of intangibles associated with acquisitions and other acquisition related expenses.
B For the three and six months ended January 2, 2015, Product development and Marketing and administrative expenses have been adjusted on a non-GAAP basis to exclude the impact of acquisition and integration costs associated with acquisitions.
C For the three and six months ended January 2, 2015, Amortization of intangibles primarily related to our acquisitions has been excluded on a non-GAAP basis.
D For the three and six months ended January 2, 2015, Restructuring and other, net, primarily related to a reduction in our work force as a result of our ongoing focus on cost efficiencies in all areas of our business.
E For the three and six months ended January 2, 2015, Gain on arbitration award, net, has been adjusted on a non-GAAP basis to exclude the final award amount of $630 million, less litigation and other related costs of $10 million, related to the arbitration award in the Company’s case against Western Digital for the misappropriation of the Company’s trade secrets.
F For the three and six months ended January 2, 2015, Other income (expense), net, has been adjusted on a non-GAAP basis mostly to exclude the partial payment of $143 million for interest accrued on the final arbitration award amount in the Company’s case against Western Digital and the net impact of losses recognized on the early redemption and repurchase of debt.
G For the three and six months ended January 2, 2015, Provision for income taxes, has been adjusted on a non-GAAP basis primarily to exclude the net tax expense associated with the final audit assessment from the Jiangsu Province State Tax Bureau of the People’s Republic of China for changes to the Company’s tax filings for the calendar years 2007 through 2013.

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