Seagate Technology Reports Fiscal Third Quarter 2019 Financial Results

Seagate Technology plc (NASDAQ: STX) (the “Company” or “Seagate”) today reported financial results for its fiscal third quarter ending March 29, 2019.

“Seagate executed very well in the third quarter while navigating near-term demand head-winds. Our focus on operational efficiency and expense discipline drove better-than-expected EPS and free cash flow generation,” said Dave Mosley, Seagate’s chief executive officer.

“We began shipping the industry’s first 16-terabyte high capacity drives in the fiscal third quarter and expect to ramp high volume production in the second half calendar 2019. The Data Age digital transformation has given rise to many new applications including machine learning, autonomous vehicles, and Smart Cities, which all rely on faster access to an increasing amount of data. These trends are creating significant opportunities for our mass data storage solutions and we are successfully executing our technology roadmap to address growing demand.”

Quarterly Financial Results

	GAAP				Non-GAAP
	FQ3 2019		FQ3 2018		FQ3 2019		FQ3 2018
Revenue ($M)	$2,313		$2,803		$2,313		$2,803
Gross Margin	26.0%		30.2%		26.6%		30.8%
Net Income ($M)	$195		$381		$235		$424
Diluted Earnings Per Share	$0.69		$1.31		$0.83		$1.46

In the third quarter, the Company generated $438 million in cash flow from operations and $291 million in free cash flow. Year to date, the Company has generated $1.3 billion in cash flow from operations and $862 million in free cash flow. Seagate’s balance sheet is healthy and during the third quarter, the Company paid cash dividends of $178 million and repurchased 7.2 million ordinary shares for $327 million. Cash and cash equivalents totaled $1.4 billion at the end of the quarter. There were 277 million ordinary shares issued and outstanding as of the end of the quarter.

For a detailed reconciliation of GAAP to non-GAAP results, see accompanying financial tables.

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

Quarterly Cash Dividend

The Board of Directors of the Company (the “Board”) declared a quarterly cash dividend of $0.63 per share, which will be payable on July 3, 2019 to shareholders of record as of the close of business on June 19, 2019. 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.

Business Outlook

Our outlook for the fourth fiscal quarter is based on our current assumptions and expectations; actual results may differ materially, as a result of, among other things, the important factors discussed in the Cautionary Note Regarding Forward-Looking Statements section of this release.

The Company is providing the following guidance for its fiscal fourth quarter 2019:

• Revenue of approximately $2.32 billion, plus or minus 5%
• Non-GAAP diluted earnings per share of approximately $0.83, plus or minus 5%

Guidance regarding non-GAAP diluted earnings per share excludes known charges related to amortization of acquired intangible assets of $0.06 per share.

We have not reconciled our non-GAAP diluted earnings per share to the most directly comparable GAAP measure because material items that may impact these measures are out of our control and/or cannot be reasonably predicted including, but not limited to, accelerated depreciation, impairment, and other charges related to cost saving efforts, restructuring charges, strategic investment losses or impairment recognized, income tax adjustments on these measures, and other charges that may arise. The amounts of these measures are not currently available, but may be material to future results. A reconciliation of the non-GAAP diluted earnings per share to the corresponding GAAP measures is not available without unreasonable effort. A reconciliation of our historical non-GAAP financial measures to their nearest GAAP equivalent is contained in this release.

Investor Communications

Seagate management will hold a public webcast today at 6:00 a.m. Pacific Time that can be accessed on its Investor Relations website at www.seagate.com/investors.

An archived audio webcast of this event will be available on Seagate’s Investors Relations website at www.seagate.com/investors shortly following the event conclusion.

About Seagate

To learn more about the Company’s products and services, visit www.seagate.com and follow us on Twitter, Facebook, LinkedIn, Spiceworks, YouTube and subscribe to our blog. The contents of our website and social media channels are not a part of this release.

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 the Company’s plans, strategies and prospects, financial outlook for future periods, including the fourth quarter of fiscal 2019, expectations regarding the Company’s products, our ability to ramp production, market demand, shifts in technology, the Company’s ability to meet market and industry expectations and the effects of these future trends and expectations on the Company’s business as well as dividend issuance plans for the fiscal quarter ending June 28, 2019 and beyond. These statements identify prospective information and may include words such as “expects,” “intends,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “projects,” “should,” “may,” “will,” or the negative of these words, variations of these words and comparable terminology. These forward-looking statements are based on information available to the Company as of the date of this report 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: items that may be identified during its financial statement closing process that cause adjustments to the estimates included in this report; the uncertainty in global economic and political conditions; the impact of the variable demand and adverse pricing environment for storage products; the Company’s ability to successfully qualify, manufacture and sell its storage products in increasing volumes on a cost-effective basis and with acceptable quality; the impact of competitive product announcements; the Company’s ability to achieve projected cost savings in connection with restructuring plans and consolidation of manufacturing activities; possible excess industry supply with respect to particular storage products and competing alternative storage technology solutions; the impact of trade barriers, such as import/export duties and restrictions, tariffs and quotas, imposed by the U.S. or other countries in which the Company conducts business; disruptions to its supply chain or production capabilities; unexpected advances in competing technologies or changes in market trends; the development and introduction of products based on new technologies and expansion into new data storage markets; the Company’s ability to effectively manage its debt obligations and comply with certain covenants in its credit facilities with respect to financial ratios and financial condition tests; currency fluctuations that may impact the Company’s margins, international sales and results of operations; cyber-attacks or other data breaches that disrupt the Company’s operations or result in the dissemination of proprietary or confidential information and cause reputational harm; cybersecurity threats and vulnerabilities associated with the Company’s infrastructure updates to its information technology systems; 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 (“SEC”) on August 3, 2018, the “Risk Factors” section of which is incorporated into this press release by reference, and other documents filed with or furnished to the SEC. 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, except as required by applicable law.

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 and social media channels are not part of this press release.

SEAGATE TECHNOLOGY PLC CONDENSED CONSOLIDATED BALANCE SHEETS (In millions) (Unaudited)
		March 29, 2019				June 29, 2018 (a)
ASSETS
Current assets:
Cash and cash equivalents		$	1,388			$	1,853
Accounts receivable, net		897				1,184
Inventories		1,001				1,053
Other current assets		201				220
Total current assets		3,487				4,310
Property, equipment and leasehold improvements, net		1,822				1,792
Investment in debt security		1,318				1,275
Goodwill		1,237				1,237
Other intangible assets, net		129				188
Deferred income taxes		416				417
Other assets, net		187				191
Total Assets		$	8,596			$	9,410
LIABILITIES AND EQUITY
Current liabilities:
Accounts payable		$	1,310			$	1,728
Accrued employee compensation		145				253
Accrued warranty		100				112
Current portion of long-term debt		—				499
Accrued expenses		591				598
Total current liabilities		2,146				3,190
Long-term accrued warranty		112				125
Long-term accrued income taxes		5				10
Other non-current liabilities		122				100
Long-term debt, less current portion		4,522				4,320
Total Liabilities		6,907				7,745
Total Equity		1,689				1,665
Total Liabilities and Equity		$	8,596			$	9,410
(a) The information in this column was derived from the Company’s audited Consolidated Balance Sheet as of June 29, 2018.

SEAGATE TECHNOLOGY PLC CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (In millions, except per share data) (Unaudited)
		For the Three Months Ended								For the Nine Months Ended
		March 29, 2019				March 30, 2018				March 29, 2019				March 30, 2018
Revenue		$	2,313			$	2,803			$	8,019			$	8,349
Cost of revenue		1,712				1,956				5,711				5,889
Product development		238				254				750				767
Marketing and administrative		110				135				345				422
Amortization of intangibles		6				6				17				47
Restructuring and other, net		11				11				41				95
Total operating expenses		2,077				2,362				6,864				7,220
Income from operations		236				441				1,155				1,129
Interest income		21				10				67				23
Interest expense		(55		)		(60		)		(169		)		(182		)
Other, net		13				2				28				(18		)
Other expense, net		(21		)		(48		)		(74		)		(177		)
Income before income taxes		215				393				1,081				952
Provision for income taxes		20				12				52				231
Net income		$	195			$	381			$	1,029			$	721
Net income per share:
Basic		$	0.69			$	1.33			$	3.62			$	2.50
Diluted		0.69				1.31				3.57				2.48
Number of shares used in per share calculations:
Basic		281				286				284				288
Diluted		284				291				288				291
Cash dividends declared per ordinary share		$	0.63			$	0.63			$	1.89			$	1.89

SEAGATE TECHNOLOGY PLC CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (In millions) (Unaudited)
		For the Nine Months Ended
		March 29, 2019				March 30, 2018
OPERATING ACTIVITIES
Net income		$	1,029			$	721
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		407				461
Share-based compensation		73				85
Deferred income taxes		15				209
Gain on sale of property and equipment		(1		)		—
Other non-cash operating activities, net		(68		)		9
Changes in operating assets and liabilities:
Accounts receivable, net		296				124
Inventories		49				(20		)
Accounts payable		(366		)		74
Accrued employee compensation		(108		)		(49		)
Accrued expenses, income taxes and warranty		(32		)		(24		)
Other assets and liabilities		19				55
Net cash provided by operating activities		1,313				1,645
INVESTING ACTIVITIES
Acquisition of property, equipment and leasehold improvements		(451		)		(270		)
Proceeds from settlement of foreign currency forward exchange contracts		66				—
Proceeds from sale of strategic investments		10				—
Proceeds from sale of properties previously classified as held for sale		27				43
Proceeds from sale of property and equipment		3				2
Purchases of strategic investments		(14		)		(8		)
Other investing activities, net		—				(6		)
Net cash used in investing activities		(359		)		(239		)
FINANCING ACTIVITIES
Redemption and repurchase of debt		(499		)		(209		)
Dividends to shareholders		(539		)		(545		)
Repurchases of ordinary shares		(613		)		(361		)
Taxes paid related to net share settlement of equity awards		(30		)		(22		)
Net proceeds from issuance of long-term debt		196				—
Proceeds from issuance of ordinary shares under employee stock plans		68				110
Net cash used in financing activities		(1,417		)		(1,027		)
Effect of foreign currency exchange rate changes on cash, cash equivalents and restricted cash		(3		)		8
(Decrease) increase in cash, cash equivalents and restricted cash		(466		)		387
Cash, cash equivalents and restricted cash at the beginning of the period		1,857				2,543
Cash, cash equivalents and restricted cash at the end of the period		$	1,391			$	2,930

Use of non-GAAP financial information

The Company uses non-GAAP measures of adjusted revenue, gross margin, operating expenses, net income, diluted earnings per share and free cash flow which are adjusted from results based on GAAP to exclude certain gains, losses and expenditures. These non-GAAP financial measures may be provided to enhance the user’s overall understanding of the Company’s current financial performance and its 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 gains, losses and expenditures that it believes are not indicative of its core operating results and because it is similar to the approach used in connection with the financial models and estimates published by financial analysts who follow the Company.

These non-GAAP results are some of the 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 its industry.

SEAGATE TECHNOLOGY PLC RECONCILIATIONS OF GAAP TO NON-GAAP MEASURES (In millions, except per share amounts and gross margin) (Unaudited)
		For the Three Months Ended								For the Nine Months Ended
		March 29, 2019				March 30, 2018				March 29, 2019				March 30, 2018
GAAP Revenue		$	2,313			$	2,803			$	8,019			$	8,349
Adjustment to discontinued products			—				—				1				(6	)
Non-GAAP Revenue		$	2,313			$	2,803			$	8,020			$	8,343
GAAP Gross Margin		$	601			$	847			$	2,308			$	2,460
Adjustment to discontinued products			—				—				1				(6	)
Accelerated depreciation, impairment and other charges related to cost saving efforts			—				1				—				2
Amortization of acquired intangible assets			14				15				40				43
Other charges			—				—				(1	)			11
Non-GAAP Gross Margin		$	615			$	863			$	2,348			$	2,510
GAAP Gross Margin			26.0	%			30.2	%			28.8	%			29.5	%
Non-GAAP Gross Margin			26.6	%			30.8	%			29.3	%			30.1	%
GAAP Operating Expenses		$	365			$	406			$	1,153			$	1,331
Accelerated depreciation, impairment and other charges related to cost saving efforts			—				(4	)			(2	)			(6	)
Amortization of acquired intangible assets			(5	)			(4	)			(14	)			(43	)
Restructuring and other, net			(11	)			(11	)			(41	)			(95	)
Other charges			—				(2	)			—				(4	)
Non-GAAP Operating Expenses		$	349			$	385			$	1,096			$	1,183
GAAP Net Income		$	195			$	381			$	1,029			$	721
Adjustment to discontinued products			—				—				1				(6	)
Accelerated depreciation, impairment and other charges related to cost saving efforts			—				5				2				8
Amortization of acquired intangible assets			19				19				54				86
Restructuring and other, net			11				11				41				95
Losses recognized on the early redemption and repurchase of debt			—				1				—				4
Strategic investment losses or impairment recognized			—				3				2				3
Other charges			—				3				(1	)			15
Income tax adjustments			10				1				8				208
Non-GAAP Net Income		$	235			$	424			$	1,136			$	1,134
Shares used in diluted net income per share calculation			284				291				288				291
GAAP Diluted Net Income Per Share		$	0.69			$	1.31			$	3.57			$	2.48
Non-GAAP Diluted Net Income Per Share		$	0.83			$	1.46			$	3.94			$	3.90
GAAP Net Cash Provided by Operating Activities		$	438			$	558			$	1,313			$	1,645
Acquisition of property, equipment and leasehold improvements			147				69				451				270
Free Cash Flow		$	291			$	489			$	862			$	1,375

The Company’s Non-GAAP measures are adjusted for the following items:

Adjustment to discontinued products

These adjustments relate to sales of certain discontinued products or changes in sales provision for discontinued products. These adjustments are inconsistent in amount and frequency and are excluded in the non-GAAP measures as these adjustments are not indicative of the underlying ongoing operating performance.

Accelerated depreciation, impairment and other charges related to cost saving efforts

These expenses are excluded in the non-GAAP measure due to its inconsistency in amount and frequency and are excluded to facilitate a more meaningful evaluation of the Company’s current operating performance and comparison to its past periods operating performance.

Amortization of acquired intangible assets

The Company records expense from amortization of intangible assets that were acquired in connection with its business combinations over their estimated useful lives. Such charges are inconsistent in size and are significantly impacted by the timing and magnitude of the Company’s acquisitions. Consequently, these expenses are excluded in the non-GAAP measures to facilitate a more meaningful evaluation of its current operating performance and comparison to its past periods operating performance.

Other charges

The other charges primarily include write-off of certain discontinued inventory and expense related to disposed business. These charges are inconsistent in amount and frequency and are excluded in the non-GAAP measures to facilitate a more meaningful evaluation of its current operating performance and comparison to its past periods operating performance.

Restructuring and other, net

Restructuring charges and other, net are costs associated with restructuring plans that are primarily related to costs associated with reduction in the Company’s workforce, exiting certain facilities and other related costs. These also exclude charges or gains from sale of properties classified as held-for-sale. These costs or benefits do not reflect the Company’s ongoing operating performance and consequently are excluded from the non-GAAP measures to facilitate a more meaningful evaluation of its current operating performance and comparison to its past periods operating performance.

Losses Recognized on the early redemption and repurchase of debt

From time to time, the Company incurs losses from the early redemption and repurchase of certain long-term debt instruments. These losses represent the difference between the reacquisition costs and the par value of the debt extinguished and include the write off of any related unamortized debt issuance costs. The amount of these charges may be inconsistent in size and varies depending on the timing of the repurchase of debt.

Strategic investment losses, (gains) or impairment recognized

From time to time, the Company incurs losses or gains from strategic investment accounted under equity method of accounting or records impairments charges which are not considered as part of its ongoing operating performance. The resulting expense or gain is inconsistent in amount and frequency and consequently are excluded from the non-GAAP measures to facilitate a more meaningful evaluation of its current operating performance and comparison to its past periods operating performance.

Income tax adjustments

Provision for income taxes represents the tax effects of non-GAAP adjustments determined using a hybrid with and without method and effective tax rate for the applicable adjustment and jurisdiction. It also includes a provisional tax benefit for the re-measurement of the Company's U.S. deferred tax assets at the lower 21% tax rate resulting from the U.S. Tax Cuts and Jobs Act enacted on December 22, 2017.

Free cash flow

Free cash flow is a non-GAAP measure defined as net cash provided by operating activities less acquisition of property, equipment and leasehold improvements. This non-GAAP financial measure is used by management to assess the Company's sources of liquidity, capital structure and operating performance.

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