Seagate(STX) - 2024 Q2 - Quarterly Report

PART I FINANCIAL INFORMATION Item 1. Financial Statements This section presents the unaudited condensed consolidated financial statements for the three and six months ended December 29, 2023 Condensed Consolidated Balance Sheet Highlights (Unaudited) | Account | Dec 29, 2023 (In millions) | June 30, 2023 (In millions) | | :--- | :--- | :--- | | Total Assets | $7,149 | $7,556 | | Cash and cash equivalents | $787 | $786 | | Inventories | $1,053 | $1,140 | | Total Liabilities | $8,963 | $8,755 | | Long-term debt, less current portion | $5,669 | $5,388 | | Total Shareholders' Deficit | $(1,814) | $(1,199) | Condensed Consolidated Statements of Operations Highlights (Unaudited) | Metric | Three Months Ended Dec 29, 2023 (In millions) | Three Months Ended Dec 30, 2022 (In millions) | | :--- | :--- | :--- | | Revenue | $1,555 | $1,887 | | Gross Profit | $362 | $246 | | Income (loss) from operations | $124 | $(160) | | Net loss | $(19) | $(33) | | Diluted net loss per share | $(0.09) | $(0.16) | Condensed Consolidated Statements of Cash Flows Highlights (Unaudited) | Metric | Six Months Ended Dec 29, 2023 (In millions) | Six Months Ended Dec 30, 2022 (In millions) | | :--- | :--- | :--- | | Net cash provided by operating activities | $296 | $496 | | Net cash used in investing activities | $(105) | $(210) | | Net cash used in financing activities | $(191) | $(131) | Note 1. Basis of Presentation and Summary of Significant Accounting Policies The company outlines its primary data storage products and a change in the estimated useful lives of manufacturing equipment - The company's principal products are hard disk drives (HDDs), complemented by a range of data storage products including solid state drives (SSDs), storage subsystems, and a scalable edge-to-cloud mass data platform (Lyve)[26] - Effective from the first quarter of fiscal year 2024, the company extended the useful lives of certain manufacturing equipment, which increased net income by approximately $30 million for the three months and $40 million for the six months ended December 29, 2023[37] Note 2. Balance Sheet Information This note details balance sheet components, including a decrease in total inventories and the sale of trade receivables Inventories Breakdown | Category | Dec 29, 2023 (In millions) | June 30, 2023 (In millions) | | :--- | :--- | :--- | | Raw materials and components | $214 | $241 | | Work-in-process | $627 | $682 | | Finished goods | $212 | $217 | | Total inventories | $1,053 | $1,140 | - During the three months ended December 29, 2023, the company sold trade receivables without recourse for cash proceeds of $290 million[46] Note 3. Debt The company details its total debt, the issuance of new Exchangeable Senior Notes, and the subsequent repayment of Term Loans - On September 13, 2023, the company issued $1.5 billion in 3.50% Exchangeable Senior Notes due 2028[56] - Proceeds from the 2028 Notes were used to repay the entire outstanding principal amount of Term Loans A1, A2, and A3, resulting in a net loss on debt extinguishment of $29 million[57] - In connection with the 2028 Notes issuance, the company purchased capped call transactions for $95 million to reduce potential dilution, with an initial cap price of $107.848 per share[61] Note 5. Restructuring and Other, net This note outlines a net benefit from restructuring activities, primarily driven by a gain on a property sale and leaseback - The company recorded a net benefit of $31 million for the three months ended December 29, 2023, mainly from a $30 million net gain on a property sale and leaseback transaction[69] Restructuring Accrual Activity (Six Months Ended Dec 29, 2023) | Description | Amount (In millions) | | :--- | :--- | | Accrual balance at June 30, 2023 | $119 | | Restructuring charges | $3 | | Cash payments | $(110) | | Adjustments | $(2) | | Accrual balance at Dec 29, 2023 | $10 | Note 6. Derivative Financial Instruments The company discusses its use of derivatives to manage risk, including the termination of interest rate swaps for a significant gain - On September 13, 2023, the company terminated its interest rate swap agreements due to the repayment of its Term Loans, resulting in a realized net gain of $104 million[76] Notional Value of Foreign Currency Forward Contracts (as of Dec 29, 2023) | Currency | Designated as Hedges (In millions) | Not Designated as Hedges (In millions) | | :--- | :--- | :--- | | Singapore Dollar | $126 | $102 | | Thai Baht | $95 | $16 | | Chinese Renminbi | $40 | $19 | | British Pound Sterling | $38 | $7 | | Total | $299 | $144 | Note 9. Revenue This note provides a disaggregation of revenue by sales channel and geography, with OEMs and the Asia Pacific region being the largest segments Revenue by Channel (Three Months Ended) | Channel | Dec 29, 2023 (In millions) | Dec 30, 2022 (In millions) | | :--- | :--- | :--- | | OEMs | $1,140 | $1,365 | | Distributors | $218 | $297 | | Retailers | $197 | $225 | | Total | $1,555 | $1,887 | Revenue by Geography (Three Months Ended) | Geography | Dec 29, 2023 (In millions) | Dec 30, 2022 (In millions) | | :--- | :--- | :--- | | Asia Pacific | $777 | $760 | | Americas | $544 | $853 | | EMEA | $234 | $274 | | Total | $1,555 | $1,887 | Note 12. Legal, Environmental and Other Contingencies The company details its legal proceedings, including a significant settlement with the U.S. Bureau of Industry and Security (BIS) - In April 2023, Seagate entered into a settlement agreement with the U.S. Bureau of Industry and Security (BIS) regarding sales to Huawei, agreeing to pay a $300 million penalty[114] - The BIS settlement is payable in quarterly installments of $15 million over five years; as of December 29, 2023, $285 million remains payable[114][116] - A securities class action lawsuit was filed against the company and certain officers in July 2023, which the company believes is without merit and intends to defend vigorously[108] Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses financial results, noting a gradual market recovery amidst macroeconomic headwinds while focusing on cost discipline Results of Operations Quarterly revenue increased sequentially to $1.6 billion, with gross margin improving significantly due to non-recurring charges in the prior quarter Quarterly Revenue and Margin Comparison | Metric | Dec 2023 Quarter | Sep 2023 Quarter | Dec 2022 Quarter | | :--- | :--- | :--- | :--- | | Revenue (in millions) | $1,555 | $1,454 | $1,887 | | Gross Margin | 23% | 10% | 13% | | Operating Margin | 8% | (9)% | (9)% | - Revenue increased sequentially due to a rise in mass capacity and legacy storage exabytes shipped, reflecting a gradual recovery in the U.S. cloud market and positive consumer seasonality[130] - The sequential increase in gross margin was primarily driven by the non-recurrence of $118 million in order cancellation fees from the September quarter, reduced factory underutilization charges, and lower depreciation expense[134] Liquidity and Capital Resources The company maintained stable cash reserves and believes its liquidity sources are sufficient for the next 12 months - Primary liquidity sources as of December 29, 2023, consist of $787 million in cash, expected cash from operations, and $1.5 billion available under a revolving credit facility[156] - During the six months ended December 29, 2023, the company used $1.3 billion to redeem term loans and paid $291 million in dividends[154][162] - As of December 29, 2023, the company had unconditional long-term purchase obligations of approximately $2.6 billion, primarily for inventory components[118] Quantitative and Qualitative Disclosures About Market Risk The company is exposed to market risks from interest rates and foreign currency exchange rates, which it manages through derivatives - The company's primary market risks are related to interest rates on its cash portfolio and foreign currency exchange rates on its international operations[173] - On September 13, 2023, the company terminated its interest rate swap agreements after repaying its variable-rate Term Loans, eliminating that source of interest rate variability[176] Foreign Currency Forward Exchange Contracts (as of Dec 29, 2023) | Currency | Notional Amount (In millions) | Estimated Fair Value (In millions) | | :--- | :--- | :--- | | Singapore Dollar | $228 | $2 | | Thai Baht | $111 | $2 | | Chinese Renminbi | $59 | $(1) | | British Pound Sterling | $45 | $2 | | Total | $443 | $5 | Controls and Procedures Management concluded that the company's disclosure controls and procedures were effective, with no material changes in internal controls - Based on an evaluation, the CEO and CFO concluded that the company's disclosure controls and procedures were effective as of December 29, 2023[183] - No changes in internal control over financial reporting occurred during the quarter that have materially affected, or were reasonably likely to materially affect, internal controls[184] PART II OTHER INFORMATION Legal Proceedings This section refers to Note 12 of the financial statements for a detailed discussion of the company's legal proceedings - For a discussion of legal proceedings, see "Part I, Item 1. Financial Statements—Note 12. Legal, Environmental and Other Contingencies"[186] Risk Factors This section outlines principal risks including dependence on new products, key customers, supply chain vulnerabilities, and macroeconomic headwinds - The company's ability to increase revenue depends on successfully introducing new products in a timely manner to keep pace with rapid technological change[197] - The business has been adversely affected by reduced or canceled purchases from key customers, including large hyperscale data center companies and CSPs[207] - The company relies on single-source or limited suppliers for critical components like read/write heads, substrates, and NAND flash memory, creating supply chain risks[229][230] - Changes in the macroeconomic environment, including inflation and reduced spending, have negatively impacted and may continue to impact results of operations[239] Unregistered Sales of Equity Securities and Use of Proceeds The company did not repurchase any shares during the quarter, with $1.9 billion remaining under its repurchase authorization - As of December 29, 2023, $1.9 billion remained available for repurchase under the company's existing share repurchase authorization[284] - No shares were repurchased under the publicly announced plan during the quarter ended December 29, 2023[285]