Seagate Technology Reports Fiscal Third Quarter 2007 Results

Apr 17, 2007

SCOTTS VALLEY, Calif. -  Seagate Technology (NYSE: STX) today reported revenue of $2.8 billion, GAAP net income of $212 million, and diluted net income per share of $0.37 for the quarter ended March 30, 2007. Net income and diluted net income per share includes approximately $62 million of charges associated with recent acquisitions. Excluding these charges, non-GAAP net income and diluted net income per share were $274 million and $0.47.

For the nine months ended March 30, 2007 Seagate reported revenue of $8.6 billion, GAAP net income of $371 million and diluted net income per share of $0.62. Net income and diluted net income per share include charges of approximately $219 million associated with recent acquisitions and $19 million for the early retirement of the 8% notes. Excluding these charges, non-GAAP net income and diluted net income per share were $609 million and $1.02.

“We are disappointed in our results for the March quarter,” said Bill Watkins, Seagate chief executive officer. “We clearly miscalculated the market, and in this unusually challenging environment failed to deliver the projected results. However, it is worth noting that the fundamentals of our business and that of the industry remain solid.  Seagate’s revenue remained strong, our balance sheet is healthy, and we continued to generate cash for ongoing investments in the capital and R&D required for growth. We are operating at the kind of scale that will allow us to continue to innovate while driving down costs, and thus exercise a great deal of market flexibility. Moving forward, we will align spending with the current outlook, and continue to drive the cost improvements necessary to thrive in this environment.”
Adjustments made to GAAP net income and diluted net income per share can be found with the financial statements included with this press release. Additional information relating to the financial results for the third fiscal quarter of 2007 can be found online at seagate.com.

Business Outlook
For fiscal year 2007, Seagate now expects $11.3 - $11.4 billion in revenue and $0.92 - $0.96 GAAP diluted net income per share. Including Maxtor’s operating result but excluding approximately $247 million of expected acquisition related costs, and $19 million of fees associated with the early redemption of the 8% notes, non-GAAP diluted net income per share is expected to fall within the range of $1.37 - $1.41.

For the June quarter, Seagate expects to report revenue of $2.65 - $2.75 billion, and GAAP diluted net income per share of $0.29 - $0.33.  Excluding approximately $28 million of expected acquisition related costs, Non-GAAP diluted net income per share for the June quarter is expected to fall within the range of $0.34 - $0.38.

This guidance does not include the impact of any future acquisitions, stock repurchases or restructuring activities the company may undertake.

Dividend and Stock Repurchase
The company has declared a quarterly dividend of $0.10 per share to be paid on or before May 18, 2007 to all common shareholders of record as of May 4, 2007.

During the quarter ended March 30, 2007, the company took delivery of approximately 22.6 million of its common shares related to its share repurchase plan. The average price of the shares delivered to the company in the March quarter was $26.26. The company has authorization to purchase approximately $1.175 billion of additional shares under the current stock repurchase program.

Conference Call
Seagate will hold a conference call to review the fiscal second quarter results at 2:30 p.m. Pacific Time today. The conference call can be accessed online at seagate.com or by phone as follows:

USA: (877) 223-6202
International: (706) 679-3742
Conference ID: 3512136

Replay
A replay will be available beginning April 17 at 6:30 p.m. Pacific Time through April 24 at 8:59 p.m. Pacific Time. The replay can be accessed from seagate.com or by phone as follows:

USA: (800) 642-1687
International: (706) 645-9291
Conference ID: 3512136

Podcast
A podcast featuring Bill Watkins discussing Seagate’s performance during the quarter and the outlook going forward can be heard and downloaded from http://www.podtech.net/seagate  beginning at 2:30 p.m. Pacific Time.

About Seagate
Seagate is the worldwide leader in the design, manufacture and marketing of hard disc drives, providing products for a wide-range of applications, including Enterprise, Desktop, Mobile Computing, Consumer Electronics and Branded Solutions. Seagate's business model leverages technology leadership and world-class manufacturing to deliver industry-leading innovation and quality to its global customers, and to be the low cost producer in all markets in which it participates. The company is committed to providing award-winning products, customer support and reliability to meet the world's growing demand for information storage. Seagate can be found around the globe and 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, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These forward-looking statements include, but are not limited to, statements related to the company’s future financial performance, including expected revenue, net income and diluted earnings per share (presented on a GAAP basis as well as on a non-GAAP adjusted basis), price and product competition, customer demand for our products, and general market conditions. These forward-looking statements are based on information available to Seagate as of the date of this press release. Current expectations, forecasts and assumptions involve a number of risks and uncertainties that could cause actual results to differ materially from those anticipated by these forward-looking statements. Such risks and uncertainties include a variety of factors, some of which are beyond the company's control. In particular, such risks and uncertainties include the impact of the variable demand and the aggressive pricing environment for disc drives; dependence Seagate’s ability to successfully qualify, manufacture and sell its disc drive products in increasing volumes on a cost-effective basis and with acceptable quality, particularly the new disc drive products with lower cost structures and those that address the 1.8-inch form factor; the impact of competitive product announcements and possible excess industry supply with respect to particular disc drive products, particularly now that there are no material limitations on disc drive component supply for our competitors; the impact of the acquisition of Maxtor on the company’s financial results, including without limitation due to charges associated with retention, integration, purchase accounting and other related transaction costs; and the possibility that the combination of Seagate and Maxtor will not provide the anticipated benefits to the combined company on the projected timeline, if at all. Information concerning additional factors that could cause results to differ materially from those projected in the forward-looking statements is contained in the company's Annual Report on Form 10-K as filed with the U.S. Securities and Exchange Commission on September 11, 2006 and in the company’s Quarterly Report on Form 10-Q as filed with the U.S. Securities and Exchange Commission on February 2, 2007. These forward-looking statements should not be relied upon as representing the company's views as of any subsequent date and Seagate undertakes no obligation to update forward-looking statements to reflect events or circumstances after the date they were made.
#  #  #

 

Seagate Technology
Condensed Consolidated Balance Sheets
(In millions)
(Unaudited)

 
March
30,
2007
   
June
30,
2006(a)
Assets        
Cash and cash equivalents
$
909
 
$
910
  Short-term investments
301
 
823
 
  Accounts receivable, net
1,367
 
1,445
 
  Inventories
832
 
891
 
  Other current assets
400
 
264
 
   
 
  Total Current Assets
3,809
 
4,333
 
               
Property, equipment and leasehold improvements, net
2,279
 
2,106
 
  Goodwill
2,452
 
2,475
 
  Other intangible assets
219
 
307
 
  Other assets, net
517
 
323
 
   
 
  Total Assets
$
9,276
   
$
9,544
 
Liabilities and Shareholders' Equity        
  Accounts payable
$
1,397
   
$
1,692
 
  Accrued employee compensation
156
 
385
 
  Accrued restructuring
25
 
210
 
  Accrued expenses, other
775
 
648
 
  Accrued income taxes
77
 
72
 
  Current portion of long-term debt
330
 
330
 
   
 
  Total Current Liabilities
2,760
 
3,337
 
         
  Accrued restructuring
21
 
23
 
  Other non-current liabilities
342
 
332
 
  Long-term debt, less current portion
1,733
 
640
 
   
 
  Total Liabilities
4,856
 
4,332
 
       
  Shareholders' Equity
4,420
 
5,212
 
 
 
  Total Liabilities and Shareholders' Equity
$
9,276
   
$
9,544
 
 
(a)
The information in this column was derived from the Company’s audited consolidated balance sheet as of June 30, 2006.




 

Seagate Technology
Condensed Consolidated Statements of Operations
(In millions, except per share data)
(Unaudited)
       
Three Months Ended
 
Nine Months Ended
 
March 30,
2007
March 31,
2006
March 30,
2007
March 31,
2006
Revenue
$
2,828
$
2,289
$
8,616
$
6,677
               
Cost of revenue
2,225
1,733
7,025
4,995
Product development
214
195
683
573
Marketing and administrative
126
108
446
303
Amortization of intangibles 13 36
Restructuring, net
3
4
  Total operating expenses
2,581
 
2,036
 
8,190
 
5,875
 
   
       
Income from operations
247
253
426
802
       
Interest income
15
19
59
48
Interest expense (33)   (7)   (107)   (31)  
Other, net
1
  12   11  
22
 
  Other income (expense), net (17)   24   (37)   39  
   
       
Income before income taxes
230
277
389
841
Provision for income taxes
18
3
18
8
 
Net income
$
212
$
274
$
371
$
833
 
Net income per share:  
  Basic
$
0.39
$
0.56
$
0.66
$
1.72
  Diluted
0.37
   
0.53
 
0.62
 
1.63
 
Number of shares used in per share calculations:  
  Basic
546
   
489
 
564
 
483
 
  Diluted
577
521
595
511
           



 

Seagate Technology
Condensed Consolidated Statements of Cash Flows
(In millions)
(Unaudited)
 
Nine Months Ended

March
30,
2007
March
31,
2006
Operating Activities        
Net income
$
371
   
$
833
 
Adjustments to reconcile net income to net cash from operating activities:            
Depreciation and amortization
650
 
436
 
  Stock-based compensation 101   57  
  Allowance for doubtful accounts receivable 42    
  Redemption charges on 8% Senior Notes due 2009 19    
  In-process research and development 4    
  Tax benefit from stock options   (14)  
Other non-cash operating activities, net
16
 
(13)
 
Changes in operating assets and liabilities:    
    Current assets and liabilities  
(703)
     
49
 
  Other assets and liabilities  
70
     
(53)
 
   
 
  Net cash provided by operating activities
570
 
1,295
 
   
 
 
Investing Activities        
Acquisition of property, equipment and leasehold improvements  
(688)
     
(606)
 
Proceeds from sale of fixed assets 29    
Purchases of short-term investments
(322)
 
(2,627)
 
Maturities and sales of short-term investments  
851
     
2,724
 
Acquisitions, net of cash acquired   (178)       (28)  
Other investing activities, net
(44)
 
(134)
 
   
 
Net cash used in investing activities
(352)
 
(671)
 
   
 
               
Financing Activities        
Net proceeds from issuance of long-term debt   1,477        
Repayment of long-term debt   (405)      
(340)
 
Redemption premium on 8% Senior Notes due 2009   (16)        
Issuance of common shares for employee stock plans
207
   
106
 
Dividends to shareholders
(158)
 
(115)
 
Tax benefit from stock options         14  
Repurchases of common stock   (1,324)        
   
 
Net cash used in financing activities
(219)
 
(335)
 
   
 
               
Increase (decrease) in cash and cash equivalents
(1)
 
289
 
Cash and cash equivalents at the beginning of the period
910
 
746
 
 
 
Cash and cash equivalents at the end of the period
$
909
 
$
1,035
 





Use of non-GAAP financial information

Our results of operations have undergone significant change in the past year, most significantly in connection with our acquisition of Maxtor.  To help the readers of our condensed consolidated financial statements prepared on a GAAP basis better understand our past financial performance and our expectations of our future results, we supplementally disclose, after making certain non-GAAP adjustments, non-GAAP net income and non-GAAP diluted net income per share.  We also provide forecasts of these non-GAAP financial measures.  A reconciliation of the adjustments to GAAP net income and diluted net income per share for the quarter and year-to-date periods are presented in the tables below.  In addition, an explanation of the ways in which our board of directors and management use these non-GAAP financial measures to evaluate the business, the substance behind our management’s decision to use these non-GAAP financial measures, the material limitations associated with the use of these non-GAAP financial measures, the manner in which Seagate management compensates for those limitations, and the substantive reasons why we believe that these non-GAAP financial measures provide useful information to investors is included under the caption “Use of Non-GAAP Financial Measures” in the Form 8-K furnished today with the U.S. Securities and Exchange Commission.  This additional non-GAAP financial information is not meant to be considered in isolation or as a substitute for net income or diluted net income per share prepared in accordance with GAAP.  You should not compare our non-GAAP net income or non-GAAP diluted net income per share results with those of other companies, as the adjustments made to our GAAP results are unique to Seagate.




                             
Seagate Technology
Adjustments to GAAP Net Income and Diluted Net Income Per Share
(In millions, except per share amounts)
(Unaudited)
                             
              Three Months
Ended March 30,
2007
line
  Nine Months
Ended March 30,
2007
line
 
                         
  GAAP net income       $ 212     $ 371    
  Non-GAAP adjustments:                      
    Redemption charges on  8% Senior Notes due 2009   A           19    
    Maxtor and EVault acquisition related adjustments:                      
      - Amortization of purchased intangible assets   B     53       127    
      - Write-off of in-process research and development   C     4       4    
      - Stock-based compensation   D     3       24    
      - Integration and retention costs   E     1       53    
      - Customer compensatory claims   F           18    
      - Fair market value lease - interest expense amortization   G     2       5    
    Adjustments for taxes   H     (1)       (12)    
                   
  Non-GAAP net income         274       609    
                         
  Diluted net income per share:                      
    GAAP       $ 0.37     $ 0.62    
                         
    Non-GAAP       $ 0.47     $ 1.02    
                         
  Shares used in diluted net income per share calculation:         577       595    
                         
                             
A   To exclude charges of $19 million related to the redemption of Seagate’s $400 million 8% Senior Notes due 2009 (allocated to Interest expense)
                             
B   For the three and nine months ended March 30, 2007, amortization of purchased intangible assets acquired in the Maxtor and EVault acquisitions was allocated as follows:
                             
              Three Months
Ended March 30,
2007
line
  Nine Months
Ended March 30,
2007
line
 
                         
  Cost of revenue       $ 40     $ 92    
  Amortization of intangibles         13       35    
                         
    Total amortization of purchased intangible assets       $ 53     $ 127    
                     
                             
C   To exclude the write-off of in-process research and development related to the EVault acquisition (allocated to Product development)
                             
D   For the three and nine months ended March 30, 2007, stock-based compensation expense related to the Maxtor acquisition was allocated as follows:
                             
              Three Months
Ended March 30,
2007
line
  Nine Months
Ended March 30,
2007
line
 
                         
  Cost of revenue       $     $ 3    
  Product development         3       15    
  Marketing and administrative               6    
                         
    Total stock-based compensation expense       $ 3     $ 24    
                         
                             
E   For the three and nine months ended March 30, 2007, integration and retention costs related to the Maxtor acquisition were allocated as follows:
                             
              Three Months
Ended March 30,
2007
line
  Nine Months
Ended March 30,
2007
line
 
                         
  Cost of revenue       $     $ 18    
  Product development               20    
  Marketing and administrative         1       15    
                         
    Total integration and retention costs       $ 1     $ 53    
                         
                             
F   To exclude the settlement of $18 million in customer compensatory claims relating to legacy Maxtor products (allocated to Cost of revenue)
                             
G   To exclude interest expense related to purchase accounting treatment for fair market value lease amortization
                             
H   To exclude the tax effects, where applicable, of adjustments to GAAP net income
                             



Use of Non-GAAP Financial Measures
       

Our results of operations have undergone significant change in the past year, most significantly in connection with our acquisition of Maxtor.  To help the readers of our condensed consolidated financial statements prepared on a GAAP basis better understand our past financial performance and our expectations of our future results, in Exhibit 99.1 hereto, we supplementally disclosed, after making certain non-GAAP adjustments, non-GAAP net income and non-GAAP diluted net income per share on a historical basis, as well as forecasts of these non-GAAP financial measures for future periods.  These non-GAAP financial measures are not prepared or presented in accordance with, or an alternative for, GAAP measures, and are not based on any comprehensive set of accounting rules or principles.  The GAAP measure most directly comparable to (i) non-GAAP net income is net income and (ii) non-GAAP diluted net income per share is diluted net income per share.  Reconciliations of each of these non-GAAP financial measures to GAAP information are included in the tables above.  This additional non-GAAP financial information is not meant to be considered in isolation or as a substitute for net income or diluted net income per share prepared in accordance with GAAP.  You should not compare our non-GAAP net income or non-GAAP net income per share results with those of other companies, as the adjustments made to our GAAP results are unique to Seagate.

These non-GAAP financial measures are among the primary factors management uses in internal planning, budgeting, calculating bonus payments and forecasting future periods.  An explanation of the ways in which our board of directors and management use these non-GAAP financial measures to evaluate the business, the substance behind our management’s decision to use these non-GAAP financial measures, the material limitations associated with the use of these non-GAAP financial measures, the manner in which Seagate management compensates for those limitations, and the substantive reasons why we believe that these non-GAAP financial measures provide useful information to investors are set forth below.

Use and Economic Substance of Non-GAAP Financial Measures Used by Seagate

Non-GAAP net income and non-GAAP diluted net income per share consist of net income or diluted net income per share, excluding charges related to the redemption of $400 million of our 8% Senior Notes previously due 2009, as well as charges relating to the acquisitions of Maxtor and EVault, which include: amortization of purchased intangible assets; stock-based compensation expense related to the acquisition of Maxtor; write-off of in-process research and development; integration and retention costs; settlement of customer compensatory claims relating to legacy Maxtor products; the interest expense related to purchase accounting treatment for fair market value lease amortization related to the Maxtor acquisition, and the tax impact, where applicable, associated with the excluded adjustments.  Our management uses these non-GAAP financial measures for purposes of evaluating our historical and prospective financial performance, as well as our performance relative to our competitors.  We believe that excluding those items mentioned above in these non-GAAP financial measures allows our board of directors, management, investors, analysts and other interested parties to better understand Seagate’s consolidated financial performance in relationship to the operating results, as management does not believe that the excluded items are reflective of our ongoing core operating results and business outlook and that excluding these items allows us to better understand and analyze trends in our business.  These reasons provide the basis for management’s belief that the measures are useful.  More specifically, our management excludes each of those items mentioned above for the following reasons:
       
Redemption of 8% Notes.  Charges related to the redemption of $400 million aggregate principal amount of Seagate’s 8% Senior Notes previously due 2009 (“Notes”) consists of a redemption premium of $16 million and approximately $3 million of unamortized issuance costs which were recorded as interest expense in Seagate’s Condensed Consolidated Statement of Operations for the nine months ended March 30, 2007.  We exclude these charges for purposes of calculating non-GAAP net income and non-GAAP diluted net income per share because we believe that these one-time payments to completely redeem a series of debt securities that are no longer outstanding, do not reflect expected future expenses and do not contribute to a meaningful evaluation of our current operating performance or comparisons to our past operating performance.

Charges relating to acquisitions.  We have adjusted our GAAP net income and diluted net income per share to exclude the impacts of the acquisition of Maxtor, and to a lesser extent, certain impacts associated with the acquisition of EVault, which impacts we expect will disappear within a finite period:
     
  Amortization of purchased intangible assets.  Charges relating to the amortization of intangibles acquired in the Maxtor and EVault acquisitions are non-cash in nature, are inconsistent in amount and frequency, and have no direct correlation to Seagate’s ongoing operating results.  We exclude these charges for purposes of calculating these non-GAAP financial measures to facilitate a more meaningful evaluation of our current operating results and comparisons to our past operating performance;
     
  Write-off of in-process research and development.  These charges relate to in-process research and development acquired in the EVault acquisition, which has no alternative future use, and has no direct correlation to our ongoing operating results.  Excluding these charges for purposes of calculating these non-GAAP financial measures contributes to a more meaningful evaluation of our current operating results and comparisons to our past operating performance;
     
  Stock-based compensation expense.  These non-cash charges relate to the amortization of unearned compensation as a result of assuming unvested Maxtor employee stock options and nonvested shares and are not reflective of our ongoing operating results;
     
  Integration and retention costs.  This amount consists primarily of payments made to retain key Maxtor employees for a certain period and various integration expenses associated with the Maxtor acquisition, all of which we excluded in calculating the non-GAAP financial measures, because they arose from the Maxtor acquisition and management does not believe that they are directly related to the ongoing operation of our business;
     
  Customer compensatory claims.  We excluded the settlement of certain customer compensatory claims relating to legacy Maxtor products because we believe settlement of the claims is not directly related to the operation of our ongoing business; and
     
  Fair market value lease-interest expense amortization.  This relates to purchase accounting treatment for fair market value lease amortization, and was excluded from our non-GAAP financial measures because they are non-cash expenses that we do not believe are reflective of ongoing operating results and were directly a result of our acquisition of Maxtor.
     
Income tax effect of non-GAAP adjustments.  This amount represents the tax effects, where applicable, associated with the excluded non-GAAP adjustments.
     
     
Material Limitations Associated with Use of Non-GAAP Financial Measures

The non-GAAP financial measures that we present may have limitations as analytical tools, and these measures should not be considered in isolation or as a substitute for analysis of our results as reported under GAAP.  Some of the limitations in relying on these non-GAAP financial measures are:
       
Items such as amortization of intangible assets, though not directly affecting our cash position, represent the loss in value of intangible assets over time.  The expense associated with this loss in value is not included in non-GAAP net income and non-GAAP diluted net income per share and therefore does not reflect the full economic effect of the loss in value of those intangible assets.
       
While we make adjustments to net income and diluted net income per share for items that we believe are not reflective of our operating performance and that we believe are non-recurring in nature, no assurance may be given that we will not incur similar costs in the future.
       
Other companies may calculate non-GAAP net income and non-GAAP diluted net income per share differently than we do, limiting the usefulness of those measures for comparative purposes.
       
       
Compensation for Limitations Associated with Use of Non-GAAP Financial Measures

We compensate for the limitations on our use of non-GAAP net income and non-GAAP diluted net income per share by preparing our financial statements on a GAAP basis to gain a complete picture of our business.  Our non-GAAP financial measures focus only upon our core business that management believes it can directly effect or exercise influence over.   Thus, these non-GAAP financial measures only represent a limited reflection of a subset, albeit a critical one, of the business that the management considers it can control and change from period to period.  Additionally, we provide detailed reconciliations to the most directly comparable GAAP measures within the press release and in other written materials that include these non-GAAP measures.  We encourage investors to carefully review those reconciliations.  This additional non-GAAP financial information is not meant to be considered in isolation or as a substitute for net income or diluted net income per share prepared in accordance with GAAP.  You should not compare our non-GAAP net income or non-GAAP diluted net income per share results with those of other companies, as the adjustments made to our GAAP results are unique to Seagate.
       
The Substantive Reasons why Management Believes the Non-GAAP Financial Measures Provides Useful Information to Investors

We believe that providing non-GAAP net income and non-GAAP diluted net income per share to investors in addition to the related GAAP measures provides investors with greater transparency to the information used by our management in our financial and operational decision-making and allows investors to see our results “through the eyes” of management.  We further believe that providing this information better enables our investors to understand our operating performance and to evaluate the efficacy of the methodology and information used by management to evaluate and measure such performance.  Investors are encouraged to review the reconciliation of our non-GAAP financial measures to the comparable GAAP results, which is attached to our quarterly earnings release and which can be found, along with other financial information, on the investor relations page of our Web site at http://www.seagate.com/www/en-us/about/investor_relations/