Apr 18, 2006

Seagate Technology Reports Fiscal Third Quarter 2006 Results

Seagate Technology (NYSE: STX) today reported quarterly revenue of $2.3 billion, net income of $274 million, and diluted earnings per share of $0.53 for the quarter ended March 31, 2006. Included in these results are an expense of $21 million for non-cash stock based compensation and a $7 million one-time investment gain. These results compare to revenue of $1.97 billion, net income of $229 million and diluted earnings per share of $0.45 in the year-ago quarter. The year-ago results did not reflect costs associated with non-cash stock based compensation.   

For the nine months ended March 31, 2006, Seagate reported revenue of $6.7 billion, net income of $833 million and diluted earnings per share of $1.63. This compares to revenue of $5.4 billion, net income of $427 million and diluted earnings per share of $0.85 for the nine-month period ended April 1, 2005.

“I’m pleased to report yet another quarter of strong operational and financial results. Seagate enjoyed significant year-over-year unit and revenue growth, fueled by continued robust demand for our products across all markets, particularly in notebook and consumer electronics applications,” said Bill Watkins, Seagate president and chief executive officer. “Our strong sales of 2.5-inch disc drives during the quarter propelled us to number two in market share in under three years participation in this space. We also just announced the industry’s first enterprise drive based on perpendicular recording, allowing us to now deliver the benefits of drives based on perpendicular technology to three of the key markets we serve: consumer, enterprise and mobile computing.

“Overall, we are seeing more consumers and applications than ever before creating, using and sharing digital content. There is also a rapidly growing trend to make that content available on-demand, replacing physical distribution with digital distribution and placing Seagate hard drives squarely at the center of a growing global phenomenon. This growth and diversity in content use and delivery has had a positive impact across all storage markets, and contributed to the fact that 30% of our revenue in the March quarter came from sales outside of markets associated with PC microprocessor shipments; that’s nearly double the amount from just two years ago. Going forward, we see profound, ongoing opportunities for storage and believe Seagate is uniquely positioned to leverage these opportunities and to strengthen our position as the global storage leader.”

Consumer Electronics Products
Seagate experienced strong growth in the consumer electronics (CE) market in the March quarter, shipping 4.7 million drives, an increase of 12% from the year-ago quarter and 33% sequentially. Shipments into DVR applications grew over 100% year-over-year to 2.5 million units, while shipments into the gaming market increased 39% over the same period.

Mobile Computing Products
Demand for Seagate products in the mobile computing market reached record levels as the company shipped 3.8 million disc drives, representing an increase of 112% from the year-ago quarter and 30% sequentially. Seagate grew overall share in this space for the 7th consecutive quarter. During the quarter, Seagate began volume shipments of its industry-leading 160GB 2.5-inch disc drive utilizing perpendicular recording technology. Given Seagate’s growing strength in the high-capacity portion of this market, the company’s shipments of capacity points at 80GB and greater grew sequentially 26%. Also during the quarter, industry average capacity in this space grew to over 60GB, while Seagate’s average capacity reached almost 70GB.

Enterprise Products
Seagate extended its leadership in the enterprise space during the quarter, shipping 3.5 million units. Seagate has now expanded its industry-leading portfolio of enterprise drives with the industry’s first enterprise disc drive utilizing perpendicular recording technology. The 15,000 RPM, 300GB, Cheetah 15K.5, delivers 30% better performance over previous versions and doubles the capacity of any 15,000 RPM drive on the market. The new drive will be in qualification at several OEMs this quarter.

Desktop Products
Seagate continued its leadership in the desktop storage space during the quarter by shipping 17.5 million desktop drives, an increase of 12% from the year-ago quarter. Channel sales for Seagate desktop products remained healthy throughout the quarter and Seagate exited the quarter with under five weeks of distribution channel inventory.

Pricing
The average selling price for all Seagate products, on a blended basis, decreased approximately $2.00 from the December quarter. In aggregate, price decreases on a “like for like” product basis during the March quarter were typical for a March quarter and in line with the company’s expectations at the beginning of the quarter.

Business Outlook
The following outlook for the June quarter and fiscal year 2006 reflects only the financial results of Seagate Technology and does not include any financial results for Maxtor. If the proposed acquisition of Maxtor is closed during the June quarter, the reported results for the quarter will include the financial results of Maxtor from the date of closure through the end of the quarter and transaction related financial impacts.

For the June quarter, Seagate expects to report revenue of $2.1-2.25 billion, and diluted earnings per share of $0.46-0.49, excluding expenses associated with non-cash stock based compensation. Non-cash stock based compensation is expected to be approximately $23 million or $0.04 per share, equating to GAAP earnings per share of $0.42-0.45.

For fiscal year 2006, Seagate expects to report earnings per share in the range of $2.21-$2.24, excluding expenses associated with non-cash stock based compensation. Non-cash stock based compensation is expected to be approximately $80 million or $0.16 per share, equating to GAAP earnings per share of $2.05-$2.08.

Dividend
The company has declared a quarterly cash distribution of $0.08 per share to be paid on or before May 19, 2006 to all common shareholders of record as of May 5, 2006.

Conference Call

Seagate will hold a conference call to review the fiscal third 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

Replay
A replay will be available beginning April 18 at 5 p.m. Pacific Time through April 25 at 8:59 p.m. Pacific Time. The replay can be accessed from www.seagate.com/newsinfo/invest or by phone as follows:

USA: (800) 642-1687
International: (706) 645-9291
Conference ID: 6170234

For more information please visit: http://www.seagate.com/newsinfo/invest/financial_info

About Seagate
Seagate is the worldwide leader in the design, manufacture and marketing of hard disc drives, providing products for a wide-range of Enterprise, Desktop, Mobile Computing, and Consumer Electronics applications. 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.

Safe Harbor
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 future financial performance, 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 release and current expectations, forecasts and assumptions and 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 on the company’s ability to successfully manufacture in increasing volumes on a cost-effective basis and with acceptable quality its current and new disc drive products; the adverse impact of competitive product announcements and possible excess industry supply with respect to particular disc drive products; the impact of the announced agreement for the company to acquire Maxtor Corporation on current customer demand during the period prior to a closing of the transaction; the impact of the actual closing of the acquisition of Maxtor, if and when it occurs, on the company’s financial results, including without limitation expected charges associated with restructuring, purchase accounting and other related transaction costs; the possibility that the company’s pending acquisition of Maxtor may not be consummated on a timely basis or at all; and the possibility that the combination of Seagate and Maxtor will not provide the anticipated benefits to the combined company. 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 August 1, 2005; in the company’s Quarterly Report on Form 10-Q as filed with the U.S. Securities and Exchange Commission on February 3, 2006; and in the Company’s Registration Statement on Form S-4, as originally filed with the U.S. Securities and Exchange Commission on March 14, 2006 and as amended on April 13, 2006.  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.

 

IMPORTANT ADDITIONAL INFORMATION

This press release is being made in respect of the proposed transaction involving Seagate and Maxtor. In connection with the proposed transaction, Seagate filed with the SEC a Registration Statement on Form S-4 containing a Joint Proxy Statement/Prospectus, which is being mailed to stockholders of Seagate and Maxtor.  INVESTORS AND SECURITY HOLDERS ARE URGED TO READ THE JOINT PROXY STATEMENT/PROSPECTUS AND OTHER DOCUMENTS FILED WITH THE SEC CAREFULLY IN THEIR ENTIRETY BECAUSE THEY CONTAIN IMPORTANT INFORMATION ABOUT THE PROPOSED TRANSACTION.

Investors and security holders can obtain free copies of the Registration Statement and the Joint Proxy Statement/Prospectus and other documents filed with the SEC by Seagate and Maxtor through the web site maintained by the SEC at www.sec.gov. In addition, investors and security holders can obtain free copies of the Registration Statement and the definitive Joint Proxy Statement/Prospectus and other documents filed with the SEC from Seagate by directing a request to Seagate Technology, 920 Disc Drive, P.O. Box 66360, Scotts Valley, California 95067, Attention: Investor Relations (telephone: (831) 439-5337) or going to Seagate’s corporate website at www.Seagate.com, or from Maxtor by directing a request to Maxtor Corporation, 500 McCarthy Boulevard, Milpitas, California 95035, Attention: VP of Investor Relations (telephone: 408-894-5000) or going to Maxtor’s corporate website at www.Maxtor.com.

Seagate and Maxtor, and their respective directors and executive officers, may be deemed to be participants in the solicitation of proxies in respect of the proposed transaction. Information regarding Seagate’s directors and executive officers is contained in Seagate’s Annual Report on Form 10-K for the fiscal year ended July 1, 2005, its proxy statement dated October 7, 2005 and its Current Report on Form 8-K dated December 22, 2005, which are filed with the SEC. Information regarding Maxtor’s directors and executive officers is contained in Maxtor’s Annual Report on Form 10-K for the fiscal year ended December 31, 2005 and its definitive proxy statement dated April 14, 2006, which are filed with the SEC. Additional information regarding the interests of such potential participants are included in the Joint Proxy Statement/Prospectus and the other relevant documents filed with the SEC.

#  #  #

 

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

 
March
31,
2006
   
July
1,
2005 (a)
Assets        
Cash and cash equivalents
$
1,035
 
$
746
  Short-term investments
1,005
 
1,090
 
  Accounts receivable, net
1,152
 
1,094
 
  Inventories
549
 
431
 
  Other current assets
171
 
141
 
   
 
  Total Current Assets
3,912
 
3,502
 
               
Property, equipment and leasehold improvements, net
1,717
 
1,529
 
  Other non-current assets
348
 
213
 
   
 
  Total Assets
$
5,977
   
$
5,244
 
Liabilities and Shareholders' Equity        
  Accounts payable
$
1,182
   
$
1,108
 
  Accrued employee compensation
286
 
266
 
  Accrued expenses
424
 
356
 
  Accrued income taxes
48
 
46
 
  Current portion of long-term debt
__
 
4
 
   
 
  Total Current Liabilities
1,940
 
1,780
 
         
  Other non-current liabilities
194
 
187
 
  Long-term debt, less current portion
400
 
736
 
   
 
  Total Liabilities
2,534
 
2,703
 
       
  Shareholders' Equity
3,443
 
2,541
 
 
 
  Total Liabilities and Shareholders' Equity
$
5,977
   
$
5,244
 
 
(a)
The information in this column was derived from the Company’s audited consolidated balance sheet as of July 1, 2005.



Seagate Technology
Condensed Consolidated Statements of Operations

(In millions, except per share data)
(Unaudited)

       
Three Months Ended
 
Nine Months Ended
 
March
31,
2006
April
1,
2005
March
31,
2006
April
1,
2005
Revenue
$
2,289
$
1,969
$
6,677
$
5,374
               
Cost of revenue
1,733
1,492
4,995
4,241
Product development
195
164
573
474
Marketing and administrative
108
78
303
219
Restructuring, net
__
(2)
4
(1)
  Total operating expenses
2,036
 
1,732
 
5,875
 
4,933
 
   
       
Income from Operations
253
237
802
441
       
Interest income
19
10
48
23
Interest expense (7)   (13)   (31)   (35)  
Other, net
12
  3   22  
12
 
  Other income (expense), net 24   __   39   __  
   
       
Income before income taxes
277
237
841
441
Provision for income taxes
3
8
8
14
 
Net income
$
274
$
229
$
833
$
427
 
Net income per share:  
  Basic
$
0.56
$
0.49
$
1.72
$
0.92
  Diluted
0.53
   
0.45
 
1.63
 
0.85
 
Number of shares used in per share calculations:  
  Basic
489
   
472
 
483
 
466
 
  Diluted
521
507
511
500
           




Seagate Technology
Condensed Consolidated Statements of Operations
Reconciliation of GAAP to Non-GAAP Information
(In millions, except per share data)
(Unaudited)

 

Three Months Ended March 31, 2006
 

GAAP
Non-GAAP Adjustment

Non-GAAP
Revenue
$
2,289
$
__
$
2,289
           
Cost of revenue 1,733   (7) A 1,726
Product development 195   (7) A   188
Marketing and administration 108   (7) A 101
Restructuring, net __   __   __
     
   Total operating expenses 2,036   (21)   2,015
             
   Income from operations   253     21     274  
                   
Interest income   19     __     19  
Interest expense   (7)     __     (7)  
Other, net   12     (7) B   5  
             
   Other income (expense), net   24     (7)     17  
             
Income before income taxes
277     14     291  
Provision for income taxes   3     (2) A B 1  
             
Net income
$
274
$
16  
$
290
Net income per share:                  
  Basic
$
0.56
     
$
0.59
  Diluted
0.53
       
0.55
 
Number of shares used in per share calculations:                  
  Basic   489           489  
Diluted
521         525  
     

The non-GAAP financial measures provided herein exclude the impact of non-cash charges related to stock-based compensation expense and a gain associated with an investment in equity securities, and the related tax effects of these. We believe these non-GAAP measures are useful to investors because they provide an alternative method for measuring the operating performance of the Company’s business, excluding the stock-based compensation expense and gain on equity securities.

These non-GAAP financial measures are not prepared in accordance with generally accepted accounting principles and may be different from non-GAAP measures used by other companies. Non-GAAP financial measures should not be considered a substitute for, or superior to, measures of financial performance prepared in accordance with GAAP.

Footnotes

A To exclude stock-based compensation expense (Cost of revenue $7 million; Product development $7 million; Marketing and administrative $7 million; tax effect $1 million for the quarter ended March 31, 2006)
B. To exclude a $7 million gain on equity securities
   
     
     
   
Nine Months Ended March 31, 2006
 

GAAP
Non-GAAP Adjustment

Non-GAAP
Revenue
$
6,677
$
__  
$
6,677
           
Cost of revenue
4,995
  (20) C
4,975
Product development   573     (25) C D 548  
Market and administrative   303     (18) C   285  
Restructuring, net   4     (4) E   __  
             
   Total operating expenses   5,875     (67)     5,808  
             
   Income from operations   802     67     869  
                   
Interest income   48     __     48  
Interest expense   (31)     2 F   (29)  
Other, net   22     (7) G   15  
             
   Other income (expense), net   39     (5)     34  
             
Income before income taxes   841     62     903  
Provision for income taxes   8     1 H   9  
     
Net income
$
833
$
61  
$
894
Net income per share:                  
  Basic
$
1.72
     
$
1.85
  Diluted
1.63
       
1.74
 
Number of shares used in per share calculations:                  
  Basic   483           483  
Diluted
  511           515  
     

The non-GAAP financial measures provided herein exclude the impact of non-cash charges related to stock-based compensation expense, one-time charge associated with a licensing arrangement Seagate entered into, the impact of restructuring costs, costs associated with a early repayment of a term loan and a gain associated with an investment in equity securities, and the related tax effects of these. We believe these non-GAAP measures are useful to investors because they provide an alternative method for measuring the operating performance of the Company’s business, excluding the stock-based compensation expense, licensing charges, early loan repayment costs, restructuring costs and gain on equity securities.

These non-GAAP financial measures are not prepared in accordance with generally accepted accounting principles and may be different from non-GAAP measures used by other companies. Non-GAAP financial measures should not be considered a substitute for, or superior to, measures of financial performance prepared in accordance with GAAP.

Footnotes

C To exclude stock-based compensation expense (Cost of revenue $20 million; Product development $19 million; Marketing and administrative $18 million for the nine months ended March 31, 2006)
D To exclude a $6 million one-time charge associated with a licensing arrangement Seagate entered into
E To exclude restructuring costs of $4 million
F To exclude costs of $2 million associated with early repayment of a term loan
G To exclude a $7 million gain on equity securities
H To exclude the tax effects of C, D and G
 

 


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

March
31,
2006
April
1,
2005
Operating Activities        
Net income
$
833
   
$
427
 
Adjustments to reconcile net income to net cash from operating activities:            
Depreciation and amortization
436
 
345
 
  Stock-based compensation 57   2  
  Tax benefit from stock options (14)    
Other non-cash operating activities, net
(13)
 
13
 
Changes in operating assets and liabilities:    
    Current assets and liabilities  
49
     
96
 
  Non-current assets and liabilities  
(53)
     
45
 
   
 
  Net cash provided by operating activities
1,295
 
928
 
   
 
 
Investing Activities        
Acquisition of property, equipment and leasehold improvements  
(606)
     
(384)
 
Purchase of short-term investments
(2,627)
 
(3,381)
 
Maturities and sales of short-term investments  
2,724
     
3,164
 
Acquisitions, net of cash acquired   (28)        
Other investing activities, net
(134)
 
(24)
 
   
 
Net cash used in investing activities
(671)
 
(625)
 
   
 
               
Financing Activities        
Repayment of long-term debt   (340)      
(1)
 
Issuance of common shares for employee stock plans
106
   
80
 
Dividends to shareholders
(115)
 
(84)
 
Tax benefit from stock options  
14
     
 
   
 
Net cash used in financing activities
(335)
 
(5)
 
   
 
               
Increase in cash and cash equivalents
289
 
298
 
Cash and cash equivalents at the beginning of the period
746
 
422
 
 
 
Cash and cash equivalents at the end of the period
$
1,035
 
$
720
 


Seagate Technology
Financial Highlights

         
Change from Prior
 
Percentage Change
 
Q3 FY06
Q2 FY06
Q3 FY05
 
Year
Quarter
 
Prior Yr
Prior Qtr
Units Shipped (000)
 
 
 
 
 
  
 
     Enterprise
3,510
3,538
3,440
70
(28)
2%
-1%
     Desktop
17,480
18,852
15,540
1,940
(1,372)
12%
-7%
     Mobile
3,770
2,900
1,770
2,000
870
112%
30%
     Consumer Electronics
4,690
3,530
4,190
500
1,160
12%
33%
 
29,450
28,820
24,940
4,510
630
18%
2%
 
 
 
 
Total Revenue ($M)
$
2,289
$
2,300
$
1,969
$
 320
$
(11)
16%
0%
 
 
 
 
Average Selling Price
$
78
$
80
$
79
$
(1)
$
(2)
-2%
-3%
 
 
 
 
Gross Margin %
24.3%
25.7%
24.2%
 
 
 
 
Channel Mix
 
 
 
     OEM
73%
71%
70%
     Distribution
24%
26%
28%
     Retail
3%
3%
2%
 
 
 
 
Georgraphic Mix
 
 
 
     North America
31%
29%
30%
     Europe
26%
30%
28%
     Asia Pacific
43%
41%
42%
 
Inventory Metrics ($M)
     Raw Material/WIP
$
240
$
203
$
196
$
44
$
37
22%
18%
     Finished Goods
$
309
$
302
$
216
$
93
$
7
43%
2%
     Total Inventory
$
549
$
505
$
412
$
137
$
44
33%
9%
 
 
 
 
Inventory Turns
12.6
13.5
14.5
(1.9)
(0.9)
 
 
 
 
Channel Inventory - Desktop
 
 
 
     Weeks on Hand
4.8
3.8
3.9
0.9
1.0
 
 
 
Cash Related Information ($M)
 
 
     Cash Flow from      Operations
$
527
$
562
$
433
$
94
$
(35)
22%
-6%
     Capital Investments
$
253
$
184
$
199
$
54
$
69
27%
38%
     Depreciation & Amort
$
150
$
147
$
113
$
37
$
3
33%
2%
     Days Sales 
     Outstanding
46
43
46
3
0%
7%