(EDGAR Online via COMTEX) -- ITEM 2.MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following is a discussion of the financial condition, changes in financial condition and results of operations for our fiscal quarters ended April 3, 2020, January 3, 2020 and March 29, 2019, referred to herein as the "March 2020 quarter," the "December 2019 quarter," and the "March 2019 quarter," respectively. We operate and report financial results on a fiscal year of 52 or 53 weeks ending on the Friday closest to June 30. The March 2020 quarter, the December 2019 quarter and the March 2019 quarter were each 13 weeks. You should read this discussion in conjunction with financial information and related notes included elsewhere in this report. Unless the context indicates otherwise, as used herein, the terms "we," "us," "Seagate," the "Company" and "our" refer collectively to Seagate Technology plc, an Irish public limited company, and its subsidiaries. References to "$" or "dollars" are to United States dollars. This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements provide current expectations of future events based on certain assumptions and include any statement that does not directly relate to any historical fact. Forward-looking statements contained in this Quarterly Report on Form 10-Q include, among other things, statements about our plans, strategies and prospects; market demand for our products; shifts in technology; estimates of industry growth; possible effects of the economic conditions worldwide resulting from the COVID-19 pandemic; our ability to effectively manage our cash liquidity position and debt obligations, and comply with the covenants in our credit facilities; our restructuring efforts; the sufficiency of our sources of cash to meet cash needs for the next 12 months; our expectations regarding capital expenditures; and projected cost savings for the fiscal year ending July 3, 2020. Forward-looking statements generally can be identified by words such as "expects," "intends," "plans," "anticipates," "believes," "estimates," "predicts," "projects," "may," "will," "will continue," "can," "could," or 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 Quarterly Report on Form 10-Q 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 our control and may pose a risk to our operating and financial condition. Such risks and uncertainties include, but are not limited to: the uncertainty in global economic and political conditions; the development and introduction of products based on new technologies and expansion into new data storage markets, and market acceptance of new products; the impact of competitive product announcements and unexpected advances in competing technologies or changes in market trends; the impact of variable demand, changes in market demand, and an adverse pricing environment for storage products; 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 and its ability to maintain a favorable cash liquidity position; 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; any price erosion or volatility of sales volumes through the Company's distributor and retail channel; the effects of the outbreak of COVID-19 and related individual, business and government responses on the global economy and their impact on the Company's business, operations and financial results; disruptions to the Company's supply chain or production capabilities; currency fluctuations that may impact the Company's margins, international sales and results of operations; 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; the evolving legal and regulatory, economic, environmental and administrative climate in the international markets where the Company operates; and 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. Table of Contents Information concerning these and other risks, uncertainties and factors, among others, that could cause results to differ materially from our expectations are described in this Quarterly Report on Form 10-Q, including in Part II, Item 1A of this Quarterly Report, and in "Item 1A. Risk Factors" of our Annual Report on Form 10-K for the fiscal year ended June 28, 2019, which we encourage you to carefully read. These forward-looking statements should not be relied upon as representing our views as of any date subsequent to the date on which they were made and we undertake no obligation to update forward-looking statements except as required by law. Our Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") is provided in addition to the accompanying condensed consolidated financial statements and notes to assist readers in understanding our results of operations, financial condition, and cash flows. Our MD&A is organized as follows: Overview of the March 2020 quarter. Highlights of events in the March 2020 quarter that impacted our financial position. Results of Operations. An analysis of our financial results comparing the March 2020 quarter to the December 2019 quarter and the March 2019 quarter. Liquidity and Capital Resources. An analysis of changes in our balance sheet and cash flows, and discussion of our financial condition including the credit quality of our investment portfolio and potential sources of liquidity. Critical Accounting Policies. Accounting policies and estimates that we believe are important to understanding the assumptions and judgments incorporated in our reported financial results. For an overview of our business, see "Part I, Item 1. Financial Statements-Note 1. Basis of Presentation and Summary of Significant Accounting Policies-Organization"
Overview of the March 2020 quarter
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Results of Operations We list in the tables below summarized information from our Condensed Consolidated Statements of Operations by dollars and as a percentage of revenue: For the Three Months Ended For the Nine Months Ended April 3, January 3, March 29, April 3, March 29, (Dollars in millions) 2020 2020 2019 2020 2019 Revenue $ 2,718 $ 2,696 $ 2,313 $ 7,992 $ 8,019 Cost of revenue 1,972 1,938 1,712 5,817 5,711 Gross margin 746 758 601 2,175 2,308 Product development 246 250 238 751 750 Marketing and administrative 119 120 110 361 345 Amortization of intangibles 3 4 6 11 17 Restructuring and other, net 2 - 11 19 41 Income from operations 376 384 236 1,033 1,155 Other expense, net (38) (48) (21) (161) (74) Income before income taxes 338 336 215 872 1,081 Provision for income taxes 18 18 20 34 52 Net income $ 320 $ 318 $ 195 $ 838 $ 1,029 For the Three Months Ended For the Nine Months Ended April 3, January 3, March 29, April 3, March 29, 2020 2020 2019 2020 2019 Revenue 100 % 100 % 100 % 100 % 100 % Cost of revenue 73 72 74 73 71 Gross margin 27 28 26 27 29 Product development 9 9 10 9 9 Marketing and administrative 4 4 5 5 4 Amortization of intangibles - - - - - Restructuring and other, net - - 1 - 1 Income from operations 14 15 10 13 15 Other expense, net (1) (2) (1) (2) (1) Income before income taxes 13 13 9 11 14 Provision for income taxes 1 1 1 1 1 Net income 12 % 12 % 8 % 10 % 13 %
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Revenue The following table summarizes information regarding consolidated revenues by channel, geography and market and HDD exabytes shipped by market and price per terabyte: For the Three Months Ended For the Nine Months Ended April 3, January 3, March 29, April 3, March 29, 2020 2020 2019 2020 2019 Revenues by Channel (%) OEMs 73 % 68 % 68 % 71 % 70 % Distributors 17 % 17 % 18 % 17 % 17 % Retailers 10 % 15 % 14 % 12 % 13 % Revenues by Geography (%) Asia Pacific 46 % 51 % 46 % 49 % 49 % Americas 35 % 28 % 35 % 32 % 32 % EMEA 19 % 21 % 19 % 19 % 19 % Revenues by Market (%) Mass capacity 57 % 49 % 40 % 51 % 42 % Legacy 36 % 43 % 52 % 42 % 51 % Other 7 % 8 % 8 % 7 % 7 % HDD Exabytes Shipped by Market Mass capacity 91 71 43 226 150 Legacy 29 36 34 99 113 Total 120 107 77 325 263 HDD Price per Terabyte $ 21 $ 23 $ 28 $ 23 $ 28
Revenue in the March 2020 quarter increased by $22 million from the December 2019 quarter primarily due to an increase in mass capacity storage exabytes shipped, partially offset by a decrease in legacy market exabytes shipped and price erosion.
Cost of Revenue and Gross Margin For the Three Months Ended For the Nine Months Ended April 3, January 3, March 29, April 3, March 29, (Dollars in millions) 2020 2020 2019 2020 2019 Cost of revenue $ 1,972 $ 1,938 $ 1,712 $ 5,817 $ 5,711 Gross margin 746 758 601 2,175 2,308 Gross margin percentage 27 % 28 % 26 % 27 % 29 %
Gross margin as a percentage of revenue for the March 2020 quarter decreased compared to the December 2019 quarter primarily driven by price erosion and higher logistics costs and factory under-utilization due to COVID-19 disruptions, partially offset by improved product mix.
Operating Expenses For the Three Months Ended For the Nine Months Ended April 3, January 3, March 29, April 3, March 29, (Dollars in millions) 2020 2020 2019 2020 2019 Product development $ 246 $ 250 $ 238 $ 751 $ 750 Marketing and administrative 119 120 110 361 345 Amortization of intangibles 3 4 6 11 17 Restructuring and other, net 2 - 11 19 41 Operating expenses $ 370 $ 374 $ 365 $ 1,142 $ 1,153
Product development expense. Product development expense for the March 2020 quarter remained relatively flat compared to the December 2019 quarter. Product development expense increased by $8 million in the March 2020 quarter compared to the March 2019 quarter primarily due to a $7 million increase in variable compensation expense, a $6 million increase in outside services expense and a $5 million increase in other general expenses mainly as a result of timing of materials purchases, partially offset by a $6 million decrease related to timing of grants received and a $5 million decrease in depreciation expense. Product development expense for the nine months ended April 3, 2020 remained relatively flat compared to the nine months ended March 29, 2019.
Other Expense, Net For the Three Months Ended For the Nine Months Ended April 3, January 3, March 29, April 3, March 29, (Dollars in millions) 2020 2020 2019 2020 2019 Other expense, net $ (38) $ (48) $ (21) $ (161) $ (74)
Other expense, net. Other expense, net for the March 2020 quarter decreased by $10 million from the December 2019 quarter primarily due to a $9 million net increase in gains due to favorable changes in foreign currency exchange rates. Other expense, net for the March 2020 quarter increased by $17 million compared to the March 2019 quarter primarily due to $25 million of non-recurring income, net in the March 2019 quarter related to our previous investment in Toshiba Memory Holdings Corporation ("TMHC"), which was redeemed in the quarter ended June 28, 2019, partially offset by $5 million net increase in gains due to favorable changes in foreign currency exchange rates and $4 million decrease in interest expense from the repurchase of certain long-term debt. Other expense, net for the nine months ended April 3, 2020 increased by $87 million compared to the nine months ended March 29, 2019 primarily due to $78 million of non-recurring income, net in the nine months ended March 29, 2019 related to our previous investment in TMHC, which was redeemed in the quarter ended June 28, 2019 and a $30 million loss resulting from the repurchase of certain long-term debt, partially offset by a related $14 million decrease in interest expense and a $7 million net increase in gains due to favorable changes in foreign currency exchange rates.
Income Taxes For the Three Months Ended For the Nine Months Ended April 3, January 3, March 29, April 3, March 29, (Dollars in millions) 2020 2020 2019 2020 2019 Provision for income taxes $ 18 $ 18 $ 20 $ 34 $ 52
We recorded income tax provisions of $18 million and $34 million in the three and nine months ended April 3, 2020, respectively. The discrete items in the income tax provision were not material for the three months ended April 3, 2020. The income tax provision for the nine months ended April 3, 2020 included approximately $13 million of net discrete tax benefits, primarily associated with net excess tax benefits related to share-based compensation expense. Our income tax provision recorded for the three and nine months ended April 3, 2020 differed from the provision for income taxes that would be derived by applying the Irish statutory rate of 25% to income before income taxes, primarily due to the net effect of tax benefits related to (i) non-Irish earnings generated in jurisdictions that are subject to tax incentive programs and are considered indefinitely reinvested outside of Ireland and (ii) current year generation of research credits.
Apr 30, 2020
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