Seagate Technology plc — FY2016 Form 10-K
Business context and reporting period
Seagate designs and manufactures hard disk drives (HDDs) and also sells solid-state and hybrid drives, storage systems, and related solutions. Its products serve enterprise, client-compute, and client non-compute markets. This annual report covers the 52-week fiscal year ended July 1, 2016; FY2015 had 53 weeks. The fourth quarter ended July 1, 2016.
Financial performance and liquidity
| Metric | FY2016 | FY2015 |
|---|---|---|
| Revenue | $11.160 billion | $13.739 billion |
| Gross profit / margin | $2.615 billion / 23% | $3.809 billion / 28% |
| Operating income | $445 million | $2.058 billion |
| Net income | $248 million | $1.742 billion |
| Diluted EPS | $0.82 | $5.26 |
| Cash from operations | $1.680 billion | $2.647 billion |
- FY2016 shipments were 169 million drives totaling 233 exabytes; average selling price was approximately $61 per drive. Shipments were down 43 million units year over year, while exabytes shipped increased from 228 million.
- FY2016 quarterly revenue was $2.654 billion and net income was $70 million, compared with $2.927 billion and $138 million, respectively, in the prior-year fourth quarter.
- Cash and cash equivalents plus short-term investments totaled $1.131 billion at year-end, down from $2.485 billion. Current assets were $3.533 billion and current liabilities $2.249 billion.
- Long-term debt was approximately $4.130 billion, versus $4.155 billion a year earlier. The company had a $700 million revolving credit facility with no borrowings outstanding and reported compliance with debt covenants.
- Investing cash outflow was $1.211 billion, including $587 million of capital expenditures and $634 million for acquisitions, net of cash acquired. Financing cash outflow was $1.820 billion, including $1.090 billion of share repurchases and $727 million of dividends.
Material changes versus the prior comparable period
- Revenue fell 19% year over year, driven by lower shipments and price erosion, reflecting weaker client-compute demand and reduced demand for mission-critical enterprise HDDs; improved product mix partly offset the decline.
- Gross margin declined five percentage points. Management cited price erosion, weaker demand for legacy drives, and underutilization at some factories.
- Operating income and net income dropped sharply. FY2015 included a $620 million net arbitration gain related to Western Digital; FY2016 instead recorded $175 million of restructuring and other charges.
- FY2016 operating cash flow declined by $967 million. FY2015 included a $773 million partial arbitration-award payment and related interest; FY2016 also had lower earnings, partly offset by working-capital effects.
- Seagate acquired Dot Hill Systems for $674 million in cash, expanding its OEM-oriented storage-systems business. The acquisition added $364 million of goodwill.
Outlook, commentary, risks, and unusual items
- Management expected FY2017 capital expenditures to be below its long-term target of 6%–8% of revenue. It stated that available liquidity and expected operating cash generation should fund operations and requirements for at least 12 months. No specific revenue or earnings guidance is provided in the supplied filing text.
- On July 11, 2016, after fiscal year-end, Seagate announced a further restructuring targeting approximately 6,500 job reductions, expected to be substantially completed by FY2017 year-end, with approximately $164 million of pretax charges expected in FY2017.
- Earlier FY2016 restructuring plans targeted about 4,600 workforce reductions in total; FY2016 restructuring charges were $175 million. Management warned that savings may not meet expectations and that restructuring could disrupt operations or employee retention.
- Key risks include volatile demand and pricing, HDD competition from SSDs, product qualification and manufacturing execution, customer and supplier concentration, supply-chain disruptions, foreign-exchange and tax exposures, cybersecurity, and substantial debt service. Dell represented about 12% of FY2016 revenue; no other customer exceeded 10%.
- Several intellectual-property matters remained pending, including Convolve/MIT, Shukh, Enova, and a newly filed Lambeth matter. The company said it could not reasonably estimate possible losses for certain cases. It did not expect environmental cleanup costs at identified sites to be material.
- FY2016 included a $53 million charge for impaired or temporarily discontinued manufacturing equipment. The $984 million deferred-tax valuation allowance and $606 million of net deferred tax assets depend in part on future taxable income.
Important facts for investors to verify
- Whether stabilization in client-compute and enterprise HDD demand, pricing, and factory utilization supports a recovery in gross margin.
- Whether announced restructuring reductions and expected FY2017 charges translate into durable cost savings without harming execution or product quality.
- Cash generation and liquidity after dividends, repurchases, acquisition spending, capital investment, and scheduled debt interest.
- Debt-covenant headroom and the company’s ability to refinance or service approximately $4.1 billion of debt.
- Progress integrating Dot Hill and the performance of the broader cloud-systems business.
- Developments in pending litigation, tax audits and deferred-tax-asset realization; the filing does not provide clear loss estimates for certain legal matters.
The independent auditor issued unqualified opinions on the financial statements and internal control over financial reporting; management also reported disclosure controls as effective.