Seagate Technology plc — FY2019 Form 10-K
Business context and reporting period. Seagate designs and manufactures HDDs and also sells SSDs, hybrid drives and storage systems for enterprise, cloud, consumer and computing markets. This annual report covers the 52-week fiscal year ended June 28, 2019; fiscal Q4 also ended June 28, 2019. Figures are in U.S. dollars unless noted.
Financial performance
| Metric | FY2019 | FY2018 |
|---|---|---|
| Revenue | $10.390 billion | $11.184 billion |
| Gross profit / gross margin | $2.932 billion / 28% | $3.364 billion / 30% |
| Operating income / operating margin | $1.487 billion / 14% | $1.634 billion / 15% |
| Net income | $2.012 billion | $1.182 billion |
| Diluted EPS | $7.06 | $4.05 |
| Operating cash flow | $1.761 billion | $2.113 billion |
| Capital expenditures | $602 million | $366 million |
| Cash and cash equivalents at year-end | $2.220 billion | $1.853 billion |
| Debt carrying value at year-end | $4.253 billion | $4.819 billion |
- FY2019 revenue declined 7%, primarily from weaker market conditions in the first half and price erosion, partly offset by higher capacity shipments. HDD capacity shipped rose to 347 exabytes from 338; average HDD price per terabyte fell to $30 from $33.
- Gross margin fell two percentage points, with price erosion partly offset by improved product mix. Operating expenses decreased to $1.445 billion from $1.730 billion, including lower marketing and administrative costs and a $22 million net restructuring-and-other gain, principally from property sales.
- Net income included a $640 million income tax benefit, including a $761 million net benefit primarily from releasing valuation allowances on U.S. deferred tax assets. Thus, the reported earnings increase does not represent a comparable increase in operating performance.
- Fiscal Q4 revenue was $2.371 billion, versus $2.835 billion in prior-year Q4; operating income was $332 million versus $505 million. Q4 net income of $983 million included a $692 million tax benefit, including the $761 million valuation-allowance release.
- FY2019 financing uses included $963 million for share repurchases, $713 million in dividends and $574 million in net debt repayment. The company received approximately $1.3 billion when Toshiba Memory Holdings redeemed its preferred shares.
Liquidity, debt and capital allocation
Year-end current assets were $4.363 billion and current liabilities were $2.232 billion. Seagate reported $2.220 billion in cash and cash equivalents, $4.253 billion in long-term debt and no current portion of long-term debt. Its new $1.5 billion unsecured revolving credit facility, maturing February 2024, was undrawn at year-end. Management said cash sources should be sufficient for at least the next 12 months and that the company was compliant with debt covenants and expected to remain compliant over that period.
For FY2020, management expected capital expenditures to be within its long-term target of 6%–8% of revenue; the filing does not provide a clear revenue or earnings forecast. The board declared a subsequent quarterly dividend of $0.63 per share. The company had $2.2 billion of remaining share-repurchase authorization at year-end, subject to cash flows, financial condition, debt covenants and other factors.
Material changes, outlook and risks
- Revenue fell from FY2018 while exabyte shipments increased, reflecting lower pricing and less favorable market conditions. HDD price per terabyte continued to decline.
- Management described long-term storage demand drivers including cloud, data creation and higher-capacity storage, while acknowledging near-term variability in customer procurement and industry supply-demand balance. It emphasized HDD capacity and cost-effectiveness and continued investment in technologies including HAMR and MACH.2.
- Principal risks include price competition and erosion, demand volatility, migration to flash storage, customer order deferrals or cancellations, product qualification and manufacturing execution, supplier concentration, and the impact of tariffs and other trade restrictions. Manufacturing concentration in Asia and elsewhere also exposes the company to regional disruption.
- Seagate carries substantial debt; debt covenants, refinancing conditions and cash-flow requirements could constrain investment and shareholder returns. Future dividends and repurchases are discretionary and not assured.
- Tax benefits rely in part on future taxable income and foreign tax-incentive programs, some of which expire in whole or part through 2025. The company disclosed $1.1 billion of net deferred tax assets and significant tax-loss and credit carryforwards; realization is not assured.
- Contingencies include ongoing intellectual-property litigation. Seagate said a reasonable loss range could not be estimated for the Convolve/MIT matter; it considered the estimated loss in the Lambeth case immaterial. Environmental cleanup costs at identified sites were not expected to be material.
- Other notable items: property sales produced a reported $78 million gain in FY2019, partly offset by a $3 million impairment. Adoption of the new revenue standard had no material effect on FY2019 results. Auditors issued unqualified opinions on the financial statements and internal control over financial reporting.
Most important facts for investors to verify
- How much FY2019 and Q4 earnings and EPS depend on the non-recurring deferred-tax valuation-allowance release, and whether deferred tax assets can be realized.
- Whether revenue, gross margin and cash generation stabilize as capacity shipments rise, given continuing price erosion and demand uncertainty.
- Debt maturities, covenant headroom, interest burden and the sustainability of dividends and buybacks relative to operating cash flow and capital spending.
- Progress on HAMR and other product transitions, including qualification, yields, quality and customer adoption.
- Developments in the Convolve/MIT and Lambeth litigation, tax audits, supplier commitments and trade-policy exposure.