Seagate Technology plc — FY2013 Form 10-K
Business context and reporting period
Seagate designs and sells hard disk drives (HDDs), solid-state hybrid drives and solid-state drives for enterprise, client-compute and client non-compute markets, alongside data-storage services. This 10-K covers the 52-week fiscal year ended June 28, 2013; the fourth quarter ended on that date. Fiscal 2013 results are compared primarily with fiscal 2012.
Financial and operating metrics
| Metric | FY2013 | FY2012 |
|---|---|---|
| Revenue | $14.351 billion | $14.939 billion |
| Gross profit / margin | $3.940 billion / 27% | $4.684 billion / 31% |
| Operating income / margin | $2.091 billion / 14% | $3.108 billion / 21% |
| Net income | $1.838 billion | $2.862 billion |
| Diluted EPS | $4.81 | $6.49 |
| Operating cash flow | $3.047 billion | $3.262 billion |
| Capital expenditures | $786 million | $636 million |
| Total debt at year-end | $2.777 billion | $2.863 billion |
Fiscal 2013 shipments were 226 million units versus 224 million; exabytes shipped rose to 185 from 150, while average selling price declined to $63 from $66. Product development expense was $1.133 billion, or 8% of revenue. The company reported a $7 million income tax benefit, versus a $20 million provision in FY2012.
Fourth-quarter revenue was $3.425 billion, operating income $448 million and net income $348 million; diluted EPS was $0.94. In the year-earlier quarter, revenue was $4.482 billion, operating income $1.057 billion and net income $1.013 billion, with diluted EPS of $2.37.
At June 28, 2013, cash and cash equivalents were $1.708 billion, short-term investments $480 million, restricted cash and investments $101 million, and current assets $5.412 billion versus current liabilities of $2.611 billion. A $500 million revolving credit facility was undrawn, except for $2 million used for letters of credit. Seagate said it was compliant with debt covenants and expected available sources to fund operations and requirements for at least 12 months.
Material changes versus the prior comparable period
- Revenue fell 4%, gross profit declined 16%, and net income declined 36%. Management attributed lower revenue and gross margin mainly to lower average selling prices as HDD supply recovered from the Thailand flooding-related constraints that boosted prices in FY2012.
- Operating expenses rose to $1.849 billion from $1.576 billion, including higher product-development and marketing costs and increased acquired-intangible amortization. Product development increased 13%; marketing and administrative expense increased 20%.
- Operating cash flow decreased by $215 million. Investing cash outflow was $825 million, including $786 million of property and equipment purchases; financing cash outflow was $2.222 billion.
- Seagate repurchased 54 million shares for $1.654 billion and paid $518 million of dividends. It issued $1 billion of 4.75% senior notes due 2023 and used $1.224 billion for debt repayments and redemptions; debt-repurchase losses totaled $141 million.
- The company acquired a majority interest in LaCie in August 2012 and held approximately 94.5% by fiscal year-end. The Samsung HDD business, acquired in December 2011, contributed a full year of operations in FY2013.
Outlook, commentary, risks and contingencies
- Management expected FY2014 capital investment to remain within its long-term target of 6%–8% of revenue and stated that liquidity was sufficient for at least the next 12 months. The filing does not provide a specific revenue or earnings forecast.
- Management cited continued growth in digital content, cloud storage and enterprise demand as HDD opportunities, while noting evolving storage architectures and alternative technologies.
- Key risks include volatile demand and pricing, intense competition and price erosion, SSD substitution, customer concentration and order deferrals, difficulty forecasting demand, product qualification and manufacturing execution, and dependence on limited suppliers and globally concentrated production.
- Seagate disclosed substantial leverage and debt-service obligations. It also noted that repatriating approximately $3.5 billion of indefinitely reinvested non-Irish subsidiary earnings could result in about $875 million of Irish tax.
- Potential tax-attribute ownership changes could, according to management, trigger an estimated one-time U.S. tax charge of $400 million–$500 million and additional annual tax expense of $70 million–$85 million. The company also had $554 million of net deferred tax assets and a $989 million valuation allowance.
- Material legal matters included the remanded Convolve patent claim, the Shukh employment and inventorship suit seeking damages above $75 million, the LEAP claim seeking approximately $38 million, the Realtek ITC investigation and a newly filed Enova patent suit. For several matters, Seagate said it could not reasonably estimate a possible loss range. It did not expect environmental cleanup costs to be material.
- Chinese approval conditions for the Samsung HDD acquisition included maintaining Samsung as a separate HDD brand competitor, expanding production capacity and spending at least $800 million annually on combined HDD R&D for three years. Compliance could add costs or constrain business practices.
Most important facts for investors to verify
- Whether pricing, gross margin and unit economics remain pressured as industry supply normalizes, and how shipment growth translates into revenue and profit.
- Whether cash generation supports dividends, repurchases, capital spending and debt service without weakening liquidity or covenant headroom.
- Progress on Samsung integration and the required Chinese regulatory commitments, plus the costs and results of the LaCie acquisition.
- Developments in the named litigation, tax-attribute limitations and the realization of deferred tax assets.
- Customer and supplier concentration, production continuity, and the pace of SSD substitution and other technology changes.