Seagate Technology plc — FY2011 10-K Summary
Reporting period: Fiscal year ended July 1, 2011 (52 weeks), with fourth-quarter results for the 13 weeks ended July 1, 2011. The filing was signed August 17, 2011. Seagate designs, manufactures, and sells hard disk drives and related storage products and services; it reports one operating segment.
Key financial results
| Metric | FY2011 | FY2010 | Change |
|---|---|---|---|
| Revenue | $10.971 billion | $11.395 billion | Down 4% |
| Gross profit / margin | $2.146 billion / 20% | $3.204 billion / 28% | Profit down 33%; margin down 8 percentage points |
| Operating income / margin | $806 million / 7% | $1.740 billion / 15% | Down 54% |
| Net income | $511 million | $1.609 billion | Down 68% |
| Diluted EPS | $1.09 | $3.14 | Down 65% |
| Operating cash flow | $1.264 billion | $1.932 billion | Down 35% |
| Capital expenditures | $843 million | $639 million | Up $204 million |
FY2011 free cash flow, calculated as operating cash flow less capital expenditures, was approximately $421 million, versus $1.293 billion in FY2010. Seagate shipped 199 million drives, up 3%, while average selling price declined to $54 from $58 per drive.
Fourth quarter: Revenue was $2.859 billion, gross profit $551 million, operating income $190 million, and net income $119 million. Compared with Q4 FY2010, revenue increased from $2.656 billion, while gross profit decreased from $728 million, operating income from $380 million, and net income from $379 million. Q4 gross margin was approximately 19%.
Balance sheet, debt, and liquidity
- At July 1, 2011, cash and cash equivalents were $2.677 billion and short-term investments were $474 million; restricted cash and investments were an additional $102 million.
- Total debt was approximately $3.512 billion, up from $2.502 billion a year earlier. Cash plus short-term investments totaled $3.151 billion, or about $361 million less than reported debt.
- Current assets were $6.425 billion and current liabilities $3.463 billion. The company reported $2.463 billion of shareholders’ equity.
- FY2011 financing included $1.324 billion of net proceeds from long-term debt issuance and $377 million of debt repayments. The company repurchased $822 million of shares and paid $74 million in dividends.
- A $350 million revolving credit facility matured in January 2015; no cash borrowings were outstanding at year-end. Seagate reported compliance with its debt covenants and said available liquidity should fund operations and requirements for at least 12 months.
- $559 million of principal was due in FY2012. Contractual obligations included $1.613 billion of future interest payments and $1.158 billion of purchase obligations.
Changes, outlook, and management commentary
- Management attributed lower annual revenue to competitive pricing, partly offset by industry supply constraints late in the year. Gross margin fell primarily because of price erosion and delayed new-product manufacturing-yield improvements. Sales programs and incentives rose to about 8% of gross revenue from 6%.
- Industry demand was mixed: total available HDD market units increased 4%; enterprise demand increased 16%, client non-compute 20%, and client compute declined 1%. The filing describes supply as relatively balanced overall, with tight supply and possible unmet demand in the final quarter.
- Management expected FY2012 capital investment to be at or below the low end of its 6%–8% of revenue target. It also stated that it expected to remain covenant-compliant over the next 12 months. The filing provides no specific revenue or earnings guidance.
- Seagate’s proposed purchase of Samsung’s HDD business was pending regulatory review. Consideration was $687.5 million in cash and approximately 45.2 million Seagate shares; management expected closing by the end of calendar 2011. Specified termination circumstances could trigger fees of $72.5 million or $82.5 million. The company warned of integration risks, possible revenue attrition, additional capital spending, and significant post-closing charges.
- Other unusual items included $18 million of restructuring and other charges, no FY2011 impairment charge, and higher interest expense associated with increased average debt and debt-redemption losses. The AMK Singapore manufacturing closure was completed during FY2011; a sale-leaseback generated a $15 million gain, with a further $26 million deferred.
Principal risks and contingencies
- Persistent HDD price erosion, intense competition, demand volatility, and possible excess supply could pressure revenue and margins. Flash memory and SSD adoption could displace HDDs in some applications.
- Manufacturing depends on successful product launches, customer qualifications, yields, and access to components and raw materials. The filing notes limited suppliers for some inputs and rising rare-earth costs.
- Major customer concentration is material: HP represented approximately 15% and Dell 13% of FY2011 revenue; their purchase agreements do not require minimum purchases. Both also accounted for more than 10% of year-end receivables.
- Debt levels, substantial debt service, pledged assets, and covenant restrictions may constrain flexibility. The scheduled FY2012 debt maturity and refinancing needs merit attention.
- Several intellectual-property cases remained pending; for certain matters, including Convolve, Shukh, Siemens in Germany, Rembrandt, and a Rambus ITC investigation, the company said it could not reasonably estimate possible losses or ranges. It did not expect material environmental-site cleanup costs.
- Other exposures include macroeconomic weakness, foreign currency and international operating risks, warranty and tax-estimation uncertainty, and the risk that the Samsung transaction is delayed, altered, or not completed.
Most important facts for investors to verify
- Whether HDD pricing, gross margins, and manufacturing yields stabilized after the FY2011 decline.
- Actual operating cash generation and capital spending, and the company’s ability to meet the $559 million FY2012 maturity and other debt obligations.
- Regulatory approval, closing terms, share dilution, integration costs, and realized benefits of the Samsung transaction.
- Customer concentration and order trends, particularly for HP and Dell, and the exposure to distributor pricing programs.
- Developments in pending intellectual-property litigation, supplier constraints and rare-earth costs, and the realization of deferred tax assets.