Seagate Technology plc — FY2017 Form 10-K
Reporting period: Fiscal year ended June 30, 2017 (52 weeks). The filing also reports fourth-quarter results for the quarter ended June 30, 2017. Seagate sells HDDs, SSDs, hybrid drives, storage systems and related solutions. Amounts below are U.S. dollars; financial statement figures are in millions unless noted.
Financial performance and liquidity
| Metric | FY2017 | FY2016 |
|---|---|---|
| Revenue | $10,771 | $11,160 |
| Gross profit / margin | $3,174 / 29% | $2,615 / 23% |
| Operating income / margin | $1,054 / about 10% | $445 / about 4% |
| Net income | $772 | $248 |
| Diluted earnings per share | $2.58 | $0.82 |
| Operating cash flow | $1,916 | $1,680 |
| Capital expenditures | $434 | $587 |
- Revenue declined 3% year over year; HDD shipments rose to 263 exabytes from 233, while average selling price per drive increased to $66 from $61.
- Cash and cash equivalents were $2,539 at year-end, up from $1,125. Current assets were $5,041 and current liabilities $2,626.
- Long-term debt carrying value was $5,021, compared with $4,091 a year earlier; principal outstanding was $5,073. Cash less carrying-value debt was approximately $2.5 billion net debt.
- Cash generation and new note proceeds increased liquidity. Seagate issued $750 million of 4.25% notes due 2022 and $500 million of 4.875% notes due 2024; it also redeemed or repurchased $316 million of debt.
- FY2017 included $561 million of cash dividends paid and $460 million of share repurchases. The company declared dividends of $2.52 per share for the year and had $1.3 billion remaining under its share-repurchase authorization.
Material changes and quarterly results
- Gross margin increased six percentage points, attributed to favorable product mix and improved factory utilization from cost savings and manufacturing consolidation, partly offset by price erosion.
- Operating income and net income rose substantially from FY2016. FY2016 had lower margins amid price erosion, weak legacy-drive demand and underused factories.
- Restructuring charges were $178 million in FY2017 versus $175 million in FY2016. FY2017 plans included workforce reductions and manufacturing-footprint consolidation; the company reported reductions of approximately 6,800 employees during the year.
- FY2017 fourth-quarter revenue was $2,406 million, gross profit $666 million, operating income $196 million and net income $114 million. Compared with FY2016’s fourth quarter, revenue declined from $2,654 million while net income increased from $70 million.
- Other expense increased to $239 million from $171 million, including higher interest expense, the absence of certain prior-year arbitration-related income, and impairment of strategic investments.
Outlook, risks and unusual items
- Management expected FY2018 capital expenditures to be less than 5% of revenue and stated it expected available cash sources to fund operations and requirements for at least 12 months. The filing provides no specific revenue or earnings guidance.
- After year-end, Seagate approved another restructuring plan covering about 600 employees, expected to be substantially complete by the end of FY2018 Q1, with approximately $50 million of pretax charges, primarily in that quarter.
- Management described long-term demand drivers including cloud infrastructure, digital content, surveillance, IoT and data analytics, while noting that HDDs face growing SSD competition, particularly in notebook and enterprise mission-critical markets. Price erosion, volatile customer orders and supply-demand imbalances remain significant risks.
- Debt service and covenant compliance are key risks. The company had no borrowings under its $700 million revolving facility at year-end and reported covenant compliance, with an expectation of continued compliance over the next 12 months. Most cash was held by non-Irish subsidiaries; repatriation to Ireland could incur tax.
- Other risks include customer concentration, manufacturing and supplier disruptions, product qualification and quality, restructuring execution, foreign exchange, cybersecurity, and intellectual-property litigation. Several patent disputes remained unresolved; the company said possible losses could not be reasonably estimated for certain matters. It did not expect environmental cleanup costs to be material.
- Seagate announced a CEO transition effective October 1, 2017: William Mosley was appointed CEO and Stephen Luczo was to become Executive Chairman. The company reported audited financial statements and effective internal control over financial reporting.
Most important facts for investors to verify
- Whether improved gross margin and factory utilization can persist despite price erosion and lower annual revenue.
- Debt maturities, refinancing needs, interest burden and continuing compliance with credit-facility covenants.
- Cash generation after dividends, buybacks, restructuring costs and capital spending; reconcile cash dividends paid with dividends declared and accrued.
- Execution and realized savings from workforce reductions, facility consolidation and the additional FY2018 restructuring plan.
- Exposure to SSD substitution, major-customer purchasing changes, supplier concentration and unresolved legal claims.
- Reliability of deferred tax assets and tax-holiday benefits, including their expiration schedule and potential effects on future tax expense.