Seagate Technology plc — FY2014 Form 10-K
Reporting period: Fiscal year ended June 27, 2014. The filing also reports the fourth quarter ended June 27, 2014; this is an annual report, not a standalone quarterly filing. Financial amounts are in U.S. dollars.
Business context and reporting period
Seagate is a global data-storage provider, principally of hard disk drives, with additional solid-state and hybrid drives, storage systems and services. It reports one operating segment. Its markets include enterprise, client-compute and client non-compute storage. Management described ongoing demand drivers including cloud computing and increasing digital content, while noting that HDD industry manufacturing capacity exceeded demand in FY2013 and FY2014. Seagate shipped 220 million units totaling 202 exabytes in FY2014.
Financial performance and liquidity
| Metric | FY2014 | FY2013 |
|---|---|---|
| Revenue | $13.724 billion | $14.351 billion |
| Gross profit / gross margin | $3.846 billion / 28% | $3.940 billion / 27% |
| Operating income / margin | $1.776 billion / 13% | $2.091 billion / 14% |
| Net income | $1.570 billion | $1.838 billion |
| Diluted earnings per share | $4.52 | $4.81 |
| Cash from operations | $2.558 billion | $3.047 billion |
| Capital expenditures | $559 million | $786 million |
| Total debt | $3.920 billion | $2.777 billion |
Revenue fell about 4%; unit shipments declined 3% and average selling price fell from $63 to $61, partly offset by improved product mix. Gross margin rose one percentage point due to product mix and operating efficiencies, despite modest price erosion. Operating income and net income declined as lower revenue and higher operating expenses more than offset the gross-margin improvement.
For Q4 FY2014, revenue was $3.301 billion, gross profit $925 million, operating income $410 million and net income $320 million. In Q4 FY2013, the corresponding figures were $3.425 billion, $939 million, $448 million and $348 million.
At year-end, cash and cash equivalents were $2.634 billion, short-term investments $20 million, and current assets $5.777 billion versus current liabilities of $2.398 billion. Seagate reported a $500 million revolving credit facility with no borrowings drawn and stated it was in compliance with debt covenants. Management said available liquidity and expected operating cash flow should fund operations and cash requirements for at least 12 months.
Material changes and capital allocation
- FY2014 operating cash flow declined about 16% to $2.558 billion. Cash and cash equivalents increased by $926 million, supported in part by $1.8 billion of debt issuance.
- Seagate issued $800 million of 3.75% senior notes due 2018 and $1 billion of 4.75% notes due 2025. It repurchased or redeemed $725 million of debt principal; year-end debt increased by $1.143 billion from FY2013.
- Share repurchases totaled approximately $1.912 billion for 41 million shares; dividends paid were $557 million. The company declared $1.67 per share in FY2014 dividends.
- Seagate acquired Xyratex for approximately $376 million in cash in March 2014. The acquisition’s reported FY2014 revenue and earnings contribution was not significant.
- An agreement to acquire LSI’s Accelerated Solutions and Flash Components divisions from Avago for $450 million in cash was pending at filing; closing was expected in the first quarter of FY2015, subject to conditions and regulatory approval.
Outlook, commentary, risks and unusual items
Management did not provide a specific revenue or earnings forecast. For FY2015, it expected capital expenditures to be at or below its long-term target of 6%–8% of revenue and expected to remain in compliance with debt covenants. Management cited digital-data growth and cloud storage as demand opportunities, while acknowledging variable demand, industry oversupply and pricing pressure.
- Competition, price erosion, alternative flash/SSD storage, product-transition execution and customer qualification may affect market share, revenue and margins.
- Demand and quarterly results can be volatile; OEM orders may be deferred or canceled, and Dell and HP each represented about 13% of FY2014 revenue.
- Manufacturing is vertically integrated and geographically concentrated. Dependence on limited suppliers, raw-material constraints, natural disasters and operational disruption could affect production and costs.
- Debt and debt-service obligations increased; covenants may constrain dividends, investments and other actions. Cash held by non-Irish subsidiaries was $2.6 billion and management intended to reinvest it outside Ireland; repatriation as a taxable dividend could trigger Irish tax.
- Tax attributes and tax audits are material uncertainties. The filing estimates a possible $400–$500 million one-time tax expense if certain ownership changes limit tax carryforwards, plus an estimated $70–$85 million of additional annual tax expense thereafter. U.S. and China tax examinations could also have a material effect if resolved adversely.
- FY2014 included $24 million of restructuring and other charges, primarily workforce-reduction costs, and a $14 million income-tax benefit. The filing also identifies pending intellectual-property and other litigation; certain matters have unquantified possible losses.
- Chinese approval conditions related to the Samsung HDD acquisition included maintaining separate Samsung and Seagate HDD brands, expanding Samsung HDD capacity, and combined R&D investment of at least $800 million annually for three years.
The independent auditor issued an unqualified opinion on the financial statements and internal control over financial reporting. Management also concluded disclosure controls were effective as of June 27, 2014.
Most important facts for investors to verify
- Whether unit volumes, average selling prices, product mix and gross margins can stabilize as industry supply and demand evolve.
- Whether operating cash flow can support debt service, capital spending, dividends and buybacks, given debt of $3.920 billion and substantial shareholder distributions.
- Progress, integration costs and returns from Xyratex and the pending LSI divisions acquisition, including the stated closing timing and purchase price.
- Tax exposure and realization of deferred tax assets, including the potential ownership-change limitation and ongoing tax audits.
- Developments in material litigation, supplier availability, customer concentration and Samsung-acquisition regulatory obligations.