Seagate Technology plc — FY2018 Form 10-K
Reporting period: Fiscal year ended June 29, 2018 (52 weeks). Fiscal Q4 ended June 29, 2018. Seagate supplies HDDs, SSDs, hybrid drives and storage systems for enterprise, cloud, computing and consumer markets.
Financial performance
| Metric | FY2018 | FY2017 |
|---|---|---|
| Revenue | $11.184 billion | $10.771 billion |
| Gross profit / margin | $3.364 billion / 30% | $3.174 billion / 29% |
| Operating income | $1.634 billion | $1.054 billion |
| Net income | $1.182 billion | $772 million |
| Diluted EPS | $4.05 | $2.58 |
| Operating cash flow | $2.113 billion | $1.916 billion |
| Capital expenditures | $366 million | $434 million |
| Cash and cash equivalents at year-end | $1.853 billion | $2.539 billion |
| Total debt at year-end | $4.819 billion | $5.021 billion |
FY2018 revenue rose 4%, primarily on greater high-capacity HDD demand and exabytes shipped, partly offset by price erosion. Seagate shipped 338 exabytes, versus 263 in FY2017; HDD average selling price per unit was $69, versus $66. Gross margin improved by one percentage point, reflecting favorable product mix and factory utilization. Operating expenses fell $390 million, including lower product development, administrative, amortization and restructuring costs.
FY2018 included a $236 million income tax provision, including approximately $204 million of expense from remeasuring U.S. deferred tax assets after U.S. tax reform. Operating margin was approximately 14.6% and net margin approximately 10.6%, calculated from reported figures.
Fiscal Q4: Revenue was $2.835 billion, gross profit $904 million, operating income $505 million, net income $461 million and diluted EPS $1.57. Compared with FY2017 Q4, revenue increased from $2.406 billion, operating income from $196 million, net income from $114 million and diluted EPS from $0.38. Q4 gross and operating margins were approximately 31.9% and 17.8%, respectively, calculated from reported figures.
Liquidity, capital allocation and debt
- Cash declined $686 million during FY2018, chiefly reflecting the $1.3 billion Pangea investment, $726 million of dividends, $361 million of share repurchases, $214 million of debt repayments and $366 million of capital expenditures; operating cash flow partly offset these uses.
- Current assets were $4.310 billion and current liabilities $3.190 billion at year-end. The company reported $1.853 billion of cash and a $700 million revolving credit facility with no borrowings drawn.
- Management said available cash and expected operating cash generation should meet requirements for at least 12 months, and reported compliance with debt covenants. However, the revolver could mature August 16, 2018 if Seagate lacked investment-grade ratings on August 15 and extension conditions were not met.
- Debt principal totaled $4.862 billion, including $499 million of 3.75% notes due November 2018. Contractual obligations included $1.604 billion of future interest payments and $963 million of purchase obligations.
- Quarterly dividend was $0.63 per share; the board declared another $0.63 dividend on July 30, 2018. The company repurchased approximately 10 million shares for $361 million and had $0.9 billion remaining under its repurchase authorization.
Outlook, commentary and material risks
- Management expected FY2019 capital expenditures to remain below its long-term target of 6%–8% of revenue. The filing states cash should be sufficient for the next 12 months, but provides no specific revenue or earnings guidance in the supplied text.
- Seagate views cloud expansion and growing digital data as demand drivers for high-capacity storage, while identifying price erosion, volatile demand and the shift toward flash storage as risks. It is investing in future HDD technologies, including HAMR, whose development, qualification and volume ramp could be challenging.
- On May 31, 2018, Seagate invested approximately $1.3 billion in six-year, non-convertible preferred stock of K.K. Pangea in connection with the Toshiba Memory acquisition. It is accounted for as a held-to-maturity debt security and carries payment-in-kind income; impairment or changes in Pangea’s creditworthiness and business prospects could adversely affect results and liquidity.
- Restructuring charges were $89 million in FY2018; plans included workforce reductions of approximately 1,100 employees. A $25 million gain from property sales partly offset charges. Management warned that restructuring may disrupt operations or fail to deliver expected savings.
- Other key exposures include substantial leverage and covenant requirements; customer order deferrals and concentration; supply-chain and manufacturing disruptions; foreign exchange and trade restrictions; tax audits and uncertainty around tax-law changes; cybersecurity; and intellectual-property litigation. The company said environmental cleanup costs at identified sites were not expected to be material. A Convolve/MIT patent matter remained unresolved with no reasonably estimable loss range; Seagate estimated the Lambeth matter’s possible loss as immaterial. Enova claims were dismissed with prejudice.
- Subsequent to year-end, Seagate disclosed that CFO David Morton would leave on August 3, 2018; a search for a successor was to begin and an interim CFO was named.
Investor facts to verify
- Whether the revolving credit facility’s August 2018 maturity condition was extended or otherwise resolved, and how the $499 million notes due November 2018 were funded or refinanced.
- Performance, recoverability and foreign-currency exposure of the $1.3 billion Pangea investment, including the expected PIK income and any impairment indicators.
- Whether higher exabyte shipments and improved factory utilization can continue to offset HDD price erosion and competition from SSDs.
- Cash generation, covenant headroom, debt repayment capacity and the sustainability of dividends and buybacks after the large investment.
- Realization of deferred tax assets, expirations or limitations on tax attributes, and the effect of tax incentives that expire through 2027.