Business context and reporting period
Seagate Technology plc designs and sells hard disk drives and related storage products for enterprise, client-compute and client non-compute markets, as well as storage services. This summary covers its 52-week fiscal year ended June 29, 2012; the fourth quarter ended the same date. Amounts are U.S. dollars.
Financial results and key metrics
| Metric | FY 2012 | FY 2011 |
|---|---|---|
| Revenue | $14.939 billion | $10.971 billion |
| Gross profit / margin | $4.684 billion / 31% | $2.146 billion / 20% |
| Operating income | $3.108 billion | $806 million |
| Net income | $2.862 billion | $511 million |
| Diluted EPS | $6.49 | $1.09 |
| Operating cash flow | $3.262 billion | $1.264 billion |
| Capital expenditures | $636 million | $843 million |
| Debt at year-end | $2.863 billion | $3.512 billion |
Fourth-quarter revenue was $4.482 billion, gross profit $1.484 billion, operating income $1.057 billion and net income $1.013 billion. In the comparable FY 2011 quarter, these were $2.859 billion, $551 million, $190 million and $119 million, respectively.
At June 29, 2012, cash and cash equivalents were $1.707 billion and short-term investments were $411 million; restricted cash and investments were an additional $93 million. The $350 million revolving credit facility was undrawn, except for $2 million used for letters of credit. Cash plus short-term investments were below total debt by approximately $745 million. FY 2012 financing cash use was $3.118 billion, principally reflecting $2.426 billion of share repurchases, $670 million of debt repayments and $372 million of dividends.
Material changes versus the prior comparable period
- Revenue rose 36% year over year, while units shipped increased 13% to 224 million and reported average selling price increased to $66 from $54 per unit.
- Management attributed the higher selling prices and gross margin primarily to HDD supply constraints following severe Thailand flooding. Industry shipments were estimated at 600 million units, down from 658 million in FY 2011; Seagate said the component supply chain had substantially recovered by year-end.
- Seagate completed its acquisition of Samsung’s HDD business on December 19, 2011 for consideration valued at $1.14 billion: $571 million cash and 45.2 million Seagate shares. The acquired business contributed $970 million revenue and $104 million net income from acquisition through year-end. FY 2012 included $22 million of acquisition-related expenses.
- Cash and cash equivalents fell $970 million, while debt declined approximately $649 million on the selected-data basis. Shareholders’ equity increased to $3.497 billion from $2.463 billion.
- Product development expense increased 15% to $1.006 billion; marketing and administrative expense increased 19% to $528 million, with management citing performance-based compensation and Samsung integration.
Outlook, risks, contingencies and unusual items
- Management expected FY 2013 capital investment to be below its historical target range of 6%–8% of revenue, and stated that available liquidity should fund operations and cash requirements for at least 12 months. The filing provides no revenue or earnings guidance.
- After year-end, the board approved a $0.32-per-share dividend, payable August 26, 2012. Dividends and repurchases remain subject to cash needs, debt covenants and other restrictions.
- Samsung acquisition approval in China carried continuing conditions, including maintaining the Samsung HDD brand as a separate competitor, expanding Samsung HDD capacity within six months, and investing at least $800 million annually in combined HDD R&D for three years. The company warned that integration costs or failure to realize expected synergies could adversely affect results.
- Key operating risks include renewed supply-chain disruption, price erosion and supply-demand swings, customer concentration, reliance on limited suppliers, product qualification and manufacturing execution, competition from SSDs, and macroeconomic and seasonal demand volatility. Dell and HP represented approximately 15% and 14% of FY 2012 revenue, respectively.
- Debt-related risks include substantial interest and principal obligations, restrictive covenants and pledged assets. Contractual obligations included $2.869 billion principal debt, $1.368 billion estimated interest payments and $972 million purchase obligations. The company reported covenant compliance at year-end.
- Potential tax-attribute ownership changes could, according to management, trigger a one-time U.S. tax charge of approximately $400–$500 million and increase annual tax expense by approximately $50–$75 million. Tax holidays and incentives increased FY 2012 net income by approximately $504 million, and some expire through 2020.
- Pending litigation includes appeals in the Convolve and Rembrandt matters, a former-employee claim seeking more than $75 million, and a Japanese lawsuit seeking approximately $38 million; the company said it could not reasonably estimate potential losses for these matters. The ITC terminated the Rambus investigation in July 2012 with a finding of no violation by Seagate and the other respondents. Environmental cleanup costs were not expected to be material.
- The company continued to hold auction-rate securities with a $17 million par value and $15 million estimated fair value; auctions had failed since 2008. Management considered the impairment temporary. The filing also reported an unqualified audit opinion and effective internal control over financial reporting.
Important facts for investors to verify
- Whether HDD pricing and margins remain resilient as industry supply recovers from Thailand-related disruption.
- Samsung integration progress, realized synergies and compliance with the China-imposed brand, capacity and R&D conditions.
- Cash generation, working-capital needs, debt maturities and covenant headroom, particularly the $319 million of 2014 Notes due in FY 2014.
- Effects of share repurchases and dividends on liquidity, share count and compliance with debt restrictions.
- Developments in the pending legal matters, tax-attribute limitations, and the value and liquidity of auction-rate securities.