01—Abstract
Summary
Summary of the 10-K filed August 19, 2009. Cited figures are marked; the original filing is the authoritative source.
Seagate's fiscal 2009 (ended July 3, 2009) was a sharply down year: revenue fell 23% to $9.8 billiona from $12.7 billion, gross margin compressed from 25% to 14%, and the company posted a net loss of $3.1 billion, driven mainly by a $2.3 billion goodwill and long-lived asset impairment recorded in the December 2008 quarter.
Management attributes the decline to the global macroeconomic downturn, a roughly 4% contraction in the total disk drive market, near double-digit price erosion in the first half of the year, and time-to-market delays from prior-year product execution issues. Unit shipments fell 10% to 163.8 million, while ASPs dropped 13% to $59b. Management reports that the June 2009 quarter showed signs of recovery, with gross margin rebounding, price erosion moderating to historical rates, and channel inventory at about four weeks, the low end of historical levels.
The balance sheet and liquidity profile weakened materially. Total debt rose to $2.7 billionc from $2.0 billion, shareholders' equity fell to $1.5 billion from $4.6 billion, and the company drew its $350 million credit facility in full. Seagate issued $430 million of 10% second-priority secured notes, which is a sign of tighter access to capital, and it suspended its quarterly dividend in April 2009 to conserve liquidity.
Cash and short-term investments totaled about $1.5 billiond, and cash from operations was $823 million, down from $2.5 billion. The amended credit agreement relaxed financial covenants only through January 2010, after which the requirements revert to tighter levels. Investors should weigh whether the operating recovery can produce sufficient cash flow to meet those tighter tests and the approximately $1.0 billion of debt maturing within roughly two years.
The company is also restructuring aggressively, cutting about 5,500 employees, closing several sites, and announcing the closure of its Ang Mo Kio facility in Singapore on August 4, 2009. Competitive and structural risks remain prominent in the filing, including captive manufacturers' aggressive pricing, flash-based SSDs as an emerging alternative, customer concentration with HP at about 16% and Dell at about 11% of revenue, and ongoing intellectual property litigation, including the Convolve/MIT and Siemens matters. Overall, the filing describes a company in the trough of a cyclical downturn that is restructuring its cost base and balance sheet, with recovery dependent on demand normalization and the execution of its new product roadmap.
02—Key points
Key Highlights
- Revenue declined 23% year over year to $9.8 billion, and gross margin fell 1,100 basis points to 14%, reflecting price erosion, lower capacity utilization, and product transition delays.
- Net loss of $3.1 billion (-$6.32 per share), driven primarily by a $2.3 billion goodwill and long-lived asset impairment in the December 2008 quarter.
- Total debt increased to $2.7 billion from $2.0 billion, shareholders' equity fell to $1.5 billion from $4.6 billion, and the $350 million credit facility is fully drawn.
- Liquidity is about $1.5 billion in cash and short-term investments, supported by a $430 million 10% second-priority secured note issuance; the quarterly dividend was suspended in April 2009.
- Cash from operations fell to $823 million from $2.5 billion, though working capital release from receivables and inventory reductions helped offset the loss.
- Unit shipments declined 10% to 163.8 million and ASP fell 13% to $59; the June 2009 quarter showed a gross margin rebound and moderating price erosion.
- Restructuring is ongoing, with roughly 5,500 employees cut in fiscal 2009 and the Ang Mo Kio Singapore facility closure announced in August 2009, with about $40 million of annual savings expected.
03—One dollar
Follow one dollar
For each $1.00 of revenue in FY2009, Seagate Technology Holdings plc lost $0.32.
- Revenue$9.80B100.0%
- Cost of revenue−$8.39B85.6%
- Gross profit$1.41B14.4%
- Operating costs−$4.08B41.6%
- Operating income−$2.67B27.2%
- Interest, other & tax−$460.0M4.7%
- Net income−$3.13B31.9%
04—Financials
Financial Highlights
Figures from 10-KFY2009filed August 19, 2009Financial Statements
| Revenue | $9.80B |
| Cost of Revenue | $8.39B |
| Gross Profit | $1.41B |
| R&D Expenses | $953.00M |
| SG&A Expenses | $537.00M |
| Operating Expenses | $12.47B |
| Operating Income | -$2.67B |
| Interest Expense | $143.00M |
| Net Income | -$3.13B |
| EPS (Basic) | $-6.40 |
| EPS (Diluted) | $-6.40 |
| Shares Outstanding (Basic) | 488.00M |
| Shares Outstanding (Diluted) | 488.00M |
05—Questions
Frequently Asked Questions
Why did Seagate post such a large net loss in fiscal 2009?
The loss was primarily driven by a $2.3 billion non-cash impairment of goodwill and other long-lived assets recorded in the December 2008 quarter, after the company determined that the sharp decline in demand represented a significant adverse change in its business climate. Operating results also weakened materially, with gross margin falling to 14% from 25% on lower volumes, price erosion, and a $271 million unfavorable valuation allowance adjustment on deferred tax assets.
Is Seagate's liquidity position at risk?
Liquidity is adequate for the next 12 months according to management, with roughly $1.5 billion in cash and short-term investments and $380 million of 10% note proceeds held in escrow for debt repayment. However, risk is elevated: the credit facility is fully drawn, covenants were relaxed only through January 1, 2010 and then revert to tighter levels, and the $300 million floating rate notes mature in October 2009. Cash from operations also declined sharply, so future cash generation is critical.
Why did Seagate suspend its dividend?
On April 13, 2009, Seagate adopted a policy of no longer paying a quarterly dividend to enhance liquidity. Dividend capacity is also restricted under the amended credit facility to $45 million for April 2009 through January 2010 and $300 million over any four-quarter period thereafter. Investors should not expect dividends to resume soon, and any future payments could also trigger upward conversion-rate adjustments on the 2.375% convertible notes.
What are the main risks to Seagate's recovery?
Key risks include continued weak consumer and enterprise demand, persistent price erosion from captive manufacturers such as Samsung, Toshiba, and Hitachi, and the gradual shift toward solid state drives in notebook and enterprise applications. Customer concentration is significant, with HP at roughly 16% and Dell at roughly 11% of revenue, and both master agreements are cancelable for convenience. Ongoing patent litigation, including the Convolve/MIT and Siemens cases, also presents potential costs.
Are there signs the business is stabilizing?
Management pointed to several improvements in the June 2009 quarter: gross margin recovered significantly from the prior quarter, price erosion returned to historical rates, distribution channel inventory fell to about four weeks, and the company believes it has made significant progress on product time-to-market. Cost reductions, including the January and May 2009 restructuring plans expected to save about $130 million and $125 million annually, should also support margins, although the mobile market grew 16% while desktop and enterprise demand declined.
06—Continue