01—Abstract
Summary
Summary of the 10-K filed August 20, 2010. Cited figures are marked; the original filing is the authoritative source.
Seagate Technology plc's fiscal 2010 10-K (fiscal year ended July 2, 2010) shows a sharp recovery from the prior year's downturn.
Revenue rose 16% to $11.4 billiona, driven by an 18% increase in drive shipments to 193 million units. Gross margin expanded to 28% from 14% in fiscal 2009, reflecting higher volumes, muted price erosion, a better product mix, and much higher factory utilization. Net income swung to $1.6 billion (diluted EPS $3.14) from a $3.1 billion loss in fiscal 2009, which included a $2.3 billion goodwill and long-lived asset impairment.
Fiscal 2010 also benefited from a $40 millionb net income tax benefit, partly from a valuation allowance reversal. Cash generation and balance-sheet actions were solid. Operating cash flow was $1.9 billion against $639 million of capital expenditures.
The company repurchased 32.4 million shares for $584 millionc under an anti-dilution program, issued $600 million of 6.875% Senior Notes due 2020, and repaid about $827 million of debt and short-term borrowings. Cash and short-term investments reached $2.5 billion. Total debt was $2.5 billion, and substantially all assets are pledged as collateral for the 10% Second-Priority Notes.
The company also suspended its quarterly dividend in 2009 and does not expect to resume it soon. Investors should weigh the strong fiscal 2010 results against cautionary signals in the filing. Management said price erosion returned in the June 2010 quarter as industry supply exceeded demand, and it expects that pressure to carry through the entire portfolio in the September 2010 quarter, with a larger impact on gross margin.
The company also faces ongoing intense competition from captive manufacturers and from flash-based SSDs, heavy customer concentration (HP at 16%d and Dell at 11% of revenue), and several pending patent suits. The company also completed its redomicile from the Cayman Islands to Ireland on July 3, 2010.
02—Key points
Key Highlights
- Revenue grew 16% to $11.4B on 18% higher unit shipments (193.2M units), while ASPs fell slightly to $58 from $59.
- Gross margin nearly doubled to 28% from 14%, helped by muted price erosion, a better product mix, and higher manufacturing capacity utilization.
- Net income of $1.61B (diluted EPS $3.14) compares with a $3.13B loss in fiscal 2009, which included a $2.3B impairment charge.
- Operating cash flow was $1.93B, capex was $639M, and free cash flow was roughly $1.3B.
- Capital returns and debt management: $584M in share repurchases (32.4M shares), a $600M 6.875% Senior Notes issuance, and roughly $827M of debt and short-term borrowings repaid. The dividend remains suspended.
- Management warned that price erosion returned in the June 2010 quarter and will affect the full product portfolio in the September 2010 quarter, pressuring gross margins.
- Customer concentration remains high: HP (16%) and Dell (11%) of revenue. Substantially all assets are pledged as collateral for the 10% Notes, which limits financial flexibility.
03—One dollar
Follow one dollar
Of each $1.00 of revenue in FY2010, Seagate Technology Holdings plc kept $0.14.
- Revenue$11.39B100.0%
- Cost of revenue−$8.19B71.9%
- Gross profit$3.20B28.1%
- Operating costs−$1.46B12.8%
- Operating income$1.74B15.3%
- Interest, other & tax−$131.0M1.1%
- Net income$1.61B14.1%
Where FY2010 revenue went
$11.39B- Cost of revenue: $8.19B, 72% of revenue
- Net income: $1.61B, 14% of revenue
- R&D: $877.0M, 7.7% of revenue
- SG&A: $437.0M, 3.8% of revenue
- Other operating costs: $150.0M, 1.3% of revenue
- Interest, other & tax: $131.0M, 1.1% of revenue
Kept 14% as net incomeOther operating costs $150.0M · 1.3%Interest, other & tax $131.0M · 1.1%
Full revenue history →04—Financials
Financial Highlights
Figures from 10-KFY2010filed August 20, 2010Financial Statements
FY2010 against FY2009
| Line item | FY2010FY2009 | Change |
|---|---|---|
| Revenue | $11.39B$9.80B | +16.2% |
| Cost of Revenue | $8.19B$8.39B | −2.4% |
| Gross Profit | $3.20B$1.41B | +127.2% |
| R&D Expenses | $877.00M$953.00M | −8.0% |
| SG&A Expenses | $437.00M$537.00M | −18.6% |
| Operating Expenses | $9.65B$12.47B | −22.6% |
| Operating Income | $1.74B-$2.67B | +165.3% |
| Interest Expense | $174.00M$143.00M | +21.7% |
| Net Income | $1.61B-$3.13B | +151.5% |
| EPS (Basic) | $3.28$-6.40 | +151.3% |
| EPS (Diluted) | $3.14$-6.40 | +149.1% |
| Shares Outstanding (Basic) | 491.00M488.00M | +0.6% |
| Shares Outstanding (Diluted) | 514.00M488.00M | +5.3% |
05—Questions
Frequently Asked Questions
How much did Seagate's profitability improve in fiscal 2010?
Net income rose to $1.61 billion, or $3.14 per diluted share, from a $3.13 billion loss in fiscal 2009. Fiscal 2009 included a $2.3 billion impairment of goodwill and other long-lived assets. Gross margin rose to 28% from 14%, and operating income reached $1.74 billion versus a $2.67 billion loss a year earlier.
Why did gross margins recover so sharply?
Management attributed the improvement to an 18% increase in drive shipments, muted price erosion during the first nine months of the year (the industry faced supply constraints), a more cost-effective product mix, and substantially higher manufacturing capacity utilization. Sales program accruals also fell to about 6% of gross revenue from 12% in fiscal 2009.
Is the pricing environment expected to stay favorable?
Not necessarily. Industry supply exceeded demand in the June 2010 quarter, and price erosion returned to seasonal levels. Management expects the adverse pricing environment to carry through the entire portfolio in the September 2010 quarter, which would weigh more heavily on gross margins. Competitors, including captive manufacturers such as Samsung, Toshiba, and Hitachi, and flash-based SSDs also add pressure.
How is Seagate managing its debt and capital structure?
In fiscal 2010, Seagate issued $600 million of 6.875% Senior Notes due 2020 and repaid the $350 million credit facility, the $300 million Floating Rate Notes, and the 6.8% Convertible Notes. It also called the 2.375% Convertible Notes and 5.75% Debentures for redemption, retiring about $362 million after year-end. Total debt was $2.5 billion at year-end. The 10% Second-Priority Notes are secured by substantially all assets, which limits future secured borrowing.
What changed corporately, and what are the main risks for shareholders?
On July 3, 2010, Seagate reorganized so that Seagate Technology plc, an Irish company, became the publicly traded parent in place of the Cayman Islands entity. Ordinary shares were exchanged one-for-one. Key risks include industry price erosion, customer concentration (HP and Dell), dependence on a few suppliers for critical components, intellectual property litigation (including Convolve/MIT, Siemens, and Qimonda), and the shift toward SSDs. The company has also suspended quarterly dividends and does not expect to resume them soon.
06—Continue