01—Abstract
Summary
Summary of the 10-K filed August 17, 2011. Cited figures are marked; the original filing is the authoritative source.
Seagate's fiscal 2011 (ended July 1, 2011) was a year of sharply lower profitability despite stable volumes.
Revenue fell 4% to $10.97 billiona from $11.40 billion, while units shipped rose 3% to 199 million. The decline was driven by industry price erosion and a gross margin that compressed to 20% from 28%, which cut gross margin dollars by 33% to $2.15 billion. Operating income fell to $806 million from $1.74 billion, and net income dropped to $511 million, or $1.09 per diluted share, from $1.61 billion ($3.14 per diluted share) a year earlier.
Management attributed the margin pressure to price erosion and slow manufacturing yield ramps on new products. Balance sheet and cash flow shifted toward more leverage. Operating cash flow was $1.26 billionb, capital expenditures were $843 million, and free cash flow was roughly $420 million.
Seagate issued $1.3 billionc of new long-term debt, including $750 million of 7.75% notes due 2018 and $600 million of 7.00% notes due 2021, and repaid about $377 million. Total debt rose to $3.5 billion from $2.5 billion, while cash, equivalents and short-term investments reached $3.2 billion. Management also reinstated a quarterly dividend of $0.18 per share and repurchased 56.9 million shares for $822 million during the year.
The filing is dominated by the pending asset purchase from Samsung for its hard disk drive business, which carries $687.5 milliond in cash plus about 45.2 million new ordinary shares (over 10% dilution). The deal is subject to U.S. FTC and European Commission review and other approvals, with a $72.5 million termination fee in certain circumstances.
Management expects closing by the end of calendar 2011. Investors should weigh the strategic benefit of consolidating the market against integration risk, revenue attrition, and near-term accounting charges.
02—Key points
Key Highlights
- Revenue declined 4% to $10.97 billion, while unit shipments grew 3% to 199 million, indicating that lower average selling prices (ASP fell to $54 from $58) drove the top-line decline.
- Gross margin compressed sharply to 20% from 28% due to price erosion and delayed manufacturing yield ramps on new products; gross margin dollars fell 33% to $2.15 billion.
- Net income fell 68% to $511 million, or $1.09 per diluted share, versus $3.14 per diluted share in fiscal 2010, which included a large tax benefit.
- Total debt rose to $3.5 billion from $2.5 billion after $1.3 billion of new senior notes; the company remains in compliance with its revolver covenants and reports $3.2 billion in cash and short-term investments.
- Operating cash flow was $1.26 billion against $843 million in capital expenditures, leaving modest free cash flow of about $420 million.
- Pending Samsung HDD asset acquisition: $687.5 million cash plus about 45.2 million shares, subject to FTC and EC review, with a $72.5 million reverse termination fee if the deal fails to close by the December 31, 2011 expiration (extendable to March 31, 2012).
- Capital return resumed: a $0.18 quarterly dividend was reinstated, and $822 million was used to repurchase 56.9 million shares during fiscal 2011.
03—One dollar
Follow one dollar
Of each $1.00 of revenue in FY2011, Seagate Technology Holdings plc kept $0.05.
- Revenue$10.97B100.0%
- Cost of revenue−$8.82B80.4%
- Gross profit$2.15B19.6%
- Operating costs−$1.34B12.2%
- Operating income$806.0M7.3%
- Interest, other & tax−$295.0M2.7%
- Net income$511.0M4.7%
Where FY2011 revenue went
$10.97B- Cost of revenue: $8.82B, 80% of revenue
- Net income: $511.0M, 4.7% of revenue
- R&D: $875.0M, 8.0% of revenue
- SG&A: $445.0M, 4.1% of revenue
- Interest, other & tax: $295.0M, 2.7% of revenue
Kept 4.7% as net incomeNet income $511.0M · 4.7%
Full revenue history →04—Financials
Financial Highlights
Figures from 10-KFY2011filed August 17, 2011Financial Statements
FY2011 against FY2010
| Line item | FY2011FY2010 | Change |
|---|---|---|
| Revenue | $10.97B$11.39B | −3.7% |
| Cost of Revenue | $8.82B$8.19B | +7.7% |
| Gross Profit | $2.15B$3.20B | −33.0% |
| R&D Expenses | $875.00M$877.00M | −0.2% |
| SG&A Expenses | $445.00M$437.00M | +1.8% |
| Operating Expenses | $10.16B$9.65B | +5.3% |
| Operating Income | $806.00M$1.74B | −53.7% |
| Interest Expense | $214.00M$174.00M | +23.0% |
| Net Income | $511.00M$1.61B | −68.2% |
| EPS (Basic) | $1.13$3.28 | −65.5% |
| EPS (Diluted) | $1.09$3.14 | −65.3% |
| Shares Outstanding (Basic) | 451.00M491.00M | −8.1% |
| Shares Outstanding (Diluted) | 467.00M514.00M | −9.1% |
05—Questions
Frequently Asked Questions
Why did Seagate's profitability decline so sharply in fiscal 2011 even though shipments grew?
Gross margin fell from 28% to 20% because of industry-wide price erosion, which outpaced the benefit of higher unit volumes, and because new products ramped to maturity more slowly than planned, depressing manufacturing yields. Average selling prices dropped from $58 to $54 per unit. Operating expenses were roughly flat, so the margin decline flowed almost directly to operating income, which fell from $1.74 billion to $806 million.
What does the Samsung transaction mean for shareholders?
Seagate agreed to acquire Samsung's hard disk drive business for $687.5 million in cash and about 45.2 million ordinary shares, which would dilute existing holders by over 10%. Management expects the combination to create cost synergies and scale, but warns of revenue attrition, significant accounting charges, amortization of intangibles, and higher capital spending, mainly in the first year after closing. Completion depends on U.S., EU, Korean, Japanese and Chinese regulatory approvals, and a termination fee could be payable if the deal fails.
How is Seagate's debt and liquidity position changing?
Total debt increased to $3.5 billion, up roughly $1 billion, after issuing $750 million of 7.75% notes due 2018 and $600 million of 7.00% notes due 2021. Maturities are concentrated in fiscal 2012 ($559 million 6.375% notes due October 2011) and fiscal 2014 ($416 million 10% secured notes). The company holds $3.2 billion in cash and short-term investments, has a $350 million undrawn secured revolver, and states it expects to meet covenants and fund operations for at least the next 12 months, although the 10% notes and revolver carry restrictive covenants and the debt is substantially secured by company assets.
Is the dividend sustainable, and how much did Seagate return to shareholders?
Seagate reinstated a quarterly dividend of $0.18 per share in fiscal 2011, paid $74 million in dividends during the year, and approved another $0.18 payment for August 2011. Share repurchases were larger, at $822 million for 56.9 million shares under the anti-dilution and November 2010 programs. Management explicitly warns that dividends depend on financial position, cash flow and debt covenants, and that a reduction could pressure the share price. Given operating cash flow of $1.26 billion against capital spending of $843 million and rising interest expense ($214 million), dividend coverage is thin but positive, and the Samsung cash payment will draw on the same liquidity.
What are the key risks highlighted in the filing?
The main risks include continued industry price erosion, competition from captive manufacturers such as Samsung and Hitachi, and the threat from solid-state drives in notebook and enterprise applications. Customer concentration is high, with Hewlett-Packard at about 15% and Dell at about 13% of revenue. The company has a heavy fixed-cost base from vertical integration, faces significant intellectual property litigation (including an $800 million claim by Convolve/MIT and a $75 million-plus claim by a former engineer), depends on rare earth supply from China, and is highly leveraged, with its debt secured by substantially all of its assets.
06—Continue