01—Abstract
Summary
Summary of the 10-K filed August 9, 2012. Cited figures are marked; the original filing is the authoritative source.
Seagate's fiscal 2012 (ended June 29, 2012) was a record year driven by the industry-wide supply shock from the Thailand flooding.
Revenue rose 36% to $14.9 billiona from $11.0 billion, and gross margin expanded to 31% from 20%, as average selling prices climbed to $66 per unit from $54. Net income reached $2.86 billion, or $6.49 per diluted share, versus $511 million in fiscal 2011. Operating cash flow was $3.26 billion, and the company returned substantial capital through $2.4 billion of share repurchases and $372 million of dividends.
Part of the earnings strength reflects a sizable tax benefit: a $504 millionb net impact from tax holidays in Malaysia, Singapore and Thailand, plus a $35 million valuation allowance reversal, against a 25% Irish statutory rate. Investors should weigh the durability of these results. Management itself attributes the pricing spike to temporary supply constraints, and the industry's supply chain has since largely recovered, which points toward price erosion as the historical norm.
The company also acquired Samsung's HDD business in December 2011 for about $1.1 billionc, adding scale and 2.5-inch product capabilities, while carrying $2.9 billion of fixed-rate debt, including 10% secured notes due 2014. Cash, equivalents and short-term investments fell to $2.2 billion from $3.3 billion as buybacks outpaced free cash flow.
Risk factors center on customer concentration (Dell 15% and HP 14% of revenue), competition from Western Digital and Toshiba, flash/SSD substitution, supplier concentration in Thailand, and pending litigation including the Convolve matter seeking $800 milliond in damages. Subsequent to year-end, the company acquired 64.5% of LaCie S.A. for about $117 million, and the Board declared a $0.32 quarterly dividend.
02—Key points
Key Highlights
- Revenue grew 36% to $14.9 billion, driven by a 36% rise in average selling price to $66 per unit and 13% higher units shipped (224 million).
- Gross margin nearly doubled as a percentage of revenue, reaching 31% versus 20% in fiscal 2011, primarily from pricing tailwinds following the Thailand flood disruption.
- Net income of $2.86 billion ($6.49 diluted EPS) compares with $511 million ($1.09) in fiscal 2011; roughly $504 million of the profit came from tax holidays in Asian jurisdictions.
- Operating cash flow of $3.26 billion funded $636 million of capex, a $561 million Samsung HDD acquisition payment, $2.4 billion of share repurchases (101 million shares) and $372 million of dividends.
- Cash and short-term investments declined to $2.2 billion from $3.3 billion, while total debt was reduced to $2.86 billion from $3.5 billion through $670 million of repayments.
- Dividend policy is active: $0.86 declared in fiscal 2012, raised to $0.25 quarterly, with a $0.32 quarterly dividend approved for August 2012 payment.
- Remaining buyback authorization stood at $2.6 billion as of June 29, 2012, following a $2.5 billion authorization in April 2012.
03—One dollar
Follow one dollar
Of each $1.00 of revenue in FY2012, Seagate Technology Holdings plc kept $0.19.
- Revenue$14.94B100.0%
- Cost of revenue−$10.26B68.6%
- Gross profit$4.68B31.4%
- Operating costs−$1.58B10.5%
- Operating income$3.11B20.8%
- Interest, other & tax−$246.0M1.6%
- Net income$2.86B19.2%
Where FY2012 revenue went
$14.94B- Cost of revenue: $10.26B, 69% of revenue
- Net income: $2.86B, 19% of revenue
- R&D: $1.01B, 6.7% of revenue
- SG&A: $528.0M, 3.5% of revenue
- Interest, other & tax: $246.0M, 1.6% of revenue
Kept 19% as net incomeInterest, other & tax $246.0M · 1.6%
Full revenue history →04—Financials
Financial Highlights
Figures from 10-KFY2012filed August 9, 2012Financial Statements
FY2012 against FY2011
| Line item | FY2012FY2011 | Change |
|---|---|---|
| Revenue | $14.94B$10.97B | +36.2% |
| Cost of Revenue | $10.26B$8.82B | +16.2% |
| Gross Profit | $4.68B$2.15B | +118.3% |
| R&D Expenses | $1.01B$875.00M | +15.0% |
| SG&A Expenses | $528.00M$445.00M | +18.7% |
| Operating Expenses | $11.83B$10.16B | +16.4% |
| Operating Income | $3.11B$806.00M | +285.6% |
| Interest Expense | $241.00M$214.00M | +12.6% |
| Net Income | $2.86B$511.00M | +460.1% |
| EPS (Basic) | $6.72$1.13 | +494.7% |
| EPS (Diluted) | $6.49$1.09 | +495.4% |
| Shares Outstanding (Basic) | 426.00M451.00M | −5.5% |
| Shares Outstanding (Diluted) | 441.00M467.00M | −5.6% |
05—Questions
Frequently Asked Questions
How much of Seagate's record fiscal 2012 profit is sustainable?
Much of the year's margin expansion stemmed from temporary supply shortages after the Thailand flooding, which lifted ASPs. Management notes the industry has largely recovered and historically experiences price erosion, so margins are likely to normalize. Tax holidays in Malaysia, Singapore and Thailand also contributed about $504 million to net income, with those incentives expiring at various dates through 2020.
What is the significance of the Samsung HDD acquisition?
Seagate acquired Samsung's HDD business on December 19, 2011 for $1.14 billion ($571 million cash plus 45.2 million shares). It strengthens the 2.5-inch product line, expands China and Southeast Asia customer access, and contributed $970 million of revenue since closing. Risks include integration challenges, assumed liabilities, and Chinese Ministry of Commerce conditions requiring separate Samsung-branded HDD operations and at least $800 million annual R&D for three years.
How concentrated is Seagate's customer base, and what are the main competitive threats?
OEMs account for 72% of revenue. Dell (15%) and HP (14%) are the largest customers, and losing either would be material. Primary disk drive competitors are Western Digital and Toshiba, and flash-based SSDs are increasingly competing in tablet, notebook and enterprise applications.
What debt and liquidity risks should investors monitor?
Total debt was $2.86 billion at year-end, including $319 million of 10% Senior Secured Notes due May 2014 and $2.55 billion of unsecured notes maturing 2016 through 2021. Substantially all assets are pledged as collateral, and the $350 million revolver is undrawn but subject to three financial covenants. The company held $2.2 billion of cash and investments and $3.5 billion of tax-related carryforwards, with a potential $400 to $500 million charge if ownership changes trigger Section 382 limitations.
06—Continue