01—Abstract
Summary
Summary of the 10-K filed August 8, 2014. Cited figures are marked; the original filing is the authoritative source.
Seagate Technology plc's fiscal 2014 (ended June 27, 2014) 10-K shows a year of lower revenue and margin pressure, with earnings declining as the company leaned on capital returns and debt refinancing.
Revenue fell about 4% to $13.7 billiona from $14.4 billion, driven by a 3% drop in units shipped (220 million) and a $2 decline in average selling price to $61, partly offset by favorable product mix. Gross margin improved modestly to 28% from 27% on product mix and operating efficiencies, but operating income fell 15% to $1.78 billion and net income declined 15% to $1.57 billion, with diluted EPS of $4.52 versus $4.81 a year earlier. Cash generation remained substantial, with operating cash flow of $2.56 billion (down from $3.05 billion).
The company returned significant capital, repurchasing about 41 million shares for $1.9 billionb and paying $557 million in dividends, while quarterly dividends rose to $0.43 per share. Total debt rose to $3.92 billion from $2.78 billion after issuing $800 million of 3.75% notes due 2018 and $1 billion of 4.75% notes due 2025, which were used to retire higher-coupon debt and fund buybacks. Shareholders' equity fell to $2.83 billion, reflecting buybacks that exceeded earnings retention.
The filing also flags several forward-looking items: a $450 millionc agreement to acquire LSI's flash and accelerated solutions businesses from Avago (expected to close in Q1 fiscal 2015), the completed $376 million Xyratex acquisition, and continued exposure to HDD price erosion and competition from SSDs. Management notes that a potential ownership change could trigger a one-time $400-500 million U.S. tax charge tied to net operating loss limitations, and that Chinese regulators have imposed conditions on the Samsung HDD acquisition.
02—Key points
Key Highlights
- Revenue declined 4% to $13.72 billion (from $14.35 billion), reflecting a 3% drop in units shipped and a $2 decline in ASP to $61 per unit amid price erosion.
- Gross margin improved to 28% from 27%, aided by a more favorable product mix and operational efficiency gains, despite modest price erosion.
- Operating income fell 15% to $1.78 billion, and net income declined 15% to $1.57 billion; diluted EPS was $4.52 versus $4.81 in fiscal 2013.
- Operating cash flow was $2.56 billion, down from $3.05 billion, while capital expenditures were $559 million (about 4% of revenue).
- Shareholder returns remained high: $1.9 billion in share repurchases (41 million shares) and $557 million in dividends, with $1.5 billion left on the repurchase authorization.
- Total debt increased to $3.92 billion from $2.78 billion after new 3.75% (2018) and 4.75% (2025) senior notes refinanced higher-coupon debt.
- Pending $450 million acquisition of LSI's flash and accelerated solutions divisions from Avago expands Seagate's SSD and enterprise flash capabilities; the Xyratex acquisition for about $376 million closed March 31, 2014.
03—One dollar
Follow one dollar
Of each $1.00 of revenue in FY2014, Seagate Technology Holdings plc kept $0.11.
- Revenue$13.72B100.0%
- Cost of revenue−$9.88B72.0%
- Gross profit$3.85B28.0%
- Operating costs−$2.07B15.1%
- Operating income$1.78B12.9%
- Interest, other & tax−$206.0M1.5%
- Net income$1.57B11.4%
Where FY2014 revenue went
$13.72B- Cost of revenue: $9.88B, 72% of revenue
- Net income: $1.57B, 11% of revenue
- R&D: $1.23B, 8.9% of revenue
- SG&A: $722.0M, 5.3% of revenue
- Other operating costs: $122.0M, 0.9% of revenue
- Interest, other & tax: $206.0M, 1.5% of revenue
Kept 11% as net incomeNet income $1.57B · 11%Other operating costs $122.0M · 0.9%Interest, other & tax $206.0M · 1.5%
Full revenue history →04—Financials
Financial Highlights
Figures from 10-KFY2014filed August 8, 2014Financial Statements
FY2014 against FY2013
| Line item | FY2014FY2013 | Change |
|---|---|---|
| Revenue | $13.72B$14.35B | −4.4% |
| Cost of Revenue | $9.88B$10.41B | −5.1% |
| Gross Profit | $3.85B$3.94B | −2.4% |
| R&D Expenses | $1.23B$1.13B | +8.2% |
| SG&A Expenses | $722.00M$635.00M | +13.7% |
| Operating Expenses | $11.95B$12.26B | −2.5% |
| Operating Income | $1.78B$2.09B | −15.1% |
| Interest Expense | $195.00M$214.00M | −8.9% |
| Net Income | $1.57B$1.84B | −14.6% |
| EPS (Basic) | $4.66$4.97 | −6.2% |
| EPS (Diluted) | $4.52$4.81 | −6.0% |
| Shares Outstanding (Basic) | 337.00M370.00M | −8.9% |
| Shares Outstanding (Diluted) | 347.00M382.00M | −9.2% |
05—Questions
Frequently Asked Questions
Why did Seagate's revenue and earnings decline in fiscal 2014?
Revenue fell about 4% to $13.7 billion because units shipped dropped 3% and average selling price declined by $2 to $61 per unit due to ongoing price erosion. Operating income fell 15% as operating expenses rose $221 million, driven by higher product development spending ($1.23 billion), marketing and administrative costs, and restructuring charges, partly offset by better gross margin.
How is Seagate funding its shareholder returns while carrying more debt?
Operating cash flow of $2.56 billion covered capital expenditures of $559 million and part of the $1.9 billion in buybacks and $557 million in dividends. The gap was bridged by net new debt, as the company issued $1.8 billion of notes and repaid about $725 million of older debt. Total debt rose to $3.92 billion, and the company held $2.66 billion in cash and short-term investments at year end.
What are the main risks to Seagate's business outlook?
Key risks include persistent price erosion in disk drives, competition from solid state storage in notebooks and enterprise applications, and dependence on a few large OEM and distributor customers such as Dell and HP, which together accounted for about 26% of revenue. Other risks include supply chain concentration in Thailand and China, currency fluctuations, and the possibility of a $400-500 million one-time U.S. tax charge if ownership changes limit use of net operating loss carryforwards.
What do the pending acquisitions and regulatory conditions mean for investors?
Seagate agreed to buy LSI's Accelerated Solutions and Flash Components divisions from Avago for $450 million, expected to close in the first quarter of fiscal 2015, which would strengthen its enterprise flash and SSD controller capabilities. The Chinese Ministry of Commerce conditioned approval of the Samsung HDD acquisition on maintaining the Samsung brand as a separate competitor, expanding Samsung production capacity, and investing at least $800 million per year in R&D for three years, which could require costly operational changes.
What is Seagate's dividend and capital return policy outlook?
Seagate paid $1.67 per share in dividends declared during fiscal 2014, up from $1.40, and the Board approved a quarterly dividend of $0.43 per share in July 2014. Dividend payments depend on financial results and debt covenants. The company had $1.5 billion remaining under its $2.5 billion buyback authorization as of June 27, 2014, and has returned approximately $2.5 billion in dividends since its 2002 IPO.
06—Continue