01—Abstract
Summary
Summary of the 10-K filed August 3, 2018. Cited figures are marked; the original filing is the authoritative source.
Seagate's fiscal 2018 (ended June 29, 2018) showed a clear operational recovery.
Revenue rose about 4% to $11.18 billiona, driven by higher exabyte shipments (338 EB vs. 263 EB in FY2017) of high-capacity HDDs, partly offset by modest price erosion. Gross margin expanded 100 basis points to 30%, and operating income more than doubled CFO-adjusted terms to $1.63 billion (from $1.05 billion). Net income rose to $1.18 billion, or $4.05 diluted EPS, though it was depressed by a roughly $204 million one-time charge from remeasuring U.S. deferred tax assets under the Tax Act (about 14 points of effective tax rate).
Operating cash flow was $2.1 billion, and capex was held to $366 millionb. The balance sheet and capital allocation are the key watch items. Total debt was $4.8 billion against $1.9 billion of cash, and $499 million of 3.75% notes come due in November 2018.
Shareholder returns were substantial: $726 millionc in dividends, $361 million in buybacks, and a quarterly dividend of $0.63 per share (about $2.52 annualized, roughly a 4% yield at recent prices). Management also made a $1.3 billion investment in non-convertible preferred stock of K.K. Pangea, the vehicle for the Toshiba Memory acquisition.
This is a held-to-maturity debt security with six-year maturity and PIK income, and it is exposed to impairment risk if Pangea's credit or fair value deteriorates. The filing also discloses the CFO's departure effective August 3, 2018, with interim leadership named. The risk profile remains heavily tied to the HDD market's competitive dynamics.
Management flags NAND flash substitution in enterprise storage, weakness in the edge compute/client compute PC market, customer concentration (Dell was about 10%d of revenue in FY2017), and the company's high fixed-cost base. The HAMR technology transition is a major execution risk. Taken together, FY2018 demonstrates that restructuring and cost discipline are working, but sustaining margins will depend on capacity-driven pricing, successful HAMR ramp, and the Pangea investment outcome.
02—Key points
Key Highlights
- Revenue grew about 4% to $11.18B; exabytes shipped rose to 338 EB from 263 EB, driven by high-capacity HDD demand.
- Gross margin expanded 100 bps to 30%, and operating income rose 55% to $1.63B on favorable mix and factory utilization.
- Net income of $1.18B ($4.05 diluted EPS) was reduced by roughly $204M in one-time Tax Act deferred tax remeasurement charges.
- Operating cash flow was $2.1B against $366M of capex, supporting $726M in dividends and $361M in share repurchases.
- A $1.3B investment in K.K. Pangea preferred stock (Toshiba Memory acquisition vehicle) is a held-to-maturity exposure that carries impairment risk.
- Total debt was $4.8B against $1.85B cash, with $499M of 3.75% notes due November 2018 and a $700M undrawn revolver.
- CFO David Morton departs August 3, 2018; Kathryn Scolnick named interim CFO while a permanent successor is sought.
03—One dollar
Follow one dollar
Of each $1.00 of revenue in FY2018, Seagate Technology Holdings plc kept $0.11.
- Revenue$11.18B100.0%
- Cost of revenue−$7.82B69.9%
- Gross profit$3.36B30.1%
- Operating costs−$1.73B15.5%
- Operating income$1.63B14.6%
- Interest, other & tax−$452.0M4.0%
- Net income$1.18B10.6%
Where FY2018 revenue went
$11.18B- Cost of revenue: $7.82B, 70% of revenue
- Net income: $1.18B, 11% of revenue
- R&D: $1.03B, 9.2% of revenue
- SG&A: $562.0M, 5.0% of revenue
- Other operating costs: $142.0M, 1.3% of revenue
- Interest, other & tax: $452.0M, 4.0% of revenue
Kept 11% as net incomeNet income $1.18B · 11%Other operating costs $142.0M · 1.3%
Full revenue history →04—Financials
Financial Highlights
Figures from 10-KFY2018filed August 3, 2018Financial Statements
FY2018 against FY2017
| Line item | FY2018FY2017 | Change |
|---|---|---|
| Revenue | $11.18B$10.77B | +3.8% |
| Cost of Revenue | $7.82B$7.60B | +2.9% |
| Gross Profit | $3.36B$3.17B | +6.0% |
| R&D Expenses | $1.03B$1.23B | −16.7% |
| SG&A Expenses | $562.00M$606.00M | −7.3% |
| Operating Expenses | $9.55B$9.72B | −1.7% |
| Operating Income | $1.63B$1.05B | +55.0% |
| Interest Expense | $236.00M$222.00M | +6.3% |
| Net Income | $1.18B$772.00M | +53.1% |
| EPS (Basic) | $4.10$2.61 | +57.1% |
| EPS (Diluted) | $4.05$2.58 | +57.0% |
| Shares Outstanding (Basic) | 288.00M296.00M | −2.7% |
| Shares Outstanding (Diluted) | 292.00M299.00M | −2.3% |
05—Questions
Frequently Asked Questions
Why did net income rise so much while the tax line also jumped?
Operating income rose to $1.63B from $1.05B on higher revenue and gross margin, lifting pre-tax income to $1.42B from $815M. The tax provision rose to $236M from $43M, mainly because of about $204M of one-time tax expense from remeasuring U.S. deferred tax assets at the new 21% rate under the Tax Act. Net income still increased to $1.18B from $772M.
What is the Pangea investment and what risks does it create?
In May 2018 Seagate invested $1.3B in non-convertible preferred stock of K.K. Pangea, a consortium vehicle led by Bain Capital that is acquiring Toshiba Memory. It is a six-year held-to-maturity debt security accruing PIK income. Risks include a decline in Pangea's creditworthiness or fair value, which could force impairment charges, and foreign currency exposure that is partly hedged with yen forwards.
Is Seagate's debt load manageable?
Total debt is about $4.8B, with cash of $1.85B and a $700M revolver that is undrawn. Scheduled maturities are light near term ($499M in FY2019 and $750M in FY2022), and the company was in compliance with its covenants. Interest expense of $236M is a significant drain, and management acknowledges that leverage limits flexibility for acquisitions and capital returns.
Is the dividend at risk?
The Board declared a $0.63 quarterly dividend ($2.52 annualized), unchanged from the prior two years. Cash dividends of $726M were paid in FY2018, which exceeded the company's free cash flow of about $1.7B after capex only modestly. The filing states that dividends are discretionary and could be reduced, a risk factor investors should monitor given the leverage and the Pangea commitment.
What are the biggest risks to the HDD business outlook?
The main risks include NAND flash substituting for hard drives in enterprise and PC markets, weakness in the edge compute/client compute segment, price erosion if industry supply exceeds demand, customer concentration in OEMs and cloud providers, and execution risk on the transition to heat-assisted magnetic recording (HAMR) technology. Management also flags risks from tariffs, Asian manufacturing concentration, and the 2018 U.S.-China trade environment.
06—Continue