01—Abstract
Summary
Summary of the 10-K filed August 2, 2019. Cited figures are marked; the original filing is the authoritative source.
Seagate Technology plc's fiscal 2019 (ended June 28, 2019) was a year of revenue contraction and margin pressure, offset by a large one-time tax benefit that drove reported net income to $2.0 billiona.
Revenue fell about 7% to $10.39 billionb from $11.18 billion, driven by weaker market conditions in the first half of the year and price erosion, partly offset by higher exabytes shipped (347 EB vs. 338 EB). Gross margin declined to 28% from 30%, and income from operations fell 9% to $1.49 billion. Net income of $2.01 billion (diluted EPS $7.06) was inflated by a $640 million income tax benefit, which included a $761 million net release of valuation allowance on U.S. deferred tax assets.
Investors should view the EPS figure as not representative of recurring operating profitability; operating income and cash flow are the better gauges of underlying performance. Cash generation and capital return remained substantial. Operating cash flow was $1.76 billionc, capital expenditures were $602 million, and free cash flow was roughly $1.16 billion.
The company returned about $1.68 billiond to shareholders through dividends ($713 million) and share repurchases ($963 million), and it received $1.3 billion from the redemption of its Toshiba Memory Holdings preferred stock investment. Cash rose to $2.22 billion, and gross debt was reduced to about $4.3 billion principal, including $819 million used to repurchase debt. The company also replaced its revolving credit facility with a $1.5 billion facility, undrawn at year end.
Key risks highlighted in the filing include continued pressure from NAND flash substitution in enterprise and edge compute markets, price erosion, customer concentration in OEMs (about 70% of revenue), tariff and trade policy exposure, the ramp of HAMR technology, and leverage that limits financial flexibility. The fiscal 2020 outlook implies continued capital discipline, with capex guided to 6% to 8% of revenue, and a quarterly dividend of $0.63 per share declared on July 30, 2019.
02—Key points
Key Highlights
- Revenue declined about 7% to $10.39 billion, reflecting weaker first-half market conditions and price erosion, partly offset by 347 exabytes shipped (up from 338 EB).
- Gross margin contracted to 28% from 30%, as price erosion more than offset improved product mix; operating income fell to $1.49 billion from $1.63 billion.
- Net income of $2.01 billion (diluted EPS $7.06) was inflated by a $640 million tax benefit, including a $761 million valuation allowance release, so it overstates underlying earnings power.
- Operating cash flow of $1.76 billion and capex of $602 million produced roughly $1.16 billion of free cash flow.
- Shareholder returns totaled about $1.68 billion: $713 million in dividends and $963 million in share repurchases, with $2.2 billion of buyback authorization remaining.
- Balance sheet strengthened: cash rose to $2.22 billion after receiving $1.3 billion from the Toshiba Memory Holdings preferred stock redemption, and debt principal was reduced to $4.29 billion.
- A new $1.5 billion senior unsecured revolving credit facility (undrawn at year end) replaced the prior $700 million facility, maturing in February 2024.
03—One dollar
Follow one dollar
Of each $1.00 of revenue in FY2019, Seagate Technology Holdings plc kept $0.19.
- Revenue$10.39B100.0%
- Cost of revenue−$7.46B71.8%
- Gross profit$2.93B28.2%
- Operating costs−$1.45B13.9%
- Operating income$1.49B14.3%
- Interest, other & tax$525.0M5.1%
- Net income$2.01B19.4%
Where FY2019 revenue went
$10.39B- Cost of revenue: $7.46B, 72% of revenue
- Operating income: $1.49B, 14% of revenue
- R&D: $991.0M, 9.5% of revenue
- SG&A: $453.0M, 4.4% of revenue
Kept 14% as operating income
Full revenue history →04—Financials
Financial Highlights
Figures from 10-KFY2019filed August 2, 2019Financial Statements
FY2019 against FY2018
| Line item | FY2019FY2018 | Change |
|---|---|---|
| Revenue | $10.39B$11.18B | −7.1% |
| Cost of Revenue | $7.46B$7.82B | −4.6% |
| Gross Profit | $2.93B$3.36B | −12.8% |
| R&D Expenses | $991.00M$1.03B | −3.4% |
| SG&A Expenses | $453.00M$562.00M | −19.4% |
| Operating Expenses | $8.90B$9.55B | −6.8% |
| Operating Income | $1.49B$1.63B | −9.0% |
| Interest Expense | $224.00M$236.00M | −5.1% |
| Net Income | $2.01B$1.18B | +70.2% |
| EPS (Basic) | $7.13$4.10 | +73.9% |
| EPS (Diluted) | $7.06$4.05 | +74.3% |
| Shares Outstanding (Basic) | 282.00M288.00M | −2.1% |
| Shares Outstanding (Diluted) | 285.00M292.00M | −2.4% |
05—Questions
Frequently Asked Questions
Did Seagate's profitability improve in fiscal 2019?
Not on an operating basis. Revenue fell 7% and gross margin declined to 28% from 30%, so income from operations dropped to $1.49 billion from $1.63 billion. Reported net income rose sharply to $2.01 billion, but that was driven by a $640 million income tax benefit, primarily a valuation allowance release, rather than stronger operations.
How much of the net income increase was due to the tax benefit?
The tax benefit was $640 million for fiscal 2019, compared with a $236 million tax provision in fiscal 2018, a swing of $876 million. Excluding the $761 million net tax benefit from the valuation allowance release, the company would have reported a tax expense, so the one-time benefit accounts for most of the year-over-year net income increase.
What were the main drivers of the revenue decline?
Management attributed the 7% decline (about $0.8 billion) primarily to less favorable market conditions in the first half of the fiscal year and price erosion. These were partly offset by higher exabytes shipped, which rose to 347 EB from 338 EB. HDD price per terabyte fell to $30 from $33.
Is Seagate's debt load manageable, and what are the key covenants?
Debt was reduced to about $4.29 billion in principal during fiscal 2019, after repaying the $499 million 3.75% notes and repurchasing $819 million of debt in total. The 2019 revolving credit facility includes an interest coverage ratio, a total leverage ratio, and a minimum liquidity requirement. The company stated it was in compliance as of June 28, 2019 and expected to remain compliant for the next 12 months.
What risks should investors monitor most closely?
Key risks include substitution of disk drives by NAND flash in enterprise and edge compute markets, ongoing price erosion, dependence on a small number of OEM customers (about 70% of revenue), U.S. tariff and trade policy changes affecting China and other manufacturing locations, execution risk on the HAMR technology transition, and leverage that constrains flexibility. The filing also notes that the company's tax rate benefit from incentive programs in Malaysia, Singapore, and Thailand expires in whole or part through 2025.
06—Continue