<PAGE>
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended JUNE 28, 1998
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission File Number 0-14709
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HUTCHINSON TECHNOLOGY INCORPORATED
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(Exact name of registrant as specified in its charter)
MINNESOTA 41-0901840
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
40 WEST HIGHLAND PARK, HUTCHINSON, MINNESOTA 55350
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(Address of principal executive offices) (Zip code)
(320) 587-3797
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(Registrant's telephone number, including area code)
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(Former name, address or fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
----- -----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
As of July 31, 1998 the registrant had 19,777,499 shares of Common Stock issued
and outstanding.
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<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
HUTCHINSON TECHNOLOGY INCORPORATED
CONDENSED CONSOLIDATED BALANCE SHEETS - UNAUDITED
(Dollars in thousands)
<TABLE>
<CAPTION>
June 28, September 28,
1998 1997
-------- -------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $107,924 $ 98,340
Securities available for sale 6,531 20,211
Trade receivables, net 53,057 51,467
GE lease receivable 6,014 31,073
Other receivables 3,895 3,504
Inventories 30,262 27,189
Prepaid taxes and other expenses 22,547 11,562
-------- --------
Total current assets 230,230 243,346
Property, plant and equipment, net 310,045 175,253
Other assets 22,359 11,240
-------- --------
$562,634 $429,839
-------- --------
-------- --------
LIABILITIES AND SHAREHOLDERS' INVESTMENT
Current liabilities:
Current maturities of long-term debt $ 4,613 $ 5,332
Accounts payable and accrued expenses 58,111 39,373
Accrued compensation 25,239 19,407
Accrued income taxes 3,366 6,078
-------- --------
Total current liabilities 91,329 70,190
Long-term debt, less current maturities 70,122 72,862
Convertible subordinated notes 150,000 -
Other long-term liabilities 1,254 3,829
Shareholders' investment:
Common stock, $.01 par value, 45,000,000 shares 198 196
authorized, 19,777,000 and 19,619,000 issued
and outstanding
Additional paid-in capital 152,794 150,676
Retained earnings 96,937 132,086
-------- --------
Total shareholders' investment 249,929 282,958
-------- --------
$562,634 $429,839
-------- --------
-------- --------
</TABLE>
See accompanying notes to condensed consolidated financial statements.
<PAGE>
HUTCHINSON TECHNOLOGY INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS - UNAUDITED
(In thousands, except per share data)
<TABLE>
<CAPTION>
Thirteen Weeks Ended Thirty-Nine Weeks Ended
----------------------- -----------------------
June 28, June 29, June 28, June 29,
1998 1997 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net sales $107,127 $121,713 $291,237 $352,878
Cost of sales 105,472 88,534 292,775 249,907
-------- -------- -------- --------
Gross profit (loss) 1,655 33,179 (1,538) 102,971
Selling, general and
administrative expenses 9,589 11,955 31,276 34,921
Research and development
expenses 4,652 4,671 15,337 15,157
-------- -------- -------- --------
Income (loss) from operations (12,586) 16,553 (48,151) 52,893
Other income, net 1,840 1,759 2,955 2,926
Interest expense (1,764) (759) (2,315) (2,626)
-------- -------- -------- --------
Income (loss) before income taxes (12,510) 17,553 (47,511) 53,193
Provision (benefit) for income taxes (3,260) 3,855 (12,362) 11,695
-------- -------- -------- --------
Net income (loss) ($9,250) $ 13,698 ($35,149) $ 41,498
-------- -------- -------- --------
-------- -------- -------- --------
Basic earnings (loss) per common share ($0.47) $0.70 ($1.79) $2.33
-------- -------- -------- --------
-------- -------- -------- --------
Diluted earnings (loss) per common share ($0.47) $0.68 ($1.79) $2.24
-------- -------- -------- --------
-------- -------- -------- --------
Weighted average common shares
outstanding 19,755 19,531 19,686 17,834
Weighted average common and
diluted shares outstanding 19,755 20,276 19,686 18,526
</TABLE>
See accompanying notes to condensed consolidated financial statements.
<PAGE>
HUTCHINSON TECHNOLOGY INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS - UNAUDITED
(Dollars in thousands)
<TABLE>
<CAPTION>
Thirty-Nine Weeks Ended
-------------------------
June 28, June 29,
1998 1997
-------- --------
<S> <C> <C>
Operating activities:
Net income (loss) ($35,149) $ 41,498
Adjustments to reconcile net income (loss) to
cash provided by (used for) operating activities:
Depreciation and amortization 33,239 28,995
Deferred income taxes (12,149) (752)
Change in operating assets and liabilities (Note 6) 10,037 (5,148)
-------- --------
Cash provided by (used for) operating activities (4,022) 64,593
-------- --------
Investing activities:
Capital expenditures (159,416) (51,588)
Funding from GE lease receivable 29,523 3,526
Increase in GE lease receivable (13,001) (21,872)
Sales of marketable securities 18,541 4,195
Purchases of marketable securities (4,860) (27,393)
-------- --------
Cash used for investing activities (129,213) (93,132)
-------- --------
Financing activities:
Repayments of long-term debt (3,459) (3,455)
Net proceeds from issuance of long-term debt - 25,000
Net proceeds from issuance of convertible subordinated notes 145,320 -
Net proceeds from issuance of common stock 958 104,359
-------- --------
Cash provided by financing activities 142,819 125,904
-------- --------
Net increase in cash and cash equivalents 9,584 97,365
Cash and cash equivalents at beginning of period 98,340 22,884
-------- --------
Cash and cash equivalents at end of period $107,924 $120,249
-------- --------
-------- --------
</TABLE>
See accompanying notes to condensed consolidated financial statements.
<PAGE>
HUTCHINSON TECHNOLOGY INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
(Dollars in thousands)
(1) ACCOUNTING POLICIES
The condensed consolidated financial statements have been prepared by the
Company, without audit, pursuant to the rules and regulations of the Securities
and Exchange Commission. The information furnished in the condensed
consolidated financial statements include normal recurring adjustments and
reflect all adjustments which are, in the opinion of management, necessary for a
fair presentation of such financial statements. Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted
pursuant to such rules and regulations. Although the Company believes that the
disclosures are adequate to make the information presented not misleading, it is
suggested that these condensed consolidated financial statements be read in
conjunction with the financial statements and the notes thereto included in the
Company's latest Annual Report on Form 10-K. The quarterly results are not
necessarily indicative of the actual results that may occur for the entire
fiscal year.
(2) RECENT ACCOUNTING PRONOUNCEMENT
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "ACCOUNTING FOR DERIVATIVE
INSTRUMENTS AND HEDGING ACTIVITIES" ("SFAS 133"). SFAS 133 establishes
accounting and reporting standards requiring that every derivative instrument
(including certain derivative instruments embedded in other contracts) be
recorded in the balance sheet as either an asset or liability measured at its
fair value. SFAS 133 requires that changes in the derivative's fair value be
recognized currently in earnings unless specific hedge accounting criteria
are met. Special accounting for qualifying hedges allows a derivative's gains
and losses to offset related results on the hedged item in the income
statement, and requires that a company must formally document, designate and
assess the effectiveness of transactions that receive hedge accounting.
SFAS 133 is effective for fiscal years beginning after June 15, 1999. The
Company has not yet quantified the impact of adopting SFAS 133 on its
financial statements and has not determined the timing of adoption of SFAS 133.
However, adoption of SFAS 133 could increase volatility in earnings.
(3) BUSINESS AND CUSTOMERS
The Company is the world's leading supplier of suspension assemblies for hard
disk drives. Suspension assemblies hold the recording heads in position above
the spinning magnetic disks in the drive and are critical to maintaining the
necessary microscopic clearance between the head and disk. The Company
developed its leadership position in suspension assemblies through research,
development and design activities coupled with a substantial investment in
manufacturing technologies and equipment. The Company intends to maintain its
position by continuing to develop suspension assemblies which meet the
increasingly higher performance specifications of disk drive manufacturers, and
is committed to reliably producing its suspension assemblies in high volume,
with specialized design, expanded functionality and greater precision. The
Company also is engaged in the development of product opportunities in the
medical devices market but does not expect any medical-related revenue in fiscal
1998. A breakdown of customer sales is as follows:
<TABLE>
<CAPTION>
Thirteen Weeks Ended Thirty-Nine Weeks Ended
-------------------- -----------------------
June 28, June 29, June 28, June 29,
Percentage of Net Sales 1998 1997 1998 1997
- ----------------------- --------- -------- ---------- ----------
<S> <C> <C> <C> <C>
Six Largest Customers 84% 84% 88% 85%
SAE Magnetics, Ltd./TDK 28 13 28 13
IBM 18 12 16 11
Seagate Technology Incorporated 17 35 19 35
Read-Rite Corporation 9 12 12 13
HSPC 7 0 4 0
Yamaha 5 12 9 13
</TABLE>
<PAGE>
(4) CONVERTIBLE SUBORDINATED NOTES
In March 1998, the Company completed a private placement of $150,000,000
aggregate principal amount of 6% Convertible Subordinated Notes due 2005 (the
"Convertible Notes") with interest payable semiannually commencing September 15,
1998. The Convertible Notes are convertible, at the option of the holder, into
Common Stock of the Company at any time prior to their stated maturity, unless
previously redeemed or repurchased, at a conversion price of $28.35 per share.
Beginning March 20, 2001, the Convertible Notes are redeemable, in whole or in
part, at the option of the Company at 103.43% of their principal amount, and
thereafter at prices declining to 100% at any time on and after March 15, 2005.
In addition, upon the occurrence of certain events, each holder of the
Convertible Notes may require the Company to repurchase all or a portion of such
holder's Convertible Notes at a purchase price equal to 100% of the principal
amount thereof, together with accrued and unpaid interest and liquidated
damages, if any, to the date of the repurchase.
The Convertible Notes were issued by the Company and were sold in transactions
exempt from registration under the Securities Act of 1933, as amended. The
Company filed a Registration Statement registering the Convertible Notes and the
shares of Common Stock of the Company into which the Convertible Notes are
convertible.
(5) INVENTORIES
All inventories are stated at the lower of last-in, first-out (LIFO) cost or
market. Inventories consisted of the following:
<TABLE>
<CAPTION>
June 28, September 28,
1998 1997
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<S> <C> <C>
Raw materials $ 8,502 $10,560
Work in process 14,403 5,950
Finished goods 7,572 10,919
LIFO reserve (215) (240)
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$30,262 $27,189
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</TABLE>
<PAGE>
(6) SUPPLEMENTARY CASH FLOW INFORMATION
<TABLE>
<CAPTION>
Thirty-Nine Weeks Ended
-------------------------
June 28, June 29,
1998 1997
---------- ----------
<S> <C> <C>
Changes in operating assets and liabilities:
Receivables, net ($1,981) ($15,109)
Inventories (3,073) (3,485)
Prepaid and other expenses (5,552) 426
Accounts payable and accrued liabilities 23,218 15,075
Other non-current liabilities (2,575) (2,055)
------- --------
$10,037 ($5,148)
-------- --------
-------- --------
Cash paid for:
Interest (net of amount capitalized) $ - $ 1,502
Income taxes 2,883 10,424
</TABLE>
Capitalized interest for the thirty-nine weeks ended June 28, 1998 was
$5,123,000 compared to $1,905,000 for the comparable period in fiscal 1997.
<PAGE>
HUTCHINSON TECHNOLOGY INCORPORATED
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
GENERAL
The Company derives virtually all of its revenue from the sale of suspension
assemblies to a small number of customers. Suspension assemblies are a critical
component of hard disk drives and the Company's results of operations are highly
dependent on the hard disk drive industry. The hard disk drive industry is
intensely competitive and highly cyclical and the Company's results of
operations have been adversely affected from time to time during hard disk drive
industry slowdowns.
The Company experienced a significant reduction in demand for and shipments of
its conventional suspension assemblies during the last part of the fiscal 1997
third quarter, the fourth quarter of fiscal 1997 and the first and second
quarters of fiscal 1998. The Company believes this reduction was due to a
slowdown in the disk drive industry's demand for disk drive components,
primarily because of excess inventory held by drive and recording head
manufacturers. The Company's operating results were adversely affected by this
slowdown, and operating activities consequently have not provided the cash
needed to help fund capital expenditures that are necessary to meet steadily
rising demand for the Company's TSA suspension assemblies. The Company's
shipments of conventional suspensions continued to decline in the third quarter
of fiscal 1998 due to continuing weak demand among the major disk drive
manufacturers. The Company believes shipments of conventional suspensions will
continue to trail prior year levels as customer demand shifts towards TSA
suspension assemblies.
The Company's gross margins have fluctuated and will continue to fluctuate
quarterly and annually based upon a variety of factors such as the level of
utilization of the Company's production capacity, changes in demand, product
mix, selling prices and manufacturing yields, increases in production and
engineering costs associated with production of new products and changes in the
cost, or limitations on availability, of materials. Cost-effective high-volume
production of TSA suspensions has not yet been achieved by the Company in
connection with its ramp-up of TSA suspension capacity. These production
inefficiencies have resulted in significantly declining gross margins which have
adversely affected operating results.
The Company's ability to introduce new products on a timely basis is an
important factor in its continued success. New products have lower
manufacturing yields and are produced in lower quantities than more mature
products. Manufacturing yields generally improve as the product matures and
production volumes increase. Manufacturing yields also vary depending on the
complexity and uniqueness of product specifications. Because the Company's
business is capital intensive and requires a high level of fixed costs, gross
margins are also extremely sensitive to changes in volume. Assuming fixed
product prices, small variations in capacity utilization or manufacturing yields
generally have a significant impact on gross margins. The Company typically
allows customers to change or cancel orders on short notice without penalty.
The Company therefore plans its production and inventory based on forecasts
of customer demand rather than on order backlog. Both customer demand and the
resulting forecasts often fluctuate substantially. These factors, among
others, create an environment where scheduled production and capacity
utilization can vary significantly from week to week, leading to variability
in gross margins.
Growth in the Company's net sales depends, in part, on the successful expansion
by the Company of its manufacturing capacity, manufacturing work force and
corporate infrastructure. In order to meet current and anticipated future
demand for TSA suspension assemblies, the Company is continuing its planned
expansion of TSA suspension production capacity. The Company currently
anticipates spending approximately $200,000,000 during fiscal 1998 for expansion
of TSA suspension production capacity and for plant construction. The Company
anticipates that continued significant capital expenditures will be necessary in
fiscal 1999 and 2000 for continued expansion of its TSA suspension production
capacity as the Company transitions from conventional suspension assembly
production to high volume TSA suspension assembly production, and to accommodate
anticipated market growth. If the Company is not able to finance or complete
its current expansion plans in a timely manner and within acceptable budgets,
its quarterly and annual results of operations may be materially adversely
affected.
<PAGE>
RESULTS OF OPERATIONS
THIRTEEN WEEKS ENDED JUNE 28, 1998 VS. THIRTEEN WEEKS ENDED JUNE 29, 1997.
Net sales for the thirteen weeks ended June 28, 1998 were $107,127,000, a
decrease of $14,586,000 or 12% compared to the comparable period in fiscal 1997.
This decrease was primarily due to decreased conventional suspension assembly
sales volume.
Gross profit for the thirteen weeks ended June 28, 1998 was $1,655,000 compared
to $33,179,000 for the comparable period in fiscal 1997, and gross profit as a
percent of net sales decreased from 27% to 2%, primarily due to lower
conventional suspension assembly sales volume and higher manufacturing costs
associated with increased TSA suspension assembly production.
Selling, general and administrative expenses for the thirteen weeks ended June
28, 1998 were $9,589,000, a decrease of $2,366,000 or 20% compared to the
comparable period in fiscal 1997. The decreased expenses were due primarily to
decreased profit sharing and other incentive compensation costs of $2,739,000,
lower recruitment and relocation expenses of $359,000 and lower travel and
training of $339,000, offset partially by higher depreciation and lease expense
of $708,000, increased labor expenses of $505,000 and higher bad debt provision
of $327,000. As a percent of net sales, selling, general and administrative
expenses decreased from 10% in the third quarter of fiscal 1997 to 9% in the
third quarter of fiscal 1998.
Interest expense for the thirteen weeks ended June 28, 1998 was $1,764,000, an
increase of $1,005,000 from the comparable period in fiscal 1997, primarily due
to higher average outstanding debt partially offset by an increase in
capitalization of interest of $1,316,000.
The income tax benefit for the thirteen weeks ended June 28, 1998 was based on
an estimated effective tax rate for the fiscal year of 26% which was below the
statutory federal rate primarily due to the large portion of sales that
qualifies for the benefit of the Company's Foreign Sales Corporation.
Net loss for the thirteen weeks ended June 28, 1998 was $9,250,000, compared to
net income of $13,698,000 for the comparable period in fiscal 1997. As a
percent of net sales, net income (loss) decreased from 11% to (9)% primarily due
to the lower sales volume and higher manufacturing costs, noted above.
THIRTY-NINE WEEKS ENDED JUNE 28, 1998 VS. THIRTY-NINE WEEKS ENDED JUNE 29, 1997.
Net sales for the thirty-nine weeks ended June 28, 1998 were $291,237,000, a
decrease of $61,641,000 or 17% compared to the comparable period in fiscal 1997.
This decrease was primarily due to decreased conventional suspension assembly
sales volume.
Gross loss for the thirty-nine weeks ended June 28, 1998 was $1,538,000,
compared to a gross profit of $102,971,000 for the comparable period in fiscal
1997, and gross profit (loss) as a percent of net sales decreased from 29% to
(1)%, primarily due to lower conventional suspension assembly sales volume and
higher manufacturing costs associated with increased TSA suspension assembly
production.
Selling, general and administrative expenses for the thirty-nine weeks ended
June 28, 1998 were $31,276,000, a decrease of $3,645,000 or 10% compared to the
comparable period in fiscal 1997. The decreased expenses were due primarily to
decreased profit sharing and other incentive compensation costs of $8,913,000,
partially offset by increased labor expenses of $2,041,000, higher depreciation
and
<PAGE>
lease expense of $1,315,000, fees related to certain financing agreements of
$1,290,000, and higher bad debt provision of $1,131,000. As a percent of net
sales, selling, general and administrative expenses increased from 10% for the
thirty-nine weeks ended June 29, 1997 to 11% for the thirty-nine weeks ended
June 28, 1998.
Research and development expenses for the thirty-nine weeks ended June 28, 1998
were $15,337,000 compared to $15,157,000 for the thirty-nine weeks ended June
29, 1997. The increase was mainly due to increased expenses related to
development of the Company's medical product and further TSA product
development, offset partially by lower development expenses related to
production of TSA prototype suspensions.
Interest expense for the thirty-nine weeks ended June 28, 1998 was $2,315,000, a
decrease of $311,000 from the comparable period in fiscal 1997, primarily due to
an increase in capitalization of interest of $3,218,000, offset partially by
higher average outstanding debt.
The income tax benefit for the thirty-nine weeks ended June 28, 1998 was based
on an estimated effective tax rate for the fiscal year of 26% which was below
the statutory federal rate primarily due to the large portion of sales that
qualifies for the benefit of the Company's Foreign Sales Corporation.
Net loss for the thirty-nine weeks ended June 28, 1998 was $35,149,000, compared
to net income of $41,498,000 for the comparable period in fiscal 1997. As a
percent of net sales, net income (loss) decreased from 12% to (12)% primarily
due to the lower sales volume and higher manufacturing costs, noted above.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal sources of liquidity are cash balances, cash flow from
operations and additional financing capacity. The Company currently does not
have available, and has no commitments for, a revolving credit or other similar
borrowing facility.
The Company's cash and cash equivalents have fluctuated during fiscal year
1998. Cash and cash equivalents decreased from $98,340,000 at September 28,
1997 to $36,069,000 at December 28, 1997 due to capital expenditures,
described below, and increased to $160,549,000 at March 29, 1998 as a result
of the private placement of convertible subordinated notes by the Company,
described below. Cash and cash equivalents decreased to $107,924,000 at June
28, 1998, primarily due to continued capital expenditures. Cash and cash
equivalents increased by $9,584,000 from September 28, 1997 to June 28, 1998
primarily because the proceeds from the convertible subordinated notes and
funding from the GE lease receivable, described below, were greater than
capital expenditures during the thirty-nine week period. The Company used
cash from operating activities of $4,022,000 for the thirty-nine weeks ended
June 28, 1998.
Cash used for capital expenditures totaled $159,416,000 for the thirty-nine
weeks ended June 28, 1998, an increase of $107,828,000 from the comparable
period in fiscal 1997. The expenditures for the thirty-nine weeks ended June
28, 1998 were primarily related to expansion of TSA suspension capacity,
including manufacturing and support equipment, construction costs for the
Company's Sioux Falls, South Dakota plant and construction of an expansion to
the Company's Hutchinson, Minnesota plant.
In March 1998, the Company issued and sold $150,000,000 aggregate principal
amount of its 6% Convertible Subordinated Notes due 2005 (the "Convertible
Notes") to NationsBanc Montgomery Securities LLC and First Chicago Capital
Markets, Inc., which resold the Convertible Notes to qualified institutional
buyers and institutional accredited investors. The Company is using the net
proceeds from the issuance and sale of the Convertible Notes primarily to fund
capital expenditures to expand TSA suspension capacity.
During the first quarter of fiscal 1997, the Company signed a Master Lease
Agreement with General Electric Capital Corporation ("GE"), providing for
leasing of manufacturing equipment in fiscal 1997. The Company serves as a
purchasing agent on behalf of GE. As such, amounts expended on GE's behalf,
but not yet reimbursed, are included on the accompanying consolidated balance
sheet under GE lease receivable. During the fourth quarter of fiscal 1997,
the Company signed an amendment to the Master Lease Agreement with GE,
providing for leasing of up to $30,000,000 of manufacturing equipment in
fiscal 1998. The full amount of the fiscal 1998 commitment has been expended
on GE's behalf, of which $6,014,000 remains as a receivable at June 28, 1998.
<PAGE>
The Company's financing agreements contain various restrictive financial
covenants. As of June 28, 1998, the Company was in compliance with all such
covenants. Due to its operating results for the thirty-nine weeks ended June
28, 1998 and its expected operating results for the remainder of the fiscal
year, the Company anticipates that it will need to amend two financing
agreements to maintain compliance at the end of its fiscal quarter on
September 27, 1998 with covenants requiring it to maintain minimum fixed
charge coverage and interest coverage ratios and minimum earnings
requirements. The Company currently is negotiating amendments to such
financial covenants. The Company in addition anticipates that in its fiscal
quarter ending December 27, 1998, it will need to amend two other financing
agreements to maintain compliance at the end of such quarter with covenants
requiring it to maintain a minimum fixed charge coverage ratio and limiting
the Company's ability to enter into long-term leases. There can be no
assurance that the Company will be successful in renegotiating its financing
agreements or otherwise obtaining relief from such covenants at any future
date. If the Company is not in compliance with financial covenants in its
financing agreements at the end of any fiscal quarter, its future financial
results and liquidity could be materially adversely affected.
The Company's business is highly capital intensive. The Company currently
anticipates fiscal 1998 capital expenditures of approximately $200,000,000
primarily related to expansion of TSA suspension capacity, including
manufacturing and support equipment, construction of the Company's Sioux
Falls assembly plant and the expansion of the Company's Hutchinson, Minnesota
plant. The Company currently believes its cash balances, any cash generated
from operations and anticipated future revenue will be sufficient to meet its
operating expenses, debt service requirements under the Convertible Notes and
other outstanding indebtedness and capital expenditure requirements through
fiscal 1999, as the Company continues to transition from conventional
suspension assembly production to high-volume TSA suspension assembly
production. If the Company's fiscal year 1999 operating results or cash from
operations do not meet the Company's expectations, the Company may require
additional external financing to fund operations, debt service and capital
expenditures. The Company is evaluating and intends to pursue additional
external sources of capital to supplement its current capital resources.
The Company anticipates that continued significant capital expenditures will be
necessary in fiscal 1999 and 2000 for continued expansion of its TSA suspension
production capacity, and to accommodate anticipated market growth. In that
regard, beyond fiscal 1999 the Company may require significant additional
external financing to fund operations, debt service and capital expenditures.
The Company's ability to fund its future liquidity needs depends on its future
performance and financial results, which, to a certain extent, are subject to
general conditions in the hard disk drive industry as well as general economic,
financial, competitive and other factors that are beyond its control. If
forecasted operating results do not meet the Company's expectations or if the
Company is unable to obtain adequate financing at such time or times as such
financing is required, the Company's future financial results and liquidity
could be materially adversely affected. There can be no assurance that the
Company's business will generate sufficient cash flow from operations, that
anticipated revenue growth and operating improvements will be realized or that
the Company will be able to obtain additional financing in an amount sufficient
to enable the Company to service its indebtedness, make necessary capital
expenditures or fund its operations.
In connection with the sale of the Convertible Notes by the Company in
March 1998, the Company incurred $150,000,000 in additional indebtedness which
increased the ratio of total debt to total capitalization to 47.4% at June 28,
1998. As a result of this increased leverage, the Company's interest
obligations increased substantially. To the extent that a substantial portion
of the Company's cash flow from operations is used to pay the principal of, and
interest on, its indebtedness, such cash flow will not be available to fund
future operations and capital expenditures. There is no assurance that the
Company's operating cash flow will be sufficient to meet its debt service
requirements.
<PAGE>
The Company uses technology throughout its operations that will be affected
by Year 2000 issues. During fiscal 1997, the Company implemented remediation
steps to make the core business systems which are part of the Company's
computer systems Year 2000 compliant. The Company recently completed a
company-wide project to identify and assess other Company systems for Year
2000 compliance. Remediation efforts currently are addressing its critical
non-compliant systems. The Company also is continuing to assess the Year 2000
compliance status of its critical suppliers. The expenses relating to Year
2000 compliance incurred in fiscal 1997 and for the thirty-nine weeks ended
June 28, 1998 were not material, and the Company believes the amounts that
will be required to be expensed in the future for such compliance will not
have a material impact on its results of operations, liquidity and capital
resources.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "ACCOUNTING FOR DERIVATIVE
INSTRUMENTS AND HEDGING ACTIVITIES" ("SFAS 133"). SFAS 133 establishes
accounting and reporting standards requiring that every derivative instrument
(including certain derivative instruments embedded in other contracts) be
recorded in the balance sheet as either an asset or liability measured at its
fair value. SFAS 133 requires that changes in the derivative's fair value be
recognized currently in earnings unless specific hedge accounting criteria
are met. Special accounting for qualifying hedges allows a derivative's gains
and losses to offset related results on the hedged item in the income
statement, and requires that a company must formally document, designate and
assess the effectiveness of transactions that receive hedge accounting.
SFAS 133 is effective for fiscal years beginning after June 15, 1999. The
Company has not yet quantified the impact of adopting SFAS 133 on its
financial statements and has not determined the timing of adoption of SFAS 133.
However, adoption of SFAS 133 could increase volatility in earnings.
MARKET TRENDS AND CERTAIN CONTINGENCIES
The Company expects that the expanding use of personal computers, enterprise
computing and storage, increasingly complex software and the emergence of new
applications for disk storage that have contributed to the historical
year-to-year increases in disk drive production will continue for the
foreseeable future. The Company also believes demand for disk drives will
continue to be subject, as it has in the past, to rapid short-term changes
resulting from, among other things, changes in disk drive inventory levels,
responses to competitive price changes and unpredicted high or low market
acceptance of new drive models.
As in past years, disk drives continue to be the storage device of choice for
applications requiring low access times and higher capacities because of their
speed and low cost per megabyte of stored data. The cost of storing data on
disk drives continues to decrease primarily due to increasing areal density, the
amount of data which can be stored on magnetic disks. Improvements in areal
density have been attained by lowering the fly height of the read/write head,
using smaller read/write heads with advanced air bearing designs, improving
other components such as motors and media and using new read/write head types
such as those of magneto-resistive (MR) design. The move to MR heads, which
require more electrical leads, and the transition to smaller or pico-sized
heads, which are more sensitive to mechanical variation, may compel drive
manufacturers to use newer suspension technologies, such as the Company's TSA
suspension assemblies. Although customer demand for TSA suspensions is growing,
the Company expects that conventional suspensions will make up a majority of its
shipments for the current fiscal year.
The continual pursuit of increasing areal density may lead to further
value-added features for TSA suspensions which incorporate a second stage
actuator on the suspension to improve head positioning over increasingly tighter
data tracks, or which mount preamplifiers near the head to improve data transfer
signals. These changes require the Company to develop the competencies of an
electromechanical system supplier so that multiple functions may be consolidated
on the suspension assembly.
The introduction of new types or sizes of read/write heads and new disk drive
designs tends to initially decrease customers' yields with the result that the
Company may experience temporary elevations of demand for some types of
suspension assemblies. The advent of new heads and new drive designs may
require rapid development and implementation of new suspension types which
temporarily may reduce the Company's manufacturing yields and efficiencies.
There can be no assurance that such changes will not continue to affect the
Company.
<PAGE>
The Company generally experiences fluctuating selling prices due to product
maturity, competitive pricing pressures and new product offerings. While many
of the Company's current products are reaching or are in the mature phase of
their life cycle and thus are experiencing declining prices, its newer products,
such as TSA suspensions, have initially much higher selling prices.
The Company and certain users of the Company's products have from time to
time received, and may in the future receive, communications from third
parties asserting patents against the Company or its customers which may
relate to certain of the Company's manufacturing equipment or products or to
products which include the Company's products as a component. Although the
Company to date has not been a party to any such material intellectual
property litigation, certain of its customers have been sued on patents
having claims closely related to products sold by the Company. In the event
any third party were to make a valid infringement claim and a license were
not available on terms acceptable to the Company, the Company's operating
results could be adversely affected. The Company expects that, as the number
of patents issued continues to increase, and as the Company grows, the volume
of intellectual property claims could increase.
On February 27, 1998, the Company commenced a lawsuit, in McLeod County
District Court in Glencoe, Minnesota, against five former employees and their
newly-formed company. Four of the five former employees were managers or
supervisors and all were involved with the Company's TSA suspension program.
The lawsuit alleges, among other things, breach of non-compete,
confidentiality and assignment of inventions agreements. The Company seeks
monetary damages in an amount to be determined at trial, and an injunction
preventing unlawful conduct by the defendants. The Company has determined to
pursue the lawsuit to prevent the improper use and disclosure of trade
secrets and other confidential information.
The Company is a party to certain other claims arising in the ordinary course
of business. In the opinion of management, the outcome of such claims will
not materially affect the Company's current or future financial position or
results of operations.
FORWARD-LOOKING STATEMENTS
The statements above under the headings "General" and "Market Trends and
Certain Contingencies" about demand for and shipments of disk drives and
suspension assemblies, including TSA suspensions, manufacturing capacity and
yields and selling prices, the statements above under the headings "General"
and "Liquidity and Capital Resources" about anticipated operating results,
covenant amendments, capital expenditures and capital resources, and the
statements above under the heading "Liquidity and Capital Resources" about
Year 2000 compliance expenditures, are forward-looking statements based on
current expectations. These statements are subject to risks and
uncertainties, including fluctuating order rates and product mix, slower or
faster customer acceptance of the Company's new products, difficulties in
producing its TSA suspensions, difficulties in financing and expanding
capacity, changes in manufacturing efficiencies, difficulties in obtaining
covenant amendments in its existing financing agreements, difficulties in
implementing Year 2000 compliance and the other risks and uncertainties
discussed above. These factors may cause the Company's actual future results
to differ materially from historical earnings and from the financial
performance of the Company presently anticipated. Additional discussion of
these and other factors may be found in the Company's Registration Statement
on Form S-3, filed on April 15, 1998.
<PAGE>
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
a) EXHIBITS.
3.1 Restated Articles of Incorporation of the Company, as amended by
Articles of Amendment dated January 27, 1988 and as amended by Articles
of Amendment dated January 21, 1997 (incorporated by reference to
Exhibit 3.1 to the Company's Quarterly Report on Form 10-Q for the
quarter ended June 29, 1997, File No. 0-14709).
3.2 Restated By-Laws of the Company (incorporated by reference to Exhibit
3.2 to the Company's Quarterly Report on Form 10-Q for the quarter ended
December 29, 1996, File No. 0-14709).
11.1 Statement Regarding Computation of Per Share Earnings.
27.1 Financial Data Schedule.
b) REPORTS ON FORM 8-K.
No Current Reports on Form 8-K were filed by the Company during the thirteen
weeks ended June 28, 1998.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HUTCHINSON TECHNOLOGY INCORPORATED
Date: August 6, 1998 By /s/Wayne M. Fortun
---------------------- ----------------------------------
Wayne M. Fortun
President, Chief Executive Officer
and Chief Operating Officer
Date: August 6, 1998 By /s/John A. Ingleman
---------------------- ----------------------------------
John A. Ingleman
Vice President, Chief Financial
Officer and Secretary
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit
No. Page
- ------- --------------
<S> <C> <C>
11.1 Statement Regarding Computation of Per Share Electronically
Earnings Filed
27.1 Financial Data Schedule Electronically
Filed
</TABLE>
<PAGE>
HUTCHINSON TECHNOLOGY INCORPORATED
STATEMENT REGARDING COMPUTATION
OF PER SHARE EARNINGS- UNAUDITED
(In thousands, except per share data)
<TABLE>
<CAPTION>
Thirteen Weeks Ended Thirty-Nine Weeks Ended
----------------------- -----------------------
June 28, June 29, June 28, June 29,
1998 1997 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
NET INCOME (LOSS) ($9,250) $13,698 ($35,149) $41,498
-------- -------- -------- --------
-------- -------- -------- --------
NET INCOME (LOSS) PER SHARE -
BASIC:
Weighted average common
shares outstanding 19,755 19,531 19,686 17,834
-------- -------- -------- --------
BASIC
NET INCOME (LOSS) PER SHARE ($0.47) $0.70 ($1.79) $2.33
-------- -------- -------- --------
-------- -------- -------- --------
NET INCOME (LOSS) PER SHARE -
DILUTED:
Weighted average common
shares outstanding 19,755 19,531 19,686 17,834
Dilutive effect of stock options
outstanding after application
of treasury stock method - 745 - 692
-------- -------- -------- --------
19,755 20,276 19,686 18,526
-------- -------- -------- --------
-------- -------- -------- --------
DILUTED
NET INCOME (LOSS) PER SHARE ($0.47) $0.68 ($1.79) $2.24
-------- -------- -------- --------
-------- -------- -------- --------
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AND CONSOLIDATED STATEMENT OF OPERATIONS OF
HUTCHINSON TECHNOLOGY INCORPORATED FOR THE THIRTY-NINE WEEKS ENDED JUNE 28,
1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> SEP-27-1998
<PERIOD-START> SEP-29-1997
<PERIOD-END> JUN-28-1998
<CASH> 107,924,000
<SECURITIES> 6,531,000
<RECEIVABLES> 53,057,000
<ALLOWANCES> 5,293,000
<INVENTORY> 30,262,000
<CURRENT-ASSETS> 230,230,000
<PP&E> 507,793,000
<DEPRECIATION> 197,748,000
<TOTAL-ASSETS> 562,634,000
<CURRENT-LIABILITIES> 91,329,000
<BONDS> 220,122,000
0
0
<COMMON> 198,000
<OTHER-SE> 249,731,000
<TOTAL-LIABILITY-AND-EQUITY> 562,634,000
<SALES> 291,237,000
<TOTAL-REVENUES> 291,237,000
<CGS> 292,775,000
<TOTAL-COSTS> 292,775,000
<OTHER-EXPENSES> 15,337,000<F1>
<LOSS-PROVISION> 5,034,000
<INTEREST-EXPENSE> 2,315,000
<INCOME-PRETAX> (47,511,000)
<INCOME-TAX> (12,362,000)
<INCOME-CONTINUING> (35,149,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (35,149,000)
<EPS-PRIMARY> (1.79)
<EPS-DILUTED> (1.79)
<FN>
<F1>OTHER EXPENSES REFLECT RESEARCH AND DEVELOPMENT EXPENSES.
</FN>
</TABLE>
