<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 27, 1999
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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
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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 30, 1999 the registrant had 24,741,340 shares of Common Stock
issued and outstanding.
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
HUTCHINSON TECHNOLOGY INCORPORATED
CONDENSED CONSOLIDATED BALANCE SHEETS - UNAUDITED
(Dollars in thousands)
<TABLE>
<CAPTION>
June 27, September 27,
1999 1998
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<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $178,743 $ 58,942
Securities available for sale 83,444 11,921
Trade receivables, net 64,890 65,798
Other receivables 2,619 12,337
Inventories 44,860 25,780
Prepaid taxes and other expenses 19,789 19,507
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Total current assets 394,345 194,285
Property, plant and equipment, net 348,628 335,289
Other assets 19,203 19,904
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$762,176 $549,478
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LIABILITIES AND SHAREHOLDERS' INVESTMENT
Current liabilities:
Current maturities of long-term debt $ 3,995 $ 4,613
Accounts payable and accrued expenses 49,569 64,187
Accrued compensation 23,702 24,371
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Total current liabilities 77,266 93,171
Long-term debt, less current maturities 66,125 68,247
Convertible subordinated notes 150,000 150,000
Other long-term liabilities 1,807 1,230
Shareholders' investment:
Common stock, $.01 par value, 45,000,000 shares authorized,
24,650,000 and 19,780,000 issued and outstanding 247 198
Additional paid-in capital 363,269 152,957
Retained earnings 103,462 83,675
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Total shareholders' investment 466,978 236,830
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$762,176 $549,478
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</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 27, June 28, June 27, June 28,
1999 1998 1999 1998
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Net sales $131,257 $107,127 $438,898 $ 291,237
Cost of sales 121,864 105,472 359,530 292,775
-------------- -------------- -------------- --------------
Gross profit (loss) 9,393 1,655 79,368 (1,538)
Selling, general and
administrative expenses 10,775 9,589 35,821 31,276
Research and development
expenses 6,138 4,652 17,184 15,337
-------------- -------------- -------------- --------------
Income (loss) from operations (7,520) (12,586) 26,363 (48,151)
Other income, net 3,158 1,840 6,414 2,955
Interest expense (2,593) (1,764) (7,730) (2,315)
-------------- -------------- -------------- --------------
Income (loss) before income taxes (6,955) (12,510) 25,047 (47,511)
Provision (benefit) for income taxes (1,461) (3,260) 5,260 (12,362)
-------------- -------------- -------------- --------------
Net income (loss) $(5,494) $(9,250) $ 19,787 $(35,149)
============== ============== ============== ==============
Basic earnings (loss) per share $ (0.22) $ (0.47) $ 0.88 $ (1.79)
============== ============== ============== ==============
Diluted earnings (loss) per share $ (0.22) $ (0.47) $ 0.88 $ (1.79)
============== ============== ============== ==============
Weighted average common shares
outstanding 24,650 19,755 22,371 19,686
Weighted average common and
diluted shares outstanding 24,650 19,755 28,302 19,686
</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
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June 27, June 28,
1999 1998
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<S> <C> <C>
Operating activities:
Net income (loss) $ 19,787 $ (35,149)
Adjustments to reconcile net income (loss) to
cash provided by operating activities:
Depreciation and amortization 65,317 33,239
Deferred taxes 2,808 (12,149)
Change in operating assets and liabilities (Note 5) (16,861) 10,037
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Cash provided by (used for) operating activities 71,051 (4,022)
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Investing activities:
Capital expenditures (87,348) (159,416)
Funding from GE lease receivable - 29,523
Increase in GE lease receivable - (13,001)
Sales of marketable securities 35,270 18,541
Purchases of marketable securities (106,793) (4,860)
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Cash used for investing activities (158,871) (129,213)
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Financing activities:
Repayments of long-term debt (2,740) (3,459)
Net proceeds from issuance of convertible subordinated notes - 145,320
Net proceeds from issuance of common stock 210,361 958
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Cash provided by financing activities 207,621 142,819
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Net increase in cash and cash equivalents 119,801 9,584
Cash and cash equivalents at beginning of period 58,942 98,340
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Cash and cash equivalents at end of period $ 178,743 $ 107,924
================== ==================
</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) 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 is focused on continuing to develop
suspension assemblies which address the rapidly changing requirements of the
hard disk drive industry. The Company also is evaluating other product
opportunities in the medical devices market but does not expect any
medical-related revenue in fiscal 1999. A breakdown of customer sales is as
follows:
<TABLE>
<CAPTION>
Thirteen Weeks Ended Thirty-Nine Weeks Ended
-------------------------------- -------------------------------
June 27, June 28, June 27, June 28,
Percentage of Net Sales 1999 1998 1999 1998
- ----------------------- --------------- --------------- --------------- --------------
<S> <C> <C> <C> <C>
Five Largest Customers 77% 81% 81% 79%
Seagate Technology Incorporated 22 17 16 19
SAE Magnetics, Ltd./TDK 20 28 19 28
Yamaha Corporation 13 5 13 9
Alps Electric Co., Ltd. 12 6 9 3
IBM and affiliates 10 25 24 20
</TABLE>
<PAGE>
(3) 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 27, September 27,
1999 1998
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<S> <C> <C>
Raw materials $16,943 $ 9,320
Work in process 16,214 12,740
Finished goods 11,891 3,908
LIFO reserve (188) (188)
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$44,860 $25,780
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</TABLE>
(4) NET INCOME PER SHARE
Basic earnings (loss) per share is computed by dividing net income (loss)
available to common shareholders by the weighted average number of common shares
outstanding during the year. Diluted earnings (loss) per share is computed under
the treasury stock method and is calculated to compute the dilutive effect of
potential common shares. A reconciliation of these amounts is as follows:
<TABLE>
<CAPTION>
Thirty-Nine Weeks Ended
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June 27, June 28,
1999 1998
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<S> <C> <C>
Net income (loss) $19,787 $(35,149)
Plus: interest expense on convertible subordinated notes 7,233 -
Less: additional profit-sharing expense and tax benefit reduction 2,091 -
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Net income (loss) available to common shareholders $24,929 $(35,149)
=================== ==================
Weighted average common shares outstanding 22,371 19,686
Dilutive potential common shares 5,931 -
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Weighted average common and diluted shares outstanding 28,302 19,686
=================== ==================
Basic earnings (loss) per share $ 0.88 $ (1.79)
Diluted earnings (loss) per share $ 0.88 $ (1.79)
</TABLE>
<PAGE>
(5) SUPPLEMENTARY CASH FLOW INFORMATION
<TABLE>
<CAPTION>
Thirty-Nine Weeks Ended
-------------------------------------------
June 27, June 28,
1999 1998
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<S> <C> <C>
Changes in operating assets and liabilities:
Receivables, net $ 10,626 $(1,981)
Inventories (19,080) (3,073)
Prepaid and other (3,143) (5,552)
Accounts payable and accrued liabilities (5,841) 23,218
Other non-current liabilities 577 (2,575)
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$(16,861) $ 10,037
=================== ==================
Cash paid (refunded) for:
Interest (net of amount capitalized) $ 4,462 $ -
Income taxes $ (2,023) $ 2,883
</TABLE>
Capitalized interest for the thirty-nine weeks ended June 27, 1999 was
$3,996,000 compared to $5,123,000 for the comparable period in fiscal 1998.
6) SALE OF COMMON STOCK
In February 1999, the Company issued 4,800,000 shares of its common stock
through a public offering. The Company received net proceeds of $209,136,000 and
expects to use the funds for general corporate purposes, primarily capital
expenditures related to expansion of TSA suspension assembly production
capacity. Pending such uses, the Company has invested the net proceeds from the
offering in short-term income-producing investments.
<PAGE>
HUTCHINSON TECHNOLOGY INCORPORATED
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
GENERAL
Since the late 1980's, we have derived substantially all of our revenue from the
sale of our suspension assemblies. We currently sell a variety of conventional
suspension assemblies based on several standard designs for nano- and pico-sized
heads. In fiscal 1997, we began volume production of our TSA suspension
assemblies.
The disk drive industry is highly cyclical, with periods of increased demand and
rapid growth followed by periods of oversupply and subsequent contraction.
Beginning in the third quarter of fiscal 1997 and continuing throughout all of
fiscal 1998, total suspension assembly unit sales in the industry declined
substantially. Demand for our conventional suspension assemblies started to
recover during the latter part of the fourth quarter of fiscal 1998. Such demand
remained stable through the third quarter of fiscal 1999.
Demand for our TSA suspension assemblies was not adversely affected by the
industry slowdown during fiscal 1998. In fiscal 1998, we shipped 85 million TSA
suspension assemblies, up from 8 million units shipped in fiscal 1997. In the
first quarter of fiscal 1999, we shipped 55 million TSA suspension assemblies,
representing approximately 38% of our total unit shipments and 68% of net sales
in that period. In the second quarter of fiscal 1999, we again increased our
shipments of TSA suspension assemblies to 60 million, representing approximately
40% of our total unit shipments and 65% of net sales in that period. Shipments
of TSA suspension assemblies dropped to 56 million in the third quarter of
fiscal 1999, representing 60% of net sales in that period, due to weak demand
during the quarter.
Although we have limited visibility, we expect that demand for our conventional
suspension assemblies may weaken in the fourth quarter of fiscal 1999 from the
91 million units shipped in the third quarter of fiscal 1999, and we expect to
ship fewer conventional suspension assemblies in fiscal 1999 than we shipped in
fiscal 1998. At the same time, we anticipate continuing acceptance by the disk
drive industry of our TSA suspension assemblies and expect shipments of TSA
suspension assemblies to improve from the third quarter to the fourth quarter of
fiscal 1999, accounting for just under half of our total unit shipments and a
majority of our net sales in fiscal 1999. However, demand has typically been
weak during the summer months, and the recovery in demand could be slower than
currently anticipated.
TSA suspension assemblies have a higher average selling price than conventional
suspension assemblies because of the improved performance and other benefits
they provide to our customers. We rapidly expanded our TSA suspension assembly
production capacity in fiscal 1998, but our high-volume production of TSA
suspension assemblies was not profitable in that year due to production
inefficiencies. We produced TSA suspension assemblies profitably in the first
quarter of fiscal 1999 due to higher volumes, productivity gains and the
benefits of premium pricing on a particular program that required an accelerated
ramp. During the second quarter of fiscal 1999, we continued to improve our TSA
suspension production efficiency, and improved the profitability of TSA
suspensions over the first quarter of fiscal 1999. TSA suspension margins in the
fiscal 1999 third quarter, however, were impacted by an expected decline in TSA
prices as certain TSA products have matured, and by lower suspension demand, as
noted above.
Growth in our net sales depends, in part, on the successful management of our
TSA suspension assembly production capacity, our manufacturing work force and
our corporate infrastructure. To meet anticipated
<PAGE>
future demand for TSA suspension assemblies, we have continued to expand TSA
suspension assembly production capacity. In the fiscal year ended September
27, 1998, our capital expenditures were approximately $207 million, primarily
related to expansion of TSA suspension assembly capacity. We made capital
expenditures of $35 million in the first quarter of fiscal 1999 and $24
million in the second quarter of fiscal 1999. As demand has fluctuated during
fiscal 1999, we reduced capital expenditures to $28 million in the third
quarter of fiscal 1999, and we currently anticipate spending an additional
$28 million in capital expenditures during the fourth quarter of fiscal 1999,
primarily for expansion of TSA suspension assembly production capacity.
On August 4, 1999, we announced plans to consolidate our assembly operations
by transferring assembly operations currently located in our Hutchinson,
Minnesota plant to our plants in Eau Claire, Wisconsin and Sioux Falls, South
Dakota. We also announced plans to defer the start of production at our Eau
Claire trace manufacturing facility, currently under construction. The
transfer of the Hutchinson assembly operations will reduce employment in
Hutchinson by approximately 500 positions over the next two fiscal quarters,
but will increase employment in Eau Claire and Sioux Falls. These changes are
intended to improve production efficiency and reduce costs as well as improve
the efficiency of our capital spending. We currently anticipate that capital
expenditures in fiscal 2000 will be similar to fiscal 1999 which will expand
our TSA suspension assembly production capacity to accommodate anticipated
market growth and additional future TSA product features.
Our ability to introduce new products on a timely basis is an important
factor in our continued success. New products have lower manufacturing yields
and are produced in lower quantities than more mature products. Manufacturing
yields generally improve as a product matures and production volumes
increase. Manufacturing yields also vary depending on the complexity and
uniqueness of product specifications. Because our business is capital
intensive and requires a high level of fixed costs, gross margins are also
extremely sensitive to changes in volume. Small variations in capacity
utilization or manufacturing yields generally have a significant impact on
gross margins. Both customer demand and our 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.
RESULTS OF OPERATIONS
THIRTEEN WEEKS ENDED JUNE 27, 1999 VS. THIRTEEN WEEKS ENDED JUNE 28, 1998.
Net sales for the thirteen weeks ended June 27, 1999 were $131,257,000, an
increase of $24,130,000 or 23% compared to the comparable period in fiscal
1998. This increase was primarily due to higher overall suspension volumes
and a favorable product mix of more TSA suspension assemblies having higher
average selling prices.
Gross profit for the thirteen weeks ended June 27, 1999 was $9,393,000, an
increase of $7,738,000 or 468% compared to the comparable period in fiscal
1998, and gross profit as a percent of net sales increased from 2% to 7%.
This increase was primarily due to improved efficiencies on TSA suspension
assembly production and higher TSA suspension assembly sales volume, offset
partially by lower conventional suspension assembly sales volume.
Selling, general and administrative expenses for the thirteen weeks ended
June 27, 1999 were $10,775,000, an increase of $1,186,000 or 12% compared to
the comparable period in fiscal 1998. The increased expenses were due
primarily to higher engineering software consulting and information systems
contractor expenses of $455,000, higher depreciation and lease expense of
$263,000 and higher travel and training of $242,000. During the third quarter
of fiscal 1999, we also recognized expenses related to settlement of
intellectual property claims relating to bar coding and machine vision systems.
These increases were partially offset by a reduction of the bad debt reserve
of $753,000. As a percent of net sales, selling, general and administrative
expenses decreased from 9% in the third quarter of fiscal 1998 to 8% in the
third quarter of fiscal 1999.
Research and development expenses for the thirteen weeks ended June 27, 1999
were $6,138,000 compared to $4,652,000 for the thirteen weeks ended June 28,
1998. The increase was mainly due to higher expenses for developing a
suspension that incorporates a second stage actuator (referred to as an
aTSA suspension)
<PAGE>
and other suspension and equipment development, and higher expenses for
medical product development expenses. As a percent of net sales, research and
development expenses remained at 5% in the third quarter of fiscal 1998 and
in the third quarter of fiscal 1999.
Other income, net, for the thirteen weeks ended June 27, 1999 was $3,158,000,
an increase of $1,318,000 from the comparable fiscal 1998 period. The
increase was primarily due to an increase in interest income as a result of a
higher average investment balance.
Interest expense for the thirteen weeks ended June 27, 1999 was $2,593,000,
an increase of $829,000 from the comparable period in fiscal 1998, primarily
due to a decrease in capitalization of interest of $819,000.
The income tax benefit for the thirteen weeks ended June 27, 1999 was based
on an estimated effective tax rate for the fiscal year of 21% which was below
the statutory federal rate primarily due to the large portion of sales that
qualifies for the benefit of our Foreign Sales Corporation.
Net loss for the thirteen weeks ended June 27, 1999 was $5,494,000, compared
to a net loss of $9,250,000 for the comparable period in fiscal 1998. As a
percent of net sales, net loss decreased from (9)% to (4)%. The decrease in
the net loss was primarily due to the improved manufacturing efficiencies on
TSA suspension assembly production, higher overall suspension volumes and a
favorable product mix with higher average selling prices, as noted above.
THIRTY-NINE WEEKS ENDED JUNE 27, 1999 VS. THIRTY-NINE WEEKS ENDED JUNE 28,
1998.
Net sales for the thirty-nine weeks ended June 27, 1999 were $438,898,000, an
increase of $147,661,000 or 51% compared to the comparable period in fiscal
1998. This increase was primarily due to higher overall suspension volumes
and a favorable product mix of more TSA suspension assemblies having higher
average selling prices, a portion of which was related to premium pricing on
a particular program that required an accelerated ramp in the first quarter of
fiscal 1999.
Gross profit for the thirty-nine weeks ended June 27, 1999 was $79,368,000,
or 18% of net sales, compared to a gross loss of $1,538,000 for the
comparable period in fiscal 1998. This increase was primarily due to improved
manufacturing efficiencies on TSA suspension assembly production, higher
average selling prices, including the premium pricing described above, and
higher TSA suspension assembly sales order volume, offset partially by lower
conventional suspension assembly sales volume.
Selling, general and administrative expenses for the thirty-nine weeks ended
June 27, 1999 were $35,821,000, an increase of $4,545,000 or 15% compared to
the comparable period in fiscal 1998. The increased expenses were due
primarily to increased profit sharing and other incentive compensation costs
of $4,788,000 and higher depreciation and lease expense of $950,000. The
second quarter of fiscal 1998 included $1,290,000 in fees related to certain
financing agreements. Increases in selling, general and administrative
expenses also were offset partially by a reduction of the bad debt reserve of
$1,076,000. As a percent of net sales, selling, general and administrative
expenses decreased from 11% for the thirty-nine weeks ended June 28, 1998 to
8% for the thirty-nine weeks ended June 27, 1999.
Research and development expenses for the thirty-nine weeks ended June 27,
1999 were $17,184,000 compared to $15,337,000 for the thirty-nine weeks ended
June 28, 1998. The increase was mainly due to higher expenses for developing a
suspension that incorporates a second stage actuator (referred to as an aTSA
suspension) and other suspension and equipment development, offset partially
by lower medical product
<PAGE>
development expenses. As a percent of net sales, research and development
expenses decreased from 5% for the thirty-nine weeks ended June 28, 1998 to
4% for the thirty-nine weeks ended June 27, 1999.
Other income, net, for the thirty-nine weeks ended June 27, 1999 was
$6,414,000, an increase of $3,459,000 from the comparable period in fiscal
1998, primarily due to an increase in interest income as a result of a higher
average investment balance.
Interest expense for the thirty-nine weeks ended June 27, 1999 was
$7,730,000, an increase of $5,415,000 from the comparable period in fiscal
1998, primarily due to higher average outstanding debt and a decrease in
capitalization of interest of $1,127,000.
The income tax provision for the thirty-nine weeks ended June 27, 1999 was
based on an estimated effective tax rate for the fiscal year of 21% which was
below the statutory federal rate primarily due to the large portion of sales
that qualifies for the benefit of our Foreign Sales Corporation.
Net income for the thirty-nine weeks ended June 27, 1999 was $19,787,000, or
5% of net sales, compared to a net loss of $35,149,000 for the comparable
period in fiscal 1998. The improved profitability was primarily due to the
improved manufacturing efficiencies on TSA suspension assembly production,
higher overall suspension volumes, and a favorable product mix with higher
average selling prices, as noted above.
LIQUIDITY AND CAPITAL RESOURCES
Our principal sources of liquidity are cash and cash equivalents, securities
available for sale, cash flow from operations and additional financing
capacity. On December 31, 1998, we signed a financing agreement with The CIT
Group/Business Credit, Inc., establishing a $50,000,000 credit facility
secured by our accounts receivable and inventory. At June 27, 1999, we had an
outstanding letter of credit under this facility of $1,015,000 as security
for our variable rate demand note. No other amounts were outstanding under
the credit facility at June 27, 1999.
Our cash and cash equivalents increased from $58,942,000 at September 27,
1998 to $178,702,000 at June 27, 1999. The increase was primarily a result of
the stock offering noted below. We generated cash from operating activities
of $71,051,000 for the thirty-nine weeks ended June 27, 1999.
Cash used for capital expenditures totaled $206,888,000 in fiscal 1998 and
$87,348,000 for the thirty-nine weeks ended June 27, 1999. The capital
expenditures we made in the first three quarters of fiscal 1999 were
primarily related to continued expansion of our TSA suspension assembly
production capacity. We currently anticipate spending an additional
$28,000,000 for capital expenditures during the fourth quarter of fiscal 1999
and similar amounts thereafter, primarily for continued expansion of TSA
suspension assembly production capacity to accommodate anticipated market
growth and additional future TSA product features.
In February 1999, we issued 4,800,000 shares of our common stock through a
public offering. We received net proceeds of $209,136,000 and expect to use
the funds for general corporate purposes, primarily capital expenditures
related to expansion of TSA suspension assembly production capacity. Pending
such uses, we have invested the net proceeds from the offering in short-term
income-producing investments.
We currently believe that our cash and cash equivalents, securities available
for sale, cash generated from operations and our existing credit facility
will be sufficient to meet our operating expenses, debt service requirements
and capital
<PAGE>
expenditures through fiscal 1999. We may require significant additional
financing to meet our capital requirements beyond fiscal 1999, dependent on
market conditions. We will pursue additional debt or equity financing to
supplement our current capital resources if needed. Our ability to obtain
additional financing will depend upon a number of factors, including our
future performance and financial results and general economic and capital
market conditions. We cannot be sure that we will be able to raise additional
capital on reasonable terms or at all.
Certain of our existing financing agreements contain financial covenants and
covenants which may restrict our ability to enter into certain types of
financing. At June 27, 1999, we were in compliance with all such covenants.
Due to our expected operating results for the fourth quarter of fiscal 1999,
we anticipate that we will need to amend one financing agreement to maintain
compliance at the end of our fiscal quarter on September 26, 1999 with a
covenant requiring us to maintain a minimum fixed charge coverage ratio. If
we are not in compliance with financial covenants in our financing agreements
at the end of any fiscal quarter, our future financial results and liquidity
could be materially adversely affected.
There can be no assurance that our business will generate sufficient cash
flow from operations, that anticipated future revenue growth and operating
improvements will be realized or that we will be able to obtain additional
financing in an amount sufficient to enable us to make necessary capital
expenditures, service our indebtedness, fund our operations or maintain
compliance with financing agreement covenants.
YEAR 2000 ISSUE
The Year 2000 issue is the result of computer programs, microprocessors and
embedded date-reliant systems using two digits rather than four to define the
applicable year. If not corrected, date-related information and data could
cause many programs or systems to fail or to generate erroneous information.
Our products have no inherent time or date function. Our products will
operate regardless of the Year 2000 issue. However, we use computer systems
and programs that will be affected by Year 2000 issues.
In fiscal 1997, we began a comprehensive Year 2000 readiness program. The
program addressed: (i) business software and hardware; (ii) manufacturing
software and hardware used in the design, and/or manufacturing of suspension
assemblies; and (iii) third party suppliers. Although we do not currently
expect any significant disruption to our operations due to Year 2000 issues,
we cannot be sure that we will be able to assess, identify and correct all
Year 2000 issues in a timely or successful manner.
We completed remediation of our key business software in November 1997. These
key applications include purchased applications that address, but are not
limited to: (i) sales and order processing; (ii) resource planning and
scheduling; (iii) procurement; (iv) inventory control; (v) shipping; and (vi)
financial accounting and reporting. We completed additional testing of these
systems during the second quarter of fiscal 1999 using "data-aging" software,
and we completed implementation of Year 2000 compliance follow-up measures in
connection with such testing by June 30, 1999.
We completed an enterprise-wide inventory in May 1998 of all other business
software and hardware with potential Year 2000 issues. The inventory included
approximately 460 purchased and internally-developed business and desktop
software programs or packages. We consider 350 of these software programs or
packages critical. The inventory also included over 3,000 pieces of hardware,
including personal computers, servers and network devices. We have analyzed
all of the critical business and desktop software and hardware included in
the inventory for the existence and extent of Year 2000 issues. As of
June 30, 1999, approximately 92% of the critical software and approximately 99%
of the hardware was Year 2000 compliant. We believe that all of the critical
business software and hardware included in the inventory will be Year 2000
compliant by September 1999.
<PAGE>
We completed an enterprise-wide inventory in May 1998 of all manufacturing
software, hardware and embedded-chip technology with potential Year 2000
issues. The inventory included: (i) all equipment and software used to
design, build and test tools and machines; (ii) all tools and machines used
to design, build and test suspension assemblies; and (iii) software and
equipment for all facility systems. As of June 30, 1999, we had completed
analysis of the entire inventory for the existence and extent of Year 2000
issues. As of June 30, 1999, approximately 90% of the manufacturing software,
hardware and embedded-chip technology included in the inventory was Year 2000
compliant. We believe that all manufacturing software, hardware and
embedded-chip technology will be Year 2000 compliant by September 1999.
We are assessing our suppliers whose failure to become Year 2000 compliant in
a timely manner, if at all, could have a material adverse effect on us. We
distributed questionnaires on Year 2000 compliance status (and follow-up
letters, as necessary) to over 200 of our suppliers. As of June 30, 1999, we
have received responses from 90% of the suppliers queried. The responses are
being reviewed, and follow-up activities are being pursued as required to
evaluate, or mitigate, potential risks associated with such suppliers due to
Year 2000 issues. Analysis of initial supplier responses is 90% complete. We
anticipate that all analysis and follow-up activities with the suppliers who
have responded will be complete by August 1999. We also have developed
contingency plans for the suppliers that have not responded or for whom there
is uncertainty regarding Year 2000 compliance.
As of June 30, 1999, we had incurred $282,000 in Year 2000 efforts. We
currently estimate incurring an additional $550,000 for Year 2000 efforts.
The projected costs of our Year 2000 readiness efforts are based on our best
estimates, which were derived using assumptions about future events. These
estimates may change as our efforts proceed and actual results could differ
significantly from current plans.
Although we expect to complete our Year 2000 remediation in 1999, there are
risks if our efforts are delayed or fail. A delay or failure in remedying a
Year 2000 issue, caused by computer hardware or software errors, or our
failure to be, or suppliers who may not be, Year 2000 compliant could, in a
worst case, interrupt our business. Any interruption in our business could
have a material adverse effect on our business, financial condition and
results of operations depending upon the extent and duration of the
interruption.
We have completed a corporate contingency plan and are implementing this plan
to ensure that back-up processes are in place if we are unable to complete
remediation efforts by December 31, 1999. We are also developing contingency
plans for specific business areas and assets which we expect to complete
by September 1999, but we cannot be sure that we will complete such plans, or
that any such plans will address all risks that may actually arise.
MARKET TRENDS AND CERTAIN CONTINGENCIES
We expect 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. We also believe 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
<PAGE>
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) and giant magneto-resistive (GMR) design.
The move to MR and GMR 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 our TSA suspension assemblies. We anticipate continuing
acceptance by the disk drive industry of our TSA suspension assemblies and
expect TSA suspension assemblies to account for just under half of our total
unit shipments in fiscal 1999.
The continual pursuit of increasing areal density may lead to further
value-added features for TSA suspensions. The industry may require a TSA
suspension which incorporates a second stage actuator on the suspension
(referred to as an aTSA suspension) to improve head positioning over
increasingly tighter data tracks, or which mounts a preamplifier chip near
the head to improve data transfer signals (referred to as a cTSA suspension).
These changes have required that we 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 we
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 our manufacturing yields and efficiencies. There can be no assurance
that we will not continue to be affected by such changes.
We generally experience fluctuating selling prices due to product maturity,
competitive pricing pressures and new product offerings. While many of our
current products are reaching or are in the mature phase of their life cycle
and thus are experiencing declining prices, our newer products 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.
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, production capacity and
yields and selling prices, the statements above under the headings "General"
<PAGE>
and "Liquidity and Capital Resources" about anticipated operating results and
gross margins, covenant amendments, capital expenditures and capital
resources, and the statements above under the heading "Year 2000 Issue" about
Year 2000 readiness efforts and its projected costs, 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 our new products, difficulties in
producing our TSA suspensions, difficulties in financing and expanding capacity,
changes in manufacturing efficiencies, difficulties in obtaining covenant
amendments in our existing financing agreements, difficulties in implementing
Year 2000 compliance and the other risks and uncertainties discussed above.
These factors may cause our actual future results to differ materially from
historical earnings and from the future financial performance we presently
anticipate. Additional discussion of these and other factors may be found in
our Registration Statement on Form S-3, filed January 8, 1999, under the
heading "Risk Factors".
<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).
4.1 Instruments defining the rights of security holders, including
an indenture. The Registrant agrees to furnish the Securities
and Exchange Commission upon request copies of instruments
with respect to long-term debt.
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 27, 1999.
<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 4, 1999 By /s/ Wayne M. Fortun
------------------------------- -----------------------------------
Wayne M. Fortun
President and Chief Executive Officer
Date: August 4, 1999 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>
11.1 Statement Regarding Computation of Per Share Earnings Electronically
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 27, June 28, June 27, June 28,
1999 1998 1999 1998
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
NET INCOME (LOSS) $(5,494) $(9,250) $19,787 $(35,149)
Plus: interest expense on convertible
subordinated notes - - 7,233 -
Less: additional profit sharing expense and tax
benefit reduction - - 2,091 -
--------------- --------------- --------------- ---------------
NET INCOME (LOSS) AVAILABLE TO COMMON
SHAREHOLDERS: $(5,494) $(9,250) $24,929 $(35,149)
=============== =============== =============== ===============
Weighted average common
shares outstanding 24,650 19,755 22,371 19,686
Dilutive effect of convertible
subordinated notes - - 5,291 -
Dilutive effect of stock options
outstanding after application of
treasury stock method - - 640 -
--------------- --------------- --------------- ---------------
24,650 19,755 28,302 19,686
=============== =============== =============== ===============
BASIC
NET INCOME (LOSS) PER SHARE $ (0.22) $ (0.47) $ 0.88 $ (1.79)
=============== =============== =============== ===============
DILUTED
NET INCOME (LOSS) PER SHARE $ (0.22) $ (0.47) $ 0.88 $ (1.79)
=============== =============== =============== ===============
</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 27, 1999
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> SEP-26-1999
<PERIOD-START> SEP-28-1998
<PERIOD-END> JUN-27-1999
<CASH> 178,743,000
<SECURITIES> 83,444,000
<RECEIVABLES> 64,890,000
<ALLOWANCES> 7,509,000
<INVENTORY> 44,860,000
<CURRENT-ASSETS> 394,345,000
<PP&E> 599,999,000
<DEPRECIATION> 251,371,000
<TOTAL-ASSETS> 762,176,000
<CURRENT-LIABILITIES> 77,266,000
<BONDS> 216,125,000
0
0
<COMMON> 247,000
<OTHER-SE> 466,731,000
<TOTAL-LIABILITY-AND-EQUITY> 762,176,000
<SALES> 438,898,000
<TOTAL-REVENUES> 438,898,000
<CGS> 359,530,000
<TOTAL-COSTS> 359,530,000
<OTHER-EXPENSES> 17,184,000<F1>
<LOSS-PROVISION> 6,528,000
<INTEREST-EXPENSE> 7,730,000
<INCOME-PRETAX> 25,047,000
<INCOME-TAX> 5,260,000
<INCOME-CONTINUING> 19,787,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 19,787,000
<EPS-BASIC> (0.22)
<EPS-DILUTED> (0.22)
<FN>
<F1>Other Expenses reflect research and development expenses.
</FN>
</TABLE>
