<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15 (d)
OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended April 2, 1995
Commission File Number 0-16852
KOMAG, INCORPORATED
(Registrant)
Incorporated in the State of Delaware
I.R.S. Employer Identification Number 94-2914864
275 South Hillview Drive, Milpitas, California 95035
Telephone: (408) 946-2300
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 .
---------- -----------
On April 2, 1995, 23,118,623 shares of the Registrant's common stock, $0.01 par
value, were issued and outstanding.
<PAGE> 2
INDEX
KOMAG, INCORPORATED
<TABLE>
<CAPTION>
Page No.
<S> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements (Unaudited)
Consolidated income statements -- Three
months ended April 2, 1995, and April 3, 1994 . . . . . 3
Consolidated balance sheets -- April 2, 1995, and
January 1, 1995 . . . . . . . . . . . . . . . . . . . 4
Consolidated statements of cash flows -- Three
months ended April 2, 1995, and April 3, 1994 . . . . . 5
Notes to consolidated financial statements --
April 2, 1995 . . . . . . . . . . . . . . . . . . . . 6-7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations . . . . . 8-11
PART II. OTHER INFORMATION
Item 1. Legal Proceedings . . . . . . . . . . . . . . . . . . . 11
Item 2. Changes in Securities . . . . . . . . . . . . . . . . . 11
Item 3. Defaults Upon Senior Securities . . . . . . . . . . . . 11
Item 4. Submission of Matters to a Vote of Security Holders . . 11
Item 5. Other Information . . . . . . . . . . . . . . . . . . . 11
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . 11
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
</TABLE>
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<PAGE> 3
PART I. FINANCIAL INFORMATION
KOMAG, INCORPORATED
CONSOLIDATED INCOME STATEMENTS
(In Thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
---------------------
APRIL 2 April 3
1995 1994
-------- -------
<S> <C> <C>
Net sales $105,063 $97,701
Cost of sales 72,296 64,813
-------- -------
GROSS PROFIT 32,767 32,888
Operating expenses:
Research, development and engineering 6,065 5,325
Selling, general and administrative 7,542 7,525
-------- -------
13,607 12,850
-------- -------
OPERATING INCOME 19,160 20,038
Other income (expense):
Interest income 1,034 717
Interest expense (614) (852)
Other, net (384) 437
-------- -------
36 302
-------- -------
Income before income taxes, minority interest,
and equity in joint venture income 19,196 20,340
Provision for income taxes 4,800 6,015
-------- -------
Income before minority interest and equity in
joint venture income 14,396 14,325
Minority interest in net income of consolidated subsidiary 415 148
Equity in net income of unconsolidated joint venture 899 1,267
-------- -------
NET INCOME $ 14,880 $15,444
======== =======
Net income per share $0.63 $0.68
======== =======
Number of shares used in per share computation 23,641 22,694
======== =======
</TABLE>
See notes to consolidated financial statements.
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<PAGE> 4
KOMAG, INCORPORATED
CONSOLIDATED BALANCE SHEETS
(In Thousands)
<TABLE>
<CAPTION>
APRIL 2 January 1
1995 1995
---------- ---------
(UNAUDITED) (note)
<S> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents $ 70,304 $ 47,329
Short-term investments 20,925 46,619
Accounts receivable less allowances of
$2,182 in 1995 and $2,223 in 1994 47,425 44,778
Inventories:
Raw materials 19,709 15,030
Work-in-process 5,673 5,652
Finished goods 2,345 3,419
--------- ---------
Total inventories 27,727 24,101
Prepaid expenses and deposits 1,345 1,611
Deferred income taxes 7,069 7,069
--------- ---------
Total current assets 174,795 171,507
Investment in Unconsolidated Joint Venture 26,667 22,653
Property, Plant and Equipment
Land 4,360 4,360
Building 34,412 33,322
Equipment 318,093 294,626
Furniture 5,494 4,711
Leasehold Improvements 47,279 45,633
--------- ---------
409,638 382,652
Less allowances for depreciation and amortization (166,993) (153,769)
--------- ---------
Net property, plant and equipment 242,645 228,883
Deposits and Other Assets 1,040 1,052
--------- ---------
$ 445,147 $ 424,095
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Trade accounts payable $18,390 $ 17,842
Accounts payable to related parties 3,088 2,354
Accrued compensation and benefits 15,505 17,913
Other liabilities 2,003 1,665
Income taxes payable 4,454 271
Current portion of long-term debt 12,920 13,232
--------- ---------
Total current liabilities 56,360 53,277
Long-term Debt, less current portion 13,333 16,250
Deferred Income Taxes 18,725 18,725
Other Long-term Liabilities 529 548
Minority Interest in Consolidated Subsidiary 4,215 4,080
Stockholders' Equity
Preferred stock -- --
Common stock 231 229
Additional paid-in capital 241,035 238,262
Retained earnings 101,670 86,790
Accumulated foreign currency translation adjustments 9,049 5,934
--------- ---------
Total stockholders' equity 351,985 331,215
--------- ---------
$ 445,147 $ 424,095
========= =========
</TABLE>
Note: The balance sheet at January 1, 1995 has been derived from the audited
financial statements at that date.
See notes to consolidated financial statements.
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<PAGE> 5
KOMAG, INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
-----------------------
APRIL 2 April 3
1995 1994
-------- --------
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 14,880 $ 15,444
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 13,885 10,916
Provision for losses on accounts receivable (60) 94
Equity in net income of unconsolidated joint venture (899) (1,267)
Loss on disposal of equipment 476 432
Deferred rent (19) 12
Minority interest in net income of consolidated subsidiary 415 148
Changes in operating assets and liabilities:
Accounts receivable (2,587) (841)
Inventories (3,626) 2,027
Prepaid expenses and deposits 266 822
Trade accounts payable 548 (3,738)
Accounts payable to related parties 734 382
Accrued compensation and benefits (2,408) (235)
Other liabilities 338 (1,547)
Income taxes payable 4,183 469
Restructuring liability -- (7,456)
-------- --------
Net cash provided by operating activities 26,126 15,662
INVESTING ACTIVITIES
Acquisition of property, plant and equipment (28,133) (18,252)
Purchases of short-term investments (6,525) (25,844)
Proceeds from short-term investments at maturity 32,219 32,500
Proceeds from disposal of equipment 10 599
Deposits and other assets 12 198
-------- --------
Net cash used in investing activities (2,417) (10,799)
FINANCING ACTIVITIES
Increase in notes payable -- 1,500
Payments of notes payable -- (4,500)
Payments of long-term obligations (3,229) (2,711)
Sale of Common Stock, net of issuance costs 2,775 4,411
Distribution to minority interest holder (280) (280)
-------- --------
Net cash used in financing activities (734) (1,580)
Increase in cash and cash equivalents 22,975 3,283
Cash and cash equivalents at beginning of year 47,329 27,159
-------- --------
Cash and cash equivalents at end of period $ 70,304 $ 30,442
======== ========
</TABLE>
See notes to consolidated financial statements.
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<PAGE> 6
KOMAG, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
APRIL 2, 1995
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of Management, all
adjustments (consisting of normal recurring accruals) considered necessary for
a fair presentation have been included. Operating results for the three-month
period ended April 2, 1995 are not necessarily indicative of the results that
may be expected for the year ending December 31, 1995.
For further information, refer to the consolidated financial statements and
footnotes thereto included in the Company's Annual Report on Form 10-K for the
year ended January 1, 1995.
The Company uses a 52-53 week fiscal year ending on the Sunday closest to
December 31. The three-month reporting periods for the comparable years
included in this report are each comprised of thirteen weeks.
NOTE 2 - INVESTMENT IN DEBT SECURITIES
The Company invests its excess cash in high-quality, short-term debt and
equity instruments. Short-term investments consist primarily of AAA-rated,
municipal auction-rate preferred stock with maturities greater than 90 days.
None of the Company's investments have maturities greater than one year.
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<PAGE> 7
The following is a summary of the Company's investments by major security
type at amortized cost which approximates its fair value:
<TABLE>
<CAPTION>
APR 2 Jan 1
(in thousands) 1995 1995
------- -------
<S> <C> <C>
State and local government securities $77,100 $70,765
Corporate debt securities 4,319 2,417
Mortgage-backed securities 8,163 10,677
------- -------
$89,582 $83,859
======= =======
Amounts included in cash and cash equivalents $68,657 $46,244
Amounts included in short term investments 20,925 37,615
------- -------
$89,582 $83,859
======= =======
</TABLE>
NOTE 3 - INCOME TAXES
The estimated annual effective income tax rate for 1995 of 25% is lower
than the 1995 combined federal and state statutory rate of 41% and the
effective income tax rate for 1994 of 30%. The Company's wholly-owned thin-film
media operation, Komag USA (Malaysia) Sdn., has been granted a tax holiday for
a period of five years commencing in July 1993. The decrease in the effective
income tax rate for 1995 relative to 1994 is primarily due to anticipated
growth in the percentage of consolidated income to be derived from the
Malaysian operation in 1995.
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<PAGE> 8
KOMAG, INCORPORATED
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS:
Revenue
Net sales of thin-film media increased 8% in the first quarter of 1995
relative to the first quarter of 1994. The increase between the comparable
periods was almost entirely due to higher unit sales volume as the overall
average selling price decreased only slightly. Price reductions for individual
product offerings are characteristic of the thin-film media industry and
strengthening of the overall average selling price typically occurs only as the
result of product mix shifts to higher-priced, more technologically advanced
product offerings. Sales of the Company's highest-density product offering
(1800 Oe), which began in the last half of 1994, accounted for 41% of net sales
for the first quarter of 1995. This rapid transition to higher-priced, 1800 Oe
product mostly offset traditionally declining prices on older-generation
products between the first quarter of 1994 and the first quarter of 1995. On a
sequential basis, the unit sales mix of 1800 Oe product in the first quarter of
1995 increased substantially from 14% of the unit sales mix in the fourth
quarter of 1994 and resulted in a 3% increase in the overall average selling
price between the periods. Industry demand for high performance 1800 Oe disks
currently exceeds industry supply. The Company plans to aggressively ramp
production of this product class throughout 1995 at both its U.S. and Malaysian
facilities, exiting the year with over 80% of unit shipments in this product
class. The Company anticipates that the planned transition to a higher mix of
1800 Oe product and a continuing industry shortage of high performance disks
will stabilize the overall average selling price in 1995. In the event the
Company is unable to continue the steep production ramp of 1800 Oe media,
demand for its products may decrease and its operating performance may be
adversely affected. Distribution sales of thin-film media manufactured by the
Company's Japanese joint venture, Asahi Komag Co., Ltd. ("AKCL"), of $0.2
million in the first quarter of 1995 were substantially lower than the $3.3
million in the first quarter of 1994. The Company expects that distribution
sales of AKCL product will be minimal throughout 1995 as demand within the
Japanese thin-film media market is expected to continue to absorb most of
AKCL's capacity.
During the first quarter of 1995 three customers individually accounted for
at least ten percent of consolidated net sales: Seagate Technology (45%),
Quantum Corporation (22%), and Hewlett-Packard Company (21%). The Company
expects that it will continue to derive a substantial portion of its sales from
a relatively few number of customers. Additionally, the distribution of sales
among customers may vary from quarter to quarter.
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<PAGE> 9
The 12% increase in unit production volume at the Company exceeded the 9%
increase in unit sales volume between the comparable first quarters of 1994 and
1995 to compensate for the decrease in product sourced from AKCL between these
two periods. Increased production was primarily achieved through increases in
effective capacity. Manufacturing yields decreased slightly between these
periods as a result of the steep transition to the more technologically
advanced 1800 Oe product mix. Capacity utilization was relatively unchanged.
The Company has historically increased production capacity through the addition
of sputtering lines and implementation of process improvement programs designed
to improve throughput. These improvement programs accounted for nearly two-
thirds of the increase in effective capacity between the periods. Net physical
capacity additions provided the remaining increase in unit production volume.
The Company added its fourteenth and fifteenth sputtering lines in August 1994
and March 1995, respectively, and had available its thirteenth sputtering line
(added in mid-January 1994) for all of the first quarter of 1995. One of the
Company's fifteen sputtering lines is exclusively devoted to research and
development activities. Additionally, the Company removed one of its
sputtering machines from production in November 1994 in order to retrofit the
machine. The retrofitting is expected to enhance a machine's product
capabilities and shorten process cycle time. The retrofitted machine was
returned to production in March 1995. One machine is expected to be out of
production throughout 1995 as the Company sequentially retrofits three
additional machines.
Gross Margin
The thin-film media gross margin percentage for the first quarter of 1995
declined to 31.2% from 33.7% in the first quarter of 1994. The decrease
represents the combined effects of the slightly lower overall average selling
price and higher manufacturing costs in the current year quarter relative to
the first three months of 1994. Lower manufacturing yields associated with the
ramping of 1800 Oe product coupled with certain equipment write-offs in the
U.S. and start-up costs for the fourth sputtering line in Malaysia contributed
to the higher manufacturing costs. A decrease in the mix of lower-margin
distribution sales of product manufactured by AKCL relative to sales of the
Company's internally produced thin-film media cushioned the effects of the
lower overall average selling price and higher manufacturing costs in the first
three months of 1995 relative to the first three months of 1994.
Operating Expenses
Research and development ("R&D") expenses increased 14% ($0.7 million) in
the first quarter of 1995 compared to the first quarter of 1994. The increase
between the comparable three-month periods was mainly due to development costs
for advanced thin-film media and certain equipment write-offs. Selling, general
and administrative ("SG&A") expenses were unchanged in the first quarter of
1995 relative to the first quarter of 1994. SG&A expenses, excluding
provisions for bad debt allowances and the Company's bonus and profit sharing
-9-
<PAGE> 10
programs, increased approximately $0.3 million primarily due to higher
personnel costs incurred to support the growth in the business. Provisions for
bad debt allowances and the Company's bonus and profit sharing programs
decreased $0.2 million and $0.1 million, respectively, between these
three-month periods.
Interest and Other Income/Expense
Interest income increased $0.3 million (44%) in the three-month period of
1995 relative to the comparable period of 1994. The increase was due primarily
to higher interest rates in the current year period. Additionally, average
cash and short-term investment balances were slightly higher in the 1995
period. Interest expense decreased $0.2 million (28%) in the first quarter of
1995 relative to the first quarter of 1994 due to a lower average outstanding
debt balance in the current year period. Other expense increased $0.8 million
in the first quarter of 1995 compared to the first quarter of 1994 mainly due
to lower foreign currency gains at the Company's Malaysian operations in the
current year period.
Income Taxes
The estimated annual effective income tax rate for 1995 of 25% is lower
than the 1995 combined federal and state statutory rate of 41% and the
effective income tax rate for 1994 of 30%. The Company's wholly-owned thin-film
media operation, Komag USA (Malaysia) Sdn., has been granted a tax holiday for
a period of five years commencing July 1993. The decrease in the effective
income tax rate for 1995 relative to 1994 is primarily due to anticipated
growth in the percentage of consolidated income to be derived from the
Malaysian operation in 1995.
Minority Interest in KMT/Equity in Net Income of AKCL
The minority interest in the net income of consolidated subsidiary
represented Kobe Steel USA Holdings Inc's 45% share of Komag Material
Technology, Inc.'s ("KMT's") net income. KMT recorded net income of $0.9
million in the first quarter of 1995 and $0.3 million in the first quarter of
1994. The Company recorded 50% of AKCL's net income as its equity in net
income of unconsolidated joint venture. AKCL reported net income of $1.8
million in the three-month period of 1995, down from $2.5 million in the three-
month period of 1994. The decrease is primarily attributable to the partial
writedown ($1.0 million, net of tax) of AKCL's investment in Headway
Technologies, Inc. AKCL will continue such write downs until Headway emerges
from the development stage. These writedowns are a function of losses incurred
at Headway. AKCL's functional currency is the Japanese yen and the Company
translates AKCL's yen-based income statements to U.S. dollars at the average
exchange rate for the period. The yen strengthened approximately 10% between
the comparable three-month periods. AKCL's net income would have been
approximately $1.5 million in the first quarter of 1995 had the yen-based
income statement been translated at the average rate in effect for the first
quarter of 1994.
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<PAGE> 11
LIQUIDITY AND CAPITAL RESOURCES:
Cash and short-term investments of $91.2 million at the end of the first
quarter of 1995 decreased $2.7 million from the end of the prior fiscal year.
Consolidated operating activities generated $26.1 million in cash during the
first three months of 1995 and funded most of the Company's $28.1 million of
capital spending during the three-month period. Sales of Common Stock under
the Company's stock option and stock purchase programs during this period
generated $2.8 million, while repayments of long-term obligations used $3.2
million.
Total capital expenditures for 1995 are currently planned at approximately
$150 million. Construction of a 230,000 square-foot manufacturing plant on a
55-acre site in the Malaysian state of Sarawak, process improvements in the
U.S. and Malaysia, installation of two additional sputtering lines, and
payments on an additional sputtering line (expected to be installed in Malaysia
in 1996) are the major components of the capital plan. Non-cancellable
commitments at April 2, 1995 total approximately $33.9 million.
The Company believes that existing cash balances and credit facilities,
coupled with anticipated cash flow from operations, will fund its 1995 capital
spending plans and allow the maintenance of adequate cash balances. The
Company has $80.0 million available under various revolving credit agreements
including a three-year term $35.0 million facility and two one-year term lines
aggregating $45.0 million. The Company is currently evaluating its expansion
plans beyond 1995 to determine the feasibility of accelerating capacity
additions. The Company will continue to review its cash requirements and
evaluate its need for additional financing.
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings -- Not Applicable.
ITEM 2. Changes in Securities -- Not Applicable.
ITEM 3. Defaults Upon Senior Securities -- Not Applicable.
ITEM 4. Submission of Matters to a Vote of Security Holders -- Not
Applicable.
ITEM 5. Other Information -- Not Applicable.
ITEM 6. Exhibits and Reports on Form 8-K -- None.
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<PAGE> 12
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.
KOMAG, INCORPORATED
(Registrant)
DATE: MAY 8, 1995 BY: /s/ William L. Potts, Jr.
----------- ------------------------------
William L. Potts, Jr.
Vice President and
Chief Financial Officer
DATE: MAY 8, 1995 BY: /s/ Stephen C. Johnson
----------- ------------------------------
Stephen C. Johnson
President and
Chief Executive Officer
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<TABLE> <S> <C>
<ARTICLE> 5
<RESTATED>
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-02-1995
<PERIOD-END> APR-02-1995
<EXCHANGE-RATE> 1
<CASH> 70,304
<SECURITIES> 20,925
<RECEIVABLES> 49,607
<ALLOWANCES> 2,182
<INVENTORY> 27,727
<CURRENT-ASSETS> 174,795
<PP&E> 409,638
<DEPRECIATION> 166,993
<TOTAL-ASSETS> 445,147
<CURRENT-LIABILITIES> 56,360
<BONDS> 13,333
<COMMON> 231
0
0
<OTHER-SE> 351,985
<TOTAL-LIABILITY-AND-EQUITY> 445,147
<SALES> 105,063
<TOTAL-REVENUES> 105,063
<CGS> 72,296
<TOTAL-COSTS> 72,296
<OTHER-EXPENSES> 13,607
<LOSS-PROVISION> (60)
<INTEREST-EXPENSE> 614
<INCOME-PRETAX> 19,196
<INCOME-TAX> 4,800
<INCOME-CONTINUING> 14,880
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 14,880
<EPS-PRIMARY> .63
<EPS-DILUTED> .62
</TABLE>
