UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 8-K
CURRENT REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES AND EXCHANGE ACT OF 1934
Commission File Number 0-16852
Date of Report: June 2, 1998
KOMAG, INCORPORATED
(Registrant)
Incorporated in the State of Delaware
I.R.S. Employer Identification Number 94-2914864
1704 Automation Parkway, San Jose, California 95131
Telephone: (408) 576-2000
<PAGE>
ITEM 5: OTHER EVENTS
The Company issued the following press release on June 2, 1998:
Komag Updates Second Quarter Outlook
and Announces Actions to Address Weak Market Conditions
FOR IMMEDIATE RELEASE:
San Jose, California (June 2, 1998): Komag, Incorporated (Nasdaq: KMAG),
a leading independent supplier of thin-film media for computer hard disk
drives, today announced that the company will record a one-time charge
to earnings of $135-185 million in the second quarter ending June 28,
1998. The cash component is estimated at approximately 5-10% of the
charge. The second quarter charge is comprised of an impairment charge
that effectively reduces asset valuations to reflect the economic effect
of recent industry price erosion for disk media and the projected
underutilization of the company's production equipment and facilities.
The one-time charge also includes provisions for facility closure
expenses and severance-related costs. The company plans to reduce its
U.S. and Malaysian workforce of 4,800 employees by 10% through attrition
and a reduction in force.
Komag's management will hold a conference call at 5 p.m. eastern
daylight time today to discuss the contents of this press release. Komag
tentatively plans to release actual second quarter results on Thursday,
July 16, 1998 after the close of the market.
Second Quarter Update:
"At the beginning of the second quarter we anticipated that Komag's net
sales would rebound sharply from the $76.1 million recorded in the first
quarter of 1998 into the $100-125 million range. Several customers
recently lowered their orders for our disk products in response to
downward adjustments in their hard disk drive production build
schedules. As a result, we now expect second quarter net sales to be in
the $75-85 million range. Excluding the one-time charge, we expect to
post a net loss in the second quarter similar in magnitude to the $58
million net loss recorded in the first quarter of 1998," said Stephen C.
Johnson, president and chief executive officer of Komag, Incorporated.
"Recent changes in customer demand and our current belief that the media
industry's supply/demand imbalance will extend into 1999 have caused us
to adjust our expectations for the utilization of our installed
production capacity. In light of these changed expectations, we are
reducing the carrying value of the company's assets. Additionally, we
will limit our capital expenditures in the second half of 1998 to
approximately $15 million. As a result, our capital expenditures for
1998 should be about $100 million instead of the $120 million originally
budgeted for this year," said Johnson.
"Capital expenditures in the first half of 1998 largely reflect the
costs to implement advancements in our substrate and sputtering process
technologies. Customer feedback on our new product offerings that
incorporate these new technologies has been very favorable. We recently
began shipment of next-generation disks that store 3.4 gigabytes (GB) of
data on a 3-1/2 inch disk, our second product offering using epitaxial
sputtering technology on the company's upgraded in-line sputtering
machines. Importantly, our new epitaxial products are entering volume
production at the highest introductory yield level achieved at Komag
during the past two years. Additionally, our customers are obtaining
high drive assembly yields with these new products," said Johnson.
"We were recently selected to supply advanced disk media to the
industry's first 3-1/2 inch giant magnetoresistive (GMR) disk drive
program. This GMR media program is scheduled to enter volume production
in the second half of 1998. Using our new substrate and epitaxial
sputtering technologies, Komag's advanced product development team has
also demonstrated the capability to manufacture 3-1/2 inch disks that
can store 7.5 GB of data with GMR heads," said Johnson.
An expected sequential improvement in second quarter operating results
at Asahi Komag Co., Ltd. (AKCL), the company's 50%-owned unconsolidated
Japanese joint venture, will be offset by additional equipment write-
offs at AKCL. Consequently, Komag's share of AKCL's net loss is expected
to approximate the $9.9 million equity loss of the first quarter. AKCL
expects to record improving operating results in the third and fourth
quarters of 1998 based on continuing success with new product
qualifications.
At the end of May the company had $165 million in cash and investments.
The size of the company's expected second quarter net loss will result,
unless cured, in a technical default under the company's various bank
credit lines at the end of the quarter. The company currently has $260
million of bank borrowings outstanding. The company's borrowing capacity
will be subject to the successful re-negotiation of the terms of these
agreements and/or the negotiation of new financing arrangements. The
company is currently in discussions with existing and potential new
lenders about these matters.
Business Outlook:
"The company believes that overall unit shipments for the disk media
industry in 1998 will be relatively flat compared to 1997. A trend
toward fewer platters per disk drive, improving disk drive manufacturing
yields, and a concerted effort by disk drive suppliers to reduce disk
drive inventories should translate into a slower recovery for the media
industry in 1998 when compared to the recovery of the overall disk drive
market. In addition, the increased capacity and capability of captive
media suppliers will result in a decline in the merchant disk market
available to independent media suppliers this year. Due to the high
level of vertical integration within Komag's customer set, this market
change has had a pronounced negative effect on our actual and projected
unit shipment volumes for 1998. Due to an ample supply of media at
favorable pricing and the difficult market conditions in the disk drive
market, we expect that captive media suppliers may begin either to slow
or defer capacity expansion plans. If this occurs and the overall market
strengthens, the merchant market should resume a pattern of growth, thus
increasing our opportunity for higher unit volumes in 1999 and beyond,"
said Johnson.
"As part of our plan to reduce the company's cost structure, we will
cease operations at our oldest San Jose, California plant before
expiration of the building lease in July 1999. After closure of this
facility, we will operate five state-of-art production facilities
encompassing nearly 1.2 million square feet of manufacturing space.
Approximately 75% of this manufacturing space is located in Southeast
Asia. These facilities are closer to our customers' disk drive assembly
plants in Southeast Asia and enjoy certain cost and tax advantages over
U.S.-based manufacturing plants.
"Based on our current outlook, we expect to return to profitability in
the first half of 1999 subject to stabilization in industry media
pricing, continued success with new product introductions, and
realization of projected cost reductions and yield improvements. While
the majority of our production equipment and facilities remain
physically in place, the one-time second quarter charge will effectively
lower the depreciation bases of these assets, thus improving our fixed
cost structure. Additionally, we have instituted an aggressive cost
reduction program for direct materials and operating supplies.
Significant cost reduction opportunities have been identified and
several are in process of being implemented. With the recent
introduction of our new advanced substrate technology into manufacturing
we have seen noticeable yield improvement on our production lines. We
anticipate that these actions will support gross margins in the mid to
high 20% range by the second half of 1999," said Johnson.
"Our actions today, although painful, position us to emerge from this
turbulent period as a stronger and more competitive company. Our
decision to leave capable production assets physically in place at the
company's manufacturing facilities provides us with several advantages.
First, we will be able to limit 1999 capital expenditures to
approximately 50% of our 1998 spending rate. At such a spending level
and with profitable operating results, we expect to generate substantial
positive cash flow during 1999. Second, should the market rebound more
quickly than we currently anticipate, we can support increased disk
needs of our customers by re-staffing our idle production lines. Longer-
term, we expect to succeed by offering our customers superior products
at very competitive prices," said Johnson.
Forward-Looking Statements:
The above business outlook contains predictions, estimates and other
forward-looking statements that involve a number of risks and
uncertainties. While this outlook represents Komag's current judgment on
the future direction of the business, actual results may differ
materially from any future performance suggested above. Factors that
could cause actual results to differ include the following: availability
of sufficient cash resources; changes in the industry supply-demand
relationship and related pricing for enterprise and desktop disk
products; timely and successful product qualification of next-generation
products; timely and successful deployment of new process technologies
into manufacturing; utilization of manufacturing facilities; changes in
manufacturing efficiencies, in particular product yields; extensibility
of process equipment to meet more stringent future product requirements;
vertical integration and consolidation within the company's limited
customer base; increased competition; structural changes within the disk
media industry, availability of certain sole-sourced raw material
supplies; and the risk factors listed in the company's various SEC
filings, including its Form 10-K for the year ended December 28, 1997.
The company undertakes no obligation to publicly release the result of
any revisions to these forward-looking statements that may be made to
reflect events or circumstances after the date hereof or to reflect the
occurrence of unanticipated events.
About Komag:
Founded in 1983, Komag, Incorporated has produced over 340 million thin-
film disks, the primary storage medium for digital data used in computer
disk drives. The company is well positioned as the broad-based
strategic supplier of choice for the industry's leading disk drive
manufacturers. Through its highly automated factories in the United
States, Japan, and Southeast Asia, Komag provides high quality, leading-
edge disk products at a low overall cost of ownership. These attributes
enable Komag to partner with customers in the execution of their time-
to-market design and time-to-volume manufacturing strategies.
For more information about Komag, visit Komag's Internet home page at
http://www.komag.com or call Komag's Investor Relations 24-hour Hot Line
at
888-66-KOMAG or 408-576-2901.
Contact: Komag, Incorporated, San Jose, California
David H. Allen or William L. Potts, Jr.
408-576-2000 or via e-mail at [email protected]
<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, in the City of San Jose, State
of California, on June 8, 1998.
KOMAG, INCORPORATED
(Registrant)
DATE: JUNE 8, 1998 BY: /s/ WILLIAM L. POTTS, Jr.
William L. Potts, Jr.
Senior Vice President and
Chief Financial Officer
