1
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 25, 2000
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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 August 11, 2000 the registrant had 24,823,847 shares of Common Stock
issued and outstanding.
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
HUTCHINSON TECHNOLOGY INCORPORATED
CONDENSED CONSOLIDATED BALANCE SHEETS - UNAUDITED
(Dollars in thousands)
June 25, September 26,
2000 1999
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ASSETS
Current assets:
Cash and cash equivalents $ 107,312 $ 98,820
Securities available for sale 116,499 139,402
Trade receivables, net 56,990 72,716
Other receivables 13,798 9,050
Inventories 32,025 40,984
Prepaid taxes and other expenses 18,349 17,814
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Total current assets 344,973 378,786
Property, plant and equipment, net 284,529 352,936
Deferred tax assets (Note 6) 29,215 6,343
Other assets 13,537 13,784
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$ 672,254 $ 751,849
================== ===================
LIABILITIES AND SHAREHOLDERS' INVESTMENT
Current liabilities:
Current maturities of long-term debt $ 65,421 $ 4,171
Accounts payable and accrued expenses 33,100 43,635
Accrued compensation 16,348 17,014
GE lease accrual 8,012 4,519
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Total current liabilities 122,881 69,339
Long-term debt, less current maturities 2,304 65,562
Convertible subordinated notes 150,000 150,000
Other long-term liabilities 6,525 1,989
Shareholders' investment:
Common stock, $.01 par value, 45,000,000 shares authorized,
24,800,000 and 24,744,000 issued and outstanding 248 247
Additional paid-in capital 364,172 363,399
Retained earnings 26,124 101,313
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Total shareholders' investment 390,544 464,959
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$ 672,254 $ 751,849
================== ===================
See accompanying notes to condensed consolidated financial statements.
3
HUTCHINSON TECHNOLOGY INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS - UNAUDITED
(In thousands, except per share data)
Thirteen Weeks Ended Thirty-Nine Weeks Ended
--------------------------------- --------------------------------
June 25, June 27, June 25, June 27,
2000 1999 2000 1999
-------------- -------------- -------------- --------------
Net sales $ 108,663 $ 131,257 $ 343,423 $ 438,898
Cost of sales 104,425 121,864 326,760 359,530
------------- ------------- ------------- -------------
Gross profit 4,238 9,393 16,663 79,368
Selling, general and
administrative expenses 13,139 10,775 37,384 35,821
Research and development expenses 5,122 6,138 16,300 17,184
Asset impairment and other (Note 2) 16,740 -- 63,268 --
------------- ------------- ------------- -------------
Income (loss) from operations (30,763) (7,520) (100,289) 26,363
Interest expense (3,287) (2,593) (9,776) (7,730)
Other income, net 3,492 3,158 9,813 6,414
------------- ------------- ------------- -------------
Income (loss) before income taxes (30,558) (6,955) (100,252) 25,047
Provision (benefit) for income taxes (7,639) (1,461) (25,063) 5,260
------------- ------------- ------------- -------------
Net income (loss) ($ 22,919) ($ 5,494) ($ 75,189) $ 19,787
============= ============= ============= =============
Basic earnings (loss) per share ($ 0.92) ($ 0.22) ($ 3.04) $ 0.88
============= ============= ============= =============
Diluted earnings (loss) per share ($ 0.92) ($ 0.22) ($ 3.04) $ 0.88
============= ============= ============= =============
Weighted average common shares
outstanding 24,791 24,650 24,765 22,371
Weighted average common and
diluted shares outstanding 24,791 24,650 24,765 28,302
See accompanying notes to condensed consolidated financial statements.
4
HUTCHINSON TECHNOLOGY INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS - UNAUDITED
(Dollars in thousands)
Thirty-Nine Weeks Ended
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June 25, June 27,
2000 1999
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Operating activities:
Net income (loss) ($ 75,189) $ 19,787
Adjustments to reconcile net income (loss) to
cash provided by (used for) operating activities:
Asset impairment and other 63,268 --
Depreciation and amortization 70,883 65,317
Deferred taxes (23,558) 2,808
Change in operating assets and liabilities (Note 7) 5,635 (16,861)
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Cash provided by operating activities 41,039 71,051
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Investing activities:
Capital expenditures (54,216) (87,348)
Sales of marketable securities 90,621 35,270
Purchases of marketable securities (67,718) (106,793)
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Cash used for investing activities (31,313) (158,871)
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Financing activities:
Repayments of long-term debt (2,008) (2,740)
Net proceeds from issuance of common stock 774 210,361
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Cash provided by (used for) financing activities (1,234) 207,621
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Net increase in cash and cash equivalents 8,492 119,801
Cash and cash equivalents at beginning of period 98,820 58,942
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Cash and cash equivalents at end of period $107,312 $178,743
================= =================
See accompanying notes to condensed consolidated financial statements.
5
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) ASSET IMPAIRMENT AND OTHER
The Company recorded charges in its third fiscal 2000 quarter of $12,995,000 for
impaired assets and $3,745,000 for severance costs for approximately 950
employees terminated during the quarter. The Company also recorded charges in
its first fiscal 2000 quarter of $43,528,000 for impaired assets and $3,000,000
for severance costs for approximately 250 employees terminated during the
quarter. These charges are reflected on the accompanying statement of operations
as "Asset impairment and other."
i) Asset Impairment
Recent advances in technology have enabled disk drive manufacturers to reduce
their costs by using fewer components, including suspension assemblies, in each
desktop drive. Decreases in the industry's forecast for components, and our
resulting lower forecast for suspension assembly demand early in our third
fiscal quarter, caused us to suspend photoetching operations at our Eau Claire,
Wisconsin plant and consolidate these operations into our Hutchinson, Minnesota
plant. Late in our first fiscal quarter, the Company's forecast of future
suspension assembly demand decreased significantly due to industry forecasts
indicating decreases in component counts as a result of data density
improvments, extending from the desktop market to server drives. As a result of
these events, the Company prepared analyses during the third and first fiscal
quarters, in accordance with Statement of Financial Accounting Standards No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of", to determine if there was impairment of certain
excess manufacturing equipment and tooling, primarily for TSA suspensions. The
analyses resulted in impairment charges based on the difference between the
carrying value and the estimated fair value of these assets. Fair value was
based on discounting estimated future cash flows for assets grouped at the
lowest level for which there were identifiable cash flows at a discount rate
commensurate with the risks involved.
ii) Severance Charges
During quarter three, the Company terminated approximately 950 employees in its
workforce, including direct positions at our Eau Claire site and indirect
positions in its administrative, development and manufacturing support areas at
all plant sites. This workforce reduction resulted in a charge for severance
costs of $3,745,000. As of June 25, 2000, the full amount of these severance
costs had been paid. During quarter one, the Company terminated approximately
250 employees in its workforce, including indirect positions in its
administrative, development and manufacturing support areas at all plant sites.
This workforce reduction resulted in a charge for severance costs of $3,000,000.
The full amount of these severance costs has been paid.
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(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 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 2000. A breakdown of customer sales is as
follows:
Thirteen Weeks Ended Thirty-Nine Weeks Ended
-------------------------------- --------------------------------
June 25, June 27, June 25, June 27,
Percentage of Net Sales 2000 1999 2000 1999
- ----------------------- --------------- --------------- --------------- ---------------
Five Largest Customers 84% 69% 84% 74%
SAE Magnetics, Ltd./TDK 29 20 26 19
Seagate Technology, Inc. 17 22 20 16
Read-Rite Corporation 15 5 12 6
IBM and affiliates 13 10 14 24
Alps Electric Co., Ltd. 10 12 12 9
(4) INVENTORIES
At June 25, 2000, all inventories were stated at the lower of first-in,
first-out ("FIFO") cost or market. Inventories consisted of the following:
June 25, September 26,
2000 1999
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Raw materials $10,382 $15,728
Work in process 8,628 13,749
Finished goods 13,015 11,672
LIFO reserve - (165)
--------------- ---------------
$32,025 $40,984
=============== ===============
Effective September 27, 1999, the Company changed its method of inventory
accounting from last-in, first-out ("LIFO") to the FIFO method for determining
the cost of inventories. This change was made due to significant permanent
declines in inventory conversion costs over the life cycle of substantially all
of the Company's products. The permanent declines arise primarily due to
technological advances that
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affect the Company's conversion costs due to productivity gains. In addition,
substantially all of the Company's peer group utilizes the FIFO method of
accounting for their inventories. The pre-tax cumulative effect of the
accounting change was $165,000 and has been included in cost of sales on the
accompanying consolidated statement of operations for the thirty-nine weeks
ended June 25, 2000. The effect of this accounting change was not material to
the Company's results of operations; therefore, pro forma earnings per share
information has not been presented.
(5) EARNINGS (LOSS) 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:
Thirty-Nine Weeks Ended
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June 25, June 27,
2000 1999
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Net income (loss) ($75,189) $19,787
Plus: interest expense on convertible subordinated notes - 7,233
Less: additional profit-sharing and tax expense - 2,091
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Net income (loss) available to common shareholders ($75,189) $24,929
================ =================
Weighted average common shares outstanding 24,765 22,371
Dilutive potential common shares - 5,931
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Weighted average common and diluted shares outstanding 24,765 28,302
================ =================
Basic earnings (loss) per share ($ 3.04) $ 0.88
Diluted earnings (loss) per share ($ 3.04) $ 0.88
Potential common shares of 5,625,000 were excluded from the computation above of
diluted loss per share for the period ended June 25, 2000, as inclusion of these
shares would have been antidilutive.
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(6) INCOME TAXES
The following table details the significant components of the Company's deferred
tax assets:
June 25, September 26,
2000 1999
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Current deferred tax assets:
Receivable reserves $ 2,117 $ 2,489
Inventories 10,344 8,887
Accruals and other reserves 4,073 4,642
Tax credits 668 498
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Total current deferred tax assets $17,202 $16,516
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Long-term deferred tax assets (liabilities):
Property, plant and equipment 19,671 (209)
Tax credits 11,937 12,903
Net operating loss carryforwards 35,664 15,268
Valuation allowance (38,057) (21,619)
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Total long-term deferred tax assets 29,215 6,343
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Total deferred tax assets $46,417 $22,859
================= =================
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. At June 25, 2000, the
Company had unused tax credits and net operating loss carryforwards of
$48,269,000, of which $5,458,000 can be carried forward indefinitely and
$42,811,000 expire at various dates through 2015. A valuation allowance of
$38,057,000 has been recognized to offset the related deferred tax assets due to
the uncertainty of realizing the benefit of certain tax credits and net
operating loss carryforwards.
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(7) LONG-TERM DEBT
Certain of the Company's existing financing agreements contain restrictive
financial covenants. As of June 25, 2000, the Company was not in compliance with
certain covenants under its financing agreements governing its $65,000,000
senior notes. The Company has since obtained waivers for such non-compliance.
The Company anticipates, however, that as of the end of its fourth fiscal
quarter it will not be in compliance with such covenants if it cannot obtain
amendments that modify these covenants. As a result, all of these senior notes
have been classified as a current liability on the accompanying June 25, 2000
condensed consolidated balance sheet until the Company completes negotiations
with its lenders and all applicable amendments are obtained.
(8) SUPPLEMENTARY CASH FLOW INFORMATION
Thirty-Nine Weeks Ended
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June 25, June 27,
2000 1999
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Changes in operating assets and liabilities:
Receivables, net $ 10,978 $ 10,626
Inventories 8,959 (19,080)
Prepaid and other (319) (3,143)
Accounts payable and accrued liabilities (12,669) (5,841)
Other non-current liabilities (1,314) 577
----------------- -----------------
$ 5,635 ($ 16,861)
================= =================
Cash paid (refunded) for:
Interest (net of amount capitalized) $ 6,687 $ 4,462
Income taxes ($ 4,058) ($ 2,023)
Capitalized interest for the thirty-nine weeks ended June 25, 2000 was
$2,415,000 compared to $3,996,000 for the comparable period in fiscal 1999.
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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 virtually all of our revenue from the sale
of suspension assemblies to a small number of customers. We currently sell a
variety of conventional and TSA suspension assemblies based on several standard
designs. Suspension assemblies are a critical component of hard disk drives and
our results of operations are highly dependent on the hard disk drive industry.
The hard disk drive industry is intensely competitive and highly cyclical and
our results of operations have been adversely affected from time to time due to
hard disk drive industry slowdowns, technological changes that impact industry
component demand and production yields and our own product transitions.
During the past few years, some of the major personal computer makers and hard
disk drive manufacturers have transitioned to build-to-order manufacturing,
decreasing required disk drive inventory levels. Recent improvements in data
density of hard disk drives also enabled disk drive manufacturers to reduce
their costs by using fewer components, including suspensions, in each drive.
Additionally, improved head-gimbal assembly yields at our customers and shifts
in suspension assembly market share on certain programs has, to a lesser extent,
decreased demand for our products. Results for fiscal 1999 and the first three
quarters of fiscal 2000, therefore, did not show the results we expected, as
unit shipments have continued to decline as a result of continued weak demand.
Decreases in the industry's forecast for components, and our resulting lower
forecast for suspension assembly demand early in our third fiscal quarter,
caused us to suspend photoetching operations at our Eau Claire, Wisconsin plant
and consolidate these operations into our Hutchinson, Minnesota plant. This
resulted in the elimination of approximately 200 production and support
positions at the Eau Claire plant. We also eliminated approximately 750
additional positions across our plants. This workforce reduction resulted in a
$3,745,000 charge for severance costs. We also recognized a $12,995,000
write-down of impaired manufacturing equipment and tooling, primarily for our
TSA suspensions. These charges were recognized during the third quarter of
fiscal 2000.
In light of continued weak demand for suspension assemblies, we
terminated 350 employees during the second quarter of fiscal 2000, resulting in
a $1,181,000 charge for severance costs.
Late in our first fiscal quarter, our forecast of future suspension assembly
demand decreased significantly due to industry forecasts indicating decreases in
component counts as a result of data density improvements, extending from the
desktop market to server drives. Consequently, we conducted an impairment review
to determine if there was impairment of certain excess manufacturing equipment
and tooling. The results of the first quarter of fiscal 2000 included a
$43,528,000 write-down of impaired manufacturing equipment and tooling,
primarily for our TSA suspensions, and a $3,000,000 charge for severance costs
for approximately 250 employees terminated during that quarter.
We anticipate that our financial results for the last quarter of fiscal 2000 and
subsequent years will be impacted favorably by lower depreciation, lease and
labor expenses as a consequence of these first, second and third quarter
charges. These charges are expected to produce an estimated annual labor savings
of approximately $100,000,000. These charges also are expected to produce
savings of depreciation and lease costs of approximately $11,000,000,
$13,000,000, $10,000,000, $8,000,000 and $6,000,000 for the fiscal years 2000
through 2004, respectively, and thereafter an aggregate of $6,000,000 in
additional savings. With these cost reductions, at current demand levels, we
expect to reduce our losses in our fourth fiscal quarter. We currently believe
we will continue to have excess
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capacity, and suspension shipments will remain relatively flat for the
foreseeable future, until Internet-related storage growth increases, new
applications for disk storage become more widespread or average component counts
within disk drives stabilize.
Our gross margins have fluctuated and will continue to fluctuate based upon a
variety of factors such as the level of utilization of our production capacity,
changes in demand, product mix, selling prices, manufacturing yields, increases
in production and engineering costs associated with production of new products
and changes in the cost or limitations in the availability of materials. We
rapidly expanded our TSA suspension assembly production capacity in fiscal 1998
and in the first half of fiscal 1999, and capacity has exceeded demand since the
third quarter of fiscal 1999 as a result of the factors discussed above.
Profitable production of TSA suspension assemblies was achieved during fiscal
1999 primarily due to higher volumes and productivity gains. TSA suspension
margins, however, have been negatively impacted since the third quarter of
fiscal 1999 by lower than expected TSA suspension shipments resulting in excess
manufacturing equipment and tooling.
Our ability to introduce new products on a timely basis is an important factor
in our 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 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.
We typically allow customers to change or cancel orders on short notice without
penalty. We plan our production and inventory based primarily on forecasts of
customer demand, including forecasts of customer pulls of product out of our
"just-in-time" inventory hubs, 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 and difficulty in estimating our market share.
Improvement in our operating margins depends, in part, on the successful
management of our corporate infrastructure, our suspension assembly production
capacity and our workforce. In fiscal 1999, we brought together product and
process development functions in a separate, dedicated development center
located at our Hutchinson site to enable us to shorten prototype development
cycles and achieve high volume output per manufacturing unit more quickly.
During the past twelve months, we consolidated some of our manufacturing
operations to make better use of existing equipment and support staff across all
of our plants and to reduce costs. In fiscal 2000, we have terminated
approximately 1,550 employees as part of our efforts to reduce costs and improve
efficiency.
RESULTS OF OPERATIONS
THIRTEEN WEEKS ENDED JUNE 25, 2000 VS. THIRTEEN WEEKS ENDED JUNE 27, 1999.
Net sales for the thirteen weeks ended June 25, 2000 were $108,663,000, a
decrease of $22,594,000 or 17% from the comparable period in fiscal 1999. The
decrease was primarily due to lower suspension assembly sales volume.
Gross profit for the thirteen weeks ended June 25, 2000 was $4,238,000, a
decrease of $5,155,000 or 55% from the comparable period in fiscal 1999, and
gross profit as a percent of net sales decreased from
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7% to 4%. This decrease was primarily due to the lower sales volume noted above,
offset partially by lower manufacturing labor and benefits expenses as a result
of the recent workforce reductions.
Selling, general and administrative expenses for the thirteen weeks ended June
25, 2000 were $13,139,000, an increase of $2,364,000 or 22% over the comparable
period in fiscal 1999. The increase was due primarily to the accrual of
anticipated fees related to certain financing agreements. As a percent of net
sales, selling, general and administrative expenses increased from 8% in the
third quarter of fiscal 1999 to 12% in the third quarter of fiscal 2000.
Research and development expenses for the thirteen weeks ended June 25, 2000
were $5,122,000 compared to $6,138,000 for the thirteen weeks ended June 27,
1999. The decrease was primarily due to lower labor expenses and lower spending
on equipment and product development. As a percent of net sales, research and
development expenses have remained at 5% in the third quarter of fiscal 1999
and in the third quarter of fiscal 2000.
During the third quarter of fiscal 2000, we recorded a charge of $16,740,000 to
write down certain assets and record severance costs for approximately 950
employees terminated during the quarter. Components of the charge included a
$12,995,000 asset write-down of impaired manufacturing equipment and tooling,
primarily for our TSA suspensions, and $3,745,000 of severance costs. See Note
2, "Asset Impairment and Other", in the notes to the condensed consolidated
financial statements.
Interest expense for the thirteen weeks ended June 25, 2000 was $3,287,000, an
increase of $694,000 from the comparable period in fiscal 1999, primarily due to
a decrease in capitalization of interest of $717,000.
Other income, net, for the thirteen weeks ended June 25, 2000 was $3,492,000, an
increase of $334,000 from the comparable fiscal 1999 period. The increase was
primarily due to an increase in interest income as a result of higher
investment yields in the short-term markets.
The income tax benefit for the thirteen weeks ended June 25, 2000 was based on
an estimated effective tax rate for the fiscal year of 25% 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. We adjusted our
effective tax rate for the year from 29% to 25% during the second quarter of
fiscal 2000. This was a result of forecasting a larger loss for fiscal 2000 than
previously anticipated.
Net loss for the thirteen weeks ended June 25, 2000 was $22,919,000, compared to
a net loss of $5,494,000 for the comparable period in fiscal 1999. The decrease
was primarily due to the charge discussed above and the lower suspension
assembly sales volumes, as noted above. As a percent of net sales, net income
(loss) decreased from (4)% to (21)%.
THIRTY-NINE WEEKS ENDED JUNE 25, 2000 VS. THIRTY-NINE WEEKS ENDED JUNE 27, 1999.
Net sales for the thirty-nine weeks ended June 25, 2000 were $343,423,000, a
decrease of $95,475,000 or 22% from the comparable period in fiscal 1999. This
decrease was primarily due to lower suspension assembly sales volume and lower
average selling prices. In the first half of fiscal 1999, higher average selling
prices were largely due to premium pricing on a particular program that required
an accelerated production ramp.
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Gross profit for the thirty-nine weeks ended June 25, 2000 was $16,663,000,
compared to $79,368,000 for the comparable period in fiscal 1999, and gross
profit as a percent of net sales decreased from 18% to 5%. This decrease was
primarily due to the lower sales volume and average selling prices described
above and lower suspension assembly production volume, offset partially by lower
manufacturing labor and benefits expenses as a result of the recent workforce
reductions.
Selling, general and administrative expenses for the thirty-nine weeks ended
June 25, 2000 were $37,384,000, an increase of $1,563,000 or 4% from the
comparable period in fiscal 1999. The increased expenses were due primarily to
the accrual of anticipated fees related to certain financing agreements. As a
percent of net sales, selling, general and administrative expenses increased
from 8% for the thirty-nine weeks ended June 27, 1999 to 11% for the thirty-nine
weeks ended June 25, 2000.
Research and development expenses for the thirty-nine weeks ended June 25, 2000
were $16,300,000 compared to $17,184,000 for the thirty-nine weeks ended June
27, 1999. The decrease was primarily due to lower spending on equipment and
product development and lower labor expenses, offset partially by higher medical
product development expenses. As a percent of net sales, research and
development expenses increased from 4% for the thirty-nine weeks ended June 27,
1999 to 5% for the thirty-nine weeks ended June 25, 2000.
During the first quarter of fiscal 2000, we recorded a charge of $46,528,000 to
write down certain assets and record severance costs for approximately 250
employees terminated during the quarter. Components of the charge included a
$43,528,000 asset write-down of impaired manufacturing equipment and tooling,
primarily for our TSA suspensions, and $3,000,000 of severance costs. During the
third quarter of fiscal 2000, we recorded a charge of $16,740,000 to write down
certain assets and record severance costs for approximately 950 employees
terminated during the quarter. Components of the charge included a $12,995,000
asset write-down of impaired manufacturing equipment and tooling, primarily for
our TSA suspensions, and $3,745,000 of severance costs. See Note 2, "Asset
Impairment and Other", in the notes to the condensed consolidated financial
statements.
Interest expense for the thirty-nine weeks ended June 25, 2000 was $9,776,000,
an increase of $2,046,000 from the comparable period in fiscal 1999, primarily
due to a decrease in capitalization of interest of $1,581,000.
Other income, net, for the thirty-nine weeks ended June 25, 2000 was $9,813,000,
an increase of $3,399,000 from the comparable fiscal 1999 period. This increase
was primarily due to an increase in interest income as a result of higher
investment yields in the short-term markets.
The income tax benefit for the thirty-nine weeks ended June 25, 2000 was based
on an estimated effective tax rate for the fiscal year of 25% 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. We adjusted our
effective tax rate for the year from 29% to 25% during the second quarter of
fiscal 2000. This was a result of forecasting a larger loss for fiscal 2000 than
previously anticipated.
Net loss for the thirty-nine weeks ended June 25, 2000 was $75,189,000, compared
to net income of $19,787,000 for the comparable period in fiscal 1999. The
decrease was primarily due to the charges discussed above and to lower
suspension assembly sales and production volumes, as noted above. As a percent
of net sales, net income (loss) decreased from 5% to (22)%.
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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.
As of June 25, 2000, we had a $50,000,000 credit facility secured by our
accounts receivable and inventory, an outstanding letter of credit under this
facility of $800,000 as security for our variable rate demand note, and $200,000
outstanding (which has since been paid) under the facility's working capital
line for reimbursement obligations also in connection with our variable rate
demand note. No other amounts were outstanding under the credit facility at June
25, 2000. The amount we can borrow under this credit facility is limited by the
levels of our accounts receivable and inventory balances. As of June 25, 2000,
approximately $48,000,000 of borrowing capacity was available to us.
Our cash and cash equivalents increased from $98,820,000 at September 26, 1999
to $107,312,000 at June 25, 2000. Our securities available for sale decreased
from $139,402,000 to $116,499,000 during the same period. Overall, this reflects
a $14,411,000 decrease in our cash and cash equivalents and securities available
for sale. This decrease was primarily due to the timing of receipt of certain
accounts receivable. We generated cash from operating activities of $41,039,000
for the thirty-nine weeks ended June 25, 2000.
Cash used for capital expenditures totaled $54,216,000 for the thirty-nine weeks
ended June 25, 2000. We currently anticipate spending approximately $75,000,000
during fiscal 2000 primarily for continued equipment improvements to meet
advanced product specifications, new program tooling, automated vision
inspection equipment and the purchase of certain leased equipment in connection
with early termination of equipment leases. Financing of these capital
expenditures will be principally from internally generated funds, cash and cash
equivalents and/or securities available for sale. We currently anticipate
capital expenditures to decline from fiscal 2000 to fiscal 2001.
As more fully described below, as of June 25, 2000, we were not in compliance
with certain financial covenants in some of our existing financing agreements.
We have obtained waivers through September 22, 2000 for such non-compliance in
connection with financing agreements governing our senior notes. We are
currently in negotiation to obtain amendments to these and other financing
agreements. See further discussion below and Note 7, "Long-Term Debt", in the
accompanying condensed consolidated financial statements.
We currently believe that our cash and cash equivalents, securities available
for sale, cash generated from operations and credit facility will be sufficient
to meet our operating expenses, obligations to purchase equipment in connection
with equipment lease terminations, capital expenditures and debt service
requirements, including possible repayment of obligations under certain of our
financing agreements, as more fully described below, through fiscal 2001. We
may require additional financing to meet our capital requirements beyond fiscal
2001, dependent on market conditions, including the growth of Internet-related
storage and new applications for disk storage. 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.
COVENANT VIOLATIONS UNDER CERTAIN FINANCING AGREEMENTS
Certain of our existing financing agreements contain restrictive financial
covenants. As of June 25, 2000, we were not in compliance with covenants
regarding fixed charge coverage and interest coverage ratios under certain of
our financing agreements, as more fully described below, because of our
operating results in fiscal 1999 and in the first three quarters of fiscal 2000.
As of June 25, 2000, we were not in compliance with covenants regarding fixed
charge coverage ratios in connection with our $25,000,000 outstanding July 2003
senior notes, our $15,000,000 outstanding February 2004 senior notes and our
$25,000,000 outstanding November 2004 senior notes. We have obtained waivers
through September 22, 2000 for covenant violations in connection with our senior
notes financing agreements. We are currently negotiating with the holders of
our senior notes to amend the applicable agreement provisions, but have not
reached agreement. Although we obtained waivers relating to these covenant
violations in connection with our third fiscal quarter, we anticipate that as of
the end of our fourth fiscal quarter we will not be in compliance with these
covenants if we cannot obtain amendments that modify these covenant provisions.
As a result, we have classified the senior notes as current liabilities on the
accompanying June 25, 2000 condensed consolidated balance sheet. If amendments
to these agreements are not completed by September 22, 2000, or if the waivers
are not extended beyond this date, we will be in default under these agreements.
As of June 25, 2000, we were not in compliance with the interest coverage ratio
covenant in our Master Lease Agreement with General Electric Capital Corporation
("GECC") and six additional lessors to whom GECC previously assigned certain of
its interests under the master lease. We have approximately $28,000,000 in
remaining obligations during the initial term of the master lease. We have
completed an agreement to terminate the interests of one lessor by our purchase
of the equipment that it leases to us, and are currently negotiating with
another lessor to terminate its interests, but have not reached agreement. We
have agreed in principle with all remaining lessors to the basic terms of a
master lease amendment providing for the issuance of letters of credit under our
credit facility to support our obligations under the master lease. We have not,
however, completed and executed definitive documentation. We anticipate that
our obligations under the master lease to the remaining lessors will be
classified as obligations under capital leases on our condensed consolidated
balance sheet as of the end of our fiscal 2000 fourth quarter. Failure to reach
agreement with all lessors, and complete applicable documentation to modify our
covenant obligations under the master lease, may result in a default under the
master lease.
As of June 25, 2000, we were not in compliance with the fixed charge coverage
ratio covenant in our Subordination, Non-Disturbance, Attornment and Estoppel
Agreement with the lessor and the mortgagee of our Eau Claire, Wisconsin
assembly manufacturing building, an agreement that we entered into in
connection with a 1996 sale/leaseback transaction. We are currently
negotiating with the mortgagee to amend the subordination agreement and with
the lessor to amend the terms of the lease, but have not reached agreement.
Our failure to comply with this covenant has resulted in an event of default
under the mortgage between the lessor of our Eau Claire building and its
lender, the mortgagee, who may direct the lessor to declare an event of
default under our lease. We have the right, under the terms of the
subordination agreement, to purchase the lessor's $15,500,000 original
principal amount note that is secured by the mortgage. If we do not exercise
this right, the mortgage could be foreclosed and the lease extinguished and/or
the lessor could declare an event of default under the lease, with the lessor
seeking to terminate the lease.
We cannot be sure that we will be successful in negotiating amendments to our
financing agreements, or amendments of, or termination of interests under, the
master lease or amendments to the Eau Claire building lease and related
subordination agreement, or that any of these amendments or terminations will
contain terms that are acceptable to us. If we fail to obtain these amendments
or terminations, we may be in default under these agreements and our financial
condition and results of operations may be materially adversely affected.
MARKET TRENDS AND CERTAIN CONTINGENCIES
We expect the expanding use of personal computers, enterprise computing and
storage, increasingly complex software and the emergence of new applications for
disk storage, such as Internet-related storage, digital video recording and
digital cameras, will continue to increase disk drive demand for the foreseeable
future. We also believe demand for disk drives will continue to be subject, as
it has in the past, to rapid or unforeseen changes resulting from, among other
things, increases in data density and other technological advances, changes in
disk drive inventory levels, responses to competitive price
15
changes and unpredicted high or low market acceptance of new drive models.
Recent improvements in data density of hard disk drives, extending from the
desktop market to server drives, has reduced unit shipments of suspension
assemblies, and we expect suspension assembly shipments will remain relatively
flat for the foreseeable future until Internet-related storage growth increases,
new applications for disk storage become more widespread, or average component
counts within disk drives stabilize.
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 data density, the
amount of data which can be stored on magnetic disks.
Improvements in data 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) 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, have compelled drive manufacturers to
use wireless suspension technologies, such as our TSA suspension assemblies. We
anticipate continuing acceptance by the disk drive industry of our TSA
suspension assemblies and expect that TSA suspension assemblies will continue to
account for the majority of our unit shipments in fiscal 2000.
The continual pursuit of increasing data density may lead to further value-added
features for TSA suspensions. Actuated suspensions, including our aTSA
suspension, incorporate a second stage actuator on the suspension to improve
head positioning over increasingly tighter data tracks. Our cTSA suspension
allows for attachment of preamplifiers near the head to improve data transfer
signals.
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. Likewise, as programs mature, higher yields decrease the demand for
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 cycles
and thus are experiencing declining selling prices, our newer products initially
have higher selling prices.
We and certain users of our products have from time to time received, and may in
the future receive, communications from third parties asserting patents against
us or our customers that may relate to our manufacturing equipment or to our
products or to products that include our products as a component. We have not
been a party to any such material intellectual property litigation to date.
Certain of our customers, however, have been sued on patents having claims
closely related to products we sell. If any third party makes a valid
infringement claim against us and a license were not available on terms
acceptable to us, our business, financial condition and results of operations
could be adversely affected. We expect that, as the number of patents issued
continues to increase, and as we grow, the volume of intellectual property
claims made against us could increase. We may need to engage in litigation to
enforce patents issued or licensed to us, protect trade secrets or know-how
owned by us or determine the enforceability, scope and validity of the
intellectual property rights of others. We could incur substantial
16
costs in such litigation or other similar legal actions, which could have a
material adverse effect on our results of operations.
The World Trade Organization (WTO) has ruled that the U.S. Foreign Sales
Corporation (FSC) provision constitutes an illegal export subsidy, and has
specified that the United States withdraw the FSC provision effective October 1,
2000. The U.S. government has stated that the United States intends to comply
with the WTO's ruling and that the United States will seek a WTO-compatible
solution that maintains the current benefits of the FSC provision.
We are 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 our 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 heading "General" about
anticipated operating results and cost reduction efforts, the statements above
under the heading "Liquidity and Capital Resources" about capital expenditures
and capital resources and the statements above under the heading "Covenant
Violations Under Certain Financing Agreements" about covenant violations and the
consequences of failure to comply with or amend financing agreement covenants,
are forward-looking statements based on current expectations. These statements
are subject to risks and uncertainties, including slower or faster customer
acceptance of our new products, fluctuating order rates, difficulties in
producing our TSA suspensions and variations of our TSA suspensions,
difficulties in managing capacity, changes in manufacturing efficiencies,
difficulties in obtaining covenant amendments, and possible repayment
obligations in our existing financing agreements, 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 financial performance
we presently anticipate.
17
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Our credit facility with The CIT Group/Business Credit, Inc. carries interest
rate risk, in connection with certain borrowings under the working capital line
it provides, that is generally related to either LIBOR or the prime rate. If
either of these rates were to change while we had such borrowings outstanding
under the credit facility, interest expense would increase or decrease
accordingly. At June 25, 2000, there was $200,000 of such outstanding borrowings
under the credit facility, which has since been paid, in connection with
reimbursement obligations for our variable rate demand note ("Note"). Our Note
also carries interest rate risk that is generally related to the 91-day U.S.
treasury bill interest rate. At June 25, 2000, the outstanding principal amount
of the Note was $800,000, which was subject to an interest rate of 4.65%.
We have no earnings or cash flow exposure due to market risk on our other
debt obligations which are subject to fixed interest rates. Interest
rate changes, however, would affect the fair market value of this fixed rate
debt. At June 25, 2000, we had fixed rate debt of $216,725,000.
We do not enter into derivative or other financial instruments for trading or
speculative purposes.
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PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
A) EXHIBITS.
UNLESS OTHERWISE INDICATED, ALL DOCUMENTS INCORPORATED HEREIN
BY REFERENCE TO A DOCUMENT FILED WITH THE SECURITIES AND
EXCHANGE COMMISSION PURSUANT TO THE SECURITIES EXCHANGE ACT OF
1934, AS AMENDED, ARE LOCATED UNDER SEC FILE NUMBER 0-14709.
3.1 Restated Articles of Incorporation of HTI, as amended by
Articles of Amendment dated 1/27/88 and as amended by Articles
of Amendment dated 1/21/97 (incorporated by reference to
Exhibit 3.1 to HTI's Quarterly Report on Form 10-Q for the
quarter ended 6/29/97).
3.2 Restated By-Laws of HTI (incorporated by reference to Exhibit
3.2 to HTI's Quarterly Report on Form 10-Q for the quarter
ended 12/29/96), and Amendments to Restated By-Laws of HTI
dated 7/19/00.
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.
4.2 Indenture dated as of 3/18/98 between HTI and U.S. Bank
National Association, as Trustee (incorporated by reference to
Exhibit 4.6 to HTI's Registration Statement on Form S-3,
Registration No. 333-50143).
4.3 Purchase Agreement dated 3/12/98 by and among HTI, NationsBanc
Montgomery Securities LLC and First Chicago Capital Markets,
Inc. (incorporated by reference to Exhibit 4.7 to HTI's
Registration Statement on Form S-3, Registration No.
333-50143).
4.4 Shelf Registration Agreement dated as of 3/18/98 by and among
HTI, NationsBanc Montgomery Securities LLC and First Chicago
Capital Markets, Inc. (incorporated by reference to Exhibit
4.8 to HTI's Registration Statement on Form S-3, Registration
No. 333-50143).
4.5 Rights Agreement dated as of 7/19/00 by and between HTI and
Wells Fargo Bank Minnesota, N.A. (incorporated by reference to
Exhibit 1 to HTI's Registration Statement on Form 8-A, filed
7/24/00).
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 25, 2000.
19
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 14, 2000 By /s/Wayne M. Fortun
----------------- ---------------------------------------
Wayne M. Fortun
President and Chief Executive Officer
Date: August 14, 2000 By /s/John A. Ingleman
----------------- ---------------------------------------
John A. Ingleman
Vice President, Chief Financial Officer
and Secretary
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INDEX TO EXHIBITS
Exhibit
No. Page
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3.2 Amendments to Restated By-Laws Electronically
Filed
27.1 Financial Data Schedule Electronically
Filed