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 DECEMBER 28, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from _____________ to ___________________
Commission File Number 0-14709
HUTCHINSON TECHNOLOGY INCORPORATED
----------------------------------
(Exact name of registrant as specified in its charter)
MINNESOTA 41-0901840
------------------------------ ---------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
40 WEST HIGHLAND PARK DRIVE N.E., HUTCHINSON, MINNESOTA 55350
------------------------------------------------------- -----
(Address of principal executive offices) (Zip code)
(320) 587-3797
--------------
(Registrant's telephone number, including area code)
(Former name, address or fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
As of February 04, 2004 the registrant had 26,033,708 shares of Common Stock
issued and outstanding.
1
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
HUTCHINSON TECHNOLOGY INCORPORATED
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except shares and per share data)
December 28,
2003 September 28,
(Unaudited) 2003
------------ -------------
ASSETS
Current assets:
Cash and cash equivalents $ 149,380 $ 67,505
Securities available for sale 164,248 224,860
Trade receivables, net 65,212 59,822
Other receivables 5,352 6,036
Inventories 30,028 31,290
Prepaid taxes and other (Note 8) 11,253 11,156
------------ -------------
Total current assets 425,473 400,669
Property, plant and equipment, net 184,073 176,559
Deferred tax assets 33,645 37,840
Other assets (Note 8) 22,950 23,888
------------ -------------
$ 666,141 $ 638,956
============ =============
LIABILITIES AND SHAREHOLDERS' INVESTMENT
Current liabilities:
Accounts payable $ 28,970 $ 21,462
Accrued expenses 14,719 13,299
Accrued compensation 19,477 22,202
------------ -------------
Total current liabilities 63,166 56,963
Convertible subordinated notes 150,000 150,000
Deferred income 2,791 408
Other long-term liabilities 137 210
Shareholders' investment:
Common stock, $.01 par value, 100,000,000 shares authorized,
25,956,000 and 25,458,000 issued and outstanding 260 259
Additional paid-in capital 380,461 379,663
Accumulated other comprehensive income 177 525
Retained earnings 69,149 50,928
------------ -------------
Total shareholders' investment 450,047 431,375
------------ -------------
$ 666,141 $ 638,956
============ =============
See accompanying notes to condensed consolidated financial statements -
unaudited.
2
HUTCHINSON TECHNOLOGY INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS - UNAUDITED
(In thousands, except per share data)
Thirteen Weeks Ended
---------------------------
December 28, December 29,
2003 2002
------------ ------------
Net sales $ 133,636 $ 132,862
Cost of sales 90,350 91,434
------------ ------------
Gross profit 43,286 41,428
Research and development expenses 4,855 3,448
Selling, general and administrative expenses 16,687 15,044
------------ ------------
Income from operations 21,744 22,936
Interest expense (928) (2,235)
Interest income 945 1,423
Gain on debt extinguishment (Note 9) -- 221
Other income, net 734 297
------------ ------------
Income before income taxes 22,495 22,642
Provision for income taxes 4,274 4,302
------------ ------------
Net income $ 18,221 $ 18,340
============ ============
Basic earnings per share $ 0.70 $ 0.72
Diluted earnings per share $ 0.60 $ 0.65
Weighted average common shares outstanding 25,945 25,414
Weighted average common and diluted shares outstanding 31,788 30,455
See accompanying notes to condensed consolidated financial statements -
unaudited.
3
HUTCHINSON TECHNOLOGY INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS - UNAUDITED
(Dollars in thousands)
Thirteen Weeks Ended
---------------------------
December 28, December 29,
2003 2002
------------ ------------
Operating activities:
Net income $ 18,221 $ 18,340
Adjustments to reconcile net income to cash
provided by operating activities:
Depreciation and amortization 14,402 13,814
Deferred taxes 3,569 3,012
Loss on disposal of assets 50 --
Changes in operating assets and liabilities (Note 10) 5,672 7,198
------------ ------------
Cash provided by operating activities 41,914 42,364
------------ ------------
Investing activities:
Capital expenditures (20,985) (10,453)
Purchases of marketable securities (138,119) (58,023)
Sales of marketable securities 198,266 45,644
------------ ------------
Cash provided by (used for) investing
activities 39,162 (22,832)
------------ ------------
Financing activities:
Repayments of long-term debt -- (10,971)
Repayments of capital lease obligation -- (2,793)
Net proceeds from issuance of common stock 799 1,766
------------ ------------
Cash provided by financing activities 799 11,998
------------ ------------
Net increase in cash and cash equivalents 81,875 7,534
Cash and cash equivalents at beginning of period 67,505 57,852
------------ ------------
Cash and cash equivalents at end of period $ 149,380 $ 65,386
============ ============
See accompanying notes to condensed consolidated financial statements -
unaudited.
4
HUTCHINSON TECHNOLOGY INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
(Columnar dollar amounts in thousands except per share amounts)
When we refer to "we," "us," the "Company" or "HTI," we mean Hutchinson
Technology Incorporated and its subsidiaries. Unless otherwise indicated,
references to "2005" mean the Company's fiscal year ending September 25, 2005,
references to "2004" mean the Company's fiscal year ending September 26, 2004,
references to "2003" mean the Company's fiscal year ended September 28, 2003 and
references to "2002" mean the Company's fiscal year ended September 29, 2002.
(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 ("SEC"). The information furnished in the condensed
consolidated financial statements includes normal recurring adjustments and
reflects 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 accounting principles generally accepted in the United States of
America 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) ACCOUNTING PRONOUNCEMENTS
In August 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets" ("FAS 144"), which supersedes
Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of"
("FAS 121"), and amends Accounting Principles Board ("APB") Opinion No. 30,
"Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions." FAS
144 requires that long-lived assets that are to be disposed of by sale be
measured at the lower of book value or fair value less costs to sell. FAS 144
retains the fundamental provisions of FAS 121 for (a) recognition and
measurement of the impairment of long-lived assets to be held and used, and (b)
measurement of long-lived assets to be disposed of by sale. The Company adopted
FAS 144 on September 30, 2002. The adoption of FAS 144 did not have a material
impact on the Company's consolidated balance sheet or results of operations.
In June 2002, the FASB issued Statement of Financial Accounting Standards No.
146, "Accounting for Costs Associated with Exit or Disposal Activities" ("FAS
146"). FAS 146 addresses financial accounting and reporting for costs associated
with exit or disposal activities and nullifies Emerging Issues Task Force
("EITF") Issue No. 94-3. The Company adopted FAS 146 on January 1, 2003. The
adoption of FAS 146 did not have a material impact on the Company's consolidated
balance sheet or results of operations.
In November 2002, the FASB issued FASB Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others" ("FIN 45"). FIN 45 clarifies the
requirements for a guarantor's accounting for and disclosure of certain issued
and outstanding guarantees. The Company adopted the recognition and measurement
provisions of FIN 45 on January 1, 2003 and adopted the disclosure provisions of
FIN 45 effective for the quarter ended December 29, 2002. The Company has
provided the interim disclosures required by FIN 45 in Note 4 to its condensed
consolidated financial statements. The adoption of the recognition and
measurement provisions of FIN 45 did not have a material impact on the Company's
consolidated balance sheet or results of operations.
5
In December 2002, the FASB issued Statement of Financial Accounting Standards
No. 148, "Accounting for Stock-Based Compensation -- Transition and Disclosure"
("FAS 148"), which amends Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation" ("FAS 123"). FAS 148 provides
alternative methods of transition for a voluntary change to the fair value based
method of accounting for stock-based employee compensation. In addition, FAS 148
amends the disclosure requirements of FAS 123 to require more prominent and more
frequent disclosures in financial statements of the effects of stock-based
compensation. The transition guidance and annual disclosure provisions of FAS
148 are effective for fiscal years ending after December 15, 2002. The interim
disclosure provisions are effective for financial reports containing condensed
financial statements for interim periods beginning after December 15, 2002. The
Company adopted the disclosure provisions of FAS 148 in the second quarter of
2003 and has provided the interim disclosures in Note 11 to its condensed
consolidated financial statements. The adoption of FAS 148 did not have a
material impact on the Company's consolidated balance sheet or results of
operations as the Company continues to account for stock-based employee
compensation in accordance with APB Opinion No. 25, "Accounting for Stock Issued
to Employees" ("APB No. 25"), as permitted by FAS 148.
In January 2003, the FASB issued FASB Interpretation 46, "Consolidation of
Variable Interest Entities" ("FIN 46"), revised December 2003 ("FIN 46(R)"). FIN
46(R) addresses the consolidation of variable interest entities, including
entities commonly referred to as special purpose entities. The Company was
required to apply FIN 46(R) to all new variable interest entities created or
acquired after January 31, 2003. As it relates to variable interest entities
created or acquired prior to February 1, 2003, the FASB issued a deferral of the
effective date of FIN 46(R) until the first interim or annual period ending
after March 15, 2004. The adoption of FIN 46(R) as it relates to activities
occurring after January 31, 2003 did not have a material impact on the Company's
consolidated balance sheet or results of operations. In addition, the adoption
of FIN 46(R) as it relates to activities prior to February 1, 2003 is not
expected to have a material impact on the Company's consolidated balance sheet
or results of operations.
In April 2003, the FASB issued Statement on Financial Accounting Standards No.
149, "Amendment of Statement 133 on Derivative Instruments and Hedging
Activities" ("FAS 149"), which amends and clarifies financial accounting and
reporting for derivative instruments, including certain derivative instruments
embedded in other contracts and for hedging activities under FAS 133,
"Accounting for Derivative Instruments and Hedging Activities." FAS 149 was
effective for contracts entered into or modified after December 29, 2003 except
for the provisions that were cleared by the FASB in prior pronouncements. The
adoption of FAS 149 did not have a material impact on the Company's consolidated
balance sheet or results of operations.
In May 2003, the FASB issued Statement on Financial Accounting Standards No.
150, "Accounting for Certain Financial Instruments with Characteristics of both
Liabilities and Equity" ("FAS 150"). FAS 150 establishes standards for how an
issuer classifies and measures certain financial instruments with
characteristics of both liabilities and equity. In accordance with FAS 150,
financial instruments that embody obligations for the issuer are required to be
classified as liabilities. FAS 150 was effective for financial instruments
entered into or modified after May 31, 2003, and was otherwise effective for the
Company during the fourth quarter of 2003. The adoption of FAS 150 did not have
a material impact on the Company's consolidated balance sheet or results of
operations.
(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. To further assure a readily available supply of
products to its customers, the Company sells etched and stamped component-level
6
suspension assembly parts, such as flexures and baseplates, to competing
suspension assembly manufacturers. The Company also is engaged in the
development and production of products for the medical device market, but does
not expect to generate significant revenue from these products during 2004.
A breakdown of customer sales is as follows:
Thirteen Weeks Ended
------------------------------------
December 28, December 29,
Percentage of Net Sales 2003 2002
----------------------- ------------ ------------
Five Largest Customers 81% 86%
SAE Magnetics, Ltd./TDK 34 23
Alps Electric Co., Ltd. 24 27
Western Digital 10 --
K.R. Precision Co. 7 6
Innovex, Inc. 6 4
Seagate Technology LLC 6 21
Hitachi Global Storage Technologies
and affiliates 5 9
(4) TRADE RECEIVABLES
The Company grants credit to customers, but generally does not require
collateral or any other security to support amounts due. Trade receivables of
$65,212,000 at December 28, 2003 and $59,822,000 at September 28, 2003 are net
of allowances of $2,109,000 and $2,194,000, respectively. As of December 28,
2003, allowances of $2,109,000 consisted of an $841,000 allowance for doubtful
accounts and a $1,268,000 allowance for sales returns. As of September 28, 2003,
allowances of $2,194,000 consisted of a $1,097,000 allowance for doubtful
accounts and a $1,097,000 allowance for sales returns.
The Company warrants that the goods sold by it will be free from defects in
materials and workmanship for a period of 60 days following delivery to the
customer. Upon determination that the goods sold are defective, the Company
typically accepts the return of such goods and refunds the purchase price to the
customer. The Company records a provision against revenue for estimated returns
on sales of its products in the same period that the related revenues are
recognized. The Company bases the allowance on historical product returns, as
well as existing product return authorizations. The following table reconciles
the changes in the Company's allowance for sales returns under warranties:
Increases in the Reductions in the
September 28, allowance related to allowance for returns December 28,
2003 warranties issued under warranties 2003
------------- -------------------- --------------------- ------------
$1,097 $1,352 $(1,181) $1,268
(5) INVENTORIES
Inventories are valued at the lower of cost (first-in, first-out method) or
market by analyzing market conditions, current sales prices, inventory costs and
inventory balances. Inventories consisted of the following at December 28, 2003
and September 28, 2003:
December 28, September 28,
2003 2003
------------ -------------
Raw materials $ 8,464 $ 7,417
Work in process 5,690 6,853
Finished goods 15,874 17,020
------------ -------------
$ 30,028 $ 31,290
============ =============
7
(6) EARNINGS PER SHARE
Basic earnings per share is computed by dividing net income available to common
shareholders by the weighted average number of common shares outstanding during
the year. Diluted earnings per share is computed under the treasury stock method
for stock options and the if-converted method for convertible debt and is
calculated to compute the dilutive effect of potential common shares. A
reconciliation of these amounts is as follows:
Thirteen Weeks Ended
---------------------------
December 28, December 29,
2003 2002
------------ ------------
Net income (A) $ 18,221 $ 18,340
Plus: interest expense on convertible subordinated
notes 1,007 2,150
Less: additional profit-sharing expense and income
tax provision 273 583
------------ ------------
Net income available to common shareholders (B) $ 18,955 $ 19,907
============ ============
Weighted average common shares outstanding (C) 25,945 25,414
Dilutive potential common shares 5,843 5,041
------------ ------------
Weighted average common and diluted shares outstanding (D) 31,788 30,455
============ ============
Basic earnings per share [(A)/(C)] $ 0.70 $ 0.72
Diluted earnings per share [(B)/(D)] $ 0.60 $ 0.65
(7) INCOME TAXES
The following table details the significant components of the Company's deferred
tax assets:
December 28, September 28,
2003 2003
------------ -------------
Current deferred tax assets:
Receivable allowance $ 789 $ 764
Inventories 5,485 5,150
Accruals and other reserves 4,270 3,482
Valuation allowance (4,246) (3,828)
------------ -------------
Total current deferred tax assets 6,298 5,568
Long-term deferred tax assets:
Property, plant and equipment 10,972 14,054
Deferred income 1,048 --
Tax credits 14,317 14,422
Net operating loss carryforwards 50,499 54,557
Valuation allowance (43,191) (45,193)
------------ -------------
Total long-term deferred tax assets 33,645 37,840
------------ -------------
Total deferred tax assets $ 39,943 $ 43,408
============ =============
8
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 December 28, 2003, the
Company's deferred tax assets included $14,317,000 of unused tax credits,
$3,728,000 of which can be carried forward indefinitely and $10,589,000 of which
begin to expire at various dates beginning in 2010. At December 28, 2003, the
Company's balance sheet included $50,499,000 of deferred tax assets related to
net operating loss carryforwards that will begin to expire in 2018. As of
December 28, 2003, the Company had an estimated federal net operating loss
carryforward of approximately $130,075,000 for United States federal tax return
purposes. A portion of the credits and net operating loss carryforwards are
subject to an annual limitation under United States Internal Revenue Code
("IRC") Section 382. A valuation allowance of $47,437,000 has been recognized to
offset the related deferred tax assets due to the uncertainty of realizing the
benefits of certain tax credits and net operating loss carryforwards before they
expire. The valuation allowance is based on the Company's historical taxable
income and the Company's estimates of future taxable income in each jurisdiction
in which the Company operates and the period over which the Company's deferred
tax assets will be recoverable. To the extent that operating results continue to
be favorable in 2004 and the Company anticipates favorable operating results
beyond 2004, the valuation allowance may be materially reduced. Such adjustment
may significantly reduce the Company's reported income tax provision in the
period of adjustment, and may increase its reported income tax provision in
subsequent periods. The Company will continue to assess the likelihood that the
deferred tax assets will be realizable and the valuation allowance will be
adjusted accordingly, which could materially impact its financial position and
results of operations.
(8) OTHER ASSETS
During the second quarter of 2002, the Company prepaid $26,000,000 related to a
technology and development agreement. As of December 28, 2003, the unamortized
portion of the prepayment was $19,653,000, of which $3,174,000 was included in
"Prepaid taxes and other" and $16,479,000 was included in "Other assets" on the
accompanying condensed consolidated balance sheet. The unamortized portion will
be amortized on a straight-line basis over the remaining term of the agreement
which ends in 2010.
(9) GAIN ON DEBT EXTINGUISHMENT
During the first quarter of 2003, the Company repurchased $10,971,000 of its 6%
Convertible Subordinated Notes due 2005 (the "6% Convertible Notes") at a
pre-tax gain of $221,000. On March 26, 2003, the Company redeemed the remaining
$132,529,000 of its 6% Convertible Notes at a pre-tax loss of $3,486,000. The
pre-tax loss consisted of a $2,266,000 redemption premium paid by the Company
and a $1,220,000 write-off of unamortized debt issuance costs associated with
the 6% Convertible Notes. Prior to the redemption of the Company's 6%
Convertible Notes, in February 2003, the Company issued and sold $150,000,000
aggregate principal amount of 2.25% Convertible Subordinated Notes due 2010 (the
"2.25% Convertible Notes") to Salomon Smith Barney Inc. and Needham & Company,
Inc., which resold the 2.25% Convertible Notes to qualified institutional
buyers, and outside the United States in accordance with Regulation S under the
Securities Act of 1933, as amended (the "Securities Act"). The Company used net
proceeds of $145,436,000 from the issuance and sale of the 2.25% Convertible
Notes primarily to redeem its 6% Convertible Notes, with the remaining proceeds
intended to be used for general corporate purposes. In connection with the
issuance and sale of the 2.25% Convertible Notes, the Company incurred and
capitalized debt issuance costs of $4,564,000, which are being amortized over
the term of the 2.25% Convertible Notes. Beginning in the third quarter of 2003,
the redemption of the 6% Convertible Notes, combined with the issuance and sale
of the 2.25% Convertible Notes, has reduced the Company's interest expense by
approximately $1,140,000 per quarter.
9
(10) SUPPLEMENTARY CASH FLOW INFORMATION
Thirteen Weeks Ended
---------------------------
December 28, December 29,
2003 2002
------------ ------------
Changes in operating assets and liabilities:
Receivables, net $ (4,706) $ (2,136)
Inventories 1,262 3,276
Prepaid and other assets 1,416 3,627
Accounts payable and accrued expenses 5,390 2,669
Other non-current liabilities 2,310 (238)
------------ ------------
$ 5,672 $ 7,198
============ ============
Cash paid for:
Interest (net of amount capitalized) $ 67 $ 188
Income taxes $ 526 $ 7
Capitalized interest for the thirteen weeks ended December 28, 2003 was $136,000
compared to $180,000 for the comparable period in 2003. Interest is capitalized,
using an overall borrowing rate, for assets that are being constructed or
otherwise produced for the Company's own use. Interest capitalized during the
thirteen weeks ended December 28, 2003 was primarily for TSA suspension
production capacity, new program tooling, process technology and capability
improvements and new business systems.
(11) STOCK-BASED COMPENSATION
The Company has an employee stock purchase plan that provides for the sale of
the Company's common stock at discounted purchase prices. The cost per share
under this plan is 85% of the lesser of the fair market value of the Company's
common stock on the first or last day of the purchase period, as defined.
The Company has two stock option plans under which options may be granted to any
employee, including officers and directors of the Company, at a price not less
than the fair market value of the Company's common stock at the date the options
are granted. Under one of the plans, options may be granted to certain
non-employees at a price not less than the fair market value of the Company's
common stock at the date the options are granted. Options generally expire ten
years from the date of grant or at an earlier date as determined by the
committee of the Board of Directors of the Company that administers the plans.
Options granted under the plans generally are exercisable one year from the date
of grant.
The Company follows APB No. 25, under which no compensation cost has been
recognized in connection with stock option grants pursuant to the stock option
plans. Had compensation cost been determined consistent with FAS 123, the
Company's pro forma net income and pro forma earnings per share would have been
as follows:
10
Thirteen Weeks Ended
---------------------------
December 28, December 29,
2003 2002
------------ ------------
Net income, as reported $ 18,221 $ 18,340
Deduct: Total stock-based employee compensation
expense determined under fair value based
method for all awards, net of related tax
effects (1,387) (1,586)
------------ ------------
Pro forma net income $ 16,834 $ 16,754
============ ============
Earnings per share:
Basic - as reported $ 0.70 $ 0.72
Basic - pro forma $ 0.65 $ 0.66
Diluted - as reported $ 0.60 $ 0.65
Diluted - pro forma $ 0.55 $ 0.55
In determining compensation cost pursuant to FAS 123, the fair value of each
option grant is estimated on the date of grant using the Black-Scholes option
pricing model. The following weighted average assumptions were used for various
grants in fiscal 2004: risk-free interest rate of 3.6%; expected life of six
years; and expected volatility of 43%. The following weighted average
assumptions were used for various grants in 2003: risk-free interest rate of
3.5%; expected life of six years; and expected volatility of 61%.
(12) LEGAL CONTINGENCIES
The Company and certain users of the Company's products have 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 that include the
Company's products as a component. In addition, the Company and certain of the
Company's customers have been sued on patents having claims closely related to
products sold by the Company. If any third party makes a valid infringement
claim and a license is 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
may need to engage in litigation to enforce patents issued or licensed to it,
protect trade secrets or know-how owned by it or determine the enforceability,
scope and validity of the intellectual property rights of others. The Company
could incur substantial costs in such litigation or other similar legal actions,
which could have a material adverse effect on its results of operations.
The Company is a party to certain 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.
(13) OTHER MATTERS
Over the course of the last three years, the World Trade Organization ("WTO")
has ruled that the Foreign Sales Corporation ("FSC") provisions of the IRC, and
the FSC's replacement provisions contained in the FSC Repeal and
Extraterritorial Income Exclusion Act of 2000 ("ETI"), are prohibited export
subsidies under the rules of the WTO. Federal legislation introduced in both
2002 and 2003 has proposed the repeal of ETI. Until such legislation is signed
into law, the Company expects to earn a net benefit under the ETI provisions
similar to that previously earned under the FSC provisions of the IRC. If such
legislation is signed into law, the Company's effective tax rate could increase
significantly and its business, financial condition and results of operations
could be materially adversely affected.
11
(14) SEGMENT REPORTING
The Company follows the provisions of Statement of Financial Accounting
Standards No. 131, "Disclosures about Segments of an Enterprise and Related
Information" ("FAS 131"). FAS 131 establishes annual and interim reporting
standards for an enterprise's business segments and related disclosures about
its products, services, geographic areas and major customers. The method for
determining what information to report is based upon the way management
organizes the operating segments within the Company for making operating
decisions and assessing financial performance. The Company considers its chief
operating decision-maker to be the Chief Executive Officer.
The Company has determined that it has two reportable segments: the Disk Drive
Division and the BioMeasurement Division. The accounting policies of the
segments are the same as those described in the summary of significant
accounting policies in the Company's most recent Annual Report on Form 10-K.
The following table represents net sales and operating income (loss) for each
reportable segment.
Thirteen Weeks Ended
---------------------------
December 28, December 29,
2003 2002
------------ ------------
Net sales:
Disk Drive Division $ 133,544 $ 132,791
BioMeasurement Division 92 71
------------ ------------
$ 133,636 $ 132,862
============ ============
Operating income (loss):
Disk Drive Division $ 23,387 $ 24,238
BioMeasurement Division (1,643) (1,302)
------------ ------------
$ 21,744 $ 22,936
============ ============
Assets of the BioMeasurement Division are not relevant for management of the
BioMeasurement Division segment or significant for disclosure.
12
HUTCHINSON TECHNOLOGY INCORPORATED
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
When we refer to "we," "us," "HTI," or the "Company," we mean Hutchinson
Technology Incorporated and its subsidiaries. Unless otherwise indicated,
references to "2005" mean HTI's fiscal year ending September 25, 2005,
references to "2004" mean HTI's fiscal year ending September 26, 2004,
references to "2003" mean HTI's fiscal year ending September 28, 2003,
references to "2002" mean HTI's fiscal year ended September 29, 2002, references
to "2001" mean HTI's fiscal year ended September 30, 2001, references to "2000"
mean HTI's fiscal year ended September 24, 2000, and references to "1999" mean
HTI's fiscal year ended September 26, 1999.
GENERAL
Since the late 1980s, we have derived virtually all of our revenue from the sale
of suspension assemblies to a small number of customers. We currently supply a
variety of suspension assemblies and suspension assembly components to
manufacturers of disk drives and manufacturers of disk drive components
(including Alps, Fujitsu, Hitachi Global Storage Technologies and its
affiliates, Innovex, Kaifa, K.R. Precision, Maxtor, Pemstar, SAE Magnetics/TDK,
Samsung, Seagate Technology, Toshiba and Western Digital). Suspension assemblies
are a critical component of disk drives and our results of operations are highly
dependent on the disk drive industry. The disk drive industry is intensely
competitive, and demand for disk drive components fluctuates. Our results of
operations are affected from time to time due to disk drive industry demand
changes, technological changes that impact suspension assembly demand, shifts in
our market position and our customers' market position, our customers'
production yields and our own product transitions.
From 1999 to 2002, improvements in data density, the amount of data which can be
stored on magnetic disks, outpaced disk drive storage capacity requirements.
This enabled disk drive manufacturers to reduce their costs by using fewer
components, including suspension assemblies, in each drive. The average number
of suspension assemblies required per drive decreased from approximately 4.5 in
1999 to approximately 3.3 in 2000, approximately 2.8 in 2001 and approximately
2.5 in 2002. Shifts in our position in the marketplace had also, to a lesser
extent, decreased demand for our products. Slower growth of disk drive storage
demand and a weaker global economy had also decreased demand for our products
since 2001. Consequently, our shipments declined from 583 million in 1999 to 398
million in 2002.
Our shipments of suspension assemblies in 2003 were 526 million, 32% higher than
our shipments in 2002. We shipped 147 million suspension assemblies in the first
quarter of 2004 compared to 135 million suspension assemblies in the first
quarter of 2003. The quarter over quarter increase was due to an increase in
disk drive demand. Overall demand in both quarters was impacted by continuing
higher suspension consumption related to lower yields some of our customers
experienced as they transitioned to higher density recording heads. During the
transition to higher density recording heads, some customers are experiencing
higher levels of defective recording heads, which they are unable to detect
until after they have attached the recording heads to our suspension assemblies.
In addition, with a slowing rate of improvement in data density, the average
number of suspension assemblies required per drive was approximately 2.3 in
2003, down from 2.5 in 2002. Although we continue to have limited visibility for
future demand, we expect shipments to range from 135 to 145 million units for
the second quarter of 2004.
Our selling prices are subject to market pressure from our competitors and
pricing pressure from our customers. Our selling prices also are affected by
changes in overall demand for our products, changes in the specific products our
customers buy and a product's life cycle. A typical life cycle for our products
begins with higher pricing when products are introduced and decreasing prices as
they mature. To offset price decreases during a product's life, we rely
primarily on higher sales volume and improving our manufacturing yields and
efficiencies to reduce our cost. If we cannot reduce our manufacturing costs as
prices decline during our products' life cycles, our business, financial
condition and results of operations could be materially adversely affected.
13
We typically allow customers to change or cancel orders on short notice. We plan
our production and inventory based primarily on forecasts of customer demand,
including forecasts of customer pulls of product out of our "vendor managed
inventory" facilities. Customers often prefer a dual source supply and,
therefore, may allocate their demand among suppliers. 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 position in the marketplace.
Our gross margins have fluctuated and will continue to fluctuate based upon a
variety of factors such as changes in:
- - demand or customer requirements;
- - utilization of our production capacity;
- - product mix;
- - selling prices;
- - infrastructure costs;
- - production and engineering costs associated with production of new
products;
- - manufacturing yields or efficiencies; and
- - costs of materials.
Gross margins improved in 2003 and the first quarter of 2004 primarily due to
increased utilization of our production capacity resulting from higher shipment
volumes, improved productivity and continued cost controls.
In 2000 and 2001, as a result of industry forecasts of slower growth for disk
drive storage demand and a significant decrease in our long-term forecast for
suspension demand, we recorded asset impairment charges totaling $56,523,000 and
$20,830,000, respectively. As a result of these charges we estimate our annual
savings in depreciation and lease costs were approximately $12,000,000 in 2003
and future annual savings will be approximately $9,000,000 in 2004 and
$5,000,000 in 2005 and thereafter an aggregate of approximately $8,000,000 in
additional savings. Demand for suspension assemblies in 2003 improved due to an
increase in disk drive demand, an increase in suspension consumption related to
lower yields some of our customers continue to experience as they transition to
higher density recording heads, improvements in our market position and a
slowdown in the rate of improvement in data density of disk drives in mass
production. Consequently, the majority of the previously impaired assets are
currently in use, and our operating results and gross margins have been, and
will continue to be, impacted favorably by lower depreciation and lease expenses
as a result of these previous charges.
The disk drive industry is intensely competitive, and our customers' operating
results are dependent on being the first-to-market and first-to-volume with new
products at a low cost. Our ability to respond to our customers' needs for new
products and product features on a timely basis is an important factor in our
success. Our dedicated Development Center enables us to shorten development
cycles and achieve high volume output per manufacturing unit more quickly.
New suspension assembly types have lower manufacturing yields and are produced
in smaller 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. Small variations in manufacturing yields generally have a
significant impact on gross margins. Because our business is capital intensive
and requires a high level of fixed costs, gross margins are also sensitive to
changes in volume and capacity utilization.
In addition to increases in suspension assembly demand, improvements to our
operating margins depend, in part, on the successful management of our corporate
infrastructure and our suspension assembly production capacity. As part of our
efforts to improve our operating results, we may need to increase our employment
level to meet customer demand. Our overall employment level was 3,446 at the end
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of 2003 and has increased to 3,582 at the end of quarter one of 2004 due to
increased demand. We also increased the number of additional production workers
supplied by temporary staffing agencies from 210 at the end of 2003 to 252 at
the end of quarter one of 2004.
RESULTS OF OPERATIONS
THIRTEEN WEEKS ENDED DECEMBER 28, 2003 VS. THIRTEEN WEEKS ENDED DECEMBER 29,
2002.
Net sales for the thirteen weeks ended December 28, 2003 were $133,636,000, an
increase of $774,000 or 1% from the comparable period in 2003. Sales of
suspension assembly components to other suspension assembly manufacturers
increased $3,061,000. Suspension assembly sales decreased $2,245,000 from the
comparable period in 2003, as a result of a 10% decline in average selling
prices for our suspension assemblies offset by a 9% increase in suspension
assembly unit shipments
Gross profit for the thirteen weeks ended December 28, 2003 was $43,774,000,
compared to $41,428,000 for the comparable period in 2003. Gross profit as a
percent of net sales increased from 31% to 32%. The increase was primarily due
to higher utilization of our production capacity and productivity improvements,
together with the increase in sales mentioned above.
Research and development expenses for the thirteen weeks ended December 28, 2003
were $4,855,000 compared to $3,448,000 for the comparable period in 2003. The
comparable period expenses were reduced by customer funding of $800,000 for the
development of an advanced suspension assembly. The increase is also
attributable to higher labor expenses due to more development activity. As a
percent of net sales, research and development expenses increased from 3% in the
first quarter of 2003 to 4% for the first quarter of 2004.
Selling, general and administrative expenses for the thirteen weeks ended
December 28, 2003 were $16,736,000, an increase of $1,692,000 or 11% from the
comparable period in 2003. Expenses related to the design of our new enterprise
resource planning (ERP) business system increased $428,000 over the comparable
period. Selling, general and administrative expenses for our BioMeasurement
Division increased by $260,000 over the comparable period due to increasing our
sales, marketing and regulatory efforts. Expenses for our subsidiary, Hutchinson
Technology Asia, Inc., increased by $143,000 over the comparable period as
on-site service and engineering support to our customers in Asia increased. The
increase was also related to higher insurance and labor expenses partially
offset by lower incentive compensation costs. Overall, selling, general and
administrative expenses as a percent of net sales increased from 11% in the
first quarter of 2003 to 13% in the first quarter of 2004.
Income from operations for the thirteen weeks ended December 28, 2003 was
$22,183,000, compared to $22,936,000 for the comparable period in 2003. Income
from operations for the thirteen weeks ended December 28, 2003 included a
$1,643,000 loss from operations for our BioMeasurement Division segment,
compared to a $1,302,000 loss for the comparable period in 2003.
Interest expense for the thirteen weeks ended December 28, 2003 was $928,000, a
decrease of $1,307,000 from the comparable period in 2003, primarily due to a
lower interest rate on our refinanced convertible notes.
Interest income for the thirteen weeks ended December 28, 2003 was $945,000, a
decrease of $478,000 from the comparable period in 2003. This was primarily a
result of lower investment yields and a loss on the sale of certain securities,
partially offset by a higher average investment balance.
Other income, net of other expenses, for the thirteen weeks ended December 28,
2003 was $734,000, an increase of $437,000 from the comparable period in 2003
primarily due to increased royalty income.
The income tax provision for the thirteen weeks ended December 28, 2003 was
based on an estimated effective tax rate for the fiscal year of 19%, which is
below the statutory federal rate primarily due to our estimate of the benefit
15
derived from the FSC Repeal and Extraterritorial Income Exclusion Act of 2000
provisions related to export of U.S. products and our estimate of our
utilization of net operating loss carryforwards.
Net income for the thirteen weeks ended December 28, 2003 was $18,221,000
compared to net income of $18,340,000 for the comparable period in 2003. Net
income as a percent of net sales was 14% in both periods.
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.
Our cash and cash equivalents increased from $67,505,000 at September 28, 2003
to $149,380,000 at December 28, 2003. Our securities available for sale
decreased from $224,860,000 to $164,248,000 during the same period. Overall,
this reflects a $21,263,000 increase in our cash and cash equivalents and
securities available for sale for the thirteen weeks ended December 28, 2003,
primarily as a result of generating cash from operating activities of
$41,914,000 offset by our capital expenditures.
As of December 28, 2003, our $50,000,000 credit facility had a borrowing base of
$36,056,000, secured by our eligible accounts receivable and inventory. Letters
of credit outstanding under this facility totaled $1,400,000 and fees due
totaled $12,000 as of such date. The amount we can borrow under this credit
facility is limited by the levels of our eligible accounts receivable and
inventory balances. As of December 28, 2003, $34,645,000 of borrowing capacity
remained available to us.
Cash used for capital expenditures totaled $20,985,000 for the thirteen weeks
ended December 28, 2003. We anticipate capital expenditures to total
approximately $90,000,000 in 2004 primarily for increases in TSA suspension
production capacity, process technology and capability improvements, new program
tooling and new business systems. Financing of these capital expenditures will
be principally from internally generated funds, cash and cash equivalents and
securities available for sale.
During the first quarter of 2003, we repurchased $10,971,000 of our 6%
Convertible Notes at a pre-tax gain of $221,000. On March 26, 2003, we redeemed
the remaining $132,529,000 of our 6% Convertible Notes at a pre-tax loss of
$3,486,000. The pre-tax loss consisted of a $2,266,000 redemption premium that
we paid and a $1,220,000 write-off of unamortized debt issuance costs associated
with the 6% Convertible Notes. These notes had a maturity date of March 15,
2005. Prior to the redemption of our 6% Convertible Notes, in February 2003, we
issued and sold $150,000,000 aggregate principal amount of 2.25% Convertible
Notes to Salomon Smith Barney Inc. and Needham & Company, Inc., which resold the
2.25% Convertible Notes to qualified institutional buyers, and outside the
United States in accordance with Regulation S under the Securities Act. We used
net proceeds of $145,436,000 from the issuance and sale of the 2.25% Convertible
Notes primarily to redeem our 6% Convertible Notes, with the remaining proceeds
intended to be used for general corporate purposes. In connection with the
issuance and sale of the 2.25% Convertible Notes, we incurred and capitalized
debt issuance costs of $4,564,000, which are being amortized over the term of
the 2.25% Convertible Notes. Beginning in the third quarter of 2003, the
redemption of the 6% Convertible Notes, combined with the issuance and sale of
the 2.25% Convertible Notes, has reduced our interest expense by approximately
$1,140,000 per quarter.
Certain of our existing financing agreements contain financial covenants as well
as covenants which, among other things, restrict our ability to pay dividends to
our shareholders and may restrict our ability to enter into certain types of
financing. As of December 28, 2003, we were in compliance with all such
covenants. If, however, we are not in compliance with the covenants in our
financing agreements at the end of any future quarter and cannot obtain
amendments on terms acceptable to us, our future financial results and liquidity
could be materially adversely affected.
We currently believe that our cash and cash equivalents, securities available
for sale, cash generated from operations and our credit facility will be
sufficient to meet our operating expenses, debt service requirements and
16
capital expenditures through 2004. Our ability to obtain additional financing,
if needed, 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, if needed.
CRITICAL ACCOUNTING POLICIES
Our discussion and analysis of our financial condition and results of operations
are based upon our consolidated financial statements, which have been prepared
in accordance with accounting principles generally accepted in the United States
of America. The preparation of these financial statements requires estimation
and judgment that affect the reported amounts of revenues, expenses, assets and
liabilities. We base our estimates on historical experience and on various other
assumptions that are believed to be reasonable under the circumstances, the
results of which form the basis for making judgments about the carrying values
of assets and liabilities that are not readily apparent from other sources.
Following are our most critical accounting policies that affect significant
areas and involve judgment and estimates. If these estimates differ materially
from actual results, the impact to the consolidated financial statements may be
material.
Revenue Recognition
In recognizing revenue in any period, we apply the provisions of SEC Staff
Accounting Bulletin No. 101, "Revenue Recognition." We recognize revenue from
the sale of our products when persuasive evidence of an arrangement exists, the
product has been delivered, the fee is fixed and determinable and collection of
the resulting receivable is reasonably assured. Amounts billed to customers for
shipping and handling costs associated with products sold are classified as
revenue.
For all sales, we use a binding purchase order as evidence of an arrangement.
Delivery generally occurs when product is delivered to a common carrier. Certain
of our products are delivered on an FOB destination basis. We defer our revenue
associated with these transactions until the product has been delivered to the
customers' premises.
We also store inventory in warehouses ("vendor managed inventory" (VMI)
facilities) that are located close to the customer's manufacturing facilities.
Revenue is recognized on sales from VMI facilities upon the transfer of title
and risk of loss, following the customer's acknowledgement of the receipt of the
goods.
We also enter into arrangements with customers that provide us with
reimbursement for guaranteed capacity. We recognize the associated revenue over
the estimated life of the program for which the capacity is guaranteed.
Accounts Receivable
We are dependent on a limited number of customers, and as a result, our trade
accounts receivable is highly concentrated. We establish an allowance for
doubtful accounts by analyzing specific customer accounts and assessing the risk
of uncollectability based on past transaction history with the customer and the
customer's financial condition. While we perform ongoing credit reviews of our
customers and have established an allowance for doubtful accounts, a significant
deterioration in the financial condition of any significant customer may result
in additional charges to increase the allowance for doubtful accounts or to
write off certain accounts.
We record a provision against revenue for estimated returns on sales of our
products in the same period that the related revenues are recognized. We base
the allowance on historical returns as well as existing product return
authorizations.
17
Inventory Valuation
Inventories are valued at the lower of cost (first-in, first-out method) or
market by analyzing market conditions, current sales prices, inventory costs and
inventory balances.
We are dependent on a limited number of customers and a limited number of
product programs for each customer. Because our products are custom-built, we
typically cannot shift work-in-process or finished goods from customer to
customer, or from one program to another for a particular customer. We evaluate
inventory balances for excess quantities and obsolescence on a regular basis by
analyzing backlog, estimated demand, inventory on hand, sales levels and other
information. We write down excess and obsolete inventory to the lower of cost or
market based on the analysis.
Long-Lived Assets
We evaluate the carrying value of long-lived assets, consisting primarily of
property, plant and equipment, whenever certain events or changes in
circumstances indicate that the carrying amount of these assets may not be
recoverable. Such events or circumstances include, but are not limited to, a
prolonged industry downturn or significant reductions in projected future cash
flows. In assessing the recoverability of long-lived assets, we compare the
carrying value to the undiscounted future cash flows the assets are expected to
generate. If the total of the undiscounted future cash flows is less than the
carrying amount of the assets, the assets will be written down based on the
excess of the carrying amount over the fair value of the assets. Fair value
would generally be determined by calculating the discounted future cash flows
using a discount rate based upon our weighted average cost of capital.
Significant judgments and assumptions are required in the forecast of future
operating results used in the preparation of the estimated future cash flows.
Changes in these estimates could have a material effect on the assessment of
long-lived assets.
Income Taxes
We account for income taxes in accordance with Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes." As part of the process of
preparing our consolidated financial statements, we are required to estimate our
income taxes in each of the jurisdictions in which we operate. This process
involves estimating our current tax exposure together with assessing temporary
differences resulting from differing treatment of items for tax and accounting
purposes. These differences result in deferred tax assets and liabilities, which
are included within our consolidated balance sheet. We must then assess the
likelihood that our deferred tax assets will be recovered from future taxable
income and to the extent we believe that recovery is not likely, we must
establish a valuation allowance. To the extent we establish a valuation
allowance or change this allowance in a period, we must include an expense or a
benefit within the tax provision in our statement of operations.
Significant judgment is required in determining our provision for income taxes,
our deferred tax assets and liabilities and any valuation allowance recorded
against our deferred tax assets. We have recorded a valuation allowance of
$47,437,000 as of December 28, 2003, due to the uncertainty of realizing the
benefits of certain tax credits and net operating loss carryforwards before they
expire. The valuation allowance is based on our historical taxable income and
our estimates of future taxable income in each jurisdiction in which we operate
and the period over which our deferred tax assets will be recoverable. To the
extent that operating results continue to be favorable in 2004 and management
anticipates favorable operating results beyond 2004, the valuation allowance may
be materially reduced. Such adjustment may significantly reduce our reported
income tax provision in the period of adjustment, and may increase our reported
income tax provision in subsequent periods. Management will continue to assess
the likelihood that the deferred tax assets will be realizable and the valuation
allowance will be adjusted accordingly, which could materially impact our
financial position and results of operations.
18
MARKET TRENDS AND CERTAIN CONTINGENCIES
MARKET TRENDS.
We expect that the expanding use of enterprise computing and storage, personal
computers, increasingly complex software and the emergence of new applications
for disk storage, such as personal video recorders, gaming consoles, digital
cameras, audio players, guidance systems in automobiles and cell phones and
other consumer applications, will increase disk drive demand and, therefore,
suspension assembly demand in the 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, changes in disk drive inventory
levels, technological advances, responses to competitive price changes and
unpredicted high or low market acceptance of new drive models. Improvements in
data density of disk drives, across all disk drive market segments, have reduced
unit shipments of suspension assemblies since the third quarter of 1999.
However, data density has improved at a slower rate in the past year, and we
believe it will continue to improve at a slower rate in 2004.
Worldwide suspension assembly shipments increased in 2003 due to overall growth
in disk drives shipped and increased consumption of suspension assemblies
resulting from lower yields some customers are experiencing because of the
continuing challenges posed by the use of higher density recording heads. We
believe that worldwide suspension assembly shipments are likely to track more
closely with the growth in industry-wide disk drive shipments, which is
currently forecasted by industry observers to be 11% for 2004. We continue to
have limited visibility for future demand.
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 gigabyte of stored data. The cost of storing data on disk
drives continues to decrease primarily due to increasing data density, thereby
increasing storage capacity in disk drives or reducing the number of components,
including suspension assemblies, required in a disk drive.
The continual pursuit of increasing data density and lower storage costs are
leading to further adoption of features for suspensions, such as dampers,
extended arms, polished headlifts, limiters, anti-static coatings and plated
grounds. Our suspension assemblies also allow for dual stage actuation, which
incorporates a second stage actuator on the suspension to improve head
positioning over increasingly tighter data tracks.
The introduction of new types or sizes of read/write heads and disk drives tends
to initially decrease customers' yields with the result that we may experience
temporary elevations of demand for some types of suspension assemblies. We
believe reduced yields at some of our customers due to their transition to
higher density recording heads resulted in increased shipments of our suspension
assemblies in 2003 and may continue to have a positive impact on demand in 2004.
As programs mature, higher customer 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 assembly types which
temporarily may reduce our manufacturing yields and efficiencies. These changes
will continue to affect us.
CONTINGENCIES.
We and certain users of our products have received, and may in the future
receive, communications from third parties asserting patents against us or our
customers which may relate to certain of our manufacturing equipment or products
or to products that include our products as a component. In addition, we and
certain of our customers, have been sued on patents having claims closely
related to products sold by us. If any third party makes a valid infringement
claim and a license is not available on terms acceptable to us, our operating
results 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 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 costs in such litigation or other
similar legal actions, which could have a material adverse effect on our results
of operations.
19
We are a party to certain claims arising in the ordinary course of business. In
the opinion of our management, the outcome of such claims will not materially
affect our current or future financial position or results of operations.
OTHER MATTERS.
Over the course of the last three years, the WTO has ruled that the FSC
provisions of the IRC, and the FSC's replacement provisions contained in ETI,
are prohibited export subsidies under the rules of the WTO. Federal legislation
introduced in both 2002 and 2003 has proposed the repeal of ETI. Until such
legislation is signed into law, we expect to earn a net benefit under the ETI
provisions similar to that previously earned under the FSC provisions of the
IRC. If such legislation is signed into law, our effective tax rate could
increase significantly and our business, financial condition and results of
operations could be materially adversely affected.
In accordance with Section 10A of the Securities Exchange Act of 1934, as
amended by Section 202 of the Sarbanes-Oxley Act of 2002, non-audit services
approved in 2004 by the Audit Committee of our Board of Directors and to be
performed by Deloitte & Touche LLP, our independent auditors, are as follows:
(i) tax compliance services, (ii) tax planning services, (iii) tax controversy
services, and (iv) advisory services related to review of certain internal
control procedures.
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, and suspension assembly components, the
impact of customer yields on suspension assembly demand and disk drive and TSA
suspension technology and development, the statements under the heading
"General" about our gross margins and operating results, the statements above
under the heading "Market Trends and Certain Contingencies" about data density
improvements in disk drives and expected tax benefits and the statements above,
under the heading "Liquidity and Capital Resources," about capital expenditures
and capital resources, are forward-looking statements based on current
expectations. These statements are subject to risks and uncertainties, including
slower or faster customer acceptance and adoption of new product features,
fluctuating order rates, faster or slower improvements in disk drive data
densities and other technological advances which affect suspension assembly and
component demand, changes in market consumption of disk drives or suspension
assemblies, difficulties in producing our TSA suspensions, difficulties in
managing capacity, changes in manufacturing efficiencies, changes in tax laws
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.
20
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 working capital line provided by the credit facility, interest expense
would increase or decrease accordingly. At December 28, 2003, there were no
outstanding borrowings under the credit facility.
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 December
28, 2003, we had fixed rate debt of $150,000,000.
We do not enter into derivative or other financial instruments or hedging
transactions for trading or speculative purposes. All of our sales transactions
in our Disk Drive Division are denominated in United States dollars and thus are
not subject to risk due to currency exchange fluctuations. Certain sales
transactions in our BioMeasurement Division may be denominated in foreign
currencies.
21
ITEM 4. CONTROLS AND PROCEDURES.
As of the end of the period covered by this Quarterly Report on Form 10-Q, we
conducted an evaluation, under the supervision and with the participation of our
principal executive officer and principal financial officer, of our disclosure
controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the
Securities Exchange Act of 1934, as amended). Based on this evaluation, the
principal executive officer and principal financial officer concluded that our
disclosure controls and procedures are effective to ensure that information we
are required to disclose in reports that we file or submit under the Securities
Exchange Act of 1934 is recorded, processed, summarized and reported within the
time periods specified in SEC rules and forms. There was no change in our
internal control over financial reporting during our most recently completed
fiscal quarter that has materially affected, or is reasonably likely to
materially affect, our internal control over financial reporting.
22
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 SEC pursuant to the Securities Exchange Act of 1934, as
amended, are located under SEC file number 0-14709.
3.1 Amended and Restated Articles of Incorporation of HTI (incorporated by
reference to Exhibit 3.1 to HTI's Quarterly Report on Form 10-Q for the
quarter ended 12/29/02).
3.2 Restated By-Laws of HTI (incorporated by reference to Exhibit 4.2 to
HTI's Registration Statement on Form S-3, Registration No. 333-104074).
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 Share Rights Agreement dated as of 7/19/00, between HTI and Wells Fargo
Bank Minnesota, N.A., as Rights Agent (incorporated by reference to
Exhibit 1 to HTI's Registration Statement on Form 8-A, dated 7/24/00).
4.3 Indenture dated as of 2/24/03 between HTI and LaSalle Bank National
Association, as Trustee (incorporated by reference to Exhibit 4.5 to
HTI's Registration Statement on Form S-3, Registration No. 333-104074).
4.4 Purchase Agreement dated 2/18/03 by and among HTI, Salomon Smith Barney
Inc. and Needham & Company, Inc. (incorporated by reference to Exhibit
4.6 to HTI's Registration Statement on Form S-3, Registration No.
333-104074).
4.5 Registration Rights Agreement dated as of 2/24/03 by and among HTI,
Salomon Smith Barney Inc. and Needham & Company, Inc. (incorporated by
reference to Exhibit 4.7 to HTI's Registration Statement on Form S-3,
Registration No. 333-104074).
10.1 Office/Warehouse Lease between OPUS Corporation, Lessor, and HTI,
Lessee, dated 12/29/95 (incorporated by reference to Exhibit 10.2 to
HTI's Quarterly Report on Form 10-Q for the quarter ended 3/24/96), and
First Amendment to Office/Warehouse Lease dated 4/30/96 (incorporated
by reference to Exhibit 10.2 to HTI's Quarterly Report on Form 10-Q for
the quarter ended 6/23/96).
#10.2 Directors' Retirement Plan effective as of 1/1/92 (incorporated by
reference to Exhibit 10.12 to HTI's Annual Report on Form 10-K for the
fiscal year ended 9/27/92) and Amendment effective as of 11/19/97
(incorporated by reference to Exhibit 10.5 to HTI's Quarterly Report on
Form 10-Q for the quarter ended 12/28/97).
#10.3 Hutchinson Technology Incorporated 1988 Stock Option Plan, as amended
(incorporated by reference to Exhibit 10.3 to HTI's Annual Report on
Form 10-K for the fiscal year ended 9/28/03).
10.4 Patent License Agreement, effective as of 9/1/94, between HTI and
International Business Machines Corporation (incorporated by reference
to Exhibit 10.11 to HTI's Quarterly Report on Form 10-Q/A for the
quarter ended 6/25/95).
23
10.5 Lease Agreement between Meridian Eau Claire LLC and HTI, dated 5/1/96
(incorporated by reference to Exhibit 10.10 to HTI's Quarterly Report
on Form 10-Q for the quarter ended 6/23/96) and First Amendment to
Lease (incorporated by reference to Exhibit 10.6 to HTI's Annual Report
on Form 10-K for the fiscal year ended 9/24/00).
#10.6 Hutchinson Technology Incorporated 1996 Incentive Plan, as amended
(incorporated by reference to Exhibit 10.6 to HTI's Annual Report on
Form 10-K for the fiscal year ended 9/28/03).
#10.7 Hutchinson Technology Incorporated Incentive Bonus Plan (incorporated
by reference to Exhibit 10.13 to HTI's Quarterly Report on Form 10-Q
for the quarter ended 12/28/97).
#10.8 Description of Fiscal Year 2004 Management Bonus Plan of Hutchinson
Technology Incorporated.
#10.9 Description of Fiscal Year 2004 BioMeasurement Division Bonus Plan of
Hutchinson Technology Incorporated.
31.1 Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer.
31.2 Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer.
32 Section 1350 Certifications.
# Management contract, compensatory plan or arrangement required to be filed as
an exhibit to this Quarterly Report on Form 10-Q.
(B) REPORTS ON FORM 8-K:
We filed the following Current Reports on Form 8-K during the thirteen weeks
ended December 28, 2003:
1. Current Report on Form 8-K dated November 3, 2003 reporting, under Item 7
("Financial Statements and Exhibits") of Form 8-K, the Company's fiscal
year and fourth quarter earnings press release dated November 3, 2003.
24
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: February 9, 2004 By /s/ Wayne M. Fortun
------------------------------------------
Wayne M. Fortun
President and Chief Executive Officer
Date: February 9, 2004 By /s/ John A. Ingleman
------------------------------------------
John A. Ingleman
Vice President and Chief Financial Officer
25
INDEX TO EXHIBITS
Exhibit
No. Page
- ------- ---------------
3.1 Amended and Restated Articles of Incorporation of HTI (incorporated by Incorporated by
reference to Exhibit 3.1 to HTI's Quarterly Report on Form 10-Q for Reference
the quarter ended 12/29/02).
3.2 Restated By-Laws of HTI (incorporated by reference to Exhibit 4.2 to Incorporated by
HTI's Registration Statement on Form S-3, Registration No. Reference
333-104074).
4.1 Instruments defining the rights of security holders, including an Incorporated by
indenture. The Registrant agrees to furnish the Securities and Reference
Exchange Commission upon request copies of instruments with respect to
long-term debt.
4.2 Share Rights Agreement dated as of 7/19/00, between HTI and Wells Incorporated by
Fargo Bank Minnesota, N.A., as Rights Agent (incorporated by reference Reference
to Exhibit 1 to HTI's Registration Statement on Form 8-A, dated
7/24/00).
4.3 Indenture dated as of 2/24/03 between HTI and LaSalle Bank National Incorporated by
Association, as Trustee (incorporated by reference to Exhibit 4.5 to Reference
HTI's Registration Statement on Form S-3, Registration No.
333-104074).
4.4 Purchase Agreement dated 2/18/03 by and among HTI, Salomon Smith Incorporated by
Barney Inc. and Needham & Company, Inc. (incorporated by reference to Reference
Exhibit 4.6 to HTI's Registration Statement on Form S-3, Registration
No. 333-104074).
4.5 Registration Rights Agreement dated as of 2/24/03 by and among HTI, Incorporated by
Salomon Smith Barney Inc. and Needham & Company, Inc. (incorporated by Reference
reference to Exhibit 4.7 to HTI's Registration Statement on Form S-3,
Registration No. 333-104074).
10.1 Office/Warehouse Lease between OPUS Corporation, Lessor, and HTI, Incorporated by
Lessee, dated 12/29/95 (incorporated by reference to Exhibit 10.2 to Reference
HTI's Quarterly Report on Form 10-Q for the quarter ended 3/24/96),
and First Amendment to Office/Warehouse Lease dated 4/30/96
(incorporated by reference to Exhibit 10.2 to HTI's Quarterly Report
on Form 10-Q for the quarter ended 6/23/96).
10.2 Directors' Retirement Plan effective as of 1/1/92 (incorporated by Incorporated by
reference to Exhibit 10.12 to HTI's Annual Report on Form 10-K for the Reference
fiscal year ended 9/27/92) and Amendment effective as of 11/19/97
(incorporated by reference to Exhibit 10.5 to HTI's Quarterly Report
on Form 10-Q for the quarter ended 12/28/97).
10.3 Hutchinson Technology Incorporated 1988 Stock Option Plan, as amended Incorporated by
(incorporated by reference to Exhibit 10.3 to HTI's Annual Report on Reference
Form 10-K for the fiscal year ended 9/28/03).
10.4 Patent License Agreement, effective as of 9/1/94, between HTI and Incorporated by
International Business Machines Corporation (incorporated by reference Reference
to Exhibit 10.11 to HTI's Quarterly Report on Form 10-Q/A for the
quarter ended 6/25/95).
26
10.5 Lease Agreement between Meridian Eau Claire LLC and HTI, dated 5/1/96 Incorporated by
(incorporated by reference to Exhibit 10.10 to HTI's Quarterly Report on Form Reference
10-Q for the quarter ended 6/23/96) and First Amendment to Lease (incorporated
by reference to Exhibit 10.6 to HTI's Annual Report on Form 10-K for the
fiscal year ended 9/24/00).
10.6 Hutchinson Technology Incorporated 1996 Incentive Plan, as amended Incorporated by
(incorporated by reference to Exhibit 10.6 to HTI's Annual Report on Form 10-K Reference
for the fiscal year ended 9/28/03).
10.7 Hutchinson Technology Incorporated Incentive Bonus Plan (incorporated by Incorporated by
reference to Exhibit 10.13 to HTI's Quarterly Report on Form 10-Q for the Reference
quarter ended 12/28/97).
10.8 Description of Fiscal Year 2004 Management Bonus Plan of Hutchinson Technology Filed Electronically
Incorporated.
10.9 Description of Fiscal Year 2004 BioMeasurement Division Bonus Plan of Filed Electronically
Hutchinson Technology Incorporated.
31.1 Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer. Filed Electronically
31.2 Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer. Filed Electronically
32 Section 1350 Certifications. Filed Electronically
27