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Document is copied.
Filed by Komag, Incorporated Pursuant to Rule 425 under the
Securities Act of 1933.
Subject Company: Komag, Incorporated
Commission File No. 333-58316
KOMAG ANNOUNCES FIRST QUARTER RESULTS
KOMAG MOVES ITS U.S. MANUFACTURING TO MALAYSIA AHEAD OF SCHEDULE
FOR IMMEDIATE RELEASE
SAN JOSE, Calif., April 19, 2001 -- Komag, Incorporated (Nasdaq: KMAG), the
largest independent producer of media for disk drives, today announced its
financial results for the first fiscal quarter of 2001.
First QUARTER RESULTS
As a result of a widespread slowdown in demand, especially in the server segment
of the data storage industry, net sales for the first fiscal quarter of 2001
totaled $87.9 million, down 21% from $111.2 million recorded in the fourth
quarter of 2000. The company's net loss for the first quarter of 2001 was $51.0
million, or $0.46 per share based on 111.6 million weighted average shares
outstanding, compared to a loss of $43.7 million, or $0.40 per share based on
110.0 million weighted average shares outstanding, in the fourth quarter of
2000.
REVIEW OF FIRST QUARTER OPERATIONS
Komag shipped 12.7 million disks during the first quarter of 2001, in line with
the company's earlier forecast announced in a press release on March 26, 2001.
During the first quarter of 2001, Komag also shipped 3.4 million nickel plated
and polished ("NPP") substrates. First quarter disk production was approximately
13.7 million units, 81% of which were made in the company's Malaysian factories.
First quarter average selling price for finished disks was $6.30 per disk
compared with $6.40 in the fourth quarter of 2000. The quarter-over-quarter
decline of less than 2% was in line with the company's expectation of relatively
flat pricing stated in a previous press release. Sales to Maxtor, Seagate and
Western Digital were 36%, 12%, and 46% of revenue, respectively.
Komag ended the quarter with a cash and short term investment balance of $51.6
million. The decline from last quarter of $29.1 million was in line with the
company's expectations. It resulted from operating the company's U.S. factories
at low utilization, the continued cost of moving manufacturing equipment to
Malaysia to prepare for the cessation of U.S. manufacturing, a scheduled payment
of $7.5 million to reduce our senior debt, and the $6.6 million semiannual
interest payment on the HMT convertible bonds. Earnings before interest, taxes,
depreciation and amortization, were a negative $3.3 million. The company expects
this measure of performance to improve substantially as Komag completes its
planned relocation of all U.S. manufacturing operations to Malaysia. Komag's
ending accounts receivable balance improved to 30 days of sales outstanding
compared with 33 days in the fourth quarter of 2000. Inventory turns declined
from 21 to 12 annualized turns due to changes in timing of customer demand for
disks in the first quarter.
BUSINESS OUTLOOK
Komag expects shipments for the second quarter of 2001 to be approximately 14
million disks, up 10% from the first quarter, and average selling prices to
remain flat. The company currently expects further modest increases in unit
shipments with continued flat pricing in the second half of 2001. Sales of NPP
substrates are expected to decline in the second quarter.
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Komag's announced strategy has been to locate 100% of its production capacity in
Malaysia to achieve low manufacturing costs. The company ceased manufacturing at
its facilities located in Fremont and Santa Rosa, California and Eugene, Oregon
within the last ten days. These closures are ahead of schedule, accelerating the
timing of expected cost savings. The three production lines that have been moved
to Malaysia already are fully qualified and are producing disks at high yields.
"Now that all of our production comes from our Malaysian facilities, our U.S.
presence will be focused on research and development. Our R&D team in San Jose
will continue to develop finished media and substrate development efforts will
remain in Santa Rosa," said T.H. Tan, Komag's chief executive officer.
By shifting all manufacturing offshore to Malaysia, Komag expects to
significantly reduce the cost of production. The company's business model
anticipates that fixed manufacturing costs, including employee, factory and
equipment expenses, will be around $35 million per quarter compared with $52
million in the first quarter of 2001. The variable cost of producing a disk is
approximately $2.70 to $2.80 per disk. "Our low cost structure is a significant
competitive advantage and will be instrumental in returning the company to
profitability. We are moving Komag to the next phase. In spite of the current
weakness in demand, closing our U.S. manufacturing ahead of schedule places us
on track for a much healthier business in the second half of this year," stated
Mr. Tan.
Komag's technology continues to provide leading edge products to disk drive
customers. Currently the company is the only fully qualified source shipping
volume quantities of 30 gigabyte ("GB") per platter disks in the industry. These
are the highest storage density disks available in the market today. The company
continues to be on schedule in qualifications of 40 GB and 60 GB per disk
programs and is providing synthetic antiferromagnetic (SAF) and perpendicular
recording media samples for advanced technology evaluations. The company is also
engaged in qualification of its low cost glass substrates and media.
DEBT RESTRUCTURING
On April 5, 2001 Komag filed a registration statement for a proposed exchange
offer to exchange the company's existing convertible bonds for new convertible
bonds. The proposed exchange offer is part of a comprehensive restructuring plan
that also includes proposed new debt financing from Malaysian sources and
proposed use of cash proceeds and new convertible bonds to settle the company's
existing senior debt and a note held by Western Digital Corporation. The
registration statement includes a more detailed description of the company's
plan. Komag expects to commence the exchange offer as soon as practical.
Currently, none of the parts of the restructuring plan has been completed, and
the terms are subject to change.
CONFERENCE CALL
Komag will conduct a conference call with the investment community at 2:00 p.m.
PDT. The conference call will be broadcast live over the Internet:
http://www.komag.com (Click on Webcast).
A replay of the conference call via the web will be available after 5:00 p.m.
PDT on April 19, 2001 until 5:00 p.m. PDT on April 26, 2001 by accessing the
same URL address as the live audio webcast.
ABOUT KOMAG:
Founded in 1983, Komag completed a merger with HMT Technology Corporation in
October 2000. The combined company is the world's largest independent supplier
of thin-film disks, the primary high-capacity storage medium for digital data in
computers and consumer appliances. Komag's advanced development capability and
high-volume, low-cost manufacturing expertise provide high quality, leading-edge
disk products at a low overall cost to its customers. These attributes enable
Komag to partner with customers in the execution of their time-to-market design
and time-to-volume manufacturing strategies. Supplementing its core disk
business, Komag has launched a diversification program that will leverage the
company's knowledge of magnetic recording and its ultra-high precision
manufacturing capabilities.
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For more information about Komag, visit Komag's Internet home page at
http://www.komag.com or call Komag's Investor Relations 24-hour Hot Line at
888-66-KOMAG or 408-576-2901.
FORWARD LOOKING STATEMENTS
This press release contains certain "forward-looking" statements within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities Exchange Act of 1934, as amended, and are subject to the
safe harbors created thereby. These statements represent the company's current
judgment with respect to, but are not limited to, shipment volume, revenue, net
loss, utilization of facilities, future operating costs, the ability to move
manufacturing assets, and the cost and timing of such moves. The company's
actual results for future periods could differ materially from those projected
in such forward-looking information. Factors that could cause actual results to
differ include, but are not limited to, the company's ability to successfully
consolidate manufacturing operations in Malaysia on time and on budget,
variability in demand for and average selling price of disks, the impact of
demand variation on factory utilization, the company's ability to achieve its
operating yield, cost and profitability targets, the company's ability to
satisfy customer qualification requirements at its Malaysian facilities, and
requirements for glass substrates. In addition, statements in this press release
relating to the company's plan to restructure its outstanding debt, including a
proposed new debt financing from Malaysian sources, the exchange of convertible
bonds and the use of cash and bonds to settle certain of the company's existing
senior debt are subject to risks relating to the company's ability to complete
the proposed transactions on acceptable terms, or at all, the timing of
completion of the transactions, and the company's ability to satisfy all of the
conditions precedent to the transactions. These and other risk factors are
described in the company's Registration Statement on Form S-4/S-3 and the most
recent Annual Report on Form 10-K and other periodic reports filed by Komag with
the Securities and Exchange Commission. Komag undertakes no obligation to update
forward-looking statements to reflect events or circumstances occurring after
the date of such statements.
ADDITIONAL INFORMATION AND WHERE TO FIND IT
Komag has filed a Registration Statement on SEC Form S-4/S-3 in connection with
the proposed exchange offer involving the company's convertible bonds. Investors
and security holders are urged to read the Registration Statement carefully. The
Registration Statement and the enclosed preliminary prospectus contain important
information about Komag, the proposed financing strategies, the proposed terms
of the exchange offer, descriptions of the company's existing debt and the
proposed terms of the new convertible bonds. Investors and security holders will
be able to obtain free copies of the Registration Statement through the website
maintained by the U.S. Securities and Exchange Commission at http://www.sec.gov.
Free copies of the document may also be obtained from Komag by directing a
request through the Investor Relations portion of Komag's website at
http://www.komag.com or by mail to Komag, Incorporated, 1710 Automation Parkway,
San Jose, CA 95131, attention: Investor Relations, telephone: (408) 576-2000.
In addition to the Registration Statement, Komag files annual, quarterly and
special reports, proxy statements and other information with the Securities and
Exchange Commission. You may read and copy any reports, statements or other
information filed by Komag at the Commission's public reference rooms at 450
Fifth Street, N.W., Washington, D.C. 20549 or at any of the Commission's other
public reference rooms in New York, New York and Chicago, Illinois. Please call
the Commission at 1-800-SEC-0330 for further information on the public reference
rooms. Komag's filings with the Commission are also available to the public from
commercial document-retrieval services and at the website maintained by the
Commission at http://www.sec.gov.
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KOMAG, INCORPORATED
SCRIPT USED IN CONNECTION WITH
QUARTERLY EARNINGS CONFERENCE CALL
APRIL 19, 2001
Operator: Good afternoon everyone and welcome to Komag's First Quarter 2001
financial results conference call. Today's conference is being
recorded. At this time, I would like to turn the call over to the
Chief Executive Officer, T.H. Tan. Please proceed, sir.
T.H. Tan: Thank you. Good afternoon. Thank you for being with us
today. I am T.H. Tan, Komag's CEO.
With me here today are our newly appointed president, Mike
Russak, and our CFO,Ted Siegler.
On the call this afternoon,
o Ted will discuss our financial results for first quarter
2001.
o Then I will discuss significant developments in our sales
and manufacturing
o Mike will update you on the R&D areas., and
o I will conclude with some final comments.
o Ted. . .
Ted Siegler: Thanks, T.H. Before I begin today, I would like to remind our
audience that we make forward-looking statements during our
conference call, in our press releases and in our published SEC
filings. These forward-looking statements involve risks and
uncertainties, but they also represent our current judgment
regarding the future direction of our business. The associated
risks and uncertainties can cause actual results to differ
materially from our forecasts. Important factors relating to our
business are described in today's press release and in our SEC
filings.
As many of you are aware, we filed a registration statement with
the Securities and Exchange Commission on April 5th. The
registration statement details our plans to restructure our
senior debt, which I will discuss later. Because we are in a
registration period, we will not conduct our usual question and
answer session after our prepared remarks today.
A press release describing our first quarter 2001 results was
placed on the news wires today at approximately 4:15 p.m. EDT. If
you have not received a copy of our earnings press release, it is
currently posted on our Web site at www.komag.com.
For those of you who have not had a chance to read our press
release, let me summarize the financial numbers.
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o First quarter sales and earnings were negatively impacted by
weak market demand, particularly in the server segment of
the data storage industry.
o Net sales for the first fiscal quarter of 2001 totaled $87.9
million, down 21% from $111.2 million recorded in the fourth
quarter of 2000.
o The company's net loss for the first quarter of 2001 was
$51.0 million, or $0.46 per share based on 111.6 million
shares outstanding compared to a loss of $43.7 million or
$0.40 per share based on 110.0 million shares outstanding in
the fourth quarter of 2000.
o Earnings before interest, taxes, depreciation and
amortization, were negative $3.3 million. As we will
discuss, we ceased U.S. manufacturing over the last 10 days
to achieve our cost objectives as rapidly as possible. Now
that all of our manufacturing is in Malaysia, we expect this
measure of performance to improve substantially.
o We ended the quarter with a cash balance of $51.6 million.
The decline from last quarter of $29.1 million was in line
with the company's expectations. Uses of cash included
operating our U.S. factories at low utilization, the
continued cost of moving manufacturing equipment to
Malaysia, a scheduled payment of $7.5 million to reduce our
senior debt, and the $6.6 million semiannual interest
payment on the HMT convertible bonds.
ON OUR BALANCE SHEET AND CASH FLOW:
o Ending accounts receivable balance was equal to 30 days
sales outstanding down from 33 days in the fourth quarter of
2000.
o Inventory turns declined from 21 to 12 due to the timing of
our customers' inventory adjustments.
o Capital expenditures were approximately $16.5 million as
spending reflected the continued cost of relocating
manufacturing assets to Malaysia. At this point spending on
this project should drop off dramatically.
o Depreciation and amortization of intangibles were $18.6
million and $7.6 million, respectively.
o According to the terms of our loan restructure agreement,
our senior debt was at $209.2 million at the end of the
quarter. Subsequently we have made the $7.5 million
amortization payment due in April, further lowering the
balance to $201.7 million. To date, we have paid down $58.3M
of the $260M principal of our senior debt. We remain in
compliance with our Restructured Loan Agreement.
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Looking at our first quarter operating results in more detail:
o Revenue was down 21% due to decreased unit volume: from 15.3
million disks to 12.7 million disks, as we announced in a
previous press release from March 26th. Average unit selling
price for finished media declined 1.6% to $6.30.
o This quarter we shipped 3.4 million nickel plated and
polished ("NPP") substrates. First quarter disk production
was approximately 13.7 million units, 81% of which was made
in the company's Malaysian factories.
o Gross margin was (6.3)% and that's down from 2.2% in the
fourth quarter. The drop was primarily due to under
utilization of our U.S. manufacturing facilities.
o Research and development at $10.7 million was in line with
expectations for our combined company. SG&A spending was
$5.7 million. We continue to expect SG&A spending to decline
by approximately 30% by the fourth quarter as we complete
the integration of the Komag and HMT teams.
o Interest expense was $22.2 million. This expense included
cash interest expense of $8.6 million for our senior debt
and the HMT convertible bonds, $10.9 million non-cash
accretion of the HMT convertible bonds and $2.7 million
other non-cash interest charges.
We have finished moving and installing 3 of 4 production lines
from our Fremont factory to Malaysia. The fourth line move should
be completed in about a month. Our business model, once we fully
integrate manufacturing operations into Malaysia, includes:
o Fixed manufacturing costs of around $35 million per quarter,
a savings of about $17 million compared to last quarter's
results.
o Variable costs, on a yielded basis, in a range of $2.70 to
$2.80 per disk.
o We are sizing our Malaysian factories to run 16-17 million
disks per quarter. At this level of production, and assuming
average selling prices remain fairly stable, we should
achieve gross margins in a range of 20% to 25%.
o I will remind you that projections of this nature are based
on a number of assumptions that are subject to risks and
uncertainties, but we feel confident that our future
business model will be sustainable.
DEBT RESTRUCTURING
On April 5, 2001 we filed a registration statement for a proposed
tender offer to exchange existing convertible bonds for new
convertible bonds. This registration statement includes a
detailed description of our proposed plan to restructure our
outstanding debt. The restructuring transactions include:
o Proposed new debt financing from Malaysian sources,
o The proposed exchange of convertible bonds, and
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o The proposed use of cash proceeds and new convertible bonds
to settle the company's existing senior debt and a note held
by Western Digital Corporation.
o These transactions are complex and they have not been
finalized. They are also dependent on each other. The terms
may change and we will update the registration statements to
reflect changes as warranted.
I will now hand the call over to T.H. to discuss Komag's
operations.
T.H. Tan: Thank you Ted. Our integration and consolidation plan has met
significant milestones and is, in fact, ahead of schedule.
WE CEASED PRODUCTION AT OUR U.S. LOCATIONS OVER THE LAST TEN DAYS
o We have relocated enough equipment to our Malaysia
operations to meet current customer demand. This relocated
equipment is fully qualified and producing disks at yields
that equal or surpass what we were able to achieve in the
U.S. This provides the opportunity to accelerate our
shutdown schedule in the U.S.
o We are in the process of releasing the workforces at our
plants in Fremont and Santa Rosa, California and Eugene,
Oregon. The employees that are laid off will receive
notification pay and severance consistent with our past
practices and is included in our plans.
o We have begun the process of building closure, which will
occur over the next several months.
o As we have said previously, we are actively marketing our
surplus real estate assets. We believe these buildings
represent unique value in their respective markets and
expect that the search for the right buyer may take some
time.
o As a result of the early closure of U.S. operations we
expect our gross margins in the June quarter to exceed 10%
and that our loss will narrow considerably. In subsequent
quarters we should gain the full benefit of the Malaysian
cost structure that Ted described earlier.
FROM A MANUFACTURING STANDPOINT:
o During the first quarter we produced 13.7 million finished
disks. Our Malaysian operations produced 81% of this total.
o Our yields remained high. The relentless improvement in
storage density continues and our ability to keep yields up
is critical to our business model. Our R&D and manufacturing
teams have established a record of great success on this
front.
o Inventory turns declined from 21 to 12 due to slowdown in
demand we experienced last quarter. We believe slackening
demand is related to an industry-wide inventory adjustment
and soft end product sales, especially in the server segment
of the industry. We expect to adjust our inventory during
the second quarter.
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FROM A SALES AND MARKETING PERSPECTIVE:
o We shipped 12.7 million disks in the quarter, a drop of
about 17% compared to the fourth quarter. Currently we
expect our shipments to improve to slightly more than 14
million units in the second quarter. The increase is likely
to result from strong demand for 30 GB per platter products.
o For the balance of the year, we currently expect modest
increases in unit shipments with continued flat pricing.
o We sold 3.4 million nickel plated and polished substrates
and 1.6 million aluminum substrates. We expect sales of NPP
substrates will decline this quarter.
o 26% of our shipments were at the 30 GB per platter density
and 90% were over 20 GB per platter compared to 58% in the
fourth quarter of 2000. To the best of our knowledge we are
the only supplier shipping 30 GB per disk products in
volume. During the first quarter we also provided 40 GB per
platter disks for qualification in advanced drive programs.
o Our average selling prices dropped about 1.6% to $6.30 for
finished disks during the first quarter. We are seeing the
average selling price curve flatten and expect that it will
remain stable next quarter and in the foreseeable future.
o Sales mix by customer was Maxtor at 36%, Seagate at 12% and
Western Digital at 46% of revenue. Shipments to enterprise
programs dropped to 6% of sales, reflecting weakness in that
segment of the market. This weakness impacted our sales to
Seagate in particular.
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MIKE: This is Mike Russak. We believe that Komag offers our customers
the best and most complete set of technological capabilities of
any media supplier. Some recent examples of our technology
leadership are:
o Currently the company is the only fully qualified source of
30 gigabytes ("GB") per platter disks in the industry. These
are the highest storage density disks available in the
market today. We're really pleased that we are producing
these disks at high yields in our Malaysian factories.
o The company is also on schedule in qualifications of 40 GB
and 60 GB per disk programs
o The merger of Komag and HMT provided the opportunity to
strengthen our technical team and, we believe, increase the
gap between Komag and our merchant competition. In fact, we
believe that we have the strongest R&D presence in the
industry and that we see substantial benefit from this
strength at the 30 GB per platter and expect it to continue
at 40 GB and beyond.
o The technology to make our disks gets more difficult with
each generation. Our R&D strength will be a critical factor
in helping our customers stay on their stated technology
schedules.
o Our advanced technology team is working with customers to
evaluate new technologies such as synthetic
antiferromagnetic (SAF) and perpendicular recording media.
We are currently shipping samples of these new media and the
results look positive. We don't expect to need to make these
modifications to our magnetic structures until we reach 80
GB per platter or higher applications.
o Deployment of our low cost glass technology is paced by our
qualification efforts. We are working with several customers
to determine the best program to introduce this new
technology.
TH: The first quarter was cyclically weak from a sales standpoint.
However, we have made the fundamental operational improvements
necessary to substantially improve our results. We are ahead of
schedule shifting manufacturing to Malaysia so that we can take
advantage of a low cost structure. We will reap the additional
benefit of reducing the expense of supporting operations here in
the U.S. Our technology is solid and our disks meet our
customers' most advanced needs. The primary issue facing us today
is to restructure our balance sheet. We have made what we believe
to be a constructive proposal to resolve our debt and will
vigorously negotiate until we have a final solution in place.
Thank you for joining us today.
ABOUT KOMAG:
Founded in 1983, Komag completed a merger with HMT Technology Corporation in
October 2000. The combined company is the world's largest independent supplier
of thin-film disks, the primary high-capacity
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storage medium for digital data in computers and consumer appliances. Komag's
advanced development capability and high-volume, low-cost manufacturing
expertise provide high quality, leading-edge disk products at a low overall cost
to its customers. These attributes enable Komag to partner with customers in the
execution of their time-to-market design and time-to-volume manufacturing
strategies. Supplementing its core disk business, Komag has launched a
diversification program that will leverage the company's knowledge of magnetic
recording and its ultra-high precision manufacturing capabilities.
For more information about Komag, visit Komag's Internet home page at
http://www.komag.com or call Komag's Investor Relations 24-hour Hot Line at
888-66-KOMAG or 408-576-2901.
FORWARD LOOKING STATEMENTS
This press release contains certain "forward-looking" statements within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities Exchange Act of 1934, as amended, and are subject to the
safe harbors created thereby. These statements represent the company's current
judgment with respect to, but are not limited to, shipment volume, revenue, net
loss, utilization of facilities, future operating costs, the ability to move
manufacturing assets, and the cost and timing of such moves. The company's
actual results for future periods could differ materially from those projected
in such forward-looking information. Factors that could cause actual results to
differ include, but are not limited to, the company's ability to successfully
consolidate manufacturing operations in Malaysia on time and on budget,
variability in demand for and average selling price of disks, the impact of
demand variation on factory utilization, the company's ability to achieve its
operating yield, cost and profitability targets, the company's ability to
satisfy customer qualification requirements at its Malaysian facilities, and
requirements for glass substrates. In addition, statements in this press release
relating to the company's plan to restructure its outstanding debt, including a
proposed new debt financing from Malaysian sources, the exchange of convertible
bonds and the use of cash and bonds to settle certain of the company's existing
senior debt are subject to risks relating to the company's ability to complete
the proposed transactions on acceptable terms, or at all, the timing of
completion of the transactions, and the company's ability to satisfy all of the
conditions precedent to the transactions. These and other risk factors are
described in the company's Registration Statement on Form S-4/S-3 and the most
recent Annual Report on Form 10-K and other periodic reports filed by Komag with
the Securities and Exchange Commission. Komag undertakes no obligation to update
forward-looking statements to reflect events or circumstances occurring after
the date of such statements.
ADDITIONAL INFORMATION AND WHERE TO FIND IT
Komag has filed a Registration Statement on SEC Form S-4/S-3 in connection with
the proposed exchange offer involving the company's convertible bonds. Investors
and security holders are urged to read the Registration Statement carefully. The
Registration Statement and the enclosed preliminary prospectus contain important
information about Komag, the proposed financing strategies, the proposed terms
of the exchange offer, descriptions of the company's existing debt and the
proposed terms of the new convertible bonds. Investors and security holders will
be able to obtain free copies of the Registration Statement through the website
maintained by the U.S. Securities and Exchange Commission at http://www.sec.gov.
Free copies of the document may also be obtained from Komag by directing a
request through the Investor Relations portion of Komag's website at
http://www.komag.com or by mail to Komag, Incorporated, 1710 Automation Parkway,
San Jose, CA 95131, attention: Investor Relations, telephone: (408) 576-2000.
In addition to the Registration Statement, Komag files annual, quarterly and
special reports, proxy statements and other information with the Securities and
Exchange Commission. You may read and copy any reports, statements or other
information filed by Komag at the Commission's public reference rooms at 450
Fifth Street, N.W., Washington, D.C. 20549 or at any of the Commission's other
public reference rooms in New
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York, New York and Chicago, Illinois. Please call the Commission at
1-800-SEC-0330 for further information on the public reference rooms. Komag's
filings with the Commission are also available to the public from commercial
document-retrieval services and at the website maintained by the Commission at
http://www.sec.gov.
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