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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 MARCH 28, 2004
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 May 4, 2004 the registrant had 26,073,379 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)
March 28,
2004 September 28,
(Unaudited) 2003
---------- -------------
ASSETS
Current assets:
Cash and cash equivalents $126,618 $ 67,505
Securities available for sale 194,023 224,860
Trade receivables, net 56,363 59,822
Other receivables 6,889 6,036
Inventories 41,961 31,290
Prepaid taxes and other (Note 8) 9,968 11,156
-------- --------
Total current assets 435,822 400,669
Property, plant and equipment, net 187,846 176,559
Deferred tax assets 30,875 37,840
Other assets (Note 8) 22,031 23,888
-------- --------
$676,574 $638,956
======== ========
LIABILITIES AND SHAREHOLDERS' INVESTMENT
Current liabilities:
Accounts payable $ 28,988 $ 21,462
Accrued expenses 11,590 13,299
Accrued compensation 21,452 22,202
-------- --------
Total current liabilities 62,030 56,963
Convertible subordinated notes 150,000 150,000
Deferred income 2,647 408
Other long-term liabilities 103 210
Shareholders' investment:
Common stock, $.01 par value, 100,000,000 shares authorized, 26,048,000
and 25,458,000 issued and outstanding 260 259
Additional paid-in capital 382,415 379,663
Accumulated other comprehensive income 372 525
Retained earnings 78,747 50,928
-------- --------
Total shareholders' investment 461,794 431,375
-------- --------
$676,574 $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 Twenty-Six Weeks Ended
-------------------------- --------------------------
March 28, March 30, March 28, March 30,
2004 2003 2004 2003
--------- --------- --------- ---------
Net sales $ 113,354 $ 124,959 $ 246,990 $ 257,821
Cost of sales 79,565 86,328 169,915 177,762
--------- --------- --------- ---------
Gross profit 33,789 38,631 77,075 80,059
Research and development expenses 6,819 2,638 11,674 6,086
Selling, general and administrative expenses 16,431 13,663 33,118 28,707
--------- --------- --------- ---------
Income from operations 10,539 22,330 32,283 45,266
Interest expense (878) (2,981) (1,806) (5,216)
Interest income 1,198 1,610 2,143 3,033
Loss on debt extinguishment (Note 9) -- (3,486) -- (3,265)
Other income, net 990 309 1,724 606
--------- --------- --------- ---------
Income before income taxes 11,849 17,782 34,344 40,424
Provision for income taxes 2,251 3,379 6,525 7,681
--------- --------- --------- ---------
Net income $ 9,598 $ 14,403 $ 27,819 $ 32,743
========= ========= ========= =========
Basic earnings per share $ 0.37 $ 0.56 $ 1.07 $ 1.29
Diluted earnings per share $ 0.33 $ 0.50 $ 0.92 $ 1.15
Weighted average common shares outstanding 26,031 25,509 25,988 25,462
Weighted average common and diluted shares outstanding 31,754 32,262 31,771 31,357
See accompanying notes to condensed consolidated financial statements -
unaudited.
3
HUTCHINSON TECHNOLOGY INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS - UNAUDITED
(Dollars in thousands)
Twenty-Six Weeks Ended
--------------------------------
March 28, March 30,
2004 2003
--------- ---------
Operating activities:
Net income $ 27,819 $ 32,743
Adjustments to reconcile net income to cash
provided by operating activities:
Depreciation and amortization 28,562 28,410
Write-off of unamortized debt issuance costs -- 1,346
Deferred taxes 7,083 6,842
Loss on disposal of assets 141 --
Changes in operating assets and liabilities (Note 10) 324 4,209
--------- ---------
Cash provided by operating activities 63,929 73,550
--------- ---------
Investing activities:
Capital expenditures (38,181) (20,808)
Purchases of marketable securities (247,003) (104,748)
Sales of marketable securities 277,615 59,969
--------- ---------
Cash used for investing activities (7,569) (65,587)
--------- ---------
Financing activities:
Repayments of long-term debt -- (143,553)
Repayments of capital lease obligation -- (3,737)
Net proceeds from issuance of convertible subordinated notes -- 145,626
Net proceeds from issuance of common stock 2,753 2,658
--------- ---------
Cash provided by financing activities 2,753 994
--------- ---------
Net increase in cash and cash equivalents 59,113 8,957
Cash and cash equivalents at beginning of period 67,505 57,852
--------- ---------
Cash and cash equivalents at end of period $ 126,618 $ 66,809
========= =========
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 "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 April 2003, the Financial Accounting Standards Board ("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.
In March 2004, the Emerging Issues Task Force ("EITF") reached consensus on
Issue No. 03-1, "The Meaning of Other-Than-Temporary Impairment and Its
Application to Certain Investments" regarding disclosures about unrealized
losses on available-for-sale debt and equity securities accounted for under FASB
Statements No. 115, "Accounting for Certain Investments in Debt and Equity
Securities," and No. 124, "Accounting for Certain Investments Held by
Not-for-Profit Organizations." The guidance for evaluating whether an investment
is other-than-temporarily impaired should be applied in other-than-temporary
impairment evaluations made in reporting periods beginning after June 15, 2004.
The disclosures are effective in annual financial statements for fiscal years
ending after December 15, 2003, for investments accounted for under Statements
115 and 124. For all other investments within the scope of this Issue, the
disclosures are effective in annual financial statements for fiscal years ending
after June 15, 2004. The additional disclosures for cost method investments are
effective for fiscal
5
years ending after June 15, 2004. The Company does not expect that the
implementation of EITF 03-1 in the fourth quarter will have a material effect on
its financial statements. The additional disclosures required by EITF 03-1 will
be provided in the notes to fiscal 2004 financial statements.
(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
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 to the five largest customers for the thirteen and
twenty-six week periods ended March 28, 2004, and sales to those customers for
the comparable periods in 2003, is as follows:
Thirteen Weeks Ended Twenty-Six Weeks Ended
---------------------------- ----------------------------
March 28, March 30, March 28, March 30,
Percentage of Net Sales 2004 2003 2004 2003
- ----------------------- --------- --------- --------- ---------
Five Largest Customers 86% 81% 83% 81%
SAE Magnetics, Ltd./TDK 34 25 34 24
Alps Electric Co., Ltd. 22 28 23 27
Western Digital Corporation 16 -- 13 --
Innovex, Inc. 7 5 7 4
Seagate Technology LLC 7 14 6 17
(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
$56,363,000 at March 28, 2004 and $59,822,000 at September 28, 2003 are net of
allowances of $1,491,000 and $2,194,000, respectively. As of March 28, 2004,
allowances of $1,491,000 consisted of a $653,000 allowance for doubtful accounts
and an $838,000 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 March 28,
2003 warranties issued under warranties 2004
- ------------- -------------------- --------------------- ---------
$1,097 $1,694 $(1,953) $838
6
(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 March 28, 2004 and
September 28, 2003:
March 28, September 28,
2004 2003
--------- -------------
Raw materials $ 9,167 $ 7,417
Work in process 10,156 6,853
Finished goods 22,638 17,020
------- -------
$41,961 $31,290
======= =======
(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 Twenty-Six Weeks Ended
----------------------- -----------------------
March 28, March 30, March 28 March 30,
2004 2003 2004 2003
--------- --------- -------- ---------
Net income (A) $ 9,598 $14,403 $27,819 $32,743
Plus: interest expense on convertible subordinated notes 1,007 2,405 2,014 4,554
Less: additional profit-sharing expense and income tax
provision 273 652 545 1,234
------- ------- ------- -------
Net income available to common shareholders (B) $10,332 $16,156 $29,288 $36,063
======= ======= ======= =======
Weighted average common shares outstanding (C) 26,031 25,509 25,988 25,462
Dilutive potential common shares 5,723 6,753 5,783 5,895
------- ------- ------- -------
Weighted average common and diluted shares outstanding (D) 31,754 32,262 31,771 31,357
======= ======= ======= =======
Basic earnings per share [(A)/(C)] $ 0.37 $ 0.56 $ 1.07 $ 1.29
Diluted earnings per share [(B)/(D)] $ 0.33 $ 0.50 $ 0.92 $ 1.15
7
(7) INCOME TAXES
The following table details the significant components of the Company's deferred
tax assets:
March 28, September 28,
2004 2003
--------- -------------
Current deferred tax assets:
Receivable allowance $ 546 $ 764
Inventories 4,911 5,150
Accruals and other reserves 3,935 3,482
Valuation allowance (3,895) (3,828)
-------- --------
Total current deferred tax assets 5,497 5,568
Long-term deferred tax assets:
Property, plant and equipment 7,964 14,054
Deferred income 991 --
Tax credits 14,930 14,422
Net operating loss carryforwards 51,738 54,557
Valuation allowance (44,748) (45,193)
-------- --------
Total long-term deferred tax assets 30,875 37,840
-------- --------
Total deferred tax assets $ 36,372 $ 43,408
======== ========
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 March 28, 2004, the
Company's deferred tax assets included $14,930,000 of unused tax credits,
$3,728,000 of which can be carried forward indefinitely and $11,202,000 of which
begin to expire at various dates beginning in 2010. At March 28, 2004, the
Company's balance sheet included $51,738,000 of deferred tax assets related to
net operating loss carryforwards that will begin to expire in 2018. As of March
28, 2004, the Company had an estimated federal net operating loss carryforward
of approximately $135,204,000 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 $48,643,000 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 for 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 the Company's 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 March 28, 2004, the unamortized
portion of the prepayment was $18,859,000, of which $3,174,000 was included in
"Prepaid taxes and other" and $15,685,000 was included in "Other assets" on the
accompanying condensed consolidated balance sheet. The unamortized portion is
being amortized on a straight-line basis over the remaining term of the
agreement which ends in 2010.
(9) LOSS 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. These notes had a maturity date of March 15, 2005.
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
8
Securities Act of 1933, as amended (the "Securities Act"). The Company used net
proceeds of $145,421,000 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 $4,579,000, 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.
(10) SUPPLEMENTARY CASH FLOW INFORMATION
Twenty-Six Weeks Ended
-------------------------
March 28, March 30,
2004 2003
--------- ---------
Changes in operating assets and liabilities:
Receivables, net $ 2,606 $ (902)
Inventories (10,671) 119
Prepaid and other assets 2,668 3,972
Accounts payable and accrued expenses 3,228 1,594
Other non-current liabilities 2,493 (574)
-------- --------
$ 324 $ 4,209
======== ========
Cash paid for:
Interest (net of amount capitalized) $ 174 $ 5,164
Income taxes $ 831 $ 8
Capitalized interest for the twenty-six weeks ended March 28, 2004 was $318,000
compared to $357,000 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
twenty-six weeks ended March 28, 2004 was primarily for 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 have been granted to
employees, 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
were granted. Options under one plan are no longer granted because the maximum
number of shares available for option grants under such plan has been reached.
Under the other plan, 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 Accounting Principles Board Opinion 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:
9
Thirteen Weeks Ended Twenty-Six Weeks Ended
--------------------------- ----------------------------
March 28, March 30, March 28, March 30,
2004 2003 2004 2003
---------- ---------- ---------- ----------
Net income, as reported $ 9,598 $ 14,403 $ 27,819 $ 32,743
Deduct: Total stock-based employee compensation
expense determined under fair value based method
for all awards, net of related tax effects (1,205) (1,489) (2,599) (3,075)
---------- ---------- ---------- ----------
Pro forma net income $ 8,393 $ 12,914 $ 25,220 $ 29,668
========== ========== ========== ==========
Earnings per share:
Basic - as reported $ 0.37 $ 0.56 $ 1.07 $ 1.29
Basic - pro forma $ 0.32 $ 0.51 $ 0.97 $ 1.17
Diluted - as reported $ 0.33 $ 0.50 $ 0.92 $ 1.15
Diluted - pro forma $ 0.29 $ 0.45 $ 0.84 $ 1.05
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
3.4%; 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 since 2002
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.
10
(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 for each
reportable segment.
Thirteen Weeks Ended Twenty-Six Weeks Ended
------------------------ -------------------------
March 28, March 30, March 28, March 30,
2004 2003 2004 2003
------------------------ -------------------------
Net sales:
Disk Drive Division $ 113,256 $ 124,934 $ 246,800 $ 257,725
BioMeasurement Division 98 25 190 96
--------- --------- --------- ---------
$ 113,354 $ 124,959 $ 246,990 $ 257,821
========= ========= ========= =========
Income from operations:
Disk Drive Division $ 12,249 $ 23,807 $ 35,636 $ 48,045
BioMeasurement Division (1,710) (1,477) (3,353) (2,779)
--------- --------- --------- ---------
$ 10,539 $ 22,330 $ 32,283 $ 45,266
========= ========= ========= =========
Assets of the BioMeasurement Division are not relevant for management of the
BioMeasurement Division segment or significant for disclosure.
11
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 ended 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 by disk drive industry demand changes,
adjustments in inventory levels throughout the disk drive supply chain,
technological changes that impact suspension assembly demand, shifts in our
market position and our customers' market positions, 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 increases in 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 274 million suspension assemblies in the first
half of 2004 compared to 265 million suspension assemblies in the first half of
2003. The increase from the first half of 2003 was due to an increase in disk
drive demand. Overall demand in both six-month periods 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.
Shipments of suspension assemblies in the second quarter of 2004 were 127
million, down 20 million or 13% from the first quarter of 2004. This reduction
in shipments was due to reduced suspension assembly demand as a result of
temporarily elevated levels of disk drive inventory. Although we believe this
inventory is being reduced and the reduction in demand to be temporary, we
continue to have limited visibility for future demand and expect shipments to
range from 125 to 135 million units for the third 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
12
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.
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. Disk drive 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 half of 2004 primarily due to
increased utilization of our production capacity resulting from higher shipment
volumes, improved productivity and continued cost controls. Although we continue
to have limited visibility for future demand, we expect our gross margin to
range from 23 to 25% of net sales for the third quarter of 2004, down from 30%
in the second quarter of 2004 primarily due to lower utilization of our
production capacity.
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. 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. However, 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 experienced as they transitioned 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 dedicated Development Center typically enables us to
shorten development cycles and achieve high volume output per manufacturing unit
more quickly than our competitors which is an important factor in our success.
The next generation of smaller disk drives and recording head sizes, such as
femto, will require finer conductive leads on the suspension assembly. This
requirement has lead our Development Center to increase efforts to develop new
production processes and equipment.
New manufacturing processes for advanced suspension assembly features and new
suspension assembly types, such as those currently under development, initially
have lower manufacturing yields than more mature products and processes.
Manufacturing yields generally improve as the process and product matures and
13
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 or decrease
our employment level to meet customer requirements. Our overall employment level
was 3,446 at the end of 2003 and has increased to 3,638 at March 28, 2004. We
decreased the number of additional production workers supplied by temporary
staffing agencies from 210 at the end of 2003 to 192 at the end of quarter two
of 2004 as demand decreased in the latter part of the quarter.
RESULTS OF OPERATIONS
THIRTEEN WEEKS ENDED MARCH 28, 2004 VS. THIRTEEN WEEKS ENDED MARCH 30, 2003.
Net sales for the thirteen weeks ended March 28, 2004 were $113,354,000, a
decrease of $11,605,000 or 9% from the comparable period in 2003. Suspension
assembly sales decreased $6,535,000 from the comparable period in 2003, as a
result of a 3% decline in average selling prices for our suspension assemblies
and a 2% decrease in suspension assembly unit shipments. The decline in unit
shipments is due to lower suspension demand as a result of customers slowing
build schedules to reduce temporarily elevated levels of disk drive inventory.
Sales of suspension assembly components to other suspension assembly
manufacturers decreased $4,747,000 from the comparable period in 2003.
Gross profit for the thirteen weeks ended March 28, 2004 was $33,789,000,
compared to $38,631,000 for the comparable period in 2003. Gross profit as a
percent of net sales decreased from 31% to 30%. The decrease was primarily due
to the decrease in sales mentioned above resulting in lower utilization of our
production capacity.
Research and development expenses for the thirteen weeks ended March 28, 2004
were $6,819,000 compared to $2,638,000 for the comparable period in 2003. The
comparable period expenses were reduced by customer funding of $1,641,000 for
the development of an advanced suspension assembly. The increase is also
attributable to $1,426,000 of higher labor expenses due to the hiring of
additional personnel to meet increased development efforts and $921,000 of
expenses related to the development of process improvements to support advanced
TSA suspension assembly features. As a percent of net sales, research and
development expenses increased from 2% in the second quarter of 2003 to 7% in
the second quarter of 2004.
Selling, general and administrative expenses for the thirteen weeks ended March
28, 2004 were $16,431,000, an increase of $2,768,000 or 20% from the comparable
period in 2003. The increase is primarily attributable to $1,039,000 in higher
professional service fees, $476,000 in higher expenses related to the design of
our new enterprise resource planning (ERP) business system, $341,000 in higher
labor expense, $319,000 in higher information technology support expenses,
$221,000 in increased expenses for our BioMeasurement Division and $143,000 in
increased on-site service and support to our customers in Asia. Overall,
selling, general and administrative expenses as a percent of net sales increased
from 11% in the second quarter of 2003 to 14% in the second quarter of 2004.
Income from operations for the thirteen weeks ended March 28, 2004 was
$10,539,000, compared to $22,330,000 for the comparable period in 2003. Income
from operations for the thirteen weeks ended March 28, 2004 included a
$1,710,000 loss from operations for our BioMeasurement Division segment,
compared to a $1,477,000 loss for the comparable period in 2003.
14
Interest expense for the thirteen weeks ended March 28, 2004 was $878,000, a
decrease of $2,103,000 from the comparable period in 2003, primarily due to the
lower interest rate and lower outstanding balance of our convertible notes.
Interest income for the thirteen weeks ended March 28, 2004 was $1,198,000, a
decrease of $412,000 from the comparable period in 2003. This was primarily a
result of lower investment yields, partially offset by a higher average
investment balance.
Other income, net of other expenses, for the thirteen weeks ended March 28, 2004
was $990,000, an increase of $681,000 from the comparable period in 2003
primarily due to increased royalty income.
During the second quarter of 2003, we retired $132,529,000 of our 6% Convertible
Notes before their maturity. In connection with this transaction, we recorded a
$3,486,000 pre-tax loss on debt extinguishment. See Note 9, "Loss on Debt
Extinguishment," in the notes to the condensed consolidated financial
statements.
The income tax provision for the thirteen weeks ended March 28, 2004 and March
30, 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 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 March 28, 2004 was $9,598,000 or 8% of
net sales, compared to net income of $14,403,000 or 12% of net sales for the
comparable period in 2003. Net income for the thirteen weeks ended March 30,
2003 included the above-mentioned loss on debt extinguishment.
TWENTY-SIX WEEKS ENDED MARCH 28, 2004 VS. TWENTY-SIX WEEKS ENDED MARCH 30, 2003.
Net sales for the twenty-six weeks ended March 28, 2004 were $246,990,000, a
decrease of $10,831,000 or 4% from the comparable period in 2003. Suspension
assembly sales decreased $8,780,000 from the comparable period in 2003, as a
result of a 7% decline in average selling prices for our suspension assemblies,
somewhat offset by a 3% increase in suspension assembly unit shipments. Sales of
suspension assembly components to other suspension assembly manufacturers
decreased $1,686,000 from the comparable period in 2003.
Gross profit for the twenty-six weeks ended March 28, 2004 was $77,075,000,
compared to $80,059,000 for the comparable period in 2003. The decrease was
primarily due to the lower sales mentioned above. Gross profit as a percent of
net sales was 31% for both periods.
Research and development expenses for the twenty-six weeks ended March 28, 2004
were $11,674,000 compared to $6,086,000 for the comparable period in 2003. The
comparable period expenses were reduced by customer funding of $2,441,000 for
the development of an advanced suspension assembly. The increase is also
attributable to $2,044,000 in higher labor expenses due to the hiring of
additional personnel to meet increased development efforts and $921,000 of
expenses related to the development of process improvements to support advanced
TSA suspension assembly features. As a percent of net sales, research and
development expenses increased from 2% in the first half of 2003 to 5% for the
first half of 2004.
Selling, general and administrative expenses for the twenty-six weeks ended
March 28, 2004 were $33,118,000, an increase of $4,411,000 or 15% from the
comparable period in 2003. The increase is primarily attributable to $905,000 in
higher expenses related to the design of our new enterprise resource planning
(ERP) business system, $774,000 in higher professional service fees, $641,000 in
higher labor expense, $590,000 in higher information technology support
expenses, $478,000 in increased expenses for our BioMeasurement Division and
$286,000 in increased on-site service and support to our customers in Asia. The
increase was also related to higher insurance expenses offset by lower incentive
compensation costs. Overall, selling, general and administrative expenses as a
percent of net sales increased from 11% in the first half of 2003 to 13% in the
first half of 2004.
15
Income from operations for the twenty-six weeks ended March 28, 2004 was
$32,283,000, compared to $45,266,000 for the comparable period in 2003. Income
from operations for the twenty-six weeks ended March 28, 2004 included a
$3,353,000 loss from operations for our BioMeasurement Division segment,
compared to a $2,779,000 loss for the comparable period in 2003.
Interest expense for the twenty-six weeks ended March 28, 2004 was $1,806,000, a
decrease of $3,410,000 from the comparable period in 2003, primarily due to the
lower interest rate and lower outstanding balance of our convertible notes.
Interest income for the twenty-six weeks ended March 28, 2004 was $2,143,000, a
decrease of $890,000 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 twenty-six weeks ended March 28,
2004 was $1,724,000, an increase of $1,118,000 from the comparable period in
2003 primarily due to increased royalty income.
During the second quarter of 2003, we retired $132,529,000 of our 6% Convertible
Notes before their maturity. In connection with this transaction, we recorded a
$3,486,000 pre-tax loss on debt extinguishment. See Note 9, "Loss on Debt
Extinguishment," in the notes to the condensed consolidated financial
statements.
The income tax provision for the twenty-six weeks ended March 28, 2004 and March
30, 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 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 twenty-six weeks ended March 28, 2004 was $27,819,000
compared to net income of $32,743,000 for the comparable period in 2003. Net
income as a percent of net sales decreased from 13% in the first half of 2003 to
11% in the first half of 2004. Net income for the twenty-six weeks ended March
30, 2003 included the above-mentioned loss on debt extinguishment.
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 $126,618,000 at March 28, 2004. Our securities available for sale decreased
from $224,860,000 to $194,023,000 during the same period. Overall, this reflects
a $28,276,000 increase in our cash and cash equivalents and securities available
for sale for the twenty-six weeks ended March 28, 2004, primarily as a result of
generating cash from operating activities of $63,929,000 offset by our capital
expenditures of approximately $38,181,000.
On January 30, 2004, we entered into a Loan Agreement with LaSalle Bank National
Association, establishing a $10,000,000 unsecured credit facility. As of March
28, 2004, we had no outstanding loans under this facility. Letters of credit
outstanding under this facility totaled approximately $1,789,000 as of such
date, resulting in approximately $8,211,000 of remaining availability. Our
Financing Agreement with The CIT Group/Business Credit, Inc. of $50,000,000
was terminated during the quarter ended March 28, 2004.
Cash used for capital expenditures totaled $38,181,000 for the twenty-six weeks
ended March 28, 2004. We anticipate capital expenditures to total approximately
$90,000,000 in 2004 primarily for increases in 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.
16
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 $145,421,000 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 $4,579,000, 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 March 28, 2004, 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 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 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.
17
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.
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
18
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
$48,643,000 as of March 28, 2004, 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 for 2004 and we
anticipate 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. We 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.
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 growth of new applications for
disk storage, such as personal video recorders, gaming consoles, digital cameras
and audio players, together with emerging opportunities in cell phones, guidance
systems for automobiles 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 12% to 15% annually over the
next two years. During the second quarter of 2004, suspension assembly demand
declined due to temporarily elevated levels of disk drive inventory. Although we
believe this inventory is being reduced and the reduction in demand to be
temporary, 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.
19
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.
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 since 2002 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.
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, the impact of customer yields on suspension assembly demand and disk
drive and suspension assembly 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 LaSalle Bank National Association 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 March 28, 2004, 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 March
28, 2004, 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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
At our 38th Annual Meeting of Shareholders held on January 28, 2004, our
shareholders approved the following:
(a) the election of directors to serve until their successors are duly
elected. Each nominated director was elected as follows:
Director Votes For Votes Withheld
- -------- --------- --------------
W. Thomas Brunberg 16,702,863 7,951,375
Archibald Cox, Jr. 24,469,808 184,430
Wayne M. Fortun 24,451,079 203,159
Jeffrey W. Green 24,438,116 216,122
Russell Huffer 16,704,513 7,949,725
R. Frederick McCoy, Jr. 15,932,861 8,721,377
William T. Monahan 24,354,121 300,117
Richard B. Solum 16,783,860 7,870,378
(b) a proposal to ratify the appointment of Deloitte & Touche LLP to
serve as independent public accountants of the Company for the fiscal
year ending September 26, 2004. The proposal received 15,462,992 votes
for, and 9,174,798 votes against, ratification. There were 16,448
abstentions and no broker non-votes.
23
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).
24
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 (incorporated by reference to Exhibit 10.8 to
HTI's Quarterly Report on Form 10-Q for the quarter ended 12/28/03).
#10.9 Description of Fiscal Year 2004 BioMeasurement Division Bonus Plan of
Hutchinson Technology Incorporated (incorporated by reference to
Exhibit 10.9 to HTI's Quarterly Report on Form 10-Q for the quarter
ended 12/28/03).
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 March 28, 2004:
1. Current Report on Form 8-K dated January 20, 2004 reporting, under Item 7
("Financial Statements and Exhibits") of Form 8-K, the Company's first
quarter earnings press release dated January 20, 2004.
25
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: May 6, 2004 By /s/ Wayne M. Fortun
-------------------------------
Wayne M. Fortun
President and Chief Executive
Officer
Date: May 6, 2004 By /s/ John A. Ingleman
-------------------------------
John A. Ingleman
Vice President and Chief
Financial Officer
26
INDEX TO EXHIBITS
Exhibit
No. Page
--- ----
3.1 Amended and Restated Articles of Incorporation of HTI (incorporated by reference to Incorporated by Reference
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 Incorporated by Reference
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, Incorporated by Reference
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 Incorporated by Reference
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 Incorporated by Reference
& 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 Incorporated by Reference
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
(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 Incorporated by Reference
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 Incorporated by Reference
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 Incorporated by Reference
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).
27
10.5 Lease Agreement between Meridian Eau Claire LLC and HTI, dated 5/1/96 (incorporated by Incorporated by Reference
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 Incorporated by Reference
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 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 by Reference
Incorporated (incorporated by reference to Exhibit 10.8 to HTI's Quarterly Report on
Form 10-Q for the quarter ended 12/28/03).
10.9 Description of Fiscal Year 2004 BioMeasurement Division Bonus Plan of Hutchinson Incorporated by Reference
Technology Incorporated (incorporated by reference to Exhibit 10.9 to HTI's Quarterly
Report on Form 10-Q for the quarter ended 12/28/03).
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
28