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EXCEL - IDEA: XBRL DOCUMENT - HUTCHINSON TECHNOLOGY INCFinancial_Report.xls
EX-32 - EXHIBIT 32 - HUTCHINSON TECHNOLOGY INCexh_32.htm
EX-31.2 - EXHIBIT 31.2 - HUTCHINSON TECHNOLOGY INCexh_312.htm
EX-31.1 - EXHIBIT 31.1 - HUTCHINSON TECHNOLOGY INCexh_311.htm
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 
FORM 10-Q

(Mark One)
[x]
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 25, 2011
 
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 001-34838
 
Hutchinson Technology Incorporated
(Exact name of registrant as specified in its charter)
 
Minnesota
 
41-0901840
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
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, former address and former 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 has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files.)
Yes [x]                      No [  ]
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definition of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer [  ]
Accelerated filer [x]
Non-accelerated filer [  ]
Smaller reporting company [  ]
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes [  ]                      No [x]
 
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
 
As of January 25, 2012, the registrant had 23,398,624 shares of common stock issued and outstanding.
 
 

 
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS

HUTCHINSON TECHNOLOGY INCORPORATED
CONDENSED CONSOLIDATED BALANCE SHEETS – UNAUDITED
(In thousands, except shares and per share data)

   
December 25,
2011
   
September 25,
2011
 
ASSETS
 
Current assets:
           
Cash and cash equivalents (Note 2)
  $ 54,635     $ 57,554  
Short-term investments -restricted
    1,200       1,612  
Trade receivables, net
    35,143       44,998  
Other receivables
    12,426       7,064  
Inventories
    52,912       55,018  
Other current assets
    3,946       4,312  
Total current assets
    160,262       170,558  
                 
Property, plant and equipment, net
    211,643       223,134  
Other assets
    7,043       7,313  
Total assets
  $ 378,948     $ 401,005  
   
LIABILITIES AND SHAREHOLDERS’ EQUITY
 
Current liabilities:
               
Current maturities of long-term debt
  $ 184     $ 10,681  
Accounts payable
    16,744       18,373  
Accrued expenses
    10,185       7,759  
Accrued compensation (Note 9)
    10,976       12,431  
Total current liabilities
    38,089       49,244  
                 
Convertible notes, net of discount (Note 7)
    145,831       144,159  
Other long-term liabilities
    1,208       1,280  
Shareholders’ equity:
               
Common stock, $.01 par value, 100,000,000 shares authorized,
     23,399,000 and 23,387,000 issued and outstanding
    234       234  
Additional paid-in capital
    420,392       419,984  
Accumulated other comprehensive (loss) income
    (244 )     190  
Accumulated loss
    (226,562 )     (214,086 )
Total shareholders’ equity
    193,820       206,322  
Total liabilities and shareholders’ equity
  $ 378,948     $ 401,005  
 
See accompanying notes to condensed consolidated financial statements – unaudited.
 
2

 
HUTCHINSON TECHNOLOGY INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS – UNAUDITED
(In thousands, except per share data)

   
Thirteen Weeks Ended
 
   
December 25,
2011
   
December 26,
2010
 
             
Net sales
  $ 58,475     $ 68,244  
Cost of sales
    56,174       64,920  
Gross profit
    2,301       3,324  
                 
Research and development expenses
    3,948       4,049  
Selling, general and administrative expenses
    7,173       13,634  
Severance and other expenses (Note 9)
    (711 )      
Flood-related costs, net of insurance recoveries (Note 11)
           
Loss from operations
    (8,109 )     (14,359 )
                 
Other (expense) income, net
    (87 )     831  
Interest income
    17       55  
Interest expense
    (4,283 )     (3,844 )
Gain on short- and long-term investments
    30       364  
Loss before income taxes
    (12,432 )     (16,953 )
Provision (benefit) for income taxes
    44       (3 )
Net loss
  $ (12,476 )   $ (16,950 )
Basic loss per share
  $ (0.53 )   $ (0.73 )
Diluted loss per share
  $ (0.53 )   $ (0.73 )
                 
Weighted-average common shares outstanding
    23,395       23,371  
Weighted-average common and diluted shares outstanding
    23,395       23,371  
 
CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME – UNAUDITED
(In thousands)

   
Thirteen Weeks Ended
 
   
December 25,
2011
   
December 26,
2010
 
Net loss
  $ (12,476 )   $ (16,950 )
Other comprehensive (loss) income
               
Gain on available-for-sale securities, net of income taxes of $0
          37  
Foreign currency translation, net of income taxes of $0
    (434 )     164  
Other comprehensive (loss) income
    (434 )     201  
Comprehensive loss
  $ (12,910 )   $ (16,749 )
 
See accompanying notes to condensed consolidated financial statements – unaudited.
 
3

 
HUTCHINSON TECHNOLOGY INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS – UNAUDITED
(In thousands)

   
Thirteen Weeks Ended
 
   
December 25,
 2011
   
December 26,
2010
 
OPERATING ACTIVITIES:
           
Net loss
  $ (12,476 )   $ (16,950 )
Adjustments to reconcile net loss to cash provided by operating activities:
               
Depreciation and amortization
    9,334       11,797  
Stock-based compensation
    388       750  
Gain on short- and long-term investments
    (30 )     (364 )
(Gain) loss on disposal of assets
    (38 )     227  
Severance and other expenses (Note 9)
    (1,624 )     290  
Asset impairment charge  (Notes 10 and 11)
    8,338        
Non-cash interest expense
    1,672       2,238  
Flood insurance receivable (Note 11)
    (4,727 )      
Changes in operating assets and liabilities
    11,665       3,416  
Cash provided by operating activities
    12,502       1,404  
 
               
INVESTING ACTIVITIES:
               
Capital expenditures
    (5,384 )     (4,686 )
Change in restricted cash
    (2 )        
Purchases of short-term investments
    (1,613 )     (5,700 )
Sales/maturities of short-term investments
    2,055       18,732  
Cash (used for) provided by investing activities
    (4,944 )     8,346  
                 
FINANCING ACTIVITIES:
               
Repayments of revolving credit line and debt
    (65,219 )     (485 )
Proceeds from revolving credit line
    54,722        
Proceeds from issuance of common stock
    20        
Cash used for financing activities
    (10,477 )     (485 )
                 
Net (decrease) increase in cash and cash equivalents
    (2,919 )     9,265  
                 
Cash and cash equivalents at beginning of period
    57,554       55,639  
                 
Cash and cash equivalents at end of period
  $ 54,635     $ 64,904  
                 
Supplemental cash flow disclosure:
               
Cash interest paid (net of amount capitalized)
  $ 73     $  
Income taxes paid
  $ 1     $ 261  
 
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,” “our,” “us,” the “company” or “HTI,” we mean Hutchinson Technology Incorporated and its subsidiaries. Unless otherwise indicated, references to “2013” mean our fiscal year ending September 29, 2013, references to “2012” mean our fiscal year ending September 30, 2012, references to “2011” mean our fiscal year ended September 25, 2011, and references to “2010” mean our fiscal year ended September 26, 2010.
 
(1)  BASIS OF PRESENTATION
 
The condensed consolidated financial statements have been prepared by us, 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 our 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 we believe that the disclosures are adequate to make the information presented not misleading, we suggest that these condensed consolidated financial statements be read in conjunction with the financial statements and the notes thereto included in our 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)  CASH AND CASH EQUIVALENTS
 
Cash and cash equivalents consist of all highly liquid investments with original maturities of ninety days or less. As of December 25, 2011 and September 25, 2011, we had $2,622,000 and $2,620,000 of cash and cash equivalents that were restricted in use, respectively, which are classified in other current assets. These amounts covered outstanding letters of credit.
 
(3)  FAIR VALUE MEASUREMENTS
 
The following table provides information by level for assets and liabilities that are measured at fair value on a recurring basis.
 
   
Fair Value Measurements at
December 25, 2011
 
   
Level 1
   
Level 2
   
Level 3
 
Assets
                 
Available-for-sale securities
                 
U.S. government debt securities
  $ 1,200     $     $  
Total assets
  $ 1,200     $     $  

   
Fair Value Measurements at
September 25, 2011
 
   
Level 1
   
Level 2
   
Level 3
 
Assets
                 
Available-for-sale securities
                 
U.S. government debt securities
  $ 1,612     $     $  
Total assets
  $ 1,612     $     $  
 
5

The fair value measurement guidance defines fair value, establishes a framework for measuring fair value and expands disclosure requirements about fair value measurements. Under the guidance, fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The guidance also establishes a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available. Observable inputs are inputs market participants would use in valuing the asset or liability, developed based on market data obtained from independent sources. Unobservable inputs are inputs that reflect our assumptions about the factors market participants would use in valuing the asset or liability, developed based upon the best information available in the circumstances. The fair value hierarchy prescribed by the guidance is broken down into three levels as follows:
 
Level 1 –
Unadjusted quoted prices in an active market for the identical assets or liabilities at the measurement date.
   
Level 2 –
Other observable inputs available at the measurement date, other than quoted prices included in Level 1, either directly or indirectly, including:
 
· Quoted prices for similar assets or liabilities in active markets;
 
· Quoted prices for identical or similar assets in nonactive markets;
 
· Inputs other than quoted prices that are observable for the asset or liability; and
 
· Inputs that are derived principally from or corroborated by other observable market data.
   
Level 3 –
Unobservable inputs that reflect the use of significant management judgment. These values are generally determined using pricing models for which assumptions utilize management’s estimates of market participant assumptions.
 
(4)  INVESTMENTS
 
Our short-term investments are comprised of U.S. government debt securities. We account for securities available for sale in accordance with Financial Accounting Standards Board (“FASB”)  guidance regarding accounting for certain investments in debt and equity securities, which requires that available-for-sale and trading securities be carried at fair value. Unrealized gains and losses deemed to be temporary on available-for-sale securities are reported as other comprehensive (loss) income (“OCI”) within shareholders’ equity. Realized gains and losses and decline in value deemed to be other than temporary on available-for-sale securities are included in “Gain on short- and long-term investments” on our condensed consolidated statements of operations. Fair value of the securities is based upon quoted market prices in active markets or estimated fair value when quoted market prices are not available. The cost basis for realized gains and losses on available-for-sale securities is determined on a specific identification basis. We classify our securities available-for-sale as short- or long-term based upon management’s intent and ability to hold these investments.
 
A summary of our investments as of December 25, 2011, is as follows:
 
         
Gross Realized
   
Gross Unrealized
       
   
Cost Basis
   
Gains
   
Losses
   
Gains
   
Losses
   
Recorded Basis
 
                                     
Available-for-sale securities
                                   
Short-term investments
                                   
Marketable securities
  $ 1,200     $     $     $     $     $ 1,200  
 
A summary of our investments as of September 25, 2011, is as follows:
 
         
Gross Realized
   
Gross Unrealized
       
   
Cost Basis
   
Gains
   
Losses
   
Gains
   
Losses
   
Recorded Basis
 
                                     
Available-for-sale securities
                                   
Short-term investments
                                   
Marketable securities
  $ 1,612     $     $     $     $     $ 1,612  
 
As of December 25, 2011, our short-term investments mature within one year.
 
6

 
As of December 25, 2011, and September 25, 2011, we had $1,200,000 and $1,612,000, respectively, of short-term investments that were restricted in use. These amounts covered a security for our self-insured workers compensation programs.
 
(5)  TRADE RECEIVABLES
 
We grant credit to our customers, but generally do not require collateral or any other security to support amounts due. Trade receivables of $35,143,000 at December 25, 2011, and $44,998,000 at September 25, 2011, are net of allowances of $127,000 and $185,000, respectively. As of December 25, 2011, allowances of $127,000 consisted of a $24,000 allowance for doubtful accounts and a $103,000 allowance for sales returns. As of September 25, 2011, allowances of $185,000 consisted of a $23,000 allowance for doubtful accounts and a $162,000 allowance for sales returns.
 
We generally warrant that the products sold by us will be free from defects in materials and workmanship for a period of one year or less following delivery to our customer. Upon determination that the products sold are defective, we typically accept the return of such products and refund the purchase price to our customer. 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 product returns, as well as existing product return authorizations. The following table reconciles the changes in our allowance for sales returns under warranties:
 
 
September 25,
2011
 
Reductions in the
Allowance for Returns
Under Warranties
 
December 25,
2011
 
 
$162
 
$(59)
 
$103
 
 
(6)  INVENTORIES
 
Inventories are valued at the lower of cost (first-in, first-out method) or market by analyzing market conditions, current sales prices, inventory costs and inventory balances. Inventories consisted of the following at December 25, 2011, and September 25, 2011:
 
   
December 25,
2011
   
September 25,
2011
 
             
Raw materials
  $ 19,164     $ 21,566  
Work in process
    15,258       14,656  
Finished goods
    18,490       18,796  
    $ 52,912     $ 55,018  
 
(7)  SHORT- AND LONG-TERM DEBT
 
Short- and long-term debt consisted of the following at December 25, 2011, and September 25, 2011:
 
   
December 25,
2011
   
September 25,
2011
 
3.25% Notes
  $ 76,243     $ 76,243  
3.25% debt discount
    (4,213 )     (5,156 )
8.50% Notes
    85,170       85,170  
8.50% debt discount
    (11,369 )     (12,098 )
PNC Bank Credit Line
          10,409  
Capital lease obligations
    184       272  
Total debt
    146,015       154,840  
Less: Current maturities
    (184 )     (10,681 )
    $ 145,831     $ 144,159  
 
As of December 25, 2011, we had fixed rate debt of $161,413,000. At December 25, 2011, our fixed rate debt had a fair market value of approximately $110,148,000.
 
7

 
3.25% Notes
 
In January 2006, we issued $225,000,000 aggregate principal amount of 3.25% Convertible Subordinated Notes due 2026 (the “3.25% Notes). The 3.25% Notes were issued pursuant to an Indenture dated as of January 25, 2006 (the “Indenture”). Interest on the 3.25% Notes is payable on January 15 and July 15 of each year, which began on July 15, 2006. Issuance costs of $6,029,000 were capitalized and are being amortized over seven years in consideration of the holders’ ability to require us to repurchase all or a portion of the 3.25% Notes on January 15, 2013, as described below.
 
Since January 21, 2011, we have had the right to redeem for cash all or a portion of the 3.25% Notes at specified redemption prices, as provided in the Indenture, plus accrued and unpaid interest, if any, to, but excluding, the applicable redemption date. Holders of the 3.25% Notes may require us to purchase all or a portion of their 3.25% Notes for cash on January 15, 2013, January 15, 2016 and January 15, 2021, or in the event of a fundamental change, at a purchase price equal to 100 percent of the principal amount of the 3.25% Notes to be repurchased plus accrued and unpaid interest, if any, to, but excluding, the purchase date.
 
Under certain circumstances, holders of the 3.25% Notes may convert their 3.25% Notes based on a conversion rate of 27.4499 shares of our common stock per $1,000 principal amount of the 3.25% Notes (which is equal to an initial conversion price of approximately $36.43 per share), subject to adjustment. Upon conversion, in lieu of shares of our common stock, for each $1,000 principal amount of the 3.25% Notes a holder will receive an amount in cash equal to the lesser of (i) $1,000, or (ii) the conversion value, determined in the manner set forth in the Indenture, of the number of shares of our common stock equal to the conversion rate. If the conversion value exceeds $1,000, we also will deliver, at our election, cash or common stock or a combination of cash and common stock with respect to the remaining common stock deliverable upon conversion.
 
We follow FASB authoritative guidance for accounting for convertible debt instruments that may be settled in cash upon conversion (including partial cash settlement). This guidance specifies that convertible debt instruments that may be settled in cash upon conversion shall be separately accounted for by allocating a portion of the fair value of the instrument as a liability and the remainder as equity. The excess of the principal amount of the liability component over its carrying amount shall be amortized to interest cost over the effective term. The provisions of this guidance apply to the 3.25% Notes. This guidance requires us to recognize additional (non-cash) interest expense based on the market rate for similar debt instruments that do not contain a comparable conversion feature.
 
The adoption of this guidance required us to allocate the original $225,000,000 proceeds received from the issuance of our 3.25% Notes between the applicable debt and equity components. Accordingly, we allocated $160,584,000 of the proceeds to the debt component of our 3.25% Notes and $40,859,000, net of deferred taxes of $23,557,000, to the equity conversion feature. Subsequent to the original issuance date of the 3.25% Notes, a full valuation allowance was recorded against our deferred tax assets (see Note 12 for a discussion of income taxes). The debt component allocation was based on the estimated fair value of similar debt instruments without a conversion feature as determined by using a discount rate of 8.75%, which represents our estimated borrowing rate for such debt as of the date of our 3.25% Notes issuance. The difference between the cash proceeds associated with our 3.25% Notes and the debt component was recorded as a debt discount with a corresponding offset to additional paid-in capital, net of applicable deferred taxes, representing the equity conversion feature. The debt discount that we recorded is being amortized over seven years, the expected term of our 3.25% Notes (January 19, 2006 through January 15, 2013), using the effective interest method resulting in additional non-cash interest expense. As of December 25, 2011, the remaining period over which the debt discount will be amortized is approximately 12 months.
 
The carrying amounts of our 3.25% Notes included in our condensed consolidated balance sheets were as follows:
 
   
December 25,
2011
   
September 25,
2011
 
Principal balance
  $ 76,243     $ 76,243  
Debt discount
    (4,213 )     (5,156 )
Convertible subordinated notes, net
  $ 72,030     $ 71,087  
 
We have recorded the following interest expense related to our 3.25% Notes in the periods presented:
 
8

 
   
Thirteen Weeks Ended
 
   
December 25,
2011
   
December 26,
2010
 
Coupon rate of interest (cash interest)
  $ 619     $ 1,605  
Debt discount amortization (non-cash interest)
    943       2,238  
Net interest expense for the 3.25% Notes
  $ 1,562     $ 3,843  

8.50% Notes
 
In February 2011, we issued as part of a tender/exchange $40,000,000 of 8.50% Convertible Senior Notes due 2026 (the “8.50% Notes”) pursuant to an indenture dated as of February 11, 2011. The 8.50% Notes are senior in right of payment to any of our existing and future subordinated indebtedness, including the 3.25% Notes that remain outstanding. Interest is payable on the 8.50% Notes on January 15 and July 15 of each year, beginning July 15, 2011. The 8.50% Notes mature on January 15, 2026. Each $1,000 principal amount of the 8.50% Notes is convertible into 116.2790 shares of our common stock (which is equal to an initial conversion price of approximately $8.60 per share), subject to adjustment.
 
We have the right to redeem the 8.50% Notes (i) on or after January 15, 2013 to, but excluding, January 15, 2015, if the closing price of our common stock equals or exceeds 150 percent of the conversion price, and (ii) at any time on or after January 15, 2015, in either case in whole or in part, for cash equal to 100 percent of the principal amount of the 8.50% Notes to be redeemed plus any accrued but unpaid interest to but excluding the redemption date. Holders of the 8.50% Notes may require us to repurchase all or a portion of their 8.50% Notes at par on each of January 15, 2015, January 15, 2016 and January 15, 2021 for cash equal to 100 percent of the principal amount of the 8.50% Notes to be repurchased plus any accrued but unpaid interest to but excluding the repurchase date. If a fundamental change (as defined in the indenture) occurs, each holder of 8.50% Notes will have the right to require us to repurchase all or any portion of that holder’s 8.50% Notes for cash equal to 100 percent of the principal amount of the 8.50% Notes to be repurchased plus any accrued but unpaid interest to but excluding the repurchase date.
 
As a result of the February 2011 tender/exchange, we retired an aggregate principal amount of $75,294,000 of the 3.25% Notes in February 2011. We made cash payments of $30,000,000 for the purchase of $35,294,000 aggregate principal amount of the 3.25% Notes and we issued the $40,000,000 aggregate principal amount of the 8.50% Notes in exchange for $40,000,000 aggregate principal amount of the 3.25% Notes. We determined that the tender/exchange was a substantial debt modification and applied debt extinguishment accounting. The difference between the fair value and the carrying value of the liability component of our debt at the date of extinguishment was recorded as a $5,467,000 gain on extinguishment of debt. The difference between the fair value of the liability component and the fair value of the consideration exchanged was applied as reacquisition of the equity component, which resulted in a $3,371,000 reduction to additional paid-in capital.
 
In July 2011, we completed an exchange for an additional portion of our outstanding 3.25% Notes. In connection with the July 2011 exchange, we issued $45,170,000 aggregate principal amount of the 8.50% Notes and made aggregate cash payments of $3,091,000 in exchange for $45,963,000 aggregate principal amount of the 3.25% Notes. We determined that the exchange was a substantial debt modification and applied debt extinguishment accounting. The difference between the fair value and the carrying value of the liability component of our debt at the date of extinguishment was recorded as a $2,915,000 gain on extinguishment of debt. The difference between the fair value of the liability component and the fair value of the consideration exchanged was applied as reacquisition of the equity component, which resulted in a $606,000 reduction to additional paid-in capital.
 
At a special meeting held June 17, 2011, our shareholders approved the issuance of up to $40,000,000 aggregate principal amount of additional 8.50% Notes (and the issuance of our common stock upon conversion thereof) for cash in one or more future private placements or registered offerings. Accordingly, we may, but are not obligated to, issue a limited amount of additional 8.50% Notes without further shareholder approval.
 
9

 
PNC Bank Credit Line
 
On September 16, 2011, we entered into a revolving credit and security agreement with PNC Bank. The credit agreement provides us with a revolving credit facility in a principal amount of up to $35,000,000, subject to a borrowing base. The credit facility is secured by substantially all of the personal property of Hutchinson Technology Incorporated. The maturity date of the credit facility is October 1, 2014 if, by October 1, 2012, the aggregate outstanding principal amount of the 3.25% Notes is reduced to $50,000,000 or less and we have at least $50,000,000 of liquidity remaining; otherwise the maturity date is October 1, 2012. The credit agreement contains customary representations, warranties, covenants and events of default, including, but not limited to, limitations on the payment of dividends and repurchases of stock, financial covenants requiring a minimum fixed charge coverage ratio, minimum earnings before interest, taxes, depreciation and amortization (“EBITDA”) and minimum liquidity. We maintain an account at PNC Bank with a minimum balance of $15,000,000, as required under the credit agreement.
 
As of December 25, 2011 we had no borrowings under the credit facility. If we borrow additional amounts under the credit facility in the future, such amounts will be subject to cash interest, at our election, at a rate equal to either (i) PNC Bank’s alternate base rate (as defined in the credit agreement) plus 2.0% per annum or (ii) LIBOR plus 4.5% per annum. After March 25, 2012, such loans, if any, will be eligible to bear cash interest at a reduced rate equal to either (i) PNC Bank’s alternate base rate plus 1.0% per annum or (ii) LIBOR plus 3.5% per annum if no defaults or events of default exist under the credit agreement.
 
The previously announced suspension of production in our Thailand facility during October 2011 triggered an event of default provision related to business interruptions under the credit agreement with PNC Bank, and we have obtained a waiver of the event of default. The event of default did not trigger any cross-default provisions in our other financing arrangements. As of December 25, 2011, we were in compliance with the covenants of our credit facility.
 
Capital Leases
 
We lease some manufacturing equipment that has been treated as a capital lease for accounting purposes. The present value of the minimum quarterly payments under these leases resulted in an initial $686,000 of related leased assets. The outstanding lease obligations as of December 25, 2011 were $184,000.
 
(8)  OTHER COMPREHENSIVE (LOSS) INCOME
 
The components of accumulated OCI, net of income taxes (see Note 12 for a discussion of income taxes), were as follows:
 
   
December 25,
2011
   
September 25,
2011
 
Foreign currency translation
  $ (244 )   $ 190  
Total accumulated OCI
  $ (244 )   $ 190  

Our Thailand operation uses their local currency as its functional currency. Assets and liabilities are translated at exchange rates in effect at the balance sheet date. Income and expense accounts are translated at the average exchange rates during the year. Resulting translation adjustments are recorded as a separate component of accumulated OCI. Foreign currency translation, net of income taxes (see Note 12 for a discussion of income taxes), for the thirteen weeks ended December 25, 2011 was a $434,000 loss, compared to a $164,000 gain for the thirteen weeks ended December 26, 2010.
 
Transaction gains and losses that arise from the exchange rate changes on transactions denominated in a currency other than the local currency are included in “Other (expense) income, net” in the consolidated statements of operations. We recognized a foreign currency loss of $530,000 for the thirteen weeks ended December 25, 2011, primarily related to purchases and advances denominated in U.S. dollars made by our Thailand operation.
 
10

 
(9)  SEVERANCE AND OTHER EXPENSES
 
A summary of our severance and benefits and other expenses as of December 25, 2011, is as follows:
 
   
Severance and
Benefits
   
Other
Expenses
   
Total
 
Accrual balances, September 25, 2011
  $ 1,741     $     $ 1,741  
Reduction of severance accrual
    (895 )           (895 )
Restructuring charges
          184       184  
Cash payments
    (729 )     (184 )     (913 )
Accrual balances, December 25, 2011
  $ 117     $     $ 117  
 
During the second quarter of 2011, we announced a manufacturing consolidation and restructuring plan that consolidated our Hutchinson, Minnesota components operations into our operations in Eau Claire, Wisconsin. We also took additional actions to resize the company, reduce costs and improve cash flow, including severance actions. Due to the flooding in Thailand, we are leveraging our U.S. assembly operations to offset the temporary loss of capacity in Thailand and have retained approximately 120 employees in our Hutchinson, Minnesota manufacturing facility that were previously expected to terminate and that were included in our 2011 severance and benefits charges. This resulted in a reduction of $895,000 of our severance and benefits expense during the first quarter of 2012. We expect the remaining severance and benefits payments of $117,000 will be complete by the end of our second quarter of 2012.
 
As part of the consolidation and restructuring plan, we incurred approximately $184,000 of other expenses for the thirteen weeks ended December 25, 2011 for a total of $985,000 of other expenses recorded in 2011 and 2012, primarily internal labor, contractors and freight, related to consolidation of the Hutchinson components operations into our operations in Eau Claire, Wisconsin.
 
(10)  ASSET IMPAIRMENT
 
When indicators of impairment exist and assets are held for use, we estimate future undiscounted cash flows attributable to the assets. In the event such cash flows are not expected to be sufficient to recover the recorded value of the assets, the assets are written down to their estimated fair values based on the expected discounted future cash flows attributable to the assets or based on appraisals. Factors affecting impairment of assets held for use include the ability of the specific assets to generate positive cash flows. Changes in any of these factors could necessitate impairment recognition in future periods for other assets held for use.
 
During the first quarter of 2012, flooding in Thailand required us to suspend our Thailand assembly operations and constrained the disk drive manufacturing supply chain, which affected demand for our products. We believe that the flooding, together with our continued operating losses, was a triggering event that required an impairment analysis. Based on our forecast model and impairment analysis for our first quarter of 2012, there was a cushion in excess of 10% between our expected undiscounted cash flows and the carrying value of our assets. However, impairments were recognized on specific identification of assets that were destroyed by the floodwaters (see Note 11 regarding the Thailand flood). Changes in our forecast model estimates could require additional impairment charges related to our long-lived assets.
 
(11)  THAILAND FLOOD
 
In October 2011, severe flooding in Thailand required us to suspend assembly operations at our Thailand manufacturing facility. During our fourth quarter of 2011, prior to the flooding, approximately one-third of our sales originated out of our Thailand assembly facility. By the end of that quarter, our Thailand operations had an assembly capacity of four to five million parts per week.
 
After review of the flood mitigation plans of the Thai government and those of the industrial park where our plant is located, we are proceeding with plans to restore our Thailand manufacturing facility to pre-flood output levels. We expect to resume production there by the end of June 2012 and that it will take until the middle of 2013 to return production to pre-flood output levels.
 
11

 
As a result of the flooding in Thailand, during our first quarter of 2012, we recorded flood-related costs, net of insurance recoveries, as follows:
 
Impairment charges for damaged building and equipment
  $ 8,338  
Inventory write-offs
    2,744  
Continuing costs during site shutdown
    2,543  
Site restoration
    102  
      13,727  
Insurance recoveries
    (13,727 )
Flood-related costs, net of insurance recoveries
  $  
 
The total carrying value of our Thailand building and equipment was approximately $18,700,000 at the time of the flood. Of the total, $8,338,000 was destroyed by the floodwaters and was impaired and written off. The inventory write-off of $2,744,000 included the cost of raw materials, work-in-process and finished goods inventories that were not able to be used or sold due to the flood damage. We expect the remaining $2,600,000 of inventory that was not written off will be usable or sellable. As we repair and restore our facility and equipment in Thailand, we may determine that additional property, plant and equipment and inventory may be damaged. This could result in additional impairments and write-offs. Our estimates of our flood-related costs are based on current damage assessments and it is reasonably possible that the estimate will change in the near term and the effect of the change could be material.  We expect any remaining impairments and write-offs related to the floodwaters would be less than $2,000,000.
 
After the suspension of production in Thailand in our first quarter of 2012, we have and will continue to incur costs for wages, salaries and benefits, depreciation and other items, which continued regardless of the suspension of production. Some employees normally engaged in the assembly manufacturing operation are being utilized in the clean-up and repairs of the facility and equipment, assessment and recovery of inventories and other aspects of the site restoration. In addition, we have and will continue to hire contractors to assist in the repair and restoration of our facility and equipment. These expenses totaled $2,645,000 for the thirteen weeks ended December 25, 2011. These amounts are shown, net of insurance recoveries, in the line item Flood-related costs, net of insurance recoveries, on our consolidated statement of operations.
 
In total, we estimate we will spend $25,000,000 to $30,000,000 in 2012 and an additional $5,000,000 in 2013 to restore our Thailand manufacturing operation and bring it back to pre-flood capacity levels and to cover the incremental costs of manufacturing in the United States. These estimates do not include lost profits. These costs will be partially offset by $25,000,000 in insurance proceeds.
 
Our insurance policies provide for $25,000,000 of flood coverage for property and casualty damage and business interruption. Our total claims exceeded this amount. Insurance proceeds are recognized in the consolidated financial statements to the extent of losses incurred when realization is deemed probable. During the first quarter of 2012, we received an initial insurance payment of $9,000,000 which is included in cash provided by operating activities on our consolidated statement of cash flows. Subsequent to December 25, 2011, we received the final insurance payment of $16,000,000. The insurance recoveries, to the extent of losses incurred, were deemed probable at December 25, 2011. Accordingly, we recorded a flood insurance receivable in the amount of $4,727,000 included in the line item Other receivables on our condensed consolidated balance sheets. Recoveries in excess of losses incurred were assessed for recognition in accordance with gain contingency guidance and will be recognized when no contingencies remain. There are no restrictions on the insurance proceeds received. We plan to use the proceeds to repair and restore our Thailand facility and replace equipment.
 
(12)  INCOME TAXES
 
We account for income taxes in accordance with FASB guidance on accounting for income taxes. As part of the process of preparing our consolidated financial statements, we are required to estimate our income taxes in each of the jurisdictions in which we operate. This process involves estimating our current tax exposure together with assessing temporary differences resulting from differing treatment of items for tax and accounting purposes. These temporary differences result in deferred tax assets and liabilities, which are included within our consolidated balance sheets. We must then assess the likelihood that our deferred tax assets will be realized based on 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 consolidated statements of operations.
 
 
12

 
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. Valuation allowances arise due to the uncertainty of realizing deferred tax assets. At September 25, 2011, we had a valuation allowance of $186,447,000. The FASB guidance requires that companies assess whether valuation allowances should be established against their deferred tax assets based on the consideration of all available evidence, using a “more likely than not” standard. In making such assessments, significant weight is to be given to evidence that can be objectively verified. A company’s current or previous losses are given more weight than its future outlook. Under the guidance, our three-year historical cumulative loss was a significant negative factor. This loss, combined with uncertain near-term market and economic conditions, reduced our ability to rely on our projections of future taxable income in determining whether a valuation allowance is appropriate. Accordingly, we concluded that a full valuation allowance was appropriate. We will continue to assess the likelihood that our deferred tax assets will be realizable, and our valuation allowance will be adjusted accordingly, which could materially impact our financial position and results of operations.
 
The income tax provision for the thirteen weeks ended December 25, 2011 was $44,000 compared to a benefit of $3,000 for the thirteen weeks ended December 26, 2010.  The income tax provision for the thirteen weeks ended December 25, 2011, consists primarily of foreign income tax expense.  The income tax benefit for the thirteen weeks ended December 26, 2010, was primarily due to a change in U.S. tax law that enabled us to carry back some of our operating losses to prior years and apply for a refund of taxes paid in those years. This benefit was partially offset by foreign income tax expense.
 
(13)  STOCK-BASED COMPENSATION
 
Under our equity incentive plan, stock options were granted to employees, including our officers, and directors at an exercise price not less than the fair market value of our common stock at the date the options are granted. The options granted generally expire ten years from the date of grant or at an earlier date as determined by the committee of our board of directors that administered the plan. Options granted under the plan prior to November 2005 generally were exercisable one year from the date of grant. Options granted under the plan from November 2005 to October 2011 are exercisable two to three years from the date of grant. Options granted under the plan since November 2011 are exercisable one to three years from the date of grant.
 
On January 20, 2011, our shareholders approved (i) our 2011 Equity Incentive Plan, which authorizes the issuance of 1,200,000 shares of our common stock (plus any shares that remained available on that date for future grants under our 1996 Incentive Plan) for equity-based awards (no further awards will be made under our 1996 Incentive Plan), and (ii) the amendment and restatement of our employee stock purchase plan, to increase the maximum number of shares of our common stock authorized for issuance under that plan by 1,000,000 shares, to a total of 2,500,000, and provide means by which eligible employees of our foreign subsidiaries may participate in that plan.
 
We recorded stock-based compensation expense, included in selling, general and administrative expenses, of $388,000 and $750,000 for the thirteen weeks ended December 25, 2011, and December 26, 2010, respectively. As of December 25, 2011, $2,902,000 of unrecognized compensation expense related to non-vested awards is expected to be recognized over a weighted-average period of approximately 18 months.
 
We use the Black-Scholes option pricing model to determine the weighted-average fair value of options. The weighted-average fair value of options granted during the thirteen weeks ended December 25, 2011, and December 26, 2010, were $1.29 and $2.22, respectively. The fair value of options at the date of grant and the weighted-average assumptions utilized to determine such values are indicated in the following table:
 
   
Thirteen Weeks Ended
 
   
December 25,
2011
   
December 26,
2010
 
Risk-free interest rate
    1.7%       2.2%  
Expected volatility
    80.0%       80.0%  
Expected life (in years)
    8.0       7.3  
Dividend yield
           
 
 
13

 
The risk-free interest rate is based on a treasury instrument whose term is consistent with the expected life of our stock options. We considered historical data in projecting expected stock price volatility. We estimated the expected life of stock options and stock option forfeitures based on historical experience.
 
Option transactions during the thirteen weeks ended December 25, 2011, are summarized as follows:
 
   
Number of Shares
   
Weighted-Average
Exercise Price ($)
   
Weighted-Average
Remaining
Contractual
Life (yrs.)
   
Aggregate
Intrinsic Value ($)
 
Outstanding at September 25, 2011
    3,782,018       15.44       5.9        
Granted
    193,500       1.70                  
Exercised
                           
Expired/Canceled
    (278,342 )     20.99                  
Outstanding at December 25, 2011
    3,697,176       14.31       6.3        
Options exercisable at December 25, 2011
    2,418,372       19.72       4.9        

The following table summarizes the status of options that remain subject to vesting:
 
   
Number of Shares
   
Weighted-
Average
Grant Date Fair
Value ($)
 
Non-vested at September 25, 2011
    1,666,646       3.55  
Granted
    193,500       1.29  
Vested
    (558,967 )     4.01  
Canceled
    (22,375 )     2.99  
Non-vested at December 25, 2011
    1,278,804       3.02  
 
The following table summarizes information concerning currently outstanding and exercisable stock options:
 
     
Options Outstanding
   
Options Exercisable
 
Range of
Exercise Prices ($)
   
Number
Outstanding
   
Weighted-Average
Remaining
Contractual
Life (yrs.)
   
Weighted-Average
Exercise Price ($)
   
Number
Exercisable
   
Weighted-Average
Exercise Price ($)
 
1.70-3.00          193,500       9.9         1.70                     0        0.00  
3.01-5.00       1,171,188       8.2         3.04          454,925        3.03  
5.01-10.00          708,083       8.0         7.34          339,042        7.36  
10.01-20.00            20,000       6.1       15.96            20,000       15.96  
20.01-25.00          601,567       3.2       23.71          601,567       23.71  
25.01-30.00          590,740       5.0       26.79          590,740       26.79  
30.01-45.06          412,098       2.4       32.52          412,098       32.52  
Total
      3,697,176       6.3       14.31       2,418,372       19.72  

Under our equity incentive plan, we also issue restricted stock units (“RSUs”) to employees, including our officers. RSUs generally vest over three years in annual installments commencing one year after the date of grant. We recognize compensation expense for the RSUs over the service period equal to the fair market value of the stock units on the date of issuance. Upon vesting, RSUs convert to shares in accordance with the terms of our equity incentive plan.
 
14

 
RSU transactions during the thirteen weeks ended December 25, 2011, are summarized as follows:
 
   
Number of RSUs
   
Weighted-
Average
Grant Date Fair
Value ($)
 
Non-vested at September 25, 2011
           
Granted
    501,100       1.70  
Vested
           
Canceled
    (3,750 )     1.70  
Non-vested at December 25, 2011
    497,350       1.70  
 
(14)  EARNINGS (LOSS) PER SHARE
 
Basic earnings (loss) per share is computed by dividing net income (loss) by the weighted-average number of common shares outstanding during the year. Diluted earnings (loss) per share identifies the dilutive effect of potential common shares using net income (loss) available to common shareholders and is computed (i) using the treasury stock method for outstanding stock options and the if-converted method for the 8.50% Notes, and (ii) in accordance with FASB guidance relating to the effect of contingently convertible instruments on diluted earnings per share for the 3.25% Notes. A reconciliation of these amounts is as follows:
 
   
Thirteen Weeks Ended
 
   
December 25,
2011
   
December 26,
2010
 
Net loss
  $ (12,476 )   $ (16,950 )
                 
Weighted-average common shares outstanding
    23,395       23,371  
Dilutive potential common shares
           
Weighted-average common and diluted shares outstanding
    23,395       23,371  
                 
Basic loss per share
  $ (0.53 )   $ (0.73 )
                 
Diluted loss per share
  $ (0.53 )   $ (0.73 )
 
Options to purchase common stock and RSUs that will convert to common stock upon vesting to 4,195,000 and 2,885,000 shares were not included for the thirteen weeks ended December 25, 2011 and December 26, 2010, respectively, because they were anti-dilutive.
 
Diluted loss per share for the thirteen weeks ended December 25, 2011, excludes potential common shares of 0, using the treasury stock method, and 9,903,000, using the if-converted method for the 8.50% Notes, as they were anti-dilutive. Diluted loss per share for the thirteen weeks ended December 26, 2010, excludes potential common shares of 95,000 using the treasury stock method as they were anti-dilutive.
 
(15)  SEGMENT REPORTING
 
We follow the provisions of FASB guidance, which establish annual and interim reporting standards for an enterprise’s business segments and related disclosures about each segment’s products, services, geographic areas and major customers. The method for determining what information to report is based on the way management organizes the operating segments within a company for making operating decisions and assessing financial performance. Our Chief Executive Officer is considered to be our chief operating decision maker.
 
15

 
We have determined that we have two reportable segments: the Disk Drive Components Division and the BioMeasurement Division. The accounting policies of the segments are the same as those described in the summary of significant accounting policies disclosed in our Annual Report on Form 10-K for the fiscal year ended September 25, 2011.
 
The following table represents net sales by product for each reportable segment and operating loss for each reportable segment.
 
   
Thirteen Weeks Ended
 
   
December 25,
2011
   
December 26,
2010
 
Net sales:
           
Disk Drive Components Division:
           
Suspension assemblies
  $ 54,011     $ 66,240  
Other products
    4,048       1,462  
Total Disk Drive Components Division
    58,059       67,702  
BioMeasurement Division
    416       542  
    $ 58,475     $ 68,244  
                 
Loss from operations:
               
Disk Drive Components Division
  $ (6,986 )   $ (11,448 )
BioMeasurement Division
    (1,123 )     (2,911 )
    $ (8,109 )   $ (14,359 )
 
 (16)  SUBSEQUENT EVENTS
 
Our insurance policies provide for $25,000,000 of flood coverage for property and casualty damages and business interruption. Our total claims exceeded this amount. During our first quarter of 2012, we received an initial insurance payment of $9,000,000. Subsequent to our first quarter of 2012, we received a final insurance payment of $16,000,000. There are no restrictions on the insurance proceeds received. We plan to use the proceeds to repair and restore our Thailand facility and replace equipment.
 
We evaluated subsequent events after the balance sheet date through the date the consolidated financial statements were issued. We did not identify any additional material events or transactions occurring during this subsequent event reporting period that required further recognition or disclosure in these consolidated financial statements.
 
 
 
16

 
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
When we refer to “we,” “our,” “us,” the “company” or “HTI,” we mean Hutchinson Technology Incorporated and its subsidiaries. Unless otherwise indicated, references to “2013” mean our fiscal year ending September 29, 2013, references to “2012” mean our fiscal year ending September 30, 2012, references to “2011” mean our fiscal year ended September 25, 2011, and references to “2010” mean our fiscal year ended September 26, 2010.
 
The Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) should be read in conjunction with the MD&A included in our Annual Report on Form 10-K for the year ended September 25, 2011.
 
GENERAL
 
Overview
 
We are a global technology manufacturer committed to creating value by developing solutions to critical customer problems. Our culture of quality, continuous improvement, superior innovation and a relentless focus on the fundamentals enables us to compete in the markets we serve. We incorporated in Minnesota in 1965.
 
Our Disk Drive Components Division is a key world-wide supplier of suspension assemblies for hard disk drives. Suspension assemblies are precise electro-mechanical components that hold a disk drive’s read/write head at microscopic distances above the drive’s disks. Our innovative product solutions help customers improve yields, increase reliability and enhance disk drive performance, thereby increasing the value they derive from our products.
 
Our BioMeasurement Division is focused on bringing new technologies and products to the market that provide information clinicians can use to improve the quality of healthcare and reduce costs. Our noninvasive InSpectra StO2 devices provide clinicians the ability to instantly detect changes in a patient’s perfusion status, and help in the early detection of hypoperfusion to enable faster and more precise assessment of oxygen delivery to vital organs and tissue in critical care settings.
 
Thailand Flooding
 
In October 2011, severe flooding in Thailand required us to suspend assembly operations at our Thailand manufacturing facility. During our fourth quarter of 2011 prior to the flooding, approximately one-third of our sales originated out of our Thailand assembly facility. By the end of that quarter, our Thailand operations had an assembly capacity of four to five million parts per week.
 
We are leveraging our U.S. assembly operations to offset the temporary loss of capacity in Thailand. This resulted in our retaining approximately 120 employees in our Hutchinson, Minnesota manufacturing facility that we previously expected to terminate and whose anticipated severance and benefits were included in our 2011 severance and benefits charges. This resulted in a reduction of $895,000 in our severance and benefits expense during our first quarter of 2012.
 
After review of the flood mitigation plans of the Thai government and those of the industrial park where our plant is located, we are proceeding with plans to restore our Thailand manufacturing facility. We expect to resume production there by the end of June 2012 and that it will take until the middle of 2013 to return production to pre-flood output levels. The timing of resuming production in Thailand is dependant on several factors including the requalification of our clean room at the Thailand site, the timing and our ability to get replacement equipment fully operational and final product qualification from our customers.
 
As a result of the flooding in Thailand, during our first quarter of 2012, we recorded flood-related costs, net of insurance recoveries, as follows:
 
·  
Flood-related costs of $13,727,000, including $8,338,000 of impairment charges for damaged facility equipment and fixtures, manufacturing equipment and tooling, $2,744,000 of inventory write-downs and $2,645,000 of Thailand operating and site restoration costs; and
 
17

 
 
·  
Flood insurance recoveries of $13,727,000, including $9,000,000 of cash proceeds and $4,727,000 proceeds receivable.
 
The total carrying value of our Thailand building and equipment was approximately $18,700,000 at the time of the flood. We expect the remaining $2,600,000 of inventory that was in Thailand at the time of the flood and that was not written off will be usable or sellable. As we repair and restore our facility and equipment in Thailand, we may determine that additional property, plant and equipment and inventory may be damaged. This could result in additional impairments and write-offs. Our estimates of our flood-related costs are based on current damage assessments and it is reasonably possible that the estimate will change in the near term and the effect of the change could be material. We expect any remaining impairments and write-offs related to the floodwaters will be less than $2,000,000.
 
After the suspension of production in Thailand in our first quarter of 2012, we have and will continue to incur costs for wages, salaries and benefits, depreciation and other items, which continued regardless of the suspension of production. Some employees normally engaged in the assembly manufacturing operation are being utilized in the clean-up and repairs of the facility and equipment, assessment and recovery of inventories and other aspects of the site restoration. In addition, we have and will continue to hire contractors to assist in the repair and restoration of our facility and equipment.
 
In total, we estimate we will spend $25,000,000 to $30,000,000 in 2012 and an additional $5,000,000 in 2013 to restore our Thailand manufacturing operation and bring it back to pre-flood capacity levels and to cover the incremental costs of manufacturing in the United States. These estimates do not include lost profits. These costs will be partially offset by $25,000,000 in insurance proceeds. We believe we have sufficient cash to manage through the restoration of our Thailand operations.
 
Our insurance policies provide for $25,000,000 of flood coverage for property and casualty damage and business interruption. Our total claims exceeded this amount. Insurance proceeds are recognized in the consolidated financial statements to the extent of losses incurred when realization is deemed probable. During the first quarter of 2012, we received an initial insurance payment of $9,000,000 which is included in cash provided by operating activities on our consolidated statement of cash flows. Subsequent to December 25, 2011, we received the final insurance payment of $16,000,000. The insurance recoveries, to the extent of losses incurred, were deemed probable at December 25, 2011. Accordingly, we recorded a flood insurance receivable in the amount of $4,727,000 included in the line item Other receivables on our condensed consolidated balance sheets. Recoveries in excess of losses incurred were assessed for recognition in accordance with gain contingency guidance and will be recognized when no contingencies remain. There are no restrictions on the insurance proceeds received. We plan to use the proceeds to repair and restore our Thailand facility and replace equipment.
 
Our available assembly capacity and vertically integrated components operations in the U.S. are enabling us to meet current levels of customer demand and should provide us with the flexibility to respond to increases in demand as the supply chain recovers. The effects of the flooding in Thailand continue to constrain overall capacity in the disk drive supply chain, significant portions of which are still in recovery mode.  We expect our second quarter of 2012 suspension assembly shipments will total 90 million to 100 million, compared with 89.3 million in the first quarter of 2012.  We expect our shipments to further increase in our third and fourth quarters of 2012 as the disk drive supply chain continues to recover from the flooding in Thailand.
 
General Business
 
We are a supplier to all manufacturers of disk drives and head-gimbal assemblers. Sales to our four largest customers constituted 93% of net sales for the thirteen weeks ended December 25, 2011 as shown in the following table.
 
Customer
 
Percentage of Sales
SAE Magnetics, Ltd/TDK Corporation
 
49%
Western Digital Corporation
 
22%
Hitachi and affiliates
 
12%
Seagate Technology, LLC
 
10%
 
We expect to continue to depend on a limited number of customers for our sales, given the small number of disk drive manufacturers and head-gimbal assemblers. Our results of operations could be adversely affected by reduced demand from a major customer.
 
18

 
The following table sets forth our recent quarterly suspension assembly shipment quantities in millions for the periods indicated:
 
Suspension Assembly Shipments by Quarter
 
2011
 
2012
 
First
Second
Third
Fourth
 
First
Suspension assembly shipment quantities
107
102
118
127
 
89
 
Our second quarter of 2011 shipments decreased four percent compared with the preceding quarter as a result of our customers’ reduced production plans. Our third quarter of 2011 suspension assembly shipments increased 15 percent sequentially to 118 million as shipments to all of our customers increased and we estimate that we gained a modest amount of market share in all disk drive segments as a result of share shifts among our customers and improvements in our share positions on some existing customer programs. Our fourth quarter of 2011 shipments increased eight percent sequentially primarily due to an increase in shipments of suspension assemblies for mobile applications.
 
The flooding in Thailand has temporarily suppressed the overall production capacity of the hard disk drive supply chain, and this has resulted in a material decrease in our suspension assembly demand. In our first quarter of 2012, shipments decreased 38 million or 30% compared to the preceding quarter due to the flood-related capacity constraints at our customers. We estimate that we maintained our overall market share compared with the previous quarter, however, as we leveraged our vertically integrated U.S. operations to meet customers’ needs.
 
TSA+ suspension assemblies accounted for 52% of first quarter of 2012 shipments, down from 60% in the preceding quarter because of shifts in product mix resulting from flood-related capacity constraints among the disk drive manufacturers.  Despite a decline in our TSA+ shipments, we further reduced our TSA+ cost per part. As the shift in our product mix from subtractive TSA suspensions to additive TSA+ suspensions resumes, and we make further improvements in our TSA+ process efficiency and capacity utilization, our total cost per part will continue to improve. We currently expect TSA+ suspension assemblies to account for about 80% or more of our shipments by the end of 2012.
 
Average selling price in our first quarter of 2012 was $0.60, up from $0.58 in the preceding quarter primarily because of changes in our product mix resulting from the flood-related capacity constraints at our customers. Suspension assembly pricing is likely to remain competitive in 2012.  Without the product mix changes we experienced in the first quarter of 2012, our average selling price would have been flat compared with the preceding quarter.  Industry-wide, there is currently sufficient suspension assembly capacity to meet customers’ needs, so there are no supply constraints to exert upward pressure on suspension assembly prices.
 
We expect gross profit to improve as our shipment volume increases.  We expect cost of goods sold to include quarterly costs of approximately $2,000,000, compared to approximately $1,000,000 in the first quarter of 2012, while we are reliant on our U.S. assembly operations for the majority of our production. These costs will continue until our Thailand operation resumes production and will then decrease as production ramps to pre-flood output levels, expected by the middle of 2013.
 
Our prototyping activity for dual-stage actuated, or DSA, suspension assemblies is increasing.  We continue to work with multiple customers on DSA programs, and we still expect demand for DSA products to develop gradually in 2012.  All of our DSA capacity is currently at our U.S. sites, and we are well positioned to meet customer demand as it materializes.
 
The impact of the flood-related disruption to our business is delaying the full realization of the benefits that our 2011 restructuring and consolidation plan are expected to bring.  Nevertheless, we remain on a path that we expect will enable us to become the industry’s lowest cost producer of suspension assemblies, which we believe is integral to winning preferred supplier positions on customers’ new disk drive programs and further improving our financial performance.
 
19

 
RESULTS OF OPERATIONS
 
Thirteen Weeks Ended December 25, 2011 vs. Thirteen Weeks Ended December 26, 2010
 
Net sales for the thirteen weeks ended December 25, 2011, were $58,475,000, compared to $68,244,000 for the thirteen weeks ended December 26, 2010, a decrease of $9,769,000. Suspension assembly sales decreased $12,229,000 from the thirteen weeks ended December 26, 2010, primarily as a result of the flood-related capacity constraints at our customers. Our average selling price decreased to $0.60, compared to $0.62 for the first quarter of 2011, due to competitive pressures that were partially offset by a favorable change in our product mix as a result of the flood-related capacity constraints at our customers. Net sales in our BioMeasurement Division for the thirteen weeks ended December 25, 2011 were $416,000, compared to $542,000 for the thirteen weeks ended December 26, 2010.
 
Gross profit for the thirteen weeks ended December 25, 2011, was $2,301,000, compared to gross profit of $3,324,000 for the thirteen weeks ended December 26, 2010, a decrease of $1,023,000. Gross profit as a percent of net sales was four percent and five percent for the thirteen weeks ended December 25, 2011, and December 26, 2010, respectively. The lower gross profit was primarily due to reduced net sales, as well as a lower mix of TSA+ products and approximately $1,000,000 of incremental costs of manufacturing in our U.S. assembly operations instead of in Thailand, partially offset by cost savings as a result of our 2011 consolidation and restructuring plan.
 
Selling, general and administrative expenses for the thirteen weeks ended December 25, 2011, were $7,173,000, compared to $13,634,000 for the thirteen weeks ended December 26, 2010, a decrease of $6,461,000. The decrease was primarily due to cost savings from our 2011 restructuring actions, and the thirteen weeks ended December 26, 2010 included approximately $4,700,000 of Thailand assembly manufacturing startup expenses.
 
Severance and other expenses for the thirteen weeks ended December 25, 2010 were reduced $711,000. We reversed $895,000 of previously accrued severance and benefits expenses partially offset by $184,000 of other expenses incurred related to our site consolidation plans. As a result of leveraging our U.S. assembly operations to offset the temporary loss of manufacturing capacity in Thailand, we retained approximately 120 employees in our Hutchinson, Minnesota manufacturing facility that we previously expected to terminate and whose anticipated severance and benefits were included in our 2011 severance and benefits expenses.
 
Loss from operations for the thirteen weeks ended December 25, 2011, included a $1,123,000 loss from operations for our BioMeasurement Division, compared to a $2,911,000 loss from BioMeasurement Division operations for the thirteen weeks ended December 26, 2010. The BioMeasurement Division operating loss for the thirteen weeks ended December 25, 2011 was reduced by our 2011 restructuring actions.
 
Other expenses for the thirteen weeks ended December 25, 2011, were $87,000, compared to other income of $831,000 for the thirteen weeks ended December 26, 2010, a decrease of $918,000. The decrease was primarily due to a $530,000 loss on foreign currency transactions for the thirteen weeks ended December 25, 2011, compared to a $322,000 gain on foreign currency transactions for the thirteen weeks ended December 26, 2010 related to our Thailand assembly operations.
 
LIQUIDITY AND CAPITAL RESOURCES
 
Our principal sources of liquidity are cash and cash equivalents, short-term investments, cash flow from operations and additional financing capacity, if available given current credit market conditions and our operating performance. Our cash and cash equivalents decreased from $57,554,000 at September 25, 2011, to $54,635,000 at December 25, 2011. Our short-term investments decreased from $1,612,000 to $1,200,000 during the same period. In total, our cash and cash equivalents and short-term investments decreased by $3,331,000. The decrease was primarily due to a $10,409,000 repayment of borrowings from our credit line and $5,384,000 of capital expenditures, partially offset by $12,502,000 of cash provided by operations, which included $9,000,000 of flood insurance proceeds.
 
In light of the significant decreases in our net sales over the past two completed fiscal years and current uncertain market and economic conditions, we are aggressively managing our cost structure and cash position to ensure that we will meet our debt obligations while preserving the ability to make investments that will enable us to respond to customer requirements and achieve long-term profitable growth. We currently believe that our cash and cash equivalents, short-term investments, cash generated from operations and additional financing, if needed and as available given current credit market conditions and our operating performance, will be sufficient to meet our forecasted operating expenses, other debt
 
20

 
service requirements, debt and equity repurchases and capital expenditures through our first quarter of 2013. We currently have outstanding $76,243,000 aggregate principal amount of our 3.25% Notes. Holders of our 3.25% Notes may require us to purchase all or a portion of their 3.25% Notes for cash as early as January 15, 2013. We also currently have outstanding $85,170,000 aggregate principal amount of our 8.50% Notes. Holders of our 8.50% Notes may require us to purchase all or a portion of their 8.50% Notes for cash as early as January 15, 2015. We anticipate that we would need to obtain additional financing if the holders of our 3.25% Notes require us to purchase all or a portion of their 3.25% Notes for cash on that date. We may from time to time seek to prepay or retire our outstanding debt through cash purchases in open market or privately negotiated transactions or otherwise. These transactions, if any, will depend on prevailing market conditions, our liquidity requirements, contractual restrictions and other factors. Our ability to obtain additional financing will depend upon a number of factors, including our future performance and financial results and general economic and capital market conditions. We cannot be certain that we will be able to raise additional financing on terms acceptable to us, including covenants that we will be able to comply with in the short term, or at all, if needed. If we are unable to obtain new financing, if and when necessary, our future financial results and liquidity could be materially adversely affected.
 
At a special meeting held June 17, 2011, our shareholders approved the issuance of up to $40,000,000 aggregate principal amount of additional 8.50% Notes (and the issuance of our common stock upon conversion thereof) for cash in one or more future private placements or registered offerings. Accordingly, we may, but are not obligated to, issue a limited amount of additional 8.50% Notes without further shareholder approval.
 
On September 16, 2011, we entered into a revolving credit and security agreement with PNC Bank. The credit agreement provides us with a revolving credit facility in a principal amount of up to $35,000,000, subject to a borrowing base. The credit facility is secured by substantially all of the personal property of Hutchinson Technology Incorporated. The maturity date of the credit facility is October 1, 2014 if, by October 1, 2012, the aggregate outstanding principal amount of the 3.25% Notes is reduced to $50,000,000 or less and we have at least $50,000,000 of liquidity remaining; otherwise the maturity date is October 1, 2012. The credit agreement contains customary representations, warranties, covenants and events of default, including, but not limited to limitations on the payment of dividends and repurchases of stock, financial covenants requiring a minimum fixed charge coverage ratio, EBITDA and minimum liquidity. We maintain an account at PNC Bank with a minimum balance of $15,000,000, as required under the credit agreement. As of December 25, 2011, we were in compliance with the covenants of our credit facility. During the thirteen weeks ended December 25, 2011, the maximum amount drawn on our credit facility was $10,409,000, which was fully repaid in October 2011. We did not borrow any amounts from the credit facility for the remainder of our first quarter of 2012.
 
The suspension of production at our Thailand facility during October 2011 triggered an event of default provision related to business interruptions under our credit agreement with PNC Bank, and we have obtained a waiver of the event of default. As of December 25, 2011, we had no borrowings drawn under the credit agreement and the event of default did not trigger any cross-default provisions in our other financing arrangements.
 
Our suspension assembly business is capital intensive. The disk drive industry experiences rapid technology changes that require us to make substantial ongoing capital expenditures in product and process improvements to maintain our competitiveness. Significant industry technology transitions often result in increasing our capital expenditures. The disk drive industry also experiences periods of increased demand and rapid growth followed by periods of oversupply and subsequent contraction, which also results in fluctuations in our capital expenditures. Cash used for capital expenditures totaled $5,384,000 for the thirteen weeks ended December 25, 2011. We anticipate capital expenditures will be approximately $35,000,000 in 2012, including approximately $6,000,000 of costs related to restoring operations in Thailand, and for TSA+ flexure production capacity and tooling and manufacturing equipment for new process technology and capability improvements, such as for DSA suspension assemblies. As the transition to TSA+ suspensions takes place over the next two to three years, and as demand increases for our DSA suspension assemblies, our capital expenditures could increase as we add capacity as needed. Financing of these capital expenditures will be principally from operations, our current cash, cash equivalents and short-term investments or additional financing, if available given current credit market conditions and our operating performance.
 
We have reduced the cost structure of our BioMeasurement Division, although we will continue to market and sell our InSpectra StO2 products and will have continued operating losses until our products are more widely accepted in the marketplace. For the thirteen weeks ended December 25, 2011, our BioMeasurement Division incurred an operating loss of $1,123,000.
 
 
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In 2008, our board of directors approved a share repurchase program authorizing us to spend up to $130,000,000 to repurchase shares of our common stock from time to time in the open market or through privately negotiated transactions. The maximum dollar value of shares that may yet be purchased under the share repurchase program is $72,368,000. We have not repurchased any shares since 2008.
 
CRITICAL ACCOUNTING POLICIES
 
There have been no material changes in our critical accounting policies from those disclosed in our Annual Report on Form 10-K for the fiscal year ended September 25, 2011.
 
RECENT ACCOUNTING PRONOUNCEMENTS
 
In June 2011, the FASB updated the disclosure requirements for comprehensive income. The updated guidance requires companies to disclose the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. The updated guidance does not affect how earnings per share is calculated or presented. The updated guidance is effective for us for our fiscal year  2013. We elected early adoption of this guidance started with our first quarter of 2012. The adoption of this pronouncement did not have a material impact on our consolidated financial statements.
 
In May 2011, the FASB issued authoritative guidance related to fair value measurements. The updated guidance results in a consistent definition of fair value and common requirements for measurement of and disclosure about fair value between accounting principles generally accepted in the United States (U.S. GAAP) and International Financial Reporting Standards (IFRS). The updated guidance is effective for us for our second quarter of 2012. We do not expect the adoption of this pronouncement will have a material impact on our consolidated financial statements.
 
FORWARD-LOOKING STATEMENTS
 
Statements contained in this Quarterly Report on Form 10-Q that are not statements of historical fact may constitute forward-looking statements. Forward-looking statements speak only as of the date on which the statements are made and include, but are not limited to, statements regarding the following: the demand for and shipments of disk drives, suspension assemblies and suspension assembly components, disk drive and suspension assembly technology and development, the development of and market demand for medical devices, product commercialization and adoption, production capabilities, capital expenditures and capital resources, average selling prices, product costs, inventory levels, division and company-wide revenue, gross profits and operating results, manufacturing capacity, assembly operations in Asia, cost reductions and economic and market conditions. Words such as “believe,” “anticipate,” “expect,” “intend,” “estimate,” “approximate,” “plan,” “goal,” “should” and similar expressions are intended to identify forward-looking statements but are not the exclusive means of identifying such statements. Although we believe these statements are reasonable, forward-looking statements involve risks and uncertainties that may cause actual results to differ materially from those projected by such statements. Factors that could cause actual results to differ from those discussed in the forward-looking statements include, but are not limited to, those discussed under the heading “Risk Factors” in our most recent Annual Report on Form 10-K for the fiscal year ended September 25, 2011. This list of factors is not exhaustive, however, and these or other factors, many of which are outside of our control, could have a material adverse effect on us and our results of operations. Therefore, you should consider these risk factors with caution and form your own critical and independent conclusions about the likely effect of these risk factors on our future performance. Except as otherwise required by law, we undertake no obligation to update any forward-looking statement for any reason. You should carefully review the disclosures and the risk factors described in this and other documents we file from time to time with the SEC, including our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K. All forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by the cautionary statements set forth herein.
 
 
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 
Except as noted in this Item 3, there have been no material changes in our exposure to market risk or to our quantitative and qualitative disclosures about market risk as disclosed in our Annual Report on Form 10-K for the fiscal year ended September 25, 2011.
 
As of December 25, 2011, we had fixed rate debt of $161,413,000. At December 25, 2011, our fixed rate debt had a fair market value of approximately $110,148,000.
 
 
ITEM 4. CONTROLS AND PROCEDURES
 
EVALUATION OF DISCLOSURE 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 management, including our principal executive and principal financial officers, of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act). Based on this evaluation, the principal executive officer and principal financial officer concluded that our disclosure controls and procedures were effective as of December 25, 2011 to ensure that information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms.
 
CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING
 
We have not identified any 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.
 
 
23

 
PART II. OTHER INFORMATION
 
ITEM 1A. RISK FACTORS
 
There have been no material changes in our risk factors from those disclosed in our Annual Report on Form 10-K for the fiscal year ended September 25, 2011.
 

 
 
24

 
ITEM 6. EXHIBITS
 
(a)  Exhibits:
 
Unless otherwise indicated, all documents incorporated herein by reference to a document filed with the SEC pursuant to the Exchange Act, are located under SEC file number 001-34838.
 
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 12/29/2002; File No. 0-14709).
3.2
 
Restated By-Laws of HTI, as amended December 3, 2008 (incorporated by reference to Exhibit 3.1 to HTI’s Current Report on Form 8-K filed 12/9/2008; File No. 0-14709).
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.
 

 
 
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:
January 27, 2012
By    
/s/ Wayne M. Fortun
     
Wayne M. Fortun
     
President and Chief Executive Officer
       
       
       
Date:
January 27, 2012
By    
/s/ David P. Radloff
     
David P. Radloff
     
Vice President and Chief Financial Officer
       
 
 

 
 
 

 
INDEX TO EXHIBITS

Exhibit No.
 
Description
 
Method of Filing
3.1
 
Amended and Restated Articles of Incorporation of HTI.
 
Incorporated by Reference
3.2
 
Restated By-Laws of HTI, as amended December 3, 2008.
 
Incorporated by Reference
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