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EX-32 - HUTCHINSON TECHNOLOGY INCex32.htm
EX-31 - HUTCHINSON TECHNOLOGY INCex31-1.htm
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

 

FORM 10-Q

 

(Mark One)

þQuarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 

For the quarterly period ended March 27, 2016

 

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 þ   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 þ    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 þ 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 þ

 

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 3, 2016, the registrant had 33,916,379 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)

 

   March 27,
2016
   September 27,
2015
 
ASSETS          
Current assets:          
Cash and cash equivalents (Note 3)  $47,434   $39,454 
Short-term investments restricted (Note 4)   506    965 
Trade receivables, net   8,046    15,860 
Other receivables   1,814    2,707 
Inventories   37,242    40,148 
Other current assets   3,231    3,588 
Total current assets   98,273    102,722 
           
Property, plant and equipment, net   123,808    134,509 
Other assets   3,686    4,281 
Total assets  $225,767   $241,512 
           
LIABILITIES AND SHAREHOLDERS’ EQUITY          
Current liabilities:          
Current debt, net of discount (Note 7)  $86,874   $3,000 
Current portion of capital lease obligation   2,259    2,188 
Accounts payable   15,209    19,877 
Accrued compensation   9,809    9,388 
Accrued expenses and other   7,438    4,239 
Accrued interest   2,785    2,838 
Total current liabilities   124,374    41,530 
           
Long-term debt, net of discount (Note 7)   37,500    122,156 
Capital lease obligation   3,276    4,220 
Other long-term liabilities   3,171    2,731 
Commitments and contingencies (Notes 7, 8, and 14)          
Shareholders’ equity:          
Common stock, $.01 par value, 100,000,000 shares authorized, 33,915,000 and 33,540,000 issued and outstanding   339    335 
Additional paid-in capital (Note 7)   452,830    452,165 
Accumulated other comprehensive loss   (3,482)   (4,309)
Accumulated loss   (392,241)   (377,316)
Total shareholders’ equity   57,446    70,875 
Total liabilities and shareholders’ equity  $225,767   $241,512 

 

See accompanying notes to condensed consolidated financial statements – unaudited.

 

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HUTCHINSON TECHNOLOGY INCORPORATED

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS – UNAUDITED

(In thousands, except per share data)

 

   Thirteen Weeks Ended   Twenty-Six Weeks Ended 
   March 27,
2016
   March 29,
2015
   March 27,
2016
   March 29,
2015
 
                 
Net sales  $54,160   $62,359   $118,087   $134,782 
Cost of sales   48,448    56,097    100,654    117,056 
Gross profit   5,712    6,262    17,433    17,726 
                     
Research and development expenses   5,602    7,097    11,459    13,139 
Selling, general and administrative expenses   5,905    5,848    11,112    11,833 
Merger related expenses   938        4,375     
Severance and site consolidation expenses (Note 11)   503        503    159 
Loss from operations   (7,236)   (6,683)   (10,016)   (7,405)
                     
Other income (expense), net   937    267    1,088    (288)
Loss on extinguishment of long-term debt (Note 7)               (4,318)
Interest income   20    15    32    19 
Interest expense   (3,359)   (3,270)   (6,642)   (7,723)
Loss before income taxes   (9,638)   (9,671)   (15,538)   (19,715)
(Benefit) provision for income taxes (Note 13)   (10)   32    (613)   (113)
Net loss  $(9,628)  $(9,703)  $(14,925)  $(19,602)
Basic loss per share  $(0.28)  $(0.29)  $(0.44)  $(0.61)
Diluted loss per share  $(0.28)  $(0.29)  $(0.44)  $(0.61)
                     
Weighted-average common shares outstanding   33,905    33,270    33,790    31,909 
Weighted-average diluted shares outstanding   33,905    33,270    33,790    31,909 

 

See accompanying notes to condensed consolidated financial statements – unaudited.

 

 3 

 

 

HUTCHINSON TECHNOLOGY INCORPORATED

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS – UNAUDITED

(In thousands)

 

   Thirteen Weeks Ended   Twenty-Six Weeks Ended 
   March 27,
2016
   March 29,
2015
   March 27,
2016
   March 29,
2015
 
                 
Net loss  $(9,628)  $(9,703)  $(14,925)  $(19,602)
Other comprehensive income (loss)                    
Foreign currency translation, net of income taxes of $0   686    342    827    (183)
Other comprehensive income (loss)   686    342    827    (183)
Total comprehensive loss  $(8,942)  $(9,361)  $(14,098)  $(19,785)

 

See accompanying notes to condensed consolidated financial statements – unaudited.

 

 4 

 

 

HUTCHINSON TECHNOLOGY INCORPORATED

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS – UNAUDITED

(In thousands)

 

   Twenty-Six Weeks Ended 
  

March 27,

2016

  

March 29,

2015

 
OPERATING ACTIVITIES:          
Net loss  $(14,925)  $(19,602)
Adjustments to reconcile net loss to cash provided by operating activities:          
Depreciation and amortization   14,559    16,419 
Stock-based compensation   636    661 
(Gain) loss on disposal of assets   (418)   39 
Non-cash interest expense   718    1,290 
Loss on extinguishment of debt (Note 7)       4,318 
Severance and site consolidation expenses (Note 11)   387    (27)
Changes in operating assets and liabilities   11,676    15,599 
Cash provided by operating activities   12,633    18,697 
           
INVESTING ACTIVITIES:          
Capital expenditures   (4,582)   (14,505)
Proceeds from the sale and sale/leaseback of equipment   707    2,408 
Change in restricted cash (Note 3)   32    (974)
Purchases of marketable securities   (47)   (965)
Sales/maturities of marketable securities   506    965 
Cash used for investing activities   (3,384)   (13,071)
           
FINANCING ACTIVITIES:          
Proceeds from issuance of common stock   33    60 
Repayments of capital lease   (1,288)   (1,113)
Repayments of revolving credit line   (29,752)   (76,523)
Proceeds from revolving credit line   29,752    66,990 
Repayments of debt   (1,500)   (39,822)
Proceeds from private placement of debt       37,500 
Proceeds from term loan       15,000 
Debt refinancing costs       (3,175)
Cash used for financing activities   (2,755)   (1,083)
           
Effect of exchange rate changes on cash   1,486    114 
           
Net increase in cash and cash equivalents   7,980    4,657 
           
Cash and cash equivalents at beginning of period   39,454    37,939 
           
Cash and cash equivalents at end of period  $47,434   $42,596 
           
Supplemental cash flow disclosure:          
Cash interest paid (net of amount capitalized)  $5,508   $5,112 
Income taxes paid  $21   $3 
Assets acquired through capital lease  $263   $2,289 
Non-cash exchange of debt for equity (Note 7)  $   $15,000 

 

See accompanying notes to condensed consolidated financial statements – unaudited.

 

 5 

 

 

 

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 “2016” mean our fiscal year ending September 25, 2016, and references to “2015” mean our fiscal year ended September 27, 2015.

 

(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 provided 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. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. 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)ENTRY INTO MERGER AGREEMENT

 

On November 1, 2015, we entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Headway Technologies, Inc. (“Parent”) and Hydra Merger Sub, Inc., a wholly owned subsidiary of Parent (“Merger Subsidiary”). Pursuant to the Merger Agreement, Merger Subsidiary will merge with and into our company and our company will continue as the surviving corporation and as a wholly owned subsidiary of Parent (the “Merger”). Parent and Merger Subsidiary are each beneficially owned by TDK Corporation, a Japanese electronics company.

 

Pursuant to the Merger Agreement, at the effective time of the Merger, each issued and outstanding share of our capital stock (other than shares held (1) by Parent or Merger Subsidiary or any direct or indirect subsidiary of our company or Parent, and (2) by shareholders who have perfected and not withdrawn a demand for dissenters’ rights or who have not otherwise lost dissenters’ rights under Minnesota law with respect to such shares), will be cancelled and extinguished and automatically converted into the right to receive:

 

·$3.62 in cash, without interest, plus

 

·up to $0.38 in cash, without interest (the “Additional Consideration”).

 

The Additional Consideration will be determined prior to consummation of the Merger and will be an amount equal to $0.0108 per share for each $500,000 of our Net Cash (as defined in the Merger Agreement) over $17,500,000 as of a fiscal period end within 45 days prior to the consummation of the Merger. We cannot predict the amount of Additional Consideration, if any, that will be payable to shareholders. As of March 27, 2016, our Net Cash was $51,283,000.

 

On January 28, 2016, at a special meeting of our shareholders, the Merger Agreement, and the Merger pursuant to that agreement, was approved by our shareholders. We currently expect the transactions described in the Merger Agreement to be completed during the second calendar quarter of 2016, subject to the termination or expiration of the waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, and the satisfaction or waiver of the other closing conditions specified in the Merger Agreement.

 

During the thirteen weeks and twenty-six weeks ended March 27, 2016, we incurred $938,000 and $4,375,000, respectively, of expenses related to the pending Merger.

 

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(3)CASH AND CASH EQUIVALENTS

 

Cash and cash equivalents consist of all highly liquid investments with original maturities of three months or less.

 

As of March 27, 2016, and September 27, 2015, we had $1,645,000 and $1,677,000, respectively, of cash and cash equivalents that were restricted in use, which are classified in other current assets. These amounts for both periods covered outstanding letters of credit and cash received and temporarily held in our senior secured credit facility collections account.

 

(4)INVESTMENTS

 

A summary of our investments is as follows:

 

   March 27,
2016
   September 27,
2015
 
Available-for-sale securities          
U.S government debt securities  $506   $965 

 

Our short-term investments are comprised of United States government debt securities. Unrealized gains and losses deemed to be temporary on available-for-sale securities are reported as other comprehensive gain or loss within shareholders’ equity.

 

As of March 27, 2016, our short-term investments were scheduled to mature within one year.

 

As of March 27, 2016, and September 27, 2015, we had $506,000 and $965,000, respectively, of short-term investments that were restricted in use. The amounts are required by the State of Minnesota to be held as 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 $8,046,000 at March 27, 2016, and $15,860,000 at September 27, 2015, are net of allowances for sales returns of $343,000 and $623,000, respectively.

 

During the twenty-six weeks ended March 27, 2016, we entered into multiple independent bill of exchange discounting transactions with a certain customer under an uncommitted facility with Hongkong and Shanghai Banking Corporation Limited, Bangkok Branch (“HSBC”), under which our Thai subsidiary, Hutchinson Technology Operations (Thailand) Co. Ltd., sold, without recourse, an aggregate of $59,884,000 of its accounts receivable to HSBC and was paid 100% of the face value of the accounts receivable sold, less interest expense of LIBOR plus 1.75%. As of March 27, 2016, there was no outstanding balance to be paid to our Thai subsidiary from HSBC. During 2015, our Thai subsidiary was paid 95% of the face value of the accounts receivable sold, less interest expense of LIBOR plus 1.75%. The balance remaining to be paid to our Thai subsidiary from HSBC as of September 27, 2015 was $1,228,000, included within the line item “Other receivables” on our consolidated balance sheets.

 

We also entered into multiple independent bill of exchange discounting transactions with a certain customer under an uncommitted facility with Bank of America, N.A., Bangkok Branch (“Bank of America”), under which our Thai subsidiary can sell, without recourse, approximately 90% of its accounts receivable to Bank of America and be paid the full face value of that accounts receivable sold, less interest expense of LIBOR plus 1.50%. The approximately 10% remainder due on the receivable is included in our trade receivables balance until paid. During the twenty-six weeks ended March 27, 2016, our Thai subsidiary sold $31,279,000 of its accounts receivable to Bank of America, which has been paid in full.

 

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:

 

 7 

 

 

September 27,
2015
   Increases in the
Allowance Related to
Warranties Issued
   Reductions in the
Allowance for Returns
Under Warranties
   March 27,
2016
 
$623   $308   $(589)  $342 

 

(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 March 27, 2016, and September 27, 2015:

 

   March 27,
2016
   September 27,
2015
 
         
Raw materials  $16,611   $19,236 
Work in process   8,086    9,537 
Finished goods   12,545    11,375 
   $37,242   $40,148 

 

(7)Debt

 

Debt consisted of the following at March 27, 2016, and September 27, 2015:

 

   March 27,
2016
   September 27,
2015
 
         
8.50% Secured Notes  $63,931   $63,931 
8.50% Secured Notes debt discount   (1,109)   (1,742)
10.875% Notes   12,200    12,200 
10.875% Notes debt discount   (148)   (233)
8.50% New Convertible Notes   37,500    37,500 
PNC Bank term loan   12,000    13,500 
Total debt, net of discounts   124,374    125,156 
Less: Current maturities, net of discounts   (86,874)   (3,000)
Total long-term debt, net of discounts  $37,500   $122,156 

 

October 2014 Financing Transactions

 

On October 23, 2014, we issued $37,500,000 aggregate principal amount of 8.50% Convertible Senior Notes due 2019 (the “8.50% New Convertible Notes”). The 8.50% New Convertible Notes bear interest at a rate of 8.50% per annum, payable semi-annually in arrears on April 30 and October 31 of each year, beginning April 30, 2015. The 8.50% New Convertible Notes mature on October 31, 2019. Each $1,000 principal amount of the 8.50% New Convertible Notes is convertible into 266.6667 shares of our common stock (which is equal to an initial conversion price of approximately $3.75 per share), subject to adjustment under certain circumstances. The 8.50% New Convertible Notes rank pari passu in right of payment with all existing and future senior indebtedness of our company. Certain beneficial holders of the 8.50% New Convertible Notes had the right to require us to repurchase for cash up to $7,500,000 aggregate principal amount of the 8.50% New Convertible Notes, plus accrued and unpaid interest, if any, during the 120-day period commencing on October 23, 2014. Accordingly, $7,500,000 of the proceeds to us from the sale of the 8.50% New Convertible Notes were escrowed until the put right expired on February 20, 2015. Additionally, we were required to escrow at least $35,000,000 of cash that was restricted solely for the repayment, repurchase, redemption, defeasance or other acquisition for value of our 8.50% Convertible Senior Notes due 2026 (the “8.50% Convertible Notes”), plus accrued but unpaid interest thereon. We capitalized debt financing costs of $1,652,000 which are being amortized over five years or until the maturity date. The amortization expense is included in interest expense. On January 15, 2015, we completed a redemption of the then outstanding $39,822,000 aggregate principal amount of 8.50% Convertible Notes. To fund this, we used the escrowed $35,000,000 and our existing cash.

 

 8 

 

 

On October 23, 2014, we entered into an agreement providing for the private exchange of $15,000,000 aggregate principal amount of our 8.50% Senior Secured Second Lien Notes due 2017 (the “8.50% Secured Notes”) held by a certain holder for 2,500,000 shares of our common stock and warrants to purchase an additional 2,500,000 shares of our common stock on a cashless basis at an exercise price of $0.01 per share. On November 25, 2014, 1,250,000 warrants were exercised, which resulted in the issuance of 1,246,493 shares of common stock. On January 15, 2015, the remaining 1,250,000 warrants were exercised which resulted in the issuance of 1,246,428 shares of common stock and no warrants remain outstanding. The fair value of the common stock and warrants was recorded in additional paid-in capital in the amount of $17,388,000. Applying debt extinguishment accounting, we recorded a loss on extinguishment of debt of $4,318,000 in our first quarter of 2015. The loss also included $1,232,000 of broker, legal and accounting fees related to the exchange transaction.

 

To accommodate the October 2014 debt transactions described above, on October 20, 2014, we entered into supplemental indentures relating to our 8.50% Secured Notes and to our 10.875% Senior Secured Second Lien Notes due 2017 (the “10.875% Notes”). Additionally, on October 20, 2014, we entered into an amendment to our senior secured credit agreement, dated as of September 16, 2011, as previously amended, with PNC Bank, National Association (“PNC Bank”). Under the amendment, PNC Bank consented to the transactions contemplated by the 8.50% New Convertible Notes and the exchange transaction, referred to above.

 

8.50% Secured Notes

 

We currently have outstanding $63,931,000 aggregate principal amount of 8.50% Secured Notes, which as of March 27, 2016 was classified as current on our consolidated balance sheets. The 8.50% Secured Notes were originally issued in March 2012 in the aggregate principal amount of $78,931,000. Of that total amount, $38,931,000 aggregate principal amount of 8.50% Secured Notes was issued pursuant to an effective registration statement relating to an offer to purchase for cash or exchange for new securities any and all of our outstanding 3.25% Convertible Subordinated Notes due 2026. The remaining $40,000,000 aggregate principal amount of 8.50% Secured Notes was issued in a private placement that included the issuance of warrants to purchase 3,869,000 shares of our common stock. The warrants were exercisable on a cashless basis for $.01 per share for ten years after their issuance. The total purchase price for the 8.50% Secured Notes and warrants issued in the private placement was $39,400,000. The fair value of the warrants was recorded in additional paid-in capital in the amount of $8,489,000. As of May 2013, all 3,869,000 warrants had been exercised and there were no warrants outstanding.

 

The 8.50% Secured Notes bear interest at a rate of 8.50% per annum, payable semi-annually in arrears on January 15 and July 15 of each year, beginning July 15, 2012, and mature on January 15, 2017, unless redeemed or repurchased in accordance with their terms. The 8.50% Secured Notes are secured by liens on all assets securing our existing or future senior secured credit facilities (other than certain excluded assets), which liens rank junior in priority to any liens securing our senior secured credit facilities and other permitted priority liens.

 

We may redeem all or part of the 8.50% Secured Notes at any time by paying 100% of the principal amount redeemed, plus a make-whole premium (and accrued and unpaid interest on the principal amount redeemed to) as of the date of redemption (subject to the rights of holders of the 8.50% Secured Notes on the relevant record date to receive interest due on the relevant interest payment date as and to the extent provided in the indenture). The indenture governing the 8.50% Secured Notes contains certain covenants that, among other things, will limit our and our restricted subsidiaries’ ability to incur additional indebtedness, pay dividends on or make distributions in respect of capital stock or make certain other restricted payments or investments, enter into agreements that restrict distributions from restricted subsidiaries, sell or otherwise dispose of assets, including capital stock of restricted subsidiaries, enter into transactions with affiliates, create or incur liens and enter into operating leases.

 

As described previously, on October 23, 2014, we entered into an agreement for the private exchange of $15,000,000 aggregate principal amount of our 8.50% Secured Notes held by a certain holder for 2,500,000 shares of our common stock and warrants to purchase an additional 2,500,000 shares of our common stock on a cashless basis at an exercise price of $0.01 per share. On November 25, 2014, 1,250,000 warrants were exercised which resulted in the issuance of 1,246,493 shares of common stock. On January 15, 2015, the remaining 1,250,000 warrants were exercised, which resulted in the issuance of 1,246,428 shares of common stock and no warrants remain outstanding.

 

 9 

 

 

10.875% Notes

 

On January 22, 2013, we issued $12,200,000 aggregate principal amount of the 10.875% Notes for a total purchase price of $11,590,000. As of March 27, 2016, the $12,200,000 aggregate principal amount of the 10.875% Notes was classified as current on our consolidated balance sheets. The 10.875% Notes were issued in a private placement pursuant to an indenture dated as of January 22, 2013, and bear interest at a rate of 10.875% per annum, payable semi-annually in arrears on January 15 and July 15 of each year, beginning July 15, 2013. The 10.875% Notes are secured by liens on all assets securing our senior secured credit facilities (other than capital stock of subsidiaries of our company to the extent that inclusion of such capital stock would require the filing of separate financial statements for such subsidiaries with the SEC), which liens rank junior in priority to the liens securing our senior secured credit facilities and other permitted priority liens and on an equal and ratable basis with the liens securing our 8.50% Secured Notes. The 10.875% Notes are scheduled to mature on January 15, 2017, unless redeemed or repurchased in accordance with their terms. We may redeem all or a portion of the 10.875% Notes at any time by paying 100% of the principal amount redeemed, plus a make-whole premium as of, and accrued and unpaid interest to, the date of redemption.

 

To accommodate the January 2013 debt transactions, on January 22, 2013, we entered into (i) a first supplemental indenture to the indenture dated as of March 30, 2012, which governs the 8.50% Secured Notes, and (ii) a consent and third amendment to our senior secured credit agreement.

 

Debt refinancing costs of $359,000 were capitalized and are being amortized over four years or until the maturity date. The amortization expense is included in interest expense.

 

Senior Secured Credit Facility

 

We are party to a revolving credit and security agreement with PNC Bank dated as of September 15, 2011, as amended from time to time (the “Credit Agreement”). On September 22, 2014, we amended the Credit Agreement to reduce the maximum principal amount of the revolving credit facility provided by the Credit Agreement (the “Senior Secured Credit Facility”) from $35,000,000 to $20,000,000, extend the maturity date of the Senior Secured Credit Facility from October 1, 2014 to December 1, 2016, reduce the cash balance we are required to maintain in an account at PNC Bank from $15,000,000 to $2,500,000, and modify the fixed charge coverage covenant by eliminating the requirement for the four fiscal quarters ending September 28, 2014 and changing the measurement periods thereafter for the fixed charge coverage covenant by excluding from such measurement periods all fiscal quarters ended on or prior to September 28, 2014.

 

Our credit agreement with PNC Bank and the indentures governing the 8.50% Secured Notes and the 10.875% Notes each contain certain covenants that, among other things, limit our and our restricted subsidiaries’ ability to incur additional indebtedness; pay dividends on or make distributions in respect of capital stock or make certain other restricted payments or investments; enter into agreements that restrict distributions from restricted subsidiaries; sell or otherwise dispose of assets, including capital stock of restricted subsidiaries; enter into transactions with affiliates; create or incur liens; enter into operating leases; merge, consolidate or sell substantially all of our assets; make capital expenditures; change the nature of our business; and expend the assets or free cash flow of certain subsidiaries. The indentures also limit the amount of our consolidated total assets and free cash flow that can be attributable to subsidiaries that have not guaranteed the 8.50% Secured Notes or, in certain cases, have not pledged their stock to secure the 8.50% Secured Notes.

 

On April 30, 2015, we further amended the Credit Agreement to maintain compliance with the fixed charge coverage covenant thereunder to eliminate the requirement for our quarters ended March 29, 2015, June 28, 2015 and September 27, 2015 and to change the measurement periods starting with our quarter ending December 27, 2015 by excluding from such measurement periods all quarters ended before September 27, 2015. The amendment also implemented an additional earnings before interest, taxes, depreciation and amortization (“EBITDA”) covenant for our quarters ended March 29, 2015, June 28, 2015 and September 27, 2015.

 

On December 10, 2015, we entered into a ninth amendment to our Credit Agreement with PNC Bank. The amendment modified the Credit Agreement to defer application of the fixed charge coverage covenant until December 25, 2016, and impose a minimum EBITDA requirement and a new minimum liability requirement for 2016.

  

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From time to time, we borrow funds under the Senior Secured Credit Facility. As of March 27, 2016, we had no outstanding balance. Our average outstanding balance in the twenty-six weeks ended March 27, 2016 was $110,000. Amounts borrowed under the Senior Secured Credit Facility bear cash interest at a reduced rate equal to, at our election, either (i) PNC Bank’s alternate base rate (as defined in the Credit Agreement) 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.

 

If we are unable to generate sufficient operating results in future quarters, we may not be able to comply with financial covenants in the Credit Agreement in future quarters. If necessary, we intend to negotiate a waiver of any noncompliance or an amendment of the financial covenant specific to the applicable period; however, there is no assurance that a waiver can be obtained. As of March 27, 2016, we were in compliance with the financial covenants set forth in the Credit Agreement.

 

PNC Bank Term Loan

 

On December 23, 2014, we entered into an amendment to our existing senior secured credit facility dated as of September 16, 2011, as previously amended, with PNC Bank as agent and lender.

 

Pursuant to the amendment, a term loan was made to us in the amount of $15,000,000. The covenants in the Credit Agreement also apply to this term loan. The term loan may consist of domestic rate loans, with a per annum interest rate equal to PNC Bank’s alternate base rate (as defined in the Credit Agreement) plus 2.50%, or LIBOR rate loans, with a per annum interest rate equal to 3.50% plus the greater of the LIBOR rate (as defined in the Credit Agreement) or 1.00%, or a combination thereof. As a result, our interest rate for the term loan has been 4.5%. The principal balance of the term loan is payable in quarterly installments of $750,000 on the first day of each calendar quarter, commencing on April 1, 2015, and continuing through January 1, 2020. In the event that the Credit Agreement is not extended beyond December 1, 2016, the balance due on the term loan also will become due on December 1, 2016. Accordingly, the term loan has been classified as current debt on our consolidated balance sheets. Once repaid, amounts borrowed under the term loan may not be reborrowed. As of March 27, 2016, $12,000,000 of the term loan remained outstanding and is classified as current debt in our consolidated balance sheets.

 

Current 8.50% Secured Notes and 10.875% Notes

 

We currently have outstanding $63,931,000 aggregate principal amount of our 8.50% Secured Notes and $12,200,000 aggregate principal amount of our 10.875% Notes, which as of March 27, 2016, were classified as current on our consolidated balance sheets. We currently expect the pending Merger to be completed before the maturity dates of these current debt obligations. However, in the event that the pending Merger is not completed prior to such time, we will evaluate a variety of financing and strategic alternatives to address these debt obligations prior to the maturity dates.

 

(8)COMMITMENTS AND CONTINGENCIES

 

Lease Commitments

 

We have commitments under various capital and operating lease agreements. Assets acquired under capital leases are depreciated over the useful life of the asset.

 

The future minimum lease payments for all capital and operating leases as of March 27, 2016, are as follows:

 

  

Capital

Leases

   Operating
Leases
 
2016  $1,266   $469 
2017   2,480    320 
2018   1,466    249 
2019   652    218 
Thereafter   46    72 
Total future minimum lease payments   5,910    1,328 
Less: Interest   (375)    
Total future minimum lease payments excluding interest  $5,535   $1,328 

 

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Legal Proceedings

 

We and certain users of our products have from time to time received, and may in the future receive, communications from third parties asserting patents against us or our customers which may relate to certain of our manufacturing equipment or products or to products that include our products as a component. In addition, 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 was 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, 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.

 

In November and December 2015, following the announcement of the Merger, four actions were filed by purported shareholders of the company in the United States District Court for the District of Minnesota. The actions are captioned David Erickson v. Hutchinson Technology Incorporated, et al., Case No. 0:15-cv-04261-DSD-LIB, Stephen M. Harnik v. Hutchinson Technology Incorporated, et al., Case No. 0:15-cv-04321, Jesse Hendricks v. Richard J.Penn, et al., Case No. 0:15-cv-04338, and Matthew Ridler and Lori Ridler v. Hutchinson Technology Incorporated, Case No. 0:15-cv-04356-MJD-TNL. The plaintiffs each purport to bring their action as a class action on behalf of the company’s public shareholders. All four complaints name the company and its directors as defendants, and allege that they have violated Sections 14(a) and 20(a) of, and Rule 14a-9 under, the Securities Exchange Act of 1934 by filing a preliminary proxy statement that contains materially incomplete and misleading statements and omissions. The Hendricks complaint also names Parent and Merger Subsidiary as defendants, and includes claims under state law for breach of fiduciary duty, aiding and abetting breach of fiduciary duty, and equitable relief under the Minnesota Business Corporation Act. The Hendricks complaint alleges that the company’s directors breached their fiduciary duties to the company by operating an inadequate sale process, agreeing to a merger with Parent and Merger Subsidiary at an unfair price, and agreeing to deal protection provisions that are unfavorable to the company and its shareholders. All of the federal complaints seek injunctive and equitable relief, including an order enjoining the closing of the Merger until the alleged deficiencies in the preliminary proxy statement have been corrected; damages in an unspecified amount; and an award of plaintiffs’ attorneys’ fees, costs, and disbursements. The defendants have not yet responded to any of the complaints, but intend to move to dismiss the actions. We believe that the actions are without merit, and intend to vigorously defend against all claims asserted.

 

We are a party from time to time to ordinary routine litigation incidental to our business. The outcome of such claims, if, any, is not expected to materially affect our current or future financial position or results of operations.

 

(9)ACCUMULATED OTHER COMPREHENSIVE GAIN (LOSS)

 

Other comprehensive gain (loss) refers to revenue, expenses, gains and losses that are recorded as an element of shareholders’ equity but are excluded from net income. Our other comprehensive gain (loss) is comprised of unrealized gains and losses on foreign translation adjustments.

 

Accumulated other comprehensive gain (loss), net of tax (see Note 13 for a discussion of income taxes), was as follows:

 

   Foreign Currency
Translation
Adjustments
 
Balance as of  September 27, 2015  $(4,309)
Other comprehensive gain   827 
Balance as of March 27, 2016  $(3,482)
      
Balance as of  September 28, 2014  $(543)
Other comprehensive loss   (183)
Balance as of  March 29, 2015  $(726)

 

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(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 or changes in our forecast model estimates could necessitate impairment recognition in future periods for other assets held for use.

 

(11)  SEVERANCE AND SITE CONSOLIDATION EXPENSES

 

A summary of our severance and site consolidation expenses as of March 27, 2016, is as follows:

 

   Severance   Site Consolidation
Expenses
   Total 
Accrual balances, September 28, 2014  $27   $   $27 
Restructuring charges   (19)   178    159 
Cash payments   (8)   (178)   (186)
Accrual balances, December 28, 2014            
                
Accrual balances, December 28, 2015            
Restructuring charges   503        503 
Cash payments   (116)        (116)
Accrual balances, March 27, 2016   387        387 

 

In recent years, we had multiple severance and manufacturing consolidation and restructuring plans in place to support efforts to improve operating results and liquidity through improved utilization of our facilities in both the U.S. and Thailand.

 

In connection with the consolidation of our operations, we incurred site consolidation expenses of $178,000 during the twenty-six weeks ended March 29, 2015. The site consolidation expenses consisted primarily of internal labor and contractors.

 

During the second quarter of 2016, we recorded severance expense of $503,000 related to a reduction of approximately 80 positions in Hutchinson, Minnesota, resulting in part from our ongoing transition of high-volume assembly operations to Thailand. As of March 27, 2016, $387,000 of severance expense remained to be paid during our third quarter of 2016.

 

(12)  OTHER INCOME (EXPENSE)

 

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 income (expense), net” in our condensed consolidated statements of operations. For the thirteen and twenty-six weeks ended March 27, 2016, we recognized a foreign currency gain of $713,000 and $746,000, respectively. For the thirteen and twenty-six weeks ended March 29, 2015, we recognized a foreign currency gain of $139,000 and a foreign currency loss of $501,000, respectively. These were primarily related to U.S. dollar-denominated inter-company liabilities owed to us by our Thai subsidiary.

 

(13)  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.

 

 13 

 

 

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 27, 2015, we had a valuation allowance of $239,912,000. We assess whether valuation allowances should be established against our 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. Our current or previous losses are given more weight than our future outlook. 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 was 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 benefit for the thirteen weeks ended March 27, 2016, was $10,000, compared to the income tax provision of $32,000 for the twenty-six weeks ended March 29, 2015. The income tax benefit for the twenty-six weeks ended March 27, 2016, was $613,000, compared to the income tax benefit of $113,000 for the twenty-six weeks ended March 29, 2015. For the twenty-six weeks ended March 27, 2016, the net benefit of $613,000 was made up of credits for the expected future refunds of previously paid U.S. Federal Alternative Minimum Tax, as provided by the Protecting Americans from Tax Hike legislation enacted on December 18, 2015, offset primarily by various foreign withholding and income taxes we incur. For the twenty-six weeks ended March 29, 2015, we recognized a benefit of $113,000, as a result of credits for the expected refund of previously paid U.S. Federal Alternative Minimum Tax, offset primarily by various foreign withholding and income taxes.

 

(14)  STOCK-BASED COMPENSATION

 

Our 2011 Equity Incentive Plan has been approved by shareholders and 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). Under the equity incentive plans, stock options have been granted to employees, including our officers, and to our 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 administers the plans. Options granted under the plans prior to November 2005 generally were exercisable one year from the date of grant. Options granted under the plans from November 2005 to October 2011 are exercisable two to three years from the date of grant. Options granted under the plans since November 2011 are exercisable one to three years from the date of grant.

 

Under our equity incentive plan, we also have issued 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 RSUs on the date of issuance. Upon vesting, RSUs convert to shares in accordance with the terms of the equity incentive plan under which they were issued.

 

We recorded stock-based compensation expense related to our stock options, RSUs and common stock, included in selling, general and administrative expenses, of $636,000 and $661,000 for the twenty-six weeks ended March 27, 2016, and March 29, 2015, respectively. As of March 27, 2016, $1,477,000 of unrecognized compensation expense related to non-vested awards is expected to be recognized over a weighted-average period of approximately 15 months.

 

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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 twenty-six weeks ended March 29, 2015, was $2.34. Pursuant to the terms of the Merger Agreement, there were no options granted during the twenty-six weeks ended March 27, 2016. 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:

 

   Twenty-Six
Weeks Ended
 
   March 29, 2015 
Risk-free interest rate   2.3%
Expected volatility   80.0%
Expected life (in years)   8.0 
Dividend yield    

 

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 twenty-six weeks ended March 27, 2016, are summarized as follows:

 

   Number of Shares  

Weighted-Average

Exercise Price ($)

  

Weighted-Average

Remaining

Contractual

Life (yrs.)

 
Outstanding at September 27, 2015   3,338,717    9.52    4.2 
Granted             
Exercised   (18,767)   3.02      
Expired/Canceled   (214,885)   25.24      
Outstanding at March 27, 2016   3,105,065    7.00    4.9 
Options exercisable at March 27, 2016   2,745,062    7.48    4.4 

 

The aggregate intrinsic value at March 27, 2016, of our stock options (the amount by which the market price of the stock on the date of exercise exceeded the exercise price of the option) outstanding was $1,999,000. The aggregate intrinsic value of our stock options exercisable at March 27, 2016, was $1,871,000.

 

The following table summarizes the status of options that remain subject to vesting:

 

   Number of Shares  

Weighted-

Average

Grant Date Fair

Value ($)

  

Weighted-

Average

Remaining

Contractual

Life (yrs.)

 
Non-vested at September 27, 2015   706,020    2.22    8.6 
Granted             
Vested   (346,016)   2.04      
Canceled             
Non-vested at March 27, 2016   360,004    2.39    8.4 

 

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

Price ($)

   Number
Exercisable
  

Weighted-Average

Exercise Price ($)

 
1.45 - 3.00   910,720    6.8    2.12    807,385    2.01 
3.01 - 5.00   1,191,827    5.5    3.18    935,159    3.11 
5.01 - 10.00   490,383    3.7    7.33    489,383    7.33 
10.01 - 37.95   513,135    1.2    24.22    513,135    24.22 
Total   3,105,065    4.9    7.00    2,745,062    7.48 

 

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RSU transactions during the twenty-six weeks ended March 27, 2016, are summarized as follows:

 

   Number of RSUs  

Weighted-
Average

Grant Date Fair

Value ($)

 
Non-vested at September 27, 2015   691,899    2.90 
Granted        
Vested   (356,103)   2.53 
Canceled   (1,132)   3.32 
Non-vested at March 27, 2016   334,664    3.30 

 

(15)  LOSS PER SHARE

 

Basic loss per share is computed by dividing net loss by the weighted-average number of common shares outstanding during the year. Diluted loss per share identifies the dilutive effect of potential common shares using net loss available to common shareholders and is computed using the treasury stock method for outstanding stock options and the if-converted method for the 8.50% Convertible Notes and the 8.50% New Convertible Notes.

 

A reconciliation of these amounts is as follows:

 

   Thirteen Weeks Ended   Twenty-Six Weeks Ended 
   March 27, 2016   March 29, 2015   March 27, 2016   March 29, 2015 
Net loss  $(9,628)  $(9,703)  $(14,925)  $(19,602)
                     
Weighted-average common shares outstanding   33,905    33,270    33,790    31,909 
Dilutive potential common shares                
Weighted-average common and diluted shares outstanding   33,905    33,270    33,790    31,909 
                     
Basic loss per share  $(0.28)  $(0.29)  $(0.44)  $(0.61)
                     
Diluted loss per share  $(0.28)  $(0.29)  $(0.44)  $(0.61)

 

Diluted loss per share for the thirteen weeks ended March 27, 2016, excludes potential common shares of 365,000 using the treasury stock method, and 10,000,000 using the if-converted method for the 8.50% New Convertible Notes, as they were anti-dilutive. Diluted loss per share for the thirteen weeks ended March 29, 2015, excludes potential common shares of 359,000 using the treasury stock method, and 10,865,000 using the if-converted method for the 8.50% Convertible Notes, as they were anti-dilutive. Diluted loss per share for the twenty-six weeks ended March 27, 2016, excludes potential common shares of 253,000 using the treasury stock method, and 10,000,000 using the if-converted method for the 8.50% New Convertible Notes, as they were anti-dilutive. Diluted loss per share for the twenty-six weeks ended March 29, 2015, excludes potential common shares of 380,000 using the treasury stock method, and 11,429,000 using the if-converted method for the 8.50% Convertible Notes and the 8.50% New Convertible Notes, as they were anti-dilutive.

 

As discussed in Note 7, on October 23, 2014, we issued 2,500,000 shares of common stock and warrants to purchase 2,500,000 shares of our common stock as part of an exchange transaction. On November 25, 2014, 1,250,000 warrants were exercised, which resulted in the issuance of 1,246,493 shares of common stock. On January 15, 2015, the remaining 1,250,000 warrants were exercised, which resulted in the issuance of 1,246,428 shares of common stock. No warrants remain outstanding.

 

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(16)  FAIR VALUE MEASUREMENTS

 

Financial assets and liabilities that are remeasured and reported at fair value at each reporting period are classified and disclosed in one of the following three levels:

 

Level 1 –   Quoted prices in active markets that are unadjusted and accessible at the measurement date for identical, unrestricted assets or liabilities;
     
Level 2 –   Quoted prices for identical assets and liabilities in markets that are inactive; quoted prices for similar assets and liabilities in active markets or financial instruments for which significant inputs are observable, either directly or indirectly; or
     
Level 3 –     Inputs that are unobservable for the asset or liability and that are significant to the fair value of the assets or liabilities.

 

The following tables present our assets that are measured at fair value on a recurring basis at March 27, 2016, and September 27, 2015:

 

   Fair Value Measurements at March 27, 2016 
   Level 1   Level 2   Level 3   Total 
Assets:                    
Available-for-sale securities  $506   $   $   $506 

 

   Fair Value Measurements at September 27, 2015 
   Level 1   Level 2   Level 3   Total 
Assets:                    
Available-for-sale securities  $965   $   $   $965 

 

Available-for-Sale Securities

 

Our available-for-sale securities are comprised of United States government debt securities. The fair value is based on quoted market prices in active markets.

 

Debt

 

The fair value of our 8.50% Secured Notes was determined based on the closing market price of the Notes as of the end of the fiscal quarter. The fair value of the 8.50% Secured Notes was classified in Level 1 of the fair value hierarchy.

 

Our 10.875% Notes have not experienced trading activity; therefore the fair value estimate was based on the closing market prices of comparable debt as of the end of the fiscal quarter. Our 8.50% New Convertible Notes have not experienced trading activity; therefore the fair value estimate was based on market variables combined with variables specific to the 8.50% New Convertible Notes to determine the theoretical value. The fair values of the 10.875% Notes and the 8.50% New Convertible Notes were classified in Level 2 of the fair value hierarchy.

 

The fair value of the PNC Bank credit facility and term loan’s carrying values are a reasonable estimate of fair value because of their short-term nature. The fair value measurement for the credit facility and term loan was classified in Level 2 of the fair value hierarchy.

 

The estimated fair values of our debt were as follows on each of the indicated dates:

 

   March 27, 2016   September 27, 2015 
  

Carrying

Amount

   Fair Value  

Carrying

Amount

   Fair Value 
8.50% Secured Notes  $63,931   $64,011   $63,931   $64,011 
10.875% Notes   12,200    12,972    12,200    12,972 
8.50% New Convertible Notes   37,500    51,184    37,500    32,404 
PNC Bank term loan   12,000    12,000    13,500    13,500 

 

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Other

 

Our financial instruments, other than those presented in the disclosures above, include accounts receivable, accounts payable, and other payables. The carrying value of accounts receivable, accounts payable, and other payables approximate fair value because of the short-term nature of these instruments. The fair values of these items were classified in Level 1 of the fair value hierarchy.

 

(17)  SUBSEQUENT EVENTS

 

We evaluated subsequent events after the balance sheet date through the date the condensed 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 condensed consolidated financial statements.

  

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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 “2016” mean our fiscal year ending September 25, 2016, and references to “2015” mean our fiscal year ended September 27, 2015.

 

This 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 27, 2015.

 

GENERAL

 

Our Company

 

We are a global supplier of critical precision component technologies. As a key supplier of suspension assemblies for disk drives, we help customers improve overall disk drive performance and meet the demands of an ever-expanding digital universe. Through our new business development initiatives, we focus on leveraging our unique precision manufacturing capabilities in new markets to improve product performance, reduce size, lower cost and reduce time to market.

 

Entry into Merger Agreement

 

On November 1, 2015, we entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Headway Technologies, Inc. (“Parent”) and Hydra Merger Sub, Inc., a wholly owned subsidiary of Parent (“Merger Subsidiary”). Pursuant to the Merger Agreement, Merger Subsidiary will merge with and into our company and our company will continue as the surviving corporation and as a wholly owned subsidiary of Parent (the “Merger”). Parent and Merger Subsidiary are each beneficially owned by TDK Corporation, a Japanese electronics company (“TDK”).

 

Pursuant to the Merger Agreement, at the effective time of the Merger, each issued and outstanding share of our capital stock (other than shares held (1) by Parent or Merger Subsidiary or any direct or indirect subsidiary of our company or Parent, and (2) by shareholders who have perfected and not withdrawn a demand for dissenters’ rights or who have not otherwise lost dissenters’ rights under Minnesota law with respect to such shares), will be cancelled and extinguished and automatically converted into the right to receive:

 

$3.62 in cash, without interest, plus

 

up to $0.38 in cash, without interest (the “Additional Consideration”).

 

The Additional Consideration will be determined prior to consummation of the Merger and will be an amount equal to $0.0108 per share for each $500,000 of our Net Cash (as defined in the Merger Agreement) over $17,500,000 as of a fiscal period end within 45 days prior to the consummation of the Merger. We cannot predict the amount of Additional Consideration, if any, that will be payable to shareholders. As of March 27, 2016, our Net Cash was $51,283,000.

 

On January 28, 2016, at a special meeting of our shareholders, the Merger Agreement, and the Merger pursuant to that agreement, was approved by our shareholders. We currently expect the transactions desribed in the Merger Agreement to be completed during the second calendar quarter of 2016, subject to the termination or expiration of the waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, and the satisfaction or waiver of the other closing conditions specified in the Merger Agreement.

 

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General Business

 

The majority of our revenue is derived from the sale of suspension assemblies to a small number of manufacturers. Suspension assemblies are precise electro-mechanical components that hold a disk drive’s read/write head at microscopic distances above the drive’s disks.

 

Sales to our three largest customers constituted 95% of net sales for the twenty-six weeks ended March 27, 2016, as shown in the following table.

 

Customer  Percentage of Sales 
Western Digital Corporation   59%
Seagate Technology, LLC   33%
SAE Magnetics, Ltd/TDK   3%

 

Portions of our revenue may be indirectly attributable to large manufacturers of disk drives, such as Western Digital Corporation, Seagate Technology, LLC and Toshiba Corporation, which may purchase read/write head assemblies that utilize our suspension assemblies from SAE Magnetics, Ltd/TDK. 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 any one disk drive industry customer.

 

The following table sets forth our recent quarterly suspension assembly shipment quantities in millions for the periods indicated:

 

Suspension Assembly Shipments by Quarter

   2015   2016 
   First   Second   Third   Fourth   First   Second 
Suspension assembly shipment quantities   122    101    87    105    107    85 

 

Our suspension assembly shipments totaled 107 million in the first quarter of 2016, up 1% compared with 105 million in the fourth quarter of 2015. Demand weakened near the end of the first quarter of 2016. In the second quarter of 2016, suspension assembly shipments decreased 12% to 85 million. The decrease was primarily due to a decline in disk drive demand in the seasonally slower March quarter.

 

Average selling price remained at $0.57 for the second quarter of 2016, flat with the first quarter of 2016 and the fourth quarter of 2015.

 

Gross profit in the second quarter of 2016 was $5,712,000, or 11% of net sales, compared with $11,721,000 in the first quarter of 2016, or 18% of net sales. Gross profit in the first quarter of 2016 benefited from our continued efforts to reduce costs and a favorable product mix including suspensions using lower cost, internally-produced TSA+ flexures. Gross profit in the second quarter of 2016 declined as a result of lower volume in the quarter, resulting in lower leverage of our capacity and fixed costs.

 

As part of our new business development efforts, we have been developing an optical image stabilization (“OIS”) actuator for smartphone cameras. Our new shape memory alloy (“SMA”) OIS actuator is currently undergoing testing and evaluation in prototype camera modules with smartphone makers. The results from performance and reliability tests continue to be encouraging and we are continuing to work with companies in the smartphone camera supply chain on evaluations of our SMA OIS actuator.

 

During the first and second quarters of 2016, all of the costs of our SMA OIS initiative were classified as research and development expenses.

 

Outlook

 

We expect demand to remain soft, with suspension assembly shipments in the third quarter of 2016 to range from 80 million to 90 million. Our average selling price is expected to be flat to up slightly, depending on the mix of products shipped. Gross profit is expected to be about flat with the second quarter of 2016. We are focusing on containing costs and maximizing our cash balance as we work to conclude the Merger.

 

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RESULTS OF OPERATIONS

 

Thirteen Weeks Ended March 27, 2016 vs. Thirteen Weeks Ended March 29, 2015

 

Net sales for the thirteen weeks ended March 27, 2016, were $54,160,000, compared to $62,359,000 for the thirteen weeks ended March 29, 2015, a decrease of $8,199,000. Suspension assembly sales decreased $11,239,000 for the thirteen weeks ended March 27, 2016, primarily as a result of lower volume and a decrease in average selling price. This was partially offset by increased net sales from our new business development initiatives and disk drive industry-related engineering services.

 

Gross profit for the thirteen weeks ended March 27, 2016, was $5,712,000, compared to gross profit of $6,262,000 for the thirteen weeks ended March 29, 2015, a decrease of $550,000. Gross profit was 11% of net sales for the thirteen weeks ended March 27, 2016, compared to 10% of net sales for the thirteen weeks ended March 29, 2015. The decrease in gross profit was primarily due to lower net sales in the quarter.

 

Research and development expenses for the thirteen weeks ended March 27, 2016, were $5,602,000 compared to $7,097,000 for the thirteen weeks ended March 29, 2015, a decrease of $1,495,000. The decrease was primarily due to lower SMA OIS actuator activity.

 

During the thirteen weeks ended March 27, 2016, we incurred $938,000 of expenses related to the pending Merger with TDK.

 

During the thirteen weeks ended March 27, 2016, we recorded severance expense of $503,000 related to a reduction of approximately 80 positions in Hutchinson, Minnesota, resulting in part from our ongoing transition of high-volume assembly operations to Thailand. As of March 27, 2016, $387,000 of severance expense remained to be paid and will be paid during our third quarter of 2016.

 

Other income (expense), net, for the thirteen weeks ended March 27, 2016, included a foreign currency gain of $713,000, compared to a foreign currency gain of $139,000 for the thirteen weeks ended March 29, 2015. The foreign currency activity was primarily related to U.S. dollar-denominated inter-company liabilities owed to us by our Thai subsidiary.

 

Twenty-Six Weeks Ended March 27, 2016 vs. Twenty-Six Weeks Ended March 29, 2015

 

Net sales for the twenty-six weeks ended March 27, 2016, were $118,087,000, compared to $134,782,000 for the twenty-six weeks ended March 29, 2015, a decrease of $16,695,000. Suspension assembly sales decreased $22,609,000 for the twenty-six weeks ended March 27, 2016, primarily as a result of lower volume and a decrease in average selling price. This was partially offset by increased net sales from our new business development initiatives and disk drive industry-related engineering services.

 

Gross profit for the twenty-six weeks ended March 27, 2016, was $17,433,000, compared to gross profit of $17,726,000 for the twenty-six weeks ended March 29, 2015, a decrease of $293,000. Gross profit as a percent of net sales was 15% and 13% for the twenty-six weeks ended March 27, 2016, and March 29, 2015, respectively. The decrease in gross profit was primarily due to lower net sales in the first two quarters.

 

Research and development expenses for the twenty-six weeks ended March 27, 2016, were $11,459,000, compared to $13,139,000 for the twenty-six weeks ended March 29, 2015, a decrease of $1,680,000. The decrease was primarily due to lower SMA OIS actuator activity.

 

During the twenty-six weeks ended March 27, 2016, we incurred $4,375,000 of expenses related to the pending Merger with TDK.

 

During the twenty-six weeks ended March 27, 2016, we recorded severance expense of $503,000 related to a reduction of approximately 80 positions in Hutchinson, Minnesota, resulting in part from our ongoing transition of high-volume assembly operations to Thailand. As of March 27, 2016, $387,000 of severance expense remained to be paid and will be paid during our third quarter of 2016.

 

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During the twenty-six weeks ended March 29, 2015, as part of our continued focus on overall cost reductions, we recognized $159,000 of severance and site consolidation expenses. The site consolidation expenses were primarily supplies and internal labor related to the consolidation.

 

Other income (expense), net, for the twenty-six weeks ended March 27, 2016, included a foreign currency gain of $746,000, compared to a foreign currency loss of $501,000 for the twenty-six weeks ended March 29, 2015. The foreign currency activity was primarily related to U.S. dollar-denominated inter-company liabilities owed to us by our Thai subsidiary.

 

On October 23, 2014, we entered into an agreement providing for the private exchange of $15,000,000 aggregate principal amount of our 8.50% Senior Secured Second Lien Notes due 2017 (the “8.50% Secured Notes”) held by a certain holder for 2,500,000 shares of our common stock and warrants to purchase an additional 2,500,000 shares of our common stock on a cashless basis at an exercise price of $0.01 per share. The fair value of the common stock and warrants was recorded in additional paid-in capital in the amount of $17,388,000. Applying debt extinguishment accounting, we recorded a loss on extinguishment of debt of $4,318,000 in our first quarter of 2015. The loss also included $1,232,000 of broker, legal and accounting fees related to the exchange transaction.

 

Interest expense for the twenty-six weeks ended March 27, 2016, was $6,642,000, compared to $7,723,000 for the twenty-six weeks ended March 29, 2015, a decrease of $1,081,000. The decrease in interest expense was primarily due to a reduction in our outstanding debt amounts.

 

The income tax benefit for the twenty-six weeks ended March 27, 2016, was $613,000, compared to the income tax benefit of $113,000 for the twenty-six weeks ended March 29, 2015. For the twenty-six weeks ended March 27, 2016, the net benefit of $613,000 was made up of credits for the expected future refunds of previously paid U.S. Federal Alternative Minimum Tax, offset primarily by various foreign withholding and income taxes we incur. For the twenty-six weeks ended March 29, 2015, we recognized a benefit of $113,000, as a result of credits for the expected refund of previously paid U.S. Federal Alternative Minimum Tax, offset primarily by various foreign withholding and income taxes.

 

Liquidity and Capital Resources

 

We continue to incur net losses which have dampened our ability to generate cash from operations. We currently believe that our cash and cash equivalents, restricted cash, short-term investments, cash flow from operations, credit facility and term loan, bill of exchange transactions, and additional financing, if needed and as available given contractual restrictions and current credit market conditions, will be sufficient to meet our forecasted operating expenses, debt service and capital expenditures through 2016. We currently have outstanding $63,931,000 aggregate principal amount of our 8.50% Secured Notes and $12,200,000 aggregate principal amount of our 10.875% Senior Secured Second Lien Notes due 2017 (the “10.875% Notes”), which as of March 27, 2016, were classified as current on our consolidated balance sheets. We currently expect the pending Merger to be completed before the maturity dates of our current debt obligations. However, in the event that the pending Merger is not completed prior to such time, we will evaluate a variety of financing and strategic alternatives to address these debt obligations prior to the maturity dates. We also have outstanding $37,500,000 aggregate principal amount of our 8.50% Convertible Senior Notes due 2019 (the “8.50% New Convertible Notes”). Our 8.50% New Convertible Notes mature on October 31, 2019.

 

During the first quarter of 2015, we obtained a $15,000,000 term loan from PNC Bank, National Association (“PNC Bank”). The principal balance of the term loan is payable in quarterly installments of $750,000 on the first day of each calendar quarter, commencing on April 1, 2015, and continuing through January 1, 2020. As of March 27, 2016, $12,000,000 of the term loan remained outstanding and is classified as current debt in our consolidated balance sheets. See below for additional details.

 

In October 2014, we sold $37,500,000 aggregate principal amount of 8.50% New Convertible Notes. We also exchanged $15,000,000 aggregate principal amount of 8.50% Secured Notes for 2,500,000 shares of common stock and warrants to purchase an additional 2,500,000 shares, of which 1,250,000 warrants were exercised in November 2014 and the remaining 1,250,000 were exercised in January 2015. On January 15, 2015, we completed a redemption of the then outstanding $39,822,000 of 8.50% Convertible Senior Notes due 2026 (the “8.50% Convertible Notes”).

 

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The Merger Agreement, our credit agreement with PNC Bank and the indentures governing the 8.50% Secured Notes and the 10.875% Notes each contain certain covenants that, among other things, limit our and our restricted subsidiaries’ ability to: incur additional indebtedness; pay dividends on or make distributions in respect of capital stock or make certain other restricted payments or investments; enter into agreements that restrict distributions from restricted subsidiaries; sell or otherwise dispose of assets, including capital stock of restricted subsidiaries; enter into transactions with affiliates; create or incur liens; enter into operating leases; merge, consolidate or sell substantially all of our assets; make capital expenditures; change the nature of our business; and expend the assets or free cash flow of certain subsidiaries. The indentures also limit the amount of our consolidated total assets and free cash flow that can be attributable to subsidiaries that have not guaranteed the 8.50% Secured Notes or, in certain cases, have not pledged their stock to secure the 8.50% Secured Notes.

 

Subject to applicable contractual limitations, 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 and historical performance and financial results, contractual restrictions 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. We have a facility in Hutchinson, Minnesota currently offered for sale or lease, which may provide an additional source of cash.

 

Our principal sources of liquidity are cash and cash equivalents, short-term investments, cash flow from operations, our senior secured credit facility and term loan, leasing, bill of exchange transactions, and additional financing capacity, if needed and as available given contractual restrictions, current credit market conditions and our operating performance. Our cash and cash equivalents increased from $39,454,000 at September 27, 2015, to $47,434,000 at March 27, 2016. Our short-term investments decreased from $965,000 at September 27, 2015, to $506,000 at March 27, 2016 and are restricted in use. In total, our cash and cash equivalents and short-term investments increased by $7,521,000.

 

Cash Provided by Operating Activities

 

Cash provided by operating activities for the twenty-six weeks ended March 27, 2016, was $12,633,000, compared to $18,697,000 for the twenty-six weeks ended March 29, 2015. The decrease in operating cash flows was primarily due to changes in working capital.

 

Cash Used for Investing Activities

 

For the twenty-six weeks ended March 27, 2016, cash used for investing activities was $3,384,000, compared to $13,071,000 for the twenty-six weeks ended March 29, 2015. The cash used for the twenty-six weeks ended March 27, 2016, was primarily due to $4,582,000 of capital expenditures for product tooling and manufacturing equipment for new process technology and capability improvements, partially offset by $459,000 from the sale of marketable securities, $444,000 of equipment sale proceeds and $263,000 of equipment sale/leaseback transactions in Thailand. The cash used for the twenty-six weeks ended March 29, 2015, was primarily due to $14,505,000 of capital expenditures for manufacturing equipment for new process technology and capability improvements and product tooling, partially offset by $2,408,000 of equipment sale/leaseback transactions in Thailand.

 

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. We anticipate capital expenditures will be approximately $10,000,000 in 2016, primarily for product tooling and manufacturing equipment for new process technology and capability improvements, such as dual-stage actuated suspension assemblies and SMA OIS actuators. Financing of these capital expenditures will be principally from operations, our current cash, cash equivalents, our senior secured credit facility, leasing, or additional financing, if available given current credit market conditions and our financial performance.

  

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Cash Used for Financing Activities

 

Cash used for financing activities for the twenty-six weeks ended March 27, 2016, was $2,755,000, compared to cash used for financing activities of $1,083,000 for the twenty-six weeks ended March 29, 2015. The cash used in the twenty-six weeks ended March 27, 2016, was primarily due to $1,500,000 in repayments of our PNC Bank term loan and $1,288,000 of capital lease payments. The cash used for financing activities for the twenty-six weeks ended March 29, 2015, was primarily due to the redemption of the then outstanding $39,822,000 aggregate principal amount of 8.50% Convertible Notes, $9,533,000 in repayments of our senior secured credit facility, $3,175,000 of debt refinancing costs, and $1,113,000 of capital lease payments, partially offset by $37,500,000 in proceeds from the private placement of our 8.50% New Convertible Notes and $15,000,000 in proceeds from the PNC term loan.

 

Bill of Exchange

 

During the twenty-six weeks ended March 27, 2016, we entered into multiple independent bill of exchange discounting transactions under an uncommitted facility with Hongkong and Shanghai Banking Corporation Limited, Bangkok Branch (“HSBC”), under which our Thai subsidiary, Hutchinson Technology Operations (Thailand) Co. Ltd., sold, without recourse, an aggregate of $59,884,000 of its accounts receivable to HSBC and was paid 100% of the face value of the accounts receivable, less interest expense of LIBOR plus 1.75%. The balance remaining to be paid to our Thai subsidiary from HSBC as of September 27, 2015 was $1,228,000, included within the line item “Other receivables” on our consolidated balance sheet. As of March 27, 2016, there was no outstanding balance to be paid to our Thai subsidiary from HSBC.

 

We also entered into multiple independent bill of exchange discounting transactions under an uncommitted facility with Bank of America, N.A., Bangkok Branch (“Bank of America”), under which our Thai subsidiary can sell, without recourse, approximately 90% of its accounts receivable to Bank of America and be paid the full face value of that accounts receivable sold, less interest expense of LIBOR plus 1.50%. The approximately 10% remainder due on the receivable is included in our trade receivables balance until paid. During the twenty-six weeks ended March 27, 2016, our Thai subsidiary sold $31,279,000 of its accounts receivable to Bank of America, which has been paid in full.

 

Debt

 

October 2014 Financing Transactions - On October 23, 2014, we issued $37,500,000 aggregate principal amount of 8.50% New Convertible Notes. The 8.50% New Convertible Notes bear interest at a rate of 8.50% per annum, payable semi-annually in arrears on April 30 and October 31 of each year, beginning April 30, 2015. The 8.50% New Convertible Notes mature on October 31, 2019. Each $1,000 principal amount of the 8.50% New Convertible Notes is convertible into 266.6667 shares of our common stock (which is equal to an initial conversion price of approximately $3.75 per share), subject to adjustment under certain circumstances. The 8.50% New Convertible Notes rank pari passu in right of payment with all existing and future senior indebtedness of our company. Certain beneficial holders of the 8.50% New Convertible Notes had the right to require us to repurchase for cash up to $7,500,000 aggregate principal amount of the 8.50% New Convertible Notes, plus accrued and unpaid interest, if any, during the 120-day period commencing on October 23, 2014. Accordingly, $7,500,000 of the proceeds to us from the sale of the 8.50% New Convertible Notes were escrowed until the put right expired on February 20, 2015. Additionally, we were required to escrow at least $35,000,000 of cash that was restricted solely for the repayment, repurchase, redemption, defeasance or other acquisition for value of our 8.50% Convertible Notes, plus accrued but unpaid interest thereon. We capitalized debt financing costs of $1,652,000 which are being amortized over five years or until the maturity date. The amortization expense is included in interest expense. On January 15, 2015, we completed a redemption of the then outstanding $39,822,000 aggregate principal amount of 8.50% Convertible Notes. To fund this, we used the escrowed $35,000,000 and our existing cash.

 

On October 23, 2014, we entered into an agreement providing for the private exchange of $15,000,000 aggregate principal amount of our 8.50% Secured Notes held by a certain holder for 2,500,000 shares of our common stock and warrants to purchase an additional 2,500,000 shares of our common stock on a cashless basis at an exercise price of $0.01 per share. On November 25, 2014, 1,250,000 warrants were exercised, which resulted in the issuance of 1,246,493 shares of common stock. On January 15, 2015, the remaining 1,250,000 warrants were exercised, which resulted in the issuance of 1,246,428 shares of common stock and no warrants remain outstanding. The fair value of the common stock and warrants was recorded in additional paid-in capital in the amount of $17,388,000. Applying debt extinguishment accounting, we recorded a loss on extinguishment of debt of $4,318,000 in our first quarter of 2015. The loss also included $1,232,000 of broker, legal and accounting fees related to the exchange transaction.

 

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To accommodate the October 2014 debt transactions described above, on October 20, 2014, we entered into supplemental indentures relating to our 8.50% Secured Notes and to our 10.875% Notes. Additionally, on October 20, 2014, we entered into an amendment to our senior secured credit agreement, dated as of September 16, 2011, as previously amended, with PNC Bank. Under the amendment, PNC Bank consented to the transactions contemplated by the 8.50% New Convertible Notes and the exchange transaction, referred to above.

 

Senior Secured Credit Facility - We are party to a revolving credit and security agreement with PNC Bank dated as of September 15, 2011, as amended from time to time (the “Credit Agreement”). On September 22, 2014, we amended the Credit Agreement to reduce the maximum principal amount of the revolving credit facility provided by the Credit Agreement (the “Senior Secured Credit Facility”) from $35,000,000 to $20,000,000, extend the maturity date of the Senior Secured Credit Facility from October 1, 2014 to December 1, 2016, reduce the cash balance we are required to maintain in an account at PNC Bank from $15,000,000 to $2,500,000, and modify the fixed charge coverage covenant by eliminating the requirement for the four fiscal quarters ended September 28, 2014 and changing the measurement periods thereafter for the fixed charge coverage covenant by excluding from such measurement periods all fiscal quarters ended on or prior to September 28, 2014.

 

In April 2015, we further amended the Credit Agreement to maintain compliance with the fixed charge coverage covenant thereunder to eliminate the requirement for our quarters ended March 29, 2015, June 28, 2015 and September 27, 2015 and to change the measurement periods starting with our quarter ending December 27, 2015 by excluding from such measurement periods all quarters ended before September 27, 2015. The amendment also implemented an additional earnings before interest, taxes, and depreciation and amortization (“EBITDA”) covenant for our quarters ended March 29, 2015, June 28, 2015 and September 27, 2015.

 

On December 10, 2015, we entered into a ninth amendment to our Credit Agreement with PNC Bank. The amendment modified the Credit Agreement to defer application of the fixed charge coverage covenant until December 25, 2016, and impose a minimum EBITDA requirement and a new minimum liability requirement for 2016.

 

From time to time, we borrow funds under the Senior Secured Credit Facility. As of March 27, 2016, we had no outstanding borrowings. Our average outstanding balance in the twenty-six weeks ended March 27, 2016, was $110,000. Amounts borrowed under the Senior Secured Credit Facility bear cash interest at a reduced rate equal to, at our election, either (i) PNC Bank’s alternate base rate (as defined in the Credit Agreement) 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.

 

If we are unable to generate sufficient operating results in future quarters, we may not be able to comply with financial covenants in the Credit Agreement in future quarters. If necessary, we intend to negotiate a waiver of any noncompliance or an amendment of the financial covenant specific to the applicable period; however, there is no assurance that a waiver can be obtained. As of March 27, 2016, we were in compliance with the financial covenants set forth in the Credit Agreement.

 

PNC Bank Term Loan - On December 23, 2014, we amended the Credit Agreement to establish a $15,000,000 term loan with PNC. The covenants in the Credit Agreement also apply to this term loan. The amount borrowed under the term loan may consist of domestic rate loans, with a per annum interest rate equal to PNC Bank’s alternate base rate (as defined in the Credit Agreement) plus 2.50%, or LIBOR rate loans, with a per annum interest rate equal to 3.50% plus the greater of the LIBOR rate (as defined in the Credit Agreement) or 1.00%, or a combination thereof. As a result, our interest rate for the term loan has been 4.5%. The principal balance of the term loan is payable in quarterly installments of $750,000 on the first day of each calendar quarter, commencing on April 1, 2015, and continuing through January 1, 2020. In the event that the Credit Agreement is not extended beyond December 1, 2016, the balance due on the term loan also will become due on December 1, 2016. Accordingly, the term loan has been classified as current debt on our consolidated balance sheet. Once repaid, amounts borrowed under the term loan may not be reborrowed. As of March 27, 2016, $12,000,000 of the term loan remained outstanding.

 

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Capital Leases - As of March 27, 2016, we have remaining capital lease payment obligations of $5,535,000. We expect to enter into more leasing transactions throughout 2016.

 

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 27, 2015.

 

RECENT ACCOUNTING PRONOUNCEMENTS

 

In May 2014, the Financial Accounting Standards Board (the “FASB”) issued authoritative guidance related to revenue from contracts with customers. The guidance outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. It also requires entities to disclose both quantitative and qualitative information that enable financial statements users to understand the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. In July 2015, the FASB confirmed a one-year deferral of the effective date of the new revenue standard and allowed early adoption as of the original effective date. The updated guidance will be effective for our first quarter of 2019. We are in the process of assessing the impact, if any, this guidance will have on our consolidated financial statements.

 

In April 2015, the FASB issued authoritative guidance related to simplifying the presentation of debt issuance costs, which requires debt issuance costs to be presented in the balance sheet as a direct deduction from the associated debt liability. The standard is effective for our first quarter of 2017. Early adoption is permitted for financial statements that have not been previously issued. The new guidance will be applied on a retrospective basis. We are in the process of assessing the impact this guidance will have on our consolidated financial statements.

 

In February of 2016, the FASB issued authoritative guidance related to leases, which requires all leases to be recognized in the statement of financial position. The standard is effective for our first quarter of 2019. Early adoption is permitted for financial statements that have not been previously issued. The new guidance will be applied on a retrospective basis. We are in the process of assessing the impact, if any, this guidance will have on our consolidated financial statements.

 

In March 2016, the FASB issued authoritative guidance related to stock compensation. This guidance is intended to simplify several aspects of the accounting for share-based payment transactions, including, the accounting for income taxes, forfeitures and statutory tax withholding requirements, as well as classification in the statement of cash flows. The standard is effective for our first quarter of 2017. Early adoption is permitted for financial statements that have not been previously issued. We are in the process of assessing the impact, if any, this guidance will have on our consolidated financial statements.

 

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FORWARD-LOOKING STATEMENTS

 

Statements contained in this Quarterly Report on Form 10-Q that are not statements of historical fact should be considered forward-looking statements within the meaning of the safe harbor provisions of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Forward-looking statements include, but are not limited to, statements regarding the following: the pending merger transaction, demand for and shipments of our products, our market position, technology, development, program ramps, product mix, pricing, production capabilities and volumes, product costs, inventory levels, our operations in Thailand and the United States, site consolidation efforts, capital spending, repayment of debt, additional liquidity, operating expenses, cost reductions, market adoption and our production of optical image stabilization actuators and our business model, operating performance financial results. Words such as “believe,” “anticipate,” “expect,” “intend,” “estimate,” “approximate,” “plan,” “goal” 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 27, 2015. 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 latest 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 27, 2015.

 

As of March 27, 2016, we had $113,631,000 carrying value of fixed rate debt which had a fair market value of approximately $128,167,000. We used trading activity to determine the fair market value of the 8.50% Secured Notes. The 10.875% Notes and the 8.50% New Convertible Notes have not had trading activity, therefore the fair market value estimate for these notes was based on the closing market price of comparable debt as of the end of the fiscal quarter.

 

As of September 27, 2015 we had no outstanding borrowings under our Senior Secured Credit Facility. Such borrowings, if any, are eligible to bear cash interest at a reduced rate equal to, at our election, either (i) PNC Bank’s alternate base rate (as defined in the Credit Agreement) 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 amount borrowed under the PNC Bank term loan may consist of domestic rate loans, with a per annum interest rate equal to PNC Bank’s alternate base rate (as defined in the Credit Agreement) plus 2.50%, or LIBOR rate loans, with a per annum interest rate equal to 3.50% plus the greater of the LIBOR rate (as defined in the Credit Agreement) or 1.00%, or a combination thereof. As a result, our interest rate for the term loan has been 4.5%. Our investing activities are guided by an investment policy, which is reviewed at least annually by our board of directors, and whose objectives are preservation and safety of capital, maintenance of necessary liquidity and maximizing of the rate of return within the stated guidelines. Our policy provides guidelines as to the maturity, concentration limits and credit quality of our investments, as well as guidelines for communication, authorized securities and other policies and procedures in connection with our investing activities.

 

We are exposed to various market risks and potential loss arising from changes in interest rates and foreign currency exchange rates in connection with our cash, cash equivalents and marketable securities held in investment accounts.

 

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.

 

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.

 

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PART II. OTHER INFORMATION

 

ITEM 1. LEGAL PROCEEDINGS

 

The disclosure under the heading “Legal Proceedings” in Note 8 to the Condensed Consolidated Financial Statements in Part I, Item 1, of this Quarterly Report on Form 10-Q is incorporated herein by reference.

 

ITEM 1A. RISK FACTORS

 

There have been no material changes from the risk factors previously disclosed in Part I, Item 1A, of our Annual Report on Form 10-K for the fiscal year ended September 27, 2015.

  

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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.

 

2.1   Agreement and Plan of Merger, dated November 1, 2015, by and among Hutchinson Technology Incorporated, Headway Technologies, Inc., and Hydra Merger Sub, Inc. (incorporated by reference to Exhibit 2.1 to Current Report on Form 8-K filed 11/2/2015).
3.1   Amended and Restated Articles of Incorporation of Hutchinson Technology Incorporated (incorporated by reference to Exhibit 3.1 to Quarterly Report on Form 10-Q for the quarter ended 12/29/2002; File No. 0-14709).
3.2   Amended and Restated By-Laws of Hutchinson Technology Incorporated (incorporated by reference to Exhibit 3.1 to Current Report on Form 8-K filed 11/2/2015).
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.
101.INS   XBRL Instance Document
101.SCH   XBRL Taxonomy Extension Schema
101.CAL   XBRL Taxonomy Extension Calculation Linkbase
101.DEF   XBRL Taxonomy Extension Definition Linkbase
101.LAB   XBRL Taxonomy Extension Label Linkbase
101.PRE   XBRL Taxonomy Extension Presentation Linkbase

 

 30 

 

 

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 5, 2016 By  /s/ Richard J. Penn
      Richard J. Penn
      President and Chief Executive Officer
       
Date: May 5, 2016 By  /s/ David P. Radloff
      David P. Radloff
      Vice President and Chief Financial Officer

 

 31 

 

 

INDEX TO EXHIBITS

 

Exhibit
No.
  Description   Method of Filing
2.1   Agreement and Plan of Merger, dated November 1, 2015, by and among HTI, Headway Technologies, Inc., and Hydra Merger Sub, Inc.   Incorporated by Reference
3.1   Amended and Restated Articles of Incorporation of HTI   Incorporated by Reference
3.2   Amended and Restated By-Laws of HTI   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
101.INS   XBRL Instance Document   Filed Electronically
101.SCH   XBRL Taxonomy Extension Schema   Filed Electronically
101.CAL   XBRL Taxonomy Extension Calculation Linkbase   Filed Electronically
101.DEF   XBRL Taxonomy Extension Definition Linkbase   Filed Electronically
101.LAB   XBRL Taxonomy Extension Label Linkbase   Filed Electronically
101.PRE   XBRL Taxonomy Extension Presentation Linkbase   Filed Electronically