Item 1.	Business
When we refer to “we,” “our,” “us,” the “company” or “HTI,” we mean Hutchinson Technology Incorporated and its subsidiaries. Unless otherwise indicated, references to “2015” mean our fiscal year ending September 27, 2015, references to “2014” mean our fiscal year ended September 28, 2014, references to “2013” mean our fiscal year ended September 29, 2013, references to “2012” mean our fiscal year ended September 30, 2012, references to “2011” mean our fiscal year ended September 25, 2011, references to “2010” mean our fiscal year ended September 26, 2010, and references to “2009” mean our fiscal year ended September 27, 2009.
OVERVIEW
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.
BUSINESS
We manufacture suspension assemblies for all sizes and types of hard disk drives. Suspension assemblies are critical components of disk drives that hold the read/write heads in position above the spinning magnetic disks. We developed our position as a key supplier of suspension assemblies through an integrated manufacturing approach, research, development and design activities coupled with substantial investments in process capabilities, product features and manufacturing capacity. We manufacture our suspension assemblies with proprietary technology and processes with very low part-to-part variation. These processes require manufacturing to precise specifications that are critical to maintaining the necessary microscopic clearance between the head and disk and the electrical connectivity between the head and the drive circuitry.
We design our suspension assemblies with a focus on the increasing performance requirements of new disk drives, principally more complex, increased data density, improved head-to-disk stability during a physical shock event and reduced data access time. Increased capacity, improved reliability and performance, as well as the miniaturization of disk drives, generally require suspension assemblies with lower variability, specialized design, expanded functionality and greater precision. Manufacturing of these small and more complex suspension assemblies requires that we develop new manufacturing process capabilities. We will continue to invest, as needed, to advance suspension assembly technology, enhance our process capabilities and expand our production capacity. During 2014, we shipped 432 million suspension assemblies of all types, supplying all manufacturers of disk drives and head-gimbal assemblers.
As the disk drive industry has matured and consolidated, cost competitiveness has become an increasingly important factor to our customers. To meet this need, we have been reshaping the company with the intent of being the industry’s lowest cost producer of suspension assemblies. While we have continued to realize net operating losses, we have lowered our overall cost structure by significantly improving our operating efficiency, transitioning more assembly production to our lower cost Thailand operation and consolidating our U.S. operations. We believe that our vertically integrated model provides the best means to meet customers’ requirements and to be the low cost producer in the industry.
Effective October 1, 2012, we realigned our business into a single operating and reportable segment. Our chief operating decision maker now assesses financial performance of our company as a whole. Due primarily to the restructuring actions that occurred during 2012 and the additional cost reductions that we have made since the end of 2012, the operating losses from our biomeasurement products have been significantly reduced. In connection with this realignment, we also eliminated divisional presidents. We are continuing to look at partnering opportunities that can help us extract value from the biomeasurement technology that we have developed.
Products
We categorize our current products as either suspension assemblies or other revenue, which consists primarily of revenue outside of the disk drive industry for precision component manufacturing, tool design, tool build and metrology, suspension assembly components, reimbursement for disk drive industry-related engineering services and specific disk drive program capacity and biomeasurement products.
The following table shows, for each of 2014, 2013 and 2012, the relative contribution to net sales, in millions of dollars and percentages, of each product category:
See Note 10 to the consolidated financial statements contained in Item 15 below for financial information with respect to a distribution of revenue and long-lived assets by geographic area for each of 2014, 2013 and 2012. See also the Selected Financial Data in Item 6 below.
Suspension Assemblies. During 2014, we shipped 432 million suspension assemblies, compared to 404 million and 392 million in 2013 and 2012, respectively. We shipped suspension assemblies incorporating our internally produced flexures, as well as suspensions using purchased flexures.
We have the capability to produce multiple variations of suspension assemblies. This capability permits us to assist customers’ design efforts and meet the varied and changing requirements of specific customers. We have developed significant proprietary capabilities in the design and production of suspension assemblies for both current and new generations of higher performance disk drives and read/write heads. The continual pursuit of increased data density and lower storage costs is leading to suspension assemblies with flexures that have finer electrical conductors, greater lead counts and increased complexity, and to the adoption of value-added features for suspension assemblies, such as formed and polished headlifts, larger dampers with through-hole features, co-located micro actuators and a variety of limiter configurations. We continue to see an increase in the volume of dual-stage actuated (“DSA”) suspensions, which carry a higher selling price and cost more to manufacture. DSA suspension shipments increased to 26% of our 2014 product mix compared to 16% in 2013.
We price our products to be competitive and our selling prices also are affected by changes in overall demand for our products, changes in the specific products our customers buy and a product’s life cycle. Our selling prices are subject to market pressure from our competitors and pricing pressure from our customers. Disk drive manufacturers seek low cost designs and suspension assembly pricing is highly competitive. A typical life cycle for our products begins with higher pricing when products are introduced and decreasing prices as they mature. To offset price decreases during a product’s life, we rely primarily on higher sales volume and improving our manufacturing yields and efficiencies to reduce our cost. If we cannot increase our sales volume or reduce our manufacturing costs as prices decline during our products’ life cycles, our business, financial condition and results of operations could be materially adversely affected.
Other Revenue. To derive additional value from the unique expertise and capabilities in precision component manufacturing, tool design, tool build and metrology that we have developed in our suspension manufacturing, we are offering these capabilities to targeted companies in several industries outside of the disk drive industry. In 2014, $6,921,000, or 3% of our revenues were from new business development initiatives, compared to $5,911,000, or 2% in 2013. In the early stages of this effort, the revenues generated have been somewhat unpredictable quarter to quarter. We continue to explore a range of opportunities.
We enter into arrangements with customers to be reimbursed for disk drive industry-related engineering services and specific program capacity, which partially offset the costs of our investment. We recognize the associated revenue over the estimated life of the program to which the services and capacity relate. In 2014, $2,893,000 was for reimbursement of these disk drive industry-related engineering services and specific disk drive program capacity, compared to $2,482,000 in 2013.
In the first half of 2012, we had suspension assembly component sales of $4,051,000, primarily as a result of the flood-related capacity constraints in the disk drive industry that created demand for our suspension assembly components.
As part of our new businesses development effort, we were recently selected to provide an optical image stabilization (“OIS”) actuator for a smartphone camera and we have begun manufacturing this new product. Although we did not generate any revenue from this product in 2014, we began selling the OIS actuator product early in 2015. Our OIS actuator is based on shape memory alloy (“SMA”) technology and improves picture and video quality, particularly in low-light conditions, and offers performance, size and expected cost advantages over current OIS solutions. We are bringing this product to market with our partner, Cambridge Mechatronics Ltd., a high technology design and engineering company based in Cambridge, England. In addition to marketing, design and development, the partnership includes sharing in required investments and potential profits, if any. Our initial SMA OIS product will be used in a smartphone for the Chinese market that is scheduled for release late in calendar 2014. We are also working with other interested smartphone and camera module makers who are evaluating our SMA OIS actuator for potential inclusion in their future products.
While we are in the early stages with this product and volumes initially will be low, the smartphone camera market represents a significant growth opportunity for us. More companies are adopting OIS as a feature of their smartphone cameras. Apple and Samsung each recently introduced a high-end smartphone that uses OIS technology to improve camera performance. These phones use an OIS solution that is different from our SMA OIS but we believe their use of any OIS technology is strong evidence that adoption and growth of OIS is very real. We believe there is growing interest in our solution among smartphone and camera module makers. We are focusing on winning positions on new programs and increasing our production efficiency and capacity.
Manufacturing
Our manufacturing strategy focuses on reliably producing suspension assemblies in high volume with the consistent precision and features required by our customers. We have developed advanced proprietary process, inspection and measurement systems and controls, and related automated production equipment. We have adopted an integrated manufacturing approach that closely couples design, tooling and manufacturing, which has facilitated the development, implementation and high-volume production of new suspension assembly products. We believe that our integrated approach and dedicated development capability give us a competitive advantage in quickly supplying suspension assembly prototypes, ramping volume manufacturing and responding to short-term shifts in market demand.
New manufacturing processes for advanced suspension assembly features and suspension assembly types initially have lower manufacturing yields than those for more mature products and processes. Manufacturing yields generally improve as the process and product mature and production volumes increase. Manufacturing yields also vary depending on the complexity and uniqueness of products. Small variations in manufacturing yields can have a significant negative impact on gross profits.
Our products require several manufacturing processes, each dependent on different technical disciplines, to ensure the high degree of precision and the process control necessary to meet strict customer requirements. The manufacturing processes we employ include photoetching, stamping, chemical deburring, automated optical inspection, image processing, plasma etching, electrolytic and electroless plating, precision forming, laser ablation/polishing and welding, metal deposition, ultrasonic cleaning, precision adhesive, assembly technology, and automated die bonding.
Our critical raw material needs are available through multiple sources of supply, with the following exceptions. Certain types of stainless steel, polyimide, adhesives, purchased flexures and photoresists are currently single-sourced because the raw materials provided by these sources meet our strict specifications. To protect against the adverse effect of a short-term supply disruption, we maintain several weeks’ supply of these materials and have multi-site manufacturing available and other sourcing options available. Similarly, we obtain certain customized equipment and related repair parts from single sources because of the specialization of the equipment and the quality of these supply sources. We continue to look for options that may reduce our risk of supply disruption.
Our production processes require the storage, use and disposal of a variety of chemicals that are considered hazardous under applicable federal and state laws. Accordingly, we are subject to a variety of regulatory requirements for the handling of such materials. We do not anticipate any material effect on our capital expenditures, earnings or competitive position due to compliance with government regulations involving environmental matters.
Our biomeasurement products are classified as medical devices and therefore are subject to governmental regulations in countries where they are sold.
Research and Development
The disk drive industry is subject to rapid technological change, and our ability to remain competitive depends on, among other things, our ability to anticipate and respond to changes and to continue our close working relationships with the engineering staffs of our customers. Our research and development efforts are directed at continuing to develop suspension assembly capabilities and features that enable our products to meet performance criteria desired by our customers for specific drive applications. Measurement, process development and process control are critical to improving capability related to static attitude, gram force and resonance, all performance characteristics important to suspension assemblies.
The development of more complex next-generation read/write heads and continuing improvement in data density necessitate the further miniaturization of suspension component features, including finer conductor lines and spaces on our TSA+ flexures and further improvement of suspension performance through DSA or other means. We have and will continue to implement alternative technologies, as needed, which we believe will be required for manufacturing future generations of our products.
We have devoted and will continue to devote substantial resources to research and development efforts. Our research and development expenses were $17,316,000, $14,621,000 and $16,474,000, in 2014, 2013 and 2012, respectively. The reduction in research and development expenses from 2012 to 2013 was primarily related to cost reduction actions. The increase from 2013 to 2014 was primarily related to higher expenses to support our new business development activity related to the development of our SMA OIS actuator for smartphone cameras.
Customers and Marketing
Our disk drive products are sold principally through our account management team operating primarily from our headquarters in Hutchinson, Minnesota. Through subsidiaries, we have managers, technical representatives and quality coordinators in Asia. We sell our suspension assemblies to original equipment manufacturers for use in their products and to a subassembler who sells to original equipment manufacturers. Our account management team is organized by individual customer, and contacts are typically initiated with both the customer’s purchasing agents and its engineers. Our engineers and account management team together actively participate in the selling process and in maintaining customer relationships.
We maintain “vendor managed inventory,” or VMI, facilities near the major production centers of certain individual customers to assure that we meet the customers’ inventory requirements. Certain agreements with our customers provide that we maintain minimum finished goods inventory levels. A significant majority of our suspension assembly shipments are distributed to our customers in Thailand, Hong Kong and the Philippines. We also utilize our Thailand manufacturing facility to provide product logistics support, technical support and measurement services.
We are a supplier to all manufacturers of disk drives and head-gimbal assemblers. The following table shows our four largest customers for 2014, 2013 and 2012 as a percentage of net sales.
Sales to our four largest customers constituted 97%, 98% and 95% of net sales for 2014, 2013 and 2012, respectively. Significant portions of our revenue may be indirectly attributable to large manufacturers of disk drives, such as Western Digital, which may purchase read/write head assemblies that utilize our suspension assemblies from SAE Magnetics, Ltd./TDK Corporation (“SAE Magnetics”). During 2012, we sold a higher percentage of our suspension assemblies to SAE Magnetics due to flood-related constraints in the disk drive industry.
The disk drive industry has consolidated significantly in recent years. In December 2011, Seagate Technology, LLC acquired the hard disk drive business of Samsung Electronics Co., Ltd. In March 2012, Western Digital Corporation completed its acquisition of Hitachi Global Storage Technologies (HGST). We expect to continue to depend upon a limited number of customers for our disk drive industry sales, given the relatively small number of disk drive manufacturers and head-gimbal assemblers. Our results of operations could be adversely affected by reduced demand from any disk drive industry customer.
Backlog
We generally make our sales pursuant to purchase orders rather than long-term contracts. Our backlog of purchase orders was $32,067,000 at September 28, 2014, as compared to $42,759,000 at September 29, 2013. Our purchase orders may be changed or cancelled by customers on short notice. In addition, we believe that it is a common practice for disk drive manufacturers to place orders in excess of their needs during growth periods. Backlog should not be considered indicative of sales for any future period.
Seasonality
Historically, the disk drive industry has experienced seasonal demand, with higher levels of demand in the second half of the calendar year driven by consumer spending. Seasonal demand for our suspension assemblies generally tracks that of the disk drive industry and also may be delayed or accelerated by existing inventory levels in the supply chain.
Competition
We believe that the principal factors of competition in the suspension assembly market include price, reliability of volume supply, time to market, product performance, quality and customer service. Disk drive manufacturers seek low cost designs and as the disk drive industry has matured and consolidated, cost competitiveness, and thus suspension assembly pricing, has become an increasingly important factor to our customers. Our customers’ operating results also depend on being the first-to-market and first-to-volume with new products at a low cost. Our development efforts typically have enabled us to shorten development cycles and achieve reliable high-volume output per manufacturing unit quickly.
Our principal competitors are Nihon Hatsujo Kabusikigaisha (“NHK”), Magnecomp Precision Technology Public Company Limited (“MPT”), a subsidiary of TDK Corporation, and NAT Peripheral (H.K.) Co., Ltd., (a joint venture of NHK and TDK Corporation). The NAT Peripheral joint venture has provided our customer, SAE Magnetics, the capability to produce suspension assemblies since calendar 2005. We believe that consolidation in the disk drive industry, including the affiliation between our competitor MPT and our customer SAE Magnetics, has resulted in shifts in certain industry supply chain alignments that have negatively impacted our competitive position since 2008. Our principal competitors in producing suspension flexures are Nitto Denko Corporation and Dai Nippon Corporation. Although we cannot be sure that the number of competitors will not increase in the future or that users of suspension assemblies will not develop internal capabilities to manufacture suspension assemblies or suspension assembly components, we believe that the number of entities that have the technical capability and capacity for producing precision suspension assemblies or components in large volumes will remain small.
We continually monitor technological developments in and potential threats to the disk drive storage market and we believe disk drives will remain the primary data storage technology for the foreseeable future. However, other types of data storage technology, such as solid state storage or flash (semiconductor) memory, have become competitive with certain disk drive applications, and therefore negatively affect the demand for our products. As an example, emerging applications requiring digital storage, particularly consumer electronics products that require lower storage capacity, are using flash memory, which has and may continue to limit growth opportunities for disk drive-based data storage.
Foreign Sales
Sales to foreign-based enterprises totaled $49,648,000, $79,691,000 and $148,999,000 for 2014, 2013 and 2012, respectively. Sales to foreign subsidiaries of United States corporations totaled $203,895,000, $162,120,000 and $89,548,000 for 2014, 2013 and 2012, respectively. The majority of these sales were to the Pacific Rim region. During 2012, sales to foreign based enterprises increased as we sold a higher percentage of our suspension assemblies to SAE Magnetics due to flood- related constraints in the disk drive industry.
In addition, we have sales to United States corporations that use our products in their offshore manufacturing sites. See Note 10 to the consolidated financial statements for additional information about geographic areas.
Intellectual Property
We regard much of the equipment, processes, information and knowledge that we generate and use in the manufacture of our products as proprietary and protectable under applicable trade secret, copyright, trademark and unfair competition laws. In addition, if we develop manufacturing equipment, products and processes for products where patents might enhance our position, we have pursued, and we will continue to pursue, patents in the United States and in other countries covering our products. We also have obtained certain trademarks for our products to distinguish them from our competitors’ products.
As of September 28, 2014, we held 208 United States patents and 20 foreign patents, and we had 22 patent applications pending in the United States and 19 patent applications pending in other countries. Internally, we protect intellectual property and trade secrets through physical security measures at our facilities, as well as through non-disclosure and non-competition agreements with all employees and confidentiality policies and non-disclosure agreements with consultants, strategic suppliers and customers.
We have entered into licensing and cross-licensing agreements relating to certain of our patents and patent applications allowing some of our competitors to produce products similar to ours in return for royalty payments and/or cross-license rights. The agreements include cross-licenses to certain existing and future suspension assembly technology. These agreements are renegotiated as needed. One of these agreements has expired and we are in the process of renegotiating the terms.
From time to time, third parties have asserted patents against us or our customers that may relate to certain of our manufacturing equipment or products or to products that include our products as a component. Some of our competitors have experience with, and have developed patent portfolios relating to, technology associated with our TSA+ product. We also have litigated claims against a competitive supplier in the disk drive industry alleging infringement of our patents. In addition, some of our customers have been sued on patents having claims closely related to products we sell. As the number of patents issued continues to increase, the volume of intellectual property claims may increase.
Employees
As of September 28, 2014, we had 2,489 employees located primarily in the United States and Thailand.
Available Information
Our website is: http://www.htch.com. We make available, free of charge, through our website materials we file with or furnish to the SEC pursuant to Section 13(a) of the Exchange Act, including our Annual Report on Form 10-K, our Quarterly Reports on Form 10-Q, our Current Reports on Form 8-K and amendments to those reports. These materials are posted on our website as soon as reasonably practicable after we electronically file them with or furnish them to the SEC.
Members of the public may read and copy any materials we file with the SEC at its Public Reference Room at 450 Fifth Street, NW, Washington, DC 20549. Information on the operation of the Public Reference Room is available by calling the SEC at 1-800-SEC-0330. The SEC maintains a website that contains reports, proxy and information statements and other information about us and other issuers that file electronically at http://www.sec.gov.
Item 1A.
Item 1A.	Risk Factors
We may not be able to generate enough cash or secure enough capital to service our existing debt obligations or execute our current and future business plans.
Since 2009, we have experienced significant reductions in demand for and shipments of our suspension assemblies due primarily to our losses of market share resulting from supply chain realignments by our customers. Our operating results and cash flow from operations have been adversely affected by decreases in our demand. Our manufacturing capacity may continue to be underutilized in the future, which will negatively impact our operating results. Despite our workforce reductions and restructuring actions in each of the last four years, we have continued to incur operating losses. Our unfavorable operating results in recent years resulted in reduced cash flow from operations. Cash flow used by operations was $1,463,000 for 2014, and cash flow provided by operations was $6,085,000 for 2013. We will continue to have significant liquidity needs. Our outstanding $39,822,000 aggregate principal amount of 8.50% Convertible Senior Notes due 2026 (the “8.50% Convertible Notes”) are being redeemed on January 15, 2015. Additionally, our outstanding $63,931,000 aggregate principal amount of 8.50% Senior Secured Second Lien Notes due 2017 (the “8.50% Secured Notes”) mature on January 15, 2017. Our outstanding $12,200,000 aggregate principal amount of 10.875% Senior Secured Second Lien Notes due 2017 (the “10.875% Notes”) also mature on January 15, 2017.
A further deterioration in our business or disruption in the global credit and financial markets and related adverse economic conditions would impact our ability to generate cash flow from operations and our ability to obtain new financing. We may not be able to obtain new financing on terms acceptable to us, including covenants that we will be able to comply with in the short-term. If cash flow from operations together with cash and cash equivalents are not sufficient to fund operations, capital expenditures and debt obligations, and we are unable to secure alternative sources of financing, our results of operations, financial condition and liquidity would be materially adversely affected.
We will need a significant amount of funds over the next several years to achieve our long-term growth objectives and to meet our debt obligations.
Our business will require significant funds over the next several years. We would likely use these funds for capital expenditures, research and development, debt service and working capital. Our business is capital intensive. Our total capital expenditures were $17,283,000 in 2014, $18,880,000 in 2013 and $27,880,000 in 2012. Our estimate for capital expenditures in 2015 is approximately $20,000,000. In addition, our total research and development expenses were $17,316,000, or 7% of net sales, in 2014.
We have a revolving credit and security agreement with PNC Bank, National Association (“PNC Bank”). Our credit agreement with PNC Bank and the indentures governing our 8.50% Secured Notes and our 10.875% Notes each contain a number of financial covenants and other customary provisions. Our 8.50% Convertible Notes are being redeemed on January 15, 2015, and our 8.50% Secured Notes and our 10.875% Notes mature in January 2017. We may pursue additional debt or equity financing or other forms of financing to supplement our current capital resources, if needed, in 2015 and beyond. Our ability to obtain additional financing will depend upon a number of factors, including our future performance and financial results and general economic and capital market conditions. We may not be able to maintain adequate capital or raise additional capital on reasonable terms or at all, if needed.
The following factors could affect our ability to obtain additional financing on favorable terms, or at all:
•our results of operations;
•general economic and capital market conditions and conditions in the disk drive industry;
•our financial condition;
•our ratio of debt to equity;
•the perception in the capital markets of our business;
•our business prospects;
•changes in interest rates; and
•our existing secured debt.
Our ability to execute our long-term strategy may depend on our ability to obtain additional long-term debt and equity capital. We cannot determine the precise amount and timing of our funding needs at this time. We may be unable to obtain additional financing on terms acceptable to us or at all. We also may need to refinance our indebtedness on a required repurchase date or at maturity. We may not be able to obtain additional capital on favorable terms to refinance our indebtedness or provide us with sufficient cash to serve our ongoing needs. An inability to refinance our indebtedness, if needed, could materially adversely affect our results of operations, financial condition and liquidity.
The terms of our credit agreement with PNC Bank and the indentures governing the 8.50% Secured Notes and the 10.875% Notes may prevent us from capitalizing on business opportunities.
The revolving credit and security agreement with PNC Bank and the indentures governing our 8.50% Secured Notes and our 10.875% Notes impose significant operating and financial restrictions on us. As a result of these covenants and restrictions, we will be limited in how we conduct our business, and we may be unable to raise additional debt or equity financing to compete effectively or to take advantage of new business opportunities. The agreements also require us to meet certain financial ratios and financial conditions tests. The terms of any future indebtedness we may incur could include more restrictive covenants. We cannot assure you that we will be able to maintain compliance with these covenants in the future and, if we fail to do so, that we will be able to obtain waivers from the lenders and/or amend the covenants.
Our failure to meet the financial ratios and financial condition tests described above or to comply with the restrictive covenants described above, as well as the terms of any future indebtedness we may incur from time to time, could result in an event of default, which, if not cured or waived, could require that we repay any borrowings before their due date. If we are forced to refinance any borrowings on less favorable terms, our results of operations and financial condition could be adversely affected.
Future disruptions in the global credit and financial markets could limit our access to credit, which could negatively impact our business.
Domestic and foreign credit and financial markets have experienced extreme disruption, including volatility in security prices, diminished liquidity and credit availability, declining valuations of certain investments and significant changes in the capital and organizational structures of certain financial institutions. We are unable to predict the likely timing, duration and severity of disruptions in the credit and financial markets or of any related adverse economic conditions. Given these conditions, we may not be able to secure additional financing for future activities on satisfactory terms, or at all, which could materially adversely affect our results of operations, financial condition and liquidity.
Borrowings under our revolving credit and security agreement with PNC Bank and our 8.50% Secured Notes and our 10.875% Notes are secured by substantially all of the personal and real property of Hutchinson Technology Incorporated. In addition, our credit agreement with PNC Bank and the indentures governing our 8.50% Secured Notes and our 10.875% Notes each contain a number of financial covenants and other customary provisions. Deterioration in our business or disruptions in the global credit and financial markets could result in reductions in our access to credit, which could materially adversely affect our results of operations, financial condition and liquidity.
Future disruptions in the global credit and financial markets also could adversely affect our customers and suppliers. Our customers and their customers may experience difficulty obtaining financing for significant purchases and operations. A resulting decrease in orders could decrease the overall demand for our products. It is also possible that our customers could demand adjustments in pricing terms or postpone or cancel existing orders as a result of limited credit availability. Furthermore, we maintain significant balances due from customers and limitations on the credit available to our customers could impair our ability to collect those receivables on a timely basis. If we were not able to enter into new independent bill of exchange discounting transactions, our working capital would be negatively impacted. If our suppliers, of either raw materials or equipment, experience similar credit restrictions, they may become unable to meet our ongoing supply demands or tighten the terms of our purchases. Disruptions in the global credit markets that adversely affect our customers and suppliers could materially adversely affect our results of operations, financial condition and liquidity.
A slowdown in demand for computer systems and consumer electronics and enterprise storage products may cause a decline in demand for suspension assemblies.
Our suspension assemblies are components in computers and a variety of consumer electronics and enterprise storage products. The demand for these products can be volatile. In a weak economy, consumer spending tends to decline and retail demand for computer systems, other consumer electronics and enterprise storage products tends to decrease, as does business demand for computer systems. Demand for suspension assemblies therefore may be adversely impacted as a result of a weaker economy. During the second half of 2012, overall disk drive production capacity recovered from the flooding in Thailand; however, hard disk drive demand weakened in the world market and has remained relatively flat. Previously, demand for suspension assemblies weakened significantly in 2009, which resulted in shipments of our suspension assemblies declining 30% from 2008. In addition, in the past, unexpected slowdowns in demand for computer systems, other consumer electronics and enterprise storage products have caused sharp declines in demand for suspension assemblies, resulting in periods during which the supply of suspension assemblies exceeded demand. If in the future an unexpected slowdown in demand for suspension assemblies occurs or if demand decreases as a result of a weakening economy, our results of operations will be materially adversely affected as a result of lower revenue and gross profits.
Our sales are concentrated in a small customer base.
Although we supply all manufacturers of disk drives and head-gimbal assemblers, sales to our four largest customers constituted 97%, 98% and 95% of net sales for 2014, 2013 and 2012, respectively. The failure by any one of our largest customers to pay its account balance with us could have a material adverse effect on our results of operations. We currently enter into bill of exchange discounting transactions that enable us to reduce our balance of outstanding receivables. If we were not able to enter into new independent bill of exchange discounting transactions, our working capital would be negatively impacted.
Over the years, the disk drive industry has experienced numerous consolidations. TDK Corporation controls MPT, a competitive suspension assembly supplier, and our customer SAE Magnetics. (which is owned by TDK Corporation), is affiliated with a competitive supplier of suspension assemblies. In December 2011, Seagate Technology, LLC acquired the hard disk drive business of Samsung Electronics Co., Ltd. In March 2012, Western Digital Corporation completed its acquisition of HGST. We believe that consolidation in the disk drive industry has negatively impacted our competitive position and future consolidation could have a similar result.
The following factors could adversely impact our market share:
•change in supply chain alignment by a customer due to disk drive industry consolidation, strategic sourcing decisions or otherwise;
•loss of one or more of our disk drive industry customers;
•development by any one customer of the capability to produce suspension assemblies in high volume for its own products;
•loss of market share by one of our major customers; and
•change in the type of suspension assembly or flexures used in suspension assemblies, such as our TSA+ flexure, used by a customer.
Any reduction in our market share could have a material adverse effect on our results of operations.
We may not be able to manufacture our products efficiently due to changes in product mix or technology, or other unforeseen events.
We manufacture a wide variety of suspension assemblies with different selling prices and manufacturing costs. Disk drive makers continue to expand their product lines to include drives offering performance characteristics optimized for specific applications, which has resulted in a proliferation of individual disk drive programs. We cannot produce products for certain low-volume disk drive programs as efficiently as we produce products for high-volume programs. Our product mix varies as market demand changes. Any substantial variation in product mix can lead to changes in utilization of our equipment and tooling, inventory obsolescence and overstaffing in certain areas, all of which could adversely impact our business, financial condition and results of operations.
Manufacturing yields, efficiencies and processing operations vary from product to product. Newer products often require new or additional manufacturing process steps and typically have lower initial manufacturing yields and efficiencies as we ramp up manufacturing. As a result, new products are frequently more expensive to produce and may not be profitable. We used new manufacturing processes to produce TSA+ suspension assemblies, which caused us to experience inefficiencies and lower yields in 2010 and 2011. We have experienced missed shipments and increased sales returns in the past as we ramp up manufacturing of new products, or as new features for our products are introduced, or as new manufacturing processes are implemented. In 2010, a defect in some of our TSA+ product resulted in decreased shipments. The measures we took to isolate and contain the product defect also reduced our yield, limited our output and increased our costs. We may in the future experience additional process issues that impact our ability to meet customer demand and cause us to incur higher costs. We also may in the future experience missed shipments or increased sales returns. In addition, we may be required to reimburse customers for product costs relating to the incorporation of defective suspension assemblies into our customers’ products. We may not attain our output goals and be profitable with regard to any of our suspension assembly products.
We may need to transfer production of certain suspension assemblies from one manufacturing site to another. In 2011, we started high-volume assembly operations at our Thailand plant and we expect to continue to transfer assembly manufacturing to that location. In the past, transfers between our manufacturing sites have lowered initial yields and/or manufacturing efficiencies. This results in higher manufacturing costs. Our manufacturing plants located in Minnesota, Wisconsin and Thailand can experience severe weather. Severe weather has, at times, resulted in lower production and decreased our shipments.
Our ability to conduct business could be impaired if our workforce were to be unionized and employees refused to work or if a significant number of our specialized employees were to leave and we could not replace them with comparable personnel. The locations of our plants and the broad span and technological complexity of our products and processes may limit the number of satisfactory engineering and other candidates for key positions. Our business may be adversely affected if we need to adjust the size of our workforce due to fluctuating demand. We significantly reduced our workforce in 2008, 2009 and 2011 and further restructured our business in each of the past four years. Past or future workforce reductions may impact our ability to recruit and retain employees, and we are uncertain if we will be able to adequately staff our operations if we need to increase our manufacturing capacity in the future.
Almost all of our sales depend on the disk drive industry, which is cyclical, subject to ongoing technological innovation and subject to intense price competition.
Sales of suspension assemblies and suspension assembly components historically have accounted for 95% or more of our net sales. The disk drive industry is intensely competitive and technology changes rapidly, such as during past industry transitions to smaller disks or higher density read/write heads. The industry’s demand for disk drive components also fluctuates. The disk drive industry experiences periods of increased demand and rapid growth followed by periods of oversupply and subsequent contraction. These cycles may affect suppliers to this industry because we believe that it is a common practice for disk drive manufacturers to place orders for disk drive components in excess of their needs during growth periods, and sharply reduce orders for these components during periods of contraction. In addition, there is continuous downward price pressure on disk drive manufacturers and their suppliers. If price reductions exceed our ability to reduce costs, our operating results could be negatively affected.
Industry transitions in head technology and data density improvements impact demand for suspension assemblies. During past industry transitions, production yields of head and disk drive manufacturers initially were reduced. Because a significant portion of head yield reduction occurs after the head is bonded onto the suspension assembly, low yields at our customers often result in increased demand for suspension assemblies. When our customers improve their production yields, overall demand for our products may be negatively impacted. Our results of operations could be materially adversely affected if a reduction in the industry’s component demand continues long-term or a future significant slowdown in the industry occurs.
Demand for our suspension assemblies will decline if we are unable to qualify our products in disk drive programs.
We must qualify our products with our customers. The qualification process for disk drive products can be complex and difficult. We cannot be sure that our suspension assemblies will continue to be selected for design into our customers’ products. If we are unable to obtain additional customer qualifications, or if we cannot qualify our products for high-volume production quantities, or at all, our business, financial condition and results of operations could be materially adversely affected.
We may not be able to utilize our capacity efficiently or accurately plan our capacity requirements, which may negatively affect our operating results.
We increase our production capacity and the overhead that supports production based on anticipated market demand. Market demand, however, has not always developed as expected or remained at a consistent level. The underutilization that can result decreases our profitability. For example, in 2010 and 2011 demand for our suspension assemblies declined, primarily due to market share losses. In 2012, the flooding in Thailand temporarily constrained the overall production capacity of the hard disk drive supply chain, which also resulted in a material decrease in our suspension assembly demand. This resulted in underutilization of our manufacturing capacity. As a result, our profitability also was below our expectations.
A deterioration of our business could result in further underutilization of our manufacturing capacity and we may need to impair certain assets in the future. In 2009, we recorded non-cash impairment charges of $71,809,000 for the impairment of long-lived assets related to manufacturing equipment in our assembly and component operations. This impairment included the closure of our Sioux Falls, South Dakota facility at the end of June 2009. In 2012, we recorded flood-related costs of $20,360,000 for impairment of damaged facility equipment and fixtures, manufacturing equipment and tooling, inventory write-downs, and Thailand operating and site restoration costs. In 2014, we recorded non-cash impairment charges of $4,470,000 in connection with selling our Eau Claire, Wisconsin assembly building.
The following factors complicate accurate capacity planning for market demand:
•changes in the demand for and mix of specific products our customers buy and the features they require;
•our ability to add and train staff to operate our production equipment in advance of demand;
•the market’s pace of technological change;
•variability in our manufacturing yields and productivity; and
•long lead times for most of our plant and equipment expenditures, requiring major financial commitments well in advance of actual production requirements.
Our inability to plan our capacity requirements accurately and efficiently utilize our production capacity, or our failure to put in place the technologies and capacity necessary to meet market demand, could adversely affect our business, financial condition and results of operations.
If our customers improve their manufacturing yields, demand for our suspension assemblies may decrease.
In the past, we believe that improvements in our sales and unit volumes have occasionally been due in part to manufacturing difficulties experienced by our customers as they transitioned to higher density read/write heads. These customers experienced higher levels of defective read/write heads, which they were unable to detect until after they had attached the read/write heads to our suspension assemblies and our customers required more suspension assemblies during those periods. If our customers’ production yields continue to improve in the future, or when they separate and re-use suspension assemblies or test the read/write head before attaching suspension assemblies, overall suspension assembly shipments could decline and our operating results could be negatively affected.
Our investment in developing new process capabilities could result in significant increases in our operating expenses and may result in a product that is not acceptable to our customers.
Rapid technological change in the disk drive industry, as well as the expanding use of disk drives in a growing range of consumer electronics and enterprise storage applications, has led to numerous suspension assembly design changes and tighter performance specifications. To maintain our position in the disk drive industry, we need to develop new process capabilities to achieve the ever-increasing performance requirements of our customers. Also, if processes change, we may need to replace, modify or design, build and install equipment. These changes may require additional capital expenditures and increased development and support expenses, which may adversely impact our operating results.
We expect to continue to have significant research and development expenses for the following new products:
•suspension assemblies that incorporate flexures produced using additive processing;
•suspension assemblies with tighter performance specifications than our customers currently require;
•suspension assemblies that require additional or smaller electrical conductors;
•suspension assemblies that incorporate new materials, such as thinner laminates and piezoelectric actuators used in DSA suspension assemblies, which are more difficult to handle in the manufacturing process;
•suspension assemblies for use with more complex read/write heads; and
•SMA OIS actuators for use in the smartphone camera market.
We have invested, and continue to invest, a substantial amount of engineering and manufacturing resources to develop process capabilities, as needed, to produce suspension assembly flexures and DSA suspension assemblies that meet the ever-increasing performance requirements of our customers. If high-volume manufacturing of our TSA+ suspension assemblies that are produced using additive processing capabilities cannot be produced profitably in the quantities and to the specifications required by our customers, we may need to purchase increased quantities of additive flexures. We may not be able to purchase the necessary quantity of such components on terms acceptable to us or at all.
The introduction of new process capabilities for our products also increases the likelihood of unexpected quality concerns, which may negatively impact our ability to bring products to market on time and at acceptable costs. When we started high-volume manufacturing of TSA+ suspension assemblies, we experienced higher cost due to yield loss, quality problems, startup and production inefficiencies and equipment problems. These TSA+ costs added a cost burden of approximately $30,400,000 in 2010, $32,000,000 in 2009 and $37,600,000 in 2008.
Our operating results are subject to fluctuations.
Our past operating results, and our gross profits, have fluctuated from period to period. We expect our future operating results and gross profits will continue to fluctuate from period to period. The following factors may cause these fluctuations:
•changes in overall demand for our products;
•changes in our manufacturing process, or problems related to our manufacturing process;
•changes in our manufacturing yields and related scrap recovery;
•increased costs when we start producing new products and features, and ramping up high-volume production;
•changes in our production efficiency;
•changes in utilization of existing or newly added production capacity;
•long disruptions in operations at any of our plants or our customers’ plants for any reason;
•changes in our selling prices;
•changes in the specific products our customers buy and features they require;
•changes in our infrastructure costs and expected production and shipping costs, and how we control them;
•changes in the cost of, or limits on, available materials and labor; and
•currency exchange rate fluctuations related to the Thai baht.
A deterioration of our business could result in further underutilization of our manufacturing capacity and we may need to impair certain assets in the future. In 2009, we recorded non-cash impairment charges of $71,809,000 for the impairment of long-lived assets related to manufacturing equipment in our assembly and component operations. If customer demand for suspension assemblies weakens, or if one or more customers reduce, delay or cancel orders, our business, financial condition and results of operations could be materially adversely affected. Furthermore, we may incur restructuring and asset impairment charges that would reduce our earnings, as we did in 2012 and 2014.
We typically allow customers to change or cancel orders on short notice. We plan our production and inventory based primarily on forecasts of customer demand. Our customers often prefer a dual source supply and, therefore, may allocate their demand among suppliers. Both customer demand and the resulting forecasts often fluctuate substantially. These factors, among others, create an environment where scheduled production and capacity utilization can vary, leading to variability in gross profits and difficulty in estimating our position in the marketplace.
Our selling prices are subject to market pressure from our competitors and pricing pressure from our customers. Disk drive manufacturers seek low cost designs and suspension assembly pricing is highly competitive. Our selling prices also are affected by changes in overall demand for our products, changes in the specific products our customers buy and a product’s life cycle. A typical life cycle for our products begins with higher pricing when products are introduced and decreasing prices as they mature. To offset price decreases during a product’s life, we rely primarily on higher sales volume and improving our manufacturing yields and efficiencies to reduce our cost. If we cannot reduce our manufacturing costs as prices decline during our products’ life cycles, our business, financial condition and results of operations could be materially adversely affected.
We may be unable to achieve our financial and strategic goals in connection with investments in our assembly operation in Thailand.
Our assembly operation in Thailand is our first and only offshore manufacturing plant. We may fail to identify significant issues in connection with manufacturing in a foreign location, such as issues related to its infrastructure, workforce, quality or reporting systems, local tax, legal and financial controls or contingencies. Additionally, our operations in Thailand may be subject to various political, economic, foreign currency exchange rates and other risks and uncertainties inherent in operating in foreign jurisdictions. Thailand has experienced political and civil unrest in the past and continued or future political or civil unrest in Thailand could adversely affect our ability to maintain operations in Thailand. From time to time, fluctuations in foreign exchange rates have negatively affected our profitability and there can be no assurance that these fluctuations will not adversely affect our operations and profitability in the future. An inability to manage these risks as part of our investment in this manufacturing location could materially adversely affect our business, financial condition and results of operations.
We may not be able to differentiate our product features or process capabilities in the future.
We historically held a market leadership position through innovation and technological advancement that has enabled our customers to deploy higher disk drive capacities at lower total costs. However, with the slowing of the areal density growth rate, the amount of technical innovation required to produce suspension assemblies also has decreased which has enabled our competitors to gain market share. If we can no longer differentiate our product features or process capabilities, competing suppliers may have access to a greater percentage of disk drive programs and program share. This inability to differentiate could be caused through our misunderstanding of market requirements, including technology changes, which could enable a competitor to take market share. The inability to differentiate our product offerings could also allow for supply chain alignments between our customers and other suppliers that could limit our access to available disk drive programs and corresponding market share. These alignments could include share agreements, sole-sourcing conditions or primary access to development programs. Any of the above scenarios could adversely impact our shipment volumes, average selling prices and operational costs.
Competing storage technology or reductions in demand for storage capacity may reduce demand for our products.
Other types of data storage technology, such as solid state storage or flash (semiconductor) memory compete with certain disk drive applications and negatively impact the demand for our products. Lower capacity storage needs increasingly are being met by flash memory. If flash memory suppliers overcome both the technical and economic limitations of flash memory storage and can offer better performance or more competitive cost per unit of capacity than disk drive products for higher capacity storage needs, demand for disk drives, and thus for our products, may decrease. Additionally, consumers’ demand for storage capacity may not continue to grow as expected as a result of how consumers store data, such as the emerging storage processes for cloud computing and storage virtualization. These factors, among others, could lead to lower capacity hard drives or solid state storage memory that could reduce demand for disk drive components, including our suspension assemblies. Our business, financial condition and results of operations could be materially adversely affected if the computer industry adopts technology that reduces or replaces disk drives as a computer data storage medium.
If the rate of data density improves at a significantly faster rate than the rate of increase in the demand for disk drive storage, demand for suspension assemblies may decrease.
Disk drive manufacturers have been able to steadily increase data density, and we believe that they will continue to do so for the foreseeable future. Increasing data density permits drive manufacturers to reduce the average number of disks in each disk drive, which in turn reduces the number of components they need per drive, including suspension assemblies. If improvements in data density outpace growth in data storage capacity requirements, demand for our suspension assemblies may decline and we may not be able to maintain or expand our suspension assembly business.
We may have difficulty obtaining an adequate supply of raw materials that meet our strict specifications at reasonable prices.
Certain types of stainless steel, polyimide, adhesives, purchased flexures and photoresists are currently single-sourced because the raw materials provided by these sources meet our strict specifications. We have chosen to obtain certain other materials from a single or limited set of sources because of quality and pricing considerations. If we were not able to obtain an adequate supply of these materials from our current suppliers or if a current supplier were to exit the market, we could experience production delays and quality problems. Similarly, we obtain certain customized equipment and related repair parts from single sources because of the specialization of the equipment and the quality of these supply sources. We continue to look for options that may reduce our risk of supply disruption.
The price we pay for stainless steel periodically is reset and can fluctuate with changes in the value of the Japanese yen, which will impact our costs. The price we pay for gold and other precious metals has fluctuated in the past. We also have experienced increased expenses due to higher fuel costs related to freight and higher utility rates. During times of increased prices, we typically do not pass this higher price on to our customers. If we could not obtain the materials referred to above in the necessary quantities, with the necessary quality and at reasonable prices, our business, financial condition and results of operations could be materially adversely affected.
The future success of our optical image stabilization actuator remains uncertain.
We recently started manufacturing an OIS actuator for use in a smartphone for the Chinese market scheduled for release late in calendar 2014. This new product is in the early stages of low-volume production. We face significant manufacturing challenges as we ramp our first production line to volume and we may not meet the market’s product requirements, attain our manufacturing goals or achieve our cost targets. Our manufacturing process is capital intensive. We have very limited operating and marketing experience in the smartphone camera market. We do not know whether the product will generate sufficient revenue to offset expenditures related to product development and manufacturing start-up or become profitable. We do not know whether this product will be accepted by the market, the rate at which it will be accepted, if at all, or whether our product will be competitive with existing products already in the market or new technologies that may be introduced in the future. There can be no assurance that our investment in this new product line will not negatively impact our operating results and financial condition.
Natural disasters in certain regions could adversely affect our supply chain or our customer base, which, in turn, could have a negative impact on our business, our ability to deliver or receive products and demand for our products.
We cannot be certain what impact the occurrence of natural disasters in certain regions, such as earthquakes and tsunamis in Japan or flooding in Thailand, may have on demand for our products or our ability to produce and supply our products to our customers and to what extent our customers could decrease or cancel orders. For example, the 2012 flooding in Thailand resulted in the suspension of manufacturing at our Thailand assembly facility, and also constrained hard disk drive production in the near-term, which resulted in a material decrease in demand for suspension assemblies in 2012. Any such occurrences could cause sales of suspension assemblies and hard disk drives to be negatively affected by disruptions in the hard disk drive or PC supply chain, which could materially adversely affect our business, financial condition and results of operations.
Significant changes in the market price of our common stock could result in securities litigation claims against us.
Significant price and value fluctuations have occurred with respect to the publicly traded securities of technology companies generally. In the past, securities litigation claims have been filed against certain companies following a period of decline in the market price of their publicly traded securities. We may be the target of similar securities litigation claims in the future. Risks associated with litigation often are difficult to assess or quantify and their existence and magnitude can remain unknown for significant periods of time. Although we maintain director and officer insurance, the amount of insurance coverage may not be sufficient to cover a claim and the continued availability of this insurance cannot be assured. Future litigation, if any, may result in substantial costs and divert management’s attention and resources, which could materially adversely affect our results of operations, financial condition and liquidity.
Our ability to use our deferred tax assets is subject to certain annual limitations, and may be further limited by a “change of control.”
At September 28, 2014, our deferred tax assets included $30,520,000 of unused tax credits, of which $3,079,000 can be carried forward indefinitely and $22,323,000 expire at various dates beginning in 2018, and $5,118,000 of various state tax credits expire at various dates beginning in 2015, including $255,000 that will expire in 2015.
In addition, at September 28, 2014, our deferred tax assets included $185,493,000 of net operating loss (“NOL”) carryforwards that will begin to expire in 2021 if not otherwise used by us. As of September 28, 2014, we had an estimated NOL carryforward of $520,153,000 for United States federal tax return purposes.
A valuation allowance of $227,219,000 has been recognized to offset the related deferred tax assets due to the uncertainty of realizing the deferred tax assets before they expire. Both our unused tax credits and our estimated NOL carryforwards may be used to offset taxable income, if any, generated by us in future years. Our ability to use these deferred tax assets is subject to an annual limitation imposed by certain change of control provisions under Section 382 of the Internal Revenue Code that may be triggered by an aggregate change in the beneficial ownership of our common stock. If we do not generate sufficient profits or the annual limitation under Section 382 is triggered, some or all of our deferred tax assets may expire or we may not be able to use them to offset taxes due in the applicable period.
We may not be able to adequately protect our intellectual property.
We attempt to protect our intellectual property rights through copyrights, patents, trademarks, trade secrets and other measures. We may not, however, be able to obtain rights to protect our technology. In addition, competitors may be able to develop similar technology independently. Our ability to remain competitive depends in large part on trade secrets relating to our proprietary manufacturing processes. We seek to protect trade secrets and our other proprietary technology in part by requiring each of our employees to enter into non-disclosure, assignment and non-competition agreements. In these agreements, the employee agrees to maintain the confidentiality of all of our proprietary information and, subject to certain exceptions, to assign to us all rights in any proprietary information or technology made or contributed by the employee during his or her employment. In addition, we regularly enter into non-disclosure agreements with third parties, such as consultants, strategic suppliers and customers. These agreements may, however, be breached, and we may not have an adequate remedy for any such breach. In addition, our competitors may otherwise learn or independently develop our trade secrets.
We believe that the patents we hold and may obtain are valuable, but that they will not independently determine our success. Moreover, we may not receive patents for our pending patent applications, and our issued patents may not be broad enough to protect our technology adequately. Our future technology may not be protected, and any patent issued to us may be challenged, invalidated, circumvented or infringed. In addition, we have only limited patent rights outside the United States, and the laws of certain foreign countries may not protect our intellectual property rights to the same extent as the laws of the United States.
In the past, we have entered into licensing and cross-licensing agreements relating to certain of our patents and patent applications allowing some of our competitors to produce products similar to ours in return for royalty payments and/or cross-license rights. The agreements also include cross-licenses to certain existing and future suspension assembly technology. These agreements are renegotiated as needed. One of these agreements has expired and we are in the process of renegotiating the terms.
We and certain users of our disk drive industry products have received, and may receive, communications from third parties asserting patents against us or our customers that may relate to certain of our manufacturing equipment or to our products or to products that include our products as a component. Some of our competitors have experience with, and have developed patent portfolios relating to, technology associated with our TSA+ product. In addition, we and certain of our customers have been sued on patents having claims closely related to products we sell. If any third party makes a valid infringement claim against us and we are unable to obtain a license on terms acceptable to us, our business, financial condition and results of operations could be adversely affected. As the number of patents issued in connection with our disk drive industry business continues to increase, the volume of intellectual property claims made against us 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 our intellectual property rights or the rights of others.
In the past, we have litigated claims against a competitive disk drive industry supplier alleging infringement of our patents. We could incur substantial costs in other such litigation or other similar legal actions, which could have a material adverse effect on our business, financial condition and results of operations.
Item 2.
Item 2.	Properties
We own four buildings on a site of approximately 163 acres in Hutchinson, Minnesota. The buildings have an aggregate of approximately 790,000 square feet of floor area, 20,000 of which are leased to a third party. This site serves as our corporate headquarters, our center for research and development, and for manufacturing of suspension assemblies and precision components for several industries outside of the disk drive industry. We have consolidated our Hutchinson, Minnesota Development Center into our headquarters building, taking advantage of the space made available by moving component manufacturing from Hutchinson to Eau Claire, Wisconsin in 2011, and the Development Center is currently offered for sale or lease. We also lease a 20,000 square foot warehouse and a 7,200 square foot fabrication shop near the Hutchinson site.
We own a manufacturing plant in Eau Claire, Wisconsin. This site includes component manufacturing operations and office space. During the second quarter of 2014, we vacated and sold 116,000 square feet of our Eau Claire, Wisconsin assembly building, and related real and personal property for net proceeds of $4,364,000. We will continue to own and operate the remaining portion of the Eau Claire facility, representing approximately 700,000 square feet of floor space.
We lease a building of approximately 100,000 square feet located in Plymouth, Minnesota, and in 2014, we moved our stamping operation that occupied this building to our headquarters building in Hutchinson, Minnesota. This lease will expire at the end of calendar 2014.
We own a manufacturing plant in Ayutthaya, Thailand that is used for assembly manufacturing operations and office space. The plant is approximately 123,000 square feet. Early in 2012, severe flooding in Thailand required us to suspend assembly operations at our Thailand facility. By the end of 2012, we resumed production at that facility.
Through our wholly-owned subsidiaries, we also lease offices for customer service and support in the People’s Republic of China.
We believe that our existing facilities will be more than adequate to meet our anticipated requirements for 2015.
Item 3.
Item 3.	Legal Proceedings
We and certain users of our disk drive industry products have from time to time received, and may in the future receive, communications from third parties asserting patents against us or our customers that may relate to certain of our manufacturing equipment or products or to products that include our products as a component. In addition, we and certain of our customers have been sued on patents having claims closely related to products sold by us. If any third party makes a valid infringement claim and a license were 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 our intellectual property rights or the rights of others. We could incur substantial costs in such litigation or other similar legal actions, which could have a material adverse effect on our results of operations.
We are a party 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.
PART II
Item 5.
Item 5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Market Information
Our common stock, $.01 par value, trades on the NASDAQ Global Select Market under the symbol HTCH. For price information regarding our common stock, see Note 11 to the consolidated financial statements contained in Item 15 below. As of December 5, 2014, our common stock was held by 508 shareholders of record.
Dividends
We have never paid any cash dividends on our common stock. Further, our revolving credit and security agreement with PNC Bank and the indentures governing our 8.50% Secured Notes and our 10.875% Notes each limits or prohibits our ability to pay dividends. We currently intend to retain all earnings for use in our business and do not anticipate paying cash dividends in the foreseeable future. Any future determination as to payment of dividends will depend upon our financial condition and results of operations and such other factors as are deemed relevant by our board of directors.
Performance Graph
Set forth below is a graph comparing, for a period of five fiscal years ended September 28, 2014, the yearly cumulative total shareholder return of the S&P 500 Index and the NYSE Arca Disk Drive Index. During 2014, the AMEX Disk Drive Index was replaced by the NYSE Arca Disk Drive Index. The comparison of total shareholder returns assumes that $100 was invested on September 27, 2009, in each of our company, the S&P 500 Index and the NYSE Arca Disk Drive Index, and that dividends were reinvested when and as paid.
Stock Repurchase Program
On February 4, 2008, we announced that our board of directors had approved a share repurchase program authorizing us to spend up to $130,000,000 to repurchase shares of our common stock from time to time in the open market or through privately negotiated transactions. The board of directors terminated the plan on October 9, 2013, at which point $72,368,000 remained available for repurchase and no repurchases had been made since 2008.
Item 6.
Item 6.	Selected Financial Data
FIVE-YEAR SELECTED FINANCIAL DATA
Hutchinson Technology Incorporated and Subsidiaries
(In thousands, except per share data)
Item 7.
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion of our financial condition and results of operations should be read in conjunction with the selected historical consolidated financial data and consolidated financial statements and notes thereto appearing elsewhere in this Annual Report on Form 10-K.
General
Since the late 1980s, we have derived virtually all of our revenue from the sale of suspension assemblies to a small number of customers. We currently supply a variety of suspension assemblies to all manufacturers of disk drives and head-gimbal assemblers for all sizes of disk drives. Suspension assemblies are a critical component of disk drives, and our results of operations are highly dependent on the disk drive industry. The disk drive industry is intensely competitive, and demand for disk drive components fluctuates. Our results of operations are affected from time to time by disk drive industry demand changes, adjustments in inventory levels throughout the disk drive supply chain, technological changes that impact suspension assembly demand, shifts in our market position and our customers’ market position, changes in supply chain alignment by a customer, our customers’ production yields and our own product transitions, production yields and production capacity utilization.
The efforts we have been making to reduce our costs, shift more production to our Thailand assembly operation, streamline our U.S. operations and strengthen our overall competitive position have begun to benefit our financial performance. In 2014, our customers showed their support and commitment to us through higher shipment volume and increased collaboration on development efforts. Our relationship and position with Western Digital continues to be very strong, and our business with Seagate has grown since late 2013. Our suspension assembly shipments increased to 432 million in 2014, up from 404 million in 2013. We believe we ended 2014 with market share of approximately 23%, which is up from 21% at the end of 2013. While we have continued to realize net operating losses, we have a competitive cost structure that will improve further as we transition more assembly production to Thailand and realize the full benefits of our U.S. operations consolidation. We expect our business will generate profitability and positive cash flow as our volume grows over the long term.
We are also making progress with our new business development initiatives, which focus on leveraging our precision manufacturing capabilities and equipment capacity to produce components in markets outside the disk drive industry. In 2014, $6,921,000, or 3% of our revenues were from these activities compared to $5,911,000, or 2% in 2013. In the early stages of this effort, the revenues generated have been somewhat unpredictable quarter to quarter. We continue to explore a range of opportunities.
As part of these initiatives, we were recently selected to provide an OIS actuator for a smartphone camera and we have begun manufacturing this new product. Although we did not generate any revenue from this product in 2014, we began selling the OIS actuator product early in 2015. Our OIS actuator is based on shape memory alloy SMA technology that improves picture and video quality, particularly in low-light conditions, and offers performance, size and expected cost advantages over current OIS solutions. We are bringing this product to market with our partner, Cambridge Mechatronics Ltd., a high technology design and engineering company based in Cambridge, England. In addition to marketing, design and development, the partnership includes sharing in required investments and potential profits, if any. Our initial SMA OIS product will be used in a smartphone for the Chinese market that is scheduled for release by the end of calendar year 2014. We are also working with other interested smartphone and camera module makers who are evaluating our SMA OIS actuator for potential inclusion in their future products.
While we are in the early stages with this product and volumes initially will be low, the smartphone camera market represents a significant growth opportunity for us. More companies are adopting OIS as a feature of their smartphone cameras. Apple and Samsung each recently introduced a high-end smartphone that uses OIS technology to improve camera performance. These phones use an OIS solution that is different from our SMA OIS. But we believe their use of any OIS technology is strong evidence that adoption and growth of OIS is very real. We believe there is growing interest in our solution among smartphone and camera module makers. We are focusing on winning positions on new programs and increasing our production efficiency and capacity.
We are continuing to carefully manage our cost structure and cash position to ensure that we will meet our debt obligations while preserving the ability to make investments that will enable us to respond to customer requirements and achieve profitability. On October 23, 2014, subsequent to our fiscal year-end, we sold $37,500,000 of 8.50% Convertible Senior Notes due 2019 (the “8.50% New Convertible Notes”), and we also completed an exchange of $15,000,000 of our 8.50% Secured Notes for 2.5 million shares of our common stock and warrants to purchase an additional 2.5 million shares of our common stock of which 1.25 million subsequently were exercised. Certain beneficial holders of the 8.50% New Convertible Notes have 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 was escrowed until this put right expires. Additionally, we were required to escrow at least $35,000,000 of cash that is 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. On December 1, 2014, we initiated a redemption of the existing $39,822,000 of 8.50% Convertible Notes that can be put to us in January 2015. To fund this, we expect to use the proceeds of the 8.50% New Convertible Notes and our existing cash. As a result of the exchange transaction, we expect to record a loss on extinguishment of debt of approximately $4,000,000 in our first quarter of 2015. We are also pursuing additional first lien financing of up to $15,000,000. See the Liquidity and Capital Resources section below for a full discussion of our cash position, debt and other financing arrangements.
Effective October 1, 2012, we realigned our business into a single operating and reportable segment. Our chief operating decision maker now assesses financial performance of our company as a whole. Due primarily to the restructuring actions that occurred during 2012 and the additional cost reductions that we have made since the end of 2012, the operating losses from our biomeasurement products have been significantly reduced. In connection with this realignment, we have also eliminated divisional presidents. We are continuing to look at partnering opportunities that can help us extract value from the biomeasurement technology that we have developed.
General Business
The following table sets forth our quarterly suspension assembly shipment quantities in millions for the periods indicated:
Our suspension assembly shipments totaled 116 million in the first quarter of 2014, up 13% compared with 103 million in the fourth quarter of 2013. The increase was primarily due to suspension assembly demand for 2.5” mobile drives that was particularly strong during the first quarter of 2014. In the second quarter of 2014, suspension assembly shipments decreased to 102 million. The decrease was due to weakness in the enterprise industry segment, which utilizes a higher number of suspensions per drive, slower-than-expected ramps on certain new customer programs and seasonally weak demand. The seasonally weak demand continued into the third quarter of 2014. In the fourth quarter of 2014, suspension assembly shipments increased to 116 million. The increase was due to an increase in disk drive production levels and our improved share positions on several disk drive programs. We expect first quarter of 2015 suspension assembly shipments to be 120 million to 125 million as our participation on customers’ programs continues to improve.
Our average selling price decreased to $0.58 in 2014 from $0.60 in 2013. The decline in 2014 resulted from certain DSA suspension assemblies transitioning to high-volume pricing, coupled with a slower-than-expected shift in product mix toward more DSA products. DSA suspensions, which carry a higher selling price and cost more to manufacture, increased to 26% of our 2014 product mix compared to 16% in 2013. Average selling price is expected to remain flat in the first quarter of 2015.
Gross profit for 2014 was $23,901,000, compared to $16,425,000 for 2013, an increase of $7,476,000. Overall, 2014 gross profit benefited from the higher shipment volume, the benefits of the cost reductions achieved through our restructuring and site consolidation actions and improved operating performance. This increase was partially offset by higher variable costs associated with shipping a higher mix of DSA product and product that uses purchased flexures and our decreased average selling price discussed above. In the last half of 2013, we experienced some short-term manufacturing issues that resulted in approximately $5,000,000 of additional expenses. Gross profit in the first quarter of 2015 should improve modestly on higher expected total shipment volume.
We have made significant progress on our site consolidation efforts. We vacated our assembly operations building in Eau Claire, Wisconsin by moving equipment to other available space and shifting more production to our Thailand operation. We have moved our Development Center operations to our headquarters building in Hutchinson, Minnesota. The Development Center building is currently offered for sale or lease. We have also moved our stamping operation from a facility we currently lease in Plymouth, Minnesota, to our headquarters building in Hutchinson, Minnesota. With these consolidation activities substantially complete, the related costs are now largely behind us and we expect to realize further cost benefits in future quarters. In total, we incurred site consolidation expenses of $1,661,000 during 2013 and $1,349,000 during 2014. The site consolidation expenses consist primarily of internal labor and contractors.
Near the end of the first quarter of 2014, we received third-party interest in a purchase of our Eau Claire assembly building. Based on the facts and circumstances known at that time, we evaluated the recoverability of the Eau Claire building and recorded an impairment charge of $4,470,000 included in the line item “Asset impairment” in our consolidated statement of operations. During the second quarter of 2014, we sold our Eau Claire, Wisconsin assembly building and related real and personal property for net proceeds of $4,364,000. We will continue to own and operate the remaining portion of the Eau Claire facility, representing approximately 700,000 square feet of floor space.
During the fourth quarter of 2014, we estimate that we realized approximately $3,000,000 of the projected $4,000,000 of quarterly cost savings we aimed to achieve through our site consolidation and restructuring actions. We expect that the full $4,000,000 of quarterly cost savings will be realized starting in the second quarter of 2015. Our Thailand operation accounted for 78% of our total assembly production during the fourth quarter of 2014. In the first quarter of 2015, we expect our Thailand operation will account for approximately 80% of our total assembly production.
During the second and third quarters of 2014, we identified a total of approximately 170 positions to be eliminated as part of our continued consolidation effort and our continued focus on overall cost reductions. During the fourth quarter of 2014, we retained approximately 40 of those positions for manufacturing of our SMA OIS product. This resulted in an estimated $1,377,000 of net severance and other expenses for 2014. We expect the total remaining 2014 severance and benefits payments of $27,000 will be complete by the end of our first quarter of 2015.
Our overall employment level was 2,060 at the end of 2012, 2,436 at the end of 2013, and 2,489 at the end of 2014. The increase in employment from 2013 to 2014 was due to ramping our assembly manufacturing operation in Thailand partially offset by continued consolidation of our U.S. manufacturing operations.
Market Trends
Our suspension assemblies are components in hard disk drives used in computers and a variety of consumer electronics and enterprise storage products. We believe that the continued growth of digital content world-wide requires increasingly higher storage capacity in order to store, aggregate, host, distribute, manage and backup content, which we believe will continue to result in increased demand for disk drives.
Non-compute applications, such as internet-based storage of consumer data, mobile devices, digital video recorders (“DVRs”), gaming devices and surveillance monitors are driving the broad, global growth of digital content through:
•creation and sharing of all types of digital content, such as high-resolution photos, high definition video and movies, and music by consumers and data by enterprises;
•collection and distribution of digital content through services and other company offerings utilizing cloud computing;
•network infrastructure, including broadband, cable and satellite, which is enabling the access, hosting and distribution of digital content;
•consumption of digital content through consumer electronic devices such as smartphones, DVRs and gaming consoles; and
•protection of content through storage backup devices and services.
The demand for disk drives and, therefore, suspension assemblies can be volatile, as experienced since calendar 2009, due to market and world economic conditions. In a weak economy, consumer and business spending tends to decline and demand for computer systems and other consumer electronics and enterprise storage products tends to decrease. Demand for suspension assemblies, therefore, may be adversely impacted as a result of a weaker economy.
In the long-term, however, we expect that the growth in digital content and the expanding use of enterprise computing and storage, desktop and mobile computers, increasingly complex software, the internet and cloud computing, as well as the data intensive non-compute market will increase demand for disk drives and, therefore, suspension assemblies. While the overall demand for disk drive storage remains strong, the components making up that demand are changing. Demand for higher capacity cloud storage applications is offsetting declines in drive demand associated with lower spending for desktop and portable computers. Meeting the growing demand for data storage is expected to require more data surfaces and, in turn, more suspension assemblies. The hard disk drive market segments with the strongest growth rates - personal storage and capacity-optimized enterprise storage for cloud computing - use more suspension assemblies per disk drive.
We also believe demand for disk drives will continue to be subject, as it has in the past, to rapid or unforeseen changes resulting from, among other things, changes in disk drive inventory levels, technological advances, responses to competitive price changes and unpredicted high or low market acceptance of new drive models and the end devices in which disk drives are used.
As in past years, disk drives continue to be the primary storage device of choice for applications requiring shorter access times and higher capacities because of their speed and low cost per unit of stored data. The cost of storing data on disk drives continues to decrease primarily due to increasing data density, thereby increasing storage capacity in disk drives or reducing the number of components, including suspension assemblies, required in a disk drive. The continual pursuit of increased data density and lower storage costs is leading to suspension assemblies with flexures that have finer electrical conductors, greater lead counts and increased complexity such as DSA suspension designs, and to the adoption of value-added features for suspension assemblies, such as formed and polished headlifts, larger dampers with through-hole features, co-located micro actuation and a variety of limiter configurations.
The development of next-generation read/write technology and the introduction of new types or configurations of read/write head configurations and sizes, and the continuing improvement in data density and the use of disk drives in consumer electronics and enterprise storage applications will require even finer electrical conductors on the suspension assembly. Next-generation disk drives also will likely require additional electrical conductors. These changes may temporarily increase our development spending and reduce our manufacturing yields and efficiencies. We are investing in developing the process capabilities and related capital equipment required to meet new industry specifications in 2015 and beyond.
The advent of new disk drive technologies may initially decrease our customers’ yields with the result that we may experience temporary elevations of demand for some types of suspension assemblies. As programs mature, higher customer yields decrease the demand for suspension assemblies. In addition, disk drive manufacturers are increasingly seeking lower cost designs and suspension assembly pricing is highly competitive. While we are generally able to increase our selling price for suspension assemblies when they are introduced, our selling prices decrease as our products mature.
The following table sets forth our consolidated statements of operations as a percentage of net sales for each period presented.
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* Less than 1%.
2014 Operations to 2013 Operations
Net sales for 2014 were $261,087,000, compared to $249,596,000 for 2013, an increase of $11,491,000. Suspension assembly sales increased $9,500,000, primarily as a result of a 7% increase in suspension assembly unit shipments. Our average selling price decreased to $0.58 in 2014 from $0.60 in 2013. We believe the increase in unit shipments was primarily a result of an increase in our market share.
Gross profit for 2014 was $23,901,000, compared to $16,425,000 for 2013, an increase of $7,476,000. Gross profit was 9% of net sales in 2014, compared to 7% in 2013. Overall, 2014 gross profit benefited from the higher shipment volume, the benefits of the cost reductions achieved through our restructuring and site consolidation actions and improved operating performance. This increase was partially offset by higher variable costs associated with shipping a higher mix of DSA product and product that uses purchased flexures and our average selling price decreased to $0.58 in 2014 from $0.60 in 2013.
Research and development expenses for 2014 were $17,316,000, compared to $14,621,000 for 2013, an increase of $2,695,000. The increase was primarily due to higher expenses to support our new business development activity related to the development of SMA OIS actuators for smartphone cameras. Research and development expenses were 7% of net sales in 2014 and 6% in 2013.
Selling, general and administrative expenses for 2014 were $22,990,000, compared to $23,676,000 for 2013, a decrease of $686,000. The lower selling, general and administrative expenses were primarily due to cost reduction actions.
In 2014, we incurred $1,349,000 of site consolidation expenses, compared to $1,661,000 in 2013. These expenses were primarily due to internal labor and contractors related to the ongoing consolidation of our U.S. operations.
During 2014, we eliminated approximately 130 positions at our Eau Claire, Wisconsin and Hutchinson, Minnesota sites to further reduce costs. This resulted in an estimated $1,377,000 of severance expense in 2014. We expect the total remaining 2014 severance and benefits payments of $27,000 will be complete by the end of our first quarter of 2015.
During the first quarter of 2013, we identified approximately 55 positions to be eliminated as part of our continued focus on overall cost reductions. This resulted in $1,212,000 of severance and other expenses for 2013. All 2013 severance and benefits amounts have been paid in full.
In 2014, we recognized an asset impairment charge of $4,470,000 on our Eau Claire, Wisconsin assembly building and related assets, as discussed above.
In 2013, we recognized a gain on short- and long-term investments of $272,000. The gain was due to payments we received under a settlement agreement. Auction rate securities (“ARS”) previously held by us were subsequently sold by the settlement parties at a price that was higher than the price identified in the settlement agreement.
Other (expense) income for 2014 included a foreign currency loss of $2,076,000, compared to a foreign currency loss of $1,372,000 for 2013. These were primarily related to purchases and advances denominated in U.S. dollars made by our Thailand operation.
In January 2013, we repurchased $18,682,000 aggregate principal amount of our outstanding 8.50% Convertible Notes by making cash payments totaling $11,583,000, plus accrued and unpaid interest, which payments were funded by the proceeds of the sale of our 10.875% Notes. Applying debt extinguishment accounting, we recorded a gain on extinguishment of debt of $4,986,000.
The income tax benefit for 2014 was $761,000, compared to the income tax expense of $16,000 in 2013. In 2014, we recognized an $859,000 benefit due to reserves for certain tax refunds that were released due to the expiration of the applicable statute of limitations.
2013 Operations to 2012 Operations
Net sales for 2013 were $249,596,000, compared to $248,589,000 for 2012, an increase of $1,007,000. Suspension assembly sales increased $6,140,000, primarily as a result of a 3% increase in suspension assembly unit shipments. Our average selling price remained at $0.60 in both 2013 and 2012. We believe the increase in unit shipments was primarily a result of an increase in our market share. Suspension assembly component sales were $29,000 in 2013 compared to $4,051,000 in 2012, primarily as a result of the flood-related capacity constraints in the disk drive industry creating demand for our suspension assembly components in 2012.
Gross profit for 2013 was $16,425,000, compared to $3,521,000 for 2012, an increase of $12,904,000. Gross profit was 7% of net sales in 2013, compared to 1% in 2012. Although we experienced some short-term manufacturing issues in the last half of 2013 that resulted in approximately $5,000,000 of additional expenses, overall, gross profit benefited from lower variable costs, resulting primarily from improved efficiency in manufacturing TSA+ suspension assemblies compared to 2012, and from our cost reduction actions. We also realized an improvement of approximately $3,000,000 due to increased shipments of higher-priced development products and increased scrap recoveries. These improvements were partially offset by approximately $7,800,000 and $10,800,000 of incremental costs of manufacturing in our U.S. assembly operations instead of in Thailand, for 2013 and 2012, respectively. We also recorded a $1,747,000 impairment of our biomeasurement inventory late in 2013.
Research and development expenses for 2013 were $14,621,000, compared to $16,474,000 for 2012, a decrease of $1,853,000. The decrease was primarily related to lower labor expenses as a result of cost reductions. Research and development expenses were 6% of net sales in 2013 and 7% in 2012.
Selling, general and administrative expenses for 2013 were $23,676,000, compared to $28,398,000 for 2012, a decrease of $4,722,000. The lower selling, general and administrative expenses were primarily due to cost reduction actions.
In 2013, we incurred $1,661,000 of site consolidation expenses, primarily internal labor, contractors and freight, related to the ongoing consolidation of our U.S. operations.
During the first quarter of 2013, we identified approximately 55 positions to be eliminated as part of our continued focus on overall cost reduction. This resulted in $1,212,000 of severance and other expenses for 2013. All severance and benefits amounts owed have been paid in full.
During the first quarter of 2012, severance and other expenses were reduced $711,000. We reversed $895,000 of previously accrued severance and benefits expenses, partially offset by $184,000 of other expenses incurred related to our site consolidation plans. As a result of leveraging our U.S. assembly operations to offset the temporary loss of manufacturing capacity in Thailand, we retained approximately 120 employees in our Hutchinson, Minnesota manufacturing facility that we previously expected to terminate and whose anticipated severance and benefits were included in our 2011 severance and benefits expenses.
Debt refinancing costs for 2012 were $4,127,000. Because the terms of the 8.50% Secured Notes issued March 30, 2012 in exchange for our 3.25% Convertible Subordinated Notes due 2026 (the “3.25% Notes”) were not substantially different, debt modification accounting was applied in accordance with Financial Accounting Standards Board (“FASB”) guidance. The debt refinancing costs associated with the debt transactions were expensed as incurred.
As a result of the flooding in Thailand, during 2012, we recorded $4,640,000 of insurance recoveries, net of flood-related costs, which included $25,000,000 of flood insurance recoveries, partially offset by $20,360,000 of asset impairments, inventory write-downs, and Thailand operating and site restoration costs.
The gain on short- and long-term investments for 2013 was $272,000, compared to a gain of $567,000 for 2012. The gains in 2013 and 2012 were due to payments we received under a settlement agreement. ARS previously held by us were subsequently sold by the settlement parties at a price that was higher than the price identified in the settlement agreement.
Other (expense) income for 2013 included a foreign currency loss of $1,372,000, compared to a foreign currency loss of $233,000 for 2012. These were primarily related to purchases and advances denominated in U.S. dollars made by our Thailand operation.
In March 2012, we issued $78,931,000 aggregate principal amount of 8.50% Secured Notes. Of that total amount, $38,931,000 aggregate principal amount of 8.50% Secured Notes were 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% Notes (the “3.25% Tender/Exchange Offer”). We made cash payments totaling $16,877,700, plus accrued and unpaid interest, for the purchase of $21,097,125 aggregate principal amount of outstanding 3.25% Notes that were tendered and accepted for purchase. Applying debt extinguishment accounting, we recorded a gain on extinguishment of debt of $3,268,000. The consideration paid for outstanding 3.25% Notes tendered for purchase was funded by the proceeds from the 8.50% Secured Notes sold by us in a private placement of these notes.
In April 2012, we completed an offer to purchase for cash $26,666,000 aggregate principal amount of our outstanding 8.50% Convertible Notes. After funding the purchase of outstanding 3.25% Notes pursuant to the 3.25% Tender/Exchange Offer, we applied $19,999,500 of residual proceeds from the private placement of 8.50% Secured Notes to fund the purchase of outstanding 8.50% Convertible Notes. Applying debt extinguishment accounting, we recorded a gain on extinguishment of debt of $2,629,000.
In January 2013, we repurchased $18,682,000 aggregate principal amount of our outstanding 8.50% Convertible Notes by making cash payments totaling $11,583,000, plus accrued and unpaid interest, which payments were funded by the proceeds of the sale of our 10.875% Notes. Applying debt extinguishment accounting, we recorded a gain on extinguishment of debt of $4,986,000.
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, short-term investments, cash flow from operations, our credit facility, bill of exchange transactions, and additional financing, if needed and as available given contractual restrictions, current credit market conditions and our operating performance, will be sufficient to meet our forecasted operating expenses, debt service and capital expenditures through 2015. We currently have outstanding $39,822,000 aggregate principal amount of our 8.50% Convertible Notes which was classified as current in our consolidated balance sheet as of September 28, 2014. On December 1, 2014, we initiated a redemption of the existing $39,822,000 of 8.50% Convertible Notes that can be put to us in January 2015. As of September 28, 2014, we also had outstanding $78,931,000 aggregate principal amount of our 8.50% Secured Notes and $12,200,000 aggregate principal amount of our 10.875% Notes. Our 8.50% Secured Notes and our 10.875% Notes mature on January 15, 2017.
In October 2014, subsequent to our fiscal year-end, we completed a debt offering that will enable us to address the $39,822,000 of 8.50% Convertible Notes that can be put to us in January 2015 and provided for the sale of $37,500,000 of 8.50% New Convertible Notes. We also completed an exchange of $15,000,000 of 8.50% Secured Notes for 2.5 million shares of common stock and warrants to purchase an additional 2.5 million shares of which 1.25 million were subsequently exercised. Certain beneficial holders of the 8.50% New Convertible Notes have 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 was escrowed until this put right expires. Additionally, we were required to escrow at least $35,000,000 of cash that is 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. On December 1, 2014, we initiated a redemption of the existing $39,822,000 of 8.50% Convertible Notes that can be put to us in January 2015. To fund this, we expect to use the proceeds of the 8.50% New Convertible Notes and our existing cash. As a result of the exchange transaction, we expect to record a loss on extinguishment of debt of approximately $4,000,000 in our first quarter of 2015. We are also pursuing added liquidity through additional first lien financing of up to $15,000,000. Details of this debt offering and exchange are discussed in more detail below.
Subsequent to year-end, we entered into an agreement under which we will receive a $15,000,000 advance payment from a customer in our first quarter of 2015 for suspension assemblies expected to ship to that customer in the second quarter of 2015.
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 sold a portion of one of our facilities in the second quarter of 2014 and 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, leasing and additional financing capacity, if available given contractual restrictions, current credit market conditions and our operating performance. Our cash and cash equivalents decreased from $39,403,000 at September 29, 2013, to $37,939,000 at September 28, 2014. Our short-term investments decreased from $1,200,000 at September 29, 2013 to $965,000 at September 28, 2014 and are restricted in use. In total, our cash and cash equivalents and short-term investments decreased by $1,699,000.
Cash (Used for) Provided by Operating Activities
Cash used for operating activities in 2014 was $1,474,000, compared to $6,085,000 of cash provided from operating activities in 2013. The decrease in operating cash flows was primarily due to an unfavorable change in our working capital primarily due to an increase in our accounts receivable balance driven by higher sales in our fourth quarter of 2014.
Cash Used for Investing Activities
In 2014, cash used for investing activities was $4,428,000, compared to $11,885,000 of cash used for investing activities in 2013. The cash used in 2014 was primarily due to $17,283,000 of capital expenditures for manufacturing equipment for new process technology and capability improvements and product tooling, partially offset by $6,395,000 of equipment sale/leaseback transactions in the U.S. and Thailand, $4,563,000 in proceeds from the sale of a portion of our Eau Claire, Wisconsin facility and other assets and the release of $1,662,000 of restricted cash that was temporarily held in our senior secured credit facility collections account. The cash used in 2013, was primarily due to $18,880,000 of capital expenditures for manufacturing equipment for new process technology and capability improvements and product tooling offset by $5,025,000 of equipment sale/leaseback transactions in the U.S. and Thailand and the release of $1,698,000 of restricted cash that was temporarily held in our senior secured credit facility collections account.
As of September 28, 2014, and September 29, 2013, we had $2,059,000 and $3,721,000, respectively, of cash and cash equivalents that were restricted in use. These amounts covered outstanding letters of credit and cash received and temporarily held in our senior secured credit facility collections account.
Cash Provided by (Used for) Financing Activities
Cash provided by financing activities in 2014, was $3,873,000, compared to $8,684,000 of cash used for financing activities in 2013. The cash provided in 2014, was primarily due to a $5,553,000 increase in borrowings from our senior secured credit facility, partially offset by $1,739,000 of capital lease payments. The cash used in 2013, was primarily due to $11,886,000 used for the redemption of all our remaining outstanding 3.25% Notes, $11,583,000 used for the repurchase of outstanding 8.50% Convertible Notes and $783,000 of capital lease payments, offset by $11,590,000 in proceeds from the private placement of our 10.875% Notes and a $3,980,000 increase in borrowings from our senior secured credit facility.
Bill of Exchange Transactions
During 2014, 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 sold, without recourse, an aggregate of $43,849,000 of its accounts receivable to HSBC and was paid 95% of the face value of the receivable, less interest expense of LIBOR plus 1.75%. Upon full payment of the receivable by its customer to HSBC, our Thai subsidiary receives from HSBC the 5% remainder due on the receivable. As of September 28, 2014, there remained $1,177,000 to be paid to our Thai subsidiary from HSBC, all of which was included within the line item “Other receivables” on our consolidated balance sheets.
Outstanding Indebtedness
Senior Secured Credit Facility - On September 22, 2014, we entered into an amendment to our existing senior secured credit agreement dated as of September 16, 2011, as previously amended, with PNC Bank. At our request, the amendment reduces the maximum principal amount of the revolving credit facility provided by the credit agreement from $35,000,000 to $20,000,000, extends the maturity date of the senior secured credit facility from October 1, 2014 to December 1, 2016, reduces the cash balance we are required to maintain in an account at PNC Bank from $15,000,000 to $2,500,000, and modifies the fixed charge coverage covenant under the credit agreement 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.
The amendment also requires us to maintain cash on our balance sheet during the period from December 1, 2014 through January 16, 2015 (which is the day after the 2015 put date for our 8.50% Convertible Notes) and during the period from December 1, 2015 through January 16, 2016 (which is the day after the 2016 put date for our 8.50% Convertible Notes) in an amount not less than the aggregate principal amount of our 8.50% Convertible Notes then outstanding, and establishes a reserve against our borrowing base during each such period in the same amount. The amendment permits us to redeem, repurchase or repay our 8.50% Convertible Notes in whole or in part at any time as long as, after giving effect to such redemption, repurchase or repayment, no default or event of default exists under the credit agreement and we have liquidity of not less than $20,000,000, and permits us to incur additional unsecured debt at any time prior to January 15, 2016 in an amount not to exceed the aggregate principal amount of our 8.50% Convertible Notes then outstanding as long as certain conditions are satisfied, including a requirement that, by the next put date for our 8.50% Convertible Notes, we reduce the aggregate principal balance of our 8.50% Convertible Notes by an amount equal to the principal amount of such additional unsecured debt then outstanding.
Our credit agreement with PNC Bank and the indentures governing the 8.50% Secured Notes, the 10.875% Notes and the 8.50% New Convertible 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.
From time to time, we borrow funds under the senior secured credit facility. As of September 28, 2014, we had $9,533,000 in outstanding borrowings which were repaid early in the following quarter. Our average outstanding balance in 2014 was $3,133,000. Amounts borrowed under the 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. As of September 28, 2014, we were in compliance with the covenants of our credit facility.
The credit agreement contains certain financial covenants that require us to maintain a minimum fixed charge coverage ratio and minimum liquidity. 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.
October 2014 Financing Transactions - On October 23, 2014, subsequent to year-end, we sold $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 will 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 have 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 was escrowed until the put right expires. Additionally, we were required to escrow at least $35,000,000 of cash that is 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. On December 1, 2014, we initiated a redemption of the existing $39,822,000 of 8.50% Convertible Notes that can be put to us in January 2015. To fund this, we expect to use the proceeds of the 8.50% New Convertible Notes 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, there were 1,250,000 warrants exercised which resulted in the issuance of 1,246,493 shares of common stock. The holder of the warrant will be entitled to participate pro rata in any dividends or other distributions (whether in cash, securities or other assets) paid, or rights offered, to holders of our common stock on an as-exercised basis. Applying debt extinguishment accounting, we expect to record a loss on extinguishment of debt of approximately $4,000,000 in our first quarter of 2015.
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% Secured Notes.
As of October 20, 2014, we entered into an additional 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 debt offering and the exchange transactions, referred to above.
On December 1, 2014, we initiated a redemption of all $39,822,000 aggregate principal amount of our outstanding 8.50% Convertible Notes. In accordance with the terms of the indenture and a notice of redemption thereunder, the 8.50% Convertible Notes will be redeemed on January 15, 2015 at a redemption price of 100% of the principal amount thereof, plus accrued and unpaid interest to, but excluding, the redemption date.
3.25% Notes Redemption - In accordance with the terms of the indenture governing the 3.25% Notes and a notice of redemption thereunder, all $11,885,875 aggregate principal amount of 3.25% Notes were redeemed on or before February 2, 2013, at a redemption price of 100% of the principal amount, plus accrued and unpaid interest up to, but not including, the redemption date. Interest on the 3.25% Notes called for redemption ceased to accrue as of February 2, 2013. Payment of the redemption price was funded by cash on hand. After completion of the redemption, no 3.25% Notes remained outstanding.
2013 Debt Transactions - On January 22, 2013, we sold $12,200,000 aggregate principal amount of 10.875% Notes for a total purchase price of $11,590,000. On the same date, we repurchased $18,682,000 aggregate principal amount of our outstanding 8.50% Convertible Notes by making cash payments totaling $11,583,000, plus accrued and unpaid interest, which payments were funded by the proceeds of the sale of the 10.875% Notes. This refinancing reduced the portion of our outstanding debt subject to a holder-initiated repurchase as early as 2015 from $58,504,000 to $39,822,000.
The 10.875% Notes were issued under an indenture dated as of January 22, 2013, and bear interest at a rate of 10.875% per annum, payable semiannually 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.
The indenture governing the 10.875% Notes contains 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 and enter into operating leases. The indenture also limits the amount of our consolidated total assets and free cash flow that can be attributable to subsidiaries that have not guaranteed the 10.875% Notes or, in certain cases, had their stock pledged to secure the 10.875% Notes. The indenture contains customary events of default, the occurrence of which would permit the acceleration of the 10.875% Notes, including failure to pay principal of or interest on the 10.75% Notes, failure to comply with covenants in the indenture or other related documents, default in the payment of principal of, or acceleration of, other material indebtedness for borrowed money of the company, failure of the company or any of its significant subsidiaries to pay or discharge material judgments, and bankruptcy of the company or any of its significant subsidiaries.
To accommodate the January 2013 debt transactions described above, 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 credit agreement.
Capital Leases - As of September 28, 2014, we have remaining capital lease payment obligations of $6,573,000.
Share Repurchase Program - In 2008, our board of directors approved a share repurchase program authorizing us to spend up to $130,000,000 to repurchase shares of our common stock from time to time in the open market or through privately negotiated transactions. The board of directors terminated the plan on October 9, 2013, at which point $72,368,000 remained available for repurchase and no repurchases had been made since 2008.
Contractual Obligations
The following table presents our contractual obligations at September 28, 2014 (in thousands):
As of September 28, 2014, the liability balance for uncertain tax positions was $6,065,000. We are not able to reasonably estimate in which future periods these amounts will ultimately be settled.
We currently have outstanding $39,822,000 aggregate principal amount of our 8.50% Convertible Notes. On December 1, 2014, we initiated a redemption of the existing $39,822,000 of 8.50% Convertible Notes that can be put to us in January 2015. The outstanding $78,931,000 aggregate principal amount of our 8.50% Secured Notes mature on January 15, 2017. The outstanding $12,200,000 aggregate principal amount of our 10.875% Notes mature on January 15, 2017. We also currently have outstanding $37,500,000 aggregate principal amount of our 8.50% New Convertible Notes that mature on October 31, 2019.
Critical Accounting Policies
Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires estimation and judgment that affect the reported amounts of revenues, expenses, assets and liabilities. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Following are our most critical accounting policies that affect significant areas and involve judgment and estimates. If these estimates differ materially from actual results, the impact on the consolidated financial statements may be material.
Revenue Recognition - We recognize revenue from the sale of our products when persuasive evidence of an arrangement exists, the product has been delivered, the fee is fixed and determinable and collection of the resulting receivable is reasonably assured. Amounts billed to customers for shipping and handling costs associated with products sold are classified as revenue.
For all sales, we use a binding purchase order as evidence of an arrangement. Delivery generally occurs when product is delivered to a common carrier. Certain of our products are delivered on an FOB destination basis. We defer our revenue associated with these transactions until the product has been delivered to the customer’s premises.
We also store inventory in “vendor managed inventory,” or VMI facilities, which are warehouses located close to the customer’s manufacturing facilities. Revenue is recognized on sales from such facilities upon the transfer of title and risk of loss, following the customer’s acknowledgement of the receipt of the goods.
We also enter into arrangements with customers that provide us with reimbursement for engineering services and specific program capacity to partially offset the costs of our investment. We recognize the associated revenue over the estimated life of the program to which the services and capacity relate.
Inventory Valuation - Inventories are valued at the lower of cost (first-in, first-out method) or market by analyzing market conditions, current sales prices, inventory costs and inventory balances.
We are dependent on a limited number of customers and a limited number of product programs for each customer. Because our products are custom built, we typically cannot shift work-in-process or finished goods from customer to customer or from one program to another for a particular customer. We evaluate inventory balances for excess quantities and obsolescence on a regular basis by analyzing backlog, estimated demand, inventory on hand, sales levels and other information. We write down excess and obsolete inventory to the lower of cost or market based on the analysis.
Long-Lived Assets - We evaluate the carrying value of long-lived assets, consisting primarily of property, plant and equipment, whenever certain events or changes in circumstances indicate that the carrying amount of these assets may not be recoverable. Such events or circumstances include, but are not limited to, a prolonged industry downturn or significant reductions in projected future cash flows. In assessing the recoverability of long-lived assets, we compare the carrying value to the undiscounted future cash flows the assets are expected to generate. If the total of the undiscounted future cash flows is less than the carrying amount of the assets, the assets will be written down based on the excess of the carrying amount over the fair value of the assets. Fair value would generally be determined by calculating the discounted future cash flows using a discount rate based upon our weighted average cost of capital. Significant judgments and assumptions are required in the forecast of future operating results used in the preparation of the estimated future cash flows.
Income Taxes - We account for income taxes in accordance with FASB guidance on accounting for income taxes. As part of the process of preparing our consolidated financial statements, we are required to estimate our income taxes in each of the jurisdictions in which we operate. This process involves estimating our current tax exposure together with assessing temporary differences resulting from differing treatment of items for tax and accounting purposes. These temporary differences result in deferred tax assets and liabilities, which are included within our consolidated balance sheet. 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 statement of operations.
Significant judgment is required in determining our provision for income taxes, our deferred tax assets and liabilities and any valuation allowance recorded against our deferred tax assets. Valuation allowances arise due to the uncertainty of realizing deferred tax assets. At September 28, 2014, and September 29, 2013, we had valuation allowances of $227,219,000 and $213,948,000, respectively. The FASB guidance requires that companies assess whether valuation allowances should be established against their deferred tax assets based on the consideration of all available evidence, using a “more likely than not” standard. In making such assessments, significant weight is to be given to evidence that can be objectively verified. A company’s current or previous losses are given more weight than its future outlook. Under the guidance, our three-year historical cumulative loss was a significant negative factor. This loss, combined with uncertain near-term market and economic conditions, reduced our ability to rely on our projections of future taxable income in determining whether a valuation allowance was appropriate. Accordingly, we concluded that a full valuation allowance is 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.
Other Matters
See Note 1 to the consolidated financial statements contained in Item 15 below for a discussion of recent accounting pronouncements.
Inflation
Management believes inflation has not had a material effect on our operations or on our financial condition. We cannot be sure that our business will not be affected by inflation in the future.
Item 7A.
Item 7A.	Quantitative and Qualitative Disclosures about Market Risk
We have no earnings or cash flow exposure due to market risk on our debt obligations that are subject to fixed interest rates. Interest rate changes, however, would affect the fair market value of this fixed rate debt. At September 28, 2014, we had fixed rate debt of $130,953,000, with a fair market value of $131,870,000. We used trading activity to determine the fair market value of the 8.50% Convertible Notes and the 8.50% Secured Notes. The 10.875% Notes had no trading activity, therefore the estimate was based on the closing market price of comparable debt as of the end of the fiscal year.
As of September 28, 2014 we had $9,533,000 in outstanding borrowings under our credit facility with PNC Bank. Prior to March 25, 2012, amounts borrowed under the credit facility were subject to cash interest, at our election, at a rate equal to either (i) PNC Bank’s alternate base rate (as defined in the credit agreement) plus 2.0% per annum, or (ii) LIBOR plus 4.5% per annum. After March 25, 2012, such loans, if any, are eligible to bear cash interest at a reduced rate equal to either (i) PNC Bank’s alternate base rate plus 1.0% per annum, or (ii) LIBOR plus 3.5% per annum if no defaults or events of default exist under the credit agreement.
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. Fluctuations could impact our operating results or negatively affect our cash, cash equivalents and marketable securities held in investment accounts.
Item 8.
Item 8.	Financial Statements and Supplementary Data
The financial statements and notes thereto required pursuant to this Item begin on page of this Annual Report on Form 10-K.
Item 9.
Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A.
Item 9A.	Controls and Procedures
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures that are designed to ensure that information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time period specified in SEC rules and forms. These controls and procedures are also designed to ensure that such information is accumulated and communicated to our management, including our principal executive and principal financial officers, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating disclosure controls and procedures, we have recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. Management is required to apply judgment in evaluating its controls and procedures.
We performed an evaluation under the supervision and with the participation of our management, including our principal executive and principal financial officers, to assess the effectiveness of the design and operation of our disclosure controls and procedures under the Exchange Act. Based on that evaluation, our management, including our principal executive and principal financial officers, concluded that our disclosure controls and procedures were effective as of September 28, 2014.
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.
Management’s Report on Internal Controls and Procedures
Our management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act). Our internal control system is designed to provide reasonable assurance to our management and board of directors regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Our internal control over financial reporting includes those policies and procedures that:
•pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect our transactions and dispositions of assets;
•provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles in the United States of America, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and
•provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of company assets that could have a material effect on our financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
We performed an evaluation under the supervision and with the participation of our management, including our principal executive and principal financial officers, to assess the effectiveness of the design and operation of our disclosure controls and procedures under the Exchange Act as of September 28, 2014. In making this assessment, we used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control - Integrated Framework (1992). Based on that criteria, our management concluded that our internal control over financial reporting was effective as of September 28, 2014.
Our consolidated financial statements as of and for the year ended September 28, 2014, have been audited by Deloitte & Touche LLP, our independent registered public accounting firm, in accordance with the standards of the Public Company Accounting Oversight Board (United States). Deloitte & Touche LLP has also audited our internal control over financial reporting as of September 28, 2014, as stated in its attestation report included in this Annual Report on Form 10-K.
December 9, 2014
/s/ Richard J. Penn	
President and Chief Executive Officer
	/s/ David P. Radloff	
Vice President and Chief Financial Officer
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of
Hutchinson Technology Incorporated
Hutchinson, Minnesota:
We have audited the internal control over financial reporting of Hutchinson Technology Incorporated and subsidiaries (the “Company”) as of September 28, 2014, based on the criteria established in Internal Control - Integrated Framework (1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission. The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Controls and Procedures. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed by, or under the supervision of, the company’s principal executive and principal financial officers, or persons performing similar functions, and effected by the company’s board of directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of September 28, 2014, based on the criteria established in Internal Control - Integrated Framework (1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements and financial statement schedule as of and for the year ended September 28, 2014 of the Company and our report dated December 9, 2014 expressed an unqualified opinion on those financial statements and financial statement schedule.
/s/ Deloitte & Touche LLP
Minneapolis, Minnesota
December 9, 2014
PART III
Certain information required by Part III is incorporated by reference from our definitive Proxy Statement for the Annual Meeting of Shareholders to be held on January 29, 2015 (the “Proxy Statement”), which will be filed with the SEC pursuant to Regulation 14A within 120 days after September 28, 2014. Except for those portions specifically incorporated in this Annual Report on Form 10-K by reference to our Proxy Statement, no other portions of the Proxy Statement are deemed to be filed as part of this Annual Report on Form 10-K.
Item 10.
Item 10.	Directors, Executive Officers and Corporate Governance
Incorporated into this item by reference is the information appearing under the headings “Proposal No. 1 - Election of Directors” and “Section 16(a) Beneficial Ownership Reporting Compliance” in our Proxy Statement.
Our executive officers are as follows:
Mr. Penn became President and Chief Executive Officer in October 2012. Previously, he had served as Senior Vice President and President of the Disk Drive Components Division since March 2011. He was Senior Vice President and President of the BioMeasurement Division from April 2007 to March 2011, Senior Vice President and President of the Disk Drive Components Division from 2005 to April 2007, and Vice President of Operations from 2003 to 2005. Mr. Penn has been with HTI since 1981.
Mr. Radloff became Vice President and Chief Financial Officer in September 2010. Previously, he had served as Corporate Controller since January 2009. He served as Vice President of Corporate Finance from December 2007 to January 2009 and as Chief Information Officer from February 2000 to January 2009. He has been with HTI since 1986.
Ms. Pautz became Vice President of Human Resources & Corporate Communications in December 2009. Previously, she had served as Human Resources Director since January 2009. She served as Corporate Communications Director from March 2001 to December 2009. She has been with HTI since 1984.
Mr. Ruzicka became Vice President of Operations in December 2012. Previously, he had served as plant manager since May 2008. He served as Director of Manufacturing Strategy from 2006 to May 2008 and Director of Asian Operations from 2000 to 2006. He has been with HTI since 1982.
Mr. Jelkin became Vice President of Engineering in June 2014. Previously, he had served as Director of Engineering and Program Development since 2006. He has been with HTI since 1988.
Executive officers are appointed annually by our board of directors and serve a one-year period or until their successors are elected.
None of the above executive officers is related to each other or to any of our directors.
We have adopted a Code of Ethics and Conduct, which applies to our members of the board of directors, chief executive officer, chief financial officer, controller and other employees performing similar functions as designated by our chief executive officer. A copy of our Code of Ethics and Conduct is available on our website at http://www.htch.com. We intend to post on our website any amendments to, or waivers from, our Code of Ethics and Conduct pursuant to the rules of the SEC and the NASDAQ Stock Market.
Item 11.
Item 11.	Executive Compensation
Incorporated into this item by reference is the information appearing under the heading “Compensation of Executive Officers,” the information regarding compensation committee interlocks and insider participation under the heading “Corporate Governance” and the information regarding compensation of non-employee directors under the heading “Proposal No. 1 - Election of Directors” in our Proxy Statement.
Item 12.
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Incorporated into this item by reference is the information appearing under the headings “Security Ownership of Principal Shareholders and Management” and “Equity Compensation Plan Information” in our Proxy Statement.
Item 13.
Item 13.	Certain Relationships and Related Transactions, and Director Independence
Incorporated into this item by reference is the information regarding director independence under the heading “Proposal No. 1 - Election of Directors” and the information regarding related person transactions under the heading “Corporate Governance” in our Proxy Statement.
Item 14.
Item 14.	Principal Accountant Fees and Services
Incorporated into this item by reference is the information under the heading “Proposal No. 3 - Ratification of Independent Registered Public Accounting Firm” in our Proxy Statement.
PART IV
Item 15.
Item 15.	Exhibits and Financial Statement Schedules
(a)Documents Filed as Part of this Annual Report on Form 10-K:
1.Consolidated Financial Statements:
Consolidated Statements of Operations for the fiscal years ended September 28, 2014, September 29, 2013 and September 30, 2012
Consolidated Statements of Comprehensive Loss for the fiscal years ended September 28, 2014, September 29, 2013 and September 30, 2012
Consolidated Balance Sheets as of September 28, 2014 and September 29, 2013
Consolidated Statements of Cash Flows for the fiscal years ended September 28, 2014, September 29, 2013 and September 30, 2012
Consolidated Statements of Shareholders’ Equity for the fiscal years ended September 28, 2014, September 29, 2013 and September 30, 2012
Notes to Consolidated Financial Statements
Report of Independent Registered Public Accounting Firm
2.Financial Statement Schedule:
Schedule II - Valuation and Qualifying Accounts
All other schedules for which provision is made in the applicable accounting regulations of the SEC are not required under the related instructions or are inapplicable and therefore have been omitted.
(b)Exhibits:
Unless otherwise indicated, all documents incorporated into this Annual Report on Form 10-K by reference to a document filed with the SEC pursuant to the Exchange Act are located under SEC file number 1-34838.
3.1
Amended and Restated Articles of Incorporation (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
Restated By-Laws, as amended December 16, 2013 (incorporated by reference to Exhibit 3.1 to Current Report on Form 8-K filed 12/18/2013).
4.1
Instruments defining the rights of security holders. The registrant agrees to furnish to the SEC upon request copies of instruments with respect to long-term debt.
4.2
Rights Agreement dated as of July 29, 2010, with Wells Fargo Bank, N.A., as Rights Agent (incorporated by reference to Exhibit 1 to Registration Statement on Form 8-A filed 7/30/2010); First Amendment to Rights Agreement dated as of May 6, 2011, with Wells Fargo Bank, N.A., as Rights Agent (incorporated by reference to Exhibit 2 to Registration Statement on Form 8-A/A filed 5/6/2011); Second Amendment to Rights Agreement, dated February 24, 2012, with Wells Fargo Bank, N.A., as Rights Agent (incorporated by reference to Exhibit 3 to Registration Statement on Form 8-A/A filed 2/24/2012); and Third Amendment to Rights Agreement, dated March 27, 2102, with Wells Fargo Bank, N.A., as Rights Agent (incorporated by reference to Exhibit 4 to Registration Statement on Form 8-A/A filed 3/27/2012).
4.3
Indenture dated as of January 25, 2006, with LaSalle Bank National Association, as Trustee (incorporated by reference to Exhibit 4.1 to Current Report on Form 8-K filed 1/26/2006; File No. 0-14709), and Instrument of Resignation, Appointment and Acceptance dated October 29, 2008, with LaSalle Bank National Association, as prior trustee, and Wells Fargo Bank, National Association, as successor trustee (incorporated by reference to Exhibit 4.4 to Annual Report on Form 10-K for the fiscal year ended 9/28/2008).
4.4
Form of 3.25% Convertible Subordinated Note due 2026 (included as part of Exhibit ).
4.5
Indenture, dated February 11, 2011, with Wells Fargo Bank, National Association, as Trustee (incorporated by reference to Exhibit 4.1 to Current Report on Form 8-K filed 2/11/2011); and First Supplemental Indenture, dated June 17, 2011, with Wells Fargo Bank, National Association, as Trustee (incorporated by reference to Exhibit 4.8 to Amendment No. 3 to Registration Statement on Form S-4; File No. 333-173970).
4.6
Form of 8.50% Convertible Senior Note due 2026 (incorporated by reference to Exhibit 4.2 to Current Report on Form 8-K filed 2/11/2011).
4.7
Intercreditor Agreement, dated March 30, 2012, by and between PNC Bank, National Association, and Wells Fargo Bank, National Association (incorporated by reference to Exhibit 4.2 to Current Report on Form 8-K filed 4/2/2012); First Amendment to Intercreditor Agreement, dated January 22, 2013 (incorporated by reference to Exhibit 4.3 to Current Report on Form 8-K filed 1/28/2013).
4.8
8.50% Senior Secured Second Lien Note Indenture, dated March 30, 2012, with Wells Fargo Bank, National Association, as Trustee (including form of 8.50% Senior Secured Second Lien Note due 2017) (incorporated by reference to Exhibit 4.1 to Current Report on Form 8-K filed 4/2/2012); First Supplemental Indenture, dated January 22, 2013 (incorporated by reference to Exhibit 4.4 to Current Report on Form 8-K filed 1/28/2013).
4.9
Form of Warrant (incorporated by reference to Exhibit 4.4 to Current Report on Form 8-K filed 4/2/2012)
4.10
10.875% Senior Secured Second Lien Note Indenture, dated January 22, 2013, with Wells Fargo Bank, National Association, as trustee (including form of 10.875% Senior Secured Second Lien Note due 2017) (incorporated by reference to Exhibit 4.1 to Current Report on Form 8-K filed 1/28/2013).
4.11
Intercreditor Agreement, dated January 22, 2013, between Wells Fargo Bank, National Association (incorporated by reference to Exhibit 4.2 to Current Report on Form 8-K filed 1/28/2013).
10.1
Office/Warehouse Lease with OPUS Corporation, dated December 29, 1995 (incorporated by reference to Exhibit 10.2 to Quarterly Report on Form 10-Q for the quarter ended 3/24/96; File No. 0-14709), First Amendment to Office/Warehouse Lease dated April 30, 1996 (incorporated by reference to Exhibit 10.2 to Quarterly Report on Form 10-Q for the quarter ended 6/23/96; File No. 0-14709); and Second Amendment to Office/Warehouse Lease with VV Minneapolis, L.P., as successor-in-interest to OPUS Corporation, dated April 14, 2004 (incorporated by reference to Exhibit 10.1 to Annual Report on Form 10-K for the year ended 9/25/2005; File No. 0-14709).
10.2
Patent License Agreement, effective as of September 1, 1994, with International Business Machines Corporation (incorporated by reference to Exhibit 10.11 to Quarterly Report on Form 10-Q/A for the quarter ended 6/25/95; File No. 0-14709).
10.3*
Amended and Restated 1996 Incentive Plan (as amended and restated October 10, 2008) (incorporated by reference to Exhibit 10.6 to Annual Report on Form 10-K for the fiscal year ended 9/28/2008; File No. 0-14709).
10.4*
Form of Non-Statutory Stock Option Agreement (Employee) under Amended and Restated 1996 Incentive Plan (incorporated by reference to Exhibit 10.9 to Annual Report on Form 10-K for the fiscal year ended 9/28/2008; File No. 0-14709).
10.5*
Form of Incentive Stock Option Agreement (Employee) under Amended and Restated 1996 Incentive Plan (incorporated by reference to Exhibit 10.10 to Annual Report on Form 10-K for the fiscal year ended 9/28/2008; File No. 0-14709).
10.6*
Form of Non-Statutory Stock Option Agreement (Director) under Amended and Restated 1996 Incentive Plan (incorporated by reference to Exhibit 10.11 to Annual Report on Form 10-K for the fiscal year ended 9/28/2008; File No. 0-14709).
10.7*
Form of Restricted Stock Agreement (Director) under Amended and Restated 1996 Incentive Plan (incorporated by reference to Exhibit 10.2 to Current Report on Form 8-K filed 12/7/2004; File No. 0-14709).
10.8*
Non-Employee Directors Equity Plan (as amended and restated January 25, 2012) (incorporated by reference to Exhibit 10.8 to Annual Report on Form 10-K for the fiscal year ended 9/30/2012).
10.9*
Form of Severance and Change in Control Agreement for Senior Executives (incorporated by reference to Exhibit 10.1 to Amendment No. 1 to Current Report on Form 8-K/A filed 10/14/2010).
10.10*
Severance Pay Plan (as amended and restated March 8, 2011) (incorporated by reference to Exhibit 10.1 to Amendment No. 1 on Form 10-Q/A for the quarter ended 3/27/2011).
10.11*
Employee Stock Purchase Plan (as amended and restated January 20, 2011) (incorporated by reference to Appendix B to Definitive Proxy Statement on Schedule 14A filed 12/10/2010).
10.12*
2011 Equity Incentive Plan (incorporated by reference to Exhibit 10.3 to Quarterly Report on Form 10-Q for the fiscal quarter ended 12/26/2010).
10.13*
Form of Director Stock Option Agreement under 2011 Equity Incentive Plan (incorporated by reference to Exhibit 10.4 to Quarterly Report on Form 10-Q for the fiscal quarter ended 12/26/2010).
10.14*
Form of Employee Non-Statutory Stock Option Agreement under 2011 Equity Incentive Plan (incorporated by reference to Exhibit 10.13 to the Annual Report on Form 10-K for the fiscal year ended 9/25/2011).
10.15*
Form of Employee Incentive Stock Option Agreement under 2011 Equity Incentive Plan (incorporated by reference to Exhibit 10.14 to Annual Report on Form 10-K for the fiscal year ended 9/25/2011).
10.16*
Form of Employee Restricted Stock Unit Agreement under 2011 Equity Incentive Plan (incorporated by reference to Exhibit 10.15 to Annual Report on Form 10-K for the fiscal year ended 9/25/2011).
10.17*
Form of Senior Management Restricted Stock Unit Agreement under 2011 Equity Incentive Plan (incorporated by reference to Exhibit 10.16 to Annual Report on Form 10-K for the fiscal year ended 9/25/2011).
10.18*
Description of Fiscal Year 2014 Executive Annual Cash Incentive Plan (incorporated by reference to Exhibit 10.1 to Current Report on Form 8-K filed 10/15/2013).
10.19
Revolving Credit and Security Agreement, dated September 16, 2011 (incorporated by reference to Exhibit 10.1 to Current Report on Form 8-K filed 9/21/2011); Consent and Amendment No. 1 to Revolving Credit and Security Agreement, between PNC Bank, National Association, as agent and lender, dated February 6, 2012 (incorporated by reference to Exhibit 10.2 to Amendment No. 1 to Registration Statement on Form S-1, filed 2/27/2012; File No. 333-179384); Amendment to Consent and Amendment No. 1 to Revolving Credit and Security Agreement, dated March 28, 2012, with PNC Bank, National Association, as Agent and Lender (incorporated by reference to Exhibit 10.2 to Current Report on Form 8-K filed 4/2/2012); Amendment No. 2 to Revolving Credit and Security Agreement, dated July 23, 2012, with PNC Bank, National Association, as Agent and Lender (incorporated by reference to Exhibit 10.1 to Current Report on Form 8-K filed 7/26/2012); Consent and Amendment No. 3 to Revolving Credit and Security Agreement, dated January 22, 2013 (incorporated by reference to Exhibit 10.4 to Current Report on Form 8-K filed 1/28/2013); Waiver and Amendment No. 4 to Revolving Credit and Security Agreement, dated as of October 28, 2013 (incorporated by reference to Exhibit 10.1 to Current Report on Form 8-K filed 10/31/2013); Amendment No. 5 to Revolving Credit and Security Agreement, dated September 22, 2014 (incorporated by reference to Exhibit 10.1 to Current Report on Form 8-K filed 9/25/2014).
10.20
Securities Purchase Agreement, dated March 28, 2012 (incorporated by reference to Exhibit 10.1 to Current Report on Form 8-K filed 4/2/2012).
21.1
List of Subsidiaries.
23.1
Consent of Independent Registered Public Accounting Firm.
24.1
Powers of Attorney.
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.
32.1
Section 1350 Certifications.
The following financial statements and footnotes from the HTI Annual Report on Form 10-K for the fiscal year ended September 28, 2014, formatted in XBRL (eXtensible Business Reporting Language): (i) Consolidated Statements of Operations; (ii) Consolidated Balance Sheets; (iii) Consolidated Statements of Cash Flows; (iv) Consolidated Statements of Shareholders’ Equity; and (v) Notes to Consolidated Financial Statements.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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, on December 9, 2014.
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Registrant and in the capacities indicated on December 9, 2014.
/s/ Richard J. Penn
/s/ David P. Radloff
Richard J. Penn,
President and Chief Executive Officer
(Principal Executive Officer) and Director
David P. Radloff,
Vice President and Chief Financial Officer
(Principal Financial Officer and Principal Accounting Officer)
*
*
Martha Goldberg Aronson, Director
Frank P. Russomanno, Director
*
*
Wayne M. Fortun, Director
Philip E. Soran, Director
*
*
Russell Huffer, Director
Thomas R. VerHage, Director
_____________________________
*Richard J. Penn, by signing his name hereto, does hereby sign this document on behalf of each of the above-named directors of the Registrant pursuant to powers of attorney duly executed by such persons.
By: /s/ Richard J. Penn
Richard J. Penn,
Attorney-in-Fact
CONSOLIDATED STATEMENTS OF OPERATIONS
Hutchinson Technology Incorporated and Subsidiaries
The accompanying notes are an integral part of these consolidated financial statements.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
Hutchinson Technology Incorporated and Subsidiaries
The accompanying notes are an integral part of these consolidated financial statements.
CONSOLIDATED BALANCE SHEETS
Hutchinson Technology Incorporated and Subsidiaries
The accompanying notes are an integral part of these consolidated financial statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Hutchinson Technology Incorporated and Subsidiaries
The accompanying notes are an integral part of these consolidated financial statements.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
Hutchinson Technology Incorporated and Subsidiaries
The accompanying notes are an integral part of these consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Hutchinson Technology Incorporated and Subsidiaries
(Columnar dollar amounts in thousands except per share amounts)
1.Basis of Presentation and Summary of Significant Accounting Policies
Organization
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.
We manufacture suspension assemblies for all sizes and types of hard disk drives. Suspension assemblies are critical components of disk drives that hold the read/write heads in position above the spinning magnetic disks. We developed our position as a key supplier of suspension assemblies through an integrated manufacturing approach, research, development and design activities coupled with substantial investments in process capabilities, product features and manufacturing capacity. We manufacture our suspension assemblies with proprietary technology and processes with very low part-to-part variation. These processes require manufacturing to precise specifications that are critical to maintaining the necessary microscopic clearance between the head and disk and the electrical connectivity between the head and the drive circuitry.
We design our suspension assemblies with a focus on the increasing performance requirements of new disk drives, principally more complex, increased data density, improved head-to-disk stability during a physical shock event and reduced data access time. Increased capacity, improved reliability and performance, as well as the miniaturization of disk drives, generally require suspension assemblies with lower variability, specialized design, expanded functionality and greater precision. Manufacturing of these smaller and more complex suspension assemblies requires that we develop new manufacturing process capabilities. We will continue to invest, as needed, to advance suspension assembly technology, enhance our process capabilities and expand our production capacity.
Principles of Consolidation
The consolidated financial statements include the accounts of Hutchinson Technology Incorporated and its subsidiaries (“we,” “our” and “us”), all of which are wholly-owned. All intercompany accounts and transactions have been eliminated in consolidation.
Use of Estimates
The preparation of financial statements in conformity with generally accepted accounting principles (“GAAP”) 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.
Accounting Pronouncements
In May 2014, the FASB issued authoritative guidance related to revenue from contracts with customers. The updated 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. The updated guidance will be effective for our first quarter of 2018. We are in the process of assessing the impact, if any, this guidance will have on our consolidated financial statements.
Fiscal Year
Our fiscal year is a fifty-two/fifty-three week period ending on the last Sunday in September. The fiscal years ended September 28, 2014, and September 29, 2013, were both fifty-two week periods and the fiscal year ended September 30, 2012, was a fifty-three week period.
Revenue Recognition
We recognize revenue from the sale of our products when persuasive evidence of an arrangement exists, the product has been delivered, the fee is fixed and determinable and collection of the resulting receivable is reasonably assured. Amounts billed to customers for shipping and handling costs associated with products sold are classified as revenue.
For all sales, we use a binding purchase order as evidence of an arrangement. Delivery generally occurs when the product is delivered to a common carrier. Certain of our products are delivered on an FOB destination basis. We defer our revenue associated with these transactions until the product has been delivered and accepted at the customer’s premises.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Hutchinson Technology Incorporated and Subsidiaries - (Continued)
We also store inventory in “vendor managed inventory,” or VMI, facilities, which are warehouses located close to the customer’s manufacturing facilities. Revenue is recognized on sales from such facilities upon the transfer of title and risk of loss, following the customer’s acknowledgement of the receipt of the goods.
We also enter into arrangements with customers that provide us with reimbursement for engineering services and specific program capacity to partially offset the costs of our investment. We recognize the associated revenue over the estimated life of the program to which the services and capacity relate. The deferred revenue related to these reimbursements, as recorded on our consolidated balance sheets as of September 28, 2014, and September 29, 2013, was $1,135,000 and $513,000, respectively, included in the line item “Accrued expenses and other” and $1,891,000 and $524,000, respectively, included in the line item “Other long-term liabilities.”
Cash and Cash Equivalents
Cash equivalents consist of all highly liquid investments with original maturities of three months or less.
The cash and cash equivalents that were restricted in use, as recorded on our consolidated balance sheets as of September 28, 2014, and September 29, 2013, was $2,059,000 and $3,721,000, respectively included in the line item “Other current assets”. As of September 28, 2014, and September 29, 2013, these amounts covered outstanding letters of credit and cash received and temporarily held in our senior secured credit facility collections account. The revolving credit and security agreement between us and PNC Bank, as amended, requires that we maintain a $2,500,000 compensating balance to draw proceeds on the corresponding credit facility. The $2,500,000 balance is maintained under the credit agreement to assure future credit availability.
Investments
Our short-term investments are comprised of United States government debt securities. We account for securities available for sale in accordance with Financial Accounting Standards Board (“FASB”) guidance regarding accounting for certain investments in debt and equity securities, which requires that available-for-sale and trading securities be carried at fair value. Unrealized gains and losses deemed to be temporary on available-for-sale securities are reported as other comprehensive income (“OCI”) within shareholders’ equity. Fair value of the securities is based upon quoted market prices in active markets or estimated fair value when quoted market prices are not available. The cost basis for realized gains and losses on available-for-sale securities is determined on a specific identification basis. We classify our available-for-sale securities as short- or long-term based upon management’s intent and ability to hold these investments.
A summary of our investments as of September 28, 2014, and September 29, 2013, is as follows:
As of September 28, 2014, and September 29, 2013, our short-term investments mature within one year.
As of September 28, 2014, and September 29, 2013, we had $965,000 and $1,200,000, 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.
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 $23,971,000 at September 28, 2014, and $21,680,000 at September 29, 2013, are net of allowances for sales returns of $497,000 and $656,000, respectively.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Hutchinson Technology Incorporated and Subsidiaries - (Continued)
During the third and fourth quarters of 2014, 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 $43,849,000 of its accounts receivable to HSBC and was paid 95% of the face value of the accounts receivable, less interest expense of LIBOR plus 1.75%. Upon full payment of the receivable by its customer to HSBC, our Thai subsidiary receives from HSBC the 5% remainder due on the receivable. As of September 28, 2014, there remained $1,177,000 to be paid to our Thai subsidiary from HSBC from the sale of $23,472,000 of its accounts receivable to HSBC. The $1,177,000 was included within the line item “Other receivables” on our consolidated balance sheet.
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:
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 September 28, 2014, and September 29, 2013:
Property and Depreciation
Property, plant and equipment are stated at cost. We compute depreciation using the straight-line method over the estimated useful lives of the assets. We also use straight-line depreciation methods for income tax reporting purposes.
Costs of renewals and betterments that substantially extend the useful life of an asset are capitalized and depreciated. Maintenance and repairs are charged directly to expense as incurred.
Property under capital lease is comprised of equipment used in our operations. The related depreciation for capital leases is included in depreciation expense. The carrying value of property under capital lease was $9,770,000 at September 28, 2014, net of accumulated depreciation of $2,520,000.
Estimated useful lives for financial reporting purposes are as follows:
Buildings	(in years) to
Leasehold improvements	(in years) to
Equipment	(in years) to
Capital leases	(in years) to
Other Comprehensive Loss
The components of accumulated OCI, net of income taxes, were as follows:
Our Thailand operation uses their local currency as its functional currency. Assets and liabilities are translated at exchange rates in effect at the balance sheet date. Income and expense accounts are translated at the average exchange rates during the year. Resulting translation adjustments are recorded as a separate component of accumulated OCI. Foreign currency translation, net of income taxes of $0, was a $395,000 loss in 2014, a $19,000 loss in 2013 and a $319,000 loss in 2012.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Hutchinson Technology Incorporated and Subsidiaries - (Continued)
Transaction gains and losses that arise from the exchange rate changes on transactions denominated in a currency other than the local currency are included in “Other (expense) income, net” in the consolidated statements of operations. We recognized a foreign currency loss of $2,076,000 in 2014, a loss of $1,372,000 in 2013 and a loss of $233,000 in 2012 primarily related to purchases denominated in U.S. dollars made by our Thailand operation.
Engineering and Process Development
Our engineers and technicians are responsible for the implementation of new technologies, as well as process and product development and improvements. Expenditures related to these activities totaled $47,397,000 in 2014, $39,657,000 in 2013 and $39,764,000 in 2012. Of these amounts, $17,316,000 in 2014, $14,621,000 in 2013 and $16,474,000 in 2012 were classified as research and development expenses, with the remainder relating to quality, engineering and manufacturing support, classified as cost of sales.
Severance and Site Consolidation Expenses
A summary of our severance and site consolidation expenses as of September 28, 2014, is as follows:
We have had an ongoing severance and manufacturing consolidation and restructuring plan in place to support efforts to improve operating results and liquidity through improved utilization of our facilities in both the U.S. and Thailand.
At the end of 2011, $1,741,000 of severance and other expenses remained to be paid related to the 2011 manufacturing consolidation and restructuring plan that included eliminating approximately 800 positions from our U.S. workforce. As a result of leveraging our U.S. assembly operations to offset the temporary loss of manufacturing capacity in Thailand due flooding, we retained approximately 120 employees in our Hutchinson, Minnesota manufacturing facility that we previously expected to terminate and whose anticipated severance and benefits were included in our 2011 severance and benefits expenses. This resulted in a reduction of $895,000 in our severance and benefits expenses during the first quarter of 2012. The remaining severance and benefits payments were completed in our second quarter of 2012.
As part of our consolidation and restructuring actions, a total of $184,000 of other expenses were recorded in 2012, primarily internal labor, contractors and freight, related to consolidation of the Hutchinson, Minnesota components operations into our operations in Eau Claire, Wisconsin.
During the first quarter of 2013, we eliminated approximately 55 positions as part of our continued focus on overall cost reductions. As of September 29, 2013, we had incurred $2,873,000 of severance and site consolidation expenses, primarily internal labor, contractors and freight, related to the consolidation. All severance and benefits payments were completed in our second quarter of 2013.
During the second and third quarters of 2014, we identified a total of approximately 170 positions to be eliminated as part of our continued consolidation effort and our continued focus on overall cost reductions. During the fourth quarter of 2014, we retained approximately 40 of those positions for manufacturing of our shape memory alloy optical image stabilization product. This and our site consolidation activities resulted in $2,726,000 of severance and site consolidation expenses. We expect the total remaining 2014 severance and benefits payments of $27,000 will be complete by the end of our first quarter of 2015.
Asset Impairment
When indicators of impairment exist and assets are held for use, we estimate future undiscounted cash flows attributable to the assets. In the event such cash flows are not expected to be sufficient to recover the recorded value of the assets, the assets are written down to their estimated fair values based on the expected discounted future cash flows attributable to the assets or based on appraisals. Factors affecting impairment of assets held for use include the ability of the specific assets to generate positive cash flows. Changes in any of these factors could necessitate impairment recognition in future periods for other assets held for use.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Hutchinson Technology Incorporated and Subsidiaries - (Continued)
In connection with this consolidation of our operations, two of our facilities were offered for sale or lease in 2013, including the Eau Claire, Wisconsin assembly building and the Development Center building on our Hutchinson, Minnesota campus. During the first quarter of 2014, we received third-party interest in purchasing the Eau Claire assembly building. Based on the discussions regarding the potential sale of this building, we modified our forecast model to increase the probability of a sale of our Eau Claire assembly building and decrease the probability of a lease. Using these new weightings for sale and lease, the carrying value of our assets exceeded the expected undiscounted cash flows indicating a trigger of potential impairment. As a result, we evaluated the recoverability of the Eau Claire assembly building based on these circumstances and recorded an impairment charge of $4,470,000 included in the line item “Asset impairment” in our consolidated statement of operations. The building and related assets had remaining useful lives ranging from 15 to 30 years. We determined the long-lived assets did not meet the criteria to be classified as assets held for sale. During the second quarter of 2014, we sold the Eau Claire, Wisconsin assembly building, and related real and personal property for net proceeds of $4,364,000. We will continue to own and operate the remaining portion of the Eau Claire facility, representing approximately 700,000 square feet of floor space. As of September 28, 2014, there were no indicators of additional impairment related to our Development Center building.
Thailand Flood
In October 2011, severe flooding in Thailand required us to suspend assembly operations at our Thailand manufacturing facility. During our fourth quarter of 2011, prior to the flooding, approximately one-third of our sales originated out of our Thailand assembly facility. By the end of that quarter, our Thailand operations had an assembly capacity of four to five million parts per week.
As a result of the flooding in Thailand, during 2012, we recorded insurance recoveries, net of flood-related costs, as follows:
The total carrying value of our Thailand building and equipment was approximately $18,700,000 at the time of the flood. Of the total, $8,541,000 was destroyed by the flooding and was impaired and written off. The flood-related inventory write-off was $3,298,000, which included the cost of raw materials, work-in-process and finished goods inventories that were not able to be used or sold due to the flood damage. Repairs, maintenance, employee and other flood-related costs were expensed when incurred. These expenses totaled $8,521,000 for 2012. These amounts are reflected, net of insurance recoveries, in “Insurance recoveries, net of flood related costs”, on our consolidated statements of operations.
After review of the flood mitigation plans of the Thai government and those of the industrial park where our plant is located, we restored our Thailand manufacturing facility. The industrial park has completed construction of a flood wall and we resumed production at that facility and began shipping products for customer qualification during the third quarter of 2012. In total, we spent approximately $27,000,000 during 2012 and $7,000,000 during 2013 for incremental costs of manufacturing in our U.S. assembly operations instead of in Thailand, capital expenditures for site restoration and equipment replacement, recovery expenses, and inventory replenishment. These costs were partially offset by the $25,000,000 in insurance proceeds that we received in 2012. These costs do not include lost profits from lower demand due to constraints in the overall capacity in the disk drive supply chain as a result of the flooding.
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 statement of operations.
Significant judgment is required in determining our provision for income taxes, our deferred tax assets and liabilities and any valuation allowance recorded against our deferred tax assets. Valuation allowances arise due to the uncertainty of realizing deferred tax assets. At September 28, 2014, and September 29, 2013, we had valuation allowances of $227,219,000 and $213,948,000 respectively. The FASB guidance requires that companies assess whether valuation allowances should be established against their deferred tax assets based on the consideration of all available evidence, using a “more likely than not” standard. In making such assessments, significant weight is to be given to evidence that can be objectively verified. A company’s current or previous losses are given more weight than its future outlook. Under the guidance, our three-year historical cumulative loss was a significant negative factor. This loss, combined with uncertain near-term market and economic conditions, reduced our ability to rely on our projections of future taxable income in determining whether a valuation allowance is appropriate. Accordingly, we concluded that a full valuation allowance was appropriate. We will continue to assess the likelihood that our deferred tax assets will be realizable, and our valuation allowance will be adjusted accordingly, which could materially impact our financial position and results of operations.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Hutchinson Technology Incorporated and Subsidiaries - (Continued)
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 earnings (loss) per share identifies the dilutive effect of potential common shares using net income (loss) available to common shareholders and is computed (i) using the treasury stock method for outstanding stock options and the if-converted method for the 8.50% Convertible Notes, and (ii) in accordance with FASB guidance relating to the effect of contingently convertible instruments on diluted earnings per share for the 3.25% Notes outstanding as of September 30, 2012. A reconciliation of these amounts is as follows:
Diluted loss per share for 2014 excludes potential common shares of 366,000 using the treasury stock method and potential common shares of 4,630,000 using the if-converted method for the 8.50% Convertible Notes, as they were anti-dilutive. Diluted loss per share for 2013 excludes potential common shares of 533,000 using the treasury stock method and potential common shares of 5,305,000 using the if-converted method for the 8.50% Convertible Notes, as they were anti-dilutive. Diluted loss per share for 2012 excludes potential common shares and warrants of 2,241,000 using the treasury stock method and potential common shares of 8,466,000 using the if-converted method for the 8.50% Convertible Notes, as they were anti-dilutive.
2.Financing Arrangements
Debt
At September 28, 2014, the future maturities of short- and long-term debt consisted of the following:
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Hutchinson Technology Incorporated and Subsidiaries - (Continued)
October 2014 Financing Transactions
On October 23, 2014, subsequent to year-end, 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 will 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 have 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 was escrowed until the put right expires. Additionally, we were required to escrow at least $35,000,000 of cash that will be 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. On December 1, 2014, we initiated a redemption of the existing $39,822,000 of 8.50% Convertible Notes that can be put to us in January 2015. To fund this, we expect to use the proceeds of the 8.50% New Convertible Notes 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% 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 holder of the warrants will be entitled to participate pro rata in any dividends or other distributions (whether in cash, securities or other assets) paid, or rights offered, to holders of our common stock on an as-exercised basis. Applying debt extinguishment accounting, we expect to record a loss on extinguishment of debt of approximately $4,000,000 in our first quarter of 2015.
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% Secured 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 New Notes and the exchange transaction, referred to above.
8.50% Convertible Notes
We currently have outstanding $39,822,000 aggregate principal amount of 8.50% Convertible Notes, which as of September 28, 2014 was classified as current on our consolidated balance sheets. The 8.50% Convertible Notes were issued in February 2011 as part of a tender/exchange pursuant to an indenture dated as of February 11, 2011. The 8.50% Convertible Notes are senior in right of payment to any of our existing and future subordinated indebtedness. Interest at a rate of 8.50% per annum is payable on the 8.50% Convertible Notes on January 15 and July 15 of each year. The 8.50% Convertible Notes mature on January 15, 2026. Each $1,000 principal amount of the 8.50% Convertible Notes is convertible into 116.2790 shares of our common stock (which is equal to an initial conversion price of approximately $8.60 per share), subject to adjustment.
We have the right to redeem the 8.50% Convertible Notes (i) on or after January 15, 2013, to, but excluding, January 15, 2015, if the closing price of our common stock equals or exceeds 150% of the conversion price, and (ii) at any time on or after January 15, 2015, in either case in whole or in part, for cash equal to 100% of the principal amount of the 8.50% Convertible Notes to be redeemed plus any accrued but unpaid interest to, but excluding, the redemption date. Holders of the 8.50% Convertible Notes may require us to repurchase all or a portion of their 8.50% Convertible Notes at par on each of January 15, 2015, January 15, 2016, and January 15, 2021, for cash equal to 100% of the principal amount of the 8.50% Convertible Notes to be repurchased plus any accrued but unpaid interest to, but excluding, the repurchase date. On December 1, 2014, we initiated a redemption of the existing 8.50% Convertible Notes that can be put to us on January 15, 2015. To fund this, we will use the proceeds of the 8.50% New Convertible Notes and our existing cash. If a fundamental change (as defined in the indenture) occurs, each holder of 8.50% Convertible Notes will have the right to require us to repurchase all or any portion of that holder’s 8.50% Convertible Notes for cash equal to 100% of the principal amount of the 8.50% Convertible Notes to be repurchased plus any accrued but unpaid interest to, but excluding, the repurchase date.
In July 2011, we completed an exchange for a portion of our outstanding 3.25% Notes. In connection with the July 2011 exchange, we issued $45,170,000 aggregate principal amount of the 8.50% Convertible Notes and made aggregate cash payments of $3,091,000 in exchange for $45,963,000 aggregate principal amount of the 3.25% Notes.
In April 2012, after funding the purchase of 3.25% Notes through the 3.25% Tender/Exchange Offer (as described below), we completed an offer to purchase for cash $26,666,000 aggregate principal amount of our outstanding 8.50% Convertible Notes, whereby we applied $19,999,500 of residual proceeds from a private placement of 8.50% Secured Notes to fund the purchase of outstanding 8.50% Convertible Notes.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Hutchinson Technology Incorporated and Subsidiaries - (Continued)
In January 2013, we repurchased $18,682,000 aggregate principal amount of our outstanding 8.50% Convertible Notes by making cash payments totaling $11,583,000, plus accrued and unpaid interest, which payments were funded by the proceeds of the sale of our 10.875% Senior Secured Second Lien Notes due 2017 (the “10.875% Notes”). Applying debt extinguishment accounting, we recorded a gain on extinguishment of debt of $4,986,000 for the thirty-nine weeks ended June 30, 2013. These transactions reduced the portion of our outstanding debt subject to a holder-initiated repurchase as early as 2015 from $58,504,000 to $39,822,000.
8.50% Secured Notes
In March 2012, we issued $78,931,000 aggregate principal amount of 8.50% Secured Notes. Of that total amount, $38,931,000 aggregate principal amount of 8.50% Secured Notes were 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% Notes (the “3.25% Tender/Exchange Offer”). 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 semiannually 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.
On October 23, 2014, subsequent to year-end, 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. The holder of the warrant will be entitled to participate pro rata in any dividends or other distributions (whether in cash, securities or other assets) paid, or rights offered, to holders of our common stock on an as-exercised basis.
10.875% Notes
In January 2013, we issued $12,200,000 aggregate principal amount of 10.875% Notes for a total purchase price of $11,590,000. 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 semiannually 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 described above, 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 revolving credit and security agreement.
Debt refinancing costs of $359,000 were capitalized and are being amortized until the maturity date. The amortization expense is included in interest expense.
Senior Secured Credit Facility
On September 22, 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, National Association (“PNC Bank”). The amendment reduces the maximum principal amount of the revolving credit facility provided by the credit agreement from $35,000,000 to $20,000,000, extends the maturity date of the senior secured credit facility from October 1, 2014 to December 1, 2016, reduces the cash balance we are required to maintain in an account at PNC Bank from $15,000,000 to $2,500,000, and modifies the fixed charge coverage covenant under the credit agreement 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.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Hutchinson Technology Incorporated and Subsidiaries - (Continued)
The amendment also requires us to maintain cash on our balance sheet, including restricted cash, during the period from December 1, 2014 through January 16, 2015 (which is the day after the 2015 put date for our 8.50% Convertible Notes) and during the period from December 1, 2015 through January 16, 2016 (which is the day after the 2016 put date for our 8.50% Convertible Notes) in an amount not less than the aggregate principal amount of our 8.50% Convertible Notes then outstanding, and establishes a reserve against our borrowing base during each such period in the same amount. The amendment permits us to redeem, repurchase or repay our 8.50% Convertible Notes in whole or in part at any time as long as, after giving effect to such redemption, repurchase or repayment, no default or event of default exists under the credit agreement and we have liquidity of not less than $20,000,000, and permits us to incur additional unsecured debt at any time prior to January 15, 2016 in an amount not to exceed the aggregate principal amount of our 8.50% Convertible Notes then outstanding as long as certain conditions are satisfied, including a requirement that, by the next put date for our 8.50% Convertible Notes, we reduce the aggregate principal balance of our 8.50% Convertible Notes by an amount equal to the principal amount of such additional unsecured debt then outstanding.
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.
From time to time, we borrow funds under the senior secured credit facility. As of September 28, 2014, we had $9,533,000 outstanding which was repaid early in the following quarter. Our average outstanding balance in 2014 was $3,133,000. Amounts borrowed under the credit facility bear cash interest at a reduced rate equal to, at our election, either (i) PNC Bank’s alternate base rate plus 1.0% per annum, or (ii) LIBOR plus 3.5% per annum if no defaults or events of default exist under the credit agreement. The credit agreement contains certain financial covenants that require us to maintain a minimum fixed charge coverage ratio and minimum liquidity. 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.
3.Income Taxes
The (benefit) provision for income taxes consists of the following:
In the fourth quarter of 2008, we established a full valuation allowance against our deferred tax assets. The accounting guidance requires that companies assess whether valuation allowances should be established against their deferred tax assets based on the consideration of all available evidence, using a “more likely than not” standard. In making such assessments, significant weight is given to evidence that can be objectively verified. A company’s current or previous losses are given more weight than its future outlook. Under that standard, our three-year historical cumulative loss was a significant negative factor. This loss, combined with uncertain near-term market and economic conditions, reduced our ability to rely on our projections of future taxable income in determining whether a valuation allowance is appropriate. Accordingly, we concluded that a full valuation allowance is 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.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Hutchinson Technology Incorporated and Subsidiaries - (Continued)
The deferred provision is composed of the following:
A reconciliation of the statutory federal income tax rate to the effective tax rate is as follows:
The following table shows the significant components of our deferred tax assets:
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. At September 28, 2014, our deferred tax assets included $30,520,000 of unused tax credits. Of the total, $3,079,000 can be carried forward indefinitely, $22,323,000 of US federal tax credits expire at various dates beginning in 2018, and $5,118,000 of various state tax credits expire at various dates beginning in 2015, including $255,000 that will expire in 2015.
In addition, at September 28, 2014, our deferred tax assets included $185,493,000 of NOL carryforwards that will begin to expire in 2021 if not otherwise used by us. As of September 28, 2014, we had an estimated NOL carryforward of $520,153,000 for United States federal tax return purposes.
A valuation allowance of $227,219,000 has been recognized to offset the related deferred tax assets due to the uncertainty of realizing the deferred tax assets before they expire.
Gross unrecognized tax benefits as of September 28, 2014, and September 29, 2013, were $6,065,000 and $7,021,000, respectively. For 2014, $5,665,000 of our gross unrecognized tax benefits would decrease our effective tax rate if realized.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Hutchinson Technology Incorporated and Subsidiaries - (Continued)
A reconciliation of the beginning and ending balances of the total amounts of gross unrecognized tax benefits is as follows:
Our policy is to record interest expense and penalties within the provision for income taxes on the consolidated statements of operations. No interest expense or penalties have been included in the gross amount of unrecognized tax benefits due to existing tax credits and NOL carryforwards.
The major jurisdictions in which we file income tax returns are United States federal, various U.S. states and Thailand. In the United States federal jurisdiction we are no longer subject to examination for fiscal years prior to 2011. For state jurisdictions we are no longer subject to examination for fiscal years prior to 2010. Although certain years are no longer subject to examinations by the IRS and various state taxing authorities, NOL carryforwards generated in those years may still be adjusted upon examination by the IRS or state taxing authorities if they either have been or will be used in a future period. In Thailand we operate under various tax holidays that currently are scheduled to fully expire as early as 2024. For 2014 and prior fiscal years, these holidays had no impact on our tax provision or our net loss.
The timing of the resolution of uncertain tax positions is dependent on numerous factors and therefore is highly uncertain; however, we believe it is reasonably possible in the next 12 months that the gross unrecognized tax benefits could be reduced between $70,000 and $100,000 due to tax attributes expiring unused.
On September 13, 2013, the IRS released final regulations relating to the capitalization of tangible personal property. We continue to analyze the impact of these new regulations. We do not believe they will have a material impact on our financial statements. These regulations become effective for us in 2015.
4.Fair Value of Financial Instruments
We follow fair value measurement accounting with respect to (i) nonfinancial assets and liabilities that are recognized or disclosed at fair value in our financial statements on a recurring basis, and (ii) all financial assets and liabilities.
The fair value measurement guidance defines fair value, establishes a framework for measuring fair value and expands disclosure requirements about fair value measurements. Under the guidance, fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The guidance also establishes a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available. Observable inputs are inputs market participants would use in valuing the asset or liability, developed based on market data obtained from independent sources. Unobservable inputs are inputs that reflect our assumptions about the factors market participants would use in valuing the asset or liability, developed based upon the best information available in the circumstances. The fair value hierarchy prescribed by the guidance is broken down into three levels as follows:
Level 1 - Unadjusted quoted prices in an active market for the identical assets or liabilities at the measurement date.
Level 2 -
Other observable inputs available at the measurement date, other than quoted prices included in Level 1, either directly or indirectly, including:
· Quoted prices for similar assets or liabilities in active markets;
· Quoted prices for identical or similar assets in nonactive markets;
· Inputs other than quoted prices that are observable for the asset or liability; and
· Inputs that are derived principally from or corroborated by other observable market data.
Level 3 - Unobservable inputs that reflect the use of significant management judgment. These values are generally determined using pricing models for which assumptions utilize management’s estimates of market participant assumptions.
Cash and Cash Equivalents
Cash equivalents consist of highly liquid investments purchased with a maturity of three months or less. The carrying value of these cash equivalents approximates fair value due to their short-term maturities.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Hutchinson Technology Incorporated and Subsidiaries - (Continued)
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.
The following table provides information by level for assets and liabilities that are measured at fair value on a recurring basis.
Debt
The fair values of our 8.50% Convertible Notes and our 8.50% Secured Notes were determined based on the closing market price of the respective Notes as of the most recent trading date before the end of the fiscal year. The fair value of our 8.50% Convertible Notes and our 8.50% Secured Notes were classified in Level 2 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. The fair value of the 10.875% Notes was classified in Level 2 of the fair value hierarchy. The fair value of the PNC Bank credit facility’s carrying value is a reasonable estimate of fair value. The fair value measurement for the credit facility was classified in Level 2 of the fair value hierarchy.
The estimated fair values of our short- and long-term debt are as follows:
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 as Level 1 of the fair value hierarchy.
Nonrecurring Fair Value Measurements
Certain assets are measured at fair value on a nonrecurring basis. These assets are not measured at fair value on an ongoing basis but are subject to fair value adjustments only in certain circumstances. These include certain long-lived assets that are written down to fair value when they are determined to be impaired. In the first quarter of 2014, we recognized an impairment of $4,470,000 related to our Eau Claire assembly building using a valuation methodology based on Level 3 inputs. See Note 1 to the consolidated financial statements for additional details regarding this impairment.
5.Employee Benefits
In March 2009, our board of directors approved the suspension of our employee stock purchase plan, effective April 1, 2009. Prior to this date, our employee stock purchase plan provided for the sale of our common stock at discounted purchase prices. The cost per share under this plan was 85% of the lesser of the fair market value of our common stock on the first or last day of the purchase period, as defined.
Stock Options
Under our equity incentive plans, stock options have been granted to employees and directors, including our officers, 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 prior to November 2005 generally were exercisable one year from the date of grant. Options granted 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.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Hutchinson Technology Incorporated and Subsidiaries - (Continued)
Under our equity incentive plan, we also 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 stock units on the date of issuance. Upon vesting, RSUs convert to shares in accordance with the terms of our equity incentive plan.
On January 20, 2011, our shareholders approved (i) our 2011 Equity Incentive Plan, which authorizes the issuance of 1,200,000 shares of our common stock (plus any shares that remained available on that date for future grants under our 1996 Incentive Plan) for equity-based awards (no further awards will be made under our 1996 Incentive Plan), and (ii) the amendment and restatement of our employee stock purchase plan, to increase the maximum number of shares of our common stock authorized for issuance under that plan by 1,000,000 shares, to a total of 2,500,000, and provide means by which eligible employees of our foreign subsidiaries may participate in that plan.
We recorded stock-based compensation expense related to our stock options, RSUs and common stock, included in selling, general and administrative expenses, of $1,345,000, $1,140,000 and $1,979,000 for 2014, 2013 and 2012, respectively. As of September 28, 2014, $1,593,000 of unrecognized compensation costs related to non-vested awards is expected to be recognized over a weighted-average period of approximately 17 months.
We use the Black-Scholes option pricing model to determine the weighted-average fair value of options. The weighted-average fair value of options granted during 2014, 2013, and 2012 was $2.34, $1.27, and $1.27, respectively. The fair value of options at the date of grant and the weighted-average assumptions utilized to determine such values are indicated in the following table:
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 2014 are summarized in the following table:
The aggregate intrinsic value at year-end 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 for 2014, 2013 and 2012 was $1,813,000, $1,573,000 and $39,000, respectively. The aggregate intrinsic value at year-end of our stock options exercisable for 2014 was $1,079,000, for 2013 was $421,000 and for 2012 was $0.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Hutchinson Technology Incorporated and Subsidiaries - (Continued)
The following table summarizes the status of options that remain subject to vesting:
The following table summarizes information about stock options outstanding at September 28, 2014:
RSU transactions for 2014 are summarized as follows:
Employee Benefit Plans
We have a defined contribution plan covering our employees in the U.S. Our contributions to the plan were $1,221,000 in 2014, $1,154,000 in 2013 and $905,000 in 2012. We also have a provident fund covering our employees in Thailand. Our contributions to the plan were $120,000 in 2014, $79,000 in 2013 and $62,000 in 2012.
We sponsor a self-insured comprehensive medical and dental plan for qualified U.S. employees that is funded by contributions from plan participants and from us. Contributions are made through a Voluntary Employee’s Benefit Association Trust. We recognized expense related to these plans of $6,935,000 in 2014, $7,387,000 in 2013 and $10,159,000 in 2012. We also recognized $361,000 and $78,000 in 2014 and 2013, respectively, related to a post-employment benefit upon retirement obligation related to our Thailand facility employees under the Thai Labor Protection Act.
6.Commitments and Contingencies
Lease Commitments
We are committed under various operating lease agreements. Total lease expense under these operating leases was $1,717,000 in 2014, $2,381,000 in 2013 and $3,291,000 in 2012.
We also have leased manufacturing equipment that has been treated as capital leases for accounting purposes. Assets acquired under capital leases are depreciated over the useful life of the asset.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Hutchinson Technology Incorporated and Subsidiaries - (Continued)
The future minimum lease payments under our capital and operating leases by fiscal year at September 28, 2014, are as follows:
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 that may relate to certain of our manufacturing equipment or products or to products that include our products as a component. In addition, we and certain of our customers have been sued on patents having claims closely related to products sold by us. If any third party makes a valid infringement claim and a license 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, and as we grow, the volume of intellectual property claims could increase. We may need to engage in litigation to enforce patents issued or licensed to us, protect trade secrets or know-how owned by us or determine the enforceability, scope and validity of the intellectual property rights of others. We could incur substantial costs in such litigation or other similar legal actions, which could have a material adverse effect on our results of operations.
We are a party 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.
7.Supplementary Cash Flow Information
Capitalized interest was $650,000 in 2014, $1,278,000 in 2013 and $1,630,000 in 2012. Interest is capitalized using an overall borrowing rate for assets that are being constructed or otherwise produced for our own use. Interest capitalized during 2014 was primarily for additional manufacturing equipment for new process technology and capability improvements and tooling.
8.Shareholders’ Equity
Stock Repurchase Program
On February 4, 2008, we announced that our board of directors had approved a share repurchase program authorizing us to spend up to $130,000,000 to repurchase shares of our common stock from time to time in the open market or through privately negotiated transactions. The board of directors terminated the plan on October 9, 2013, at which point $72,368,000 remained available for repurchase and no repurchases had been made since 2008.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Hutchinson Technology Incorporated and Subsidiaries - (Continued)
9.Share Rights Plan
In July 2010, our board of directors declared a dividend of one common share purchase right for each outstanding share of common stock held by shareholders of record as of the close of business on August 10, 2010. Under certain conditions, each right may be exercised to purchase one-tenth of a share of common stock at an exercise price of $3.00, subject to adjustment. The rights generally will become exercisable after any person or group acquires beneficial ownership of 15% or more of our common stock or announces a tender or exchange offer that would result in that person or group beneficially owning 15% or more of our common stock. If any person or group becomes a beneficial owner of 15% or more of our common stock, each right will entitle its holder (other than the 15% owner) to purchase, at an adjusted exercise price equal to ten times the previous purchase price, shares of our common stock having a market value of two times the right’s adjusted exercise price.
In May 2011, we amended the rights agreement to accommodate the exchange of 3.25% Notes for 8.50% Convertible Notes in an exchange offer to avoid one or more participants inadvertently becoming “acquiring persons” with respect to the rights. In each of February and March 2012, we further amended the rights agreement to similarly accommodate the issuance of common stock warrants in connection with the private placement of 8.50% Secured Notes to avoid the warrant holders inadvertently becoming acquiring persons with respect to the rights. In October 2014, subsequent to year-end, we further amended the rights agreement to accommodate the issuance of the 8.50% New Convertible Notes to avoid one or more participants and the warrant holders inadvertently becoming acquiring persons with respect to the rights.
The rights, which do not have voting rights, expire on August 10, 2020 and may be redeemed by us at a price of $0.001 per right, subject to adjustment, at any time prior to their expiration or a person’s or group’s acquisition of beneficial ownership of at least 15% of our common stock. In certain circumstances, at the option of our board of directors, we may exchange the rights for shares of our common stock, delay or temporarily suspend the exercisability of the rights or reduce the stock-ownership threshold of 15% to not less than 10%.
In the event that we are acquired in certain merger or other business-combination transactions, or sell 50% or more of our assets or earnings power, each holder of a right shall have the right to receive, at the right’s adjusted exercise price, common shares of the acquiring company having a market value of twice the right’s adjusted exercise price.
10.Business Segment, Geographic Information and Major Customers
Segment Information
We follow the provisions of FASB guidance, which establish annual and interim reporting standards for an enterprise’s business segments and related disclosures about each segment’s products, services, geographic areas and major customers. The method for determining what information to report is based on the way management organizes the operating segments within a company for making operating decisions and assessing financial performance. Our Chief Executive Officer is considered to be our chief operating decision maker.
Effective October 1, 2012, we realigned our business into a single operating and reportable segment. Our chief operating decision maker now assesses financial performance of our company as a whole. Due primarily to the restructuring actions that occurred during 2012 and the additional cost reductions that we have made since the end of 2012, the operating losses from our biomeasurement business have been significantly reduced. In connection with this realignment, we also eliminated divisional presidents.
The October 1, 2012, realignment is reflected in the information contained in this report for all periods presented.
Net Sales by Product
The following table represents net sales by product:
Geographic Information
Sales to foreign locations were as follows:
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Hutchinson Technology Incorporated and Subsidiaries - (Continued)
The majority of these foreign location sales were to the Pacific Rim region. In addition, we have sales to United States corporations that used our products in their offshore manufacturing sites.
Revenue assigned based on product shipment location and long-lived assets by geographic area were as follows:
Major Customers
Sales to customers in excess of 10% of net sales were as follows:
11.Summary of Quarterly Information (unaudited)
The following table summarizes unaudited financial data for 2014 and 2013. The price range per share reflects the high and low sales prices as reported on the NASDAQ Global Select Market during each quarter.
1During the first quarter of 2014, we recorded $4,470,000 of impairment related to our Eau Claire assembly building and $300,000 of site consolidation expenses.
2During the second quarter of 2014, we recorded $400,000 for severance expenses and $600,000 of site consolidation expenses.
3During the third quarter of 2014, we recorded $1,300,000 for severance expenses and $200,000 of site consolidation expenses.
4During the fourth quarter of 2014, we recorded a $300,000 reversal of previously recorded severance expenses and $300,000 of site consolidation expenses.
5During the first quarter of 2013, we recorded $1,000,000 for severance expenses.
6During the second quarter of 2013, we recorded $300,000 of site consolidation expenses.
7During the third quarter of 2013, we recorded $600,000 of site consolidation expenses.
8During the fourth quarter of 2013, we recorded $900,000 of site consolidation expenses.
9During the first quarter of 2014, we recorded $3,200,000 loss on foreign currency.
10During the second quarter of 2013, we recorded a $5,000,000 gain on extinguishment of debt related to our 3.25% Notes redemption and 8.50% Convertible Notes exchange.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Hutchinson Technology Incorporated and Subsidiaries - (Continued)
12.Subsequent Events
In October 2014, subsequent to year-end, we completed a debt offering that will enable us to address the $39,822,000 of 8.50% Convertible Notes that can be put to us in January 2015. This included the sale of $37,500,000 of 8.50% New Convertible Notes and an exchange of $15,000,000 of 8.50% Secured Notes for 2.5 million shares of common stock and warrants to purchase an additional 2.5 million shares. Certain beneficial holders of the 8.50% New Convertible Notes have 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 was escrowed until the put right expires. Additionally, we were required to escrow at least $35,000,000 of cash that will be 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. On December 1, 2014, we initiated a redemption of the existing $39,822,000 of 8.50% Convertible Notes that can be put to us in January 2015. To fund this, we expect to use the proceeds of the 8.50% New Convertible Notes and our existing cash. See Note 2 to the consolidated financial statements for additional details regarding these financing transactions.
On November 25, 2014, subsequent to year-end, there were 1,250,000 warrants exercised which resulted in the issuance of 1,246,493 shares of common stock.
On December 1, 2014, subsequent to year-end, we initiated a redemption of all $39,822,000 aggregate principal amount of our outstanding 8.50% Convertible Notes. In accordance with the terms of the indenture and a notice of redemption thereunder, the 8.50% Convertible Notes will be redeemed on January 15, 2015 at a redemption price of 100% of the principal amount thereof, plus accrued and unpaid interest to, but excluding, the redemption date.
Subsequent to year-end, we entered into an agreement under which we will receive a $15,000,000 advance payment from a customer in our first quarter of 2015 for suspension assemblies expected to ship to that customer in the second quarter of 2015.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of
Hutchinson Technology Incorporated
Hutchinson, Minnesota:
We have audited the accompanying consolidated balance sheets of Hutchinson Technology Incorporated and subsidiaries (the “Company”) as of September 28, 2014 and September 29, 2013, and the related consolidated statements of operations, comprehensive loss, shareholders’ equity, and cash flows for each of the three years in the period ended September 28, 2014. Our audits also included the financial statement schedule listed in the Index at Item 15(a)2. These financial statements and financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on the financial statements and financial statement schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Hutchinson Technology Incorporated and subsidiaries at September 28, 2014 and September 29, 2013, and the results of their operations and their cash flows for each of the three years in the period ended September 28, 2014, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company’s internal control over financial reporting as of September 28, 2014, based on the criteria established in Internal Control - Integrated Framework (1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated December 9, 2014 expressed an unqualified opinion on the Company’s internal control over financial reporting.
/s/ Deloitte & Touche LLP
Minneapolis, Minnesota
December 9, 2014
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
Hutchinson Technology Incorporated and Subsidiaries
1Returns honored and credit memos issued.