Hutchinson: Fiscal 2Q14 Financial Results

Hutchinson Technology Incorporated reported net sales of $60.7 million for its fiscal 2014 second quarter ended March 30, 2014, on suspension assembly shipments of 101.7 million, down 12% from 115.7 million in the preceding quarter.

Gross profit in the fiscal 2014 second quarter was $5.9 million, or 10% of net sales, compared with $5.5 million, or 8% of net sales in the preceding quarter.

Rick Penn, Hutchinson Technology’s president and CEO, said the company’s second quarter suspension assembly shipments declined due to weakness in the enterprise segment, which utilizes a higher number of suspensions per drive, slower-than-expected ramps on certain new customer programs and seasonal softness.

“Despite the near-term weakness in demand, we believe we are well positioned with our key customers,” said Penn.

“During the quarter, we leveraged our capacity to build inventory that will be used to facilitate the transfer of additional production to our Thailand plant,” said Penn. “We also realized improved yields at our Thailand and U.S. assembly operations and in our TSA+ process.“

Second quarter gross profit benefited from the inventory build and the resulting fixed cost leverage and the increases in manufacturing yields and efficiencies.

The company’s Thailand operation accounted for 55% of assembly production during the quarter, up from 52% in the preceding quarter.

“Our cost structure will benefit from continuing to shift more assembly volume to our Thailand plant, which we expect will account for about 60% to 65% of assembly production in our fiscal 2014 third quarter,” said Penn.

For its fiscal 2014 second quarter, the company reported a net loss of $8.7 million.

The net loss included:

• $800,000 of non-cash interest expense;
• $700,000 of severance and other costs related to the ongoing consolidation of the company’s operations; and
• a $600,000 foreign currency gain.

Excluding these items, the company’s fiscal 2014 second quarter net loss was $7.8 million, or $0.28 per share.

In the preceding quarter, the company’s $15.3 million net loss included:

• a $4.5 million asset impairment charge on the company’s assembly building in Eau Claire, WI;
• a $3.2 million foreign currency loss;
• a $900,000 tax benefit; $800,000 of non-cash interest expense; and
• $600,000 of site consolidation costs related to the ongoing consolidation of its operations.

Excluding these items, the company’s fiscal 2014 first quarter net loss was $7.2 million, or $0.26 per share.

ASP in the fiscal 2014 second quarter was $0.57, compared with $0.59 in the preceding quarter. The decline resulted from certain dual-stage actuated suspensions transitioning to high-volume pricing, coupled with a slower-than-expected shift in product mix toward more DSA products. Shipments of DSA suspensions accounted for 24% of second quarter shipments compared with 23% in the preceding quarter.

Cash and investments at the end of the fiscal 2014 second quarter totaled $40.2 million, unchanged from the preceding quarter. Cash used by operations in the quarter totaled $2.2 million, primarily due to an increase in the company’s finished goods inventories, and capital spending totaled $3.1 million. During the quarter, the company received $4.4 million of net proceeds from the sale of its Eau Claire assembly building and $1.5 million of lease financing. Outstanding borrowings on the company’s revolving line of credit totaled $2.0 million at the end of the second quarter, flat with the preceding quarter.

The company expects its suspension assembly shipments in the fiscal 2014 third quarter to be relatively flat sequentially. Third quarter ASP is expected to be about flat sequentially before rising slightly in the fiscal 2014 fourth quarter as DSA suspension assemblies account for a higher percentage of the company’s shipments. As a result of a planned decrease in third quarter production volumes, the company expects its gross margin to decline sequentially in its third quarter.

“We are pleased with the operational improvements we have made even though current demand is disappointing. We expect to make further progress on reducing costs through the consolidation of our operations and the shift of more assembly volume to our Thailand plant,” said Penn. “Our financial performance will improve as the benefits of our improved cost structure become more material in the latter part of the calendar year and as our positions on customers’ new programs translate into increased demand.”