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Hutchinson: Fiscal 2Q15 Financial Results

HDD suspension assembly shipments declined 17% Q/Q to 101.1 million

(in $ million) 2Q14 2Q15 6 mo. 14 6 mo. 15
Revenue 60.7 62.4 131.0 134.8
Growth   3%   3%
Net income (loss) (8.7) (9.7) (24.1) (19.6)

Hutchinson Technology Incorporated reported a net loss of $9.7 million, or $0.29 per share, on net sales of $62.4 million, for its fiscal second quarter ended March 29, 2015.

The net loss included $430,000 of non-cash interest expense and a $140,000 foreign currency gain. Excluding these items, the company’s net loss for the fiscal 2015 second quarter was $9.4 million, or $0.28 per share.

In the preceding quarter, the company reported a net loss of $9.9 million, or $0.32 per share, on net sales of $72.4 million. The net loss included a $4.3 million loss on debt extinguishment, $860,000 of non-cash interest expense, $640,000 of foreign currency losses and $160,000 of site consolidation costs. Excluding these items, the company’s net loss for the fiscal 2015 first quarter was $3.9 million, or $0.13 per share.

Compared with the preceding quarter, the company’s suspension assembly shipments declined 17% to 101.1 million.

We had anticipated a seasonal decline in shipments in our second quarter, but the decline was steeper than we expected, primarily due to weakness in the personal computer market,” said Rick Penn, president and CEO. “While our current demand is still heavily weighted toward PC applications, cloud and hyperscale applications are expected to provide future growth for suspension assembly demand.

Gross profit in the fiscal 2015 second quarter totaled $6.3 million, or 10.0% of net sales, compared with $11.5 million, or 15.8% of net sales, in the preceding quarter. The decline resulted from the lower volume in the quarter which reduced operating leverage as the company curtailed production and managed inventory down. Despite the reduced operating leverage, Penn said that operating efficiency in the quarter remained strong in its component and assembly operations. The company’s Thailand assembly operation accounted for 85% of assembly production in the second quarter, up from 77% in the preceding quarter.

Regarding its shape memory alloy (SMA) optical image stabilization (OIS) actuator, Penn said the company continues to focus on optimizing manufacturing processes and refining product designs in order to increase acceptance among smartphone and camera module manufacturers.

As we work to win new programs, customer interest in our SMA technology is encouraging,” said Penn. “The smartphone camera market is in the early phases of adopting OIS technology, and as we’ve stated previously, we are still in the initial stages of developing this new opportunity.”

Total R&D expenses increased to $7.1 million in the fiscal 2015 second quarter compared to $6.0 million in the preceding quarter, with the increase attributable to additional costs for OIS product and process development.

Cash and investments at the end of the fiscal 2015 second quarter totaled $43.6 million compared with $34.5 million at the end of the preceding quarter. Cash generated by operations in the quarter totaled $15.6 million and included the remainder of an advance payment from a customer and other working capital improvements. Capital spending totaled $8.2 million in the second quarter.

The seasonal weakness that we saw in the March quarter has continued into the June quarter, with an extremely slow start to the quarter as customers have reacted to lower disk drive demand by reducing their build plans and their levels of suspension inventory,” said Penn.

As a result, the company currently expects fiscal 2015 third quarter suspension assembly shipments to be down approximately 10% compared with the second quarter and ASP to be 58 to 59 cents per part. Due to the lower volume, third quarter gross profit is also expected to decline compared to the second quarter.

The current weakness in demand is disappointing but consistent with seasonal demand and production in the disk drive industry and, in particular, the weight that personal computing applications still carry in our mix of business,” said Penn. “In the second half of the calendar year, we expect higher volume due to increased worldwide suspension assembly demand and an improving position on customers’ disk drive programs. We’re also encouraged by the level of development activity that is occurring with our customers across all of the disk drive segments. Beyond our core business, our SMA OIS product presents an attractive opportunity to extend our precision manufacturing expertise into a new market.”

Comments

Abstracts of the earnings call transcript:

Dave Radloff, CFO:
"Shipments of DSA suspensions accounted for about 36% of our shipments compared with 38% in the preceding quarter.
"Our mix of product shipped in the quarter was as follows: Suspension shipments for 3.5 inch ATA applications including suspensions for capacity optimized enterprise applications were down 18% sequentially and accounted for 31% of our shipments compared the same as in the preceding quarter.
"Shipments for 2.5 inch mobile applications declined 17% and accounted for 54% of our shipments compared, the same as in the preceding quarter. And shipments for performance optimized or traditional enterprise applications decreased 15% sequentially and accounted for 15% of our shipments, the same as in the preceding quarter. Our average selling price was $0.59, up a penny from the preceding quarter.
"The revenue percentages for our top customers in the quarter were as follows: Western Digital, 54%; Seagate, 26% and SAE TDK, 17%."

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