Hutchinson: Fiscal 4Q08 Financial Results

Hutchinson Technology Incorporated reported net sales of $164.3 million for its fiscal fourth quarter ended September 28, 2008, up 9 percent compared with $150.4 million in the preceding quarter. Net sales totaled $199.9 million in the fiscal 2007 fourth quarter, which was a 14-week quarter.

The company reported a net loss of $105.5 million, or $4.60 per share, for the fiscal 2008 fourth quarter. The net loss for the quarter includes a non-cash charge of $92.5 million, or $4.03 per share, related to establishing a full valuation allowance against its deferred tax assets. The net loss for the quarter also includes a charge of $8.5 million, or $0.37 per share, related to an other-than-temporary impairment of its long-term investments. Details of both of these charges are discussed later in this news release. Excluding the impairment charge, the company’s loss before income taxes for the fiscal 2008 fourth quarter would have been $11.8 million.

In the fiscal 2007 fourth quarter, the company reported net income of $18.6 million, or $0.62 per diluted share. Net income for the fiscal 2007 fourth quarter included a favorable income tax adjustment of $9.2 million, or $0.30 per share. The favorable income tax adjustment resulted from a review of research and development tax credits earned in prior years.

The company shipped 209 million suspension assemblies in the fiscal 2008 fourth quarter, up from 189 million in the preceding quarter, but down from 246 million in last year’s 14-week fourth quarter. Overall average suspension assembly selling price in the quarter was $0.78, down from $0.79 in the preceding quarter and $0.81 in last year’s fourth quarter.

Gross margin in the fiscal 2008 fourth quarter was 10 percent, compared with 11 percent in the preceding quarter and 18 percent in last year’s fourth quarter. Gross profit for the fiscal 2008 fourth quarter was reduced by $11.0 million, due to the costs of ramping the company’s TSA+ flexure production, compared to a $10.2 million reduction in the preceding quarter. Wayne M. Fortun, Hutchinson Technology’s president and chief executive officer, said that although the initial ramp of TSA+ volume production has dampened the company’s gross margin, this burden should diminish with the TSA+ volume growth and process and productivity improvements that are expected over the next several quarters.

The company incurred an operating loss of $10.5 million in the fiscal 2008 fourth quarter, compared with an operating loss of $12.0 million in the preceding quarter and an operating profit of $6.0 million in last year’s fourth quarter. Operating results for these periods included operating losses in the company’s BioMeasurement Division of $6.1 million in the 2008 fourth quarter, $5.6 million in the preceding quarter and $5.7 million in last year’s fourth quarter.

The company’s total cash and investments at the end of the fiscal 2008 fourth quarter totaled $263 million, compared with $275 million at the end of the fiscal 2008 third quarter. Fortun said that in light of uncertain market and economic conditions, the company is focusing on managing its cash position and continuing the investments required to sustain progress on its TSA+ and BioMeasurement initiatives. "Optimizing and leveraging our TSA+ production capabilities and broadening adoption and use of our InSpectra(tm) StO2 Tissue Oxygenation Monitor are both key to our future growth and profitability," said Fortun.

Disk Drive Components Division
Kathleen Skarvan, president of the company’s Disk Drive Components Division, said that shipments of suspension assemblies for all disk drive industry segments increased in the fiscal 2008 fourth quarter compared with the preceding quarter. "We estimate that we maintained our overall market share during the quarter," said Skarvan. "We are working to strengthen our positions in the 3.5-inch ATA and 2.5-inch mobile segments of the disk drive market and sustain our leadership position in the enterprise segment."

The Disk Drive Components Division shipped 5 million TSA+ suspension assemblies in the fiscal 2008 fourth quarter, a four-fold increase from the preceding quarter as the ramp to higher TSA+ volume continued. "We are currently in the process of qualifying our second TSA+ program, and remain focused on further increasing market adoption of TSA+ suspension assemblies," said Skarvan. Skarvan also said that the company has selected Thailand as the location for establishing an Asian assembly operation. "In light of the uncertain market and economic conditions, we are assessing the pace of our investment in this operation," said Skarvan.

BioMeasurement Division
Fourth quarter net sales in the company’s BioMeasurement Division nearly doubled compared with the preceding quarter and net sales for the division’s first full year in the market exceeded $1 million. The division added 12 new customers in the fiscal 2008 fourth quarter and nearly tripled the number of sensors sold compared with the preceding quarter. "In addition to adding new customers, existing customers are placing repeat orders for monitors and sensors," said Rick Penn, president of the BioMeasurement Division. "Some of these customers are hospitals that are purchasing our products in order to conduct their own independent research into the benefits of monitoring StO2 in a broad range of clinical settings."

"The benefits of StO2 monitoring – both clinical and economic – are significant," said Penn. "They include more effective and reduced use of fluids and blood products, avoidance of invasive procedures and associated infections and complications, and improved patient management and resuscitation. Other added benefits include shorter intensive care unit and hospital stays and overall increased staff productivity."

Penn said that as the evidence on the value of StO2 monitoring continues to grow, the division is intensifying its marketing and clinician education efforts to broaden understanding of the accuracy and reliability of InSpectra StO2 as an indicator of patient status and a guide to managing treatment. "We believe that InSpectra StO2 will become an established vital sign routinely measured in patients in a wide range of critical care settings, from trauma and emergency medicine to emergency transport, peri-operative care and intensive care."

Review and Outlook
Commenting on fiscal year 2008, Fortun said: "We are disappointed in our financial performance, but pleased with our accomplishments that should improve our long-term prospects. In our Disk Drive Components Division, we increased our market share in the mobile and enterprise segments and initiated volume shipments of TSA+ suspensions. In our BioMeasurement Division, we more than doubled the number of hospitals using our InSpectra StO2 System and began expanding beyond trauma applications into emergency medicine."

Regarding the outlook for the Disk Drive Components Division, storage industry analysts and industry participants are currently expecting calendar 2008 fourth quarter disk drive shipments to be flat to up slightly compared with the preceding quarter. Fortun said the company’s current suspension assembly demand forecast is more cautious and reflects a sequential quarter decline in volume, based in part on assumptions regarding customer build plans and the uncertain market and economic conditions. He said the company believes it will maintain its overall market share during the quarter and in fiscal 2009 and that pressure on average selling price will continue.

In the BioMeasurement Division, Fortun said fiscal 2009 revenue is projected to reach $3 million to $5 million. The revenue growth is expected to come from further adoption of the InSpectra StO2 System in targeted critical care applications and from an increase in InSpectra StO2 Systems purchased by hospitals initiating their own research into the clinical value of StO2 monitoring. "We expect the clinical and economic evidence of the value of monitoring StO2 will continue to grow, and our InSpectra StO2 System will become the established standard of care for measuring tissue perfusion in multiple critical care settings," said Fortun.