Hutchinson: Fiscal 3Q09 Financial Results

Hutchinson Technology, Inc. reported a net loss of $42.1 million, or $1.80 per share, on net sales of $106.1 million for its fiscal 2009 third quarter ended June 28, 2009.

Results for the quarter included:

• Asset impairment charges of $20.8 million related primarily to manufacturing equipment in the company’s assembly operations;
• Severance charges of $4.9 million related to the previously announced elimination of approximately 300 positions; and
• A $1.9 million gain on the repurchase of $25 million par value of the company’s 2.25% Convertible Subordinated Notes due 2010.

Excluding these items, Hutchinson Technology’s net loss for the fiscal 2009 third quarter would have been $18.3 million, or $0.78 per share.

In the fiscal 2008 third quarter, the company reported a net loss of $8.4 million, or $0.36 per share, on net sales of $150.4 million. The net loss for the quarter included severance charges of approximately $1.1 million, or $0.03 per share.

Wayne M. Fortun, Hutchinson Technology’s president and chief executive officer, said that net sales grew 34% on a sequential quarter basis as the company responded to increased demand from all of its disk drive customers. He added that the company’s major restructuring actions are now complete and that it has further reduced the current portion of its debt obligations. "Our fiscal 2009 restructuring actions have reduced our costs on an annualized basis by $185 million, and we have begun to realize the full benefits in our fiscal 2009 fourth quarter. In addition, our balance sheet has been further strengthened by a $25 million reduction of our current debt on favorable terms." The company’s remaining convertible debt due in March 2010 now totals $65 million.

Gross profit in the fiscal 2009 third quarter totaled $2.0 million or 2%, compared with a gross loss of $11.8 million or 15% in the preceding quarter. The improvement in gross profit was primarily a result of the $27 million sequential quarter increase in net sales, but was reduced by shipments of higher-cost inventory that was on hand prior to the April 2009 cost reductions. Gross profit was also dampened by the cost burden related to TSA+ flexure production.

The company’s total cash and investments at the end of the fiscal 2009 third quarter totaled $251 million, compared with $293 million at the end of the preceding quarter. During the fiscal 2009 third quarter, the company repurchased $25 million par value of its 2.25% Convertible Subordinated Notes due 2010 for approximately $23 million and made severance payments of approximately $15 million. Fortun said the company expects its fiscal 2009 capital spending to be less than $25 million.

Disk Drive Components Division
The company shipped 146 million suspension assemblies in the fiscal 2009 third quarter, compared with 107 million in the preceding quarter and 189 million in last year’s third quarter. Kathleen Skarvan, president of the Disk Drive Components Division, said the 36% sequential increase in third quarter unit shipments was a result of stronger demand in every segment. Shipments of suspension assemblies for mobile applications nearly doubled compared with the preceding quarter. This product mix shift helped maintain an average selling price that was flat compared with the preceding quarter at $0.71.

The company shipped approximately 10 million TSA+ suspension assemblies in the fiscal 2009 third quarter, flat with the preceding quarter but up from about one million in the fiscal 2008 third quarter when volume production was just beginning. Fiscal 2009 third quarter TSA+ shipments were less than previously forecasted as a result of a slower than expected ramp of a customer’s disk drive program on which the company’s TSA+ suspensions are used. Skarvan said the company reduced the cost burden of TSA+ flexure production from $7.8 million in the preceding quarter to $7.6 million in the fiscal 2009 third quarter despite the flat sequential volume. "In the fiscal 2009 fourth quarter, our TSA+ shipments will potentially double compared to the preceding quarter as a customer’s ramp of a disk drive program accelerates," said Skarvan. "As we increase TSA+ production volume to meet demand and continue to improve yield and efficiencies, we expect to further reduce the cost burden of TSA+ flexure production and eliminate the burden during the second half of fiscal 2010." Skarvan reiterated that compared to current subtractive flexures, TSA+ flexures manufactured using additive processes provide superior performance and will ultimately have a lower cost.

As previously announced, the company’s sales to Seagate Technology are expected to decline to slightly less than 10% of the company’s total revenue in its fiscal 2009 fourth quarter, down from 18% in the preceding quarter. As a result, the company expects a single-digit percentage decline in its total fourth quarter shipments and net sales compared to the preceding quarter.

During the fiscal 2009 third quarter, the company completed the transfer of manufacturing equipment from its Sioux Falls site to its Eau Claire and Hutchinson sites under a previously announced consolidation plan undertaken as part of the company’s restructuring actions. The sale of the Sioux Falls site for $12 million closed on July 17, 2009, and will result in a gain of approximately $1.9 million in the company’s fiscal 2009 fourth quarter.

Skarvan said that the company has resumed its plans to establish an assembly operation in Thailand, with a goal of initiating production in the second half of calendar 2010. "Our decision to move ahead with an Asian assembly operation reflects our confidence in our financial position," said Skarvan. The company expects capital expenditures related to establishing the Thailand assembly operation to total $10 million to $15 million in fiscal 2010.

BioMeasurement Division
Net sales for the BioMeasurement Division in the fiscal 2009 third quarter totaled $408,000, compared with $458,000 in the preceding quarter and $230,000 in the fiscal 2008 third quarter. Rick Penn, president of the BioMeasurement Division, said that the lower than expected sales resulted primarily from hospital spending restrictions that have delayed some initial purchases by prospective new customers. As a result, Penn said that the company now expects fiscal 2009 BioMeasurement Division sales to reach about $2 million.

Penn said: "Among our existing customers, sensor sales are growing as hospitals adopt protocols that incorporate StO2 monitoring and as they expand the use of the InSpectra StO2 System across multiple critical care applications." Penn also said the division continues to conduct advanced training sessions on the clinical use of StO2 monitoring with physicians and nurses in the United States and Europe. "These clinicians are learning more about the value of incorporating InSpectra StO2 monitoring into their practices, and their sensor usage has subsequently increased," said Penn. The BioMeasurement Division now has 86 customers worldwide, up from 74 at the end of the preceding quarter, and the installed base of monitors exceeds 170.