Hutchinson: Fiscal 1Q10 Financial Results

Hutchinson Technology Incorporated reported net income of $2.2 million, or $0.09 per diluted share, on net sales of $108.3 million for its fiscal 2010 first quarter ended December 27, 2009.

The company’s fiscal 2010 first quarter gross profit was $20.8 million, or 19 percent of net sales, an increase of $3.3 million or more than 200 basis points compared with the preceding quarter as a result of higher shipment volume and net sales. Compared with the prior year’s first quarter, gross profit increased by $20.9 million despite an $11.4 million decline in net sales, reflecting the benefits of the company’s fiscal 2009 restructuring and cost reduction actions.

Net income for the fiscal 2010 first quarter included:

• A non-cash interest expense of $2.1 million resulting from the company’s adoption of Financial Accounting Standards Board guidance for accounting for convertible debt instruments. As the company previously disclosed, the adoption of this guidance is expected to result in non-cash interest expense of approximately $8.5 million in fiscal 2010. A non-recurring income tax benefit of $2.3 million, primarily due to a recent change in U.S. tax law that enabled the company to carry back some of its net operating losses to prior years and apply for a refund of taxes paid in those years.

Excluding these two items, net income for the fiscal 2010 first quarter would have been $2.0 million, or $0.09 per diluted share.

In the comparable fiscal 2009 period, the company had a net loss of $66.2 million, or $2.88 per share, on net sales of $119.7 million. The company’s fiscal 2006 through fiscal 2009 financial statements have been adjusted to reflect the required retrospective adoption of the accounting guidance noted above. Results for the fiscal 2009 first quarter included asset impairment charges of $32.3 million, severance costs of $19.5 million, a $12.2 million gain on the repurchase of $59.9 million par value of the company’s 2.25% Convertible Subordinated Notes due 2010, a $2.4 million net gain related to the valuation of the company’s auction-rate securities portfolio and a non-cash interest expense of $2.1 million related to the retrospective adoption of the accounting guidance noted above. Excluding these items, the company would have reported a fiscal 2009 first quarter net loss of $26.8 million, or $1.17 per share.

Cash from operations in the fiscal 2010 first quarter totaled $24.0 million and capital expenditures totaled $4.1 million. During the quarter, the company repurchased $4.5 million of its 2.25% Convertible Subordinated Notes due March 2010, leaving a balance due of $41.1 million. The company added $15 million to its cash and investments balance, which totaled $242 million at the end of the fiscal 2010 first quarter.

"Our first quarter operating performance benefited from sequential quarter growth in shipments and net sales, as well as the lower costs resulting from our fiscal 2009 restructuring actions," said Wayne M. Fortun, Hutchinson Technology’s president and chief executive officer. "In addition, we increased our cash and investments balance while further reducing our debt," said Fortun. "To achieve consistent profitability, we will continue to focus on improving our TSA+ production efficiency, expanding TSA+ adoption, establishing operations in Thailand and growing revenue in our BioMeasurement Division."

Disk Drive Components Division
As previously reported, the company shipped approximately 155 million suspension assemblies in the fiscal 2010 first quarter, up 7 percent from 145 million in the preceding quarter and about flat with the fiscal 2009 first quarter. Compared with the preceding quarter, shipments of suspension assemblies for 3.5-inch ATA and enterprise applications increased, shipments for 2.5-inch ATA applications were about flat and shipments for 1.8-inch ATA applications declined, as is seasonally typical.

Average selling price in the fiscal 2010 first quarter was 68 cents, compared with 70 cents in the preceding quarter and 76 cents in the fiscal 2009 first quarter. The decline in fiscal 2010 first quarter average selling price was a result of a competitive pricing environment and the mix of products shipped.

The company’s first quarter shipments of TSA+ suspension assemblies totaled approximately 25 million, up 36 percent from the preceding quarter. With the increased volume, the company reduced its TSA+ cost per part by approximately 16 percent in the fiscal 2010 first quarter compared with the preceding quarter. However, the TSA+ cost burden increased to $7.4 million in the fiscal 2010 first quarter from $7.1 million in the preceding quarter due to lower than expected TSA+ yields.

"Our TSA+ yield declined slightly in the first quarter as we began implementing certain process improvements that we expect to create long-term benefits," said Kathleen Skarvan, president of the Disk Drive Components Division. "With continued growth in TSA+ suspension assembly volume and improvement in our TSA+ manufacturing efficiencies and yields, we believe we can eliminate the cost burden associated with TSA+ flexure production in the second half of the fiscal year and begin to achieve a cost advantage for TSA+ flexures over current subtractive TSA flexures soon after."

Skarvan said the company has begun construction of an assembly operation in Thailand and hiring of management and support staff and expects to begin operations there in the second half of calendar 2010. "The Thailand operation will improve our ability to serve our customers’ operations in Asia and enable us to reduce our labor costs, freight costs and future income taxes," she said. Skarvan reaffirmed that the Thai assembly operation will require about $15 million in fiscal 2010 capital spending.

Regarding the outlook for suspension assembly demand and pricing, Skarvan said the company expects demand to closely track the growth in worldwide shipments of disk drives in calendar 2010 and that pricing will remain competitive. "However, in the March quarter we expect suspension demand to decline in line with historical seasonality based on our understanding of customer build plans and a temporary reduction in suspension assemblies per disk drive," said Skarvan.

BioMeasurement Division
The company’s BioMeasurement Division reported fiscal 2010 first quarter net sales of $509,000, compared with $624,000 in the preceding quarter and $265,000 in the fiscal 2009 first quarter. Rick Penn, president of the BioMeasurement Division, attributed the sequential quarter decline in net sales primarily to delays in sales to new customers.

Focusing on year-over-year comparisons, Penn noted that net sales, the number of customers and the installed base of InSpectra StO2 Tissue Oxygenation monitors have all doubled or nearly doubled, with the number of customers growing to more than 100 worldwide and the installed base of monitors reaching nearly 250. "Among our growing customer base, we are focused on educating clinicians regarding the use of InSpectra StO2 in specific clinical situations," said Penn. "More than 100 physicians will participate in our Advanced StO2 Education Programs during the first two quarters of fiscal 2010, nearly triple the total number of physicians that participated in all of fiscal 2009. We are encouraged by the increased demand for this training and believe that as the number of physicians who understand the use and value of StO2 readings in patient care grows, so will the usage of InSpectra StO2 sensors." Penn said the division continues to expect fiscal 2010 net sales of $4 million to $6 million.