Hutchinson: Fiscal 1Q09 Financial Results

Hutchinson Technology Incorporated  reported a net loss of $64.1 million, or $2.79 per diluted share, on net sales of $119.7 million for its fiscal 2009 first quarter ended December 28, 2008.

Results for the quarter included:

• Asset impairment charges of $32.3 million related to manufacturing equipment in the company’s assembly and components operations;
• Severance costs of $19.5 million related to a workforce reduction of approximately 1,380;
• A $12.2 million gain on the previously announced repurchase of $59.9 million par value of the company’s 2.25% Convertible Subordinated Notes due 2010; and
• A $2.4 million net gain related to the valuation of the company’s auction-rate securities portfolio.

Excluding these items, Hutchinson Technology’s net loss for the fiscal 2009 first quarter would have been $26.8 million, or $1.17 per diluted share.

In the comparable fiscal 2008 period, the company reported net income of $2.3 million, or $0.09 per diluted share, on net sales of $173.1 million. Diluted earnings per share for the quarter were reduced approximately $0.05 by a pre-tax litigation charge of $2.5 million.

Wayne M. Fortun, president and chief executive officer, said the company has taken a number of actions to adjust to weakened demand and uncertain future market conditions. "Our immediate focus has been on reducing costs and strengthening our cash position," said Fortun. "We’ve made structural changes that consolidate certain operations, lower our fixed costs and preserve cash so that we can meet our debt obligations and make strategic investments as needed," he said. "These actions should generate $110 million to $125 million in annualized cost savings and reduce our expected loss in fiscal 2009 without compromising our leadership in technology, quality and speed to volume. We believe we are well positioned to improve our financial results when demand growth resumes."

The company’s total cash and investments at the end of the fiscal 2009 first quarter totaled $299 million, compared with $263 million at the end of the preceding quarter. "We strengthened our cash position by obtaining a loan against our auction-rate securities portfolio and improved our debt structure by repurchasing some of our convertible debt on favorable terms," said John A. Ingleman, Hutchinson Technology’s chief financial officer. In December 2008, the company entered into a settlement to provide liquidity for the company’s auction-rate securities held with UBS affiliates. As part of the settlement, the company accessed a $59.5 million line of credit that will be treated as a no-net-cost loan secured only by its auction-rate securities held with UBS affiliates. As previously reported, the company also repurchased $59.9 million par value of its 2.25% Convertible Subordinated Notes due 2010 for approximately $48 million, including accrued interest, resulting in the $12.2 million gain noted above. As previously announced, the company also has reduced its planned fiscal 2009 capital spending from $60 million to $40 million.

The company shipped approximately 155 million suspension assemblies in its fiscal 2009 first quarter, as demand declined sharply in the second half of the quarter. Suspension assembly shipments totaled approximately 209 million in the preceding quarter and 213 million in the fiscal 2008 first quarter.

The decline in fiscal 2009 first quarter net sales reduced the company’s ability to cover its fixed costs and resulted in gross margin of zero percent, compared to 10 percent in the preceding quarter and 19 percent in the fiscal 2008 first quarter. Due to continued yield improvements and reductions in unit costs, the gross profit burden of ramping TSA+ flexure production declined to $9.5 million in the fiscal 2009 first quarter compared with $11.0 million in the preceding quarter.

Including the above-mentioned asset impairment charges and severance costs, the company incurred an operating loss of $77.2 million in the fiscal 2009 first quarter, compared to an operating loss of $10.5 million in the preceding quarter and an operating profit of $2.0 million in the fiscal 2008 first quarter.

As announced last week, the company will close its assembly operation in Sioux Falls, South Dakota over the next three months. In addition, the company is planning to further reduce the workforce at its Eau Claire, Wisconsin components operation by approximately 100 employees. The company estimates that its financial results for its fiscal 2009 second quarter ending March 29, 2009 will include $10 million to $18 million of asset impairment charges, severance charges and other costs related to these restructuring actions.

Disk Drive Components Division
The company estimates that it maintained its overall suspension assembly market share during the fiscal 2009 first quarter, according to Kathleen Skarvan, president of the company’s Disk Drive Components Division. "We believe the weakened demand we saw in the quarter resulted primarily from a decline in disk drive shipments and a reduction of inventories in the supply chain,"’ said Skarvan.

Skarvan said the company increased its production of TSA+ suspension assemblies compared with the preceding quarter due to the improved reliability, yields and output of the TSA+ volume production line. "Our continuous focus on process optimization has begun to reduce the financial burden of ramping our TSA+ production process," said Skarvan.

As part of the restructuring initiative, Skarvan said that the company is consolidating some of its component and assembly manufacturing. "This realignment will enable us to reduce our production costs, further improve our overall operating efficiency and retain our ability to respond to customer requirements," said Skarvan.

Skarvan said visibility regarding future suspension assembly demand is very limited. "As a result of expected declines in worldwide disk drive shipments in the seasonally weaker March quarter, suspension assembly demand is likely to remain weak and pricing to be aggressive," said Skarvan.

BioMeasurement Division
The company’s BioMeasurement Division nearly doubled the number of InSpectra StO2 Tissue Oxygenation monitors placed in the first quarter compared to the number placed in the preceding quarter, as the division continued to add customers and expand the installed base of monitors. Net sales for the division totaled $265,000 in the fiscal 2009 first quarter compared with $445,000 in the preceding quarter. The decline occurred primarily because the majority of first quarter monitor placements were on a pay-per-use basis rather than outright sales of the monitors.

Rick Penn, president of the BioMeasurement Division, said that the company continues to expand InSpectra StO2 monitoring to new applications beyond trauma medicine. "Our marketing and clinician education efforts are advancing the understanding of the clinical and economic benefits of using InSpectra StO2 as a guide to managing treatment in a wide range of critical care settings,"’ said Penn. "These benefits include more effective use of fluids and blood products, avoidance of invasive procedures and associated complications, shorter intensive care unit and hospital stays and overall increased staff productivity."

Penn said that while the company continues to expand its customer base in trauma medicine, more than half of the prospective customers currently evaluating InSpectra StO2 are considering it for use in emergency medicine, intensive care or operating room applications. "These applications have high patient volumes that can be expected to generate strong sensor sales in the future," added Penn.

Fiscal 2009 net sales for the BioMeasurement Division are expected to reach $3 million to $5 million. As a result of the expected increase in sales and the company’s restructuring actions, the division’s operating loss is expected to decline in fiscal 2009.

Fortun said that while near-term business conditions are expected to remain difficult, he is confident the company is positioned for improved financial performance when demand growth resumes. "The cost reductions achieved through our restructuring actions will help offset an expected revenue decline in fiscal year 2009 while improving our overall operating efficiency," said Fortun. "In addition, the strengthening of our cash position will enable us to effectively manage through the current market and economic conditions. We are deeply grateful for the hard work and contributions of the colleagues whose positions we had to eliminate in our restructuring efforts, and we appreciate the dedication and commitment of the people continuing with the company as we manage through current business and economic conditions."