Hutchinson: Fiscal 2Q09 Financial Results

Hutchinson Technology, Inc. reported a net loss of $57.7 million, or $2.49 per diluted share, on net sales of $79.0 million for its fiscal 2009 second quarter ended March 29, 2009.

Results for the quarter included:

• Asset impairment charges of $18.7 million related to manufacturing and support equipment in the company’s assembly and components operations; and
• Severance and other costs of $4.8 million related primarily to the previously announced closure of the company’s assembly operations in Sioux Falls, South Dakota.

Excluding these items, Hutchinson Technology’s net loss for the fiscal 2009 second quarter would have been $34.2 million, or $1.48 per share. In the comparable fiscal 2008 period, the company reported a net loss of $6.2 million, or $0.25 per share, on net sales of $143.8 million.

The decline in fiscal 2009 second quarter net sales resulted primarily from a 40% decline in suspension assembly shipments compared with the fiscal 2008 second quarter and reduced the company’s ability to cover its fixed costs, resulting in a gross loss of $11.8 million or 15%. The gross loss included a $7.8 million cost burden related to TSA+ flexure production. Increased TSA+ volume and further yield improvements helped reduce this burden from $9.5 million in the fiscal 2009 first quarter.

The company also announced that it is taking additional actions to reduce costs, improve cash flow, meet the current portion of its debt obligations and make strategic investments as needed. "We are further restructuring the company to adjust to market conditions and the expected phase out of suspension assembly shipments to Seagate Technology over the next 18 to 24 months," said Wayne Fortun, president and chief executive officer. The restructuring actions include eliminating approximately 300 additional positions, bringing overall employment to about 2,500 by the end of the fiscal 2009 third quarter. The company estimates that its financial results for its fiscal 2009 third quarter ending June 28, 2009 will include approximately $25 million of severance and asset impairment charges related to these restructuring actions. "These actions should generate approximately $50 million in annualized cost savings. Combined with other restructuring actions we have taken this year, we estimate we have reduced our costs by approximately $175 million on an annualized basis, and these savings will become fully realized in our fiscal 2009 fourth quarter. This will position the company to generate positive free cash flow at quarterly revenue of $85 million to $90 million," said Fortun.

The company’s total cash and investments at the end of the fiscal 2009 second quarter totaled $293 million, compared with $299 million at the end of the preceding quarter. The company has further reduced its planned fiscal 2009 capital spending from $40 million to less than $30 million.

Disk Drive Components Division
The company shipped approximately 107 million suspension assemblies in the fiscal 2009 second quarter, down from 155 million in the preceding quarter. Kathleen Skarvan, president of the Disk Drive Components Division, attributed the sequential quarter decline in suspension assembly volume primarily to lower demand for disk drives, lower disk drive production as the drive makers reduced inventories and a modest loss of market share. As previously reported, the company’s combined shipments for the mobile and enterprise segments declined more than 50% sequentially, while shipments for the 3.5" ATA segment increased approximately 15%. This shift in product mix was the primary reason that average selling price declined sequentially from $0.76 to $0.71.

The company shipped approximately 10 million TSA+ suspension assemblies in the fiscal 2009 second quarter, up from 4.5 million in the preceding quarter. Unit costs for TSA+ suspension assemblies have continued to decline as a result of increasing TSA+ volume and further optimization of TSA+ production processes. "We expect our TSA+ shipments to further increase in subsequent quarters and the associated ramp of TSA+ production volume will continue to reduce the gross margin burden," said Skarvan. "Compared to current subtractive flexures, additive TSA+ flexures provide superior performance and will ultimately have a lower cost."

The company currently expects fiscal 2009 third quarter suspension assembly shipments to increase on a sequential basis, in contrast to the historical norm of a decrease in the June quarter. Skarvan said that shipments to Seagate are expected to decline to less than 10% of the company’s total suspension assembly volume in its fiscal 2009 fourth quarter, and the remaining volume will be phased out subsequently. Skarvan added that the company continues to ramp suspension assembly programs with all of the other disk drive makers.

BioMeasurement Division

Net sales for the BioMeasurement Division totaled $458,000, up from $265,000 in the preceding quarter. Rick Penn, president of the BioMeasurement Division, said that almost all of fiscal 2009’s second quarter sales were to customers who are using the InSpectra StO2 system in clinical applications rather than for research. "These applications include trauma, emergency medicine, intensive care and peri-operative care," said Penn.

After adding 19 new customers during the fiscal 2009 second quarter, the BioMeasurement Division now has 74 customers and the installed base of monitors exceeds 140. The second quarter growth included increased monitor sales in Europe and the United States and sales through distributors in parts of Europe and the Middle East. "The growing base of installed systems should begin to result in increased sensor sales as our system becomes routinely used to manage treatment in a wide range of critical care settings," said Penn.

The company expects fiscal 2009 net sales for the BioMeasurement Division to reach $3 million to $5 million, with the division’s operating losses narrowing on the revenue growth and cost reductions within the division.