Hutchinson: Fiscal 3Q09 Financial Results

Hutchinson Technology Incorporated reported net income of $8.3 million, or $0.34 per diluted share, on net sales of $103.2 million for its fiscal fourth quarter ended September 27, 2009. The company’s operating results, excluding the three items below, generated a net loss of $1.0 million, or $0.04 per share.

Results for the quarter included:

• A gain of $7.1 million on the repurchase of $27.5 million par value of the company’s 3.25% Convertible Subordinated Notes due January 2026, leaving a balance of $197.5 million;
• A gain of $1.9 million on the sale of the company’s building in Sioux Falls, South Dakota; and
• A gain of $0.4 million on the repurchase of $19.5 million par value of the company’s 2.25% Convertible Subordinated Notes due March 2010, leaving a balance of $45.6 million.

In its fiscal 2008 fourth quarter, the company reported a net loss of $105.5 million, or $4.60 per diluted share, on net sales of $164.3 million. The net loss for the quarter included a non-cash charge of $92.5 million, or $4.03 per share, related to establishing a full valuation allowance against deferred tax assets and a charge of $8.5 million, or $0.37 per share, related to an other-than-temporary impairment of its long-term investments. Excluding the impairment charge, the company’s loss before income taxes for the fiscal 2008 fourth quarter would have been $11.8 million.

Wayne M. Fortun, Hutchinson Technology’s president and chief executive officer, said the actions taken in fiscal 2009 to reduce costs and debt have improved the company’s operating results and financial position. "Excluding the gains noted above, we operated at close to breakeven in the fourth quarter as a result of substantial reductions in our costs achieved primarily through structural changes in our business," said Fortun. "In addition, over the course of the year, we repaid $132 million, or 35%, of our convertible debt." The company ended the year with total cash and investments of $227 million. "We are prepared for the resumption in year-over-year demand growth that we expect, and we are better positioned to weather market and economic instability should it occur," said Fortun.

Gross profit improved from $17.1 million, or 10%, in the fiscal 2008 fourth quarter to $17.5 million, or 17%, in the fiscal 2009 fourth quarter, despite a $61 million decline in net sales. Operating income totaled $2.1 million in the fiscal 2009 fourth quarter, compared with an operating loss of $10.5 million in the fiscal 2008 fourth quarter. "Achieving a $13 million improvement in operating income compared with last year’s fourth quarter, despite a 31% decline in suspension shipments, illustrates the impact of the actions we took to restructure the company," said Fortun.

The company currently estimates fiscal 2010 capital spending to be approximately $35 million, including $15 million to establish its Thailand assembly operation. The company’s fiscal 2010 results will include an additional non-cash interest expense of approximately $8.5 million resulting from the adoption of Financial Accounting Standards Board Staff Position No. APB 14-1, ‘Accounting for Convertible Debt Instruments That May Be Settled in Cash Upon Conversion (Including Partial Cash Settlement).’

Disk Drive Components Division
The company shipped 145 million suspension assemblies in the fiscal 2009 fourth quarter, compared with 146 million in the preceding quarter and 209 million in the fiscal 2008 fourth quarter. Volume was about flat on a sequential quarter basis despite a decline in shipments to Seagate Technology that was expected. Average selling price in the fiscal 2009 fourth quarter was $0.70, compared with $0.71 in the preceding quarter and $0.78 in last year’s fourth quarter.

Shipments of TSA+ suspension assemblies totaled 18 million in the fiscal 2009 fourth quarter, up from 10 million in the preceding quarter and 5 million in last year’s fourth quarter. "TSA+ suspension assemblies offer our customers superior performance, and as a result are gaining broader acceptance and being designed into more disk drive programs," said Kathleen Skarvan, president of the Disk Drive Components Division. The company continued to reduce the cost burden of TSA+ flexure production, which was $7.1 million in the fiscal 2009 fourth quarter, compared to $7.6 million in the preceding quarter and $11 million in the 2008 fourth quarter. "Our TSA+ output, yields and efficiencies are all improving and we remain on track to eliminate the cost burden associated with TSA+ flexure production in the second half of fiscal 2010," said Skarvan. "We expect that the cost to produce our additive TSA+ flexures will ultimately be lower than the cost to produce our current subtractive TSA flexures."

The company expects its overall suspension assembly volume to, at minimum, keep pace with the worldwide demand for suspension assemblies, resulting in a return to year-over-year volume growth in fiscal 2010. "TSA+ suspensions should account for a steadily increasing percentage of our shipments over the course of the year as we continue to expand TSA+ adoption," said Skarvan. "We’re also progressing with establishing an assembly operation in Thailand, with a goal of initiating production in the second half of calendar 2010. This will further enhance our long-term cost position, as well as our ability to serve our customers in Asia."

BioMeasurement Division
Net sales for the BioMeasurement Division in the fiscal 2009 fourth quarter totaled $624,000 compared with $408,000 in the preceding quarter and $445,000 in the fiscal 2008 fourth quarter. Rick Penn, president of the BioMeasurement Division, attributed the sequential quarter revenue growth primarily to recurring sales to existing customers, which more than doubled compared with the preceding quarter. "Although hospital spending restrictions delayed some initial purchases by prospective new customers, we are encouraged by the growth in recurring sensor sales. This growth reflects increasing clinician acceptance resulting from our customer education efforts and the development of protocols that incorporate the use of InSpectra StO2 monitoring," said Penn. "Our fourth quarter revenue also benefited from sales through distributors as we continued to widen our geographic reach. We are now positioned to sell into 26 countries through a combination of direct sales and more than 10 distributors."

During fiscal 2009, the BioMeasurement Division nearly doubled its number of customers to 98 and nearly tripled the installed base of InSpectra StO2 systems, which totaled more than 220 at the end of the fiscal year. Over the course of the year, there also were more than 60 industry publications or presentations that documented the value of StO2 monitoring. "This momentum and body of evidence provides a firm foundation for our overall marketing and sales efforts, our clinician education programs and our focus on establishing InSpectra StO2 monitoring as a standard of care," said Penn. Penn added that although revenue within each quarter is difficult to predict, the company expects fiscal 2010 BioMeasurement Division revenue to reach $4 million to $6 million, compared to $1.8 million in fiscal 2009.

Commenting on fiscal 2009, Fortun said the company responded to challenging market, industry and economic conditions by strengthening its overall financial position and substantially changing its cost structure without compromising its ability to innovate and compete. "Looking ahead, our strategies to achieve consistent profitability include improving our TSA+ production efficiency, expanding TSA+ adoption, initiating production in Thailand, and growing revenue in our BioMeasurement Division."