Hutchinson: Fiscal 2Q10 Financial Results

Hutchinson Technology Incorporated reported a net loss of $15.6 million, or $0.67 per share, on net sales of $87.6 million for its fiscal 2010 second quarter ended March 28, 2010.

The company’s fiscal 2010 second quarter gross profit was $7.3 million, or 8 percent of net sales, down from $20.8 million, or 19 percent of net sales in the preceding quarter, primarily due to a 16 percent sequential quarter decline in suspension assembly shipments. Compared with the prior year’s second quarter, gross profit improved by approximately $19.1 million on an $8.6 million increase in net sales, reflecting the benefits of the fiscal 2009 restructuring actions. Fiscal 2010 second quarter results included non-cash interest expense of $2.1 million resulting from the company’s adoption at the beginning of fiscal 2010 of Financial Accounting Standards Board guidance for accounting for convertible debt instruments.

In the fiscal 2009 second quarter, the company reported a net loss of $59.9 million, or $2.59 per share, on net sales of $79.0 million. Results for the fiscal 2009 second quarter included asset impairment charges of $18.7 million, severance and other costs of $4.8 million and non-cash interest expense of $2.2 million related to the retrospective adoption of the accounting guidance noted above. Excluding these items, the company’s net loss for the fiscal 2009 second quarter would have been $34.2 million, or $1.48 per share.

"Our 16 percent sequential decline in shipments was more than the estimated decline in worldwide suspension assembly shipments," said Wayne M. Fortun, Hutchinson Technology’s president and chief executive officer. "This temporary market share loss resulted primarily from our broad implementation of a TSA+ process improvement that temporarily prevented us from meeting demand and from share shifts among disk drive makers. Based on program qualifications and volume commitments from our customers, we are confident we will regain market share in the fiscal 2010 third quarter," said Fortun. "To achieve consistent profitability, we will continue to focus on growing our suspension assembly revenue, improving our TSA+ production efficiency, expanding TSA+ adoption, establishing operations in Thailand and growing revenue in our BioMeasurement Division."

Cash flow from operations totaled $7.4 million in the fiscal 2010 second quarter and capital expenditures totaled $7.7 million. During the quarter, the company retired the remaining $41.1 million balance on its 2.25% Convertible Subordinated Notes due March 15, 2010. The company’s cash and investments balance at the end of the quarter totaled $197 million. As previously disclosed, the company sold a portion of its auction-rate securities portfolio for $19.3 million in cash.

Disk Drive Components Division
The company shipped approximately 130 million suspension assemblies in the fiscal 2010 second quarter, down 16 percent from 155 million in the preceding quarter and up 22 percent from 107 million in last year’s second quarter. Compared with the preceding quarter, suspension assembly shipments declined for all disk drive applications, with the most significant decline in the 2.5-inch ATA segment.

The company’s average selling price in the fiscal 2010 second quarter was 66 cents, compared with 68 cents in the preceding quarter and 71 cents in the fiscal 2009 second quarter. The decline in average selling price reflects the continuation of a competitive pricing environment.

The company shipped approximately 20 million TSA+ suspension assemblies in the fiscal 2010 second quarter, compared with 25 million in the preceding quarter and 10 million in the fiscal 2009 second quarter. Due to temporary yield declines experienced in the last month of the quarter as certain process improvements were being broadly implemented and new TSA+ products were brought into production, the TSA+ cost burden increased to $7.9 million in the fiscal 2010 second quarter from $7.4 million in the preceding quarter.

Kathleen Skarvan, president of the Disk Drive Components Division, said that TSA+ yields have improved in the first four weeks of the fiscal 2010 third quarter. "We remain confident in our TSA+ production ramp and yield improvement efforts and believe that we can eliminate the cost burden by the end of the fiscal year," said Skarvan. "We continue to gain customer acceptance on new programs with our TSA+ products and expect TSA+ suspensions to grow significantly as a percentage of our product mix, as they continue to replace TSA suspensions. To respond to growing customer demand, we are expanding our TSA+ capacity and increasing our planned fiscal 2010 capital spending from $35 million to approximately $50 million."

Construction of the company’s assembly facility in Thailand and hiring and training of employees are proceeding on schedule. "We expect to ship products for customer qualification from our Thai operation early in fiscal 2011," said Skarvan.

Regarding the company’s outlook, Skarvan said that based on expected share gains, the company’s fiscal 2010 third quarter shipments should be relatively flat compared to the fiscal 2010 second quarter despite a projected seasonal decline in disk drive shipments. Skarvan also noted that projections for calendar 2010 unit shipments of disk drives continue to strengthen and the company is well positioned to gain market share on customer programs expected to ramp to higher volume.

BioMeasurement Division
Net sales for the BioMeasurement Division totaled $687,000, up from $508,000 in the preceding quarter and $458,000 in last year’s second quarter. Rick Penn, president of the BioMeasurement Division, said that while sales were below targeted levels, the company is pleased with the increase in sensor sales and repeat business. The number of InSpectra StO2 sensors sold in the fiscal 2010 second quarter more than doubled compared with both the preceding quarter and last year’s second quarter. The division now has 120 customers and the worldwide base of installed monitors has almost doubled year-over-year to 280.

Penn said that clinician education delivered via the company’s Advanced StO2 Education Programs remains a high priority. "We are seeing a strong linkage between clinician participation in this program, which focuses on the use of InSpectra StO2 monitoring in specific clinical situations, and increasing sensor usage," said Penn.

The division also continues to foster the expanded use of InSpectra StO2 monitoring to applications beyond trauma medicine. "For emergency room applications, high patient volumes provide quick and compelling opportunities to demonstrate the value of InSpectra StO2 in identifying problems that other measures of patient status do not," said Penn. "In addition, we are seeing customers starting to adopt InSpectra StO2 as an alternative to central catheters for monitoring patient status."

As a result of the current pace of adoption of the InSpectra StO2 System and spending constraints in health care markets worldwide, the company now expects fiscal 2010 net sales from the BioMeasurement Division to be approximately $3 million, compared to previous expectations of $4 million to $6 million.