Hutchinson: Fiscal 3Q10 Financial Results

Hutchinson Technology Incorporated reported a net loss of $18.5 million, or $0.79 per share, on net sales of $77.3 million for its fiscal third quarter ended June 27, 2010. In the preceding quarter, the company reported a net loss of $15.6 million, or $0.67 per share, on net sales of $87.6 million.

Gross profit in the quarter was $4.9 million, or 6 percent of net sales, compared with $7.3 million, or 8 percent of net sales, in the preceding quarter. Results for the fiscal 2010 third quarter included $2.3 million of non-recurring asset write-downs in the BioMeasurement Division.

Results for both the fiscal 2010 third quarter and the preceding quarter 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.

Wayne M. Fortun, Hutchinson Technology’s president and chief executive officer, said that the company’s shipments declined 11 percent sequentially primarily due to reductions in disk drive makers’ production plans. In addition, the company lost volume due to a defect on some of its TSA+ product. "The defect that we encountered late in the quarter prevented share gains we expected to achieve," said Fortun. "We have now contained the defect and identified the cause, and we are implementing and validating the solutions. Our TSA+ production process is complex and requires persistent focus on improving reliability and yields. We acted quickly to address this latest challenge, and we continue to ship TSA+ suspensions in volume."

Fortun said the company is taking actions to further reduce costs and preserve cash, targeting annualized cost reductions of approximately $25 million by the end of fiscal 2010. "In our BioMeasurement Division, we will reduce costs by approximately $12 million in light of slower than expected revenue growth," said Fortun. "In our Disk Drive Components Division, we will reduce costs by approximately $8 million, while keeping intact capabilities that are core to our competitive position. We will also reduce our corporate expenses by approximately $5 million." The company estimates that its financial results for its fiscal 2010 fourth quarter will include approximately $4 million of severance charges related to these actions.

Fortun said that in addition to reducing the operating loss in the BioMeasurement Division, the company’s path to profitability includes increasing revenue through overall suspension assembly market growth and higher market share, improving TSA+ production efficiency and establishing operations in Thailand.

Cash flow from operations in the fiscal 2010 third quarter totaled $2.9 million and capital expenditures totaled $10.9 million. The company has reduced its capital spending plans for fiscal 2010 from $50 million to $40 million. During the quarter, the company sold $20.5 million of auction rate securities at par value, and the full proceeds were applied to the loan that was previously obtained against these securities. The company’s cash and investments balance at the end of the quarter totaled $168 million.

Subsequent to the end of the fiscal 2010 third quarter, the remaining $44.6 million of auction rate securities held by the company were put back to UBS at par value, under the terms of a previous agreement. The remaining $34 million balance on the loan obtained against these securities was repaid, reducing both the company’s cash and investments balance and its current debt by $34 million.

Disk Drive Components Division
The company shipped approximately 117 million suspension assemblies in the fiscal 2010 third quarter, down from 130 million in the preceding quarter and 146 million in the fiscal 2009 third quarter. Shipments of suspension assemblies for 3.5-inch ATA applications increased slightly while shipments for the enterprise and mobile segments declined compared with the preceding quarter. The pricing environment continues to be competitive, and the company’s average selling price declined one cent from the preceding quarter to 65 cents. Average selling price in the fiscal 2009 third quarter was 71 cents.

The company shipped approximately 33 million TSA+ suspension assemblies in the fiscal 2010 third quarter, up from 20 million in the preceding quarter and 10 million in last year’s third quarter. Kathleen Skarvan, president of the Disk Drive Components Division, said that a defect on some of its TSA+ product resulted in lost volume at the end of the fiscal 2010 third quarter and will negatively impact volume in the company’s fourth quarter as well. The company reduced the cost burden of TSA+ flexure production from $7.9 million in the preceding quarter to $7.5 million in the fiscal 2010 third quarter as cost per part declined by approximately 13 percent. Skarvan said that TSA+ suspension assemblies will continue to grow as a percentage of the company’s product mix. However, due to a yield setback associated with the TSA+ product defect, the company is now targeting elimination of the TSA+ cost burden in the first half of fiscal 2011.

Construction of the company’s assembly facility in Thailand is scheduled to be complete in August and equipment installation will begin thereafter. "We expect to ship products for customer qualification from our Thailand facility early in fiscal 2011," said Skarvan.

Regarding the outlook for suspension assembly demand, Skarvan said the company currently expects its fiscal 2010 fourth quarter shipments to decline 5 to 10 percent compared with the third quarter as a result of share losses with certain customers. "While it will take longer than we previously expected to regain market share, we believe that our strategic investments in our TSA+ process capabilities and our assembly operation in Thailand will further lower our costs and strengthen our competitive position," said Skarvan.

BioMeasurement Division
Net sales for the BioMeasurement Division in the fiscal 2010 third quarter totaled $536,000 compared with $687,000 in the preceding quarter and $408,000 in last year’s third quarter. Monitor sales were relatively flat on both a year-over-year and a sequential basis. Sensor sales nearly doubled year-over-year, but declined on a sequential basis in the company’s third quarter. The installed base of monitors now totals more than 300 across 131 customers compared with 280 at 120 customers at the end of the preceding quarter. The company now expects fiscal 2010 BioMeasurement Division sales to reach about $2.5 million compared with $1.8 million in fiscal 2009.

"In light of slower sales growth, we are significantly reducing the division’s cost structure," said Rick Penn, president of the BioMeasurement Division. "We will focus primarily on the customers, applications and geographic markets where we have the most momentum, which will enable us to reduce our sales force and our spending in other areas."

"We have proven that measurement of StO2 can identify problems that other vital signs cannot, and we are making progress in expanding use of our InSpectra StO2 system in the trauma and emergency departments and surgical intensive care unit," said Penn. "We believe that the potential for the InSpectra StO2 system merits our continued investment."