Hutchinson: Fiscal 2Q11 Financial Results

Hutchinson Technology Incorporated reported a net loss of $20.5 million, or $0.88 per share, on net sales of $63.3 million for its fiscal second quarter ended March 27, 2011.

The net loss for the quarter included:

• Severance costs of $6.7 million and accelerated depreciation of $0.7 million related to the previously announced manufacturing consolidation and restructuring plan;
• A gain on debt extinguishment of $5.5 million related to a tender/exchange offer that was completed in February 2011 for $75.3 million of the company’s 3.25% Convertible Subordinated Notes due 2026; and
• Non-cash interest expense of $2.0 million resulting primarily from the company’s adoption, at the beginning of fiscal 2010, of Financial Accounting Standards Board guidance for accounting for convertible debt instruments.

Excluding these items, the company’s net loss for its fiscal second quarter totaled $16.5 million, or $0.71 per share.

In the preceding quarter, the company reported a net loss of $17.0 million, or $0.73 per share, on net sales of $68.2 million. Excluding non-cash interest expense of $2.2 million, the company’s net loss was $14.7 million, or $0.63 per share.

Wayne Fortun, Hutchinson Technology’s president and chief executive officer, said that the company’s overall cost position will improve as a result of its consolidation and restructuring plan. The consolidation of the company’s TSA+ and photoetch operations into its Wisconsin site and the transition of assembly operations to its Thailand site will improve the utilization of its high-volume manufacturing locations and support infrastructure. As part of the restructuring plan, Fortun said the company is also taking actions to resize the company and further reduce costs in its BioMeasurement Division. As a result of the consolidation and restructuring effort that is taking place over the next 9 months, the company expects to reduce its costs by $50 million to $55 million on an annualized basis by the start of the fiscal 2012 second quarter.

"The favorable yield and output trends for our TSA+ products, steadily higher volume at our Thailand assembly operations and benefits from our consolidation and restructuring plans will improve our cost structure and competitive position," said Fortun. "These changes will also help us become the lowest cost manufacturer of suspension assemblies and return to positive cash flow and profitability."

In line with the company’s previously revised guidance, second quarter suspension assembly shipments declined 4 percent compared with the preceding quarter as a result of customers’ reduced production plans. The company shipped 102.3 million suspension assemblies in the fiscal 2011 second quarter, compared with 106.5 million in the preceding quarter. Shipments of TSA+ suspension assemblies accounted for 53 percent of fiscal 2011 second quarter shipments, up from 45 percent in the preceding quarter.

Average selling price in the fiscal 2011 second quarter was $0.60 compared with $0.62 in the preceding quarter. The sequential quarter decline in average selling price resulted from the continuation of a competitive pricing environment as well as a shift in product mix, as shipments for 3.5-inch ATA applications increased while shipments for mobile and enterprise applications decreased.

The company’s fiscal 2011 second quarter gross loss was $2.3 million, compared with a gross profit of $3.3 million in the preceding quarter. The decline resulted from the lower net sales in the quarter and the inclusion of manufacturing expenses from its Thailand assembly operations in cost of goods sold that, in previous quarters, were treated as startup costs in selling, general and administrative expenses.

TSA+ cost per part further declined as TSA+ yields and output continued to improve. "Our TSA+ process is performing well, and our overall cost per part will decrease further as our product mix continues to transition from subtractive TSA suspensions to additive TSA+ suspensions and as our TSA+ process efficiency and capacity utilization improves," said Rick Penn, president of the Disk Drive Components Division. The company currently expects TSA+ suspension assemblies to account for two-thirds or more of its shipments by the end of the fiscal year.

In the fiscal 2011 second quarter, cash used by operations totaled $5.4 million and capital expenditures totaled $2.7 million. Cash and investments at quarter end totaled $61.7 million compared with $101.2 million at the end of the preceding quarter. The company used $31.2 million in cash and issued $40 million of 8.50% Convertible Senior Notes due 2026 to complete a tender/exchange offer for $75.3 million of the company’s 3.25% Convertible Subordinated Notes due 2026. "The tender/exchange offer improved our financial flexibility by extending the first put date on a portion of our convertible debt and reduced our overall debt balance," said Dave Radloff, chief financial officer.

The company is not currently experiencing any components or materials shortages for its own operations as a result of events in Japan. However, the full impact of the Japan earthquake continues to be evaluated, and sales of hard disk drives could be affected by disruptions in the hard disk drive or PC supply chain. The company currently expects its suspension assembly shipments in the fiscal third quarter to be relatively flat compared with its second quarter. Beginning in the fiscal 2011 fourth quarter, the company expects its market share to increase modestly as a new hard disk drive program that the company is qualified on ramps to higher volume.