Hutchinson: Fiscal 3Q14 Financial Results

Hutchinson Technology Incorporated reported net sales of $59.8 million for its fiscal third quarter ended June 29, 2014, on suspension assembly shipments of 97.5 million, down 4% from 101.7 million in the preceding quarter.

Gross profit in the fiscal 2014 third quarter was $3.6 million, or 6% of net sales, compared with $5.9 million, or 10% of net sales, in the preceding quarter.

Rick Penn, Hutchinson’s president and CEO, said the sequential decline in gross profit was in line with the company’s expectations for the quarter.

“As planned, we decreased production volume in the third quarter, which is typically a seasonally slower period for suspension assembly demand. The lower production volume resulted in lower fixed cost absorption and a decline in gross profit,” said Penn.

Penn noted that the company has made significant progress on its site consolidation efforts and expects the resulting cost benefits to become more meaningful as the company exits the current fiscal year.

“With the production volumes we are now achieving at our Thailand operation, we were able to exit our Eau Claire assembly operation in June,” said Penn. “In addition, we expect to vacate our leased Plymouth facility after we finish consolidating the stamping operation into our Hutchinson site by the end of the fiscal year.”

Penn said the Thailand operation accounted for 64% of assembly production in the third quarter, up from 55% in the preceding quarter, and is expected to account for 70% to 80% of fourth quarter assembly production.

For its fiscal 2014 third quarter, the company reported a net loss of $11.2 million, or $0.40 per share.

The net loss included:

• $1.5 million of severance and site consolidation costs;
• $800,000 of non-cash interest expense; and
• a $100,000 foreign currency gain.

Excluding these items, third quarter net loss was $8.9 million, or $0.32 per share.

In the preceding quarter, the company’s $8.7 million net loss included $800,000 of non-cash interest expense, $700,000 of severance and site consolidation costs, and a $600,000 foreign currency gain. Excluding these items, fiscal 2014 second quarter net loss was $7.8 million, or $0.28 per share.

ASP in the fiscal 2014 third quarter was $0.58, compared with $0.57 in the preceding quarter. The increase resulted from a mix of products shipped that included certain dual-stage actuated (DSA) suspensions that carried higher development-stage pricing. Shipments of DSA suspensions accounted for 25% of third quarter shipments compared with 24% in the preceding quarter.

Cash and investments at the end of the fiscal 2014 third quarter totaled $40.2 million, unchanged from the preceding quarter. Cash generated by operations in the quarter totaled $0.5 million and capital spending totaled $2.9 million. Outstanding borrowings on the company’s revolving line of credit totaled $4.8 million at the end of the third quarter, compared with $2.0 million at the end of the preceding quarter.

The company expects its suspension assembly shipments in the fiscal 2014 fourth quarter to be 110 million to 115 million as customers’ production plans for HDD drives increase and the company’s participation on customers’ programs improves. Fourth quarter ASP is expected to be relatively flat sequentially with DSA suspension assemblies accounting for 25% to 30% of fourth quarter shipments. The company expects fourth quarter gross profit to increase on a sequential basis as higher shipments and the benefits of cost reductions are partially offset by a reduction in finished goods inventories.

“With the progress we have made on our site consolidation and related restructuring efforts, we are confident that we have the industry’s lowest cost model for producing suspension assemblies,” said Penn. “We have achieved this while preserving the core technical, manufacturing and quality capabilities required to effectively meet our customers’ advancing requirements. Our customers are recognizing what we have accomplished and our share positions on new customer programs are beginning to reflect that,” said Penn. “Our customers are showing their support and commitment to us through higher volume and increased collaboration on development efforts.”

Penn said the company is also making progress in its new business development initiative, which focuses on leveraging its precision manufacturing capabilities and equipment capacity to produce components in new market segments. As part of this effort, the company was recently selected to provide an Optical Image Stabilization (OIS) actuator for a smartphone camera and has begun manufacturing of this new product. The OIS actuator is based on Shape Memory Alloy (SMA) technology that improves picture and video quality, particularly in low-light conditions, and offers performance and size advantages over current OIS solutions. The company is bringing this product to market with its partner, Cambridge Mechatronics Ltd., a technology design and engineering company based in Cambridge, England. The initial SMA OIS product will be used on a smartphone for the Chinese market that will be released in the fall of 2014.

“The SMA OIS actuator is ideally suited to leverage our quality and continuous improvement expertise and our precision component manufacturing capabilities, including our automated photoetching, stamping, additive circuit and assembly processes. Our first OIS automated production line is being installed and will be ramping to volume later this summer,” said Penn. “We are also working with other interested smartphone and camera module makers who are evaluating our OIS actuator for potential inclusion in their future products. While we’re in the early stages with this product and volumes initially will be low, we are encouraged by the interest our OIS actuator is attracting and excited about the significant opportunity that the smartphone camera market provides.”