Hutchinson Technology: Fiscal 2Q08 Financial Results

Hutchinson Technology Inc. reported a net loss of $6.2 million, or $0.25 per share, on net sales of $143.8 million for its fiscal second quarter ended March 30, 2008. The net loss included a charge of approximately $0.9 million, or $0.03 per share, related to an increase in the valuation allowances on certain deferred tax assets. In the comparable fiscal 2007 period, the company reported a net loss of $3.6 million, or $0.14 per share, on net sales of $170.7 million.

The company shipped approximately 179 million suspension assemblies in its fiscal 2008 second quarter, compared with approximately 213 million in the preceding quarter and approximately 205 million in the fiscal 2007 second quarter. Wayne Fortun, the company’s president and chief executive officer, said that the sequential decline in the company’s shipments was primarily the result of its customers’ lower build plans during the seasonally slower quarter, previously noted market share losses in the 3.5-inch ATA segment and OEM share shifts in the 2.5-inch mobile segment.

Gross margin in the fiscal 2008 second quarter was 13 percent, compared with 19 percent in the preceding quarter and 18 percent in the fiscal 2007 second quarter. Capacity utilization in the 2008 second quarter was approximately 75 percent, about flat with both the preceding quarter and the prior year period, as the company increased its finished goods inventory during the quarter. However, the substantial decline in revenue reduced the company’s ability to offset its fixed costs, such as rising costs incurred as the company continues to ready its TSA+ processes for volume production of next-generation suspension assemblies. The loss from operations in the fiscal 2008 second quarter totaled $9.8 million and included a $5.8 million operating loss in the BioMeasurement Division.

The company is taking actions to reduce operating costs, including eliminating up to 80 positions company-wide over the next several weeks. The company said its financial results for its fiscal 2008 third quarter will include a pre-tax charge for severance costs. The workforce reductions and other cost-cutting actions are expected to reduce expenses by $10 million to $12 million on an annualized basis. "These cost reductions will contribute to improving our financial performance without jeopardizing our longer-term opportunities, but our return to profitability will ultimately be driven by revenue growth and by leveraging our investments in our TSA+ processes and our BioMeasurement Division," said Fortun.

Kathleen Skarvan, president of the Disk Drive Components Division, said the company’s efforts to bring TSA+ to the market are progressing as planned. "TSA+ is plan of record on multiple customer programs and we are shipping TSA+ suspension assemblies for customer program qualifications from our volume line in Eau Claire," said Skarvan. "Although we are incurring increased costs as we prepare to initiate volume TSA+ production, the negative gross profit impact of our TSA+ investments will diminish as our TSA+ volume grows and leverage of our investments improves." The company currently plans to initiate volume shipments of TSA+ suspension assemblies near the end of the fiscal third quarter.

In the company’s BioMeasurement Division, the number of customers for the InSpectra StO2 Tissue Oxygenation Monitor totaled 37 at the end of the fiscal 2008 second quarter, up from 27 at the end of the preceding quarter. "Additionally, more than 100 hospitals in the U.S. and Europe are currently evaluating the system or moving toward purchase, compared to about 70 at the end of the preceding quarter," said Richard Penn, president of the BioMeasurement Division. "The momentum for our InSpectra StO2 System is building," said Penn, noting that clinicians using the device are presenting their experiences at important trauma and critical care forums. "The clinical and economic value of measuring StO2 is becoming increasingly understood, and we continue to progress toward our long-term goal of establishing the InSpectra StO2 System as the standard for measuring tissue perfusion in multiple critical care settings."

The company generated $39 million in cash from operations in the fiscal 2008 second quarter, and capital expenditures totaled $18 million. For the full fiscal year, the company estimates that its capital expenditures will total $75 million, compared to $102 million in fiscal 2007. During the fiscal 2008 second quarter, the company spent $48 million to purchase approximately 2.9 million of its common shares at an average price of $16.61 per share. The company is authorized to purchase approximately $82 million of additional shares under the current share repurchase program. The company’s total cash and investments decreased from $320 million at the end of the first quarter to $285 million at the end of the second quarter primarily as a result of the company’s share repurchases.

The company’s investments include $94 million of highly-rated (AAA/Aaa) auction-rate securities, largely collateralized by student loans that are 97% guaranteed by the U.S. government. As a result of the uncertainty in the credit markets, these auction-rates securities have been classified as long-term investments as of March 30, 2008. Additionally, the company has reduced the value of its auction-rate security investments from a par value of $101 million to an estimated fair value of $94 million as of March 30, 2008. The company considers this reduction in value a temporary impairment and has recorded it as an unrealized loss in shareholders’ investment. All of the company’s auction-rate security investments have made their scheduled interest payments based on par value, and the interest rates have been set to the maximum rate defined for each investment.

Regarding industry conditions and the company’s outlook for the second half of its fiscal year, Fortun said storage industry analysts continue to expect disk drive shipments to increase approximately 12 percent in calendar year 2008, resulting in continued growth in worldwide suspension assembly shipments. "However, based on our estimated share positions on customers’ programs and a decline in our average selling price in the second half of our fiscal year, we estimate that our net sales for fiscal 2008 will be 10 to 15 percent lower than our fiscal 2007 net sales of $716 million," said Fortun. "Looking ahead, we are focused on rebuilding our position in the 3.5-inch ATA segment, strengthening our position in the 2.5-inch mobile segment and maintaining our market-leading position in the enterprise segment."

Fortun added that while 2008 will be a challenging year, he remains confident in the company’s long-term growth opportunities. "In our Disk Drive Components Division, we believe that our TSA+ platform will enhance our ability to meet customers’ requirements and win preferred supplier status on next-generation disk drive programs. This will enable us to generate the volume and revenue required to leverage our TSA+ investments and reduce our per-part costs. In our BioMeasurement Division, we expect the number of clinical applications for our InSpectra StO2 System to expand. This will result in a broad opportunity to grow the installed base of monitors, increase the volume of sensor sales and realize an attractive return on our investment in this new technology."

Hutchinson Technology Inc.