Hutchinson Technology F3Q09 (Qtr End 6/28/09) Earnings Transcript

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 |  About: Hutchinson Technology Incorporated (HTCH)
by: SA Transcripts

Operator

Ladies and gentlemen, thank you for standing by and welcome to the Hutchinson Technology Third Quarter Results Conference Call. During today's presentation, all parties will be in a listen-only mode. Following the presentation, the conference will be open for questions. (Operator Instructions). This conference is being recorded today, Thursday, July 30, 2009.

I would now like to turn the conference over to John Ingleman, Chief Financial Officer. Please go ahead, sir.

John A. Ingleman

Good afternoon everyone. Welcome to our third quarter results conference call.

With me today is Wayne Fortun, our CEO; Kathleen Skarvan, President of our Disk Drive Components Division; Rick Penn, President of our BioMeasurement Division; Dave Radloff, our Corporate Controller; and Chuck Ives, our Investor Relations Manager.

As a reminder, we will be providing forward-looking information on demand for shipments of the company's products, production capacity and capability, capital expenditures, worldwide disk drive and suspension assembly demand and shipments; average selling price; product cost, cost reductions, severance costs, our plans to establish new assembly operation in Thailand, our law measurement division revenue and operating loss, product commercialization product commercialization and adoption, the company's results of operations, operating performance and debt obligations in cash management.

These forward-looking statements involve risks and uncertainties since they are based on our current expectations. Our actual results could differ materially as a result of several factors that are described in our periodic reports on file with the SEC.

In connection with the adoption of SEC rules governing fair disclosure, the company provides financial information and projections only through means that are designed to provide broad distribution of the information to the public. The company will not make projections or provide material non-public information through any other means. We issued our third quarter results announcements just after the market closed this afternoon. The announcement is now posted on our website at www.htch.com as well.

I'll turn the call over for Wayne for his opening remarks.

Wayne M. Fortun

Thanks John. In our fiscal 2009 third quarter we saw net sales grow 34% compared with the preceding quarter as we responded to increase suspension assembly demand from all of the disk drive customers.

We also completed a major restructuring actions announced earlier this year to align our costs with the market and economic conditions and our expectations regarding suspension assembly demand. Our fiscal 2009 restructuring actions have reduced our costs on an annual basis by approximately $185 million compared to our fiscal 2008 run rate.

We began realizing some of the benefits of our lower cost structures in the third quarter and expect to see the benefits more to be more fully evident in operating results for the fourth and beyond.

During the quarter we also further reduced our current portion of our debts. We repurchase unfavorable churns, approximately 25 million par value of our 2.25 or 2.25% convertibles subordinated notes that we will do in March 2010.

With the retirement of another $25 million in short term debt and the overall reduction of our operating cost we are well positioned to meet our current debt obligations and make strategic investment in company's future. Accordingly we have resumed our plans to establish an assembly operation in Thailand in order to further reduce our costs and better serve our customers through closer proximity.

While business conditions remain challenging we have nailed our losses and positioned the company for further improvement in our financial results.

Now I'll turn the call over to Cathleen to discuss the Disk Drive Components Divisions third quarter performance.

Kathleen S. Skarvan

Thanks Wayne. During our fiscal 2009 third quarter we shipped 146 million suspension assemblies, an increase of 36% when compared with shipments of 107 million in the preceding quarter. Shipments in last year's third quarter totaled 189 million.

We estimate that we maintained our overall market share during the quarter and we believe the sequential quarter increased in our shipments reflects growth in the overall suspension assembly market resulting from increase shipments and production.

Suspension assembly shipments increased sequentially in all segments including a 97% increase in shipments for mobile application. The mix of our third quarter shipment breakdown as follows: suspension assemblies for mobile applications accounted for 44% of our shipment, up for 30% in the preceding quarter, 3.5-inch ATA applications accounted for 38% of our shipment compared to 49% in the preceding quarter.

And suspension for enterprise applications accounted for 18% of our shipment's compared to 21% in the preceding quarter. This product mix help maintain our average selling price of $0.71 for the third quarter which was flat with the preceding quarter.

Based on our current expectations for product mix, our fourth quarter sequential ASP decline should continue to be more moderate than what we experienced in the first half of this fiscal year. Also included in our third quarter shipments were about 10 million TSA+ suspension assemblies. This was flat with the preceding quarter and lower than our expectations as a result of the lower than expected by customers Disk Drive programs.

In our fourth quarter however our PSA+ shipments will potentially doubled on a sequential basis as the ramp of this program accelerates. In the fiscal 2009, third quarter the PSA+ cost rate was reduced to $7.6 million from $7.8 million in the preceding quarters. This was despite the flat volume. It reflects continued improvement in PSA+ yields and manufacturing efficiencies and we continue to believe that we can eliminate the cost burden associated with PSA+ cost production in the second half of fiscal 2009.

As we have emphasized previously, compared to current TSA+ flexures which are manufactured using additive properties of a superior performance and will ultimately have a lower cost. As part of our restructuring efforts we have been consolidating certain operations across the Disk Drive Components Division to achieve improvements in efficiency and factory utilization and to reduce operating costs.

The closure of the assembly operation at our Sioux Falls plant should be completed in June. We completed the transfer of the manufacturing equipment to all players in Hutchinson site and we closed on $12 million sale of this default price on July 17.

We again express our gratitude towards the following employees; they helped us accomplished orderly wind down our operational sales and this new transport equipment to that other side. Their efforts helped to capitalize of the opportunity created by the stronger demand we saw in the first quarter.

As we noted in our results announcement today, we have resumed our plans to establish an assembly operation in Thailand with a goal of initiating production in the second half of calendar 2010. The decision to proceed reflects our confidence in our financial position and in consistent with our focus on continuing to lower our overall cost. We expect capital expenditures related to establishing the Thailand Assembly operation to total 10 to $15 million in fiscal near 2010.

With respect to the outlook for a suspension assembly demand, as we have stated previously, we expect sales to Seagate Technology to decline to slightly less than 10% of our total revenue in the fiscal 2009 fourth quarter, down from 18% in the third quarter. This will likely result in a single-digit percentage decline in our total fourth quarter unit shipment and net sales compared with fiscal 2009 third quarter.

I'll turn the call over to Rick now for an update on our BioMeasurement division.

Richard J. Penn

Thanks Kathleen. Net sales for the BioMeasurement division totaled $408,000 in the fiscal 2009 third quarter compared with $458,000 in the preceding quarter and $230,000 from last year's third quarter.

Sales in the third quarter were clearly below our expectations primarily because in the current environment as for the spending restriction had delays some services by respected new customer. As a result, we now expect fiscal 2009 revenue for the division to reach above $2 million.

Although our overall sales was low expectation, sense of sales to existing customers grew on a sequential quarter basis. We are hoping faster increase center use and broader and -- to adoption to advanced training session on the clinical use StO2 monitoring and we are doing this physicians and nurses in the United States and Europe. These sessions helped establish and reinforce the value from StO2 monitoring.

As a result, center use increasing from existing customers and hospitals adopt protocols than cooperate StO2 monitoring and the expander use of inspector across multiple prism care application.

We remain very confident in the near-term and long-term prospects for the inspector systems. We've got a growing base of customers for sensor usage and increasing, but winning business in both large influential hospital systems and small regional hospitals. In the value proposition of inspector StO2 is strengthening across a variety of medical care application. Some examples of these applications are more effective fluid management, tuning and after surgery including the avoidance of unnecessary blood transfusion, improving patient's assessment in the emergency apartment to quickly determine the most appropriate course of treatment, optimizing fluid management during the outage to reduce the risk of complications particularly for unstable patients. And improving patient assessment in the ICU, enabling shorter patient's phase and expensive care setting.

As a result of the companywide restructuring actions, we continue to narrow the operating loss in the BioMeasurement Division despite the lower net expected sales.

The division's third quarter operating loss including severance charges was $5.7 million, down from 6.2 million in the preceding quarter. And we expect to further reduce the loss in our fourth quarter.

I'll turn the call to John now for a recap of our third quarter financial results.

John A. Ingleman

Thanks, Rick. Net sales for the fiscal 2009 third quarter totaled a $106 million, up $27 million or 34% from $79 million in the preceding quarter. Net sales in the fiscal 2008 third quarter were a $150 million.

The revenue percentages for our top customers in the quarter were as follows: SAAETK 40%; Western Digital 34%; Seagate 18%; Fujitsu 5% and Hitachi, 3%. Gross profit totaled $2 million or 2% of net sales. This equates to a $14 million improvement from a gross loss of $11.8 million or 15% in the preceding quarter. The gross profit benefit of the $27 million sequential quarter increase in sales was reduced by shipments of higher cost inventory that was on hand prior to our April 2009 cost reductions.

As Kathleen mentioned in her remarks, we reduced the cost burden of TSA+ flexure production by about $200,000 compared with the preceding quarter. Despite TSA+ volume that was flat sequentially.

Depreciation and amortization expenses were approximately $17 million compared to $23 million in the preceding quarter and 28 million in last year's third quarter.

R&D expenses were $5.7 million, down from 7.5 million in the preceding quarter and 9.7 million in last year's third quarter.

SG&A expenses totaled $13.3 million, down from 14.9 million in the preceding quarter and 17.8 million in last year's third quarter.

Severance and other cost related to our previously announced elimination of 300 positions during the third quarter totaled $4.9 million. We also recorded a non-cash asset impairment charge of $20.8 million remained at primarily to manufacturing equipment in our assembly operations.

Including the asset impairment and severance charges, our third quarter operating loss totaled $42.8 million that compared to $57.6 loss in the preceding quarter and a $12 million in the fiscal 2008 third quarter.

Interest expense was $2.8 million comparing the 3 million in the preceding quarter and 2.9 in last year's third quarter. Interest income was $700,000 compared with 900,000 in the preceding quarter and 1.4 million in fiscal 2008 third quarter.

As Wayne mentioned, we repurchased $25 million par value of our 2.25% Convertible Subordinated Notes due in March 2010 at an 8% discount generating a gain of $1.9 million. With this repurchase, the amount of convertible debt that is due in March 2010 has been reduced to just over $65 million.

We recorded income tax benefit in the quarter of $200,000. Our net loss totaled $42.1 million or $1.80 per share. The net loss included the previously mentioned asset impairment and severance charges as well as the $1.9 million gain on the convertible note repurchase.

Excluding these items, our net loss for the fiscal 2009 third quarter would have been $18.3 million or $0.78 per share. This compares with a net loss of 34.2 million or $1.48 per share in preceding quarter and that also excludes any asset impairment or severance charges.

Our cash in investments at the end of the fiscal 2009 third quarter totaled $251 million, down from $293 million at the end of the preceding quarter. We spent about approximately $23 million to retire, $25 million of convertible notes and made severance payments of approximately $15 million.

Severance payments related to our fiscal 2009 restructuring actions will be completed once the remaining $2 million is paid out in the fiscal 2009 fourth quarter. Including severance payments, cash used by operations in the third quarter totaled $17 million and our capital spending totaled $1 million resulting in a negative free cash flow of $18 million in the quarter.

Our share count at the end of the quarter was approximately 23.3 million shares giving us a book value of $12.06, a book value per share of $12.06, pretty natural outlook. As Kathleen mentioned, we are expecting a single-digit percentage sequential decline in our total suspension assembly shipments and net sales in our fiscal 2009 fourth quarter.

Our major restructuring actions are now complete and we are done to realize the full benefit in our fourth quarter. We have reduced our cost by approximately $185 million on an annualized basis compared to our fiscal 2008 cost.

The savings are expected to be spread across our P&L as follows. Approximately 77% of the savings will be in cost of goods sold, about 10% will be in R&D and remaining 13% in SG&A. Of the savings in cost of goods sold, approximately two-thirds of the savings are a reduction of fixed cost with the remaining one-third lowering our variable cost.

As a result, we expect our quarterly fixed cost in cost of goods sold to be approximately $45 million beginning in the fiscal 2009 fourth quarter. Compared to the preceding quarter, R&D expenses are expected to decline slightly and SG&A expenses are expected to decline approximately $1 million in the fourth quarter.

The sale of the Sioux Falls Building for $12 million closed on July 17 and we generated a gain of about $1.9 million which will be recognized in the 2009 fourth quarter. Our fiscal 2009, affected tax rate will be about a 0%.

In order to estimate our free cash flow, which combined estimated net income with the following guidance. Depreciation and amortization expenses for fiscal 2009 is now expected to be approximately $70 million. As previously mentioned, remaining severance of $2 million will be paid during the fiscal fourth quarter.

And finally fiscal 2009 capital expenditures are expected to be less than $25 million. As we realized the full benefit of our lower cost structure that we estimate in our fourth quarter, breakeven revenue will be approximately $115 million.

Excluding the remaining $2 million of severance, we estimate that approximately $90 million of revenue will be required in fourth quarter to generate a positive free cash flow.

I'll now turn the call over to Wayne for his closing comments.

Wayne M. Fortun

Thanks, John. We are pleased to have our major restructuring actions behind us and look forward to realizing to the full benefits of the significant reduction in our cost structure. Additionally, we have reduced and we'll continue to reduce the cost for in the TSA+ production and the operating loss in our BioMeasurement Division.

These improvements put us on the path back to profitability and a return in growth suspension assembly demand would further shorten that path. We believe that our ability to respond to the third quarter, 30% -- 36% increase in unit volume demonstrates that we were aggressive but prudent in resizing the business for market conditions and expected volume.

In addition, by managing our balance sheet carefully, we have reduced our debt and preserved our ability to make strategic important investments. Such is our plan to establishment of the Asia assembly operations. Restructuring actions that we have completed over the prior nine months have created enormous challenges for our people companywide and I thank and commend all of our employees for their contributions to this very demanding effort.

That concludes our prepared remarks. Operator please begin pulling the questions.

Question-and-Answer Session

Operator

Thank you Sir. We'll now begin the question and answer session. (Operator Instructions). Our first question is from the line of Rich Kugele with Needham & Company. Please go ahead.

Richard Kugele - Needham & Company

Thank you. Good afternoon. A couple quick questions I guess first just on the Asian operation, what element of the manufacturing process should we expect to come out of there?

And when you're talking about the CapEx number, does that include having to set up basically redundant capacity for a time or do you think you can move things over. I guess because you have excess capacity today.

Kathleen Skarvan

Hi Richard, Kathleen.

Richard Kugele - Needham & Company

Hi.

Kathleen Skarvan

We're focusing on the assembly portion of our process on our operations and at this point, we believe that we are in a position that we wouldn't need to install any redundant capacity that we have equipment that for beginning of that operation.

Richard Kugele - Needham & Company

And this would be a legacy TSA products?

Kathleen Skarvan

We haven't chosen that we will start with. But it would be the description of that type of product would be something that is mature, that we might find is stable and so most likely to have success and to ramp quickly.

Richard Kugele - Needham & Company

Will it require additional qualifications by the customers?

Kathleen Skarvan

I believe so.

Richard Kugele - Needham & Company

Then hopefully not as long as a normal qualification right?

Kathleen Skarvan

Oh no, interestingly Rich, we had to do re-qualification when we closed the fall facility (ph) and transferred products to our Hutchinson in our fair sight and it was quite transparent based on their willingness to help us out on that and do it very quickly.

Richard Kugele - Needham & Company

Okay. And then in terms of the Seagate, I don't know what they call it, I'd mentioned would be the long word. Do you think that the -- well let me ask you this, when that happens, did you do any additional restructurings or was everything already in motion and it has been, its been proven to be I guess sufficient in terms of the cost reduction?

Kathleen Skarvan

Yeah interestingly of that news came as we were preparing to do the additional restructuring and so we folded into that and so I don't anticipate that that's your question that we're looking anything further.

Wayne Fortun

But we added to the restructuring at the time of when we got the news because as Kathleen said, we had started and we further expanded the cost reduction because of it and we don't anticipate anything further.

Richard Kugele - Needham & Company

Okay. Then just lastly in terms of demand, obviously many of the giant companies had very good June quarters, can you make any comments on what you're seeing from a demand perspective thus far this quarter or how the linearity was in the quarter for example?

Kathleen Skarvan

I think he was responding to some of the comments that the giant companies made on their earnings releases that I think be continuing as they had been as they exited the quarter, but again they've been guiding anywhere from 2 to 6% additional drive shipment over the quarter. Again we're guiding that we could be slightly down single digit and some of that is accounted for the change in Seagate demand.

Richard Kugele - Needham & Company

Okay. Thank you very much.

Operator

Okay. (Operator Instructions). Our next question is from the line of Matt Bryson with Avian Securities. Please go ahead.

Matt Bryson - Avian Securities

Hey guys. Do you have any feel for what's suspension count per drives in these days and if there was impact at all in terms of more low capacity drives being shipped in the last quarter and how do you see that impact things going forward?

Kathleen Skarvan

Hello Matt. We haven't seen a trend where over the last two or three quarters, particularly since the global recession started, there was a trend more towards the lower capacity maybe more affordable disk drive. I couldn't say that I know exactly what that trend was in last quarter. Year-over-year we have seen a slight decline in hedge for nothing that's been a huge impact though on suspension as we move forward though.

Matt Bryson - Avian Securities

I guess and with Seagate product diminishing, Q-over-Q, does that strike that they have impact on your when that ASP at all (ph).

Kathleen Skarvan

I would say no. We don't anticipate its. Its haven't been yet.

Matt Bryson - Avian Securities

Okay. Thank you.

Operator

We are showing no additional questions at this time. I would like to turn it back to management for closing remarks.

Wayne Fortun

Well, thanks everyone for calling in and we look forward to hopefully an economy that speeds the lease cable, if not continuing to rise well we think we can follow with through drive making as they're describing it with the exception of our shift on the Seagate business. Thank you.

Operator

Ladies and gentlemen, this concludes Hutchinson Technology third quarter result conference call. You may now disconnect Thank you for using AT&T Conferencing.

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