HTCH

Hutchinson Technology Incorporated (HTCH)

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Hutchinson Technology Incorporated (HTCH)

F3Q10 (Qtr End 06/27/10) Earnings Call Transcript

July 27, 2010 5:00 pm ET

Executives

Chuck Ives – IR Manager

Wayne Fortun – President and CEO

Kathleen Skarvan – VP and President, Disk Drive Components Division

Rick Penn – SVP and President, BioMeasurement Division

Steve Polacek – SVP and CFO

Analysts

Rich Kugele – Needham & Company

Sherri Scribner – Deutsche Bank

Tom Lewis – High Road Value Research

Ambar Espinoza – Minnesota Public Radio

Mark Miller – Noble Financial

Jim Brilliant – Century Management

Presentation

Operator

Good day, ladies and gentlemen, thank you for standing by. Welcome to the Hutchinson Technology's 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 opened for questions. (Operator instructions) This conference is being recorded today, Tuesday, July 27th, 2010. I would now like to turn the conference over to Mr. Chuck Ives from Investor Relations. Please go ahead, sir.

Chuck Ives

Good afternoon, everyone. Welcome to our third quarter results conference call. On the call with me today are Wayne Fortun, our CEO; Kathleen Skarvan, President of our Disk Drive Components Division; Rick Penn, President of our BioMeasurement Division; Steve Polacek, our Chief Financial Officer; and Dave Radloff, our Corporate Controller.

As a reminder, we will be providing forward-looking information on demand for and shipments of the Company's products, production capabilities and capacity; capital spending; pricing, product cost; cost reductions, our plans to establish an assembly operation in Thailand; our BioMeasurement Division's revenue; product commercialization and adoption; the Company's results of operations and operating performance.

These forward-looking statements involve risks and uncertainties as 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 nonpublic information through any other means.

We issued our third quarter results announcement just after the market closed this afternoon, and it is now posted on our website at www.htch.com.

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

Wayne Fortun

Thanks, Chuck. Good afternoon, everyone, thank you for joining us today. Our results for the fiscal third quarter were disappointing. As we reported this afternoon, our shipments of suspension assemblies declined 11% compared with the preceding quarter, resulting in about a 12% decline in net sales.

Entering the quarter, we expected our third quarter suspension assembly shipments to be about flat with the second quarter despite the seasonal decline in disk drive shipments. As the quarter progressed it became evident that our customers were curtailing their production plans as they responded to lower demand. In addition, a defect on some of our TSA+ product resulted in lost volume late in the quarter and prevented us from realizing share growth opportunities on certain customer programs. We have contained the TSA+ product defect, identified its cause and we are now implementing and validating solutions.

We acted quickly to address this problem and we continue to ship TSA+ suspensions in volume. Nevertheless, we are disappointed in this setback. Our TSA+ production processes are demanding and complex and while we have scaled them to produce millions of units per week, these processes will continue to demand persistent requirement to improve our yields and to ensure the consistent level of quality that we and our customers expect.

In light of our financial results, we are taking actions to further reduce cost and preserve cash. In total, we are planning to bring our annualized operating cost down by $25 million by the end of fiscal 2010. The most significant cost reductions will be in our BioMeasurement Division where we plan to reduce our operating cost by approximately $12 million due to slower-than-expected revenue growth. We will focus our sales and marketing activities primarily on customers and applications and geographic markets where we have momentum that we can build on.

We also expect to reduce our corporate expenses by approximately $5 million, and in our Disk Drive Components Division, we expect to reduce the cost by approximately $8 million on an annualized basis. However, we will keep intact the capabilities that are core to our competitive position, including product design, rapid prototype development, speed to volume and very low part to part variation in finished products. We believe that our vertically integrated model provides the best means to meet customer requirements and achieve the lowest manufacturing cost. Improving our TSA+ product production efficiency and establishing assembly operations in Thailand will further lower our cost and strengthen our competitive position.

I will turn the call over to Kathleen now for an update on the Disk Drive Components Division.

Kathleen Skarvan

Thanks, Wayne. During our fiscal 2010 third quarter we shipped 117 million suspension assemblies, down 11% from 130 million in the preceding quarter and down 20% from 146 million in last year’s third quarter. As Wayne mentioned, a defect on some of our TSA+ product cost us some volume late in the third quarter and will negatively impact volume in our fourth quarter as well.

The impact of the defect on volume was two-fold. First, we were unable to ship some product until we contain the problem. Second, the measures we took to isolate and contain the defect reduced our yield and limited our output, which prevented us from realizing some opportunities to gain share that we had expected as the third quarter began.

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