More losses predicted for Hutch Tech

Article by: STEVE ALEXANDER , Star Tribune
Updated: March 8, 2011 - 8:48 PM

After a decade of cuts, company said Tuesday's restructuring was a step toward recovery.

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Employee Greg Peller left the grounds of Hutchinson Technology around noon for his daily, five-mile run.

Photo: Jim Gehrz, Star Tribune

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It's been a long fall for disk drive component maker Hutchinson Technology, which over the last five years has seen its market share and revenues decline by more than half.

One analyst predicted that the company, which lost $17 million in its first quarter on revenue of $68.2 million, faces another 18 to 24 months of financial losses as it tries to regain its financial footing.

Hutchinson Technology said it was taking steps toward recovery with the restructuring announced Tuesday, eliminating 700 to 900 jobs and cutting expenses by $45 million to $60 million a year.

"Our position is that we need revenue growth," said spokeswoman Connie Pautz. "To capture growth, we need to be the lowest-cost supplier."

Now, after a decade in which the company has already cut more than 4,000 employees, it plans to eliminate at least 600 manufacturing and assembly jobs in its namesake headquarters town, Hutchinson, Minn. The headquarters and engineering, and research and development units will be remain, employing fewer than 500 people.

Hutchinson Technology makes a critical disk drive component called a "suspension assembly," which suspends reading and writing chips above a rapidly spinning magnetic disk.

Over the past five years, Hutchinson's share of the suspension assembly market has dropped from 55 percent to 20 percent as a result of company mistakes and outside economic influences, Mark Miller, an analyst at Noble Financial Capital Markets in Boca Raton, Fla.

The company is replacing the head of that business, Kathleen Skarvan, with another company executive, Richard Penn, according to a filing with the Securities and Exchange Commission. Penn, who will become senior vice president and president of the disk drive components division, is currently senior vice president and president of the BioMeasurement Division.

Hutchinson also said it expects its second quarter ending this month will produce an operating loss greater than $14.4 million operating loss it suffered in the first quarter. In addition, the firm said it expects a 5 percent decline in second-quarter product shipments compared to the first quarter.

Miller said Hutchinson isn't likely to become profitable for about two years, and that if losses drag on longer a bankruptcy can't be ruled out. The company did not comment directly on Miller's dire warning. It currently has $66.3 million in cash reserves.

He is recommending investors sell Hutchinson Technology stock, which closed at $2.80 a share Tuesday, down 30 cents or nearly 10 percent. The stock price has plummeted nearly 90 percent in the last five years.

Pluses and minuses

The company's mistakes included continuing a money-losing biomedical business, over-expanding capacity three years ago in its suspension assembly business and making technical errors in the new assembly called "TSA-Plus," Miller said. The recession and a consolidation among Hutchinson's customers also hurt revenue, he said.

Competition has long been fierce in the disk drive component business. Hutchinson Technology has been losing market share to competitors such as Magnecomp Precision Technology, Miller said.

Hutchinson's business also isn't being helped by the Apple's iPad computer and its imitators, which use flash memory instead of disk drives, Miller said. Such tablet computers are expected to reduce sales of laptops, which do contain disk drives, by 15 to 25 percent this year, he said.

However, another corporate consolidation -- disk drive maker Western Digital's purchase of Hitchachi Global Storage -- could help. That's because Western Digital is Hutchinson's largest customer, accounting for about 57 percent of revenue, Miller said.

Steve Alexander • 612-673-4553