Hutchinson Technology shows signs of a recovery

  • Article by: STEVE ALEXANDER , Star Tribune
  • Updated: July 6, 2011 - 9:08 PM

The disk drive component maker's severe cutbacks seem to be paying off already, analysts said. Shares rose more than 20 percent.

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Computer components firm Hutchinson Technology said third-quarter product shipments were up 15 percent from the previous quarter.

Photo: Jim Gehrz, Star Tribune

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Hutchinson Technology Inc., which earlier this year slashed employment in response to dire financial trouble, may be staging a comeback.

The company Wednesday updated its third-quarter projections, saying product shipments were up 15 percent from the previous quarter rather than the 10 percent improvement it had disclosed in mid-June, just days after the quarter ended on June 11. In addition, the company said third-quarter revenue would be $72 million, or about 10 percent higher than a $65.52 million average of analysts' estimates. Results won't be fully disclosed until July 26.

Still the news sent the stock of the Hutchinson, Minn., disk drive component firm up more than 21 percent Wednesday -- closing at $2.75, up 48 cents.

Analysts agreed that Hutchinson results are impressive, and are based on a resurgence in demand for personal computer hard-disk drives, many of which use Hutchinson Technology components. In addition to normal demand, the disk drive industry is trying to make up for a manufacturing slowdown that occurred when Japan's earthquake and tsunami created a shortage of electronic parts, they said.

One of the chief beneficiaries of those trends has been disk drive maker Western Digital, which is a major user of Hutchinson's "suspension assemblies," which suspend reading and writing chips above rapidly spinning magnetic disks.

But the rapid turnaround in the company's financial outlook is striking. In March, after the firm lost $17 million in its first quarter, some analysts predicted Hutchinson faced another 18 to 24 months of financial losses as it tried to regain its financial footing. In April, Hutchinson Technology outlined plans to save $50 million to $55 million a year by cutting its 2,275 employee U.S. work force by 30 to 40 percent, while transferring some operations from Hutchinson to Eau Claire, Wis., and overseas.

Some analysts believe the company's deep cuts paid off.

"I think Hutchinson can sustain this recovery, because their cost cuts have been dramatic," said Mark Miller, an analyst at Noble Financial Capital Markets in Boca Raton, Fla. "The cost cuts combined with improved overseas efficiencies have brought their break-even point down to $75 million or less -- and they're already at $72 million in the third quarter."

But others warn that Hutchinson's recovery could be short-lived.

Jayson Noland, an analyst who follows Western Digital for Robert W. Baird in Milwaukee, said Hutchinson could prosper if other disk drive makers sign up for more of its parts. But Hutchinson's gains could be temporary if it continues to rely heavily on Western Digital, which is expected to lose market share to Toshiba. Earlier this year, Western Digital accounted for 58 percent of Hutchinson's revenue.

The next critical hurdle in Hutchinson's recovery will be whether bondholders agree to renegotiate its $122 million in convertible debt that is due in January 2013, Miller said. The company is seeking to extend the deadline two years.

"Wednesday's third-quarter announcement was a promising development, but we'll remain neutral on the stock until we see what happens on the July 15 deadline for the change in the debt," Miller said.

Steve Alexander • 612-673-4553

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