Continued: Hutchinson dealing with double hit

For Hutchinson Technology Inc., the nation's economic meltdown couldn't have come at a worse time.

It caught the Hutchinson, Minn.-based maker of disk-drive components in the middle of a high-stakes product transition on which the company has spent more than $100 million. Hutchinson's signature product is a "suspension assembly" that holds tiny reading and writing computer chips above a computer's spinning hard disk.

Hutchinson has about 45 percent of the market for suspension assemblies, making it the world's largest producer, according to Krishna Chander, an analyst with research firm iSuppli Corp. in Santa Clara, Calif. But Hutchinson's product has lost market share, and its next-generation model isn't ready. Now, because of the economy's plunge, the product transition has been delayed by two quarters or more, Chander said.

"We believe 2009 is going to be a very challenging year for the company," Christian Schwab, an analyst at Minneapolis-based Craig-Hallum Capital Group, wrote this month in a report in which he lowered the stock's rating to "neutral" from "buy." Relief from the new disk-drive component is well over a year away; the device is expected to reach break-even in early 2010, he said.

Meanwhile, the company faces near-term losses and heavy debt payments. Hutchinson had $263 million in cash at the end of the fourth quarter in September, but Schwab said near-term losses and debt payments (including $150 million due in early 2010) mean that "liquidity cannot be ruled out as a concern."

Uncertainty hasn't helped the company's stock. The value of Hutchinson shares dropped from just more than $15 in late August to less than $3 this month. A disappointing fourth-quarter earnings report -- a $105.5 million loss compared with an $18.6 million profit a year ago -- didn't help.

Despite those problems, company officials insisted to analysts during a conference call this month that Hutchinson was not shifting its product development priorities. It continues to ramp up its new disk-drive component, called TSA+, which adds a new type of layered circuitry to Hutchinson's devices. But the firm said in a filing with the Securities and Exchange Commission that, even once the TSA+ product is profitable, the disk-drive industry probably will take several years to completely switch over to such next-generation components.

Hutchinson's other new product development effort, a medical oxygen monitor unrelated to its disk-drive business, is in the early stages of marketing. Company officials recently agreed with Schwab that revenue would need to grow tenfold to make the product profitable.

Since the conference call, the company has declined to give interviews. But the firm's other initiatives include trying to staunch market-share losses and maintain its current share of the suspension assembly business in 2009 -- a year in which analysts predict that the disk-drive industry unit sales will grow 11 percent, down from earlier estimates of 12.1 percent.

Hutchinson also is trying to cut costs. It's moving some final assembly of its drive components to Thailand; fabrication would remain in Minnesota.

And, in another attempt to ease its financial problems, Hutchinson recently sued two Wall Street firms, UBS and Citigroup, that allegedly sold the company's auction-rate securities by understating the financial risk. About $100 million is at stake, and possibly more if Hutchinson wins punitive damages in one of the suits.

But two of the company's underlying risk factors don't change: It depends on a few big customers, and its finances are inextricably tied to consumer spending. In the fourth quarter, Hutchinson got 95 percent of its component revenue from three big disk-drive manufacturers: SAE/TDK, Western Digital and Seagate Technology (which does much of its design work in the Twin Cities).

Consumer spending's effect on Hutchinson is surprisingly direct, said Chander, the iSuppli analyst. If consumers buy an expensive personal computer that has disk-drive capacities well over 250 gigabytes, they are in effect buying two or more suspension assemblies, because the drive contains multiple disks.

But if consumers opt for less-expensive PCs that have 250-gigabyte drives, they are buying only one disk -- and one suspension assembly.

Part of Hutchinson's problem, Chander said, is that "the guy shopping in Best Buy is going after the less-expensive PC with the lower-capacity disk drive."

Steve Alexander • 612-673-4553