Conference Call, 01/21/97: Hutchinson Technology, Inc. Q1 '97

FOOL CONFERENCE CALL SYNOPSIS*
By Dale Wettlaufer (MF Raleigh)

Hutchinson Technology, Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: HTCH)") else Response.Write("(Nasdaq: HTCH)") end if %>
40 W. Highland Park
Hutchinson, MN 55350
(320) 587-3797

ALEXANDRIA, Va, January 21, 1997 /FOOLWIRE/ -- Hutchinson Technology Incorporated reported on January 20th earnings per share of $1.97 for the fiscal first quarter ended December 29, 1996, compared to $.51 per share in the comparable year ago period. Fiscal 1996 first quarter results included a $.69 per share charge against earnings reflecting recognition of fixed commitments to IBM under a technology sharing agreement.

Net sales for the fiscal 1997 first quarter totaled $106.9 million, up 28 percent from $83.3 million in the fiscal 1996 first quarter and up 16 percent from $91.9 million in the fiscal 1996 fourth quarter. Net income for the fiscal 1997 first quarter totaled $11.1 million, compared to $2.9 million after the previously mentioned charge against earnings in the year ago period and $1.4 million in the fiscal 1996 fourth quarter.

The company also announced a three-for-one split of the company's common stock, effective on February 11, 1997, for shareholders of record at the close of business on January 31, 1997.

Wayne M. Fortun, Hutchinson Technology's chief executive officer, said that the increase in first quarter net sales resulted from sustained strong demand for the company's suspension assemblies throughout the period. "As we reported in early December, demand for suspension assemblies began rising as we entered the first quarter and remained strong across all suspension types. In addition, it appears demand will remain at or near current levels through the fiscal second quarter. We have been able to meet the higher levels of conventional suspension demand because of our improving manufacturing efficiency and because of the new equipment and facilities we added over the past year."

Fortun also said, "despite typical startup difficulties, during the quarter the company had increased its shipments of prototype TSA suspensions and had begun shipments of pre-production TSA suspensions which are now qualified for use at four of the major disk drive manufacturers. Interest in TSA suspensions is building as we expected, and we currently remain on plan to have capacity to produce more than two million TSA suspensions per week by the fall of 1997." TSA suspensions are suspension assemblies incorporating integrated electrical leads.

Net income for the period resulted from higher production volumes and improved manufacturing efficiency at all three of the company's manufacturing facilities. Gross margin in the quarter was 29 percent compared to 26 percent in the fiscal 1996 first quarter and 20 percent in the preceding quarter.

Because of the highly sensitive nature of the TSA suspension product line for both HTI and its customers, the company will no longer disclose its weekly run-rate for any product line or discuss average selling prices.

QUESTION AND ANSWER SESSION

Customer revenue breakdown for the quarter:

36% Seagate
14% Yamaha
13% Read-Rite
13% SAE Magnetics
10% IBM

For Q4 1996:

43% Seagate
16% Yamaha
12% SAE Magnetics
8% IBM
6% Read-Rite

The company believes it has gained market share partly because of the current demand picture and partly because of quality issues with the company's 850 line going into higher-end desktop drives.

R&D dropped this quarter because some of the expenditures recently found in this line have gone into the Cost of Goods Sold line as those suspensions have gone into production. That move also includes expenditures for TSA suspensions. Going forward, R&D should be in the 5% of sales range.

Though the company cannot discuss run-rates for competitive reasons, this quarter's production was up substantially from last quarter. The company foresees an increase from this production level in the coming quarter but that demand and production should hold steady in this range. Demand looks strong through March heading toward the summer cycles.

Capacity-wise, the company is operating near the red-line right now but is in the process of hiring and training the right people to operate the additional machinery capacity that is available at its facilities.

SG&A increased due to higher profit-sharing expense, which is calculated at 10% of pre-tax, pre-profit sharing net income.

With production running at this level, pricing pressure was not a distinguishing feature of the quarter -- the company is "maintaining its position nicely."

Product mix was 86% nano and 14% pico, in terms of sales dollars.

The company believes it will have capacity to ship more than two million TSA suspensions per week by the end of the year and that it will be in position to produce one million per week by the end of Q2.

The company has lost some production time due to the harsh winter in Minnesota. About eight days were lost, in total, across the company's facilities. In the coming quarter, the company believes that it is prepared to deal with weather contingencies, although "the weather is as hard to predict as the drive industry."

The TSA program cost the company approximately $0.65-70 per share in the quarter. Q2 Costs for TSA will stay flat or rise sequentially as the program ramps up. Q2 will see the greatest planned expense level for the TSA program. Roughly 60% of TSA costs in Q1 were related to the manufacture of TSA parts and getting those out the door. R&D expense is mainly comprised of TSA and related products. 80% of the $0.65-70 is found in the COGS line.

Capital expenditures for the year are planned to be $90 million; Q1 cap. ex. was $9 million. Depreciation for the quarter was $9.6 million and for the year is planned to be in the range of $40-45 million.

Demand is strong across product lines and across vendors. Capacity constraints at customers is a helpful happenstance for the company with the supply/demand balance seen at HTI this quarter.

Gross margin model for the coming quarter, and long-term, is 27%, with a range of 26-29%.

The company does not expect any profits from its medical products this year. Costs will remain flat for the first half and will possibly pick up in the second half as the company nears the marketing stage.

As customers ramp magneto resistive programs and more precise inductive head programs, yield may have decreased, which has the effect of increasing demand for HTI products. The company expressed its caution to investors on that factor of demand. Regarding final demand for disk storage, the company's output is driven less by desktop PC drives and more by high-end drives which require more of the company's higher-end suspensions.

The company does not believe that demand is being influenced by double-ordering.

* A Fool conference call synopsis represents an effort to highlight the salient points of a conference call and should not be taken as an authoritative accounting or transcription of the entire event. Note: Statements made by a company other than historical information may constitute forward-looking statements for which the company can claim protection under the Safe Harbor Act. Please consult the company's filings with the SEC for information on risk factors which might cause actual results to differ materially from the information contained in these forward-looking statements.