Hutchinson Technology Incorporated Business Information, Profile, and History

Company Perspectives:

We will be the leader among all suppliers serving the disk drive market. As a leader we recognize that our people are the source of our strength and we will treat them with the highest regard. We will promote creativity, efficiency and vitality by encouraging involvement, teamwork and the development of our people.

We will expand our market opportunities and enhance our value by enabling disk drive manufacturers to advance their technology and capability. We will achieve this through cooperative product design with customers and by developing processes and product features that meet anticipated market needs.

We will fundamentally understand, develop, improve and leverage our competencies and technologies through product, process and system design to set the industry standard of performance and quality excellence.

We will maintain our market standing through delivery of products and services that provide the most value at the lowest total cost in the least amount of time. We will accomplish this by consistently achieving unequaled levels of quality, reliability, productivity, and flexibility. We will assure that the value delivered to our customers will be reflected in the return to our shareholders.

History of Hutchinson Technology Incorporated

Hutchinson Technology Incorporated (HTI), a high-tech firm located in the middle of rich farmland just west of Minneapolis, Minnesota, holds 60 percent of the worldwide market for hard disk drive suspension assemblies. Most personal computers contain its primary product, a thin metal spring that holds the recording head in position a few millionths of an inch from the disk. HTI designs and manufactures the close-tolerance components by using chemical, mechanical, and electronic technologies. The company shipped 526 million suspension assemblies in 2003, with more than 80 percent of revenues coming from five Asia-based manufacturers: SAE Magnetics, Ltd./TDK; Alps Electric Co., Ltd.; Seagate Technology LLC; Hitachi Global Storage Technologies; and K.R. Precision Co. In spite of the predominance of these Asian customers, HTI has remained an American manufacturer. All of its production is completed at four plants, which are located in Hutchinson; Sioux Falls, South Dakota; Eau Claire, Wisconsin; and Plymouth, Minnesota. HTI also maintains service offices in Singapore, Japan, China, Thailand, and the Netherlands.

Early Years As a Custom Component Maker

HTI developed out of the collaboration between Jon Geiss and Jeffrey Green. The men met in the early 1960s; they were neighbors in a Minneapolis apartment building. Geiss, an engineer for Minnco Products, asked Green, a Sperry technical writer, to help with a manual for a photoetching process. The men became friends and shared an interest in photoetching. Thus when Geiss later suggested they develop a manufacturing business using the technology, Green agreed.

The men looked for a suitable, low-rent building in the metropolitan area of Minneapolis-St. Paul, but instead their first site became a chicken coop in Geiss's hometown of Hutchinson, 60 miles west of the Twin Cities. In 1965 the men established Hutchinson Industrial Corporation. Low on personal funds, they depended largely on private investors for financial backing, and paid rent and some other bills with company stock. Geiss moved to Hutchinson but Green stayed on at Sperry.

Their original idea was to use the photoetching technology to manufacture a lower-cost heater for gyroscopes in rocket guidance systems. That first venture failed to get off the ground, but they continued to look for new product ideas and business opportunities. A set of events opened up a door for the fledgling business, and they found their first customer: Green's employer, Sperry. By sending specifications and materials back and forth by bus between Hutchinson and Minneapolis, they put their photoetching and laminating equipment to its first real test. But the company's first big break came when Geiss persuaded a Control Data Corporation (CDC) buyer to allow the Hutchinson company to make a sample disk drive component. CDC liked what they saw, and Geiss and Green began manufacturing ferrite tracks. The down side of the deal was that CDC's disk drive manufacturing process was unique and therefore not marketable to other disk drive makers.

During the first decade of its existence Hutchinson Industrial produced a variety of components--mainly in small lots--for computer, satellite, medical, and even fake fur manufacturers. In 1972 the company began construction on a new building, eventually converting the chicken coop into a maintenance and equipment fabrication shop. The company continually reworked its photoetching processes: by the mid-1970s the company was using fourth generation equipment. They also added tool and die capabilities and laser welding. The upgraded facilities and technology helped the company finally land work with IBM in 1974. By 1975 Hutchinson employed 70 people and achieved revenues of $2.3 million.

Catching the Early 1980s Wave of Personal Computer Production

The late 1970s brought an end to the majority of Hutchinson Industrial's small quantity production runs. The company refocused its energy on the disk drive market and brought on more technical people. Growth magnified the differences between founders Geiss and Green. In the early 1980s Geiss, who was CEO, tried and failed to convince the board of directors to accelerate business diversification in order to increase revenues. In 1982, Geiss decided to leave the company and sought a buyout for his 35 percent of the company stock. A struggle ensued between a Geiss faction and a newly organized Green faction. A resulting lawsuit was decided in Green's favor. Eventually, Geiss and other original shareholders accepted a buyout offer. Green became CEO, and Wayne Fortun took over as company president. Also in 1982, the business was renamed Hutchinson Technology Incorporated (HTI).

The early 1980s personal computer boom sent disk drive manufacturing into high gear. HTI grew rapidly, adapting and adding equipment, and hiring new employees to meet the demand for rigid disk drive components. HTI delivered its first thin-film suspension assemblies in 1983. High start-up costs and delays related to fine-tuning the new manufacturing processes kept profit margins low, but HTI proceeded to work on another new product, flexible circuits. The company ended the 1983 fiscal year with a net loss. Increased thin-film suspension assembly sales and revived suspension component shipments to a major customer pushed net sales for 1984 to $31.4 million, 95 percent higher than the previous year; net income was $3.2 million.

The addition of complex assembly manufacturing in 1985 helped boost net sales another 68 percent, to $52.7 million. Fifty-five percent of that year's sales were in a volatile segment of the computer market. The components and assemblies HTI manufactured for the makers of small-and medium-sized computer systems were subject to rapid price and technology changes. The majority of HTI's remaining sales were in the large computer market, which was more stable. HTI also sold some flexible circuits to Honeywell, Teledyne, Hewlett Packard, and Textronix for use in military applications.

HTI offered its stock to the public for the first time in August 1985 for $10 per share. The newly issued stock lost as much as half of its value shortly after the offering of 1.6 million shares. In February 1986, Clinton H. Morrison of Dain Bosworth said the drop resulted from the combination of IBM order cutbacks and "an unfavorable recommendation by one of the underwriters." But Morrison pointed out that HTI had developed and implemented difficult to duplicate manufacturing technologies, which were well respected by the industry, as evidenced by its market share. In spite of the setback, HTI remained profitable by implementing a production slowdown and employee layoffs.

Focus on Engineering and Expansion in the Late 1980s

The vertically integrated HTI adapted and combined high-tech processes including photoetching, laminating, and laser welding in order to keep pace with the rapidly changing disk drive industry. The company also implemented quality control programs and management systems designed to meet the expectations of its biggest customer. According to a September 1986 Corporate Report Minnesota article, direct sales to IBM accounted for about 50 percent of HTI revenues, and indirect sales by way of original equipment manufacturers boosted the figure even higher. In the same article an IBM procurement manager, Hud Sherlock, said of HTI, "They continue to have a good record in terms of reliability, quality, and durability. We demand zero defects from our vendors, and Hutchinson Technology has done a lot to achieve that goal." Steve Marshall of Seagate said, "Their reliability and pricing can't be beat. We had our own flexure assembly plant, but shut it down. We found we couldn't put them together for what they can do it for."

In 1988 HTI's Green sparked a public controversy when he announced that the Minnesota business climate was a factor in the decision to open a plant in South Dakota. Newspaper columnists and editors, officials of the State of Minnesota, and other business leaders exchanged public barbs regarding the contention that workers' compensation laws, taxes, and the propensity of state government to involve itself in business matters were driving employers from the state. Regardless of the reason for choosing Sioux Falls, South Dakota, HTI needed the new facilities. The company turned out 1.9 million suspension assemblies a week, while the demand was for 2.2 million. In another move to increase available capacity, HTI began to phase out its low-margin complex assemblies.

The small-town company had expanded its horizons considerably under Green's leadership. In May 1988, Dave Peters described the company as being "in the forefront of high-tech manufacturing techniques," which involved such things as maintaining low inventory, using worker clusters rather than assembly lines, and sharing volume and quality statistics with employees on a daily basis. In 1988 HTI opened sales and technical support offices in Singapore and Seoul, South Korea; at that point, 40 percent of HTI products were sent to the Far East by either direct or indirect sales. The company also looked to the future by delving into production of detector cells for nuclear research and cancer treatment.

HTI began its 1989 fiscal year with its first quarterly loss since becoming a publicly held company; employee layoffs and cost-cutting measures were implemented. The company had just experienced an interval of heavy start-up expenditures and high employment and overtime costs, while the disk drive market weakened. In addition, consumers were showing a strong preference for 3.5-inch rather than 5.25-inch disk drive computer systems. Consequently, HTI was left with an inventory of the larger format components and retooling costs.

In February 1989 the company announced that it was holding acquisition talks with a Japanese company, Minebea Co. Ltd. HTI stock climbed to $15 per share, but fell to $9 after the company rejected the Minebea purchase bid as "grossly inadequate." In the second quarter of 1989, HTI was hit by more big losses and the criticism of financial analysts, some of whom maintained that with its dominance over its much smaller competitors, the company should be able to control pricing and be less susceptible to industry downturns. Fortun, HTI president, countered that their prices were already higher than competitors, and the trend in the disk drive market was for falling, not rising, prices. HTI ended 1989 with a loss of $5.7 million.

Fluctuations in the Early to Mid-1990s

HTI acted quickly to stop its downslide and entered the 1990s on an upswing. The disk drive industry backlog of inventory was down; orders for the smaller disk format were rising; and the low-profit complex assemblies were phased out of HTI's product mix. Although the company had lost some of its market share, it still held 60 percent of the suspension assembly market. Technology stocks as a whole were gaining strength, and HTI's price per share rose 42 percent within the first three months of 1990. Analyst Clinton Morrison noted in Corporate Report Minnesota that HTI's slump the previous year had pushed management to improve efficiencies and implement cost-cutting measures that had a positive effect on its profit margins. The company ended fiscal 1990 with record profits of $5.3 million on sales of $122 million.

HTI's stock price remained linked to the ups and downs of the industry and its own profit margins throughout the next year. Then, in spite of a decline in yearly profits, HTI stock skyrocketed. Dick Youngblood asserted in the Minneapolis Star Tribune that a number of long-term changes in the market and the company were behind the newly found investor confidence: the disk drive market was more stable because of a drop in the number of manufacturers; a line of HTI-designed suspension assemblies was well-received by the market; and the company was automating its manufacturing processes, spending $35 million over the previous three years and planning to spend an additional $18 million.

But HTI stock fell to less than half its 52-week high following a projected drop in third-quarter revenues and earnings. Technical problems had slowed production just as demand was rising, and efficiency and productivity had been hampered by a move to around-the-clock production. The bad news came on the heels of a $27.75 per share secondary stock offering in March. Morrison noted in the Minneapolis Star Tribune that some of the slide was due to the reaction of new investors who were unfamiliar with HTI's history of ups and downs. HTI stock recovered and climbed above the $40 mark in December, when the company announced expansion plans for both its Hutchinson and Sioux Falls plants.

Stock price volatility continued to hound HTI in 1993 as familiar problems related to growth and demand drove down earnings. Once again, HTI had to make rapid manufacturing adjustments as disk drive manufacturers flocked to buy the newly developed nano-sized suspension assembly. HTI was the only producer of suspension assemblies for the smaller, cheaper heads.

The company caught up with the demand for its nano-sized suspension assemblies by the end of the second quarter of its 1994 fiscal year. Suspension assemblies accounted for 97 percent of HTI's business in 1994; the remaining 3 percent was from etched and stamped components, welded assemblies, and laminated components. Eighty-five percent of all business came from its largest customers: Seagate Technology, Read-Rite Corp., Yamaha Corporation, IBM, and SAE Magnetics Ltd.

In 1995 HTI began work on a new plant in Eau Claire, Wisconsin, where production began in December. The firm also entered into a technology-sharing agreement with IBM to develop trace suspension assemblies (TSAs); this type of assembly included embedded copper electrical leads, allowing for more automation and more accuracy. The company shipped nine million suspension assemblies a week in the final quarter of the year. The nano-sized suspension assemblies accounted for nearly 90 percent of HTI suspension production for 1995. In addition, an even smaller suspension assembly--pico-sized--was put into production, anticipating future trends in the disk drive industry. Stock prices ranged from $27 to $91 in 1995. Net sales were $300 million, with net income of $21.1 million.

HTI stock continued to ride the highs and lows of the technology sector in 1996. Once again, company earnings were subject to production problems related to growth. HTI had nearly doubled its total number of employees during the most recent expansion drive. Wayne Fortun succeeded Jeffrey Green as CEO in 1996, but Green stayed on as chairman of the board. Fortun had already been acting as CEO without the title for the previous two or three years, and the leadership change marked the company's evolution from an entrepreneurial firm into what Fortun called "a larger, more methodical, systemic kind of company." Early in 1997, with the company stock trading at an all-time high, HTI announced a three-for-one stock split. For the fiscal year ending in September 1997, HTI posted record profits of $41.9 million on record sales of $453.2 million.

Lagging Demand, Staggering Losses, and Massive Restructuring: Late 1990s and Early 2000s

During 1998 HTI suffered from a serious decline in demand for disk drives and from start-up costs related to the new TSA assemblies. As a result, the firm lost $48.4 million and revenues fell to $407.6 million. HTI returned to profitability the following year, and its revenues reached a new high of $580.3 million thanks to the rapid adoption of the TSA assemblies, which sold for a much higher price than conventional assemblies. The TSA line represented 42 percent of total products shipped that year and 64 percent of overall revenues.

This turn of events proved short-lived, however. In the late 1990s advancements in disk drive technology were beginning to reduce the number of suspension assemblies required for each drive. Between 1997 and 2003, the average number of assemblies per drive fell from 6.7 to 2.3. This latest decline in demand sent HTI back into the red in 2000 and into a massive effort to cut costs and restructure. A series of six large staff reductions reduced the workforce from 7,701 to 4,729 employees during 2000. A $63.3 million charge for asset impairment and severance costs, along with an operating loss, added up to a net loss for the year of $73.6 million. Sales fell 21 percent that year, and the company stock fell below the $10 mark during the year, having traded as high as $51.25 the preceding year.

The slump continued in 2001, which saw a further drop in revenues as well as additional cost-cutting. The workforce was cut to fewer than 3,500 employees, and a $27.9 million charge was taken for asset impairment and restructuring. For the year, HTI suffered a net loss of $56.3 million.

HTI eked out a modest profit in 2002 but saw sales bottom out at $390.7 million. The real rebound came in fiscal 2003 when HTI shipped 526 million suspension assemblies, a 32 percent increase over the 2002 level. Revenues jumped more than 27 percent, amounting to $498.9 million. Most impressive was the record net income figure of $64.5 million, which also translated into the company's best ever profit margin, 12.9 percent. Increased manufacturing productivity and higher use of manufacturing capacity aided the profit figure, as did the steadily increasing sales of more lucrative TSA assemblies. By 2003, 86 percent of the suspension assemblies sold by HTI were of the TSA variety. During the year, HTI also improved its share of the worldwide suspension assembly market from 55 percent to 60 percent. Nevertheless, with virtually all of the company's revenues deriving from the sale of suspension assemblies or the components of such assemblies (which were sold to competing makers of suspension assemblies), Hutchinson Technology was likely to remain extremely vulnerable to the volatility of the disk drive industry.

Principal Subsidiaries: Hutchinson Technology Asia, Inc.; Hutchinson Technology Service (Wuxi) Co., Ltd. (China).

Principal Divisions: BioMeasurement Division.

Principal Competitors: K.R. Precision Co.; Magnecomp International Limited; Nihon Hatsujo Kabusikigaisha; Fujitsu Limited; Suncall Corporation.

Chronology

• Key Dates:
• 1965: Jon Geiss and Jeffrey Green found Hutchinson Industrial Corporation, working out of a chicken coop in Hutchinson, Minnesota; company spends first several years as a custom component maker.
• Late 1970s:Company refocuses on the disk drive market.
• 1982: Geiss leaves the company, Green becomes CEO, and Wayne Fortun is named president; company changes its name to Hutchinson Technology Incorporated (HTI).
• 1983: HTI delivers its first thin-film suspension assemblies.
• 1985: Company goes public.
• 1988: HTI opens a second plant in Sioux Falls, South Dakota; sales and technical support offices are opened in Singapore and South Korea.
• 1995: Production begins at a third plant in Eau Claire, Wisconsin.
• 1996: Fortun is promoted to CEO, with Green staying on as chairman.
• 1999: Rapid adoption of trace suspension assemblies (TSAs) leads to record revenues of $580.3 million for the fiscal year; falling demand toward the end of the calendar year sets off a major restructuring that will involve the elimination of thousands of jobs from the workforce.
• 2003: Increasing demand for suspension assemblies and the previous years' cost-containment efforts yield record profits of $64.5 million.