Major Hutchinson Tech Investor Asks Co. to Sell Division

Hutchinson Technology’s second-largest shareholder is encouraging the company to consider selling one of its divisions and to explore other alternatives if it’s unable to return to profitability during its current fiscal year.

A major investor in disk-drive component maker Hutchinson Technology, Inc., which has struggled in recent years amid weakened demand for its products, is calling for significant changes at the company, whose stock price he says is undervalued.

Investor Timothy Stabosz disclosed in a recent filing with the U.S. Securities and Exchange Commission that he now owns a 5.5 percent share of the Hutchinson-based company—making him its second-largest shareholder.

Stabosz wrote in the regulatory filing, as well as in an accompanying letter addressed to Hutchinson’s board of directors, that the company’s stock price is undervalued. He said that the next four quarters will represent a “major test” for the company and its leaders—and if Hutchinson is unable to turn a profit during the fiscal year that ends September 30, the company needs to “explore any and all alternatives for maximizing shareholder value.”

Tuesday calls to Hutchinson seeking comment were not immediately returned, and the company had not responded to Stabosz in public regulatory filings as of early Tuesday afternoon.

Stabosz specifically calls for the company to explore a sale of its biomeasurement division, which he says would be more valuable to a firm specializing in medical devices. He claims the division has “lost a staggering $154 million from operations, in aggregate, since 2000,” and it “damages the company’s overall image in the investment community.” A sale of the division would allow Hutchinson to refocus on regaining market share in its core suspension assembly business, he added.

According to regulatory filings, net sales for the company's biomeasurement division totaled $2.35 million in its 2011 fiscal year. The division's sales weren't broken out in the company's 2012 earnings announcement.

Stabosz wasn’t particularly critical of the company’s leadership. In his letter to the board, he described himself as a “deep-value investor” and an “unrepentant contrarian” who believes that the company can be turned around.

He said, though, that the last several years have been “incredibly painful for Hutchinson Technology’s shareholders”—who he claims have watched the company’s market share drop from more than 70 percent to about 20 percent. And if the company does not find itself “on the road to profitability” by the fourth quarter of its 2013 fiscal year, it should consider selling itself to a competitor or a disk drive maker, Stabosz said.

Stabosz said he plans to talk with the company’s board and management regarding its future plans, and he might consider communicating with other stockholders or seeking board representation.

To read Stabosz’ complete letter, click here. For the SEC filing, click here.

Hutchinson has worked in recent years to significantly cut costs. In December 2008, it announced plans to cut up to 1,125 jobs, or as much as quarter of its work force at the time. Then in 2011, it said it would cut up to 910 workers as it moved some manufacturing operations to Thailand. Flooding in that country, however, then forced the company to temporarily suspend operations there. The company has since been ramping up production in the country.

For its most recent fiscal year, which ended September 30, Hutchinson reported a net loss of $48.6 million, or $2.06 per share. That’s compared to a net loss of $55.6 million, or $2.38 per share, in the previous year. Revenue, meanwhile, slid about 10 percent to $248.6 million.

The company in August announced the promotion of Richard Penn to president and CEO.

“Overall, we are encouraged by our position on new and existing disk-drive programs,” Penn said upon announcing the company’s full-year financial results. “Looking ahead, we expect our financial results to benefit from higher volume and improved fixed-cost leverage,” increased adoption of certain products, increased production in Thailand, and continued cost reductions.