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Hutchinson Technology Incorporated (NASDAQ:HTCH)

F1Q 2013 Earnings Conference Call

January 29, 2013 17:30 ET

Executives

Charles Ives - Director, Investor Relations

Rick Penn - Chief Executive Officer

Dave Radloff - Chief Financial Officer

Analysts

Mark Miller - Noble Capital Financial Markets

Rich Kugele - Needham & Company

Timothy Stabosz - Private Investor

Tom Lewis - High Road Value Research

Operator

Good day, ladies and gentlemen. Thank you for standing by. Welcome to the Hutchinson Technology First Quarter Results Conference Call. During today’s presentation, all parties will be in a listen-only mode. Following the presentation, the conference will be opened for questions. (Operator Instructions) This conference is being recorded today Tuesday, January 29, 2013.

I would now like to turn the conference over to Mr. Chuck Ives, Director of Investor Relations. Please go ahead.

Charles Ives

Good afternoon, everyone. Welcome to our first quarter results conference call. On the call with me today are Rick Penn, our Chief Executive Officer; and Dave Radloff, our Chief Financial Officer.

As a reminder, we will be providing forward-looking information on demand for and shipments of disk drives and the company’s products, product adoption, program ramps, product mix, pricing, production capabilities and volumes, product cost, our operations in Thailand and the United States, capital spending, operating expenses, and the company’s business model, operating performance, cash, long-term debt, and financial results.

These forward-looking statements involve risks and uncertainties as they are based on our current expectations. Our actual results could differ materially, as a result of several factors that are described in our periodic reports on file with the SEC. In connection with the adoption of SEC rules governing fair disclosure, the company provides financial information and projections only through means that are designed to provide broad distribution of the information to the public. The company will not make projections or provide material non-public information through any other means.

We issued our first quarter results announcement just after the market closed this afternoon and it is now posted on our website at www.htch.com.

I’ll turn the call over to Rick now.

Rick Penn

Thanks, Doug. Good afternoon everyone and thank you for joining us today. With respect to demand, the story in our fiscal first quarter is much the same as it was in the preceding quarter. While worldwide demand for disk drives and suspension assemblies remained soft, our shipment volume benefited from our market share positions on both existing customer programs and new customer programs beginning to ramp.

Our first quarter suspension assembly shipments totaled $103.6 million. Compared with shipments of $105.2 million in the 14-week fourth quarter, that represented an increase of 6% on a weekly shipment basis. Compared with the preceding quarter, weekly suspension assembly shipments increased for all disk drive segments with a particularly strong increase in suspensions for enterprise applications.

For the fiscal 2013 first quarter, our mix of products shipped was as follows. Weekly suspension shipments for 3.5-inch ATA applications increased 2% sequentially and accounted for 40% of our shipments compared with 41% of shipments in the preceding quarter. Weekly shipments for mobile applications increased 2% sequentially and accounted for 40% of our shipments compared with 42% in the preceding quarter. And the weekly shipments for enterprise applications increased 24% sequentially and accounted for 20% of our shipments compared with 17% in the preceding quarter.

Our average selling price in the first quarter was $0.60, up from $0.58 in the preceding quarter and about flat with last year’s first quarter. The sequential increase was primarily due to a higher mix of both development and high-volume dual-stage actuated or DSA suspensions and suspensions for enterprise applications. DSA suspensions which cost more to manufacturer and carry a higher selling price accounted for 9% of our first quarter shipments, up from 5% in the preceding quarter. We continue to expect DSA suspensions to steadily increase as a percentage of our product mix as fiscal 2013 progresses.

TSA+ suspensions accounted for 85% of our first quarter shipments, that’s unchanged from the preceding quarter. Overall, we are very pleased with the levels of quality and output we are realizing from our existing TSA+ and DSA capacity, which has been enabling us to meet growing customer demand for both development and high-volume DSA suspensions.

Our Thailand assembly operation accounted for 18% of our assembly production in our fiscal first quarter. We have qualified additional products for production there and remain on track to have about one half of our total assembly output produced by our Thailand assembly operation by the end of our fiscal 2013 third quarter. By the end of our second quarter, we expect to get fully restored the pre-flood capacity at our Thailand operation. And by the end of the fiscal 2013 we should have the full capacity for the Thailand site installed. We will continue to transition more of our assembly production to Thailand as the year progresses, so that we can realize the related cost advantages and have the majority of our assembly production near our customers manufacturing locations.

We are also planning to further consolidate and streamline our U.S. operations. In Eau Claire, Wisconsin we will wind down assembly operations there in fiscal 2013, as we shift more of their production to our Thailand operation. The portion of our Eau Claire facility currently used for assembly operations will be offered for lease. In Hutchinson, we are consolidating our development center into our headquarters building in 2013 taking advantage of the space made available by moving component manufacturing from Hutchinson to Eau Claire back in 2011 and we will offer the development center for sale or lease. Near the end of fiscal 2013, we also plan to begin moving our stamping operation from a facility we currently lease in Plymouth, Minnesota to our headquarters building in Hutchinson.

As these actions are completed they will further lower our cost structure. Regarding the outlook for suspension assembly demand, we expect shipments for our fiscal 2013 second quarter to range from $95 million to $105 million. The midpoint of our guidance is down slightly from our first quarter shipment volume as we anticipate slightly lower disk drive demand and the delay in some program ramps to the second half of our current fiscal year.

Finally, I would like to update you on our BioMeasurement effort, with the additional cost reductions that we have made since the end of fiscal 2012, we have now lowered the BioMeasurement operating loss to the point that it is not material to our overall business and therefore we will no longer report specific financial results for BioMeasurement. We are also continuing to look at partnering opportunities that can help us get market traction and extract value from this technology and new metric that we’ve developed.

I will turn the call over to Dave now for discussion of our financial results.

Dave Radloff

Thanks Rick. Net sales for the fiscal 2013’s first quarter were $63.7 million, flat with the preceding quarter and up 9% compared with last year’s first quarter. The revenue percentages for our top customers in the quarter were as follows Western Digital 49%, SAE/TDK 26%, Seagate 12%, and Hitachi GST 11%. Gross profit improved considerably in the quarter to $7.4 million or 11.6% of net sales compared with a gross loss of $240,000 in the preceding quarter.

The quarter-over-quarter improvement resulted from improved fixed cost absorption on higher weekly volume and from actions we have taken as part of our ongoing efforts to reduce our costs and improve our competitive position. Increased shipments of higher priced development products and increased scrap recoveries also improved our gross profit by approximately $3 million. This $3 million impact is not expected to carry over into our second quarter. We estimate that the incremental costs associated with manufacturing more volume in the U.S. than we had planned prior to the Thailand flooding was $2.3 million from the first quarter. These costs are diminishing and will be eliminated as more customer programs are qualified to be manufactured at our Thailand operation and we ramp to higher volume at that operation.

First quarter depreciation and amortization totaled $9.7 million compared with $12.1 million in the preceding quarter. The preceding 14 week quarter included an extra week of depreciation and approximately $1 million of accelerated depreciation related to subtractive TSA production system. R&D expenses in the first quarter were $3.3 million, down from $4.1 million in the preceding 14 week quarter.

SG&A expenses totaled $6.2 million compared with $6.9 million in the preceding quarter. Our fiscal 2013 first quarter operating loss totaled $3.1 million compared to $11.9 million in the preceding quarter. Included in the first quarter operating loss were severance costs of $1 million.

Interest expense in the first quarter was $4 million, flat with the preceding quarter and included $1 million of non-cash interest expense also flat with the preceding quarter. Our net loss from the first quarter totaled $6.5 million at $0.27 per share compared with a net loss of $14.7 million or $0.62 per share in the preceding quarter. Excluding the severance costs and non-cash interest expense, our non-GAAP net loss for the fiscal 2013 first quarter was $4.5 million or $0.19 per share. In the preceding quarter the non-GAAP net loss was $13 million or $0.54 per share.

Our share count at the end of the first quarter was approximately 24 million resulting in book value per share of $6.71. Subsequent to the end of the first quarter, approximately 1.1 million shares were issued in connection with the exercise of warrants raising our outstanding share count to 25.1 million.

Our free cash flow in the quarter was negative $6.6 million, primarily as a result of changes in working capital. Cash used by operations in the fiscal 2013 first quarter totaled $1.6 million and our capital spending in the quarter totaled $5.1 million. Cash and investments at quarter end totaled $57.5 million, up $2.6 million compared with the preceding quarter, with outstanding borrowings of $4.1 million under our revolving credit line at quarter end compared with none at the end of the preceding quarter. As we announced last week, we issued $12.2 million of 10.875% Senior Secured Second Lien Notes due in 2017 and used the proceeds to repurchase $18.7 million of our 8.5% convertible senior notes. This reduced the portion of our outstanding debt with a first put date in 2015 from $58.5 million to $39.8 million.

During the second quarter, we will also redeem the remaining $11.9 million of our outstanding 3.25% convertible subordinated notes. The redemption of these notes combined with the debt issuance and repurchase I just mentioned will reduce the total principal amount of our outstanding long-term debt from $149 million to $131 million. Of this balance $39.8 million as a first put date in 2015 and $91.1 million is due in 2017.

Turning now to our outlook. As Rick mentioned, we expect our second quarter suspension shipments to range from $95 million to $105 million. Average selling price should increase slightly as a result of an increase in the mix of higher value DSA suspensions partially offset by lower shipments of development products. Second quarter gross profit is expected to decline on the lower volume, including the lower shipments of development products and the increased scrap recoveries in the first quarter are not expected to carryover into the second quarter.

We estimate that our SG&A expenses will decline to approximately $6 million per quarter as a result of cost reductions we implemented in the first quarter. Our R&D expense should be about $3.5 million per quarter. Depreciation and amortization expense is expected to be approximately $10 million per quarter. Our interest expense is expected to decrease to approximately $3.7 million per quarter with the non-cash portion decreasing to about $800,000 per quarter. Our tax rate is expected to be near-zero in fiscal 2013.

We expect our fiscal 2013 capital expenditures to be $15 million to $20 million and to be front-end loaded in the fiscal year. The capital is primarily related to customer-specific program tooling and DSA production equipment. Due to the upcoming redemption of the 3.25% Notes that I mentioned in 6 million of interest payments that were made on January 15, our cash balance will decrease during the second quarter.

As I mentioned in our fourth quarter conference call, the changes we are making in our overall cost structure should enable us to be cash neutral as shipments of $8 million or 8 million parts per week assuming no changes in our working capital. Our operating results in the fiscal 2013 first quarter show us making progress down that path. As shipments grow to more than 8 million per week; we believe we will be able to generate positive free cash flow.

I’ll turn the call over to Rick now for his closing comments.

Rick Penn

Thanks, Dave. We are encouraged by the progress that is evident in our first quarter operating results. While worldwide disk drive and suspension assembly demand remained soft, we continue to benefit from our improving competitive strength, which has earned us improved share positions on customer’s existing and new programs. As we get beyond our second quarter, we expect our financial results to benefit from several factors, including higher volume, improved fixed cost leverage, increased customer adoption of DSA suspensions, the inherent cost benefits of our TSA+ process, and further cost reductions as we transition more assembly volume to Thailand and continue to consolidate and streamline our operations in the U.S. That concludes our prepared remarks. Katia, please begin polling for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from the line of Mark Miller with Noble Capital Financial Markets. Please go ahead.

Mark Miller - Noble Capital Financial Markets

I see you picked up in terms of percent of business with Seagate, I was just wondering is that all through enterprise or do you expect it to be able to penetrate other programs besides enterprise at Seagate or more programs in the coming year?

Rick Penn

Hi Mark. The pickup at Seagate, we are primarily involved in their enterprise stuff and that mix was up this past quarter, so that’s really the main reason for the increase there. And it’s sort of new as well as existing enterprise business that we’ve got going. And I can’t comment real specifically – otherwise, but repeat what we’ve said many times in the past that we’re working very well with Seagate. We are qualifying, we are working to qualify across all customers and across segments, and that really applies to every customer. So, we think our business with Seagate will improve. We think we will participate in other segments. That work is underway and we’ll just have to see how that plays out, but we’re optimistic.

Mark Miller - Noble Capital Financial Markets

Can you break it down and then I realize you have to be confidential. Can you break it down between your new line mission-critical, because I know that new line was ships were up 23% last quarter, do you ship to all both those type programs?

Rick Penn

We are more involved in the mission critical stuff, Mark.

Mark Miller - Noble Capital Financial Markets

Okay. And I assume they are getting significant numbers of DSAs, dual-stage actuated from you?

Rick Penn

No idea, we are shipping single stage and dual stage, and that’s really to all customers.

Mark Miller - Noble Capital Financial Markets

Okay. Dual-stage ramp, are you going to – remind me, I think you have told this before, you want to get 20% by the end of this fiscal year, is that where it’s headed or more?

Rick Penn

No, yeah so we are about 9% now. If you go out about a year, Mark, it’s probably in the 40% to 50% of our mix and kind of linearly work your way there from here.

Mark Miller - Noble Capital Financial Markets

Where are your competitors at? Are they are parity with you, you got a lead or do you feel you’re – it sounds like you’re gaining some share through dual, let’s say, I’m just wondering what your competitive assessment is?

Rick Penn

Yeah. I mean we think our dual-stage process and products are performing well. And we’re finding that in some cases on some programs, we perhaps have a performance or reliability edge over our competitors. So, that’s – so our qualifications are going very, very well on dual stage. So, we may have an edge in some cases, but our competitors are making products and getting qualified also.

Mark Miller - Noble Capital Financial Markets

And then one last question, you said you had after the refinance $131 million outstanding and $91 million in 2017, what was due in 2015, again?

Dave Radloff

The first put date of 39.8.

Mark Miller - Noble Capital Financial Markets

Was that 39.8?

Dave Radloff

Yeah.

Mark Miller - Noble Capital Financial Markets

Okay and anything after 2017?

Dave Radloff

No.

Mark Miller - Noble Capital Financial Markets

Okay, alright. Thanks.

Rick Penn

Yeah. Thank you, Mark.

Operator

Our next question comes from Christian Schwab with Craig-Hallum Capital Group. Please go ahead.

Christian Schwab - Craig-Hallum Capital Group

Great quarter, guys.

Rick Penn

Thanks.

Christian Schwab - Craig-Hallum Capital Group

What is the price of the DSA convention this quarter, the conventional assembly?

Rick Penn

I’m not sure I understand your question, Christian.

Dave Radloff

Taking out this non-dual-stage from the dual-stage, Christian?

Christian Schwab - Craig-Hallum Capital Group

Yeah, the non-dual-stage actuation price or you can give me the DSA I was just going to back into it?

Dave Radloff

Yeah. We are not breaking them out. For competitive reasons we are not going to give you ASP of single stage versus ASP of dual stage.

Christian Schwab - Craig-Hallum Capital Group

Okay, that’s fair. Can you quantify – that’s alright, I think we have a good idea anyway. Can you quantify the cost savings of everything that you’re doing here of the assembly stuff and moving all the assembly there? Can you quantify what that means kind of exiting fiscal year ‘13 kind of the cost savings you will see?

Dave Radloff

Sure. The $2.3 million that we mentioned as the cost of being in the U.S. versus Thailand because we really expected all of the assembly more or less to be in Thailand at this point in time. So, that’s the savings from that. And then the other savings that we have alluded to is some of the consolidation of the facilities and when those are all concluded, that’s about a $2 million annual cash savings and about a $4 million, because of the depreciation and other things, P&L savings.

Christian Schwab - Craig-Hallum Capital Group

Perfect.

Dave Radloff

And those complete over different points in time.

Christian Schwab - Craig-Hallum Capital Group

Right. But all done by the end of this fiscal year?

Dave Radloff

Not the Plymouth transition is more of a 2014 activity.

Christian Schwab - Craig-Hallum Capital Group

Okay.

Dave Radloff

So, the consolidation of the stamping activity.

Christian Schwab - Craig-Hallum Capital Group

Consolidation of the stamping will take a little bit longer?

Dave Radloff

Yes.

Christian Schwab - Craig-Hallum Capital Group

Okay, so…

Rick Penn

Christian, just to be clear, those facility savings, those are annual numbers, where the $2.3 million that’s a quarterly number.

Christian Schwab - Craig-Hallum Capital Group

And how does that breakup that $2.3 million between COGS and OpEx?

Rick Penn

All COGS?

Christian Schwab - Craig-Hallum Capital Group

All COGS.

Rick Penn

Substantially, for all intensive purposes all COGS.

Christian Schwab - Craig-Hallum Capital Group

All COGS, that will be a nice boost. And then what type of cash flow are you assuming at some point you may get from leasing activities in Eau Claire and how much do you think you could receive for a sale in Hutchinson?

Rick Penn

I think it’s preliminary to trying to disclose that, because those are all going to be negotiation things Christian. So, I think we’ll wait and see what the market will bear and then we will make it note.

Christian Schwab - Craig-Hallum Capital Group

Right. I would assume you are ready talking to people?

Rick Penn

Yes, we are.

Christian Schwab - Craig-Hallum Capital Group

Yeah wherever, that’s going to be happening?

Rick Penn

Yes.

Christian Schwab - Craig-Hallum Capital Group

Okay, okay. And then just as regarding the ASP being up slightly and then Dave mentioned something, you expect you got ASP to go up from $0.60 in March to something, I mean $0.60 in December to something bigger in March. Is that correct?

Rick Penn

Correct.

Dave Radloff

That’s correct.

Rick Penn

Correct. Just the only odd that we have put in the script Christian was that the volume of developmentally priced product is going to be lower, and so that’s bit of a reduction, but the increase in DSA drives an increase in ASP.

Christian Schwab - Craig-Hallum Capital Group

Got it, yeah, I got it. So, if I back into what the disk drive industry TAM was and then assume suspensions per drive in your customer’s yield rates, I have you guys fairly consistent with last quarter, a fraction above 20% market share. As you look exiting fiscal ‘13 and going into fiscal ‘14 given the new product design wins with various customers, where do you see that market share going to exiting this year and say exiting ‘14?

Dave Radloff

Yeah. Christian, I think the way we are thinking about that exiting this year would be say up a couple of share points. So, we would be in the low to mid 20s if things ramp the way we think they could. And at the end of 2014, pick a number, but we are shooting to be ultimately a third of the game down the road and so we want to see this climb up north of 25, up towards 30, frankly up above 30, but how that plays and how that timing works who knows. And of course, we’ve got to perform.

Christian Schwab - Craig-Hallum Capital Group

Right, right. And then my last question, so either you can answer it or we can back into it if you can help us. You know you mentioned four different things for a gross margin number you haven’t seen in years. We can back into the puts and takes of the four things you mentioned or if it’s easier for you kind to give us a range of what gross margin should be expected in March?

Dave Radloff

Yeah. Well, we have told you the things that we think are non-recurring right?

Christian Schwab - Craig-Hallum Capital Group

Right, one more time?

Dave Radloff

Yeah. It’s the effect of the developmental pricing that was favorable and then the scrap reclaim. And those two things combined were positive approximately $3 million.

Christian Schwab - Craig-Hallum Capital Group

$3 million.

Dave Radloff

Yeah. So, without that, the gross margin would have been about 7%. And so now you play forward, there are some positive cost things, there are also some potential for TAM reduction. And so...

Christian Schwab - Craig-Hallum Capital Group

Right. So, it’s really I am doing the math right, gross margins is modestly less than 7% expected in March?

Dave Radloff

That’s directionally in the neighborhood.

Christian Schwab - Craig-Hallum Capital Group

Directionally in the neighborhood.

Dave Radloff

Yeah. We’re not going to be precise in a confirmation ever, Christian.

Christian Schwab - Craig-Hallum Capital Group

Right. Right and I understand that. But even if you do say 5% gross margins, at your utilization rates, that would be higher than, I guess, I would have assumed, which is positive. What type of unit shipment number do we need to be at to sustain the business at a mid-teens type of gross margin?

Dave Radloff

Probably somewhere around $10 million a week.

Christian Schwab - Craig-Hallum Capital Group

$10 million a week would get us kind of into that 15% to 17%, 15% to 18% range?

Dave Radloff

Yeah.

Christian Schwab - Craig-Hallum Capital Group

Excellent. No other questions. Congratulations on a good quarter.

Dave Radloff

Thanks.

Rick Penn

Thanks, Christian.

Operator

Our next question comes from the line of Rich Kugele with Needham & Company. Please go ahead.

Rich Kugele - Needham & Company

Thank you. Good afternoon. Just a couple of quick questions, I guess, first, the gross – the operating expense guidance that you gave, you’re saying that that for the first – I’m sorry for the second quarter does not – we should not assume that that is the case for the second half because you have other restructuring and facility stuff that’s going to kind of flow through?

Rick Penn

Trying to think where all that flows and how much of that’s up in COGS. I wouldn’t significantly adjust OpEx guidance based on those facilities thing. The timing of the benefits are going to be very back-end loaded and some of them into 2014.

Rich Kugele - Needham & Company

Okay. So, at this point it’s kind of tough for us given the information we have to really accurately forecast the margins for the second half other than they should be better?

Rick Penn

Yeah, I mean it’s a volume dependent assumption, alright.

Rich Kugele - Needham & Company

Yeah.

Rick Penn

And it’s the benefit as we transition to Thailand. And we’re going to continue to work on other cost reduction activities, but we’re about 50-50 fixed variable. And then so to the extent we get more volume we leverage that and that helps the margin and the cash and that’s what we’re working towards.

Rich Kugele - Needham & Company

Okay. And from an inventory perspective at least on the balance sheet it could tick up sequentially. Are you comfortable with your inventory, what you – where are you at on from a week’s perspective or relative to where you should be or what’s supposed to be I guess a little bit softer quarter?

Rick Penn

Yeah, we are carrying a little extra heavier inventory right now as we transition to Thailand because as you are moving programs in tooling you have to carry some extra finished goods to get you through that. But I think as we get through the year and as the product is produced closer to the end user there is opportunities to reduce some of the finished goods levels and maintain or improve customer service. So, that’s an opportunity we’re going to be working towards. We also would like to reduce some of the fixed – I’m sorry, the raw material we saw some up-tick in the raw material inventory and we’ll be working to bring that down a little bit. But, all-in-all, I think we can improve in our inventory, but we’re not really out of control in terms of the levels we currently have based on the business we’re running and the transitions we’re going through.

Rich Kugele - Needham & Company

Okay. And then just lastly on Thailand, are there any outstanding customer qualifications that have to occur to hit those target levels that you have outlined?

Rick Penn

Yeah. Those calls are underway. They are either completed or underway and we should be on that track. I think we’re in good shape there.

Rich Kugele - Needham & Company

Okay, great. Thank you very much.

Rick Penn

Yeah. Thanks Rich.

Dave Radloff

Thank you, Rich.

Operator

(Operator Instructions) Our next question comes from the line of Timothy Stabosz, Private Investor. Please go ahead.

Timothy Stabosz - Private Investor

Good afternoon, gentlemen.

Rick Penn

Hello, Tim.

Timothy Stabosz - Private Investor

Good quarter. I really expected the loss to be almost twice as much as what you reported. You mentioned the $3 million gain from scrappage and the developmental products, is that pretty much split 50-50 between those two factors?

Dave Radloff

It’s a little more to the scrap reclaim.

Timothy Stabosz - Private Investor

Why is this, why this one-time thing on scrappage like that seems fairly outsized for one-time situation? What’s that all about?

Dave Radloff

It is and that’s why we called it out, because we didn’t want it to be something that people built, Tim. We have got a product that’s expensive product that’s in our process. And we were able to identify and reclaim a higher amount this quarter and so we recorded it, but we don’t expect to have that. While to the extent that it’s an ongoing reclaim opportunity, we certainly will keep doing that, but it was outsized this quarter.

Timothy Stabosz - Private Investor

Okay. Why the delay in program ramps to the second half? It sounds like before you may have thought there may have been more that we would have seen in the March quarter. To what degree is the anticipated decline in volumes for fiscal Q2 a market size issue, shrinkage of the TAM that is as we have heard from Western Digital and Seagate? Can you talk about that? In other words, are we still as optimistic as we were one, two, three, four, five months ago about gaining share or are we a little less optimistic than we were and that’s part of what’s going on here?

Dave Radloff

Tim, I think we are optimistic about gaining some share and we describe that as sort of grabbing a share point quarter by quarter and sort of slowly, but surely, but that’s how this will tend to play out I think. As far as the programs that are shifting, you know, first of all, I think that the TAM that’s a little bit lower than expected is part of what causes our customers than to look at their mix, look at when they move to the next capacity point or the next product, and it causes them to do some juggling in what they launch and when they launch it. And so I think the TAM is causing some of that. And I think some of it’s just normal juggling anyway. We are not seeing anything drastic. In fact the kind of bouncing around, we are seeing is pretty normal. And we might even see some things bounce back in, you never know. But we have got a couple of programs that shifted into the second half that we thought would have been ramping beginning in the first half, but all of the nine that we have talked about still look like they will be ramping this fiscal year.

Timothy Stabosz - Private Investor

Okay, that’s helpful. It sounds like our attitude about our strength in the marketplace and the quality of our offering and our cost competitiveness hasn’t really changed then materially over the last few...

Dave Radloff

No, no, they haven’t, Tim.

Timothy Stabosz - Private Investor

Just one other question, then I think most of the other ones were answered already. The debt refinance is very interesting to me. Was the debt refinance an opportunity we took advantage of because of better visibility for the future such that we could find someone to buy this new debt or is this something we could have pursued three or say six months ago if the opportunity presented itself?

Rick Penn

The honest answer, which is the only type we should give of course, is we looked at the market and we looked at our ability to get financing. We approached the financing people and said Tim would you be interested in participating if we can put this type of a purchase together, they said yes. We went back to the people that we thought were interested, because of other conversations we had with them, they were interested, and we have put it together. So, it was relatively opportunistic is what I would say. I think we have got a history of being creative in trying to put together good opportunities on the debt structure when we can or I would just say this was a smaller one, but we felt it was a good one. It reduces cash interest. It reduces the overall debt by about $6.5 million. And we didn’t have to use any cash to do that. So, we felt there was a nice modest improvement in the debt structure.

Timothy Stabosz - Private Investor

The increased visibility for the business now versus three to six months ago certainly couldn’t hurt in terms of that, right?

Rick Penn

It’s hard for me to say we have increased visibility in the drive industry right now with the way the TAM is moving around. So, I would say we feel better about our cost structure and we have proven more of that. And operationally, we are very pleased with the way operations are running, but I would still construe most of this financing as opportunistic. We could do a good transaction that benefited all parties and we did.

Timothy Stabosz - Private Investor

Well, you have done a very good job over the last few years and pushing maturities out, so as a shareholder, I am quite pleased. And nice to see the significant loss reduction this quarter, it looks like we are going in the right direction. So, thank you, that’s all for me.

Rick Penn

Thanks Tim.

Dave Radloff

Thanks Tim.

Operator

Our next question is a follow-up question from the line of Mark Miller with Noble Capital Financial Markets. Please go ahead.

Mark Miller - Noble Capital Financial Markets

With the additional cost cuts I mean in one-time I believe you the last thing I deduced was that you were about 125 million units for breakeven has that come down by 3 million to 5 million with these costs – these new cost savings?

Rick Penn

That’s kind of precise, but it’s in that range and it could be a little better than that 125 million at this point Mark. There are a lot of things that move as we go forward and again we’re going to continue working on other opportunities as we can identify. So, we’re continuing to try and work that down.

Mark Miller - Noble Capital Financial Markets

I just asked this question a little back I’ve been interested in your – I mean Seagate, the thing that’s happening is that which would support – I have talked with you guys is the number of components and we’ve talked about that before the number of components per disk drive. Seagate surprised me yesterday when they said that their average capacity was up 59% year-over-year. And I’m just wondering what would you estimate the number of suspensions per drive currently are where that’s going to be at probably end of this calendar year?

Rick Penn

Yeah, Mark the current – well the current heads per drive which has to be yielded a bit for suspension is about 3.2 heads per drive, I think, when you look across segments. And we think it will climb. The question is at what pace and if you look back at some earlier point in time or some earlier in history here the – you’d see typically, if they heads-per was changing it might change at the most by about 0.2 heads per drive, up or down. It was 0.1, but you sort of get those kinds of changes within a year window. Now, I don’t know if the dynamics are shifting in a way that you could see some more rapid increase in heads-per in a year, in 18 months or in two years. It’s hard to say but I think it’s likely, it climbs. We’re not modeling a lot of that at this point when we look at what we think our demand could be. But a tenth of a head increases the suspension TAM by about 3% or by about 1.5 million suspensions a week or something like that. And so it’s a significant potential positive for us. And it’s hard to tell and gauge at what pace that climbs.

Mark Miller - Noble Capital Financial Markets

Well, I was just trying to extrapolate if we are growing 60% a year and areal density is half that, that’s 30%, that’s not compensated by areal density that would almost seem like one – if you’re at 3.2 heads per drive that would increase the number of heads per drive by one and the number I got from Intevac was far lower. So, I don’t know if I’m just – if I am correct here?

Rick Penn

I think it’s not – yeah, I think when you really work through the math that would be a big change and that would take a while to happen.

Mark Miller - Noble Capital Financial Markets

So, you are saying that it’s more like 0.2?

Rick Penn

That’s probably the way to think about it.

Mark Miller - Noble Capital Financial Markets

Okay. That’s kind of been in ballpark with you and Intevac telling us. Thank you.

Rick Penn

Okay. You’re welcome.

Operator

Our next question comes from the line of Tom Lewis with High Road Value Research. Please go ahead.

Tom Lewis - High Road Value Research

Hi. I just had one question, so it’s just a kind of the point of clarification. This development work that started to seem to stand out this quarter, do I understand that as a result of the nine new programs that you picked up, the initial work there or is this work that is being done on programs that you haven’t yet won or it’s possibly a combination?

Rick Penn

No, when we are actually shipping those developmental products, those are programs that we’re working on that will ramp later and just the early smaller volume, so we’re actually shipping volumes are at higher price. So, they would be part of that nine.

Tom Lewis - High Road Value Research

As opposed to being reflective of work that you are doing for future program ramps that you will announce?

Rick Penn

I think that’s – yeah, at that point that’s true.

Dave Radloff

Those other things are going on, however, Tom.

Tom Lewis - High Road Value Research

Yes. Okay. Fair enough, I am liking the progress that you are making. Keep it up.

Rick Penn

Thanks Tom.

Operator

(Operator Instructions) Our next question is a follow-up question from the line of Christian Schwab with Craig-Hallum Capital Group. Please go ahead.

Christian Schwab - Craig-Hallum Capital Group

Just a quick question, what quarters do we assume the $2.3 million COGS is entirely in the model?

Dave Radloff

End of the calendar year, so end of the first fiscal quarter of 2014. And you can more or less straight line that.

Christian Schwab - Craig-Hallum Capital Group

Perfect. Thank you.

Rick Penn

You bet.

Dave Radloff

You bet.

Operator

I am showing no further questions in the queue. I would like to turn the call over to management for closing statements.

Rick Penn

Well, thank you everyone for joining us on the call today. We really appreciate your questions and your interest in the company, and we look forward to speaking with you again. Thanks.

Operator

Ladies and gentlemen, this concludes the Hutchinson Technology first quarter results conference call. If you would like to listen to a replay of today’s conference, please dial 303-590-3030 or 1-800-406-7325 with the access code 4591374. ACT would like to thank you for your participation. You may now disconnect.

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