Hutchinson Technology Incorporated F1Q09 (Qtr End 12/28/2008) Earnings Call Transcript

Jan.27.09 | About: Hutchinson Technology (HTCH)

Hutchinson Technology Incorporated (NASDAQ:HTCH)

F1Q09 (Qtr End 12/28/2008) Earnings Call

January 27, 2009 5:00 pm ET

Executives

John Ingleman - CFO

Wayne Fortun – CEO

Kathleen Skarvan – President, Disk Drive Components Division

Rick Penn - President BioMeasurement Division

Dave Radloff - VP of Corporate Finance

Chuck Ives – Investor Relations Manager

Analysts

Ingrid Aja - Merrill Lynch

Rich Kugele - Needham & Company

Sherri Scribner - Deutsche Bank

Christian Schwab - Craig-Hallum Capital Group

Operator

Welcome to the Hutchinson Technology first quarter results conference call. (Operator Instructions) This conference is being recorded today, Tuesday, January 27, 2009. I would like to turn the conference over to John Ingleman, Chief Financial Officer. Please go ahead sir.

John Ingleman

Good afternoon, everyone. Welcome to our first quarter results conference call. With me today is Wayne Fortun, our CEO; Kathleen Skarvan, President of our Disk Drive Components Division; Rick Penn, President of our BioMeasurement Division; Dave Radloff, our Vice President of Corporate Finance; and Chuck Ives, our Investor Relations Manager.

As a reminder, we will be providing forward-looking information on demand for and shipments of the company's products; demand for design and product development; production capacity and capabilities, capital expenditures; worldwide disk drive and suspension assembly demand and shipments; average selling prices; our BioMeasurement Division revenue; product commercialization and adoption; manufacturing consolidation and efficiencies, cost reductions, asset impairment charges, work force reductions and severance costs, results of operations and operating performance and cash management. These forward-looking statements involve risks and uncertainties as they are based on our current expectations.

Our actual results may 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. That announcement is now posted on our website at www.htch.com as well.

And I'll turn the call over for Wayne, for his opening remarks.

Wayne Fortun

Thanks, John. As all of you certainly realized the market and economic conditions facing us today are very difficult. Although the last few months have been very painful for a period for us, we’re confident that the measures we’re taking to strengthen the business will enable us to ride out the current challenges.

In our fiscal 2009 first quarter, worldwide demand for disk drives and suspension assembly weakened during what is normally a seasonally stronger part of the year. Demand declined sharply in the second half of the quarter and the reduced volume coupled with our restructuring charges resulted in a net loss that we recorded.

In light of the weaker demand outlook for 2009 and economic conditions that remain uncertain at best, we have taken a number of actions to reduce cost and strengthen our cash position. These actions included consolidating certain operations to lower our fixed cost and improve efficiency and asset utilization.

As a result of all of our restructuring actions, we are reducing our work force by nearly 1700 positions companywide or over 35% of the total workforce we had at the end of December.

We also reduced salaries by 5% across the board and shutdown for a two-week period from December 21 to January 4. In addition to these measures, we also took action to strengthen our cash position and improve our debt structure.

We obtained a loan against our auction-rate securities portfolio through a settlement agreement with UBS, under which we accessed a $59.5 million line of credit. We also repurchased nearly $60 million of our convertible debt at a 20% discount generating a gain of $12 million.

As a result of the actions we have taken, we are confident that we can meet our debt obligations, continue to make strategic investments as needed and preserve our leadership technology, quality and speed the volume.

All together, we expect our restructuring actions to generate a $110 million to $125 million in annualized cost savings, which will help us offset the year-over-year revenue decline which we expect within 2009.

I will turn the call over to Kathleen now for a review of the Disk Drive Components division's first quarter performance.

Kathleen Skarvan

Thanks, Wayne. During our fiscal 2009 first quarter we shipped 155 million suspension assemblies, down 26% from $209 million in the preceding quarter and down 27% from $213 million in last year's first quarter. Compared to the preceding quarter and last year's first quarter, shipments declined across all segments, including 3.5 inch ATA mobile and enterprise.

As a percent of total shipments, suspension assembly for mobile applications accounted for about 46% of first quarter shipments flat with the preceding quarter.

Shipments for 3.5 inch ATA applications declined to 29% from 32% in the preceding quarter, while shipments for enterprise applications increased to about 25% of our volume from 22% in the preceding quarter.

Despite the decline in overall quarterly volume, we estimate that our market share was about flat compared to the preceding quarter. Weak demand in the fiscal 2009 first quarter is primarily the result of a decline in disk drive shipments and a reduction of inventories in the supply chain.

A more aggressive pricing environment has led to a year-over-year decline in our average selling price that is larger than our historical pricing decline. As a result, our average selling price in the fiscal 2009 first quarter was $0.76, down $0.02 from the preceding quarter and down $0.04 from the last year’s quarter.

Regarding TSA+, we continue to make solid progress. We produced more than 8 million TSA+ suspension assemblies in the first quarter, up from about 5 million in the preceding quarter.

Additionally, we achieved a run rate of 1.2 million flexures per week during the month of December. These increases reflect the continuous improvements that we made on the process, reliability, yield and output of our TSA+ volume production line.

As a result of weak demand, however, our TSA+ shipments declined to about 4.5 million in the first quarter from 5 million in the preceding quarter and the majority of these shipments were for one customer program.

The weakened demand outlook also caused this customer to push out a second TSA+ program that we were in the process of qualifying.

At currently anticipated levels of demand, our existing TSA+ volume line should provide sufficient capacity for our customers needs in fiscal year 2009.

As Wayne mentioned, we are consolidating certain functions across the Disk Drive Components Division to achieve improvement and efficiency in factory utilization and to reduce operating cost.

We are discontinuing operations at our Sioux Fall plant and consolidating the assembly operations into Eau Claire and Hutchinson site.

Additionally, we are consolidating (total Hutch) operations into our Hutchison site, and (Trace) operations into our Eau Claire site.

Overall, this realignment of operations will reduce our production cost and improve our overall operating efficiency, without compromising our ability to respond quickly to customer requirement.

Looking ahead, visibility regarding future demand is currently very limited. Worldwide shipments of disk drives are expected to decline further in the quarter, ending in March, which is typically a seasonally slower period for the industry.

As the result, demand for suspension assemblies is likely to remain weak and pricing will continue to be aggressive.

Based on our current assessment of demand trends and our positions on particular customer program, we expect to add market share in the 3.5 inch ATA segment over the course of the year, but lose some share in the mobile and enterprise segment.

Later in the call, John will speak to the cost saving, that we expect to achieve as a result of our restructuring action.

I’ll turn the call over to Rick now for an update on our BioMeasurement Division.

Richard Penn

Thanks, Kathleen. In the BioMeasurement Division, we continue to expand the number of customers and the base of installed monitors for InSpectra StO2 system.

During the quarter, the number of monitors placed at customers sites nearly doubled compared with the number placed in the preceding quarter. Despite this increase, Division net sales for the first quarter totaled $265,000 compared with $445,000 in the preceding quarter.

The primary reason for this sequential revenue decline is that the majority of our first quarter monitor placements were on a pay-per-use basis rather than outright sales. Under current business and economic conditions the lower capital outlay required under the pay-per-use option may continue to be more attractive our customers and outright monitor purchases.

Well that could constraint the revenue short-term, expanded immune with the installed base of monitors to create ongoing demand for single use sensors is the real longer term win.

As part of our marketing strategy, we continue working to advance the clinicians understanding of the benefits of InSpectra StO2 as a guide to managing treatment in a wide range of critical care settings

These benefits are both clinical and economic and include benefits like more effective use of fluids and blood products, avoidance of invasive procedures and the associated risks of infections and other complications of those invasive procedures, shorter intensive care unit and hospital stays and overall increased staff productivity.

So while we continue to expand our customer base in the trauma market, our efforts to broaden the clinical use of InSpectra to new applications are beginning to produce results.

Currently more than half of the prospective customers evaluating our device are considering it for use in emergency medicine, intensive care or operating room applications. These applications have high patient volume in the trauma market and will generate strong sensor sales in the future.

Fiscal 2009, we expect net sales for the Division to reach $3 million to $5 million and we expect that this revenue growth coupled with cost savings from our restructuring action will reduce the Division's operating loss this year.

I will turn the call over to John now for a recap of our first quarter financial results.

John Ingleman

Thanks, Rick. As we reported, fiscal 2009 first quarter had a total revenue of $119.7 million, down 27% from the preceding quarter and 31% from last year's first quarter.

Revenue percentages for our top customers in the quarter were as follows; SAE TDK 36%; Western Digital 32%; Seagate 25%; Fujitsu 5%; and Hitachi 1%.

The decline in the fiscal 2009 first quarter net sales reduced our ability to cover fixed cost and resulted in a gross margin of zero compared with a 10% in the preceding quarter and 19% last year in the first quarter.

As Kathleen mentioned, due to improvements in the process, reliability, yields and output of our TSA+ volume line, we reduced the gross profit burden of wrapping TSA+ process to about $9.5 million in the first quarter and that’s down from $11 million in the preceding quarter.

Finished goods inventory was flat compared to the preceding quarter, but due to expected lower demand in the March quarter, our days on hand increased to approximately six weeks at the end of the quarter.

Depreciation and amortization expense in the first quarter was $24 million compared with $28 million in the preceding quarter and last year's first quarter.

R&D expenses in the first quarter were $8.9 million or 7% of net sales that was down from $9.3 million in the preceding quarter and $10.4 million in last year's first quarter.

SG&A expenses for fiscal 2009’s first quarter totaled $16.4 million, down $2.3 million from the preceding quarter and down $2 million from last year's first quarter.

Severance cost related to the elimination of approximately 1,380 positions totaled $19.5 million. We also recorded a non-cash asset impairment charges of $32.3 million in the first quarter related to manufacturing equipment in our Disk Drive Components division's assembly and component operations.

Subsequent to the end of the third quarter, we announced that we were closing our assembly operations in Sioux Fall, South Dakota and reduced the work force in our components operation in Eau Claire, Wisconsin.

As a result, we estimate that our fiscal 2009 second quarter financial results will include $10 million to $18 million in asset impairment charges, severance charges and other cost related to closing the Sioux Fall facility and the elimination of approximately a 100 positions at our Eau Claire facility.

Turning back to our fiscal 2009 first quarter results, our operating loss totaled $77 million compared with $10.5 million loss in the preceding quarter and an operating profit of about $2 million in last year’s first quarter.

Included in the overall operating loss was a $6.6 million operating loss in the BioMeasurement Division that compared with the $6.1 million loss in the preceding quarter and $5.2 million in last year’s first quarter.

Beginning in fiscal 2009, our corporate costs are being allocated to each division, excluding this new allocations, the BioMeasurement Division’s operating loss would have declined $500,000 sequentially despite a quarter-over-quarter decline in revenue.

Interest expense for the first quarter was $2.7 million compared with $2.9 million in the preceding quarter and about $3 million in last year’s first quarter.

Interest income in the first quarter was $1.3 million that compares with $1.2 million in the preceding quarter and $4.3 million in last year's first quarter.

Other income in the first quarter was $2.7 million and included a $2.4 million net gain related to the valuation of our auction-rate securities portfolio. That net gain consists of two components, which I will now explain further.

As explained in our first quarter results release and our 8-K filed last month, we entered into a settlement agreement to provide liquidity for the auction-rate security portfolio that we hold with UBS affiliates.

As part of that settlement we accepted a rights offering, which allows us to require UBS to repurchase at par value all the auction-rate securities that we hold with UBS anytime between June 30, 2010 and July 2, 2012. As a result, we recorded a benefit of $8.6 million related to this rights offering, that’s the first component of the net gain.

At the end of the first quarter, the estimated fair value of our auction-rate securities portfolio was reduced to approximately $86 million, which resulted in an other-than-temporary loss of $6.2 million during our first quarter. This loss combined with the $8.6 million gain that I mentioned previously results in the $2.6 million net gain.

As Wayne mentioned, we repurchased about $59.9 million par value of our 2.25% convertibles subordinated notes due in March 2010 at a 20% discount generating a gain of $12.2 million. With this repurchase, the amount of convertible debt that is due in March of 2010 has been reduced to just over $90 million.

Our income tax for the quarter was primarily related to foreign taxes and amounted to $265,000.

Our net loss for the quarter was $64.1 million or $2.79 per share. This includes the asset impairment and severance charges noted previously, as well as a $12.2 million gain on the convertible notes repurchased and a $2.4 million gain related to valuation of our auction-rate security portfolio.

Excluding all of these items, our net loss for fiscal 2009 first quarter would have totaled $26.8 million or $1.17 per share. That’s a loss.

Cash generated from operations in the fiscal 2009 first quarter totaled $33.6 million including $35.2 million of cash generated from changes in operating assets and liabilities. Capital spending totaled $11.8 million resulting in a free cash flow of $21.8 million.

Our cash and investment balances increased from $263 million at the end of fiscal 2008 to $299 million at the end of our first quarter. This includes $95 million of auction-rate securities that are classified as long-term investments.

Under the previously mentioned settlement with UBS, we accessed $59.5 million of line of credit that will be treated as a no-net-cost secured only by auction-rate securities held by UBS, that’s a no-net-cost loan.

UBS may demand payment of the borrowings under this credit line only if it can provide a replacement credit facility on substantially the same terms or if it repurchases all of the pledged auction-rate securities at par.

We did not repurchase any common shares during the quarter. Our share count at the end of the first quarter is approximately $23 million shares and that results in a book value of $16.29 per share.

Turning now to our outlook, for our Disk Drive Components Division as Kathleen explained, we have little visibility into the future demand right now. In the short-term, demand is likely to remain weak and pricing under pressure, given the expectation that shipments of disk drives will further decline in the quarter ending in March.

Our restructuring and cost reduction actions will help offset the expected revenue declines in 2009. We believe the actions we have taken to consolidate operations and reduce fixed and variable costs will generate in the range of a $110 million to $125 million of annualized cost saving.

The savings are expected to be spread across the P&L as follows. A little more than 80% of the savings will be in the cost of goods sold, approximately 10% to savings in R&D and the remainder in SG&A.

Of the savings and cost to good sold, approximately two-thirds of the savings are reductions of fixed costs, the remaining one-third lowering our variable cost.

As a result, our quarterly fixed cost and cost of goods sold have been reduced to approximately $60 million from our fiscal 2009 second quarter and $50 million per quarter thereafter, that’s down from about $70 million previously.

We now estimate that fiscal 2009 R&D expenses will be about $30 million. SG&A expenses are expected to be $60 million. Our fiscal 2009 effective tax rate is expected to be approximately zero.

Taking all this guidance into consideration, we estimate that we will reduce our quarterly break-even to around $125 million, once all the announced restructuring actions have been completed.

In order to estimate free cash flow you should combine your estimate of net income with the following guidance; depreciation and amortization expense is now expected to be about $90 million that’s down from prior estimate of $100 million and also down from an actual last year of a $112 million.

Non-cash asset impairment charges should also be added back and the severance charges will be paid out over the course of the second and third fiscal quarters.

Finally, our planned capital spending for fiscal 2009 has been reduced from $60 million to $40 million and we are looking for ways to reduce that further.

Lastly, I'd like to comment further on the strengthened cash position. We modeled scenarios that assumed various levels of demand decreases and enter these stress scenarios, we remain confident in our ability to meet our debt obligations and maintain a healthy cash balance to effectively run a business and make certain strategic investments.

I'll turn the call over to Wayne for closing remarks.

Wayne Fortun

Thanks, John. Needless to say we are facing some of the toughest business conditions we've ever encountered in our company’s history.

We responded by significantly restructuring our business and aggressively cutting cost. We have made these changes without compromising our key competitive strength including our leadership and technology and quality and our ability to respond quickly to our customers needs with innovative designs and features then we can quickly transfer from development to volume production.

Most important, given the current environment, we are pleased with the strength of our cash position. As a result, we are confident we can meet our debt obligations; invest if needed in this strategic priorities; and be well positioned to improve our financial performance when the recovery in business conditions materializes.

Mitch, we’ll now open the call up for questions.

Question-And-Answer Session

Operator

(Operator Instructions). And our first question comes from Ingrid Aja with Bank of America Merrill Lynch. Please go ahead.

Ingrid Aja - Merrill Lynch

Hi, good afternoon. I was wondering if you could delve into the break-even number a little bit more. You said it would get down to $125 million once all actions are completed. Where are you this quarter? And does it just gradually go down to there?

John Ingleman

Well, Ingrid, this is John Ingleman. Do you mean the quarter that we’re in or the quarter that we just exited?

Ingrid Aja - Merrill Lynch

The quarter that we’re in.

John Ingleman

Yes, well, we’re not going to see all of those. We won't see all of those actions taking this quarter, so you probably won't see that kind of break-even until we get into our fiscal third quarter or the fourth quarter.

Ingrid Aja - Merrill Lynch

Okay, great. So it’s going to be like a gradual decline reaching there?

John Ingleman

Well, certainly gradual over to this quarter I think that...

Ingrid Aja - Merrill Lynch

The next quarter.

John Ingleman

The next quarter it won't be quite as gradual and we’ll be getting there and we should be there clearly by the end of the fiscal year.

Ingrid Aja - Merrill Lynch

Okay, great, thanks. And then I just wanted to discuss the market share. Seagate indicated that TAM was down about 20% quarter-over-quarter, but your units were down more like 26%, so I was just wondering if you could give some more color on where that difference is falling from? Is that from the inventory reduction that you saw in your customers?

Kathleen Skarvan

Ingrid, this is Kathleen. Certainly we think that is the reason why our demand was down more than what you saw from a drive standpoint, and if you see Seagate as an example, again, I would like to (inaudible).

Ingrid Aja - Merrill Lynch

So what do the new choices look like now for your customers?

Kathleen Skarvan

I've got no other word. We don’t have a lot of visibility to that, really, I couldn’t say. I don’t think they are where they want them to be and I can maybe say it that way, but again, we have so little visibility.

Ingrid Aja - Merrill Lynch

Okay. And then I guess, the (inaudible), Seagate is looking for about a 10% decline. Is that within your expectations as well?

Kathleen Skarvan

I think we are at this point, since we have so little visibility, and there is so much uncertainty even with the drive, forecast will be for 2009 that we would plan for a worldwide suspension volume, commensurate with what we just shared year-over-year, if you do that comparison with this quarter. So we’re saying it’s 27% - 28%, if you look at the other year-over-year.

Ingrid Aja - Merrill Lynch

So you'll maintain that kind of year-over-year decline?

Kathleen Skarvan

That’s what we, to the best of our visibility, would suggest right now.

Ingrid Aja - Merrill Lynch

Okay, great. And then I just wanted to clarify on the TSA+, that I understood that correctly. What was the exact number for this year, this quarter, I mean?

Kathleen Skarvan

We produced 8 million and shipped 4.5 million.

Ingrid Aja - Merrill Lynch

Okay, you produced 8 million and shipped 4.5. Okay, great, thank you.

Kathleen Skarvan

Okay. Thank you.

Operator

And our next question comes from Rich Kugele with Needham & Company. Go ahead please.

Rich Kugele - Needham & Company

Thank you. And thank you for the extra clarity on many of those issues that we usually wind up asking about or hearing about.

In terms of the restructuring, can you give us a sense on the total cash outlay including the things that are announced in the recent days?

Wayne Fortun

$25 million totaled, if you looked at the severance components.

Rich Kugele - Needham & Company

Okay. And you were saying in the cash flow calculation that you should think about that more in Q2, Q3?

Wayne Fortun

That’s correct.

Rich Kugele - Needham & Company

And when you look at your total capacity per week, does this reduce that or is it just being more efficient?

Wayne Fortun

Well, Rich, to the extent that we don’t have the people and we don’t have the units demand, but certainly the capacity has come down to the extent that we still have the equipment. So we have assembling capacity that’s probably not significantly different than we had before, but we have written off a good portion of those assets and we are staffing the equipment.

So it's sort of – what you want to call capacity is where I would go.

Unidentified Company Speaker

I suppose the one thing I'd add Rich, is that we are dissembling or cannibalizing the equipment. It still exists and it could be started up if we saw demand rise substantially.

Rich Kugele - Needham & Company

Okay, and then, Kathleen. As you look at your programs over the balance of fiscal 2009, can you give us a sense of how many of those programs are second sourced, where you’re either primary or secondary?

Kathleen Skarvan

I’m probably not going to comment on that specifically, Rich. I don’t think we see a major shift in that compared to what we’ve seen in the past couple of years. For example, interestingly now all the customers are taking a look at their roadmaps right now and they are in a bit of flux themselves on how they’re going to proceed with certain programs and capacity points. So we might have better visibility on that at least towards the end of this quarter, but again, we’re not seeing a major shift.

Rich Kugele - Needham & Company

So the issues that you’re talking about in terms of losing potential share on notebook and enterprise are not because of situations where you’re second sourced per se, but actual new designs that you’re just not on.

Kathleen Skarvan

That is, for the most part, correct.

Rich Kugele - Needham & Company

Okay. And how about the fallout from Fujitsu/Toshiba, if any?

Kathleen Skarvan

Well, we have one of our lowest share positions of any OEM with Fujitsu; we are primary and almost 100% done there, enterprise and no mobile share. And with Toshiba we enjoyed a very high share on their mobile program, so when you look at the combination of a Fujitsu/Toshiba, it's being potentially not negative for us by any means. We think there could be the potential for us; to maybe even be an advantage. Even if that combination loses some shares, it still could be a net gain for us.

Rich Kugele - Needham & Company

Okay. And the last question is on covenants. Can you just remind us all what debt instruments actually have covenants and what those are?

John Ingleman

Rich, the only debt instrument that has any covenants associated with, it is our revolving line of credit and it is primarily EBITDA type covenants and currently we have nothing drawn against that revolver.

Rich Kugele - Needham & Company

Okay, thank you.

Operator

And our next question comes from Sherri Scribner with Deutsche Bank. Go ahead please.

Sherri Scribner - Deutsche Bank

Hi, thank you. I was just curious what you are seeing in terms of the number of heads per drive. In the past, you've commented on that, and I was wondering if you are seeing lower component accounts for drive now?

Kathleen Skarvan

Hi, Sherri. We’re not going to throw out a specific number here because that is difficult to forecast at this point either. What we believe is happening is, there seems to be a trend toward lower cost drives and so one can surmise that that could be happening, but at this point, it's just a little unclear yet where that’s going to go.

Sherri Scribner - Deutsche Bank

Would you sense that component accounts is going down?

Kathleen Skarvan

Yes.

Sherri Scribner - Deutsche Bank

Okay. And then in terms of the balance sheet, clearly you guys reduced the trade receivables pretty significantly. Inventory was essentially flat and then you took the accounts payable down, just trying to model it out. In 2009, you gave some details, John, but would you expect the inventory levels to come down and should we model trade receivables and account receivables at similar level for this quarter?

John Ingleman

Yes. I think that would be fair to do, Sherri. We ought to be able to drive inventory down and we’re working on that and the receivable level obviously will depend on what we see for revenue, but that’s probably a good place to start.

Sherri Scribner - Deutsche Bank

Okay, so bringing down the inventory and then leaving receivable and payables. And did those come down so significantly because of the lower demand?

John Ingleman

It was partially lower demand and at we ended up at a relatively high level at the end of the fiscal year that’s sort of slipped over into the first quarter.

Sherri Scribner – Deutsche Bank Securities

For the accounts receivable?

John Ingleman

Yes.

Sherri Scribner – Deutsche Bank Securities

Okay, and then I know you guys have announced a 5% pay cut across the board, which I think is something that most people are doing right now, but I am just curious in terms of upper management, it's kind of a hard question to ask, but a lot of other companies have had senior management take pretty significant pay cuts Seagate and Western Digital. Have you guys considered something like that at this point?

Wayne Fortun

Well, so far and what we have done, Sherri, is now 10% that we have done, because we did a 5% earlier for the exec group. And then certainly there is no bonus paid out last year, no bonus that we have already recognized payout this year and we have always been fairly conservative in our market positioning as to how we pay and so we've talked about it at fair length with our compensation committee to make certain that we are being prudent in how we are paying and yet not foolish in cutting it so low that we entice someone to decide that with current options as they are valued, time to move on.

Sherri Scribner – Deutsche Bank Securities

Okay, I appreciate the comments. Thank you.

Operator

Okay. Thank you. And our next question comes from Christian Schwab with Craig-Hallum Capital Group. Go ahead please.

Christian Schwab - Craig-Hallum Capital Group

Great. Thank you. John, can you tell me what the BioMeasurement loss was again, I missed that?

John Ingleman

$6.6 million.

Christian Schwab - Craig-Hallum Capital Group

What do you guys believe you’re market share ended at? You said you didn’t lose any market share. What do you believe your worldwide market share is?

Kathleen Skarvan

We would describe that is around the 40%, Christian.

Christian Schwab - Craig-Hallum Capital Group

If we make our own assumptions on unit demand for mobile, desktop, and enterprise on an absolute basis, given desktop units where you’re going to add market, let me just get to that. We exit this year, is your market share is going to be at that level or will it be lower? You see where I am going?

Kathleen Skarvan

Yes, we understand the question, Christian. There is always the potential for it to be a little lower or actually be higher again. It really is going to depend on what happens with Toshiba and Fujitsu over the next few months. That again could be a look in our favor, so I want to be cautious about making predictions.

Wayne Fortun

I’ll state it somewhat differently. Currently we don’t have any indicators that would cause us to draw conclusions on either side, so call it flat and then we’re just staying very alert with the level of uncertainty in the demand and the way that things can shift about with the kind of pricing that could take place at the drive level.

And I’m talking about drives, which means mix could move in one direction or another. We’re watching it really carefully, Christian, but at this time we’d say, we have no indicators that have us anticipating a move in either direction.

Christian Schwab - Craig-Hallum Capital Group

That’s fair. On the break-even, John, at $125 million, what do you believe your approximate gross margins will be at that level? I could kind of do the math, make sure I’m doing it correctly.

John Ingleman

I’m not sure that I’m not doing the math real quickly here. I mean, at break-even it won’t be very acceptable, let's put it that way.

Christian Schwab - Craig-Hallum Capital Group

Okay. So do you think the worst is finally behind you? I mean, we’ve made massive cuts to right size the business to create demand. Your customers are buying less than they are shipping and their customers are buying less than they are shipping, so at some point, unless the world has another huge significant lag down, we’ll kind of see a snap back. So you would kind of assume I think you mentioned it earlier, but you’d hope to be operating at break-even results in Q3, Q4 of this year, did I hear that correctly?

Wayne Fortun

I don’t think that’s what I said, somebody just asked me, when we would get full benefit from the cost reductions that we have taken and I said, we would see that in Q3 and Q4.

Christian Schwab - Craig-Hallum Capital Group

Okay, so endow as far as saying break-even results in the back half of this year?

Wayne Fortun

I would ask you what’s demand, the question you are asking, Christian, about, is the worst over and what we expect well. We think that our view is that you describe it well. We’re seeing our order rate lower than what is actually the drive sales, because they are shrinking inventories.

They are going to get those inventories down to some level that we’re likely to see if the demand holds even flat. We should see an uptick suspension demand and we don’t know and we’re not trying to predict. We’re trying to be very, very conservative in all of the cost cutting we took. We thought that it gives us even a further down side breathing room and we are prepared and flexible to respond to whatever it is we witness as the demand comes through.

Christian Schwab - Craig-Hallum Capital Group

Great. Thank you, guys.

Operator

(Operator Instructions). And your next question comes from (Jason Bernstein with Quattro). Go ahead please.

Unidentified Analyst

I have a question regarding the balance sheet. You guys bought back in 80s, put the rationale when you have the other converts trading in the 30s?

John Ingleman

Well, this is John Ingleman. Primarily the first ones, the 80s, what we bought back at 80% mature the passes and that’s the one I am starting at right now.

Unidentified Analyst

And separately, are there any plans to buy back any more debt right now, given the increased liquidity?

John Ingleman

We will certainly look at whatever makes the most sense and weigh that against what the economic conditions are and we'll do whatever, again make sense.

Unidentified Analyst

Okay and on the BioMeasurement Division. It’s a $6 million loss and you guys are guiding the $3 million to $5 million in revenue for the year. I guess if we just do the back math there, we are talking about $25 million in losses. At what point you right sized the disks, when do they make sense to think about BioMeasurement?

John Ingleman

We have already done some things to right size BioMeasurement, and we reduced expenditures there and I think the math is, I think you are a little high on loss for the year. If we are in the $3 million to $5 million we will probably have about $20 million loss, maybe little less.

Unidentified Analyst

Is there any way that we can put a valuation on that business right now? Is there any comps to point to or anything where we can figure out how much it's worth?

Wayne Fortun

I don’t have any good counsel for you. I can only cite that if you were to look at other medical companies that were perhaps like in a startup version or entering into a market place, the opportunity for this is very large.

We currently don’t have any competition. This operates at the kind of classic medical device margins and when I say very large, we have been getting more and more evidence that would say that it is in the $5 billion a year kind of range and we are making steady progress with a increasing revenue growth throughout the year with the low start that we have in this first quarter and we’re still saying 3 to 5, it gives you some sense of what we are likely to end at.

And so if that all taken into consideration, if you were looking at a startup medical company with that kind of revenue potential and slow growth, you could see what they enter into the market for in terms of valuation and that might help.

Unidentified Analyst

Okay, thank you.

Operator

(Operator Instructions). Okay and we have no more audio questions at this time.

Operator

Okay and we have no more audio questions at this time.

John Ingleman

Thank you, Mitch. I’ll mix a couple of closing comments. The actions we have taken to restructure our business have been difficult and we are deeply grateful to the hardworking contributions of those colleagues whose positions we had to eliminate in our restructuring efforts.

We greatly appreciate the dedication and commitment of the people continuing with the company and we are confident with our expected cost savings and strengthening of our cash position, which will enable us to effectively manage through the current market and economic conditions. Thank you all for calling in today. That concludes our call.

Operator

Ladies and Gentlemen, this concludes the Hutchinson Technology first quarter results conference call. You may now disconnect and thank you for using AT&T conferencing.

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