Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Hutchinson Technology Incorporated (NASDAQ:HTCH)

F2Q09 Earnings Call

April 28, 2009; 5:00 pm ET

Executives

Wayne Fortun - Chief Executive Officer

John Ingleman - Chief Financial Officer

Kathleen Skarvan - President, Disk Drive Components Division

Rick Penn - President BioMeasurement Division

Dave Radloff - Vice President of Corporate Finance

Chuck Ives - Investor Relations Manager

Analysts

Richard Kugele - Needham & Company

Sherri Scribner - Deutsche Bank

Christian Schwab - Craig-Hallum Capital Group

Sherri Scribner – Deutsche Bank

Bruce Newberg - Jay Goldman & Co.

Operator

Good afternoon ladies and gentlemen. Thank you for standing by. Welcome to the Hutchinson Technology second 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, April 28, 2009.

I would now like to turn the conference over to Mr. John Ingleman, CFO. Please go ahead sir.

John Ingleman

Good afternoon, everyone. Welcome to our second 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 Corporate Controller; and Chuck Ives, our Investor Relations Manager.

As a reminder, we will be providing forward-looking information on demand for shipments of the company’s products, production capacity and capability, capital expenditures, worldwide disk drive and suspension assembly demand and shipments; average selling price; manufacturing consolidation and efficiency, product cost, cost reductions, asset impairment charges, workforce reductions and severance costs, our BioMeasurement division’s revenue, product commercialization and adoption, the company’s results of operations, operating performance and debt obligations in cash management.

These forward-looking statements involve risks and uncertainties that 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 second quarter results announcement just after the market closed this afternoon. The announcement is now posted on our website at www.htch.com.

I’ll turn the call over for Wayne for his opening remarks.

Wayne Fortun

Thanks, John. The fiscal 2009 second quarter was another difficult period for us. Demand was weak and the result in decline in net sales reduced our ability to cover our fixed cost. This lack of fixed cost coverage combined with the asset impairment charges, severance and other costs we are incurring as we structure the business resulted in the net loss for the quarter.

As we announced on April 3, we’ve been notified that Seagate Technology will be phasing out their procurement of suspension assemblies from us over the next 18 to 24 months. We currently expect shipments to Seagate to decline to less than 10% of our total suspension assembly volume in our fiscal 2009 fourth quarter with the remaining volume phased out subsequently.

To adjust to the challenging market conditions we are taking additional measures to reduce cost and improve cash flow. These actions will help us to meet our current provision of our debt obligations and maintain the flexibility to make strategic investments as needed. The additional actions include the elimination of an approximately 300 additional positions, by the end of the June quarter we will have reduced our total employment to approximately 2,500 which equates to about a 45% reduction since the end of fiscal year 2008.

We estimate that these additional restructuring and cost reduction actions will result in another $50 million in annualized cost savings, together with actions we’ve already taken this year we estimate that we have reduced our cost structure by approximately $175 million on an annualized basis.

The full benefit of these cost reductions will be realized in our fiscal 2009 fourth quarter. This will position the company to generate positive free cash flow at a quarterly revenue of $85 million to $90 million, with other actions we are taking to manage our balance sheet and conserve cash and with $293 million in cash and investments at the end of the second quarter, we believe we can meet our current portion of our debt obligations and continue to make select investments.

I’ll turn the call over to Kathleen now for the review of the Disk Drive Components Division’s second quarter performance.

Kathleen Skarvan

Thanks, Wayne. During our fiscal 2009 second quarter we shipped about 107 suspension assemblies, down 31% from 155 in the preceding quarter, and down 40% from 179 million in last year’s second quarter. Compared to the preceding quarter, shipments declined in the 2.5-inch ATA, 1.8-inch ATA and enterprise segment, but increased in the 3.5-inch ATA segment.

We believe that this sequential quarter decline in overall volume resulted primarily from three factors. First, overall lower demand for disk drive. Second, lower disk drive production as the drive makers managed down inventory; and third a modest loss of overall market share.

As a percent of total shipments, suspension assemblies for mobile applications accounted for about 30% of second quarter shipments, down from 46% in the preceding quarter and shipments for enterprise applications declined to about 21% of our volume from 25% in the preceding quarter. Shipments for 3.5-inch ATA applications increased to 49% from 29%.

This shift in product mix was primarily responsible for the decline in our average selling price to $0.71 from $0.76 in the preceding quarter. If our product mix had been comparable to the preceding quarter, average selling price in the second quarter would have been nearly flat. We continue to make good progress in ramping up volume production of our TSA+ suspension lowering unit cost and reducing the gross profit burden of TSA+ flexure production.

During the second quarter, we shifted about $10 million TSA+ suspension, up from $4.5 million in the preceding quarter. Over the past six months as we have increased our TSA+ volumes and made improvements in process reliability and yields, we have reduced the gross profit burden of TSA+ flexure production from $11 million in the fiscal 2008 fourth quarter to $9 million in the fiscal 2009 first quarter to $7.8 million in our second quarter. We estimate we are on course to eliminate this gross profit impact by the second half of fiscal year 2010.

Compared to current TSA+ flexures manufactured with subtractive processes, additive TSA+ flexures provide superior performance and will ultimately have a lower cost. As part of our restructuring efforts we have been consolidating certain assumptions across the Disk Drive Components Division to achieve improvements in efficiency and factory utilization and to reduce operating costs. We have completed that consolidation of photo-etched operations into our Hutchinson site and Trace operations into our Eau Claire site.

The closure of the assembly operation at our Sioux Falls plant should be complete by the end of June quarter as we consolidate this operation into our Eau Claire and Hutchinson site. With respect to the outlook for the second half of the year we currently expect suspension and assembly shipments for the fiscal third quarter to increase compared with the second quarter and we have experienced some of that increase already in April.

In the fourth quarter the impact of saving our shipments to Seagate will dampen volume as we noted earlier. We’ve had extensive discussions with all of our customers regarding our restructuring efforts. They have been supportive of our efforts, they remain confident in our ability and we expect to have ongoing business with all of them, which is evidenced by currently ramping program with all of them.

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

Richard Penn

Thanks Kathleen. Net sales for the BioMeasurement Division totaled $458,000 in the second quarter, up from $265,000 in the first quarter. Almost all of second quarter sales were to customers who are using the InSpectra StO2 System in clinical applications as apposed to research. This is significant because increased use in clinical applications will generate a higher volume of recurring sensor sales as our system becomes routinely used to manage treatment in various critical care setting.

We added 19 new customers in the quarter, our total of 74 customers now worldwide currently represent an installed base of more than 140 monitors. The second quarter growth resulted from increased direct sales in Europe and the United States and sales through distributors in parts of Europe and the Middle East. Some of our sales in Europe were purchases made under the agreement we signed with a group of 37 hospitals in France.

We are encouraged by the early results we are seeing from our distributor relationships, expected sales through distributors can help us accelerate growth in the adoption of InSpectra StO2. We have continued to expand our customer base beyond trauma applications and many of our prospective customers are evaluating our device for possible use in emergency transport, emergency room and intensive care applications.

These applications have higher patient volumes in trauma and therefore should generate strong recurring sensor sense. With the growth trajectory that we expect for the next six months we believe that fiscal 2009 net sales of $3 million to $5 million are within reach for the BioMeasurement Division. Growth and revenue coupled with the benefits of our cost reductions within the division should continue to narrow the division’s operating losses.

I’ll turn the call over to John now for a recap of our second quarter financial results.

John Ingleman

Thanks Rick. Net sales for the fiscal 2009 second quarter totaled $79 million, down 34% for the preceding quarter and down 45% from last year’s second quarter. Revenue percentages for our top customers in the quarter were as follows; Western Digital 40%; SAE TDK 33%; Seagate 19%; Fujitsu 4%; and Hitachi 2%.

The decline in our fiscal 2009 second quarter net sales reduced our ability to cover our fixed cost and resulted in a gross loss of $11.8 million or 15%, this compares with a zero gross margin in the preceding quarter and a gross profit of $18.9 million or 13% in the year ago second quarter.

As Kathleen mentioned, due to volume growth and improvements in the process, reliability and yields of our TSA line, we reduced the gross profit burden of TSA+ flexures production to about $7.8 million from $9.5 million in the preceding quarter. Depreciation and amortization expense in the second quarter was $21 million compared with $24 million in the preceding quarter and $28 million in last year’s second quarter.

R&D expenses were $7.5 million, down from $8.9 million in the preceding quarter and $10.3 million in last year’s second quarter. SG&A expenses totaled $14.9 million, down from $16.4 million in the preceding quarter and $18.4 million in last year’s second quarter. Severance and other costs related primarily to the closure of our Sioux Falls assembly operation totaled $4.8 million.

During the quarter we also recorded non-cash asset impairment charges of $18.7 million related to manufacturing and support equipment in our assembly and components operations. Our operating loss totaled $57.6 million compared to $77.2 million in the preceding quarter and $9.8 million in last year’s second quarter.

Included in the overall operating loss for 2009 second quarter was a $6.2 million operating loss in the BioMeasurement Division and that compared to a $6.6 million loss in the preceding quarter. Interest expense for the second quarter was $3 million that compares to $2.7 million in the preceding quarter and $2.9 million in last year’s second quarter. Interest income was $900,000 compared to $1.3 million in the preceding quarter and $3.6 million in the 2008 second quarter.

We recorded a tax benefit in the quarter of $200,000. Our net loss for the second quarter was $57.7 million or $2.49 a share. The net loss included the previously mentioned asset impairment, severance and other costs. Excluding these items, our net loss would have been $34.2 million or $1.48 per share loss. Including severance payments of approximately $12 million, cash used by operations in the fiscal 2009 second quarter totaled $4 million that compares with cash generated by operations of $34 million in the preceding quarter and $39 million in last year’s second quarter.

Our capital spending totaled $6 million resulting in a negative free cash flow of $10 million. Our cash and investment balances at the end of the second quarter totaled $293 million, down $6 million from the end of the preceding quarter. This includes $97 million of auction rate securities that are classified as long term investments. We did not purchase any of our convertible subordinated notes or shares of common stock during the quarter. Our share count at the end of the quarter was approximately 23 million, resulting in a book value per share of $13.87.

Turning now to our outlook; as Kathleen explained we expect our suspension assembly shipments to increase in the June quarter and we are already responding to the increased demand in April. In the September quarter the most significant impact of the phase out of shipments to Seagate will be felt. Despite the impact of the phase out, we currently believe that our shipment volumes over the next four quarters will be higher than our shipments in the fiscal 2009 second-quarter.

With respect to selling price; we believe the declines we experienced in the preceding two quarters will moderate. As Wayne mentioned, we are taking additional actions to restructure the company, including eliminating an additional 300 positions. We estimate that these actions will result in severance and asset impairment charges of approximately $25 million in our fiscal 2009 third quarter.

We expect these actions, combined with other restructuring actions we’ve taken this year will reduce our costs on an annualized basis by approximately $175 million compared to our fiscal 2008 costs. These savings are expected to be spread across our P&L as follows. Approximately 75% of the savings will be in cost of goods sold, around 10% will be in R&D and the remaining 15% will be in SG&A. Of the savings in cost of goods sold approximately two third of the savings are a reduction of fixed costs, with the remaining one third lowering our variable costs.

As a result, we estimate that our quarterly fixed costs, in cost of goods sold will be reduced to approximately $50 million in our fiscal 2009 third quarter and $45 million per quarter thereafter. We estimate that fiscal 2009 R&D expenses will be about $30 million. SG&A expenses are now expected to be about $55 million. Our fiscal 2009 effective tax rate is expected to be approximately zero.

Once all of our announced restructuring actions have been completed, we estimate that our breakeven revenue amount will be reduced to approximately $110 million to $115 million on a quarterly basis. In order to estimate our 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 $80 million, down from our prior estimate of $90 million.

Non-cash asset impairment charges should also be added back. Severance charges of $18 million to $20 million will be paid out during the next two quarters with the majority paid out during the fiscal third quarter. Finally, our planned capital spending for fiscal 2009 has further been reduced to a little less than $30 million. As our cost savings become fully realized in our fiscal 2009 fourth quarter, we’ll be in a position to generate positive free cash flow at a quarterly revenue run rate of about $85 million to $90 million.

Using our current forecast of demand and estimates of cost savings, we remain confident in our ability to meet our current portion of our debt obligations and maintain a healthy cash balance to effectively run our business and make certain strategic investments.

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

Wayne Fortun

Thanks, John. The past 12 months have been the most difficult that I can recall in my time with the company. That said I am convinced that we have responded to extremely challenging business conditions with the appropriate focus on what’s urgent without losing sight of what’s important or strategic.

Actions that we have taken to reduce cost, improve cash flow and manage our balance sheet have us well positioned to meet the current portion of our debt obligation. Meanwhile the structural changes we’ve made will benefit our operating efficiency and lower our costs while preserving our ability to respond to customer’s requirements from new suspension assembly design and quick transitions to high volume at industry leading levels of quality and cost.

I’m grateful to the commitment and dedication we are getting from all of our people in this difficult environment. Thanks to them, I believe we will emerge from this time period as a stronger business.

We’ll take our question now, Damien. You can begin pooling for questions please.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Rich Kugele - Needham & Company.

Richard Kugele - Needham & Company

A few questions, I guess first when it comes to the Seagate situation you’re talking about having a little less than I guess less than 10% of unit volume by the fiscal third quarter, correct? With the percentages that you normally give in terms of TDK and Seagate, that’s usually a percentage of revenue, due you think it’s comparable?

Kathleen Skarvan

Rich, it’s Kathleen. First of all I should clarify the fact that 10% of our revenue will be in the fiscal quarter four and I think it’s pretty close, close enough that you can say that it will comparable in revenue also.

Richard Kugele - Needham & Company

From a competitive standpoint, to the best of your knowledge has there been an improvement by NHK and TDK, their ability to manufacture enterprise or is that the piece that is going to take longer to transition and Seagate is just hoping that they figure it out?

Wayne Fortun

This is Wayne speaking; I’ll take it a shy on that. We’ve had good competitors, they are always getting better and I can only judge it by our current share. It’s still very high and so yes those programs last a along time for one thing and some of the older ones are not likely to be re-qualified for someone and so that part of the reason is extends with the other is, we’ll see how low they do and I don’t care to predict this as to how well they do it.

Richard Kugele - Needham & Company

Then before I get on to the suspension overall commentary, just to refresh our memories, is there any history of customers leaving and then coming back and if so how long where they gone and any thoughts there, I thought that there was an example of this?

Kathleen Skarvan

Well, it’s certainly an interesting question Rich and I think Seagate, of course we’ve been very disappointed with the direction that they are taking. We certainly though have had our ups and downs with Seagate in the past and so we’re going to continue to work the relationship.

We are going to continue to dialogue with them and communicate with them. We are going to do everything possible to extend the current programs we have. If there is some history, I’d say that you never count any customer out and there is always the opportunity in the future for that to change I think.

Richard Kugele - Needham & Company

The last question is just, when you’re talking about seeing up units, can you give us a sense of the magnitude that you’re talking about from a percentage perspective? Then when you include the Seagate effect for the September quarter, does that mean then we are talking about flat units?

Wayne Fortun

I think Rich you guys know us well enough that we’re pretty doggone conservative and so if we’re actually saying it’s up, it is not by that the current run rate that we’re seeing would have us comfortable enough it’s not up by a few points. We then say it’s really looks more flat.

So it’s a notable move and we think that with that and of course any visibility nowadays talking about out two quarters or something like that, you have to be very, very cautious about it, but we think that what we are citing is that it’s at the worst flat to where we are after this current quarter and very likely more robust than that and up. The indicators right now have us feeling more confident enough to speak of it as not flat, but up.

Richard Kugele - Needham & Company

Okay, so no comparison to like December levels or September ‘08 levels?

Wayne Fortun

I wouldn’t begin to try to do those kinds of comparisons, because the whole market has shifted so dramatically that I wouldn’t know how to make a judgment.

Operator

Your next question comes from Sherri Scribner - Deutsche Bank.

Sherri Scribner- Deutsche Bank

In terms of restructuring actions that you’ve taken, I am just curious of how much production capacity do you think you’ve taken off-line? In the past we had production capacity per week of somewhere around $21 million to $22 million. Has that number come down significantly? I guess I’m trying to get it through your utilization rates right now.

Kathleen Skarvan

It’s going to vary by area, the assembly versus our component areas, but we’ve been quantifying the equipment for the most part still exists for assembly. So, even though we may have done an asset impairment on that physically exists yet. So, that 20 million to 23 million from an assembly standpoint really has not changed significantly.

Now, when we close Sioux Falls down, there will be physically less space for equipment. So, we’ve been quantifying that somewhere in the 16 million to 18 million per week from an assembly standpoint, I believe and I am kind of looking around the room to see if everybody is nodding here at me or not.

Then in our component areas, it can vary, but I think that’s probably the best way to describe it. Even the photo-etch and trade, that equipment still exists physically. So, even though we’ve done some consolidation there at different area, so, and I think we are not giving out utilization numbers any longer, because there are so many moving parts and it is really not probably as relevant under these current conditions.

Wayne Fortun

I think I’d probably add that part of the reason for asking the question Sherri is what’s the, not just the utilization, but what’s the impact of the depreciation or the lack of utilization and the impact of that depreciation, but with the impairment charges that we’ve taken and I will turn to the rest of the finance guys, but if you look at the amount of impairment charges we’ve taken, it’s to, in essence, resize, primarily assembly is part of our business to what we think is a reasonable forward-looking demand and that has helped us to change what would be that depreciation rate on an ongoing basis.

John Ingleman

That’s accurate. I think that depreciation, you can see the quarter-over-quarter changes we’ve seen and it’s going to come down significantly in the upcoming quarters also. So the depreciation on the manufacturing side is going to be relatively in line with demand that we are seeing out there.

Sherri Scribner - Deutsche Bank

Because if I look at that 16 to 18, I think about that significantly lower than what you’re shipping right now, as I’m thinking about utilization rates and I mean, is your expectation that you would get back to that 16 million to 18 million per week? Because it seems in my mind a little bit difficult to get to.

Kathleen Skarvan

Yes, Sherri, I’m sorry if I gave you the impression that we think that we could get back to that level anytime soon. All I’m saying is that the physical assembly pace that’s available in case for some reason something took off like crazy in the drive industry, we certainly could respond yet, but no, we don’t believe that’s what we’re planning for in the near future.

Wayne Fortun

We’re not staffed for that.

Sherri Scribner - Deutsche Bank

I would assume that, like many of the hard drive companies, you’ve cut significant staff. I mean, obviously you have announced headcount reductions, but the staff cuts are the sort of the bigger piece of it, that you aren’t staff as you said, to produce that many, but if you did see an upswing you would do quick hiring or something like that?

Kathleen Skarvan

That would be accurate Sherri. We are real quick to react to with our direct labor to the actual demand or the run rates that we have and we’ve been doing that all along here over the last year and a half.

Sherri Scribner - Deutsche Bank

Then I just wanted to dig into the TSA+ a little bit. It looks like the absorption of that is coming down and I’m just curious. It looks like it’s about 10%; maybe about 9% of your units right now are TSA+. When do we start to see that ramp to a more significant portion of your business?

At what point does TSA+ become breakeven? Is there a number there or a percentage of your business? Then a clarification, I thought last quarter you said that TSA+ units were $8 million, but it sounds like now its $4.5 million. So, if you could just clarify that.

Wayne Fortun

I will answer your last question first Sherri. Last quarter we produced 8 million and shipped 4.5 million. So that’s the discrepancy between the two numbers there.

Sherri Scribner - Deutsche Bank

Were those just sitting in inventory last quarter?

John Ingleman

Yes.

Kathleen Skarvan

We will start with, how do we see the TSA+ continuing to ramp. We are continuing to run prototypes for additional programs. We don’t have a deep ramp ahead of us for the next three quarters, but it does continue to improve the volume and some of that we are trying to line up too with the way that we are improving the efficiencies and the yields of the process itself Sherri.

So, I believe we’ve talked about once we get to optimizing that we could be in the neighborhood of 3.5 million to 4 million per week TSA+. So that would be that run rate over getting close to 50 million a quarter.

So we don’t have, I don’t want to give a specific outlook on when we think we can get when we see that getting to that kind of level, but also we are producing both our own subtractive, our own additive, and then we are purchasing CIF flexures externally. So there is a kind of a mix there. It’s going to probably be 18 to 24 months before we see that crossover from subtractive to additive.

Sherri Scribner - Deutsche Bank

Would you say 18 to 24 months before you see breakeven in the TSA+?

John Ingleman

No, I think that what we said in the call Sherri was that we would, by the second half of 2010 there would be no more TSA+ burden at the gross profit level and that’s primarily due to volume and increase and improving our process and improving yields. So, a good portion of it’s going to be volume, but as those yields improve and process capability improves, we’ll see this thing not being a burden anymore by the second half of 2010.

Operator

Your next question comes from Christian Schwab - Craig-Hallum Capital Group.

Christian Schwab - Craig-Hallum Capital Group

On the SAE/TDK, the 33% of revenue, can you break that out by customer roughly?

John Ingleman

No, we haven’t done that historically. So, I don’t think we’re going to start now. It is obviously, we are shipping some of that is Samsung, some of is Toshiba. There maybe even some WD in there, but it’s difficult to break it all out.

Christian Schwab - Craig-Hallum Capital Group

How much did you lose in the BioMeasurement Division this quarter?

Rick Penn

$6.2 million.

Christian Schwab - Craig-Hallum Capital Group

Then remind me, how many salespeople do you have?

John Ingleman

We’ve got roughly 30 salespeople, clinical or sales types out in the field.

Christian Schwab - Craig-Hallum Capital Group

What is the ASP of that product again?

John Ingleman

The price of the monitor is about $15,000 Christian and the sensors sell for $150 each.

Christian Schwab - Craig-Hallum Capital Group

What is the sales cycle length for that $15,000 piece of equipment?

John Ingleman

All over the math, to over a year to they buy right out of the chute, even in the evaluation phase. So, the average doesn’t mean much, frankly. I’d say it is generally shortening. We were pretty consistently at nine months to 12 months and I’d say we’re finding that it’s coming down from that.

Christian Schwab - Craig-Hallum Capital Group

On the math just in September quarter, to make sure, I have the right numbers? What is your quarterly run rate going to be on R&D? Is that going to be $7.5 million and then…?

John Ingleman

I think what we said, Christian was that of the expenses we guided to $30 million of R&D for the year and we’ve had $16.3 million year-to-date. So, that would tell you there is going to be $13.7 million over the last half, roughly and you can assume that quarter four will be lower than quarter three.

Christian Schwab - Craig-Hallum Capital Group

When we look at breakeven at $110 million to $115 million a quarter in revenue, if we go back to last year and we strip out Seagate for last fiscal year, you averaged $111 million in revenue per quarter. So, do you think you’ve fired enough people? Because it seems to me that I don’t think you have right size for the environment, you’re losing Seagate.

You have Fujitsu and Toshiba who are merging and are losing share as a result of that as we speak with Seagate looking to be the biggest winner in the near term from our checks. You have Samsung, who hasn’t added capacity in years and have severed relationships with contract manufacturers to produce more that really leaves you almost entirely dependent upon the whims of Western Digital. I don’t get how you return to breakeven?

Wayne Fortun

I will just add to see how the allocations are played out and Seagate does not go to zero immediately, as we’ve said and it’s useful to remember that because the portion of business that remains is a nice piece of business, the enterprise for us. As any projections in this time period, I think that it’s difficult to judge what will those volumes being so forth and we’ll have to see whether or not we’ve done it enough or not, Christy.

John Ingleman

With these cuts, we’ve said it and we’ll say it again, we’re going to have $175 million that has come out of the model compared to 2008 and we’ll end up with being positive free cash flow at $85 million of revenue.

Christian Schwab - Craig-Hallum Capital Group

Right, I understand that and those were not easy decisions by any stretch, but the point is also that you have taken out $175 million, and percentage wise in the quarterly revenue basis you are still a long ways away from breakeven on an earnings basis. My last question is, I am sure you guys have done a lot of reflection over the past six to 12 months.

I am just curious, what do you believe your biggest mistake was? Was it focusing on BioMeasurement? Was it not moving to Asia when your customers begged and pleaded you to do it? Or was it your slow migration to the TSA+ technology?

Wayne Fortun

I think that the biggest mistake may have been listening to our customers at times when we shouldn’t have. That may sound way overly defensive, but on the other hand, quite honestly when we are told about how we moved and migrated the TSA+ too late, I will remind you that neither of our competitors moved to TSA at all or to additive at all. They still haven’t that capability.

We were prevented from competing and quoting product using the same sources they were and then that same customer pulled the demand entirely after they forced us into that kind of investment and so I am sorry, but admittedly we have made mistakes Christian, but before you hammer on us too hard, you have to understand that some of these relationships in this supply chain are very challenged in many ways and therefore can inflict difficulties to suppliers in ways that are very, very hard to overcome.

Operator

Your next question comes from Sherri Scribner - Deutsche Bank

Sherri Scribner – Deutsche Bank

I just wanted to get a little more detail on the other income line, and try to understand a little better for modeling purposes. It looks like interest expense picked up a little bit this quarter, which I don’t understand because your debt didn’t change and then other income was up in some ordering, was there a gain somewhere? And if you could just sort of flesh that out for us.

John Ingleman

Interest expense in the preceding quarter was affected by a period time where there was $60 million of debt that was taken off the books, but then that debt was brought back on when we drew down the line of credit with UBS. So, the more apples-to-apples comparison is two quarters ago and you will see that the interest expense was about flat in that comparison. For the other income there is a gain in there this quarter on the auction rate securities. You will notice that our valuation of that went up; I think it was roughly $1.5 million and so that would have been included in other income this quarter.

Sherri Scribner – Deutsche Bank

Okay, so the UBS loan for the auction rate securities, I guess I thought that was a no net cost, but it sounds like there is interest on that. So, I guess I do not understand.

John Ingleman

No net cost means that the interest that you pay on it is no greater than the interest that you are earning on the auction rate securities that are flooded as part of that loan.

Wayne Fortun

So, you book both the interest income and the interest expense.

Sherri Scribner – Deutsche Bank

So those should be offsetting each other, right? Okay, so I guess interest income would be higher. Is that the way to think about it?

John Ingleman

Then if you did not have the loan, that is accurate

.

Operator

Your next question comes from Bruce Newberg - Jay Goldman & Co.

Bruce Newberg - Jay Goldman & Co.

Can you guys talk a little bit about why Seagate is pulling the business price, quality?

Wayne Fortun

I think it really comes down to price. I don’t believe there is any quality concern relative to us that has caused them to make that change. It is really economics and it is one of those in which, at some point, one says that is as far as we can go.

Kathleen Skarvan

There are circumstances where we can’t even go far enough; depending on what the competition decides they want to do for that business. So, when needs to keep that in mind also.

Bruce Newberg - Jay Goldman & Co.

I guess this once for John. Is there any intention to not repurchase or to repurchase any of the debt prior to maturity? Is it just market conditions? I mean, you seem to have enough cash.

John Ingleman

Well Bruce, I think that we will continue to evaluate the best use of the cash. We are still certainly in challenged economic times and if the opportunity looks to be the right opportunity, I can say that we may buy them back. On the other hand, we may choose to ride them out. I don’t have a good answer for you right now.

Bruce Newberg - Jay Goldman & Co.

In terms of cash impact, other than losses and depreciation minus CapEx is there any other and severance expenses, are there any other impacts to cash that you see coming?

John Ingleman

You mentioned severance, so you’ve got that. You’ve got the add back of depreciation. You’ve got the add back of impairment and we have done some things on working capital, certainly on the receivable side of the world, but as you well know, that eventually runs out. We still have some opportunity, maybe on the inventory side, but that will take some time to work through. So I think you’ve got most of it.

Operator

Thank you, Mr. Fortun and management, I show there are no further questions at this time. Please continue with any closing remarks.

Wayne Fortun

Thank you, Damien. Thank you for calling in today. That concludes our call.

Operator

Ladies and gentlemen, this conference will be available for replay after 6 pm Central Standard Time today through May 1, 2009 at midnight Central Standard Time. You may access the replay system at any time by dialing 303-590-3000 or 1-800-405-2236 and entering the access code, 11130123 and the # sign. Ladies and gentlemen, that concludes the Hutchinson Technology second quarter results conference call. Thank you for your participation and for using ACT Teleconferencing. You may now disconnect.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Hutchinson Technology Incorporated. F2Q09 (Qtr End 03/23/09) Earnings Call Transcript
This Transcript
All Transcripts