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Hutchinson Technology Incorporated (NASDAQ:HTCH)

F3Q 2013 (Qtr End 06/30/2013) Earnings Conference Call

July 25, 2013, 5:00 PM ET

Executives

Charles Ives - Treasurer and Director, Investor Relations

Richard Penn - President and Chief Executive Officer

David Radloff - Vice President and Chief Financial Officer

Analysts

Rich Kugele - Needham & Company

Tom Lewis - High Road Value Research

Brian Yurinich - Craig-Hallum Capital Group

Timothy Stabosz - Private Investor

Mark Miller - Noble Financial Capital Market

Operator

Welcome to the Hutchinson Technology third quarter results conference call. (Operator Instructions) I would now like to turn the conference over to Mr. Chuck Ives, Treasurer and Director of Investor Relations. Please go ahead, sir.

Charles Ives

Good afternoon, everyone. Welcome to our third 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 the company's products, program ramps, product mix and adoption, pricing, production capabilities and volumes, product cost, our operations in Thailand and the United States, capital spending and financing, operating expenses, and the company's business model, operating performance 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 third quarter results announcement just after the market close this afternoon, and it is now posted on our website at www.htch.com.

I'll turn the call over to Rick now.

Richard Penn

Thanks, Chuck. Good afternoon, everyone, and thank you for joining us today. Our third quarter suspension assembly shipments were in line with our expectations, as was our overall product mix.

Industry sources estimate that this direction in which were down slightly in the quarter. With our unit shipments relatively flat on a sequential quarter basis, we estimate our overall market share was relatively unchanged at 20% to 21%.

The decline in gross profit we experienced in the quarter had two clauses. The first, we were expecting in the second quarter temporary issues that we have now resolved. As you recall, we indicated in our second quarter conference call that we would experience some margin erosion in the third quarter, because of lower production volume.

During the third quarter, we used component inventories that we built in the preceding quarter to ensure we would be able to accommodate customer demand and changes in product mix, while continuing the transfer assembly production to our operation in Thailand.

The resulting lower production volume reduced our fixed cost leverage, but we also experienced some manufacturing inefficiencies during the quarter that increased our variable costs and further reduced gross margin. We've addressed and corrected these issues and as we exited the quarter, we were once again hitting our operating efficiency targets.

As we've mentioned before, we believe we are well-positioned to our new customer disk drive programs. The ramps to higher volume on some of these programs are beginning to materialize. And as a result, we expect to see a modest increase in demand in our fourth quarter and further increases in the new fiscal year that begins in October.

A significant portion of this demand is for new dual-stage actuated or DSA suspension assemblies. DSA suspensions enable greater precision in the alignment of read/write heads over disk drives data tracks. And as a result, our DSA suspensions are very important, helping our customers achieve their performance and cost goals for their products.

DSA suspensions accounted for 20% of our shipments in the third quarter and should increase to 25% to 30% of our product mix in the fourth quarter. Beyond quarter four, DSA suspensions will continue to increase as a percentage of our product mix.

Our Thailand operation accounted for 35% of our assembly production in the third quarter and exceeded 40% of our assembly production by the end of the quarter compared to 27% in the preceding quarter. In our fourth quarter, we expect our Thailand operation to account for above 50% of our assembly production volume.

We continue to explore opportunities to leverage our process technologies and manufacturing strengths to lighting components products in markets outside of the disk drive industry. Our development expenses are modestly higher due to these efforts.

At this stage, in our new business development process, we are looking at multiple opportunities and the revenues being generated are unpredictable quarter-to-quarter. As the contributions from these activities become more material, we'll keep you updated.

Looking ahead, we expect to be back on the path to improved financial performance in the current quarter. We remain highly focused on further reducing our costs by continuing to increase the percentage of our assembly volume produced at our Thailand operation, improving our manufacturing efficiency and continuing to consolidate our U.S. operations.

Our goal, as we said before, is to be the industry's lowest cost producer of suspension assemblies, leveraging our vertical integration in Asia assembly. We are expecting improved volume, profitability and free cash flow in the quarters ahead.

I'll turn the call over to Dave now, for further discussion of our financial results.

David Radloff

Thanks Rick. Our third quarter suspension assembly shipments totaled $99.3 million, which is relatively flat compared with the preceding quarter, and in line with the guidance we've provided at the time of our second quarter results announcement.

Our mix of product shift in the quarter was as follows: suspension shipments for 3.5-inch ATA applications, which includes near-line and capacity-optimized debt patients increased 3% sequentially and accounted for 44% of our shipments compared with 43% of shipments in the preceding quarter.

Shipments for mobile applications decreased 2% sequentially and accounted for 39% of our shipments compared with 40% in the preceding quarter. And shipments for performance-optimized enterprise applications increased 1% sequentially and accounted for 17% of our shipments, the same as in the preceding quarter.

DSA suspensions accounted for 20% of our shipments in the third quarter, up from 12% in the preceding quarter. Our average selling price was $0.594 compared to $0.595 in the second quarter. Net sales for the quarter were $61.3 million, up 1% from $60.9 million in the prior quarter.

Revenue percentages for our top customers in the quarter were as follows: Western Digital 56%, SAE/TDK 21%, Seagate 13%, and Hitachi GST 7%. Gross profit in the third quarter declined to $1.4 million or 2.3% of net sales compared with $8 million or 13.1% of net sales in the second quarter.

As we discussed during our March quarter earnings call, some of this decline was expected, as we reduced our TSA cost structure inventory. In March quarter we built inventory to adjust to a change of product mix and to ensure our ability to meet expected demand, while we continue to transfer more production capacity to Thailand.

We estimated that building more suspension and flexures than we shipped had a favorable gross margin impact in the March quarter of approximately $2 million. In the June quarter, we expected to see an unfavorable gross profit margin impact as we use that inventory and manufactured less, resulting in lower fixed cost leverage. It played out as we expected, resulting in an unfavorable impact of $2 million on our third quarter gross profit.

However, we did not expect the operational inefficiency that we experienced during the middle of the quarter that negatively impacted our variable cost by a little more than $2 million. By the end of the quarter we were back on track and our operational indicators had returned to their previous level.

Regarding our assembly production, we estimate that the incremental costs associated with manufacturing more volume in the U.S. than we have planned prior to the 2011 Thailand flooding was $1.8 million in the third quarter, down from $2 million in the preceding quarter. As we continue to shift more assembly production volume to Thailand, these costs will continue to diminish.

Third quarter depreciation and amortization totaled $9.7 million compared with $10.2 million in the prior quarter and should continue to be approximately $10 million per quarter in the near term.

R&D expenses in the third quarter were $4.1 million compared with $3.5 million in the second quarter. The increase was primarily due to increased development activities for our new business development initiative. SG&A expenses totaled $5.6 million compared to $6.2 million in the preceding quarter.

Our third quarter results included approximately $640,000 in site consolidation expenses, of which $520,000 were external costs. As we continue to consolidate some of our U.S. operations, we expect to incur an additional $1.5 million of external costs in the next five quarters to prepare the available space in Hutchinson corporations and to move equipments from our development center and stamping operation to our headquarters building. Once the consolidation is complete, we expect to achieve savings of $4 million per year, of which $2 million will be cash savings.

Our operating loss totaled $8.9 million in the third quarter compared with $2.1 million in the preceding quarter. Interest expense was $3.6 million down from $3.8 million in the second quarter. Third quarter interest expense included $750,000 of non-cash interest expense, down from $800,000 in the preceding quarter.

Other expenses in the third quarter totaled $3.4 million, almost all of which were the result of foreign currency losses. The losses were primarily due to the weakening of the Thai baht against the U.S. dollar, as was the $2 million gain that we incurred in our second quarter. The majority of the currency losses in the third quarter were unrealized losses and intercompany obligations of our Thai subsidiary to the parent company.

The third quarter net loss totaled $15.9 million or $0.59 a share. Excluding the $3.4 million loss on foreign currency, $750,000 of non-cash interest expense and $640,000 of site consolidation costs, our non-GAAP net loss was $11.1 million or $0.41 a share. In the preceding quarter, our non-GAAP net loss was $4 million or $0.16 a share.

Our share count increased to 27.5 million shares at the end of the quarter, primarily as a result of 1.3 million warrants that were exercised. At the end of the third quarter, no warrants remain outstanding.

Cash generated by operations in the third quarter totaled $1 million and our capital spending in the quarter totaled $2.4 million, resulting in free cash flow of negative $1.4 million. Cash and investments at quarter end totaled $37.5 million compared with $41.1 million at the end of the preceding quarter.

In addition to this negative free cash flow that I mentioned, we used $2.3 million of cash to repay the outstanding borrowings under our revolving line of credit. We ended the quarter with a long-term debt principal balance of $131 million, of which $39.8 million has a first put date in 2015, and $91.1 million is due on 2017.

Turning now to outlook. We expect our fourth quarter shipments to be between 100 million and 110 million or up 1% to 11% sequentially. Average selling price in the fourth quarter should be flat-to-up slightly, as our mix of higher value DSA suspensions continues to increase.

Our fourth quarter gross profit is expected to improve compared with the third quarter, primarily because of higher fixed cost leverage and improved manufacturing efficiency. Our SG&A expense should be approximately $6 million.

R&D expenses should be between $3.5 million to $4 million for the next couple of quarters. The development activity for new business development continues.

Our interest expense is expected to be approximately $3.7 million per quarter with the non-cash portion of $750,000 per quarter. Our tax rate is expected to be near zero in fiscal 2013.

We expect our fiscal 2013 capital expenditures to be about $20 million, primarily for customer-specific program tooling and DSA manufacturing equipment. Through the third quarter we've obtained about $5 million of lease financing for the capital investments in DSA and we expect to obtain more as we move forward.

That concludes our prepared remarks. Operator, please begin pooling for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question is from the line of Rich Kugele with Needham & Company.

Rich Kugele - Needham & Company

A couple of questions from me. First, can you elaborate a little bit about what the manufacturing issue was? And has this type of issue happened in the past, and just repeat again what it cost you in the quarter? I missed that part.

Richard Penn

We had a few manufacturing issues in more than one process. Not big problems, but they happened all at ones. Not related to each other and it was relatively short lived within the quarter. And as we said, we exited the quarter with all of those resolved and back on track to keep advancing process capabilities and cost reductions and so forth. So there is really nothing more to say than that. We did not impact our customers' requirements.

Rich Kugele - Needham & Company

So these products never left the door.

Richard Penn

Right. And as far as the cost impact is, it's a little north of $2 million, Rich.

Rich Kugele - Needham & Company

And then, if we were to go and fast-forward to call it the end of next fiscal year, by that point the transition of Thailand is complete. Presumably you're at a very high level of DSA suspensions, at that point, I would imagine it'd be three quarters of them or something, I don't want to put numbers in your mouth.

Richard Penn

You're directionally right. It's a little high, but it's in that direction.

Rich Kugele - Needham & Company

Presumably the program that you're on, are now in volume. What did the company look like at that point? Would you expect, you'd have a certain market share, and then by default, we'd be able to go and figure out, what your profitability would be. Is there any way of like rather than pinning you down the guidance, instead saying, well, okay, let's go out like six to seven quarters and say, okay, well, this is what the company, their target is as we go out? Is there like a target mix, and then at that point you could say, well, we're going to be more than modestly profitable at that point? Just any type of visibility we can go out that far that would be helpful, and just framing where you're targeting.

David Radloff

I mean, to caveat before answering Rich, it's still volume dependent, right. But if we would look at what we're getting insights and visibility from customers and potential allocations that they would target for us, I would say, you get out into '14 and early '15, and margins are up a teens, and we are moderately profitable, not highly profitable. I think is a fair target in that timeframe.

Rich Kugele - Needham & Company

You want to relate it, Dave, you want to relate this sort of the model to volume more specifically?

David Radloff

Sure. In that scenario, I think you're looking at the market share that's 25% and probably a little higher. And volumes are probably somewhere north of $130 million a quarter. That's where we're targeting, and things have play out, right.

Rich Kugele - Needham & Company

So if we're going to look at the very near term, then your cash flow breakeven requires what type of revenue?

David Radloff

Cash flow breakeven is revenue pretty much where we're at, maybe a little bit north deadlock.

Richard Penn

So at the levels that Dave described, we'll be generating pretty decent cash and moving into profitability.

Rich Kugele - Needham & Company

Now as you've gained some of this market share back on these programs, what have you seen competitively, any changes?

Richard Penn

Well, I mean nothing major, Rich, at this point. I mean we're trying grabbing each share point we can and earning our way down that road sort of share point by share point. So that comes from somewhere. I guess I would add to that, we think that over time, data services and suspensions grow because of the data growth relative to the AB improvement rate, which is slowing in. And so we think there is probably a better than flat situation that we're looking at as we go forward. And its debt at the suspension level, there is some growth. And we just want to grab as much of that growth as we can.

So I don't know if you have other specific competitive questions, but we feel that we're fundamentally, because we're vertically integrated and because of the reshaping that we've done and are doing with the company that our cost model will be better than the other guys. And we aren't giving up strength in technology and flat performance and reliability with our model. So we feel really positive about how we're positioned and that that we're starting down that trail.

Rich Kugele - Needham & Company

My last question just, what is the average suspension count today? And do you have any sense of what it might be a year from now?

Richard Penn

I think we'd say it's about three-two across the market. And I think we're getting signals, which ticks up maybe or tends to maybe a little more than that further step of ahead will drive maybe two over next year or six quarters.

David Radloff

And, Rich, just to add to that. Every tenth of a head is about a 3% increase in the suspension TAM or about $1.2 million per week, increased suspensions for us to go chase, so it's pretty significant. We're trying to be conservative and we think of it is as about a tenth of a head increase per year, but we're certainly hearing from our customers that it's likely to be better than that, maybe about doubled that.

Operator

Our next question is from the line of Tom Lewis with High Road Value Research.

Tom Lewis - High Road Value Research

First off, this move of assembly equipment to Taiwan or to Thailand, that I mean, obviously, it's a move that had a discontinuous cadence. You can't do it all at once and you obviously can't do it, they are just one assemble unit at a time. And it looks like to me that you just had to take a pretty big fight at it in this process.

Two questions there, I mean, is that something that relates to getting yourselves set up for programs that are about to ramps, is that a correct way of understanding that? And two, does it have to be a discontinuous like that going forward or could it be a little more piecemeal and linear shall we say?

David Radloff

From the cost standpoint I'd say certainly as you are ramping, there is some of efficiencies as are you're ramping an operation and though higher the percent of that ramp rolling out, it's less efficient as you're adding a unit to a higher number of operating units to get a lot more efficient time. So certainly it's less efficient as we start out. And overtime when you're not shipping units and incurring those costs, you're shipping maybe tools and things like that.

If we think about the other thing that happens overtime, certainly our customers would prefer and we're moving towards earlier qualification and lots of a transition, lots of what's actually transitioning from the U.S. to Thailand and overtime more the medium term development that you actually do in Thailand. And so that's part of the overall transition in the next couple of years also.

Richard Penn

Is that answering your question Tom?

Tom Lewis - High Road Value Research

I mean, that's important, but if they didn't quiet get at, I mean is it correct to say that, I mean, this whole business having to build inventory a quarter ahead and bear inefficiencies around that in this quarter, seems to be about moving at a faster cadence, since say, the average cadence of the whole transition process. Is that a reflection of the fact, I mean, it's that what seven, eight programs that are in the early stages, and you got to be setup to meet the demand?

Richard Penn

I think you're trying to test are we going to sort of see this continuing for some period of time or are we through or how does this look as we go forward. And part of what drove the inventory build and sort of the swing there was that that change in product mix that hit us and tooling, you won't get so much tooling, and we ended a sort of deal with that through building some inventory and then transitioning.

I would say, we're likely to be managing the ramp of HTL and all those new programs come online and so forth. And I would say it's probably generally would be smoother. And again, there was always lots of products mixed shift that caused this kind of swing than the ramp process and the ramp planning that we were undergoing. And that's going to happen again, but we'll manage our way through that.

Tom Lewis - High Road Value Research

But it would be a function of products and programs as opposed to this process of taking these great complex sets of machines and setting them up in transitioning to Thailand.

David Radloff

Although we are still adding, I don't want to give the wrong impression, Tom. We are still moving machines to Thailand. That facility is not full of equipment at this point.

Tom Lewis - High Road Value Research

No, I've got that. I'm just curious that it was going to come in, what seems like a relative, a wide as opposed to which is something that's quick and smooth.

David Radloff

Yes. It's fairly smooth. Going to Thailand is a very good thing. And we actually want to see that happen faster than slower and so that's what we're working towards, which is managing through that. But I think you saw a bigger swing than you're going to see on a regular basis.

Tom Lewis - High Road Value Research

I guess, my other question would be, I mean, to the extent you based on the suspensions you shipped, I would assume, you're able to know, whether a given suspension is, say, going either into a really thin drive, you know, like these 5 millimeter drives that everybody is so interested in these days or the other end of the spectrum, they're really big cloud drives, that bulk of the customers you're talking about, do you have that visibility? And are you seeing anything at all that suggest that that is a trend in play?

David Radloff

We can see what's happening with the real thin drives. And then we can differentiate that those suspensions and what's going on there and as you know that's early. And I think our drive customers could talk a more with you about what they think that's low profile, 5 millimeter hybrid drives business might look for example. We can't really see our differentiated products that's going into say desktop PC and near-line or capacity-optimized drives in the cloud.

We really can't see that. I mean the suspensions can be the same suspensions and usually are. And it's also difficult for us to differentiate between products that are going into two-and-a-half inch drives for laptops, let's say, versus into gaming devices. We can't really differentiate that either. So we're a little bit limited in some ways on how well we can gel those segments by our suspension shipments.

Operator

Our next question is from the line of Christian Schwab with Craig-Hallum Capital Group.

Brian Yurinich - Craig-Hallum Capital Group

This is actually Brian Yurinich on behalf of Christian. It kind of appears that your guidance for next quarter kind of from modest sequential growth is pretty much in line with the TAM guidance that Seagate and Western Digital gave. When can we see the inflection point that will allow or when your new customer programs ramp, they will allow you guys to grow faster than the overall market?

David Radloff

When we first caveat I would say Brian is, be a little careful to try to link directly, our suspension volumes in the given quarter with TAM at the dry level because there can be some other things that swing around, timing and inventorial may never reflect. Having said that, we're seeing these new programs starting to ramp, we're seeing that this quarter. We see that continuing as we go into the first quarter of our fiscal 2014 and beyond.

And we're getting some clarity and some of these programs that we qualified on and these programs wins that we've got, we're seeing some clarity on reallocation picture from our customers through us. So we think that as we go through 2014, we'll chip away at some share gains.

And we maybe, starting that right now. And that's probably about the most that we can give you as far as color, but we're very confident that we're going to make some gains. And these program positions are starting to move and so that's why we have a confidence level that we do.

Brian Yurinich - Craig-Hallum Capital Group

And then what's the likelihood that we can return to profitability sometime in 2014?

David Radloff

It's a volume dependent question, hence you keep repeating that. But if we get the volumes, we think there is a little probability in the latter half that we can do that.

Brian Yurinich - Craig-Hallum Capital Group

Can you remind us again what it takes, just I mean, we talked earlier, so it sounded like 130 guys would be decently profitable, what would it take to just to get to breakeven?

David Radloff

I would say it depends on the timing. And so I would say in the latter half of '14, you need to get above 130 to become profitable. And as we continue with some of our cost savings as we get into '15, it becomes better profit at that level.

Brian Yurinich - Craig-Hallum Capital Group

So it could be on the lesser suspensions in 2015 and '14?

Richard Penn

Correct. We're moving through some cost initiatives, still the HTL ramp, some other efficiencies in early consolidation and our component operations, U.S. facility consolidation, and so we're bringing our breakeven point down a bit, as we go through 2014.

Operator

Our next question is from the line of Timothy Stabosz, Private Investor.

Timothy Stabosz - Private Investor

It's seems, and correct me if I'm wrong, with the volume increases from new programs seem to get pushed further and further out. Is that indicative of a, I will say, problem with the new business model? Do we feel the same way we did a quarter or two or three back, about the ultimate outcome for the long-term business model success for Hutch with regard to everything we're doing, the success of our DSA and low costs and everything? Are we as enthusiastic as ever or we are little more tentative at this point than we would have been a quarter or two back.

David Radloff

Tim, we're as enthusiastic as ever. You're right the programs did push. And there is a variety of reasons that our customers juggle there with their programs around, and look at their economic situation and besides when to ramp the new programs. But really as we said last quarter, we're increasingly optimistic. We still are. And particularly, because we're now starting to see the ramps and we're starting to see the increases. And even if the market is overall flat, we think we can still grow this business, because of our position on those upcoming programs.

So we're optimistic. We're not thrilled with the loss of this past quarter, but going on top of the production issues, for example and feel really good about doing that quickly. And as far as our position with customers, it's very solid and improving and we're very, very optimistic that the business model that's coming together is coming together. And we continue to feel optimistic that we can be the low cost guy.

Timothy Stabosz - Private Investor

And will be at that point somewhere, what, in 2014 or something or again it depends on the volumes?

Richard Penn

I think it's kind of repeat of what Dave was responding to the previous question. The volume is key and making more progress on some of the cost initiatives that are still underway are important. You can feel pretty good about 2014, as we move into the back half of that year, but again volumes mean a lot.

Timothy Stabosz - Private Investor

What about the visibility on longer term market share? I think we've kind of talk about here or there in the past conference calls, two, three years out, is there additional market share gains that were fairly confident about, just qualitatively, of course, not per se, quantitatively? Again, long-term business model, what's the visibility going out two, three years?

Richard Penn

It's a good question. We don't need a lot more share to have a business model that we really like. That's maybe the first thing we just reiterate. We get to that 25% share of level, even in a flat market. And we're starting to feel pretty good about profit and cash generation. And Tim, beyond that or if there is some market growth, which we think there will be, it's pretty positive picture.

So we'd like to keep chipping away at gaining share points, but I think we're just going to go heads down and keep working to earn every bit of it. And we'll be at that place that we're definitely going to keep working beyond 25% share and keep driving hard.

Timothy Stabosz - Private Investor

And finally, are there any perhaps, lot of tiny assets, but are there any refinance opportunities or any balance sheet opportunities in the next three to six months that we think capacity out there? Debt wise or what have you?

David Radloff

I think my answer would be, I think always been, last couple of years we've been pretty careful to keep alert if those opportunities present themselves, but I don't know that I'd predict or could predict any at this point. And if I could I'm not sure I would, but I think we demonstrated, we're alert to those things. And we are cognizant of managing the balance sheet when those opportunities present themselves.

Timothy Stabosz - Private Investor

If I were just to say, the opportunities push out maturities further or refinanced is directly tied to the impertinent profitability and share gains and volumes, right?

David Radloff

I mean, they are always timing questions, that when you think it's the right time and what's the proper time from a shareholder and a risks and all those other standpoint. And we'll do our best to balance those things and we feel we've done a pretty good job over the last couple of years and we continue to trying to do a good job.

Operator

Our next question is from the line of Mark Miller with Noble Financial Capital Market.

Mark Miller - Noble Financial Capital Market

You're projecting in this, roughly about 13 million suspensions or increased by roughly 30 million suspensions to get into some profits and I'm just wondering, in sense, your two smallest customers only realized 20 million suspensions in the last quarter. Are this growth in 30 million suspensions, is it going to come more proportionally from the larger customers or will we see a substantial increases to the smallest customers?

David Radloff

Mark, just for clarity, are you talking smallest in terms of their volume or their volume with us?

Mark Miller - Noble Financial Capital Market

Their volume with you.

David Radloff

Mark, you know, we're not positioned well with Toshiba, because of the head supply from TDK and their captive suspension MTT. And so we're really not looking at, we were qualified with Toshiba, where we keep working them. But we're not anticipating great moves there. And if we can get some, we keep working to get some of that.

But really, our business is going to come from the big players. And that's what we see as we look at how we're lining up, what those new programs are, where they are and how they ramp. And so we think it's really, the picture guide is we will win those kinds of quantities.

Mark Miller - Noble Financial Capital Market

Let me just rephrase the question. In terms of your two largest customers, they account, like I said, if you look at Seagate and Hitachi combined, there were 20% of sales last quarter. And of these 30 million suspensions that you need, will they come more predominantly from the lower, I'm really referring to Seagate or Hitachi or from Western Digital, let's say, in terms of the growth you need or will it be spread proportionally?

David Radloff

It's hard to say how that will spread. As we've said we hope to earn an increasing chunk of Seagate, and that's important to us. We'll see how that plays. And we will feed in the numbers as we progress, as we go forward. And I don't know that I can give you a lot more color than that without getting into a lot of customer specific stuff, Mark.

Mark Miller - Noble Financial Capital Market

There is two trends going on right now, the obvious secular decline in mobile drives due to tablets, but as previously mentioned there is some excitement amongst the larger customers about hybrid drives and also the thin drives. And one end of the situation or maybe just say, are you qual for those type of programs or you're expecting qual for those type of programs, because that's where the growth is going to be rather than just supplying drives to the secular decline in the standard laptop market.

David Radloff

Well, they're qualifying for those types of drives.

Mark Miller - Noble Financial Capital Market

And your margins has demonstrated this quarter, have jumped all over the place, you've indicated why. And you say they are going to improve, but there is a big difference between 2% and 13%, and when we're trying to model this, which these news reports fill out your next year numbers and the analyst can affirm understanding, we have to be very conservative. So I'm just saying basically are we going to be back up to where we're at earlier this year or closer to where we're at last quarter. Now that's certainly going to be a bit closer to where you were at earlier this year in terms of margins for the next quarter.

David Radloff

I think Mark, when we take out the unusual things for both quarters we would probably been more like in the 9% this year, high-single digits margins in each quarter and if you took out operational efficiencies last quarter. So that's full performance. And so we would say that going forward we'd be there and improving as we go forward.

Mark Miller - Noble Financial Capital Market

You had a significant exposure to the lower valuation of the baht, and I assume that's just because you had interest rates jacked up because of the comments, and that's likely to reoccur, can you protect yourself against that or are you going to protect yourself against that or do you feel you need to?

David Radloff

We don't feel we need to, Mark. There is intercompany debt, U.S. dollar denominated debt, from the Thai subsidiary to the U.S. parent that is primarily the source of that. And as the baht weakens relative to the dollar, the Thai subsidiary they have to record a loss on the U.S. debt, U.S. dollar denominated debt, but at the same time it's happening in our product that are priced in dollars.

And achieving a lower operating cost and so that doesn't offset at any point in time in a short period of a quarter. We don't think it's a real economic loss in the debt translation unrecognized, unrealized translation accounting loss and so we don't think we should spend the money to hedge it.

Mark Miller - Noble Financial Capital Market

And final question, like you said, you seem to be in line with what the (inaudible) forecast, and that you said you really can't compare that all the time in terms of their TAM forecasts in your shipments. But there was something curios, a couple of days ago Nidec, which ships in motors to everybody said that their shipments are going to be up 16%.

Now, I guess, that Western Digital they thought it might be just the inventory restocking, but that seems to be much higher than anybody is talking about. Is that increase, and again that kind of a dollar there for the industry, is that more due to an inventory restocking, but there are customers while they increased mobile shipment 16%, but there is something rolling in there.

Richard Penn

We really don't have any visibility on that, Mark, I can't help you there. I'm not sure.

Operator

I am showing no further questions at this time. Please continue.

Richard Penn

Well, thanks everyone for joining us on the call today. We appreciate your questions and your interest in the company and we look forward to talking with you soon. Thank you.

Operator

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