Hutchinson Technology's CEO Discusses F2Q 2014 Results - Earnings Call Transcript

May. 2.14 | About: Hutchinson Technology (HTCH)

Hutchinson Technology Inc. (NASDAQ:HTCH)

F2Q 2014 Earnings Conference Call

May 1, 2014 05:00 pm ET

Executives

Rick Penn – President & Chief Executive Officer

Dave Radloff – Vice President & Chief Financial Officer

Chuck Ives – Director, Investor Relations

Analysts

Rick Kugele – Needham & Company

Christian Schwab – Craig Hallum Capital Group

Mark Miller – Noble Financial Capital Markets

Tom Lewis – High Road Value Research

Timothy Stabos – Stabos Asset Management

Operator

Good day, ladies and gentlemen, and thank you for standing by. Welcome to the Hutchinson Technologies’ F2Q 2014 Results Conference Call. (Operator instructions.) I would now like to turn the conference over to our host Mr. Chuck Ives, Director of Investor Relations. Please go ahead, sir.

Chuck Ives

Thank you. Good afternoon, everyone. Welcome to our F2Q 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, our market position, program ramps, product mix and adoption, pricing, production capabilities and volumes, our operations in Thailand and the United States, capital spending, operating expenses, cost reductions 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 period 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 nor provide non-public material information through any other means.

We issued our F2Q results announcement just after the market closed this afternoon and it is now posted on our website at www.htch.com. I’ll turn the call over to Rick.

Rick Penn

Thanks, Chuck. Good afternoon, everyone, and thank you for joining us today. In a quarter that was tough from a demand standpoint we executed well operationally. I’ll discuss the demand first.

Our F2Q demand for suspension assemblies was weaker than we expected. While the March quarter is often a seasonally slower period our shipments were also dampened by weakness in the enterprise segment which utilizes a higher number of suspensions per drive, and by slower than expected ramps of certain new customer programs.

For example, customers in some cases were able to meet their product requirements without transitioning more volume to new suspensions such as dual-stage actuated or DSA suspensions where we are better positioned.

As a result of these factors our F2Q suspension assembly shipments declined 12% sequentially versus our January guidance of a 5% to 9% decline. Although the most significant decline was in suspension shipments for performance optimized or traditionalized application we saw declines in all of the hard disk drive segments.

Despite the weakness in demand in the quarter we continue to be well positioned with our key customers. Year-to-date our suspension shipments are up 7% over the first half of F2013. We are earning key supplier positions on customers’ programs based on our ability to meet their requirements for quality, volume and innovative designs that help them meet performance goals for their new products; and by continuing to improve our cost structure.

Gross profit in F2Q improved slightly despite the lower shipments. During the quarter we leveraged our capacity by building inventory that will help us handle the transfer of additional assembly production to our Thailand plant. In addition we also realized improved yields at both our Thailand and our US assembly operations including improved DSA yields, and we made additional gains in our TSA Plus process.

Our Thailand operation accounted for 55% of our overall assembly production, up from 52% in the preceding quarter and produced about two-thirds of our DSA volume in F2Q. Our cost structure as well as our ability to service our customers will continue to benefit from the shift of additional assembly production volume to our Thailand plant. In F3Q we expect the plant to account for 60% to 65% of assembly production depending on product mix.

Our current level of suspension demand is a challenge for our financial performance but we’re pleased with the progress we continue to make in reducing our costs and improving our manufacturing yields and efficiencies. In addition to the transfer of additional volume to our Thailand plant there are still more cost and efficiency gains to be achieved through the ongoing consolidation of our US operations.

As part of our manufacturing consolidation we expect to exist the assembly portion of our Au Claire operation during F3Q and we expect to vacate the leased facility in Plymouth, Minnesota, used for our stamping operation, by the end of the fiscal year. The costs related to these consolidation initiatives have been diminishing and should be eliminated by the end of the fiscal year.

Our solid positions on customers’ new disk drive programs should translate into demand growth in the second half of the calendar year. With the recovery in demand the substantial improvements that we have made in our cost structure will become increasingly evident in our financial performance.

I’ll turn the call over to Dave now for a review of our financial results.

Dave Radloff

Thanks, Rick. Our F2Q suspension assembly shipments totaled $101.7 million, down 12% compared with $115.7 million in the previous quarter and up 3% over F2Q 2013.

Our mix of products shipped in the quarter was as follows: suspension shipments for 3.5” ATA including near-line applications were down 4% sequentially and accounted for 37% of our shipments compared with 34% of our shipments in the preceding quarter.

Shipments for 2.5” and 1.8” mobile applications decreased 11% sequentially and accounted for 46% of our shipments, which was flat with the preceding quarter. Shipments for performance optimized or traditional enterprise applications decreased 28% sequentially and accounted for 17% of our shipments compared with 20% in the preceding quarter.

Our average selling price was $0.57, down from $0.59 in the preceding quarter. The decline resulted from certain DSA suspensions transitioning from low-volume development pricing to high-volume pricing coupled with a slower-than-expected shift in product mix toward DSA suspensions. DSA suspensions accounted for 24% of our F2Q shipments compared with 23% in the preceding quarter.

F2Q net sales were $60.7 million, down 14% from the prior quarter. The revenue percentages for our top customers in the quarter were as follows: Western Digital, 64%; Seagate 16%; SAE TDK 12%; and HGST 4%. Gross profit in F2Q totaled $5.9 million or 10% of net sales.

As Rick noted earlier the sequential improvement resulted from the higher production volume and improved leverage in the quarter as well as the continued progress we made with our manufacturing yields and efficiency. We estimate the higher production and inventory build had a favorable impact on our gross profit of $2 million to $3 million.

Depreciation and amortization totaled $9.9 million compared with $10.0 million in the prior quarter and should continue to be around $9.0 million per quarter in the near term. R&D expenses in F2Q were $4.4 million reflecting some additional spending for a new business development effort and SG&A expenses totaled $6.2 million.

In connection with the consolidation of our operations we recorded $700,000 of severance and site consolidation expenses compared to $600,000 in the preceding quarter. The F2Q charge of $700,000 includes $366,000 of severance costs for approximately 70 positions that will be eliminated as we cease assembly operations at our facility in Au Claire, Wisconsin. We expect the severance will be paid in F3Q and F4Q.

We expect to complete the consolidation of our US operations over the next two quarters. In addition to vacating the assembly portion of the Au Claire facility as we transition more production to Thailand, this consolidation process includes relocating our stamping operations and our development center operations to our headquarters building. Once completed, these consolidation measures and the benefit of operating in Thailand are expected to generate P&L improvements of $2.5 million per quarter compared to our F2Q.

Our operating loss in F2Q was $5.4 million, down from $9.3 million in F1Q. Interest expense was $4.0 million and included $800,000 of noncash interest expense. Interest expense rose compared to the preceding quarter due to capitalizing less interest.

Other income in F2Q included a $600,000 foreign currency gain. The gain is primarily related to US dollar-denominated inter-company liabilities owed to the company by our Thai subsidiary.

Our net loss totaled $8.7 million or $0.31 per share. On a non-GAAP basis our net loss was $7.8 million or $0.28 per share compared to a non-GAAP net loss of $7.2 million or $0.26 per share in the preceding quarter. Our share count at the end of the quarter was 28.1 million shares.

Cash used by operations in F2Q totaled $2.2 million primarily due to the increase in our finished goods inventories. Capital spending totaled $3.1 million resulting in negative free cash flow of $5.3 million. This was offset by $4.4 million of net proceeds from the sale of our Au Claire assembly building and $1.5 million of leased financing that we secured during the quarter.

Cash and investments at quarter end totaled $40.2 million which was unchanged from the end of the preceding quarter. We had outstanding borrowings of $2.0 million under our revolving line of credit at quarter end which was also flat compared to the end of the preceding quarter. We ended the quarter with a long-term debt principle balance of $131 million of which $39.8 million has a first put date in January of 2015, and $91.1 million is due in 2017.

Turning now to our outlook: we expect our shipments in the seasonally slower F3Q to be relatively flat on a sequential basis. Our mix of DSA suspensions is expected to be similar to our F2Q mix and our average selling price is expected to be flat as well. Although we normally expect DSA suspensions to be 50% of our shipments by the end of the fiscal year we do expect our DSA mix to increase in our F4Q and in turn causing our average selling price to rise slightly.

We currently expect our F3Q gross margin to decline sequentially as a result of a planned decrease in our production volume. Our SG&A expenses should be approximately $6 million for the quarter and our R&D expenses should be about $4 million for the quarter. Interest expense is expected to be approximately $3.9 million per quarter with the noncash portion at $800,000 per quarter.

Excluding the tax benefit in F1Q our tax rate is expected to be near zero in F2014. Our F2014 capital expenditures, which are primarily for customer-specific program tooling and DSA manufacturing equipment should total about $20 million.

That concludes our prepared remarks. Operator, please open the call for questions.

Question-and-Answer Session

Operator

Ladies and gentlemen, at this time we’ll begin our question-and-answer session. (Operator instructions.) And our first question comes from the line of Rick Kugele with Needham & Company. Please go ahead.

Rick Kugele – Needham & Company

Thank you, good afternoon. Just a couple questions: I guess one first on the benefit that you saw in the quarter to running the factory a little longer and building a little inventory, can you just talk about how much inventory that is perhaps in weeks? Is that in any particular category? Just to make sure that it’s all usable inventory. And then from a modeling perspective is it fair to assume that for F3Q we can just go and reverse that $2 million benefit to figure out what the gross margin would be?

Dave Radloff

Yeah, it took us a little north of four weeks, almost five weeks of inventory, Rich. All of it is good. It’s inventory we built specifically so we could continue to transfer product. The $2 million to $3 million reversal is a fair assumption. Did I miss a piece or is that all the pieces that you’ve got?

Rick Kugele – Needham & Company

No, it was the nature of the mix, how many weeks inventory and extending that.

Dave Radloff

It’s pretty much across the board. It’s basically the product that we’re manufacturing in the US that we’re trying to get offshore, so to the extent the product was already offshore that would be less of the mix of the inventory we built.

Rick Kugele – Needham & Company

Okay, and then just lastly on the linearity in the quarter, at what point did you start to see the enterprise weakness and any color on the market?

Rick Penn

Well just the quarter, just generally it was strong in the first part, real weak in the middle and then picked up a little bit at the end. But I think through, when we got into the second period of the quarter was probably when it was becoming clearer what was going on with enterprise. And I think what we saw really parallels what you’ve heard both Seagate and WD talk about. We tend to get swung one direction further depending on up or down, but I think generally what would happen to us is what you heard them describe and I don’t think I’ve got any more color on the market dynamics beyond that, Rich.

Rick Kugele – Needham & Company

So from an overall suspension perspective, maybe that’s a better dynamic to look at than revenue, what type of suspension shipment number do you need to hit to be able to get to breakeven?

Rick Penn

I’ll let Dave maybe get into the detail a little bit there but I think we’d reiterate what we’ve been saying for a while in terms of what our model looks like and what our breakeven point is. But go ahead, Dave.

Dave Radloff

Yeah, I think we’re still at that 130 million [a week] if we’ve got the same type of quarter, if we’ve got the mix that we have today. There is a consideration if you switch the mix to a lot more of a procured mix in (inaudible) that changes that somewhat. But we’d still say that we’re targeting to be breakeven at 130 million a quarter.

Rick Kugele – Needham & Company

So bridging from 100 million in shipments obviously 30%, the market’s not growing at 30% so some of that is increasing suspension counts, some of it’s program wins and broader market share gains. I mean how would you break that up? How do you get there?

Rick Penn

Well I think if the market stayed relatively flat for example, Rich, but over time we could grow our share from the low 20% to the 25%, 27% - that kind of share gain gets us I think into the zone we’re talking about. Our view longer term, we still believe that there’s going to be data service growth even though things have been flat or depending on the quarter up or down a bit.

But if you just step back and take a longer-term view and you look at what’s happening with storage growth compared to aerial density improvement rates which are not high these days and they’re probably going to be low for some time, that that translates into data service growth and therefore suspension growth in the single digits. Could be low single digits, could be high single digits.

So we still think about the business that way but if it’s flat or if it’s low single digits or flat, we get share gains in the five percentage point range or something like that and we start to feel pretty good about where we are. So that’s not a massive swing in allocations, and when we look at what’s happening particularly with the two big guys and how we’re lined up on programs we’re still optimistic about our prospects.

And it’s taking long, and when you’ve got a quarter like this one, like the one we just finished and perhaps the one we’re in now where the overall TAM is down or is challenged, that kind of slows the pace. It’s tougher to get allocations moving our direction at a higher rate and those kinds of things. So we’re actually still very positive about how we’re positioned and you know, March quarters can be soft, June quarters can be soft. We’ll see what happens from here.

Rick Kugele – Needham & Company

Okay, that’s helpful, thank you.

Rick Penn

Yep.

Operator

And our next question comes from the line of Christian Schwab with Craig Hallum Capital Group. Please go ahead.

Christian Schwab – Craig Hallum Capital Group

Yes, thanks for taking my questions. So assembly in Thailand, 60% to 65% in F3Q. When will you be at 100%?

Rick Penn

We’ll be where we want to be which is 80% plus – we’ll have some stuff going in the US for more development products probably for the long haul, Christian, but I’m sort of looking at these guys and thinking about the forecast… But we’re probably about a year out, or maybe sooner? Okay.

Dave Radloff

It depends on the volume and the [bandwidth] in the facility.

Rick Penn

It’s going to bounce but that probably gets you in the neighborhood, Christian.

Christian Schwab – Craig Hallum Capital Group

Okay. So let’s just say suspension assemblies don’t grow; we just kind of sit here at 100 million to 110 million a quarter. What type of gross margin when we have 80% of our assembly production in Thailand yielded well? What does that stay in gross margin for your company?

Rick Penn

We’re thinking here, Christian.

Dave Radloff

Yeah, I don’t have that exact scenario in my head, Christian, but you’re going to be probably 10% gross profit-ish.

Christian Schwab – Craig Hallum Capital Group

Okay. Is there any more room in the OPEX structure for any more meaningful reductions in order to generate cash?

Dave Radloff

Perhaps. We’ve got some things happening with our consolidation and our costs that improve as we move through the year, Christian, that we talked about, and we’re doing some other things and looking at some other things to improve the cost structure further. And that’s probably about all I can say at this point, but it’s perpetual – but we definitely are looking hard at how to structure that if demand growth is slower than we’d like, which is what it’s been in the recent past, that we can start improving the financial performance sooner. So we’re being pretty aggressive in what we’re looking at. I’ll leave it at that.

Christian Schwab – Craig Hallum Capital Group

Okay, that’s great. No other questions, thank you.

Dave Radloff

Yep.

Operator

And our next question comes from the line of Mark Miller with Noble Financial Capital Markets. Please go ahead.

Mark Miller – Noble Financial Capital Markets

Your Seagate percent of sales, I see it has jumped over the last couple of quarters. Is there any way to increase that or are you going to be sitting around 16%, 18%, 20%?

Rick Penn

Hi, Mark. Again we feel real positive about how we’re positioned on Seagate’s programs across several segments and we think that position can grow. And we’ve got to show that that can happen. Our volumes are about twice what they were with Seagate if you look back a couple of quarters but we’re still a relatively low share of our business and we’re working to move that up and we feel pretty good about the prospects of doing that.

Mark Miller – Noble Financial Capital Markets

Seagate has guided, and I think Western Digital has kind of less directly hinted at a better or higher TAM later this year, maybe up to 145 million (inaudible) – roughly a 5% increase. If they would go there and you would go back to the same mix of enterprise I assume you could get up to about 115 million suspensions if the [TIM] grew that much and you returned to the mix that you had prior to this quarter for suspension assemblies? Or would it be higher?

Rick Penn

Did you say 150 million or 115 million?

Mark Miller – Noble Financial Capital Markets

115 million.

Rick Penn

Oh yeah, yeah. I think probably depending on what you want to assume you can do better than that.

Dave Radloff

There’s just a lot of moving parts in new programs and other things. But no I think we can move it north of that.

Mark Miller – Noble Financial Capital Markets

Okay, so if Seagate’s right you just get back to the, and Seagate is projecting it as well as Western Digital, more enterprise. You can bounce back, that helps.

Rick Penn

Yep.

Mark Miller – Noble Financial Capital Markets

I’m just wondering there’s been some signs or just reading Toshiba’s recent shipments, it appears to me at least that Toshiba might have gained some share especially in the enterprise. I’m just wondering what your thoughts are about that and how that would impact you if that was the case.

Rick Penn

Well I don’t know, Mark, what’s happening there. And our Toshiba business is so low that the impact would be negligible, just to be honest.

Mark Miller – Noble Financial Capital Markets

Okay. But it might take something away from Seagate or Western Digital, that’s my concern, which would be a problem for you.

Rick Penn

Yeah, and I’m just not sure I have a good read on the degree that that’s happening or how well they’re lined up to do that.

Mark Miller – Noble Financial Capital Markets

I just want to clarify something: you’re saying the exit from the Au Claire assembly facility and the leased Plymouth facility will save another $2.5 million, and that’s expected over the next two quarters or is that correct?

Dave Radloff

It’s that and it’s ramping more assembly operation in Thailand. So some of those are related, right? As well as some consolidation of costs as we move from our DC building into our headquarters building, so there’s an additional building on this campus that we’re also exiting. So it is all those things and the ramping of Thailand is $2.5 million per quarter from the expense rate we’re at in the quarter we just completed.

Mark Miller – Noble Financial Capital Markets

Okay, so it’s in addition to the Thai ramp and the consolidation, and it’ll improve your yields also.

Dave Radloff

Yep. And that’s as we exit the September quarter is when we would be seeing most of that.

Mark Miller – Noble Financial Capital Markets

Okay. Just curious – can you give us any color on what’s going on, why the DSA ramp has slowed down?

Rick Penn

I think it’s, you know, it’s driven by our customers’ mix and what they’re doing to satisfy their customers, Mark. And I think they’re, you know, they’ve been able at least in some cases to use the more current programs to satisfy capacity points or price points for their customers instead of transitioning to the newer programs, or at least to the somewhat newer programs. And when you look at how that mix has shook out this last quarter it tended to favor the older, earlier generation program that in many cases or at least in some cases are not DSA.

So it’s part of the whole mix thing that happened in this last quarter, but I think over time you’ll have this march towards more and more… The programs that are using DSA suspensions, these next, follow-on programs will ramp at whatever pace, that march will continue on.

Mark Miller – Noble Financial Capital Markets

Would that reflect… Seagate was talking about two of its primary enterprise customers ramping new programs but right now they’re kind of selling off the old programs. Would that possibly indicate that you’d see more DSA if these new programs would be that Seagate’s talking about at two major enterprise customers?

Rick Penn

I’m not sure. That might be an example of that, Mark, I’m not sure.

Mark Miller – Noble Financial Capital Markets

Okay, thank you.

Rick Penn

Okay, yep.

Operator

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

Tom Lewis – High Road Value Research

Hey, good afternoon. First off, and your comment on DSA, just to make sure you’re not making your fiscal year-end goal – can we assume that’s just a timing issue and can you give us a sense of where you would expect DSA to be three or four quarters down the road as part of the mix?

Rick Penn

Yeah, I think it is timing, Tom, and I’ll give you a sense for maybe what the picture looks like at the moment – but remember, these programs can change, Tom. But yeah, so I think maybe as we exit the fiscal year maybe we’d be pushing up more towards 30% of the mix; and as we exit the calendar year it might be pushing up more towards 40%. And if you looked at things a year from now it might be 60% or more. So you can draw the lines and see what that looks like, but that I think gives you as good a sense as we’ve got at this point of how things have maybe changed a bit. And that could bounce one way or the other.

Tom Lewis – High Road Value Research

And that trajectory gets you to I would think a more favorable mix.

Rick Penn

Yep.

Tom Lewis – High Road Value Research

I mean to the extent that mix matters, mix wasn’t exactly your friend in this quarter.

Rick Penn

That’s right.

Tom Lewis – High Road Value Research

Yeah. Okay, in your press release and in talking you’re referencing additional transfer of equipment to Thailand. Is that additional as in you’ve been planning all along or is that additional relative to the plan as we understood it 90 or 180 days ago?

Rick Penn

It’s part of the plan but it can go a little bit in fits and starts, Tom, depending on what’s happening with demand and maybe more importantly what’s happening with demand program by program; and therefore what kind of inventory do we need to build depending on what type of tooling we’ve got, excess tooling or not and so forth. And so you know, you’ve got to look at what’s happening with each program and demand, and of course our overall objective is get this stuff to Thailand which is where we want the assembly part of this company to be happening and increasingly so.

So we’re doing that as fast and as efficiently as we can and there’s going to be some quarters where we look at what’s moving and shaking and what the tooling situation is and we make the call on what we’ve got to build for inventory to keep on that march to get the assembly to Thailand.

Tom Lewis – High Road Value Research

So to the extent that as you say, you’re moving as fast as you can, the tempo at which these units go over there has been pretty high. You talk about being geared up to be at 60%-something this quarter. At what point is that tempo likely to moderate of units going over there?

Dave Radloff

I think end of the calendar year is likely when you’ll see the units but there will continue to be increasing output as those units continue to improve in their outputs and yields.

Rick Penn

Yeah, you’ve got to have tooled units and so you know, the facility’s actually got a lot of units in it and getting, we’ll probably have it filled with production lines by the end of the fiscal year essentially. But they won’t all be running or they won’t all be running well or at high volumes yet. So (inaudible) leveraging the facility and then it’s just you tool up those units and keep going.

Tom Lewis – High Road Value Research

Okay, and to that, that whole process of tooling up Thailand, you’ve got a little two tough-looking quarters (inaudible) to send additional people over there. The tone of what looks like improved operations and performance, I’m inferring from that you’ve made some progress there but can you put some flesh on that? And do you still have to, as you were saying a quarter or two ago, have additional technical resources over there to do that?

Rick Penn

I’ll give you a little color on that – it’s probably mostly qualitative, Tom, but first of all we’re doing much better at getting units ramped over there now. And we’ve got a pretty good system in place for how we’re rotating technical resources through there, through that operation to bring those units up; and we’re also making nice gains with the people that are in Thailand and live in Thailand all of the time and bringing that expertise up.

So we’re firing on all cylinders pretty well compared to where we were a couple of quarters ago. We have pretty aggressive goals and we’re still not hitting those goals, I’ll add that but that’s often the case – we’ve got aggressive goals that we’re still not quite hitting. But it’s going well and by the way, those goals keep climbing.

Tom Lewis – High Road Value Research

Right. And then lastly I know you’re not going to be reporting out any new product ventures until there’s a dollar volume to require that but I’m assuming that’s all still going on. Is there anything, can we assume that you’re still making progress on that front?

Rick Penn

We are. It’s definitely a purposeful strategy of the companies and it is relatively small but again, a couple of things that look pretty interesting. And I think we’ll look different in two or three years as a company because of business outside of the suspension realm that we’ll have going. And as we said we’ll, we want to be a little cautious and we’ll talk more when there’s more to say, and I’ll leave it at that.

Tom Lewis – High Road Value Research

Well can I ask you, there was that Blade product that there’s been an article or two written about…

Rick Penn

Yep.

Tom Lewis – High Road Value Research

Would you answer a question or two about the Blades?

Rick Penn

Sure, I could try but I’m not sure I’ll be able to. I can tell you that that’s small at the moment.

Tom Lewis – High Road Value Research

Okay. Can you tell us, is that a product that… I mean is that simply you get to a Blade that’s better but it costs the same or more or is there a compelling value proposition to doing it your way as opposed to the incumbent way?

Rick Penn

There is value in etching it as opposed to the other ways of getting a sharp edge.

Tom Lewis – High Road Value Research

Okay, we’ll just leave it at that for now and we’ll wish you the best to grow that up to the point where you’ve got to talk about it all the time. Thanks a lot.

Rick Penn

Yep, you bet.

Operator

(Operator instructions.) And our next question comes from the line of Mark Miller with Noble Financial Capital Markets. Please go ahead.

Mark Miller – Noble Financial Capital Markets

It’s been kicked around for a while that you were exploring alternative uses of your assembly capabilities. Is there anything new to report there for other products?

Rick Penn

Maybe a follow-on to some of the questions Tom was asking about, new business opportunities, Mark, but again I would say that we’re leveraging several of our process technologies. Because we’re vertically integrated there’s quite a breadth of technologies and process technologies and engineering disciplines that are resonant in the company. And so we’re leveraging those strengths. And processes include the chemical processes, the assembly processes, stamping processes and so forth. So all of that’s being leveraged in some of these new business opportunities, and again we’ll see how that goes and we’ll talk when it becomes more material.

Mark Miller – Noble Financial Capital Markets

Thank you.

Rick Penn

Okay.

Operator

And our next question comes from the line of Timothy Stabos. Please go ahead, sir.

Timothy Stabos – Stabos Asset Management

Hi everyone. I think this question should be asked, I know it may seem flippant in one sense but how do we know that the new programs are actually going to ramp? I mean shareholders keep waiting and waiting and it’s frustrating obviously for you and for us. How do we know it’s going to happen?

Rick Penn

Well, it is happening. It is happening, Tim, it’s just happening a bit slower; and particularly this last quarter it was a lot slower, again just because of how our customers are satisfying and mixing their drives to satisfy their customers. So it’s happening. I don’t think there’s any question about the next-generation drive programs or the current generation drive programs that are now ramping that are newer. I don’t think there’s any question that those will be dominant programs as we look forward.

Timothy Stabos – Stabos Asset Management

Does the delay of those programs effectively mean that we did lose certain amounts of sales permanently? I guess that goes without saying – we thought the sales were going to come sooner, you know, and we didn’t get them. Or the ability for us to reach an eventual market share level, has that changed or been compromised, or are we still as confident as ever that whatever that number is, whether it’s 25% or 27%, or eventually a few years out 33% - I don’t know what the exact number is? Because of this delay do we feel any different about where we eventually… Our confidence level about where we will eventually be in terms of market share?

Rick Penn

No, we don’t. I think it’s just that – it’s a delay and the programs are coming, that’s clear. And our ability to move our share up on these programs and even other programs that are perhaps less visible at this point I think gives us every reason to feel very positive about our ability to grow share. If I use the word market position it’s strengthening, and by that I mean qualification across segments, across key customers is in really solid shape. And I think our vertical integration and the cost benefits that that can bring, the cost efficiency that that can bring to the industry along with capability advancement is key.

Remember, we have PSA Plus and are one of two companies that can make that circuit component that goes into suspensions – that’s a key piece of value of the company. And so I think when you look at those, you know those big things as well as look at program qualification progress over the last several quarters and what that’s looked like we feel very positive about our ability to gain share as we’ve talked about. Nothing looks different to us.

Timothy Stabos – Stabos Asset Management

Thank you, that’s helpful. And as far as the financial losses of course we’ve been suffering the erosion of book value and the put date for debt in January. You’re talking about looking to see where we can cut more costs. David or whoever, what is our confidence level or where are we at in terms of our confidence that we can finance operating losses for whatever it is and that’s [a quarter or two], or I don’t know what it is exactly, and get to where we need to be where we’re at positive free cash flow and everything’s coming up roses? [laughs]

Dave Radloff

I think we’ve been pretty consistent in the way we’ve tried to proactively address our debt. Certainly the performance and how we perform in the story affects the cost of that debt, and so we’re cognizant of making sure we’re careful in terms of shareholder dilution and other things as we also go about trying to address the debt that can be put to us in January, 2015. But it’s $40 million and that’s a meaningful amount but it’s an amount that we’re reasonably positive we can figure it out.

Timothy Stabos – Stabos Asset Management

Okay, and then finally, finally, one concern and I hope you can help with this question: the DSA pricing decline in the quarter, the whole ballgame about shifting the DSA is that we’ve got a better DSA and that we can produce it at the lowest cost and make a larger amount of money. Does this issue in the quarter create doubt that we can make money, the type of money that we anticipated we could on DSA? Is this a basis for worry? Has something changed?

Rick Penn

No. The pricing, you hit certain points, certain capacity points and you know, the pricing drops. And we’ve laid that out and are following what we were planning to follow so there’s really nothing changing there. It’s been a lower volume product, and if you go back a couple of quarters we had low volume pricing and that was, you could see that in the financial performance. And we’re now moving into volume and it’s planned, and we’re getting the costs adjusted. And what we really need to make it work is total volume for the company and that’s to get those numbers up and the fixed cost structure gets better leverage.

Timothy Stabos – Stabos Asset Management

Mm-hmm, okay. Thank you.

Rick Penn

Yep, you’re welcome.

Operator

(Operator instructions.) And I’m showing no further questions in the queue. Please continue.

Rick Penn

Okay, everyone. Thanks much for joining in on the call, very good questions and we appreciate your questions and interest in the company. And we’ll look forward to speaking with you soon. Thank you.

Operator

Ladies and gentlemen, that does conclude our conference for today. You may now disconnect.

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