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Executives

Chuck Ives – Director of Investor Relations and Treasurer

Kathleen S. Skarvan – President of Disk Drive Components Division

David Radloff – Chief Financial Officer

Richard Penn – Biomeasurement Division

Wayne Fortun – Chief Executive Officer

Analysts

Sherri Scribner – Deutsche Bank

(Rich Coogle) – Needham and Company

(Matt Swill) – Gleacher Securities

Mark Miller – Novell Capital

Eric Reubel – MTR Securities

(Tom Lewis)

Presentation

Hutchinson Technology, (HTCH) Q1 2011 Earnings Conference Call January 25, 2011 4:58 PM ET

Operator

Good morning ladies and gentlemen, thank you for standing by and welcome to the Hutchinson Technology First Quarter Results Conference Call. During today’s presentation all parties will be in a listen only mode. Following the presentation, the conference will be open for questions, if you have a question please press the star followed by the one on your touchtone phone. If you would like to withdraw your question please press the star followed by the two and if you’re using speaker equipment please lift the handset before making your selection.

This conference is being recorded today, Tuesday, January 25 of 2011. I’d now like to turn the conference over to Director of Investor Relations and Treasurer, Mr. Chuck Ives, please go ahead sir.

Chuck Ives

Good afternoon everyone, welcome to our first quarter results conference call. On the call with me today are Wayne Fortun our Chief Executive Officer, Kathleen Skarvan, President of our Disk Drive Components Division, Rick Penn, President of our Biomeasurement Division 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, pricing, customer mix, production capabilities and capacity, capacity utilization, our assembly operations in Thailand, capital spending, product costs, operating expenses, our biomeasurement division’s revenue, clinical evidence, product commercialization and adoption, and the company’s 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 FDC. In connection with the adoption of FDC rules governing fair disclosure, the company provides financial information and projections only through means that are designed to provide broad distribution of information to the public.

The company will not make projections or provide material non-public information through any other means. We issued our first quarter results announcement just after the market closed this afternoon and it is now posted on our website at www.htch.com. I’ll turn the call over to Wayne now for his opening remarks.

Wayne Fortun

Thanks, Chuck. Good afternoon, everyone and thank you for joining us today. In our fiscal 2011 first quarter we substantially reduced our net loss compared with the preceding quarter despite lower volume and revenue. The smaller loss resulted from benefits from our recent costs reductions and a significant improvement in our TSA plus yield and output. We have reduced our annual costs by $25 million inline with the plans we discussed on our previous earnings call.

During the quarter we also demonstrated that we can attain levels of TSA plus yields, out put and capacity utilization that eliminate the cost burden that has been associated with TSA plus production. Looking ahead our cost position on suspension assemblies will continue to benefit from further improvement in our TSA plus yield and out put as well as a steady increase in volume produced at our Thailand assembly operation.

During the quarter our Thailand site was qualified by a customer and we’re now shipping volume product from this site. Continued TSA plus improvements and the ramp to higher volume at our Thailand facility will move us steadily closer to our goal of being the industries lowest cost producer of suspension assemblies.

Our biomeasurement division has significantly reduced its operating loss. As a result of previously mentioned cost reduction. In addition, the division has initiated sales of the newly introduced InSpectra St02 spot check product in countries that recognize the CE mark. I’ll turn the call over to Kathleen now for a recap of the disk drive components division for first quarter.

Kathleen Skarvan

Thanks, Wayne. During our fiscal 2011 first quarter we shipped 16.5 million suspension assemblies, down 3.5% from 110.4 million in the first quarter and 155.2 million in last years first quarter. The sequential decline was inline with our guidance, which included one customer managing down their existing inventory. For the quarter, our mix of products shipped was as following.

Suspensions for 3.5-inch ATA applications increased 5% sequentially and accounted for 58% of our shipments up from 53% in the preceding quarter. Shipments for mobile applications declined 27% sequentially and accounted for 17% of our shipments, down from 23% in the preceding quarter.

Shipments for enterprise applications were flat with the preceding quarter and accounted for 25% of our shipments compared with 24% in the preceding quarter. Average selling price in the fiscal 2011 first quarter was $0.62 compared with $0.66 in the preceding quarter and $0.68 in last year’s first quarter.

The sequential quarter decline in ASP reflects the continuation of a competitive pricing environment and a change in the mix of our products and customers. So revenue percentages for our top customers in the quarter were as follows: Western Digital 57%, SAETDK 16%, Hitachi 13%, Seagate 12%.

Some of the suspension assemblies we sell, including, suspensions produced for the vertically integrated hard disk drive OEM’s are shipped to SAE. During the first quarter however we shipped a greater percentage of suspensions directly to HGD OEM. This accounted for nine percentage points or half of the sequential quarter change in revenue, from SAETDK. In addition, as we mentioned in our fourth quarter conference call, one of our customers pulled extra suspension assemblies in the last week of the fourth quarter to honor a volume commitment.

We estimate that this shift in the timing of shipments lowered our first quarter volume with SAETDK by five to seven million suspension assemblies. Our customer mix may revert somewhat as our market shares improve modestly over the course of the fiscal year 2011. Our first quarter suspension assembly shipments included 48 million TSA plus suspension assemblies or about 45% of our volume. That’s up from 38 million or 34% over volume in the preceding quarter and 25 million or 16% of our volume in last years first quarter.

The cost burden that has been associated with TSA plus cluster production declined to $3.1 million in fiscal 2011 first quarter. That’s down from 7.6 million in the preceding quarter as we significantly improved our TSA plus yields and output. For a four-week period in our fiscal 2011 first quarter we reached yield, output and capacity utilization levels at which the cost burden of TSA plus (inaudible) production was eliminated. Demonstrating that this cost burden can be eliminated is a significant achievement.

With yields continuing to improve as we entered the second quarter our TSA plus cost per part will be determined primarily by our TSA output and capacity utilization. The TSA plus capacity utilization trend should be favorable as we expect TSA plus suspension assemblies to account for more than half of our volume in fiscal 2011-second quarter and two-thirds of our volume by the end of fiscal year.

With the cost burden significantly reduced in quarter one we are now migrating toward a competitive cost advantage on TSA plus suspensions. Effective with our fiscal 2011-quarter two earnings announcement we will no longer be reporting the costs per TSA plus (inaudible) production.

Our costs position as well as our ability to serve customers, operations in Asia, will also benefit from the continued ramp of assembly volume at our operation in Thailand. As Wayne, mentioned our Thailand facility has been qualified by a customer and we are now shipping product in volume from this sister. We also continue to supply prototype, duel stage actuation, or DSA, suspensions to four of the five hard disk drives OEMs.

As we work with them on new programs expected to incorporate the DSA technology we expect wider adoption of DSA suspensions on customer programs beginning in 2012. Our leading edge design, proven capabilities, and established capacity for DSA suspension positioned us to meet our customers evolving needs for this technology.

Turning now for our demand outlook as we said in our quarter four earnings call in November. We believe the first quarter will be the low point for our quarterly suspension assembly volume in fiscal 2011 as we expect to see modest market share growing in the balance of our fiscal year. In our fiscal 2011-second quarter we currently expect our suspension assembly shipments to be flat to up slightly and pricing is expected to remain competitive.

I’ll turn the call over to Rick now for a review of biomesuarements division results.

Richard Penn

Thanks Kathleen, net sales for the biomesurement division in the fiscal 2011 first quarter totaled $542,000 compared with $682,000 in the preceding quarter and $509,000 in last years first quarter. The sequential quarter decline in sales resulted from a decline in sensor sales reflecting lower patient volume during the calendar fourth quarter. The install base of monitors at the end of fiscal 2011 first quarter was 367 up from 344 at the end of the prior quarter and 248 at the end of fiscal 2010 first quarter.

In December we began sales of our new product the InSpectra St02 spot check in countries that recognize the CE mark. We also filed for a marketing clearance of the product under the U.S. FDA’s pre-market notification for 510K process. The spot check is hand held devices that leverages our St02 measurement technology and enables clinicians to quickly and cost effectively identify at-risk patients in a wide range of settings.

Patients with low St02 readings can then be continuously monitored with the inspector St02 tissue oxygenation monitor. Used together these two complimentary products can help reduce the time to critical patients intervention and help identify the endpoints of our resuscitation. The clinical and economic evidence supporting wider adoption of St02 monitoring continues to grow. Multiple clinical studies have demonstrated that patients with low St02 are at-risk of all outcomes and that a significant percentage of patients in the emergency departments and ICU have low St02 even though their other vital signs are normal.

Additionally, independent study results were not presented this month at the Society of Critical Care Medicines fortieth Critical Care Congress, showing how InSpectra St02 was used to guide resuscitation of shock patients and improve outcomes in the form of shorter ICU and hospital stays. Based on the compelling results of this initial study the principle investigator is initiating an independent multi-site outcome study to demonstrate these results in a larger patient population.

We expect the study to significantly add to the growing body of clinical and economic evidence that supports wider adoption of St02 monitoring. I’ll turn the call over to Dave now for a discussion of our financial results.

David Radloff

Thanks, Rick. Net sales for the fiscal 2011 first quarter totaled $68.2 million down 8% from $74 million in the preceding quarter and down 375 from $108.3 million in last year’s first quarter. Gross profit in the first quarter was $3.3 million or about 5% of net sales compared with zero in the preceding quarter. Last year’s first quarter gross profits totaled $20.8 million or 19% of net sales.

Compared with the preceding quarter fiscal 2011 first quarter gross profit improved due to the benefits of our 2010 cost reductions a reduced TSA plus cost burden and better utilization of our component manufacturing capacity. Our utilization improved as we increased our TSA plus (inaudible) inventories to provide supplies for in-store customers.

We also increased the components inventory our assembly operation in Thailand to support increasing production volumes there. Depreciation and amortization expense was $11.8 million in the fiscal 2011 first quarter compared with $11.4 million in the preceding quarter and $14.8 million in last years first quarter.

R&D expenses were $4 million down from $5.3 million in the preceding quarter and $5.1 million in last year’s first quarter reflecting the impact of our cost reduction. SG&A expenses totaled $13.6 million compared with $15.5 million in the preceding quarter and $12.5 million in last years first quarter.

Fiscal 2011 first quarter SG&A expenses included $4.7 million of start up expenses for our assembly operation in Thailand compared to $2.9 million in the preceding quarter and $500,000 in last years first quarter. Beginning in our fiscal 2011 second quarter approximately $3 million of these Thailand expenses will remain as ongoing quarterly operating costs, most of which will now be classified as cost of goods sold.

Our fiscal 2011 first quarter operating loss totaled $14.4 million, a substantial decline from the $24.5 million operating loss we incurred in the preceding quarter. In the year ago first quarter we reported operating income of $3.1 million. The biomeasurement divisions operating loss in the fiscal 2011 first quarter was $2.9 million down from $6 million in the preceding quarter as the impact of the divisions cost reductions began to take effect.

For the full fiscal year we currently expect the divisions operating loss to be less than $8 million on net sales of $3 to $5 million. Interest expense in the fiscal 2011 first quarter was $3.8 million compared with $3.7 million in the preceding quarter and $4.2 million in last years first quarter.

Interest expense in both the fiscal 2011 first quarter and the preceding quarter included $2.2 million of non-cash interest expense resulting from our adoption of (inaudible) guidance for accounting for convertible debt instruments. Interest expense for the year ago quarter included $2.1 million of non-cash interest expense.

Our income tax provision was roughly zero, resulting in a net loss for the fiscal 2011 first quarter of $17 million or $0.73 per share compared with the net loss of $27.1 million or $1.16 per share in the preceding quarter. In last years first quarter we reported net income of $2.2 million and $0.09 per share including the impact of the $2.3 million non-recurring income tax benefit. We generated $1.4 million in cash from operations in the fiscal 2011 first quarter, this included the cash benefit of an $8.6 million decrease in our receivables which is partially offset by a $7.3 million increase in our inventory.

We invested $4.7 million in capital expenditures resulting in negative free cash flow of $3.3 million. In the preceding quarter cash used by operations, a total of $20.5 million in capital spending totaled $8.7 million. At quarter end our cash and investments balance totaled $101.2 million compared with $104.5 million at the end of the preceding quarter and $242 million at the end of last year’s first quarter. The principle amount of debt balance at the end of our fiscal 2011 first quarter was $198 million unchanged from the end of the preceding quarter, down from $296 million at the end of the fiscal 2010 first quarter.

On January 10th we commenced a tender exchange offer for $75.3 million of our 3.25% convertible subordinated notes due 2026. Because it is an ongoing tender exchange offer we will not be able to comment further on the offer or any future plans for our debt until after the offer has expired. Our share count at the end of the fiscal 2011 first quarter was approximately $23.4 million resulting in both value per share of $10.64.

This includes $0.95 per share primarily related to the portion of our convertible debt that we were required to reclassify as shareholder equities under the accounting guidance for convertible debt instruments. Turning now to our outlook.

As Kathleen noted we expect fiscal 2011-second quarter suspension assembly shipments to be flat to up slightly. Pricing is expected to remain competitive in our second quarter results are not expected to include the gross margin benefit of the inventory bill that occurred in the first quarter. We believe that the combination of these factors will result in a sequential decline in our fiscal 2011-second quarter gross and operating margins.

In the near-term we expect our cost of goods sold to be split about 55% to 45% between fixed and variable costs. R&D expenses for fiscal 2011 are expected to total about $17 million and SG&A expenses should be about $45 million for the year. Depreciation and amortization expenses of 2011 is expected to be a little less than $50 million.

Our effective tax rate expected to be near zero for the fiscal year. Finally, we still expect our fiscal 2011 capital expenditures to be $20 to $25 million. I’ll turn the call over to Wayne now for his closing comments.

Wayne Fortun

Thanks, Dave. As we have said before our path back to positive cash flow and profitability includes positioning the business to benefit from the overall growth in the worldwide suspension assembly market, expanding our share of that market and reducing the operating loss in our biomeasurement division.

During the first quarter we made important progress along this path. In our disk drive components division we demonstrated that we can eliminate the costs burden of TSA plus (inaudible) production at attainable levels of yield, output, and capacity utilization. And we began shipping volume products from our new Thailand assembly site.

These developments are moving us toward our goal of being the industry’s lowest cost producer suspension assemblies which is key to being well positioned to return to market share growth and to benefit from our overall market growth. In our biomeasurement division we have substantially reduced our costs and expect the divisions fiscal 2011 operating loss to be less than $8 million.

We’ve also launched a product that compliments our existing product by enabling clinicians to quickly, easily and cost effectively obtain a patients St02 measurement in a wide variety of settings. Meanwhile clinical and economic evidence supporting a wider adoption of St02 monitoring continues to grow. That concludes our opening remarks, Lisa, will begin poling for questions.

Questions-and-Answer Session

Operator

Thank you, sir. We will now begin the question and answer session. (Operator instructions). Our first question comes from the line of Sherri Scribner with Deutsche Bank, please go ahead.

Sherri Scribner – Deutsche Bank

Hi, thank you, I was curious if you could go into a little more detail Kathleen on the changes at TDK? It sounded like there was change that had a 9% point impact and then the second change was that one customer pulled some inventory in the fourth quarter which impacted the first quarter, sort of clarify that a little bit?

Kathleen Skarvan

Sure we’ll do that, Sherri. As most – as you know the majority of our business with SAETDK is for two primary OEMs that do not, of course, have their own head capacity and of course, the others are vertically integrated but also by some share of their SAETDK. As a result some of the suspensions we produced, of course, go directly to SAE during quarter one. As your question is in regard to the greater percent of suspensions were shipped directly to the HDD OEMs and that as we said accounted for nine points or half of the change.

We also said in November’s call that in quarter four one of our customers in order to honor volume commitment they had made to us did pull a significant amount of volume at the end of the quarter then that offset volume for the quarter one and that did account for some of that or almost half of it. And then lastly, I do want to mention to that when it comes to Toshiba we are not seeing ourselves in the primary supplier for them at this point and so overall our volume with them has changed a bit and so that factors into there also.

Sherri Scribner – Deutsche Bank

Okay, in terms of the expectations that you know the fiscal first quarter was the low point and that you continue to gain shares through the year, it sounds like there’s been some changes at Toshiba, I guess I’m just curious what gives you the confidence, what type of visibility, do you have that makes you believe that your share will improve?

Kathleen Skarvan

Well, without disclosing specific details by customer, you know one of the areas that you can see we have confidence in is our TSA plus supply assurance and that’s providing more than one customer confidence in our ability to proved a very economically priced suspension that meets their performance requirements and so that’s part of what provides the confidence for us as we go forward.

Sherri Scribner – Deutsche Bank

Okay and then just in terms of the ASPs they’ve declined pretty significantly. I think they’re down about 9% year over year, I mean if I think back to the suspension industry that seems like a substantial decline and you indicated you thought you’d continue to see pricing moving down. Do we start to see ASPs start to go up at any point or are they going to continue to decline and if they are how do you offset that in terms of reducing your costs to match that ASP decline?

Kathleen Skarvan

I’m sure that’s a great question, Sherri. I think in the single stage area when we refer to the environment remains competitive that’s primarily what we’re referring to and we will, we expect to cot9inue to see declines where we thing we will have an advantage of course is with TSA plus. Of course we will not be buying the majority of our (flexures). We’ll be producing them ourselves which we believe is a cost advantage and then additionally as we ramp more volume from Thailand that will put us in a more competitive position so that we can offset those price declines on the single stage.

And I think we believe there are further efficiencies that we can gain in our U.S. operations also over time. Now pricing going up? Well, we believe that with duel stage actuation there will be some opportunity for pricing increases and that’s somewhat exciting as we see a more broader adoption then.

Sherri Scribner – Deutsche Bank

Okay, great. Thank you very much.

Operator

Our next question comes from the line of (Rich Coogle) with Needham and Company, please go ahead.

(Rich Coogle) – Needham and Company

Thank you, good afternoon, just a couple of questions, in terms of the gross margin how much do you think the extra inventory bill both here and Thailand helped the gross margin?

Unidentified Company Representative

Probably two to three points, (Rich).

(Rich Coogle) – Needham and Company

Do you think you now have enough so that you’ll be able to transfer operations cleanly when the time comes?

Unidentified Company Representative

Yes.

Kathleen Skarvan

Absolutely.

(Rich Coogle) – Needham and Company

Okay and then in terms of the balance sheet, I know you don’t want to get into the debt side too much but how much cash do you think you need in any given year to run the business? And then secondly, is there a target debt level you’d like to be at later in the year?

Unidentified Company Representative

From a cash balance you know we’d like to think closer to $75 million as a cash balance. You can certainly run from below $50 and operate the business (Rich), but we’d like to stay closer to $75. We’re really going to stay away from talking about anything related to debt or financing until after the offer is over.

(Rich Coogle) – Needham and Company

Okay and then I guess from an adjustment perspective if there is a right EPS loss, most industry seems to be excluding the $0.10 non-cash accounting charge. So it’s about $0.65 right? That’s the way it would think about the earnings loss?

Unidentified Company Representative

Results of non-cash interest charge, (Rich), would be $0.63 so.

(Rich Coogle) – Needham and Company

Okay, great, thank you very much.

Operator

And we have a question from the line of (Matt Swill) with Gleacher Securities, please go ahead.

(Matt Swill) – Gleacher Securities

Hi guys, could you comment a little more on Thailand and where your utilization stands there now and where you’re looking to get that too?

Kathleen Skarvan

Sure, of course, we have a few units running right now. So it’s really – they’re a 100% utilized. The equipment that we have that we’re running, when we talk about utilization I guess we could refer to the overall facility and we’re quite under utilized when it comes to total facility and we haven’t really been describing our ramp plans here publicly but we, we believe that with the success we’ve achieved thus far and in fact probably exceeded. Not probably, we have exceeded our expectations and the goals that we set that we will continue to re-evaluate how quickly we can ramp that facility and bring it to an higher overall facility utilization. Of course, because we believe that as time goes on we will certainly have a lower cost center U.S. operation.

Wayne Fortun

I think the other thing we spoken of publicly was that as we look at this year and we continue to increase the total output from the Thailand operations that it will actually – as we reach the end of this year we’ll actually flip over to contributing instead of being any kind of a start up cost or added cost that we’re carrying right now as you hear about us from the (inaudible) in this first quarter at $4.7 million.

(Matt Swill) – Gleacher Securities

And will we see – you guys commented on that earlier, we will we see that number go away as early as the second quarter? Or do we need – do we have a couple more quarters of the start up costs?

David Radloff

You’re going to still see – I think the way you have to think of it is we have start up costs there and you have redundant costs here. Until we have transitioned the operation significantly more to Thailand and so it’s kind of what is the start up costs now becomes the real costs and you have to take away the costs domestically to offset that and so it will certainly run the length of time we’ve talked. It will take most of this fiscal year.

(Matt Swill) – Gleacher Securities

That’s what you were saying, David, it moves into the cost of goods, probably when will that be? The third or fourth quarter?

David Radloff

It does that right away. So we will no longer – because it’s an operating facility we’ll no longer classify them as G&A costs but they’ll be somewhat – it’ll be redundant costs for a little bit until we get that operation ramped up.

(Matt Swill) – Gleacher Securities

I see. And all the equipment you’re putting in there, Kathleen, to what you were saying at the start of my question, is that all equipment that you’re just shipping from the U.S. over there?

Kathleen Skarvan

That’s correct. We are not – we do not have any new capital expenditures for equipment.

(Matt Swill) – Gleacher Securities

And we shouldn’t think about from an industry perspective any new capacity coming online here just being shifted from Minnesota I guess primarily over to Thailand?

Kathleen Skarvan

That’s accurate.

(Matt Swill) – Gleacher Securities

And then just thinking about the cash, you guys mentioned a $75 million kind of minimum that you like to have on hand although you couldn’t run lower, do you see cash getting anywhere near that $75 million level over the next couple of quarters?

Unidentified Company Representative

I’m going to refer to the S4 we filed related to the tender exchange offer that has some perspective numbers that would show that you could get there depending on how that tender exchange offer would result.

(Matt Swill) – Gleacher Securities

Okay, well that’s fair enough, so if we just pretended like that wasn’t going on and looked at cash flow from operations minus CapEx on operations alone you would not get there.

Unidentified Company Representative

That’s accurate.

(Matt Swill) – Gleacher Securities

Great and on operations alone you would not get there?

Unidentified Company Representative

That’s accurate.

(Matt Swill) – Gleacher Securities

Great and then just as we think about working capital for the year and you mentioned you know kind of what went on with AR and inventory for the quarter, can we think about working capital as a continued or a total source of cash for the year?

Unidentified Company Representative

We think so because we do have some higher levels of raw materials inventory as an example related to end of life funds on the TSA plus, TSA, I’m sorry the TSA products that have some raw materials that we’ve – we’re doing end of life buys on that will run out over the next couple of years. And so there are still working capital opportunities that we’re working on.

(Matt Swill) – Gleacher Securities

Got it and just one last one. Do you guys calculate and EBITDA number? Is there an EBITDA number that you would use for the quarter?

Unidentified Company Representative

I think it was pretty close to break even, (Matt). Maybe negative $1 million.

(Matt Swill) – Gleacher Securities

And that’s after adding back the Thailand start up?

Unidentified Company Representative

No that would include the Thailand start up costs.

(Matt Swill) – Gleacher Securities

Got you, so if we added that back we’d get to something like $3 million or somewhere in there?

Unidentified Company Representative

That’s accurate.

(Matt Swill) – Gleacher Securities

Great, thank you guys.

Operator

And our next question comes from the line of Mark Miller with Novel Capital, please go ahead.

Mark Miller – Novell Capital

With the progress you’ve been making, TSA now be coming out of (inaudible) and also the Thai brand, I think we’ve talked before about you’re projected break even revenue level, are we still $95 to $100 million or is that going to come down with some of the developments in this quarter?

Unidentified Company Representative

We’re still saying it’s in the $100 million range. I think because the – I think as we’ve talked previously this kind of how are your costs coming down relative to the pricing continuing to decline … and so as you get in to next year, we like to think that Thailand starts contributing more, and TSA plus continues to contribute more, and that could help bring that number down, but for now I think that $100 million is probably the best number.

Mark Miller – Novell Capital

So if I understand what you said basically the results, the improvements you noted, however in an undermined by this more aggressive cost environment, is that an overstatement or correct?

Unidentified Company Representative

I think the specific challenges are the cost, how fast are your costs coming down and how fast the prices are coming down and are your costs coming down enough, faster than pricing to lower that, break even?

Mark Miller – Novell Capital

And last question, what are the (inaudible) look like? Are they depleted or are they at normal levels?

Unidentified Company Representative

For us?

Mark Miller – Novell Capital

Yes.

Unidentified Company Representative

I’d say normal. We’re pretty comfortable. There’s about four weeks there.

Mark Miller – Novell Capital

Same as last quarter, roughly? Maybe a little less?

Unidentified Company Representative

It’s a little less but it’s close.

Mark Miller – Novell Capital

Thank you.

Operator

And we have a question from the line of Eric Reubel with MTR Securities, please go ahead.

Eric Reubel – MTR Securities

Hi, good evening, and thanks for taking my question. First, just a quick clarification, the break even that you talked about at the $100 million level, is that for operations or earnings?

David Radloff

That’s earnings.

Eric Reubel – MTR Securities

Earnings and where with the operating income would the break even be?

David Radloff

Probably $5 million, maybe $8 million, less than that.

Eric Reubel – MTR Securities

Okay that’s great. Sometimes you break up the splits between fixed and variable costs in the quarter, could you break that out?

David Radloff

It’s about 55, 45, 55 fixed, 45 variable.

Eric Reubel – MTR Securities

Okay and on the discussion in the press release about you know reaching the break even over the four week period in the quarter and that’s really good news, my question is if you had to sort of you know take that over the whole quarter, how many units would be you know talking about to kind of get to the break even on or eliminating the costs per unit if you had to you know take that month and put it out over the quarter?

David Radloff

Sure. That’s about $70 to $75 million TSA plus (flexures), so suspensions, I’m sorry, TSA plus suspensions.

Eric Reubel – MTR Securities

Okay, in your view of -- you know Western Dig kind of described an excessive $8 or so million drives in the channel. In your view do you think that’s accurate and with WD managing inventory down in the quarter how do we see that impact your sort of bill plan for the quarter?

Kathleen Skarvan

Yeah, it – I don’t think we’ve got a real good sense of what the over hang or what kind of an interest situation there is at the drive level at that point. We’re facing our projections primarily on what we see our bill plans and what the allocations is that those particular customers are saying they’ll provide for us this quarter. So I’m sorry I don’t have a lot to comment.

Eric Reubel – MTR Securities

Okay, you know one last thing on the start up costs that are moving into the cost of goods. That number is $3 million for the quarter or so, is that correct?

David Radloff

That’s the amount of Thailand expenses and that’ll remain and most of that goes out to cost of goods sold.

Eric Reubel – MTR Securities

Okay and then you talk about kind of having redundant costs throughout those, taking about the rest of the year to factor through, is that – do we try to model that coming down at all during the year or should I …

Unidentified Company Representative

I would, I think that just a gradual move towards the end of the year is a reasonable assumption.

Eric Reubel – MTR Securities

Okay, thank you and good progress on the manufacturing side.

Unidentified Company Representative

Thank you.

Operator

(Operator instructions). Our next question come from the line of Tom Lewis with (inaudible) research, please go ahead.

(Tom Lewis)

Yeah, hey good afternoon, first of all with respect to the four week period that you’re in that had no burden on the TSA plus, we understand that that’s kind of where you had it ramped to until seasonal factors or you know we heard a couple of customers last week talking about the volume decrease right at the end of the quarter kicked in. Is that kind of – is that a fair way of understanding or is there something else that may have been not a longer period than that?

Unidentified Company Representative

I think it was more us wanting to put the inventory in place and so we ran it at a high level.

(Tom Lewis)

Got it.

Unidentified Company Representative

And once we got that inventory under level in place we pulled the volume production back wouldn’t you say?

Kathleen Skarvan

Okay, yes. You have to understand that we’ve been running at almost zero inventory as we were working through the quality issue a we had a quarter or so ago and so this helps us with our supply flexibility and assurance.

(Tom Lewis)

Right, okay, and I guess my other question would be with respect to Spot Check is there any – do you have any indication of the extent to which the, we’ll call it launch of this product, may have effected the customer behavior either in terms of telling you come back when you have the product or yes, I like the product but I’ll buy when Spot Checks available? And if you had time to see any difference in customer behavior since it’s been available?

Unidentified Company Representative

It’s so early (Tom) that it’s pretty hard to tell, I mean we really, we just started selling it outside the U.S. and feedback has been very good but some of those sales have been through distributors so there’s just a limited amount of product that’s actually gotten into the customer’s hands at this point. The feedback we’re getting is very positive. We’ve been showing it in the U.S. For example, we were at the SECM conference.

We referenced that in the script earlier and lots of interest, has been for a while from clinicians and from the administrative side in the U.S. and I think there’s some pent up demand that once we get clearance we’ll see some things happen and it’s just – to be very clear this is a great tool to – or know, really know, or low cost for patient just get that St02 rating. Find out if there’s a profusion problem or not and whether that patient then should be continuously monitored.

And I don’t think – I think maybe part of your question was are our customers behaving in a way that they’re sort of waiting for Spot Check and holding off on buying the other device? There might be a little bit of that going on. I don’t think that’s having much of a factor of what we’re seeing.

(Tom Lewis)

Okay and can you have – are you comfortable at all with handicapping when we’ll be able to take the not available in U.S. label off the ads and actually market it here?

Unidentified Company Representative

Well we submitted all of our material to the FDA in mid-December and their average timeframe that they shoot for is 90 days and so I can’t tell you any more than that. This is a pretty simple approval process so we’re not expecting any hiccups but you never know.

(Tom Lewis)

Okay, all right, thanks.

Unidentified Company Representative

Yes, thank you.

Unidentified Company Representative

Thanks, (Tom).

Operator

(Operator instructions). Our next question is a follow up question from the line of Sherri Scribner with Deutsche Bank. Please go ahead.

Sherri Scribner – Deutsche Bank

Hi, guys, I just had a clarification on the gain that you saw this quarter and short and long term investments. Was that because you sold some of your short and long term investments? Why did you have a gain and then is that something that you would expect to re-occur? Is that kind of a one-time thing?

Unidentified Company Representative

Sherri, that’s related to the auction rates securities that we previously settled with on Citi, the Citi Group on.

Sherri Scribner – Deutsche Bank

Okay.

Chuck Ives

We have a three-year period from the date of that settlement in which we can get additional gains if there’s opportunities to sell them at a higher price in the market.

Sherri Scribner – Deutsche Bank

And I thought that you guys were done with auction rate stuff, is that the case or am I – do you still …

Chuck Ives

Yeah, they’re not on our books. So to the extent there are redemptions of those auction rate securities we are able to recoup some of that money and we also have a provision where we can repurchase them from Citi Group if there’s an opportunity to sell them at a higher price.

David Radloff

We can repurchase – we have an option, Sherri, to repurchase them at the price that Citi sold them to us and if we can – so Chuck does a very nice job of staying on top of that and if we can find an opportunity to buy them back and sell them for more we do.

Sherri Scribner – Deutsche Bank

And how long does that go, for the next two years? Is that …

David Radloff

About two years more.

Sherri Scribner – Deutsche Bank

Okay. Thank you.

Operator

And I show no further questions at this time, Mr. Fortun, please continue.

Wayne Fortun

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

Operator

And ladies and gentlemen that concludes our call for today, thank you for your participation, you may now disconnect.

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Source: Hutchinson Technology, Q1 2011 Earnings Conference Call Transcript
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