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Hutchinson Technology Inc. (NASDAQ:HTCH)

F3Q11 Earnings Call

July 26, 2011, 5:00 PM ET

Executives

Chuck Ives – Treasurer and Director of Investor Relations

Wayne Fortun – Chief Executive Officer

Rick Penn – President, Disk Drive Components Division

Dave Radloff – Chief Financial Officer

Analysts

Sherri Scribner – Deutsche Bank

Rich Kugele – Needham & Company

Matthew Swope – Gleacher Securities

David Epstein – CRT

Tom Lewis – High Road Value Research

Operator

Ladies and gentlemen, thank you for standing by, and welcome to the Hutchinson Technology third quarter results conference call.

During today's presentation, all parties will be placed in a listen-only mode. Following the presentation, the conference will be opened for questions. (Operator Instructions) This conference is being recorded today, Tuesday, July 26th, 2011. And I would now like to turn the conference over to Mr. Chuck Ives, Director of Investor Relations and Treasurer. Please go ahead, sir.

Chuck Ives

Good afternoon, everyone. Welcome to our third quarter results conference call. On the call with me today are Wayne Fortun, our Chief Executive Officer; Rick Penn, President of our Disk Drive Components Division; and Dave Radloff, our Chief Financial Officer.

Wayne will provide an overview of the business, Rick will provide an update on our Disk Drive Components Division, and Dave will speak to our financial results and guidance.

As a reminder, we will be providing forward-looking information on-demand for and shipments of disk drives and the company's products, market position, product mix, pricing, production capabilities, assembly operations in Thailand, capital spending, product costs, manufacturing consolidation and restructuring, operating expenses, our BioMeasurement Division's results, product commercialization and adoption, and the company's cost structure, 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 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 third quarter, our suspension assembly shipments increased 15% and our net sales grew 14% and we cut our net loss nearly in half compared to our second quarter.

Our improved financial performance is driven by an increase in shipments and the cost benefits from actions we have taken to position ourselves as the industry's lowest cost producer of suspension assembly.

Improved efficiency in our TSA+ production, the transition of assembly operations to our Thailand facility, the consolidation of our manufacturing operations and the restructuring of our business are reducing our costs and improving our competitive position.

Volume with all of our customers increased in the third quarter compared with the preceding quarter and we believe we gained a modest amount of market share in all of the disk drive segments as a result of share shifts among our customers and improvement in our share positions on some existing customer programs.

I'll turn it over to Rick now for a recap on the Disk Drive Components Division.

Rick Penn

Thanks, Wayne. During our fiscal 2011 third quarter, we shipped 117.9 million suspension assemblies, up 15% from a 102.3 million suspension assemblies in the preceding quarter. After a weak start in the first-four weeks, our demand strengthened in the final nine weeks of the quarter.

As Wayne mentioned, compared to the preceding quarter, volume increased for all customers in across all disk drive market segments.

For the quarter, our mix of product shipped was as follows. Suspensions for 3.5-inch ATA applications increased 6% sequentially and accounted for 58% of our shipments compared with 63% in the preceding quarter.

Shipments for mobile applications increased 43% sequentially and accounted for 19% of our shipments, up from 16% in the preceding quarter, and shipments for enterprise applications increased 22% sequentially and accounted for 23% of our shipments compared to a 21% in the preceding quarter.

The average sell price in the fiscal 2011 third quarter was $0.59 compared with $0.60 in the preceding quarter. A favorable shift in product mix with suspensions for mobile and enterprise applications accounting for more of the quarter's total shipments, somewhat mitigated a sequential quarter decline in average selling price.

Our third quarter shipments of TSA+ suspension assemblies increased 11% sequentially to $60 and accounted for 51% of our shipments compared with 53% in the preceding quarter when total volume was lower.

Looking ahead, we expect TSA+ suspensions to account for 55% to 60% of our fourth quarter shipments and about 80% of our shipments by this time next year. Our TSA+ yield in cost per part continue to improve in the third quarter.

As more of our product mix shifts from subtractive TSA suspensions to additive TSA+ suspensions and we make further improvements in our TSA+ process efficiency and capacity utilization, our total cost per part will continue to improve.

In regards to our manufacturing consolidation plan, the transition of our Hutchinson components operation into Eau Claire site is progressing well. The startup of our photoetching processes in Eau Claire and the movement of TSA+ equipment from Hutch to Eau Claire are both on track with our plan.

In our assembly operation in Thailand, production output continues to improve and the cost per part there is ahead of our goal at this stage of the production ramp. We expect our total cost per part to improve significantly as output at our Thailand assembly operations grows as more of our volume shifts to TSA+ and as we complete our consolidation and restructuring efforts.

Overall, we are encouraged by the progress we are making towards being the industry's lowest cost producer of suspension assemblies and we believe our competitive position is strengthening.

We are also pleased with the recent win on dual-stage actuated or DSA program. With this win we are now slated to provide volume product on DSA programs with two different customers. While our near term volume of DSA suspensions will be minimal, we currently expect our DSA shipments to increase steadily in calendar year 2012 and to become a more meaningful portion of our product mix a year from now.

Turning now to our current demand, based on actual shipments through the first-four weeks and current demand forecast from our customers, we expect fourth quarter shipments to increase 5% to 10% compared with the third quarter. Demand looks solid through August with less visibility for September.

With that I’ll turn the call over to Dave now, for discussion of our financial results.

Dave Radloff

Thanks, Rick. Net sales for the fiscal 2011 third quarter totaled $72.2 million, up 14% from $63.3 million in the preceding quarter. The revenue percentages for our top customers in the quarter were as follows. Western Digital 53%; SAE/TDK 19%; Seagate 14%; and Hitachi 10%.

Net sales for the quarter included BioMeasurement division revenue of $809,000, up from $718,000 in the preceding quarter and $536,000 in last year’s third quarter. We saw an increase in distributor sales in the third quarter consistent with the shift in our BioMeasurement sales model as part of our effort to minimize the division's costs.

Sales also benefited from orders for our Spot Check product, which provides a cost effective method for clinicians to experience the benefits of StO2 monitor.

Our gross profit in the third quarter totaled $4.2 million or 6% of sales. This is a $6.5 million improvement over the $2.3 million gross loss we recorded in the preceding quarter. The sequential quarter improvement resulted primarily from increased volume, improved production efficiency and the initial benefits of our manufacturing consolidation and restructuring actions. Compared with the preceding quarter, our variable cost per part declined 13%.

The total fixed costs were flat despite the inclusion in our third quarter of $2.4 million of accelerated depreciation related to our manufacturing consolidation actions. Including the accelerated depreciation, third quarter depreciation and amortization totaled $13.1 million. In the preceding quarter, depreciation and amortization was $12.8 million and included accelerated depreciation of $700,000.

R&D expenses in the quarter were $3.5 million, down from $3.9 million in the preceding quarter. SG&A expenses decreased to $8.8 million from $10.5 million in the preceding quarter.

With our total severance payout now expected to be less than our initial estimate of $6.7 million, we recorded a reduction of $600,000 for that estimate in the third quarter. On our income statement, this is shown net of $300,000 of equipment moving costs related to the manufacturing consolidation and restructuring plan.

Our fiscal 2011 third quarter operating loss totaled $7.8 million, down substantially from the $23.4 million operating loss reported in the preceding quarter. The third quarter operating loss in the BioMeasurement Division totaled $2.2 million, down from $2.7 million in the preceding quarter. After completing the planned cost reductions, we estimate that the division's operating loss will be less than $1 million per quarter.

Interest expense in the fiscal 2011 third quarter was $3.6 million flat with the preceding quarter and included $1.7 million of non-cash interest expense related to the accounting for convertible debt instruments compared with $2 million in the preceding quarter.

Our third quarter pre tax and net loss totaled $10.9 million or $0.47 per share. In the preceding quarter, our net loss totaled $20.5 million or $0.88 per share. Excluding $2.4 million of accelerated depreciation, $1.7 million of non-cash interest expense, the $600,000 reduction in estimated severance costs and the $300,000 of equipment move costs, our non-GAAP net loss for the quarter would have been $7.2 million or $0.31 per share.

Cash used by operations in our third quarter totaled $3.9 million, including $3.6 million in severance payments. Capital expenditures in the quarter totaled $2.1 million, resulting in negative free cash flow of $6.1 million.

Changes in our working capital impacted our cash flow as our receivables increased by $11.4 million compared with the end of the preceding quarter. This was primarily due to the timing of customer payments on higher sales that occurred in the latter weeks of the quarter. Our cash and investments at quarter end totaled $55 million, down $7 million from the preceding quarter.

Subsequent to the end of the quarter, we issued 45.2 million of 8.5% convertible senior notes, with the first put date of January 2015 and used $3.1 million in cash to complete an exchange offer for $46 million of our 3.25% convertible subordinated notes.

In the last six months, we have reduced the outstanding principal amount of the 3.25% notes, which have a first put date of January 2013 from a $197.5 million to $76.2 million improving our financial flexibility.

Our share count at the end of fiscal 2011 third quarter was approximately 23.4 million shares resulting in book value per share of $9.17. This includes $0.78 per share, primarily related to the portion of our convertible debt that we are required to classify shareholders equity under the accounting guidance for convertible debt instruments.

Now, turning to our outlook. As Rick mentioned, we expect suspension assemblies shipment in our fiscal 2011 fourth quarter to increase by about 5% to 10% compared with this quarter's buy. Suspension assembly pricing is expected to remain competitive.

The cost of goods sold, a split between fixed and variable costs moved closer to 50-50 in the third quarter as a result of higher volume and we expect this split to be about the same in the fourth quarter.

The cost of our manufacturing and consolidation plan will include additional cost to move equipment from Hutchinson to Eau Claire, and another $200,000 of accelerated depreciation in the fourth quarter.

With respect to the realization of the cost reduction benefits of our consolidation and restructuring plans, we are on track with the timing we had described previously. We estimate our plan will produce a $50 million to $55 million reduction in our costs on an annualized basis compared to our cost in the second quarter of fiscal 2011. In our fourth quarter, we expect to realize about 60% of this savings or approximately $8 million in that quarter.

We estimate that our third quarter results included the realization of about 25% of the savings or about $3 million in that quarter. We expect the full quarterly savings to be realized by the beginning of the fiscal 2012 second quarter.

As a reminder, we expect the saving to be spread across our P&L as follows. Two-third to 70% of the savings will be in cost of goods sold; 25% to 30% of savings will be in SG&A; and the remainder will be in R&D.

Of the savings in cost of goods sold, 60% to 70% of the savings are a reduction of fixed costs with the remaining 30% to 40% lowering our variable costs. As a result, we estimate that our quarterly fixed costs and cost of goods sold will be reduced from $36 million in our fiscal 2011 second quarter to approximately $30 million in our fiscal 2012 second quarter.

R&D expenses are expected to total about $15 million for fiscal 2011 and $14 million on an annualized basis after the completion of our cost reductions.

SG&A expenses for fiscal 2011are expected to be $41 million to $42 million and include $4.7 million of startup expenses that were incurred in our first quarter for our operation in Thailand. After the completion of our consolidation and restructuring efforts, we expect SG&A expenses to be about $28 million on an annualized basis.

Depreciation and amortization expense in fiscal 2011 is expected to be a little less than $50 million.

Subsequent to the additional debt refinancing that we completed in July, our interest expense is expected to increase approximately $4 million per quarter, including $1.5 million of non-cash interest expense. Our tax rate is still expected to be near zero.

Finally, we estimate that our capital expenditures for fiscal 2011 will total approximately $15 million.

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

Wayne Fortun

Thanks, Dave. We are encouraged by the progress we made in the third quarter. Our competitive position is improving as we begin to realize the benefits of improving TSA+ efficiency, shipping a portion of our assembly volume to Thailand operation and further reducing our costs through the consolidation and restructuring of our manufacturing operations.

As we’ve said before, our goal is to be the industry’s lowest cost producer in suspension assemblies and the benefits of our strategic initiatives will significantly improve our cost structure over the next couple of years. We benefited in the third quarter from share shifts from our customers and improvements in our share positions on certain existing programs.

Our volume grew at a greater rate than estimates of the overall growth in disk drive and suspension assembly shipments. Higher volume in conjunction with our favorable changes to our cost structure will help us to return to positive cash flow and profitability.

That concludes our prepared remarks. McKayla [ph], please begin the polling for questions.

Question-and-Answer Session

Operator

Thank you, sir. Ladies and gentlemen, we will now begin the question-and-answer session. (Operator Instructions) And our first question does come from the line of Sherri Scribner with Deutsche Bank. Please go ahead.

Sherri Scribner – Deutsche Bank

Hi, thank you. Congratulations for the results in the quarter. I just wanted to get a sense of your guidance suggesting unit growth 5 % to 10% sequentially, that’s a bit better than the HDD makers which are guiding in a low single-digit unit growth. So, is the implication that you think you’re going to gain additional share in the September quarter or is there something else going on that’s driving that better than industry guidance?

Rick Penn

Hi, Sherri. This is Rick. Maybe the first point to make is suspension volumes in a given quarter don’t necessarily track exactly what the drive shipments look like just because of inventories and we’re sort of at the tail at the end of the dog. And so, we don’t know, we track within a quarter, the same as the drive shipments just because of build plans and inventories and so forth. So, there continue to be some differences there. And perhaps we’ll gain a bit more share, it’s hard to tell frankly. But what we can say is that when we look at how the quarter has started and we look at what customers are signaling us as far as their plans to pull product and so forth that it looks like that 5% to 10% is a very safe range for what we can do this quarter. And that’s about all we can tell you as far as what it looks like to us, but it looks pretty strong.

Sherri Scribner – Deutsche Bank

With the stronger than industry unit growth in September, should we expect that December would potentially be less strong than the HDD industry potentially flat, considering the strength and maybe some of the suspensions get purchased in the third calendar quarter versus the fourth calendar quarter?

Rick Penn

It’s – I don’t know that I’d go there. I mean that’s one scenario, but I don’t know that that’s anymore likely scenario than some other scenario where they might still have aggressive build plans or something. So it’s just hard to – it’s hard to go there.

Wayne Fortun

I wouldn’t want to leave anyone of the impression that we believe that the drive makers are busy building inventory this quarter and cut it off – and cut back later.

Rick Penn

No, we’re not saying that.

Wayne Fortun

No. So I would say that in all likelihood, we think this represents sort of – the timing is always as Rick says, we’re always shifting a little bit Sherri, between what’s being built and what's shipped. But I wouldn’t think that there is any real build of inventory and so I don’t think – we’re not expecting the things to drop off in the December quarter.

Sherri Scribner – Deutsche Bank

Okay. I guess just with the shift, what is typical seasonality for you guys in the fourth calendar quarter?

Rick Penn

Yeah, I mean, we could very likely see a pretty strong December quarter.

Wayne Fortun

Yeah.

Rick Penn

If you look at sort of seasonal history.

Wayne Fortun

We have normal seasonality.

Rick Penn

Yeah.

Sherri Scribner – Deutsche Bank

Yeah.

Wayne Fortun

Strong December quarter too.

Sherri Scribner – Deutsche Bank

Okay.

Dave Radloff

I will say, but you know normal seasonality goes back (inaudible) no.

Rick Penn

Yeah. having said all of that it’s really hard to tell. I mean, we don’t have a lot of visibility even to the month of September at this point, although we have some and it looks good. But now you move a quarter out and it's right to tell. But we don’t have any reason to believe that there will be some pullback because there is some build up going on now.

Sherri Scribner – Deutsche Bank

Okay. And then, it looks like you gained some share with Seagate this quarter based on the percentage of revenue from Seagate. Did you get on new programs with Seagate or is that just programs that you’ve already qualified on?

Rick Penn

Really, current programs we’re strong and so while we were playing we benefited from that. We’re certainly working with them on new programs as well, but that wasn’t in the effect that you saw on this last quarter.

Sherri Scribner – Deutsche Bank

Okay. So no new program. Okay. Great. Thank you.

Rick Penn

You bet.

Operator

Thank you. And our next question comes from the line of Rich Kugele with Needham & Company, please go ahead.

Rich Kugele – Needham & Company

Thank you. Good afternoon. Just a few from me, first the growth in notebook line was considerable, certainly much greater than the actual notebook market by far. What correlation can we make to the customer list if any? And would you expect to see that moderate to more industry growth rates in the next quarter?

Rick Penn

Rich, the mobile strength resulted probably from a couple of things. One is the Japan situation and the supply problems due to the tsunami and what that caused in terms of shifting around and where business landed with the different drive companies tended to benefit programs that we’re on. And I think maybe more fundamentally, looking forward the share shifts that are going on as Seagate combined with Samsung and as WD combined with Hitachi and what that means for Toshiba as the third player that’s sort of a fundamental that is continuing as we look forward, and the share shifts there resulting from that have also helped us and turned out to be good for the mobile business going forward.

Rich Kugele – Needham & Company

Okay. That's helpful.

Rick Penn

That’s really what’s been happening, yeah.

Rich Kugele – Needham & Company

But then, Rick, in terms TSA+, now that the major milestone hitting greater than 50% for TSA+, the whole idea was that you were going to be able to get a point where you start also sourcing some of the underlying components to make TSA+ yourself, where are you in that process and when should we expect to see that benefit gross margins?

Rick Penn

I’m not sure I understand Rich, what you mean by sourcing the underlying component?

Rich Kugele – Needham & Company

Well, you're buying some of the assemblies on the outside till Rick.

Rick Penn

We’re buying some of the TIS...

Wayne Fortun

Flexures.

Rick Penn

Flexures from Nitto Denko. Yes that’s true. And we’re going to plan to continue to do that over time, Rich. I mean, I think our flexure purchases for additive flexures from Nitto, if you go back several quarters have ranged anywhere from something like under 10% of our suspensions to around 20% of our volume and I think that’s about where we’re currently at. And we like Nitto as supplier and a partner and they’ve got good flexures and they help us manage our capacity adds, and they help the total economics then for us and for our customers. And so, we see Nitto as supplier and hopefully a good partners over the long haul for some portion of our flexures. I don’t know if that’s addressing the question that you asked.

Rich Kugele – Needham & Company

Yeah, I just, I misunderstood, I thought that over time, maybe you would be entirely the only supplier vertically sourced – internally sourced, but, so it sounds like that only some portion may over time remain externally sourced.

Rick Penn

That would be our intend, yes.

Rich Kugele – Needham & Company

Okay.

Wayne Fortun

And just to be clear Rich, the 51% does not include any externally procured flexures.

Rick Penn

That’s just our…

Wayne Fortun

That's all of our own flexures.

Rich Kugele – Needham & Company

Okay, that’s helpful. And then, lastly David, with the remaining debt that’s still callable for January 2013, what can you say about your plans to deal with that debt. Do you have it down to a more manageable level and now you just deal with it with cash or what can you talk about publicly?

David Radloff

Sure. Well, first we feel, certainly it's a much more manageable level and we got about 18 months, not quite, but almost 18 months to address it. And so, we expect that we'll likely finance a portion of that, but we also at this point are looking to more focus on our performance and improve the financials and we are not aggressively pursuing additional financing in the near term.

Rich Kugele – Needham & Company

Okay, great. Thank you very much.

Operator

Thank you. And our next question comes from the line of Matt Swope with Gleacher Securities. Please go ahead.

Matthew Swope – Gleacher Securities

Hi, guys. Just a follow up on a couple of those points. So the tsunami issue, is there any way to measure what share gains you had that might be temporary and related to the tsunamis that we might expect to reverse over the next couple of quarters?

Rick Penn

Matt, here is the way we think about it. The share gains that we made are just to put in perspective, roughly we're around 20% of the market and a quarter or quarter and a half back we were probably in that 17% or 18% range, but we are now getting into levels of change that are a little bit difficult to measure, but generally that’s the kind of sort of shift, where the shift has been positive and to some degree we’ve gained some ground. And, the way I look at it is that we are in that 20% range and I think because of momentum on upcoming programs that looks good, because of overall customer confidence that’s growing in us due to TSA+ successful ramp, due to Asia ramp, due to the consolidation and the costs that are coming down that will provide good economics, due to the financing and refinancing that’s going on. Those things are really increasing customer confidence in us. And so, I think we’re on a margin, who knows at what pace to move our volumes and our share up from this point.

Now, will we bounce around a bit? That could be, but I think generally, we think we’re positioned and getting positioned much more competitively and we’re hearing that from our customers and they are behaving that way and we like the momentum on the new follow-on programs. So, with all that said, we see good positive momentum. It’s really hard I think to peg exactly, due to the tsunami what that impact is. But I think that may have already been sort of off the radar and the shifts due to the market consolidation that are occurring are there already and more permanent, and so I don’t know that any of that changes goes away.

Matthew Swope – Gleacher Securities

That’s fair and obviously there are a lot of moving pieces.

Wayne Fortun

Yeah.

Matt Swope - Gleacher Securities

And to that same point, as the quarter went along you kept increasing your guidance and obviously you had a much better quarter than we thought originally. How much visibility do you have? And you talked about what you can see for this month and next month. As you look into September, is it completely hazy or do you have some sense?

Rick Pen

No, no, September is not completely hazy. We’re getting, again strong signals from our customers and what their pulls are going to look like as we move through the quarter including through September. So it’s not like visibility is a complete haze. It’s – we see a pretty decent quarter.

Wayne Fortun

Yeah, I think the challenge is within the disk drive industry and they are at the end of the PC or other data storage demands and those numbers move on them, and so they have a clear picture, we don’t have a clear picture.

Matthew Swope – Gleacher Securities

Right. Makes sense.

Rick Penn

Yeah.

Matthew Swope – Gleacher Securities

And a different topic, as you went through the exchange process on that convertible bonds, you have changed the nature of the exchange. Can you talk about why originally you had a minimum number of bonds you were looking for, and then as you revised the exchange offer actually took away the minimum and had a maximum.

Wayne Fortun

I’ll talk to the second piece, when we look at the participation before we extended the exchange, obviously there wasn’t sufficient participation and we looked at, what it would take to meaningful increase that participation and among the options that we had available to us, when we felt was going to be the most effective and to achieve what we are looking to was additional cash. Having said that we didn’t want to have an unlimited amount of cash or max out that cash in the exchange offer. And so, we have – we finished this quarter with $55 million, we're going to be using $3 million of that or we have used $3 million of that to sell it at exchange after the quarter end. And so, we didn’t want that to be $6 or $7 or $8 million of cash outflow and so that’s why we put a maximum amount.

Matthew Swope – Gleacher Securities

I see. That's fair. And can you give us an update on where your cash number stands today or at the most recent time you’ve seen the number?

Wayne Fortun

We’re not going to update anything past the quarter end.

Matthew Swope – Gleacher Securities

Okay. And then just one last one, what EBITDA number would you guys use or calculate from the numbers you just released?

Dave Radloff

We put it at about $6 million of positive EBITDA for the quarter.

Matthew Swope – Gleacher Securities

Got it, great. Thanks for the quarter guys.

Wayne Fortun

You bet.

Operator: Thank you. And our next question comes from the line of David Epstein with CRT. Please go ahead.

David Epstein – CRT

Good afternoon. I might have missed it, but did you give or can you give any sort of free cash flow or net cash burn outlook?

Dave Radloff

Sure.

David Epstein – CRT

Or either – for either the coming quarter or whatever period you are willing to give.

Dave Radloff

Sure. I will talk at least to the coming quarter. We think that we can be – first, I’m going to put a caveat. Obviously, we had a very large AR change this past quarter. And we think that we should have that reversed somewhat in a current quarter and with that in mind we think that we can be fairly neutral in cash in this coming quarter. But the AR balance will have a lot to do with that.

David Epstein – CRT

And that’s before or after CapEx and severance etcetera?

Dave Radloff

That’s everything included. So basically I’m saying if the AR moves away we think we would end with the cash balance very similar to the cash balance we ended this quarter with.

David Epstein – CRT

Are you talking like an $11 million kind of full reversal, I mean because obviously it’s a big number.

Dave Radloff

No, not a full reversal, because revenue has been growing. So part of that increase in receivables is due to revenue growth, right?.

David Epstein – CRT

Right.

Dave Radloff

And a part of it was just due to payment timing, and I would say it’s the payment timing piece that we would think should generally be more normalized at the end of this quarter.

David Epstein – CRT

Okay. How about further out?

Dave Radloff

We are expecting to start generating cash starting with the first quarter of next fiscal year – and that to be color on amount, yeah, but we expect to be generating cash.

David Epstein – CRT

Okay. When you are talking about, potentially roughly flat in the coming quarter, are you also including like the cash for the tender?

Dave Radloff

Yes. That's included in that whole cash outlook.

David Epstein – CRT

Okay. And can you talk about the other major working capital items in this just past quarter in addition to your $11 million increase and receivables, what was the net of everything else?

Unidentified Company Representative

Sure, just one second.

Unidentified Company Representative

So our payables increased that was about $8 million, we had payables and our accrued expenses, our inventories were down by about $2 million and those were really the major categories.

Unidentified Company Representative

That was a artificial load in a previous quarter to some degree.

Unidentified Company Representative

Right.

David Epstein – CRT

Okay, but it sounds like the net then of working capital was roughly flatter or maybe like a million use with cash.

Unidentified Company Representative

No, it was around $4 million.

David Epstein – CRT

Okay.

Unidentified Company Representative

There was another $2 million in other assets that decreased cash.

David Epstein – CRT

Okay. So, a net $4 million use.

Unidentified Company Representative

Correct.

David Epstein – CRT

Okay. And then, if I can ask you a final question. As far as sort of what maybe changed strategically regarding your strong load, how should – do you – and I don’t doubt you, but you really believe that in the past, the question of your financial strength was a very big issue and folks staying away from you?

Unidentified Company Representative

I think it definitely had the impact, no question about it. I can tell you that we had very serious conversations with our customers including at top levels management and CFO to CFO talking about our health and solvency and I think that some of this financing activity and getting this thing down to a much more manageable number and changing our cost structure so that just as you – the train of your questions David in terms of our cash flow, I think has brought about some enough confidence that we are seeing our customers coming back to us in a way that, I think they were holding off for a while because they were uncertain…

Unidentified Company Representative

Yeah, I think there is no question that, maybe it was a key piece of the confidence factor.

Unidentified Company Representative

But nobody stayed away entirely, but they limited us as I think how I would portray it.

Unidentified Company Representative

Some high grade.

Unidentified Company Representative

Yeah.

David Epstein – CRT

Now, some of your strong results are stronger results are manifesting themselves now, your past quarter and a lot of the decisions that drove your past quarter from your customers, probably happened many, many months ago, was that all – was that really all influenced by, of you or you are improving outlook, I guess it's a little harder to flatten that five or six months ago that they would have that confidence or maybe they just really believed your blueprint or whether it just other thing some of them potentially lack of being in the right programs at the right time plus the Japanese tsunami etcetera.

Unidentified Company Representative

Well, it's all of those things, but you don’t have to go that very far and our TSA+ operation for example wasn’t really up and running with high yields at very significant volumes and you don’t have to go that very far where our Asia operation, assembly operation was not up and running well. And with the consolidation, we just announced, what a quarter and half ago or something. So we made some very significant shifts at HDI in the recent past, not to mention the financing or refinancing that’s going on. You know, that coupled with certainly the Japan supply situation, played well, given what programs we were lined up on and we’ve been all through all of this working as closely as possible with our customers on programs and new programs. And so, investments we were making in the past and significant shifts and changes that are quite recent are affecting the business and I said before that customer confidence is going up.

Unidentified Company Representative

And to add to that I think it is that clarity perhaps we can talk about going to Thailand, but opening – but actually producing the first product and being qualified on that product in January as customers are looking at it and saying well, it looks like these guys are going to meet their schedule and they are going to do it and the money is already spent and so that should start to bring down their costs and improved our logistics support. And in the case of the TSA+ we had a rocky road there about this time last year, but we came out of that about in October and started talking about yields and improving and so forth, and it looked, and by the time we got to January, I would say several of our customers started to see this. It looks like we’d hit a level of consistency that their confidence level in TSA+ rose and so one might argue that from the standpoint of the things we have been talking about that we are starting to show actual results of the tactics and the action we were putting forth, we're bringing results. And so I think that may have been the part of the point at times when customer started to feel somewhat differently.

David Epstein – CRT

Yes.

Unidentified Company Representative

But of course, they can and did in some cases change on volumes simply on product that was already that we were on as well as our customers and they were just able to shift volumes within those programs.

Unidentified Company Representative

Yeah, I think customers are looking at what we are doing and what that means for our costs and the economics for them, and they are looking at that very favorably and I think what we haven’t said is coupled with all of that is we’re keeping a very strong core and technical team in place that provide to the kind of support, the kind of ramps that you know, the kinds of sort of joint work with our customer technical team that you know, I think leading in the industry and so we’re not sacrificing that really core technical ability as we marched down the path of having costs that are the lowest.

David Epstein – CRT

Was – is price a big factor, obviously lower costs allows you to compete on price, but is price helping you to gain business.

Unidentified Company Representative

We’re priced competitively, no matter what and we’ll just keep doing that. And we know that if we’ve got cost that are at least as low as, not lower than the other guys that we'll be in the position to always win that that game long term.

David Epstein – CRT

Thanks very much and congratulations on your progress.

Unidentified Company Representative

Yeah.

Unidentified Company Representative

Yeah.

Unidentified Company Representative

You’re welcome. Thanks.

Operator

Thank you. And our next question comes from the line of Eric Reubel with MTR Securities. Please go ahead.

Eric Reubel – MTR Securities

Good afternoon, gentlemen. Thanks for taking my questions. You know Rick or Wayne talked a lot about some of the share increases you saw on existing programs and we talked a lot about impact of tsunami, whether or not those are quantifying those impacts and specific terms may not be possible, but I wanted to ask from the high level you’ve talked about having hard to hard conversations, CFO to CFO with your key customers about your solvency. You mentioned your confidence is improving, is there any sort of high level discussions that you had with your customers about supply chain diversification with respect to suspension assemblies and you know given the impact of the earthquake, is there a meaningful understanding that keeping diversification is a priority and something that’s also specifically driving the share increases that you saw on existing programs during the quarter.

Unidentified Company Representative

Yeah, I got. I think you are looking at that the right way and to add to that, having at least another source for the key and most expensive component of the suspension which is the flexure, the additive flexure having another source that's really up and running and viable with our TSA+ is, I think part of that supply chain thinking as our customers look at the whole situation.

Eric Reubel – MTR Securities

Okay. That’s helpful. Also Western Digital's expecting regulatory approval for the Hitachi acquisition, they said it’s moving on well, Europe by September, hopefully the US by the end of the year end any other regulatory approval that would be required. Is it too early to mention any color that you can provide around, how that acquisition is going to effect with the WD, how that’s going to effect potential programs as you line up for the new combined Western Digital and Hitachi?

Unidentified Company Representative

It really is too really for us to see any of that. We’re just working very closely as we have been with WD and we see a really strong partnership getting stronger there. And we continue to work with HGST. And it’s really not clear to us how as they combine, how programs will shift and so forth. We just can’t tell you.

Eric Reubel – MTR Securities

Okay.

Unidentified Company Representative

But having said that, we feel, it’s a combination that we feel good about and we’ll keep working hard to earn a real strong position with WD as they combined HGST.

Eric Reubel – MTR Securities

One more question on the products, you mentioned Rick, that there is DSA win in the quarter. Can you give a little more color around, you know, how meaningful you think DSA is going to be as a volume. When do you think those types of programs get into volume and what sort of revenue, what sort of ASP premium can we expect from that.

Rick Penn

Sure.

Eric Reubel – MTR Securities

And does that start to – how does that start to offset some of the price erosion that is normal to the business?

Rick Penn

Yeah. Well, first of all, DSA looks like it’s really needed for drive programs, 3.5-inch programs desktop or enterprise when they move to one terabyte per platter kinds of densities that tends to be pushing and you can look what drive guys are doing and saying, there. But those are upcoming programs tend to shift towards needing DSA to accomplish what they’re trying to accomplish.

Our volumes, we’re just in the early sort of prototype tens of thousands a week kind of volumes there. As we move through the December quarter, there could be, hundreds of thousands per week. As we move into early next year, the calendar year, 500,000 per week and then, you know, a year from now maybe represents 20% of our volume or, you know, 2 plus million per week something like that just to give an idea. As we look at programs and how they might ramp, kind of how that volume might move. So, really not much effect on us in the year 2011 and more effect really in the back half of 2012 and just in terms of the volumes.

As far as pricing goes, there will be some pricing reset because there is an added component under suspension, two piece, Electric Motors that had purchased material content to the cost and to the price of those suspensions. And I think that the way we were thinking about the business frankly is that it will be – it will be quite competitive. And our margins and the value that we add will probably not be unlike the margins that we‘ve received on the more conventional single state suspensions on the value that we add there. And so, that’s how we’re thinking about that business, but you will see pricing that will be higher because of that added material content going through.

Unidentified Company Representative

I guess, that one adder I'd say is that now we back away and start talking long-term, I think that DSA, I would fully expect that we’ll see DSA on 50% of all product in three years or four years something in that neighborhood.

Unidentified Company Representative

Yeah, it will become…

Unidentified Company Representative

It is going to be a fundamental element of how drives are made in the future. And so we were pleased, not real anxious, but pleased to get in at this level. We think we’re in the ground level with when as DSA starts to ramp up now and we’ll see it de-ramping up over throughout 2012 and beyond.

Rick Penn

Yeah, if we are executing well, if our product is performing, we hear in some cases, you know, better than the other guys. And we think we’re positioned partially because of the experience we’ve had in the past with this type of product. We think we’re positioned well for this upcoming programs as Wayne said, that will go DSA as we look down the road.

Eric Reubel – MTR Securities

Great. Just a couple final ones from me, Dave. Could you give us CapEx and depreciation guidance for fiscal 2012 and could you provide any color around the credit facilities last revolver that you announced?

David Radloff

Sure. So, CapEx we expect to be in the neighborhood of $20 million in fiscal ‘12 and it’s early, because a lot will depend upon demand and TSA plus ramps at additional, it’s new capital and certainly we in that $20 million that includes an estimate for what to be TSA+ capital would be, but $20 million is a reasonable numbers to use at this point.

Eric Reubel – MTR Securities

Okay.

David Radloff

And the deprecation and amortization somewhere in the $42million to $44 million for year range.

Eric Reubel – MTR Securities

Okay.

David Radloff

And then on a credit facility, we’re still negotiating that credit facility and there isn’t really more color I'd give at this point other than it is secured facility and in the range of the balance we told you.

Eric Reubel – MTR Securities

All right, gentlemen. Congratulations on the good results. Thanks.

Wayne Fortun

Yes, Thank you.

Rick Penn

Yes, thank you.

Operator: Thank you. 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, thanks for the – all that color on DSA. We heard a lot last week about the hard drive industry is looming a product refresh and challenges related to that. If there is anything about the suspension assemblies you’ll be shipping to, into that new product that is you know, represent a change from existing models besides the DSA that we need to know about. And I’m thinking specifically to anything that so we say yet – as yet unresolved engineering issue to deliver inside?

Rick Penn

Tom, I would say no. I mean, I think the biggest change really is the DSA element. As we march through time, customers need more traces heading up to the head for various reasons. If you achieve certain electrical characteristics and so we’ll be marching towards blinds and spaces that continue to get a bit finer than they are, but there is really nothing out of the ordinary about that. It’s all, no, I don’t think so. I think the investments we’ve been making in capability and in technology related to TSA+ and frankly to DSA are ever since in a pretty good solid place to move ahead with what the requirements are looking like as we look at these programs.

Wayne Fortun

Tom, I – this is Wayne speaking. I am still enough of an engineer to sort of throw in my few sense on the technology side, as I look at this. I’ve kind of looked at the last four years as sort of a respite in technical demands of the suspension. It really, the perpendicular recording improved, the aerial density improvement capabilities for the drive magnet so much that there really wasn’t much coming back to the suspension level to help them get there. And now, during that time, we were busy investing in TSA+ simply to get the circuits to be where they needed to be. But that really wasn’t mechanical or other elements that caused the suspension to aid the drive makers. But what we are seeing now beyond dual-stage, we are seeing new requests for improvements in the mechanical attributes that we adjust the suspension for on static attitude, tighter requirements for resonance control. Tighter requirements for the gram force, the load that supplied in. So, part of and you probably, if you follow the drive industry, you’ve heard the drive makers talking about and the industry analysts talking about in general that the aerial density seems to be slowing down and that the difficulties and the challenges are getting to be more significant to further improve aerial density on the perpendicular recording media. And therefore, they’re now using every little trick that they can and that comes back to the suspensions. And so for us, that usually plays well for us because we’re good at that kind of work. We’re a technology company that answers those problems well. So, I would say that, and I look at it is that this is a better time and opportunity for us and we’ve seen in four years for that Rick.

Rick Penn

And I think the point I was trying to make along with what Wayne is saying is that, whatever glitches the drive guys maybe having as they move on to these next levels of capability and performance. From a suspension standpoint, we feel pretty well prepared for what those suspension requirements are. And as Wayne said, there are some technical shifts going on, DSA miniaturization, the traces some mechanical kinds of things that play well into what we believe we’re pretty well ready for.

It also a relentless, just a relentless effort on the part of the drive guys to ring out, improving their production lines yields and ring out costs on the HDA and HSA lines, I mean, no surprise there, right. And so when it comes to integrating, tailoring the suspension in ways that it integrates very well in their line and has a right resonance characteristics and the right tail termination approaches and so forth. Those kind of things are also driving suspension requirements on just drive performance. And again, we feel like we’re in a good place technically to address those issues.

Wayne Fortun

Clearly, Tom, you asked a good question. And at least in a way we see it as to all of what it entails. But to also make the point as we’re talking about these technical elements and so forth. We’re very, very happy to be able to help our customers solve their problems so that they can achieve what they want. But none of things that we’re being asked to do now and that we see including DSA come even close to the technical challenge and the task that was at hand, at developing the TSA+.

Rick Penn

Right.

Wayne Fortun

They are even – not close for that effort and so we are not concerned about what’s coming, only see as a chance for opportunity for us.

Tom Lewis – High Road Value Research

Okay. Just one other question that ties into this and it's kind of timely. We heard a lot last week about the pricing availability of certain rare earth elements. Wayne do you know, if that is a factor at all in the march to these, shall we say the 1-terrabyte platter and how – and if so does it a fact to be extent to which the march to the higher capacity point as a mechanical as opposed to our material solution.

Wayne Fortun

You know, Tom I don’t think so. I think that was just a standard march that one more leg of the journey. Of course when he was talking near line, if you can do with more capacity per box, you're using fewer magnets, but I don’t think that this was anything compelling to cause them to make that move at this time. The place it can have the biggest impact is the – is on hybrid cars.

Tom Lewis – High Road Value Research

Okay. Just one last thing, another quarter goes by, you’ve got your sales folks out there with the Spot Check product. Is there anything that have seen it all about – and obviously you’re selling some, but I’m just curious about if you’ve learned anything about all this effects your sales process with respect the things like, getting the appointment or getting to the next meeting or getting the test or anything like that.

Wayne Fortun

It really make you easier to walk in with the handheld them put it on and they can just see the number and it’s just the number. Once they start using it and they soon find that the number is not fully satisfactory. They want to track the trend but our monitor is designed so that it gives not only a number, but it tracks the trend, and the simplicity of it, the scope at which they look at and think about it, it makes it easier and so it really has and we thought it maybe help as a door opener and that is proving to be case. So, we are hopeful Tom.

Tom Lewis – High Road Value Research

Okay. Well, we are too. Thanks a lot.

Wayne Fortun

You bet.

Operator

Thank you. And we have a follow up question form the line of Sherri Scribner from Deutsche Bank. Please go ahead.

Sherri Scribner – Deutsche Bank

Hi, I just had a couple of housekeeping question on the BioMeasurement revenue, did you say that was 890,000 and you've lost $2.2 million in that segment, did I have those numbers right?

Dave Radloff

It's 809, Sherri. 809.

Sherri Scribner – Deutsche Bank: Okay.

Dave Radloff

The last number you had is correct.

Sherri Scribner – Deutsche Bank

Okay. And then in terms of how many TSA+ customers you have that are qualified the product, can you update us on that, the same as last quarter?

Dave Radloff

We were run 120 customers there.

Rick Penn

TSA+.

Dave Radloff

TSA+

Sherri Scribner – Deutsche Bank

Yeah, I hope you don’t have 120 customers.

Dave Radloff

Yeah, this is same as last quarter.

Sherri Scribner – Deutsche Bank

Same as last quarter.

Dave Radloff

Yeah.

Sherri Scribner – Deutsche Bank

And then are you still just one customer qualified in the Thailand facility that was qualified for the Thailand facility?

Unidentified Company Representative

Yes, I am trying to thinking it for you – if it's around the cusp of going beyond one, but thinking about it what’s coming on there...

Unidentified Company Representative

Primarily one player.

Wayne Fortun

I would say that and you can correct me if I am wrong in this Rick, but we've had second customer qualified the facility. I don’t think we have had a second customer who qualified our product that...

Rick Penn

I think at this point in time, I think, that’s right.

Sherri Scribner – Deutsche Bank

Okay.

Rick Penn

It's all changing.

Sherri Scribner – Deutsche Bank

Okay. Great. Thank you.

Wayne Fortun

Thank you. Yeah.

Operator

Thank you (Operator Instructions). And we have a follow-up question from the line of David Epstein from CRT. Please go ahead.

David Epstein – CRT

Hi. The positive $6 million EBITDA that you stated in the quarter that’s making the same adjustment that used for your adjustment can figure?

Dave Radloff

I think that's GAAP actually.

David Epstein – CRT

That’s GAAP. Okay, and any thoughts on EBIT, I know you might have given that – EBITDA through the coming quarter?

Dave Radloff

No, we didn’t give that.

David Epstein – CRT

Do you have any views on that?

Unidentified Company Representative

I think, we just the cash guidance we gave is what we comfortable giving at this point Dave.

David Epstein – CRT

Okay. And then -- finally we talked about sort of the percentage of total cost savings that will be available at certain points in the future. Can you let us know how much additional costs you think are being removed in the coming quarter versus this quarter?

Unidentified Company Representative

No, we said we would expect to attain about 60% of the quarterly savings which required to about $8 million versus getting around $3 million of savings in the quarter that we just completed or an additional $5 million.

David Epstein – CRT

And that’s – right that’s in the next quarter, correct?

Unidentified Company Representative

Yeah, the quarter we are right now.

Unidentified Company Representative

Right.

David Epstein – CRT

Right. Thanks very much.

Operator

Thank you. And at this time, I’m showing no further questions in my queue, I'd like to turn the conference back to the management, please continue.

Wayne Fortun

Well, thank everyone for joining us on this call today. It’s been a very long hour. We appreciate your questions and your interest and we look forward to talking to you next quarter. Thanks.

Operator

Ladies and gentlemen, this does concludes the conference for today. We thank you for your participation and you may now disconnect.

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