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Executives

Chuck Ives – Director, IR & Treasurer

Wayne Fortun – CEO

Rick Penn – President, Disk Drive Components Division

Dave Radloff – CFO

Analysts

Sherri Scribner – Deutsche Bank

Rich Hoogly [ph] - B&M Company [ph]

Mark Miller – Noble Financial

Tom Lewis – High Road Value Research

Eric Ruebel – MTR Securities

Franklin Leong – Silver Lake Credit

Hutchinson Technology, Inc. (HTCH) F4Q2011 Earnings Conference Call November 1, 2011 5:00 PM ET

Operator

Good afternoon, ladies and gentlemen. Thank you for standing by. Welcome to the Hutchinson Technology’s fourth 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. (Operator instructions) This conference is being recorded today, Tuesday, November 1st, 2011.

I would now like to turn the conference over to Chuck Ives, Director of Investor Relations and Treasurer. Go ahead, sir.

Chuck Ives

Good afternoon, everyone. Welcome to our fourth 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, product mix, pricing, production capabilities, assembly operations in Thailand, the impact of flooding in Thailand, our insurance coverage and claims, capital spending, product costs, operating expenses, our BioMeasurement Division's results, product commercialization and adoption, manufacturing consolidation and restructuring, and the company's cost structure, operating performance, cash position 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 fourth quarter results announcement just after the market close this afternoon and it is now posted on our website at, www.htch.com. I'll turn the call over to Wayne now for his opening remarks.

Wayne Fortun

Thanks, Chuck. Good afternoon, everyone and thank you for joining us today. As all of you who follow disk drive industry know the severe flooding in Thailand has created substantial disruption and uncertainty for the entire hard disk drive industry. Our employees in Thailand have been deeply impacted by the flooding and our sympathies are with them and their families as they cope with this disaster.

As we reported previously we suspended our operations in Thailand in the second week of October and floodwaters inundated our plant and the large industrial park that our plant resides in shortly thereafter.

We fully intend to resume operations in Thailand. Our assembly operation there was meeting or exceeding all of our expectations for volume, quality and costs. It remains integral to our plan to be the industry's lowest cost producer of suspension assemblies.

Based on the information we currently have, we expect it will be multiple quarters before we are fully operational in Thailand again. However, thanks to extraordinary efforts by our employees both abroad and here in the U.S. we’ve been able to respond to the unprecedented flooding and leverage our available assembly capacity and vertically integrated components operations in the U.S. to meet current levels of customer demand despite the temporary loss of our assembly capacity in Thailand.

Before we can assess the financial impact of our recovery effort in any insurance proceeds, we need the floodwaters to recede so we can fully evaluate the damage to our operations in Thailand. This is expected to take several weeks.

In addition to the impact on our operations, the flooding in Thailand is temporarily suppressing overall production capacity of the hard disk drive supply chain and this is resulting in a material decrease in our suspension assembly demand.

Now, I’ll turn it over to Rick for a recap of the disk drive components division’s fourth quarter.

Rick Penn

Thanks, Wayne. During our fiscal 2011 fourth quarter, we shipped 127.4 million suspension assemblies, up 8% from 117.9 million in the preceding quarter. For the quarter, our mix of products shipped was follows. Suspensions for 3.5-inch ATA applications increased 3% sequentially and accounted for 55% of our shipments compared with 58% in the preceding quarter.

Shipments for mobile applications increased 51% sequentially and accounted for 27% of our shipments, up from 90% in the preceding quarter, and shipments for enterprise applications decreased 16% sequentially and accounted for 18% of our shipments compared to a 23% in the preceding quarter.

Average selling price in the fourth quarter was $0.58, compared with $0.59 in the preceding quarter. Our fourth quarter shipments of TSA+ suspensions increased 27% sequentially to 76.2 million and accounted for 60% of our fourth quarter shipments, compared with 51% in the preceding quarter.

And despite a sequential reduction in flexure production, our TSA+ cost per flexure declined 7% in the fourth quarter, as we successfully consolidated our TSA+ equipment into our Eau Claire operations.

The consolidation allowed us to lower some fixed costs in Hutchinson and is already helping reduce our TSA+ cost per part. We expect to realize significant cost savings as more of our volume shifts to TSA+ suspensions and as we further our approve TSA+ output and efficiency. The start-up and ramp of our photoetching processes in Eau Claire is also on track with our plan, and photoetch production in Hutchinson was shutdown in October.

We continue to see strong customer interest in dual-stage actuated or DSA suspension assemblies and we are working with our customers on multiple DSA programs. We currently expect the demand for DSA suspensions to develop gradually in the first half of fiscal 2012 depending primarily on the pace at which the disk drives makers launch new programs during this period of industry disruption. We are ready to meet the demand for DSA suspensions as it materializes and all of our DSA capacity is currently at our U.S. sites.

Now, turning to our assembly operation in Thailand. During our fourth quarter, approximately one-third of our sales originated out of our Thailand assembly facility. By the end of the quarter, our Thailand operations had an assembly capacity of four to five million per week. Prior to the floodwaters entering our Thailand on October 11, our employees were able to have some of our inventory moved to other locations and to elevate much of the remaining component and finished goods inventory.

All our manufacturing equipment there remains on the first floor. Our second floor consists just of limited office space. At this time, with our plants still inundated by the floodwaters, we cannot reliably estimate how much it will cost to bring the assembly operation back into production. And as Wayne said, we expect it will be multiple quarters before we are fully operational in Thailand again.

In the meantime, we’ve been able to accommodate current levels of customer demand with the output from our U.S. operations. Our vertically integrated operations in the U.S. manufacture each of the components that go into our suspension assemblies. We also have assembly operations at our Hutchison, Minnesota and Eau Claire, Wisconsin sites, including available assembly equipment that will be put into production to respond to increases in demand as the supply chain recovers.

So, turning now to our demand outlook, in the near term, the flooding in Thailand will constrain hard disk drive production and reduce the demand for suspension assemblies. In this uncertain environment, we currently expected our first quarter suspension shipments will be 80 million to 100 million.

As the industry and the supply chain recover, inventories will likely need to be replenished and we expect suspension assembly demand to recover. Our U.S. operations position us to meet customers’ demand during the uncertain near-term period and also provide the capability and capacity to support customers’ requirements as their plants come back on line.

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

Dave Radloff

Thanks, Rick. Net sales for the fiscal 2011 fourth quarter totaled $74.4 million, up 3% from $72.2 million in the preceding quarter. The revenue percentages for our top customers in the quarter were as follows: Western Digital, 56%; SAE/TDK, 23%; Hitachi, 11%; and Seagate, 9%.

Net sales for the quarter included BioMeasurement division revenue of $283,000 compared with $809,000 in the preceding quarter. The sequential quarter decline resulted primarily from a decrease in sales of monitors and Spot Check Systems to distributors. We expect that our sales from quarter to quarter may continue to be uneven until we can generate enough clinical evidence to change our revenue growth.

Our gross profit in the fourth quarter totaled $5.1 million or 7% of sales compared with $4.2 million or 6% of sales in the preceding quarter. The sequential quarter improvement in gross profit resulted primarily from the higher shipment volume in the fourth quarter, but was lower than we expected.

While we realized the cost savings we were targeting in the quarter, the gross margin benefits were dampened primarily by two factors. First, product mix changes in the quarter contributed to higher materials and freight costs associated with certain products.

Second, we incurred charges related to disk drive program cancellations that occurred as a result of pending industry consolidation. Including approximately $150,000 of accelerated depreciation, fourth quarter depreciation and amortization totaled $10.4 million compared to $13.1 million in the preceding quarter which included $2.4 million in accelerated depreciation.

R&D expenses in the fourth quarter were $3.1 million compared to a $3.4 million in the preceding quarter. SG&A expenses decreased $900,000 sequentially to $7.9 million. Net consolidation expenses in the quarter totaled $350,000 and included a reduction in our severance charges of $150,000. Our fiscal 2011 fourth quarter operating loss totaled $6.3 million compared with $7.8 million in the preceding quarter. This includes an operating loss of $1.4 million in the BioMeasurement division, down from $2.2 million loss in the preceding quarter.

Interest expense in the fiscal 2011 fourth quarter was $4.1 million, up $500,000 compared with the preceding quarter due to the higher interest rate on the 8.5% convertible senior notes that we issued earlier this year. Fourth quarter interest expense includes $1.7 million of non-cash interest expense related to the accounting for convertible debt instruments, flat with the preceding quarter.

Our fourth quarter results included a $2.9 million gain on debt extinguishment related to the exchange offer we completed in July. Our net loss for the quarter totaled $7.2 million or $0.31 per share. In the preceding quarter, we reported a net loss of $10.9 million or $0.47 per share.

Excluding the $2.9 million gain on the debt exchange, $1.7 million non-cash interest expense, $350,000 of net consolidation expenses and the $150,000 of accelerated depreciation, our fourth quarter non-GAAP loss was $7.9 million or $0.34 a share.

Cash generated by operations totaled $5.4 million in the fourth quarter and capital expenditures totaled $4 million, resulting in positive free cash flow of $1.4 million. We used $3.1 million of cash for the previously announced debt exchange that was completed in July.

We also paid $1.8 million in debt issuance costs for the newly issued 8.5% convertible debt and for a new revolving line of credit of up to $35 million. Borrowings under new line of credit totaled $10.4 million at quarter end; however, the balance was repaid in early October.

Our cash and investments at quarter end totaled $61.8 million up $6.9 million from the end of the preceding quarter. Principal amount of our outstanding debt was $172 million, up $10 million from the end of the third quarter. Our share count at year end was approximately 23.4 million, resulting in book value per share of $8.82.

This includes $0.91 per share primarily related to the portion of our convertible debt that we were required to classify as shareholders equity under the accounting guidance for convertible debt instruments.

Turning now to our outlook, as mentioned earlier, the flooding in Thailand is expected to constrain hard disk drive production in the near term and result in a material decrease in demand for suspension assemblies in our fiscal first quarter.

We expect that our first quarter suspension shipments will be 80 million to 100 million. Suspension assembly pricing is likely to remain competitive. The normal pricing pressures could be offset somewhat during the current supply chain disruption.

In regard to our costs, the full realization of our cost reductions will be delayed by the impact of the flooding in Thailand. We still estimate that our plant will produce approximately $50 million in cost reductions on an annualized basis, but when we will fully realize those benefits depends on when we are able to resume operation in Thailand and how quickly we can increase our assembly output in Thailand.

Cost of goods sold; we currently estimate that we’ll incur additional quarterly costs of $1 million to $2 million in the U.S. due to producing all of our suspension assemblies in the U.S. In the near term, we estimate that our SG&A expenses will remain at approximately $8 million per quarter.

Our R&D effort should not be affected significantly by the events in Thailand and we estimate that our quarterly R&D expenses will total about $3.5 million. Depreciation and amortization expense is expected to be approximately $10 million to $11 million per quarter.

Our interest expense is expected to be $4 million per quarter, including $1.7 million of non-cash interest expense. All of this guidance for our quarterly expenses is based on a 13-week quarter. However, our fourth quarter of fiscal 2012 will be a 14-week quarter. This will result in another week of revenue and expenses during that quarter and you should keep this mind for modeling purposes.

Our tax rate is still expected to be near zero in fiscal 2012. Our estimate for fiscal 2012 capital expenditures prior to the flooding in Thailand totaled about $25 million. That estimate does not taken into account capital expenditures that will be required to restore operations in Thailand which we are not yet able to estimate.

Finally, here is some information about our insurance coverage in Thailand. Our policy provides for $25 million of flood coverage for property and casualty damages and business interruption. It is possible that our claims will exceed this amount.

Our Thailand facility currently has a book value of about $12 million on the building. Our manufacturing office equipment in Thailand has an approximate book value of $4 million and we have around $10 million of inventories in Thailand, including inventor hubs at off-site locations in Thailand.

Replacement value of our equipment is higher than the book value. However, if we need to replace our equipment in Thailand, we expect much of this to be equipment that is currently available at our U.S. operations.

Finally, the timing our cash flows for flood related expenditures, insurance proceeds is uncertain at this time. However, we have modeled various scenarios and we believe we have sufficient cash to manager through the recovery. I’ll turn the call over to Wayne now for his closing comments.

Wayne Fortun

Thanks, Dave. Through our outstanding efforts of our employees, we’ve made significant strides in improving our business model this year and while the disaster in Thailand will hinder some of our progress as we begin our new fiscal year, we believe there are still opportunities to further improve our business, our value proposition to our customers and our financials.

Due to our available capacity in the U.S. and our vertical integration, we believe we are well positioned to work with customers through the current period of industry-wide disruption, as well as meet their needs as the supply chain recovers.

Our focus remains on becoming the lowest cost producer of suspension assemblies. Further improvements in our TSA+ output and efficiency will enable us to realize additional cost reductions as more of our product mix shifts to TSA+ products.

As we are better able to evaluate the damage in our operation in Thailand, we’ll provide further information on the cost and time that will be required to get our plant back on line. That concludes our prepared remarks. Joe, please begin polling for question.

Question-and-Answer Session

Operator

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

Sherri Scribner – Deutsche Bank

Hi, thank you. I wanted to ask the question about your potential to gain share in the current, with the current issues going in Thailand. Obviously, having capacity in the U.S. is an advantage in this situation, it sounds like Magnecomp has at least one of its facilities flooded, I suppose NHK is not impacted by this., but do you think there is an opportunity for you to gain share as a result of some of the disruptions at your competitors?

Rick Penn

Hi, Sherri this is Rick. Yeah, let me start by saying that through this whole disruption, the one thing I would start out with is, our position with each customer is really solid, our share is solid and in some cases, growing and at each account we see that that’s going to continue to move the right direction, the momentum is really good as we move through this recovery and beyond, so good position with each customer at this point.

Now as far as how does their position shift around? We can’t, it’s hard to tell. And that can have an impact on what happens to our overall share and our overall share could bounce around up or down depending on how that all plays out. With MPT’s problems, we may see some demand come our direction and we’ll just have to see how that all plays, but we’ve got the capacity to handle it, if that happens. And a lot of the ability to grab some of that will depend on whether we are already qualified on those programs and so forth, but it is hard to tell overall how this will all settle out, but we feel real positive about the momentum at each customer.

Sherri Scribner – Deutsche Bank

Okay, great. And then just to clarify, I think what you are saying is and just to make sure I understand this completely clearly, it sounds like you are saying that you have enough capacity at your US site to make up for the capacity in Thailand, so if we were at full HDD capacity for the industry, you would be able to meet that in the industry, am I understanding that correctly?

Rick Penn

That is correct. And maybe just to refresh on the capacity situation of the company, at the assembly level, or the assembly processes, even with the equipment that you (inaudible) commission in Thailand, we have capacity to probably supply something in the 18 to 20 million suspensions per week kind of range with current equipment just available. For our other component processes, we have at least that, if not more, capacity, except for TSA+ of course which we are growing and expanding. The current equipment capacity for those processes is probably something around 11 million a week something like that.

Sherri Scribner – Deutsche Bank

Okay, great. And then finally, based on the 80 to 100 million units you expect to ship in the fiscal first quarter, what type of industry pan does that equate you for the HDD industry or another way to ask that is, what share do you think you will have?

Rick Penn

We are looking at an industry shipment, our disk drive shipment pam [ph] that’s probably in the 120 to 130 million drives. And we don’t have any magic insight into that, Sherri. We are kind of going by what a number of you guys and analysts are estimating. And as far as, I think your second part of the question was, what do we think happens to share this quarter again.

Sherri Scribner – Deutsche Bank

What share would that equates you for you?

Rick Penn

Yes, again, our share has been in the 20% range and we are not sure how that’ll bounce as customers share bounces around.

Sherri Scribner – Deutsche Bank

Okay, great. Thank you.

Rick Penn

Yep.

Operator

Thank you very much. Our next question comes from the line of Rich Hoogly [ph] with B&M Company [ph]. Please go ahead.

Rich Hoogly - B&M Company

Thank you. Good afternoon. A few questions, can you just remind us how much you had spent offsetting Thailand in the first place, both the building and if you could break out the equipment and such and then what happens to that expense as you are ramping up the US? I would assume you still have to pay for Thailand and the employees to some degree. And then lastly, would you need – with the insurance company, if you go and actually call on that policy, are you allowed to go back to the same building or you have to go someplace else in Thailand?

Rick Penn

I’m going to let Chuck – make sure we got the right numbers in the initial, I don’t go off my memory. With regards to the costs in Thailand, yes, there will be ongoing costs in Thailand. I think it’s fair to think of those in the range $1 to $2 million a quarter and we would also have cost in the US for producing the assembly capacity that was in Thailand of $1 million to $2 million. And I would say combine those, and the range would be more like $2 million to $3 million. I wouldn’t want to end up with a $4 million range when you combine those two numbers.

Charles Ives

Rich [ph], it was approximately $15 to build the facility over there. As Dave mentioned in his prepared remarks, the book value of that facility is now around $12 million. We don’t believe the building will be a total loss and I’ll let Rick speak further as to going back to that facility.

Rick Penn

What the game plan is?

Charles Ives

Yes.

Rick Penn

Yes, we’ll definitely be heading back to Thailand and it’s just a matter of when. As we’ve said, the water has got to recede, so we can get in there and start moving ahead and give you a sense for the timing, we said multiple quarters, but once the water is out of there, we probably got two quarters or so before we’ve got the site back in shape to start putting units, assembly units back in there and then from that point, we’ll start to ramp up again over the next or so from that point to get to about the capacity we were pre-flood.

Dave Radloff

And Rich, from a – it’s fair to say insurance coverage is likely to be limited and expensive. And so, we are working on risk mitigation plans. We’ll certainly work with the industrial park, look at what the government is doing, but we will have our own plans related to how you would respond to floods, what you can do with the facility and how you protect your equipment and other assets. Certainly, we have a much greater awareness and we along with the entire disk drive supply chain are paying a lot of attention to how we would mitigate those risks.

Rich Hoogly - B&M Company

Okay. Then Dave, in terms of your credit and any of your debt lines, are there any covenants that could potentially be tripped as you pay for these abnormal expenses?

Dave Radloff

Yes, there are covenants in the credit line. One has to do with business interruption insurance and having that for a certain period of time is a potential default and also the fixed charge coverage calculation in that agreement is a challenge and a risk for this quarter because of the change. And so, we are proactively talking to PNC about the situation and we will be working that issue with them and we’ll keep people updated in November.

Wayne Fortun

Just as a reminder, this is Wayne, we don’t have any debt with the PNC on that line of credit right now. And then there are no covenants on the rest of the bulk of the debt, so it really is just a credit line and we think we’ll be driving [ph] at PNC and see how we can work things out.

Dave Radloff

Yes, turn [ph] attention to work through this.

Rich Hoogly - B&M Company

Okay. Thank you very much.

Operator

Thank you. Our next question comes from the line of Mark Miller with Noble Financial. Go ahead, please.

Mark Miller – Noble Financial

I would like to go back and look, you talked a little about the impact on margin this quarter, I am trying to get a little more understanding there. You said product mix adversely affected margins, I assume that was greater mobile garage [ph] shipments and if the mix had stayed the same as last quarter, what would be the margin improvement?

Dave Radloff

I think what we wanted to talk to really is, what of that we think goes forward, and there is $2 million to $3 million of the costs that we incur this quarter that we think are not normal going forward. I don’t want to get into a great deal on the mix, effective different programs, because I guess it will be specific. But going forward, this $2 million to $3 million of the costs in this quarter, that would not be something to model in going forward.

Mark Miller – Noble Financial

That includes the current quarter?

Dave Radloff

The quarter we are in today.

Mark Miller – Noble Financial

Oh, so the $2 million or $3 million in additional costs this quarter from last quarter?

Dave Radloff

No, there is $2 million to $3 million of expenses in the quarter we just announced, that would not be expenses to model going forward.

Wayne Fortun

I don’t think you should tie that directly to mobile, Mark. It’s more of a customer specific programs against specific issues and it’s broad based across mobile.

Mark Miller – Noble Financial

Are these related, you said charges to drive industry consolidation, I am a little confused about what they are. You are getting charged because your competitors are consolidating, I didn’t understand that.

Dave Radloff

No. That’s a separate issue where we have – consolidation is what’s happening at the drive company level, and we have inventory and tooling and other investments we’ve made that we are writing off because the program is being cancelled due to those consolidations, due to one of those consolidations, so –.

Mark Miller – Noble Financial

Okay. Just what we are seeing in the channel, and again, I realize that OEM price will be more constrained, but we are certainly seeing very significant, some people are calling it price (inaudible) in the channel, and you mentioned there is a possibility – while you termed pricing would be competitive, but there is a possibility that we could see some relief on ASPs and I was just trying to get just some feeling, how much, if any, do you feel, because certainly I mean, we are seeing extremely high increases in channel pricing. I imagine and Seagate did indicate they are very open to discussions with the OEMs concerning, what I assume is, pricing and deliveries, and I am just wondering what flexibility you would have to help you guys out, because it doesn’t take a lot in terms of the total contribution of the drive. If you get a $0.10 price, that could be very significant for you guys and compared to what we are seeing in the channel price increases, or even assuming a 5% to 10% [ph] price increase in ASPs would still be fairly small. Just if you can comment about the ability to get, to recoup some of the units you lost via pricing?

Rick Penn

Yes, Mark, this is Rick. Probably the first comment is that at the suspension level in the chain, the supply and demand dynamics are different than –obviously than what’s going at the drive level. And frankly, there is enough suspension supply between the three of us to deal with the current levels of demand and I suspect it would ever level – the demand starts to ramp once we get through all of this. That’s clearly not the case at the drive level where it is a very significant constraint.

So I think overall, you’ve got to think about pricing as remaining competitive like it does normally. Now having said that, there will likely be some opportunities because of expediting and starting up costs in the U.S. and other things that we can work with our customers to get some reimbursement for, and I think there will be some programs where we can hold the previously scheduled price declines that as you hit certain quantity breaks [ph] that kind of thing.

So we may see some leveling and some pressure that helps us do that. We are certainly going to work to, as we’ve added cost, to try to jump through hoops to help customers try to get paid for that. But I don’t think you can think about anything real sweeping or massive.

Mark Miller – Noble Financial

Okay. I guess the point that obviously I think we as a group missed is – and the moving target, the really hard thing where you are at now for the analyst and I think it impacts the whole investment community perception is what do we model for margins next quarter, higher, lower, same and that’s the problem.

Dave Radloff

We understand that. I think that it – and a lot of that is going to depend where do you fall even in that range of the 100 to 80 that we have. But we – you have a sense of the fixed versus variable cost and you are going to need them, keep the fixed related fixed and we’ve got some costs that are going to increase and we are giving you estimates of that. And so, the gross profit I would expect is going down.

Mark Miller – Noble Financial

Gross profits going up, okay.

Dave Radloff

No, going down.

Mark Miller – Noble Financial

I am sorry.

Wayne Fortun

In the next quarter, (inaudible) volumes we are talking about which is a broad range and one that’s got a lot of uncertainty into how well it really comes through and what it develops, but I agree with what Dave has said.

Mark Miller – Noble Financial

Hey, just two final questions, one is a shorty [ph], what was the amount of equipment in the Thai plant? You might have mentioned that.

Wayne Fortun

Say that again Mark. Could you repeat?

Mark Miller – Noble Financial

The amount of equipment, what is your estimate for the value of the equipment in the Thai plant?

Dave Radloff

The book value of the equipment in the Thai plant is around $4 million. The replacement cost is significantly higher and the insurance is based on replacement cost.

Mark Miller – Noble Financial

And then final, what I am hearing the tough issue once you get the water out, again, it depends on cleanliness as mold, the concern about mold and what mold should do. Again, I don’t know what percentage of your operations, if any, are clean room, but the impact of suppressing mold because we all know how sensitive drives are to particle contamination. I am just wondering if that’s a problem to you, certainly I feel it could be a problem for Western Digital, but have you given any thought about that?

Rick Penn

Well, yeah, the facility really is a clean room facility, Mark and so, we got to get it back to those standards. And we’ll be worried about mold and everything else and ensuring that we have done whatever we need to do at the facility and equipment. And we don’t have a great assessment of the specifics of what’s involved and what it will take because we haven’t been there and haven’t – don’t know all the details about what we’ll be up against, but mold would be one of many issues.

Wayne Fortun

I would just also state that the one thing to remember is that this clean room facility is not designed with the air going through the floor with the sub floor but instead it’s a side exhaust, so it’s a concrete epoxy coated floor that we have to clean up and it –

Rick Penn

Essentially a very sealed environment.

Wayne Fortun

Yeah. So it’s not the kind of conditions in which it is hard to clean up or to manage mold. Now we don’t know what would be the impact of just the environment, it didn’t get wet enough to get high enough to our HEPA filter systems, but we don’t know what that environment is like and what we will have to deal with. But mold and things like that is all part of what we are going to have to make certain we understand and as the facility is brought back on line, it will have to be qualified and certified for those kind of contamination things you are describing.

Mark Miller – Noble Financial

Well, I guess, it’s good news you didn’t get the water in the HEPA filters, but the concern would be if there was sufficient – significant mold generation you apply [ph] those filters pretty quickly.

Wayne Fortun

For us, they're sitting high and dry now. We'll have to see what happens.

Mark Miller – Noble Financial

Thank you.

Operator

Thank you very much. Our next question comes from the line of Tom Lewis with High Road Value Research. Please go ahead.

Tom Lewis – High Road Value Research

Hey, good afternoon. First off, can you give us a sense of going back to early October and your sort of response time you had to this, I mean was there, was it days, weeks, hours, ahead of October 12 that it might have occurred to you to stop installing equipment or keeping them out of the container or again do something, (inaudible) what you said about taking the inventory and putting it someplace else?

Rick Penn

Tom, this is Rick I’ll start and I’ll let these guys pipe in, it almost seems like ancient history to go back that far and recount it. What I will say is the day that – the day I'm thinking in Thai time versus U.S. time, but the day that we flooded, earlier that day, we were quite confident that we would stay dry from all of this. And that’s how through information, not bad information, just an assessment of what was going on around as our crew on the ground who was pretty – trying to stay pretty street smart about the situation and how dire it was getting and how fast it was, the flood, the waters were progressing and so forth. We were through all of that we – up until 12 hours or so before we had a problem, we were quite confident we were going to stay dry; we would just have problems getting employees in and out and that would have an effect. And I’ll let these guys pipe in, but we worked as fast and furious as possible as we understood the situation as it unfolded to save some tooling, move inventory out, but there wasn’t much time, and we are talking about some pretty substantial pieces of production equipment that is not easily moved.

Tom Lewis – High Road Value Research

That I understand, but I imagine that some parts would be if you have time and get more [ph] of the point, the people to get it done?

Rick Penn

We will be, as Dave mentioned earlier, we will be looking at a lot of alternative that can help us mitigate risk should something like this be headed our way again and whether that’s modularized to a larger degree so we can move, disassemble and move more, other techniques to keep water at bay. We’ll be looking at what are the options to avoid this obviously.

Tom Lewis – High Road Value Research

Okay. And as far as the prognosis for a recovery in hard drive volumes, are you – maybe you can share with us, you are more concerned about the hard drive manufacturers ability to get their – that have been impacted to get their capacity up or might we want to be more concerned about, a lot of them maybe some part, some component that nobody is talking about?

Rick Penn

Tom, the drive guys have shed some light on that and they probably can better give you an ongoing feel for how that’s playing out as we go through time. Certainly WD reported about their slider fabrication constraint and what a big issue that really is for them and to the degree that it’s affecting them this quarter. We hear about other components like basis for the drives, voice coil motors, pivot bearings, those are the sub components, flex assembly, as well as motors; those are the things that seem to rise to the top of the list as to sites that have been affected companies, that have been affected and where there could be constraints that are maybe running neck and neck, but that’s just sort of about all we can tell you. And you might, again, you might know more, learn more talking to the drive guys that this keeps rolling.

Tom Lewis – High Road Value Research

All right. And finally do you have any sense at all as I understand that facility is there at the same industrial park with you, but that competitive capacity that has suffered the same fate as you, do you have any sense, is that operation comparable in size to what you have there, larger or smaller?

Rick Penn

It’s – we are looking at each other, excuse me.

Dave Radloff

It’s not the primary site of that competitor.

Rick Penn

Yeah, they’ve got two sites, the one that’s wet, as Dave said, is not the primary site and the one that’s dry has got water all around it, we understand, but so far they are still dry and –

Dave Radloff

I believe that those two sites together is greater volume than we were capable of producing at the one site.

Rick Penn

That is true, probably quite a lot.

Dave Radloff

Yes, and I am not sure that we made it clear earlier in the call that neither site is operational today; one, we believe is dry the other one has gotten wet and so they are going to have some recovery issues, but they can’t get employees to the one that’s dry today. So they are not producing or power so they are not producing or power, so they are not product out of it at the current time. There is more capacity that is lost by them in that case than we have, but they haven’t – it’s not a lost over a long period of time simply because one is supposedly still dry.

Tom Lewis – High Road Value Research

All right.

Rick Penn

Just a little more competitive insight and this is – mostly, I think it’s fairly well known out there, MPT also produces in China. And then as far as NHK goes, we understand they are well grown sites [ph], maybe been affected but not gotten wet. And I am not sure whether they are, to degree what they’ve been able to get people in and out there to run. And they’ve got production that occurs in other places besides Thailand as well.

Tom Lewis – High Road Value Research

All right, thanks for the color.

Rick Penn

You bet.

Operator

(Operator instructions) Our next question comes from the line of Eric Reubel from MTR Securities. Please go ahead.

Eric Ruebel – MTR Securities

Hi, gentlemen. Good evening. Thanks for taking the questions. Rick, in your comments you mentioned that there may be some opportunities to take share but that would be dependent on your existing qualification such as dual-source for some of those existing programs. I was wondering if you could characterize if there is any level of activity that you are seeing now with respect to new qualifications as the hard disk drives guys try to sort of accelerate their ability to source suspension assemblies?

Rick Penn

Yeah, Eric. I would say that we are seeing some activity, it’s early. There may be some of the demand that we are actually currently seeing is probably some shifting where we are actually lined up on the same programs as the other guys and we are seeing a little bit of that come our direction even currently. And we are definitely –when we look at the upcoming programs, I think interest is increasing and our position is improving with customers, given our ability to flex up, given our multiple sites, given the cost model that is, we think, going to be lowest cost once we get through all of this. So near term, seeing a little bit of action and then for upcoming programs, increasing interest kind of coming our way.

Eric Ruebel – MTR Securities

Thanks for that. And if I could, you guys have sort of outlined a little bit, we’ve talked generally about how much was spent initially in Thailand you’ve talked about how you think it will take a couple of quarters to get the facility dry ready for manufacturing and then a couple more quarters to get back to the level of production that you are at before the flood. What’s sort of the plan to move, to go back to Thailand but to move to another facility, one that might give you the opportunity to get up and running in the game a little faster, is there – are you looking at, concurrently looking at other real estate as you move through this process?

Rick Penn

Well, remember, Eric, we can get up and running and meet whatever demand comes at us with our U.S. available capacity just to be clear on that.

So we can tackle whatever is coming with our current sites in the U.S. And as far as Asia assembly, we are committed to that. We are certainly committed to getting back into our current Thailand site and like everyone else, we’ll be thinking about how much capacity do we put in one single site before you have another site in a location that’s some distance away and hopefully on higher ground. So we’ll be working through all of that as we go through the next month and years on how the expansion occurs from there.

Eric Ruebel – MTR Securities

If I can give one more, Dave, could you talk a little bit about the draw on the revolver, what was sort of the rationale for taking it down and then if you could talk about, if you could just provide a little more color on the one covenant that would be tripped as a result of claim for business interruption insurance?

Dave Radloff

Sure. Basically as a part of entering into the agreement, we had indicated we would draw to PNC and so we want to follow through on that. As the quarter went on, we more or less repaid it, (inaudible) arrangement and we repaid it as receipts came in. And then with the flood, we felt that it was better and safer not to be into that line while we work with PNC through the recovery. And so, as opposed to having there being perceived risk on their part because we keep drawing. And we don’t need to be in the line right now. And so I was also part of the discussion and the decision.

And the covenant, yes, there is a covenant that basically if you are receiving business interruption insurance for more than 30 days, that can be deemed as default. So there is not much question in our mind that we will have a business interruption claim that exceeds that. And so we are talking to PNC, we think that we have good reasons why that shouldn’t be a concern to them. But we are not – nothing to report further and we’ve been very open and candid with them about the flood, and its effect and how we would like to work with them to get through it.

Eric Ruebel – MTR Securities

So, if I can just paraphrase, there was an intention to use the line which you went out and did in order to show good faith with the lender and then at the same time, you – there isn’t any real liquidity need to have that line and you have the ability to repay it and in order to ease the negotiations around this covenant were flat on the revolver today going forward?

Dave Radloff

Correct.

Eric Ruebel – MTR Securities

Okay, very good. Thank you, gentlemen.

Dave Radloff

It’s paid off, just to be clear. It’s not flat at the previous level.

Eric Ruebel – MTR Securities

Right, flat at zero.

Dave Radloff

We chose to repay it.

Eric Ruebel – MTR Securities

Right exactly. Okay, thank you.

Operator

Thank you very much. We have a follow-up question from the line of Mark Miller with Noble Financial. Go ahead please.

Mark Miller – Noble Financial

I just want to clarify that you’ve paid off the revolving credit, but the possible – if there are any covenant violations regarding the line of credit, I guess the one is the fixed, so it’s the line of credit that contributed rather than [ph] covenant violations, is that correct?

Dave Radloff

Yes, it’s the line of credit that has the covenant that we could trigger, the line that we could violate, yes. It’s not – it is not the convertible debt.

Mark Miller – Noble Financial

I realize not only your cost cuts are in full speed and also the fact that with all the flood uncertainties, but neglecting the flood uncertainties and once all your cost cuts, are we still looking at break-even units in the low 120 range?

Dave Radloff

I think it’s early, I think we need to work through the timing and when we achieve the full reductions once we get Thailand up and running. So I think it’s early to make a call on that Mark.

Mark Miller – Noble Financial

Okay. And then finally, your BioMeasurement loss, was that $1.4 million (inaudible)?

Dave Radloff

Yes.

Mark Miller – Noble Financial

Okay, thank you.

Dave Radloff

Thank you.

Operator

Thank you. (Operator instructions) Our next question comes from the line of Franklin Leong with Silver Lake Credit. Go ahead please.

Franklin Leong – Silver Lake Credit

Hi, my questions have already been answered, and I’ll just hop back in the queue. Thanks.

Operator

Thank you. At this time, I see no questions in the queue. You may continue with any closing remarks.

Wayne Fortun

Well, we just want to thank everyone for joining us on the call today. We appreciate your questions and interest in the company and we are looking forward to speaking with you again when hopefully we have more insights as to what’s taking place in Thailand. Thanks.

Operator

Thank you, ladies and gentlemen. This concludes the Hutchison Technology fourth quarter results conference call, you may now disconnect. Thank you for using ACT Conferencing.

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