Demand for suspension assemblies continued to grow in 2006, but at a more moderate pace than in the prior year. Further consolidation among disk drive manufacturers resulted in the elimination of some disk drive programs, creating some uncertainty in the disk drive industry supply chain. In the second half of our year, seasonally lower demand for disk drives used in desktop applications and customers’ management of their component inventories reduced suspension assembly demand. Despite this challenging environment, we increased our shipment volumes by 12 percent compared with 2005, generating record net sales of $722 million.

Our capacity utilization and manufacturing efficiency, which vary depending on overall demand and product mix, have a substantial impact on our profitability. In the first half of our year, our gross margins were reduced by lower yields and productivity on an increasing mix of advanced TSA products. In the second half, our yields and productivity increased substantially as our manufacturing proficiency improved, but demand weakened. This resulted in underutilization of recently added manufacturing capacity, and the associated higher depreciation and overhead costs further reduced our gross margins. For the full year, our gross margin was 20 percent compared with 28 percent in 2005.

The long-term outlook for the proliferation of disk drive applications and the resulting growth in unit shipments remains strong. Storage industry analysts currently expect disk drive unit shipments to grow at a compound annual rate of 13 to 14 percent over the next five years.

We expect the long-term rate of growth in suspension assembly shipments to approximate the rate of growth in disk drive shipments. Short-term swings related to seasonality, product introduction cycles and the pace of adoption of new technologies will continue. We strive to mitigate the effects of short-term volatility on our operating results and the pace of our capital investments in several ways, including improving yields and productivity, controlling our costs and strategically managing our inventories.