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UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549
 FORM 10-Q (Mark One) þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended MARCH 27, 2005 OR o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the transition period from _______________ to _______________ Commission File Number 0-14709 HUTCHINSON TECHNOLOGY INCORPORATED  MINNESOTA
    
    41-0901840(State or other jurisdiction of
    
    (I.R.S. Employerincorporation or organization)
    
    Identification No.)
 40 WEST HIGHLAND PARK DRIVE N.E., HUTCHINSON, MINNESOTA
    
    55350(Address of principal executive offices)
    
    (Zip code)
 (320) 587-3797
(Registrants telephone number, including area code)  (Former name, address or fiscal year, if changed since last report)
 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes [ X ]            No [    ] Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of
the Exchange Act). Yes [ X ]            No [    ] Indicate the number of shares outstanding of each of the issuers classes of common stock, as of
the latest practicable date. As of April 25, 2005 the registrant had 25,261,251 shares of Common Stock issued and
outstanding.




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TABLE OF CONTENTS  PART I.FINANCIAL INFORMATIONITEM 1. FINANCIAL STATEMENTS.ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.ITEM 4. CONTROLS AND PROCEDURES.PART II. OTHER INFORMATIONITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.ITEM 6. EXHIBITSSIGNATURESINDEX TO EXHIBITSRule 13a-14(a)/15d-14(a) Certifications of CEORule 13a-14(a)/15d-14(a) Certifications of CFOSection 1350 Certifications    Table of Contents  
 PART I. FINANCIAL INFORMATION 
  HUTCHINSON TECHNOLOGY INCORPORATED
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except shares and per share data) March 27, 2005
    
    
    September 26,(Unaudited)
    
    
    2004ASSETSCurrent assets:Cash and cash equivalents
    
    $
    50,112
    
    
    $
    33,704Securities available for sale
    
    
    231,465
    
    
    
    224,356Trade receivables, net
    
    
    76,692
    
    
    
    69,073Other receivables
    
    
    9,241
    
    
    
    7,272Inventories
    
    
    35,852
    
    
    
    35,319Deferred tax assets (Note 7)
    
    
    7,325
    
    
    
    9,415Other current assets (Note 8)
    
    
    4,976
    
    
    
    5,657Total current assets
    
    
    415,663
    
    
    
    384,796Property, plant and equipment, net
    
    
    252,815
    
    
    
    213,761Deferred tax assets (Note 7)
    
    
    68,499
    
    
    
    68,211Other assets (Note 8)
    
    
    20,325
    
    
    
    21,624$
    757,302
    
    
    $
    688,392LIABILITIES AND SHAREHOLDERS INVESTMENTCurrent liabilities:Accounts payable
    
    $
    44,791
    
    
    $
    29,310Accrued expenses
    
    
    14,821
    
    
    
    12,759Accrued compensation
    
    
    25,010
    
    
    
    19,816Total current liabilities
    
    
    84,622
    
    
    
    61,885Convertible subordinated notes
    
    
    150,000
    
    
    
    150,000Other long-term liabilities
    
    
    2,757
    
    
    
    2,955Shareholders investment:Common stock, $.01 par value,
100,000,000 shares authorized,
25,222,000 and 24,394,000 issued and
outstanding
    
    
    252
    
    
    
    244Additional paid-in capital
    
    
    382,080
    
    
    
    363,786Accumulated other comprehensive loss
    
    
    (1,101
    )
    
    
    (588
    )Accumulated earnings
    
    
    138,692
    
    
    
    110,110Total shareholders investment
    
    
    519,923
    
    
    
    473,552$
    757,302
    
    
    $
    688,392
 See accompanying notes to condensed consolidated financial statements - unaudited. 2




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HUTCHINSON TECHNOLOGY INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS - UNAUDITED
(In thousands, except per share data) Thirteen Weeks Ended
    
    
    Twenty-Six Weeks EndedMarch 27,
    
    
    March 28,
    
    
    March 27,
    
    
    March 28,2005
    
    
    2004
    
    
    2005
    
    
    2004Net sales
    
    $
    158,043
    
    
    $
    113,354
    
    
    $
    303,661
    
    
    $
    246,990Cost of sales
    
    
    110,355
    
    
    
    79,565
    
    
    
    215,023
    
    
    
    169,915Gross profit
    
    
    47,688
    
    
    
    33,789
    
    
    
    88,638
    
    
    
    77,075Research and development expenses
    
    
    8,301
    
    
    
    6,819
    
    
    
    15,919
    
    
    
    11,674Selling, general and administrative expenses
    
    
    21,174
    
    
    
    16,431
    
    
    
    39,981
    
    
    
    33,118Income from operations
    
    
    18,213
    
    
    
    10,539
    
    
    
    32,738
    
    
    
    32,283Interest and other income, net
    
    
    2,557
    
    
    
    2,188
    
    
    
    5,008
    
    
    
    3,867Interest expense
    
    
    (587
    )
    
    
    (878
    )
    
    
    (1,241
    )
    
    
    (1,806
    )Income before income taxes
    
    
    20,183
    
    
    
    11,849
    
    
    
    36,505
    
    
    
    34,344Provision for income taxes
    
    
    5,046
    
    
    
    2,251
    
    
    
    7,923
    
    
    
    6,525Net income
    
    $
    15,137
    
    
    $
    9,598
    
    
    $
    28,582
    
    
    $
    27,819Basic earnings per share
    
    $
    0.60
    
    
    $
    0.37
    
    
    $
    1.14
    
    
    $
    1.07Diluted earnings per share
    
    $
    0.51
    
    
    $
    0.33
    
    
    $
    0.98
    
    
    $
    0.92Weighted average common shares outstanding
    
    
    25,184
    
    
    
    26,031
    
    
    
    24,971
    
    
    
    25,988Weighted average common and diluted shares
outstanding
    
    
    30,819
    
    
    
    31,754
    
    
    
    30,571
    
    
    
    31,771
 See accompanying notes to condensed consolidated financial statements - unaudited. 3




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HUTCHINSON TECHNOLOGY INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS - UNAUDITED
(In thousands) Twenty-Six Weeks EndedMarch 27,
    
    
    March 28,2005
    
    
    2004OPERATING ACTIVITIES:Net income
    
    $
    28,582
    
    
    $
    27,819Adjustments to reconcile net income to cash
provided by operating activities:Depreciation and amortization
    
    
    29,706
    
    
    
    28,562Deferred income taxes
    
    
    5,744
    
    
    
    7,083Loss on disposal of assets
    
    
    11
    
    
    
    141Changes in operating assets and liabilities (Note 10)
    
    
    9,854
    
    
    
    324Cash provided by operating activities
    
    
    73,897
    
    
    
    63,929INVESTING ACTIVITIES:Capital expenditures
    
    
    (64,252
    )
    
    
    (38,181
    )Purchases of marketable securities
    
    
    (93,257
    )
    
    
    (247,003
    )Sales and maturities of marketable securities
    
    
    85,878
    
    
    
    227,615Cash used in investing activities
    
    
    (71,631
    )
    
    
    (7,569
    )FINANCING ACTIVITIES:Net proceeds from issuance of common stock
    
    
    14,142
    
    
    
    2,753Cash provided by financing activities
    
    
    14,142
    
    
    
    2,753Net increase in cash and cash equivalents
    
    
    16,408
    
    
    
    59,113Cash and cash equivalents at beginning of period
    
    
    33,704
    
    
    
    67,505Cash and cash equivalents at end of period
    
    $
    50,112
    
    
    $
    126,618
 See accompanying notes to condensed consolidated financial statements - unaudited. 4




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HUTCHINSON TECHNOLOGY INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
(Columnar dollar amounts in thousands except per share amounts) Reference to the Company means Hutchinson Technology Incorporated and
its subsidiaries. Unless otherwise indicated, references to 2006 mean the Companys fiscal year
ending September 24, 2006, references to 2005 mean the Companys fiscal year ending September 25,
2005, references to 2004 mean the Companys fiscal year ended September 26, 2004, references to
2003 mean the Companys fiscal year ended September 28, 2003 and references to 2002 mean the
Companys fiscal year ended September 29, 2002. (1) ACCOUNTING POLICIES The condensed consolidated financial statements have been prepared by the Company, without audit,
pursuant to the rules and regulations of the Securities and Exchange Commission (SEC). The
information furnished in the condensed consolidated financial statements includes normal recurring
adjustments and reflects all adjustments which are, in the opinion of management, necessary for a
fair presentation of such financial statements. Certain information and footnote disclosures
normally included in financial statements prepared in accordance with accounting principles
generally accepted in the United States of America have been condensed or omitted pursuant to such
rules and regulations. Although the Company believes that the disclosures are adequate to make the
information presented not misleading, it is suggested that these condensed consolidated financial
statements be read in conjunction with the financial statements and the notes thereto included in
the Companys latest Annual Report on Form 10-K. The quarterly results are not necessarily
indicative of the actual results that may occur for the entire fiscal year. (2) ACCOUNTING PRONOUNCEMENTS In December 2004, the Financial Accounting Standards Board (FASB) issued a revision to Statement
of Financial Accounting Standards 123, Share-Based Payment (SFAS 123(R)(R)). The revision
requires all entities to recognize compensation expense in an amount equal to the fair value of
share-based payments granted to employees. SFAS 123(R) eliminates the alternative method of
accounting for employee share-based payments previously available under Accounting Principles Board
Opinion No. 25 (APB 25). In April 2005, the SEC delayed the effective date of SFAS 123(R) to
fiscal years beginning after June 15, 2005. As a result SFAS 123(R) will be effective for the
Company beginning in the first quarter of 2006. The Company has not completed its evaluation of
the impact that adopting SFAS 123(R) will have on its financial statements. (3) BUSINESS AND CUSTOMERS The Company is the worlds leading supplier of suspension assemblies for hard disk drives.
Suspension assemblies hold the recording heads in position above the spinning magnetic disks in the
drive and are critical to maintaining the necessary microscopic clearance between the head and
disk. The Company developed its leadership position in suspension assemblies through research,
development and design activities coupled with a substantial investment in manufacturing
technologies and equipment. The Company is focused on continuing to develop suspension assemblies
which address the rapidly changing requirements of the hard disk drive industry. To further assure
a readily available supply of products to its customers, the Company sells etched and stamped
component-level suspension assembly parts, such as flexures and baseplates, to competing suspension
assembly manufacturers. The Company also is engaged in the development and production of products
for the medical device market, but does not expect to generate significant revenue from these
products during 2005. 5




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A breakdown of customer sales is as follows: Thirteen Weeks Ended
    
    
    Twenty-Six Weeks EndedMarch 27,
    
    
    March 28,
    
    
    March 27,
    
    
    March 28,Percentage of Net Sales
    
    2005
    
    
    2004
    
    
    2005
    
    
    2004Five Largest Customers
    
    
    87
    %
    
    
    86
    %
    
    
    89
    %
    
    
    83
    %SAE Magnetics, Ltd./TDK
    
    
    28
    
    
    
    34
    
    
    
    29
    
    
    
    34Western Digital Corporation
    
    
    20
    
    
    
    16
    
    
    
    21
    
    
    
    13Alps Electric Co., Ltd.
    
    
    20
    
    
    
    22
    
    
    
    21
    
    
    
    23Innovex, Inc.
    
    
    11
    
    
    
    7
    
    
    
    9
    
    
    
    7Seagate Technology LLC
    
    
    8
    
    
    
    7
    
    
    
    7
    
    
    
    6Fujitsu Limited
    
    
    8
    
    
    
    4
    
    
    
    8
    
    
    
    4
 (4) TRADE RECEIVABLES The Company grants credit to customers, but generally does not require collateral or any other
security to support amounts due. Trade receivables of $76,692,000 at March 27, 2005 and
$69,073,000 at September 26, 2004 are net of allowances of $1,583,000 and $1,462,000, respectively.
As of March 27, 2005, allowances of $1,583,000 consisted of a $940,000 allowance for doubtful
accounts and a $643,000 allowance for sales returns. As of September 26, 2004, allowances of
$1,462,000 consisted of a $683,000 allowance for doubtful accounts and a $779,000 allowance for
sales returns. The Company generally warrants that the goods sold by it will be free from defects in materials and
workmanship for a period of one year or less following delivery to the customer. Upon
determination that the goods sold are defective, the Company typically accepts the return of such
goods and refunds the purchase price to the customer. The Company records a provision against
revenue for estimated returns on sales of its products in the same period that the related revenues
are recognized. The Company bases the allowance on historical product returns, as well as existing
product return authorizations. The following table reconciles the changes in the Companys
allowance for sales returns under warranties: Increases in the
    
    Reductions in theallowance related
    
    allowance forSeptember 26,
    
    to warranties
    
    returns under
    
    March 27,2004
    
    issued
    
    warranties
    
    2005$779
    
    $824
    
    $(960)
    
    $643
 (5) INVENTORIES Inventories are valued at the lower of cost (first-in, first-out method) or market by analyzing
market conditions, current sales prices, inventory costs and inventory balances. Inventories
consisted of the following at March 27, 2005 and September 26, 2004: March 27,
    
    
    September 26,2005
    
    
    2004Raw materials
    
    $
    13,803
    
    
    $
    9,144Work in process
    
    
    8,353
    
    
    
    9,546Finished goods
    
    
    13,696
    
    
    
    16,629$
    35,852
    
    
    $
    35,319
 6




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(6) EARNINGS PER SHARE Basic earnings per share is computed by dividing net income available to common shareholders by the
weighted average number of common shares outstanding during the year. Diluted earnings per share is
computed under the treasury stock method for stock options and the if-converted method for
convertible debt and is calculated to compute the dilutive effect of potential common shares. A
reconciliation of these amounts is as follows: Thirteen Weeks Ended
    
    
    Twenty-Six Weeks EndedMarch 27,
    
    
    March 28,
    
    
    March 27,
    
    
    March 28,2005
    
    
    2004
    
    
    2005
    
    
    2004Net income
    
    $
    15,137
    
    
    $
    9,598
    
    
    $
    28,582
    
    
    $
    27,819Plus: interest expense on convertible
subordinated notes
    
    
    1,008
    
    
    
    1,007
    
    
    
    2,017
    
    
    
    2,014Less: additional profit-sharing expense
and income tax provision
    
    
    328
    
    
    
    273
    
    
    
    596
    
    
    
    545Net income available to common shareholders
    
    $
    15,817
    
    
    $
    10,332
    
    
    $
    30,003
    
    
    $
    29,288Weighted average common shares outstanding
    
    
    25,184
    
    
    
    26,031
    
    
    
    24,971
    
    
    
    25,988Dilutive potential common shares
    
    
    5,635
    
    
    
    5,723
    
    
    
    5,600
    
    
    
    5,783Weighted average common and diluted shares
outstanding
    
    
    30,819
    
    
    
    31,754
    
    
    
    30,571
    
    
    
    31,771Basic earnings per share
    
    $
    0.60
    
    
    $
    0.37
    
    
    $
    1.14
    
    
    $
    1.07Diluted earnings per share
    
    $
    0.51
    
    
    $
    0.33
    
    
    $
    0.98
    
    
    $
    0.92
 (7) INCOME TAXES The following table details the significant components of the Companys deferred tax assets: March 27,
    
    
    September 26,2005
    
    
    2004Current deferred tax assets:Receivable allowance
    
    $
    578
    
    
    $
    535Inventories
    
    
    3,045
    
    
    
    5,167Accruals and other reserves
    
    
    3,702
    
    
    
    3,713Total current deferred tax assets
    
    
    7,325
    
    
    
    9,415Long-term deferred tax assets:Property, plant and equipment
    
    
    19,121
    
    
    
    12,762Deferred income
    
    
    857
    
    
    
    924Tax credits
    
    
    18,328
    
    
    
    15,628Net operating loss carryforwards
    
    
    35,162
    
    
    
    44,539Valuation allowance
    
    
    (4,969
    )
    
    
    (5,642
    )Total long-term deferred tax assets
    
    
    68,499
    
    
    
    68,211Total deferred tax assets
    
    $
    75,824
    
    
    $
    77,626
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Deferred income taxes reflect the net tax effects of temporary differences between the carrying
amounts of assets and liabilities for financial reporting purposes and the amounts used for income
tax purposes. At March 27, 2005, the Companys deferred tax assets included $18,328,000 of unused
tax credits, $4,940,000 of which can be carried forward indefinitely and $13,388,000 of which begin
to expire at various dates beginning in 2010. A valuation allowance of $4,969,000 has been
recognized to offset the estimated tax credits that may not be realized before they expire. At
March 27, 2005, the Companys balance sheet included $35,162,000 of deferred tax assets related to
an estimated federal net operating loss (NOL) carryforward of approximately $90,689,000 for
United States federal tax return purposes and certain state NOLs that will begin to expire in 2018. Significant judgment is required in determining the Companys provision for income taxes, its
deferred tax assets and liabilities and any valuation allowance recorded against its deferred tax
assets. At September 28, 2003, the Company had a valuation allowance of $49,021,000, due to the
uncertainty of realizing the benefits of certain tax credits and NOL carryforwards before they
expire. The valuation allowance was based on the Companys historical taxable income and its
estimates of future taxable income in each jurisdiction in which it operates and the period over
which its deferred tax assets will be recoverable. At June 27, 2004, based on the Companys
continued review of various factors, including the Companys recent historical taxable income,
year-to-date operating results and its estimates of future taxable income, the Company determined
that it was more likely than not that a significant portion of the tax benefits of these deferred
tax assets would be realized. Accordingly, the valuation allowance was reduced by $41,318,000,
resulting in a net income tax benefit of $36,202,000 for the three and nine months ended June 27,
2004 and an increase to shareholders equity at June 27, 2004 of $5,116,000, which related to the
exercise and/or sale of stock options by employees. At December 26, 2004 and due to the completion
of the Companys income tax return, the Company determined it is more likely than not that the
state NOL carryforward would be realized. Accordingly, the valuation allowance was reduced by
$673,000, resulting in a net income tax benefit of $649,000 for the three months ended December 26,
2004 and the six months ended March 27, 2005 and an increase to shareholders equity at March 27,
2005 of $24,000. The Company will continue to assess the likelihood that the deferred tax assets
will be realizable and the valuation allowance will be adjusted accordingly, which could materially
impact the Companys financial position and results of operations. (8) OTHER ASSETS During the second quarter of 2002, the Company prepaid $26,000,000 related to a technology and
development agreement. As of March 27, 2005, the unamortized portion of the prepayment was
$15,686,000, of which $3,174,000 was included in Other current assets and $12,512,000 was
included in Other assets on the accompanying condensed consolidated balance sheet. The
unamortized portion is being amortized over the remaining term of the agreement which ends in 2010. (9) SHAREHOLDERS EQUITY In July 2004, the Companys Board of Directors authorized the repurchase of up to two million
shares of its common stock from time to time in the open market or through privately negotiated
transactions, subject to market conditions, share price and other factors. In 2004, the Company
repurchased a total of 1,722,500 shares for a total cost of $39,252,000. The average price paid
per share was $22.75. No shares were repurchased during the twenty-six weeks ended March 27, 2005.
The Company may still repurchase up to 277,500 shares under this program. 8




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(10) SUPPLEMENTARY CASH FLOW INFORMATION Twenty-Six Weeks EndedMarch 27,
    
    
    March 28,2005
    
    
    2004Changes in operating assets and liabilities:Receivables, net
    
    $
    (9,588
    )
    
    $
    2,606Inventories
    
    
    (533
    )
    
    
    (10,671
    )Other assets
    
    
    1,607
    
    
    
    2,668Accounts payable and accrued expenses
    
    
    18,566
    
    
    
    3,228Other non-current liabilities
    
    
    (198
    )
    
    
    2,493$
    9,854
    
    
    $
    324Cash paid for:Interest (net of amount capitalized)
    
    $
    882
    
    
    $
    1,234Income taxes
    
    $
    394
    
    
    $
    831
 Capitalized interest for the twenty-six weeks ended March 27, 2005 was $806,000 compared to
$454,000 for the twenty-six weeks ended March 28, 2004. Interest is capitalized, using an overall
borrowing rate, for assets that are being constructed or otherwise produced for the Companys own
use. Interest capitalized during the twenty-six weeks ended March 27, 2005 was primarily related
to the expansion of production capacity, new program tooling, process technology and capability
improvements and new business systems. (11) STOCK-BASED COMPENSATION The Company has an employee stock purchase plan that provides for the sale of the Companys common
stock at discounted purchase prices. The cost per share under this plan is 85% of the lesser of
the fair market value of the Companys common stock on the first or last day of the purchase
period, as defined. The Company has two stock option plans under which options have been granted to employees,
including officers and directors of the Company, at a price not less than the fair market value of
the Companys common stock at the date the options were granted. Options under one plan are no
longer granted because the maximum number of shares available for option grants under such plan has
been reached. Under the other plan, options also may be granted to certain non-employees at a
price not less than the fair market value of the Companys common stock at the date the options are
granted. Options generally expire ten years from the date of grant or at an earlier date as
determined by the committee of the Board of Directors of the Company that administers the plans.
Options granted under the plans generally are exercisable one year from the date of grant. Effective beginning in the first quarter of fiscal 2006, the Company will adopt the provisions of
SFAS 123(R). The Company will be required to recognize compensation expense in an amount equal to
the fair value of share-based payments granted to employees. SFAS 123(R) eliminates the
alternative method of accounting for employee share-based payments previously available under APB
25. However, the Company currently follows APB 25, under which no compensation expense has been
recognized in connection with stock option grants pursuant to the stock option plans. Had
compensation expense been determined consistent with Statement of Financial Accounting Standards
No. 123, Accounting for Stock-Based Compensation (FAS 123), the Companys pro forma net income
and pro forma earnings per share would have been as follows: 9




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Thirteen Weeks Ended
    
    
    Twenty-Six Weeks EndedMarch 27,
    
    
    March 28,
    
    
    March 27,
    
    
    March 28,2005
    
    
    2004
    
    
    2005
    
    
    2004Net income, as reported
    
    $
    15,137
    
    
    $
    9,598
    
    
    $
    28,582
    
    
    $
    27,819Deduct: Total stock-based
employee compensation expense
determined under fair value
based method for all awards,
net of related tax effects
    
    
    941
    
    
    
    1,205
    
    
    
    2,087
    
    
    
    2,599Pro forma net income
    
    $
    14,196
    
    
    $
    8,393
    
    
    $
    26,495
    
    
    $
    25,220Earnings per share:Basic  as reported
    
    $
    0.60
    
    
    $
    0.37
    
    
    $
    1.14
    
    
    $
    1.07Basic  pro forma
    
    $
    0.56
    
    
    $
    0.32
    
    
    $
    1.06
    
    
    $
    0.97Diluted  as reported
    
    $
    0.51
    
    
    $
    0.33
    
    
    $
    0.98
    
    
    $
    0.92Diluted  pro forma
    
    $
    0.48
    
    
    $
    0.29
    
    
    $
    0.91
    
    
    $
    0.84
 In determining compensation cost pursuant to FAS 123, the fair value of each option grant is
estimated on the date of grant using the Black-Scholes option pricing model. The following
weighted average assumptions were used for various grants in 2005: risk-free interest rate of
3.9%; expected life of six years; and expected volatility of 41%. The following weighted average
assumptions were used for various grants in 2004: risk-free interest rate of 3.6%; expected life
of six years; and expected volatility of 43%. (12) LEGAL CONTINGENCIES The Company and certain users of the Companys products have from time to time received, and may in
the future receive, communications from third parties asserting patents against the Company or its
customers which may relate to certain of the Companys manufacturing equipment or products or to
products that include the Companys products as a component. In addition, certain of the Companys
customers have been sued on patents having claims closely related to products sold by the Company.
If any third party makes a valid infringement claim and a license were not available on terms
acceptable to the Company, the Companys operating results could be adversely affected. The
Company expects that, as the number of patents issued continues to increase, and as the Company
grows, the volume of intellectual property claims could increase. The Company may need to engage
in litigation to enforce patents issued or licensed to it, protect trade secrets or know-how owned
by it or determine the enforceability, scope and validity of the intellectual property rights of
others. The Company could incur substantial costs in such litigation or other similar legal
actions, which could have a material adverse effect on its results of operations. The Company is a party to certain claims arising in the ordinary course of business. In the
opinion of management, the outcome of such claims will not materially affect the Companys current
or future financial position or results of operations. 10




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(13) OTHER MATTERS The American Jobs Creation Act of 2004 (AJCA) was signed into law on October 22, 2004. The AJCA
contained two provisions that affect the Company. The first provision is the repeal of the FSC
Repeal and Extraterritorial Income Exclusion Act of 2000 (EIE), which will be phased out on a
calendar year basis with the benefit ending December 31, 2006. Due to the new law, it is expected
that the Company will have a decreased benefit from EIE. The second provision is the introduction of a deduction for a percentage of income from domestic
production activities. The deduction is phased in on a taxable year basis with the benefit to the
Company beginning in 2006 and being fully phased in for the Companys fiscal year ending September
25, 2011. There will be no impact to the Company from this new deduction in 2005, and the benefit
starting in 2006 is expected to offset some of the lost EIE benefit. (14) SEGMENT REPORTING The Company follows the provisions of Statement of Financial Accounting Standards No. 131,
Disclosures about Segments of an Enterprise and Related Information (FAS 131). FAS 131
establishes annual and interim reporting standards for an enterprises business segments and
related disclosures about its products, services, geographic areas and major customers. The method
for determining what information to report is based upon the way management organizes the operating
segments within the Company for making operating decisions and assessing financial performance.
The Company considers its chief operating decision-maker to be the Chief Executive Officer. The Company has determined that it has two reportable segments: the Disk Drive Division and the
BioMeasurement Division. The accounting policies of the segments are the same as those described
in the summary of significant accounting policies in the Companys most recent Annual Report on
Form 10-K. The following table represents net sales and operating income for each reportable segment. Thirteen Weeks Ended
    
    
    Twenty-Six Weeks EndedMarch 27,
    
    
    March 28,
    
    
    March 27,
    
    
    March 28,2005
    
    
    2004
    
    
    2005
    
    
    2004Net sales:Disk Drive Division
    
    $
    157,939
    
    
    $
    113,256
    
    
    $
    303,419
    
    
    $
    246,800BioMeasurement Division
    
    
    104
    
    
    
    98
    
    
    
    242
    
    
    
    190$
    158,043
    
    
    $
    113,354
    
    
    $
    303,661
    
    
    $
    246,990Income (loss) from operations:Disk Drive Division
    
    $
    20,178
    
    
    $
    12,249
    
    
    $
    36,359
    
    
    $
    35,636BioMeasurement Division
    
    
    (1,965
    )
    
    
    (1,710
    )
    
    
    (3,621
    )
    
    
    (3,353
    )$
    18,213
    
    
    $
    10,539
    
    
    $
    32,738
    
    
    $
    32,283
 Assets of the BioMeasurement Division are not relevant for management of the BioMeasurement
Division segment or significant for disclosure. 11




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HUTCHINSON TECHNOLOGY INCORPORATED 
 ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. When we refer to we, us or HTI, we mean Hutchinson Technology Incorporated and
its subsidiaries. Unless otherwise indicated, references to 2006 mean HTIs fiscal year ending
September 24, 2006, references to 2005 mean HTIs fiscal year ending September 25, 2005,
references to 2004 mean HTIs fiscal year ended September 26, 2004, references to 2003 mean
HTIs fiscal year ended September 28, 2003, references to 2002 mean HTIs fiscal year ended
September 29, 2002, references to 2001 mean HTIs fiscal year ended September 30, 2001, and
references to 2000 mean HTIs fiscal year ended September 24, 2000. GENERAL Since the late 1980s, we have derived virtually all of our revenue from the sale of suspension
assemblies to a small number of customers. We currently supply a variety of suspension assemblies
and suspension assembly components to nearly all manufacturers of disk drives and manufacturers of
disk drive components for all sizes of disk drives. Suspension assemblies are a critical component
of disk drives and our results of operations are highly dependent on the disk drive industry. The
disk drive industry is intensely competitive, and demand for disk drive components fluctuates. Our
results of operations are affected from time to time due to disk drive industry demand changes,
adjustments in inventory levels throughout the disk drive supply chain, technological changes that
impact suspension assembly demand, shifts in our market position and our customers market
position, our customers production yields and our own product transitions, and changes in our
yields and production capacity utilization. We estimate the average number of suspension assemblies required per drive decreased from
approximately 4.5 in 1999 to approximately 2.3 in 2003. During that time, improvements in data
density, the amount of data which can be stored on disks, outpaced disk drive storage capacity
requirements. This enabled disk drive manufacturers to reduce their costs by using fewer
components, including suspension assemblies, in each drive. In calendar 2004, the average
number of suspension assemblies per drive increased to 2.4 and we expect that number to increase to
2.7 for calendar 2005. This increase in the number of suspension assemblies used per disk drive is
the result of market demand for disk drive storage capacity requirements increasing faster than the
improvement in data density and an increased demand for higher capacity disk drives. Higher
capacity disk drives, such as those used in personal video recorders and near-line storage in the
enterprise market, typically require multiple disks and recording heads and therefore multiple
suspension assemblies per drive. Shipments of suspension assemblies in the first two quarters of 2004 were 147 million and 127
million units, respectively. In the third quarter of 2004 we shipped 114 million suspension
assemblies, down 13 million or 10% from the second quarter of 2004. This reduction in shipments
was due to reduced suspension assembly demand as a result of shifts in market share and product mix
among the major disk drive makers, weaker overall disk drive demand and improved yields in our
customers manufacturing processes. In the fourth quarter of 2004 and the first quarter of 2005 we
shipped 150 million and 175 million suspension assemblies, respectively. The increase in shipments
in these periods resulted primarily from a seasonal increase in demand and an increase in the
average number of suspension assemblies per disk drive. During the second quarter of 2005, we
shipped 181 million suspension assemblies, up 3% compared to the first quarter of 2005, due to
strong demand for suspension assemblies for higher capacity disk drives used in server and consumer
electronics applications, such as personal video recorders. We expect these factors to
continue to impact our shipments through the third quarter of 2005. We anticipate shipments to
range from 190 million to 200 million units for the third quarter of 2005. Our selling prices are subject to market pressure from our competitors and pricing pressure from
our customers. In 2004, our average selling prices declined as a result of planned price
reductions triggered by higher volumes of certain suspension assemblies, as well as changes in the
mix of products we sold. In 2005, our average selling prices have increased and we anticipate
that they will continue to modestly increase based upon a greater mix of products with finer
electrical conductors and value-added features, such as dual stage actuation, clad unamount arms,
plated grounds, electrostatic protection measures and formed and polished headlifts. Our selling
prices also 12




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are affected by changes in overall demand for our products, changes in the specific products our
customers buy and a products life cycle. A typical life cycle for our products begins with higher
pricing when products are introduced and decreasing prices as they mature or achieve specified
cumulative volumes. To offset price decreases during a products life, we rely primarily on higher
sales volume and improving our manufacturing yields and efficiencies to reduce our cost. If we
cannot reduce our manufacturing costs as prices decline during our products life cycles, our
business, financial condition and results of operations could be materially adversely affected. We typically allow customers to change or cancel orders on short notice. We plan our production
and inventory based primarily on forecasts of customer demand, including forecasts of customer
pulls of our product out of vendor managed inventory (VMI) facilities. Certain agreements with
our customers provide that we maintain minimum finished goods inventory levels. Due to the
higher demand we have experienced in the past three quarters, our finished goods inventory
levels are low, and we intend to increase our finished goods inventory during the latter part of
2005 by increasing our production capacity through additional capital spending and continued
productivity improvements. Our customers often prefer a dual source supply and, therefore, may
allocate their demand among suppliers. Both customer demand and the resulting forecasts often
fluctuate substantially. These factors, among others, create an environment where scheduled
production and capacity utilization can vary significantly from week to week, leading to
variability in gross margins and difficulty in estimating our position in the marketplace. Our gross margins have fluctuated and will continue to fluctuate based upon a variety of factors
such as changes in:  
    demand or customer requirements;
    utilization of our production capacity;
    product and feature mix;
    selling prices;
    infrastructure and expedited production and shipping costs;
    production and engineering costs associated with production of new products and features;
    manufacturing yields or efficiencies; and
    costs of materials. Gross margins declined from 31% in 2003 to 28% in 2004 primarily due to lower suspension assembly
average selling prices, lower component sales and lower utilization of our production capacity
during the third quarter and the first half of the fourth quarter. Our gross margin for the
first quarter of 2005 was 28%, up from 24% in the fourth quarter of 2004, on higher production
capacity utilization that was partially offset by higher costs for expedited production and
shipping of products to our customers. For the second quarter of 2005, our gross margin increased
to 30% on higher volumes, partially offset by higher depreciation expense and higher costs for
expedited production and shipping of products to our customers. We anticipate our gross margin to
range from 30% to 32% of net sales for the third quarter of 2005 on expected higher suspension
assembly shipments. Our suspension assembly business is capital intensive. To meet expected demand growth, we plan to
increase our manufacturing capacity from approximately 15 million suspension assemblies per week to
20 million units per week by the end of 2005. To achieve this growth in manufacturing capacity, we
have increased our planned 2005 capital spending budget to $220,000,000 from $120,000,000. Through
March 27, 2005, capital expenditures for the year have totaled $64,252,000. We expect to fund our
remaining 2005 capital spending from operations and from our current cash, cash equivalents and
securities available for sale. Our operating results and gross margins have been, and will continue to be, impacted favorably by
lower depreciation and lease expenses as a result of asset impairment charges in 2000 and 2001
totaling $56,523,000 and $20,830,000, respectively. Commencing in 2003, consumption of suspension
assemblies has exceeded the industry estimates for long-term suspension assembly demand used in
determining the impairment charges and a majority of the previously impaired assets have been
placed back in service. We estimate annual savings in depreciation and lease costs due to these
asset impairment charges were approximately $9,000,000 in 2004 and that annual savings in 2005 will be approximately $5,000,000 and
will thereafter total an aggregate of
approximately $8,000,000 in additional savings. 13




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In 2005, we are significantly increasing our research and development spending over the prior year
to develop new production processes, new products and equipment. The disk drive industry is
intensely competitive, and our customers operating results are dependent on being the
first-to-market and first-to-volume with new products at a low cost. Our development efforts
typically enable us to shorten development cycles and achieve high volume output per manufacturing
unit more quickly than our competitors and is an important factor in our success. The next
generation of smaller disk drives and sub-pico recording head sizes will require finer electrical
conductors on the suspension assembly. We are continuing to invest in extending the capabilities
of our existing processes and adding associated capital equipment for manufacturing TSA suspension
assemblies to meet escalating customer requirements for precision and performance. We are developing additive processes and adding associated capital equipment for producing future
generations of suspension assemblies. Additive processing involves depositing a thin seed layer of
metal onto a polyimide surface and then imaging and chemically plating up that seed layer to form
the suspensions electrical conductors. If our development of additive process capabilities is
delayed for any reason or if suspension assemblies cannot be produced profitably in the quantities
and to the specifications required by our customers, we may need to purchase components
manufactured through additive processing. New manufacturing processes for advanced suspension assembly features and suspension assembly
types, such as those currently under development, initially have lower manufacturing yields than
those for more mature products and processes. Manufacturing yields generally improve as the
process and product matures and production volumes increase. Manufacturing yields also vary
depending on the complexity and uniqueness of products. Small variations in manufacturing yields
can have a significant impact on gross margins. We are in the process of implementing a new enterprise resource planning (ERP) system throughout
our company. We anticipate that the implementation of this system will allow us to better manage
our production capacity and respond more quickly to changes in demand. We expect this
implementation to be substantially complete during 2006. Because ERP systems are highly complex,
implementation and the transition to the new system can be costly and may initially result in
unexpected cost or difficulties, including failure or inefficient operation of the new system. A
failure in the new system could impair our ability to access certain business and financial
information. We will continue to assess and mitigate these potential risks, however, should we
experience such difficulties as a result of our new ERP system, our business, financial condition
and results of operations could be materially adversely affected. RESULTS OF OPERATIONS Thirteen Weeks Ended March 27, 2005 vs. Thirteen Weeks Ended March 28, 2004. Net sales for the thirteen weeks ended March 27, 2005 were $158,043,000, an increase of $44,689,000
or 39% from the thirteen weeks ended March 28, 2004. Suspension assembly sales increased
$46,353,000 from the thirteen weeks ended March 28, 2004, as a result of a 42% increase in
suspension assembly unit shipments. The increase in unit shipments was due to strong demand
industry wide and, in particular, for suspension assemblies for higher capacity disk drives used in
server and consumer electronics applications, such as personal video recorders. Sales of
suspension assembly components to other suspension assembly manufacturers were $4,155,000, a
decrease of $901,000 from the thirteen weeks ended March 28, 2004. Gross profit for the thirteen weeks ended March 27, 2005 was $47,688,000, compared to $33,789,000
for the thirteen weeks ended March 28, 2004. The increase was primarily due to the increase in
suspension assembly shipments noted above. Gross profit as a percent of net sales was 30% for both
periods. 14




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Research and development expenses for the thirteen weeks ended March 27, 2005 were $8,301,000, an
increase of $1,482,000 or 22% from the thirteen weeks ended March 28, 2004. The increase primarily
was attributable to $1,111,000 of higher labor expenses due to the hiring of additional personnel
to support increased customer-specific development efforts and to make process improvements and
$422,000 in higher supply expenses. As a percent of net sales, research and development expenses
decreased from 6% in the second quarter of 2004 to 5% in the second quarter of 2005. Selling, general and administrative expenses for the thirteen weeks ended March 27, 2005 were
$21,174,000, an increase of $4,743,000 or 29% from the thirteen weeks ended March 28, 2004. The
increase primarily was attributable to $1,357,000 in higher incentive compensation expenses,
$910,000 of increased labor expenses, $855,000 in higher professional services expenses primarily
related to the design of our new ERP system, and a $416,000 increase in travel and training
expenses. Overall, selling, general and administrative expenses as a percent of net sales
decreased from 14% in the second quarter of 2004 to 13% in the second quarter of 2005. Income from operations for the thirteen weeks ended March 27, 2005 was $18,213,000, compared to
$10,539,000 for the thirteen weeks ended March 28, 2004. The higher operating income was due to
the increase in suspension assembly shipments noted above. Income from operations for the thirteen
weeks ended March 27, 2005 included a $1,965,000 loss from operations for our BioMeasurement
Division segment, compared to a $1,710,000 loss for the thirteen weeks ended March 28, 2004. Interest expense for the thirteen weeks ended March 27, 2005 was $587,000, a decrease of $291,000
from the thirteen weeks ended March 28, 2004. The reduction was due to an increase in the amount
of interest expense capitalized. Interest income for the thirteen weeks ended March 27, 2005 was $1,483,000, an increase of $285,000
from the thirteen weeks ended March 28, 2004. The increase was due to higher investment yields. Other income, net of other expenses, for the thirteen weeks ended March 27, 2005 was $1,074,000, an
increase of $84,000 from the thirteen weeks ended March 28, 2004 due to increased royalty income. The income tax provisions for the thirteen weeks ended March 27, 2005 and March 28, 2004 were based
on estimated annual effective tax rates of 25% and 19%, respectively. These rates are below the
statutory federal rate primarily due to our estimate of the benefit derived from the EIE provisions
related to export of U.S. products. Net income for the thirteen weeks ended March 27, 2005 was $15,137,000, compared to net income of
$9,598,000 for the thirteen weeks ended March 28, 2004. The higher net income was due to the
increase in suspension assembly shipments noted above. Twenty-Six Weeks Ended March 27, 2005 vs. Twenty-Six Weeks Ended March 28, 2004. Net sales for the twenty-six weeks ended March 27, 2005 were $303,661,000, an increase of
$56,671,000 or 23% from the twenty-six weeks ended March 28, 2004. Suspension assembly sales
increased $68,553,000 from the twenty-six weeks ended March 28, 2004, as a result of a 30% increase
in suspension assembly unit shipments. The increase in unit shipments was due to strong demand
industry wide and, in particular, for suspension assemblies for higher capacity disk drives used in
server and consumer electronics applications, such as personal video recorders. Sales of
suspension assembly components to other suspension assembly manufacturers were $5,801,000, a
decrease of $10,524,000 from the twenty-six weeks ended March 28, 2004. Gross profit for the twenty-six weeks ended March 27, 2005 was $88,638,000, compared to $77,075,000
for the twenty-six weeks ended March 28, 2004. The increase was primarily due to the increase in
suspension assembly shipments noted above. Gross profit as a percent of net sales decreased from
31% to 29%. The decrease in gross profit as a percent of net sales was primarily due to the
reduction in sales of suspension assembly components noted above and an increase in products having
higher material costs as a percent of net sales. 15




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Research and development expenses for the twenty-six weeks ended March 27, 2005 were $15,919,000,
an increase of $4,245,000 or 36% from the twenty-six weeks ended March 28, 2004. The increase
primarily was attributable to $2,940,000 of higher labor expenses due to the hiring of additional
personnel to support increased customer-specific development efforts and to make process
improvements, $658,000 in higher supply expenses and $652,000 in higher professional services
expenses. As a percent of net sales, research and development expenses were 5% for both periods. Selling, general and administrative expenses for the twenty-six weeks ended March 27, 2005 were
$39,981,000, an increase of $6,863,000 or 21% from the twenty-six weeks ended March 28, 2004. The
increase primarily was attributable to $1,726,000 of increased labor expenses, $999,000 in higher
professional services expenses primarily related to the design of our new ERP system, $869,000 in
higher incentive compensation expenses, a $707,000 increase in bad debt expense, and a $641,000
increase in travel and training expenses. Overall, selling, general and administrative expenses as
a percent of net sales were 13% for both periods. Income from operations for the twenty-six weeks ended March 27, 2005 was $32,738,000, compared to
$32,283,000 for the twenty-six weeks ended March 28, 2004. The higher operating income was due to
the increase in suspension assembly shipments noted above, offset by higher selling, general and
administrative expenses, higher research and development expenses, and lower sales of suspension
assembly components. Income from operations for the twenty-six weeks ended March 27, 2005
included a $3,621,000 loss from operations for our BioMeasurement Division segment, compared to a
$3,353,000 loss for the twenty-six weeks ended March 28, 2004. Interest expense for the twenty-six weeks ended March 27, 2005 was $1,241,000, a decrease of
$565,000 from the twenty-six weeks ended March 28, 2004. The reduction was due to an increase in
the amount of interest expense capitalized. Interest income for the twenty-six weeks ended March 27, 2005 was $2,705,000, an increase of
$562,000 from the twenty-six weeks ended March 28, 2004. The increase was due to higher investment
yields and a loss on the sale of some securities during the twenty-six weeks ended March 28, 2004. Other income, net of other expenses, for the twenty-six weeks ended March 27, 2005 was $2,303,000,
an increase of $579,000 from the twenty-six weeks ended March 28, 2004 due to increased royalty
income. The income tax provisions for the twenty-six weeks ended March 27, 2005 and March 28, 2004 were
based on estimated effective tax rates for each fiscal year of 25% and 19%, respectively. These
rates are below the statutory federal rate primarily due to our estimate of the benefit derived
from the EIE provisions related to export of U.S. products. The estimated annual effective tax
rate of 25% for the twenty-six weeks ended March 27, 2005 was reduced to approximately 22% by
certain discrete events occurring during the thirteen weeks ended December 26, 2004, primarily the
reduction of the valuation allowance associated with state NOL carryforwards and the difference
between estimated and actual tax deductions and tax credits that were included in the filing of our
2004 income tax return. Net income for the twenty-six weeks ended March 27, 2005 was $28,582,000, compared to net income of
$27,819,000 for the twenty-six weeks ended March 28, 2004. The higher net income was due to the
increase in suspension assembly shipments noted above, offset by higher selling, general and
administrative expenses, higher research and development expenses, and lower sales of suspension
assembly components. LIQUIDITY AND CAPITAL RESOURCES Our principal sources of liquidity are cash and cash equivalents, securities available for sale,
cash flow from operations and additional financing capacity. Our cash and cash equivalents
increased from $33,704,000 at September 26, 2004 to $50,112,000 at March 27, 2005. Our securities
available for sale increased from 16




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$224,356,000 to $231,465,000 during the same period. Overall, this reflects a $23,517,000 increase
in our cash and cash equivalents and securities available for sale for the twenty-six weeks ended
March 27, 2005. The increase primarily was a result of $73,897,000 generated from operations and
$14,142,000 from the issuance of common stock in connection with the exercise of stock options,
partially offset by capital expenditures totaling $64,252,000. On January 30, 2004, we entered into a Loan Agreement with LaSalle Bank National Association,
establishing a $10,000,000 unsecured credit facility. As of March 27, 2005, we had no outstanding
loans under this facility. Letters of credit outstanding under this facility totaled approximately
$1,808,000 as of such date, resulting in approximately $8,192,000 of remaining availability. Our
Financing Agreement with The CIT Group/Business Credit, Inc., providing for a line of credit of
$50,000,000, was terminated during the quarter ended March 28, 2004. Cash used for capital expenditures totaled $64,252,000 for the twenty-six weeks ended March 27,
2005, compared to $38,181,000 for the twenty-six weeks ended March 28, 2004. We have increased our
2005 capital spending budget from $120,000,000 to $220,000,000 to support the planned increase in
our manufacturing capacity from approximately 15 million suspension assemblies per week to 20
million units per week by the end of 2005. We anticipate our capital expenditures will be for both
TSA suspension and additive suspension production capacity, process technology and capability
improvements, new program tooling and new business systems. Financing of these capital
expenditures will be principally from internally generated funds, cash and cash equivalents and
securities available for sale. In July 2004, our Board of Directors authorized the repurchase of up to two million shares of our
common stock from time to time in the open market or through privately negotiated transactions,
subject to market conditions, share price and other factors. In 2004, we repurchased a total of
1,722,500 shares for a total cost of $39,252,000. The average price paid per share was $22.75. No
shares were repurchased during the twenty-six weeks ended March 27, 2005. We may still repurchase
up to 277,500 shares under this program. Certain of our existing financing agreements contain financial covenants as well as covenants
which, among other things, restrict our ability to pay dividends to our shareholders and may
restrict our ability to enter into certain types of financing. As of March 27, 2005, we were in
compliance with all such covenants. If, however, we are not in compliance with the covenants in
our financing agreements at the end of any future quarter and cannot obtain amendments on terms
acceptable to us, our future financial results and liquidity could be materially adversely
affected. We currently believe that our cash and cash equivalents, securities available for sale, cash
generated from operations and our credit facility will be sufficient to meet our operating
expenses, debt service requirements and capital expenditures through 2005. Our ability to obtain
additional financing, if needed, will depend upon a number of factors, including our future
performance and financial results and general economic and capital market conditions. If we cannot
raise additional capital on reasonable terms or at all, if needed, our future financial results and
liquidity could be materially adversely affected. CRITICAL ACCOUNTING POLICIES Our discussion and analysis of our financial condition and results of operations are based upon our
consolidated financial statements, which have been prepared in accordance with accounting
principles generally accepted in the United States of America. The preparation of these financial
statements requires estimation and judgment that affect the reported amounts of revenues, expenses,
assets and liabilities. We base our estimates on historical experience and on various other
assumptions that are believed to be reasonable under the circumstances, the results of which form
the basis for making judgments about the carrying values of assets and liabilities that are not
readily apparent from other sources. Following are our most critical accounting policies that
affect significant areas and involve judgment and estimates. If these estimates differ materially
from actual results, the impact to the consolidated financial statements may be material. 17




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Revenue Recognition In recognizing revenue in any period, we apply the provisions of SEC Staff Accounting Bulletin No.
101, Revenue Recognition. We recognize revenue from the sale of our products when persuasive
evidence of an arrangement exists, the product has been delivered, the fee is fixed and
determinable and collection of the resulting receivable is reasonably assured. Amounts billed to
customers for shipping and handling costs associated with products sold are classified as revenue. For all sales, we use a binding purchase order as evidence of an arrangement. Delivery generally
occurs when product is delivered to a common carrier. Certain of our products are delivered on an
FOB destination basis. We defer our revenue associated with these transactions until the product
has been delivered to the customers premises. We also store inventory in warehouses (vendor managed inventory (VMI) facilities) that are
located close to the customers manufacturing facilities. Revenue is recognized on sales from VMI
facilities upon the transfer of title and risk of loss, following the customers acknowledgement of
the receipt of the goods. We also enter into arrangements with customers that provide us with reimbursement for guaranteed
capacity. We recognize the associated revenue over the estimated life of the program for which the
capacity is guaranteed. Accounts Receivable We are dependent on a limited number of customers, and as a result, our trade accounts receivable
is highly concentrated. We establish an allowance for doubtful accounts by analyzing specific
customer accounts and assessing the risk of uncollectability based on past transaction history with
the customer and the customers financial condition. While we perform ongoing credit reviews of
our customers and have established an allowance for doubtful accounts, a significant deterioration
in the financial condition of any significant customer may result in additional charges to increase
the allowance for doubtful accounts or to write off certain accounts. We record a provision against revenue for estimated returns on sales of our products in the same
period that the related revenues are recognized. We base the allowance on historical returns as
well as existing product return authorizations. Inventory Valuation Inventories are valued at the lower of cost (first-in, first-out method) or market by analyzing
market conditions, current sales prices, inventory costs and inventory balances. We are dependent on a limited number of customers and a limited number of product programs for each
customer. Because our products are custom-built, we typically cannot shift work-in-process or
finished goods from customer to customer, or from one program to another for a particular customer.
We evaluate inventory balances for excess quantities and obsolescence on a regular basis by
analyzing backlog, estimated demand, inventory on hand, sales levels and other information. We
write down excess and obsolete inventory to the lower of cost or market based on the analysis. Long-Lived Assets We evaluate the carrying value of long-lived assets, consisting primarily of property, plant and
equipment, whenever certain events or changes in circumstances indicate that the carrying amount of
these assets may not be recoverable. Such events or circumstances include, but are not limited to,
a prolonged industry downturn or significant reductions in projected future cash flows. In
assessing the recoverability of long-lived assets, we compare the carrying value to the
undiscounted future cash flows the assets are expected to generate. If the total of 18




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the
undiscounted future cash flows is less than the carrying amount of the assets, the assets will be
written down based on the excess of the carrying amount over the fair value of the assets. Fair
value would generally be determined by calculating the discounted future cash flows using a discount rate based upon our
weighted average cost of capital. Significant judgments and assumptions are required in the
forecast of future operating results used in the preparation of the estimated future cash flows.
Changes in these estimates could have a material effect on the assessment of long-lived assets. Income Taxes We account for income taxes in accordance with Statement of Financial Accounting Standards No. 109,
Accounting for Income Taxes. As part of the process of preparing our consolidated financial
statements, we are required to estimate our income taxes in each of the jurisdictions in which we
operate. This process involves estimating our current tax exposure together with assessing
temporary differences resulting from differing treatment of items for tax and accounting purposes.
These temporary differences result in deferred tax assets and liabilities, which are included
within our consolidated balance sheet. We must then assess the likelihood that our deferred tax
assets will be recovered from future taxable income and to the extent we believe that recovery is
not likely, we must establish a valuation allowance. To the extent we establish a valuation
allowance or change this allowance in a period, we must include an expense or a benefit within the
tax provision in our statement of operations. Significant judgment is required in determining our provision for income taxes, our deferred tax
assets and liabilities and any valuation allowance recorded against our deferred tax assets. At
September 28, 2003, we had a valuation allowance of $49,021,000, due to the uncertainty of
realizing the benefits of certain tax credits and NOL carryforwards before they expire. The
valuation allowance was based on our historical taxable income and our estimates of future taxable
income in each jurisdiction in which we operate and the period over which our deferred tax assets
will be recoverable. At June 27, 2004 based on our continued review of various factors, including
our recent historical taxable income, year-to-date operating results and our estimates of future
taxable income, we determined that it was more likely than not that a significant portion of the
tax benefits of these deferred tax assets would be realized. Accordingly, the valuation allowance
was reduced by $41,318,000, resulting in a net income tax benefit of $36,202,000 for the three and
nine months ended June 27, 2004 and an increase to shareholders equity at June 27, 2004 of
$5,116,000, which related to the exercise and/or sale of stock options by employees. At December
26, 2004 and due to the completion of our income tax return, we determined it is more likely than
not that the state NOL carryforward would be realized. Accordingly, the valuation allowance was
reduced by $673,000, resulting in a net income tax benefit of $649,000 for the three months ended
December 26, 2004 and the six months ended March 27, 2005 and an increase to shareholders equity
at March 27, 2005 of $24,000. We will continue to assess the likelihood that the deferred tax
assets will be realizable and the valuation allowance will be adjusted accordingly, which could
materially impact our financial position and results of operations. MARKET TRENDS AND CERTAIN CONTINGENCIES Market Trends We expect that the expanding use of enterprise computing and storage, desktop and mobile computers,
increasingly complex software and the growth of new applications for disk storage, such as personal
video recorders, audio players and digital cameras, together with emerging opportunities in cell
phones, guidance systems for automobiles and other consumer electronic applications, will increase
disk drive demand and, therefore, suspension assembly demand in the future. We also believe demand
for disk drives will continue to be subject, as it has in the past, to rapid or unforeseen changes
resulting from, among other things, changes in disk drive inventory levels, technological advances,
responses to competitive price changes and unpredicted high or low market acceptance of new drive
models. Disk drive industry observers currently project that disk drive shipments for calendar 2005 will
increase by about 20% compared with calendar 2004. In addition, we believe the average number of
suspension assemblies used per disk drive will increase to about 2.7 per drive in calendar 2005
compared to 2.4 per drive in calendar 2004. 19




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Increased demand for higher capacity drives, coupled
with a slower rate of improvement in data density, tends to result in more disks, heads and
suspension assemblies per disk drive. The forecasted growth in calendar 2005 disk drive shipments and in suspension assemblies used per disk drive is expected to result in a
worldwide calendar 2005 increase in suspension assembly shipments of about 30%. As in past years, disk drives continue to be the storage device of choice for applications
requiring low access times and higher capacities because of their speed and low cost per gigabyte
of stored data. The cost of storing data on disk drives continues to decrease primarily due to
increasing data density, thereby increasing storage capacity in disk drives or reducing the number
of components, including suspension assemblies, required in a disk drive. The continual pursuit of increasing data density and lower storage costs are leading to suspension
assemblies with finer electrical conductors and further adoption of features for suspension
assemblies, such as clad unamount arms, plated grounds, electrostatic protection measures and
formed and polished headlifts. Our suspension assemblies also allow for dual stage actuation,
which incorporates a second stage actuator on the suspension to improve head positioning over
increasingly tighter data tracks. The miniaturization of disk drives, the development of smaller recording heads, continuing
improvement in data density and the increasing use of disk drives in consumer electronic
applications, will require even finer electrical conductors on the suspension assembly. Newer disk
drives also may require additional electrical conductors. Our current TSA suspension flexures are
produced using a subtractive process, and we are investing in extending our current process
capabilities and in developing new additive processes and equipment to meet emerging industry
specifications. While we do not expect to generate significant revenue from suspension assemblies
produced utilizing additive processes in 2005, we will invest significantly in developing this
capability and related capital equipment. The introduction of new types or sizes of recording heads and disk drives tends to initially
decrease customers yields with the result that we may experience temporary elevations of demand
for some types of suspension assemblies. We believe reduced yields at some of our customers due to
their transition to higher density recording heads resulted in increased shipments of our
suspension assemblies in 2003 and the first half of 2004. As programs mature, higher customer
yields decrease the demand for suspension assemblies. The advent of new heads and new drive
designs may require rapid development and implementation of new suspension assembly types which
temporarily may increase our development spending and reduce our manufacturing yields and
efficiencies. These changes will continue to affect us. Contingencies We and certain users of our products have from time to time received, and may in the future
receive, communications from third parties asserting patents against us or our customers which may
relate to certain of our manufacturing equipment or products or to products that include our
products as a component. In addition, certain of our customers have been sued on patents having
claims closely related to products sold by us. If any third party makes a valid infringement claim
and a license were not available on terms acceptable to us, our operating results could be
adversely affected. We expect that, as the number of patents issued continues to increase, and as
we grow, the volume of intellectual property claims could increase. We may need to engage in
litigation to enforce patents issued or licensed to us, protect trade secrets or know-how owned by
us or determine the enforceability, scope and validity of the intellectual property rights of
others. We could incur substantial costs in such litigation or other similar legal actions, which
could have a material adverse effect on our results of operations. We are a party to certain claims arising in the ordinary course of business. In the opinion of our
management, the outcome of such claims will not materially affect our current or future financial
position or results of operations. 20




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Other Matters The American Jobs Creation Act of 2004 (AJCA) was signed into law on October 22, 2004. The AJCA
contained two provisions that affect us. The first provision is the repeal of the FSC Repeal and
Extraterritorial Income Exclusion Act of 2000 (EIE), which will be phased out on a calendar year basis with the
benefit ending December 31, 2006. Due to the new law, it is expected that we will have a decreased
benefit from EIE. The second provision is the introduction of a deduction for a percentage of income from domestic
production activities. The deduction is phased in on a taxable year basis with the benefit to us
beginning in 2006 and being fully phased in for our fiscal year ending September 25, 2011. There
will be no impact to us from this new deduction in 2005, and the benefit starting in 2006 is
expected to offset some of the lost EIE benefit. Forward-Looking Statements The statements above under the headings General and Market Trends and Certain Contingencies
about demand for and shipments of disk drives and suspension assemblies, the number of suspension
assemblies used per disk drive, research and development spending and capital expenditures and disk
drive and suspension assembly technology and development, the statements under the heading
General about our average selling prices, inventory levels, gross margins, expected savings in
depreciation and lease costs, our manufacturing capacity and funding of capital expenditures,
implementation of our new ERP system and our operating results, the statements above under the
heading Market Trends and Certain Contingencies about expected tax benefits and intellectual
property matters and the statements above, under the heading Liquidity and Capital Resources,
about capital expenditures, capital resources, and share repurchases, are forward-looking
statements based on current expectations. These statements are subject to risks and uncertainties,
including a slowdown in demand for computer systems and consumer electronics, slower or faster
customer acceptance and adoption of new product features, process capabilities, fluctuating order
rates, faster or slower improvements in disk drive data densities and other technological advances
which affect suspension assembly and component demand, changes in market consumption of disk drives
or suspension assemblies, difficulties in producing our suspensions or suspension features at
levels of precision, quality, variety, value and cost our customers require, difficulties in
managing capacity, changes in required investment to increase manufacturing capacity, changes in
product mix, changes in manufacturing efficiencies, changes in tax laws and the other risks and
uncertainties discussed above. These factors may cause our actual future results to differ
materially from historical earnings and from the financial performance we presently anticipate. 21




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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. Our credit facility with LaSalle Bank National Association carries interest rate risk, in
connection with certain borrowings under the working capital line it provides, that is generally
related to either LIBOR or the prime rate. If either of these rates were to change while we had
such borrowings outstanding under the working capital line provided by the credit facility,
interest expense would increase or decrease accordingly. At March 27, 2005, there were no
outstanding borrowings under the credit facility. We have no earnings or cash flow exposure due to market risk on our other debt obligations which
are subject to fixed interest rates. Interest rate changes, however, would affect the fair market
value of this fixed rate debt. At March 27, 2005, we had fixed rate debt of $150,000,000. We have not entered into derivative or other financial instruments or hedging transactions for
trading or speculative purposes. All of our sales transactions in our Disk Drive Division are
denominated in United States dollars and thus are not subject to risk due to currency exchange
fluctuations. Certain sales transactions in our BioMeasurement Division may be denominated in
foreign currencies. 22




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ITEM 4. CONTROLS AND PROCEDURES. Evaluation of Disclosure Controls and Procedures. As of the end of the period covered by this Quarterly Report on Form 10-Q, we conducted an
evaluation, under the supervision and with the participation of our principal executive officer and
principal financial officer, of our disclosure controls and procedures (as defined in Rules
13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934). Based on this
evaluation, the principal executive officer and principal financial officer concluded that our
disclosure controls and procedures are effective to ensure that information we are required to
disclose in reports that we file or submit under the Securities Exchange Act of 1934 is recorded,
processed, summarized and reported within the time periods specified
in Securities and Exchange Commission (SEC) rules and forms. Changes in Internal Control Over Financial Reporting. There
was no change in our internal control over financial reporting during our most recently completed
fiscal quarter that has materially affected, or is reasonably likely to materially affect, our
internal control over financial reporting. Risks Regarding Controls and Procedures. We are in the process of documenting and testing our internal control procedures in order to
satisfy the requirements of Section 404 of the Sarbanes-Oxley Act of 2002 (the Act), which
requires annual management assessments of the effectiveness of our internal controls over financial
reporting and a report by our independent registered public accounting firm addressing these
assessments. During the course of our testing we may identify deficiencies which we may not be
able to remediate in time to meet the deadline imposed by the Act for compliance with the
requirements of Section 404. In addition, we may experience difficulties in the transition to our
new ERP system that could affect our internal control systems, processes and procedures. If we
fail to achieve and maintain effective internal controls, as such standards are modified,
supplemented or amended from time to time, we may not be able to ensure that we can conclude on an
ongoing basis that we have effective internal controls over financial reporting in accordance with
Section 404 of the Act. Failure to achieve and maintain an effective internal control environment
could have a material adverse effect on our business, financial condition and results of
operations. 23




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PART II. OTHER INFORMATION 
 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. At our 39th Annual Meeting of Shareholders held on January 26, 2005, our shareholders approved the
following: (a) the election of directors to serve until their successors are duly elected. Each
nominated director was elected as follows: Director
    
    Votes For
    
    
    Votes WithheldW. Thomas Brunberg
    
    
    22,571,782
    
    
    
    1,359,761Archibald Cox, Jr.
    
    
    21,622,760
    
    
    
    2,308,783Wayne M. Fortun
    
    
    22,637,624
    
    
    
    1,293,919Jeffrey W. Green
    
    
    22,580,181
    
    
    
    1,351,362Russell Huffer
    
    
    22,867,320
    
    
    
    1,064,223R. Frederick McCoy, Jr.
    
    
    21,623,432
    
    
    
    2,308,111William T. Monahan
    
    
    21,621,482
    
    
    
    2,310,061Richard B. Solum
    
    
    22,674,887
    
    
    
    1,256,656
 (b) a proposal to approve the amendment and restatement of the Hutchinson Technology
Incorporated 1996 Incentive Plan to, among other things, increase the aggregate number of shares of common stock authorized for issuance under the plan by 1,250,000 shares to
5,000,000 shares. The proposal received 16,183,711 votes for, and 3,427,110 votes against,
ratification. There were 41,040 abstentions and 4,279,682 broker non-votes; and (c) a proposal to ratify the appointment of Deloitte & Touche LLP to serve as independent
public accountants of our company for the fiscal year ending September 25, 2005. The
proposal received 23,154,880 votes for, and 763,118 votes against, ratification. There were
13,545 abstentions and no broker non-votes. 24




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##### Table of Contents



ITEM 6. EXHIBITS Unless otherwise indicated, all documents incorporated herein by reference to a document filed with
the SEC pursuant to the Securities Exchange Act of 1934, as amended, are located under SEC file
number 0-14709.  3.1
    Amended and Restated Articles of Incorporation of HTI (incorporated by reference to Exhibit
3.1 to HTIs Quarterly Report on Form 10-Q for the quarter ended 12/29/02).3.2
    Restated By-Laws of HTI (incorporated by reference to Exhibit 3.2 to HTIs Quarterly Report
on Form 10-Q for the quarter ended 6/27/04).4.1
    Instruments defining the rights of security holders, including an indenture. The Registrant
agrees to furnish the Securities and Exchange Commission upon request copies of instruments
with respect to long-term debt.4.2
    Share Rights Agreement dated as of 7/19/00, between HTI and Wells Fargo Bank Minnesota, N.A.,
as Rights Agent (incorporated by reference to Exhibit 1 to HTIs Registration Statement on
Form 8-A, dated 7/24/00).4.3
    Indenture dated as of 2/24/03 between HTI and LaSalle Bank National Association, as Trustee
(incorporated by reference to Exhibit 4.5 to HTIs Registration Statement on Form S-3,
Registration No. 333-104074).4.4
    Purchase Agreement dated 2/18/03 by and among HTI, Salomon Smith Barney Inc. and Needham &
Company, Inc. (incorporated by reference to Exhibit 4.6 to HTIs Registration Statement on
Form S-3, Registration No. 333-104074).4.5
    Registration Rights Agreement dated as of 2/24/03 by and among HTI, Salomon Smith Barney Inc.
and Needham & Company, Inc. (incorporated by reference to Exhibit 4.7 to HTIs Registration
Statement on Form S-3, Registration No. 333-104074).#10
    Hutchinson Technology Incorporated Amended and Restated 1996
Incentive Plan (incorporated by reference to Annex A to HTIs
Definitive Proxy Statement on Schedule 14A, dated 12/16/04).31.1
    Rule 13a-14(a)/15d-14(a) Certifications of Chief Executive Officer.31.2
    Rule 13a-14(a)/15d-14(a) Certifications of Chief Financial Officer.32
    Section 1350 Certifications. # Management contract, compensatory plan or arrangement required to be filed as an exhibit to
this Quarterly Report on Form 10-Q. 25




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SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused
this report to be signed on its behalf by the undersigned thereunto duly authorized. HUTCHINSON TECHNOLOGY INCORPORATEDDate:
    
    April 26, 2005
    
    By
    
    /s/Wayne M. FortunWayne M. Fortun
President and Chief Executive OfficerDate:
    
    April 26, 2005
    
    By
    
    /s/John A. InglemanJohn A. Ingleman
Vice President and Chief Financial Officer
 26




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INDEX TO EXHIBITS ExhibitNo.
    
    
    
    Page3.1
    
    Amended and Restated Articles of Incorporation of HTI
(incorporated by reference to Exhibit 3.1 to HTIs Quarterly
Report on Form 10-Q for the quarter ended 12/29/02).
    
    Incorporated by
Reference3.2
    
    Restated By-Laws of HTI (incorporated by reference to Exhibit 3.2
to HTIs Quarterly Report on Form 10-Q for the quarter ended
6/27/04).
    
    Incorporated by
Reference4.1
    
    Instruments defining the rights of security holders, including an
indenture. The Registrant agrees to furnish the Securities and
Exchange Commission upon request copies of instruments with
respect to long-term debt.4.2
    
    Share Rights Agreement dated as of 7/19/00, between HTI and Wells
Fargo Bank Minnesota, N.A., as Rights Agent (incorporated by
reference to Exhibit 1 to HTIs Registration Statement on Form
8-A, dated 7/24/00).
    
    Incorporated by
Reference4.3
    
    Indenture dated as of 2/24/03 between HTI and LaSalle Bank
National Association, as Trustee (incorporated by reference to
Exhibit 4.5 to HTIs Registration Statement on Form S-3,
Registration No. 333-104074).
    
    Incorporated by
Reference4.4
    
    Purchase Agreement dated 2/18/03 by and among HTI, Salomon Smith
Barney Inc. and Needham & Company, Inc. (incorporated by reference
to Exhibit 4.6 to HTIs Registration Statement on Form S-3,
Registration No. 333-104074).
    
    Incorporated by
Reference4.5
    
    Registration Rights Agreement dated as of 2/24/03 by and among
HTI, Salomon Smith Barney Inc. and Needham & Company, Inc.
(incorporated by reference to Exhibit 4.7 to HTIs Registration
Statement on Form S-3, Registration No. 333-104074).
    
    Incorporated by
Reference10
    
    Hutchinson Technology Incorporated Amended and Restated 1996
Incentive Plan (incorporated by reference to Annex A to HTIs
Definitive Proxy Statement on Schedule 14A, dated 12/16/04).
    
    Incorporated by
Reference31.1
    
    Rule 13a-14(a)/15d-14(a) Certifications of Chief Executive Officer.
    
    Filed Electronically31.2
    
    Rule 13a-14(a)/15d-14(a) Certifications of Chief Financial Officer.
    
    Filed Electronically32
    
    Section 1350 Certifications.
    
    Filed Electronically
 27