##### Table of Contents



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       JUNE 27, 2004 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 jurisdiciton of
incorporation or organization)
    
    (I.R.S. Employer
Identification No.)40 WEST HIGHLAND PARK DRIVE N.E., HUTCHINSON, MINNESOTA
    
    55350(Address of principal executive offices)
    
    (Zip code)
 (320) 587-3797 
  (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 þ No o Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes þ No o Indicate the number of shares outstanding of each of the issuers classes of
common stock, as of the latest practicable date. As
of August 5, 2004 the registrant had 26,073,379 shares of Common Stock
issued and outstanding.    1




---



TABLE OF CONTENTS  PART I. FINANCIAL INFORMATIONITEM 1. FINANCIAL STATEMENTS.CONDENSED CONSOLIDATED BALANCE SHEETSCONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS  UNAUDITEDCONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS  UNAUDITEDNOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  UNAUDITEDITEM 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.SIGNATURESINDEX TO EXHIBITSRestated By-LawsCertification of Chief Executive OfficerCertification of Chief Financial OfficerSection 1350 Certifications    Table of Contents  
 
 PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS. 
 HUTCHINSON TECHNOLOGY INCORPORATED
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except shares and per share data) June 27,2004
    
    September 28,(Unaudited)
    
    2003ASSETSCurrent assets:Cash and cash equivalents
    
    $
    72,469
    
    
    $
    67,505Securities available for sale
    
    
    241,839
    
    
    
    224,860Trade receivables, net
    
    
    49,240
    
    
    
    59,822Other receivables
    
    
    6,476
    
    
    
    6,036Inventories
    
    
    46,144
    
    
    
    31,290Deferred tax assets
    
    
    9,439
    
    
    
    5,568Other current assets (Note 8)
    
    
    6,482
    
    
    
    5,588Total current assets
    
    
    432,089
    
    
    
    400,669Property, plant and equipment, net
    
    
    194,033
    
    
    
    176,559Deferred tax assets
    
    
    71,283
    
    
    
    37,840Other assets (Note 8)
    
    
    21,218
    
    
    
    23,888$
    718,623
    
    
    $
    638,956LIABILITIES AND SHAREHOLDERS INVESTMENTCurrent liabilities:Accounts payable
    
    $
    25,578
    
    
    $
    21,462Accrued expenses
    
    
    13,498
    
    
    
    13,299Accrued compensation
    
    
    20,399
    
    
    
    22,202Total current liabilities
    
    
    59,475
    
    
    
    56,963Convertible subordinated notes
    
    
    150,000
    
    
    
    150,000Deferred income
    
    
    2,501
    
    
    
    408Other long-term liabilities
    
    
    89
    
    
    
    210Shareholders investment:Common stock, $.01 par value, 100,000,000
shares authorized, 26,075,000 and 25,804,000
issued and outstanding
    
    
    261
    
    
    
    259Additional paid-in capital
    
    
    388,213
    
    
    
    379,663Accumulated other comprehensive income (loss)
    
    
    (1,003
    )
    
    
    525Retained earnings
    
    
    119,087
    
    
    
    50,928Total shareholders investment
    
    
    506,558
    
    
    
    431,375$
    718,623
    
    
    $
    638,956
 See accompanying notes to condensed consolidated financial statements  unaudited. 2




---



##### Table of Contents



HUTCHINSON TECHNOLOGY INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS  UNAUDITED
(In thousands, except per share data) Thirteen Weeks Ended
    
    Thirty-Nine Weeks EndedJune 27,
    
    June 29,
    
    June 27,
    
    June 29,2004
    
    2003
    
    2004
    
    2003Net sales
    
    $
    100,400
    
    
    $
    120,127
    
    
    $
    347,390
    
    
    $
    377,948Cost of sales
    
    
    76,520
    
    
    
    81,227
    
    
    
    246,435
    
    
    
    258,989Gross profit
    
    
    23,880
    
    
    
    38,900
    
    
    
    100,955
    
    
    
    118,959Research and development expenses
    
    
    7,441
    
    
    
    4,332
    
    
    
    19,115
    
    
    
    10,417Selling, general and administrative expenses
    
    
    15,121
    
    
    
    16,043
    
    
    
    48,239
    
    
    
    44,751Income from operations
    
    
    1,318
    
    
    
    18,525
    
    
    
    33,601
    
    
    
    63,791Interest expense
    
    
    (815
    )
    
    
    (560
    )
    
    
    (2,621
    )
    
    
    (5,776
    )Interest income
    
    
    1,230
    
    
    
    1,516
    
    
    
    3,373
    
    
    
    4,549Loss on debt extinguishment (Note 9)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3,265
    )Other income, net
    
    
    1,082
    
    
    
    774
    
    
    
    2,806
    
    
    
    1,380Income before income taxes
    
    
    2,815
    
    
    
    20,255
    
    
    
    37,159
    
    
    
    60,679Provision (benefit) for income taxes
    
    
    (37,525
    )
    
    
    3,848
    
    
    
    (31,000
    )
    
    
    11,529Net income
    
    $
    40,340
    
    
    $
    16,407
    
    
    $
    68,159
    
    
    $
    49,150Basic earnings per share
    
    $
    1.55
    
    
    $
    0.64
    
    
    $
    2.62
    
    
    $
    1.93Diluted earnings per share
    
    $
    1.30
    
    
    $
    0.55
    
    
    $
    2.22
    
    
    $
    1.70Weighted average common shares outstanding
    
    
    26,073
    
    
    
    25,650
    
    
    
    26,016
    
    
    
    25,525Weighted average common and diluted shares
outstanding
    
    
    31,599
    
    
    
    31,300
    
    
    
    31,712
    
    
    
    31,308
 See accompanying notes to condensed consolidated financial statements  unaudited. 3




---



##### Table of Contents



HUTCHINSON TECHNOLOGY INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS  UNAUDITED
(Dollars in thousands) Thirty-Nine Weeks EndedJune 27,
    
    June 29,2004
    
    2003Operating activities:Net income
    
    $
    68,159
    
    
    $
    49,150Adjustments to reconcile net income to cash
provided by operating activities:Depreciation and amortization
    
    
    43,245
    
    
    
    43,322Write-off of unamortized debt issuance costs
    
    
    
    
    
    
    1,346Deferred taxes
    
    
    (36,426
    )
    
    
    9,611Loss on disposal of assets
    
    
    186
    
    
    
    Changes in operating assets and liabilities (Note 10)
    
    
    408
    
    
    
    3,692Cash provided by operating activities
    
    
    75,572
    
    
    
    107,121Investing activities:Capital expenditures
    
    
    (59,726
    )
    
    
    (35,974
    )Purchases of marketable securities
    
    
    (335,367
    )
    
    
    (167,062
    )Sales and maturities of marketable securities
    
    
    315,933
    
    
    
    115,627Cash used for investing activities
    
    
    (79,160
    )
    
    
    (87,409
    )Financing activities:Repayments of long-term debt
    
    
    
    
    
    
    (143,924
    )Repayments of capital lease obligation
    
    
    
    
    
    
    (5,475
    )Net proceeds from issuance of convertible subordinated notes
    
    
    
    
    
    
    145,540Net proceeds from issuance of common stock
    
    
    8,552
    
    
    
    7,721Cash provided by financing activities
    
    
    8,552
    
    
    
    3,862Net increase in cash and cash equivalents
    
    
    4,964
    
    
    
    23,574Cash and cash equivalents at beginning of period
    
    
    67,505
    
    
    
    57,852Cash and cash equivalents at end of period
    
    $
    72,469
    
    
    $
    81,426
 See accompanying notes to condensed consolidated financial statements  unaudited. 4




---



##### Table of Contents



HUTCHINSON TECHNOLOGY INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  UNAUDITED
(Columnar dollar amounts in thousands except per share amounts) When we refer to we, us, the Company or HTI, we mean Hutchinson
Technology Incorporated and its subsidiaries. Unless otherwise indicated,
references to 2004 mean the Companys fiscal year ending 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 March 2004, the Emerging Issues Task Force (EITF) reached consensus on
Issue No. 03-1, The Meaning of Other-Than-Temporary Impairment and Its
Application to Certain Investments (EITF 03-1) regarding disclosures about
unrealized losses on available-for-sale debt and equity securities accounted
for under the Financial Accounting Standards Board (FASB) Statements No. 115,
Accounting for Certain Investments in Debt and Equity Securities, and No.
124, Accounting for Certain Investments Held by Not-for-Profit Organizations.
The guidance for evaluating whether an investment is other-than-temporarily
impaired should be applied in other-than-temporary impairment evaluations made
in reporting periods beginning after June 15, 2004. The disclosures are
effective in annual financial statements for fiscal years ending after December
15, 2003, for investments accounted for under Statements No. 115 and No. 124.
For all other investments within the scope of EITF 03-1, the disclosures are
effective in annual financial statements for fiscal years ending after June 15,
2004. The additional disclosures for cost method investments are effective for
fiscal years ending after June 15, 2004. The Company does not expect that the
implementation of EITF 03-1 in the fourth quarter will have a material effect
on its financial statements. The additional disclosures required by EITF 03-1
will be provided in the notes to the Companys audited fiscal 2004 financial
statements. In May 2003, the FASB issued the Companys Statement on Financial Accounting
Standards No. 150, Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity (FAS 150). FAS 150
establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity. In
accordance with FAS 150, financial instruments that embody obligations for the
issuer are required to be classified as liabilities. FAS 150 was effective for
financial instruments entered into or modified after May 31, 2003, and was
otherwise effective for the Company during the fourth quarter of 2003. The
adoption of FAS 150 did not have a material impact on the Companys
consolidated balance sheet or results of operations. In April 2003, the FASB issued Statement on Financial Accounting Standards No.
149, Amendment of Statement 133 on Derivative Instruments and Hedging
Activities (FAS 149), which amends and clarifies financial accounting and
reporting for derivative instruments, including certain derivative instruments
embedded in other contracts and for hedging activities under FAS 133,
Accounting for Derivative Instruments and Hedging Activities. FAS 149 was
effective for contracts entered into or modified after December 29, 2003 except
for the 5




---



##### Table of Contents



provisions that were cleared by the FASB in prior pronouncements. The adoption
of FAS 149 did not have a material impact on the Companys consolidated balance
sheet or results of operations. (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 2004. A breakdown of customer sales is as follows: Thirteen Weeks Ended
    
    Thirty-Nine Weeks EndedJune 27,
    
    June 29,
    
    June 27,
    
    June 29,Percentage of Net Sales
    
    2004
    
    2003
    
    2004
    
    2003Five Largest Customers
    
    
    89
    %
    
    
    82
    %
    
    
    82
    %
    
    
    82
    %SAE Magnetics, Ltd./TDK
    
    
    36
    
    
    
    33
    
    
    
    34
    
    
    
    27Alps Electric Co., Ltd.
    
    
    22
    
    
    
    26
    
    
    
    23
    
    
    
    27Western Digital Corporation
    
    
    13
    
    
    
    
    
    
    
    13
    
    
    
    Innovex, Inc.
    
    
    9
    
    
    
    7
    
    
    
    7
    
    
    
    5Fujitsu Limited
    
    
    9
    
    
    
    4
    
    
    
    5
    
    
    
    3
 (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
$49,240,000 at June 27, 2004 and $59,822,000 at September 28, 2003 are net of
allowances of $1,161,000 and $2,194,000, respectively. As of June 27, 2004,
allowances of $1,161,000 consisted of a $555,000 allowance for doubtful
accounts and a $606,000 allowance for sales returns. As of September 28, 2003,
allowances of $2,194,000 consisted of a $1,097,000 allowance for doubtful
accounts and a $1,097,000 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 60 days 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 28,
    
    to warranties
    
    returns under
    
    June 27,2003
    
    issued
    
    warranties
    
    2004$1,097
    
    $
    2,462
    
    
    $
    (2,953
    )
    
    $
    606
 6




---



##### Table of Contents



(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 June 27,
2004 and September 28, 2003: June 27,
    
    September 28,2004
    
    2003Raw materials
    
    $
    8,555
    
    
    $
    7,417Work in process
    
    
    10,874
    
    
    
    6,853Finished goods
    
    
    26,715
    
    
    
    17,020$
    46,144
    
    
    $
    31,290
 (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
    
    Thirty-Nine Weeks EndedJune 27,
    
    June 29,
    
    June 27,
    
    June 29,2004
    
    2003
    
    2004
    
    2003Net income (A)
    
    $
    40,340
    
    
    $
    16,407
    
    
    $
    68,159
    
    
    $
    49,150Plus: interest expense on convertible
subordinated notes
    
    
    1,008
    
    
    
    1,001
    
    
    
    3,022
    
    
    
    5,556Less: additional profit-sharing expense and
income tax provision
    
    
    228
    
    
    
    271
    
    
    
    683
    
    
    
    1,506Net income available to common shareholders (B)
    
    $
    41,120
    
    
    $
    17,137
    
    
    $
    70,498
    
    
    $
    53,200Weighted average common shares outstanding (C)
    
    
    26,073
    
    
    
    25,650
    
    
    
    26,016
    
    
    
    25,525Dilutive potential common shares
    
    
    5,526
    
    
    
    5,650
    
    
    
    5,696
    
    
    
    5,783Weighted average common and diluted shares
outstanding (D)
    
    
    31,599
    
    
    
    31,300
    
    
    
    31,712
    
    
    
    31,308Basic earnings per share [(A)/(C)]
    
    $
    1.55
    
    
    $
    0.64
    
    
    $
    2.62
    
    
    $
    1.93Diluted earnings per share [(B)/(D)]
    
    $
    1.30
    
    
    $
    0.55
    
    
    $
    2.22
    
    
    $
    1.70
 (7) INCOME TAXES The following table details the significant components of the Companys
deferred tax assets: June 27,
    
    September 28,2004
    
    2003Current deferred tax assets:Receivable allowance
    
    $
    425
    
    
    $
    764Inventories
    
    
    4,416
    
    
    
    5,150Accruals and other reserves
    
    
    4,598
    
    
    
    3,482Valuation allowance
    
    
    
    
    
    
    (3,828
    )Total current deferred tax assets
    
    
    9,439
    
    
    
    5,568
 7




---



##### Table of Contents



June 27,
    
    September 28,2004
    
    2003Long-term deferred tax assets:Property, plant and equipment
    
    
    13,244
    
    
    
    14,054Deferred income
    
    
    958
    
    
    
    Tax credits
    
    
    15,273
    
    
    
    14,422Net operating loss carryforwards
    
    
    47,751
    
    
    
    54,557Valuation allowance
    
    
    (5,943
    )
    
    
    (45,193
    )Total long-term deferred tax assets
    
    
    71,283
    
    
    
    37,840Total deferred tax assets
    
    $
    80,722
    
    
    $
    43,408
 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 June 27, 2004, the
Companys deferred tax assets included $15,273,000 of unused tax credits,
$3,902,000 of which can be carried forward indefinitely and $11,371,000 of
which begin to expire at various dates beginning in 2010. At June 27, 2004,
the Companys balance sheet included $47,751,000 of deferred tax assets related
to net operating loss (NOL) carryforwards that will begin to expire in 2018.
As of June 27, 2004, the Company had an estimated federal NOL carryforward of
approximately $124,888,000 for United States federal tax return purposes. A
portion of the credits and NOL carryforwards are subject to an annual
limitation under United States Internal Revenue Code (IRC) Section 382. 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 financial 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 is 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 relates to the exercise and/or sale of stock options
by employees. At June 27, 2004, the Company had a remaining valuation
allowance of $5,943,000, related primarily to certain tax credits and the
uncertainty of realizing these benefits before they expire due to certain
limitations. 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 June 27, 2004, the unamortized
portion of the prepayment was $18,066,000, of which $3,174,000 was included in
Other current assets and $14,892,000 was included in Other assets on the
accompanying condensed consolidated balance sheet. The unamortized portion is
being amortized on a straight-line basis over the remaining term of the
agreement which ends in 2010. (9) LOSS ON DEBT EXTINGUISHMENT During the first quarter of 2003, the Company repurchased $10,971,000 of its 6%
Convertible Subordinated Notes due 2005 (the 6% Convertible Notes) at a
pre-tax gain of $221,000. On March 26, 2003, the Company redeemed the
remaining $132,529,000 of its 6% Convertible Notes at a pre-tax loss of
$3,486,000. The pre-tax loss consisted of a $2,266,000 redemption premium paid
by the Company and a $1,220,000 write-off of unamortized debt 8




---



##### Table of Contents



issuance costs associated with the 6% Convertible Notes. These notes had a
maturity date of March 15, 2005. Prior to the redemption of the Companys 6%
Convertible Notes, in February 2003, the Company issued and sold $150,000,000
aggregate principal amount of 2.25% Convertible Subordinated Notes due 2010
(the 2.25% Convertible Notes) to Salomon Smith Barney Inc. and Needham &
Company, Inc., which resold the 2.25% Convertible Notes to qualified
institutional buyers, and outside the United States in accordance with
Regulation S under the Securities Act of 1933, as amended (the Securities
Act). The Company used net proceeds of $145,410,000 from the issuance and
sale of the 2.25% Convertible Notes primarily to redeem its 6% Convertible
Notes, with the remaining proceeds intended to be used for general corporate
purposes. In connection with the issuance and sale of the 2.25% Convertible
Notes, the Company incurred and capitalized debt issuance costs of $4,590,000,
which are being amortized over the term of the 2.25% Convertible Notes.
Beginning in the third quarter of 2003, the redemption of the 6% Convertible
Notes, combined with the issuance and sale of the 2.25% Convertible Notes, has
reduced the Companys interest expense by approximately $1,140,000 per quarter. (10) SUPPLEMENTARY CASH FLOW INFORMATION Thirty-Nine Weeks EndedJune 27,
    
    June 29,2004
    
    2003Changes in operating assets and liabilities:Receivables, net
    
    $
    10,142
    
    
    $
    (453
    )Inventories
    
    
    (14
    )
    
    
    (5,383
    )Deferred tax assets
    
    
    (3,871
    )
    
    
    1,704Other assets
    
    
    4,507
    
    
    
    4,839Accounts payable and accrued expenses
    
    
    2,512
    
    
    
    3,780Other non-current liabilities
    
    
    1,972
    
    
    
    (795
    )$
    408
    
    
    $
    3,692Cash paid for:Interest (net of amount capitalized)
    
    $
    2,938
    
    
    $
    4,664Income taxes
    
    $
    833
    
    
    $
    8
 Capitalized interest for the thirty-nine weeks ended June 27, 2004 was $567,000
compared to $453,000 for the comparable period in 2003. 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 thirty-nine weeks ended June 27, 2004 was primarily for
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 may also 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 9




---



##### Table of Contents



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. The Company follows Accounting Principles Board Opinion No. 25, under which no
compensation cost has been recognized in connection with stock option grants
pursuant to the stock option plans. Had compensation cost 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: Thirteen Weeks Ended
    
    Thirty-Nine Weeks EndedJune 27,
    
    June 29,
    
    June 27,
    
    June 29,2004
    
    2003
    
    2004
    
    2003Net income, as reported
    
    $
    40,340
    
    
    $
    16,407
    
    
    $
    68,159
    
    
    $
    49,150Deduct: Total stock-based
employee compensation expense
determined under fair value
based method for all awards,
net of related tax effects
    
    
    (1,197
    )
    
    
    (1,504
    )
    
    
    (3,796
    )
    
    
    (4,579
    )Pro forma net income
    
    $
    39,143
    
    
    $
    14,903
    
    
    $
    64,363
    
    
    $
    44,571Earnings per share:Basic  as reported
    
    $
    1.55
    
    
    $
    0.64
    
    
    $
    2.62
    
    
    $
    1.93Basic  pro forma
    
    $
    1.50
    
    
    $
    0.58
    
    
    $
    2.47
    
    
    $
    1.75Diluted  as reported
    
    $
    1.30
    
    
    $
    0.55
    
    
    $
    2.22
    
    
    $
    1.70Diluted  pro forma
    
    $
    1.26
    
    
    $
    0.50
    
    
    $
    2.10
    
    
    $
    1.55
 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 fiscal 2004: risk-free interest rate of 3.6%; expected life
of six years; and expected volatility of 43%. The following weighted average
assumptions were used for various grants in 2003: risk-free interest rate of
3.4%; expected life of six years; and expected volatility of 61%. (12) LEGAL CONTINGENCIES The Company and certain users of the Companys products have 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, the Company and 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 is 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




---



##### Table of Contents



(13) OTHER MATTERS Over the course of the last three years, the World Trade Organization (WTO)
has ruled that the Foreign Sales Corporation (FSC) provisions of the IRC, and
the FSCs replacement provisions contained in the FSC Repeal and
Extraterritorial Income Exclusion Act of 2000 (ETI), are prohibited export
subsidies under the rules of the WTO. Federal legislation introduced since
2002 has proposed the repeal of ETI. Until such legislation is signed into
law, the Company expects to earn a net benefit under the ETI provisions similar
to that previously earned under the FSC provisions of the IRC. If such
legislation is signed into law, the Companys effective tax rate could increase
significantly and its business, financial condition and results of operations
could be materially adversely affected. (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
    
    Thirty-Nine Weeks EndedJune 27,
    
    June
    29,
    June 27,
    June 29,2004
    
    2003
    
    2004
    
    2003Net sales:Disk Drive Division
    
    $
    100,307
    
    
    $
    120,037
    
    
    $
    347,107
    
    
    $
    377,762BioMeasurement Division
    
    
    93
    
    
    
    90
    
    
    
    283
    
    
    
    186$
    100,400
    
    
    $
    120,127
    
    
    $
    347,390
    
    
    $
    377,948Income from operations:Disk Drive Division
    
    $
    3,204
    
    
    $
    20,178
    
    
    $
    38,832
    
    
    $
    68,223BioMeasurement Division
    
    
    (1,886
    )
    
    
    (1,653
    )
    
    
    (5,231
    )
    
    
    (4,432
    )$
    1,318
    
    
    $
    18,525
    
    
    $
    33,601
    
    
    $
    63,791
 Assets of the BioMeasurement Division are not relevant for management of the
BioMeasurement Division segment or significant for disclosure. (15) SUBSEQUENT EVENT On July 22, 2004, the Company announced that its Board of Directors had
approved a share repurchase program, authorizing the repurchase of up to two
million shares of its common stock. The amount and timing of any repurchases
of the Companys common stock, which may be made from time to time in the open
market or through privately negotiated transactions, will be based on an
evaluation of market conditions, share price and other factors. The Company
will fund the repurchases from available cash. 11




---



##### Table of Contents



HUTCHINSON TECHNOLOGY INCORPORATED 
 ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. When we refer to we, us, HTI, or the Company, we mean Hutchinson
Technology Incorporated and its subsidiaries. Unless otherwise indicated,
references to 2005 mean HTIs fiscal year ending September 25, 2005,
references to 2004 mean HTIs fiscal year ending 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,
references to 2000 mean HTIs fiscal year ended September 24, 2000, and
references to 1999 mean HTIs fiscal year ended September 26, 1999. 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 by 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 positions, our customers production yields and our
own product transitions and production capacity utilization. From 1999 to 2002,improvements in data density, the amount of data which can
be stored on magnetic disks, outpaced increases in disk drive storage capacity
requirements. This enabled disk drive manufacturers to reduce their costs by
using fewer components, including suspension assemblies, in each drive. The
average number of suspension assemblies required per drive decreased from
approximately 4.5 in 1999 to approximately 3.3 in 2000, approximately 2.8 in
2001 and approximately 2.5 in 2002. Shifts in our position in the marketplace
had also, to a lesser extent, decreased demand for our products. Slower growth
of disk drive storage demand and a weaker global economy had also decreased
demand for our products since 2001. Consequently, our shipments declined from
583 million in 1999 to 398 million in 2002. Our shipments of suspension assemblies in 2003 were 526 million, 32% higher
than our shipments in 2002. The increase was due to an increase in disk drive
demand and higher suspension consumption related to lower yields some of our
customers experienced as they transitioned to higher density recording heads.
During the transition to higher density recording heads, some customers
experienced higher levels of defective recording heads, which they were unable
to detect until after they had attached the recording heads to our suspension
assemblies. Shipments of suspension assemblies in the first two quarters of 2004 were 147
and 127 million, 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 among the major disk drive makers,
weaker overall disk drive demand and improved yields in customers
manufacturing processes. We expect shipments to range from 115 million to 130
million units for the fourth quarter of 2004, although we continue to have
limited visibility for future demand Our selling prices are subject to market pressure from our competitors and
pricing pressure from our customers. We may also enter into formal supply
agreements with customers, which typically contain pricing provisions. Our
selling prices also 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. 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. 12




---



##### Table of Contents



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 product out of our vendor
managed inventory facilities. Disk drive 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 mix;  
    
    selling prices;  
    
    infrastructure costs;  
    
    production and engineering costs associated with production of new products;  
    
    manufacturing yields or efficiencies; and  
    
    costs of materials. Gross margins improved to 31% in 2003 and in the first half of 2004 primarily
due to increased utilization of our production capacity resulting from higher
shipment volumes, improved productivity and continued cost controls. In the
third quarter of 2004, our gross margin declined to 24% due to lower suspension
assembly shipment volume, lower component sales and lower utilization of
production capacity. Although we continue to have limited visibility for
future demand, we expect our gross margin to range from 20 to 24% of net sales
for the fourth quarter of 2004. We are anticipating this decline due to
expected under-utilization of our production capacity, lower component demand
and slightly lower average selling prices. In 2000 and 2001, as a result of industry forecasts of slower growth for disk
drive storage demand and a significant decrease in our long-term forecast for
suspension demand, we recorded asset impairment charges totaling $56,523,000
and $20,830,000, respectively. However, demand for suspension assemblies in
2003 improved due to an increase in disk drive demand, an increase in
suspension consumption related to lower yields some of our customers
experienced as they transitioned to higher density recording heads,
improvements in our market position and a slowdown in the rate of improvement
in data density of disk drives in mass production. Consequently, the majority
of the previously impaired assets are currently in use, and 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 these
previous charges. We estimate our annual savings in depreciation and lease
costs due to these asset impairment charges were approximately $12,000,000 in
2003 and future annual savings will be approximately $9,000,000 in 2004 and
$5,000,000 in 2005 and thereafter an aggregate of approximately $8,000,000 in
additional savings. 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 dedicated Development Center typically enables 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 recording head sizes,
such as femto, will require finer conductive leads on the suspension assembly.
This requirement has lead our Development Center to increase spending to
develop new production processes and equipment. 13




---



##### Table of Contents



New manufacturing processes for advanced suspension assembly features and new
suspension assembly types, such as those currently under development, initially
have lower manufacturing yields than 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 product specifications. Small variations in
manufacturing yields generally have a significant impact on gross margins.
Because our business is capital intensive and requires a high level of fixed
costs, gross margins are also sensitive to changes in volume and capacity
utilization. In addition to increases in suspension assembly demand, improvements to our
operating margins depend, in part, on the successful management of our
corporate infrastructure and our suspension assembly production capacity. As
part of our efforts to improve our operating results, we may need to increase
or decrease our employment level to meet customer requirements. Our overall
employment level was 3,446 at the end of 2003 and has increased to 3,698 at
June 27, 2004. We decreased the number of additional production workers
supplied by temporary staffing agencies from 210 at the end of 2003 to 13 at
the end of quarter three of 2004. RESULTS OF OPERATIONS Thirteen Weeks Ended June 27, 2004 vs. Thirteen Weeks Ended June 29, 2003. Net sales for the thirteen weeks ended June 27, 2004 were $100,400,000, a
decrease of $19,727,000 or 16% from the comparable period in 2003. Suspension
assembly sales decreased $17,943,000 from the comparable period in 2003, as a
result of a 12% decrease in suspension assembly unit shipments and a 3% decline
in average selling prices for our suspension assemblies. The decline in unit
shipments was due to lower suspension demand primarily as a result of improved
yields in customers manufacturing processes and shifts in market share among
the major disk drive makers. Sales of suspension assembly components to other
suspension assembly manufacturers decreased $1,635,000 from the comparable
period in 2003. Gross profit for the thirteen weeks ended June 27, 2004 was $23,880,000,
compared to $38,900,000 for the comparable period in 2003. Gross profit as a
percent of net sales decreased from 32% to 24%. The decrease was primarily due
to the decrease in sales mentioned above resulting in lower utilization of our
production capacity. Research and development expenses for the thirteen weeks ended June 27, 2004
were $7,441,000 compared to $4,331,000 for the comparable period in 2003. The
increase was attributable to $1,723,000 of higher labor expenses due to the
hiring of additional personnel to meet increased customer-specific development
efforts and process improvements. The increase also includes $1,331,000 in
supplies and prototype build expenses to support customer-specific programs.
As a percent of net sales, research and development expenses increased from 4%
in the third quarter of 2003 to 8% in the third quarter of 2004. Selling, general and administrative expenses for the thirteen weeks ended June
27, 2004 were $15,121,000, a decrease of $923,000 or 6% from the comparable
period in 2003. The decrease was primarily attributable to lower incentive
compensation costs of $2,385,000, partially offset by $400,000 in higher
professional services fees, $265,000 in increased expenses for on-site service
and support to our customers in Asia, increased labor expenses of $254,000 and
$141,000 in increased expenses for our BioMeasurement Division. Overall,
selling, general and administrative expenses as a percent of net sales
increased from 13% in the third quarter of 2003 to 15% in the third quarter of
2004. Income from operations for the thirteen weeks ended June 27, 2004 was
$1,318,000, compared to $18,525,000 for the comparable period in 2003. Income
from operations for the thirteen weeks ended June 27, 2004 included a
$1,886,000 loss from operations for our BioMeasurement Division segment,
compared to a $1,653,000 loss for the comparable period in 2003. 14




---



##### Table of Contents



Interest expense for the thirteen weeks ended June 27, 2004 was $815,000, an
increase of $255,000 from the comparable period in 2003. Interest income for the thirteen weeks ended June 27, 2004 was $1,230,000, a
decrease of $286,000 from the comparable period in 2003. This was primarily a
result of lower investment yields, partially offset by a higher average
investment balance. Other income, net of other expenses, for the thirteen weeks ended June 27, 2004
was $1,082,000, an increase of $308,000 from the comparable period in 2003
primarily due to increased royalty income. The income tax provisions for the thirteen weeks ended June 27, 2004 and June
29, 2003 were based on estimated effective tax rates for each fiscal year of
14% and 19%, respectively, excluding the release of the valuation allowance
discussed below and under Critical Accounting Policies  Income Taxes. These
rates are below the statutory federal rate primarily due to our estimate of the
benefit derived from the Foreign Sales Corporation (FSC) Repeal and
Extraterritorial Income Exclusion Act of 2000 (EIE) provisions related to
export of U.S. products, and our estimate of our utilization of net operating
loss (NOL) carryforwards. The effective tax rate for the quarter ended June
27, 2004 reflects the impact of adjusting our estimated annual effective tax
rate for 2004, excluding the release of the valuation allowance, from 19% to
14% during the quarter, as a result of changes to our estimate of the benefit
derived from the FSC Repeal and EIE provisions. During the third quarter of 2004, we released $41,318,000 of the valuation
allowance related to the future tax benefits of NOL carryforwards, resulting in
a net income tax benefit of $36,202,000 for the thirteen weeks ended June 27,
2004 and an increase to shareholders equity at June 27, 2004 of $5,116,000.
Based on our taxable income in prior years, our year-to-date operating results
and our estimates of future taxable income, we concluded that it is more likely
than not that a significant portion of our NOL carryforwards will be realized. Net income for the thirteen weeks ended June 27, 2004 was $40,340,000, compared
to net income of $16,407,000 for the comparable period in 2003. Net income for
the thirteen weeks ended June 27, 2004 included the above-mentioned $36,202,000
tax adjustment. Thirty-nine Weeks Ended June 27, 2004 vs. Thirty-nine Weeks Ended June 29,
2003. Net sales for the thirty-nine weeks ended June 27, 2004 were $347,390,000, a
decrease of $30,558,000 or 8% from the comparable period in 2003. Suspension
assembly sales decreased $26,723,000 from the comparable period in 2003, as a
result of a 6% decline in average selling prices for our suspension assemblies
and a 2% decrease in suspension assembly unit shipments. Sales of suspension
assembly components to other suspension assembly manufacturers decreased
$3,321,000 from the comparable period in 2003. Gross profit for the thirty-nine weeks ended June 27, 2004 was $100,955,000,
compared to $118,959,000 for the comparable period in 2003. The decrease was
primarily due to the lower sales mentioned above. Gross profit as a percent
of net sales was 29% for the first three quarters of 2004 and 31% for the
comparable period in 2003. Research and development expenses for the thirty-nine weeks ended June 27, 2004
were $19,115,000 compared to $10,417,000 for the comparable period in 2003.
The comparable period expenses were reduced by customer funding of $2,441,000
for the development of an advanced suspension assembly. The increase was also
attributable to $3,766,000 in higher labor expenses due to the hiring of
additional personnel to meet increased customer specific development efforts
and process improvements and $2,130,000 in supplies and prototype build
expenses to support customer specific programs. As a percent of net sales,
research and development expenses increased from 3% for the first three
quarters of 2003 to 6% for the first three quarters of 2004. Selling, general and administrative expenses for the thirty-nine weeks ended
June 27, 2004 were $48,239,000, an increase of $3,488,000 or 8% from the
comparable period in 2003. The increase was primarily attributable to 15




---



##### Table of Contents



$1,400,000 in higher professional service fees, $620,000 in increased expenses
for our BioMeasurement Division, $577,000 in higher supply expenses related to
the design of our new enterprise resource planning (ERP) business system,
$551,000 in increased on-site service and support to our customers in Asia and
$363,000 in higher labor expense. Overall, selling, general and administrative
expenses as a percent of net sales increased from 12% for the first three
quarters of 2003 to 14% for the first three quarters of 2004. Income from operations for the thirty-nine weeks ended June 27, 2004 was
$33,601,000, compared to $63,791,000 for the comparable period in 2003. Income
from operations for the first three quarters of 2004 included a $5,231,000 loss
from operations for our BioMeasurement Division segment, compared to a
$4,432,000 loss for the comparable period in 2003. Interest expense for the thirty-nine weeks ended June 27, 2004 was $2,621,000,
a decrease of $3,155,000 from the comparable period in 2003, primarily due to
the lower interest rate on our 2.25% Convertible Notes. Interest income for the thirty-nine weeks ended June 27, 2004 was $3,373,000, a
decrease of $1,176,000 from the comparable period in 2003. This was primarily
a result of lower investment yields and a loss on the sale of certain
securities,partially offset by a higher average investment balance. Other income, net of other expenses, for the thirty-nine weeks ended June 27,
2004 was $2,806,000, an increase of $1,426,000 from the comparable period in
2003 primarily due to increased royalty income. During the second quarter of 2003, we retired $132,529,000 of our 6%
Convertible Notes before their maturity. In connection with this transaction,
we recorded a $3,486,000 pre-tax loss on debt extinguishment. See Note 9,
Loss on Debt Extinguishment, in the notes to the condensed consolidated
financial statements. The income tax provisions for the thirty-nine weeks ended June 27, 2004 and
June 29, 2003 were based on estimated effective tax rates for each fiscal year
of 14% and 19%, respectively, excluding the release of the valuation allowance
discussed below and under Critical Accounting Policies  Income Taxes. These
rates are below the statutory federal rate primarily due to our estimate of the
benefit derived from the FSC Repeal and EIE provisions related to export of
U.S. products and our estimate of our utilization of NOL carryforwards. We
adjusted our annual effective tax rate for 2004 from 19% to 14%, excluding the
release of the valuation allowance, during the third quarter of 2004, as a
result of changes to our estimate of the benefit derived from the FSC Repeal
and EIE provisions. During the third quarter of 2004, we released $41,318,000 of the valuation
allowance related to the future tax benefits of NOL carryforwards, resulting in
a net income tax benefit of $36,202,000 for the thirty-nine weeks ended June
27, 2004 and an increase to shareholders equity at June 27, 2004 of
$5,116,000. Based on our taxable income in prior years, our year-to-date
operating results and our estimates of future taxable income, we concluded that
it is more likely than not that a significant portion of our NOL carryforwards
will be realized. Net income for the thirty-nine weeks ended June 27, 2004 was $68,159,000
compared to net income of $49,150,000 for the comparable period in 2003. Net
income as a percent of net sales increased from 13% for the first three
quarters of 2003 to 20% for the first three quarters of 2004. Net income for
the first three quarters of 2004 included the above-mentioned $36,202,000 tax
adjustment, and net income for the first three quarters of 2003 included the
above-mentioned loss on debt extinguishment. 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 $67,505,000 at September
28, 2003 to $72,469,000 at June 27, 2004. Our securities available for sale
increased from $224,860,000 to $241,839,000 during the same period. Overall,
this reflects a $21,943,000 increase in our cash and 16




---



##### Table of Contents



cash equivalents and securities available for sale for the thirty-nine weeks
ended June 27, 2004, primarily as a result of generating cash from operating
activities of $75,572,000, partially offset by our capital expenditures of
$59,726,000. 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 June 27, 2004, we had no outstanding loans under this facility. Letters of
credit outstanding under this facility totaled approximately $1,795,000 as of
such date, resulting in approximately $8,205,000 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 $59,726,000 for the thirty-nine
weeks ended June 27, 2004. We anticipate capital expenditures to total
approximately $90,000,000 in 2004 primarily for increases in 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. On July 22, 2004, we announced that our Board of Directors had approved a share
repurchase program, authorizing our repurchase of up to two million shares of
our common stock. The amount and timing of any repurchases of our common stock,
which may be made from time to time in the open market or through privately
negotiated transactions, will be based on our evaluation of market conditions,
share price and other factors. We will fund the repurchases from available
cash. During the first quarter of 2003, we repurchased $10,971,000 of our 6%
Convertible Notes at a pre-tax gain of $221,000. On March 26, 2003, we
redeemed the remaining $132,529,000 of our 6% Convertible Notes at a pre-tax
loss of $3,486,000. The pre-tax loss consisted of a $2,266,000 redemption
premium that we paid and a $1,220,000 write-off of unamortized debt issuance
costs associated with the 6% Convertible Notes. These notes had a maturity
date of March 15, 2005. Prior to the redemption of our 6% Convertible Notes in
February 2003, we issued and sold $150,000,000 aggregate principal amount of
2.25% Convertible Notes to Salomon Smith Barney Inc. and Needham & Company,
Inc., which resold the 2.25% Convertible Notes to qualified institutional
buyers, and outside the United States in accordance with Regulation S under the
Securities Act. We used net proceeds of $145,410,000 from the issuance and
sale of the 2.25% Convertible Notes primarily to redeem our 6% Convertible
Notes, with the remaining proceeds intended to be used for general corporate
purposes. In connection with the issuance and sale of the 2.25% Convertible
Notes, we incurred and capitalized debt issuance costs of $4,590,000, which are
being amortized over the term of the 2.25% Convertible Notes. Beginning in the
third quarter of 2003, the redemption of the 6% Convertible Notes, combined
with the issuance and sale of the 2.25% Convertible Notes, has reduced our
interest expense by approximately $1,140,000 per quarter. 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 June 27, 2004, 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 2004. 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. We cannot be sure that we will be able to raise additional capital
on reasonable terms or at all, if needed. 17




---



##### Table of Contents



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. 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 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 18




---



##### Table of Contents



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 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 is more likely than not that a
significant portion 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 relates to the exercise and/or sale of stock options by
employees. At June 27, 2004, we have a remaining valuation allowance of
$5,943,000, related primarily to certain tax credits and the uncertainty of
realizing these benefits before they expire due to certain limitations. 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, personal
computers, increasingly complex software and the growth of new applications for
disk storage, such as personal video recorders, gaming consoles, digital
cameras and audio players, together with emerging opportunities in cell phones,
guidance systems for 19




---



##### Table of Contents



automobiles and other consumer 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. Improvements in data density of disk
drives, across all disk drive market segments, have reduced unit shipments of
suspension assemblies since the third quarter of 1999. However, data density
has improved at a slower rate in the past year, and we believe it will continue
to improve at a slower rate in 2004. Worldwide suspension assembly shipments increased in 2003 due to overall growth
in disk drives shipped and increased consumption of suspension assemblies
resulting from lower yields some customers experienced because of the
continuing challenges posed by the use of higher density recording heads. We
believe that worldwide suspension assembly shipments are likely to track more
closely with the growth in industry-wide disk drive shipments, which is
currently forecasted by industry observers to be 12% to 15% annually over the
next two years. During the second quarter and throughout the third quarter of
2004, our suspension assembly demand declined as a result of shifts in market
share among the major disk drive makers, weaker overall disk drive demand and
improved yields in customers manufacturing processes. We continue to have
limited visibility for future demand. 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 further adoption of features for suspensions, such as dampers,
extended arms, polished headlifts, limiters, anti-static coatings and plated
grounds. 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 next generation of smaller disk drives and recording head sizes, such as
femto, will require finer conductive leads on the suspension assembly. This
requirement has lead our Development Center to increase spending to develop new
production processes and equipment. The introduction of new types or sizes of
read/write 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 as experienced in the third quarter of 2004. 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 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,
we and 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 is 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. 20




---



##### Table of Contents



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. Other Matters Over the course of the last three years, the WTO has ruled that the FSC
provisions of the IRC, and the FSCs replacement provisions contained in ETI,
are prohibited export subsidies under the rules of the WTO. Federal
legislation introduced since 2002 has proposed the repeal of ETI. Until such
legislation is signed into law, we expect to earn a net benefit under the ETI
provisions similar to that previously earned under the FSC provisions of the
IRC. If such legislation is signed into law, our effective tax rate could
increase significantly and our business, financial condition and results of
operations could be materially adversely affected. 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 impact of customer yields on suspension assembly
demand and disk drive and suspension assembly technology and development, the
statements under the heading General about our gross margins, expected
savings in depreciation and lease costs, and our operating results, the
statements above under the heading Market Trends and Certain Contingencies
about data density improvements in disk drives, 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 slower or faster customer acceptance and adoption of new product
features, 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 TSA suspensions,
difficulties in managing capacity, 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




---



##### Table of Contents



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 June 27, 2004, 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 June
27, 2004, we had fixed rate debt of $150,000,000. We do not enter 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




---



##### Table of Contents



ITEM 4. 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, as amended). 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 SEC rules and forms. 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. 23




---



##### Table of Contents



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:
    
    August 9, 2004
    
    By
    
    /s/Wayne M. FortunWayne M. Fortun
President and Chief Executive OfficerDate:
    
    August 9, 2004
    
    By
    
    /s/John A. InglemanJohn A. Ingleman
Vice President and Chief Financial Officer
 24




---



##### Table of Contents



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.
    
    Filed
Electronically4.1
    
    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
Reference10.1
    
    Office/Warehouse Lease between OPUS Corporation, Lessor, and HTI,
Lessee, dated 12/29/95 (incorporated by reference to Exhibit 10.2
to HTIs Quarterly Report on Form 10-Q for the quarter ended
3/24/96), and First Amendment to Office/Warehouse Lease dated
4/30/96 (incorporated by reference to Exhibit 10.2 to HTIs
Quarterly Report on Form 10-Q for the quarter ended 6/23/96).
    
    Incorporated by
Reference10.2
    
    Directors Retirement Plan effective as of 1/1/92 (incorporated
by reference to Exhibit 10.12 to HTIs Annual Report on Form 10-K
for the fiscal year ended 9/27/92) and Amendment effective as of
11/19/97 (incorporated by reference to Exhibit 10.5 to HTIs
Quarterly Report on Form 10-Q for the quarter ended 12/28/97).
    
    Incorporated by
Reference10.3
    
    Hutchinson Technology Incorporated 1988 Stock Option Plan, as
amended (incorporated by reference to Exhibit 10.3 to HTIs
Annual Report on Form 10-K for the fiscal year ended 9/28/03).
    
    Incorporated by
Reference10.4
    
    Patent License Agreement, effective as of 9/1/94, between HTI and
International Business Machines Corporation (incorporated by
reference to Exhibit 10.11 to HTIs Quarterly Report on Form
10-Q/A for the quarter ended 6/25/95).
    
    Incorporated by
Reference
 25




---



##### Table of Contents



ExhibitNo.
    
    
    
    Page10.5
    
    Lease Agreement between Meridian Eau Claire LLC and HTI, dated
5/1/96 (incorporated by reference to Exhibit 10.10 to HTIs
Quarterly Report on Form 10-Q for the quarter ended 6/23/96) and
First Amendment to Lease (incorporated by reference to Exhibit
10.6 to HTIs Annual Report on Form 10-K for the fiscal year
ended 9/24/00).
    
    Incorporated by
Reference10.6
    
    Hutchinson Technology Incorporated 1996 Incentive Plan, as
amended (incorporated by reference to Exhibit 10.6 to HTIs
Annual Report on Form 10-K for the fiscal year ended 9/28/03).
    
    Incorporated by
Reference10.7
    
    Hutchinson Technology Incorporated Incentive Bonus Plan
(incorporated by reference to Exhibit 10.13 to HTIs Quarterly
Report on Form 10-Q for the quarter ended 12/28/97).
    
    Incorporated by
Reference10.8
    
    Description of Fiscal Year 2004 Management Bonus Plan of
Hutchinson Technology Incorporated (incorporated by reference to
Exhibit 10.8 to HTIs Quarterly Report on Form 10-Q for the
quarter ended 12/28/03).
    
    Incorporated by
Reference10.9
    
    Description of Fiscal Year 2004 BioMeasurement Division Bonus
Plan of Hutchinson Technology Incorporated (incorporated by
reference to Exhibit 10.9 to HTIs Quarterly Report on Form 10-Q
for the quarter ended 12/28/03).
    
    Incorporated by
Reference31.1
    
    Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer.
    
    Filed Electronically31.2
    
    Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer.
    
    Filed Electronically32
    
    Section 1350 Certifications.
    
    Filed Electronically
 26