UNITED STATES SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

(Mark One)

For the quarterly period ended       JUNE 27, 2004

OR

For the transition period from                     to                    
..

Commission File Number       0-14709

HUTCHINSON TECHNOLOGY INCORPORATED

(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.

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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)

See accompanying notes to condensed consolidated financial statements — unaudited.

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HUTCHINSON TECHNOLOGY INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS — UNAUDITED
(In thousands, except per share data)

See accompanying notes to condensed consolidated financial statements — unaudited.

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HUTCHINSON TECHNOLOGY INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS — UNAUDITED
(Dollars in thousands)

See accompanying notes to condensed consolidated financial statements — unaudited.

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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

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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:

(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:

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(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:

(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:

(7) INCOME TAXES

The following table details the significant components of the Company’s deferred tax assets:

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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 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

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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

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

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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:

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.

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(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.

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.

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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,” “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 assembli