Hutchinson Technology 10Q 2007 Q1 Quarterly report

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 endedDECEMBER 24, 2006


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 Number0-14709

HUTCHINSON TECHNOLOGY INCORPORATED

(Exact name of registrant as specified in its charter)


MINNESOTA		41-0901840

(State or other jurisdiction of		(I.R.S. Employer
incorporation or organization)		Identification No.)


40 WEST HIGHLAND PARK DRIVE N.E., HUTCHINSON, MINNESOTA		55350

(Address of principal executive offices)		(Zip code)

(320) 587-3797

(Registrant’s telephone number, including area code)

(Former name, address or fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yesþ Noo

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.

Large accelerated filerþ Accelerated filero Non-accelerated filero

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yeso Noþ

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

As of January 25, 2007 the registrant had 25,986,213 shares of Common Stock issued and outstanding.

TABLE OF CONTENTS


PART I. FINANCIAL INFORMATION
	ITEM 1. FINANCIAL STATEMENTS
	ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
	ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
	ITEM 4. CONTROLS AND PROCEDURES
PART II. OTHER INFORMATION
	ITEM 1. LEGAL PROCEEDINGS
	ITEM 1A. RISK FACTORS
	ITEM 6. EXHIBITS
SIGNATURES
INDEX TO EXHIBITS
Certification
Certification
Section 1350 Certification

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

HUTCHINSON TECHNOLOGY INCORPORATED
CONDENSED CONSOLIDATED BALANCE SHEETS — UNAUDITED
(In thousands, except shares and per share data)


	December 24,			September 24,
	2006			2006
ASSETS
Current assets:
Cash and cash equivalents	$	21,111		$	40,331
Securities available for sale		273,759			250,110
Trade receivables, net		99,593			95,391
Other receivables		14,617			14,409
Inventories		76,223			81,298
Deferred tax assets (Note 7)		7,271			8,021
Other current assets (Note 8)		7,286			7,161

Total current assets		499,860			496,721
Property, plant and equipment, net		480,955			472,163
Deferred tax assets (Note 7)		62,470			57,867
Other assets (Note 8)		16,446			18,333

	$	1,059,731		$	1,045,084


LIABILITIES AND SHAREHOLDERS’ INVESTMENT

Current liabilities:
Current maturities of long-term debt	$	1,274		$	1,252
Accounts payable		44,071			45,090
Accrued expenses		18,012			14,819
Accrued compensation		21,630			21,338

Total current liabilities		84,987			82,499
Convertible subordinated notes		375,000			375,000
Long-term debt, less current portion		4,962			5,291
Other long-term liabilities		3,047			3,570
Shareholders’ investment:
Common stock, $.01 par value, 100,000,000 shares authorized, 25,945,000 and 25,638,000 issued and outstanding		259			256
Additional paid-in capital		405,202			398,047
Accumulated other comprehensive loss		(182	)		(222	)
Accumulated earnings		186,456			180,643

Total shareholders’ investment		591,735			578,724

	$	1,059,731		$	1,045,084

See accompanying notes to condensed consolidated financial statements — unaudited.

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


	Thirteen Weeks Ended
	December 24,			December 25,
	2006			2005
Net sales	$	188,882		$	184,560
Cost of sales		153,272			144,960

Gross profit		35,610			39,600
Research and development expenses		14,109			12,747
Selling, general and administrative expenses		19,517			22,513

Income from operations		1,984			4,340
Other income, net		1,810			1,252
Interest income		3,689			2,065
Interest expense		(2,309	)		(501	)

Income before income taxes		5,174			7,156
Provision (benefit) for income taxes		(639	)		1,166

Net income	$	5,813		$	5,990

Basic earnings per share	$	0.22		$	0.24

Diluted earnings per share	$	0.22		$	0.22


Weighted average common shares outstanding		25,869			25,535

Weighted average common and diluted shares outstanding		30,974			30,798

See accompanying notes to condensed consolidated financial statements — unaudited.

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


	Thirteen Weeks Ended
	December 24,			December 25,
	2006			2005
OPERATING ACTIVITIES:
Net income	$	5,813		$	5,990
Adjustments to reconcile net income to cash provided by operating activities:
Depreciation and amortization		28,158			27,526
Stock-based compensation		916			1,140
Provision (benefit) for deferred taxes (Note 7)		(3,875	)		405
Loss on disposal of assets		—			61
Changes in operating assets and liabilities (Note 11)		5,224			(9,309	)

Cash provided by operating activities		36,236			25,813


INVESTING ACTIVITIES:
Capital expenditures		(36,875	)		(73,397	)
Purchases of marketable securities		(437,166	)		(148,583	)
Sales/maturities of marketable securities		413,534			182,351

Cash used for investing activities		(60,507	)		(39,629	)


FINANCING ACTIVITIES:
Net proceeds from issuance of common stock		5,358			2,328
Repayment of long-term debt		(307	)		(429	)

Cash provided by financing activities		5,051			1,899


Net decrease in cash and cash equivalents		(19,220	)		(11,917	)

Cash and cash equivalents at beginning of period		40,331			33,733


Cash and cash equivalents at end of period	$	21,111		$	21,816

See accompanying notes to condensed consolidated financial statements — unaudited.

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 “2007” mean our fiscal year ending September 30, 2007, references to “2006” mean our fiscal year ended September 24, 2006, references to “2005” mean our fiscal year ended September 25, 2005, references to “2004” mean our fiscal year ended September 26, 2004, references to “2003” mean our fiscal year ended September 28, 2003, and references to “2002” mean our fiscal year ended September 29, 2002.

(1) BASIS OF PRESENTATION

The condensed consolidated financial statements have been prepared by us, 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 our 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 we believe that the disclosures are adequate to make the information presented not misleading, we suggest that these condensed consolidated financial statements be read in conjunction with the financial statements and the notes thereto included in our 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 September 2006, the SEC released Staff Accounting Bulletin No. 108, “Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements” (“SAB 108”). SAB 108 permits adjustment for the cumulative effect of misstatements related to prior years, previously deemed to be immaterial, in the carrying amount of assets and liabilities with an offsetting adjustment to the opening balance of retained earnings in the year of adoption. SAB 108 also requires the adjustment of any prior quarterly financial statements in future SEC filings within the fiscal year of adoption for the effects of such misstatements on the quarters when the information is next presented. This adjustment does not require reports previously filed with the SEC to be amended.

Effective September 26, 2005, we elected early application of SAB 108. In accordance with SAB 108, we reduced our opening retained earnings for 2006 by $1,952,000, net of tax of $1,126,000, and adjusted our financial results for the first three quarters of 2006 as shown in the tables below. We consider this adjustment to be immaterial to prior periods.

Our SAB 108 adjustment relates to one customer arrangement whereby certain revenues that were recorded in 2004 and 2005 should have been deferred. Deferred revenue amounts related to this arrangement are included within accrued expenses and other long-term liabilities on our condensed consolidated balance sheet as of September 24, 2006. Based on our approach for assessing misstatements prior to the adoption of SAB 108, we previously concluded that these amounts were immaterial.

The impact of this adjustment for the first three quarters of 2006 is presented below (in thousands, except per share data).


	Thirteen Weeks Ended December 25, 2005
	As Reported		Adjustment			As Adjusted
Net sales	$	184,627	$	(67	)	$	184,560
Provision for income taxes		1,177		(11	)		1,166
Net income		6,046		(56	)		5,990
Earnings per share:
Basic		0.24		0.00			0.24
Diluted		0.22		0.00			0.22


	Thirteen Weeks Ended March 26, 2006						Twenty-Six Weeks Ended March 26, 2006
	As Reported		Adjustment		As Adjusted		As Reported		Adjustment		As Adjusted
Net sales	$	185,926	$	469	$	186,395	$	370,553	$	402	$	370,955
Provision for income taxes		1,361		73		1,434		2,538		62		2,600
Net income		7,873		396		8,269		13,919		340		14,259
Earnings per share:
Basic		0.31		0.01		0.32		0.54		0.01		0.55
Diluted		0.28		0.01		0.29		0.50		0.01		0.51


	Thirteen Weeks Ended June 25, 2006								Thirty-Nine Weeks Ended June 25, 2006
	As Reported			Adjustment		As Adjusted			As Reported		Adjustment		As Adjusted
Net sales	$	169,599		$	380	$	169,979		$	540,152	$	782	$	540,934
Provision (benefit) for income taxes		(163	)		22		(141	)		2,375		84		2,459
Net income		5,838			358		6,196			19,756		698		20,454
Earnings per share:
Basic		0.23			0.01		0.24			0.77		0.02		0.79
Diluted		0.22			0.01		0.23			0.72		0.02		0.74

In July 2006, the Financial Accounting Standards Board (“FASB”) issued FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (“FIN 48”), an interpretation of FASB Statement 109. FIN 48 prescribes a comprehensive model for recognizing, measuring, presenting and disclosing in the financial statements tax positions taken or expected to be taken on a tax return, including a decision whether to file or not to file a tax return in a particular jurisdiction. FIN 48 is effective for fiscal years beginning after December 15, 2006. If there are changes in net assets as a result of the application of FIN 48, these will be accounted for as an adjustment to retained earnings. We are currently assessing the impact of FIN 48 on our consolidated balance sheet and results of operations.

(3) BUSINESS AND CUSTOMERS

We are 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. We developed our leadership position in suspension assemblies through research, development and design activities coupled with a substantial investment in manufacturing technologies and equipment. We are 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 our customers, we sell etched and stamped component-level suspension assembly parts, such as flexures and baseplates, to competing suspension assembly manufacturers. We also are engaged in the development and production of products for the medical device market, but do not expect to generate significant revenue from these products during 2007.

A breakdown of customer sales is as follows:


	Percentage of Net Sales
	Thirteen Weeks Ended
	December 24,			December 25,
	2006			2005
Five Largest Customers		87	%		87	%

Sales to Major Customers:
SAE Magnetics, Ltd./TDK		28	%		28	%
Seagate Technology LLC		23	%		12	%
Western Digital Corporation		17	%		17	%
Alps Electric Co., Ltd.		12	%		22	%
Fujitsu Limited		7	%		6	%
Innovex, Inc.		6	%		8	%

(4) TRADE RECEIVABLES

We grant credit to our customers, but generally do not require collateral or any other security to support amounts due. Trade receivables of $99,593,000 at December 24, 2006 and $95,391,000 at September 24, 2006 are net of allowances of $1,564,000 and $1,618,000, respectively. As of December 24, 2006, allowances of $1,564,000 consisted of a $461,000 allowance for doubtful accounts and a $1,103,000 allowance for sales returns. As of September 24, 2006, allowances of $1,618,000 consisted of a $553,000 allowance for doubtful accounts and a $1,065,000 allowance for sales returns.

We generally warrant that the disk drive products sold by us will be free from defects in materials and workmanship for a period of one year or less following delivery to the customer. Upon determination that any of such products sold are defective, we typically accept the return of such products and refund the purchase price to our customer. We record a provision against revenue for estimated returns on sales of our disk drive products in the same period that the related revenues are recognized. We base the allowance on historical product returns, as well as existing product return authorizations. The following table reconciles the changes in our allowances for sales returns under warranties:


	Increases in the	Reductions in the
	Allowance Related	Allowance for
September 24,	to Warranties	Returns Under	December 24,
2006	Issued	Warranties	2006
$1,065	$931	$(893)	$1,103

(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 December 24, 2006 and September 24, 2006:


	December 24,		September 24,
	2006		2006
Raw materials	$	24,169	$	21,868
Work in process		12,867		17,698
Finished goods		39,187		41,732

	$	76,223	$	81,298

(6) EARNINGS PER SHARE

Basic earnings per share is computed by dividing net income by the weighted-average number of common shares outstanding during the year. Diluted earnings per share is computed (i) in accordance with Statement of Financial Accounting Standards No. 128, “Earnings per Share,” using the treasury stock method for outstanding stock options and the if-converted method for the $150,000,000 aggregate principal amount of 2.25% Convertible Subordinated Notes due 2010, and (ii) in accordance with Emerging Issues Task Force Issue No. 04-8, “The Effect of Contingently Convertible Instruments on Diluted Earnings per Share,” for the $225,000,000 aggregate principal amount of 3.25% Convertible Subordinated Notes due 2026 (the “3.25% Notes”), and is calculated to compute the dilutive effect of potential common shares using net income available to common shareholders. A reconciliation of these amounts is as follows:


	Thirteen Weeks Ended
	December 24,			December 25,
	2006			2005
Net income	$	5,813		$	5,990
Plus: interest expense on convertible subordinated notes		1,008			1,008
Less: additional profit-sharing expense and income tax provisions		(150	)		(342	)

Net income available to common shareholders	$	6,671		$	6,656


Weighted-average common shares outstanding		25,869			25,535
Dilutive potential common shares		5,105			5,263

Weighted-average common and diluted shares outstanding		30,974			30,798


Basic earnings per share	$	0.22		$	0.24


Diluted earnings per share	$	0.22		$	0.22

(7) INCOME TAXES

The following table details the significant components of our deferred tax assets:


	December 24,			September 24,
	2006			2006
Current deferred tax assets:
Receivable allowance	$	572		$	592
Inventories		4,084			3,722
Accruals and other reserves		2,615			3,707

Total current deferred tax assets		7,271			8,021

Long-term deferred tax assets:
Property, plant and equipment		32,063			28,860
Deferred income		2,852			1,317
Tax credits		22,431			19,957
Net operating loss carryforwards		10,391			13,000
Valuation allowance		(5,267	)		(5,267	)

Total long-term deferred tax assets		62,470			57,867

Total deferred tax assets	$	69,741		$	65,888

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 December 24, 2006, our deferred tax assets included $22,431,000 of unused tax credits, $5,989,000 of which can be carried forward indefinitely and $16,442,000 of which begin to expire at various dates beginning in 2009. At December 24, 2006, our balance sheet included $10,391,000 of deferred tax assets related to net operating loss (“NOL”) carryforwards which will begin to expire in 2018. As of December 24, 2006 we had an estimated NOL carryforward of approximately $24,985,000 for United States federal tax return purposes. A portion of the credits and NOL carryforwards may be subject to an annual limitation under United States Internal Revenue Code Section 382. A valuation allowance of $5,267,000 has been recognized to offset the related deferred tax assets due to the uncertainty of realizing the benefits of certain tax credits and NOL carryforwards before they expire.

The income tax provision for the thirteen weeks ended December 24, 2006 was based on an estimated annual effective tax rate of negative 14% considering the combined prior and current year effects of the reinstatement of the federal research and development tax credit retroactive to January 1, 2006. Excluding the prior year effect of the reinstatement of the federal research and development tax credit, our 2007 annual effective tax rate would be estimated at 5%. This rate is below the statutory federal rate primarily due to the reinstatement of the federal research and development tax credit and the benefit derived from the Extraterritorial Income Exclusion Act of 2000 (“EIE”) provision related to the export of U.S. products. The effective tax rate for the first quarter of 2007 of negative 12% reflects the discrete item related to the reinstatement of the federal research and development tax credit.

The income tax provision for the thirteen weeks ended December 25, 2005 was based on an estimated annual effective tax rate of 27%. This rate is below the federal statutory rate primarily due to our estimate of the benefit derived from the EIE provision related to the export of U.S. products. The effective tax rate for the quarter of 16% was reduced for certain discrete items occurring during the quarter, primarily the settlement of a state income tax audit of fiscal years 1991 through 1993.

(8) OTHER ASSETS

During the second quarter of 2002, we prepaid $26,000,000 related to a technology and development agreement. As of December 24, 2006, the unamortized portion of the prepayment was $10,699,000, of which $3,557,000 was included in “Other current assets” and $7,142,000 was included in “Other assets” on the accompanying condensed consolidated balance sheet. The unamortized portion is being amortized over the remaining term of the agreement which ends in 2010 based on estimated product shipments.

(9) LONG-TERM DEBT

In January 2006, we issued $225,000,000 aggregate principal amount of the 3.25% Notes. The 3.25% Notes were sold in a registered, underwritten offering pursuant to a Purchase Agreement, dated January 19, 2006 (the “Purchase Agreement”), between us and Merrill Lynch & Co. and Merrill Lynch, Pierce, Fenner & Smith Incorporated, as representative of the underwriters listed in Schedule A to the Purchase Agreement. The 3.25% Notes were issued pursuant to an Indenture dated as of January 25, 2006 (the “Indenture”). Interest on the 3.25% Notes is payable on January 15 and July 15 of each year, beginning on July 15, 2006. Issuance costs of $6,029,000 were capitalized and are being amortized over seven years in consideration of the holders’ ability to require us to repurchase all or a portion of the 3.25% Notes on January 15, 2013, as described below.

We have the right to redeem for cash all or a portion of the 3.25% Notes on or after January 21, 2011 at specified redemption prices, as provided in the Indenture, plus accrued and unpaid interest, if any, to, but excluding, the applicable redemption date. Holders of the 3.25% Notes may require us to purchase all or a portion of their 3.25% Notes for cash on January 15, 2013, January 15, 2016 and January 15, 2021, or in the event of a fundamental change, at a purchase price equal to 100% of the principal amount of the 3.25% Notes to be repurchased plus accrued and unpaid interest, if any, to, but excluding, the purchase date.

Under certain circumstances, holders of the 3.25% Notes may convert their 3.25% Notes based on a conversion rate of 27.4499 shares of our common stock per $1,000 principal amount of 3.25% Notes (which is equal to an initial conversion price of approximately $36.43 per share), subject to adjustment. Upon conversion, in lieu of shares of our common stock, for each $1,000 principal amount of 3.25% Notes a holder will receive an amount in cash equal to the lesser of (i) $1,000, or (ii) the conversion value, determined in the manner set forth in the Indenture, of the number of shares of our common stock equal to the conversion rate. If the conversion value exceeds $1,000, we also will deliver, at our election, cash or common stock or a combination of cash and common stock with respect to the remaining common stock deliverable upon conversion. If a holder elects to convert his, her or its 3.25% Notes in connection with a fundamental change that occurs prior to January 21, 2011, we will pay, to the extent described in the Indenture, a make-whole premium by increasing the conversion rate applicable to such 3.25% Notes.

(10) SHAREHOLDERS’ EQUITY

In July 2004, our Board of Directors authorized the repurchase of up to two million shares of our common stock from time to time in the open market or through privately negotiated transactions, subject to market conditions, share price and other factors. In 2004, we repurchased a total of 1,722,500 shares for a total cost of $39,252,000. The average price paid per share was $22.75. In 2005, we repurchased a total of 206,000 shares for a total cost of $5,747,000. The average price paid per share was $27.86. In 2006, we repurchased the remaining authorized amount of 71,500 shares for a total cost of $1,299,000. The average price paid per share was $18.13.

(11) SUPPLEMENTARY CASH FLOW INFORMATION


	Thirteen Weeks Ended
	December 24,			December 25,
	2006			2005
Changes in operating assets and liabilities:
Receivables, net	$	(4,410	)	$	(18,173	)
Inventories		5,075			(2,911	)
Prepaid and other assets		175			(1,756	)
Accounts payable and accrued expenses		4,907			13,753
Other non-current liabilities		(523	)		(222	)

	$	5,224		$	(9,309	)

Cash paid for:
Interest (net of amount capitalized)	$	150		$	—
Income taxes		902			6

Non-cash investing activities:
Capital expenditures in accounts payable	$	5,853		$	14,087

Capitalized interest for the thirteen weeks ended December 24, 2006 was $907,000 compared to $657,000 for the thirteen weeks ended December 25, 2005. Interest is capitalized using an overall borrowing rate for assets that are being constructed or otherwise produced for our own use. Interest capitalized during the thirteen week period ended December 24, 2006 was primarily for facility construction and related equipment, development of new process technology and capability improvements, TSA+ suspension production capacity, and new program tooling.

During the first quarter of 2006, we purchased the assembly manufacturing building (which we previously leased) at our Eau Claire, Wisconsin manufacturing site, together with related equipment, for $12,924,000, which included the assumption of a mortgage by us.


Purchase price of building and related equipment	$	12,924
Cash paid for building and related equipment		(5,069	)

Mortgage assumed	$	7,855

At December 24, 2006, the mortgage balance totaled $6,236,000.

(12) STOCK-BASED COMPENSATION

We have an employee stock purchase plan that provides for the sale of our common stock at discounted purchase prices. The cost per share under this plan is 85% of the lesser of the fair market value of our common stock on the first or last day of the purchase period, as defined.

We have two stock option plans under which options have been granted to employees, including our officers and directors, at a price not less than the fair market value of our common stock at the date the options were granted. Options under one plan are no longer granted because the maximum number of shares available for option grants under such plan has been reached. Under the other plan, options also may be granted to certain non-employees at a price not less than the fair market value of our common stock at the date the options are granted. Options generally expire ten years from the date of grant or at an earlier date as determined by the committee of our Board of Directors that administer the plans. Options granted under the plans prior to November 2005 generally are exercisable one year from the date of grant. Options granted under the plans since November 2005 are exercisable two to three years from the date of grant.

We recorded $916,000 of related stock-based compensation expense, included in general and administrative expense, for the thirteen weeks ended December 24, 2006 compared to $1,197,000 for the thirteen weeks ended December 25, 2005.

In accordance with the Statement of Financial Accounting Standards No. 123(R), “Share-Based Payment” (“SFAS 123(R)”), there was no tax benefit from recording this non-cash expense as such benefits will be recorded upon utilization of our NOLs. The compensation expense related to SFAS 123(R) for the thirteen weeks ended December 24, 2006 was $862,000 compared to $1,140,000 for the thirteen weeks ended December 25, 2005 which reduced both basic and diluted earnings per share by $0.02 for each quarter. In accordance with the modified-prospective transition method permitted by SFAS 123(R), results for prior periods have not been restated.

As of December 24, 2006, $10,188,000 of unrecognized compensation costs related to non-vested awards is expected to be recognized over a weighted-average period of approximately twenty-nine months.

We use the Black-Scholes option pricing model to determine the weighted-average fair value of options. The weighted-average fair value of options granted during the thirteen weeks ended December 24, 2006 and December 25, 2005 were $12.79 and $13.89, respectively.

The fair value of options at the date of grant and the weighted-average assumptions utilized to determine such values are indicated in the following table:


	Thirteen Weeks Ended
	December 24,			December 25,
	2006			2005
Risk-free interest rate		4.7	%		4.4	%
Expected volatility		45.0	%		45.0	%
Expected life (in years)		7.6			7.3
Dividend yield		—			—

The risk-free interest rate is based on a treasury instrument whose term is consistent with the expected life of our stock options. We considered historical data in projecting expected stock price volatility. We estimated the expected life of stock options and stock option forfeitures based on historical experience.

Option transactions during the thirteen weeks ended December 24, 2006 are summarized as follows:


						Weighted-Average
						Remaining
	Number of			Weighted-Average		Contractual		Aggregate
	Shares			Exercise Price ($)		Life (yrs.)		Intrinsic Value ($)
Outstanding at September 24, 2006		3,109,546			25.08		5.3		—
Granted		509,600			23.05
Exercised		(269,700	)		17.39
Expired		(2,750	)		28.43

Outstanding at December 24, 2006		3,346,696			25.39		6.2		—


Options exercisable at December 24, 2006		2,389,596			25.49		4.8		—

The following table summarizes information concerning currently outstanding and exercisable stock options:


	Options Outstanding			Options Exercisable
		Weighted-Average
		Remaining
Range of		Contractual	Weighted-Average	Number	Weighted-Average
Exercise Prices ($)	Number Outstanding	Life (yrs.)	Exercise Price ($)	Exercisable	Exercise Price ($)
14.81-20.00	608,690	3.4	18.85	608,690	18.85
20.01-25.00	1,418,807	6.5	23.42	909,207	23.62
25.01-30.00	620,194	7.0	28.08	175,694	29.58
30.01-45.06	699,005	7.2	32.71	696,005	32.72

Total	3,346,696	6.2	25.39	2,389,596	25.49

(13) LEGAL CONTINGENCIES

Securities Litigation

Our company and six of our present executive officers, two of whom are directors, are named as defendants in a consolidated complaint filed by several investors in the U.S. District Court for the District of Minnesota on May 1, 2006. The consolidated complaint purports to be brought on behalf of a class of all persons (except defendants) who purchased our stock in the open market between October 4, 2004 and August 29, 2005 (the “class period”). The consolidated complaint alleges that the defendants made false and misleading public statements about our company, and our business and prospects, in press releases and SEC filings during the class period, and that the market price of our stock was artificially inflated as a result. The consolidated complaint alleges claims under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). The consolidated complaint seeks compensatory damages on behalf of the alleged class in an unspecified amount, interest, an award of attorneys’ fees and costs of litigation, and unspecified equitable/injunctive relief. The defendants’ motion to dismiss the consolidated complaint was heard by the Court on October 27, 2006. As of January 29, 2007, the Court had not yet ruled on the motion.

We believe that we, and the other defendants, have meritorious defenses to the claims made in the consolidated complaint, and we intend to contest the lawsuit vigorously. We are not able to predict the ultimate outcome of this litigation, but it may be costly and disruptive. The total costs cannot be reasonably estimated at this time. Securities class action litigation can result in substantial costs and divert our management’s attention and resources, which may have a material adverse effect on our business and results of operations, including our cash flows.

Derivative Litigation

Our company, as a nominal defendant, all of our present directors and one of our officers were named as defendants in a purported derivative action, Saul Kopelowitz v. Wayne Fortun, et al., that was filed on December 14, 2005 in the U.S. District Court for the District of Minnesota. In the complaint, the shareholder-plaintiff alleged claims of breach of fiduciary duty, waste of corporate assets, unjust enrichment and misappropriation of information against the individual defendants arising out of the same events that are alleged in the federal securities actions described above. Essentially, the complaint asserted that breaches of duty by the individual defendants resulted in our company making false and misleading public statements, which in turn led to the federal securities fraud litigation described above, which in turn caused our company to suffer damages. The complaint sought compensatory damages from the individual defendants for the loss allegedly sustained by our company, restitution and disgorgement of all profits, benefits and other compensation obtained by the individual defendants and an award of attorneys’ fees and costs of litigation. On February 21, 2006, the defendants moved to dismiss the complaint. On April 25, 2006, the parties agreed that the action should be voluntarily dismissed without prejudice and without costs, and a stipulation of voluntary dismissal without prejudice was filed.

Other Litigation

Our company was named as the defendant in a complaint brought in Hennepin County, Minnesota, District Court by two current and three former employees and served on us on August 28, 2006. The complaint asserts claims based on the federal Fair Labor Standards Act, several statutes and regulations dealing with topics related to wages and breaks, and common law theories, and alleges that we fail to pay our production workers for the time they spend changing into and out of protective clothing and that we do not provide employees the breaks allegedly required by Minnesota law or promised by company policy. On September 18, 2006, we removed the action to the U.S. District Court for the District of Minnesota. The complaint seeks pay for the allegedly unpaid time, an equal amount of liquidated damages, other damages, penalties, attorneys’ fees and interest. Plaintiffs have filed a motion to certify a class including all current and former non-exempt production workers at all company sites. We are not able to predict the ultimate outcome of the litigation at this early stage, but it may be costly and disruptive.

We and certain users of our products have from time to time received, and may in the future receive, communications from third parties asserting patents against us or our customers which may relate to certain of our manufacturing equipment or products or to products that include our products as a component. In addition, certain of our customers have been sued on patents having claims closely related to products sold by us. If any third party makes a valid infringement claim and a license were not available on terms acceptable to us, our operating results could be adversely affected. We expect that, as the number of patents issued continues to increase, and as we grow, the volume of intellectual property claims could increase. We may need to engage in litigation to enforce patents issued or licensed to us, protect trade secrets or know-how owned by us or determine the enforceability, scope and validity of the intellectual property rights of others. We could incur substantial costs in such litigation or other similar legal actions, which could have a material adverse effect on our results of operations.

We are a party to certain claims arising in the ordinary course of business. In the opinion of our management, the outcome of such claims will not materially affect our current or future financial position or results of operations.

(14) OTHER MATTERS

The American Jobs Creation Act of 2004 (“AJCA”) was signed into law on October 22, 2004. The AJCA contained two provisions that affect us. The first provision is the repeal of the EIE, which was phased out with the benefit ending December 31, 2006.

The second provision of the AJCA that affects us is the introduction of a deduction for a percentage of income from domestic production activities. The deduction is limited in any fiscal year in which a taxpayer uses NOL carryforwards. For our fiscal year ending September 30, 2007, we do not expect any benefit from this deduction, as we will use NOL carryforwards. The deduction is phased in on a fiscal-year basis and will be fully phased in for our fiscal year ending September 25, 2011.

(15) SEGMENT REPORTING

We follow 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 each segment’s products, services, geographic areas and major customers. The method for determining what information to report is based on the way management organizes the operating segments within a company for making operating decisions and assessing financial performance. Our Chief Executive Officer is considered to be our chief operating decision maker.

We have determined that we have two reportable segments: the Disk Drive Components 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 our most recent Annual Report on Form 10-K.

The following table represents net sales and operating income (loss) for each reportable segment.


	Thirteen Weeks Ended
	December 24,			December 25,
	2006			2005
Net sales:
Disk Drive Components Division	$	188,800		$	184,587
BioMeasurement Division		82			53

	$	188,882		$	184,560


Income (loss) from operations:
Disk Drive Components Division	$	5,665		$	7,175
BioMeasurement Division		(3,681	)		(2,835	)

	$	1,984		$	4,340

Assets of the BioMeasurement Division are not relevant for management of the BioMeasurement Division segment or significant for disclosure.

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 “2007” mean our fiscal year ending September 30, 2007, references to “2006” mean our fiscal year ended September 24, 2006, references to “2005” mean our fiscal year ended September 25, 2005, references to “2004” mean our fiscal year ended September 26, 2004, references to “2003” mean our fiscal year ended September 28, 2003, and references to “2002” mean our fiscal year ended September 29, 2002.

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 head and head gimbal assemblers for all sizes of disk drives. Suspension assemblies are a critical component of disk drives, and our results of operations are highly dependent on the disk drive industry. The disk drive industry is intensely competitive, and demand for disk drive components fluctuates. Our results of operations are affected from time to time due to disk drive industry demand changes, adjustments in inventory levels throughout the disk drive supply chain, technological changes that impact suspension assembly demand, shifts in our market position and our customers’ market position, our customers’ production yields and our own product transitions, production yields and production capacity utilization. Our BioMeasurement Division is engaged in the development and production of products for the medical device market, but we do not expect to generate significant revenue from these products during 2007.

For calendar 2006 disk drive shipments are estimated to have reached 436 million units, an increase of about 15% from calendar 2005. The growth in disk drive shipments is resulting from increased demand for data storage in traditional computing applications as well as in consumer electronics applications. Our shipments of suspension assemblies in 2006 were 805 million, 12% higher than our shipments in 2005. This increase was due to the year-over-year increase in disk drive shipments. Storage industry analysts currently forecast a 13% to 15% increase in disk drive shipments in calendar 2007. For calendar 2007, we are closely monitoring storage capacity requirements and the pace of transition to higher capacity desktop and notebook disk drives. A slower transition to higher capacity drives could result in the average number of suspension assemblies per disk drive declining from an estimated 2.8 in calendar 2006 to approximately 2.7 in calendar 2007. As a result, while we expect continued growth in worldwide suspension assembly demand, the rate of increase in 2007 may be less than the rate of increase in disk drive shipments.

In both calendar 2006 and 2005, demand for storage outpaced the rate of improvement in data density for disk drives in mass production. The rate of data density improvement in calendar 2005 remained about flat with the prior year at approximately 20%. As a result, achieving the higher storage capacities necessary for many disk drive applications required using both sides of a single disk in a disk drive or adding disks. We estimate this caused the number of suspension assemblies required per disk drive to increase from an average of about 2.4 in calendar 2004 to an average of about 2.8 in calendar 2005, and the number remained stable at 2.8 in calendar 2006. In contrast, when the rate of data density improvement outpaces demand for storage, the average number of suspension assemblies required per disk drive decreases. For example, from calendar 1999 to 2002, the average number of suspension assemblies required per disk drive declined from approximately 4.5 to approximately 2.3.

During the first and second quarters of 2006, we shipped 207 million and 205 million suspension assemblies, respectively, an increase of 18% and 13%, respectively, over the comparable 2005 quarters due to overall growth in storage demand, growth in disk drive shipments and our share positions on customer disk drive programs ramping up to volume. During the third quarter of 2006, we shipped 192 million suspension assemblies. The decrease in

suspension shipments from the second quarter to the third quarter of 2006 resulted, we believe, from seasonally lower demand for disk drives used in desktop applications and certain head-gimbal assemblers and disk drive manufacturers managing existing inventories. In the fourth quarter of 2006 and the first quarter of 2007, we shipped 201 and 225 million suspension assemblies, respectively, reflecting a seasonal improvement in the desktop, mobile computing and, more recently, growth in consumer electronics disk drive segments. 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. 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. 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.

In 2005, our average selling prices increased as a result of ramp-ups on new customer programs and a mix of products sold with finer electrical conductors or value-added features such as dual-stage actuation, clad unamount arms, plated grounds, electrostatic protection measures, formed and polished headlifts, a variety of limiter configurations, dampers and laminated loadbeams. In 2006, our average selling prices held about flat as a result of lower program pricing of certain high-volume suspension assemblies, offset by the higher priced value-added features discussed above. In the first quarter of 2007, our average selling prices declined primarily due to a sales mix that included a higher percentage of mature products for disk drive programs experiencing longer market lives. Cumulative volume on some programs triggered new customer price points, resulting in lower overall average selling prices. The higher percentage of mature products in our sales mix will likely reduce our average selling prices for 2007 as compared to 2006.

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 (“VMI”) facilities. Certain agreements with our customers also provide that we maintain minimum finished goods inventory levels for them.

In May 2006, our customer Seagate Technology LLC acquired our customer Maxtor Corporation. This consolidation resulted in the elimination of some disk drive programs, creating some uncertainty in the disk drive industry supply chain during 2006.

Our customers often prefer a multiple source supply strategy 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 existing or newly added production capacity;

	•		manufacturing yields or efficiencies;

	•		production and engineering costs associated with production of new products and features;

	•		product and feature mix;

	•		selling prices;

	•		infrastructure and expedited production and shipping costs; and

	•		costs of materials.

Gross margin was 28% in 2005. Increased production efficiencies during the first half of 2005 were offset by decreased production efficiencies during the second half of 2005 resulting from a shift in product mix toward advanced suspension assembly products that are typically more costly to produce in the ramp-up to higher volume. Gross margin was 20% in 2006. Gross margin in 2006 was negatively impacted by higher depreciation and overhead expense coupled with lower-than-expected utilization of manufacturing equipment as we added capacity throughout the year. The negative impact of the lower-than-expected utilization was somewhat mitigated by improvements in yields and labor productivity. In the first quarter of 2006, capacity utilization exceeded 90%, but lower yields on certain advanced products that were ramping to higher volume resulted in first quarter of 2006 gross margin of 21%. In the first quarter of 2007, the seasonal increase in demand improved our capacity utilization to about 80% compared with about 70% in the fourth quarter of 2006. The improvement in capacity utilization resulted in an increase in first quarter of 2007 gross margin to 19% from the 17% in the preceeding quarter.

Although we continue to have limited visibility for future demand, we expect our operating margins in 2007 will continue to be under pressure from underutilization of manufacturing capacity, as well as planned investments in TSA+ capabilities and in the BioMeasurement Division.

Our suspension assembly business is capital intensive. We have added capacity to meet expected increases in customer demand and expected shifts in product mix. In addition, we expanded our manufacturing facility located in Eau Claire, Wisconsin by adding a production bay with an above-ground footprint of approximately 70,000 square feet. For 2006, capital expenditures for the year totaled $247,754,000, primarily for additions to both TSA suspension and TSA+ suspension manufacturing capacity, facilities, tooling and for new process technology equipment. We expect our capital expenditures to be approximately $140,000,000 in 2007, primarily for TSA+ suspension production capacity, development of new process technology and cabability improvements and new program tooling.

Our capital expenditures for the Disk Drive Components Division are planned based on anticipated customer demand for our suspension assembly products, market demand for disk drives, process improvements to be incorporated in our manufacturing operations and the rate at which our customers adopt new generations of higher performance disk drives and next-generation read/write technology and head sizes which may require new or improved process technologies. We manage our capital spending to reflect the capacity that will be needed to meet disk drive industry customer forecasts. However, existing work in process with vendors and lengthy lead times sometimes prevent us from adjusting capital expenditures to match near-term demand. This can result in underutilization of capacity, which could lower gross profit. We expect to fund capital expenditures with cash generated from operations, our current cash, cash equivalents, securities available for sale, our credit facility or additional financing as needed.

In 2006, we significantly increased our research and development spending over the prior year to develop new process technologies for next-generation products and equipment and increased clinical research for our BioMeasurement Division. We spent $52,939,000 on research and development in 2006 compared to $36,829,000 in 2005. Research and development spending specific to our BioMeasurement Division was $6,249,000 in 2006 and $4,076,000 in 2005. During the first quarter of 2007, we spent $14,109,000 on research and development. We expect that our research and development spending in 2007 will be similar to our 2006 spending. The disk drive industry is intensely competitive, and our customers’ operating results are dependent on being the first-to-market and first-to-volume with new products at a low cost. Our development efforts typically enable us to shorten development cycles and achieve high-volume output per manufacturing unit more quickly than our competitors, and are an important factor in our success. The miniaturization of disk drives and the development of next-generation read/write technology and head sizes will require finer electrical conductors on the suspension assembly. Our current TSA suspensions are produced using a subtractive process, and we continue to invest in extending our current process capabilities and adding associated capital equipment for manufacturing TSA suspension assemblies to meet escalating customer requirements for precision and performance.

We are also developing an additive process and adding associated capital equipment for producing future generations of suspension assemblies, known as TSA+ suspension assemblies. Additive processing involves depositing thin metal layers onto a polyimide surface in the shape of the desired circuitry and then imaging and chemically plating up metal layers to form the suspension’s electrical conductors. Our ability to develop this process to accommodate further conductor miniaturization and the rate at which our customers adopt next-generation read/write technology and head sizes will largely determine the pace of our transition to an additive process and the volume of products we manufacture using the process. We expect to have a volume production line ready in the second half of 2007 to produce flexures using an additive process. We are currently purchasing some additive components to fill existing customer development requirements. As we transition TSA+ suspension assemblies from development to high-volume manufacturing, we may experience higher cost due to yield loss, production inefficiencies and equipment problems. Furthermore, our additive process is added in large blocks of capacity, so certain equipment will be underutilized until demand develops. If our development of additive process capabilities is delayed for any reason or if TSA+ suspension assemblies cannot be produced profitably in the quantities and to the specifications required by our customers, we also may need to purchase components manufactured through additive processing.

New manufacturing processes for advanced suspension assembly features and suspension assembly types, such as those currently under development, initially have lower manufacturing yields than those for more mature products and processes. Manufacturing yields generally improve as the process and product matures and production volumes increase. Manufacturing yields also vary depending on the complexity and uniqueness of products. Small variations in manufacturing yields can have a significant impact on gross margins.

In addition to increases in suspension assembly demand, improvements to our gross margins and operating margins will depend, in part, on the successful management of our corporate infrastructure and our suspension assembly production capacity. Our business is capital intensive and requires a high level of fixed costs. Our margins are sensitive to our level of fixed costs as well as changes in volume, product mix and capacity utilization. As part of our efforts to improve our operating results, we may need to increase or decrease our overall employment level to meet customer requirements. Our overall employment level was 5,310 at the end of 2005, 5,433 at the end of 2006 and 5,412 at the end of the first quarter of 2007.

RESULTS OF OPERATIONS

Thirteen Weeks Ended December 24, 2006 vs. Thirteen Weeks Ended December 25, 2005

Net sales for the thirteen weeks ended December 24, 2006 were $188,882,000 compared to $184,560,000 for the thirteen weeks ended December 25, 2005, an increase of $4,322,000 from the thirteen weeks ended December 25, 2005. Suspension assembly sales increased $3,990,000 from the thirteen weeks ended December 25, 2005. The increase in suspension assembly sales was due to increased suspension assembly unit shipments of 17,644,000, partially offset by lower average selling prices on suspension assembly unit shipments which decreased from $0.84 to $0.80 from the year ago quarter. The increase in unit shipments was due to overall growth in storage demand and growth in disk drive shipments. The decline in average selling prices resulted primarily from a sales mix that included a higher percentage of mature products for disk drive programs experiencing longer market lives. Cumulative volume on some programs triggered new customer price points, resulting in lower overall average selling prices. Sales of suspension assembly components to other suspension assembly manufacturers were $7,883,000, a decrease of $230,000 from the thirteen weeks ended December 25, 2005.

Gross profit for the thirteen weeks ended December 24, 2006 was $35,610,000, compared to $39,600,000 for the thirteen weeks ended December 25, 2005. Gross profit as a percent of net sales decreased from 21% to 19%, respectively. The lower gross profit was due to $1,775,000 of higher depreciation expenses and $1,761,000 of higher manufacturing support expenses due to added personnel, as well as increases in material expenses and in

manufacturing supply expenses. These higher expenses were partially offset by lower manufacturing labor expenses due to improved labor efficiency and yields and fewer personnel in manufacturing areas.

Research and development expenses for the thirteen weeks ended December 24, 2006 were $14,109,000, compared to $12,747,000 for the thirteen weeks ended December 25, 2005. The increase was attributable to $1,920,000 of higher prototype production and depreciation expenses, primarily related to TSA+ suspension assembly development, and $660,000 of higher labor expenses due to the hiring of additional personnel to support increased customer-specific suspension assembly development efforts and to develop process technologies for next-generation products. These higher expenses were partially offset by $878,000 of lower supply and professional services expenses. As a percent of net sales, research and development expenses remained unchanged at 7% in the first quarter of 2006 and the first quarter of 2007.

Selling, general and administrative expenses for the thirteen weeks ended December 24, 2006 were $19,517,000 compared to $22,513,000 for the thirteen weeks ended December 25, 2005, a decrease of $2,996,000 from the thirteen weeks ended December 25, 2005. The reduction was primarily due to $826,000 of lower recruitment and relocation expenses, $672,000 of lower professional services and supply expenses, $454,000 of lower depreciation and lease expenses, and $364,000 of reduced travel and training expenses. Overall, selling, general and administrative expenses as a percent of net sales decreased from 12% in the first quarter of 2006 to 10% in the first quarter of 2007.

Income from operations for the thirteen weeks ended December 24, 2006 was $1,984,000, compared to $4,340,000 for the thirteen weeks ended December 25, 2005. The lower operating income was primarily due to lower gross profit and higher research and development expenses, partially offset by lower selling, general and administrative expenses. Income from operations for the thirteen weeks ended December 24, 2006 included a $3,681,000 loss from operations for our BioMeasurement Division segment, compared to a $2,835,000 loss from BioMeasurement operations for the thirteen weeks ended December 25, 2005.

Interest income for the thirteen weeks ended December 24, 2006 was $3,689,000 compared to $2,065,000 for the thirteen weeks ended December 25, 2005, an increase of $1,624,000 from the thirteen weeks ended December 25, 2005. The increase in interest income was due to higher average cash balances and higher investment yields.

Other income, net of other expenses, for the thirteen weeks ended December 24, 2006 was $1,810,000 compared to $1,252,000 for the thirteen weeks ended December 25, 2005, an increase of $558,000 from the thirteen weeks ended December 25, 2005. Other income consists primarily of royalty income.

Interest expense for the thirteen weeks ended December 24, 2006 was $2,309,000 compared to $501,000 for the thirteen weeks ended December 25, 2005, an increase of $1,808,000 from the thirteen weeks ended December 25, 2005. The increase in interest expense was due to a higher average debt balance.

The income tax provision for the thirteen weeks ended December 24, 2006 was based on an estimated annual effective tax rate of negative 14% considering the combined prior and current year effects of the reinstatement of the federal research and development tax credit retroactive to January 1, 2006. Excluding the prior year effect of the reinstatement of the federal research and development tax credit, our 2007 annual effective tax rate would be estimated at 5%. This rate is below the statutory federal rate primarily due to the reinstatement of the federal research and development tax credit and the benefit derived from the EIE provision related to the export of U.S. products. The effective tax rate for the first quarter of 2007 of negative 12% reflects the discrete item related to the reinstatement of the federal research and development tax credit.

was reduced for certain discrete items occurring during the quarter, primarily the settlement of a state income tax audit of fiscal years 1991 through 1993.

Net income for the thirteen weeks ended December 24, 2006 was $5,813,000 compared to net income of $5,990,000 for the thirteen weeks ended December 25, 2005. Net income for the thirteen weeks ended December 24, 2006 included a combination of the prior and current year effects of the above-mentioned federal research and development tax credit reinstatement of $1,911,000. The lower net income for the thirteen weeks ended December 24, 2006, excluding the effect of the reinstatement of the federal research and development credit, primarily was due to lower gross profit and higher research and development expenses offset by lower selling, general and administrative expenses as discussed above.

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 decreased from $40,331,000 at September 24, 2006 to $21,111,000 at December 24, 2006. Our securities available for sale increased from $250,110,000 to $273,759,000 during the same period. Overall, this reflects an $4,429,000 increase in our cash and cash equivalents and securities available for sale, primarily due to $36,236,000 of cash generated from operations and $5,358,000 net proceeds from issuance of common stock offset by capital expenditures of $36,875,000 during the first quarter of 2007.

Under certain circumstances, holders of the 3.25% Notes may convert their 3.25% Notes based on a conversion rate of 27.4499 shares of our common stock per $1,000 principal amount of 3.25% Notes (which is equal to an initial conversion price of approximately $36.43 per share), subject to adjustment. Upon conversion, in lieu of shares of our common stock, for each $1,000 principal amount of 3.25% Notes a holder will receive an amount in cash equal to the lesser of (i) $1,000 or (ii) the conversion value, determined in the manner set forth in the Indenture, of the number of shares of our common stock equal to the conversion rate. If the conversion value exceeds $1,000, we also will deliver, at our election, cash or common stock or a combination of cash and common stock with respect to the remaining common stock deliverable upon conversion. If a holder elects to convert his, her or its 3.25% Notes in connection with a fundamental change that occurs prior to January 21, 2011, we will pay, to the extent described in the Indenture, a make-whole premium by increasing the conversion rate applicable to such 3.25% Notes.

On December 21, 2005, we entered into an amended and restated Loan Agreement with LaSalle Bank National Association, increasing our $10,000,000 unsecured credit facility to a $50,000,000 unsecured credit facility that provides both revolving loans and letters of credit. As of December 24, 2006, we had no outstanding loans under

this facility. Letters of credit outstanding under this facility totaled $700,000 as of such date, resulting in $49,300,000 of remaining availability under the facility.

Cash used for capital expenditures totaled $36,875,000 for the thirteen weeks ended December 24, 2006, compared to $73,397,000 for the thirteen weeks ended December 25, 2005. We currently anticipate capital expenditures to total approximately $140,000,000 in 2007, primarily for TSA+ suspension production capacity, development of new process technology and capability improvements and new program tooling. Financing of these capital expenditures will be principally from internally generated funds, cash and cash equivalents, securities available for sale, our credit facility and new financing.

On July 15, 2005, our Board of Directors approved an expansion of our manufacturing facility located in Eau Claire, Wisconsin. We have added a production bay with an above-ground footprint of approximately 70,000 square feet to our manufacturing facility, costing approximately $25,800,000. This expansion was completed in November 2006.

During the first quarter of 2006, we purchased the assembly manufacturing building (which we previously leased), together with related equipment, at our manufacturing site in Eau Claire, Wisconsin for $12,924,000, including $5,069,000 paid in cash and the remainder by our assumption of a mortgage with a 7.15% interest rate that matures in April 2011.

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 restrict our ability to enter into certain types of financing. As of December 24, 2006, we were in compliance with all covenants in our financing agreements and believe we will maintain compliance through 2007. 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, our credit facility and additional financing will be sufficient to meet our operating expenses, debt service requirements and capital expenditures through 2007. Our ability to obtain additional financing 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.

CRITICAL ACCOUNTING POLICIES

Our discussion and analysis of our financial condition and results of operations are based upon our condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. 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,” as amended and codified by Staff Accounting Bulletin No. 103, “Update of Codification of Staff Accounting Bulletins” (Codification of Staff Accounting Bulletins, Topic 13: “Revenue Recognition”), as amended by Staff Accounting Bulletin No. 104, “Revision of Topic 13” (Codification of Staff Accounting Bulletins, Topic 13: “Revenue Recognition,” Section A – “Selected Revenue Recognition Issues”). We recognize revenue from the sale of our products when persuasive evidence of an arrangement exists, the product has been delivered, the fee is fixed and determinable and collection of the resulting receivable is reasonably assured. Amounts billed to customers for shipping and handling costs associated with products sold are classified as revenue.

For all sales, we use a binding purchase order as evidence of an arrangement. Delivery generally occurs when product is delivered to a common carrier. Certain of our products are delivered on an FOB destination basis. We defer our revenue associated with these transactions until the product has been delivered to the customer’s premises.

We also store inventory in VMI facilities, which are warehouses located close to the customer’s manufacturing facilities. Revenue is recognized on sales from such facilities upon the transfer of title and risk of loss, following the customer’s acknowledgement of the receipt of the goods.

We also enter into arrangements with customers that provide us with reimbursement for guaranteed capacity. We recognize the associated revenue over the estimated life of the program for which the capacity is guaranteed.

Accounts Receivable

We are dependent on a limited number of customers, and as a result, our trade accounts receivable is highly concentrated. We establish an allowance for doubtful accounts by analyzing specific customer accounts and assessing the risk of uncollectability based on past transaction history with the customer and the customer’s financial condition. While we perform ongoing credit reviews of our customers and have established an allowance for doubtful accounts, a significant deterioration in the financial condition of any significant customer may result in additional charges to increase the allowance for doubtful accounts or to write off certain accounts.

We record a provision against revenue for estimated returns on sales of our products in the same period that the related revenues are recognized. We base the allowance on historical returns, as well as existing product return authorizations.

Inventory Valuation

Inventories are valued at the lower of cost (first-in, first-out method) or market by analyzing market conditions, current sales prices, inventory costs and inventory balances.

We are dependent on a limited number of customers and a limited number of product programs for each customer. Because our products are custom built, we typically cannot shift work-in-process or finished goods from customer to customer or from one program to another for a particular customer. We evaluate inventory balances for excess quantities and obsolescence on a regular basis by analyzing backlog, estimated demand, inventory on hand, sales levels and other information. We write down excess and obsolete inventory to the lower of cost or market based on the analysis.

Long-Lived Assets

We evaluate the carrying value of long-lived assets, consisting primarily of property, plant and equipment, whenever certain events or changes in circumstances indicate that the carrying amount of these assets may not be recoverable. Such events or circumstances include, but are not limited to, a prolonged industry downturn or significant reductions in projected future cash flows. In assessing the recoverability of long-lived assets, we compare the carrying value to the undiscounted future cash flows the assets are expected to generate. If the total of 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 realized based on 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. Valuation allowances arise due to the uncertainty of realizing the benefits of certain tax credits and NOL carryforwards before they expire, and are based on our historical taxable income and our estimates of future taxable income in each jurisdiction in which we operate. At December 24, 2006 and September 24, 2006 we had valuation allowance of $5,267,000 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.

RECENT ACCOUNTING PRONOUNCEMENTS

Recent accounting pronouncements are set forth in Note 2 to our unaudited condensed consolidated financial statements and are incorporated herein by reference.

In September 2006, the SEC released SAB 108, which permits adjustment for the cumulative effect of misstatements related to prior years, previously deemed to be immaterial, in the carrying amount of assets and liabilities with an offsetting adjustment to the opening balance of retained earnings in the year of adoption. SAB 108 also requires the adjustment of any prior quarterly financial statements in future SEC filings within the fiscal year of adoption for the effects of such misstatements on the quarters when the information is next presented. This adjustment does not require reports previously filed with the SEC to be amended.

Our SAB 108 adjustment relates to one customer arrangement whereby certain revenues that were recorded in 2004 and 2005 should have been deferred. Deferred revenue amounts related to this arrangement are included within accrued expenses and other long-term liabilities on our condensed consolidated balance sheet as of September 24, 2006. Based on our approach for assessing misstatements prior to the adoption of SAB 108, we had previously concluded that these amounts were immaterial.

The impact of this adjustment for the first three quarters of 2006 is presented below (in thousands, except per share data).


	Thirteen Weeks Ended December 25, 2005
	As Reported		Adjustment			As Adjusted
Net sales	$	184,627	$	(67	)	$	184,560
Provision for income taxes		1,177		(11	)		1,166
Net income		6,046		(56	)		5,990
Earnings per share:
Basic		0.24		0.00			0.24
Diluted		0.22		0.00			0.22


	Thirteen Weeks Ended March 26, 2006						Twenty-Six Weeks Ended March 26, 2006
	As Reported		Adjustment		As Adjusted		As Reported		Adjustment		As Adjusted
Net sales	$	185,926	$	469	$	186,395	$	370,553	$	402	$	370,955
Provision for income taxes		1,361		73		1,434		2,538		62		2,600
Net income		7,873		396		8,269		13,919		340		14,259
Earnings per share:
Basic		0.31		0.01		0.32		0.54		0.01		0.55
Diluted		0.28		0.01		0.29		0.50		0.01		0.51


	Thirteen Weeks Ended June 25, 2006								Thirty-Nine Weeks Ended June 25, 2006
	As Reported			Adjustment		As Adjusted			As Reported		Adjustment		As Adjusted
Net sales	$	169,599		$	380	$	169,979		$	540,152	$	782	$	540,934
Provision (benefit) for income taxes		(163	)		22		(141	)		2,375		84		2,459
Net income		5,838			358		6,196			19,756		698		20,454
Earnings per share:
Basic		0.23			0.01		0.24			0.77		0.02		0.79
Diluted		0.22			0.01		0.23			0.72		0.02		0.74

MARKET TRENDS

We expect that the expanding use of enterprise computing and storage, desktop and mobile computers, increasingly complex software and the growth of new applications for disk storage, such as personal video recorders and portable audio and video players, together with emerging opportunities in other consumer electronics 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.

As in past years, disk drives continue to be the storage device of choice for applications requiring shorter 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 increased data density and lower storage costs is leading to suspension assemblies with finer electrical conductors and further adoption of value-added features for suspension assemblies, such as dual-stage actuation, clad unamount arms, plated grounds, electrostatic protection measures, formed and polished headlifts, a variety of limiter configurations, dampers and laminated loadbeams.

The miniaturization of disk drives, the development of next-generation read/write technology and head sizes, continuing improvement in data density and the increasing use of disk drives in consumer electronics applications will require even finer electrical conductors on the suspension assembly. Next-generation disk drives also may require additional electrical conductors. We will invest significantly in developing the process capabilities and related capital equipment required to meet new industry specifications in 2007 and beyond.

The introduction of new types or sizes of read/write heads and disk drives tends to initially decrease our customers’ yields with the result that we may experience temporary elevations of demand for some types of suspension assemblies. For example, we believe reduced yields at some of our customers due to their transition to higher density recording heads resulted in increased shipments of our suspension assemblies in 2003 and the first half of 2004. As programs mature, higher customer yields decrease the demand for suspension assemblies. The advent of new heads and new drive designs may require rapid development and implementation of new suspension assembly types, which may temporarily increase our development spending and reduce our manufacturing yields and efficiencies. These changes will continue to affect us.

OTHER MATTERS

The AJCA was signed into law on October 22, 2004. The AJCA contains two provisions that affect us. The first provision is the repeal of the EIE, which was phased out with the benefit ending December 31, 2006.

FORWARD-LOOKING STATEMENTS

Statements contained in this Quarterly Report on Form 10-Q that are not statements of historical fact should be considered forward-looking statements within the meaning of the safe harbor provisions of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Exchange Act. Forward-looking statements include, but are not limited to, statements regarding the following: the demand for and shipments of disk drives, suspension

assemblies and suspension assembly components, disk drive and suspension assembly technology and development, the development of and market demand for medical devices, capital expenditures and capital resources, average selling prices, inventory levels, gross margins and operating results and manufacturing capacity. Words such as “believe,” “anticipate,” “expect,” “intend,” “estimate,” “approximate” and similar expressions are intended to identify forward-looking statements but are not the exclusive means of identifying such statements. Although we believe these statements are reasonable, forward-looking statements involve risks and uncertainties that may cause actual results to differ materially from those projected by such statements. Factors that could cause actual results to differ from those discussed in the forward-looking statements include, but are not limited to, those discussed under the heading “Risk Factors” in our most recent Annual Report on Form 10-K for the fiscal year ended September 24, 2006. This list of factors may not be exhaustive, however, and these or other factors, many of which are outside of our control, could have a material adverse effect on us and our results of operations. Therefore, you should consider these risk factors with caution and form your own critical and independent conclusions about the likely effect of these risk factors on our future performance. Forward-looking statements speak only as of the date on which the statements are made, and we undertake no obligation to update any forward-looking statement for any reason, even if new information becomes available or other events occur in the future. You should carefully review the disclosures and the risk factors described in this and other documents we file from time to time with the SEC, including our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K. All forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by the cautionary statements set forth herein.

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 for which 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 credit facility, interest expense would increase or decrease accordingly. At December 24, 2006, there were no outstanding loans 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 December 24, 2006, we had fixed rate debt of $381,236,000.

From time to time, we use foreign currency option contracts to minimize our exposure to currency fluctuations associated with the underlying operating expenses of some of our offices overseas. We did not, however, enter into any foreign currency option contracts in 2006 or during the first quarter of 2007. All of our sales transactions in our Disk Drive Components Division are denominated in U.S. 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.

ITEM 4. CONTROLS AND PROCEDURES

EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES

As of the end of the period covered by this Quarterly Report on Form 10-Q, we conducted an evaluation, under the supervision and with the participation of our principal executive officer and principal financial officer, of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act). 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 Exchange Act is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms, and to ensure that information required to be disclosed by us in the reports we file or submit under the Exchange Act is accumulated and communicated to our management, including our principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosures.

CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING

There was no change in our internal control over financial reporting during our most recently completed fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

SECURITIES LITIGATION

Our company and six of our present executive officers, two of whom are directors, are named as defendants in a consolidated complaint filed by several investors in the U.S. District Court for the District of Minnesota on May 1, 2006. The consolidated complaint purports to be brought on behalf of a class of all persons (except defendants) who purchased our stock in the open market between October 4, 2004 and August 29, 2005 (the “class period”). The consolidated complaint alleges that the defendants made false and misleading public statements about our company, and our business and prospects, in press releases and SEC filings during the class period, and that the market price of our stock was artificially inflated as a result. The consolidated complaint alleges claims under Sections 10(b) and 20(a) of the Exchange Act. The consolidated complaint seeks compensatory damages on behalf of the alleged class in an unspecified amount, interest, an award of attorneys’ fees and costs of litigation, and unspecified equitable/injunctive relief. The defendants’ motion to dismiss the consolidated complaint was heard by the Court on October 27, 2006. As of January 29, 2007, the Court had not yet ruled on the motion.

DERIVATIVE LITIGATION

OTHER LITIGATION

ITEM 1A. RISK FACTORS

There have been no material changes in our risk factors from those disclosed in our Annual Report on Form 10-K for the fiscal year ended September 24, 2006.

ITEM 6. EXHIBITS

(A)EXHIBITS:

Unless otherwise indicated, all documents incorporated herein by reference to a document filed with the SEC pursuant to the Exchange Act, are located under SEC file number 0-14709.

3.1		Amended and Restated Articles of Incorporation of HTI (incorporated by reference to Exhibit 3.1 to HTI’s Quarterly Report on Form 10-Q for the quarter ended 12/29/02).

3.2		Restated By-Laws of HTI (incorporated by reference to Exhibit 3.2 to HTI’s Quarterly Report on Form 10-Q for the quarter ended 6/27/04).

10.1		Description of Non-employee Director Compensation (incorporated by reference to Exhibit 10.14 to HTI’s Annual Report on Form 10-K for the year ended 9/24/06).

31.1		Rule 13a-14(a)/15d-14(a) Certifications of Chief Executive Officer.

31.2		Rule 13a-14(a)/15d-14(a) Certifications of Chief Financial Officer.

32		Section 1350 Certifications.

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 INCORPORATED
Date: January 29, 2007	By	/s/ Wayne M. Fortun
		Wayne M. Fortun
		President and Chief Executive Officer


Date: January 29, 2007	By	/s/ John A. Ingleman
		John A. Ingleman
		Senior Vice President and Chief Financial Officer

INDEX TO EXHIBITS


Exhibit
No.		Page
3.1	Amended and Restated Articles of Incorporation of HTI (incorporated by reference to Exhibit 3.1 to HTI’s Quarterly Report on Form 10-Q for the quarter ended 12/29/02).	Incorporated by Reference

3.2	Restated By-Laws of HTI (incorporated by reference to Exhibit 3.2 to HTI’s Quarterly Report on Form 10-Q for the quarter ended 6/27/04).	Incorporated by Reference

10.1	Description of Non-employee Director Compensation (incorporated by reference to Exhibit 10.14 to HTI’s Annual Report on Form 10-K for the year ended 9/24/06).	Incorporated by Reference

31.1	Rule 13a-14(a)/15d-14(a) Certifications of Chief Executive Officer.	Filed Electronically

31.2	Rule 13a-14(a)/15d-14(a) Certifications of Chief Financial Officer.	Filed Electronically

32	Section 1350 Certifications.	Filed Electronically

Positive
Negative
Uncertain
Constraining
Legalese
Litigous
Readability	H.S. sophomore Good

Hutchinson Technology (HTCH) Inactive 10-Q2007 Q1 Quarterly report

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