When we refer to "we," "our," "us," the "company" or "HTI," we mean Hutchinson Technology Incorporated and its subsidiaries. Unless otherwise indicated, references to "2013" mean our fiscal year ending September 29, 2013, references to "2012" mean our fiscal year ended September 30, 2012 and references to "2011" mean our fiscal year ended September 25, 2011.

This Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") should be read in conjunction with the MD&A included in our Annual Report on Form 10-K for the year ended September 30, 2012.

GENERAL

Overview

We are a global technology manufacturer committed to creating value by developing solutions to critical customer problems. Our culture of quality, continuous improvement, superior innovation and a relentless focus on the fundamentals enables us to compete in the markets we serve.

The majority of our revenue is derived from the sale of suspension assemblies to a small number of manufacturers. Suspension assemblies are precise electro-mechanical components that hold a disk drive's read/write head at microscopic distances above the drive's disks. Our innovative product solutions help customers improve yields, increase reliability and enhance disk drive performance, thereby increasing the value they derive from our products.

General Business

We are a key world-wide supplier to all manufacturers of disk drives and
head-gimbal assemblers. Sales to our four largest customers constituted 98% of
net sales for the thirteen weeks ended December 30, 2012 as shown in the
following table.

                                       Percentage
Customer                                 of Sales
Western Digital Corporation                    49 %
SAE Magnetics, Ltd/TDK Corporation             26 %
Seagate Technology, LLC                        12 %
HGST (a Western Digital company)               11 %

Significant portions of our revenue may be indirectly attributable to large manufacturers of disk drives, such as Western Digital, which may purchase read/write head assemblies that utilize our suspension assemblies from SAE Magnetics, Ltd/TDK Corporation. We expect to continue to depend on a limited number of customers for our sales, given the small number of disk drive manufacturers and head-gimbal assemblers. Our results of operations could be adversely affected by reduced demand from a major customer.

The following table sets forth our recent quarterly suspension assembly shipment quantities in millions for the periods indicated:

                                Suspension Assembly Shipments by Quarter
                                                                  2012                             2013
                                              First        Second       Third        Fourth       First
Suspension assembly shipment quantities            89           97          100          105          104

The October 2011 flooding in Thailand temporarily constrained the overall production capacity of the hard disk drive supply chain in 2012. Additionally, some hard disk drive manufacturers temporarily reduced the average capacity size of their disk drives to maximize their use of components that were in short supply, and therefore, maximize the number of disk drives that they were able to ship. We believe this temporarily reduced the number of suspensions per disk drive. These factors together caused a material decrease in our suspension assembly demand. In our first quarter of 2012, shipments decreased 38 million or 30% compared to the fourth quarter of 2011 due to the flood-related capacity constraints at our customers. Our second quarter of 2012 shipments increased sequentially in all segments, with the largest percentage increase in shipments for enterprise applications. We estimate that we maintained our overall suspension assembly market share in both the first and second quarters of 2012, compared to the preceding quarter, by leveraging our vertically integrated U.S. operations to meet customers' needs. Our third quarter of 2012 shipments increased slightly compared with the preceding quarter but demand for our suspension assemblies declined by more than 15% in the final five weeks of the quarter compared with the quarter's first eight weeks, primarily due to weakened disk drive demand. Our 14-week fiscal fourth quarter of 2012 shipments totaled 105 million, down 2% on a weekly shipment basis compared with the 13-week fiscal third quarter of 2012. Industry sources estimate that disk drive shipments in the quarter ended September 2012 declined by 11% compared with the preceding quarter. Increased allocations on our existing programs and participation on new program ramps helped offset the near-term market weakness.

Our suspension assembly shipments totaled 104 million in the 13-week fiscal 2013 first quarter, up 6% on a weekly shipment basis compared with 105 million in the 14-week fiscal 2012 fourth quarter. As in the fourth quarter of 2012, our shipments benefited from our market share positions on both existing and new customer programs even as worldwide disk drive and suspension assembly demand remained soft.

Average selling price in the first quarter of 2013 was $0.60, up from $0.58 in the preceding quarter, due to a higher mix of both development and high volume dual-stage actuated (DSA) suspensions and suspensions for enterprise applications. DSA suspensions, which carry a higher selling price and cost more to manufacture, increased to 9% of our first quarter product mix up from 5% in the preceding quarter. We expect our product mix to continue to shift toward DSA suspensions throughout 2013. Suspension assembly pricing is likely to remain competitive in 2013.

Gross profit in the 2013 first quarter was $7,421,000, or 12% of net sales, compared with a gross loss of $0.2 million in the preceding quarter. Compared with the fourth quarter of 2012, gross profit benefited from improved absorption of fixed costs due to higher weekly volume and ongoing efforts to reduce costs. Increased shipments of higher-priced development products and increased scrap recoveries also improved gross profit by approximately $3,000,000. The impact of these items is not expected to carry over into our 2013 second quarter.

The quarter also included higher assembly operating costs of approximately $2,300,000, compared to approximately $4,000,000 in the preceding quarter, while we are relying on our U.S. assembly operations for the majority of our production. We will continue to transition more of our assembly production to Thailand as the year progresses so that we can realize the related cost advantages and have the majority of our assembly production near our customers' manufacturing locations. By the end of our second quarter 2013, we expect to have fully restored the pre-flood capacity of our Thailand operation. We intend to have the full capacity for the Thailand site installed by the end of 2013.

We are planning to further consolidate and streamline our U.S. operations. We plan to wind down our assembly operations in Eau Claire, Wisconsin during 2013 as we shift more of that production to our Thailand operation. The portion of our Eau Claire facility currently used for assembly operations will be offered for lease. In Hutchinson, we are consolidating our Development Center into our headquarters building in 2013, taking advantage of the space made available by moving component manufacturing from Hutchinson to Eau Claire in 2011, and intend to offer the Development Center for sale or lease. Near the end of 2013, we also plan to begin moving our stamping operation from a facility we currently lease in Plymouth, MN to our headquarters building in Hutchinson. As these actions are completed, they are expected to further lower our cost structure.

Our operation in Thailand accounted for 18% of assembly production in the first quarter of 2013. We have qualified additional products at our Thailand site and remain on track to have about one-half of our total assembly output produced there by the end of our 2013 third quarter.

Effective October 1, 2012, we realigned our business into a single operating and reportable segment. Our chief operating decision maker now assesses financial performance of our company as a whole. Due primarily to the restructuring actions that occurred during 2012 and the additional cost reductions that we have made since the end of 2012, the operating losses from our BioMeasurement products have been significantly reduced. In connection with this realignment, we have also eliminated divisional presidents. We are also continuing to look at partnering opportunities that can help us get market traction and extract value from this technology that we have developed.

Outlook

We expect our second quarter of 2013 suspension assembly shipments to range from 95 million to 105 million, anticipating slightly lower demand for disk drives and a delay in some programs ramps to the second half of 2013. Gross profit is expected to decline on the lower volume in the second quarter of 2013 and on lower shipments of development products.

Beyond the second quarter of 2013, we expect our financial results will benefit from higher volume and improved fixed cost leverage, increased adoption of our DSA suspensions, the cost benefits of our TSA+ process, further cost reductions as we transition more assembly volume to Thailand and continued consolidation and streamlining of our U.S. operations.

RESULTS OF OPERATIONS

Thirteen Weeks Ended December 30, 2012 vs. Thirteen Weeks Ended December 25, 2011

Net sales for the thirteen weeks ended December 30, 2012, were $63,699,000, compared to $58,475,000 for the thirteen weeks ended December 25, 2011, an increase of $5,224,000. Our suspension assembly shipments increased 16 percent compared to the same quarter in 2012 primarily due to an increase in disk drive shipments year over year. Suspension assembly component sales were $876,000 for the thirteen weeks ended December 25, 2011, primarily as a result of the flood-related capacity constraints that existed in the disk drive industry creating demand for our suspension assembly components. We had no suspension assembly component sales for the thirteen weeks ended December 30, 2012.

Gross profit for the thirteen weeks ended December 30, 2012, was $7,421,000, compared to the gross profit of $2,301,000 for the thirteen weeks ended December 25, 2011, an increase of $5,120,000. Gross profit as a percent of net sales was twelve percent and four percent for the thirteen weeks ended December 30, 2012, and December 25, 2011, respectively. The increase in gross profit was primarily the result of the increase in net sales which included a higher mix of TSA+ and DSA products, and an improvement of approximately $3,000,000 due to increased shipments of higher-priced development products and increased scrap recoveries. These were partially offset by approximately $2,300,000 of incremental costs of manufacturing in our U.S. assembly operations instead of Thailand compared to approximately $1,000,000 for the thirteen weeks ended December 25, 2011.

Research and development expenses for the thirteen weeks ended December 30, 2012, were $3,339,000, compared to $3,948,000 for the thirteen weeks ended December 25, 2011, a decrease of $609,000. The decrease was primarily due to cost reduction actions.

Selling, general and administrative expenses for the thirteen weeks ended December 30, 2012, were $6,166,000, compared to $7,173,000 for the thirteen weeks ended December 25, 2011, a decrease of $1,007,000. The decrease was primarily due to cost reduction actions.

During the first quarter of 2013, we identified approximately 55 positions to be eliminated as part of our continued focus on overall cost reduction. This resulted in $1,018,000 of severance and benefits expense during the first quarter of 2013. We expect the remaining severance and benefits payments of $387,000 will be complete by the end of our second quarter of 2013.

Severance and other expenses for the thirteen weeks ended December 25, 2011 were reduced $711,000 because we reversed $895,000 of previously accrued severance and benefits expenses partially offset by $184,000 of other expenses incurred related to site consolidation plans during that quarter. As a result of leveraging our U.S. assembly operations to offset the temporary loss of manufacturing capacity in Thailand, during that quarter, we retained approximately 120 employees in our Hutchinson, Minnesota manufacturing facility that we previously expected to terminate and whose anticipated severance and benefits had been included in our 2011 severance and benefits expenses.

LIQUIDITY AND CAPITAL RESOURCES

Our principal sources of liquidity are cash and cash equivalents, short-term investments, cash flow from operations, our senior secured credit facility and additional financing capacity, if available given current credit market conditions and our operating performance. Our cash and cash equivalents increased from $53,653,000 at September 30, 2012, to $56,300,000 at December 30, 2012. Our short-term investments remained at $1,200,000. In total, our cash and cash equivalents and short-term investments increased by $2,647,000. The increase was primarily due to $4,109,000 net borrowings from our senior secured credit facility, the release of $3,400,000 of restricted cash that was temporarily held in our senior secured credit facility collections account and $1,638,000 in proceeds from an equipment sale-leaseback transaction. These proceeds were partially offset by $5,063,000 of capital expenditures and $1,564,000 of cash used by operations.

In recent years, our net sales have decreased significantly. With ongoing uncertain market and economic conditions, we are continuing to carefully manage our cost structure and cash position to ensure that we will meet our debt obligations while preserving the ability to make investments that will enable us to respond to customer requirements and achieve profitability. We currently believe that our cash and cash equivalents, short-term investments, cash generated from operations, our credit facility and additional financing, if needed and as available given contractual restrictions, current credit market conditions and our operating performance, will be sufficient to meet our forecasted operating expenses, debt and capital expenditures through 2013.

As of the date of this report, we had outstanding $39,822,000 aggregate principal amount of our 8.50% Convertible Notes; $78,931,000 aggregate principal amount of our 8.50% Secured Notes; and $12,200,000 aggregate principal amount of our 10.875% Senior Secured Second Lien Notes due 2012 (the "10.875% Notes"). Holders of our 8.50% Convertible Notes may require us to purchase all or a portion of their 8.50% Convertible Notes for cash as early as January 15, 2015.

Due to the flooding in Thailand in October 2011, in total, we have spent approximately $27,000,000 during 2012 and $3,000,000 during the first quarter 2013 for incremental costs of manufacturing in our U.S. assembly operations instead of Thailand, capital expenditures for site restoration and equipment replacement, recovery expenses, and inventory replenishment at our Thailand facility. We estimate we will spend an additional $4,000,000 in the remainder of 2013 to restore our Thailand manufacturing operation and bring it back to pre-flood capacity levels and to cover the incremental costs of manufacturing in the United States. These estimates do not include lost profits. These expenditures were partially offset by the $25,000,000 in insurance proceeds that we received in 2012.

Our Thailand flood insurance policy in effect at the time of the October 2011 Thailand flood had a one-year term and has expired. We have evaluated flood-related insurance available to us, assessing our current flood risk compared to the cost of flood insurance. Our current flood coverage under a Thailand Government program is approximately $20,000,000 in addition to our current insurance flood coverage of approximately $1,000,000 for our Thailand facility.

During our third quarter 2012, we refinanced a portion of our debt, as discussed below, by reducing the principal amount of our outstanding debt subject to a holder-initiated redemption as early as 2013 from $76,243,000 to $11,886,000. The refinancing improved our financial position by extending the average maturities on our debt and reducing our overall debt balance from $161,413,000 to $149,321,000 while maintaining our cash levels. We may from time to time seek to prepay or retire our outstanding debt through cash purchases in open market or privately negotiated transactions or otherwise. These transactions, if any, will depend on prevailing market conditions, our liquidity requirements, contractual restrictions and other factors. Our ability to obtain additional financing will depend upon a number of factors, including our future performance and financial results, contractual restrictions and general economic and capital market conditions. We cannot be certain that we will be able to raise additional financing on terms acceptable to us, including covenants that we will be able to comply with in the short term, or at all, if needed. If we are unable to obtain new financing, if and when necessary, our future financial results and liquidity could be materially adversely affected.

Our credit agreement with PNC Bank and the indenture governing the 8.50% Secured Notes each contain certain covenants that, among other things, limit our and our restricted subsidiaries' ability to incur additional indebtedness; pay dividends on or make distributions in respect of capital stock or make certain other restricted payments or investments; enter into agreements that restrict distributions from restricted subsidiaries; sell or otherwise dispose of assets, including capital stock of restricted subsidiaries; enter into transactions with affiliates; create or incur liens; enter into operating leases; merge, consolidate or sell substantially all of our assets; make capital expenditures; change the nature of our business; and expend the assets or free cash flow of certain subsidiaries. The indenture also limits the amount of our consolidated total assets and free cash flow that can be attributable to subsidiaries that have not guaranteed the 8.50% Secured Notes or, in certain cases, had their stock pledged to secure the 8.50% Secured Notes.

We are making changes in our overall cost structure that should enable us to be cash-neutral at shipment volumes of 8 million per week, assuming no changes in our working capital. As volumes grow to more than 8 million suspension assemblies per week, we believe we will be able to generate positive free cash flow.

Senior Secured Credit Facility - In September 2011, we entered into a revolving credit and security agreement with PNC Bank. The credit agreement provides us with a senior secured credit facility in a principal amount of up to $35,000,000, subject to a borrowing base. The credit facility is secured by substantially all of the personal and real property of Hutchinson Technology Incorporated. The maturity date of the credit facility is October 1, 2014. In addition to the covenants identified above, the credit agreement contains certain financial covenants that require us to maintain a minimum fixed charge coverage ratio, minimum earnings before interest, taxes, depreciation and amortization ("EBITDA"), and minimum liquidity. We maintain an account at PNC Bank with a minimum balance of $15,000,000, as required under the credit agreement. In December 2012, we had borrowed $7,000,000 under the revolving credit agreement. As of December 30, 2012, $4,109,000 remained outstanding.

If we are unable to generate sufficient operating results in future quarters, we may be out of compliance with financial covenants in the credit agreement in future quarters. If necessary, we intend to negotiate a waiver of any noncompliance or an amendment of the financial covenant specific to the applicable period. As of December 30, 2012, we were in compliance with the covenants of our credit facility.

3.25% Notes Redemption Subsequent to Quarter End

On January 3, 2013, subsequent to quarter end, we initiated a redemption of all remaining 3.25% Notes. In accordance with the terms of the indenture governing the 3.25% Notes and a notice of redemption there under, all $11,885,875 aggregate principal amount of 3.25% Notes were redeemed on or before February 2, 2013 at a redemption price of 100 percent of the principal amount, plus accrued and unpaid interest up to, but not including, the redemption date. Interest on the 3.25% Notes called for redemption has ceased to accrue as of February 2, 2013. Payment of the redemption price was funded by cash on hand. After completion of the redemption, no 3.25% Notes will remain outstanding.

Debt Refinancing Subsequent to Quarter End

On January 22, 2013, subsequent to quarter end, we sold $12,200,000 aggregate principal amount of 10.875% Notes for a total purchase price of $11,590,000. On the same date, we repurchased $18,682,000 aggregate principal amount of our outstanding 8.50% Convertible Notes by making cash payments totaling $11,583,000, plus accrued and unpaid interest, which payments were funded by the proceeds of the sale of the 10.875% Notes. This refinancing reduced the portion of our outstanding debt subject to a holder-initiated repurchase as early as 2015 from $58,504,000 to $39,822,000.

The 10.875% Notes are issued under an indenture dated as of January 22, 2013 and bear interest at a rate of 10.875% per annum, payable semiannually in arrears on January 15 and July 15 of each year, beginning July 15, 2013. The 10.875% Notes are secured by liens on all assets securing our senior secured credit facilities (other than capital stock of subsidiaries of our company to the extent that inclusion of such capital stock would require the filing of separate financial statements for such subsidiaries with the SEC, which liens rank junior in priority to the liens securing our senior secured credit facilities and other permitted prior liens and on an equal and ratable basis with the liens securing our 8.50% Secured Notes. The 10.875% notes are scheduled to mature on January 15, 2017 unless redeemed or repurchased in accordance with their terms. We may redeem all or a portion of the 10.875% Notes at any time by paying 100 percent of the principal amount redeemed, plus a make-whole premium as of, and accrued and unpaid interest to, the date of redemption.

The indenture governing the 10.875% Notes contains certain covenants that, among other things, limit our and our restricted subsidiaries' ability to incur additional indebtedness, pay dividends on or make distributions in respect of capital stock or make certain other restricted payments or investments, enter into agreements that restrict distributions from restricted subsidiaries, sell or otherwise dispose of assets, including capital stock of restricted subsidiaries, enter into transactions with affiliates, create or incur liens and enter into operating leases. The indenture also limits the amount of our consolidated total assets and free cash flow that can be attributable to subsidiaries that have not guaranteed the 10.875% Notes or, in certain cases, had their stock pledged to secure the 10.875% Notes. The indenture contains customary events of default, the occurrence of which would permit the acceleration of the 10.875% Notes, including failure to pay principal of or interest on the 10.75% Notes, failure to comply with covenants in the indenture or other related documents, default in the payment of principal of, or acceleration of, other material indebtedness for borrowed money of the company, failure of the company or any of its significant subsidiaries to pay or discharge material judgments, and bankruptcy of the company or any of its significant subsidiaries.

To accommodate the January 2013 debt refinancing described above, on January 22, 2013, we entered into (i) a first supplemental indenture to the indenture dated as of March 30, 2012, which governs the 8.50% Secured Notes, and (ii) a consent and amendment no. 3 to our revolving credit and security agreement.

Capital Expenditures - Our suspension assembly business is capital intensive. The disk drive industry experiences rapid technology changes that require us to make substantial ongoing capital expenditures in product and process improvements to maintain our competitiveness. Significant industry technology transitions often result in increasing our capital expenditures. The disk drive industry also experiences periods of increased demand and rapid growth followed by periods of oversupply and subsequent contraction, which also results in fluctuations in our capital expenditures. Cash used for capital expenditures totaled $5,063,000 for the thirteen weeks ended December 30, 2012. We anticipate capital expenditures will total $15,000,000 to $20,000,000 in 2013 primarily for manufacturing equipment for new process technology and capability improvements, such as DSA suspension assemblies and product tooling. Financing of these capital expenditures will be principally from operations, our current cash, cash equivalents, our senior secured credit facility or additional financing, if available given current credit market conditions.

CRITICAL ACCOUNTING POLICIES

There have been no material changes in our critical accounting policies from those disclosed in our Annual Report on Form 10-K for the fiscal year ended September 30, 2012.

RECENT ACCOUNTING PRONOUNCEMENTS

In June 2011, the FASB updated the disclosure requirements for comprehensive income. The updated guidance requires companies to disclose the total of comprehensive income, the components of net income and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. The updated guidance does not affect how earnings per share is calculated or presented. The updated guidance is effective for us for 2013. We elected early adoption of this guidance beginning with our first quarter of 2012. The adoption of this pronouncement did not have a material impact on our consolidated financial statements.

In May 2011, the FASB issued authoritative guidance related to fair value measurements. The updated guidance results in a consistent definition of fair value and common requirements for measurement of and disclosure about fair value between accounting principles generally accepted in the United States (U.S. GAAP) and International Financial Reporting Standards (IFRS). We adopted this guidance beginning with our second quarter of 2012. The adoption of this pronouncement did not have a material impact on our consolidated financial statements.

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 (the "Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). Forward-looking statements include, but are not limited to, statements regarding the following: market demand and market consumption of disk drives or suspension assemblies; demand for and shipments of our products, production capacity and capabilities, product commercialization and adoption, capital expenditures, . . .