[3rd Quarter of fiscal 2003 Performance Briefing]Consolidated results for the 3rd quarter of Fiscal Year 2003

Mr. Seiji Enami
General Manager
Finance & Accounting Department

Good afternoon. I am Seiji Enami. Thank you for braving the cold and taking the time to attend today's presentation. Without further ado, I would like to report on TDK's consolidated operating results for the third quarter of fiscal 2003, which ended on December 31, 2002. Please turn to the earnings release that has been handed out.

Firstly, I would like to report on our consolidated results.

Please turn to page 1 of the earnings release, where you will find our results summarized on the top of the page. As you can see, we recorded top- and bottom-line growth on a year on year basis. Consolidated net sales grew 9.2% to ¥161,678 million, operating income increased ¥20,343 million to ¥6,172 million, income before income taxes rose ¥19,860 million to ¥6,055 million and net income increased ¥14,334 million to ¥4,575 million. The result was net income per common share of ¥34.49 and ¥69.47 for the third quarter and first nine months of fiscal 2003, respectively.

This performance reflected four main factors:

1. The benefits of structural reforms that TDK launched in the prior fiscal year
2. Lower structural reform expenses, although structural reforms have continued this fiscal year
3. Higher sales of electronic materials and electronic devices despite strong calls for discounts, and
4. A strong improvement by HDD heads in the recording devices sector.

These gains were offset to a degree by a number of negative factors. One was sales price discounts, which had a ¥19.0 billion detrimental effect on earnings. Overall, sales prices fell 11% on average, 10% in the electronic materials and components segment and 11% in the recording media & systems segment. Another negative factor was the effect of exchange rate movements. Albeit slight, these had the effect of lowering operating income by ¥0.4 billion. Average third-quarter yen exchange rates for the U.S. dollar and euro were ¥122.62 and ¥122.51, respectively, as the yen rose 0.7% from ¥123.45 against the dollar and weakened 10.8% from ¥110.57 against the euro.

The weakness of the yen against the euro had the effect of boosting sales by about ¥1.3 billion. But it had a negative impact on operating income due to an operating loss in Europe, which was caused by actions associated with structural reforms.

In addition to restructuring costs of ¥2.6 billion, which are shown separately, structural reform expenses in the third quarter included ¥0.2 billion included in cost of sales. In total, third-quarter structural reform expenses were ¥2.8 billion.

TDK effectively brought forward ¥1.1 billion in structural reform expenses to the third quarter. At our presentation of our interim results, we projected ¥1.7 billion for the third quarter.

In the same period of fiscal 2002, structural reform expenses totaled ¥8.5 billion, comprising restructuring costs of ¥7.3 billion and expenses included in cost of sales of ¥1.2 billion.

Please now look at the balance sheets on page 9 of your handouts. I would like to look at our financial position with reference also to the cash flow statements on page 10. The comparisons I draw are with September 30, 2002.

Total assets stood at ¥731.4 billion at December 31, 2002, an increase of ¥3.7 billion. The yen appreciated against the U.S. dollar, from ¥122.60 to ¥119.90. Between the two dates the yen depreciated against the euro, falling from ¥120.37 to ¥125.08. But the strength of the yen against the key U.S. dollar had the effect of decreasing overseas assets when converted into yen by a slight ¥2.9 billion.

Cash and cash equivalents increased ¥6.6 billion. TDK used about ¥8.0 billion for paying bonuses and dividends, and exchange rate movements had the effect of decreasing cash and cash equivalents by ¥1.1 billion. Furthermore, cash was used for reducing accounts payable and due to an increase in accounts receivable in line with higher sales. These factors were offset by TDK's profit, the reduction of inventories and a more selective policy toward capital expenditures.

Inventories fell to approximately ¥76.4 billion from the peak of ¥123.5 billion at the end of the first quarter of fiscal 2002. Compared with September 30, 2002, inventories were ¥7.3 billion lower.

Property, plant and equipment were ¥7.8 billion lower. This reflected the greater selectivity in making investments and the fact that the current period was not deemed the right time to make additional investments to ramp up capacity. Compared with depreciation of ¥14.4 billion, new investments in the form of capital expenditures were held to ¥8.5 billion. The lower total also reflected the disposal of facilities.

Accumulated other comprehensive loss increased ¥7.4 billion, lowering shareholders' equity. This was mainly due to foreign currency translation adjustments (¥3.7 billion) and minimum pension liability adjustments (¥3.7 billion). You can find a breakdown of this account in Note 3 on page 12.

The increase in the minimum pension liability adjustments was partly the result of difficulties in generating sufficient returns due to falling stock prices and interest rates. Retirement and severance benefits, shown under liabilities, increased for the same reason. As profits still haven't recovered to a level sufficient to offset such negative influences, the equity ratio fell slightly.

TDK is striving to improve cash flows. As you can see on page 9 of the supplementary data, we have made some progress toward our targets. Inventory turnover improved to 1.4 months, compared with 1.9 months last fiscal year; fixed asset turnover was 2.7 times, compared with 2.1 times last fiscal year; and trade receivables turnover was 2.7 months, compared with 3.0 months last fiscal year.

I'd like now to turn back to page 1, where you will find a breakdown of sales on the lower part of the page. I would like to give an overview of the composition of sales, as well as draw comparisons with the previous fiscal year.

In the electronic materials and components segment, net sales increased 13.3% to ¥121.9 billion and accounted for 75.4% of total net sales.

Within this segment, sales in the electronic materials sector rose 5.5% to ¥41.6 billion and accounted for 25.7% of total net sales.
(Capacitors)Although sales increased compared with the same period of the previous fiscal year, sales have fallen quarter on quarter since the first quarter. This reflects the impact of strong demands for price reductions from customers and the fact that additional orders fell short of expectations due to production cutbacks at audio and visual product clients prompted by a not-so-bumper Christmas sales season. Contrastingly, automotive sales remained strong due to the increasing use of electronics in automobiles.
(Ferrite Cores)In ferrite cores, sales were largely the same as in the previous fiscal year. Strong demand for ferrite cores used in LCD backlights and in power supplies, mainly for digital audio and visual products, was negated by soft demand for cores used in information and communications applications.
(Magnets)Demand was solid from the automobile and parts fields. Strong demand for motor magnets drove sales higher.

Capacitors accounted for 64% of sector sales, up 4% year on year. Ferrite cores and magnets accounted for the remaining 36%, up 8%.

In the electronic devices sector, sales rose 10.8% to ¥28.9 billion and accounted for 17.9% of total net sales.
(Inductive devices)Inductive devices sales were higher as a whole because of the growing use of automotive electronics and a recovery in sales volumes, compared with one year ago, for communications applications. This outweighed the effects of lower output by manufacturers of audio and visual products.
(High-frequency components)Orders from manufacturers of communications products, particularly mobile phones, have been trending upward. These higher volumes enabled TDK to post higher sales despite the need to absorb strong demands for price reductions.
(Other Products)Overall, sales in this sector increased. Growth was paced by brisk sales of actuators and chip varistors used in PCs and peripherals and communications products. DC-DC converter sales, which had been brisk, declined as customers cut back production levels.

Inductive devices accounted for 51% of sector sales, up 10%. High-frequency components accounted for 17% of sector sales, up 13%. Other products represented 32%, up 11%.

Recording devices sales surged 25.0% to ¥47.8 billion and accounted for 29.6% of total net sales.
(HDD Heads)HDD head sales increased due to a recovery in TDK's market share, particularly in respect of well-received 40 gigabyte/disk HDD heads. Another factor was a high level of total demand for HDD heads as the average number of heads used per HDD did not decline as rapidly as had been expected.
(Other Heads)Sales of other heads were higher overall.

HDD heads accounted for 89% of sector sales, up 26%. Other heads accounted for the remaining 11%, up 15%.

Sales in the semiconductors and others sector declined 6.9% to ¥3.6 billion and accounted for 2.2% of total net sales. Sales of semiconductors for WAN/LAN and other devices fell sharply due to continuing low levels of investment in communications infrastructure equipment.

Next, I would like to look at the recording media & systems segment. Segment sales edged down 1.6% to ¥39.8 billion and accounted for 24.6% of total net sales. Essentially, sales of audiotapes and videotapes fell in line with shrinking overall demand but this fall was offset by higher sales of newly verified tape-based data storage media for computers and sales in the software business.
(Audiotapes)Audiotape sales accounted for 9% of segment sales, down 25%.
(Videotapes)Videotape sales accounted for 32% of segment sales, down 2%.
(Optical Discs)Optical discs accounted for 25% of segment sales, up 6%. Higher volumes covered falling sales of CD-Rs, and DVD sales rose gradually. Growth in these two categories offset declining demand for MDs.
(Tape-based data storage media for computers, recording equipment and others)Sales here accounted for 34% of segment sales, up 2%.

I would now like to give a breakdown of the ¥121.9 billion in sales in the electronic materials and components segment that I reported on earlier by the markets we serve, assuming that the segment represents 100. This information is on the left-hand side of page 4 of the supplementary data. Sales of PCs and peripherals rose 15% and accounted for 52% of segment sales. Sales for the communications industry, mainly mobile phone-related, decreased 1% and accounted for 9% of segment sales. Audio and visual product component sales decreased 9% and accounted for 14% of segment sales. Automotive component sales increased 27% and accounted for 9% of segment sales. Parts sales climbed 45% and accounted for 7% of segment sales. Home electronics and appliances rose 6% and accounted for 2% of segment sales.

Please turn to the segment information on page 11. First I would like to look at the industry segment information on the upper half of the page. Operating income in the electronics materials and components segment rose ¥19.0 billion year on year to ¥5.8 billion. The recording media & systems segment, meanwhile, posted operating income of ¥0.4 billion, an improvement of ¥1.3 billion. Both segments thus reversed losses in the previous fiscal year.

In the electronic materials and components segment, ¥6.7 billion of the increase relates to lower structural reform expenses in the period of ¥1.8 billion; in the previous fiscal year they were ¥8.5 billion. Excluding this factor, the increase in segment operating income was effectively ¥12.3 billion. The recovery in sales of HDD heads in recording devices was a major factor behind this result, as were higher profits in electronic materials and electronic devices that stem from structural reforms started in the previous fiscal year.

In the recording media & systems segment, the effective increase was ¥2.3 billion, excluding the ¥1.0 billion incurred for structural reforms in the current fiscal year. The turnaround in the segment is attributable to two years of structural reforms and efforts to expand tape-based data storage media for computers and other businesses. These actions have put the segment partly back on a growth trajectory.

At the very bottom of the page you will see a breakdown of sales by region. Sales in Japan rose 5.3% to ¥43.0 billion. This was mainly attributable to a rebound in the market share of HDD heads, which outweighed a decrease in sales in the recording media & systems segment. In the Americas, sales decreased 1.4% to ¥28.1 billion as sales in both the electronic materials and components and the recording media & systems segments were slightly lower. In Europe, sales were up 2.9% to ¥22.0 billion. The main reason for the increase in sales in Europe was the strength of the euro against the yen, compared with the same period of the previous fiscal year. Sales were, however, soft across the board. In Asia (excluding Japan) and Others, sales rose 19.6% to ¥68.5 billion on rising sales in most business areas. The biggest gain was attributable to the reclaimed market share of HDD heads in the recording devices sector.

The overall result was a 10.7% rise in overseas sales year on year to ¥118.6 billion. Overseas sales accounted for 73.4% of consolidated net sales, a 1.0 percentage point increase from 72.4% in the previous year's third quarter.

The year-on-year changes in operating income shown in Geographic Segment Information mirrored the changes in sales by region.

As I mentioned before when I talked about currency movements, the deterioration in Europe was the result of the combination of the weak yen and the restructuring costs of ¥1.5 billion, which caused an operating loss in the region.

The dramatic improvement in operating income in Japan was attributable to lower year-on-year structural reform expenses. In the previous fiscal year's third quarter, TDK implemented structural reforms, focused on Japanese subsidiaries, which has yielded benefits for TDK.

Now I would like to cover progress we have made with Selection and Concentration of resources this year as part of efforts to improve profits. This relates to products accounting for approximately ¥67.0 billion in sales annually that were identified as Critical Business Units using TVA and NPV. Products ceased in the first half of fiscal 2003 represented combined sales of ¥6.2 billion. Additional products targeted for cessation in fiscal 2003 have a combined value in terms of sales of ¥5.5 billion. Products that are improving according to plan represented ¥14.4 billion of the approximate ¥67.0 billion total. Products that have growth potential and are expected to improve next fiscal year accounted for ¥14.1 billion, while products for which profit recovery is expected next fiscal year due to further restructuring in fiscal 2003 accounted for ¥26.8 billion of the total.

We will continue to watch Critical Business Units, including products we have decided to continue, next fiscal year. We will also continue to promote Selection and Concentration, which may involve the addition of new business units to the list of Critical Business Units.

Finally, I would like to cover TDK's consolidated projections for fiscal 2003, ending March 31, 2003. We have revised projections made in October when we announced our interim results, as follows. The projections are shown on page 6.

The projections are based principally on several assumptions. One is that we are assuming an average yen-U.S. dollar exchange rate of ¥120 for the fourth quarter of fiscal 2003. This is the same rate as was assumed in October. Second is that we expect difficult market conditions to persist in the electronic materials and electronic devices markets, with no expectations of a strong recovery in demand prolonging the supply glut. This forecast is based on growing economic uncertainty around the world, particularly in the U.S., since our previous announcement in October. Fourth quarter sales of HDD heads are expected to be on a par with the third quarter based on strong support for TDK's products and solid orders. Moreover, sales growth is expected to be counterbalanced by price reductions resulting in no change in operating income. We also expect income before income taxes to fall slightly due to foreign currency movements.

We are forecasting net sales for the fourth quarter of ¥150.0 billion, higher than the last forecast of ¥137.9 billion. Our forecast for operating income is unchanged at ¥4.0 billion, but the forecast for income before income taxes has been downwardly revised from ¥4.5 billion to ¥4.0 billion. Net income is also expected to come in under the previous forecast of ¥3.6 billion at ¥3.4 billion.

Turning to forecasts for the full year, we project consolidated net sales of ¥608.1 billion, higher than the previous projection of ¥585.0 billion. Operating income is expected to surpass the previous projection of ¥20.0 billion to come in at ¥20.2 billion. But we have revised downward our projection for income before income taxes from ¥18.3 billion to ¥17.7 billion, as well as net income from ¥13.0 billion to ¥12.6 billion.

That concludes my presentation of TDK's third quarter results and fiscal 2003 projections.

Thank you for your attention.