[ 21st Quarter of fiscal 2006 Performance Briefing ]Consolidated Results

Mr. Seiji Enami
Director
Corporate Officer
General Manager
Finance & Accounting Department

Thank you for braving the hot weather and taking the time to attend today's presentation.

I will now present TDK's consolidated operating results for the first quarter of fiscal 2006, the three-month period ended June 30, 2005. My presentation will follow the earnings release.

As the top half of page 1 of the earnings release shows, we recorded an approximate ¥10.2 billion, or 6.5%, year-on-year increase in consolidated net sales to ¥167,422 million. However, operating income declined ¥1.5 billion, or 10.3%, to ¥12,889 million. Income from continuing operations before income taxes decreased 6.7% to ¥14,275 million. Income from continuing operations rose 1.7% to ¥10,687 million, and net income rose 7.0% to ¥10,874 million. So, we posted growth on our top and bottom lines in the first quarter of fiscal 2006. Basic net income per common share was ¥82.22.

The sale of semiconductor operations, which was reported during the last earnings release conference for the fourth quarter of fiscal 2005, was not entirely completed by the end of fiscal 2005 from the viewpoint of financial papers. Due to this, there were some adjustments in this quarter, which had a slight effect on first-quarter results.

Average first-quarter yen exchange rates for the U.S. dollar and euro were ¥107.73 and ¥135.47, respectively. This meant that the yen appreciated 1.7% versus the U.S. dollar and depreciated 2.5% against the euro, compared with the first quarter of the previous fiscal year. This lowered net sales by approximately ¥1.3 billion and operating income by approximately ¥0.6 billion.

There were four main reasons for the higher sales but lower earnings on an operating basis. The first concerns HDD heads in recording devices. In the first half of the previous fiscal year, there was a large drop in orders due to the internal production of heads by a certain client and inventory cut-backs. Demand picked up considerably in the third and fourth quarters of fiscal 2005, with these strong conditions spilling over to the first quarter of the current fiscal year. This helped to boost earnings in the first quarter of fiscal 2005.

The second reason concerns capacitors. When we presented our earnings for fiscal 2005 on April 27 this year, we stated that problems relating to capacitor production yields that were a negative factor in the fourth quarter had more or less been resolved, and that the effect of yield problems on our performance in fiscal 2006 would be minimal. Unfortunately, we have yet to adequately resolve this issue, so first-quarter earnings were affected in comparison with the previous fiscal year's first quarter.

A third factor was recording media. This sector has been posting losses since the second quarter of fiscal 2005 due to a sharp drop in prices of DVDs. In response, we have been implementing structural reforms, as we reported on April 27. Consequently, the earnings of this segment were lower in the first quarter of fiscal 2006, compared to the same quarter in the previous fiscal year.

The fourth reason was continued severe discounting pressure in both the recording media segment and the electronic materials and components segment.

Let's now look at a breakdown of sales, which is shown on the lower half of page 1. You will note that there have been changes in the names of a sector and segment. Due to the sale of semiconductor operations, the former "semiconductors & others" segment was renamed "electronic components & others." Furthermore, the "recording media & systems segment" is now called the "recording media segment" to align the name with the makeup of this business following restructuring of systems businesses.

In the electronic materials and components segment, net sales rose 10.4% to ¥143.3 billion, and represented 85.6% of total net sales. Looking at the electronics market in the first quarter of fiscal 2006, the PC, HDD, flat-screen TV and car electronics fields were relatively strong. However, by no means was the market as a whole that strong.

In terms of sector results, sales in the electronic materials sector declined 8.3% to ¥41.0 billion, and accounted for 24.5% of total net sales. (Capacitors) Multilayer chip capacitors, the main product in the capacitors sector, saw lower sales in all market categories other than car electronics.
(Ferrite cores and magnets) In ferrite cores, sales were down due to lower sales of large ferrite cores used in CRTs. However, magnet sales increased on firm demand for voice coil motors (VCMs) for HDDs.

As a result, capacitors accounted for 66% of sector sales, and sales were down 14% year on year. Ferrite cores and magnets accounted for the remaining 34% and sales were up 4% year on year.

In the electronic devices sector, sales increased 1.6% to ¥28.7 billion, and accounted for 17.1% of total net sales.
(Inductive Devices) Sales of power line coils for mobile phones and HDDs were higher.
(High-frequency Components) Sales decreased due to declines in sales prices of components for mobile phones and lower shipment volumes of some products.
(Other Products) Sales of DC-AC inverters for amusement equipment and of sensors and actuators were strong.

As a result, inductive devices accounted for 49% of sector sales and sales were up 5% year in year. High-frequency components accounted for 8% of sector sales and sales were down 22% year on year. Other products accounted for the remaining 43% and sales were up 4% year on year.

Recording devices sales rose 31.3% to ¥68.5 billion, and accounted for 40.9% of total net sales.
(HDD Heads) Sales increased year on year. Amid rising demand for HDDs, HDD head shipments increased, absorbing the effect of falling prices.
(Other heads) Sales of other heads declined year on year due to sluggish sales of optical pickups.

HDD heads accounted for 94% of total sector sales, with sales up 36%, while other heads accounted for the remaining 6% and sales were down 20%.

Sales in the electronic components & others sector rose 10.8% to ¥5.1 billion, and accounted for 3.1% of total net sales. Sales of semiconductor manufacturing equipment, which were very strong in the previous fiscal year, have declined slightly since the beginning of the first quarter.

Next, I would like to look at the recording media segment. Segment sales declined 12.1% to ¥24.1 billion, and accounted for 14.4% of total net sales.
(Audiotapes and videotapes) Sales of audiotapes and videotapes declined year on year. While TDK maintained a high market share, demand declined.
(Optical media) Sales of optical media increased year on year, with higher DVD sales volumes driven by increasing demand offset somewhat by lower CD-R sales and prices.
(Other products) Sales of LTO-standard (Linear Tape-Open) tape-based data storage media for computers increased. However, sales of other products decreased year on year, mainly because of the termination of recording equipment and other businesses as part of efforts to prioritize management resources.

As a result, audiotapes and videotapes accounted for 28% of segment sales and sales were down 23% year on year. Optical media sales accounted for 49% of segment sales and sales were up 3% year on year. Other products accounted for the remaining 23% of segment sales and sales were down 23% year on year.

By market field in the electronic materials and components segment, sales to the IT home electronics field increased 19% and accounted for 67% of segment sales. Sales to the high-speed, large-capacity networks field were down 8% and accounted for 8% of segment sales. Sales to the car electronics field rose 10% and accounted for 9% of segment sales. TDK is concentrating on these three categories as strategic areas. Sales to other fields declined 8% and accounted for 16% of segment sales.

Turning to sales by region, please refer to the bottom of page 11. Sales in Japan increased 3.1%, as higher sales in recording devices outweighed lower sales in all other product sectors. Sales declined 8.3% in the Americas, with sales down in all product sectors, except electronic devices. In Europe, sales declined 8.6%, with sales down in all product sectors. In Asia and other areas sales increased 15.6%. Sales in the electronic devices, recording devices and electronic components & others sectors were up as customers continued to shift manufacturing bases to this region.

Overseas sales accounted for 73.7% of consolidated net sales, up 0.9 of a percentage point.

Please turn to the consolidated income statements on page 8.

Operating income declined ¥1.5 billion year on year. The main positive factors were higher sales, including improvements in the capacity utilization rate and product mix, which contributed ¥9.2 billion, lower materials costs, which contributed ¥3.9 billion, and rationalization and cost cutting, which contributed ¥10.7 billion. This meant that positive factors lifted earnings by a total of ¥23.8 billion.

Turning to factors that negatively affected earnings, sales price discounts had a ¥23.9 billion detrimental effect, R&D expenses increased ¥0.9 billion and the yen's slight appreciation against the U.S. dollar affected earnings by ¥0.6 billion. These and other factors resulted in a combined negative effect on earnings of ¥25.3 billion. The net result of the positive and negative effects was a ¥1.5 billion decline in operating income.

The downward pressure on prices remained as severe as ever. In HDD heads, the prolonged lifespan of 80GB/P continues to be an issue. Although the share of sales of 80GB/P products within our product mix is declining because of the gradual shift to 100GB/P and 120GB/P products, the weighting of long-lived 80GB/P still remains high. Discounting on 80GB/P products is heavy. Sales price discounts on electronic materials and components segment, including HDD heads, was more than 10% on average. Recording media also continued to face severe downward pressure on prices, particularly DVDs.

Income taxes declined ¥1.2 billion year on year. This was one of the major factors for the increase in net income, despite the decline in operating income. As you know, TDK received correction notices from the Japanese tax authorities based on transfer pricing taxation laws. Regardless of whether we agree or disagree with them, we are obliged to pay the additional taxes once we receive these assessments. Taxes on the additional taxable income of ¥21.3 billion that has been assessed have been received from the companies with whom the transfer pricing transactions in question were conducted. But because of concerns that these payments will leave these companies short of funds for their business activities, in principle, we plan to suspend the planned dividends of these companies.

On a consolidated basis, the additional taxes from the correction notices will result in an amendment to the past fiscal year's earnings. Because we are aware of these additional taxes now, before we file our Form 20-F for fiscal 2005 with the SEC in August, we will amend our financial statements for that fiscal year. However, foregoing dividends from applicable companies for the current fiscal year will reduce our taxes. As a result, because taxes will be lower than in fiscal 2005, we expect earnings to increase in fiscal 2006.

Below income taxes, you will see an item "loss from discontinued operations." In the first quarter of fiscal 2006, there was a ¥0.5 billion improvement in this item, which was another reason for the increase in net income. In the first quarter of fiscal 2005, we reported an operating loss in semiconductor operations. We sold these operations in the fourth quarter of fiscal 2005 and provided allowances for estimated divestment expenses. But because these allowances were a little on the high side, we reversed part of these allowances in the first quarter of fiscal 2006 following the closure of the sale agreement. This action boosted our earnings slightly in the form of a ¥0.5 billion improvement in "loss from discontinued operations."

Please now refer to segment information on the upper half of page 11. By segment, electronic materials and components recorded operating income of ¥15.4 billion, which represented only a small increase of ¥0.1 billion year on year. This was one of the notable features of our first-quarter results, as was mentioned earlier. Simply put, while HDD head earnings increased, earnings from capacitors decreased. Recording media, meanwhile, posted an operating loss of ¥2.5 billion, ¥1.6 billion more than in the first quarter of fiscal 2005.

Please look at the balance sheets on page 9 of the earnings report, the cash flows on page 4 and statements of cash flows on page 10. The comparisons I will draw are with March 31, 2005.

Total assets stood at ¥823.1 billion, up ¥15.1 billion. The yen depreciated ¥3.23 against the U.S. dollar, from ¥107.39 as of March 31, 2005 to ¥110.62 at June 30, 2005. This depreciation contrasts with the average exchange rate for the period. During the same period, the yen appreciated ¥5.24 against the euro, strengthening from ¥138.87 to ¥133.63. Because we have more assets denominated in US dollars than in euros, these changes had the net effect of increasing yen translations of overseas assets by approximately ¥9.0 billion. Total assets includes ¥7.6 billion in assets of the Hong Kong polymer lithium battery manufacturing and sales company we acquired in May this year.

Cash and cash equivalents declined ¥13.7 billion. Operating activities provided net cash of more than ¥10.0 billion. The main positive factors were net income of approximately ¥10.7 billion, and depreciation and amortization of about ¥13.0 billion, while the main negative factors were an increase in inventories and a decrease in net income taxes payable.

Investing activities used net cash of about ¥21.9 billion, including ¥12.6 billion for capital expenditures and ¥10.6 billion for the acquisition of a company.

Financing activities used net cash of around ¥5.1 billion. The bulk of this represented dividends paid and reflected the increase in the per-share year-end dividend to ¥40.

Exchange rate changes had a positive effect on cash flows, with the net result being a ¥13.7 billion decrease in cash and cash equivalents during the first quarter. Compared with the first quarter of fiscal 2005, when cash and cash equivalents rose around ¥3.5 billion, this represented a difference of ¥17.2 billion. While capital expenditures and payments for the purchase of a company was one reason, the increase in inventories also lowered cash flows. Including the effect of exchange rate changes, inventories increased ¥8.8 billion. Exchange rate changes accounted for ¥1.0 billion of this, the company we acquired represented ¥1.2 billion and the remainder of the increase was mostly the result of a rise in HDD head inventories. We intend to keep a close eye on inventory levels to prevent an increase, while keeping in mind the need to maintain adequate inventories to fill customer orders.

Accumulated other comprehensive income (loss) improved by about ¥5.9 billion. You can find a detailed breakdown of this account in note 3 on page 12. A ¥6.3 billion improvement in foreign currency translation adjustments was the main reason for the improvement.

Finally, I would like to cover TDK's projections for fiscal 2006, ending March 31, 2006 on page 5 of the handout. In short, there has been no change to the consolidated projections for fiscal 2006 that we announced on April 27 this year. Our forecasts therefore assume an exchange rate of ¥100 to the US dollar as before.

On April 27, we announced projections for the first half of fiscal 2006 and full year. Rather than confusing you by changing forecasts at the end of the first quarter, we believe it is better to revise forecasts if necessary once we know our first-half results.

Regarding our current forecasts, in terms of market conditions for electronic components, we expect conditions to remain a little weak in the second quarter as in the first quarter. However, we are assuming a gradual increase in demand because of higher demand for finished products in the second half of fiscal 2006. Capacitor results are improving, but the effects of production yield problems will likely linger in the second quarter. A full-fledged turnaround in capacitors probably won't happen until the third quarter.

In regards to orders for HDD heads, orders were again strong in the first quarter. We expect orders to remain stable at about the same level in the second quarter, and then to pick up again in the second half of fiscal 2006 because of seasonal factors. One cause for concern though is the difficulty procuring some key components for HDDs. This has the potential to hamper earnings.

In the recording media segment, market conditions have been generally in line with the outlook that we announced at the start of the fiscal year.

Our forecasts are based on an assumed rate of ¥100 to the US dollar, whereas the average exchange rate in the first quarter was ¥107.73. This raised our first quarter earnings by around ¥2.5 billion. But part of this benefit was negated by weakness in electronic components. Nevertheless, this depreciation of the yen relative to our first-quarter assumption at the start of the fiscal year enabled the segment to report better-than-expected operating results.

As you know, TDK was assessed with large sums of additional taxes after receiving correction notices for taxable income based on transfer pricing taxation regulations. Some of you may be worried that we may receive similar notices in the future. You may also be concerned about what effect these correction notices will have on our forecasts for the current fiscal year. Without going into too much detail, we don't believe this matter should affect your investment decisions. We will also work to ensure that is the case.

TDK recently announced the acquisition of the Lambda Power Division in the power supplies field, making it a member of the TDK Group. However, the closing date of this transaction is still to be determined. Although we expect to close on October 1, because of this uncertainty, we have not included the sales and earnings of this division in our current projections of operating results.

This concludes my presentation of TDK's first-quarter results and projections for fiscal 2006.

Thank you for your attention.