[ 3rd Quarter of fiscal 2006 Performance Briefing ]Consolidated Results

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

I'm Seiji Enami. Thank you for taking the time to attend today's meeting. Your interest in TDK is greatly appreciated.

I will now present TDK's consolidated operating results for the third quarter of fiscal 2006, the three-month period ended December 31, 2005. My presentation will follow the earnings release.

As page 1 of the earnings release shows, both sales and earnings increased year on year. TDK posted net sales of ¥222,654 million, up approximately ¥48.4 billion, or 27.8%, year on year. Operating income increased approximately ¥4.0 billion, or 23.3%, to ¥21,291 million. Income before income taxes increased 27.5% to ¥22,011 million. Net income increased 35.7% to ¥16,568 million.

I'd now like to give you results for the first three quarters of fiscal 2006, the period from April 1 to December 31, 2005. These figures are shown on page 2 of the earnings release. For the nine-month period, net sales increased ¥81.3 billion, or 16.5%, year on year to ¥573,041 million. Operating income rose ¥4.3 billion, or 9.6%, to ¥49,341 million. Income before income taxes rose 14.3% to ¥53,609 million. Net income increased 19.2% to ¥38,234 million. So, TDK posted higher sales and earnings for the first nine months of the current fiscal year.

Basic net income per common share was ¥125.31 for the third quarter and ¥289.14 for the nine months to December 31, 2005.

From here, for the most part, I will report on consolidated results for the third quarter of fiscal 2006.

Average third-quarter yen exchange rates for the U.S. dollar and euro were ¥117.37 and ¥139.46 as the yen depreciated 10.8% and 1.7% against the dollar and euro, respectively. This had the effect of raising net sales by ¥15.9 billion and operating income by ¥5.4 billion.

There were four main reasons for the higher sales and earnings in the third quarter. One concerns HDD heads in the recording devices sector. In the third quarter of fiscal 2005, TDK failed to win sufficient business from new customers to make up for the loss of a major HDD head customer. In contrast, these efforts along with growing demand for HDDs in the consumer electronics market have enabled TDK not only to cover the loss of this customer, but to post a significant increase in terms of volume this fiscal year. This strong growth in sales volumes continued in the third quarter. However, due to severe price discounting and other factors, earnings have not grown as much as sales. This is a key issue for TDK.

The second reason concerns the recording media business. Although DVD prices continue to fall, ongoing structural reforms yielded a much smaller loss in the recording media business in the third quarter compared with one year earlier, helping to lift earnings.

The third main feature of our third-quarter performance concerns electronic components, namely electronic materials and electronic devices. There was a sharp increase in sales on the back of strong demand for PCs and mobile phones. In capacitors, earnings were considerably higher than in the first half of the fiscal year as sales volumes, which had been lackluster in the first half, began to pick up around September. However, due to ongoing production yield problems, we were unable to return to a normal level of quality assurance activities. Consequently, earnings are still unsatisfactory.

However, production yield problems, which had been improving, though, little by little, prevented us from releasing the additional inspection processes that we set on top of the normal inspections.

The fourth reason for higher sales and earnings relates to acquisitions of a battery company and the Lambda Power Division. Both businesses made sizeable contributions to sales and earnings.

Let's now look at a breakdown of sales, which is shown on the lower half of page 1. The breakdown shows our operating results for each segment, the share of sales for each segment and sector, and the percentage change from the same period in fiscal 2005.

First, in the electronic materials and components segment, net sales rose 33.6% to ¥192.1 billion and accounted for 86.3% of total net sales. In the electronics market in the third quarter of fiscal 2006, in comparison with one year earlier, demand for notebook PCs, HDDs, flat-screen TVs and mobile phones was much higher. There was a particularly noticeable surge in demand for MP3 digital audio players. A strong car electronics market and a weaker yen also helped to boost sales in this segment.

In the electronic materials sector of the segment, sales increased 10.7% to ¥47.6 billion and accounted for 21.4% of total net sales.
(Capacitors) Capacitor sales increased year on year despite lower sales prices, as we benefited from strong demand for products in the IT home electronics and car electronics markets and were able to keep pace with this demand.

(Ferrite cores and magnets) Sales of ferrite cores and magnets rose year on year due to increasing demand for cores for coils and power supplies, higher sales of rare-earth magnets on increasing HDD demand and the beneficial effect of the weaker yen.

As a result, capacitors sales were up 11% year on year, accounting for 69% of sector sales. Ferrite cores and magnets accounted for the remaining 31%, and sales were also up 11% year on year.

Sales in the electronic devices sector leapt 53.7% to ¥47.0 billion, and accounted for 21.1% of total net sales. The large increase in sales reflects the inclusion for the first time of the operating results of the Lambda Power Division. However, sales in existing businesses also rose.
(Inductive devices) Sales of inductive devices increased on strong growth in sales of power line coils for use in mobile phones, HDDs and other products.
(High-frequency components) Sales of high-frequency components were slightly down due to lower sales prices. However, orders for wireless LAN components remained strong.
(Other products) Sales of other products rose sharply due to the addition of sales of the Lambda Power Division. Sales of DC-DC converters and DC-AC inverters for use in amusement equipment were much higher. Sensors and actuators for HDDs and mobile phones also recorded higher sales.

As a result, in the third quarter of fiscal 2006, inductive devices sales increased 29% and accounted for 38% of total sector sales. High-frequency components accounted for 7% and sales were down 5%. Other products accounted for the remaining 55% and sales were up 94%.

In the recording devices sector, sales rose 31.2% to ¥85.7 billion and accounted for 38.5% of total net sales.
(HDD heads) Sales grew markedly, with growth in demand for heads used in PC HDDs as well as the increasing use of HDD heads in consumer electronics outweighing a drop in sales prices.
(Other heads) Sales of other heads declined as companies reduced inventories of optical pickups.

Overall, HDD heads accounted for 95% of total sector sales and sales were up 34% year on year. Other heads, including optical pickups, accounted for the remaining 5% and sales were down 5% year on year.

In other electronic components, sales rose 143.9% to ¥11.8 billion and accounted for 5.3% of total net sales. The increase in sector sales was driven by organic EL displays, which generated significant sales for the first time, and the inclusion of the results of a new battery subsidiary.

The increase in sector sales was driven by organic EL displays, which generated a significant sales growth for the first time,

Sales in the recording media segment edged up 0.3% to ¥30.6 billion and accounted for 13.7% of total net sales, much less than in the past.
(Audiotapes and videotapes) In audiotapes and videotapes, demand continued to decline.
(Optical media) In optical media, CD-R sales have peaked and are declining. Sales of DVDs rose on higher volume, even though prices continue to fall. As a result, optical media sales increased overall.
(Other products) In other products, sales of LTO-standard* (Linear Tape-Open) tape-based data storage media for computers rose. However, sales of other recording equipment & accessory products declined as TDK made progress with efforts to create a more tightly focused product lineup.

In the recording media segment, audiotape sales declined 10% year on year and represented 5% of segment sales. Videotape sales were down 21% and accounted for 21% of sales. Sales of optical media products rose 14% and accounted for 50% of sales. Other products sales rose 2% and accounted for 24% of segment sales.

Please turn to the third-quarter consolidated income statements on the upper half of page 9. Operating income increased ¥4.0 billion year on year. The main positive factors were higher sales, including improvements in the capacity utilization rate and product mix, which contributed ¥15.9 billion; lower materials costs and rationalization and cost-cutting contributed ¥13.1 billion; and exchange rate fluctuations contributed ¥5.4 billion. Positive factors lifted earnings by a total of ¥34.4 billion.

Turning to factors that negatively affected earnings, a continuation of severe sales price discounts had a ¥23.3 billion detrimental effect, and selling, general and administrative expenses increased ¥7.1 billion due to acquisitions. The combined negative effect on earnings was thus ¥30.4 billion. In the third quarter, price discounting remained severe in electronic components, recording media and HDD heads.

Structural reform expenses rose ¥0.7 billion from ¥0.2 billion last year to ¥0.9 billion in the third quarter of fiscal 2006. Furthermore, in the third quarter of fiscal 2005, TDK recorded a one-time gain of ¥1.8 billion from the sale of a logistics subsidiary. There was no such gain in the third quarter of fiscal 2006. Given this, the ¥4.0 billion increase in operating income was effectively ¥6.5 billion.

The other-net component of other income (deductions) was ¥1.8 billion lower than in fiscal 2005, reflecting a ¥1.0 billion loss on the write-down of marketable securities and a ¥0.8 billion decline in the assessed equity value of an affiliate. Both amounts relate to ELDis, Inc.'s termination of activities involving TFT substrates for organic EL displays, as reported in the newspapers recently. TDK owns a 5% equity interest in this company, equating to an investment of ¥1.0 billion. The full amount of this investment has now been written off as impaired.

TDK has a minority share of a company which is a parent of ELDis, Inc. Since ELDis, Inc goes into liquidation, its parent company will have an negative impact due to this liquidation, which again forces TDK to reevaluate the share value of this affiliate.

Please look at the balance sheet on page 10 of the earnings release.

Total assets stood at ¥903.1 billion, up ¥63.8 billion. The yen depreciated by 4.3% against the U.S. dollar compared with September 30, 2005 to ¥118.07 at December 31, 2005. During the same period, the yen depreciated 2.7% against the euro, falling to ¥139.83. These changes had the effect of increasing yen translations of overseas assets by ¥19.9 billion, which was one of the reasons for the increase in total assets.

Cash and cash equivalents declined ¥23.8 billion from September 30, 2005 to ¥200.8 billion. One reason was an approximate ¥24.3 billion outflow for the October 1 purchase of the Lambda Power Division, net of cash acquired. In addition, although TDK generated net income of ¥16.6 billion and exchange rate changes had a positive effect of ¥5.0 billion on cash flows, there were outflows due to capital expenditures exceeding depreciation and amortization, an increase in trade receivables and other changes. As a result, cash declined by an amount equivalent to the funds used for acquisitions.

Please note that when looking at the cash flow statement on the next page, the differences in cash on the balance sheet and cash flow statement between September 30 and December 31, 2005 won't necessarily match. On the cash flow statement, the ¥24.3 billion for the October 1 acquisition of the Lambda Power Division is shown as one figure under "Payment for purchase of a subsidiary, net of cash acquired" in the investing activities section.

Accordingly, in the third quarter, operating activities provided net cash of ¥20.1 billion; investing activities used net cash of ¥44.6 billion, mainly for corporate acquisitions and capital expenditures; and financing activities used net cash of ¥4.3 billion. After the positive effect of exchange rate changes, the net decrease in cash and cash equivalents was ¥23.8 billion.

On the balance sheet, net trade receivables increased ¥35.7 billion from September 30, 2005. Of this amount, ¥13.3 billion was due to the purchase of the Lambda Power Division. The remaining ¥22.4 billion relates to existing businesses. This increase is normal because sales in existing businesses rose by approximately ¥40.0 billion between the second and third quarters.

Inventories increased ¥10.7 billion to ¥97.1 billion, with ¥9.2 billion of this representing inventories of the Lambda Power Division and ¥2.5 billion the result of exchange rate fluctuations. Inventories at continuing businesses actually declined by ¥1.0 billion, resulting in the overall increase in inventories of ¥10.7 billion.

Accumulated other comprehensive loss, a component of stockholders' equity, decreased ¥15.5 billion from ¥38.0 billion to ¥22.6 billion, as shown on page 13. The ¥22.6 billion comprises foreign currency income adjustments of ¥20.2 billion, minimum pension liability adjustments of ¥3.2 billion and net unrealized gains on securities of ¥0.8 billion.

Please turn to the segment information on page 14.

First, operating income in the electronic materials and components segment increased ¥2.6 billion, or 13.4%, to ¥22.2 billion. Without counting reform charges, TDK's total operating income happens to be equivalent to the operating income of this segment. The recording media segment recorded an operating loss of ¥0.9 billion, but this was ¥1.4 billion better than one year earlier. The reason for this equation is because the recording media profit was negative ¥0.9 billion, including reform charges of ¥0.9 billion.

Regarding the electronic materials and components segment, there were higher sales volumes of capacitors and HDD heads, our core earnings drivers. However, sales price discounting and other factors meant that higher volumes didn't translate directly into profits. This is an issue TDK must address in this segment.

Regarding the recording media segment, we are continuing to implement structural reforms. Although we are still recording a loss, we feel that we are on the verge of turning things around. Excluding structural reform expenses, we are determined to generate a profit in the fourth quarter.

At the very bottom of page 14 you will see a breakdown of sales by region.

In Japan, sales declined 11.7% to ¥43.5 billion, the result of lower sales in the recording devices sector, which was strong overall.

In the Americas, sales climbed 28.4% to ¥25.3 billion, with sales up in all product sectors. The weaker yen also boosted sales.

Sales in Europe increased 21.5% to ¥22.6 billion. Sales were up in all product sectors, except recording devices.

In Asia (excluding Japan) and other areas, sales surged 51.5% to ¥131.2 billion.

The overall result was a 43.4% increase in overseas sales year on year to ¥179.1 billion. Overseas sales grew to account for 80.5% of consolidated net sales.

Finally, I would like to cover TDK's consolidated projections for fiscal 2006, ending March 31, 2006. These forecasts are shown on page 7.

When we announced our interim results, we projected net sales of ¥725.0 billion, operating income of ¥68.0 billion, income before income taxes of ¥72.5 billion and net income of ¥51.0 billion. We are now projecting net sales of ¥765.0 billion, an increase of ¥40.0 billion, and the same operating income, income before income taxes and net income as previously forecast.

We are assuming an average yen-U.S. dollar exchange rate of ¥110 for the fourth quarter.

Our fourth-quarter forecasts for the electronic materials and electronic devices sectors call for strong performances to continue, so we don't expect to see a major fall in sales. However, there will probably be a slight correction from the third quarter.

Regarding HDD heads, we are expecting sales to drop slightly from the third quarter due to seasonal factors. However, we expect demand to continue increasing for HDD applications in the consumer electronics market.

In the recording media segment, we are forecasting a large drop in sales in the fourth quarter from the third quarter due to seasonal factors and to structural reforms that aim to create a more tightly focused product lineup.

As a result, we are assuming an approximate ¥30.0 billion quarter-on-quarter decrease in net sales overall.

Regarding structural reform expenses, in addition to the ¥4.5 billion planned for the recording media segment, we are forecasting an additional ¥2.0 billion for restructuring in electronic components in the fourth quarter. Without these restructuring measures in electronic components, our operating income projection would have been ¥70.0 billion, instead of ¥68.0 billion.

While we are projecting lower quarter-on-quarter net sales and higher restructuring expenses, we are determined to attain the same earnings as previously forecast. We hope to absorb the fourth-quarter fall in net sales with better performances in capacitors and recording media as well as higher earnings at the Lambda Power group and in other electronic component areas.

This completes my remarks concerning third-quarter operating results and our outlook for the fiscal year.

Thank you.