[ 3rd Quarter of fiscal 2007 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 2007, the three-month period ended December 31, 2006. My presentation will follow the earnings release before you.

As the upper part of page 1 of the earnings release shows, although there was only a small increase in net sales, TDK posted higher earnings year on year. Net sales were ¥223,253 million, up marginally by about ¥0.6 billion, or 0.3%, year on year. However, operating income increased approximately ¥1.9 billion, or 8.7%, to ¥23,141 million. Income from continuing operations before income taxes rose about ¥4.0 billion, or 18.3%, to ¥26,048 million. Net income climbed about ¥3.1 billion, or 18.7%, to ¥19,669 million.

I'd now like to give you results for the first three quarters of fiscal 2007, the period from April 1 to December 31, 2006. These figures are shown on page 2 of the earnings release. For the nine-month period, net sales increased about ¥75.1 billion, or 13.1%, to ¥648,091 million. Operating income rose approximately ¥12.1 billion, or 24.5%, to ¥61,405 million. Income from continuing operations before income taxes climbed 25.7% to ¥67,377 million. Net income rose 28.9% to ¥49,291 million. So, TDK also posted higher sales and earnings for the first nine months of the current fiscal year.

Basic net income per common share was ¥148.69 for the third quarter alone and ¥372.58 for the nine months to December 31, 2006.

The rest of my presentation will focus on consolidated results for the third quarter of fiscal 2007, the period from October 1 through December 31.

Average third-quarter yen exchange rates for the U.S. dollar and euro were ¥117.83 and ¥151.95, as the yen depreciated slightly against the dollar and by about 9.0% against the euro. Because the share of euro-denominated transactions is small as a whole, these forex movements only boosted net sales by about ¥2.4 billion and operating income by roughly ¥0.2 billion. Currency movements had very little impact on TDK's third-quarter operating results compared with the previous year.

There were four main reasons TDK posted higher earnings on only slightly higher net sales in the third quarter. One concerns the recording devices sector. Volume declined due to the loss of one major HDD heads customer. However, growth in demand for HDDs for use in PCs as well as increasing demand for HDDs in the consumer electronics market enabled TDK to post higher sales volume overall. Notwithstanding this increase, severe price discounting pressure led to a large decline in sales in monetary terms, with the higher volume failing to offset this impact. However, compared with the second quarter of fiscal 2007 and the third quarter of the previous fiscal year, the drop in earnings wasn't that large.

The second reason concerns the recording media business. This business just managed to turn a profit following several years of structural reforms.

The third main feature of our third-quarter performance concerns electronic components. Our operations benefited from strong conditions in the industry as a whole, characterized by robust production of flat-screen TVs and mobile phones as well as the increasing use of electronics in automobiles. That said, growth in these components was sufficient only to offset the drop in recording devices and recording media, resulting in only a slight increase in sales.

Fourthly, interest income in other income and other factors also boosted earnings.

Let's look now 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 2006.

In the electronic materials and components segment, net sales rose 1.3% to ¥194.5 billion and accounted for 87.1% of total net sales. The third quarter is a period of strong demand for the electronics market. There was robust demand for flat-screen TVs, notebook PCs and digital audio players, as well as an increase in new demand for mobile phones, particularly from the so-called BRICs nations of Brazil, Russia, India and China. Together with the increasing use of electronics in automobiles, this fueled strong demand for electronic components for the aforementioned applications.

Electronic materials saw sales rise 5.6% to ¥50.3 billion and account for 22.5% of overall net sales. Sales of capacitors increased year on year, mainly for use in PCs. In ferrite cores and magnets, there was a year-on-year increase in sector sales, as higher sales of both ferrite magnets and rare earth magnets in the magnets category outweighed a decrease in sales of ferrite cores due to the termination of some products. As a result, capacitor sales were up 7% year on year and accounted for 69% of sector sales. Ferrite cores and magnets accounted for the remaining 31% and sales were up 4% year on year.

Sales in the electronic devices sector rose 7.6% to ¥50.5 billion, and accounted for 22.6% of total net sales. Sales of inductive devices increased year on year on strong growth in sales of power line coils for use in mobile phones and multilayer products. Sales of high-frequency components declined due to lower sales volume and sales prices. Sales of other products increased on growth in sales of power systems, although sales of sensors and actuators fell slightly due to lower sales prices.

As a result, in the third quarter of fiscal 2007, inductive devices sales increased 11% and accounted for 39% of total sector sales. High-frequency components accounted for 5% and sales were down 21%. Other products accounted for the remaining 56% and sales were up 9%.

In the recording devices sector, sales declined 10.4% to ¥76.8 billion and accounted for 34.4% of total net sales. TDK's HDD head sales volume increased as growing demand not only for HDDs used in PCs but also for applications such as consumer electronics countered the detrimental effects of HDD industry restructuring. However, the higher volume was outweighed by a fall in sales prices due to competition for market share among HDD manufacturers, leading to an overall drop in HDD head sales. Sales of other heads, including optical pickups, declined year on year.

Overall, HDD heads accounted for 95% of total sector sales and sales were down 11% year on year. Other heads accounted for the remaining 5% and sales were down 7%.

In other electronic components, sales rose 43.8% to ¥16.9 billion and accounted for 7.6% of total net sales. This result reflected higher sales of new products such as semiconductor production equipment and organic EL displays.

Sales in the recording media segment declined 6.1% to ¥28.7 billion and accounted for 12.9% of total net sales. Sales of audiotapes and videotapes declined year on year amid falling demand for these products as a whole even though TDK maintained a high market share. Sales of optical media products rose year on year as higher sales volumes of DVDs and CD-Rs outweighed a continued fall in unit prices. Sales of other products decreased year on year. Sales of LTO-standard tape-based data storage media for computers increased, but the termination of some other products brought sales as a whole down.

As a result, in the recording media segment, audiotape sales declined 23% year on year and represented 4% of segment sales. Videotape sales were down 24% and accounted for 17% of sales. Sales of optical media products increased 3% and accounted for 55% of sales. Other products sales decreased 6% and accounted for 24% of segment sales.

Please turn to the third-quarter consolidated income statements on page 9. Operating income increased by just under ¥1.9 billion year on year. The main positive factors were higher sales, including improvements in the capacity utilization rate and product mix, which contributed ¥17.9 billion; lower materials costs and rationalization and cost-cutting contributed ¥4.4 billion; and exchange rate fluctuations contributed ¥0.2 billion. Positive factors lifted earnings by a total of ¥22.5 billion.

Turning to factors that negatively affected earnings, sales price discounts had a ¥17.2 billion detrimental effect, and selling, general and administrative expenses increased ¥3.4 billion. The combined negative effect on earnings was thus ¥20.6 billion. The net result of these positive and negative factors was a ¥1.9 billion increase in operating income.

Regarding requests for price discounts, discounting pressure was more severe in the third quarter than in the previous two quarters because the third quarter was a period of strong demand for electronic components, recording media and HDD heads. Furthermore, amid a run-up in prices for natural resources, such as crude oil and copper, we weren't able to lower raw materials costs as much as we had expected despite our best efforts. Regarding structural reform expenses, these expenses were ¥0.9 billion in the third quarter of fiscal 2006, but only ¥0.4 billion in the third quarter under review, a year-on-year decrease of ¥0.5 billion. Under generally buoyant market conditions, while the increase in earnings wasn't necessarily that large, I personally feel we performed fairly well given the conditions faced by our HDD head operations. Total other income (deductions) increased by ¥2.2 billion, with the main contributors being higher interest income and a ¥0.7 billion increase in equity-method earnings. Furthermore, in the previous fiscal year TDK recorded a ¥1.0 billion loss on the write-down of marketable securities. The absence of this charge in the current fiscal year boosted non-operating income and as a consequence the bottom line.

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

Total assets stood at ¥976.0 billion, up ¥16.6 billion. The yen depreciated ¥1.21 against the U.S. dollar from ¥117.90 at September 30, 2006 to ¥119.11 at December 31, 2006. During the same period, the yen depreciated ¥6.73 against the euro from ¥149.77 to ¥156.50. These changes had the effect of increasing yen translations of overseas assets by ¥9.4 billion between the two dates.

Cash and cash equivalents increased ¥3.2 billion from September 30, 2006 to ¥268.1 billion. The effective increase, however, was ¥0.8 billion because of the ¥2.4 billion effect of exchange rate changes on cash and cash equivalents. In addition, TDK generated net income of ¥19.7 billion and depreciation and amortization had a positive effect of ¥16.8 billion. On the other hand, there was ¥15.1 billion in outflows for capital expenditures, a net outflow of ¥6.7 billion for short-term investments, and the payment of dividends used ¥6.6 billion in cash. Cash was also used by a ¥7.3 billion decrease in trade payables and other factors. Positive changes were almost entirely cancelled out by negative changes, resulting in only a slight increase in cash and cash equivalents at the end of the period.

In the third quarter, operating activities provided net cash of ¥29.0 billion, investing activities used net cash of ¥21.7 billion, and financing activities used net cash of ¥6.5 billion. Combined with the ¥2.4 billion positive effect of exchange rate changes, cash and cash equivalents at December 31, 2006 were ¥268.1 billion. Compared with the previous fiscal year, when there was a ¥23.8 billion decrease in cash and cash equivalents, in the period under review cash and cash equivalents increased ¥3.2 billion. This large difference was mainly accounted for by the outflow for the purchase of the Lambda Power Division in the previous fiscal year.

Total stockholders' equity increased ¥19.2 billion to ¥744.4 billion, the result mainly of an increase in retained earnings as TDK generated a profit. The net improvement in accumulated other comprehensive loss, a component of stockholders' equity, contributed ¥5.9 billion to the overall increase. Foreign currency translation adjustments improved ¥5.6 billion to a negative ¥13.5 billion due to the yen's depreciation, minimum pension liability adjustments improved ¥0.5 billion to a negative ¥2.5 billion due to improving pension assets, and net unrealized gains on securities decreased ¥0.2 billion to ¥1.2 billion. Accumulated other comprehensive loss is the sum of foreign currency translation adjustments, minimum pension liability adjustments and net unrealized gains on securities.

Please turn to the segment information on page 16.

First, operating income in the electronic materials and components segment increased ¥0.8 billion, or 3.6%, to ¥23.0 billion, as electronic components offset a decrease in HDD heads in the recording devices sector, one of the pillars of TDK's earnings. Operating income in the recording media segment was ¥0.1 billion, ¥1.0 billion better than a year earlier. Ongoing structural reforms have finally enabled the recording media segment to post a profit.

At the very bottom of page 16 you will see a breakdown of sales by region.

In Japan, sales increased 2.8% to ¥44.7 billion despite lower sales in the recording devices sector and recording media segment. The higher sales reflected growth in other sectors.

In the Americas, sales rose 6.1% to ¥26.9 billion, with sales up in all product sectors, apart from electronic materials and the recording media segment.

Sales in Europe declined 1.3% to ¥22.3 billion, reflecting decreases in other electronic components and the recording media segment.

In Asia (excluding Japan) and other areas, sales decreased 1.4% to ¥129.4 billion.

The overall result was a 0.4% decrease in overseas sales year on year to ¥178.5 billion. Overseas sales accounted for 80% of consolidated net sales, a slight decrease from 80.5% in the previous fiscal year.

Finally, I would like to cover TDK's consolidated projections for fiscal 2007, ending March 31, 2007. These forecasts are shown on page 7.

Previously, we were projecting net sales of ¥820.0 billion, operating income of ¥82.0 billion, income from continuing operations before income taxes of ¥88.0 billion and net income of ¥61.0 billion. Our projections for operating income and income from continuing operations before income taxes are unchanged but we are now forecasting net sales of ¥853.0 billion and net income of ¥63.0 billion, a slight increase in projected earnings.

The reason for the revisions is that since the beginning of January, conditions following the year-end holiday sales period have become clear. Data suggest that inventory levels of main products such as digital home appliances and mobile phones are at suitable levels. Our revised sales projection therefore assumes that no major reduction in inventories will be necessary. In terms of earnings, however, there has been no change to pre-tax forecasts because of severe discounting pressure. Our exchange rate forecast is ¥118, reflecting the actual third-quarter rate. Regarding electronic materials and electronic devices, TDK is projecting a year-on-year increase in sales, whereas with HDD heads, while TDK expects sales volume of a similar level to the third quarter to cancel out the negative effects of industry restructuring, it forecasts lower monetary sales due to price discounting.

In recording media, we expect to generate a profit, although sales are likely to fall.

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

Thank you.