Amendment Conference for Fiscal 2009 Consolidated Projections(Announced on Jan. 8, 2009)

Mr. Seiji Enami
Director
Executive Vice President

Good afternoon. My name is Seiji Enami. First, thank you for taking time out of your busy schedules to attend today's meeting in large numbers, as well as for your continuing support of TDK. This year, our announcement of third-quarter results was later than usual due to the inclusion of EPCOS AG within the TDK Group. Allow me to take this opportunity to apologize in advance for the announcement of year-end results, which will also be held later than usual this year.

Without further ado, I would like to report on TDK's consolidated results for the third quarter of the fiscal year ending March 31, 2009, and our projections for the full year. I will be using slides as part of this presentation.

First is an overview of consolidated results for the third quarter. While the first half of the year saw less than stellar results, the third quarter (October to December) saw economic conditions worsen from October. Declines were rapid and steep, causing a complete change in the business landscape. So rather than discuss cumulative results for the nine-month period, I think it best to begin my discussion of results from the third quarter.

These figures include those from EPCOS. Net sales were ¥191,779 million, down ¥33,563 million, or 14.9%. We posted an operating loss of ¥5,109 million, representing a worsening of ¥31,826 million year on year. The loss before income taxes for the quarter was ¥15,129 million, worsening ¥43,769 million year on year. The net loss for the quarter was ¥14,317 million, worsening ¥36,030 million from the same quarter a year earlier. As you can see, these results represent sharp top- and bottom-line declines for the quarter. Currency exchange rates were responsible for ¥24.0 billion of the deterioration in net sales and ¥7.1 billion of that in operating profitability, due to the yen's sharp appreciation against the dollar and the euro.

Characteristic of the third quarter, demand in the electronics market where TDK operates declined suddenly for electronic devices, causing manufacturers to sharply cut back production. Typically when business results worsen, the first step in this process is a downturn in net sales due to a decrease in orders. In other words, capacity utilization declines. In the second stage, capacity utilization is scaled down intentionally to adjust inventories, which are relatively large as a result of the initial decline in operations. The third stage is a pattern whereby restructuring costs are incurred in implementing structural reforms to cope with changes or abnormalities in the business environment, causing business performance to deteriorate further. If I had to choose, I would say that TDK's third-quarter results strongly reflect what we expect to see in the first stage of this process.

While some adjustments to capacity utilization were made and some structural reforms conducted following the precipitous downturn in December, most of what we saw was still in the first stage. The decline in capacity utilization from decreased orders is likely to continue into the fourth quarter. Results for the quarter will probably strongly reflect the intentional scale down of capacity utilization expected in the second stage and the structural reforms associated with the third stage. Since EPCOS AG is in the same electronic components industry as TDK, the situation both companies face is essentially identical. Exchange rates, as I mentioned earlier, saw the yen higher compared to the previous year. However, in the third quarter, the yen appreciated even compared to the second quarter.

To divide the figures stated into those from the EPCOS Group and from the TDK Group prior to EPCOS' consolidation, net sales from the TDK Group were ¥155.9 billion, down ¥69.4 billion, or 30.8%. The operating loss was ¥2.1 billion, or a year-on-year decline of ¥28.9 billion. The EPCOS Group recorded ¥35.9 billion in net sales and an operating loss of ¥3.0 billion. While not written here, consolidated results also included a loss before income taxes of ¥3.6 billion and a net loss of ¥3.8 billion from EPCOS.

I stated earlier that the TDK Group's operating loss was ¥2.1 billion, but this figure included ¥3.9 billion in restructuring costs. Of that ¥3.9 billion, though, ¥3.6 billion was part of the ¥15.0 billion that we announced on January 8 that we wanted to use for restructuring costs. Similarly, of the ¥3.0 billion loss booked by EPCOS, ¥0.4 billion of that is mainly for restructuring costs pertaining to personnel rationalization. In terms of net sales, the weight of TDK is 81% and the EPCOS Group 19%.

Now, I would like to report on sales by product for the TDK Group, as well as year-on-year change, the rate of growth, and the composition of sales.

Of the ¥155.9 billion in net sales for the TDK Group, electronic materials accounted for ¥32.0 billion, a year-on-year decline of ¥19.4 billion, or 38%. This represented 21% of net sales. Sales of the capacitors that comprise electronic materials declined heavily in PCs, AV and game equipment, mobile phones, and car electronics. Capacitors accounted for 63% of sales of electronic materials, a year-on-year decline of 42%. Sales of ferrite cores and magnets have also fallen in their respective sectors-those related to HDDs for metallic magnets, automobiles for ferrite magnets, and power supply transformers for ferrite cores. As a result, these products accounted for 37% of sales of electronic materials, a year-on-year decline of 28%.

Sales in the electronic devices sector fell ¥14.9 billion year on year to ¥38.4 billion, a decline of 28%. This figure accounted for 25% of net sales. Inductive devices, which comprise a large share of the electronic devices sector, consist of coils for the auto market, EMC products for flat-screen TVs, and transformers for power supplies, with sales lower in each of these applications. Inductive devices accounted for 46% of sector sales, a 30% decrease from the previous year. Sales of high-frequency components were down 54% year on year, as sales of these products for PCs fell sharply, and accounted for 5% of sector sales. Other products, which include power supply sensors, decreased 21% year on year, mainly as sales declined on adverse conditions in the semiconductor market, and accounted for 49% of sector sales.

In the recording devices sector, sales were ¥58.4 billion, a year-on-year decline of ¥31.6 billion, or 35%. Sales of recording devices accounted for 37% of net sales. HDD head sales decreased 40% year on year due to contracting demand, lower sales volume, and falling sales prices and accounted for 90% of sector sales. Other products, namely components such as other heads, saw sales increase 192% year on year, reflecting TDK's purchase of HDD suspension assemblies manufacturer MPT, and accounted for 10% of sector sales.

In the Other category, sales were ¥27.1 billion, down ¥3.6 billion or 12% year on year. Sales accounted for 17% of net sales. Batteries alone saw extremely healthy sales, recording sales growth on greatly increased demand.

Next, I will discuss the consolidated statements of income. I will later discuss the restructuring costs of ¥3.6 billion and deterioration of ¥31.8 billion in operating profitability, but first I would like to explain why we booked total other deductions that were so substantial for the quarter.

We incurred an interest expense of ¥1.1 billion. The interest expense for funds borrowed by TDK for the purchase of EPCOS AG was just under ¥0.5 billion. For the EPCOS Group, it was roughly ¥0.6 billion. The loss on securities, net, booked of ¥5.3 billion was due to a decline in valuation from falling stock prices. This entire figure was for TDK only. Of the foreign exchange loss of ¥4.5 billion, ¥4.0 billion was booked by TDK and ¥0.5 billion by EPCOS. Because of the loss recorded overall, for income taxes, ¥3.3 billion in deferred tax assets booked by subsidiaries were reversed.

Now I will analyze the factors behind the decline of ¥31.8 billion in operating income. Rationalization and cost reductions and purchased materials savings contributed ¥6.2 billion to income, while decreases in SG&A expenses contributed ¥1.0 billion, for a total of ¥7.2 billion. In contrast, the decline in net sales, which included changes in capacity utilization and the product mix, caused income to fall by ¥15.3 billion; exchange fluctuations had a negative impact of ¥7.1 billion. Other sources of declining income were sales price discounts of ¥10.0 billion, ¥3.6 billion in restructuring costs, and ¥3.0 billion from consolidation of the EPCOS Group.
Ultimately, however, the deterioration of ¥31.8 billion in operating profitability was attributable to the decline of ¥69.4 billion in net sales. Let me give you a breakdown. Sales price discounts accounted for ¥10.0 billion, while currency exchange rates reduced sales by ¥22.0 billion. The remaining ¥37.4 billion reflected reduced capacity utilization due to lower orders. While ordinarily we would raise capacity utilization to offset the effects of discounts and exchange rates, this time around, capacity utilization decreased further.

Next is a comparison with the previous quarter. Here, I'll explain how the third quarter compared to the second quarter. Net sales for the third quarter, which included those from the EPCOS Group, were ¥191.8 billion, down 6.8% from the ¥205.9 billion recorded for the second quarter. The TDK Group alone saw sales decline from ¥205.9 billion to ¥155.9 billion. This represented a decline of ¥50.0 billion, or 24.3%, from the preceding quarter. Sharply lower sales were seen in all business segments.

Of the ¥50.0 billion decrease in net sales from the preceding quarter, currency exchange rates had an impact of ¥15.0 billion compared to the second quarter, and a roughly ¥5.5 billion effect on operating profitability. The remaining ¥35.0 billion decrease was due to discounts and reduced orders. Therefore, if we assume that the combined impact on profitability of discounts and reduced orders was around half of the ¥35.0 billion decrease in net sales, then the combined impact from these factors on profitability must have been around ¥17.5 billion. Adding the effects of currency exchange rates to this, the overall negative impact was ¥23.0 billion. In contrast, although operating profitability deteriorated by ¥11.1 billion between the second and third quarters, this includes restructuring costs of ¥3.9 billion in the third quarter, versus ¥1.8 billion in the second quarter. Excluding this ¥2.1 billion difference, operating profitability actually deteriorated by around ¥9.0 billion. This means that there was an improvement of ¥14.0 billion in operating profitability relative to the estimated ¥23.0 billion negative effect on earnings. We believe these improvements suggest that benefits, however small, from personnel rationalization, reductions in expenses and rationalization we have pursued, particularly in HDD heads, were at work here.

For reference, I have presented income figures for the EPCOS Group from last year using exchange rates from this fiscal year. While both companies are confronting sharp declines in sales and earnings, the starting point for our relationship still lies ahead. After all, parts of EPCOS that normally would have meant profits have, under this environment, led to the consolidation of losses.

The next point is net sales by major customer industry. The figures listed are derived from setting industry sales in the older electronic materials and components segment, which excludes recording media and sales from the EPCOS Group, at 100. As you can see, sharp declines of around 30% were recorded in each area.

Next, I would like to discuss the balance sheets. Here, our comparison is with September 30, the end of the second quarter. Total assets stood at ¥1,136.2 billion as of December 31, 2008, an increase of ¥73.0 billion from the second quarter. Exchange rates as of December 31, 2008 were ¥91 to the U.S. dollar, and ¥128 to the euro. This represents an appreciation of ¥12.5 and ¥21.1, respectively, compared to September 30. As a result, the monetary impact on total assets from conversion of assets denominated in foreign currencies into yen was a negative ¥73.4 billion. The fact that total assets increased by ¥73.0 billion, in spite of this erosion pertaining to yen conversion, stems from several factors. One is that by the end of September, only the funds that TDK had borrowed for purchasing around 45% of EPCOS' shares, and the investment account related to this purchase, were recorded at that point. In contrast, EPCOS' total assets were incorporated as of the end of the third quarter, since nearly 95% of EPCOS shares had been acquired by the end of December. Another factor was ¥56.8 billion in goodwill that emerged in the process of offsetting investment accounts, since ¥165.1 billion had been used to purchase 95% of EPCOS' shares.

Since each balance sheet item was considerably complicated by changes to most figures from the consolidation of EPCOS, I will briefly discuss just a few key items. In a breakdown of ¥177.2 billion in cash and cash equivalents, TDK accounted for ¥159.2 billion and EPCOS for ¥18.0 billion. The decline for TDK was ¥14.4 billion. One factor that increased cash and cash equivalents was borrowings of ¥108.3 billion. For depreciation and amortization, investment within the scope of depreciation and amortization has a positive effect of ¥1.9 billion. In contrast, we recorded calculated losses of ¥10.9 billion and ¥85.6 billion for EPCOS AG stock. Dividends were ¥9.0 billion. Erosion from currency exchange was ¥20.4 billion. From these factors, TDK's cash declined by ¥14.4 billion. Of the ¥128.1 billion in inventories, TDK accounted for ¥91.4 billion. While currency exchange eroded inventories by ¥7.4 billion, inventories were still ¥2.8 billion lower than at September 30. One might think that, given the dramatic decline in orders, this figure suggests that inventories were relatively tightly controlled. In light of current sales, however, these inventory levels are excessive. Consequently, capacity utilization will be adjusted to pare down inventories further going forward. EPCOS inventories were ¥36.7 billion. Net property, plant and equipment amounted to ¥355.9 billion, of which ¥283.2 billion was from TDK and ¥72.7 billion was from EPCOS.

This quarter, accumulated other comprehensive income worsened considerably, ending in a substantial loss of ¥142.6 billion. Of this amount, TDK accounted for ¥123.8 billion, and EPCOS for ¥18.8 billion. For TDK, this mainly reflected foreign currency translation adjustments of ¥114.7 billion due to the stronger yen. For EPCOS, the same factor accounted for ¥17.0 billion of the ¥18.8 billion posted. Looking at the shareholders' equity ratio, this figure, which was 68.5% at September 30, fell sharply to 55.9%. Undoubtedly the net loss for the third quarter played some role here. However, the cancellation, due to accounting procedures related to consolidation, of the shareholders' equity held by the EPCOS Group prior to its acquisition is what caused shareholders' equity to drop so substantially.

Next is an overview of consolidated cumulative results for the nine-month period through the third quarter. Net sales were ¥588,316 million, down 10.6%, or ¥70,114 million, from the same period last year. Operating income was ¥9,272 million, down 87.4%, or ¥64,590 million, from a year earlier. While these figures managed to stay in the black, we booked a loss before income taxes for the period of ¥303 million, a worsening of ¥77,305 million from the previous year. The net loss for the period was ¥2,449 million, or a worsening of ¥58,788 million from last year. Currency exchange rates for the nine-month period saw the yen substantially higher compared to the previous term, resulting in negative impacts on net sales and operating income of ¥62.3 billion and ¥19.8 billion, respectively.

I will now analyze changes in operating income for the nine-month period. The breakdown of the ¥64.6 billion downturn in operating income is as follows. Rationalization and cost reductions and purchased materials savings contributed ¥16.0 billion to income, while decreases in SG&A expenses contributed ¥3.8 billion. Minus factors were the decline in sales, which included declines stemming from capacity utilization and the product mix, which reduced income by ¥10.8 billion, as well as ¥19.8 billion from the impact of currency exchange rates, and ¥32.3 billion from sales price discounts. Last year, we posted gains on the transfer of the recording media business, the absence of which this year became a minus factor of ¥14.9 billion. Restructuring costs were ¥3.6 billion, and the consolidation of EPCOS had a negative effect of ¥3.0 billion. Looking at the cumulative nine-month period, we have managed to keep operating income in the black. While impacts have emerged from currency exchange and discounts, we began lowering capacity utilization only in November and December of the third quarter, meaning that the effects of this action are relatively small over the nine-month period. Nevertheless, this decision has also been a factor, albeit a minor one, in keeping operating income out of the red.

Next are results and projections for capital expenditures, depreciation and amortization, and research and development expenditures. Earlier we said that projected capital expenditures would amount to ¥85.0 billion. However, partly due to the inclusion of EPCOS, the projection has been raised to ¥95.0 billion, of which TDK should account for ¥90.0 billion. Projected depreciation and amortization have been revised upwards from ¥77.0 billion to ¥83.0 billion, with TDK alone accounting for ¥75.0 billion. Projected research and development expenditures have been raised from ¥54.0 billion to ¥57.0 billion. TDK's proportion of this is expected to be ¥52.0 billion. While capital expenditures exceeded ¥30.0 billion in the first and second quarters, this figure was ¥16.0 billion for the third quarter and is projected at ¥6.0 billion for the fourth quarter, for a projected total of ¥90.0 billion. While capital expenditures for TDK are likely to be ¥90.0 billion this term, in part due to expenditures carried over from the previous term, costs related to this should largely diminish in the upcoming fiscal year since we are intent on scaling back investments by just over ¥28.0 billion from the third quarter of this year.

Next are our projections for consolidated results for the full year. When we announced losses on January 8, the projections we released for the full year were net sales of ¥673.0 billion, an operating loss of ¥26.0 billion, a loss before income taxes of ¥32.0 billion, and a net loss of ¥28.0 billion. No changes have been made to these projections. The EPCOS group, which has been included in results from October to March, will account for ¥68.0 billion in net sales, an operating loss of ¥7.0 billion, a loss before income taxes of ¥9.0 billion, and a net loss of ¥9.0 billion. Additionally, there is the cost of goodwill and other factors accompanying the purchase. Earlier I mentioned ¥56.8 billion in goodwill had emerged. The burden of expenses that must be shed this term, including the portion of recognized intangible assets to be depreciated over several years, is expected to be approximately ¥5.0 billion. Incorporating that figure, projections for consolidated results for the full term are net sales of ¥741.0 billion, an operating loss of ¥38.0 billion, a loss before income taxes of ¥46.0 billion, and a net loss of ¥42.0 billion.

There has been a larger decrease in net sales in January than in December. Given this situation, we are aware that it may be necessary to ramp up our intentional steps to scale down capacity utilization as part of inventory adjustments, as well as implement structural reforms to weather the changing environment, to a much greater degree than originally thought.

My next topic is the urgent actions we announced on January 8. At that time, we talked of using ¥15.0 billion for restructuring costs to see a benefit of ¥62.9 billion, and thereby avoid losses even under similar conditions in the future. There were questions at the time as to whether some of our numbers were overlapping or had been counted more than once. Upon rechecking our calculations, I can say that this figure is attainable if these actions are taken.

Let me say a word on the progress of these actions. While our work on unprofitable products has gone largely according to plan, we sell a variety of products as packages. What this means is that for certain products where the best parts can't be easily taken out, other steps for dealing with them are needed. Elsewhere, the realignment of operating bases is proceeding as scheduled. We should also be where we expect regarding progress on personnel rationalization by March. SG&A expenses will be reduced by ¥22.0 billion. This averages out to about ¥1.9 billion per month. Of this amount, roughly 80% is accounted for by a review of development themes, operating bases and other areas in our preliminary estimates, so we must now determine how to achieve the additional savings. We will examine additional measures in this regard as needed.

I would like to direct your attention to the employee figures in the tables below. In the earnings report, we listed a figure for TDK and EPCOS of 74,000 employees. If you add 20,000 employees from EPCOS to the 65,000 employees we reported in the second quarter, you get 85,000, which means we have already cut this number by 11,000. At our Amendment Conference for Fiscal 2009 Projections on January 8, we stated that we would reduce the TDK Group workforce, including contractual workers, by more than 25,000 employees in total. Looking at results from September 30, 2008 to December 31, 2008, we have reduced the number of contractual workers by 15,000, while reducing the number of other TDK Group employees by 11,000.
While not included in this slide, we suspect that depreciation and amortization expenses may, in contrast to this fiscal year, decline to the ¥10.0 billion level in the upcoming year. In addition to ongoing depreciation, our efforts to contain investment between the second half of this year and the upcoming fiscal year may enable this outcome.

On January 8, we stated that through restructuring, we hoped to change our present structure, which is generating monthly sales of ¥45.0 billion and an operating loss of ¥4.0 billion, to one that will avoid losses. Given changing conditions since then, we recognize the situation is now one of monthly sales of ¥43.0 billion and an operating loss of ¥4.5 billion, amid what appears to be a protracted downturn in HDD heads. We are exploring additional ways to clear this hurdle through restructuring. With EPCOS now part of the Group, we intend to pursue the same course of restructuring there as well. Since we have not yet embarked on consolidations or eliminations of any kind at this stage, we hope to move forward in this area as swiftly as possible to take advantage of synergies from EPCOS' inclusion. On the other hand, approaching restructuring too aggressively could leave us unable to respond effectively once inventory adjustments end. With this consideration in mind, we want to avoid any overkill in the actions we take, and leave TDK in a position to respond quickly to the situation.

This concludes my presentation. Thank you for your attention.