[ Financial Results for Fiscal 2009 Performance Briefing ]Consolidated Results

Mr. Seiji Enami
Director
Executive Vice President

Good afternoon. I'm Seiji Enami. You have just heard from TDK's president that we recorded very large losses for fiscal 2009, the fiscal year ended March 31, 2009. I'd like to look at our operating results in slightly more detail now.

Main Features of FY2009 Results

Let me begin with the main features of our consolidated results. Although the Beijing Summer Olympic Games were staged in the first half of fiscal 2009, production of electronic devices didn't grow as much as expected. In addition, with demand for high-performance electronic devices seen to be trending downward, growth of electronic components was already in decline from around this time. In the second half of fiscal 2009, in the wake of the Lehman Brothers' collapse, demand for electronic devices dropped rapidly, slamming the brakes on production in the electronics market. The auto market experienced similar conditions, with demand plummeting in the second half due to the global recession, after it had been affected by steeply rising oil prices in the first half.

As a result of all this, amid lower-than-expected volume growth in the first half, our earnings were heavily impacted by the appreciating yen, discount pressure and much higher resource prices. Our third-quarter performance reflected declining capacity utilization due to a rapid drop-off in orders. In the fourth quarter, as capacity utilization worsened and recognition that the slump in operating levels was becoming protracted set in, we initiated structural reforms to reduce capacity utilization in order to reduce inventories and to improve our operations. Our performance was thus marked heavily by these factors.

Another major development in the past fiscal year was our acquisition of EPCOS AG. This acquisition resulted in the inclusion in TDK's consolidated results of six months' results of EPCOS from October 2008. Our results were also affected by the amortization of goodwill arising from this acquisition. EPCOS faced the same market conditions as TDK and recorded a loss, which was included in TDK's consolidated operating results. Foreign currency movements had a major detrimental effect on our performance in fiscal 2009, too. In fiscal 2008, the average yen-U.S. dollar exchange rate was ¥114.44. In fiscal 2009, it was ¥100.71, representing a ¥13.73, or 12%, appreciation.

FY2009 vs. FY2008

As you heard earlier from our president, consolidated net sales declined 16% year on year even with the inclusion of EPCOS Group sales. Excluding the EPCOS Group, the TDK Group alone recorded a decrease in net sales of ¥206.9 billion, or 23.9% year on year. The declines in electronic materials, which includes capacitors, and recording devices, which consists mainly of HDD heads, were comparatively severe. The Others segment recorded a relatively smaller decline thanks to strong sales of lithium-ion batteries, however. Before you heard that TDK is projecting a 1% decline in net sales for fiscal 2010. This reflects the impact of including projected sales of EPCOS for a full year versus six months in fiscal 2009. Excluding EPCOS' projected sales, we would be projecting a year-on-year decline of more than 10% for the TDK Group alone.

FY2009 Consolidated Statement of Income

Now let's look at our consolidated statement of income. Overall, we recorded restructuring expenses of ¥38.0 billion. We also recorded ¥5.2 billion for amortization of goodwill related to EPCOS. Including these expenses, we posted a large consolidated operating loss of ¥54.3 billion. This result was ¥141.5 billion worse than our fiscal 2008 operating income. I'll explain the item shown here as "restructuring cost" later. Moving down the income statement, we recorded total other deductions of ¥27.3 billion, which was ¥31.7 billion worse than the net other income recorded in fiscal 2008. One reason for this change was a ¥4.3 billion decline in interest and dividend income. Interest is the main component of this line item and it was affected by a drop in interest rates as well as a decline in surplus funds invested. Another reason for the increase in total other deductions was a ¥2.1 billion increase in interest expense, which reflected fund procurement through corporate bonds and long-term debt for the EPCOS acquisition. The net loss on securities relates to shares that are seen as investment securities. Write-downs due to falling share prices resulted in a net loss on securities of ¥6.4 billion, ¥4.3 billion more than in fiscal 2008.

Equity in earnings of affiliates was also ¥19.0 billion worse year on year. This related to the 20% stake we acquired in Imation Corp. when we transferred our consumer recording media business to that company in the fiscal year ended March 31, 2008. Due to Imation's stock price falling, we recognized a ¥17.4 billion write-down on our shareholding. As a holder of more than a 20% equity interest, we participate in Imation's management through a director on the company's Board of Directors. For that reason, we don't necessarily measure impairment based solely on the stock price. However, the extent of the decline was so large that we wrote down our investment.

While we booked a large loss in fiscal 2009, we still believe that it is possible to recover deferred tax assets in the future from future taxable income.

Breakdown of Operating Income Changes

TDK's consolidated operating income declined ¥141.5 billion year on year. This slide shows the reasons for this change. In terms of factors that had a positive effect on operating income, rationalization and cost reductions as well as purchased materials savings contributed ¥25.8 billion, and reductions in SG&A expenses contributed ¥10.8 billion, for a total positive contribution of ¥36.6 billion. On the other hand, the decline in net sales, which included changes in capacity utilization and the product mix, caused operating income to fall by ¥58.5 billion. Exchange fluctuations had an ¥18.9 billion negative effect, while sales price discounts had a ¥40.1 billion negative effect. The costs of restructuring at TDK had a ¥31.4 billion negative impact. The overall decrease in operating income also reflects the ¥15.3 billion gain on business transfer to Imation Corp. recorded in fiscal 2008. Another factor was an ¥8.0 billion operating loss at the EPCOS Group, which was included in our consolidated results. There was also ¥0.7 billion in restructuring costs at EPCOS and a ¥5.2 billion charge related to goodwill. Together, these negative factors totaled ¥178.1 billion. The net result of positive and negative factors was the ¥141.5 billion decline in operating income.

The restructuring cost shown in the consolidated income statement before includes costs that must be shown separately under accounting audit standards. Other restructuring costs are included, in principle, in cost of sales or SG&A expenses. Restructuring charges were ¥32.1 billion, the total of TDK's restructuring charges of ¥31.4 billion and EPCOS' restructuring costs of ¥0.7 billion and this was a reason for the year-on-year decline in operating income. The amount incurred, however, was ¥38.0 billion. In the past, we have been able to compensate for the unavoidable effects of currency fluctuations and sales price discounts, by raising capacity utilization. However, capacity utilization slipped due to the rapid and large drop in demand from the third to the fourth quarter and we were forced to reduce capacity to reduce excess inventories. This led to a negative ¥58.5 billion effect on operating income. The execution of structural reforms that were necessary to ensure that our business can withstand a large fall in orders, also led to the large drop in operating income.

The ¥5.2 billion for amortization of goodwill on the EPCOS acquisition was a relatively large figure. Let me discuss this briefly. We have acquired an equity interest of more than 95% in EPCOS at a cost of ¥166.6 billion, and goodwill in the broad sense has been measured at ¥70.6 billion by external appraisers. Of this figure, there is ¥31.3 billion of goodwill that in the narrow sense is eligible for impairment measurement and therefore isn't subject to amortization. Deducting this ¥31.3 billion from ¥70.6 billion, leaves ¥39.5 billion as an intangible asset subject to valuation. Some of this must be written off over a number of years and some booked as a one-time write-off. The ¥5.2 billion goodwill charge is the total of those two types of write-off.

Actual Results Compared With February 9 Projections

Our actual results for the full year were far worse than the earnings guidance we gave on February 9, 2009 when we announced our third-quarter results. I think that we need to explain the reasons for this marked deterioration given that we raised long-term finance through the issuance of corporate bonds and borrowing from banks after the February 9 announcement. The difference between actual results and our previous projections naturally all related to the fourth quarter. Firstly, because of the precipitous drop in sales in December, we multiplied December sales by three to arrive at our fourth-quarter sales forecast. However, our forecast turned out to be optimistic and January sales were actually lower than December sales. While sales began to rebound from February, it was only a very modest upturn, and as a result net sales came in ¥13.6 billion under our February 9 projection. Furthermore, we assumed a yen-U.S. dollar rate of ¥90, but the rate was actually ¥94 for the quarter. Factoring in the approximate ¥4 depreciation in the yen, the actual shortfall from our forecast sales was roughly ¥20.0 billion. The ¥20.0 billion shortfall translated into a roughly ¥8.0 billion shortfall in operating income, because of the lost earnings from the shortfall and fixed costs that could not be covered. On the other hand, the approximate ¥4 depreciation in the yen boosted operating income by ¥2.0 billion. Deducting ¥2.0 billion from ¥8.0 billion gives a net shortfall in operating income attributable to sales of about ¥6.0 billion.

We booked restructuring costs of ¥3.6 billion in the first half and ¥0.3 billion in the third quarter, as well as announced structural reform expenses of ¥15.0 billion and EPCOS restructuring costs of ¥0.7 billion. We were therefore assuming restructuring costs of ¥19.6 billion in total for fiscal 2009. Actual costs were ¥38.0 billion, ¥18.4 billion more than we had estimated. These additional costs plus the ¥6.0 billion negative impact on operating income attributable to net sales, totaled ¥24.4 billion. We were able to limit the deterioration between our projected operating loss and actual result to ¥16.3 billion. The difference of ¥8.1 billion (¥24.4 billion minus ¥16.3 billion) represents the gradual manifestation of benefits from measures taken from January, namely the termination and improvement of unprofitable products, job cuts, base consolidations and cost cutting.

The loss before income taxes was ¥35.6 billion worse than we projected on February 9, 2009. Given that the operating loss was ¥16.3 billion more than we expected, this means that non-operating items were ¥19.3 billion worse than assumed. The majority of this relates to the write-down of our investment in Imation Corp. that I mentioned earlier. Our president also touched on the reasons for restructuring costs being much higher than expected, but we haven't been able to deal with unprofitable products as we would have liked. To cover for this, we implemented additional measures, as well as took steps in response to moves by other companies related to TDK. We also incurred restructuring costs for disposing of inventories and impairment losses on just-launched businesses that have yet to generate profits. While these charges led to larger losses, we believe that they have made our operations stronger.

Balance Sheet as of March 31, 2009

Looking now at our consolidated balance sheet, because of the major changes from the third quarter to the fourth quarter, I will compare our balance sheet at March 31, 2009 with the balance sheet at the end of December, not with the end of March 2008. Total assets decreased ¥35.2 billion. We used a rate of ¥98.23 to the U.S. dollar and ¥129.84 to the euro at March 31, 2009 for conversion purposes. These rates represented depreciation in the yen of ¥7.20 and ¥1.88, respectively, compared with December 31, 2008. This resulted in a more than ¥30.0 billion increase in foreign currency-denominated assets. The decrease in total assets, however, was attributable to the consolidated net loss and increase in accumulated other comprehensive income (loss). In terms of changes in asset accounts, cash and cash equivalents declined ¥11.5 billion. Contrastingly, short-term investments increased ¥15.9 billion and marketable securities increased ¥17.5 billion. Other assets under noncurrent assets include ¥6.8 billion in funds equivalent to the remaining shareholding of about 5% that TDK requires to make EPCOS a wholly owned subsidiary. There was a ¥28.2 billion net increase in these asset accounts after December.

On the other side of the balance sheet, short-term debt decreased by ¥162.2 billion, reflecting refinancing as long-term debt. In addition, current installments of long-term debt decreased ¥14.0 billion. In contrast, long-term debt, excluding current installments, which consists of long-term borrowings and corporate bonds, increased ¥202.9 billion, meaning that there was a net increase of ¥26.7 billion in borrowings. TDK posted a large loss in the fourth quarter due to large restructuring costs, write-downs and other factors. However, TDK avoided a deterioration in its cash position because structural reforms didn't involve cash outflows, and it rigorously cut inventories and collected accounts receivables. Cash inflows from the latter slightly exceeded increased cash from borrowings. Indeed, inventories declined ¥22.4 billion. In terms of the TDK Group's inventories, excluding EPCOS, inventories declined by ¥19.3 billion from ¥91.4 billion at December 31, 2008 to ¥72.1 billion at March 31, 2009.

Moving down the balance sheet, the stockholders' equity ratio dropped to 50.3%. The ratio declined to 55.9% at December 31, 2008 due to the ¥165.1 billion acquisition of EPCOS, which resulted in an increase in total assets. The further decline reflects the loss of ¥60.7 billion in the fourth quarter. There was also a ¥20.1 billion increase in accumulated other comprehensive income (loss), mainly on account of pension liability adjustments. The lower stockholders' equity ratio due to a decline in capital is something we want to improve quickly.

Consolidated Fourth-Quarter Results

Now for a look at fourth-quarter sales by product. I will draw comparisons by segment with the fourth quarter of the fiscal year ended March 31, 2008, excluding EPCOS' sales. I will give you the year-on-year changes, growth rates and the share of total sales. I will also look at the product sectors making up segments, giving you growth rates and shares of sales.

The TDK Group, excluding EPCOS, recorded fourth-quarter sales of ¥107.0 billion, ¥100.9 billion, or 49%, down year on year. Total sales including EPCOS sales, were ¥139.1 billion, meaning that the TDK Group's sales represented 77% of total net sales.

Electronic materials sales were ¥20.9 billion, down ¥25.0 billion, or 54%, year on year. Sales here accounted for 15% of total sales. Capacitors saw sales fall for use in PCs, AV and game equipment, mobile phones and car electronics. As a result, capacitor sales fell 54% and accounted for 68% of segment sales. Ferrite cores and magnets recorded a 56% drop in sales due to lower sales of metal magnets for HDDs and ferrite magnets for automotive applications and ferrite cores for power supply transformers. Ferrite core and magnet sales represented the remaining 32% of segment sales.

Electronic devices registered sales of ¥29.0 billion, down ¥22.3 billion, or 43%, year on year. Sales in this segment accounted for 21% of total sales. Inductive devices saw sales of coils and EMC products fall for use in flat-screen TVs, game equipment, mobile phones and automotive electronics. Meanwhile, sales fell of transformers for power supplies. In high-frequency components, sales were down for use in PCs. Sales of sensors and actuators, which are included in the "Other products" sector, declined for use in PC peripheral equipment, while power supply products recorded lower sales due to a soft semiconductor market. As a result, inductive devices recorded a 44% drop in sales and accounted for 43% of segment sales. High-frequency components recorded a 71% drop in sales and accounted for 5% of segment sales. Other products recorded a 37% fall in sales and accounted for the remaining 52% of segment sales.

Recording devices posted fiscal 2009 fourth-quarter sales of ¥38.8 billion, ¥49.1 billion, or 56%, lower year on year. Sales in this segment represented 28% of total sales. Sales declined due to falling demand and the accompanying decline in sales volume, as well as lower sales prices and the impact of the stronger yen. HDD head sales dropped 53% and accounted for 88% of segment sales. Sales in the Other sector declined 70% and represented 12% of segment sales. Other includes suspension assemblies. Sales of suspension assemblies fell due to lower demand. TDK acquired Magnecomp Precision Technology Public Company, a suspension assembly manufacturer, in October 2007 and because 5 months' sales, from October that year to March 2008, were included in fiscal 2008 fourth-quarter sales, suspension assembly sales fell considerably year on year.

Others sales in the fourth quarter of fiscal 2009 were ¥18.2 billion, ¥4.5 billion, or 20%, down year on year. Sales in this segment accounted for 13% of total sales. Batteries logged higher sales on the back of increasing demand, helping the segment to record a relatively smaller decline in sales than other segments.

Operating income in the fourth quarter of fiscal 2009 was ¥66.0 billion worse year on year. Lower capacity utilization had a ¥46.3 billion detrimental effect and there were also restructuring charges of ¥29.2 billion. In addition, the yen's appreciation and sales price discounts had an adverse effect. These negative factors couldn't be fully offset by rationalization and cost reductions, purchased materials savings, cuts in SG&A expenses and other savings. EPCOS recorded an operating loss of ¥10.9 billion in the fourth quarter of fiscal 2009. Its operating loss from ordinary operating activities was ¥5.7 billion, including restructuring costs of ¥0.3 billion. But there was also an amortization charge for goodwill of ¥5.2 billion.

Comparison of 3Q and 4Q

Next, let me compare the fourth quarter with the third quarter. Total sales fell ¥48.9 billion quarter on quarter. October, November and December 2008 saw rapid and large drops in orders and lower sales. Sales in January were lower than December sales. And because there was only a very slight recovery from February, net sales in the fourth quarter declined ¥48.9 billion quarter on quarter. The operating loss was ¥50.5 billion wider between the quarters, reflecting the combined effects of lower sales and reduced capacity utilization to lower inventories. A ¥25.9 billion increase in restructuring costs from ¥3.9 billion in the third quarter to ¥29.8 billion in the fourth quarter was another reason.

Capital Expenditures, Depreciation and Amortization, Research and Development Expenses for Fiscal 2009 and Outlook
Here are our capital expenditures, depreciation and amortization, and research and development expenses for fiscal 2009 and projections for fiscal 2010. Capital expenditures in fiscal 2009 were ¥100.0 billion, with ¥95.6 billion accounted for by TDK and the remaining ¥4.4 billion accounted for by EPCOS. Depreciation and amortization was ¥89.6 billion, and research and development expenses were ¥57.6 billion. Capital expenditures were approximately ¥5.0 billion higher than our previous forecast. Looking at this on a cash basis, because we curbed new investments, the higher-than-forecast capital expenditures were largely the result of having accelerated payments for existing investments. Depreciation and amortization also increased, but this was the result of adding the ¥5.2 billion goodwill amortization charge related to EPCOS. Turning to our fiscal 2010 projections, we are forecasting capital expenditures of ¥41.0 billion, depreciation and amortization of ¥81.0 billion, and research and development expenses of ¥53.0 billion. Because fiscal 2010 includes 12 months' figures for EPCOS unlike fiscal 2009 when only 6 months' figures were included, the year-on-year declines are actually more than the figures indicate.

Quarterly Capital Expenditures

To finish my presentation, I'd like to look at why capital expenditures on a cash basis swelled to ¥95.6 billion in fiscal 2009. The main reason was that many capital expenditures, such as the Honjo Plant, that we decided on in the previous fiscal year, slid into fiscal 2009. On an approval basis, capital expenditures for fiscal 2009 were ¥44.6 billion, with only ¥5.7 billion approved in the fourth quarter. We therefore curbed capital expenditures on an approval basis by more than ¥25.0 billion from the ¥70.0 billion we initially planned. In fiscal 2009, we incurred significant restructuring charges, but these were necessary under conditions that raise no prospects for a major economic recovery. We are determined to do our best though to restore profitability one way or another.

Thank you for your attention.