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[ 2nd Quarter of fiscal 2011 Performance Briefing ]Consolidated Results

Mr. Takakazu Momozuka General Manager Finance & Accounting Dept.

Mr. Takakazu Momozuka
General Manager
Finance & Accounting Dept.

Good afternoon. I'm Takakazu Momozuka, General Manager of the Finance & Accounting Dept. at TDK. You have just heard our president report our consolidated operating results for the first half of the fiscal year ending March 31, 2011. I will now provide you with some further information, with a focus on the second quarter. I will be using slides as part of this presentation.

Consolidated Results for 2Q FY March 2011

Let me begin with our consolidated results for the second quarter of fiscal 2011, the fiscal year ending March 31, 2011. I will draw comparisons with the second quarter of the previous fiscal year. Consolidated net sales were ¥220,309 million, which was ¥16,004 million, or 7.8%, higher year on year. Operating income was ¥16,979 million, which was ¥7,932 million, or 87.7%, higher year on year. Income before income taxes was ¥15,826 million, representing a year-on-year increase of ¥9,455 million, or 148.4%. Net income attributable to TDK Corp. was ¥11,593 million, a ¥7,237 million, or 166.1%, year-on-year rise. Basic per common share net income attributable to TDK Corp. was ¥89.87. The average yen exchange rates for the second quarter were ¥85.88 versus the U.S. dollar and ¥110.67 versus the euro. The yen thus appreciated by 8.4% against the U.S. dollar and 17.3% against the euro. These changes had the effect of lowering net sales by ¥18.9 billion and operating income by ¥5.2 billion.

Net Sales Comparison: 2Q FY Mar 2011 vs. 2Q FY Mar 2010

This fiscal year, as we did in the first quarter, I would like to compare sales for the second quarter of fiscal 2011 with the second quarter of fiscal 2010 based on our new segment classifications. Passive components sales rose ¥15.7 billion, or 16.8%, to ¥109.5 billion. The increase in passive components sales accounted for the lion's share of the overall sales increase of ¥16.0 billion, driving TDK's overall performance. On the back of strong shipments for use in mobile phones, especially smartphones, automobiles and industrial equipment, capacitors, inductive devices and other passive components all registered double-digit growth year on year. Meanwhile, EPCOS posted sales that surpassed pre-Lehman Shock levels on a euro basis, on the back of strong sales of products for use in energy-related industrial equipment and communications-related applications. Sales of magnetic application products decreased ¥4.0 billion, or 4.2%, year on year to ¥92.2 billion. Within this segment, recording devices sales dropped 8% from the second quarter of fiscal 2010. Although shipment volumes of HDD heads increased, the lower monetary sales reflected the impact of the yen's appreciation and sales price discounts. Other magnetic application products saw sales rise 6.7% year on year on increased shipments for use in industrial equipment. Sales in the "other" segment jumped 30% year on year to ¥18.6 billion.

Net Sales and Operating Income: 2Q FY Mar 2011 vs. 2Q FY Mar 2010

Moving on, let me look at business segment earnings compared with the second quarter of fiscal 2010. Passive components recorded a large rise in operating income, which jumped from ¥0.2 billion in the second quarter of fiscal 2010 to ¥7.3 billion in the second quarter of fiscal 2011. Higher sales, including EPCOS sales, spurred this earnings jump. Magnetic application products recorded operating income of ¥12.5 billion, ¥1.2 billion, or 10.8%, higher year on year. This increase was due to rationalization and cost reductions, which absorbed lower sales due to forex movements in recording devices. Higher sales of other magnetic application products also supported increased segment operating income. The "other" segment recorded operating income of ¥1.7 billion, an increase of ¥0.4 billion year on year.

Consolidated Statement of Operations for 2Q FY March 2011

Now let's look at our consolidated statement of operations for the second quarter.

The cost of sales ratio improved 2 percentage points from 76.4% to 74.4%. Selling, general and administrative expenses, including items shown separately as restructuring cost, were about the same as the second quarter of the fiscal year ended March 31, 2010. These expenses represented 17.9% of net sales, a 1.3 percentage point improvement year on year. Past structural reforms have lowered our breakeven point, making us more profitable. Capacity utilization has also recovered to between 85% and 90% on average. Coupled with the benefits of increased sales continuing on from the first quarter, operating income was ¥17.0 billion. In terms of one-off expenses, the second quarter of fiscal 2010 included structural reform expenses of ¥1.3 billion, including restructuring cost of ¥0.8 billion. The second quarter of fiscal 2011 only included ¥0.5 billion. In other income (deductions), there was a ¥1.5 billion improvement year on year. The main factors were a decrease of just under ¥0.6 billion in interest expense resulting from the reclassification of debt from long-term to short-term. An improvement in equity in earnings of affiliated companies was the main reason for the improvement of just under ¥1.0 billion in other-net.

Breakdown of Operating Income Changes (2Q FY March 2011 vs. 2Q FY March 2010)

This slide shows a breakdown of the positive and negative factors behind the ¥7.9 billion increase in operating income.

Starting with the factors that made a positive contribution, higher sales, including the capacity utilization rate and product mix, boosted operating income by ¥19.8 billion. Rationalization, cost reductions and purchased materials sales discounts contributed ¥6.5 billion. Together, positive factors lifted operating income by ¥26.3 billion. In terms of the factors that had a negative impact on operating income, higher SG&A expenses reduced operating income by ¥3.0 billion. Further, exchange rate fluctuations lowered operating income by ¥5.2 billion, while sales price discounts had a ¥10.2 billion negative impact, for a combined negative impact of ¥18.4 billion. The main reason for the ¥7.9 billion increase in operating income was higher sales, which resulted from an improved capacity utilization rate centered on passive components, as was the case in the first quarter. Amortization expenses of goodwill from the EPCOS acquisition were ¥1.1 billion in the second quarter of fiscal 2011, down ¥0.1 billion from ¥1.2 billion in the second quarter of fiscal 2010.

1Q vs. 2Q Comparison of Net Sales and Operating Income

Now I would like to draw a comparison of segment earnings between the first and second quarters of the current fiscal year. The first quarter of fiscal 2011 saw a broad-based recovery in demand, including for use in notebook PCs, flat-screen TVs and other digital products as well as mobile phones, automobiles and industrial equipment. In contrast, the second quarter saw production adjustments in some quarters, such as notebook PCs, flat-screen TVs and HDDs, although shipments remained healthy for use in mobile phones, especially smartphones, automobiles and industrial equipment. Moreover, there was a 6.7% appreciation in the yen between the two quarters, as the yen strengthened from an average of ¥92.01 in the first quarter to an average of ¥85.88 in the second quarter. In this market environment, second-quarter net sales were ¥1.6 billion, or 0.7%, down on the first quarter, while operating income declined ¥3.2 billion over the same period.

By segment, passive components saw sales rise ¥4.4 billion, or 4.2%, with growth centered on inductive devices and other passive components. As a result, passive components operating income increased ¥1.1 billion, or 17.6%. Within the magnetic application products segment, recording devices sales dropped 8.8%, despite HDD head shipments on a par with the first quarter even as HDD manufacturers cut back production. The decline resulted from the impact of the yen's appreciation and sales price discounts. Accordingly, magnetic application products net sales fell ¥8.0 billion, 8.0%, overall from the first quarter, and operating income dropped ¥3.5 billion. Sales in the "other" category increased ¥2.0 billion, or 12.1%, and operating income rose ¥0.6 billion.

That completes my presentation of our first-half consolidated operating results. Thank you.

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