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[ 3rd Quarter of fiscal 2011 Performance Briefing ]Consolidated Results 3Q of FY March 2011
Full year projections for FY March 2011

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. Thank you for braving the cold weather in such large numbers to attend today's presentation of our third-quarter consolidated results for the year ending March 2011. Thank you also for your ongoing support for TDK. I will be using slides as part of this presentation.

Consolidated Results for 3Q of FY March 2011

Let's look at our consolidated performance in the third quarter of fiscal 2011. I will compare our results with the third quarter of fiscal 2010. Consolidated net sales were ¥219,937 million, which was 3.9% higher year on year. Operating income was ¥17,213 million, which was 42.3% higher year on year. Income before income taxes rose 67.6% year on year to ¥16,557 million. Net income attributable to TDK was ¥12,595 million, 42.7% higher year on year. Basic net income attributable to TDK was ¥97.64. The average yen exchange rates for the third quarter were ¥82.65 versus the U.S. dollar and ¥112.20 versus the euro. The yen thus appreciated 7.9% against the greenback and 15.4% against the euro. These changes had the effect of lowering net sales by ¥10.4 billion and operating income by ¥4.3 billion. Regarding exchange rate sensitivities, as we have explained in the past, in terms of the relationship between the yen and the U.S. dollar, a ¥1 appreciation against the U.S. dollar lowers net sales by approximately ¥5.5 billion and operating income by approximately ¥2.0 billion. In terms of the relationship between the yen and euro, there is only a negligible impact.

Highlights of Results in 3Q of FY March 2011

Now for a word on what defined the third quarter of fiscal 2011 for us. In the electronics market, market trends differed by type of finished product. As notebook PCs, flat-screen TVs and certain other main finished products struggled to grow, smartphones and tablet PCs drove the mobile terminal market, leading robust expansion. Furthermore, demand from industrial equipment and automotive electronics markets remained solid. Against this market backdrop, sales of our passive components rose 15% year on year. Sales of inductive devices increased for use in a wide range of finished products. Moreover, sales of high-frequency components rose sharply for use in mobile phones, particularly smartphones. Sales of aluminum electrolytic and film capacitors rose for use in industrial equipment.

Looking at sales of magnetic application products, there was an 11.0% year-on-year decrease. This decrease was attributable to lower recording device sales because of production adjustments in the HDD market and the impact of the yen's appreciation. Other magnetic application products saw sales rise 35.0% year on year. Sales of rechargeable batteries jumped for use in mobile devices.

Net Sales Comparison: 3Q FY March 2011 vs. 3Q FY March 2010

Continuing on, I would like to compare sales by segment with the third quarter of fiscal 2010. Sales of passive components were ¥108.4 billion, 15% higher year on year. Shipments of high-frequency components, which are included in other passive components, were strong for use in smartphones and mobile phones. This enabled us to capture more synergies with subsidiary EPCOS, the German company we acquired. Sales of magnetic application products were ¥90.8 billion, 11% down year on year. Within magnetic application products, sales of recording devices decreased 14.6% year on year. In addition to a slight drop in sales volumes of HDD heads, this decrease reflected the impact of the yen's appreciation and lower sales prices. "other" sales rose 35% year on year to ¥20.7 billion.

Overall, lower recording device sales were outweighed by higher sales of inductive devices and other passive components as well as higher rechargeable battery sales.

Operating Income: 3Q FY March 2011 vs. 3Q FY March 2010

Now I would like to draw a comparison of segment earnings between the third quarters of fiscal 2011 and 2010. Passive components posted fiscal 2011 third-quarter operating income of ¥6.3 billion, compared with ¥0.3 billion in the third quarter of fiscal 2010, with higher sales, including EPCOS sales, making a major contribution to the sharply higher earnings. Magnetic application products recorded operating income of ¥11.5 billion, a year-on-year decline of 20.9%. This decline was due to lower sales of recording devices, which resulted from forex effects and sales discounts. "other" recorded operating income of ¥2.0 billion, a year-on-year rise of 84.2%.

Consolidated Statements of Operations for 3Q FY March 2011

Now let's look at our consolidated statement of operations for the third quarter. Although lower sales prices and much higher prices for rare earths had an impact, along with other factors, the cost of sales ratio was 75.4% due to rationalization and higher productivity stemming from the automation of production lines at Chinese manufacturing bases. Selling, general and administrative expenses, including items shown separately as restructuring cost, declined ¥4.4 billion year on year. These expenses represented 16.8% of net sales, a 2.8 percentage point year-on-year improvement. The average capacity utilization rate was close to 85%, on a par with the previous quarter. As was the case in the interim period, this combined with higher sales to lift operating income to ¥17.2 billion. In terms of one-off expenses, the third quarter of fiscal 2010 included structural reform expenses of ¥2.0 billion, including restructuring cost of ¥0.1 billion. The third quarter of fiscal 2011 only included structural reform expenses of ¥0.3 billion. In other income (deductions), there was a ¥1.6 billion improvement year on year. The main factors were a ¥1.1 billion improvement in gains on investment securities, and a ¥0.9 billion improvement in equity in earnings of affiliated companies, which are included in "Other-net" on the income statement.

Breakdown of Operating Income Changes (3Q FY March 2011 vs. 3Q FY March 2010)

This slide shows a breakdown of the ¥5.1 billion increase in operating income. Starting with factors that made a positive contribution, higher sales, including the capacity utilization and product mix, boosted operating income by ¥11.6 billion. Rationalization, cost reductions and purchased materials sales discounts contributed ¥6.6 billion. The decrease in SG&A expenses contributed ¥1.2 billion. Together, these positive factors lifted operating income by a total of ¥19.4 billion. In terms of factors that had a negative impact on operating income, exchange rate fluctuations lowered operating income by ¥4.3 billion, while sales price discounts had a ¥10.0 billion negative impact, for a combined negative impact of ¥14.3 billion. Amortization expenses of goodwill from the EPCOS acquisition were ¥1.7 billion, ¥0.2 billion less than the ¥1.9 billion recorded in the third quarter of fiscal 2010.

2Q vs. 3Q Comparison of Net Sales and Operating Income

Now I would like to draw a comparison of segment sales and earnings between the second and third quarters of the current fiscal year. The second quarter of fiscal 2011 saw production adjustments in some sectors, such as notebook PCs, flat-screen TVs and HDDs, although shipments remained healthy for use in mobile phones, especially smartphones, automobiles and industrial equipment. The third quarter of fiscal 2011 saw the continuation of these trends. Moreover, there was a 3.8% appreciation in the yen between the two quarters, as the yen strengthened from an average of ¥85.88 in the second quarter to an average of ¥82.65 in the third quarter.

In this market environment, third-quarter net sales were down ¥0.4 billion, or 0.2%, on the second quarter. On the other hand, operating income was ¥0.2 billion, or 1.2%, higher in the third quarter than the second quarter. Amortization expenses of goodwill from the EPCOS acquisition were ¥1.7 billion in the third quarter, ¥0.6 billion higher than the ¥1.1 billion recorded in the second quarter. By segment, passive components saw sales decline ¥1.1 billion, or 1.0%, with lower capacitor sales negating higher sales of other passive components, which resulted from rising demand for mobile phone applications. Passive components operating income decreased 13.7% due to the lower net sales. Within the magnetic application products segment, recording devices sales dropped 3.5%, despite HDD head shipments on a par with the second quarter even as the notebook PC market languished. The decline resulted from the impact of the yen's appreciation and sales price discounts. Other magnetic application products registered 3.1% growth in net sales on higher sales of power supply components. Consequently, as a whole, sales of magnetic application products declined ¥1.4 billion, or 1.5%, quarter on quarter. Operating income in magnetic application products declined ¥1.0 billion, or 8.0%. "other" net sales increased ¥2.1 billion, or 11.3%, from the second quarter. Operating income increased ¥0.3 billion. Corporate and eliminations improved ¥2.0 billion in operating income due to lower expenses.

Consolidated Results through 3Q of FY2011

Next I would like to look at our consolidated results for the first nine months of fiscal 2011. Consolidated net sales were ¥662,171 million, up 10.8% year on year. Operating income was ¥54,401 million, representing a 3.1 times year-on-year increase. Income before income taxes was ¥51,201 million, a year-on-year increase of 4.7 times. Net income attributable to TDK was ¥38,711 million, a 3.8 times increase from the first nine months of fiscal 2010. Basic net income attributable to TDK was ¥300.10. Average yen exchange rates for the U.S. dollar and euro during the first nine months of fiscal 2011 were ¥86.84 and ¥113.27, respectively, as the yen appreciated 7.2% versus the U.S. dollar and 14.9% against the euro. This lowered net sales by approximately ¥38.6 billion and operating income by approximately ¥12.7 billion.

Full-Year Projections for FY2011

Next are our full-year projections for fiscal 2011. We are projecting consolidated net sales of ¥880.0 billion, operating income of ¥62.0 billion, income before income taxes of ¥60.0 billion, and net income attributable to TDK of ¥45.0 billion, as we previously forecast. We are assuming average yen exchange rates for the fourth quarter of ¥80 and ¥110 for the U.S. dollar and euro, respectively. For the fourth quarter, we are also assuming one-off expenses of approximately ¥3.5 billion, but have not changed our operating income forecast of ¥62.0 billion. These charges are associated with unprofitable products and streamlining our product lineup. We are expecting fourth-quarter sales to be the same as the third quarter, but are looking conservatively at earnings in the January-March quarter because of the usual seasonal factors during this period.

Forecast for FY2011 Dividend Payments

Next a word on dividends applicable to fiscal 2011. We are projecting a year-end dividend of ¥40 per share. Combined with the ¥40 interim dividend, we are thus planning to pay an annual dividend per share of ¥80.

That concludes my presentation of our third-quarter consolidated results and full-year projections. Thank you.

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