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[ 2nd Quarter of fiscal 2012 Performance Briefing ]Consolidated 2nd-Quarter Results for Fiscal 2012

Mr. Takakazu Momozuka Corporate Officer,General Manager of Finance & Accounting Department

Mr. Takakazu Momozuka
Corporate Officer,
General Manager of Finance & Accounting Department

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, 2012. I will now provide you with some further information on our business results, with a focus on the second quarter.

Consolidated 2nd-Quarter Results for Fiscal 2012

Let me begin with our consolidated results for the second quarter of fiscal 2012. The second quarter was the three-month period from July to September 2011. Consolidated net sales were ¥210.4 billion, down ¥9.9 billion, or 4.5%, from ¥220.3 billion in the second quarter of fiscal 2011. Operating income was ¥8.1 billion, a decrease of ¥8.8 billion, or 52%, from ¥17.0 billion in the second quarter of fiscal 2011. As a result, the operating income margin was 3.9%. Income before income taxes was ¥7.4 billion, down ¥8.5 billion, or 53.5%, year on year. Net income decreased ¥7.3 billion, or 62.9%, year on year to ¥4.3 billion. Earnings per share was ¥33.30. The average exchange rates for the second quarter were ¥77.96 versus the U.S. dollar and ¥110.42 versus the euro. The yen thus appreciated 9.2% against the greenback and 0.2% against the euro. These changes had the effect of lowering net sales by around ¥14.7 billion and operating income by around ¥5.0 billion in the second quarter. The Great East Japan Earthquake had an approximate ¥1.1 billion negative impact on net sales in the second quarter and lowered operating income by approximately ¥0.6 billion.

Net Sales Comparison: 2Q Fiscal 2012 vs. 2Q Fiscal 2011

Next, I will compare net sales year on year by segment.

Passive components sales declined ¥8.8 billion, or 8.1%, year on year to ¥99.9 billion. Capacitor sales declined by approximately 9.5% year on year, as ceramic capacitors recorded a decrease in sales for home information appliance applications, despite higher sales of aluminum electrolytic capacitors and film capacitors for industrial equipment applications. Sales of inductive devices decreased 6.5% year on year due to lower sales for home information appliance applications, primarily flat-screen TVs. Other passive component sales decreased 8.3% year on year. The main factor behind this decrease was lower sales of high-frequency components for use in mobile phones.

Sales of magnetic application products declined ¥7.7 billion, or 8.4%, year on year to ¥84.5 billion. Within this segment, recording devices saw sales fall ¥12.0 billion, or 18.4%, year on year. Although sales volumes of recording devices were largely flat compared with the April-June quarter, forex effects due to the strong yen and sales price discounts weighed down sales. On the other hand, sales of other magnetic application products rose 16% year on year. The main factor behind this increase was the transfer to magnet prices of some of the cost increases for raw materials due to soaring rare earth prices. Other contributing factors included higher sales of power supplies and recording media. Sales in Other increased 34.7% year on year to ¥26.0 billion. This was attributable mainly to higher sales of rechargeable batteries.

Net Sales and Operating Income: 2Q Fiscal 2012 vs. 2Q Fiscal 2011

Let’s now take a look at segment operating income for the second quarter of fiscal 2012, compared with the second quarter of fiscal 2011. Passive components recorded operating income of ¥1.3 billion, a decrease of 82.5% from the second quarter of fiscal 2011. This decrease reflected an increase of ¥0.4 billion in structural reform expenses and earthquake-related charges of ¥0.4 billion, in addition to lower sales of ceramic capacitors, inductors, and high-frequency components. Operating income in the magnetic application products segment declined by 29.8% year on year to ¥8.8 billion overall, mainly reflecting the substantial impact of falling sales prices for HDD heads. The Other segment recorded operating income of ¥1.7 billion, mostly unchanged from the second quarter of fiscal 2011. This operating income included one-off expenses of ¥0.9 billion in the second quarter of fiscal 2012, compared with around ¥0.5 billion in the second quarter of fiscal 2011.

Breakdown of Operating Income Changes (1H Fiscal 2012 vs. 1H Fiscal 2011)

Next, I will look at the positive and negative factors behind the ¥23.4 billion decline in operating income in the first half of fiscal 2012, compared with the first half of fiscal 2011.

Higher sales, including the capacity utilization rate and product mix, contributed around ¥13.3 billion to operating income. Rationalization, cost reductions and purchased material savings lifted operating income by ¥5.3 billion. However, sales price discounts of 4.9% on average had a ¥21.4 billion negative impact. Higher SG&A expenses negatively affected operating income by around ¥3.0 billion. The impact of the change of pension plan recorded in the first quarter had a negative impact of ¥3.1 billion on operating income. The Great East Japan Earthquake negatively impacted operating income by ¥3.6 billion in the first half of fiscal 2012. Furthermore, exchange rate fluctuations lowered operating income by ¥10.9 billion.

Comparison of Net Sales and Operating Income (1Q of Fiscal 2012 vs. 2Q of Fiscal 2012)

Next is a comparison of quarterly business results between the second and first quarters of fiscal 2012.

In the second quarter of fiscal 2012, net sales were ¥210.4 billion, increasing ¥3.6 billion, or 1.7%, from the first quarter of fiscal 2012. This increase reflects a gradual recovery in net sales in the second quarter, after first-quarter net sales were heavily impacted by the earthquake. Operating income in the second quarter was ¥8.1 billion, an increase of ¥2.5 billion, or 44.6%, from the first quarter. Lower sales prices and an appreciation of 4 yen had an impact. However, in the first quarter, we booked one-off expenses of ¥6.7 billion, including a ¥3.1 billion negative impact from a change in the pension plan. In contrast, total one-off expenses declined to ¥1.5 billion in the second quarter, including structural reform expenses of ¥0.9 billion.

Amortization expenses of goodwill from the EPCOS acquisition were ¥1.2 billion, down ¥0.2 billion from ¥1.4 billion in the first quarter. By segment, passive components saw overall sales decline by ¥1.8 billion, or 1.8%, due to lower sales of capacitors and inductors despite higher sales of high-frequency components. As a result, passive components operating income was ¥1.3 billion, a decrease of ¥2.5 billion from the first quarter, despite lower one-off expenses. Within the magnetic application products segment, recording devices sales dropped ¥1.9 billion from the first quarter, due to sales price declines and the impact of the yen’s appreciation. However, overall magnetic application products net sales increased by ¥1.8 billion, or 2.2%, from the first quarter on the back of higher sales of magnets and recording media. Consequently, operating income in the magnetic application products segment rose ¥1.2 billion from the first quarter to ¥8.8 billion in the second quarter. Sales in the Other segment increased ¥3.6 billion compared to the first quarter, as a result of higher sales of rechargeable batteries, and operating income in the segment rose ¥0.2 billion.

Financial Position

Now for a word on TDK’s financial position at September 30, 2011.

Total assets stood at ¥1,049.8 billion, ¥15.9 billion lower than June 30, 2011. Total liabilities increased ¥4.2 billion from June 30, 2011 to ¥537.5 billion. This total includes interest-bearing liabilities, which rose ¥17.2 billion to ¥268.0 billion from June 30, 2011. Stockholders’ equity was ¥499.2 billion, ¥27.8 billion less than at June 30, 2011. Accumulated other comprehensive loss was ¥258.2 billion, ¥35.5 billion more than at June 30, 2011. This was mainly due to a ¥33.0 billion deterioration in foreign currency translation adjustments, as the yen appreciated against the greenback and certain other currencies. The stockholders’ equity ratio decreased by 1.8 percentage points from June 30, 2011 to 47.6%.

Full year projections of FY March, 2012 (the latest projections vs. projections in July)

Our president reported earlier on our full-year projections for fiscal 2012. I would now like to give you some additional information about these projections.

We have reduced our full-year net sales projection by ¥70.0 billion to ¥820.0 billion. We have also lowered our operating income projection by ¥32.0 billion to ¥35.0 billion, compared with our initial projection of ¥67.0 billion. These revisions mainly reflect larger than initially anticipated production adjustments in the flat-screen TV, PC, and PC-related device markets. Another factor is that production adjustments by our main customers in the mobile phone and smartphone markets have persisted longer than we initially anticipated. We also expect the flooding in Thailand to negatively impact net sales by around ¥23.0 billion and reduce operating income by around ¥10.0 billion. We also expect a negative impact from the change in our foreign exchange assumption for the average yen exchange rate from ¥80 to ¥76 against the U.S. dollar in the second half. Positive factors include an anticipated boost in profit from measures to improve our earnings structure in the second half. Taking into account all of these factors, we have revised our full-year operating income projection to ¥35.0 billion.

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

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