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[ 3rd Quarter of fiscal 2012 Performance Briefing ]Consolidated Results 3Q of FY March 2012

Mr. Takakazu Momozuka General Manager Finance & Accounting Dept.

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

Good afternoon. I’m Takakazu Momozuka, General Manager of the Finance & Accounting Department at TDK. Thank you for attending today’s presentation of our third-quarter consolidated results for the fiscal year ending March 31, 2012 in such large numbers, despite your busy schedules.

Consolidated 3rd Quarter Results for Fiscal 2012

Let me explain our third-quarter performance.

In my explanation, I will draw comparisons with the third quarter of the fiscal year ended March 31, 2011. Net sales declined 12.8% year on year to ¥191.8 billion. Operating income declined 59.2% to ¥7.0 billion. Income before income taxes dropped 80.5% to ¥3.2 billion. And we recorded a consolidated net loss of ¥11.6 billion. TDK booked income taxes of approximately ¥12.0 billion, due to the impact of a corporate tax reduction and the special corporate tax for reconstruction, as well as to the reassessment of the recoverability of deferred tax assets. The basic per common share net loss attributable to TDK Corp. was ¥90.24. The average yen exchange rates for the third quarter were ¥77.35 versus the U.S. dollar and ¥104.30 versus the euro. The yen thus appreciated by 6.4% against the greenback and 7% against the euro. These changes had the effect of lowering net sales by approximately ¥10.6 billion and operating income by approximately ¥2.6 billion. The flooding in Thailand negatively impacted net sales by approximately ¥11.3 billion and operating income by approximately ¥3.9 billion.

Breakdown of Operating Income Changes

Now let’s look at the positive and negative factors behind the ¥10.2 billion decrease in operating income.

In terms of positive factors, rationalization, cost reductions and purchased materials savings contributed ¥3.3 billion to operating income. Next, the decrease in SG&A expenses contributed ¥3.6 billion to operating income. This figure included ¥4.0 billion in gains on the sale of land. Turning to negative factors, lower sales, including the capacity utilization rate and product mix, lowered operating income by ¥3.2 billion. Sales price discounts had a ¥7.4 billion negative impact. Also, the Thai floods had a ¥3.9 billion negative impact, while exchange rate fluctuations had a ¥2.6 billion negative impact.

Segment Information

Now let me look at segment information.

Looking firstly at conditions in the electronics market, production of mobile phones, especially smartphones, and tablet devices remained strong, rising year on year, on the back of expanding demand. On the other hand, production of flat-screen TVs and PCs was lower year on year. In particular, HDD production dropped sharply from the previous fiscal year, mainly as a result of the impact of flooding in Thailand.

Against this backdrop, let me explain the changes in sales and operating income for each segment from the second quarter to the third quarter of the fiscal year ending March 31, 2012. Sales of passive components declined ¥10.4 billion, or 10.4%, from ¥99.9 billion in the second quarter to ¥89.5 billion. Over this period, sales of capacitors dropped ¥3.6 billion, or 10.5%, from ¥34.2 billion to ¥30.6 billion. While sales of ceramic capacitors increased for use in automobiles, sales declined to the home information appliance market and distributors because of sluggish demand for flat-screen TVs and PC-related applications. Sales of aluminum electrolytic and film capacitors declined, mainly due to lower demand from the industrial equipment market.

Sales of inductive devices declined ¥2.8 billion, or 8.9%, from ¥31.4 billion to ¥28.6 billion. Sales of inductive devices to the automobile industry, which recovered in the second quarter, remained at the same level in the third quarter. And sales to the communications equipment market, chiefly for smartphones, increased. On the other hand, sales of transformers, ferrite cores, and certain other products used in power circuits of flat-screen TVs and PC-related applications declined due to soft demand for these finished products. Other passive components saw sales decline ¥4.0 billion, or 11.6%, from ¥34.4 billion to ¥30.4 billion. Third-quarter sales of high-frequency components remained sluggish for communications equipment applications, resulting in a decline in overall sales of high-frequency components compared with the second quarter. The operating income of passive components rose ¥0.2 billion from the second quarter to ¥1.5 billion. Earnings were hurt by an electronic components market that was more sluggish than expected, as well as by sales price discounts and certain other factors. The ¥1.5 billion third-quarter operating income result for this segment reflected the recording of ¥4.0 billion in gains from the sale of idle assets.

In the magnetic application products segment, net sales declined ¥12.7 billion, or 15%, from ¥84.5 billion to ¥71.8 billion. Third-quarter sales of recording devices declined ¥11.3 billion, or 21.2%, from ¥53.3 billion to ¥42.0 billion. The main reasons for this decline were lower sales volumes of HDD heads due to lower production by HDD manufacturers that were affected by flood damage in Thailand, and production stoppages at two Thai HDD suspension assembly factories that were directly impacted by the floods. Regarding these two suspension assembly facilities, the mainstay Wangnoi Plant has already resumed normal operations, while the Rojana Plant began volume production at the end of January 2012.

Sales of other magnetic application products declined ¥1.4 billion, or 4.5%, from ¥31.2 billion to ¥29.8 billion. Sales of magnets as a whole were about the same as in the second quarter, despite the impact of lower production at TDK’s Thai factories and HDD manufacturers, who are key customers for TDK. This result was due to much higher sales of magnets to the automobile market. The flood-damaged Wangnoi Plant commenced normal operations in December 2011 after repairing its production facilities. The Rojana Plant, meanwhile, has begun repair work inside the factory, having cleared out water and cleaned and sterilized the factory. The plant expects to resume production in April 2012. Power supply sales declined due to a sluggish industrial equipment market. Operating income in the magnetic application products segment was ¥6.4 billion, lower by ¥2.4 billion, or 27.3%, than the ¥8.8 billion recorded in the second quarter, due to the impact of the Thai floods and other factors.

Third-quarter sales in the other segment rose ¥4.5 billion, or 17.3%, from ¥26.0 billion to ¥30.5 billion. Rechargeable battery sales were higher than in the second quarter, on the back of continued robust demand, mainly for use in smartphones. The operating income in the other segment was ¥2.5 billion, up ¥0.8 billion, or 47.1%, from ¥1.7 billion in the second quarter. This increase was mainly attributable to higher sales of rechargeable batteries and improved profitability of other products.

Amortization expenses of goodwill from the EPCOS acquisition declined ¥0.2 billion from ¥1.2 billion in the second quarter to ¥1.0 billion in the third quarter. In terms of one-off expenses, TDK recorded a total of ¥4.2 billion in the third quarter, which was made up of ¥3.9 billion in charges related to the Thai floods and ¥0.3 billion in one-off expenses. In contrast, in the second quarter, TDK recorded total one-off expenses of ¥1.5 billion, comprising ¥0.6 billion in charges caused by the Great East Japan Earthquake, and ¥0.9 billion in one-off expenses.

Consolidated Results Through 3rd Quarter of Fiscal 2012

Now let me give you our results for the nine months ended December 31, 2011.

Net sales were ¥608.9 billion, which was down 8% year on year. Operating income was ¥20.8 billion. Income before income taxes was ¥13.9 billion. And we recorded a net loss of ¥4.9 billion.

Full-Year Projections for Fiscal 2012

Now a word on our projections for the full fiscal year ending March 31, 2012. We are projecting net sales of ¥800.0 billion, operating income of ¥10.0 billion, income before income taxes of ¥3.0 billion, and a net loss attributable to TDK of ¥11.0 billion. This means we have lowered our forecasts that were issued previously in October 2011. Our projections assume average exchange rates of ¥76 to the U.S. dollar and ¥100 to the euro for the fourth quarter. The downward revisions to our projections reflect our expectation that finished products and demand for electronic components in the electronics market will be softer than we anticipated. Accordingly, TDK’s orders and capacity utilization rate are expected to remain below the level assumed in our previous forecast. Therefore, we decided to implement additional structural reforms prompted by the changes in our business environment. As a result of these additional reforms, we now expect to record ¥12.3 billion in structural reforms expenses, which is ¥9.3 billion more than the ¥3.0 billion we originally assumed. Moreover, with these additional reforms, we aim to accelerate the improvement in our operations to restore profitability in the fiscal year ending March 31, 2013. We are estimating a full-year net loss of ¥11.0 billion, partly due to the negative impact of booking ¥12.0 billion in income taxes related to deferred tax assets in the third quarter.

Dividend Forecast for Fiscal 2012

Let me talk now about our dividend forecast for the year ending March 31, 2012. While we are projecting a net loss, we intend to work hard to restore earnings ahead of next fiscal year by implementing structural reforms to improve our operations. Furthermore, the projected structural reform expenses and reversal of deferred tax assets won’t affect cash flows. For these reasons, we expect to pay the ¥40 per share year-end dividend previously announced for the year ending March 31, 2012.

Current Status of Restructuring Measures

Let me now discuss our progress with the restructuring measures we have announced. With regard to production site restructuring, we previously announced that we would restructure 4 of a total of 19 plants located in the Tohoku region of Japan. Today, we announced plans to restructure a further three plants, bringing the total number of plants slated for restructuring to seven. Previously we announced that we would cut 11,000 jobs, comprising approximately 10,000 overseas and 1,000 in Japan. As of December 31, 2011, we had reduced the overseas workforce by approximately 5,500 from September 30, 2011. In Japan, we expect to reduce our work volume corresponding to around 1,000 through the planned production site reorganization and gains in operational efficiency. As part of this, we are reviewing our outsourcing agreements with our business partners to reduce headcount. Regarding unprofitable businesses and products, we have decided to sell the organic EL display business. This sale is expected to go through at the end of March 2012, as planned. We are also cutting fixed costs. We are implementing initiatives as planned, with a focus on cutting operating expenses. Idle assets are targeted as well. In the third quarter, we sold some idle assets overseas, resulting in the booking of ¥4.0 billion in gains on sale. In the fourth quarter, we plan to sell some idle assets in Japan, and expect sales gains of approximately ¥2.5 billion as a consequence.

Restructuring Costs and Projected Benefits

Finally, I’d like to say a few words on restructuring costs and the projected benefits. Initially, we forecast structural reform expenses of ¥3.0 billion for the second half of the fiscal year ending March 31, 2012. Having decided to implement additional reforms at a cost of ¥9.0 billion as a result of changes in our business environment, we are now projecting second-half structural reform expenses of ¥12.3 billion, including the ¥0.3 billion incurred in the third quarter. For next fiscal year, we project structural reform expenses of ¥5.0 billion. This has also led to a revision in projected benefits. We initially projected second-half benefits of approximately ¥13.0 billion. At present, we now project benefits of ¥13.5 billion due to additional gains on the sale of land. For next fiscal year, we expect benefits of approximately ¥18.0 billion from restructuring measures, in comparison with those at the end of the year ending March 31, 2012. However, if the ¥4.0 billion in additional benefits from the additional restructuring expenses of ¥9.3 billion are added, next fiscal year’s benefits would come to ¥22.0 billion.

That concludes my presentation. Thank you for listening.

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