The 121st Ordinary General Meeting of Shareholders Q & A

Q1. Can you include projections for consolidated operating results on your notice of convocation?

A1. We will make improvements while ensuring consistency between information stated in the notice of convocation and information stated in other disclosed materials.

Q2. I would like for all directors to own shares in TDK Corporation (the “Company”). Please explain the current situation, including any restrictions regarding outside directors from the perspective of maintaining independence.

A2. We have established internal guidelines that encourage our internal directors and corporate officers to acquire shares in the Company. Our outside directors and candidates do not own shares in the Company. It is a matter of personal assets, and also involves insider trading regulations. We will consider the most appropriate state in the future from the perspective that outside directors are on the same standpoint as shareholders.

Q3. I believe that business transfer gains following the establishment of a joint venture with Qualcomm Incorporated contributed significantly to the consolidated operating results for the fiscal year under review (the fiscal year ended in March 2017). What were the results excluding the business transfer gains?

A3. Business transfer gains accounted for 144.4 billion yen of our 208.7 billion yen operating income in the fiscal year under review. That leaves around 64.3 billion yen. We intend to make the most of the funds we gained from the business transfer by using it for future growth and earnings increases.

Q4. The announcement of the consolidated results for the fiscal year under review was later than in other years (May 10, 2017). What was the reason for this? Will announcements be made around the same period next year and onward?

A4. Procedures related to the business transfer following the establishment of the joint venture with Qualcomm Incorporated, such as examination of target assets and liabilities, were expected to require a considerable amount of time. We allowed some leeway in terms of time to ensure careful examination. We do not intend to change our policy of announcing full-year results at the end of April next year and onward, as we did until last year.

Q5. Please tell us about the president’s achievements during the fiscal year under review and his future management policy.

A5. I have said that I wanted to achieve two things. One is the realization of our growth strategy. It is my mission to generate growth after transferring part of our high frequency components business. In order to do so, I intend to initially develop the electronic components business based on materials and process technologies, after which I intend to grow the sensor- and actuator-related solutions business. With regard to sensors, I hope to offer value to customers by incorporating the technologies of InvenSense Inc. and Micronas Semiconductor Holding AG—companies which we acquired—in addition to the existing magnetic, temperature and pressure sensors. We will also grow the actuator business, such as for camera modules. Furthermore, in the power electronics-related field, which is based on our electromagnetism roots, I intend to develop the energy solutions and power solutions businesses. It is my passion and mission to grow these three major domains.
Second is to establish a framework for conducting profitable business. As part of this effort, we have already started the “Industry 4.0+zero defect” initiative in the Akita district from the perspective of strengthening monozukuri (manufacturing expertise). In addition, we will be first to market by shortening our cycle time and lead time. Furthermore, by using the logic tree method, I hope to introduce a system by which we can steadily achieve our themes as well as to promote professionalism and globalization of staff members.
The first is, so to speak, an aggressive action and the second is a less-aggressive action. I intend to aim for further growth with these two as the core.

Q6. In the president’s explanation of pressing issues, you mentioned “integrating the dispersed organization.” What do you mean specifically?

A6. A typical example for this fiscal year (the fiscal year ended in March 2018) is the sensor business. The sensor business was spread across multiple business units within the TDK Group. We are consolidating and integrating the business as the Sensor Systems Business Company and unifying its business, marketing and development functions.

Q7. I would like to know which products currently have a large share and what their advantages are. Also, which products do you expect to see increase their market share in the future?

A7. The Company was founded in 1935 for the industrial production of ferrite, a magnetic material. Our magnetic technology is world-class, and we believe that our strengths are magnetic application products and process technology to make such products.
Products with a leading share on a global basis include lithium polymer batteries used in smartphones and other applications, and various inductors used in smartphones and automobiles. In addition, the number of ECUs (electronic control units) has increased due to the high performance of automobiles, and we estimate a large share of EMC filters that are used to reduce the noise of in-vehicle LAN that link the ECUs. Our share of RF filters is estimated to be large as well, with higher frequency expected in radio waves that will be used in future communications such as in connected cars (cars with constant connection to the internet) and 5G (fifth-generation mobile communication system). We also expect the top-class share in piezoelectric material products and circuit protection components. We intend to further increase our share of products using platform technologies in market areas where future growth can be expected.

Q8. How do you view the market for wireless power transfer and how do you intend to develop business in the future?

A8. Wireless power transfer is a technology with a broad range of use, from low power to high power. Low power transfer is used for smartphones, earphones and hearing aids, while medium power transfer is used for industrial equipment such as AGVs (automatic guided vehicles) and robots. High power transfer is used for vehicles. We are already mass-producing power transmission and reception coils for smartphones. A major feature of the coils is their thinness. For industrial equipment, we are currently focusing on developing products for 1 kW or less. We are also developing products for vehicles. We believe we have an advantage in development and mass production using the magnetic resonance method based on a license agreement with WiTricity Corporation of the U.S., and intend to continue to develop products and cultivate applications so that we can lead the market.

Q9. I would like to know the regional breakdown of net sales, which amounted to 1.1 trillion yen.

A9. Our actual performance for the fiscal year ended in March 2017 was 70% in Asia and others, 12% in Europe, 9% in the Americas and 9% in Japan.

Q10. How many Japanese employees are on loan to overseas operations?

A10. There are currently about 300, mainly in technical, accounting and planning divisions.

Q11. What are the risks to stable procurement of raw materials and what kind of efforts have you taken to reduce such risks?

A11. Our concept of materials procurement is to prioritize local procurement and focus on establishing a supply chain. We will ensure stable procurement by selecting suppliers with sufficient QCD (quality, cost, delivery) abilities and formulating a BCP (business continuity plan) in cooperation with them. We intend to continue taking sufficient measures by also gathering information on areas that we are not directly involved in, such as conflict minerals.

Q12. Please explain the impact of exchange rate fluctuations and countermeasures.

A12. Our transaction currencies are mainly foreign currencies such as the U.S. dollar and euro. There are two major impacts due to exchange rate fluctuations. A depreciation of the yen has a positive effect when exporting from Japan in a foreign currency as well as in consolidated results, which include the business performance of overseas subsidiaries. Countermeasures against yen appreciation include carrying out transactions between overseas subsidiaries and Japan in local currencies as much as possible to consolidate exchange rate risks to Japan and reducing the risks with exchange contracts and foreign currency borrowings.

Q13. You seem to be building a new facility to the north (of the venue where the shareholders meeting is held), but what is its purpose and projected usage?

A13. We started construction of a new building in April this year. It is scheduled for completion at the end of March 2019, including the building and outdoor development such as external works.
This facility is a part of Technical Center of the Company, which is a site for generating further innovations. We intend to use the new facility mainly for exchanges with people from various industries for the purpose of creating new businesses in order to be first to market.

Q14. Consolidated net sales of the Magnetic Application Products segment increased 10.9% year-on-year. Did sales increase even when excluding the sales of acquired companies Micronas Semiconductor Holding AG and Hutchinson Technology Incorporated?

A14. With regard to sales of the Magnetic Application Products segment, sales of Micronas Semiconductor Holding AG are included for the full fiscal year, and those of Hutchinson Technology Incorporated are included from October 2016. However, even if we exclude the figures of these two companies, sales saw a slight year-on-year increase, driven by robust sales of HDD heads.

Q15. Consolidated net sales of the Passive Components segment decreased 6.0% year-on-year. What was the reason for this decline and what is your future outlook?

A15. Mainly, there are two reasons for the decline. One is that sales in February and March 2017 were not included due to the partial transfer of the high frequency components business. The other is that the yen was stronger than in the previous term. We believe that we can continue to secure a double-digit operating margin due to the expansion of business opportunities in the IoT (Internet of Things) market and the rise in demand for highly reliable electronic components in the automobile market.

Q16. Why has the operating income of the Magnetic Application Products segment decreased substantially from the previous term? Why is the year-on-year decrease particularly large in the 4^th quarter?

A16. The main reason was that we posted around 11 billion yen of structural reform costs in 4Q. To be specific, we posted an impairment loss related to the HDD head business following the switching of one of our wafer fabs to the sensor business. In addition, with regard to the magnet business, we posted an impairment loss due to our departure from the dependence on HDD heads in metal magnets and further focusing on the automobile and industrial equipment market to achieve structural changes. Figures were roughly the same as the previous term when considering these factors and the impact of exchange rate fluctuations.

Q17. What are your basic policy and the current state of business in China?

A17. Many of our overseas manufacturing bases are in China. In establishing a manufacturing base, we focus on whether there is demand nearby (in-market) and whether the site offers an advantage on a global basis in cost, quality and delivery time. As a result, we have many bases in China, as they meet these requirements. Furthermore, under our policy of respecting diversity and utilizing global human resources, the staff members at our Chinese bases have contributed significantly not only in manufacturing but also in R&D, such as the post-process of HDD heads and rechargeable batteries.

Q18. Please explain about strengthening the intellectual property division.

A18. We believe that intellectual property is the source of competitiveness as well as an asset that is necessary for customers to use our products with a sense of security. We made changes to our organization and appointed an officer in charge so as to enable the implementation of a consistent intellectual property strategy from “proactive” to “defensive” actions.