Crystal Technology: Smart Innovation

Annual Report 2013 Report for the Fiscal Year Ended March 31, 2013

A LEADER IN THE FIELD OF QUARTZ CRYSTAL ELECTRONIC COMPONENTS NIHON DEMPA KOGYO Profile

Nihon Dempa Kogyo Co., Ltd. (NDK), was founded in 1948 as a company specializing in the manufacture of quartz crystal devices, based on its business philosophy of “contributing to the prosperity of society and world peace through our service to customers.” The NDK Group supplies crystal devices that serve as indispensable “oscil- lation sources with superior stability” in a wide range of products, including telecommunications devices, such as smartphones, audiovisual/office-automation equipment, and car electronics products. Through these business activities, the NDK Group has developed top-class technological capabilities and has earned one of the top global market shares in its industry. To maintain the high levels of trust of its stakeholders, the NDK Group manages its businesses soundly and with a high level of transparency. As evidence of this, the Group has become the first company in Japan to adopt the International Financial Reporting Standards (IFRS) in the preparation of its financial statements. As a company striving for excellence in manufacturing based on the slogan of “quality first,” the NDK Group is also taking active initiatives to promote the growth of its business activities, by assisting its customers in the development of their businesses and to contribute to the building of afflu- ent societies.

The NDK Group’s Global Network

The NDK Group has 19 sales bases and 8 manufacturing plants around the world. Through this global network, the Group is well positioned to be responsive to its customers, providing them with advice and service.

Asia/Japan Americas Europe

s Head Office l Sales Base n R&D Center n Production Facility

Contents Editorial Policy Beginning with its fiscal 2013 01 Financial Highlights 13 Financial Section reporting initiative, the NDK Group is presenting its Annual Report in 02 To Our Shareholders 21 Corporate History/Guide to NDK’s Website two sections. These are the Annual 06 NDK at a Glance 22 Overview of the NDK Group/Directory Report 2013 (this publication) on the Company’s business and other 08 NDK Is Pioneering the Future 23 Investor Information activities and the Annual Report 2013 Financial Section, which con- 10 Contributing to a Sustainable Society tains detailed financial information 12 Board of Directors and is available solely in PDF form at the following URL: http://www.ndk.com/en/ir/report/ Forward-Looking Statements Statements made in this report with respect to our current plans, estimates, strategies, and beliefs and other statements that are not historical facts are forward-looking statements about our future performance. These statements are based on management’s assumptions and beliefs in light of information currently available to it. We caution that a number of important risks and uncertainties could cause actual results to differ materially from those discussed in the forward-looking statements, and therefore you should not place undue reliance on them. You also should not rely on the belief that it is our obligation to update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise. Risks and uncertainties that might affect us include, but are not limited to, fluctuation of currency exchange rates, overall supply and customer demand in the industry, product development and production capacities, performance of affiliated companies, and other risks and uncertainties.

04 Nihon Dempa Kogyo Annual Report 2013 Financial Highlights Nihon Dempa Kogyo Co., Ltd. and Consolidated Subsidiaries For the years ended March 31, 2013 and 2012

Thousands of U.S. dollars Millions of yen (Note) 2013 2012 2013 Net sales ¥50,623 ¥50,804 $538,256 Operating income 112 2,081 1,190 (Loss)/Income before income tax (159) 1,615 (1,690) Net (loss)/income (412) 1,759 (4,380) Net (loss)/income attributable to owners of the parent (412) 1,759 (4,380) Total comprehensive income for the period 1,316 1,863 13,992 Total assets 71,367 67,216 758,819 Total equity 27,047 26,123 287,581

U.S. dollars Yen (Note) Per Share Data: Net (loss)/income: Basic ¥(21.01) ¥89.66 $(0.22) Diluted — 89.66 — Cash dividends applicable to the period 20.00 20.00 0.21

Note: The figures are presented in accordance with International Financial Reporting Standards. The U.S. dollar amounts represent translations of Japanese yen amounts at the rate of ¥94.05 to U.S.$1.00, which was the rate prevailing on March 31, 2013.

Net Sales Operating Income/(Loss) (Millions of yen) (Millions of yen) 80,000 10,000

60,000 0

40,000 –10,000

20,000 –20,000

0 –30,000 ’09 ’10 ’11 ’12 ’13 ’09 ’10 ’11 ’12 ’13

Net (Loss)/Income Total Assets, Total Equity, and Equity Ratio (Millions of yen) (Millions of yen) (%) 10,000 80,000 80

0 60,000 60

–10,000 40,000 40

–20,000 20,000 20

–30,000 0 0 ’09 ’10 ’11 ’12 ’13 ’09 ’10 ’11 ’12 ’13 Total Assets (left) Total Equity (left) Equity Ratio (right)

Nihon Dempa Kogyo Annual Report 2013 01 To OUR sHAREHOLDERS

Toshiaki Takeuchi, Chairman, CEO, and Representative Director Hiroshi Takeuchi, President and Representative Director

Review of Fiscal 2013

In fiscal 2013, which ended March 31, 2013, the NDK Group had to make adjustments in production because of the prolonged economic downturn in Europe, the deceleration in the Chinese economy, and the boycot- ting of Japanese products in China because of territorial issues surrounding the Senkaku Islands. In addition, although a trend toward yen depreciation emerged at the end of the fiscal year, the yen continued to be strong for the fiscal year as a whole, thus creating a harsh environment for NDK’s operations. Amid this market environment, the NDK Group focused on expanding sales of new and high-value-added products as well as capturing high market shares in growth markets. NDK also continued its initiatives to reduce manufacturing costs and restructure its production systems; however, the pace of recovery in orders weakened, and improvement in profitability was delayed because of price competition worldwide. In particular, although sales of crystal oscillators for use in automotive systems remained firm, demand for devices used in smartphones was below the forecast levels, and sales of Temperature Compensated Crystal Oscillators (TCXOs) showed only a slight increase. In addition, demand for high-precision crystal oscillators for mobile phone base stations was stagnant as European countries remained in an economic downturn. Sales of components for audiovisual/office-automation (AV/OA) products were adversely affected by production cutbacks among Japanese producers of televisions and other digital equipment products and reductions in output of PCs as demand shifted to tablet-type devices. These adverse conditions, together with falling prices of components along with increased competition, resulted in lower overall sales than in the previous fiscal year.

02 Nihon Dempa Kogyo Annual Report 2013 In addition, as a result of deterioration in yields of certain products, an increase in valuation losses on inventories, and other factors, the Group’s consolidated net sales for the fiscal year amounted to ¥50,623 million, a decrease of 0.4% from the previous fiscal year. The Group reported operating income of ¥112 million, 94.6% below the previous fiscal year, and a loss before income tax of ¥159 million, compared with income before income tax of ¥1,615 million in the previous fiscal year. The Group reported a net loss of ¥412 million, versus net income of ¥1,759 million in the previous fiscal year. A sharp depreciation of the yen produced a foreign exchange gain of ¥1,629 million on contributions from foreign operations. The overall result was total comprehensive income for the Group of ¥1,316 million, down 29.4% from the previous fiscal year. Among our management performance indexes, our ratio of operating income to net sales was 0.2%, and the return on equity attributable to owners of the Company (ROE) ratio was minus 1.6%.

Targets for Fiscal 2014

We are anticipating moderate economic recovery in fiscal 2014, ending March 31, 2014, because of recovery in the United States and the emerging economies, including China. We are also expecting an increase in domestic demand in Japan and improvement in the environment for exports, as the correction of the overvaluation of the yen has made progress. Under these conditions, we intend to step up our Companywide activities and work together to strengthen profitability, mainly by lowering the Group’s break-even point through reductions in fixed and variable costs as well as the implementation of a growth strategy based on the launching of new products to secure profitability. During fiscal 2014, we are currently forecasting ¥51.0 billion in consolidated net sales, 0.7% higher than in fiscal 2013, operating income of ¥1.5 billion, income before income tax of ¥1.1 billion, and net income of ¥1.0 billion.

Priority Policies Strengthening Profitability by Lowering the Break-Even Point The market environment is changing at a faster pace than expected, and, looking ahead, we must be prepared for continuing uncertainty in the operating environment. It will be indispensable for us to further increase our capabilities for dealing with the changes in the market. Specifically, to reduce fixed costs, we will cut our capital investment approximately in half to ¥2.3 billion, compared with actual capital investment in the previous fiscal year of ¥4.7 billion, by using equipment already in place to the maximum extent. Among R&D expenses also, during the current fiscal year, we will place emphasis on new more-compact products and reduce R&D spending about 8%, to ¥2.4 billion (representing 4.7% of net sales), compared with ¥2.6 billion (representing 5.1% of net sales) in the previous fiscal year. Regarding variable costs, we will increase yield by accelerating the improvement in our design capabilities through implementing a major reorganization of our technical departments and by optimizing our production processes. We will also pursue thoroughgoing reductions in manufacturing costs by using our blank production facilities optimally and accelerating local procurement. Through these activities to reduce the break-even point, we will work to develop operating systems that can show a profit, even during times of major changes in the market environment.

Realizing Sustainable Growth by Pursuing a Growth Strategy In parallel with strengthening our profitability, we will also pursue reforms in our business portfolio that will enable us to develop growth path scenarios that will secure growth for the NDK Group in the medium-to-long

Nihon Dempa Kogyo Annual Report 2013 03 term. As a manufacturer specializing in crystal devices that perform “frequency control and selection functions” and are indispensable in electronic devices, we have provided products that respond to the needs of the times and aim for “high quality, high precision, low cost, compactness, and power conservation.” We have positioned the crystal technology that we have developed over many years as the core of our activities. By combining this know-how with technologies from other fields, such as telecommunications circuitry and biochemical technology, we are confident that we have substantially broadened the possibilities for new markets and new uses. In our main markets, we have responded to market needs, including consumer applications (such as mobile phones, AV/OA products, and automobile systems). Also, in addition to expanding our share in the fixed radio communications field, we will broaden our product lineup for new uses in fields that include medicine, food products, and environmental equipment as well as respond to the needs of the aerospace, aircraft, and defense industries that require even more-sophisticated specifications.

Consumer Applications Market (Mobile communications, AV/OA products, and automotive electronics) As electronic devices, including especially smartphones, have become more compact and lighter as well as capable of performing more-sophisticated functions, the movement toward the miniaturization of electronic components has advanced rapidly. At present, 32mm by 25mm units are in widest use, but forecasts call for 25mm by 20mm or smaller units to account for about 40% of the market in the future. The market for consumer applications is expected to continue to experience rapid growth going forward, in parallel with an accelerating trend toward commoditization. The NDK Group will continue its drive to achieve substantial reductions in manufacturing costs, and launch compact new products, ahead of its competitors, that use new materials and new production methods, while also maintaining NDK’s long-standing high-quality levels and its superiority in terms of price competitiveness. The aim of this drive will be to replace existing products and steadily increase the NDK Group’s share in target markets and among targeted customers.

Industrial Applications Market Mobile Phone Base Station Market Along with the increase in telecommunications transmission speeds and volume, the installation of small cells (microcells, picocells, and femtocells) to supplement macrocells is expected to rise with the aims of eliminating blind zones and facilitating connectivity. In the field of high-precision oscillators for base stations, substantially greater precision is required for LTE (long-term evolution) in macrocell base stations. In addition, for small cells, high-precision oscillators featuring low power consumption, resistance to a wide range of temperature levels, instant start-up, and compactness are required. The NDK Group, as a leading manufacturer of high-precision oscillators, will develop and expand sales of new products meeting the needs of various types of mobile base stations.

Sensor Market For more than 30 years, the NDK Group has also engaged in businesses outside the crystal device field, including the development and manufacturing of ultrasonic probes for medical use. In recent years, the Group has taken active initiatives to develop original products, differentiated by high-performance characteristics, which combine crystal technology with technologies from other fields. In 2004, the Group applied quartz

04 Nihon Dempa Kogyo Annual Report 2013 crystal microbalance (QCM)* technology to develop its NAPiCOS® devices that analyze interaction among biomolecules. Since then, sensors have undergone further development in many respects, and, at present, NDK Group sensors are used in R&D applications at universities, public research and development institutions, and elsewhere. At the same time that the Group’s devices have compiled an extensive record of accomplishments in research applications, the Group has continued to apply this technology more broadly. These activities include the commencement of joint research with pharmaceutical, food product, and other companies to develop highly sensitive, low-cost industrial biosensors that can perform simplified measurement operations. The Group expects to commercialize these devices within a few years and make them available for use in a wide range of applications, including the fields of pharmaceuticals, food products, and environmental measurement. In tandem with these activities, last fiscal year, the Group developed new sensor modules incorporating crystal physical sensors and millimeter wave Gunn-diode VCOs (voltage-controlled oscillators). Looking ahead, the NDK Group will continue to develop new markets and expand sales of high-value-added businesses.

*QCM: A molecular level measurement method using quartz crystal as the sensor board.

Contributing to Development of the Advanced Information Society and Increasing Corporate Value in the Long Term Thus far, the NDK Group has developed its business activities by providing high-value-added products in the field of crystals to meet the most-advanced needs of its customers. The NDK Group’s potential is linked to the contributions it can make in the long term to the development of the advanced information society. This means it must continue to create and apply technology that “draws forth the special features of crystals to the maximum extent possible” and, not only develop its activities based on the conventional “frequency control and selection functions” of crystal devices, but also go beyond this to expand into new business domains. We believe that these are the business activities that the NDK Group should continue to pursue as well as the activities that lead the way to increasing the Group’s corporate value in the long term. During the coming year, fiscal 2014, the Group will strive to attain sustainable growth amid ever more-intense global competition. Among priority activities, the Group will endeavor to reform its earnings structure, accelerate the development of new products, expand its market share in targeted markets, and continue to develop new markets and new customers. Also, to continue to be a company that is trusted and needed by all of its stakeholders, NDK has positioned corporate governance as one of its management issues of highest importance. As we work to increase the efficiency of management to raise the NDK Group’s corporate value, we will also be striving to strengthen management surveillance functions, to be in full compliance with laws and regulations, and to maintain high standards of disclosure and accountability. We thank all our shareholders for their continuing interest in the activities of the NDK Group, and we welcome their support in the future.

Toshiaki Takeuchi Hiroshi Takeuchi Chairman, CEO, and Representative Director President and Representative Director

Nihon Dempa Kogyo Annual Report 2013 05 NDK at a Glance

Product Lineup

Synthetic Quartz Crystals Crystal Units Crystal Oscillators

Business Summary

Principal Markets Business Results for Fiscal 2013

n In the mobile phone market during fiscal 2013, as during the previous year, smartphones Mobile Communications showed a strong performance, and their unit production volume experienced robust expan- Number of crystal devices used: sion. Smartphone (4-8) n NDK expanded sales of high-precision, compact units that can run high-value-added func- Mobile phone tions (such as GPS, W-Lan, etc.) on feature phones and smartphones. NDK also entered and (other than smartphones) % (2-5) 29 expanded its market share as well as its base among customers in the Chinese markets. However, sales were only slightly above the previous year because of delays in launches of new smartphone models and a decrease in selling prices due to more-intense competition.

Percentage of Total29 Sales%

n Demand for base stations for mobile communications and other telecommunications Fixed Radio Communications equipment declined, reflecting the worldwide economic slowdown, and NDK sales in this

Number of crystal devices used: % market decreased. Even in this operating environment, however, NDK products continued to (1-10 or more per unit) 2910% Base station for mobile be highly evaluated by its customers and received the Excellence Global Core Partner award communications from its major customers in the telecommunications equipment industry. Optical communications n NDK strengthened its lineup of products, and, for the LTE mobile base station market, device proceeded with the development of high-precision OCXOs (±0.5ppb). In addition, NDK ex- 29% 10% panded its lineup of oscillators for use in both indoor and outdoor environments, featuring low power consumption, resistance to a wide range of temperatures, and compactness.

Percentage of Total Sales 24% % 10 n To cope effectively with the strong yen and major price declines in a severe operating en- Audiovisual/Office Automation vironment, NDK worked to substantially lower its costs and restructured its production sys- Number of crystal devices used: tems to rely more on overseas plants. However, as a result of the decline in demand because Notebook computer: 3 to 4 24% of further cutbacks in production by Japanese TV manufacturers as well as the decrease in Tablet computer: 3 to 4 31% 10% demand for notebook computers, sales declined for almost all customer segments. LCD TV: 2 to 3 n NDK anticipated an increase in demand for compact products and accelerated the development of more-compact units that make use of new materials and new production methods and feature high quality and competitive prices. 24% n As a result of the spread of smartphone usage, the market for compact digital still cameras 31% (DSCs) has diminished in size, but sales of single-lens reflex cameras continued to grow over Percentage of Total Sales the previous year. 10% n Although the boycotts of Japanese automobiles in China had some adverse effects, NDK Automotive Electronics24 % 31% sales in this market expanded because of growth in the Japanese automobile market sup- Number of crystal devices used: ported by favorable tax measures, recovery in North America, and growth in the emerging Economy models (30-40) countries. % Premium models (70-100) 10 n Sales of NDK products for existing equipment, such as engine control and ABS applications, expanded, and sales of products for other types of car electronics equipment also ex- 31% panded, including equipment for more eco-friendly, safer, and more-pleasant driving as well as certain legally mandated applications, such as tire pressure monitoring systems. 10% n NDK is also continuing to develop products from the design stage with features expected Percentage of Total Sales to come into wider use in the future, such as applications for preventive safety technology.

Percentage of Total Sales 10% 06 Nihon Dempa Kogyo Annual Report 2013 Crystal Filters/SAW Devices Optical Devices Ultrasonic Transducers

Used in Market Prospects & Outline of Strategy for Fiscal 2014

n Global sales of smartphones are forecast to rise about 29% over the previous year and account for more than one-half of the mobile phone units shipped for the first time. In the medium term, smartphones and tablet-type mobile terminals are expected to sweep the market, and the trend toward greater speed and the provision of more functions will accelerate. n In a market characterized by severe cost competition among participants, NDK will focus on developing new products, mainly in the ultra-compact SMD product area where demand is strong, that combine high quality, high performance, and competitive prices. NDK will work to launch these products before competitors and increase its market share. In addition, NDK will strive to expand its customer base to include up-and-coming smartphone manufacturers in Asia, which are expected to grow in the years ahead. Mobile phones

n Along with the rise in communications volume, the market is forecast to expand in the medium-to- long term. However, as the financial instability in European economies continues, during the current fiscal year, demand for major investments in base stations and optical communications equipment in the European market is expected to continue to be weak. Base stations n In the short term, NDK will continue to develop new products with features built in at the design stage Satellite for mobile communications communications offering compactness, high precision, and low power consumption as it works to expand its share among the top four companies in its industry, which account for about 90% of the market. n In the medium-to-long term, NDK will work to further develop its position in industrial-use fields. These will include aerospace and defense, public-sector radio, train wireless communications, and measuring Optical fiber transmission systems equipment, with the objectives of offering higher-value-added products and generating high margins.

n NDK will continue to target high-demand uses, including notebook computers, tablets, HDDs, LCD TVs as well as wireless local area networks (W-Lans), Solid State Drives (SSDs), and Universal Serial Bus (USBs), which are expected to show substantial growth going forward. In each of these markets, NDK will launch products suited to those uses and work to expand orders. Flat-panel Notebook n Production of overseas Electronic Manufacturing Service (EMS) companies is expanding, and NDK televisions computers will strive to expand its market share among these customers. In addition, NDK will also mount an active response to the emergence of local manufacturers in China. n In the single-lens reflex camera market, stable growth is forecast going forward. NDK will, therefore, work to strengthen its responsiveness to price trends and increase its share of the high-quality optical Game consoles Digital still products market segment. cameras

n The sales volume of automobiles is projected to show robust growth. Since concern for the environment and upgrading of preventive safety devices is becoming more important in the industrialized countries, usage of communications equipment (inside and outside the vehicle) is increasing rapidly along with the expansion in demand for eco-friendly automobiles and vehicle telematics. In response to these trends, NDK is developing products for sensors and vehicle-mounted equipment that incorporate applications needed for vehicles from the design stage. n NDK is stepping up its initiatives to reduce defects and respond to price and quality requirements as it maintains its high market share. Automobiles n To meet demand in newly emerging countries, NDK is strengthening its capabilities for incorporating features from the design stage at its worldwide product development centers.

Nihon Dempa Kogyo Annual Report 2013 07 NDK Is Pioneering the Future

NDK’s Reliable Quality

Crystal devices are essential components in the electronic equipment that supports the smart society. NDK is the leader in crystal devices, and we daily seek to provide the highest level of QCDS (Quality, Cost, Delivery, and Service) that our customers expect, the market demands, and that will continue to make us the company of choice for crystal technologies.

nQuality: nCost: Building in Flawless Quality through Integrated Pro- Providing Flawless Products at Low-Cost Levels duction Processes That Begin with Basic Materials NDK is building a manufacturing system that leverages the NDK is one of the world’s few specialized crystal device special characteristics of its plants in Japan and overseas. suppliers with integrated development and manufacturing We use the sophisticated manufacturing technologies capabilities for processes ranging from the creation of syn- accumulated over many years to develop new manufactur- thetic crystals through to the assembly of crystal devices. ing methods and equipment in-house, construct optimal The Company’s outstanding reputation for reliability has manufacturing lines, and to be able to supply high-quality earned it the top market share in automotive equipment products at low cost. and designation by the Japan Aerospace Exploration Agency (JAXA) as the sole supplier of crystal units for use R&D Expenses (Consolidated) (Millions of yen) (%) in aerospace applications. 3,000 6

2,500 5

2,000 4

1,500 3

1,000 2

500 1

0 0 FY ’09 ’10 ’11 ’12 ’13 ’14 (Forecast) R&D expenses Photo provided by JAXA R&D expenses ratio against net sales (%)

NDK’s Reliable Quality

n Delivery: nService: Meeting Global Demand Responding to Diverse Customer with Stable Supplies Needs with Total Process Service A broad manufacturing network of four bases in Japan We meet a broad range of customer needs and provide and two overseas (China and Malaysia) and a multisourc- customer satisfaction in all aspects of quality, price, and ing system for obtaining materials and components from delivery from 19 sales bases around the world. numerous suppliers enable the Group to ensure stable supply in all conditions.

08 Nihon Dempa Kogyo Annual Report 2013 NDK Technological Power Enabling the “Smart Society”

From our foundation developing business for frequency control and selection crystal devices, we are actively integrating our crystal technologies with technologies from other fields and developing our proprietary high-performance, highly differentiated products (high-performance products (modules) and systems products) to reach into new business domains and continue contributing to the development of an advanced information society. n Crystal Products for Consumer Market (Mobile Phones, AV/OA Equipment, and Automotive Electronics) Smartphones and other mobile devices are becoming ever smaller to save space and increasingly more energy efficient to enable longer continuous running times. We are meeting these needs by proactively developing high-quality, low-cost components for mobile devices, such as compact crystal units, crystal oscillators, and SAW devices. Telematics services and other communications technologies used in automobile components are also being developed in the industry. We are developing high-precision crystal products to meet a wide range of customer needs, such as products with high temperature tolerance that allow placement even in the most-severe temperature environments. n Crystal Products for Industrial Market (Base Stations) Communications companies are expected to supplement their macrocell networks by constructing an increasing number of small cells (microcells, picocells, femtocells) to respond to demands for increasingly faster connections and larger data volumes and to eliminate blind zones and realize easier connection access. NDK is one of the world’s leading manufacturers of high-precision oscillators and is constantly developing new products to meet the evolving needs of all types of base stations.

Size: 37 x 28mm Size: 26 x 26mm Products Currently World’s highest-level Macrocell developed in under ultrahigh-precision OCXO FY2012 development Ultrahigh-precision Accurate to within one second in 0.05ppb for LTE 640 years

0.5ppb/1600mW 0.05ppb/2500mW

Size: 14 x 9mm Size: 14 x 9mm Products Currently World’s highest-level Microcell/Picocell developed in under development ultrahigh-precision TCXO High-precision, compact, FY2012 Accuracy equivalent to OCXO wide temperature range, low power consumption 50ppb*/70mW 25ppb*/70mW

Size: 7 x 5mm Size: 5 x 3mm Products Products World’s highest-level developed in developed in ultracompact, Femtocell FY2011 FY2012 high-precision TCXO Ultracompact Reference: For smartphones 2.0 x 1.6mm 500ppb/1.7mW 100ppb**/30mW 100ppb**/12mW

** Frequency temperature characteristics in the -40°C to +85°C temperature range. ** Reference: Standard temperature range -10°C to +70°C ** Hold-over frequency stability (including stability over a wide temperature range, fluctuations in voltage, and aging of 24 hours) n Our Time-Tested Technical Proficiency Creates New Possibilities for the Future NDK has developed its business in products other than crystal oscillators and resonators for many years, including hospital-use ultrasound probes, which it has developed and manufactured for over 30 years. The Company is actively applying its crystal technology to the development of a wide diversity of distinctive high-performance products, including ultralow profile SAW devices in WL-CSPs, frequency synthesizers, physical (earthquake) sensors, millimeter wave Gunn-diode VCOs, and crystal optical low pass filters.

3D Imaging Ultrasonic Probe QCM Systems and Sensors An ultrasonic probe designed for QCM systems and crystal sensors examining the abdomen and other are designed as biomolecule inter- areas providing deep, wide-angle action analyzers for use by academ- observation from the contact point ic and public research institutes. We and real-time 3D imaging. are currently collaborating with food NAPiCOS Auto (QCM system product) and drug industry companies to apply this technology to develop high- 3D probe for abdominal diagnosis sensitivity, industrial-use biosensors capable of simple measurements. Crystal sensor

Nihon Dempa Kogyo Annual Report 2013 09 Contributing to a Sustainable Society

Responding to Global Environmental Issues

1 Environmental Philosophy n Logistics and distribution: With the cooperation of our In accordance with its philosophy—“NDK takes its part in subcontractors in the supply chain, we work to optimize protecting the environment and is fulfilling its social responsi- transportation methods, implement eco-drives, and take bilities.”—NDK is rigorously complying with all environmental measures to reduce CO2 emissions. laws and regulations, working to develop environment-friendly products, and moving ahead with programs designed to 3 Environmental Performance reduce the overall environmental impact of its operations. Within Aiming to reduce the overall environmental impact of its opera- NDK, we have established the Global Environment Protection tions, NDK works to protect the environment by drafting and Countermeasures Committee and taken other measures to implementing medium-term plans that include specific tasks and build, maintain, and improve our Companywide environmental goals. The following paragraphs introduce the initiatives we are management systems. taking at our Sayama Plant, which is NDK’s “mother” plant. (i) Global warming prevention measures: The Company’s 2 Green Crystal Technology™ CO2 emissions are on a declining trend as a result of the Based on Green Crystal Technology™, NDK works to improve the introduction of energy-saving equipment and thoroughgoing contribution of its products to energy conservation and their envi- operating management, and other measures, but emissions ronmental friendliness throughout their life cycles. per unit of production are deteriorating because of the stag- n Development and design: We apply cutting-edge technolo- nation in sales accompanying the decline in unit prices. gies to create products that are compact and lightweight (ii) Reduction of waste materials: By promoting recycling pro- and consume low levels of power. grams and introducing new wastewater treatment facilities, n Procurement: Our products do not use harmful substances, the plant has maintained “zero emissions” (100% recycling of and, in particular, our new devices are lead-free. We are waste products) performance since fiscal 2010. working actively to make products previously introduced (iii) Management of environmentally hazardous substances: lead-free. We strive to procure materials that are manufac- The only substance NDK employs that falls within the scope tured in eco-friendly plants and place a small burden on the of Japan’s Pollutant Release and Transfer Register (PRTR) environment. System (a system designed to promote the improved mea- n Production: Especially in stages of our production process- surement and management of environmentally hazardous es that may have an impact on the environment, we are tak- substance emissions) is hydrogen fluoride and its water ing initiatives that include implementing energy-conservation soluble salts. However, the volume of wastes transferred has measures, eco-friendly waste and recycling policies, reduc- been reduced to zero through the use of sludge treatment tions in emissions of chemical substances, and other mea- processes. sures.

(i) CO2 Emissions (ii) Waste Emissions (iii) Hydrogen Fluoride Usage and Transfer (t-CO2) (t-CO2/millions of yen) (t) (%) (t) (t/millions of yen) 20,000 2.0 400 100 5.0 0.0005

4.0 0.0004 15,000 1.5 300 75

3.0 0.0003 10,000 1.0 200 50 2.0 0.0002

5,000 0.5 100 25 1.0 0.0001

0 0.0 0 0 0 0.0000 FY ’09 ’10 ’11 ’12 ’13 FY ’09 ’10 ’11 ’12 ’13 FY ’09 ’10 ’11 ’12 ’13

CO2 emissions volume Waste emission volume Volume used Emissions per unit of production Recycling ratio Volume transferred as waste (tons/millions of yen, right scale) (right scale) Volume transferred to sewerage, etc. Volume used per unit of production (tons/millions of yen, right scale) ** Figures in fiscal 2012 have been revised. ** The reason why volume transferred increased as usage decreased is that the frequency of the replacement cycle for the cleaning agent was increased to improve quality.

For more-detailed information, please read the CSR activities information at the following Internet address: http://www.ndk.com/en/environment/

10 Nihon Dempa Kogyo Annual Report 2013 Being a Good Corporate Citizen

To ensure that it can maintain its position as a company that 2. Creation of expeditious and reliable export systems through is trusted and needed by all of its stakeholders going forward, the trade system certifications, including obtaining certifica- NDK is endeavoring to strengthen its corporate governance sys- tion as an Authorized Economic Operator (AEO) tems and create and upgrade its internal control systems while 3. Measures to ensure that NDK’s R&D related to leading-edge concurrently moving ahead with social contribution activities. technologies and new products gives due respect to the in- tellectual property assets of others n Corporate Governance 4. Measures to preserve the natural environment; to select Governance Framework transactional partners that offer superior quality, prices, man- NDK has adopted the corporate auditor governance model ufacturing capabilities, and technological power as well as to and has elected 13 directors and 3 corporate auditors, includ- give priority to procurement from transactional partners that ing 2 external auditors. Meeting once a month and at other are proactively promoting environmental preservation times when necessary, the Board of Directors makes decisions 5. Measures to ensure the appropriate and timely disclosure of on legally stipulated matters, basic management policies, and corporate information to shareholders, investors, and other other important matters in addition to supervising directors’ and stakeholders (as reflected in NDK’s May 13, 2010 release of employees’ performance of their duties. Comprised of direc- corporate financial statements prepared in accordance with tors who also have executive posts in the Company, the Board International Financial Reporting Standards (IFRS), the first of Managing Directors meets twice a month in principle and such application of IFRS by a Japanese company) has the role of providing support to the Board of Directors and thereby enable it to make management judgments efficiently. n Occupational Health and Safety Initiatives While maintaining close cooperation between the financial In addition to complying with laws and regulations related to audit company and the Internal Audit Office, the corporate occupational health and safety, NDK endeavors to create work- auditors perform audits related to the Company’s operational place environments that enable personnel to remain healthy and and financial management; attend important Company meet- safe in mind and body. We continually strive to ensure outstand- ings, including those of the Board of Directors and the Board of ing performance and to make improvements when necessary Managing Directors; and hold monthly meetings of the Board of with respect to the prohibition of child labor and forced labor, Auditors. In addition, the Internal Audit Office performs audits of the thorough elimination of discrimination and physical punish- the state of business execution and works to increase management, the proactive promotion of exchanges of views with trade ment efficiency and prevent management errors by promoting unions, the appropriate management of work hours, and the the expeditious improvement of problematic matters. employment and remuneration of human resources with emphasis given to individuals’ humanity and capabilities. Internal Control Systems NDK is taking the following measures to strengthen its internal n Social Contribution Initiatives control systems and ensure their effectiveness. The Company is undertaking diverse kinds of corporate contri- • The Company has formed a Compliance Committee and em- bution activities, including proactive participation in local cleanup ploys an internal reporting system to gather internal informa- campaigns and planting species native to local regions to pre- tion related to illegal behavior and other actions that may be serve biodiversity as well as holding annual NDK festivals for the questionable from a compliance perspective and promote the general public at its Sayama Plant and organizing environmental analysis and use of that information. education programs. • The Company has formed a Risk Management Committee Through these and other initiatives, the Company actively and is working to build systems that prevent the emergence works to engage in two-way communications with people in lo- of risks in advance and keep associated losses to a minimum. cal communities. • To ensure the reliability of financial reporting, the Company works to evaluate and confirm the effectiveness of such systems as it introduces and operates those systems. n Compliance Initiatives 1. Measures to ensure free competition and fair trade practice performance and measures to prevent improper access to personal information gathered during the course of business operations as well as to prevent the loss, destruction, altera- tion, leakage of such information, or other problems related

to such information Neighborhood cleanup campaign

Nihon Dempa Kogyo Annual Report 2013 11 Board of Directors

Chairman, CEO, and Representative Director Toshiaki Takeuchi

President and Representative Director Hiroshi Takeuchi

Managing Directors Masahiro Tsuchiya General Manager of Corporate Production Control Division President and Representative Director of Hakodate NDK Co., Ltd. Hiromi Kato General Manager of Administration Division Kiyoto Shinmei General Manager of Sales and Customer Service Division General Manager of Sales Management Dept. 4

Directors Akio Noheji Deputy General Manager of Corporate Production Control Division President and Representative Director of Furukawa NDK Co., Ltd. Yasushi Yamamoto General Manager of Engineering Division General Manager of Engineering Management Dept. 3 Tadashi Ishii Seated, from left: Toshiaki Takeuchi and Hiroshi Takeuchi Deputy General Manager of Engineering Division Standing, from left: Hiromi Kato, Masahiro Tsuchiya, and Kiyoto Shinmei General Manager of Engineering Management Dept. 1 Junichi Naruse General Manager of Sales Management Dept. 1 Reiji Fukuhara Deputy General Manager of Corporate Production Control Division General Manager of SCM Dept. Kiyoji Shinomiya General Manager of Sales Management Dept. 3 Hiroyuki Shinada Deputy General Manager of Corporate Production Control Division General Manager of Industrial Engineering Management Dept. Nobumitsu Fujiwara President and Director of Suzhou NDK Co., Ltd.

Corporate Auditors Standing Auditor Shigeo Handa

Auditors Shoji Kenmochi Licensed tax accountant Takehiko Tatsuko Chairman of Japan International Marine Science and Technology Federation (JIMSTEF)

Seated, from left: Akio Noheji and Yasushi Yamamoto (As of June 21, 2013) Standing, from left: Hiroyuki Shinada, Reiji Fukuhara, Tadashi Ishii, Junichi Naruse, Kiyoji Shinomiya, and Nobumitsu Fujiwara

12 Nihon Dempa Kogyo Annual Report 2013 Five-Year Summary Nihon Dempa Kogyo Co., Ltd. and Consolidated Subsidiaries For the years ended March 31

Thousands of U.S. dollars Millions of yen (Note) 2013 2012 2011 2010 2009 2013 Net sales ¥50,623 ¥50,804 ¥54,934 ¥52,590 ¥59,429 $538,256 Cost of sales 40,833 38,744 42,421 38,005 55,021 434,162 Selling, general and administrative expenses 7,213 7,417 7,511 7,560 9,235 76,693 Research and development expenses 2,593 2,686 2,420 2,241 2,530 27,570 Operating income/(loss) 112 2,081 2,094 3,979 (25,380) 1,190 (Loss)/Income before income tax (159) 1,615 1,695 4,303 (24,358) (1,690) Net (loss)/income (412) 1,759 1,738 4,337 (28,731) (4,380) Net (loss)/income attributable to owners of the parent (412) 1,759 1,738 4,337 (28,731) (4,380) Total comprehensive income/ (loss) for the period 1,316 1,863 852 4,167 (29,707) 13,992 Total assets 71,367 67,216 67,586 64,558 67,348 758,819 Total equity 27,047 26,123 24,652 24,193 20,667 287,581 Depreciation and amortisation 3,425 3,040 3,247 3,067 9,436 36,416 Capital expenditures 4,736 4,873 3,389 1,983 11,092 50,356

U.S. dollars Yen (Note) Per Share Data: Net (loss)/income: Basic ¥(21.01) ¥89.66 ¥88.59 ¥220.94 ¥(1,463.61) $(0.22) Diluted — 89.66 88.59 200.16 (1,463.61) — Cash dividends applicable to the period 20.00 20.00 20.00 20.00 25.00 0.21

Note: Figures are presented in accordance with International Financial Reporting Standards. The U.S. dollar amounts represent translations of Japanese yen amounts at the rate of ¥94.05 to U.S.$1.00, which was the rate prevailing on March 31, 2013.

Cost of Sales/Net Sales R&D Expenses (%) (Millions of yen) 100 3,000

2,500 80

2,000 60 1,500 40 1,000

20 500

0 0 ’09 ’10 ’11 ’12 ’13 ’09 ’10 ’11 ’12 ’13

ROE ROA (%) (%) 40 10

20 0

0 –10 −20 –20 −40

–30 −60

−80 –40 ’09 ’10 ’11 ’12 ’13 ’09 ’10 ’11 ’12 ’13

Nihon Dempa Kogyo Annual Report 2013 13 Management’s Discussion and Analysis

Outlook Sales by Customer-Based Geographic Area The global economy in the fiscal year ended March 31, 2013, 2013 2012 showed a gradual recovery trend in the United States supported Malaysia Others Malaysia Others 2.1% 2.5% by signs of improvement in the housing market and personal 16.8% China 16.1% China consumption along with recessive conditions in Europe as the U.S. 33.3% U.S. 31.7% 5.3% 4.4% prolonging debt problems and other developments threatened to South South Korea Germany Korea Germany rekindle the smoldering sense of crisis. The impact of the sluggish 3.4% 9.3% 4.5% 11.1% Japan Japan economies in the industrialized countries, particularly in Europe, 29.8% 29.7% also reached to China, where exports declined and economic growth settled into a slower pace. The Japanese economy was fol- (3) Other lowing a moderate recovery track boosted and fueled mainly by the Other sales increased 13.9% year on year, to ¥7,848 million. Sales reconstruction-related demand after the Great East Japan Earth- rose for optical devices, led by single lens reflex camera applica- quake but was unable to break away of the economic stagnation tions, and ultrasonic transducers. caused by falling exports and production levels in a slowing global economy. Performance by Customer-Based Geographic Area Performance by customer-based geographic area was as follows: Results of Operations Japan In these conditions, the NDK Group focused on expanding sales Optical device sales were strong on increased demand for single of new and high-value-added products and building market share lens reflex camera applications. Sales declined for crystal oscillators in growth markets while continuing to cut costs and restructure its for mobile phone base stations and other telecommunications in- manufacturing systems. Despite these efforts, the sluggish recovery frastructure applications due largely to a backlash from the demand pace for orders and global cost competition led to slow improve- surge during the post-earthquake reconstruction last year. Sales ment in profitability. of crystal devices for flat-panel TVs and other audiovisual products During the consolidated fiscal year ended March 31, 2013, also declined, primarily reflecting the sluggish economic conditions. orders declined 0.4% from the level in the previous fiscal year, Japan sales declined 0.1% year on year, to ¥15,069 million. to ¥50,431 million, and consolidated net sales also decreased 0.4%, to ¥50,623 million. The Group recorded a 94.6% decline in Asia operating income, to ¥112 million, a net loss before income tax The stagnant economic conditions in Europe and other industrial- of ¥159 million versus the previous year’s income before income ized countries and the consequent slower economic growth in the tax of ¥1,615 million, and a net loss of ¥412 million, down from region led to declining sales of crystal devices, particularly for digital net income of ¥1,759 million in the previous fiscal year. A sharp appliance and mobile phone base station applications. In this same depreciation of the yen produced a foreign exchange gain of ¥1,629 environment, crystal device sales increased for smartphone and million on contributions from foreign operations. The overall result automotive applications. By country, China sales rose 4.7% year on was total comprehensive income for the Group of ¥1,316 million, year, to ¥16,840 million, South Korea sales fell 24.4%, to ¥1,730 down 29.4% from the previous fiscal year. million, Malaysia sales declined 14.6%, to ¥1,072 million, and sales in other locations rose 35.3%, to ¥3,444 million. Sales by Product Sales by product were as follows: Europe (1) Crystal Units The impact from the recessive economic conditions, including the Sales of crystal units increased 0.4% year on year, to ¥24,683 prolonging debt crisis, led to declines in sales of crystal oscillators million. Crystal unit product sales increased for smartphone and for mobile phone base stations and other telecommunications in- automotive applications while declining for flat-panel TVs and other frastructure applications and for crystal devices for automotive ap- audiovisual products. plications. Sales declined 16.4% year on year, to ¥4,726 million, in (2) Crystal Devices Germany and 13.9%, to ¥3,942 million, in other locations. Crystal device sales declined 6.4% year on year, to ¥18,092 million. Sales of crystal oscillators declined, particularly for mobile phone North America base stations and other telecommunications infrastructure applica- Crystal device sales increased, led by crystal devices for automotive tions, owing to the backlash from the demand surge accompanying applications, as an economic recovery trend emerged, supported the reconstruction after the Great East Japan Earthquake in 2011 by improvements in the housing market, personal consumption, and the slowing of the global economy.

14 Nihon Dempa Kogyo Annual Report 2013 and other areas. Sales rose 17.9% year on year, to ¥2,666 million, The main positive factors in cash flows during the fiscal year in the United States and surged 87.1%, to ¥37 million, in other under review were ¥10,500 million in proceeds from long-term locations. debt and ¥3,425 million in depreciation and amortization. The main negative factors in cash flows were ¥5,699 million in the purchase R&D Expenses of property, plant and equipment and ¥5,445 million in the repay- The NDK Group’s R&D units are engaged in R&D programs aimed ment of long-term debt. As a result of these and other factors, the at establishing the fundamental new technologies required for new balance of cash and cash equivalents at the year-end increased products over the medium-to-long term as well as in the develop- ¥3,016 million from the previous fiscal year-end, to ¥11,812 million. ment of new manufacturing methods. To better meet customers’ Net cash provided by operating activities totaled ¥3,666 million, crystal device needs, the Group is strengthening its global R&D an increase of ¥1,127 million from the previous fiscal year. Positive network with the Sayama facility as its hub, making it possible to factors included ¥3,425 million in depreciation and amortization deliver new solutions to the market in a timely manner. and a ¥910 million decrease in inventories. The main negative fac- In addition, the construction of Laboratory ATOM within the tor was a ¥628 million decrease in trade payables. Sayama Plant was completed in May 2009, and that facility has Net cash used in investing activities totaled ¥5,062 million, a de- been developing next-generation frequency control and selection cline of ¥980 million from the previous fiscal year largely reflecting devices that integrate crystal technologies and MEMS technologies ¥5,699 million for the purchase of property, plant and equipment. as well as undertaking R&D related to key leading-edge technolo- Net cash provided by financing activities amounted to ¥3,800 gies required for such devices. million, up ¥6,720 million from the level in the previous fiscal year. R&D expenditures during the fiscal year under review totaled Positive factors included ¥10,500 million in proceeds from long- ¥2,593 million, compared with ¥2,686 million in the previous term debt, which more than offset the negative factors of ¥5,445 fiscal year. million in repayment of long-term debt and an ¥861 million net decrease in short-term loans. Financial Condition Free cash flow during the fiscal year was a negative ¥1,395 mil- At fiscal year-end, total assets amounted to ¥71,367 million, an in- lion on a consolidated basis, which was ¥147 million more than the crease of ¥4,150 million from the previous fiscal year-end, owing to negative free cash flow in the previous fiscal year, as the ¥3,666 factors including a ¥3,016 million increase in cash and cash equiv- million in net cash provided by operating activities was more than alents, a ¥394 million decrease in inventory assets, and a ¥1,932 offset by the ¥5,062 million in net cash used in investing activities. million increase in property, plant and equipment. Total liabilities amounted to ¥44,320 million, up ¥3,227 million from the previous Dividends fiscal year-end, owing to factors including a ¥5,022 million increase NDK regards returning profit to shareholders as a management in long-term debt (including the current portion of long-term debt) priority and aims to maintain stable dividend payments while taking and a ¥1,536 million decline in trade and other payables. Despite a into account earnings, financial position, and other factors. While decline of ¥805 million in retained earnings due to recording a net ensuring a reasonable balance between levels of retained earnings loss and the payment of dividends, total equity attributable to own- and shareholder dividend payments, we are committed to further ers of the parent company rose to ¥27,047 million, up ¥923 million improving earnings performance by conducting R&D and capital from the previous fiscal year-end, due in part to a foreign exchange investment related to the manufacture of high-value-added and gain of ¥1,629 million in other components of equity. As a result, high-quality products in a manner that will effectively strengthen the the ratio of equity attributable to owners of the parent company constitution of the Company. was 37.9% at the fiscal year-end, down 1.0 percentage point from Based on a comprehensive consideration of factors including the previous fiscal year-end. the business performance during the year and the management environment, the Company has set a year-end dividend of ¥10 per Capital Financing and Cash Flow Analysis share for the fiscal year ended March 31, 2013. Combined with the The Group obtains funds for working capital and capital invest- ¥10 per share interim dividend, the total dividend payment for the ments from internal sources and bank loans. Bank loans include fiscal year ended March 31, 2013, amounted to ¥20 per share. short-term loans with periods of one year or less procured for In the fiscal year ending March 31, 2014, the Company plans to working capital and long-term loans for long-term funding, such as pay an interim dividend of ¥10 per share and a year-end dividend for production facilities. At March 31, 2013, the outstanding bal- of ¥10 per share for a total dividend payment of ¥20 per share. ance of short-term loans was ¥738 million and long-term debt was ¥28,541 million.

Nihon Dempa Kogyo Annual Report 2013 15 Consolidated Statements of Financial Position Nihon Dempa Kogyo Co., Ltd. and Consolidated Subsidiaries As of March 31, 2013 and 2012

Thousands of Millions of yen U.S. dollars ASSETS 2013 2012 2013 Current assets: Cash and cash equivalents (Note 4) ¥11,812 ¥ 8,796 $125,592 Trade receivables (Note 5) 12,593 12,075 133,896 Inventories (Note 6) 11,256 11,650 119,681 Income taxes refundable 2 69 21 Derivatives (Note 28) 9 37 95 Others (Note 7) 1,692 2,757 17,990 Total current assets 37,365 35,385 397,288

Non-current assets: Property, plant and equipment (Notes 8 and 30) 29,229 27,296 310,781 Intangible assets (Note 9) 1,005 1,021 10,685 Investment property (Note 10) 254 254 2,700 Investment securities (Note 11) 1,064 946 11,313 Deferred tax assets (Note 26) 1,500 1,380 15,948 Others (Note 12) 947 929 10,069 Total non-current assets 34,001 31,830 361,520 Total assets ¥71,367 ¥67,216 $758,819

The accompanying notes to consolidated financial statements are an integral part of these consolidated financial statements.

16 Nihon Dempa Kogyo Annual Report 2013 Thousands of Millions of yen U.S. dollars LIABILITIES AND EQUITY 2013 2012 2013 Current liabilities: Short-term loans (Note 15) ¥ 738 ¥ 1,508 $ 7,846 Current portion of long-term debt (Note 15) 6,030 5,259 64,114 Trade and other payables (Note 13) 8,746 10,282 92,993 Derivatives (Note 28) 751 338 7,985 Provisions for settlement for products sold (Note 32) 45 84 478 Income taxes payable 127 190 1,350 Others (Note 14) 629 640 6,687 Total current liabilities 17,067 18,305 181,467

Non-current liabilities: Long-term debt, net of current portion (Note 15) 22,510 18,259 239,340 Deferred tax liabilities (Note 26) 702 512 7,464 Employee benefits (Note 16) 2,958 2,977 31,451 Provisions for asset retirement obligation (Note 32) 60 59 637 Provisions for settlement for products sold (Note 32) 98 119 1,041 Deferred government grants 392 324 4,167 Others 529 535 5,624 Total non-current liabilities 27,252 22,787 289,760 Total liabilities 44,320 41,092 471,238

Equity: Share capital (Note 17) 10,649 10,649 113,227 Share premium (Note 17) 8,566 8,566 91,079 Other components of equity (Note 17) (1,262) (2,991) (13,418) Retained earnings 9,094 9,899 96,693 Total equity attributable to owners of the Company 27,047 26,123 287,581 Total equity 27,047 26,123 287,581 Total liabilities and equity ¥71,367 ¥67,216 $758,819

Nihon Dempa Kogyo Annual Report 2013 17 Consolidated Statements of Comprehensive Income Nihon Dempa Kogyo Co., Ltd. and Consolidated Subsidiaries For the years ended March 31, 2013 and 2012

Thousands of Millions of yen U.S. dollars 2013 2012 2013 Net sales ¥50,623 ¥50,804 $538,256 Cost of sales (Notes 19, 23 and 24) (40,833) (38,744) (434,162) Gross profit 9,789 12,060 104,082

Selling, general and administrative expenses (Notes 20, 23 and 24) (7,213) (7,417) (76,693) Research and development expenses (Notes 21, 23 and 24) (2,593) (2,686) (27,570) Other operating income (Note 22) 349 421 3,710 Other operating expenses (Notes 22 and 24) (220) (296) (2,339) Operating income 112 2,081 1,190

Financial income (Note 25) 143 53 1,520 Financial expenses (Note 25) (416) (519) (4,423) (Loss)/Income before income tax (159) 1,615 (1,690) Income tax expenses/(benefits) (Note 26) 252 (144) 2,679 Net (loss)/income for the period (412) 1,759 (4,380)

Other comprehensive income: Foreign currency translation differences for foreign operations (Note 17) 1,629 80 17,320 Change in fair value of available-for-sale financial assets (Note 17) 212 16 2,254 Change in fair value of available-for-sale financial assets transferred to profit or loss (67) 18 (712) Income tax on other comprehensive income (Note 26) (45) (13) (478) Other comprehensive income for the period, net of income tax 1,728 103 18,373 Total comprehensive income for the period ¥ 1,316 ¥ 1,863 $ 13,992

Net income attributable to: Owners of the Company Net (loss)/income from continuing operations ¥ (412) ¥ 1,759 $ (4,380) Net (loss)/income attributable to owners of the Company (412) 1,759 (4,380) Net (loss)/income for the period (412) 1,759 (4,380)

Total comprehensive income attributable to: Owners of the Company ¥ 1,316 ¥ 1,863 $ 13,992 Total comprehensive income for the period 1,316 1,863 13,992

Yen U.S. dollars Earnings per share (Note 27): Basic (loss)/earnings per share ¥ (21.01) ¥ 89.66 $ (0.22) Diluted earnings per share — 89.66 —

Earnings per share (Continuing operations): Basic (loss)/earnings per share ¥ (21.01) ¥ 89.66 $ (0.22) Diluted earnings per share — 89.66 —

The accompanying notes to consolidated financial statements are an integral part of these statements.

18 Nihon Dempa Kogyo Annual Report 2013 Consolidated Statements of Changes in Equity Nihon Dempa Kogyo Co., Ltd. and Consolidated Subsidiaries For the years ended March 31, 2013 and 2012

Millions of yen Reserve Available- Translation Additional for share- for-sale differences Other Attributable Share paid-in Treasury Convertible based Share financial for foreign components Retained to owners of Total capital capital* shares* bonds* payments* premium* assets** operations** of equity** earnings the Company equity Balance at April 1, 2011 ¥10,649 ¥11,353 ¥(2,786) ¥ 78 ¥ 35 ¥8,681 ¥ 88 ¥(3,183) ¥(3,095) ¥8,416 ¥24,652 ¥24,652 Total comprehensive income for the period Net income — — 1,759 1,759 1,759 Other comprehensive income, net of income tax Foreign currency translation differences for foreign operations — 80 80 80 80 Net change in fair value of available-for-sale financial assets — 22 22 22 22 Total comprehensive income for the period — — — — — — 22 80 103 1,759 1,863 1,863 Transactions with owners, recorded directly in equity Contributions by and distributions to owners Changes in treasury shares, net (0) (0) (0) — (0) (0) Dividends declared (Note 18) — — (392) (392) (392) Redemption of convertible bonds (78) (78) — 78 — — Share options expired (35) (35) — 35 — — Total contributions by and distributions to owners — (0) (0) (78) (35) (115) — — — (277) (392) (392) Total transactions with owners — (0) (0) (78) (35) (115) — — — (277) (392) (392) Balance at March 31, 2012 ¥10,649 ¥11,353 ¥(2,786) ¥ — ¥ — ¥8,566 ¥111 ¥(3,103) ¥(2,991) ¥9,899 ¥26,123 ¥26,123 Total comprehensive income for the period Net loss — — (412) (412) (412) Other comprehensive income, net of income tax Foreign currency translation differences for foreign operations — 1,629 1,629 1,629 1,629 Net change in fair value of available-for-sale financial assets — 99 99 99 99 Total comprehensive income for the period — — — — — — 99 1,629 1,728 (412) 1,316 1,316 Transactions with owners, recorded directly in equity Contributions by and distributions to owners Changes in treasury shares, net (0) (0) — (0) (0) Dividends declared (Note 18) — — (392) (392) (392) Total contributions by and distributions to owners — — (0) — — (0) — — — (392) (392) (392) Total transactions with owners — — (0) — — (0) — — — (392) (392) (392) Balance at March 31, 2013 ¥10,649 ¥11,353 ¥(2,787) ¥ — ¥ — ¥8,566 ¥211 ¥(1,473) ¥(1,262) ¥9,094 ¥27,047 ¥27,047

Thousands of U.S. dollars Reserve Available- Translation Additional for share- for-sale differences Other Attributable Share paid-in Treasury Convertible based Share financial for foreign components Retained to owners of Total capital capital* shares* bonds* payments* premium* assets** operations** of equity** earnings the Company equity Balance at March 31, 2012 $113,227 $120,712 $(29,622) $— $— $91,079 $1,180 $(32,993) $(31,802) $105,252 $277,756 $277,756 Total comprehensive income for the period Net loss — — (4,380) (4,380) (4,380) Other comprehensive income, net of income tax Foreign currency translation differences for foreign operations — 17,320 17,320 17,320 17,320 Net change in fair value of available-for-sale financial assets — 1,052 1,052 1,052 1,052 Total comprehensive income for the period — — — — — — 1,052 17,320 18,373 (4,380) 13,992 13,992 Transactions with owners, recorded directly in equity Contributions by and distributions to owners Changes in treasury shares, net (0) (0) — (0) (0) Dividends declared (Note 18) — — (4,167) (4,167) (4,167) Total contributions by and distributions to owners — — (0) — — (0) — — — (4,167) (4,167) (4,167) Total transactions with owners — — (0) — — (0) — — — (4,167) (4,167) (4,167) Balance at March 31, 2013 $113,227 $120,712 $(29,633) $— $— $91,079 $2,243 $(15,661) $(13,418) $ 96,693 $287,581 $287,581

* The figures in the share premium column are calculated by totalling additional paid-in capital, treasury shares, convertible bonds and reserve for share-based payments. ** The figures in the other components of the equity column are calculated by totalling available-for-sale financial assets and translation differences for foreign operations. The accompanying notes to consolidated financial statements are an integral part of these statements.

Nihon Dempa Kogyo Annual Report 2013 19 Consolidated Statements of Cash Flows Nihon Dempa Kogyo Co., Ltd. and Consolidated Subsidiaries For the years ended March 31, 2013 and 2012

Thousands of Millions of yen U.S. dollars 2013 2012 2013 Operating activities: (Loss)/Income before income tax ¥ (159) ¥ 1,615 $ (1,690) Depreciation and amortisation 3,425 3,040 36,416 Loss on retirement of property, plant, equipment and intangible assets 22 12 233 Loss on impairment of property, plant, equipment and intangible assets 1 15 10 Settlement for products sold 33 24 350 Reversal of provisions for settlement for products sold (53) (155) (563) Gain on sales of investment securities (82) — (871) Decrease in trade receivables 51 660 542 Decrease/(Increase) in inventories 910 (2,651) 9,675 Decrease in trade payables (628) (230) (6,677) Interest and dividend income (45) (52) (478) Interest expense 300 334 3,189 Interest and dividends received 42 48 446 Interest paid (233) (276) (2,477) Income tax paid, net (68) (307) (723) Payment for settlement for products sold (25) (109) (265) Other, net 176 569 1,871 Net cash provided by operating activities 3,666 2,538 38,979

Investing activities: Purchase of property, plant and equipment (5,699) (3,937) (60,595) Purchase of intangible assets (108) (68) (1,148) Purchase of investments and other assets (680) (1,256) (7,230) Proceeds from sales of property, plant and equipment 4 3 42 Proceeds from grant of subsidies 170 131 1,807 Proceeds from sales of investments and other assets 1,257 1,047 13,365 Other, net (6) (1) (63) Net cash used in investing activities (5,062) (4,081) (53,822)

Financing activities: Proceeds from long-term debt 10,500 3,500 111,642 Repayment of long-term debt (5,445) (5,299) (57,894) Net decrease in short-term loans (861) (478) (9,154) Payment for redemption of convertible bonds — (250) — Cash dividends paid (391) (391) (4,157) Purchase and sales of treasury shares, net (0) (0) (0) Net cash provided by/(used in) financing activities 3,800 (2,920) 40,404 Net increase/(decrease) in cash and cash equivalents 2,404 (4,463) 25,560 Cash and cash equivalents at beginning of year 8,796 13,236 93,524 Net effect of currency translation on cash and cash equivalents 611 23 6,496 Cash and cash equivalents at end of year (Note 4) ¥11,812 ¥ 8,796 $125,592

The accompanying notes to consolidated financial statements are an integral part of these consolidated financial statements.

20 Nihon Dempa Kogyo Annual Report 2013 Corporate History

1948 • Founded as Nanbu Shoko Co., Ltd. Europe Ltd., which is a subsidiary of the parent company 1949 • Started crystal unit production and sales • ISO 9001 certification obtained 1950 • Changed the Company’s name to Nihon Dempa Kogyo Co., Ltd. 1995 • Established sales subsidiary NDK Electronics (HK) Limited in 1954 • Relocated to newly constructed Head Office and plant in Hong Kong Shibuya-ku, Tokyo 1998 • QS-9000 certification obtained 1959 • Started crystal filter production • Listed on the First Section of the Tokyo Stock Exchange 1960 • Started crystal oscillator production 1999 • ISO 14001 certification obtained 1962 • Started construction of Sayama Plant in Sayama, Saitama 2001 • Opened NDK Europe Ltd., German Office, for Sales (functions Prefecture transferred to NDK Germany GmbH upon the establishment of 1963 • Started mass production of synthetic quartz crystals that company as a subsidiary of the parent company in 2008) • Began trading of NDK stock on the OTC market 2002 • Established production subsidiary NDK Crystal, Inc., in Illinois, 1964 • Opened Kansai Sales Office for sales in Osaka U.S.A. 1970 • Established production affiliate Hawk Denshi Co., Ltd., in Niigata • Established NDK Holdings USA, Inc., in Illinois, U.S.A. Prefecture (converted to a subsidiary in 1990 and renamed as an umbrella holding company holding 100% of the shares Niigata NDK Co., Ltd., in 2005) in NDK America, Inc., and NDK Crystal, Inc. 1975 • Opened representative sales office in California, U.S.A. • Established NRS Technologies Inc. in Hakodate, Hokkaido, 1976 • Established subsidiary Furukawa NDK Co., Ltd., in Miyagi as a joint venture with NEC Prefecture • Established sales subsidiary NDK-Electronics Shanghai Co., Ltd. 1979 • Established subsidiary Asian NDK Crystal Sdn. Bhd. in Selangor, 2003 • Established NDK Crystal Asia Pte. Ltd. in Singapore Malaysia as a sales subsidiary of Asian NDK Crystal Sdn. Bhd., which is a • Established NDK America, Inc., in California, U.S.A., subsidiary of the parent company and dissolved representative sales office 2004 • Opened Chitose Technical Center in Chitose, Hokkaido 1985 • Completed main building at Sayama Plant 2005 • NRS Technologies Inc. was merged into Hakodate NDK Co., Ltd. 1986 • Opened Chubu Sales Office for sales in Aichi Prefecture • Head Office functions relocated to Sasazuka, Shibuya-ku, Tokyo • Established production subsidiary Malaysian Quartz Crystal Sdn. 2006 • Registered Head Office moved from Nishihara, Shibuya-ku, Bhd. in Selangor, Malaysia (now NDK Quartz Malaysia Sdn. Bhd.) Tokyo, to Sasazuka, Shibuya-ku, Tokyo • Completed construction of new facilities at Sayama Plant 2008 • Quality Assurance Laboratory recognized by Japan Accreditation 1988 • Established sales subsidiary NDK Europe Ltd. Board for Conformity Assessment as meeting the ISO/IEC 17025 in the United Kingdom (2005) international laboratory management standard 1989 • Established production subsidiary Hakodate NDK Co., Ltd., in • Obtained approval as a specified exporter from Tokyo Customs Hakodate, Hokkaido 2009 • Completed Laboratory ATOM, a new research facility, within the 1990 • Relocated Head Office functions to Shinjuku-ku, Tokyo Sayama Plant • Listed NDK stock on the Second Section of the Tokyo Stock • Established Suzhou NDK Trading Co., Ltd., in Suzhou, China as Exchange a subsidiary of Suzhou NDK Co., Ltd., which is a subsidiary of 1994 • Established production subsidiary Suzhou NDK Co., Ltd., the parent company in Suzhou, China 2010 • NDK became the first company in Japan to adopt IFRS • Established sales subsidiary NDK Italy Srl as a subsidiary of NDK

Guide to NDK’s Website http://www.ndk.com/ NDK’s Website offers investor relations (IR) materials along with diverse other information—such as explanations of our unique technologies—that will enable you to gain a deeper understanding of NDK.

n CSR Activities This section offers information about NDK’s broad range of CSR activities, including environmental protection activities, environmental information disclosure activities, safety promotion activities, etc.

n Investor Relations This section offers such information as materials for explaining financial results, annual reports, etc.

n Event Information This section offers information about NDK’s participation in exhibitions.

Nihon Dempa Kogyo Annual Report 2013 21 Overview of the NDK Group

The NDK Group is currently comprised of 17 companies, including four in Japan and 13 overseas. The Group engages in the integrated manufacture as well as the marketing of crystal-related products, such as crystal devices (e.g., crystal units, crystal oscillators, and crystal filters), ultrasonic transducers, synthetic quartz crystals, and crystal blanks.

Production Companies Sales Companies Furukawa NDK Co., NDK America, Inc. Ltd. Consolidated Hakodate NDK Co., NDK Crystal Asia Pte. Japan Subsidiaries Ltd. (crystal devices, Ltd. crystal blanks, etc.) Niigata NDK Co., Ltd. NDK Europe Ltd. Consolidated Overseas Subsidiaries (crystal devices) Nihon NDK Italy Srl Dempa NDK Electronics (HK) Kogyo Limited Customers Co., Ltd. (Parent NDK-Electronics Asian NDK Crystal Company) Shanghai Co., Ltd. Sdn. Bhd. NDK Quartz Malaysia Consolidated Sdn. Bhd. Overseas Subsidiaries (crystal devices, (crystal devices, Suzhou NDK Co., Ltd. crystal blanks, ultrasonic transducers, synthetic quartz synthetic quartz crystals, etc.) NDK Crystal, Inc. crystals, etc.)

Directory

Head Office Suzhou NDK Co., Ltd. (in Suzhou, China) NDK Germany GmbH (in Germany) Nihon Dempa Kogyo Co., Ltd. • Sales Department Phone: 49-7261-4027-0 Sasazuka NA Bldg., Phone: 86-512-68252071 E-Mail: [email protected] 1-50-1, Sasazuka, NDK Crystal, Inc. (in Illinois, U.S.A.) NDK Electronics (HK) Limited Shibuya-ku, Tokyo 151-8569, Japan (in Hong Kong, China) Phone: 81-3-5453-6711 Overseas Sales Subsidiaries Phone: 852-2956-3181 E-Mail: [email protected] NDK America, Inc. (in Illinois, U.S.A.) • Taipei Branch (in Taiwan) • Kansai Sales Office (in Osaka) Phone: 1-815-544-7900 Phone: 886-2-2555-0232 • Chubu Sales Office (in Aichi) E-Mail: [email protected] E-Mail: [email protected] • Sayama Plant (in Saitama) • Eastern U.S. Regional Office • Shenzhen Representative Office • Chitose Technical Center (in Hokkaido) (in Pennsylvania) (in Shenzhen, China) Phone: 1-717-497-8353 Phone: 86-755-2518-1845 Domestic Production • Silicon Valley Office (in California) Subsidiaries Phone: 1-408-428-0800 NDK-Electronics Shanghai Co., Ltd. Furukawa NDK Co., Ltd. (in Miyagi) (in Shanghai, China) NDK Europe Ltd. (in U.K.) Phone: 86-21-6278-5115 Hakodate NDK Co., Ltd. (in Hokkaido) Phone: 44-20-8547-0500 E-Mail: [email protected] Niigata NDK Co., Ltd. (in Niigata) E-Mail: [email protected] • French Office (in France) Suzhou NDK Trading Co., Ltd. Overseas Production Phone: 33-1-60-95-0000 (in Suzhou, China) Subsidiaries E-Mail: [email protected] Phone: 86-512-68252071 Asian NDK Crystal Sdn. Bhd. • Scandinavian Office (in Finland) E-Mail: [email protected] Phone: 358-(0)-10-440-1801 NDK Quartz Malaysia Sdn. Bhd. NDK Crystal Asia Pte. Ltd. (in Singapore) (in Malaysia) E-Mail: [email protected] Phone: 65-6298-9878 • Sales Department NDK Italy Srl (in Italy) E-Mail: [email protected] Phone: 60-3-5192-3360 Phone: 39-02-9670-2920 E-Mail: [email protected] (As of July 1, 2013) E-Mail: [email protected]

22 Nihon Dempa Kogyo Annual Report 2013 Investor Information (As of March 31, 2013)

Date of Foundation: 1948 Share Capital: ¥10,649,469,744 Number of Shares of Common Stock: 20,757,905 shares (including 1,129,346 shares held in treasury) Number of Shareholders: 12,357 Major Shareholders: Number of Shares Held Shareholding Name (Thousands) Ratio Japan Trustee Services Bank, Ltd. (Trust Account) 1,131 5.76% The Master Trust Bank of Japan, Ltd. (Trust Account) 765 3.90% Resona Bank, Ltd. 667 3.39% Marusan Securities Co., Ltd. 654 3.33% Toshiaki Takeuchi 622 3.17% Saitama Resona Bank, Ltd. 610 3.10% Hiroshi Takeuchi 569 2.90% Tokio Marine & Nichido Fire Insurance Co., Ltd. 420 2.14% Japan Trustee Services Bank, Ltd. (Trust Account 9) 410 2.08% The Nomura Trust and Banking Co., Ltd. (Trust Account) 326 1.66%

Note: (1) The Company holds 1,129,346 shares of treasury stock but has excluded itself from the above list of major shareholders. Note: (2) Shareholding ratios are calculated based on the number of outstanding shares less the number of treasury stock shares, and are stated here rounded down through the discarding of figures after the second decimal place.

Distribution of Ownership among Shareholders: (On a number of shares basis) Treasury shares Other corporations 5.4% 2.6% Financial product vendors 5.7% Foreign corporations, etc. 7.8% Individuals 47.1% Financial institutions 31.4%

Stock Listing:ﾊ First Section of the Tokyo Stock Exchange Fiscal Year-End:ﾊ March 31 General Meeting of Shareholders:ﾊ June

For more detailed information, please contact: Nihon Dempa Kogyo Co., Ltd. Head Office: Sasazuka NA Bldg., 1-50-1, Sasazuka, Shibuya-ku, Tokyo 151-8569, Japan Phone: 81-3-5453-6711 E-mail: [email protected] URL: http://www.ndk.com/

Nihon Dempa Kogyo Annual Report 2013 23 NIHON DEMPA KOGYO CO., LTD. A nn u al R eport 2013

Sasazuka NA Bldg., 1-50-1, Sasazuka, Shibuya-ku, Tokyo 151-8569, Japan Phone: 81-3-5453-6711 URL: http://www.ndk.com/

Printed in Japan ANNUAL REPORT 2013 Report for the Fiscal Year Ended March 31, 2013

Financial section Nihon Dempa Kogyo Co., Ltd. and Consolidated Subsidiaries

Contents

01 Five-Year Summary 02 Management‘s Discussion and Analysis 04 Consolidated Statements of Financial Position 06 Consolidated Statements of Comprehensive Income 07 Consolidated Statements of Change in Equity 08 Consolidated Statements of Cash Flows 09 Notes to Consolidated Financial Statements 31 Independent Auditor’s Report FIVE-YEAR SUMMARY Nihon Dempa Kogyo Co., Ltd. and Consolidated Subsidiaries For the years ended March 31

Cost of Sales/Net Sales R&D Expenses (%) (Millions of yen) 100 3,000

2,500 80

2,000 60 1,500 40 1,000

20 500

0 0 ’09 ’10 ’11 ’12 ’13 ’09 ’10 ’11 ’12 ’13

ROE ROA (%) (%) 40 10

20 0

0 –10 −20 –20 −40

–30 −60

−80 –40 ’09 ’10 ’11 ’12 ’13 ’09 ’10 ’11 ’12 ’13

NIHON DEMPA KOGYO ANNUAL REPORT 2013 01 MANAGEMENT’S DISCUSSION AND ANALYSIS

Outlook Sales by Customer-Based Geographic Area The global economy in the fiscal year ended March 31, 2013, 2013 2012 showed a gradual recovery trend in the United States supported Malaysia Malaysia Others Others 2.1% 2.5% by signs of improvement in the housing market and personal 16.8% China 16.1% China consumption along with recessive conditions in Europe as the U.S. 33.3% U.S. 31.7% 5.3% 4.4% prolonging debt problems and other developments threatened to South South Korea Germany Korea Germany rekindle the smoldering sense of crisis. The impact of the sluggish 3.4% 9.3% 4.5% 11.1% Japan Japan economies in the industrialized countries, particularly in Europe, 29.8% 29.7% also reached to China, where exports declined and economic growth settled into a slower pace. The Japanese economy was fol- (3) Other lowing a moderate recovery track boosted and fueled mainly by the Other sales increased 13.9% year on year, to ¥7,848 million. Sales reconstruction-related demand after the Great East Japan Earth- rose for optical devices, led by single lens reflex camera applica- quake but was unable to break away of the economic stagnation tions, and ultrasonic transducers. caused by falling exports and production levels in a slowing global economy. Performance by Customer-Based Geographic Area Performance by customer-based geographic area was as follows: Results of Operations Japan In these conditions, the NDK Group focused on expanding sales Optical device sales were strong on increased demand for single of new and high-value-added products and building market share lens reflex camera applications. Sales declined for crystal oscillators in growth markets while continuing to cut costs and restructure its for mobile phone base stations and other telecommunications in- manufacturing systems. Despite these efforts, the sluggish recovery frastructure applications due largely to a backlash from the demand pace for orders and global cost competition led to slow improve- surge during the post-earthquake reconstruction last year. Sales ment in profitability. of crystal devices for flat-panel TVs and other audiovisual products During the consolidated fiscal year ended March 31, 2013, also declined, primarily reflecting the sluggish economic conditions. orders declined 0.4% from the level in the previous fiscal year, Japan sales declined 0.1% year on year, to ¥15,069 million. to ¥50,431 million, and consolidated net sales also decreased 0.4%, to ¥50,623 million. The Group recorded a 94.6% decline in Asia operating income, to ¥112 million, a net loss before income tax The stagnant economic conditions in Europe and other industrial- of ¥159 million versus the previous year’s income before income ized countries and the consequent slower economic growth in the tax of ¥1,615 million, and a net loss of ¥412 million, down from region led to declining sales of crystal devices, particularly for digital net income of ¥1,759 million in the previous fiscal year. A sharp appliance and mobile phone base station applications. In this same depreciation of the yen produced a foreign exchange gain of ¥1,629 environment, crystal device sales increased for smartphone and million on contributions from foreign operations. The overall result automotive applications. By country, China sales rose 4.7% year on was total comprehensive income for the Group of ¥1,316 million, year, to ¥16,840 million, South Korea sales fell 24.4%, to ¥1,730 down 29.4% from the previous fiscal year. million, Malaysia sales declined 14.6%, to ¥1,072 million, and sales in other locations rose 35.3%, to ¥3,444 million. Sales by Product Sales by product were as follows: Europe (1) Crystal Units The impact from the recessive economic conditions, including the Sales of crystal units increased 0.4% year on year, to ¥24,683 prolonging debt crisis, led to declines in sales of crystal oscillators million. Crystal unit product sales increased for smartphone and for mobile phone base stations and other telecommunications in- automotive applications while declining for flat-panel TVs and other frastructure applications and for crystal devices for automotive ap- audiovisual products. plications. Sales declined 16.4% year on year, to ¥4,726 million, in (2) Crystal Devices Germany and 13.9%, to ¥3,942 million, in other locations. Crystal device sales declined 6.4% year on year, to ¥18,092 million. Sales of crystal oscillators declined, particularly for mobile phone North America base stations and other telecommunications infrastructure applica- Crystal device sales increased, led by crystal devices for automo- tions, owing to the backlash from the demand surge accompanying tive applications, as an economic recovery trend emerged, support- the reconstruction after the Great East Japan Earthquake in 2011 ed by improvements in the housing market, personal consumption, and the slowing of the global economy.

02 NIHON DEMPA KOGYO ANNUAL REPORT 2013 and other areas. Sales rose 17.9% year on year, to ¥2,666 million, The main positive factors in cash flows during the fiscal year in the United States and surged 87.1%, to ¥37 million, in other loca- under review were ¥10,500 million in proceeds from long-term tions. debt and ¥3,425 million in depreciation and amortization. The main negative factors in cash flows were ¥5,699 million in the purchase R&D Expenses of property, plant and equipment and ¥5,445 million in the repay- The NDK Group’s R&D units are engaged in R&D programs aimed ment of long-term debt. As a result of these and other factors, the at establishing the fundamental new technologies required for new balance of cash and cash equivalents at the year-end increased products over the medium-to-long term as well as in the develop- ¥3,016 million from the previous fiscal year-end, to ¥11,812 million. ment of new manufacturing methods. To better meet customers’ Net cash provided by operating activities totaled ¥3,666 million, crystal device needs, the Group is strengthening its global R&D an increase of ¥1,127 million from the previous fiscal year. Positive network with the Sayama facility as its hub, making it possible to factors included ¥3,425 million in depreciation and amortization deliver new solutions to the market in a timely manner. and a ¥910 million decrease in inventories. The main negative fac- In addition, the construction of Laboratory ATOM within the tor was a ¥628 million decrease in trade payables. Sayama Plant was completed in May 2009, and that facility has Net cash used in investing activities totaled ¥5,062 million, a de- been developing next-generation frequency control and selection cline of ¥980 million from the previous fiscal year largely reflecting devices that integrate crystal technologies and MEMS technologies ¥5,699 million for the purchase of property, plant and equipment. as well as undertaking R&D related to key leading-edge technolo- Net cash provided by financing activities amounted to ¥3,800 gies required for such devices. million, up ¥6,720 million from the level in the previous fiscal year. R&D expenditures during the fiscal year under review totaled Positive factors included ¥10,500 million in proceeds from long- ¥2,593 million, compared with ¥2,686 million in the previous term debt, which more than offset the negative factors of ¥5,445 fiscal year. million in repayment of long-term debt and an ¥861 million net decrease in short-term loans. Financial Condition Free cash flow during the fiscal year was a negative ¥1,395 mil- At fiscal year-end, total assets amounted to ¥71,367 million, an in- lion on a consolidated basis, which was ¥147 million more than the crease of ¥4,150 million from the previous fiscal year-end, owing to negative free cash flow in the previous fiscal year, as the ¥3,666 factors including a ¥3,016 million increase in cash and cash equiv- million in net cash provided by operating activities was more than alents, a ¥394 million decrease in inventory assets, and a ¥1,932 offset by the ¥5,062 million in net cash used in investing activities. million increase in property, plant and equipment. Total liabilities amounted to ¥44,320 million, up ¥3,227 million from the previous Dividends fiscal year-end, owing to factors including a ¥5,022 million increase NDK regards returning profit to shareholders as a management in long-term debt (including the current portion of long-term debt) priority and aims to maintain stable dividend payments while taking and a ¥1,536 million decline in trade and other payables. Despite a into account earnings, financial position, and other factors. While decline of ¥805 million in retained earnings due to recording a net ensuring a reasonable balance between levels of retained earnings loss and the payment of dividends, total equity attributable to own- and shareholder dividend payments, we are committed to further ers of the parent company rose to ¥27,047 million, up ¥923 million improving earnings performance by conducting R&D and capital from the previous fiscal year-end, due in part to a foreign exchange investment related to the manufacture of high-value-added and gain of ¥1,629 million in other components of equity. As a result, high-quality products in a manner that will effectively strengthen the the ratio of equity attributable to owners of the parent company constitution of the Company. was 37.9% at the fiscal year-end, down 1.0 percentage point from Based on a comprehensive consideration of factors including the previous fiscal year-end. the business performance during the year and the management environment, the Company has set a year-end dividend of ¥10 per Capital Financing and Cash Flow Analysis share for the fiscal year ended March 31, 2013. Combined with the The Group obtains funds for working capital and capital invest- ¥10 per share interim dividend, the total dividend payment for the ments from internal sources and bank loans. Bank loans include fiscal year ended March 31, 2013, amounted to ¥20 per share. short-term loans with periods of one year or less procured for In the fiscal year ending March 31, 2014, the Company plans to working capital and long-term loans for long-term funding, such as pay an interim dividend of ¥10 per share and a year-end dividend for production facilities. At March 31, 2013, the outstanding bal- of ¥10 per share for a total dividend payment of ¥20 per share. ance of short-term loans was ¥738 million and long-term debt was ¥28,541 million.

NIHON DEMPA KOGYO ANNUAL REPORT 2013 03 CONSOLIDATED STATEMENTS OF FINANCIAL POSITION Nihon Dempa Kogyo Co., Ltd. and Consolidated Subsidiaries As of March 31, 2013 and 2012

The accompanying notes to consolidated financial statements are an integral part of these consolidated financial statements.

04 NIHON DEMPA KOGYO ANNUAL REPORT 2013 Thousands of Millions of yen U.S. dollars LIABILITIES AND EQUITY 2013 2012 2013 Current liabilities: Short-term loans (Note 15) ¥ 738 ¥ 1,508 $ 7,846 Current portion of long-term debt (Note 15) 6,030 5,259 64,114 Trade and other payables (Note 13) 8,746 10,282 92,993 Derivatives (Note 28) 751 338 7,985 Provisions for settlement for products sold (Note 32) 45 84 478 Income taxes payable 127 190 1,350 Others (Note 14) 629 640 6,687 Total current liabilities 17,067 18,305 181,467

NIHON DEMPA KOGYO ANNUAL REPORT 2013 05 CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME Nihon Dempa Kogyo Co., Ltd. and Consolidated Subsidiaries For the years ended March 31, 2013 and 2012

Thousands of Millions of yen U.S. dollars 2013 2012 2013 Net sales ¥50,623 ¥50,804 $538,256 Cost of sales (Notes 19, 23 and 24) (40,833) (38,744) (434,162) Gross profit 9,789 12,060 104,082

Total comprehensive income attributable to: Owners of the Company ¥ 1,316 ¥ 1,863 $ 13,992 Total comprehensive income for the period 1,316 1,863 13,992

Yen U.S. dollars Earnings per share (Note 27): Basic (loss)/earnings per share ¥ (21.01) ¥ 89.66 $ (0.22) Diluted earnings per share — 89.66 —

Earnings per share (Continuing operations): Basic (loss)/earnings per share ¥ (21.01) ¥ 89.66 $ (0.22) Diluted earnings per share — 89.66 —

The accompanying notes to consolidated financial statements are an integral part of these statements.

06 NIHON DEMPA KOGYO ANNUAL REPORT 2013 CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY Nihon Dempa Kogyo Co., Ltd. and Consolidated Subsidiaries For the years ended March 31, 2013 and 2012

Millions of yen Reserve Available- Translation Additional for share- for-sale differences Other Attributable Share paid-in Treasury Convertible based Share financial for foreign components Retained to owners of Total capital capital* shares* bonds* payments* premium* assets** operations** of equity** earnings the Company equity Balance at April 1, 2011 ¥10,649 ¥11,353 ¥(2,786) ¥ 78 ¥ 35 ¥8,681 ¥ 88 ¥(3,183) ¥(3,095) ¥8,416 ¥24,652 ¥24,652 Total comprehensive income for the period Net income — — 1,759 1,759 1,759 Other comprehensive income, net of income tax Foreign currency translation differences for foreign operations — 80 80 80 80 Net change in fair value of available-for-sale financial assets — 22 22 22 22 Total comprehensive income for the period — ———— —22801031,759 1,863 1,863 Transactions with owners, recorded directly in equity Contributions by and distributions to owners Changes in treasury shares, net (0) (0) (0) — (0) (0) Dividends declared (Note 18) — — (392) (392) (392) Redemption of convertible bonds (78) (78) — 78 — — Share options expired (35) (35) — 35 — — Total contributions by and distributions to owners — (0) (0) (78) (35) (115) — — — (277) (392) (392) Total transactions with owners — (0) (0) (78) (35) (115) — — — (277) (392) (392) Balance at March 31, 2012 ¥10,649 ¥11,353 ¥(2,786) ¥ — ¥ — ¥8,566 ¥111 ¥(3,103) ¥(2,991) ¥9,899 ¥26,123 ¥26,123 Total comprehensive income for the period Net loss — — (412) (412) (412) Other comprehensive income, net of income tax Foreign currency translation differences for foreign operations — 1,629 1,629 1,629 1,629 Net change in fair value of available-for-sale financial assets —99 99 9999 Total comprehensive income for the period — ———— —991,629 1,728 (412) 1,316 1,316 Transactions with owners, recorded directly in equity Contributions by and distributions to owners Changes in treasury shares, net (0) (0) — (0) (0) Dividends declared (Note 18) — — (392) (392) (392) Total contributions by and distributions to owners — — (0) — — (0) — — — (392) (392) (392) Total transactions with owners — — (0) — — (0) — — — (392) (392) (392) Balance at March 31, 2013 ¥10,649 ¥11,353 ¥(2,787) ¥ — ¥ — ¥8,566 ¥211 ¥(1,473) ¥(1,262) ¥9,094 ¥27,047 ¥27,047

NIHON DEMPA KOGYO ANNUAL REPORT 2013 07 CONSOLIDATED STATEMENTS OF CASH FLOWS Nihon Dempa Kogyo Co., Ltd. and Consolidated Subsidiaries For the years ended March 31, 2013 and 2012

The accompanying notes to consolidated financial statements are an integral part of these consolidated financial statements.

08 NIHON DEMPA KOGYO ANNUAL REPORT 2013 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Nihon Dempa Kogyo Co., Ltd. and Consolidated Subsidiaries

1. Reporting Entity (c) Effects of Applying New Accounting Standards Nihon Dempa Kogyo Co., Ltd. (“NDK” or the “Company”) is a compa- The Group has applied the following standards since April 1, 2012: ny domiciled in Japan. The main activities of the Company and its sub- IFRS 7 Financial Instruments: Disclosures (Revised in October 2010). sidiaries (collectively, the “Group”) are the manufacture and sale of The standards are applied in conformity with the respective transi- quartz crystal units and devices. The consolidated financial statements tional provisions. Adoption of these revised standards had no signifi- of the Company as of and for the years ended March 31, 2013 and cant effects on the consolidated financial statements of the Group 2012 comprise those of the Group. during the periods.

2. Basis of Preparation (d) New Standards and Interpretations Not Yet Adopted (a) Statement of Compliance The IASB has issued some standards, interpretations and amend- The consolidated financial statements have been prepared in accor- ments to existing standards whose application is not yet mandatory dance with International Financial Reporting Standards (IFRS) adopted and which have not yet been applied by the Group ahead of time. by the International Accounting Standards Board (IASB) and interpreta- These standards and interpretations are not expected to have signifi- tions issued by the IFRS Interpretations Committee. cant effects on future consolidated financial statements of the Group, The consolidated financial statements were authorised for issue by except IFRS 9 Financial Instruments (Issued in November 2009, the board of directors on June 18, 2013. Revised in October 2010 and December 2011) which introduce new requirements for the classification and measurement of financial assets (b) Basis of Measurement and IAS19 Employee Benefits (Revised in June 2011) which requires The consolidated financial statements are presented in Japanese yen immediate recognition of actuarial gains and losses in other compre- which is the functional currency of NDK, and figures of less than one hensive income. million yen are omitted. They are prepared on the historical cost basis IFRS 9 will be applied for the annual period beginning on April 1, except for the following material items in the consolidated statements 2015. The effects of adopting this standard on the consolidated finan- of financial position: cial statements of the Group are under review and cannot be estimat- • Derivative financial instruments are measured at the fair value. ed at this time. • Available-for-sale financial assets are measured at the fair value. IAS 19 will be applied for the annual period beginning on April 1, • The defined benefit assets and liabilities are recognised as the pres- 2013. The retrospective application of this standard will cause a ent value of the defined benefit obligation, less the fair value of the decrease in total equity of ¥889 million ($9,452 thousand) and ¥899 plan assets, and adjusted for unrecognised actuarial gains and losses. million ($9,558 thousand) as of April 1, 2012 and March 31, 2013, The translations of the Japanese yen amounts into U.S. dollars are respectively, and a decrease in loss before income tax of ¥122 million included solely for the convenience of the reader as supplementary ($1,297 thousand) for the year ended March 31, 2013. information, using the prevailing exchange rate at March 31, 2013, which was ¥94.05 to U.S.$1.00. The convenience translations should (e) Basis of Consolidation not be construed as representations that the Japanese yen amounts (i) Subsidiaries have been, could have been, or could in the future be converted into Subsidiaries are those entities controlled by the Group. Control exists U.S. dollars at this or any other rate of exchange. when the Group has the power, directly or indirectly, to govern the Accounting policies have been consistently applied by the Group financial and operating policies of an entity so as to obtain benefits entities and are consistent with those used in the previous year unless from its activities. The financial statements of subsidiaries are included otherwise stated. in the consolidated financial statements from the date that control The preparation of consolidated financial statements in conformity commences until the date that control ceases. with IFRS requires management to make judgements, estimates and assumptions that affect the application of accounting policies and the (ii) Transactions eliminated on consolidation reported amounts of assets and liabilities, income and expenses. Intra-group balances and transactions, and any unrealised gains aris- Actual results may differ from these estimates. ing from intra-group transactions, are eliminated in preparing the con- The estimates and underlying assumptions are reviewed on an solidated financial statements. Unrealised losses are eliminated in the ongoing basis. Revisions to accounting estimates are recognised in the same way as unrealised gains, but only to the extent that there is no period in which the estimates are revised if the revision affects only that evidence of impairment. period, or in the period of the revision and future periods if the revision affects both current and future periods. (iii) Scope of consolidation Judgements and estimates made by management in the application The scope of consolidation, including NDK, comprises 17 consolidated of IFRS that have a significant effect on the amounts recognised in the companies as of March 31, 2013 and 2012. All domestic and overseas consolidated financial statements are as follows: subsidiaries are consolidated for the years ended March 31, 2013 and • Estimate of useful lives and residual values of property, plant and 2012. equipment (refer to Notes 8 and 9) • Accounting for and valuation of provisions (refer to Note 32) (f) Foreign Currency • Devaluation of inventories (refer to Note 6) (i) Foreign currency transactions • Valuation of trade and other receivables (refer to Notes 5 and 28) Transactions in foreign currencies are translated into functional curren- • Utilisation of tax losses and deductions (refer to Note 26) cies at the foreign exchange rate ruling at the date of the transaction. • Planning and valuation premises upon which impairment tests are based (refer to Notes 8 and 9)

NIHON DEMPA KOGYO ANNUAL REPORT 2013 09 Monetary assets and liabilities denominated in foreign currencies at (j) Inventories the consolidated statement of financial position date are translated into Inventories are valued at the lower of cost and net realisable value. Net functional currencies at the foreign exchange rate ruling at that date. realisable value is the estimated selling price in the ordinary course of Foreign exchange differences arising on translation are recognised in business, less the estimated costs of completion and selling expenses. the consolidated statements of comprehensive income. Non-monetary Cost is based primarily on the moving-average cost for raw materials assets and liabilities that are measured in terms of historical cost in for- and first-in, first-out cost for finished products, semi-finished products eign currencies are translated using the exchange rate at the date of and work in process. For processed inventories, cost includes the transaction. Non-monetary assets and liabilities denominated in foreign applicable allocation of fixed and variable overhead costs. currencies that are stated at fair value are translated into functional currencies at the foreign exchange rates ruling at the dates the fair values (k) Property, Plant and Equipment were determined. (i) Owned assets Property, plant and equipment are stated at cost, less accumulated (ii) Financial statements of foreign operations depreciation and impairment losses (refer to Basis of Preparation (o)). The assets and liabilities of foreign operations other than its functional Cost includes expenditures that are directly attributable to the acqui- currency is Japanese yen are translated into presentation currency sition of the asset, the costs of dismantling and removing the items (Japanese yen) at the foreign exchange rates ruling at the consolidated and restoring the site on which they are located and borrowing costs statement of financial position date. The revenues and expenses of for- that are directly attributable to the acquisition, construction or produc- eign operations are translated into Japanese yen at the average rates tion of a qualifying asset. of exchange for the period. Foreign exchange differences arising on translation are recognised in other comprehensive income. (ii) Leased assets The exchange rates for major currencies against Japanese yen for Leases in terms of which the Group assumes substantially all the risks the years ended March 31, 2013 and 2012 were as follows: and rewards of ownership are classified as finance leases. Plant and equipment acquired by way of finance leases are stated at an amount Yen equal to the lower of their fair value and the present value of the mini- Year-End Rate Average Rate mum lease payments at inception of the leases, less accumulated 2013 2012 2013 2012 depreciation (refer to (iv)) and impairment losses (refer to Basis of U.S.A. US$ ¥ 94.05 ¥ 82.19 ¥ 83.23 ¥ 79.30 Preparation (o)). The future lease payments are recorded as financial U.K. GBP 143.16 131.34 131.36 127.19 obligations. Italy, Germany EUR 120.73 109.80 107.57 110.17 China RMB 15.16 13.06 13.27 12.40 (iii) Subsequent expenditure Hong Kong HK$ 12.12 10.58 10.73 10.20 The cost of replacing a part of an item of property, plant and equip- Malaysia MYR 30.45 26.80 26.89 25.98 ment is recognised in the carrying amount of the item if it is probable Singapore SG$ 75.79 65.37 66.93 63.41 that the future economic benefits embodied within the part will flow to the Group, and its cost can be measured reliably. The carrying amount (g) Derivative Financial Instruments of the replaced part is derecognised. The costs of the day-to-day ser- The Group uses derivative financial instruments to hedge its exposure vicing of property, plant and equipment are recognised in profit or loss to foreign exchange and interest rate risks arising from operating, as incurred. financing and investing activities. In accordance with its treasury policy, the Group does not hold or issue derivative financial instruments for (iv) Depreciation trading purposes. However, derivatives that do not qualify for hedge Whether held for operational purposes or as investment properties accounting are accounted for as held for trading. (refer to Basis of Preparation (n)), depreciation is charged to the con- Derivatives are recognised initially at fair value; attributable transac- solidated statements of comprehensive income on a straight-line basis tion costs are recognised in profit or loss when incurred. Subsequent over the following estimated useful lives: to initial recognition, derivatives are measured at fair value. The fair • Buildings and structures 3-50 years values of derivatives are based on quotes from financial institutions. • Machinery and vehicles 2-20 years Changes in the fair value of derivatives are recognised immediately in • Furniture and fixtures 2-20 years profit or loss. Leased assets are depreciated over their estimated useful lives The Group uses forward exchange contracts and foreign currency except where subsequent transfer of title is uncertain, in which case swap contracts to economically hedge the foreign exchange exposure they are depreciated over their estimated useful lives or the respective of a recognised monetary asset or liability, firm commitments or fore- lease term, whichever is shorter. cast transactions. In this case, hedge accounting is not applied and No depreciation is provided on land and construction in progress. any changes in fair value of the hedging instrument are recognised in Depreciation methods, useful lives and residual values are reviewed profit or loss. at each reporting date.

(h) Cash and Cash Equivalents (l) Intangible Assets Cash comprises cash on hand and bank deposits. Cash equivalents Intangible assets are recognised if it is probable that the future eco- are short-term, highly liquid investments that are readily convertible to nomic benefits attributable to the asset will flow to the enterprise and cash with original maturities of three months or less and are subject to the cost of the asset can be measured reliably. After initial recognition, an insignificant risk of change in value. intangible assets other than goodwill are measured at cost, less accumulated amortisation, and any accumulated impairment losses (refer to (i) Trade and Other Receivables Basis of Preparation (o)), unless the useful lives are indefinite. Trade and other receivables are initially recognised at fair value. Subsequent to initial recognition, trade and other receivables are mea- (i) Goodwill sured at amortised cost using the effective interest method, less any Goodwill represents the excess of the cost of acquisition over the impairment losses. Group’s interest in the fair value of the net identifiable assets acquired. Goodwill is measured at cost less accumulated impairment losses. Goodwill is subject to an annual impairment test and is subject to an impairment write-down, if applicable. Impairments of goodwill are not reversed.

10 NIHON DEMPA KOGYO ANNUAL REPORT 2013 (ii) Software Objective evidence that financial assets are impaired can include Costs of acquisition of new software are capitalised and are treated default or delinquency by a debtor, restructuring of an amount due to as intangible assets if these costs are not an integral part of the related the Group on terms that the Group would not consider otherwise, indi- hardware. cations that a debtor or issuer will enter bankruptcy and the disappear- ance of an active market for a security. In addition, for an investment in (iii) Patents an equity security, a significant or prolonged decline in its fair value Costs incurred in the acquisition of patents are capitalised and treated below its cost is objective evidence of impairment. as intangible assets. The Group considers evidence of impairment for receivables at both a specific asset and collective level. All individually significant receiv- (iv) Research and development ables are assessed for specific impairment. All individually significant Expenditure on research activities, undertaken with the prospect of receivables found not to be specifically impaired are then collectively gaining new scientific or technical knowledge and understanding, is assessed for any impairment that has been incurred but not yet identi- recognised in profit or loss when incurred. Development expenditure fied. Receivables that are not individually significant are collectively is capitalised only if development costs can be measured reliably, the assessed for impairment by grouping together receivables with similar product or process is technically and commercially feasible, future eco- risk characteristics. nomic benefits are probable, and the Group intends to and has suffi- In assessing collective impairment, the Group uses historical trends cient resources to complete development and to use or sell the asset. of the probability of default, timing of recoveries and the amount of loss Other development expenditure is recognised in profit or loss incurred, adjusted for management’s judgement as to whether current as incurred. economic and credit conditions are such that the actual losses are likely to be greater or less than suggested by historical trends. (v) Subsequent expenditure An impairment loss in respect of a financial asset measured at amor- Subsequent expenditure on capitalised intangible assets is capitalised tised cost is calculated as the difference between its carrying amount only when it increases the future economic benefits embodied in the and the present value of the estimated future cash flows discounted specific asset to which it relates. All other expenditure is expensed in at the asset’s original effective interest rate. Losses are recognised in profit or loss as incurred. profit or loss and reflected in an allowance account against receivables. Interest on the impaired asset continues to be recognised (vi) Amortisation through the unwinding of the discount. When a subsequent event Amortisation is charged to profit or loss on a straight-line basis over causes the amount of impairment loss to decrease, the decrease in the estimated useful lives of intangible assets other than goodwill, impairment loss is reversed through profit or loss. unless such lives are indefinite. Other intangible assets are amortised Impairment losses on available-for-sale financial assets are recog- from the date they are available for use. Amortisation methods, useful nised by transferring the cumulative loss that has been recognised in lives and residual values are reviewed at each financial year-end and other comprehensive income, and presented in change in fair value of adjusted if appropriate. The estimated useful lives are as follows: available-for-sale financial assets in equity, to profit or loss. The cumu- • Software 3-5 years lative loss that is removed from other comprehensive income and rec- • Patents 5-12 years ognised in profit or loss is the difference between the acquisition cost, net of any principal repayment and amortisation, and the current fair (m) Investment Securities value, less any impairment loss previously recognised in profit or loss. All investment securities are classified as available-for-sale and remeasured to fair value. Gains and losses arising from the changes in (ii) Non-financial assets the fair values of available-for-sale investments are recognised in other The carrying amounts of the Group’s non-financial assets, other than comprehensive income as net change in fair value of available-for-sale inventories and deferred tax assets, are reviewed at each reporting financial assets, until the investment is sold or otherwise disposed of or date to determine whether there is any indication of impairment. If any until it is determined to be impaired (refer to Basis of Preparation (o)), at such indication exists, then the asset’s recoverable amount is estimat- which time the cumulative gain or loss previously recognised in other ed. For goodwill, and intangible assets that have indefinite useful lives comprehensive income is included in net profit or loss for the period. or that are not yet available for use, the recoverable amount is estimat- The fair value of an available-for-sale investment is its closing price at ed each year at the same time. the consolidated statement of financial position date. Investments held The recoverable amount of an asset or cash-generating unit is the as available-for-sale are recognised/derecognised on the date greater of its value in use and its fair value less costs to sell. In assess- the Group commits to purchase/sell the investments. ing value in use, the estimated future cash flows are discounted to their Interest and dividends received on available-for-sale investments present value using a pre-tax discount rate that reflects current market are reported as financial income. assessments of the time value of money and the risks specific to the asset. For the purpose of impairment testing, assets that cannot be (n) Investment Property tested individually are grouped together into the smallest group of Investment property is stated at cost, less accumulated depreciation assets that generates cash inflows from continuing use that are largely (refer to Basis of Preparation (k) (iv)) and accumulated impairment independent of the cash inflows of other assets or groups of assets losses (refer to Basis of Preparation (o)). (the “cash-generating unit”, or “CGU”). For the purposes of goodwill impairment testing, CGUs to which goodwill has been allocated are (o) Impairment of Assets aggregated so that the level at which impairment is tested reflects the (i) Financial assets lowest level. Goodwill acquired in a business combination is allocated A financial asset not carried at fair value through profit or loss is to groups of CGUs that are expected to benefit from the synergies of assessed at each reporting date to determine whether there is objec- the combination. tive evidence that it is impaired. A financial asset is impaired if objective The Group’s corporate assets do not generate separate cash evidence indicates that a loss event has occurred after the initial recog- inflows. If there is an indication that a corporate asset may be nition of the asset, and that the loss event had a negative effect on the impaired, then the recoverable amount is determined for the CGU to estimated future cash flows of that asset that can be estimated reliably. which the corporate asset belongs.

NIHON DEMPA KOGYO ANNUAL REPORT 2013 11 An impairment loss is recognised if the carrying amount of an asset (t) Employee Benefits or its CGU exceeds its estimated recoverable amount. Impairment (i) Defined benefit plans losses are recognised in profit or loss. Impairment losses recognised The Group’s net obligation with respect to defined benefit pension in respect of CGUs are allocated first to reduce the carrying amount plans is calculated separately for each plan by estimating the amount of any goodwill allocated to the units, and then to reduce the carrying of future benefit that employees have earned in return for their service amounts of the other assets in the unit (group of units) on a pro rata in the current and prior periods; that benefit is discounted to determine basis. the present value, and the fair value of any plan assets is deducted. An impairment loss in respect of goodwill is not reversed. In respect The discount rate is the yield at the consolidated statement of financial of other assets, impairment losses recognised in prior periods are position date on high quality corporate bonds that have maturity dates assessed at each reporting date for any indications that the loss has approximating the terms of the Group’s obligations. The calculation is decreased or no longer exists. An impairment loss is reversed if there performed by a qualified actuary using the projected unit credit meth- has been a change in the estimates used to determine the recoverable od. Actuarial gains or losses are amortised on a straight-line basis over amount. An impairment loss is reversed only to the extent that the 10 years, which is less than the expected average remaining working asset’s carrying amount does not exceed the carrying amount that lives of the employees, commencing from the following fiscal year. would have been determined, net of depreciation or amortisation, if no impairment loss had been recognised. (ii) Defined contribution plans The employees of the Company and certain subsidiaries are provided (p) Trade and Other Payables defined contribution plans based on local practices and regulations. Trade and other payables are initially recognised at fair value. Obligations for contributions to defined contribution pension plans are Subsequent to initial recognition, trade and other payables are recognised as an expense in profit or loss as incurred. In addition, the measured at amortised cost using the effective interest method. Company participates in a defined benefit multi-employer plan. The Company accounts for the plan as if it were a defined contribution plan (q) Short-term Loans and Long-term Debt because sufficient information on the Company’s share of the defined Short-term loans and long-term debt are recognised initially at fair benefit obligation and plan assets in the plan is not available to use value, less attributable transaction costs. Subsequent to initial recogni- defined benefit accounting. tion, short-term loans and long-term debt are measured at amortised cost using the effective interest method. (iii) Short-term employee benefits Short-term employee benefit obligations are measured on an undis- (r) Convertible Bonds counted basis and are expensed as the related service is provided. The net proceeds received from the issue of convertible bonds are split A liability is recognised for the amount expected to be paid as a between a liability component, embedded derivative components that bonus or vacation pay if the Group has a present legal or constructive are separated from the liability component and an equity component at obligation to pay this amount, and the obligation can be estimated the date of issue. The fair value of the liability component is estimated reliably. using the prevailing market interest rate for similar non-convertible debt. The fair value of the embedded derivatives that are separated is (iv) Share-based payments estimated based on quotes from financial institutions. The difference The Group’s share option plan allows the directors and eligible between the proceeds of issue of the convertible bonds and the fair employees of the Group to acquire shares of the Company. The fair values assigned to the liability component and embedded derivatives value of options granted is recognised as an employee expense after that are separated, representing the embedded option to convert the the grant date over the period during which the employees become liability into equity of the Company, is included in equity and is not unconditionally entitled to the options with a corresponding increase remeasured. in equity. The fair value of the options granted is measured using the Any directly attributable transaction costs are allocated to the liability, Black Scholes formula, taking into account the terms and conditions embedded derivatives that are separated and equity components in upon which the options were granted. On a regular basis, the Group proportion to their initial carrying amounts. reviews the assumptions made and revises its estimates of the num- The liability component is carried at amortised cost using the effec- ber of options that are expected to be exercised, when necessary. tive interest method, unless it is designated at fair value through profit or loss. (u) Net Sales Revenue from the sale of goods is measured at the fair value of the (s) Provisions consideration received or receivable, net of returns, trade discounts Provisions are recognised in the consolidated statements of financial and volume rebates. Revenue is recognised when the significant risks position when the Group has a legal or constructive obligation as a and rewards of ownership have been transferred to the buyer, there is result of a past event, it is probable that an outflow of resources no continuing management involvement with the goods, recovery of embodying economic benefits will be required to settle the obligation, the consideration is probable and the associated costs and amount and a reliable estimate can be made of the amount of the obligation. of revenue can be measured reliably. Royalties are recognised on an If the effect is material, provisions are determined by discounting the accrual basis in accordance with the terms of agreements. expected future cash flows at a pre-tax rate that reflects current market assessments of the time value of money and, where appropriate, (v) Government Grants the risks specific to the liability. The unwinding of the discount is Government grants related to certain investments are measured at the recognised as a financial expense. fair value and are recognised in the consolidated statements of financial position initially as deferred income when there is reasonable assurance (i) Asset retirement obligation that they will be received and that the Group will comply with the condi- In accordance with a contractual obligation to a landlord to dismantle tions attached to the grants. Grants that compensate the Group for and remove leasehold improvements from a leased office at the end expenses incurred are recognised as revenue in profit or loss on a sys- of the lease contract, a provision for asset retirement obligation is tematic basis in the same periods in which the expenses are recognised. recognised. Grants that compensate the Group for the cost of an asset are recognised in the consolidated statements of comprehensive income as other (ii) Settlement for products sold operating income on a systematic basis over the useful life of the asset. The Company makes a provision for settlement for products sold regarding the damage incurred by customers attributed to the Company’s products.

12 NIHON DEMPA KOGYO ANNUAL REPORT 2013 (w) Shipping and Handling Costs consolidated statement of financial position date, and any adjustment The costs of shipping and handling products are included in selling, to taxes payable in respect of previous years. general and administrative expenses. Deferred taxes are recognised in respect of temporary differences between the carrying amounts of assets and liabilities for financial (x) Lease Payments reporting purposes and the amounts used for taxation purposes. The (i) Operating lease following temporary differences are not provided for: goodwill not Operating lease payments are recognised in the consolidated state- deductible for tax purposes, the initial recognition of assets or liabilities ments of comprehensive income on a straight-line basis over the lease that affect neither accounting nor taxable profit, and differences relating term. to investments in subsidiaries to the extent that they will probably not reverse in the foreseeable future. (ii) Finance lease The amount of deferred taxes recognised is based on the expected Minimum lease payments made under finance leases are apportioned manner of realisation or settlement of the carrying amount of assets between the finance expense and the reduction of the outstanding lia- and liabilities, using tax rates enacted or substantially enacted at the bility. The finance expense is allocated to each period during the lease consolidated statement of financial position date. term so as to produce a constant periodic rate of interest on the Deferred tax assets and liabilities are offset if there is a legally remaining balance of the liability. enforceable right to offset current tax liabilities and assets, and they relate to income taxes levied by the same tax authority on the same (y) Financial Income and Expenses taxable entity, or on different tax entities, but they intend to settle cur- Financial income and expenses mainly comprise interest income, divi- rent tax liabilities and assets on a net basis or their tax assets and dend income, interest expense on borrowings calculated using the liabilities will be realised simultaneously. effective interest method, foreign exchange gains and losses, changes A deferred tax asset is recognised for unused tax losses, tax credits in the fair value of derivative financial instruments, impairment loss of and deductible temporary differences, to the extent that it is probable available-for-sale financial instruments and gain and loss on sales of that future taxable profits will be available against which they can be available-for-sale financial instruments. utilised. Deferred tax assets are reduced to the extent that it is no Interest income is recognised in the consolidated statements of longer probable that the related tax benefit will be realised. comprehensive income as it accrues, taking into account the effective yield on the asset. Dividend income is recognised in the consolidated state- (aa) Segment Information ments of comprehensive income on the date that the dividend is declared. An operating segment is a component that engages in business activi- Borrowing costs that are not directly attributable to the acquisition, ties from which it may earn revenues and incur expenses including rev- construction or production of a qualifying asset are recognised in profit enues and expenses relating to transactions with other components of or loss using the effective interest method. the Group. The main activities of the Group are the integrated manufacture and (z) Income Taxes sale of quartz crystal units, crystal devices, ultrasonic transducers and Income taxes comprise current and deferred taxes. Income taxes are synthetic quartz crystals and there is no separate operating segment recognised in profit or loss except to the extent that they relate to whose operating results are regularly reviewed by the Group’s manage- items recognised directly in equity or other comprehensive income. ment to make decisions about resources to be allocated to the segment Current taxes are the expected taxes payable on the taxable income and assess its performance and for which discrete financial information for the year, using tax rates enacted or substantially enacted at the is available. Therefore, the Group has a single reportable segment.

3. Segment Information General information The main activities of the Group are the integrated manufacture and sale of quartz crystal units, crystal devices, ultrasonic transducers and synthetic quartz crystals and there are no separate operating segments. Therefore, the Group has a single reportable segment.

Information about products and services Sales by type of products is as follows:

Thousands of Millions of yen U.S. dollars 2013 2012 Increase/(Decrease) 2013 Amount Composition (%) Amount Composition (%) Amount Change (%) Amount Quartz crystal units ¥24,683 48.8 ¥24,583 48.4 ¥ 99 0.4 $262,445 Crystal devices 18,092 35.7 19,332 38.0 (1,240) (6.4) 192,365 Others 7,848 15.5 6,888 13.6 960 13.9 83,444 Total ¥50,623 100.0 ¥50,804 100.0 ¥ (180) (0.4) $538,256

NIHON DEMPA KOGYO ANNUAL REPORT 2013 13 Information about geographical areas Sales by geographical areas and non-current assets other than financial instruments, deferred tax assets, post-employment benefit assets, and rights arising under insurance contracts are as set out below. Sales by geographical areas are categorised by country or areas of customers and non-current assets are based on the geographical location of the assets.

Millions of yen 2013 Japan China Germany South Korea U.S.A. Malaysia Others Total Sales ¥15,069 ¥16,840 ¥4,726 ¥1,730 ¥2,666 ¥1,072 ¥8,517 ¥50,623 Non-current assets 24,573 3,036 2 — 458 2,540 57 30,668

Millions of yen 2012 Japan China Germany South Korea U.S.A. Malaysia Others Total Sales ¥15,081 ¥16,083 ¥5,653 ¥2,287 ¥2,262 ¥1,255 ¥8,180 ¥50,804 Non-current assets 22,856 2,988 1 — 417 2,425 44 28,733

Thousands of U.S. dollars 2013 Japan China Germany South Korea U.S.A. Malaysia Others Total Sales $160,223 $179,053 $50,249 $18,394 $28,346 $11,398 $90,558 $538,256 Non-current assets 261,275 32,280 21 — 4,869 27,006 606 326,081

Major customers During the years ended March 31, 2013 and 2012, there were no major external customers.

4. Cash and Cash Equivalents 6. Inventories

Thousands of Thousands of Millions of yen U.S. dollars Millions of yen U.S. dollars 2013 2012 2013 2013 2012 2013 Cash on hand and bank deposits ¥ 8,312 ¥6,196 $ 88,378 Finished products ¥ 6,201 ¥ 6,741 $ 65,933 Short-term investments 3,500 2,600 37,214 Semi-finished products 550 464 5,847 Total ¥11,812 ¥8,796 $125,592 Work in process 1,970 1,783 20,946 Raw materials and supplies 2,533 2,660 26,932 Cash and cash equivalents in the consolidated statements Total ¥11,256 ¥11,650 $119,681 of cash flows ¥11,812 ¥8,796 $125,592 Write-down of inventories recognised as an expense ¥ 1,337 ¥ 784 $ 14,215 Reversal of write-down ¥ (789) ¥ (917) $ (8,389)

5. Trade Receivables Notes: 1. Write-down and the reversal of write-down of inventories are included in cost of sales. Thousands of 2. Since it is not possible for the Company to track individual utilisation of the inventory Millions of yen U.S. dollars allowance, the total amount of write-down recognised at the previous year-end is 2013 2012 2013 reversed to cost of sales in the current period. Notes receivable ¥ 211 ¥ 258 $ 2,243 Accounts receivable 12,382 11,816 131,653 7. Other Current Assets Total ¥12,593 ¥12,075 $133,896 Thousands of Millions of yen U.S. dollars 2013 2012 2013 Prepaid expenses ¥ 182 ¥ 175 $ 1,935 Trust beneficiary right — 441 — Other receivables 286 689 3,040 Advance payments 206 164 2,190 Consumption tax/ value-added tax receivables 1,007 1,278 10,707 Others 8 7 85 Total ¥1,692 ¥2,757 $17,990

14 NIHON DEMPA KOGYO ANNUAL REPORT 2013 8. Property, Plant and Equipment

Millions of yen 2012 Buildings Machinery Furniture Construction Land and structures and vehicles and fixtures in progress Total Cost: At April 1 ¥3,684 ¥ 27,759 ¥69,425 ¥ 5,395 ¥2,213 ¥108,478 Additions 77 319 1,761 155 2,487 4,801 Retirements — (13) (960) (170) (7) (1,151) Sales — — (88) — (0) (88) Currency translation differences (5) 11 169 6 15 198 Transfers and others — (1) 683 47 (1,022) (293) At March 31 ¥3,756 ¥ 28,075 ¥ 70,991 ¥ 5,435 ¥3,685 ¥111,944 Accumulated depreciation and impairment losses: At April 1 ¥ — ¥(14,452) ¥(63,035) ¥(4,851) ¥ (691) ¥ (83,031) Depreciation for the year — (1,085) (1,618) (196) — (2,899) Impairment losses — (3) (12) (0) — (15) Retirements — 11 952 167 7 1,139 Sales — — 85 — — 85 Currency translation differences — (9) (161) (2) (0) (173) Transfers and others — 1 (283) 27 501 247 At March 31 ¥ — ¥(15,537) ¥(64,072) ¥(4,855) ¥ (182) ¥ (84,647) Net book value ¥3,756 ¥ 12,538 ¥ 6,919 ¥ 580 ¥3,503 ¥ 27,296

Thousands of Millions of yen U.S. dollars 2013 2013 Buildings Machinery Furniture Construction Land and structures and vehicles and fixtures in progress Total Total Cost: At April 1 ¥3,756 ¥28,075 ¥70,991 ¥5,435 ¥3,685 ¥111,944 $1,190,260 Additions 19 176 2,921 239 1,277 4,635 49,282 Retirements — (55) (154) (195) (2) (407) (4,327) Sales — (14) (14) (1) (4) (34) (361) Currency translation differences 33 855 2,687 157 52 3,787 40,265 Transfers and others — 238 1,327 142 (1,900) (191) (2,030) At March 31 ¥3,808 ¥29,277 ¥77,759 ¥5,777 ¥3,108 ¥119,733 $1,273,078 Accumulated depreciation and impairment losses: At April 1 ¥ — ¥(15,537) ¥(64,072) ¥(4,855) ¥ (182) ¥ (84,647) $ (900,021) Depreciation for the year — (1,104) (1,988) (212) — (3,305) (35,140) Impairment losses — (0) (0) (0) — (1) (10) Retirements — 37 153 194 — 385 4,093 Sales — 0 14 1 — 16 170 Currency translation differences — (466) (2,392) (132) (0) (2,992) (31,812) Transfers and others — — 35 0 5 40 425 At March 31 ¥ — ¥(17,069) ¥(68,250) ¥(5,005) ¥ (178) ¥ (90,503) $ (962,286) Net book value ¥3,808 ¥ 12,208 ¥ 9,509 ¥ 772 ¥2,930 ¥ 29,229 $ 310,781

Note: Depreciation is included in cost of sales, selling, general and administrative expenses, research and development expenses and other operating expenses. Impairment losses are included in other operating expenses.

Impairment losses ¥9 million ($95 thousand) and ¥12 million as of March 31, 2013 and During the year ended March 31, 2013, ¥1 million ($10 thousand) of 2012, respectively. impairment losses were recognised for the assets related to optical products and others at Suzhou NDK Co., Ltd. Construction in progress During the year ended March 31, 2012, ¥15 million of impairment The main content of construction in progress was as follows: losses were recognised for idle assets at Suzhou NDK Co., Ltd. and During the years ended March 31, 2013 and 2012, the Group Sayama Plant. The recoverable amount of the idle assets which will not acquired new production lines under construction for crystal units, be used due to obsolescence was based on the net selling prices, crystal oscillators and optical devices. The cost of acquisition was after deducting the costs of disposal. ¥2,700 million ($28,708 thousand) and ¥3,055 million for the years ended March 31, 2013 and 2012, respectively. Leased assets In addition, the Group is constructing extensions to buildings, for The carrying amount of leased machinery and vehicles was ¥44 million which the carrying amount was ¥229 million ($2,434 thousand) and ($467 thousand) and ¥48 million as of March 31, 2013 and 2012, ¥447 million as of March 31, 2013 and 2012, respectively. respectively. The carrying amount of leased furniture and fixtures was

NIHON DEMPA KOGYO ANNUAL REPORT 2013 15 9. Intangible Assets

Millions of yen 2012 Computer software Goodwill Patents Others Total Cost: At April 1 ¥1,180 ¥1,356 ¥ 1,731 ¥53 ¥ 4,321 Additions 62 — — 9 71 Retirements (373) — — — (373) Currency translation differences (1) — — — (1) Transfers and others 12 — — (5) 6 At March 31 ¥ 880 ¥1,356 ¥ 1,731 ¥57 ¥ 4,025 Accumulated amortisation and impairment losses: At April 1 ¥ (889) ¥ (644) ¥(1,697) ¥ (4) ¥(3,235) Amortisation for the year (136) — (2) (1) (140) Retirements 373 — — — 373 Currency translation differences 1 — — — 1 Transfers and others (2) — — — (2) At March 31 ¥ (652) ¥ (644) ¥(1,700) ¥ (6) ¥(3,003) Net book value ¥ 227 ¥ 712 ¥ 30 ¥50 ¥ 1,021

Thousands of Millions of yen U.S. dollars 2013 2013 Computer software Goodwill Patents Others Total Total Cost: At April 1 ¥ 880 ¥1,356 ¥1,731 ¥57 ¥ 4,025 $ 42,796 Additions 91 — — 8 100 1,063 Retirements (161) — (1,696) — (1,857) (19,744) Currency translation differences 11 — — — 11 116 Transfers and others 9 — — (8) 1 10 At March 31 ¥ 832 ¥1,356 ¥ 35 ¥58 ¥ 2,282 $ 24,263 Accumulated amortisation and impairment losses: At April 1 ¥(652) ¥ (644) ¥(1,700) ¥ (6) ¥(3,003) $(31,929) Amortisation for the year (115) — (2) (1) (120) (1,275) Retirements 161 — 1,696 — 1,857 19,744 Currency translation differences (10) — — — (10) (106) At March 31 ¥(617) ¥ (644) ¥ (7) ¥ (8) ¥(1,277) $(13,577) Net book value ¥ 214 ¥ 712 ¥ 27 ¥49 ¥ 1,005 $ 10,685

Note: Amortisation is included in cost of sales, selling, general and administrative expenses and research and development expenses.

Impairment losses long-term nature of the business. Revenues were projected based on • Goodwill the three-year business plan. The anticipated annual revenue growth As a result of annual impairment tests, the recoverable amount of a rates included in the cash flow projections were 6.3%, 17.0%, 21.0%, cash-generating unit exceeded the net book value and no impairment 15.0% and 10.0%, for the years ending March 31, 2014, 2015, 2016, losses were recognised during the years ended March 31, 2013 and 2017 and 2018, respectively. Thereafter, the estimated growth rate 2012. was 5.0%. The costs were projected based on the three-year plan and The estimates of the recoverable amount of the cash-generating future development in revenues. The pre-tax discount rate used in the unit, including the goodwill for SAW device production, were based on calculation was 4.5% and 4.2% for the years ended March 31, 2013 the value in use, which was calculated using the discounted present and 2012, respectively. value of estimated future cash flows for 10 years. The cash flows were projected based on actual operating results • Other and the three-year business plan. Thereafter, the cash flow estimation During the years ended March 31, 2013 and 2012, there were no was extrapolated by using the estimated growth rates noted below. impairment losses. The Company believes that the forecast period was justified due to the

16 NIHON DEMPA KOGYO ANNUAL REPORT 2013 10. Investment Property 14. Other Current Liabilities

Thousands of Thousands of Millions of yen U.S. dollars Millions of yen U.S. dollars 2013 2012 2013 2013 2012 2013 At April 1 ¥254 ¥254 $2,700 Accrued vacation pay ¥457 ¥441 $4,859 Change during the year — — —Others 171 199 1,818 At March 31 ¥254 ¥254 $2,700 Total ¥629 ¥640 $6,687 Fair value ¥735 ¥748 $7,814 Rental income from 15. Short-term Loans and Long-term Debt investment property ¥ 22 ¥ 22 $ 233 This note provides information about the contractual terms of the Group’s interest-bearing loans and debt, which are measured at amor- Direct operating expenses arising tised cost. For more information about the Group’s exposure to interest from investment property ¥ 5 ¥ 5 $ 53 rate, foreign currency and liquidity risks, see Note 28. The fair value of the investment property was based on the appraised Short-term loans and long-term debt at March 31, 2013 and 2012 assessed value by an independent real-estate appraiser. comprised the following: Rental income from investment property is included in other operat- Thousands of ing income. Millions of yen U.S. dollars 2013 2012 2013

11. Investment Securities Short-term loans: Unsecured bank loans ¥ 738 ¥ 1,508 $ 7,846 Thousands of Long-term debt maturing Millions of yen U.S. dollars within one year: 2013 2012 2013 Unsecured bank loans 6,011 5,238 63,912 Available-for-sale investments ¥1,064 ¥946 $11,313 Finance lease obligations 19 21 202 Total ¥ 6,768 ¥ 6,768 $ 71,961 Long-term debt: 12. Other Non-current Assets Unsecured bank loans ¥22,470 ¥18,211 $238,915

Thousands of Finance lease obligations 40 47 425 Millions of yen U.S. dollars Total ¥22,510 ¥18,259 $239,340 2013 2012 2013 The maturities of long-term debt at March 31, 2013 and 2012 were ¥223 $ 2,371 Lease deposits ¥216 as follows: Golf and resort club memberships 154 182 1,637 Long-term prepaid expenses 179 160 1,903 Thousands of Loans to employees 0 0 0 Millions of yen U.S. dollars Insurance premium reserve 361 346 3,838 2013 2012 2013 Others 28 24 297 The second year ¥ 9,558 ¥ 5,328 $101,626 Total ¥947 ¥929 $10,069 The third year 4,829 8,822 51,345 The fourth year 7,619 4,105 81,010 The fifth year 501 2 5,326 Thereafter 0 — 0 13. Trade and Other Payables Total ¥22,510 ¥18,259 $239,340 Thousands of Millions of yen U.S. dollars 2013 2012 2013 Trade notes payable ¥ — ¥ 54 $ — Trade accounts payable 4,819 5,234 51,238 Accrued expenses 2,982 3,038 31,706 Other payables 944 1,954 10,037 Total ¥8,746 ¥10,282 $92,993

Future minimum lease payments for the finance leases are as follows:

Millions of yen Thousands of U.S. dollars 2013 2012 2013 Present value Future value Present value Future value Present value Future value Within one year ¥19 ¥22 ¥21 ¥26 $202 $233 From one year through six years 40 43 47 53 425 457 Total minimum lease obligations ¥59 ¥65 ¥69 ¥79 $627 $691

The difference between the future value of the minimum lease pay- was used and ¥17,862 million ($189,920 thousand) was unused and ments and their present value represents the interest element of the available for borrowing on an uncommitted basis. finance leases. At March 31, 2012, the Group had ¥27,947 million of total lines of At March 31, 2013, the Group had ¥28,941 million ($307,719 thou- credit, of which ¥1,508 million was used and ¥16,113 million was sand) of total lines of credit, of which ¥738 million ($7,846 thousand) unused and available for borrowing on an uncommitted basis.

NIHON DEMPA KOGYO ANNUAL REPORT 2013 17 16. Employee Benefits Movement in fair value of plan assets: Post-employment benefits Thousands of Millions of yen U.S. dollars Defined benefit plans 2013 2012 2013 The Company and certain subsidiaries, including both overseas and domestic, provide defined benefit plans for their employees. Benefits Fair value of plan assets at April 1 ¥3,681 ¥3,328 $39,138 are dependent on the levels of wages and salaries at the times of Contributions paid into the plan 584 551 6,209 retirement or termination, lengths of service and certain other factors. Benefits paid by the plan (298) (119) (3,168) The following table reconciles the funded status of the defined bene- Expected return on plan assets 69 70 733 fit plans to the amounts recognised in the consolidated statements of Actuarial gains/(losses) 267 (149) 2,838 financial position: Fair value of plan assets at March 31 ¥4,304 ¥3,681 $45,762 Thousands of Millions of yen U.S. dollars The Company and domestic subsidiaries expect to pay ¥587 million 2013 2012 2013 ($6,241 thousand) in contributions to defined benefit plans for the year Present value of funded obligations ¥6,162 ¥5,670 $65,518 ending March 31, 2014. Fair value of plan assets (4,304) (3,681) (45,762) Pension expenses comprise the following:

1,858 1,989 19,755 Thousands of Present value of unfunded obligations 1,999 1,877 21,254 Millions of yen U.S. dollars Unrecognised actuarial losses (899) (889) (9,558) 2013 2012 2013 Net liabilities 2,958 2,977 31,451 Current service costs ¥483 ¥458 $5,135 Net liabilities recognised in Interest expense on obligations 137 140 1,456 the consolidated statements of Expected return on plan assets (69) (70) (733) financial position ¥2,958 ¥2,977 $31,451 Net actuarial losses recognised in the year 122 146 1,297 Movement in present value of the defined benefit obligations: Total pension expenses ¥675 ¥675 $7,177 Thousands of Actual return on plan assets ¥336 ¥ (79) $3,572 Millions of yen U.S. dollars 2013 2012 2013 Pension expenses are recorded as cost of sales, selling, general Defined benefit obligations at April 1 ¥7,548 ¥6,827 $80,255 and administrative expenses, and research and development expenses. Benefits paid by the plan (298) (119) (3,168) Principal actuarial assumptions used to determine pension obliga- Benefits paid by the Group (109) (53) (1,158) tions as of March 31, 2013 and 2012 are as follows: Current service costs and interest 621 598 6,602 2013 2012 Actuarial losses 400 294 4,253 Discount rate 1.5% 1.9% Defined benefit obligations Expected return on plan assets 1.9 2.2 at March 31 ¥8,161 ¥7,548 $86,772 Rate of wage and salary increase 2.1 2.1 Plan assets consist of the following: The expected long-term rate of return is determined as a result of consideration of expected return and risk which are based on the port- Thousands of Millions of yen U.S. dollars folio at present and in the future as a whole and not on the sum of the 2013 2012 2013 returns on individual asset categories and historical returns. Domestic bonds ¥2,004 ¥1,687 $21,307 Domestic equities 506 417 5,380 Foreign-currency bonds 219 142 2,328 Foreign-currency equities 433 399 4,603 General accounts at life insurance company* 1,005 927 10,685 Others 133 106 1,414 Total plan assets ¥4,304 ¥3,681 $45,762

* The life insurance company has guaranteed future interest rates and return of capital.

Historical information:

Thousands of Millions of yen U.S. dollars 2013 2012 2011 2010 2009 2013 Present value of the defined benefit obligations ¥ 8,161 ¥ 7,548 ¥6,827 ¥ 7,001 ¥ 6,747 $ 86,772 Fair value of plan assets 4,304 3,681 3,328 3,447 2,836 45,762 Deficit in the plans ¥(3,857) ¥(3,867) ¥(3,498) ¥(3,553) ¥(3,910) $(41,010)

Experience adjustments arising on plan liabilities ¥ 400 ¥ 294 ¥ (357) ¥ (24) ¥ 353 $ 4,253 Experience adjustments arising on plan assets 267 (149) (294) 423 (798) 2,838

18 NIHON DEMPA KOGYO ANNUAL REPORT 2013 Multi-employer plan The contributions paid to the plan are as follows: The Company participates in the welfare pension fund for the Tokyo Thousands of Electrical Machinery Association, a multi-employer defined benefit plan. Millions of yen U.S. dollars For the multi-employer defined benefit plan, sufficient information is 2013 2012 2013 not available to use defined benefit accounting, since it is not possible to calculate the amount of plan assets corresponding to the Contributions paid to the plan ¥291 ¥294 $3,094 Company’s contributions. Therefore, the Company accounts for the The Company and domestic subsidiaries expect to pay ¥283 million plan as if it were a defined contribution plan. ($3,009 thousand) in contributions to the multi-employer plan for the year ending March 31, 2014.

Information for the multi-employer plan as a whole is as follows:

Thousands of Millions of yen U.S. dollars 2012 2011 2012 Fair value of plan assets ¥254,797 ¥258,978 $2,709,165 Actuarial benefit obligation in the plan 299,366 300,200 3,183,051 Net ¥ (44,568) ¥ (41,221) $ (473,875)

Deficit ¥ (42,914) ¥ (11,029) $ (456,289) Additional/(Subtractive) amount of present value of assets* 11,538 (14,970) 122,679 Unamortised past service obligation (13,193) (15,221) (140,276) Total ¥ (44,568) ¥ (41,221) $ (473,875) Amortisation method of past service obligation The amounts of principal The amounts of principal and interest are amortised and interest are amortised equally for 20 years equally for 20 years Residual years of amortisation 7 8 Ratio of contributions by the Company in the plan as a whole 2.94% 2.72%

* Actuarial value of assets is calculated based on the average fair value of assets over the last 5 years. The difference between the actuarial value of assets and the present value at the end of the fiscal year is recognised as “additional/(subtractive) amount of present value of assets.” ** Information for the multi-employer plan is not in accordance with IAS 19 Employee Benefits.

Defined contribution plans The number and weighted average exercise prices of the options are In addition to the preceding plans, the Company and a majority of its as follows: subsidiaries, overseas and domestic, sponsor defined contribution 2013 2012 plans based on local practices and regulations. The Group’s contributions were as follows: Number Weighted Number Weighted of share average of share average Thousands of options exercise price options exercise price Millions of yen U.S. dollars Outstanding at beginning of year — ¥— 416 ¥2,982 2013 2012 2013 Expired during the year — — (416) 2,982 Contributions paid to the plans ¥1,047 ¥917 $11,132 Outstanding at end of year — — — — Exercisable at end of year — ¥— — ¥ — Termination benefits The number of shares per option granted equals 100 shares. The Company and certain subsidiaries, including both overseas and The Group calculates the fair value of the options using the Black domestic, paid additional compensation to employees for early retire- Scholes formula with the following assumptions: ment recorded as selling, general and administrative expenses. Fair value at measurement date ¥864.26 Thousands of Millions of yen U.S. dollars Share price ¥ 2,810 2013 2012 2013 Exercise price ¥ 2,982 Expected volatility 44.05% Expense recognised in consolidated Expected dividends ¥ 16 statements of comprehensive income ¥— ¥0 $— Option life 3.9 years Risk free interest rate 0.41% Share-based payments The expected volatility is based on the historic volatility. In the year ended March 31, 2006, the Group introduced an equity- The options are granted with a service condition. The condition is settled share option plan. The plan offers the directors and eligible not taken into account in the grant date fair value measurement of the employees options to purchase shares of NDK, at a price not less than service received. There are no market conditions associated with the the fair market value at the date the options were granted. The options option grants. are exercisable on or after July 1, 2007 by the directors and eligible employees who are employed by the Group on the vesting date. The options will be forfeited on July 1, 2011 or, if earlier, on resignation from NDK Group employment (subject to certain exceptions). No expense was recognised during the years ended March 31, 2013 and 2012, because the vesting date passed already on July 1, 2007.

NIHON DEMPA KOGYO ANNUAL REPORT 2013 19 17. Share Capital Capital reserves Treasury shares Number of shares When share capital recognised as equity is repurchased, the amount 2013 2012 of the consideration paid, which includes directly attributable costs, net Class of shares Ordinary shares Ordinary shares of any tax effects, is recognised as a deduction from equity. Number of authorised shares 40,000,000 40,000,000 Repurchased shares are classified as treasury shares and are present- Number of outstanding shares ed as a deduction from total equity. When treasury shares are sold or Beginning of period 20,757,905 20,757,905 reissued subsequently, the amount received is recognised as an End of period 20,757,905 20,757,905 increase in equity, and the resulting surplus or deficit on the transaction Number of treasury shares is transferred to/from retained earnings. Beginning of period 1,128,972 1,128,607 Number of purchased Convertible bonds and share-based payments or sold shares less than These reserves comprise the residual value attributable to the equity a full trading unit 374 365 component of convertible bonds as determined on the date of issue End of period 1,129,346 1,128,972 and reserve for share-based payments. Notes: 1. Ordinary shares have no par value. 2. Outstanding shares are fully paid. Other components of equity Available-for-sale financial assets Available-for-sale financial assets includes the cumulative net change in the fair value of available-for-sale financial assets until they are sold or otherwise disposed of or are determined to be impaired.

Translation differences for foreign operations This reserve is used for translation differences arising on the consolidation of financial statements of foreign subsidiaries.

18. Dividends 2012 payments of dividend:

Amount of dividends Dividend par share Thousands of Resolution Class of shares Millions of yen U.S. dollars Yen Record date Payment date Annual general meeting on June 24, 2011 Ordinary shares ¥196 $2,083 ¥10 March 31, 2011 June 27, 2011 Board of directors on November 7, 2011 Ordinary shares ¥196 $2,083 ¥10 September 30, 2011 December 5, 2011 2013 payments of dividend:

Amount of dividends Dividend par share Thousands of Resolution Class of shares Millions of yen U.S. dollars Yen Record date Payment date Annual general meeting on June 22, 2012 Ordinary shares ¥196 $2,083 ¥10 March 31, 2012 June 25, 2012 Board of directors on November 6, 2012 Ordinary shares ¥196 $2,083 ¥10 September 30, 2012 December 3, 2012 On June 21, 2013, a dividend of ¥196 million will be proposed to shareholders at the annual general meeting:

Amount of dividends Dividend par share Thousands of Resolution Class of shares Millions of yen U.S. dollars Yen Record date Payment date Annual general meeting on June 21, 2013 Ordinary shares ¥196 $2,083 ¥10 March 31, 2013 June 24, 2013

Note: In accordance with IAS 10 Events After the Reporting Period, the dividend has not been recorded in the consolidated financial statements for the year ended March 31, 2013.

19. Cost of Sales 20. Selling, General and Administrative Expenses

Thousands of Thousands of Millions of yen U.S. dollars Millions of yen U.S. dollars 2013 2012 2013 2013 2012 2013 Raw materials ¥19,651 ¥20,343 $208,942 Personnel expenses Subcontract fees 990 1,075 10,526 (refer to Note 23) ¥3,554 ¥3,643 $37,788 Decrease/(Increase) in products Depreciation and amortisation and work in process 900 (2,129) 9,569 (refer to Note 24) 243 255 2,583 Personnel expenses Commissions 557 526 5,922 (refer to Note 23) 11,253 11,132 119,649 Shipping charges 637 632 6,772 Depreciation and amortisation Travel 333 322 3,540 (refer to Note 24) 2,703 2,289 28,740 Welfare 214 242 2,275 Others 5,333 6,033 56,703 Rent 315 327 3,349 Total ¥40,833 ¥38,744 $434,162 Advertising 199 207 2,115 Communication 99 94 1,052 Others 1,059 1,163 11,259 Total ¥7,213 ¥7,417 $76,693

20 NIHON DEMPA KOGYO ANNUAL REPORT 2013 21. Research and Development Expenses 24. Depreciation and Amortisation Expenses

Thousands of Thousands of Millions of yen U.S. dollars Millions of yen U.S. dollars 2013 2012 2013 2013 2012 2013 Personnel expenses Property, plant and equipment: (refer to Note 23) ¥1,329 ¥1,324 $14,130 Cost of sales ¥2,653 ¥2,241 $28,208 Depreciation and amortisation Selling, general and (refer to Note 24) 401 405 4,263 administrative expenses 200 198 2,126 Materials 478 570 5,082 Research and development Others 383 385 4,072 expenses 375 368 3,987 Total ¥2,593 ¥2,686 $27,570 Other operating expenses 76 91 808 Subtotal—depreciation expenses ¥3,305 ¥2,899 $35,140 Intangible assets and goodwill: 22. Other Operating Income and Expenses Cost of sales ¥ 50 ¥ 47 $ 531 Selling, general and Thousands of administrative expenses 43 56 457 Millions of yen U.S. dollars Research and development 2013 2012 2013 expenses 26 36 276 ¥198 $2,105 Government grants ¥143 Subtotal—amortisation expenses ¥ 120 ¥ 140 $ 1,275 Reversal of provisions for settlement for products sold 53 155 563 Total depreciation and Other income 98 122 1,041 amortisation expenses ¥3,425 ¥3,040 $36,416 Total other operating income ¥349 ¥421 $3,710 Loss on sales of PPE ¥ 10 ¥ — $ 106 25. Financial Income and Expenses Loss on retirement of PPE 22 12 233 Loss on impairment of PPE Thousands of and intangible assets 1 15 10 Millions of yen U.S. dollars Depreciation of temporarily 2013 2012 2013 idle fixed assets 72 84 765 Interest income: Settlement for products sold 33 24 350 Interest income on bank deposits ¥ 30 ¥ 34 $ 318 Loss due to accident — 87 —Dividend income: Other expenses 79 71 839 Available-for-sale financial assets 15 18 159 Total other operating expenses ¥220 ¥296 $2,339 Gain on sales of investment securities: Available-for-sale financial assets* 82 — 871 Government grants Gain arising from changes Grants mainly received from national and local public entities for in the fair value of derivative employment and investments in facilities, subsidies for restoration and financial instruments: maintenance of facilities regarding the Great East Japan Earthquake, Financial assets measured and benefits received through low-interest loans using the lending at fair value and recognised 15 159 system of the Bank of Japan are recognised in the periods when the through profit or loss — related expenses are recognised. Total financial income ¥143 ¥ 53 $1,520 Interest expense: Loss due to accident Unwind of discount ¥ 2 ¥ 3 $ 21 During the year ended March 31, 2012, ¥87 million of losses were Financial liability measured incurred as a result of damage to inventory and fixed assets caused at amortised cost 297 331 3,157 by the Great East Japan Earthquake. Loss on impairment of investment securities: Available-for-sale financial assets* — 25 — 23. Personnel Expenses and Number of Employees Loss arising from changes

Thousands of in the fair value of derivative Millions of yen U.S. dollars financial instruments: 2013 2012 2013 Financial assets measured at fair value and recognised Wages and salaries ¥13,009 ¥13,034 $138,320 through profit or loss — 18 — Pension expenses 2,014 1,894 21,414 Foreign exchange losses, net 107 137 1,137 Termination benefits — 0 — Others 8 3 85 Fringe benefits (excluding expenses related to defined Total financial expenses ¥416 ¥519 $4,423 benefit plans) and others 1,113 1,171 11,834 * Of these amounts, ¥(67) million ($(712) thousand) and ¥18 million for the years ended Total ¥16,137 ¥16,100 $171,578 March 31, 2013 and 2012, respectively, were transferred from equity to profit or loss. The number of employees at the end of the year is as follows:

2013 2012 Number of employees 4,654 4,824

Note: The average number of temporary staff is included in number of employees.

NIHON DEMPA KOGYO ANNUAL REPORT 2013 21 26. Income Taxes Deferred tax assets have not been recognised in respect of the Deferred tax assets and liabilities are attributable to the following: following items:

Thousands of Thousands of Millions of yen U.S. dollars Millions of yen U.S. dollars 2013 2012 2013 2013 2012 2013 Deferred tax assets by type Deductible temporary differences ¥15,645 ¥16,461 $166,347 of temporary differences: Tax losses 11,524 9,444 122,530 Accrued bonus ¥ 73 ¥ 129 $ 776 Total ¥27,170 ¥25,906 $288,888 Loss from devaluation of inventories 35 41 372 Deferred tax assets have not been recognised in respect of these Loss on impairment of items because it is not probable that future taxable profit will be avail- PPE and intangible assets 374 418 3,976 able against which the Group can utilise the benefits therefrom. The Elimination of unrealised gains deductible temporary differences and part of tax losses do not expire on inventories 73 80 776 under current tax legislation. The tax losses carried forward for the Depreciation of PPE Company and certain subsidiaries are with the following schedule of and amortisation of expiration: intangible assets 150 225 1,594 Thousands of Tax losses carried forward 505 421 5,369 Millions of yen U.S. dollars Others 390 382 4,146 2013 2012 2013 ¥1,603 ¥ 1,699 $17,044 The first year ¥ — ¥ — $ — Offset by deferred tax liabilities The second year — — — within each entity ¥ (102) ¥ (319) $ (1,084) The third year — — — Deferred tax assets ¥1,500 ¥ 1,380 $15,948 The fourth year — — — The fifth year and after 11,467 9,394 121,924 Deferred tax liabilities by type Deferred tax liabilities have not been recognised for temporary differ- of temporary differences: ences associated with investments in foreign subsidiaries of ¥147 Depreciation of PPE million ($1,562 thousand) and ¥139 million at March 31, 2013 and and amortisation of 2012, respectively, as the Company has determined that the profits intangible assets ¥ (376) ¥ (434) $(3,997) concerned will not be distributed in the foreseeable future. Holding gains on investment securities (113) (68) (1,201) Others (315) (327) (3,349) ¥ (805) ¥ (831) $(8,559) Offset by deferred tax assets within each entity ¥ 102 ¥ 319 $ 1,084 Deferred tax liabilities ¥ (702) ¥ (512) $(7,464) Net deferred tax assets ¥ 797 ¥ 868 $ 8,474

Movement in net deferred tax assets during the year is as follows:

Millions of yen Recognised Recognised Recognised Recognised in other Balance Recognised Recognised in other Balance Balance in profit directly comprehensive March 31, in profit directly comprehensive March 31, April 1, 2011 or loss in equity income 2012 or loss in equity income 2013 Accrued bonus ¥132 ¥ (2) ¥— ¥ — ¥129 ¥(56) ¥— ¥ — ¥ 73 Loss from devaluation of inventories 46 (5) — — 41 (5) — — 35 Loss on impairment of investment securities (29) (26) — (13) (68) 0 — (45) (113) Loss on impairment of PPE and intangible assets 373 45 — — 418 (44) — — 374 Elimination of unrealised gains on inventories 70 10 — — 80 (6) — — 73 Depreciation of PPE and amortisation of intangible assets (375) 166 — — (209) (16) — — (225) Tax losses carried forward 381 39 — — 421 83 — — 505 Convertible bonds (3) 3 — — — — — — — Others 8 46 — — 54 19 — — 74 Total ¥603 ¥277 ¥— ¥(13) ¥868 ¥(25) ¥— ¥(45) ¥797

Note: The difference between total of “Recognised in profit or loss” and “Deferred tax expenses/(benefits)” is due to exchange rate fluctuations.

22 NIHON DEMPA KOGYO ANNUAL REPORT 2013 Thousands of U.S. dollars Recognised Balance Recognised Recognised in other Balance March 31, in profit directly comprehensive March 31, 2012 or loss in equity income 2013 Accrued bonus $1,371 $(595) $— $ — $ 776 Loss from devaluation of inventories 435 (53) — — 372 Loss on impairment of investment securities (723) 0 — (478) (1,201) Loss on impairment of PPE and intangible assets 4,444 (467) — — 3,976 Elimination of unrealised gains on inventories 850 (63) — — 776 Depreciation of PPE and amortisation of intangible assets (2,222) (170) — — (2,392) Tax losses carried forward 4,476 882 — — 5,369 Convertible bonds — — — — — Others 574 202 — — 786 Total $9,229 $(265) $— $(478) $8,474

Income taxes are composed of the following: 27. Earnings per Share

Thousands of Thousands of Millions of yen U.S. dollars Millions of yen U.S. dollars 2013 2012 2013 2013 2012 2013 Current tax expenses/(benefits): Net (loss)/income applicable to Current year ¥ 74 ¥ 131 $ 786 ordinary shareholders ¥(412) ¥1,759 $(4,380) Deferred tax expenses/(benefits): Diluted net income — 1,759 — Origination and reversal of temporary differences (171) 438 (1,818) Number of shares Change in tax rate 37 (62) 393 2013 2012 Utilisation/(benefit) of tax losses Weighted-average number of recognised 28 (39) 297 shares outstanding 19,628,742 19,629,108 Change in unrecognised deductible temporary differences 283 (612) 3,009 Weighted-average number of diluted ordinary shares outstanding — 19,629,108 Total 178 (276) 1,892 Total income tax expense/(benefits) ¥252 ¥(144) $2,679 Yen U.S. dollars Reconciliation of effective tax rate is as follows: 2013 2012 2013

Thousands of Basic earnings per share ¥(21.01) ¥89.66 $(0.22) Millions of yen U.S. dollars Diluted earnings per share — 89.66 — 2013 2012 2013 Basic earnings per share is calculated by dividing the net income (Loss)/Income before income taxes ¥(159) ¥1,615 $(1,690) for the period attributable to ordinary shareholders by the weighted- Taxes at the Company’s domestic average number of ordinary shares outstanding during the period. tax rate* (60) 652 (637) For the year ended March 31, 2013, diluted earnings per share is Expenses not deductible not disclosed because there are no potential ordinary shares which for tax purposes 72 100 765 have dilution effect. Non-taxable income (246) (214) (2,615) For the year ended March 31, 2012, the potential ordinary shares Impact of different tax rates are anti-dilutive because conversion of convertible bonds or exercise in other countries (111) (124) (1,180) of share options would increase income per share. Effect of eliminating dividends received from subsidiaries 291 256 3,094 Effect of unrecognised tax losses or temporary differences 283 (612) 3,009 Effect of change in tax rate 37 (62) 393 Others (14) (139) (148) Total income tax (benefits) ¥ 252 ¥ (144) $ 2,679

* The Company is subject to a number of income taxes that, in the aggregate, result in an applicable tax rate in Japan of approximately 38.0% and 40.4% in the years ended March 31, 2013 and 2012, respectively.

NIHON DEMPA KOGYO ANNUAL REPORT 2013 23 28. Financial Instruments The maximum exposure to credit risk for trade receivables at the Exposure to credit, liquidity, interest rate and currency risk arises in the reporting date by geographic region was: normal course of the Group’s business. Thousands of Millions of yen U.S. dollars Credit risk 2013 2012 2013 Management has a credit policy in place and the exposure to credit risk is monitored on an ongoing basis. Credit evaluations are Domestic ¥ 5,229 ¥ 5,719 $ 55,598 performed on all customers requiring credit over a certain amount. Asia 5,001 4,269 53,173 The Group does not require collateral in respect of financial assets. Europe 1,678 1,577 17,841 Transactions involving derivative financial instruments are with credit- North America 683 503 7,262 worthy financial institutions. Given their creditworthiness, management Other regions 0 5 0 does not expect any counterparty to fail to meet its obligations. At the Total ¥12,593 ¥12,075 $133,896 consolidated statement of financial position date, there were no significant concentrations of credit risk. The maximum exposure to credit risk is represented by the carrying amount of each financial asset, including derivative financial instruments, in the consolidated statements of financial position. The maximum exposure to credit risk at the consolidated statements of financial position date was:

Thousands of Millions of yen U.S. dollars 2013 2012 2013 Available-for-sale financial assets ¥ 1,219 ¥ 1,129 $ 12,961 Financial assets at fair value through profit or loss 9 37 95 Trade and other receivables 12,880 13,205 136,948 Cash and cash equivalents 11,812 8,796 125,592 Total ¥25,921 ¥23,168 $275,608

The aging of trade receivables at the reporting date was:

Millions of yen Thousands of U.S. dollars 2013 2012 2013 Gross Impairment Gross Impairment Gross Impairment Not past due ¥11,712 ¥— ¥11,744 ¥— $124,529 $ — Past due 0–30 days 759 — 277 3 8,070 — Past due 31–90 days 127 8 53 5 1,350 85 Past due 91–365 days 5 2 19 11 53 21 Past due more than 365 days 48 47 35 34 510 499 Total ¥12,652 ¥59 ¥12,130 ¥55 $134,524 $627

The Group separately records an allowance for trade receivables For the year ended March 31, 2013, ¥4 million ($42 thousand) of based on the possibility of default. reversal of allowance for doubtful receivables was recorded in other An allowance in respect of trade receivables is used to record operating income. This reversal arose since the allowance for trade impairment losses unless the Group is satisfied that no recovery of the receivables overdue more than 90 days for which the Group had amount owing is possible; at that point the amount considered irrecov- judged collectability was doubtful and recorded an allowance for erable is written off against the financial asset directly. doubtful receivables in the previous period was reduced due to an Impairment losses are included in selling, general and administrative improvement in collection conditions. expenses. For the year ended March 31, 2012, ¥13 million of allowance for Considering the past rate of default, the Group judges that there is doubtful receivables was recorded in selling, general and administrative no necessity to record impairment in respect of trade receivables not expenses, in relation to receivables for which the Group had judged past due and past due within 30 days. In addition, the Group judges collectability was doubtful. that it is possible to collect trade receivables past due more than 30 days for which an impairment is not recorded based on the analysis Liquidity risk of each customer’s financial and credit condition. Liquidity risk is the risk that the Group will not be able to meet its The movement in the allowance for doubtful receivables during the financial obligations as they fall due. The Group manages liquidity risk year was as follows: by holding appropriate reserves, ensuring that it has access to credit facilities at financial institutions, and continuously monitoring forecasts Thousands of Millions of yen U.S. dollars and actual cash flows. The maturity profile of financial assets and liabilities is also reconciled 2013 2012 2013 on a regular basis. At April 1 ¥55 ¥44 $584 Impairment loss (reversed) (4) 13 (42) Currency translation differences 8 (1) 85 At March 31 ¥59 ¥55 $627

24 NIHON DEMPA KOGYO ANNUAL REPORT 2013 The following are the contractual maturities of financial liabilities, including interest payments and excluding the impact of netting agreements.

Millions of yen Carrying Contractual Within The second The third The fourth The fifth March 31, 2013 amount cash flows one year year year year year Thereafter Non-derivative financial liabilities: Short-term loans ¥ 738 ¥ (742) ¥ (742) ¥ — ¥ — ¥ — ¥ — ¥ — Long-term debt with fixed rates 26,100 (26,443) (5,780) (9,641) (2,876) (7,642) (501) — Long-term debt with floating rates 2,380 (2,405) (391) (9) (2,004) — — — Finance lease obligations with fixed rates 59 (66) (22) (20) (15) (5) (2) (0) Trade and other payables 9,270 (9,270) (8,746) — — — — (524) Derivative financial liabilities: Forward exchange contracts (0) 0 0 — — — — — Currency swap 4 (4) (4) — — — — — Total ¥38,554 ¥(38,933) ¥(15,687) ¥(9,671) ¥(4,896) ¥(7,648) ¥(503) ¥(525)

Millions of yen Carrying Contractual Within The second The third The fourth The fifth March 31, 2012 amount cash flows one year year year year year Thereafter Non-derivative financial liabilities: Short-term loans ¥ 1,508 ¥ (1,523) ¥ (1,523) ¥ — ¥ — ¥ — ¥— ¥ — Long-term debt with fixed rates 20,687 (21,040) (5,006) (5,040) (8,858) (2,135) — — Long-term debt with floating rates 2,762 (2,801) (394) (391) (10) (2,005) — — Finance lease obligations with fixed rates 69 (78) (26) (19) (17) (12) (2) — Trade and other payables 10,813 (10,813) (10,282) — — — — (530) Derivative financial liabilities: Forward exchange contracts (29) 29 29 — — — — — Currency swap 19 (19) (19) — — — — — Total ¥35,830 ¥(36,246) ¥(17,222) ¥(5,451) ¥(8,886) ¥(4,152) ¥ (2) ¥(530)

Thousands of U.S. dollars Carrying Contractual Within The second The third The fourth The fifth March 31, 2013 amount cash flows one year year year year year Thereafter Non-derivative financial liabilities: Short-term loans $ 7,846 $ (7,889) $ (7,889) $ — $ — $ — $ — $ — Long-term debt with fixed rates 277,511 (281,158) (61,456) (102,509) (30,579) (81,254) (5,326) — Long-term debt with floating rates 25,305 (25,571) (4,157) (95) (21,307) — — — Finance lease obligations with fixed rates 627 (701) (233) (212) (159) (53) (21) (0) Trade and other payables 98,564 (98,564) (92,993) — — — — (5,571) Derivative financial liabilities: Forward exchange contracts (0) 0 0 — — — — — Currency swap 42 (42) (42) — — — — — Total $409,930 $(413,960) $(166,794) $(102,828) $(52,057) $(81,318) $(5,348) $(5,582)

Interest rate risk Millions of yen Effective The Company controls and monitors debt financing of the Group and Carrying amount prohibits entering into a debt contract without obtaining approval by interest rate Within More the head office for the terms and amount. (weighted one than one The Company has a policy of considering economic conditions at For the year ended March 31, 2013 average) year year Total the time of the contract and future economic conditions when select- Short-term loans (Note 15): ing fixed or floating interest rates. Also, the Company consistently Unsecured bank loans monitors the effectiveness of their selection. with fixed rates 0.60% ¥ 658 ¥ — ¥ 658 Unsecured bank loans Effective interest rates and repricing analysis with floating rates 0.51% 79 — 79 In respect of interest-bearing financial liabilities, the following table Long-term debt (Note 15): indicates their effective interest rates at the consolidated statement Unsecured bank loans of financial position date and the contractual repricing or maturity with fixed rates 0.65% 5,630 20,470 26,100 dates, whichever dates are earlier. Unsecured bank loans with floating rates 0.49% 380 2,000 2,380 Finance lease obligations with fixed rates 6.90% 19 40 59

NIHON DEMPA KOGYO ANNUAL REPORT 2013 25 Millions of yen Effect in millions of yen Effective interest Carrying amount Profit or loss Equity rate Within More 100bp 100bp 100bp 100bp (weighted one than one March 31, 2013 increase decrease increase decrease For the year ended March 31, 2012 average) year year Total Variable rate instruments ¥(19) ¥19 ¥(19) ¥19 Short-term loans (Note 15): Cash flow sensitivity (net) ¥(19) ¥19 ¥(19) ¥19 Unsecured bank loans with fixed rates 1.05% ¥1,348 ¥ — ¥ 1,348 Unsecured bank loans Effect in millions of yen with floating rates 0.53% 160 — 160 Profit or loss Equity Long-term debt (Note 15): 100bp 100bp 100bp 100bp Unsecured bank loans March 31, 2012 increase decrease increase decrease with fixed rates 0.90% 4,856 15,830 20,687 Variable rate instruments ¥(27) ¥27 ¥(27) ¥27 Unsecured bank loans Cash flow sensitivity (net) ¥(27) ¥27 ¥(27) ¥27 with floating rates 0.50% 381 2,380 2,762 Finance lease obligations Effect in thousands of U.S. dollars with fixed rates 7.56% 21 47 69 Profit or loss Equity 100bp 100bp 100bp 100bp Thousands of U.S. dollars March 31, 2013 increase decrease increase decrease Carrying amount Variable rate instruments $(202) $202 $(202) $202 Within More one than one Cash flow sensitivity (net) $(202) $202 $(202) $202 For the year ended March 31, 2013 year year Total Short-term loans (Note 15): Foreign currency risk Unsecured bank loans The Group experiences foreign currency risk mainly on sales that are with fixed rates $ 6,996 $ — $ 6,996 denominated in a currency other than yen. The currency giving rise to Unsecured bank loans this risk is primarily the U.S. dollar. The Group economically hedges at with floating rates 839 — 839 least 80% of all trade receivables denominated in a foreign currency. Long-term debt (Note 15): The Group uses forward exchange contracts to hedge its foreign cur- Unsecured bank loans rency risk. Most of the forward exchange contracts have maturities of with fixed rates 59,861 217,650 277,511 less than four months. In respect of other monetary assets and liabili- Unsecured bank loans ties held in currencies other than yen, the Group ensures that the net with floating rates 4,040 21,265 25,305 exposure is kept to an acceptable level by buying or selling foreign Finance lease obligations currencies at spot rates where necessary to address short-term with fixed rates 202 425 627 imbalances. Foreign currency risks also arise on loan payables and are economically hedged by currency swaps. Cash flow sensitivity analysis for variable rate instruments Changes in the fair value of forward exchange contracts and curren- A change of 100 basis points “bp” in interest rates at the reporting cy swaps that economically hedge monetary assets and liabilities, firm date would have increased (decreased) equity and profit or loss by the commitments or forecasted transactions, in foreign currencies and for amounts shown below. This analysis assumes that all other variables, which no hedge accounting is applied are recognised in the consoli- in particular foreign currency rates, remain constant. The analysis is dated statements of comprehensive income. Both the changes in fair performed on the same basis for 2012. value of the forward contracts and the foreign exchange gains and losses relating to the monetary items are recognised as part of “financial income and expenses” (refer to Note 25).

Exposure to currency risk The Group’s exposure to foreign currency risk was as follows based on thousands of original amounts:

March 31, 2013 US$ GBP EUR RMB MYR SG$ Trade receivables 49,382 0 862 36,780 855 0 Trade payables (3,514) (146) (521) (47,971) (2,275) (39) Short-term loans (7,000) — — — — — Gross consolidated statement of financial position exposure 38,867 (145) 340 (11,190) (1,420) (39) Estimated forecast sales 13,800 — 200 5,600 — — Estimated forecast purchases (3,200) — — (43,000) — — Gross exposure 10,600 — 200 (37,400) — — Forward exchange contracts (86,822) — (880) 81,517 — — Net exposure (37,354) (145) (340) 32,926 (1,420) (39)

26 NIHON DEMPA KOGYO ANNUAL REPORT 2013 March 31, 2012 US$ GBP EUR RMB MYR SG$ Trade receivables 44,167 0 708 18,997 1,474 (0) Trade payables (6,535) (55) (355) (36,577) (2,251) (9) Short-term loans (16,400) — — — — — Gross consolidated statement of financial position exposure 21,231 (54) 352 (17,579) (776) (10) Estimated forecast sales 14,900 — 250 — — — Estimated forecast purchases (12,000) — — — — — Gross exposure 2,900 — 250 — — — Forward exchange contracts (49,030) — (1,174) — — — Net exposure (24,898) (54) (572) (17,579) (776) (10) The significant exchange rates applied during the years are described in Basis of Preparation (f).

Sensitivity analysis Convertible bonds A 10% strengthening of the yen against the U.S. dollar at March 31 On August 24, 2006, the Company issued bonds at a par value of would have increased (decreased) equity and profit by the amounts ¥11,000 million which can be convertible into ordinary shares of the shown below. This analysis assumes that all other variables, in particu- Company at any time from September 7, 2006 until two weeks before lar interest rates, remain constant. The analysis is performed on the their maturity date of August 24, 2011. If the bonds have not been pre- same basis for 2012. viously purchased and cancelled, redeemed or converted, they will be redeemed at the par value on August 24, 2011. The bonds include call Effect in millions of yen options and put options classified as derivatives. March 31, 2013 Equity Profit The value of convertible bonds recognised in the consolidated state- US$ ¥(475) ¥(475) ment of financial position is calculated as follows:

Thousands of Effect in millions of yen Millions of yen U.S. dollars March 31, 2012 Equity Profit 2013 2012 2013 US$ ¥(358) ¥(358) At April 1 ¥— ¥247 $— Accreted interest — 2 — Effect in thousands of U.S. dollars Maturity redemption — (250) — March 31, 2013 Equity Profit At March 31 ¥— ¥ — $— US$ $(5,050) $(5,050) The finance cost of the bonds is calculated using the effective inter- A 10% weakening of the yen against the U.S. dollar at March 31 est method by applying the effective interest rate of 2.82%. would have had the equal but opposite effect to the amounts shown The gain relating to the liability component is recognised in the con- above, on the basis that all other variables remain constant. solidated statements of comprehensive income, and the consideration relating to the equity component is recognised in equity.

Fair Value The fair values of financial assets and liabilities, together with the carrying amounts shown in the consolidated statements of financial position, are as follows:

Millions of yen Thousands of U.S. dollars 2013 2012 2013 Carrying Carrying Carrying amounts Fair value amounts Fair value amounts Fair value Assets carried at fair value: Available-for-sale financial assets ¥ 1,110 ¥ 1,110 ¥ 1,020 ¥ 1,020 $ 11,802 $ 11,802 Financial assets designated at fair value through profit or loss 9 9 37 37 95 95 Assets carried at amortised cost: Cash and cash equivalents 11,812 11,812 8,796 8,796 125,592 125,592 Trade and other receivables 12,880 12,880 13,205 13,205 136,948 136,948 Liabilities carried at fair value: Financial liabilities designated at fair value through profit or loss 751 751 338 338 7,985 7,985 Liabilities carried at amortised cost: Short-term loans 738 738 1,508 1,508 7,846 7,846 Trade and other payables 9,270 9,270 10,813 10,813 98,564 98,564 Long-term debt, including current portion 28,541 28,622 23,518 23,584 303,466 304,327

NIHON DEMPA KOGYO ANNUAL REPORT 2013 27 Basis for determining fair value of financial instruments Fair value hierarchy • Cash and cash equivalents, trade and other receivables, short-term For financial instruments that are measured at fair value, the Company loans and trade and other payables classifies fair value measurements into a three-level fair value hierarchy The carrying amounts of these financial instruments approximate by reference to the observability and significance of the inputs used in fair values because they are settled in the short term. making the measurement. • Level 1 • Available-for-sale financial assets Quoted prices in active markets for identical assets or liabilities The fair values of marketable securities are based on quoted market • Level 2 prices. For non-marketable securities for which there are no quoted Quoted prices in active markets for similar assets or liabilities market prices in an active market amounting to ¥108 million ($1,148 Quoted prices for identical or similar assets or liabilities in markets thousand) and ¥108 million in the consolidated statements of financial that are considered less than active position as of March 31, 2013 and 2012, respectively, fair value cannot Inputs for the assets or liabilities that are observable other than be reliably measured. Accordingly, these investments are stated at cost market price and not included in available-for-sale financial assets in the table Marketable inputs for the assets or liabilities that are not observable above. The disposal of marketable securities for which there are no directly but are derived from or corroborated by observable quoted market prices is not expected. market data • Level 3 • Financial assets and liabilities designated at fair value through profit Unobservable inputs for the assets or liabilities that are not based on or loss observable market data The fair values of derivative financial instruments were estimated based on quotes from the financial institutions.

• Long-term debt, including current portion The fair value of long-term debt is estimated based on the discounted amounts of future cash flows using the Group’s current borrowing rates for similar liabilities. For finance leases, the market rate of interest is determined by reference to similar lease agreements.

The details of financial assets or liabilities continuously designated at fair value at the end of the reporting period were as follows:

Millions of yen Thousands of U.S. dollars March 31, 2013 Level 1 Level 2 Level 3 Total Level 1 Level 2 Level 3 Total Available-for-sale financial assets ¥956 ¥154 ¥— ¥1,110 $10,164 $1,637 $— $11,802 Financial assets designated at fair value through profit or loss — 9 — 9 — 95 — 95 Total assets ¥956 ¥164 ¥— ¥1,120 $10,164 $1,743 $— $11,908 Financial liabilities designated at fair value through profit or loss ¥ — ¥751 ¥— ¥ 751 $ — $7,985 $— $ 7,985 Total liabilities ¥ — ¥751 ¥— ¥ 751 $ — $7,985 $— $ 7,985

Millions of yen March 31, 2012 Level 1 Level 2 Level 3 Total Available-for-sale financial assets ¥838 ¥182 ¥— ¥1,020 Financial assets designated at fair value through profit or loss — 37 — 37 Total assets ¥838 ¥220 ¥— ¥1,058 Financial liabilities designated at fair value through profit or loss ¥ — ¥338 ¥— ¥ 338 Total liabilities ¥ — ¥338 ¥— ¥ 338

28 NIHON DEMPA KOGYO ANNUAL REPORT 2013 Available-for-sale financial assets for which fair value measurement 30. Non-cash Transactions is based on level 1 inputs comprise listed securities and mutual funds, Property, plant and equipment acquired under finance leases for the which are measured at unadjusted market prices in active markets years ended March 31, 2013 and 2012 amounted to ¥14 million where there are sufficient volume and frequency of transactions. ($148 thousand) and ¥27 million, respectively. Available-for-sale financial assets for which fair value measurement is based on level 2 inputs comprise golf and resort club memberships. Golf and resort club memberships are measured based on the quoted 31. Related Party Transactions prices of identical assets in markets that are considered less than The Group made the following related party transactions with an entity active. that is controlled by a close member of the family of a director: Financial instruments which are measured at fair value through profit Thousands of or loss include forward exchange contracts and foreign currency swap Millions of yen U.S. dollars contracts. 2013 2012 2013 Forward exchange contracts and foreign currency swap contracts are measured based on observable market data, such as foreign currency Receipt of services (payment of exchange rates and interest rates provided by financial institutions. nonlife insurance premiums) ¥5 ¥7 $53 Transactions are priced on an arm’s length basis and other terms Capital management and conditions are equivalent to those with third-party entities. There The board of the Company aims to maximise the corporate value by were no outstanding balances for these transactions as of March 31, balancing the return on capital and healthy financial position of the 2013 and 2012. Group using equity and debt finance. ROE, which the Company Compensations to the members of the board of directors are defines as net income divided by total equity, and the Debt/Equity as follows: Ratio, which the Company defines as total liabilities divided by total equity, are used as management performance indexes, which the Thousands of board monitors. Millions of yen U.S. dollars For the years ended March 31, 2013 and 2012, ROE amounted to 2013 2012 2013 (1.6)% and 6.9%, and the Debt/Equity Ratio amounted to 163.9% and Short-term employee benefits ¥327 ¥383 $3,476 157.3%, respectively. Post-employment benefits — 7 — From time to time, the Company purchases its own shares and con- Total ¥327 ¥390 $3,476 vertible bonds on the market; the timing of these purchases depends on market prices. Primarily, the shares are intended to be utilised when 2013 2012 the conversion rights of the convertible bonds and share options are exercised. Shares held by the members of There were no changes in the Group’s approach to capital manage- the board of directors 1,240,459 1,239,459 ment during the year. Short-term employee benefits include the salaries paid to directors Neither the Company nor any of its subsidiaries are subject to exter- in respect of their dual position as employees. nally imposed capital requirements.

29. Operating Leases The Group leases office space and motor vehicles under various operating leases. Certain contracts contain renewal options for various periods of time. Total operating lease expenses recognised in the consolidated statements of comprehensive income were ¥264 million ($2,807 thousand) and ¥271 million for the years ended March 31, 2013 and 2012, respectively.

NIHON DEMPA KOGYO ANNUAL REPORT 2013 29 32. Provisions

Thousands of Millions of yen U.S. dollars 2013 2012 2013 Asset Settlement Asset Settlement retirement for products retirement for products obligation sold Total obligation sold Total Total At April 1 ¥59 ¥204 ¥263 ¥57 ¥472 ¥530 $2,796 Provision made during the year — — — — 24 24 — Provision used during the year — (17) (17) — (139) (139) (180) Reversals — (45) (45) — (155) (155) (478) Unwind of discount 1 1 2 1 2 3 21 Currency translation differences — — — — (0) (0) — At March 31 ¥60 ¥143 ¥203 ¥59 ¥204 ¥263 $2,158

Asset retirement obligation Settlement for products sold The Company made a provision for asset retirement obligation in The Company made a provision for settlement for products sold respect of the Company’s obligation to the landlord to dismantle and regarding the damage incurred by customers attributed to the remove leasehold improvements from a leased office at the end of the Company’s products. lease contract. Because of the long-term nature of the liability, the The major uncertainties are the cost that will be incurred and the major uncertainties are the cost that will be incurred and the time the timing of settlement. A portion of the liability is expected to be settled lease contract ends. The Company has estimated the cost using an after more than one year. The provision has been determined by esti- estimate provided by a third party and the lease period in consideration mating the settlement cost based on management’s estimate of the of that of the Company’s former office and the useful life of the furniture likely settlement amount. The non-current provision has been calculat- and fixtures attached to the office. The provision has been calculated ed using a discount rate of 1.5%. using a discount rate of 3%.

33. List of Significant Consolidated Subsidiaries

Entity Place of incorporation Principal activities Ownership interest Furukawa NDK Co., Ltd. Japan Manufacturing 100.0% Hakodate NDK Co., Ltd. Japan Manufacturing 100.0% Niigata NDK Co., Ltd. Japan Manufacturing 100.0% NDK Holdings USA, Inc. U.S.A. Holding company 100.0% NDK America, Inc. U.S.A. Sales 100.0% NDK Crystal, Inc. U.S.A. Manufacturing 100.0% NDK Crystal Asia Pte. Ltd. Singapore Sales 100.0% NDK Europe Ltd. United Kingdom Sales 100.0% NDK Italy Srl Italy Sales 100.0% NDK Germany GmbH Germany Sales 100.0% NDK Electronics (HK) Limited Hong Kong Sales 100.0% Asian NDK Crystal Sdn. Bhd. Malaysia Manufacturing 100.0% NDK Quartz Malaysia Sdn. Bhd. Malaysia Manufacturing 100.0% Suzhou NDK Co., Ltd. China Manufacturing 100.0% Suzhou NDK Trading Co., Ltd. China Sales 100.0% NDK-Electronics Shanghai Co., Ltd. China Sales 100.0%

30 NIHON DEMPA KOGYO ANNUAL REPORT 2013 INDEPENDENT AUDITOR’S REPORT

NIHON DEMPA KOGYO ANNUAL REPORT 2013 31 Sasazuka NA Bldg., 1-50-1, Sasazuka, Shibuya-ku, Tokyo 151-8569, Japan Phone: 81-3-5453-6711 Facsimile: 81-3-5453-6733 URL: http://www.ndk.com/