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[ 3rd Quarter of fiscal 2001 Performance Briefing ]Outline statement of the financial results

Kazuhiko Sadamura Senior Manager of the Finance & Accounting Dept.

Kazuhiko Sadamura
Senior Manager of the Finance & Accounting Dept.

I will now outline TDK's consolidated results for the three-month period ended December 31, 2000, which is the third quarter of the fiscal year ending March 31, 2001.

Firstly, net sales were 180,174 million yen, up 4.3% year on year. Operating profit was 18,083 million yen, down 4.5% from the same period a year ago and the operating profit ratio was 10%. Income before income taxes was 15,552 million yen, down 13.3% year on year. Income before income taxes as a percentage of net sales was 8.6%. Net income fell 14.5% year on year to 10,392 million yen, with the net income ratio at 5.8%.

I will go into the sales results in more detail later on, but for now I will explain the noteworthy points about the results. First is the effect of exchange rate fluctuations. These fluctuations had the net effect of raising net sales by approximately 2.2 billion yen and operating profit by roughly 1.3 billion yen. On a year-on-year basis, the yen weakened by about 5% against the U.S. dollar from around 105 yen to 110 yen. In contrast, the yen strengthened by approximately 12% against the euro from 109 yen to 96 yen.

One of the factors to have a significant effect on earnings was falling sales prices. Overall, this resulted in a year-on-year decrease in sales of just under 14.0 billion yen. This reflected mainly lower prices for recording media products and for heads for HDDs. Another factor affecting earnings was an increase of 2.5 billion yen in selling, general and administrative expenses. The majority of this, or around 2.2 billion yen, reflected increased R&D expenses. Breaking this amount down, R&D expenses relating to Headway Technologies, Inc., which was acquired in March last year, represented a large portion. And development expenses to strengthen domestic R&D increased. Thus both falling sales prices and higher selling, general and administrative expenses dragged down earnings. Offsetting this somewhat were cost-cutting initiatives and rationalization, which had a positive impact on earnings. Even so, lower sales of heads for HDDs and recording media combined with price declines in recording media to bring earnings down.

Regarding other income (deductions), deductions increased by 1.5 billion yen. During the quarter, TDK booked a charge of approximately 3.3 billion yen for loss on impairment of investment securities, which represented most of the increase in deductions. There was however a 1.7 billion yen improvement related to foreign exchange movements in the third quarter. Coming back to the loss on impairment of investment securities, TDK recorded an offsetting 3.3 billion yen gain on the exchange of investment securities for the shares of another company in the second quarter. These losses and gains related to the same stock, which is held by a U.S. semiconductor subsidiary. The gain arose in the first half of the year, but in the second half the NASDAQ plummeted and the stock fell back to around its original price level, resulting in the offsetting amounts.

Now, I would like to go back and take a closer look at net sales.
Firstly, I would like to look at sales by product sector, starting with the electronic materials and components segment. In the electronic materials sector, which includes ceramic capacitors, ferrite products and magnets, sales of multilayer chip capacitors increased sharply, underpinned by growth in the mobile phone market and strong demand for use in PCs and peripherals. Ferrite products sales were equally brisk due to solid demand for use in ADSL and other information and communications devices. Overall, sector sales increased approximately 30% to 56.1 billion yen year on year. Ferrite products and magnets accounted for 35% of sector sales, up 2% year on year. Ceramic capacitors, meanwhile, accounted for the remaining 65% of sector sales, up 53% year on year.

Next let's look at the electronic devices sector, which includes high-frequency components and inductive devices. Both of these products saw sales increase sharply due to expansion of the mobile phone market. In inductive devices, sales increased as TDK responded to rising demand for their use in audio and visual products, and office equipment. As a result of higher demand for mainstay products, sector sales thus increased 19% year on year to 39.3 billion yen. Inductive devices accounted for 53% of the sector's sales, up 11% from the same period a year earlier. High-frequency components represented 26% of total sector sales, up 52%, similar to multilayer chip capacitors. Higher sales of other products in this sector also helped to drive total sales higher.

In recording devices, a deterioration in production yields and a natural disaster in the first half of the fiscal year started to affect results in the second half, as was also mentioned in the earnings release. TDK responded by setting in motion a plan to improve production yields to respond to demand. However, a cloud began to form over the PC marketplace from around the latter half of November causing a rapid market slowdown. This resulted in some customers reducing inventories and production. Unfortunately, sector sales fell 22% to 39.5 billion yen as a result. Heads for HDDs accounted for the bulk of sector sales at 84%. Sales of these heads were nevertheless down 24% year on year. Other heads, which accounted for the remainder of sector sales at 16%, were down 7% year on year.

Sales in the semiconductors & others sector remained brisk, up 40% to 7.0 billion yen.

Turning to the recording media & systems segment, in main optical disk products, TDK ramped up production to respond to expanding demand for CD-Rs. Despite this, the imbalance between supply and demand rapidly worsened. This, combined with downward pressure on prices, resulted in lower sales. In audiotapes, sales fell in the third quarter as demand weakened. In videotapes, falling prices dragged down sales, although volumes remained almost flat. As a result of lower sales of mainstay products, segment sales overall decreased 7.6% to 38.3 billion yen.

This concludes my overview of TDK's main segments.

Now I would like to talk about recording and communications, two strategic areas targeted in our medium-term business plan.

Net sales in communications were held to 11% in the previous third quarter. However, sales in communications accounted for 16% of net sales in the quarter under review due to expanding demand for mobile phones and other products, as I mentioned earlier. In the medium term, TDK is aiming to grow communications to account for 20% of net sales. Sales in the recording field, however, dropped to 37% of total net sales due to issues associated with heads for HDDs and recording media products.

I would like now to break down sales by the markets we serve. In the electronic materials and components segment, audio and visual product component sales rose 9% and accounted for 15% of the total. Home electronics and appliances rose 8% accounting for 3% of total sales. Automotive component sales increased 11% and accounted for 7% of segment sales. Sales of components for PCs and other data-related equipment declined 11% and accounted for 41% of the total. Sales for the communications industry increased 47% and were 19% of total segment sales. Sales of components to industrial machinery manufacturers increased 67% and accounted for 2% of the total. Sales to components manufacturers rose 36% to account for 6% of the total segment sales. Overall, sales in the electronic materials and components segment rose by 8%.

Looking at sales by geographic area, sales in Europe and the Americas were strong, while sales in Japan and Asia and others decreased.

In Europe, dynamic growth in demand for components for the GSM mobile phone format fueled a sharp increase in sales of TDK's multilayer chip capacitors and high-frequency components. Sales in Europe increased 24% year on year to 30.2 billion yen as a result.

In the Americas, growth was recorded by electronic materials and electronic devices. Furthermore, sales of recording devices increased year on year, but this was primarily the result of the acquisition of Headway Technologies, Inc. Overall, sales in the Americas increased 29% to 33.7 billion yen.

Turning now to the areas that recorded declines, overall sales in Japan decreased slightly by 1% to 61.0 billion yen, despite top-line growth in multilayer chip capacitors and other electronic materials and components. This was the result of decreases in the recording media & systems segment and recording devices outweighing these gains.

In Asia and others, where recording devices account for a high percentage of sales, lower sales of recording devices had a major impact. As with Japan, this could not be offset fully by strong demand for electronic devices and electronic materials. Overall, sales in Asia and others decreased 9% year on year to 55.2 billion yen.

Now, I would like to look at TDK's consolidated balance sheets as of December 31, 2000 and September 30, 2000. I would like to point out items that changed significantly. The main increases were firstly in net trade receivables, which increased in line with higher sales. Inventories increased 10.3 billion yen on account of sharp increases in electronic materials and electronic devices. Furthermore, net property, plant and equipment increased by 13.2 billion yen as a result of investments to ramp up production capacity of multilayer chip capacitors, GMRs and other products, as well as for rationalization. Capital expenditures totaled 26.9 billion yen. The main decrease was in cash and cash equivalents, which declined 15.6 billion yen. This was a consequence of the increase in net trade receivables and inventories as well as the payment of some accounts at year-end. There were no major changes in liabilities or shareholders' equity.

Regarding TDK's forecast for the full fiscal year ending March 31, 2001, TDK has revised its estimates downward from the previously announced figures. TDK is now projecting net sales of 70.0 billion yen, up 3.8% year on year. The previous projection, however, was for net sales of 72.0 billion yen. TDK has lowered its forecast for operating profit from 75.0 billion yen to 66.0 billion yen, which would represent a 11.5% year-on-year decrease and an operating profit ratio of 9.4%. Income before income taxes is projected at 72.0 billion yen, compared with the previous projection of 86.0 billion yen. That would represent a year-on-year decrease of 1.9% and income before income taxes to net sales of 10.3%. Net income is projected to decrease 3.4% to 49.0 billion yen, compared with the previous forecast of 59.0 billion yen. This would represent net income to net sales of 7.0%.

As explained in the third quarter earnings release, TDK has revised its projections due to a number of factors. Firstly, November projections were based on the outlook for higher sales of electronic materials and electronic devices into the third and fourth quarters. However, manufacturers of mobile phones and PCs and peripherals have reportedly started to reduce their inventories upon entering the fourth quarter, clouding the sales outlook. Given this severe situation, the company has revised its sales projection downward by 17.5 billion yen from the previous projection. In recording devices, too, an expected rapid deceleration in growth in the PC marketplace suggests that inventory reductions are also likely. This outlook has necessitated a slight downward revision. As a result, TDK is now projecting consolidated net sales for the full fiscal year of 700.0 billion yen. The projection for operating profit has also been revised downward, compared to the November projection, based on the lower sales forecast.