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[ Financial Results of fiscal 2001 Performance Briefing ]Outline statement of the financial results

Mitsuaki Konno Associate Director General Manager of Management Review & Support Department

Mitsuaki Konno
Associate Director
General Manager of Management Review & Support Department

You just heard the fiscal 2001 results from President Sawabe, and I will continue to talk about TDK's results. When we announced our projections for the full year at the 3rd quarter earnings presentation at the start of February, we forecasted net sales of ¥700 billion and operating profit of ¥66 billion. Actual consolidated net sales fell short of the projection by about ¥10 billion. Operating profit was about ¥9.7 billion short of our estimate. Results therefore varied quite differently from projections.

Let's look at the reasons for this. Of the ¥10 billion difference in net sales, ¥7.0 billion was accounted for by electronic materials, primarily multilayer chip capacitors. Sales of electronic devices fell short by ¥2 billion. High-frequency components and inductive devices didn't perform nearly as well as we expected. Lower-than-expected sales of other products account for the remaining ¥1 billion. One of the biggest factors was the cancellation of orders, particularly for multilayer chip capacitors, from the second half of February through March.

These products are highly profitable electronic components. Lower sales due to cancelled orders and a lower capacity utilization rate resulting from inventory reductions had a significant impact on operations. In addition, we recorded restructuring costs of approximately ¥3.1 billion in selling, general and administrative expenses, as was previously mentioned. These variables negatively impacted on operating profit.

I apologize for any inconvenience we may have caused by our optimistic forecasts announced at the start of February for net sales and operating profit.

Let me just cover the major changes with reference to our earnings release. On page 10, you will find our consolidated statement of income. You will see that operating profit decreased 24.5%, or by just over ¥18 billion. A major reason was lower prices. Sales prices in recording media decreased by just over 15%, while sales prices in electronic materials and components were down approximately 5%. The combined effect was a loss of approximately ¥49 billion.

Another variable was exchange rates. The average rate of the yen was ¥111 for the U.S. dollar and ¥100 for the euro. A ¥1 appreciation in the yen against the U.S. dollar and ¥15 appreciation against the euro reduced operating profit by an estimated ¥4.4 billion. Next, selling, general and administrative expenses increased by approximately ¥13.0 billion. This partly reflected the accounting of one-time restructuring costs of ¥3.1 billion. The remaining roughly ¥10 billion represented research and development expenses. R&D expenses increased by ¥4 billion in Japan and ¥6 billion overseas, mainly reflecting project costs for communications, recording fields and projects to develop new products. R&D expenses for Headway Technologies in the U.S. are also included in the ¥10 billion approximate increase.

An improved capacity utilization rate, including increased production volumes, had an approximately ¥25 billion positive effect on earnings. Cost reduction from streamlining, including materials discounts, generated savings of ¥23 billion. These factors had a positive effect of about ¥50 billion on earnings. The net effect of the positive and negative factors to decrease operating profit by around ¥18 billion.

There was a considerable change in other income (deductions) between fiscal 2000 and fiscal 2001. In fiscal 2001, other income was approximately ¥8.2 billion, but in fiscal 2000 other deductions of ¥1.2 billion were recorded. This category thus improved by about ¥9.4 billion.

The gain on exchange of investment securities of ¥3.3 billion was offset by a similar ¥3.3 billion loss on impairment of investment securities. The gain on exchange of investment securities of ¥3.3 billion resulted from an exchange of shares owned by a U.S. semiconductor design subsidiary with Canadian company Mitel Networks, which is listed in the New York Stock Exchange. Mitel's stock price fell in the second half of the year along with the rest of the high-tech stock on the New York bourse, resulting in the loss on impairment of investment securities of approximately ¥3.3 billion.

TDK also booked a ¥12.5 billion gain on contribution of investment securities to pension trust-the parent company established a pension trust as it adopted new accounting standards for retirement liabilities. TDK contributed shares worth approximately ¥35 billion to the trust. The gain on a consolidated basis of approximately ¥12.5 billion represented the difference between the book value and the fair value. Next, in the first half of the year, TDK booked a ¥4.4 billion write-off of intangible fixed assets relating to in-process R&D acquired when TDK purchased Headway Technologies. TDK decided to write off the total amount in fiscal 2001 rather than amortize it in the next and subsequent fiscal years. The foreign exchange loss of about ¥3.0 billion was lower than the previous year.

Turning to page 11, let me cover the major changes in the balance sheet.

Total assets stood at approximately ¥820 billion as of March 31, 2001, up ¥44.2 billion from a year ago. In overseas assets, the closing exchange rate at the end of fiscal 2000 was ¥106, while it was ¥124 at the end of March 2001. The yen thus depreciated by approximately ¥18. Assets owned overseas swelled when converted into yen, adding about ¥37.0 billion to total assets. Cash equivalents and marketable securities decreased about ¥30 billion while cash on hand also declined. The contribution of cash and cash equivalents to the pension trust for retirement benefits represented an outflow of around ¥15 billion. Capital expenditures were also quite considerable in the term. On a consolidated basis, capital expenditures were ¥99.4 billion, while depreciation and amortization on a consolidated basis was ¥63.5 billion. This capital expenditure was funded almost entirely from cash and cash equivalents.

Inventories increased by just over ¥30 billion compared to the previous year. The depreciation in the yen increased overseas assets when converted into yen by about ¥9 billion. Inventories represented around two month's worth of sales, compared with 1.5 months previously. We tried to react to inventory reductions by customers, but as our actions were a little late, our inventories increased.

The main components of capital expenditures were investment in the GMR head wafer process, multilayer chip capacitors for the data and communications market, ramping up production of high-frequency components and R&D. By region, almost 40% of the capital expenditures were overseas and approximately 60% were in Japan.

In fiscal 2001, we accounted for ¥40 billion in prepaid pension costs-there were no prepaid pension costs in the previous fiscal year. The parent company adopted new accounting standards for retirement liabilities and recorded a one-time write-off of approximately ¥50 billion. Because pension accounting was already being employed on a consolidated basis, the ¥50 billion extraordinary loss at the parent company was booked as a prepaid pension cost on a consolidated basis.

Page 9 shows a sales breakdown. In the electronic materials and components segment, electronic materials posted sales of ¥212.1 billion. I will now give you the composition of sales and growth rates. Sales of capacitors accounted for 63% of sales in the electronic materials sector, a year-on-year increase of 40%. Ferrite and magnets accounted for the remainder of sector sales, down 1%. Sales in the electronic devices sector were ¥145.2 billion. Sales of inductive devices rose 8% and were 56% of the segment total. High-frequency components sales rose just over 30% and were 22% of the total. Other product sales increased 7% and represented 22% of total sector sales. Sales in the recording devices sector were ¥169.1 billion. HDD heads sales decreased 16% and accounted for 87% of total sector sales. Sales of other heads were down 14% and represented 13% of the total. Sales in the semiconductors & others segment were ¥25.7 billion. Sales of semiconductors were up 12% year on year and accounted for 53% of total sales in the sector. Other product sales increased 34% and accounted for 47% of total sector sales.

The recording media & systems segment returned sales of ¥137.7 billion. Audiotape sales decreased 25% and represented 15% of sales. Videotape sales decreased 12% and represented 34% of sales. Optical media sales decreased 6% and accounted for 24% of sales. Other product sales increased by just under 20% and represented 26% of sales.

Earlier I mentioned the respective proportions for Communications and Recording. I will now give the proportion and growth rates by sector assuming that the electronic materials and components segment represents 100. Of the ¥550 billion in sales in the electronic materials and components segment, PCs and peripheral devices decreased 7% and accounted for 45% of sales. Sales for the communications industry increased 34% and were 17% of sales. Audio and visual product component sales increased 5% and were 15% of the total. Automotive component sales increased 5% and were 7% of the total. Sales to component manufacturers rose 18% to account for 6% of the total segment sales. Home electronics and appliances rose 4% and accounted for 3% of the total.

Page 16 shows segment information. As President Sawabe said before, the recording media & systems segment posted an operating loss of ¥9 billion. Of this figure, ¥2.3 billion relates to Net-related restructuring costs.

Although the electronic materials and components segment posted a 5% increase in net sales, operating profit decreased approximately 10%. While multilayer chip capacitors, high-frequency components and inductive devices in the communications field achieved earnings growth, this was outweighed by the drop in earnings in HDD heads in recording devices, constituting the major factor in the operating loss.

By geographic segment, operating profit in Japan increased largely due to growth in capacitors and inductive devices. The Americas posted a deficit, while operating profit also declined in Europe. Restructuring costs in recording media had the largest impact. Asia and others was affected by poor performance in HDD heads in the recording devices segment.

In sales by region, sales in the Americas increased 21% due mainly to the inclusion of sales of Headway Technologies and strong results in capacitors and inductive devices. Sales in Europe benefited from growth in sales of multilayer chip capacitors and high-frequency components, mainly for mobile phones. Sales in Asia (excluding Japan) and Others were dragged down by lower sales in recording devices.

Page 23 contains supplementary information. Capital expenditures on a consolidated basis were ¥99.4 billion and depreciation was ¥63.5 billion. Research and development expenses were approximately ¥37.0 billion, representing 5.4% of net sales. Capital expenditures for fiscal 2002 are projected to increase from ¥65.0 billion to ¥70.0 billion. Capital expenditures for ramping up production capacity have been completed, so this amount reflects investment in other areas. Depreciation is expected to be ¥65.0 billion on a consolidated basis, meaning that investment will be conducted within the scope of depreciation. R&D expenditures are expected to account for just under 6% of net sales.

Page 7 shows TDK's projections for fiscal 2002. Of the projected net sales of ¥690 billion, ¥214 billion represent electronic materials, slight 1% increase. Electronic devices represent ¥133 billion, down 8%. Recording devices represent ¥160 billion, down 5%. Semiconductors & others represents ¥19 billion, down 26%. The recording media & systems segment represents ¥164 billion, up 19%.

Regarding consolidated results for the first half, results fell considerably in the 4th quarter and inventory corrections are expected to continue into the 1st quarter. Consequently, because inventory corrections of electronic components will continue to shape the first half of the year, TDK is projecting net sales for the first half of fiscal 2002 of ¥325 billion on a consolidate basis, an approximately 8% decrease over the corresponding period a year earlier. Operating profit for the first half of fiscal 2002 is projected at ¥10 billion, while income before income taxes is estimated at ¥11 billion and net income at ¥7.5 billion. All represent year-on-year decreases of over 70%.

That concludes my presentation. Thank you for your attention.