Finance and Accounting Department
Consolidated results for the first quarter of fiscal 2002, the three-month period from April 1, 2001 through June 30, 2001, are as follows:
TDK recorded a sharp drop on both its top and bottom lines during the first quarter of fiscal 2002. Net sales decreased 19.6% to ¥141,000 million, while operating profit fell 86.5% to ¥2,589 million. Income before income taxes fell 86.6% to ¥2,564 million and net income dropped 90.6% to ¥1,207 million. Income taxes were substantially up over the amount in the corresponding period of the previous fiscal year, reflecting the fact that certain overseas subsidiaries that posted losses were unable to derive tax benefits due to local tax regulations.
Later I will outline TDK's projections for the second quarter. Firstly, I would like to point out that TDK's operating environment since the previous quarter has been characterized by dramatic change. TDK aims to stay on top of these changes while striving to improve its earnings as soon as possible. We are presently exploring ways to stimulate this recovery.
Let me now explain the key points from TDK's earnings release.
Operating profit fell approximately ¥16.6 billion, compared with the same period of the previous fiscal year. The principal reason was a lower capacity utilization rate accompanying declining orders. The decline in profit came as a result of lower sales, including a changed product mix, and amounted to approximately ¥14.3 billion. Lower sales prices were another important factor, having a roughly ¥10.5 billion negative impact on earnings. Sales prices of electronic materials and components and recording media & systems decreased by just under 5% and approximately 14%, respectively. While sales prices of existing media such as audiotapes, videotapes and CD-Rs decreased 14% year on year, sales prices corresponded to about the same level as in the fourth quarter of fiscal 2001, reflecting efforts TDK has made to lift the prices of these products.
Average first quarter yen exchange rates for the U.S. dollar and euro were ¥123 and ¥107, respectively, as the yen depreciated 15% versus the dollar and 7% versus the euro, compared with the previous year's first quarter. This had the effect of increasing net sales by approximately ¥10.3 billion and operating profit by approximately ¥2.7 billion. Other factors that had a positive effect on earnings were lower materials prices, cost savings and lower selling and administrative expenses. These factors had a combined beneficial effect of roughly ¥5.5 billion on earnings. They were, however, insufficient to fully offset the negative factors, hence the sharp drop in both sales and operating profit.
There was no major change in other income (expenses), but the weaker yen did result in a lower foreign exchange loss. Furthermore, interest income declined as a result of falling interest rates in Japan and the U.S. and also reflected a lower amount of cash on hand.
Now I would like to compare TDK's financial position at June 30, 2001 with our financial position at March 31, 2001. Total assets decreased ¥29.2 billion to approximately ¥790.9 billion. The yen weakened just slightly against the U.S. dollar between the end of March and end of June from ¥123.90 to ¥124.60. In contrast, the yen strengthened against the euro, rising from ¥109.33 to ¥105.20. These changes largely offset each other, resulting in a slight decline of approximately ¥0.6 billion in assets on conversion.
Cash and cash equivalents decreased approximately ¥21.1 billion, reflecting the payment of approximately ¥21.6 billion in bonuses, dividends and taxes. Inventories increased by ¥7.1 billion, despite efforts to reduce inventories during the first quarter. Capital expenditures for the period amounted to approximately ¥22.6 billion, which contributed to the decline in cash and cash equivalents.
At the previous earnings presentation held in May, it was explained that inventories increased as a result of our delayed response to a sudden reduction in orders. We thus tried to reduce inventories to bring them down to an optimal level. To do so, we lowered the operating rate at all plants, but the sudden cancellations of orders and delivery postponements hampered our efforts. The reduction in orders was worse than expected, meaning that we were unable to lower inventories.
The main components of capital expenditures related to the Kitakami chip capacitor plant, investments to rationalize electronic materials and components production, and R&D expenditures. Net trade receivables and trade payables both fell substantially. This reflected the decline in capacity utilization in line with lower orders.
Now I will give a breakdown of sales by product. I would like to give an overview of results, the proportion of sales accounted for by each product sector and year-on-year growth rates. TDK's products are divided broadly into two segments: electronic materials and components and recording media & systems. In the electronic materials and components segment, net sales decreased approximately 24% year on year to ¥110.4 billion, accounting for 78% of total net sales. The slowdown in the U.S. economy, which began in the fourth quarter of the previous fiscal year, prompted customers in a wide range of fields, not just PCs and mobile phones, to trim their inventories. The effects of this spilled over into the first quarter, with multilayer chip capacitors for mobile phones and PCs and peripherals in particular taking the full force of the cutbacks. Sales of ferrite cores for PCs and peripherals and audio and visual products also dropped noticeably. While magnet sales tracked the overall market trend, magnets for automotive applications enjoyed a slight increase in sales, buoyed by the increasing use of electronics in automobiles.
As a result of these factors, sales in the electronic materials sector declined approximately 17% to ¥43.9 billion, accounting for 31% of total net sales. Capacitors accounted for 61% of sector sales, down 16% from the previous year. Ferrite cores and magnets accounted for the remaining 39% of sector sales, 17% lower year on year.
The electronic devices sector encountered similar market conditions to the electronic materials sector, with the effects of the U.S. economic slowdown reverberating in the first quarter. Sales of high-frequency components fell dramatically due to customer inventory cutbacks amid a cooling mobile phone market-the majority of TDK's high-frequency components are used in mobile phones. Sales of inductive devices also dropped sharply due to falling demand in the audio and visual products, PC and peripherals and communications markets. As with magnets, however, the increasing use of electronics in automobiles drove a slight increase in inductors for automotive applications (which account for a small proportion of inductor sales). Demand for power supplies for audio and visual products and video game systems was relatively strong, with sales increasing slightly.
Overall, sales in the electronic devices sector decreased approximately 21% to ¥28.6 billion, accounting for 20% of total net sales. Inductive devices accounted for 56% of sector sales, down 22% from the corresponding period of the previous fiscal year. High-frequency components accounted for 17% of sector sales, down sharply by 39%. Other products comprised 27% and were down 2%.
Turning to recording devices, TDK lost market share due to being slower than competitors in supplying 30-gigabyte/disk HDD heads, which were mainstream products in the first quarter. Demand for HDD heads also fell as customers scaled back production due to a slowing PC market. These factors combined to drag down sector sales by 34% to ¥32.8 billion, accounting for 23% of total net sales. HDD heads comprised the bulk of sector sales at 86%. Sales of these heads were nevertheless down 36% year on year. Other heads declined 12% year on year.
In the semiconductors & others sector, sales of semiconductors fell sharply due to the continuing downturn in the semiconductor market as demand for communications infrastructure, which had driven semiconductor demand last year, declined. However, sales of anechoic chambers and measurement systems increased. Even so, sector sales decreased approximately 21% to ¥5.1 billion, accounting for 4% of total net sales. Semiconductors accounted for 38% of sector sales, down 48%. Others rose 16% year on year.
In the recording media & systems segment, sales were largely the same as in the corresponding period of the previous fiscal year, with the yen's depreciation contributing to sales. Segment sales were ¥30.6 billion, accounting for 22% of total net sales. Sales of audiotapes and videotapes declined as total demand fell. Offsetting these falls, however, were higher sales of CD-Rs and the contribution of recording equipment, sales of which began last autumn. The results of restructuring in the previous quarter were quite noticeable in existing media. The launch of new businesses, however, is slightly behind schedule. Audiotapes accounted for 14% of segment sales, down 17%, videotapes 33%, down 8% and optical discs 24%, up 9%. This reflected the fact that increased volumes outweighed the sharp drop in prices. Others accounted for 29% of segment sales, up 15%, as a result of higher sales of data tapes and recording equipment.
Communications and Recording are both strategic fields targeted by TDK's medium-term management plan. Sales in the Recording field accounted for 39% of total net sales, down 27% year on year. Communications accounted for 11% of total net sales, down 37% year on year. The decline in Recording mainly reflected falling HDD head sales, which was the result of production cutbacks at customers and a lower market share for 30-gigabyte/disk HDD heads. The decline in Communications was principally the result of lower sales of high-frequency components for mobile phones, falling sales of multilayer chip capacitors and inductors and a drop-off in demand for semiconductors for WAN/LANs.
I would like now to break down sales by the markets we serve. In the electronic materials and components segment, sales of components for PCs and other data-related equipment declined 32% and accounted for 43% of segment sales. Sales for the communications industry decreased 37% and accounted for 13% of segment sales. Audio and visual product component sales decreased 11% and accounted for 17% of segment sales. Automotive component sales increased 11% and accounted for 9% of segment sales. It was one of the few sectors to increase. Sales of components to industrial machinery manufacturers decreased 16% to account for 6% of total segment sales. Home electronics and appliances rose 1% to account for 3% of total segment sales.
Now I will give a breakdown of sales by region. Sales in Japan decreased 23% to ¥43.5 billion, reflecting lower sales in all categories, most noticeably recording devices. In Europe, sales decreased 9% to ¥19.8 billion due to sluggish demand for high-frequency components for mobile phones, which reflected a cooling mobile phone market. This outweighed comparatively strong demand for CD-Rs. In Asia (excluding Japan) and Others, sales fell 24% to ¥50.0 billion, as like Japan, sales fell in all product sectors, notably recording devices. In the Americas, sales declined 11% to ¥27.6 billion, despite sales from recording equipment launched last autumn in the recording media & systems segment. The lower sales were primarily attributable to lackluster performances in electronic materials and electronic devices.
The overall result was an 18% fall in overseas sales to ¥97.5 billion. Overseas sales accounted for 69.1% of consolidated net sales, a 1.5 percentage point increase from 67.6%.
Finally, I would like to give you TDK's fiscal 2002 projections.
TDK believes that a second-half recovery-the basis for our May 2001 projections-is extremely unlikely. At present, the outlook for results in the second half is clouded with uncertainties such as the direction of mobile phone demand. TDK has not revised projections for the full fiscal year based on this outlook for the second half.
To avoid any misunderstanding, TDK has revised full-year projections to only reflect the new projections for the second quarter. In other words, we have only changed our projection announced in May 2001 based on actual first quarter results and our outlook for the second quarter. Our fiscal 2002 projection now calls for a 6.5% decline in net sales from those previously announced to ¥645 billion and for a 46.7% decline in operating profit to ¥30 billion. Our fiscal 2002 forecast for net income is ¥21 billion, a decline of 52.3%. This means that we are forecasting first-half net sales of ¥280 billion and for operating profit and net income to break even. Our overall projection is that second quarter results will be worse than the first quarter.
In terms of specific figures for the second quarter, we project net sales of ¥139 billion, a slight decline from the first quarter sales. We are also projecting an operating loss of ¥2.6 billion and loss before income taxes of ¥1.2 billion. Accordingly, we expect operating profit and income before income taxes to break even for the first half of fiscal 2002.
As of May 2001, we expected that there would be a gradual, across-the-board recovery for PCs, mobile phones and audio and visual products from the second quarter onward, after the markets bottomed out in the first quarter. However, no signs of such an upturn have materialized so far in the second quarter. TDK thus expects results in the electronic materials and components segment to fall short of May projections.
Furthermore, on the profit front, falling orders and inventory reductions have unavoidably resulted in lower capacity utilization. Customers have also renewed calls for discounts. These factors are pressing earnings and conspiring to drag them down below the first quarter.
That concludes my explanation of TDK's first-quarter results. Thank you for your attention.