Finance & Accounting Department
[ Slide 1 - Cover Page ]
I would like to report on our operating results for the six months ended September 30, 2001. Please turn to the earnings release that has been handed out.
[ Slide 2 - Consolidated Income Statement ]
Firstly, I would like to report on our consolidated performance. Please turn to page 10 of the handout.
President Sawabe reported just now on the figures. At the first-quarter earnings release conference held on August 7, 2001, we forecasted first-half net sales of ¥280 billion and for operating profit and net income to break even based on a harsher operating environment in the second quarter than the first quarter. Unfortunately, due to a far harsher operating environment than initially projected, we were unable to prevent a further sales decline. In response, we implemented certain structural reforms that led to restructuring expenses of around ¥1.1 billion and a consequential operating loss for the first half. We also recorded a loss before income taxes, but due to tax-effect accounting, we posted a marginal net income.
[ Slide 3 - Analysis of Operating Profit ]
Please turn to the consolidated income statement on page 11.
I will skip over the factors behind the decline in operating income because President Sawabe has already explained them. The ¥20.1 billion impact on earnings from price decreases reflected an approximate 6% price fall in electronic materials and components and a roughly 11% price decline relating to the recording media & systems segment.
[ Slide 4 - Consolidated Balance Sheets: Assets ]
Please turn to the consolidated balance sheets on page 12. I would like to compare TDK's financial position at September 30, 2001 with our financial position at March 31, 2001.
Total assets decreased by around ¥71.2 billion to approximately ¥748.9 billion. The yen strengthened against the U.S. dollar between the end of March and end of September from ¥123.90 to ¥119.40, and improved negligibly against the euro from ¥109.33 to ¥109.30. These changes had the effect of decreasing overseas assets by approximately ¥10 billion on conversion.
Cash and cash equivalents declined by roughly ¥24.2 billion, reflecting the payment of approximately ¥21.6 billion in bonuses, dividends and taxes, as well as capital expenditures of around ¥38.1 billion (depreciation expenses were approximately ¥29.1 billion), and other funding requirements. The principal factor in this decline, however, was the drop in earnings, a major source of funds for operating activities. Inventories increased by ¥1.0 billion. Compared with the end of the first quarter of fiscal 2002, however, inventories fell by ¥6.1 billion. TDK is firmly aware of the need to lower inventories, and has lowered its capacity utilization rate to achieve this goal. Nevertheless, the higher-than-expected decline in orders resulted in increased inventories. Despite this increase, TDK believes it now has the right conditions in place to reduce inventories. The lower capacity utilization resulting from the decrease in orders was also behind substantial declines in trade receivables and trade payables.
[ Slide 5 - Consolidated Balance Sheet: Stockholders' Equity ]
In the fixed assets section, there were major changes in prepaid pension cost and other assets, and in stockholders' equity there was a major change in accumulated other comprehensive loss. These changes were the result of the application of U.S. standards for pension accounting. In fiscal 2001, we contributed approximately ¥50.0 billion, representing the shortfall in retirement liabilities, to a pension trust. However, since our pension assets exceeded our accumulated benefit obligations, we recorded the difference as a prepaid pension cost in our consolidated balance sheet. As a result of falling share prices and other factors in the interim period, however, pension assets were underfunded by roughly ¥1.0 billion compared to the actuarial present value of accumulated benefit obligations at the end of the interim period. Had there not been such an underfunding resulting from an actuarial loss, the undisclosed shortfall that did not require disclosure under ordinary accounting principles would have been recognized as a liability and offset against the prepaid pension cost on the balance sheet. We reduced stockholders' equity and treated the tax portion as deferred taxes so as not to distort the interim income statement.
[ Slide 6 - Segment Sales ]
The lower part of page 10 gives a breakdown of sales by product. I would like to give an overview and talk about the composition of sales, as well as changes over the previous year.
Net sales in the electronic materials and components segment were ¥209.7 billion, down sharply by 28% year on year. Sales in this segment represented 77% of total net sales. The segment as a whole was negatively affected by inventory corrections at TDK's customers in a broad range of product categories. These corrections were brought on by a global downturn in IT investment-led demand. It is clear that an overly optimistic outlook for worldwide mobile phone and PC demand has led to excess inventories across a broad spectrum of electronic components, our mainstream products. Inventory corrections have also been going on for a very long time now.
Within the electronic materials and components segment, sales in the electronic materials sector declined 26% to ¥81.4 billion, accounting for 30% of total net sales. Multilayer chip capacitors, principally for use in mobile phones and PCs and peripherals, and ferrite cores and magnets, mainly for PC and peripherals, audiovisual product applications and data-communications devices, saw sales drop sharply. Multilayer chip capacitors accounted for 62% of electronic materials sales and decreased 26% year on year. The remaining 38% was accounted for by ferrites and magnets, down also by 26%.
Sales in the electronic devices sector decreased 28% to ¥54.3 billion, accounting for 20% of total net sales. Sales of inductive devices to the audiovisual, PC and mobile phone markets declined substantially, as did sales of high-frequency components, which were affected by inventory corrections at customers in line with the rapid slowdown of the mobile phone market. A high proportion of TDK's high-frequency component sales are to the mobile phone market. Power systems and other products were held to a marginal sales decrease owing to strong demand for DC-DC converters for video game systems.
Inductive devices accounted for 55% of electronic devices sales, down 29% from the corresponding period of the previous fiscal year. High-frequency components accounted for 17% of sector sales, down sharply by 46%. Other product sales decreased 4% and accounted for 28% of sales.
Sales in the recording devices sector plunged 30% to ¥64.0 billion, representing 23% of total net sales. HDD heads, which comprised the bulk of sector sales at 85%, saw sales dip 33% year on year. Sales of other heads declined 13% and accounted for 15% of sector sales.
In the semiconductors & others sector, sales of semiconductors fell sharply due to the continuing sluggishness in the semiconductor market as demand for communications infrastructure equipment declined. This demand had driven semiconductor market growth in the previous fiscal year. However, sales of anechoic chambers and measurement systems increased. Sector sales nevertheless decreased 24% to ¥10.0 billion, accounting for 4% of total net sales.
I would now like to move on to the recording media & systems segment. Sales were largely the same as in the corresponding period of the previous fiscal year, with foreign exchange rates contributing to sales. Segment sales totaled ¥63.0 billion, representing 23% of total net sales. The results of restructuring in the previous fiscal year were quite noticeable in existing media such as audiotapes, videotapes and CD-Rs. New businesses contributed somewhat to sales, but did not quite reach the levels we expected, and are still slightly behind schedule.
Audiotapes accounted for 14% of segment sales, down 19%, videotapes 32%, down 11%, and optical disks 26%, up 13%. Other product sales accounted for 28% of segment sales, an increase of 18%.
Item 1 on page 16, you can see information by segment. The reason why TDK posted a slight operating loss in the electronic materials and components segment is that we lowered capacity utilization across the board due to the factors I have already mentioned. In the recording media & systems segment, we posted an operating loss of approximately ¥2.0 billion. At the first-quarter earnings presentation, we originally said that a negative operating profit ratio of 5% was recorded in the first quarter and that the second quarter would break even. However, in addition to the first quarter, we also posted a slight operating loss in the second quarter due to the downturn in business in September.
[ Slide 7 - Recording and Communications ]
Communications and Recording are both strategic fields targeted by TDK's medium-term management plan. Sales in the Recording field accounted for 41% of total net sales short of our 45% target, and declined 24% year on year. Communications accounted for 10% of total net sales, only half of our 20% target, and declined 47% year on year. Central to the decline in the Recording field were HDD heads. The decline in the Communications field, meanwhile, resulted from lower sales of high-frequency components, multilayer chip capacitors and inductors for mobile phones, and semiconductors for WAN/LANs.
[ Slide 8 - Sales Breakdown ]
I would like now to break down sales by the markets we serve. In the electronic materials and components segment, where we posted sales of ¥209.7 billion, sales of components for PCs and other data-related equipment declined 29% and accounted for 45% of segment sales. Sales for the communications industry, mainly mobile phone-related, decreased 47% and accounted for 12% of segment sales. Audio and visual product component sales decreased 17% and accounted for 18% of segment sales. Automotive component sales increased 6% and accounted for 9% of segment sales. It was the only sector to increase. Sales of components to industrial machinery manufacturers decreased 25% to account for 6% of segment sales. Home electronics and appliances fell 7% and accounted for 3% of total segment sales.
[ Slide 9 - Regional Breakdown ]
I would now like to give a breakdown of sales by region. Please look at item 3 on page 16. Sales in Japan decreased 25% to ¥85.2 billion, reflecting lower sales in most categories, particularly HDD heads. In the Americas, sales declined 17% to ¥52.0 billion. Sales were impacted considerably by sluggish demand for electronic materials and devices, which outweighed the contribution from recording equipment to higher sales in the recording media & systems segment. In Europe, sales decreased 17% to ¥38.0 billion due to sales trends similar to the Americas. In Asia (excluding Japan) and Others, sales fell 25% to ¥97.4 billion due to slow demand for electronic materials and devices. An additional factor was sharply lower sales of recording devices, which represent a high proportion of total sales in this region.
The overall result was a 21% decline in overseas sales to ¥187.4 billion. Overseas sales accounted for 69% of consolidated net sales, a 1-percentage point increase from 68%.
[ Slide 10 - Non-consolidated Results ]
Please turn to page 18 of the handout while I give you an overview of TDK's non-consolidated results for the first half.
Parent-company net sales decreased 30% to ¥164.0 billion, current income was ¥14.0 billion, down 60% on the ¥35.0 billion recorded in the first half of fiscal 2001, and net income surged 345% to ¥9.8 billion from ¥2.2 billion in the prior year's first half.
The reason why current income fell significantly while net income rose so substantially was that in the prior year's first half TDK booked an expense of ¥34.6 billion for the net transition obligation arising from the adoption of new accounting standards for retirement liabilities.
Similar to TDK's consolidated results, the effects of the market slowdown hampered our non-consolidated performance in the electronic materials and components segment, with sales declining 31% to ¥140.6 billion. Sales in the recording media & systems segment dropped 24% to ¥23.4 billion as a result of lower total demand for audiotapes and videotapes, and our decision to end production of CD-Rs at the parent company and directly purchase them from external sources.
[ Slide 11 - Consolidated Business Forecast ]
Finally, I would like to give you TDK's fiscal 2002 projections. Please turn to page 7.
President Sawabe went over TDK's projections for the full fiscal year in the previous presentation. Calculating from the figures he gave, we are forecasting second-half net sales of ¥287.4 billion, operating profit of ¥1.5 billion and a net loss of ¥1.8 billion.
In the third quarter, we are projecting net sales of ¥144.3 billion, an operating loss of ¥4.2 billion and a net loss of ¥5.8 billion. Fourth-quarter net sales are forecasted at ¥143.1 billion, with operating profit of ¥5.7 billion and net income of ¥4.0 billion.
Starting in the second half and continuing into next fiscal year, we are pushing ahead with plans to reduce our workforce by 8,860. We estimate that these measures will result in charges of approximately ¥6.5 billion. Of this figure, ¥5.5 billion will be incurred in the third quarter, and ¥1.0 billion in the fourth quarter. These charges have been factored into our operating profit projection for the full fiscal year.
That concludes my explanation of TDK's first-half results and projections for the full fiscal year. Thank you for your attention.