Investor Relations | IR Events | Performance Briefing

[ Third quarter of fiscal 2002 Performance Briefing ]Consolidated results

Seiji Enami

Seiji Enami
General Manager
Finance & Accounting Department

[ Slide 1,2 ]

Outline Statement of the Financial Results

[ Slide 3 ]

I would like to report on TDK's results for the third quarter of fiscal 2002, the three-month period from October 1, 2001 through December 31, 2001.

Please turn to page 9 of the handout, which shows TDK's consolidated income statement. TDK posted an operating loss in the third quarter, a result that was approximately ¥32.3 billion worse than in the same quarter of the previous fiscal year. The primary reason for the decline was an approximate ¥26.9 billion impact on earnings from falling sales, including the effects of a lower capacity utilization rate in line with falling orders and a changing product mix. A secondary factor was falling sales prices, which had an approximate ¥12.5 billion negative impact on operating income. This partly reflected the fact that customers requested heftier discounts on electronic materials and devices, which lead to declines of just over 8% and 6% on average for prices in the electronic materials and components segment and recording media & systems segment, respectively. This came despite wider adoption of 40gigabyte/disk HDD heads by customers.

Average exchange rates for the yen during the third quarter were ¥123 and ¥111 versus the U.S. dollar and euro, respectively, as the yen weakened by 12% and 16% in relation to these two currencies compared with the same period a year ago. TDK estimates that the depreciation of the yen had the net effect of lifting net sales by approximately ¥10.6 billion and reducing the operating loss by approximately ¥2.9 billion.

Efforts to trim purchasing costs for raw materials, to lower costs through rationalization measures and to reduce selling, general and administration expenses yielded savings of ¥11.5 billion. However, these savings were insufficient to offset the effects of the lower capacity utilization rate and sales price reductions. Recognizing no other way out of this impasse, we were compelled to take restructuring charges of ¥7.3 billion to improve our operating base.

In the interim period, we reported restructuring charges of ¥5.5 billion. The additional ¥1.8 billion reflects the fact that the number of employees who opted for early retirement at domestic subsidiaries exceeded our target by 500.

The restructuring charges have been treated as operating expenses in accordance with SEC regulations and disclosed separately. Only expenses directly related to restructuring have been recognized in these expenses. Opportunity losses associated with the closure of plants and ensuing transfer of production are not included. The ¥8.5 billion reported by President Sawabe in his speech includes such opportunity losses.

Other income (deductions) improved ¥2.9 billion, mainly due to the absence of ¥3.3 billion booked in the corresponding period of the previous fiscal year for losses on the impairment of investment securities.

[ Slide 4 ]

Please turn to the consolidated balance sheets on page 10 of your handout. You will see a comparison between TDK's financial position at December 31 and September 30, the end of the interim period.

Total assets stood at approximately ¥768.2 billion, up roughly ¥19.3 billion. The yen weakened against both the U.S. dollar and the euro between the end of September and the end of December. Against the U.S. dollar, the yen depreciated from ¥119 to ¥132, while against the euro the yen weakened from ¥109 to ¥117. These changes had the effect of increasing overseas assets by approximately ¥27.6 billion.

I'd now like to look at the main asset accounts in the balance sheets on the upper part of the page. "Cash and cash equivalents" decreased by approximately ¥9.1 billion, reflecting cash used of approximately ¥11.0 billion for paying bonuses, dividends and taxes, and cash used of roughly ¥13.0 billion for investment in facilities. The depreciation expense was approximately ¥15.7 billion. The main factor behind the fall in cash and cash equivalents was unquestionably the slump in profits, which is a major source of cash.

"Inventories" declined approximately ¥6.5 billion. Since peaking at the end of the first quarter, inventories have decreased in both the second and third quarters. This is tangible evidence that our efforts to reduce stock are working.

"Net trade receivables" increased approximately ¥14.1 billion due to a slight increase in sales from the second quarter. The change also includes the effects of exchange rate fluctuations between the second and third quarters.

[ Slide 5 ]

In the liabilities section in the balance sheets, you will see that "accrued expenses and other current liabilities" increased by roughly ¥5.4 billion. This reflects the recognition of expenses associated with the early voluntary retirement program offered at domestic subsidiaries.

"Retirement and severance benefits and others" increased by approximately ¥21.0 billion. Other major changes were in "other assets" in the assets section and "accumulated other comprehensive income (loss)" in stockholders' equity. In the interim period, we reported that the market value of our pension assets had fallen slightly below the actuarial present value of accumulated benefit obligations (ABO) due to falling stock prices. A sharp fall in stock prices in late September resulted in a further ¥21.0 billion decline in the fair value of TDK's pension assets. Accordingly, we recognized the under-funded portion of ¥21.0 billion as an obligation in line with SEC standards. In addition, so as not to distort the income statement, stockholders' equity was reduced, taking into account deferred taxes.

These actions should have increased "accumulated other comprehensive income (loss)". However, the decrease in this account reflects an increase in the foreign exchange translation adjustments account due to the yen's depreciation.

[ Slide 6 ]

The lower part of page 7 gives a breakdown of sales by product. I would like to give an overview and talk about the composition of sales, as well as draw comparisons with the previous year.

I will first talk about the electronic materials and components segment. Net sales in this segment were ¥107.6 billion, down sharply by 24% year on year. Segment sales accounted for 72% of total net sales.

Within this segment, sales in the electronic materials sector dropped 30% year on year to ¥39.4 billion and accounted for 26% of total net sales. Sales of capacitor declined 29% year on year and accounted for 65% of electronic materials sector sales. Ferrite cores and magnets, which accounted for the remaining 35% of sector sales, saw sales fall 31% year on year. The main factors behind these figures were soft demand for use in mobile phones, including the impact of inventory corrections undertaken by customers, dull investment in IT, and sluggish demand for use in PCs and peripherals and audio and visual products. While a slight recovery was evident for some multilayer chip capacitors as customers restocked after finishing their inventory corrections, signs of a marked upturn for electronic materials were nonexistent, when compared with the fiscal year's first half.

Sales in the electronic devices sector declined 34% year on year to ¥26.0 billion and accounted for 17% of total net sales. Inductive device sales dropped 35% from the previous year and accounted for 52% of sector sales. High-frequency components recorded a sharp 58% decline in sales year on year due to the slowdown in the mobile phone market, which accounts for a high proportion of sales. Sales of these components represented 16% of sector sales. Sales of power supplies and other products, which accounted for the remaining 32% of sector sales, were flat year on year, but were supported by strong demand for DC-DC converters for video game systems.

Sales in the recording devices sector decreased 3% year on year to ¥38.3 billion and accounted for 26% of total net sales. Within the sector, HDD heads accounted for 88% of sales, with sales rising 1% over the previous year. Other sales, which accounted for the remaining 12% of sector sales, fell 28% year on year. TDK is regaining market share through a gradual increase in shipments of 40gigabyte/disk HDD heads.

Sales in the semiconductors & others sector, which is also part of the electronic materials and components segment, declined 44% to ¥3.9 billion, accounting for 3% of total net sales. This result reflects the continuing slowdown in the semiconductor market in the third quarter.

Sales in the recording media & systems segment increased 9% year on year to ¥41.6 billion and accounted for 28% of total net sales. Within this segment, audiotapes accounted for 11% of segment sales, down 16%, videotapes 33%, down 3%, and optical discs 24%, up 9%, as higher volumes outweighed sales price declines. Recording equipment and other product sales increased 40% year on year to account for 32% of segment sales. This reflected, among other factors, sales of new game software.

[ Slide 7 ]

Communications and Recording are both strategic fields targeted by TDK's medium-term management plan. Sales in the Recording field accounted for 45% of total net sales, the same level as our target, but declined 1% year on year. This is merely the result of a comparative improvement in HDD head sales versus a decrease in sales of electronic materials and devices.

As President Sawabe mentioned briefly before, Communications recorded a 59% decrease in year-on-year sales and accounted for 8% of total net sales, substantially below our 20% target in this field.

[ Slide 8 ]

I would now like to give a breakdown of the ¥107.6 billion in sales in the electronic materials and components segment by the markets we serve. Sales of components for PCs and peripherals declined 7% and accounted for 50% of segment sales. Sales for the communications industry, mainly mobile phone-related, decreased 60% and accounted for 10% of segment sales. Audio and visual product component sales decreased 13% and accounted for 17% of segment sales. Automotive component sales decreased 1% and accounted for 8% of segment sales. Sales of components to industrial machinery manufacturers decreased 35% to account for 5% of segment sales. Home electronics and appliances fell 27% and accounted for 3% of total segment sales.

[ Slide 9 ]

I would now like to give a breakdown of sales by region. Please look at page 11. Sales in Japan decreased 33% to ¥40.9 billion due to lower year-on-year sales in most product categories, including HDD heads. The contribution to sales of recording equipment and software is small relative to other regions, which also explains the overall result in Japan. In the Americas, sales declined 12% to ¥29.5 billion as sluggish sales of electronic materials and devices outweighed higher sales of HDD heads and higher sales in the recording media & systems segment thanks to strong demand for recording equipment and software. In Europe, sales decreased 29% to ¥21.5 billion, reflecting falling demand for electronic materials and electronic devices, most notably sales of high-frequency components for mobile phones. In addition, the contribution to sales from the recording media & systems segment was not as great as in the U.S.

In Asia (excluding Japan) and Others, sales increased 4% to ¥57.3 billion. Relative to other regions, the fall in sales of electronic materials and devices was smaller and this decrease was outweighed by higher sales as TDK regained market share in HDD heads.

[ Slide 10 ]

Finally, I would like to explain TDK's projections for fiscal 2002. Please turn to page 4.

President Sawabe has already touched on the consolidated projections for the current fiscal year and the reasons for revising the projections announced in November last year. I will therefore only look at projections for fourth-quarter sales by segment compared with the November forecast. We have assumed a yen-U.S. dollar exchange rate of ¥130, compared with the previous estimate of ¥120.

We are now projecting fourth-quarter net sales of ¥143.2 billion compared with ¥143.1 billion. Sales of electronic materials are expected to total ¥37.7 billion, against the ¥41.0 billion we predicted earlier. The electronic devices sector is expected to post sales of ¥23.3 billion, compared with the last forecast of ¥25.0 billion. Recording devices sales are projected at ¥41.4 billion, compared with the previous estimate of ¥39.0 billion. Sales in the semiconductors & others sector are projected at ¥3.2 billion, compared with the November forecast of ¥4.1 billion. In the recording media & systems segment, TDK has changed its projection from ¥34.0 billion to ¥37.6 billion.

When explaining why our projections have changed, President Sawabe referred to ¥25.6 billion in expenses to reform TDK's profit structure. This figure includes opportunity losses associated with the closing of plants and ensuing transfer of production, in addition to expenses directly related to restructuring.

That concludes my explanation of TDK's third-quarter results and projections for the full fiscal year. Thank you for your attention.