[ Financial Results of fiscal 2002 Performance Briefing ]Consolidated results

Seiji Enami
General Manager
Finance & Accounting Department

[ Slide 1 ]

You have just heard the fiscal 2002 results from President Sawabe. I will continue to talk about our results in more detail. My presentation will follow the handouts in front of you, which contain information TDK continuously discloses.

[ Slide 2,3 ]

To start with, I would like to look at TDK's consolidated results.

Please look at page 16 of the handout, which shows TDK's consolidated income statement.

As Mr. Sawabe has already talked about the reasons for our ¥98.4 billion deterioration in operating income from the previous year, I have nothing really to add to the explanation on operating income (loss). You will note, however, that while Mr. Sawabe mentioned restructuring costs of ¥36.1 billion, the income statement says ¥25.9 billion. I want to give you more details on this to avoid any misunderstanding.

TDK prepares its consolidated financial statements in accordance with SEC standards. Consequently, the ¥36.1 billion in restructuring costs is, in principle, included in operating income. The ¥36.1 billion includes expenses for integrating plants, relocating production bases, ceasing production of products, early retirement and TDK's special voluntary retirement program, among other items. These items combined represent ¥31.9 billion in one-time, direct charges. Of the ¥31.9 billion, expenses that are regarded as costs are included in cost of sales. Only ¥25.9 billion in expenses regarded as selling, general and administrative expenses are shown as restructuring costs. Regardless of how these expenses are shown in the income statement, we regard them all as one-time expenses for structural reforms.

The difference of ¥4.2 billion, between ¥36.1 billion and ¥31.9 billion, represents opportunity losses associated with the closing of plants and ensuing transfer of production. These losses are included in the cost of sales.

Let's now look at other income (deductions). You will see that interest expense increased slightly. This does not represent an increase in borrowings-they actually declined. Instead it represents a change in itemization of hedging expenses for foreign exchange contracts, which we consider should be treated as real interest.

Other, net, a component of other income (deductions) improved by ¥6.4 billion. This is the result of two main factors. One is the absence of a ¥4.4 billion write-off of intangible fixed assets relating to the purchase of Headway Technologies that TDK booked in the year ended March 31, 2001. The second reason is the reclassification of expenses for the disposal of operating facilities as selling, general and administrative expenses included as part of operating income, effective from the fiscal year ended March 31, 2002. Expenses of this nature included under Other, net in the year ended March 31, 2001 were ¥2.9 billion. Other, net in the year ended March 31, 2002 included for regular disposal of facilities, which isn't recognized as a restructuring cost.

Turning to minority interests, the reason why this item was positive was because of minority interests taking part of TDK's loss.

[ Slide 4 ]

Please now look at the balance sheets on page 17 of your handout, which shows a comparison with the previous year-end.

Total assets decreased approximately ¥69.3 billion to roughly ¥750.9 billion. The yen weakened from ¥123.90 against the US dollar at March 31, 2001 to ¥133.25. Between the two dates the yen also depreciated against the euro, falling from ¥109.33 to ¥116.14. The weaker yen had the effect of increasing overseas assets when converted into yen by about ¥21.0 billion.

Let me now just run through the main asset accounts. Cash and cash equivalents declined approximately ¥25.2 billion. TDK used approximately ¥32.6 billion in cash for paying bonuses, dividends and taxes, and approximately ¥58.8 billion for investment in facilities. The decrease in cash and cash equivalents also reflected the net loss, despite TDK holding capital expenditures within the scope of depreciation, which was roughly ¥61.9 billion, and reducing inventories.

Payments of approximately ¥15.0 billion for the special voluntary retirement package at the parent company were made in April and were consequently recorded under accrued expenses. Inventories decreased by a net ¥25.3 billion, which included a ¥3.3 billion increase from the yen's depreciation. TDK will continue to work to reduce inventories further in the current fiscal year.

Net trade receivables, part of current assets, and trade payables, part of current liabilities, both declined sharply. This is principally the result of a drop in the capacity utilization rate from lower orders.

There were also major changes in prepaid pension cost and other assets, under fixed assets, and retirement and severance benefits, which is part of liabilities, and the accumulated other comprehensive income (loss) component of shareholders' equity. This was principally the result of accounting for pension in terms of U.S. accounting standards. During the term, the market value of our pension assets fell below the actuarial present value of accumulated benefit obligations (ABO) due to falling stock prices, creating a funding shortfall. Had there not been such an underfunding resulting from the actuarial loss, the shortfall, which didn't have to be disclosed under ordinary accounting principles, would have been recognized as a liability and offset against the prepaid pension cost on the balance sheet. We reduced shareholders' equity and treated the tax portion as deferred taxes so as not to distort the income statement.

Accumulated other comprehensive income (loss) includes an increase in the foreign exchange adjustments account of ¥16.0 billion resulting from the yen's depreciation.

[ Slide 5 ]

The decrease in income taxes is attributable to TDK posting a net loss for the year.

The decrease in retained earnings reflects the net loss of ¥24.8 billion, dividends of ¥8.0 billion and the transfer of ¥2.3 billion to the legal reserve as required by overseas accounting standards.

[ Slide 6 ]

Please now look at the lower part of page 15 of your handout, which shows a breakdown of sales by product.

Again I may be repeating something President Sawabe has already told you, but I would like to give an overview of the composition of sales, as well as draw comparisons with the previous year.

Let me cover the electronic materials and components segment first. Net sales declined sharply to ¥432.9 billion, 22% down year on year. Segment sales accounted for 75% of total net sales.

Within this segment, sales in the electronic materials sector dropped 24% year on year to ¥161.8 billion and accounted for 28% of total net sales. Sales of multilayer chip capacitors, which account for the majority of capacitor sales, decreased 23% year on year and accounted for 63% of sector sales. Ferrite cores and magnets, which accounted for the remaining 37% of sector sales, saw sales fall 25% year on year.

Sales in the electronic devices sector declined 27% year on year to ¥105.9 billion and accounted for 18% of total net sales. Inductive devices, the largest product category in this sector, saw sales drop 30% from the previous year. These products accounted for 53% of sector sales. High-frequency components recorded a 47% drop in sales due to the effects of the dramatic slowdown in the mobile phone market. Sales of these components represented 16% of sector sales. Sales of power supplies and other products, which accounted for the remaining 31% of sector sales, were flat year on year, but supported by strong demand for DC-DC converters for video game systems.

Sales in the recording devices sector decreased 13% year on year to ¥147.0 billion and accounted for 26% of total net sales. Within the sector, sales of HDD heads fell sharply in the year's first half. One factor was our delay, relative to competitors, in supplying mainstream 30gigabyte/disk HDD heads, which resulted in us losing market share. Another factor was lower demand for HDD heads caused by lackluster PC demand. In the second half of the year, however, we regained some lost market share as we shipped 40gigabyte/disk HDD heads, which proved popular with customers. We were thus able to check the slide in sales. HDD head sales, which accounted for 87% of sector sales, decreased 13%, but the fall could have been worse had it not been for the second-half performance. Other head sales, which accounted for the remaining 13% of sector sales, fell 15% year on year.

In the semiconductors & others sector, which is part of the electronic materials and components segment, sales decreased 29% to ¥18.2 billion and accounted for 3% of total net sales. A sharp fall in sales of semiconductors was only partly offset by higher sales of anechoic chambers and measurement systems.

Next, let's look at the recording media & systems segment. Sales in this segment increased 3% year on year, helped by favorable exchange rates, to ¥142.1 billion and accounted for 25% of total net sales. Lower sales of audiotapes and videotapes due to falling overall demand were more than countered by higher sales of CD-Rs and growth in recording equipment sales. Also boosting sales were sales of LTO-verified, tape-based data storage media for computers.

Within this segment, audiotapes accounted for 12% of sales, down 19%, videotapes 31%, down 5%, optical discs 26%, up 9%, and recording equipment and other product sales 31%, up 22%.

[ Slide 7 ]

Communications and Recording are both strategic fields targeted by TDK's medium-term management plan. I would now like to look at sales in these areas.

Sales in the Recording field accounted for 43% of total net sales-our target was 45%-declining 11% year on year. Communications recorded a decrease of 50% in year-on-year sales and accounted for 9% of total net sales, substantially below our 20% target in this field.

[ Slide 8 ]

I would now like to give a breakdown of the ¥432.9 billion in sales in the electronic materials and components segment that I reported on earlier by the markets we serve, assuming that the segment represents 100. Here, too, I will be repeating in part what President Sawabe explained earlier.

Sales of components for PCs and peripherals declined 15% and accounted for 48% of segment sales. Sales for the communications industry, mainly mobile phone-related, decreased 51% and accounted for 11% of segment sales. Audio and visual product component sales decreased 11% and accounted for 17% of segment sales. Automotive component sales increased 5% and accounted for 9% of segment sales. Sales of parts decreased 25% to account for 6% of segment sales. Home electronics and appliances fell 17% and accounted for 3% of total segment sales.

[ Slide 9 ]

Please turn to page 21 where you will see industry segment information on the top half of the page. The electronic materials and components segment posted a large operating loss of ¥34.7 billion. This partly reflected the decline in the overall capacity utilization rate for the reasons I explained earlier. It was also the result of major structural reforms. Of the ¥31.9 billion in direct restructuring costs, ¥28.6 billion related to the electronic materials and components segment. The majority of the ¥4.2 billion in opportunity costs accompanying structural reforms relate to the electronic materials and components segment.

The recording media & systems segment recorded an operating loss of ¥7.4 billion. With further restructuring required and new businesses a little slow to hit full stride, the segment failed to fulfill its promise of moving into the black. This segment accounted for ¥3.3 billion of the restructuring costs.

[ Slide 10 ]

On the bottom half of page 21 you will see a breakdown of sales by region. Sales in Japan decreased 26% to ¥164.9 billion. Most product categories, led by HDD heads, recorded sharp declines in sales. In the Americas, sales decreased 14% to ¥113.3 billion. Demand for electronic materials and devices was particularly sluggish and couldn't be covered by higher sales in the recording media & systems segment thanks to strong demand for recording equipment. In Europe, sales dropped 21% to ¥80.0 billion as demand for products mirrored that in the Americas. In Asia (excluding Japan) and Others, sales declined 8% to ¥216.7 billion. This was attributable to soft demand for electronic materials and devices. It was also due to a drop in sales of recording devices, which account for a high proportion of sales in this region, although sales did pick up in the second half.

The overall result was a 12% fall in overseas sales to ¥410.1 billion. Overseas sales accounted for 71% of consolidated net sales.

[ Slide 11 ]

On page 24 of the earnings release you will find a non-consolidated income statement. Sales declined 30.6%, or ¥139.9 billion, to ¥317.8 billion. The parent company posted an operating loss of ¥8.5 billion, compared with operating income of ¥26.1 billion the previous fiscal year. Current income was ¥7.6 billion, compared with ¥50.1 billion in fiscal 2001. And the parent company posted a net loss of ¥3.8 billion, compared with net income of ¥8.7 billion in the previous fiscal year. As with consolidated results, operating income deteriorated sharply because of a large top-line decline, lower capacity utilization rate, sales price discounts and other factors. These negative factors could only be partly offset by cost savings and other measures. A decrease in dividends from subsidiaries also lowered current income by ¥7.9 billion. In the previous fiscal year, TDK established an investment trust for retirement benefits, resulting in an extraordinary loss of ¥50.0 billion. This figure, however, was offset by revaluation gains, resulting in a net expense from establishing the trust of ¥34.7 billion in fiscal 2001. The absence of this expense in fiscal 2002 had a beneficial effect on results. On the other hand, the parent company booked business reformation costs of ¥14.9 billion under extraordinary loss in fiscal 2002. These factors led to a ¥21.0 billion negative change in income before income taxes. These business reformation costs were reclassified as restructuring costs under operating income in the consolidated financial statements. That is, they are included as part of the ¥25.9 billion restructuring costs shown on the consolidated income statement.

[ Slide 12 ]

I would like to finish by presentation by talking about our projections for fiscal 2003, which President Sawabe reported. I would like to add to his explanation by giving you are breakdown of sales by segment.

Please look at page 13 of the handout, which shows our projections for fiscal 2003. We are projecting ¥163.3 billion in net sales for electronic materials, compared with ¥161.8 billion in fiscal 2002, and sales of ¥41.1 billion for the first quarter. In electronic devices, we are forecasting net sales of ¥110.4 billion in fiscal 2003, compared with ¥105.9 billion in fiscal 2002, and sales of ¥27.3 billion for the first quarter. Recording devices sales are projected at ¥146.9 billion, compared with ¥147.0 billion and first-quarter sales are projected at ¥38.2 billion. Sales in the semiconductors & others sector are projected at ¥15.5 billion, compared with ¥18.2 billion in fiscal 2002, and we project first-quarter sales of ¥4.4 billion. In the recording media & systems segment, TDK is projecting net sales of ¥143.9 billion versus fiscal 2002 sales of ¥142.1 billion, and first-quarter sales of ¥34.0 billion. As a whole, we are projecting total net sales of ¥580.0 billion, compared with ¥575.0 billion, and first-quarter sales of ¥145.0 billion.

That concludes my presentation of TDK's fiscal 2002 results and fiscal 2003 projections. Thank you for your attention.