Investor Relations

[ inancial Results of fiscal 2002 Performance Briefing ]Q&A

Q1. Please give us a quarterly breakdown of the restructuring costs of \36.1 billion for fiscal 2002 and the \8.5 billion forecast for fiscal 2003.
A1. In fiscal 2002, TDK incurred restructuring costs of \1.1 billion in the second quarter, \8.5 billion in the third quarter, and \26.5 billion in the fourth quarter. In fiscal 2003, we project restructuring costs of \1.2 billion in the first quarter, \4.0 billion in the second, \2.4 billion in the third and \0.9 billion in the fourth.
Q2. Please give us a breakdown of projected sales by sector for the first half of the current fiscal year. Also, what is your outlook for first-half operating income?
A2. In the first half of fiscal 2003, we project sales of \80.3 billion for the electronic materials sector, \54.0 billion in the electronic devices sector, \74.8 billion in the recording devices sector, \7.9 billion in the semiconductors & others sector, and \68.0 billion in the recording media & systems segment. That makes a total of \285.0 billion. TDK forecasts operating income of \8.0 billion for the first half of fiscal 2003.
Q3. TDK has explained that it will classify certain businesses as critical business units. What are their sales? What product segments will be classified as critical business units? TDK has announced that it will exit from product segments accounting for \6.2 billion in sales in the first half of fiscal 2003. Which product segments will it exit? What effect will this have? And what impact will this have on earnings?
A3. TDK has reviewed operations to identify critical business units in line with criteria explained earlier. Operations worth about \67.2 billion in sales were identified as critical business units. Of this total, we plan to withdraw from product segments worth about \6.2 billion in sales in the first half, including PTC thermistors, polymer batteries, rotary transformers, metallic electrodes, certain recording products and other products. There are about 12 to 13 products in total, but I will not list all of them now.

Withdrawing from these product segments will not spill too much red ink, as earnings forecasts already factor in efforts to reform our profit structure. However, the beneficial effects are still an unknown. TDK will follow a policy of exiting product segments after assessing circumstances early in the first half.
Q4. You just talked about product segments accounting for \6.2 billion of the critical business units. What product segments will account for the remaining \61.0 billion?
A4. TDK can't go into any more detail at this stage, considering its relationships with customers. In the event that TDK withdraws from a product segment in the course of advancing its business, it will make an announcement.
Q5. What were the total sales of the strategic products, defined earlier, in fiscal 2002? What is the sales forecast for these products for fiscal 2003? What is the medium-term sales outlook? Can you give us a sense of the overall direction?
A5. The strategic products in the three fields mentioned earlier are just examples, and many more products will be added. In total, fiscal 2002 sales were \225.0 billion. In the medium-term, sales are expected to increase \120.0 billion by fiscal 2005, compared with fiscal 2002.
Q6. Please give us TDK's outlook for capital expenditures, depreciation and R&D expenses for the current fiscal year.
A6. TDK forecasts capital expenditures of approximately \50.0 billion, depreciation of around \60.0 billion on account of lower capital expenditures, and R&D expenses of about \32.0 billion.
Q7. Please give us an idea of HDD head production volume from quarter to quarter. It appears that in fiscal 2003, first-quarter sales will be lower than the fourth quarter of fiscal 2002. What is the reason for lower sales?
A7. I would like to hold off on giving precise figures for HDD head production volume. However, let me say that HDD head production saw double-digit growth from the third to fourth quarter, and is expected to increase slightly in the first quarter this year. The decline in first-quarter sales from the previous quarter can be put down to sales price discounts and exchange rate fluctuations.
Q8. Can you provide us with a summary of the profitability of HDD heads, specifically growth in the fourth quarter of fiscal 2002 and the first quarter of fiscal 2003 versus the third quarter of the previous fiscal year?
A8. The operating income margin for HDD heads improved by several percentage points from the third to fourth quarters fiscal 2002, and is expected to rise several more percentage points in the first quarter of fiscal 2003.
Q9. Can you provide us with a summary of the profitability of capacitors, specifically growth in the fourth quarter of fiscal 2002 and the first quarter of fiscal 2003 versus the third quarter of the previous fiscal year?
A9. Capacitor-related earnings fell by about one-half in the fourth quarter of fiscal 2002, relative to the third quarter. Substantial sales price discounts and the inventory reductions were to blame. However, we are hoping for an improvement over the third quarter in the first and second quarters of the current fiscal year, as we reap the benefits of restructuring.
Q10. Capacitor-related earnings fell by about one-half in the fourth quarter of fiscal 2002, relative to the third quarter. Substantial sales price discounts and the inventory reductions were to blame. However, we are hoping for an improvement over the third quarter in the first and second quarters of the current fiscal year, as we reap the benefits of restructuring.
A10. Direct restructuring costs totaled \31.9 billion, including personnel costs and non-recurring costs such the disposal of facilities, inventories and other assets. On a quarterly basis, direct restructuring costs were \1.1 billion in the first half, \7.3 billion in the third quarter, and \23.5 billion in the fourth quarter, accounting for \31.9 billion in total. TDK began incurring opportunity losses, including those arising from plant closures and the ensuing transfer of product production, in the third quarter of fiscal 2002. Opportunity losses were \1.2 billion in the third quarter, \3.0 billion in the fourth quarter, and totaled \4.2 billion. Combining direct restructuring costs and opportunity losses, restructuring costs were \36.1 billion in total.

Opportunity losses, for example, relate to the complete stoppage of machinery when a plant is closed. Expenses are incurred for a certain period of time even after this happens where personnel remain. These expenses are recognized as one-time expenses.
Q11. In the past year, TDK implemented various restructuring measures and withdrew from a variety of product segments. How is morale holding up? Many employees have left the company. Please share with us any negative consequences, such as a key employee leaving against the wishes of the company.
A11. TDK has lost only a handful of employees classed as "Rank A" from engineering and management at the divisional or sectional manager levels. The mood around the company has suffered as a result of recent restructuring actions. That's why associated directors and general managers of TDK do the rounds of all divisions frequently. A variety of campaigns and educational programs have also been put in place. Fortunately, TDK not received any complaints from those who have left. Rather, I have received more than just a few e-mails and letters expressing devotion to the company and encouragement. In some overseas locations where TDK plans to close down plants, we have heard loud protests from local governments and others parties. TDK will respond by seconding staff that have worked at these companies to those regions to exchange views with local government and society, starting this month. On the whole, TDK's reputation has not suffered any visible damage to date.
Q12. Sales of product segments classified as critical business units were about \67.2 billion. Can you give us an idea of the earnings, or losses, from these products in fiscal 2002, and the earnings outlook for fiscal 2003?
A12. Earnings data for fiscal 2002 is unavailable. In fiscal 2003, TDK expects to break even on an income before income tax basis. This forecast could, however, be slightly optimistic.
Q13. Please give us a breakdown of the planned \8.5 billion in restructuring costs for the first and second halves of the current fiscal year.
A13. TDK has budgeted for restructuring costs of \8.5 billion in fiscal 2003-\5.2 billion in the first half and \3.3 billion in the second. TDK hopes that lower restructuring costs of \1.9 billion between the first and second halves and cost savings will result in higher operating income in the second half. Accordingly, TDK forecasts operating income of \8.0 billion in the first half and \12.0 billion in the second half.
Q14. The breakdown of sales by sector for fiscal 2003 predicts a decline in sales by the electronic materials sector, from \41.1 billion in the first quarter to \39.2 billion in the second. Meanwhile, we have heard that sales of capacitors, a product included in this sector, are turning around. Sales by the electronic devices and recording devices sectors are also forecast to decline from the first to second quarters. Why is TDK forecasting sales declines in all sectors?
A14. One reason is that we are much more cautious about the outlook for the second quarter than the first. TDK has set an aggressive in-house plan to improve results, but is more cautious about earnings forecasts released outside the company, as the market still contains many uncertainties.
Q15. The unit price of HDD heads will likely drop more than expected, considering TDK's forecast for HDD head sales and market share, and assuming an exchange rate of US$1= \120. What is the reason?
A15. Basically, the main reason is a changing product mix. The quantities we gave for HDD heads are based on HGA (Head Gimbal Assembly) numbers. But the proportion of HSA (Head Stack Assembly) high-value-added products, for example, declined.
Q16. Excluding factors related to the product mix, that is the distinction between HGA (Head Gimbal Assembly) and HSA (Head Stack Assembly) HDD heads, how do you view the decline in unit price forecast for fiscal 2003?
A16. The drop-off in unit price depends on a product's lifecycle. Generally, 40GB/P heads are expected to fall another US$0.50. We expect the relatively short product life of 60GB/P heads to result in a fall in unit price by as much as US$1.00. I cannot comment on 80GB/P heads, as price negotiations are currently under way.
Q17. To what extent will restructuring measures planned for fiscal 2003 affect earnings?
A17. I should point out that restructuring measures will take place throughout the year. TDK forecasts restructuring-related cost savings of about \2.0 billion in fiscal 2003-\0.6 to \0.7 billion in the first half and \1.2-1.3 billion in the second-mostly from reduced labor costs.
Q18. To what extent has falling unit prices in the electronic materials and components segment been factored into forecasts? How heavily will this weigh on the segment's performance, in light of orders on hand?
A18. The average unit price is projected to decline by more than 9% year on year. I stress that this is an average figure, so some products will be discounted more heavily than others. But the 9% figure is appropriate at present.
Q19. Excluding restructuring costs, TDK posted an operating loss of \5.7 billion in the third quarter and operating income of \1.4 billion in the fourth quarter. How do you analyze this improvement?
A19. The main reason was that actual sales for the full fiscal year were \575.0 billion, \10.0 billion more than the \565.0 billion we forecast on February 5.
Q20. Can you give us a breakdown of projected rationalization and cost savings of \54.6 billion for fiscal 2003, versus the \44.7 billion in the previous fiscal year?
A20. There are number of factors, but one is a higher production yield of HDD heads. Another is the inclusion of \20.0 billion in discounts on materials, \7.0 billion more than last year's level of \12.0 billion to \13.0 billion.
Q21. Excluding restructuring costs, operating income by the recording devices sector appears to improve from the third quarter to the fourth quarter of the previous fiscal year. How did the electronic materials and electronic devices sectors fare?
A21. Sales and earnings in both sectors remained mostly flat.
Q22. Presently, 40GB/P heads are the mainstream HDD heads. When do you expect 60GB/P heads to become the mainstream heads? How is TDK positioned in regard to 60GB/P heads relative to competitors?
A22. TDK expects 60GB/P heads to become mainstream at the end of 2002. Of course, not all customers will need 60GB/P heads. While 60GB/P heads have a short product lifecycle, the lifecycle of 40GB/P heads is expected to be longer. TDK-made 60GB/P heads are rated first or second by customers. But more customers rank them first than second.
Q23. How are your capacitor operations performing against budget now?
A23. TDK's capacitor operations are performing much better than expected, with a double-digit improvement over targets. Results have been lifted by steady orders and a weaker yen than initially planned for.