Investor Relations | IR Events | Performance Briefing

[FY2003 1Q Performance Briefing]Consolidated results

Seiji Enami General Manager Finance & Accounting Department

Consolidated results

[ Slide 1 ]

Consolidated results for the first quarter of fiscal 2003, the three-month period from April 1, 2002 through June 30, 2002, are as follows:Consolidated results for the first quarter of fiscal 2003, the three-month period from April 1, 2002 through June 30, 2002, are as follows:

[ Slide 2 ]

Please look at the upper part of page 1 of the earnings release. You will see that TDK managed to post higher sales and earnings, albeit at lower levels than in past years. Net sales increased 6.0% to ¥148,708 million, operating income soared 131.2% to ¥5,986 million and income before income taxes rose 28.8% to ¥3,303 million. Net income climbed 79.0% to ¥2,161 million and net income per common share was ¥16.27.

This performance was attributable to four main factors. One was tangible benefits from the structural reforms implemented last fiscal year. Second was that orders for components, particularly capacitors, rebounded slowly from early in 2002, ending a period of inventory reductions at customers. This trend continued through to May in the first quarter. Third was strong sales of HDD heads in the recording devices sector. Fourth was the weak yen during the quarter, as well as the effect of the abrupt rise toward the end of June.

[ Slide 3 ]

Please turn to the consolidated income statement on page 5. Operating income increased ¥3.4 billion from the same period of the previous fiscal year. In terms of main contributors to this increase, higher sales, including an improved capacity utilization rate and changed product mix, contributed ¥3.4 billion; lower materials costs contributed ¥4.4 billion; rationalization and cost cutting contributed ¥5.3 billion; cuts in selling, general and administration expenses contributed ¥2.5 billion; and the yen's overall weakness boosted net sales by approximately ¥4.2 billion and operating income by approximately ¥0.8 billion. These factors resulted in a combined positive effect on earnings of ¥16.4 billion.

Average first-quarter yen exchange rates for the U.S. dollar and euro were ¥127 and ¥117, respectively, as the yen depreciated 4% from ¥123 versus the dollar and 9% from ¥107 versus the euro, compared with the previous year's first quarter. This had the effect of slightly boosting net sales and operating income, as I have just mentioned.

In terms of factors that negatively affected earnings, one was sales price discounts, which had a ¥12.2 billion detrimental effect. Overall sales prices fell 8% on average, 7% in the electronic materials and components segment and 11% in the recording media & systems segment. Furthermore, ongoing structural reforms had a ¥0.8 billion negative effect on earnings. Restructuring costs are shown separately on the income statement.

In other income (expenses), a rapid rise in the yen against the U.S. dollar in late June meant that the quarter-end exchange rate was ¥119.50, compared with the average for the quarter of ¥127, giving rise to a large foreign exchange loss. Also, while there was a ¥1.4 billion gain on foreign exchange hedge contracts, TDK booked a ¥4.2 billion charge related to the revaluation of foreign currency-denominated assets and liabilities, such as accounts receivable, on the quarter-end exchange rate. This was substantially higher than the amount booked in the same period in the previous fiscal year. In total, exchange rate movements had a negative effect of just over ¥2.0 billion on after-tax earnings.

Thanks to structural reforms that have been implemented since last year, TDK reduced fixed expenses by ¥7.8 billion in the first quarter, compared with the same period of the previous fiscal year. This represented ¥3.3 billion in labor-cost savings and ¥4.5 billion in other fixed expenses.

In addition to restructuring costs, which are shown separately, expenses related to structural reforms in the first quarter included ¥1.1 billion included in the cost of sales. In total then first-quarter structural reform-related expenses were ¥1.9 billion.

[ Slide 4 ]

Please now look at the balance sheets on page 6 of your handouts. I would like to look at our financial position with reference also to the cash flow statements on page 7. The comparisons I will draw are with March 31, 2002.

Total assets stood at ¥720.4 billion at June 30, 2002, a decrease of ¥29.5 billion. The yen appreciated sharply against the U.S. dollar, from ¥133.25 to ¥119.50 at June 30, 2002. Between the two dates the yen depreciated slightly against the euro, falling from ¥116.14 to ¥118.13. But the strength of the yen against the key U.S. dollar had the effect of decreasing overseas assets when converted into yen by about ¥25.7 billion.

Cash and cash equivalents were ¥120.0 billion, down ¥5.5 billion from March 31, 2002. During the first quarter, TDK recorded earnings and made progress in reducing inventories, being more selective about capital expenditures and in other areas. However, these positive factors were outweighed by the use of ¥8.0 billion for paying bonuses, dividends and other earnings-related items; ¥15.2 billion for paying retirement expenses that had accrued as at March 31, 2002, which was related to the special voluntary retirement package offered in the previous fiscal year; and approximately ¥6.1 billion in foreign exchange loss on overseas funds.

Inventories fell by approximately ¥40.0 billion from the peak at the end of the previous first quarter. Compared with March 31, 2002, inventories were ¥7.4 billion lower. This represented ¥3.8 billion in foreign exchange losses and an actual reduction in inventories of ¥3.6 billion. This underscores the efforts TDK has made to reduce inventories.

Fixed assets were ¥15.7 billion lower. This reflected both the greater selectively in making investments and the timing of investments. Compared with depreciation of ¥14.5 billion, new investments in fixed assets were held to ¥6.3 billion. Other reasons for the lower total were the disposal of facilities on the books at ¥1.1 billion and a foreign exchange loss of ¥6.7 billion.

[ Slide 5 ]

Other current liabilities decreased ¥15.3 billion, mainly due to the previously mentioned payment of accrued retirement expenses.

Accumulated other comprehensive income (loss) increased ¥26.8 billion, lowering shareholders' equity. This was mainly due to foreign currency translation adjustments, minimum pension liability adjustments and net unrealized losses on securities. You can find a detailed breakdown of this account in Note 3 on page 9.

[ Slide 6 ]

I'd like now to turn back to page 1, where you will find a breakdown of sales on the lower part of the page. I would like to give an overview of the composition of sales, as well as draw comparisons with the previous year.

As Note 2 states, figures have been restated due to the application of EITF 01-9 effective from the fiscal year starting April 1, 2002. This resulted in the reclassification of sales promotion expenses. Previously debited to selling, general and administrative expenses, these expenses are now debited to net sales. Further details of this change can be found on page 1 of the supplementary materials. Please update your records to reflect this change, which has no effect on operating income.

In the electronic materials and components segment, net sales rose 7.1% to ¥118.2 billion, accounting for 79.5% of total net sales.

Within this segment, sales in the electronic materials sector were ¥45.9 billion, 4.5% higher year on year. This sector accounted for 30.8% of total net sales.
(Capacitors) Sales of capacitors rose on the back of continuing strong demand for use in audio and visual products, such as DVD players and video game consoles, and in automobiles and PCs and peripherals.
(Ferrite Cores) In ferrite cores and magnets, overall sales of ferrite cores dropped year on year. While demand for cores used in LCD backlights and power supplies for audio and visual products increased, demand failed to recover for cores used in information and communications applications and other areas, leading to the lower sales.
(Magnets) Magnet sales were largely the same year on year thanks to a continuation of solid demand from the automobile and parts fields.

Capacitors accounted for 66% of sector sales, up 13% year on year. Ferrite cores and magnets accounted for the remaining 34%, down 9%.

In the electronic devices sector, sales rose 4.5% to ¥29.8 billion. This sector accounted for 20.1% of total net sales.
(Inductive Devices) Inductive device sales were almost flat as demand from the communications market failed to recover. Demand was firm, however, for use in PCs and peripherals and in automotive applications due to the increasing use of electronics in automobiles.
(High-Frequency Components) Sales of high-frequency components dropped marginally due to stronger calls than last year for discounts from customers. The effect of these discounts outweighed a quarter-on-quarter recovery in demand for use in communications applications, particularly mobile phones. A high proportion of TDK's high-frequency components are used in this market.
(Other Products) In other products, sales rose, buoyed by strong demand for DC-DC converters for video game systems.

Inductive devices thus accounted for 52% of sector sales, down 3%. High-frequency components accounted for 15% of sector sales, down 5%, while other products represented 33%, up 26%.

Recording devices sales rose 16.8% to ¥38.3 billion and accounted for 25.8% of total net sales.
(HDD Heads) HDD head sales increased as TDK's well-received 40 gigabyte/disk HDD heads became a mainstream product and the company regained market share.
(Other Heads) Sales of other heads fell due to inventory cutbacks by customers and other factors.

HDD heads accounted for 91% of sector sales, up 24%. Other heads accounted for the remaining 9%, down 25%.

Sales in the semiconductors and other sector dropped 18.1% to ¥4.1 billion and accounted for 2.8% of total net sales. This reflected a sharp drop in sales of semiconductors for WAN/LAN and other devices due to continuing low levels of investment in communications infrastructure equipment.

Next, I would like to look at the recording media & systems segment. Sales rose 2.1% to ¥30.5 billion and accounted for 20.5% of total net sales. Essentially, lower sales of audiotapes resulting from falling overall demand, were more than offset by higher sales of newly verified tape-based data storage media and sales of recording equipment.
(Audiotapes) Audiotape sales accounted for 11% of segment sales, down 19%. The fall in demand intensified in this product area.
(Videotapes) Videotape sales accounted for 34% of segment sales, up 4%. The 2002 FIFA World Cup? helped to boost sales slightly.
(Optical Discs) Optical discs accounted for 24% of segment sales, up 2%. Higher volumes covered falling sales in CD-Rs, and DVD sales rose gradually.
(Data tapes, recording equipment and others) Sales here accounted for 31% of segment sales, up 10%. Sales of LTO-verified, tape-based data storage started to contribute to sales in this area.

[ 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.

[ Slide 8 ]

I would now like to give a breakdown of the ¥118.2 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.

Sales of components for PCs and peripherals rose 18% and accounted for 47% of segment sales. Sales for the communications industry, mainly mobile phone-related, decreased 27% and accounted for 9% of segment sales. Audio and visual product component sales increased 3% and accounted for 17% of segment sales. Automotive component sales increased 20% and accounted for 10% of segment sales. Sales of parts rose 26% to account for 7% of segment sales. Home electronics and appliances fell 16% and accounted for 2% of total segment sales.

[ Slide 9 ]

Please turn to page 8 where you will see industry segment information on the top half of the page.

Operating income in the electronic materials and components segment rose 30.6% year on year to ¥5.5 billion. The recording media & systems segment, meanwhile, posted operating income of ¥0.5 billion, an improvement of ¥2.1 billion, as it reversed an operating loss.

In the electronic materials and components segment, the recovery in HDD heads in the recording devices sector had a major impact. Results in electronic materials and electronic devices look to be on the road to recovery, but structural reforms are still continuing.

The turnaround in the recording media & systems segment is attributable to two years of structural reform and efforts to expand data storage tape and other businesses. These actions have put the segment partly back on a growth trajectory.

[ Slide 10 ]

At the very bottom of the page you will see a breakdown of sales by region. Sales in Japan declined 2% to ¥42.5 billion, reflecting generally weak demand. One bright note was higher demand for DC-DC converters for video game systems. In the Americas, sales rose 8% to ¥29.2 billion, despite lower demand in electronic materials and electronic devices. This increase reflected two factors: a recovery in HDD heads in the recording devices sector, and higher sales of tape-based data storage in the recording media & systems segment. In Europe, sales dropped 16% to ¥16.6 billion due to soft sales across the board. The European market continues to contract as customers shift operations from Western Europe to Eastern Europe, with certain customers shifting production from Europe to China and other countries. In Asia (excluding Japan) and Others, sales climbed 21% to ¥60.4 billion on rising sales in most business areas. The biggest gain was made in HDD heads in the recording devices sector.

The overall result was a 10% rise in overseas sales year on year to ¥106.2 billion. Overseas sales accounted for 71.4% of consolidated net sales, a 2.4 percentage point increase from 69.0% in the previous year's first quarter.

The year-on-year changes in operating income shown in Geographic Segment Information mirrored the changes in sales by region.

[ Slide 11 ]

Finally, I would like to cover TDK's consolidated projections for fiscal 2003, ending March 31, 2003. These are contained on page 4.

The consolidated projections are based principally on several assumptions. One is that the average yen-U.S. dollar exchange rate from the second quarter onward will be ¥120. This is the same rate TDK used for its initial estimates.

Secondly, TDK feels that difficulties will persist in our operating environment as the outlook for economic recovery, particularly in the U.S., remains uncertain and tenuous. Demonstrating TDK's concerns is the fact that although orders in the components industry moved onto a recovery path at the start of the year, they dropped off again in June. Therefore, while operating income was better than expected in the first quarter, earnings in the second quarter are likely to be in line with earlier estimates, given such factors as the uncertainty surrounding foreign currency movements and the economic malaise. We don't therefore see any increase in earnings from initial projections for the second quarter onward. TDK will do its utmost to meet those initial projections, which TDK does not plan to revise at this point.

TDK is projecting net sales of ¥140,000 million and ¥580,000 million for the second quarter and full year, respectively, the same as initially projected. Likewise, the company is projecting operating income of ¥4,000 million and ¥20,000 million, income before income taxes of ¥3,000 million and ¥17,000 million, and net income of ¥2,500 million and ¥13,000 million.

That concludes my presentation of TDK's first quarter results and fiscal 2003 projections.

Thank you for your attention.

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