Mr. Seiji Enami
Finance & Accounting Department
[ Slide 1 ]
I would like to report on our operating results for the six months ended September 30, 2002. Please turn to the earnings release that has been handed out.
[ Slide 2 ]
Firstly, I would like to report on our consolidated performance.
Please turn to the consolidated income statements on page 13. President Sawabe has just reported on the figures, and explained factors behind changes in TDK's results, including operating income. I will continue to discuss our results in more detail.
Despite the continued sales price discounts, the cost of sales ratio improved from 78.8% to 75.5% and the ratio of selling, general and administrative expenses to net sales improved from 22.2% to 20.0%. These two factors boosted earnings by 5.5 percentage points.
We attribute this improvement to structural reforms implemented last fiscal year.
TDK continues to push forward with structural reform. Total structural reform expenses in the first half of fiscal 2003 were ¥5.1 billion, an increase of ¥4.0 billion on the ¥1.1 billion recorded in the same period last year. This included ¥3.4 billion shown as restructuring costs. The remainder was expensed under cost of sales due to their nature. TDK's ¥12.8 billion improvement in operating income came even despite this ¥4.0 billion increase.
In other income (deductions), TDK recorded a significant foreign exchange loss of ¥2.8 billion at the end of the first quarter due to the conversion of foreign currency-denominated accounts receivables and payables and other items into Japanese yen. This reflected the rapid rise in the yen against the U.S. dollar. The first-quarter-end exchange rate was ¥119.50 against the previous period-end rate of ¥133.25. For the period under review, the foreign exchange loss was ¥1.7 billion on an interim-end exchange rate of ¥122.60. Although the exchange loss has narrowed, reflecting a slight weakness in the yen, the yen remains strong against the U.S. dollar.
Other-net included in other income (deductions) totaled ¥1.2 billion, ¥0.8 billion more than in the previous year, reflecting a loss on revaluation of investment securities.
[ Slide 3 ]
Please now look at the balance sheets on page 14 of your handouts. I would like to look at our financial position with reference also to the statements of cash flow on page 16. The comparisons I will draw are with March 31, 2002.
Total assets stood at ¥727.7 billion at September 30, 2002, a decrease of ¥22.2 billion. The yen appreciated sharply against the U.S. dollar, from ¥133.25 to ¥122.60 at September 30, 2002. The strength of the yen against the key U.S. dollar had the effect of decreasing overseas assets when converted into yen by about ¥19.6 billion.
Cash and cash equivalents at September 30, 2002 stood at ¥147.8 billion, an increase of ¥22.1 billion from a year ago. ¥8.0 billion was used for paying bonuses, dividends and other items, and ¥15.2 billion was used for paying retirement expenses that had accrued as at March 31, 2002, which related to the special voluntary retirement package offered in the previous year. On the other hand, cash inflows came from the net income, a ¥7.4 billion decrease in inventories, and improved collection of accounts receivable. The company was also more selective about capital expenditures. The add back of depreciation and amortization of ¥28.5 billion outweighed ¥14.5 billion in cash used for investing in the interim period, resulting in a ¥14.0 billion improvement in cash flows in this regard.
The balance of trade receivables and inventories fell slightly as of September 30, 2002. Although a key factor, TDK places equal importance on setting and improving receivables and inventory turnover targets. As explained by President Sawabe, we have cleared or are close to meeting our targets. Accordingly, new targets have been set as of the interim period end.
Fixed assets were ¥21.6 billion lower. This reflected greater selectivity in making investments and our ongoing structural reform, which has streamlined TDK's facilities. The fixed assets turnover ratio is finally showing signs of improvement.
[ Slide 4 ]
I'd now like to break down accumulated other comprehensive loss, which is shown under stockholders' equity. At September 30, 2002, this account showed a loss of ¥64.1 billion, a ¥20.1 billion increase compared with the loss of ¥44.0 billion at March 31, 2002. This increase led to a decrease in stockholders' equity. Please look at the bottom part of page 17. Note that the accumulated other comprehensive loss of ¥64.1 billion comprised foreign currency translation adjustments of ¥23.3 billion; minimum pension liability adjustments of ¥39.2 billion; and ¥1.6 billion in net unrealized losses on securities. While this has not affected earnings yet, only stockholders' equity at this stage, it may do so in the future.
[ Slide 5 ]
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. President Sawabe has already provided an outline for you. I would like to expand on his presentation and give an overview of the composition of sales, as well as draw comparisons with the previous year.
As the note at the bottom of the page states, figures have been restated effective from the fiscal year starting April 1, 2002. This relates to the reclassification of sales promotion expenses. Certain figures for the same period of the previous fiscal year have been retroactively debited to net sales. As a result of this change, net sales were reduced by approximately ¥1.8 billion. Please update your records to reflect this change.
In the electronic materials and components segment, net sales rose 11.8% to ¥234.3 billion, accounting for 79% of total net sales.
Within this segment, sales in the electronic materials sector were ¥88.9 billion, 9.3% higher year on year. This sector accounted for 30% of total net sales. Capacitors accounted for 66% of sector sales, up 16% year on year. Ferrite cores and magnets accounted for the remaining 34%, down 2.0%.
In the electronic devices sector, sales rose 9.3% to ¥59.3 billion. This sector accounted for 20% of total net sales.Inductive devices accounted for 51% of sector sales, up 3%. High-frequency components accounted for 15% of sector sales, down 3%, while other products represented 34%, a significant increase of 29%.
In the recording devices sector, sales rose 22.1% to ¥78.2 billion, and accounted for 26.4% of total sales.HDD head sales increased 29% and accounted for 90% of sector sales. Other heads accounted for the remaining 10%, down 19%.
Finally for this segment, sales in the semiconductors and & others sector dropped sharply, by 20.8% to ¥7.9 billion and accounted for 2.6% of total net sales.
Next, I would like to look at the recording media & systems segment. Sales rose 1.5% to ¥62.1 billion and accounted for 21% of total net sales.
(Audiotapes)Audiotape sales accounted for 10% of segment sales, down 23%.
(Videotapes)Videotape sales accounted for 33% of segment sales, up 5%. Demand was boosted by the 2002 FIFA World Cup?.
(Optical Discs)Optical discs accounted for 24% of segment sales, down 3%.
(Tape-based data storage media for computers, recording equipment and others)Sales here accounted for 33% of segment sales, up 12%.
[ Slide 6 ]
Communications and Recording are both strategic fields targeted by TDK's medium-term management plan. I would now like to give an overview of the composition of sales, as well as draw comparisons with the previous year.
Sales in the Recording field accounted for 45% of total net sales-the same as our target-increasing 19% year on year. This mainly reflected a recovery in sales of HDD heads. Communications recorded a decrease of 20% in year-on-year sales and accounted for 7% of total net sales, substantially below our target of 20% in this field.
[ Slide 7 ]
I would now like to give a breakdown of the ¥234.3 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 20% and accounted for 48% of segment sales. Sales for the communications industry, mainly mobile phone-related, decreased 18% and accounted for 9% of segment sales. Audio and visual product component sales increased 5% and accounted for 16% of segment sales. Automotive component sales increased 24% and accounted for 10% of segment sales. Sales of parts rose 37% to account for 7% of segment sales. Home electronics and appliances fell 13% and accounted for 2% of total segment sales.
[ Slide 8 ]
I would now like to cover TDK's non-consolidated results. On page 21 of the earnings release you will find the non-consolidated income statement. Sales rose 2%, or ¥3.3 billion, to ¥167.3 billion. The parent company posted operating income of ¥3.5 billion, an improvement of ¥3.8 billion over the operating loss of ¥0.3 billion in the previous year. Current income was ¥6.9 billion, a drop of ¥7.0 billion, or 50%. Income before income taxes fell ¥11.6 billion, or 85%, to ¥2.1 billion. Net income was down 89%, or ¥8.7 billion, to ¥1.1 billion.
The increase in operating income is largely the result of a ¥4.4 billion reduction in expenses-¥2.1 billion in labor costs and ¥2.3 billion in fixed expenses-yielded by structural reforms.
Current income for the interim period fell mainly due to a substantial ¥9.9 billion decrease in dividends from subsidiaries to ¥2.5 billion. This reflected large losses in the fiscal year ended March 31, 2002 due to the implementation of sweeping structural reforms.
The parent company incurred various year-on-year increases in extraordinary losses, which are shown between current income and income before income taxes, during the interim period. These included a ¥3.0 billion increase in restructuring costs, a ¥0.5 billion increase in loss on the revaluation of investment securities and a ¥0.7 billion increase in loss on revaluation of subsidiary and other stocks. These factors explain the ¥11.6 billion decrease in income before income taxes.
[ Slide 9 ]
Finally, I would like to give you TDK's fiscal 2003 projections. Please turn to page 11.
President Sawabe has already touched on the consolidated projections for the current fiscal year. Based on the figures he gave, we are forecasting third-quarter net sales of ¥150.7 billion and operating income of ¥6.0 billion.
That concludes my explanation of TDK's first-half results and projections for the full fiscal year. Thank you for your attention.