Mr. Seiji Enami
Finance & Accounting Department
You have just heard President Sawabe's presentation on fiscal 2003 results. I will continue to talk about our results in more detail.
Please turn to page 12 of the earnings release, which shows TDK's consolidated income statement.
The first item I would like to look at is operating income. Earlier, you heard that structural reform expenses for fiscal 2003 were ¥7.2 billion. But you may be confused because the income statement shows restructuring costs of only ¥5.3 billion. The reason for this is that only expenses that are deemed to be related to selling, general and administrative expenses are shown in this line item. The remaining structural reform expenses are included in cost of sales due to their nature. This is how we have separately treated these expenses in the past.
At our earnings release conference for the third quarter on February 5, we projected structural reform expenses for the full year of ¥8.7 billion. We managed to hold these costs to ¥7.2 billion. The difference is not the result of putting off planned structural reforms. In fact, we executed reforms on schedule. While doing this, we disposed of dormitories, company housing and other idle assets as part of structural reforms. This led to an additional ¥1.5 billion in earnings that we hadn't budgeted for, which lifted operating income.
Also in February we projected depreciation expenses and R&D expenses for the full year of ¥57.0 billion and ¥31.0 billion, respectively. These came in at ¥57.8 billion and ¥31.9 billion, higher than we had forecast. The difference of ¥1.7 billion dragged down operating income.
Looking at "Other-net," which is a line item in the "Other income (deductions)" section, you will note that this was ¥2.0 billion higher than in the previous fiscal year. This was the result of appraisal losses on marketable securities due to falling stock prices, and was something that we hadn't anticipated at the third-quarter earnings conference. And this result came even though TDK has almost no marketable securities.
Our net income of ¥12.0 billion was slightly lower than the ¥12.6 billion we forecast at the third-quarter earnings conference. This was primarily because we recorded a write down of about ¥1.2 billion against prior years' deferred tax assets following the decision to adopt a lower tax rate in the year ended March 31, 2003 ahead of the scheduled introduction of corporate activity tax in the year ending March 31, 2005.
Please turn to page 13, where you will see TDK's consolidated balance sheets.
Compared to March 31, 2002, total assets had declined ¥2.6 billion to ¥747.3 billion at the end of March 31, 2003.
The yen appreciated by about 10% against the US dollar, from ¥133.25 to ¥120.20. Between March 31, 2002 and March 31, 2003, however, the yen depreciated roughly 12% against the euro, falling from ¥116.14 to ¥129.83. The effect of the appreciation of the yen against the U.S. dollar, in which TDK has a heavy weighting of assets denominated, was to decrease overseas assets when converted into yen by ¥23.7 billion.
Cash and cash equivalents increased ¥44.8 billion, recovering to ¥170.6 billion. In addition to the recovery in our earnings, this reflected our efforts to reduce assets and improve the return on assets. We reduced inventories further, shortened the trade receivables turnover period and worked to collect receivables, and were more selective about capital expenditures.
Inventories were reduced to the ¥70 billion level, ¥73.9 billion to be exact, for the first time in 10 years. As a result, and as you will note on page 15 of the earnings release, cash flows from operating activities climbed ¥104.4 billion, and free cash flows, which includes investing cash flows, increased ¥57.7 billion, as President Sawabe reported earlier. When financing cash flows and the negative effect of exchange rate changes are taken into account, cash and cash equivalents increased ¥44.8 billion.
Accumulated other comprehensive loss, which is part of stockholders' equity, increased ¥34.8 billion to ¥78.8 billion, further reducing stockholders' equity. A breakdown is shown on the bottom part of page 16. Note that the accumulated other comprehensive loss comprised foreign currency translation adjustments of ¥26.5 billion, up ¥18.7 billion; minimum pension liability adjustments of ¥52.4 billion, up ¥15.8 billion; and net unrealized gains on securities of ¥0.1 billion, a decrease of ¥0.3 billion.
The foreign currency translation adjustments reflected the effect of the roughly 10% appreciation of the yen against the U.S. dollar. Regarding minimum pension liability adjustments, accumulated benefit obligations (ABOs) increased approximately ¥13.5 billion due to the lowering of the applicable discount rate from 2.5% to 2.0%, and pension assets fell by about ¥20.0 billion due to negative returns on investments resulting from stock price falls and other factors. After deducting the approximate ¥26.0 billion tax effect (at a tax rate of 40%) on additional minimum pension obligations, the net result was a ¥15.8 billion negative effect on stockholders' equity. The 40% tax effect is included as a long-term deferred tax asset and reflected in the ¥17.0 billion increase in other assets (noncurrent) on the balance sheet.
Retirement and severance benefits, which is included under long-term liabilities, increased ¥35.0 billion for the same reasons. Balance sheet items are improving but unfortunately our earnings still haven't recovered to the extent where they could cover the reduction in pension assets. As a result, stockholders' equity declined from 77.9% to 74.1%.
Please turn back to page 1 where you will see a breakdown of sales on the lower part of the page. President Sawabe gave you some numbers and an overview of the operations of each of TDK's reporting segments earlier. I would now like to give an overview of the composition of sales, as well as draw comparisons with the previous fiscal year.
The electronic materials and components segment accounted for 77.6% of total net sales. Within this segment, the electronic materials sector accounted for 27.8% of total net sales. Capacitors represented 65% of the sector's sales, and were up 7%, and ferrite cores and magnets accounted for the remaining 35%, and were down 1%. The electronic devices sector accounted for 18.5% of total net sales. Within this sector, inductive devices represented 52% of sales, and were up 3%, high-frequency components represented 16% of sales, and were up 5%, and other products accounted for the remaining 32%, up 13% year on year. The recording devices sector accounted for 28.9% of total net sales. HDD heads represented 90% of sales, after growing 24% year on year, and other heads were down 8% and accounted for 10% of sector sales. The semiconductors & others sector accounted for 2.4% of total net sales.
The other reporting segment, recording media & systems, represented 22.4% of total net sales. Within this segment, audiotapes accounted for 10% of sales, down 22%, videotapes represented 33% of sales, up 3%, optical discs accounted for 26% of sales, up 1%, and tape-based data storage media for computers and others accounted for 31% of sales, up 2%.
Please now turn to segment information on page 18. First I would like to look at the industry segment information on the upper half of the page. As President Sawabe reported earlier, operating income in the electronics materials and components segment was ¥20.5 billion, marking a ¥56.9 billion turnaround from the previous fiscal year. And the recording media & systems segment, meanwhile, posted operating income of ¥1.5 billion, a ¥8.9 billion year-on-year improvement. While we are still not completely satisfied with the level of our earnings, we definitely turned things around in the year just ended.
In the electronic materials and components segment, ¥25.4 billion of the increase relates to lower structural reform expenses in the period of ¥6.3 billion; in the previous fiscal year they were ¥31.7 billion. Excluding this factor, the increase in segment operating income was effectively ¥31.5 billion. The recovery in market share and improvement in the production yield of HDD heads in recording devices was a major factor behind the improvement in profits in this segment. Other important factors were higher profits in electronic materials and electronic devices that stem from structural reforms started in the previous fiscal year.
In the recording media & systems segment, ¥3.5 billion of the increase relates to lower structural reforms expenses in the period of ¥0.9 billion; in the previous fiscal year they were ¥4.4 billion. Excluding this factor, the increase in segment operating income was effectively ¥5.4 billion. The turnaround in the segment is attributable to three years of structural reforms and efforts to expand tape-based data storage media for computers and other businesses. These actions have put the segment partly back on a growth trajectory.
Finally, I would like to report on the progress we made over the last year in reforming our profit structure by identifying Critical Business Units using NPV. This initiative is strengthening our businesses. This is the last time we will be reporting on Critical Business Units.
As was reported at the third-quarter earnings conference, in fiscal 2003 we ceased production of products accounting for combined sales of ¥11.0 billion. While the Critical Business Units we identified at the start of fiscal 2002 posted losses totaling just over ¥10 billion in the year ended March 31, 2002, I am pleased to report that in fiscal 2003 we managed to hold down losses to several billion yen, excluding restructuring costs accompanying decisions to cease production of certain products.
We forecast that all products remaining in production will return to profitability in fiscal 2004, excluding items kept on the production line due to their growth potential.
There may be some products that we ultimately decide to cease production of even though we have decided to continue producing them at the moment. And there may be other products that we decide should be classified as Critical Business Units. Moving forward, there will probably be no need to report specifically about Critical Business Units, but I would like to stress that we are determined to work to strengthen these businesses.