Mr. Seiji Enami
Finance & Accounting Department
You have just heard an overview of first-half operating results by the president, Mr. Sawabe. I would now like to provide some additional information based on the business results you received today.
Please turn to page 12, the consolidated income statement.
Note that we recorded improvements in the gross margin as the cost of sales fell from 75.5% to 72.1% of sales, and in the SG&A ratio, which declined from 21.1% to 20.3%, despite the inclusion of restructuring expenses. As a result, our operating margin rose 4.2% to 7.6% even as we faced strong demands for price reductions and a strengthening yen in September. We view these improvements as the benefits of ongoing structural reforms that we launched in fiscal 2002.
From this year we have stopped providing a separate table for restructuring costs. To summarize however, expenses included in SG&A expenses declined from 3.4 billion yen in last year's first half to 1.5 billion yen. In the cost of sales, restructuring expenses were down from 1.7 billion yen to 1.1 billion yen. Overall, structural reform expenses fell from 5.1 billion yen to 2.6 billion yen.
Let's move on to foreign exchange gains and losses in non-operating items. Although the yen stood at 133 against the U.S. dollar at the end of March 2002, it strengthened rapidly during the first quarter of the previous fiscal year to 119.50, resulting in a significant first-quarter foreign exchange loss. The rate remained stable at around 120 until the second quarter of this fiscal year, when it again rapidly gained strength to 111 against the dollar. Consequently, there were foreign exchange losses in both this year and last year's interim period. The net result in this interim period was a negative impact of 300 million yen compared with the previous year.
The Other-net component of Other income (deductions) improved by 3.8 billion yen. This was mainly attributable to a one-time increase of 2.0 billion yen in patent fees, a 1.2 billion yen increase in equity-method income, and a decrease of about 600 million yen in securities valuation losses and other expenses. In sum, we absorbed a 2.0 billion yen foreign exchange loss, generating income before income taxes of 25.0 billion yen, 1.0 billion yen more than operating income.
Next, please turn to page 13, the consolidated balance sheets, and page 15, the cash flow statements. Increases and decreases in this section are for the first six months of this fiscal year.
Total assets increased 3.4 billion yen to 750.7 billion yen. During the fiscal year's first half, the yen appreciated 7% from 120.20 to 111.25 to the U.S. dollar. The yen also appreciated slightly against the euro from 129.83 yen to 129.19 yen. The overall effect of these foreign exchange movements was a decline of 19.9 billion yen in our overseas assets.
Cash and cash equivalents increased 22.8 billion yen to 193.4 billion yen. This represents a recovery from just below the 120.0 billion level in the middle of the structural reform process to the highest level since March 1999, when cash and cash equivalents stood at 200.1 billion yen.
Inventories increased 3.7 billion yen, but this was the result of strong orders for HDD heads and preparations for the year-end selling season, mainly by increasing inventories of DVD disks and other recording media. In other product categories, inventories continue to decline.
Please now turn your attention to the bottom of page 16, which shows changes in equity, accumulated other comprehensive loss, in relation to the end of last March. This increased from 78.8 billion yen to 85.2 billion yen resulting in a negative impact on equity of 6.4 billion yen. In more detail, the increase in accumulated other comprehensive loss was the net result of an increase in foreign currency translation adjustments of 14.7 billion yen, and an improvement in minimum pension liability adjustments of 8.3 billion yen. This 8.3 billion yen improvement was mainly attributable to an increase in pension plan assets as stock prices rebounded. Note that this figure is net of the effect of taxes. The effect of taxes, which has decreased, is recorded as deferred tax assets in the other assets component of noncurrent assets. The recovery of the stock market was also responsible for the approximately 9.0 billion yen decrease in retirement and severance benefits in long-term liabilities.
TDK has received an exemption from the obligation to make future payments with regard to the substituted portion of the Welfare Pension. However, as we have decided to adopt the gensoku-ho, we plan to recognize gains and losses on the return of the substituted portion in the following fiscal year.
Now please return to page one and look at the sales composition table.
Mr. Sawabe has already discussed these figures, but I would like to provide more details. As you can see, the table provides sales composition and year-on-year growth figures.
First, let's look at the electronic materials and components segment. In the electronic materials sector, capacitors sales were down 4% and accounted for 68% of sector sales. Sales of ferrite cores and magnets were down 14% and accounted for the remaining 32%.
In the electronic devices sector, inductive devices sales were down 2% and represented 57% of sector sales. Sales of high-frequency components were down 10% and accounted for 15% of the total, while other products sales dropped 27% and were 28% of sector sales.
In the recording devices sector, HDD head sales were up 43% and accounted for 90% of sales, while sales of other heads rose 39% and were 10% of sector sales.
In the recording media & systems segment, audiotape sales fell 23%, representing 8% of segment sales. Videotape sales were down 11% and accounted for 30% of sales. Sales of optical media products rose 38% and were 34% of total sales. Other products posted an 11% sales decline, representing 28% of segment sales.
This completes my remarks. Thank you.