[ Financial Results for Fiscal 2004 Performance Briefing ]Consolidated Results
Mr. Seiji Enami
General Manager
Finance & Accounting Department
You have just heard President Sawabe's presentation of fiscal 2004 results. I will now discuss our results in more detail.
Please turn to page 11 of the earnings release, the consolidated income statement.
My first subject is operating income. When we announced our third-quarter results, we were projecting operating income of ¥52.5 billion. The actual figure was ¥54.3 billion, slightly above this forecast. Also at the third-quarter announcement, we stated that we planned ¥4.0 billion or so in structural reforms in the fourth quarter, bringing total structural reform expenses to around ¥8.2 billion for the year, including the ¥4.0 billion that we announced at the start of fiscal 2004. Earlier you heard from Mr. Sawabe that structural reform expenses for fiscal 2004 were actually ¥7.5 billion. This does not mean that we scaled back structural reforms. In fact, they were implemented according to plan. The ¥7.5 billion merely reflects the subtraction of a gain on the sale of land that wasn't in our budget.
Another factor that affected our operating income was the application of actuarial accounting at an overseas subsidiary. This was done in accordance with SEC pension accounting standards because of the greater importance of this overseas subsidiary. Basically, on the day before we were due to close our books for the year, we received an exposure draft, which was expected to give rise to unplanned additional pension expenses. On the advice of our accountants, we decided to book a one-time charge of ¥1.7 billion for pension expenses in the period just ended. This amount was not included in our forecasts announced with our third-quarter results.
Looking at "Other-net," which is a line item in the "Other income (deductions)" section, you will note that this figure improved ¥6.8 billion from the previous fiscal year and offset a ¥1.6 billion increase in foreign exchange losses caused by the yen's appreciation. There were several reasons for the improvement: an approximate ¥1.3 billion increase in equity in earnings of affiliates; a ¥1.9 billion increase in income from patents and licenses; a ¥2.1 billion decrease in appraisal losses on investment securities; and a ¥0.6 billion gain on the sale of a U.S.-based software company. There was also a ¥0.5 billion contribution from a change in accounting standards -cash discounts, warranties and compensation that were booked under "Other income (deductions)" in the previous fiscal year were booked as operating expenses in fiscal 2004. This amount was zero in the previous fiscal year.
Please turn to page 12, TDK's consolidated balance sheets. These figures should be viewed in conjunction with the consolidated cash flows statements on page 14, the statements of stockholders' equity on page 13 and trends in cash flows for fiscal 2004 on page 9. The comparisons I will draw are with the end of March 2003.
Total assets at March 31, 2004 were ¥770.3 billion, increasing ¥23.0 billion from a year ago.
The yen appreciated by about 12% (¥14) against the U.S. dollar, from ¥120.20 to ¥105.69. Between March 31, 2003 and March 31, 2004, the yen appreciated slightly against the euro, from ¥129.83 to ¥128.88. The effect of these changes was to reduce yen translations of overseas assets by ¥38.5 billion. But this amount was absorbed by other changes, resulting in the net increase in total assets of around ¥23.0 billion.
Cash and cash equivalents increased ¥56.6 billion to ¥227.2 billion. This was a record high for TDK. The main reasons were the improvement in our earnings as well as our policy of making only carefully chosen investments, mainly in property, plant and equipment. Specifically, while not intentionally lowering our investments, we worked to reduce assets and improve asset efficiency, resulting in capital expenditures of ¥44.9 billion and depreciation and amortization of ¥51.2 billion. As a result, operating activities provided net cash of ¥114.7 billion.
Investing activities used net cash of ¥37.8 billion, resulting in free cash flows of ¥76.9 billion, as Mr. Sawabe reported earlier. Financing activities used net cash of ¥9.6 billion, including for the repayment of borrowings, not a large amount. After taking into account the negative effect of exchange rate changes of ¥10.7 billion, cash and cash equivalents increased by a net ¥56.6 billion.
Accumulated other comprehensive loss, which is part of stockholders' equity, increased by ¥11.6 billion to ¥90.4 billion. A breakdown of the ¥11.6 billion is shown on the bottom of page 15. Note that accumulated other comprehensive loss comprised foreign currency translation adjustments of ¥52.8 billion, up ¥26.3 billion; minimum pension liability adjustments of ¥38.2 billion, down ¥14.2 billion: and net unrealized gains on securities of ¥0.6 billion, an increase of ¥0.5 billion.
The foreign currency translation adjustments increase reflects the effect of the appreciation of the yen against the U.S. dollar. Regarding the improvement in minimum pension liability adjustments, an increase of ¥21.0 billion in pension assets due to the stock market rally in Japan contributed to a ¥23.5 billion decrease in pension obligations. After deducting 40% as deferred tax, the net result was the ¥14.2 billion improvement in minimum pension liability adjustments. Because of this 40% deduction, deferred tax assets, a component of "other assets" under "noncurrent assets" on the balance sheet, decreased considerably. "Retirement and severance benefits," a component of "noncurrent liabilities" on the balance sheet, declined ¥11.5 billion due to the increase in pension assets.
Please turn back to page 1, where you will see a breakdown of sales on the bottom half of the page. President Sawabe gave you details of individual business results earlier. I would now like to give you the sales composition, as well as draw comparisons with the previous fiscal year.
The electronic materials and components segment accounted for 79.4% of total net sales, and recorded a sales increase of 10.7% year on year. Within this segment, the electronic materials sector accounted for 25.3% of total net sales, and sales were down 1.3% year on year. Capacitors represented 69% of the sector's sales, and were up 4%, and ferrite cores and magnets accounted for the remaining 31%, and were down 11%.
The electronic devices sector accounted for 16.4% of total net sales, and sales were down 4.2% year on year. Within this sector, inductive devices represented 56% of sales, and were up 4%, high-frequency components represented 15% of sales, and were down 9%, and other products accounted for the remaining 29%, and were down 16%.
The recording devices sector accounted for 35.0% of total net sales, and sales were up 30.8% year on year. HDD heads represented 90% of sector sales, after growing 31% year on year, and other heads, mainly optical pickups, were up 27% and accounted for 10% of sector sales. The semiconductors & others sector, the last sector in the electronic materials and components segment, accounted for 2.7% of total net sales, and sales rose 20.7% year on year.
The other reporting segment, recording media & systems, represented 20.6% of total net sales, and sales were down 0.3% year on year. Within this segment, audiotapes accounted for 7% of sales, down 27%, videotapes represented 28% of sales, down 16%, optical discs accounted for 36% of sales, up 38%, and tape-based data storage media for computers and others accounted for 29% of sales, down 8%.
Please turn to our forecasts for fiscal 2005 on page 10. President Sawabe gave you the full-year forecasts earlier. I'd now like to give you our forecasts for the first half of the year.
We are projecting consolidated net sales of ¥317. 7 billion, operating income of ¥24.5 billion, income before income taxes of ¥25.5 billion and net income of ¥19.2 billion for the first half of the fiscal year. These forecasts, from sales through to the bottom line, all represent slight increases from the same period of the previous fiscal year, and take into account an expected drop-off in HDD head sales and the impact of a higher yen.
As you know, TDK plans to transfer to the Japanese government the substitutional portion of the employees' pension fund this fiscal year. Using the end of September as the record date for valuation, we plan to recognize both the past and future portions at once in the second half of the fiscal year. We do not know if the transfer will result in a gain or loss because this is largely dependent on investment conditions. Therefore, we cannot at this time reasonably estimate the effect of this action. Any potential gains or losses on transfer have not been incorporated in the earnings forecasts I have mentioned.
Finally, please look at our non-consolidated results on page 19. As you heard from President Sawabe, operating income declined ¥1.4 billion, while current income increased ¥1.2 billion. The main reason was development expenses. The parent company accounts for development expenses shared with subsidiaries as a component of operating expenses. But when the parent company is the recipient of shared development expenses, we treat the proceeds as non-operating income, specifically as "technology commission." These proceeds can't be recorded as sales due to their nature, and if they were deducted from operating expenses, the parent company would lose track of actual operating expenses. To simplify the situation, expenses are recorded against operating income while receipts are recorded as non-operating income. The increase in "technology commission" in fiscal 2004 was about ¥4.0 billion. Taking this into account, operating income would have effectively increased ¥2.6 billion because "technology commission" should rightly offset expenses that were deducted from operating income. While there was no noteworthy recovery in parent-company results compared with consolidated results, we feel that the operating structure is gradually improving.
