Mr. Seiji Enami
Finance & Accounting Department
I would now like to provide some additional information based on our earnings release.
But first I want to discuss first half earnings. When we released our first-quarter results on July 29, we stated that we would not revise our forecasts for the first half and full year. But since our first-half results exceeded our initial forecasts, we feel we are generally on track in terms of our overall performance.
However, we also said during the Q&A session in July that we wanted to achieve the same level of earnings in the second quarter as in the first quarter, when we posted operating income of ¥14.0 billion, despite difficult conditions for HDD heads. This would have meant first-half operating income of ¥28.0 billion. However, actual operating income was ¥26.9 billion.
We achieved our plan for the second quarter in the electronic materials and components segment with a performance that was above our first-quarter result. However, we failed to achieve our overall operating income target due to a larger-than-expected drop in DVD prices in the recording media & systems segment.
Please turn to page 12, the consolidated income statement.
Operating income increased by ¥2.9 billion compared with the same period a year earlier. Forex movements had a ¥5.9 billion negative impact on operating income and a ¥15.1 billion negative effect on net sales. Structural reform expenses, which were ¥2.6 billion in the first half of fiscal 2004, were ¥1.5 billion in the first half of the current fiscal year. While we had initially budgeted for only ¥1.3 billion, this was still ¥1.1 billion less than the previous year and a reason for the year-on-year increase in operating income. Depreciation expenses were ¥25.4 billion, compared with ¥23.6 billion last year, and R&D expenses were ¥18.2 billion, compared with ¥17.2 billion in the previous fiscal year's first half. Although the combined increase in these two expense items was ¥2.8 billion, these are planned increases in expenses resulting from actions that will contribute to TDK's performance in future years.
The foreign exchange gain, a component of Other income (deductions), improved ¥2.6 billion against the previous year. In the previous fiscal year, a large foreign exchange loss was booked due to a rapid appreciation in the yen versus the U.S. dollar from ¥120.20 at March 31, 2003 to ¥111.25 at September 30, 2003. In comparison, in the first half of fiscal 2005, the yen depreciated from ¥105.69 at March 31, 2004 to ¥111.05 at September 30, 2004, resulting in a small foreign exchange gain and year-on-year improvement of ¥2.6 billion.
On the other hand, the Other-net component of Other income (deductions) declined by ¥1.8 billion compared with the previous year, when TDK recorded a one-time receipt of ¥2.0 billion in patent fees. The decrease reflected the absence of such abnormal items in the interim period under review.
Income taxes increased ¥3.3 billion. This increase reflected a recovery in profits in Japan, where tax rates are high, on strong results in electronic materials and electronic devices. Another reason for the higher tax was slightly higher dividends from overseas, an action that had not been included in initial plans for the year.
Next, turn to page 13, the consolidated balance sheets.
Total assets increased ¥37.6 billion to ¥807.9 billion. As explained earlier, during the fiscal year's first half, the yen depreciated by just over 5% against the U.S. dollar from ¥105.69 at March 31, 2004 to ¥111.05 at September 30, 2004. The yen also weakened against the euro, by just over 6% from ¥128.88 to ¥137.04 during the same period. The overall effect of these forex movements was to increase yen translations of overseas assets by ¥17.7 billion.
Cash and cash equivalents increased ¥8.8 billion to ¥236.0 billion. This increase includes ¥5.2 billion due to the weaker yen. The effective increase was therefore only ¥3.6 billion.
In terms of main items affecting cash, TDK generated net income of ¥19.9 billion in the first half of fiscal 2005, but there was a ¥4.5 billion net outflow as capital expenditures of ¥29.9 billion exceeded depreciation and amortization of ¥25.4 billion. Another factor was a ¥7.7 billion increase in inventories, excluding the effect of forex movements, reflecting an increase in materials inventories to ensure production during China's National Day holiday and for other reasons. In addition, tax payments increased. Due to these factors, there was not a significant increase in cash.
Accumulated other comprehensive loss, a component of stockholders' equity, improved ¥19.5 billion from ¥90.4 billion to ¥70.8 billion. In more detail, foreign currency translation adjustments decreased from ¥52.8 billion to ¥41.0 billion, resulting in a positive impact on equity of ¥11.8 billion. This was the result of a weaker yen. Minimum pension liability adjustments decreased from ¥38.2 billion to ¥30.0 billion, resulting in a ¥8.2 billion positive impact on equity. This reflected a ¥13.5 billion increase in pension plan assets due to a buoyant stock market. After tax of 40%, the net increase was ¥8.2 billion.
I'd now like to talk about the transfer of the substitutional portion of Employees' Pension Fund (EPF) liabilities. In the previous fiscal year, TDK received governmental permission to be exempted from the obligation to pay benefits for future employee service related to the substitutional portion of the EPF plan. On October 1, 2004, we also received approval from the Minister of Health, Labour and Welfare to transfer the substitutional portion of past Employees' Pension Fund (EPF) liabilities. TDK will recognize a one-time gain or loss on transfer of the substitutional portion in the fourth quarter of fiscal 2005.
Please return to page 1 and look at the sales breakdown on the bottom part of the page.
First, let's look at the electronic materials and components segment. In the electronic materials sector, which is made up of capacitors and ferrite cores and magnets, capacitor sales were up 13% and accounted for 70% of sector sales. Sales of ferrite cores and magnets were up 6% and accounted for the remaining 30%.
In the electronic devices sector, inductive devices sales rose 11% and represented 48% of sector sales. Sales of high-frequency components were down 3% and accounted for 9% of the total, while other products sales were up 12% and accounted for 43% of sector sales.
In the recording devices sector, HDD head sales were down 6% and accounted for 91% of sales, while sales of other heads were down 16% and accounted for the remaining 9% of sector sales.
In the recording media & systems segment, audiotape sales declined 32% and represented 6% of segment sales. Videotape sales were down 22% and accounted for 25% of sales. Sales of optical media products were up 15% and represented 43% of total sales. Other products posted an 18% decline in sales and accounted for 26% of segment sales.
Finally, please look at TDK's fiscal 2005 projections on page 10. Mr. Sawabe has already given you TDK's consolidated projections, so I would like to look at our non-consolidated projections. Today, we filed revised forecasts with the Tokyo Stock Exchange because of our strong first-half earnings, which were due to brisk sales in the electronic materials and electronic devices sectors and higher dividends from overseas subsidiaries. We are now forecasting non-consolidated net sales of ¥344.7 billion, compared with ¥338.0 billion, and operating income of ¥13.4 billion, up from ¥9.7 billion. Furthermore, we are forecasting current income of ¥33.7 billion, up from ¥20.5 billion, and net income of ¥22.9 billion, up from ¥13.5 billion.
This concludes my remarks on TDK's interim results. Thank you.