Mr. Seiji Enami
Finance & Accounting Department
You just heard President Sawabe's presentation of TDK's fiscal 2005 performance. I will now discuss our results in more details.
Please turn to page 13 of the earnings release, the consolidated income statement.
Mr. Sawabe touched on this before, but, at the end of March 2005, we decided to sell with a 99% probability a semiconductor-related business that was operated by a U.S.-based subsidiary. As a result of this move, we have categorized this business as a discontinued operation for accounting purposes in accordance with SFAS 144. Our income statement thus separates discontinued operations from continuing operations. Based on this presentation, discontinued operations had a loss of ¥762 million in fiscal 2004 and ¥3,665 million in fiscal 2005. The net loss in fiscal 2004 was held to under ¥0.8 billion due to patent-related non-operating income of approximately ¥2.0 billion. However, the net loss from discontinued operations ballooned to ¥3.7 billion in fiscal 2005 due to additional expenses of approximately ¥2.0 billion resulting from structural reforms, including impairment losses on goodwill, related to the sale of the U.S. subsidiary.
When we released our 3Q results, we lowered our forecast for net sales by ¥20.0 billion, but we left our forecast for operating income unchanged at ¥60.0 billion. Actual operating income was ¥59.8 billion. While this is very close to the forecast, there was a considerable change in the composition of this figure. Let me explain the differences from our forecast, starting from our actual operating income of ¥59.8 billion. In fiscal 2005, we returned the substitutional portion of the Employees' Pension Fund. We had anticipated when we released our third-quarter results that we would record a gain on this transfer of ¥4-¥6 billion. While we didn't announce it at that time, we were estimating a gain of ¥4 billion. The actual gain was ¥6.2 billion, ¥2.2 billion above our estimate. In addition, of the ¥3.7 billion loss related to the sale of the U.S. subsidiary, ¥2.0 billion was due to the sale of discontinued operations, with the remaining loss of approximately ¥1.7 billion from ordinary operations. Excluding both the difference from the transfer of the substitutional portion and this ¥1.7 billion loss from the actual operating income results in an effective operating income of ¥55.9 billion. The result is a shortfall of ¥4.1 billion compared with the operating income forecast.
Looking at the makeup of this shortfall, one cause is our bringing forward structural reforms to continuing businesses, including the recording media business. Previously, we stated that we expected to incur structural reform expenses of around ¥1.0 billion in the fourth quarter. In the end, we incurred ¥2.5 billion, ¥1.5 billion more than forecast. So, while there was a shortfall of ¥4.1 billion between the adjusted operating income and forecast operating income, ¥1.5 billion of this shortfall represents expenses for restructuring measures we were planning in fiscal 2006 that we brought forward. Of the remaining ¥2.6 billion difference, ¥1.2 billion represents a worse-than-expected performance by recording media. The other ¥1.4 billion, as you may already know, represents lower earnings in electronic components resulting from problems with capacitor production yields. These problems have already been mostly resolved.
Please turn to page 14, TDK's consolidated balance sheets.
Total assets at March 31, 2005 were ¥790.0 billion, up ¥19.7 billion from a year ago. This increase partly reflects an approximate ¥10.0 billion increase in the value of overseas assets at March 31, 2005 due to a weaker yen against the greenback and euro. In March 2004, the yen strengthened. Whereas the balance sheet is based on a comparison of rates at two points, the income statement reflects the average rate for the fiscal year. Because the value of the yen against the U.S. dollar was higher during fiscal 2005 than in fiscal 2004, there was a negative effect on sales and earnings.
Cash and cash equivalents increased ¥24.4 billion to ¥251.5 billion. Fiscal year earnings were one contributor. Another was depreciation and amortization of ¥52.8 billion. On the other hand, there were outlays of ¥61.0 billion for capital expenditures. Including these and other factors, free cash flow was ¥32.7 billion. Meanwhile, financing activities used net cash of ¥9.4 billion, including dividends paid. The increase of ¥24.4 billion in cash and cash equivalents is the net result of these changes and after accounting for net cash used in discontinued operations of ¥1.6 billion and the effect of exchange rate changes, which was a positive ¥2.7 billion due to a slight depreciation in the yen. Inventories decreased approximately ¥2.4 billion to ¥74.9 billion. At the end of September 2004, inventories had increased to close to ¥87.4 billion but fell back to ¥74.9 billion due in part to inventory reductions in the second half.
Stockholders' equity improved ¥74.5 billion to ¥650.7 billion. One reason was the increase in earnings. Another reason was a ¥38.7 billion decline in accumulated other comprehensive loss from ¥90.0 billion to ¥51.7 billion. This decline reflected a ¥5.6 billion improvement in foreign currency translation adjustments to ¥47.2 billion due to a slight depreciation in the yen. Also contributing to the decline in accumulated other comprehensive loss was a decrease of ¥32.9 billion in minimum pension liability adjustments to ¥5.3 billion. This improvement resulted from the transfer of the substitutional portion of Employees' Pension Fund liabilities. The final component of the improvement in accumulated other comprehensive loss was an increase in net unrealized gains on securities of ¥0.2 billion to ¥0.8 billion.
Regarding the improvement in the minimum pension liability adjustments, there were actually two reasons. One was a decrease in accumulated benefit obligations (ABOs), which resulted from the transfer of the substitutional portion of Employees' Pension Fund liabilities. The other was that pension assets exceeded remaining ABOs. As this made it unnecessary to book a minimum pension liability in accordance with SEC standards, there was a substantial decrease in this account. However, pension assets exceed ABOs by only ¥0.6 billion, meaning that we could easily be required to post a minimum pension liability again if there is only a small downturn in the performance of pension assets. Since we have transferred the substitutional portion, we won't be posting a liability anything like before. But we could see an increase in the minimum pension liability at any time.
Please return to page 1. I would now like to give you the sales composition, as well as draw comparisons with the previous fiscal year. As a result of separating the semiconductor business, we have made a slight change to how we report sales composition by product. You can find sales composition by quarter for the fiscal years ended March 31, 2004 and 2005 on a separate handout.
The electronic materials and components segment accounted for 82.9% of total net sales, and recorded a sales increase of 4.9% year on year. Within this segment, the electronic materials sector accounted for 26.6% of total net sales, and sales were up 4.8% year on year. Within this sector, capacitors represented 69% of sales, and were up 5%, and ferrite cores and magnets accounted for the remaining 31%, and were up 4.3%.
The electronic devices sector accounted for 17.7% of total net sales, and sales were up 7.8%. Within this sector, inductive devices represented 47% of sales, and were up 7.7%, high-frequency components represented 10% of sales, and sales were flat year on year, and other products accounted for the remaining 43%, and were up 9.8%.
The recording devices sector accounted for 35.7% of total net sales, and sales were up 1.9%. HDD heads represented 92% of sector sales, up 4.3% year on year, and other heads accounted for 8%, and sales were down 21.0% year on year.
The semiconductors & others sector, after the sale and separation of semiconductor operations, accounted for 2.9% of total net sales, and sales were up 30.8%.
Recording media & systems, represented 17.1% of total net sales, and sales were down substantially by 17.2%. Within this segment, audiotapes accounted for 6% of sales, and sales were down 30.3%, videotapes represented 25% of sales, down 23.7%, optical discs accounted for 45% of sales, up 1.2%, and others accounted for 24% of sales, down 30.8%.
This concludes my presentation.