Investor Relations | IR Events | Performance Briefing

[ 1st Half of fiscal 2006 Performance Briefing ]Consolidated Results

Mr. Seiji Enami Director Corporate Officer General Manager Finance   & Accounting Department

Mr. Seiji Enami
Director
Corporate Officer
General Manager
Finance & Accounting Department

You just heard President Sawabe's presentation about TDK's fiscal 2006 first-half performance. I would now like to provide some additional information based on our earnings release.

Please turn to page 13 of the earnings release, where you will see the consolidated income statement.

Note that due to the classification of a semiconductor business sold in the fourth quarter of fiscal 2005 as a discontinued operation, some figures for the first half of fiscal 2005 have been restated. This revision increased fiscal 2005 interim operating income from ¥26.9 billion to ¥27.7 billion. This amended figure has been used as the basis for comparison with the current fiscal year's interim earnings.

Average first-half yen exchange rates for the U.S. dollar and euro were ¥109.52 and ¥135.61, both minor changes from ¥109.80 and ¥133.28 in the previous fiscal year's first half. There was thus a minimal effect on net sales and operating income; net sales was raised by ¥0.9 billion and operating income was lowered by ¥0.2 billion.

Structural reform expenses were ¥1.3 billion, almost the same as the ¥1.5 billion in the first half of fiscal 2005. We had planned ¥4.0 billion in structural reform expenses for the first half, so we plan to incur charges of ¥2.7 billion in the second half. Depreciation expenses were ¥26.5 billion, compared with ¥25.2 billion last year, excluding semiconductor-related expenses. R&D expenses were ¥18.4 billion, compared with ¥17.5 billion, excluding semiconductor-related expenses. The combined increase in these two expense items, which reflect investments in our future, was ¥2.2 billion.

"Other-net" income in other income (deductions) increased ¥0.6 billion year on year. This relates mainly to growth in interests in affiliated companies.

Please now turn to the income statement on page 23 of the non-consolidated results. You will note that TDK recorded a net loss after taxes. This is due to incremental charges totaling ¥11.9 billion, including ¥10.6 billion in additional taxes and ¥1.3 billion in arrears, in relation to correction notices issued by Japanese taxation authorities based on transfer pricing taxation regulations, as we reported earlier. In addition, we booked ¥1.2 billion in taxes for the 2004 and 2005 fiscal years. An amount equivalent to the amended taxable income will be transferred from overseas subsidiaries involved in the transfer pricing taxation issue and booked as earnings in the second half of the current fiscal year. Accordingly, no revisions have been made to the previously announced non-consolidated projections for the full year.

On a consolidated basis, the amended incremental taxes of ¥11.9 billion have already been included in revisions to prior-year consolidated results. Furthermore, the tax on the amended taxable income of ¥1.2 billion has already been incorporated in first-half earnings.

Just to reiterate what we have previously stated, TDK has lodged objections to the amended incremental taxes that were assessed based on transfer pricing taxation regulations and we have submitted a written statement of disagreement. Taxation authorities are currently examining our objections.

Please look at the consolidated balance sheets on page 14 of the earnings report, and the statement of cash flows on page 16. The comparisons I will draw are with March 31, 2005.

Total assets stood at ¥839.3 billion, ¥31.3 billion higher than at March 31, 2005. The yen depreciated 5.4% against the U.S. dollar, from ¥107.39 as of March 31, 2005 to ¥113.19 at September 30, 2005. During the same period, the yen appreciated 2% against the euro, strengthening from ¥138.87 to ¥136.13. These changes had the net effect of increasing yen translations of overseas assets by ¥18.9 billion.

Cash and cash equivalents declined ¥26.9 billion to ¥224.6 billion. The actual decline was ¥32.4 billion if one takes into account the positive effect of exchange rate changes on cash and cash equivalents of ¥5.5 billion. There were several main factors behind the decrease in cash and cash equivalents. We had net income of ¥21.7 billion, but capital expenditures of ¥34.3 billion exceeded depreciation and amortization of ¥26.5 billion by ¥7.8 billion. Another factor was a ¥9.2 billion increase in inventories in preparation for anticipated sales growth beginning in October as well as for China's National Day holiday at the beginning of October. In addition, there were outflows of ¥15.9 billion in income taxes payables, net, including ¥11.9 billion in payments for amended taxes related to transfer pricing, although we are objecting to this assessment. Furthermore, we paid ¥8.7 billion for the purchase of a company, ¥2.5 billion for the acquisition of minority interests in a subsidiary and ¥5.3 billion in dividends.

Looking at page 16, which shows a comparison with the previous fiscal year's first half, higher payments of income taxes was a major reason for the lower operating cash flows. In investing cash flows, increases in payments for capital expenditures and outflows for the purchase of a company and acquisition of minority interests had a major effect on cash. In financing activities, higher dividend payments negatively affected cash flows. The acquisition of the Lambda Power Division had no effect on the cash balance at the end of September 30, 2005 because the acquisition was completed on October 1, 2005.

At the very bottom of page 17 you will see accumulated other comprehensive loss, which is a component of stockholders' equity. This account improved ¥13.6 billion from ¥51.7 billion to ¥38.1 billion mainly because foreign currency translation adjustments decreased from ¥47.2 billion to ¥33.8 billion, resulting in a positive impact on equity of ¥13.4 billion. Minimum pension liability adjustments decreased from ¥5.3 billion to ¥4.8 billion, resulting in a ¥0.5 billion positive impact on equity. Net unrealized gains on securities, however, decreased ¥0.3 billion from ¥0.8 billion to ¥0.5 billion.

Please return to page 1 for a breakdown of sales. I would like to give you the sales composition by product sector and draw comparisons with the previous fiscal year.

First, let's look at the electronic materials and components segment. In the electronic materials sector, sales of capacitors accounted for 67% of sector sales and sales were down 10% year on year. Ferrite cores and magnets accounted for the remaining 33% of sector sales and sales were up 4%.

In the electronic devices sector, inductive devices sales rose 8% year on year and represented 49% of sector sales. Sales of high-frequency components were down 9% year on year and accounted for 8% of sector sales. Sales of other products were up 7% and accounted for 43% of sector sales.

In the recording devices sector, HDD head sales were up 40% and accounted for 94% of sales, while sales of other heads were down 11% and accounted for the remaining 6% of sector sales.

In the recording media segment, sales of audiotapes were down 11% year on year and accounted for 6% of segment sales. Sales of videotapes were down 26% and accounted for 21% of segment sales. Sales of optical media products were up 2% and accounted for 50% of segment sales. Sales of other products, including LTO-standard (Linear Tape-Open) tape-based data storage media for computers and recording equipment, declined 20% year on year and represented 23% of segment sales.

Finally, please look at TDK's fiscal 2006 projections on page 11. You'll note that we are projecting net income of ¥51.0 billion, up 53% on the ¥33.3 billion in fiscal 2005. This is due to the impact on last year's net income of the ¥11.9 billion in amended incremental taxes incurred in the fourth quarter of fiscal 2005.

You heard earlier from President Sawabe that the Lambda Power Division became a member of the TDK Group in October. However, as we announced today, TDK plans to sell to its subsidiary Densei-Lambda on January 1, 2006 all Lambda Power Division subsidiaries in Europe and the Americas other than those belonging to Densei-Lambda KK. This will leave only a small fraction of the Lambda Power Division companies that recently joined the TDK Group under the direct ownership of Densei-Lambda KK. Densei-Lambda's operations have been principally focused on the Asian region, but this move will allow this subsidiary to conduct its power supply business on a global scale, including in Europe and the Americas. This sale is one aspect of our actions to optimize the power supply business.

Thank you for attending today's presentation.

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