Invr Relatiestoons | Performance Briefing

[ 1st Half of fiscal 2007 Performance Briefing ]Consolidated Results

Mr. Seiji Enami
Director
Corporate Officer
General Manager

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

You have just heard the president's presentation about TDK's fiscal 2007 first-half performance. I would now like to provide some additional information.

Please turn to page 12 of our earnings release, where you will see the consolidated income statement.

Operating income increased 10.2 billion yen from 28.1 billion yen to 38.3 billion yen. The main positive factors were higher sales, including improvements in the capacity utilization rate and product mix, which contributed 33.9 billion yen; lower materials costs and rationalization and cost-cutting contributed 14.5 billion yen; and exchange rate fluctuations contributed 4.1 billion yen. Positive factors lifted earnings by a total of 52.5 billion yen. Turning to factors that negatively affected earnings, sales price discounts had a 26.4 billion yen detrimental effect, and there was a large increase of 15.9 billion yen in selling, general and administrative expenses. The combined negative effect was 42.3 billion yen. However, since negative factors were outweighed by positive factors, operating income increased by 10.2 billion yen.

Average first-half yen exchange rates for the U.S. dollar and euro were 115.38 yen and 146.01 yen. The yen depreciated 5.86 yen and 10.40 yen from the average exchange rates for the U.S. dollar and euro in the previous fiscal year of 109.52 yen and 135.61 yen, respectively. These changes had the effect of raising net sales by 17.7 billion yen and operating income by 4.1 billion yen.

Structural reform expenses were 3.1 billion yen, compared with 1.3 billion yen in the previous fiscal year. Previously, we said that our plan was for 3.8 billion yen in restructuring expenses for the first half. The actual expenses, therefore, were 0.7 billion yen less than planned. These expenses will be incurred in the second half of the year. As I mentioned earlier, selling, general and administrative expenses increased substantially. One of the major factors behind this increase was the acquisition of the power supplies business. Because that acquisition was completed in October 2005, first-half expenses in fiscal 2007 swelled compared with the same period a year earlier. For the same reason, depreciation rose from 26.5 billion yen in the first half of fiscal 2006 to 30.9 billion yen in the interim period under review. Likewise, R&D expenses, which were 18.4 billion yen a year earlier, rose to 23.8 billion yen. The combined increase in these two expense items, which reflect investments in our future, was 9.8 billion yen.

While there was also a large negative effect on earnings because of sales price discounts, there was a slight easing in price pressure year on year as the supply-demand situation improved due to extremely strong economic conditions. That said, demands for discounting remain severe in the second half, meaning that there are still challenges in this regards.

Looking at other income (deductions), interest and dividend income increased by 1.5 billion yen year on year, the result of rising U.S. dollar interest rates. Cash that we hold in U.S. dollars generated this interest income. The other-net component of other income (deductions) declined by 1.1 billion yen from the previous fiscal year. This reflected lower growth in interests in affiliated companies and losses on the sale and write-down of long-term marketable securities.

Please now refer to the segment information on page 18. Earlier the president reported that the recording media segment turned in an operating loss of 2.3 billion yen for the first half of fiscal 2007. Breaking this loss down by quarter, the segment recorded a loss of 1.6 billion yen in the first quarter. As this included restructuring expenses of 0.8 billion yen, the effective loss was 0.8 billion yen on an ordinary operating basis. The segment recorded an operating loss of 0.7 billion yen in the second quarter. As this included restructuring expenses of 0.3 billion yen, the effective loss was 0.4 billion yen. While we moved closer to breaking even in this segment, we unfortunately still failed to achieve a profit. However, given that we posted a profit on a single-month basis in September and that the third quarter represents our busiest period of the year, we are hopeful of finally restoring profitability to this segment.

Please look at the consolidated balance sheets on page 13 of the earnings report, and the statements of cash flows on page 16. The comparisons I will draw are with March 31, 2006.

Total assets at September 30, 2006 stood at 959.4 billion yen, 35.9 billion yen higher than at March 31, 2006. The yen at September 30 (117.90 yen) was largely unchanged from March 31, 2006 (117.47). However, against the euro, the yen depreciated around 5% from 142.81 to 149.77 between the two dates. These changes had the net effect of increasing yen translations of overseas assets by around 4.2 billion yen. This effect is included in the 35.9 billion yen increase in total assets.

Cash and cash equivalents increased 25.8 billion yen from March 31, 2006 to 264.8 billion yen. The effective increase was 24.4 billion yen if one takes into account the positive effect of exchange rate changes on cash and cash equivalents of 1.4 billion yen. Capital expenditures of 36.0 billion yen exceeded depreciation and amortization of 30.9 billion yen, for a net cash outflow of 5.1 billion yen. Inventories also increased by 2.5 billion yen. The lion's share of this represented inventories held by the Lambda Power Division for the second half of the fiscal year. Excluding this, therefore, there was hardly any increase in inventories held by TDK proper even as sales rose. Regarding the repayment of debt, a total of 2.8 billion yen was repaid, with funds borrowed externally by the Lambda Power Division repaid using TDK's internal funds. Furthermore, there were dividend payments of 6.6 billion yen. Against these uses of cash, TDK recorded net income of 29.6 billion yen. Furthermore, a decrease in trade receivables due to progress on collecting receivables provided cash of 5.1 billion yen. Moreover, trade payables increased by 8.6 billion yen. The overall result from these and other factors, therefore, was an effective 24.4 billion yen increase in cash and cash equivalents.

Looking at the cash flow statements on page 16, you will note that there was a 60.0 billion yen increase in net cash provided by operating activities year on year, which mainly reflects the increase in net income and a decrease in income taxes payables, net, including tax assessed under transfer pricing regulations. In terms of investing activities, the absence of the 8.7 billion yen outflow for business acquisitions in the corresponding period of the previous fiscal year had a beneficial effect on cash flows. Overall, however, there was a 0.2 billion yen increase in net cash used in investing activities due to a net 10.0 billion yen increase in short-term investments. Financing activities used 3.1 billion yen more in cash than in the previous fiscal year due to an increase in dividends paid and the repayment of debt. The positive effect of exchange rate changes on cash and cash equivalents was 4.1 billion yen less than in the first half of fiscal 2006. As a result, cash and cash equivalents improved by 52.7 billion yen in comparison with the previous fiscal year's first half.

Turning to the consolidated statement of stockholders' equity on page 14. You will see that total stockholders' equity increased 22.7 billion yen compared with March 31, 2006. Under the retained earnings column, the second item from the top shows a 2.3 billion yen adjustment for the cumulative effect on prior years of the adoption of SAB No. 108. This represents paid leave that should have been recorded as expenses. Although an accounting standard has been established for the providing of allowances for paid leave, prior years' amounts were recorded under stockholders' equity during the interim period as this was deemed an acceptable treatment if done so this fiscal year. The 2.3 billion yen represents the net result after deducting the tax effect from the total amount of prior years' paid leave of 3.8 billion yen. The booking of this adjustment acted to reduce stockholders' equity.

Also in this statement you will see accumulated other comprehensive loss. This totaled 20.7 billion yen as of September 30, 2006. Breaking this account down, foreign currency translation adjustments was a negative 19.1 billion yen, minimum pension liability adjustments was a negative 3.0 billion yen and net unrealized gains on securities was 1.4 billion yen. While the 20.7 billion yen affects stockholders' equity, it could affect the income statement in the future. We won't look particularly at non-consolidated results today, but please note the difference in presentation of stockholders' equity compared to the past due to enforcement of the Company Law.

Please return to the bottom of page 1 for a breakdown of sales. The president has already given an outline by segment, so I will give you the sales composition by product sector in each segment 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 68% of sector sales and sales were up 17% year on year. Ferrite cores and magnets accounted for the remaining 32% of sector sales and sales were up 9%.

Next, in the electronic devices sector, inductive device sales accounted for 39% and sales rose 27% year on year. Sales of high-frequency components were down 4% and accounted for 5% of sector sales. Sales of other products climbed 106% and accounted for 56% of sector sales. First-half sales also included 25.4 billion yen in sales of the power supply business of the Lambda Power Division, which was the reason for the major increase.

In the recording devices sector, HDD head sales were up 13% year on year and accounted for 97% of sector sales. This 13% increase came despite a nearly 50% reduction in sales to Maxtor following its acquisition. Sales of other heads accounted for the remaining 3% of sector sales and declined 35% year on year.

In other electronic components, sector sales jumped 104%. This reflected continued strong growth in sales of semiconductor production equipment, flash memory controllers and other new products.

In the recording media segment, sales of audiotapes were down 23% year on year and accounted for 5% of segment sales. Sales of videotapes were down 17% and accounted for 18% of segment sales. Sales of optical media were down 1%, remaining largely flat as higher sales volume was negated by falling sales prices. Optical media accounted for 50% of segment sales. Sales of data tapes and recording equipment increased 11% year on year and represented 27% of segment sales. This category includes LTO-standard (Linear Tape-Open) tape-based data storage media for professional use.

That concludes my presentation. Thank you.

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