[ 1st Half of fiscal 2008 Performance Briefing ]Consolidated Results
Mr. Seiji Enami Director Senior Vice President
General Manager
Finance & Accounting Department
You have just heard the president's presentation on TDK's fiscal 2008 first-half performance. I would now like to provide some additional information.
Please look at page 13 of the earnings release, where you will see the consolidated income statements. Operating income increased by 8.9 billion yen compared with the previous fiscal year. The main positive factors were higher sales, including improvements in the capacity utilization rate and product mix, which contributed 10.3 billion yen; and lower materials costs and rationalization and cost-cutting which contributed 2.1 billion yen and 7.8 billion yen, respectively. As shown on the income statement, we also recorded a gain on sales business transfer of 14.9 billion yen in recording media. Exchange rate fluctuations had a 4.9 billion yen positive effect on operating income. Turning to factors that negatively affected earnings, sales price discounts had a 30.6 billion yen detrimental effect, and there was an increase of 0.5 billion yen in selling, general and administrative expenses. The net result was that positive factors outweighed negative factors and lifted operating income by 8.9 billion yen.
Regarding the effect of exchange rates in the first half, the average yen exchange rate for the U.S. dollar was 119.40 yen, 4 yen weaker than the 115.38 yen in the same period of fiscal 2007. The average yen exchange rate for the euro was 162.33, 16.32 yen weaker than 146.01 yen in the previous fiscal year. These changes had the effect of raising net sales by 15.2 billion yen and operating income by 4.9 billion yen.
Structural reform expenses were 4.4 billion yen, compared with 3.1 billion yen in the previous fiscal year. Of the total amount, 1.0 billion yen is included in the calculation of the 14.9 billion gain on sale business transfer. Consequently, the remaining 3.4 billion yen has been recognized separately from profit as an expense. Breaking this figure down, 1.5 billion yen related to the electronic materials and components segment and the remaining 1.9 billion yen to structural reforms for recording media. Depreciation expenses and R&D expenses were 5.5 billion yen higher in total year on year. While this reflected proactive moves it nevertheless had a negative impact on earnings. Since the benefits don't immediately reflect in sales because there is some time lag, the result was a much smaller contribution to operating income from higher sales, including improvements in the capacity utilization rate and product mix, compared with the previous fiscal year. In the first half of fiscal 2007, the contribution to earnings from increased sales was 33.0 billion yen. Because the contribution was only 10.3 billion yen in the interim period under review, this was a major reason for the small rise in operating income.
Regarding lower materials costs, while this contributed 6.7 billion yen in operating income in the previous fiscal year's interim period, the contribution in the interim period under review was limited to 2.1 billion yen by soaring costs for some materials and other factors. Regarding sales price discounts, there was a 6.6% drop as a whole, whereas this was 5.9% in the previous fiscal year, meaning the decline was larger. This includes price discounts in recording media, but even if we look only at the electronic materials and components segment, we see a similar situation, with sales price discounts increasing from 5.3% last year to 5.9% in the interim period under review. When we announced our first-quarter results, we said that the price decline in the first quarter was 9%, compared with 4.9% a year earlier, and that we expected a price decline of 6.3% in the second quarter against 6.6% a year earlier for HDD heads in recording devices. However, the effect of sales price declines is being gradually normalized by changes in our product mix.
Looking at the other income (deductions) section of the income statement, total other income declined 1.8 billion yen year on year. While there was a 1.7 billion yen increase in interest and dividend income due partly to higher U.S. dollar interest rates, foreign exchange loss increased 1.7 billion yen due to the yen's appreciation at the end of September, which cancelled out the higher interest income. In addition, a 1.5 billion yen write-down of marketable securities caused total other income to fall 1.8 billion yen year on year. On the whole, net sales, operating income and pre-tax earnings were largely in line with our forecasts at the start of the year, but net income fell short of the projected number. This was because most of the gain on business transfer belonged to TDK proper, resulting in an effective tax rate that was higher than the assumed tax rate.
Please look now at the non-consolidated statements of income on page 24. You will note that there was a 24.1 billion yen year-on-year increase in extraordinary loss. This was the result of a write-down of investments due to the separation of affiliated companies from TDK as part of the transfer of the recording media business. But this affected only non-consolidated operating results and had no effect on consolidated results.
Please turn to segment information on page 18. The electronic materials and components segment saw operating income fall 4.5 billion yen year on year to 36.0 billion yen. One of the factors behind this result was that while net sales rose 21.7 billion yen, 13.4 billion yen was down to forex movements, meaning the actual increase in sales was only 2.2%. The earnings increase due to better capacity utilization was not enough to offset sales price declines and higher fixed costs. Another factor was soaring prices for raw materials.
Net sales rose 27.6 billion yen from 185.4 billion yen in the first quarter to 213.0 billion yen in the second quarter. Despite this, the increase in operating income between the two quarters was only 0.8 billion yen; operating income increased from 17.6 billion yen to 18.4 billion yen. Analyzing this, one of the major factors was dead inventory. Up to now we have provided an allowance for inventory in stock for more than 12 months, but this reserve is now provided when inventory is more than 6 months old. This change in the accounting treatment of dead inventory led to an increase in expenses of 0.5 billion yen. Furthermore, depreciation expenses increased 0.8 billion yen, R&D expenses rose 0.9 billion yen and charges for structural reforms rose 1.1 billion yen. These and other increases accounted for the 5.9 billion yen increase in fixed costs. Of the 27.6 billion yen increase in net sales between the first and second quarters, 16.1 billion yen was accounted for by HDD heads. HDD head operations generated operating income in line with this increase as they absorbed the higher expenses, but other electronic components weren't able to do the same, despite net sales rising 11.5 billion yen.
The recording media segment posted operating income of 11.1 billion yen. But this included a gain on business transfer of 14.9 billion yen and if restructuring charges of 1.9 billion yen are deducted relating to the transfer, which weren't included in the gain on business transfer account, the net result was 13.0 billion yen. This should be regarded as the actual gain on the business transfer. If this is deducted from the segment operating income of 11.1 billion yen, the segment recorded an operating loss of 1.9 billion yen. Of this amount, 1.1 billion yen related to the businesses that were transferred. So while the recording media segment's profitability had been improving, the concern caused by the business transfer to employees, agents and others had an indirect negative impact on operations. The remaining 0.8 billion yen didn't relate to the business transfer, but TDK believes these operations will become profitable in the second half of the year and beyond.
Please look now at the consolidated balance sheets on page 12 of the earnings report.
Total assets at September 30, 2007 were 987.7 billion yen, down 1.6 billion yen from March 31, 2007. Compared with March 31, 2007, the yen appreciated 2.2% against the greenback, but depreciated 3.8% against the euro. Because of the large impact of the U.S. dollar, total assets decreased by around 8.2 billion yen when overseas assets were converted into yen. This effect is included in the 1.6 billion yen decline in total assets.
Cash and cash equivalents decreased 59.7 billion yen to 229.5 billion yen. The reasons for this were a 39.2 billion yen share buyback and cancellation, the reclassification of 12.9 billion yen in assets to short-term investments, a 9.9 billion yen increase in operating assets such as inventories and net trade receivables, capital expenditures exceeding depreciation and amortization by 5.1 billion yen, and dividend payments of 7.9 billion yen. Inventories at 90.0 billion yen were around 0.2 billion yen higher, but more or less the same level as at March 31, 2007. The transfer of the recording media sales business reduced inventories, but HDD heads and other inventories increased by an equivalent amount. This increase was in preparation for the year-end shopping season. Total stockholders' equity decreased 18.8 billion yen. More details on this account can be found in the statements of stockholders' equity on page 14 of the earnings release.
Please return to page 1 for a breakdown of sales. I will give you the sales composition by product sector in each segment and draw comparisons with the previous fiscal year.
In the electronic materials sector of the electronic materials and components segment, sales of capacitors accounted for 70% of sector sales and sales were up 7% year on year. Ferrite cores and magnets accounted for the remaining 30% of sector sales and sales were down 1%.
Next, in the electronic devices sector, inductive devices accounted for 47% of sector sales and sales rose 10% year on year. Sales of high-frequency components climbed 43% and accounted for 6% of sector sales. Sales of other products were up 3% and accounted for 47% of sector sales. In the recording devices sector, HDD heads accounted for 97% of sector sales and saw sales rise 2%. Sales of other heads accounted for the remaining 3% of sector sales and were down 8%.
Regarding the recording media segment, a simple comparison is not possible because of the transfer of the sales business at the end of July. For reference purposes, however, audiotapes accounted for 6% of segment sales and sales were down 16% year on year. Sales of videotapes accounted for 14% of segment sales and were down 43% year on year. Optical media accounted for 47% of segment sales and sales were down 33%. Sales of tapes and other products accounted for 33% of segment sales and were down 11% year on year.
In closing, I would like to discuss our full-year forecasts on page 7. As you heard from President Kamigama earlier, there has been no change to our initial projections. In terms of operating income, the electronic materials and components segment recorded operating income of 36.0 billion yen in the first half of fiscal 2008. Because we are projecting 42.8 billion yen in operating income for this segment in the second half, we must raise earnings by 6.8 billion yen on a projected increase in sales of 19.8 billion yen. Regarding HDD heads, we are projecting the same level of sales and earnings as in the first half because of uncertainties in the fourth quarter. Because of a changing product mix, price declines are having less of an impact on results and we expect further improvement in this regards in the third and fourth quarters. Regarding electronic materials and electronic devices, we hope to derive tangible benefits from actions taken to respond to escalating raw materials prices such as making products smaller and finding substitute materials. Our projection assumes a second-half increase in sales of 19.8 billion yen, but we are determined to achieve our projections by driving further growth in sales, reducing losses in unprofitable product lines and through other actions.
That concludes my presentation. Thank you.
