Mr. Seiji Enami Director Senior Vice President
Finance & Accounting Department
Good afternoon. I'm Seiji Enami, General Manager of the Finance & Accounting Department. Thank you for braving the cold to attend today's meeting in large numbers. Without further ado, let me report on TDK's consolidated operating results.
My presentation will follow the earnings release before you. Page 1 of the consolidated earnings release shows a comparison of the third quarter of fiscal 2008 with the same quarter of previous fiscal year. TDK posted earnings growth on only a slight increase in sales. Net sales rose approximately ¥2.1 billion, or 0.9%, to ¥225,342 million year on year. Operating income was up approximately ¥3.6 billion, or 15.5%, at ¥26,717 million. Income before income taxes rose approximately ¥2.6 billion, or 10%, to ¥28,640 million. Net income rose approximately ¥2.0 billion, or 10.4%, to ¥21,713 million.
Turning to page 2, you will see our consolidated results for the nine-month period ended December 31, 2007, compared with the same period of fiscal 2007. Net sales on this basis rose approximately ¥10.3 billion, or 1.6%, to ¥658,430 million. Operating income climbed approximately ¥12.5 billion, or 20.3%, to ¥73,862 million. Income before income taxes rose approximately ¥9.6 billion, or 14.3%, to ¥77,002 million. Net income rose approximately ¥7.0 billion, or 14.3%, to ¥56,339 million. In summary, we recorded year-on-year increases in both sales and earnings for the first nine months of the current fiscal year. Basic net income per common share was ¥167.39 and ¥433.55 for the third quarter alone and nine-month period, respectively.
The rest of my presentation will principally focus on consolidated results for the third quarter of fiscal 2008.
Average third-quarter yen exchange rates for the U.S. dollar and euro were ¥113.26 and ¥163.90, respectively, as the yen appreciated 3.9% against the greenback but depreciated 7.9% against the euro. Because dollar-denominated transactions account for a large percentage of the whole, these forex movements resulted in an approximate ¥5.3 billion decrease in net sales and an approximate ¥2.8 billion decrease in operating income.
I'd now like to comment on the main reasons TDK managed to post higher earnings on only a slight increase in net sales.
One reason concerns HDD heads in the recording devices sector. In the third quarter of fiscal 2007, TDK had lost an important customer and had to work hard to make up for the lost sales. In the third quarter of this fiscal year, in addition to the benefits of these efforts to win new customers, the market itself was strong, which led to a large increase in volume. We also improved our product mix, increasing the share of sales of products based on perpendicular magnetic recording technology.
The second feature of our third-quarter performance concerns electronic components, which exclude recording devices. Electronic components experienced a slight softening of the market in comparison with recent years. However, production of electronic products increased. Against this backdrop, sales of products, including other electronic components, grew sharply. This enabled us to overcome the negative effect on sales of a higher yen relative to the U.S. dollar to post higher sales in electronic components. Not everything was positive, however, as capacitor operations unfortunately continued to face challenges.
A third main feature of our third-quarter performance concerned recording media. There was a large drop in sales in recording media due to the transfer of our sales business to U.S.-based Imation Corp. on August 1, 2007. That said, the effect on earnings was almost nonexistent as this business lacked earnings power in the first place.
Page 3 shows a breakdown of sales by segment. The breakdown shows operating results, the share of sales for each segment and sector, and the percentage change from the same period in fiscal 2007.
First in the electronic materials and components segment, net sales rose 11.9% to ¥217.7 billion and accounted for 96.6% of total net sales. As these figures show, TDK is now essentially an electronic components company.
The third quarter is a period of strong demand for the electronics industry and the current fiscal year's third quarter was no exception. Production of flat-screen TVs, notebook PCs, digital audio players, HDDs, mobile phones, digital cameras and game consoles all increased. There was also an increase in the number of electronic components used in these products driven by their increasing sophistication and features. These factors, together with the growing use of electronics in automobiles, lifted demand for electronic components in the third quarter of fiscal 2008.
Electronic materials recorded sales of ¥51.4 billion, a modest 2.2% increase year on year. Sales in this sector accounted for 22.8% of overall net sales. Capacitors were held to only a small increase in sales. Ferrite cores and magnets, meanwhile, achieved year-on-year sales growth, with higher sales of rare earth magnets overcoming lower ferrite magnet sales. As a result, capacitor sales accounted for 68% of sector sales and were up only 0.7% year on year. Ferrite cores and magnets accounted for the remaining 32% and sales were up 6%.
Sales in the electronic devices sector rose 5.4% to ¥53.3 billion, and accounted for 23.6% of total net sales. Sales of inductive devices increased year on year on higher sales of power line coils for flat-screen TVs as well as signal line coils. Sales of high-frequency components increased year on year due to higher sales of products for PC applications. Sales of other products, however, declined year on year due to lower sales of sensors and actuators and of power systems, which stemmed from sluggish sales for semiconductor production equipment applications and the restructuring of unprofitable products. As a result, in the third quarter of fiscal 2008, inductive devices sales increased 11% and accounted for 47% of total sector sales. High-frequency components accounted for 9% and sales were up 77%. Other products accounted for the remaining 44% and sales were down 6%.
In the recording devices sector, sales increased 17.1% to ¥89.9 billion and accounted for 39.9% of total net sales. TDK's HDD head sales volume increased on the back of higher HDD unit production, which was spurred by growth in PC applications. Another factor behind the higher sales volume was that increasing storage capacity of HDDs led to an increase in the number of heads per HDD. Sales of other heads, however, declined due to the withdrawal from optical pickups.
Overall, HDD heads accounted for 98% of total sector sales and sales were up 20% year on year. Other heads accounted for the remaining 2% and sales were down 47%.
Next, in other electronic components, sales climbed 36.8% to ¥23.1 billion and accounted for 10.3% of total net sales. The main contributors were higher sales of semiconductor production equipment, anechoic chambers and rechargeable batteries and strong sales of new products.
Sales in the recording media segment fell sharply, by ¥21.1 billion, or 73.6%, to ¥7.6 billion, and accounted for 3.4% of total net sales. This large decline reflected the August 1 transfer of the recording media sales business to Imation Corp.
As a result, there was a large change in the makeup of sales in the recording media segment. Audiotape sales declined 34% year on year and represented 10% of segment sales. Videotape sales were down 71% and accounted for 19% of sales. Optical media sales dropped 95% and accounted for 12% of segment sales. Other products, including tape-based data storage media for computers and recording equipment, saw sales decline 34% and account for 59% of segment sales.
Please turn to the third-quarter consolidated income statements on the upper part of page 10. Operating income increased by approximately ¥3.6 billion year on year. The main positive factors were higher sales, including improvements in the capacity utilization rate and product mix, which contributed ¥12.5 billion; rationalization and cost-cutting, which contributed ¥4.9 billion; and reductions in selling, general and administrative expenses, which contributed ¥2.8 billion. Positive factors lifted earnings by a total of ¥20.2 billion.
Turning to factors that negatively affected earnings, sales price discounts had a ¥13.7 billion detrimental effect, and there was a ¥0.1 billion negative impact from higher material costs due to soaring raw materials prices. Exchange rate fluctuations lowered earnings by approximately ¥2.8 billion. The combined negative impact on earnings was thus ¥16.6 billion. The net result of these positive and negative factors was an approximate ¥3.6 billion increase in operating income.
Price discounts were of about the same level as in the first and second quarters, but slightly less. The decrease in SG&A expenses resulted from the transfer of the recording media sales business. TDK didn't make the progress it had expected in reducing materials costs due to the impact of rising prices for crude oil, copper, and rare metal resources, which has made it difficult to achieve positive gains in materials cost cutting. Regarding structural reform expenses, these were ¥1.0 billion in the third quarter of fiscal 2008, but only ¥0.4 billion in the third quarter of fiscal 2007. Besides these expenses, as per our release to the Tokyo Stock Exchange during the third quarter, we finally completed the liquidation of a subsidiary whose businesses had actually been wound up several years earlier. Approximately ¥1.6 billion included in the foreign currency translation adjustments account related to this liquidation was booked as a loss in the income statement.
Please look now at total other income (deductions), which decreased approximately ¥1.0 billion year on year. One of the reasons for this was a negative foreign exchange impact from the collection of account receivables and their revaluation. Another reason was the write-down of some marketable securities.
I also have some comments about minority interests. The income statement shows a positive effect on earnings and not a negative one. This was due to TDK increasing its equity interest in DENSEI-LAMBDA K.K. to almost 100% via a tender offer. As there are no longer minority shareholders, no deduction is made to reflect minority shareholders' equity interest in earnings of DENSEI-LAMBDA. Furthermore, as some companies with minority shareholders recorded losses, minority shareholders carry the partial burden of these losses in accordance with their equity interests.
At this juncture, I would like to compare third-quarter results with second-quarter results. Net sales decreased ¥1.1 billion. If the gain on transfer is excluded, second quarter operating income was ¥16.1 billion. Given that third-quarter operating income was ¥26.7 billion, this would represent a ¥10.6 billion increase between the two quarters. Let me talk about this some more.
In the electronic materials and components segment, net sales increased ¥4.8 billion yen quarter on quarter. Operating income rose ¥8.5 billion in this segment between these quarters, meaning growth in earnings was higher than on the top line. Looking at the quarter-on-quarter difference in net sales, electronic materials sales declined ¥1.6 billion and sales in electronic devices also declined, by ¥1.2 billion. On the other hand, sales increased in recording devices and other electronic components by ¥3.4 billion and ¥4.2 billion, respectively. This is the breakdown of sales between the second and third quarters. Recording devices saw profitability rise on the increase in sales. Other electronic components, where growth was delivered by profitable products, generated higher earnings commensurate with sales growth. Electronic materials and electronic devices, although recording lower sales, also delivered higher earnings as a result of improvements in low-margin products.
In the recording media segment, excluding the gain on transfer of ¥14.9 billion, a second-quarter operating loss of ¥2.3 billion was recorded. As the operating loss in the third quarter was only ¥0.2 billion, this effectively contributed ¥2.1 billion to the improvement in earnings between the quarters. This shows a breakdown of the increase in earnings between the second and third quarters. The ¥0.2 billion operating loss in the recording media segment was almost entirely due to expenses for completing the realignment of operations after the transfer of the sales business.
Please now look at the balance sheet on page 9 of the earnings release as well as the third-quarter consolidated cash flow statement on page 13. The comparisons I will draw are with the end of September 2007.
Total assets stood at approximately ¥982.6 billion, down ¥5.1 billion. The yen had appreciated 1.1% against the U.S. dollar to ¥114.15 at December 31, 2007, and had depreciated 2% against the euro to ¥166.66. Because U.S. dollar-denominated assets are larger, the stronger yen resulted in a ¥3.5 billion reduction in overseas assets when converted into yen. This effect is included in the ¥5.1 billion reduction in total assets.
On the balance sheet, cash and cash equivalents at December 31, 2007 were ¥198.9 billion, ¥30.6 billion less than at September 30, 2007. Of this decrease, ¥2.0 billion was due to the yen's appreciation. Ignoring this, the decline was ¥28.6 billion and was predominantly due to a new corporate acquisition-¥17.9 billion of the decline related to the acquisition of Magnecomp Precision Technology Public Company Limited. Another ¥14.1 billion was used for the tender offer to make DENSEI-LAMBDA a wholly owned subsidiary. Moreover, TDK used another ¥2.0 billion to increase its shareholding in Imation Corp. to 20% from the nearly 16% stake it received when it transferred its recording media sales business to this company. Other main reasons for the decrease in cash included capital expenditures exceeding depreciation and amortization by ¥3.0 billion; inventories increasing by ¥3.7 billion; net payables, including income taxes, decreasing by ¥6.1 billion; and the payment of ¥7.7 billion in dividends. Cash was mainly provided by net income of ¥21.7 billion and a net decrease in short-term investments of ¥11.1 billion, but these inflows were insufficient to fully offset the abovementioned uses of cash.
TDK conducted active investment activities in the third quarter of fiscal 2008 in comparison with the third quarter of fiscal 2007. The key point now is whether these investments "pay dividends" going forward.
At the very bottom of the balance sheet, you will see accumulated other comprehensive income (loss), a component of stockholders' equity. This item could affect earnings in the future, so I'd like to make a few comments. Accumulated other comprehensive loss increased by ¥2.7 billion from ¥25.2 billion to ¥27.9 billion. Looking at a breakdown of this account, foreign currency translation adjustments deteriorated ¥2.3 billion to ¥25.4 billion due to the yen's appreciation against the greenback. And minimum pension liability adjustments deteriorated ¥4.9 billion to ¥3.5 billion as the value of pension assets fell due to falling stock prices. Net unrealized gains on securities improved ¥4.5 billion to ¥1.0 billion. This improvement resulted from the reclassification of Imation Corp. to affiliated company status after TDK increased its equity interest to more than 20%.
Let me say a few more words about our Imation Corp. shareholding. At the end of the second quarter, TDK had a shareholding of just over 16%. With ordinary marketable securities, a decrease in share price raises the possibility of impairment and this decrease is included in other comprehensive income (loss). However, because TDK's stake in Imation Corp. is now more than 20%, this investment ceases to be treated like ordinary marketable securities. In other words, the investment is treated in the same way as when a shareholding of more than 50% is acquired. That is, impairment isn't recognized. This is the reason for the improvement in net unrealized gains on securities.
Please look at the top half of page 16 for segment information.
First, operating income in the electronic materials and components segment increased ¥3.9 billion, or 17.1%, to ¥26.9 billion. The recording media segment, however, recorded an operating loss of ¥0.2 billion, ¥0.3 billion worse than the profit in the same period of the previous fiscal year.
The effective increase in operating income in the electronic materials and components segment was ¥5.5 billion because foreign currency translation adjustments for several prior years of a subsidiary that was liquidated, as explained earlier, were reversed to earnings.
Regarding the result in the recording media segment, this segment finally posted a profit in the third quarter of fiscal 2007 after the implementation of far-reaching structural reforms, which included terminating certain manufacturing operations, mainly in Europe. In the third quarter of fiscal 2008, TDK still had to do some work to realign operations following the transfer of its recording media sales business.
At the bottom of page 17 you will see a breakdown of sales by region. All regions were affected by the transfer of the recording media sales business. In Japan, sales fell in all product sectors except other electronic components. In the Americas, electronic materials and electronic devices recorded lower sales, resulting in an overall decrease here. In Europe, sales declined in electronic materials. The impact of the transfer of the recording media sales business was big in this region, causing a sharp drop in sales overall. In Asia (excluding Japan) and other areas, sales increased overall on the back of higher sales in all four products sectors of the electronic materials and components segment.
The overall result was a 4.5% increase in overseas sales year on year to ¥186.5 billion. Overseas sales accounted for 82.8% of consolidated net sales, up from 80%.
Let's look now at sales in the electronic materials and components segment by market field, assuming sales are 100. Sales to the IT home electronics field increased 14% on growth in storage devices and accounted for 65% of segment sales. Sales to the high-speed, large-capacity networks field rose 19% due to growth in components for telecommunications and accounted for 10% of segment sales. Sales to the car electronics field rose 15% on steady growth from the auto industry and accounted for 8% of segment sales. Sales to the others field declined 1% and accounted for 17% of segment sales.
There is one more matter I would like to talk about at this point. It concerns Magnecomp Precision Technology Public Company, the suspension assembly manufacturing company we acquired in November. This company has an extremely large number of subsidiaries. But because we weren't able to reflect the results of all these subsidiaries in the third quarter, our third-quarter results only reflected the purchase of shares in the investment account. Because of this, some operating results for November and all of December weren't included in our third-quarter operating results. The impact of this was extremely small, however. We intend to fully reflect the results of these companies in our operating results for the full year.
Finally, a word on our full-year forecasts. Please look at page 6. There is no change to our projections for net sales, operating income and income before income taxes. Our projections assume an exchange rate of 110 yen to the US dollar for the fourth quarter. The effect of the subprime loan problem, share market weakness and other factors on the real economy is difficult to gauge and it is hard to predict therefore how things will play out in the fourth quarter. We don't know whether achieving our projections will be easy or extremely difficult. However, we will try our utmost to achieve our initial targets.
Thank you for your attention.