Investor Relations | IR Events | Performance Briefing

[ 2nd Quarter of fiscal 2010 Performance Briefing ]Consolidated Results

Mr. Seiji Enami Director Executive Vice President

Mr. Seiji Enami
Executive Vice President

Good evening. I'm Seiji Enami. You have just heard from our president, who gave you an overview of our fiscal 2010 first-half consolidated performance. I will now explain our performance in more detail, focusing on the second quarter. I will be using slides as part of this presentation.

Consolidated Results for the Second Quarter of Fiscal 2010

This slide compares our fiscal 2010 second-quarter consolidated results with the same quarter in fiscal 2009. Net sales decreased ¥1.6 billion, or 0.8%, to ¥204.3 billion. Operating income was almost the same at ¥9.0 billion. Income before income taxes was approximately ¥6.4 billion, down ¥2.9 billion, or 31.1%, year on year. Net income attributable to TDK Corp. after taxes was ¥4.4 billion, down ¥3.1 billion, or 41.3%, year on year. The average yen exchange rates for the second quarter were ¥93.7 versus the US dollar and ¥133.8 versus the euro. The yen thus appreciated by more than 10% against both currencies. This had the effect of lowering net sales by ¥20.4 billion and operating income by ¥6.2 billion.

Demand plummeted in the wake of the Lehman Brothers bankruptcy, but has gradually recovered since along with capacity utilization which is now around 80%. As a result, we were profitable for the first time in four quarters since the second quarter of fiscal 2009. Amid the yen's appreciation and low capacity utilization, we were more profitable, albeit slightly, than the previous fiscal year's second quarter in terms of operating income.

Supplementary Data for Consolidated Performance

The next part of my presentation overlaps somewhat with Mr. Kamigama's report, but I would like to look at the contributions of TDK and EPCOS AG to our second-quarter results. TDK, excluding EPCOS, posted net sales of ¥161.1 billion. While I said that things are recovering, this was still a 21.7% year-on-year decline. Operating income was ¥10.1 billion. This represented a 12.4% year-on-year increase, as we absorbed the negative impact of forex fluctuations that I just talked about. For the July-September quarter, EPCOS AG posted net sales of ¥43.2 billion and operating income of ¥0.1 billion. Almost all business domains saw an improvement, including SAW components.

However, as a result of a large increase in taxes, net income worsened considerably. As was mentioned earlier, the establishment of TDK-EPC Corporation on October 1 as part of the business combination, resulted in control passing from TDK to TDK-EPC Corp. Under German law, if control is transferred even within a corporate group, deferred tax assets must be reversed in their entirety. Accordingly, after-tax income worsened due to the reversal of deferred tax assets. While the incorporation actually occurred in the third quarter because the incorporation date was October 1, this reversal was included in the second quarter and not the third quarter. On the far right of this slide, you will see a column showing goodwill and eliminations between TDK and EPCOS. Since there are almost no intercompany transactions at this time, these figures for the most part represent goodwill amortization.

Operating Results Highlights

Next I would like to look at the main points of our fiscal 2010 second-quarter results. Following the precipitous drop in demand for finished products in the wake of the Lehman Brothers bankruptcy, demand hit bottom in the January-March quarter and has since recovered, albeit slightly and not necessarily satisfactorily. This recovery in demand continued in the second quarter, with demand exceeding the first quarter. There were differences in capacity utilization among products, with slight increases or decreases, but capacity utilization as a whole recovered to around 80%. Production levels for notebook PCs and flat-screen TVs were strong, and HDD heads carried over the strength from the first quarter. Volumes were therefore higher than the previous year. Passive components have still to reach last year's level, but increased volumes are supporting higher sales.

Year-on-Year Comparison of Sales by Product

The next slide shows a comparison of sales by product between the second quarter of fiscal 2010 and the second quarter of fiscal 2009. I would like to give you the sales for each product sector, the monetary change and growth rates, and the share of total sales, as well as product growth rates and shares within each sector. Incidentally, EPCOS' sales of ¥43.2 billion are included in "Others."

Electronic materials sales declined ¥12.8 billion, or 27%, year on year to ¥33.7 billion. Capacitors declined 29% and accounted for 64% of sector sales, while ferrite cores and magnets recorded a 24% decrease in sales, and accounted for the remaining 36% of sector sales.

Electronic devices sales declined ¥13.5 billion, or 27%, to ¥36.6 billion. Overall, sales of inductive devices dropped 24% and accounted for 52% of sector sales; sales of high-frequency products dropped 32% and accounted for 5% of sector sales; and sales of other products, which includes power supplies and sensors, declined 30% and accounted for 43% of sector sales.

Recording devices recorded net sales of ¥70.8 billion, down ¥6.8 billion, or 9%. HDD head sales dropped 10%, despite higher volumes year on year, and accounted for 90% of sector sales. Other head sales declined 1% and accounted for 10% of sector sales. This includes suspension assemblies.

In the others sector, TDK's sales were ¥20.0 billion, down ¥11.7 billion, or 37%, year on year. Net sales of EPCOS were ¥43.2 billion. No year-on-year comparisons are available. EPCOS' sales represented 21% of total sales.

Consolidated Statements of Operations

Now for a look at the consolidated statements of operations. We experienced a sharp drop-off in orders at the same time as we acquired EPCOS AG. As a result, while there has been a recovery, TDK's sales have remained mostly the same as before the EPCOS acquisition largely because of the inclusion of EPCOS sales. TDK was saddled with excessive cost of sales and fixed costs again in the second quarter, as in the first quarter. The cost of sales ratio improved 1 percentage point overall, although capacity utilization was still insufficient. Looking at TDK, excluding EPCOS, the cost of sales ratio improved 3.3 percentage points from 77.3% to 74.0%.

Selling, general and administrative expenses increased ¥0.7 billion year on year. Given that this includes approximately ¥7.1 billion related to EPCOS, including goodwill amortization, selling, general and administrative expenses for TDK excluding EPCOS declined around ¥6.4 billion. Operating income improved ¥0.1 billion compared with the second quarter of the previous fiscal year. I'll explain the reasons for this a little later. Total other deductions worsened by ¥2.9 billion year on year, reflecting mainly a decline in interest income due to a change in our cash position following the acquisition of EPCOS. Interest expense, meanwhile, increased ¥1.2 billion, and other-net deteriorated by around the same amount. The latter reflected an approximate ¥1.7 billion decline in equity in earnings of affiliates because of prevailing market conditions.

Breakdown of Operating Income Changes (YoY Comparison)

Operating income increased by slightly less than ¥0.1 billion. I'd like to explain the factors that had a positive and negative impact on earnings. First for the factors that had a positive impact on operating income. Rationalization, cost reductions and purchased materials saving contributed ¥16.4 billion due to the execution of structural reforms. A decrease in selling, general and administrative expenses, excluding the impact of forex fluctuations, contributed ¥2.5 billion. In terms of factors that had a negative impact on operating income, changes in sales, including the capacity utilization rate and product mix, had a ¥3.9 billion negative effect. Compared to the first quarter, the negative impact of lower capacity utilization was considerably less. Exchange rate fluctuations, namely the yen's appreciation, had a ¥6.2 billion negative impact on operating income, sales price discounts had a ¥7.7 billion negative impact, too. EPCOS had a ¥1.1 billion negative impact. This included goodwill amortization of ¥1.2 billion.

Structural reform expenses were ¥1.4 billion, including the ¥0.7 billion shown on the statements of operations before as "restructuring cost." Structural reform expenses also included costs of ¥0.3 billion related to EPCOS. These are structural reform expenses incurred in the course of business combination that were not included in the planned restructuring charges of ¥3.3 billion that we discussed at the beginning of the fiscal year. Structural reform expenses in the second quarter of fiscal 2009 were ¥2.3 billion.

Consolidated Balance Sheets (Assets)

The next slide shows the assets part of the consolidated balance sheets. I will compare assets as of September 30, 2009 with the end of the first quarter, June 30. Total assets decreased by approximately ¥30.7 billion from ¥1,119.6 billion to ¥1,088.9 billion. As of September 30, 2009, the yen was worth ¥90.21 against the US dollar and ¥131.72 against the euro, as the yen appreciated ¥5.80 and ¥3.81, respectively, from June 30. The ¥30.7 billion overall decrease in total assets includes a decrease in foreign currency-denominated assets of ¥36.6 billion.

Cash and cash equivalents declined ¥22.4 billion. The net income had a ¥4.4 billion positive impact on cash. The difference between depreciation and amortization and capital expenditures had a ¥3.2 billion positive impact on cash. Inventories, excluding the impact of forex fluctuations, had almost no impact on cash. The net increase from increases in trade receivables and trade payables due to business expansion of ¥10.2 billion had a negative impact on cash. Furthermore, the transfer of cash into short-term investments had a net ¥8.9 billion negative impact on cash. The net decrease in debt had a ¥13.6 billion negative effect on cash. Exchange rate changes reduced cash by ¥7.6 billion. Changes in various asset and liability accounts had a ¥10.0 billion positive impact on cash. The net result was the figure you see here, a ¥22.4 billion decrease in cash and cash equivalents. This decrease is almost the same as the total net decrease in debt of ¥13.6 billion and the ¥8.9 billion transfer into short-term investments.

Balance Sheets (Liabilities and Equity)

This slide shows the liabilities and equity part of the balance sheet. You will note that accumulated other comprehensive income (loss) increased ¥25.3 billion. This was due principally to a deterioration ¥26.6 billion in the foreign currency translation adjustments account due to the stronger yen. As a result, there was unfortunately a slight decrease in stockholders' equity ratio.

1Q vs. 2Q Comparison of Net Sales and Operating Income

Now I would like to draw a comparison between the first and second quarters of the current fiscal year. Although there was a bottoming out in the January-March quarter, the sharper recovery in the first quarter didn't necessarily mean that production responded immediately to orders. It was more a case of drawing down inventories in response to the higher demand. So my comparison is between this sort of first quarter and a second quarter that saw the recovery continue but production largely conducted in line with orders, without an increase in inventories.

Looking at the bottom of the slide, sales increased ¥22.8 billion, or 12.5%. Operating income improved ¥13.8 billion, excluding goodwill.

Excluding EPCOS, TDK recorded total second-quarter sales that were ¥16.5 billion, or 11.4%, higher year on year. Operating income increased ¥10.0 billion. Of the ¥16.5 billion increase in sales, around half was accounted for by HDD heads sales. The remaining half was accounted for by electronic components. Looking at a breakdown of the ¥10.0 billion increase in operating income by product sector, the improvement in the electronic materials and electronic devices sectors was greater than the recording devices sector.

Structural reform expenses increased by about ¥0.2 billion from ¥0.8 billion in the first quarter to ¥1.0 billion in the second quarter. The ¥3.63 appreciation in the yen against the US dollar from the first to the second quarter lowered net sales by about ¥5.0 billion and operating income by about ¥1.6 billion. While I said total sales increased ¥16.5 billion quarter on quarter, if one adds back the ¥5.0 billion decrease due to the forex impact, the actual total sales increase, reflecting higher capacity utilization, was ¥21.5 billion. Assuming a variable expense ratio of around 50%, the effective increase in operating income as a result of this sales increase was ¥10.8 billion.

Between the two quarters, EPCOS saw sales increase by ¥6.2 billion, or 17%. Operating income improved ¥3.8 billion. Structural reform expenses were ¥0.3 billion in the second quarter compared with ¥0.9 billion in the first quarter. The ¥0.6 billion decrease was one reason for the improved operating income.

Structural Reform Benefits

Finally, I'd like to talk briefly about the benefits we reaped from structural reforms in the second quarter. This applies to TDK, excluding EPCOS.

Against the backdrop of the rapid drop in sales in November and December last year, TDK reported that it was generating monthly sales of ¥45.0 billion and an operating loss of ¥3.9 billion, excluding abnormal factors. Taking stock of the situation, we initiated structural reforms to cut fixed expenses to ensure we could generate a profit even with this level of monthly sales.

Adjusting second-quarter results for sales discounts and forex fluctuations, the cost of sales ratio improved 10.2 percentage points from 81.3% to 71.1%. The monthly improvement in cost of sales was ¥4.6 billion as calculated by multiplying this improvement rate by the ¥45.0 billion in monthly sales I mentioned. Selling, general and administrative expenses improved ¥2.3 billion from ¥12.3 billion to ¥10.0 billion, giving an overall improvement of ¥6.9 billion. Deducting purchased materials discounts of ¥1.1 billion included in this figure, structural reforms led to an improvement of around ¥5.8 billion per month. This equates to an improvement of ¥17.4 billion for the 3 months of the second quarter. This figure also includes the impact of improved production yields. Even so, we have achieved most of the ¥16.6 billion benefits expected from structural reforms.

With that, I will conclude my presentation. Thank you.