Investor Relations | IR Events | Performance Briefing

[ 3rd Quarter of fiscal 2010 Performance Briefing ]Consolidated Results 3Q of FY March 2010 and Projections for FY March 2010

Mr. Seiji Enami Director Executive Vice President

Mr. Seiji Enami
Director
Executive Vice President

Good afternoon. I'm Seiji Enami. Thank you for taking the time and braving the cold to attend today's presentation. I will now explain our performance for the third quarter of fiscal 2010. I will be using slides as part of this presentation.

Consolidated Results for the Third Quarter of Fiscal 2010

This slide summarizes our operating results for the three-month period ended December 31, 2009, compared with the same quarter of the previous fiscal year. Consolidated net sales rose ¥19,883 million, or 10.4%, to ¥211,662 million. Operating income improved ¥17,202 million to ¥12,093 million. TDK posted income before income taxes of ¥9,879 million, which was ¥25,008 million better year on year. What's more, net income attributable to TDK Corp. at ¥8,826 million was ¥23,143 million better than the third quarter of fiscal 2009. In terms of currency movements, the yen appreciated 6.9% to an average rate of ¥89.7 against the U.S. dollar. Against the euro, the yen depreciated 4.4% to ¥132.7. These changes had the effect of lowering net sales by approximately ¥11.5 billion and operating income by ¥3.7 billion.

In the past, we have explained the impact that a one-yen appreciation relative to the greenback had on our net sales and operating income. However, I believe that people are also probably interested in the impact of the euro due to our acquisition of EPCOS AG, which is headquartered in Europe. According to EPCOS' calculations, the euro appreciated by 12.1% against the U.S. dollar from 1.32 to 1.48 in the third quarter compared with the third quarter last year. This lowered EPCOS' sales and operating income by ¥4.4 billion and ¥0.8 billion, respectively. This impact is included in the overall currency impact I discussed before.

In the fiscal year ended March 31, 2009, demand fell sharply and rapidly, with November worse than October, December worse than November, and January and February worse than December in the aftermath of the collapse of Lehman Brothers. Thanks to the implementation of ongoing stimulus measures by countries around the world, TDK has recovered and is continuing to do so, although a bona fide recovery hasn't been achieved. Our third-quarter net sales increased ¥19.9 billion yen, or 10.4%, year on year on the back of this recovery. We also achieved an improvement in operating income of ¥17.2 billion yen, which was close to the sales increase. The return to profitability was partly the result of major structural reforms implemented in the fourth quarter of the previous fiscal year.

The third quarter was marked by the continued upturn in production volumes of finished products, which had plummeted. Key products such as notebook PCs, flat-screen TVs and mobile phones saw production increase year on year. In addition, production was comparable with the second quarter of the current fiscal year. The TDK Group's performance is heavily influenced by the electronics industry and as a result shipments of passive components rose year on year in the third quarter, maintaining the same level as the previous quarter. HDD head shipments were naturally higher than the third quarter of fiscal 2009 on the strength of robust demand and were even higher than the second quarter of the current fiscal year.

Supplementary Data to Consolidated Operating Results

Allow me now to look at the contributions of TDK excluding EPCOS and of EPCOS to our third-quarter results, as well as the amortization of goodwill related to the EPCOS acquisition. EPCOS was finally profitable in terms of both operating income and net income. In the third quarter, a goodwill expense of ¥1.9 billion was also booked on the EPCOS acquisition.

Year-on-Year Comparison of Net Sales and Operating Income

I will now compare sales by product with the third quarter of the previous fiscal year. Total sales at TDK excluding EPCOS were ¥168.7 billion, a ¥12.8 billion, or 8.2%, year-on-year increase. Operating income on the same basis was ¥15.1 billion better year on year at ¥13.0 billion, as we absorbed the negative effect of foreign currency movements discussed earlier to post a profit. In recording devices, HDD heads reported impressive growth. Contrastingly, sales in the others product sector fell from the previous fiscal year when TDK benefited from exceptional demand for batteries.

EPCOS recorded third-quarter sales of ¥42.9 billion. While this wasn't especially higher than the second quarter, it did represent a year-on-year increase of ¥7.1 billion, or 19.7%. EPCOS reported operating income of ¥1.0 billion, a ¥4.0 billion turnaround from the third quarter of the previous fiscal year. This tells you the extent of the fall in the third quarter of fiscal 2009. All business fields handled by EPCOS, including ceramic components and SAW filters, saw improved performances. Goodwill of ¥1.9 billion was also recorded; the operating income figure just mentioned was before the deduction of this goodwill expense. There was no goodwill expense in the third quarter of fiscal 2009 because EPCOS had just been acquired and integrated.

Next I will give you sales for each product sector, the monetary change and growth rates, and the share of total sales, as well as growth rates and shares within each sector. Incidentally, EPCOS' sales of ¥42.9 billion are included in "Others."

Electronic materials sales rose ¥2.6 billion, or 8%, year on year, to ¥34.7 billion. These sales accounted for 16% of total sales. Capacitor sales increased 10% and accounted for 64% of sector sales, while ferrite cores and magnets recorded a 5% sales increase, and accounted for the remaining 36% of sector sales.

Electronic devices sales increased ¥1.2 billion, or 3%, to ¥39.7 billion. These sales accounted for 19% of total sales. Sales of inductive devices rose 9%, sales of high-frequency components were flat and sales of other products, which includes power supplies as well as sensors and actuators, declined 2%. These products accounted for 49%, 5% and 46% of electronic devices sales, respectively.

Recording devices recorded net sales of ¥73.9 billion, up ¥15.2 billion, or 26%. Recording devices sales accounted for 35% of total sales. HDD head sales rose 26% and other head sales rose 29%. These products accounted for 90% and 10%, respectively, of sector sales.

In the others sector, TDK's sales excluding EPCOS were ¥20.8 billion, declining ¥6.3 billion, or 23%. As I said before, the main reason was the extraordinary demand for batteries in the previous fiscal year. Net sales of EPCOS were ¥42.9 billion, up ¥7.1 billion, or 20%, year on year. Together, TDK and EPCOS sales in the others sector represented 30% of total sales.

Consolidated Statements of Operations

From the third quarter, we are able to draw comparisons with the previous fiscal year including EPCOS' results because EPCOS was consolidated in October 2008 as we have explained previously. The cost of sales ratio improved 5.8 percentage points from 80.5% to 74.7%. The goodwill expense incurred in the current fiscal year is partly included in cost of sales in the amount of ¥1.1 billion. Excluding that charge, the effective improvement in the cost of sales ratio was 6.3 percentage points. Looking at TDK excluding EPCOS, the cost of sales ratio improved 5.9 percentage points from 78.1% to 72.2%. Accordingly, because this was about the same as the total, EPCOS' cost of sales ratio also improved by about the same margin or more. However, because EPCOS' cost of sales ratio is higher than TDK's there is still room to improve it further by looking for synergies.

Selling, general and administrative expenses decreased ¥1.1 billion year on year, representing an apparent 2.7% improvement, looking at the income statement and including restructuring cost, which is shown separately. However, abnormal expenses must be considered. In the third quarter of fiscal 2009, TDK recognized structural reform expenses of ¥4.3 billion, including restructuring cost of ¥3.6 billion, which is separately shown. In contrast, TDK booked structural reform expenses of only ¥2.0 billion in the third quarter of fiscal 2010. Because ¥0.8 billion for goodwill was included in selling, general and administrative expenses, total abnormal expenses in the third quarter of the current fiscal year were ¥2.8 billion. Excluding these expenses, selling general and administrative expenses effectively rose ¥0.4 billion. Other deductions declined ¥7.8 billion. One reason was a ¥4.2 billion decrease in net loss on securities. Another factor was a ¥5.2 billion improvement in foreign exchange gain from a large foreign exchange loss in the previous fiscal year.

Breakdown of Operating Income Changes (YoY Comparison)

Operating income increased ¥17.2 billion year on year. I'd like to explain the changes, including EPCOS. In terms of factors that had a positive impact on operating income, changes in sales, including capacity utilization rate and product mix, contributed ¥21.4 billion, while rationalization, cost reductions and purchased materials contributed ¥15.8 billion. Furthermore, a decrease in SG&A expenses contributed ¥0.9 billion, but this reflected a ¥2.3 billion decrease in structural reform expenses. In terms of negative factors affecting operating income, the yen's appreciation had a ¥3.6 billion detrimental impact. Sales price reductions had a ¥15.4 billion negative effect, and EPCOS goodwill had a ¥1.9 billion negative effect. The net result of these positive and negative factors was a ¥17.2 billion increase in operating income. Capacity utilization had a major negative impact in the first and second quarters, but was a positive contributor to operating income in the third quarter. On the other hand, sales price reductions were larger in the third quarter than the first two quarters of fiscal 2010. Structural reform expenses in the third quarter were ¥2.0 billion compared with ¥4.3 billion in the third quarter of fiscal 2009.

Consolidated Balance Sheets (Assets)

Next I'd like to look at our consolidated balance sheets, beginning with the assets part. I will compare assets as of December 31, 2009 with September 30, 2009. Total assets increased ¥19.6 billion from ¥1,088.9 billion to ¥1,108.5 billion. As of December 31, 2009, the yen was worth ¥92.10 against the US dollar and ¥132 against the euro, as the yen depreciated ¥1.89 and ¥0.28, respectively, from September 30, 2009. The overall increase in total assets includes an increase in foreign currency-denominated assets of ¥12.1 billion.

Cash and cash equivalents increased ¥4.6 billion. Based on the third-quarter ¥8.8 billion net income attributable to TDK Corp., the difference between depreciation and amortization and capital expenditures had a ¥6.4 billion positive impact on cash. On the other hand, the net result from increases in trade receivables and trade payables was a ¥6.7 billion positive impact on cash. The sale of marketable securities had a ¥2.9 billion positive impact on cash. Losses, including impairment losses on long-term assets, that don't affect cash were a ¥3.1 billion positive contributor to cash. A ¥1.0 billion net increase in debt was another reason for the increase in cash. On the other hand, a net ¥18.6 billion in cash was used for short-term investments. Furthermore, dividends used cash of ¥3.9 billion and an increase in inventories used ¥5.4 billion in cash. These factors reduced cash. Exchange rate changes at the end of the term increased cash by ¥2.6 billion due to a slight depreciation of the yen. Cash on hand increased ¥24.6 billion including cash and deposits and short-term investments. Because debt increased ¥1.0 billion, cash on hand increased around ¥23.6 billion in the third quarter.

Balance Sheets (Liabilities and Equity)

Accumulated other comprehensive loss improved ¥9.7 billion and there was an improvement in foreign currency translation adjustments due to a slight depreciation of the yen.

2Q vs. 3Q Comparison of Net Sales and Operating Income

Now I would like to draw a comparison between the second and third quarters of the current fiscal year. Third-quarter net sales increased ¥7.4 billion, or 3.6%. Operating income, meanwhile, rose ¥3.1 billion from the second quarter. There was a ¥0.7 billion increase in EPCOS goodwill from ¥1.2 billion in the second quarter to ¥1.9 billion in the third quarter. Structural reform expenses increased ¥0.6 billion from ¥1.4 billion in the second quarter to ¥2.0 billion in the third quarter. Adding these increases of ¥1.3 billion to the increased operating income of ¥3.1 billion, operating income from normal business rose ¥4.4 billion.

Excluding EPCOS, TDK recorded third-quarter sales that were ¥7.6 billion, or 4.7%, higher year on year. Operating income increased ¥2.9 billion. Structural reform expenses increased ¥0.8 billion from ¥1.1 billion to ¥1.9 billion. If this increase was excluded, operating income would have risen ¥3.7 billion. A major factor was a 1.7 percentage point improvement in the cost of sales ratio between the second and third quarters. Although EPCOS' sales were largely unchanged, the company posted a ¥0.9 billion increase in operating income. Structural reform expenses decreased ¥0.2 billion from ¥0.3 billion in the second quarter to ¥0.1 billion in the third quarter. Taking into account this decrease, operating income at EPCOS improved ¥0.7 billion.

Overview of Consolidated Results for the Nine-Month Period

Turning now to the nine-month period ended December 31, 2009, net sales increased ¥9.2 billion, or 1.6%, to ¥597.5 billion. Operating income, however, increased ¥8.2 billion, or 88.7%, to ¥17.5 billion. Income before income taxes was ¥10.8 billion, a year-on-year improvement of ¥11.1 billion. Net income attributable to TDK Corp. was ¥10.0 billion, a year-on-year improvement of ¥12.4 billion. Given that capacity utilization hasn't returned to pre-Lehman Shock levels and the yen is strong, the reason for the year-on-year earnings increases lies predominantly in an improved cost of sales ratio. This improvement was supported by the continued strong performance of HDD heads in the nine-month period. The ¥9.2 billion increase in overall net sales reflected the inclusion of a full nine months' sales from EPCOS this fiscal year; only three months' sales were included in the previous fiscal year. Given that EPCOS sales in the first half were about ¥80.0 billion, sales underperformed by around ¥71.0 billion.

Projections for Fiscal 2010

Let me now give you our projections for the fiscal year ending March 31, 2010. We are projecting net sales of ¥795.0 billion, operating income of ¥22.0 billion, income before income taxes of ¥14.0 billion and net income of ¥7.0 billion.

Behind these forecasts is our belief that the world should avoid the double-dip recession that is on the minds of many people, at least in the January-March quarter. The projections are based on the premise that the usual seasonal fall should go no further than the present level. We don't believe a rapid economic recovery can be expected in the next two to three years with unemployment rates in Japan, the U.S. and Europe very high and not improving. In that sense, the best that can be expected is a modest recovery. There's also the risk of the yen appreciating. It's in this context that we are forecasting operating income of ¥22.0 billion. You may feel that this represents a slightly slower pace of operating income growth than through the first nine months of fiscal 2010. Our intention is to prioritize structural reforms in light of the economic conditions I have just mentioned. The projected operating income of ¥22.0 billion is based on this.

As I said, we are projecting net income of ¥7.0 billion. We had already generated net income of around ¥10.0 billion through the end of the third quarter and we had ¥14.1 billion in incremental income rescinded in a recent transfer pricing taxation ruling, as you may be aware; we'll actually receive a refund of only ¥9.4 billion. You may be asking the premises for the ¥7.0 billion in projected net income. Well, in the March 2009 fiscal year we executed many reforms due to a large drop in orders and as a result booked deferred tax assets. Because we expect a full-scale recovery to take some time, we have strictly reassessed the recoverability of deferred tax assets and decided to reverse them. The effect of this reversal of deferred tax assets is included in the ¥7.0 billion net income projection.

Progress With Profit Structure Reforms

Finally today, I'd like to review the progress we are making with profit structure reforms. In the previous fiscal year, we used a substantial amount of money for reforms with the view to generating annual benefits of around ¥70.0 billion. We reported our progress in the first and second quarters. In the third quarter, benefits were also largely in line with our expectations.

With that, I will conclude my presentation of our third-quarter results and fiscal 2010 projections. Thank you.

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