Investor Relations | IR Events | Performance Briefing

[ Financial Results for Fiscal 2010 Performance Briefing ]Consolidated Results

Mr. Takakazu Momozuka General Manager Finance & Accounting Dept.

Mr. Takakazu Momozuka
General Manager
Finance & Accounting Dept.

Good afternoon. My name is Takakazu Momozuka. Thank you for attending this presentation.

You have just heard from our president, who gave you an overview of our fiscal 2010 consolidated performance. I will now explain our performance in more detail, including our fourth-quarter performance.

Consolidated Results (Supplementary Data)

This slide shows some supplementary data for our consolidated sales results in fiscal 2010. The slide shows data for TDK, excluding EPCOS, EPCOS, and goodwill amortization associated with the acquisition of EPCOS.

The second half of fiscal 2009 was defined by a sharp drop-off in demand after the onset of the financial crisis. In fiscal 2010, pump-priming measures by governments around the world brought about a mild recovery, but not a full-fledged one. This ongoing recovery helped TDK, excluding EPCOS, to post net sales of ¥639.9 billion. While sales were lower because of the impact of the yen's appreciation, they were down only 3.0% year on year. The benefits of structural reforms implemented in the fourth quarter of fiscal 2009 contributed significantly to improved earnings for TDK in fiscal 2010, enabling us to move back into the black. The improvement in earnings was ¥72.1 billion year on year. We had expected structural reforms to yield benefits of around ¥70.0 billion on an annual basis, so we were almost spot on with this estimate. Let's look at EPCOS next. EPCOS returned to profitability from the second quarter of fiscal 2010. However, because of its first-quarter loss, which was attributable in part to the slow recovery in European markets in April and May 2009, EPCOS recorded an operating loss of around ¥1.5 billion for the full year. Goodwill related to the acquisition of EPCOS was ¥4.4 billion.

Consolidated Results by Quarter

This slide shows our consolidated performance for fiscal 2010 by quarter. Results are from the fourth quarter of fiscal 2009, divided between TDK, excluding EPCOS, and EPCOS.

For TDK, excluding EPCOS, capacity utilization in the January-March 2009 quarter of the previous fiscal year, when demand plummeted, was only about 30% to 40%. But this was the low point, and capacity utilization subsequently recovered to approximately 70% in the first quarter (April to June) of fiscal 2010. Capacity continued to inch up from the second quarter in step with the modest market recovery. Normally, the fourth quarter (January to March) sees a seasonal drop, but in the fourth quarter of fiscal 2010, no large drop was witnessed thanks to robust demand in emerging markets, centered on Asia. While there is some difference in capacity utilization depending on the product, capacity utilization was maintained at around 80% to 85% in the fourth quarter of fiscal 2010. Furthermore, fourth-quarter sales were only down 1.9% from third-quarter sales.

Shipment volumes of passive components also moved onto a recovery footing in the second and third quarters of fiscal 2010. And thanks to strong demand for key finished products, namely notebook PCs and flat-screen TVs, shipment volumes in the fourth quarter were only down slightly on the third quarter. Regarding HDD heads, shipment volumes increased every quarter in step with higher demand from the beginning of fiscal 2010. Because fourth-quarter shipments were about the same level as those in the third quarter, shipments were strong throughout the year, underpinning our performance in HDD heads operations.

The quarter-by-quarter increase in shipment volumes and the benefits of structural reforms implemented in the fourth quarter of fiscal 2009, contributed to a quarterly improvement in the operating income ratio. In the fourth quarter of fiscal 2010, we incurred approximately ¥7.2 billion in structural reform expenses, but even including these expenses, the operating income ratio was 9.4%. Turning to EPCOS, earnings have improved after the company returned to profitability from the second quarter on the back of rising sales, which reflected improving automotive-related and mobile phone markets in Europe.

Fourth-Quarter Sales and Operating Income

This slide shows sales by product sector for the fourth quarter of fiscal 2010, compared with the fourth quarter of the previous fiscal year.

For TDK, excluding EPCOS, total sales in the fourth quarter of fiscal 2010 were ¥165.5 billion, which was ¥58.5 billion, or 54.7%, higher year on year. Operating income was ¥8.4 billion, representing a year-on-year turnaround of ¥61.1 billion. The increase in sales compared to the large drop in sales in the fourth quarter of fiscal 2009 together with the benefits of structural reforms and much lower structural reform expenses were the main factors behind the improved earnings. Electronic materials and recording devices posted large increases in sales, and all other sectors also saw sales rise. EPCOS posted sales in the January to March 2010 quarter of ¥45.9 billion, which was ¥13.8 billion, or 42.9%, higher year on year. EPCOS also recorded a ¥6.9 billion improvement in operating income from a loss in the fourth quarter of fiscal 2009 to operating income of ¥1.2 billion in the fourth quarter of fiscal 2010. These improvements came after both TDK and EPCOS witnessed quite large drops in the fourth quarter of fiscal 2009. Taking into account ¥1.3 billion in goodwill amortization in the fourth quarter, the improvement in earnings from the previous fiscal year was ¥3.9 billion. Structural reform expenses in the fourth quarter of fiscal 2010 were approximately ¥8.0 billion, compared with ¥30.1 billion in the fourth quarter of fiscal 2009.

Continuing on, I would like to give you sales figures for each product sector, the monetary change and growth rates compared with the fourth quarter of fiscal 2009, as well as the share of total sales and product growth rates and shares within each sector.

Electronic materials recorded sales of ¥34.5 billion, representing year-on-year growth of 65% and 16% of total sales. Ferrite cores and magnets recorded an 84% increase in sales and accounted for 36% of sector sales. Capacitors saw sales climb 56% and account for 64% of sector sales. Electronic devices recorded sales of ¥38.2 billion, representing year-on-year growth of 32% and 18% of total sales. Inductive devices saw sales increase 52% and account for 50% of sector sales. High-frequency components sales grew 31% and accounted for 5% of sector sales. Other products sales rose 15% and accounted for 45% of sector sales. Recording devices posted sales of ¥72.1 billion, representing year-on-year growth of 86% and 34% of total sales. HDD heads sales soared 91% and accounted for 90% of sector sales. Other heads sales rose 47% and accounted for the remaining 10% of sector sales. The others sector recorded sales of ¥20.7 billion, representing year-on-year growth of 13% and 10% of total sales. Finally, EPCOS posted sales of ¥45.9 billion, representing 43% year-on-year growth and 22% of total sales.

Consolidated Statements of Operations

On this slide, you will see our consolidated statements of operations. As we have explained in the past, because EPCOS was consolidated from October 2008, the first half of fiscal 2009 reflects only TDK's results. Please bear that in mind when we discuss year-on-year comparisons.

Fiscal 2010 structural reform expenses were approximately ¥13.0 billion, comprising ¥10.9 billion at TDK and ¥2.1 billion at EPCOS. Including these expenses, operating income was ¥25.8 billion. Therefore, compared to fiscal 2009 when we booked structural reform expenses of ¥38.0 billion, operating income improved ¥80.1 billion. I will discuss this in more detail later in this presentation. The cost of sales ratio improved 6.9 points from 83.3% to 76.4%. The cost of sales ratio for TDK, excluding EPCOS, improved 7.6 points from 81.7% to 74.1%. Total other deductions decreased ¥23.5 billion. There was a ¥15.3 billion improvement in equity in earnings of affiliates. However, this improvement was mainly due to the absence of ¥17.4 billion booked for the write down of shares held in Imation Corp. that were acquired when the consumer recording media business was transferred. Furthermore, loss on securities, net decreased ¥5.0 billion and foreign exchange loss decreased ¥4.3 billion. During fiscal 2010, TDK received a tax refund of ¥2.4 billion related to transfer pricing reassessments. Of this, ¥1.6 billion was included in interest and dividend income, and ¥0.8 billion was included in other-net.

Breakdown of Operating Income Changes

The slide shows the positive and negative reasons for the ¥80.1 billion improvement in operating income.

First, let's consider the factors that had a positive impact on operating income. Sales, including the capacity utilization rate and product mix, had a ¥45.5 billion positive effect on operating income. Rationalization, cost reductions and purchased materials savings had a ¥50.2 billion positive effect on operating income. The decrease in SG&A expenses, including a ¥26.4 billion decline in structural reform expenses, contributed ¥23.9 billion to operating income. Another contributing factor was the higher operating income at EPCOS. This was ¥7.3 billion compared to the second half of fiscal 2009 when EPCOS became subject to consolidation for the first time. EPCOS goodwill amortization was ¥0.8 billion. In terms of factors that had a negative impact on operating income, exchange fluctuations had a ¥12.8 billion negative impact on operating income, sales price discounts had a ¥34.8 billion negative impact too. Capacity utilization and cost reductions stemming from the benefits of structural reforms contributed significantly to the improved operating income, absorbing the negative impact of sales price discounts and the yen's appreciation.

Consolidated Balance Sheets (Assets)

Now for a word on the consolidated balance sheets. I will draw a comparison with March 31, 2009.

Total assets at March 31, 2010 stood at ¥1,091.5 billion, down ¥9.6 billion from ¥1,101.0 billion. The exchange rates at March 31, 2010 were ¥93.04 versus the U.S. dollar and ¥124.92 versus the euro. There was therefore an appreciation of ¥5.19 against the U.S. dollar and of ¥4.92 against the euro. This led to the decrease in total assets, including an approximate ¥28.1 billion decrease in foreign currency-denominated assets.

Cash and cash equivalents declined ¥32.7 billion. Net income was ¥12.9 billion and depreciation and amortization expenses were ¥83.8 billion. As capital expenditures were lower than these expenses at ¥64.4 billion, earnings rose by ¥19.4 billion. On the other hand, short-term investments used net cash of ¥44.9 billion and ¥11.6 billion was used for the payment of dividends, while ¥20.1 billion in net cash was used to reduce debt. Cash on hand increased ¥11.2 billion, including short-term investments.

Consolidated Balance Sheets (Liabilities and Equity)

Accumulated other comprehensive loss increased approximately ¥9.4 billion. The main reason was deterioration in the foreign currency translation adjustments account due to the stronger yen.

Fiscal 2010 Structural Reform Expenses and Benefits

Let's have a quick look at structural reform expenses for fiscal 2010 and their benefits.

In the fourth quarter of fiscal 2009, we undertook some major structural reforms. These reforms yielded benefits approximating ¥70.0 billion on an annual basis, contributing handsomely to our improved earnings performance in fiscal 2010. For the first three quarters of fiscal 2010 we incurred structural reform expenses of approximately ¥5.0 billion and a further ¥8.0 billion in the fourth quarter, which brought total structural reform expenses for fiscal 2010 to ¥13.0 billion. We expect these reforms to yield benefits of around ¥10.0 billion in fiscal 2011.

With that, I will conclude my presentation of our fiscal 2010 results. Thank you.

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