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[ 2nd Quarter of fiscal 2014 Performance Briefing ]Consolidated 2Q Results of FY March, 2014

Mr. Takakazu Momozuka

Mr. Takakazu Momozuka
Corporate Officer

Consolidated 2Q Results of FY March, 2013

For the 2Q consolidated business performance for March 2014, we already announced that we are going to withdraw from data tape market. Excluding this business, net sales were 249.8 billion yen, a 44.8 billion yen increase, or a 21.9% increase year-on-year. Operating income was 12.4 billion yen, an increase of 1.3 billion yen or 11.7% increase year-on-year. Income before income tax was 12.7 billion yen, an increase of 3.2 billion yen or 33.7% more. Net profit was 9.2 billion yen, an increase of 2.7 billion yen or 41.5% more. Net profit for the non-continuity business was -3.2 billion yen, which includes 2.8 billion yen of structural reform costs. There was also -100 million yen for non-controlling interests and the net income was at 6 billion yen, an increase of 700 million yen or 13.2% more year-on-year. Earnings per share are 47.95 yen. The average exchange rate to the dollar is at 99.02 yen, a 25.9% depreciation of the yen; and to the euro, 131.11 yen, a 33.4% yen depreciation. The change in foreign exchange rates resulted in 43.2 billion yen of incremental revenue and 7.2 billion yen of operating income.
When it comes to sensitivity to currency, one yen depreciations will trigger 1.5 billion yen of incremental effects on the operating income.

Breakdown of Operating Income Changes (2Q)

About the breakdown and factors of the 1.3 billion incremental increase in operating income compared to Q2 from last year. And including the utilizations and the product mix, due to this, the incremental revenues. For the breakdown of operating income changes, we have +1.9 billion yen of operating income. Compared to the last year, we had a dramatic increase of revenues, but this is mainly due to the foreign exchange rate change. When we adjusted with a declining selling price in recording devices, the shipment volumes declined by 10% year-on-year, resulting in a negative impact. On the other hand, we had a substantial increase in the passive components business and it more than offset. For the sales price reduction we had -10.2 billion yen, for the exchange fluctuation we had +7.2 billion yen, for rationalization and cost reduction we had +4.4 billion yen, for structural reforms we had +1.8 billion yen, and for reduction of SG&A expenses we have 1.4 billion yen of operating income and this will include that 1.6 billion yen of incremental income because the structural reform costs have reduced from 1.8 billion last year to 200 million this year. We also don’t receive the benefit insurance that we received last year from the floods in Thailand and now this is a negative impact of -5.2 billion yen.

Restructuring Progress

For the restructuring reform progress, in order to optimize the business portfolio we have to withdraw from the LTO business, ending production by October and withdrawing entirely by March 2014, as well as withdrawing from the Blu-ray business by the second half of this year. Second, in order to enhance our manufacturing capabilities we will implement the consolidation of domestic production bases. For restructuring reform costs, in Q1 we spent 700 million yen, and in Q2 we spent 200 million yen. 2.8 billion yen will be spent by the withdrawing date. 3 billion yen were spent in Q2 so in total we spent 3.7 billion yen in restructuring reform costs in the first half, which is out of the 10 billion yen structural reform budget of this fiscal year. The expected amount of benefits from this structural reform is still about 8 billion yen that we announced in April 2013 and this is the final phase of restructuring.

Segment Information

For segment information, the sales of passive components for Q2 was 119.4 billion yen, 2.4 billion yen more or +2.1% from the 117 billion yen of Q1. For capacitors, sales were 35.1 billion yen, 1.4 billion yen more or +4.2% from the 33.7 billion yen of Q1. This is due to the automobile markets and holiday season game consoles. For inductive devices, sales in Q2 were 35.5 billion yen, 500 million yen more or +1.4% from the 35 billion yen of Q1 due to the favorable automobile, information devices, and consumer markets. Other passive components increased from the 48.3 billion yen of Q1 by 500 million yen or +1.0% to 48.8 billion yen in Q2 partly due to smartphones and tablets using high frequency components. Operating income for passive components increased from the 2.8 billion yen of Q1 by 3.4 billion yen to 6.2 billion yen in Q2. Inductive devices have been particularly favorable with more sales of high frequency devices as well as due to cost reduction and sales of capacitor components. When it comes to structural reform costs, it was reduced by 500 million yen from the 700 million yen of the first half to 200 million yen.
For magnetic application products, sales went up 6.7 billion yen or +7.8% from the 86.2 billion yen in Q1 to 92.9 billion yen in Q2. For recording devices, sales went up 6.1 billion yen or +10.1% from the 60.2 billion yen in Q1 to 66.3 billion yen in Q2. For other magnetic application products, sales went up 600 million yen or +2.3% from the 26 billion yen in Q1 to 26.6 billion yen in Q2. Sales of magnets were flat but power supplies increased for the telecom equipment market. The operating income of the magnetic application products stood at 4.6 billion yen in Q1, going up 3.2 billion yen or +69.6% to 7.8 billion yen. This is mainly due to the increase in profitability which is attributable to the increased volume of HDD heads of recording devices. Because of this, as for the recording devices, 50% increase was seen over Q1. On the other hand, with respect to magnetic products in Q1, capacity utilization was dropping due to the consolidation of sites overseas. There was a restarting start-up cost due to consolidation of sites. After the consolidation the revenue became worse, but in Q2, the capacity utilization went up. However, we are still incurring restart-up costs and so the revenue improvement has been slow in the second half, due to the improvement of profitability. We would like to improve the profitability. About Q1 sales in film application products, sales stood at 27 billion yen in Q1, going up 6.1 billion or +22.6%, currently standing at 33.1 billion yen in Q2. In Q1, the sales of rechargeable batteries was slow due to the production adjustment of major customers, however, from Q2 there has been a pickup of new customers and sales groups. On the other hand, applied film products decreased for the communications equipment market. The operating income of film application products in Q1 was 2 billion, going up 1.2 billion yen or +60%, currently standing at 3.2 billion yen in Q2. For rechargeable batteries, thanks to the sales increase due to the launch of new products we saw a profit increase. Data tapes are now a discontinued operation and this has been deducted from the sales and operating income of the segment. Others were flat from Q1 in terms of both sales and operating income. For the operating loss for the entire company, it stood at -4.2 billion yen in Q1, improving by 200 million yen, currently at -4 billion yen in Q2.

Financial Position

For the financial position at the end of September 2013, compared to the end of June 2013, total assets stood at 1,220.7 billion yen, a reduction of 3.3 billion. Total liability stood at 617.2 billion yen, up 2.2 billion over the end of June. Stockholders’ equity stood at 588.6 billion yen, down 100 million yen over the end of June. Of this, comprehensive income stood at 126.1 billion yen, down 900 million yen over the end of June. Cash and cash equivalents stood at 242.5 billion yen, down 2.3 billion yen over the end of June. On the other hand, the interest-bearing debt stood at 294.5 billion yen, down 9.9 billion yen over the end of June. As a result, net cash improved by 7.6 billion yen over the end of June, standing at -52 billion yen. We have been conducting cost reductions of purchased equipment, and as a result, as with Q1, cash position improved.

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