[ 3rd Quarter of fiscal 2014 Performance Briefing ]Consolidated 3Q Results of FY March, 2014
Consolidated Full Year Projections of FY March, 2014
Mr. Takakazu Momozuka
Corporate Officer
My name is Takakazu Momozuka. Thank you very much for coming today. I will give an outline of our consolidated results for the 3rd quarter of FY March 2014.
Consolidated Results for the 3rd Quarter of FY March 2014
First, let me explain the particulars of our consolidated results for the 3rd quarter in comparison with the corresponding quarter of the previous year. As we withdrew from the data tape business, operating results relating to the data tape business are presented separately as discontinued operations in the consolidated statements of income as in the case of the 2nd quarter. For this reason, reclassifications have been made to the consolidated statements of income for the corresponding quarter of the previous year.
Net sales of continuing operations excluding the data tape business totalled ¥258.6 billion, an increase of ¥45.3 billion (+21.2%) from the corresponding quarter of the previous year. Operating income totalled ¥17.6 billion, an increase of ¥12.6 billion (approximately +250%) from the corresponding quarter of the previous year. Income from continuing operations before income taxes totalled ¥17.2 billion, an increase of ¥14.2 billion from the corresponding quarter of the previous year. Net income from continuing operations totalled ¥11.1 billion, an increase of ¥9.7 billion from the corresponding quarter of the previous year. Losses from discontinued operations relating to the data tape business amounted to ¥1.0 billion. Net income after deducting net income attributable to controlling interests in the amount of ¥800 million amounted to ¥9.3 billion, an increase of ¥8.9 billion from the corresponding quarter of the previous year. Net income per share is ¥73.99. Exchange rates for the U.S. dollar and euro were ¥100.38 and ¥136.56, respectively, as the yen depreciated by 23.7% against the U.S. dollar and by 29.7% against euro year on year. This increased net sales by approximately ¥43 billion and operating income by ¥8.1 billion.
Results by Business for the 3rd Quarter of FY March 2014
Results by business for the 3rd quarter in comparison with the corresponding quarter of the previous year were as follows.
Net sales of passive components totalled ¥117.1 billion, a 25.8% increase from the corresponding quarter of the previous year. Operating income totalled ¥6.1 billion, an operating loss of ¥1.8 billion in the corresponding quarter of the previous year. The ceramic capacitors business reported a profit, although it reported a loss in the corresponding quarter of the previous year. The ceramic capacitors business has reported a profit since the 1st quarter. The inductive devices business reported a sharp increase in profit from the corresponding quarter of the previous year due to optimization of the product mix. The high-frequency devices business reported a reduced loss from the corresponding quarter of the previous year due to productivity improvement, etc. The piezoelectric material products business reported an increase in both sales and profit from the corresponding quarter of the previous year due to increased sales of auto parts. The income of the passive components business includes the gain on sale of part of overseas assets in the amount of approximately ¥2 billion.
Net sales of magnetic application products totalled ¥95.7 billion, a 13.7% increase from the corresponding quarter of the previous year. Operating income totalled ¥10.3 billion, a 37.3% increase from the corresponding quarter of the previous year. Although the shipment quantity of recording devices (heads) decreased from the corresponding quarter of the previous year, the income of the business remained unchanged from the corresponding quarter of the previous year due to productivity improvements. The loss recorded in the magnets business sharply decreased from the corresponding quarter of the previous year due to the significant productivity improvements of sites in China due to consolidation. The productivity of the power supplies business increased from the corresponding quarter of the previous year due to a recovery in sales to the industrial equipment market.
Net sales of film application products totalled ¥41.4 billion, a 34% increase from the corresponding quarter of the previous year. Operating income totalled ¥6.5 billion, an 80.6% increase from the corresponding quarter of the previous year. Sales of energy devices (rechargeable batteries) for smartphones and tablet PCs remained strong. As a result, the film application products business reported a significant increase in both sales and income compared with the corresponding quarter of the previous year. We expect to completely withdraw from the data tape business in the 4th quarter as production is discontinued.
Analysis of Changes in Operating Income in the 3rd Quarter
Contributions to the increase of ¥12.6 billion in operating income in the 3rd quarter were as follows.
Changes in profit from sales due to factors of operating rate and product mix contributed to an increase of ¥6.5 billion in operating income. Sales of other passive components significantly increased year on year. An improved operating rate also contributed to an increase in operating income. A significant increase in sales of energy devices contributed to an increase in operating income year on year. A fall in the price of energy devices contributed to a decrease of ¥9.5 billion in operating income. Exchange gain on foreign currency earnings due to the weak yen contributed to an increase of ¥8.1 billion in operating income. The absence of the price fluctuations of rare earth which occurred a year ago contributed to an increase of approximately ¥1.3 billion in operating income. Rationalization-based cost reduction contributed to a net increase of approximately ¥5.3 billion in operating income, although labor costs in China contributed to a decrease in operating income due to wage hikes as before. Restructuring contributed to an increase of ¥900 million in operating income (¥500 million for passive components and ¥400 million for magnetic application products, mainly due to the concentration of sites, a reduction in overseas personnel, etc.) Selling, general and administrative expenses contributed to a decrease of ¥400 million in operating income. The increase in operating income included a gain on the sale of assets in the amount of approximately ¥2 billion. The one-time impact of the insurance payout of ¥400 million which was received by the Company in the 3rd quarter of the previous fiscal year was largely responsible for a decrease of ¥400 million being seen in operating income.
Summary of Consolidated Results for the 3rd Quarter of FY March 2014
Let me briefly explain net sales and operating income by segment in the 2nd and 3rd quarters.
Net sales of passive components in the 3rd quarter decreased by ¥2.3 billion, or 1.9%, from the 2nd quarter. Net sales of capacitors decreased by ¥400 million or 1.1% from ¥35.1 billion in the 2nd quarter to ¥34.7 billion in the 3rd quarter. Sales to the automotive and game machines markets remained firm from the 2nd quarter. However, sales to the industrial machinery market in Europe decreased due to seasonal factors. Net sales of inductive devices decreased from ¥35.5 billion in the 2nd quarter to ¥34.9 billion in the 3rd quarter, a fall of ¥600 million or 1.7%. Like capacitors, sales of inductive devices to the automotive market remained firm but sales to the industrial machinery and telecommunications markets decreased. Net sales of passive components decreased from ¥48.8 billion in the 2nd quarter to ¥47.5 billion in the 3rd quarter, a fall of ¥1.3 billion or 2.7%. This is because sales of high-frequency devices to leading manufacturers of smartphones and tablet PCs in North America but sales of VCMs, for which demand in the first half was strong, decreased due to the adjustment of smartphone production in China.
The operating income of passive components decreased by ¥100 million from ¥6.2 billion in the 2nd quarter to ¥6.1 billion in the 3rd quarter. This operating income includes the gain on the sale of overseas assets in the amount of ¥2 billion. Productivity in the high-frequency products business decreased due to production adjustment by leading Korean smartphone manufacturers and a decline in sales by Chinese smartphone manufacturers. The profit of the piezoelectric material products business also decreased due to a decline in sales of VCMs. Restructuring cost amounted to ¥200 million which is almost the same as that in the 2nd quarter.
Net sales of magnetic application products increased by ¥2.8 billion or 3% from ¥92.9 billion in the 2nd quarter to ¥95.7 billion in the 3rd quarter. Sales of recording devices increased by ¥2.7 billion or 4.1% from ¥66.3 billion in the 2nd quarter to ¥69.0 billion in the 3rd quarter because the shipment quantity of HDD heads exceeded expectations due to strong demand for game machines and replacement demand for PCs due to the expiration of Windows XP support. Sales of other magnetic application products increased by ¥200 million or 0.8% from ¥26.6 billion in the 2nd quarter to ¥26.8 billion in the 3rd quarter. Sales of magnets and power supplies remained almost unchanged. The operating income of magnetic application products increased by ¥2.5 billion or 32.1% from ¥7.8 billion in the 2nd quarter to ¥10.3 billion in the 3rd quarter. This was mainly due to an increase in the shipment quantity of HDD heads for recording devices. As for magnets, start-up expenses occurred until the 2nd quarter due to concentration of production sites. However, profitability increased in the 3rd quarter due to the absence of such expenses.
Net sales of film application products increased by ¥8.3 billion or 25.1% from ¥33.1 billion in the 2nd quarter to ¥41.4 billion in the 3rd quarter. This is because sales of rechargeable batteries increased due to the increased production of new model products by our main customers and sales to other customers also expanded in the 3rd quarter. Operating income from film application products increased by ¥3.3 billion or 103.1% from ¥3.2 billion in the 2nd quarter to ¥6.5 billion in the 3rd quarter. This was mainly due to an increase in sales of rechargeable batteries as a result of the increased production of new model products by our main customers. TDK is scheduled to complete withdrawal from the Blu-ray Disc business in the film application products segment in the 4th quarter and treat the business as a discontinued operation thereafter.
The net sales and operating income of the other products segment in the 3rd quarter remain almost unchanged from the 2nd quarter. The operating loss of the other products segment increased by ¥400 million from ¥4.0 billion in the 2nd quarter to ¥4.4 billion in the 3rd quarter due to a temporary increase in expenses.
Results for the First Nine Months of FY March 2014
In the first nine months of FY March 2014, net sales totalled ¥743.4 billion, an 18.9% increase year on year; operating income totalled ¥34.4 billion, a 36% increase year on year; and net profit totalled ¥15.7 billion, a 55.4% increase year on year.
Consolidated Business Forecast for FY March 2014
Let me explain the consolidated business forecast for FY March 2014. The consolidated business forecast has been revised upwards as follows. Net sales, operating income, income from continuing operations before income taxes and net income are expected to total ¥985.0 billion, ¥37.0 billion, ¥38.0 billion and ¥16.0 billion, respectively. Net income per share is forecast to be ¥127.18. The average exchange rates of the yen against the U.S. dollar and the euro in the 4th quarter are expected to be ¥102 and ¥135, respectively.
The background of this consolidated business forecast is as follows. Sales of electronic components to the automotive market and sales of HDD heads and rechargeable batteries continued to be stronger than those of the previously announced consolidated business forecasts for FY March 2014. The yen remains weak and is expected to continue to be weak against the U.S. dollar. The Blu-ray Disc business is expected to become a discontinued operation in the 4th quarter due to withdrawal from the business as part of structural reform. Expenses for restructuring continuing operations of ¥4.8 billion are reported. In view of these factors, the consolidated business forecast is revised.
Forecast of dividend for FY March 2014
No amendments have been made to the forecast of dividends for FY March 2014 which has been announced before. The year-end and annual dividends are expected to be ¥40 and ¥70, respectively.
Progress of Structural Reforms
Let me now explain the progress of structural reforms which are scheduled in FY March 2014.
As part of business portfolio rationalization efforts, the data tape business, as a non-core business, was discontinued in the 3rd quarter and TDK is scheduled to completely withdraw from the business in the 4th quarter. As in the case of the data tape business, TDK judged that the Blu-ray Disc business is not promising and therefore TDK is scheduled to discontinue production and withdraw from the business toward the end of the current term. With the aim of enhancing manufacturing capability, TDK now promotes efforts to optimize the location of production sites through the elimination and consolidation of mainly overseas sites.
As for structural reform expenses, TDK reported a total of ¥3.7 billion (¥900 million for continuing operations and ¥2.8 billion for the data tape business as discontinued operations) in the first half of FY March 2014. In the 3rd quarter, TDK reported a total of ¥700 million (¥400 million for continuing operations and ¥300 million for the data tape business). In the 4th quarter, TDK is expected to report a total of ¥5.4 billion (¥4.8 billion for continuing operations and ¥600 million for the Blu-ray Disc business as discontinued operations). Of the ¥10.0 billion which was estimated for FY March 2014, our company is expected to spend approximately ¥9.8 billion on a full-year basis. At the beginning, TDK expected that restructuring effects will amount to ¥8.0 billion. At present, TDK expects that restructuring effects will amount to ¥2.8 billion in FY March 2014 and approximately ¥4.0 billion in FY March 2015. As I previously explained, large-scale structural reforms will be completed in the current term.
Financial Situation
Lastly, let me explain TDK’s financial situation. Gross assets totalled ¥1,311.8 billion, an increase of ¥91.1 billion from September. Liquidity in hand (cash and cash equivalent, and short-term investments) totalled ¥276.1 billion, an increase of ¥33.6 billion from September. As a result, our net cash position amounted to -¥29.2 billion, an improvement of ¥22.8 billion from September. The net cash position improved following the 2nd quarter.
That’s all. Thank you.
