RNS Number:4300G
TDK Corporation
15 December 2004
TDK Corporation
Interim Consolidated Financial Statements for the six-month-period ended
September 30, 2004 (in English)
On December 15, 2004, this report in the Japanese version was filed with the
Director of the Kanto Local Finance Bureau of the Ministry of Finance pursuant
to the Securities and Exchange Law of Japan
1) Consolidated balance sheets (Unaudited)
Yen (Millions)
ASSETS September 30, September 30, March 31,
2003 2004 2004
Current assets:
Cash and cash equivalents Y193,406 Y235,969 Y227,155
Marketable securities (Note 2) - 1,366 402
Trade receivables:
Notes 6,610 6,393 6,431
Accounts 137,415 139,810 133,900
Allowance for doubtful receivables (2,682) (2,532) (2,000)
Net trade receivables 141,343 143,671 138,331
Inventories 77,663 87,429 77,301
Income taxes receivables 2,667 121 763
Prepaid expenses and other current 31,245 40,985 31,821
assets (Note 7)
Total current assets 446,324 509,541 475,773
Investments in securities (Note 2) 16,791 17,896 18,381
Property, plant and equipment, at cost:
Land 20,622 20,285 20,464
Buildings 175,950 181,502 176,256
Machinery and equipment 488,427 452,045 471,247
Construction in progress 7,629 12,866 10,312
692,628 666,698 678,279
Less accumulated depreciation (475,958) (449,945) (469,334)
Net property, plant and equipment 216,670 216,753 208,945
Goodwill (Note 8) 11,316 10,457 10,029
Intangible assets (Note 8) 15,977 14,482 15,027
Deferred income taxes 36,935 30,996 34,140
Other assets (Note 5) 6,702 7,788 8,024
Y750,715 Y807,913 Y770,319
See accompanying notes to consolidated financial statements.
Yen (Millions)
LIABILITIES AND STOCKHOLDERS' EQUITY September 30, September 30, March 31,
2003 2004 2004
Current liabilities:
Short-term debt Y 1,338 Y - Y 315
Current installments of long-term debt 282 160 101
Trade payables:
Notes 617 552 635
Accounts 59,837 60,012 59,282
Accrued salaries and wages 13,489 15,099 12,085
Accrued expenses 24,277 35,468 33,449
Income taxes payables 2,163 11,384 4,689
Other current liabilities (Note 7) 7,833 5,279 4,662
Total current liabilities 109,836 127,954 115,218
Long-term debt, excluding current 89 58 27
installments
Retirement and severance benefits 75,811 63,858 73,521
Deferred income taxes 13 745 215
Other noncurrent liabilities 76 1,868 1,843
Commitments and contingent liabilities - - -
(Note 6)
Total liabilities 185,825 194,483 190,824
Minority interests 3,228 3,254 3,276
Stockholders' equity:
Common stock 32,641 32,641 32,641
Authorized 480,000,000 shares;
issued 133,189,659 shares
at September 30, 2003 and 2004, and March
31, 2004;
outstanding
132,375,557 shares at September 30, 2003,
132,203,090 shares at September 30, 2004
and
132,409,452 shares at March 31, 2004
Additional paid-in capital 63,051 63,051 63,051
Legal reserve (Note 3) 16,494 17,055 16,497
Retained earnings (Note 3) 541,295 576,039 560,756
Accumulated other comprehensive income (85,204) (70,839) (90,387)
(loss) (Note 4)
Treasury stock at cost;
814,102 shares at September 30, 2003,
986,569 shares at September 30, 2004 and
780,207 shares at March 31, 2004 (6,615) (7,771) (6,339)
Total stockholders' equity 561,662 610,176 576,219
Y750,715 Y807,913 Y770,319
2) Consolidated statements of income (Unaudited)
Yen (Millions)
Six months ended Six months ended Year ended
September 30, 2003 September 30, 2004 March 31, 2004
Net sales Y316,279 Y318,770 Y658,862
Cost of sales 227,919 228,776 474,106
Gross profit 88,360 89,994 184,756
Selling, general and administrative 64,340 63,105 130,434
expenses
Operating income 24,020 26,889 54,322
Other income (deductions):
Interest and dividend income 655 643 1,189
Patent infringement settlement 2,012 - 1,933
Equity in earnings (loss) of affiliates 1,372 621 1,639
Interest expense (212) (157) (323)
Loss (gain) on securities, net (1,068) 95 (1,093)
Foreign exchange gain (loss) (2,037) 592 (3,065)
Other - net 272 121 1,001
994 1,915 1,281
Income before income taxes 25,014 28,804 55,603
Income taxes:
Current 3,017 12,163 10,275
Deferred 2,494 (3,311) 2,868
5,511 8,852 13,143
Income before minority interests 19,503 19,952 42,460
Minority interests 246 83 359
Net income Y19,257 Y19,869 Y42,101
Amounts per share:
Yen (except number of common shares outstanding)
Basic net income per share (Note 9) Y145.27 Y150.11 Y317.80
Diluted net income per share (Note 9) 145.27 150.00 317.69
Weighted average basic common
shares outstanding (in thousands) (Note 9) 132,559 132,366 132,475
Weighted average diluted common
shares outstanding (in thousands) (Note 9) 132,565 132,461 132,523
Cash dividends paid (Note 3) Y25.00 Y30.00 Y50.00
See accompanying notes to consolidated financial statements.
3) Consolidated statements of stockholders' equity (Unaudited)
Yen (Millions)
Six months Six months Year ended
ended September ended September March 31,
30, 2003 30, 2004 2004
Common stock:
Balance at beginning of period Y32,641 Y32,641 Y32,641
Balance at end of period 32,641 32,641 32,641
Additional paid-in capital:
Balance at beginning of period 63,051 63,051 63,051
Balance at end of period 63,051 63,051 63,051
Legal reserve (Note 3):
Balance at beginning of period 15,953 16,497 15,953
Transferred from retained earnings 541 558 544
Balance at end of period 16,494 17,055 16,497
Retained earnings (Note 3):
Balance at beginning of period 525,919 560,756 525,919
Net income 19,257 19,869 42,101
Cash dividends (3,316) (3,972) (6,625)
Losses on sales of treasury stock (24) (56) (95)
Transferred to legal reserve (541) (558) (544)
Balance at end of period 541,295 576,039 560,756
Accumulated other comprehensive
income (loss) (Note 4):
Balance at beginning of period (78,824) (90,387) (78,824)
Other comprehensive income (loss) (6,380) 19,548 (11,563)
for the period, net of tax
Balance at end of period (85,204) (70,839) (90,387)
Treasury stock:
Balance at beginning of period (4,855) (6,339) (4,855)
Acquisition of treasury stock (1,854) (1,658) (1,865)
Exercise of stock option 94 226 381
Balance at end of period (6,615) (7,771) (6,339)
Total stockholders' equity Y561,662 Y610,176 Y576,219
Disclosure of comprehensive income
(loss):
Net income for the period Y19,257 Y19,869 Y42,101
Other comprehensive income (loss) (6,380) 19,548 (11,563)
for the period, net of tax (Note 4)
Total comprehensive income for the Y12,877 Y39,417 Y30,538
period
See accompanying notes to
consolidated financial statements.
4) Consolidated statements of cash flows (Unaudited)
Yen (Millions)
Six months Six months Year ended
ended September ended September March
30, 2003 30, 2004 31, 2004
Cash flows from operating activities:
Net income Y 19,257 Y19,869 Y42,101
Adjustments to reconcile net income to net
cash
provided by operating activities:
Depreciation and amortization 23,642 25,368 51,233
Loss on disposal of property and equipment 1,231 233 1,789
Deferred income taxes 2,494 (3,311) 2,868
Loss (gain) on securities, net 1,068 (95) 1,093
Changes in assets and liabilities:
Increase in trade receivables (6,860) (983) (7,582)
Increase in inventories (6,323) (7,679) (7,824)
Increase in prepaid expenses and other (277) (6,764) (3,196)
current assets
Increase (decrease) in trade payables 6,411 (2,270) 8,171
Increase in accrued salaries and wages 2,006 3,014 602
Increase (decrease) in accrued expenses (2,358) 324 8,058
Increase (decrease) in income taxes 2,072 7,193 5,877
payables, net
Increase (decrease) in other current 2,667 (333) (308)
liabilities
Increase in retirement and severance 4,377 3,194 9,285
benefits
Other - net 2,624 655 2,537
Net cash provided by operating activities 52,031 38,415 114,704
Cash flows from investing activities:
Capital expenditures (20,826) (29,856) (44,866)
Proceeds from sales and maturities of 1,830 210 1,814
investments in securities
Payment for purchase of investments in - (200) (1)
securities
Payment for purchase of other investments (96) (128) (442)
Proceeds from sales of property, plant and 844 867 4,571
equipment
Acquisition of minority interests (287) - (366)
Proceeds from sale of a subsidiary - - 1,523
Other - net - - (3)
Net cash used in investing activities (18,535) (29,107) (37,770)
Cash flows from financing activities:
Proceeds from long-term debt 35 137 69
Repayment of long-term debt (212) (53) (479)
Increase (decrease) in short-term debt, net (15) (325) (1,047)
Sale (purchase) of treasury stock, net (1,784) (1,488) (1,579)
Dividends paid (3,316) (3,972) (6,625)
Net cash used in financing activities (5,292) (5,701) (9,661)
Effect of exchange rate changes on cash and (5,349) 5,207 (10,669)
cash equivalents
Net increase in cash and cash equivalents 22,855 8,814 56,604
Cash and cash equivalents at beginning of
period 170,551 227,155 170,551
Cash and cash equivalents at end of
period Y193,406 Y235,969 Y227,155
See accompanying notes to consolidated
financial statements.
5) Notes to Consolidated Financial Statements (Unaudited)
1. Nature of Operations and Summary of Significant Accounting Policies
(a) Financial Statements
The accompanying consolidated financial statements have been prepared
in accordance with accounting principles generally accepted in the
United States of America ("U.S. GAAP"). The consolidated financial
statements include the accounts of TDK and all its subsidiaries.
The segment information is presented in accordance with the accounting
principles generally accepted in Japan. The segment information
required to be disclosed in financial statements under U.S. GAAP is
not presented in the accompanying consolidated financial statements.
In the opinion of management, all adjustments necessary for a fair
presentation have been included. The results of operations for
interim periods are not necessarily indicative of the operating
results which may be expected for any other interim period or for the
year. For further information, refer to the March 31, 2004
consolidated financial statements and notes thereto included in
TDK Corporation and Subsidiaries Annual Report 2004. Consolidated
financial statements ended March 31, 2004 are audited while
consolidated financial statements ended September 30, 2003 and 2004
are unaudited.
(b) Consolidation Policy
The consolidated financial statements include the accounts of TDK and
its subsidiaries. All significant intercompany accounts and
transactions have been eliminated in consolidation.
In December 2003, the Financial Accounting Standards Board ("FASB")
issued FASB Interpretation No. 46 (revised December 2003) ("FIN 46R"),
"Consolidation of Variable Interest Entities", which addresses the
consolidation by primary beneficiary of variable interest entities
("VIEs") as defined in the Interpretation. FIN 46R replaces FASB
Interpretation No. 46, "Consolidation of Variable Interest Entities",
which was issued in January 2003. FIN 46R is effective immediately
for all VIEs created or acquired after January 31, 2003 and effective
for other VIEs as of March 31, 2004. TDK has not created or acquired
any VIEs after January 31, 2003. For VIEs created or acquired before
February 1, 2003, the adoption of FIN 46R for these entities did not
have a material effect on TDK's consolidated financial statements.
The investments in affiliates in which TDK's ownership is 20% to 50%
and TDK exercises significant influence over their operating and
financial policies are accounted for by the equity method. All
significant intercompany profits from these affiliates have been
eliminated.
(c) Cash Equivalents
Cash equivalents include all highly liquid debt instruments purchased
with an original maturity of three months or less.
(d) Allowance for Doubtful Receivables
The allowance for doubtful receivables is TDK's best estimate of the
amount of probable credit losses in TDK's existing accounts
receivables. An additional reserve for individual receivables is
recorded when TDK becomes aware of a customer's inability to meet its
financial obligations, such as in the case of bankruptcy filings or
deterioration in the customer's operating results or financial
position. If circumstances related to customers change, estimates of
the recoverability of receivables would be further adjusted.
(e) Investments in Securities
TDK classifies its debt and equity securities into one of three
categories:
trading, available-for-sale, or held-to-maturity. Trading securities
are bought and held principally for the purpose of selling them in the
near term. Held-to-maturity securities are those securities in which
TDK has the ability and intent to hold the security until maturity.
All securities not included in trading or held-to-maturity are
classified as available-for-sale.
Trading and available-for-sale securities are recorded at fair value.
Held-to-maturity securities are recorded at amortized cost, adjusted
for the amortization or accretion of premiums or discounts.
Unrealized holding gains and losses on trading securities are included
in earnings. Unrealized holding gains and losses, net of the related
tax effect, on available-for-sale securities are excluded from
earnings and are reported as a separate component of accumulated other
comprehensive income (loss) until realized. As of September 30, 2003
and 2004, and March 31, 2004, TDK did not hold any trading or
held-to-maturity securities. Available-for sale securities, which
mature or are expected to be sold in less than one year, are
classified as current assets.
A decline in the fair value of any available-for-sale security below
cost that is deemed to be other-than-temporary results in a reduction
in carrying amount to fair value. The impairment is charged to
earnings and a new cost basis for the security is established. To
determine whether an impairment is other-than-temporary, TDK
periodically reviews fair value of available-for-sale security for
possible impairment by taking into consideration of the financial
and operating conditions of the issuer, the general market conditions
in the issuer's industry, degree and period of the decline in fair
value and other relevant factors.
Nonmarketable securities are recorded at cost, as fair value is not
readily determinable. TDK periodically evaluates the values of
nonmarketable securities for possible impairment by taking into
consideration of the financial and operating conditions of the issuer,
the general market conditions in the issuer's industry and period of
the decline in the estimated fair value and other relevant factors.
If the impairment is determined to be other-than-temporary,
nonmarketable securities is written down to its impaired value through
a charge to earnings.
(f) Inventories
Inventories are stated at the lower of cost or market. Cost is
determined principally by the average method.
(g) Property, Plant and Equipment
Depreciation of property, plant and equipment is principally computed
by the declining-balance method for assets located in Japan and of
certain foreign subsidiaries and by the straight-line method for
assets of other foreign subsidiaries based on the following estimated
useful lives:
Buildings . . . . . . . . . . . . . . . . . . . . 3 to 60 years
Machinery and equipment . . . . . . . . . . . . . 2 to 22 years
In June 2001, the FASB issued Statement of Financial Accounting
Standards No.143 ("SFAS 143"), "Accounting for Asset Retirement
Obligations", which addresses financial accounting and reporting for
obligations associated with the retirement of tangible long-lived
assets and associated asset retirement costs. SFAS 143 applies to
legal obligations associated with the retirement of long-lived assets
that result from the acquisition, construction, development and (or)
the normal operation of a long-lived asset, except for certain
obligations of lessees. SFAS 143 requires that the fair value of a
liability for an asset retirement obligation be recognized in the
period in which it is incurred if a reasonable estimate of fair value
can be made. The associated asset retirement costs are capitalized as
part of the carrying amount of the long-lived asset and subsequently
allocated to expense over the asset's useful life. TDK adopted SFAS
143 on April 1, 2003. The adoption of SFAS 143 did not have a
material effect on TDK's consolidated financial statements.
(h) Income Taxes
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the estimated
future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and
liabilities and their respective tax bases and operating loss and tax
credit carryforwards.
Deferred tax assets and liabilities are measured using enacted tax
rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled. The
effect on deferred tax assets and liabilities of a change in tax rates
is recognized in income in the period that includes the enactment
date.
(i) Stock Option Plan
In December 2002, the FASB issued Statement of Financial Accounting
Standards No. 148 ("SFAS 148"), "Accounting for Stock-Based
Compensation - Transition and Disclosure", which amends FASB Statement
No. 123 ("SFAS 123"), "Accounting for Stock-Based Compensation". SFAS
148 provides alternative methods of transition for a voluntary change
to the fair value based method of accounting for stock-based employee
compensation. In addition, SFAS 148 amends the disclosure
requirements of SFAS 123 to require more prominent and more frequent
disclosures in financial statements about the effects of stock-based
compensation. However, it gives an entity a choice of recognizing
related compensation expense by adopting the fair value method or to
continue to measure compensation using the intrinsic value-based
method prescribed under Accounting Principles Board Opinion No. 25
("APB 25"), "Accounting for Stock Issued to Employees", the former
standard. TDK has chosen to use the measurement principle prescribed
by APB 25. As such, stock-based compensation cost is recognized by
TDK only if the market price of the underlying common stock exceeds
the exercise price on the date of grant. Accordingly, no stock option
related compensation cost has been recognized during the six months
ended September 30, 2003 and 2004, and during the year ended March 31,
2004 for TDK's stock based compensation plan. The adoption of SFAS
148 did not have an impact on the consolidated results of operations
or financial position of TDK for the six months ended September 30,
2003 and 2004, and for the year ended March 31, 2004.
The following table illustrates the effect on net income and net
income per share if the fair-value-based method had been applied to
all outstanding and unvested stock based awards with such costs
recognized ratably over the vesting period of the underlying
instruments.
Yen (Millions)
September 30, September 30, March 31,
2003 2004 2004
Net income, as reported Y19,257 Y19,869 Y42,101
Deduct total stock-based (129) (213) (330)
employee compensation expense
determined under
fair-value-based method for
all awards, net of tax
Pro forma net income 19,128 19,656 41,771
Yen
Basic net income per share:
As reported Y145.27 Y150.11 Y317.80
Pro forma 144.30 148.50 315.31
Diluted net income per share:
As reported Y145.27 Y150.00 Y317.69
Pro forma 144.30 148.39 315.20
(j) Advertising Costs
Advertising costs are expensed as incurred.
(k) Foreign Currency Translation
Foreign currency financial statements have been translated in
accordance with Statement of Financial Accounting Standards No. 52
("SFAS 52"), "Foreign Currency Translation". Under SFAS 52, the
assets and liabilities of TDK's subsidiaries located outside Japan
are translated into Japanese yen at the rates of exchange in effect at
the balance sheet date. Revenue and expense items are translated at
the average exchange rates prevailing during the period. Gains and
losses resulting from foreign currency transactions are included in
other income (deductions), and those resulting from translation of
financial statements are excluded from the statements of income and
are accumulated in stockholders' equity as a component of accumulated
other comprehensive income loss).
(l) Use of Estimates
Management of TDK has made a number of estimates and assumptions
relating to the reporting of assets, liabilities, revenues and
expenses and the disclosure of contingent assets and liabilities to
prepare these consolidated financial statements in conformity with
U.S. GAAP. Significant items subject to such estimates and
assumptions include the valuation of intangible assets, property,
plant and equipment, trade receivables, inventories, and deferred
income tax assets, and assumptions related to the estimation of
actuarial determined employee benefit obligations. Actual results
could differ from those estimates.
(m) Accounting for the Impairment or Disposal of Long-Lived Assets
In August 2001, the FASB issued Statement of Financial Accounting
Standards No. 144 ("SFAS 144"), "Accounting for the Impairment or
Disposal of Long-Lived Assets" which supersedes both Statement of
Financial Accounting Standards No. 121 ("SFAS 121"), "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to Be
Disposed Of" and the accounting and reporting provisions of APB
Opinion No. 30 ("Opinion 30"), "Reporting the Results of Operations -
Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and
Transactions", for the disposal of a segment of a business (as
previously defined in that Opinion). SFAS 144 retains the fundamental
provisions in SFAS 121 for recognizing and measuring impairment losses
on long-lived assets held for use and long-lived assets to be disposed
of by sale, while also resolving significant implementation issues
associated with SFAS 121.
TDK's long-lived assets and certain identifiable intangibles with
finite useful lives are reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset
may not be recoverable. Recoverability of assets to be held and used
is measured by a comparison of the carrying amount of an asset to
future net cash flows (undiscounted and without interest charges)
expected to be generated by the asset. If such assets are considered
to be impaired, the impairment to be recognized is measured by the
amount by which the carrying amount of the assets exceed the fair
value of the assets. Assets to be disposed of are reported at the
lower of the carrying amount or fair value less costs to sell.
(n) Goodwill and Other Intangible Assets
In June 2001, the FASB issued Statement of Financial Accounting
Standards No. 141 ("SFAS 141"), "Business Combinations", and
Statement of Financial Accounting Standards No. 142 ("SFAS 142"),
"Goodwill and Other Intangible Assets". SFAS 141 requires the use of
the purchase method of accounting for business combinations. SFAS 141
also specifies the types of acquired intangible assets that are
required to be recognized and reported separately from goodwill and
those acquired intangible assets that are required to be included in
goodwill. Under SFAS 142 goodwill is no longer amortized, but instead
is tested for impairment at least annually. Intangible assets are
amortized over their respective estimated useful lives and reviewed
for impairment in accordance with Statement of Financial Accounting
Standards No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets". Any recognized intangible asset determined to
have an indefinite useful life will not be amortized, but instead
is tested for impairment until its life is determined to no longer be
indefinite.
TDK conducts its annual impairment test at the end of each fiscal
year.
(o) Derivative Financial Instruments
In June 1998, the FASB issued Statement of Financial Accounting
Standards No. 133 ("SFAS 133"), "Accounting for Derivative Instruments
and Hedging Activities". In June 2000, the FASB also issued Statement
of Financial Accounting Standards No. 138 ("SFAS 138"), "Accounting
for Certain Derivative Instruments and Certain Hedging Activities, an
amendment of the FASB Statement No. 133". Both standards establish
accounting and reporting standards for derivative instruments and for
hedging activities, and require that an entity recognize all
derivatives as either assets or liabilities in the balance sheets and
measure those instruments at fair value. TDK has not elected to apply
hedge accounting. Accordingly, changes in the fair value of
derivatives are recognized in earnings in the period of the changes.
(p) Net Income per Share
Basic net income per share has been computed by dividing net income
available to common stockholders by the weighted-average number of
common shares outstanding during each period. Diluted net income per
share reflects the potential dilution that could occur if securities
or other contracts to issue common stock were exercised or converted
into common stock or resulted in the issuance of common stock of TDK.
Stock options to purchase 328,400, 404,700 and 170,400 shares for the
six months ended September 30, 2003 and 2004 and for the year ended
March 31, 2004, respectively, were excluded from the calculation of
dilutes earnings per share as the effect would have been antidilutive.
(q) Revenue Recognition
TDK generates revenue principally through the sale of electronic
materials & components and recording media & systems under separate
contractual arrangements for each. TDK recognizes revenue when
persuasive evidence of an arrangement exists, delivery has occurred
and title and risk of loss have been transferred to the customer, the
sales price is fixed or determinable, and collectibility is probable.
Revenue from sales of electronic materials & components including
electronic materials, electronic devices and recording devices is
recognized when the products are received by customers based on the
free-on board destination sales term. With regards to sales of
electronic materials & components, TDK's policy is not to accept
product returns unless the products are defective. The conditions of
acceptance are governed by the terms of the contract or customer
arrangement and those not meeting the predetermined specification are
not recorded as revenue.
Revenue from sales of recording media & systems products such as
videotapes and DVDs sold is also recognized when the products are
received by customers based on the free-on board destination sales
term. With regards to sales of recording media & systems products,
TDK provides sales incentive programs to resellers and retailers. The
sales incentive programs include product discount, volume-based
rebates and consumer promotion to support retailers' advertisement
expenses. TDK records estimated reductions in sales at the time of
sales for sales incentive program. Estimated reduction in sales are
based upon historical trends and other known factors at the time of
sales. TDK allows limited right of returns in certain cases and
reduces revenue for estimated future returns based upon historical
experience at the time the related revenue is recorded. No product
warranties are offered on TDK's products.
In November 2002, the Emerging Issues Task Force reached a consensus
on Issue 00-21 ("EITF 00-21"), "Accounting for Revenue Arrangements
with Multiple Deliverables". EITF 00-21 provides guidance on when and
how to account for arrangements that involve the delivery or
performance of multiple products, services and/or rights to use
assets. TDK adopted EITF 00-21 on July 1, 2003. The adoption of EITF
00-21 did not have a material effect on TDK's consolidated financial
position or results of operations.
(r) Retirement and Severance Benefits
TDK's funding consists of the Employees' Pension Fund ("EPF") in
accordance with welfare pension regulations, the fund in accordance
with income tax regulations and the voluntary pension fund.
The domestic EPF plan is composed of (1) a corporate defined benefit
portion established by TDK and (2) a substitutional portion based on
benefits prescribed by the government (similar to social security
benefits in the United States). TDK has been exempted from
contributing to the Japanese Pension Insurance ("JPI") program that
would otherwise have been required if it had not elected to fund the
government substitutional portion of the benefit through an EPF
arrangement. The plan assets of the EPF are invested and managed as a
single portfolio for the entire EPF and are not separately attributed
to the substitutional and corporate portions. In June 2001, the
Japanese pension law was amended to permit an employer to elect to
transfer the entire substitutional portion benefit obligation from the
EPF to the government together with a specified amount of plan assets
pursuant to a government formula. After such transfer, the employer
would be required to make periodic contributions to JPI, and the
Japanese government would be responsible for all benefit payments.
The corporate portion of the EPF would continue to exist exclusively
as a corporate defined benefit pension plan.
In this regard, TDK has elected to transfer the substitutional portion
of its EPF to the government. TDK will account for the transfer in
accordance with the Emerging Issues Task Force issue 03-2
("EITF 03-2"), "Accounting for the Transfer to the Japanese Government
of the Substitutional Portion of Employee Pension Fund Liabilities".
EITF 03-2 addresses accounting for a transfer to the Japanese
government of a substitutional portion of an EPF plan, which is a
defined benefit pension plan established under the Welfare Pension
Insurance Law. EITF 03-2 requires employers to account for the
separation process of the substitutional portion from the entire EPF
plan (which includes a corporation portion) upon completion of the
transfer to the government of the substitutional portion of the
benefit obligation and related plan assets. The separation process is
considered the culmination of a series of steps in a single settlement
transaction. Under this approach, the difference between the fair
value of the obligation and the assets required to be transferred to
the government should be accounted for and separately disclosed as a
subsidy.
On September 25, 2003, TDK was approved by the Minister of Health,
Labour and Welfare for an exemption from the obligation to pay
benefits for future employee service related to the substitutional
portion of an EPF plan and for an exemption from the obligation to pay
benefits for past employee service related to the substitutional
portion of the EPF plan on October 1, 2004, and will transfer the
benefit obligation and related plan assets to government, which is
presently expected to be completed by February 2005. Accordingly,
there is no effect on TDK's consolidated financial statement for the
six months ended September 30, 2004. The aggregate effect of this
separation will be determined based on TDK's total pension benefits
obligation as of the date the transfer is completed and the amount of
plan assets required to be transferred.
(s) Reclassifications
Certain reclassifications have been made to the prior periods'
consolidated financial statements to conform to the presentation used
for the six months ended September 30, 2004.
2. Marketable Securities and Investments in Securities
Marketable securities and investments in securities at September 30, 2003
and 2004, and at March 31, 2004, are as follows:
Yen (Millions)
September 30, September 30, March 31,
2003 2004 2004
Short-term marketable Y - 1,366 402
securities
Long-term marketable 2,526 3,475 4,535
securities
Nonmarketable securities 1,411 553 419
Investments in affiliates 12,854 13,868 13,427
Y16,791 19,262 18,783
Marketable securities and investments in securities include
available-for-sale securities. Information with respect to such securities
at September 30, 2003 and 2004, and at March 31, 2004, are as follows:
September 30, 2003
Gross Gross
Unrealized Unrealized
Holding Holding
Yen (Millions): Cost Gains Losses Fair Value
Equity securities Y1,262 180 13 1,429
Debt securities 1,099 - 2 1,097
Y2,361 180 15 2,526
September 30, 2004
Gross Gross
Unrealized Unrealized
Holding Holding
Yen (Millions): Cost Gains Losses Fair Value
Equity securities Y3,384 491 137 3,738
Debt securities 1,103 - - 1,103
Y4,487 491 137 4,841
March 31, 2004
Gross Gross
Unrealized Unrealized
Holding Holding
Yen (Millions): Cost Gains Losses Fair Value
Equity securities Y2,782 1,054 - 3,836
Debt securities 1,101 - - 1,101
Y3,883 1,054 - 4,937
3. Legal Reserve and Dividends
Cash dividends and appropriations to the legal reserve charged to retained
earnings during the periods represent dividends paid out during the periods
and related appropriations to the legal reserve. The accompanying
consolidated financial statements do not include any provision for the
dividend proposed by the Board of Directors of Y30 per share aggregating
Y3,966 million in respect of the six months ended September 30, 2004, or
for the related appropriation to the legal reserve.
Cash dividends per common share are computed based on dividends paid for
each period presented.
4. Other Comprehensive Income (Loss)
Changes in accumulated other comprehensive income (loss) for the six months
ended September 30, 2003 and 2004, and the year ended March 31, 2004, are
as follows:
Yen (Millions)
September 30, September 30, March 31,
2003 2004 2004
Foreign currency translation
adjustments:
Balance at beginning of period Y(26,520) Y(52,807) Y(26,520)
Adjustments for period (14,709) 11,799 (26,287)
Balance at end of period (41,229) (41,008) (52,807)
Net unrealized gains (losses) on securities:
Balance at beginning of period 110 648 110
Adjustments for period 33 (435) 538
Balance at end of period 143 213 648
Minimum pension liability
adjustments:
Balance at beginning of period (52,414) (38,228) (52,414)
Adjustments for period 8,296 8,184 14,186
Balance at end of period (44,118) (30,044) (38,228)
Total accumulated other
comprehensive income (loss):
Balance at beginning of period (78,824) (90,387) (78,824)
Adjustments for period (6,380) 19,548 (11,563)
Balance at end of period Y(85,204) Y(70,839) Y(90,387)
5. Leases
TDK occupies offices and other facilities under various cancellable lease
agreements expiring in fiscal 2005 through 2007. Lease deposits made under
such agreements, aggregating Y1,773 million, Y2,084 million and Y2,079
million at September 30, 2003 and 2004 and at March 31, 2004, respectively,
are included in other assets on the accompanying consolidated balance
sheets.
The following is a schedule of future minimum rental payments required
under operating leases that have initial or remaining noncancellable lease
terms in excess of one year as of September 30, 2003 and 2004, and March
31, 2004:
Yen (Millions)
September 30, September 30, March 31,
2003 2004 2004
Less 1 year Y3,976 Y2,776 Y3,347
Over 1 year 8,331 6,281 7,562
Total Y12,307 Y9,057 Y10,909
6. Contingent Liabilities
Contingent liabilities for guarantees of loans of TDK's employees and
affiliates at September 30, 2003 and 2004, and March 31, 2004, are as
follows:
Yen (Millions)
September 30, September 30, March 31,
2003 2004 2004
Contingent liabilities for Y6,926 Y6,402 Y6,605
guarantees of loans of TDK's
employees and affiliates
Several claims and legal actions against TDK and certain subsidiaries are
pending. Provision has been made for the estimated liabilities for certain
items. In the opinion of management, based upon discussion with counsel,
any additional liability will not materially affect the consolidated
financial position and results of operations of TDK.
7. Risk Management Activities and Derivative Financial Instruments
TDK and its subsidiaries operate internationally which exposes them to the
risk of changes in foreign exchange rates and interest rates, and therefore
utilize derivative financial instruments to reduce these risks. TDK and
its subsidiaries do not hold or issue financial instruments for trading
purposes. TDK is exposed to credit related losses in the event of
nonperformance by the counterparties to those financial instruments, but
does not expect any counterparties to fail to meet their obligations given
their high credit ratings. The credit exposure of currency swaps, interest
rate and currency swaps, forward foreign exchange contracts and currency
option contracts is represented by the fair values of contracts.
TDK and one of its subsidiaries have currency swaps with certain financial
institutions to limit their exposure to fluctuations in foreign exchange
rates involved mainly in loans made by TDK to its subsidiaries. Gains or
losses on interest and currency swaps and currency swaps are included in
interest expense and foreign exchange gain (loss) in the consolidated
statements of income, respectively. The swap contracts are measured at
fair value and are included in prepaid expenses and other current assets or
other current liabilities, as the case may be, in the consolidated balance
sheets.
Forward exchange contracts and currency option contracts have been entered
into to hedge adverse effects of foreign currency exchange rate
fluctuations mainly on foreign-currency-denominated trade receivables and
foreign-currency-denominated forecasted transactions.
TDK and certain subsidiaries had forward exchange contracts to sell and buy
foreign currencies at September 30, 2003 and 2004, and at March 31, 2004.
Gains or losses on forward exchange contracts and currency option contracts
are included in foreign exchange gain (loss) in the consolidated statements
of income. These contracts are measured at fair value and are included in
prepaid expenses and other current assets or other current liabilities, as
the case may be, in the consolidated balance sheets.
The contract amounts, carrying amounts and estimated fair values of TDK's
financial instruments at September 30, 2003 and 2004, and at March 31,
2004, are summarized as follows:
Yen (Millions)
September 30, 2003 Contract Carrying Estimated
amount amount fair value
Forward foreign exchange contracts Y3,124 Y(21) Y(21)
Currency option contracts - - -
Currency swap agreements for loans 10,418 (9) (9)
to its subsidiaries
Yen (Millions)
September 30, 2004 Contract Carrying Estimated
amount amount fair value
Forward foreign exchange contracts Y962 Y(7) Y(7)
Currency option contracts 20,266 (133) (133)
Currency swap agreements for loans 10,533 (271) (271)
to its subsidiaries
Yen (Millions)
March 31, 2004 Contract Carrying Estimated
amount amount fair value
Forward foreign exchange contracts Y18,638 Y396 Y396
Currency option contracts 16,340 91 91
Currency swap agreements for loans 12,605 252 252
to its subsidiaries
Limitations
Fair value estimates are made at a specific point in time, based on
relevant market information and information about the financial instrument.
These estimates are subjective in nature and involve uncertainties and
matters of significant judgment and therefore cannot be determined with
precision. Changes in assumptions could significantly affect the
estimates.
8. Goodwill and Other Intangible Assets
TDK adopted Statement of Financial Accounting Standards No. 142
("SFAS 142"), "Goodwill and Other Intangible Assets", effective April 1,
2001. Under SFAS 142, goodwill is no longer amortized but is reviewed for
impairment annually, or more frequently if certain indicators arise. In
addition, the statement requires reassessment of the useful lives of
previously recognized intangible assets. With the adoption of SFAS 142,
TDK ceased amortization of goodwill as of April 1, 2001. As of March 31,
2004, TDK completed a goodwill impairment test. No impairment was
indicated at that time.
The components of acquired intangible assets excluding goodwill at
September 30, 2003, September 30, 2004 and March 31, 2004, are as follows:
Yen (Millions)
September 30, 2003 September 30, 2004 March 31, 2004
Gross Accumulated Gross Accumulated Gross Accumulated
Carrying Amortization Carrying Amortization Carrying Amortization
Amount Amount Amount
Amortized intangible assets:
Patent Y10,628 1,038 Y10,339 1,738 Y10,349 1,259
Software 7,373 4,159 8,046 4,931 7,359 4,207
Other 2,849 694 2,656 824 2,739 870
Total 20,850 5,891 21,041 7,493 20,447 6,336
Unamortized intangible assets Y1,018 Y934 Y916
Aggregate amortization expenses for the six months ended September 30, 2003
and 2004 and for the year ended March 31, 2004 are Y1,300 million, Y1,210
million and Y2,626 million, respectively. Estimated amortization expense
for the next five years is: Y1,274 million in the 2nd half of 2005, Y2,308
million in 2006, Y1,787 million in 2007, Y1,432 million in 2008, and Y1,224
million in 2009. The changes in the carrying amount of goodwill by segment
for the six months ended September 30, 2003 and 2004, and the year ended
March 31, 2004 are as follows:
Yen (Millions)
Electronic
materials and Recording media
components and systems Total
Balance as of March 31, 2003 Y13,634 Y497 Y14,131
Additions - - -
Deductions (1,902) - (1,902)
Translation adjustment (913) - (913)
Balance as of September 30, Y10,819 Y497 Y11,316
2003
Yen (Millions)
Electronic
materials and Recording media
components and systems Total
Balance as of March 31, 2004 Y10,029 Y - Y10,029
Additions 40 - 40
Deductions (378) - (378)
Translation adjustment 766 - 766
Balance as of September 30, Y10,457 Y - Y10,457
2004
Yen (Millions)
Electronic
materials and Recording media
components and systems Total
Balance as of March 31, 2003 Y13,634 Y497 Y14,131
Additions 76 - 76
Deductions (2,128) (497) (2,625)
Translation adjustment (1,553) - (1,553)
Balance as of March 31, 2004 Y10,029 Y - Y10,029
9. Net Income per Share
A reconciliation of the numerators and denominators of the basic and diluted net
income per share computations is as follows:
Yen(Millions)
Six months Six months Year
ended ended ended
September 30, September 30, March 31,
2003 2004 2004
Net income available to common Y19,257 19,869 42,101
stockholders
Number of shares (Thousands)
Six months Six months Year
ended ended ended
September 30, September 30, March 31,
2003 2004 2004
Weighted average common shares 132,559 132,366 132,475
outstanding
Effect of dilutive stock options 6 95 48
Diluted common shares outstanding 132,565 132,461 132,523
Yen
Six months Six months Year
ended ended ended
September 30, September 30, March 31,
2003 2004 2004
Net income per share:
Basic Y145.27 150.11 317.80
Diluted 145.27 150.00 317.69
10. Supplementary Information
Yen (Millions)
Six months Six months Year
ended ended ended
September 30, September 30, March 31,
2003 2004 2004
(a) Statement of Income
Research and development Y17,179 Y18,192 Y34,495
Rent 4,579 3,979 8,230
Maintenance and repairs 5,674 5,661 12,184
Advertising costs 2,786 2,605 6,269
(b) Statement of Cash Flows
Cash paid during the periods for:
Interest Y 196 Y164 Y350
Income taxes Y1,822 Y5,400 Y4,299
Noncash activities
There were no material noncash investing and financing activities during
the periods presented.
11. Segment Information
(a) Industry segment information
Six months ended September 30, 2003
Yen (Millions)
Electronic Recording Eliminations
materials & media & and
components systems Sub total corporate Total
Net sales
Unaffiliated Y254,352 Y61,927 Y316,279 - Y316,279
customers
Intersegment - - - - -
Total 254,352 61,927 316,279 - 316,279
Operating expenses 228,520 63,739 292,259 - 292,259
Operating income Y25,832 Y(1,812) Y24,020 - Y24,020
(loss)
Six months ended September 30, 2004
Yen (Millions)
Electronic Recording Eliminations
materials & media & and
components systems Sub total corporate Total
Net sales
Unaffiliated Y264,364 Y56,406 Y318,770 - Y318,770
customers
Intersegment - - - - -
Total 264,364 56,406 318,770 - 318,770
Operating expenses 232,456 59,425 291,881 - 291,881
Operating income Y29,908 Y(3,019) Y26,889 - Y26,889
(loss)
Year ended March 31, 2004
Yen (Millions)
Electronic Recording Eliminations
materials & media & and
components systems Sub total corporate Total
Net sales
Unaffiliated Y522,862 Y136,000 Y658,862 - Y658,862
customers
Intersegment - - - - -
Total 522,862 136,000 658,862 - 658,862
Operating expenses 466,335 138,205 604,540 - 604,540
Operating income Y56,527 Y(2,205) Y54,322 - Y54,322
(loss)
(Notes) 1. Segment classification
Segments are classified by the similarity of the products, the
product's character, the manufacturing method and the selling
market.
2. Principal products in each segment
Electronic materials and components:
Ferrite cores, Ceramic capacitors, High-frequency
components, Inductors, GMR heads and Semiconductors
Recording media & systems:
Audio tapes, Video tapes, CD-Rs, MDs and DVDs
(b) Geographic segment information
Six months ended September 30, 2003
Yen (Millions)
Elimina-
Asia and tions and
Japan Americas Europe others Sub total corporate Total
Net sales
Unaffiliated Y77,524 Y36,128 Y36,268 Y166,359 Y316,279 - Y316,279
customers
Intersegment 81,192 13,585 300 19,332 114,409 (114,409) -
Total 158,716 49,713 36,568 185,691 430,688 (114,409) 316,279
Operating 155,208 50,318 36,627 164,131 406,284 (114,025) 292,259
expenses
Operating Y3,508 Y(605) Y(59) Y21,560 Y24,404 Y(384) Y24,020
income (loss)
Six months ended September 30, 2004
Yen (Millions)
Elimina-
Asia and tions and
Japan Americas Europe others Sub total corporate Total
Net sales
Unaffiliated Y79,169 Y31,985 Y35,688 Y171,928 Y318,770 - Y318,770
customers
Intersegment 93,927 13,671 220 16,137 123,955 (123,955) -
Total 173,096 45,656 35,908 188,065 442,725 (123,955) 318,770
Operating 162,133 44,206 37,291 170,731 414,361 (122,480) 291,881
expenses
Operating Y10,963 Y1,450 Y(1,383) Y17,334 Y28,364 Y(1,475) Y26,889
income (loss)
Year ended March 31, 2004
Yen (Millions)
Elimina-
Asia and tions and
Japan Americas Europe others Sub total corporate Total
Net sales
Unaffiliated Y161,607 Y74,482 Y80,233 Y342,540 Y658,862 - Y658,862
customers
Intersegment 168,175 29,918 408 38,241 236,742 (236,742) -
Total 329,782 104,400 80,641 380,781 895,604 (236,742) 658,862
Operating 321,244 101,603 80,756 337,869 841,472 (236,932) 604,540
expenses
Operating Y8,538 Y2,797 Y(115) Y42,912 Y54,132 Y190 Y54,322
income (loss)
(Notes) 1. Net sales in each geographic area are based on the location of
TDK entities where the sales are generated.
2. Principal nations in each geographic segment excluding Japan:
Americas: United States of America
Europe: Germany
Asia and others: Hong Kong, Taiwan and China
(c) Overseas sales
Six months ended September 30, 2003
Yen (Millions)
Americas Europe Asia and others Total
Sales by region Y43,328 Y36,987 Y154,428 Y234,743
Net sales 316,279
Ratio of overseas 13.7 11.7 48.8 74.2
sales to net sales
(%)
Six months ended September 30, 2004
Yen (Millions)
Americas Europe Asia and others Total
Sales by region Y40,288 Y36,204 Y154,646 Y231,138
Net sales 318,770
Ratio of overseas 12.6 11.4 48.5 72.5
sales to net sales
(%)
Year ended March 31, 2004
Yen (Millions)
Americas Europe Asia and others Total
Sales by region Y89,657 Y81,950 Y318,599 Y490,206
Net sales 658,862
Ratio of overseas 13.6 12.4 48.4 74.4
sales to net sales
(%)
(Notes) 1. Overseas sales are based on the location of the customers.
2. Principal nations in each region excluding Japan:
Americas: United States of America
Europe: Germany, Italy and France
Asia and others: Hong Kong, Singapore and China
3. Overseas sales are net sales of TDK and its consolidated
subsidiaries in the countries and regions other than Japan.
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