TOKYO ELECTRON ANNUAL REPORT 2019

PAGE

13

CONTENTS

To Our Stakeholders

Business Overview
and Financial Highlights

Review of Operations
and Business Outlook

Interview with the CEO

Financial Section
Investor Information

Corporate GovernanceConsolidated Balance Sheets
Consolidated Statements of Income
Consolidated Statements of Comprehensive Income
Consolidated Eleven-Year Summary
Financial Review
Consolidated Statements of Changes in Net Assets
Consolidated Subsidiaries
Consolidated Statements of Cash Flows
Independent Auditor’s Report
Notes to Consolidated Financial Statements

Investor Information

Financial Review
Sales and Income
Operating Environment
The overall world economy in fiscal 2019 held firm, with
the United States economy remaining solid, despite
signs of stagnation in the economies of China, Asia andEurope.
In the electronics industry, investment in mobile
devices and data centers remained brisk. Demand forsemiconductors, especially memory, increased. As aresult, the wafer fab equipment market grew a further
16% year on year from the previous year’s recordbreaking US$50 billion, reaching approximately US$59
billion. At the same time, the display industry saw fullscale investment in large generation 10.5 panels,
despite adjustments in investment in small- and­medium-sized OLED panels due to slower growth inshipments of mobile devices. Accordingly, the market
for flat panel display (FPD) production equipment
maintained the brisk level from the previous year,­staying at around US$20 billion.
Sales
Net sales in fiscal 2019 rose 13.0% year on year to¥1,278.2 billion. This reflected the favorable market
environment for semiconductors and FPD as well as
the increase in the Company’s share of each market. By
segment, net sales in the semiconductor production
equipment (SPE) segment grew 10.6% year on year to¥1,166.7 billion. Net sales in the FPD production equipment segment grew 48.2% year on year to ¥111.2 billion.
For details on performance by segment, please refer to
Review of Operations and Business Outlook on page 7.
Furthermore, net sales in the field solutions business(encompassing sales of parts and used equipment,
modifications and maintenance services) rose 14.8%
year on year to ¥288.2 billion, accounting for 22.6% ofconsolidated net sales.

Gross Profit, SG&A Expenses and Operating Income
Gross profit in fiscal 2019 was up 10.8% year on year to¥526.1 billion, reflecting the growth in net sales. The
gross profit margin fell 0.8 percentage points to 41.2%,
due to an increase in the production cost ratio following an expansion of the production and service systems.
SG&A expenses rose 11.2% year on year to ¥215.6 billion, but the ratio of SG&A expenses to consolidated
net sales dropped 0.2 percentage points from the previous fiscal year to 16.9% in the fiscal year under review.
The Group actively advanced R&D with the aim of outperforming the SPE market, where growth is expected.
Consequently, operating income increased 10.5% year
on year to ¥310.5 billion, and the operating margindecreased 0.6 percentage points to 24.3%. This wasdue to increases in the R&D expense ratio and the production cost ratio.
R&D Expenses
R&D expenses were up 17.4% year on year to ¥113.9 billion. The increase was focused consistently with theprevious year: the reinforcement of R&D in the fieldsof etch, deposition and cleaning systems, in which theCompany is working to expand its market share underthe medium-term management plan. Tokyo Electron
also focused on R&D aimed at enhancing the competitiveness of future products. This included not only
enhancing the performance of individual products, butdeveloping innovative technologies to optimize entire
processes, as well as making products more intelligent.
Tokyo Electron regards advanced technologicalprowess as the source of its growth. Accordingly, theCompany actively invests in growth to produce nextgeneration products, mainly focusing on fields in whichmarket growth is forecast. In the fiscal year underreview, Tokyo Electron increased its market share in
key fields related to cutting-edge DRAM and 3D NAND

flash memory production, making progress toward thegoals of the medium-term management plan.
In FPD production equipment, Tokyo Electron developed a new version of the PICP™ plasma etch system
for generation 10.5 panels, which are expected to see
rapid market growth. This system excels in uniformity andwas originally released for small- and medium-sizedpanels. In addition, the Company released a high-­
resolution inkjet printing system for small- and mediumsized panels amid growing demand for higher
definition OLED displays.

Net Sales and Gross Profit Margin

Millions of yen

Sales and Income

2017

2018

2019

Net sales¥613,125¥663,949¥799,719¥1,130,728¥1,278,240

Gross profit

242,774

267,210322,291

475,032

526,183

39.6%

40.2%

40.3%

42.0%

41.2%

Selling, general and administrative expenses

154,661

150,421

166,594

193,860

215,612

Operating income

88,113

116,789

155,697

281,172

310,571

Gross profit margin

Operating margin

14.4%

17.6%

19.5%

24.9%

24.3%

Income before income taxes

86,828106,467

149,116

275,242

321,508

Net income attributable to owners of parent

71,88877,892

115,208

204,371248,228

1 This lower limit may be revised in the event that the Company does not generate net income for two consecutive fiscal years.

Financial Position and Cash Flows
Assets, Liabilities and Net Assets
M Assets
Current assets increased ¥36.2 billion from the end of
the previous fiscal year to ¥982.8 billion, reflecting a¥25.2 billion decrease in cash and cash equivalents and¥44.0 billion increase in short-term investments. The
turnover period for trade notes and accounts receivablein fiscal 2019 was 42 days, compared with 52 days in fiscal 2018, and the inventory turnover period in fiscal
2019 was 101 days, compared with 111 days in fiscal 2018.

Comprehensive Income
In fiscal 2019, Tokyo Electron recognized comprehensive
income of ¥242.6 billion, up from ¥206.1 billion in fiscal
2018. This was mainly due to the ¥248.2 billion in net
income, ¥4.1 billion in unrealized loss on investment

1,600

2016

Dividend Policy and Dividends
It is the policy of Tokyo Electron to pay dividends on
the basis of business performance. The Company aims
for a payout ratio of 50% of net income attributable toowners of the parent. Furthermore, with an eye toensuring stable dividends, a lower limit of ¥150 per
share has been set on annual dividends.1 Reflecting theCompany’s strong sales and profit growth, Tokyo
Electron paid annual dividends for fiscal 2019 of ¥758
per share (for a payout ratio of 50.1%), its highest ever.
Going forward, the Company will seek to build worldclass profitability and reciprocate the support of shareholders by delivering profit growth.

Other Income (Expenses) and Net Income
Attributable to Owners of Parent
During fiscal 2019, net other expenses came to ¥0.1 billion (digits below ¥0.1 billion are truncated), reflecting¥1.0 billion in extraordinary loss due mainly to a loss on
sales and disposal of property, plant and equipment, as
well as net unrealized losses on investment securities,
offsetting ¥0.8 billion in extraordinary income due toa gain on sales of investment securities and property,
plant and equipment. Income before income taxes
came to ¥321.5 billion, up 16.8% year on year. As
a result, net income attributable to owners of the parent
totaled ¥248.2 billion in fiscal 2019, up 21.5% from fiscal
2018. Net income per share (basic) rose 21.5% year on
year to ¥1,513.58.

(Billions of yen)

2015

securities related to strategically held shares, ¥0.2 billion
in net deferred loss on hedging instruments, and ¥1.1 billion in loss on foreign currency translation adjustments.

42.0 41.2

39.6 40.2 40.3

1,278.2

1,200

1,130.7

613.1

320
24.9

33

19.5 281.1

240

160

14.4

663.9

16

(%)

(Billions of yen)

310.5

28

280

24.3

21

210

14

140

17

18

(%)

29.0

19

11

80

0

0

155.6

 Operating Income Operating Margin

16

32

24

204.3
19.1

16
11.8

88.1

15

30.1
248.2

116.8

0
 Net Sales
 Gross Profit Margin(Billions of yen)

22

400

15

(%)

44

Net Income Attributableto Owners of Parent and ROE

17.6

799.7

800

Operating Income andOperating Margin

17

18

19

7

70

0

0

13.0

115.2

71.9 77.9

8

0

15

16

17

18

19

 Net Income Attributable to Owners of Parent
 ROE
ROE = Net income attributable to owners of parent /Average total equity x 100

TOKYO ELECTRON ANNUAL REPORT 2019

PAGE

14

CONTENTS

Business Overview
and Financial Highlights

To Our Stakeholders

Review of Operations
and Business Outlook

Interview with the CEO

Financial Section
Investor Information

Corporate GovernanceConsolidated Eleven-Year Summary
Consolidated Balance Sheets
Consolidated Statements of Income
Consolidated Statements of Comprehensive Income
Financial Review
Consolidated Statements of Changes in Net Assets
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
Independent Auditor’s Report
Consolidated Subsidiaries

Investor Information

Financial Review
Net property, plant and equipment increased ¥24.1
billion year on year to ¥150.0 billion. This was largely
due to finishing construction of a new developmentbuilding at the Miyagi Plant to bolster the developmentof next-generation technologies, beginning construction of new production buildings at the Yamanashi and
Tohoku plants, and acquiring new evaluation tools.
Investments and other assets decreased ¥5.5 billion
year on year to ¥124.6 billion. This reflected a ¥6.8 billion
year-on-year decrease in intangible assets to ¥9.0 billion,
due primarily to depreciation and amortization, as well as
the removal of TEL NEXX, Inc. from the scope of consolidation. As a result, total assets as of March 31, 2019 stoodat ¥1,257.6 billion, up ¥54.8 billion year on year.

Non-current liabilities increased ¥1.7 billion year on
year to ¥64.6 billion.
Net assets came to ¥888.1 billion at the end of fiscal
2019, up ¥116.6 billion from the end of fiscal 2018. Thiswas mainly due to a ¥123.4 billion increase in retained
earnings, reflecting the recording of ¥248.2 billion in
net income attributable to owners of the parent and¥124.7 billion paid in cash dividends (¥56.9 billion for
the fiscal 2018 year-end dividend and ¥67.8 billion for
the fiscal 2019 interim dividend).
As a result, the equity ratio rose 6.2 percentage
points year on year to 70.0% at the end of March 2019.
ROE climbed to 30.1% from 29.0% in fiscal 2018.
In addition, Tokyo Electron adopted Partial
Amendments to Accounting Standard for Tax EffectAccounting (ASBJ Statement No. 28, February 16, 2018)from April 1, 2018. Prior year comparisons retroactively
apply these standards to the abovementioned figures
for assets, liabilities and net assets as of March 31, 2018.

M Liabilities and Net Assets
Current liabilities decreased ¥63.5 billion from the endof fiscal 2018 to ¥304.8 billion at the end of fiscal 2019.
This was mainly due to a ¥33.1 billion decrease in tradenotes and accounts payable and a ¥22.9 billion
decrease in customer advances.

Millions of yen

Financial Position

2015

2016

2017

2018

2019

Total current assets¥670,883¥617,416¥775,938¥ 946,597¥ 982,897

Net property, plant and equipment

106,896

96,317

100,441

125,952

150,069

Total investments and other assets

98,375

79,63581,067130,246

124,661

Total assets

876,154793,368

957,447

1,202,796

1,257,627

Capital Expenditures1 and Depreciation andAmortization2
Capital expenditures totaled ¥49.7 billion in fiscal 2019,
a 9.1% year-on-year increase. Major expenditures
included the acquisition of evaluation tools in order tostrengthen key areas in the SPE business as well as thecompletion of construction of a new developmentbuilding at the Miyagi Plant and start of constructionof new production buildings at the Tohoku andYamanashi plants to meet rising demand for etch anddeposition equipment.
Depreciation and amortization increased 18.0% to¥24.3 billion.

one year not included in cash and cash equivalents,
increased ¥18.7 billion year on year to ¥392.6 billion at
the end of March 2019. Cash flows during the fiscal
year under review were as follows.
Net cash provided by operating activities came to¥189.5 billion, up ¥2.9 billion from fiscal 2018. Major
contributors were ¥321.5 billion in income before
income taxes, ¥24.3 billion in depreciation and amortization, and a ¥10.5 billion decrease in trade notes andaccounts receivable. Major outflows included ¥102.9
billion in income taxes paid, a ¥31.7 billion decrease intrade notes and accounts payable, a ¥22.0 billion
decrease in customer advances, and a ¥14.7 billion
increase in inventories.
Net cash used in investing activities was ¥84.0 billion, compared with ¥11.8 billion used in the previous
fiscal year. This was mainly due to ¥46.5 billion used as
payment for purchases of property, plant and equipment and a net outflow of ¥44.0 billion due to anincrease in short-term investments.
Net cash used in financing activities came to ¥129.7 billion, compared with ¥82.5 billion in fiscal 2018. This was
mainly attributable to ¥124.7 billion in dividends paid.

1 Capital expenditures represent only the gross increase in property, plant andequipment.
2 Depreciation and amortization does not include amortization of goodwill or
losses on impairment.

Cash FlowsThe balance of cash and cash equivalents at the end of
March 2019 stood at ¥232.6 billion, a decrease of ¥25.2
billion from the end of fiscal 2018. Cash on hand, which
consists of cash and cash equivalents as well as shortterm investments with original maturities of less thanMillions of yen

Cash Flows

2015

2016

2017

2018

2019

Cash flows from operating activities¥ 71,806¥ 69,398¥136,948¥186,582¥189,572

Total current liabilities

172,812

166,061

247,770

368,452

304,882

Cash flows from investing activities

155,738(150,014)(28,893)(11,833)(84,033)

Total liabilities

234,991

229,129

311,447

431,287

369,510

Cash flows from financing activities(18,214)(138,601)(39,380)(82,549)(129,761)

Total net assets

641,163564,239645,999

771,509888,117

Cash and cash equivalents at end of year

317,632

95,638164,366

257,877

232,634

Note: From fiscal 2019, the Company applied the Accounting Standards Board of Japan’s “Partial Amendments to Accounting Standard for Tax Effect Accounting”(ASBJ Statement No. 28, revised on February 16, 2018). Total current assets, total investments and other assets, total assets and total liabilities for fiscal 2018
have been restated in accordance with the revised accounting standard.

Selling, General and Administrative
Expenses and Ratio to Net Sales

R&D Expenses(Billions of yen)(%)(Billions of yen)

240

40

120

Cash Dividends per Share
(Yen)

113.9

215.6
193.8
180
154.7 150.4
120

90
71.3

20

624

600

83.8

(Days)(Billions of yen)

160

50

105 107

108

10

200

30

20
66

237

0

0

16

17

18

19

 Selling, General and Administrative Expenses
 Ratio to Net Sales

0

64

40

61

16

17

18

19

16

17

18

19

20.9

15
 Receivable Turnover
 Inventory Turnover

16

17

18

19

315.3

200

20.6
19.320.6
17.8
100

10

0

0

15

317.7

392.6

236.7

13.2 13.3

52
42

0

15

373.8

30
24.3

143

15

101

352
17.1 16.9

400

300

111

80

20.8

60

(Billions of yen)

49.7

40

120

400

Cash on Hand

45.6

76.3

60

Capital Expenditures andDepreciation and Amortization

758

97.1
30

166.5

25.2
22.6

800

Receivable Turnover andInventory Turnover

0

15

16

17

 Capital Expenditures Depreciation and Amortization

18

19

15

16

17

18

19

Cash on Hand = Cash and cash equivalents +Short-term investments with original maturities of less than
one yearTOKYO ELECTRON ANNUAL REPORT 2019

PAGE

15

CONTENTS

To Our Stakeholders

Business Overview
and Financial Highlights

Interview with the CEO

Review of Operations
and Business Outlook

Corporate GovernanceConsolidated Eleven-Year Summary
Consolidated Balance Sheets
Consolidated Statements of Income
Consolidated Statements of Comprehensive Income
Financial Review
Consolidated Statements of Changes in Net Assets
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
Independent Auditor’s Report
Consolidated Subsidiaries

Financial Section
Investor Information

Investor Information

Financial Review
Business-Related and Other Risks
The following risks may have a material impact onTokyo Electron’s business performance, stock price, or
financial position.
(1) Impact from Changes in the Semiconductor
MarketTokyo Electron has achieved a high profit margin byconcentrating resources in high-tech fields, including
semiconductor production equipment, where technological innovation is rapid but Tokyo Electron caneffectively use its strengths. Although technologicalchange is responsible for the semiconductor market’s
rapid growth, Tokyo Electron has actively undertaken
structural reforms to be able to generate profits under
any circumstances, including when the market contracts temporarily due to imbalance of supply anddemand. However, order cancellations, excess capacityand personnel and increased inventories resulting froman unexpectedly large market contraction, losses frombad debts resulting from the worsening of a customer’s financial position, and supply shortages resulting
from the worsening of a supplier’s management situation, could adversely affect Tokyo Electron’s businessperformance considerably.
(2) Impact from Concentration of Transactions on
Particular Customers
Tokyo Electron has been successful at increasing transactions with the leading semiconductor manufacturers
worldwide, including those in Japan, through the provision of products featuring outstanding, cutting-edge
technology and of services offering a high level of customer satisfaction. However, Tokyo Electron’s sales mayfrom time to time be temporarily concentrated on particular customers due to the timing of large capital
investments of major semiconductor manufacturers.
The resulting escalation in sales competition could
adversely affect Tokyo Electron’s business performance.

(3) Impact from Research and Development
Through ongoing and proactive R&D investment andactivities in cutting-edge technologies—miniaturization, vacuum, plasma, thermal processing, coating/developing, cleaning, wafer-transfer and clean technologies—Tokyo Electron has created advanced technologies. At the same time, by quickly bringing to market
new products incorporating these technologies, Tokyo
Electron has successfully captured a high market sharein each of the product fields it has entered and generated a high profit margin. However, delays in the
launch of new products and other factors could
adversely affect Tokyo Electron’s business performance.
(4) Safety-Related Impact
Tokyo Electron’s basic philosophy is to always bear inmind safety and health in the execution of businessactivities, including development, manufacturing, sales,
services and management. In accordance with this philosophy, Tokyo Electron works actively and continuously to improve the safety of its products and toeliminate any harmful impact on health. However,harm to customers, order cancellations or other circumstances resulting from safety or other problems
related to Tokyo Electron’s products could adversely
affect Tokyo Electron’s business performance.
(5) Impact from Quality Issues
Tokyo Electron actively develops outstanding, cuttingedge technologies for incorporation in new productsthat are brought quickly to market. At the same time,
Tokyo Electron works to establish a quality assurance
system, efforts that include obtaining ISO 9001 certification, as well as to establish a world-class service system. These actions have resulted in a large number ofcustomers adopting Tokyo Electron’s products.
However, because Tokyo Electron’s products are basedon cutting-edge technologies, and due to other factors,
many of the technologies developed are in unfamiliar
fields. The occurrence of unforeseen defects or otherissues could adversely affect Tokyo Electron’s businessperformance.

(6) Impact of Intellectual Property Rights
In order to distinguish its products and make themmore competitive, Tokyo Electron has promoted its
R&D strategy for the early development of cuttingedge technologies together with its business and intellectual property strategies. This approach has enabledTokyo Electron to obtain sole possession of many proprietary technologies that have been instrumental to
the Company’s ability to capture a high market shareand generate high profit margins in each of its productfields. Tokyo Electron’s products incorporate and optimize many of these proprietary cutting-edge technologies. There may be cases in which, by avoiding the useof third-party technologies and intellectual property
rights, Tokyo Electron’s business performance could be
adversely affected.
(7) Impact of Fluctuating Foreign Exchange Rates
Success in the development of overseas operations has
increased the share of sales generated overseas. As arule, Tokyo Electron conducts export transactions on a
yen basis to avert exposure to foreign currency risks.
However, some exports are denominated in foreign
currencies. In these cases, Tokyo Electron hedges foreign currency risk by using a forward foreign exchange
contract when an order is received or by other means.
However, foreign exchange rate risks can arise fromfluctuations in prices due to sudden foreign exchange
movements, which could have an indirect adverse
effect on Tokyo Electron’s business performance.
(8) Influence of Corporate Acquisitions
As part of its business strategy, Tokyo Electron conducts corporate acquisitions in order to expand into
new business areas, secure new technologies and business platforms, and strengthen the competitiveness ofexisting businesses. The Company conducts due diligence and carefully deliberates each specific acquisition. However, in the event that the results following an
acquisition do not meet expectations, Tokyo Electron’sbusiness performance could be adversely affected.

(9) Impact from Major Lawsuits or Legal Actions
Tokyo Electron is not currently involved in any lawsuits
or other legal actions that are likely to significantly
influence its business results. However, in the eventthat the Company’s business or other activities
become the subject of a major lawsuit or other legal
action, depending on the outcome of such action,
Tokyo Electron’s business results could be adversely
affected.
(10) Impact of Laws and Regulations
Tokyo Electron operates globally and is therefore subject to and strives to ensure compliance with the laws
and regulations of the countries and regions where it
does business, including import and export regulations,environmental regulations and transfer pricing rules.
However, should the Company be unable to respondadequately to unforeseen tightening or other changes
to such laws or regulations, such changes could
adversely affect Tokyo Electron’s business performance.
(11) Other Risks
Tokyo Electron is actively engaged in reforming its corporate structure so that it can generate profits evenwhen markets contract. These reforms have entailed
creating new high-growth and high-return businesses
and pursuing higher earnings from existing businesses.
At the same time, Tokyo Electron has promoted activities to preserve the environment and worked torestructure its compliance, risk management and information security management systems. However, as
long as it conducts business activities, as with peer
companies or companies in different industries, Tokyo
Electron is subject to the effect of many other factors.
These include the world and regional economic environments, natural disasters, war, terrorism, infectious
diseases and other unavoidable occurrences, financial
or stock markets, government or other regulations,
supply chains, market conditions for products and realestate, the ability to recruit personnel in Japan andoverseas, competition over standardization, and loss of
key personnel. Any of these factors could adversely
affect Tokyo Electron’s business performance.