Management’s Discussion and Analysis

Company’s core SPE Division grew 16.7 percent, to 425.7
billion yen, primarily by favorable growth in sales tosemiconductor and FPD manufacturers in Asia, including
Japan. The sales growth of Computer Network andElectronic Components divisions also contributed to overallsales expansion.

Sales and Income
Business Environment
In the fiscal year ended March 31, 2004, despite theuncertain factors affecting the global economy, such as thegrowing tension in Iraq and the spread of severe acuterespiration syndrome (SARS) at the beginning of the fiscal
year, the U.S. economy remained firm thanks to thebenefits of tax cuts and other positive factors. In Asia, theChinese economy continued to grow and the economies of
Taiwan and Korea also rallied. Japan’s economy posted amild recovery; corporate performances improved regardlessof the negative impact of the appreciation in the yen andother pressures, and capital investment and exports
advanced mainly led by the manufacturing industry.

Domestic sales increased 27.2 percent to 242.3 billion yen
and overseas sales rose 6.4 percent to 287.3 billion yen. As
a result, the contribution of overseas sales to net sales
decreased to 54.2 percent from 58.6 percent in theprevious fiscal year.
Consolidated orders received for the fiscal year increased
42.5 percent from the previous fiscal year to 653.6 billion
yen. The order backlogs at the fiscal year-end increased
82.3 percent to 274.7 billion yen.

During the fiscal year, there was robust demand in theelectronics market where the Company participates.
Growth of the market was supported by replacement
demand stimulated by new models of personal computers(PCs) and mobile phones with embedded cameras and the
expanding market for digital consumer products, such as
DVD recorders, digital cameras, and flat panel televisions.
As a result, the rate of capacity utilization rose forsemiconductor manufacturers, many of which have theirproduction bases in Japan and other Asian countries, andfurther increase in capacity was pursued, beginning at the
middle of the fiscal year.

Performance by Division
Semiconductor Production Equipment Division
Triggered by the bursting of the bubble in the IT market, theglobal electronics industry, and especially thesemiconductor-related industry, experienced a serious
downturn for approximately two years. At the beginning of
2003, replacement demand for PCs and mobile phones
began to grow and the digital consumer products market
began to emerge. These trends prompted a sharp recovery
in capital investment sentiment among semiconductor
manufacturers producing devices related to these markets.
In particular, subsequent orders from semiconductor
manufacturers in Japan began to rise beginning in the

Sales
Under these circumstances, consolidated net sales for the
fiscal year ended March 31, 2004 increased 15.0 percent
from the prior fiscal year to 529.7 billion yen. Sales of theThousands of
U.S. Dollars

Millions of Yen (percentage of net sales)

2004

2003

2002

2004

Net sales¥529,654 (100.0)¥460,580 (100.0)¥417,825 (100.0)$5,013,762

Cost of sales

389,499(73.5)

326,540(70.9)

302,270(72.3)

3,687,037

Gross profit

140,155(26.5)

134,040(29.1)

115,555(27.7)

1,326,725

SG&A expenses

117,875(22.3)

132,921(28.9)

133,865(32.1)

1,115,823

Operating income (loss)

22,280

(4.2)

1,119

(0.2)

(18,310)–

210,902

Other income (expenses)(7,344)–(24,129)–(4,609)–(69,520)

Income (loss) before income taxes

14,936(2.8)(23,010)–(22,919)–

141,382

Provision for income taxes

6,124

(1.2)

18,532(4.0)(2,990)–57,962

Minority interest

515

(0.1)

12

(0.0)

8

(0.0)

4,876

Net income (loss)

8,297

(1.6)

(41,554)–(19,938)–

78,544

20

Tokyo Electron

www.tel.com

Focusing on individual products, the sales of major products
such as coater/developers, etch systems, thermal
processing systems, single wafer CVD systems, wafer
probers, cleaning systems and FPD production equipment
rose during the fiscal year. Among the latest products,
TELFORMULA, a new thermal processing tool, and CLEAN
TRACK LITHIUS, a new coater/developer, posted strong
sales.

spring of 2003, since Japanese semiconductor
manufacturers are especially strong in the fields of image
sensors for digital cameras and LCD drivers. Accordingly,
semiconductor manufacturers, particularly Asian, started toincrease capital investment in their fabs and equipment inresponse to the increased demand for memory and PCrelated devices.
Consolidated orders of the SPE Division for the fiscal year
amounted to 549.8 billion yen, rising 51.3 percent from theprevious fiscal year. Consolidated sales climbed 16.7
percent to 425.7 billion yen. Contribution to consolidated
sales also rose, increasing to 80.4 percent from 79.2
percent. Japanese and overseas FPD manufacturers also
increased their capital investment, building new factories
and capacity based on the long-term growth expectations
for the flat panel television market. As a result, sales of FPD
production equipment, which are also included in thisdivision, expanded compared with the previous fiscal year.
Looking at performance by region, capital investment insemiconductor devices for digital consumer products was
active in Japan, causing sales to rise 45.7 percent, to 141.9
billion yen. In Korea, capital investment in memory devices
and FPD products increased, boosting sales 7.2 percent, to61.4 billion yen. Capital investment in the semiconductor
industry in Taiwan recovered from a recent weak spell,
supporting a 49.9 percent increase in sales, to 100.5 billion
yen. On the other hand, sales in the U.S. market fell 31.9
percent, to 50.6 billion yen due to continuing low capital
investment by major semiconductor manufacturers in thisregion.

425.7

364.7

325.7

619.0

355.1

SPE Division’s Sales by Geographic Region(Billions of Yen)

600

150
141.9

700
424.6

800

Computer Network Division
Net sales of the Computer Network (CN) Division advanced
7.3 percent, to 18.4 billion yen. The division’s business isprincipally based on providing customers with storage area
networks (SAN: high speed network that interconnects
external data storage devices, and internal storage devices
and computers), and broadband solutions.
Among SAN-related products, which generated about 37
percent of CN Division sales, Brocade Communications
Systems, Inc.’s fibre channel fabric switches and Emulex
Corporation’s fibre channel host bus adapters steadily
expanded their sales. NeoScale Systems, Inc.’s backup
data encryption systems, which the division started
distributing in recognition of the growing importance of
security for data storage systems, are now being adopted
as a solution for preventing data leaks. The division is set
to begin sales of Advanced Digital Information Corp.’s

SPE Division’s Sales(Billions of Yen)

529.7

460.6

417.8

723.9

440.7

Domestic and Overseas Sales(Billions of Yen)

In terms of wafer sizes, capital investment in 300mm wafer
manufacturing lines continued to increase among
semiconductor manufacturers in Asia, including Japan. In
total, the sales contribution of 300mm equipment
accounted for approximately 60 percent of our SPE sales.

600
500

01

Japan
Overseas

04

100.5

20.6
19.9

20.1
17.6

57.3
61.4

74.3

100
0

00

50.6

28.0
33.9

03

242.3

190.5

02

0

200

67.0

97.4

287.3

270.1

231.3
186.5

184.0

200

300
50

299.3

400

256.7

100
400

0
00

01

02

03

04

Japan
2003

North
EuropeAmerica

Korea

TaiwanChina Southeast
Asia

2004

Annual Report 2004

21

(ADIC) tape libraries, which hold the top share of the global
open-system tape automation market, as part of theirstrategy to offer expanded solutions including data storageand management.
Among network-related products, a newly added securesocket layer-virtual private network (SSL-VPN) product fromF5 Networks, one of the division’s core product lines,
expanded sales in a new market.
During the fiscal year, the division added Ruff Systems
HDV, a new version of its own proprietary high-definition
video picture and sound broadcasting systems, that enables
the Internet Protocol transmission of video camera images
processed with a high-definition video standard which ismore economical than high-definition television (HDTV)
cameras. The division believes that having made HighVision image transmission over broadband networks areality, it has the possibility to contribute to the diffusion of
HDTV content for professionals and consumers.
Electronic Components Division
Net sales of Electronic Components Division, including
sales of semiconductors, board products, software andgeneral electronic components, rose 8.9 percent to 84.2
billion yen. During the fiscal year, the division concentrated
on sales of high-value-added products that require technicalsupport services. In addition, the division expanded its
product line-up, working to add new products in particular.
The division also expanded its sales network, opening sales
offices in Nagaoka and Okayama, Japan to provide better
customer service.

Sales of board products, such as motherboards, VME
boards, and others sold well during the fiscal year. Sales ofsoftware rose as well, benefiting from by expanding salesof operating system software for embedded system
devices. On the other hand, sales of general electronic
components slightly declined despite the efforts to increase
sales of panel PCs and power switches for consumer
electronic devices.
The division is aggressively developing its design anddevelopment services for custom ICs, motherboards andsoftware. In response to the increased number of orders
received for these services, in January 2004, the Company
established a subsidiary in Shanghai, China, to expand its
capacity. In the development of original products, thedivision has been one of the quickest to respond to largescale integrated circuit (LSI) market needs, developing
products such as high-definition simultaneous separator

89.2

73.7

77.4

84.2

20

72.1

18.4

EC Division’s Sales(Billions of Yen)
17.2

17.0

14.1

12.4

CN Division’s Sales(Billions of Yen)

Semiconductor products accounted for 88 percent ofdivisional net sales. During the fiscal year, the division
worked to expand sales of high-value-added items, such as
Xilinx, Inc.’s programmable logic devices (PLDs), use ofwhich is expanding in consumer electronics products suchas flat panel televisions, and Linear Technology
Corporation’s analog ICs for power sources of mobile
devices. Furthermore, the sales of Texas Instruments,
Inc.’s products that the division began distributing in 2002
increased due to growth in sales of semiconductor testing
equipment, ATMs and other industrial devices.
Consequently, sales of semiconductor products rose 8.5
percent compared with the prior fiscal year.

00

01

02

03

04

100

80
15
60
10
40
5
20

0

0
00

22

01

Tokyo Electron

02

03

04

www.tel.com

development period, R&D expenses decreased 11.9 percent
to 44.1 billion yen, year-on-year. R&D expenses wereallocated strategically to the development of 65 nanometerand-beyond design rule process technology and equipment,
as well as new product development. Operating income
increased 21.2 billion yen to 22.3 billion yen from 1.1 billion
yen in the previous fiscal year.

LSIs for picture devices for LCD projectors, plasma
televisions and other displays, and host controllers for SD
memory cards used extensively in mobile phones.
As a result, sales of the division amounted to 84.2 billion
yen, up 8.9 percent from the previous fiscal year.
Making efforts to understand customer needs, and to
pursue further growth in its design, development andoriginal products business, the division will focus onproviding thorough technical support for high-value-added
products such as custom, dedicated, or analog ICs.

Non-operating Income and Expenses and Net
IncomeNet non-operating expenses improved 16.8 billion yen fromthe previous fiscal year, to 7.3 billion yen. The decline in
non-operating expenses primarily resulted from a reduction
in restructuring expenses from 20.6 billion yen to 2.5 billion
yen, down 18.1 billion yen from the prior fiscal year. Income
before income taxes, therefore, increased 37.9 billion yen
from the prior fiscal year to 14.9 billion yen.

Cost of Sales, SG&A Expenses and Operating
IncomeAlthough gross profit increased 4.6 percent to 140.2 billion
yen, cost of sales increased 19.3 percent to 389.5 billion
yen, thus gross profit margin decreased 2.6 percentage
points to 26.5 percent compared with the previous fiscal
year. There were reductions in production costs and anincrease in plant utilization rates due to higher businessvolume, however, the gross profit margin decreasedslightly influenced to some extent by a change in the fieldengineering-related contracts of some of our services
subsidiaries.

Net income improved 49.9 billion yen to 8.3 billion yen, andnet income per share improved from minus 238.57 yen to46.37 yen. The Company increased cash dividends by 2.0
yen per share to 10.0 yen per share; the payout ratio was
47.4 percent on a non-consolidated basis.

Selling, general and administrative expenses (SG&A)
decreased 11.3 percent to 117.9 billion yen, and SG&A to
net sales declined from 28.9 percent to 22.3 percent. Basedon efforts to focus on selected R&D projects to shorten

10

8

8

14

44.1

50.1

53.8

52.9

37.1

22.3

150

38

Cash Dividends per Share &Payout Ratio (Yen / %)R&D Expenses(Billions of Yen)
1.1

-18.3

121.1

35.8

Operating Income(Billions of Yen)

40

60

50
47.4

120

40
30

90

40

30.2
30
20

60

20
30

21.6

20
10

10

0
-30
01

02

03

04

0

0

0
00

00

01

02

03

04

00

01

02

03

04

Cash Dividends per Share
Payout Ratio(Non-consolidated basis)
Note: The payout ratio of FY2002 and FY2003 are notindicated due to net loss on a non-consolidated basis.

Annual Report 200423

prices. Therefore, total assets increased 36.7 billion yen
year-on-year to 561.6 billion yen.

Financial Position and Cash Flows
Financial Position

Current liabilities decreased 19.2 billion yen year-on-year to141.5 billion yen. Major factors behind this decrease wereredemption of 35.0 billion yen worth of commercial paper
and the maturity of the second unsecured convertible
bonds, regardless of the increase of trade notes andaccounts payable due to increased procurement necessary
for higher production levels.

Current assets at March 31, 2004 increased 46.5 billion yen
year-on-year, to 403.0 billion yen. Among the main factors
in this change were a 63.3 billion yen rise in trade notes andaccounts receivable along with greater sales, and a 10.3
billion yen decrease in cash and cash equivalents due toincrease of working capital. Even though work-in-processincreased due to the ramp-up of manufacturing, inventory
decreased 6.6 billion yen to 105.2 billion yen year-on-year
due to finished goods reduction efforts. Excluding otheraccounts receivables, trade notes and accounts receivable
turnover based at the end of fiscal year lengthened to 159
days, from 135 days the prior fiscal year because of theincrease of regional sales, which have a relatively longcollection period for accounts receivable. Inventory
turnover, however, improved to 72 days, compared with 89days in the previous fiscal year.

Long-term debt increased 32.7 billion yen year-on-year to140.4 billion yen due to a 20 billion yen 10th unsecured
bond issue and a 30 billion yen 11th unsecured bond issue.
Shareholders’ equity increased 22.9 billion yen to 275.8
billion yen, principally due to the conversion of convertible
bonds and greater retained earnings resulting from theincrease in net income. As a percentage of total assets,shareholders’ equity rose to 49.1 percent from 48.2 percent
the previous fiscal year. Return on average total
shareholders’ equity was 3.1 percent.

Property, plant and equipment decreased 10.8 billion yen
year-on-year to 108.8 billion yen. During the fiscal year, theCompany placed an investment of 11.0 billion yen inproperty, plant and equipment, primarily for the purchase ofevaluation equipment and IT-related investments.

Cash FlowsNet cash provided by operating activities amounted to 7.9
billion yen, decreasing from 21.4 billion yen, year-on-year.
The positive main factors included income before income
taxes amounting to 14.9 billion yen, depreciation andamortization totaling 25.0 billion yen, and increases inaccount payable amounting to 29.2 billion yen. On theInvestments and other assets increased 1.0 billion yen to49.9 billion yen. The main factor in the increase ininvestments and other assets was the increase of the fairvalue of marketable securities due to improvement of stock

Debt-to-Equity Ratio(Times)

261.5

195.7

243.9

228.7

50

309.8

Working Capital & Current Ratio(Billions of Yen / Times)

11.0

12.4

30.9

49.4

19.0

Capital Expenditure for Property,
Plant and Equipment (Billions of Yen)

350

5

1.0

4

0.8

3

0.6

2

0.4

1

0.2

0

0

300
40
250
30

3.2

0.62
2.8

200
150

20

2.6

2.3

2.2

0.60

0.51
0.46

0.45

100
10
50
0

0
00

01

02

03

04

00

01

02

Working Capital
Current Ratio

24

Tokyo Electron

www.tel.com

03

04

00

01

02

03

04

fiscal year. The Company had outlays during the fiscal year
related to commercial papers and redemption of the eighth
unsecured bond issue, repayment of short-termborrowings, and payment of dividends. These outlays wereoffset, however, by proceeds from the 20 billion yen 10th
unsecured bond issue and the 30 billion yen 11th
unsecured bond issue.

contrary, negative factors included increases in accounts
receivable amounting to 61.8 billion yen.
Net cash used in investing activities was 8.5 billion yen,increasing from 7.3 billion yen the previous fiscal year.
Investment in property, plant and equipment totaling 7.5
billion yen was mainly comprised of the purchase of
equipment for R&D.

Cash and cash equivalents at the end of the year were 42.7
billion yen, down 10.3 billion yen from 53.0 billion yen at theend of the previous fiscal year.

Net cash used in financing activities amounted to 10.3
billion yen compared with 9.9 billion yen in the previous

Thousands of
U.S. Dollars

Millions of Yen (percentage of total assets)

Total assets

2004

2003

2004

¥561,632 (100.0)¥524,901 (100.0)$5,316,467

Cash and cash equivalents

42,650(7.6)

52,982(10.1)

403,727

Trade notes and accounts receivable

245,554(43.7)

182,218(34.7)

2,324,439

Inventories

105,187(18.7)

111,810(21.3)

995,712Investments and other assets

49,869(8.9)

48,851(9.3)

472,064

Property, plant and equipment

108,789(19.4)

119,611(22.8)

1,029,805

Total liabilities

2,668,356

281,885(50.2)

268,402(51.1)

Short-term borrowings

6,815

(1.2)

8,729

(1.7)

64,514

Trade notes and accounts payable

78,009(13.9)

48,279(9.2)

738,440

Accrued income taxes

3,273

(0.6)

3,645

(0.7)

30,983Long-term debt, less current portion

98,476(17.5)

70,230(13.4)

932,181

Shareholders’ equity

275,800(49.1)

252,904(48.2)

2,610,748

01

33.3

00

6.4

25
20.4

-14.2

400

83.7

275.8

252.9

307.6

Net Cash Flow
(Billions of Yen)
39.3

100

333.3

Shareholder’s Equity & ROE(Billions of Yen / %)273.6

Shareholder's Equity Ratio
(%)

02

03

04

100

20

300

80

80

15
200
10

60

100

55.2

54.8

49.1
40

60

5
40

0

48.2

45.7

3.1

7.5

0
-5

20

-10

20

-6.2

0
-15
-14.8

0
00

01

02

03

04

00

01

02

03

Shareholder’s Equity
Return on Equity

-20
04

-20

Net Cash Flow =Net Income + Depreciation and Amortization

Annual Report 2004

25

Business-related and Other Risks
The following are possible risks that may have an impact on
the Company’s operating results, stock prices, or financial
position.
(1) Impact of fluctuating foreign exchange rates
Success in the development of our overseas operations has
increased the Company’s portion of overseas sales. As arule, the Company carries out export transactions on a yenbasis in order to avert exchange-related risks, yet there aresome exports involving foreign currencies. In these cases,
the Company employs an exchange risk hedge, such as aforward exchange contract when an order is placed.
However, since for overseas customers, exchange-relatedrisks can arise from fluctuations in prices due to drastic
exchange fluctuations, it may have indirect negative impact
on the Company’s performance.
(2) Impact from research and development
Through the ongoing implementation of proactive R&D
investment and activities for cutting-edge
technologies––miniaturization, vacuum, plasma, thermalprocessing, coating/developing, cleaning, wafer-transfer,and clean technologies––the Company has created cuttingedge technologies. Promptly introducing new products on
the market that are equipped with these technologies, theCompany has successfully obtained a large market share ineach of the product fields, as well as a high profit margin.
However, the possibility does exist that the ill-timed launchof new products may have a negative impact on the
Company’s performance.
(3) Impact from changes in semiconductor market
The Company has achieved a high profit margin byconcentrating resources in the high-tech field, including
semiconductor production equipment, where technologies
undergo rapid changes and the Company is able to display
its strength. Although the semiconductor market enjoys
broad growth through technological change, the Company
has actively undertaken structural reforms to be able togenerate profit under any circumstance, such as, when thesize of the market temporarily contracts due to imbalanceof supply and demand. However, the possibility does exist
that business results and cash flow may receive a negative
impact from an unexpectedly broad contraction in the sizeof the market, resulting in order write-offs, over capacityand personnel, or increased inventories.
(4) Impact from transactions concentrated on particularcustomers
Providing products equipped with superior, cutting-edge
technology and offering a system of high customer
satisfaction, the Company has been successful in
expanding its business transactions with the world’s

26Tokyo Electron

www.tel.com

leading semiconductor manufacturers both inside andoutside of Japan. Yet, since the Company’s net sales may
at times be temporarily concentrated on particularcustomers due to the timing of large-scale capital
investments, there is the possibility of a negative impact on
business results from intensified sales competition.
(5) Impact from quality issues
The Company has been proactively developing superior,cutting-edge technologies utilized in new products that arepromptly introduced to the market, while establishing aquality assurance system, including obtaining ISO 9001
certification at the same time. The Company has also worked
to establish a world-class service system, resulting in a large
number of customers adopting our products. However,
because they are cutting-edge technology products, inaddition to other factors, many of the technologies
developed are in unknown fields, and the possibility existsthat business results may be negatively affected by theoccurrence of unforeseen defective products.
(6) Impact of intellectual property rights
In order to set the Company’s products apart and enhance
its competitive strength, the Company has promoted its
R&D strategy for the prompt development of cutting-edge
technologies, together with its business and intellectual
property strategies. This has made it possible to obtainmany of the Company’s own proprietary technologies,
thereby successfully ensuring a large market share and highprofit margin in each product field. However, partly because
the Company’s products use many of the consolidated andoptimized cutting-edge technologies, there may be cases
where a negative impact on business results arises fromavoiding the use of a third party’s technology andintellectual property rights.
(7) Other risks
Seeking the creation of new high-growth, high-return
businesses, while pursuing higher revenues from existing
businesses, the Company has been actively involved in
making improvements to corporate structure so that profit
can be generated even during contractions in market size,
and also overhauled its risk management system. However,to the extent that the Company performs its operations, likeother companies in the same or different industries, it issubject to the impact from factors such as global or local
economic environment, natural disasters, wars, terrorism,
unavoidable incidents (such as infectious diseases),financial or stock markets, government regulation, provisionsystems of suppliers, market conditions for products andreal estate, securing of personnel domestically or overseas,
competition over standardization, loss of important
personnel, etc., and at times it can be assumed that suchfactors may have a negative impact on the Company’sbusiness performance.