TOKYO ELECTRON ANNUAL REPORT 2017

18

PAGE

CONTENTS

To Our Stakeholders

Business Overview
and Financial Highlights

Interview with the CEO
Message from the CFO

Review of Operations
and Business Outlook

Corporate Governance
CSR-Oriented Operations

Corporate Data

Financial Section

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

Financial Review
Sales and Income
Operating Environment
The overall world economy in fiscal 2017 saw gradual
recovery, with ongoing gentle expansion in the U.S.
economy and signs of recovery in China. In the electronics industry, capital investment by semiconductor
manufacturers was strong. This was due to growth indemand for data center servers, reflecting increases indata transmission volumes driven by the arrival of theinternet of things (IoT), as well as the growing sophistication of smartphones. As a result, the wafer fab
equipment market, in which Tokyo Electron operates,grew more than 10% year on year to US$37 billion. At
the same time, the display industry also saw active
capital investment aimed mainly at manufacturing
higher resolution panels for mobile devices. Accordingly,
the market for flat panel display (FPD) production
equipment was brisk, surpassing US$10 billion for the
first time since 2011.
Sales
Net sales in fiscal 2017 rose 20.4% year on year to ¥799.7
billion. This reflected the favorable market environment,
expanding demand for cutting-edge semiconductor
production equipment (SPE) and increased demand forparts and used equipment sales, modifications andmaintenance services. By segment, net sales in the SPE
segment grew 22.3% year on year to ¥749.8 billion. Net
sales in the FPD production equipment segment grew
10.5% year on year to ¥49.3 billion. For details on­performance by segment, please refer to Review ofOperations and Business Outlook on page 9.
Furthermore, net sales in the field solutions business(encompassing sales of parts and used equipment,
modifications and maintenance services) rose 12% year
on year to approximately ¥208.0 billion, accounting for
26% of overall net sales.
Gross Profit, SG&A Expenses and Operating Income
Gross profit in fiscal 2017 was up 20.6% year on year to¥322.2 billion, reflecting the growth in net sales.
However, the gross profit margin rose only 0.1 of a percentage point to 40.3%, as profitability gains fromincreased factory utilization were partially offset byinvestment in growth aimed at reinforcing productcompetitiveness.
SG&A expenses rose 10.8% year on year to ¥166.5
billion, but the ratio of SG&A expenses to consolidated
net sales dropped 1.8 percentage points from the previous fiscal year to 20.8% in the fiscal year underreview. Consequently, operating income increased
33.3% year on year to ¥155.6 billion, and the operating
margin rose 1.9 percentage points to a record high of
19.5%. As this shows, the Group made progress toward
its medium-term management plan target of an operating margin of 24–26%, including reducing the ratio of
SG&A expenses to consolidated net sales.
R&D Expenses
R&D expenses were up 9.8% year on year to ¥83.8 billion. The main cause of this rise was the reinforcementof R&D in the fields of etch, deposition and cleaningsystems, in which the Company is working to expand
its market share under the medium-term management
plan. Tokyo Electron focused on R&D aimed at enhancing the competitiveness of future products. This

2013

2014

2015

Net Sales and Gross Profit Margin

2016

2017

¥497,300¥612,170¥613,125¥663,949¥799,719

Gross profit

158,755

201,892

242,774

267,210322,291

31.9%

33.0%

39.6%

40.2%

40.3%

146,206

169,687

154,661

150,421

166,594

Selling, general and administrative expenses* This lower limit may be revised in the event that the Company does not­generate net income for two consecutive fiscal years.

Financial Position and Cash Flows
Assets, Liabilities and Net Assets
M Assets
Current assets increased ¥158.5 billion from the end of
the previous fiscal year to ¥775.9 billion, reflecting

Operating Income andOperating Margin(Billions of yen)(%)(Billions of yen)

1,000

50

200

Net Income (Loss) Attributableto Owners of Parent and ROE(%)(Billions of yen)

19.5

20

120

155.6

15

80

10

40

5

0

(%)

Operating income

12,54932,205

88,113

116,789

155,697

Operating margin

2.5%

5.3%

14.4%

17.6%

19.5%

Income (loss) before income taxes

17,767(11,756)

86,828106,467

149,116

Net income (loss) attributable to owners of parent

6,076(19,409)71,88877,892

115,208

40.3
39.6 40.2

800
31.9 33.0

613.1

600
497.3

663.9

40

799.7
30

612.2

20

200

10

0

0

 Net Sales
 Gross Profit Margin

14

15

16

17

71.9

116.8
100

400

13

14.4

150

5.3

50
2.5
0

11.8

88.1

12.5

13
 Operating Income Operating Margin

0

14

15

16

17

20

77.9 19.1
13.0

10

6.1

0

1.0

32.2

30

115.2

17.6

Net sales

Gross profit margin

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. Furthermore,with an eye to ensuring stable dividends, a lower limitof ¥150 per share has been set on annual dividends.*
Reflecting the Company’s strong sales and profit
growth, Tokyo Electron paid annual dividends for fiscal
2017 of ¥352 per share (for a payout ratio of 50.1%), its
highest ever. Going forward, the Company will seek tobuild world-class profitability and reciprocate the­support of shareholders by delivering profit growth.

Other Income (Expenses) and Net Income
Attributable to Owners of Parent
During fiscal 2017, net other expenses came to ¥6.5 billion, reflecting ¥7.5 billion in loss on disaster related to
the Kumamoto Earthquake and ¥1.0 billion in interestand dividend income. As a result, income before
income taxes came to ¥149.1 billion, up 40.1% year on
year. Net income attributable to owners of the parent
totaled ¥115.2 billion in fiscal 2017, up 47.9% from fiscal
2016. Net income per share rose 52.3% year on yearto ¥702.26.

Millions of yen

Sales and Income

Comprehensive income
In fiscal 2017, Tokyo Electron recognized comprehensive income of ¥119.9 billion, up from ¥61.0 billion in­fiscal 2016. This was mainly due to the ¥115.2 billion in
net income, ¥2.8 billion in unrealized gains on investment securities related to strategically held shares, and¥2.6 billion in gain on remeasurements of defined benefit plans due to an increase in the discount rate used
to calculate retirement benefits as a result of risinginterest rates.

included developing innovative technologies to not
only enhance the performance of individual products,
but optimize entire processes, as well as making products more intelligent, all of which are especially important in terms of differentiating the Company’s products
going forward.
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 released a new single wafer
deposition system and increased its market share in allof its key product areas, making tangible progress toward
the goals of the medium-term management plan.
In FPD production equipment, Tokyo Electron primarily advanced development of products for new
generation 10.5/11 panels, which are expected to see
rapid market growth going forward.

-3.3
-19.4

-40

13

14

-10

15

16

17

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

TOKYO ELECTRON ANNUAL REPORT 2017

PAGE

19

CONTENTS

Business Overview
and Financial Highlights

To Our Stakeholders

Interview with the CEO
Message from the CFO

Review of Operations
and Business Outlook

Corporate Governance
CSR-Oriented Operations

Corporate Data

Financial Section

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

Financial Review
a ¥78.6 billion increase in cash on hand* due to thegeneration of ¥118.0 billion in free cash flow,** a ¥41.1
billion increase in inventories due to increased production to meet robust demand from semiconductor anddisplay manufacturers, and a ¥17.3 billion increase intrade notes and accounts receivable. The turnover
period for trade notes and accounts receivable in fiscal
2017 was 61 days, compared with 64 days in fiscal 2016,
and the inventory turnover period in fiscal 2017 was
108 days, compared with 107 days in fiscal 2016.
Net property, plant and equipment increased ¥4.1
billion year on year to ¥100.4 billion. This was largely
due to ¥20.6 billion in new fixed asset acquisitions,
including part of the construction costs for a newlogistics building being constructed at the Miyagi
Plant to increase productivity as well as R&D equipment acquired to bolster the development of nextgeneration technologies. These and other positive
factors more than offset ¥17.8 billion in depreciation
and amortization.
Investments and other assets increased ¥1.4 billion
year on year to ¥81.0 billion.

As a result, total assets as of March 31, 2017 stood at¥957.4 billion, up ¥164.0 billion year on year.
* Cash on hand: Cash and cash equivalents + Short-term investments withoriginal maturities of less than one year** Free cash flow: Cash flows from operating activities + Cash flows frominvesting activities (excluding changes in short-term investments with­original maturities of less than one year)

M Liabilities and Net Assets
Current liabilities increased ¥81.7 billion from the end of
fiscal 2016 to ¥247.7 billion at the end of fiscal 2017.
This was mainly due to a ¥34.4 billion increase in customer advances, a ¥24.1 billion increase in trade notes
and accounts payable, a ¥10.2 billion increase inaccrued employees’ bonuses and an ¥8.6 billion
increase in income taxes payable.
Non-current liabilities increased ¥0.6 billion year on
year to ¥63.6 billion.
Net assets came to ¥645.9 billion at the end of fiscal
2017, up ¥81.7 billion from the end of fiscal 2016. Thiswas mainly due to a ¥75.7 billion increase in retained
earnings, reflecting the recording of ¥115.2 billion in net
income attributable to owners of the parent and ¥39.3
Millions of yen

Financial Position

2013

2014

2015

2016

2017

Total current assets¥521,501¥621,492¥670,883¥617,416¥775,938

Net property, plant and equipment

135,698

112,344

106,896

96,317

100,441billion paid in cash dividends (¥18.3 billion for the fiscal
2016 year-end dividend and ¥20.9 billion for the fiscal
2017 interim dividend).
As a result, the equity ratio fell 3.7 percentage points
year on year to 67.2% at the end of March 2017. ROE
climbed to 19.1% from 13.0% in fiscal 2016.

short-term investments with original maturities of lessthan one year not included in cash and cash equivalents, increased ¥78.6 billion year on year to ¥315.3 billion at the end of March 2017. Cash flows during the
fiscal year under review were as follows.
Net cash provided by operating activities came to¥136.9 billion, up ¥67.5 billion from fiscal 2016. Major
contributors were ¥149.1 billion in income before
income taxes, a ¥34.4 billion increase in customer
advances, a ¥24.0 billion increase in trade notes andaccounts payable, and ¥17.8 billion in depreciation andamortization. Major negative factors included a ¥44.1
billion increase in inventories, ¥32.6 billion in income
taxes paid, and a ¥17.4 billion increase in trade notes
and accounts receivable.
Net cash used in investing activities was ¥28.8 billion, compared with ¥150.0 billion used in the previous
fiscal year. Major outflows included ¥17.5 billion used as
payment for purchases of property, plant and equipment and a ¥9.9 billion net increase in short-term
investments.
Net cash used in financing activities came to ¥39.3
billion, compared with ¥138.6 billion in fiscal 2016. Thiswas mainly attributable to ¥39.3 billion in dividends paid.

Capital Expenditures* and Depreciation andAmortization**
Capital expenditures totaled ¥20.6 billion in fiscal 2017,a 55.1% year-on-year increase. Major expenditures
included the acquisition of R&D machinery and equipment in order to strengthen key areas in the SPE business.
Depreciation and amortization decreased 7.2% to¥17.8 billion.
* C apital expenditures represent only the gross increase in property, plant andequipment.
** Depreciation and amortization does not include amortization of goodwill or
losses on impairment.

Cash FlowsThe balance of cash and cash equivalents at the endof March 2017 stood at ¥164.3 billion, an increase of¥68.7 billion from the end of fiscal 2016. Cash on hand,which consists of cash and cash equivalents as well as

Millions of yen

Cash Flows

2013

2014

2015

2016

2017

¥ 69,398¥136,948

Total investments and other assets

118,329

94,756

98,375

79,63581,067

Cash flows from operating activities¥ 84,267¥ 44,449¥ 71,806

Total assets

775,528

828,592

876,154793,368

957,447

Cash flows from investing activities(141,769)(19,599)

155,738(150,014)(28,893)

Total current liabilities

106,670

170,510

172,812

166,061

247,770

Cash flows from financing activities(10,625)(187)(18,214)(138,601)(39,380)

Total liabilities

170,401

237,978

234,991

229,129

311,447

Cash and cash equivalents at end of year

85,314

104,797

317,632

95,638164,366

Total net assets (Total shareholders' equity)605,127590,614641,163564,239645,999

Selling, General and Administrative
Expenses and Ratio to Net Sales

R&D Expenses

Cash Dividends per Share

Receivable Turnover andInventory Turnover

Capital Expenditures andDepreciation and Amortization

Cash on Hand

(Billions of yen)(%)(Billions of yen)

(Yen)

(Days)(Billions of yen)(Billions of yen)

200

40

100

400

160

32

360

30

75

120

24

169.7
150

146.2
29.4

154.7 150.4

166.5
73.2

352

83.8

78.7
71.3

76.3

300

100

27.7
22.6

20

50

143
10

25

100

0

0

0

0

14

105 107

108

15

16

80

200

20.8

50

13

100

317.7
24.9

21.8

17

 Selling, General and Administrative Expenses
 Ratio to Net Sales

13

14

15

16

17

16
74

51

50

13

14

66

64

61

15

16

17

16

17

The fiscal 2013 annual dividend of ¥51 includes
a commemorative 50 year anniversary dividend of ¥20.

8

13
 Receivable Turnover
 Inventory Turnover

14

236.7

180

90

0

0

15

240.1

12.8 13.2 13.3

77

40

20.6
19.3
17.8

315.3

268.1

270
20.9

237
25.2

100

26.6

0

13

14

15

 Capital Expenditures Depreciation and Amortization

16

17

13

14

15

16

17

Cash on Hand = Cash and cash equivalents +Short-term investments with original maturities of less than
one yearTOKYO ELECTRON ANNUAL REPORT 2017

PAGE

20

CONTENTS

To Our Stakeholders

Business Overview
and Financial Highlights

Interview with the CEO
Message from the CFO

Review of Operations
and Business Outlook

Corporate Governance
CSR-Oriented Operations

Financial Section

Corporate Data

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

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) Impact 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’s business 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) 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.