TOKYO ELECTRON ANNUAL REPORT 2018

PAGE

16

CONTENTS

To Our Stakeholders

Business Overview
and Financial Highlights

Review of Operations
and Business Outlook

Interview with the CEO

Innovation Drives the Evolutionof Semiconductors

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 2018 held firm, with
the United States and Europe seeing ongoing steadyeconomic recovery, while the economies of China andAsia were solid.
In the electronics industry, investment in data center
servers was brisk, reflecting growth in high-volume datatransmission driven by streaming video and other cloudbased services. Demand for semiconductors, especiallymemory, increased substantially. As a result, the wafer
fab equipment market, in which Tokyo Electron operates,grew 37% year on year, surpassing US$50 billion for the
first time ever. At the same time, the display industry
saw capital investment aimed at OLED panels for mobile
devices and the start of capital investment in large
generation 10.5 panels. Accordingly, the market for flat
panel display (FPD) production equipment was brisk,
growing 40% year on year to approach US$20 billion.
Sales
Net sales in fiscal 2018 rose 41.4% year on year to¥1,130.7 billion. This reflected the favorable market
environment, expanding demand for cutting-edge
semiconductor production equipment (SPE) andincreased demand for parts and used equipment sales,
modifications and maintenance services. By segment,
net sales in the SPE segment grew 40.7% year on yearto ¥1,055.2 billion. Net sales in the FPD production
equipment segment grew 52.0% year on year to ¥75.0
billion. For details on performance by segment, pleaserefer to Review of Operations and Business Outlook on
page 8. Furthermore, net sales in the field solutions

business (encompassing sales of parts and used equipment, modifications and maintenance services) rose
20.5% year on year to ¥251.0 billion, accounting for22.2% of consolidated net sales.
Gross Profit, SG&A Expenses and Operating Income
Gross profit in fiscal 2018 was up 47.4% year on year to¥475.0 billion, reflecting the growth in net sales. The
gross profit margin rose 1.7 percentage points to 42.0%,
mainly due to increased sales of high-value-added
products.
SG&A expenses rose 16.4% year on year to ¥193.8 billion, but the ratio of SG&A expenses to consolidated
net sales dropped 3.7 percentage points from the previous fiscal year to 17.1% in the fiscal year under review.
The Group also steadily advanced cost control measures, as targeted under the medium-term management plan. Consequently, operating income increased
80.6% year on year to ¥281.1 billion, and the operating
margin rose 5.4 percentage points to 24.9%, greatly
exceeding the previous record high.
R&D Expenses
R&D expenses were up 15.9% year on year to ¥97.1 billion.
The main cause of this rise was the reinforcement of R&D
in the fields of etch, deposition and cleaning systems, inwhich 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 included developing
innovative technologies to not only enhance the performance of individual products, but 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 DRAM and 3D NAND flash memory
manufactured using cutting-edge technology, making
progress toward the goals of the medium-term management plan.
In FPD production equipment, Tokyo Electron
released new products for generation 10.5 panels, which
are expected to see rapid market growth going forward.

Financial Position and Cash Flows
Assets, Liabilities and Net Assets
M Assets
Current assets increased ¥221.1 billion from the end of
the previous fiscal year to ¥997.1 billion, reflectinga ¥58.5 billion increase in cash on hand1 due to thegeneration of ¥139.7 billion in free cash flow,2 a ¥107.8
billion increase in inventories due to increased production to meet robust demand from semiconductor and

Net Sales and Gross Profit Margin

Operating Income andOperating Margin

Millions of yen

2015

2016

2017

2018

(%)

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

320

28

210

Net sales¥612,170¥613,125¥663,949¥799,719¥1,130,728

Gross profit

201,892

242,774

267,210322,291

475,032

33.0%

39.6%

40.2%

40.3%

42.0%

Selling, general and administrative expenses

169,687

154,661

150,421

166,594

193,860

Operating income

32,205

88,113

116,789

155,697

281,172

5.3%

14.4%

17.6%

19.5%

24.9%

Income (loss) before income taxes(11,756)

86,828106,467

149,116

275,242

Net income (loss) attributable to owners of parent(19,409)71,88877,892

115,208

204,371

900

33.0

21

140

14

70

7

0

36

240

19.5 281.1

799.7
600

612.2 613.1

(%)

29.0

19.1

17.6

663.9

24

11.8

14.4

160

12

5.3
0

0

14
 Net Sales
 Gross Profit Margin

15

16

17

18

0

88.1

 Operating Income Operating Margin0

15

13.0 115.2
10

0
-3.3
-19.4

32.2

14

20

71.9

116.8

80

204.3

77.9

155.6
300

30

24.9

39.6 40.2 40.3
42.0

Net Income (Loss) Attributableto Owners of Parent and ROE

48
1,130.7

2014

Operating margin1	This lower limit may be revised in the event that the Company does not generate net income for two consecutive fiscal years.

Comprehensive Income
In fiscal 2018, Tokyo Electron recognized comprehensive income of ¥206.1 billion, up from ¥119.9 billion in
fiscal 2017. This was mainly due to the ¥204.3 billion
in net income, ¥6.3 billion in unrealized gains on

1,200

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 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 2018 of ¥624
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 2018, net other expenses came to ¥5.9 billion, reflecting ¥3.1 billion in extraordinary loss due tothe transition to a defined contribution pension planand ¥0.9 billion in loss on impairment of goodwill. As aresult, income before income taxes came to ¥275.2 billion, up 84.6% year on year. Net income attributable toowners of the parent totaled ¥204.3 billion in fiscal
2018, up 77.4% from fiscal 2017. Net income per sharerose 77.4% year on year to ¥1,245.48.

(Billions of yen)

Sales and Incomei­nvestment securities related to strategically held
shares, and ¥4.4 billion in loss on remeasurements ofdefined benefit plans due to a decrease in the discountrate used to calculate retirement benefits as a result of
falling interest rates.

16

17

18

-10

-70

14

15

16

17

18

 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 2018

PAGE

17

CONTENTS

Business Overview
and Financial Highlights

To Our Stakeholders

Review of Operations
and Business Outlook

Interview with the CEO

Innovation Drives the Evolutionof Semiconductors

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
M Liabilities and Net Assets
Current liabilities increased ¥120.6 billion from the endof fiscal 2017 to ¥368.4 billion at the end of fiscal 2018.
This was mainly due to a ¥32.2 billion increase in customer advances, a ¥29.3 billion increase in trade notes
and accounts payable, a ¥12.6 billion increase inaccrued employees’ bonuses and a ¥34.9 billion
increase in income taxes payable.
Non-current liabilities increased ¥5.0 billion year on
year to ¥68.7 billion.
Net assets came to ¥771.5 billion at the end of fiscal
2018, up ¥125.5 billion from the end of fiscal 2017. Thiswas mainly due to a ¥122.0 billion increase in retained
earnings, reflecting the recording of ¥204.3 billion in
net income attributable to owners of the parent and¥82.2 billion paid in cash dividends (¥36.7 billion for the
fiscal 2017 year-end dividend and ¥45.4 billion for the
fiscal 2018 interim dividend).
As a result, the equity ratio fell 3.7 percentage points
year on year to 63.5% at the end of March 2018. ROE
climbed to 29.0% from 19.1% in fiscal 2017.

FPD manufacturers, and a ¥25.7 billion increase in tradenotes and accounts receivable. The turnover period for
trade notes and accounts receivable in fiscal 2018 was
52 days, compared with 61 days in fiscal 2017, and theinventory turnover period in fiscal 2018 was 111 days,
compared with 108 days in fiscal 2017.
Net property, plant and equipment increased ¥25.5
billion year on year to ¥125.9 billion. This was largely
due to ¥45.6 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 next-generation technologies.
Investments and other assets increased ¥4.5 billion
year on year to ¥85.6 billion.
As a result, total assets as of March 31, 2018 stood at¥1,208.7 billion, up ¥251.2 billion year on year.
1	Cash on hand: Cash and cash equivalents + Short-term investments withoriginal maturities of less than one year
2 Free cash flow: Cash flows from operating activities + Cash flows frominvesting activities (excluding changes in short-term investments with original maturities of less than one year)

Capital Expenditures1 and Depreciation andAmortization2
Capital expenditures totaled ¥45.6 billion in fiscal 2018,a 120.3% 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 increased 15.4% to¥20.6 billion.

Net cash provided by operating activities came to¥186.5 billion, up ¥49.6 billion from fiscal 2017. Major
contributors were ¥275.2 billion in income before
income taxes, a ¥31.6 billion increase in customer
advances, a ¥28.5 billion increase in trade notes andaccounts payable, and ¥20.6 billion in depreciation andamortization. Major outflows included a ¥109.8 billion
increase in inventories, ¥49.7 billion in income taxes
paid, and a ¥25.9 billion increase in trade notes andaccounts receivable.
Net cash used in investing activities was ¥11.8 billion,
compared with ¥28.8 billion used in the previous fiscal
year. This was mainly due to ¥41.7 billion used as payment for purchases of property, plant and equipment
and an inflow of ¥35.0 billion due to a net decrease in
short-term investments.
Net cash used in financing activities came to ¥82.5
billion, compared with ¥39.3 billion in fiscal 2017. Thiswas mainly attributable to ¥82.2 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 2018 stood at ¥257.8 billion, an increase of ¥93.5
billion from the end of fiscal 2017. Cash on hand, which
consists of cash and cash equivalents as well as shortterm investments with original maturities of less than
one year not included in cash and cash equivalents,
increased ¥58.5 billion year on year to ¥373.8 billion at
the end of March 2018. Cash flows during the fiscal
year under review were as follows.

Millions of yen

Financial Position

2014

2015

2016

2017

2018

Total current assets¥621,492¥670,883¥617,416¥775,938¥ 997,102

Net property, plant and equipment

112,344

106,896

96,317

100,441

125,952

Millions of yen

Cash Flows

2014

2015

2016

2017

2018

¥ 69,398¥136,948¥186,582

Total investments and other assets

94,756

98,375

79,63581,06785,650Cash flows from operating activities¥ 44,449¥ 71,806

Total assets

828,592

876,154793,368

957,447

1,208,705

Cash flows from investing activities(19,599)

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

Total current liabilities

170,510

172,812

166,061

247,770

368,452

Cash flows from financing activities(187)(18,214)(138,601)(39,380)(82,549)

Total liabilities

237,978

234,991

229,129

311,447

437,195

Cash and cash equivalents at end of year

104,797

317,632

95,638164,366

257,877

Total net assets (Total shareholders' equity)

590,614641,163564,239645,999

771,509

Selling, General and Administrative
Expenses and Ratio to Net Sales(Billions of yen)

200

193.8

(%)

(Billions of yen)

40

100

Cash Dividends per Share

97.1

Receivable Turnover andInventory Turnover

154.7 150.4(Yen)(Days)(Billions of yen)

800

160

50

166.5
30

75

83.8

78.7
71.3

76.3

624

600

400
373.8

100

105 107

108

317.7

300

111

22.6

20

50

80

400

50

10

25

237

200

66

40

64

61

52

143
0

0

15

16

17

18

 Selling, General and Administrative Expenses
 Ratio to Net Sales

0

0

14

15

16

17

18

50

15

16

17

18

20.6
19.320.6
17.8

12.8 13.2 13.3

100

0

0

14

10

200
20.9

20

77

17.1

236.7
24.9

352

20.8

14
 Receivable Turnover
 Inventory Turnover

15

16

17

18

315.3

268.1
30

25.2

14

Cash on Hand
(Billions of yen)

40

120

27.7
100

Capital Expenditures andDepreciation and Amortization

45.6

169.7
150

R&D Expenses

0

14

15

16

 Capital Expenditures Depreciation and Amortization

17

18

14

15

16

17

18

Cash on Hand = Cash and cash equivalents +Short-term investments with original maturities of less than
one yearTOKYO ELECTRON ANNUAL REPORT 2018

PAGE

18

CONTENTS

To Our Stakeholders

Business Overview
and Financial Highlights

Interview with the CEO

Review of Operations
and Business Outlook

Innovation Drives the Evolutionof Semiconductors

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.