Name: Krasen Dimov ID#:100063777 Class:BUS220f

ANNUAL PROJECT 2011

INDIVIDUAL PAPER

Company: Toshiba Corporation Data from Annual Report 2011, 2010

Toshiba is $77 billion multinational electric and electronic equipment manufacturer led by CEO Norio Sasaki. The company has a very wide range of products starting from digital products and electronic devices to home appliances and social infrastructure. Currently Toshiba is the fifth largest personal computer vendor with more than 203,000 employees. With around $4 billion annual investments in research and development, Toshiba Corporation is one of the most renowned innovators in the technology industry: Committed to people, committed to the future. This paper discusses the performance and future perspectives of the company using tools like horizontal and vertical analysis of the financial statements and some key financial ratios. Despite the economic uncertainties in many countries and the sluggish recovery of the global economy, we see a significant improvement in the financial indicators of Toshiba Corporation. Referring to the horizontal analysis of the income statement, we see a significant 2% (107.3 billion yen) increase in the consolidated net sales for FY2010. This has led to an impressive 468% or 161.1 billion yen increase of the income from continuing operations (before non-controlling interest and taxes). We can also notice a significant improvement in the selling, administrative and general expenses, which have decreased with 53,273 million yen (4%). Naturally this has led to a 157,588 billion yen increase of the net income attributable to the shareholders, despite the yen appreciation and the impact of the Great East Japan Earthquake. Although these statistics sound impressive, we should also note that the net income attributable to the shareholders of the company merely returned to its recorded levels in FY 2007. The management of the company explains the climb in profits mainly with an increase in sales of TVs, semiconductors and memories. In addition, the company recorded a high profit level in the home appliances industry and the social infrastructure segment. Toshiba Corporation managed to cut PC procurement costs and restructure its display operations. We should also note that the Japanese giant supplies the famous Apple Inc. with smartphone displays, storage devices and lighting. Thus the increased demand for the iPad and iPhone was one of the reasons for Toshibas lucrative FY 2010. Referring to the balance sheet horizontal analysis we see a significant decrease of 25% in the long-term debt. This is due to the companys endeavor to achieve an asset light business model. The total liabilities have decreased with 3% to a total of 4,200 billion yen. This has also affected the assets of the company, which have decreased with 1%. We see a decrease of 9% of the fixed assets, which is due to the above mentioned policy. The increase in the net profit and the cut of the expenses have also led to an 8% increase in the total equity

attributable to the shareholders of the company (868 billion yen for FY 2010). In general, the company tries to reduce the long term liabilities and to use its assets more efficiently. By reviewing the common-size income statement we can clearly see the marks of an aggressive reorganization of the company, which helps reducing the costs. In the fiscal year ended March 31, 2011, we can see that the total expense were 98.4% of the net sales, compared to a 100.9% for FY 2009. We can also notice a significant decrease in the cost of sales and the selling, general and administrative expenses. At the end of FY 2010 the company has recorded a net income attributable to shareholders of 2.2% of net sales, which is an improvement from FY 2009, during which Toshiba recognized a net loss amounting to 0.3% of net sales. Furthermore, the common-size balance sheet shows us a slight increase of the proportion of current assets to total assets on account of the fixed assets for the 2010 fiscal year. For the FY 2010 the current assets are 52% of the total assets, compared to the 50.7% for the FY 2009. On the other hand, the fixed assets for FY 2010 are just 16.7% of the total assets, while for FY 2009 they are 18%. Yet again this shows the attempt of the company to increase its efficiency and flexibility. This policy has affected the liability side of the balance sheet as well. For FY 2010 the proportion of long-term debt to total assets is 14.3% compared to 17.6% from the previous year. The liquidity position of Toshiba Corporation has significantly improved for the FY 2010. There is a clear increase in the net working capital, which means that the company has become safer in terms of meeting its short term obligations and thus it can safely expand. This fact is reflected in the increase of the current ratio from 1.11 to 1.12 for FY 2010. Although relatively low, the current ratio of Toshiba Corporation is considered to be safe. Whether the company has optimized its usage of assets is ambiguous and hard to tell from the inventory, total assets and accounts receivable turnover ratios. On one hand, we have a decrease in the inventory turnover from 8.10 to 7.71. This means that the company has inefficiently tied up more of its funds to its inventories. In addition, there is a decrease in the accounts receivable turnover, which means that the company is worse off in collecting its accounts receivables and managing its sales on credit. On the other hand, the total asset turnover shows an increase from 1.15 to 1.18 for FY 2010, which tells us that in general the corporate resources are better managed compared to the previous year. The picture looks less bright when we look at the leverage ratios. For FY 2010 the debt-to-equity ratio has decreased from 1.5 to 1.2. This shows that the company has put a lot of effort in making itself safer in terms of paying its debts and interests. This statement can be

backed up with the change of the interest coverage ratio from 3.74 to 7.70, which clearly indicates that Toshiba Corporation has done a lot in decreasing the risk of default on its debts. These results are partly due to the decrease in the long-term debt of the company and due to the increase in the equity attributable to the shareholders. Nevertheless, the leverage indicators of Toshiba Corporation are comparatively high, which means that the company uses mostly debt to finance its assets. Despite the positive developments, we can still conclude that Toshiba has relatively high leverage ratios, so it should continue working in the same direction. From profitability point of view we can also see a significant change in the ratios. This is due to the recorded in FY 2010 net income comparable in size to the net income prior to the 2007 financial crisis. We should also note that Toshiba had e very poor performance in FY 2009 with a recorded net loss of 19 billion yen. This explains the net profit margin jump from -0.31% to 2.12%. We observe a similar change in the return on total assets. More interesting is the change from -3.2% to 16.6% in the return on equity. This huge change is due to the simultaneous increase in the equity attributable to shareholders and the net profit, and shows the overall increase in the profitability of the company. Furthermore, there are significant increases in the companys common stock ratios, which indicate an overall improvement in the performance and increase in the companys value. All the conclusions drawn in the previous paragraphs are based on data from the 2011/10 annual reports, so it is important to pay attention to the accounting policies used in creating the reports and any additional notes attached to them. It seems that there are no significant changes in the accounting policies of the company. Toshiba Corporation prepares its financial statements according to the generally accepted accounting principles in Japan, but at the same time maintains the records of its foreign subsidiaries in conformity with the accounting policies for the different countries. The company also uses some management estimates in order to comply with U.S. GAAP. The company has a very ambitious dividend policy for the FY 2010 and FY 2011. It has set its goals to a 30% payout ratio on a consolidated basis. For the last fiscal year Toshiba has decided to pay an interim dividend of 2 yen per share and year-end dividend of 3 yen per share. This amounts to 5 yen per share of annual dividend. It will also seek a continual increase in the actual dividend payments on consolidated basis in the future. We should also have in mind that for the FY 2009 Toshiba did not pay any dividends.

Taking a look at the capital structure of the company we would see that Toshiba has, in a way, potentially problematic debt leverage. Indicators such as the quick ratio show that the company does not have an adequate amount of liquid assets. Except for the above mentioned liquidity problem, Toshiba Corporation has also a relatively high leverage ratios. On one hand, this could be explained by the capital intensive businesses with which Toshiba deals. On the other hand, this does not change the fact that the company is relatively risky in terms of maintaining a positive capital and meeting its obligations. Nevertheless, we can see a tendency of a decreasing long-term debt, which indicates that the company is working on improving its capital structure and decreasing the risk of insolvency. For FY 2010 the equity attributable to shareholders has increased with 70.2 billion yen, which lead to an improvement of the shareholders equity ratio. Furthermore, the total debt of the company has decreased with 137 billion yen. These developments indicate a significant improvement in the health of the company. An article in Bloomberg.com named Toshiba to Buy Meter Maker Landis+Gyr for $2.3 Billion in Smart Grid Boost shows how confident the company feels about its future. The article discusses that Toshiba is going to acquire the Swiss company Landis+Gyr for $2.3 billion. This will expand the computer giants business with smart-grid operations and will provide the Japanese company access to 30 different markets. Smart-grid is a system that monitors and manages the usage of electricity from renewable sources such as solar power and wind. This is a big step for Toshibas green oriented policy, which justifies the motto of the company: Committed to the future. Furthermore, the Japanese giant expects the smartgrid market to expand sixfold to $71 billion over the next decade. Nevertheless, this does not mean that Toshiba is a safe harbor for the investors money. As IndustryWeeks article titled Toshiba returns to black points out, the outlook still remains uncertain. The Great Japanese Earthquake had an enormous impact on the performance of the company for the fiscal 2010 year and will have effect on the company in the future as well. As the article suggests, the nearly doubled revenue for FY 2010 is mainly due to the strong demand for television sets and memory chips, which are just a small portion of the companys product range. At the same time, Toshiba had to close a chip-making factory in Iwate Prefecture, which has resumed its operations only partially. In the long-term the computer giant has to deal with the paralyzed Japanese economy, which will definitely lead to a change in the domestic demands.

So the question is: should we invest in Toshiba Corporation? On one hand, the company is relatively debt leveraged and that means its equity is pretty sensitive to losses. Currently the economic picture of the world is not very promising: we have a sovereign debt crisis and Europe and in addition the earthquake stricken economy of Japan. These uncertainties make Toshiba a relatively risky company to invest in, because the case of big net losses would wipe out the equity of the company. On the other hand, we should also note that the company is trying to restructure itself and create a more flexible business model. It has managed to decrease its long-term debt and cut many operational expenses. Furthermore, except for the strongly established business in the digital products and electronic devices segments, Toshiba has been consistent in its annual investments in new technologies and alternative sources of energy. In the future this may turn out to be a gold mine for the company and for the stockholders. To conclude, in the short run Toshiba is not the perfect company to invest in, but for a venturesome investor, the Japanese giant may turn out to be an easy way to for multiplying money.

Sources:
1. Toshiba to Buy Meter Maker Landis+Gyr for $2.3 Billion in Smart Grid Boost. www.bloomberg.com. http://www.bloomberg.com/news/2011-05-19/toshiba-reaches-agreement-topurchase-landis-gyr-for-2-3-billion-in-cash.html May 19, 2011. Web.

2.

Toshiba returns to black. www.industryweek.com. http://www.industryweek.com/articles/toshiba_returns_to_black_24566.aspx ?cid=NLQMN May 9, 2011. Web.

Consolidated Financial Statements:

Consolidated Balance Sheet Toshiba Corporation and Subsidiaries As of March 31, 2011 and 2010 In millions of yen Assets Current Assets: Cash and cash equivalents Notes and accounts receivable, trade: Notes Accounts Allowance for doubtful notes and accounts Inventories Deferred tax assets Other receivables Prepaid expenses and other current assets Total current assets Long-term receivables and investments: Long-term receivables Investments in and advances to affiliates Marketable securities and other investments Total long-term receivables and investments Property, plant and equipment: Land Buildings Machinery and equipment Construction in progress Less-Accumulated depreciation Total property, plant and equipment Other assets: Goodwill and other intangible Deferred tax assets Other assets Total other assets Total assets Liabilities and equity Current liabilities: Short-term borrowings Current portion of long-term debt Notes and accounts payable, trade Accounts payable, other and accrued expenses 2011 2010 2009

258,840 47,311 1,093,948 (17,079) 864,382 161,197 189,028 202,041 2,799,668

267,449 44,122 1,160,389 (20,112) 795,601 134,950 187,164 192,043 2,761,606

343,793 64,260 1,038,396 (19,270) 758,305 141,008 176,196 217,943 2,720,631

2,540 416,431 241,409 660,380

3,337 366,250 253,267 622,854

3,987 340,756 190,110 534,853

99,834 996,409 2,330,565 113,132 (2,639,735) 900,205

105,663 1,016,520 2,508,934 97,309 (2,749,700) 978,726

98,116 996,709 2,698,626 114,617 (2,818,489) 1,089,579

559,246 356,592 103,228 1,019,066 5,379,319

618,731 355,687 113,569 1,087,987 5,451,173

629,820 352,948 125,394 1,108,162 5,453,225

152,348 159,414 1,194,229 380,360

51,347 206,017 1,191,885 375,902

747,971 285,913 1,003,864 366,219

Accrued income and other taxes Advance payments received Other current liabilities Total current liabilities Long-term liabilities: Long-term debt Accrued pension and severance costs Other liabilities Total long-term liabilities Total liabilities Equity attributable to shareholders of the Company Common stock: Authorized10,000,000,000 shares Issued shares Additional paid-in capital Retained earnings Accumulated other comprehensive loss Treasury stock, at cost: 20112,519,870 shares 20102,160,986 shares 20091,910,852 shares Total equity attributable to shareholders of the Company Equity attributable to noncontrolling interests Total equity Total liabilities and equity

38,197 271,066 302,695 2,498,309

42,384 317,044 303,866 2,488,445

38,418 268,083 357,305 3,067,773

769,544 734,309 197,541 1,701,394 4,199,703

960,938 725,620 148,548 1,835,106 4,323,551

776,768 719,396 130,007 1,626,171 4,693,944

439,901 399,552 551,523 (521,396) (1,461)

439,901 447,733 375,376 (464,250)

280,281 291,137 395,134 (517,996)

(1,305) (1,210) 868,119 311,497 1,179,616 5,379,319 797,455 330,167 1,127,622 5,451,173 447,346 311,935 1,206,627 5,453,225

Horizontal Analysis:
Consolidated Balance Sheet Toshiba Corporation and Subsidiaries As of March 31, 2011 and 2010 In millions of yen Assets Current Assets: Cash and cash equivalents Notes and accounts receivable, trade: Notes Accounts Allowance for doubtful notes and accounts Inventories Deferred tax assets Other receivables Prepaid expenses and other current assets 2011 Increase (Decrease) 2010 Amount Percent

258,840 47,311 1,093,948 (17,079) 864,382 161,197 189,028 202,041

267,449 44,122 1,160,389 (20,112) 795,601 134,950 187,164 192,043

(8,609) 3,189 (66,441) 3,033 68,781 26,247 1,864 9,998

-3% 7% -6% -18% 8% 16% 1% 5%

Total current assets Long-term receivables and investments: Long-term receivables Investments in and advances to affiliates Marketable securities and other investments Total long-term receivables and investments Property, plant and equipment: Land Buildings Machinery and equipment Construction in progress Less-Accumulated depreciation Total property, plant and equipment Other assets: Goodwill and other intangible Deferred tax assets Other assets Total other assets Total assets Liabilities and equity Current liabilities: Short-term borrowings Current portion of long-term debt Notes and accounts payable, trade Accounts payable, other and accrued expenses Accrued income and other taxes Advance payments received Other current liabilities Total current liabilities Long-term liabilities: Long-term debt Accrued pension and severance costs Other liabilities Total long-term liabilities Total liabilities Equity attributable to shareholders of the Company Common stock: Authorized10,000,000,000 shares Issued: 2011 and 20104,237,602,026 shares Additional paid-in capital

2,799,668

2,761,606

38,062

1%

2,540 416,431 241,409 660,380

3,337 366,250 253,267 622,854

(797) 50,181 (11,858) 37,526

-31% 12% -5% 6%

99,834 996,409 2,330,565 113,132 (2,639,735) 900,205

105,663 1,016,520 2,508,934 97,309 (2,749,700) 978,726

(5,829) (20,111) (178,369) 15,823 109,965 (78,521)

-6% -2% -8% 14% -4% -9%

559,246 356,592 103,228 1,019,066 5,379,319

618,731 355,687 113,569 1,087,987 5,451,173

(59,485) 905 (10,341) (68,921) (71,854)

-11% 0% -10% -7% -1%

152,348 159,414 1,194,229 380,360 38,197 271,066 302,695 2,498,309

51,347 206,017 1,191,885 375,902 42,384 317,044 303,866 2,488,445

101,001 (46,603) 2,344 4,458 (4,187) (45,978) (1,171) 9,864

66% -29% 0% 1% -11% -17% 0% 0%

769,544 734,309 197,541 1,701,394 4,199,703

960,938 725,620 148,548 1,835,106 4,323,551

(191,394) 8,689 48,993 (133,712) (123,848)

-25% 1% 25% -8% -3%

439,901 399,552

439,901 447,733

(48,181)

-12%

Retained earnings Accumulated other comprehensive loss Treasury stock, at cost: 20112,519,870 shares 20102,160,986 shares Total equity attributable to shareholders of the Company Equity attributable to noncontrolling interests Total equity Commitments and contingent liabilities Total liabilities and equity

551,523 (521,396) (1,461)

375,376 (464,250)

176,147 (57,146)

32% 11%

(1,305) 868,119 311,497 1,179,616 5,379,319 797,455 330,167 1,127,622 5,451,173 70,664 (18,670) 51,994 (71,854) 8% -6% 4% -1%

Consolidated Statements of Income Toshiba Corporation and Subsidiaries For the years ended March 31, 2011 and 2010 In millions of yen Sales and other income: Net sales Interest and dividends Equity in earnings of affiliates Other income Total revenue Costs and expenses: Cost of sales Selling, general and administrative Interest Other expense Total expense Income from continuing operations, before income taxes and noncontrolling interests Income taxes Income from continuing operations, before noncontrolling interest Loss from discounted operations, before noncontrolling interests Net income (loss) before noncontrolling interests Less: Net income attributable to noncontrolling interest Net income (loss) attributable to shareholders 2011 6,398,505 8,704 18,478 67,811 6,493,498 4,897,547 1,260,685 32,331 107,386 6,297,949 195,549 40,720 Increase (Decrease) 2010 Amount Percent 6,291,208 7,965 22,385 62,793 6,384,351 4,852,002 1,313,958 35,650 148,328 6,349,938 34,413 33,534 107,297 739 (3,907) 5,018 109,147 45,545 (53,273) (3,319) (40,942) (51,989) 161,136 7,186 2% 9% -17% 8% 2% 1% -4% -9% -28% -1% 468% 21%

154,829

879

153,950

(8,183)

(6,172)

(2,011)

146,646

(5,293)

8,801

14,450

(5,649)

-39%

137,845

(19,743)

157,588

798%

Vertical Analysis:
Consolidated Balance Sheet (Vertical analysis) Toshiba Corporation and Subsidiaries As of March 31, 2011 and 2010 Amounts on March 31 2011 Percent of total assets 2010 2011 2010

In millions of yen Assets Current Assets: Cash and cash equivalents Notes and accounts receivable, trade: Notes Accounts Allowance for doubtful notes and accounts Inventories Deferred tax assets Other receivables Prepaid expenses and other current assets Total current assets Long-term receivables and investments: Long-term receivables Investments in and advances to affiliates Marketable securities and other investments Total long-term receivables and investments Property, plant and equipment: Land Buildings Machinery and equipment Construction in progress Less-Accumulated depreciation Total property, plant and equipment Other assets: Goodwill and other intangible Deferred tax assets Other assets Total other assets Total assets Liabilities and equity Current liabilities: Short-term borrowings Current portion of long-term debt Notes and accounts payable, trade Accounts payable, other and accrued expenses

258,840 47,311 1,093,948 (17,079) 864,382 161,197 189,028 202,041 2,799,668

267,449 44,122 1,160,389 (20,112) 795,601 134,950 187,164 192,043 2,761,606

4,8% 0,9% 20,3% -0,3% 16,1% 3,0% 3,5% 3,8% 52,0%

4,9% 0,8% 21,3% -0,4% 14,6% 2,5% 3,4% 3,5% 50,7%

2,540 416,431 241,409 660,380

3,337 366,250 253,267 622,854

7,7% 4,5% 12,3%

6,7% 4,6% 11,4%

99,834 996,409 2,330,565 113,132 (2,639,735) 900,205

105,663 1,016,520 2,508,934 97,309 (2,749,700) 978,726

1,9% 18,5% 43,3% 2,1% -49,1% 16,7%

1,9% 18,6% 46,0% 1,8% -50,4% 18,0%

559,246 356,592 103,228 1,019,066 5,379,319

618,731 355,687 113,569 1,087,987 5,451,173

10,4% 6,6% 1,9% 18,9% 100%

11,4% 6,5% 2,1% 20,0% 100%

152,348 159,414 1,194,229 380,360

51,347 206,017 1,191,885 375,902

2,8% 3,0% 22,2% 7,1%

0,9% 3,8% 21,9% 6,9%

Accrued income and other taxes Advance payments received Other current liabilities Total current liabilities Long-term liabilities: Long-term debt Accrued pension and severance costs Other liabilities Total long-term liabilities Total liabilities Equity attributable to shareholders of the Company Common stock: Authorized10,000,000,000 shares Issued: 2011 and 20104,237,602,026 shares Additional paid-in capital Retained earnings Accumulated other comprehensive loss Treasury stock, at cost: 20112,519,870 shares 20102,160,986 shares Total equity attributable to shareholders of the Company Equity attributable to noncontrolling interests Total equity Commitments and contingent liabilities Total liabilities and equity

38,197 271,066 302,695 2,498,309

42,384 317,044 303,866 2,488,445

0,7% 5,0% 5,6% 46,4%

0,8% 5,8% 5,6% 45,6%

769,544 734,309 197,541 1,701,394 4,199,703

960,938 725,620 148,548 1,835,106 4,323,551

14,3% 13,7% 3,7% 31,6% 78,1%

17,6% 13,3% 2,7% 33,7% 79,3%

439,901 399,552 551,523 (521,396) (1,461)

439,901 447,733 375,376 (464,250)

8,2% 7,4% 10,3% -9,7%

8,1% 8,2% 6,9% -8,5%

(1,305) 868,119 311,497 1,179,616 5,379,319 797,455 330,167 1,127,622 5,451,173 16,1% 5,8% 21,9% 100% 14,6% 6,1% 20,7% 100%

Common-size Income Statement:

Consolidated Statements of Income Toshiba Corporation and Subsidiaries For the years ended March 31, 2011 and 2010 In millions of yen Sales and other income: Net sales Interest and dividends Equity in earnings of affiliates Other income Total revenue Costs and expenses: Cost of sales Selling, general and administrative Interest Other expense Total expense 2011 6,398,505 8,704 18,478 67,811 6,493,498 4,897,547 1,260,685 32,331 107,386 6,297,949 6,291,208 7,965 22,385 62,793 6,384,351 4,852,002 1,313,958 35,650 148,328 6,349,938 2010 Percentage 2011 2010 100,0% 0,1% 0,3% 1,1% 101,5% 76,5% 19,7% 0,5% 1,7% 98,4% 100,0% 0,1% 0,4% 1,0% 101,5% 77,1% 20,9% 0,6% 2,4% 100,9%

Income from continuing operations, before income taxes and noncontrolling interests Income taxes Income from continuing operations, before noncontrolling interest Loss from discounted operations, before noncontrolling interests

195,549 40,720

34,413 33,534

3,1% 0,6%

0,5% 0,5%

154,829

879

2,4%

0,0%

(8,183)

(6,172)

-0,1%

-0,1%

Less: Net income attributable to noncontrolling interest Net income (loss) attributable to shareholders

8,801

14,450

0,1%

0,2%

137,845

(19,743)

2,2%

-0,3%

Key Financial Ratios:

2011 Working Capital Current Ratio/Working Capital Ratio Quick Ratio Accounts Receivable Turnover Inventory Turnover Total Asset Turnover Debt-Equity Ratio Interest Coverage Ratio Net Profit Margin Return on Total Assets Return on Equity Earning per share (basic) Earning per share (diluted) Price-to-earning ratio (P/E) Annual dividends per share Book Value per Share Price-to-book value 2010

301,359 273,161 1,12 1,11 0,62 0,66 5,68 5,72 7,71 8,10 1,18 4,84 7,70 2,12% 2,55% 16,55% 32,5 31,2 12,51 5 204,98 2,6 1,15 5,42 3,74 -0,31% -0,36% -3,17% -4,93 -4,93 0 188,28 2