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Financial Review

Consolidated Financial Highlights

The Akebono Brake Group recorded a decline in sales within Japan on the back of weak automobile production activities, but an expansion in automobile sales in North America to a record high level, increases in new orders in China, expansion in brake caliper business in Europe and the influence of the weaker yen (JPY22.2 billion) allowed consolidated sales to rise by 10.7% year-on-year to a record high JPY281.3 billion. With regards to profits, expansion in orders in China, rationalization of production and procurement functions within Japan and other facilities in Asia, and the positive effect of cost reduction efforts allowed profits to be achieved in the respective markets. However the prolonged influence of the production issues that started in North America in 2014 and the subsequent higher costs of labor and of expedited shipment of parts had a profound effect and caused a consolidated operating loss of JPY3.8 billion (compared with an operating income of JPY4.0 billion during the previous term) to occur. Despite the booking of extraordinary income due to the sale of a portion of investment securities, impairment losses on property, plant and equipment of the Elizabethtown Plant (hereinafter called ABE) in Kentucky, provisions for business structure improvement reserves, and losses relating to a recall (Note 2) contributed to a net loss attributable to owners of parent of JPY19.5 billion (Compared with a loss of JPY6.1 billion in the previous term).

Regarding Extraordinary Income and Loss
The realization of stable profits at an early stage in the wake of the large losses suffered from the previous year is a high priority management issue of the Akebono Brake Group. In order to achieve profitability, efforts to reform the local management structure, revise product categories and reform the manufacturing structure have been implemented as part of large reforms to the overall business structure in North America. The reforms to achieve profitability at an early stage in North America led to implementation of impairment accounting for assets during the fourth quarter.
Specifically, impairment of manufacturing facilities at ABE, which is one of several manufacturing facilities in North America, was conducted. ABE suffered from an ongoing condition of “extra costs” due to manufacturing issues arising from excessive orders, and there was a need to resolve issues regarding profitability and production structure by product category. In light of these conditions, reviews of future collectability led to the decision to implement impairment accounting on property, plant and equipment of ABE amounting to about USD69 million. In addition, impairment accounting was also implemented for specific facilities at ABCS and the Clarksville Plant in Tennessee which were not in operation.
At the same time, expenses related to reforms of the management structure of the North American business (business structure restructuring reserves provision) amounting to JPY0.5 billion were incurred. In addition, an extraordinary income of JPY5.0 billion from the sale of investment securities and impairment loss of JPY0.4 billion were recorded in the Japan business segment.

<Extraordinary Income and Loss Details>

(Units: JPY Billion) YTD 3rd
Quarters
4th Quarter Full Year
Investment securities sales
Others
3.3
0.1
1.7
0.0
5.0
0.1
Total extraordinary income 3.4 1.7 5.0
Property, plant and equipment impairment loss
  (United States)
  (Japan)
Business restructuring reserve provision
Recall related loss
Property, plant and equipment asset sale loss
1.6
1.6
-
-
0.8
0.2
10.2
9.8
0.4
0.5
-
0.4
11.8
11.4
0.4
0.5
0.8
0.6
Total extraordinary loss 2.6 11.1 13.7
(Note1)
Our fiscal years are defined as follows:
  • (1) North America, China, Thailand, and Indonesia: January to December 2015
  • (2) Japan and Europe: April 2015 to March 2016
(Note2)
A press release entitled "General Motors Safety Recall" was issued on June 12, 2015.

→Consolidated Financial Results

Results by Geographical Segment

  • (1) Japan
    The influence of the introduction of a tax hike on mini vehicles (sub-compact cars driven by engines of less than 660 cubic centimeters in displacement) during the current fiscal year contributed to a weakening in demand for mini vehicles, and led to a weakening in the overall automobile market within Japan. The influence of weak automobile production and decline in sales of service parts to overseas markets heavily influenced Akebono Brake’s Japanese business and caused sales to decline by 4.2% year-on-year to JPY83.1 billion. And while the burden of research and development expenses of Akebono Brake Group companies in overseas markets grew on the back of the globalization trend and orders declined, reductions in performance based bonuses and other labor costs and in manufacturing and procurement expenses allowed the decline in operating income to be limited to a relatively small margin of 9.5% year-on-year to JPY3.3 billion.
  • (2) North America
    Declines in crude oil prices and aggressive sales financing plans acted as tailwinds allowing automobile sales volumes to trend at close to record high levels in North America. With regards to Akebono Brake’s North American business, growth in orders from major automobile manufacturers created by strong market demand and the positive influence of foreign exchange translation allowed sales to rise by 19.0% year-on-year (4.6% increase in United States Dollar terms) to JPY166.9 billion. Despite transfer of manufacturing responsibilities to other facilities and other efforts to resolve the manufacturing issues in North America, an operating loss of JPY11.2 billion was incurred (compared with a loss of JPY3.2 billion in the previous term).
    While the efforts to reduce the manufacturing burden at ABE, including transfer of manufacturing responsibility and facility improvement support from Japan, were partly effective, the continued high levels of orders forced ABE to fail to completely cease its full capacity operations, including three shifts per day, seven days a week. Consequently, reductions in labor costs did not proceed as planned and the ABE plant incurred losses for the second consecutive term.
    The Akebono Brake Glasgow Plant (hereinafter called ABG) continued to incur additional costs for expedited shipment of parts to help resolve tight capacity constraints and for labor due to employees working overtime and on days off. In order to resolve this issue, production capacity was expanded at this plant in May 2015, specialists were sent to improve productivity and some of the disc brake pad production was transferred to Japan and other global facilities. However, improvements in productivity did not progress as anticipated, which necessitated expedited shipments of some parts from other production facilities.
    With regards to the Columbia Plant in South Carolina (hereinafter called ABCS), excessive manufacturing burden compounded by the breakdown of aluminum casting facilities contributed to a large decline in capacity utilization rates. Furthermore, large costs arising from expedited shipments of parts to avoid delays in delivery of parts to customers led to a large loss. Despite these conditions, orders continued to grow and additional labor costs were incurred due to the need for employees to work overtime and on holidays to maintain supplies to vehicle manufacturers.
  • (3) Europe
    The gradual recovery in the economies of Europe allowed automobile sales volumes to rise by 9.2% year-on-year, but the absolute level of sales remained below the “pre-sovereign debt crisis” levels. Akebono Brake Group saw a decline in its service parts business, but sales of products responding to global platforms (vehicles with commonized platforms manufactured and sold throughout the world) and mass produced high performance brake caliper products (imported from our North American facilities) trended favorably and allowed sales to rise by 22.2% year-on-year to JPY10.9 billion. Despite higher depreciation, labor and other expenses due to the start of production at the Slovakia Plant and labor and expenses arising from the fortification of the marketing structure to expand the brake caliper business, the operating loss was limited to JPY0.9 billion (compared with a loss of JPY0.5 billion in the previous year) due to the normalization of disc brake pad sales pricing, improvements in brake caliper production process productivity and other rationalization efforts.
  • (4) China
    While automobile sales volumes rose only marginally compared with the previous year due to weak demand during the first half of the fiscal year and a buildup in inventories, tax incentives for compact cars (powered by engines of less than 1600cc displacement) introduced in October allowed sales volumes to increase by a large margin during the latter half of the fiscal year. Higher sales of products for global platforms, expansion in orders from new clients and the influence of the weaker yen (JPY2.0 billion) allowed sales to rise by 36.0% year-on-year to JPY19.4 billion (22.3% increase in local currency terms). With regards to profits, an expansion in orders, rationalization of production and procurement functions, and cost reduction efforts allowed operating income to increase by a large 50.5% margin year-on-year to JPY2.5 billion despite increases in depreciation and labor expenses.
  • (5) Thailand
    While sales volumes within Thailand continued to trend weakly, strong exports of pickup trucks and strong global sales of eco-cars allowed production volumes of vehicles within Thailand to reach a new record high. With regards to Akebono Brake’s Thailand business, weak domestic demand was offset by strong exports and higher sales of service parts to the Middle East region and allowed sales to increase by 9.8% year-on-year to JPY6.0 billion. While depreciation costs rose, higher orders for service parts allowed operating income to rise by 81.1% year-on-year to JPY0.5 billion.
  • (6) Indonesia
    While production and sales of motorcycles and automobiles fell below the previous year by a large margin, growth in the Indonesian market over the medium to longer term is expected to be strong. Akebono Brake was able to grow sales by 1.1% year-on-year to JPY16.6 billion due to brake product shipments for global platform applications in Europe and despite declines in orders from motorcycle manufacturers and weak domestic demand from Japanese automobile manufacturers arising from reductions in production to adjust inventories. Decline in orders and increases in labor and depreciation expenses contributed to a 7.6% year-on-year decline in operating income to JPY1.7 billion.

→Results by Geographical Segment

Consolidated Assets, Liabilities, Net Asset Conditions

(Assets)
At the end of the current fiscal year, total consolidated assets declined by JPY21.5 billion from the end of the previous fiscal year to JPY204.4 billion at the end of the current term.
Current assets rose by JPY3.7 billion from the end of the previous fiscal year to JPY84.1 billion at the end of the current term due in part to a JPY8.0 billion increase in cash and deposits and despite a JPY3.8 billion decline in notes and accounts receivables. Noncurrent assets declined by JPY25.2 billion to JPY120.3 billion over the same period due mainly to the JPY9.3 billion decline in property, plant and equipment arising from the impairment losses, and a JPY14.4 billion decline in investment securities arising from sale of securities holdings.

(Liabilities)
Total consolidated liabilities grew by JPY8.3 billion from the end of the previous term to JPY174.3 billion at the end of the current term.
Current liabilities declined by JPY15.9 to JPY84.6 billion over the same period due to a JPY15.0 billion decline in corporate bonds due to be redeemed within one year arising from redemption. Noncurrent assets rose by JPY24.3 to JPY89.7 billion on the back of a JPY26.5 billion increase in long term loans payables and despite a JPY3.5 billion decline in deferred tax liabilities arising from the sale of shareholdings.
Moreover, net interest bearing debts, which reflects the value after cash and deposits is subtracted from the totalbalance of interest bearing liabilities (JPY119.8 billion), stood at JPY99.4 billion.

(Net assets)
Consolidated net assets declined by JPY29.8 billion from the end of the previous fiscal year to JPY30.1 billion at the end of the current fiscal year. The main factors influencing this decline include booking of JPY19.5 billion in net loss attributable to parent company shareholders, a decline of JPY20.1 billion in retained earnings due to payment of dividends, and a JPY7.3 billion decline other marketable securities valuation due in part to the sale of shareholdings.

→Consolidated Financial Performance

Consolidated Cash Flow Conditions

Consolidated cash and deposits rose by JPY8.0 billion from the end of the previous fiscal year to JPY20.4 billion at the end of the current fiscal year.

(Cash flows from operating activities)
A net inflow of JPY7.5 billion was seen in operating activities (A JPY2.7 billion decline from the net inflow seen in the previous term). The main factors influencing this net inflow included JPY15.5 billion loss before income taxes and minority interests, tax payments of JPY2.5 billion, amortization and depreciation of JPY13.1 billion, impairment accounting loss of JPY11.8 billion and a JPY3.6 billion improvement in working capital.

(Cash flows from investing activities)
A net outflow of JPY10.1 billion was recorded in investing activities (a decline of JPY7.6 billion from the net outflow in the previous term). Amongst the factors influencing this outflow were a JPY17.5 billion payment for acquisition of property, plant equipment for preparation of launch of new models in North America and capital investments at ABE, and JPY8.6 billion income for proceeds derived from the sale of investment securities.

(Cash flows from financing activities)
A net inflow of JPY11.2 billion was recorded in financing activities (a JPY5.4 billion increase from the inflow in the previous term). The main factors influencing this inflow included the assumption of JPY43.1 billion in long term loans payable, JPY16.6 billion repayment of long term loans payables and JPY15.0 billion payment for redemption of corporate bonds.

(Reference) Cash flow indicator trends

  FY2012 FY2013 FY2014 FY2015
Equity ratio (%) 24.9 26.4 23.9 11.6
Equity ratio on market value basis (%) 30.8 31.5 26.5 18.0
Cash flow to interest-bearing debt ratio (year) 11.8 4.8 10.6 15.9
Interest coverage ratio 6.5 14.1 8.6 4.3

Equity ratio: Net equity / Total assets
Equity ratio on market value basis : Aggregated market value of net equity / Total assets
Cash flow to interest-bearing debt ratio: Interest-bearing debt / Cash flow
Interest coverage ratio: Cash flow / Interest payments

  1. Each indicator is calculated using consolidated financial data.
  2. Market value of shares is calculated using the total number of shares issued.
  3. Cash flow is based on our operating cash flow.
  4. Interest bearing debt includes all of the liabilities which bear interest payments on our consolidated balance sheet.

→Consolidated Cash Flow

Consolidated Financial Forecast

Automobile sales in the major markets around the world during fiscal year March 2017 are expected to grow. By geographic region, an anticipated hike in the consumption tax in April 2017 and the influence of the earthquake disaster in the Kumamoto region are expected to cast a shadow over demand within Japan. Despite uncertainties resulting from the potential for a hike in policy interest rates and the effect of stagnant macro economic conditions upon demand in North America, sales are expected to remain at high levels. With regards to Europe, sales are expected to grow on the back of economic recoveries throughout the region. And while growth is expected to slow in China, demand for sports utility vehicles (SUV) and compact cars is expected to remain strong. Within the ASEAN region, sales are expected to grow in Indonesia but decline in Thailand.
The Akebono Brake Group’s estimates for the coming fiscal year similar levels of sales and operating income within Japan as the term just ended. In North America, transfer of production to facilities in other geographic regions is expected to contribute to a decline in sales, but efforts are being implemented to reduce the losses arising from additional costs necessary to resolve the manufacturing issues there. Specifically, stricter selection of orders to improve profitability, transfer of production to reduce the burden upon manufacturing facilities and improve productivity, large reduction in expedited shipments of products, and booking of provisions to business restructuring reserves for impairment charges of tangible assets are expected to lead to a large reduction in operating losses. In addition, outside professionals are being employed to help with efforts to assess the current business and review current problems and issues, review product category profitability, reduce sales, general and administrative expenses and indirect costs, secure stable quality levels, reduce expedited shipments, replace management level staff, and make adjustments to ensure appropriate levels of staff are maintained. A person with strong experiences has been appointed to become the new chief executive officer of the United States operations and a new chief financial officer has also been hired as part of the restructuring of the management team. And while the loss (JPY4.5 billion) may not be totally eradicated within fiscal year 2016, these measures are undertaken to increase the speed of the reforms and enable Akebono to realize a profit in fiscal year 2017 (JPY1.2 billion operating income) and to achieve the target of JPY3.5 billion operating income in fiscal year 2018. With regards to Asia, aggressive efforts will continue to be made within China and other regions to grow sales, and reviews of product sales mix are expected to allow similar levels of operating income as the term just ended to be achieved. At the same time, sales are expected to decline by a small margin and operating loss is expected to expand in Europe due to review of product sales mix and anticipatory investments.

<Fiscal year ending March, 2017 earnings by geographical segment>

(Units: billion yen)
  Sales Operating income
Japan 81.9 3.0
North America
(United States)
(Mexico)
156.7
155.2
1.5
-4.9
-4.5
-0.4
Europe 10.1 -1.5
China 21.3 2.5
Thailand 6.4 0.4
Indonesia 16.2 1.9
Elimination -21.3 0.2
Total consolidated 271.3 1.6

FY2016 represents results of Fiscal year ended March 2016 and FY2017 represents forecast of Fiscal year ending March 2017.
These forecasts assume annual average foreign exchange rates of USD1 = JPY115, and EUR1 = JPY125.

Ordinary income of JPY0.1 billion is expected despite interest payment of JPY1.5 billion in non-operating income.
With regards to extraordinary income, net income attributable to shareholders of the parent company is expected to turn positive to JPY0.2 billion on the back of sale of assets which is expected to raise about JPY3.3 billion.
In addition, uncertainties regarding order trends arising from the Kumamoto earthquake disaster and the recent Mitsubishi Motors Corporation problems have not been factored into our earnings estimates for the coming term.

→Consolidated Financial Forecast