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Financial Review

Consolidated Financial Highlights

We provide details of the Akebono Brake Group’s business performance for the current fiscal year (Note) as follows. Weak automobile sales within Japan and slowing exports during the first half contributed to a decline of sales of the Japanese operations. At the same time, favorable order trends in North America, increases in orders in China, and start of mass produced high performance vehicles business applications on a full scale in Europe contributed to increases in sales in local currencies in all geographic regions excluding Japan. However, the large influence of fluctuations in the value of the yen (-JPY23.4 billion) caused sales to decline by 5.4% year-on-year to JPY266.1 billion. With regard to profit, earlier than anticipated results of various measures including cost reduction efforts within Japan and restructuring of the North American operations (Refer to section 2) North America) and increases in orders in China allowed operating profit to improve from a loss of JPY3.8 billion in the previous term to a profit of JPY4.2 billion in the current term despite a continuation of some of the production issues in North America (Additional labor cost, expedited freight). Declines in interest expense were offset by foreign exchange loss and contributed to the booking of ordinary profit of JPY0.8 billion compared with a loss in the previous term of JPY6.8 billion. Profit attributable to owners of parent improved from a loss in the previous term of JPY19.5 billion to an profit of JPY0.35 billion due in part to the booking of extraordinary income from sales of some investment securities and subsidy income (Fukushima business investment subsidy for revitalization of industries).

(Note)
Our fiscal years are defined as follows:
  • (1) North America, China, Thailand, and Indonesia: January to December 2016
  • (2) Japan and Europe: April 2016 to March 2017

→Consolidated Financial Results

Results by Geographical Segment

  • (1) Japan
    Despite positive factors of increases in new orders, transfer of production from overseas facilities and higher sales of aftermarket parts, total orders declined because of decreased production of compact trucks for overseas markets and lower exports of industrial machinery application products. As the result, sales declined by 2.7% year-on-year to JPY80.9 billion. With regard to profits, efforts to rationalize manufacturing and procurement functions, cost reductions, and reductions in development expenses of overseas group companies allowed operating profit to rise by 26.5% year-on-year to JPY4.1 billion.
  • (2) North America
    Results of various restructuring measures for the North American operations have been achieved earlier than expected and new business inquiries have recovered in the wake of the production issues. Consequently, orders continued to trend at high levels and sales in local currency rose 1.3% year-on-year. However, sales in yen terms fell by 8.2% year-on-year to JPY153.1 billion due to the impact of the stronger yen (-JPY16.0 billion). In addition, the production issues, which caused large losses to be incurred in the previous term, are approaching an end due to the success of various measures, and a subsequent considerable improvement in profitability has allowed the operating loss to contract to JPY3.2 billion in the current term from JPY11.2 billion in the previous term.
  • Progress in achieving success in critical measures implemented for the North American operations is described below.
  • i) Fundamental organizational reforms
    A new Chief Executive Officer and Chief Financial Officer, new plant and marketing managers, production division managers and purchasing division managers have been hired to renew the core management and overall organizational structure, and strengthen the organizational and supervisory structure. In addition, efforts to change the awareness associates and improve the working environment implemented in the current term are expected to yield results and lead to large improvements in earnings from the coming term onwards. In February 2017, restructuring of the organizational and supervisory structure has been completed with the hiring of a new executive has responsible for the human resources division. Furthermore, measures will be implemented to strengthen collaboration within the Akebono Group, and restructure the manufacturing function by promoting production efficiency improvements and increasing production capacity based upon a return to the basic philosophy of Akebono’s corporate culture of “Monozukuri” (manufacturing excellence) to achieve stability of operations and further improvements in earnings.
  • ii) Productivity improvement
    Akebono Brake is promoting optimization of manufacturing functions on a global basis by considering Akebono Group’s various production facilities’ capacity utilization and reviewing logistics conditions, and by transferring production of some friction material products to overseas facilities within our group (Japan and Thailand) to optimize manufacturing on a global basis. Manufacturing lines had been operating at full capacity three shifts per day, seven days a week in response to the prolonged period of strong demand. But optimization efforts have allowed our company to reduce the work load to three shifts for six days a week, and to begin reducing the number of shifts to two per day at some lines. Consequently, facility maintenance and repairs can now be implemented as planned and expenses for expedited freight of parts because of production delays have been reduced by a large margin and earnings improvements are being achieved. Akebono Group will conduct efforts to achieve further improvements in manufacturing optimization and stability.
  • iii) Manufacturing capacity increase
    In response to the growing demand for aluminum brake calipers in North America and Europe, new manufacturing facilities have been introduced to increase production capacity to the Columbia Plant in South Carolina in April 2016, and a new line began full scale operation in October 2016. Moreover, the expanded manufacturing facilities for friction materials as part of the highly profitable aftermarket parts business at the Glasgow Plant in Kentucky were expanded in February 2017. Furthermore, output capacity of products responding to strong demand from pickup trucks and sports utility vehicles (SUVs) applications will be expended with a view to customer needs and market trends.
  • iv) Optimization of sales and purchase prices
    Efforts to improve manufacturing costs, and reviews to optimization of sales and purchase pricing were undertaken to improve the earnings generating structure of the North American operations. The results of these efforts are expected to contribute to improved earnings of the North American operations from the current term onwards.
  • (3) Europe
    While aftermarket friction materials products sales declined, expansion in products sold to global platform applications (common platforms for global distribution) and full scale sales of disc brake calipers for mass produced high performance vehicles allowed sales to grow by 6.5% year-on-year to JPY11.6 billion. With regard to profits, the increase in one-off expenses arising from preparations for increased production at the newly established Slovakia Plant and deterioration in the product sales mix due to declines in the friction materials business caused operating loss to expand to JPY1.3 from JPY0.9 billion in the previous term.
  • (4) China
    Orders grew due to favorable sales of SUVs and compact cars on the back of special tax incentives and sales rose by 2.8% year-on-year to JPY20.0 billion. With regard to profits, changes in sales composition arising from increases in orders for friction materials and cost reduction efforts allowed operating profit to rise by 1.7% year-on-year to JPY2.6 billion despite increases in labor cost and depreciation related to environmental responses and an increase in manufacturing lines.
  • (5) Thailand
    Increases in production of exported compact cars, start of production of newly ordered parts, optimization of production within the Akebono Group arising from transfer of production from North America and increases in orders in general allowed sales to rise by 10.1% year-on-year to JPY6.6 billion. With regard to profits, higher depreciation accompanying the start of new businesses for compact cars, increases in labor expenses and start-up expenses arising from the start of production at a new foundry caused operating profit to fall by 9.5% year-on-year to JPY0.4 billion despite higher sales.
  • (6) Indonesia
    Orders within Indonesia associated with new business for multi-purpose vehicles (MPVs) that meet low-cost green car (LCGC) regulations, and shipments of products for global platform vehicle applications in Europe remained favorable and allowed sales in local currency terms to grow. However, the negative influence of the stronger yen (-JPY1.8 billion) caused sales to decline by 1.3% year-on-year to JPY16.3 billion. With regard to profits, higher materials expenses caused by a weakening of the Indonesian rupiah and increases in labor expenses caused operating profit to decline by 17.9% year-on-year to JPY1.4 billion.
  • The influence of foreign currency fluctuations upon earnings
    Against the backdrop of recent large fluctuations in foreign currencies, the Akebono Brake Group implements various measures to reduce risks arising from foreign currency fluctuations, but identifies the influence of fluctuations upon its earnings during the current fiscal year as follows.
  • i. Net sales: Caused a JPY23.41 billion year-on-year decline
    ii. Operating profit: Caused a JPY0.15 billion yea-on-year decline
    iii. Non-operating income: A JPY1.16 billion foreign currency translation loss was incurred
    The main reasons for the above mentioned items resulted from factors other than the differences in foreign currency exchange rates at the time of sales of products and procurement of materials are described in the following two points.
    A) Currency translation on foreign currency denominated loans extended by Akebono Brake in Japan to its overseas subsidiaries of JPY0.47 billion
    B) Currency translation on United States dollar denominated loans assumed by the local subsidiary in Mexico of JPY0.30 billion
    While the incidences of business denominated in United States dollars had been common traditionally, settlements denominated in Euros and Mexican pesos are increasing in response to the recent global expansion of Akebono Group’s business and influence of the severe fluctuations in foreign exchange rates. Consequently, Akebono Brake is doing its utmost to reduce the influence of foreign exchange fluctuations by assuming loans locally denominated in local currencies and assuming other methods of hedging foreign exchange risks.

→Results by Geographical Segment

Consolidated Assets, Liabilities, Net Asset Conditions

(Assets)
At the end of the current fiscal year, total consolidated assets declined by JPY2.6 billion from the end of the previous fiscal year to JPY201.8 billion. Current assets declined by JPY8.3 to JPY75.8 billion over the same period due primarily to a decline in cash and deposits of JPY4.8 billion arising from repayment of loans payable and a decline in notes and accounts receivable - trade of JPY2.7 billion arising from liquidation of credit receivable. Noncurrent assets rose by JPY5.7 to JPY126.0 billion over the same period due primarily to increases in property, plant and equipment of JPY3.0 billion and marketable securities of JPY1.6 billion resulting from a rise in share prices.

(Liabilities)
At the end of the current fiscal year, total consolidated liabilities declined by JPY1.9 billion from the end of the previous fiscal year to JPY172.4 billion.
Current liabilities rose by JPY9.6 to JPY94.2 billion over the same period due mainly to a JPY1.2 billion increase in short term loans payable for use as working capital and an JPY8.1 billion increase in current portion of long-term loans payable. Noncurrent liabilities declined by JPY11.5 to JPY78.2 billion due in part to a JPY10.5 decline in long term loans payable. Moreover, interest bearing liabilities and net interest bearing liabilities excluding cash and deposits stood at JPY118.1 and JPY102.5 billion respectively.

(Net assets)
At the end of the current fiscal year, net assets fell by JPY0.7 billion from the end of the previous fiscal year to JPY29.4 billion. The main factors behind this decline include a JPY1.3 billion increase in valuation difference on available-for-sale securities accompanying a rise in share prices, a JPY1.3 billion increase in remeasurements of defined benefit plans, a JPY1.8 billion decline in foreign exchange translation adjustment and a JPY1.9 billion drop in non-controlling interests.

→Consolidated Financial Performance

Consolidated Cash Flow Conditions

At the end of the current term, cash and cash equivalents declined by JPY4.8 billion from the end of the previous fiscal year to JPY15.6 billion.

(Cash flows from operating activities)
A net inflow of JPY14.1 billion was recorded in operating activities (An JPY6.6 billion increase in net inflow from the previous term). The main factors influencing this inflow include JPY2.3 billion of corporate and other tax payments, JPY2.6 billion of income before taxes and JPY11.9 in depreciation expense.

(Cash flows from investing activities)
A net cash outflow of JPY15.9 billion was recorded in investing activities (A JPY5.8 billion increase in the net outflow from the previous term). This outflow is mainly attributed to JPY1.1 billion in proceeds from sales of marketable securities, JPY1.2 billion in proceeds from state subsidy, JPY3.8 billion in capital investments in Japan and the United States and purchase of some leased properties in North America, and JPY18.3 billion for purchase of property, plant and equipment.

(Cash flows from financing activities)
A net outflow of JPY2.8 billion (Compared with a net inflow of JPY11.2 billion in the previous term) was recorded in financing activities. The main factors influencing this net outflow included JPY14.7 billion in proceeds from long-term loans payable, and JPY16.1 billion in regularly scheduled repayments of long-term loans payable.

→Consolidated Cash Flow

Consolidated Financial Forecast

Sales of automobiles on a global basis excluding North America are expected to continue to grow in fiscal year 2017. Automobile sales in Japan are anticipated to rise slightly from the previous fiscal year on the back of a gradual recovery in the economy and abating of the negative influence of falsified gas mileage reporting. In North America, the increase in the amount of sales incentives burdened by automobile manufacturers and increases in inventories are expected to lead to a slight year-on-year decline in automobile sales volumes, but demand for SUVs and pickup trucks is expected to remain strong. In Europe, automobile sales are expected to see a small increase based upon the outlook for continued recoveries in economies from the previous year. In China, the extension of tax incentives for compact cars for one year, albeit at a reduced amount, and growth in demand for SUVs are expected to allow automobile sales to grow in China. In ASEAN regions, strategic investments in infrastructure are expected to allow the automobile market to expand in Indonesia, and recovery in the economy is expected to also allow automobile sales in Thailand to grow.
The Akebono Brake Group forecasts call for sales growth on the back of favorable orders in China and ASEAN regions, full scale sales launch of disc brake calipers for high performance vehicles in Europe, and despite weaker sales growth in Japan and North America. With regards to profits, Akebono will strengthen its management and supervision of development costs traditionally performed in Japan, expenses for expanded production of disc brake calipers for high performance vehicles in Europe, ongoing cost reductions in Japan, and with a view to intensifying competition within Asia. In addition, profits are expected to improve by a large margin due to the recovery to profitability in the United States.

<Fiscal year March 2018 earnings forecasts by geographic region>

(Units: billion yen)
  Sales Operating profit
FY2016 FY2017 FCST. YoY Change FY2016 FY2017 FCST. YoY Change
Japan 80.9 76.5 -4.4 4.1 3.0 -1.1
North America 153.1 138.2 -14.9 -3.2 2.0 5.3
Europe 11.6 13.1 1.5 -1.3 -1.4 -0.2
Asia 42.6 43.9 1.3 4.4 4.0 -0.4
Eliminations -22.1 -21.1 1.0 0.2 0.4 0.2
Total consolidated 266.1 250.6 -15.5 4.2 8.0 3.8

Foreign exchange rate average assumptions: JPY110 = US$1, JPY115 = 1 Euro

Moreover, ordinary profit and profit attributable to owners of parent are expected to be JPY5.8 and JPY3.0 billion, respectively.

Japan:
Sales of the Japanese operations are expected to decline by 5.4% year-on-year to JPY76.5 billion during fiscal year March 2018. Operating profit is also expected to decline due to lower sales and the influence of higher labor expenses despite rationalization and cost reduction efforts.

North America:
While effective pricing revisions were achieved during fiscal year ended March 2017, our sales are expected to decline due to slow automobile sales in North America and the influence of termination of some platforms. With regard to profits, pricing revisions, productivity improvements, success of North American operations restructuring efforts, and large declines in consulting and expedited shipment fees recorded during the previous fiscal year are expected to allow operating profit to improve by a large margin.

Europe:
The start of full scale production at the Slovakia Plant, which is a manufacturing center for disc brake calipers in Europe, increases in capital investments to facilitate a stable supply structure to satisfy future growth, and expenses for support provided from Japan are expected to contribute to a continued operating loss. The Slovakia Plant is the most important manufacturing facility in the midterm business plan of expanding the brake calipers business for high performance vehicles and efforts will be made to establish a firm foundation for this business. In addition, the responsibility of the company overseeing all operations in Europe located in Belgium will be divided and transferred to three companies located in France, Germany and Slovakia, and supervision will be provided directly from the headquarters as part of the restructuring of the European operations. These measures are being undertaken to strengthen the global network and improve earnings of the European operations.

Asia:
Losses are expected to be incurred due to increases in materials and labor expenses, and initial expenses arising from the startup of a foundry in Thailand. However, efforts will be made to grow sales and secure profits.

→Consolidated Financial Forecast