Advantest Corporation - Consolidated
1. Management Policy
Advantest's Basic Management Policy
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Advantest believes that its philosophy of management is to support
leading-edge technology at its forefront. Its basic management policy consists
of the following elements: increasing corporate value, improving shareholder and
customer satisfaction and achieving excellence.
Business Strategy
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While maintaining "Measurements" as our core competence, Advantest intends
to improve its corporate value by establishing an operation and finance
structure that that responds timely to changes in the global market, and also
aims to increase market share by introducing fine products that will inspire the
market demands of the next generation. To achieve these objectives, Advantest is
driven to further strengthen its product development operations and improve
production efficiency by selectively focusing on certain businesses, while
strengthening its overseas operations and support system in the U.S., Europe and
Asia.
Further, Advantest seeks to increase the level of customer satisfaction by
maximizing the functions of our test systems by providing them with "GET
Solution"(1) as a total solution for businesses to improve business efficiency.
In October 2001, Advantest launched a company-wide initiative called
"Initiative 21". This initiative seeks to promote new ideas and improvement
strategies at all levels of the company, from divisions ranging from sales,
development and manufacturing to maintenance and administration, with an aim
toward strengthening the company's competitiveness. Advantest expected to
achieve further growth and fulfill its social mission by having each employee
take the initiative to tackle new issues. This initiative continued until 2004,
the year of Advantest 50th anniversary, which was set up as the last year of the
initiative. As a result, Advantest achieved its target figures in aspects such
as sales and profit rate of the company-wide "Initiative 21".
In the future, Advantest will launch a new company-wide initiative based on
its medium-term plans.
*(1) GET solution (Globally Enabled Total solution) is Advantest's service
business designed to provide a set of comprehensive solutions to deal with
issues ranging from the design to the delivery of semiconductors.
Target Financial Index
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Advantest applies the "AVA" (Advantest Value Added), a financial index
incorporating the concept of EVA (Economic Value Added)(2), as a significant
performance indicator, along with profit margin, ROE and cash flows, to measure
its business performance. Specifically, Advantest will continue to set the
minimum return-on-investment ratio ("hurdle rate") for evaluating AVA at 8% and
a mid-term target at 12% with an aim to increase corporate value and shareholder
value.
*(2) "EVA" is a registered trademark of Stern Stewart & Co.
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Basic Policy on Distribution of Profits
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Advantest believes that shareholder value is premised on the realization of
long-term and continued growth in corporate value.
With respect to the distribution of profits, Advantest has adopted a policy
of maintaining consistent dividend payouts after taking into consideration the
business performance and financial condition of 2004.
Retained profits are invested in new businesses, research and development,
streamlining efforts and overseas expansion to enable the strengthening of its
business position and creation of corporate value.
Advantest's Views and Policies on Lowering its Investment Unit
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As part of its capital policy, Advantest has long recognized the importance
of increasing the market liquidity of its shares, promoting long-term and stable
holding of its shares among investors and expanding its investor base. Back in
August 1995, the company reduced the minimum investment unit for its shares from
1000 to 100 shares.
As Advantest considers the current liquidity level of its shares to be
sufficient and expects any further reduction of investment unit to require
significant costs, it is cautious about implementing any further reductions and
will do so only after careful consideration of prevailing market conditions,
business performance, share prices and other factors.
Advantest's Basic View on Corporate Governance; State of Implementation of
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Corporate Governance
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[Advantest's Basic View on Corporate Governance]
Advantest intends to strengthen its global competitiveness by enhancing
information disclosure to all stakeholders, including its investors
(shareholders) and customers.
[State of Implementation of Corporate Governance]
(1) Functions of the Company's Organization
In order to ensure timely response to rapid changes in the business
environment and to strengthen corporate governance, Advantest implemented the
executive officer's structure and separates its decision-making functions and
operational function.
As the decision making body of the operation, the board of directors set
the group's business policies and propose, monitor and manage the operation of
business, and is delegate significant authority for executing operations
speedily and efficiently.
Advantest adopts a Board of Corporate Auditors system, and the Board of
Corporate Auditors is comprised of 4 auditors (of which 2 are external
auditors). Each auditor, based on the policies and plans adopted by the Board of
Corporate Auditors, audit the board's fulfillment of its duties by attend
significant meetings such as the Board of Directors meeting and investigating
the company's business and finance.
(2) Status of the Internal Controls System, Risk Management System and Corporate
Audit
Advantest's basic principle is to conduct business with high ethical
standards, sincerity and social justice. As such, Advantest has developed the
"Advantest Behavior Norms" and has
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focused on enforcing corporate ethics. In June 2004, the "Code of Ethics for
Officers" was implemented and clarified that the officers will act with
sincerity and ethically. In April 2005, in response to applicable regulations
and to achieve a higher level of ethical conscience, a revision of the
"Advantest Behavior of Norms" was revised and the "Corporate Ethics Helpline"
was implemented to handle comments, reports and to advise regarding Accounting,
Internal Controls, and Audit at the same time as implementing the "Behavior
Norms Committee" to strengthen compliance.
In addition, in order to strengthen the corporate structure for Corporate
Social Responsibility, we have implemented the "CSR (Corporate Social
Responsibility) Committee" and placed under it the "Disclosure Committee",
"Internal Controls Committee", "Environmental Policy Supervisory Committee",
"Information Security Committee", "Human Rights Committee", "Human Resource
Complaints Processing Committee", and "Behavior Norms Committee" that are
expanding its activities. In Particular, the "Internal Controls Committee" that
was implemented in order to strengthen the Internal Controls process and risk
management structure is taking measures to establish the three objectives of
internal controls that are "Business Effectiveness and Efficiency", "Reliability
of Financial Reports", and "Compliance with the Law". Also, in the Audit Office
of the Internal Audit Department, as part of operational audit, monitors the
internal controls procedures and its application on a daily basis and
identifies, comments and advises improvement.
Furthermore, the Audit Office, Board of Corporate Auditors and outside
Audit firms coordinate amongst each other, exchange information regarding audit
schedule, audit status and internal controls, and conduct meetings periodically
and whenever necessary.
Matters Relating to Parent Companies
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Advantest does not have a parent company as of the fiscal year end.
Historically Fujitsu Corporation had been classified as a "Parent Company"
but due to Advantest's shareholder voting rights ownership ratio being reduced
from 20.44% to 15.27% in February 2005, Advantest is no longer an affiliated
company of Fujitsu Corporation.
In addition, Fujitsu Corporation's voting rights ratio is 10.91% as of the
fiscal year end.
2. Business Results and Financial Condition
(1) Business Results
Fiscal Year Results
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During the fiscal year, business conditions affecting the Company during
the first half of the fiscal year was favorable due to an increased appetite for
capital expenditures in the semiconductor manufacturing industry, as stimulated
by the strong demand for consumer digital electronics products such as flat
screen televisions, DVD devices and digital cameras and a steady demand for
computers including personal computers. However, in the second half of the
fiscal year, capital expenditure by the semiconductor manufacturing industry
indicated a trend to expenditure restrictions as a result of inventory control
of consumer digital electronics products and a decline in DRAM prices. Towards
the end of the fiscal year there were signs of recovery.
Under this environment, Advantest made concentrated efforts to increase
incoming orders and expand sales through the timely introduction of new products
that meets customers' needs. Advantest and its group companies combined forces
in a drive towards improving profitability by after stock production method and
improving production efficiency, through a reorganization of its manufacturing
operations, as well as continuing its efforts to reduce costs.
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As a result of the above, Advantest returned to profit as incoming orders
increased by 8.9% to (Y) 227.4 billion and net sales increased by 37.4% to (Y)
239.4 billion, each as compared with the previous fiscal year, while achieving
net income before income taxes of (Y) 61.8 billion increased by 114.0% and net
income of (Y) 38 billion increased by 119.7%. Overseas sales as a percentage of
total sales were 74.9%, as compared to 66.7% in the previous fiscal year.
[Condition of Business by Segment]
Operation Condition by Business Segment
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In connection with the business and organizational reorganization, we have
changed Advantest's two historical reportable segments of "automated test
equipment" and "measuring instruments" into three new reportable segments of
"semiconductor and component test system", "mechatronics system" and "services,
support and others". With respect to the following figures as compared with the
previous fiscal year, the previous fiscal year amounts have been converted into
the new business segments.
(Semi-Conductor and Component Test System Segment)
In the memory tester market, sales maintained positive throughout the
fiscal year despite the adjustments made in the second half of the fiscal year
due to new products such as the ultra-high-speed memory tester and general
purpose high-speed memory tester. On the other hand, sales of flash memory
testers was strong in the first half of the fiscal year in continuation from the
previous fiscal year, but orders and sales lagged in the second half of the
year, due to reduced capital expenditures of semiconductor manufacturers as a
result of inventory adjustment by IT related products.
In the SoC (System-on-a Chip)/ AS (Application Specific) tester market,
sales of the T2000, a new concept tester compatible with OPENSTAR(R)*4, was
steady. On the other hand, sales of SoC tester for cell phones and other digital
consumer equipment related devices and testers for LCD driver IC, although
maintaining steady sales domestically and in Taiwan in continuation from the
previous fiscal year, orders and sales lagged as the flash memory testers did.
As a result of the above, incoming orders was (Y) 171 billion (11.1%
increase in comparison to the last fiscal year), sales was (Y) 180.6 billion
(46.3% increase) and operating profit was (Y) 50.6 billion (76.5% increase).
(Mechatronics System Segment)
Impacted by the positive sales of memory testers, memory test handlers with
simultaneous-testing features or coolant features maintained a steady sales
throughout the fiscal year despite inventory adjustment in the second half of
the fiscal year. In addition, device interface products maintained steady sales
throughout the year as a result of factors such as diversification of devices.
As a result of the above, incoming orders was (Y) 43.8 billion (11.1%
increase in comparison with previous year, sales was (Y) 46.3 billion (35.6%
increase) and operating profit was (Y) 13.6 billion (21.6% increase).
(Services, Support and Others Segment)
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In this segment, incoming orders was (Y) 19.1 billion (-5.1 % in comparison
with previous year, sales was (Y) 19.6 billion (-3.8 % decrease) and operating
profit was (Y) 3.4 billion.
*(4) OPENSTAR(R) : The name of an open architecture standard published by the
STC (Semiconductor Testing Consortium). OPENSTAR(R) is a registered trademark or
a trademark of STC in the United States, Japan and other countries.
[Distribution of Profits]
As described above, sales in the second half of the fiscal year was
impacted by restricted capital investment by semiconductor electronics
manufacturers but overall achieved an increase of revenue and profit. As such,
although future business conditions remain unclear, with respect to the year end
distribution of profit, based on the profit distribution policy described above,
and as initially forecasted, Advantest expects to propose to the 63rd General
Shareholders' Meeting a year-end dividend of (Y) 25 per share, which, together
with the interim dividend of (Y) 25 per share already paid, amounts to a
fiscal-year total of (Y) 50 per share (as compared to (Y) 40 per share in the
previous fiscal year.)
Prospects for the Upcoming Fiscal Year
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With respect to business conditions in the upcoming fiscal year, in the
medium term, Advantest expects to see a continuing increase in demand for
digital consumer devices as well as a solid increase in semiconductor demand in
light of the stable demand of the personal computer market and expansion of the
third-generation mobile phone market. In addition, Advantest expects an increase
in capital expenditures by semiconductor manufacturers resulting from
investments relating to 300mm wafers and the transition to a generation of
memory devices. On the other hand, in the short term, due to reduced capital
expenditures as a result of factors such as the decreased production, inventory
and prices of products that affect the digital market such as semiconductors,
electronic components and IT related products, increase in raw materials and
risk of a strong yen and pressure for a price decrease in our products in
relation to such factors may not allow for an optimistic outlook.
In order to respond to these conditions, Advantest plans to implement a
number of measures aimed at furthering its profitability, including plans to
increase incoming orders and sales through the timely introduction of new
products that flexibly meet customers' needs, as well as its continued efforts
to shorten time-to-delivery through improvements in manufacturing efficiency and
to reduce costs.
As a result of the above, net sales for the upcoming fiscal year are
currently estimated to increase by 0.2% to (Y) 240 billion, while income
before income taxes is estimated to decrease by 2.9% to (Y) 60 billion and net
income decrease by 2.8% to (Y) 37 billion, each as compared with the current
fiscal year.
[Profit Distribution Forecast]
Based on the prospects for the upcoming fiscal year and the profit
distribution policy described above, Advantest expects to pay dividends of (Y)
50 per share for the upcoming fiscal year (including an interim dividend of (Y)
25 per share).
(2) Financial Condition
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Total assets at the end fiscal year end is (Y) 296.7 billion, a decrease of
(Y) 34 billion compared to the previous fiscal year, due primarily to a decrease
of (Y) 19.8 billion compared to the previous fiscal year in inventories. Total
liabilities are (Y) 90 billion, a decrease of (Y) 18.4 billion compared to the
previous fiscal year. The major factor for this decrease is the decrease of
accounts payable by (Y) 15 billion. Shareholders' equity is (Y) 206.7 billion
after increase of (Y) 38 billion in current net profit and decrease of (Y) 54.5
billion by repurchase of shares. Equity to Assets ratio is 69.7%, an increase
by 2.6 point.
(Cash Flow Condition)
Cash and cash equivalents held at March 31, 2005 were (Y) 120.9 billion, an
increase of (Y) 19.8 billion from March 31, 2004.
Significant cash flows during this fiscal year and their causes are
described below.
Net cash provided by operating activities was (Y) 90.3 billion. This amount
was primarily attributable to a net income of (Y) 38 billion and a decrease in
account receivables by (Y) 20.9 billion and inventories by (Y) 20.2 billion.
Net cash used in investment activities were an outflow of (Y) 8.2 billion.
This amount was primarily attributable to capital expenditures of (Y) 8.7
billion, including capital expenditures related to equipment for leasing.
Net cash used in financing activities was (Y) 63 billion. This amount was
primarily attributable to repurchase of shares in the amount of (Y) 54.5
billion, dividend payments in the amount of (Y) 4.9 billion, and the repayment
of bonds with preemptive rights in the amount of (Y) 4.5 billion.
The following table illustrates the historical movements of certain cash
flow indexes:
Year ended March 31,
2001 2002 2003 2004 2005
Stockholders' equity ratio (%) 65.8 78.3 74.9 67.0 69.7
Stockholders' equity ratio based
on market prices(%) 304.0 311.4 147.4 253.4 256.0
Debt to annual cash flow ratio 1.1 3.0 5.4 0.9 0.2
Interest coverage ratio 4,116.43 1,703.0 1,013.7 5,965.1 20,210.9
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Stockholders' equity ratio: stockholders' equity / total assets
Stockholders' equity ratio based on market prices: market capitalization / total
assets
Debt to annual cash flow ratio: interest-bearing liabilities / operating cash
flows Interest coverage ratio: operating cash flows / interest payments
(Notes) 1. These indexes are calculated using U.S. GAAP figures.
2. Operating cash flows are the cash flows provided by operating
activities on the consolidated statements of cash flows.
3. Interest-bearing liabilities include all liabilities on the
consolidated balance sheets that incur interests.
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