Name: Krasen DimovID#:100063777Class:BUS220f

ANNUAL PROJECT 2011

INDIVIDUAL PAPER

Company: Toshiba CorporationData 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 TV’s, 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 Toshiba’s 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 company’s 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 company’s common stock ratios,

which indicate an overall improvement in the performance and increase in the company’s

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 shareholder’s 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 giant’s 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 Toshiba’s green oriented policy, which justifies the motto of

the company: “Committed to the future”. Furthermore, the Japanese giant expects the smart-

grid 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 IndustryWeek’s 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 company’s 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-

to-purchase-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 SheetToshiba Corporation and Subsidiaries

As of March 31, 2011 and 2010

In millions of ¥ yen 2011 2010 2009AssetsCurrent Assets: Cash and cash equivalents 258,840 267,449 343,793 Notes and accounts receivable, trade:

Notes 47,311 44,122 64,260 Accounts 1,093,948 1,160,389 1,038,396 Allowance for doubtful notes and accounts (17,079) (20,112) (19,270)

Inventories 864,382 795,601 758,305 Deferred tax assets 161,197 134,950 141,008 Other receivables 189,028 187,164 176,196 Prepaid expenses and other current assets 202,041 192,043 217,943

Total current assets 2,799,668 2,761,606 2,720,631

Long-term receivables and investments: Long-term receivables 2,540 3,337 3,987 Investments in and advances to affiliates 416,431 366,250 340,756 Marketable securities and other investments 241,409 253,267 190,110 Total long-term receivables and investments 660,380 622,854 534,853

Property, plant and equipment: Land 99,834 105,663 98,116 Buildings 996,409 1,016,520 996,709 Machinery and equipment 2,330,565 2,508,934 2,698,626 Construction in progress 113,132 97,309 114,617 Less-Accumulated depreciation (2,639,735) (2,749,700) (2,818,489)

Total property, plant and equipment 900,205 978,726 1,089,579

Other assets: Goodwill and other intangible 559,246 618,731 629,820 Deferred tax assets 356,592 355,687 352,948 Other assets 103,228 113,569 125,394 Total other assets 1,019,066 1,087,987 1,108,162

Total assets 5,379,319 5,451,173 5,453,225

Liabilities and equityCurrent liabilities:Short-term borrowings 152,348 51,347 747,971 Current portion of long-term debt 159,414 206,017 285,913 Notes and accounts payable, trade 1,194,229 1,191,885 1,003,864 Accounts payable, other and accrued expenses 380,360 375,902 366,219 Accrued income and other taxes 38,197 42,384 38,418 Advance payments received 271,066 317,044 268,083 Other current liabilities 302,695 303,866 357,305 Total current liabilities 2,498,309 2,488,445 3,067,773

Long-term liabilities:Long-term debt 769,544 960,938 776,768 Accrued pension and severance costs 734,309 725,620 719,396 Other liabilities 197,541 148,548 130,007 Total long-term liabilities 1,701,394 1,835,106 1,626,171

Total liabilities 4,199,703 4,323,551 4,693,944

Equity attributable to shareholders of the Company Common stock:Authorized—10,000,000,000 sharesIssued shares 439,901 439,901 280,281 Additional paid-in capital 399,552 447,733 291,137 Retained earnings 551,523 375,376 395,134 Accumulated other comprehensive loss (521,396) (464,250) (517,996)Treasury stock, at cost:2011—2,519,870 shares (1,461)2010—2,160,986 shares (1,305)2009—1,910,852 shares (1,210)Total equity attributable to shareholders of the Company 868,119 797,455 447,346 Equity attributable to noncontrolling interests 311,497 330,167 311,935 Total equity 1,179,616 1,127,622 1,206,627

Total liabilities and equity 5,379,319 5,451,173 5,453,225

Horizontal Analysis:

Consolidated Balance SheetToshiba Corporation and Subsidiaries

As of March 31, 2011 and 2010Increase (Decrease)

In millions of ¥ yen 2011 2010 Amount PercentAssetsCurrent Assets: Cash and cash equivalents 258,840 267,449 (8,609) -3% Notes and accounts receivable, trade:

Notes 47,311 44,122 3,189 7%Accounts 1,093,948 1,160,389 (66,441) -6%Allowance for doubtful notes and

accounts (17,079) (20,112) 3,033 -18%

Inventories 864,382 795,601 68,781 8% Deferred tax assets 161,197 134,950 26,247 16% Other receivables 189,028 187,164 1,864 1% Prepaid expenses and other current assets 202,041 192,043 9,998 5%

Total current assets 2,799,668 2,761,606 38,062 1%

Long-term receivables and investments: Long-term receivables 2,540 3,337 (797) -31% Investments in and advances to affiliates 416,431 366,250 50,181 12% Marketable securities and other investments 241,409 253,267 (11,858) -5% Total long-term receivables and investments 660,380 622,854 37,526 6%

Property, plant and equipment: Land 99,834 105,663 (5,829) -6% Buildings 996,409 1,016,520 (20,111) -2%Machinery and equipment 2,330,565 2,508,934 (178,369) -8%Construction in progress 113,132 97,309 15,823 14%Less-Accumulated depreciation (2,639,735) (2,749,700) 109,965 -4%

Total property, plant and equipment 900,205 978,726 (78,521) -9%

Other assets: Goodwill and other intangible 559,246 618,731 (59,485) -11% Deferred tax assets 356,592 355,687 905 0% Other assets 103,228 113,569 (10,341) -10% Total other assets 1,019,066 1,087,987 (68,921) -7%

Total assets 5,379,319 5,451,173 (71,854) -1%

Liabilities and equityCurrent liabilities:Short-term borrowings 152,348 51,347 101,001 66%Current portion of long-term debt 159,414 206,017 (46,603) -29%Notes and accounts payable, trade 1,194,229 1,191,885 2,344 0%Accounts payable, other and accrued expenses 380,360 375,902 4,458 1%Accrued income and other taxes 38,197 42,384 (4,187) -11%Advance payments received 271,066 317,044 (45,978) -17%Other current liabilities 302,695 303,866 (1,171) 0%Total current liabilities 2,498,309 2,488,445 9,864 0%

Long-term liabilities:Long-term debt 769,544 960,938 (191,394) -25%Accrued pension and severance costs 734,309 725,620 8,689 1%Other liabilities 197,541 148,548 48,993 25%Total long-term liabilities 1,701,394 1,835,106 (133,712) -8%

Total liabilities 4,199,703 4,323,551 (123,848) -3%

Equity attributable to shareholders of the Company Common stock:Authorized—10,000,000,000 shares

Issued: 2011 and 2010—4,237,602,026 shares 439,901 439,901 Additional paid-in capital 399,552 447,733 (48,181) -12%Retained earnings 551,523 375,376 176,147 32%Accumulated other comprehensive loss (521,396) (464,250) (57,146) 11%Treasury stock, at cost:2011—2,519,870 shares (1,461)2010—2,160,986 shares (1,305)Total equity attributable to shareholders of the Company 868,119 797,455 70,664 8%Equity attributable to noncontrolling interests 311,497 330,167 (18,670) -6%Total equity 1,179,616 1,127,622 51,994 4%Commitments and contingent liabilities Total liabilities and equity 5,379,319 5,451,173 (71,854) -1%

Consolidated Statements of IncomeToshiba Corporation and Subsidiaries

For the years ended March 31, 2011 and 2010Increase (Decrease)

In millions of ¥ yen 2011 2010 Amount PercentSales and other income: Net sales 6,398,505 6,291,208 107,297 2% Interest and dividends 8,704 7,965 739 9% Equity in earnings of affiliates 18,478 22,385 (3,907) -17% Other income 67,811 62,793 5,018 8%

Total revenue 6,493,498 6,384,351 109,147 2%Costs and expenses: Cost of sales 4,897,547 4,852,002 45,545 1% Selling, general and administrative 1,260,685 1,313,958 (53,273) -4% Interest 32,331 35,650 (3,319) -9% Other expense 107,386 148,328 (40,942) -28%

Total expense 6,297,949 6,349,938 (51,989) -1%

Income from continuing operations, before income taxes and noncontrolling interests 195,549 34,413 161,136 468%

Income taxes 40,720 33,534 7,186 21%

Income from continuing operations, before noncontrolling interest 154,829 879 153,950

Loss from discounted operations, before noncontrolling interests (8,183) (6,172) (2,011)

Net income (loss) before noncontrolling interests 146,646 (5,293)

Less: Net income attributable to noncontrolling interest 8,801 14,450 (5,649) -39%

Net income (loss) attributable to shareholders 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 31Percent of total assets

In millions of ¥ yen 2011 2010 2011 2010AssetsCurrent Assets: Cash and cash equivalents 258,840 267,449 4,8% 4,9% Notes and accounts receivable, trade:

Notes 47,311 44,122 0,9% 0,8%Accounts 1,093,948 1,160,389 20,3% 21,3%Allowance for doubtful notes and

accounts (17,079) (20,112) -0,3% -0,4% Inventories 864,382 795,601 16,1% 14,6% Deferred tax assets 161,197 134,950 3,0% 2,5% Other receivables 189,028 187,164 3,5% 3,4% Prepaid expenses and other current assets 202,041 192,043 3,8% 3,5%

Total current assets 2,799,668 2,761,606 52,0% 50,7%

Long-term receivables and investments: Long-term receivables 2,540 3,337 Investments in and advances to affiliates 416,431 366,250 7,7% 6,7% Marketable securities and other investments 241,409 253,267 4,5% 4,6% Total long-term receivables and investments 660,380 622,854 12,3% 11,4%

Property, plant and equipment: Land 99,834 105,663 1,9% 1,9% Buildings 996,409 1,016,520 18,5% 18,6%Machinery and equipment 2,330,565 2,508,934 43,3% 46,0%Construction in progress 113,132 97,309 2,1% 1,8%Less-Accumulated depreciation (2,639,735) (2,749,700) -49,1% -50,4%

Total property, plant and equipment 900,205 978,726 16,7% 18,0%

Other assets: Goodwill and other intangible 559,246 618,731 10,4% 11,4% Deferred tax assets 356,592 355,687 6,6% 6,5% Other assets 103,228 113,569 1,9% 2,1% Total other assets 1,019,066 1,087,987 18,9% 20,0%

Total assets 5,379,319 5,451,173 100% 100%

Liabilities and equityCurrent liabilities:Short-term borrowings 152,348 51,347 2,8% 0,9%Current portion of long-term debt 159,414 206,017 3,0% 3,8%Notes and accounts payable, trade 1,194,229 1,191,885 22,2% 21,9%Accounts payable, other and accrued expenses 380,360 375,902 7,1% 6,9%

Accrued income and other taxes 38,197 42,384 0,7% 0,8%Advance payments received 271,066 317,044 5,0% 5,8%Other current liabilities 302,695 303,866 5,6% 5,6%Total current liabilities 2,498,309 2,488,445 46,4% 45,6%

Long-term liabilities:Long-term debt 769,544 960,938 14,3% 17,6%Accrued pension and severance costs 734,309 725,620 13,7% 13,3%Other liabilities 197,541 148,548 3,7% 2,7%Total long-term liabilities 1,701,394 1,835,106 31,6% 33,7%

Total liabilities 4,199,703 4,323,551 78,1% 79,3%

Equity attributable to shareholders of the Company Common stock:Authorized—10,000,000,000 sharesIssued: 2011 and 2010—4,237,602,026 shares 439,901 439,901 8,2% 8,1%Additional paid-in capital 399,552 447,733 7,4% 8,2%Retained earnings 551,523 375,376 10,3% 6,9%Accumulated other comprehensive loss (521,396) (464,250) -9,7% -8,5%Treasury stock, at cost:2011—2,519,870 shares (1,461)2010—2,160,986 shares (1,305)Total equity attributable to shareholders of the Company 868,119 797,455 16,1% 14,6%Equity attributable to noncontrolling interests 311,497 330,167 5,8% 6,1%Total equity 1,179,616 1,127,622 21,9% 20,7%Commitments and contingent liabilities Total liabilities and equity 5,379,319 5,451,173 100% 100%

Common-size Income Statement:

Consolidated Statements of IncomeToshiba Corporation and Subsidiaries

For the years ended March 31, 2011 and 2010Percentage

In millions of ¥ yen 2011 2010 2011 2010Sales and other income: Net sales 6,398,505 6,291,208 100,0% 100,0% Interest and dividends 8,704 7,965 0,1% 0,1% Equity in earnings of affiliates 18,478 22,385 0,3% 0,4% Other income 67,811 62,793 1,1% 1,0%

Total revenue 6,493,498 6,384,351 101,5% 101,5%Costs and expenses: Cost of sales 4,897,547 4,852,002 76,5% 77,1% Selling, general and administrative 1,260,685 1,313,958 19,7% 20,9% Interest 32,331 35,650 0,5% 0,6% Other expense 107,386 148,328 1,7% 2,4%

Total expense 6,297,949 6,349,938 98,4% 100,9%

Income from continuing operations, before income taxes and noncontrolling interests 195,549 34,413 3,1% 0,5%

Income taxes 40,720 33,534 0,6% 0,5%

Income from continuing operations, before noncontrolling interest 154,829 879 2,4% 0,0%

Loss from discounted operations, before noncontrolling interests (8,183) (6,172) -0,1% -0,1%

Less: Net income attributable to noncontrolling interest 8,801 14,450 0,1% 0,2%

Net income (loss) attributable to shareholders 137,845 (19,743) 2,2% -0,3%

Key Financial Ratios:

2011 2010

Working Capital 301,359

273,161

Current Ratio/Working Capital Ratio 1,12 1,11Quick Ratio 0,62 0,66Accounts Receivable Turnover 5,68 5,72Inventory Turnover 7,71 8,10Total Asset Turnover 1,18 1,15Debt-Equity Ratio 4,84 5,42Interest Coverage Ratio 7,70 3,74Net Profit Margin 2,12% -0,31%Return on Total Assets 2,55% -0,36%Return on Equity 16,55% -3,17%Earning per share (basic) 32,5 -4,93Earning per share (diluted) 31,2 -4,93Price-to-earning ratio (P/E) 12,51 -Annual dividends per share 5 0Book Value per Share 204,98 188,28Price-to-book value 2,6 2