Hitachi, Ltd has announced its consolidated financial results for the first quarter of fiscal 2006, ended June 30, 2006.
Business Results
(1) Summary of Fiscal 2006 First Quarter Consolidated Business Results
During the first quarter, the U.S. economy remained firm, supported by healthy consumer spending due to favorable job and wage environments, and continued strength in capital investments. This was despite the impact of surging prices for crude oil and other raw materials. Asian economies grew strongly due to a high growth rate in China and other factors. European economies staged a solid recovery. As a whole, therefore, the world economy was steady during the first quarter.
In Japan, economic conditions were firm as improving corporate earnings and a stronger job and wage environment, as well as other factors, fueled growth in plant and equipment investment and consumer spending.
Under these circumstances during the first quarter, Hitachi strengthened its social and industrial infrastructure business by transferring parts of its Industrial Systems Group to Hitachi Plant Engineering & Construction Co., Ltd. At the same time, Hitachi Kiden Kogyo, Ltd. and Hitachi Industries Co., Ltd. were merged into Hitachi Plant Engineering & Construction to form Hitachi Plant Technologies, Ltd. Furthermore, Hitachi Air Conditioning Systems Co., Ltd. and Hitachi Home & Life Solutions, Inc. were merged to form Hitachi Appliances, Inc., thereby strengthening the air conditioning and home appliance business.
Hitachi's consolidated revenues rose 10%, to 2$19.55 billion. Revenues were higher year on year in the Information & Telecommunication Systems segment on growth in sales of storage products; the Digital Media & Consumer Products segment due to growth in sales of flat-panel TVs and other factors; and the High Functional Materials & Components segment, mainly from growth in sales of components and materials for the electronics-related field.
Operating income rose $137.4 billion to $148.77 billion. Earnings improved in the Information & Telecommunication Systems, the Electronic Devices, Power & Industrial Systems and High Functional Materials & Components segments mainly by expanding each business and promoting cost reductions.
Due to foreign currency exchange gain and loss and other factors, other income declined 33%, to 9.1 billion yen and other deductions increased 42%, to $124.41 million.
As a result, Hitachi recorded income before income taxes and minority interests of $103.53 million, up 146% year on year. After income taxes of $152.25 million, Hitachi posted a loss before minority interests of 5.6 billion yen. Hitachi also posted a net loss of $191.4 million, $17.4 million less than a year earlier.
(2) Revenues and Operating Income (Loss) by Segment
Information & Telecommunication Systems
Information & Telecommunication Systems revenues rose 11%, to $4.37 billion. Software and services revenues were higher than the corresponding quarter of the previous fiscal year due to firm growth in software sales and strong sales in services, particularly in the outsourcing business. Hardware revenues also rose on growth in storage products.
The segment posted an operating loss of 6.5 billion yen, an improvement of $144.42 million from the same term of the previous year. Earnings improved in software and services year on year, mainly reflecting improved project management in services. Furthermore, hardware earnings were much improved year on year due to a narrower loss in hard disk drive (HDD) operations, strong sales in disk array subsystems, and other factors.
Electronic Devices
Electronic Devices revenues increased 11%, to $2.64 billion. This was mainly due to higher sales at Hitachi High-Technologies Corporation and growth in sales of small and medium-sized LCDs in the display business.
Operating income climbed 108%, to $85.2 billion, mainly due to improved earnings in the display business.
Power & Industrial Systems
Power & Industrial Systems revenues rose 3%, to $5.25 billion, mainly due to increased sales at Hitachi Construction Machinery Co., Ltd. and other factors, despite the effect of merging Hitachi Air Conditioning Systems Co., Ltd. and Hitachi Home & Life Solutions, Inc. in April 2006.
The segment posted 21% increase in operating income, to $94.83 million due to strong earnings at Hitachi Construction Machinery and other factors.
Digital Media & Consumer Products segment revenues climbed 25%, to $3.23 billion, mainly due to strong sales growth in plasma and other flat-panel TVs and the effect of the formation of Hitachi Appliances, Inc. by merging Hitachi Air Conditioning Systems Co., Ltd. and Hitachi Home & Life Solutions, Inc. in April this year.
However, the segment posted an operating loss of $140.07 million, $68.73 million more than a year earlier. This wider loss reflected increased investments for marketing digital media products such as plasma TVs, as well as the impact of falling prices for home appliances, among other factors.
High Functional Materials & Components
Segment revenues rose 14%, to $3.65 billion on the back of strong sales at Hitachi Chemical Co., Ltd. and Hitachi Metals, Ltd., principally of components and materials in the electronics-related field. Hitachi Cable, Ltd. also recorded sales growth.
Operating income climbed 27%, to $246.21 million, mainly due to higher sales and the benefits of cost-cutting.
Logistics, Services & Others
Segment revenues rose 12%, to $2.65 billion on healthy growth in sales at Hitachi Transport System, Ltd., mostly in the third-party logistics solutions business, and sales growth at overseas general trading companies.
The segment posted operating income of $9.75 million, 29% down year on year, mainly due to lower earnings at domestic services companies.
Financial Services
Revenues declined 4%, to $1.07 billion due to flat revenues at Hitachi Capital Corporation.
Segment operating income declined 6%, to $50.4 million.
(3) Revenues by Market
Revenues in Japan were $11.01 billion, 2% higher than in the first quarter of the previous fiscal year.
Overseas revenues rose 21%, to $8,54 billion, due to year-on-year growth in sales in Europe, in addition to steep growth in revenues in Asia, particularly in China, and North America.
As a result, the ratio of overseas revenues to consolidated revenues rose 4 percentage points year on year to 44%.
(4) Capital Investment, Depreciation and R&D Expenditures
Capital investment on a completion basis, excluding leasing assets, rose 31%, to $894.36 million, mainly due to investments in HDDs, plasma display panels, automotive-related parts and other products. Depreciation, excluding leasing assets, increased 5%, to $745.59 million. R&D expenditures, which are primarily used to strengthen frontier and basic research, and upgrade development capabilities in HDDs, automotive-, displays- and digital media-related fields, increased 3%, to $832.59 million, and corresponded to 4.3% of revenues.
Financial Position
(1) Financial Position
Total assets as of June 30, 2006 were $86.86 billion, largely the same as at March 31, 2006. Interest-bearing debt increased $964.83 million, to $22.01 billion as of June 30, 2006. Stockholders' equity decreased $457.62 million, to $29,36 billion caused by the net loss in the first quarter. As a result of these changes, the stockholders' equity ratio declined by 0.4 of a percentage point to 24.6%. The debt-to-equity ratio (including minority interests) deteriorated 0.05 of a point to 0.73 times due to the decrease in stockholders' equity and increase in interest-bearing debt.
(2) Cash Flows
Operating activities used net cash of $346.26 million, $137.46 million less than in the first quarter of the previous fiscal year.
Investing activities used net cash of $1.66 billion, $635.1 million more than the first quarter of the previous fiscal year. This was mainly due to an increase in capital investment, particularly in businesses targeted for growth.
Free cash flows, the sum of cash flows from operating and investing activities, were an outflow of $2.01 billion, $497.64 million more than the first quarter of the previous fiscal year.
Financing activities provided net cash of $553.32 million, $52.2 million less than the first quarter of the previous fiscal year.
The net result of the above items was a $1.47 billion decrease in cash and cash equivalents to $4.25 billion.
Outlook for the First Half of Fiscal 2006
Regarding the outlook for the global economy, the Hitachi Group expects the U.S. to experience a gentle economic slowdown, owing to weaker growth in housing investment and consumer spending due to the effect of interest rate rises thus far. Although Asian economies are expected to remain strong, supported by domestic demand in China, there are concerns of a deceleration in the pace of economic recovery in Europe due to the slowdown of the U.S. economy.
Overall, therefore, the global economy is expected to experience a slight slowdown in the second half of fiscal 2006.
The forecast for the Japanese economy is for strong growth due to growth in plant and equipment investment as corporate earnings rise and to increasing consumer spending in an improving job environment. However, economic growth is expected to moderate in the second half of fiscal 2006, due to lower growth in corporate earnings, primarily resulting from a global economic slowdown centered on the U.S. and persistently high prices for crude oil and other raw materials.
Based on this outlook, the Hitachi Group is forecasting the operating results shown above for the first half of fiscal 2006, the same as those announced with fiscal 2005 consolidated financial results on April 27, 2006.
Hitachi is pushing forward with business reforms targeting future business development. For example, Hitachi decided to reorganize the network systems related subsidiaries in October this year. In another move, Hitachi will establish the post of Chief Executive for Asia in August with the aim of expanding business in the Asia region.
Furthermore, Hitachi will continue efforts to create new businesses and strengthen targeted businesses by maximizing Hitachi's internal resources, such as R&D and marketing capabilities, personnel, and its funding system. Also, Hitachi is leveraging group-wide synergies to reduce procurement costs, business expenses, IT operational costs and other costs by standardizing and integrating business operations. Hitachi is implementing business restructuring measures to build a high-earnings framework, and reinforce its financial position.
Regarding the HDD, flat-panel TV and LCD businesses, where there are issues concerning profitability, Hitachi is taking wide-ranging countermeasures to quickly improve its development capabilities, cost competitiveness, marketing activities and other areas of its operations. Furthermore, Hitachi will work to become more competitive on a consolidated basis and to establish a more powerful earnings base by driving forward structural reforms that target future business development, such as efforts to expand overseas business.
Projections assume exchange rates of 110 yen to the U.S. dollar and 140 yen to the euro for the second quarter of fiscal 2006.
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