Ferrotec Corporation (6890)
President Akira Yamamura
Akira Yamamura
Corporate Profile
Ferrotec Corporation
Code No.
Electric Equipment (Manufacturing)
Akira Yamamura
HQ Address
Nihonbashi Plaza Building, Nihonbashi 2-3-4, Chuo-ku, Tokyo
Stock Information
Share Price Shares Outstanding Market Cap. ROE (actual) Trading Unit
¥547 30,810,278 shares ¥16.853 billion - 100 shares
DPS (Est.) Dividend Yield (Est.) EPS (Est.) PER (Est.) BPS (actual) PBR (actual)
¥5.00 0.9% ¥32.46 16.9x ¥1,104.12 0.5x
* Stock price as of closing on December 6, 2013. Number of shares issued at the end of the most recent quarter excluding treasury shares.
Consolidated Earnings Trends
Fiscal Year Net Sales Operating
EPS Dividend (¥)
March 2010 31,541 703 524 156 6.58 12.00
March 2011 57,880 6,931 6,290 4,483 180.63 20.00
March 2012 60,088 4,124 3,287 1,715 59.18 20.00
March 2013 38,424 -3,608 -3,465 -6,532 - 5.00
March 2014 Est. 42,000 1,000 850 1,000 32.46 5.00
* Estimates are those of the Company.
This Bridge Report reviews the earnings results for the first half of fiscal year March 2014.
Key Points
Company Overview
Ferrotec manufactures and sells silicon single crystal pulling equipment, consumable products used in the silicon single crystal manufacturing process including crucibles (The number one manufacturer in the world) in the photovoltaic business category, semiconductor manufacturing equipment and flat panel display (FPD) manufacturing equipment parts, semiconductor materials, and various thermoelectric temperature controllers. And while most of these products may not be visible to the eyes of consumers, they are widely used in personal computers, cellular telephones, and devices using liquid crystal and plasma technologies. The Ferrotec Group is comprised of 24 consolidated subsidiaries, which conduct manufacturing and other business activities in China, Europe, North America, Russia, and Taiwan, and five equity accounting method held affiliates, in addition to the parent Ferrotec Corporation,.
<Business Segments>
Ferrotec's operations can be divided between the equipment related business segment where vacuum feedthrough, quarts, and other ceramic products used in semiconductor, FPD, and LED related manufacturing equipment are manufactured, electronic device business segment where thermoelectric module application products are made, and photovoltaic business segment where silicon single crystal manufacturing equipment and crucibles used in devices are produced. In fiscal year March 2013, sales of the equipment related, electronic device, and photovoltaic related business segments accounted for 49.1%, 11.9% and 32.1% of total sales respectively, while saw blades, equipment part cleansing, machine tool, and other products not included in reported segments accounts for 6.9%. Moreover, Ferrotec leverages its knowhow and technologies for vacuum feedthrough, which are a main product of the equipment related business segment, in its silicon crystal manufacturing equipment.
First Half Fiscal Year March 2014 Earnings Results
Return to Profit with ¥159 Million at Operating Level, Operating Cash Flow of ¥2.013 Billion Secured
Sales rose by 0.9% year-over-year to ¥20.229 billion. Despite a decline in sales arising from the retreat from unprofitable businesses as called for by the business restructuring plan and in photovoltaic related business segment due to weak demand from equipment manufacturers, sales of the equipment related business segment increased due to the contribution from quartz and ceramic products used in smartphone memory and logic manufacturers. At the same time, sales of the electronic device business segment rose on strong demand for thermoelectric modules used in automobile seat automated heating and other consumer applications.

With regards to profits, the disappearance of valuation losses arising from the implementation of lowest cost accounting (¥1.264 billion in valuation losses during the previous first half) contributed to a 6.8% point improvement in gross margin to 24.9%. At the same time, progress in the business restructuring plan and declines in doubtful account reserves (¥711 million booked during the previous first half) contributed to a 15.7% year-over-year decline in sales, general and administrative expenses. Consequently, operating income improved from the loss of ¥2.153 billion in the previous first half to a profit of ¥159 million in the current first half. Foreign exchange translation gains on yen based debt (Approximately ¥6.2 billion) assumed by the Chinese subsidiary amounted to ¥1.1 billion at the non-operating level, and offset additional business restructuring expenses amounting to ¥462 million arising from the contraction in the photovoltaic related business, allowing ordinary income of ¥530 million to be realized. Extraordinary income arising from the sale of marketable securities totaling ¥645 million was booked and allowed net income of ¥694 million to be achieved. The average foreign exchange rates during the first half were ¥95.90 per United States dollar (¥79.78 during the previous first half), and ¥15.53 per Chinese yuan (¥12.65 during the previous first half).
Equipment Related Business
Sales rose by 7.1% year-over-year to ¥10.189 billion, but operating income declined by 45.0% year-over-year to ¥77 million. Sales of quartz product rose due to a recovery in orders from two of the largest OEM manufacturing customers in the United States, and vacuum feedthrough sales rose by a small margin as demand arising from a recovery in semiconductor related investments was offset to an extent by weaker demand arising from sluggish investments in manufacturing equipment for large television LCD, high resolution mobile handset LCD, and OLED in China. Aside from these developments, the recovery in the market for Ferrotec branded products contributed to a large increase in sales of silicon wafer processing, EB guns, LED deposition equipment applications. At the same time, sluggish demand for consumer electronic applications contributed to a decline in sales of ceramics products including machinable ceramics "photoveels." In addition to price declines on high value added and high purity quartz products, profitability also suffered from the provision of a large amount of products for approval and assessment as part of the sales expansion strategy in Taiwan.
Photovoltaic Related Business
Sales declined by 19.1% year-over-year to ¥5.680 billion and an operating loss of ¥111 million was incurred (Compared with a loss of ¥2.393 billion during the previous first half). Retreat from Ferrotec branded products to focus upon crystal ingots and wafers on an OEM basis allowed sales of silicon products to rise. At the same time, sales of square tanks, including single crystal crucibles and multiple crystal square tanks, to customers in Taiwan rose. The price decline in crucibles and square tanks bottomed. Also, a lack of demand for new manufacturing equipment was observed.
Electronic Device Business
Sales and operating income rose by 27.6% and 115.6% year-over-year to ¥2.801 billion and ¥249 million respectively. Strong sales of automobiles were complimented by the selection of automobile seat automated heating options in luxury sedans and sub utility vehicles in the North American market and allowed sales of thermoelectric modules to increase (Accounting for 63% of this segment's sales). In addition, demand from testing equipment and biotechnology related equipment applications continued to trend firmly. New applications in electric shavers and water cleaners also contributed to higher sales. Moreover, mass production and sales of power device boards were also started.
Total assets rose by ¥6.8 billion from the end of the previous fiscal year to ¥73.144 billion at the end of the first half of the current term (Equivalent to ¥65.9 billion using the same foreign exchange rate at the end of the previous fiscal year). The weakening of the yen led to valuation gains on assets held overseas, and increases in inventories and tangible fixed assets. At the same time, investments and other accounts declined on the back of sales of a portion of marketable securities. With regards to liabilities, the weakening of the yen led to foreign exchange translation gains in the value of interest bearing liabilities (¥18.3 billion) and to foreign exchange translation adjustment accounts. Equity ratio of 46.5% was recorded. Moreover, capital investments amounted to ¥1.640 billion with the focus of spending upon facilities for fixed abrasive wire saw (OEM focus) to meet the demands of customers (¥1.820 billion in the previous first half).
While only a small amount of operating income of ¥159 million realized, a large amount of the expenses that were incurred do not require cash outlays, including depreciation of facilities and amortization of goodwill amounting to ¥1.981 billion and ¥212 million (¥1.573 billion and ¥208 million during the previous first half) respectively. Consequently, a net inflow of ¥2.013 billion in operating cash flow was realized. While a net outflow of ¥1.761 billion was recorded in investing cash flow due primarily to capital investments (Payments for outstanding payments for facilities), a net inflow of ¥251 million was recorded in free cash flow.
Fiscal Year March 2014 Earnings Estimates
During the second half, a recovery in semiconductor related investments is expected to allow equipment related business sales to rise by a large margin. Moreover, recovery in demand for consumables is expected to boost demand for products in the photovoltaic related business and strong demand for thermoelectric modules from automobile seat automated heating applications is expected to lead to favorable sales of electronic device business. In addition to these higher sales, the effects of the business restructuring plan and the disappearances of one-off expenses are expected contribute to continued improvement in profitability.
Various Efforts in Each Business Segment
Equipment Related Business
In addition to restart of semiconductor related investments by Japanese and Korean manufacturers, consigned manufacturing of vacuum feedthrough for client companies in China are expected to trend strongly. And while large investments in flat panel displays (FPD) are not expected, additional investments in mobile handset related applications are anticipated. Quartz product orders are expected to undergo a recovery beginning with large OEM clients in North America and Japan on the back of restart of capital investments by companies in Japan and Asia. The acquisition of certification of the increased manufacturing capacity for ultrahigh purity products in China is expected to also positively influence earnings. In the realm of ceramic products, production of machinable ceramic "photoveels" to be used as next generation testing jig devices is expected to be increased, with applications for N/Flash expected to also gradually recover during the second half. Mass production of general products currently undergoing evaluation for use in medical related parts in the United States is expected to begin. Fine ceramics used in semiconductor manufacturing equipment is benefitting from stronger than expected recoveries in leading edge investments by memory and foundry makers (Miniaturization, three dimensional applications) since the start of the second half and orders from Japanese and overseas equipment manufacturers are on the rise. Against this backdrop, successful efforts to increase share in overseas markets is expected to lead to a large increase in sales during the second half over the first half.
Photovoltaic Related Business
Strong demand from panel manufacturers in Japan, the United States and China is expected to contribute to strong sales of both multiple crystal square tanks and single crystal quartz crucibles, and pricing negotiations have begun. In addition, Ferrotec expects to implement measures focusing upon quartz crucibles, including the acquisition of certification (Japanese semiconductor use silicon manufacturers) of high value added 22 to 24 inch semiconductor use small sized crucibles and facilitation of its production lines. Moreover, efforts to increase pricing through the introduction of both square tanks and crucibles with extended life spans, and to reduce costs at the Yinchuan plant will be promoted. At the same time, favorable OEM supplies and introduction of solar power generating facilities in developing regions including Eastern Europe, Middle East and South America are expected to act as a tailwind for photovoltaic use silicon. Efforts to bring about differentiation including improvements in both fixed abrasive wafer cutting technologies and efficiencies of superior N type single crystal products will also be implemented.
Electronic Device Business
Strong automobile sales are expected to contribute to growth in sales of thermoelectric modules used in automobile seat automated heating applications. And while other industry applications including biotechnology equipment and optical applications are expected to trend sideways, consumer related applications including new usages in electric shavers, beauty related home electronics, water cleaners, and air conditioners are expected to trend strongly. An increase in new applications for power device boards is expected to lead to higher sales. Furthermore, efforts to expand market share in the United States and Europe will be implemented along with measures to fortify marketing for power device boards. Also, efforts to raise production efficiencies and to strengthen cost competitiveness will also be conducted.
Ferrotec's full year earnings estimates call for sales to rise by 9.3% year-over-year to ¥42.0 billion and operating income of ¥1.0 billion (Compared with a ¥3.608 billion loss in the previous term). Capital investments are expected to amount to ¥2.0 billion (Compared with ¥3.706 billion in the previous term) on a cash flow basis due to a lack of large investment plans and after considering the outstanding facilities payments at the end of the previous term. Depreciation is expected to total ¥3.9 billion (Compared with ¥3.321 billion in the previous term). The Company bases these estimates on average foreign exchange rate assumptions of ¥95.0 per US dollar (¥80.1 in the previous term), and ¥15.0 per Chinese yuan (¥12.7 in the previous term). A dividend of ¥5 per share is expected to be paid.
Amidst efforts to strengthen the earnings generation capability of Ferrotec through the retreat from unprofitable businesses and reductions in fixed costs, a recovery in capital investments in the semiconductor related industry and a bottoming in the photovoltaic related market have appeared. Ferrotec states that it expects "the weak supply and demand conditions in China to be resolved and improve through consolidation amongst manufacturers, and to be able to achieve stable growth of about 10% per year from 2015." Expansion in automobile seat automated heating applications and efforts to capture demand from new applications in non-automobile related consumer applications is expected to lead to continued favorable trends.

Investment Bridge expects Ferrotec's earnings to bottom in the current fiscal year and to begin a period of renewed growth from fiscal year March 2015, with a recovery in operating income to ¥1.5 to ¥2.0 billion in the future. However, to achieve continued growth in fiscal year March 2016 and beyond, the Company will need to cultivate new growth drivers. Therefore, Ferrotec is endeavoring to strengthen both its existing and new product development capabilities, with research and development efforts focused upon jet valve technologies with promising greenhouse exhaust gas effects, high purity single crystal silicon ingot critical for high purity crucibles, and new applications of thermoelectric modules. These various efforts are all designed to provide richer lifestyles by achieving higher levels of environmental conservation, energy efficiencies, and technological breakthroughs, while at the same time leveraging the technologies and manufacturing facilities of amassed by Ferrotec. Given that no further large capital investments are expected to be required, the Company's financial foundation is expected to be fortified by using the bountiful operating cash flow of over ¥2.0 billion anticipated during the second half of the current term.

In addition to the attraction of a share price trading significantly below Ferrotec's net asset value (Book value) per share and the potential to realize high levels of operating cash flow of over ¥2.0 billion during the second half, the Company's shares appear to be highly attractive.
This report is intended solely for information purposes, and is not intended as a solicitation to invest in the shares of this company. The information and opinions contained within this report are based on data made publicly available by the Company, and comes from sources that we judge to be reliable. However we cannot guarantee the accuracy or completeness of the data. This report is not a guarantee of the accuracy, completeness or validity of said information and or opinions, nor do we bear any responsibility for the same. All rights pertaining to this report belong to Investment Bridge Co., Ltd., which may change the contents thereof at any time without prior notice. All investment decisions are the responsibility of the individual and should be made only after proper consideration.
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