New focus on cash flow: Toshiba struggles to get on track amid slide in components business

New focus on cash flow: Toshiba struggles to get on track amid slide in components business

TOKYO — Japanese electronics maker Toshiba will hold an extraordinary shareholders meeting Wednesday to seek approval of its new management nearly six months since its book-padding came to light.

     “Our brand image has suffered the most serious damage in our 140-year history,” said Hisao Tanaka, who resigned as president in July. The shareholders meeting may help to clear up the lingering murk at Toshiba, which has come clean over its past financial statements. Top executives and most board members who were in charge when the scandal broke have stepped down.

     But the accounting shenanigans revealed a weak earnings structure at the company, and there are concerns over declining profit margins in its core electronic devices and components business. The meeting is just the first step in Toshiba’s long road to recovery.

Soft in the middle

The company saw earnings decline in all six of its business segments in the April-June quarter. Overall, it had an operating loss of 10.9 billion yen ($89.8 million), compared with an operating profit of 47.6 billion yen in the year-earlier period.

     The 27% decline in the electronic device and component division’s operating profit to 35.6 billion yen came as a particular shock. The segment comprises a big portion of Toshiba’s profit; it has long been considered solid, whatever the company’s struggles in home appliances and other segments.

     Toshiba has seen higher sales of NAND flash memory chips — which retain data when a device has been switched off — thanks to the global growth of smartphones. But, said Toshiba President and CEO Masashi Muromachi, “Prices for NAND flash memory chips have been declining due to intense price competition with [our] rivals.”  The company has seen its operating profit margin for NAND flash memory chips fall from the upper 20% range in the fiscal year ended March, to below 20% in the April-June quarter of this year.

     There has been a worldwide glut of these chips since the start of the fiscal year. Demand is slowing in China as the smartphone market in that country grows saturated. Toshiba’s competitors have also seen their profit margins deteriorate. The company’s reputation for reliability has won it a strong following in other segments, such as chips for data centers, but the problems in the smartphone market were a bigger drag on results than expected.

     Toshiba, long known for its technical prowess, has plowed profits back into research and development over its 140-year history. But its business model is looking long in the tooth. Its tireless research and heavy investment helped it develop NAND flash memory technology ahead of its competitors in the 1980s. That helped it win a war of attrition with its rivals. Now others have caught up. 

Staying committed

One of Toshiba’s strengths is Muromachi’s commitment to whipping the sprawling company into shape. Toshiba’s previously announced restructuring measures, which were scheduled to take effect at the end of this year, will be front-loaded to late October or early November, when the company announces its April-September results.

     Another good sign is the company’s plan to pay more attention to cash flow. It is difficult to fudge the numbers when it comes to cash generated. Gauging the profitability of each business realistically, and cutting loose those that cannot be improved, is essential to making Toshiba’s investments pay off.

     The most recent QUICK consensus survey forecasts a 56% on-year jump in operating profit to 266.6 billion yen for this fiscal year ending March 2016. However, an analyst at a foreign-affiliated brokerage, which resumed coverage of Toshiba, said it is difficult to make forecasts because of the many uncertainties the company faces. “Even its core electronic device and component segment has seen profitability fall.”

     The Tokyo Stock Exchange designated Toshiba as a “security on alert” Sept. 15. If it decides the company’s internal controls have improved within a year, the designation will be lifted. That may encourage institutional investors to buy Toshiba shares again.

     In the meantime, the new management — assuming they get the green light at the upcoming shareholders meeting — faces the enormous task shaking up the company, sharpening its money-making skills and sowing the seeds of new technology.

New focus on cash flow: Toshiba struggles to get on track amid slide in components business