Hitachi Net Income Tumbles 79% in Q3 -- What Happened? (HIT)

 |  About: Hitachi Ltd. ADR (HTHIY)
by: Steven Towns

Hitachi's (HIT) Q3 financials aren't pretty with a 79% y-o-y drop in net income to a lowly US$47 million despite a 6% y-o-y increase in sales to US$1.91 billion of sales. Hitachi is maintaining its forecast for the full fiscal year, which projects net income to drop 61% y-o-y on 2% higher sales but a 14% decrease in operating income. Below I will list a summary of Hitachi's Q3 numbers along with a look at each business segment to see what went wrong.

Summary of results for the three months ended Dec. 31, 2005 and y-o-y % change

    • Revenues: 2,258.8 billion yen (US$19.143 billion) +6%
    • Operating Income: 39.1 billion yen (US$332 million) +14%
    • Income before Taxes and Minority Interests: 59.6 billion yen (US$506 million) -16%
    • Income before Minority Interests: 24.2 billion yen (US$205 million) -33%
    • Net Income: 5.4 billion yen (US$47 million) -79%
    • Net Income per Share (basic): 1.65 yen ($0.01) -79%
    • Net Income per Share (diluted): 1.64 yen ($0.01) -78%
    • Net Income per Share ADS (basic, representing 10 ordinary shares): 16 yen ($0.14) -80%
    • Net Income per Share ADS (diluted): 16 yen ($0.14) -79%

Two areas responsible for heavy losses include Hitachi making Hitachi Fujitsu Plasma Display Limited a subsidiary in April last year, which posted an operating loss. Also, in the prior year period Hitachi had benefited from the sale of securities that resulted in Other Income being considerably lower in its most recent period.

Revenue & Operating Income by Segment with y-o-y % change:

    • IT Systems:
      - Revenues: 511.3 billion yen (US$4.33b), +6%
      - Operating Income: 0.5 billion yen (US$5m), -75%
      - Positive factors: software and services sales; growth in disk array subsystems
      - Negative factors: losses in HDD and PC operations; effects of a subsidiary's pension fund liabilities

    • Electronic Devices:
      - Revenues: 296.6 billion yen (US$2.51b), -1%
      - Operating Income: 6.5 billion yen (US$55m), +186%
      - Positive factors: higher sales of small/med-sized LCDs and LCD manuf. equip.; operating income increase due to smaller loss in display business

    • Power & Industrial Systems:
      - Revenues: 605.7 billion yen (US$5.13b), +8%
      - Operating Income: 12.9 billion yen (US$110m), +117%
      - Positive factors: growth in overseas sales at Hitachi Construction Machinery Co., A/C systems and industrial machinery sales increased thanks to recovering private-sector plant and equipment investing; healthy growth in sales of automotive systems products

    • Digital Media & Consumer Products:
      - Revenues: 362.3 billion yen (US$3.07b), +11%
      - Operating Income: -5.8 billion yen (US$-49m), --
      - Positive factors: growth in sales of plasma TVs and higher sales at Hitachi Maxell, Ltd.,
      - Negative factors: operating loss due to joint plasma display business with Fujitsu which Hitachi made a subsidiary in Apr. '05

    • High Functional Materials & Components:
      - Revenues: 414.2 billion yen (US$3.51b), +9%
      - Operating Income: 30.9 billion yen (US$262m), 40%
      - Positive factors: strong growth in sales and earnings at Hitachi Chemical Co., Hitachi Metals, Ltd., and Hitachi Cable

    • Logistics, Services & Others:
      - Revenues: 317.1 billion yen (US$2.69b), +2%
      - Operating Income: 1.1 billion yen (US$9m), -54%
      - Positive factors: revenue increase due in part to higher sales at Hitachi Transport, Ltd.
      - Negative factors: operating income hurt by lower product prices, especially at overseas sales companies; lower earnings from net gain on securities sale in prior period resulting in 39% decrease in Other Income

    • Financial Services:
      - Revenues: 126.8 billion yen (US$1.08b), -3%
      - Operating Income: 9.6 billion yen (US$82m), +20%

* Note: US$ figures calculated at Y118/US$1, the approximate rate at the end of 2005 for convenience; 1 Hitachi ordinary share equals 10 Hitachi ADSs

HIT 1-yr chart: