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  • Consolidated Financial Statements for the Third Quarter of

    the Fiscal Year Ending March 31, 2018

    [Japanese GAAP]

    February 5, 2018

    Company name: VITAL KSK HOLDINGS, INC.

    Stock exchange listing: Tokyo Stock Exchange

    Code number: 3151

    URL: http://www.vitalksk.co.jp/

    Representative: Mr. Taisuke Murai, President & CEO

    Contact: Mr. Kiharu Takahashi, General Manager of Accounting & Finance

    Phone: +81-03-3275-3303

    Scheduled date of filing quarterly report: February 13, 2018

    Scheduled date of commencing dividend payments: Preparation of supplementary explanatory materials: None

    Quarterly financial results meeting: None

    (Amounts of less than one million yen are rounded down.)

    1. Consolidated Results for the Third Quarter of the Fiscal Year Ending March 31, 2018

    (April 1, 2017 December 31, 2017)

    (1) Consolidated Operating Results (% indicates changes from the previous corresponding period.)

    Net sales Operating profit Ordinary profit Profit attributable to

    owners of parent Nine months ended Million yen % Million yen % Million yen % Million yen %

    December 31, 2017 433,608 (2.7) 1,672 (39.4) 4,438 (20.2) 3,243 (14.6)

    December 31, 2016 445,667 (3.6) 2,757 (34.2) 5,563 (20.7) 3,796 (19.7)

    (Note) Comprehensive income: Nine months ended December 31, 2017: 5,954 million [(5.0)%]

    Nine months ended December 31, 2016: 6,265 million [(18.1)%] Basic earnings per

    share Diluted earnings per

    share Nine months ended Yen Yen

    December 31, 2017 57.56 49.53

    December 31, 2016 67.36 58.00

    (2) Consolidated Financial Position Total assets Net assets Equity ratio

    Million yen Million yen % As of December 31, 2017 343,184 94,828 27.4

    As of March 31, 2017 305,375 90,007 29.3

    (Reference) Equity: As of December 31, 2017: 94,179 million

    As of March 31, 2017: 89,415 million

    2. Cash Dividends

    Annual dividends

    1st quarter-end

    2nd quarter-end

    3rd quarter-end

    Year-end Total

    Yen Yen Yen Yen Yen

    Year ended March 31, 2017 - 10.00 - 10.00 20.00

    Year ending March 31, 2018 - 10.00 -

    Year ending March 31, 2018 (Forecast)

    10.00 20.00

    (Note) Revision to the forecast for dividends announced most recently: None

  • 3. Forecast of Consolidated Results for the Fiscal Year Ending March 31, 2018

    (April 1, 2017 - March 31, 2018)

    (% indicates changes from the previous corresponding period.)

    Net sales Operating profit Ordinary profit Profit

    attributable to owners of parent

    Basic earnings per share

    Million yen % Million yen % Million yen % Million yen % Yen Full year 570,000 (1.9) 2,100 (34.5) 5,800 (17.0) 4,070 (14.8) 72.22

    (Note) Revision to forecast of consolidated results announced most recently: None

    * Notes:

    (1) Changes in significant subsidiaries during the period under review: None (2) Accounting policies adopted specially for the preparation of quarterly consolidated financial statements: Yes

    * For details, please see (3) Notes to Quarterly Consolidated Financial Statements (Accounting policies adopted specially for the preparation of quarterly consolidated financial statements) on page 8 of the attached materials.

    (3) Changes in accounting policies, changes in accounting estimates and retrospective restatement

    1) Changes in accounting policies due to the revision of accounting standards: None

    2) Changes in accounting policies other than 1) above: None

    3) Changes in accounting estimates: None

    4) Retrospective restatement: None

    (4) Total number of outstanding shares (common shares)

    1) Total number of outstanding shares at the end of the period (including treasury stocks):

    December 31, 2017: 61,224,796 shares

    March 31, 2017: 61,224,796 shares

    2) Total number of treasury stocks at the end of the period:

    December 31, 2017: 4,868,826 shares

    March 31, 2017: 4,868,605 shares

    3) Average number of shares during the period:

    Nine months ended December 31, 2017: 56,356,117 shares

    Nine months ended December 31, 2016: 56,356,337 shares

    * These quarterly financial results are outside the scope of quarterly review.

    * Explanation of the proper use of performance forecast and other notes

    The earnings forecast and other forward-looking statements herein are based on the information currently

    available and certain assumptions deemed reasonable by the Company, and thus actual results may differ

    significantly from these forecasts due to a wide range of factors.

  • 1

    Table of Contents

    1. Qualitative Information on Quarterly Financial Results .................................................................................. 2

    Explanation of Operating Results .................................................................................................................... 2

    2. Quarterly Consolidated Financial Statements and Primary Notes.................................................................... 4

    (1) Quarterly Consolidated Balance Sheets ....................................................................................................... 4

    (2) Quarterly Consolidated Statements of Income and Comprehensive Income ............................................... 6

    (3) Notes to Quarterly Consolidated Financial Statements ................................................................................ 8

    (Notes on going concern assumption) ..................................................................................................... 8

    (Notes in the case of significant changes in amount of shareholders equity) ......................................... 8

    (Accounting policies adopted specially for the preparation of quarterly consolidated financial statements) ......... 8

    (Segment information) ............................................................................................................................ 8

  • 2

    1. Qualitative Information on Quarterly Financial Results

    Explanation of Operating Results

    The Japanese economy during the nine months ended December 31, 2017 continued to be on a moderate

    recovery trend as seen in improvements in corporate earnings and the employment situation, led by the

    governments economic and financial policies and other factors. However, factors such as concern over policies

    overseas have created an uncertain outlook.

    In the pharmaceutical wholesale industry, our Groups primary business segment, Japans medical expense

    curbing policy led to drug price revision in April 2016, which lowered drug price standards by 7.8%. The

    government is likely to continue with its policy to limit medical costs in the future.

    Under these circumstances, the Group is in the second year of its third medium-term management plan for

    the three-year period from the year ended March 31, 2017 to the year ending March 31, 2019. In the third

    medium-term management plan, the Company defines its long-term vision with a 10-year goal of Becoming

    an indispensable presence in regional and community healthcare by strategically providing products and

    services to support medicine and nursing. Furthermore, under this long-term vision, as its medium-term vision

    during the third medium-term management plan, the Company defined the two visions of 1. Even in the

    Generic Medicine 80% era, construct a system to create profits, and 2. Move deeper into regional healthcare

    by establishing a business foundation for a medicine-nursing cooperative business. Additionally, to realize this

    medium-term vision, the Company has been working toward the four basic principles of 1. Demonstrating the

    comprehensive strength of the Group by implementing effective and efficient Group management, 2.

    Promoting and further deepening area marketing that always emphasizes the viewpoint of the local people, 3.

    Fostering and retaining healthcare coordinators, and 4. Becoming a solutions company for the medical and

    nursing sectors.

    In April 2017, the Company absorbed its wholly-owned consolidated subsidiary VK Shared Service, Inc.

    The Information Systems Department of the subsidiary was transferred to the Information Systems Department

    Office, the ICT Strategy Department of the Company. Moving forward, the ICT Strategy Department will

    manage and control the Groups entire IT system, and review ICT investments. Meanwhile, the head office of

    KSK CO., LTD. moved into a new building in December 2017, and the new Osaka Branch created through

    integrating the Osaka Sales Department with the Osaka Daiichi Chuo Branch and Osaka Daiichi Kita Branch

    was relocated to the new building in January 2018. Additionally, through also integrating the Osaka Daini

    Branch in February 2018, the Company seeks to consolidate its business locations.

    For the nine months ended December 31, 2017, in the pharmaceutical wholesale business, the core

    business of the Group, the effects of declines in sales of hepatitis C medication and the emergency price

    revision of OPDIVO, an antineoplastic agent were significant, and as a result, net sales were 433,608 million

    (97.3% of that of the same period of the previous year), operating profit was 1,672 million (60.6% of that of

    the same period of the previous year), ordinary profit was 4,438 million (79.8% of that of the same period of

    the previous year) and profit attributable to owners of parent was 3,243 million (85.4% of that of the same

    period of the previous year).

    Performance results by business segment are as follows.

    1) Pharmaceutical Wholesale Business

    In the pharmaceutical wholesale business, sales of long-listed drugs continued its previous decline due to

    category changes. In the medical payment revisions in April 2016 as well, further measures for promoting use

    of generic drugs were proposed, and declines in sales of long-listed drugs were persistent during the nine

    months ended December 31, 2017. Under such circumstances, the Group focused on the sales of new products

    (original drugs) and products covered by the premium pricing scheme for the promotion of new drug creation

    and resolution of unapproved drugs/off-label use. Additionally, its focus was also placed on promoting

    negotiations by single unit and single price, an initiative to improve logistics for which efforts have been made

  • 3

    across the pharmaceutical wholesale industry. Furthermore, the Group conducted business activities across a

    wide area in the medical and nursing sectors, including the establishment of domain-based liaisons (Note 1) to

    strengthen specialization in domains such as residential care and cancer treatment, strengthening the sales and

    rental business of welfare equipment through the acquisition of welfare equipment consultant certifications

    by 32 MS (Note 1) staff, and expansion of Meron Support, (Note 2) which provides support for creating

    regular pharmacies and pharmacies that provide health support for local residents. However, as mentioned

    earlier, the effects of declines in sales of hepatitis C medication were significant, and as a result, net sales were

    412,242 million (97.2% of that of the same period of the previous year), and segment income (operating

    profit) was 1,465 million (55.5% of that of the same period of the previous year).

    At present, the Hyogo Logistics Center for KSK CO., LTD. is currently under construction. The Hyogo

    Logistics Center is scheduled to begin operations in May 2018, and through creating frameworks in response to

    urban logistics, the Company seeks to improve logistics efficiency.

    (Note 1) Domain-based liaisons, MS

    Wholesale MSs (marketing specialists; sales representatives for pharmaceutical wholesale) that possess

    specialized knowledge in specific patient and medical fields, and can provide information, etc. from a customer

    perspective.

    (Note 2) Meron Support

    Meron is customer support centered on the pharmacy portal website provided by the Group, and is a

    platform that matches regional residents with their regular pharmacies. Meron Support is one of the Meron

    services, and provides support for holding events at pharmacies through the rental of various simplified testing

    and measurement equipment.

    Meron website URL (in Japanese): http://www.meron-net.jp/

    2) Other Businesses

    In other businesses, net sales were 21,365 million (99.1% of that of the same period of the previous year)

    due mainly to a decline in sales in the veterinary drug wholesale business, but as a result of a recovery in

    business performance in the dispensing pharmacy business, segment income (operating profit) was 158

    million (269.0% of that of the same period of the previous year).

  • 4

    2. Quarterly Consolidated Financial Statements and Primary Notes (1) Quarterly Consolidated Balance Sheets

    (Million yen)

    As of March 31, 2017 As of December 31, 2017

    Assets

    Current assets

    Cash and deposits 23,022 37,238

    Notes and accounts receivable - trade 125,788 137,883

    Inventories 29,137 32,967

    Accounts receivable - other 15,125 16,493

    Other 2,318 1,800

    Allowance for doubtful accounts (293) (79)

    Total current assets 195,098 226,303

    Non-current assets

    Property, plant and equipment

    Buildings and structures, net 15,447 15,932

    Land 19,880 19,874

    Other, net 3,855 6,080

    Total property, plant and equipment 39,183 41,887

    Intangible assets

    Goodwill 4,239 4,007

    Other 3,181 2,845

    Total intangible assets 7,421 6,853

    Investments and other assets

    Investment securities 51,732 55,387

    Other 12,970 13,711

    Allowance for doubtful accounts (1,030) (959)

    Total investments and other assets 63,673 68,139

    Total non-current assets 110,277 116,880

    Total assets 305,375 343,184

  • 5

    (Million yen)

    As of March 31, 2017 As of December 31, 2017

    Liabilities

    Current liabilities

    Notes and accounts payable - trade 170,688 204,712

    Short-term loans payable 1,330 1,350

    Current portion of long-term loans payable 2,261 518

    Income taxes payable 370 839

    Provision for bonuses 1,723 666

    Other provision 202 223

    Other 3,513 3,935

    Total current liabilities 180,089 212,245

    Non-current liabilities

    Convertible bond-type bonds with subscription

    rights to shares 10,029 10,022

    Long-term loans payable 4,812 4,800

    Other provision 182 184

    Net defined benefit liability 7,058 7,341

    Negative goodwill 1,473 920

    Other 11,723 12,840

    Total non-current liabilities 35,278 36,110

    Total liabilities 215,368 248,356

    Net assets

    Shareholders equity

    Capital stock 5,000 5,000

    Capital surplus 12,739 12,739

    Retained earnings 49,726 51,840

    Treasury shares (3,759) (3,759)

    Total shareholders equity 63,706 65,820

    Accumulated other comprehensive income

    Valuation difference on available-for-sale

    securities 24,204 26,941

    Remeasurements of defined benefit plans 1,503 1,416

    Total accumulated other comprehensive

    income 25,708 28,358

    Non-controlling interests 592 648

    Total net assets 90,007 94,828

    Total liabilities and net assets 305,375 343,184

  • 6

    (2) Quarterly Consolidated Statements of Income and Comprehensive Income

    Quarterly Consolidated Statements of Income

    Nine Months Ended December 31, 2016 and 2017

    (Million yen)

    For the nine months ended

    December 31, 2016

    For the nine months ended

    December 31, 2017

    Net sales 445,667 433,608

    Cost of sales 412,072 401,215

    Gross profit 33,595 32,393

    Reversal of provision for sales returns 240 202

    Provision for sales returns 235 223

    Gross profit - net 33,600 32,373

    Selling, general and administrative expenses 30,843 30,701

    Operating profit 2,757 1,672

    Non-operating income

    Interest income 104 107

    Dividend income 640 667

    Share of profit of entities accounted for using

    equity method 93 89

    Office work fee 1,086 1,091

    Amortization of negative goodwill 552 552

    Other 422 352

    Total non-operating income 2,899 2,861

    Non-operating expenses

    Interest expenses 29 34

    Rent expenses 49 44

    Other 14 14

    Total non-operating expenses 93 94

    Ordinary profit 5,563 4,438

    Extraordinary income

    Gain on sales of non-current assets 1 2

    Gain on sales of investment securities 57 113

    Gain on investment in partnership - 172

    Other 25 4

    Total extraordinary income 84 292

    Extraordinary losses

    Loss on sales of non-current assets 11 Impairment loss 27 15

    Loss on retirement of non-current assets 5 9

    Dismantlement expense 59 Other 22 1

    Total extraordinary losses 127 26

    Profit before income taxes 5,519 4,705

    Income taxes 1,645 1,401

    Profit 3,874 3,304

    Profit attributable to non-controlling interests 78 60

    Profit attributable to owners of parent 3,796 3,243

  • 7

    Quarterly Consolidated Statements of Comprehensive Income

    Nine Months Ended December 31, 2016 and 2017

    (Million yen)

    For the nine months ended

    December 31, 2016

    For the nine months ended

    December 31, 2017

    Profit 3,874 3,304

    Other comprehensive income

    Valuation difference on available-for-sale

    securities 2,302 2,720

    Remeasurements of defined benefit plans, net of

    tax (163) (86)

    Share of other comprehensive income of entities

    accounted for using equity method 252 16

    Total other comprehensive income 2,390 2,650

    Comprehensive income 6,265 5,954

    Comprehensive income attributable to

    Comprehensive income attributable to owners of

    parent 6,187 5,893

    Comprehensive income attributable to non-

    controlling interests 78 60

  • 8

    (3) Notes to Quarterly Consolidated Financial Statements

    (Notes on going concern assumption)

    For the nine months ended December 31, 2017 (from April 1, 2017 to December 31, 2017)

    Not applicable.

    (Notes in the case of significant changes in amount of shareholders equity)

    For the nine months ended December 31, 2017 (from April 1, 2017 to December 31, 2017)

    Not applicable.

    (Accounting policies adopted specially for the preparation of quarterly consolidated financial statements)

    Calculation of tax expenses

    Tax expenses are calculated by the method in which the effective tax rate on profit before income taxes for

    the current consolidated fiscal year after application of tax effect accounting is reasonably estimated, and

    profit before income taxes was multiplied by the estimated effective tax rate.

    (Segment information)

    I. For the nine months ended December 31, 2016 (from April 1, 2016 to December 31, 2016)

    Information on net sales and income (loss) by reportable segment

    (Million yen)

    Reportable segment

    Others

    (Note 1) Total

    Adjustment

    (Note 2)

    Amount recorded in Quarterly

    Consolidated Statements of

    Income (Note 3)

    Pharmaceuti-cal

    Wholesale Business

    Total

    Net sales

    Net sales to outside customers 424,101 424,101 21,566 445,667 445,667

    Inter-segment net sales or

    transfers 3,784 3,784 1,938 5,722 (5,722)

    Total 427,885 427,885 23,504 451,390 (5,722) 445,667

    Segment income 2,638 2,638 58 2,697 60 2,757

    (Notes) 1. Others is the segment which is not included in reportable segments, including such businesses as

    dispensing pharmacy business, retail of pharmaceuticals, etc., wholesale of agricultural chemicals and

    veterinary drugs, transportation business, nursing care service business and consulting services for

    medical institutions.

    2. Adjustment of segment income of 60 million refers to elimination of inter-segment transactions.

    3. Adjustments are made to reconcile segment income to operating profit reported on the quarterly

    consolidated statements of income.

  • 9

    II. For the nine months ended December 31, 2017 (from April 1, 2017 to December 31, 2017)

    (Million yen)

    Reportable segment

    Others

    (Note 1) Total

    Adjustment

    (Note 2)

    Amount recorded in Quarterly

    Consolidated Statements of

    Income (Note 3)

    Pharmaceuti-cal

    Wholesale Business

    Total

    Net sales

    Net sales to outside customers 412,242 412,242 21,365 433,608 433,608

    Inter-segment net sales or

    transfers 3,785 3,785 1,610 5,396 (5,396)

    Total 416,028 416,028 22,976 439,005 (5,396) 433,608

    Segment income 1,465 1,465 158 1,623 48 1,672

    (Notes) 1. Others is the segment which is not included in reportable segments, including such businesses as

    dispensing pharmacy business, retail of pharmaceuticals, etc., wholesale of agricultural chemicals and

    veterinary drugs, transportation business, nursing care service business and consulting services for

    medical institutions.

    2. Adjustment of segment income of 48 million refers to elimination of inter-segment transactions.

    3. Adjustments are made to reconcile segment income to operating profit reported on the quarterly

    consolidated statements of income.

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