ANNUAL REPORT

LETTER TO SHAREHOLDERS AND BUSINESS REVIEW
Despite a significant deleveraging of its balance sheet, unprecedented volume declines forced Asahi
Tec’s US subsidiary Metaldyne into Chapter 11. Asahi Tec also suffered from collapsing demand and is
likely to breach financial covenants during the fiscal year ending March 31, 2010
Asahi Tec’s consolidated revenue fell by 30.7% from JPY 315,768
million during the fiscal year ended March 31, 2008 to JPY
218,815 million during the fiscal year ended March 31, 2009. The
global economic recession had a severe impact on Japan’s
export driven economy. Asahi Tec’s Asian activities experienced
significant volume declines, particularly driven by decreased
export of motorcycles to emerging markets and continuously
falling domestic demand for cars and trucks. Despite increased
sales of parts for construction machines and electric power
transmission equipment, Asian consolidated sales fell by 39%
compared to the previous year.
In the US, the effect of the downturn was even more devastating.
U.S. sales at Asahi Tec’s US based subsidiary Metaldyne fell by
41.4%. Sagging customer confidence and the lack of credit
availability resulted in continuously falling demand. Metaldyne’s
main customers shut down production for several weeks in an
attempt to respond to the contraction of the US auto market that
ultimately resulted in Chrysler’s and General Motor’s filing for
Chapter 11 bankruptcy protection.
During the 2nd and 3rd quarter of the fiscal year ended March
31, 2009, Metaldyne responded to the decreasing sales by
continuous adjustment of its cost structure, and was able to
significantly deleverage its balance sheet following the
successful tender for most of its outstanding senior and senior
subordinated bonds with an aggregate principal amount of USD
361.3 million (JPY 35,621 million). Metaldyne reduced its
outstanding debt from approximately USD 830.2 million (JPY
82,529 million) at March 31, 2008, to USD 536.3 million (JPY
52,878 million), including the cancellation, effective September
26, 2008, of approximately USD 31.0 million (JPY 3,134 million) of
secured subordinated notes pursuant to a debt cancellation
agreement entered into between Chrysler Corporation
("Chrysler") and Metaldyne. In addition, upon completion of the
tender offer, Chrysler agreed to cancel the 97,098 Class C
Preferred shares it held in Asahi Tec with a face value of JPY
6,082 million. The bond tender was financed by a USD 50 million
investment from Asahi Tec, funded by the Company’s
subscription to newly issued shares of Asahi Tec for JPY 4,917
million, increasing its ownership in Asahi Tec from 45.3% to
60.18%. In addition, certain of Metaldyne’s leading customers
provided Metaldyne with USD 60 million funding for the bond
tender offer, in the form of loans to Metaldyne. From the total
proceeds of USD 110 million, Metaldyne used USD 60.1 million
to pay for the tendered bonds. Previously, on July 15, 2008, the
Company, via a capital subscription of JPY 1,800 million in Asahi
Tec, also funded a cure of Metaldyne’s breach of financial
covenants at June 30, 2008. On October 14, 2008, a capital
injection of JPY 1,051 million by the Company into Asahi Tec
further supported Metaldyne’s liquidity.
Throughout the fiscal year ended March 31, 2009, Asahi Tec and
Metaldyne increased their efforts to maintain profitability
through cost reductions, plant closures, successfully negotiated
price revisions and other measures designed to contain the
effects of continuously falling order volumes, but the
combination of the unprecedented sales decline and increased
material prices resulted in a gross profit of JPY 18,848 million
for the fiscal year ended March 31, 2009, compared to JPY
29,528 million a year earlier.
The operating loss for the fiscal year ended March 31, 2009, of
JPY 52,294 million, was negatively impacted by an impairment
charge of JPY 49,309 million on certain property, plant and
equipment and intangible assets, including goodwill, of
Metaldyne in view of its deteriorated financial performance and
the uncertainty around its ability to operate as a going concern
that existed at March 31, 2009 (1) . Excluding impairment losses
for both years, the operating loss for the fiscal year ended March
31, 2009, amounted to JPY 2,985 million, compared to an
operating profit of JPY 4,175 million for the previous fiscal year.
The impairment losses were partly offset by the gain of JPY
39,768 million on the redemption of bonds following the
successful bond tender and the cancellation of debt by Chrysler,
resulting in a net loss for the fiscal year ended March 31, 2009 of
JPY 23,958 million, compared to JPY 41,059 million last year.
Despite Asahi Tec’s continued support and the resulting
reduction of Metaldyne’s indebtedness, Metaldyne’s financial
performance was heavily affected by car production in the US
that continued to fall beyond expectations. Faced with its own
challenges, Asahi Tec was no longer in a position to further
support Metaldyne, which on May 27, 2009, filed a voluntary
petition to reorganize under Chapter 11 of the U.S. Bankruptcy
Code, shortly after Chrysler, one of its main customers, also
filed for protection under Chapter 11.
Given that its assets and capital structure are completely
ringfenced from Metaldyne, Asahi Tec will now focus on its own
needs and opportunities. Without Metaldyne, which will be
deconsolidated, Asahi Tec projects net sales of JPY 60,200
million and an operating loss of JPY 300 million, based on its
management forecast prepared under J-GAAP for the fiscal year
ending March 31, 2010.
Asahi Tec is likely to breach certain financial covenants under its
credit agreements in the course of the fiscal year ending March
31, 2010. Asahi Tec is currently seeking a waiver of covenants
from its lenders. In the event that Asahi Tec were not successful
in obtaining such a waiver, it would be in default of its
obligations under its credit agreements, which would cast
significant doubt on Asahi Tec’s ability to operate as a going
concern.
(1) The total impairment charge recorded in the consolidated financial statements for
the fiscal year ended March 31, 2009, amounted to JPY 52,786 million as a result
of an additional impairment loss of JPY 3,477 million recorded by the Company on
goodwill resulting from the purchase price allocation.
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